UNITED STATES

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
☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2014
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐	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 For the transition period from __________ to __________

Commission file number: 001-35658

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

(Exact name of Registrant as specified in its charter)

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

(Translation of Registrant’s name into English)

United Mexican States

(Jurisdiction of incorporation or organization)

Avenida Prolongación Paseo de la Reforma 500

Colonia Lomas de Santa Fe

Delegación Álvaro Obregón

01219 México, D.F.

(Address of principal executive offices)

Fernando Borja Mujica

General Legal Director

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

Avenida Prolongación Paseo de la Reforma 500

Colonia Lomas de Santa Fe

Delegación Álvaro Obregón

01219 México, D.F.

Telephone: +(52) 55-5257-8000

Fax: +52 55-5269-2701

(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 five shares of the Series B common stock of Grupo Financiero Santander México, S.A.B. de C.V., par value of Ps.3.780782962	New York Stock Exchange
Series B shares, par value of Ps.3.780782962	New York Stock Exchange*

* Grupo Financiero Santander México, S.A.B. de C.V.’s Series B shares are not listed for trading, but are only listed in connection with the registration of the American Depositary Shares, pursuant to the requirements of the New York Stock Exchange.

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

Series B shares: 3,322,085,768

Series F shares: 3,464,309,145

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

x  Yes o  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.

o Yes x No

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

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.

x Yes o 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o Yes o 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  o Non-accelerated filer  o

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

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

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

o Item 17 o 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).

o Yes x No

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

TABLE OF CONTENTS

Page

PRESENTATION OF FINANCIAL AND OTHER INFORMATION		iii
GLOSSARY OF SELECTED TERMS		vi
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS		x
ENFORCEMENT OF JUDGMENTS		xi
PART I		1
ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS		1
A.	Directors and Senior Management	1
B.	Advisers	1
C.	Auditors	1
ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE		1
A.	Offer Statistics	1
B.	Method and Expected Timetable	1
ITEM 3.  KEY INFORMATION		1
A.	Selected Financial Data	1
B.	Capitalization and Indebtedness	7
C.	Reasons for the Offer and Use of Proceeds	7
D.	Risk Factors	8
ITEM 4.  INFORMATION ON THE COMPANY		39
A.	History and Development of the Company	39
B.	Business Overview	43
C.	Organizational Structure	141
D.	Property, Plants and Equipment	142
ITEM 4A.  UNRESOLVED STAFF COMMENTS		142
ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS		142
A.	Operating Results	146
B.	Liquidity and Capital Resources	181
C.	Research and Development, Patents and Licenses, etc.	191
D.	Trend Information	191
E.	Off-Balance Sheet Arrangements	192
F.	Tabular Disclosure of Contractual Obligations	193
G.	Safe Harbor	193
ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES		194
A.	Directors and Senior Management	194
B.	Compensation	202
C.	Board Practices	205
D.	Employees	209
E.	Share Ownership	210
ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS		211
A.	Major Shareholders	211
B.	Related Party Transactions	212
C.	Interests of Experts and Counsel	218
ITEM 8.  FINANCIAL INFORMATION		218
A.	Consolidated Statements and Other Financial Information	218
B.	Significant Changes	219
ITEM 9.  THE OFFER AND LISTING		219
A.	Offering and Listing Details	219
B.	Plan of Distribution	220
C.	Markets	220
D.	Selling Shareholders	227
E.	Dilution	227
F.	Expenses of the Issue	227

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ITEM 10.  ADDITIONAL INFORMATION		227
A.	Share Capital	227
B.	Memorandum and Articles of Association	227
C.	Material Contracts	239
D.	Exchange Controls	239
E.	Taxation	239
F.	Dividends and Paying Agents	244
G.	Statement by Experts	244
H.	Documents on Display	244
I.	Subsidiary Information	244
ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		244
ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES		262
A.	Debt Securities	262
B.	Warrants and Rights	262
C.	Other Securities	262
D.	American Depositary Shares	262
PART II		264
ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES		264
A.	Defaults	264
B.	Arrears and Delinquencies	264
ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS		264
A.	Material Modifications to Instruments	264
B.	Material Modifications to Rights	264
C.	Withdrawal or Substitution of Assets	264
D.	Change in Trustees or Paying Agents	264
E.	Use of Proceeds	264
ITEM 15.  CONTROLS AND PROCEDURES		264
A.	Disclosure Controls and Procedures	264
B.	Management’s Annual Report on Internal Control over Financial Reporting	264
C.	Attestation Report of the Registered Public Accounting Firm	265
D.	Changes in Internal Control over Financial Reporting	266
ITEM 16.  [RESERVED]		266
ITEM 16A.  AUDIT COMMITTEE FINANCIAL EXPERT		266
ITEM 16B.  CODE OF ETHICS		266
ITEM 16C.  PRINCIPAL ACCOUNTANT FEES AND SERVICES		266
ITEM 16D.  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES		267
ITEM 16E.  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS		267
ITEM 16F.  CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT		268
ITEM 16G.  CORPORATE GOVERNANCE		268
ITEM 16H.  MINE SAFETY DISCLOSURE		271
PART III		272
ITEM 17.  FINANCIAL STATEMENTS		272
ITEM 18.  FINANCIAL STATEMENTS		272
ITEM 19.  EXHIBITS		272
SIGNATURES		273

ii

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Definitions

Unless otherwise indicated or the context otherwise requires, all references in this annual report on Form 20-F to “Grupo Financiero Santander Mexico,” “we,” “our,” “ours,” “us” or similar terms refer to Grupo Financiero Santander México, S.A.B. de C.V., together with its consolidated subsidiaries.

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

When we refer to “Banco Santander Mexico” or the “Bank,” we refer to Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México, together with its consolidated subsidiaries.  When we refer to “Casa de Bolsa Santander,” we refer to Casa de Bolsa Santander, S.A. de C.V., Grupo Financiero Santander México, a Mexican broker-dealer.  When we refer to “Gestión Santander” we refer to Gestión Santander, S.A. de C.V., a Mexican mutual fund manager (entity sold in December 2013).  When we refer to “Seguros Santander” we refer to Zurich Santander Seguros México, S.A. (formerly, Seguros Santander, S.A., Grupo Financiero Santander) (entity sold in November 2011).

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

References in this annual report on Form 20-F to certain financial terms have the following meanings:

· References to “Mexican Banking GAAP” are to the accounting standards and regulations prescribed by the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores,or CNBV) for credit institutions, as amended.  These accounting standards apply to holding companies when the principal subsidiary is a bank.

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

· References to our “audited financial statements” are to the audited consolidated financial statements of Grupo Financiero Santander Mexico as of December 31, 2013 and December 31, 2014, and for each of the fiscal years ended December 31, 2012, 2013 and 2014, together with the notes thereto.  The audited financial statements were prepared in accordance with IFRS and are contained in this annual report on Form 20-F.

As used in this annual report on Form 20-F, the following terms relating to our capital adequacy have the meanings set forth below, unless otherwise indicated.  See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation.”

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

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

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

As used in this annual report on Form 20-F, the term “billion” means one thousand million (1,000,000,000).

In this annual report on Form 20-F, the term “Mexico” refers to the United Mexican States.  The terms “Mexican government” or the “government” refer to the federal government of Mexico, and the term “Mexican Central Bank” refers to Banco de México.  References to “U.S.$,” “U.S. dollars” and “dollars” are to United States dollars and references to “Mexican pesos,” “pesos,” or “Ps.” are to Mexican pesos.  References to “euros” or “€” are to the common legal currency of the member states participating in the European Economic and Monetary Union.

iii

Financial and Other Information

Market position.  We make statements in this annual report on Form 20-F about our competitive position and market share in the Mexican financial services industry and the market size of the Mexican financial services industry.  We have made these statements on the basis of statistics and other information from third-party sources, primarily the CNBV, that we believe are reliable.

Currency and accounting standards.  We maintain our financial books and records in pesos.  Our consolidated income statement data for each of the years ended December 31, 2010, 2011, 2012, 2013 and 2014 and our consolidated balance sheet data as of December 31, 2010, 2011, 2012, 2013 and 2014, included in this annual report on Form 20-F, have been audited under the standards of the Public Company Accounting Oversight Board (United States), or PCAOB, and are prepared in accordance with IFRS.  For regulatory purposes, including Mexican Central Bank regulations and the reporting requirements of the CNBV, we concurrently prepare and will continue to prepare and make available to our shareholders statutory financial statements in accordance with the accounting standards of the CNBV, which prescribes generally accepted accounting criteria for all financial institutions in Mexico.

IFRS differs in certain significant respects from Mexican Banking GAAP.  While we have prepared our consolidated financial data as of and for the years ended December 31, 2010, 2011, 2012, 2013 and 2014 in accordance with IFRS, data reported by the CNBV for the Mexican financial sector as a whole as well as individual financial institutions in Mexico, including our own, is prepared in accordance with Mexican Banking GAAP and, thus, may not be comparable to our results prepared in accordance with IFRS. All statements in this annual report on Form 20-F regarding our relative market position and financial performance vis-à-vis the financial services sector in Mexico, including financial information as to net income, return on average equity and non-performing loans, among others, are based, out of necessity, on information obtained from CNBV reports, and accordingly are presented in accordance with Mexican Banking GAAP.  Unless otherwise indicated, all financial information provided in this annual report on Form 20-F has been prepared in accordance with IFRS.

Effect of rounding. Certain amounts and percentages included in this annual report on Form 20-F and in our audited financial statements have been rounded for ease of presentation.  Percentage figures included in this annual report on Form 20-F have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding.  For this reason, certain percentage amounts in this annual report on Form 20-F may vary from those obtained by performing the same calculations using the figures in our audited financial statements.  Certain other amounts that appear in this annual report on Form 20-F may not sum due to rounding.

Exchange rates and translation into U.S. dollars.  This annual report on Form 20-F contains translations of certain peso amounts into U.S. dollars at specified rates solely for your convenience.  These translations should not be construed as representations by us that the peso amounts actually represent such U.S. dollar amounts or could, at this time, be converted into U.S. dollars at the rate indicated.  Unless otherwise indicated, we have translated peso amounts into U.S. dollars at an exchange rate of Ps.14.7414 to U.S.$1.00, the rate calculated on December 31, 2014 (the last business day in December) and published on January 2, 2015 in the Official Gazette of the Federation (Diario Oficial de la Federación) by the Mexican Central Bank, as the exchange rate for the payment of obligations denominated in currencies other than pesos and payable within Mexico (tipo de cambio para solventar obligaciones denominadas en moneda extranjera).  The translation of income statement transactions expressed in pesos using such rates may result in presentation of dollar amounts that differ from the U.S. dollar amounts that would have been obtained by translating Mexican pesos into U.S. dollars at the exchange rate prevailing when such transactions were recorded.  See “Item 3. Key Information—A. Selected Financial Data—Exchange Rates” for information regarding exchange rates between the peso and the U.S. dollar for the periods specified therein.

Retrospectively adjusted amounts for comparability. For comparative purposes, we have adjusted previously presented consolidated income statement data for the years ended December 31, 2010, 2011 and 2012 and previously presented consolidated balance sheet data as of December 31, 2010, 2011 and 2012 to reflect the application of IAS 19 (revised), as well as discontinued operations relating to our sale of Gestión Santander in December 2013. See Item 5. Principal Factors Affecting our Financial Condition and Results of Operations—Critical Accounting Policies—Application of New and Revised IFRS—IAS 19 Employee Benefits.

We have retrospectively adjusted the comparative amounts from December 31, 2010 to December 31, 2012 in our selected financial data as if this revised standard had been in effect for this period. In addition, due to the sale of Gestión Santander in December 2013, we have included as discontinued operations, each year’s profit generated by this entity as Profit from discontinued operations in the consolidated income statement data for the years ended

iv

December 31, 2010, 2011 and 2012 in addition to the amounts previously presented in this item regarding the Elavon transaction and the sale of Seguros Santander.

References herein to “UDIs” are to Unidades de inversión, a peso-equivalent unit of account indexed for Mexican inflation.  UDIs are units of account created by the Mexican Central Bank on April 4, 1995, the value of which in pesos is indexed to inflation on a daily basis, as measured by the change in the National Consumer Price Index (Índice Nacional de Precios al Consumidor).  Under a UDI-based loan or financial instrument, the borrower’s nominal peso principal balance is converted either at origination or upon restructuring to a UDI principal balance and interest on the loan or financial instrument is calculated on the outstanding UDI balance of the loan or financial instrument.  Principal and interest payments are made by the borrower in an amount of pesos equivalent to the amount due in UDIs at the stated value of UDIs on the day of payment. As of December 31, 2014, one UDI was equal to Ps.5.270368 (U.S.$0.3575).

v

GLOSSARY OF SELECTED TERMS

The following is a glossary of selected terms used in this annual report on Form 20-F.

Afore	An entity established pursuant to Mexican law that manages independent retirement accounts.  The main functions of an Afore include, among others, (i) managing pension funds, (ii) creating and managing individual pension accounts for each worker, (iii) creating, managing and operating specialized pension funds known as Siefores, (iv) distributing and purchasing Siefores’ stock, (v) contracting pension insurance, and (vi) distributing, in certain cases, the individual funds directly to the pensioned worker
ALCO	Our Assets and Liabilities Committee (Comité de Activos y Pasivos), which is responsible for determining guidelines for managing risk with respect to financial margin, net worth and long-term liquidity
Basel III	An international framework of capital and liquidity standards for internationally active banking organizations that includes, among other things, the definition of capital, capital requirements, the treatment of counterparty credit risk, the leverage ratio and the global liquidity standard.  The Basel III framework was designed by the Basel Committee in 2010
Basel Committee	Basel Committee on Banking Supervision, which includes the supervisory authorities of twelve major industrial countries
Bonding Companies Law	Ley Federal de Instituciones de Fianzas
BSC	Banking Stability Committee (Comité de Estabilidad Bancaria)
Cetes	Mexican Treasury bills (Certificados de la Tesorería de la Federación)
CDI	Certificate of interbank deposit
CFC	Mexican Federal Economic Competition Commission (Comisión Federal de Competencia Económica)
CNBV	Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores)
CNSF	Mexican National Insurance and Bonding Commission (Comisión Nacional de Seguros y Fianzas)
CONSAR	Mexican National Commission for the Retirement Savings Systems (Comisión Nacional del Sistema de Ahorro para el Retiro)
CONDUSEF	Mexican National Commission for the Protection and Defense of Financial Service Users (Comisión Nacional para la Protección y Defensa de los Usuarios de Servicios Financieros)

vi

CRM	Customer relationship management
Exchange Act	Securities Exchange Act of 1934, as amended
General Law of Ancillary Credit Organizations and Activities	Ley General de Organizaciones y Actividades Auxiliares del Crédito
General Law of Negotiable Instruments and Credit Transactions	Ley General de Títulos y Operaciones de Crédito
IFRS	International Financial Reporting Standards, accounting standards issued by the International Accounting Standards Board, and interpretations issued by the International Financial Reporting Standards Interpretations Committee
IMPI	Mexican Institute of Industrial Property (Instituto Mexicano de la Propiedad Industrial)
Infonavit	Mexican Institute of the National Housing Fund for Workers (Instituto Nacional para el Fomento de la Vivienda de los Trabajadores)
Insurance Companies Law	Ley General de Instituciones y Sociedades Mutualistas de Seguros
IPAB	Mexican Institute for the Protection of Bank Savings (Instituto para la Protección al Ahorro Bancario)
IPC	Mexican Stock Exchange Prices and Quotations Index (Índice de Precios y Cotizaciones)
Law of the Mexican Central Bank	Ley del Banco de México
LCR	Liquidity coverage ratio
LGD	Loss given default
MexDer	Mexican Derivatives Exchange (Mercado Mexicano de Derivados, S.A. de C.V.)
Mexican Banking GAAP	The financial accounting standards and regulations prescribed by the CNBV for credit institutions, as amended
Mexican Banking Law	Ley de Instituciones de Crédito
Mexican Central Bank	Banco de México
Mexican Commerce Code	Código de Comercio
Mexican Financial Groups Law	Ley para Regular las Agrupaciones Financieras
Mexican Mutual Funds Law	Ley de Sociedades de Inversión
Mexican Securities Market Law	Ley del Mercado de Valores
Mexican Stock Exchange	Bolsa Mexicana de Valores, S.A.B. de C.V.
MVE	Market value of equity

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NAFIN	Nacional Financiera, Sociedad Nacional de Crédito, Institución de Banca de Desarrollo, a Mexican government bank that provides support for SMEs
National Consumer Price Index	Índice Nacional de Precios al Consumidor
NIM	Net Interest Margin
NIM Sensitivity	Net interest margin sensitivity is the difference between the return on assets and the financial cost of our financial liabilities based on a one-year time frame and a parallel movement of 100 basis points (1%) in market interest rates
NYSE	New York Stock Exchange
NSFR	Net Stable Funding Ratio
PCAOB	Public Company Accounting Oversight Board (United States)
PD	Probability of default
Public Registry of Commerce	Registro Público de Comercio
RNV	Mexican National Securities Registry (Registro Nacional de Valores)
SEC	U.S. Securities and Exchange Commission
SHCP	Mexican Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público)
SHF	Mexican Federal Mortgage Agency (Sociedad Hipotecaria Federal)
Siefores	Specialized pension funds (Sociedades de Inversión Especializadas de Fondos para el Retiro) established pursuant to Mexican law
SME	Small and medium-sized enterprises, consisting of small companies with annual revenue of less than Ps.100,000,000 (U.S.$6,783,616)
Sofoles	Sociedades Financieras de Objeto Limitado, non-banking institutions in Mexico that focused primarily on offering credit or financing for specific purposes (housing, automobiles, personal loans, etc.) to middle- and low-income individuals.  All existing Sofol authorizations automatically terminated on July 19, 2013.  Existing Sofoles had the option of converting to Sofomes or otherwise extending their corporate purpose to include activities carried out by Sofomes
Sofomes	Sociedades Financieras de Objeto Múltiple, non-banking institutions in Mexico that engage in lending and/or financial leasing and/or factoring services and may be regulated or non-regulated

viii

TIIE	Mexican benchmark interbank money market rate (Tasa de Interés Interbancaria de Equilibrio)
UDI	Unidades de inversión, a peso-equivalent unit of account indexed for Mexican inflation
VaR	Value at risk, an estimate of the expected maximum loss in the market value of a given portfolio over a one-day time horizon at a 99% confidence interval

ix

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 20-F includes forward-looking statements, principally under the captions “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company—B. Business Overview” and “Item 5. Operating and Financial Review and Prospects.” These statements appear throughout this annual report on Form 20-F and include statements regarding our intent, belief or current expectations in connection with:

· asset growth and sources of funding;

· growth of our fee-based business;

· expansion of our distribution network;

· financing plans;

· competition;

· impact of regulation;

· action to modify or revoke Banco Santander Mexico’s banking license;

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

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

· projected capital expenditures;

· capitalization requirements and level of reserves;

· liquidity;

· trends affecting the economy generally; and

· trends affecting our financial condition and our results of operations.

Many important factors, in addition to those discussed elsewhere in this annual report on Form 20-F, could cause our actual results to differ substantially from those anticipated in our forward-looking statements, including, among other things:

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

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

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

· inflation;

· deflation;

· unemployment;

· unanticipated turbulence in interest rates;

· movements in foreign exchange rates;

· movements in equity prices or other rates or prices;

· changes in Mexican and foreign policies, legislation and regulations;

x

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

· changes in taxes and tax laws;

· competition, changes in competition and pricing environments;

· our inability to hedge certain risks economically;

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

· the adequacy of allowance for impairment losses and other losses;

· increased default by borrowers;

· exposure to the home builders sector;

· our inability to successfully and effectively integrate acquisitions;

· technological changes;

· changes in consumer spending and saving habits;

· increased costs;

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

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

· the other risk factors discussed under “Item 3. Key Information—D. Risk Factors” in this annual report on Form 20-F.

The words “believe,” “may,” “will,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “forecast” and similar words are intended to identify forward-looking statements.  You should not place undue reliance on such statements, which speak only as of the date they were made.  We undertake no obligation to update publicly or to revise any forward-looking statements after we distribute this annual report on Form 20-F because of new information, future events or other factors.  Our independent public auditors have neither examined nor compiled the forward-looking statements and, accordingly, do not provide any assurance with respect to such statements.  In light of the risks and uncertainties described above, the future events and circumstances discussed in this annual report on Form 20-F might not occur and are not guarantees of future performance.  Because of these uncertainties, you should not make any investment decision based upon these estimates and forward-looking statements.

ENFORCEMENT OF JUDGMENTS

We are a publicly traded variable capital corporation (sociedad anónima bursátil de capital variable) incorporated in accordance with the laws of Mexico.  All of our directors and officers and experts named herein are non-residents of the United States, and all or substantially all of the assets of such persons and substantially all of our assets are located outside the United States.  As a result, it may not be possible for investors to effect service of process within the United States upon such persons or to enforce against them or us in United States courts judgments predicated upon the civil liability provisions of United States federal securities laws.  We have been advised by our special counsel as to Mexican law, that there is doubt as to the enforceability, in original actions in Mexican courts, of liabilities predicated solely on U.S. federal securities laws and as to the enforceability in Mexican courts of judgments of United States courts obtained in actions predicated upon the civil liability provisions of U.S. federal securities laws.  We have been advised by such special Mexican counsel, Ritch, Mueller, Heather y Nicolau, S.C., that no bilateral treaty is currently in effect between the United States and Mexico that covers the reciprocal enforcement of civil foreign judgments.  In the past, Mexican courts have enforced judgments

xi

rendered in the United States by virtue of the legal principles of reciprocity and comity, consisting of the review in Mexico of the United States judgment, in order to ascertain, among other matters, whether Mexican legal principles of due process, public policy (orden público) and non-violation of Mexican law have been complied with, without reviewing the merits of the subject matter of the case.

xii

PART I

ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

A.  Directors and Senior Management

Not applicable.

B.  Advisers

Not applicable.

C.  Auditors

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

The following tables present our selected consolidated financial data for each of the periods indicated.  You should read this information in conjunction with our audited financial statements and related notes and the information under “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report on Form 20-F.

We have derived our selected consolidated income statement data for the years ended December 31, 2010, 2011, 2012, 2013 and 2014 and our selected consolidated balance sheet data as of December 31, 2010, 2011, 2012, 2013 and 2014 from our audited financial statements, which have been prepared in accordance with IFRS.

For comparative purposes, we have retrospectively adjusted previously presented consolidated income statement data for the years ended December 31, 2010, 2011 and 2012 and previously presented consolidated balance sheet data as of December 31, 2010, 2011 and 2012 to reflect the application of IAS 19 (revised), as well as discontinued operations relating to our sale of Gestión Santander in December 2013.

We have retrospectively adjusted the comparative amounts from December 31, 2010 to December 31, 2012 in our selected financial data as if this revised standard had been in effect for this period. In addition, due to the sale of Gestión Santander in December 2013, we have included as discontinued operations, each year’s profit generated by this entity as Profit from discontinued operations in the consolidated income statement data for the years ended December 31, 2010, 2011 and 2012 in addition to the amounts previously presented in this item regarding the Elavon transaction and the sale of Seguros Santander.

1

CONSOLIDATED INCOME STATEMENT DATA IN ACCORDANCE WITH IFRS

	For the year ended December 31,
	2010			2011			2012			2013			2014			2014
	(Millions of pesos)(1)															(Millions of U.S. dollars)(1)(2)
Interest income and similar income	Ps.	39,237		Ps.	46,587		Ps.	55,521		Ps.	55,386		Ps.	57,916		U.S.$	3,929
Interest expenses and similar charges		(12,991	)		(17,976	)		(21,639	)		(19,539	)		(20,305	)		(1,377	)
Net interest income		26,246			28,611			33,882			35,847			37,611			2,552
Income from equity instruments		289			299			212			245			153			10
Fee and commission income (net)		8,999			9,904			11,685			12,844			13,373			907
Gains/(losses) on financial assets and liabilities (net)		3,618			271			1,265			3,281			2,619			178
Exchange differences (net)		(14	)		30			(6	)		—			(11	)		(1	)
Other operating income		665			623			628			787			487			33
Other operating expenses		(1,507	)		(1,590	)		(1,794	)		(2,078	)		(2,479	)		(168	)
Total income		38,296			38,148			45,872			50,926			51,753			3,511
Administrative expenses		(13,280	)		(14,918	)		(16,724	)		(18,630	)		(19,897	)		(1,350	)
Personnel expenses		(6,542	)		(7,297	)		(8,232	)		(9,261	)		(9,977	)		(677	)
Other general administrative expenses		(6,738	)		(7,621	)		(8,492	)		(9,369	)		(9,920	)		(673	)
Depreciation and amortization		(1,396	)		(1,457	)		(1,537	)		(1,620	)		(1,682	)		(114	)
Impairment losses on financial assets (net)		(6,972	)		(5,435	)		(8,970	)		(14,905	)		(13,132	)		(891	)
Loans and receivables(3)		(6,972	)		(5,435	)		(8,970	)		(14,905	)		(13,132	)		(891	)
Impairment losses on other assets (net)		(92	)		(100	)		(34	)		(22	)		(48	)		(3	)
Other intangible assets		(27	)		(30	)		—			—			—			—
Non-current assets held for sale		(65	)		(70	)		(34	)		(22	)		(48	)		(3	)
Provisions (net)(4)		(469	)		1,890			680			(751	)		(157	)		(11	)
Gains/(losses) on disposal of assets not classified as non-current assets held for sale		(77	)		13			1,743			31			8			1
Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations		17			54			135			(16	)		(15	)		(1	)
Operating profit before tax		16,027			18,195			21,165			15,013			16,830			1,142
Income tax		(4,409	)		(4,776	)		(3,853	)		(2,670	)		(3,541	)		(240	)
Profit from continuing operations		11,618			13,419			17,312			12,343			13,289			902
Profit from discontinued operations (net)		969			4,352			132			1,938			—			—
Profit for the year	Ps.	12,587		Ps.	17,771		Ps.	17,444		Ps.	14,281		Ps.	13,289		U.S.$	902
Profit attributable to the Parent		12,586			17,770			17,443			14,279			13,288			902
Profit attributable to non-controlling interests		1			1			1			2			1			—
Earnings per share from continuing and discontinued operations:
Basic earnings per share		1.85			2.62			2.57			2.11			1.96			0.13
Diluted earnings per share		1.85			2.62			2.57			2.11			1.96			0.13
Earnings per share from continuing operations:
Basic earnings per share		1.71			1.98			2.55			1.82			1.96			0.13
Diluted earnings per share(5)		1.71			1.98			2.55			1.82			1.96			0.13
Cash dividend per share (pesos) (6)		0.94			1.67			1.08			3.08			0.51			—

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	For the year ended December 31,
	2010		2011		2012		2013		2014		2014
	(Millions of pesos)(1)										(Millions of U.S. dollars)(1)(2)
Cash dividend per share (U.S. dollar) (2)(6)		0.07		0.12		0.08		0.24		0.03		—
Weighted average shares outstanding		6,786,395		6,786,395		6,782,807		6,773,812		6,775,809		6,775,809
Dilutive effect of rights on shares(5)		-		-		13,401		12,583		10,586		10,586
Adjusted number of shares		6,786,395		6,786,395		6,796,208		6,786,395		6,786,395		6,786,395

(1) Except per share amounts. Share amounts are presented in thousands of shares.

(2) Results for the year ended December 31, 2014 have been translated into U.S. dollars, for convenience purposes only, using the exchange rate of Ps.14.7414 per U.S.$1.00 as calculated on December, 31, 2014 and reported by the Mexican Central Bank in the Official Gazette of the Federation (Diario Oficial de la Federación) on January 2, 2015 as the exchange rate for the payment of obligations denominated in currencies other than pesos and payable within Mexico.

(3) Impairment losses on loans and receivables less recoveries of loans previously charged off (net of legal expenses).

(4) Principally includes provisions for off-balance sheet risk and provisions for tax and legal matters.  See “Item 5. Operating and Financial Review and Prospects.”

(5) To calculate diluted earnings per share, the amount of Profit attributable to the Parent and the weighted average number of shares issued, net of treasury shares, are adjusted to take into account all the dilutive effects relating to potential share issuances (share options, warrants and convertible debt instruments). See note 5.3 to our audited financial statements.

(6) On February 2, 2011, we paid a dividend of Ps.6,400 million, equal to Ps.0.94 per share, with respect to fiscal year 2010.  On March 5, 2012, we paid a dividend of Ps.11,350 million, equal to Ps.1.67 per share, with respect to fiscal year 2011. On September 13, 2012, we paid a dividend of Ps.7,300 million, equal to Ps.1.08 per share, in advance with respect to fiscal year 2012.  On August 30, 2013, we paid a dividend of Ps.3,950 million, equal to Ps.0.58 per share, in advance with respect to fiscal year 2013.  On December 27, 2013, we paid a dividend of Ps.4,900 million, equal to Ps.0.72 per share, in advance with respect to fiscal year 2013. On December 27, 2013, we paid an extraordinary dividend of Ps.12,000 million, equal to Ps.1.77 per share. On December 29, 2014, we paid an extraordinary dividend of Ps.3,473 million, equal to Ps.0.51 per share.

CONSOLIDATED BALANCE SHEET DATA IN ACCORDANCE WITH IFRS

	As of December 31,
	2010		2011		2012		2013		2014		2014
	(Millions of pesos)										(Millions of U.S. dollars)(1)
Assets
Cash and balances with Mexican Central Bank	Ps.	44,136	Ps.	44,143	Ps.	48,397	Ps.	49,681	Ps.	51,823	U.S.$	3,515
Financial assets held for trading		238,613		242,463		198,250		176,907		208,371		14,135
Other financial assets at fair value through profit or loss		12,661		21,589		63,168		86,361		31,872		2,162
Available-for-sale financial assets		60,426		61,582		47,518		61,525		83,128		5,639
Loans and receivables		271,879		346,187		403,036		441,657		530,397		35,980
Hedging derivatives		1,287		897		300		300		4,740		322
Non-current assets held for sale		7,811		464		576		1,100		844		57
Tangible assets		5,488		5,607		4,113		4,767		5,262		357
Intangible assets		1,879		3,462		3,648		3,751		4,079		277
Tax assets		15,266		13,454		17,784		25,943		22,988		1,559
Other assets		2,288		4,426		6,242		5,826		6,479		440
Total assets	Ps.	661,734	Ps.	744,274	Ps.	793,032	Ps.	857,818	Ps.	949,983	U.S.$	64,443
Liabilities
Financial liabilities held for trading	Ps.	116,535	Ps.	125,291	Ps.	141,101	Ps.	136,199	Ps.	136,805	U.S.$	9,280

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	As of December 31,
	2010		2011		2012		2013			2014			2014
	(Millions of pesos)												(Millions of U.S. dollars)(1)
Other financial liabilities at fair value through profit or loss		112,239		118,269		71,192		76,025			108,784			7,379
Financial liabilities at amortized cost		326,448		391,568		458,856		528,184			579,125			39,286
Hedging derivatives		28		2,501		1,637		1,392			4,403			299
Liabilities associated with non-current assets held for sale		5,368		—		—		—			—			—
Provisions(2)		9,080		7,069		6,294		5,710			6,086			413
Tax liabilities		118		866		758		856			80			5
Other liabilities		6,557		7,866		13,582		16,934			12,413			842
Total liabilities	Ps.	576,373	Ps.	653,430	Ps.	693,420	Ps.	765,300		Ps.	847,696		U.S.$	57,504
Shareholders’ equity
Share capital	Ps.	25,658	Ps.	25,658	Ps.	25,658	Ps.	25,658		Ps.	25,658		Ps.	1,741
Share premium		11,415		11,415		11,415		11,415			11,415			774
Accumulated reserves		33,745		34,618		44,324		41,593			52,160			3,538
Profit for the year attributable to the Parent		12,586		17,770		17,443		14,279			13,288			902
Valuation adjustments		1,947		1,372		764		(436	)		(244	)		(17	)
Non-controlling interests		10		11		8		9			10			1
Total equity		85,361		90,844		99,612		92,518			102,287			6,939
Total liabilities and equity	Ps.	661,734	Ps.	744,274	Ps.	793,032	Ps.	857,818		Ps.	949,983		U.S.$	64,443

(1) The balance as of December 31, 2014 has been translated into U.S. dollars, for convenience purposes only, using the exchange rate of Ps.14.7414 per U.S.$1.00 as calculated on December, 31, 2014 and reported by the Mexican Central Bank in the Official Gazette of the Federation on January 2, 2015 as the exchange rate for the payment of obligations denominated in currencies other than pesos and payable within Mexico.

(2) Includes provisions for pensions and similar obligations, provisions for off-balance sheet risk and provisions for tax and legal matters.  See “Item 5. Operating and Financial Review and Prospects.”

SELECTED RATIOS AND OTHER DATA

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

	As of and for the year ended December 31,
	2010			2011			2012			2013			2014
	(Millions of pesos or percentages, except per share, branch and employee data)
Profitability and performance
Net interest margin(1)		6.09	%		5.08	%		5.09	%		5.29	%		4.82	%
Total margin(2)		8.16	%		6.82	%		6.84	%		7.17	%		6.52	%
Return on average total assets (ROAA)(3)		2.36	%		2.67	%		2.24	%		1.83	%		1.43	%
Return on average equity (ROAE)(4)		15.72	%		22.01	%		18.25	%		14.16	%		13.54	%
Efficiency ratio(5)		38.32	%		42.92	%		39.81	%		39.76	%		41.70	%
Net fee and commission income as a percentage of operating expenses(6)		61.32	%		60.48	%		63.99	%		63.43	%		61.97	%
Yield on average interest-earning assets		9.01	%		8.18	%		8.29	%		8.12	%		7.39	%
Average cost of interest-bearing liabilities		3.65	%		3.71	%		3.66	%		3.26	%		2.85	%
Net interest spread		5.36	%		4.47	%		4.63	%		4.86	%		4.54	%

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	As of and for the year ended December 31,
	2010			2011			2012			2013			2014
	(Millions of pesos or percentages, except per share, branch and employee data)
Common stock dividend payout ratio(7)		50.85	%		63.87	%		41.85	%		146.00	%		26.14	%
Average interest-earning assets		435,651			569,502			669,697			682,420			783,865
Average interest-bearing liabilities		356,059			483,925			590,861			598,484			713,105
Capital adequacy
Net tangible book value(8)		83,482			87,382			95,964			88,767			98,208
Net tangible book value per share		12.30			12.88			14.15			13.09			14.49
Average equity as a percentage of average total assets		14.99	%		12.11	%		12.28	%		12.90	%		10.56	%
Total capital (Mexican Banking GAAP)		69,792			73,144			76,197			86,531			96,517
Tier 1 capital (Mexican Banking GAAP)		68,703			71,674			74,618			69,409			76,697
Tier 1 capital to risk-weighted assets (Mexican Banking GAAP)		15.31	%		14.53	%		14.47	%		12.79	%		12.85	%
Total capital to risk-weighted assets(9) (Mexican Banking GAAP)		15.56	%		14.82	%		14.78	%		15.94	%		16.17	%
Asset quality
Non-performing loans as a percentage of total loans(10)		2.11	%		1.98	%		2.06	%		3.81	%		3.90	%
Non-performing loans as a percentage of computable credit risk(10)(11)		1.93	%		1.83	%		1.92	%		3.56	%		3.66	%
Loan charge-offs as a percentage of average total loans		4.93	%		2.38	%		2.45	%		3.33	%		3.10	%
Loan charge-offs as a percentage of computable credit risk(11)		4.01	%		1.98	%		2.15	%		2.94	%		2.68	%
Allowance for impairment losses as a percentage of average total loans(12)		3.58	%		2.49	%		2.80	%		3.66	%		3.49	%
Allowance for impairment losses as a percentage of non-performing loans(10)(12)		151.04	%		113.55	%		128.08	%		90.70	%		82.46	%
Allowance for impairment losses as a percentage of loan charge-offs(12)		72.60	%		104.76	%		114.34	%		109.85	%		112.49	%
Allowance for impairment losses as a percentage of total loans(12)		3.19	%		2.25	%		2.64	%		3.45	%		3.22	%
Liquidity
Liquid assets as a percentage of deposits(13)		79.69	%		78.96	%		56.48	%		48.79	%		47.32	%
Total loans, net of allowance for impairment losses, as a percentage of deposits(14)		84.24	%		99.97	%		98.23	%		98.45	%		102.15	%
Total loans as a percentage of total funding(15)		55.73	%		65.86	%		70.49	%		67.86	%		69.97	%
Deposits as a percentage of total funding(14)(15)		64.05	%		64.39	%		69.86	%		66.55	%		66.29	%
Operations
Offices(16)		1,073			1,097			1,142			1,234			1,322
Employees (full-time equivalent)		11,828			12,395			13,385			14,260			16,427

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

(2) Total margin is defined as net interest income (including income from equity investments) plus fee and commission income (net) over average interest-earning assets.

(3) Calculated based upon the average daily balance of total assets.

(4) Calculated based upon the average daily balance of equity.

(5) Efficiency ratio is defined as administrative expenses plus depreciation and amortization, divided by total income.

(6) Net fee and commission income divided by administrative expenses plus depreciation and amortization.

(7) Dividends paid per share divided by net income per share.

(8) Calculated as total assets less intangible assets less total liabilities.

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(9) Tier 1 plus Tier 2 capital divided by total risk-weighted assets, calculated according to the Mexican Capitalization Requirements.

(10) Non-performing loans include (i) all credits past due by more than (x) 30 days, in the case of single-payment loans, (y) 60 days, in the case of revolving loans (including consumer loans and credit card loans), and (z) 90 days, in the case of periodic-payment loans (including non-revolving consumer loans, mortgages and commercial loans), and (ii) other doubtful credits. Other doubtful credits include (i) if greater than 25% of a customer’s loans are considered non-performing, the rest of such customer’s loans and (ii) loans to borrowers in doubtful financial situations such as bankruptcy.

(11) Computable credit risk is the sum of the face amounts of loans (including non-performing loans), guarantees and documentary credits. When guarantees or documentary credits are contracted, we book them as off-balance sheet accounts.  As of the date we make the payment to the beneficiary, we claim the payment from the solicitor (i.e., the debtor in the case of a guarantee or the buyer in the case of a documentary credit).  The account becomes non-performing as of the date when the payment was due if we do not receive payment from the solicitor on that date.  We maintain the account as a non-performing loan until recovery or, in the case of practical impossibility for recovery (e.g., when the creditor is declared bankrupt or upon the death of a creditor who is a natural person), until our Comprehensive Risk Management Committee decides to charge off the account.  Such decision is at the discretion of our Comprehensive Risk Management Committee.

(12) Allowance for impairment losses were Ps.7,558 million, Ps.7,247 million, Ps.9,387 million, Ps.13,764 million and Ps.15,198 as of December 31, 2010, 2011, 2012,  2013 and 2014, respectively.

(13) For the purpose of calculating this ratio, the amount of deposits includes the sum of demand deposits and time deposits.  See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Composition of Deposits.”

Liquid assets include cash, due from banks and government securities recorded at market prices. We believe we could obtain cash for our liquid assets immediately, although under systemic stress scenarios, we would likely be subject to a discount to the face value of these assets.  As of December 31, 2010, 2011, 2012, 2013 and 2014, we had a total amount of liquid assets of Ps.216,913 million, Ps.248,505 million, Ps.198,777 million, Ps.190,678 million and Ps.211,821, respectively. For the years ended December 31, 2010, 2011, 2012, 2013 and 2014, the average amounts outstanding were Ps.201,854 million, Ps.220,444 million, Ps.215,274 million, Ps.188,614 million and Ps.203,061, respectively.

As of December 31, 2010, liquid assets were composed of the following: 20.4% cash and balances with the Mexican Central Bank (cash at our branches and ATMs and the Depósito de Regulación Monetaria (Compulsory Deposits)); 49.5% debt instruments issued by the Mexican Government and 30.1% debt instruments issued by the Mexican Central Bank.

As of December 31, 2011, liquid assets were composed of the following: 17.8% cash and balances with the Mexican Central Bank (cash at our branches and ATMs and the Depósito de Regulación Monetaria (Compulsory Deposits)); 53.9% debt instruments issued by the Mexican Government and 28.3% debt instruments issued by the Mexican Central Bank.

As of December 31, 2012, liquid assets were composed of the following: 24.3% cash and balances with the Mexican Central Bank (cash at our branches and ATMs and the Depósito de Regulación Monetaria (Compulsory Deposits)); 45.7% debt instruments issued by the Mexican Government and 30.0% debt instruments issued by the Mexican Central Bank.

As of December 31, 2013, liquid assets were composed of the following: 26.0% cash and balances with the Mexican Central Bank (cash at our branches and ATMs and the Depósito de Regulación Monetaria (Compulsory Deposits)); 51.0% debt instruments issued by the Mexican Government and 23.0% debt instruments issued by the Mexican Central Bank.

As of December 31, 2014, liquid assets were composed of the following: 24.5% cash and balances with the Mexican Central Bank (cash at our branches and ATMs and the Depósito de Regulación Monetaria (Compulsory Deposits)); 31.6% debt instruments issued by the Mexican Government and 43.9% debt instruments issued by the Mexican Central Bank.

(14) For the purpose of calculating this ratio, the amount of deposits includes the sum of demand deposits and time deposits.  “See Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Composition of Deposits.”

(15) For the purpose of calculating this ratio, the amount of total funding comprises the total of our deposits and reverse repurchase agreements, our total marketable debt securities and the amount of our subordinated liabilities.

For December 31, 2010, 2011, 2012, 2013 and 2014, our deposits and reverse repurchase agreements amounted to Ps.412,956 million, Ps.463,841 million, Ps.449,034 million, Ps.517,340 million and Ps.596,706, respectively, and our marketable debt securities amounted to Ps.12,005 million, Ps.23,894 million, Ps.54,703 million, Ps.53,118 million and Ps.59,077, respectively. For December 31, 2013 and 2014, our subordinated liabilities amounted to Ps.16,824 million and Ps.19,446 million, respectively.

(16) Includes branches, cash desks (ventanillas), Santander Select offices (including Centros Select, Espacios Select and box offices) and Santander Select units (módulos).

6

Exchange Rates

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

The following tables set forth, for the periods indicated, the low, high, average and period-end exchange rates expressed in pesos per U.S. dollar published by the Mexican Central Bank in the Official Gazette of the Federation as the exchange rate for the payment of obligations denominated in currencies other than pesos and payable within Mexico.  The rates shown below are in nominal pesos and have not been restated in constant currency units.  No representation is made that the peso amounts referred to in this annual report on Form 20-F could have been or could be converted into U.S. dollars at any particular rate or at all.  As of April 29, 2015, the exchange rate for U.S. dollars was Ps.15.20 per U.S. dollar.

Year	Low		High		Average(1)		Period End
2010	Ps.	12.16	Ps.	13.18	Ps.	12.64	Ps.	12.35
2011		11.50		14.24		12.47		13.95
2012		12.63		14.39		13.14		12.97
2013		11.98		13.44		12.87		13.08
2014		12.85		14.79		13.30		14.74

(1) Average end-of-month exchange rates for  2010, 2011, 2012, 2013 and 2014, respectively.

Month	Low		High		Average(1)		Period End
October 2014	Ps.	13.38	Ps.	13.57	Ps.	13.48	Ps.	13.48
November 2014		13.53		13.90		13.62		13.90
December 2014		13.93		14.79		14.51		14.74
January 2015		14.56		14.99		14.69		14.99
February 2015		14.75		15.11		14.92		14.96
March 2015		14.93		15.58		15.23		15.26
April 2015 (through April 29)		14.80		15.45		15.22		15.20

(1) Average daily exchange rates for October, November and December 2014 and January, February, March and April (through April 28) 2015.

Unless otherwise indicated, U.S. dollar amounts that have been translated from pesos have been so translated at an exchange rate of Ps.14.7414 to U.S.$1.00, the exchange rate as calculated on December 31, 2014 and reported by the Mexican Central Bank in the Official Gazette of the Federation on January 2, 2015 as the exchange rate for the payment of obligations denominated in currencies other than pesos and payable within Mexico.

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

B.  Capitalization and Indebtedness

Not applicable.

C.  Reasons for the Offer and Use of Proceeds

Not applicable.

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D.  Risk Factors

Our business, financial condition and results of operations could be materially and adversely affected if any of the risks described below occur. As a result, the market price of our American Depositary Shares, or ADSs, or our Series B shares could decline, and you could lose all or part of your investment. This annual report also contains forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements.” The risks described below are those known to us or that we currently believe may materially and adversely affect us; other risks not currently known to us may arise in the future or may reach a greater level of materiality, which may materially and adversely affect us and our business.

Risks Associated with Our Business

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

In the past seven years, financial systems worldwide have experienced periods and events of difficult credit and liquidity conditions and disruptions leading to less liquidity, greater volatility, general widening of spreads and, in some cases, lack of price transparency on interbank lending rates.  Global economic conditions deteriorated significantly between 2007 and 2009, and many countries, including the United States, fell into recession.  Although macroeconomic conditions have slightly improved in the past three years, global imbalances and risks remain.  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).  The global economic slowdown has had, and may continue to have, a negative impact on the Mexican economy and an adverse effect on our business. The normalization of U.S. monetary policy, including the end of its quantitative easing stimulus, might also have a negative impact on the Mexican economy and adversely affect our business.

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

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

· Reduced demand for our products and services.

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

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

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

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

· Macroeconomic shocks may negatively impact the household income of our retail customers and may adversely affect the recoverability of our retail loans, resulting in increased loan losses.

Despite recent improvements in certain segments of the global economy, uncertainty remains concerning the future economic environment. There can be no assurance that economic conditions in these segments will continue to improve or that the global economic condition as a whole will improve significantly. Such economic uncertainty could have a negative impact on our business and results of operations. Global investor confidence remains cautious. A slowing or failing of the economic recovery or the normalization of U.S. monetary policy would likely aggravate the adverse effects of these difficult economic and market conditions on us and on others in the financial services industry.

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Increased 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/or 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 and liquidity.

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

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

Market risk refers to the probability of variations in our net interest income or in the market value of our assets and liabilities due to volatility of interest rates, exchange rates or equity prices.  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.

Interest rates are 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. Variations in short-term interest rates could affect our net interest income, which comprises the majority of our revenue.  When interest rates rise, we may be required to pay higher interest on our floating-rate borrowings while interest earned on our fixed-rate assets does not rise as quickly, which could cause profits to grow at a reduced rate or decline in some parts of our portfolio.  Interest rate variations could adversely affect us, including our net interest income, reducing its growth rate or even resulting in losses.  We monitor our interest rate risk using the Net Interest Margin, or NIM, sensitivity, which is the difference between the return on assets and the financial cost of our financial liabilities based on a one-year time frame and a parallel movement of 100 basis points (1%) in market interest rates.  As of December 31, 2014, the 1% NIM sensitivity was Ps.1,008.

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

If interest rates decrease, although this is likely to decrease our funding costs, it is likely to adversely impact the income we receive arising from our investments in securities 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. In recent years, interest rates have been low by historical standards.  However, there can be no assurance that such low rates will continue in the future.

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

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We are also exposed to equity price risk in connection with our trading investments in equity securities. The performance of financial markets may cause adverse changes in the value of our investment and trading portfolios. The volatility of world equity markets due to the continued economic uncertainty has had a particularly strong impact on the financial sector. Continued volatility may affect the value of our investments in entities in this sector and, depending on their fair value and future recovery expectations, could become a permanent impairment which would be subject to charge-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, which would in turn adversely impact our business.

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

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 if conditions cause a decrease in expected values. 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 sale or other disposal may be lower than current fair market values. 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 with no reported trading prices, such as loans, and particularly in times of economic instability. In such circumstances, our valuation methodologies may 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 or future results. Any consequential impairments or charge-offs could have a material adverse effect on our operating results, financial condition and prospects.

If we are unable to effectively control the level of non-performing or poor credit quality loans in the future, or if our allowance for impairment losses is 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 have an adverse effect on us.  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 have acquired or may acquire in the future, or factors beyond our control, such as those associated with our acquisition of mortgage assets, as well as the adverse effect of changes in the credit quality of our borrowers and counterparties or a general deterioration in Mexican or global economic conditions, the impact of political events, events affecting certain industries or events affecting financial markets and global economies. For example, on November 25, 2014, we entered into an agreement to acquire a non-revolving consumer loans portfolio of approximately 39,200 loans with a total face value of approximately Ps.3,179 million from Scotiabank Inverlat, S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank (“Scotiabank Inverlat”). We paid Ps.3,002 million for the portfolio, in two tranches closing on April 4 and April 19, 2015. Although we will integrate these loans into our broader consumer loans portfolio, we can provide no assurance that the levels of non-performing loans in this recently acquired portfolio will not be materially higher in the future.

Our current allowance for impairment losses may not be adequate to cover an increase in the amount of non-performing loans or any future deterioration in the overall credit quality of our total loan portfolio. Our allowance for impairment losses is based on our current assessment of and expectations concerning various factors affecting us, including the quality of our loan portfolio. These factors include, among other things, our borrowers’ financial condition, ability and intent to pay, the realizable value of 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 allowance for impairment

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losses will be sufficient in the future to cover actual loan and credit 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 SMEs, 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 provisions and allowance for impairment losses, which may adversely affect us.  If we are unable to control or reduce the level of our non-performing or poor credit quality loans, this could have a material adverse effect on us.

Our exposure to individuals and small and medium-sized businesses could lead to higher levels of non-performing loans, allowances for loan losses and charge-offs.

A substantial number of our customers consist of individuals (approximately 39.1% of the value of the total gross loan portfolio as of December 31, 2014) and, to a lesser extent, SMEs (those companies with annual revenues of less than Ps.100,000,000 (U.S.$6,783,616)), which comprised approximately 11% of the value of the total gross loan portfolio as of December 31, 2014.  As part of our business strategy, we are seeking to further increase lending and other services to individuals and SMEs, which are more likely to be adversely affected by downturns in the Mexican economy than large corporations and high-income individuals who have greater resources.  Consequently, in the future we may experience higher levels of non-performing loans, which could result in increases in our allowance for impairment losses, which in turn will affect our financial condition and results of operations.  For the year ended December 31, 2014, non-performing loans were Ps.18,430 million and total charge-offs against our allowance for impairment losses were Ps.13,510 million.  Non-performing loans related to individuals and SMEs represented 48.0% and 8.4%, respectively, of our total non-performing loans for the year ended December 31, 2014, as compared to 45.1% and 8.6%, respectively, of our total non-performing loans for the year ended December 31, 2013.  Charge-offs related to individual and SME loans represented 77.1% and 18.4%, respectively, of our total charge-offs for the year ended December 31, 2014, as compared to 77.6% and 19.2%, respectively, for the year ended December 31, 2013.  There can be no assurance that the levels of non-performing loans and subsequent charge-offs will not be materially higher in the future and that this activity will not have an adverse effect on us.

Part of our current growth strategy is also to increase volume in the credit card portfolio, at the same rate or a slightly higher rate than the market, which may increase the level of non-performing loans in our total loan portfolio.  In addition, the introduction of new products, such as residential mortgages with increasing payments and a fixed interest rate could lead to greater loan provisions.  As of December 31, 2014, our mortgage loan portfolio totaled Ps.108,184 million, representing 22.9% of our gross loans and advances to customers (excluding repurchase agreements).  If the economy and real estate market in Mexico experience a significant downturn, as it may due to the global financial and economic crisis, this could materially adversely affect the liquidity, businesses and financial conditions of our customers, which may in turn cause us to experience higher levels of past due loans, thereby resulting in higher allowance for impairment losses and subsequent charge-offs.  This may materially and adversely affect our asset quality, results of operations and financial condition.

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

We are exposed to currency risk any time we hold an open position in a currency other than pesos and to interest rate risk when we have an interest rate repricing gap or carry interest-earning securities having fixed real or nominal interest rates.  Peso exchange rates and interest rates in Mexico have been subject to significant fluctuations in recent years.  Because of the historical volatility in peso exchange rates and interest rates in Mexico, the risks associated with such positions may be greater than in certain other countries.  Our foreign currency liabilities are subject to regulation by the Mexican Central Bank, which imposes liquidity requirements in matching currencies, depending upon the maturities of such liabilities. As of December 31, 2014, the value at risk, or VaR, associated with our financial instruments sensitive to interest rates and foreign currency exchange rates was U.S.$2.96 (Ps.43.59) and U.S.$1.09 (Ps.16.10), respectively.  Although we follow various risk management procedures in connection with our trading and treasury activities and are subject to regulations that seek to avoid important mismatches, there can be no assurance that we will not experience losses with respect to these positions in the future, any of which could have a material adverse effect on us, including our results of operations.

Severe devaluation or depreciation of the peso may have an adverse effect on us by, for example, increasing in peso terms the amount of our foreign currency-denominated liabilities and the rate of default among our borrowers or affecting our results of operations when measured in U.S. dollar terms.  In addition, severe depreciations may

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result, as in the past, in the implementation of exchange controls that may impact our ability to convert pesos into U.S. dollars or to transfer currencies outside of Mexico, which may have an impact on us.

Negative economic conditions in the United States and in other parts of the world have translated into high volatility in international and domestic markets. As a result, the Mexican peso has posted significant fluctuations in the past years. For instance, the peso depreciated 26.5% in 2008, but then it regained strength in 2009 and 2010, appreciating by 5.4% and 5.5%, and depreciating by 13.0% in 2011. At the end of 2012, the peso had appreciated to 12.87 pesos per U.S. dollar compared to the exchange rate at the end of 2011. At the end of 2013, the peso had depreciated to 13.08 pesos per U.S. dollar compared to the exchange rate at the end of 2012. At the end of 2014, the peso had depreciated to 14.74 pesos per U.S. dollar compared to the exchange rate at the end of 2013. As of April 29, 2015, the peso had depreciated to Ps.15.20 per U.S. dollar relative to the end of December 2014 exchange rate. The peso continues to be affected by uncertainty and volatility in the global markets. The Mexican government has consistently implemented a series of measures to limit the volatility of the peso, varying from auctioning U.S. dollars to intervening in interest rates and regulating hedges of foreign currency-denominated liabilities of Mexican banks.  However, we cannot assure you that such measures will be effective or maintained or how such measures will impact the Mexican economy.

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

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

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

We are subject to extensive laws and regulations regarding our organization, operations, lending and funding activities, capitalization, transactions with related parties and taxation and other matters.  These laws and regulations impose numerous requirements on us, including the maintenance of minimum credit risk-based, market risk-based and operating-risk capital levels and allowance for impairment losses, prohibited activities, regulation of our business practices and practices relating to risk-profile and sales of securities, regulation on money laundering, regulation on derivatives, rates charged, application of required accounting regulations and tax obligations.  Many of the applicable laws and regulations have changed extensively in recent years, with a negative impact on us.  There may be future changes in the legal or regulatory system or in the interpretation and enforcement of the laws and regulations. On November 1, 2013 the Mexican Congress approved several tax reforms that have become effective. These reforms include changes to the Income Tax Law (Ley del Impuesto sobre la Renta), Value Added Tax Law (Ley del Impuesto al Valor Agregado) and the Mexican Federal Tax Code (Código Fiscal de la Federación).  The tax reforms also repeal the Single Rate Corporate Tax Law (Ley del Impuesto Empresarial a Tasa Única) and the Tax Law on Cash Deposits (Ley del Impuesto a los Depósitos en Efectivo). On November 26, 2013, the Mexican Congress approved a financial reform package that granted broader authority to financial authorities and ordered the Mexican competition authorities to initiate an investigation on the fairness of trade practices in the Mexican financial system. See “Item 4. Information on the Company—B. Business Overview—The Mexican Financial System.”

One of the main aspects of the recent changes in the Mexican Banking Law approved by the Mexican Congress consists of the authority granted to the Mexican Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público, or SHCP) to conduct evaluations of Mexican banks. Although the guidelines for such evaluations were scheduled to be published at the end of December 2014, the results of the first evaluation are now scheduled to be published in 2016.Results of evaluations are required to be made publicly available by the Ministry. Negative or deficient results from evaluations may result in corrective measures being ordered, including a requirement to

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present a plan to correct such deficiencies.  It is uncertain what such measures may be and whether the imposition of such measures on us may have a material adverse effect on our business.

We cannot predict the terms that will be included in the evaluation report prepared by the SHCP, particularly in relation to lending to certain sectors of the economy. However, if the Ministry determines, after an evaluation, that we have not complied with applicable requirements, we may be forced to lend to certain sectors of the economy or to certain persons that may not meet our credit quality or other standards specified in our policies, that we may not be familiar with or that are not acceptable credit risks, which in turn may impact our financial condition and results of operations. Furthermore, if we were to fail any evaluation, publicity surrounding such failure may impact our reputation, which in turn may adversely impact our ability to conduct business in Mexico and our financial condition and results of operations.

Given the current environment affecting the financial services sector, there may be future changes in the regulatory system or in the interpretation and enforcement of the laws and regulations that could adversely affect us.  See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation” for a discussion of the governmental authorities that regulate us.

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

The Federal Law for Protection of Personal Data Held by Private Persons (Ley Federal de Protección de Datos Personales en Posesión de los Particulares) protects personal data collected and requires that we ensure the confidentiality of information received from clients. We have modified our processes, procedures and systems as required to implement this law and the supervision of our activities thereunder and as a means to obtain the consent of our customers prior to using any personal information provided by them. Violations of this law could have a material adverse effect on us, including increasing our operating costs and subjecting us to fines and penalties in the event of violations of the provisions of such law.

Future Mexican government restrictions on interest rates or changes in allowance for impairment losses requirements could have a material adverse effect on us.

In Mexico, the Law for the Protection and Defense of Financial Services Users (Ley de Protección y Defensa al Usuario de Servicios Financieros) does not impose any specific limit on interest rates, subject to certain exceptions, that a bank may charge.  However, under the Law for the Transparency and Ordering of Financial Services, the Mexican Central Bank may issue regulations in respect of interest rates, if it determines that economic conditions are not conducive to competition (after hearing the opinion of the CFC). Although the Mexican government could impose limitations or additional informational requirements regarding such interest rates in the future, as of the date of this annual report on Form 20-F, the Mexican Congress and Mexican regulators (including the Mexican Central Bank) have not proposed any specific limit to the interest rates we may charge.A portion of our revenues and operating cash flow is generated by interest rates we charge to our customers, and any such limitations or additional informational requirements could have a material adverse effect on us.

Changes in regulatory or accounting requirements regarding allowance for impairment losses may have a material adverse effect on us, our financial condition and results of operations.

We may be required to make significant contributions to the IPAB.

IPAB manages the bank savings protection system and the financial support granted to banks in Mexico.  Under Mexican law, banks are required to make monthly contributions to IPAB to support its operations that are equal to 1/12 of 0.004% (the annual rate) multiplied by the average of certain liabilities minus the average of certain assets.  Mexican authorities impose regular assessments on banking institutions covered by IPAB for funding.  We contributed to IPAB Ps.982 million in 2010, Ps.1,228 million in 2011, Ps.1,342 million in 2012, Ps.1,544 million in 2013 and Ps.1,887 million in 2014.  In the event that IPAB’s reserves are insufficient to manage the Mexican bank savings protection system and provide the necessary financial support required by troubled banking institutions, IPAB maintains the right to require extraordinary contributions to all banking institution participants in the system, which we may be required to make and may be significant.  Although we have not been required to make

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extraordinary contributions to the IPAB in the past, we may be required to make extraordinary contributions in the future. Such extraordinary contributions would increase our expenses and could have a material adverse effect on us.

We are subject to Mexican regulatory inspections, examinations, inquiries or audits, and future sanctions, fines and other penalties resulting from such inspections and audits, including the revocation of Banco Santander Mexico’s banking license, could have a material adverse effect on us.

We are subject to comprehensive regulation and supervision by Mexican regulatory authorities, such as the Mexican Central Bank, the CNBV and the SHCP.  See “Item 4. Information on the Company—B. Business Overview—The Mexican Financial System.”  These regulatory authorities have broad powers to adopt regulations and other requirements affecting or restricting virtually all aspects of our capitalization, organization and operations, including changes to capital adequacy and allowance for impairment losses requirements, the activities we may and may not conduct (including limitations on derivative transactions), supervision of compliance with rules relating to secrecy, the imposition of anti-money laundering measures and the authority to regulate the terms of products, including the interest rates we charge and the fees we collect in exchange for services.  Moreover, Mexican financial regulatory authorities possess significant powers to enforce applicable regulatory requirements, including the imposition of fines, requiring that new capital be contributed, inhibiting us from paying dividends to shareholders or paying bonuses to employees, or the revocation of licenses to operate our business (including our banking or broker-dealer licenses).  In the event we encounter significant financial problems or become insolvent or in danger of becoming insolvent, Mexican banking authorities would have the power to take over our management and operations.  Pursuant to the Law for the Protection and Defense of Financial Services Users, the Mexican National Commission for the Protection and Defense of Financial Service Users (Comisión Nacional para la Protección y Defensa de los Usuarios de Servicios Financieros, or CONDUSEF) is entitled to, among other things, initiate class actions against Mexican financial institutions in connection with events of any nature that affect groups of users of financial services. See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation.”

Despite our risk management policies, procedures and methodologies, we may nonetheless be exposed to unidentified or unanticipated risks. In addition, failure to successfully implement and continue to improve our credit risk management system, which is affected by the quality and scope of information available in Mexico, could materially and adversely affect us.

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.  Some of our quantitative tools and metrics for managing risk are based upon our use of observed historical market behavior.  We apply statistical tools to these observations to arrive at quantifications of our risk exposures.  These quantitative tools and metrics may fail to predict future risk exposures.  These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models.  This would limit our ability to manage our risks.  Our losses, thus, could be significantly greater than the historical measures indicate.  In addition, our quantified modeling does not take all risks into account.  Our 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.

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 credit risks higher than those 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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In addition, the effectiveness of our credit risk management is affected by the quality and scope of information available in Mexico.  In assessing customers’ creditworthiness, we rely largely on the credit information available from our own internal databases, the Mexican credit bureaus and other sources.  Due to limitations in the availability of information and the developing information infrastructure in Mexico, our assessment of credit risk associated with a particular customer may not be based on complete, accurate or reliable information.  In addition, although we have been improving our credit scoring systems to better assess borrowers’ credit risk profiles, we cannot assure you that our credit scoring systems collect complete or accurate information reflecting the actual behavior of customers or that their credit risk can be assessed correctly. Without complete, accurate and reliable information, we have to rely on other publicly available resources and our internal resources, which may not be effective.  As a result, our ability to effectively manage our credit risk and subsequently our provisions and loan loss allowance may be materially adversely affected.

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  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 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 us, including our fee and commission income.

Even in the absence of a market downturn, below-market performance by mutual funds may result in increased withdrawals and reduced inflows, which would reduce the revenue we receive from fees and adversely affect our results of operations. Our revenues from fees may also be reduced by legislative changes affecting the financial system.

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 fair value measurements of financial instruments, deferred tax assets, impairment of financial assets classified as available-for-sale, allowance for impairment losses

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on loans and receivables and provisions for off-balance sheet risk, defined benefit plan, business combinations and goodwill, impairment of goodwill and provisions and contingent 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.

Goodwill impairments may be required in relation to acquired businesses.

We have made business acquisitions in recent years and may make further acquisitions in the future. It is possible that the goodwill which has been attributed, or may be attributed, to these businesses may have to be written-down if our valuation assumptions are required to be reassessed as a result of any deterioration in their underlying profitability, asset quality and other relevant matters. Impairment testing in respect of goodwill is performed annually, more frequently if there are impairment indicators present, and comprises a comparison of the carrying amount of the cash-generating unit with its recoverable amount. Goodwill impairment does not, however, affect our regulatory capital. While no impairment of goodwill was recognized in 2013 or 2014, there can be no assurances that we will not have to recognize any impairment or write down the value attributed to goodwill in the future, which would adversely affect our results and net assets.

Competition with other financial institutions could adversely affect us.

We face substantial competition in all parts of our business, including in originating loans and in attracting deposits.  The competition in originating loans comes principally from other Mexican and foreign banks, mortgage banking companies, consumer finance companies, insurance companies and other lenders and purchasers of loans.  We anticipate that we will encounter greater competition as we expand our operations.  In addition, certain of our competitors, such as Sofomes, are not licensed financial institutions and, as such, not subject to the same extensive banking regulation, including capitalization and allowance for impairment losses requirements.  As a result, certain of our competitors may have advantages in conducting certain businesses and providing certain services and particularly, may be more aggressive in their loan origination activities.

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

For a number of years, foreign financial institutions have been permitted to establish subsidiary financial groups, banks, broker-dealers and other financial entities in Mexico.  According to the CNBV, as of December 31, 2014, Mexico’s ten largest domestic banks, measured in terms of assets, held 86.6% of the total assets in the Mexican banking system.  Five of these ten banks are foreign-owned. These foreign financial institutions are generally well-capitalized, and have substantial resources (such as personnel, technology and product development and organization); if any of them pursue the Mexican market aggressively, by establishing or expanding operations, we may be unable to compete with them.

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

In addition, legal and regulatory reforms in the Mexican banking industry have also increased competition among banks and among other financial institutions. In particular, recent rules applicable to all banks permit the substitution of loans by banks (and the resulting acquisition of clients) by complying with de minimis requirements, that are likely to result in banks losing clients to their competitor institutions that embark in aggressive pricing strategies.  We believe that the Mexican government’s policies of adopting market-oriented reforms in the financial industry have brought greater competition.  As financial sector reform continues, foreign financial institutions, some

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having greater resources than we do, have entered and may continue to enter the Mexican market either by themselves or in partnership with existing Mexican financial institutions and compete with us.  There can be no assurance that we will be able to compete successfully with such domestic or foreign financial institutions.

Increasing competition could 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.

Our brokerage subsidiary also faces intense competition in its value intermediary business.  See “Item 4. Information on the Company—B. Business Overview—Competition.”

We are exposed to risks faced by other financial institutions.

We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, hedge funds and other institutional clients.  Defaults by, and even rumors or questions about the solvency of, certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by other institutions.  Many of the routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties.  In 2010 and 2011, the financial health of a number of European governments was shaken by the European sovereign debt crisis, contributing to volatility of the capital and credit markets, and the risk of contagion throughout and beyond the Eurozone remains, as a significant number of financial institutions throughout Europe have substantial exposures to sovereign debt issued by nations which are under considerable financial pressure.  These liquidity concerns have had, and may continue to have, an adverse effect on interbank financial transactions in general.  Should any of these nations default on their debt, or experience a significant widening of credit spreads, major financial institutions and banking systems throughout Europe could be destabilized.  A default by a significant financial counterparty, or liquidity problems in the financial services industry generally, could have a material adverse effect on us.

Liquidity and funding risks are inherent to 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 have liquidity management processes designed 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 our liquidity, including interbank 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.

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

As a result, 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.

We rely, and will continue to rely, primarily on customer 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 customer 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

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deposits. Any of these factors could significantly increase the amount of customer deposit withdrawals in a short period of time, thereby reducing our ability to access customer 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.

If wholesale debt financing and related markets cease to become available, or become excessively expensive to us, 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.

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.

Many Mexican banks have suffered severe liquidity problems from time to time.  We have not suffered material liquidity problems since the 1995 to 1996 period, when we experienced a significant increase in the cost of funding as a result of the financial crisis in Mexico.  During this period, we were able to obtain the required funding, but at a higher cost.  While we have not suffered material liquidity problems in recent years, we cannot assure you that liquidity problems will not affect the Mexican banking system in the future or that liquidity constraints will not affect us in the future.  While we expect to be able to refinance our liabilities, we cannot assure you that we will be able to repay our liabilities or refinance our liabilities on favorable terms or at all.

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

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

Our credit card business is subject to a number of risks and uncertainties, including the possibility of over-indebtedness of our customers, despite our focus on low-risk and medium- and high-income customers. We currently segment our credit card portfolio into ten groups based on a composite score comprised of a behavior score based on internal and external data and a credit capacity score based primarily on external data.  We perform monthly validations of our scores to test their predictive capacity so that the methodologies can be adjusted, if necessary.  We measure the loss rates for each of the ten groups over a one-year period and compare the average loss rate to our appetite for risk within the credit card portfolio.  As of December 31, 2014, approximately 57% of our credit card portfolio was included in the top five groups, which together had an average loss rate of 4.5%, which we consider to be low risk.

Credit card products are characterized by higher consumer default than other consumer credit products, and defaults are highly correlated with macroeconomic indicators that are beyond our control.  From 2008 to 2010, our credit card portfolio decreased by Ps.22,832 million, or 48%, primarily due to charge-offs, tightening of credit policies and a reduction in the origination of new credit cards, all of which were a response to a material deterioration in credit quality in our credit card portfolio.  Part of our current growth strategy is to increase volume in the credit card portfolio, at the same or a slightly higher rate than the market, which may increase our exposure to risk in our loan portfolio. During 2014, our credit card portfolio grew 5.8%. If Mexican economic growth slows or declines, or if we fail to effectively analyze the creditworthiness of our customers (including by targeting certain sectors), we may be faced with unexpected losses that could have a material adverse effect on us.

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One of our core strategies is to grow our operations and we may not be able to manage such growth effectively, which could have an adverse impact on us.

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. We 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 the strategic growth decisions include our ability to:

· efficiently manage 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, newly established entities or acquisitions in line with our strategy;

· align our current information technology systems adequately with those of an enlarged group;

· apply our risk management policy effectively to an enlarged group;

· manage a growing number of entities without over-committing management or losing key personnel; and

· generate transactions through our electronic channels.

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 us.

The value of the collateral securing our loans may not be sufficient, and we may be unable to realize the full value of the collateral securing our loan portfolio.

The value of the collateral securing our loan portfolio may significantly fluctuate due to factors beyond our control, including macroeconomic factors affecting Mexico’s economy.  The performance of the real estate market may affect us as real estate represents a significant portion of the collateral securing our residential mortgage loan portfolio.  As of December 31, 2014, the loan-to-value ratio of our mortgage portfolio and the loan-to-value ratio for originations were 62.9% and 59.4% on average, respectively.  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 adversely affect our results of operations and financial condition.

Credit, market and liquidity risk may have an adverse effect on our credit ratings and on us, including 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 us, including our interest margins and results of operations.

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

Any downgrade in our 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.

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The long-term debt of Banco Santander, S.A., or Banco Santander Parent, is currently rated investment grade by the major rating agencies—Baa1 by Moody’s Investors Service (“Moody’s”), BBB+ by Standard & Poor’s Ratings Services (“S&P”) and A- by Fitch Ratings Ltd. (“Fitch”)—all of which have a stable outlook due to the gradual economic improvement in Spain.

All three agencies had downgraded Banco Santander Parent’s 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, S&P downgraded Banco Santander Parent’s rating by two notches in April 2012 together with that of 15 other Spanish banks following that rating agency’s decision to downgrade Spain’s sovereign debt rating by two notches.  Moody’s Investors Service España, S.A. further downgraded Banco Santander Parent’s rating in May 2012, together with downgrades of 15 other Spanish banks and Santander UK plc, a United Kingdom-domiciled subsidiary of Banco Santander Parent.  In June 2012, Fitch 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 further downgraded Banco Santander Parent’s rating on June 11, 2012 from A to BBB+, with a negative outlook.  Moody’s downgraded Banco Santander Parent’s rating on June 25, 2012 from A3 to Baa2, with a negative outlook.  On October 15, 2012, S&P further downgraded Banco Santander Parent’s rating from A- to BBB, with a negative outlook, following S&P’s additional downgrade of the Spanish sovereign debt rating.

Recently the ratings agencies have acknowledged the gradual improvement in Spain’s economic conditions which have in turn improved the outlook for Banco Santander Parent’s long-term debt.  Accordingly, the ratings agencies have each changed their outlook on Banco Santander Parent’s long-term debt to stable, from negative. Moreover, Fitch and S&P affirmed their BBB+ and BBB ratings on November 8, 2013 and December 20, 2013, respectively.  In addition, on March 4, 2014 Moody’s raised its rating to Baa1, from Baa2. However, we can provide no assurances that ratings agencies will not change their view based on changes in economic conditions or otherwise.

On February 12, 2014, Moody’s raised the long-term foreign currency deposit and issuer ratings of some of the main Mexican banks, including Banco Santander Mexico, from Baa1 to A3.  This decision mirrored Moody’s upgrade of Mexico’s government bond ratings to A3, from Baa1. Our long-term debt in foreign currency is currently rated BBB+ with a stable outlook by S&P, BBB+ with a stable outlook by Fitch and A3 with a stable outlook by Moody’s. All three rating agencies revised our ratings during 2012 following the downgrades of Banco Santander Parent, although S&P raised the local and foreign currency short-term debt ratings of Banco Santander Mexico for any issuances in the international capital markets from A-3 to A-2, which mirrored S&P’s decision to raise Mexico’s sovereign short-term foreign currency rating to A-2 on July 9, 2012.

Our funding costs have generally not been affected by downgrades of Spain’s sovereign debt, Banco Santander Parent’s debt and our related downgrades.  For debt financing, we rely in part on local, peso-denominated issuances, and we continue to be rated mxAAA, Aaa.mx and AAA(mex) by S&P, Moody’s and Fitch, respectively, with respect to our local peso-denominated long-term debt, with equivalent ratings for our local peso-denominated short-term debt.  Nor have we been required to post additional collateral or take other actions under any of our derivative contracts.

However, any downgrades of Spain’s sovereign debt, Banco Santander Parent’s debt and our related downgrades could adversely affect our cost of funding related to any further issuances of debt in the international capital markets. We estimate that if the rating agencies were to downgrade our long-term senior debt ratings by one or two notches, it would increase our borrowing costs for debt issued in the international capital markets by approximately 10 to 20 basis points for our short-term debt. The effect on our long-term debt is much more uncertain due to the factors described above; however, we estimate that there would be an increase of approximately 30 to 50 basis points in our borrowing costs for long-term debt issued in the international capital markets in the event of a downgrade by one or two notches. In addition, we estimate that we would be required to post up to U.S.$26.14 million in additional collateral in respect of our derivative arrangements in the event of such a downgrade, based on our derivatives portfolio as of December 31, 2014.

While certain potential impacts of these downgrades 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

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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, counterparty, operational and other related risks associated with our derivative transactions that could have a material adverse effect on us.

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

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

Market practices and documentation for derivative transactions in Mexico may differ from those in other countries. 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. These factors further increase the risks associated with these transactions and could have a material adverse effect on us.

Broad regulatory authority granted to CONDUSEF may result in measures being taken that affect our operations and financial condition.

CONDUSEF has broad powers to regulate our activities and activities of other Mexican banks, which may have an adverse impact on us. Under recent changes approved by the Mexican Congress to the Law for the Protection and Defense of Financial Services Users, CONDUSEF is entitled (i) to order amendments to our standard form commercial banking documentation (such as loan and account agreements), if CONDUSEF deems that provisions included in such agreements are detrimental to users, (ii) to order the attachment of our assets for the benefit of our customers, and (iii) to initiate class actions for the benefit of groups of customers. CONDUSEF has broad and discretionary authority to take this and other similar actions, including the imposition of fines and the publication of information that may be detrimental to our business and reputation. Actions taken by CONDUSEF against us, whether on an isolated or recurrent basis, may have a material adverse impact on us.

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.

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

One of our main strategies is to focus on the retail banking sector and to grow our retail loan portfolio.  The recoverability of retail loans in particular and our ability to increase the amount of loans outstanding, and our results of operations and financial condition in general, may become increasingly vulnerable to macroeconomic shocks that could negatively impact the household income of our retail customers and result in increased loan losses that could have a material adverse effect on us. GDP growth in 2013 posted a sharp decline, but improved during 2014, consistent with the Mexican cyclical economic history.  We can provide no assurance that GDP growth rates will continue to increase, nor that they will not regress.  For the year ended December 31, 2014, Mexico had a growth rate of 2.1%, compared with a growth rate of 5.1% in 2010, 4.0% in 2011, 4.0% in 2012 and 1.4% in 2013.

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

Our 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, services and campaigns 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, services and campaigns 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. We can provide no assurances that our new products, even if initially successful, will continue to meet our clients’ needs or be successful in the future.

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

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

Our ability to remain competitive depends in part on our ability to upgrade our information technology on a timely and cost-effective basis.  We must continually make significant investments and improvements in our information technology infrastructure in order to remain competitive.  For 2015, 28.63% of our capital expenditures budget for information technology is designated for replacing obsolete hardware and software in order to minimize technological risk.  We cannot assure you that in the future we will be able to maintain the level of capital expenditures necessary to support the improvement or upgrading of our information technology infrastructure.  Any failure to effectively improve or upgrade our information technology infrastructure and management information systems in a timely manner could have a material adverse effect on us.

Failure to timely detect or prevent money laundering and other financial crime activities fully or on a timely basis could expose us to additional liabilities and could have a material adverse effect on us.

We are required to comply with applicable anti-money laundering, anti-terrorism, sanctions and other laws and regulations in the jurisdictions in which we operate.  These laws and regulations require us, among other things, to conduct full customer due diligence regarding sanctions and politically-exposed person screening, keep our customer, account and transaction information up to date and have implemented effective financial crime policies

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and procedures detailing what is required from those responsible. Our requirements also include anti-money laundering training for our employees, reporting suspicious transactions and activity to appropriate law enforcement following full investigation by our anti-money laundering compliance personnel.  See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Banking Regulation—Money Laundering Regulations.”

Financial crime has become the subject of enhanced regulatory scrutiny and supervision by regulators globally. Anti-money laundering sanctions, laws and regulations are increasingly complex and detailed and have become the subject of enhanced regulatory supervision, requiring improved systems, sophisticated monitoring and skilled compliance personnel.

We have developed policies and procedures aimed at detecting and preventing the use of our banking network for money laundering and other financial crime related activities. These require implementation and embedding within our business effective controls and monitoring, which in turn require on-going changes to systems and operational activities. Financial crime is continually evolving and subject to increasingly stringent regulatory oversight and focus. This requires proactive and adaptable responses from us so that we are able to effectively deter threats and criminality. Even known threats can never be fully eliminated, and there will be instances where we may be used by other parties to engage in money laundering and other illegal or improper activities. In addition, we rely heavily on our employees to assist us by spotting such activities and reporting them, and our employees have varying degrees of experience in recognizing criminal tactics and understanding the level of sophistication of criminal organizations. Where we outsource any of our customer due diligence, customer screening or anti financial crime operations, we remain responsible and accountable for full compliance and any breaches. If we are unable to apply the necessary scrutiny and oversight, there remains a risk of regulatory breach.

If we are unable to fully comply with applicable laws, regulations and expectations, our regulators and relevant law enforcement agencies have the ability and authority to impose significant fines and other penalties on us, including requiring a complete review of our business systems, day-to-day supervision by external consultants and ultimately the revocation of our licenses.

The reputational damage to our business and brand would be severe if we were found to have breached anti-money laundering or sanctions requirements. Our reputation could also suffer if we are unable to protect our customers or our business from being used by criminals for illegal or improper purposes. Any such risks could have a material adverse effect on us.

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

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

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regarding our dividend policy, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividends and Dividend Policy.”

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.

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.

We are required to report every event related to information security issues, such as hacking or hacking attempts, events where customer information may be compromised, unauthorized access and other security breaches, to the CNBV. As of the date of this annual report on Form 20-F, we have not experienced information security problems and we have not had to report any such events to the CNBV. Any material disruption or slowdown of our systems could cause information, including data related to customer requests, to be lost or to be delivered to our clients with delays or errors, which could reduce demand for our services and products and could materially and adversely affect us. Internet banking, ATMs and branches are the main distribution channels that are subject to this risk in Mexico.

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 our attempt to modify or enhance our protective measures or investigate or remediate any vulnerability.

Failure to protect personal information could adversely affect us.

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 operating results, financial condition and prospects. In addition, we may be required to report events related to information security issues (including any cybersecurity issues), events where customer information may be compromised, unauthorized access and other security breaches, to the relevant regulatory authorities.

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

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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.

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

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

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.

Changes in financial accounting standards could impact reported earnings and may have a material adverse effect on us.

The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our audited financial statements. These changes can be hard to predict and 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 which could have a material adverse effect on 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 services for any reason or their performing services poorly, could adversely affect our ability to deliver products and services to customers and otherwise to conduct business, affecting our results of operations and financial condition. 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 have entered into a number of administrative, accounting, finance, treasury, legal and other services agreements with our subsidiaries and affiliates.  In 2014, the aggregate amount of our expenses related to the service agreements we have with our subsidiaries and affiliates was Ps.3,170 million, or 14.69% of our administrative expenses, and we had an insignificant amount of income related to such agreements.  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.

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

We are likely to continue to engage in transactions with our subsidiaries or affiliates (including our controlling shareholder).  While the CNBV has not disagreed with our determinations that the terms of these transactions are “substantially on market conditions” in the past, we can provide no assurances that the CNBV will agree with any of our future determinations.  In addition, future conflicts of interests between us and any of our subsidiaries or affiliates, or among our subsidiaries and affiliates, may arise, which conflicts are not required to be and may not be resolved in our favor.  See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.”

The growth of our loan portfolio may expose us to increased loan losses.

From December 31, 2012 to December 31, 2013, gross loans and advances to customers (excluding repurchase agreements) grew by 12.2% to Ps.398,516 million (U.S.$27,034 million), while our consumer loans to individuals grew by 8.6% to Ps.69,796 million (U.S.$4,735 million). From December 31, 2013 to December 31, 2014, our gross loans and advances to customers (excluding repurchase agreements) grew by 18.6% to Ps.472,453 million (U.S.$32,049 million), while our consumer loans to individuals grew by 9.7%. In addition, on November 25, 2014, we entered into an agreement to acquire a non-revolving consumer loans portfolio of approximately 39,200 loans with a total face value of approximately Ps.3,179 million from Scotiabank Inverlat. We paid Ps.3,002 million for the portfolio, in two tranches closing on April 4 and April 19, 2015.

The expansion of our loan portfolio (particularly in the consumer, small- and mid-sized companies and real estate segments) can be expected to expose us to a higher level of loan losses and require us to establish higher levels of allowance for impairment losses.

Our loan portfolio may not continue to grow at the same rate. Economic turmoil may lead to a contraction in our loan portfolio.

There can be no assurance that our loan portfolio will continue to grow at similar rates to the historical growth rate described elsewhere in this annual report.  A reversal of the rate of growth of the Mexican economy, a slowdown in the growth of customer demand, an increase in market competition, changes in governmental regulations or changes in our credit risk appetite could adversely affect the rate of growth of our loan portfolio and our risk index and, accordingly, increase our required allowance for impairment losses.  Economic turmoil could materially adversely affect the liquidity, businesses and financial condition of our customers as well as lead to a general decline in consumer spending and a rise in unemployment. All this could in turn lead to decreased demand for borrowings in general, adversely affecting us.

Credit facilities granted to the Mexican home builder sector may cause an adverse effect on our credit portfolio.

During the past years, the historic shortage of housing in Mexico drove the Mexican government to actively incentivize its development. These incentives led to increased construction of subsidized housing and to the acquisition of large land inventories. The lack of infrastructure, large distances to workplaces and transportation costs, as well as announced changes to the government’s policies relating to housing infrastructure, led to increased abandonment and mortgage default of these homes. The foregoing caused a strong decrease in home building and sales of the principal Mexican home builders and an adjustment in their growth plans and business models in order to compensate for the impacts of these changes. In 2014, two of the three principal Mexican home builders, Corporación Geo, S.A.B. and Grupo Homex, announced that they had filed for bankruptcy protection in Mexico.

As of December 31, 2014, our loan portfolio with the three principal Mexican companies in the home builder sector stood at Ps.4,903 million, which represents 1.07% of our loans and advances to customers and 0.52% of our total assets, of which the full amount was composed of non-performing loans. As of December 31, 2014, we have made the corresponding allowance for impairment losses based on the incurred loss methodology for this loan portfolio, and we consider that this allowance for impairment losses is adequate to cover all known or knowable losses that could arise from this loan portfolio.

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

We operate as a stand-alone subsidiary within the Santander Group. Our principal shareholders have no liability for our banking operations, except for the amount of their respective holdings of our capital stock. Banco Santander Parent, our controlling shareholder, currently beneficially owns, directly and indirectly, 74.97% of our common stock (including Series B and Series F shares). Due to its share ownership, our controlling shareholder has the ability to control us and our subsidiaries, including the ability to:

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

· cause the appointment of our principal officers;

· declare the payment of any dividends;

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

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

In December 2012, primarily in response to the requirements of the European Banking Authority, the Bank of Spain and regulators in various jurisdictions, Banco Santander Parent adopted a corporate governance framework (Marco de Gobierno Interno del Grupo Santander). The purpose of the framework is to organize and standardize the corporate governance practices of Banco Santander Parent and its most significant subsidiaries, including us. Our Board of Directors approved the adoption of this corporate governance framework in July 2013, subject to certain overarching principles, such as the precedence of applicable laws and regulations over the framework to the extent they are in conflict.  See “Item 16G. Corporate Governance.” Our adoption of this framework may enhance Banco Santander Parent’s control over us.

The interests of Banco Santander Parent may differ from our interests or those of our other shareholders, and the concentration of control in Banco Santander Parent will limit other shareholders’ ability to influence corporate matters.  As a result, we may take actions that our other shareholders do not view as beneficial.

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

We have acquired controlling interests in various companies and have engaged in other strategic partnershiPs. From time to time, we evaluate acquisition opportunities that we believe offer additional value to our shareholders and are consistent with our business strategy. These acquisitions may be acquisitions of assets or of existing operations, such as our acquisition of the GE Capital mortgage business in 2011 or our subsidiary Banco Santander Mexico’s acquisitions of ING Hipotecaria in November 2013 and our acquisition of a non-revolving consumer loans portfolio from Scotiabank Inverlat in April 2015. However, we may not be able to identify suitable acquisition candidates, and we may not be able to acquire promising targets on favorable terms or at all. We base our assessment of potential acquisitions on limited and potentially imprecise information and on assumptions with respect to operations, profitability and other matters that may prove to be incorrect. For example, we face the risk of undisclosed liabilities.  Our ability to benefit from any such acquisitions 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.  The integration of acquired businesses entails significant risks, including:

· unforeseen difficulties in integrating operations and systems;

· inability to modify accounting standards rapidly;

· problems assimilating or retaining the employees of acquired businesses;

· challenges retaining customers of acquired businesses;

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

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

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

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

We recently began preparing financial statements in accordance with IFRS, and these financial statements are not directly comparable to the financial statements that we have historically prepared and that we will continue to prepare in accordance with Mexican Banking GAAP.  In addition, some of the financial data presented in this annual report are not easily comparable from period to period.

We recently began preparing our financial statements in accordance with IFRS.  As a result, our financial data as of and for the years ended December 31, 2010, 2011, 2012, 2013 and 2014 presented in this annual report on Form 20-F has been derived from our audited financial statements prepared in accordance with IFRS.  However, prior to the year ended December 31, 2010, we prepared our financial statements solely in accordance with Mexican Banking GAAP.  For regulatory purposes, including Mexican Central Bank regulations and CNBV reporting requirements, we currently prepare and will continue to prepare and make available to our shareholders statutory financial statements in accordance with Mexican Banking GAAP.  Also, we will continue to report to Mexican regulators under Mexican Banking GAAP.  Because IFRS differs in certain significant respects from Mexican Banking GAAP, any Mexican Banking GAAP financial information presented in this annual report on Form 20-F for any period is not directly comparable to our IFRS financial data.  For example, in the section entitled “Item 4.—Information on the Company—B. Business Overview—Selected Statistical Information,” we present certain financial information in IFRS as of and for the years ended December 31, 2010, 2011, 2012, 2013 and 2014.  The lack of comparability of our IFRS and Mexican Banking GAAP financial data from period to period may make it difficult to gain a full and accurate understanding of our operations and financial condition.

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 provisions related to the costs anticipated to be incurred in connection with these various claims and legal proceedings.  As of December 31, 2014, we have set aside Ps.1,308 million (U.S.$89 million) as provisions for these legal actions (including tax-related litigation).  See note 24.b to our audited financial statements.  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 provisions 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.

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Risks Relating to Mexico

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

We are a holding company for Mexican financial institutions, and substantially all of our operations and assets are in Mexico and are dependent upon the performance of the Mexican economy.  As a result, our business, financial condition and results of operations may be affected by the general condition of the Mexican economy, the devaluation of the peso as compared to the dollar, price instability, inflation or deflation, interest rates, regulation, taxation, social instability and other political, social and economic developments in or affecting Mexico, over which we have no control.  The economy of Mexico has experienced significant volatility in recent decades, characterized, in some cases, by slow or regressive growth and contraction, declining investment and hyperinflation. This volatility has resulted in fluctuations in the levels of deposits and in the relative economic strength of various segments of the economy to which we lend.

A substantial amount of our loans are to borrowers doing business in Mexico. Accordingly, the recoverability of these loans in particular, and our ability to increase the amount of loans outstanding and our results of operations and financial condition in general, are dependent to a significant extent on the level of economic activity in Mexico. Our results of operations and financial condition could be affected by changes in economic or other policies of the Mexican government, which has exercised and continues to exercise substantial influence over many aspects of the private sector, or other political or economic developments in Mexico.

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 Mexico could also result in government defaults on public debt.  This could affect us in two ways: directly, through portfolio losses, and indirectly, through instabilities that a default in public debt could cause to the banking system as a whole, particularly since commercial banks’ exposure to government debt is high in Mexico.  No assurance can be given that our growth, asset quality and profitability will not be affected by volatile macroeconomic conditions.

According to the Mexican National Institute of Statistics and Geography (Instituto Nacional de Estadística y Geografía), and the Mexican Central Bank, in 2008, the Mexican gross domestic product, or GDP, grew by approximately 1.4% and inflation was 6.5%.  Mexico was in a recession for five consecutive quarters from the fourth quarter of 2008 until the fourth quarter of 2009.  In 2009, GDP decreased by approximately 4.7% and inflation reached 3.6%.  In 2010, GDP was 5.1% and inflation was 4.4%.  In 2011, GDP was 4.0% and inflation was 3.8%.  In 2012, GDP increased 4.0% and inflation reached 3.6%.  In 2013, GDP increased 1.1% and inflation reached 4.0%. In 2014, GDP increased 2.1% and inflation reached 4.1%.

Mexico also has, and is expected to continue to have, volatility in exchange and interest rates.  The annualized interest rates on 28-day Mexican Treasury bills (Certificados de la Tesorería de la Federación, or Cetes) averaged approximately 4.4%, 4.2%, 4.2%, 3.8% and 3.0% for 2010, 2011, 2012, 2013 and 2014 respectively.  Relative to the U.S. dollar, the peso appreciated by 5.5% in 2010, depreciated by 12.9% in 2011, appreciated by 6.9% in 2012, depreciated by 1.7% in 2013 and depreciated by 12.7% in 2014, all in nominal terms. The peso continues to be affected by uncertainty and volatility in the global markets.

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

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

The Mexican government exercises significant influence over many aspects of the Mexican economy. 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.  As a result, the actions of the Mexican government concerning the economy and regulating certain industries, including the financial services sector, could have a significant effect on Mexican

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private sector entities, including us, and on market conditions, prices and returns on Mexican securities, including our securities.

Presidential and federal congressional elections in Mexico were held in July 2012.  The candidate from the Partido Revolucionario Institucional, Enrique Peña Nieto, took office in December 2012.  In his economic platform, Peña Nieto proposed structural reforms such as labor, energy and fiscal reforms in order to promote economic growth. In this regard, during the first two years of the current administration, several tax, labor, education, telecommunications, local government indebtedness, transparency, financial, fiscal and energy reforms were passed by the Mexican Congress and are currently being implemented. Elections relating to the federal congress and nine governorships will be held in June 2015. We cannot predict whether potential changes in Mexican governmental and economic policy could adversely affect economic conditions in Mexico or the sector in which we operate and therefore could have an adverse effect on us.

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

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

Financial and securities markets in Mexico are, to varying degrees, influenced by economic and market conditions in other countries in Latin America and beyond.  Negative developments in the economy or securities markets in one country, particularly in an emerging market, may have a negative impact on other emerging market economies.  These developments may adversely affect our business, financial condition and operating results.  Although economic conditions in other countries may differ significantly from economic conditions in Mexico, investors’ reactions to adverse developments in other countries may have an adverse effect on the market value of securities of Mexican issuers, including us.  For example, during 2007 and 2008, prices of both Mexican debt and equity securities decreased substantially as a result of the global financial crisis.  According to Bloomberg, the Dow Jones Industrial Average fell by 39% from its average level in July 2007 to its January 2009 average level, while Mexico’s Stock Exchange Prices and Quotations Index (Índice de Precios y Cotizaciones, or IPC) fell by 36% in the same period.  In 2010, 2011, 2012, 2013 and 2014, the Dow Jones Industrial Average increased by 11%, 6%, 7%, 27% and 8%, respectively, while Mexico’s Stock Exchange Prices and Quotations Index increased by 20% in 2010, fell by 4% in 2011, increased by 18% in 2012, decreased by 2% in 2013 and increased by 1.0% in 2014.

In addition, in recent years economic conditions in Mexico have become increasingly correlated to economic conditions in the United States as a result of the North American Free Trade Agreement, or NAFTA, and increased economic activity between the two countries, which was highlighted during the 2008 to 2009 economic crisis affecting the United States.  The Mexican economy continues to be influenced by the U.S. economy, and therefore, the deterioration of the United States’ economy, the termination of NAFTA or other related events, delays in the recovery of the U.S. economy or any changes to U.S. monetary or fiscal policy may impact the economy of Mexico.  In 2009, the gross domestic product of the United States contracted by 3.5% while Mexican gross domestic product fell by 4.7%.  This recession caused unemployment to increase from an average of 5.8% in 2008 to an average of 9.3% in 2009 in the United States and from 4.3% in September 2008 to 6.4% in September 2009 in Mexico.  This sudden change in economic conditions reduced credit demand, caused a 32.8% depreciation of the peso from September 2008 to March 2009 and triggered a monetary policy response by the Mexican Central Bank that resulted in lower interest rates, which dropped to 4.5% in December 2009 from its December 2008 level of 8.0%.  These changes in macroeconomic conditions in Mexico did not have a material impact on our business or operations.  However, we cannot assure you that any developments in the United States or elsewhere will not materially and adversely affect us in the future.

During 2011 and 2012, the developments in the global economy, and particularly in Europe, increased the risk premiums in global credit markets, which in turn generated volatility in the Mexican financial markets.  Given the transitory nature of such volatility, due to several measures taken by the European authorities, the Mexican economy was not materially affected by it. In 2013, the uncertainties regarding the recovery of the U.S. economy and the changes made to its monetary policy in the short and medium term resulted in increased volatility in the debt and foreign exchange markets, affecting all emerging markets, including Mexico. In 2014, the U.S. economy showed signs of improvement with an annual GDP growth rate of 2.4%, which caused the Federal Reserve System to begin normalizing its monetary policy by ending its quantitative monetary stimulus. Such monetary policy normalization,

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together with a sharp decline in oil prices, resulted in increased volatility in the financial markets and increased uncertainty regarding the recovery of certain economic zones in Europe, China and most emerging markets. We cannot assure you that events in Europe, the United States or elsewhere will not materially and adversely affect us in the future.

As a wholly-owned subsidiary of our controlling shareholder, Banco Santander Parent, significant aspects of our strategy, infrastructure and capital funding are dependent on our controlling shareholder. Although our controlling shareholder has a significant presence in various markets around the world, its results of operations are materially affected by conditions in the capital markets and the economy generally in Europe, Latin America and the United States. Accordingly, a significant decline in general economic conditions in Europe, Latin America or the United States, whether caused by recession, inflation, unemployment, changes in securities markets, acts of terrorism or other occurrences could impact our controlling shareholder, and, in turn, have a material adverse effect on our financial condition and results of operations.

Under the Statutory Responsibility Agreement entered into with our financial services subsidiaries pursuant to the Mexican Financial Groups Law, we are responsible secondarily and without limitation for performance of the obligations incurred by our subsidiaries, and Series F shares or Series B shares of Grupo Financiero Santander Mexico may be required to be posted as collateral to IPAB to secure liabilities of Banco Santander Mexico to IPAB in the event Banco Santander Mexico suffers losses that are covered by IPAB.

Under the Statutory Responsibility Agreement entered into with our financial services subsidiaries pursuant to the Mexican Financial Groups Law, we are responsible secondarily and without limitation for the performance of the obligations incurred by our subsidiaries as a result of the authorized activities of such subsidiaries, and we are fully responsible for certain losses of our subsidiaries, up to the total amount of our assets.  For such purposes, a subsidiary is deemed to have losses if (i) its shareholders’ equity represents an amount that is less than the amount the subsidiary is required to have as minimum paid-in capital under applicable law, (ii) its capital and reserves are less than the subsidiary is required to maintain under applicable law, or (iii) in the judgment of the regulatory commission supervising the subsidiary’s activities, the subsidiary is insolvent and cannot fulfill its obligations. If Banco Santander Mexico is deemed to have losses, it will not be allowed to pay any dividends or transfer any monetary benefit to us as a shareholder, from the date on which the IPAB determines Banco Santander Mexico’s losses up to the date on which the CNBV determines we have complied with the provisions contained in the Mexican Financial Groups Law regarding the Statutory Responsibility Agreement (including the payment of applicable losses).

Under the Statutory Responsibility Agreement and the Mexican Financial Groups Law, if IPAB were to determine that Banco Santander Mexico has suffered losses which are covered by IPAB, Grupo Financiero Santander Mexico would be required, within 15 days from the date of such determination, to (i) create an adequate reserve covering such losses and (ii) post collateral to secure performance of Banco Santander Mexico’s obligations to IPAB to repay funds advanced by IPAB to Banco Santander Mexico to cover such losses.  Grupo Financiero Santander Mexico would be required to repay IPAB within sixty days from the final determination by IPAB of its losses relating to Banco Santander Mexico.  Pursuant to the Mexican Financial Groups Law, our shares and the shares of our subsidiaries would be required to be posted as collateral to secure the payment of Banco Santander Mexico’s losses in favor of IPAB.  Pursuant to Article 120 of the Mexican Financial Groups Law, our shareholders, by virtue of their holding of our shares, accept that their shares could be posted as collateral in favor of IPAB and that such shares will be transferred to IPAB, if we are unable to pay for any amounts due to IPAB as a result of Banco Santander Mexico’s losses.  Although Mexican law is unclear on this point, it is possible that the obligation to provide collateral to IPAB would extend to all our Series B shares if Series F shares held by Banco Santander Parent were insufficient.

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

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We cannot assure you that in the future, Banco Santander Mexico or any other of our subsidiaries will not be deemed to have losses, and if so, that we will have sufficient assets to cover such losses.  See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Financial Groups’ Statutory Responsibility.”

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

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

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

Different disclosure and financial accounting standards between Mexico and the United States may provide you with different or less information about us than you expect.

There may be less publicly available information about us than is regularly published about companies in the United States. While we are subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the disclosure required from foreign private issuers under the Exchange Act is more limited than the disclosure required from U.S. issuers.  Additionally, we present our financial statements under IFRS, which differs from U.S. GAAP.  In addition, for regulatory purposes, we currently prepare and will continue to prepare and make available to our shareholders statutory financial statements in accordance with Mexican Banking GAAP, which differs from IFRS in a number of respects.

Our status as a controlled company and a foreign private issuer exempts us from certain of the corporate governance standards of the New York Stock Exchange, or NYSE, limiting the protections afforded to investors.

We are a “controlled company” and a “foreign private issuer” within the meaning of the NYSE corporate governance standards.  Under the NYSE rules, a controlled company is exempt from certain NYSE corporate governance requirements.  In addition, a foreign private issuer may elect to comply with the practice of its home country and not to comply with certain NYSE corporate governance requirements, including the requirements that (1) a majority of the board of directors consist of independent directors, (2) a nominating and corporate governance committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, (3) a compensation committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities and (4) an annual performance evaluation of the nominating and corporate governance and compensation committees be undertaken.   Although we have similar practices, they do not entirely conform to the NYSE requirements for U.S. issuers; therefore we currently use these exemptions available to foreign private issuers and intend to continue using them.  Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all NYSE corporate governance requirements.

For example, under our bylaws and in accordance with the Mexican Financial Groups Law and the Mexican Securities Market Law, at least 25% of the members of our Board of Directors must be independent, but independence is determined in accordance with Article 34 of the Mexican Financial Groups Law and our bylaws rather than NYSE standards.  The independence standards in Article 34 of the Mexican Financial Groups Law and our bylaws may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE. In addition, like U.S. companies, we are required to have an audit committee that satisfies the requirements of Rule 10A-3 under the Exchange Act, including basic independence standards.  However, as a

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foreign private issuer we are exempt from additional requirements relating to independence and the audit committee charter.  As a result, the oversight of our Audit Committee may be different from, or more limited than, the oversight provided by audit committees of U.S. companies listed on the NYSE.

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

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

We are subject to substantial regulation which could adversely affect our business and operations. In addition, we are subject to regulatory capital and liquidity requirements that could limit our operations, and changes to these requirements may further limit and adversely affect our operating results, financial condition and prospects.

As a financial institution, we are subject to extensive regulation, including regulation by the Mexican Central Bank, the CNBV and the SHCP, which materially affects our businesses.  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, and the interpretation and the application of those laws and regulations by regulators is also subject to change.

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 been recently adopted, such as the regulations implementing Basel III in Mexico, the manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving.  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.

Our bank subsidiary is subject to capital adequacy requirements adopted by the CNBV which provide for a minimum ratio of total capital to risk-weighted loans, assets and operations of 8%, although 10% is the minimum to avoid any precautionary measures being adopted by the CNBV. Any failure by us to maintain this ratio will result in administrative actions or sanctions which may affect our ability to fulfill our obligations, including losing our banking license.

In response to the financial crisis, the Basel Committee issued comprehensive changes to its regulatory capital standards as part of a comprehensive framework, known as Basel III.  The Basel III capital standards are 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.  The Basel III minimum risk-based capital ratio standards require total capital to risk-weighted assets of 8%, Tier 1 capital to risk-weighted assets of 6% and common equity Tier 1 capital (“CET1”) to risk-weighted assets of 4.5%. In addition to these minimum capital requirements, the Basel III capital standards also include capital buffers,

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measured as a percent of CET1 capital to risk-weighted assets, that must be maintained above the minimum capital requirements in order to avoid limitations on capital distribution to shareholders. These capital buffers include, on a fully phased-in basis, a 2.5% capital conservation buffer and a countercyclical buffer of up to 2.5%, to be deployed at the discretion of national regulators during periods of excess credit growth. Basel III also introduces a leverage ratio for institutions as a backstop measure, to be applied alongside the risk-based regulatory capital requirements.  The changes in Basel III are intended to be implemented at the national level on a phased-in basis between January 2013 and January 2022.

The CNBV issued amendments to the capital requirements, which became effective on January 1, 2013 and implemented the Basel III capital standards in all material respects.

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, as these changes to the regulatory capital framework and other changes are implemented, or as 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.

The newly implemented capital requirements or their implementation could have a material adverse effect on our operating results, financial condition and prospects.

In addition to the changes to the capital standards described above, the Basel III framework also introduces the Basel Committee’s global quantitative liquidity standards, which include the Liquidity Coverage Ratio, or LCR, and Net Stable Funding Ratio, or NSFR. The objectives of the LCR and NSFR, respectively, are to (1) promote the short-term resilience of banks’ liquidity risk profiles by ensuring they have sufficient high-quality liquid assets to meet 30-day cash outflows during 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 was subsequently revised by the Basel Committee in January 2013, which amended the definition of high-quality liquid assets and agreed to 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. In October 2014, the Basel Committee published the final NSFR, which established a standard for banks to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities. The first effective date of the NSFR under the Basel Committee standard is January 1, 2018. A proposed disclosure standard related to the NSFR was published in December 2014.

There is a risk that implementing and maintaining enhanced liquidity risk management systems may incur significant costs, and more stringent requirements to hold liquid assets and stable funding sources may materially affect our lending business as we may be required to maintain a larger liquidity buffer or more stable funding sources, thereby reducing future profitability.

Allowance for impairment losses requirements in Mexico differ from those under IFRS.

Except for loans to the Mexican government and the Mexican Central Bank, IPAB and certain international organizations, we are generally required to classify each loan or type of loan according to an assessment of risk based on criteria set forth by Mexican banking regulations and to establish corresponding allowance for impairment losses. For revolving consumer credit card loans, mortgage loans, other non-revolving consumer loans, credits granted to states and municipalities and commercial loans, we consider the type of credit, the estimated probability of default of the borrowers, the severity of the loss associated with the value and nature of the credit’s collateral and the potential for default. For the purposes of the audited financial statements included in this annual report on Form 20-F, we have estimated our allowance for impairment losses using an incurred loss model in accordance with IFRS.  However, for capital and other regulatory purposes, including safety and soundness regulation, our allowance for impairment losses is determined based on an expected loss model in accordance with Mexican banking regulations and Mexican Banking GAAP.  The Mexican banking regulations criteria to establish an allowance for impairment losses include both qualitative and quantitative factors.  Mexican banking regulations relating to loan classification and determination of the allowance for impairment losses are generally different from and may be less stringent than those applicable to banks under IFRS.

In addition, with respect to our commercial, corporate and financial institutions portfolios, we received approval from the CNBV effective as of January 1, 2012 to use our internal models to determine our allowance for

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impairment losses as an alternative to the standard generic models developed by the CNBV.  Our approach is based on the Foundation Internal Ratings-Based Approach as defined in the Basel II accords, and is based on the evaluation of four main factors: country risk, financial risk, industry risk and payment performance.  This results in an overall determination of debtor risk, which is then applied to each loan operation and mitigated by any collateral to obtain a risk grade which is associated to a provision factor.  We have a mapping between this risk grade and the internal customer rating that has been approved by the CNBV.  While our internal methodology has resulted in the calculation of probabilities of default that are lower than the probabilities of default calculated and established by the CNBV in its standard methodology, the use of our internal methodology does not necessarily result in a reduction of capital requirements or in the allowance for impairment losses.

In June 2013, the CNBV modified the methodology applicable to the classification of our commercial loans portfolio in order to change the current model of creating allowance for impairment losses based on the incurred loss model to an expected loss model wherein losses of the following twelve months are estimated with the credit information that is best-suited to estimate expected losses such as past payment performance information that can be obtained through the Mexican credit bureaus, financial statement variables and qualitative information. This change increased the allowance for impairment losses requirements for our commercial loans portfolio, which resulted in a substantial increase to our allowance for impairment losses in the amount of Ps.3,445 million, as calculated in accordance with Mexican Banking GAAP on that date. Additionally, during the second quarter of 2014, we changed the methodology applicable to the classification of our financial entities loans portfolio, which resulted in an increase to our allowance for impairment losses of Ps.83 million, calculated in accordance with Mexican Banking GAAP on that date. However, because the methodology is calculated under Mexican Banking GAAP there is no impact on our financial statements prepared under IFRS.

The Mexican government has exercised, and continues to exercise, significant influence over the Mexican economy, including to control inflation.  This involvement, together with Mexico’s political and economic conditions, could adversely affect our financial condition and the market price of our securities.

The Mexican government frequently intervenes in the Mexican economy and occasionally makes significant changes in policies and regulations.  The Mexican government’s actions to control inflation and other policies and regulations historically have involved, among other measures, increases in interest rates, changes in tax policies, price controls, currency fluctuations, taxation on investment flows, capital controls and limits on imports.  Our business, financial condition and results of operations, as well as the market price of our securities, may be adversely affected by changes in policies or regulations involving, among others:

· interest rates;

· exchange rates and controls and restrictions on the movement of capital out of Mexico;

· reserve requirements;

· capital requirements;

· currency fluctuations;

· inflation;

· liquidity of the domestic capital and lending markets; and

· tax and regulatory policies.

Mexico has experienced high rates of inflation in the past and has therefore implemented monetary policies that have resulted in high nominal interest rates.  The Mexican government’s measures to fight inflation, principally through the Mexican Central Bank, have had and may in the future have significant effects on the Mexican economy and our business.  Tight monetary policies with high interest rates and high compulsory deposit requirements may restrict Mexico’s growth and the availability of credit, reduce our loan volumes and increase our loan loss provisions.  Conversely, more lenient government and Mexican Central Bank policies and interest rate decreases may trigger increases in inflation, and, consequently, growth volatility and the need for sudden and significant interest rate increases, which could negatively affect our interest rate spreads.

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Although the Mexican government has implemented what we believe to be sound economic policies over the past few years, uncertainty over whether the Mexican government will implement changes in policy or regulation in the future may contribute to economic uncertainty in Mexico and to heightened volatility in the Mexican securities markets and in the securities issued abroad by Mexican issuers.  These uncertainties and other developments in the Mexican economy may adversely affect us and the market value of our securities.

Changes in taxes and other fiscal assessments may adversely affect us.

The Mexican 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 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 produce uncertainty in the financial system, increasing the cost of borrowing and contributing to the increase in our non-performing credit portfolio.

Exposure to Mexican federal government debt could have a material adverse effect on us.

Like many other Mexican banks, we invest in debt securities of the Mexican government (including those issued by the Mexican Central Bank). As of December 31, 2014, approximately 16.8% of our total assets and 80.1% of our debt securities portfolio was comprised of debt securities issued by the Mexican government (including those issued by the Mexican Central Bank). Any failure by the Mexican government to make timely payments under the terms of these securities, or a significant decrease in their market value, will have a material adverse effect on us.

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

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

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

Risks Relating to the ADSs and Our Series B Shares

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

Except in certain circumstances (including a follow-on public offering), under Mexican law, if we issue new shares of common stock as part of a capital increase, we generally grant our shareholders the right to subscribe and pay for a sufficient number of shares to maintain their existing ownership percentage.  Rights to subscribe and pay for shares in these circumstances are known as preemptive rights.  We may not legally be permitted to allow holders of our Series B shares or ADSs in the United States to exercise any preemptive rights in any future capital increase, unless we file a registration statement with the SEC with respect to that future issuance of shares or the offering qualifies for an exemption from the registration requirements of the Securities Act.  Similar restrictions may apply to holders of our Series B shares or ADSs in other jurisdictions.  We cannot assure you that we will file a registration statement with the SEC or any other regulatory authority, or that an exemption from registration will be available to allow holders of our Series B shares or ADSs in the United States or any other jurisdiction, to participate in a preemptive rights offering.  At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement with the SEC, and any other factors, that we consider important to determine whether we will file such a registration statement.  Under Mexican law, sales or other transfers by the depositary of preemptive rights and distribution of the proceeds from such sales to ADS holders is not possible. See “Item 10. Additional Information—B. Memorandum and Articles of Association—Preemptive Rights.”

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

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

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

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

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

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

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

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

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 bylaws and Mexican corporate law (including specific laws that regulate us as a financial services holding company), 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 Mexico.  Under Mexican corporate law, you may have fewer and less well-defined rights to protect your interests than under the laws of other jurisdictions outside Mexico. For example, under Mexican law, the protections afforded to minority shareholders and the fiduciary duties of officers and directors are, in some respects, less than, or different from, those existing in the United States and certain other jurisdictions.

Actions against officers and directors may only be initiated by holders of blocks of 5% of our outstanding Series B shares (including Series B shares underlying ADSs), as opposed to a single shareholder or group of affected shareholders, and are shareholders’ derivative suits, which benefit us (as the affected company) rather than affected

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shareholders directly.  Rules and policies against self-dealing and regarding conflicts of interest may also be less well-defined and enforced in Mexico than in the United States, putting holders of our Series B shares and ADSs at a potential disadvantage.  In particular, the Mexican legal regime concerning fiduciary duties of directors is not as comprehensive or developed as in the United States.  The duties of care and loyalty of directors and officers are solely defined by the Mexican Securities Market Law and have not been interpreted or defined by courts and, as a result, the judicial interpretation of the meaning and extent of such duties is uncertain.  Although Mexico recently passed laws that permit the initiation of class actions, rules implementing applicable law have not fully developed procedural requirements for class action lawsuits.  There has not been a significant number of claims relating to breach of duties, whether as class actions or as derivative suits, to encourage litigation based upon breaches of fiduciary duties or to assist in the predictability of the outcome of any potential action.  As a result, it may be more difficult in practice for our minority shareholders to decide to exercise or enforce their rights against us and our directors, officers or controlling shareholders than it would be for shareholders of a U.S. company.

Although Mexican 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 Mexico, 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.

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

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

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

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

There may be a lack of liquidity and market for our shares and ADSs.

Prior to our initial public offering of ADSs, there was no public market for our ADSs and substantially no liquidity of our Series B shares.  Our ADSs are listed and traded on the NYSE under the symbol “BSMX.” Our Series B shares are listed and traded on the Mexican Stock Exchange under the symbol “SANMEX.”  At December 31, 2014, we had 6,786,394,913 shares of common stock outstanding, including 3,322,085768 Series B shares and 3,464,309,145 Series F shares. The Mexican securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States.

Although our Series B shares are traded on the Mexican Stock Exchange, there can be no assurance that a liquid trading market for our Series B shares will continue to exist. Approximately 51.68% of our outstanding Series B shares are held by the public (i.e., shareholders other than Banco Santander Parent and its affiliates), including our Series B shares that are represented by ADSs trading on the NYSE.  A limited trading market in general and our concentrated ownership in particular may impair the ability of an ADS holder to sell in the Mexican market Series B shares obtained upon withdrawal of such shares from the ADR facility in the amount and at the price and time such holder desires, and could increase the volatility of the price of the ADSs.

In addition, if the trading volume of our ADSs on the NYSE or our Series B shares on the Mexican Stock Exchange were to decline below certain levels, the ADSs or the Series B shares could be delisted or deregistered, further reducing liquidity of our ADSs and Series B shares.

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

Investing in securities that trade in emerging markets, such as Mexico, often involves greater risk than investing in securities of issuers in the United States, and such investments are considered to be more speculative in nature.  The Mexican securities market is substantially smaller, less liquid, more concentrated in a limited number of broker-dealers and institutional participants, and can be more volatile than securities markets in the United States.  There is also significantly greater concentration in the Mexican securities market than in major securities markets in the United States. As of December 31, 2014, total market capitalization amounted to U.S.$497.7 billion and the ten largest companies in terms of market capitalization represented approximately 53.8% of the aggregate market capitalization of the Mexican Stock Exchange. Accordingly, although ADS holders are entitled to withdraw the Series B shares underlying the ADSs from the depositary at any time, their ability to sell such shares in the Mexican securities market at a price and time they desire may be limited.

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

Shareholders who have a conflict of interest with us and do not abstain from voting on a resolution that ultimately causes damages and losses to us, may be held liable for such damages and losses, but only if the transaction would not have been approved without the favorable vote of such shareholders.  See “Item 10. Additional Information—B. Memorandum and Articles of Association—Conflicts of Interest.”

ITEM 4.  INFORMATION ON THE COMPANY

A.  History and Development of the Company

General

We are the fifth-largest financial services holding company in Mexico based on net income, the fourth-largest financial services holding company in Mexico based on total assets and loans, and the third-largest financial services company in Mexico based on deposits as of December 31, 2014, in each case as determined in accordance with Mexican Banking GAAP, according to information published by the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, or CNBV). Through our bank and other subsidiaries, we provide a wide range of financial and related services, principally in Mexico, including retail and commercial banking, securities underwriting and brokerage and custody services, and asset management. Our principal subsidiaries are Banco Santander Mexico, our commercial bank subsidiary, and Casa de Bolsa Santander, our brokerage subsidiary. Gestión Santander, our former asset management subsidiary, was fully divested in December 2013.

Our principal executive offices are located at Avenida Prolongación Paseo de la Reforma 500, Colonia Lomas de Santa Fe, Delegación Álvaro Obregón, 01219, México, Distrito Federal, Mexico.  Our telephone number at that address is +52 55 5257-8000 and our website is www.santander.com.mx.  None of the information contained on our website is incorporated by reference into, or forms part of, this annual report on Form 20-F.

Our agent for service of process is Banco Santander, S.A., New York Branch, Attn: James H. Bathon, Chief Legal Officer, 45 E. 53rd Street New York, New York 10022.

History

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

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

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In 2010, Santusa Holding, S.L., a subsidiary of Banco Santander Parent, acquired Bank of America Corporation’s interest in our company, resulting in the Santander Group’s ownership of 99.9% of our shares. See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders.”  In order to make our company more identifiable to investors and to differentiate our company from our affiliates that operate in countries other than Mexico, we obtained shareholder approval on August 13, 2012 to change our name to Grupo Financiero Santander México, S.A.B. de C.V.  The Mexican Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público, or SHCP) authorized this name change.

On November 4, 2011, we announced that we had completed the final documentation and obtained the authorizations necessary to close the sale of our insurance company subsidiary Seguros Santander to ZS Insurance America, S.L., which was created as a consequence of the strategic alliance between Banco Santander Parent and Zurich Financial Services Group, for a price of Ps.7,441 million (U.S.$505 million).  The sale and joint venture were completed on November 4, 2011.  The joint venture is 51% controlled by Zurich Financial Services Group and 49% by Banco Santander Parent.  We do not hold shares in the joint venture.  In connection with the sale and joint venture, Seguros Santander, as a subsidiary of ZS Insurance America, S.L., and Banco Santander Mexico entered into an exclusive distribution agreement with respect to all types of insurance other than auto insurance.  As a result, Banco Santander Mexico will continue to sell insurance policies on behalf of this joint venture and to receive commissions from those sales.

In October 2012, we completed an SEC-registered initial public offering in the United States and in other countries outside of the United States and Mexico of 273,913,200 ADSs, each representing five Series B shares, including 35,681,039 ADSs sold to the international underwriters pursuant to their option to purchase additional ADSs, and a public offering in Mexico of 319,977,408 Series B shares, including 41,736,184 Series B shares sold to the Mexican underwriters pursuant to their option to purchase additional shares. Our ADSs began to trade on the New York Stock Exchange, or NYSE, under the symbol “BSMX” on September 26, 2012, and the Series B shares continued to trade on the Mexican Stock Exchange (Bolsa Mexicana de Valores, S.A.B. de C.V.) under the symbol “SANMEX.” We refer to the public offering in the United States and in other countries outside of the United States and Mexico as the 2012 international offering, and we refer to the public offering in Mexico as the 2012 Mexican offering. We refer to the 2012 international offering and the 2012 Mexican offering together as the 2012 global offering.  The selling shareholders, Banco Santander, S.A. and Santusa Holding, S.L., received all of the proceeds from the 2012 global offering.

On December 5, 2013, after receipt of the required regulatory approvals and authorizations, we sold our shares of Gestión Santander, in accordance with the previously disclosed May 2013 agreement with Banco Santander Parent to grow its asset management division. As a result of this transaction, Warburg Pincus and General Atlantic indirectly hold 50% of the equity of Gestión Santander and the remaining 50% is indirectly held by Banco Santander Parent. The transaction was valued at Ps.3,179 million, resulting in a net capital gain of Ps.1,944 million. The transaction was completed in December 2013 and resulted in the divestiture of Gestión Santander from us. We have entered into exclusive, long-term distribution agreements so that Banco Santander Mexico and Casa de Bolsa Santander can continue to offer mutual funds managed by Gestión Santander following the divestiture.

On June 19, 2014, we announced that our parent company, Banco Santander Parent entered into a definitive agreement with FINESP Holdings II B.V. (an affiliate of Warburg Pincus, a leading global private equity firm focused on growth investing) to create a leader in the custody business. Under the terms of the agreement, which is subject to legal and regulatory approvals, the new group, which will also include Temasek Holdings Private Limited  (a Singapore-based investment company), will acquire a 50% stake in Banco Santander Parent’s current custody operations in Spain, Mexico and Brazil. The remaining 50% will be owned by Banco Santander Parent. Also on June 19, 2014, we announced that we had agreed to sell our custody business to Banco Santander Parent for Ps.2,030 million, subject to legal and regulatory approvals. The agreements and joint venture were approved by both our board of directors and the board of directors of Banco Santander Parent at a meeting held on July 22, 2014. Since our obligation to transfer our custody business is subject to legal and regulatory approvals that had not been received as of December 31, 2014, we have not recognized any financial or tax effects in our audited financial statements. See note 3.9 to our audited financial statements.

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Banco Santander México

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

In 1970, Banco de Londres y México merged with Compañía General de Aceptaciones (formerly a shareholder of Banco de Londres), with Banco de Londres y México under its new name, Banca Serfin, as the surviving entity.

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

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

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

In 1992, Grupo Financiero Serfin was incorporated following the acquisition of Banca Serfin by Operadora de Bolsa.

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

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

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

On December 23, 2010, Banco Santander Mexico entered into a stock and assets purchase agreement to acquire the residential mortgage business of General Electric Capital Corporation and its subsidiaries, or GE Capital, in Mexico, or the GE Capital mortgage business.  The purchase price for the acquisition was Ps.2,042 million (U.S.$139 million) and, in addition, we repaid at closing to GE Capital the Ps.21,009 million (U.S.$1,425 million) intercompany debt at that date relating to the GE Capital mortgage business, which GE Capital historically had financed through intercompany debt.  The total volume of assets at the time of closing was Ps.23,904 million (U.S.$1,622 million), including a total loan portfolio of Ps.21,926 million (U.S.$1,487 million), while the total volume of liabilities was Ps.21,494 million (U.S.$1,458 million). The transaction closed on April 29, 2011. The acquisition made us the second-largest provider of residential mortgages in Mexico in terms of residential mortgages outstanding in 2011, as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV.

Banco Santander Mexico obtained shareholder approval on September 12, 2012 to change its name to Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México, and such name change was subsequently authorized by the CNBV.

In November 2012, Banco Santander Mexico completed a debt offering of U.S.$1.0 billion in senior notes in  the domestic and international markets.

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In November 2013, Banco Santander Mexico completed the acquisition of the equity stock of ING Hipotecaria, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada, or ING Hipotecaria, a subsidiary of ING Group. Prior to the acquisition, ING Hipotecaria provided mortgage-related products and services to more than 28,000 clients and operated 20 branches throughout Mexico. The net assets acquired amounted to Ps.395 million which includes a loan portfolio with an unpaid principal balance of Ps.11,237 million, and an estimated fair value of Ps.10,772 million. A loan portfolio of approximately Ps.363 million was expected to be uncollectible at the time of the acquisition. As part of the transaction, we made a cash payment of Ps.541.4 million (approximately U.S.$36.7 million) for ING Hipotecaria’s equity. This acquisition solidifies Banco Santander Mexico’s position as the second largest banking mortgage provider in Mexico with an estimated market share that increased from 17.7% as of December 31, 2013 to 18.9% as of December 31, 2014. Since the acquisition, Banco Santander Mexico has closed 18 of the 20 branches in an effort to consolidate the distribution network and increase operational efficiency.

On December 13, 2013 ING Hipotecaria obtained shareholder approval to change its name to Santander Vivienda, S.A. de C.V., Sociedad Financiera de Objeto Múltiple Entidad Regulada, or Santander Vivienda. In February 2014, Santander Vivienda obtained the permits required to change its legal name.

In December 2013, Banco Santander Mexico completed a debt offering of U.S.$1.3 billion aggregate principal amount of Basel III compliant Tier 2 Subordinated Capital Notes in the domestic and international capital markets.

On June 19, 2014, we announced that our parent company, Banco Santander Parent entered into a definitive agreement with FINESP Holdings II B.V. (an affiliate of Warburg Pincus, a leading global private equity firm focused on growth investing) to create a leader in the custody business. Under the terms of the agreement, which is subject to legal and regulatory approvals, the new group, which will also include Temasek Holdings Private Limited  (a Singapore-based investment company), will acquire a 50% stake in Banco Santander Parent’s current custody operations in Spain, Mexico and Brazil. The remaining 50% will be owned by Banco Santander Parent. Also on June 19, 2014, we announced that we had agreed to sell our custody business to Banco Santander Parent for Ps.2,030 million, subject to legal and regulatory approvals. The agreements and joint venture were approved by both our board of directors and the board of directors of Banco Santander Parent at a meeting held on July 22, 2014. Since our obligation to transfer our custody business is subject to legal and regulatory approvals that had not been received as of December 31, 2014, we have not recognized any financial or tax effects in our audited financial statements. See note 3.9 to our audited financial statements.

On November 25, 2014, we entered into an agreement to acquire a non-revolving consumer loans portfolio of approximately 39,200 loans with a total face value of approximately Ps.3,179 million from Scotiabank Inverlat. We paid Ps.3,002 million for the portfolio, in two tranches closing on April 4 and April 19, 2015.

Capital Expenditures and Divestitures

In 2012, our capital expenditures were Ps.1,782 million (U.S.$121 million), 62.2% (Ps.1,108 million) of which was for technology and the remainder of which was for furniture, fixtures and equipment (Ps.674 million).  In 2013, our capital expenditures were Ps.2,239 million (U.S.$152 million), 52.7% (Ps.1,180 million) of which was for technology and the remainder of which was for furniture, fixtures and equipment (Ps.1,059 million). In 2014, our capital expenditures were Ps.2,479 (U.S.$168),58.1% (Ps.1,439) of which was for information technology and the remainder of which was for furniture, fixtures and equipment (Ps.1,040).

Our principal capital expenditures since January 1, 2010 have been the acquisition of the GE Capital mortgage business in 2010 and the acquisition of ING Hipotecaria in 2013. On December 23, 2010, Banco Santander Mexico entered into a stock and assets purchase agreement to acquire the GE Capital mortgage business.  The purchase price for the acquisition was Ps.2,042 million (U.S.$139 million) and, in addition, we repaid at closing to GE Capital the Ps.21,009 million (U.S.$1,425 million) intercompany debt at that date relating to the GE Capital mortgage business, which GE Capital historically had financed through intercompany debt. The transaction closed on April 29, 2011.

The purchase price for the acquisition of ING Hipotecaria was Ps.541.1 million (U.S.$37 million). The transaction closed on November 29, 2013.

Our principal divestitures since January 1, 2010 have been the sale of our insurance company subsidiary Seguros Santander in 2011 and the sale of our asset management subsidiary Gestión Santander in 2013. Seguros Santander was sold to ZS Insurance America, S.L., which was a joint venture created as a consequence of the

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strategic alliance between Banco Santander Parent and Zurich Financial Services Group, for a price of Ps.7,441 million (U.S.$505 million). The sale and joint venture were completed on November 4, 2011.

On December 5, 2013, after receipt of the required regulatory approvals and authorizations, we sold our shares of Gestión Santander, in accordance with the previously disclosed May 2013 agreement with Banco Santander Parent to grow its asset management division. As a result of this transaction, Warburg Pincus and General Atlantic indirectly hold 50% of the equity of Gestión Santander and the remaining 50% is indirectly held by Banco Santander Parent. The transaction was valued at Ps.3,179 million, resulting in a net capital gain of Ps.1,944 million. This transaction results in the divestiture of Gestión Santander from us. Additionally, we have entered into exclusive, long-term distribution agreements so that we, as well as Banco Santander Mexico and Casa de Bolsa Santander, can continue to offer mutual funds managed by Gestión Santander following the divestiture.

On November 25, 2014, Banco Santander Mexico entered into an agreement to acquire a non-revolving consumer loans portfolio from Scotiabank Inverlat as described above. The acquisition was made in two tranches, closing on April 4 and April 19, 2015.

For 2015, we have a capital expenditures budget of Ps.3,350 million, 71.0% (Ps.2,378) of which will be spent on information technology and the rest of which will be spent on furniture, fixtures and equipment (Ps.972 million).  Our management expects that cash flows from operations will be sufficient to meet our liquidity requirements over the next 12 months, including our expected 2015 capital expenditures. We are in the final stages of our intended plan to add 200 new branches to our distribution network between the fourth quarter of 2012 and the first semester of 2015. We expect that this expansion will cost approximately Ps.1.25 billion and will be funded using our working capital. At the end of 2014 we had opened 185 new branches; 15 branches during the fourth quarter of 2012, 75 branches during 2013 and 95 branches during 2014. We expect to open an additional 15 branches and invest Ps.80 million in connection with these 15 new branches during 2015.

Public Takeover Offers

No matters to report.

B.  Business Overview

Overview

We are the fifth-largest financial services holding company in Mexico based on net income, the fourth-largest financial services holding company in Mexico based on total assets and loans, and the third-largest financial services holding company in Mexico based on deposits as of December 31, 2014, in each case as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV. Through our bank and other subsidiaries, we provide a wide range of financial and related services, principally in Mexico, including retail and commercial banking, securities underwriting and brokerage and custody services, and asset management. Our principal subsidiaries are Banco Santander Mexico, our commercial bank subsidiary, and Casa de Bolsa Santander, our brokerage subsidiary. Gestión Santander, our former asset management subsidiary, was completely divested in December 2013. As of December 31, 2014, we had total assets of Ps.949,983 million (U.S.$64,443 million) and total equity of Ps.102,287 million (U.S.$6,939 million), and for the year ended December 31, 2014, we had net income of Ps.13,288 million (U.S.$901 million), which represented a return on average equity, or ROAE, of 13.54% for that period.  Our most significant subsidiary is Banco Santander Mexico, which as of December 31, 2014 accounted for 99.9% of our total assets and 98.3% of our shareholders’ equity, and for the year ended December 31, 2014 accounted for 100.3% of our net income. As of December 31, 2014, Banco Santander Mexico had total loans, net of allowance for impairment losses, of Ps.457,255 million (U.S.$31,018 million), total deposits of Ps.573,507 million (U.S.$38,905 million) and 1,322 offices located throughout Mexico. We offer a differentiated financial services platform in Mexico focused on the client segments that we believe are most profitable, such as high- and mid-income individuals, SMEs and medium and large companies in Mexico, while also providing integrated financial services to low-income individuals.  We began to implement our client segmentation strategy in 2008 through the development of our information technology systems, product offerings, distribution channels and internal practices.

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

Retail Banking

Global Wholesale Banking

Focusing on the following categories of clients: ·      Individuals, with a net wealth of less than Ps.5 million, categorized as classic, preferred, premier or select ·      Private banking, for individuals with net wealth in excess of Ps.5 million ·      SMEs, with annual gross revenues of less than Ps.100 million ·      Middle-market corporations, with annual gross revenues of more than Ps.100 million that are not clients of Global Wholesale Banking ·      Government institutions, comprised of Mexican federal government agencies, state agencies and municipalities, as well as Mexican universities

Offering our largest clients (mainly Mexican and multinational corporations, financial groups and large institutional clients) financial services and products such as: ·      Global transaction banking, which includes cash management, security services, trade finance and funding alternatives for institutions with international operations ·      Credit markets, which includes origination units, distribution of structured credit and debt products, debt capital markets, project finance and asset and capital structuring ·      Corporate finance, which includes mergers and acquisitions as well as equity capital markets services ·      Equity custodial and related services, which includes equity derivatives, exchange-traded derivatives, cash equities and equity research ·      Treasury trading activities, which offers our customers derivative products, foreign exchange transactions (including for individuals) and other financial products and structures ·      Proprietary trading, which is responsible for the management of our proprietary investment portfolio ·      Global wholesale banking products and solutions for retail customers, which offers retail segment clients tailor-made wholesale banking products and solutions in order to meet specific needs

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

The investment banking and equity trading activities of Casa de Bolsa, our broker-dealer subsidiary, are included in the Global Wholesale Banking segment, while the retail portion of our brokerage business is part of the Retail Banking segment.  The activities of Gestión Santander, our asset management subsidiary (prior to December 2013), are included in both the Retail Banking and the Global Wholesale Banking segments. Our insurance activities are included in the Retail Banking segment.

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

	IFRS
	Net interest income						Operating profit before tax
	For the year ended December 31,						For the year ended December 31,
	2012		2013		2014		2012		2013		2014
	(Millions of pesos)
Retail Banking	Ps.	26,533	Ps.	29,767	Ps.	33,316	Ps.	12,045	Ps.	8,702	Ps.	12,270
Global Wholesale Banking		3,723		3,471		3,971		4,535		3,716		4,226
Corporate Activities		3,626		2,609		324		4,585		2,595		334
Total	Ps.	33,882	Ps.	35,847	Ps.	37,611	Ps.	21,165	Ps.	15,013	Ps.	16,830

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

	IFRS
	As of and for the year ended December 31,
	2012			2013			2014
	(Millions of pesos, except percentages, branch and customer data)
Offices(1)		1,142			1,234			1,322
Customers		10,215,299			10,728,823			11,725,423
Total assets	Ps.	793,032		Ps.	857,818		Ps.	949,983
Loans	Ps.	345,702		Ps.	384,752		Ps.	457,255
Deposits(2)	Ps.	351,915		Ps.	390,813		Ps.	447,627
Total equity	Ps.	99,612		Ps.	92,518		Ps.	102,287
Non-performing loans as a percentage of total loans(3)		2.06	%		3.81	%		3.90	%
Efficiency(4)		39.81	%		39.76	%		41.70	%
ROAE(5)		18.25	%		14.16	%		13.54	%

(1) Includes branches, cash desks (ventanillas), Santander Select offices (including Centros Select, Espacios Select and box offices) and Santander Select units (módulos).

(2) Includes Demand and Time deposits.

(3) Non-performing loans include (i) all credits past due by more than (x) 30 days, in the case of single-payment loans, (y) 60 days, in the case of revolving loans (including consumer loans and credit card loans), and (z) 90 days, in the case of periodic-payment loans (including non-revolving consumer loans, mortgages and commercial loans), and (ii) other doubtful credits. Other doubtful credits include (i) if greater than 25% of a customer’s loans are considered non-performing, the rest of such customer’s loans and (ii) loans to borrowers in doubtful financial situations such as bankruptcy.

(4) Efficiency ratios are equal to administrative expenses plus depreciation and amortization, divided by total income.

(5) Calculated based upon the average daily balance of equity.

Banco Santander, S.A., or Banco Santander Parent, is our controlling shareholder and owns, directly or indirectly, 74.97% of our total capital stock.  We believe that our relationship with Banco Santander Parent and the Santander Group as a whole offers us significant competitive advantages over other financial services holding companies in Mexico. As of December 31, 2014, the Santander Group had total assets of €1,266.3 billion (U.S.$1,539.2 billion), equity of €89,714 million (U.S.$109,047 million) and a market capitalization of €88,041 million (U.S.$107,014 million). It also generated an attributable profit of €5,816 million (U.S.$7,069 million) in the year ended December 31, 2014. We represented approximately 8% of the Santander Group’s attributable profit in the year ended December 31, 2014, making us the fifth largest contributor of attributable profits to the Santander Group. We also represented approximately 4% of the Santander Group’s assets in the year ended December 31, 2014, according to the annual report of the Santander Group for 2014.

The Santander Group had 12,951 branches, 185,405 employees and an attributable profit of €5,816 million (U.S.$7,069 million) for the year ended December 31, 2014, according to the annual report of the Santander Group for 2014.

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Our Competitive Strengths

Leading market position in select categories

We rank fifth in terms of net income, fourth in terms of total assets and total loans, and third in terms of deposits among financial groups in Mexico as of December 31, 2014, according to information published by the CNBV, with market shares of 13.0%, 13.2%, 14.9% and 15.4%, respectively, as of December 31, 2014, in each case as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV. Banco Santander Mexico, our commercial bank subsidiary, ranks third in terms of net income and total assets among private-sector banks in Mexico, with market shares of 15.0% and 13.3%, respectively, as of December 31, 2014, in each case as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV. Among the seven largest financial groups and private-sector banks in Mexico, we believe we hold leading market positions in most of our key product lines, such as mortgages and commercial loans (including loans to SMEs and middle-market corporations).

The following table shows the rankings and market share of Banco Santander Mexico and Grupo Financiero Santander Mexico as of December 31, 2014, according to information published by the CNBV.  All statements in this annual report on Form 20-F regarding our relative market position and financial performance vis-à-vis the financial services sector in Mexico are based, out of necessity, on information obtained from CNBV reports, and accordingly are presented in accordance with Mexican Banking GAAP.  For a more detailed description of our performance relative to the Mexican banking industry, see “—Competition.”

	Mexican Banking GAAP
	As of December 31, 2014
Rankings and Market Share	Rank of Banco Santander Mexico among Banks(1)		Rank of Grupo Financiero Santander Mexico among Financial Groups(2)		Market Share of Banco Santander Mexico among Banks(1)(3)			Market Share of Grupo Financiero Santander Mexico among Financial Groups(2)(3)
Total loans		3		4		13.9	%		14.9	%
Deposits		4		4		14.1	%		15.3	%
Total assets		3		4		13.5	%		13.2	%
Asset quality(4)		6		6		—			—
Total equity		3		4		13.7	%		12.7	%
Net income		3		5		15.0	%		13.0	%
Efficiency(5)		2		3		—			—
ROAE(6)		3		3		—			—

Source: CNBV.

(1) Among the seven largest private banks in Mexico in terms of total assets: Banco Santander Mexico, BBVA Bancomer, S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer; Banco Nacional de México, S.A., Integrante del Grupo Financiero Banamex; Banco Mercantil del Norte, S.A., Institución de Banca Múltiple, Grupo Financiero Banorte; HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC; Banco Inbursa, S.A., Institución de Banca Múltiple, Grupo Financiero Inbursa; and Scotiabank Inverlat, S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank.

(2) Among the seven largest private financial groups in Mexico in terms of total assets: Grupo Financiero Santander Mexico, Grupo Financiero BBVA Bancomer, Grupo Financiero Banamex, Grupo Financiero Banorte, Grupo Financiero HSBC, Grupo Financiero Inbursa and Grupo Financiero Scotiabank.

(3) We calculate market share data based on information published by the CNBV.

(4) Defined as total non-performing loans as a percentage of total loans.

(5) We calculate the efficiency ratio as administrative and promotional expenses, which include depreciation and amortization, divided by total income, using information published by the CNBV.

(6) Calculated based upon the average balance of equity.

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We believe that our scale and market leadership provide us with exceptional competitive opportunities, including the ability to gather market intelligence to support decision-making in determining business opportunities and in meeting our customers’ needs.

Focus on well-defined profitable client segments resulting in superior track record

We believe our market share in our key client segments (high- and mid-income individuals and SMEs) will continue to contribute to our profitability. We have posted ROAE levels for Banco Santander Mexico of  18.5%, 20.0%  and 14.3% in 2012, 2013 and 2014, respectively, as determined in accordance with Mexican Banking GAAP, making us the third most profitable bank among the seven largest private-sector banks in Mexico under that metric in 2014, as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV.

We developed our client segmentation strategy in 2008 with clearly defined client segments: high- and mid-income individuals, SMEs and middle-market corporations. Since then, we have focused our efforts on further refining our client segmentation, developing our product offerings, developing our information technology systems and our internal practices, as well as enhancing our distribution channels in order to better service our key client segments.

We believe our targeted efforts have helped us organically increase our market share in key business lines such as retail services to middle-market corporations and SMEs.  From December 31, 2010 to December 31, 2014, our commercial loans market share (which includes loans to middle-market corporations, institutions, corporate clients and SMEs) increased 2.1 percentage points, from 13.3% to 15.4%, as determined in accordance with Mexican Banking GAAP, according to CNBV data.  We are the second-largest provider of residential mortgages in Mexico in terms of residential mortgages outstanding in 2014, as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV.  See “—Our Core Products—Retail Lending—Mortgages.”

Efficient and business-oriented operational platform

Our operational platform efficiently combines our modern business-oriented information technology systems with our multichannel distribution strategy, resulting in innovative ways to serve our clients.  Our multichannel distribution strategy consists of using both traditional and alternative distribution channels such as branches, internet banking, mobile banking and contact centers tailored to each of our client segments and designed to reach a broad spectrum of customers in a cost-efficient manner.  We have well-developed customer relationship management, or CRM, tools that allow us to monitor our clients’ behavior and provide them with targeted product offerings through diverse channels.  As a consequence, we are able to efficiently leverage alternative distribution channels, such as ATMs, internet banking and our contact centers, that are complementary to our traditional proprietary branch network, which enables us to deliver better service to our clients and increases our sales ratios.  As of December 31, 2014, we had approximately 1.45 million customers with pre-authorized credit offers.  We believe our efficient operations allow us to realize synergies and more profitable growth.  As of December 31, 2014, we were the third most efficient financial group among the seven largest financial groups in Mexico, as calculated in accordance with Mexican Banking GAAP, according to information published by the CNBV.  For this purpose, we calculate the efficiency ratio as administrative expenses divided by total income, using information published by the CNBV.  We believe this is a result of many factors, including our focus on cost-control and best practices that we can leverage from Banco Santander Parent, among others.  We believe our efficiency ratio provides us with operating flexibility and enables us to be competitive in pricing versus our peers.

Synergies from our affiliation with the Santander Group

We believe that being an affiliate of the Santander Group offers us significant competitive advantages.  The Santander Group is one of the largest banking groups in Latin America in terms of assets, the largest financial group in Spain and a significant financial system participant in various European countries, including the United Kingdom, through its Santander UK subsidiary, Poland and Portugal, among others.  Through Santander Consumer, Santander Group also operates a leading consumer finance franchise in the United States as well as in Germany, Italy, Spain and several other European countries. Our relationship with the Santander Group allows us, among other things, to:

· benefit from the Santander Group’s operational expertise in areas such as internal control and risk management, with practices that have been developed in response to a wide range of market conditions around the world and that we believe will enhance our ability to grow our business within desired risk limits;

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· strengthen our internal auditing function and, as a result of the addition of an internal auditing department that reports concurrently and directly to our Audit Committee and the audit committee of Santander Group, making it more independent from management;

· enhance our ability to manage credit and market risks through the adoption of policies and know-how developed by Santander Group;

· leverage the Santander Group’s latest-generation, customer-centered, global information technology platform, which reduces our technology development costs, provides operational synergies with the Santander Group, enhances our ability to support our customers and enables us to deliver products and services targeted to the needs of our customers;

· utilize the Santander Group’s management training and development, which is composed of a combination of in-house training and development with access to managerial expertise and best practices in other Santander Group units outside Mexico. Santander Group also participates in monitoring key supervisory areas, including risk, auditing, accounting and financial control;

· access the Santander Group’s multinational client base and benefit from the Santander Group’s global presence, particularly in Latin America;

· support our large Mexican corporate customers in the internationalization of their businesses, through trade financing, international capital markets access, structured finance and syndicated loans, as well as transactional banking services;

· benefit from selectively borrowing from Santander Group’s product offerings in other countries as well as from their know-how in systems management;

· replicate or adapt in Mexico the Santander Group’s successful product offerings and best practices from other countries; and

· benefit from the Santander Group’s overall market presence and market campaigns such as the Formula 1 sponsorship.

Although we benefit from our affiliation with the Santander Group, our executive officers are responsible for the management of our business independent from our Parent.

Strong and sustainable funding and capitalization profile

Our principal source of funding is customer deposits, including reverse repurchase agreements, which represented Ps.514.6 billion, or 60.7%, of our total liabilities as of December 31, 2014.  As of December 31, 2014, customer deposits represented 86.2% of our total deposits.  Since Banco Santander Mexico is primarily a transactional bank, customer deposits, a comparatively less expensive source of funding, constitute the main source of liquidity in our financing structure.  This has allowed us to manage our reliance on and exposure to riskier sources of funding and manage our liquidity requirements. We believe Banco Santander Mexico has attractive capitalization levels based on its Tier 1 capital ratio, which has been at or near the median of the seven largest banks in Mexico over the past 5 years. As of December 31, 2014, our total capitalization ratio was 16.2%, comprised of Tier 1 capital ratio of 12.9% and Tier 2 capital ratio of 3.3%, in each case as calculated in accordance with Mexican Banking GAAP.

Experienced management team and skilled workforce

We benefit from a highly experienced management team.  Our senior management has an average of 20 years of experience in the financial industry and 15 years in the Santander Group. Our management team has guided us through economic cycles and, by anticipating recent macroeconomic developments, our net income has increased at a compound annual growth rate, or CAGR, of 8.45% since 2005, as determined in accordance with Mexican Banking GAAP, compared to 7.70% CAGR increase in the Mexican banking system as a whole over the same

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period, as determined in accordance with Mexican Banking GAAP, according to data from the CNBV.  Our management has concentrated its efforts on establishing a successful working environment and employee culture, and has invested in rigorous personnel selection processes, training programs and evaluation processes to maintain a strong talent base and foster retention.  We have promoted the development and strengthening of abilities and skills in managing people and teams.  The experience and commitment of our senior management team has been a critical component in the growth of our franchise, as well as in the continuing enhancement of our operations and financial performance.

Our Strategy

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

We intend to achieve these objectives through the following strategies:

Leverage our leading market position to benefit from the significant growth potential of the Mexican banking sector

We seek to continue increasing our market penetration, focusing on our well-defined client segments and targeted products (such as mortgages, consumer lending, SME lending and middle-market corporations).  At the same time we intend to continue developing our profitable and client-centered wholesale bank.  To achieve these objectives, we will continue to leverage our strong brand name, distribution network and products, as well as capture the benefits of growth in the banking sector as the Mexican economy grows and the level of penetration of financial services in Mexico approaches those of other countries in Latin America.  Furthermore, we will continue to focus our marketing efforts to grow our customer base and promote loyalty through the transactional use of our electronic channels, as well as the cross-selling of products and services to increase the number of products used by each of our clients.  We intend to achieve this objective through ongoing technological innovation and by cross-selling credit products, such as mortgages, credit card loans, payroll loans, personal loans and insurance products, such as life, automobile, home, health, accident, fraud and unemployment insurance, to our payroll clients.  As of December 31, 2014, we had Ps.16,662 million (U.S.$1,130 million) in payroll loans.  We intend to improve our competitiveness by further strengthening our brand awareness, particularly through the marketing of our products and the use of our multichannel distribution platform, and by continuing to focus on the development of innovative products aimed at satisfying the needs of each of our different client segments.

Continue to expand and develop our customer base in our focused client segments and enhance customer loyalty

We intend to continue to use our extensive distribution network to proactively pursue and strengthen our relationships with high- and mid-income customers through the offering of key products and business solutions for SMEs and middle-market corporations.  An important part of our strategy is the segmentation of our customer base.  We classify our individual customers in four main categories: “select”, “premier”, “preferred” and “classic” customers.  We believe that our clear customer classification allows us to offer our customers a portfolio of targeted products that fit their specific needs.  Another important part of our strategy is the use of multiple channels, including third-party branches, ATMs, our contact centers, internet banking and mobile banking, among others.  We believe that these alternative channels are an important way to reach a broader spectrum of customers and promote transactions,  allowing us to more efficiently connect with and expand our customer base. We also believe that our high quality customer service capabilities allow us to differentiate ourselves in the highly competitive Mexican banking environment.  By combining our highly productive branch network with our alternative channels, such as ATMs, our contact centers, internet banking and mobile banking, we believe that we are able to consistently satisfy our customers’ expectations and that we will be able to achieve top-quality service levels.

Expand product offerings and distribution channels, particularly in the Retail Banking segment

We intend to further increase our business and operations throughout Mexico, expanding our retail banking services to existing and prospective retail customers.  Through the implementation of CRM strategies and market

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intelligence, we plan to offer new products and services to existing customers according to client segmentation and the development of value-added offers.  Our CRM mission is to place our clients at the center of our commercial strategy.  By improving our information technology and our processes, we believe we will be able to produce business intelligence by acquiring detailed information about the current and future needs and behaviors of our customers.  This business intelligence will allow further customer segmentation according to life cycle and income levels and will also enable us to improve the way we serve our customers through our various distribution channels.

We will also continue to invest in creating and maintaining strong business support and commercial processes to make our services more accessible and improve our relationships with our clients.  For example, we have developed a fully integrated commercial network, which manages customer product offerings through an internally designed CRM tool that makes it easier for branch executives to know their portfoliosand to approach customers with specific and tailored product offerings.

Finally, our contact centers enhance our ability to provide segmented customer service. We are in the final stages of our intended plan to add 200 new branches to our branch network by the first half of 2015, including the 15 branches we opened in the fourth quarter of 2012, the 75 branches we opened during 2013, the 95 branches we opened during 2014 and the 15 new branches we expect to open in 2015. We expect that this expansion will cost approximately Ps.1.25 billion (including Ps.80 million in connection with the 15 new branches expected to be opened during 2015)  and will be funded using our working capital.

We seek to increase our market share in retail banking by offering innovative banking products and intend to focus on profitable products such as insurance, mortgages, credit cards, personal loans, SMEs and middle-market corporations loans where we believe there is an opportunity to increase our market share.  For our non-retail clients, we will continue to offer through our Global Wholesale Banking segment an array of comprehensive products and services relating to finance, guarantees, mergers and acquisitions, equity and fixed income, structured finance, international trade finance, cash management services, collection services and e-banking, including structured loans, syndicated loans, acquisition financing and financing of investment plans, among others.  We intend to improve the ways we serve our clients by expanding the multichannel distribution strategy related to each of our client segments, and we will continue to maximize the synergies and leverage the cross-selling opportunities between our corporate and retail businesses.  In addition, we have established a division that is focused on enhancing the quality of our products and processes.

Capitalize on our risk management practices and cost-efficient culture to promote profitable and sustainable growth

As we pursue our growth and profitability objectives, we will apply risk policies aimed at generating an appropriate return for the risk incurred. We intend to continue to carefully monitor the credit quality of our asset portfolio and adapt our risk policies accordingly, particularly any assets in high growth segments such as individuals and SMEs, while diversifying our balance sheet.  We plan to maintain a balanced growth profile with a strong emphasis on liquidity, a stable, low-cost funding base and strong capital ratios.

We plan to make efficient use of technology through alternative channels, such as mobile banking, internet banking and our telephone contact centers, in order to control the expenses associated with the continued expansion of our multichannel distribution strategy.  As of December 31, 2014, we were the second most efficient bank among the seven largest private banks in terms of assets in the Mexican banking system, as determined in accordance with Mexican Banking GAAP, according to data from the CNBV.  For this purpose, we calculate the efficiency ratio as administrative expenses divided by total income, using information published by the CNBV.  We will continue to monitor our administrative and promotional expenses in order to maintain a low efficiency ratio.

Operations Through Subsidiaries

We have organized our business operations through our principal subsidiaries:

· Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México, our commercial bank subsidiary;

· Casa de Bolsa Santander, S.A. de C.V., Grupo Financiero Santander México, our broker-dealer subsidiary;

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· Gestión Santander, S.A. de C.V., Grupo Financiero Santander, our asset management subsidiary prior to December 2013; and

· Zurich Santander Seguros México, S.A. (formerly known as Seguros Santander, S.A., Grupo Financiero Santander), our insurance company subsidiary prior to November 2011.

In addition, as of December 31, 2014, the Bank has three principal subsidiaries: Santander Consumo, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada, or Santander Consumo, Santander Hipotecario, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada, or Santander Hipotecario and Santander Vivienda.

The following table shows total assets, net income and total equity of each of the abovementioned subsidiaries (other than Seguros Santander and Gestión Santander which we sold in 2011 and 2013, respectively) as of and for the year ended December 31, 2013.

	IFRS
	As of and for the year ended December 31, 2014
	Total assets		Net income			Total equity
	(Millions of pesos)
Banco Santander Mexico(1)	Ps.	948,769	Ps.	13,336		Ps.	100,583
Santander Consumo		58,736		2,983			12,113
Santander Hipotecario		36,004		1,139			4,774
Santander Vivienda		10,310		(54	)		1,573
Casa de Bolsa Santander		895		(2	)		1,010

(1) Includes total assets and net income of Banco Santander Mexico and its subsidiaries on a consolidated basis.

Banco Santander Mexico is our most significant subsidiary, and as of December 31, 2014, accounted for approximately 99.9% of our total assets, 98.3% of our total equity and 100.3% of our net income.  Banco Santander Mexico’s principal sources of funding are customer deposits. Customer deposits typically represent a large portion of Banco Santander Mexico’s funding base because of Banco Santander Mexico’s ability to attract deposits from customers through its extensive retail, wholesale and corporate network.  Since Banco Santander Mexico is primarily a commercial bank, customer deposits constitute the main source of liquidity in its financing structure.  These deposits currently cover most of Banco Santander Mexico’s liquidity requirements.  Banco Santander Mexico’s control and management functions involve planning its funding requirements, structuring the sources of financing to achieve optimal diversification in terms of maturities, instruments and markets and setting forth contingency plans.  In order to increase liquidity, we rely in part on local peso-denominated issuances. We also have access to international funding through U.S. dollar-denominated issuances with longer maturities. For a further discussion of our funding, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources.”

Banco Santander Mexico

Banco Santander Mexico is a corporation (sociedad anónima) authorized to operate as a multi-purpose banking institution (institución de banca múltiple) under the Mexican Banking Law.  Banco Santander Mexico is one of the top four multi-purpose banks in Mexico in terms of total assets, net income and loan portfolio as of December 31, 2014, as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV.  For the year ended December 31, 2014, Banco Santander Mexico had net income of Ps.13,336 million (U.S.$905 million), and as of December 31, 2014, Banco Santander Mexico had total assets of Ps.948,769 million (U.S.$64,361 million), total loans, net of allowance for impairment losses, of Ps.457,255 million (U.S.$31,018 million), total deposits of Ps.573,507 million (U.S.$38,905 million) and total equity of Ps.100,583 million (U.S.$6,823 million).  As of December 31, 2014, Banco Santander Mexico had 1,322 offices located throughout Mexico. Its headquarters are located in Mexico City, Distrito Federal, and it operates in every state in Mexico.

Banco Santander Mexico provides a broad range of retail and commercial banking services to its customers, including peso- and foreign currency-denominated loans to finance a variety of commercial transactions, trade, foreign currency forward contracts and credit lines and a variety of retail banking services, including mortgage

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financing and credit cards.  It seeks to offer its customers a wide range of products while providing high levels of service.  In addition to its traditional banking operations, Banco Santander Mexico offers a variety of ancillary financial services including financial leasing, financial advisory services, insurance brokerage and investment management.

Gestión Santander

Prior to its sale in December 2013, Gestión Santander was our asset management subsidiary with fully integrated investment, product, operational and commercial structures. On December 5, 2013, after receipt of the required regulatory approvals and authorizations, we sold our shares of Gestión Santander, in accordance with the previously disclosed May 2013 agreement with Banco Santander Parent to grow its asset management division. As a result of this transaction, Warburg Pincus and General Atlantic indirectly hold 50% of the equity of Gestión Santander and the remaining 50% is indirectly held by Banco Santander Parent. The transaction was valued at Ps.3,179 million, resulting in a net capital gain of Ps.1,944 million. The transaction was completed in December 2013 and resulted in the divestiture of Gestión Santander from us. We have entered into exclusive, long-term distribution agreements so that Banco Santander Mexico and Casa de Bolsa Santander can continue to offer mutual funds managed by Gestión Santander following the divestiture.

As of and for the year ended December 31, 2012, as applicable, Gestión Santander accounted for 0.1% of our total assets, 0.8% of our net income and 0.3% of our total equity.

Casa de Bolsa Santander

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

As of December 31, 2014, Casa de Bolsa Santander had 4,881 customer contracts and Ps.416.6 billion in assets under management, and accounted for 0.1% of our total assets and 1.0% of our total equity. In 2014, Casa de Bolsa Santander had net income of Ps.(2) million (U.S.$0.14 million), which represented (0.02)% of our net income.

Retail Banking

General

Our Retail Banking segment’s activities include products and services for individuals, private banking clients, SMEs, middle-market corporations and government institutions.  As of December 31, 2014, our Retail Banking segment accounted for approximately 76.3% of our total loan portfolio based on the aggregate principal amount of loans in this segment, approximately 79.0% of our total demand and time deposits, 88.6% of our net interest income, 87.2% of our fee income and 73.7% of our operating profit before tax.  Our Retail Banking operations served 11,671,458 customers as of December 31, 2014, an increase of 990,637 customers since December 31, 2013.

In 2014, our branch network and alternative channels originated more than 622,598 credit cards, 509,389 consumer loans and 18,308 mortgage loans.

Individuals

We classify individual high-income customers as “select,” if they have a monthly income in excess of Ps.70,000 (U.S.$4,749) and “premier,” if they have a monthly income between Ps.50,000 (U.S.$3,392) and Ps.70,000 (U.S.$4,749); mid-income, or “preferred,” if they have a monthly income between Ps.7,500 (U.S.$509) and Ps.50,000 (U.S.$3,392); and low-income, or “classic,” if they have a monthly income below Ps.7,500 (U.S.$509).  We believe that our clear customer classification allows us to offer our customers a portfolio of targeted products that fit their specific needs.  Our focus is on select, premier and preferred customers, areas in which we have

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experienced growth as a result of our efforts to provide innovative products and services.  We began to classify eligible customers as premier or preferred in April 2010 and soon thereafter began to sell them packaged products and services known as Membresía Premier (Premier Membership), Círculo Preferente (Preferred Circle) and Cuenta Total (Total Account) accounts. Since 2014, we also have offered Mundo Select (Select World)  services to our select customers. As of December 31, 2014, individuals accounted for 39.1% of our total loans outstanding and 28.8% of our deposits.  As of December 31, 2014, individuals (including individuals served by our private banking business described below under “—Private Banking”) accounted for 61.4% of our fee income and 39.2% of our operating profit before tax in the year ended December 31, 2014.

New individual customers are classified according to their socioeconomic status as classic, preferred, premier, select or as private banking customers (as described below in “—Private Banking”).  Individual customers are then further classified into sub-segments according to their age, and each customer sub-segment is offered products tailored to their socioeconomic status and age.  Through this strategy, we aim to build customer loyalty by developing products that meet our customers’ financial needs throughout their entire financial life cycle.

We follow different service models for each customer class:

· Select customers: We offer a commercial model tailored to provide exclusive products and services through unique and differentiated branches. The customers in this segment have significant assets giving them access to specialized channels and an exclusive menu of products and services. To best serve our select customers we offer different investment products (both short- and long-term), asset protection, personal credit, mortgages and credit cards. The select model offers the opportunity be part of a network of both financial and non-financial benefits called Mundo Select, which is the key access point for the select commercial model. As of December 31, 2014, our Select customers class included 230,263 customers, 126,907 of whom were attended to by 519 Select managers that specialize in investment services. About half of our select customers were attended to in 121 exclusive Santander Select offices, which provide services in a private, distinguished and comfortable environment.

· Premier customers:  We have a commercial model that tracks our premier customers’ financial growth and addresses their credit, protection and savings needs. These customers are attended to with a value-added approach focused on providing quality service with the flexibility of accessing banking services through any of our channels. All of our branches have a dedicated area to serve these customers, as well as a premier executive to focus exclusively on their specific needs. As of December 31, 2014, our premier customer class included 318,838 customers that were served by approximately 730 representatives throughout our 1,322 branches across Mexico.

· Preferred customers: We use a multichannel service model, supported by our account managers as well as our contact center operators. We provide differentiated services with preferential benefits such as insurance, additional credit cards, consumer loans and automatic payments to these customers, whom we view as upwardly mobile. As of December 31, 2014, we had 3,984,983 preferred customers.

· Classic customers: Our emphasis is on serving our classic customers through alternative channels to support self-service and maintain a profitable business model.  In our branches, classic customers are served under a standardized model through pools of account executives, with a sales-oriented approach.  We offer differentiated services such as preferred bundled offers and payroll benefits to customers we view as upwardly mobile.  As of December 31, 2014, we had 6,801,835 classic customers.

Within the Retail Banking segment, customers classified as individuals, together with private banking customers, collectively accounted for 70.5% of our fee income and 53.1% of our operating profit before tax in 2014.

Private Banking

Our private banking business is served by approximately 1,700 professionals in 100 offices worldwide, and ranks in the top ten private banking units globally in terms of asset volume. In 2014, The Banker recognized us as the best private bank in Latin America for the second year in a row.

As of December 31, 2014, our private banking unit had 23 offices and 108 specialized bankers located throughout Mexico who attended to 12,698 customers.  As of December 31, 2014, our private banking unit managed

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approximately Ps.208,432 million (U.S.$14,139 million) in assets and had approximately 14,360 private banking accounts.

Our private banking business has experienced significant growth in Mexico, since 2013, assets under management have increased by 30%. Our growth is a result of our focus on providing customers with a full-service banking experience.

We classify our individual customers with net wealth in excess of Ps.5 million (U.S.$339,181) as private banking customers.  We provide customized financial and investment services to these high net worth individuals by offering innovative and transparent products developed via a rigorous risk management process and adapted to each client’s specific needs and investment profile.  These customers are assigned a specialized banker who is familiar with the customer’s individual needs and who can recommend and provide access to specialized products and services.  Our private banking model is based on full-service representation of our customers by means of specialized bankers, who attend to a limited number of customers and help customers monitor their portfolios and adapt to changing economic conditions.  We offer a wide range of financial products to our private banking customers and offer our customers the opportunity to invest with funds managed and administered by other financial institutions and independent asset managers.

In order to provide a differentiated business model, we have two divisions in private banking, depending on a customer’s total balance maintained at the Bank:

· Private banking customers, with net wealth in excess of Ps.5 million (U.S.$339,181); and

· Private wealth customers, with net wealth in excess of Ps.300 million (U.S.$20 million).  We offer our private wealth customers the same products and services that we offer to our private banking customers, but tailor these products and services to their specific needs.

Our private banking unit has been recognized as the second-best provider of private banking services in Mexico according to the Euromoney Private Banking Survey 2012.  It has one of the largest numbers of mutual funds and products—ranging from fixed income to equity to capital protection funds—compared to other local competitors.  The private banking unit has been implementing a commercial and business model according to best practices and has developed a new strategy to offer loans and transactional banking products specifically designed for our Private Banking and Private Wealth customers.  In 2013, Euromoney recognized our private banking unit as the best in the “super affluent” category, defined as clients with a net worth between U.S.$500,000 and U.S.$1.0 million, and The Banker recognized it as the best private bank in Latin America.

SMEs

As of December 31, 2014, our SME line of business represented 11.0% of our total loans outstanding and 7.8% of our deposits. SMEs accounted for 10.4% of our fee income and 13.2% of our operating profit before tax in the year ended December 31, 2014.  We offer our customers in this business line a range of products, including revolving lines of credit, commercial loans, leasing, factoring, foreign trade loans and guarantees, credit cards, mortgage loans, current accounts, savings products, mutual funds and insurance brokerage.

Our Retail Banking segment provides banking services and originates loans for SMEs.  The maximum level of credit extended to such companies is generally limited to approximately Ps.8,000,000 (U.S.$542,689).  In 2010, we developed revolving lines of credit for our SME customers that do not require collateral.  We refer to these credit lines as Crédito Ágil (Flexible Credit).  These lines of credit are limited to Ps.8,000,000 (U.S.$542,689) and are primarily used by our SME customers to finance their working capital needs.  Crédito Ágil can also be used as a special purpose credit card, which allows a large number of our SME customers to access term financing for the first time.  Approximately 56.5% of SMEs loan portfolio has a certain type of guarantee granted by Nacional Financiera, Sociedad Nacional de Crédito, Institución de Banca de Desarrollo, or NAFIN, a Mexican government bank that provides support for SMEs.

Our SME business represented Ps.51,835 million of our loan portfolio as of December 31, 2014, an increase of 25% from December 31, 2013. This increase reflects the positive results obtained from the improvement in client services via the “SME Santander Model,” through which we strive to be the preferred bank for SMEs by providing quality customer service, straightforward and targeted commercial and risk processes and a customer development program featuring financial educational courses offered both live and  online that focus on issues relevant to SMEs

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in Mexico. We also continue to expand our specialized network of SME executives dedicated exclusively to attending SME customers.  The specialized SME network included 782 dedicated SME specialists as well as 18 dedicated specialized offices (Centros Pyme, or SME Centers) as of December 31, 2014.

Middle-Market Corporations

This business line is comprised of companies that generally have annual revenues of more than Ps.100 million (U.S.$6.8 million), are not clients of Global Wholesale Banking and meet certain other qualifying criteria.  We offer middle-market corporations a wide range of products, including commercial loans, credit lines, leasing, factoring, foreign trade loans and guarantees, current accounts, savings products, mutual funds, payroll administration (a potential source for new individual customers), cash management, treasury services, financial advisory services, credit cards and insurance brokerage.  We also offer our middle-market corporations customers with higher income the same products that we offer to our wholesale banking customers.  As of December 31, 2014, we had 34,130 middle-market corporations customers, and 24 specialized offices, 188 senior executives, 14 agro executives, 9 account directors, 8 subdirectors and 5 management officers (back office executives that support the sales force) located throughout Mexico dedicated to attending these middle-market corporations customers.

Our middle-market corporations portfolio represented Ps.105,552 million (U.S.$7,160 million) of our loan portfolio as of December 31, 2014, an increase of 13.7% from December 31, 2013. The quality of this portfolio has not been affected by its growth; the non-performance rate was 1.3% as of December 31, 2013 and 1.1% as of December 31, 2014. As of December 31, 2014, our middle-market corporations customers represented 22.3% of our total loans outstanding and 18.0% of our deposits.  Middle-market corporations accounted for 12.4% of our fee income and 17.2% of our operating profit before tax in 2014.

The middle-market business is an important source of deposits and most of its revenues come from credit products.  This business has consistently increased its array of products designed to meet our customers’ needs in terms of cash management and collection solutions.  Due to the low penetration in this market by Mexican banks, we believe we have an opportunity to further provide loans and cash management and collections solutions to middle-market corporations.

In addition, Banco Santander Mexico has significantly increased cross-selling within this business unit.  We have established a model to serve customers that actively use at least three products, including investment, credit, payroll administration and cash management, among others.  We refer to these clients as Vinculados Transaccionales (Transactionally Linked).  Our sales team has focused on increasing the volume of transactions of our middle-market corporations customers and, as a result, we had more than 2,381 Vinculados Transaccionales customers as of December 31, 2014, an increase of 41% from December 31, 2013.

We created a specialized area in our contact center to provide a more personalized service to corporations (SMEs and middle-market corporations), driven by efficient and high-quality services while keeping our executives current on the corporations’ specific needs and requests.

Institutions

This business unit caters to Mexican federal government agencies, states agencies and municipalities as well as Mexican universities.  Institutional customers are a potential source for new individual payroll customers.  As of December 31, 2014, these customers represented 3.9% of our total loans portfolio and 24.3% of our deposits.  Institutions accounted for 2.9% of our fee income and 4.1% of our operating profit before tax in the year ended December 31, 2014.  We had 18,124 institutional customers as of December 31, 2014.

We have 12 specialized representative zones in Mexico that offer tailor-made products to meet our institutional customers’ needs.  Among the products we offer to our governmental clients are current accounts, loans, payroll processing, cash management, collection services and payment processing services.  Serving these institutions allows us to cross-sell current accounts, credit card services, loan products, insurance products and collection services to their employees.

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Global Wholesale Banking

General

Santander Global Banking and Markets is the business unit that caters to the needs of corporate and institutional customers which, due to their size, complexity or sophistication, require customized services and value-added wholesale products.

The Global Wholesale Banking segment serves customers that require sophisticated financial services and products, such as large Mexican companies and local and foreign multinational companies which are served globally by the Santander Group. This segment also includes domestic and international financial groups, as well as large institutional customers.

This segment provides comprehensive products and services relating to finance, guarantees, mergers and acquisitions, equity and fixed income, structured finance, international trade finance, cash management services and e-banking, structured loans, syndicated loans, acquisition financing and asset and capital structuring, among others, through two branch offices located in Mexico City and Monterrey. The Global Wholesale Banking segment uses its range of products, knowledge of the local market and efficient execution in order to customize the financial solutions it offers to our customers.

As of December 31, 2014, the Global Wholesale Banking segment served 376 customers and accounted for 23.7% of our total loan portfolio, 18.7% of our total demand and time deposits, 13.4% of our fee income and 24.9% of our operating profit before tax.

The main products and services that our Global Wholesale Banking segment provides are:

· Global transaction banking, which includes cash management trade finance and other financing alternatives;

· Credit markets, which includes origination and distribution units for structured credit and debt products, debt capital markets, project finance and asset and capital structuring;

· Corporate finance, which includes mergers and acquisitions and equity capital markets products.

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

· Treasury trading activities, which offers our customers tailored derivative products, foreign exchange transactions and other financial products and structures;

· Proprietary trading, which is responsible for the management of our proprietary investment portfolio; and

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

Global Transaction Banking

Our Global Transaction Banking segment focuses on facilitating and optimizing the most common banking transactions of corporate and institutional clients in the Global Wholesale Banking segment by offering products and services such as:

· Cash Management. We offer our clients our electronic banking platforms, enabling them to manage payments, collections and liquidity efficiently.

· Basic financing. We offer our clients short- and medium-term financing for working capital and other purposes.

· Commercial financing. We offer supply chain financing products, such as confirming, factoring and leasing, among others.

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· Trade finance. We have a dedicated team for originating and structuring foreign trade transactions and related financing operations, including both credit and collateral management. In 2013 and 2014, Trade Finance Magazine named Banco Santander Mexico the best bank in the “Best Trade Bank in Mexico” category, based on annual client polls. In 2015, Global Finance Magazine named Banco Santander Mexico the “Best Trade Finance Provider” in Mexico.

Credit Markets

The credit markets operations of Global Wholesale Banking include project finance, debt capital markets, syndicated loans and acquisition finance, and asset and capital structuring areas:

· Project Finance. Banco Santander Mexico originates, structures and finances projects generally sponsored by a private institution, with public sponsorship and/or productive state enterprises. Banco Santander Mexico has participated in transactions in almost all economic sectors, most notably in energy, oil and gas, logistics, infrastructure and water, among others. It is currently positioned as the leading commercial bank for the structuring and financing of infrastructure and energy projects in Mexico. In the energy sector, Banco Santander Mexico acted as the coordinating bank for two wind farms called “Las Ventikas”. These projects are valued at Ps.7,150 million and will be developed by Cemex and Fisterra (Blackstone). This is the first project in which all Mexican development banks are participating. Additionally, the Bank participated as a financial advisor on the “Los Ramones Sur” project, assisting in the structuring of a Ps.12,747 million senior credit facility with a 20-year term, as well as a Ps.1,200 million value-added tax (“VAT”) facility. PMI Holdings, TAG Pipelines and GDF Suez are the co-sponsors of the “Los Ramones Sur” project.

· Syndicated Loans and Acquisition Finance. In 2014 we ranked among the top local banks in terms of deal count, according to our own calculations, closing a total of 17 deals. These deals included customers such as PEMEX, Grupo R, Ventura Capital, Genomma Lab, Fibra Uno, Mexichem, Gas Natural, Cinepolis, Alsea, Cablevision, Televisa, Techgen, Cemex, America Movil, and Cydsa, with an aggregate transaction volume of U.S.$ 11.5 billion.

· Debt Capital Markets. Our Debt Capital Markets team originates, structures and distributes corporate and sovereign debt in both the local and international capital markets for Mexican issuers. We worked on transactions with different corporate, quasi-sovereign and financial institution issuers, such as PEMEX (aggregate amount of Ps.12,600 million), NAFIN (Ps.1,750 million, and a second tranche for Ps.3,250 million), INFONAVIT (Ps.2,968 million), CFE (Ps.15,000 million), RCO (Ps.4,400 million), ICA (Ps.1,747 million) and Genomma Lab (Ps.1,500 million), among others in the local market. In the international debt capital markets we participated in issuances that involved clients such as PEMEX (U.S.$1,000 million), Gruma (U.S.$400 million), Mexichem (U.S.$750 million), Cemex (U.S.$1,100 million, and a second tranche for U.S.$1,000 million), Fibra Uno (U.S.$600 million, and a second tranche for U.S.$400 million), among others.

· Asset and Capital Structuring. This area is responsible for the development of financing products that optimize capital investments.  Our principal asset and capital structuring activities involve equity and mezzanine funding for energy and infrastructure projects. By the end of 2014, our assets and capital structuring division had invested, or obtained approval to invest, in a portfolio of wind, hydro and solar photovoltaic projects, totaling 837 megawatts (weighted by our provision of the equity funding for the projects).

Corporate Finance

Our Corporate Finance sub-division of our Global Wholesale Banking segment is engaged in the following activities.

Mergers and Acquisitions

We offer a wide range of investment banking services relating to mergers and acquisitions, including sell-side advisory, buy-side advisory, fairness opinions and capital raising services.  As part of our universal banking model, we are able to offer financing to the parties we advise.

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Equity Capital Markets

We are one of the leading banks in the Mexican domestic capital markets. In 2014, we participated in 4 transactions for different clients in the international and Mexican equity capital markets. We acted as global coordinator in a subsequent follow-on offering of Fibra Uno(Fideicomiso de Infraestructura de Bienes Raíces) for an aggregate amount of Ps.32,816 million, which was the second-largest offering ever in Mexico. We acted as an underwriter in the initial public offering of Grupo Hotelero Santa Fe (GHSF) in the local market, for an aggregate amount of Ps.750 million. We also participated as local and international underwriter in the initial public offering of Rotoplas for an aggregate amount of Ps.4,182 million, and as underwriter in the structured equity issuance of Mexico Infrastructure Partners (MIP), for an aggregate amount of Ps.819 million.

Equity Custodial and Related Services

Our Global Wholesale Banking segment includes our equities business, which offers institutional and corporate clients equity services ranging from global custody and brokerage on domestic and international exchanges to the tailoring of sophisticated equity derivative products, including market research services.  The execution of brokerage services is carried out by our affiliate Casa de Bolsa Santander, Grupo Financiero Santander Mexico’s brokerage subsidiary.

We offer brokerage services in equity exchanges, either through our direct participation in domestic markets or through another broker in the international markets.  We offer primary market services in collaboration with the corporate finance area, such as securities distribution in initial public offerings.

Through exchange-traded derivatives, we offer our institutional clients both domestic and international listed derivative products.  We are a leader in the Mexican Derivatives Exchange (Mercado Mexicano de Derivados, S.A. de C.V., or MexDer); in 2014, we ranked among the top three most active brokers and clearing members in terms of traded volume in futures, options and listed swap contracts.

We also offer our institutional and corporate clients tailored derivative products, known as equity derivatives, in order to manage and hedge their financial risks and optimize the performance of their portfolios.

Treasury Trading Activities

Our Global Wholesale Banking segment includes our treasury trading activities business, which offers a variety of treasury products to customers, including institutional investors, corporate clients and individuals.  We provide sophisticated and innovative derivative products to help our customers manage market risk exposure to foreign exchange rates and interest rates.  We believe we have an effective client coverage model based on dedicated sales teams for each client segment that allows us to maintain specialists committed to providing for the specific needs of our individual clients.  In addition, we have structuring and product development teams that work to maintain a cutting edge portfolio of innovative client solutions.  The global network of Santander Group, with its strong presence in Europe and Latin America, gives us the ability to offer a wide range of international products as an integrated service for our local customers.  Furthermore, we offer treasury products as a standardized solution, providing hedge and yield enhancement, to middle and retail market companies.  We have implemented extensive suitability processes designed to ensure customers understand and accept the risks involved in the derivatives market.

Global Wholesale Banking Products and Solutions for Retail Customers

We have specialized teams dedicated to bringing retail segment clients tailor-made wholesale banking products and solutions in order to cover these clients’ needs in investment banking and markets.

Our retail markets team designs and provides adapted derivative and cash flow products (mainly rates and foreign exchange) for retail clients, distributing them through our branch network.  They also provide tailor-made derivative products for those retail clients with specific, complex requirements.

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Our retail investment banking team is involved in structuring a variety of transactions, such as project and acquisition finance, debt and equity issuances, mergers and acquisitions, and asset and capital structuring, bringing our retail clients products that address specific, one-time needs.

Proprietary Trading

The proprietary trading area of our Global Wholesale Banking segment is responsible for the management of the Bank’s proprietary portfolio of investment.  In the management of the Bank’s books, we seek to maintain recurrent results for each single individual book with the main objective of preserving capital.  The decision-making process is based on fundamental aspects of each market, supported by technical views.  The strict observance of these principles has allowed this activity to present sustainable results for the organization.

The proprietary trading desks must comply with risk control policies established by our senior management and also with those applied worldwide by Banco Santander Parent.  All positions and processes are strictly monitored and controlled by specialized market and operational risk teams and finance and compliance departments.

Our Core Products

Deposit-Taking and Repurchase Agreements Transactions

We offer our Retail Banking customers a variety of deposit products, such as:

· current accounts (also referred to as demand deposits), which do not bear interest;

· traditional savings accounts, which bear interest; and

· time deposits, which are represented by certificates of deposits, which normally have a maturity of less than 36 months and bear interest at a fixed or floating rate.

In addition, we accept deposits from financial institutions as part of our treasury operations, which are represented by certificates of interbank deposit, or CDIs, and which earn the interbank deposit rate.  Besides representing a significant source of stable funding for us, we regard each account holder as a potential customer for the full range of products and services we offer.

We also enter into repurchase agreements transactions.  Repurchase agreements are Mexican-law governed sale and repurchase agreements (reportos), also known as repos, pursuant to which a party agrees to a temporary purchase or sale of securities in exchange for (i) a specified premium to be paid or received and (ii) the obligation to resell or repurchase the underlying security.  Under a circular issued by the Mexican Central Bank, Mexican banks may enter into repurchase transactions with Mexican and foreign counterparties.  Repurchase transactions may be entered into in respect of bank securities, Mexican government securities, debt securities registered with the CNBV and certain foreign securities.  Repurchase transactions must be entered into under master agreements, such as the master agreements of the International Securities Market Association and the Public Securities Association.  Collateral may be provided in connection with repurchase transactions.

Reverse repurchase agreements totaled Ps.103,478 million at December 31, 2014, a 36.1% increase compared to the amount at December 31, 2013.  We expect to continue using this funding source in the future due to its broad availability and low cost.

The table below presents a breakdown of our total deposits by product type including our reverse repurchase agreements at the dates indicated.

	At December 31,
	2012		2013		2014
	(Millions of pesos)
Demand deposits:
Interest-bearing deposits	Ps.	115,619	Ps.	145,587	Ps.	169,950
Non-interest-bearing deposits		95,242		112,367		124,113
Subtotal	Ps.	210,861	Ps.	257,954	Ps.	294,063

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	At December 31,
	2012		2013		2014
	(Millions of pesos)
Time deposits:
Notes with interest payable at maturity	Ps.	119,875	Ps.	115,711	Ps.	118,742
Fixed-term deposits		6,261		146		205
Foreign currency time deposits		5,340		4,046		14,640
Subtotal	Ps.	131,476	Ps.	119,903	Ps.	133,587
Reverse repurchase agreements	Ps.	51,589	Ps.	57,506	Ps.	69,726
Accrued interest(1)		213		182		183
Other deposits		11,958		11,579		17,069
Total customer deposits	Ps.	406,097	Ps.	447,124	Ps.	514,628
Deposits from the Mexican Central Bank and credit institutions(2)		42,937		70,216		82,078
Total deposits	Ps.	449,034	Ps.	517,340	Ps.	596,706

(1) Mainly from time deposits.

(2) Includes Ps.19,603 million, Ps.18,519 million and Ps.33,752 million of reverse repurchase agreements with the Mexican Central Bank and with credit institutions as of December 31, 2012, 2013 and 2014, respectively.

Lending

The following table shows a breakdown of our loan portfolio by customer category at the dates indicated.

	At December 31,				Change, December 31, 2014 vs. December 31, 2013
	2013		2014		(Millions of pesos)		(%)
	(Millions of pesos)
Individuals	Ps.	161,657	Ps.	184,770	Ps.	23,113		14.3	%
SMEs		41,411		51,835		10,424		25.2
Middle-market corporations(1)		92,796		105,552		12,756		13.7
Institutions		14,484		18,283		3,799		26.2
Subtotal		310,348		360,440		50,092		16.1
Global corporate clients		88,168		112,013		23,845		27.0
Total(2)	Ps.	398,516	Ps.	472,453	Ps.	73,937		18.6	%

(1) Included private banking.

(2) These amounts do not include repurchase agreements.

Retail Lending

General

We offer retail lending products to customers through our extensive branch network and on-site service units.  See “—Distribution Network.” We divide our customers into separate categories based principally on their monthly income (for individuals) and annual gross revenues (for businesses).  We tailor our products and services to the needs of each customer classification.  Our loans and mortgages are generally originated and serviced internally.  We believe our underwriting system has the capability to process large application volumes (greater than the expected volume for the upcoming years), maintaining the tight controls and information requirements to improve the decision models.

We make credit available to our customers through the various loan products listed in the table below.  The table sets forth the composition of our individual and SME customer total loan portfolio at the dates indicated.

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	As of December 31,				Change, December 31, 2014 vs. December 31, 2013
	2013		2014		(Millions of pesos)		(%)
	(Millions of pesos)
Mortgages	Ps.	91,859	Ps.	108,184	Ps.	16,325		17.8	%
Credit cards		39,782		42,104		2,322		5.8	%
SMEs		41,411		51,835		10,424		25.2	%
Payroll loans		15,572		16,662		1,090		7.0	%
Personal loans		14,150		17,298		3,148		22.2	%
Other		291		522		231		79.4	%
Total	Ps.	203,065	Ps.	236,605	Ps.	33,540		16.5	%

The Santander Hipotecario residential mortgage portfolio amounted to Ps.26,906 million and Ps.35,480 as of December 31, 2013 and December 31, 2014, respectively.

The following table shows the annual interest rate applicable to the main categories of retail lending products at December 31, 2013.

	Annual interest rate
	(%)
Credit cards		24.7
Personal loans (includes payroll loans, personal loans and others)		26.2
Mortgages		10.0

Payroll Loans

Payroll loans are a typical consumer lending product with a differentiated method of payment.  We grant loans (after conducting a risk assessment) to clients that receive their salaries through a current account at the Bank.  The loan payments are made through automatic charges to the current account and are scheduled according to the payroll frequency of each employee (weekly, biweekly, monthly).

Our clients include employees from the public and private sectors. At December 31, 2014, payroll loans amounted to Ps.16,662 million (U.S.$1,130 million), representing approximately 3.5% of our total lending portfolio.  We held approximately 10.6% of the market share in Mexico in payroll loans at December 31, 2014, as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV.

Personal Loans

Personal loans are loans granted to individuals with maturities of up to 48 months, and the monthly installments to be paid by the customer may not exceed 30% of such customer’s net monthly salary. Personal loans are not secured by collateral. At December 31, 2014, personal loans amounted to Ps.17,298 million (U.S.$1,173 million), representing approximately 3.7% of our total lending portfolio.

Credit Cards

We are the third-largest issuer of credit card loans in the Mexican market according to information published by the CNBV, and we had 2.8 million outstanding credit cards across 2.5 million accounts as of December 31, 2014.  At this date, we held a 13.5% market share, with a Ps.42,104 million (U.S.$2,856 million) loan portfolio and a delinquency rate of 4.1%, the lowest in the Mexican market, in each case as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV.  As of December 31, 2014, our total credit card loans outstanding represents approximately 8.9% of our total lending portfolio.

We issue 18 different MasterCard, Visa and, beginning this year, American Express credit cards designed for our different business segments.  We mainly issue to our existing customers, such as deposit account holders and non-deposit account holders.  Our income from credit cards includes interchange merchant fees, interest on credit card balances, annual cardholder fees and fees charged for cash advances.  We market our credit cards through our branch network and offer preselected credit cards to our customer base across all socioeconomic customer segments.  Our growth strategy is based on gaining market share while growing profits, by focusing on product innovation and

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aggressive customer acquisition efforts through commercial campaigns and managing risk according to different segments and channels.  Since 2001, we have launched credit card products designed to serve customer preferences and financial needs and aimed at encouraging demand for our products.  The main customer preferences and needs that have been addressed are low rates, no commissions, total protection and miles/rewards programs.

During 2007 and 2008, excessive over-leverage in the consumer credit market in Mexico resulted in poor portfolio performance.  This also affected our credit card portfolio.  As a result, we implemented contingency measures, such as tightening of credit policies, reinforcement of collections and reduction or cancellation of credit lines.  These factors helped to put delinquency rates and credit losses back within acceptable risk levels by the middle of 2010.  As of December 31, 2014, our credit card portfolio has the best performance in terms of asset quality (defined as total non-performing loans as a percentage of total loans) among the seven largest private banks in Mexico, as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV.

The following table shows the non-performing loans in our credit card portfolio as a percentage of the total loans in our credit card portfolio for the periods indicated.

	IFRS
	For the years ended December 31,
	2010			2011			2012			2013			2014
Total credit card non-performing loans as a percentage of total credit card loans		5.08	%		3.11	%		4.04	%		3.35	%		4.70	%

A special risk management unit for the credit card business continuously monitors portfolio performance.  New application scores, behavior scores and capacity score models were implemented to manage new growth strategies.  In addition, the credit card portfolio is segmented for risk according to behavior models.  Depending on risk stratification, different offers are designed in order to increase, maintain or reduce exposure and profitability.

Our credit card business follows the Santander Group’s corporate model, which provides the following benefits:

· Standardization throughout the Santander Group’s markets through standardized management of certain “business levers”: acquisition, activation, billing, receivables, retention, loyalty and products.

· Knowledge transfer across geographies and business levers.  Campaign definitions, design and results are shared by the Santander Group’s card units globally by means of an electronic campaign library.

· State-of-the-art decision-making process based on commercial and business facts and information, supported by strong analytic capabilities and robust infrastructure that enable us to design and execute focused, aggressive strategies and tactics, directed by a group of experts who collectively identify portfolio-relevant trends, patterns and opportunities in order to grow the business.

· Campaign management.  All marketing initiatives and campaigns are run through a proven statistical model that allows the managers of the business levers to measure and analyze each campaign.

· New product development is subject to a very strict methodology that provides deep opportunity analysis and filtering.

The Santander Group has invested in simplifying support and commercial processes. Due to our new issuing process, customers can leave the branch with their credit card in less than fifteen minutes.  Our contact centers provide segmented customer service and retention activities, utilizing analytical tools as well as predictive retention models.

In addition to issuing credit and debit cards, we also manage ATMs and point-of-sale terminals.  The point-of-sale terminals business is a joint venture with Elavon Merchant Services México, or Elavon, which is a subsidiary of U.S. Bancorp, a company that provides end-to-end payment processing services to more than one million merchants in the United States, Europe, Canada and Puerto Rico.  The main contributions of Elavon are its know-how, its portfolio of products and services, its multinational customers with operations in Mexico and its access to the

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investments that this business requires.  Our alliance with Elavon has resulted in what we believe is a more diligent management of our credit card business, focusing on providing new payment solutions and innovative business services for merchants.

Mortgages

We offer loans to our customers for the purchase of real estate secured by mortgages with a maturity of up to 20 years.  We have a leading position in this business among non-government-owned banks and, at December 31, 2014, held a 18.95% market share in Mexico in terms of amounts of loans outstanding, as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV.  As of December 31, 2014, we had a total mortgage portfolio of Ps.108,184 million (U.S.$12,223 million), representing approximately 22.9% of our total lending portfolio.

On December 23, 2010, we entered into a stock and assets purchase agreement to acquire the U.S.$2 billion residential mortgage business of General Electric Capital Corporation and its subsidiaries, or GE Capital, in Mexico, or the GE Capital mortgage business. The transaction closed on April 29, 2011. The purchase price was Ps.2,042 million (U.S.$139 million), which was determined at closing based on the aggregate total equity of the entities that we acquired, plus the net value of the assets that we purchased directly, minus a negotiated discount.  In addition, we repaid at closing to GE Capital the Ps.21,009 million (U.S.$1,425 million) intercompany debt at that date relating to the GE Capital mortgage business, which GE Capital historically had financed through intercompany debt. We did not purchase any loans to developers as part of the GE Capital acquisition or otherwise. The total volume of assets at the time of closing was Ps.23,904 million (U.S.$1,622 million), including a total loan portfolio of Ps.21,926 million (U.S.$1,487 million), while the total volume of liabilities was Ps.21,494 million (U.S.$1,458 million).

On November 29, 2013, we completed the acquisition of the equity stock of ING Hipotecaria, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada, or ING Hipotecaria, a subsidiary of ING Group. In February 2014, ING Hipotecaria was renamed Santander Vivienda. Santander Vivienda provides mortgage-related products and services to more than 28,000 clients and operates 2 branches throughout Mexico. The net assets acquired amounted to Ps.395 million, which included a loan portfolio with an unpaid principal balance of Ps.11,237 million and an estimated fair value of Ps.10,772 million. A loan portfolio of approximately Ps.363 million was expected to be uncollectible at the time of the acquisition. As part of the transaction, we made a cash payment of Ps.541.4 million (approximately U.S.$36.7 million) for ING Hipotecaria’s equity. Since the acquisition, Banco Santander Mexico has closed 18 of the original 20 ING Hipotecaria branches in an effort to consolidate the distribution network and increase operational efficiency.

As a result of our acquisition of the GE Capital residential mortgage business and ING Hipotecaria, we had the second-largest mortgage portfolio in the private banking sector in Mexico in 2014, as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV.  The mortgage portfolio of the GE Capital mortgage business represented approximately 30% and 33% of our mortgage portfolio as of December 31, 2013 and 2014, respectively, as determined in accordance with Mexican Banking GAAP. The mortgage portfolio of Santander Vivienda (formerly known as ING Hipotecaria) represented approximately 10% of our mortgage portfolio as of December 31, 2014, as determined in accordance with Mexican Banking GAAP.

On average, the loan-to-value ratio of our mortgage loans was 66.3% as of December 31, 2014. We generally do not make any loans for more than 80% of the value of the property to be purchased (if the property value is greater than Ps.5 million) or up to 90% (if the property value is less than or equal to Ps.5 million). Borrowers must meet certain minimum monthly income levels as evidenced by recent payroll information and tax returns.  Borrowers must provide satisfactory documentary evidence to confirm their employment or other types of revenue and to otherwise evaluate their ability to pay.

According to the Mexican Federal Mortgage Agency (Sociedad Hipotecaria Federal, or SHF), there was a deficit of approximately 9.9 million homes in Mexico in 2014.This deficit is expected to increase to an estimated 14.2 million homes in 2020, according to the SHF, based on the expected demographic growth of 600,000 families per year in Mexico, according to the SHF.  We expect that this systemic housing deficit in Mexico will continue to drive demand for our residential mortgages and related products in the near term.

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Insurance Brokerage

On February 22, 2011, Banco Santander Parent publicly announced that it had reached an agreement with Zurich Financial Services Group (“Zurich”) to establish a strategic alliance for bancassurance in Mexico, Brazil, Chile, Argentina and Uruguay.  On July 15, 2011, we announced that we had signed the definitive agreements with Zurich regarding this long-term alliance. On November 4, 2011, we announced that we had completed the final documentation and obtained the authorizations necessary to close the sale of our insurance company subsidiary Seguros Santander to Zurich Santander Insurance America, S.L., which was created as the holding company for the joint venture between Banco Santander Parent and Zurich, for an initial price of Ps.7,441 million.  During the second quarter ended June 30, 2013, there was a price adjustment decreaseof Ps.178 million (before taxes) related to the sale of Seguros Santander to the joint venture, which resulted from a revision to the methodology used to calculate insurance reserves. As a result of this revision, the parties agreed to a purchase price adjustment and a release agreement whereby both parties agreed to a mutual release of claims upon receipt of payment with respect to post-closing price adjustments. The adjustment represented 4.1% of our revenues and less than 1% of our reported net income in 2012. The joint venture is 51% controlled by Zurich and 49% by Banco Santander Parent.  Banco Santander Mexico does not hold shares in the joint venture.  In connection with the sale and joint venture, Seguros Santander, as a subsidiary of Zurich Santander Insurance America, S.L., and Banco Santander Mexico entered into an exclusive distribution agreement with respect to all types of insurance, other than auto insurance sold through its aggregator and subject to certain other limitations on exclusivity.  As a result, Banco Santander Mexico presently continues to sell insurance policiesthrough its different distribution channels, focusing on open market insurance products and the development of credit-linked supply insurances.

Prior to its sale to Zurich Santander Insurance America, S.L., Seguros Santander offered life, automobile, fraud and home insurance.  Its products were offered through our branch network.  We did not distribute third-party providers’ insurance products prior to the sale of Seguros Santander to Zurich Santander Insurance America, S.L.

We currently distribute insurance products from Zurich Santander Insurance America, S.L. as well as third-party providers. The products we sell, which are underwritten by the joint venture with Zurich, together with sales of products of its predecessor, Seguros Santander, represented approximately 22.8% and 23.5% of the commissions we earned in 2013 and 2014, respectively.

Total outstanding insurance premiums distributed by us increased 11.8%, to Ps.1,004, in 2014 as compared to 2013, and total insurance commissions collected by us increased 14.2% in 2014 as compared to 2013. This result was supported by a significant mass media campaign for Autocompara, focusing on the improvement of sales force productivity and their incentive scheme.

The products we distribute as part of our insurance brokerage services include life, automobile, home, health, accident, fraud, unemployment and life-savings insurance. We focus on simple standardized banking product-related insurance mainly intended for the retail business. We cross-sell these insurance products with our banking products.  The products are sold through our distribution network and we receive a service fee from the insurance providers based on our sales.

We do not bear any underwriting risk in connection with our insurance brokerage services. All underwriting risk is assumed by, and all premiums are payable to, the relevant third-party insurance underwriters.

In 2011, we launched our Autocompara program, which allows potential clients to compare automobile insurance quotes from the seven largest insurance companies in Mexico.  Clients may access this program at our branches, on the Internet or by telephone.  This new program has been accompanied by a national publicity campaign, which has allowed us to position ourselves among the top companies in the automobile insurance sector.  As of December 31, 2014, automobile insurance products generated commissions of Ps.766 million (U.S.$52 million) based on a portfolio of approximately 775,075 outstanding automobile insurance policies.

Corporate Lending

We offer a wide range of credit products to our corporate customers, including general corporate and working capital financing and foreign trade financing complemented by deposit-taking and cash management services.  As of December 31, 2014, we had approximately 313,516 SME customers, 34,130 middle-market corporation customers and 18,124 government institutional customers.  Our middle-market corporation customers include companies across all industry sectors.  Our SME and middle-market corporation clients coverage is handled by our officers who

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are appointed according to the customer’s geographic location in the case of middle-market clients, and according to the location of our corporate headquarters in Monterrey and Mexico City in the case of our large domestic companies customers.

Securities Brokerage Services

Through Casa de Bolsa Santander, our broker-dealer subsidiary, we provide comprehensive financial products and services to institutional investors, corporate customers and individuals, including the intermediation of equity and fixed income securities, financial advisory services, portfolio structuring, asset management of investment portfolios, investment banking and sale of investment funds and debt securities.  Our premier clients have access to Casa de Bolsa’s financial services through specialized bank executives at our Santander Select offices.

Casa de Bolsa Santander is an authorized broker-dealer for the Mexican Stock Exchange, where it conducts transactions for the purchase and sale of securities.  It provides distribution and advisory services for companies seeking the placement of their securities, supported by a local and international equity research team of analysts, an institutional sales force and a national distribution network focused on individual investors.  Our equity research team is part of the Santander Group’s Latin American equity research group.

In brokerage services, our strategy is to provide our customers excellence in execution services supported by a first-class technological execution platform and specialized advisory services supported by a high-quality research team.

As of December 31, 2014, Casa de Bolsa Santander had 4,881 customer contracts and Ps.416.6 billion in assets under management, and accounted for 0.1% of our total assets and 1.0% of our total equity. In 2014, Casa de Bolsa Santander had net income of Ps.(2) million (U.S.$0.14 million), which represented (0.02)% of our net income.

Asset Management

Prior to its sale in December 2013, Gestión Santander was our asset management subsidiary with fully integrated investment, product, operational and commercial structures. On December 5, 2013, after receipt of the required regulatory approvals and authorizations, we sold our shares of Gestión Santander, in accordance with the previously disclosed May 2013 agreement with Banco Santander Parent to grow its asset management division. As a result of this transaction, Warburg Pincus and General Atlantic indirectly hold 50% of the equity of Gestión Santander and the remaining 50% is indirectly held by Banco Santander Parent. The transaction was valued at Ps.3,179 million, resulting in a net capital gain of Ps.1,944 million. The transaction was completed in December 2013 and resulted in the divestiture of Gestión Santander from us. We have entered into exclusive, long-term distribution agreements so that Banco Santander Mexico and Casa de Bolsa Santander can continue to offer mutual funds managed by Gestión Santander following the divestiture.

Distribution Network

General

We refer to our strategy of using multiple distribution channels, such as branches, internet banking, mobile banking, contact centers and third-party branches, tailored to each of our client segments and designed to reach a broad spectrum of customers in a cost-efficient manner as our multichannel distribution strategy.  Our distribution network provides integrated financial services and products to our customers through a variety of channels, including our traditional proprietary branch network and on-site service units and complementary distribution channels such as ATMs, our contact centers and other direct sales distribution channels like internet banking, which we refer to as alternative distribution channels.  The principal aims of the complete multichannel distribution strategy are to benefit from the synergy of the various channels and to direct customers to the most effective channel for the purposes of their transactions.

As of December 31, 2014, our distribution channels included:

· Office network: We have 1,322 offices throughout Mexico.

· ATMs: We have 5,528 ATMs with coverage throughout Mexico.

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· Contact centers: We have 2,459 contact center positions with approximately 4,674 employees. We receive more than 4.1 million in-bound calls per month and generate 5.5 million transactions.

· Internet banking: We had, on average, more than 42.5 million banking transactions per month in 2014, with more than 654,184 active customers.

· Mobile banking: Our newly launched channel, which enables customers to complete transactions from their cell phones and tablets. As of December 31, 2014, we had more than 281,471 active customers and 10.2 million transactions per month on average.

· Specialized sales force: We have 262 agents in our Asesores Super Nómina network. See “—Alternative Distribution Channels—Specialized Sales Force.”

· Third-party branches (corresponsalía): We have 16,531 complementary branches provided by our agents, Telecomm, Oxxo and 7-ELEVEN.  See “—Alternative Distribution Channels—Third-Party Branches.”

· Third-party mortgage brokers: In the year ended December 31, 2014, approximately 32% of our mortgages were originated through third-party mortgage brokers. The rest of the mortgages were originated through our office network.

Office Network

Our office network offers our products and services to our customers. The table below shows the number of branches in our branch network,  which includes our cash tellers (ventanillas), Santander Select offices and Santander Select units (módulos) across Mexico’s regions at the dates indicated. Information is provided with respect to the offices of Banco Santander Mexico only. Cash desks are service areas that do not have a branch director and which are located in enclosed areas, for example, inside courthouses, corporations, universities, municipalities and airports. Santander Select offices include (i) Centros Select, which operate like individual branches and have a director and between four and five executives, (ii) Espacios Select, which are smaller and are inside or adjacent to a branch but function like an individual branch, with a director and approximately three executives, and (iii) box offices, which are inside of branches and have two executives but no cash tellers.  We did not have any box offices in 2010 and 2011. Santander Select units are service areas that do not have a branch director and that are in enclosed areas, but are larger than cash desks. For example, Santander Select units may be located in universities or hospitals.

	At December 31,						Change, December 31, 2014 vs. December 31, 2013
	2012		2013		2014			#	%
Central		131		142		153		11		7.7	%
Metro North		155		165		186		21		12.7
Metro South		143		157		169		12		7.6
Northeast		144		154		168		14		9.1
Northwest		108		117		122		5		4.3
North		96		106		110		4		3.8
West		117		125		135		10		8.0
South		105		111		114		3		2.7
Southeast		143		157		165		8		5.1
Total		1,142		1,234		1,322		88		7.1	%

Alternative Distribution Channels

General

We also distribute our products and services through alternative distribution channels, which have experienced consistent growth in terms of sales, services, provision of product information and customer preference. These alternative distribution channels consist of ATMs, our contact centers, internet banking, mobile banking, Asesores Super Nómina and third-party branches.

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Because of their low cost and large attendance capacity, these channels are becoming one of the most efficient ways to interact with our customers at any time. We believe that alternative distribution channels are an important way to reach certain customers, in particular those in the low income segment where we are able to have a more effective relationship with a broader customer base.

ATMs

We operate an extensive network of 5,528 ATMs throughout Mexico, including those located in our branches and on-site service units.  Our customers may use these ATMs to access their accounts and conduct banking transactions.

The following table shows the number of our ATM machines across Mexico’s regions at the dates indicated.

	At December 31,						Change, December 31, 2013 vs. December 31, 2012
	2012		2013		2014			#	%
Central		500		539		565		26		5	%
Metro North		623		662		700		38		6
Metro South		501		551		594		43		8
Northeast		645		653		677		24		4
Northwest		465		506		512		6		1
North		408		434		453		19		4
West		435		455		481		26		6
South		574		614		633		19		3
Southeast		795		850		913		63		7
Total		4,946		5,264		5,528		264		5	%

Contact Centers

Our contact centers in Queretaro and Crisol in Mexico City, Mexico can be used by customers to make inquiries, execute payment transactions or apply for products and services, such as personal loans.  A portion of our contact center personnel is dedicated to contacting current account holders to offer them additional products and services, in particular insurance, credit cards and consumer loans.  Those products are offered to preauthorized customers who are selected by our Risk and Commercial Intelligence departments in our central offices.  Our contact centers also have a retention unit that handles customer requests for the cancellation of products or services.

Our contact centers serve three basic functions:

· Customer service: We receive more than 2.9 million in-bound calls per month from our customers.

· Sales: Through our contact centers, we grant approximately 31% of the consumer loans and approximately 35% of the credit cards that we issue.

· Collecting receivables: With more than 6.5 million outbound and in-bound calls, we collect more than Ps.696 million (U.S.$47 million) of receivables per month.

Internet Banking

We view the internet banking channel as the most efficient and convenient way to access bank services and as a key instrument for offering additional products. Our strategy includes three main components that seek to ensure the success of our internet banking channel:

· Customer acquisition: This includes a complete strategy regarding how to easily enroll new customers and make product alliances to promote internet banking as “easy, fast and secure.”  We seek to provide great service to our internet banking customers through an intuitive operating platform that we are developing throughout the site.

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· Customer transactions: We are constantly improving the ways our customers access information, creating synergies within all our channels in order to promote the use of internet banking and optimize transaction costs.

· Selling products and services: We offer products according to a customer’s profile and design easy and efficient product acquisition processes.

As of December 31, 2014, we had approximately 654,184 active internet banking clients.  We had, on average, 42.5 million internet banking transactions, either monetary or non-monetary, per month in the year ended December 31, 2014.  The following table presents summarized operating statistics for our internet banking channel.

	Monthly Average				Change, year ended December 31, 2014 vs. year ended December 31, 2013
	Year ended December 31,					#	%
	2013		2014
Monetary transactions		10,925,648		11,710,446		784,798		7	%
Non-monetary transactions		27,542,137		30,833,019		3,290,882		12	%
Total transactions		38,467,785		42,543,465		4,075,680		11	%

Mobile Banking

In March 2012, we launched our new mobile banking (Banca Móvil) channel, which enables customers to effect transactions on mobile phones.  The application comes with a “geo-reference” function, which allows our customers to locate the nearest Santander branch or ATM.  The application is compatible with most of the cell phones available in the Mexican market, including smart phones.  There is also a customized version for tablets.

Mobile banking lowers the cost of bringing services to our customers and makes our services more convenient, which we believe helps to increase customer transactions.

Specialized Sales Force

Our Asesores Super Nomina network is a specialized sales force responsible for delivering the payroll kits to the employees of the companies that have payroll services with the Bank.  Payroll kits are welcome kits that describe all of the benefits of the payroll deposit services to the client. Upon the signature of a contract contained in this kit, the employee allows us to offer him pre-approved financial products (such as credit cards, consumer loans, insurance policies and investments) through all of our banking channels. This process is part of our 360-degree cross-selling strategy.

When the payroll kits are delivered, the Asesores Super Nómina also explain the different benefits of being a customer of the Bank and assist with the activation process of debit cards.

As of December 31, 2014, 262 agents belonged to our Asesores Super Nómina network.  These agents are located throughout Mexico, primarily at our branches but also at some of our corporate offices.

We delivered a monthly average of 109,217 total payroll kits in 2014, an increase of 15.7% from a monthly average of 94,424 payroll kits delivered in 2013.

Third-Party Branches

In the first quarter of 2013, we entered into an agreement with Grupo Oxxo, which operates convenience stores throughout Mexico, pursuant to which we obtained the ability to offer our services through more than 11,901 new third-party branches. At these locations, our clients make deposits through debit cards and payments through credit cards any day of the week. Transaction amounts are limited to Ps.5,000 per account per day. The agreement is renewable on an annual basis and we pay Oxxo a fixed amount per transaction.

We provide banking services to our customers through 13,061 Grupo Oxxo offices and 1,620 complementary branches provided by our agent, Telecom, as of December 31, 2014.  At these third-party branches, we process more than 830,000 transactions per month, offering basic banking services, such as debit and credit deposits, withdrawals

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and balance inquiries.  These branches strengthen our national coverage and fortify our payroll service to companies with local coverage.

We are evaluating other joint strategies with third parties that might be interested in offering our services, which would increase the number of customers visiting their facilities and their revenues from commission received per transaction.

Third-Party Mortgage Brokers

The acquisition of the GE Capital residential mortgage business in April 2011 reinforced our strategy of originating mortgages through third-party mortgage brokers. Approximately 32% of our mortgages were originated through third-party mortgage brokers in 2014.  We have a direct relationship with the largest mortgage brokers in Mexico and an indirect relationship with approximately 50 smaller brokers, which sometimes originate mortgages on behalf of the larger brokers.  Although we do not have exclusivity arrangements with these third-party mortgage brokers, we estimate that 30% of their operations are for our benefit.

Funding

Our principal source of funding is customer deposits, including reverse repurchase agreements, which represented Ps.514.6 billion (U.S.$34.9 billion), or 60.7%, of our total liabilities as of December 31, 2014.  Customer deposits typically represent a large portion of our funding base because of our ability to attract deposits from customers through our extensive retail, wholesale and corporate network.  Since we are primarily a commercial bank, customer deposits constitute the main source of liquidity in our financing structure. These deposits currently cover most of our liquidity requirements.  Our control and management functions involve planning our funding requirements, structuring the sources of financing to achieve optimal diversification in terms of maturities, instruments and markets and setting forth contingency plans.  In order to increase liquidity, we rely in part on local peso-denominated issuances. We also have access to international funding through U.S. dollar-denominated issuances with longer maturities. For a further discussion of our funding, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources.”

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The following table sets forth Banco Santander Mexico’s funding and market share with respect to funding for the periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2010					2011					2012					2013					2014
	(Millions of pesos)		(Market share (%))			(Millions of pesos)		(Market share (%))			(Millions of pesos)		(Market share (%))			(Millions of pesos)		(Market share (%))			(Millions of pesos)		(Market share (%))
Santander	Ps.	301,954		11.0	%	Ps.	357,430		12.1	%	Ps.	425,151		13.2	%	Ps.	460,636		13.4	%	Ps.	524,047		13.7	%
BBVA Bancomer		678,856		24.7			666,673		22.5			697,077		21.7			743,952		21.7			847,427		22.2
Banamex		550,552		20.0			574,710		19.4			575,574		17.9			568,614		16.6			589,990		15.5
Banorte(1)		283,679		10.3			371,393		12.5			425,524		13.2			441,869		12.9			492,754		12.9
HSBC		275,547		10.0			330,668		11.2			318,601		9.9			308,318		9.0			341,279		8.9
Inbursa		149,221		5.4			147,878		5.0			156,067		4.8			169,872		5.0			180,948		4.7
Scotiabank		131,183		4.8			129,444		4.4			150,127		4.7			171,319		5.0			186,873		4.9
Santander + Top 6	Ps.	2,370,992		86.3	%	Ps.	2,578,196		87.0	%	Ps.	2,748,121		85.4	%	Ps.	2,864,580		83.6	%	Ps.	3,163,318		82.9	%
Total System	Ps.	2,746,820		100.0	%	Ps.	2,964,687		100.0	%	Ps.	3,219,261		100.0	%	Ps.	3,424,998		100.0	%	Ps.	3,816,826		100.0	%

Source: Funding and market share data are calculated by us, using information published by the CNBV.  In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

The following table sets forth Banco Santander Mexico’s total demand deposits and market share with respect to demand deposits for the periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2010					2011					2012					2013					2014
	(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)
Santander	Ps.	156,912		10.8	%	Ps.	178,490		10.8	%	Ps.	210,950		11.8	%	Ps.	257,927		12.9	%	Ps.	294,269		13.2	%
BBVA Bancomer		403,441		27.7			438,267		26.5			472,832		26.5			526,225		26.4			578,467		25.9
Banamex		352,223		24.2			411,261		24.9			400,428		22.5			430,280		21.6			470,042		21.0
Banorte(2)		140,713		9.7			180,303		10.9			199,770		11.2			244,809		12.3			287,838		12.9
HSBC		150,358		10.3			172,808		10.5			187,271		10.5			178,358		8.9			177,870		8.0
Scotiabank		62,537		4.3			70,268		4.3			75,059		4.2			88,336		4.4			99,268		4.4
Inbursa		51,738		3.6			53,052		3.2			59,981		3.4			65,622		3.3			69,473		3.1
Santander + Top 6(3)	Ps.	1,317,922		90.6	%	Ps.	1,504,449		91.0	%	Ps.	1,606,291		90.2	%	Ps.	1,791,557		89.9	%	Ps.	1,977,227		88.4	%
Total System	Ps1,454,463			100.0	%	Ps.	1,652,742		100.0	%	Ps.	1,781,714		100.0	%	Ps.	1,993,472		100.0	%	Ps.	2,237,273		100.0	%

Source: CNBV.

(1) Market share data are calculated by us, using information published by the CNBV.

(2) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

(3) Total demand deposits and market share data for “Santander + Top 6” are calculated by us, using information published by the CNBV.

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The following table sets forth Banco Santander Mexico’s total fixed-term deposits and market share with respect to fixed-term deposits for the periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2010					2011					2012					2013					2014
	(Millions of pesos)		(Market share (%))			(Millions of pesos)		(Market share (%))			(Millions of pesos)		(Market share (%))			(Millions of pesos)		(Market share (%))			(Millions of pesos)		(Market share (%))
Santander	Ps.	126,179		11.9	%	Ps.	159,387		14.6	%	Ps.	186,739		15.5	%	Ps.	172,808		14.7	%	Ps.	192,547		14.9	%
BBVA Bancomer		214,990		20.2			208,102		19.1			199,437		16.6			185,827		15.8			219,339		16.9
Banorte(1)		129,503		12.2			166,938		15.3			204,522		17.0			181,062		15.4			190,211		14.7
Banamex		171,354		16.1			119,883		11.0			132,013		11.0			116,591		9.9			111,989		8.6
HSBC		103,258		9.7			125,323		11.5			108,603		9.0			109,450		9.3			121,387		9.4
Inbursa		89,872		8.5			89,049		8.2			90,944		7.6			91,311		7.8			107,022		8.3
Scotiabank		64,042		6.0			53,571		4.9			69,480		5.8			70,855		6.0			79,155		6.1
Santander + Top 6	Ps.	899,198		84.7	%	Ps.	922,253		84.6	%	Ps.	991,738		82.5	%	Ps.	927,904		78.8		Ps.	1,021,650		78.9	%
Total System	Ps.	1,061,776		100.0	%	Ps.	1,089,816		100.0	%	Ps.	1,202,330		100.0	%	Ps.	1,177,040		100.0	%	Ps.	1,295,564		100.0	%

Source: Total fixed-term deposits and market share data are calculated by us, using information published by the CNBV.  In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

The following table sets forth Banco Santander Mexico’s total interbank lending and market share with respect to interbank lending for the periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2010					2011					2012					2013					2014
	(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)
Santander	Ps.	18,863		8.2	%	Ps.	19,553		8.8	%	Ps.	27,463		11.7	%	Ps.	29,901		11.7	%	Ps.	37,231		13.1	%
BBVA Bancomer		60,425		26.2			20,304		9.1			24,808		10.5			31,900		12.5			49,621		17.5
Banamex		26,975		11.7			43,566		19.6			43,133		18.3			21,743		8.5			7,959		2.8
HSBC		21,931		9.5			32,537		14.6			22,727		9.7			20,510		8.1			42,021		14.8
Banorte(2)		13,463		5.8			24,152		10.9			21,232		9.0			15,998		6.3			14,705		5.2
Inbursa		7,610		3.3			5,776		2.6			5,143		2.2			12,940		5.1			4,454		1.6
Scotiabank		4,604		2.0			5,605		2.5			5,588		2.4			12,129		4.8			8,450		3.0
Santander + Top 6(3)	Ps.	153,871		66.7	%	Ps.	151,493		68.2	%	Ps.	150,094		63.8	%	Ps.	145,121		57.0	%	Ps.	164,441		57.9	%
Total System	Ps.	230,581		100.0	%	Ps.	222,129		100.0	%	Ps.	235,216		100.0	%	Ps.	254,486		100.0	%	Ps.	283,989		100.0	%

Source: CNBV.

(1) Market share data are calculated by us, using information published by the CNBV.

(2) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

(3) Total interbank lending and market share data for “Santander + Top 6” are calculated by us, using information published by the CNBV.

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Marketing

After operating for more than 15 years in Mexico, Santander has become a marketing leader in the Mexican financial services market. We are fifth among all banks in terms of advertising spending, according to December 2014 data provided by Ibope AGB México, an independent agency that monitors advertising and television audience levels. In addition, we are third in terms of unassisted brand recognition and also third in the “Most Remembered” category, according to a report prepared by Ipsos, a global marketing research company, for Banco Santander Parent in September-October 2014.

Our marketing strategy is derived from our solid business plan, which focuses on our select, premier, preferred, and small business customers, and also on managing mortgage products. Of particular importance are our university customers which, in addition to being the cornerstone of our social responsibility policy, have found in us a bank that understands their needs. Our university customers generally fall into the classic category, due to their low-income status as students.

We also strongly support SMEs, as these are major employers in Mexico. Today, we are one of the banks with the largest growth in the SME market. The premier segment is also critical, as evidenced by the development of the “Santander Select” concept, with branches exclusively dedicated to serving this class of customers. At the end of 2014, we had 121 Santander Select offices.

Our direct and clear quality-based strategy has led us to tie for second place in terms of customer service among banks, according to the Corporate Customer Satisfaction Survey conducted by Ipsos for Banco Santander between April and September 2014. We are striving to improve the overall experience of our customers in order to become the leading bank in customer satisfaction.

One of our most well-known attributes is innovation, which is evident in the development of successful and innovative products that have been well received in their markets and have added value to our brand. For example, “Light credit cards” offering a low interest rate,  “Black credit cards” offering insurance and fraud protection, personal loans, funds, and mortgages, among others.

In Mexico, part of our marketing efforts is dedicated to social responsibility. Our ATMs receive voluntary donations from our customers four times a year. With these contributions, we have supported the valuable work of UNICEF in Mexico, helping children attend school and receive a quality education. This program has raised more than Ps.125 million in the past eleven years. We have also supported environmental projects led by Reforestamos México, and also the building of homes through Fundación Vivienda (Fideicomiso Provivah), with more than 3,433 homes built over the past six years. Additionally, together with other organizations, we actively support the Mexican Banking Association “Bécalos” program, which has awarded 221,323 student scholarships to date.

In 2014, our mass media campaigns continued to focus on high growth markets and key products to achieve our commercial banking segment objectives: car insurance, credit cards, consumer loans and accounts. Other campaigns that combined publicity and customer events continued to focus on universities, certain customer segments (small businesses, premier and select), private banking and mortgages.

All of our campaigns have focused on our customers, which are the core of our business model. We are striving to respond to their needs with innovative solutions and to build long-term business relationships based on trust, approachability, and transparency.

We are also taking advantage of corporate sponsorship opportunities, including Scuderia Ferrari, and we will continue to build local sponsorships, such as the Mexico City Formula 1 Gran Prix, Cirque du Soleil, and major events at the Arena Monterrey, one of the highest ticket-selling venues in the world.

We have also significantly increased our online presence, through social networks such as YouTube, Facebook and Twitter. At the end of 2014, we had more than 660,000 followers on Facebook and more than 62,000 on Twitter.

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Information Technology

Our main data center is located in Mexico and our disaster recovery site is located in Spain. We continuously invest in new technology and the maintenance of our existing equipment and infrastructure in order to improve our value proposition to our customers, increase our efficiency and support business growth.  We believe that proper management of technology is key to the proper management of our business.  Our modern technology platform is interconnected with the platform of the Santander Group, which enables us to provide seamless coverage to our customers.

Through our Information Technology (IT) governance model, we identify those IT investments aligned with our strategy and business plan, and we use Produban and Isban, the Santander Group’s banking technology subsidiaries, to manage the technical infrastructure, execute IT projects and support and manage suppliers.  This model enables us to leverage our global scale and capture the benefits of outsourcing, including consolidation, shared capability, scale, exchange of best practices and simplified governance, without the risk of losing control of core activities.

Our IT architecture is the central pillar of our banking operations.  Our focus is to serve our customers on a global scale, under an architecture that is uniquely customer-centered, provides business support and increases the efficiency of our processes, all within a framework of security and regulatory compliance.

Our operational platform efficiently combines our modern business-oriented IT systems with our multichannel distribution strategy, resulting in innovative ways to serve our clients.  We have well-developed CRM tools that allow us to monitor our clients’ behavior and provide them with targeted product offerings through diverse channels.  As a result, we are able to efficiently leverage alternative distribution channels, such as ATMs, internet banking and our contact centers, that are complementary to our traditional proprietary branch network, which enables us to provide better service to our clients and to increase our sales ratios.

Intellectual Property

In Mexico, ownership of trademarks can be acquired only through a validly approved registration with the Mexican Institute of Industrial Property (Instituto Mexicano de la Propiedad Industrial, or IMPI), the agency responsible for registering trademarks and patents in Mexico.  After registration, the owner has exclusive use of the trademark in Mexico for ten years.  Trademarks registrations can be renewed indefinitely for additional ten-year periods, if the registrant proves that it has used such trademark within the last three years.

We have several trademarks, most of which are brand names of our products or services.  All our material trademarks are registered or have been submitted to IMPI for registration by the Santander Group or us.

We own the principal domain names used in our business, which include www.santander.com.mx, www.llamasantander.com.mx, www.valorsantander.com.mx and www.supernetempresas.com.mx.  None of the information contained on our websites is incorporated by reference into, or forms part of, this annual report on Form 20-F.

Competition

General

We face strong domestic competition in all aspects of our business from other Mexican financial groups, commercial banks, insurance companies and securities brokerage houses, as well as from non-Mexican banks and international financial institutions. Banco Santander Mexico competes for both commercial and retail customers with other large Mexican banks, including subsidiaries of foreign banks, which, like Banco Santander Mexico, are a part of financial groups.  In some parts of Mexico, Banco Santander Mexico also competes with regional banks. Banco Santander Mexico also competes with certain non-Mexican banks (principally those based in the United States and Spain) for the business of the largest Mexican industrial groups and government entities, as well as high net worth individuals.

Banco Santander Mexico’s principal competitors are BBVA Bancomer, S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer; Banco Nacional de México, S.A., Integrante del Grupo Financiero Banamex, which is part of Citigroup; Banco Mercantil del Norte, S.A., Institución de Banca Múltiple, Grupo Financiero Banorte; HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC; Banco Inbursa, S.A.,

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Institución de Banca Múltiple, Grupo Financiero Inbursa; and Scotiabank Inverlat, S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank Inverlat. Some of the banks with which Banco Santander Mexico competes are significantly larger and have more financial resources than Santander Mexico, including a larger asset size and capital base.

The following table shows the rankings and market share of Banco Santander Mexico and Grupo Financiero Santander Mexico as of December 31, 2014, according to information published by the CNBV.

	Mexican Banking GAAP
	As of December 31, 2014
Rankings and Market Share	Rank of Banco Santander Mexico among Banks(1)		Rank of Grupo Financiero Santander Mexico among Financial Groups(2)		Market Share of Banco Santander Mexico among Banks(1)(3)			Market Share of Grupo Financiero Santander Mexico among Financial Groups(2)(3)
Total loans		3		4		13.9	%		14.9	%
Deposits		4		4		14.1	%		15.3	%
Total assets		3		4		13.5	%		13.2	%
Asset quality(4)		6		6		—			—
Total equity		3		4		13.7	%		12.7	%
Net income		3		5		15.0	%		13.0	%
Efficiency(5)		2		3		—			—
ROAE(6)		3		3		—			—

Source: CNBV.

(1) Among the seven largest private banks in Mexico in terms of total assets: Banco Santander Mexico, BBVA Bancomer, S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer; Banco Nacional de México, S.A., Integrante del Grupo Financiero Banamex; Banco Mercantil del Norte, S.A., Institución de Banca Múltiple, Grupo Financiero Banorte; HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC; Banco Inbursa, S.A., Institución de Banca Múltiple, Grupo Financiero Inbursa; and Scotiabank Inverlat, S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank.

(2) Among the seven largest private financial groups in Mexico in terms of total assets: Grupo Financiero Santander Mexico, Grupo Financiero BBVA Bancomer, Grupo Financiero Banamex, Grupo Financiero Banorte, Grupo Financiero HSBC, Grupo Financiero Inbursa and Grupo Financiero Scotiabank.

(3) We calculate market share based on information published by the CNBV.

(4) Defined as total non-performing loans as a percentage of total loans.

(5) We calculate the efficiency ratio as administrative expenses divided by total income, using information published by the CNBV.

(6) Calculated based upon the average balance of equity.

Our prominence in the Mexican financial system has been recognized in the Mexican business community. In 2012, América Economía ranked Banco Santander Mexico as the second overall best bank in Latin America and the first in Mexico, and The Banker and Euromoney also recognized Banco Santander México as the best bank in the country. In 2012 and 2013, Euromoney recognized our private banking unit as the best in the “super affluent” category, defined as clients with net worth between U.S.$500,000 and U.S.$1.0 million. Also in 2013, Euromoney ranked Banco Santander Mexico as the best bank in Mexico once again and The Banker recognized it as the best private bank in Latin America. In 2014, Euromoney recognized Banco Santander México as the best bank in Mexico for the third consecutive year and Latin Finance recognized Banco Santander México as the best infrastructure bank in the country.

74

The banking sector in Mexico can be classified into two groups: the mature, established “large banks” and the recently created “new banks.” As of December 31, 2014, the four largest banks, BBVA Bancomer, Banamex, Banorte and Banco Santander Mexico, held in the aggregate 64.3% of the total deposits in Mexico, followed by a total of 18.6% held in the aggregate by HSBC, Scotiabank and Inbursa, all of which are established large banks. The remaining 17.1% was distributed among 38 other banks.

We also compete with credit unions in Mexico.  Credit unions are financial institutions that are formed for the purpose of providing access to funding and favorable conditions for savings and receipt of loans and financial services.  Credit unions do not provide services to the public in general, since they are only authorized to carry out transactions with their members.  The operation of a credit union is carried out by its own members.  In order to be a member of a credit union, one must comply with the eligibility requirements established for that organization and acquire a certain number of shares of the credit union.

The deposits of members with a credit union are not subject to any form of deposit insurance.  There are credit unions for many different economic groups, ranging from fishermen to industrialists, but there are also “mixed” credit unions that accept members who perform different economic activities and “social sector” credit unions that serve economic sectors that are unable to access traditional financial institutions due to social, economic and geographic conditions.

Commercial banks in Mexico also compete in the retail market with non-banking institutions known as Sofomes, which focus primarily on offering consumer, commercial and mortgage loans to middle- and low-income individuals.  Until recently, the commercial credit market for middle- and low-income individual customers has been serviced almost exclusively by non-banking institutions.  Currently, more than 50 non-banking institutions are licensed to operate in Mexico. Mexican non-banking institutions may engage in certain specific lending activities, but are prohibited from engaging in many banking operations, including receiving deposits, foreign trade financing, offering current accounts and engaging in foreign currency operations.  Traditional banks have begun to extend their credit services to the markets previously dominated by Sofoles (now abolished) and Sofomes.

At the beginning of 2008, the Mexican Banking Law was modified to, among other things, grant authority to the CNBV (with the assistance of other regulators, but having primary responsibility) to authorize the creation of banks solely to engage in certain activities (which is intended to incentivize competition, reduce required capital considering their risk exposure and improve the attention to certain industries and regions) as compared to so-called “universal” banks, such as Banco Santander Mexico.  As a result of the reduced capital requirements and potential reduced operational costs that are likely to apply to this type of bank, competition has increased as a result of the creation of more banks to target specific market niches.

Commercial banks also face increasing competition from securities firms and other financial intermediaries that can provide larger companies with access to domestic and international capital markets as an alternative to bank loans.

In the brokerage services sector, Casa de Bolsa Santander, our broker-dealer subsidiary, competes with 35 other brokerage houses, 18of which are part of a financial group and the rest of which are independent. As of December 31, 2014, Casa de Bolsa Santander ranked in seventhplace in terms of amount traded on the Mexican Stock Exchange with a market share of 5.07%.

75

Market Position of Grupo Financiero Santander Mexico

Net income

The following table sets forth Grupo Financiero Santander Mexico’s and its peers’ net income and market share in terms of net income for the time periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2010					2011					2012					2013					2014
	(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)
Santander	Ps.	13,851		15.7	%	Ps.	18,683		20.9	%	Ps.	17,822		17.6	%	Ps.	20,878		16.7	%	Ps.	14,016		13.0	%
BBVA Bancomer		27,011		30.5			28,834		32.3			28,123		27.8			37,871		30.3			31,007		28.8
Banamex		22,091		25.0			14,150		15.8			17,965		17.7			21,639		17.3			14,479		13.5
Inbursa		8,216		9.3			6,031		6.7			8,382		8.3			16,316		13.0			18,106		16.8
Banorte(2)		7,362		8.3			9,569		10.7			10,888		10.8			14,279		11.4			15,453		14.4
HSBC		2,130		2.4			2,788		3.1			6,274		6.2			3,715		3.0			3,976		2.0
Scotiabank		2,933		3.3			3,132		3.5			4,399		4.3			3,179		2.5			2,111		3.7
Others(3)		4,833		5.5			6,176		6.9			7,419		7.3		Ps.	7,277		5.8		Ps.	8,406		7.8
Financial groups	Ps.	88,427		100.0	%	Ps.	89,364		100.0	%	Ps.	101,272		100.0	%	Ps.	125,154		100.0	%	Ps.	107,552		100.0	%

Source: CNBV.

(1) Market share data are calculated by us, using information published by the CNBV.

(2) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

(3) Net income and market share data for “Others” are calculated by us, using information published by the CNBV.

Total assets

The following table sets forth Grupo Financiero Santander Mexico’s and its peers’ total assets and market share in terms of total assets for the time periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2010					2011					2012					2013					2014
	(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)
Santander	Ps.	676,019		13.2	%	Ps.	739,173		12.8	%	Ps.	750,337		12.5	%	Ps.	821,799		12.6	%	Ps.	937,384		13.2	%
BBVA Bancomer		1,114,171		21.8			1,324,736		22.9			1,383 ,800		23.1			1,501,965		23.0			1,677,899		23.7
Banamex		1,149,480		22.5			1,199,200		20.7			1,196,579		20.0			1,262,376		19.4			1,206,283		17.0	%
Banorte(2)		590,558		11.6			829,277		14.3			916,567		15.3			1,006,788		15.4			1,097,982		15.5
HSBC		435,309		8.5			508,721		8.8			504,526		8.4			530,540		8.1			613,377		8.7
Inbursa		264,823		5.2			340,436		5.9			339,958		5.7			360,194		5.5			385,743		5.5
Scotiabank		194,225		3.8			190,081		3.3			226,979		3.8			245,775		3.8			297,259		4.2
Others(3)		679,905		13.3			653,783		11.3			678,064		11.3			788,659		12.1			861,588		12.2
Financial groups	Ps.	5,104,490		100.0	%	Ps.	5,785,407		100.0	%	Ps.	5,996,810		100.0	%	Ps.	6,518,096		100.0	%	Ps.	7,077,516		100.0	%

Source: CNBV.

(1) Market share data are calculated by us, using information published by the CNBV.

(2) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

(3) Total assets and market share data for “Others” are calculated by us, using information published by the CNBV.

76

Total equity

The following table sets forth total equity and market share in terms of total equity for the seven private-sector financial groups with the largest market shares for the time periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2010					2011					2012					2013					2014
	(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)
Santander	Ps.	82,424		13.2	%	Ps.	88,479		13.3	%	Ps.	97,826		13.7	%	Ps.	94,703		12.5	%	Ps.	105,384		12.7	%
Banamex		161,678		25.9			155,987		23.5			160,413		22.5			160,816		21.3			172,041		20.7
BBVA Bancomer		126,261		20.2			136,120		20.5			144,084		20.2			156,984		20.8			166,873		20.1
Banorte(2)		50,227		8.1			77,082		11.6			88,509		12.4			108,691		14.4			124,672		15.0
Inbursa		68,497		11.0			73,198		11.0			78,011		11.0			82,165		10.9			97,305		11.7
HSBC		49,522		7.9			46,787		7.1			50,748		7.1			55,770		7.4			54,246		6.5
Scotiabank		29,892		4.8			29,654		4.5			33,005		4.6			33,826		4.5			34,441		4.2
Total for seven financial groups(3)	Ps.	568,501		91.1	%	Ps.	607,307		91.6	%	Ps.	652,596		91.6	%	Ps.	692,954		91.6	%	Ps.	754,961		91.0	%

Source: CNBV.

(1) Market share data are calculated by us, using information published by the CNBV.

(2) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

(3) Total equity and market share data for the seven financial groups are calculated by us, using information published by the CNBV.

77

Return on average equity and equity to total assets ratio

The following table sets forth Grupo Financiero Santander Mexico’s and its peers’ return on average equity and equity to total assets ratio at the latest available date for the time periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2010						2011						2012						2013						2014
	Return on average equity (%)(1)			Equity to total assets ratio (%)			Return on average equity (%)(1)			Equity to total assets ratio (%)			Return on average equity (%)(1)			Equity to total assets ratio (%)			Return on average equity (%)(1)			Equity to total assets ratio (%)			Return on average equity (%)(1)			Equity to total assets ratio (%)
Santander		17.7	%		12.2	%		21.9	%		12.0	%		19.1	%		13.0	%		21.7	%		11.5	%		14.0	%		11.2	%
BBVA Bancomer		22.4			11.3			22.0			10.3			20.1			10.4			25.2			10.5			19.1			9.9
HSBC		4.4			11.4			5.8			9.2			12.9			10.1			7.0			10.5			3.0			8.8
Banorte(2)		15.5			8.5			15.0			9.3			13.2			9.7			14.5			10.8			13.2			14.3
Banamex		13.8			14.1			8.9			13.0			11.4			13.4			13.5			12.7			8.7			11.4
Scotiabank		10.3			15.4			10.5			15.6			14.0			14.5			9.5			13.8			11.6			11.6
Inbursa		12.6			25.9			8.5			21.5			11.1			22.9			20.4			22.8			20.2			25.2
Financial groups		14.7	%		12.2	%		13.9	%		11.5	%		14.9	%		11.9	%		17.5	%		11.6	%		13.7	%		11.7	%

Source: Return on average equity and the equity to total assets ratio are calculated by us using information published by the CNBV.

(1) Calculated based upon the average balance of shareholders’ equity.

(2) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

Efficiency

As of December 31, 2014, Grupo Financiero Santander Mexico was the third-most efficient financial group among the seven largest financial groups in Mexico, according to each financial group’s efficiency ratio.  For this purpose, we calculate the efficiency ratio as administrative expenses divided by total income, using information published by the CNBV.  The following table sets forth Grupo Financiero Santander Mexico’s and its peers’ efficiency ratios for the time periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2010			2011			2012			2013			2014
	(%)
Santander		38.6	%		44.2	%		39.5	%		35.5	%		43.0	%
Inbursa		25.7			37.5			28.8			23.3			25.1
BBVA Bancomer		40.7			41.2			42.1			42.1			42.7
Banamex		48.4			52.3			50.9			46.5			49.9
Banorte(1)		52.3			55.7			54.0			52.1			48.5
HSBC		76.9			70.7			63.9			63.0			68.3
Scotiabank		68.4			63.6			63.1			64.6			61.4
Financial groups		49.9	%		51.3	%		47.7	%		45.1	%		46.8	%

Source:  Efficiency ratios are calculated by us, using information published by the CNBV.

(1) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

78

Total loans

The following table sets forth total loans and market share in terms of loans for the seven private financial groups with the largest market shares in Mexico for the time periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2010					2011					2012					2013					2014
	(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)
Santander	Ps.	227,556		11.2	%	Ps.	313,672		13.5	%	Ps.	350,683		13.7	%	Ps.	394,932		14.0	%	Ps.	465,541		14.9	%
BBVA Bancomer		579,725		28.6			629,897		27.1			663,857		25.9			720,423		25.6			808,382		25.8
Banamex		332,743		16.4			394,840		17.0			444,028		17.3			484,749		17.2			478,771		15.3
Banorte(2)		270,213		13.3			357,506		15.4			409,914		16.0			438,693		15.6			486,061		15.5
HSBC		171,421		8.5			187,639		8.1			198,979		7.8			204,990		7.3			231,460		7.4
Inbursa		176,212		8.7			174,108		7.5			177,043		6.9			199,079		7.1			202,981		6.5
Scotiabank		106,012		5.2			114,519		4.9			127,827		5.0			148,400		5.3			179,035		5.7
Total for seven financial groups(3)	Ps.	1,863,882		92.0	%	Ps.	2,172,181		93.6	%	Ps.	2,372,331		92.6	%	Ps.	2,591,266		91.9	%	Ps.	2,852,231		91.2	%

Source: CNBV.

(1)  Market share data are calculated by us, using information published by the CNBV.

(2)  In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

(3)  Total loans and market share data for the seven financial groups are calculated by us, using information published by the CNBV.

Deposits

The following table set forth deposits and market share in terms of deposits for the seven private-sector financial groups with the largest market shares for the time periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2010					2011					2012					2013					2014
	(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)
Santander	Ps.	276,848		12.3	%	Ps.	309,193		12.8	%	Ps.	362,452		14.0	%	Ps.	404,668		14.8	%	Ps.	459,623		15.3	%
BBVA Bancomer		572,581		25.4			591,574		24.5			614,634		23.8			652,459		23.9			723,759		24.1
Banamex		486,390		21.6			510,969		21.2			503,417		19.5			523,716		19.2			556,860		18.5
Banorte(2)		288,836		12.8			363,337		15.0			419,759		16.2			438,336		16.1			492,516		16.4
HSBC		249,093		11.1			293,185		12.1			291,081		11.2			281,484		10.3			292,384		9.7
Scotiabank		119,605		5.3			116,816		4.8			137,465		5.3			142,830		5.2			164,114		5.5
Inbursa		125,934		5.6			107,240		4.4			97,575		3.8			89,879		3.3			83,434		2.8
Total for seven financial groups(3)	Ps.	2,119,287		94.1	%	Ps.	2,292,314		94.9	%	Ps.	2,426,383		93.8	%	Ps.	2,533,372		93.0	%	Ps.	2,772,690		92.3	%

Source: CNBV.

(1)  Market share data are calculated by us, using information published by the CNBV.

(2)  In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

(3)  Total deposits and market share data for the seven financial groups are calculated by us, using information published by the CNBV.

79

Asset quality

The following table sets forth Grupo Financiero Santander Mexico’s and its peers’ non-performing loans to total loans ratio, as defined by the CNBV, for the time periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2010			2011			2012			2013			2014
	(%)
Santander		1.7	%		1.7	%		1.7	%		3.6	%		3.7	%
Banamex		1.4			1.6			1.9			2.4			2.2
Scotiabank		3.6			2.7			2.3			2.9			3.3
Banorte(1)		2.5			1.9			2.1			3.1			2.9
BBVA Bancomer		2.5			3.1			3.3			3.1			2.7
Inbursa		2.0			3.3			3.7			4.4			3.7
HSBC		3.1			2.7			2.0			5.9			5.3
Financial groups		2.3	%		2.4	%		2.4	%		3.2	%		3.0	%

Source:  Asset quality ratios are calculated by us, using information published by the CNBV.

(1) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

Coverage ratio

The following table sets forth Grupo Financiero Santander Mexico’s and its peers’ coverage ratios for the time periods indicated.  The coverage ratio is defined as allowance for impairment losses divided by total non-performing loans.

	Mexican Banking GAAP
	As of December 31,
	2010			2011			2012			2013			2014
	(%)
Santander		268.6	%		210.5	%		190.0	%		115.5	%		97.1	%
HSBC		173.9			214.5			233.8			100.6			103.7
Banorte(1)		123.7			143.1			138.3			104.6			107.0
BBVA Bancomer		174.2			126.4			128.8			120.6			118.8
Scotiabank		103.3			115.3			130.5			121.1			114.2
Banamex		255.0			284.0			230.7			214.6			225.4
Inbursa		522.7			398.8			389.1			308.5			206.7
Median of seven financial groups		174.2	%		210.5	%		190.0	%		120.6	%		116.5	%

Source: Coverage ratios are calculated by us, using information published by the CNBV.

(1) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

80

Cost of risk

The following table sets forth Grupo Financiero Santander Mexico’s and its peers’ costs of risk for the time periods indicated.  The cost of risk is defined as allowance for impairment losses divided by average gross loans.

	Mexican Banking GAAP
	As of December 31,
	2010			2011			2012			2013			2014
	(%)
Santander		3.9	%		2.4	%		2.8	%		3.4	%		3.3	%
Inbursa		2.8			1.9			3.1			1.7			1.7
Banorte(1)		2.7			1.7			1.6			2.1			2.4
Scotiabank		2.5			1.9			1.3			2.8			2.7
BBVA Bancomer		3.6			3.3			3.4			3.4			3.3
HSBC		5.6			3.8			2.4			4.0			3.7
Banamex		4.4			4.9			4.5			5.5			6.0
Median of seven financial groups		3.6	%		2.4	%		2.8	%		3.4	%		3.5	%

Source: Cost of risk is calculated by us, using information published by the CNBV.

(1) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

Return on average assets

The following table sets forth Grupo Financiero Santander Mexico’s and its peers’ return on average assets for the periods presented.

	Mexican Banking GAAP
	As of December 31,
	2010			2011			2012			2013			2014
	(%)(1)
Santander		2.2	%		2.6	%		2.4	%		2.7	%		1.6	%
Inbursa		3.0			2.0			2.5			4.7			4.9
BBVA Bancomer		2.4			2.4			2.1			2.6			2.0
Banamex		1.9			1.2			1.5			1.8			1.2
Banorte(2)		1.3			1.3			1.2			1.5			1.5
Scotiabank		1.6			1.6			2.1			1.3			1.5
HSBC		0.5			0.6			1.2			0.7			0.4
Median of seven financial groups		1.9	%		1.6	%		2.1	%		1.8	%		1.6	%

Source: Return on average assets is calculated by us, using information published by the CNBV.

(1) Calculated based upon the average balance of total assets.

(2) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

81

Loans to deposits ratio

The following table sets forth Grupo Financiero Santander Mexico’s and its peers’ loans to deposits ratios for the periods presented.  The loans to deposit ratio is total loans, net of allowance for impairment losses, divided by deposits.

	Mexican Banking GAAP
	As of December 31,
	2010			2011			2012			2013			2014
	(%)
Santander		78.5	%		97.8	%		93.6	%		93.6	%		97.6	%
HSBC		65.1			60.3			65.1			68.5			74.8
Banamex		66.0			73.9			84.4			87.8			81.7
Banorte(1)		90.7			95.7			94.9			96.8			95.6
Scotiabank		85.4			95.0			90.2			100.2			105.0
BBVA Bancomer		96.9			102.3			103.5			106.2			108.1
Inbursa		125.0			141.1			155.0			191.5			224.9
Median of seven financial groups		85.4	%		95.7	%		93.6	%		96.8	%		97.6	%

Source: The loans to deposit ratio is calculated by us, using information published by the CNBV.

(1) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

Loans and deposits per branch

The following table sets forth Grupo Financiero Santander Mexico’s and its peers’ loans per branch and deposits per branch as of December 31, 2014, as calculated in accordance with Mexican Banking GAAP.

	As of December 31, 2014
	(Loans per branch in millions of pesos)(1)		(Deposits per branch in millions of pesos)(1)
Santander	Ps.	385	Ps.	380
BBVA Bancomer		442		395
Inbursa		595		245
Banorte(2)		383		388
Banamex		311		362
HSBC		235		297
Scotiabank		306		280

Source: Loans per branch and deposits per branch are calculated by us, using information published by the CNBV.

(1) The number of branches is based on the latest available information published by the CNBV for the banks corresponding to each financial group.  Loans and deposits information is based on the latest available information published by the CNBV for the financial groups.

(2) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

82

Loans and deposits per employee

The following table sets forth Grupo Financiero Santander Mexico’s and its peers’ loans per employee and deposits per employee as of December 31, 2014, as calculated in accordance with Mexican Banking GAAP.

	As of December 31, 2014
	(Loans per employee in millions of pesos)(1)		(Deposits per employee in millions of pesos)(1)
Santander	Ps.	27	Ps.	26
Inbursa		95		39
BBVA Bancomer		27		25
Banorte(2)		23		23
Banamex		95		39
Scotiabank		19		17
HSBC		14		17

Source: Loans per employee and deposits per employee are calculated by us, using information published by the CNBV.

(1) The number of employees is based on the latest available information published by the CNBV for the banks corresponding to each financial group.  Loans and deposits information is based on the latest available information published by the CNBV for the financial groups.

(2) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

Operating expenditures as a percentage of the sum of average loans and deposits

The following table sets forth Grupo Financiero Santander Mexico’s and its peers’ operating expenditures as a percentage of the sum of average loans and deposits as of December 31, 2014, as calculated in accordance with Mexican Banking GAAP.

	As of December 31, 2014
	(%)
Santander		2.76	%
Inbursa		2.61
Banorte(1)		3.15
BBVA Bancomer		3.38
HSBC		4.40
Scotiabank		4.26
Banamex		4.86	%

Source: Operating expenditures as a percentage of the sum of average loans and deposits is calculated by us, using information published by the CNBV.

(1) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

83

Net fees as a percentage of operating expenditures

The following table sets forth Grupo Financiero Santander Mexico’s and its peers’ net fees as a percentage of operating expenditures as of December 31, 2014, as calculated in accordance with Mexican Banking GAAP.

	As of December 31, 2014
	(%)
Santander		56.3	%
Banamex		57.8
BBVA Bancomer		42.3
Banorte		29.3
HSBC		29.6
Scotiabank		28.2
Inbursa		10.4	%

Source: Net fees as a percentage of operating expenditures is calculated by us, using information published by the CNBV.

Market Position of Banco Santander Mexico

Net income

The following table sets forth net income and market share in terms of net income for the seven largest commercial banks in Mexico for the time periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2012					2013					2014
	(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)
Santander	Ps.	17,398		20.0	%	Ps.	18,903		17.7	%	Ps.	14,049		15.0	%
BBVA Bancomer		23,151		26.6			30,829		28.8			24,792		26.4
Banamex		12,356		14.2			16,354		15.3			8,106		8.6
Banorte(2)		10,139		11.6			12,065		11.3			11,892		12.7
Inbursa		4,079		4.7			11,797		11.0			14,776		15.8
Scotiabank		3,841		4.4			2,766		2.6			3,397		3.6
HSBC		4,370		5.0			2,146		2.0			1,089		1.2
Others(3)		11,793		13.5			12,213		11.4			15,710		16.7
Mexican financial system	Ps.	87,127		100.0	%	Ps.	107,073		100.0	%	Ps.	93,811		100.0	%

Source: CNBV.

(1) Market share data is calculated by us, using information published by the CNBV.

(2) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

(3) Net income and market share data for “Others” are calculated by us, using information published by the CNBV.

(4) Figures do not add due to rounding.

84

Total equity

The following table sets forth shareholders’ equity and market share in terms of total equity (as a percentage of the total equity of 42 private banks in Mexico) for the seven private-sector banks with the largest market shares for the time periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2012					2013					2014
	(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)
Santander	Ps.	95,966		15.1	%	Ps.	92,820		13.7	%	Ps.	103,523		13.7	%
Banamex		129,349		20.3			137,760		20.3			142,675		18.9
BBVA Bancomer		117,183		18.4			125,701		18.5			133,934		17.8
Banorte(2)		66,105		10.4			77,859		11.5			94,681		12.6
Inbursa		54,058		8.5			57,006		8.4			71,232		9.5
HSBC		43,187		6.8			47,610		7.0			48,269		6.4
Scotiabank		29,674		4.7			26,756		3.9			30,248		4.0
Total for seven banks(3)	Ps.	535,522		84.1	%	Ps.	565,512		83.3	%	Ps.	624,562		82.9	%

Source: CNBV.

(1) Market share data are calculated by us, using information published by the CNBV.

(2) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

(3) Total equity and market share data for the seven banks are calculated by us, using information published by the CNBV.

Return on average equity and equity to total assets ratio

The following table sets forth the return on average equity and equity to total assets ratio for the seven largest commercial banks in Mexico for the time periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2012						2013						2014
	Return on average equity (%)(1)			Equity to total assets ratio (%)			Return on average equity (%)(1)			Equity to total assets ratio (%)			Return on average equity (%)(1)			Equity to total assets ratio (%)
Santander		18.5	%		12.8	%		20.0	%		11.3	%		14.3	%		11.3	%
BBVA Bancomer		19.8			9.3			25.4			9.2			19.1			8.7
HSBC		10.7			8.9			4.7			9.3			2.3			8.1
Banorte(2)		16.7			10.9			16.8			9.9			13.8			11.1
Scotiabank		13.4			13.2			9.8			11.1			11.9			10.4
Banamex		9.5			11.5			12.2			11.9			5.8			12.8
Inbursa		7.9			22.2			21.2			22.2			23.0			21.2
Mexican financial system		14.0	%		10.6	%		17.2	%		10.6	%		13.1	%		11.1	%

Source: Return on average equity and equity to total assets ratio data are calculated by us, using information published by the CNBV.

(1) Calculated based upon the average balance of equity.

(2) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

85

Core capital ratio

The following table sets forth Banco Santander Mexico’s and its peers’ core capital ratios for the periods presented.   Core capital ratio is defined as Tier 1 Capital (total equity) divided by risk-weighted assets.

	Mexican Banking GAAP
	As of December 31,
	2010			2011			2012			2013			2014
	(%)
Santander		15.3	%		14.5	%		14.5	%		12.8	%		12.85	%
Inbursa		22.2			18.9			20.0			18.1			20.3
Banamex		19.4			15.0			14.9			14.1			15.5
Banorte(1)		12.1			10.8			11.8			12.7			13.7
Scotiabank		17.5			15.5			15.5			12.1			12.2
HSBC		11.2			11.9			11.5			12.0			10.8
BBVA Bancomer		12.1			11.3			11.0			11.9			11.6
Median of seven banks		15.3	%		14.5	%		14.5	%		12.7	%		12.8	%

Source: CNBV.

(1) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

Efficiency

As of December 31, 2014, Banco Santander Mexico was the second most efficient bankamong the seven largest commercial banks in Mexico, according to each bank’s efficiency ratio.  For this purpose, we calculate the efficiency ratio as administrative expenses divided by total income, using information published by the CNBV.  The following table sets forth Banco Santander Mexico’s and its peers’ efficiency ratios for the time periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2012			2013			2014
	(%)
Santander		38.6	%		34.8	%		42.4	%
Inbursa		26.8			19.8			22.8
BBVA Bancomer		45.0			44.6			46.6
Banamex		54.0			49.4			53.3
Banorte(1)		50.5			53.7			50.5
Scotiabank		64.8			65.5			62.9
HSBC		69.2			66.7			72.1
Mexican financial system		54.4	%		47.0	%		49.6	%

Source: Efficiency ratios are calculated by us, using information published by the CNBV.

(1) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

86

Total loans

The following table sets forth total loans and market share (as a percentage of the total loans of 42 private banks in Mexico) for the seven private-sector banks with the largest market shares for the time periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2010					2011					2012					2013					2014
	(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)
Santander	Ps.	227,556		10.7	%	Ps.	313,672		12.7	%	Ps.	350,683		12.7	%	Ps.	394,930		13.0	%	Ps.	465,541		13.9	%
BBVA Bancomer		573,991		27.0			624,742		25.4			659,258		24.0			713,505		23.5			802,468		24.0
Banamex		332,719		15.6			394,523		16.0			444,496		16.2			485,369		16.0			478,899		14.3
Banorte(2)		249,495		11.7			338,528		13.7			392,013		14.3			422,890		14.0			464,201		13.9
HSBC		171,779		8.1			188,046		7.6			198,979		7.2			204,990		6.8			231,460		6.9
Inbursa		178,665		8.4			177,705		7.2			174,569		6.3			197,549		6.5			199,844		6.0
Scotiabank		106,023		5.0			114,525		4.7			127,473		4.6			148,115		4.9			178,553		5.3
Total for seven banks(3)	Ps.	1,840,228		86.5	%	Ps.	2,151,741		87.4	%	Ps.	2,347,471		85.3	%	Ps.	2,567,348		84.7	%	Ps.	2,820,966		84.3	%

Source: CNBV.

(1) Market share data are calculated by us, using information published by the CNBV.

(2) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

(3) Total loans and market share data for the seven banks are calculated by us, using information published by the CNBV.

The following table sets forth Banco Santander Mexico’s total mortgage loans and market share based on total mortgage loans for the time periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2010					2011					2012					2013					2014
	(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)
Santander	Ps.	34,743		9.6	%	Ps.	63,361		15.4	%	Ps.	70,875		15.7	%	Ps.	90,711		17.7	%	Ps.	106,588		18.9	%
BBVA Bancomer		144,998		40.0			146,809		35.6			153,849		34.0			155,582		30.3			161,697		28.7
Banorte(2)		54,694		15.1			62,752		15.2			71,389		15.8			81,715		15.9			89,767		16.0
Banamex		49,906		13.8			58,144		14.1			67,048		14.8			74,885		14.6			77,407		13.8
Scotiabank		43,055		11.9			45,298		11.0			50,029		11.0			57,204		11.2			67,580		12.0
HSBC		19,659		5.4			19,879		4.8			19,924		4.4			25,183		4.9			26,426		4.7
Inbursa		1,299		0.4			1,304		0.3			1,293		0.3			1,249		0.2			1,501		0.3
Santander + Top 6(3)	Ps.	348,354		96.2	%	Ps.	397,547		96.4	%	Ps.	434,407		95.9	%	Ps.	486,528		94.9	%	Ps.	530,966		94.4	%
Total System	Ps.	362,261		100.0	%	Ps.	412,206		100.0	%	Ps.	452,866		100.0	%	Ps.	512,865		100.0	%	Ps.	562,608		100.0	%

Source: CNBV.

(1) Market share data are calculated by us, using information published by the CNBV.

(2) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

(3) Total mortgage loans and market share data for “Santander + Top 6” are calculated by us, using information published by the CNBV.

87

The following table sets forth Banco Santander Mexico’s total consumer loans and market share based on total consumer loans for the time periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2010					2011					2012					2013					2014
	(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)
Santander	Ps.	41,615		10.4	%	Ps.	50,612		10.2	%	Ps.	63,840		10.7	%	Ps.	69,305		10.3	%	Ps.	75,624		10.6	%
BBVA Bancomer		123,749		30.9			152,215		30.7			173,404		29.1			187,702		27.9			200,618		28.1
Banamex		95,401		23.8			126,325		25.5			149,649		25.1			166,270		24.7			174,234		24.4
Banorte(2)		28,913		7.2			38,239		7.7			47,348		7.9			59,815		8.9			66,856		9.4
HSBC		28,238		7.1			30,536		6.2			34,887		5.8			39,463		5.9			37,940		5.3
Scotiabank		16,598		4.1			16,679		3.4			20,717		3.5			26,433		3.9			26,020		3.6
Inbursa		10,051		2.5			10,255		2.1			5,387		0.9			15,966		2.4			18,843		2.6
Santander + Top 6(3)	Ps.	344,565		86.0	%	Ps.	424,862		85.6	%	Ps.	495,231		83.0	%	Ps.	564,954		83.9	%	Ps.	600,134		84.1	%
Total System	Ps.	400,487		100.0	%	Ps.	496,144		100.0	%	Ps.	596,601		100.0	%	Ps.	673,022		100.0	%	Ps.	713,200		100.0	%

Source: CNBV.

(1) Market share data are calculated by us, using information published by the CNBV.

(2) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

(3) Total consumer loans and market share data for “Santander + Top 6” are calculated by us, using information published by the CNBV.

The following table sets forth Banco Santander Mexico’s total commercial loans and market share based on total commercial loans for the time periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2010					2011					2012					2013					2014
	(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)
Santander	Ps.	130,637		13.3	%	Ps.	164,345		14.4	%	Ps.	176,853		14.5	%	Ps.	195,183		14.6	%	Ps.	221,822		15.4	%
BBVA Bancomer		216,024		22.0			226,348		19.8			235,953		19.4			269,269		20.2			301,845		20.9
Banamex		133,104		13.5			154,966		13.6			169,929		14.0			179,604		13.5			167,115		11.6
Banorte(2)		110,629		11.3			154,351		13.5			170,912		14.1			170,522		12.8			172,219		11.9
Inbursa		131,380		13.4			142,986		12.5			125,129		10.3			139,493		10.5			146,056		10.1
HSBC		83,106		8.5			103,446		9.1			111,236		9.1			117,824		8.8			124,591		8.6
Scotiabank		35,130		3.6			42,187		3.7			42,660		3.5			50,968		3.8			60,921		4.2
Santander + Top 6(3)	Ps.	840,011		85.4	%	Ps.	988,629		86.5	%	Ps.	1,032,672		84.9	%	Ps.	1,122,863		84.2	%	Ps.	1,194,569		82.9	%
Total System	Ps.	983,114		100.0	%	Ps.	1,142,790		100.0	%	Ps.	1,215,802		100.0	%	Ps.	1,333,143		100.0	%	Ps.	1,441,251		100.0	%

Source: CNBV.

(1) Market share data are calculated by us, using information published by the CNBV.

(2) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

(3) Total commercial loans and market share data for “Santander + Top 6” are calculated by us, using information published by the CNBV.

88

The following table sets forth Banco Santander Mexico’s total government and financial entities loans and market share based on total government and financial entities loans for the time periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2010					2011					2012					2013					2014
	(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)
Santander	Ps.	20,560		5.4	%	Ps.	35,355		8.6	%	Ps.	39,116		8.1	%	Ps.	39,731		7.8	%	Ps.	61,507		9.8	%
Banorte(2)		55,258		14.5			83,186		20.2			102,364		21.1			110,838		21.7			135,360		21.5
BBVA Bancomer		89,221		23.4			99,370		24.2			96,052		19.8			100,954		19.7			138,308		22.0
Banamex		54,309		14.2			55,087		13.4			57,869		11.9			64,611		12.6			60,143		9.5
Inbursa		35,934		9.4			23,159		5.6			42,761		8.8			40,841		8.0			33,445		5.3
Scotiabank		11,240		2.9			10,362		2.5			14,067		2.9			37,866		7.4			24,032		3.8
HSBC		40,776		10.7			34,184		8.3			32,933		6.8			22,520		4.4			42,504		6.7
Santander + Top 6(3)	Ps.	307,297		80.6	%	Ps.	340,703		82.8	%	Ps.	385,160		79.3	%	Ps.	417,361		81.6	%	Ps.	495,299		78.6	%
Total System	Ps.	381,400		100.0	%	Ps.	411,242		100.0	%	Ps.	485,586		100.0	%	Ps.	511,373		100.0	%	Ps.	629,867		100.0	%

Source: CNBV.

(1) Market share data are calculated by us, using information published by the CNBV.

(2) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

(3) Total government and financial entities loans and market share data for “Santander + Top 6” are calculated by us, using information published by the CNBV.

Deposits

The following table sets forth deposits and market share in terms of deposits (as a percentage of the total deposits of 45 private banks in Mexico) for the seven private-sector banks with the largest market shares for the time periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2012					2013					2014
	(Millions of pesos)		(Market share (%))			(Millions of pesos)		(Market share (%))			(Millions of pesos)		(Market share (%))
Santander	Ps.	362,595		13.0	%	Ps.	405,469		13.7	%	Ps.	460,776		14.1	%
BBVA Bancomer		616,099		22.1			656,449		22.2			726,940		22.2
Banamex		512,161		18.3			529,244		17.9			565,835		17.3
Banorte(1)		400,325		14.3			421,868		14.2			473,539		14.5
HSBC		291,630		10.4			281,772		9.5			293,025		9.0
Scotiabank		138,317		5.0			147,340		5.0			165,981		5.1
Inbursa		100,838		3.6			91,802		3.1			84,708		2.6
Total for seven banks	Ps.	2,421,965		86.8	%	Ps.	2,533,944		85.5	%	Ps.	2,770,804		84.7	%

Source: Deposits and market share data are calculated by us, using information published by the CNBV.

(1) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

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Asset quality

The following table sets forth the asset quality, defined as total non-performing loans as a percentage of total loans by the CNBV, for the seven largest commercial banks in Mexico for the time periods indicated.

	Mexican Banking GAAP
	As of December 31,
	2012			2013			2014
	(Asset quality (%))			(Asset quality (%))			(Asset quality (%))
Santander		1.7	%		3.6	%		3.7	%
Banorte(1)		1.8			3.1			3.0
Banamex		1.9			2.4			2.2
HSBC		2.0			5.9			5.3
Scotiabank		2.3			2.9			3.1
BBVA Bancomer		3.3			3.2			2.7
Inbursa		3.5			4.2			3.4
Mexican financial system		2.5	%		3.4	%		3.1	%

Source: CNBV.

(1) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

Branches and ATMs

The following table sets forth Banco Santander Mexico’s total bank branches and market share based on number of bank branches for the time periods indicated.

	As of December 31,
	2010					2011					2012					2013					2014
	(Branches)		(Market share (%))(1)			(Branches)		(Market share (%))(1)			(Branches)		(Market share (%))(1)			(Branches)		(Market share (%))(1)			(Branches)		(Market share (%))(1)
Santander		1,075		9.5	%		1,097		9.3	%		1,142		9.2	%		1,234		9.8	%		1,209		9.5	%
BBVA Bancomer		1,796		15.9			1,810		15.4			1,799		14.5			1,793		14.3			1,830		14.4
Banamex		1,696		15.0			1,703		14.4			1,705		13.7			1,683		13.4			1,539		12.1
Banorte(2)		1,134		10.0			1,289		10.9			1,322		10.7			1,284		10.2			1,269		10.0
HSBC		1,144		10.1			1,067		9.1			1,040		8.4			987		7.8			984		7.7
Scotiabank		646		5.7			647		5.5			639		5.1			628		5.0			586		4.6
Inbursa		254		2.2			270		2.3			295		2.4			318		2.5			341		2.7
Santander + Top 6(3)		7,745		68.6	%		7,883		66.9	%		7,942		64.0	%		7,927		63.0	%		7,758		61.0	%
Total System		11,291		100.0	%		11,786		100.0	%		12,412		100.0	%		12,581		100.0	%		12,715		100.0	%

Source: CNBV, R1 Information on branches, ATMs and credit cards.

(1) Market share data are calculated by us, using information published by the CNBV.

(2) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

(3) Total bank branches and market share data for “Santander + Top 6” are calculated by us, using information published by the CNBV.

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The following table sets forth Banco Santander Mexico’s total number of ATMs and market share in terms of ATMs for the time periods indicated.

	As of December 31,
	2010					2011					2012					2013					2014
	(ATMs)		(Market share (%))(1)			(ATMs)		(Market share (%))(1)			(ATMs)		(Market share (%))(1)			(ATMs)		(Market share (%))(1)			(ATMs)		(Market share (%))(1)
Santander		4,439		12.4	%		4,689		12.9	%		4,946		12.3	%		5,262		12.9	%		5,517		12.9	%
BBVA Bancomer		6,760		18.8			7,710		21.2			7,746		19.3			7,749		19.0			8,996		21.0
Banorte(2)		5,004		13.9			5,179		14.2			6,716		16.8			7,049		17.3			7,297		17.0
Banamex		5,855		16.3			6,029		16.6			6,288		15.7			6,609		16.2			7,142		16.6
HSBC		6,331		17.6			6,195		17.0			6,490		16.2			6,120		15.0			5,780		13.5
Scotiabank		1,492		4.2			1,554		4.3			1,558		3.9			2,221		5.4			2,148		5.0
Inbursa		745		2.1			781		2.1			711		1.8			703		1.7			752		1.8
Santander + Top 6(3)		30,626		85.2	%		32,137		88.2	%		34,455		86.0	%		35,713		87.5	%		37,632		87.7	%
Total System		35,942		100.0	%		36,429		100.0	%		40,082		100.0	%		40,811		100.0	%		42,931		100.0	%

Source: CNBV, R1 Information on branches, ATMs and credit cards.

(1) Market share data are calculated by us, using information published by the CNBV.

(2) In March 2011, IXE merged with Banorte, and the information above for Banorte in 2011 is consolidated with IXE results.

(3) Total ATMs and market share data are calculated by us, using information published by the CNBV.

Environmental Matters

We have maintained a strategic Social Corporate Responsibility Program (Responsabilidad Social Corporativa) which promotes a continuous commitment to acting in a responsible manner, thereby contributing to economic development and improving the quality of life of our employees and their families, and the community as a whole.

In this context, we have reaffirmed our respect and commitment to the environment by establishing environmental policies and an Environmental Management System (Sistema de Gestión Ambiental, or SGA).

In October 2012, we obtained AENOR’s recertification of our ISO 14001:2004 certificate, which applies to the administration, management and maintenance of the SGA of our headquarters in Santa Fe, Mexico City.  The recertification has a three-year term and  with annual revisions. To date, the two follow-up audits have taken place, confirming that the SGA was still operating in an effective manner, and that it showed significant improvements.

Our environmental policy aims to integrate sustainability into our day-to-day management and is carried out by our senior management.  Further, our environmental policy requires us to be committed to the following:

· Complying with environmental law requirements applicable to the environmental aspects of the production and management process and services in general, as well as with other requirements which Grupo Financiero Santander Mexico sets forth and environmental requirements of clients and associates.

· Controlling and later reducing the environmental impact generated by the production and management process and services in general.

· Maintaining a commitment to continually improve and prevent land, water and air pollution within work premises.

· Establishing and continuously carrying out the objectives and action plans necessary to reduce environmental impact.

Additionally, our environmental policy is communicated to all of our employees through one or more of the following means: communication ads, posters located within the workplace, intranet website and/or training courses to contractors and new employees.

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Below is a list of the acknowledgments and certifications which we have obtained:

· Corporativo Centro Santa Fe, Mexico City, Mexico: ISO 14001:2004 and the award for “Smart Building” in 1994.

· Centro Tecnológico de Operaciones (CETOS), Queretaro, Mexico: IMEI National Award for “Smart Building” in 2004, Quinta Wellington Redwood Mexico Award in 2005, 2007 and 2008 (related to optimization of internal processes), and the Empresa Socialmente Responsable (Socially Responsible Business) Award in 2010.

· Contact Center, Queretaro, Mexico: IMEI National Award for “Smart Building” in 2008.

· Contact Center, Querétaro, México: National Award for Energy Savings 2012 by the federal electricity commission throughout FIDE (Fideicomiso para Ahorro de Energía Eléctrica).

To the best of our knowledge, there are currently no international, federal, state or local environmental laws, rules or regulations that will materially adversely affect our results of operations or our position with respect to our competitors.  However, possible future environmental laws may adversely affect our operating results.

Selected Statistical Information

The following information for Grupo Financiero Santander Mexico is included for analytical purposes and is derived from, and should be read in conjunction with, the audited financial statements contained elsewhere herein as well as “Item 5. Operating and Financial Review and Prospects.”

Average balance sheet data has been calculated based upon the sum of daily average for each month in the applicable period. Average income statement and balance sheet data and other related statistical information have been prepared on a consolidated basis. We believe that the average data set forth herein accurately reflect in all material aspects our financial condition and results of operations at the date and for the periods specified.

For comparative purposes, we have retrospectively adjusted previously presented consolidated income statement data for the years ended December 31, 2010, 2011 and 2012 and previously presented consolidated balance sheet data as of December 31, 2010, 2011 and 2012 to reflect the application of IAS 19 (revised), as well as discontinued operations relating to our sale of Gestión Santander in December 2013. We have retrospectively adjusted the comparative amounts from December 31, 2010 to December 31, 2012 in our selected financial data as if this revised standard had been in effect for this period. In addition, due to the sale of Gestión Santander in December 2013, we have included as discontinued operations, each year’s profit generated by this entity as Profit from discontinued operations in the consolidated income statement data for the years ended December 31, 2010, 2011 and 2012 in addition to the amounts previously presented in this item regarding the Elavon transaction and the sale of Seguros Santander.

Average Balance Sheet and Interest Rates

The following tables show our average balance sheet and interest rates for each of the periods presented.  With respect to the tables below and the tables under “—Changes in Net Interest Income—Volume and Rate Analysis” and “—Assets—Earning Assets—Yield Spread,” we have stated average balances on a gross basis, before netting our allowance for impairment losses, except for the total average asset figures, which include such netting. All average data have been calculated using daily averages.

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Average Balance Sheets, Income from Interest-Earning Assets and Interest on Interest-Bearing Liabilities

	IFRS for the year ended December 31,
	2012							2013							2014
	Average balance		Interest		Average nominal rate			Average balance		Interest		Average nominal rate			Average balance		Interest		Average nominal rate
	(Millions of pesos, except percentages)
Cash and balances with the Mexican Central Bank
Pesos	Ps.	31,446	Ps.	1,444		4.59	%	Ps.	31,365	Ps.	1,264		4.03	%	Ps.	32,546	Ps.	1,061		3.26	%
Total	Ps.	31,446	Ps.	1,444		4.59	%	Ps.	31,365	Ps.	1,264		4.03	%	Ps.	32,546	Ps.	1,061		3.26	%
Loans and advances to credit institutions
Pesos	Ps.	60,511	Ps.	2,751		4.55	%	Ps.	72,994	Ps.	2,989		4.09	%	Ps.	88,114	Ps.	2,899		3.29	%
Foreign currency(1)		22,386		39		0.17			19,696		30		0.15			11,084		14		0.13
Total	Ps.	82,897	Ps.	2,790		3.37	%	Ps.	92,690	Ps.	3,019		3.26	%	Ps.	99,198	Ps.	2,913		2.94	%
Loans and advances to customers—excluding credit cards
Pesos	Ps.	254,822	Ps.	27,930		10.96	%	Ps.	286,653	Ps.	29,757		10.38	%	Ps.	331,713	Ps.	32,360		9.76	%
Foreign currency(1)		47,102		1,551		3.29			50,923		1,816		3.57			63,011		2,020		3.21
Total	Ps.	301,924	Ps.	29,481		9.76	%	Ps.	337,576	Ps.	31,573		9.35	%	Ps.	394,724	Ps.	34,380		8.71	%
Loans and advances to customers—credit cards
Pesos	Ps.	32,965	Ps.	8,604		26.10	%	Ps.	38,666	Ps.	9,882		25.56	%	Ps.	41,053	Ps.	10,121		24.65	%
Total	Ps.	32,965	Ps.	8,604		26.10	%	Ps.	38,666	Ps.	9,882		25.56	%	Ps.	41,053	Ps.	10,121		24.65	%
Debt instruments
Pesos	Ps.	217,059	Ps.	11,490		5.29	%	Ps.	179,272	Ps.	8,802		4.91	%	Ps.	193,928	Ps.	8,231		4.24	%
Foreign currency(1)		3,406		48		1.41			2,851		26		0.91			22,416		864		3.85
Total	Ps.	220,465	Ps.	11,538		5.23	%	Ps.	182,123	Ps.	8,828		4.85	%	Ps.	216,344	Ps.	9,095		4.20	%
Income from hedging operations
Pesos			Ps.	1,540						Ps.	728						Ps.	277
Foreign currency(1)				—							—							—
Total			Ps.	1,540						Ps.	728						Ps.	277
Other interest-earning assets
Pesos			Ps.	111						Ps.	80						Ps.	53
Foreign currency(1)				13							12							16
Total			Ps.	124						Ps.	92						Ps.	69
Total interest-earning assets
Pesos	Ps.	596,803	Ps.	53,870		9.03	%	Ps.	608,950	Ps.	53,502		8.79	%	Ps.	687,354	Ps.	55,002		8.00	%
Foreign currency(1)		72,894		1,651		2.26			73,470		1,884		2.56			96,511		2,914		3.02
Total	Ps.	669,697	Ps.	55,521		8.29	%	Ps.	682,420	Ps.	55,386		8.12	%	Ps.	783,865	Ps.	57,916		7.39	%

(1) Represents assets or liabilities denominated in foreign currencies.  Values are presented in pesos.

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	IFRS for the year ended December 31,
	2012								2013								2014
	Average balance			Interest		Average nominal rate			Average balance			Interest		Average nominal rate			Average balance			Interest		Average nominal rate
	(Millions of pesos, except percentages)
Cash and loans and advances to credit institutions
Pesos	Ps.	12,898							Ps.	14,048							Ps.	13,916
Foreign currency(1)		815								861								834
Total	Ps.	13,713							Ps.	14,909							Ps.	14,750
Allowance for impairment losses
Pesos	Ps.	(12,762	)						Ps.	(10,355	)						Ps.	(13,301	)
Foreign currency(1)		(318	)							(424	)							(670	)
Total	Ps.	(13,080	)						Ps.	(10,779	)						Ps.	(13,971	)
Tangible assets
Pesos	Ps.	6,508							Ps.	6,458							Ps.	7,857
Total	Ps.	6,508							Ps.	6,458							Ps.	7,857
Intangible assets
Pesos	Ps.	1,872							Ps.	1,924							Ps.	2,039
Total	Ps.	1,872							Ps.	1,924							Ps.	2,039
Other non-interest-earning assets
Pesos	Ps.	99,871							Ps.	86,463							Ps.	124,645
Foreign currency(1)		180								327								9,966
Total	Ps.	100,051							Ps.	86,790							Ps.	134,611
Total non-interest-earning assets
Pesos	Ps.	108,387							Ps.	98,538							Ps.	135,156
Foreign currency(1)		677								764								10,130
Total	Ps.	109,064							Ps.	99,302							Ps.	145,286
Total average assets
Pesos	Ps.	705,190		Ps.	53,870		7.64	%	Ps.	707,488		Ps.	53,502		7.56	%	Ps.	822,510		Ps.	55,002		6.69	%
Foreign currency(1)		73,571			1,651		2.24			74,234			1,884		2.54			106,641			2,914		2.73
Total	Ps.	778,761		Ps.	55,521		7.13	%	Ps.	781,722		Ps.	55,386		7.09	%	Ps.	929,151		Ps.	57,916		6.23	%

(1) Represents assets or liabilities denominated in foreign currencies.  Values are presented in pesos.

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	IFRS for the year ended December 31,
	2012							2013							2014
	Average balance		Interest		Average nominal rate			Average balance		Interest		Average nominal rate			Average balance		Interest		Average nominal rate
	(Millions of pesos, except percentages)
Deposits from the Mexican Central Bank and credit institutions
Pesos	Ps.	94,051	Ps.	4,253		4.52	%	Ps.	60,294	Ps.	2,505		4.15	%	Ps.	108,133	Ps.	4,094		3.79	%
Foreign currency(1)		13,614		138		1.01			16,741		144		0.86			17,849		89		0.50
Total	Ps.	107,665	Ps.	4,391		4.08	%	Ps.	77,035	Ps.	2,649		3.44	%	Ps.	125,982	Ps.	4,183		3.32	%
Customer deposits—Demand accounts
Pesos	Ps.	126,752	Ps.	2,133		1.68	%	Ps.	154,825	Ps.	2,866		1.85	%	Ps.	193,255	Ps.	3,027		1.57	%
Foreign currency(1)		17,284		5		0.03			20,150		9		0.04			26,751		27		0.10
Total	Ps.	144,036	Ps.	2,138		1.48	%	Ps.	174,975	Ps.	2,875		1.64	%	Ps.	220,006	Ps.	3,054		1.39	%
Customer deposits—Savings accounts
Pesos	Ps.	24						Ps.	18						Ps.	14
Total	Ps.	24						Ps.	18						Ps.	14
Customer deposits—Time deposits
Pesos	Ps.	122,493	Ps.	5,414		4.42	%	Ps.	126,985	Ps.	4,971		3.91	%	Ps.	118,595	Ps.	3,776		3.18	%
Foreign currency(1)		9,209		27		0.29			9,707		26		0.27			11,049		32		0.29
Total	Ps.	131,702	Ps.	5,441		4.13	%	Ps.	136,692	Ps.	4,997		3.66	%	Ps.	129,644	Ps.	3,808		2.94	%
Customer deposits—Reverse repurchase agreements
Pesos	Ps.	104,175	Ps.	4,682		4.49	%	Ps.	89,003	Ps.	3,393		3.81	%	Ps.	76,178	Ps.	2,306		3.03	%
Total	Ps.	104,175	Ps.	4,682		4.49	%	Ps.	89,003	Ps.	3,393		3.81	%	Ps.	76,178	Ps.	2,306		3.03	%
Subordinated debentures
Foreign currency(1)	Ps.	—	Ps.	—				Ps.	228	Ps.	11		4.82	%	Ps.	17,305	Ps.	1,051		6.07	%
Total	Ps.	—	Ps.	—				Ps.	228	Ps.	11		4.82	%	Ps.	17,305	Ps.	1,051		6.07	%
Marketable debt securities and other financial liabilities
Pesos	Ps.	31,124	Ps.	1,648		5.29	%	Ps.	28,634	Ps.	1,390		4.85	%	Ps.	32,328	Ps.	1,226		3.79	%
Foreign currency(1)		2,048		88		4.30			13,052		604		4.63			13,586		611		4.50
Total	Ps.	33,172	Ps.	1,736		5.23	%	Ps.	41,686	Ps.	1,994		4.78	%	Ps.	45,914	Ps.	1,837		4.00	%
Other liabilities
Pesos	Ps.	70,087	Ps.	3,029		4.32	%	Ps.	78,847	Ps.	3,084		3.91	%	Ps.	98,062	Ps.	3,132		3.19	%
Total	Ps.	70,087	Ps.	3,029		4.32	%	Ps.	78,847	Ps.	3,084		3.91	%	Ps.	98,062	Ps.	3,132		3.19	%
Expense from hedging operation
Pesos	Ps.	—	Ps.	9				Ps.	—	Ps.	320				Ps.	—	Ps.	735
Foreign currency (1)		—		—					—		—					—		—
Total	Ps.	—	Ps.	9				Ps.	—	Ps.	320				Ps.	—	Ps.	735
Other interest expense
Pesos	Ps.	—	Ps.	213				Ps.	—	Ps.	216				Ps.	—	Ps.	199
Foreign currency(1)		—		—					—		—					—		—
Total	Ps.	—	Ps.	213				Ps.	—	Ps.	216				Ps.	—	Ps.	199
Total interest-bearing liabilities
Pesos	Ps.	548,706	Ps.	21,381		3.90	%	Ps.	538,606	Ps.	18,745		3.48	%	Ps.	626,565	Ps.	18,495		2.95	%
Foreign currency(1)		42,155		258		0.61			59,878		794		1.33			86,540		1,810		2.09
Total	Ps.	590,861	Ps.	21,639		3.66	%	Ps.	598,484	Ps.	19,539		3.26	%	Ps.	713,105	Ps.	20,305		2.85	%

(1) Represents assets or liabilities denominated in foreign currencies.  Values are presented in pesos.

95

	IFRS for the year ended December 31,
	2012							2013							2014
	Average balance		Interest		Average nominal rate			Average balance		Interest		Average nominal rate			Average balance		Interest		Average nominal rate
	(Millions of pesos, except percentages)
Customer deposits—Demand deposits
Pesos	Ps.	17,841						Ps.	22,032						Ps.	28,032
Foreign currency(1)		11							32							39
Total	Ps.	17,852						Ps.	22,064						Ps.	28,071
Other liabilities—non-interest-bearing
Pesos	Ps.	42,562						Ps.	49,106						Ps.	68,451
Foreign currency(1)		31,885							11,239							21,369
Total	Ps.	74,447						Ps.	60,345						Ps.	89,820
Total equity
Pesos	Ps.	95,601						Ps.	100,829						Ps.	98,155
Total	Ps.	95,601						Ps.	100,829						Ps.	98,155
Total non-interest-bearing liabilities and equity
Pesos	Ps.	156,004						Ps.	171,967						Ps.	194,638
Foreign currency(1)		31,896							11,271							21,408
Total	Ps.	187,900						Ps.	183,238						Ps.	216,046
Total liabilities and equity
Pesos	Ps.	704,710	Ps.	21,381		3.03	%	Ps.	710,573	Ps.	18,745		2.64	%	Ps.	821,203	Ps.	18,495		2.25	%
Foreign currency(1)		74,051		258		0.35			71,149		794		1.12			107,948		1,810		1.68
Total	Ps.	778,761	Ps.	21,639		2.78	%	Ps.	781,722	Ps.	19,539		2.50	%	Ps.	929,151	Ps.	20,305		2.19	%

(1) Represents assets or liabilities denominated in foreign currencies.  Values are presented in pesos.

Changes in our Net Interest Income—Volume and Rate Analysis

The following tables allocate the changes in our net interest income between changes in average volume and changes in average rate for the year ended December 31, 2014 compared to the year ended December 31, 2013.  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 “—Average Balance Sheet and Interest Rates.”

Change in Financial Income and Expense

	IFRS for the year ended December 31, 2014 and 2013
	Volume			Rate			Net Change
	(Millions of pesos)
INTEREST-EARNING ASSETS
Cash and balances with the Mexican Central Bank
Pesos	Ps.	39		Ps.	(242	)	Ps.	(203	)
Total	Ps.	39		Ps.	(242	)	Ps.	(203	)
Loans and advances to credit institutions
Pesos	Ps.	497		Ps.	(587	)	Ps.	(90	)
Foreign currency(1)		(11	)		(5	)		(16	)
Total	Ps.	486		Ps.	(592	)	Ps.	(106	)
Loans and advances to customers—excluding credit cards
Pesos	Ps.	4,396		Ps.	(1,793	)	Ps.	2,603
Foreign currency(1)		388			(184	)		204
Total	Ps.	4,784		Ps.	(1,977	)	Ps.	2,807

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	IFRS for the year ended December 31, 2014 and 2013
	Volume			Rate			Net Change
	(Millions of pesos)
Loans and advances to customers—credit cards
Pesos	Ps.	588		Ps.	(349	)	Ps.	239
Total	Ps.	588		Ps.	(349	)	Ps.	239
Debt instruments
Pesos	Ps.	622		Ps.	(1,193	)	Ps.	(571	)
Foreign currency(1)		754			84			838
Total	Ps.	1,376		Ps.	(1,109	)	Ps.	267
Income from hedging operations
Pesos	Ps.	(451	)	Ps.	-		Ps.	(451	)
Foreign currency (1)		-			-			-
Total	Ps.	(451	)	Ps.	-		Ps.	(451	)
Other interest-earning assets
Pesos	Ps.	(27	)	Ps.	-		Ps.	(27	)
Foreign currency(1)		4			-			4
Total	Ps.	(23	)	Ps.	-		Ps.	(23	)
Total interest-earning assets
Pesos	Ps.	5,664		Ps.	(4,164	)	Ps.	1,500
Foreign currency(1)		1,135			(105	)		1,030
Total	Ps.	6,799		Ps.	(4,269	)	Ps.	2,530

(1) Represents assets or liabilities denominated in foreign currencies.  Values are presented in pesos.

	IFRS for the year ended December 31, 2014 and 2013
	Volume			Rate			Net Change
	(Millions of pesos)
INTEREST-BEARING LIABILITIES
Deposits from the Mexican Central Bank and credit institutions
Pesos	Ps.	1,811		Ps.	(222	)	Ps.	1,589
Foreign currency(1)		6			(61	)		(55	)
Total	Ps.	1,817		Ps.	(283	)	Ps.	1,534
Customer deposits—Demand accounts
Pesos	Ps.	602		Ps.	(441	)	Ps.	161
Foreign currency(1)		7			11			18
Total	Ps.	609		Ps.	(430	)	Ps.	179
Customer deposits—Savings accounts
Pesos	Ps.	-		Ps.	-		Ps.	-
Foreign currency(1)		-			-			-
Total	Ps.	-		Ps.	-		Ps.	-
Customer deposits—Time deposits
Pesos	Ps.	(267	)	Ps.	(928	)	Ps.	(1,195	)
Foreign currency(1)		4			2			6
Total	Ps.	(263	)	Ps.	(926	)	Ps.	(1,189	)
Customer deposits—Reverse repurchase agreements
Pesos	Ps.	(388	)	Ps.	(699	)	Ps.	(1,087	)
Foreign currency(1)		-			-			-
Total	Ps.	(388	)	Ps.	(699	)	Ps.	(1,087	)
Subordinated debentures
Foreign currency(1)	Ps.	1,037		Ps.	3		Ps.	1,040
Total	Ps.	1,037		Ps.	3		Ps.	1,040

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	IFRS for the year ended December 31, 2014 and 2013
	Volume			Rate			Net Change
	(Millions of pesos)
Marketable debt securities and other financial liabilities
Pesos	Ps.	140		Ps.	(304	)	Ps.	(164	)
Foreign currency(1)		24			(17	)		7
Total	Ps.	164		Ps.	(321	)	Ps.	(157	)
Other liabilities
Pesos	Ps.	614		Ps.	(566	)	Ps.	48
Foreign currency(1)		-			-			-
Total	Ps.	614		Ps.	(566	)	Ps.	48
Expense from hedging operations
Pesos	Ps.	415		Ps.	-		Ps.	415
Foreign currency(1)		-			-			-
Total	Ps.	415		Ps.	-		Ps.	415
Other interest expense
Pesos	Ps.	(17	)	Ps.	-		Ps.	(17	)
Foreign currency(1)		-			-			-
Total	Ps.	(17	)	Ps.	-		Ps.	(17	)
Total interest-bearing liabilities
Pesos	Ps.	2,910		Ps.	(3,160	)	Ps.	(250	)
Foreign currency(1)		1,078			(62	)		1,016
Total	Ps.	3,988		Ps.	(3,222	)	Ps.	766

(1) Represents assets or liabilities denominated in foreign currencies.  Values are presented in pesos.

Assets

Earning Assets—Yield Spread

The following tables analyze 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 periods indicated.  You should read this table and the footnotes thereto in light of our observations noted in “—Average Balance Sheet and Interest Rates.”

	IFRS
	For the year ended December 31,
	2012			2013			2014
	(Millions of pesos, except percentages)
Net Interest Margin and Spread
Average earning assets
Pesos	Ps.	596,803		Ps.	608,950		Ps.	687,354
Foreign currency(1)		72,894			73,470			96,511
Total	Ps.	669,697		Ps.	682,420		Ps.	783,865
Net interest income
Pesos	Ps.	32,489		Ps.	34,757		Ps.	36,507
Foreign currency(1)		1,393			1,090			1,104
Total	Ps.	33,882		Ps.	35,847		Ps.	37,611
Gross yield(2)
Pesos		9.03	%		8.79	%		8.00	%
Foreign currency(1)		2.26			2.56			3.02
Total		8.29	%		8.12	%		7.39	%
Net yield(3)
Pesos		5.44	%		5.71	%		5.31	%
Foreign currency(1)		1.91			1.48			1.14
Total		5.06	%		5.25	%		5.05	%
Yield spread(4)
Pesos		5.13	%		5.31	%		4.85	%
Foreign currency(1)		1.65			1.23			0.93
Total		4.63	%		4.86	%		4.54	%

(1) Represents assets or liabilities denominated in foreign currencies.  Values are presented in pesos.

(2) Gross yield is the quotient of interest divided by average interest-earning assets, which are loans, receivables, debt instruments and other financial assets that yield interest or similar income.

(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 rate of interest-bearing liabilities.

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Return on Average Equity and Assets

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

	IFRS
	For the year ended December 31,
	2012			2013			2014
	(Percentages)
Return on Average Equity and Assets
ROAA: Return on average total assets		2.24	%		1.83	%		1.43	%
ROAE: Return on average equity		18.25			14.16			13.54
Dividend pay-out ratio(1)		41.85			146.00			26.13
Average equity as a percentage of average total assets		12.28	%		12.90	%		10.56	%

(1) Dividends declared per share divided by net income per share. On March 5, 2012, we paid a dividend of Ps.11,350 million, equal to Ps.1.67 per share, with respect to fiscal year 2011.  On September 13, 2012, we paid a dividend of Ps.7,300 million, equal to Ps.1.08 per share, in advance with respect to fiscal year 2012. On August 30, 2013, we paid a dividend of Ps.3,950 million, equal to Ps.0.58 per share, in advance with respect to fiscal year 2013. On December 27, 2013, we paid a dividend of Ps.4,900 million, equal to Ps.0.72 per share, in advance with respect to fiscal year 2013. On December 27, 2013, we paid an extraordinary dividend of Ps.12,000 million, equal to Ps.1.77 per share. On December 29, 2014, we paid a dividend of Ps.3,473 million, equal to Ps.0.51 per share.

Interest-Earning Assets

The following table shows 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 “—Average Balance Sheet and Interest Rates.”

	IFRS
	For the years ended December 31,
	2012			2013			2014
	(Percentages)
Average Interest-Earning Assets
Cash and balances with the Mexican Central Bank		4.70	%		4.60	%		4.15	%
Loans and advances to credit institutions		12.38			13.57			12.65
Loans and advances to customers – excluding credit cards		45.08			49.47			50.36
Loans and advances to customers – credit cards		4.92			5.67			5.24
Debt instruments		32.92			26.69			27.60
Total interest-earning assets		100.00	%		100.00	%		100.00	%

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Investment Securities

At December 31, 2012, 2013 and 2014, the book value of our investment securities was Ps.171.3 billion, Ps.171.2 billion and Ps.204.9 billion, respectively (representing 21.6%, 20.0% and 21.6% of our total assets at such dates). Mexican government securities and instruments issued by the Mexican Central Bank represented Ps.150.4 billion, or 87.8%, of our investment securities at December 31, 2012, Ps.141.0 billion, or 82.4%, of our investment securities at December 31, 2013 and Ps.160 billion, or 78.1%, of our investment securities at December 31, 2014.  For a discussion of how we value our investment securities, see note 2 to our audited financial statements.

The following table shows the book values of our investment securities by type of counterparty at each of the dates indicated.  As of December 31, 2012, 2013 and 2014, Ps.41.3 billion, Ps.41.5 billion and Ps.52.1 billion, of our available-for-sale debt instruments, respectively, were issued by the Mexican government and by the Mexican Central Bank.  As of December 31, 2012, 2013 and 2014, the aggregate book value of our debt instruments issued by the Mexican government, excluding instruments issued by the Mexican Central Bank, was equal to 91.1%, 105.0% and 65.5%, of our total equity, respectively, and the aggregate book value of our debt instruments issued by the Mexican Central Bank was equal to 59.9%, 47.4% and 90.8% of our total equity, respectively.

	IFRS
	For the year ended December 31,
	2012		2013		2014
	(Millions of pesos)
Investment Securities
Debt instruments issued by the Mexican government (excluding Mexican Central Bank)	Ps.	90,735	Ps.	97,172	Ps.	67,039
Debt instruments issued by the Mexican Central Bank		59,645		43,825		92,959
Foreign government debt securities		—		13,440		24,734
Debt instruments issued by private sector		8,247		11,285		14,919
Total debt instruments		158,627		165,722		199,651
Total equity securities		12,652		5,448		5,259
Total investment securities	Ps.	171,279	Ps.	171,170	Ps.	204,910

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The following table analyzes the expected maturities of our debt investment securities (before impairment allowance) and the weighted average yield at December 31, 2014.

	Maturity as of December 31, 2014
	Less than 1 year		Average yield			1 to 5 years		Average yield			5 to 10 years		Average yield			More than 10 years		Average yield			Total
	(Millions of pesos, except percentages)
Investment Securities
Debt instruments issued by the Mexican government (excluding Mexican Central Bank)	Ps.	11,503		0.88	%	Ps.	39,229		4.39	%	Ps.	9,337		3.21	%	Ps.	6,970		5.77	%	Ps.	67,039
Debt instruments issued by the Mexican Central Bank		682		3.00			61,228		3.28			31,049		2.99			-		0.00			92,959
Foreign government debt securities		41		0.00			24,693		4.06			-		0.00			-		0.00			24,734
Debt instruments issued by the private sector		9,458		3.74			2,668		5.22			2,793		5.67			-		0.00			14,919
Total debt instruments	Ps.	21,684		1.90	%	Ps.	127,818		4.24	%	Ps.	43,179		3.96	%	Ps.	6.970		1.44	%	Ps.	199,651

Loans and Advances to Credit Institutions

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

	IFRS
	For the year ended December 31,
	2012		2013		2014
	(Millions of pesos)
Loans and Advances to Credit Institutions
Time deposits	Ps.	115	Ps.	101	Ps.	98
Call money transactions granted		26,822		17,560		11,098
Repurchase agreements		59,963		70,594		27,379
Guarantee deposits—collateral delivered		17,285		15,272		20,758
Other demand accounts		6,182		8,316		9,186
Reciprocal accounts		1,467		9,997		26,167
Total	Ps.	111,834	Ps.	121,840	Ps.	94,686

Loan Portfolio

At December 31, 2012, 2013 and 2014 our total loans and advances to customers, which excludes our loans and advances to credit institutions and repurchase agreements, equaled Ps.355,089 million, Ps.398,516 million and Ps.472,453 million, respectively, representing 44.8%, 46.45% and 49.7%, of our total assets at such dates, respectively.  Net of allowance for impairment losses, loans and advances to customers equaled Ps.345,702 million, Ps.384,752 million and Ps.457,255 million, at December 31, 2012, 2013 and 2014, respectively, representing 43.6%, 44.9% and 48.1%, of our total assets at such dates. We also have loan commitments drawable by third parties, which amounted to Ps.139,152 million, Ps.140,643 million and Ps.128,785 million, at December 31, 2012, 2013 and 2014, respectively.  Loan commitments drawable by third parties include mostly credit card lines and commercial commitments.  While credit cards lines are unconditionally cancelable by the issuer, commercial commitments are generally one-year facilities, subject to an evaluation of the customer’s projected cash flows and financial history.  The loans guaranteed by governmental entities are reported in non-performing loans without impact on or adjustment relating to the amount guaranteed, and therefore the guarantees have no impact on our non-performing loan ratios.

Types of Loans by Type of Customer

The following tables analyze our loans and advances to customers (excluding loans and advances to credit institutions and repurchase agreements), by type of customer loan, at each of the dates indicated.  For each category

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of loan, we maintain specific risk management policies in line with the standards of the Santander Group, and as managed and monitored by our Board of Directors through the Comprehensive Risk Management Committee.  Our credit approval processes for each category of loan are structured primarily around our business segments.  See “Item 11. Quantitative and Qualitative Disclosures About Risk—Credit Risk” for details on our credit approval policies for retail and wholesale lending.

The Bank has a diversified loan portfolio with no concentration exceeding 10% of total loans.

	IFRS
	For the year ended December 31,
	2010			2011			2012			2013			2014
	(Millions of pesos)
Loans by Type of Customer
Public sector	Ps.	15,841		Ps.	33,378		Ps.	38,732		Ps.	37,387		Ps.	55,865
Commercial, financial and industrial		143,179			173,357			179,802			199,474			231,818
Mortgage		35,776			64,043			72,290			91,859			108,184
Installment loans to individuals		42,044			51,097			64,265			69,796			76,586
Revolving consumer credit card loans		25,097			28,637			36,973			39,782			42,104
Non-revolving consumer loans		16,947			22,460			27,292			30,014			34,482
Total loans		236,840			321,875			355,089			398,516			472,453
Allowance for impairment losses		(7,558	)		(7,247	)		(9,387	)		(13,764	)		(15,198	)
Loans net of allowance for impairment losses	Ps.	229,282		Ps.	314,628		Ps.	345,702		Ps.	384,752		Ps.	457,255

The following table shows the percentage of our non-performing loans by type of customer, for the periods indicated.

	IFRS
	For the year ended December 31,
	2010			2011			2012			2013			2014
	(Percentages)
Non-performing Loans as a Percentage of Total Loans by Type of Customer
Public sector		0.0	%		0.0	%		0.0	%		0.0	%		0.00	%
Commercial, financial and industrial		1.7			1.5			1.1			4.2			4.1
Mortgage		2.0			3.5			3.4			3.9			4.9
Installment loans to individuals		4.5			3.0			4.6			4.7			4.7
Revolving consumer credit card loans		5.1			3.1			4.0			3.3			4.7
Non-revolving consumer loans		3.7			2.8			5.3			6.4			4.7
Total		2.1	%		2.0	%		2.1	%		3.8	%		3.9	%

Maturity

The following tables set forth an analysis by maturity of our loans and advances to customers by type of loan as of December 31, 2014.

	IFRS as of December 31, 2014
	Less than 1 year						1 to 5 Years					Over 5 years					Total
	Balance			% of total			Balance		% of total			Balance		% of total			Balance			% of total
	(Millions of pesos, except percentages)
Public sector	Ps.	25,299			12.25	%	Ps.	16,521		10.01	%	Ps.	14,045		13.90	%	Ps.	55,865			11.82	%
Commercial, financial and industrial		142,986			69.28			77,841		47.18			10,991		10.87			231,818			49.07
Mortgages		13,508			6.55			29,675		17.99			65,001		64.31			108,184			22.90
Installment loans to individuals		24,591			11.92			40,953		24.82			11,042		10.92			76,586			16.21
Revolving consumer credit card loans		10,456			5.07			20,606		12.49			11,042		10.92			42,104			8.91
Non-revolving consumer loans		14,135			6.85			20,347		12.33			-		0.00			34,482			7.30
Total loans		206,384			100.00	%		164,990		100.00	%		101,079		100.00	%		472,453			100.00	%
Allowance for impairment losses		(15,198	)					-					-					(15,198	)
Loans net of allowance for impairment losses	Ps.	191,186					Ps.	164,990				Ps.	101,079				Ps.	457,255

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Fixed and Variable Rate Loans

The following table sets forth a breakdown of our fixed and floating rate loans having a maturity of more than one year as of December 31, 2014.

	IFRS as of December 31, 2014
	(Millions of pesos)
Interest Rate Formula
Fixed interest rate	Ps.	178,576
Floating interest rate		293,877
Total	Ps.	472,453

Non-Accrual of Interest

The following table shows (i) the amount of gross interest income that would have been recorded on our non-accrual and restructured loans if such loans had been current in accordance with their original terms and had been outstanding throughout the reported periods or since origination if outstanding for less than the entire period and (ii) the amount of interest income that was recorded for such loans in the periods presented.  We do not have any accruing loans which are contractually past due 90 days or more as to principal or interest payments.  In general, the total interest that we received on our restructured loans in 2010 through 2014 was greater than the amount of non-accrued interest on the basis of the original contractual terms because the restructurings resulted in interest rates that were higher on average than the contractual interest rates that preceded such restructurings.

	IFRS
	For the year ended December 31,
	2010		2011		2012		2013		2014
	(Millions of pesos)
Non-accrued interest on the basis of contractual terms owed:
Non-accrual loans(1)	Ps.	92	Ps.	171	Ps.	211	Ps.	561	Ps.	916
Restructured loans(1)		324		299		413		503		412
Interest received:
Non-accrual loans(1)	Ps.	45	Ps.	108	Ps.	72	Ps.	174	Ps.	250
Restructured loans(1)		369		322		521		549		490

(1) These amounts do not include non-accrued interest on the basis of contractual terms owed and interest received from revolving consumer credit card loans due to the revolving nature of these types of loans.

The restructured loans referred to in the tables above comprise non-performing loans that have been renegotiated.  However, our renegotiated loans include both renegotiations of performing loans and renegotiations of loans in non-performing status, as contractual terms of a loan may be modified not only due to concerns about the customer’s ability to meet contractual payments but also for customer retention purposes and other factors not

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related to current or potential credit deterioration of the customer.  See note 12.e to our audited financial statements for additional information about our renegotiated loans.

The following table shows the cumulative balance of renegotiated loans as of the dates presented.

	As of December 31,
	2012		2013		2014
	(Millions of pesos)
Commercial	Ps.	14,434	Ps.	13,668	Ps.	11,120
Consumer		850		715		638
Mortgage		831		1,906		4,174
Credit card		1,664		1,541		1,394
Total	Ps.	17,779	Ps.	17,830	Ps.	17,326

Movements in Allowance for Impairment Losses

The following tables analyze the movements in our allowance for impairment losses for each of the periods indicated below, not including recoveries.  For further discussion of movements in the allowance for impairment losses, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Results of Operations for the Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013—Impairment Losses on Financial Assets (Net)” and “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Results of Operations for the Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012—Impairment Losses on Financial Assets (Net).”

	IFRS
	For the year ended December 31,
	2010			2011			2012			2013			2014
	(Millions of pesos)
Movements in Allowance for Impairment Losses
Allowance for impairment losses at beginning of year	Ps.	10,077		Ps.	7,558		Ps.	7,247		Ps.	9,387		Ps.	13,764
Impairment losses on loans and receivables(1)		7,894			6,620			10,338			16,888			14,831
Others		(3	)		(13	)		12			19			113
Charge-offs against allowance for impairment losses		(10,410	)		(6,918	)		(8,210	)		(12,530	)		(13,510	)
Allowance for impairment losses at end of year	Ps.	7,558		Ps.	7,247		Ps.	9,387		Ps.	13,764		Ps.	15,198

(1) The amount of impairment losses on financial assets – Loans and receivables reduced by loans recovered net of legal expenses for an amount of Ps.922 million in 2010, Ps.1,185 million in 2011, Ps.1,368 million in 2012, Ps.1,983 million in 2013 and Ps.1,699 million in 2014, is recorded under Impairment losses on financial assets (net) – Loans and receivables in the consolidated income statement.

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The tables below show a breakdown of recoveries, impairment losses on loans and receivables and charge-offs against allowance for impairment losses by type of borrower for the periods indicated.

	IFRS
	For the year ended December 31,
	2010			2011			2012			2013			2014
	(Millions of pesos)
Recoveries of Loans Previously Charged Off – by type
Commercial, financial and industrial	Ps.	(274	)	Ps.	(437	)	Ps.	(536	)	Ps.	(809	)	Ps.	(534	)
Mortgage		(413	)		(360	)		(658	)		(824	)		(888	)
Installment loans to individuals		(911	)		(889	)		(826	)		(923	)		(1,046	)
Revolving consumer credit card loans		(788	)		(722	)		(613	)		(706	)		(696	)
Non-revolving consumer loans		(123	)		(167	)		(213	)		(217	)		(350	)
Expenses paid to recovery agencies		676			501			652			573			769
Total recoveries of loans previously charged off	Ps.	(922	)	Ps.	(1,185	)	Ps.	(1,368	)	Ps.	(1,983	)	Ps.	(1,699	)

	IFRS
	For the year ended December 31,
	2010		2011		2012		2013		2014
	(Millions of pesos)
Impairment Losses on Loans and Receivables
Commercial, financial and industrial	Ps.	1,556	Ps.	1,261	Ps.	1,166	Ps.	5,331	Ps.	3,925
Mortgage		747		726		1,014		1,071		1,203
Installment loans to individuals		5,591		4,633		8,158		10,486		9,703
Revolving consumer credit card loans		3,859		2,710		4,753		5,995		5,837
Non-revolving consumer loans		1,732		1,923		3,405		4,491		3,866
Total impairment losses on loans and receivables(1)	Ps.	7,894	Ps.	6,620	Ps.	10,338	Ps.	16,888	Ps.	14,831

(1) The amount of impairment losses on financial assets – Loans and receivables reduced by loans recovered net of legal expenses for an amount of Ps.922 million in 2010, Ps.1,185 million in 2011, Ps.1,368 million in 2012, Ps.1,983 million in 2013 and Ps.1,699 million in 2014, is recorded under Impairment losses on financial assets (net) – Loans and receivables in the consolidated income statement.

	IFRS
	For the year ended December 31,
	2010		2011		2012		2013		2014
	(Millions of pesos)
Charge-offs against Allowance for Impairment Losses(1)
Commercial, financial and industrial	Ps.	1,716	Ps.	1,086	Ps.	1,449	Ps.	2,811	Ps.	3,139
Mortgage		509		419		472		631		642
Installment loans to individuals		8,185		5,413		6,289		9,088		9,729
Revolving consumer credit card loans		6,215		3,857		4,055		5,467		5,631
Non-revolving consumer loans		1,970		1,556		2,234		3,621		4,098
Total charge-offs against allowance for impairment losses	Ps.	10,410	Ps.	6,918	Ps.	8,210	Ps.	12,530	Ps.	13,510

(1) See note 12 to our audited financial statements included in this annual report on Form 20-F for more details.

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The tables below show a breakdown of the allowance for impairment losses by type of borrowers and the percentage of loans in each category as a share of total loans at the dates indicated.

	IFRS
	For the year ended December 31,
	2010		% of total allowance			2011		% of total allowance			2012		% of total allowance			2013		% of total allowance			2014		% of total allowance
	(Millions of pesos, except percentages)
Allowance for Impairment Losses
Commercial, financial and industrial	Ps.	2,745		36.32	%	Ps.	2,913		40.20	%	Ps.	2,608		27.78	%	Ps.	5,147		37.39	%	Ps.	6,031		39.68	%
Mortgage		149		1.97			461		6.36			1,038		11.06			1,478		10.74			2,054		13.51
Installment loans to individuals		4,664		61.71			3,873		53.44			5,741		61.16			7,139		51.87			7,113		46.81
Revolving consumer credit card loans		3,613		47.80			2,461		33.96			3,159		33.65			3,688		26.79			3,893		25.62
Non-revolving consumer loans		1,051		13.91			1,412		19.48			2,582		27.51			3,451		25.08			3,220		21.19
Total	Ps.	7,558		100.00	%	Ps.	7,247		100.00	%	Ps.	9,387		100.00	%	Ps.	13,764		100.00	%	Ps.	15,198		100.00	%

Impaired Loans

The following tables show our impaired loans.

	IFRS
	For the year ended December 31,
	2010			2011			2012			2013			2014
	(Millions of pesos, except percentages)
Impaired Loans
Non-performing loans	Ps.	5,004		Ps.	6,382		Ps.	7,329		Ps.	15,175		Ps.	18,430
Non-performing loans as a percentage of total loans		2.11	%		1.98	%		2.06	%		3.81	%		3.90	%
Loan charge-offs as a percentage of average total loans		4.93	%		2.38	%		2.45	%		3.33	%		3.10	%

Movement of Impaired Loans

The following tables show the movement in our impaired loans.

	IFRS
	For the year ended December 31,
	2010			2011			2012			2013			2014
	(Millions of pesos)
Movement of impaired loans
Beginning balance	Ps.	6,311		Ps.	5,004		Ps.	6,382		Ps.	7,329		Ps.	15,175
Additions		14,002			12,809			15,523			26,408			24,848
Transfers to performing loans		(4,899	)		(4,513	)		(6,366	)		(6,032	)		(8,083	)
Charge-off		(10,410	)		(6,918	)		(8,210	)		(12,530	)		(13,510	)
Balance at year-end	Ps.	5,004		Ps.	6,382		Ps.	7,329		Ps.	15,175		Ps.	18,430

Impaired Asset Ratios

The following tables show the ratio of our impaired assets to total computable credit risk and our coverage ratio at the dates indicated.

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	IFRS
	For the year ended December 31,
	2010			2011			2012			2013			2014
	(Millions of pesos, except percentages)
Impaired assets and ratios
Computable credit risk(1)	Ps.	259,394		Ps.	349,009		Ps.	381,660		Ps.	425,701		Ps.	503,232
Non-performing loans		5,004			6,382			7,329			15,175			18,430
Commercial, financial and industrial		2,401			2,609			1,912			8,325			9,575
Mortgage		707			2,249			2,472			3,590			5,249
Installment loans to individuals		1,896			1,524			2,945			3,260			3,606
Revolving consumer credit card loans		1,276			891			1,492			1,332			1,980
Non-revolving consumer loans		620			633			1,453			1,928			1,626
Allowance for impairment losses		7,558			7,247			9,387			13,764			15,198
Ratios
Non-performing loans to computable credit risk(1)		1.93	%		1.83	%		1.92	%		3.56	%		3.66	%
Coverage ratio(2)		151.04	%		113.55	%		128.08	%		90.70	%		82.46	%

(1) Computable credit risk is the sum of the face amounts of loans (including non-performing loans), guarantees and documentary credits.  When guarantees or documentary credits are contracted, we book them as off-balance sheet accounts.  As of the date we make the payment to the beneficiary, we claim the payment from the solicitor (i.e., the debtor in the case of a guarantee or the buyer in the case of a documentary credit).  The account becomes non-performing as of the date when the payment was due if we do not receive payment from the solicitor on that date.  We maintain the account as a non-performing loan until recovery or, in the case of practical impossibility for recovery (e.g., when the creditor is declared bankrupt or upon the death of a creditor who is a natural person), until our Comprehensive Risk Management Committee decides to charge off the account.  Such decision is at the discretion of our Comprehensive Risk Management Committee.

(2) Allowance for impairment losses as a percentage of non-performing loans.

Liabilities

Deposits

The principal components of our deposits are demand and time deposits. Our retail customers are the principal source of our demand and time deposits.

	IFRS
	For the year ended December 31,
	2010		2011		2012		2013		2014
	(Millions of pesos)
Deposits from Mexican Central Bank and credit institutions
Reciprocal accounts and overnight deposits	Ps.	13,790	Ps.	16,380	Ps.	9,643	Ps.	15,592	Ps.	6,790
Reverse repurchase agreements		47,218		45,707		19,603		18,519		33,752
Time deposits		1,317		8,006		9,578		12,956		19,977
Other accounts		4,539		5,043		4,064		23,122		21,533
Accrued interest		28		57		49		27		26
Total deposits from Mexican Central Bank and credit institutions	Ps.	66,892	Ps.	75,193	Ps.	42,937	Ps.	70,216	Ps.	82,078
Customer deposits
Current accounts		156,840		177,986		210,837		257,952		294,062
Savings accounts		25		24		24		2		1
Other deposits		9,984		9,122		11,965		11,579		17,069
Time deposits		114,007		128,695		131,476		119,903		133,587
Reverse repurchase agreements		65,021		72,562		51,589		57,506		69,726
Accrued interest		187		259		206		182		183
Total customer deposits	Ps.	346,064	Ps.	388,648	Ps.	406,097	Ps.	447,124	Ps.	514,628
Total deposits	Ps.	412,956	Ps.	463,841	Ps.	449,034	Ps.	517,340	Ps.	596,706

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Short-Term Borrowings

The following table shows our short-term borrowings including securities that we sold under reverse repurchase agreements for the purpose of funding our operations as well as short positions from financial liabilities arising out of the outright sale of financial assets acquired under reverse repurchase agreements.

	IFRS
	For the year ended December 31,
	2012					2013					2014
	Amount		Average rate			Amount		Average rate			Amount		Average rate
	(Millions of pesos, except percentages)
Short-Term Borrowings
Reverse repurchase agreements:
At December 31	Ps.	71,193		4.06	%	Ps.	76,024		2.74	%	Ps.	102,646		2.99	%
Average during year		147,332		4.10			116,505		3.38			156,689		3.12
Maximum month-end balance		206,995		4.32			155,413		3.94			188,532		3.40
Short positions:
At December 31(1)	Ps.	55,794		4.20	%	Ps.	51,964		3.47	%	Ps.	27,297		3.11	%
Average during year		51,444		4.17			55,075		3.64			84,363		3.23
Maximum month-end balance		97,424		4.39			113,751		4.31			109,596		3.52
Total short-term borrowings at year end	Ps.	126,987		4.13	%	Ps.	127,988		3.11	%	Ps.	129,943		3.05	%

(1) This amount forms part of the outstanding balance of “Short positions” in our consolidated balance sheet.  See note 11.b to our audited financial statements included in this annual report on Form 20-F.

The Mexican Financial System

General

Mexico’s financial system is currently comprised of commercial banks, national development banks, brokerage firms, development trust funds and other non-bank institutions, such as insurance and reinsurance companies, bonding companies, credit unions, savings and loans companies, foreign exchange houses, factoring companies, bonded warehouses, financial leasing companies, mutual fund companies, pension fund management companies, limited purpose financial institutions, multiple purpose financial institutions and limited purpose banks.  In 1990, the Mexican government adopted the Mexican Financial Groups Law aimed at achieving the benefits of universal banking, which permits a number of financial services companies to operate as a single financial services holding company.  Most major Mexican financial institutions are members of financial groups.

The principal financial authorities that regulate financial institutions are the SHCP, the Mexican Central Bank, the CNBV, the Mexican National Commission for the Retirement Savings Systems (Comisión Nacional del Sistema de Ahorro para el Retiro, or CONSAR), the Mexican National Insurance and Bonding Commission (Comisión Nacional de Seguros y Fianzas, or CNSF), the Mexican Institute for the Protection of Bank Savings (Instituto para la Protección al Ahorro Bancario, or IPAB) and the Mexican National Commission for the Protection and Defense of Financial Service Users (Comisión Nacional para la Protección y Defensa de los Usuarios de Servicios Financieros, or CONDUSEF).

Financial Groups

The enactment of the Mexican Financial Groups Law in 1990 permitted the development of the universal banking model in Mexico.  By July 1992, most major Mexican financial institutions had become part of financial groups controlled by a financial services holding company, such as Grupo Financiero Santander Mexico, and made up of a number of financial operating entities.  The operations of financial services holding companies are generally restricted to holding shares representing the capital stock of financial services operating subsidiaries.  Such subsidiaries, whether direct or indirect, may include Mexican banks, broker-dealers, insurance companies, bonding companies, mutual fund operators, mutual funds, auxiliary credit organizations (such as factoring, financial leasing and bond-warehousing companies), Sofomes, foreign exchange service providers and retirement fund administrators.  Financial groups may be comprised by a holding company and any two financial institutions (which may be of the same type of financial institution), provided that a financial group may not be comprised solely by the holding company and two Sofomes.

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The Mexican Financial Groups Law permits entities controlled by the same financial services holding company:

· to act jointly before the public, offer services that are supplemental to the services provided by the other and hold themselves out as part of the same group;

· use similar corporate names; and

· conduct their activities in the offices and branches of other entities part of the same group.

In addition, the Mexican Financial Groups Law requires that each financial services holding company enter into an agreement with each of its financial services subsidiaries pursuant to which the holding company agrees to be responsible secondarily and without limitation for the satisfaction of the obligations incurred by its subsidiaries as a result of the activities that each such subsidiary is authorized to conduct under the applicable laws and regulations, and is fully responsible for certain losses of its subsidiaries, up to the total amount of the holding company’s assets.  For such purposes, a subsidiary is deemed to have losses if:

· its shareholders’ equity represents an amount that is less than the amount the subsidiary is required to have as minimum paid-in capital under applicable law;

· capital and reserves are less than the subsidiary is required to have under applicable law; and

· in the judgment of the regulatory commission supervising the subsidiary’s activities, the subsidiary is insolvent and cannot fulfill its obligations.

No subsidiary of any such holding company is responsible for the losses of the holding company or any other subsidiary thereof.

We have entered into such agreements with our subsidiaries, as described under “—Supervision and Regulation—Financial Groups’ Statutory Responsibility.”

The Mexican Congress recently approved a new Mexican Financial Groups Law.  Relevant changes include permitting financial services holding companies to hold minority interests in financial institutions, with the authorization from the SHCP, setting forth specific duties of care and loyalty applicable to board members, even if the financial services holding company is not public, permitting foreign governmental entities to acquire controlling interests and indirect interests in financial services holding companies, and strengthening the required regulatory supervision of consolidated financial groups. In addition financial services holding companies may be required, pursuant to general rules issued by Mexican regulators, to maintain consolidated capital, in connection with risks affecting such companies. Furthermore, financial services holding companies could be required to maintain a minimum net capital, arising from permanent investments made in subsidiaries, and may be subject to corrective measures (such as non-distribution of dividends, suspending payments of interest and deferring payments of principal, ordering the sale of assets, suspending payments of bonuses).

Authorities of the Mexican Financial System

The principal authorities that regulate and supervise financial institutions related to the activities of Grupo Financiero Santander Mexico in Mexico are the Mexican Central Bank, the SHCP, the CNBV, the CONSAR, the CNSF, the IPAB and the CONDUSEF.  These authorities are subject to a number of organic laws and other administrative regulations that govern their regulatory, supervisory and other powers.  Also, these entities continually enact administrative regulations within the scope of their respective authority for the regulation of the corresponding financial entities, as further mentioned below.  Grupo Financiero Santander Mexico, as a financial services holding company, is subject to the supervision and regulation of the CNBV.  In addition, our financial subsidiaries are subject to the supervision and regulation of the corresponding financial authority, and are in constant interaction with such authorities during their normal course of business.

Banco de México

Banco de México is the Mexican Central Bank.  It is an autonomous entity that is not subordinated to any other body in the Mexican government.  Its primary purpose is to issue the Mexican currency, as well as to maintain the

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acquisition power of such currency, to establish reference interest rates and to ensure that the banking and payments systems perform under safe and sound principles.

Monetary policy decisions are taken by the members of the Governing Board of the Mexican Central Bank.  The Governing Board is composed of a Governor and four Deputy Governors, all of which are appointed by the President and ratified by the Senate or the Permanent Commission of Congress, as applicable.

Among the decisions that only the Governing Board may take are the authorization of the issuance of currency and the minting of coins, the decision to extend credit to the Mexican government, the determination of policies and criteria that the Mexican Central Bank uses in its operations and in the regulations that it issues, and the approval of its rules of procedure, budget, working conditions and similar internal matters.

SHCP

The SHCP is the regulator in charge of proposing, conducting and controlling the economic policy of the Mexican government in matters of economics, tax, finance, public budget, public debt and income.  Together with the CNBV and the Mexican Central Bank, it is the primary regulator of commercial banks and national development banks.  The SHCP participates in the process of incorporation, revocation, operation, merger, control and stock purchase of financial institutions.

CNBV

The CNBV is a governmental body subordinate to the SHCP, having independent technical and executive powers.  The CNBV is in charge of the supervision and regulation of financial entities, with the purpose of ensuring their stability and sound performance, as well as the maintenance of a safe and sound financial system.  The scope of the CNBV’s authority includes inspection, supervision, prevention and correction powers.  The primary financial entities regulated by the CNBV are commercial banks, national development banks, regulated multiple purpose financial institutions, brokerage firms, as well as publicly traded companies and other entities that have issued debt securities to the public.  The CNBV is also in charge of granting and revoking banking and securities brokerage licenses in Mexico.

CONSAR

The CONSAR is a governmental body subordinated to the SHCP, having independent technical and executive powers.  The CONSAR was created in 1997 as part of a comprehensive reform of the retirement savings and pensions system, and is in charge of protecting the retirement savings of employees through the regulation and supervision of Afores, entities that manage independent retirement accounts, and Siefores, specialized pension funds.  The CONSAR evaluates risks borne by the participants in the retirement savings system and makes sure these participants are solvent and maintain adequate liquidity levels.

CNSF

The CNSF is a governmental body ascribed to the SHCP, having independent technical and executive powers.  The CNSF is in charge of the supervision and regulation of insurance and bonding companies, promoting the safe and sound development of the insurance and guaranty bond financial sectors.

IPAB

After the 1994 financial crisis, the Mexican government created the IPAB, an independent, decentralized governmental institution with its own legal standing and assets.  The IPAB’s primary purpose is the protection and insurance of bank deposits, also having powers to provide solvency to banking institutions, contributing to the safe and sound development of the banking sector and the national payments system.  The IPAB is also entitled to acquire assets from distressed banking institutions.

CONDUSEF

The CONDUSEF is a governmental body under the SHCP.  The CONDUSEF is in charge of the provision of financial orientation, guidance and information to customers of financial services, as well as implementation of corrective measures through the processing of claims by such customers, with the primary purpose of protecting

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customer’s interests.  The CONDUSEF may also act as arbitrator in disputes between financial institutions and their customers and establish regulations and impose sanctions to financial institutions in order to protect their clients.

The History of the Banking Sector

Banking activities in Mexico have been and continue to be affected by prevailing conditions in the Mexican economy, and the demand for and supply of banking services have been vulnerable to economic downturns and changes in government policies.  Prior to the early 1990s, lending by Mexican banks to the private sector had fallen to very low levels.  It is estimated, however, that by the end of 1994, average total indebtedness of the private sector to Mexican commercial banks had grown to represent approximately 40.7% of Mexican GDP, with mortgage loans and credit card indebtedness generally growing faster than commercial loans.  The devaluation of the Mexican peso in December 1994 initiated a crisis, and the resulting high interest rates and contraction of the Mexican economy in 1995 severely impacted most borrowers’ ability to both repay loans when due and meet debt service requirements.  These effects, among others, caused an increase in the non-performing loan portfolio of Mexican financial institutions, particularly during 1995, which adversely affected the capitalization level of financial institutions.  Also, increased domestic interest rates and the deteriorating value of the peso made it more difficult for financial institutions to renew dollar-denominated certificates of deposit and credit lines.

From 1995 through the end of 1997, the CNBV had assumed or intervened in the operations of 13 banks and had adopted several measures designed to protect, stabilize and strengthen the Mexican banking sector.  These measures included:

· creating a temporary capitalization program to assist banks;

· establishing a foreign exchange credit facility with the Mexican Central Bank to help banks with dollar liquidity problems;

· increasing the level of required allowance for impairment losses;

· establishing a temporary program for the reduction of interest rates on certain loans;

· establishing various programs to absorb a portion of debt service cost for mortgage loan debtors (including debt restructuring and conversion support programs); and

· broadening the ability of foreign and Mexican investors to participate in Mexican financial institutions.

Reforms to Mexican Banking Law

In November 2013, the Mexican Congress approved reforms to the Mexican financial system which, among other measures, seek to promote lending activities to small and medium-sized companies, improve banking supervision and regulations, improve regulatory powers of, and the ability to impose sanctions by, CONDUSEF, improve the banks’ ability to foreclose on collateral and correct deficiencies of the Bankruptcy Law, in respect of related policy sanctions and certain other activities.

In July 2014, the investigation regarding competitive conditions in the Mexican financial system performed by the CFC, arising from the approved financial reforms, resulted in a series of recommendations in connection with new regulations to promote competition in the Mexican financial system.  The recommendations issued by the CFC may be summarized as requiring (i) avoidance of a displacement or any access limitations to competitors in the financial markets, (ii) reducing the risks of coordinated anticompetitive effects among competitors, (iii) reducing barriers to competition, and (iv) increasing the CFC’s authority over anticompetitive action.

Bankruptcy Law

The Mexican Bankruptcy Law provides for a single insolvency proceeding encompassing two successive phases: a conciliatory phase of mediation between creditors and debtor, and bankruptcy. Recent amendments permit parties to move directly to the bankruptcy stage.

In connection with banks, there is a special procedure under which only IPAB or the CNBV may demand the declaration of insolvency of banking institutions, including Banco Santander Mexico.  In the case of banking

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institutions, such as Banco Santander Mexico, with the declaration of bankruptcy the judicial procedure is initiated in the bankruptcy phase (quiebra) and not, as in common procedures, in the conciliatory phase.  The bankruptcy of a Mexican bank is viewed as an extreme measure (because it results in a liquidation and dissolution), which has not been resorted to in practice, and is preceded by a number of measures that seek to avoid it, such as corrective measures taken by the CNBV, facilities made available by IPAB and an intervention led by the CNBV.  Upon filing of the application for the declaration of insolvency, banking institutions must cease operations and suspend payment of all obligations.

The Mexican Bankruptcy Law establishes precise rules that determine when a debtor is in general default in its payment obligations.  The principal indications are failure by a debtor to comply with its payment obligations in respect of two or more creditors, and the existence of any of the following two conditions: (i) 35.0% or more of a debtor’s outstanding liabilities are 30 days past due; or (ii) the debtor fails to have certain specifically defined liquid assets and receivables to cover at least 80.0% of its obligations which are due and payable.

Applicable law provides for the use and training of experts in the field of insolvency and the creation of an entity to coordinate their efforts.  Such experts include the intervenor (interventor), conciliator (conciliador) and receiver (síndico).  The IPAB acts as the liquidator and receiver and the CONDUSEF may appoint up to three intervenors.

On the date the insolvency judgment is entered, all peso-denominated obligations are converted into UDIs, and foreign currency-denominated obligations are converted into pesos at the rate of exchange for that date and then converted into UDIs.  Only creditors with a perfected security interest (i.e., mortgage, pledge or security trust) continue to accrue interest on their loans. The Mexican Bankruptcy Law mandates the netting of derivative transactions upon the declaration of insolvency.

The Mexican Bankruptcy Law provides for a general rule as to the period when transactions may be scrutinized by the judge to determine if they were entered into for fraudulent purposes, which is 270 calendar days prior to the judgment declaring insolvency (recently modified as set forth below).  This period is referred to as the retroactivity period.  Nevertheless, upon the reasoned request of the conciliator, the intervenors, who may be appointed by the creditors to oversee the process, or any creditor, the judge may set a longer period.

The Mexican Congress has approved changes to Mexico’s Bankruptcy Law (Ley de Concursos Mercantiles), intended to improve the application of such law. Relevant changes include (i) the consolidation of bankruptcy proceedings affecting parent and subsidiary companies, (ii) the immediate application of liquid assets provided as collateral (without judicial intervention), in connection with the netting and close out of derivative and similar contracts, (iii) setting forth an outside limit to bankruptcy restructuring (three years), (iv) permitting trustees and other creditor representatives to submit claims on behalf of groups of creditors, (v) expressly recognizing subordinated creditors, and deeming related party creditors as subordinated creditors, and (vi) making members of the board of directors liable to the bankrupt debtor if such member acted when affected by a conflict of interest, self-dealing and otherwise against the interests of the bankrupt debtor.

Deregulation of Lending Entities and Activities

In July 2006, the Mexican Congress enacted reforms to the General Law of Auxiliary Credit Organizations and Activities, the Mexican Banking Law and the Foreign Investment Law (Ley de Inversión Extranjera), with the objective of creating a new type of financial entity called multiple purpose financial entities (sociedad financiera de objeto múltiple, or Sofom) (the “Sofom Amendments”).  The Sofom Amendments were published in the Official Gazette of the Federation (Diario Oficial de la Federación) on July 18, 2006.

The main purpose of the Sofom Amendments was to deregulate lending activities, including financial leasing and factoring activities.  Sofomes are Mexican corporations (sociedades anónimas) that expressly include as their main corporate purpose in their bylaws, engaging in lending and/or financial leasing and/or factoring services.  Pursuant to the Sofom Amendments, the SHCP ceased to authorize the creation of new Sofoles, and all existing Sofol authorizations automatically terminated on July 19, 2013.

Among others, Sofomes that are affiliates of Mexican credit institutions (i.e., private or public banks) or the holding companies of financial groups that hold a credit institution are regulated and supervised by the CNBV, and required to comply with a number of provisions and requirements applicable to credit institutions such as capital adequacy requirements, risk allocation requirements, related party transactions rules, charge-offs and assignment

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provisions, as well as reporting obligations.  Regulated Sofomes are required to include in their denomination the words “Entidad Regulada” (regulated entity) or the abbreviation thereof, “E.R.” All other entities whose main purpose is engaging in lending, financial leasing and factoring activities are non-regulated Sofomes and must so indicate in their corporate denomination by including the words “Entidad No Regulada” (non-regulated entity) or the abbreviation thereof, “E.N.R.” Non-regulated Sofomes are not subject to the supervision of the CNBV.

Sofomes (regulated or non-regulated) are subject to the supervision of the CONDUSEF as is the case with any other financial entity.

The Sofom Amendments also eliminated the restrictions on foreign equity investment applicable to Sofomes, financial leasing and factoring companies, which until the Sofom Amendments became effective, was limited to 49.0%.  Accordingly, the Sofom Amendments resulted in an increase in competition in the financial services industry, from foreign financial institutions.

The Mexican Securities Market Law

The Mexican Securities Market Law sets standards for authorizing companies to operate as brokerage firms, which authorization is granted by the CNBV with the approval of its Governing Board.  In addition to setting standards for brokerage firms, the Mexican Securities Market Law authorizes the CNBV, among other things, to regulate the public offering and trading of securities, corporate governance, disclosure and reporting standards and to impose sanctions for the illegal use of insider information and other violations of the Mexican Securities Market Law.  See “Item 9. The Offer and Listing—C. Markets—The Mexican Securities Market.”

Insurance System

The Mexican insurance system is governed by the Insurance Companies Law, the Bonding Companies Law, the Insurance Contract Law (Ley Sobre el Contrato de Seguro) and other regulatory provisions issued by the SHCP and the CNSF.  Insurance companies require the authorization of the SHCP for their incorporation.  The authorization shall include the specific sector in which the insurance company will conduct business, including life, health care, property and casualty, civil and professional liability, among others.  The SHCP may also grant authorization to perform reinsurance and co-insurance activities.  Insurance companies are subject to stringent capital adequacy and investment rules, compliance with which is verified by the CNSF.  These rules determine the type of assets into which insurance companies may invest, as well as the minimum amount of capital required to be maintained by such entities.  Also, insurance companies are required to maintain technical reserves as protection against risks, which help such entities to maintain adequate liquidity levels.

The regulation and surveillance powers of the CNSF grant this entity the authority to verify compliance with the various financial and technical actuarial regulations, as well as with other corporate governance principles.

Retirement Savings System

The Retirement Savings Systems Law (Ley de los Sistemas de Ahorro para el Retiro) established the Afore pension system.  Among other economic benefits and other services to be provided to participants in the retirement savings system, the Retirement Savings Systems Law provides that each employee may establish an independent retirement account, which is to be managed by an approved Afore.  Under this system, employees, employers and the government are required to make contributions to the independent retirement accounts maintained by each employee.  In addition to the mandatory contributions, employees are allowed to make voluntary contributions to their independent retirement accounts.  Pursuant to the Retirement Savings Systems Law, the main functions of an Afore include, among others, (i) managing pension funds, (ii) creating and managing individual pension accounts for each worker, (iii) creating, managing and operating specialized pension funds (Siefores), (iv) distributing and purchasing Siefores’ stock, (v) contracting pension insurance, and (vi) distributing, in certain cases, the individual funds directly to the pensioned worker.

Afores and Siefores are subject to the supervision of the CONSAR, which is in charge of the coordination and regulation of the pension system.

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Amendments to Financial Regulations Impacting Banks

The Mexican financial system has continued to advance in recent years, consistent with demands from regulators and market participants, developments in other jurisdictions and to address systemic issues resulting from the global financial crisis.

Even though the recent global financial crisis did not affect Mexican banks directly, many Mexican corporations were affected, primarily by having engaged in foreign currency-linked derivative transactions, which increased exposures substantially as a result of the devaluation of the peso, triggering a new regulation issued by the CNBV that seeks to improve disclosure standards as they relate to derivative transactions.

The Federal Law for Protection of Personal Data Held by Private Persons (Ley Federal de Protección de Datos Personales en Posesión de Particulares) requires us to ensure the confidentiality of information received from clients. We have modified our processes, procedures and systems as required to implement this law and the supervision of our activities thereunder and as a means to obtain the consent of our customers prior to using any personal information provided by them.  We could be subject to fines and penalties in the event of violations of the provisions of such law.

On January 9, 2015, the General Rules Applicable to Financial Entities and other Persons that Provide Investment Services (Disposiciones de Carácter General Aplicables a las Entidades Financieras y donde Personas que Proporcionan Servicios de Inversión, or the “Investment Services Rules”) were published. The purpose of the Investment Services Rules includes having a sole regulation that contains the rules applicable to brokerage firms, credit institutions and investment advisors, companies that operate mutual funds and companies or entities that distribute shares of mutual funds.

In accordance with the Investment Services Rules, financial entities and investment advisors rendering advisory services in connection with investments shall ensure that any advice, recommendation or suggestion given to the client is reasonable for such client, and consistent with the client’s investment profile and the financial product profile.

The Investment Services Rules set forth obligations applicable to financial entities and investment advisors to create either a committee which shall be responsible for the analysis of financial products offered by such entities, and whose members shall be independent from the structuring area of the relevant entity, or an equivalent institution or responsible person.

The Investment Services Rules also require the creation of an Analysis Committee. Such Analysis Committee shall maintain minutes for each committee meeting held together with the relevant presentations, which documentation shall be kept by the entity and made available to the CNBV for at least five years.

The Analysis Committee shall approve each financial product offered, compensation applicable to investment portfolios and, prior to its delivery, all information given to any client regarding any investment recommendation, which information shall include at least the prospectus or memorandum describing the relevant securities or offering.

The Investment Services Rules also provide that the board of directors of the financial entity shall approve the policies and guidelines required for each entity to:

· perform the necessary evaluation to determine the profile of its clients;

· carry out the analysis of the financial products to be offered to the clients; and

· comply with the evaluation of the “reasonableness” of recommendations, required to render advisory investment services.

Such policies and guidelines must be submitted to the CNBV within 10 days from its approval by the board of directors, and the CNBV may order the relevant entity to incorporate corrections in order to make them consistent with the Investment Services Rules.

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The Investment Services Rules provide that the board of directors must appoint an officer to verify compliance of each firm with the Investment Services Rules.

Pursuant to the changes to the Mexican Securities Market Law, (i) all offerings conducted outside of Mexico by Mexican issuers, regardless of whether the offering is public or not, are required to be notified to the CNBV, (ii) clarifications were made in respect of the governance regime applicable to vehicles issuing asset-backed securities, (iii) required capitalization requirements and corrective measures in the absence of compliance with capitalization requirements applicable to broker-dealers were defined, (iv) rules implementing profiling of investors and provisions dealing with parties relating to the sale of securities have been incorporated into the Mexican Securities Market Law (as opposed to being left to implementing regulations), and (v) investment advisors are required to be registered with the CNBV, and are more strictly regulated.

Supervision and Regulation

Introduction

Our operation is primarily regulated by the Mexican Financial Groups Law and the rules and regulations issued by the SHCP, the CNBV and the Mexican Central Bank.  The operations of our financial subsidiaries are primarily regulated by the Mexican Banking Law, the Mexican Securities Market Law, the Mexican Mutual Funds Law and the rules issued thereunder by the SHCP and the CNBV, as well as rules issued by the Mexican Central Bank and the IPAB.  The authorities that supervise our financial subsidiaries’ operations are the SHCP, the Mexican Central Bank, CONDUSEF and the CNBV.

Incorporation of a Financial Group and Subsidiaries

Financial groups are integrated by a number of financial operating entities controlled by a financial services holding company, such as Grupo Financiero Santander Mexico.  Such financial operating entities may include bonded-warehousing companies, foreign exchange service providers, surety companies, insurance companies, brokerage firms, banks, mutual fund operators, mutual fund distributors, retirement fund administrators, Sofomes and certain financial companies.  Financial groups may be generally comprised of a financial services holding company and any two financial institutions (which may be of the same type of financial institution). Financial services holding companies are now permitted to hold minority interests in certain subsidiaries.  New legislation permits the incorporation of sub-holding companies, that permit indirect investments of the holding company in the financial services companies of the same financial group and in other non-financial companies of the same financial group, such as service companies and real estate companies.

Entities of the same financial group are allowed to (i) act jointly before the public, offer complementary services and publicly act as part of the same financial group; (ii) use similar corporate names; and (iii) conduct their activities in the offices and branches of members of the same financial group.

Pursuant to the Mexican Financial Groups Law, the incorporation of a financial group requires an authorization by the SHCP.  The SHCP may grant or deny such authorization at its own discretion, taking into consideration the opinion of the Mexican Central Bank and the opinion of the CNBV.

The corporate purpose of a financial group’s holding company is to acquire and manage the shares issued by the financial services subsidiaries of the holding company.  In no case shall the financial services holding company perform or execute any of the financial activities authorized to the entities that comprise the financial group.

The bylaws of the financial services holding companies, sub-holding companies, service companies and real estate companies, the Statutory Responsibility Agreement (described below), and any other amendment to such documents, shall be submitted to the approval of the SHCP, which may grant or deny such authorization, taking into consideration the opinion of the Mexican Central Bank and, as the case may be, the opinion of the CNBV or the CNSF.

The holding company may also invest in (i) the capital stock of financial entities not forming part of their financial group, (ii) capital stock of service companies and real estate companies, (iii) shares representing at least 51% of the capital stock of sub-holding companies, only if such holding company controls such sub-holding company and with the prior authorization of the SHCP, the favorable opinion of the Mexican Central Bank and, as applicable, of the CNBV, the CNSF and the Retirement Saving System, (iv) real estate properties, assets and

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equipment, strictly necessary for carrying out their corporate purpose, (v) securities issued by the Mexican federal government, banking deposit instruments and other investments authorized by the SHCP, and (vi) capital stock of foreign financial companies, with the prior authorization of the SHCP.  Investments in the aforementioned companies shall not be considered members of the financial group of the holding company. A holding company requires prior authorization of the SHCP, with the favorable opinion of the Mexican Central Bank and the CNBV, the CNSF and to the Retirement Saving System, as applicable, to invest, whether direct or indirectly in financial companies that are not part of the same financial group, and such investments may not exceed 50% of the capital stock of the corresponding financial company, and in no event may the sum of such investments exceed 50% of the capital stock of all its subsidiaries.

The Mexican Banking Law imposes certain restrictions on investments by Mexican banks, such as our subsidiary Banco Santander Mexico, in equity securities of companies engaged in non-financial activities.  Mexican banks may own equity capital in such companies in accordance with the following guidelines: (i) up to 5.0% of the capital of such companies at any time, without any approval; (ii) more than 5.0% and up to 15.0% of the capital of such companies, for a period not to exceed three years, upon prior authorization of a majority of the members of the bank’s Board of Directors; (iii) higher percentages and for longer periods, in companies engaged in new long-term projects with prior authorization of the CNBV; and (iv) higher percentages and for longer periods, in companies engaged in activities related to their corporate purpose, with prior authorization of the SHCP.  The total of all such investments (divided considering investments in listed and in non-listed companies) made by a bank may not exceed 30.0% of such bank’s Mexican Tier 1 capital.

A Mexican bank, such as our subsidiary Banco Santander Mexico, requires the prior approval of the CNBV to invest in the capital stock of companies that render auxiliary services to such bank and of companies that hold real estate where the offices of the applicable bank may be located.

Under the Mexican Banking Law, the approval of the CNBV is required prior to the merger of a commercial bank with any other entity taking into consideration the opinion of the CFC and the favorable opinion of the Mexican Central Bank.

At the end of 2014, pursuant to the new Mexican Financial Groups Law, the SHCP issued the General Rules for Financial Groups. These rules repealed the previous General Rules for the Incorporation and Operation of Financial Groups and provide the requirements for the operation of financial groups.

Financial Groups’ Statutory Responsibility

The Mexican Financial Groups Law requires that each financial services holding company, such as Grupo Financiero Santander Mexico, enter into an agreement with each of its financial services subsidiaries (the “Statutory Responsibility Agreement”), and Grupo Financiero Santander Mexico has entered into such an agreement with its financial services subsidiaries.  Pursuant to such agreement, the financial services holding company is responsible secondarily and without limitation for performance of the obligations incurred by its subsidiaries as a result of the authorized activities of such subsidiaries, and is fully responsible for certain losses of its subsidiaries, up to the total amount of the financial services holding company’s assets.  For such purposes, a subsidiary is deemed to have losses if (i) its shareholders’ equity represents an amount that is less than the amount the subsidiary is required to have as minimum paid-in capital under applicable law, (ii) its capital and reserves are less than the subsidiary is required to have under applicable law, or (iii) in the judgment of the regulatory commission supervising the subsidiary’s activities, the subsidiary is insolvent and cannot fulfill its obligations.

The financial services holding company has to inform the CNBV of the existence or potential existence of any such obligation or loss.  The financial services holding company would only be liable with respect to the obligations of its financial services subsidiaries fifteen business days after the CNBV (or any other principal regulator) delivers notice of its approval of the enforceability of such obligations.  The financial services holding company responds to the losses of its subsidiaries by making capital contributions to such subsidiaries (no later than 30 days counted from the date the applicable losses shall arise).

In the event of a financial services holding company’s statutory responsibility with respect to a bank, IPAB must determine the amount of the preliminary losses of such bank.  The financial services holding company is required to create a capital reserve for the amount of such losses.  The financial services holding company is also required to guarantee the payment of the bank’s losses that are paid by IPAB pursuant to its law.  Such guarantee

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may be created over the financial services holding company’s assets or over such company’s shares or those of its subsidiaries.  Pursuant to Article 120 of the Mexican Financial Groups Law, any shareholder of the financial services holding company, due to its holding of the shares, accepts that its shares could be posted as guarantee in favor of IPAB, and that such shares will be transferred to IPAB if the financial services holding company is unable to pay any amounts due to IPAB as a result of the bank’s losses.

A financial services holding company is not allowed to pay any dividends or transfer any monetary benefit to its shareholders as of the date on which IPAB determines the bank’s losses up to the date on which the financial services holding company has paid for the bank’s losses.  No subsidiary is responsible for the losses of the financial services holding company or of the financial services holding company’s subsidiaries.

Liabilities

A financial services holding company may only engage on direct or contingent liabilities, or post its assets as guarantee, in the following cases: (i) with respect to its obligations under the Statutory Responsibility Agreement; (ii) transactions with IPAB; and (iii) with the authorization of the Mexican Central Bank for the case of subordinated debentures of mandatory conversion and the obtainment of short-term loans.

Supervision and Intervention

A financial services holding company is subject to the supervision of the commission that supervises the most important entity of the financial group, as determined by the SHCP.  We are subject to the supervision of the CNBV, which supervises Banco Santander Mexico. A financial services holding and sub-holding company’s accounting will be subject to the rules authorized by the corresponding commission.

If, as part of its supervision activities, the corresponding commission determines that a financial services holding company has engaged in irregular activities against the applicable financial regulations, the chairman of such commission may impose the corrective measures it deems necessary.  If such measures are not complied with in the period set for such purposes, the relevant commission may declare the administrative intervention (intervención administrativa) of the financial services holding company.

If, in the opinion of the relevant commission, the irregularities of a financial services holding company affect its stability and solvency, and endanger the interests of the public or its creditors, a managerial intervention (intervención gerencial) can be declared by the chairman of the relevant commission, prior resolution of the governing board.  The chairman will appoint a peremptory manager (interventor-gerente).  The peremptory manager will assume the authority of the Board of Directors.  The peremptory manager will have the authority to represent and manage us with the broadest powers under Mexican law and will not be subject to the Board of Directors or the shareholders’ meeting.  The appointment of the peremptory manager must be registered in the Public Registry of Commerce of the corresponding domicile.

Ownership Restrictions; Foreign Financial Affiliates

Ownership of a financial services holding company’s capital stock is no longer limited to specified persons and entities under the Mexican Financial Groups Law.  Financial services holding companies may be formed by a foreign financial institution, as defined in the Mexican Financial Groups Law, with prior authorization from the SHCP.  The capital stock of such a financial services holding company shall be comprised of Series F shares and Series B shares.  Series F shares must represent at all times at least 51% of the issued and outstanding capital stock and may only be owned by a foreign financial institution. Series F shares may only be transferred with the prior approval of the SHCP, except if such shares are transferred in guarantee or in property to IPAB.  Series B shares can be subscribed by both Mexican and non-Mexican investors, including the relevant foreign financial institution, and may represent up to 49% of the issued and outstanding capital stock.  Our capital stock is divided into Series F shares and Series B shares.

Notwithstanding the foregoing, under the Mexican Financial Groups Law, foreign governments cannot purchase a financial services holding company’s capital stock unless (i) as a temporary measure, in connection with financial support or rescue plans, (ii) when the corresponding investment results in having the control of the holding company and is made through entities such as government sponsored funds, with the prior authorization of the SHCP, and (iii) when the investment is an indirect investment and does not involve having control of the holding company.  Mexican financial entities, including those that form part of a financial group, cannot purchase a financial services

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holding company’s capital stock, unless such entities are institutional investors as defined in the Mexican Financial Groups Law.

In addition, pursuant to the Mexican Financial Groups Law and our bylaws, no person or entity or group of persons or entities may acquire (i) more than 2% of our shares, unless any such person or entity notifies the SHCP after the acquisition, (ii) 5% or more of our shares, unless any such person or entity obtains the prior approval by the SHCP, and (iii) 20% or more of our shares, or control, unless such person or entity has prior authorization of the SHCP, with the favorable opinion of the Central Mexican Bank and the corresponding Commission.

A holder that acquires shares in violation of the foregoing restrictions, or in violation of the percentage ownership restrictions, will have none of the rights of a shareholder with respect to such shares and will be required to forfeit such shares in accordance with procedures set forth in the Mexican Financial Groups Law and the Mexican Banking Law.

Banking Regulation

The SHCP, either directly or through the CNBV, possesses broad regulatory powers over the banking system.  Banks are required to report regularly to the financial regulatory authorities.  Reports to bank regulators are often supplemented by periodic meetings, formal or informal, between senior management of the banks and senior officials of the CNBV.  Banks must submit their unaudited monthly and quarterly and audited annual financial statements to the CNBV for review, and must publish on their website and in a national newspaper their unaudited quarterly balance sheets and audited annual balance sheets.  The CNBV may order a bank to modify and republish such balance sheets.

Additionally, banks must publish on their website, among other information:

· the bank’s basic consolidated and audited annual financial statements, together with a report containing the management’s discussion and analysis of the financial statements and the bank’s financial position, including any important changes thereto and a description of the bank’s internal control systems;

· a description of the bank’s Board of Directors, identifying independent and non-independent directors and their background, education and experience;

· a description and the total sum of compensation and benefits paid to the members of the Board of Directors and senior officers during the past year;

· unaudited quarterly financial statements for the periods ending March, June and September of each year, together with any comments thereon;

· any information requested by the CNBV to approve the accounting criteria and special registries;

· a detailed explanation regarding the main differences in the accounting used to prepare the financial statements;

· the credit rating of their portfolio;

· the capitalization level of the bank, its classification (as determined by the CNBV) and any modifications thereto;

· financial ratios;

· a brief summary of the resolutions adopted by any shareholders’ meeting, debenture holders’ meeting, or by holders of other securities or instruments; and

· the bank’s bylaws.

The CNBV has authority to impose fines for failing to comply with the provisions of the Mexican Banking Law, or regulations promulgated thereunder.  In addition, the Mexican Central Bank has authority to impose certain fines and administrative sanctions for failure to comply with the provisions of the Law of the Mexican Central Bank

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and regulations adopted by it and the Law for the Transparency and Ordering of Financial Services, particularly as violations relate to interest rates, fees and the terms of disclosure of fees charged by banks to clients.  Violations of specified provisions of the Mexican Banking Law are subject to administrative sanctions and criminal penalties.

The Mexican Baking Law permits foreign governments to acquire equity securities of Mexican banks on a temporary basis in connection with rescue or similar packages, and to acquire control of Mexican banks with the prior approval of the CNBV.

Mexican banks are required to obtain the express approval, through their boards of directors, of compensation payable to officers and, for that purpose, will be required to observe general rules to be issued by the CNBV and to establish and maintain a compensation committee.

The Mexican Banking Law includes a provision for self-correcting irregularities detected by Mexican banks, arising from non-compliance with applicable law.  Programs for self-correction are required to be approved by the board of directors of the applicable Mexican bank and must be supervised by the bank’s audit committee. General rules implementing the provisions are expected to be issued by the CNBV.

A Mexican bank may only be dissolved and liquidated, if the CNBV has issued a determination to that effect.  Prior to such dissolution and liquidation, IPAB may provide temporary financial assistance to Mexican banks having liquidity problems.

Non-viable Mexican banks will be liquidated pursuant to a procedure set forth in the Mexican Banking Law, under which IPAB will act as liquidator, will conduct the procedures necessary to collect fees and pay creditors (respective parties specified under the Mexican Banking Law) and will take all measures conducive to the bank’s liquidations.  The Mexican Banking Law reflects provisions related to the dissolution and liquidation of Mexican banks.  Liquidation proceedings may be conducted in-court or out of court, depending upon the circumstances affecting the relevant Mexican bank.  In addition to liquidation proceedings, Mexican banks may be declared in bankruptcy pursuant to a specialized proceeding set forth in the Mexican Bankruptcy Law.

The SHCP is authorized to conduct evaluations of Mexican banks. Although guidelines for such evaluations have already been issued, additional rules will be issued in the future. Such evaluations will be based upon the size of the banks and their participation in the relevant markets, and will determine whether or not a particular bank is lending to all sectors of the economy (primarily to small and medium-sized businesses). Results of evaluations are required to be made publicly available by the Ministry. Negative results from evaluations may result in corrective measures being ordered, however, it is uncertain what such measures may be.

We cannot predict the terms that will be included in implementing regulations in connection with requirements to be satisfied in respect of lending activities to certain sectors of the economy. However, if the SHCP determines, after an evaluation, that Banco Santander Mexico has not complied with applicable requirements, it may be forced to lend to certain sectors of the economy or to certain persons that may not meet its credit quality standards, or other standards specified in its policies, that it may not know or that are not acceptable credit risks, which in turn may impact its financial condition and results of operations. Furthermore, if the Bank were to fail any evaluation, publicity surrounding such failure may impact its reputation, which in turn may adversely impact its ability to conduct business in Mexico and its financial condition and results of operations.

Licensing of Banks

Authorization of the Mexican government is required to conduct banking activities.  The CNBV, with the approval of its Governing Board and subject to the prior favorable opinion of the Mexican Central Bank, has the power to authorize the establishment of new banks, subject to minimum capital standards, among other things.  Approval of the CNBV is also required prior to opening, closing or relocating offices, including branches, of any kind outside of Mexico or transfer of assets or liabilities between branches.

Intervention

The CNBV, with the approval of its Governing Board, may declare the managerial intervention (intervención) of a banking institution pursuant to Articles 129 through 146 of the Mexican Banking Law (a “CNBV Intervention”).  In addition, the Governing Board of IPAB may also appoint a peremptory manager (administrador cautelar) if IPAB provides liquidity, in accordance with applicable law, to a banking institution.

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A CNBV Intervention pursuant to Articles 129 through 146 of the Mexican Banking Law will only occur when (i) during a calendar month, the Capital Ratio of a bank is reduced from a level equal to or below the minimum Capital Ratio required under Article 50 of the Mexican Banking Law, to 50% or less than such minimum Capital Ratio, (ii) the bank does not maintain the minimum Capital Ratio required in accordance with the Mexican Banking Law, and such bank does not operate under the conditional regime referred to in article 29 Bis 2 of the law, or (iii) the bank (a) for an amount in pesos exceeding the equivalent of twenty million UDIs (1) does not pay loans granted by another bank, foreign financial entity or the Mexican Central Bank, or (2) does not pay the principal and interest amounts of securities issued by it and deposited in a securities deposit institution, (b) within two or more business days and for an amount in pesos exceeding the equivalent of  two million UDIs (1) does not pay one or more participants the amounts due under any compensation process carried out through a clearing house or central counterparty, or does not pay three or more checks for a total amount of two million UDIs, excluded from a clearing house for causes attributable to the drawee institution in terms of the applicable provisions, or (2) does not pay in the bank windows of two or more branches the banking deposits and cash withdrawals carried out by 100 or more of their customers and that total said amount.

The peremptory manager will be appointed by IPAB, if IPAB has granted extraordinary financial support to a bank in accordance with the Mexican Banking Law.  The peremptory manager appointed by IPAB will assume the authority of the Board of Directors and the shareholders.  The peremptory manager will have the authority to represent and manage the bank with the broadest powers under Mexican law, will prepare and submit to IPAB the bank’s budget (for approval), will be authorized to contract liabilities, make investments, undertake acquisitions or dispositions and incur expenses, is authorized to hire and fire personnel and may suspend operations.  The appointment of the peremptory manager must be registered in the Public Registry of Commerce of the corresponding domicile.

Revocation of a License; Payment of Guaranteed Obligations

Revocation of Banking License.  In the case that the CNBV revokes a license to be organized and operate as a banking institution, IPAB’s Governing Board will determine the manner under which the corresponding banking institution shall be dissolved and liquidated in accordance with Articles 166 through 187 of the Mexican Banking Law.  In such a case, IPAB’s Governing Board may determine to carry out the liquidation through any or a combination of the following transactions: (i) transfer the liabilities and assets of the banking institution in liquidation to another banking institution directly or indirectly through a trust set up for such purposes; (ii) constitute, organize and manage a new banking institution owned and operated directly by IPAB with the exclusive purpose of transferring the liabilities and assets of the banking institution in liquidation; or (iii) any other alternative that may be determined within the limits and conditions provided by the Mexican Banking Law that IPAB considers as the best and least expensive option to protect the interests of bank depositors. As described above, amendments to the Mexican Banking Law approved by the Mexican Congress will substitute these provisions.

Causes to Revoke a Banking License.  Following are the events upon which the CNBV may revoke a banking license:

(i)      if a shareholder decision is made to request the revocation;

(ii)     if the banking institution is dissolved or initiates liquidation procedures;

(iii)    if the banking institution (a) does not comply with any minimum corrective measures ordered by the CNBV pursuant to Article 122 of the Mexican Banking Law, (b) does not comply with more than one special corrective measure ordered by the CNBV pursuant to such Article 134 Bis 1, or (c) repeatedly does not comply with an additional special corrective measure ordered by the CNBV;

(iv)    if the banking institution does not comply with the minimum Capital Ratio required under the Mexican Capitalization Requirements;

(v)     if the banking institution (a) does not timely repay loans or debt securities issued or (b) does not timely pay deposits or clear checks; or

(vi)    if the institution repeatedly undertakes prohibited or sanctioned transactions in accordance with the Mexican Banking Law or if it continues not complying with preventive or corrective actions imposed by the CNBV.

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Upon publication of the resolution of the CNBV revoking a banking license in the Official Gazette of the Federation (Diario Oficial de la Federación) and in two newspapers of wide distribution in Mexico and registration of such resolution with the corresponding Public Registry of Commerce, the relevant banking institution will be dissolved and liquidation will be initiated.  Upon liquidation or the declaration of bankruptcy of a banking institution, IPAB is required to proceed to make payment of all “guaranteed obligations” of the relevant banking institution in accordance with the terms and conditions set forth in the Mexican Banking Law and the IPAB law.

Liabilities owed by the banking institution in liquidation will be paid in the following order of preference: (i)  secured claims, (ii) labor claims and tax claims, (iii) claims entitled to special privileges under applicable law, (iv) claims guaranteed by IPAB, up to the amount guaranteed by IPAB, (v) claims in excess of the amount guaranteed by IPAB, (vi) other senior claims, (vii) subordinated preferred debentures, and (viii) subordinated non-preferred debentures. The remainder, if any, shall be paid to the shareholders.

Financial Support

Determination by the Banking Stability Committee.  The Banking Stability Committee, or BSC, includes representatives of the SHCP, the Mexican Central Bank, the CNBV and IPAB.  In the case that the BSC determines that if a bank were to default on its payment obligations and such default may (i) generate severe negative effects in one or more commercial banks or other financial entities, endangering their financial stability or solvency, and such circumstance may affect the stability or solvency of the financial system, or (ii) result in the operation of the payments’ system to be put at risk, then the BSC may determine, on a case-by-case basis, that a general percentage of all of the outstanding obligations of the troubled bank that are not considered “guaranteed obligations” under the IPAB Law and guaranteed obligations in amounts equal to or higher than the amount set forth under Article 11 of the IPAB Law (400,000 UDIs per person per entity), be paid as a means to avoid the occurrence of any of such circumstances.  Notwithstanding the foregoing, under no circumstance may transactions such as liabilities or deposits in favor of shareholders, members of the Board of Directors and certain senior officers, and certain illegal transactions or the liabilities resulting from the issuance of subordinated debentures, be covered or paid by IPAB or any other Mexican governmental agency.

Types of Financial Support.  In the case that the BSC makes the determination referred to in the prior paragraph, then IPAB’s Governing Board will determine the manner according to which the troubled commercial bank will receive financial support, which may be through either of the following options:

(a)  If the BSC determines that the full amount of all of the outstanding liabilities of the relevant troubled bank (guaranteed and non-guaranteed) must be paid, then the financial support may be implemented through (i) capital contributions granted by IPAB in accordance with the Mexican Banking Law, or (ii) credit support granted by IPAB also in accordance the Mexican Banking Law, and in either case the CNBV shall refrain from revoking the banking license granted to such commercial bank.

(b)  If the BSC determines that less than the full amount of all the outstanding liabilities of the troubled commercial bank (guaranteed and non-guaranteed) must be paid, then the support will consist of transferring the assets and liabilities of such bank to any third party, as set forth in Articles 188 through 197 of the Mexican Banking Law.

Conditional Management Regime.  As an alternative to revoking the banking license, a new conditional management regime was created, which can be established in respect of commercial banks with a Capital Ratio below the minimum required pursuant to the Mexican Capitalization Requirements.  To adopt this regime, the relevant bank, with prior approval of its shareholders, must voluntarily request from the CNBV the application of the conditional management regime.  To qualify for such regime, the relevant commercial bank should (i) deliver to the CNBV a plan for the reconstitution of its capital, and (ii) transfer at least 75% of its shares to an irrevocable trust.

Banking institutions with a Capital Ratio equal to or below 50% of the minimum Capital Ratio required by the Mexican Capitalization Requirements may not adopt the conditional management regime.

Capitalization

The minimum subscribed and paid-in capital for banks is set in accordance with three different components: credit risk, market risk and operational risk.  Pursuant to the Mexican Banking Law and the General Rules

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Applicable to Mexican Banks, banks may participate in any of the activities and render the services as provided under Article 46 of the Mexican Banking Law, as well as those permitted under other laws.

In accordance with the capitalization rules currently in effect, the minimum equity capital required for banks that engage in all banking activities under the Mexican Banking Law (such as Banco Santander Mexico) is 90,000,000 UDIs.

The Mexican Capitalization Requirements set forth the methodology to determine the net capital (capital neto) relative to market risk, credit risk and operational risk.  Under the relevant regulations, the CNBV may impose additional capital requirements.  The Mexican Capitalization Requirements provide capitalization standards for Mexican banks similar to international capitalization standards, particularly with respect to the recommendations of the Basel Committee on Banking Regulations and Supervisory Practices, or the Basel Committee, which includes the supervisory authorities of twelve major industrial countries.

The General Rules Applicable to Mexican Banks, currently specify that Mexican banks may be classified in several categories based on their Capital Ratio, Tier 1 capital and Fundamental Tier 1 Capital .  The relevant corrective measures applicable to the Bank are determined based on the following classifications:

Class	Capital Ratio	Tier 1 Capital	Fundamental Tier 1 Capital
Class I	Equal to or greater than 10.5%	Equal to or greater than 8.5%	Equal to or greater than 7%
Class II	Equal to or greater than 10.5%	Equal to or greater than 6%	Equal to or greater than 4.5%
Class II	Equal to or greater than 8% and less than  10.5%	Equal to or greater than 6%	Equal to or greater than 4.5%
Class III	Equal to or greater than 8%	Less than 6.0%	Equal to or greater than 4.5%
Class III	Equal to or greater than 7% and less than 8%	Equal to or greater than 6%	Equal to or greater than 4.5%
Class IV	Equal to or greater than 7% and less than 8%	Less than 6%	Equal to or greater than 4.5%
Class IV	Equal to or Greater than 4.5% and less than 7%	Equal to or greater than 4.5%	Equal to or greater than 4.5%
Class V	Less than 4.5%	N/A	Less than 4.5%

This table is based upon the table set forth in Article 220 of the General Rules Applicable to Mexican Banks, which should be consulted for a complete understanding of the applicable requirements.

Furthermore, the General Rules Applicable to Mexican Banks provide that none of Capital Ratio, Tier 1 capital or Fundamental Tier 1 Capital shall be subject to a maximum limit if (a) the Capital Ratio is equal to or exceeds 10.5%, (b) Tier 1 capital is equal to or exceeds 8.5%, and (c) Fundamental Tier 1 Capital is equal to or exceeds 7.0%

For clarification purposes, Tier 1 capital means the two components of Tier 1 capital (Fundamental Tier 1 Capital and Non-fundamental Tier 1 Capital) as such terms are defined in the Rules for Capitalization. Fundamental Tier 1 Capital means only the basic or fundamental amount of Tier 1 capital (excluding Non-fundamental Tier 1 Capital) as such term is defined in the Rules for Capitalization, as further described below.Tier 2 capital refers to the additional portion (parte complementaria) of total net capital, as such term is defined in the Rules for Capitalization. Tier 1 capital refers to the basic portion (parte básica) of total net capital, as such term is defined in the Rules for Capitalization.

The General Rules Applicable to Mexican Banks require Mexican banks to maintain a Capital Ratio of at least 10.5% to avoid the imposition of corrective measures notwithstanding that the minimum required Capital Ratio is 8%.

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Aggregate net capital consists of Tier 1 capital and Tier 2 capital.  The Mexican Capitalization Requirements include among the Fundamental Tier 1 Capital, mainly, paid-in capital, which represents the most subordinated right to collect in case of liquidation of a credit institution, which are not due and do not grant reimbursement rights, profits (mainly including retained profits), and capital reserves, and subtract from such Fundamental Tier 1 Capital, among other things, certain subordinated debt instruments, issued by financial and non-financial entities, securities representing residual parts of portfolio securitization, investments in the equity of venture-capital funds and investments in or credits to related companies (only in instances where they exceed certain thresholds), reserves pending creation, loans and other transactions that contravene applicable law, and intangibles (including goodwill).  Non-fundamental Tier 1 capital is comprised of preferential shares, regarding which the issuer has the right to cancel the dividend payments, and subordinated debt instruments, which are not subject to a due date or forced conversion, regarding which it is possible to cancel the interest payments and which may become shares of a credit institution or a controlling entity or are subject to cancellation (when capitalization problems arise).

The supplementary part of basic capital (Tier 2) comprises capitalization instruments, which are subordinated to deposits and any other debt of the credit institution, do not have any specific guarantee, have a term of at least five years and are convertible into shares at their maturity date or are subject of write-down procedures, and the difference between total admissible reserves and total expected losses up to an amount that does not exceed 0.6% of weighted assets by credit risk.  These instruments shall be included as capital based on their maturity date: 100% if the due date exceeds five years, 80% if the due date exceeds four years but is less than five years, 60% if the due date exceeds three years but is less than four years, 40% if the due date exceeds two years but is less than three years, 20% if the due date exceeds one year but is less than two years, and 0% if the due date is less than one year.

Every Mexican bank must create certain legal reserves (fondo de reserva de capital) that are considered to be part of Tier 1 capital. Banks must separate and allocate 10.0% of their net income to such reserve each year until the legal reserve equals 100.0% of their paid-in capital (without adjustment for inflation).  The remainder of net income, to the extent not distributed to shareholders as dividends, is added to the retained earnings account.  Under Mexican law, dividends may not be paid out against the legal reserve. As of December 31, 2014, we and our subsidiaries operating in the financial sector had set aside an aggregate of Ps.10,022  million in legal reserves (including Ps.386 million in legal reserves for Grupo Financiero Santander Mexico on an individual basis) compared to aggregate paid-in capital without adjustment for inflation of Ps.25,658  million, which is the same as paid-in capital of Grupo Financiero Santander Mexico on an individual basis, in each case as determined in accordance with Mexican Banking GAAP.

Corrective Measures

The Mexican Banking Law and the General Rules Applicable to Mexican Banks establish the minimum corrective and special additional measures that banks must fulfill according to the category in which they were classified based on their capital.  These corrective measures are designed to prevent and, when necessary, correct the operations of the banks that could negatively affect their solvency or financial stability.  The CNBV is required to notify the relevant bank in writing of the corrective measures that it must observe, within five business days after the Mexican Central Bank has notified the CNBV the capitalization ratio of the bank, as well as verify its compliance with the corrective measures imposed.  Class I is exempted from any corrective measure, but for the remainder of the categories such corrective measures include:

For Class II:

(a)  requiring the bank to (i) inform the board of directors about the bank’s classification, as well as the causes that caused the CNBV to make such classification, and submit a detailed report containing a comprehensive evaluation of the bank’s financial situation, its level of compliance with the regulatory framework and the main indicators that reflect the degree of stability and solvency of the bank, within 20 business days after the bank has received the CNBV notification of the corrective measure, (ii) include in such report any observations mandated, in accordance with their respective scope of authority, by each of the CNBV and the Mexican Central Bank, (iii) report in writing the financial situation to the chief executive officer and chairman of the board of directors of the bank or the board of directors of the bank’s holding company, in the event the bank is part of a financial group, (iv) abstain from entering transactions that will cause its Capital Ratio to be lower than required under the Capitalization Requirements, (v) abstain from increasing the current amounts of the financings granted to relevant related parties, and (vi) submit for approval to the CNBV, a plan for capital restoration which has as a result an increase of its

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Capital Ratio in order for the institution to be placed in Class I.  Such plan shall be presented to the CNBV no later than 20 business days after the date the bank receives the CNBV notification of the corrective measure;

For Class III and above:

(b)  requiring the bank’s board of directors to (i) within 15 business days as of the notice of its classification, submit to the CNBV, for its approval, a plan for capital restoration that will result in an increase in its Capital Ratio, which may contemplate a program for improvement in operational efficiency, streamlining costs and increasing profitability, the carrying out of contributions to the capital and limits to the operations that the banks may carry out in compliance with their bylaws, or to the risks derived from such operations.  The capital restoration plan shall be approved by such bank’s board of directors before being presented to the CNBV.  The bank shall determine in the capital restoration plan that, in accordance with this subsection, it must submit, periodic targets, as well as the date in which the capital of such bank will get the capitalization level required in accordance with the applicable provisions.  The CNBV, through its governing board, must resolve all that corresponds to the capital restoration plan that has been presented to them, in a maximum of 60 calendar days from the date the plan was submitted; and (ii) comply with the plan within the period specified by the CNBV, which in no case may exceed 270 calendar days starting the day after the bank was notified of the respective approval.  To determine the period for the completion of the restoration plan, the CNBV shall take into consideration the bank’s category, its financial situation, as well as the general conditions prevailing in the financial market.  The CNBV, by agreement of its governing board, may extend the deadline once by a period that will not exceed 90 calendar days.  The CNBV will monitor and verify compliance with the capital restoration plan, without prejudice of the provenance of other corrective measures depending on the category in which the corresponding bank is classified;

(c)  requiring the bank to suspend any payment of dividends to its shareholders, as well as any mechanism or act that involves the transfer of any economic benefits to the shareholders.  If the bank belongs to the holding company, the measure provided in this subsection will apply to the holding company to which the bank belongs, as well as the financial entities or companies that are part of such holding company.  This restriction on the payment of dividends for entities that are part of the same financial group will not apply in the event the dividend is being applied to the capitalization of the bank;

(d)  requiring the bank to suspend any capital stock repurchase programs of the bank and, in the event that the bank belongs to a financial group, also the programs of the holding company of such group;

(e)  requiring the bank to defer or cancel the interest payments on outstanding subordinated debt and, when applicable, defer the payment of the principal or exchange the debt into shares of the bank in the amount necessary to cover the capital deficiency, in advance and proportionately, according to the nature of such obligations.  This corrective measure will be applicable to those obligations that are identified as subordinated debt in their indenture or issuance document;

(f)   requiring the bank to suspend payment of any extraordinary benefits and bonuses that are not a component of the ordinary salary of the chief executive officer or any officer within the next two levels, as well as not granting any new benefits in the future for the chief executive officer and the officers until the bank complies with the minimum levels of capitalization required by the CNBV in accordance with the provisions referred to in Article 50 of the Mexican Banking Law;

(g)  requiring the bank to refrain from increasing outstanding amounts of any credit granted to any individual who is a related party.

For Class IV and above:

(h)  requiring the bank to request authorization from the CNBV to undertake new investments on non-financial assets, open branches or perform activities other than those made in the ordinary course of business, provided those investments or activities do not require authorization from SHCP or the Mexican Central Bank; and

(i)   requiring the bank to undertake other corrective measures provided for in the general rules of Articles 225 I and IV and 226, 227 and 228 of the General Rules Applicable to Mexican Banks and Article 134 Bis 1 of the Mexican Banking Law (which are the General Rules Applicable to Mexican Banks), from time to time.

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Regardless of the Capital Ratio of the banks, the CNBV may order the implementation of additional and special corrective measures.  The additional and special corrective measures that, if applicable, the banks must comply with are: (a) define the concrete actions that it will carry out in order not to deteriorate its Capital Ratio; (b) hire the services of external auditors or any other specialized third party for special audits on specific issues; (c) refrain from agreeing to increases in the salaries and benefits of the officers and employees in general, except for agreed salary revisions and in compliance with labor rights; (d) substitute officers, members of the board or external auditors with appointed persons occupying the respective positions; or (e) undergo other actions or be subject to other limitations as determined by the CNBV, based on the result of its functions of monitoring and inspection, as well as with sound banking and financial practices.

On July 26, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee, reached broad agreement on the overall design of a capital and liquidity reform package for internationally active banking organizations around the world, known as Basel III, which includes, among other things, the definition of capital, the treatment of counterparty credit risk, the leverage ratio and the global liquidity standard.  On September 12, 2010, the Basel Committee announced a substantial strengthening of existing capital requirements in connection with Basel III.  The full text of the Basel III rules and the results of a quantitative impact study to determine the effects of the reforms on banking organizations were published on December 16, 2010.

The Basel III rules for capitalization were implemented in Mexico through an amendment to the General Rules Applicable to Mexican Banks published in the Official Gazette of the Federation on November 28, 2012, effective as of January 1, 2013. Banco Santander Mexico currently complies with the minimum capital requirement.

Reserve and Compulsory Deposit Requirements

The compulsory reserve requirement is one of the monetary policy instruments used as a mechanism to control the liquidity of the Mexican economy to reduce inflation.  The objective of the Mexican Central Bank’s monetary policy is to maintain the stability of the purchasing power of the Mexican peso and in this context, to maintain a low inflation level.  Given the historic inflation levels in Mexico, the efforts of the Mexican Central Bank have been directed towards a restrictive monetary policy.

Under the Law of the Mexican Central Bank, the Mexican Central Bank has the authority to determine the percentage of the liabilities of financial institutions that must be deposited in interest or non-interest-bearing deposits with the Mexican Central Bank (Depósitos de Regulación Monetaria).  These deposits may not exceed 20% of the aggregate liabilities of the relevant financial institution.  The Mexican Central Bank also has the authority to order that 100% of the liabilities of Mexican banks resulting from specific funding purposes, or pursuant to special legal regimes, be invested in specific assets created in respect of any such purpose or regime.

The Mexican Central Bank imposes reserve and compulsory deposit requirements on Mexican commercial banks. Bulletin 09/2014 published on June 17, 2014, stated that the total compulsory reserve deposit required of Mexican commercial banks was Ps.278.5 billion, which had to be deposited by June 19, 2014. The amount of the deposit that each bank had to make was equal to the amount of the compulsory deposits allocated as of June 18, 2014. Additionally, according to Bulletin 11/2014 published on June 25, 2014, an additional deposit of Ps.41.5 billion was required which had to be deposited in four installments, on August 14, September 11, October 9 and November 6, 2014. The amount of the deposit that each bank had to make was determined based on the total amount of the traditional customer deposits in Mexican pesos of each Mexican bank as of May 31, 2014.

The compulsory deposit reserves required under the terms of Bulletins 09/2014 and 11/2014 have an indefinite term. During the time these reserves are maintained on deposit with the Mexican Central Bank, each banking institution receives interest on such deposits every 27, 28, 29 or 30 days so that each last day of the period falls on a Thursday. The Mexican Central Bank will provide advance notice of the date and the procedure to withdraw the balance of these compulsory deposits at such time, if any, that the compulsory deposit reserves are suspended or terminated.

Classification of Loans and Allowance for Impairment Losses

Non-performing loan portfolio

In accordance with Mexican Banking GAAP, the Bank applies the following criteria to classify past-due loans as non-performing:

· Loans with a single payment of principal and interest at maturity are considered non-performing 30 calendar days after the date of maturity.

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· Loans with a single payment of principal at maturity and with scheduled interest payments are considered non-performing 30 calendar days after principal becomes past due and 90 calendar days after interest becomes past due.

· Loans with a payment of principal and interest had been agreed to in scheduled payments are considered non-performing 90 days after the first installment is due.

· In the case of revolving credit, loans are considered non-performing when payment has not been received for two normal successive billing periods, or 60 days after they become due.

· Mortgage loans with periodic payments of principal and interest are considered non-performing when a payment is 90 days or more past due.

· Customer bank accounts showing overdrafts are reported as non-performing loans at the time the overdraft occurs.

Restructured or renewed non-performing loans are not considered as performing until there is evidence of sustained payment; i.e., evidence of payment by the borrower without arrears for the total amount due and payable in terms of principal and interest, for at least three consecutive installments under the credit payment scheme, or in the case of credits with installments that cover periods in excess of 60 calendar days, the payment of one installment as established in Mexican Banking GAAP.

Loans with a single payment of principal upon maturity and periodic payments of interest, which were restructured or renewed during the loan term, are considered as non-performing until there is evidence of sustained payment, as well as those in which at least 80% of the original term of the loan has not elapsed, which did not cover the total amount of the accrued interest or cover the principal of the original amount of the loan, and which should have been settled as of the date of renewal or restructuring in question.

Interest is recognized in income when it is accrued.  However, the accrual of interest is suspended when loans become non-performing.

For accrued but uncollected regular interest on non-performing loans, the Bank creates an allowance for an equal amount when the loan is transferred to the non-performing portfolio.

The loan classification and rating rules set forth under the General Rules Applicable to Mexican Banks, provide a methodology to classify (i) consumer loans (i.e., each of credit card exposure and loans to individuals, divided as separate groups), considering as principal elements (a) for credit card exposure, the possibility of non-payment and potential losses, and (b) for loans to individuals, the possibility of non-payment, potential losses (taking into account collateral and guarantees received), and credit exposure (net of allowance for impairment losses); (ii) mortgage loans (i.e., residential, including loans for construction, remodeling or improvements), considering as principal elements delinquency periods, possibility of non-payment and potential losses (taking into account collateral and guarantees received); and (iii) commercial loans, based principally on an evaluation of the borrower’s ability to repay its loan (including country risk, financial risk, industry risk and payment history) and an evaluation of the related collateral and guarantees.  The loan classification and rating rules also permit banks, subject to prior approval by the CNBV, to develop and adopt specific internal procedures within certain parameters to grade the loans in their loan portfolio.  Generally, our subsidiaries follow the methodology set forth in the loan classification and rating rules.  However, with respect to our commercial, corporate and financial institutions portfolios, we received approval from the CNBV, effective as of January 1, 2012, to use our internal models to determine our allowance for impairment losses as an alternative to the standard generic models developed by the CNBV.  Our approach is based on the Foundation Internal Ratings-Based Approach as defined in the Basel II accords and is based on the evaluation of four main factors: country risk, financial risk, industry risk and payment performance.  This results in an overall determination of debtor risk, which is then applied to each loan operation and mitigated by any collateral to obtain a risk grade which is associated to a provision factor.  We have a mapping between this risk grade and the internal customer rating that has been approved by the CNBV.  Our internal methodology predicts expected losses more accurately than the standard methodology because it is based on the particular characteristics of our portfolio, whereas the standard methodology approved by the CNBV is based on the Mexican banking sector as a whole, which has a higher risk profile than us.  While our internal methodology has resulted in the calculation of probabilities of default that are lower than the probabilities of default calculated and established by the CNBV in its

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standard methodology, the use of an internal methodology does not necessarily result in a reduction of capital requirements or in the allowance for impairment losses.

As we describe in note 2.g to our audited financial statements included in this annual report on Form 20-F, we do not use the internal methodology discussed above or the loan classification and rating rules set forth under the General Rules Applicable to Mexican Banks described below to determine our allowance for impairment losses for our corporate, commercial and financial institution portfolios for the purpose of our IFRS financial statements.

The loan classification and rating rules require that consumer loans to individuals be stratified on a loan-by-loan basis, considering the type of loan, amounts due, the number of unpaid billing periods applicable to the relevant loans, collateral received and other factors that may influence delinquency, on an expected loss basis; and that a statutory percentage be applied to loans that are past due for each level, as a means to create an allowance for impairment losses.  As we describe in note 2.g to our audited financial statements, we estimate our allowance for impairment losses under IFRS using exposure at default, probability of default and loss given default, a method that complies with IAS 39 and differs from the one used under the General Rules Applicable to Mexican Banks.

The allowance for impairment losses created in accordance with Mexican Banking GAAP may be decreased as the maturity of the applicable loan approaches and past due payments are made.  Credit card loans must be reserved, on a loan-by-loan basis, considering amounts due, amounts paid to the relevant date, credit limits, and minimum payments required.  Consumer loans to individuals may be classified as A, B, C, D or E, depending upon the percentage of allowance required (from 0% to 100%); credit card consumer loans may be classified as A, B-1, B-2, C, D or E also depending upon the percentage of allowance required.

Under the loan classification and rating rules, mortgage loans must also be stratified on a loan-by-loan basis, considering the number of unpaid monthly installments applicable to the relevant loans, the current loan-to-value ratio and other factors that may influence the recovery process, on an expected loss basis; and a statutory percentage must be applied to loans that are past due for each level, as a means to create an allowance for impairment losses.  Mortgage loans to individuals may be classified as A, B, C, D or E, depending upon the percentage of allowance for impairment losses required (ranging from 0% to 100%).

Since September 2011, the grading of loans to government entities, such as states and municipalities, is also based on an expected loss model that is calculated on a loan-by-loan basis. In this model the expected loss is based on both qualitative and quantitative characteristics of the debtor, as well as other factors established by the CNBV. The qualitative characteristics include socioeconomic risk and financial strength. The quantitative characteristics include payment experience, coverage of the debtor by rating agencies and financial statement ratios that capture the financial risk of the debtor.

The loan classification and rating rules establish the following categories corresponding to levels of risk and applicable allowance for impairment losses and set forth procedures for the grading of commercial loans: A-1, A-2, B-1, B-2, B-3, C-1, C-2, D and E.

Since June 2013, the grading of commercial loan portfolios is also based on an expected loss model that is calculated on a loan-by-loan basis. In this model, the expected loss is based on both qualitative and quantitative characteristics of the debtor, as well on the type and coverage of the collaterals and guarantees that cover the loans. The qualitative characteristics include country and industry risk, market position, corporate governance and quality of the management. The quantitative characteristics include payment experience in the credit bureau, payment experience with Infonavit and financial statement ratios that capture the financial risk of the debtor.

The loan classification and rating rules require that Mexican banks grade their commercial loan portfolio (except loans made to or guaranteed by the Mexican federal government) as of the end of each quarter and the classification must be reported to the CNBV.  The classification of mortgage and consumer loans is required to be made monthly and reported to the CNBV.

The allowance for impairment losses is held in a separate account on our balance sheet and all charge-offs of uncollectible loans are charged against this allowance.  Mexican banks are required to obtain authorization from their Board of Directors to charged-off loans.

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The determination of the allowance for impairment losses, particularly for commercial loans, requires management’s judgment.  The allowance for impairment lossescalculation that results from using the estimated and prescribed loss percentages may not be indicative of future losses.  Differences between the estimate of the allowance for impairment losses and the actual loss will be reflected in our financial statements at the time of charge-off.

The IFRS allowance for impairment losses requirements differs in certain significant respects from the allowance for impairment losses requirements under Mexican Banking GAAP.  Under IFRS, we estimate the impairment of loans and receivables using an incurred loss model, which is based on our historical experience of impairment and other circumstances known at the time of assessment.  Such IFRS criteria differ from the related criteria for Mexican Banking GAAP under which impairment losses are determined using prescribed formulas that are based primarily on an expected losses model.  The expected loss model formulas are developed by the CNBV using losses information compiled from the Mexican lending market as a whole, which may differ significantly from our credit loss experience. Furthermore, the risk weighting of assets under IFRS is determined using the most important factors that contribute to explaining the situation of the portfolio whereas risk weighting of assets under Mexican Banking GAAP is determined by the CNBV based on market experience during an observation period.

Liquidity Requirements for Foreign Currency-Denominated Liabilities

Pursuant to regulations of the Mexican Central Bank, the total amount of maturity-adjusted (by applying a factor, depending upon the maturity of the relevant liability) net liabilities denominated or indexed to foreign currencies that Mexican banks, their subsidiaries or their foreign agencies or branches may maintain (calculated daily), is limited to 1.83 times the amount of their Tier 1 capital.  To calculate such limit, maturity-adjusted foreign currency-denominated or indexed assets (including liquid assets, assets with a maturity of less than one year, short term derivatives and spot foreign exchange transactions) are subtracted from maturity-adjusted foreign currency-denominated or indexed liabilities, and the aforementioned factor is applied to the resulting amount.

The maturity-adjusted net liabilities of Mexican banks denominated or indexed to foreign currencies (including dollars) are subject to a liquidity coefficient (i.e., to maintaining sufficient foreign currency-denominated or indexed liquid assets).  These permitted liquid assets include, among others:

· U.S. dollar-denominated cash or cash denominated in any other currency freely convertible;

· deposits with the Mexican Central Bank;

· treasury bills, treasury bonds and treasury notes issued by the U.S. government or debt certificates issued by agencies of the U.S. government, which have the unconditional guarantee of the United States government;

· demand deposits or one- to seven-day deposits in foreign financial institutions rated at least P-2 by Moody’s Investors Service, Inc., or Moody’s, or A-2 by Standard & Poor’s Rating Services, or S&P;

· investments in mutual or similar funds or companies approved by the Mexican Central Bank, that satisfy certain requirements; and

· unused lines of credit granted by foreign financial institutions rated at least P-2 by Moody’s or A-2 by S&P, subject to certain requirements.

Such liquid assets may not be posted as collateral, lent or be subject to repurchase transactions or any other similar transactions that may limit their transferability.

Banco Santander Mexico is in compliance with the applicable reserve requirement and liquidity coefficients in all material aspects.

Lending Limits

In accordance with the General Rules Applicable to Mexican Banks, limits relating to the diversification of a bank’s lending transactions are determined in accordance with the bank’s compliance with Mexican Capitalization Requirements.  For a bank with:

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· a Capital Ratio greater than 8.0% and up to 9.0%, the maximum financing exposure to a person or a group of persons representing common risk to the bank, is limited to 12.0% of the bank’s Tier 1 capital;

· a Capital Ratio greater than 9.0% and up to 10.0%, the maximum financing exposure to a person or a group of persons representing common risk to the bank is limited to 15.0% of the bank’s Tier 1 capital;

· a Capital Ratio greater than 10.0% and up to 12.0%, the maximum financing exposure to a person or a group of persons representing common risk to the bank is limited to 25.0% of the bank’s Tier 1 capital;

· a Capital Ratio greater than 12.0% and up to 15.0%, the maximum financing exposure to a person or a group of persons representing common risk to the bank is limited to 30.0% of the bank’s Tier 1 capital; and

· a Capital Ratio greater than 15.0%, the maximum financing exposure to a person or a group of persons representing common risk to the bank is limited to 40.0% of the bank’s Tier 1 capital.

These lending limits are required to be measured on a quarterly basis.  The CNBV has discretion to reduce the aforementioned limits, if internal control systems or the risk management of the bank is inadequate.

The following financings are exempt from these lending limits:  (i) financings guaranteed by unconditional and irrevocable security interests or guarantees, that may be enforced immediately and without judicial action, granted by foreign financial institutions with investment grade ratings and established in a country member of the European Union or the Organization for Economic Cooperation and Development (which guarantees must be accompanied with a legal opinion as to their enforceability), (ii) securities issued by the Mexican government and financings made to the Mexican government, Mexican local governments (subject to such financings being guaranteed by the right to receive certain Federal taxes), the Mexican Central Bank, the IPAB and development banks guaranteed by the Mexican government, and (iii) cash (transferred to the bank lender under a deposit that may be freely disposed of by the lender).  However, such financings may not exceed 100% of a bank’s Tier 1 capital.

Likewise, financings granted to Sofomes for which the bank owns at least 99% of its capital stock, are exempted from the aforementioned limits, but such financings may not exceed 100% of a bank’s Tier 1 capital. In turn, the controlled Sofomes maintain or grant financing (regardless of the origin of the resources) to a person or a group of persons representing common risk, such financing shall comply with the aforementioned limits.

The aggregate amount of financings granted to the three largest borrowers of a bank may not exceed 100.0% of the bank’s Tier 1 capital.

Banks are not obligated to comply with the aforementioned limits with respect to financings granted to the Mexican federal government, local governments (subject to such financings being guaranteed by the right to receive certain Federal taxes), the Mexican Central Bank, IPAB and development banks guaranteed by the Mexican government.

Banks are required to disclose, in the notes to their financial statements for Mexican Banking GAAP purposes, (i) the number and amount of financings that exceed 10.0% of Tier 1 capital, and (ii) the aggregate amount of financings made to their three largest borrowers.

Funding Limits

In accordance with the General Rules Applicable to Mexican Banks, Mexican banks are required to diversify their funding risks.  In particular, a Mexican bank is required to notify the CNBV, on the business day following the occurrence of the event, in the event it receives funds from a person or a group of persons acting in concert that represent in one or more funding transactions more than 100% of such bank’s Tier 1 capital.  None of the liabilities of Banco Santander Mexico to a person or group of persons exceeds the 100% threshold.

Related Party Loans

Pursuant to the Mexican Banking Law, the total amount of the transactions with related parties may not exceed 35% of the bank’s Tier 1 capital.  For the case of loans and revocable credits, only the disposed amount will be counted.  See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Loans to Related Parties.”

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Tier 1 capital is calculated by taking into account the balance as of the last day of each month. When calculating Tier 1 capital, the General Rules Applicable to Mexican Banks establish that if the aggregate amount of operations subject to credit risk relating to relevant related parties exceeds 25% of the bank’s Tier 1 capital then the excess must be subtracted in order to determine Tier 1 capital.

On a monthly basis, we monitor and implement controls relating to the consumption of both the 35% and 25% limits in order to ensure strict compliance with the abovementioned regulations.

Foreign Currency Transactions

Mexican Central Bank regulations govern transactions by banks denominated in foreign currencies.  Mexican banks may, without any specific additional approval, engage in spot, foreign exchange transactions (i.e., transactions having a maturity not exceeding four business days).  Other foreign currency transactions are deemed derivative transactions and require approvals as discussed below.  At the end of each trading day, banks are generally obligated to maintain a balanced foreign currency position (both in the aggregate and by currency).  However, short and long positions are permitted in the aggregate, so long as such positions do not exceed 15% of a bank’s Tier 1 capital.  In addition, Mexican banks must maintain liquid assets, prescribed by regulations issued by the Mexican Central Bank, in connection with maturities of obligations denominated in foreign currencies (as discussed under “—Liquidity Requirements for Foreign Currency-Denominated Liabilities” above).

Derivative Transactions

Certain Mexican Central Bank rules apply to derivative transactions entered into by Mexican banks.  Mexican banks are permitted to enter into swaps, credit derivatives, forwards and options with respect to the following underlying assets:

· specific shares, groups of shares or securities referenced to shares; that are listed in a securities exchange,

· stock exchange indexes,

· Mexican currency, foreign currencies and UDIs (a peso-equivalent unit of account indexed for Mexican inflation),

· inflation indexes,

· gold or silver,

· swine meat, pork and cattle,

· natural gas, diesel, gasoline and crude oil,

· aluminum, copper, nickel, platinum, lead and zinc,

· wheat, corn, soybean and sugar,

· rice, sorghum, cotton, oats, coffee, orange juice, cocoa, barley, cattle, swine, milk, canola, soybean oil and soybean paste,

· nominal or real interest rates with respect to any debt instrument,

· loans or other advances; and

· futures, options and swaps with respect to the underlying assets mentioned above.

Mexican banks require an express general approval, issued in writing by the Mexican Central Bank, to enter into, as so-called intermediaries, derivative transactions, with respect to each class or type of derivative.  Mexican banks that have not received the relevant general approval would require a specific approval from the Mexican Central Bank to enter into such derivative transactions (or even if in possession of such general approval, to enter into derivative transactions with underlying assets different from the assets specified above).  Mexican banks may, however, enter into derivatives without the authorization of the Mexican Central Bank, if the exclusive purpose of

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such derivatives is to hedge the relevant bank’s existing risks.  Authorizations may be revoked if, among other things, the applicable Mexican bank fails to comply with Mexican Capitalization Requirements, does not timely comply with reporting requirements, or enters into transactions that contravene applicable law or sound market practices.

Banks that execute derivative transactions with related parties or with respect to underlying assets of which the issuer or debtor are related parties, shall comply with the corresponding limits set forth in the Mexican Banking Law in respect of related party transactions.

Institutions may collateralize derivative transactions through cash deposits, receivables and/or securities of its portfolio.  Derivative transactions that are entered into in over-the-counter (OTC) markets, may be collateralized only when the counterparties are credit institutions, brokerage firms, foreign financial institutions, mutual funds, pension fund managers, Sofomes, and any other counterpart authorized by the Mexican Central Bank.  Mexican banks are required to periodically inform their Board of Directors with respect to the derivative transactions entered into, and whether or not the Mexican bank is in compliance with limits imposed by the Board of Directors and any applicable committee.  Mexican banks must also inform the Mexican Central Bank periodically of derivative transactions entered into and whether any such transaction was entered into with a related party. The counterparties in respect of hedging derivatives transactions entered into by Mexican banks must be other Mexican banks, Mexican financial entities authorized to enter into such derivatives by the Mexican Central Bank or foreign financial institutions or recognized markets. Derivatives must be entered into pursuant to master agreements that must include terms and guidelines, similar to international standards such as ISDA master agreements and master agreements approved for the domestic market. As an exception to applicable rules, Mexican banks may pledge cash, receivables and securities to secure obligations resulting from their derivative transactions.

Banco Santander Mexico has received approval from the Mexican Central Bank to engage in swaps, forwards and options related to stocks, indices, currencies and interest rates.

Restrictions on Liens and Guarantees

Under the Mexican Banking Law, banks are specifically prohibited from (i) pledging their securities or other assets as collateral, except (a) if the Mexican Central Bank or the CNBV so authorizes, including as described above with respect to derivative transactions, or (b) for obligations in favor of the Mexican Central Bank, IPAB, Mexican development banks or governmental trusts, (ii) guaranteeing the obligations of third parties, except, generally, in connection with letters of credit and bankers’ acceptances and (iii) make loans secured by subordinated debt or rights of trusts funded by subordinated debt.

Bank Secrecy Provisions; Credit Bureaus

Pursuant to the Mexican Banking Law, a Mexican bank may not provide any information relating to the identity of its customers or specific deposits, services or any other banking transactions (including loans) to any third parties (including any purchaser, underwriter or broker, or holder of any of the bank’s securities), other than (i) the depositor, debtor, accountholder or beneficiary and their legal representatives or attorneys-in-fact, (ii) judicial authorities in trial proceedings in which the accountholder is a party or defendant, (iii) the Mexican federal tax authorities for tax purposes, (iv) the SHCP for purposes of the implementation of measures and procedures to prevent terrorism and money laundering, (v) the Federal Auditor (Auditoría Superior de la Federación) to exercise its supervisory authority (including information on accounts or agreements involving federal public resources), (vi) the supervisory unit of the Federal Electoral Agency, (vii) the federal attorney general’s office (Procuraduría General de la República) for purposes of criminal proceedings, (viii) the Treasurer of the Federation (Tesorería de la Federación), as applicable, to request account statements and any other information regarding the personal accounts of public officers, assistants and, as the case may be, individuals related to the corresponding investigation, and (ix) the Secretary and undersecretaries of the Ministry of Public Function (Secretaría de la Función Pública) when investigating or auditing the estates and assets of federal public officers, among others.  In most cases, the information needs to be requested through the CNBV.

The CNBV is authorized to furnish foreign financial authorities with certain protected information under the Mexican bank secrecy laws, provided that an agreement must be in effect between the CNBV and such authority for the reciprocal exchange of information.  The CNBV must abstain from furnishing information to foreign financial authorities if, in its sole discretion, such information may be used for purposes other than financial supervision, or by reason of public order, national security or any other cause set forth in the relevant agreement.

Banks and other financial entities are allowed to provide credit-related information to duly authorized Mexican credit bureaus.

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Money Laundering Regulations

Mexico has in effect rules relating to money laundering and terrorist financing; the most recent set of rules have been in effect since April 21, 2009 and have subsequently been amended (the “General Provisions on Money Laundering and Terrorist Financing”).

Under these provisions, our subsidiaries operating in the financial sector are required to satisfy various requirements, including:

· the establishment and implementation of procedures and policies, including client identification and know-your-customer policies, to prevent and detect actions, omissions or transactions that might favor, assist or cooperate in any manner with terrorism or money laundering activities (as defined in the Mexican Federal Criminal Code (Código Penal Federal));

· implementing procedures for detecting relevant, unusual and suspicious transactions (as defined in the General Provisions on Money Laundering and Terrorist Financing);

· reporting of relevant, unusual and suspicious transactions to the SHCP, through the CNBV; and

· the establishment of a communication and control committee (which, in turn, must appoint a compliance officer) in charge of, among other matters, supervising compliance with anti-money laundering provisions.

Our subsidiaries operating in the financial sector are also required to organize and maintain a file before opening an account or entering into any kind of transaction, for the identification of each client (each, an “Identification File”).

An individual’s Identification File shall include, among other information, a copy of the following documentation or data (which must be maintained and updated): (i) full name, (ii) sex, (iii) date of birth, (iv) nationality and country of birth, (v) tax identification number and the certificate evidencing the tax identification number issued by the SHCP or the population registry identification number and evidence thereof issued by the Ministry of Interior, as the case may be, (vi) occupation, profession, main activity or line of business, (vii) complete domicile (including telephone number), (viii) e-mail address, if any, and (ix) advanced electronic signature series number, when applicable.

An entity’s Identification File shall include, among other information, a copy of the following documentation or data (which must be maintained and updated): (i) corporate name, (ii) domicile, (iii) nationality, (iv) name of the sole administrator, the members of the Board of Directors, the general manager or any relevant attorney-in-fact, (v) main activity or line of business, (vi) tax identification number and the certificate evidencing the tax identification number issued by the SHCP, (vii) advanced electronic signature series number, when applicable, and (viii) copy of the public deed containing its constitutive documents.

Identification Files shall be maintained for the complete duration of the corresponding agreement entered into with such client, and for a minimum term of ten years from the date such agreement is terminated.

The Mexican Banking Law requires banks to have a manual for anti-money laundering procedures that is approved by the board of directors and certified by the CNBV.

Under the General Provisions on Money Laundering and Terrorist Financing, our subsidiaries operating in the financial sector must provide to the SHCP, through the CNBV, (i) quarterly reports (within ten business days from the end of each quarter) with respect to transactions equal to, or exceeding, U.S.$10,000, (ii) monthly reports (within 15 business days from the end of the month) with respect to international funds transfers, received or sent by a client, with respect to transactions equal to, or exceeding, U.S.$10,000, (iii) reports of unusual transactions, within 60 calendar days counted from the date an unusual transaction is detected by our financial subsidiaries’ systems, and (iv) periodic reports of suspicious transactions, within 60 calendar days counted from the date the suspicious transaction is detected.

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In June 2010 new regulations were issued by the SHCP, as amended in September and December 2010 and August 2011, which restrict cash transactions denominated in U.S. dollars that may be entered into by Mexican banks.  Pursuant to such regulations, Mexican banks are not permitted to receive physical cash amounts, in U.S. dollars, from individuals in excess of U.S.$4,000 per month for deposits.  Mexican banks are also not permitted to receive physical cash amounts, in U.S. dollars, from their corporate clients, except in very limited circumstances.

Also, Mexican banks are not permitted to receive physical cash amounts, in U.S. dollars, from individuals, in excess of U.S.$300 per day for individual foreign exchange transactions.  In each case, the monthly amount per individual for such transactions cannot exceed U.S.$1,500.

In addition, the newly enacted regulations set forth certain reporting obligations for Mexican banks regarding their U.S. dollar cash transactions, to the SHCP (through the CNBV).

On October 17, 2012, the Federal Law to Prevent and Identify Transactions with Illegal Proceeds, or the New Money Laundering Law (Ley Federal para la Prevención e Identificación de Operaciones con Recursos de Procedencia Ilícita), was published in the Official Gazette of the Federation. The New Money Laundering Federal Law became effective on July 17, 2013. The law punishes “Vulnerable Activities,” which is defined in the applicable regulations as all acts that have a high tendency to result in a crime through the use of illegal proceeds. In addition, under such law, the SHCP is given broad authority to obtain information about unlawful activities, coordinate activities with foreign authorities and present claims related to unlawful activities. This law also grants authority to the Federal Attorney General (Procuraduría General de la República) to investigate and prosecute illegal activities, in coordination with the SHCP.

Additionally, pursuant to the Mexican Banking Law reforms published in the Official Gazette of the Federation (Diario Oficial de la Federación) on January 10, 2014, the following sanctions were included, with the purpose of preventing and detecting operations that might encourage acts of terrorism:

· A fine of 10% to 100% of the amount of the activity, operation or service performed by an entity for a client or user the entity knows to be on the blocked persons list prepared by the SHCP.

· A fine of 10% to 100% of the amount of any unreported unusual transaction and, if applicable, any additional transactions related to same client or user involved in the unreported transaction.

· A fine of 30,000 to 100,000 days’ worth of the minimum wage applicable in Mexico for significant transactions or, if applicable, a series of related transactions involving international transfers and unreported transactions in cash undertaken in a foreign currency.

· A fine of 5,000 to 50,000 days’ worth of the minimum wage applicable in Mexico for other failures to comply with applicable law.

The last amendments to the General Provisions on Money Laundering and Terrorist Financing were published in the Official Gazette of the Federation (Diario Oficial de la Federación) on April 25, 2014, September 12, 2014 and December 31, 2014, adding the following obligations to the prevention of money laundering and terrorist financing:

· Provide the CNBV, through the Financial Intelligence Unit (Unidad de Inteligencia Financiera), within the first ten business days of January, April, July and October of each year, a report for each issuance or payment of cashier’s checks carried out with its clients or users in the previous three months in an amount equal to or exceeding U.S.$10,000.

· Inform the CNBV prior to, or simultaneously with, the sharing of information regarding money laundering and terrorist financing activities,

· Immediate cancellation of any transaction or service related to a client or user identified to be on the SHCP’s blocked persons list and notification to the client that it has been included on such list.

· Inform the CNBV, within the first 15 business days of January of each year, through electronic media and on the official form, a report containing the annual program of training courses for the current year.

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Rules on Interest Rates

Mexican Central Bank regulations limit the number of reference rates that may be used by Mexican banks as a basis for determining interest rates on loans.  For peso-denominated loans, banks may choose any of a fixed rate, the Mexican benchmark interbank money market rate (Tasa de Interés Interbancaria de Equilibrio, or TIIE), Mexican Treasury bills (Certificados de la Tesorería de la Federación, or Cetes) rate, CCP (costo de captación promedio a plazo), the rate determined by the Mexican Central Bank as applied to loans funded by or discounted with NAFIN, the rate agreed upon with development banks in loans funded or discounted with them, the weighted bank funding rate (tasa ponderada de fondeo bancario) and the weighted governmental funding rate (tasa ponderada de fondeo gubernamental).  For UDI-denominated loans, the reference rate is the UDIBONOS.  For foreign currency-denominated loans, banks may choose any of a fixed rate or floating market reference rates that are not unilaterally determined by a financial institution, including LIBOR or the rate agreed upon with international or national development banks or funds, for loans funded by or discounted with such banks or funds.  For dollar-denominated loans, banks may choose either a fixed rate or any of the rates referred to in the prior sentence or CCP-Dollars, as calculated and published in the Official Gazette of the Federation by the Mexican Central Bank.

The rules also provide that only one reference rate can be used for each transaction and that no alternative reference rate is permitted, unless the selected reference rate is discontinued, in which event a substitute reference rate may be established.  A rate, or the mechanism to determine a rate, may not be modified unilaterally by a bank.  Rates must be calculated annually, based upon 360-day periods.

On November 11, 2010, the Mexican Central Bank published new rules that regulate the issuance and use of credit cards.  Such rules standardize the regulations and forms that enable cardholders to authorize charges for recurrent payments relating to goods and services and standardize the procedures for objecting to improper charges and cancelling such services quickly and securely.  The rules also establish the way in which credit card issuers shall determine the amount of the minimum payment in each period by means of a formula that favors payment of a part of the principal at the time of each minimum payment, with the aim of achieving payment of debts within a reasonable time period.  Such rules also include certain protection provisions for card users in case of theft or loss of their credit cards, the creation of incentives to credit card issuers to adopt additional measures to reduce risks derived from use of credit cards in internet transactions and the wrongful use of information contained in credit cards.  These rules did not have a material impact on our operations or financial condition.

Fees

Under Mexican Central Bank regulations, Mexican banks and Sofomes may not, in respect of loans, deposits or other forms of funding and services with their respective clients, among others, (i) charge fees that are not included in their respective, publicly disclosed, aggregate annual cost (costo anual total), (ii) charge alternative fees, except if the fee charged is the lower fee, and (iii) charge fees for the cancellation of credit cards issued.  In addition, among other things, Mexican banks may not (i) charge simultaneous fees, in respect of demand deposits, for account management and relating to not maintaining minimum amounts, (ii) charge fees for returned checks received for deposit in a deposit account or as payment for loans granted, (iii) charge fees for cancellation of deposit accounts, debit or teller cards, or the use of electronic banking services, or (iv) charge different fees depending upon the amount of a money transfer.  Under the regulations, fees arising from the use of ATMs must be disclosed to users.

Mexican banks and Sofomes operating or permitting customers to use ATMs must choose between two options for charging fees to clients withdrawing cash or requesting balances: (i) specifying a fee for the relevant transactions, in which case, Mexican banks and Sofomes issuing credit or debit cards may not charge cardholders any additional fee (credit or debit card issuers are entitled to charge operators the respective fee), or (ii) permit credit card or debit card issuers to charge a fee to clients, in which case, banks and Sofomes may not charge additional fees to clients.

The Mexican Central Bank, on its own initiative or as per request from the CONDUSEF, banks or Sofomes, may assess whether reasonable competitive conditions exist in connection with fees charged by banks or Sofomes in performing financial operations.  The Mexican Central Bank must obtain the opinion of the CFC in carrying out this assessment.  The Mexican Central Bank may take measures to address these issues.

The Mexican Central Bank published rules that modified the rules on ATM user fees which limited the Bank’s ability to charge fees for the use of ATMs by customers and the amount of such fees for services including: (i) cash

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withdrawals, (ii) checking account balances, (iii) deposits and (iv) payments, both in bank windows and ATMs operated by the clients’ bank. The rules also specify that ATMs shall show a clear legend on their screens regarding costs of the transaction so the client may decide whether to proceed with the transaction.

IPAB

The IPAB Law, which became effective January 20, 1999, provides for the creation, organization and functions of IPAB, the Mexican bank savings protection agency.  IPAB is a decentralized public entity that regulates the financial support granted to banks for the protection of bank deposits and other bank credits.

Only in exceptional cases may IPAB grant financial support to banking institutions.

According to the IPAB Law, banks must provide the information required by IPAB for the assessment of their financial situation and notify IPAB about any event that could affect their financial stability.  The IPAB Law expressly excludes the release of such data from bank secrecy provisions contained in the Mexican Banking Law and expressly provides that IPAB and the CNBV can share information databases of banks.

IPAB will manage and sell the loans, rights, shares and any other assets that it acquires to perform its activity according to the IPAB Law, to maximize their recovery value.  IPAB must ensure that the sale of such assets is made through open and public procedures.  The Mexican President is required to present annually a report to Congress prepared by IPAB with a detailed account of the transactions conducted by IPAB in the prior year.

IPAB has a governing board of seven members: (i) the Minister of Finance and Public Credit, (ii) the Governor of the Mexican Central Bank, (iii) the President of the CNBV, and (iv) four other members appointed by the President of Mexico, with the approval of two-thirds of the Senate.

The deposit insurance to be provided by IPAB to bank depositors will be paid upon determination of the dissolution and liquidation, or bankruptcy of a bank.  IPAB will act as liquidator or receiver in the dissolution and liquidation, or bankruptcy of banks, either directly or through designation of a representative.  IPAB will guarantee obligations of banks to certain depositors and creditors only up to the amount of 400,000 UDIs (or approximately U.S.$143,000 as of December 31, 2014), per person per bank.

Banks have the obligation to pay IPAB ordinary and extraordinary contributions as determined from time to time by the Governing Board of IPAB. For such purposes, banks must promptly deliver to the IPAB information regarding their liabilities for the determination of their ordinary quotas. Under the IPAB Law, banks are required to make monthly ordinary contributions to IPAB, equal to one-twelfth of 0.004% multiplied by the average of the daily outstanding liabilities of the respective bank in a specific month, less (i) holdings of term bonds issued by other commercial banks; (ii) financing granted to other commercial banks; (iii) financing granted by IPAB; (iv) subordinated debentures that are mandatorily convertible in shares representing the capital stock of the banking institution; and (v) restricted assets and liabilities resulting from the repurchase transactions (reportos) and lending of securities with the same counterparty, pursuant to the provisions issued by IPAB.

IPAB’s Governing Board also has the authority to impose extraordinary contributions in the case that, given the conditions of the Mexican financial system, IPAB does not have available sufficient funds to comply with its obligations.  The determination of the extraordinary contributions is subject to the following limitations: (i) may not exceed, on an annual basis, the amount equivalent to 0.003% multiplied by the total amount of the liabilities outstanding of the banking institutions that are subject to IPAB ordinary contributions; and (ii) the aggregate amount of the ordinary and extraordinary contributions may not exceed, in any event, on an annual basis, an amount equivalent to 0.008% multiplied by the total amount of a bank’s liabilities subject to IPAB contributions.

The Mexican Congress allocates funds to IPAB on a yearly basis to manage and service IPAB’s liabilities.  In emergency situations, IPAB is authorized to incur additional financing every three years in an amount not to exceed 6% of the total liabilities of certain Mexican banks as determined by the CNBV.

Under the IPAB law, in the event the quotas are not timely paid, between 30% and 100% of the value of the omitted quota may be imposed as a fine.

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Law for the Protection and Defense of Financial Services Users

A Law for the Protection and Defense of Financial Services Users is in effect in Mexico.  The purpose of this law is to protect and defend the rights and interests of users of financial services.  To this end, the law provides for the creation of CONDUSEF, an autonomous entity that protects the interests of users of financial services and that has very wide authority to protect users of financial services (including imposing fines).  CONDUSEF acts as mediator and arbitrator in disputes submitted to its jurisdiction and seeks to promote better relationships among users of financial institutions and the financial institutions.  Banco Santander Mexico and its subsidiaries must submit to CONDUSEF’s jurisdiction in all conciliation proceedings (initial stages of a dispute) and may choose to submit to CONDUSEF’s jurisdiction in all arbitration proceedings that may be brought before it.  The law requires banks to maintain an internal unit designated to resolve any and all controversies submitted by clients.  Our financial subsidiaries maintain such a unit.

CONDUSEF maintains a Registry of Financial Service Providers (Registro de Prestadores de Servicios Financieros), in which all financial services providers must be registered, that assists CONDUSEF in the performance of its activities.  This Registry will be replaced as explained below. CONDUSEF is required to publicly disclose the products and services offered by financial service providers, including interest rates.  To satisfy this duty, CONDUSEF has wide authority to request any and all necessary information from financial institutions.  Furthermore, CONDUSEF may scrutinize banking services provided by approving and supervising the use of standard accession agreements.

CONDUSEF, (i) is entitled to initiate class actions against Mexican financial institutions, in connection with events affecting groups of users of financial services, (ii) shall maintain a new Bureau of Financial Entities (Buró de Entidades Financeras), which is to set forth any and all information deemed material for users of financial services, (iii) is empowered to order amendments to any of the standard form commercial banking documentation (such as account and loan agreements) used by financial institutions, if it considers provisions thereof as detrimental to users, (iv) is permitted to issue resolutions as part of arbitration proceedings, for the benefit of issuers, that would permit users to attach assets of a financial institution prior to the completion of arbitration proceedings, and (v) is given broader authority to fine financial institutions, if any such financial institution does not comply with an order issued by CONDUSEF.

Banco Santander Mexico and its subsidiaries may be required to provide reserves against contingencies which could arise from proceedings pending before CONDUSEF.  Our financial subsidiaries may also be subject to recommendations by CONDUSEF regarding our standard agreements or information used to provide our services.  Our financial subsidiaries may be subject to coercive measures or sanctions imposed by CONDUSEF.  Our financial subsidiaries are not the subject of any material proceedings before CONDUSEF.

Law for the Transparency and Ordering of Financial Services

The Law for the Transparency and Ordering of Financial Services regulates (i) the fees charged to clients of financial institutions for the use and/or acceptance of means of payment, as with debit cards, credit cards, checks and orders for the transfer of funds, (ii) the fees that financial institutions charge to each other for the use of any payment system, (iii) interest rates that may be charged to clients, and (iv) other aspects related to financial services, all in an effort to make financial services more transparent and protect the interests of the users of such services.  This law grants the Mexican Central Bank the authority to regulate interest rates and fees and establish general guidelines and requirements relating to payment devices and credit card account statements (see “—Rules on Interest Rates” and “—Fees” above).  The Mexican Central Bank has the authority to specify the basis upon which each bank must calculate its aggregate annual cost (costo anual total), which comprises interest rates and fees, on an aggregate basis, charged in respect of loans and other services.  The aggregate annual cost must be publicly disclosed by each bank.  The law also regulates the terms that banks must include in standard accession agreements and the terms of any publicity and of information provided in account statements.  Our subsidiaries operating in the financial sector must inform the Mexican Central Bank of any changes in fees at least 30 calendar days before they become effective.

As part of the financial reform passed in 2013, the Mexican Congress approved changes to the Law for the Transparency and Ordering of Financial Services pursuant to which the Mexican Central Bank may issue temporary regulations applicable to interest rates and fees, if it or the CFC determines that no reasonable competitive conditions exist among financial institutions. Also, the Mexican Central Bank and the CNBV are given authority to

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issue rules regulating the means to obtain funds (i.e., credit cards, debit cards, checks and funds transfers), as a means to ensure competition, free access, no discrimination and protecting the interests of users.

Law on Transparency and Development of Competition for Secured Credit

The Law on Transparency and Development of Competition for Secured Credit (Ley de Transparencia y de Fomento a la Competencia en el Crédito Garantizado, or the “Secured Credit Law”) provides a legal framework for financial activities and certain other services performed by private credit institutions (as opposed to governmental entities) in connection with secured loans relating to real property in general and housing in particular (i.e., purchase, construction, restoration or refinancing).  In particular, the Secured Credit Law established specific rules requiring the following: (i) the disclosure of certain information by credit institutions to their clients prior to the execution of the relevant loan agreement, including the disclosure of certain terms relating to interest rates, aggregate costs and expenses payable; (ii) the compliance by credit institutions and borrowers with certain requirements in the application process; (iii) the binding effect of offers made by credit institutions granting secured loans; (iv) the inclusion of mandatory provisions in loan agreements; and (v) the assumption of certain obligations by public officers (or notaries) before whom secured loans are granted.

In addition, the Secured Credit Law seeks to foster competition among credit institutions by permitting security interests underlying a secured loan to survive any refinancing thereof, even if such loans were granted by different credit institutions.  This provision of the Secured Credit Law is designed to reduce expenditures made by borrowers.

Brokerage Firms

Brokerage firms (casas de bolsa) are regulated by, and subject to the supervision of, the CNBV, and are subject to the Mexican Securities Market Law and the General Rules Applicable to Brokerage Firms (Disposiciones de Carácter General Aplicables a las Casas de Bolsa) issued by the CNBV.  Their principal business includes the brokerage, underwriting and intermediation of securities, the sale and trading of securities (either on their own behalf or on behalf of third parties), and the provision of investment and portfolio management advice to their clients.  The CNBV has the power to authorize the incorporation and operation of brokerage firms, with the power to revoke any such authorizations.  Our subsidiary, Casa de Bolsa Santander, operates its business as a brokerage firm, and therefore, is subject to regulation and supervision by the CNBV.

Management of Broker-Dealers

Broker-dealers are managed by a board of directors and by a general director.

The board of directors may have up to 15 members, 25% of whom are required to be independent. The board of directors of our broker-dealer has 11 members, 7 of which are independent.

The broker-dealer must also maintain an audit committee.  Our broker-dealer’s audit committee comprises five members, all of whom are independent.

The board of directors is required to create a compensation committee which shall be responsible for implementing, keeping and evaluating the compensation system applicable to employees.

Capitalization

Broker-dealers are required to maintain a minimum capital depending upon their activities and it may not be less than the amount resulting from the capital requirements established by the CNBV, which depend on the risks undertaken by the broker-dealer. Broker-dealers must annually evaluate if their capital is sufficient to meet their losses deriving from such risks. The CNBV classifies broker-dealers in different categories considering their capitalization index and its components, as well as additional capital requirements pursuant to the Securities Market Law.

If minimum capitalization levels are not maintained, the CNBV may take measures against the applicable broker-dealer, which include (i) informing the CEO and chairman of the Board of Directors of its controlling  holding company of its classification, as well as the causes leading to such classification, including a detailed report evaluating its financial situation, (ii) filing before the CNBV a capital restoration plan resulting in an increase of its capitalization index, (iii) suspending the payment of dividends and other distributions to shareholders,

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(iv) suspending the payment of bonuses and extraordinary compensation to the general director and higher level officers, and (v) ordering the suspension of activities that may impact the broker-dealer’s capital.

Suspension and Limitations of Activities

The CNBV may suspend or limit the activities of a broker-dealer if (i) internal infrastructure or internal controls are not sufficient for its activities, (ii) it conducts activities different from authorized activities, (iii) it conducts activities affected by conflicts of interest, (iv) undertakes securities transactions on the Mexican Stock Exchange, and (v) transactions are omitted or incorrectly entered into the broker-dealer’s accounting.

In addition, the CNBV may intervene and commence the management of a broker-dealer, if any events affect the broker-dealer that may have an impact on the soundness, solvency or liquidity, or affect the interests of the broker-dealer’s clients.

New rules relating to sales practices require broker-dealers to profile clients and only sell securities to those clients meeting their risk profile.

Revocation of Authorization

The CNBV may revoke the authorization to operate as a broker-dealer if, among other things, it (i) does not incorporate or does not file its incorporation deed before the Public Registry of Commerce within six months counted from the date of the authorization, (ii) does not pay the minimum capital upon incorporation, (iii) does not start operations within six months counted from the date of its registration before the Public Registry of Commerce, (iv) obtains the authorization to incorporate and operate using false documentation or information or misrepresentations, (v) incurs losses that reduce its capital to a level lower than the minimum required, (vi) knowingly provides false, imprecise or incomplete information to the financial authorities that do not adequately reflect its actual financial, administrative, economic and legal situation, (vii) does not comply with the minimum or special preventive or corrective measures, (viii) repeats an offense or conduct that resulted in a partial suspension of its activities, (ix) repeatedly fails to comply with the provisions regarding the separation between the cash and securities of its clients and the broker-dealer assets, (x) repeatedly fails to comply with the provisions of operative and accounting registries, (xi) repeatedly fails to fulfill its obligations deriving from contractual operations for causes attributable to itself, (xii) gravely or repeatedly infringes applicable law, (xiii) does not perform its corporate purpose for a period of over six months, (xiv) enters dissolution and liquidation procedures, and (xv) is declared bankrupt by a judicial authority.

Systems for Handling Orders

Broker-dealers are required to maintain an automatic system to receive, register, assign and execute orders for transactions with securities received by clients.  Such system must distinguish (i) type of client, and (ii) different orders received.  Broker-dealers are required to inform clients of their schedules to receive orders and time-periods during which transactions shall remain in effect.

Secrecy

Under the Securities Market Law, broker-dealers may not provide any information in respect of transactions undertaken or services offered, except to the owner or holder of the account, to beneficiaries or their legal representatives, except if required by judicial authorities as a result of an order or to tax authorities, solely for tax purposes.

Traders and Operators

Broker-dealers may only engage in transactions with the public through authorized officers, and only if such officers have passed certain required exams and have been granted sufficient authority, through powers of attorney, by the broker-dealer.

Third-Party Services

Broker-dealers may contract with third parties any of the services required for their operations, as long as such broker-dealers obtain the approval of the CNBV and (i) maintain procedures to continuously monitor the

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performance of the service provider, (ii) cause the service provider to always grant CNBV access in connection with its supervisory rate, (iii) ensure that third-party service providers maintain confidentiality, and (iv) report to the CNBV the criteria used for selecting the service provider, the services in effect contracted, and risks arising from services provided.

For the provision of advisory and non-advisory services the broker-dealers must have separate and independent business areas, complying with the general regulations issued by the CNBV.

Financial Reporting

Broker-dealers are required to disclose to the public (i) internal financial statements for the quarters ending in March, June and September, within one month from the end of this applicable quarter, and (ii) audited financial statements for each full fiscal year, within 60 days following the end of the applicable fiscal year.

Dodd-Frank Act

Regulation of Derivatives

Title VII of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act, establishes a new U.S. regulatory regime for derivatives contracts, including swaps, security-based swaps and mixed swaps (generically referred to in this paragraph as “swaps”).  Among other things, Title VII provides the Commodity Futures Exchange Commission, or CFTC, and the SEC, with jurisdiction and regulatory authority over swaps, establishes a comprehensive registration and regulatory framework applicable to swap dealers and other major market participants in swaps (referred to as “major swap participants”), imposes clearing and execution requirements on many types of swaps, requires higher margin requirements for uncleared swaps, and requires swap market participants to report all swaps transactions to swap data repositories.  Entities that are swap dealers, security-based swap dealers, major swap participants or major security-based swap participants are required to register with the CFTC or the SEC, or both, and are or will be subject to new capital, margin, business conduct, recordkeeping, clearing, execution, reporting, and other requirements. The specific parameters of these requirements are being developed through CFTC, SEC and bank regulator rulemakings.

Banco Santander Mexico may, in the future, determine that it is required to register as a swap dealer with the CFTC or SEC as a result of its swaps activities. Banco Santander Mexico will face increased costs and regulatory oversight if it registers as a swap dealer due to the regulatory requirements indicated above.

Volcker Rule

Within the Dodd-Frank Act, the Volcker Rule prohibits “banking entities” from engaging in certain forms of proprietary trading or from sponsoring, investing in or entering into certain credit-related transactions with related covered funds, in each case subject to certain limited exceptions. The Volcker Rule became effective on July 21, 2012 and on December 10, 2013, U.S. regulators issued final rules implementing the Volcker Rule. The statute and final rules also contain exclusions and certain exemptions for market-making, hedging, underwriting, trading in U.S. government and agency obligations as well as certain foreign government obligations, trading solely outside the United States, and also permit certain ownership interests in certain types of funds to be retained.

On December 10, 2013, the Federal Reserve extended the period for all banking entities to conform with the Volcker Rule and implement a compliance program until July 21, 2015. In December 2014, the Federal Reserve issued an order extending the Volcker Rule’s general conformance period until July 21, 2016 for investments in and relationships with covered funds and certain foreign funds that were in place on or prior to December 31, 2013 (“legacy covered funds”), and stated its intention to grant a final one-year extension of the general conformance period, to July 21, 2017, for banking entities to conform ownership interests in and relationships with legacy covered funds. This extension of the conformance period does not apply to the Volcker Rule’s prohibitions on proprietary trading or to any investments in and relationships with covered funds put in place after December 31, 2013. Banking entities such as Banco Santander Parent must bring their activities and investments worldwide into compliance with the requirements of the Volcker Rule by the end of the conformance period. Banco Santander Parent, including Grupo Financiero Santander Mexico, is developing and implementing plans to bring affected businesses into compliance.

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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, 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.

During the period covered by this annual report, neither Grupo Financiero Santander Mexico nor any of its subsidiaries engaged in any activities or transactions requiring disclosure pursuant to Section 13(r).

The following activities are disclosed in response to Section 13(r) with respect to certain affiliates of Santander UK, one of our affiliates within the Santander Group.

During the period covered by this annual report:

(a)  Santander UK holds frozen savings and current accounts for three customers resident in the U.K. who are currently designated by the U.S. for terrorism. The accounts held by each customer were blocked after the customer’s designation and have remained blocked and dormant throughout 2014. No revenue has been generated by Santander UK on these accounts.  The bank account held for one of these customers was closed in the fourth quarter of 2014.

(b)  An Iranian national, resident in the U.K., who is currently designated by the U.S. under the Iranian Financial Sanctions Regulations and the Non-Proliferation of Weapons of Mass Destruction (“NPWMD”) designation, holds a mortgage with Santander UK 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 instalments.  In 2014, total revenue in connection with the mortgage was approximately Ps.2,580 while 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 also holds two investment accounts with Santander Asset Management UK Limited. The accounts have remained frozen during 2014.  The investment returns are being automatically reinvested, and no disbursements have been made to the customer. Total revenue for the Santander Group in connection with the investment accounts was approximately Ps.250 while net profits in 2014 were negligible relative to the overall profits of Banco Santander Parent.

(c)  In addition, during the third quarter 2014, Santander UK has identified two additional customers. A U.K. national designated by the U.S. under the NPWMD sanctions program held a business account.  No transactions were made and the account was closed in the fourth quarter of 2014.  No revenue or profit has been generated.  A second U.K. national designated by the U.S. for terrorism held  a personal current account and a personal credit card account, both of which were closed in the third quarter. Although transactions took place on the current account during the third quarter of 2014, revenue and profits generated were negligible. No transactions took place on the credit card.

In addition, the Santander Group has certain legacy export credits and performance guarantees with 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. Banco Santander Parent 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 Parent participated in a syndicated credit facility for Bank Mellat of €15.5 million, which matures on July 6, 2015. As of December 31, 2014, the Santander Group was owed €2.3 million under this credit facility.

Banco Santander Parent has not been receiving payments from Bank Mellat under any of these credit facilities in recent years.  Banco Santander Parent 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 Banco Santander Parent under these facilities since they were granted.

The Santander 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

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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 Santander 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 €41,000 gross revenues and approximately €80,500 net loss to the Santander Group in the year ended December 31, 2014, all of which resulted from the performance of export credit agencies rather than any Iranian entity. The Santander 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 Santander 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 Santander Group intends to continue to provide the guarantees and hold these assets in accordance with company policy and applicable laws.

C.  Organizational Structure

Banco Santander Parent is our controlling shareholder and owns, directly or indirectly, 74.97% of our total capital stock. The Santander Group, through its stand-alone subsidiaries, was one of the largest foreign bank groups in Latin America in terms of assets as of December 31, 2014, based on publicly available annual reports.  As of December 31, 2014, the Santander Group had 12,951 branches and a presence in 10 principal markets.  As a result of its voting control over us, the Santander Group is in a position to cause the election of a majority of the members of our management and to determine substantially all matters to be decided by a vote of shareholders.

The following chart presents our corporate structure, indicating our principal subsidiaries and respective ownership interests as of December 31, 2014.

IFRS at December 31, 2014	IFRS at December 31 2014
Total assets:  Ps.948,769 million (99.9% of total) Net income:  Ps.13,336 million (100.3% of total) Total equity:  Ps.100,583 million (98.3% of total)	Total assets:  Ps.895 million (0.1% of total) Net income:  Ps.(2) million (0.02% of total) Total equity:  Ps.1,010 million (1.0% of total)

All of our principal subsidiaries are incorporated in Mexico.

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D.  Property, Plants and Equipment

We are domiciled in Mexico and own our principal executive offices, which are located at Avenida Prolongación Paseo de la Reforma 500, Colonia Lomas de Santa Fe, Delegación Álvaro Obregón, 01219, México, Distrito Federal, Mexico.

We also own two other buildings in Queretaro and rent 146 other buildings. The branches operated at rented locations have lease terms varying from 1 to 10 years.

The following table sets forth our main properties as of the date indicated.

Main properties as of December 31, 2014	Number
Central Offices
Owned		3
Rented		146
Total		149
Branches
Owned		4
Rented(1)		1,300
Total(2)		1,304
SME Center
Owned		0
Rented		18
Total		18
Other Property(3)
Owned		0
Rented		932
Total		932

(1) Includes 68 branches under bailment (comodato).

(2) We also have 42 box offices to service Santander Select customers, which share the same property.  These box offices are not included in this line item.

(3) Consists mainly of back offices, storage, parking lots and ATMs.

For additional information about our property, plants and equipment, see note 2.j to our audited financial statements.

On April 27, 2012, Banco Santander Mexico entered into an agreement to sell 220 properties (branches, offices and parking lots) to Fibra Uno, a Mexican publicly traded real estate investment trust.  The sale of the properties was completed in May 2012 for Ps.3,334 million, which resulted in the recognition of net gains in the  amount of Ps.1,730 million.  Under the agreement, the properties were immediately leased back to Banco Santander Mexico for a period of 20 years with an annual rent of Ps.275 million. See note 15 to our audited financial statements.

We are in the final stages of our intended plan to add 200 new branches to our branch network between the fourth quarter of 2012 and the first half of 2015.  We expect that this expansion will cost approximately Ps.1.25 billion and will be funded using our working capital.  We expect to open an additional 15 branches and invest Ps.80 million in connection with these 15 new branches during 2015.

ITEM 4A.  UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Principal Factors Affecting Our Financial Condition and Results of Operations

All of our operations are located in Mexico.  Consequently, our results of operations and our financial condition are strongly affected by the general economic environment and political conditions existing in Mexico.

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Economic Environment

In 2010, economic activity recovered from the lows observed in 2009, mainly driven by a sharp rebound in external demand.  GDP growth was 5.1% in 2010, with broad recoveries in all sectors, particularly in the manufacturing and services sectors.  Manufacturing increased 8.55%, while electricity, water and gas supply sectors grew 4.5% in real annual terms in the same period.  Headline inflation reached 4.4% for the year, slightly above the Mexican Central Bank’s long-term objective of 3.0%.  The consequences of the worldwide financial crisis that began in 2008 continued to affect our operating performance during the first half of 2010.  Specifically, charge-offs related to our credit card business were made during this period, while low interest rates had an adverse impact on our financial margins.  However, as the Mexican economy strengthened in the second half of 2010, business conditions improved in Mexico.

In 2011, the Mexican economy continued to grow.  Mexico’s GDP grew 4.0%, with strong growth rates in the industrial and services sectors.  Manufacturing increased 4.6% in 2011 compared to 2010, while construction increased by 4.1% during 2011.  At the same time, headline inflation decreased slightly to 3.8% for the year compared to 4.4% in 2010.  The peso strengthened against the U.S. dollar to levels not seen since October 2008, although conditions in the global economy resulted in 14.1% depreciation during the year.

In 2012, the Mexican economy continued to grow at an annual GDP growth rate of 4.0%.  Service activities grew 4.5% in 2012 compared to 2011, while trade and manufacturing grew 4.8% and 4.0%, respectively in the same period.  At the same time, headline inflation remained stable during 2012 at 3.6%. The peso strengthened slightly during the year.

In 2013, the Mexican economy posted a sharp decline, with an annual GDP growth rate of just 1.4%. Service activities grew by 2.51% in 2013 compared to 2012, with a 2.34% growth in trade activities during the same period. Manufacturing increased 0.1% in 2013. At the same time, headline inflation posted a slight increase and closed at 3.97%, while the peso depreciated 1.7% against the U.S. dollar during the year.

In 2014, the Mexican economy grew at an annual GDP growth rate of 2.1%, supported mainly by external demand as domestic consumption continued to lag. At the same time, headline inflation posted a slight increase due to the fiscal reform and was 4.1% at year end, while the peso depreciated 12.6% against the U.S. dollar during the year. The sharp drop in global oil prices, the normalization process of U.S. monetary policy and global economic uncertainty continue to increase volatility in the foreign exchange market.

Effects of Changes in Interest Rates

In 2010, economic activity recovered after the crisis of the previous two years and central banks around the world contributed to the economic recovery with monetary policies that kept interest rates close to zero.  Given the fragility of the economic recovery and the situation in the labor markets coming from sharp increases in the prices of commodities, central banks maintained the monetary stimulus in 2010, regardless of inflationary pressures.  In this context, the Mexican Central Bank left the interest rate unchanged at 4.5%, a level set in July 2009.  The 28-day Mexican Treasury bills (Certificados de la Tesorería de la Federación, or Cetes) rate started at 4.5% and by the end of 2010 was at 4.5%, with an average of 4.4% during the year.

In 2011 and 2012, the Mexican economy continued to recover without experiencing a significant increase in inflation.  In this context, monetary authorities in Mexico did not change the interest rate during 2012, which was 4.5% from July 2009 to March 2013.  Short-term interest rates, as measured by the 28-day Cetes rate, began 2011 at an average level of 4.14% and have remained relatively stable, closing at an average rate of 4.05% during December 2012. In March 2013, the Mexican Central Bank changed the interest rate to 4.0%, and in the second half of 2013, further reduced the interest rate by 25 basis points, both in September and October, leaving the target rate at 3.5%. In June 2014, the Mexican Central Bank announced a 50 basis point interest rate reduction due to a weaker-than-expected performance by the economy, leaving the target rate at the current level of 3.0%. This low interest rate environment over the past years has impacted both our cost of funding and our interest income in different ways depending on the portfolio or activity conducted.  The Assets and Liabilities Committee (Comité de Activos y Pasivos, or ALCO) portfolio (which is comprised of fixed rate positions, mainly Mexican sovereign bonds, in addition to fixed rate swaps) has provided a hedge against reductions in interest rates, and our sensitivity to a parallel shift of 100 basis points in the interest rate curve over the course of the last five years has been around 2% of the net interest margin for each year.  Similarly, and given that interest rates have remained relatively stable since

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2009, we consider the effects of low interest rates on our net interest margin as non-material over the past five years. Our balance sheet is currently positioned such that increases in interest rates would result in increases in the net interest margin.  This is reflected in the current levels of NIM consumption, which show that a 100 basis point parallel shift in the interest rate curve would result in an increase in the net interest margin, and a 100 basis point parallel decrease in the interest rate curve would result in a decrease in the net interest margin.For further detail, see “Item 11. Quantitative and Qualitative Disclosures About Risk—Market Risk—Stress Tests—Assets and Liabilities Management (Banking Books).”

Critical Accounting Policies

The following is a description of certain key accounting policies on which our financial condition and results of operations are dependent.  The key accounting policies generally involve complex quantitative analyses or are based on subjective judgments or assumptions.  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.  For a full description of our accounting policies, see notes 1.c and 2 to our audited financial statements included elsewhere in this annual report on Form 20-F.

Fair value measurements and disclosures of financial instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e. an exit price) regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, we take into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date.

When there is no market price available for an identical instrument, we measure fair value on the basis of other valuation techniques that are commonly used by the financial markets that maximize the use of relevant observable inputs and minimize the use of unobservable inputs as explained in note 2.d to our audited financial statements included elsewhere in this annual report on Form 20-F.

The availability of observable prices or inputs varies by product and market, and may change over time. The level of management judgment required in establishing fair value of financial instruments for which there is a quoted price in an active market is minimal. Similarly, there is little subjectivity or judgment required for instruments valued using valuation models that are standard across the industry and where all parameter inputs are quoted in active markets. The level of subjectivity and degree of management judgment required are more significant for those instruments valued using specialized and sophisticated models and those where some or all of the parameter inputs are not observable

In making appropriate valuation adjustments, we follow methodologies that consider factors such as liquidity and credit risk (both counterparty credit risk in relation to financial assets and our own credit risk in relation to financial liabilities, which are at fair value through profit or loss).

We are required to disclose the valuation methods used to determine fair value measurements. Specifically, segmentation is required between those valued using quoted market prices in an active market (Level 1), valuation techniques based on observable inputs (Level 2) and valuation techniques using significant unobservable inputs (Level 3).  Such disclosure is provided in note 2.d.iii (for assets and liabilities carried at fair value) and note 45.c (for financial instruments that are carried at amortized cost) to our audited financial statements included elsewhere in this annual report on Form 20-F.

Deferred tax assets

As further described in note 2.t to our audited financial statements included elsewhere in this annual report on Form 20-F, 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 recovered or the liability is settled.

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In determining the amount of deferred tax assets, we use current expectations and estimates on projections of future events and trends which may affect our audited financial statements, including a review of the eligible carryforward periods, available tax planning opportunities and other relevant considerations.

We believe that the accounting estimate related to the deferred tax assets is a critical accounting estimate because it requires significant management judgment and the underlying assumptions used in the estimate can change from period to period (for example, future projected operating performance).

Impairment of financial assets classified as available-for-sale

Our financial assets, other than those at fair value through profit or loss, are assessed for impairment at each reporting date.  For investments in debt and equity instruments classified as available-for-sale, evidence of impairment would include, among other things, (i) significant or prolonged decline in fair value, (ii) adverse impact on the future cash flows that were estimated at the transaction date, (iii) indication that the carrying value of the instrument may not be fully recovered, or (iv) specific conditions in an industry or geographical area or specific information regarding the financial condition of the company to which the investment relates.  Because the estimate for impairment could change from period to period based upon future events that may or may not occur, we consider this to be a critical accounting estimate.

Allowance for impairment losses on loans and receivables and provisions for off-balance sheet risk

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

We use the concept of incurred loss to quantify the cost of the credit, using statistical models that consider the following three factors: “exposure at default,” “probability of default” and “loss given default,” as further discussed in note 2.g to our audited financial statements included elsewhere in this annual report on Form 20-F.

The accounting estimates and judgments related to the allowance for impairment losses on loans and receivables and provisions for off-balance sheet risk are a critical accounting estimate for us because the underlying assumptions used to assess the impairment can change from period to period and may significantly affect our results of operations, particularly in circumstances of economic and financial uncertainty. Further, the statistical models incorporate numerous estimates and judgments (for example, probability of default, loss recovery rates and segmentation of loans in groups with similar credit risk characteristics).  As such, the actual amount of the future cash flows and their timing may differ from the estimates used by management and consequently may cause actual losses to differ from the recognized allowance for impairment losses or provisions for off-balance-sheet risk.

We classify our retail loan portfolio into discreet pools of loans to evaluate loan collectability. Loans are grouped based on selected credit performance characteristics such as loan to value ratios for mortgage loans, percentage of credit line used for credit card loans and type of credit bureau reference (i.e., credit score) for personal loans. We separate our retail loan portfolio into the following discreet loan pools: (i) mortgage loans; (ii) credit card loans; (iii) personal loans; (iv) payroll loans; and (v) SME loans. Within each of these loan pools we further categorize the loans based on similar collectability criteria.

Defined benefit plan

The net cost of our defined benefit pension plan and other post-employment medical benefits and the present value of our pension obligations are determined using actuarial valuations. An actuarial valuation involves making various assumptions, including the determination of the discount rate, that may differ from actual developments in the future. Any changes in these assumptions will impact the carrying value of our pension obligations which may affect our results of operations. Further details about our pension obligations are included in note 24.c. to our audited financial statements included elsewhere in this annual report on Form 20-F.

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.  Accounting for

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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 those with indefinite lives or 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 determine the fair value of the consideration and the fair value of the net assets acquired.  We use internal analysis, generally based on discounted cash flow techniques, to determine the fair value of the net assets acquired and non-cash components of the consideration paid.  The actual fair value of net assets acquired could differ from the fair value determined, resulting in an under- or over-statement of goodwill.

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 our future cash flows.

Impairment of goodwill

Determining whether goodwill is impaired requires an estimation of the value in use of the cash generating unit (CGU) to which goodwill has been allocated. A cash generating unit is the smallest identifiable group of assets that, as a result of continuing operation, generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The value in use calculation requires that we estimate the future cash flows expected to arise from the CGU and a suitable discount rate in order to calculate present value. Where the actual future cash flows are less than expected, an impairment loss may arise affecting our results of operations.

Provisions and contingent liabilities

We conduct our business in many different legal, regulatory and tax environments, and, accordingly, legal claims, regulatory proceedings or uncertain income tax matters may arise.

The use of estimates is important in determining provisions for potential losses that may arise from litigation, regulatory proceedings and uncertain income tax matters.  We estimate and provide for potential losses that may arise out of litigation, regulatory proceedings and uncertain income tax matters to the extent that a current obligation exists, such losses are probable and can be reasonably estimated.  Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different.

Our actual losses may differ materially from recognized amounts.

Application of New and Revised IFRS

In 2014, we applied a number of new and revised IFRS standards issued by the IASB that are mandatory for an accounting period beginning on or after January 1, 2014. These revised standards have had no material impact on the disclosures or on the amounts recognized in our audited financial statements. See note 1.b to our audited financial statements included elsewhere in this annual report on Form 20-F.

A.  Operating Results

The following discussion of our financial condition and results of operations should be read in conjunction with our audited financial statements as of December 31, 2013 and 2014 and for the years ended December 31, 2012, 2013 and 2014, and the notes thereto, included elsewhere in this annual report, as well as the information presented under “Presentation of Financial and Other Information” and “Item 3. Key Information—A. Selected Financial Data.”

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in “Special Note Regarding Forward-Looking Statements” and “Item 3. Key Information—D. Risk Factors.”

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Results of Operations for the Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013

The following table presents our consolidated results of operations for the year ended December 31, 2014 as compared to the year ended December 31, 2013.

	For the year ended December 31,
	2013			2014			2014				2014/2013
	(Millions of pesos)						(Millions of U.S. dollars)(1)			(% Change)
Interest income and similar income	Ps.	55,386		Ps.	57,916		$	U.S.3,929			4.57	%
Interest expenses and similar charges		(19,539	)		(20,305	)		(1,377	)		3.92	%
Net Interest Income	Ps.	35,847		Ps.	37,611		$	U.S.2,552			4.92	%
Income from equity instruments		245			153			10			(37.55	)%
Fee and commission income (net)		12,844			13,373			907			4.12	%
Gains/(losses) on financial assets and liabilities (net)		3,281			2,619			178			(20.18	)%
Exchange differences (net)		—			(11	)		(1	)		(100.00	)%
Other operating income		787			487			33			(38.12	)%
Other operating expenses		(2,078	)		(2,479	)		(168	)		19.30	%
Total Income	Ps.	50,926		Ps.	51,753		$	U.S.3,511			1.62	%
Administrative expenses		(18,630	)		(19,897	)		(1,350	)		6.80	%
Personnel expenses		(9,261	)		(9,977	)		(677	)		7.73	%
Other general administrative expenses		(9,369	)		(9,920	)		(673	)		5.88	%
Depreciation and amortization		(1,620	)		(1,682	)		(114	)		3.83	%
Impairment losses on financial assets (net)		(14,905	)		(13,132	)		(891	)		(11.90	)%
Loans and receivables(2)		(14,905	)		(13,132	)		(891	)		(11.90	)%
Impairment losses on other assets (net):		(22	)		(48	)		(3	)		118.18	%
Other intangible assets		—			—			—			0.00	%
Non-current assets held for sale		(22	)		(48	)		(3	)		118.18	%
Provisions (net)(3)		(751	)		(157	)		(11	)		(79.09	)%
Gains/(losses) on disposal of assets not classified as non-current assets held for sale		31			8			1			(74.19	)%
Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations		(16	)		(15	)		(1	)		(6.25	)%
Operating Profit Before Tax	Ps.	15,013		Ps.	16,830		$	U.S.1,142			12.10	%
Income tax		(2,670	)		(3,541	)		(240	)		32.62	%
Profit from Continuing Operations		12,343			13,289			902			7.66	%
Profit from Discontinued Operations (net)		1,938			-			-			(100.00	)%
Profit for the Year	Ps.	14,281		Ps.	13,289		$	U.S. 902			(6.95	)%
Profit attributable to the Parent		14,279			13,288			902			(6.94	)%
Profit attributable to non-controlling interests		2			1			-			(50.00	)%

(1) Results for the year ended December 31, 2014 have been translated into U.S. dollars, for convenience purposes only, using the exchange rate of Ps.14.7414 per U.S.$1.00 as calculated on December 31, 2014 and reported by the Mexican Central Bank in the Official Gazette of the Federation (Diario Oficial de la Federación) on January 2, 2015 as the exchange rate for the payment of obligations denominated in currencies other than pesos and payable within Mexico.

(2) Impairment losses on loans and receivables less recoveries of loans  previously charged off (net of legal expenses).

(3) Principally includes provisions for off-balance sheet risk and provisions for tax and legal matters.

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Summary

Profit in 2014 was Ps.13,289 million, a 6.9% or Ps.992 million decrease from Ps.14,281 million in 2013.  These results reflect mainly:

· a Ps.1,267 million, or 6.8%, increase in administrative expenses, due primarily to increases in wages and salaries, as well as increases in investments in technology and systems and rental expenses; and

· a Ps.662 million, or 20.2%, decrease in gains on financial assets and liabilities (net), mainly resulting from a decrease in interest rate products, driven by interest rate derivatives such as cross-currency and interest rate swaps.

These negative results were partially offset by:

· a Ps.1,764 million, or 4.9%,  increase in net interest income due primarily to a 4.6%, or Ps.2,530 million increase in interest income and similar income, which was partially offset by an increase of Ps.766 million, or 3.9%, in interest expense and similar charges;

· a Ps.529 million, or 4.1%, increase in income from fees and commissions (net) to Ps.13,373 million, mainly due to (i) an increase in the sale of insurance products, reflecting the continued success of our insurance broker business model, as well as the positive results from our auto insurance platform, “Autocompara,” (ii) an increase in net fees and commissions related to collection and payment services, (iii) an increase in fund management fees, (iv) an increase in foreign exchange fees, and (v) an increase in net fees and commissions related to financial advisory services;

· a Ps.1,773 million, or 11.9%, decrease in impairment losses on loans and receivables (net), mainly as a result of an extraordinary allowance for impairment losses created during 2013 to cover our credit risk exposure to the three major home builders, which adversely impacted impairment losses in 2013; and

· a Ps.594 million, or 79.1%, decrease in net provisions mainly due to lower provisioning requirements related to the availability of undrawn credit card lines.

Net Interest Income

Our interest income and similar income consists mainly of interest from lending activities to customers and credit institutions, which generated Ps.47,414 million, or 81.9%, of our total interest and similar income in 2014, with the remaining interest income of Ps.10,502 million consisting of interest from investments in debt instruments, cash and balances with the Mexican Central Bank, income from hedging operations and other interest income.

Our interest expenses and similar charges consist mainly of interest paid on customer deposits.  In 2014, interest expense on customer deposits was Ps.9,168 million, representing 45.2% of our total interest expenses and similar charges for that period.  Interest expenses from time deposits, demand accounts and reverse repurchase agreements relating to Mexican government securities with non-financial institution customers amounted to Ps.3,808 million, Ps.3,054 million and Ps.2,306 million, respectively, in 2014, representing 18.8%, 15.0% and 11.4% of our total interest expenses and similar charges for the period, respectively.  In addition, interest expense on deposits from the Mexican Central Bank and credit institutions (which includes reverse repurchase agreements with financial institutions) was Ps.4,183 million, representing 20.6% of our total interest expense in 2014, while interest expense on subordinated debentures was Ps.1,051 million, representing 5.2% of our total interest expense in 2014.  Interest expenses and similar charges increased by Ps.766 million, or 3.9%, in 2014 compared to 2013.

Our net interest income in 2014 was Ps.37,611 million, a Ps.1,764 million, or 4.9%, increase from Ps.35,847 million in 2013. This increase was mainly due to an increase in average total interest-earning assets, caused principally by growth in our lending activities, offset by an increase in our interest expense, mainly due to higher interest we paid on deposits from the Mexican Central Bank and on subordinated debentures, which were in turn partially offset by decreases in interest paid on time deposits and on the funding obtained through reverse repurchase agreements with both financial and non-financial institution customers.

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The following table sets forth the components of our interest income and similar income and interest expenses and similar charges in 2013 and 2014.

	For the year ended December 31,
	2013			2014				2013/2014
	(Millions of pesos)						(% Change)
Interest income and similar income
Cash and balances with the Mexican Central Bank	Ps.	1,264		Ps.	1,061			(16.06	)%
Loans and advances to credit institutions		3,019			2,913			(3.51	)
Loans and advances to customers—excluding credit cards		31,573			34,380			8.89
Loans and advances to customers—credit cards		9,882			10,121			2.42
Debt instruments		8,828			9,095			3.02
Income from hedging operations		728			277			(61.95	)
Other interest income		92			69			(25.00	)
Total	Ps.	55,386		Ps.	57,916			4.57	%
Interest expense and similar charges
Deposits from the Mexican Central Bank and credit institutions	Ps.	(2,649	)	Ps.	(4,183	)		57.91	%
Customer deposits—Demand accounts		(2,875	)		(3,054	)		6.23
Customer deposits—Time deposits		(4,997	)		(3,808	)		(23.79	)
Customer deposits—Reverse repurchase agreements		(3,393	)		(2,306	)		(32.04	)
Subordinated debentures		(11	)		(1,051	)		9,454.55
Marketable debt securities and other financial liabilities		(1,994	)		(1,837	)		(7.87	)
Other liabilities		(3,084	)		(3,132	)		1.56
Expenses from hedging operations		(320	)		(735	)		129.69
Other interest expenses		(216	)		(199	)		(7.87	)
Total	Ps.	(19,539	)	Ps.	(20,305	)		3.92	%
Net interest income	Ps.	35,847		Ps.	37,611			4.92	%

The following table sets forth the components of our average loans and advances to customers in 2013 and 2014.

	As of December 31,
	2013		2014			2013/2014
	(Millions of pesos)				(% Change)
Average loans and advances to customers
Commercial, financial and industrial	Ps.	234,676	Ps.	265,811		13.27	%
Mortgage		75,207		98,341		30.76
Installment loans to individuals		66,359		71,625		7.94
Revolving consumer credit card loans		38,666		41,053		6.17
Non-revolving consumer loans		27,693		30,572		10.40
Total	Ps.	376,242	Ps.	435,777		15.82	%

Average total interest-earning assets were Ps.783,865 million in 2014, a 14.9% or Ps.101,445 million increase from Ps.682,420 million in 2013. This increase was due to (i) an increase in the average volume of loans and advances to customers excluding credit cards of Ps.57,148 million, or 16.9%, from Ps.337,576 million in 2013 to Ps.394,724 million in 2014, (ii) an increase in the average balance of debt instruments of Ps.34,221 million, or 18.8%, from Ps.182,123 million in 2013 to Ps.216,344 million in 2014, (iii) an increase in the average volume of loans and advances to credit institutions of Ps.6,508 million, or 7.0%, from Ps.92,690 million in 2013 to Ps.99,198 million in 2014, and (iv) an increase in the average balance of revolving consumer credit card loans of Ps.2,387 million, or 6.2%, from Ps.38,666 million in 2013 to Ps.41,053 million in 2014.

Interest income and similar income from interest-earning assets increased by Ps.2,530 million, or 4.6%, from Ps.55,386 million in 2013 to Ps.57,916 million in 2014, due primarily to an increase in interest income on loans and advances to customers excluding credit cards and interest income from our debt instruments portfolio, as well as higher interest income on revolving consumer credit card loans, partly offset by a decrease in interest income from hedging transactions. The increase in interest income from our debt instruments portfolio was due to an increase in

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the average volume of debt instruments administered by our Global Wholesale Banking and Corporate Activities segments, resulting from new investments in debt securities that were acquired to offset certain 2013 maturities. The increase in interest income on loans and advances to customers excluding credit cards was driven primarily by the Ps.57,148 million increase in average volumes in our customer loan portfolio excluding credit cards in 2014 compared to 2013, which was comprised of a Ps.31,135 million increase in average commercial, financial and industrial loans, a Ps.23,134 million increase in the average volume of our mortgage loan portfolio and an increase of Ps.2,879 million in the average volume of our non-revolving consumer loan portfolio. Additionally, the increase in the interest income on our revolving consumer credit card portfolio was mainly driven by a Ps.2,387 million increase in the average volume of our revolving consumer credit card loan portfolio. The increase in the average volume of our mortgage loan portfolio was mainly due to organic growth and in part to our acquisition of the ING Hipotecaria mortgage business. During 2014, in response to market conditions, we continued our strategy to originate lending mainly through relatively low-interest rate products, such as “Hipoteca Santander Premier” with an interest rate of 8.49%, targeting high income individuals with good credit scores, a minimum property value of Ps.1.2 million and a maximum loan-to-value ratio of 70%, and “Hipoteca Inteligente” with a variable interest rate. In addition, we believe our targeted efforts have helped us organically increase our market share in key business lines such as retail services to middle-market corporations and SMEs.  Finally, the increases in both our non-revolving consumer loan portfolio and our revolving consumer credit card portfolio were mainly due to increased commercial activity, and, to a lesser extent, the introduction of new innovative products that meet our clients’ needs such as co-branded credit cards with American Express and Delta and the first agri-business credit card in Mexico, and have allowed us to achieve above-market growth rates despite lower consumer demand.

Average interest rates on interest-earning assets decreased by 73 basis points, from 8.12% in 2013 to 7.39% in 2014, which was mainly due to a 64 basis point decrease in the average interest rate on loans and advances to customers excluding credit cards, from 9.35% in 2013 to 8.71% in 2014, which partially resulted from the 100 basis point and 50 basis point decreases in the reference rate that occurred during 2013 and 2014, respectively. The average interest rate on commercial, financial and industrial loans decreased by 72 basis points from 6.94% in 2013 to 6.22% in 2014 and on consumer loans (excluding credit cards) from 27.28% in 2013 to 26.19% in 2014. Additionally, these results were driven by (i) a 32 basis point decrease in the average interest rate on loans and advances to credit institutions, (ii) a 91 basis point decrease in the average interest rate on credit card loans from 25.56% in 2013 to 24.65% in 2014 as a consequence of promotional rates and (iii) an 65 basis point decrease in the average interest rate on debt instruments, from 4.85% in 2013 to 4.20% in 2014.

The increase in the interest earned on our customer loan portfolio excluding credit cards was mainly due to an increase of Ps.23,134 million in the average volume of our mortgage loan portfolio, from Ps.75,207 million in 2013 to Ps.98,341 in 2014, and an increase of Ps.9,986 million in the average volume of our SME loan portfolio, from Ps.36,506 million in 2013 to Ps.46,492 million in 2014.  The decrease in the average yield on our customer loan portfolio excluding credit cards was mainly due to a 99 basis point decrease in the average interest rate earned on our SME loan portfolio, from 12.96% in 2013 to 11.97% in 2014, partially as a result of increased volume of substitution loans to SMEs. Through our substitution loans to SMEs we offer our existing SME clients with a good credit history the opportunity to substitute out of an existing higher rate loan that is close to maturity and into a new lower rate loan (which may be for an increased amount) in an effort to cultivate and retain these SME clients with good credit histories. This special opportunity is only granted to SME clients meeting specific requirements, including more stringent credit scores and the use of at least three of our transactional products such as insurance, credit cards, and payroll accounts. During 2014, our substitution loans to SMEs accounted for approximately 8.5% of SME loans. The 28 basis point decrease in the interest earned on our mortgage loan portfolio in 2014 was mainly due to new originations of lower interest rate products (Premier 8.49% and Inteligente, which has a variable interest rate), which were introduced in a more competitive mortgage market.

Average volume of commercial, financial and industrial loans grew by Ps.31,135 million, from Ps.234,676 million in 2013 to Ps.265,811 million in 2014.  This increase was comprised of an increase of (i) Ps.17,100 million in the average volume of loans to middle-market corporations, (ii) Ps.9,986 million in the average volume of loans to SMEs, and (iii) Ps.3,360 million, in the average volume of loans to Global Wholesale Banking clients, which were partially offset by a decrease of Ps.562 million in the trading portfolio managed by the Global Wholesale Banking segment. The increase in SME average loan volumes resulted from increased commercial activity together with more streamlined approval processes and tailored product offerings distributed through specialized branches attended by specialized executives.  The increase in the average volume of loans to middle-market corporations was due to improved lending execution processes where lending opportunities are identified and closely pursued. Additionally, the increase in average Global Wholesale Banking segment loans, together with a decrease in the

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average loan yield of 110 basis points, resulted mainly from loans with an average aggregate amount of approximately Ps.31,000 million granted to two state-owned energy companies, whose risk profiles are comparable to any other large corporate debt, while demand among large corporations generally decreased due to their preference for issuing debt in the capital markets. The average interest rate earned from loans to middle-market corporations decreased by 86basis points, from 6.82% in 2013 to 5.96% in 2014.  The average interest rate earned from loans to SMEs decreased by 99 basis points, from 12.96% in 2013 to 11.97% in 2014, as a result of an increased volume of substitution loans to SMEs (see description above for more details on our substitution loans to SMEs), and the introduction of lower interest rate loans for loan product bundles that incentivize the sale of fee-based cash management products related to collections, payments and insurance. The average interest rate earned from loans to institutions decreased by 91 basis points, from 6.07% in 2013 to 5.16% in 2014. The average interest rate earned from loans and advances to credit institutions decreased by 32 basis points, from 3.26% in 2013 to 2.94% in 2014. The decreases across all segments were affected by the general decrease in the reference rate.

Interest income earned on our trading portfolio decreased by Ps.34 million, from Ps.437 million in 2013 to Ps.403 million in 2014, due to the combined effect of a decrease of Ps.562 million in the average balance of our trading portfolio, from Ps.12,629 million in 2013 to Ps.12,067 million in 2014, and a decrease of 12 basis points in the average interest rate earned.  The decrease in the average balance of this portfolio was due to a decrease in repurchase agreements transaction activity.

Interest income earned from debt instruments increased by Ps.267 million, from Ps.8,828 million in 2013 to Ps.9,095 in 2014, or 3.0%, reflecting an increase of Ps.34,221 million in the average balance of the portfolio, from Ps.182,123 million in 2013 to Ps.216,344 million in 2014.  The increase in interest income from debt instruments was impacted by (i) a Ps.13,443 million increase in the average volume of debt instruments administered by our Global Wholesale Banking segment, (ii) a Ps.20,778 million increase in the average balance of debt instruments administered by our Corporate Activities segment, from Ps.49,531 million in 2013 to Ps.70,309 million in 2014 and (iii) a 206 basis point decrease from 5.01% in 2013 to 2.95% in 2014 in the average interest rate earned from debt instruments administered by our Corporate Activities segment, which decrease was due to the replacement of maturing debt instruments with lower interest rate instruments.  The increase in volume of debt instruments administered by the Global Wholesale Banking segment was mainly due to an increase in our short-term debt instruments trading portfolio to position ourselves to service our customer’s repurchase agreements’ needs.The increase in the volume of debt securities administered by our Corporate Activities segment was primarily due to the replacement of debt instruments that matured during 2013 with debt instruments issued by the Mexican Central Bank and foreign governments.

Average total interest-bearing liabilities in 2014 were Ps.713,105 million, a 19.2% or Ps.114,621 million increase from Ps.598,484 million in 2013. Interest expenses and similar charges increased by Ps.766 million, or 3.9%, from Ps.19,539 million in 2013 to Ps.20,305 million in 2014. The principal drivers of this increase were (i) an increase of Ps.1,534 million in interest expense on deposits from the Mexican Central Bank and credit institutions, due primarily to an increase in the average balance of Ps.48,947 million, from Ps.77,035 million in 2013 to Ps.125,982 million in 2014, mainly resulting from an increase in long-term loans with development banks which were required to provide funding to our mortgage and consumer subsidiaries, (ii) an increase of Ps.1,040 million in interest expense on subordinated debentures, from Ps.11 million in 2013 to Ps.1,051 million in 2014, due to an increase of Ps.17,077 million in the average balance of subordinated debentures that resulted from our issuance of Tier 2 Subordinated Capital Notes in December 2013, (iii) an increase of Ps.415 million in interest expense on hedging operations, due mainly to an increase in financial derivative instruments used to hedge interest rate and foreign exchange risks from our senior and subordinated debt instruments and (iv) an increase of Ps.179 million in interest expense on demand deposits, due primarily to an increase of Ps.45,031 million in the average balance of demand deposits, from Ps.174,995 million in 2013 to Ps.220,006 million in 2014, the impact of which was offset in part by a 25 basis point decrease in the average interest rate paid on demand deposits. These increases were partially offset by (i) a decrease of Ps.1,189 million in interest expense on time deposits due to a decrease in the average balance of Ps.7,048 million, from Ps.136,692 million in 2013 to Ps.129,644 in 2014, together with a decrease in the average interest rate of 72 basis points, from 3.66% in 2013 to 2.94% in 2014; (ii) a decrease of Ps.1,087 million in interest expense on reverse repurchase agreements due to a decrease in the average balance of Ps.12,825 million, from Ps.89,003 million in 2013 to Ps.76,178 million in 2014, together with a decrease in the average interest rate of 78 basis points, from 3.81% in 2013 to 3.03% in 2014; and (iii) a decrease of Ps.157 million in interest expense on marketable debt securities and other financial liabilities mainly due to a decrease in the average interest rate of 78 basis points, the impact of which was offset in part by an increase in the average balance of Ps.4,228 million, from Ps.41,686 million in 2013 to Ps.45,914 in 2014.

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The positive effect of the increases in our average balance and interest income earned on, interest-earning assets, was partially offset by an increase in the average balance of our  interest-bearing liabilities in 2014 compared to 2013 and a decrease in the average interest rate on interest-earning assets in 2014 compared to 2013.  The combined effect of a decrease of 73 basis points in the average yield on our interest-earning assets together with a decrease of 42 basis points in the cost of our interest-bearing liabilities resulted in a decrease in the net interest spread of 54 basis points. Net interest income increased by Ps.1,764 million, due mainly to the increase in the average volume of interest-earning assets of Ps.101,445 million with an average interest rate of 7.39%, whereas interest-bearing liabilities increased by Ps.114,621 million with an average cost of 2.85%. The average cost of interest-bearing liabilities decreased from 3.26% to 2.85%, mainly as a result of a decrease in reference rates enacted by the Mexican Central Bank during 2013 and 2014 which resulted in lower interest paid on customer deposits and repurchase agreements, as well as a shift in the deposit base mix towards demand deposits.

Net Fee and Commission Income

Our net fee and commission income consists mainly of commissions charged to customers for credit and debit cards purchases, sales of insurance products, investment fund management fees, fees from collection and payment services and fees from financial advisory services.

Net fee and commission income in 2014 was Ps.13,373 million, a 4.1% or Ps.529 million increase from Ps.12,844 million in 2013. The following table presents a breakdown, by product, of our fee and commission income and expense in 2013 and 2014.

	For the Year Ended December 31,
	2013			2014				2013/2014
	(Millions of pesos)						(% Change)
Fee and commission income
Service charges on deposits accounts	Ps.	746		Ps.	816			9.38	%
Credit and debit cards		4,061			4,378			7.81
Insurance		3,438			3,896			13.32
Collection and payment services		1,596			1,830			14.66
Investment funds management		1,299			1,369			5.39
Foreign exchange		569			701			23.20
Checks and others		323			302			(6.50	)
Capital markets and securities activities		393			333			(15.27	)
Administration and custody		396			436			10.10
Financial advisory services		1,450			1,505			3.79
Other fees and commissions		795			980			23.27
Total	Ps.	15,066		Ps.	16,546			9.82	%
Fee and commission expense
Credit and debit cards	Ps.	(964	)	Ps.	(1,451	)		50.52	%
Fund management		(50	)		(73	)		46.00
Checks and others		(33	)		(33	)		0.00
Capital markets and securities activities		(125	)		(110	)		(12.00	)
Collections and transactional services		(164	)		(178	)		8.54
Other fees and commissions		(788	)		(1,266	)		60.66
Financial advisory services		(98	)		(62	)		(36.73	)
Total	Ps.	(2,222	)	Ps.	(3,173	)		42.80	%
Net fee and commission income	Ps.	12,844		Ps.	13,373			4.12	%

Fee and commission income was Ps.16,546 million in 2014, a 9.8%, or Ps.1,480 million increase from Ps.15,066 million in 2013, mainly due to: (i) an increase in fees and commissions earned from the sale of insurance products of Ps.458 million, or 13.3%, (ii) an increase in fees and commissions earned from credit and debit cards of Ps.317 million, or 7.8%, (iii) an increase in fees and commissions earned from collection and payment services of Ps.234 million, or 14.7%, from Ps.1,596 million in 2013 to Ps.1,830 million in 2014, (iv) an increase in fees and

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commissions earned from foreign exchange of Ps.132 million, or 23.2%, from Ps.569 million in 2013 to Ps.701 million in 2014 and (v) an increase in service charges on deposits accounts of Ps.70 million, or 9.4%, from Ps.746 million in 2013 to Ps.816 million in 2014. The increase in fees and commissions earned from the sale of insurance products was mainly due to a 10.4% increase in insurance distribution premiums. These increases resulted from our strategy to sell insurance products together with certain products such as consumer loans, mortgage loans and SME loans, in addition to increased sales through alternative channels such as ATMs and contact centers. This result was further supported by the strengthening of our product offerings across our product segments and a media campaign for Autocompara, focusing on improving the productivity of, and incentivizing, our sales force. The increase in fees and commissions earned from credit and debit cards was mainly due to increased commercial activity that led to an increase of 1,627,608 million, or 14.1% in the total number of credit and debit cards outstanding as of December 31, 2014. Finally, the increase in fees and commissions earned from collection and payment services, foreign exchange and service charges on deposit accounts, resulted from our increased focus to be an integral part of our client’s liquidity management efforts which led to increased transactional activity.

Fee and commission expense was Ps.3,173 million in 2014, a 42.8%, or Ps.951 million increase from Ps.2,222 million in 2013, mainly due to an increase in fees and commissions paid on credit and debit cards of Ps.487 million, or 50.5%, and an increase in other fees and commissions paid of Ps.478 million, or 60.7%, compared with 2013.  The increase in fees and commissions paid on credit and debit cards mainly resulted from higher costs related to selling credit cards outside our existing customer pool, including telemarketing, while the increase in other fees and commissions paid is mainly explained by an increase in fees paid to NAFIN in order to participate in the guarantee programs for SMEs.

Net fees and commissions generated from credit and debit cards decreased by Ps.170 million, or 5.5%, from Ps.3,097 million in 2013 to Ps.2,927 million in 2014. The decrease in net fees and commissions in 2014 resulted from the combined effect of an increase in the volume and number of credit and debit cards together with an increase in credit card issuance costs. Credit card issuance costs are generated at the time of issuance, whereas fee income is generated over time when cards are used by our clients.

Gains /(Losses) on Financial Assets and Liabilities (Net)

Our gains/(losses) on financial assets and liabilities consist mainly of gains and losses on financial instruments, and in particular derivatives. The following table shows a breakdown of our net gains/(losses) on financial assets and liabilities in 2013 and 2014.

	For the Year Ended December 31,
	2013			2014				2013/2014
	(Millions of pesos)						(% Change)
Interest rate products	Ps.	2,670		Ps.	1,194			(55.28	)%
Debt instruments		(458	)		878			(291.70	)
Interest rate derivatives		3,128			316			(89.90	)
Equity securities		124			246			98.39
Equity positions		(269	)		(70	)		(73.98	)
Equity derivatives		393			316			(19.59	)
Exchange rate products		624			1,321			111.70
Foreign exchange positions		(374	)		(682	)		82.35
Foreign exchange derivatives		998			2,003			100.70
Other(1)		(137	)		(142	)		3.65
Total	Ps.	3,281		Ps.	2,619			(20.18	)%

(1) Corresponds to commissions paid to brokers.

Gains on financial assets and liabilities (net) in 2014 were Ps.2,619 million, a decrease of Ps.662 million from a gain of Ps.3,281 million in 2013, mainly due to the activities of our Global Wholesale Banking segment, where we had a gain of Ps.1,578 million in 2014 compared to a gain of Ps.2,431 million in 2013.  The decrease in gains on financial assets and liabilities (net) was due to the following.

In 2014, we had a gain in interest rate products of Ps.1,194 million, compared with a gain of Ps.2,670 million in 2013, which was mainly explained by a decrease of Ps.2,812 million in gains on interest rate derivatives from a gain

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of Ps.3,128 million in 2013 to a gain of Ps.316  million in 2014, partially offset by an increase in gains on debt instruments of Ps.1,336 million, from a loss of Ps.458 million in 2013 to a gain of Ps.878 million in 2014.  The swing in the amount of interest rate derivatives is mainly due to market conditions and positioning in the portfolios.  All of these derivatives relate to economic hedges against debt exposure.  We hedge bonds using interest rate derivatives such as futures and swaps. The decrease of Ps.2,812 million in interest rate derivatives was mainly due to decreases of Ps.1,578 million in cross currency swaps and Ps.1,321 in interest rate swaps.

In June 2014 the Mexican Central Bank reduced the interest rate benchmark funding by 50 basis points due to the weaker than expected development of the economy.

Additionally, Mexico’s macroeconomic environment during 2014 improved compared with 2013. However, the country risk, which had increased to 155 basis points in 2013, increased further to 174 basis points in 2014. Despite this context, higher valuations in our debt instrument positions resulted in gains of Ps.878 million during 2014.

Gains on equity securities increased by Ps.122 million, from a gain of Ps.124 million in 2013 to a gain of Ps.246 million in 2014 resulting from gains in equity positions, offset by a decrease in gains from equity derivatives. The gains from equity positions increased by Ps.199 million, from a loss of Ps.269 million in 2013 to a loss of Ps.70 million in 2014. This increase was partially offset by a Ps.77 million decrease in gain from equity derivatives in 2014, which decreased from a gain of Ps.393 million in 2013 to a gain of Ps.316 million in 2014.

The decrease in the gain from equity derivatives was mainly due to a gain in derivatives of the Mexican Stock Exchange Prices and Quotations Index (IPC futures), partially offset by losses related to forward contracts on stock and indexes in the MexDer.  The investment in equity derivatives is mainly entered into to hedge equity positions.  This gain was partially offset by a loss in our equity securities position in stocks mainly traded on the Mexican Stock Exchange of Ps.70 million. The IPC quote was 42,727.09 at the end of December 2013 and 43,145.66 at the end of December 2014. This represented an increase of 1.0% in that index. None of our transactions in equity derivatives in 2013 or 2014 are related to proprietary trading.

Gains on exchange rate products increased by Ps.697 million, from a gain of Ps.624 million in 2013 to a gain of Ps.1,321 million in 2014.  Results from foreign exchange derivatives increased by Ps.1,005 million, from a gain of Ps.998 million in 2013 to a gain of Ps.2,003 million in 2014 mainly due to gains in foreign exchange forwards, as a result of increased foreign exchange volatility in the third and fourth quarters of 2014. Gains in foreign exchange positions generated in daily trading activities decreased by Ps.308 million, from a loss of Ps.374 million in 2013 to a loss of Ps.682 million in 2014.

The peso depreciated 12.7% in 2014. As of December 31, 2013, the exchange rate for U.S. dollars was Ps.13.08 per U.S. dollar, and as of December 31, 2014, the exchange rate for U.S. dollars was Ps.14.74 per U.S. dollar.  During the second half of 2014, the increased likelihood of the U.S. gradually increasing interest rates generated greater volatility in the currency markets which therefore led to currency depreciation.

Exchange Differences (Net)

Our expense from exchange differences arises from the effect that fluctuations in the value of the peso against other currencies have on our net foreign currency positions, which are mainly in U.S. dollars.  Exchange differences (net) decreased Ps.11 million in 2014 while it was flat in 2013.

Other Operating Income (Net)

Other operating income decreased by Ps.300 million, or 38.1%, from Ps.787 million in 2013 to Ps.487 million in 2014.

Other operating expense (net) increased by Ps.701 million, or 54.3%, from an expense of Ps.1,291 million in 2013 to Ps.1,992 million in 2014.

Other operating expenses increased Ps.401 million, or 19.3%, from Ps.2,078 million in 2013 to Ps.2,479 million in 2014, mainly due to the increase of Ps.343 million, or 22.2%, in the Mexican Institute for the Protection of Bank Savings (Instituto para la Protección al Ahorro Bancario, or IPAB) contributions, from Ps.1,544 million to Ps.1,887 million, due to the increase in our deposits and the increase in our liabilities due to the issuance of Tier 2 Subordinated Capital Notes in December 2013.

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Administrative Expenses

Our administrative expenses consist of personnel and other general expenses.  Our personnel expenses consist mainly of salaries, social security contributions, bonuses and our long-term incentive plan for our executives.  Our other general expenses mainly consist of: expenses related to technology and systems, administrative services, which are mainly services outsourced in the areas of information technology, taxes other than income tax, rental of properties and hardware, advertising and communication, surveillance and cash courier services and expenses related to maintenance, conservation and repair, among others.

Administrative expenses increased by Ps.1,267 million, or 6.8%, from Ps.18,630 million in 2013 to Ps.19,897 million in 2014, primarily due to increased expenses for personnel, technology and systems, maintenance, conservation and repairs, and rents.

The following table sets forth administrative expenses in 2013 and 2014, by type.

	For the Year Ended December 31,
	2013			2014				2013/2014
	(Millions of pesos)						(% Change)
Personnel expenses	Ps.	(9,261	)	Ps.	(9,977	)		7.73	%
Other general expenses		(9,369	)		(9,920	)		5.88
Administrative services		(447	)		(404	)		(9.62	)
Taxes other than income tax		(1,169	)		(1,128	)		(3.51	)
Surveillance and cash courier services		(605	)		(589	)		(2.64	)
Advertising and communication		(705	)		(653	)		(7.38	)
Maintenance, conservation and repair		(944	)		(1,134	)		20.13
Rents		(1,456	)		(1,622	)		11.40
Technology and systems		(2,232	)		(2,441	)		9.36
Stationery and supplies		(198	)		(201	)		1.52
Insurance premiums		(41	)		(42	)		2.44
Credit cards		(260	)		(285	)		9.62
Travel costs		(282	)		(302	)		7.09
Operating costs		(483	)		(466	)		(3.52	)
Other		(547	)		(653	)		19.38
Total administrative expenses	Ps.	(18,630	)	Ps.	(19,897	)		6.80	%

Our personnel expenses increased Ps.716 million, or 7.7%, from Ps.9,261 million in 2013 to Ps.9,977 million in 2014, primarily as a result of a 8.5% period-over-period average headcount increase, together with an overall increase of 10.5% in salaries and 9.8% in other personnel expenses, partially offset by a decrease of  0.9% in bonuses. Other personnel expenses include personnel benefits such as medical expenses, social security and pension plans. The average headcount in retail banking increased period-over-period by 8.6%. The increase in average headcount was mainly in our Retail Banking segment and is related to the hiring of additional employees for our branch expansion plan.

The increase in personnel expenses resulted from an increase of Ps.635 million, or 7.8%, in retail banking, from Ps.8,164 million in 2013 to Ps.8,799 million in 2014, and an increase of Ps.95 million, or 9.8%, in wholesale banking, from Ps.968 million to Ps.1,063 million. The increase in retail banking was due to an increase of Ps.448 million, or 10.4%, in salaries, from Ps.4,321 million in 2013 to Ps.4,769 million for the same period in 2014, together with an increase of Ps.174 million in other personnel expenses, from Ps.2,004 million in 2013 to Ps.2,178 million in 2014 and an increase of Ps.13 million in bonuses, from Ps.1,839 million in 2013 to Ps.1,852 million in 2014.  Additionally, personnel expenses in wholesale banking, increased due to an increase of Ps.74 million in other personnel expenses and an increase of Ps.42 million in salaries, which were partially offset by a decrease of Ps.21 million in bonuses paid.

Other general expenses increased by Ps.551 million, or 5.9%, from Ps.9,369 million in 2013 to Ps.9,920 million in 2014, mainly due to an increase of Ps.209 million, or 9.4%, in expenses related to technology and systems, which include hardware and software maintenance, data and voice telecommunication services and market information and data providers. In addition, expenses related to maintenance, conservation and repair increased by Ps.190 million, or

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20.1%, and rental expenses increased by Ps.166 million, or 11.4%. These increases were primarily due to the expansion of our branch network, including the opening of 95 new branches during 2014.

Impairment Losses on Financial Assets (Net)

Our impairment losses on loans and receivables decreased by Ps.1,773 million, or 11.9%, from Ps.14,905 million in 2013 to Ps.13,132 million in 2014, reflecting a decrease in impairment losses of Ps.1,131 million in our commercial, financial and industrial loan portfolio, of Ps.758 million in our consumer loan portfolio and of Ps.148 million in our credit card loan portfolio, offset in part by a Ps.68 million increase in impairment losses in our mortgage portfolio and a Ps.196 million increase in recovery expenses. The decrease in impairment losses was mainly explained by the following effects: (i) the non-recurring impairment losses recognized in 2013 to cover our exposure to the home builders sector in Mexico (as of December 31, 2014, our loan portfolio with the three principal Mexican companies in the home builder sector stood at Ps.4,903 million, of which the full amount was composed of non-performing loans and was provisioned for accordingly in 2013) and (ii) our heightened focus on stringent credit policies which is reflected in the improved performance of new vintages.

 We implemented new credit scoring models in 2012 in order to improve our management of new loan vintages. In 2013, as part of an ongoing process, we continued to update our credit scoring models, including the incorporation of behavioral score models from Mexican credit bureaus into our decision models for new originations, and we stopped new-to-bank originations of non-revolving consumer loans to individuals without credit bureau references. During 2014, we made certain adjustments to our origination scoring models based on individual client profiles in order to improve our selection of prospects for each type of customer. The approval rate remained stable at 20%, and early indicators of new vintages present lower levels of expected losses. Our credit policies for cross selling in credit cards and personal loans remained unchanged as we continued to focus on segments with credit references and at least 12 months of credit history. We also continued incorporating behavioral score models from Mexican credit bureaus. For installment loans, we launched top up campaigns to provide clients with upcoming maturities the opportunity to take out a new loan with the same principal amount and, in some cases, for lower risk segments, the opportunity to increase their credit lines.

Non-performing loans totaled Ps.15,175 million as of December 31, 2013 and increased to Ps.18,430 million as of December 31, 2014, an increase of Ps.3,255 million, or 21.5%, due to the increase of non-performing loans in our commercial, financial and industrial loan portfolio of Ps.1,250 million, an increase of non-performing loans in our mortgage loan portfolio of Ps.1,659 million and an increase of non-performing loans in our consumer loan portfolio of Ps.346 million. The increases in non-performing loans in our commercial, financial and industrial loan portfolio was mainly due to our exposure to certain mid-market and corporate clients that experienced delays in project execution, resulting in the restructuring of the loans associated with those projects. These clients, including mostly Pemex suppliers, were within our Global Wholesale Banking segment. Our total exposure to these restructured clients accounted for Ps.952 million and contributed 27.8% of the increase in non-performing loans. In addition, the increases in non-performing loans in our mortgage loan portfolios was mainly impacted by the inclusion of ING Hipotecaria’s mortgage business (now Santander Vivienda) into our systems, processes and credit policies. The total portfolio amounted to Ps.9,877 million and included non-performing loans of Ps.1,783 million, representing approximately 29.5% of the increase in non-performing loans. The ratio of our non-performing loans as a percentage of total loans, or NPL ratio, increased slightly from 3.81% as of December 31, 2013 to 3.90% as of December 31, 2014. We do not expect the acquisition of ING Hipotecaria’s mortgage business to continue to negatively impact our level of non-performing loans going forward beyond what we expect from our organically originated mortgage loan portfolio.

Our NPL ratio over the past year deteriorated slightly, mainly due to the incorporation of ING Hipotecaria’s mortgage business and our exposure to clients who had to restructure their loans.

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The following table shows the ratio of our impaired assets to total computable credit risk and our coverage ratio as of December 31, 2013 and 2014.

	As of December 31,
	2013			2014
	(Millions of pesos, except percentages)
Computable credit risk(1)	Ps.	425,701		Ps.	503,232
Non-performing loans		15,175			18,430
Loan charge-offs		12,530			13,510
Allowance for impairment losses		13,764			15,198
Ratios
Non-performing loans to computable credit risk		3.56	%		3.66	%
Non-performing loans coverage ratio(2)		90.70	%		82.46	%
Loan charge-off coverage ratio(3)		2.94	%		2.68	%

(1) Computable credit risk is the sum of the face amounts of loans (including non-performing loans), guarantees and documentary credits.  When guarantees or documentary credits are contracted, we book them as off-balance sheet accounts.  As of the date we make the payment to the beneficiary, we claim the payment from the solicitor (i.e., the debtor in the case of a guarantee or the buyer in the case of a documentary credit).  The account becomes non-performing as of the date when the payment was due if we do not receive payment from the solicitor on that date.  We maintain the account as a non-performing loan until recovery or, in the case of practical impossibility for recovery (e.g., when the creditor is declared bankrupt or upon the death of a creditor who is a natural person), until our Comprehensive Risk Management Committee decides to charge off the account.  Such decision is at the discretion of our Comprehensive Risk Management Committee.

(2) Allowance for impairment losses as a percentage of non-performing loans.

(3) Loan charge-offs as percentage of computable credit risk.

The following table shows our non-performing loans by type of loan as of December 31, 2013 and 2014:

	As of December 31,
	2013		2014			2013/2014
	(Millions of pesos)				(% Change)
Commercial, financial and industrial	Ps.	8,325	Ps.	9,575		15.02	%
Mortgage		3,590		5,249		46.21
Installment loans to individuals		3,260		3,606		10.61
Revolving consumer credit card loans		1,332		1,980		48.65
Non-revolving consumer loans		1,928		1,626		(15.66	)
Total	Ps.	15,175	Ps.	18,430		21.45	%

Commercial, financial and industrial

Our impairment losses in our commercial, financial and industrial loans portfolio decreased by 25.0% to Ps.3,391 million in 2014 from Ps.4,522 million in 2013. The decrease is mainly the result of the higher impairment losses of this portfolio during 2013 due to the recognition of non-recurring impairment losses related to the home builders portfolio. However, impairment losses recognized during 2014 were mainly due to the following factors: (i) our exposure to certain mid-market and corporate clients that recorded delays in project execution, resulting in the restructuring of the loans associated with those projects, thus requiring an increase in allowance for impairment losses; and (ii) the growth in the middle market and SME loan portfolio. In addition, non-performing loans in our commercial, financial and industrial loan portfolio, which as of December 31, 2014 represented 52.0% of our total non-performing loans, increased by Ps.1,250 million, or 15.0%, from December 31, 2013 to December 31, 2014, primarily due to those certain loans that had to be restructured during 2014 following the delays in the execution of certain projects. Our exposure to those loans, as of December 31, 2014, accounted for Ps.952 million of non-performing loans for which an allowance for impairment losses has been recognized. Additionally, non-performing loans in the middle market and SME segments have remained stable and in line with portfolio growth. Our NPL ratio with respect to commercial, financial and industrial loans improved from 4.17% as of December 31, 2013 to 4.13% as of December 31, 2014.

Mortgage

Our impairment losses in our mortgage loans portfolio increased by 27.5% to Ps.315 million in 2014 compared to Ps.247 million in 2013, mainly due to the increase of the portfolio during 2014. Meanwhile, non-performing loans

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in our mortgage loan portfolio, which as of December 31, 2014 represented 28.5% of our total non-performing loans, increased by Ps.1,652 million, or 46.0%, from December 31, 2013 to December 31, 2014, mainly due to the inclusion of ING Hipotecaria’s mortgage business, which had a high level of non-performing loans, into our systems, processes and credit policies. Our NPL ratio with respect to mortgage loans deteriorated from 3.91% as of December 31, 2013 to 4.85% as of December 31, 2014. We do not expect the acquisition of ING Hipotecaria’s mortgage business to continue to negatively impact our level of non-performing loans going forward beyond what we expect from our organically originated mortgage loan portfolio.

Installment loans to individuals

Our impairment losses in our installment loans to individuals portfolio decreased by 9.5% to Ps.8,657 million in 2014 from Ps.9,563 million in 2013.  In addition, non-performing loans in installment loans to individuals portfolio, which as of December 31, 2014 represented 19.6% of our total non-performing loans, increased Ps.346 million, or 10.6%, from December 31, 2013 to December 31, 2014.  This increase was due to the increase of non-performing loans in our revolving credit card loan portfolio of Ps.648 million, partially offset by a decrease in the non-performing loans in our non-revolving consumer loan portfolio of Ps.302 million. The decreases in our non-revolving consumer loan portfolio impairment losses and in our non-performing loans were due to the benefit of selling and charging-off the non-performing loans that arose in connection with the loss of a significant payroll portfolio that resulted in a reduction in payroll accounts and increased the collection risk of previously granted payroll loans, thus increasing the level of non-performing loans and requiring an increase in the allowance for impairment losses in 2013. These payroll loans were part of a third party payroll contract relating to 90,000 employees, whereby approximately 32,000 employees had payroll loans amounting to Ps.939 million with Banco Santander Mexico. While providing payroll services under the payroll contract, we had the right to collect loan installment payments directly from an employee’s bank account.  We subsequently lost the payroll contract and our ability to directly collect on the payroll loans. As a result, the employee bank accounts were moved to another banking institution that would provide payroll services under the new payroll contract. As of December 31, 2014, the majority of the payroll loans to these employees had been sold-off to the new service provider and the rest had been charged off, resulting in a decrease in our non-performing loans. The increase in our revolving credit card loan portfolio non-performing loans was mainly a result of a change to our non-performing loan classification rule for certain loans which required restructuring. However, pursuant to regulatory rules, such change does not impact our reserve calculations. Additionally, the loan portfolio grew at a slower pace compared to 2013, thus requiring lower provisioning.

Our NPL ratio with respect to our installment loans to individuals portfolio in the revolving credit card loan portfolio deteriorated from 3.35% as of December 31, 2013 to 4.70% as of December 31, 2014, due to (i) lower loan growth resulting from decreased consumer demand and (ii) the previously mentioned change to our non-performing loan classification rule for certain loans which required restructuring. Our NPL ratio with respect to our installment loans to individuals portfolio in the non-revolving consumer loan portfolio improved from 6.42% as of December 31, 2013 to 4.71% as of December 31, 2014, driven by the sale and charge-off of the payroll portfolio we lost in 2013.

As of December 31, 2014, our credit card non-performing loan coverage ratio (allowance for impairment losses/non-performing loans) decreased, while our charge-off coverage ratio for credit card loans (allowance for impairment losses/charge-offs) increased, in each case compared to the ratios as of December 31, 2013.  The decrease in the credit card non-performing loan coverage ratio in 2014 was due to the increase in non-performing loans in 2014.

Provisions (Net)

Our provisions (net) consist mainly of provisions for pensions and other retirement obligations, provisions for off-balance sheet risk and provisions for legal and tax matters. Off-balance sheet risks include undrawn lines of credit of credit cards, guarantees and loan commitments of commercial and public sector loans and guarantees and loan commitments of commercial loans to SMEs.

As of December 31, 2013 and December 31, 2014, the amounts recognized as available lines of credit amounted to Ps.140,643 million and Ps.128,785 million, respectively. Of these amounts, the amounts related to available credit card lines were Ps.67,848 million, or 48.2%, and Ps.69,418 million, or 53.9%, of the total off-balance sheet risk, respectively.

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Provisions (net) decreased by Ps.594 million, from a loss of Ps.751 million in 2013 to a loss of Ps.157 million in 2014.  This decrease was due to active management of available credit limits in higher risk segments, which led to a reduction in the amount of undrawn credit card lines, personal loan lines and payroll loan lines by Ps.5,686 million, further reducing off-balance sheet risk.

The underwriting standards for our undrawn credit card lines are consistent with our credit card underwriting standards.  There is only one set of underwriting criteria for credit cards and it applies at the time lines of credit are established through to the actual extension of credit under the lines.  Accordingly, the probability of default is the same for drawn and undrawn credit lines.  Access to undrawn credit lines is blocked if the borrower is one day past due.  However, if the borrower is past due between one and 89 days and in this time period pays all amounts past due, the borrower returns to being current and is able to access undrawn credit lines again.  We block accounts permanently when the borrower reaches 90 days past due.

During 2014, the NPL ratio for the credit card loan portfolio increased in comparison to 2013. The increase in the credit card NPL ratio did not have an impact on the provision for lines of credit due to the fact that the provision for off-balance sheet risk is based on the probability of default transition matrix methodology.  The transition matrix method reflects the effect of changes in the NPL ratio but the impact of such changes is generally limited in the period in which the changes occur because the transition matrix methodology reflects average performance over several periods. The classification between performing and non-performing loans has a minimal impact on the severity of the provision model, and is incorporated in the probability of default of this model.

The loss given default, or LGD, for the loan portfolios in our model is 83.4% as of December 31, 2014.  This LGD applies to both undrawn lines of credit associated with performing loans and those associated with non-performing loans.

We use a transition matrix to determine the probability of default, or PD, in which loans are segmented into bucket classifications primarily based on the number of days outstanding, and statistical analyses are applied to estimate the probability that loans will migrate through the different buckets and ultimately be charged off. In addition to the number of days outstanding, the bucket classifications are determined in accordance with loan credit characteristics. The transition matrix is based on historical data gathered over periods ranging from one to three years depending on type of portfolio (credit cards, payroll loans and mortgage loans).  See note 2.g to our audited financial statements.

Income Tax

Income tax in 2014 was Ps.3,541 million, a Ps.871 million or 32.6% increase from Ps.2,670 million in 2013. Our effective tax rates in 2013 and 2014 were 17.78% and 21.04%, respectively. Our effective tax rate increased 326 basis points in 2014 compared to 2013.  The variation in income tax paid is primarily explained by (i) the increase in income before taxes in 2014 as compared to 2013 and (ii) the decrease in permanent tax items, due to the fact that in 2014 we did not record a benefit as a result of favorable tax court decisions, as we did in 2013.

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Results of Operations by Segment for the Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013

The following table presents an overview of certain consolidated income statement data for each of our segments in 2013 and 2014.

	Retail Banking(1)						Global Wholesale Banking(2)						Corporate Activities(3)
	For the Year Ended December 31,
	2013			2014			2013			2014			2013			2014
	(Millions of pesos)
Net interest income	Ps.	29,767		Ps.	33,316		Ps.	3,471		Ps.	3,971		Ps.	2,609		Ps.	324
Income from equity instruments		—			—			147			53			98			100
Fee and commission income (expense) (net)		10,969			11,658			1,962			1,798			(87	)		(83	)
Gains/(losses) on financial assets and liabilities and exchange differences (net)		756			697			2,431			1,578			94			333
Other operating income (expenses) (net)		(1,160	)		(1,680	)		(561	)		(441	)		430			129
Total income	Ps.	40,332		Ps.	43,991		Ps.	7,450		Ps.	6,959		Ps.	3,144		Ps.	803
Administrative expenses		(16,802	)		(17,914	)		(1,612	)		(1,785	)		(216	)		(198	)
Depreciation and amortization		(1,488	)		(1,551	)		(130	)		(130	)		(2	)		(1	)
Impairment losses on loans and receivables (net)		(12,885	)		(12,314	)		(1,992	)		(818	)		(28	)		—
Impairment losses on other assets (net)		—			—			—			—			(22	)		(48	)
Provisions (net)		(455	)		58			—			—			(296	)		(215	)
Gain/(losses) on disposal of assets not classified as non-current assets held for sale		—			—			—			—			31			8
Gain/(losses) on disposal of non-current assets held for sale not classified as discontinued operations		—			—			—			—			(16	)		(15	)
Operating profit before tax	Ps.	8,702		Ps.	12,270		Ps.	3,716		Ps.	4,226		Ps.	2,595		Ps.	334

(1) The Retail Banking segment encompasses the entire commercial banking and asset management business. Our Retail Banking segment’s activities include products and services for individuals, private banking clients, SMEs, middle-market corporations and government institutions.

(2) The Global Wholesale Banking segment reflects the returns on the corporate banking business, including managed treasury departments and the equities business. Our Global Wholesale Banking segment provides comprehensive products and services relating to finance, guarantees, mergers and acquisitions, equity and fixed income, structured finance, international trade finance, cash management services, collection services and e-banking, including structured loans, syndicated loans, acquisition financing and financing of investment plans, among others.

(3) The Corporate Activities segment is comprised of all operational and administrative activities that are not assigned to a specific segment or product mentioned above.  The Corporate Activities segment includes the financial management division, which manages structural financial risks arising from our commercial activities, mainly liquidity risk and interest rate risk, provides short- and long-term funding for our lending activities and calculates and controls transfer prices for loans and deposits in local and foreign currencies.  The financial management division also oversees the use of our resources in compliance with internal and regulatory limits regarding liquidity and regulatory capital requirements.

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The following table presents an overview of certain consolidated balance sheet data for each of our segments as of December 31, 2013 and 2014.

	Retail Banking				Global Wholesale Banking				Corporate Activities
	As of December 31,
	2013		2014		2013		2014		2013		2014
	(Millions of pesos)
Cash and balances with the Mexican Central Bank	Ps.	42,454	Ps.	43,676	Ps.	6,508	Ps.	7,810	Ps.	719	Ps.	337
Financial assets held for trading		—		—		176,570		207,999		337		372
Other financial assets at fair value through profit or loss		—		—		86,361		31,872		—		—
Available-for-sale financial assets		—		—		—		—		61,525		83,128
Loans and receivables		291,080		342,663		129,501		151,791		21,076		35,943
Hedging derivatives		—		—		—		—		300		4,740
Non-current assets held for sale		13		13		1		1		1,086		830
Tangible assets		4,032		4,428		680		746		55		88
Intangible assets		1,714		2,016		302		328		1,735		1,735
Tax assets		—		—		—		—		25,943		22,988
Other assets		931		1,309		22		30		4,873		5,140
Total assets	Ps.	340,224	Ps.	394,105	Ps.	399,945	Ps.	400,577	Ps.	117,649	Ps.	155,301
Financial liabilities held for trading	Ps.	—	Ps.	—	Ps.	136,199	Ps.	136,805	Ps.	—	Ps.	—
Other financial liabilities at fair value through profit or loss		44,107		17,860		23,710		35,947		8,208		54,977
Financial liabilities at amortized cost		331,156		362,971		79,476		141,842		117,552		74,312
Hedging derivatives		—		—		—		—		1,392		4,403
Provisions(1)		1,524		1,359		218		237		3,968		4,490
Tax liabilities		—		—		—		—		856		80
Other liabilities		3,979		2,929		650		478		12,305		9,006
Total liabilities	Ps.	380,766	Ps.	385,119	Ps.	240,253	Ps.	315,309	Ps.	144,281	Ps.	147,268
Total equity	Ps.	38,340	Ps.	46,300	Ps.	11,949	Ps.	14,469	Ps.	42,229	Ps.	41,518
Total liabilities and equity	Ps.	419,106	Ps.	431,419	Ps.	252,202	Ps.	329,778	Ps.	186,510	Ps.	188,786

(1) Principally includes provisions for off-balance sheet risk and provisions for tax and legal matters.

Retail Banking Segment

Our Retail Banking segment’s activities include products and services for individuals, private banking clients, SMEs, middle-market corporations and government institutions.  We provide commercial banking services to individual customers of all income levels, and offer a wide range of products and services to our individual customers, including demand and term deposits, credit and debit cards, mortgages, and payroll and personal loans.  Our Retail Banking segment also serves the middle market and local corporates that are not within the global corporate customers served by our Global Wholesale Banking segment.  We offer SMEs a variety of services and products including commercial loans, transactional collections and payment services, insurance, hedging and foreign trade services.

Operating profit before taxes attributable to the Retail Banking segment in 2014 was Ps.12,270 million, a 41.0% or Ps.3,568 million increase from Ps.8,702 million in 2013. This increase was mainly due to:

· an 11.9% or Ps.3,549 million increase in net interest income, mainly due to an increase of Ps.54,479 million in the average balance of the loan portfolio excluding credit cards, resulting from the organic growth of the portfolio, which increase was offset by an 88 basis point decrease in the average interest rate of this portfolio, resulting mainly from the decrease in reference rates enacted by the Mexican Central Bank during 2013 and 2014, which caused decreases in the average interest rate across all loan portfolios.

· a 6.3% or Ps.689 million increase in net fees and commissions income, from Ps.10,969 million in 2013 to Ps.11,658 million in 2014, due mainly to an increase in fees and commissions earned from insurance products, credit and debit cards, collection and payment services, financial advisory services, administration and custody and foreign exchange, partially offset by an increase in (i) credit and debit card expenses and (ii) other fees and commissions expense.

· a 4.4% or Ps.571 million decrease in impairment losses on loans and receivables, reflecting mainly a decrease in impairment losses of Ps.723 million in our consumer loan portfolio and Ps.148 million in our credit card loan portfolio, partially offset by increases of Ps.59 million in our mortgage loan portfolio, Ps.44 million in our commercial loan portfolio and Ps.197 million in loan collection and recovery expenses.

· a 112.7% or Ps.513 million decrease in net provisions, from a loss of Ps.455 million in 2013 to a gain of Ps.58 million in 2014, mainly due to lower provisioning requirements related to off-balance sheet credit card lines available.

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These positive effects were partially offset by:

· a 6.6% or Ps.1,112 million increase in administrative expenses, from Ps.16,802 million in 2013 to Ps.17,914 million in 2014, mainly due to increases in headcount and salaries, which resulted in higher personnel expenses as well as higher rent expense. Personnel expenses increased Ps.635 million, or 7.8%, resulting from an increase of Ps.461 million, or 7.5%, in salaries and bonuses and an increase of Ps.174 million, or 8.7%, in other personnel expenses, while rents increased Ps.161 million, or 11.2%, in each case as a result of the ongoing expansion of our branch network, including the opening of 95 new branches during 2014.

· 44.8% or Ps.520 million increase in other operating income/(expenses), from a loss of Ps.1,160 million in 2013 to a loss of Ps.1,680 million in 2014, mainly due to increases in contributions to IPAB that resulted from an increase in our deposits.

· a 7.8% or Ps.59 million decrease in gains/(losses) on financial assets and liabilities and exchange differences, from a gain of Ps.756 million in 2013 to a gain of Ps.697 million in 2014, primarily due to the significant gain in 2013 from the private banking unit’s participation in the placement of shares with its customer base from Grupo Modelo’s initial public offering by Anheuser-Busch.

Global Wholesale Banking Segment

Our Global Wholesale Banking segment provides comprehensive products and services, including corporate banking, global transactional banking and investment banking services, relating to finance, guarantees, mergers and acquisitions, equity and fixed income, structured finance, international trade finance, cash management services, collection services and e-banking, including structured loans, syndicated loans, acquisition financing and financing of investment plans, among others, to our Global Wholesale Banking segment customers. This segment also includes our proprietary trading operations.

Operating profit before taxes attributable to the Global Wholesale Banking segment in 2014 was Ps.4,226 million, representing a Ps.510 million, or 13.7%, increase from Ps.3,716 million in 2013.  This increase was mainly due to:

· a 58.9% or Ps.1,174 million decrease in net impairment losses on loans and receivables, from Ps.1,992 million in 2013 to Ps.818 million in 2014,  mainly due to the extraordinary provisions created during 2013 to cover our exposure to the three major home builders, which are part of the Global Wholesale Banking segment. The relatively lower provisions created during 2014 mainly resulted from our exposure to certain corporate clients that experienced delays in project execution, resulting in the restructuring of the loans associated with those projects, thus requiring increased provisioning.

· a 14.4% or Ps.500 million increase in net interest income, mainly due to an increase of Ps.13,443 million in the average portfolio of debt instruments, together with a two basis point increase in the average interest rate and an increase of Ps.3,360 million in the average balance of loans and advances to customers, offset by a 110 basis point decrease in the average interest rate earned. Lower interest rates relating to loans and advances to customers resulted from loans granted to two state-owned energy companies with risk profiles similar to other large corporate debt, as well as the preference of certain large corporations to issue debt in the capital markets.

These positive results were partially offset by:

· a 35.1% or Ps.853 million decrease in gains/(losses) on financial assets and liabilities and exchange differences, from a gain of Ps.2,431 million in 2013 to a gain of Ps.1,578 million in 2014, primarily due to a decrease in gains from interest rate and equity derivatives.

· a 10.7% or Ps.173 million increase in administrative expenses, from Ps.1,612 million in 2013 to Ps.1,785 million in 2014, mainly due to an increase in personnel expenses and technology and systems expenses.

· an 8.4% or Ps.164 million decrease in net fees and commissions income, from Ps.1,962 million in 2013 to Ps.1,798 million in 2014, mainly due to a decrease in income from commissions from financial advisory and capital markets and securities activities, reflecting softer investment banking activity as a result of increased volatility in the markets and the slow down in the execution of the infrastructure and energy related projects pipeline.

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Corporate Activities Segment

Our Corporate Activities segment is comprised of all operational and administrative activities that are not assigned to a specific segment or product mentioned above.  The Corporate Activities segment includes the financial management division, which manages structural financial risks that arise from our commercial activities, mainly liquidity risk and interest rate risk, provides short- and long-term funding for our lending activities and calculates and controls transfer prices for loans and deposits in local and foreign currencies.  The financial management division also oversees the use of our resources in compliance with internal and regulatory limits regarding liquidity and regulatory capital requirements.

Through the assignment of a transfer price to each loan or deposit, interest income is divided between our operating segments (Retail Banking and Global Wholesale Banking ) and the Corporate Activities segment as follows:

· the difference between the interest rate charged to customers for the loans granted by our operating segments and the transfer price assigned to these loans is assigned as interest income to the respective operating segment;

· the difference between the interest rate paid to customers for the deposits received by our operating segments and the transfer price assigned to these deposits is assigned as interest income to the respective operating segment; and

· finally, the difference between the transfer price charged to the loans and the transfer price paid for the deposits is assigned to Corporate Activities as net interest income.

The financial management division determines transfer prices based on interest rates currently prevailing in the market for different durations, which are estimated from the yield of the most representative and liquid short and medium term corporate, government and Mexican Central Bank debt securities, and from the Mexican Central Bank’s reference interest rates for long-term securities.

The ALCO manages the risks associated with financial margin and net worth of the banking book, as well as liquidity risk for the entire balance sheet.  We hedge the interest rate risk of the balance sheet using strategies that can address specific operations or modify the risk profile as a whole.  In recent years, the ALCO portfolio was comprised of fixed rate positions, mainly Mexican sovereign bonds, in addition to fixed rate swaps, to protect the interest rate margin against a lower interest rate environment.  As the scenario changed to more stable short term interest rates, we have reduced the volume of activity in the ALCO portfolio, leaving existing positions to mature at their stated maturity.

Operating profit before taxes attributed to Corporate Activities in 2014 was a gain of Ps.334 million, a Ps.2,261 million, or 87.1%, decrease from a gain of Ps.2,595 million in 2013. This decrease in operating profit before taxes was mainly due to a Ps.2,285 million decrease in net interest income, from Ps.2,609 million in 2013 to Ps.324 million in 2014,  mainly due to a Ps.1,547 million increase in interest expense paid on issuances and interbank loans, resulting primarily from the issuance of our Tier 2 Subordinated Capital Notes in December 2013, as well as an increase in long-term loans with development banks which were required to provide funding to the mortgage and consumer subsidiaries.

These negative results were partially offset by a Ps.239 million increase in net gains/(losses) on financial assets and liabilities and exchange differences from a gain of Ps.94 million in 2013 to a gain of Ps.333 million in 2014. The increase in net gains/(losses) on financial assets and liabilities was mainly due to gains from the sale of some debt securities issued by the Mexican government.

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Results of Operations for the Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012

The following table presents our consolidated results of operations for the year ended December 31, 2013 as compared to the year ended December 31, 2012.

	For the year ended December 31,
	2012			2013			2013				2012/2013
	(Millions of pesos)						(Millions of U.S. dollars)(1)			(% Change)
Interest income and similar income	Ps.	55,521		Ps.	55,386		$	U.S.4,233			(0.24	%)
Interest expenses and similar charges		(21,639	)		(19,539	)		(1,493	)		(9.70	%)
Net Interest Income	Ps.	33,882		Ps.	35,847		$	U.S.2,740			5.80	%
Income from equity instruments		212			245			19			15.57	%
Fee and commission income (net)		11,685			12,844			982			9.92	%
Gains/(losses) on financial assets and liabilities (net)		1,265			3,281			251			159.37	%
Exchange differences (net)		(6	)		—			—			(100.00	%)
Other operating income		628			787			60			25.32	%
Other operating expenses		(1,794	)		(2,078	)		(159	)		15.83	%
Total Income	Ps.	45,872		Ps.	50,926		$	U.S.3,893			11.02	%
Administrative expenses		(16,724	)		(18,630	)		(1,424	)		11.40	%
Personnel expenses		(8,232	)		(9,261	)		(708	)		12.50	%
Other general administrative expenses		(8,492	)		(9,369	)		(716	)		10.33	%
Depreciation and amortization		(1,537	)		(1,620	)		(124	)		5.40	%
Impairment losses on financial assets (net)		(8,970	)		(14,905	)		(1,139	)		66.16	%
Loans and receivables(2)		(8,970	)		(14,905	)		(1,139	)		66.16	%
Impairment losses on other assets (net):		(34	)		(22	)		(2	)		(35.29	%)
Other intangible assets		––			—			—			—
Non-current assets held for sale		(34	)		(22	)		(2	)		(35.29	%)
Provisions (net)(3)		680			(751	)		(57	)		(210.44	%)
Gains/(losses) on disposal of assets not classified as non-current assets held for sale		1,743			31			2			(98.22	%)
Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations		135			(16	)		(1	)		(111.85	%)
Operating Profit Before Tax	Ps.	21,165		Ps.	15,013		$	U.S.1,148			(29.07	%)
Income tax		(3,853	)		(2,670	)		(204	)		(30.70	%)
Profit from Continuing Operations		17,312			12,343			944			(28.70	%)
Profit from Discontinued Operations (net)		132			1,938			148			1,368.18	%
Profit for the Year	Ps.	17,444		Ps.	14,281		$	U.S.1,092			(18.13	%)
Profit attributable to the Parent		17,443			14,279			1,092			(18.14	%)
Profit attributable to non-controlling interests		1			2			—			—

(1) Results for the year ended December 31, 2012 have been translated into U.S. dollars, for convenience purposes only, using the exchange rate of Ps.13.0843 per U.S.$1.00 as calculated on December 31, 2013 and reported by the Mexican Central Bank in the Official Gazette of the Federation (Diario Oficial de la Federación) on January 2, 2014 as the exchange rate for the payment of obligations denominated in currencies other than pesos and payable within Mexico.

(2) Impairment losses on loans and receivables less recoveries of loans  previously charged off (net of legal expenses).

(3) Principally includes provisions for off-balance sheet risk and provisions for tax and legal matters.

Summary

Profit in 2013 was Ps.14,281 million, a 18.1% or Ps.3,163 million decrease from Ps.17,444 million in 2012.  These results reflect mainly:

· a Ps.5,935 million, or 66.2%, increase in impairment losses on loans and receivables, net, driven mainly by growth in our loan portfolio together with a shift in our mix towards consumer and credit card products, which require a higher level of provisions, and our exposure to the home builders sector in Mexico, which has also required a higher level of provisions due to the underperformance of this sector during the second

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half of 2013, as well as by the results of a campaign launched in 2011 with less stringent policies which continued to impact us in 2013;

· a 5.8% increase in net interest income due primarily to an increase in average total interest-earning assets, caused principally by growth in our lending activities, together with a decrease of Ps.2,100 million in interest expense and similar charges, partly offset by a Ps.135 million decrease in interest income and similar income. The decrease in interest income and similar income was due to a Ps.38,342 million decrease in the average volume of our debt instruments portfolio, which led to a decrease of Ps.2,710 million in interest income from debt instruments, together with a decrease of Ps.812 million in interest income from hedging operations in 2013 compared to 2012, offset in part by a Ps.41,353 million increase in the average volume in our loans and advances to customers, which led to an increase of Ps.3,370 million in interest income from this portfolio;

· a 9.9% increase in net income from fees and commissions to Ps.12,844 million, mainly due to (i) an increase in net fees and commissions from additional credit and debit cards issued, as well as an increase in the number of credit and debit card transactions, (ii) an increase in the sale of insurance products, reflecting the continued success of our insurance broker business model, as well as the positive results from our auto insurance platform, “Autocompra,” (iii) an increase in commercial and marketing activity, (iv) the continued emphasis on our multichannel distribution platform, and (v) an increase in net fees and commissions related to collection and payment services;

· a Ps.2,016 million, or 159.4%, increase in net gains on financial assets and liabilities mainly resulting from interest rate products, driven primarily by interest rate derivatives such as cross currency swaps and interest rate futures;

· a Ps.1,938 million profit from discontinued operations resulting from the sale of our asset management business;

· a Ps.1,906 million, or 11.4%, increase in administrative expenses, due primarily to increases in salaries,  bonuses paid and headcount.

Net Interest Income

Our interest income and similar income consists mainly of interest from lending activities to customers and credit institutions, which generated Ps.44,474 million, or 80.3%, of our total interest and similar income in 2013, with the remaining interest income of Ps.10,912 million consisting of interest from investments in debt instruments, cash and balances with the Mexican Central Bank, income from hedging operations and other interest income.

Our interest expenses and similar charges consist mainly of interest paid on customer deposits.  In 2013, interest expense on customer deposits was Ps.11,265 million, representing 52.1% of our total interest expenses and similar charges for that period.  Interest expenses from time deposits, demand accounts and reverse repurchase agreements relating to Mexican government securities with non-financial institution customers amounted to Ps.4,997 million, Ps.2,875 million and Ps.3,393 million, respectively, in 2013, representing 23.1%, 13.3% and 15.7% of our total interest expenses and similar charges for the period, respectively.  In addition, interest expense on deposits from the Mexican Central Bank and credit institutions (which includes reverse repurchase agreements with financial institutions) was Ps.2,649 million, representing 12.2% of our total interest expense in 2013.  Interest expenses and similar charges decreased by Ps.2,100 million, or 9.7%, in 2013 compared to 2012.

Our net interest income in 2013 was Ps.35,847 million, a 5.8% or Ps.1,965 million increase from Ps.33,882 million in 2012. This increase was mainly due to an increase in average total interest-earning assets, caused principally by growth in our lending activities, together with a decrease in interest expense, mainly due to lower interest paid on deposits from the Mexican Central Bank and on time deposits and reverse repurchase agreements from other credit institutions which were partially offset by decreases in debt instruments and in the funding obtained through deposits from the Mexican Central Bank and credit institutions (which includes reverse repurchase agreements with financial institutions).

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The following table sets forth the components of our interest income and similar income and interest expenses and similar charges in 2012 and 2013.

	For the year ended December 31,
	2012			2013				2012/2013
	(Millions of pesos)						(% Change)
Interest income and similar income
Cash and balances with the Mexican Central Bank	Ps.	1,444		Ps.	1,264			(12.47	%)
Loans and advances to credit institutions		2,790			3,019			8.21
Loans and advances to customers—excluding credit cards		29,481			31,573			7.10
Loans and advances to customers—credit cards		8,604			9,882			14.85
Debt instruments		11,538			8,828			(23.49	)
Income from hedging operations		1,540			728			(52.73	)
Other interest income		124			92			(25.81	)
Total	Ps.	55,521		Ps.	55,386			(0.24	%)
Interest expense and similar charges
Deposits from the Mexican Central Bank and credit institutions	Ps.	(4,391	)	Ps.	(2,649	)		(39.67	%)
Customer deposits—Demand accounts		(2,138	)		(2,875	)		34.47
Customer deposits—Time deposits		(5,441	)		(4,997	)		(8.16	)
Customer deposits—Reverse repurchase agreements		(4,682	)		(3,393	)		(27.53	)
Subordinated debentures		—			(11	)		100.00
Marketable debt securities and other financial liabilities		(1,736	)		(1,994	)		14.86
Other liabilities		(3,029	)		(3,084	)		1.82
Expenses from hedging operations		(9	)		(320	)		3,455.56
Other interest expenses		(213	)		(216	)		1.41
Total	Ps.	(21,639	)	Ps.	(19,539	)		(9.70	%)
Net interest income	Ps.	33,882		Ps.	35,847			5.80	%

The following table sets forth the components of our average loans and advances to customers in 2012 and 2013.

	As of December 31,
	2012		2013			2012/2013
	(Millions of pesos)				(% Change)
Average loans and advances to customers
Commercial, financial and industrial	Ps.	211,735	Ps.	234,676		10.83	%
Mortgage		65,568		75,207		14.70
Installment loans to individuals		57,586		66,359		15.23
Revolving consumer credit card loans		32,965		38,666		17.29
Non-revolving consumer loans		24,621		27,693		12.48
Total	Ps.	334,889	Ps.	376,242		12.35	%

Average total interest-earning assets were Ps.682,420 million in 2013, a 1.9% or Ps.12,723 million increase from Ps.669,697 million in 2012.  This increase was due to (i) an increase in the average volume of loans and advances to customers excluding credit cards of Ps.35,652 million, or 11.8%, from Ps.301,924 million in 2012 to Ps.337,576 million in 2013, (ii) an increase in the average balance of loans and advances to credit institutions of Ps.9,793 million, or 11.8%, from Ps.82,897 million in 2012 to Ps.92,690 million in 2013, and (iii) an increase in the average balance of revolving consumer credit card loans of Ps.5,701 million, or 17.3%, from Ps.32,965 million in 2012 to Ps.38,666 million in 2013.  These increases were partially offset by a decrease of Ps.38,342 million, or 17.4%, in the average volume of debt instruments, from Ps.220,465 million in 2012 to Ps.182,123 million in 2013 and a slight decrease in the average volume of cash balances with the Mexican Central Bank, from Ps.31,446 million in 2012 to Ps.31,365 million in 2013.

Interest income and similar income from interest-earning assets decreased by Ps.135 million, or 0.2%, from Ps.55,521 million in 2012 to Ps.55,386 million in 2013, due primarily to a decrease in interest income from our debt instruments portfolio, partly offset by an increase in interest income on loans and advances to customers excluding

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credit cards, as well as higher interest income on revolving consumer credit card loans. The decrease in interest income from our debt instruments portfolio was due to a decrease in the average volume of debt instruments  administered by our Global Wholesale Banking and Corporate Activities segments, resulting from the maturity of certain securities in our trading portfolios. The increase in interest income on loans and advances to customers excluding credit cards was driven primarily by the Ps.35,652 million increase in average volumes in our customer loan portfolio excluding credit cards in 2013 compared to 2012, which was comprised of a Ps.22,941 million increase in average commercial, financial and industrial loans, a Ps.9,639 million increase in the average volume of our mortgage loan portfolio and an increase of Ps.3,072 million in the average volume of our non-revolving consumer loan portfolio.  The increase in the average volume of our mortgage loan portfolio was mainly due to organic growth and in part to our acquisition of the ING Hipotecaria mortgage business. During the second half of 2013 we launched “Hipoteca Santander Premier” with an interest rate of 8.49%, targeting high income individuals with good credit scores, a minimum property value of Ps.1.2 million and a maximum loan-to-value ratio of 70%. In addition, we believe our targeted efforts have helped us organically increase our market share in key business lines such as retail services to middle-market corporations and SMEs.  The slower increase in our non-revolving consumer loan portfolio was due to the adoption of a more conservative approach towards these products in an attempt to improve the overall credit quality of this portfolio which had been worsening as a result of the loans that were originated using less stringent credit policies in 2011 and the beginning of 2012. This more conservative approach is part of an ongoing process where we have continued to update our credit scoring models, including the incorporation of behavioral score models from Mexican credit bureaus into our decision models for new originations.

Average interest rates on interest-earning assets decreased by 17 basis points, from 8.29% in 2012 to 8.12% in 2013, which was mainly due to a 41 basis point decrease in the average interest rate on loans and advances to customers excluding credit cards, from 9.76% in 2012 to 9.35% in 2013, which partially resulted from the 100 basis point decrease in the reference rate that occurred during 2013. The average interest rate on commercial, financial and industrial loans decreased by 37 basis points from 7.31% in 2012 to 6.94% in 2013 and consumer loans (excluding credit cards) from 27.86% in 2012 to 27.28% in 2013. Additionally, these results were driven by (i) an 11 basis point decrease in the average interest rate on loans and advances to credit institutions and (ii) a 54 basis point decrease in the average interest rate on credit card loans from 26.10% in 2012 to 25.56% in 2013 as a consequence of promotional rates and by a 38 basis point decrease in the average interest rate on debt instruments, from 5.23% in 2012 to 4.85% in 2013.

The increase in the interest earned on our customer loan portfolio excluding credit cards was mainly due to an increase of Ps.9,639 million in the average volume of our mortgage loan portfolio, from Ps.65,568 million in 2012 to Ps.75,207 million in 2013, and an increase of Ps.11,097 million in the average volume of our SME loan portfolio, from Ps.25,541 million in 2012 to Ps.36,506 million in 2013.  The decrease in the average yield on our customer loan portfolio excluding credit cards was mainly due to a 191 basis point decrease in the average interest rate earned on our SME loan portfolio, from 14.85% in 2012 to 12.96% in 2013, partially as a result of increased volume of substitution loans to SMEs, and the introduction of a campaign offering an 8.0% interest rate for loan product bundles for a three-year term. Through our substitution loans to SMEs we offer our existing SME clients with a good credit history the opportunity to substitute out of an existing higher rate loan that is close to maturity and into a new lower rate loan (which may be for an increased amount) in an effort to cultivate and retain these SME clients with good credit histories. This special opportunity is only granted to SME clients meeting specific requirements, including more stringent credit scores and the use of at least three of our transactional products such as insurance, credit cards, and payroll accounts. During 2013, our substitution loans to SMEs accounted for approximately 10% of SME loans. The 18 basis point decrease in the interest earned on our mortgage loan portfolio in 2012 was mainly due to new originations of lower interest rate products (Light 10.45%, 10x1000 10.55% and Premier 8.49%), which were introduced in a more competitive mortgage market.

Average volume of commercial, financial and industrial loans grew by Ps.22,941 million, from Ps.211,735 million in 2012 to Ps.234,676 million in 2013.  This increase was comprised of an increase of (i) Ps.11,097 million in the average volume of loans to SMEs, (ii) Ps.11,572 million in the average volume of loans to middle-market corporations, and (iii) Ps.3,337 million in the trading portfolio managed by the Global Wholesale Banking segment, which were partially offset by a decrease of Ps.2,336 million in the average volume of loans to Global Wholesale Banking clients. The increase in SME average loan volumes resulted from increased commercial activity together with more streamlined approval processes and tailored product offerings distributed through specialized branches attended by specialized executives.  The increase in the average volume of loans to middle-market corporations was due to improved lending execution processes where lending opportunities are identified and closely pursued.

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Additionally, the decrease in average Global Wholesale Banking segment loans, together with a decrease in the average loan yield of 65 basis points, was due to the competitive scenario and the preference of certain companies to issue debt in the markets. The average interest rate earned from loans to middle-market corporations decreased by 46basis points, from 6.96% in 2012 to 6.82% in 2013.  The average interest rate earned from loans to SMEs decreased by 189 basis points, from 14.85% in 2012 to 12.96% in 2013, as a result of an increased volume of substitution loans to SMEs (see description above for more details on our substitution loans to SMEs), and the introduction of a campaign offering an 8.0% interest rate for loan product bundles for a three-year term. The average interest rate earned from loans to institutions decreased by 61 basis points, from 6.68% in 2012 to 6.07% in 2013, mainly due to a restructured state government entity loan which resulted in a lower interest rate, as well as a general decrease in the reference rate which affected our institutional variable rate loans. The average interest rate earned from loans and advances to credit institutions decreased by 11 basis points, from 3.37% in 2012 to 3.26% in 2013, mainly due to a decrease in the reference rate.

Interest income earned on our trading portfolio increased by Ps.10 million, from Ps.427 million in 2012 to Ps.437 million in 2013, due to the combined effect of an increase of Ps.3,337 million in the average balance of our trading portfolio, from Ps.9,292 million in 2012 to Ps.12,629 million in 2013 and a decrease of 113 basis points in the average interest rate earned.  The increase in the average balance of this portfolio was due to an increase in repurchase agreements activity.

Interest income earned from debt instruments decreased by Ps.2,710 million, from Ps.11,538 million in 2012 to Ps.8,828 million in 2013, or 23.5%, reflecting a decrease of Ps.38,342 million in the average balance of the portfolio, from Ps.220,465 million in 2012 to Ps.182,123 million in 2013.  The decrease in interest income from debt instruments was mainly due to (i) a Ps.30,766 million decrease in the average volume of debt instruments administered by our Global Wholesale Banking segment, (ii) a Ps.7,576 million decrease in the average balance of debt instruments administered by our Corporate Activities Segment, from Ps.57,107 million in 2012 to Ps.49,531 million in 2013 and (iii) a 26 basis point decrease from 5.27% in 2012 to 5.01% in 2013 in the average interest rate earned from debt instruments administered by our Corporate Activities Segment.  The decrease in volume of debt instruments administered by the Global Wholesale Banking segment was mainly due to a decrease in our long-term debt instruments trading portfolio as we continued to evaluate our strategy in response to changing market conditions, and reduced our exposure to long-term debt instruments as a result of increased volatility.The decrease in the volume of debt securities administered by our Corporate Activities Segment was primarily due to debt instruments maturing during 2013 that were not subsequently replaced.

The positive effect of the increase in our average balance of interest-earning assets as well as the decrease in the average cost of our interest-bearing liabilities was partially offset by an increase in the average balance of our  interest-bearing liabilities in 2013 compared to 2012 and a decrease in the average interest rate on interest-earning assets in 2013 compared to 2012.  The combined effect of a decrease of 17 basis points in the average yield on our interest-earning assets together with a decrease of 40 basis points in the cost of our interest-bearing liabilities resulted in an increase in the net interest spread of 7 basis points. Net interest income increased by Ps.1,965 million, due mainly to the increase in the average volume of interest-earning assets of Ps.12,723 million with an average interest rate of 8.12%, whereas interest-bearing liabilities increased by Ps.7,623 million with an average cost of 3.26%.

Average total interest-bearing liabilities in 2013 were Ps.598,484 million, a 1.3% or Ps.7,623 million increase from Ps.590,861 million in 2012. Interest expenses and similar charges decreased by Ps.2,100 million, or 9.7%, from Ps.21,639 million in 2012 to Ps.19,539 million in 2013. The principal drivers of this decrease were (i) a decrease of Ps.1,742 million in interest expense on deposits from the Mexican Central Bank and credit institutions, due primarily to a decrease in the average balance of Ps.30,630 million, from Ps.107,665 million in 2012 to Ps.77,035 million in 2013, (ii) a decrease of Ps.1,289 million in interest expense on reverse repurchase agreements, from Ps.4,682 million in 2012 to Ps.3,393 million in 2013, due to a decrease of Ps.15,172 million in the average balance of reverse repurchase agreements combined with a decrease of 68 basis points, from 4.49% in 2012 to 3.81% in 2013; and (iii) a decrease of Ps.444 million in interest expense related to time deposits, due primarily to the combined effect of an increase in the average balance of Ps.4,990 million, from Ps.131,702 million in 2012 to Ps.136,692 million in 2013, and a decrease of 48 basis points, from 4.13% to 3.66%. These decreases were partially offset by (i) an increase of Ps.737 million in interest expense on demand accounts due to an increase in the average balance of Ps.30,939 million, from Ps.144,036 million in 2012 to Ps.174,975 million in 2013, together with an increase in the average interest rate of 16 basis points, from 1.48% in 2012 to 1.64% in 2013; (ii) an increase of Ps.369 million in interest expense on other liabilities due to an increase in the average balance of Ps.8,760 million,

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from Ps.70,087 million in 2012 to Ps.78,847 million in 2013, despite a decrease in the average interest rate of 5 basis points, from 4.64% in 2012 to 4.59% in 2013; and (iii) an increase of Ps.258 million in interest expense on marketable debt securities and other financial liabilities due to an increase in the average balance of Ps.8,514 million, from Ps.33,172 million in 2012 to Ps.41,686 million in 2013, despite a decrease in the average interest rate of 45 basis points, from 5.23% in 2012 to 4.78% in 2013.

Net Fee and Commission Income

Our net fee income consists mainly of commissions charged to customers for credit and debit cards purchases, sales of insurance products, investment fund management fees, fees from collection and payment services and fees from financial advisory services.

Net fee and commission income in 2013 was Ps.12,844 million, a 9.9% or Ps.1,159 million increase from Ps.11,685 million in 2012. The following table presents a breakdown, by product, of our fee and commission income and expenses in 2012 and 2013.

	For the Year Ended December 31,
	2012			2013				2012/2013
	(Millions of pesos)						(% Change)
Fee and commission income
Service charges on deposits accounts	Ps.	707		Ps.	746			5.52	%
Credit and debit cards		3,667			4,061			10.74
Insurance		3,050			3,438			12.72
Collection and payment services		1,434			1,596			11.30
Investment funds management		1,417			1,299			(8.33	)
Foreign exchange		527			569			7.97
Checks and others		356			323			(9.27	)
Capital markets and securities activities		360			393			9.17
Administration and custody		343			396			15.45
Financial advisory services		1,433			1,450			1.19
Other fees and commissions		670			795			18.66
Total	Ps.	13,964		Ps.	15,066			7.89	%
Fee and commission expense
Credit and debit cards	Ps.	(1,325	)	Ps.	(964	)		(27.25	%)
Fund management		(46	)		(50	)		8.70
Checks and others		(37	)		(33	)		(10.81	)
Capital markets and securities activities		(129	)		(125	)		(3.10	)
Collections and transactional services		(127	)		(164	)		29.13
Other fees and commissions		(572	)		(788	)		37.76
Financial advisory services		(43	)		(98	)		127.91
Total	Ps.	(2,279	)	Ps.	(2,222	)		(2.50	%)
Net fee and commission income	Ps.	11,685		Ps.	12,844			9.92	%

Fee and commission income was Ps.15,066 million in 2013, a 7.9%, or Ps.1,102 million increase from Ps.13,964 million in 2012, mainly due to an increase in fees and commissions earned from the sale of insurance products of Ps.388 million, or 12.7%, an increase in fees earned from credit and debit cards of Ps.394 million, or 10.7%, an increase in fees earned from collection and payment services of Ps.162 million, or 11.3%, from Ps.1,434 million in 2012 to Ps.1,596 million in 2013, due to increased transactional activity, an increase in net fees earned from administration and custody of Ps.53 million, or 15.5%, from Ps.343 million in 2012 to Ps.396 million in 2013, and an increase in service charges on deposits accounts of Ps.39 million, or 5.5%, from Ps.707 million in 2012 to Ps.746 million in 2013. The increase in fee and commission income was partially offset by a decrease in net fees and commissions earned from investment fund management by Ps.118 million, or 8.3%, from Ps.1,417 million in 2012 to Ps.1,299 million in 2013, together with a decrease in fees earned from checks and others by Ps.33 million, or 9.3%, from Ps.356 million in 2012 to Ps.323 million in 2013.

Net fees generated from credit and debit cards increased Ps.755 million, or 32.2%, from Ps.2,342 million in 2012 to Ps.3,097 million in 2013. The increase in net fees in 2013 was due to increased volume of credit and debit

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cards. Credit card issuance costs are generated at the time of issuance, whereas fee income is generated over time when cards are used by our clients. While the total number of credit and debit cards outstanding at period end increased by 889,595, or 8.3%, to 11,577,862 as of December 31, 2013 compared to 10,668,267 as of December 31, 2012, the increase in outstanding balances of credit cards as of December 31, 2012 was 7.4%.

The increase in fees and commissions earned from the sale of insurance products was due to an increase of 3.0% in insurance policies sold, together with a 22.0% increase in insurance distribution premiums.  These increases were mainly due to our strategy to sell insurance products together with certain products such as consumer loans, mortgage loans and SME loans, in addition to increased sales through alternative channels such as ATMs and contact centers.

Gains /(Losses) on Financial Assets and Liabilities (Net)

Our gains/(losses) on financial assets and liabilities consist mainly of gains and losses on financial instruments, and in particular derivatives. The following table shows a breakdown of our net gains/(losses) on financial assets and liabilities in 2012 and 2013.

	For the Year Ended December 31,
	2012			2013				2012/2013
	(Millions of pesos)						(% Change)
Interest rate products	Ps.	407		Ps.	2,670			556.02	%
Debt instruments		855			(458	)		(153.57	)
Interest rate derivatives		(448	)		3,128			(798.21	)
Equity securities		366			124			(66.12	)
Equity positions		1,514			(269	)		(117.77	)
Equity derivatives		(1,148	)		393			(134.23	)
Exchange rate products		619			624			0.81
Foreign exchange positions		24			(374	)		(1,658.33	)
Foreign exchange derivatives		595			998			67.73
Other(1)		(127	)		(137	)		7.87
Total	Ps.	1,265		Ps.	3,281			159.37	%

(1) Corresponds to commissions paid to brokers.

Gains on financial assets and liabilities (net) in 2013 were Ps.3,281 million, an increase of Ps.2,016 million from a gain of Ps.1,265 million in 2012, mainly due to the activities of our Global Wholesale Banking segment, where we had a gain of Ps.2,431 million in 2013 compared to a gain of Ps.1,000 million in 2012.  This increase in gains on financial assets and liabilities (net) was due to the following.

In 2013, we had a gain in interest rate products of Ps.2,670 million, compared with a gain of Ps.407 million in 2012, which was mainly explained by an increase of Ps.3,576 million in gains on interest rate derivatives from a loss of Ps.448 million in 2012 to a gain of Ps.3,128 million in 2013, offset by a decrease in gains on debt instruments of Ps.1,313 million, from a gain of Ps.855 million in 2012 to a loss of Ps.458 million in 2013.  The swing in the amount of interest rate derivatives is mainly due to market conditions and positioning in the portfolios.  All of these derivatives relate to economic hedges against debt exposure.  We hedge bonds using interest rate derivatives such as futures and swaps. The increase of Ps.3,576 million in interest rate derivatives was mainly due to increases of Ps.2,040 million in cross currency swaps and Ps.1,228 in interest rate futures.

During 2013 the Mexican Central Bank reduced the interest rate benchmark funding by 100 basis points, including reductions of 50 basis points in March, 25 basis points in September and 25 basis points in October, arguing that the adjustment of the interest rate was due to both internal and external factors.

Additionally, Mexico’s macroeconomic environment during 2013 worsened compared with 2012, such that the country risk, which due to the global crisis and uncertainty had decreased to 122 basis points in 2012, increased to 155 basis points in 2013. This context supported lower valuations in our debt instruments positions, resulting in losses of Ps.458 million during 2013.

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Gains on equity securities decreased by Ps.242 million, from a gain of Ps.366 million in 2012 to a gain of Ps.124 million in 2013 resulting from losses in equity positions. The gains from equity positions  decreased by Ps.1,783 million, from a gain of Ps.1,514 million in 2012 to a loss of Ps.269 million in 2013. This decrease was partially offset by a Ps.393 million gain from equity derivatives in 2013, which increased by Ps.1,541 million from a loss of Ps.1,148 million in 2012.

The gain of Ps.393 million from equity derivatives in 2013 was due to a gain in derivatives of the Mexican Stock Exchange Prices and Quotations Index (IPC futures), partially offset by losses related to forward contracts on stock and indexes in the MexDer.  The investment in equity derivatives is mainly entered into to hedge equity positions.  This gain was partially offset by a gain in our equity securities position in stocks mainly traded on the Mexican Stock Exchange of Ps.269 million. The IPC quote was 43,705.83 at the end of December 2012 and 42,727.09 at the end of December 2013. This represented a decrease of 2.2% in that index. None of our transactions in equity derivatives in 2012 or 2013 are related to proprietary trading.

Gains on exchange rate products increased by Ps.5 million, from a gain of Ps.619 million in 2012 to a gain of Ps.624 million in 2013.  Results from foreign exchange derivatives increased by Ps.403 million, from a gain of Ps.595 million in 2012 to a gain of Ps.998 million in 2013 mainly due to gains in foreign exchange futures, as a result of increased foreign exchange volatility in the second and third quarters of 2013. Gains in foreign exchange positions generated in daily trading activities decreased by Ps.398 million, from a gain of Ps.24 million in 2012 to a loss of Ps.374 million in 2013.

The peso depreciated 0.91% in 2013. As of December 31, 2012, the exchange rate for U.S. dollars was Ps.12.97 per U.S. dollar and, as of December 31, 2013, the exchange rate for U.S. dollars was Ps.13.08 per U.S. dollar.  During the second half of 2013, the increased likelihood of the U.S. gradually paring back its monetary stimulus earlier than anticipated  generated greater volatility in the currency markets which therefore led to currency depreciation.

Exchange Differences (Net)

Our income from exchange differences arises from the effect that fluctuations in the value of the peso against other currencies have on our net foreign currency positions, which are mainly in U.S. dollars.  Exchange differences (net) was flat in 2013.

Other Operating Income (Net)

Other operating income increased by Ps.159 million, or 25.3%, from Ps.628 million in 2012 to Ps.787 million in 2013.

Other operating expense (net) increased by Ps.125 million, or 10.7%, from an expense of Ps.1,166 million in 2012 to an expense of Ps.1,290 million in 2013.

Other operating expenses increased Ps.284 million, or 15.8%, from Ps.1,794 million in 2012 to Ps.2,078 million in 2013, mainly due to the increase of Ps.200 million in the Mexican Institute for the Protection of Bank Savings (Instituto para la Protección al Ahorro Bancario, or IPAB) contributions, from Ps.1,344 million to Ps.1,544 million, due to the increase in our deposits.

Administrative Expenses

Our administrative expenses consist of personnel and other general expenses.  Our personnel expenses consist mainly of salaries, social security contributions, bonuses and our long-term incentive plan for our executives.  Our other general expenses mainly consist of: expenses related to technology and systems, administrative services, which are mainly services outsourced in the areas of information technology, taxes other than income tax, rental of properties and hardware, advertising and communication, surveillance and cash courier services and expenses related to maintenance, conservation and repair, among others.

Administrative expenses increased by Ps.1,906 million, or 11.4%, from Ps.16,724 million in 2012 to Ps.18,630 million in 2013, primarily due to increased expenses for personnel, rents and technology and systems.

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The following table sets forth administrative expenses in 2012 and 2013, by type.

	For the Year Ended December 31,
	2012			2013				2012/2013
	(Millions of pesos)						(% Change)
Personnel expenses	Ps.	(8,232	)	Ps.	(9,261	)		12.50	%
Other general expenses		(8,492	)		(9,369	)		10.33
Administrative services		(595	)		(447	)		(24.87	)
Taxes other than income tax		(1,036	)		(1,169	)		12.84
Surveillance and cash courier services		(566	)		(605	)		6.89
Advertising and communication		(662	)		(705	)		6.50
Maintenance, conservation and repair		(656	)		(944	)		43.90
Rents		(1,261	)		(1,456	)		15.46
Technology and systems		(1,865	)		(2,232	)		19.68
Stationery and supplies		(205	)		(198	)		(3.41	)
Insurance premiums		(46	)		(41	)		(10.87	)
Credit cards		(256	)		(260	)		1.56
Travel costs		(271	)		(282	)		4.06
Operating costs		(493	)		(483	)		(2.03	)
Other		(580	)		(547	)		(5.69	)
Total administrative expenses	Ps.	(16,724	)	Ps.	(18,630	)		11.40	%

Our personnel expenses increased Ps.1,029 million, or 12.5%, from Ps.8,232 million in 2012 to Ps.9,261 million in 2013, primarily as a result of a 5.9% period-over-period average headcount increase, together with an overall increase of 10.4% in salaries, 6.2% in bonuses, and 23.2% in other personnel expenses. Other personnel expenses include personnel benefits such as medical expenses, social security and pension plans. The average headcount in retail banking increased period-over-period by 5.8%. The increase in average headcount was mainly in our Retail Banking segment and is related to the hiring of additional employees for our branch expansion plan.

The increase in personnel expenses resulted from an increase of Ps.880 million, or 12.1%, in retail banking, from Ps.7,284 million in 2012 to Ps.8,164 million in 2013, due to an increase of Ps.79 million, or 4.5%, in bonuses, from Ps.1,760 million in 2012 to Ps.1,839 million for the same period in 2013, together with an increase of Ps.421 million in salaries, from Ps.3,900 million in 2012 to Ps.4,321 million in 2013.  Additionally, bonuses paid in wholesale banking increased by Ps.35 million, or 16.9%.

Other general expenses increased by Ps.877 million, or 10.3%, from Ps.8,492 million in 2012 to Ps.9,369 million in 2013, mainly due to an increase of Ps.367 million, or 19.7%, in expenses related to technology and systems, which include hardware and software maintenance, data and voice telecommunication services and market information and data providers. In addition, expenses related to maintenance, conservation and repair increased by Ps.288 million, or 43.9%, and rental expenses increased by Ps.195 million, or 15.5%, primarily due to the expansion of our branch network, including the opening of 75 new branches during 2013.

Impairment Losses on Financial Assets (Net)

Our impairment losses on loans and receivables increased by Ps.5,935 million, or 66.2%, from Ps.8,970 million in 2012 to Ps.14,905 million in 2013, reflecting an increase in impairment losses of Ps.3,891 million in our commercial, financial and industrial portfolio, of Ps.1,149 million in our credit card loan portfolio and of Ps.1,084 million in our consumer loan portfolio.  The increase in impairment losses was mainly explained by the following effects: (i) growth in outstanding loans of Ps.43,427 million, or 12.2%, in 2013; (ii) our exposure to the home builders sector in Mexico, which accounted for approximately 30%of the increase in impairment losses on loans and receivables (as of December 31, 2013, our loan portfolio with the three principal Mexican companies in the home builder sector stood at Ps.5,140 million, of which the full amount was composed of non-performing loans and has been provisioned for accordingly); (iii) the continuing effect of the loan vintages from the second half of 2011 and 2012 that have higher NPLs relative to other vintages as they were generally approved using looser credit quality standards; and (iv) the impact from the loss of a significant payroll portfolio that resulted in a reduction in payroll accounts and increased the collection risk of previously granted payroll loans, thus requiring increased provisions. See “—Installment loans to individuals” for more details. As of December 31, 2013 this portfolio amounted to Ps.939 million, of which Ps.311 million had become non-performing. The portfolio has been provisioned for accordingly.

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We have made credit policy adjustments to bring 2012 vintages back to the impairment levels in 2011.  New accounts in 2010 and 2011 were originated pursuant to a credit policy in effect in 2010, which had been tightened in response to past performance in 2008 and 2009.  Approval rates were reduced from 40% to 15%, which resulted in a lower expected loss.  This credit policy was subsequently loosened in the second half of 2011. In March and November 2012, we made adjustments in order to tighten credit policies for higher risk segments. We also implemented new credit scoring models in 2012 in order to improve our management of new loan vintages. In 2013, as part of an ongoing process, we continued to update our credit scoring models, including the incorporation of behavioral score models from Mexican credit bureaus into our decision models for new originations.

Non-performing loans totaled Ps.7,329 million as of December 31, 2012 and increased to Ps.15,175 million as of December 31, 2013, an increase of Ps.7,846 million, or 107.1%, due to the increase of non-performing loans in our commercial, financial and industrial loan portfolio of Ps.6,413 million, an increase of non-performing loans in our mortgage loan portfolio of Ps.1,118 million and an increase of non-performing loans in our consumer loan portfolio of Ps.315 million. The increases in non-performing loans in our commercial, financial and industrial loan portfolio was mainly due to our exposure to the three principal companies in the Mexican home builder sector, which accounted for Ps.5,140 million of the increase in non-performing loans. In addition, the increases in non-performing loans in our mortgage loan portfolios was impacted in part by the acquisition of ING Hipotecaria’s mortgage business (now Santander Vivienda), a Ps.10,760 million portfolio, including non-performing loans of Ps.826 million, which accounted for approximately 11% of the increase in non-performing loans. The ratio of our non-performing loans as a percentage of total loans, or NPL ratio, increased from 2.06% as of December 31, 2012 to 3.81% as of December 31, 2013. Our non-performing loans are primarily held in our Global Wholesale Banking segment, which includes the three troubled home builders, and in the Retail Banking segment as they relate to mortgage loans.

Our NPL ratios over the past year have deteriorated mainly due to our exposure to the home builders, the acquisition of ING Hipotecaria’s mortgage business, the impact from the loss of a significant payroll portfolio and the performance of the vintages from the second half of 2011 and the beginning of 2012 that have higher NPLs relative to other vintages and further deteriorated in 2013. The credit policies we applied in cross selling to our customers in the second half of 2011 were less stringent, which resulted in higher delinquencies for those vintages.  In 2012, we tightened our credit policies for higher risk segments by increasing the required minimum income level and stopped cross-selling originations of revolving and non-revolving consumer loans to individuals without credit bureau references. During 2013, as part of an ongoing process, we continued to update our credit scoring models, including the incorporation of behavioral score models from Mexican credit bureaus into our decision models for new originations. In addition, we also stopped new-to-bank originations of non-revolving consumer loans to individuals without credit bureau references.

The following table shows the ratio of our impaired assets to total computable credit risk and our coverage ratio as of December 31, 2012 and 2013.

	As of December 31,
	2012			2013
	(Millions of pesos, except percentages)
Computable credit risk(1)	Ps.	381,660		Ps.	425,701
Non-performing loans		7,329			15,175
Loan charge-offs		8,210			12,530
Allowance for impairment losses		9,387			13,764
Ratios
Non-performing loans to computable credit risk		1.92	%		3.56	%
Non-performing loans coverage ratio(2)		128.08	%		90.70	%
Loan charge-off coverage ratio(3)		2.15	%		2.94	%

(1) Computable credit risk is the sum of the face amounts of loans (including non-performing loans), guarantees and documentary credits.  When guarantees or documentary credits are contracted, we book them as off-balance sheet accounts.  As of the date we make the payment to the beneficiary, we claim the payment from the solicitor (i.e., the debtor in the case of a guarantee or the buyer in the case of a documentary credit).  The account becomes non-performing as of the date when the payment was due if we do not receive payment from the solicitor on that date.  We maintain the account as a non-performing loan until recovery or, in the case of practical impossibility for recovery (e.g., when the creditor is declared

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bankrupt or upon the death of a creditor who is a natural person), until our Comprehensive Risk Management Committee decides to charge off the account. Such decision is at the discretion of our Comprehensive Risk Management Committee.

(2) Allowance for impairment losses as a percentage of non-performing loans.

(3) Loan charge-offs as percentage of computable credit risk.

The following table shows our non-performing loans by type of loan as of December 31, 2012 and 2013:

	As of December 31,
	2012		2013			2012/2013
	(Millions of pesos)				(% Change)
Commercial, financial and industrial	Ps.	1,912	Ps.	8,325		335.41	%
Mortgage		2,472		3,590		45.23
Installment loans to individuals		2,945		3,260		10.70
Revolving consumer credit card loans		1,492		1,332		(10.72	)
Non-revolving consumer loans		1,453		1,928		32.69
Total	Ps.	7,329	Ps.	15,175		107.05	%

Commercial, financial and industrial

Our impairment losses on commercial, financial and industrial loans and receivables increased 617.8% to Ps.4,522 million in 2013 from Ps.630 million in 2012, due to the following factors: (i) the impairment losses related to the home builders portfolio and (ii) the deterioration in credit quality of the SMEs due to the substantial growth and maturity of the portfolio. In addition, non-performing loans in commercial, financial and industrial loans, which as of December 31, 2013 represented 54.9% of our total non-performing loans, increased by Ps.6,413 million, or 335.4%, from December 31, 2012 to December 31, 2013, primarily due to our exposure to the home builders, which as of December 31, 2013 accounted for Ps.5,140 million of non-performing loans which have been provisioned for accordingly. Our NPL ratio with respect to commercial, financial and industrial loans deteriorated from 1.06% as of December 31, 2012 to 4.17% as of December 31, 2013.

Mortgage

Our impairment losses on mortgage loans and receivables decreased by 30.6% to Ps.247 million in 2013 compared to Ps.356 million in 2012, mainly due to recoveries from previously charged-off loans, which increased by Ps.166 million. Meanwhile, non-performing assets in mortgage loans, which as of December 31, 2013 represented 23.7% of our total non-performing loans, increased Ps.1,118 million, or 45.2%, from December 31, 2012 to December 31, 2013, mainly due to the acquisition of ING Hipotecaria’s mortgage business, which had a high level of non-performing loans.  Our NPL ratio with respect to mortgage loans deteriorated from 3.42% as of December 31, 2012 to 3.91% as of December 31, 2013.

Installment loans to individuals

Our impairment losses on installment loans and receivables to individuals increased 30.4% to Ps.9,563 million in 2013 from Ps.7,332 million in 2012.  In addition, non-performing loans in installment loans to individuals, which as of December 31, 2013 represented 21.5% of our total non-performing loans, increased Ps.315 million, or 10.7%, from December 31, 2012 to December 31, 2013.  This increase was due to the increase of non-performing loans in our non-revolving consumer loan portfolio of Ps.475 million, partially offset by a decrease in the non-performing loans in our credit card loan portfolio of Ps.160 million. The increase in our non-revolving consumer loan portfolio was due to (i) loans originated in 2011 and the beginning of 2012 with less stringent credit policies and are continuing to impact impairment losses and (ii) the impact from the loss of a significant payroll portfolio that resulted in a reduction in payroll accounts and increased the collection risk of previously granted payroll loans, thus requiring increased provisions. These payroll loans were part of a third party payroll contract relating to 90,000 employees, whereby approximately 32,000 employees had payroll loans amounting to Ps.939 million with Banco Santander Mexico. While providing payroll services under the payroll contract, we had the right to collect loan installment payments directly from an employee’s bank account.  We subsequently lost the payroll contract and our ability to directly collect on the payroll loans. As a result, the employee bank accounts were moved to another banking institution that would provide payroll services under the new payroll contract. As of December 31, 2013, 33.1% or Ps.311 millionof the payroll loans to these employees had become non-performing after we were no

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longer the payroll bank. Because we no longer had the ability to collect and/or deduct installment payments due from the periodic salary deposits to these employees’ accounts, the non-performing loans had to be provisioned for accordingly. In March 2013 we sold-off most of this portfolio. To offset the increase in NPLs, we took certain actions in 2012 including (i) implementing stricter credit policies in the non-revolving consumer loan portfolio and (ii) tightening credit policies for cross-selling in March 2012 and then again in November 2012 for the credit card portfolio. During 2013, as part of an ongoing process, we continued to update our credit scoring models, including the incorporation of behavioral score models from Mexican credit bureaus into our decision models for new originations. In addition, we also stopped new-to-bank originations of non-revolving consumer loans to individuals without credit bureau references.

Our NPL ratio with respect to installment loans to individuals in the revolving credit card loan portfolio improved from 4.04% as of December 31, 2012 to 3.35% as of December 31, 2013, due to the adjustments in credit policies and incorporation of new credit scoring models during the second half of 2012. Our NPL ratio with respect to installment loans to individuals in the non-revolving consumer loans deteriorated from 5.32% as of December 31, 2012 to 6.42% as of December 31, 2013, driven by a segment of loans that were originated to individuals with no credit reference.

As of December 31, 2013, our credit card non-performing loan coverage ratio (allowance for impairment losses/non-performing loans) increased, while our charge-off coverage ratio for credit card loans (allowance for impairment losses/charge-offs) decreased, in each case compared to the ratios as of December 31, 2012.  The increase in the credit card non-performing loan coverage ratio in 2013 was due to the decrease in non-performing loans in 2013.  This decrease was related to the adjustments in our credit policies and the incorporation of new credit scoring models during the second half of 2012 and on 2013.

Provisions (Net)

Our provisions (net) consist mainly of provisions for pensions and other retirement obligations, provisions for off-balance sheet risk and provisions for legal and tax matters. Off-balance sheet risks include undrawn lines of credit of credit cards, guarantees and loan commitments of commercial and public sector loans and guarantees and loan commitments of commercial loans to SMEs.

As of December 31, 2012 and December 31, 2013, the amounts recorded as available lines of credit amounted to Ps.139,152 million and Ps.140,643 million, respectively. Of these amounts, the amounts related to available credit card lines were Ps.73,759 million, or 53.0%, and Ps.67,848 million, or 48.2%, of the total off-balance sheet risk, respectively.

Provisions (net) decreased by Ps.1,431 million, from a gain of Ps.680 million in 2012 to a loss of Ps.751 million in 2013. The off-balance sheet risk exposure related to credit cards has decreased since 2011 while our volume of credit cards outstanding increased due to the fact that in 2011 we cancelled Ps.35,050 million of our undrawn credit card lines after they were unused for a certain period of time; we were previously recognizing a provision for such undrawn credit lines.  During 2012, we cancelled an additional Ps.20,373 million of undrawn credit card lines that further reduced off-balance sheet risk.  During 2013, we cancelled an additional Ps.7,200 million of undrawn credit card lines that further reduced off-balance sheet risk; however, provisions related to this off-balance sheet risk increased, primarily as a result of (i) an increase in the off-balance sheet risk related to the segment with the highest probability of using their undrawn credit card lines (generally the segment with the highest percentage of its credit line already used) which is determined based on the historical percentage of an individual’s unused credit line (we classify individuals into three distinct segments based on the percentage of credit line used: (i) less than 40%; (ii) less than or equal to 60%; and (iii) greater than 60%), therefore requiring a higher level of provisioning; and (ii) an increase in the probability of loan loss factor, which is calculated using historical information for  the previous 36 months and was negatively impacted by the deterioration of this portfolio during the previous year. As such, approximately 90% of the increase in provisions was due to these two factors.

The underwriting standards for our undrawn credit card lines are consistent with our credit card underwriting standards.  There is only one set of underwriting criteria for credit cards and it applies at the time lines of credit are established through to the actual extension of credit under the lines.  Accordingly, the probability of default is the same for drawn and undrawn credit lines.  Access to undrawn credit lines is blocked if the borrower is one day past due.  However, if the borrower is past due between one and 89 days and in this time period pays all amounts past due, the borrower returns to being current and is able to access undrawn credit lines again.  We block accounts permanently when the borrower reaches 90 days past due.

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During 2013, the NPL ratio for the credit card loan portfolio decreased in comparison to 2012. The decrease in the credit card NPL ratio did not have an impact on the provision for lines of credit due to the fact that the provision for lines of credit is based on the probability of default transition matrix methodology.  The transition matrix method reflects the effect of changes in the NPL ratio but the impact of such changes is generally limited in the period in which the changes occur because the transition matrix methodology reflects average performance over several periods. The classification between performing and non-performing loans has a minimal impact on the severity of the provision model, and is incorporated in the probability of default of this model.

The loss given default, or LGD, for the loan portfolios in our model is 93.87% as of December 31, 2013.  This LGD applies to both undrawn lines of credit associated with performing loans and those associated with non-performing loans.

We use a transition matrix to determine the probability of default, or PD, in which loans are segmented into bucket classifications primarily based on the number of days outstanding, and statistical analyses are applied to estimate the probability that loans will migrate through the different buckets and ultimately be charged off. In addition to the number of days outstanding, the bucket classifications are determined in accordance with loan credit characteristics. The transition matrix is based on historical data gathered over periods ranging from one to three years depending on type of portfolio (credit cards, payroll loans and mortgage loans).  See note 2.g to our audited financial statements.

Income Tax

Income tax in 2013 was Ps.2,670 million, a Ps.1,183 million or 30.70% decrease from Ps.3,853 million in 2012. Our effective tax rates in 2012 and 2013 were 18.20% and 17.78%, respectively. Our effective tax rate decreased 42 basis points in 2013 compared to 2012.  The variation in income tax paid is primarily explained by the decrease in income before taxes in 2013 as compared to 2012. The effective tax rate did not change significantly as compared to 2012. Similarly, in the area of permanent tax items, deductions show the most representative variation, which produced a greater benefit for us in 2012 as a result of favorable tax court decisions. We only recognized the remainder of these benefits in 2013, which is why the favorable effect decreased as compared to 2012.

Results of Operations by Segment for the Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012

The following table presents an overview of certain consolidated income statement data for each of our segments in 2012 and 2013.

	Retail Banking(1)						Global Wholesale Banking(2)						Corporate Activities(3)
	For the Year Ended December 31,
	2012			2013			2012			2013			2012			2013
	(Millions of pesos)
Net interest income	Ps.	26,533		Ps.	29,767		Ps.	3,723		Ps.	3,471		Ps.	3,626		Ps.	2,609
Income from equity instruments		19			—			101			147			92			98
Fee and commission income (expense) (net)		9,884			10,969			1,882			1,962			(81	)		(87	)
Gains/(losses) on financial assets and liabilities and exchange differences (net)		612			756			1,000			2,431			(353	)		94
Other operating income (expenses) (net)		(1,107	)		(1,160	)		(484	)		(561	)		425			430
Total income	Ps.	35,941		Ps.	40,332		Ps.	6,222		Ps.	7,450		Ps.	3,709		Ps.	3,144
Administrative expenses		(15,175	)		(16,802	)		(1,368	)		(1,612	)		(181	)		(216	)
Depreciation and amortization		(1,379	)		(1,488	)		(156	)		(130	)		(2	)		(2	)
Impairment losses on loans and receivables (net)		(8,802	)		(12,885	)		(163	)		(1,992	)		(5	)		(28	)
Impairment losses on other assets (net)					—						—			(34	)		(22	)
Provisions (net)		1,460			(455	)		—			—			(780	)		(296	)
Gain/(losses) on disposal of assets not classified as non-current assets held for sale		—			—			—			—			1,743			31
Gain/(losses) on disposal of non-current assets held for sale not classified as discontinued operations		—			—			—			—			135			(16	)
Operating profit before tax	Ps.	12,045		Ps.	8,702		Ps.	4,535		Ps.	3,716		Ps.	4,585		Ps.	2,595

(1) The Retail Banking segment encompasses the entire commercial banking and asset management business. Our Retail Banking segment’s activities include products and services for individuals, private banking clients, SMEs, middle-market corporations and government institutions.

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(2) The Global Wholesale Banking segment reflects the returns on the corporate banking business, including managed treasury departments and the equities business. Our Global Wholesale Banking segment provides comprehensive products and services relating to finance, guarantees, mergers and acquisitions, equity and fixed income, structured finance, international trade finance, cash management services, collection services and e-banking, including structured loans, syndicated loans, acquisition financing and financing of investment plans, among others.

(3) The Corporate Activities segment is comprised of all operational and administrative activities that are not assigned to a specific segment or product mentioned above.  The Corporate Activities segment includes the financial management division, which manages structural financial risks arising from our commercial activities, mainly liquidity risk and interest rate risk, provides short- and long-term funding for our lending activities and calculates and controls transfer prices for loans and deposits in local and foreign currencies.  The financial management division also oversees the use of our resources in compliance with internal and regulatory limits regarding liquidity and regulatory capital requirements.

The following table presents an overview of certain consolidated balance sheet data for each of our segments as of December 31, 2012 and 2013.

	Retail Banking				Global Wholesale Banking				Corporate Activities
	As of December 31,
	2012		2013		2012		2013		2012		2013
	(Millions of pesos)
Cash and balances with the Mexican Central Bank	Ps.	41,915	Ps.	42,454	Ps.	6,368	Ps.	6,508	Ps.	114	Ps.	719
Financial assets held for trading		147		—		197,518		176,570		585		337
Other financial assets at fair value through profit or loss		—		—		63,168		86,361		—		—
Available-for-sale financial assets		—		—		—		—		47,518		61,525
Loans and receivables		244,756		291,080		134,394		129,501		23,886		21,076
Hedging derivatives		—		—		—		—		300		300
Non-current assets held for sale		14		13		1		1		561		1,086
Tangible assets		3,460		4,032		583		680		70		55
Intangible assets		1,741		1,714		293		302		1,614		1,735
Tax assets		—		—		—		—		17,784		25,943
Other assets		1,261		931		29		22		4,952		4,873
Total assets	Ps.	293,294	Ps.	340,224	Ps.	402,354	Ps.	399,945	Ps.	97,384	Ps.	117,649
Financial liabilities held for trading	Ps.	—	Ps.	—	Ps.	141,101	Ps.	136,199	Ps.	—	Ps.	—
Other financial liabilities at fair value through profit or loss		10,659		44,107		54,833		23,710		5,700		8,208
Financial liabilities at amortized cost		293,084		331,156		100,815		79,476		64,957		117,552
Hedging derivatives		—		—		—		—		1,637		1,392
Liabilities associated with non-current assets held for sale		—		—		—		—		—		—
Provisions(1)		1,151		1,524		188		218		4,955		3,968
Tax liabilities		—		—		—		—		758		856
Other liabilities		3,207		3,979		524		650		9,851		12,305
Total liabilities	Ps.	308,101	Ps.	380,766	Ps.	297,461	Ps.	240,253	Ps.	87,858	Ps.	144,281
Total equity	Ps.	34,658	Ps.	38,340	Ps.	13,048	Ps.	11,949	Ps.	51,906	Ps.	42,229
Total liabilities and equity	Ps.	342,759	Ps.	419,106	Ps.	310,509	Ps.	252,202	Ps.	139,764	Ps.	186,510

(1) Principally includes provisions for off-balance sheet risk and provisions for tax and legal matters.

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Retail Banking Segment

Our Retail Banking segment’s activities include products and services for individuals, private banking clients, SMEs, middle-market corporations and government institutions.  We provide commercial banking services to individual customers of all income levels, and offer a wide range of products and services to our individual customers, including demand and term deposits, credit and debit cards, mortgages, and payroll and personal loans.  Our Retail Banking segment also serves the middle market and local corporates that are not within the global corporate customers served by our Global Wholesale Banking segment.  We offer SMEs a variety of services and products including commercial loans, transactional collections and payment services, insurance, hedging and foreign trade services.

Operating profit before taxes attributable to the Retail Banking segment in 2013 was Ps.8,702 million, a 27.8% or Ps.3,343 million decrease from Ps.12,045 million in 2012. This decrease was mainly due to:

· a 46.4% or Ps.4,083 million increase in impairment losses on loans and receivables, reflecting mainly an increase in impairment losses of Ps.2,043 million in our commercial portfolio, Ps.1,149 million in our credit card loan portfolio and Ps.1,048 million in our consumer loan portfolio, partially offset by a decrease of Ps.77 million in our mortgage portfolio. Our NPL ratio for credit card loans improved by 69 basis points, from 4.0% as of December 31, 2012 to 3.3% as of December 31, 2013 and our NPL ratio for our consumer loan portfolio increased by 110 basis points, from 5.3% as of December 31, 2012 to 6.4% as of December 31, 2013.

· a 10.7% or Ps.1,627 million increase in administrative expenses, from Ps.15,175 million in 2012 to Ps.16,802 million in 2013, mainly due to increases in headcount primarily related to our branch expansion plan, salaries and bonuses. Rents increased Ps.191 million, or 15.3%, as a result of the ongoing expansion of our branch network, including the opening of 75 new branches during 2013.

· a 131.2% or Ps.1,915 million decrease in net provisions, from a gain of Ps.1,460 million in 2012 to a loss of Ps.455 million in 2013, mainly due toa higher provisioning requirement related to off-balance credit card lines available.

These negative effects were partially offset by:

· a 12.2% or Ps.3,234 million increase in net interest income, mainly due to an increase of Ps.35,432 million in the average balance of the loan portfolio excluding credit cards resulting from organic growth of the portfolio, despite a 58 basis point decrease in the average interest rate over this portfolio resulting mainly from decreases in the average interest rate over the SMEs, middle-market and non-revolving consumer loan portfolios.

· an 11.0% or Ps.1,085 million increase in net fee and commission income, from Ps.9,884 million in 2012 to Ps.10,969 million in 2013, due mainly to an increase in fees and commissions from credit and debit cards,  collection and payment services, fees from foreign exchange transactions, insurance products and financial advisory services.

· a 23.5% or Ps.144 million increase in gains/(losses) on financial assets and liabilities and exchange differences, from a gain of Ps.612 million in 2012 to a gain of Ps.756 million in 2013, primarily due to the private banking unit’s participation in the placement of shares with its customer base from Grupo Modelo’s initial public offering by Anheuser-Busch.

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Global Wholesale Banking Segment

Our Global Wholesale Banking segment provides comprehensive products and services, including corporate banking, global transactional banking and investment banking services, relating to finance, guarantees, mergers and acquisitions, equity and fixed income, structured finance, international trade finance, cash management services, collection services and e-banking, including structured loans, syndicated loans, acquisition financing and financing of investment plans, among others, to our Global Wholesale Banking segment customers.  This segment also includes our proprietary trading operations.

Operating profit before taxes attributable to the Global Wholesale Banking segment in 2013 was Ps.3,716 million, representing a Ps.819 million, or 18.1%, decrease from Ps.4,535 million in 2012.  This decrease was mainly due to:

· a Ps.1,829 million increase in net impairment losses on financial assets, from Ps.163 million in 2012 to Ps.1,992 million in 2013 mainly due to our exposure to the three major home builders, which are part of the Global Wholesale Banking Segment, amounting to Ps.5,140 million in loans that have become non-performing. These loans have been provisioned for accordingly.

· a 6.8% or Ps.252 million decrease in net interest income, mainly due to a decrease of Ps.2,336 million in the average balance of loans and advances to customers, together with a 65 basis point decrease in the average interest rate earned. Lower volumes and interest rates resulted from increased competition and the preference of certain companies to issue debt in the capital markets.

These negative results were partially offset by:

· a Ps.1,431 million variation in gains/(losses) on financial assets and liabilities and exchange differences, from a gain of Ps.1,000 million in 2012 to a gain of Ps.2,431 million in 2013, primarily due to an increase in gains from interest rate and equity derivatives.

· a 4.3% or Ps.80 million increase in net fee and commission income, from Ps.1,882 million in 2012 to Ps.1,962 million in 2013, due mainly to an increase in commissions from financial advisory and foreign exchange services.

Corporate Activities Segment

Our Corporate Activities segment is comprised of all operational and administrative activities that are not assigned to a specific segment or product mentioned above.  The Corporate Activities segment includes the financial management division, which manages structural financial risks that arise from our commercial activities, mainly liquidity risk and interest rate risk, provides short- and long-term funding for our lending activities and calculates and controls transfer prices for loans and deposits in local and foreign currencies.  The financial management division also oversees the use of our resources in compliance with internal and regulatory limits regarding liquidity and regulatory capital requirements.

Through the assignment of a transfer price to each loan or deposit, interest income is divided between our operating segments (Retail Banking and Global Wholesale Banking ) and the Corporate Activities segment as follows:

· the difference between the interest rate charged to customers for the loans granted by our operating segments and the transfer price assigned to these loans is assigned as interest income to the respective operating segment;

· the difference between the interest rate paid to customers for the deposits received by our operating segments and the transfer price assigned to these deposits is assigned as interest income to the respective operating segment; and

· finally, the difference between the transfer price charged to the loans and the transfer price paid for the deposits is assigned to Corporate Activities as net interest income.

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The financial management division determines transfer prices based on interest rates currently prevailing in the market for different durations, which are estimated from the yield of the most representative and liquid short and medium term corporate, government and Mexican Central Bank debt securities, and from the Mexican Central Bank’s reference interest rates for long-term securities.

The ALCO manages the risks associated with financial margin and net worth of the banking book, as well as liquidity risk for the entire balance sheet.  We hedge the interest rate risk of the balance sheet using strategies that can address specific operations or modify the risk profile as a whole.  In recent years, the ALCO portfolio was comprised of fixed rate positions, mainly Mexican sovereign bonds, in addition to fixed rate swaps, to protect the interest rate margin against a lower interest rate environment.  As the scenario changed to more stable short term interest rates, we have reduced the volume of activity in the ALCO portfolio, leaving existing positions to mature at their stated maturity.

Operating profit before taxes attributed to Corporate Activities in 2013 was a gain of Ps.2,595 million, a Ps.1,990 million, or 43.4% decrease from a gain of Ps.4,585 million in 2012. This decrease in operating profit before taxes was mainly due to a Ps.1,712 million decrease in gain/(losses) on disposal of assets not classified as non-current assets held for sale representing the net profit gained from our real estate sale and lease back transaction with Fibra Uno in April 2012 relating to 220 branches. See “Item 4. Information on the Company—D. Property, Plants and Equipment.” In addition, net interest income decreased 28.0% or Ps.1,017 million from Ps.3,626 million in 2012 to Ps.2,609 million in 2013, mainly due to a decrease of Ps.7,576 million, or 13.3%, in the average volume of debt instruments resulting from maturities during 2013 that were not replaced. This decrease was partially offset by decreases in the average volume of deposits from the Mexican Central Bank and other credit institutions, and reverse repurchase agreements, by Ps.15,228 million and Ps.15,014 million, respectively.

These negative results were partially offset by (i) a Ps.484 million decrease in net provisions from a loss of Ps.780 million in 2012 to a loss of Ps.296 million in 2013, and (ii) a Ps.447 million increase in net gains/(losses) on financial assets and liabilities and exchange differences from a loss of Ps.353 million in 2012 to a gain of Ps.94 million in 2013. The increase in net gains/(losses) on financial assets and liabilities was mainly due to the combined effect of positive adjustments in the credit value adjustment and the debit value adjustment, which principally resulted from: (i) a lower exposure to various risk factors, such as lower duration and lower credit default swap spreads in 2013 as compared to 2012 and (ii) lower loss given defaults for certain products.

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B.  Liquidity and Capital Resources

Our control and management functions involve planning our funding requirements, structuring the sources of financing to achieve optimal diversification in terms of maturities, instruments and markets and setting forth contingency plans.

Overall, we have a strong liquidity position with total loans, net of allowance for impairment losses, as a percentage of our deposits, representing approximately 76.6% of our total deposits, 88.9% of our customer deposits and 102.2% of our demand and time deposits as of December 31, 2014.  We constantly review our liquidity position and the forecasted growth of our business lines relative to our loan/deposit ratio.

Banco Santander Parent and its subsidiaries follow a global model in which each unit is responsible for its own capital and funding.  We are autonomous in the management of our liquidity and capital needs, with no structural support from our Parent company or any other unit of the Santander Group.

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

For information about our use of financial instruments for hedging purposes, see note 13 to our audited financial statements and “Item 11. Quantitative and Qualitative Disclosures About Risk—Market Risk.”

Risk-Weighted Assets and Regulatory Capital

Pursuant to Mexican Capitalization Requirements, Banco Santander Mexico, our commercial bank subsidiary, is required to maintain specified levels of net capital on an unconsolidated basis as a percentage of risk-weighted assets, including credit, market and operational risks.  See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Banking Regulation—Capitalization.” The minimum Capital Ratio currently required by the Mexican Capitalization Requirements in order not to be required to cancel interest payments or principal payments (including the forced conversion of certain securities into shares) is 8.5%.  As of December 31, 2014, Banco Santander Mexico’s Capital Ratio was 16.2%.

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The table below presents Banco Santander Mexico’s risk-weighted assets and Capital Ratios as of December 31, 2012, 2013 and 2014, calculated in accordance with Mexican Banking GAAP:

	Mexican Banking GAAP
	As of December 31,
	2012			2013			2014
	(unaudited)
	(Thousands of pesos, except percentages)
Capital:
Tier 1	Ps.	74,618,425		Ps.	69,409,388		Ps.	76,696,962
Tier 2		1,578,396			17,122,049			19,820,482
Total capital		76,196,821			86,531,437			96,517,444
Risk-Weighted Assets:
Credit risk		320,267,749			346,193,899			406,832,485
Market risk		145,714,720			138,747,454			128,329,554
Operational risk		49,600,221			57,950,529			61,790,258
Total risk-weighted assets		515,582,690			542,891,882			596,952,297
Required Regulatory Capital:
Credit risk		25,621,420			27,695,512			32,546,599
Market risk		11,657,178			11,099,796			10,266,364
Operational risk		3,968,018			4,636,042			4,943,221
Total risk-weighted assets	Ps.	41,246,616		Ps.	43,431,350		Ps.	47,756,184
Capital Ratios (credit, market & operational risk):
Tier 1 capital to risk-weighted assets		14.47	%		12.79	%		12.85	%
Tier 2 capital to risk-weighted assets		0.31	%		3.15	%		3.32	%
Total capital to risk-weighted assets(1)(2)		14.78	%		15.94	%		16.17	%

(1) Banco Santander Mexico’s Capital Ratio as of December 31, 2013, increased by 116 basis points, from 14.78% as of December 31, 2012, to 15.94% as of December 31, 2013, mainly due to a 8.1% (Ps.2,074 million) increase in required regulatory capital associated with credit risk and a 16.8% (Ps.668 million) increase in required regulatory capital associated with operational risk, which were partly offset by an increase of 13.6% (Ps.10,335 million) in total capital and a decrease of 4.8% (Ps.557 million) in required regulatory capital associated with market risk.

(2) Banco Santander Mexico’s Capital Ratio as of December 31, 2014, increased by 23 basis points, from 15.94% as of December 31, 2013, to 16.17% as of December 31, 2014, mainly due to a 17.5% (Ps.4,851 million) increase in required regulatory capital associated with credit risk and a 6.6% (Ps.307 million) increase in required regulatory capital associated with operational risk, which were partly offset by an increase of 11.5% (Ps.9,986 million) in total capital and a decrease of 7.5% (Ps.833 million) in required regulatory capital associated with market risk].

The Mexican government has stated that the country will be an early adopter of the Basel III international rules, which will require full implementation by 2019.  Basel III is a capital and liquidity reform package for internationally active banking organizations around the world that includes, among other things, the definition of capital, capital requirements, the treatment of counterparty risk, the leverage ratio and the global liquidity standard.  On November 28, 2012, the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, or CNBV) published changes to the regulations under Basel III standards in Mexico, which resulted in changes to Mexican regulations that impacted regulatory capital requirements.  The new regulations are applicable to Mexican banks as of January 1, 2013, and require banks to hold a minimum of 4.5% of common equity Tier 1 Capital, or CET1, and 6% of Tier 1 capital of risk-weighted assets, or RWA. In addition, a mandatory capital conservation buffer of 2.5% of RWA is also required, resulting in an 8% minimum total capital (or 10.5% minimum total capital plus a conservation buffer). The implementation of the Basel III measures on capital management had no significant impact on the Bank’s capital index due to its strong capital structure. According to our estimates, we believe Banco Santander Mexico and its subsidiaries will be above the 10.5% threshold that the Basel III international rules require. See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Corrective Measures.”

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Liquidity Management

Liquidity management seeks to ensure that, even under adverse conditions, we have access to funds necessary to cover client needs, maturing liabilities and working capital requirements.  Liquidity risk arises in the general funding of our financing, trading and investment activities.  It includes the risk of unexpected increases in the cost of funding the portfolio of assets at appropriate maturities and rates, the risk of being unable to liquidate a position in a timely manner at a reasonable price and the risk that we are required to repay liabilities earlier than anticipated.

Our general policy is to maintain adequate liquidity to ensure our ability to honor withdrawals of deposits in amounts and at times consistent with historical data, make repayment of other liabilities at maturity, extend loans and meet our own working capital needs in compliance with the applicable internal and regulatory reserve requirements and liquidity coefficients in all material respects.  See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Classification of Loans and Allowance for Impairment Losses—Liquidity Requirements for Foreign Currency-Denominated Liabilities” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Liquidity Risk.”

Additionally, the Basel III framework will implement a liquidity coverage ratio, or LCR, and a Net Stable Funding Ratio, or NSFR.  The LCR will require banks to maintain sufficient high-quality liquid assets to cover the net cash outflows that could be encountered under a stress scenario.  The NSFR establishes a minimum amount of stable funding a bank will be required to maintain based on the liquidity of the Bank’s assets and activities over a one-year period.

We have three principal sources of short-term peso funding: (i) demand deposits, comprised by interest-bearing and non-interest-bearing demand deposits, (ii) time deposits, which include short-term promissory notes with interest payable at maturity (pagarés bancarios), fixed-term deposits and foreign currency time deposits and (iii) reverse repurchase agreements.

The following table shows the composition of our short-term funding described above

	As of December 31,
	2013		2013		2014
	(Millions of pesos)
Demand deposits:
Interest-bearing deposits	Ps.	115,619	Ps.	145,587	Ps.	169,950
Non-interest-bearing deposits		95,242		112,367		124,113
Subtotal	Ps.	210,861	Ps.	257,954	Ps.	294,063
Time deposits:
Notes with interest payable at maturity	Ps.	119,875	Ps.	115,711	Ps.	118,742
Fixed-term deposits		6,261		146		205
Foreign currency time deposits		5,340		4,046		14,640
Subtotal	Ps.	131,476	Ps.	119,903	Ps.	133,587
Reverse repurchase agreements		51,589		57,506		69,726
Accrued interest(1)		213		182		183
Other deposits		11,958		11,579		17,069
Total customer deposits	Ps.	406,097	Ps.	447,124	Ps.	514,628
Deposits from the Mexican Central Bank and credit institutions(2)		42,937		70,216		82,078
Total deposits(3)	Ps.	449,034	Ps.	517,340	Ps.	596,706

(1) Mainly from time deposits.

(2) Includes Ps.19,603 million, Ps.18,519 million and Ps.33,752 million of reverse repurchase agreements with the Mexican Central Bank and with credit institutions as of December 31, 2012, 2013 and 2014, respectively.

(3) As of December 31, 2012, we had deposits of Ps.406,097 million from customers and Ps.42,937 million from credit institutions.  As of December 31, 2013, we had deposits of Ps.447,124 million from customers, Ps.46,963 million from credit institutions and Ps.23,253 million from the Mexican Central Bank.  As of December 31, 2014, we had deposits of Ps.514,628 million from customers, Ps.77,072 million from credit institutions and Ps.5,006 million from the Mexican Central Bank. See “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Liabilities—Deposits.”

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Demand deposits are our most important funding source and are also less expensive relative to other sources of funding.  Our funding strategy focuses on increasing the source of low-cost funding through new banking products and commercial campaigns oriented to grow the volume of demand deposits from our existing customers and expand our customer base. Consistent with our funding strategy, we were able to increase our non-interest-bearing demand deposits by approximately 10.5%, from Ps.112,367 million at December 31, 2013 to Ps.124,113 million at December 31, 2014, as a result of tailored marketing efforts based on the extensive knowledge of our customers that we have developed using information technology and leveraged using CRM strategies.

Short-term promissory notes with interest payable at maturity (pagarés bancarios) are generally issued to meet short-term funding needs and are generally issued with maturities ranging from one to 364 days.

Repurchase agreements are another important instrument in Mexico’s money market as they provide short-term investments to banking customers, mainly with Mexican government-issued paper and to a lesser extent securities issued by other Mexican banks and corporations.  We have used reverse repurchase agreements to achieve cost efficiencies and as an additional source of short-term funding.

The increase in deposits from the Mexican Central Bank and credit institutions from 2013 to 2014 was mainly due to an increase in the required compulsory deposits by the Mexican Central Bank in order to improve implementation of the monetary policy.

The following tables show our short-term borrowings that we sold under reverse repurchase agreements for the purpose of funding our operations as well as short positions from financial liabilities arising out of the outright sale of financial assets acquired under reverse repurchase agreements. Short-term borrowings at year-end from 2013 to 2014 remain stable.  See “Item 4. Information on the Company—B. Business Overview—Liabilities—Short-term Borrowings.”

	IFRS for the year ended December 31,
	2012					2013					2014
	Amount		Average rate			Amount		Average rate			Amount		Average rate
	(Millions of pesos, except percentages)
Short-Term Borrowings
Reverse repurchase agreements:
At December 31	Ps.	71,193		4.06	%	Ps.	76,024		2.74	%	Ps.	102,646		2.99	%
Average during year		147,332		4.10			116,505		3.38			156,689		3.12
Maximum month-end balance		206,995		4.32			155,413		3.94			188.532		3.40
Short positions:
At December 31(1)	Ps.	55,794		4.20	%	Ps.	51,964		3.47	%	Ps.	27,297		3.11	%
Average during year		51,444		4.17			55,075		3.64			84,363		3.23
Maximum month-end balance		97,424		4.39			113,751		4.31			109,596		3.52
Total short-term borrowings at year end	Ps.	126,987		4.13	%	Ps.	127,988		3.11	%	Ps.	129,943		3.05	%

(1) This amount forms part of the outstanding balance of “Short positions” in our consolidated balance sheet.  See note 11 to our audited financial statements included in this annual report on Form 20-F.

In the future, we expect to continue using the funding sources described above in accordance with their availability, their cost, and our asset and liability management needs.  The short-term nature of these funding sources, however, increases our liquidity risk and could cause liquidity problems for us in the future if deposits are not made in the volumes we expect or are not renewed.  For example, we are aware of the risk that a substantial number of our depositors may withdraw their demand deposits or not roll over their time deposits upon maturity; however, we believe we can respond to a liquidity problem by increasing the interest rates we pay on time deposits, altering our mix of funding sources and by liquidating our short-term assets.  We review our pricing policy daily and we believe we are able to reflect our cost of funding in the pricing of loans effectively, reducing the impact on net income.

We also have access to short- and long-term funding through the issuance of unsecured bonds (certificados bursátiles bancarios), time deposits (certificados de depósito bancario de dinero a plazo), promissory notes with interest payable at maturity (pagarés con rendimiento liquidable al vencimiento) and international funding through

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U.S. dollar-denominated issuances with longer maturities.  As of December 31, 2014, the balance of our debt securities outstanding totaled Ps.78,523 million.  See “—Debt Securities Outstanding.”

The cost of our peso-denominated funding has not been affected by the downgrades of Spain’s sovereign debt, Banco Santander Parent’s debt and our related downgrades.  For debt financing, we rely in part on local, peso-denominated issuances, and we continue to be rated mxAAA, Aaa.mx and AAA(mex) by Standard & Poor’s Ratings Services, Moody’s Investors Service and Fitch Ratings Ltd., respectively, with respect to our local peso-denominated long-term debt, with equivalent ratings for our local peso-denominated short-term debt.  However, the downgrades of Spain’s sovereign debt, Banco Santander Parent’s debt and our related downgrades could adversely affect our cost of funding related to any further issuances of debt in the international capital markets.

We do not rely in any material respect on funding from our parent company, Banco Santander Parent, and Banco Santander Parent does not rely in any material respect on funding from us.  As such, the elimination of funding to us from Banco Santander Parent or any deterioration of Banco Santander Parent’s financial condition or increase in its funding costs would not have an impact on us except to the limited extent disclosed under “Item 3. Key Information—D. Risk Factors—Risks Associated with Our Business—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.”

Our management expects that our cash flows from operations will be sufficient to meet our liquidity requirements over the next 12 months, including our expected 2014 capital expenditures.  For 2015, we have a capital expenditures budget of Ps.3,350 million (U.S.$227 million), 71% of which (Ps.2,378 million) will be spent on information technology and the rest on furniture, fixtures and equipment, and expenditures related to the addition of new branches (Ps.972 million). In 2014, our capital expenditures were Ps.2,479 million (U.S.$168 million), 58.1% of which (Ps.1,439 million) was for information technology and the remainder was for furniture, fixtures and equipment, and expenditures related to the addition of new branches (Ps.1,040 million).

As of December 31, 2014, total interest-bearing liabilities denominated in dollars amounted to Ps.73,419 million, or U.S.$4,980 million, representing 12.3%  of our total deposits and 14.3% of our customer deposits.  The sources of such funding as of December 31, 2012, 2013 and 2014 were as follows:

	IFRS
	As of December 31,
	2012		2013		2014		2014
	(Millions of pesos)						(Millions of U.S.$) (1)
Demand deposits	Ps.	17,407	Ps.	21,767	Ps.	27,949	$	U.S.1,896
Time deposits		13,418		5,344		34,617		2,348
Bank and other loans		13,500		20,349		10,853		736
Total	Ps.	44,325	Ps.	47,460	Ps.	73,419	$	U.S.4,980

(1) Translated at the rate of Ps.14.7414 per U.S.$1.00, the exchange rate for U.S. dollars published by the Mexican Central Bank in the Official Gazette of the Federation on January 2, 2015, as the exchange rate for the payment of obligations denominated in currencies other than pesos and payable within Mexico.  See “Item 3. Key Information—A. Selected Financial Data—Exchange Rates.”

Foreign Currency Position

Our foreign currency-denominated assets, most of which are U.S. dollar denominated, are funded from a number of sources, including: (i) savings accounts and time deposits from private banking customers and medium and large Mexican companies, primarily in the export sector; (ii) issuance of U.S. dollar-denominated certificates of deposit in the Mexican market; (iii) interbank deposits; (iv) trade and working capital financing facilities from Mexican development banks and from foreign export-import banks; and (v) issuance of euroclearable certificates of deposit for foreign investors.  We also obtain funding in foreign currency by swapping funding in Mexican pesos into U.S. dollars or euros through foreign currency derivatives (foreign currency swaps and cross-currency swaps) with certain local and foreign counterparties.  Foreign currency funding rates are generally referenced to the London Interbank Offered Rate, or LIBOR.

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Mexican Central Bank regulations require that a bank maintain open positions in foreign currencies no higher than a specified level with respect to its total Tier 1 capital.  As of December 31, 2014, our foreign currency-denominated assets, including derivative transactions, totaled U.S.$9,825 million (Ps.114,829 million) and our foreign currency-denominated liabilities, including derivative transactions, totaled U.S.$9,890 million (Ps.145,794 million).  As part of our asset and liability management strategy, we monitor closely our exposure to foreign currencies, with a view to minimizing the effect of exchange rate movements on our income.

As of December 31, 2014, we are also in compliance with the limits established for us by the Mexican Central Bank for maturity-adjusted net foreign currency-denominated liabilities, which was U.S.$10,619 million (Ps.156,539 million). As of such date, our maturity-adjusted net foreign currency-denominated liabilities were U.S.$7,176 million (Ps.105,784 million).  For a discussion of the components of Tier 1 and Tier 2 capital, see “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation.”

For the years ended December 31, 2012, 2013 and 2014, we were in compliance with all regulatory requirements relating to the ratio of U.S. dollar-denominated liabilities to total liabilities.

Deposits and Other Borrowings

The following tables set forth our average daily balance of liabilities for each of the periods presented, in each case together with the related average nominal interest rates paid thereon.

	IFRS
	For the year ended December 31,
	2012								2013								2014
	Average Balance		% of Total Average Liabilities and Equity			Average Nominal Rate			Average Balance		% of Total Average Liabilities and Equity			Average Nominal Rate			Average Balance		% of Total Average Liabilities and Equity			Average Nominal Rate
	(Millions of pesos, except percentages)
Demand accounts	Ps.	144,060		18.50	%		1.48	%	Ps.	174,993		22.39	%		1.64	%	Ps.	220,020		23.68	%		1.39	%
Time deposits		131,702		16.91	%		4.13	%		136,692		17.49	%		3.66	%		129,644		13.95	%		2.94	%
Deposits from the Mexican Central Bank and credit institutions		107,665		13.83	%		4.08	%		77,035		9.85	%		3.44	%		125,982		13.56	%		3.32	%
Reverse repurchase agreements		104,175		13.38	%		4.49	%		89,003		11.39	%		3.81	%		76,178		8.20	%		3.03	%
Marketable debt securities and other financial liabilities		33,172		4.26	%		5.23	%		41,686		5.33	%		4.78	%		45,914		4.94	%		4.00	%
Other liabilities(1)		70,087		8.99	%		4.32	%		78,847		10.09	%		3.91	%		98,062		10.55	%		3.19	%
Subordinated liabilities		—		—			—			228		0.02	%		4.82	%		17,305		1.86	%		6.07	%
Subtotal interest-bearing liabilities		590,861		75.87	%		3.66	%		598,484		76.56	%		3.26	%		713,105		76.74	%		2.85	%
Non-interest-bearing liabilities		92,299		11.85	%					82,409		10.54	%					117,891		12.70	%
Total equity		95,601		12.28	%					100,829		12.90	%					98,155		10.56	%
Subtotal non-interest-bearing liabilities and equity		187,900		24.13	%					183,238		23.44	%					216,046		23.26	%
Total liabilities and equity	Ps.	778,761		100.00	%				Ps.	781,722		100.00	%				Ps.	929,151		100.00	%

(1) This line includes the amount of financial liabilities arising from the sale of financial assets under reverse repurchase agreements, securities loans and sales of borrowed securities (short positions).

Average time deposits as a share of average total liabilities and equity decreased from 17.49% as of December 31, 2013 to 13.95% as of December 31, 2014, while the ratio of average demand accounts to average total liabilities and equity increased from 22.39% to 23.68% over the same period.

Average non-interest-bearing liabilities as a share of average total liabilities and equity increased from 10.54% as of December 31, 2013 to 12.69% as of December 31, 2014.

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Composition of Deposits

The following table sets forth the composition of our demand and time deposits as of December 31, 2012, 2013 and 2014.

	IFRS
	As of December 31,
	2012		2013		2014
	(Millions of pesos)
Demand deposits
Interest-bearing deposits	Ps.	115,619	Ps.	145,587	Ps.	169,950
Non-interest-bearing deposits		95,242		112,367		124,113
Subtotal	Ps.	210,861	Ps.	257,954	Ps.	294,063
Time deposits
Notes with interest payable at maturity	Ps.	119,875	Ps.	115,808	Ps.	118,742
Fixed-term deposits(1)		7,761		146		205
Foreign currency time deposits(2)		13,418		16,905		34,617
Subtotal	Ps.	141,054	Ps.	132,859	Ps.	153,564
Total	Ps.	351,915	Ps.	390,813	Ps.	447,627

(1) As of December 31, 2012, we received Ps.1,500 million of fixed-term deposits from credit institutions, and had not received fixed-term deposits from the Mexican Central Bank.  As of December 31, 2013, we had not received any fixed-term deposits from the Mexican Central Bank nor other credit institutions. As of December 31, 2014, we had not received any fixed-term deposits from the Mexican Central Bank nor other credit institutions.

(2) As of December 31, 2012, includes Ps.8,078 million of foreign currency time deposits from other credit institutions.  As of December 31, 2013, includes Ps.12,859 million of foreign currency time deposits from other credit institutions. As of December 31, 2014, includes Ps.19,977 million of foreign currency time deposits from other credit institutions.

Debt Securities Outstanding

The following table sets forth the composition, term and rate of our outstanding debt securities as of December 31, 2014.

Instrument	Amount	Maturity Date	Rate
	(Millions of pesos)
Certificates of deposit (unsecured) (2)	13	03/06/2015	2.96%
Certificates of deposit (unsecured) (2)	17	02/04/2015	2.96%
Certificates of deposit (unsecured) (2)	14	05/21/2015	2.96%
Certificates of deposit (unsecured) (2)	2,315	06/04/2015	3.25%
Certificates of deposit (unsecured) (2)	10	06/08/2015	2.96%
Certificates of deposit (unsecured) (2)	3,415	06/11/2015	3.26%
Certificates of deposit (unsecured) (2)	200	06/18/2015	3.24%
Certificates of deposit (unsecured) (2)	600	06/18/2015	3.24%
Certificates of deposit (unsecured) (2)	100	06/18/2015	3.24%
Certificates of deposit (unsecured) (2)	500	06/18/2015	3.24%
Certificates of deposit (unsecured) (2)	200	06/18/2015	3.24%
Certificates of deposit (unsecured) (2)	28	06/26/2015	2.96%
Certificates of deposit (unsecured) (2)	2,000	05/07/2015	3.25%
Certificates of deposit (unsecured) (2)	18	01/14/2015	2.96%
Certificates of deposit (unsecured) (2)	50	07/23/2015	2.96%
Certificates of deposit (unsecured) (2)	16	08/28/2015	2.96%
Certificates of deposit (unsecured) (2)	9	10/28/2015	2.96%
Certificates of deposit (unsecured) (2)	2	08/28/2015	2.96%
Certificates of deposit (unsecured) (2)	2	08/28/2015	2.96%

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Instrument	Amount	Maturity Date	Rate
	(Millions of pesos)
Certificates of deposit (unsecured) (2)	5	04/23/2015	1.00%
Certificates of deposit (unsecured) (2)	179	01/02/2015	0.34%
Certificates of deposit (unsecured) (2)	145	01/06/2015	0.32%
Certificates of deposit (unsecured) (2)	117	01/08/2015	0.31%
Certificates of deposit (unsecured) (2)	267	01/05/2015	0.30%
Certificates of deposit (unsecured) (2)	116	01/13/2015	0.37%
Certificates of deposit (unsecured) (2)	115	01/15/2015	0.46%
Certificates of deposit (unsecured) (2)	70	01/16/2015	0.30%
Certificates of deposit (unsecured) (2)	88	01/20/2015	0.30%
Certificates of deposit (unsecured) (2)	138	01/20/2015	0.65%
Certificates of deposit (unsecured) (2)	133	01/06/2015	0.45%
Certificates of deposit (unsecured) (2)	442	01/20/2015	0.41%
Certificates of deposit (unsecured) (2)	166	01/23/2015	0.40%
Certificates of deposit (unsecured) (2)	123	01/13/2015	0.30%
Certificates of deposit (unsecured) (2)	146	01/27/2015	0.40%
Certificates of deposit (unsecured) (2)	103	01/02/2015	2.78%
Certificates of deposit (unsecured) (2)	84	01/29/2015	0.50%
Certificates of deposit (unsecured) (2)	1,916	02/24/2015	0.51%
Certificates of deposit (unsecured) (2)	7	05/27/2015	0.50%
Certificates of deposit (unsecured) (2)	2	07/31/2015	0.55%
Certificates of deposit (unsecured) (2)	66	05/27/2015	0.50%
Structured bank bonds (3)	20	10/15/2015	Guaranteed rate subject to IBEX 35
Structured bank bonds (3)	5	08/04/2015	TIIE
Structured bank bonds (3)	8	08/18/2015	TIIE
Structured bank bonds (3)	11	01/20/2015	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds (3)	58	08/26/2015	TIIE
Structured bank bonds (3)	100	01/08/2015	Guaranteed rate subject to exchange rate
Structured bank bonds (3)	20	01/06/2015	Guaranteed rate subject to exchange rate
Structured bank bonds (3)	18	01/13/2015	Guaranteed rate subject to exchange rate
Structured bank bonds (3)	11	01/30/2015	Guaranteed rate subject to exchange rate
Structured bank bonds (3)	28	01/05/2015	Guaranteed rate subject to exchange rate
Structured bank bonds (3)	23	02/17/2015	Guaranteed rate subject to exchange rate
Structured bank bonds (3)	87	03/13/2017	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds (3)	50	03/16/2017	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds (3)	12	03/24/2017	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds (3)	12	04/06/2017	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds (3)	10	05/26/2016	Guaranteed rate subject to Euro SX5E
Structured bank bonds (3)	20	06/08/2016	Guaranteed rate subject to Euro SX5E
Structured bank bonds (3)	9	06/18/2015	Guaranteed rate subject to Euro SX7E
Structured bank bonds (3)	25	06/19/2015	Guaranteed rate subject to NIKKEI 225
Structured bank bonds (3)	16	06/24/2015	Guaranteed rate subject to Euro SX7E
Structured bank bonds (3)	812	06/29/2017	Guaranteed rate subject to IBEX 35
Structured bank bonds (3)	55	04/07/2016	Guaranteed rate subject to Euro SX7E
Structured bank bonds (3)	237	08/24/2016	Guaranteed rate subject to HSCEI y S&P 500
Structured bank bonds (3)	362	09/08/2017	Guaranteed rate subject to Euro SX5E
Structured bank bonds (3)	15	09/09/2015	Guaranteed rate subject to Euro SX5E
Structured bank bonds (3)	35	10/14/2016	Guaranteed rate subject to Hang Seng
Structured bank bonds (3)	106	11/06/2017	Guaranteed rate subject to S&P 500
Structured bank bonds (3)	1,480	03/02/2017	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds (3)	248	11/17/2016	Guaranteed rate subject to IBEX 35
Structured bank bonds (3)	590	08/03/2017	Guaranteed rate subject to Euro SX5E

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Instrument	Amount	Maturity Date	Rate
	(Millions of pesos)
Structured bank bonds (3)	528	09/06/2017	Guaranteed rate subject to Euro SX5E
Structured bank bonds (3)	584	01/04/2018	Guaranteed rate subject to Euro Stoxx Oil & Gas
Structured bank bonds (3)	13	01/04/2018	Guaranteed rate subject to Euro Stoxx Oil & Gas
Senior notes	14,482	11/09/2022	4.125%
Unsecured bonds (4)	1,700	03/09/2021	8.91%
Unsecured bonds (4)	2,800	09/21/2016	TIIE + 50 bps
Unsecured bonds (4)	1,300	09/21/2016	TIIE + 50 bps
Unsecured bonds (4)	979	11/23/2017	9.05%
Promissory notes (6)	2,000	01/02/2015	2.96%
Promissory notes (6)	5,000	01/02/2015	3.00%
Promissory notes (6)	3,000	01/02/2015	3.05%
Promissory notes (6)	5,000	01/02/2015	3.08%
Promissory notes (6)	750	01/07/2015	3.00%
Promissory notes (6)	52	02/13/2015	3.03%
Promissory notes (6)	2,000	01/23/2015	3.09%
Promissory notes (6)	64	01/05/2015	2.96%
Mortgage-backed bonds (5)	223	05/25/2032	5.00%
Mortgage-backed bonds (5)	13	05/25/2032	6.40%
Tier II Subordinated Capital Notes	19,032	01/30/2024	5.95%
	77,940
Transaction costs and accrued interest	583
Total debt securities outstanding	78,523

(1) Equals funding amounts taking into consideration redemptions. See note 21 to our audited financial statements.

(2) Referred to in the local Mexican market as certificados de depósito bancario de dinero a plazo.

(3) Referred to in the local Mexican market as bonos bancarios estructurados.      .

(4) Referred to in the local Mexican market as certificados bursátiles bancarios.

(5) Referred to in the local Mexican market as certificados bursátiles.

(6) Referred to in the local Mexican market as pagaré con rendimiento liquidable al vencimiento.

The 2022 Notes

In November 2012, our subsidiary, Banco Santander Mexico, issued senior notes in an aggregate principal amount of U.S.$1.0 billion under an indenture dated as of November 9, 2012, which we refer to as the 2022 notes.  The 2022 notes were issued at an issue price of 98.18%.  The 2022 notes mature on November 9, 2022, and bear interest at a rate per annum equal to 4.125%.  Interest is paid semi-annually in arrears on May 9 and November 9 of each year.  The net proceeds from this issuance were used to extend the duration of our liabilities and to refinance indebtedness maturing in the first half of 2013.

The 2022 notes are redeemable at the option of Banco Santander Mexico at any time prior to maturity, in whole but not in part, at par plus accrued and unpaid interest upon the occurrence of certain specified changes in Mexican laws affecting the withholding tax applicable to payments under the 2022 notes. Banco Santander Mexico may also redeem the 2022 notes, in whole or in part, at the greater of 100% of their principal amount outstanding and a make-whole amount defined as the sum of the present values of the remaining scheduled payments of principal and interest thereon (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 40 basis points, plus, in each case, accrued interest thereon to the date of redemption and any additional amounts payable with respect thereto.

The 2022 notes are not secured or guaranteed by any of our affiliated companies, by the IPAB or any other Mexican governmental agency, or by any other entity, and the 2022 notes are not convertible, by their terms, into

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our shares or equity capital.  The 2022 notes, other than as set forth below, rank pari passu in right of payment with all of Banco Santander Mexico’s other unsecured obligations other than obligations that are, by their terms, expressly subordinated in right of payment to the 2022 notes.  The notes are effectively subordinated to (i) all of Banco Santander Mexico’s secured indebtedness with respect and up to the value of Banco Santander Mexico’s assets securing that indebtedness, (ii) certain direct, unconditional and unsecured general obligations that in case of Banco Santander Mexico’s insolvency are granted preferential treatment pursuant to Mexican law (including tax and labor claims) and (iii) all of the existing and future liabilities of Banco Santander Mexico’s subsidiaries, including trade payables.

The indenture governing the 2022 notes imposes certain restrictions on Banco Santander Mexico’s ability to consolidate with or merge into any other corporation or convey or transfer its properties and assets substantially as an entirety to any person. However, the indenture does not limit Banco Santander Mexico’s ability to incur senior, secured or other additional indebtedness (including additional 2022 notes), Banco Santander Mexico’s ability to grant liens on its assets and properties, its payment of dividends or require Banco Santander Mexico to create or maintain any reserves.

The indenture governing the 2022 notes also provides for events of default, which, if any of them occurs, would permit or require, as applicable, the principal and interest on all then outstanding 2022 notes to be due and payable immediately.

We may issue additional notes from time to time pursuant to the indenture governing the 2022 notes.

The 2024 Notes

In December 2013, our subsidiary, Banco Santander Mexico, issued Basel III compliant Tier 2 Subordinated Capital Notes in an aggregate principal amount of U.S.$1.3 billion under an indenture dated December 19, 2013, which we refer to as the 2024 notes. Our parent, Banco Santander Parent, purchased 75% or U.S.$975 million of the aggregate principal amount of the 2024 notes. The 2024 notes were issued at an issue price of 99.235%.  The 2024 notes mature on January 30, 2024, and bear interest at a rate per annum equal to 5.95%.  Interest is paid semi-annually in arrears on January 30 and July 30 of each year.  The net proceeds from this issuance were used for general corporate purposes, including to enhance our capital in connection with the December 2013 cash dividend payment. See Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividends and Dividend Policy. After consummation of the 2024 notes offering and the payment of the December 2013 cash dividend the Bank maintains a Tier 1 capital ratio of 12.8 and a Tier 2 capital ratio of 3.2.

The 2024 notes are redeemable at the option of Banco Santander Mexico on January 30, 2019, only, or at any time if there are certain specified changes in (i) the Mexican laws affecting the withholding tax applicable to payments of interest under the 2024 notes, (ii) the Mexican laws that would change the capital treatment of the 2024 notes or (iii) the applicable tax laws that result in interest on the 2024 notes not being deductible by Banco Santander Mexico.

Principal and interest on the 2024 notes will be deferred and will not be paid under certain circumstances. The indenture governing the 2024 notes provides the Bank with the ability to automatically write-down the current principal amount of the notes upon the occurrence of a trigger event and such write-down will not constitute an event of default.

The 2024 notes are not secured or guaranteed, or otherwise eligible for reimbursement, by the IPAB or any other Mexican governmental agency, or any of the Bank’s subsidiaries or affiliates, including us, or any other entity that is part of us, and the 2024 notes are not convertible, by their terms, into any debt securities, shares or equity capital of any of the Bank’s subsidiaries or affiliates. The 2024 notes constitute subordinated indebtedness and (i) are subordinate and junior in right of payment and in liquidation to all of Banco Santander Mexico’s present and future senior indebtedness, (ii) rank pari passu with all other unsecured subordinated preferred indebtedness and (iii) are senior to subordinated non-preferred indebtedness and all classes of the Bank’s equity or capital stock.

The indenture governing the 2024 notes imposes certain restrictions on Banco Santander Mexico’s ability to consolidate with or merge into any other corporation or convey or transfer its properties and assets substantially as an entirety to any person. However, the indenture does not limit Banco Santander Mexico’s ability to incur senior, secured or other additional indebtedness (including additional 2024 notes), Banco Santander Mexico’s ability to

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grant liens on its assets and properties, its payment of dividends or require Banco Santander Mexico to create or maintain any reserves.

The indenture governing the 2024 notes also provides for events of default, which would permit or require, as applicable, the principal and interest on all then outstanding 2024 notes to be due and payable immediately.

C.  Research and Development, Patents and Licenses, etc.

In Mexico, ownership of trademarks can be acquired only through a validly approved registration with the Mexican Institute of Industrial Property (Instituto Mexicano de la Propiedad Industrial, or IMPI), the agency responsible for registering trademarks and patents in Mexico.  After registration, the owner has exclusive use of the trademark in Mexico for ten years.  Trademarks registrations can be renewed indefinitely for additional ten-year periods, if the registrant proves that it has used such trademark within the last three years.

We have several trademarks, most of which are brand names of our products or services.  All our material trademarks are registered or have been submitted to IMPI for registration by the Santander Group or us.

We or one of our affiliates owns the principal domain names used in our business, which include www.santander.com.mx, www.llamasantander.com.mx, www.valorsantander.com.mx and www.supernetempresas.com.mx.  None of the information contained on our websites is incorporated by reference into, or forms part of, this annual report on Form 20-F.

We do not currently conduct any significant research and development activities.

D.  Trend Information

The Mexican financial services sector is likely to remain competitive with a large number of financial services providers and alternative distribution channels.  Additionally, further consolidation in the sector (through mergers, acquisitions or alliances) is likely to occur as other major banks look to increase their market share, combine with complementary businesses or strengthen their balance sheets.  In addition, regulatory changes will take place in the future that we expect will increase the overall level of regulation in the sector.

The following are the most important trends, uncertainties and events that are reasonably likely to have a material adverse effect on us or that would cause the disclosed financial information not to be indicative of our future operating results or our financial condition:

· uncertainties relating to economic growth expectations and interest rate cycles in Mexico and continued instability and volatility in the financial markets, and the impact they may have over the yield curve and exchange rates;

· the resulting effect of changes in U.S. monetary policy and its effect on global financial markets and on local interest and exchange rates;

· changes in the credit quality of our loan portfolio as a result of inorganic or organic growth;

· increases in our cost of funding could adversely affect our net interest margin as a consequence of timing differences in the repricing of our assets and liabilities;

· increased competition that may lead to tightening of our margins;

· inflationary pressures that may lead to increases in interest rates and decreases in growth;

· acquisitions or restructurings of businesses that do not perform in accordance with our expectations or that subject us to previously unknown risks; and

· increased regulation, government intervention and new laws prompted by the global financial crisis which could change our industry and require us to modify our businesses or operations.

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The Mexican economy continues to be influenced by the U.S. economy, and therefore, any changes in U.S. economic conditions may impact the economy of Mexico.  In 2009, the gross domestic product of the United States contracted by 3.5% while Mexican gross domestic product fell by 6.2%.  This recession caused unemployment to increase from an average of 5.8% in 2008 to an average of 9.3% in 2009 in the United States and from 4.3% in September 2008 to 6.4% in September 2009 in Mexico.  This sudden change in economic conditions reduced credit demand, caused a 32.8% depreciation of the peso from September 2008 to March 2009 and triggered a monetary policy response by the Mexican Central Bank that resulted in lower interest rates, which dropped to 4.5% in December 2009 from its December 2008 level of 8.0%.  The U.S. economy posted significant gains in 2014 and exports to that economy were the main source of growth for the Mexican economy during the year. Nevertheless, the strengthening of the U.S. economy might result in a normalization of its monetary policy, which could increase volatility in the financial markets and affect growth, exchange rates, interest rates and credit demand in Mexico, and would be reasonably likely to have a material adverse effect on our financial condition and results of operations.

E.  Off-Balance Sheet Arrangements

In the ordinary course of our business we are a party to off-balance sheet activities to manage credit, market and operational risk, which are not reflected in our audited financial statements. These activities include commitments to extend credit not otherwise accounted for as contingent loans, such as overdrafts and credit card lines of credit.  We record our off-balance sheet arrangements as memorandum accounts, which are described more fully in note 31 of our audited financial statements included elsewhere in this annual report on Form 20-F.

We provide customers with off-balance sheet credit support through loan commitments.  Such commitments are agreements to lend to a customer at a future date, subject to compliance with the contractual terms.  Since substantial portions of these commitments are expected to expire without our granting of any loans, total commitment amounts do not necessarily represent our actual future cash requirements.  These loan commitments totaled Ps.139,152 million, Ps.140,643 million and Ps.128,785 million as of December 31, 2012, 2013 and 2014, respectively.

The credit risk of both on- and off-balance sheet financial instruments varies based on many factors, including the value of collateral held and other security arrangements.  To mitigate credit risk, we generally determine the need for specific covenant, guaranty and collateral requirements on a case-by-case basis depending on the nature of the financial instrument and the customer’s creditworthiness.  We may also require comfort letters.  The amount and type of collateral held to reduce credit risk varies, but may include real estate, machinery, equipment, inventory and accounts receivable as well as deposits, stocks, bonds and other tradable securities that are generally held in our possession or at another appropriate custodian or depository.  The collateral is valued and inspected on a regular basis to ensure both its existence and adequacy.  Additional collateral is required when it is considered necessary by us.

The following table presents our outstanding contingent loans and other off-balance sheet assets as of December 31, 2012, 2013 and 2014:

	As of December 31,
	2012		2013		2014
	(Millions of pesos)
Proprietary record accounts:
Credit commitments	Ps.	139,152	Ps.	140,643	Ps.	128,785
Assets in trust or mandate:
Trusts		125,954		133,101		135,497
Mandates(1)		1,580		274		247
Assets in custody or under administration(2)		3,561,696		3,543,470		3,193,157
Subtotal	Ps.	3,828,382	Ps.	3,817,488	Ps.	3,457,686
Collateral received	Ps.	71,296	Ps.	99,277	Ps.	51,680
Collateral received and sold or pledged as guarantee(3)		53,788		50,891		26,794
Investment banking transaction on behalf of third parties (net)(4)		393,983		565,081		415,726
Subtotal		519,067		715,249		494,200
Total	Ps.	4,347,449	Ps.	4,532,737	Ps.	3,951,886

(1) Assets received are managed under independent management trusts.  Mandates include the declared value of the assets subject to mandate contracts entered into by us.

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(2) This account includes the activity of third-party assets and securities received in custody or to be managed by us.

(3) Collateral received and sold or pledged as guarantee is composed of all collateral received in reverse repurchase agreements in which we are the buying party that in turn is sold by us as a selling party.  This balance also includes the obligation of the borrower (or lender) to return to the lender (or borrower) the assets subject to the loan transaction carried out by us.

(4) Cash and securities owned by customers and held in custody, pledged as collateral and managed by our bank and brokerage subsidiaries.

F.  Tabular Disclosure of Contractual Obligations

The table below presents our contractual obligations at December 31, 2014.

	Payment due by period
	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
	(Millions of pesos)
Demand deposits	Ps.	294,063	Ps.	-	Ps.	-	Ps.	-	Ps.	294,063
Time deposits		153,473		38		30		23		153,564
Bank and other loans(1)		21,193		3,692		11,824		8,892		45,601
Marketable debt securities(1)		32,281		4,100		988		16,402		53,771
Subordinated liabilities		475		-		-		18,971		19,446
Reverse repurchase agreements		103,478		-		-		-		103,478
Short positions		41,953		-		-		10		41,963
Operating lease obligations		414		1,324		1,728		3,581		7,047
Sundry creditors and other payables		30,853		326		-		-		31,179
Contractual interest payments(2)		15,870		5,904		5,166		7,231		34,171
Total	Ps.	694,053	Ps.	15,384	Ps.	19,736	Ps.	55,110	Ps.	784,283

(1) Includes interest payments that are calculated by applying the interest rate in effect at December 31, 2014.

(2) Calculated for Demand deposits, Time deposits, Bank and other loans, Marketable debt securities and Subordinated liabilities assuming a constant interest rate as of December 31, 2014 over time for all maturities.

The table above does not reflect amounts that we may have to pay on derivative contracts, as the amounts ultimately payable will depend upon movements in financial markets.

G.  Safe Harbor

See “Special Note Regarding Forward-Looking Statements.”

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ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.  Directors and Senior Management

Board of Directors

Our Board of Directors is currently comprised of thirteen directors and eight alternate directors.  The directors and alternate directors are elected for one-year terms at our annual ordinary general shareholders’ meeting and may be re-elected.  Pursuant to Mexican law, members of our Board of Directors continue to be members of the Board despite the expiration of their term until new members of the Board have been appointed and assumed office.

Under our bylaws and in accordance with the Mexican Financial Groups Law, at least 25% of the members of our Board of Directors have to be independent.  Independence is determined in accordance with Article 24 of the Mexican Financial Groups Law, and our bylaws.  The CNBV may contest the determination made by our shareholders as to the independence of our directors.  We have not determined whether any of our directors or any of the members of our committees other than the Audit Committee would be considered independent as defined in the U.S. securities laws or the rules of any U.S. securities exchange.

For each director, an alternate director may be appointed, provided that the alternate director corresponding to an independent director must also be independent.  All members of the Board of Directors, whether they are directors or alternate directors, are called to attend the meetings of the Board of Directors.  If both a director and an alternate director attend the same meeting, only the vote of the director shall be taken into account.

There are two different categories of directors depending on the type of shareholder appointing each such director: Series B and Series F.  Series B shares can be freely subscribed.  Series F shares can be acquired directly or indirectly only by Banco Santander Parent and can be sold only with the previous authorization of the Mexican Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público, or SHCP), unless such shares must be transferred to the Mexican Institute for the Protection of Bank Savings (Instituto para la Protección al Ahorro Bancario, or IPAB) as collateral or as property.  Both categories of directors have the same rights and obligations.

In accordance with our bylaws, holders of Series F shares representing 51% of our capital stock shall have the right to appoint 50% plus 1 of our directors and their respective alternates, and to appoint an extra director for each additional 10% of our capital stock above such percentage.  Series B shareholders have the right to appoint the remaining directors and their alternates.

The following table sets forth information about the directors and alternate directors of our Board of Directors, each of whom was elected at our general shareholders’ meeting onApril 28, 2015 for a period of one year.  The business address of our directors is Avenida Prolongación Paseo de la Reforma 500, Colonia Lomas de Santa Fe, Delegación Álvaro Obregón, 01219, México, Distrito Federal, México.

Name	Position	Series	Director Since
Carlos Gómez y Gómez	President	Series F	1992
Marcos Alejandro Martínez Gavica	Director	Series F	1997
Rodrigo Echenique Gordillo	Director	Series F	2015
José Doncel Razola	Director	Series F	2015
Carlos Fernández González	Director	Series F	2003
Rodrigo Brand de Lara	Director	Series F	2012
Francisco Javier Hidalgo Blázquez	Alternate Director	Series F	2014
Pedro José Moreno Cantalejo	Alternate Director	Series F	2006
Fernando Borja Mujica	Alternate Director	Series F	2015
Vittorio Corbo Lioi	Alternate Director	Series F	2012
Guillermo Güemez García	Independent Director	Series F	2012
Joaquín Vargas Guajardo	Independent Director	Series F	2009
Juan Ignacio Gallardo Thurlow	Independent Director	Series F	2013
José Eduardo Carredano Fernández	Independent Alternate Director	Series F	1997
Jesús Federico Reyes Heroles González Garza	Independent Alternate Director	Series F	2009
Fernando Solana Morales	Independent Director	Series B	2003

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Fernando Ruíz Sahagún	Independent Director	Series B	2003
Alberto Torrado Martínez	Independent Director	Series B	2009
Gina Lorenza Diez Barroso Azcárraga	Independent Director	Series B	2014
Enrique Krauze Kleinbort	Independent Alternate Director	Series B	2010
Antonio Purón Mier y Terán	Independent Alternate Director	Series B	2009

The Secretary of the Board of Directors is Alfredo Acevedo Rivas and the Alternate Secretary is Rocío Erika Bulhosen Aracil.

Set forth below are the biographies of the members of our Board of Directors.

Carlos Gómez y Gómez is the Chairman of our Board of Directors and Chairman of the Boards of Directors of Banco Santander Mexico, Casa de Bolsa Santander, Santander Consumo, Santander Hipotecario, Santander Vivienda. He has been a member of the Boards of Directors of Grupo KUO, S.A.B. de C.V. and DINE, S.A.B. de C.V., Gestión Santander, Grupo Yoreda, S.A. de C.V., Grupo Ceslo, S.A. de C.V., Grupo Dupuis, S.A. de C.V., Club de Industriales, A.C., Club de Banqueros de México, A.C. (Mexican Banking Club), Club de Golf Chapultepec, S.A., Consejo Mexicano de Asuntos Internacionales, A.C., Estudia Más S.A.P.I. de C.V. and Fundación Beca, A.C.  From 2005 to 2008, he served as the Vice-Chairman of the Board of Directors of the Mexican Stock Exchange (Bolsa Mexicana de Valores, S.A.B. de C.V.) and from 2006 to 2007 he was a member of the Board of Directors of Consorcio Aeroméxico, S.A.B. de C.V.  He was Chairman of the Asociación de Banqueros de México, A. C.  (Mexican Banking Association) from 1998 to 2000, President of the Club de Banqueros de México, A. C. (Mexican Banking Club) from 1994 to 2000, Vice President of the Asociación de Banqueros de México, A. C. (Mexican Banking Association) from 1992 to 1997 and Chairman of the Board of Directors of Casa de Bolsa InverMéxico, S.A. de C.V. from 1986 to 1991.  He holds a degree in Business Administration from Universidad Anáhuac.

Marcos Alejandro Martínez Gavica is a member of our Board of Directors and of the Boards of Directors of Banco Santander Mexico, Casa de Bolsa Santander, Santander Consumo, Santander Hipotecario and Santander Vivienda.  He is our and Banco Santander Mexico’s Executive President and Chief Executive Officer. He was a member of the Board of Directors of Gestión Santander from 2002 to 2013 and  President of the Asociación de Bancos de México, A. C. (Mexican Banking Association) from 2005 to 2007. He began his career in 1978 at Banco Nacional de México, S.A., holding various positions and ultimately joining the bank’s management.  He holds a degree in Chemical Engineering from Universidad Iberoamericana and a Masters in Administration with a specialty in financial planning from the Instituto Panamericano de Alta Dirección Empresarial.

Rodrigo Echenique Gordillo is a member of our Board of Directors and of the Boards of Directors of Banco Santander México, Casa de Bolsa Santander, Santander Consumo, Santander Hipotecario and Santander Vivienda. From 1999 to 2014 he served as a member of the Board of Directors and of the Executive Committee of Banco Santander Parent, as well as a certain other committees. During that time he also served as Vice President of Banco Banif, S.A., President of Allfunds Bank, President and Vice President of SPREA, a member of the Boards of Directors of Santander International and Santander Investment, Executive Vice President of Banco Santander Parent, President of N.H. Hotels, S.A., Vallehermoso, S.A., Lar, S.A., Vocento, S.A., and a Director of Inditex, S.A. He also served as a member of the Board of Directors for various industrial and financial organizations, including Ebro Azúcares y Alcoholes, S.A., Industrias Agrícolas, S.A., SABA, S.A., Accenture, S.A., Lucent Technologies and Quercus y Agrolimen, S.A. He also served as a member of the Executive Committee and Board of Governors of the Fundación Banco Santander and other charitable organizations. From 1994 to 1999, he served as a member of the Board of Directors and Executive Committee of Banco Santander Parent, serving on all Board committees. During that time he also served Vice President of Business and Investment for Banco Santander Parent. From 1984 to 1994, he served as Subdirector General of Banco Santander México and Deputy Director General, and in 1988 he was appointed to Banco Santander Parent’s Board of Directors and named Executive Director and a member of the Executive Committee. From 1976 to 1983, he held several positions at Banco Exterior de España, including as Manager of Legal Services, Deputy Director General and as a member of the Planning Committee. From 1973 to 1976, he served in various positions in the Spanish government, including with the Treasury Departments of Pontevedra and Madrid, Secretary General of Telecommunications and Technical Adviser to the executive administration. He holds a law degree from the Universidad Complutense de Madrid.

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Jose Francisco Doncel Razolais a member of our Board of Directors and of the Board of Directors of Banco Santander México, Casa de Bolsa Santander, Santander Consumo, Santander Hipotecario and Santander Vivienda. In 2014 he served as Director of the Corporate Division of Public Accounts and Management Control of Banco Santander Parent. From 2013 to 2014, he served as Director of the Corporate Division of Internal Audits, as well as a member of the Boards of Directors of various companies within our organization (such as Santander Seguros, Santander Pensions, Santander Asset Management, Santander Real Estate and Bansalud). In 2013 he served as Deputy Director General of the Management Control Area of the Spanish Commercial Bank BCE Division of Banco Santander Parent. From 1993 to 2013 he held several positions at Banco Santander Parent, including Assistant Director of Public Accounts, Deputy Director General of Public Accounts, Management Control, Financial Control and Margin Management, and member of the Board of Directors of the Santander Group, serving on several Board Committees. During that time he also served as President and a member of the Board of Directors for various banks and businesses within Grupo Banesto, including Banesto Banco de Emisiones, S.A., Banesto Holdings, S.A. From 1989 to 1994, he served as Director of Public Accounts for Banco Santander Parent and as a member of the Boards of Directors of various affiliates of the Santander Group. From 1984 to 1989, he worked for Arthur Andersen Auditores, S.A., Division of Financial Institutions and was a member of the Division of Computer Audit. He holds a degree in Economic and Business Sciences from the Universidad Complutense de Madrid.

Carlos Fernández González is a member of our Board of Directors and of the Boards of Directors of Banco Santander Mexico, Casa de Bolsa Santander, Santander Consumo, Santander Hipotecario, Santander Vivienda and Banco Santander Parent. He currently serves as President of the Board of Directors of Finaccess, S.A.P.I. de C.V. and is a member of the Board of Advisors of Chrysler México. He acted as Chief Executive Officer and Chairman of the Board of Directors of Grupo Modelo, S.A. de C.V.  He is also a member of the Boards of Directors of Emerson Electric Co. and Grupo Televisa, S.A.B. de C.V.  He has served as a member of the Board of Directors of several companies, including Anheuser Busch, Seeger Industrial, Crown Imports, Grupo ICA and the Mexican Stock Exchange. He holds a degree in Industrial Engineering from Universidad Anahuac, completed Proficiency Program AD2 from the Instituto Panamericano de Alta Dirección Empresarial and has participated in diverse seminars on financial engineering, marketing and industrial relations among others.

Rodrigo Brand de Lara is a member of our Board of Directors and the Boards of Directors of Casa de Bolsa Santander, Santander Consumo, Santander Hipotecario and Santander Vivienda and was appointed Deputy General Director of Institutional Relationships and Communication for Banco Santander Mexico in 2011.  In 2010, he was the Director General for the Social Communication Division of the Mexican Ministry of Foreign Affairs (Secretaría de Relaciones Exteriores).  From 2006 to 2010, he was the head of the Social Communication Unit and the Spokesperson for the SHCP.  From 2004 to 2006, he served as Director General of Social Communication and Institutional Link for IPAB.  Mr. Brand de Lara has previously held the following positions at SHCP: Deputy General Director of Economic and Financial Analysis from 2003 to 2004; Senior Advisor to the Subsecretary of Finance and Public Credit from 2000 to 2001; Subdirector of Internal Credit Coordination and Training from 1999 to 2000.  From 1996 to 1999, he was an Economist in Mexico for Deutsche Morgan Grenfel and during 1996 he was also an Advisor to the Deputy Director of Financial Engineering of BANOBRAS.  Mr. Brand de Lara graduated with a degree in Economics from Instituto Tecnológico Autónomo de México.

Francisco Javier Hidalgo Blázquez is an alternate member of our Board of Directors and a member or the Boards of Directors of Banco Santander Mexico, Casa de Bolsa Santander, Santander Consumo, Santander Hipotecario and Santander Vivienda. Mr. Hidalgo Blázquez was appointed Vice President of Retail Banking of Banco Santander Mexico in 2014. From 2013 to 2014 he served as Deputy General Director of Commercial and Individual Banking for Banco Santander Parent. From 2012 to 2013 he served as Executive Vice President of the Americas Division of Banco Santander Parent. From 2010 to 2012 he served as President and CEO of Grupo Financiero Santander Puerto Rico. From 2005 to 2013, Mr. Hidalgo Blázquez served as Deputy Director of Global Wholesale Banking and the Commercial Division, Deputy Director of the Americas Division, Deputy General Manager of Global Banking and Markets Division, Deputy General Manager of the Retail Banking Division and Managing Director of Global Wholesale Banking Division at both the regional and global levels, all for Banco Santander Parent. He also served as Director in various areas of Banque Nationale de Paris from 1982 to 1991. He graduated in Law from the Complutense University of Madrid and has an MBA from IESE, Barcelona.

Pedro José Moreno Cantalejo is an alternate member of our Board of Directors and a member of the Boards of Directors of Banco Santander Mexico, Casa de Bolsa Santander, Santander Consumo, Santander Hipotecario and Santander Vivienda. He was appointed Banco Santander Mexico’s Vice President of Administration and Finance in

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October 2010. From 2006 to 2010, he acted as Banco Santander Mexico’s Deputy General Director of Finance. From 2004 to 2006, he acted as a member of the Board of Directors of Santander Consumer EFC (Spain), Santander Consumer UK, Ltd. and Santander Consumer Bank (Poland), among others.  During such period he also acted as Chief Financial Officer and Chief Risk Officer of the European Division of Banco Santander Parent. From 2001 to 2004, he acted as Chief Strategic and Financial Officer of the European Division of Banco Santander Parent. In 1991, he joined the Santander Group, working in Grupo Hispamer Grupo Financiero holding various positions until 1998, when he became Chief Executive Officer and Vice President of Investment Banking of Banco Central Hispanoamericano. From 1991 to 1998 he also served as Director of Organizational Control and Systems for Mercedes Benz Leasing and Funding. Mr. Moreno Cantalejo started his career in the banking industry in 1985 as Chief of Administration at GESBICA Caja Postal de Ahorros – Madrid.  He holds a degree in Economic and Business Sciences from Universidad Autónoma de Madrid, a Masters in Management of Financial Entities from the Centro de Estudios Comerciales (CECO), and MBAs from the Executive and Senior Executive Programs from the Escuela de Negocios (ESDEN).

Fernando Borja Mujica has served as General Legal Director of Banco Santander Mexico since 2014. From 2004 to 2014, he was general counsel for Banco Nacional de México. From 1988 to 1998 he held several positions in the SHCP, including General Director of Banking Institutions. From 1998 to 2004 he was a partner at the law firm of Mijares, Angoitia, Cortés y Fuentes, S.C. Mr. Borja Mujica has held various federal government banking and finance positions. He was also a member of the Governor’s Board of the National Banking and Securities Commission and of the Insurance and Bonding National Commission and served as member of several financial institutions, including Shares and Securities, Afore Banamex (member of the investment committee) and Impulsora de Fondos Banamex. He was the secretary of the boards of Grupo Financiero Banamex and Banco Nacional de México, S.A. He holds a law degree from Escuela Libre de Derecho and a Masters in comparative law from Georgetown University.

Vittorio Corbo Lioi is an independent member of our Board of Directors and of the Board of Directors of Banco Santander Mexico, Casa de Bolsa Santander, Santander Consumo, Santander Hipotecario and Santander Vivienda. He is a senior researcher at the Centro de Estudios Públicos in Santiago, Chile and a part-time professor of Economics at the Pontificia Universidad Católica de Chile and at the University of Chile. From 2011 to 2014 he was a member of the Board of Directors of Banco Santander, S.A. in Spain and Banco Santander Chile, SURA S.A., Empresa Nacional de Electricidad, S.A. and Compañía Cerveceras Unidas in Chile. He is the President of the management committee of SURA Chile, a financial consultant to certain companies, and an advisor to the World Bank, the International Monetary Fund and the Center for Social and Economic Research.  He is the President and main shareholder of Vittorio Corbo y Asociados. From 2003 to 2007, he was the President of the Central Bank of Chile.  From 2000 to 2003 he served on the Board of Directors of the Global Development Network. From 2000 to 2002 he served as Vice President of the International Economics Association. From 1991 to 2003, he was a full-time professor of Economics at the Pontificia Universidad Católica de Chile.  From 1984 to 1991, he served in several management positions at the World Bank.  He was also Professor of Economics at the Concordia University in Montreal, Canada from 1979 to 1982 and a lecturer at Georgetown University from 1986 to 1991.  Mr. Corbo Lioi holds a degree in Commercial Engineering from the University of Chile (with honors) and a doctorate in Economics from MIT. He has also completed post-doctoral research at MIT.

Guillermo Güemez García is an independent member of our Board of Directors and of the Boards of Directors of Banco Santander Mexico, Casa de Bolsa Santander, Santander Consumo, Santander Hipotecario and  Santander Vivienda. He is an independent member of the Board of Directors and member of the investment committee of ING AFORE. He is also an independent member of the Board of Directors and President of the audit committee of Zurich Compañía de Seguros S.A. He previously served as a member of the Board of Directors of Zurich Santander México, S.A. In addition, he is a member of the strategy and finance committee of Nacional Monte de Piedad, a member of the Board of Directors of GEUPEC S.A. de C.V. and a member of the senior advisory board of Oliver Wyman. He is the President of the advisory committee of the Economics and Business Administration school of the Universidad Panamericana. He was Deputy Governor of the Mexican Central Bank and President of the responsibilities commission of the Mexican Central Bank from 1995 to 2010.  He was a cabinet member of the CNBV from 2007 to 2010, an alternate cabinet member of the Mexican National Insurance and Bonding Commission (Comisión Nacional de Seguros y Fianzas, or CNSF) from 1995 to 1997 and Executive Director of the Coordinadora Empresarial para el Tratado de Libre Comercio (Business Coordinator for NAFTA) (Mexico-USA-Canada) from 1991 to 1993.  He held several executive positions at Banamex from 1974 to 1990.  He has a degree with honors in Civil Engineering from the Universidad Nacional Autónoma de México.  He holds a master’s degree in Science from Stanford University.

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Joaquín Vargas Guajardo is an independent member of our Board of Directors and of the Boards of Directors of Banco Santander Mexico, Casa de Bolsa Santander, Santander Hipotecario, Santander Consumo and Santander Vivienda.  He is the Chairman of the Board of Directors of Corporación Mexicana de Restaurantes, S.A.B. de C.V. and was previously President of the Board of Directors of Grupo MVS Comunicaciones, the National Chamber of the Radio and Television Industries and the Association of Directors of Restaurant Chains. He is also a member of the Boards of Directors of several companies including Vitro, S.A.B. de C.V., Grupo Posadas, S.A.B de C.V., Médica Sur, S.A.B. de C.V., Grupo Aeroportuario del Pacífico, S.A.B. de C.V., Periódico el Universal and Grupo Costamex, among others. From April 1997 to April 2005 and from April 2008 to April 2012, he was a member of the Board of Directors of the Mexican Stock Exchange.  He is a member of the compensation committee of Grupo Aeroportuario del Pacífico, S.A.B. de C.V.  He holds a degree in Business Administration from the Instituto Tecnológico y de Estudios Superiores de Monterrey and studied Business Management at the Instituto Panamericano de Alta Dirección Empresarial.

Juan Ignacio Gallardo Thurlow is an independent member of our Board of Directors and of the Boards of Directors of Banco Santander Mexico, Casa de Bolsa Santander, Santander Hipotecario, Santander Consumo and Santander Vivienda.  He is the Chairman of the Board of Directors of Grupo GEPP (Pepsicola bottling group and its brands in Mexico) and Grupo Azucarero México, S.A. de C.V. He serves on the Boards of Directors of Caterpillar, Inc. and Lafarge, S.A. He is also a member of the International Advisory Board of Bombardier Inc.  He is a member of the Mexican Counsel of Businessmen, A.C. (CMHN) and the Business Council of Latin America (CEAL).  He is a General Coordinator on COECE (Coordinator for Foreign Trade Business Organizations for negotiations under the Free Trade Agreements of Mexico).  From 1978 to 1989, he was Chairman of the Board of Directors of Babcock de México, S.A. de C.V. From 1974 to 1988, he was Chairman of the Board of Directors of Clevite de México, S.A. de C.V. From 1981 to 1983, he was Deputy General Director of Grupo Industrial Minera México, S.A. From 1976 to 1980, he was Chief Executive Officer of the International Division and Investment Bank of Multibanco Comermex, S.A. Institución de Banca Múltiple. He has a law degree from the Escuela Libre de Derecho and studied business management at the Instituto Panamericano de Alta Dirección Empresarial (IPADE).

José Eduardo Carredano Fernández is an alternate independent member of our Board of Directors and of the Boards of Directors of Banco Santander Mexico, Casa de Bolsa Santander, Santander Hipotecario, Santander Consumo and Santander Vivienda.  He is a member of the Boards of Directors of Grupo Financiero Asecam, S.A. de C.V.,  Industrial Formacero, S.A. de C.V., La Ideal S.A. de C.V. and Aceros La Ideal S.A. de C.V.  Mr. Carredano Fernández also served as Chairman of the Board of Directors of Misa de México, S.A. de C.V. and Distribuidora de Manufacturas, S.A.  He was a member of the Board of Directors of Seguros Génesis, S.A. from June 1995 to October 1998.  He holds a Public Accountant degree from the Universidad Iberoamericana.

Jesús Federico Reyes Heroles González Garza is an alternate independent member of our Board of Directors and of the Boards of Directors of Banco Santander Mexico, Casa de Bolsa Santander, Santander Hipotecario,  Santander Consumo and Santander Vivienda.  He was the chief executive officer of Petróleos Mexicanos from December 2006 to September 2009.  He is the Executive President of StructurA.  He is a member of several Boards of Directors, including OHL México, S.A.B. de C.V. and Water Capital Mexico (WCAP Holdings S.A. de C.V.).  He is a member of the Advisory Board of the Energy Intelligence Group (EIG) and served as a member of the Advisory Board of Deutsche Bank from 2010 to 2012.  He is President of the Advisory Board of Agua, A.C. and of the Water Committee of Fundación Gonzalo Rio Arronte. From 1997 to 2000, he was the Mexican ambassador to the United States of America. From 1995 to 1997, he was the Secretary of Energy of Mexico.  From 1994 to 1995, he was the General Director of Banobras.  From 1993 to 1994, he was the representative of Mexico of the Grupo de Personas Eminentes (Eminent Persons Group) of APEC.  Mr. Reyes Heroles González Garza graduated with a degree in Economics from ITAM and studied law at UNAM.  He earned a doctorate degree in Economics from MIT.

Fernando Solana Morales is a member of our Board of Directors and of the Boards of Directors of Banco Santander Mexico, Santander Hipotecario, Santander Consumo and Santander Vivienda.  He serves on the Boards of Directors of various companies, including Solana Consultores, S.A. de C.V., Impulsora de Desarrollo y Empleo en América Latina, S.A. de C.V., Acrosur, S.A. de C.V., Teléfonos de México, S.A.B. de C.V., Grupo Carso, S.A.B., Siglo XXI Editores S.A. de C.V., Consejo Mexicano de Asuntos Internacionales S.A. de C.V. and Fresnillo plc.  From 1976 to 1977, he served as the Secretary of Commerce of Mexico.  From 1982 to 1988, he acted as the Chief Executive Officer of Banco Nacional de México.  From 1988 to 1993, he served as the Mexican Minister of Foreign Affairs.  From 1994 to 2000, he was a  member of the Mexican Senate.  He is the Chairman of the Board of Directors and Chief Executive Officer of Solana y Asociados.  He has degrees in Engineering, Philosophy, Business Administration and Public Policy from the Universidad Nacional Autónoma de México.

Fernando Ruiz Sahagún is an independent member of our Board of Directors and of the Boards of Directors of Banco Santander Mexico, Casa de Bolsa Santander, Santander Hipotecario, Santander Consumo and Santander Vivienda.  He also serves on the Board of Directors of the Mexican Stock Exchange, Grupo México, S.A.B. de C.V., Grupo Palacio de Hierro, S.A.B. de C.V., Grupo Pochteca, S.A.B. de C.V., Empresas ICA, S.A.B. de C.V., Fresnillo plc., Grupo Cementos de Chihuahua S.A.B. de C.V., Kimberly Clark de México, S.A.B. de C.V., Mexichen, S.A.B. de C.V., San Luis Corporación, S.A.B. de C.V. and Arcelor Mittal Las Truchas, S.A. de C.V.  Mr. Ruiz Sahagún is a member of the International Fiscal Association (IFA) and of the Instituto Mexicano de Ejecutivos de Finanzas, A.C. (Mexican Institute of Finance Executives).  He is also a member of the Instituto Mexicano de Contadores Públicos A.C. (Mexican Institute of Public Accountants) and served as a member of its Board.  He is one of the founding partners of Chevez, Ruiz, Zamarripa y Cia. S.C., a tax law firm in which he now serves as counsel.  He holds a degree in Public Accounting from the Universidad Nacional Autónoma de México.

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Alberto Torrado Martínez is an independent member of our Board of Directors and of the Boards of Directors of Banco Santander Mexico, Casa de Bolsa Santander, Santander Hipotecario, Santander Consumo and Santander Vivienda. He is a member of the Board of Directors of the Mexican Stock Exchange and is Chairman of the Mexican Communications Council. From 1998 to 2011, he served as Chairman of the Board of Directors and Chief Executive Officer of Alsea, S.A.B. de C.V. Mr. Torrado also served as Chairman of the Asociación Nacional de Servicios de Comida Rápida and as a member of the Cámara Nacional de la Industria Restaurantera y de Alimentos Condimentados.  He is one of founding partners of Torrquin, S.A. de C.V., serving as the CEO from 1990 to 1999.  From 1984 to 1989, he was the CEO of Candiles Royal, S.A. de C.V.  Mr. Torrado holds a degree in Accounting from the Instituto Tecnológico Autónomo de México.  He also completed graduate studies at the Instituto Panamericano de Alta Dirección Empresarial and participated in other seminars, and completed studies at Harvard University and the Wharton School of the University of Pennsylvania.

Gina Lorenza Diez Barroso Azcárraga is an independent member of our Board of Directors and of the Boards of Directors of Banco Santander Mexico, Casa de Bolsa Santander, Santander Consumo, Santander Hipotecario and Santander Vivienda. She is the founder and Chairman, for over 20 years, of Grupo Diarq, S.A. de C.V. and the Foundation Diarq, I.A.P. In 2004 she founded the Center of Design, Film and Television, S.C., which won an award for best College of design for the period 2012-2013, she also founded the Pro-Education Center Foundation, which awards scholarships to outstanding students in Mexico.  She is currently a member of the boards of management of Americas Society and Council of the Americas, Qualitas of Life Foundation, Integral Group of Real Estate Development, S. de R.L. de C.V., C200 Foundation Board, Global Spa and Wellness Summit, The Committee of 200, Women Presidents Organization (WPO), and Women Corporate Directors (WCD). She has a bachelor’s degree in design from the University CDI and also has degrees from the Schools of Psychology and Business at Stanford University in California.

Enrique Krauze Kleinbort is an alternate independent member of our Board of Directors and of the Boards of Directors of Banco Santander Mexico, Santander Consumo, Santander Hipotecario and Santander Vivienda.  He is director and founder of the publisher Editorial Clío. He has published numerous books over the last 30 years. He is the author of multiple documentaries and television series on Mexican history. In September 2007, he was honored by the Universidad Autónoma de Nuevo León with a doctorate honoris causa. In July 2006, he was honored with the Ezequiel Montes Ledesma Award by the government of Queretaro, Mexico. In April 2005, he became a member of the Colegio Nacional. In December 2003, the Spanish government awarded him the Gran Cruz de la Orden de Alfonso X, el Sabio. He obtained the Premio Comillas biography award in Spain in 1993. In 1990 he was inducted into the Mexican Academy of History. Mr. Krauze Kleinbort holds a degree in Industrial Engineering from UNAM and a doctorate degree in History from El Colegio de México.

Antonio Purón Mier y Terán is an alternate independent member of our Board of Directors and of the Boards of Directors of Banco Santander Mexico, Casa de Bolsa Santander, Santander Hipotecario, Santander Consumo and Santander Vivienda.  He is also a member of the Board of Directors of Zurich Santander Seguros México, S.A.  He served as an associate of the Centro de Investigación y Análisis Económico (Economic Research and Analysis Center, or CIDAC) and was a member of the Instituto de Fomento e Investigación Educativa (Institute for the Promotion of Educational Research, or IFIE) and of Metrópoli 2025. He advised public and private institutions with respect to strategy, transactions and organization in collaboration with the Centro de Investigación y Docencia Económicas (Center for Economic Research and Training, or CIDE) and with other specialists.  He served as a director-partner in the Mexican office of McKinsey & Company, Inc. for over 26 years.  He was professor of training courses to McKinsey’s partners and was in charge of the partners’ coaching program at a worldwide level. 

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He is a member of the Board of Directors of Nadro, S.A., and of the Patronato del Museo Nacional de Arte (the Patronage of the National Art Museum) of Banco Santander Parent and of the Patronato of the Universidad Iberoamericana.  Mr. Purón Mier y Terán holds a Master’s in Business Administration from Stanford University and a degree in Chemical Engineering from the Universidad Iberoamericana.  Before starting at McKinsey, he was a full-time professor at the Universidad Iberoamericana and worked at the Mexican Petroleum Institute, Ingeniería Panamericana and Polioles, S.A.

Executive Officers

Our executive officers are responsible for the management and representation of the Bank.  The following table presents the names and positions of our executive officers as of December 31, 2013.  The business address of our officers is Avenida Prolongación Paseo de la Reforma 500, Colonia Lomas de Santa Fe, 01219, México, Distrito Federal, Mexico.  Certain of our executive officers are also members of the Board of Directors and of the Boards of Directors of our subsidiaries.

Executive Officers	Position	Year of appointment to current position
Marcos Alejandro Martínez Gavica	Executive President and Chief Executive Officer	1997
Pedro José Moreno Cantalejo	Vice-president of Administration and Finance	2010
Francisco Javier Hidalgo Blázquez	Vice-president of Retail Banking	2014
Fernando Borja Mujica	General Legal Director	2014
Eduardo Fernández García-Travesí	General Counsel	2006
Emilio de Eusebio Saiz	Deputy General Director of Intervention and Control Management	2010
Estanislao de la Torre Álvarez	Deputy General Director of Operation Technology and Quality	2006
Roberto D’Empaire Muskus	Deputy General Director of Risks	2013
Juan Garrido Otaola	Deputy General Director of Wholesale Banking	2013
José Antonio Alonso Mendívil	Deputy General Director of Commercial Strategy	2011
Rodrigo Brand de Lara	Deputy General Director of Institutional Relationships and Communication	2011
Pablo Fernando Quesada Gómez	Deputy General Director of Business and Institutional Banking	2013
Jorge Alberto Alfaro Lara	Deputy General Director of Payment Systems and Credit Individual Banking	2005
Juan Ramón Jiménez Lorenzo	Executive Director of Internal Audit	2014
Alfonso Sánchez de Pazos	Deputy General Director of Private Banking	2013
Juan Pedro Oechsle Bernos	Deputy General Director of Individual Banking and SME	2011
Enrique Luis Mondragón Domínguez	Deputy General Director of Human Resources, Organization and Costs	2011

Set forth below are the biographies of our executive officers that are not members of our Board of Directors.

Emilio de Eusebio Saiz was appointed Deputy General Director of Intervention and Control Management at Grupo Financiero Santander Mexico since December 2010 after serving as the Director for Control of Corporate Management of Expenses in the Santander Group between March 2008 and November 2010. He worked in the General Intervention and Control Management division of the Santander Group from 1992 to 2008 and in the Financial Division from 1990 to 1992. He worked in Santander Group’s Human Resources Department from 1989 to 1990.  Mr. Eusebio Saiz holds a degree in Economics from the Universidad Complutense de Madrid and holds an MBA from the Instituto de Empresas de Madrid in Spain.

Estanislao de la Torre Álvarez has been our Deputy General Director of Technology, Operations and Quality since 2013.  He previously served as Deputy General Director of payment systems from 2006 to 2013, CEO of Altec México from 2004 to 2006 and Executive Director of Operations for Grupo Financiero Santander Mexico from 1998

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to 2004.  He holds a master’s degree in Public Accounting from the Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM).

Juan Garrido Otaola has served as Deputy Director of Global Wholesale Banking of Grupo Financiero Santander Mexico since 2013.  He previously served as Managing Director in Banco Santander Parent in European Fixed Income and Currency Sales from 2011 to 2012, Corporate Sales from 2009 to 2011, Iberia Retail Treasury Products from 2008 to 2009 and Spain Corporate Sales from 2005 to 2008.  Prior to joining the Santander Group he worked for Banco Portugues de Investimento from 2004 to 2005 and J.P. Morgan in Equity Sales Trading, futures and options, money market trading, interest rates and FX from 1996 to 2004.  He is a Business Administration graduate from Suffolk University, Boston, Massachusetts and has an MBA from ESEUNE, Bilbao, Spain.

Pablo Fernando Quesada Gómez was appointed Deputy General Director of Business and Institutional Banking for Grupo Financiero Santander México in 2013.  Beginning in 1993 he has held the following positions in the Santander Group: Regional Executive Director of Business and Institutional Banking from 2009 to 2013; Western Region Executive Director from 2008 to 2009; Executive Director of Business and Institutional Banking from 2007 to 2008; Regional Director from 1998 to 2006; Regional Director of Company Banking from 1997 to 1998; Regional Business Director from 1995 to 1997; and Director of Corporate Banking from 1993 to 1995. Mr. Quesada was also the Subdirector of Corporate Banking for Banco Mercantil Probusa (Mexico) from 1989 to 1992 and Corporate Bank Account Executive Banca Cremi (Mexico) from 1984 to 1988.  Pablo Fernando Quesada Gómez graduated with a degree in Business Administration from the Universidad del Valle of Atemajac, Guadalajara.

Jorge Alberto Alfaro Lara has served as Deputy General Director of Payment Systems since 1996.  Prior to joining the Santander Group, Mr. Alfaro Lara was the Executive Director of Banking Cards at Grupo Financiero Inverlat (México) from 1993 to 1996, and served on the boards of directors of Total System de México, S.A., Controladora Prosa, S.A. and Transunion de México, S.A.  Mr. Alfaro Lara began his career as Vice President of Operations for American Express in 1986.  He studied Civil Engineering at Texas A&M University and received his master’s degree in Administration from the Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM) in Mexico.

Alfonso Sánchez de Pazos was appointed the Deputy General Director of Private Banking in 2013. He previously served as Executive Director of Global Transactional Banking from 2008 to 2013 and Executive Director of Corporate Products from 2006 to 2008.  Before joining Grupo Financiero Santander Mexico, he was a Product Director at Banco Santander Parent from 2002 to 2005.  From 1998 to 2002, he was the Executive Director of International Banking, Factoring and Leasing for Banco Santander Mexico.  He worked at Banco Santander Parent as a Corporate Banking Account Executive from 1991 to 1997 and as a retail employee from 1987 to 1991. He has a law degree from the Universidad Autónoma de Madrid and has an MBA from Escuela Europea de Negocios and a Master of Internacional Commerce from Universidad Complutense de Madrid.

Juan Pedro Oechsle Bernos was appointed Deputy General Director of Individual and SME Banking in 2011.  He was previously a member of the Board of Directors of Seguros Santander.  Between 2010 and 2011, Mr. Oechsle was Chief Executive Officer of the Banco Santander Hong Kong Branch.  From 2003 to 2010, he had several managerial responsibilities in Banco Santander Mexico, including Executive Director for South and Southeastern regions, Executive Director of Business and Institutional Banking and Director of Corporate Banking.  Prior to this he was responsible for Structured Transactions in Santander Brazil and led the Cost Efficiency Department in Santander Puerto Rico.  Prior to joining Banco Santander, Mr. Oechsle worked for Citibank Corporate Banking and Banco Wiese in Peru.  Mr. Oechsle holds a degree in Business Administration with a major in Finance from the University of Texas at Austin and has completed graduate studies in Banking and Finance at Fundação Dom Cabral (Brazil).

Enrique Luis Mondragón Domínguez was appointed Deputy General Director of Human Resources, Organization and Costs in 2013.  He has also held the following positions at Banco Santander Mexico: Deputy General Director of Human Resources from 2011 to 2013; Executive Director of Human Resources from 2008 to 2011; Executive Regional Director (Southern Metropolis) from 2007 to 2008; and Executive Director of Corporate Resources from 2000 to 2007. Prior to that he held the following positions at Grupo Financiero Serfin: Executive Director of the General Division from 1997 to 2000; Executive Director of Planning and Projects from 1996 to 1997; Director of Strategic Planning and Marketing from 1993 to 1996; and Subdirector of Company Banking in 1993.  Before joining the Santander Group, Mr. Mondragón was the General Manager for Grupo Karat, S.A. de C.V. (Mexico), Account Executive in the Corporate Finance Division of Banamex from 1989 to 1990 and a Credit Analyst from 1986 to

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1989.  Mr. Mondragón Domínguez has a degree in Finance from ITAM, a master’s degree in Economics from the University of London (Queen Mary’s College) and a degree in Economics from ITAM.

Roberto D’Empaire Muskus was appointed Deputy General Director of Risk of Grupo Financiero Santander Mexico in 2014. He previously served as a Director in various areas of the Global Risk Unit of Banco Santander S.A. from 2006 to 2014. He serves as the Chairman of the Risk Committee for Retail Banking Business, the Board of Banco Santander de Negocios de Colombia and the Board of Banco Santander Panama. He was also Vice President of Banco Venezuela – Santander Group from 1998 to 2006. Mr. D’Empaire Muskus graduated with a degree in Economics from the Universidad Católica Andrés Bello in Venezuela and has an MBA from Cornell University.

Juan Ramón Jiménez Lorenzo has served as the Executive Director for Audits at Grupo Financiero Santander Mexico since 2014. He was responsible for the Internal Audit Division in Banco Santander Río, S.A. (Argentina) from 2012 to 2014 after being the Director of the Credit, Operational and Regulatory Internal Audit Division in Banco Santander México from 2005 to 2012. He previously worked in the Internal Audit Division of Banco Santander, S.A. and Banesto, S.A. from 1996 to 2005. He began his career in Europcar, S.A. as an assistant in the Financial Department from 1993 to 1994. He holds a degree in Business Administration from Universidad CEU San Pablo (Madrid) and a doctor’s degree in Public Taxation from Universidad Complutense de Madrid.

José Antonio Alonso Mendívil has served as Deputy General Director of Commercial Strategy for Banco Santander Mexico since 2011. From 2007 to 2011, he held several positions within the Santander Group, including Deputy General Director of Individual and SME Banking, Executive Regional Director for Retail, SME and Middle Market Corporates (Metropolitan area) and Executive Director of SME and Mortgage. Prior to joining the Santander Group, Mr. Alonso was Executive Regional Director (Western Division) at Banorte from 2006 to 2007, Executive Regional Director of Middle and Large Domestic Corporates (Metropolitan area) from 2002 to 2006, and held several other retail and business banking positions at Banorte, Banca Promex and Bancomer from 1986 to 2002.  Mr. Alonso is also a member of the Board of Directors of Zurich-Santander Seguros Mexico and Gestión Santander Fondos México. He has a Business Administration degree from Universidad Intercontinental in México and an MBA from Universidad de Monterrey.

B.  Compensation

The aggregate amount of compensation and benefits to our executive officers during fiscal year 2014 was Ps.339 million. For the same period, the independent directors who are members of our Board of Directors and the Audit Committee, Corporate Practices, Nominating and Compensation Committee, Comprehensive Risk Management Committee and Remuneration Committee received an aggregate compensation of Ps.11 million.  Our directors are not entitled to benefits upon termination of employment.

We are not required under Mexican law to disclose on an individual basis the compensation of our executive officers, directors or committee members, and we do not otherwise publicly disclose such information.

The aggregate compensation includes, for our executive officers, amounts generated under our bonus program.  The criteria for granting and paying bonus compensation vary depending on the department and the activities performed by such executive officer.

Our executive officers may participate in the same pension and medical expenses plan that is available to our employees, but at contribution percentages that are different from those of the rest of our employees.  The total post-employment benefits (including pension plan, medical expenses and life insurance policies) to our executive officers amounted to Ps.468 million as of December 31, 2014.

Banco Santander Parent paid a fixed fee in the aggregate amount of approximately Ps.123.4 million to 34 members of our management upon the closing of the 2012 global offering.

Share Compensation Plans

Performance Share Plan Payable in Shares of Banco Santander Parent

Banco Santander Parent’s shareholders have approved a multi-year incentive plan payable in shares of Banco Santander Parent for the benefit of the Santander Group’s executive officers, other members of management and any other executives.  This plan is approved by the shareholders of Banco Santander Parent and the beneficiaries are

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designated by the board of directors of Banco Santander Parent or, when so delegated by the board of directors, the executive committee of the board of directors of Banco Santander Parent.  The expenses associated with this plan are borne by us and are part of the overall compensation of the beneficiaries of the plan.  Approximately 6% of the participants in this plan are in Mexico.

Except for the first performance cycle, which lasted for two years (Plan I-09), the performance cycles last for approximately three years each.  The most recent cycle began on July 1, 2011 and expired on June 30, 2014. During 2014 and 2013, no awards under the plan were granted.

Each beneficiary who is employed with us for the duration of the plan cycle is entitled to a number of shares based on the achievement of certain performance targets by the Santander Group.  The targets for Plan I-11 were defined by comparing the Santander Group’s performance with that of a benchmark group of financial institutions with respect to two parameters: total shareholder return, or TSR, and growth in earnings per share, or EPs.  The targets for later plans compare the Santander Group’s performance with respect to TSR only.  The relevant performance targets are considered as of the third anniversary of the commencement of each cycle (with the exception of the first cycle, for which the second anniversary was considered).  Shares awarded in each cycle are delivered within seven months from the end of the cycle.

In January 2012, the Board of Directors of Banco Santander Parent approved the rules applicable to Plan I-14.

Certain material changes from previous plan cycles are the following:

· A certain group of executives is not eligible for this plan.

· Certain changes were made to the group of benchmark financial institutions and to the percentage of shares to be delivered in accordance with the Santander Group’s place in the TSR ranking.

· Certain additional requirements for the delivery of shares were added.  Shares will not be granted if the financial performance of the Santander Group is below certain standards, and employees will not be eligible to receive shares if they do not comply with internal regulations.

See note 42.b to our audited financial statements.

Compensation Plan Payable in Shares of Grupo Financiero Santander Mexico

On July 26, 2012, our Board of Directors delegated to the Remuneration Committee the authority to approve a new share compensation plan.  On September 24, 2012, our Remuneration Committee approved the new share compensation plan, which was ratified by our Board of Directors on October 18, 2012.  Pursuant to this share compensation plan, our eligible senior officers may receive a certain number of Series B shares of Grupo Financiero Santander Mexico, subject to certain conditions.  This plan will be paid out annually over the first three years following our public offering in September 2012, and payments will be linked to the performance of the stock price of the Series B shares of Grupo Financiero Santander Mexico in the Mexican stock market.

Under the plan terms, eligible senior officersobtain a cash payment in an amount as determined in accordance with the performance criteria set forth below that must be used to acquire Series B shares of Grupo Financiero Santander Mexico at a price of Ps.31.25 per Series B share. We refer to these payments for the purpose of acquiring Series B shares as incentive awards.

Approximately 300 of our senior officers are eligible for these incentive awards.  A variety of factors are considered in determining eligibility and the size of each eligible officer’s incentive award under this plan, including each person’s position within our corporate hierarchy, level of client engagement and relationship, ability to generate income and influence results, overall business impact and business-critical or strategic roles.  Additionally, management members identified through our talent mapping program as having high potential with a track record of outstanding performance are considered eligible.  Eligibility for the compensation plan payable in shares of Grupo Financiero Santander Mexico is determined independently of eligibility for the performance share plan payable in shares of Banco Santander Parent.

Pursuant to the compensation plan, our eligible senior officers have the right to receive the incentive awards based on the performance metrics described below in three equal parts at the end of each annual period (with each

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annual period considered independently).  Delivery of the incentive awards under the plan is subject at all times to the criteria below and to the senior officers’ continued employment with us.  For each eligible senior officer and with respect to each annual period, the following two performance criteria apply to one third of the aggregate incentive award:

(i)  Absolute revaluation of the Series B shares:

(a)  50% of the annual incentive award will be paid if the Series B shares listed on the Mexican Stock Exchange have appreciated by at least 15% compared to the prior year (beginning with the public offering price, which was Ps.31.25), as measured by the average stock price in the 30-day trading period ending the day before the applicable anniversary of the initial public offering date (September 26, 2012).

(b)  25% of the annual incentive award will be paid if the Series B shares listed on the Mexican Stock Exchange have appreciated by at least 10% compared to the prior year (beginning with the public offering price, which was Ps.31.25), as measured by the average stock price in the 30-day trading period ending the day before the applicable anniversary of the initial public offering date (September 26, 2012).

(c)  If the yearly appreciation of the Series B shares discussed above is between 10% and 15%, then the amount payable will be calculated based on a linear interpolation between 25% and 50% of the annual incentive award.

(ii)  Relative revaluation:

(a)  50% of the annual incentive award will be paid if the performance of the Series B shares is at least equal to the performance of the Mexican Stock Exchange Prices and Quotations Index (Índice de Precios y Cotizaciones, or IPC) during the relevant annual period.

The absolute revaluation and relative revaluation criteria are considered independently.

Grupo Financiero Santander Mexico, with the assistance of at least one independent expert, determines whether the performance criteria have been met in each period.

During September 2014, the performance criteria were 97% achieved. The second payment of the incentive award was proportionally granted to all eligible executives. The total aggregate cash payment amounted to Ps.130.9 million and was granted to 277 executives.

See notes 42.c and 6.e to our audited financial statements for information about this compensation plan and accounting for these incentive awards, respectively.

Corporate performance shares plan of Banco Santander Parent 2014

The shareholders’ meeting of Banco Santander Parent approved on March 28, 2014, a new share-based payment plan applicable only to a certain group of executives (known as the “identify staff”) in each country.

The plan is denominated “Corporate performance shares plan” and provides for compensation tied to the performance of the stock of Banco Santander Parent, as established in the Annual Shareholders’ Meeting of Banco Santander Parent. This multiannual performance plan is payable in shares of the Group with annual deliveries of shares to the beneficiaries during a period of three years beginning in July 2015.

The total number of shares for each beneficiary was established in early 2015 based on Banco Santander Parent’s performance (TSR) during 2014 against a peer group of financial institutions.

A percentage (0% to 100%) of one-third of the total number of vested shares will be paid at the end of each year (June 2016, 2017 and 2018) conditioned on Banco Santander Parent’s cumulative performance (TSR) (2014 and 2015 for the first tranche; 2014 - 2016 for the second tranche and 2014 – 2017 for the third tranche) against that of a peer group of financial institutions.

As of December 31, 2014, we have not recognized any expense with respect to this plan in our audited financial statements.

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C.  Board Practices

Our directors and alternate directors are elected for one-year terms at our annual ordinary general shareholders’ meeting and may be re-elected.  Pursuant to Mexican law, members of our Board of Directors continue to be members of the Board despite the expiration of their term until new members of the Board have been appointed and assumed office.  For each director, an alternate director may be appointed, provided that the alternate director corresponding to an independent director must also be independent.  All members of the Board of Directors, whether they are directors or alternate directors, are called to attend the meetings of the Board of Directors.  If both a director and an alternate director attend the same meeting, only the vote of the director shall be taken into account.

The period during which the members of our Board of Directors have served in their offices is shown in the table under Section A of this Item 6.  Each of our current members of the Board of Directors was elected at our general shareholders’ meeting on April 28, 2015 for a period of one year.

The members of our Board of Directors are not entitled to benefits upon termination of employment.

Committees

Pursuant to our bylaws, our Board of Directors has created the following committees which report to the Board of Directors:

· Audit Committee;

· Corporate Practices, Nominating and Compensation Committee;

· Comprehensive Risk Management Committee; and

· Remuneration Committee.

Audit Committee

The purpose, composition, authority and responsibilities of our Audit Committee (Comité de Auditoría), which reports to our Board of Directors, derive from Mexican law and the rules of the NYSE applicable to private issuers. The principal functions of our Audit Committee are to (i) evaluate the performance of our external auditors, including the review and approval of their annual audit, (ii) review and approve financial statements, and recommend their approval to the Board of Directors, (iii) review our internal controls and inform the Board of Directors of any irregularities, (iv) opine in respect of the financial information prepared by the chief executive officer, which includes opinions in respect of (a) whether accounting policies and criteria are adequate and sufficient, and (b) whether financial information fairly reflects our financial condition and results, and (v) ensure that related party transactions and transactions required to be approved by the Board of Directors or the shareholders are approved.

The Audit Committee may generally review our financial information and its preparation and for that purpose may undertake investigations, require opinions of third parties and require explanations and information from our officers.  The Audit Committee is responsible, subject to the approval of the Board of Directors, as required under the Mexican Securities Market Law, for the appointment, compensation, retention and oversight of the work (including resolution of any disagreements between management and the auditor regarding financial reporting) of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services, and each such registered public accounting firm must report directly to the Audit Committee.  In addition, the Audit Committee has established procedures for (i) the receipt, retention and treatment of complaints we may receive regarding accounting, internal accounting controls or auditing matters, and (ii) the confidential, anonymous submission by our employees of concerns regarding any questionable accounting or auditing matters.  The Audit Committee has the authority to engage independent counsel and other advisers, as it determines necessary to carry out its duties.  We are required to provide for appropriate funding, as determined by the Audit Committee, for payment of (i) compensation to any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services, (ii) compensation to any advisers employed by the Audit Committee, and (iii) ordinary administrative expenses of the Audit Committee that are necessary or appropriate in carrying out is duties.

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Pursuant to Mexican law, the members of the Audit Committee must be appointed for their professional qualifications, expertise and reputation.  At least one of the members must have broad experience in the financial, auditing and/or internal control sectors.  The executives or employees of Grupo Financiero Santander Mexico cannot be members of the Audit Committee.  The Audit Committee must have at least three members and no more than five members of the Board of Directors, all of whom must be independent, as determined in accordance with Article 37 of the Mexican Financial Groups Law, Article 25 of the Mexican Securities Market Law and our bylaws.

Pursuant to Mexican law and our bylaws, the President of the Audit Committee is elected and removed at the general shareholders’ meeting.  Such President cannot be the chairman of the Board of Directors.  The rest of the members of the Audit Committee are elected and/or removed by the Board of Directors.  The Audit Committee members are appointed indefinitely until they are removed or resign.

The current members of our Audit Committee are:

Name	Position	Status
Fernando Ruíz Sahagún	President of the Audit Committee and Independent Director*	Independent*
José Eduardo Carredano Fernández	Independent Director*	Independent*
Antonio Purón Mier y Terán	Independent Director*	Independent*

* As determined in accordance with Article 37 of the Mexican Financial Groups Law, Article 25 of the Mexican Securities Market Law, our bylaws and the NYSE rules applicable to foreign private issuers.

Certain invitees (invitados habituales) also attend the meetings of our Audit Committee on a regular basis.  Invitees may participate in meetings without voting rights, and the President of the Audit Committee has discretion to ask them to leave.  The current regular invitees of our Audit Committee are:

Name	Position
Juan Ramón Jimenez Lorenzo	Executive General Director of Internal Audit
Guillermo Roa Luvianos	External Auditor
Ricardo García Chagoyan	External Auditor

The Secretary of the Audit Committee is Alfredo Acevedo Rivas and the Assistant Secretary of our Audit Committee is Fernando Borja Mujica.

All of the directors on our Audit Committee are considered independent, as determined in accordance with Article 37 of the Mexican Financial Groups Law and Article 25 of the Mexican Securities Market Law.  Likewise, all of the members of our Audit Committee are considered independent in accordance with Rule 10A-3 under the Exchange Act, in compliance with the rules of the NYSE applicable to foreign private issuers.  Our Board of Directors has determined that Fernando Ruiz Sahagún is also an “Audit Committee Financial Expert” as defined by the SEC.

Corporate Practices, Nominating and Compensation Committee

The primary functions of our Corporate Practices, Nominating and Compensation Committee (Comité de Prácticas Societarias, Nominaciones y Compensaciones) are to call shareholder meetings, to aid the Board of Directors in the preparation of reports to be presented at shareholder meetings and to propose and provide advice to the Board of Directors on the following subjects:

· policies and guidelines for the use or enjoyment of our property;

· policies for loans and other transactions with related parties;

· policies for exempting related party transactions from authorization;

· policymaking relating to disclosure;

· transactions with employees;

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· unusual or non-recurring transactions;

· appointment, dismissal and compensation of the CEO;

· appointment and compensation of executive officers;

· policies that set limits on the authority of the CEO and executive officers;

· organization of human resources;

· waivers to directors, executive officers or other persons to take advantage of our business opportunities for themselves or on behalf of third parties;

· policies to promote activities in compliance with the relevant legal framework and access to adequate legal defense;

· proposed compensation to directors and members of committees;

· monitoring compliance of established corporate practices and compliance with all applicable laws or regulations;

· presenting a report to the Board of Directors, based on reports of the activities of the CEO and the internal committees; and

· proposing appropriate legal actions against our officers who do not comply with the principles of loyalty and diligence.

The Corporate Practices, Nominating and Compensation Committee may solicit the opinion of independent experts as it deems appropriate for the proper performance of its functions.

The current members of our Corporate Practices, Nominating and Compensation Committee are:

Members	Position
Antonio Purón Mier y Terán	Member (Independent Director) and President
Fernando Ruiz Sahagún	Member (Independent Director)
José Eduardo Carredano Fernández	Member (Independent Director)
Alberto Torrado Martínez	Member (Independent Director)

The Secretary of the Corporate Practices Committee is Alfredo Acevedo Rivas and the Assistant Secretary of the Corporate Practices, Nominating and Compensation Committee is Fernando Borja Mujica.

The Corporate Practices, Nominating and Compensation Committee must include at least three members of the Board of Directors, which may be members or alternate members, all of whom must be independent, as determined in accordance with Article 37 of the Mexican Financial Groups Law, Article 25 of the Mexican Securities Market Law and our bylaws.  Pursuant to Mexican law and our bylaws, the President of the Corporate Practices Committee is elected and removed by the general shareholders’ meeting.  Such President cannot be the Chairman of the Board of Directors and shall be elected on the basis of his expertise, competence and professional reputation.  The Corporate Practices Committee members are appointed indefinitely until they are removed or resign.

Comprehensive Risk Management Committee

Our Comprehensive Risk Management Committee (Comité de Administración Integral de Riesgos) reports to the Board of Directors as required by local law.  This committee proposes objectives, policies and procedures for the management of risk as well as risk exposure limits to the Board of Directors.  In addition, our Comprehensive Risk Management Committee approves the methodologies that we use to measure the various types of risks to which we are subject, as well as the models, parameters and scenarios for risk measurement, and monitors market, liquidity, credit, counterparty, legal and operational risks.  See “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Organizational Structure” for additional information about the committee’s activities.

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The current members of our Comprehensive Risk Management Committee are:

Members	Position
Guillermo Güemez García	Independent Director and President of the Comprehensive Risk Management Committee
Marcos Alejandro Martínez Gavica	Executive President, Chief Executive Officer and Director
Alberto Torrado Martínez	Independent Director
Joaquín Vargas Guajardo	Independent Director
Francisco Javier Hidalgo Blázquez	Vice President of Retail Banking
Pedro José Moreno Cantalejo	Vice President of Administration and Finance
Roberto D’Empaire Muskus	Deputy General Director of Credit
Juan Ramón Jimenez Lorenzo*	Executive General Director of Internal Audit
Juan Garrido Otaola	Deputy General Director of Global Banking & Markets Mexico

* No voting rights.

Certain invitees (invitados habituales) also attend the meetings of our Comprehensive Risk Management Committee on a regular basis.  Invitees may participate in meetings at the discretion of the President and without voting rights.  The current regular invitees of our Comprehensive Risk Management Committee are: Estanislao de la Torre Alvarez, Guillermo Alfonso Maass Moreno, Fernando Borja Mujica and Emilio de Eusebio Saiz.

Remuneration Committee

The purpose, composition, authority and responsibilities of our Remuneration Committee (Comité de Remuneraciones), which reports to our Board of Directors, have been established in a charter approved by our Board of Directors in accordance with Mexican law.

The Remuneration Committee’s primary purpose is to assist our Board of Directors in developing norms and policies relating to the administration and evaluation of the compensation plans, that together form our compensation system and to promulgate compensation plan criteria and policies to some of our employees.  The Remuneration Committee prepares biannual reports about the administration of our compensation plans and informs the CNBV about modifications to our compensation system.

The Remuneration Committee is responsible for implementing and maintaining our compensation system and informs the Board of Directors twice a year regarding the operation of the compensation system.  Additionally, the Remuneration Committee proposes compensation policies and procedures, recommends employees or personnel for inclusion in the compensation system and brings special cases and circumstances to the attention of the Board of Directors for its approval.

Our Remuneration Committee charter provides that:

· It must include at least two members of the Board of Directors, one of whom must be independent, who shall be the one presiding.

· At least one member must have knowledge and experience in risk management or internal controls.

· The person responsible for the Comprehensive Risk Management Unit shall be a member.

· A representative from the human resources division shall be a member.

· A representative from the financial planning or budget division shall be a member.

· The internal auditor may participate without voting rights.

The Remuneration Committee must meet every quarter, and at least a majority of its members must be present; provided, that an independent director shall at all times be present.  The meetings and resolutions adopted at Remuneration Committee meetings must be documented in minutes signed by all of the members who are present.

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The current members of our Remuneration Committee are:

Name	Position
Antonio Purón Mier y Terán	Independent Director
Fernando Ruiz Sahagún	Independent Director
José Eduardo Carredano Fernández	Independent Director
Marcos Alejandro Martínez Gavica	Executive President, Chief Executive Officer and Director
Roberto D’Empaire Muskus	Deputy General Director of Credit
Enrique Mondragón Domínguez	Deputy General Director of Human Resources
Emilio de Eusebio Saiz	Deputy General Director of Intervention and Control Management
Juan Ramón Jimenez Lorenzo	Executive General Director of Internal Audit
Fernando Borja Mujica	General Legal Director

The Secretary of the Remuneration Committee is Alfredo Acevedo Rivas.

D.  Employees

As of December 31, 2014, on a consolidated basis we had 16,427 employees, an increase of 15.2% since December 31, 2013.  We classify our employees as executives, professionals and administrative employees.  Executives include the top management. Professionals are middle-management personnel.  The remainder of the employees are administrative employees. We are in the final stages of our intended plan to add 200 new branches to our branch network between the fourth quarter of 2012 and the first half of 2015. We opened 15 branches during the fourth quarter of 2012, 75 branches during 2013 and 95 branches during 2014. We expect to open an additional 15 branches during 2015.

We have traditionally enjoyed good relations with our employees and their union.  Of the total number of our employees, 3,609, or 21.9%, were members of the Banco Santander Mexico labor union, which is affiliated with the National Federation of Bank Unions (Federación Nacional de Sindicatos Bancarios), as of December 31, 2014.  We negotiate salaries with our union on an annual basis and benefits every two years, as required under Mexican law.  In 2013, the collective bargaining agreement relating to both salaries and benefits was renewed, and in 2014 the collective bargaining agreement relating to salaries was renewed. Our collective bargaining agreement applies only to our unionized employees.  While terms of employment are generally the same for unionized and nonunionized employees, benefits may differ.

The following chart summarizes the number and type of our employees as of December 31, 2012, 2013 and 2014.

	As of December 31,
Employees	2012		2013		2014
Executives		107		110		113
Professionals		5,883		6,276		6,669
Administrative		7,395		7,874		9,645
Total		13,385		14,260		16,427

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E.  Share Ownership

The following table provides the names of our directors and executive officers who beneficially owned shares as of the date of this annual report.

Shareholder	Number of Series B Shares Owned	Percentage of Outstanding Series B Shares	Percentage of Total Share Capital
Carlos Gómez y Gómez	—	—	—
Marcos Alejandro Martínez Gavica	423,270	(1)	(1)
Carlos Fernandéz González	101,251	(1)	(1)
Rodrigo Brand de Lara	67,623	(1)	(1)
Francisco Javier Hidalgo Blázquez	195,995	(1)	(1)
Pedro José Moreno Cantalejo	302,556	(1)	(1)
Eduardo Fernández García-Travesí	40,129	(1)	(1)
Guillermo Güemez García	—	—	—
Joaquín Vargas Guajardo	—	—	—
Juan Ignacio Gallardo Thurlow	—	—	—
Vittorio Corbo Lioi	—	—	—
José Eduardo Carredano Fernández	—	—	—
Jesús Federico Reyes Heroles González Garza	—	(1)	(1)
Fernando Solana Morales	10,162	(1)	(1)
Fernando Ruíz Sahagún	—	—	—
Alberto Torrado Martínez	—	—	—
Gina Lorenza Diez Barroso Azcárraga	—	—	—
Enrique Krauze Kleinbort	—	—	—
Antonio Purón Mier y Terán	—	—	—
Rodrigo Echenique Gordillo	—	—	—
José Doncel Razola	—	—	—
Emilio de Eusebio Saiz	66,790	(1)	(1)
Estanislao de la Torre Álvarez	133,705	(1)	(1)
Juan Ramón Jimenez Lorenzo	16,826	(1)	(1)
Juan Garrido Otaola	207,568	(1)	(1)
Roberto D´Empaire Muskus	42,911	(1)	(1)
Juan Pedro Oechsle Bernos	110,054	(1)	(1)
Jorge Alberto Alfaro Lara	146,920	(1)	(1)
Pablo Fernando Quesada Gómez	88,026	(1)	(1)
José Antonio Alonso Mendívil	86,149	(1)	(1)
Enrique Luis Mondragón Domínguez	73,778	(1)	(1)
Alfonso Sánchez de Pazos Gómez	30,683	(1)	(1)
Fernando Borja Mujica	53,959	(1)	(1)

(1)  Beneficially owns less than 1% of each of our outstanding Series B shares and our total outstanding share capital.

Shares held by members of our Board of Directors and our executive officers do not have voting rights different from shares held by our other shareholders.

For a description of our equity compensation plan, see “Item 6. Directors, Senior Management and Employees––B. Compensation––Share Compensation Plans––Compensation Plan Payable in Shares of Grupo Financiero Santander Mexico.”

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ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.  Major Shareholders

We are a subsidiary of Banco Santander S.A., or Banco Santander Parent.  The Santander Group, through its stand-alone subsidiaries, was one of the largest foreign bank groups in Latin America in terms of assets as of December 31, 2014, based on publicly available annual reports. The Santander Group had a gross margin of €42,612 million, core capital (BIS II) of 11.8% and a market capitalization of €88,041 million as of December 31, 2014, and net income attributable to shareholders of €5,816 million in 2014.  As of December 31, 2014, the Santander Group had 12,951 branches and a presence in 10 principal markets.  As a result of its voting control over us, the Santander Group is in a position to cause the election of a majority of the members of our management and to determine substantially all matters to be decided by a vote of shareholders.

As of the date of this annual report on Form 20-F, Banco Santander Parent directly or indirectly owns approximately 74.97% of our total capital stock. Our relationship with the Santander Group has provided us with access to the expertise of the Santander Group in areas such as technology, product innovation, human resources and internal audit control systems.  In addition, the Santander Group requires us to follow its banking policies, procedures and standards, especially with respect to credit approval and risk management.  Such policies and expertise have been successfully used by the Santander Group in the Spanish and other banking markets, and we believe that such policies and expertise have had and will continue to have a beneficial effect upon our operations. For information about our relationship with Banco Santander Parent, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.”

Banco Santander Parent is our controlling shareholder and, as a result, has the ability to determine the outcome of substantially all actions requiring shareholder approval, as well as to control our management, strategy and principal policies.  Santusa Holding, S.L. and Santander Overseas Bank Inc. are affiliates of Banco Santander Parent and act in coordinated manner with Banco Santander Parent with respect to their shareholdings and the voting of their shares in our company.  We do not have a commercial relationship with Santusa Holding, S.L. because it is a holding company whose principal activity comprises holding shares of other companies.  Santusa Holding S.L. is wholly owned by Banco Santander Parent and Santander Holding Internacional S.A. (a holding company subsidiary of Banco Santander Parent).

The following table presents the beneficial ownership of our capital stock as of the date of this annual report on Form 20-F.

Name	Series B Shares		Percentage of Outstanding Series B Shares			Series F Shares		Percentage of Outstanding Series F Shares			Percentage of Total Share Capital
Banco Santander Parent (1)		—		—			3,464,309,145		100.00	%		51.05	%
Santusa Holding, S.L. (2)		1,609,062,685		48.44	%		—		—			23.71	%
Santander Overseas Bank Inc. (3)		14,428,432		0.43	%		—		—			0.21	%
Carmignac Gestion (4)		217,249,670		6.54	%		—		—			3.20	%
Minority shareholders		1,481,344,981		44.59	%		—		—			21.83	%
Total		3,322,085,768		100.00	%		3,464,309,145		100.00	%		100.00	%

(1) The address of Banco Santander Parent is Paseo de Pereda 9-12, Santander, Spain.  Banco Santander Parent, directly and indirectly through its subsidiaries, is the beneficial owner of 74.97% of our total capital stock.

(2) Banco Santander Parent and Santander Holding Internacional, S.A. (a holding company subsidiary of Banco Santander Parent) own 69.76% and 30.24% of the shares of Santusa Holding, S.L., respectively.  The address of Santusa Holding, S.L. is Avenida de Cantabria s/n (Ciudad Grupo Santander), Boadilla del Monte, 28660 Madrid, Spain.

(3) Holbah II Limited (Bahamas) (a company that is indirectly and wholly controlled by Banco Santander Parent through Parasant, S.A.) owns 100% of the shares of Santander Overseas Bank Inc. The address of Santander Overseas Bank Inc. is 207 Ponce de León, San Juan, Puerto Rico 00917-1818.

(4) Carmignac Gestion filed with the SEC a Schedule 13G dated February 9, 2015. Based solely on the disclosure set forth in such Schedule 13G, Carmignac Gestion has sole voting power with respect to 217,249,670 series B shares and sole dispositive power with respect to 217,249,670 series B shares. The address of Carmignac Gestion is 24 Place Vendome, Paris, France 75001.

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According to our depository bank, as of December 31, 2014, we had one holderregistered in Mexico in addition to JPMorgan Chase Bank, N.A. as depositary of the ADRs evidencing ADSs. As of December 31, 2014, there were a total of 151 ADR holders of record and 211,399,880 ADRs outstanding, representing 1,056,999,400 Series B shares or 31.82% of outstanding Series B shares. Since some of these ADRs are held by nominees, the number of record holders may not be representative of the number of beneficial holders.

Significant Changes in Percentage Ownership of Principal Shareholders

In October 2012, we completed an SEC-registered initial public offering in the United States and in other countries outside of the United States and Mexico of 273,913,200 ADSs, each representing five Series B shares, including 35,681,039 ADSs sold to the international underwriters pursuant to their option to purchase additional ADSs, and a public offering in Mexico of 319,977,408 Series B shares, including 41,736,184 Series B shares sold to the Mexican underwriters pursuant to their option to purchase additional shares. Our ADSs began to trade on the New York Stock Exchange, or NYSE, under the symbol “BSMX” on September 26, 2012, and the Series B shares continued to trade on the Mexican Stock Exchange (Bolsa Mexicana de Valores, S.A.B. de C.V.) under the symbol “SANMEX.” We refer to the public offering in the United States and in other countries outside of the United States and Mexico as the 2012 international offering, and we refer to the public offering in Mexico as the 2012 Mexican offering. We refer to the 2012 international offering and the 2012 Mexican offering together as the 2012 global offering.  The selling shareholders, Banco Santander, S.A. and Santusa Holding, S.L., received all of the proceeds from the 2012 global offering.

Prior to the 2012 global offering, Banco Santander Parent owned 1,608,355,340 Series B shares, or 48.41% of our then-outstanding Series B shares. Banco Santander Parent sold 1,608,355,340 Series B shares (including in the form of ADSs) in the 2012 global offering, including Series B shares (including in the form of ADSs) sold to the underwriters pursuant to their option to purchase additional shares. Immediately after the 2012 global offering, Banco Santander Parent owned 0% of our then-outstanding Series B shares but continued to be our controlling shareholder due to its beneficial ownership of 3,464,309,145 Series F shares.

Prior to the 2012 global offering, Santusa Holding, S.L. owned 1,690,250,753 Series B shares, or 50.88% of our then-outstanding Series B shares. Santusa Holding, S.L. sold 81,188,068 Series B shares (including in the form of ADSs) to the underwriters pursuant to their option to purchase additional shares in the 2012 global offering. Immediately after the 2012 global offering, Santusa Holding, S.L. owned 48.44% of our then-outstanding Series B shares and 23.71% of our total share capital.

Voting Rights of Principal Shareholders

Our principal shareholders do not have voting rights distinct from those of our other shareholders.  See “Item 10. Additional Information—B. Memorandum and Articles of Association—Voting Rights.”

B.  Related Party Transactions

Loans to Related Parties

Articles 73, 73 Bis and 73 Bis 1 of the Mexican Banking Law (Ley de Instituciones de Crédito) regulates and limits loans and other transactions pursuant to which related parties may be liable to a bank.  Transactions covered under the Articles are deposits, any type of loans, restructurings and amendments to such loans, net derivatives positions and investments in securities other than equity securities.  For purposes of these provisions, the term related parties refers to (1) holders, either directly or indirectly, of 2% or more of our or any of our subsidiaries’ shares; (2) our or any of our subsidiaries’ principal and alternate Board members; (3) relatives of a Board member or of any person specified in (1) and (2) above; (4) any person not our officer or employee who, nevertheless, is empowered to contractually bind us; (5) any corporation (or its directors or executive employees) in which we or any of our subsidiaries owns, directly or indirectly, 10% or more of its equity stock; (6) any corporation who has a director or officer in common with us or any of our subsidiaries; or (7) any corporation in which our external auditors, our employees, holders of 2% or more of our shares, or we or any of our directors or officers holds 10% or more of the outstanding capital stock.  The majority of our Board of Directors must approve such loans.  Before approval, however, the loan must undergo our customary review procedures for loans, which will vary depending on the nature and amount of the loan, except that such loans must always be reviewed and recommended by the highest loan review committee at the management level, and must be recommended by a special committee of directors responsible for reviewing our largest loans and all loans falling within the scope of Articles 73, 73 Bis and 73 Bis 1

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of the Mexican Banking Law.  In addition, certain filings must be made with the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, or CNBV) with respect to such loans.  Loans to individuals in amounts less than the greater of (1) two million UDIs (Unidades de inversión, a peso-equivalent unit of account indexed for Mexican inflation) or (2) 1% of a bank’s Tier 1 net capital are exempt from such provisions.  Loans to related parties may not exceed 35% of a bank’s Tier 1 Capital.  The CNBV may, upon request, grant exemptions from these provisions.  In our case, all loans to individuals who are related parties, regardless of the amount, are approved by our Board of Directors.

The Mexican Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público, or SHCP) has adopted rules which exclude from the category of loans to related parties loans granted to the Mexican government, provided that the recipient does not make a loan to a related party, and loans to our directors or officers if they fall within the minimum thresholds set forth above.  The SHCP rules also exclude from the category of loans to related parties loans to companies that provide ancillary services to us, meaning our affiliates that provide the necessary auxiliary services we need in order to carry out our operations, such as administrative, accounting, finance, legal, IT and other services, provided that such companies do not make a loan to a related party.  These three categories of loans are not considered for purposes of determining the 35% of Tier 1 Capital limit of our loan portfolio that may consist of loans to related parties, and do not require the prior approval of our Board of Directors.

As of December 31, 2014, our loans granted to related parties per Article 73, 73 Bis and 73 Bis 1 of the Mexican Banking Law totaled Ps.73,238 million (U.S.$4,968 million), which included loans granted to Banco Santander Mexico’s subsidiaries Santander Consumo and Santander Hipotecario (formerly GE Consumo México S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad no Regulada) and Santander Vivienda for Ps.33,689 million (U.S.$2,285 million), Ps.27,263 million (U.S.$1,849 million) and Ps 2,234 million (U.S.$152 million), respectively, which were eliminated from the balance sheet on consolidation.  These loans with related parties were approved by the Board of Directors.  According to Mexican Banking Law, loans with subsidiaries that form part of our financial group are not considered to be related party transactions and therefore do not count against the 35% of Tier 1 Capital limit. Pursuant to the methodology to classify the loan portfolio set forth under the loan classification and rating rules, 88.81% of the loans granted to related parties have a credit quality of A1, 0.04% have a credit quality of B1 and 0.15% have a credit quality of C1.  Our loans to related parties are made on terms and conditions comparable to other loans of like quality and risk.

Additionally, pursuant to the Mexican Banking Law, no loans may be made to any bank officers or employees, except in connection with certain employment benefits.  As permitted by the Mexican Banking Law, we currently provide loans to our employees at favorable rates.

Loans to Our Directors and Executive Officers

Banco Santander Mexico has granted loans to our directors (excluding directors who are also executive officers) of Ps.0.4 million, Ps.0.3 million and Ps.0.6 million as of December 31, 2012, December 31, 2013 and December 31, 2014, respectively.  None of these loans is disclosed as nonaccrual, past due, restructured or potential problems in the “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information” section.  All loans were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons not related to Banco Santander Mexico, and did not involve more than the normal risk of collectability or present other unfavorable features.

In addition, Banco Santander Mexico has granted loans to our executive officers (including directors who are also executive officers) of Ps.85.2 million, Ps.84 million and Ps.69.7 million as of December 31, 2012, December 31, 2013 and December 31, 2014, respectively.  None of these loans is disclosed as nonaccrual, past due, restructured or potential problems in the “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information” section.  As of December 31, 2012, December 31, 2013 and December 31, 2014, 98%, 90% and 87% of the total amount of these loans, respectively, were made pursuant to an employee benefit plan that makes standardized loans available to all of our employees without preferential terms or conditions for any of the executive officers, as permitted by the Mexican Banking Law.  The rest of these loans were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons not related to Banco Santander Mexico, and did not involve more than the normal risk of collectability or present other unfavorable features.

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Under applicable Mexican privacy laws, Banco Santander Mexico is not permitted to disclose the identity of its loan recipients. The following table sets forth unnamed members of our senior management who are the recipients of loans pursuant to an employee benefit plan granted by Banco Santander Mexico to which Instruction 2 of Item 7.B.2. of Form 20-F does not apply.  The recipients of such loans have not waived the application of these privacy laws.

The material terms that differentiate these loans to unnamed members of our senior management listed below from those made in the ordinary course of business in transactions with unrelated persons are the following:

· The applicable interest rate for each of these loans is the 28-day Mexican benchmark interbank money market rate (Tasa de Interés Interbancaria de Equilibrio, or TIIE) capped at 8%, which is less than the interest rate that would be charged to unrelated persons. The average TIIE rate from January to December 2014 was3.5%.

· We do not charge any commissions for these loans, whereas we would normally charge commissions on loans made to unrelated persons.

	As of December 31, 2014
Nature of loan and transaction in which incurred	Mortgage (1)				Credit lines (2)				Total amount outstanding
	Largest amount outstanding (3)		Amount outstanding		Largest amount outstanding (3)		Amount outstanding
	(Millions of pesos)
Officer 1	Ps.	43.1	Ps.	28.0	Ps.	—	Ps.	—	Ps.	28.0
Officer 2		5.3		3.7		—		—		3.7
Officer 3		5.0		2.0		—		—		2.0
Officer 4		7.0		4.0		0.6		0.2		4.2
Officer 5		8.5		4.5		1.0		0.9		5.4
Officer 6		5.4		5.2		—		—		5.2
Officer 7		5.0		4.0		—		—		4.0
Officer 8		6.0		5.7		1.0		0.2		5.9
Officer 9		2.5		2.4		—		—		2.4
Total	Ps.	87.8	Ps.	59.5	Ps.	2.6	Ps.	1.3	Ps.	60.8

(1) Under our employee benefit plan, each officer can be granted up to a maximum of 3 mortgage loans. The amount outstanding column includes all the loans outstanding as of December 31, 2014.

(2) Under our employee benefit plan, each officer can be granted up to a maximum of 2 credit lines (these are consumer loans without guarantees). The amount outstanding column includes all the loans outstanding as of December 31, 2014.

(3) The largest outstanding amount is equal to the aggregate initial amounts of all loans.

Affiliate Transactions

From time to time, we enter into agreements, including service agreements, with Banco Santander Parent, our subsidiaries and affiliates such as Santander Consumo, Casa de Bolsa Santander, Gestión Santander (entity sold in December 2013), Banco Santander Mexico, Isban México, S.A. de C.V., Gesban México Servicios Administrativos Globales, S.A. de C.V., Santander Global Property, S.A. de C.V., Santander Global Facilities, S.A. de C.V., Geoban, S.A. and Servicios de Cobranza, Recuperación y Seguimiento, S.A. de C.V. We have entered into service agreements pursuant to which we render services, such as administrative, accounting, finance, treasury, legal services and others.  We believe that these transactions with our affiliates have been made on terms that are not less favorable to us than those that could be obtained from unrelated third parties.

We have agreements with the following service providers, which are also affiliates of the Santander Group:

· Ingeniería de Software Bancario, S.L., or ISBAN, for the provision of IT services such as project development, quality plans, remediation plans, maintenance of application software, functional support of various applications and consulting.

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· Produban Servicios Informáticos Generales, S.L., or Produban, for the provision of IT services such as data processing, administration of IT services, project development, consulting, software quality management and project development support.

· Gesban Mexico Servicios Administrativos Globales, S.A. de C.V., or Gesban, for the provision of accounting services, fiscal management, budget control, support services and inspections and audits.

· Geoban, S.A., or Geoban, for the provision of operational and back-office retail services, such as the execution of management tasks related to fundraising and loan products.

· Santander Global Facilities, S.A. de C.V., or SGF, for the leasing of space and positions for our contact center operators.

The following table sets forth our assets and liabilities held in connection with related parties as of December 31, 2012, 2013 and 2014:

As of

December 31, 2012

December 31, 2013

December 31, 2014

Parent

Other Related Party

Parent

Other Related Party

Parent

Other Related Party

(Millions of pesos)

ASSETS

FINANCIAL ASSETS HELD FOR TRADING

Loans and advances to credit institutions

Banco Santander, S.A.

Ps.

4,367

––

Ps.

3,380

––

Ps.

2,341

––

Santander Benelux, S.A., N.V.

––

Ps.

3,171

––

––

––

––

Abbey National Treasury Services plc

––

47

––

––

––

––

Loans and advances to customers(1)

Produban Servicios Informáticos Generales, S.L.

––

861

––

Ps.

1,086

––

Ps.

1,413

Santander Capital Structuring, S.A. de C.V.

––

1,217

––

1,751

––

1,245

Promociones y Servicios Polanco, S.A. de C.V.

––

210

––

336

––

––

Grupo Konectanet México, S.A. de C.V.

—

—

—

15

—

15

Banco Santander Rio, S.A.

—

—

—

—

—

23

Trading derivatives

Banco Santander, S.A.

8,719

—

12,095

—

27,256

—

Santander Benelux, S.A., N.V.

––

9,921

—

7,822

—

—

Abbey National Treasury Services plc

––

295

––

70

––

828

Santander Investment Limited

––

2

––

––

––

––

Other

––

––

––

12

––

5

OTHER ASSETS

Banco Santander, S.A.

––

––

86

––

1,266

––

Zurich Santander Seguros México, S.A.

––

629

––

761

––

747

Gestión Santander, S.A. de C.V.

––

––

––

––

––

122

Other

—

67

—

60

—

88

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	As of
	December 31, 2012				December 31, 2013				December 31, 2014
	Parent		Other Related Party		Parent		Other Related Party		Parent		Other Related Party
	(Millions of pesos)
LIABILITIES AND EQUITY
FINANCIAL LIABILITIES HELD FOR TRADING
Trading derivatives
Banco Santander, S.A.		11,486		—		12,599		––		28,340		––
Santander Benelux, S.A., N.V.		––		13,040		—		8,291		—		—
Abbey National Treasury Services plc		––		345		—		42		—		426
Other		—		—		—		12		—		21
OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
Deposits from credit institutions -Reverse repurchase agreements
Banco Santander, S.A.		—		—		—		—		1,525		—
FINANCIAL LIABILITIES AT AMORTIZED COST
Deposits from credit institutions
Banco Santander, S.A.		186		—		3,298		––		249		––
Banco Santander International		—		—		—		68		—		347
Zurich Santander Seguros México, S.A.		––		––		—		—		—		425
Abbey National Treasury Services plc.		––		––		—		—		—		419
Other		—		—		—		20		—		77
Customer deposits
Isban México, S.A. de C.V.		––		491		—		676		—		837
Produban Servicios Informáticos Generales, S.L.		––		145		—		348		—		119
Santander Capital Structuring		––		––		—		114		—		117
Promociones y Servicios Santiago, S.A. de C.V.		––		––		––		––		––		1,790
Promociones y Servicios Monterrey, S.A. de C.V.		––		––		––		––		––		134
Other		––		136		––		154		––		82
Marketable Debt Securities
Banco Santander, S.A.		74		—		774		—		727		—
Zurich Santander Seguros México, S.A.		––		1,033		—		—		—		—
Subordinated debentures
Banco Santander, S.A.		––		––		12,766		—		14,630		—
Other financial liabilities
Banco Santander, S.A.		494		––		10		—		709		—
OTHER LIABILITIES
Banco Santander, S.A.		55		––		176		—		1,387		—
Other		—		22		—		45		—		38

(1) Does not include loans to our directors or executive officers, which are described separately in “—Loans to Related Parties—Loans to Our Directors and Executive Officers” above.

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The following table set forth our income and expense from related parties for the years ended December 31, 2012, 2013 and 2014:

	For the year ended December 31,
	2012						2013					2014
	Parent			Other Related Party			Parent			Other Related Party		Parent			Other Related Party
	(Millions of pesos)
INCOME STATEMENT
Interest and similar income
Banco Santander, S.A.	Ps.	7			––		Ps.	4		Ps.	––	Ps.	4		Ps.	––
Produban Servicios Informáticos Generales, S.L.		––			28			—			35		—			38
Santander Capital Structuring, S.A. de C.V.		—			46			—			79		—			83
Other		––			6			––			3		––			1
Interest expenses and similar charges
Banco Santander, S.A.		—			––			24			—		832			—
Isban México, S.A. de C.V.		––			27			—			17		—			16
Zurich Santander Seguros México, S.A.		––			11			—			—		—			—
Other		––			9			—			14		—			9
Fee and commission income
Zurich Santander Seguros México, S.A.		––			2,973			—			3,372		—			3,739
Santander Capital Structuring, S.A. de C.V.		––			30			—			30		—			38
Santander Investment
Securities Inc		—			—			—			10		—			8
Gestión Santander, S.A. de C.V.		—			—			—			1,310		—			1,353
Other		––			14			––			6		––			––
Gains/(losses) on financial assets and liabilities (net)
Financial assets held for trading
Banco Santander, S.A.		(3,964	)		—			(482	)		—		(1,641	)		—
Santander Benelux, S.A., N.V.		––			(833	)		—			900		—			(233	)
Abbey National Treasury Services plc		––			(28	)		—			72		—			117
Other		––			(90	)		—			53		—			13
Administrative expenses
Produban Servicios Informáticos Generales, S.L.		––			1,220			—			1,382		—			1,546
Isban México, S.A. de C.V.		––			67			—			—		—			125
Santander Global Facilities, S.A. de C.V.		––			155			—			166		—			159
Ingeniería de Software Bancario, S.L.		––			68			—			—		—			106
Gesban México Servicios Administrative Globales, S.A. de C.V.		––			41			—			—		—			—
Aquanima México, S. de R.L. de C.V.		—			—			—			43		—			45
Geoban, S.A.		—			74			—			—		—			79
Other		––			68			—			354		—			79
Sales of loans previously charged off
Servicios de Cobranza, Recuperación y Seguimiento, S.A. de C.V.		—			—			—			66		—			226

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C.  Interests of Experts and Counsel

Not applicable.

ITEM 8.  FINANCIAL INFORMATION

A.  Consolidated Statements and Other Financial Information

Financial statements

See “Item 18. Financial Statements,” which contains our audited financial statements prepared in accordance with IFRS.

Legal Proceedings

We are subject to certain claims and are party to certain legal proceedings in the normal course of our business.  We do not believe that the liabilities related to such claims and proceedings are likely to have, in the aggregate, a material adverse effect on our financial condition or results of operations.  There are no material proceedings in which any of our directors, any members of our senior management, or any of our affiliates is either a party adverse to us or to our subsidiaries or has a material interest adverse to us or to our subsidiaries.

Banco Santander Mexico, in its role as trustee or other fiduciary, is party to certain legal proceedings in the normal course of its business.  We do not believe that the liabilities related to such claims and proceedings are likely to have, in the aggregate, a material adverse effect on our consolidated financial condition or results of operations.

We estimate that our aggregate liability, if all legal proceedings were determined adversely to us, could result in significant losses not estimated by us.  As of December 31, 2014, we have recognized Ps.1,308 million (U.S.$89 million) as provisions for these legal actions (including tax-related litigation).  See note 24.b to our audited financial statements.  These provisions are presented under the “Different creditors and other Payables” line item in our audited financial statements.

Dividends and Dividend Policy

We paid dividends in December 2008, January 2010, February 2011, March 2012, September 2012 and August 2013 in an aggregate amount of Ps.7,287 million, Ps.4,000 million, Ps.6,400 million, Ps.11,350 million, Ps.7,300 million and Ps.3,950 million, respectively, equivalent to Ps.1.07, Ps.0.59, Ps.0.94, Ps.1.67, Ps.1.08 and Ps.0.58 per share, respectively. On December 27, 2013, we paid a dividend in an aggregate amount of Ps.16,900 million in two installments of Ps.4,900 million and Ps.12,000 million, respectively, equivalent to Ps.0.72 and Ps.1.77 per share. On December 29, 2014, we paid a dividend of Ps.3,473 million, equal to Ps.0.51 per share.

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

The declaration, payment and amount of any dividend are considered and proposed by our Board of Directors and approved at the general shareholders’ meeting by the affirmative vote of a majority of our shareholders in

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accordance with the applicable regulatory, corporate, tax and accounting rules and are subject to the statutory limitations set forth below.

Under Mexican law, dividends may only be paid from retained earnings resulting from the relevant year or prior years’ results if (i) the legal reserve has been created or maintained, by annually segregating 5% of net earnings, until the legal reserve equals at least 20% of the fully paid-in capital, (ii) shareholders, at a duly called meeting, have approved the results reflecting the earnings and the payment of dividends, and (iii) losses for prior fiscal years have been repaid or absorbed.  All shares of our capital stock rank pari passu with respect to the payment of dividends.  The reserve fund is required to be funded on a stand-alone basis for each company, rather than on a consolidated basis.  The level of earnings available for the payment of dividends is determined by Mexican Banking GAAP.  As of December 31, 2014, Grupo Financiero Santander Mexico (on an individual basis) had set aside Ps.386 million in legal reserves compared to paid-in capital of Ps.25,658 million, and thus was in compliance with the regulations pertaining to its legal reserve.

B.  Significant Changes

None.

ITEM 9.  THE OFFER AND LISTING

A.  Offering and Listing Details

Our ADSs are currently traded on the New York Stock Exchange, or NYSE, under the symbol “BSMX.” Our Series B shares are currently traded on the Mexican Stock Exchange (Bolsa Mexicana de Valores, S.A.B. de C.V.) under the symbol “SANMEX.” There was a low trading volume for our Series B shares on the Mexican Stock Exchange due to a low volume of publicly traded securities prior to the Mexican offering in September 2012.  Therefore, past high and low closing prices may not represent actual transactions or prices that would have been quoted on a more liquid trading market. The table below shows the high and low closing prices in pesos, the U.S. dollars equivalent per ADS and the average daily trading volume for our Series B shares on the Mexican Stock Exchange for the periods indicated:

	Ps. per Series B share				U.S.$ equivalent per ADS(1)
	High		Low		High		Low		Average daily trading volume of Series B shares
Year
2014	Ps.	39.16	Ps.	27.34	U.S.$	13.28	U.S.$	9.27		3,907,283
2013		45.15		33.99		17.25		12.99		5,006,472
2012		42.47		14.00		16.38		5.40		3,055,860
2011		16.50		13.15		5.91		4.71		4,046
2010		16.80		13.00		6.80		5.26		631
Quarter
First Quarter 2015		34.84		27.94		11.41		9.15		3,262,279
Fourth Quarter 2014		36.56		27.93		12.40		9.47		3,563,523
Third Quarter 2014		39.16		33.84		14.58		12.60		2,466,632
Second Quarter 2014		36.54		29.52		14.09		11.38		4,883,601
First Quarter 2014		34.79		27.34		13.32		10.47		4,805,113
Fourth Quarter 2013		37.75		34.20		14.43		13.07		3,541,818
Third Quarter 2013		41.67		33.99		15.81		12.90		4,653,149
Second Quarter 2013		42.36		34.97		16.26		13.42		7,971,243
First Quarter 2013		45.15		35.99		18.26		14.56		3,743,654
Month
April 2015 (through April 29)	34.40		31.56		11.31		10.38		2,976,486
March 2015		34.84		32.73		11.41		10.72		3,542,602
February 2015		34.63		32.16		11.58		10.75		2,893,341
January 2015		31.90		27.94		10.64		9.32		3,315,758
December 2014		31.75		27.93		10.77		9.47		3,891,732
November 2014		35.06		30.80		12.61		11.08		4,028,838
October 2014		36.56		33.60		13.56		12.47		2,879,463
September 2014		39.15		35.86		14.57		13.35		2,219,121

Source:  Bloomberg.

(1) Provided for convenience purposes only, based on a ratio of five Series B shares for each ADS and the exchange rate for U.S. dollars on the last day of each period presented, as published in the Official Gazette of the Federation (Diario Oficial de la Federación) by the Mexican Central Bank as the exchange rate for the payment of obligations denominated in currencies other than pesos and payable within Mexico.

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On April 29, 2015, the closing price for our Series B shares on the Mexican Stock Exchange was Ps.31.56 per share, or U.S.$10.38 per ADS, based on a ratio of five Series B shares to one ADS, and translating pesos to U.S. dollars at the exchange rate of Ps.15.2043 per U.S.$1.00, the exchange rate for U.S. dollars for that date published in the Official Gazette of the Federation by the Mexican Central Bank as the exchange rate for the payment of obligations denominated in currencies other than pesos and payable within Mexico.

The trading volume index (índice de bursatilidad) of our Series B shares was 8.444 as of March 31, 2015, according to the sensitivity and market risk indicators of the Mexican Stock Exchange.The trading volume index is used to measure the liquidity of shares on a scale of 1 to 10 during a given time period; there are no minimum trading volume requirements, except as specified below under “—C. Markets—The Mexican Securities Market.”  We are not aware of any suspension in trading of the Series B shares on the Mexican Stock Exchange during the past three fiscal years.

The following table shows the quarterly range of the high and low per share closing sales price for our ADSs as reported by the New York Stock Exchange.

	U.S.$ equivalent per ADS(1)
	High		Low
Year
2014	U.S.$	15.06	U.S.$	9.43
2013		17.79		13.07
2012 (since September 26, 2012)		16.77		12.91
Quarter
First Quarter 2015		11.71		9.43
Fourth Quarter 2014		13.61		9.43
Third Quarter 2014		15.06		13.01
Second Quarter 2014		14.16		11.27
First Quarter 2014		13.34		10.23
Fourth Quarter 2013		14.66		13.07
Third Quarter 2013		16.46		13.12
Second Quarter 2013		17.44		13.09
First Quarter 2013		17.79		14.01
Month
April 2015 (through April 29)		11.54		10.37
March 2015		11.54		10.57
February 2015		11.71		10.66
January 2015		10.81		9.43
December 2014		11.36		9.43
November 2014		12.94		11.29
October 2014		13.61		12.40
September 2014		15.06		13.40

B.  Plan of Distribution

Not applicable.

C.  Markets

On September 25, 2012, we completed our initial public offering and on September 26, 2012, our ADSs representing Series B shares began to trade on the NYSE. Our ADSs are listed on the NYSE under the symbol “BSMX.”  Our Series B shares currently trade on the Mexican Stock Exchange under the symbol “SANMEX.”  For information regarding the price history of our ADSs and Series B shares, see “—A. Offering and Listing Details.”

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The Mexican Securities Market

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

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

Trading on the Mexican Stock Exchange

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

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

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

Market Regulation

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

Among other activities, the CNBV regulates the public offering and trading of securities and participants in the Mexican securities market, and imposes sanctions for the illegal use of insider information and other violations of the Mexican Securities Market Law.  The CNBV regulates the Mexican securities market, the Mexican Stock Exchange, and brokerage firms through its staff and a board of governors comprised of thirteen members.

Mexican Securities Market Law

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

In particular, the Mexican Securities Market Law:

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

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

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

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

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

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

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

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

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

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

Registration and Listing Standards

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

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

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

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

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Reporting Obligations

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

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

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

· reports disclosing material information promptly;

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

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

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

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

· the information is related to incomplete transactions;

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

· no unusual price or volume fluctuation occurs.

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

Suspension of Trading

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

· if the issuer does not disclose a material event; or

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

The Mexican Stock Exchange must immediately inform the CNBV and the general public of any suspension.  An issuer may request that the CNBV or the Mexican Stock Exchange permit trading to resume if it demonstrates

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

Certain Disclosures

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

· members of a listed issuer’s board of directors;

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

· certain advisors;

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

· other insiders.

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

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

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

Tender Offers

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

Under the Mexican Securities Market Law, all tender offers must be open for at least 20 business days and purchases thereunder are required to be made pro rata to all tendering shareholders.  The Mexican Securities Market

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Law only permits the payment of certain amounts to controlling shareholders over and above the offering price if these amounts are fully disclosed, approved by the board of directors and paid solely in connection with non-compete or similar obligations.  The law also provides exceptions to the mandatory tender offer requirements and specifically sets forth remedies for noncompliance with these tender offer rules (e.g., suspension of voting rights, possible annulment of purchases, etc.) and other rights available to prior shareholders of the issuer.

Joint Trading of Common Shares and Limited or Non-Voting Shares

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

Anti-Takeover Protections

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

Board of Directors and Committees

Under the Mexican Securities Market Law, public companies must have a board of directors comprised of no more than 21 members, of which at least 25% must be independent.  Independent members must be selected based on their experience, ability and reputation at the issuer’s shareholders’ meeting; whether a director is independent must be determined by the issuer’s shareholders and such determination may be challenged by the CNBV.  As a departure from legislative precedents, the Mexican Securities Market Law permits then acting members of the board of directors to select, under certain circumstances and on a temporary basis, new members of the board of directors.

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

· determine general strategies applicable to the issuer;

· approve guidelines for the use of corporate assets;

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

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

· approve the appointment or removal of the chief executive officer;

· approve accounting and internal control policies; and

· approve policies for disclosure of information.

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

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

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

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

Duty of Care and Loyalty of Directors

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

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

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

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

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

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

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Disclosure of Shareholders’ Agreements

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

Miscellaneous

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

In addition to the right granted to minority shareholders of a public company representing 5% or more of the outstanding shares to initiate a shareholder derivative suit against directors for a breach of the duty of care or the duty of loyalty, the Mexican Securities Market Law recognizes the right of shareholders representing 10% of the outstanding shares entitled to appoint a director, call a shareholder’s meeting and request that voting on resolutions in respect of which they were not sufficiently informed, be postponed.  Also, holders of 20% of the outstanding voting shares may judicially oppose resolutions that were passed by a shareholders’ meeting and file a petition for a court order to suspend the resolution, if the claim is filed within 15 days following the adjournment of the meeting at which the action was taken, provided that (i) the challenged resolution violates Mexican law or the company’s bylaws, (ii) the opposing stockholders either did not attend the meeting or voted against the challenged resolution, and (iii) the opposing stockholders deliver a bond to the court to secure payment of any damages that we may suffer as a result of suspending the resolution in the event that the court ultimately rules against the opposing stockholder.  These provisions have seldom been invoked in Mexico and, as a result, how a competent court may interpret these provisions is uncertain.

D.  Selling Shareholders

Not applicable.

E.  Dilution

Not applicable.

F.  Expenses of the Issue

Not applicable.

ITEM 10.  ADDITIONAL INFORMATION

A.  Share Capital

Not applicable.

B.  Memorandum and Articles of Association

General

Set forth below is certain information relating to our capital stock, including the material provisions of our bylaws, Mexican corporate and securities laws and certain related laws and regulations of Mexico, including those of the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, or CNBV), all as in effect as at the date of this annual report on Form 20-F.  The following summary description of our capital stock does not purport to be complete and is qualified in its entirety by reference to our bylaws, which are an exhibit to this annual report on Form 20-F.

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We are currently organized as a publicly traded variable capital stock corporation (sociedad anónima bursátil de capital variable) under the laws of Mexico.  We were organized as a holding company of a financial group on November 14, 1991, and became a publicly listed company on December 11, 1991.  A copy of our bylaws has been filed with the CNBV and with the Mexican Stock Exchange (Bolsa Mexicana de Valores, S.A.B. de C.V.) and is available for inspection at the Mexican Stock Exchange’s website: www.bmv.com.mx, and an English translation thereof is an exhibit to this annual report on Form 20-F. Our corporate domicile is Mexico City, Federal District and our headquarters are located at Avenida Prolongación Paseo de la Reforma 500, Colonia Lomas de Santa Fe, 01219, México, Distrito Federal, Mexico.  Our telephone number is +55 5257-8000.

Issued Share Capital

Our capital stock is divided into two series of shares, Series F shares and Series B shares.  Series F shares may only be owned by a foreign financial institution, except if such shares are transferred as collateral or in property to the Mexican Institute for the Protection of Bank Savings (Instituto para la Protección al Ahorro Bancario, or IPAB), and must represent at all times at least 51% of our issued and outstanding capital stock.  Series F shares may only be transferred with the prior approval of the Mexican Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público, or SHCP).  Series B shares are common shares and may be purchased by Mexican or non-Mexican individuals or entities, subject to certain transfer restrictions.  See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Ownership Restrictions; Foreign Financial Affiliates.”  Series B shares may only represent up to 49% of our issued and outstanding capital stock.  Our Series B shares are registered with the Mexican National Securities Registry (Registro Nacional de Valores, or RNV) and have been listed on the Mexican Stock Exchange since December 11, 1991.

Since we are a variable stock corporation, our capital stock must have a fixed portion and may have a variable portion, represented both by Series F and Series B shares.  Our bylaws set forth that the variable portion of our capital stock may not exceed ten times the amount of the fixed portion thereof.

As of the date of this annual report on Form 20-F, our capital stock consists of 6,786,394,913 shares, represented by 3,322,085,768 Series B shares (one vote per share) and 3,464,309,145 Series F shares (one vote per share), all of which are book-entry shares, fully paid and of a par value of Ps.3.780782962 each.

Corporate Purpose

Our bylaws provide that our corporate purpose includes, among other things, the acquisition and management of shares issued by insurance companies, brokerage houses, depositories, mutual funds management companies, credit institutions, pension fund management companies and any other kind of financial entities as the SHCP may determine, pursuant to the provisions of the Mexican Financial Groups Law (Ley para Regular las Agrupaciones Financieras), including companies that render ancillary services to us or to the entities part of the financial group.

Registration and Transfer of Shares

Our Series B shares are registered with the Mexican National Securities Registry maintained by the CNBV.  If we wish to cancel our registration, or if it is cancelled by the CNBV, we will be required to make a public offer to purchase all outstanding Series B shares, prior to the cancellation.

Our shares are evidenced by share certificates in registered form.  The certificates evidencing our shares are deposited with the Mexican depository institution, S.D. Indeval Institución para el Depósito de Valores, S.A. de C.V., or Indeval, and are maintained in book-entry form with institutions which have accounts with Indeval.  Indeval is the holder of record in respect of all of the shares of our capital stock.  Accounts may be maintained at Indeval by brokers, banks and other financial institutions and entities authorized for this purpose.  Ownership of our shares is evidenced by certificates issued by Indeval, together with certificates issued by Indeval’s account holders.  We maintain a stock registry and only those persons listed in such stock registry and holding certificates issued in their name as registered holders, or persons holding shares through institutions that maintain accounts with Indeval, will be recognized as our shareholders.  Pursuant to Mexican law, any transfer of shares must be registered in our stock registry or through book entries that may be traced back from our stock registry to the records of Indeval.

Pursuant to the Mexican Financial Groups Law, the Mexican Securities Market Law (Ley del Mercado de Valores) and our bylaws, no person or entity, or group of persons or entities, may directly or indirectly, in one or a series of related transactions, (i) acquire any of our Series F shares, except with the prior authorization of the SHCP,

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(ii) acquire more than 2% of our shares without informing the SHCP after the acquisition, (iii) acquire 5% or more of our shares, except with the prior authorization of the SHCP, and (iv) acquire 30% or more of our shares, unless (a) the acquiror shall have previously obtained the prior authorization of the SHCP, and (b) the acquiror, with the approval of the CNBV, shall conduct a public tender offer to acquire either (x) if the intended acquisition is for shares representing less than 50% plus one of our aggregate outstanding shares of capital stock, the greater of an additional 10% of the aggregate outstanding shares or the percentage of additional outstanding shares intended to be acquired, or (y) if the intended acquisition is for shares representing more than 50% of the aggregate outstanding shares of capital stock, 100% of our aggregate outstanding shares.

In addition, our Series F shares may only be transferred with the prior approval of the SHCP.

Voting Rights

Holders of Series F or Series B shares are entitled to one vote per share and such shares shall, within each series, confer its holders with the same rights.  Holders of our shares do not have cumulative voting rights, which generally are not available under Mexican law.

Conflicts of Interest

Under Mexican law, any shareholder that votes in a transaction in which its interests conflict with our interest may be liable for damages, but only if the transaction would not have been approved without such shareholder’s vote.

A member of our Board of Directors with a conflict of interest must disclose such conflict and abstain from any deliberation or vote in connection therewith.  A breach by any member of our Board of Directors of any such obligations may result in such member being liable for damages and losses.  Further, any member of our Audit Committee or our Corporate Practices Committee who votes on a transaction in which he or she has a conflict of interest with us may be liable for damages.

Pursuant to the Mexican Securities Market Law, our Audit and Corporate Practices Committees, as the case may be, must issue an opinion with regard to, among others, transactions and arrangements with related parties, and these transactions and arrangements must be approved by our Board of Directors.

Shareholders’ Meetings

Calls

Under Mexican law and our bylaws, shareholders’ meetings may be called by:

· our Board of Directors;

· shareholders representing at least 10% of our outstanding capital stock who request that the Board of Directors or the Corporate Practices Committee or Audit Committee call a shareholder meeting;

· a Mexican court of competent jurisdiction, in the event the Board of Directors does not comply with a valid request of the shareholders described immediately above;

· the Audit Committee and the Corporate Practices Committee; and

· any shareholder, provided that no annual ordinary meeting has been held for two consecutive years or the annual shareholders’ meeting did not address the matters required to be addressed in annual shareholders’ meetings.

Calls for shareholders’ meetings will be required to be published in one of the newspapers of general circulation of our corporate domicile at least 15 days before the scheduled date of the shareholders’ meeting in the case of first call.  If the shareholders’ meeting is not held on the scheduled date, then a second call explaining the circumstances shall be published within a period not greater than 15 business days from the date established in the first call.  The second call shall be published at least 5 business days in advance of the rescheduled shareholders’ meeting.  Calls need to specify the place, date and time as well as the matters to be addressed at the meeting.  From the date on

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which a call is published until the date of the corresponding meeting, all relevant information will have to be made available to the shareholders at our executive offices.  To attend a shareholders’ meeting, shareholders will have to be either registered in the stock registry or present evidence of the deposit of their shares with Indeval or other authorized securities depositary, coupled with a certificate issued by a participant of Indeval or such depositary.

Shareholders’ Meetings

General shareholders’ meetings may be general ordinary shareholders’ meetings or general extraordinary shareholders’ meetings.  Shareholders may also hold special meetings of a given series (as for example, meetings of Series B shareholders, as a means to exercise their rights or discuss any matters that may affect such series).

General ordinary shareholders’ meetings will be those called to discuss any issues not reserved for extraordinary meetings.  General ordinary shareholders’ meetings will have to be held at least once a year during the first four months following the end of each fiscal year to:

· approve financial statements for the preceding fiscal year prepared by our chief executive officer and the report of the Board of Directors;

· elect directors;

· appoint the members of the Audit Committee, the Corporate Practices Committee and any other special committees that may be created and determine their respective compensation;

· discuss and approve the Audit Committee’s and the Corporate Practices Committee’s annual report;

· determine how to allocate net profits for the preceding year (including, if applicable, the payment of dividends);

· determine the maximum amount of funds allocated to share repurchases; and

· approve any transaction representing 20% or more of our consolidated assets during any fiscal year.

General extraordinary shareholders’ meetings will be those called to consider:

· an extension of our duration or voluntary dissolution;

· an increase or decrease in the fixed portion of our capital stock;

· any change in our corporate purpose or nationality;

· any merger, spin-off or transformation into another type of company;

· any issuance of preferred stock;

· the redemption of shares with retained earnings;

· any amendment to our bylaws;

· any amendment to our Statutory Responsibilities Agreement;

· the cancellation of the registration of shares at the Mexican National Securities Registry or any stock exchange (except for automated quotation systems); or

· the issuance of treasury shares for its further issuance in the stock markets.

A special shareholders’ meeting, comprising a single class of shares (such as our Series B shares), may be called if an action is proposed to be taken that may only affect such class.  The quorum for a special meeting of shareholders and the vote required to pass a resolution at such meeting are identical to those required for

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extraordinary meetings of shareholders, except that the calculations are based upon the number of outstanding shares of the series that is the subject of the special meeting of shareholders.

The attendance quorum for a general ordinary shareholders’ meeting will be 51% of the outstanding capital stock; and resolutions may be taken by a majority of the capital stock represented therein.  If the attendance quorum is not met upon the first call, a subsequent meeting may be called during which resolutions may be approved by the majority of the capital stock present, regardless of the percentage of outstanding capital stock represented at such meeting.  The attendance quorum for general extraordinary shareholders’ meetings will be at least 75% of our outstanding capital stock.  If an attendance quorum is not met upon the first call, a subsequent meeting may be called, at which at least 51% of the capital stock must be represented.  In either case, resolutions must be taken by the vote of at least 51% of our outstanding capital stock, except for resolutions in respect of the cancellation of the registration of shares at the Mexican National Securities Registry or any stock exchange which require that at least 95% of the outstanding capital stock vote in favor of such resolution.

Dividends

Our Board of Directors must submit our financial statements for the previous fiscal year, proposed by our chief executive officer and supplemented by a report of our Board of Directors, at our annual general ordinary shareholders’ meeting for approval.  Once our shareholders approve our financial statements, they are required to allocate net profits for the previous fiscal year.  Under Mexican law and our bylaws, prior to any distribution of dividends, 5% of our earnings must be allocated to a legal reserve fund until such legal reserve fund is equal to at least 20% of our paid-in capital stock.  Additional amounts may be allocated to other reserve funds as the shareholders may determine, including the amount allocated for the repurchase of shares.  The remaining balance, if any, may be distributed as dividends.  Any payment of dividends will be published in a gazette of major circulation of our corporate domicile.

Changes to Capital Stock

The fixed portion of our capital stock may be increased or decreased by a resolution adopted at a general extraordinary shareholders’ meeting and upon amendment of our bylaws, which amendment shall be previously approved by the SHCP.  The variable portion of our capital stock may be increased or decreased by a resolution adopted at a general shareholders’ meeting without amending our bylaws, and the corresponding minutes of such meeting shall be notarized.  Increases or decreases in the fixed or variable portion of the capital stock must be recorded in our capital variations register.  New shares cannot be issued unless the then-issued and outstanding shares have been paid in full.

Our bylaws provide that we may issue treasury shares that may be offered for subscription and payment by our Board of Directors, provided that:

· the general extraordinary shareholders’ meeting approves the maximum amount of the increase of our capital stock, and the terms and conditions for the issuance of the non-subscribed shares;

· subscription of the shares representing the increase in the capital stock is made through a public offering, and such shares must be registered in the Mexican National Securities Registry, in accordance with the Mexican Securities Market Law; and

· the subscribed and paid amount of our capital stock must be disclosed when our authorized capital, including any issued and unsubscribed shares, is made public.

Any shareholder that opposes the issuance of shares to be subscribed and paid through a public offer shall have the right to demand the public offering of its shares at the same price as the publicly offered shares.  Upon any such demand, we will be required to offer the dissenting shareholders’ shares in first place.

Election of Directors

Our Board of Directors may consist of up to 21 members and currently consists of 11 directors and 10 alternate directors.  At least 25% of the members of our Board of Directors (and their respective alternates) must be independent, pursuant to the Mexican Securities Market Law.  In accordance with our bylaws, holders of Series F shares representing 51% of our capital stock shall have the right to appoint 50% plus 1 of our directors and their

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respective alternates, and to appoint an extra director for each additional 10% of our capital stock above such percentage.  Series B shareholders have the right to appoint the remaining directors and their alternates.

For each director, an alternate director may be appointed, provided that the alternate director corresponding to an independent director must also be independent.  All members of the Board of Directors, whether they are directors or alternate directors, are called to attend the meetings of the Board of Directors.  If both a director and an alternate director attend the same meeting, only the vote of the director shall be taken into account.

Pursuant to the Mexican Financial Groups Law, none of the following persons may be appointed as a member of our board: (i) our officers or officers of other entities of our group, except for our chief executive officer and officers of the first two levels of management immediately below the chief executive officer, who may be appointed as long as they do not represent more than one third of our appointed directors; (ii) the spouse of any director, or any relatives of up to the second degree of more than two directors; (iii) persons who have a pending claim against our company or any other member of our financial group; (iv) persons who have been declared bankrupt or in concurso mercantil, condemned by a court for any patrimonial crime or disqualified to engage in commercial or financial activities; (v) persons involved in supervisory and regulatory activities and of those of our subsidiaries; and (vi) persons who participate in the board of directors of any financial entity that belongs to a different financial group, or to such group’s holding company.

A determination in respect of whether a director may be deemed independent must be made by our shareholders (at the general shareholders’ meeting where the director is elected).  Such a determination may be challenged by the CNBV within 30 days from the date the appointment of the director is notified to the CNBV.  The CNBV may only challenge the appointment after holding a hearing with us and the affected director.  Under the Mexican Securities Market Law, none of the following persons may be deemed as independent directors: (i) our officers or officers of our subsidiaries, who have being in office during the prior 12-month period; (ii) individuals who have a significant influence or authority on our company or in any member of our group; (iii) persons that are part of our group of controlling shareholders; (iv) clients, service providers, suppliers, debtors, creditors (or employees of any of them) that have material commercial relationships with us (i.e., sales to us or our subsidiaries that exceed 10% of the aggregate sales of any such person, during the prior 12-month period); (v) relatives of any of the foregoing; (vi) officers or employees of any charity or nonprofit organization that receives significant contributions from us; (vii) general directors and first-level officers of any company at which our general director or any first-level member of our management team is an elected director; or (viii) persons who have occupied any management office in our company or any of the members of our financial group.

Under the Mexican Securities Market Law, our Board of Directors may appoint temporary directors, without the vote of our shareholders, in case existing directors have resigned or their appointment has been revoked.

Directors must be elected at a special shareholders’ meeting held by each series of shares.  Holders of at least 10% of our outstanding share capital are entitled to appoint one director and his or her respective alternate.  Such an appointment may only be revoked by the shareholders when appointment of all directors designated by the same series of shares is revoked.  Any director whose appointment is so revoked may not be reelected during the 12-month period immediately following the revocation.  The ordinary shareholders’ meeting acknowledges the appointment of the members of the Board of Directors designated for each series of shares.

The chairman of the Board of Directors will be elected from the members appointed by the Series F shareholders.

Board of Directors

Our management is entrusted to our Board of Directors and our General Director.  The Board of Directors sets forth the guidelines and general strategy for the conduct of our business and supervises the execution of such strategy.

Meetings of the Board of Directors are deemed as validly convened and held if 51% of its members are present, including at least one independent director.  Resolutions passed at these meetings will be valid if approved by a majority of the members of the Board of Directors that do not have a conflict of interest.  If required, the chairman of the Board of Directors may cast a tie-breaking vote.

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Meetings of our Board of Directors may be called by (i) 25% of our Board members; (ii) the chairman of the Board of Directors; (iii) the chairman of the Audit Committee or the Corporate Practices Committee; and (iv) the Secretary of the Board of Directors.  Notice of such meetings must be provided to the members of our Board of Directors at least five days prior to the relevant meeting.

The Mexican Securities Market Law imposes duties of care and loyalty on directors.  The duty of care generally requires that directors obtain sufficient information and be sufficiently prepared to act in our best interest.  The duty of care is discharged, principally, by requesting and obtaining from us all information that may be necessary to take decisions, attending Board meetings and disclosing to the Board of Directors material information in possession of the relevant director.  Failure to act with due care by a director subjects the relevant director to joint and several liability, together with other guilty directors, for damages and losses caused to us and our subsidiaries.

The duty of loyalty consists, primarily, of a duty to act for the benefit of the issuer and includes a duty to maintain the confidentiality of information received in connection with the performance of a director’s duties and to abstain from discussing or voting on matters where the director has a conflict of interest.  In addition, the duty of loyalty is breached if a shareholder or group of shareholders is knowingly favored or if, without the express approval of the Board of Directors, a director takes advantage of a corporate opportunity belonging to us or our subsidiaries.

The duty of loyalty is also breached if the director uses corporate assets or approves the use of corporate assets in violation of our policies, discloses false or misleading information, orders not to, or causes the failure to, register any transaction in our records, that could affect our financial statements, or causes material information not to be disclosed or to be modified.

The violation of the duty of loyalty subjects the breaching director to joint and several liability with all breaching directors, for damages and losses caused to us and to the persons we control.  Liability may also arise if damages and losses result from benefits obtained by the directors or third parties, as a result of activities carried out by such directors.

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

As a safe harbor for the benefit of directors, in respect of perceived violations of the duty of care or the duty of loyalty, the Mexican Securities Market Law provides that liabilities arising from a breach of the duty of care or the duty of loyalty will not be applicable, if the director acted in good faith and (a) complied with applicable law and our bylaws, (b) decided based upon facts and information provided by officers, external auditors or third-party experts, the capacity and credibility of which may not be the subject of reasonable doubt, and (c) selected the more adequate alternative in good faith, or the negative effects of the director’s decision could not have been reasonably foreseeable, based upon the then-available information.  Mexican courts have not yet interpreted the meaning of this provision and, as a result, the extent and meaning of it are uncertain.

Under the Mexican Securities Market Law and our bylaws, our chief executive officer and our principal executives are also required to act for our benefit and not for the benefit of a shareholder or group of shareholders.  Principally, these executives are required to submit to the Board of Directors for approval the principal strategies for our business and the business of the companies we control, to execute the resolutions of the Board of Directors, to comply with the provisions related to repurchase and offering of our shares, verify the effectiveness of capital contributions, comply with any provisions relating to declaration and payment of dividends, to submit to the audit committee proposals relating to internal control systems, to prepare all material information related to our activities and the activities of the companies we control, to disclose all material information to the public, to maintain adequate accounting and registration systems and internal control mechanisms, and to prepare and submit to the board the yearly financial statements.

Committees of the Board of Directors

We maintain several committees of the Board of Directors that are required under the Mexican Securities Market Law or necessary to discharge our specialized duties and limit conflicts of interest.  Each of our Audit Committee and our Corporate Practices Committee is required to be comprised of only independent board members and it must consist of at least three directors.

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Preemptive Rights

Under Mexican law, our shareholders have preemptive rights for all share issuances or increases except in the cases noted below.  Generally, if we issue additional shares of capital stock, our shareholders will have the right to purchase the number of shares necessary to maintain their existing ownership percentage.  Shareholders must exercise their preemptive rights within the time period set forth by our shareholders at the general meeting approving the relevant issuance of additional shares.  This period must continue for at least 15 days following the publication of notice of the issuance in the Official Gazette of the Federation and in a newspaper of general circulation in our corporate domicile.

The preemptive rights specified in the prior paragraph will not apply (i) in the case of shares issued in connection with mergers, (ii) in the case of resale of shares held in our treasury, as a result of repurchases of shares conducted on the Mexican Stock Exchange, (iii) in the event of an issuance for purposes of a public offering, see “—Changes to Capital Stock” above, and (iv) in respect of shares issued in connection with the conversion of any convertible securities.

We may not be able to offer shares to U.S. shareholders pursuant to preemptive rights granted to our shareholders in connection with any future issuance of shares unless certain conditions are met.  See “Item 3. Key Information—D. Risk Factors—Risks Relating to the ADSs and Our Series B Shares— Preemptive rights may be unavailable to non-Mexican holders of our Series B shares and ADSs and, as a result, they may suffer dilution.”

Redemption

In accordance with our bylaws, shares representing our capital stock are subject to redemption in connection with either (i) a reduction of capital stock, or (ii) a redemption with retained earnings, which in either case must be approved by our shareholders.  The fixed portion of our capital stock may only be reduced to absorb losses and requires the approval of the general extraordinary shareholders’ meeting.  In connection with a capital reduction, the redemption of shares will be made pro rata among the shareholders, first of the shares representing the variable portion of the capital stock and then of the shares representing the fixed portion.  In the case of redemption with retained earnings, such redemption will be conducted (a) by means of a tender offer conducted on the Mexican Stock Exchange at prevailing market prices, in accordance with the Mexican Corporations Law, the Mexican Securities Market Law and our bylaws, or (b) pro rata among the shareholders.

Dissolution or Liquidation

Upon our dissolution, which must be approved by the SHCP, our shareholders at an extraordinary general shareholders’ meeting will appoint one or more liquidators to wind up our affairs.  Our liquidation may only take place once all of the obligations of our financial subsidiaries have been fulfilled.  All fully paid and outstanding shares of capital stock will be entitled to participate equally in any liquidation distributions.

Certain Minority Protections

Pursuant to the Mexican Securities Market Law and the Mexican Corporations Law, our bylaws include a number of minority shareholder protections.  These minority protections will include provisions that permit:

· holders of at least 10% of our outstanding capital stock:

· to vote (including in a limited or restricted manner) to request a call for a shareholders’ meeting;

· to request that resolutions with respect to any matter on which they were not sufficiently informed be postponed; and

· to appoint one member of our Board of Directors and one alternate member of our Board of Directors.

· holders of 20% of our outstanding capital stock to oppose any resolution adopted at a shareholders’ meeting and file a petition for a court order to suspend the resolution temporarily, within 15 days following the adjournment of the meeting at which the action was taken, provided that (i) the challenged resolution violates Mexican law or our bylaws, (ii) the opposing shareholders neither attended the meeting nor voted in favor of the challenged resolution, and (iii) the opposing shareholders deliver a bond to the court to

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secure payment of any damages that we may suffer as a result of suspending the resolution, in the event that the court ultimately rules against the opposing shareholders; and

· holders of 5% of our outstanding capital stock may initiate a shareholder derivative suit against some or all of our directors, for our benefit, for violations of their duty of care or duty of loyalty, in an amount equal to the damages or losses caused to us.  Actions initiated on these grounds have a five-year statute of limitations.

Other Provisions

Duration

Our corporate existence under our bylaws is indefinite.

Share Repurchases

We are able to purchase our shares through the Mexican Stock Exchange, at the then-prevailing market prices for the shares at the time of the purchase.  The economic and voting rights corresponding to repurchased shares may not be exercised by us during the period the shares are owned by us, and such shares will not be deemed outstanding for purposes of calculating any quorum or vote at any shareholders’ meeting.  We are not required to create a special reserve for the repurchase of shares and we do not need the approval of our Board of Directors to effect share repurchases; however, we are required to obtain shareholder approval in respect of the maximum amount that may be used by us for share repurchases (including, subsequent sales of such repurchased shares).  In addition, our Board of Directors must appoint an individual or group of individuals responsible for effecting share repurchases.

Share repurchases are required to be made pursuant to the provisions of the Mexican Securities Market Law, and carried out, reported and disclosed in the manner specified by the CNBV.  If we intend to repurchase more than 1% of our outstanding shares at a single trading session, we must inform the public of this intention at least 10 minutes before submitting our bid.  If we intend to repurchase 3% or more of our outstanding shares during a period of 20 trading days, we must conduct a public tender offer for these shares.

On April 25, 2014, at an ordinary general shareholders’ meeting, our shareholders approved, among other things, the creation of a fund out of accumulated reserves for the repurchase of our shares in an amount up to Ps.1,500 million.

Purchase of Shares by Our Subsidiaries

Our subsidiaries may not purchase, directly or indirectly, shares representing our capital stock or shares of companies that are our shareholders.

Anti-Takeover Protections

Our shares are subject to certain transfer restrictions that may have the effect of delaying or preventing a change in control.  See “—Registration and Transfer of Shares” above.

In addition, neither foreign governmental authorities nor Mexican financial institutions, except for Mexican financial institutions, when acting as institutional investors pursuant to the Mexican Financial Groups Law, may acquire any of our shares.

Furthermore, our bylaws provide that any transfer of shares may only be made with the prior approval of our Board of Directors.  We will obtain approval from our Board of Directors prior to the completion of this offering.

Tag-Along Rights

Our bylaws do not grant tag-along rights to our shareholders.  Notwithstanding, the Mexican Securities Market Law permits our shareholders to enter into these types of agreements or understandings, in which case the applicable shareholders shall notify us within the five business days following the corresponding agreement or understanding so that such information becomes publicly available.  Such information is also to be disclosed in our annual report.

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Such agreements and understanding shall not be enforceable against us and any breach thereunder shall not affect the validity of the vote taken pursuant to a shareholders’ meeting.  Further, the agreement or understanding shall only become effective among the parties thereto once they are disclosed to the public.

Withdrawal Rights

If our shareholders approve a change in our corporate purpose, jurisdiction of organization or transformation from one type of corporate form to another, any shareholder entitled to vote that voted against the approval of these matters has the right to withdraw and receive book value for its shares, as set forth in the financial statements last approved by our shareholders, provided that the shareholder exercises this withdrawal right within 15 days after the meeting, at which the relevant matter was approved.

Cancellation of Registration in the Mexican National Securities Registry

In accordance with our bylaws, and as set forth in the Mexican Securities Market Law, we will be required to make a public tender offer for the purchase of stock held by minority shareholders, in the event that the listing of our Series B shares on the Mexican Stock Exchange is cancelled, either as a result of our determination or by an order of the CNBV.  Our controlling shareholders will be secondarily liable for these obligations.  A controlling shareholder will be deemed to be a shareholder that holds a majority of our capital stock, has the ability to control the outcome of decisions made at a shareholders’ or board of directors’ meeting, or has the ability to appoint a majority of the members of our Board of Directors.  Unless otherwise approved by the CNBV, the price at which the stock must be purchased is the higher of:

· the average quotation price on the Mexican Stock Exchange for the 30 days prior to the date of the tender offer, or

· the book value, as reflected in the report filed with the CNBV and the Mexican Stock Exchange.

If the tender for cancellation is requested by the CNBV, it must be initiated within 180 days from the date of the request.  If initiated by us, under the Mexican Securities Market Law, the cancellation must be approved by 95% of our shareholders.

Our Board of Directors must make a determination with respect to fairness of the tender offer price, taking into consideration the minority shareholders’ interest, and disclose its opinion.  The resolution of the Board of Directors may be accompanied by a fairness opinion issued by an expert selected by our Audit Committee.  Directors and first level officers are required to disclose whether they will sell their shares in connection with the tender offer.

Holding Company Sole Liability

Pursuant to the Mexican Financial Groups Law, we, as a financial services holding company, are secondarily liable for the performance of the obligations undertaken by the members of our financial group (including all of our subsidiaries), in respect of the operations that each such member is allowed to carry out pursuant to applicable law.  In addition, we are liable for the losses of each company comprising our financial group, provided that for such purposes, such company is deemed to have losses when its assets are insufficient to fulfill its payment obligations.  As a result, we would be secondarily liable in respect of all of Banco Santander Mexico’s obligations, including any and all outstanding obligations under the Bank’s debts and issued notes.  Pursuant to our Sole Liability Agreement (Convenio Único de Responsabilidades), as amended and in effect as of the date hereof, if our assets were not sufficient to cover the aggregate losses of the members of our financial group, they would be applied first to cover the losses of Banco Santander Mexico and, thereafter, proportionately among the rest of the members of our financial group until our assets were applied entirely or the relevant losses completely covered.

Enforcement of our secondary liability is subject to a specific proceeding set forth in the Mexican Financial Groups Law and may not be carried out expeditiously.  Thus, the timing and outcome of an action against us to enforce such liability would be uncertain.

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Certain Differences between Mexican and U.S. Corporate Law

As an investor, you should be aware that the Mexican Financial Groups Law, the Mexican Securities Market Law and the Mexican Corporations Law, all of which apply to us, differ in certain material respects from laws generally applicable to U.S. corporations and their shareholders.

Mergers, Consolidations and Similar Arrangements

Under Mexican law, mergers, spin-offs, transformations or other similar reorganizations must be approved by the extraordinary general shareholders’ meeting.  Pursuant to the Mexican Corporations Law, under certain circumstances, a shareholder may be entitled to appraisal rights.

In contrast, pursuant to Delaware law, with certain exceptions, a merger, consolidation or sale of all or substantially all of the assets of a corporation must be approved by the board of directors and a majority of the outstanding shares entitled to vote thereon.  Under Delaware law, a shareholder of a corporation participating in certain major corporate transactions may, under specific circumstances, be entitled to appraisal rights pursuant to which the shareholder may receive payment in the amount of the fair market value of the shares held by the shareholder (as determined by a court) in lieu of the consideration the shareholder would otherwise receive in the transaction.  Delaware law also provides that a parent corporation, by resolution of its board of directors and without any shareholder vote, may merge with any subsidiary of which it owns at least 90% of each class of capital share.  Upon any such merger, dissenting shareholders of the subsidiary would have appraisal rights.

Transfer Restrictions

Pursuant to the Mexican Financial Groups Law, the Mexican Securities Market Law and our bylaws, no person or entity, or group of persons or entities, may directly or indirectly, in one or a series of related transactions, (i) acquire any of our Series F shares, except with the prior authorization of the SHCP, (ii) acquire more than 2% of our shares without informing the SHCP after the acquisition, (iii) acquire 5% or more of our shares, except with the prior authorization of the SHCP, and (iv) acquire 30% or more of our shares, unless (a) the acquiror shall have previously obtained the prior authorization of the SHCP, and (b) the acquiror, with the approval of the CNBV, shall conduct a public tender offer to acquire either (x) if the intended acquisition is for shares representing less than 50% plus one of our aggregate outstanding shares of capital stock, the greater of an additional 10% of the aggregate outstanding shares or the percentage of additional outstanding shares intended to be acquired, or (y) if the intended acquisition is for shares representing more than 50% of the aggregate outstanding shares of capital stock, 100% of our aggregate outstanding shares.

The Mexican Securities Market Law defines control, for these purposes, as (a) the ability to impose decisions, directly or indirectly, at a shareholders’ meeting (b) the right to vote 50% or more of our shares, or (c) the ability to cause, directly or indirectly, that our management, strategy or policies be pursued in any given fashion.  See “—Anti-Takeover Protections” above.

In contrast, under Delaware law, corporations can implement shareholder rights plans and other measures, including staggered terms for directors and super-majority voting requirements, to prevent takeover attempts.  Delaware law also prohibits a publicly held Delaware corporation from engaging in a business combination with an interested shareholder for a period of three years after the date of the transaction in which the shareholder became an interested shareholder unless:

· prior to the date of the transaction in which the shareholder became an interested shareholder, the board of directors of the corporation approves either the business combination or the transaction that resulted in the shareholder becoming an interested shareholder;

· upon consummation of the transaction that resulted in the shareholder becoming an interested shareholder, the interested shareholder owns at least 85% of the voting stock of the corporation, excluding shares held by directors, officers, and employee stock plans; or

· at or after the date of the transaction in which the shareholder became an interested shareholder, the business combination is approved by the board of directors and authorized at a shareholders’ meeting by at least 66⅔% of the voting stock which is not owned by the interested shareholder.

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Class Action Lawsuits

Applicable Mexican law has been modified to permit the initiation of class actions; however, rules implementing applicable law have not fully developed the relevant procedural requirements.  In Mexico, the law concerning fiduciary duties of directors and executive officers has been in existence for a relatively short period.  Actions against directors for breach of fiduciary duties may not be initiated as a direct action, but as a shareholder derivative suit (that is for the benefit of our company).  The grounds for shareholder derivative actions under Mexican law are limited.  See “—Certain Minority Protections” above.

In contrast, under Delaware law, class actions and derivative actions are generally available to shareholders for purposes of, among other things, breaches of fiduciary duty, corporate waste and other actions or omissions that conflict with applicable law.  In these kinds of actions, the court generally has discretion to permit the winning party to recover attorneys’ fees incurred in connection with the action.

Shareholder Proposals

Under Mexican law and our bylaws, holders of at least 10% of our outstanding capital stock may (i) vote to request a call for a shareholders’ meeting; (ii) request that resolutions with respect to any matter on which they were not sufficiently informed be postponed; and (iii) appoint one member of our Board of Directors and its respective alternate.

In contrast, Delaware law does not include a provision restricting the manner in which nominations for directors may be made by shareholders or the manner in which business may be brought before a meeting.

Calling of Extraordinary Shareholders’ Meetings

Under Mexican law and our bylaws, general shareholders’ meetings may be called by (i) our Board of Directors; (ii) shareholders representing at least 10% of our outstanding capital stock; (iii) a Mexican court of competent jurisdiction; (iv) the audit committee and the corporate practices committee; and (v) a shareholder, in limited cases.  See “—Shareholders’ Meetings” above.

Delaware law permits the board of directors or any person who is authorized under a corporation’s certificate of incorporation or bylaws to call an extraordinary meeting of shareholders.

Cumulative Voting

Cumulative voting rights generally are not available under Mexican law.

Under Delaware law, cumulative voting for the election of directors is permitted only if expressly authorized in the certificate of incorporation.

Approval of Corporate Matters by Written Consent

Under Mexican law and our bylaws, our shareholders may take action by written consent of the holders of all of the outstanding shares of capital stock.

Delaware law permits shareholders to take action by written consent of holders of outstanding shares having more than the minimum number of votes necessary to take the action at a shareholders’ meeting at which all voting shares were present and voted.

Amendment of Bylaws

Under Mexican law, any amendment to our bylaws may only be resolved by our shareholders at a general extraordinary shareholders’ meeting.  In addition, the SHCP must previously approve any amendment to our bylaws.

Under Delaware law, holders of a majority of the voting power of a corporation and, if so provided in the certificate of incorporation, the directors of the corporation, have the power to adopt, amend and repeal the bylaws of a corporation.

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C.  Material Contracts

For the two years immediately preceding the publication of this annual report, we were not a party to any material contract outside the ordinary course of business.

D.  Exchange Controls

Not applicable.

E.  Taxation

The following summary contains a description of material Mexican and U.S. federal income tax consequences of the acquisition, ownership and disposition of ADSs or Series B shares, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to hold ADSs or Series B shares. The summary is based upon the tax laws of Mexico and regulations thereunder, the tax laws of the United States and regulations thereunder and the income tax treaty between Mexico and the United States, all as of the date hereof, which are subject to change, possibly with retroactive effect, and to differing interpretations.

Mexican Taxation

The following summary contains a general description of certain tax consequences, under the Mexican Income Tax Law (Ley del Impuesto Sobre la Renta) and regulations thereunder, of the acquisition, ownership and disposition of ADSs or Series B shares by a holder that is a non-Mexican holder (as described below), and it does not purport to be a comprehensive description of all the Mexican federal tax considerations that may be relevant to a decision to purchase, hold or dispose of ADSs or Series B shares.  In addition, this summary does not address any non-Mexican or Mexican state or municipal tax considerations, that may be relevant to a non-Mexican holder of ADSs or Series B shares.

In 2014, a new Mexican Income Tax Law (Ley del Impuesto sobre la Renta) was enacted which resulted in important amendments to the tax regime applicable to both Mexican and non-Mexican resident taxpayers. While the corporate income tax rate remained at 30%, the tax reforms: (i) resulted in several amendments to corporate tax deductions, among them the elimination of deductions that were previously allowed for related-party payments to certain foreign entities and the narrowing of tax deductions for fringe benefits paid to employees, (ii) imposed a 10% withholding income tax on dividends paid by corporations, including Banco Santander Mexico, to both Mexican resident and foreign resident shareholders, (iii) repealed the possibility of paying taxes on a consolidated basis, (iv) increased the value-added tax from 11% to 16% in the Mexican border region, (v) required the use of electronic invoices and new monthly tax reports to be provided to governmental tax authorities and (vi) established a 10% income tax payable by Mexican resident individuals and foreign residents on the sale of stock listed on the Mexican Stock Exchange.

This summary is intended to be for general information purposes only, and is based upon the Mexican Income Tax Law and regulations thereunder, as in effect on the date of this annual report on Form 20-F, all of which are subject to change.

Prospective investors in and holders of ADSs or Series B shares should consult their own tax advisors as to the Mexican or other tax consequences of the purchase, ownership and disposition of ADSs or Series B shares including, in particular, the effect of any foreign, state or local tax laws, and their entitlement to the benefits, if any, afforded by the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion and a protocol thereto between Mexico and the United States, as amended (the “Tax Treaty”), and other tax treaties to which Mexico is a party and which are in effect.

For purposes of this summary, the term “non-Mexican holder” shall mean a holder that is not a resident of Mexico for tax purposes, and that will not hold ADSs or Series B shares, or a beneficial interest therein, in connection with the conduct of a trade or business, through a permanent establishment for tax purposes, in Mexico.

For purposes of Mexican taxation:

· an individual is a resident of Mexico for tax purposes, if such individual has established his or her place of residence in Mexico or if such individual has also established a place of residence outside Mexico, if his or

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her center of vital interests (centro de intereses vitales) is located within the territory of Mexico. This will be deemed to occur if (i) at least 50.0% of their aggregate annual income derives from Mexican sources, or (ii) the main center of their professional activities is located in Mexico. Mexican nationals who filed a change of tax residence to a country or jurisdiction that does not have a comprehensive exchange of information agreement with Mexico, in which their income is subject to a preferred tax regime pursuant to the provisions of the Mexican Income Tax Law, will be considered Mexican residents for tax purposes during the year of filing of the notice of such residence change and during the following three years;

· unless otherwise evidenced, a Mexican national individual shall be deemed a Mexican resident for tax purposes.  An individual will also be considered a resident Mexico for tax purposes, if such individual is a state employee, regardless of the location of the individual’s core of vital interests; and

· a legal entity is a resident of Mexico for tax purposes if it maintains the principal administration of its business, or the place of its effective management, in Mexico.

Non-residents of Mexico (whether individuals or corporate entities) who are deemed to have a permanent establishment in Mexico for tax purposes, shall be subject to the Mexican income tax laws, and all income attributable to such permanent establishment, will be subject to Mexican taxes in accordance with the Mexican Income Tax Law.

Taxation on Dividends

Pursuant to the provisions of the Mexican Income Tax Law, dividends, either in cash or in kind, paid to non-Mexican holders of ADSs or Series B shares are subject to a 10% Mexican withholding tax. Pursuant to provisions of the temporary Mexican Income Tax Law, dividends paid to non-Mexican holders from profits generated by us prior to 2014 and derived from our net after-tax profit account (“CUFIN”) existing on December 31, 2013, will not be subject to the 10% withholding tax.

In addition to the withholding tax described above, if dividends are not paid from our CUFIN balance, they will be subject to corporate level tax payable by us. This corporate tax paid by us on any such dividend distribution is not final and may be credited by us against our corporate income tax liability during the fiscal year in which the tax was paid and for the following two years. Dividends paid from our CUFIN account balance are not subject to the corporate income tax.

Taxation on Capital Gains

Gains on the sale of ADSs or Series B shares by a non-Mexican holder are subject to a 10% Mexican withholding tax if the transaction is carried out through a recognized securities market such as the Mexican Stock Exchange, to be withheld by the financial intermediary through which the sale is effected. The Mexican Income Tax Law provides that no withholding tax will apply if the holder is a resident of a country with which Mexico has in force a treaty for the avoidance of double taxation. For that purpose, the non-Mexican holder must provide a statement under oath to that effect to the financial intermediary, which statement must include the non-Mexican tax identification number of the non-Mexican holder. Additionally, to be eligible for the 10% Mexican withholding tax or the exemption, the holder (i) must have purchased and sold Series B shares in a recognized securities market, (ii) must not hold 10% or more of our Series B shares nor transfer 10% or more of our Series B shares in one or several transactions within a 24-month period, (iii) must not transfer control over us by transferring our Series B shares, and (iv) must not transfer the Series B shares in any transaction that restricts the seller from accepting a more competitive offer.

If the non-Mexican holder is ineligible for the 10% Mexican withholding tax on the gain or the treaty exemption set forth in the Mexican Income Tax Law referred to above (e.g., because the transaction is not carried out through a recognized market, such as the Mexican Stock Exchange), then the proceeds from the sale of our Series B shares by the non-Mexican holder would be subject to the general 25% tax rate applicable to the gross sales price or, alternatively, to a 35% tax rate applicable to the gain arising from the sale of our Series B shares, if certain requirements set forth under applicable law are met (including appointing an agent in Mexico for tax purposes and filing an ad-hoc tax return).

Under the Tax Treaty, a non-Mexican holder that is eligible to claim the benefits under the Tax Treaty, may be exempt from Mexican income tax gains realized from a sale or other disposition of Series B shares (directly or

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through ADSs) that is or is not carried through the Mexican Stock Exchange or such other approved securities market, to the extent such non-Mexican holder owned, directly or indirectly, less than 25% of our outstanding shares during the 12-month period preceding the date of the sale or other disposition, and provided that certain formal requirements set forth in the Mexican Income Tax Law are also complied with.

Other Mexican Taxes

There is currently no Mexican estate, gift, inheritance or value-added tax applicable to the purchase, ownership or disposition of ADSs or Series B shares by a non-Mexican holder, provided, however, that gratuitous transfers of our shares may, in certain circumstances, result in the imposition of Mexican federal income tax on the recipient.

There is currently no Mexican stamp, issue, registration or similar tax or duty payable by a non-Mexican holder with respect to the purchase, ownership or disposition of ADSs or Series B shares.

Material U.S. Federal Income Tax Consequences

The following is a description of the material U.S. federal income tax consequences to the U.S. Holders described below of owning and disposing of ADSs or Series B shares.  This discussion is not a comprehensive description of all tax considerations that may be relevant to a particular person’s decision to hold the securities.  This discussion applies only to a U.S. Holder that holds ADSs or Series B shares as capital assets for tax purposes (generally property held for investment).  In addition, it does not describe all of the tax consequences that may be relevant to you in light of your particular circumstances, including alternative minimum tax consequences, the potential application of the provisions of the Internal Revenue Code of 1986, as amended (the “Code”) known as the Medicare contribution tax, and differing tax consequences applicable to you if you are, for instance:

· a financial institution;

· a dealer or trader in securities;

· holding ADSs or Series B shares as part of a straddle, wash sale, conversion transaction or integrated transaction or entering into a constructive sale with respect to the ADSs or Series B shares;

· a U.S. Holder (as defined below) whose functional currency is not the U.S. dollar;

· a partnership for U.S. federal income tax purposes;

· a tax-exempt entity, including an “individual retirement account” or “Roth IRA”;

· a person that owns or is deemed to own ten percent or more of our voting stock;

· a person who acquired our ADSs or Series B shares pursuant to the exercise of an employee stock option or otherwise as compensation; or

· holding ADSs or Series B shares in connection with a trade or business conducted outside of the United States.

If an entity that is classified as a partnership for U.S. federal income tax purposes holds ADSs or Series B shares, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and upon the activities of the partnership.  Partnerships holding ADSs or Series B shares and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of holding and disposing of the ADSs or Series B shares.

This discussion is based on the Code, administrative pronouncements, judicial decisions, final, temporary and proposed U.S. Treasury regulations and the Tax Treaty, all as of the date hereof, any of which is subject to change, possibly with retroactive effect.  It is also based in part on representations by the Depositary and assumes that each obligation under the Deposit Agreement and any related agreement will be performed in accordance with its terms.

A “U.S. Holder” is a holder who, for U.S. federal income tax purposes, is a beneficial owner of ADSs or Series B shares who is eligible for the benefits of the Tax Treaty and is:

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· a citizen or individual resident of the United States;

· a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein 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, a U.S. Holder who owns ADSs will be treated as the owner of the underlying shares represented by those ADSs for U.S. federal income tax purposes.  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 concern that parties to whom American depositary shares are pre-released, or intermediaries in the chain of ownership between 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 holders of American depositary shares.  These actions would also be inconsistent with the claiming of the reduced rates of tax, described below, applicable to dividends received by certain non-corporate holders.  Accordingly, the creditability of Mexican taxes, and the availability of the reduced tax rates for dividends received by certain non-corporate U.S. Holders, each described below, could be affected by actions taken by such parties or intermediaries.

U.S. Holders should consult their tax advisers concerning the U.S. federal, state, local and foreign tax consequences of owning and disposing of ADSs or Series B shares in their particular circumstances.

This discussion assumes we are not a passive foreign investment company, as described below.

Taxation of Distributions

Distributions paid on ADSs or Series B shares, other than certain pro rata distributions of Series B shares, will generally be treated as dividends to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles).  Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions will generally be reported to U.S. Holders as dividends.  Subject to the discussion above regarding concerns expressed by the U.S. Treasury, dividends paid by qualified foreign corporations to certain non-corporate U.S. Holders (including individuals) may be eligible for taxation as “qualified dividend income” and therefore may be taxable at rates applicable to long-term capital gains.  A foreign corporation is treated as a qualified foreign corporation with respect to dividends paid on stock that is readily tradable on a securities market in the United States, such as the New York Stock Exchange, or NYSE, where our ADSs are traded.  Non-corporate U.S. Holders should consult their tax advisers to determine whether the favorable rates will apply to dividends they receive and whether they are subject to any special rules that limit their ability to be taxed at these  favorable rates.

The amount of a dividend will include any amounts withheld in respect of Mexican taxes.  The amount of the dividend will be treated as foreign-source dividend income to U.S. Holders and will not be eligible for the dividends-received deduction generally available to U.S. corporations under the Code.  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 dividend.  The amount of any dividend income paid in pesos will be the U.S. dollar amount calculated by reference to the exchange rate in effect on the date of receipt regardless of whether the payment is in fact converted into U.S. dollars.  If the dividend is converted into U.S. dollars on the date of receipt, U.S. Holders should not be required to recognize foreign currency gain or loss in respect of the  dividend income.  A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt.

Subject to applicable limitations, some of which vary depending upon the U.S. Holder’s circumstances, and subject to the discussion above regarding concerns expressed by the U.S. Treasury, any Mexican income taxes withheld from dividends on ADSs or Series B shares at a rate not exceeding the rate provided by the Tax Treaty generally will be creditable against the U.S. Holder’s U.S. federal income tax liability.  Instead of claiming a credit, the U.S. Holder may elect to deduct such Mexican income taxes in computing the U.S. Holder’s taxable income, subject to generally applicable limitations under U.S. law.  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.  The rules governing foreign tax credits are complex, and U.S. Holders should consult their tax advisers regarding the creditability of foreign taxes in their particular circumstances.

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Sale or Other Taxable Disposition of ADSs or Series B Shares

Gain or loss realized on the sale or other taxable disposition of ADSs or Series B shares will be capital gain or loss, and will be long-term capital gain or loss if the U.S. Holder held the ADSs or Series B shares for more than one year.  Long-term capital gain of a non-corporate U.S. Holder is generally taxed at preferential rates.  The deductibility of capital losses is subject to limitations.  The amount of the gain or loss will equal the difference between the U.S. Holder’s tax basis in the ADSs or Series B shares disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars.  If a Mexican tax is withheld on the sale or disposition of Series B shares or ADSs, a U.S. Holder’s amount realized will include the gross amount of the proceeds of the sale or disposition before deduction of the Mexican tax.  See “—Mexican Taxation —Taxation on Capital Gains” for a description of when a disposition may be subject to taxation by Mexico. This gain or loss will generally be U.S.-source gain or loss for foreign tax credit purposes. A U.S. Holder may elect to treat disposition gain that is subject to Mexican taxation as foreign-source gain for purposes of claiming a credit in respect of the tax. U.S. Holders should consult their tax advisers regarding the creditability of foreign taxes in their particular circumstances.

Passive Foreign Investment Company Rules

Based on proposed U.S. Treasury regulations, which are proposed to be effective for taxable years beginning after December 31, 1994, we believe that we were not a “passive foreign investment company” (a “PFIC”) for U.S. federal income tax purposes for 2014.  However, because the proposed U.S. Treasury regulations may not be finalized in their current form, because the application of the proposed regulations is not entirely clear and because the composition of our income and assets will vary over time, there can be no assurance that we will not be a PFIC for any taxable year.  The determination of whether we are a PFIC is made annually and is based upon the composition of our income and assets (including, among others, entities in which we hold at least a 25% interest), and the nature of our activities.

If we were a PFIC for any taxable year during which a U.S. Holder held ADSs or Series B shares, gain recognized by a U.S. Holder on a sale or other taxable disposition (including certain pledges) of the ADSs or Series B shares would generally be allocated ratably over the U.S. Holder’s holding period for the ADSs or Series B shares.  The amounts allocated to the taxable year of the sale or other taxable disposition and to any year before we became a PFIC would be taxed as ordinary income.  The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations for that year, as appropriate, and an interest charge would be imposed.  Further, to the extent that any distribution received by a U.S. Holder on its ADSs or Series B shares exceeds 125 percent of the average of the annual distributions on the ADSs or Series B shares received during the preceding three years or the U.S. Holder’s holding period, whichever is shorter, that distribution would be subject to taxation in the same manner as gain, as described immediately above.  Certain elections may be available that would result in alternative treatments (such as mark-to-market treatment) of the ADSs or Series B shares.  U.S. Holders should consult their tax advisers to determine whether any of these elections would be available and, if so, what the consequences of the alternative treatments would be in their particular circumstances.

Furthermore, if we were a PFIC or, with respect to a particular U.S. Holder, were treated as a PFIC for the taxable year in which we paid a dividend or for the prior taxable year, the preferential dividend rates discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply.

If a U.S. Holder owns ADSs or Series B shares during any year in which we are a PFIC, the holder generally must file annual reports containing such information as the U.S. Treasury may require on IRS Form 8621 (or any successor form) with respect to us, generally with the holder’s federal income tax return for that year.

Information Reporting and Backup Withholding

Payments 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 a corporation or other 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 holder’s U.S. federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to the Internal Revenue Service.

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Certain U.S. Holders who are individuals may be required to report information relating to their ownership of securities of a non-U.S. person, subject to certain exceptions (including an exception for securities held in certain accounts maintained by U.S. financial institutions, such as our ADSs).  U.S. Holders should consult their tax advisers regarding the effect, if any, of these rules on their ownership and disposition of ADSs or Series B shares.

F.  Dividends and Paying Agents

Not applicable.

G.  Statement by Experts

Not applicable.

H.  Documents on Display

We are subject to the informational requirements of the Exchange Act.  Accordingly, we are required to file reports and other information with the SEC, including annual reports on Form 20-F and reports on Form 6-K.  You may inspect and copy reports and other information filed with the SEC at the Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.  Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.  In addition, the SEC maintains an Internet website that contains reports and other information about issuers, like us, that file electronically with the SEC.  The address of that website is www.sec.gov.

As a foreign private issuer, we are exempt under the Exchange Act from, among other things, the rules prescribing the furnishing and content of proxy statements, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.  In addition, we will not be required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.

I.  Subsidiary Information

Not applicable.

ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk Management

The principal types of risk inherent in our business are market, liquidity, credit and operational risks.  The effectiveness with which we are able to manage the balance between risk and reward is a significant factor in our ability to generate long-term, stable earnings growth.  Toward that end, our senior management places great emphasis on risk management. For further information on market risk and risk management, see note 48 to our audited financial statements included elsewhere in this annual report on Form 20-F.

Organizational Structure

We regard risk management as a competitive element of a strategic nature, the ultimate goal of which is to maximize shareholder value.  Risk management is defined, both conceptually and organizationally, as the comprehensive treatment of the different risks (market, liquidity, credit, counterparty, operating, legal and technological risks) that are quantifiable and are assumed by us in the normal course of business.  The way we manage the risks inherent in our business is essential to understanding and determining our financial position and creating value in the long term.

The Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, or CNBV) has issued regulations governing risk management applicable to credit institutions.  Our Board of Directors has formed and maintains our Comprehensive Risk Management Committee (Comité de Administración Integral de Riesgos) based on the guidelines set forth in these regulations.  Our Comprehensive Risk Management Committee must be comprised of at least five members, including the head of our Comprehensive Risk Management Unit, our Chief Executive Officer, two board members (one of whom is the committee president) and our internal auditor.

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Our Comprehensive Risk Management Committee meets monthly and seeks to ensure that our operations adhere to the objectives, policies and procedures approved by the Board of Directors for risk management, which are set forth in our Comprehensive Risk Management Manual.

Our Comprehensive Risk Management Committee proposes to the Board of Directors, for their approval:

· Objectives, policies and procedures for the general management of risks.

· Risk exposure limits (on a consolidated basis, for each business unit and for each type of risk).

· Strategies for assigning resources related to the execution of operations.

In addition, our Comprehensive Risk Management Committee approves:

· Methodologies to identify, measure, monitor, limit, control, inform and disclose the different types of risks to which we are exposed.

· Models, parameters and scenarios used to measure and control risks.

· Execution of new transactions and services that involve risks.

Our Comprehensive Risk Management Committee also monitors compliance with the risk limits established by our Board of Directors.

Our Comprehensive Risk Management Committee reports existing risk exposure to our senior management and our Board of Directors, at least on a quarterly basis.  In particular, it reports our risk levels, as well as any deviation from the risk limits imposed by the risk policies and the corrective measures that have been implemented.  When a risk limit is breached, as determined by the credit or market risk department, as applicable, the excess is reported immediately, regardless of the severity of such breach, to the Comprehensive Risk Management Unit, which reports to the Comprehensive Risk Management Committee.  Our Comprehensive Risk Management Committee, in turn, reports to senior management and the Board of Directors.  The relevant business unit must then report to the credit or market risk department, as applicable, regarding the corrective measures that are being implemented to reduce risk below the risk limit.  The credit or market risk department, as applicable, monitors the risk until it is reduced below the risk limit.

Our Comprehensive Risk Management Committee has delegated to our Comprehensive Risk Management Unit (Unidad de Administración Integral de Riesgos) the responsibility for implementing the procedures for the measurement, management and control of risks, in accordance with established policies.  Our Comprehensive Risk Management Committee appoints one person responsible for the management of the Comprehensive Risk Management Unit.  This person, on behalf of the Comprehensive Risk Management Unit, reports any breaches of the risk limits and the corrective measures that have been implemented monthly to our Comprehensive Risk Management Committee and to the Board of Directors.  This person is also responsible for, among other things, presenting to the Board of Directors the Comprehensive Risk Management Committee’s reports, approvals and the risk exposures.

Our Comprehensive Risk Management Committee has the power to authorize deviations above the established risk limits, but any deviations must be reported to the Board of Directors on at least a quarterly basis.  Generally any breaches of the risk limits are low in severity and last for a few days.  Nevertheless, in the infrequent event that a breach is high in severity, the relevant business unit may request authorization from our Comprehensive Risk Management Committee, through the Comprehensive Risk Management Unit, for a specific and temporary deviation during which it will act to reduce the risk.  If the authorization is denied, then the business unit must reduce the risk as soon as possible by reducing the open risk position or hedging it, even if such action results in a loss.

Our Comprehensive Risk Management Committee may also create any subcommittees necessary to exercise its functions.  Our Credit Risk Committee, Market Risk Committee, Legal Risk Subcommittee and Operational Risk Subcommittee are subcommittees of the Comprehensive Risk Management Unit.  See “Item 6. Directors, Senior Management and Employees—C. Board Practices—Committees—Comprehensive Risk Management Committee” for additional information about our Comprehensive Risk Management Committee.

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Regulatory Review Process

We are subject to the CNBV’s ordinary regulatory review process, specified in regulations that govern the CNBV’s supervisory activities, which includes the annual evaluation of our risk models and risk management.  This annual review comprises the following steps:

· The CNBV sends us an official notice stating the date on which its inspection visit will take place, the purpose of the inspection and the initial documents that will be subject to review.

· The CNBV sends us an official notice confirming the date on which the inspection visit will take place.

· The inspection visit takes place on the scheduled date at our offices.  The visit includes review of information, interviews with officers and additional requests for information.  The visit is generally conducted in a fashion that permits dialogue between us and those officers of the CNBV conducting the review.

· Once the inspection visit is completed, the CNBV prepares an official report, which includes observations arising from the inspection visit regarding regulations or internal processes.  These observations may require answers to specific questions and may result in additional information requests.  In addition, the official report may require us to take corrective actions and provide a timetable for their implementation.

· We are entitled to respond to the observations set forth in the CNBV’s official report, including by expressing our disagreement with conclusions reached by the CNBV.

· After receipt of our responses, the CNBV issues a final report, setting forth its agreement or disagreement with the responses and the information provided.  This final report confirms the conclusion of the termination of the annual inspection process.  If we disagree with the CNBV’s conclusions, we are entitled to initiate an administrative or judicial action against any such conclusions.

Market Risk

General

We are exposed to market risk mainly as a result of the following activities:

· trading in financial instruments, which involves interest rate, foreign exchange rate, volatility and equity price risks;

· engaging in retail banking activities, which involves interest rate risk because a change in interest rates affects interest income, interest expense and customer behavior;

· investing in assets or instruments, the returns or accounts of which are denominated in currencies other than the peso, which involves foreign exchange rate risk; and

· all trading and non-trading activities, which involve liquidity risk.

Primary Market Risks and How They Arise

The primary market risks to which we are exposed are interest rate risk, foreign exchange rate risk, equity price risk and liquidity risk.  We are exposed to interest rate risk whenever there is a mismatch between interest rate-sensitive assets and liabilities.  Interest rate risk arises in connection with both our trading and non-trading activities.  Interest rate risk related to our trading activities primarily results from our investments in short-term Mexican Central Bank bills and notes, cross-currency swaps and sovereign bonds.

We are exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities and off-balance sheet items denominated in different currencies, either as a result of trading or in the normal course of business.  Our principal non-trading currency exposure is the U.S. dollar, which, as mandated by our policies, is hedged to the Mexican peso within established limits.  Our exposure to trading-related foreign exchange risk is based on our positions in bonds and currency swaps.

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We are exposed to equity price risk in connection with our trading investments in equity securities.  The execution of brokerage services is carried out by Casa de Bolsa Santander, our brokerage subsidiary.

We are also exposed to liquidity risk.  Market depth is the main liquidity driver in our trading portfolio, even though our policy is to trade the most liquid assets.  Our liquidity risk also arises in non-trading activities, due to the maturity gap between assets and liabilities mostly in our retail banking business.

We use derivatives for both trading and non-trading activities.  Trading derivatives are used to eliminate, reduce or modify risk in trading portfolios (primarily interest rate and foreign exchange risk) and to provide financial services to customers.  Our principal counterparties (in addition to customers) for this activity are financial institutions and clearing houses, such as the Mexican Derivatives Exchange (Mercado Mexicano de Derivados, S.A. de C.V., or MexDer).  Our principal derivative instruments include foreign exchange forwards, cross-currency swaps and interest rate swaps.  We also use derivatives in non-trading activity in order to manage the interest rate risk arising from asset and liability management activity.

Market Risk Management Policies

Our Market Risk Management Department within the Comprehensive Risk Management Unit is responsible for recommending the market risk management policies to be implemented by us, by establishing the parameters for measuring risks and delivering reports, analyses and evaluations to senior management, to our Comprehensive Risk Management Committee and to the Board of Directors.

The measurement of market risk quantifies the potential change in the value of our positions as a result of changes in market risk factors.

Depending on the types of activities performed by the business units, debt securities and share certificates are recorded as trading securities, securities available for sale and/or securities held to maturity.  In particular, what underlies and identifies securities available for sale is their permanent status, and they are handled as a structural part of the consolidated balance sheets.  We have established guidelines that must be applied to securities available for sale, as well as controls to seek to ensure compliance.

When significant risks are identified, they are measured and assigned limits with the aim of ensuring adequate control.  The risk is measured from a comprehensive perspective through a combination of the methodology applied to trading portfolios and the methodology applied to the management of assets and liabilities.

Trading Portfolios

To measure risks using a comprehensive approach, we follow the value at risk, or VaR, method, which is defined as the statistical estimate of the potential loss of value of a specific position in a specific period of time and with a specific level of confidence.  VaR is a universal measure of the exposure levels of the various risk portfolios.  It helps compare the risk levels among different instruments and markets by expressing the exposure level of each portfolio through a unique figure in economic units.

VaR is calculated using the historical simulation method, based on full valuation with 521 scenarios, a one-day horizon and a confidence level of 99%.

Furthermore, we perform monthly simulations of the losses or gains from the portfolios through revaluations under different scenarios (Stress Tests).  These simulations are generated in two ways:

· By applying to the risk factors percentage changes observed in a given historical period that includes significant market turbulence.

· By applying to the risk factors changes that depend on the volatility of each risk factor.

We perform back-testing every month to compare the daily losses and gains that would have occurred if the same positions had been maintained, considering only the change in value due to market movements, against the calculation of VaR, which enables our models to be calibrated.  Although they are prepared monthly, these reports include tests for all of the days.

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For further information about our methodologies, see note 48 to our audited financial statements.

The table below presents the VaR inherent in our portfolios as of December 31, 2013 and 2014:

	At December 31,
	2013					2014
	VaR (thousands of pesos)		Percentage of net capital (%)			VaR (thousands of pesos)		Percentage of net capital (%)
Trading desks	Ps.	69,042.60		0.08	%	Ps.	51,608.91		0.05	%
Market Making		42,495.42		0.05	%		36,909.53		0.04	%
Proprietary Trading		49,438.69		0.06	%		19,671.13		0.02	%
Risk factor
Interest Rate		64,326.06		0.07	%		43,593.72		0.05	%
Foreign Exchange		4,043.21		0.00	%		16,098.59		0.02	%
Equity		17,541.71		0.02	%		40,296.18		0.04	%

The average VaR (based on month-end amounts) in 2014 was:

	VaR (thousands of pesos)		Percentage of net capital (%)
Trading desks	Ps.	87,357.98		0.09	%
Market Making		57,803.78		0.06	%
Proprietary Trading		51,129.57		0.06	%
Risk factor
Interest Rate		89,019.25		0.10	%
Foreign Exchange		13,196.19		0.01	%
Equity		20,073.97		0.02	%

The risk performance of our trading portfolio with regard to trading activity in financial markets during 2014, measured by daily VaR in millions of pesos, is shown in the following graph.

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The above graph shows that daily VaR during 2014 remained at levels below the limit of U.S.$16 million (approximately Ps.236 million).

In 2014, the average daily VaR of the Group's market trading operations was Ps.86 million, as compared to Ps.78 million in 2013. In 2014, the changes in VaR were mainly due to changes in the interest rate risk factor as a result of our trading book´s strategy. VaR modeling did not change during 2014. At the end of December 2014, VaR was Ps.52 million.

During the first semester of 2014, the average daily VaR was Ps.89 million. However, in the second semester of 2014, as a result of interest rates reduction expectations, the average daily VaR consumption decreased to Ps.83 million and remained at levels between Ps.47 million and Ps.118 million.

The histogram below compares the distribution of risk in terms of daily VaR between 2013 and 2014. In 2013, the levels of VaR remained between Ps.53 and Ps.120 million on 96.8% of the days for which it was calculated. Higher values of VaR (greater than Ps.120 million) represented 3.2% of the period. During 2014, the levels remained between Ps.47 and Ps.120 million on 94% of the days for which they were calculated. Higher values (greater than Ps.120 million) represented 6% of the period.

Risk Histogram

Stress Tests

Below we present the different stress test scenarios based on different hypotheticals calculated for Grupo Financiero Santander Mexico’s trading book.

Probable Scenario

This scenario was defined based on movements derived from a standard deviation, with respect to risk factors that have an influence on the valuation of financial instruments included in Grupo Financiero Santander Mexico’s trading book for each period.  In summary, the movements applied to each risk factor were as follows:

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· Interest rate (“IR”), volatility (“Vol”) and Exchange rate (“FX”) risk factors were increased by 1 standard deviation.

· Equity risk factors (“EQ”) were decreased by 1 standard deviation.

The following table displays the possible gains (losses) for Grupo Financiero Santander Mexico’s trading book at the end of each quarter in the years presented, in millions of pesos, according to this stress scenario:

	As of March 31			As of June 30			As of September 30			As of December 31
	(Millions of pesos)
2014	Ps.	(24	)	Ps.	(71	)	Ps.	(57	)	Ps.	(10	)
2013		(104	)		(35	)		7			(37	)
2012		(84	)		(92	)		(27	)		(79	)
2011		(145	)		(122	)		(94	)		(90	)
2010		(154	)		(22	)		(179	)		(217	)

Possible Scenario

Under this scenario, risk factors were modified by 25%.  In summary, the movements applied to each risk factor were as follows:

· Risk factors: IR, Vol and FX were multiplied by 1.25 (they were increased by 25%).

· Risk factors EQ were multiplied by 0.75 (they were decreased by 25%).

The following table shows the possible profits (losses) for Grupo Financiero Santander Mexico’s trading book at the end of each quarter in the years presented, in millions of pesos, under this stress scenario:

	As of March 31			As of June 30			As of September 30			As of December 31
	(Millions of pesos)
2014	Ps.	(924	)	Ps.	(859	)	Ps.	(761	)	Ps.	(26	)
2013		(755	)		(612	)		(451	)		(930	)
2012		(1,362	)		(811	)		(521	)		(493	)
2011		(1,268	)		(1,618	)		(1,122	)		(1,112	)
2010		(645	)		(141	)		(2,501	)		(1,033	)

Remote Scenario

Under this scenario, risk factors were modified by 50%.  In summary, the modifications applied to each risk factor were as follows:

· Risk factors IR, Vol and FX were multiplied by 1.50 (i.e., they were increased by 50%).

· Risk factors EQ were multiplied by 0.5 (i.e., they were decreased by 50%).

The following table shows the possible profits (losses) for Grupo Financiero Santander Mexico’s trading book at the end of each quarter in the years presented, in millions of pesos, pursuant to this stress scenario:

	As of March 31			As of June 30			As of September 30			As of December 31
	(Millions of pesos)
2014	Ps.	(2,593	)	Ps.	(2,240	)	Ps.	(2,436	)	Ps.	(347	)
2013		(2,137	)		(1,646	)		(1,160	)		(2,462	)
2012		(2,830	)		(1,530	)		(1,173	)		(1,443	)
2011		(2,855	)		(3,441	)		(1,516	)		(2,039	)
2010		(140	)		782			(3,659	)		(933	)

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Assets and Liabilities Management (Banking Books)

Our retail banking activities generate significant balance sheet amounts.  Our Assets and Liabilities Committee, (Comité de Activos y Pasivos, or ALCO), is responsible for determining guidelines for managing risk with respect to financial margin, net worth and long-term liquidity, which must be monitored in the different retail portfolios.  The ALCO reports to our senior management.  Under this approach, our finance senior management is responsible for executing the strategies and policies established by ALCO in order to modify the risk profile of the commercial balance sheet.

The ALCO adopts investment strategies and hedges to keep these sensitivities within the target range and is responsible for the management of interest rate risk, long-term liquidity risk and capital structure.  As of the date of this annual report on Form 20-F, the foreign exchange risk in our banking books is not material and we intend to maintain the foreign exchange risk in the banking books at an immaterial level. Interest rate risk is the possibility of suffering losses as a consequence of the impact on the asset and liability structure from fluctuations in market interest rates.  When quantified, interest rate risk is our exposure to movements in the interest rate curves.

As part of corporate activities, we analyze the interest rate sensitivity of the net interest margin, or NIM, and market value of equity, or MVE, of the different balance sheet headings against interest rate variations.  This sensitivity derives from the maturity and interest rate re-pricing gaps for every asset and liability. The analysis is based on the classification of each balance line sensitive to interest rates over time, as a function of their amortization dates, maturity or contractual modification of the applicable interest rate.

The MVE is the net present value of the projected future flows of the financial assets and liabilities in the banking book.  We monitor the exposure of MVE to changes in interest rates by measuring the 1% MVE sensitivity, which is an estimate of the impact on MVE from a parallel movement of 100 basis points in market interest rates.

The NIM is the difference between the return on assets and the financial cost of financial liabilities in the banking book in a one-year period. We monitor the exposure of NIM to changes in interest rates by measuring the 1% NIM sensitivity, which is an estimate of the impact on NIM, in a one-year time frame, from a parallel movement of 100 basis points in market interest rates. The impact on NIM from changes in interest rates is reflected in profit and loss accounts and balance sheet quality.

The 1% NIM sensitivity and 1% MVE sensitivity measures are complementary: while the 1% MVE sensitivity measure estimates the exposure of our assets and liabilities to fixed rates, the 1% NIM sensitivity measure estimates the exposure of the assets and liabilities to variable rates. As a result, if a financial instrument has a high 1% MVE sensitivity, it would have a low 1% NIM sensitivity, and if a financial instrument has a low 1% MVE sensitivity, it would have a high 1% NIM sensitivity.

We use a sensitivity analysis to measure the interest rate risk of local and foreign currency (not included in the trading portfolios). We perform a simulation of scenarios, which are calculated as the difference between the present value of the flows in the chosen scenario (a curve with a parallel movement of 100 basis points in all its segments) and their value in the base scenario (current market). We have also established limits in regard to the maximum loss which these interest rate movements could impose on the economic value, 1% MVE sensitivity, (Ps.3,500 million in local currency and U.S.$35 million in foreign currency) and net financial income, 1% NIM  sensitivity (Ps.1,200 million in local currency and U.S.$15 million in foreign currency) in one year.

Our Comprehensive Risk Management Committee approves the 1% NIM and MVE sensitivity limits on an annual basis.  These limits are consistent with our risk policies and with our financial planning.  MVE and NIM limit consumption represents the amount of interest rate risk present in the banking books at any given time relative to the abovementioned sensitivity limits.

Although the limit consumption metrics are complementary, they are not directly correlated.  A change in interest rates has opposite directional impacts on market consumption levels of these metrics, but the amount of the impact may differ.  For this reason the consumption of limits could be similar.  Although having similar limit consumption on both measures does not necessarily imply that interest rate risk management is optimized or balanced, setting limits on both sensitivities does help ensure that management does not create interest rate exposure which could compromise the MVE or NIM.

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The following chart shows our NIM and MVE limit consumption for 2012 to 2014 at year-end as well as for each month in 2014.

In 2014, 1% MVE sensitivity remained stable with a maximum of 75% in March and a minimum of 60% in January. While 1% NIM sensitivity had a maximum of 94% in October and a minimum of 61% in March, these changes were due to short-term management activities that increased and decreased 1% NIM sensitivity beyond the average, respectively.

Our internal risk units propose risk methodology and risk model changes to our Comprehensive Risk Management Committee.  The Comprehensive Risk Management Committee is responsible for approving, among other things, (i) methodologies to identify, measure, monitor, limit, control, inform and disclose the different types of risks to which we are exposed; (ii) models, parameters and scenarios used to measure and control risks and (iii) new transactions and services that involve risks. This Committee holds monthly meetings and monitors that transactions are in line with the objectives, policies and procedures approved by the CNBV’s guidelines.

On an annual basis, the CNBV and Mexican Central Bank carry out an inspection visit to verify that we have complied with prudential rules established by CNBV regarding the comprehensive management of risk for credit institutions.  The agenda of the inspection visit includes a review of the functions of the Comprehensive Risk Management Committee.   Risk methodology and risk model validations and approvals are also reviewed as part of this inspection.

Liquidity Gap

The following table shows the liquidity gap of our assets and liabilities of different maturities as of December 31, 2014. The reported amounts include cash flows from interest on fixed and variable rate instruments.  The interest on variable rate instruments is determined using the forward interest rates for each period presented:

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	Total			0-1 months			1-3 months			3-6 months			6-12 months			1-3 years			3-5 years			>5 years			Not Sensitive
	(Millions of pesos)
Money Market	Ps.	136,146		Ps.	122,599		Ps.	61		Ps.	1		Ps.	8		Ps.	32		Ps.	32		Ps.	15		Ps.	13,399
Loans		571,076			80,794			50,330			43,781			58,872			148,276			56,949			137,353			(5,279	)
Trade Finance		—			—			—			—			—			—			—			—			—
Intragroup		(228	)		—			—			—			—			—			—			—			(228	)
Securities		220,743			192,457			1			1			1			5,855			—			—			22,429
Permanent		4,658			—			—			—			—			—			—			—			4,658
Other Balance Sheet Assets		68,547			—			—			—			—			—			—			—			68,547
Total Balance Sheet Assets		1,000,943			395,849			50,392			43,782			58,881			154,163			56,981			137,368			103,526
Money Market		(162,462	)		(155,404	)		(2,950	)		(9,899	)		(8,890	)		(1,607	)		(68	)		(1,116	)		17,472
Deposits		(430,155	)		(140,852	)		(42,264	)		(74	)		(11,382	)		(235,583	)		—			—			—
Trade Finance		(719	)		—			—			—			—			—			—			—			(719	)
Intragroup		—			—			—			—			—			—			—			—			—
Long-Term Funding		(123,910	)		(19,785	)		(1,868	)		(12,300	)		(6,105	)		(32,074	)		(25,361	)		(26,417	)		—
Equity		(125,578	)		—			—			—			—			—			—			—			(125,578	)
Other Balance Sheet Liabilities		(56,283	)		—			—			—			—			—			—			—			(56,283	)
Total Balance Sheet Liabilities		(899,107	)		(316,041	)		(47,082	)		(22,272	)		(26,377	)		(269,264	)		(25,429	)		(27,533	)		(165,109	)
Total Balance Sheet Gap		101,836			79,808			3,310			21,510			32,504			(115,101	)		31,552			109,835			(61,583	)
Total Off-Balance Sheet Gap		(1,912	)		(2,869	)		(973	)		284			400			(3,729	)		(109	)		(1,587	)		6,672
Total Structural Gap				Ps.	76,940		Ps.	2,336		Ps.	21,794		Ps.	32,904		Ps.	(118,830	)	Ps.	31,443		Ps.	108,248		Ps.	(54,910	)
Accumulated Gap					76,940			79,276			101,070			133,974			15,144			46,587			154,835			99,924

Interest Rate Risk Profile

The table below shows the distribution of interest rate risk by maturity as of December 31, 2014. The reported amounts include estimated interest on fixed and variable rate instruments. Interest on variable rate instruments is determined using the rate in effect as of the balance sheet date for the first scheduled interest payment and amounts determined based on the contractual spread for each period thereafter:

	Total			0-1 months			1-3 months			3-6 months			6-12 months			1-3 years			3-5 years			>5 years			Not Sensitive
	(Millions of pesos)
Money Market	Ps.	124,955		Ps.	60,052		Ps.	7		Ps.	—		Ps.	8		Ps.	32		Ps.	32		Ps.	15		Ps.	64,808
Loans		534,838			252,567			38,524			37,058			27,248			60,122			30,793			93,805			(5,279	)
Trade Finance		—			—			—			—			—			—			—			—			—
Intragroup		(228	)		—			—			—			—			—			—			—			(228	)
Securities		237,891			11,378			11,265			361			4,118			50,090			9,820			15,381			135,477
Permanent		4,658			—			—			—			—			—			—			—			4,658
Other Balance Sheet Assets		68,547			—			—			—			—			—			—			—			68,547
Total Balance Sheet Assets		970,661			323,997			49,796			37,419			31,375			110,244			40,645			109,201			267,985
Money Market		(152,529	)		(16,753	)		(19,615	)		(1,550	)		—			—			—			—			(114,611	)
Deposits		(412,118	)		(184,451	)		(7,580	)		(317	)		(22,135	)		(197,635	)		—			—			—
Trade Finance		(719	)		—			—			—			—			—			—			—			(719	)
Intragroup		—			—			—			—			—			—			—			—			—
Long-Term Funding		(220,050	)		(135,694	)		(469	)		(681	)		(1,679	)		(6,440	)		(24,741	)		(26,392	)		(23,955	)
Equity		(125,578	)		—			—			—			—			—			—			—			(125,578	)
Other Balance Sheet Liabilities		(56,283	)		—			—			—			—			—			—			—			(56,283	)
Total Balance Sheet Liabilities		(967,276	)		(336,898	)		(27,664	)		(2,547	)		(23,814	)		(204,075	)		(24,741	)		(26,392	)		(321,146	)
Total Balance Sheet Gap		3,385			(12,901	)		22,132			34,872			7,561			(93,831	)		15,904			82,809			(53,161	)
Total Off-Balance Sheet Gap		(1,912	)		9,694			836			(3,251	)		(1,332	)		(7,253	)		(791	)		(6,034	)		6,220
Total Structural Gap				Ps.	(3,207	)	Ps.	22,968		Ps.	31,620		Ps.	6,229		Ps.	(101,083	)	Ps.	15,113		Ps.	76,775		Ps.	(46,941	)
Accumulated Gap					(3,207	)		19,761			51,381			57,610			(43,473	)		(28,360	)		48,414			1,473

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Market Risk Limits

Our Comprehensive Risk Management Committee establishes market risk limits annually to accommodate senior management’s appetite for risk and to comply with the desired risk/return ratio (on a consolidated basis, for each business unit and for each type of risk).  The business units must request any subsequent limit modification from our Comprehensive Risk Management Committee through the Comprehensive Risk Management Unit.  This level includes trading and investment portfolio activities, balance sheet management and strategic positions (classified in accordance with business intentions).

Our market risk limits are based on each of our portfolios and books.  The limits structure is applied to control exposure and establish the total risk applicable to the business units.

We establish market risk limits for:

Trading Books:  VaR

Loss Trigger

Stop Loss

Interest Rate equivalent amount

Equity Delta

Fx Open positions

Banking Books: Interest Rate Sensitivity Market Value of Equity Net Interest Margin (NIM) (MVE)

For further information about the market risk limits established for our trading and banking books, see note 48 to our audited financial statements.

Liquidity Risk

Liquidity risk is associated with our capacity to finance the commitments we undertake at reasonable market prices, and it is important to our ability to carry out our business plans with stable financing sources.  Factors that influence liquidity risk may be external, such as a liquidity crisis, or internal, such as an excessive concentration of expirations.

The measures used to control liquidity risk in balance sheet management are the liquidity gap, liquidity ratios, stress scenarios, liquidity horizons and contingency plans. We manage expirations of assets and liabilities, performing oversight of maximum profiles for time lags. This oversight is based on analyses of asset and liability expirations, both contractual and related to management.  Liquidity risk is measured in terms of liquidity horizons, periods of time for which a survival horizon is established. A survival horizon is a term of days for which liquid assets are sufficient to fulfill our commitments under different stress scenarios. We target a 90-day survival horizon for local currency and all currency consolidated balance, and a 30-day survival horizon for foreign currency. During 2014 the balance remained above the established limits, and therefore we maintained a sufficient liquidity buffer. The financial management division within our Corporate Activities segment is in charge of executing the actions recommended by ALCO.

Our liquidity risk, including our liquidity management framework and our current liquidity position, is fully described in note 48 to our audited financial statements.

Credit Risk

General

Our Credit Committee is an internal management committee required by Mexican law that has powers to assist our Board of Directors in fulfilling its oversight responsibilities relating to:

· Any emerging risks associated with our loan portfolio.

· Investments in our portfolio.

· Resolving issues with respect to any of our credit operations.

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In addition to the responsibilities mentioned above, and others expressly delegated by our Board of Directors, our Credit Committee also performs the following functions and duties with full authority to act on behalf of our Board of Directors in these matters:

· Review and approve any and all amendments or modifications to the requirements, conditions or other provisions relating to the Board of Director’s general authorization of our lending activities.

· Review memoranda or other reports provided by our senior management concerning our loan portfolio and investment activities.

· Periodically review and assess underwriting policies and guidelines.

· Periodically review and assess surveillance and loss remediation policies and guidelines, including those relating to insured credits on the “Watch List.”

· Periodically review, assess and recommend to our Board of Directors investment policies, criteria, guidelines and strategy for its approval.

· Evaluate our performance on an annual basis and report the results of the evaluation to our Board of Directors.

The management of credit risk covers the identification, measurement, composition and valuation of aggregated risk and the determination of profitability adjusted to such risk, the purpose of which is to oversee the levels of risk concentration and adjust them to established limits and objectives.  We have implemented a policy of selective growth of credit risk and strict treatment of late payments and provisions.

As required under applicable provisions of the Mexican Banking Law (Ley de Instituciones de Crédito) and General Rules Applicable to Mexican Banks and pursuant to our internal policies, in connection with each loan (including mortgage and other consumer loans), we apply credit assessment and approval processes undertaken by trained officers and, when applicable, committees that comprise experienced bankers.  Furthermore, we maintain systems and personnel that continuously monitor loans, that we believe permit us to react promptly if delinquent conditions are present.  Our credit and monitoring personnel is subject to periodic training.  Furthermore, although we believe our systems relating to maintaining and supervising loans are state-of-the-art, we periodically conduct benchmarking against similar systems used by our affiliates.

We manage our credit risk differently for each of our customer segments throughout the three phases of the credit process: admission, follow-up and recovery, as explained below.

Admission

The loans that receive individual treatment (companies, financial institutions and entities) are identified and differentiated from those handled in standardized fashion (consumer and mortgage loans of private individuals and loans to businesses and micro-companies).

In the case of loans to which we apply individual treatment, we have a solvency classification or “rating” system that calculates the probability of nonperformance, which enables us to measure the risk associated with each customer from the start of the respective transaction.  The customer valuation obtained after analyzing the relevant risk factors in different areas is subsequently adjusted based on the specific characteristics of the transaction (such as guarantee or term).

Standardized risks, given their special characteristics (a large number of transactions involving relatively small amounts) require a different approach that ensures effective treatment and efficient allocation of resources, for which we use automatic decision-making tools, such as expert and credit scoring systems.

Follow-up

Business loans are subject to our “special oversight system” during the follow-up stage.  The special oversight system determines the policy to be followed in handling risk with companies or groups classified in such category.  There are four distinct special oversight situations or degrees, that in turn give rise to four different possible actions:

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to follow, to reduce, to get guarantees and to extinguish.  When a company and its loans are being evaluated, the risk analyst must decide whether to classify the company in any of these four categories and to begin special supervision until the relevant objective is accomplished (which means the risk is reduced, the guarantees are obtained or the risk is extinguished).  The special oversight rating may be determined either by alert signals, systematic reviews or special initiatives promoted by the Risk Division or Internal Audit Areas.  Our Risk Division is divided into nine territories, each of which has a group of risk analysts that are responsible for the follow-up of their portfolios according to the policies described above.

Recovery

Risks that we classify as past due loans based on noncompliance with the relevant payment schedule are assigned to our Recovery Units. Our Recovery Units are fundamental to our management of past due loans and are intended to minimize the final losses we incur. The Recovery Unit performs specialized risk management activities such as restructuring of loans, rescheduling payments or reaching a settlement agreement when the client is sued. We have different risk management activities with respect to (i) business installment loans (principally commercial loans), (ii) revolving SME loans, (iii) mortgage loans, and (iv) credit card and consumer loans.

With respect to business installment loans, we do not have prequalified restructuring programs or schemes. Instead, we negotiate with each debtor, review its capacity to make payments and the possibility of obtaining new  guarantees, and seek partial upfront payments as a sign of commitment. Based on this information, we decide whether the debtor qualifies for restructuring. Our success rate with respect to restructured business installment loans is approximately 56%. This percentage is calculated based on the peso amount of the loans. The time period that this success rate covers is 12 months. This percentage is based on the total amount of renegotiated loans at the time of renegotiation. Restructured business installment loans refer mainly to our renegotiated commercial loans. See note 12.e to our audited financial statements.

With respect to revolving SME loans, restructuring consists in eliminating the revolving characteristic of the credit and transforming it into an installment loan.

We do not have any prequalified restructuring programs or schemes for mortgage loans that have been classified as past due loans mainly due to the notarial and registration costs that such prequalified programs or schemes would entail. Our recovery activities with respect to mortgage loans have resulted in average recoveries of approximately 64% of the principal amount due plus 90 days of accrued interest.

In relation to credit cards and consumer loans that are past due loans based on noncompliance with the relevant payment schedule, we offer restructuring plans that allow us to adjust the payments of our clients to their capacity to make payments and to address their reasons for missing previous payments. These adjustments include reducing the rate and/or extending the period of payment for up to 60 months. The credit card and consumer restructured loans are classified as non-performing when the loan subject to restructuring is either past due or non-performing. Once the loan is classified as non-performing we must see evidence of sustained payment in order to re-classify the loan as performing. Restructuring plans offered to our credit card holders have a recovery rate between 45% and 50%. Six months after restructuring, approximately 45% of consumer loans are current in terms of repayment.

The following table shows the average during the last 72 months (renegotiation vintages from January 2009 to December 2014) of the accumulated amount of restructured loans (performing and non-performing loans) that were classified as non-performing or charged off, as a percentage of the total amount of loans that was renegotiated at different points in time after the renegotiation:

	NPLs and charge-offs As a % of total renegotiated amount at indicated points in time
	at 6 months			at 12 months			at 18 months
Consumer Loans(1)
Performing at the time of the renegotiation		21	%		32	%		42	%
Non-performing at the time of the renegotiation		39	%		49	%		62	%
Total Consumer Loans		22	%		33	%		43	%

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	NPLs and charge-offs As a % of total renegotiated amount at indicated points in time
	at 6 months			at 12 months			at 18 months
Commercial Loans(2)
Performing at the time of the renegotiation		22	%		24	%		24	%
Non-performing at the time of the renegotiation		25	%		37	%		37	%
Total Commercial Loans		21	%		26	%		26	%

(1) Includes credit card and consumer loans.

(2) Includes business installment and SME loans.

Based on the table above, the success rates for renegotiation vintages from January 2009 to December 2014 are as follows:

	Success Rates
	at 6 months			at 12 months			at 18 months
Consumer Loans(1)
Performing at the time of the renegotiation		79	%		68	%		58	%
Non-performing at the time of the renegotiation		61	%		51	%		38	%
Total Consumer Loans		78	%		67	%		57	%
Commercial Loans(2)
Performing at the time of the renegotiation		78	%		76	%		76	%
Non-performing at the time of the renegotiation		75	%		63	%		63	%
Total Commercial Loans		79	%		74	%		74	%

(1) Includes credit card and consumer loans.

(2) Includes business installment and SME loans.

The success rates tend to decrease going forward because the non-performing loans increase and accumulate as time goes by after the restructuring. The success rate for mortgages is not presented because renegotiations of mortgage loans are immaterial.

The following table shows point-in-time estimates of the success rates segmented by type of renegotiation, using the 2013 vintage and 2014 vintage performance as of December 31, 2014, to illustrate the different trends in our success rates for loans renegotiated due to concerns about credit (including impaired loans) and loans renegotiated due to factors other than concerns about credit.

	For the year ended 12/31/2013											For the year ended 12/31/2014
	Performing Loans											Performing Loans
	Renegotiated due to concerns about current or potential credit deterioration			Renegotiated due to other factors		Impaired Loans			Total			Renegotiated due to concerns about current or potential credit deterioration		Renegotiated due to other factors		Impaired Loans		Total
	(Millions of pesos)
Commercial		1,378			—		307			1,685			694		—		2,040		2,734
Mortgages		—			—		—			—			1		—		—		1
Consumer		1,314			—		207			1,522			542		—		799		1,341
Total		2,692			—		514			3,206			1,238		—		2,838		4,076
NPLs and charge offs	at December 31, 2014 (18 months*)											at December 31, 2014 (12 months)
Commercial		16	%		—		83	%		28	%		—		—		—		—
Consumer		48	%		—		91	%		54	%		—		—		—		—
Total		31	%		—		86	%		40	%		—		—		—		—
Success Rate	at December 31, 2014 (18 months*)											at December 31, 2014 (12 months)
Commercial		84	%		—		17%	%		72	%		—		—		—		—
Consumer		52	%		—		9	%		46	%		—		—		—		—
Total		69	%		—		14	%		60	%		—		—		—		—

* From 12 to 24 months of performance at December 31, 2013 (18 months on average)

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Success rates of renegotiated loans are reflected in the probability of default of the total portfolio, which includes performing, non-performing and renegotiated loans.  In accordance with our allowance for impairment losses methodology, the probability of default is calculated based on the PD transition matrix through roll rates in the consumer and mortgage loan portfolios, and based on ratings in the commercial portfolio.

Renegotiated loans have decreased from 3.2% of the total consumer loan portfolio as of December 31, 2013, to 2.7% as of December 31, 2014.  Our probability of default estimates reflect the behavior of our customer mix, which includes renegotiated and non-renegotiated loans, as well as performing and non-performing loans.  As such, our allowance for impairment losses is estimated based on the probability of default of portfolio pools with the same characteristics. The net decrease in the percentage of renegotiated loans between December 31, 2013, and December 31, 2014, is attributed to the movements set forth in the table below:

	% of Total Consumer Loans
Renegotiated Loans at December 31, 2013*		3.2	%
Collections/repayments on renegotiated loans		(0.6	)%
Charge-offs		(1.3	)%
Increase in consumer loan portfolio		(0.3	)%
New renegotiations		1.6	%
Renegotiated Loans at December 31, 2014		2.7	%

* Our loan renegotiation policy limits renegotiations to once per year up to a maximum of three every five years.

Counterparty Risk

We assume counterparty risk in our dealings with government, government agencies, financial institutions, corporations, companies and individuals in our treasury and correspondent banking activities.  We manage counterparty risk through a special unit whose organizational structure is independent of our business units.

We use the Interactive Risk Integrated System, or IRIS, system to ascertain the line of credit available with any Corporate and Financial counterparty, in any product and for any term and Equivalent Credit Risk, or REC, to control counterparty lines.  REC is a measure that estimates the potential loss if the counterparty ceases payment.  Because equivalent credit risk takes into account coefficients by product for the measurement of the potential risk and considers the current exposure with respect to each counterparty, the REC varies depending on the type of product and the effective term of the transactions.

Furthermore, the Gross Equivalent Credit Risk incorporates the Potential Credit Exposure or Additional Potential Risk, or RPA, which represents the possible evolution of the current credit exposure up to expiration, based on the characteristics of the transaction and possible variations in market factors.  Mexican Financial Institutions and Foreign Financial Institutions are very active counterparties with which we have current positions for financial instruments with counterparty credit risk.  The Gross REC is mitigated by the existence of netting

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agreements and, in certain cases, with collateral agreements or revaluation agreements with the counterparties. This mitigated risk is called Net REC.

Another element of credit risk is settlement risk, which arises in any transaction at its expiration date, given the possibility that the counterparty will not comply with its obligations to pay us, once we have satisfied our obligations by issuing our respective payment instructions.

To control these risks, our Financial Risk Senior Management, comprised of the Counterparty and Market Credit Risk Area, supervises on a daily basis our compliance with the counterparty risk limits.  These limits are established by counterparty, product and tenor.  The Credit Risk Admission Area for Global Wholesale Banking approves these counterparty risk limits.  Our Financial Risk Senior Management is also responsible for communicating the limits, consumptions and any excesses incurred on a daily basis.  Furthermore, our Financial Risk Senior Management reports monthly to our Comprehensive Risk Management Committee the limits for Counterparty Risk Lines and the limits for Issuer Risk Lines, current consumptions and any excesses or transactions with unauthorized customers.  It also reports the calculation of the expected loss for current operations in financial markets at the close of each month and presents different stress scenarios of the expected loss.

Counterparty Risk Lines refer to the maximum equivalent credit risk amount and the maximum permitted term for derivatives, repos, money market, foreign exchange spot or any other trading transactions.  Such risk lines are approved by the Credit Committee and are established for the following sectors: Mexican Sovereign Risk and Local Development Banking, Foreign Financial Institutions, Mexican Financial Institutions, Corporate Head Offices, Corporate Banking-SGC, Institutional Banking, Large Companies Unit and Project Finance.  Issuer Risk Lines refer to the maximum amount permitted for the purchase of fixed income securities and, in addition, regulate the maximum term and holding period permitted for each issuer.

Set forth below are the REC of the Counterparty Risk Lines and Issuer Risk Lines of Grupo Financiero Santander Mexico as of December 31, 2014, and the quarterly average Equivalent Credit Risk of Counterparty Risk Lines and Issuer Risk Lines of Grupo Financiero Santander Mexico for the fourth quarter of 2014.

	REC
	As of December 31, 2014		Fourth quarter 2014 Average
			(Millions of dollars)
Risk Lines
Sovereign Risk, Development Banking and Financial Institutions		16,422.94		20,887.63
Corporates		1,449.18		1,382.17
Companies		143.72		152.95

Set forth below are our REC lines’ maximum gross counterparty risk as of December 31, 2014, corresponding to types of derivatives transactions.

	Maximum REC gross
	As of December 31, 2014
	(Millions of dollars)
Type of Derivative
Rate Derivatives		13,627
Exchange Rate Derivatives		24,778
Derivatives on bonds		-
Equity Derivatives		513
TOTAL		38,918

* In IRIS, the Gross Equivalent Credit Risk does not consider mitigation by netting agreements and by collateral agreements with counterparties.

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The Expected Loss of Grupo Financiero Santander Mexico as of December 31, 2014, and the quarterly average of the expected loss of the Counterparty Risk Lines and Issuer Risk Lines of the Bank for the fourth quarter of 2014, are concentrated as follows:

	Expected Loss
	As of December 31, 2014		Fourth quarter 2014 Average
			(Millions of dollars)
Risk Lines
Sovereign Risk, Development Banking and Financial Institutions		5.02		5.40
Corporates		3.70		4.11
Companies		0.94		1.03

The Mexican Financial Institutions and Foreign Financial Institutions segments are very active counterparties with whom we maintain current positions of financial instruments with Counterparty Credit Risk. We mitigate Equivalent Credit Risk by netting agreements (ISDA-CMOF) and, in some cases, by collateral agreements (CSA-CGAR) or revaluation agreements with counterparties.

The composition of total collateral received for derivatives transactions as of December 31, 2014 is as follows:

Cash Collateral	57.76	%
Bonds Issued by the Mexican Federal Government Collateral	42.24	%

Operational Risk

Operational risk is defined as the risk of loss due to inadequate or failed internal processes, personnel or internal systems or due to external events.  This definition includes legal risk but excludes reputational risk and strategic risk.

We have an operational and technological risk management unit that is responsible for coordinating the implementation of policies and procedures according to the corporate model defined in Spain.  This unit also submits proposals to our Comprehensive Risk Management Committee for its approval of the methodologies, models and parameters used to identify, measure, limit, report and disclose the operational risk to which we are exposed.  Our operational risk unit reports directly to the operations head in Mexico and to the corporate operational risk manager in Spain.

Our Corporate Operational Risk Management Model is based on qualitative and quantitative tools for managing operational risk.  Among the qualitative tools are the risk and controls matrix, risk map and self-assessment questionnaire, while quantitative tools include tolerance levels, indicators, an error database and a system for data collection.

Anti-Money Laundering and Anti-Terrorist Financing

Our Communications and Control Committee approves, modifies and ensures the compliance of internal guidelines regarding the prevention, detection and reporting of money-laundering transactions.  In particular, the committee:

· establishes and amends our internal policies to prevent and detect acts or transactions that may be of illicit origin and may fall within the threshold of Articles 400 bis and 400 bis 1 of the Mexican Federal Criminal Code (Código Penal Federal) and rules thereunder;

· oversees our compliance with our applicable policies;

· evaluates the effectiveness of our policies based on the results observed and determines the necessary remedial measures;

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· decides on certain transactions that may fall within the category of unusual transactions and determines if we should notify the public authorities; and

· approves training policies for personnel and provides information to detect these transactions and ensure the enforcement of the prevention policies.

The Communications and Operations Control Committee (Comité de Comunicación y Control) reports to the Compliance Committee and Audit Committee.  Its primary purpose is to monitor the transactions of our prevention system and, in particular, to decide when to communicate unusual transactions to the authorities.  In addition, this committee reviews and approves the regulations and procedures relating to prevention, annual office review projects or plans, annual training programs, analyses of transactions and the list of clients subject to special authorizations and monitoring.

In general, this committee includes the individuals who are primarily responsible within each area that is directly involved in prevention: Commercial, Information Technology, Global Wholesale Banking, Legal Affairs and Internal Audit.  This committee is chaired, as appropriate, by our General Legal Counsel.

Legal Risk

Legal risk is defined as the potential loss from noncompliance with applicable legal and administrative provisions, the issuance of adverse administrative and court rulings and the application of penalties in relation to our transactions.

The following activities are performed in compliance with our Comprehensive Risk Management guidelines:

· establishment of policies and procedures to analyze legal validity and ensure the proper instrumentation of the legal acts performed;

· estimation of the amount of potential losses derived from unfavorable legal or administrative rulings and the possible application of penalties;

· analysis of legal acts governed by foreign legal systems;

· publication among managerial personnel and employees of legal and administrative provisions applicable to transactions;

· performance, at least annually, of internal legal audits; and

· maintenance of a historical database relating to judicial and administrative decisions, and their causes and costs, ensuring that those judicial and administrative decisions that result in a loss are registered systematically along with their different types of loss and costs, in accordance with accounting records, and are properly identified with the line or business unit of origin.

Technological Risk

Technological risk is defined as the potential loss from damages, interruption, alteration or failures derived from the use of or dependence on hardware, software, systems, applications, networks and any other information technology services provided to our customers.

We have developed a model in accordance with the corporate model created by Banco Santander Parent to deal with technological risk.  This model is currently integrated into the service and support processes of our corporate technology locations in order to identify, oversee, control and report on the technology risks to which our operations are exposed.  This model is intended to prioritize the establishment of control measures that will reduce the probability of risks materializing.

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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

Fees and Expenses

The depositary may charge each person to whom ADSs are issued, including, without limitation, issuances as a result of a distribution of shares, rights and other property, issuances pursuant to a stock dividend or stock split declared by us or issuances pursuant to a merger, exchange of securities or any other transaction or event affecting the ADSs or deposited securities, and each person surrendering ADSs for withdrawal of deposited securities in any manner permitted by the deposit agreement or whose ADRs are cancelled or reduced for any other reason, up to $5.00 for each 100 ADSs (or any portion thereof) issued, delivered, reduced, cancelled or surrendered, as the case may be.  The depositary may sell (by public or private sale) sufficient securities and property received in respect of a distribution of shares, rights and/or other property prior to such deposit to pay such charge.

The following additional charges shall be incurred by the ADR holders, by any party depositing or withdrawing Series B shares or by any party surrendering ADSs or to whom ADSs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by us or an exchange of stock regarding the ADRs or the deposited securities or a distribution of ADSs), whichever is applicable:

· a fee of $1.50 per ADR for transfers of certificated or direct registration ADRs;

· a fee of $0.05 or less per ADS for any cash distribution made pursuant to the deposit agreement;

· a fee of $0.05 or less per ADS per calendar year (or portion thereof) for services performed by the depositary in administering our ADR program (which fee may be charged on a periodic basis during each calendar year and shall be assessed against ADR holders as of the record date or record dates set by the depositary during each calendar year and shall be payable at the sole discretion of the depositary by billing such holders or by deducting such charge from one or more cash dividends or other cash distributions);

· a fee for the distribution of securities (or the sale of securities in connection with a distribution), such fee being in an amount equal to the fee for the execution and delivery of ADSs that would have been charged as a result of the deposit of such securities (treating all such securities as if they were Series B shares) but which securities or the net cash proceeds from the sale thereof are instead distributed by the depositary to those holders entitled thereto;

· a fee for the reimbursement of such fees, charges and expenses as are payable by the depositary or any of the depositary’s agents, including, without limitation, the custodian, or the agents of the depositary’s agents, in connection with the servicing of our Series B shares or other deposited securities (which charge shall be assessed against registered holders of our ADRs as of the record date or dates set by the depositary and shall be payable at the sole discretion of the depositary by billing such registered holders or by deducting such charge from one or more cash dividends or other cash distributions);

· stock transfer or other taxes and other governmental charges;

· cable, telex and facsimile transmission and delivery charges incurred at your request in connection with the deposit or delivery of Series B shares, ADRs or deposited securities;

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· transfer or registration fees for the registration or transfer of deposited securities on any applicable register in connection with the deposit or withdrawal of deposited securities;

· in connection with the conversion of foreign currency into U.S. dollars, the fees and expenses of the depositary charged by the depositary or its agent so appointed in connection with such conversion;

· such fees and expenses as are incurred by the depositary (including, without limitation, expenses incurred 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 laws, rules or regulations;

· fees of any division, branch or affiliate of the depositary utilized by the depositary to direct, manage and/or execute any public and/or private sale of securities under the deposit agreement, which are consistent with market standards in connection with such sales; and

· any other charge payable by the depositary, its agents (including the custodian) and the agents of the depositary’s agents in connection with the servicing of the Series B shares or other deposited securities.

We will pay all other charges and expenses of the depositary and any agent of the depositary (except the custodian) pursuant to agreements from time to time between us and the depositary.  The fees described above may be amended from time to time.

Direct and Indirect Payments

Our depositary has agreed to reimburse us for certain expenses we incur that are related to the establishment and maintenance of the ADR program, including investor relations expenses, reasonable legal, audit and accounting fees, initial and ongoing listing fees and certain of our out-of-pocket expenses.  The depositary also anticipates making available to us a set amount or portion of the depositary fees charged in respect of the ADR program or otherwise.  The depositary collects its fees for issuance and cancellation of ADSs directly from investors depositing Series B shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them.  The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees.  The depositary may collect its annual fee for depositary services by deduction from cash distributions, by directly billing investors or by charging the book-entry system accounts of participants acting for them.  The depositary may generally refuse to provide services to any holder until the fees and expenses owing by such holder for those services or otherwise are paid.

For the year ended December 31, 2014, we received approximately U.S.$8.4 millionas reimbursements from J.P. Morgan Chase Bank, N.A.

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PART II

ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

A.  Defaults

No matters to report.

B.  Arrears and Delinquencies

No matters to report.

ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

A.  Material Modifications to Instruments

None.

B.  Material Modifications to Rights

None.

C.  Withdrawal or Substitution of Assets

None.

D.  Change in Trustees or Paying Agents

None.

E.  Use of Proceeds

Not applicable.

ITEM 15.  CONTROLS AND PROCEDURES

A.  Disclosure Controls and Procedures

As of December 31, 2014, under the supervision and with the participation of our management, including our disclosure committee, our Chief Executive Officer and Chief Financial Officer, we performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934).  There are inherent limitations to the effectiveness of any control system, including disclosure controls and procedures.  Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2014 in ensuring that information we are required to disclose in the reports that we file or submit 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 our management, including our disclosure committee, our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

B.  Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining 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, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability

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of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS and includes those policies and procedures that:

· pertain to the maintenance of records that, in reasonable detail, fairly and accurately reflect the transactions and disposition of our assets;

· provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with IFRS, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

· provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, 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 because the degree of compliance with policies or procedures may deteriorate.

Management is responsible for establishing and maintaining adequate internal control over our financial reporting. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Based on this assessment, our management believes that as of December 31, 2014, our internal control over financial reporting is effective.

Our internal control over financial reporting as of December 31, 2014, has been audited by an independent registered public accounting firm, as stated in its report, which 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

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

We have audited the internal control over financial reporting of Grupo Financiero Santander México, S.A.B. de C.V. and subsidiaries (the “Group”) as of December 31, 2014, based on criteria established in Internal Control―Integrated Framework (2013) 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 Annual 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). 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

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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 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, 2014, based on the criteria established in Internal Control ― Integrated Framework (2013) 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), the consolidated financial statements as of and for the year ended December 31, 2014 of the Group and our report dated April 22, 2015 expressed an unqualified opinion on those consolidated financial statements and financial statement schedules when considered in relation to the basic consolidated financial statements taken as a whole.

/s/ Deloitte

Mexico, D.F.

April 22, 2015

D.  Changes in Internal Control 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

Our Audit Committee has three members, all of whom are non-executive independent directors, as determined in accordance with Article 37 of the Mexican Financial Groups Law (Ley para Regular las Agrupaciones Financieras), Article 25 of the Mexican Securities Market Law and our bylaws.  All of the members of our Audit Committee also meet the independence criteria set by the New York Stock Exchange, or NYSE, for foreign private issuers.  Our Board of Directors has determined that Fernando Ruiz Sahagún is also an “Audit Committee Financial Expert” as defined by the SEC.

ITEM 16B.  CODE OF ETHICS

Our Board of Directors has approved and adopted our General Code of Conduct, which are a code of ethics that applies to all of our employees, including executive officers, and to our Board members.  In the Audit Committee (Comité de Auditoría) and Board of Directors meetings held on February 11 and 14, 2013, respectively, amendments to our General Code of Conduct were approved.  This approval allowed us to incorporate a catalogue of ethical principles and rules of conduct that govern the performance of all Group employees into our General Code of Conduct.  The current version of our General Code of Conduct is posted and maintained on our website at www.santander.com.mx under the heading “Conoce al Banco-Código de Conducta.”  The information contained on our website is not a part of this annual report.During 2014, there were no amendments to, nor waivers granted under, our General Code of Conduct.

ITEM 16C.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table describes the amounts billed to us by Galaz, Yamazaki, Ruiz Urquiza, S.C., member firm of Deloitte Touche Tohmatsu Limited, independent registered public accounting firm, for audit and other services performed in fiscal years 2013 and 2014.

	2013		2014
	(Millions of pesos)
Audit fees	Ps.	14	Ps.	15
Audit-related fees(1)		70		39
Tax fees		3		3

(1) The fees for 2013 include Ps.19 million relating to services rendered in 2012 but paid in 2013.

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Audit Fees

Audit fees are fees billed for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. It includes the audit of our annual consolidated financial statements and other services that generally only the independent accountant reasonably can provide, such as comfort letters, statutory audits, consents and assistance with and review of documents filed with the Securities and Exchange Commission.

Audit-Related Fees

Audit-related fees are fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements for fiscal years 2014 and 2013 and not reported under the previous category. These services would include, among others: due diligence related to mergers and acquisitions, accounting consultations and audits in connection with acquisitions, internal control reviews, attest services that are not required by statute or regulation and consultation concerning financial accounting and reporting standards.

Tax Fees

Tax fees are fees billed for professional services for tax compliance and tax advice.

No amounts were billed to us by Galaz, Yamazaki, Ruiz Urquiza, S.C., member firm of Deloitte Touche Tohmatsu Limited, independent registered public accounting firm, in 2013 or 2014 for services other than audit, audit-related and tax services.

Pre-Approval Policies and Procedures

The Audit Committee is required to pre-approve the audit and non-audit services performed by the Company’s auditors in order to assure that the provision of such services does not impair the audit firm’s independence.

Each year, the Audit Committee proposes the appointment of the independent auditor to the Board.  At that time, the Audit 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 are included in the correspondent audit contracts of the Company with its principal auditing firm.

In addition, all non-audit services provided by the Company’s principal auditing firm or other auditing firms are subject to case-by-case pre-approval by the Audit Committee.

All of the audit fees, audit-related fees and tax fees described in this item 16C have been pre-approved by the Audit Committee in accordance with these pre-approval policies and procedures.

ITEM 16D.  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

All of the members of our Audit Committee satisfy the independence requirements of the NYSE applicable to foreign private issuers.

ITEM 16E.  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED

PURCHASERS

None.

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ITEM 16F.  CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

None.

ITEM 16G.  CORPORATE GOVERNANCE

Our corporate practices are governed by our bylaws (estatutos), the Mexican Securities Market Law (Ley del Mercado de Valores) and the regulations issued by the Mexican Banking and Securities Commission (Comisión Nacional Bancaria y de Valores) and the Mexican Stock Exchange (Bolsa Mexicana de Valores, S.A.B. de C.V.). In addition, our corporate governance practices reflect the Banco Santander Parent corporate governance framework described below.

In December 2012, primarily in response to the requirements of the European Banking Authority, our controlling shareholder, Banco Santander Parent, adopted a corporate governance framework (Marco de Gobierno Interno del Grupo Santander). The purpose of the framework is to organize and standardize the corporate governance practices of Banco Santander Parent and its most significant subsidiaries, including us, in order to enhance the ability of Banco Santander Parent to manage the risks arising from its operations around the world.

The three pillars of the framework are (i) an organizational model based on functions subject to internal governance, (ii) terms of reference according to which Banco Santander Parent exercises control and oversight over its subsidiaries and participates in specific decisions at the subsidiary level and (iii) corporate models establishing common guidelines for the management and control of Banco Santander Parent’s subsidiaries, subject to local autonomy considerations. In general, the framework purports to implement organizational and procedural changes rather than mandating particular substantive outcomes. However, in some cases, and subject to the limitations set forth in the framework, the framework states that Banco Santander Parent may require that its subsidiaries make substantive changes or take specific actions. The framework enables Banco Santander Parent to participate in the decision-making processes of its subsidiaries by requiring its approval of certain decisions that may have a significant impact on the Santander Group as a whole due to their significance or potential risk, such as decisions relating to mergers and acquisitions, capital structure, dividends and risk appetite, among other things. The framework also requires that a single person at each subsidiary be in charge of each function subject to internal governance and gives Banco Santander Parent the authority to participate in the appointment, evaluation and compensation of each such person.

By its own terms, the framework as a whole is premised on the legal and financial autonomy of the subsidiaries and does not empower Banco Santander Parent to supplant its subsidiaries’ decision-making processes. Moreover, each of the three pillars of the framework is explicitly made subject to local legal requirements. Our Board of Directors approved the adoption of this corporate governance framework in July 2013, subject to certain overarching principles:

· the precedence of applicable laws and regulations and orders of competent authorities over the framework to the extent they are in conflict;

· the subordination of the framework to our directors’ duty of loyalty and their obligation to create value for all of our shareholders rather than any particular shareholder or group of shareholders; and

· the disclosure of the adoption of the corporate governance framework to the public and to our employees and subsidiaries.

As a result of the precedence given to local legal requirements in the framework itself and in our Board of Directors’ adopting resolutions, we do not expect that the adoption of the corporate governance framework will affect our ability to comply with applicable corporate governance regulations, including SEC and NYSE rules applicable to foreign private issuers. For example, although one provision of the framework states that we must obtain Banco Santander Parent’s approval for our audit plan and that Banco Santander Parent may request additional audits at its discretion, to the extent that this provision of the framework would prevent our audit committee from fulfilling any of the requirements of applicable SEC or NYSE rules (including, for example, the audit committee’s obligation to be directly responsible for the appointment, compensation, retention and oversight of the work of any registered public accounting firm engaged for the purpose of preparing an audit report), we understand that this provision would be limited so as not to conflict with such requirements due to the precedence given to local legal requirements in the framework and our adopting resolutions. Similarly, we understand that the authorities given to

268

Banco Santander Parent under the framework to approve certain decisions by us and to approve the compensation of certain persons in charge of functions subject to internal governance are limited by the framework and the adopting resolutions so as not to limit the ability of members of our audit committee to make independent decisions or take independent actions as required by the audit committee independence requirements of applicable SEC and NYSE rules.

Pursuant to Section 303A.11 of the Listed Company Manual of the NYSE we are required to provide a summary of the significant ways in which our corporate governance practices differ from those required for United States resident companies under the NYSE listing standards. Section 303A of the NYSE Listed Company Manual sets forth certain corporate governance requirements that a company must satisfy to be listed on the NYSE. However, exemptions from many of the requirements are available to foreign private issuers such as us. As a foreign private issuer, we are permitted to, and we will, follow home country practice in lieu of the NYSE corporate governance standards from which we are exempt.

A discussion of the significant differences between the Mexican corporate governance standards that govern our practices and the NYSE standards applicable to U.S. companies follows below. It includes only a brief summary description of our corporate governance practices.

Majority of Independent Directors

Under NYSE Rules, listed companies must have a majority of independent directors. “Controlled companies,” which would include our company if we were a United States issuer, are exempt from this requirement under NYSE Rule §303A.00. Under our bylaws and in accordance with the Mexican Financial Groups Law (Ley para regular las Agrupaciones Financieras) and the Mexican Securities Market Law, at least 25% of the members of our Board of Directors must be independent; independence is determined in accordance with Article 37 of the Mexican Financial Groups Law and our bylaws, rather than NYSE standards.

The independence standards in Article 24 of the Mexican Financial Groups Law and our bylaws may not necessarily be consistent with the director independence standards prescribed by the NYSE. Moreover, the definition of “independence” under the Mexican Securities Market Law also differs in some aspects from the NYSE standard and prohibits, among other things, an independent director from being an employee or officer of the company or a stockholder that may have influence over our officers, relevant clients and contractors, as well as certain relationships between the independent director and family members of the independent director.

In accordance with the Mexican Securities Market Law, our shareholders’ meeting is required to make a determination as to the independence of our directors, though such determination may be challenged by the Mexican Banking and Securities Commission. There is no exemption from the independence requirement for controlled companies under Mexican law.

Executive Sessions

Under NYSE Rule §303A.03, non-management directors must meet in regularly scheduled executive sessions without management’s presence. In addition, independent directors should meet alone in an executive session at least once a year. We are exempt from this NYSE requirement. Our non-management directors have not held executive sessions without management in the past, and under our bylaws and applicable Mexican law, they are not required to do so.

Nominating/Corporate Governance Committee

Under NYSE Rule §303A.04, a nominating/corporate governance committee composed entirely of independent directors is required. The committee must have a charter specifying the purpose, duties and evaluation procedures of such committee. NYSE Rule §303A.00 exempts “controlled companies” such as us from these requirements. However, the Mexican Securities Market Law requires the creation of one or more committees that perform audit and corporate practices functions, and each committee must maintain at least three members appointed by the board of directors. Each such appointed member must be independent under Mexican law, except solely in respect of the corporate governance committee, where, for corporations controlled by a person or group maintaining 50% or more of the outstanding capital stock like us, the majority of committee members must be independent under Mexican law. Notwithstanding the foregoing, all of the members of our Corporate Governance Committee are independent,

269

as determined in accordance with Mexican law. Mexican law does not require and we do not have a committee charged with nominating directors for election to the Board.

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

Compensation Committee

Under NYSE Rule §303A.05, a compensation committee composed entirely of independent directors is required, and it must evaluate and approve the CEO’s compensation and make recommendations to the Board of Directors with respect to non-CEO executive officer compensation and incentive-compensation and equity-based plans that are subject to the approval of the Board of Directors. The committee must have a charter specifying the purpose, duties and evaluation procedures of the committee. NYSE Rule §303A.00 exempts “controlled companies” such as us from these requirements.

The General Rules Applicable to Mexican Banks require Mexican banks (whether listed or not) to have a remuneration committee, which must include at least two members of the board of directors of such bank, one of whom must be independent, as determined in accordance with Mexican law. The purpose, composition, authority and responsibilities of our Remuneration Committee, which reports to the board of directors of Banco Santander Mexico, have been established in a set of policies approved by the board of directors of Banco Santander Mexico, in accordance with Mexican law.

Audit Committee

Under NYSE Rule §303A.06, listed companies must have an audit committee that satisfies the independence and other requirements of Exchange Act Rule 10A-3. NYSE Rule §303A.07 specifies that the audit committee must have a minimum of three members, all of whom must meet additional NYSE independence standards, and it must have a charter specifying the purpose, duties and evaluation procedures of the committee. Foreign private issuers like us are subject to the basic audit committee requirements in §303A.06, but are exempt from the additional independence and charter requirements in §303A.07. Our audit committee has three members. In order to comply with Rule 10A-3 under the Exchange Act, all of the directors on our Audit Committee are independent, as determined in accordance with Rule 10A-3.

Mexican law requires that listed companies have an audit committee and that all of its members must be “independent” as defined under Mexican law.

Equity Compensation Plans

Under NYSE Rules §§3303A.08 and 312.00, equity compensation plans and all material revisions thereto require shareholder approval, subject to limited exemptions. We are exempt from such NYSE requirements. However, under Mexican rules, the adoption and amendment of an equity compensation plan requires shareholder approval, as a means to be permitted to engage in transactions with the issuer without having to conduct public offerings.

Corporate Governance Guidelines

Under NYSE Rule §303A.09, listed companies are required to adopt and maintain corporate governance guidelines addressing, among other things, director qualification standards, director responsibilities, director access to management and independent advisors, management succession and annual performance evaluations of the Board of Directors. Under Mexican rules, corporate governance guidelines are established by the Corporate Governance Committee in accordance with the applicable Mexican legislation, which imposes, among other things, qualification standards for the members of the board of directors and of the executive officers, independence of directors and directors’ responsibilities.

270

Code of Business Conduct and Ethics

Under NYSE Rule §303A.10, a code of business conduct and ethics is required and any waiver for directors or executive officers must be disclosed. Moreover, such code must contain compliance standards and procedures that will facilitate its effective operation. We are exempt from such NYSE requirements. However, we have adopted a code of conduct and ethics, which has been accepted by all of our directors, executive officers and other personnel.

ITEM 16H.  MINE SAFETY DISCLOSURE

Not applicable.

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PART III

ITEM 17.  FINANCIAL STATEMENTS

We have responded to Item 18 in lieu of this item.

ITEM 18.  FINANCIAL STATEMENTS

Financial Statements are filed as part of this annual report. See page F-1.

ITEM 19.  EXHIBITS

(a)  Index to Consolidated Financial Statements

Consolidated Financial Statements of Grupo Financiero Santander México, S.A.B. de C.V. and Subsidiaries

Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets as of December 31, 2013 and 2014	F-3
Consolidated Income Statements for the Years Ended December 31, 2012, 2013 and 2014	F-4
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012, 2013 and 2014	F-5
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2012, 2013 and 2014	F-6
Consolidated Statements of Cash Flow for the Years Ended December 31, 2012, 2013 and 2014	F-7
Notes to the Consolidated Financial Statements as of December 31, 2013 and 2014 and for each of the three years in the three-year period ended December 31, 2014	F-9
Financial Statement Schedules	F-206

(b)  List of Exhibits

Exhibit Number		Description
1.1		English translation of the bylaws (estatutos) of the Registrant (incorporated by reference to Exhibit 1.1 to the Company’s Annual Report on Form 20-F (File No. 001-35658) filed with the SEC on April 29, 2014).
2.1		Form of Deposit Agreement among the Registrant, JPMorgan Chase Bank, N.A., as depositary, and the holders from time to time of American depositary receipts issued thereunder evidencing American depositary shares (incorporated by reference to Exhibit (a) to our Registration Statement on Form F-6 (File no. 333-183694) filed with the SEC on September 4, 2012).
8.1	*	List of Subsidiaries
12.1	*	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
12.2	*	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
13.1	*	Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code.
13.2	*	Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code.
14.1	*	Opinion of the General Counsel of Grupo Financiero Santander México, S.A.B. de C.V. furnished pursuant to Instruction 3 to Item 7.B of Form 20-F.
15.1	*	Consent of Galaz, Yamazaki, Ruiz Urquiza, S.C., member firm of Deloitte Touche Tohmatsu Limited, independent registered public accounting firm.

* Filed with this Annual Report on Form 20-F.

We will furnish to the SEC, upon request, copies of any unfiled instruments that define the rights of holders of long-term debt of the Registrant or any of its consolidated subsidiaries.

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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.

GRUPO FINANCIERO SANTANDER MÉXICO, S.A.B. DE C.V.
By:	/s/ Marcos Alejandro Martínez Gavica
	Name:	Marcos Alejandro Martínez Gavica
	Title:	Executive President and Chief Executive Officer

Date: April 30, 2015

273

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

Consolidated Financial Statements in accordance with International Financial Reporting Standards as of December 31, 2013 and 2014 and for each of the three years in the three-year period ended December 31, 2014

Index	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets as of December 31, 2013 and 2014	F-3
Consolidated Income Statements for the Years Ended December 31, 2012, 2013 and 2014	F-4
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012, 2013 and 2014	F-5
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2012, 2013 and 2013	F-6
Consolidated Statements of Cash Flow for the Years Ended December 31, 2012, 2013 and 2014	F-7
Notes to the Consolidated Financial Statements as of December 31, 2013 and 2014 and for each of the three years in the three-year period ended December 31, 2014	F-8
Financial Statement Schedules	F-206

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

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

We have audited the accompanying consolidated balance sheets of Grupo Financiero Santander México, S.A.B. de C.V. and subsidiaries (the “Group”) as of December 31, 2013 and 2014, and the related consolidated income statements, comprehensive income, changes in total equity and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedules presented in the condensed financial information of the Group included on pages 196 – 198, herein. These consolidated financial statements and financial statement schedules are the responsibility of the Group’s management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of Grupo Financiero Santander México, S.A.B. de C.V. and subsidiaries as of December 31, 2013 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Group’s internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control ― Integrated Framework (2013) issued by the Committee of Sponsoring Organization of the Treadway Commission and our report dated April 22, 2015 expressed an unqualified opinion on the Group’s internal control over financial reporting.

Galaz, Yamazaki, Ruiz Urquiza, S.C.

Member of Deloitte Touche Tohmatsu Limited

/s/ Ricardo A. García Chagoyán

C.P.C. Ricardo A. García Chagoyán

Mexico City, Mexico

April 22, 2015

F-2

GRUPO FINANCIERO SANTANDER MÉXICO, S.A.B. DE C.V. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2013 AND 2014

(Millions of Pesos)

ASSETS	Note	12/31/2013	12/31/2014	LIABILITIES AND EQUITY	Note	12/31/2013	12/31/2014
CASH AND BALANCES WITH CENTRAL BANK	7	49,681	51,823	FINANCIAL LIABILITIES HELD FOR TRADING:		136,199	136,805
				Trading derivatives	11 and 32	71,773	94,842
				Short positions	11	64,426	41,963
FINANCIAL ASSETS HELD FOR TRADING:		176,907	208,371
Debt instruments	9	98,640	110,787	OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH
Equity instruments	10	5,346	5,160	PROFIT OR LOSS:		76,025	108,784
Trading derivatives	11 and 32	72,921	92,424	Deposits from Central Bank – Reverse repurchase agreements	19	18,512	5,006
				Deposits from credit institutions – Reverse repurchase agreements	19	7	28,746
				Customer deposits – Reverse repurchase agreements	20	57,506	69,726
				Marketable debt securities	21	-	5,306
OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH
PROFIT OR LOSS:		86,361	31,872	FINANCIAL LIABILITIES AT AMORTIZED COST:		528,184	579,125
Loans and advances to credit institutions - Repurchase agreements	8	70,594	27,379	Deposits from Central Bank	19	4,741	-
Loans and advances to customers - Repurchase agreements	12	15,767	4,493	Deposits from credit institutions	19	46,956	48,326
				Customer deposits	20	389,618	444,902
				Marketable debt securities	21	53,118	53,771
				Subordinated liabilities	22	16,824	19,446
AVAILABLE-FOR-SALE FINANCIAL ASSETS:		61,525	83,128	Other financial liabilities	23	16,927	12,680
Debt instruments	9	61,423	83,029
Equity instruments	10	102	99
				HEDGING DERIVATIVES	13 and 32	1,392	4,403
LOANS AND RECEIVABLES:		441,657	530,397
Loans and advances to credit institutions	8	51,246	67,307	PROVISIONS:	24	5,710	6,086
Loans and advances to customers	12	384,752	457,255	Provisions for pensions and similar obligations		2,371	2,873
Debt instruments	9	5,659	5,835	Provisions for tax and legal matters		1,332	1,308
				Provisions for off-balance sheet risk		1,524	1,359
HEDGING DERIVATIVES	13 and 32	300	4,740	Other provisions		483	546
				TAX LIABILITIES:		856	80
NON-CURRENT ASSETS HELD FOR SALE	14	1,100	844	Current		790	24
				Deferred	26	66	56
TANGIBLE ASSETS	15	4,767	5,262	OTHER LIABILITIES	25	16,934	12,413
				TOTAL LIABILITIES		765,300	847,696
INTANGIBLE ASSETS:		3,751	4,079
Goodwill	16	1,734	1,734	SHAREHOLDERS' EQUITY:	29	92,945	102,521
Other intangible assets	17	2,017	2,345	Share capital		25,658	25,658
				Share premium		11,415	11,415
TAX ASSETS:	26	25,943	22,988	Accumulated reserves		41,593	52,160
Current		8,693	7,033	Profit for the year attributable to the Parent		14,279	13,288
Deferred	26	17,250	15,955
				VALUATION ADJUSTMENTS:	28	(436)	(244)
				Available-for-sale financial assets		(458)	(537)
OTHER ASSETS	18	5,826	6,479	Cash flow hedges		22	293
				TOTAL SHAREHOLDERS’ EQUITY ATTRIBUTABLE  TO THE PARENT		92,509	102,277
				NON-CONTROLLING INTERESTS	27	9	10
				TOTAL EQUITY		92,518	102,287
TOTAL ASSETS		857,818	949,983	TOTAL LIABILITIES AND EQUITY		857,818	949,983

The accompanying notes are an integral part of these consolidated financial statements.

F-3

GRUPO FINANCIERO SANTANDER MÉXICO, S.A.B. DE C.V. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014

(Millions of Pesos)

			(Debit)/Credit
	Note		2012		2013		2014
Interest income and similar income		34		55,521		55,386		57,916
Interest expenses and similar charges		35		(21,639		(19,539		(20,305	)
NET INTEREST INCOME				33,882		35,847		37,611
Income from equity instruments		36		212		245		153
Fee and commission income		37		13,964		15,066		16,546
Fee and commission expenses		38		(2,279		(2,222		(3,173	)
Gains/(losses) on financial assets and liabilities (net)		39		1,265		3,281		2,619
Exchange differences (net)		40		(6		-		(11	)
Other operating income		41		628		787		487
Other operating expenses		41		(1,794		(2,078		(2,479	)
TOTAL INCOME				45,872		50,926		51,753
Administrative expenses:				(16,724		(18,630		(19,897	)
Personnel expenses		42		(8,232		(9,261		(9,977	)
Other general administrative expenses		43		(8,492		(9,369		(9,920	)
Depreciation and amortization	15 and 17			(1,537		(1,620		(1,682	)
Impairment losses on financial assets (net):				(8,970		(14,905		(13,132	)
Loans and receivables		12		(8,970		(14,905		(13,132	)
Impairment losses on other assets (net):				(34		(22		(48	)
Non-current assets held for sale		14		(34		(22		(48	)
Provisions (net)		24		680		(751		(157	)
Gains/(losses) on disposal of assets not classified as non-current assets held for sale		44		1,743		31		8
Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations				135		(16		(15	)
OPERATING PROFIT BEFORE TAX				21,165		15,013		16,830
Income tax		26		(3,853		(2,670		(3,541	)
PROFIT FROM CONTINUING OPERATIONS				17,312		12,343		13,289
PROFIT FROM DISCONTINUED OPERATIONS (net)		33		132		1,938		-
PROFIT FOR THE YEAR				17,444		14,281		13,289
Profit attributable to the Parent				17,443		14,279		13,288
Profit attributable to non-controlling interests				1		2		1
EARNINGS PER SHARE (pesos)
From continuing and discontinued operations
Basic earnings per share				2.57		2.11		1.96
Diluted earnings per share				2.57		2.11		1.96
From continuing operations
Basic earnings per share				2.55		1.82		1.96
Diluted earnings per share				2.55		1.82		1.96

The accompanying notes are an integral part of these consolidated financial statements.

F-4

GRUPO FINANCIERO SANTANDER MÉXICO, S.A.B. DE C.V. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED

DECEMBER 31, 2012, 2013 and 2014

(Millions of Pesos)

	Note		2012			2013			2014
PROFIT FOR THE YEAR				17,444			14,281			13,289
OTHER COMPREHENSIVE INCOME/(LOSS):
Items that will not be reclassified subsequently to profit or loss:
Remeasurement of defined benefit obligation from the year		1		(1,461	)		469			(393	)
Income tax relating to items that will not be reclassified subsequently		1		438			(141	)		118
				(1,023	)		328			(275	)
Items that may be reclassified subsequently to profit or loss:
Available-for-sale financial assets:
Valuation adjustments		28		263			(1,512	)		332
Amounts reclassified to consolidated income statement		28		68			(104	)		(262	)
Income tax		28		(100	)		485			(149	)
Cash flow hedges:
Valuation adjustments		13		160			371			(1,161	)
Amounts reclassified to consolidated income statement		13		(1,359	)		(470	)		1,548
Income tax				360			30			(116	)
				(608	)		(1,200	)		192
Other comprehensive income/(loss) for the year, net of income tax				(1,631	)		(872	)		(83	)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR				15,813			13,409			13,206
Attributable to the Parent				15,812			13,407			13,205
Attributable to non-controlling interests				1			2			1

The accompanying notes are an integral part of these consolidated financial statements.

F-5

GRUPO FINANCIERO SANTANDER MÉXICO, S.A.B. DE C.V. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014

(Millions of Pesos)

	Share Capital		Share Premium		Accumulated Reserves			Profit Attributable to the Parent			Valuation Adjustments			Total Shareholders’ Equity Attributable to the Parent			Non-Controlling Interests			Total Equity
BALANCES AT DECEMBER 31, 2011		25,658		11,415		34,618			17,770			1,372			90,833			11			90,844
Profit for the year		-		-		-			17,443			-			17,443			1			17,444
Other changes in equity:
Transfer to accumulated reserves		-		-		17,770			(17,770	)		-			-			-			-
Dividends declared		-		-		(7,300	)		-			-			(7,300	)		-			(7,300	)
Treasury shares		-		-		(419	)		-			-			(419	)		-			(419	)
Recognition of share-based payments		-		-		35			-			-			35			-			35
Other changes in non-controlling interests		-		-		-			-			-			-			(4	)		(4	)
Other comprehensive income/(loss) for the year, net of income tax		-		-		(380	)		-			(608	)		(988	)		-			(988	)
BALANCES AT DECEMBER 31, 2012		25,658		11,415		44,324			17,443			764			99,604			8			99,612
Profit for the year		-		-		-			14,279			-			14,279			2			14,281
Other changes in equity:
Transfer to accumulated reserves		-		-		17,443			(17,443	)		-			-			-			-
Dividends declared		-		-		(20,850	)		-			-			(20,850	)		-			(20,850	)
Treasury shares		-		-		115			-			-			115			-			115
Recognition of share-based payments		-		-		233			-			-			233			-			233
Other changes in non-controlling interests		-		-		-			-			-			-			(1	)		(1	)
Other comprehensive income/(loss) for the year, net of income tax		-		-		328			-			(1,200	)		(872	)		-			(872	)
BALANCES AT DECEMBER 31, 2013		25,658		11,415		41,593			14,279			(436	)		92,509			9			92,518
Profit for the year		-		-		-			13,288			-			13,288			1			13,289
Other changes in equity:
Transfer to accumulated reserves		-		-		14,279			(14,279	)		-			-			-			-
Dividends declared		-		-		(3,473	)		-			-			(3,473	)		-			(3,473	)
Treasury shares		-		-		(241	)		-			-			(241	)		-			(241	)
Recognition of share-based payments		-		-		277			-			-			277			-			277
Other comprehensive income/(loss) for the year, net of income tax		-		-		(275	)		-			192			(83	)		-			(83	)
BALANCES AT DECEMBER 31, 2014		25,658		11,415		52,160			13,288			(244	)		102,277			10			102,287

The accompanying notes are an integral part of these consolidated financial statements.

F-6

GRUPO FINANCIERO SANTANDER MÉXICO, S.A.B. DE C.V. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014

(Millions of Pesos)

	2012			2013			2014
A. CASH FLOWS FROM OPERATING ACTIVITIES:		23,335			5,450			5,482
Profit for the year		17,444			14,281			13,289
Adjustments made to obtain the cash flows from operating activities-		5,107			2,227			2,681
Depreciation and amortization		1,550			1,620			1,682
Impairment losses on other assets (net)		34			22			48
(Gains)/losses on disposal of non-current assets held for sale not classified as discontinued operations		(135	)		16			15
(Gains)/losses on disposal of assets not classified as non-current  assets held for sale		(1,743	)		(31	)		(8	)
Income tax expense recognized in consolidated income statement		3,853			2,670			3,541
Expense recognized with respect to equity-settled share-based payments		35			233			277
Gain on disposal of subsidiary		-			(2,116	)		-
Effect of foreign exchange rate changes on foreign currency cash deposits		1,513			(187	)		(2,874	)
Net (increase)/decrease in operating assets-		(44,070	)		(43,770	)		(84,752	)
Financial assets held for trading		44,001			21,771			(31,531	)
Other financial assets at fair value through profit or loss		(41,579	)		(23,193	)		54,489
Available-for-sale financial assets		14,395			(15,035	)		(21,768	)
Loans and receivables		(56,849	)		(27,271	)		(87,834	)
Other operating assets		(4,038	)		(42	)		1,892
Net increase/(decrease) in operating liabilities-		49,718			42,813			78,215
Financial liabilities held for trading		15,810			(4,904	)		606
Other financial liabilities at fair value through profit or loss		(47,077	)		4,833			32,759
Financial liabilities at amortized cost		78,638			40,757			46,894
Other operating liabilities		2,347			2,127			(2,044	)
Income tax paid		(5,076	)		(10,346	)		(4,104	)
Dividends received from equity instruments		212			245			153
B. CASH FLOWS FROM INVESTING ACTIVITIES:		1,501			(442	)		(2,500	)
Payments-		(1,782	)		(2,740	)		(2,508	)
Tangible assets		(674	)		(1,303	)		(1,283	)
Intangible assets		(1,108	)		(928	)		(1,225	)
Cash outflow on acquisition of subsidiary		-			(509	)		-
Proceeds-		3,283			2,298			8
Disposal of tangible assets		3,283			31			8
Cash inflow on disposal of subsidiary		-			2,445			-
Price adjustment on disposal of subsidiary		-			(178	)		-
C. CASH FLOWS FROM FINANCING ACTIVITIES:		(19,069	)		(3,911	)		(3,714	)
Payments-		(19,069	)		(20,735	)		(3,714	)
Dividends paid to owners		(18,650	)		(20,850	)		(3,473	)
Treasury shares		(419	)		115			(241	)
Proceeds-		-			16,824			-
Issue of subordinated notes		-			16,824			-
D. EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH DEPOSITS		(1,513	)		187			2,874
E. NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS		4,254			1,284			2,142
F. CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		44,143			48,397			49,681
G. CASH AND CASH EQUIVALENTS AT END OF YEAR		48,397			49,681			51,823

The accompanying notes are an integral part of these consolidated financial statements.

F-7

GRUPO FINANCIERO SANTANDER MÉXICO, S.A.B. DE C.V. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements as of

December 31, 2013 and 2014 and for each of the three years

in the period ended December 31, 2014

(in millions of Mexican pesos)

1. Introduction, basis of presentation of the consolidated financial statements and other information

a) Introduction

Grupo Financiero Santander México, S.A.B. de C.V. together with its subsidiaries (hereinafter, the “Group”) are a subsidiary of Banco Santander, S.A. in Spain (hereinafter, “Banco Santander (Spain)”) and are authorized by the Mexican Ministry of Finance and Public Credit to operate as a financial group under the form and terms established by the Mexican Financial Groups Law (“Ley para Regular las Agrupaciones Financieras”), subject to the supervision and oversight of the Mexican National Banking and Securities Commission (hereinafter, the “CNBV”) and the Mexican Central Bank (hereinafter, “Central Bank”, “Mexican Central Bank” or “Banco de México”). The Group and its subsidiaries are regulated, depending on their activities, by the CNBV, Central Bank and other applicable laws.

Per legal requirements, the Group has unlimited liability for the obligations assumed and losses incurred by each of its subsidiaries.

The main subsidiary of the Group is Banco Santander (México), S.A. (hereinafter, the “Bank”), which is a private-law entity, subject to the rules and regulations governing banking institutions operating in Mexico. The Bank conducts its business through branches and offices located throughout Mexico. The Bank is one of the largest private-sector banks in Mexico. The main offices of the Group are located at Prolongación Paseo de la Reforma 500, Colonia Lomas de Santa Fe, Ciudad de México.

The main activity of the Group’s subsidiaries is to carry out financial services operations including full-banking services, brokerage services and investment fund management (until November 2013).

b) Basis of presentation of the consolidated financial statements

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (hereinafter, “IFRS”) as issued by the International Accounting Standards Board (hereinafter, “IASB”) and interpretations issued by the IFRS Interpretations Committee (hereinafter, “IFRS IC”).

The consolidated financial statements have been prepared on a historical cost basis, except for financial assets held for trading, other financial instruments at fair value through profit or loss, derivative financial instruments and available-for-sale financial assets that have been measured at fair value.

The carrying values of recognized assets and liabilities that are designated as hedged items in fair value hedges that would otherwise be carried at amortized cost are adjusted to record changes in the fair values attributable to the risks that are being hedged in effective hedge relationships. The consolidated financial statements are presented in Mexican pesos.

The issuance of the consolidated financial statements was authorized by Marcos Alejandro Martínez Gavica, Executive President and Chief Executive Officer and Director of the Group on April 20, 2015. Consequently, they do not reflect events occurring after that date. These consolidated financial statements are pending to the approval of the ordinary shareholders’ meeting, where they may be modified, based on provisions set forth in the Mexican General Law of Corporations (Ley General de Sociedades Mercantiles).

F-8

The financial statements filed for Mexican statutory purposes are prepared in accordance with accounting principles and regulations prescribed by the CNBV, as amended, which are hereinafter referred to as “Mexican Banking GAAP”. Mexican Banking GAAP is composed of Mexican Financial Reporting Standards, as issued by the Mexican Board of Financial Reporting Standards, which, in turn, are supplemented and modified by specific rules mandated by the CNBV. The CNBV’s accounting rules principally relate to the recognition and measurement of impairment of loans and receivables, repurchase agreements and foreclosed assets.

The most significant differences between Mexican Banking GAAP and IFRS, as they relate to the Group, are in regard to:

a) Allowance for impairment losses. For Mexican Banking GAAP purposes, allowance for impairment losses and provisions for off-balance sheet risk are determined using prescribed formulas that are based primarily on an expected loss model. The expected loss model formulas are developed by the CNBV using information compiled from the Mexican lending market as a whole, which may differ significantly from the Group’s credit loss experience.

b) Effects of inflation. Mexican Banking GAAP requires the recognition of the comprehensive effects of inflation when an economic environment becomes inflationary, which, for purposes of Mexican Banking GAAP, is indicated by a three-year cumulative inflation rate of approximately 26 percent or more.

c) Actuarial gains and losses. Mexican Banking GAAP prescribes the “corridor” approach in order to amortize actuarial gains and losses during the remaining life of the pension plan, while IFRS require the recognition of actuarial gains and losses immediately through consolidated other comprehensive income such that the net pension asset or liability recognized in the consolidated balance sheet reflects the full value of the overfunded or underfunded status of the plan.

d) Deferred employee profit sharing. Mexican Banking GAAP requires the recognition of the deferred compulsory employee profit sharing effect based on the temporary differences arising between book and tax value of the assets and liabilities.

Application of new and revised IFRS

In the current year, the Group has applied a number of new and revised IFRS issued by the IASB that are mandatorily effective for the accounting period beginning on January 1, 2014.

Amendments to IFRS 10, IFRS 12 and IAS 27 Investment Entities

The Group has applied the amendments to IFRS 10, IFRS 12 and IAS 27 for the first time in the current year. The amendments to IFRS 10 define an investment entity and require a reporting entity that meets the definition of an investment entity not to consolidate its subsidiaries but instead to measure its subsidiaries at fair value through profit or loss in its consolidated and separate financial statements.

To qualify as an investment entity, a reporting entity is required to:

· obtain funds from one or more investors for the purpose of providing them with investment management services;

· commit to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and

· measure and evaluate performance of substantially all of its investments on a fair value basis.

F-9

Consequential amendments have been made to IFRS 12 and IAS 27 to introduce new disclosure requirements for investment entities.

As the Group is not an investment entity (assessed based on the criteria set out in IFRS 10 as at January 1, 2014), the application of the amendments has had no impact on the disclosures or the amounts recognized in the Group’s consolidated financial statements.

Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities

The Group has applied the amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities for the first time in the current year. The amendments to IAS 32 clarify the requirements relating to the offset of financial assets and financial liabilities. Specifically, the amendments clarify the meaning of “currently has a legally enforceable right of set-off” and “simultaneous realization and settlement”. The right of set-off must not be contingent on a future event. It must also be legally enforceable for all counterparties in the normal course of business, as well as in the event of default, insolvency or bankruptcy. The amendments also provide clarification on which settlement processes would meet the requirement for offsetting that an entity has “the intention to settle a financial asset and a financial liability net or simultaneously”. The realization of a financial asset and settlement of a financial liability is simultaneously if the settlements occur “at the same moment”.

The amendments have been applied retrospectively. As the Group does not have any financial assets and financial liabilities that qualify for offset, the application of the amendments has had no impact on the disclosures or on the amounts recognized in the Group’s consolidated financial statements. The Group has assessed whether certain of its financial assets and financial liabilities qualify for offset based on the criteria set out in the amendments and concluded that the application of the amendments has had no impact on the amounts recognized in the Group’s consolidated financial statements.

Amendments to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets

The Group has applied the amendments to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets for the first time in the current year. The amendments to IAS 36 remove the requirement to disclose the recoverable amount of a cash-generating unit (CGU) to which goodwill or other intangible assets with indefinite useful lives had been allocated when there has been no impairment or reversal of impairment of the related CGU. Furthermore, the amendments introduce additional disclosure requirements applicable to when the recoverable amount of an asset or a CGU is measured at fair value less costs of disposal. These new disclosures include the fair value hierarchy, key assumptions and valuation techniques used which are in line with the disclosure required by IFRS 13 Fair Value Measurements.

The application of these amendments has had no impact on the disclosures in the Group’s consolidated financial statements.

Amendments to IAS 39 Novation of Derivatives and Continuation of Hedge Accounting

The Group has applied the amendments to IAS 39 Novation of Derivatives and Continuation of Hedge Accounting for the first time in the current year. The amendments to IAS 39 provide relief from the requirement to discontinue hedge accounting when a derivative designated as a hedging instrument is novated under certain circumstances. The amendments also clarify that any change to the fair value of the derivative designated as a hedging instrument arising from the novation should be included in the assessment and measurement of hedge effectiveness.

The amendments have been applied retrospectively. As the Group does not have any derivatives that are subject to novation, the application of these amendments has had no impact on the disclosures or on the amounts recognized in the Group’s consolidated financial statements.

F-10

IFRIC 21 Levies

The Group has applied IFRIC 21 Levies for the first time in the current year. IFRIC 21 addresses the issue as to when torecognize a liability to pay a levy imposed by a government. The Interpretation defines a levy, and specifies that theobligating event that gives rise to the liability is the activity that triggers the payment of the levy, as identified by legislation.The Interpretation provides guidance on how different levy arrangements should be accounted for, in particular, it clarifiesthat neither economic compulsion nor the going concern basis of financial statements preparation implies that an entity hasa present obligation to pay a levy that will be triggered by operating in a future period.

IFRIC 21 has been applied retrospectively. The application of this Interpretation has had no impact on the disclosures or on the amounts recognized in the Group’s consolidated financial statements.

Annual Improvements to IFRSs 2010-2012 Cycle

In the 2010-2012 annual improvements cycle, the IASB issued seven amendments to six standards, which included an amendment to IFRS 13 Fair Value Measurement. The amendment to IFRS 13 is effective immediately and, thus, for periods beginning at January 1, 2014, and it clarifies in the Basis for Conclusions that short-term receivables and payables with no stated interest rates can be measured at invoice amounts when the effect of discounting is immaterial. This amendment to IFRS 13 has no impact on the Group.

Annual Improvements to IFRSs 2011-2013 Cycle

In the 2011-2013 annual improvements cycle, the IASB issued four amendments to four standards, which included an amendment to IFRS 1 First-time Adoption of International Financial Reporting Standards. The amendment to IFRS 1 is effective immediately and, thus, for periods beginning at January 1, 2014, and clarifies in the Basis for Conclusions that an entity may choose to apply either a current standard or a new standard that is not yet mandatory, but permits early application, provided either standard is applied consistently throughout the periods presented in the entity’s first IFRS financial statements. This amendment to IFRS 1 has no impact on the Group, since the Group is an existing IFRS preparer.

Standards and interpretations issued but not yet effective as of December 31, 2014

The Group has not yet adopted the following new or revised standards, as the effective dates are subsequent to the date of these consolidated financial statements. Management is currently analyzing the effects of adopting these new standards and has not yet quantified the potential impacts they may have on the consolidated financial statements.

IFRS 9 Financial Instruments5

IFRS 15 Revenue from Contracts with Customers4

Amendments to IFRS 11 Acquisitions of Interests in Joint Operations3

Amendments to IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortization3

Amendments to IAS 16 and IAS 41 Agriculture: Bearer Plants3

Amendments to IAS 19 Defined Benefit Plans: Employee Contributions1

Amendments to IFRSs Annual Improvements to IFRSs 2010-2012 Cycle2

Amendments to IFRSs Annual Improvements to IFRSs 2011-2013 Cycle1

F-11

1 Effective for annual periods beginning on or after July 1, 2014, with earlier application permitted.

2 Effective for annual periods beginning on or after July 1, 2014, with limited exceptions. Earlier application is permitted.

3 Effective for annual periods beginning on or after January 1, 2016, with earlier application permitted.

4 Effective for annual periods beginning on or after January 1, 2017, with earlier application permitted.

5 Effective for annual periods beginning on or after January 1, 2018, with earlier application permitted.

IFRS 9 Financial Instruments

IFRS 9 issued in November 2009 introduced new requirements for the classification and measurement of financial assets. IFRS 9 was subsequently amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition, and in November 2013 to include the new requirements for general hedge accounting. Another revised version of IFRS 9 was issued in July 2014 mainly to include a) impairment requirements for financial assets and b) limited amendments to the classification and measurement requirements by introducing a ‘fair value through other comprehensive income’ (FVTOCI) measurement category for certain simple debt instruments.

Key requirements of IFRS 9:

· all recognized financial assets that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement are required to be subsequently measured at amortized cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortized cost at the end of subsequent accounting periods. Debt instruments that are held within a business model whose objective is achieved both by collecting contractual cash flows and selling financial assets, and that have contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding, are measured at FVTOCI. All other debt investments and equity investments are measured at their fair value at the end of subsequent accounting periods. In addition, under IFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognized in profit or loss.

· with regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability’s credit risk are not subsequently reclassified to profit or loss. Under IAS 39, the entire amount of the change in the fair value of the financial liability designated as fair value through profit or loss is presented in profit or loss.

· in relation to the impairment of financial assets, IFRS 9 requires an expected credit loss model, as opposed to an incurred credit loss model under IAS 39. The expected credit loss model requires an entity to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition. In other words, it is no longer necessary for a credit event to have occurred before credit losses are recognized.

· the new general hedge accounting requirements retain the three types of hedge accounting mechanisms currently available in IAS 39. Under IFRS 9, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify for hedging instruments and the types of risk components of non-financial items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of an ‘economic relationship’. Retrospective assessment of hedge effectiveness is also no longer required. Enhanced disclosure requirements about an entity’s risk management activities have also been introduced.

F-12

Management anticipates that the application of IFRS 9 in the future may have a material impact on amounts reported in respect of the Group’s financial assets and financial liabilities. However, it is not practicable to provide a reasonable estimate of the effect of IFRS 9 until the Group undertakes a detailed review.

IFRS 15 Revenue from Contracts with Customers

In May 2014, IFRS 15 was issued which establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related Interpretations when it becomes effective.

The core principle of IFRS 15 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Standard introduces a 5-step approach to revenue recognition:

· Step 1: Identify the contract(s) with a customer.

· Step 2: Identify the performance obligations in the contract.

· Step 3: Determine the transaction price.

· Step 4: Allocate the transaction price to the performance obligations in the contract.

· Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

Under IFRS 15, an entity recognizes revenue when (or as) a performance obligation is satisfied, i.e. when ‘control’ of the goods or services underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been added in IFRS 15 to deal with specific scenarios. Furthermore, extensive disclosures are required by IFRS 15.

Management anticipates that the application of IFRS 15 in the future may have a non-material impact on the amounts reported and disclosures made in the Group’s consolidated financial statements. However, it is not practicable to provide a reasonable estimate of the effect of IFRS 15 until the Group performs a detailed review.

Amendments to IFRS 11 Accounting for Acquisitions of Interests in Joint Operations

The amendments to IFRS 11 provide guidance on how to account for the acquisition of a joint operation that constitutes a business as defined in IFRS 3 Business Combinations. Specifically, the amendments state that the relevant principles on accounting for business combinations in IFRS 3 and other standards (e.g. IAS 36 Impairment of Assets regarding impairment testing of a CGU to which goodwill on acquisition of a joint operation has been allocated) should be applied. The same requirements should be applied to the formation of a joint operation if and only if an existing business is contributed to the joint operation by one of the parties that participate in the joint operation.

A joint operator is also required to disclose the relevant information required by IFRS 3 and other standards for business combinations.

The amendments to IFRS 11 apply prospectively for annual periods beginning on or after January 1, 2016. Management does not anticipate that the application of these amendments to IFRS 11 will have a material impact on the Group’s consolidated financial statements.

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Amendments to IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortization

The amendments to IAS 16 prohibit entities from using a revenue-based depreciation method for items of property, plant and equipment. The amendments to IAS 38 introduce a rebuttable presumption that revenue is not an appropriate basis for amortization of an intangible asset. This presumption can only be rebutted in the following two limited circumstances:

a) when the intangible asset is expressed as a measure of revenue; or

b) when it can be demonstrated that revenue and consumption of the economic benefits of the intangible asset are highly correlated.

The amendments apply prospectively for annual periods beginning on or after January 1, 2016. Currently, the Group uses the straight-line method for depreciation and amortization for its tangible and intangible assets respectively. Management believes that the straight-line method is the most appropriate method to reflect the consumption of economic benefits inherent in the respective assets and accordingly, management does not anticipate that the application of these amendments to IAS 16 and IAS 38 will have a material impact on the Group’s consolidated financial statements.

Amendments to IAS 16 and IAS 41 Agriculture: Bearer Plants

The amendments to IAS 16 and IAS 41 define a bearer plant and require biological assets that meet the definition of a bearer plant to be accounted for as property, plant and equipment in accordance with IAS 16, instead of IAS 41. The produce growing on bearer plants continues to be accounted for in accordance with IAS 41.

Management does not anticipate that the application of these amendments to IAS 16 and IAS 41 will have a material impact on the Group’s consolidated financial statements as the Group is not engaged in agricultural activities.

Amendments to IAS 19 Defined Benefit Plans: Employee Contributions

The amendments to IAS 19 clarify how an entity should account for contributions made by employees or third parties to defined benefit plans, based on whether those contributions are dependent on the number of years of service provided by the employee.

For contributions that are independent of the number of years of service, the entity may either recognize the contributions as a reduction in the service cost in the period in which the related service is rendered, or to attribute them to the employees’ periods of service using the projected unit credit method; whereas for contributions that are dependent on the number of years of service, the entity is required to attribute them to the employees’ periods of service.

Management does not anticipate that the application of these amendments to IAS 19 will have a significant impact on the Group’s consolidated financial statements.

Annual Improvements to IFRSs 2010-2012 Cycle

The Annual Improvements to IFRSs 2010-2012 Cycle include a number of amendments to various IFRSs, which are summarized below.

The amendments to IFRS 2 (i) change the definitions of “vesting condition” and “market condition”; and (ii) add definitions for “performance condition” and “service condition” which were previously included within the definition of “vesting condition”’. The amendments to IFRS 2 are effective for share-based payment transactions for which the grant date is on or after July 1, 2014.

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The amendments to IFRS 3 clarify that contingent consideration that is classified as an asset or a liability should be measured at fair value at each reporting date, irrespective of whether the contingent consideration is a financial instrument within the scope of IFRS 9 or IAS 39 or a non-financial asset or liability. Changes in fair value (other than measurement period adjustments) should be recognized in profit or loss. The amendments to IFRS 3 are effective for business combinations for which the acquisition date is on or after July 1, 2014.

The amendments to IFRS 8 (i) require an entity to disclose the judgments made by management in applying the aggregation criteria to operating segments, including a description of the operating segments aggregated and the economic indicators assessed in determining whether the operating segments have ‘similar economic characteristics’; and (ii) clarify that a reconciliation of the total of the reportable segments’ assets to the entity’s assets should only be provided if the segment assets are regularly provided to the chief operating decision-maker.

The amendments to IAS 16 and IAS 38 remove perceived inconsistencies in the accounting for accumulated depreciation/amortization when an item of property, plant and equipment or an intangible asset is revalued. The amended standards clarify that the gross carrying amount is adjusted in a manner consistent with the revaluation of the carrying amount of the asset and that accumulated depreciation/amortization is the difference between the gross carrying amount and the carrying amount after taking into account accumulated impairment losses.

The amendments to IAS 24 clarify that a management entity providing key management personnel services to a reporting entity is a related party of the reporting entity. Consequently, the reporting entity should disclose as related party transactions the amounts incurred for the service paid or payable to the management entity for the provision of key management personnel services. However, disclosure of the components of such compensation is not required.

Management does not anticipate that the application of these amendments will have a significant impact on the Group’s consolidated financial statements.

Annual Improvements to IFRSs 2011-2013 Cycle

The Annual Improvements to IFRSs 2011-2013 Cycle include a number of amendments to various IFRSs, which are summarized below.

The amendments to IFRS 3 clarify that the standard does not apply to the accounting for the formation of all types of joint arrangement in the financial statements of the joint arrangement itself.

The amendments to IFRS 13 clarify that the scope of the portfolio exception for measuring the fair value of a group of financial assets and financial liabilities on a net basis includes all contracts that are within the scope of, and accounted for in accordance with, IAS 39 or IFRS 9, even if those contracts do not meet the definitions of financial assets or financial liabilities within IAS 32.

The amendments to IAS 40 clarify that IAS 40 and IFRS 3 are not mutually exclusive and application of both standards may be required. Consequently, an entity acquiring investment property must determine whether:

a) the property meets the definition of investment property in terms of IAS 40; and

b) the transaction meets the definition of a business combination under IFRS 3.

Management does not anticipate that the application of these amendments will have a significant impact on the Group’s consolidated financial statements.

c) Critical accounting estimates

IFRS requires that management make certain estimates and utilize certain assumptions to determine the valuation of items included in the consolidated financial statements and to make required disclosures. Although the actual results may differ, management believes that the estimates and assumptions utilized were appropriate under the circumstances.

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The critical accounting estimates applied in the preparation of these consolidated financial statements and related footnote disclosures are as follows:

-  Fair value measurement of certain financial instruments (see Note 2.d. iii. and Note 45.c.).

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e. an exit price) regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements for certain financial instruments is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2, leasing transactions that are within the scope of IAS 17, and measurements that have some similarities to fair value but are not fair value, such as value in use in IAS 36.

When there is no market price available for an identical instrument, the Group measures fair value using other valuation techniques that are commonly used by the financial markets that maximize the use of relevant observable inputs and minimize the use of unobservable inputs as explained in Note 2.d.

The availability of observable prices or inputs varies by product and market, and may change over time. The level of management judgment required in establishing fair value of financial instruments for which there is a quoted price in an active market is minimal. Similarly, there is little subjectivity or judgment required for instruments valued using valuation models that are standard across the industry and where all parameter inputs are quoted in active markets. The level of subjectivity and degree of management judgment required are more significant for those instruments valued using specialized and sophisticated models and those where some or all of the parameter inputs are not observable.

In making appropriate valuation adjustments, we follow methodologies that consider factors such as liquidity and credit risk (both counterparty credit risk in relation to financial assets and our own credit risk in relation to financial liabilities, which are at fair value through profit or loss).

-   Fair value estimates used in disclosures (see Note 2.d. iii. and Note 45.c.).

For financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

· Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical instruments;

· Level 2: inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data; and

· Level 3:  inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

This disclosure is provided in Note 2.d. iii.

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For financial instruments measured at amortized cost (which include balances with Central Bank, loans and receivables, deposits and short and long-term debt issued), the Group discloses the fair value. This disclosure is provided in Note 45.c. Generally, there is no trading activity in these instruments, and the fair value determination therefore requires significant management judgment.

-  Allowance for impairment losses and provisions for off-balance sheet risk (see Note 2.g., Note 12.c. and Note 24).

The Group recognizes credit losses inherent in financial instruments not measured at fair value taking into account the historical loss experience and other circumstances known at the time of assessment. For these purposes, inherent losses are losses incurred at the reporting date, calculated using statistical methods that have not yet been allocated to specific transactions.

The Group uses the concept of incurred loss to quantify the credit losses, using statistical models that consider the following three factors: “exposure at default”, “probability of default” and “loss given default”, as further discussed in Note 2.g.

The accounting estimates and judgments related to the allowance for impairment losses and provisions for off-balance sheet risk are a critical accounting estimate for the Group because the underlying assumptions used to assess the impairment can change from period to period and may significantly affect the Group’s operating result, particularly in circumstances of economic and financial uncertainty. Further, the statistical models incorporate numerous estimates and judgments (for example, probability of default, loss recovery rates and segmentation of loans in groups with similar credit risk characteristics). As such, the actual amount of the future cash flows and their timing may differ from the estimates used by management and consequently may cause actual credit losses to differ from the recognized allowance for impairment losses or provisions for off-balance-sheet risk.

-  The recognition and measurement of deferred tax assets (see Note 24).

As discussed in Note 2.t., 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.

In determining the amount of deferred tax assets, the Group uses current expectations and estimates on projections of future events and trends which may affect the consolidated financial statements, including a review of the eligible carryforward periods, available tax planning opportunities and other relevant considerations.

The Group believes that the accounting estimate related to the deferred tax assets is a critical accounting estimate because it requires significant management judgment and the underlying assumptions used in the estimate can change from period to period (for example, future projected operating performance of the Group).

-  Impairment of other financial assets (see Note 9 and 10).

The Group’s financial assets classified as available-for-sale are evaluated for impairment at each reporting date. For investments in debt and equity instruments classified as available-for-sale, evidence of impairment would include, among other things, significant or prolonged decline in fair value, specific conditions in an industry or geographical area or specific information regarding the financial condition of the company to which the investment relates. Because the estimate for impairment could change from period to period based upon future events that may or may not occur, the Group considers this to be a critical accounting estimate.

-  Goodwill and business combinations (see Note 4 and Note 16).

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. Accounting for goodwill and acquired intangible assets requires management’s estimates regarding: (1) the fair value of

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the acquired intangible assets and the initial amount of goodwill to be recorded, (2) the amortization period (for identified intangible assets other than those with indefinite lives or 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, the Group determines the fair value of the consideration and the fair value of the net assets acquired. The Group uses internal analysis, generally based on discounted cash flow techniques, to determine the fair value of the net assets acquired and non-cash components of the consideration paid. The actual fair value of net assets acquired could differ from the fair value determined, resulting in an under- or over-statement of goodwill.

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 Group.

-  Impairment of goodwill (see Note 16).

Determining whether goodwill is impaired requires an estimation of the value in use of the CGUs to which goodwill has been allocated. The value in use calculation requires that management estimates the future cash flows expected to arise from the CGU and a suitable discount rate in order to calculate present value. Where the actual future cash flows are less than expected, an impairment loss may arise. Details of the impairment loss calculation are set out in Note 16.

-  Defined benefit plan (see Note 24.c.).

The net cost of the defined benefit pension plan and other post-employment medical benefits and the present value of the pension obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These assumptions include the determination of the discount rate. Any changes in these assumptions will impact the carrying amount of pension obligations.

The Group determines the appropriate discount rate at the end of each year. This is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the pension obligations. The Group’s defined benefit obligation is discounted at a rate set by reference to market yields at the end of the reporting period on high quality corporate bonds.

Further details about pension obligations are given in Note 24.c.

-  The recognition and measurement of certain provisions and contingencies (see Note 24).

The Group conducts its business in many different legal, regulatory and tax environments, and, accordingly, legal claims, regulatory proceedings or uncertain income tax matters may arise.

The use of estimates is important in determining provisions for potential losses that may arise from litigation, regulatory proceedings and uncertain income tax matters. The Group estimates and provides for potential losses that may arise out of litigation, regulatory proceedings and uncertain income tax matters to the extent that a current obligation exists, the losses are probable and can be reasonably estimated. Significant judgment is required in making these estimates and the Group’s final liabilities may ultimately be materially different. The Group’s actual losses may differ materially from recognized amounts.

2. Accounting policies

The accounting policies and measurement bases applied in preparing the consolidated financial statements were as follows:

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a) Foreign currency transactions

i. Functional currency

The functional currency of all entities comprising the Group is the Mexican Peso (hereinafter, “peso” or “$”). Therefore, all balances and transactions denominated in currencies other than the peso are deemed to be denominated in foreign currency.

ii. Recognition of exchange differences

The gains and losses arising on the translation of foreign currency balances to the functional currency are recognized at their net amount under Exchange differences (net) in the consolidated income statement, except for exchange differences arising on financial instruments at fair value through profit or loss, which are recognized under Gains/(losses) on financial assets and liabilities (net) 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 in the consolidated balance sheet.

iii. Exposure to foreign currency risk

In preparing the consolidated financial statements, transactions in currencies other than the Group’s functional currency (foreign currencies) are recognized at the exchange rates prevailing at the dates of the transactions. Monetary items denominated in foreign currencies are retranslated to the functional currency at the rates prevailing at consolidated the balance sheet date. Non-monetary items carried at fair-value that are denominated in foreign currencies are retranslated to the functional currency at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured at historical cost in a foreign currency are not retranslated.

The Group performs a large number of foreign currency transactions, mainly in US dollars (“USD”). The transactions, assets and liabilities denominated in foreign currencies are translated to Mexican peso based on the exchange rates published by the Bank of México.

The “Fix” (48-hour) exchange rate used $13.0843 per one USD and $14.7414 per one USD as of December 31, 2013 and 2014, respectively.

Banco de México sets the ceilings for foreign currency liabilities and the liquidity ratio that the Group obtains directly or through its foreign branch, which must be determined daily for such liabilities to enable the Group to structure their contingency plans and access longer term funding within a reasonable time frame.

b) Basis of consolidation

i. Subsidiaries

The consolidated financial statements incorporate the financial statements of Grupo Financiero Santander México, S.A.B. de C.V. and entities (including structured entities) controlled by Grupo Financiero Santander México, S.A.B. de C.V. together with its subsidiaries. Control is achieved when the Grupo Financiero Santander México, S.A.B. de C.V.:

· has power over the investee;

· is exposed, or has rights, to variable returns from its involvement with the investee; and

· has the ability to use its power to affect its returns.

The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

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When the Group has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Group considers all relevant facts and circumstances in assessing whether or not the Group’s voting rights in an investee are sufficient to give it power, including:

· the size of the Group’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders;

· potential voting rights held by the Group, other vote holders or other parties;

· rights arising from other contractual arrangements; and

· any additional facts and circumstances that indicate that the Group has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings.

Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated income statement and other comprehensive income from the date the Group gains control until the date when the Group ceases to control the subsidiary.

On acquisition of control of a subsidiary, its assets, liabilities and contingent liabilities are recognized at fair value at the date of acquisition. Any excess of the acquisition cost, the amount recognized for non-controlling interests of the acquiree and the fair value of the acquirer’s previous held equity interest in the acquiree over the fair values of the identifiable net assets acquired are recognized as goodwill (see Note 16). Negative differences are recognized in profit or loss on the date of acquisition.

Profit or loss and each component of other comprehensive income are attributed to the owners of the Group and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Group and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance (see Note 27).

When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies.

The financial statements of the subsidiaries are fully consolidated with those of the Group. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.

A listing of the subsidiaries as of December 31, 2013 and 2014 is summarized in Note 49.

ii. Investments in associates or joint ventures

An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.

The results and assets and liabilities of associates or joint ventures are incorporated in the consolidated financial statements using the equity method of accounting, except when the investment, or a portion thereof, is classified as held for sale, in which case it is accounted for in accordance with IFRS 5. Under the equity method, an investment in an associate or a joint venture is initially recognized in the consolidated balance sheet at cost and

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adjusted thereafter to recognize the Group’s share of the profit or loss and other comprehensive income of the associate or joint venture. When the Group’s share of losses of an associate or a joint venture exceeds the Group’s interest in that associate or joint venture (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate or joint venture), the Group discontinues recognizing its share of further losses. Additional losses are recognized only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture.

An investment in an associate or a joint venture is accounted for using the equity method from the date on which the investee becomes an associate or a joint venture. On acquisition of the investment in an associate or a joint venture, any excess of the cost of the investment over the Group’s share of the net fair value of the identifiable assets and liabilities of the investee is recognized as goodwill, which is included within the carrying amount of the investment. Any excess of the Group’s share of the net fair value of the identifiable assets and liabilities over the cost of the investment, after reassessment, is recognized immediately in profit or loss in the period in which the investment is acquired.

As of December 31, 2013 and 2014 the Group did not have any associates.

As of December 31, 2013 and 2014 the Group has a commercial alliance with Elavon Mexico in order to share revenues and expenses jointly related to the merchant services. This commercial alliance is non-material to the Group’s consolidated financial statements.

iii. Business combinations

Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a businesscombination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interestsissued by the Group in exchange for control of the acquiree. Acquisition-related costs are generally recognized in profit or loss as incurred.

At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognized at their fair value, except that:

· deferred tax assets or liabilities, and assets or liabilities related to employee benefit arrangements are recognized and measured in accordance with IAS 12 Income Taxes and IAS 19 respectively;

· liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of the Group entered into to replace share-based payment arrangements of the acquiree are measured in accordance with IFRS 2 at the acquisition date; and

· assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are measured in accordance with that Standard.

Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interestsin the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognized immediately in profit or loss as a bargain purchase gain in the consolidated income statement (see Note 2.m.)

Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests’ proportionate share of the recognized amounts of the acquiree’s identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis. Other types of non-controlling interests are measured at fair value or, when applicable, on the basis specified in another IFRS.

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When the consideration transferred by the Group in a business combination includes assets or liabilities resulting froma contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date.

The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with IAS 39, or IAS 37 Provisions, Contingent Liabilities and Contingent Assets, as appropriate, with the corresponding gain or loss being recognized in profit or loss.

When a business combination is achieved in stages, the Group’s previously held equity interest in the acquiree is remeasured to its acquisition-date fair value and the resulting gain or loss, if any, is recognized in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognized in other comprehensive income are reclassified to profit or loss where such treatment would be appropriate if that interest were disposed of.

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see above), or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognized at that date.

Any positive difference between the sum of the consideration transferred; the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previous held equity interest in the acquiree over the fair values of the net identifiable assets acquired is recognized as discussed in Note 2.l. Any negative difference is recognized as bargain purchase gain in the consolidated income statement.

iv. Changes in the Group’s ownership interests in existing subsidiaries

Changes in the Group’s ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions, no gain or loss is recognized in the consolidated income statement and the initially recognized goodwill is not remeasured. The carrying amounts of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in Accumulated reserves in Shareholders’ equity.

When the Group loses control of a subsidiary, a gain or loss is recognized in profit or loss and is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-controlling interests. All amounts previously recognized in Valuation adjustments in Shareholders’ equity in relation to that subsidiary are accounted for as if the Group had directly disposed of the related assets or liabilities of the subsidiary (i.e. reclassified to profit or loss or transferred to another category of equity as specified/permitted by applicable IFRSs). The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IAS 39, when applicable, the cost on initial recognition of an investment in an associate or a joint venture.

Notes 3 and 4 contain information regarding business combinations that occurred during 2013.

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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.

IAS 39 defines a derivative as a financial instrument or other contract within the scope of the Standard with all three of the following characteristics

· its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (sometimes called the “underlying”);

· it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and

· it is 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 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:

- Pensions and similar obligations (see Note 24. c.).

- Share-based payments (see Note 42. b.).

ii. Classification of financial assets for measurement purposes

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, such as Repurchase agreements, 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.

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- 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 joint ventures, provided that such instruments have not been classified as Financial assets held for trading or as Other financial assets at fair value through profit or loss.

- Loans and receivables: This category includes the investment arising from ordinary lending activities, such as the cash amounts of loans drawn down and not yet repaid by customers or the deposits placed with other credit institutions, whatever the legal instrument and unquoted debt securities, constituting part of the Group’s business.

The Group generally intends to hold the loans and receivables granted by it until their final maturity and, therefore, they are presented in the consolidated balance sheet at their amortized cost (net of allowance for impairment losses).

- 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.

As of December 31, 2013 and 2014, the Group did not hold any investment classified as held 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 Bank: cash balances and balances receivable including the compulsory deposits with Banco de México.

- Loans and receivables: includes all loans and receivables granted by the Group, other than those classified as securities, as well as finance lease receivables and other receivables, such as balances receivable from clearing houses and settlement agencies for transactions carried out on the stock exchange and other organized markets, bonds given in cash, capital calls, fees and commissions receivable for financial guarantees and other balances arising from transactions not related to banking transactions and services. Loans and receivables are classified  in accordance with the institutional sector to which the debtor belongs, under:

- Loans and advances to credit institutions: loans of any nature, including deposits provided to credit institutions.

- Loans and advances to customers: includes all other loans.

- Debt instruments: bonds and other debt securities that represent a debt obligation for their issuer and that bear interest.

- Equity instruments: financial instruments issued by other entities, such as shares, which have the nature of equity instruments for the issuer, excluding equity instruments of issuers over which the Group exercises control, joint control or significant influence. 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 relationship, including embedded derivatives separated from hybrid financial instruments.

- Hedging derivatives: includes the fair value of derivatives in favor of the Group, including embedded derivatives separated from hybrid financial instruments, designated as hedging instruments in hedge accounting.

F-24

iv. Classification of financial liabilities for measurement purposes

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 liability position of financial instruments entered into for the purpose of generating a profit in the near term from fluctuations in their prices including financial derivatives that do not qualify for hedge accounting and sales of borrowed securities (short positions).

- Other financial liabilities at fair value through profit or loss: financial liabilities are included in this category when such classification provides for more relevant information regarding the financial liability, either because this eliminates or significantly reduces recognition or measurement inconsistencies (accounting mismatches) that would otherwise arise from measuring the 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, such as the reverse repurchase agreements.

- Financial liabilities at amortized cost: this category includes financial liabilities not included in any of the above-mentioned categories which arise from the ordinary borrowing activities.

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 classified as marketable securities and those having the substance of subordinated liabilities. This item also includes cash bonds and cash consignments received, the proceeds of which may be invested without restriction. Deposits are classified based on type of depositor as follows:

- Deposits from Central Bank: deposits of any nature received from the Banco de México.

- Deposits from credit institutions: deposits of any nature, including credit received in the name of credit institutions.

- Customer deposits: includes all other deposits.

- Marketable debt securities: includes bonds and other debt represented by marketable securities, other than subordinated liabilities. This item includes the liability component of compound financial instruments issued by the Group.

- Trading derivatives: includes the fair value of derivatives with a liability balance, including embedded derivatives separated from the host contract, which are not accounted for as hedges.

- Short positions: includes the amount of financial liabilities arising from the outright sale of financial assets acquired under repurchase agreements, securities loans and sales of borrowed securities.

- Subordinated liabilities: proceeds from financing received, which for the purposes of payment priority rank behind ordinary debt. This category also includes the financial instruments issued by the Group, which form part of the Group’s capital management for regulatory purposes, but do not meetthe requirements for classification as equity for accounting purposes.

- Other financial liabilities: includes obligations that are not included in any of the aforementioned categories, including liabilities under financial guarantee contracts.

- Hedging derivatives: includes the fair value of derivative liabilities, including embedded derivatives separated from hybrid financial instruments, designated as qualified hedging instruments.

F-25

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. The amount initially recognized for financial instruments not measured at fair value through profit or loss includes transaction costs. Financial assets and liabilities are subsequently measured at each period-end as follows:

i.  Measurement of financial assets

Financial assets are generally measured at fair value without deducting any transaction costs that may be incurred on their disposal. However, transaction costs are considered for loans and receivables, held-to-maturity investments, equity instruments whose fair value cannot be determined in a sufficiently objective manner and derivative assets that have equity instruments as their underlying and are settled by delivery of those instruments. All financial assets are accounted for at the trade date.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions. Fair value under IFRS is an exit price regardless of whether that price is directly observable or estimated using another valuation technique.

All derivatives are recognized in the consolidated 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. In the absence of evidence to the contrary, the fair value on the trade date is deemed 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 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. 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 over-the-counter (hereinafter, “OTC”) derivatives.

The fair value of OTC derivatives is determined using the most appropriate valuation techniques commonly used by the financial markets based on the characteristics of each financial instrument such as present value, 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 the acquisition cost of a financial asset or liability plus or minus, as appropriate, the principal repayments and the cumulative amortization (taken to the consolidated income statement) of the difference between the initial cost and the maturity amount. The amortized cost basis also includes reductions for impairment. 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 its estimated cash flows 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 the financial return. For floating rate financial instruments, the effective interest rate coincides with the rate of return prevailing until the next benchmark interest reset date.

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, personal guarantees, leased assets, assets acquired under repurchase agreements and securities loans.

The measurement of available-for-sale financial assets is described in further detail in iii. Valuation Techniques.

F-26

ii. Measurement of financial liabilities

In general, financial liabilities are measured at amortized cost, as defined above, except for those included under Financial liabilities held for trading and Other financial liabilities at fair value through profit or loss and financial liabilities designated as hedged items (or hedging instruments) in fair value hedges, which are measured at fair value.

iii. Valuation techniques

The following table shows a summary of the fair values of the financial assets measured at fair value and liabilities at December 31, 2013 and 2014, classified on the basis of the various measurement methods used by the Group to determine their fair value:

	12/31/2013			12/31/2014
	Published			Published
	Price			Price
	Quotations in			Quotations in
	Active	Internal		Active	Internal
	Markets	Models	Total	Markets	Models	Total
	- Level 1(1)			- Level 1
ASSETS:
Financial assets held for trading	88,319	88,588	176,907	69,507	138,864	208,371
Other financial assets at fair value through profit or loss	-	86,361	86,361	-	31,872	31,872
Available-for-sale financial assets	43,754	17,771	61,525	60,213	22,915	83,128
Hedging derivatives	-	300	300	-	4,740	4,740
	132,073	193,020	325,093	129,720	198,391	328,111
LIABILITIES:
Financial liabilities held for trading	12,772	123,427	136,199	10,911	125,894	136,805
Other financial liabilities at fair value through profit or loss	-	76,025	76,025	-	108,784	108,784
Hedging derivatives	-	1,392	1,392	-	4,403	4,403
	12,772	200,844	213,616	10,911	239,081	249,992

(1) The Group’s management revised its judgments and concluded that certain fair value measurements that were previously reported in prior year disclosure as Level 1 hierarchy should be reclassified to Level 2 hierarchy (internal model measurement method) due to trading volumes of the related securities. Accordingly, amounts previously reported in prior year disclosure have been revised for this change in classification. Such change has no impact on amounts reported in the consolidated financial statements.

The fair value of the financial instruments is determined, when possible, on the basis of a quoted price in an active market for an identical asset or liability (Level 1). This group includes government debt securities, private-sector debt securities without optional characteristics, derivatives traded in organized markets, shares and short positions.

In cases where price quotations cannot be observed, management makes its best estimate of the price that the market would set using valuation techniques. These techniques use observable market data as significant inputs (Level 2). The use of observable market data assumes that markets are efficient and therefore the data that is derived therefrom is representative. The objective of valuation techniques is to arrive at a fair value measurement that reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date.

Still, other internal models use unobservable data as inputs. Examples of such unobservable inputs and assumptions are as follows:

- Correlation: historical correlation between equity prices and exchange rates is assumed for valuing quanto and composite options.

- Dividends: the estimation for the dividend used as inputs in the internal models is based on the dividend payments expected from the issuer companies.

F-27

- Volatility: there is no liquid option market for certain long-term assets. For most Mexican underlyings, the option market is for up to one year. In the case of the Mexican Stock Exchange Prices and Quotations Index (IPC), there is an option market up to three years. In these cases, management assumes a local volatility model using maturities for which market data exists and extrapolates the curve for unknown terms.

- Rate curve for estimating the interest rate index known as the 91 day Interbank Equilibrium Interest Rate (“Tasa de Interés Interbancaria de Equilibrio”, or “TIIE”): there is no liquid market for interest rate swaps (IRS) with 91-day payment terms. For these fair value measurements, the 28-day IRS curve is used instead.

Whenever unobservable market data is used in valuation techniques, the valuation is adjusted considering unobservable assumptions that market participants would use when pricing the asset or liability, including assumptions about risk.

The Group also adjusts the value of some assets when they have very low market trading volume, even when prices are available.

Fair value measurements that incorporate significant unobservable inputs are classified as Level 3. Significant unobservable inputs are defined as inputs for which observable market data are not available and that are significant to the fair value measurement. Such inputs are developed using the best information available about assumptions that market participants would use when pricing the asset or liability.

iv. Valuation of financial instruments

The Group has implemented a formal process for systematic valuation and management of financial instruments. The governance scheme distributes responsibilities between two independent divisions inside the Group: Treasury (development, marketing and daily management of financial products) and Risk (on a periodic basis, validation of pricing models and market data, computation of risk metrics, policies of operation approval, management of market risk and implementation of fair value adjustment policies).

a. Trading and available-for-sale financial assets

The estimated fair value of these financial assets is determined through the use of quoted prices or yield curves provided by a price vendor.

b. Loans and advances to credit institutions and customers – repurchase agreements

The fair value is estimated by using the discounted cash flow technique using the interest rates that are currently offered for loans and advances with terms similar to those of borrowers having a similar credit quality.

c. Short positions, deposits from Central Bank and deposits from credit institutions and customers – reverse repurchase agreements

The fair value of these financial instruments is calculated by using the discounted cash flow technique based on the current incremental lending rates for similar types of deposits having similar maturities.

d. Financial derivatives (assets and liabilities)

The estimated fair value of futures contracts is calculated using the prices quoted on the Derivatives Exchange Market (Mercado Mexicano de Derivados and Chicago Mercantile Exchange) of identical instruments.

If there are no quoted prices on the market (either direct or indirect) for a derivative instrument, the respective fair value estimates are calculated by using one of the following models and valuation techniques:

- Analytic method.

i. Non-close formula

F-28

In the valuation of financial instruments permitting static hedging (such as loans, deposits, forwards and swaps), the present value method is used. This method consists of a) calculating the expected cash flows and b) discounting the expected cash flows at the risk interest rate through the applicable discount factor. Both steps use observable market data (yield curves, foreign exchange spot rates and so forth) which are provided by a market data supplier (price vendor).

ii. Close formula

In the valuation of plain vanilla options, the Black-Scholes model is used. This model assumes that the underlying price follows a lognormal distribution.

- The Monte Carlo method with the local volatility model is the market proxy or reference model to price a wider range of exotic equity products.

- The partial differential equation method with the local volatility model is particularly appropriate to price and manage callable products and products including barrier features on a single underlying. This method is quicker, more stable and more precise than the standard Monte Carlo method, but the latter is needed when the underlying is a basket. The local volatility models assume that share and index prices are lognormally distributed and volatility is a deterministic function of time and the market price.

- The trinomial trees method is intended for American foreign exchange products, which can be canceled at any time throughout the life of the option. It assumes deterministic interest rates and represents the evolution of the underlying foreign exchange using the Black-Scholes model.

- The partial differential equation solver using a mixed volatility model is used for pricing barrier products in foreign exchange. The development of a mixed volatility model was motivated by some very sensitive barrier products (double-no-touch options) which were quoted in the market with prices in between those provided by a local volatility model and a pure stochastic volatility model. The mixed volatility model is a combination of both models which provides a price between them.

Valuation adjustment for counterparty risk or default risk

The credit valuation adjustment (CVA) is a valuation adjustment to OTC derivatives as a result of the risk associated with the credit exposure assumed with each counterparty.

The CVA is calculated taking into account potential exposure with each counterparty in each future period. The CVA for a specific counterparty is equal to the sum of the CVA for all the periods. The following inputs are used to calculate the CVA:

•  Expected exposure: including for each transaction the mark-to-market (MtM) value plus an add-on for the potential future exposure for each period. Mitigating factors such as netting and collateral agreements are taken into account, as well as temporary impairment for derivatives with interim payments.

•  Loss given default: percentage of final loss assumed in a counterparty credit event /default.

•  Probability of default: for cases where there is no market information, probabilities are inferred using a market proxy based on market information from companies with the same industry and credit quality.

•  Discount factor curve.

The debt valuation adjustment (DVA) is a similar valuation adjustment to the CVA but, in this case, as a result of the own risk of the Group assumed by its counterparties in OTC derivatives.

The CVA and DVA recognized at December 31, 2013 amounted to 367 million and 235 million, respectively. The CVA and DVA recognized at December 31, 2014 amounted to 375 million and 167 million, respectively.

F-29

All financial instruments fair values are calculated on a daily basis.

Set forth below are the financial instruments at fair value whose measurements were based on other than quoted prices on active markets at December 31, 2013 and 2014.

	Fair Values Calculated Using Internal Models at 12/31/2013						Fair Values Calculated Using Internal Models at 12/31/2014						Valuation Techniques	Key Inputs
	Level 2		Level 3		Total		Level 2		Level 3		Total
ASSETS:
Financial assets held for trading:		87,689		899		88,588		137,961		903		138,864
Debt  instruments		15,052		899		15,951		46,052		903		46,955	Present value (non-close formula) and local volatility model with partial differential equation method	Interest rate yield curves, quoted equity price and extrapolation of the implied volatility surface
Trading derivatives:
Interest rate options		3,507		-		3,507		2,415		-		2,415	Black-Scholes model with close formula	Interest rate yield curves and implied volatility surface
Market index options:		373		-		373		1,110		-		1,110
European, composite, quanto and Asian strike options		348		-		348		1,056		-		1,056	Black-Scholes model with analytic method and local volatility model with Monte Carlo method	Interest rate yield curves, quoted equity,  index prices, implied volatility surface, historical correlations and dividends estimation
Barrier options		25		-		25		-		-		-	Local volatility model with partial differential equation method	Interest rate yield curves, quoted equity,  index prices, implied volatility surface, and dividends estimation
Asian spread option		-		-		-		54		-		54	Local volatility model with Monte Carlo method	Interest rate yield curves, quoted equity,  index prices, implied volatility surface, historical correlations and dividends estimation
Exchange rate options:		154		-		154		1,673		-		1,673
American forwards		1		-		1		10		-		10	Black-Scholes model with trinomial tree method	Interest rate yield curves, quoted exchange rates and implied volatility surface
European options		153		-		153		1,663		-		1,663	Black-Scholes model with close formula	Interest rate yield curves, quoted exchange rates and implied volatility surface
Swaps		67,217		-		67,217		79,217		-		79,217	Present value (non-close formula)	Interest rate yield curves
Market index futures		159		-		159		162		-		162	Present value (non-close formula)	Interest rate yield curves, quoted equity and index prices and dividends estimation
Interest rate futures		20		-		20		20		-		20	Hull-White model with non-close formula	Interest rate yield curves, implied volatility surface and a mean reversion parameter assumption (2%)
Exchange rate futures		1,207		-		1,207		7,312		-		7,312	Present value (non-close formula)	Interest rate yield curves and quoted exchange rates

F-30

Other financial assets at fair value through profit or loss:	86,361	-	86,361	31,872	-	31,872
Loans and advances to credit institutions – Repurchase agreements	70,594	-	70,594	27,379	-	27,379	Present value (non-close formula)	Interest rate yield curves
Loans and advances to customers – Repurchase agreements	15,767	-	15,767	4,493	-	4,493	Present value (non-close formula)	Interest rate yield curves
Financial assets available-for-sale:	17,771	-	17,771	22,915	-	22,915
Debt  instruments	17,701	-	17,701	22,845	-	22,845	Present value (non-close formula)	Interest rate yield curves
Equity instruments	70	-	70	70	-	70	Other	Value of shareholders’ equity
Hedging derivatives:	300	-	300	4,740	-	4,740
Swaps	300	-	300	3,793	-	3,793	Present value (non-close formula)	Interest rate yield curves
Exchange Rate Futures	-	-	-	947	-	947	Present value (non-close formula)	Interest rate yield curves
	192,121	899	193,020	197,488	903	198,391

F-31

	Fair Values Calculated						Fair Values Calculated
	Using Internal Models at 12/31/2013						Using Internal Models at 12/31/2014						Valuation Techniques	Key Inputs
	Level 2		Level 3		Total		Level 2		Level 3		Total
LIABILITIES:
Financial liabilities held for trading:		123,427		-		123,427		125,894		-		125,894
Trading derivatives:
Interest rate options		4,603		-		4,603		3,332		-		3,332	Black-Scholes model with analytic method	Interest rate yield curves and implied volatility surface
Market index options:		101		-		101		534		-		534
European, composite, quanto and Asian strike options		101		-		101		440		-		440	Black-Scholes model with analytic method and local volatility model with Monte Carlo method	Interest rate yield curves, quoted equity,  index prices, implied volatility surface, historical correlations and dividends estimation
Barrier options		-		-		-		40		-		40	Local volatility model with Monte Carlo method	Interest rate yield curves, quoted equity,  index prices, implied volatility surface, historical correlations and dividends estimation
Autocallable		-		-		-		12		-		12	Local volatility model with Monte Carlo method	Interest rate yield curves, quoted equity,  index prices, implied volatility surface, historical correlations and dividends estimation
Asian spread option		-		-		-		42		-		42	Local volatility model with Monte Carlo method	Interest rate yield curves, quoted equity,  index prices, implied volatility surface, historical correlations and dividends estimation
Exchange rate options:		281		-		281		1,390		-		1,390
American forwards		3		-		3		16		-		16	Black-Scholes model with close formula	Interest rate yield curves, quoted exchange rates and implied volatility surface
European options		278		-		278		1,364		-		1,364	Black-Scholes model with close formula	Interest rate yield curves, quoted exchange rates and implied volatility surface
Digital		-		-		-		10		-		10	Black-Scholes model with close formula	Interest rate yield curves, quoted exchange rates and implied volatility surface
Swaps		64,074		-		64,074		78,063		-		78,063	Present value (non-close formula)	Interest rate yield curves
Index and securities futures		364		-		364		31		-		31	Present value (non-close formula)	Interest rate yield curves, quoted equity and index prices and dividends estimation
Interest rate futures		919		-		919		550		-		550	Hull-White model with non-close formula	Interest rate yield curves, implied volatility surface and a mean reversion parameter assumption (2%)
Exchange rate futures		1,121		-		1,121		31		-		31	Present value (non-close formula)	Interest rate yield curves and quoted exchange rates
Short positions:
Debt instruments		51,964		-		51,964		41,963		-		41,963	Present value (non-close formula)	Interest rate yield curves

F-32

Other financial liabilities at fair value through profit or loss:	76,025	-	76,025	108,784	-	108,784
Deposits from Central Bank  – Reverse repurchase agreements	18,512	-	18,512	5,006	-	5,006	Present value (non-close formula)	Interest rate yield curves
Deposits from credit institutions  – Reverse repurchase agreements	7	-	7	28,746	-	28,746	Present value (non-close formula)	Interest rate yield curves
Customer deposits  – Reverse repurchase agreements	57,506	-	57,506	69,726	-	69,726	Present value (non-close formula)	Interest rate yield curves
Marketable debt securities	-	-	-	5,306	-	5,306
Hedging derivatives:	1,392	-	1,392	4,403	-	4,403
Swaps	1,392	-	1,392	2,448	-	2,448	Present value (non-close formula)	Interest rate yield curves
Exchange Rate Futures	-	-	-	1,955	-	1,995	Present value (non-close formula)	Interest rate yield curves
	200,844	-	200,844	239,081	-	239,081

Some of the instruments of the fair-value hierarchy have identical or similar offsetting exposures to certain inputs, but in accordance with IFRS, are presented as gross assets and liabilities in the consolidated balance sheet.

The measurements derived using the valuation techniques might have been different had other methods or assumptions been used with respect to interest rate risk, credit risk and foreign currency risk spreads, or their related correlations and volatilities. Nevertheless, management believes 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 reasonably stated.

Financial instruments categorized in Level 3

 - Debt and equity instruments: This category includes convertible bonds issued by Cemex. This hybrid instrument is valued using partial differential equation solver given the embedded equity option (whose underlying is CEMEX.CPO, the shares listed on Mexican Stock Exchange) on the debt instrument. Because the long-term implied volatility is not quoted directly in an active market or otherwise capable of estimates that are exclusively based on observable inputs and assumptions, this financial asset is classified as Level 3.

 - Trading derivatives: This category includes OTC European Equity Options on Cemex’s ADR (NYSE: CX) and are classified within Level 3 because the implied volatility is unobservable due to their long-term maturities (average implied volatilities are quoted up to one to two years). These instruments are valued using the Black-Scholes valuation model. These options were canceled in February 2012.

The following table provides a reconciliation of the movement between opening and closing balances of Level 3 financial instruments, measured at fair value using a valuation technique with significant unobservable inputs:

F-33

	Assets
	Debt and Equity Instruments			Trading Derivatives			Total
Balance at January 1, 2012		761			646			1,407
Total gains/losses recognized in profit or loss:
Gains/(losses) on financial assets and liabilities (net)		291			(1,518	)		(1,227	)
Purchases		-			872			872
Sales		(187	)		-			(187	)
Settlements		(88	)		-			(88	)
Balance at December 31, 2012		777			-			777
Total gains/losses recognized in profit or loss:
Gains/(losses) on financial assets and liabilities (net)		219			-			219
Sales		(15	)		-			(15	)
Settlements		(82	)		-			(82	)
Balance at December 31, 2013		899			-			899
Total gains/losses recognized in profit or loss:
Gains/(losses) on financial assets and liabilities (net)		78			-			78
Purchases		18			-			18
Sales		(12	)		-			(12	)
Settlements		(80	)		-			(80	)
Balance at December 31, 2014		903			-			903

F-34

	Liabilities
	Debt and Equity Instruments		Trading Derivatives			Total
Balance at January 1, 2012		-		750			750
Total gains/losses recognized in profit or loss:
Gains/(losses) on financial assets and liabilities (net)		-		(1,760	)		(1,760	)
Sales		-		1,010			1,010
Balance at December 31, 2012		-		-			-
Total gains/losses recognized in profit or loss:
Gains/(losses) on financial assets and liabilities (net)		-		-			-
Purchases		-		-			-
Sales		-		-			-
New issuances		-		-			-
Settlements		-		-			-
Balance at December 31, 2013		-		-			-
Total gains/losses recognized in profit or loss:
Gains/(losses) on financial assets and liabilities (net)		-		-			-
Purchases		-		-			-
Sales		-		-			-
New issuances		-		-			-
Settlements		-		-			-
Balance at December 31, 2014		-		-			-

Unobservable inputs used in measuring fair value

The table below sets out information about significant unobservable inputs used at December 31, 2014 in measuring financial instruments categorized as Level 3 in the fair value hierarchy:

Financial Instrument	Fair value	Valuation Technique	Significant Unobservable Input	Range of Estimates (weighted-average) for Unobservable Input	Fair value Measurement Sensitivity to Unobservable Inputs
Convertible bonds issued by Cemex	903	Local volatility model with partial differential equation method	Long-term implied volatility	30.53 – 35.94% (33.23%)	A significant increase in volatility would result in a lower fair value.

Although the Group believes that its estimates of fair value are appropriate, the use of different inputs could lead to different measures of fair value. As of December 31, 2014, the potential impact on the consolidated income statement of changing the main inputs used for the measurement of Level 3 financial instruments for other inputs, taking the highest (most favorable input) or lowest (least favorable) value of the range deemed reasonably possible, would be as follows:

F-35

	Potential Impact on Consolidated Income Statement as of December 31, 2014
	Most Favorable Input	Least Favorable Input
ASSETS:
Debt and equity instruments	7	(7)

Because there is no options market for the underlying assets with maturities to this position, the assumptions reflected in the scenarios are based on the Group’s experience, which management believes are conservative, but reasonably possible.

The least favorable scenario assumed the following:

- The volatility of the underlying asset of the convertible bond at its maturity moved from 33.24% to 35.94%. The volatility used as input for the internal model 33.24% is an extrapolation of the observable volatility surface of a shorter-term option market of the underlying. The scenario was based on the difference between the bid and offer quotations of these options divided by two and increased by 0.5% for each year the maturity of the convertible bond exceeds the market options maturity.

The most favorable scenario assumed the following:

- The volatility of the underlying asset of the convertible bond at its maturity moved from 33.24% to 30.53%.

Sensitivity analysis

As an alternative to sensitivity analysis, the Group uses a value-at-risk (VaR) technique. A detailed explanation about VaR technique and the main assumptions incorporated therein are described in Note 48. The VaR amounts as of December 31, 2014, including all financial instruments in the trading book position of the Group are as follows:

	Average		High		Low		12/31/2014
All financial instruments		86.18		136.09		47.05		51.61
By category:
Instruments sensitive to interest rate		88.17		135.90		41.83		43.59
Instruments sensitive to equity market prices		18.21		53.83		9.33		40.30
Instruments sensitive to foreign currency exchange rates		14.27		32.94		2.62		16.10
Instruments sensitive to volatility movements		16.02		30.86		9.89		24.13

The Group’s VaR should be interpreted in light of the limitations of the methodologies. These limitations include the following:

 - Historical data may not provide the best estimate of the joint distribution of risk factor changes in the future and may fail to capture the risk of possible extreme adverse market movements which have not occurred in the historical window used in the calculations.

 - VaR using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day.

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 - The Group largely computes the VaR of the trading portfolios at the close of business and positions may change substantially during the course of the trading day.

 - VaR using a 99 percent confidence level does not reflect the extent of potential losses beyond that percentile. These limitations and the nature of the VaR measure mean that the Group can neither guarantee that losses will not exceed the VaR amounts indicated nor that losses in excess of the VaR amounts will not occur more frequently than once in 100 business days. v. Recognition of fair value changes As a general rule, changes in the fair value 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 income and similar income or Interest expenses and similar charges, as appropriate, and those arising for other reasons which are recognized under Gain/(losses) on financial assets and liabilities (net). Adjustments due to changes in fair value arising from:

- Available-for-sale financial assets are recognized in Shareholders’ equity under Valuation adjustments - Available-for-sale financial assets, unless they relate to exchange differences arising on available-for-sale non-monetary items, in which case they are recognized also in Valuation adjustments in Shareholders’ equity. Exchange differences arising on available-for-sale monetary financial assets are recognized under Gains/(losses) on financial assets and liabilities (net) in the consolidated income statement.

- Items charged or credited to Valuation adjustments - Available-for-sale financial assets 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 in the Shareholders’ equity. vi. Hedging transactions The Group uses derivatives for the following purposes: (i) to provide these instruments to customers who request them in the management of their market and credit risks (trading derivatives); (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). 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 in, among others, 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); and

c. The net investment in a foreign operation (hedge of a net investment in a foreign operation).

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2. It is effective in offsetting exposure inherent in the hedged item 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 (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.

3. There must be adequate documentation evidencing the specific designation of the 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 its 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.

b. In cash flow hedges, the effective portion of the change in value of the hedging instrument is recognized 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 Gain/(losses) on financial assets and liabilities in the consolidated income statement.

If a derivative designated as a hedge no longer meets the requirements described above due to expiration, ineffectiveness or for any other reason, the derivative is classified for accounting purposes as a trading derivative.

When fair-value hedge accounting is discontinued, the adjustments previously recognized on the hedged item are reclassified to profit or loss at the effective interest rate recalculated 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 - Cash flow hedges (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.

vii. 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, and a separate instrument with the same term will meet the definition as embedded derivative.

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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: 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. 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.

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.

The disclosures set out in the tables below include financial assets and financial liabilities that:

• Are offset in the Group’s consolidated balance sheet; or

• Are subject to an enforceable master netting arrangement or similar agreement that covers similar financial instruments, irrespective of whether they are offset in the consolidated balance sheet.

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The similar agreements include derivative clearing agreements, global master repurchase agreements and global master securities lending agreements. Similar financial instruments include derivatives, repurchase agreements, reverse repurchase agreements and securities borrowing and lending agreements. Financial instruments such as loans and receivables and deposits are not disclosed in the tables below unless they are offset in the consolidated balance sheet.

Derivative transactions are either transacted on an exchange or entered into under International Swaps and Derivatives Association (“ISDA”) master netting agreements. In general, under ISDA master netting agreements in certain circumstances (e.g. when a credit event such as a default occurs) all outstanding transactions under the agreement are terminated, the termination value is assessed and only a single net amount is due or payable in settlement of all transactions.

Repurchase agreements, reverse repurchase agreements, securities borrowing and lending agreements are covered by master agreements with netting terms similar to those of ISDA master netting agreements.

The ISDA and similar master netting arrangements do not meet the criteria for offsetting in the consolidated balance sheet. This is because they create for the parties to the agreement a right of set-off of recognized amounts that is enforceable only following an event of default, insolvency or bankruptcy of the Group or the counterparties or following other predetermined events. In addition, the Group and its counterparties do not intend to settle on a net basis or to realize the assets and settle the liabilities simultaneously.

The Group receives and gives collateral in the form of cash and marketable securities in respect of the following transactions:

• Derivatives;

• Repurchase agreements and reverse repurchase agreements; and

• Securities lending and borrowing agreements.

Such collateral is subject to standard industry terms including, when appropriate, an ISDA Credit Support Annex. This means that securities received/given as collateral can be pledged or sold during the term of the transaction but have to be returned on maturity of the transaction. The terms also give each party the right to terminate the related transactions on the counterparty’s failure to post collateral.

The following financial assets are subject to offsetting, enforceable master netting arrangements and similar agreements:

As at December 31, 2013

				Amount not offset in the consolidated balance sheet
	Gross amount of financial assets	Gross amount of financial liabilities offset in the consolidated balance sheet	Net amount of financial assets presented in the consolidated balance sheet	Impact of Master Netting Agreements	Financial instrument collateral	Cash collateral	Net amount
Derivative financial assets	73,221	-	73,221	(59,457)	(343)	(4,944)	8,477
Repurchase agreements	86,361	-	86,361	-	(86,444)	-	(83)
Equity instruments (see Note 10.a)	131	-	131	-	(144)	-	(13)
Total	159,713	-	159,713	(59,457)	(86,931)	(4,944)	8,381

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As at December 31, 2014

				Amount not offset in the consolidated balance sheet
	Gross amount of financial assets	Gross amount of financial liabilities offset in the consolidated balance sheet	Net amount of financial assets presented in the consolidated balance sheet	Impact of Master Netting Agreements	Financial instrument collateral	Cash collateral	Net amount
Derivative financial assets	97,164	-	97,164	(77,310)	(4,883)	(6,033)	8,938
Repurchase agreements	31,872	-	31,872	(2,245)	(31,951)	-	(2,324)
Equity instruments (see Note 10.a)	567	-	567	-	(605)	-	(38)
Total	129,603	-	129,603	(79,555)	(37,439)	(6,033)	6,576

The following financial liabilities are subject to offsetting, enforceable master netting arrangements and similar agreements:

As at December 31, 2013

				Amount not offset in the consolidated balance sheet
	Gross amount of financial liabilities	Gross amount of financial assets offset in the consolidated balance sheet	Net amount of financial liabilities presented in the consolidated balance sheet	Impact of Master Netting Agreements	Financial instrument collateral	Cash collateral	Net amount
Derivative financial liabilities	73,165	-	73,165	(59,457)	(169)	(9,786)	3,753
Reverse repurchase agreements	76,025	-	76,025	-	(76,414)	-	(389)
Short positions - Securities loans see Note 11.b)	12,339	-	12,339	-	(12,617)	-	(278)
Short positions – Short sales (see Note 11.b)	51,964	-	51,964	-	(52,003)	-	(39)
Total	213,493	-	213,493	(59,457)	(141,203)	(9,786)	3,047

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As at December 31, 2014

				Amount not offset in the consolidated balance sheet
	Gross amount of financial liabilities	Gross amount of financial assets offset in the consolidated balance sheet	Net amount of financial liabilities presented in the consolidated balance sheet	Impact of Master Netting Agreements	Financial instrument collateral	Cash collateral	Net amount
Derivative financial liabilities	99,245	-	99,245	(77,310)	(320)	(15,379)	6,236
Reverse repurchase agreements	103,478	-	103,478	(2,245)	(100,198)	(151)	884
Short positions - Securities loans (see Note 11.b)	14,077	-	14,077	-	(14,432)	-	(355)
Short positions – Short sales (see Note 11.b)	27,301	-	27,301	-	(27,409)	-	(108)
Total	244,101	-	244,101	(79,555)	(142,359)	(15,530)	6,657

g) Impairment of financial assets

i. Definition

Financial assets, other than those at fair value through profit or loss (FVTPL), are assessed for indicators of impairment at the end of each reporting period. 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 loans and advances and debt instruments, give rise to an adverse impact on the future cash flows that were estimated at the transaction date.

 - In the case of equity instruments, indicate that their carrying amount may not be fully recovered.

As a general rule, the carrying amount of impaired financial asset 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 recorded impairment losses is recognized in the consolidated income statement for the period in which the impairment is reversed or reduced.

The Group applies the following criteria to classify loans and advances as impaired loans:

 - Commercial, financial and industrial loans

Loans with a single payment of principal and interest (non-amortizing loans), generally commercial loans for a short period of time, are considered impaired 30 days after the date of maturity.

Loans with a single payment of principal at maturity and with periodic interest payments (interest-only loans) are considered impaired 90 days after interest is due or 30 days after the principal is due.

Loans whose principal and interest payments have been agreed in periodic installments (amortizing loans) are considered impaired 90 days after an installment becomes due.

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 - Mortgage loans

Mortgage loans are considered impaired when a payment is past due by 90 days or more.

 - Installment loans to individuals

Revolving consumer credit cards loans are considered impaired when payment is not received in two monthly billing cycles or 60 days after they become due.

Non-revolving consumer loans whose principal and interest payments have been agreed in periodic installments are considered impaired 90 days after an installment becomes due.

 - If the borrower is declared bankrupt, in accordance with the Commercial Bankruptcy Law.

For all types of loans, impaired loans will remain as impaired until the borrower pays the total amount due in terms of principal and interests.

Impaired loans which are renegotiated will remain impaired until there is evidence of sustained payment, i.e., performance of payment by the borrower without arrears for the total amount due and payable in terms of principal and interest, for at least three consecutive installments under the loan payment scheme, or in the case of loans with installments that cover periods in excess of 60 calendar days, the payment of one installment.

With regard to uncollected accrued interest on impaired loans, the Group creates an allowance for the total amount of the uncollected accrued interest at the time the loans are classified as impaired loans.

The entire loan balance is kept on the consolidated balance sheet until the recovery of any recognized amount is considered to be unlikely. The recovery of a loan is considered to be unlikely when there is a significant deterioration in the borrower’s overall financial condition, resources, value of any guarantees and payment record which would lead a borrower to bankruptcy.

When the loan is written off, the loan balance and its corresponding allowance for impairment losses are removed from the consolidated balance sheet with no resulting impact on the profit of the Group.

Loans and the related allowance for impairment losses are normally written off considering the following:

 - Commercial, financial and industrial loans are evaluated on a case-by-case basis; as such, write-off will only take place after considering all relevant information such as the occurrence of a significant change in the borrower’s financial position, guarantees and collaterals and payment records. Within this portfolio, small and medium-sized enterprises (“SMEs”) loans and revolving SMEs loans are written off when the loans become 181 and 151 days past due, respectively.

 - Mortgage loans are generally written off when they have been past due for 36 months (see Note 2.h.).

 - For installment loans to individuals, any portion of the balance that the Group does not expect to collect is generally written off at 151 days past due for revolving consumer credit card loans and 181 days past due for other non-revolving consumer loans.

In the event of bankruptcy or similar proceedings, write-off may occur earlier than at the periods stated above. Collections procedures may continue after write-off.

Credit losses on impaired loans are assessed as follows:

 - Individually, for all significant instruments and for instruments which, although not material, are not susceptible to being classified in homogeneous groups of instruments with similar risk characteristics: instrument type, debtor’s industry, type of guarantee or collateral and age of past-due amounts, taking into account: (i) the present value of future cash flows, discounted at an appropriate discount rate; (ii) the debtor’s financial situation; and (iii) any guarantees in place. Clients individually assessed based on the borrower’s overall

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financial condition, resources, guarantees and payment record are globally managed clients, corporate, sovereign and other loans with significant balances.

 - In all other cases, statistical models based on historical experience are used as a basis for grouping loans with similar credit risk characteristics (for example, credit utilization rates, product type, asset type, collateral type, past-due status and other relevant factors) in order to determine the allowance for impairment losses. For each group, we establish the appropriate impairment losses (“identified losses”) that must be recognized. Loans that are collectively assessed in pools consist mainly of consumer, mortgage, installment, revolving credit and other consumer loans and an impairment loss is recognized when interest or principal is past due for 90 days or more.

 ii. Financial instruments carried at amortized cost

The amount of an impairment loss incurred on a financial 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 corresponding asset.

In estimating the future cash flows of financial instruments, the following factors are taken into account:

 - All the amounts that are expected to be received 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).

Impairment losses resulting from insolvency of the customers (“credit risk”) are recognized when there is evidence of a deterioration of the customer’s ability to pay, either because it is in arrears or for other reasons.

The Group has certain policies, methods and procedures for covering its credit risk arising from insolvency of counterparties.

These policies, methods and procedures are applied in the granting, examination and documentation of credit risk, contingent liabilities and commitments and credit risk from debt instruments, the identification of their impairment and the calculation of the amounts required to cover the related credit risk.

With respect to the treatment of loss arising from credit risk, the Group makes the following distinctions, taking into account the different types of loans included in the portfolio:

1. Non retail loans

Non retail portfolio comprises commercial loans and public sector loans (see Note 12).

a. Specific allowance:

The allowance for impairment losses of loans and receivables not measured at FVTPL that are determined as doubtful is generally recognized in accordance with the criteria set forth below:

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i. Assets determined as doubtful due to counterparty arrears:

Loans and receivables for all borrowers, even if backed by guarantee or collateral, with amounts more than three months past due are individually assessed for impairment. The impairment loss is measured taking into account the number of days the amounts are past due, the guarantees or collateral provided and the financial situation of the counterparty and the guarantors.

ii. Assets determined as doubtful for reasons other than counterparty arrears:

Loans and receivables that are not in arrears but for which there are reasonable doubts as to their repayment in accordance with contractual terms due to other circumstances are individually assessed for impairment. An allowance for impairment losses is recognized for the difference between the carrying amount of the loans and receivables and the net present value of estimated cash flows without considering guarantees or collateral provided.

b. Allowance for impairment losses:

The Group covers its losses inherent in loans and receivables not measured at FVTPL and in contingent liabilities taking into account the historical experience of impairment and other circumstances known at the time of assessment. Impairment losses are calculated using statistical methods and are comprised of losses incurred at the reporting date that have not yet been allocated to specific loans.

The incurred loss is the estimated credit loss over a one-year period after the reporting date considering the characteristics of the counterparty and the guarantees and collateral associated with the transaction.

The loss is calculated by multiplying three factors: exposure at default (hereinafter, “EAD”), probability of default (hereinafter, “PD”) and loss given default (hereinafter, “LGD”).

- The EAD is the amount of risk exposure at the date of default by the counterparty.

- The 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 at least 90 days and cases in which there is no portion of the loan and receivables are past due but there are doubts as to the solvency of the counterparty (subjective doubtful assets).

- The LGD is the loss arising in the event of default. It depends on the guarantees and collateral associated with the transaction.

The methodology for determining the allowance for impairment losses seeks to identify the amount of incurred losses as of the consolidated balance sheet date of loans and receivables that have not yet been identified as impaired, but that the Group estimates based on its past history and specific facts that will arise in the one-year period following the reporting date. That is called inherent losses in the context of the Group’s internal models in which impairment losses are calculated.

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Low default portfolios

In loans to the public sector, such as credit institutions and large corporations which are included in commercial, financial and industrial loans, the number of historical defaults is either very small or near to zero. Accordingly, for such low default portfolios, the Group supplements its own historical default data with the data obtained from external credit ratings in order to estimate the incurred loss used by the market to determine the PD and LGD factors. Guarantees are considered in the determination of allowance for impairment losses. When the guarantor has a better credit risk rating than the borrower, the guarantor’s rating is used in the model instead of the credit rating of the borrower.

2.  Retail portfolio

The retail portfolio comprises loans to SMEs, mortgage loans, revolving consumer credit card loans and non-revolving consumer loans (see Note 12).

With respect to the coverage of impairment losses arising from credit risk to individuals and SMEs, the Group covers its impairment losses taking into account the historical impairment loss experience at the time of assessment. For these purposes, loans are grouped considering similar credit risk characteristics (for example, credit utilization rates, product type, asset type, collateral type, past due status and other relevant factors).

The Group uses a transition matrix to determine the PD in which loans are segmented into bucket classifications primarily based on the number of days outstanding, and statistical analyses are applied to estimate the probability that loans will migrate through the different buckets and ultimately be written off. In addition to the number of days outstanding, the bucket classifications are determined in accordance with loan credit characteristics as described above. The transition matrix is based on historical data gathered over periods ranging from one to three years depending on type of portfolio.

In addition to the allowance for impairment losses on loans and receivables, the Group also estimates probable losses for off-balance sheet risk related to unfunded lending commitments such as available credit on lines of credit, credit cards and non-revolving consumer loans. The process to determine the provisions for off-balance sheet risk is similar to the methodology used for allowance for impairment losses for loans and receivables as described above.

Allowance for impairment losses related to the loan portfolio is reported as a reduction to the carrying amount of the loans and receivables whereas the provision for unfunded lending commitments is reported separately as liabilities on the consolidated balance sheet in Provisions for off-balance sheet risk. Impairment losses related to the loan portfolio and commitments is reported in the consolidated income statement as Impairment losses on financial assets (net) – Loans and receivables and Provisions (net), respectively.

iii.  Debt or equity instruments classified as Available-for-sale

For available-for-sale equity instruments, a significant or prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment.

For all other financial assets, objective evidence of impairment could include:

· significant financial difficulty of the issuer or counterparty; or

· breach of contract, such as a default or delinquency in interest or principal payments; or

· it becoming probable that the borrower will enter bankruptcy or financial re-organization; or

· the disappearance of an active market for that financial asset because of financial difficulties.

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The amount of the impairment losses is the excess of their carrying amount and their fair value.

When there is objective evidence at the date of measurement of these instruments that the excess are due to an impairment that is other than temporary, cumulative gains or losses previously recognized in equity under Valuation adjustments - Available-for-sale financial assets are reclassified to the consolidated income statement.

In respect of available-for-sale equity instruments, impairment losses previously recognized in the consolidated income statement are not reversed through profit or loss. Any increase in fair value subsequent to an impairment loss is recognized in equity under Valuation adjustments - Available-for-sale financial assets. In respect of available-for-sale debt instruments, impairment losses are subsequently reversed through profit or loss if an increase in the fair value of the investment can be objectively related to an event occurring after the recognition of the impairment loss.

iv.  Financial instruments carried at cost

For financial assets that are carried at cost, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset.

Impairment losses are recognized in the consolidated income statement for the period in which they arise and as a direct reduction of the cost of the financial instrument. Such impairment loss will not be reversed in subsequent periods.

h) Change in accounting estimates

During 2014, the Group revised certain estimates related to impaired mortgage loans by extending the period in which past-due loans and the corresponding allowance for loan losses are recognized on the consolidated balance sheet. Impaired mortgage loans are written off to the corresponding allowance for loan losses when management considers the loans to be uncollectible. Under the revised estimates, impaired mortgage loans are generally written off to allowance for loan losses 36 months after becoming past-due. Previous to the change the loans were generally written off 366 days after becoming past-due prior to the change.

Management believes that the revised estimates provide more reliable information on impaired mortgage loans since they are more consistent with the period required to complete the legal process of recovering loan collateral.

The change in accounting estimates did not have a material impact on the net loan portfolio as of December 31, 2014, or profit for the year then ended. However, the change resulted in a net decrease in the write-offs disclosed in Notes 12.c and 12.d of approximately 250 million pesos.

i) Repurchase agreements and Reverse repurchase agreements

Purchases of financial instruments under a non-optional resale agreement are measured at fair value and recorded as assets in the consolidated balance sheet under Loans and advances to credit institutions – Repurchase agreements or Loans and advances to customers – Repurchase agreements.

The excess of the purchase prices over the resale prices are recognized as interest income over the contract term.

Sales of financial instruments under a non-optional repurchase agreement are measured at fair value and recorded as liabilities in the consolidated balance sheet under Deposits from Central Bank – Reverse repurchase agreements, Deposits from credit institutions – Reverse repurchase agreements or Customer deposits – Reverse repurchase agreements.

The excess of the sales prices over the repurchase prices are recognized as interest expense over the contract term.

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Repurchase agreements are designated as financial instruments at FVTPL when this designation eliminates or significantly reduces an accounting mismatch or when they are managed and its performance is evaluated on a fair value basis.

j) Non-current assets held for sale and liabilities associated with non-current assets held for sale

Non-current assets held for sale include 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 may or may not be of a financial nature, will likely be recovered through the proceeds from their disposal. Specifically, property or other non-current assets received by the Group as total or partial settlement of their debtors’ payment obligations to them are deemed to be non-current assets held for sale, unless the Group has decided to make continuing use of these assets.

Liabilities associated with non-current assets held for sale include the balances payable arising from the assets held for sale or disposal groups and from discontinued operations.

Non-current assets held for sale are 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.

k) Tangible assets Tangible assets include the amount of buildings, land, furniture, vehicles, computer hardware and other fixtures owned by the Group 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 are presented at acquisition cost, less the related accumulated depreciation and any estimated impairment losses (excess of carrying amount over the 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	2% to 5%
Furniture and vehicles	10% to 20%
IT equipment and fixtures	25%
Others	5% to 20%

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The Group assesses at the reporting date whether there is any indication that a tangible asset may be impaired (i.e. its carrying amount exceeds its recoverable amount). If this is the case, the carrying amount of the tangible asset is reduced to its recoverable amount and future depreciation charges are adjusted in proportion to the lower 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 Group recognizes the reversal of the impairment loss recognized in prior periods and adjusts the future depreciation charges accordingly. In no circumstances may the reversal of an impairment loss on a tangible asset raise its carrying amount above that which it would have if no impairment losses had been recognized in prior years.

The estimated useful lives of the items in property, plant and equipment for own use are reviewed at least at the end of the reporting period to identify significant changes therein. If changes are identified, the useful lives of the tangible 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.

l) Accounting for leases

i.    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 Group acts as the lessors, they present the acquisition cost of the leased assets under Tangible assets. 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 Group acts 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 the consolidated income statement.

ii.    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 determining whether a sale and leaseback transaction results in an operating lease or finance lease, the Group analyzes, among other things, 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.

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 Group. Only assets whose cost can be estimated reliably and from which the Group considers it probable that future economic benefits will be generated are recognized.

Intangible assets are recognized initially at acquisition or development cost and are subsequently measured at cost less any accumulated amortization and any accumulated impairment losses.

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i.    Goodwill

Any excess of the cost of the investments in the Group accounted for using the equity method over the corresponding underlying carrying amounts acquired, adjusted at the acquisition date, is allocated as follows:

- If it is attributable to specific and identifiable assets and liabilities of the companies acquired, by increasing the value of the assets (or reducing the value of the liabilities) whose fair values were higher (lower) than the carrying amounts at which they had been recognized in the acquired entities’ balance sheets.

- If it is attributable to specific intangible assets, by recognizing such intangible assets in the consolidated balance sheet provided that the fair value of these assets within 12 months following the date of acquisition can be measured reliably.

- The remaining amount is recognized as goodwill, which is allocated to one or more CGUs. 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 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 include the amount of identifiable intangible assets.

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 Group - 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 Group reviews the remaining useful lives of the assets in order to determine 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.

Impairment charges are included in Impairment losses on other assets (net) – Other intangible assets in the consolidated income statement. The criteria used to recognize the impairment losses on these assets and, where applicable, the reversal of impairment losses recognized in prior years, are similar to those used for tangible assets (see Note 2.k.).

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n) Provisions and contingent assets and liabilities When preparing the consolidated financial statements of the Group, management distinguishes between:

 - Provisions: credit balances covering present obligations at the reporting date arising from past events which could give rise to a loss for the Group, which is considered to be more likely than not 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 Group. They include the present obligations of the Group when it is not probable that an outflow of resources embodying economic benefits will be required to settle them.

 - Contingent assets: possible assets that arise from past events and whose existence is conditional on, and will be confirmed only by, the occurrence or non-occurrence of events beyond the control of the Group. Contingent assets are not recognized in the consolidated balance sheet or in the consolidated income statement, but rather are disclosed in the notes, provided that it is probable that these assets will give rise to an increase in resources embodying economic benefits.

Provisions are quantified on the basis of the best information available regarding the event giving rise to them and are reviewed and adjusted at the end of each year. Provisions are fully or partially reversed when such obligations cease to exist or are reduced.

Provisions are classified according to the obligations covered as follows:

 - Provisions for pensions and similar obligations: includes the amount of all the provisions made to cover post-employment benefits, including obligations to pre-retirees and similar obligations.

 - Provisions for tax and legal matters: include the amount of the provisions recognized to cover tax and legal obligations.

 - Provisions for off-balance sheet risk: include the amount of the provisions made to cover obligations arising as the result of those transactions in which the Group guarantees the obligations of a third party arising as a result of financial guarantees granted or other contracts and unfunded lending commitments such as letters of credit, financial guarantees and available lines of credit cards and non-revolving consumer loans, which are irrevocable commitments that may give rise to the recognition of financial assets.

 - Other provisions: include the amount of other provisions recognized by the Group (see Note 24).

o) Litigation and/or claims in process At the end of 2013 and 2014, certain litigation and claims were in process against the Group arising from the ordinary course of their operations (see Note 24).

p) Share-based payments

Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group's estimate of equity instruments that will eventually vest, with a corresponding increase in equity. At the end of each reporting period, the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognized in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to Accumulated reserves.

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For cash-settled share-based payments, a liability is recognized for the services acquired, measured initially at the fair value of the liability. At the end of each reporting period until the liability is settled, and at the date of settlement, the fair value of the liability is remeasured, with any changes in fair value recognized in profit or loss for the year.

Share-based payments are discussed in Note 42.b. and c.

q) 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 Group’s right to receive them arises.

ii.    Fee and commission income and expenses

Fee and commission income and expenses are recognized in the consolidated income statement using criteria that vary according to their nature. The main criteria are as follows:

- Fee and commission income and expenses relating to financial assets and financial liabilities measured at fair value through profit or loss are recognized when paid.

- Those arising from transactions or services that are performed over a period of time are recognized over the life of these transactions or services.

- Those relating to services provided in a single act are recognized when the single act is carried out.

iii.   Non-finance income and expenses

These are recognized for accounting purposes on an accrual basis.

iv.   Deferred collections and payments

These are recognized for accounting purposes at the amount resulting from discounting the expected cash flows at market rates.

v.    Loan arrangement fees

Loan arrangement fees, mainly loan origination, application and information fees are accrued and recognized in income over the term of the loan as a part of the effective interest method.

r) 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

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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 for off-balance sheet risk in the consolidated balance sheet (see Note 24). 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.

s) Post-employment benefits See Note 24.c.

t) Income tax Income tax expense represents the sum of the tax currently payable and deferred tax.

Current tax

Income tax (hereinafter, “ISR”) is recognized in profit for the year in which they are incurred. The ISR currently payable is based on taxable profit for the year. Taxable profit differs from Operating profit before tax as reported in the consolidated income statement because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group’s current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such deferred tax assets and liabilities are not recognized if the temporary difference arises from the initial recognition (other than in a business combination) of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. In addition, deferred tax liabilities are not recognized if the temporary difference arises from the initial recognition of goodwill.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

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Current and deferred tax for the year

Current and deferred tax are recognized in the consolidated income statement, except when they relate to items that are recognized in equity, in which case, the current and deferred tax are also recognized in equity. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination.

u)   Remaining 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, 2013 and 2014 year-end is provided in Note 45.

v)   Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer.

w)  Dividend distribution

Dividend distribution to the Group’s shareholders is recognized as a liability in the Group’s consolidated financial statements in the period in which the dividends are approved by the Group’s shareholders.

x)   Discontinued operation

A discontinued operation is a component of the Group’s business, the operations and cash flows of which can be clearly distinguished from the rest of the Group and which:

· represents a separate major line of business or geographic area of operations;

· is part of a single co-ordinated plan to dispose of a separate major line of business or geographic area of operations; or

· is a subsidiary acquired exclusively with a view to re-sale.

Classification as a discontinued operation occurs at the earlier of disposal or when the operation meets the criteria to be classified as held-for-sale.

When an operation is classified as a discontinued operation, the comparative consolidated income statement and the comparative consolidated statement of comprehensive income is re-presented as if the operation had been discontinued from the start of the comparative year.

y) Treasury shares

Own equity instruments that are reacquired (treasury shares) are recognized at cost and deducted from equity. No gain or loss is recognized in profit or loss on the purchase, sale, issue or cancellation of the Group’s own equity instruments. Any difference between the carrying amount and the consideration, if reissued, is recognized under Accumulated reserves in Shareholders’ equity.

z) Consolidated statement 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

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which they are classified. The Group classifies as cash and cash equivalents the balances recognized under Cash and balances with Central Bank 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.

aa)  Consolidated income statement and other comprehensive income

This consolidated 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 consolidated statement presents:

a.	Profit for the year.
b.	The net amount of the income and loss items recognized directly to consolidated equity under Valuation adjustments that will be reclassified subsequently to net profit when certain conditions are met.
c.	The net amount of the income and loss items recognized directly to consolidated equity under Valuation adjustments that will not be reclassified subsequently to net profit.
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 comprehensive income, 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.

ab) Consolidated statement of changes in total equity

This consolidated statement presents all the changes in equity, including those arising from changes in accounting policies.

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.

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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. Significant events

The 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 undertaken by the Group over the last three years:

3.1  Agreement with Fibra Uno

This transaction is explained in Note 15.a.

3.2 Global public offering of shares

On July 26 2012, the Board of Directors approved the global public offering of shares, consisting of the simultaneous public offering of: (i) units in Mexico in accordance with the CNBV, and (ii) units abroad, including in the form of ADRs representing ADSs registered with the U.S. Securities and Exchange Commission (SEC) under the Securities Act of 1933 of the United States of America (USA).

In October 2012, the Group completed the global public offering of 1,689,543,408 Series B shares, representing 24.90% of its common stock. The offering shares were priced at 31.25 pesos per unit or USD12.1849 per American Depositary Share (ADS) and are traded on the Bolsa Mexicana de Valores (BMV) and the New York Stock Exchange (NYSE) as of September 26, 2012. Of the total shares sold, 81% were placed in the USA and the remaining 19% in Mexico.

3.3 Senior debt offering

On November 9, 2012, the Bank completed the placement of senior notes for the amount of USD 1,000,000,000 with a 10 year maturity. The instruments were issued and placed in accordance with Rule 144A and Regulation S of the U.S. Securities Act of 1933, as amented. Interest will be paid semiannually, on May 9 and November 9, respectively, beginning May 9, 2013.  Principal will be paid at maturity of the instruments (November 9, 2022). The instruments will bear interest at the rate of 4.125% a year. Principal will be paid when the instruments mature or, as the case may be, on the date that they are repaid in advance.

3.4 Sale of Gestión Santander

On May 30, 2013, Banco Santander (Spain) signed an agreement with Warburg Pincus and General Atlantic to strengthen its fund management division. Under this agreement, Warburg Pincus and General Atlantic jointly acquired a 50% equity stake in Santander Asset Management UK Holdings Ltd. ("Santander Asset Management"). Santander Asset Management is a holding entity that integrates several companies related with these activities in 11 countries, mainly in Europe and Latin America. The remaining 50% equity stake in Santander Asset Management is owned by Banco Santander (Spain). This transaction resulted in the sale of the Group’s 100% equity stake in Gestión Santander, S.A. de C.V., ("Gestión Santander") to Santander Asset Management. Additionally, the Group has signed exclusive long-term distribution contracts so the Bank and Casa de Bolsa Santander, S.A. de C.V. would continue to offer mutual funds managed by Gestión Santander following the divestiture. Under this contract, the Group will receive commission income for distribution of funds.

On December 5, 2013, the Group completed the sale of its 100% equity stake in Gestión Santander. For additional breakdown of items presented under discontinued operations, please refer to Note 33.

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3.5  Acquisition of ING mortgage business in Mexico

This transaction is explained in Note 4.

3.6  Subordinated debt offering

On December 27, 2013, the Bank completed the placement of debt securities denominated as Tier II Subordinated Capital Notes in the amount of USD 1,300,000,000 with a 10 year maturity with option to be prepaid in year 5. The instruments were issued and placed in accordance with Rule 144A and Regulation S of the U.S. Securities Act of 1933, as amented. Interest will be paid semiannually, on January 30 and July 30, respectively, beginning July 30, 2014. The instruments will bear interest at an initial rate of 5.95% a year during the first 5 years.

Key terms of these debt securities are explained in Note 21.

3.7  Mexican real estate sector

During the past years, the historic shortage of housing in Mexico drove the Mexican Government to actively incentivize its development. These incentives led to increased construction of subsidized housing. The lack of infrastructure, the long distances to the workplaces and associated transportation costs caused increased abandonment and mortgage default of these homes. The foregoing, together with certain changes in governmental policies in the second quarter of 2012, originated a sharp decrease in the construction and sales reported by the principal Mexican home builders and adjustments to their growth plans and business models in order to compensate for the impacts of these changes.

In April and June 2014, two of the three major Mexican real estate companies were declared bankrupt as they fulfill the requirements provided by the Commercial Bankruptcy Law to be considered insolvent.

In early December 2014, one of three major Mexican real estate companies sent to the relevant court request to initiate a pre-arranged bankruptcy.

As of December 31, 2013 and 2014 the loan portfolio of the Group with the three principal Mexican real estate companies amounted to 5,140 and 4,903 million pesos, respectively, which represents 1.34% and 1.07% of loans and advances to customers and 0.60% and 0.52% of the total assets of the Group, of which 4,265 and 4,720 million pesos are impaired. As of December 31, 2013 and 2014, the Group has made the corresponding allowance for impairment losses based on the incurred loss methodology for this loan portfolio and considered that this allowance for impairment losses adequately covers all known or knowable losses that could arise from this loan portfolio.

3.8  Tax reforms

In December 2013, the Mexican government enacted several tax reforms that are effective starting January 1, 2014. These reforms include changes to the Income Tax Law, to the Value Added Tax Law and to the Mexican Federal Tax Code. The tax reforms also repealed the Business Flat Tax Law and the Cash Deposits Tax Law.

Please refer to Note 26 for more information regarding the impact of these tax reforms.

3.9  Sale agreement for custodial business

During 2014, Banco Santander (Spain) and the Group reached an agreement to sell the custodial business to FINESP Holdings II BV, a subsidiary of Warburg Pincus ("Warburg Pincus") and Temasek Holdings Private Limited ("Temasek"):

· On June 19, 2014, Banco Santander (Spain) announced having reached a definitive agreement with an affiliate of Warburg Pincus and Temasek to acquire 50% of the custodial businesses of Santander in Spain, Mexico and Brazil through a new entity. The closing was scheduled for the fourth quarter of 2014.

· On June 19, 2014, Banco Santander (Spain) made an offer to the Group to purchase the custodial business. This offer was accepted by the Group. The agreed sale price was 2,030 million pesos. This offer requires the

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Group to transfer the custodial business, however, this obligation is subject to the following conditions: i) is valid until June 19, 2015; ii) is subject to the same conditions established in the global agreement signed by Banco Santander (Spain); iii) authorizations must be obtained by the Mexican authorities to establish a special purpose entity whose purpose is the operation of the custodial business in Mexico; iv) depends on the overall operation, if it is terminated, the operation will also terminate in Mexico; and v) operation should be formalized through the signing of the respective contracts.

· The joint venture was approved by the Board of Directors of both, Banco Santander (Spain) and the Group, at its meeting held on July 22, 2014.

Considering the above, however, that there is an obligation of the Group to transfer the custodial business to a special purpose entity for accepting the offer made by Banco Santander (Spain), this obligation is subject to various conditions that to date have not been met, such as authorization by the Mexican financial authorities of the special purpose entity that will provide custodial services, among others. As of December 31, 2104, Banco Santander (Spain) has not defined the special purpose entity to be used to provide custodial services. Therefore, the Group has not recognized any financial or tax effect in the consolidated financial statements.

3.10 Scotiabank Inverlat loan portfolio acquisition

On November 25, 2014, the Group entered into an agreement to acquire a non-revolving consumer loans portfolio of approximately 39,200 loans amounting to a total face value of approximately 3,179 million pesos from Scotiabank Inverlat. The Group will pay 3,002 million pesos for this portfolio. The acquisition was made in two tranches and completed on April 4 and April 19, 2015.

4.   Business combination

Acquisition of ING mortgage business in Mexico

On November 29, 2013, we completed the acquisition of the equity stock of ING Hipotecaria, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada (“ING Hipotecaria”), a subsidiary of ING Group. ING Hipotecaria provides mortgage-related products and services to more than 28,000 clients and operates 20 branches throughout Mexico. The acquisition is expected to generate operating synergies and contribute favorably to our overall performance once ING Hipotecaria has been fully integrated.

On December 13, 2013 ING Hipotecaria obtained shareholder approval to change its name to Santander Vivienda, S.A. de C.V., Sociedad Financiera de Objeto Múltiple Entidad Regulada ("Santander Vivienda") (formerly ING Hipotecaria, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada). In February 2013, Santander Vivienda obtained the permits required to change its legal name.

The net assets acquired amount to 395 million pesos which includes a loan portfolio with an unpaid principal balance of 11,237 million pesos, and an estimated fair value of 10,772 million pesos. Loan portfolio of approximately 363 million pesos was expected to be uncollectible at the time of the acquisition. This entity was acquired by the Group and is today established as a subsidiary. The purchase consideration consisted of a cash payment of 541 million pesos for the equity.

The recognition of the acquisition date assets and liabilities of Santander Vivienda resulted in goodwill of 146 million pesos, which consists largely of the profit-generating potential of the mortgage business acquired. Fair values of the identifiable assets acquired and liabilities assumed at the acquisition date are as follows:

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Assets:
Cash and cash equivalents	459
Loans and other receivables	11,160
Foreclosed assets	209
Accounts receivable	97
Other assets	586
	12,511
Liabilities:
Other liabilities	(12,116	)
Net assets acquired	395
Non-controlling interest	-
Cost of investment	541
Goodwill at November 29, 2013	(146	)

During December 2014, management finalized its estimates with respect to the fair values of the assets and liabilities acquired in the business combination. These adjustments have been included in the values presented on the table above. No additional adjustments were identified.

Since the acquisition date and as of December 31, 2013, Santander Vivienda has contributed 42 million pesos of net interest income and 34 million pesos of after-tax loss to the Group’s consolidated income statement for the year ended December 31, 2013. If the acquisition had been effective as of January 1, 2013, the effect on the Group’s net interest income in 2013 would have been 278 million pesos. Santander Vivienda had an after-tax loss of 121 million pesos in 2013.

5. Distribution of the Group's profit and Earnings per share

5.1 Distribution of the Group's profit

The distributions of the Group's net profit for the years ended December 31, 2013 and 2014 approved by the Board of Directors during the annual general meetings are as follows:

	2013		2014
Profit of the year		14,281		13,289
Dividends declared		20,850		3,473
Dividend per share (pesos)		3.08		0.51
Date of payment	08/30/2013 and 12/27/2013		12/29/2014

5.2 Earnings per share from continuing operations and discontinued operations

Basic earnings per share

Basic earnings per share are calculated by dividing the profit attributable to the Parent by the weighted average number of shares issued during the year (see Note 29.a.), excluding the average number of treasury shares, if any, held in the year.

Accordingly, basic earnings per share were determined as follows:

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	2012		2013		2014
Profit attributable to the Parent		17,443		14,279		13,288
Profit attributable to the Parent from discontinued operations (net of non-controlling interests)		132		1,938		-
Profit from continuing operations (net of non-controlling interests)		17,311		12,341		13,288
Weighted average number of shares outstanding		6,782,806,506		6,773,811,703		6,775,809,054
Basic earnings per share (pesos)		2.57		2.11		1.96
Basic earnings per share from discontinued operations (pesos)		0.02		0.29		-
Basic earnings per share from continuing operations (pesos)		2.55		1.82		1.96

5.3  Diluted earnings per share

In calculating diluted earnings per share, the amount of profit attributable to the Parent and the weighted average number of shares issued, net of treasury shares, are adjusted to take into account all the dilutive effects inherent to potential shares (share options, warrants and convertible debt instruments).

Accordingly, diluted earnings per share were determined as follows:

	2012		2013		2014
Profit attributable to the Parent		17,443		14,279		13,288
Profit attributable to the Parent from discontinued operations (net of non-controlling interests)		132		1,938		-
Profit from continuing operations (net of non-controlling interests)		17,311		12,341		13,288
Weighted average number of shares outstanding		6,782,806,506		6,773,811,703		6,775,809,054
Dilutive effect of rights on shares		13,401,600		12,583,210		10,585,859
Adjusted number of shares		6,796,208,106		6,786,394,913		6,786,394,913
Diluted earnings per share (pesos)		2.57		2.11		1.96
Diluted earnings per share from discontinued operations (pesos)		0.02		0.29		-
Diluted earnings per share from continuing operations (pesos)		2.55		1.82		1.96

6.   Compensation of Directors, Executive Officers and other key management personnel

The Group considers as key management personnel the directors, the executive officers and the members of the audit committee, the corporate practices, nominating and compensation committee, the comprehensive risk management committee and the remuneration committee.

a) Remuneration of directors

Our shareholders establish the compensation of our directors at the annual shareholders’ meeting. Accordingly, only independent directors receive compensation for their duties. Under Mexican law, we are not required to disclose on an individual basis the compensation of our directors, our executive officers and the members of the audit committee, the corporate practices, nominating and compensation committee, the comprehensive risk

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management committee and the remuneration committee, and we do not otherwise publicly disclose such information.

The aggregate compensation paid to independent directors who were members of the audit committee, the corporate practices, nominating and compensation committee, the comprehensive risk management committee, the remuneration committee and the Board of Directors of the Group amounted to 10 million pesos during 2012, 13 million pesos during 2013 and 11 million pesos during 2014, paid as attendance fees.

b)   Remuneration of executive officers

The aggregate amount for compensation and benefits generated during 2012 to executive officers amounted to 399 million pesos, 329 million pesos during 2013 and 339 million pesos during 2014. This amount includes annual salary, Christmas bonus, vacation bonus and performance bonus. Also, the amount paid at December 31, 2012 includes a fixed fee in connection with the closing of the global public offering. The main benefits paid to the Group’s officers are: Christmas bonus, vacation bonus, holidays, performance bonus, health care services, health insurance, life insurance and retirement fund.

The criteria for granting and paying bonus compensation vary according to the activities performed by the different areas and, therefore, payment of the bonus may vary depending on the department and activities performed by each member.  

c) Post-employment and other long-term benefits Our executive officers may participate in the same pension and medical expenses plan that is available to the Group’s employees, but at different contribution percentages to the ones made by the rest of the employees. The total post-employment benefits (including pension plan, medical expenses and life insurance policies) to executive officers amounted to 393 million pesos at December 31, 2013 and 468 million pesos at December 31, 2014.

d) Global Program – Performance share plan

The Group participates in a share-based variable compensation plan launched by Banco Santander (Spain) as part of the growth strategy implemented in 2008. The Plan was implemented through the granting of a predetermined number of shares of Banco Santander (Spain) to certain officials of the Group, based on the extent to which certain targets were achieved. The last cycle of this plan expired on June 30, 2014 (see Note 42.b.).

e) Local Program

The Group established a share-based variable compensation plan for its executives (Local Program). The plan is settled through the Group’s own equity instruments and is recognized according to their fair value at grant date. Details of the plan and the determination of the fair value of transactions involving share-based payments settled through equity instruments are presented in Note 42.c.

f) Corporate performance shares plan

On March 28, 2014, the shareholders of Banco Santander (Spain) approved a new share-based variable compensation plan denominated “Corporate performance shares plan” applicable only to a certain group of executives. This plan provides for a variable compensation tied to the performance of the stock of Banco Santander (Spain). The Corporate performance shares plan is payable in shares of the Group and will begin on July 1, 2015. Details of the plan are presented in Note 42.d.

g) Loans to executive officers

The loans conferred to executive officers amount to 84 million pesos and 70 million pesos as of December 31, 2013 and 2014, respectively.

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7.   Cash and balances with Central Bank

The breakdown by type of balances of Cash and balances with Central Bank is as follows:

	12/31/2013		12/31/2014
Cash		16,954		15,927
Central Bank compulsory deposits		31,320		35,872
Deposits in Central Bank		1,326		24
Accrued interest		81		-
		49,681		51,823

Central Bank compulsory deposits relate to a minimum balance financial institutions are required to maintain with the Central Bank based on a percentage of deposits received from third parties. Due to the nature of these compulsory deposits, management considered them as restricted assets. During June 2014, the Central Bank increased the amount of compulsory deposits from 31,320 million pesos to 35,872 million pesos.

Note 45.a. includes a breakdown of the remaining maturity of Cash and balances with Central Bank and of the related average interest rates. The compulsory deposits required by Central Bank have an indefinite term.

Additionally, Note 45.c. includes the fair value amounts of these assets.

8.   Loans and advances to credit institutions

The breakdown by classification, type and currency of the balances of Loans and advances to credit institutions in the consolidated balance sheets is as follows:

	12/31/2013		12/31/2014
Classification:
Other financial assets at fair value through profit or loss		70,594		27,379
Loans and receivables		51,246		67,307
		121,840		94,686
Type:
Reciprocal accounts		9,997		26,167
Time deposits		101		98
Guarantee deposits - Collateral delivered for OTC transactions (Note 32)		15,272		20,758
Repurchase agreements		70,594		27,379
Call money transactions granted		17,560		11,098
Other accounts		8,316		9,186
		121,840		94,686
Currency:
Peso		105,176		59,250
US Dollar		16,584		35,416
Other currencies		80		20
		121,840		94,686

As of December 31, 2013 and 2014, the time deposits include 101 million pesos and 98 million pesos related to deposits that the Group holds in Mexican banks that reprices every 182 days with a fixed interest rate of 1.5%.

“Call money transactions granted” represent interbank loan transactions agreed for periods equal to or less than 2 business days. As of December 31, 2013 and 2014, these transactions are as follows:

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	Days		Interest Rate			12/31/2013
Mexican financial institutions		2		3.50	%		17,560
							17,560
	Days		Interest Rate			12/31/2014
Mexican financial institutions		2		2.96	%		11,098
							11,098

As of December 31, 2013 and 2014, 812 million pesos and 173 million pesos, respectively, of loans and advances to credit institutions, have been pledged in connection with derivatives transactions in organized markets, and they are considered as restricted assets within Loans and advances to credit institutions – Loans and receivables.

As of December 31, 2013 and 2014, 15,272 million pesos and 20,758 million pesos, respectively, of loans and advances to credit institutions, have been pledged in connection with OTC derivatives transactions, and they are considered as restricted assets within Loans and advances to credit institutions – Loans and receivables (see Note 32).

As of December 31, 2013 and 2014, 70,621 million pesos and 27,421 million pesos, respectively, of debt securities have been received as guarantees and/or collateral in connection with the repurchase agreements transactions within Loans and advances to credit institutions – Other financial assets at fair value through profit or loss (see Note 31).

Note 45.a. includes a breakdown of the remaining maturity of Loans and advances to credit institutions and of the related average interest rates. Additionally, Note 45.c. includes the fair value amounts of these assets classified as Loans and advances to credit institutions – Loans and receivables.

9.   Debt instruments

a) Breakdown

The breakdown by classification, type and currency of the balances of Debt instruments is as follows:

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	12/31/2013		12/31/2014
Classification:
Financial assets held for trading		98,640		110,787
Available-for-sale financial assets		61,423		83,029
Loans and receivables		5,659		5,835
		165,722		199,651
Type:
Mexican government debt securities		140,997		159,998
Of which:
Collateral delivered for OTC transactions (Note 32)		169		453
Foreign government debt securities		13,441		24,734
Of which:
Brazilian Government Notes		1,651		24,693
US Government Treasury Bills (TBILLS)		11,790		41
Debt securities issued by financial institutions		3,443		4,818
Other debt securities		7,841		10,101
		165,722		199,651
Currency:
Peso		146,815		170,645
US Dollar		16,118		3,070
Brazilian Real		1,651		24,693
Other currencies		1,138		1,243
		165,722		199,651

As of December 31, 2013 and 2014, 169 million pesos and 453 million pesos, respectively, of debt instruments, have been pledged in connection with OTC derivatives transactions, and they are considered as restricted assets within Debt instruments (see Note 32).

As of December 31, 2013 and 2014, 12,617 million pesos and 14,432 million pesos, respectively, of Debt instruments, have been pledged in connection with securities loans transactions in which the lender is the Central Bank and they are considered as restricted assets within Debt instruments – Financial assets held for trading.

The breakdown of the Debt instruments classified as Held for trading is as follows:

	12/31/2013		12/31/2014
Federal Treasury Securities (CETES)		35,796		11,001
United Mexican States Bonds (UMS)		333		564
Federal Mexican Government Development Bonds (BONDES)		13,293		32,317
M and M10 Mexican Government Bonds		10,924		2,421
Mexican Bank Saving Protection Bonds (BPATs)		22,382		46,076
Federal Mexican Government Development Bonds in  UDIS(1) (UDIBONDS)		10,698		9,626
Other Mexican Government debt securities		457		-
US Government Treasury Bills (TBILLS)		15		41
Other debt securities		4,742		8,741
		98,640		110,787

(1) “UDIs” are Unidades de inversión, a peso-equivalent unit of account indexed for Mexican inflation. UDIs are units of account created by the Central Bank on April 4, 1995, the value of which in pesos is indexed to inflation on a daily basis, as measured by the change in the Mexican National Consumer Price Index (Índice Nacional de Precios al Consumidor). Under a UDI-based loan or financial instrument, the borrower’s nominal peso principal balance is

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converted either at origination or upon restructuring to a UDI principal balance and interest on the loan or financial instrument is calculated on the outstanding UDI balance of the loan or financial instrument. Principal and interest payments are made by the borrower in an amount of pesos equivalent to the amount due in UDIs at the stated value of UDIs on the day of payment. As of December 31, 2014, one UDI was equal to 5.27036 pesos.

The breakdown of the Debt instruments classified as Available-for-sale is as follows:

	12/31/2013		12/31/2014
United Mexican States Bonds (UMS)		1,987		1,775
Federal Mexican Government Development Bonds (BONDES)		3,131		-
M, M3 and M5 Mexican Government Bonds		26,558		30,982
Mexican Bank Saving Protection Bonds (BPATs)		5,019		14,566
Federal Mexican Government Development Bonds in UDIS (UDIBONDS)		4,760		4,835
US Government Treasury Bills (TBILLS)		11,775		-
Brazilian Government Notes		1,651		24,693
Other debt securities		6,542		6,178
		61,423		83,029
Of which:
Before allowance for impairment losses		61,423		83,029
Allowance for impairment losses		-		-
		61,423		83,029

The breakdown by issuer rating of Debt instruments at December 31, 2013 is as follows:

	Private Debt		Sovereign Debt		Total		%
A		6,852		152,118		158,970		95.93	%
BBB		3,218		2,320		5,538		3.34	%
BB		314		-		314		0.19	%
Below BB		900		-		900		0.54	%
		11,284		154,438		165,722		100	%

The breakdown by issuer rating of Debt instruments at December 31, 2014 is as follows:

	Private Debt		Sovereign Debt		Total		%
A		12,084		157,658		169,742		85.02	%
BBB		1,931		27,074		29,005		14.53	%
BB		904		-		904		0.45	%
		14,919		184,732		199,651		100.00	%

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The breakdown of the Debt instruments classified as Loans and receivables is as follows:

	12/31/2013		12/31/2014
Special CETES - program of credit support and additional benefits to Mexican States and Municipalities		2,317		2,389
Special CETES - support program for housing loan debtors		3,342		3,446
		5,659		5,835
Type :
Unquoted		5,659		5,835
Of which:
Before allowance for impairment losses		5,659		5,835
Allowance for impairment losses		-		-
		5,659		5,835

b) Changes

The changes in Available-for-sale – Debt instruments, disregarding the allowance for impairment losses, were as follows:

	2012			2013			2014
Beginning balance		61,416			47,332			61,423
Net additions/(disposals)		(14,401	)		15,697			21,533
Valuation adjustments		249			(1,515	)		334
Amounts reclassified to consolidated income statement		68			(91	)		(261	)
Balance at year-end		47,332			61,423			83,029

As of December 31, 2013 and 2014, 8,207 million pesos and 17,370 million pesos, respectively, of Mexican government securities (M Bonds, BONDES, UMS and other debt securities), have been pledged in connection with repurchase agreements operations, and they are considered as restricted assets within Available-for-sale – Debt instruments.

c) Allowance for impairment losses

As of December 31, 2013 and 2014 and during 2012, 2013 and 2014, the Group has not recognized any impairment on Available-for-sale – Debt Instruments (see Note 28).

d) Other information

Note 45.a. contains a breakdown of the remaining maturity periods of Available-for-sale – Debt Instruments and the related average interest rates. Additionally, Note 45.c. includes the fair value amounts of these assets classified as Debt instruments – Loans and receivables.

10.  Equity instruments

a) Breakdown

The breakdown by classification and type of Equity instruments is as follows:

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	12/31/2013		12/31/2014
Classification:
Financial assets held for trading		5,346		5,160
Available-for-sale financial assets		102		99
Of which:
Others		102		99
Of which:
Before allowance for impairment losses		102		99
Allowance for impairment losses		-		-
		5,448		5,259
Type:
Shares of Mexican companies		4,737		4,409
Shares of foreign companies		711		850
		5,448		5,259

As of December 31, 2013 and 2014, 323 million pesos and 439 million pesos, respectively, of equity instruments, have been pledged in connection with derivatives traded in organized markets, and they are considered as restricted assets within Equity instruments – Financial assets held for trading (see Note 32).

As of December 31, 2013 and 2014, 131 million pesos and 567 million pesos, respectively, of Equity Instruments, have been pledged in connection with securities loans transactions in which the lender is the Group, and they are considered as restricted assets within Equity instruments – Financial assets held for trading.

As of December 31, 2013 and 2014, 144 million pesos and 605 million pesos, respectively, of equity instruments securities have been received as guarantees and/or collateral in connection with the securities loans transactions within Equity instruments – Financial assets held for trading (see Note 31).

Note 45.a. contains a breakdown of the remaining maturity periods of these assets.

b)  Changes

The changes in Available-for-sale – Equity instruments, disregarding the allowance for impairment losses, were as follows:

	2012		2013			2014
Beginning balance		166		186			102
Transfer to non-current assets held for sale		-		(97	)		-
Net additions /(disposals)		6		23			-
Valuation adjustments		14		3			(2	)
Amounts reclassified to consolidated income statement		-		(13	)		(1	)
Balance at year-end		186		102			99

Note 28.a. includes a breakdown of the valuation adjustments recognized in Total equity on Available-for-sale financial assets.

c) Allowance for impairment losses

As of December 31, 2013 and 2014 and during 2012, 2013 and 2014, the Group has not recognized any impairment on Available-for-sale – Equity Instruments.

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11. Trading derivatives (assets and liabilities) and Short positions

a) Trading derivatives

The breakdown by type of inherent risk of the fair value of the Trading derivatives arranged by the Group is as follows (see Note 32):

	12/31/2013				12/31/2014
	Debit Balance		Credit Balance		Debit Balance		Credit Balance
Interest rate risk		44,587		44,616		37,584		37,570
Currency risk		27,566		26,424		53,055		55,709
Market price risk		768		733		1,785		1,563
		72,921		71,773		92,424		94,842

Note 45.a. contains a breakdown of the remaining maturity periods of trading derivatives.

b) Short positions

Following is a breakdown of the carrying amount of the Short positions:

	12/31/2013		12/31/2014
Securities loans:
Debt instruments		11,947		13,695
Equity instruments		392		382
		12,339		14,077
Short sales:
Debt instruments (*)		52,087		27,886
		64,426		41,963

(*) These figures include financial liabilities arising from the outright sale of  financial assets acquired under repurchase agreements of 51,964 million pesos and 27,301 million pesos as of December 31, 2013 and December 31, 2014, respectively.

Note 45.a. contains a breakdown of the remaining maturity periods of these liabilities.

12. Loans and advances to customers

a) Breakdown

The breakdown by classification of Loans and advances to customers in the consolidated balance sheets is as follows:

	12/31/2013			12/31/2014
Other financial assets at fair value through profit or loss		15,767			4,493
Loans and receivables		384,752			457,255
		400,519			461,748
Of which:
Before allowance for impairment losses		414,283			476,946
Allowance for impairment losses		(13,764	)		(15,198	)
		400,519			461,748

As of December 31, 2013 and 2014, 2,209 million pesos and 2,243 million pesos, respectively, of loans and advances to customers, have been pledged in connection with derivatives traded in organized markets, and they are considered as restricted assets within Loans and advances to customers (see Note 32).

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Note 45.a. includes a breakdown of the remaining maturity of Loans and advances to customers and of the related average interest rates. Additionally, Note 45.c. includes the fair value amounts of these assets classified as Loans and advances to customers – Loans and receivables.

b) Breakdown

The following is a breakdown by loan type, borrower sector, geographical area of residence and interest rate formula of the Loans and advances to customers. This breakdown reflects the Group's exposure to credit risk in its core business, disregarding the allowance for impairment losses:

	12/31/2013		12/31/2014
By loan type:
Commercial, financial and industrial loans		191,149		222,246
Public sector loans		37,387		55,862
Mortgage loans		88,269		102,935
Repurchase agreements		15,767		4,493
Installment loans to individuals-
Revolving consumer credit card loans		38,450		40,124
Non-revolving consumer loans		28,086		32,856
Impaired loans		15,175		18,430
		414,283		476,946
By borrower sector:
Public sector		37,387		55,865
Individuals		161,657		184,770
Communications and transportation		12,437		10,879
Construction		32,707		33,027
Manufacturing		45,816		48,242
Services		108,991		127,946
Tourism		7,218		6,309
Other sectors		8,070		9,908
		414,283		476,946
By geographical area:
Mexico		414,283		476,946
		414,283		476,946
By interest rate:
Fixed rate		169,492		183,069
Floating rate		244,791		293,877
		414,283		476,946

As of December 31, 2013 and 2014, 15,823 million pesos and 4,530 million pesos, respectively, of debt securities have been received as guarantees and/or collateral in connection with the repurchase agreements transactions within Loans and advances to customers – Other financial assets at fair value through profit or loss (see Note 31).

c) Allowance for impairment losses

The changes in the allowance for impairment losses on Loans and advances to customers were as follows:

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	2012			2013			2014
Beginning balance		(7,247	)		(9,387	)		(13,764	)
Impairment losses on financial assets – Loans and receivables (*)		(10,338	)		(16,888	)		(14,831	)
Of which:
Individually assessed		(1,166	)		(5,331	)		(3,925	)
Collectively assessed		(9,172	)		(11,557	)		(10,906	)
Others		(12	)		(19	)		(113	)
Write-off of impaired balances against recorded allowance for impairment losses		8,210			12,530			13,510
Balance at year-end		(9,387	)		(13,764	)		(15,198	)
Of which:
By method of assessment:
Individually		(2,608	)		(5,147	)		(6,031	)
Collectively		(6,779	)		(8,617	)		(9,167	)
By geographical location of risk:
Mexico		(9,387	)		(13,764	)		(15,198	)
By classification of assets:
Loans and advances to customers		(9,387	)		(13,764	)		(15,198	)

(*) The amount of impairment losses on financial assets – Loans and receivables presented in the consolidated income statement is net of recoveries and legal expenses in the amount of 1,368 million pesos in 2012, 1,983 million pesos in 2013 and 1,699 million pesos in 2014.

d) Impaired loans

The breakdown 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:

	2012			2013			2014
Beginning balance		6,382			7,329			15,175
Additions		15,523			26,409			24,848
Transfers to performing loans		(6,366	)		(6,033	)		(8,083	)
Written-off assets		(8,210	)		(12,530	)		(13,510	)
Balance at year-end		7,329			15,175			18,430

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The breakdown of  the balance of the financial assets classified as Loans and receivables – Loans and advances to customers between no past due and past due at December 31, 2013 is as follows:

			With Balances Past Due by
	With no Past Due Balances or Less than 3 Months Past Due		3 to 6 Months		6 to 9 Months		9 to 12 Months		More than 12 Months		Total
By type of loan:
Commercial, financial and industrial loans		2,654		2,153		2,323		749		446		8,325
Mortgage loans		773		770		537		441		1,069		3,590
Installment loans to individuals
Of which:
Revolving consumer credit card loans		875		457		-		-		-		1,332
Non-revolving consumer loans		841		1,072		7		2		6		1,928
		5,143		4,452		2,867		1,192		1,521		15,175

The breakdown of  the balance of the financial assets classified as Loans and receivables – Loans and advances to customers between no past- due and past-due at December 31, 2014 is as follows:

			With Balances Past Due by
	With no Past Due Balances or Less than 3 Months Past Due		3 to 6 Months		6 to 9 Months		9 to 12 Months		More than 12 Months		Total
By type of loan:
Commercial, financial and industrial loans		1,675		2,209		515		127		5,049		9,575
Mortgage loans		1,128		956		869		625		1,671		5,249
Installment loans to individuals
Of which:
Revolving consumer credit card loans		657		1,323		-		-		-		1,980
Non-revolving consumer loans		711		899		16		-		-		1,626
		4,171		5,387		1,400		752		6,720		18,430

e)   Renegotiated loans

Renegotiated loans includes renegotiation of performing loans and impaired loans, as contractual terms of a loan may be modified not only due to concerns about the borrower’s ability to meet contractual payments, but also for customer retention purposes and other factors not related to current or potential credit deterioration of the customer. A breakdown of renegotiated loans during the years ended December 31, 2012, 2013 and 2014 is as follows:

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	For the Year Ended 12/31/2012											For the Year Ended 12/31/2013											For the Year Ended 12/31/2014
	Performing loans					Impaired Loans			Total			Performing loans					Impaired Loans			Total			Performing loans					Impaired Loans			Total
	Due to Concerns About Current or Potential Credit Deterioration			Due to Other Factors								Due to Concerns About Current or Potential Credit Deterioration			Due to Other Factors								Due to Concerns About Current or Potential Credit Deterioration			Due to Other Factors
Commercial, financial and industrial loans		9,371			-		483			9,854			1,378			-		307			1,685			694			-		2,040			2,734
Mortgage loans		3			-		5			8			-			-		-			-			1			-		-			1
Installment loans to individuals		1,137			-		278			1,415			1,314			-		207			1,521			542			-		799			1,341
Total		10,511			-		766			11,277			2,692			-		514			3,206			1,237			-		2,839			4,076
Percentage		93	%		-		7	%		100	%		84	%		-		16	%		100	%		30	%		-		70	%		100	%

Impaired loans that are renegotiated continue to be classified as impaired loans until the sustained payment criteria is reached as described in Note 2.g.

The types of terms that are typically renegotiated include: (a) modifications to the contractual terms of loans, such as payment terms, interest rates and currency, or (b) modifications to the guarantees that cover the loans.

The Group has implemented renegotiation programs which include options for the borrowers to extend payment terms, reduction in scheduled installments of principal and interest repayments, consolidation of debt and other forms of loan modifications as follows:

 - Commercial, financial and industrial loans due to the nature of these portfolios, renegotiations are made on an individual, ad-hoc basis, depending on borrower risk, profile and other factors.

 - Mortgage loans – Renegotiation programs consist mainly of extended payment terms offered to the borrower, as modifications of other contractual terms generally result in high operational costs, such as notary and legal expenses. There are two options in place: (a) borrowers can either defer up to six overdue payments to the last period of the loan term, or (b) reduce up to 12 loan amortization payments of principal by a maximum of 50% of the loan payments, with the overdue principal being deferred and paid at a later date.

 - Installment loans to individuals – The renegotiation programs offered in this portfolio generally a) convert the revolving consumer credit card loans to installment arrangements, or b) depending on customer risk, profile and other factors, the Group can either lower the applicable interest rate or extend the payment terms by up to 60 months.

See Note 48 (5.4.6 Recovery management) for additional information regarding restructured and refinanced loan portfolios.

f) Maximum exposure to credit risk and credit quality information

Maximum exposure to credit risk

The tables below represent the Group’s maximum exposure to credit risk by class of financial instrument (except  for hedging derivatives) and the respective collateral and other credit enhancements mitigating credit risk for these classes of financial instruments. The maximum exposure to credit risk includes the carrying amounts of financial instruments recognized on the consolidated balance sheet subject to credit risk and the nominal amounts for off-balance-sheet commitments.

Where available, collaterals are presented at fair value; for other collaterals such as real estate and other assets, best estimates of fair value are used. Other credit enhancements such as guarantees are included at their nominal amounts.

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Collateral or guarantee is a credit enhancement in the form of an asset or third-party obligation that serves to mitigate the inherent risk of credit loss in an exposure, by either substituting the borrower default risk or improving recoveries in the event of a default. The Group’s collaterals or guarantees are contractual and are typically classified as follows:

 - Financial and other collateral, which enables the Group to recover all or part of the outstanding exposure by liquidating the collateral asset provided in cases where the borrower is unable or unwilling to fulfill its primary obligations. Cash collateral, securities (equity or debt securities), collection rights, inventory, equipment and real estate are included in this category:

 - Cash collateral received – Cash collateral requested from financial and corporate customers to secure the payments in OTC derivative transactions.

 - Collateralized by securities – Collateral to secure the payments in repurchase agreements and reverse repurchase agreements.

 - Collection rights – Highly liquid and realizable guarantees, which are mainly comprised of standby letters and pledges on funds and securities.

 - Real estate.

 - Guarantee collateral, which complements the borrower’s ability to fulfill its obligation under the legal contract and, as such, is provided by third parties in the form of individual guarantee by endorsement or cosigners, where individuals or companies act as guarantors of the loan transaction.

Collaterals and other credit enhancements related to the commercial portfolio are subject to at least an annual review. In the case of guarantees, the guarantor’s ability to perform under the guarantee contract is reviewed through an analysis of the financial position of the borrower and the guarantor. There are cases where the Group has attempted to seek recovery through the execution of a third-party guarantee and have initially been denied such recovery. Please see Note 2.g. for an explanation of how the credit ratings of guarantors affect our allowance for impairment losses.

For the retail portfolio, a review of its collaterals and other credit enhancements is performed on a periodic basis depending on the history of the payment performance of the borrower.

For the real estate collaterals, appraisals are obtained as of the date of origination of the loans and when the loan is classified as impaired.

See Note 48 (4.4.3 Transaction decision-making – Credit risk mitigation techniques) for additional information regarding collaterals.

F-73

The breakdown is as follows:

			12/31/2013
			Maximum Exposure to Credit Risk (1)				Collaterals				Other Credit Enhancements
	Maximum Exposure to Credit Risk		Unsecured		Secured		Cash Collateral Received		Collateralized by Securities		Collection Rights (3)		Real Estate (2)		Guarantees
Financial assets held for trading		171,561		-		-		18,293(4)		656(4)		-		-		-
Other financial assets at fair value through profit or loss		86,361		-		-		-		86,444(4)		-		-		-
Available-for-sale financial assets		61,423		-		-		-		-		-		-		-
Loans and receivables:		455,421		239,706		215,715		-		-		60,616		149,356		38,564
Of which:
Loans and advances to credit institutions		51,246		51,246		-		-		-		-		-		-
Loans and advances to customers		398,516		182,801		215,715		-		-		60,616		149,356		38,564
Commercial, financial and industrial loans		199,474		86,461		113,013		-		-		22,946		63,398		32,359
Public sector loans		37,387		24,956		12,431		-		-		37,670		-		6,205
Mortgage loans		91,859		1,588		90,271		-		-		-		85,958		-
Installment loans to individuals:
Revolving consumer credit card loans		39,782		39,782		-		-		-		-		-		-
Non-revolving consumer loans		30,014		30,014		-		-		-		-		-		-
Debt instruments		5,659		5,659		-		-		-		-		-		-
Guarantees, documentary credits and loan commitments		55,326		55,326		-		-		-		-		-		-
Available lines of credit cards and non-revolving consumer loans		85,317		85,317		-		-		-		-		-		-
		915,409		380,349		215,715		18,293		87,100		60,616		149,356		38,564
(1)      Related to loans and receivables and available lines of credit cards and non-revolving consumer loans in the first column (Maximum Exposure to Credit Risk) that are secured by the collaterals and other credit enhancements disclosed in the table. As such, unsecured amounts are the amounts that are not covered by any collateral or other credit enhancement. The secured amounts may differ from the total collaterals and other credit enhancements as certain loans and receivables are secured by multiple credit enhancements. (2)      Appraisals to support estimated fair value of the real estate collaterals are obtained at the moment of the loan origination and when the financial asset is classified as impaired. (3)      Public sector loan rights are guaranteed by Mexican government entities. (4)    Amounts previously reported in prior year disclosure have been revised to correct for data input errors. Such reclassification has no impact on amounts previously reported in the consolidated financial statements.

F-74

		12/31/2014
		Maximum Exposure to Credit Risk (1)				Collaterals				Other Credit Enhancements
	Maximum Exposure to Credit Risk	Unsecured		Secured		Cash Collateral Received		Collateralized by Securities		Collection Rights (3)		Real Estate (2)		Guarantees
Financial assets held for trading	203,211	-					23,174		6,380	-		-		-
Other financial assets at fair value through profit or loss	31,872	-							31,951			-
Available-for-sale financial assets	83,029	-		-			-		-	-				-
Loans and receivables:	545,595		305,244		240,351		-		-		97,844		185,769		22,301
Of which:
Loans and advances to credit institutions	67,307		67,307		-		-		-		-		-		-
Loans and advances to customers	472,453		232,102		240,351		-		-		97,844		185,769		22,301
Commercial, financial and industrial loans	231,818		114,106		117,712		-		-		47,820		80,080		22,301
Public sector loans	55,865		39,814		16,051		-		-		50,024		-		-
Mortgage loans	108,184		1,596		106,588		-		-				105,689
Installment loans to individuals:
Revolving consumer credit card loans	42,104		42,104		-		-		-		-		-		-
Non-revolving consumer loans	34,482		34,482		-		-		-		-		-		-
Debt instruments	5,835		5,835		-		-		-		-		-		-
Guarantees and loan commitments	49,154		49,154		-		-		-		-		-		-
Available lines of credit cards and non-revolving consumer loans	79,631		79,631		-		-		-		-		-		-
	992,492		434,029		240,351		23,174		38,331		97,844		185,769		22,301
(1)       Related to loans and receivables and available lines of credit cards and non-revolving consumer loans in the first column (Maximum Exposure to Credit Risk) that are secured by the collaterals and other credit enhancements disclosed in the table. As such, unsecured amounts are the amounts that are not covered by any collateral or other credit enhancement. The secured amounts may differ from the total collaterals and other credit enhancements as certain loans and receivables are secured by multiple credit enhancements. (2)       Appraisals to support estimated fair value of the real estate collaterals are obtained at the moment of the loan origination and when the financial asset is classified as impaired. (3)       Public sector loan rights are guaranteed by Mexican government entities.

Credit quality information

For the commercial loans (except SMEs) and public sector loans, in order to achieve equivalent internal ratings in the different models available and to make them comparable with the external ratings of rating agencies, the Group has developed a master rating scale. The equivalence is established through the PD associated with each rating. Internally calibrated PDs are compared against the default rates associated with the external ratings, which are published periodically by rating agencies. Internal rating scale and mapping of external ratings are as follows:

F-75

Internal Rating	Equivalence with
	Standard &	Moody’s
	Poor’s
9.3	AAA	Aaa
9.2	AA+	Aa1
9	AA	Aa2
8.6	AA-	Aa3
8.1	A+	A1
7.7	A	A2
7.3	A-	A3
6.7	BBB+	Baa1
6.1	BBB	Baa2
5.6	BBB-	Baa3
5	BB+	Ba1
4.4	BB	Ba2
3.9	BB-	Ba3
3.3	B+	B1
2.7	B	B2
2.2	B-	B3
1.6	CCC	Caa1
1	CC	Ca

For commercial loans (SMEs), mortgage loans and installment loans (revolving credit card consumer loans and non-revolving consumer loans), incurred losses are calculated using statistical methods without taking internal ratings into consideration. However, based on criteria set forth by the CNBV and a combination of internal scorecards, client financial information and qualitative criteria, ratings are assigned as follows:

Rating	Equivalence
A-1	Minimum Risk (Solid)
A-2	Low Risk (Outstanding)
B-1	Normal Risk (Good)
B-2	Normal Risk
B-3	(Satisfactory)
C-1	Normal Risk (Adequate)
C-2	Medium Risk (Weak)
D	High Risk (Poor)
E	Probable Loss

F-76

Credit quality information by rating category

The tables below represent the classification by rating category of the commercial loans and public sector loans and their related guarantees and loan commitments not recognized on the consolidated balance sheet:

	12/31/2013
Rating Category		9.3	9.2	9.0	8.5	8.0	7.5	7.0	6.5	6.0	5.5	5.0	4.5	4.0	3.5	3.0	2.5	2.0	1.5	1.0	Not Rated			Total
Commercial loans		-	-	39	770	3,408	8,983	7,963	32,191	48,966	28,069	15,201	5,054	2,506	2,354	134	26	55	-	301		2,044			158,064
Public sector loans		-	-	-	-	23,107	269	-	3,808	2,213	3,966	3,449	675	-	-	-	-	-	-	-		(100	)		37,387
		-	-	39	770	26,515	9,252	7,963	35,999	51,179	32,035	18,650	5,729	2,506	2,354	134	26	55	-	301		1,944			195,451
Financial instruments not recognized on the balance sheet:
Guarantees		-	-	-	1,421	903	1,415	713	10,354	205	1,439	-	14	-	60	-	-	-	-	-		-			16,524
Loan commitments		-	-	-	96	14,565	961	2,728	6,408	6,510	4,667	1,125	309	1,284	73	-	-	-	-	-		-			38,726
		-	-	-	1,517	15,468	2,376	3,441	16,762	6,715	6,106	1,125	323	1,284	133	-	-	-	-	-		-			55,250
		-	-	39	2,287	41,983	11,628	11,404	52,761	57,894	38,141	19,775	6,052	3,790	2,487	134	26	55	-	301		1,944			250,701

	12/31/2014
Rating Category		9.3	9.2	9.0	8.5	8.0	7.5	7.0	6.5	6.0	5.5	5.0	4.5	4.0	3.5	3.0	2.5	2.0	1.5	1.0	Not Rated			Total
Commercial loans		-	-	-	1,178	1,877	7,819	15,793	32,960	55,313	30,472	14,003	5,091	2,543	3,264	549	76	4,611	18	-		4,415			179,982
Public sector loans		-	-	-	-	38,028	143	-	3,804	3,556	4,080	6,316	-	-	-	-	-	-	-	-		(62	)		55,865
		-	-	-	1,178	39,905	7,962	15,793	36,764	58,869	34,552	20,319	5,091	2,543	3,264	549	76	4,611	18	-		4,353			235,847
Financial instruments not recognized on the balance sheet:
Guarantees		-	-	-	456	1,208	2,612	7,085	3,664	745	699	478	38	-	-	-	-	-	-	-		-			16,985
Loan commitments		-	-	-	262	13,455	374	1,174	3,977	5,404	3,543	1,030	1,357	1,317	112	40	1	-	-	-		-			32,046
		-	-	-	718	14,663	2,986	8,259	7,641	6,149	4,242	1,508	1,395	1,317	112	40	1	-	-	-		-			49,031
		-	-	-	1,896	54,568	10,948	24,052	44,405	65,018	38,794	21,827	6,486	3,860	3,376	589	77	4,611	18	-		4,353			284,878

F-77

The tables below represent the classification by rating category of the commercial loans, mortgage loans, revolving consumer credit card loans and non-revolving consumer loans and their related commitments not recognized on the consolidated balance sheet:

	12/31/2013
Rating Category		A-1	A-2	B-1	B-2	B-3	C-1	C-2	D	E	Not Rated			Total
Commercial loans (SMEs)		20,995	7,938	1,995	1,566	4,413	1,783	710	1,913	97		-			41,410
Mortgage loans		64,520	8,560	3,545	2,329	1,319	5,228	1,714	2,358	1,138		1,148			91,859
Revolving consumer credit card loans		4,771	8,748	5,793	4,595	6,801	2,953	3,137	3,059	222		(297	)		39,782
Non-revolving consumer loans		3,306	17,801	1,763	1,029	858	530	1,394	2,025	520		788			30,014
		93,592	43,047	13,096	9,519	13,391	10,494	6,955	9,355	1,977		1,639			203,065
Financial instruments not recognized on the balance sheet:
Available lines of credit cards and non-revolving consumer loans		-	-	-	85,317	-	-	-	-	-		-			85,317
Guarantees		-	-	-	-	-	-	-	-	-		1			1
Loan commitments		-	-	-	-	-	-	-	-	-		75			75
		-	-	-	85,317	-	-	-	-	-		76			85,393
		93,592	43,047	13,096	94,836	13,391	10,494	6,955	9,355	1,977		1,715			288,458

	12/31/2014
Rating Category		A-1	A-2	B-1	B-2	B-3	C-1	C-2	D	E	Not Rated		Total
Commercial loans (SMEs)		29,629	8,602	2,509	2,025	4,766	1,515	612	2,101	77		-		51,836
Mortgage loans		75,024	13,387	3,723	2,831	1,149	3,710	2,374	3,976	417		1,593		108,184
Revolving consumer credit card loans		5,308	8,859	5,148	6,112	7,027	3,082	2,945	3,314	309		-		42,104
Non-revolving consumer loans		8,893	18,484	896	738	650	825	1,081	1,654	298		963		34,482
		118,854	49,332	12,276	11,706	13,592	9,132	7,012	11,045	1,101		2,556		236,606
Financial instruments not recognized on the balance sheet:
Available lines of credit cards and non-revolving consumer loans		-	-	-	79,631	-	-	-	-	-		-		79,631
Guarantees		-	-	-	-	-	-	-	-	-		20		20
Loan commitments		-	-	-	-	-	-	-	-	-		103		103
		-	-	-	79,631	-	-	-	-	-		123		79,754
		118,854	49,332	12,276	91,337	13,592	9,132	7,012	11,045	1,101		2,679		316,360

F-78

The following is a breakdown of the retail portfolio that is past due but not impaired at December 31, 2013 and 2014, classified by type of loan and by age of the oldest past-due amount:

Portions of the retail portfolio that are past due but not impaired as of December 31, 2013 are as follows:

	Current	Balances Past Due by			Total
		1 to 30 Days	31 to 60 Days	61 to 90 Days
By type of loan:
Commercial loans (SMEs)	36,717	1,968	819	607	40,111
Mortgage loans	79,602	2,982	4,253	1,432	88,269
Installment loans to individuals
Of which:
Revolving consumer credit card loans	36,578	1,310	562	-	38,450
Non-revolving consumer loans	25,065	1,539	906	576	28,086
	177,962	7,799	6,540	2,615	194,916

Portions of the retail portfolio that are past due but not impaired as of December 31, 2014 are as follows:

	Current	Balances Past Due by			Total
		1 to 30 Days	31 to 60 Days	61 to 90 Days
By type of loan:
Commercial loans (SMEs)	46,996	2,131	741	425	50,293
Mortgage loans	94,096	5,274	2,688	877	102,935
Installment loans to individuals
Of which:
Revolving consumer credit card loans	38,493	1,021	610	-	40,124
Non-revolving consumer loans	29,302	3,032	449	73	32,856
	208,887	11,458	4,488	1,375	226,208

g) Securitization

Loans and advances to customers includes 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 21 details the liabilities associated with these securitization transactions.

	2013		2014
Retained on the balance sheet
Of which:
Securitized mortgage assets		359		282
		359		282

F-79

Securitization is used as a tool for diversifying the Group’s liquidity sources. The Group had not performed any securitization in 2012, 2013 and 2014 and prior years. This securitization corresponds to a transaction performed by the acquired entity Santander Vivienda in 2006.

The loans transferred through securitization are mortgage loans.

13. Hedging derivatives

a) Breakdown

The breakdown by type of hedge of the derivatives qualifying for hedge accounting is as follows:

	12/31/2013		12/31/2014
	Assets	Liabilities	Assets	Liabilities
Fair value hedges	76	1,001	32	1,729
Cash flow hedges	224	391	4,708	2,674
	300	1,392	4,740	4,403

b) Quantitative information

Fair value hedges

As of December 31, 2013, the hedging derivative positions are as follows:

	Nominal (Million Pesos)	Nominal (Million in Transaction Currency)	Transaction Currency	Hedged Item and Risk Hedged
Interest Rate Swaps	2,891	2,891	Peso	Loans and receivables – Interest rate risk
Interest Rate Swaps	6,478	495	US Dollar	Loans and receivables – Interest rate risk
Cross-Currency Swaps	2,183	181	US Dollar	Loans and receivables – Interest rate and foreign exchange risk
Cross-Currency Swaps	278	18	Euro	United Mexican States Bonds – Interest rate and foreign exchange risk
Cross-Currency Swaps	602	30	Pound Sterling	Petroleos Mexicanos Bonds – Interest rate and foreign exchange risk
Cross-Currency Swaps	3,860	825	UDIS	UDIBONDS – Interest rate and inflation risk

F-80

As of December 31, 2014, the hedging derivative positions are as follows:

	Nominal (Million Pesos)	Nominal (Million in Transaction Currency)	Transaction Currency	Hedged Item and Risk Hedged
Interest Rate Swaps	2,780	2,780	Peso	Loans and receivables – Interest rate risk
Interest Rate Swaps	4,783	324	US Dollar	Loans and receivables – Interest rate risk
Cross-Currency Swaps	1,888	157	US Dollar	Loans and receivables – Interest rate and foreign exchange risk
Cross-Currency Swaps	278	18	Euro	United Mexican States Bonds – Interest rate and foreign exchange risk
Cross-Currency Swaps	602	30	Pound Sterling	Petroleos Mexicanos Bonds – Interest rate and foreign exchange risk
Cross-Currency Swaps	692	57	US Dollar	Petroleos Mexicanos Bonds – Interest rate and foreign exchange risk
Cross-Currency Swaps	3,860	825	UDIS	UDIBONDS – Interest rate and inflation risk

The fair value hedges carried out by the Group are extended in certain cases up to the year 2025.

For 2012, 2013 and 2014, the effect of valuation for the period of derivative financial instruments for fair value hedging purposes recorded in the consolidated income statements under Gains/(losses) on financial assets and liabilities (net) is (111) million pesos, 119 million pesos and (71) million pesos, respectively (see Note 39).

For 2012, 2013 and 2014, the effect of valuation arising from the risk being hedged of the hedged items for fair value hedging purposes recorded in the consolidated income statements in Gains/(losses) on financial assets and liabilities (net) is 88 million pesos, (131) million pesos and 65 million pesos, respectively (see Note 39).

Each of these hedging derivative instruments is presented in the consolidated balance sheet under Hedging derivatives.

F-81

Cash flow hedges

As of December 31, 2013, the hedging derivative positions are as follows:

	Nominal (Million Pesos)	Nominal (Million in Transaction Currency)	Transaction Currency	Hedged Item and Risk Hedged
Interest Rate Swaps	2,550	2,550	Peso	BPAGs Bonds – Interest rate risk
Interest Rate Swaps	175	175	Peso	Central Bank compulsory deposits – Interest rate risk
Cross-Currency Swaps	5,145	366	US Dollar	Loans and receivables – Interest rate and foreign exchange risk
Cross-Currency Swaps	2,149	121	Euro	Loans and receivables – Interest rate and foreign exchange risk
Cross-Currency Swaps	11,253	860	US Dollar	Senior Notes – Interest rate and foreign exchange risk
Cross-Currency Swaps	654	50	US Dollar	Tier II subordinated Capital Notes – Interest rate and foreign exchange risk
Forward Fx-EUR	3,642	206	Euro	Loans and receivables – Foreign exchange risk
Forward Fx-BRL	1,757	375	Brazilian Real	Brazilian Government Notes – Foreign exchange risk
Forward Fx-USD	1,836	134	US Dollar	Brazilian Government Notes – Foreign exchange risk

F-82

As of December 31, 2014, the positions in derivatives for cash flow hedging purposes are as follows:

	Nominal (Million Pesos)	Nominal (Million in Transaction Currency)	Transaction Currency	Hedged Item and Risk Hedged
Interest Rate Swaps	2,050	2,050	Peso	BPAGs Bonds – Interest rate risk
Cross-Currency Swaps	3,916	309	US Dollar	Loans and receivables – Interest rate and foreign exchange risk
Cross-Currency Swaps	4,677	265	Euro	Loans and receivables – Interest rate and foreign exchange risk
Cross-Currency Swaps	12,677	860	US Dollar	Senior Notes – Interest rate and foreign exchange risk
Cross-Currency Swaps	19,164	1,300	US Dollar	Tier II subordinated Capital Notes – Interest rate and foreign exchange risk
Forward Fx-BRL	26,112	5,195	Brazilian Real	Brazilian Government Notes – Foreign exchange risk
Forward Fx-USD	25,561	1,809	US Dollar	Brazilian Government Notes – Foreign exchange risk

During June 2014, the Group discontinued a cash flow hedge of the Central Bank compulsory deposits for an amount of 500 million pesos (nominal value). This cash flow hedge began on February 2014 and at the date of discontinuance an amount of 12 million pesos, corresponding to the effective part of the hedging instrument, was recognized in equity under Valuation adjustments - Cash flow hedges, which amount will be reclassified to consolidated income statement over the original term of the forecast transaction, which extended through the year 2018.

As of December 31, 2013 and 2014, included in the balance recognized in equity under Valuation adjustments - Cash flow hedges are 155 million pesos and 61 million pesos (see Note 28), respectively, which refer to the accumulated unamortized gain (net of the related tax effect) of hedging derivatives for which hedge accounting was discontinued. Such balances are being reclassified based on the original terms of the forecast transactions. The term of such recycling extends through the year 2022. The remaining amount of the total valuation adjustment for cash flow hedges reflected in the consolidated other comprehensive income consists of accumulated unrealized gain or loss on effective cash flow hedges currently in effect.

The cash flow hedges entered into by the Group are extended in certain cases up to the year 2017 for Brazilian Government Notes, up to the year 2018 for BPAGs Bonds, up to the year 2022 for Senior Notes and up to the year 2023 for Loans and receivables.

F-83

A reconciliation of Valuation adjustments – Cash flow hedges is as follows:

	2012			2013			2014
Valuation adjustments		160			371			(1,161	)
Amounts reclassified to consolidated income statement		(1,359	)		(470	)		1,548
Of which:
Income from cash flow hedging derivatives swaps and discontinued cash flow hedge accounting		(1,575	)		(453	)		1,551
Cash flow hedges ineffectiveness (Note 39)		216			(17	)		(3	)
		(1,199	)		(99	)		387

The breakdown of the estimated cash flows of the cash flow hedges are as follows:

	Less than 3 Months		Between 3 Months and 1 Year		Between 1 Year and 5 Years		More than 5 Years		Total
Cash flows to be received		5,028		2,368		55,336		20,997		83,729
Cash flows to be paid		5,056		3,156		78,794		33,222		120,228

Note 45.a. contains a breakdown of the remaining maturity periods of hedging derivatives.

14. Non-current assets held for sale

The breakdown of Non-current assets held for sale is as follows:

	12/31/2013		12/31/2014
Non-current assets held for sale		1,100		844
Of which:
Foreclosed assets		1,100		844
		1,100		844

The total amount of foreclosed assets classified as non-current assets held for sale are intended for sale up to one year through the completion of auctions.

In 2012, 2013 and 2014, the Group recognized a gain of 135 million pesos, a loss of (16) million pesos and a loss of (15) million pesos, respectively, under Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations in the consolidated income statement.

As of December 31, 2012, 2013 and 2014, the Group has recognized an impairment of 34 million pesos, 22 million pesos and 48 million pesos, respectively, under Impairment losses on other assets (net) in the consolidated income statement.

To account for the foreclosed assets, the Group initially records the property at the lesser of the net carrying amount of the loan to which the assets relate or the fair value of the foreclosed asset less the estimated selling costs. If the fair value (less estimated selling costs) is lower than the carrying amount of the loan, the difference is recognized in Impairment losses on other assets (net) in the consolidated income statement for the period. Subsequent to initial

F-84

recognition, the foreclosed asset is measured at the lower of fair value (less estimated selling costs) and the amount initially recognized. The fair value of this type of asset is determined by management based on market evidence obtained from valuations performed by qualified professionals.

In 2012, 2013 and 2014, none of the sales of these assets were financed by any entity of the Group.

a) Changes

The changes in foreclosed assets in the consolidated balance sheet were as follows:

	Foreclosed Assets
Cost:
Balances at January 1, 2013		576
Additions (*)		749
Disposals		(203	)
Impairment losses		(22	)
Balances at December 31, 2013		1,100
Additions		524
Disposals		(732	)
Impairment losses		(48	)
Balances at December 31, 2014		844

(*)   These additions include 202 million pesos of Non-current assets held for sale - Foreclosed assets originated from the acquisition of Santander Vivienda (see Note 4).

15. Tangible assets

a) Changes

The changes in Tangible assets in the consolidated balance sheet were as follows:

F-85

	Property, Plant and Equipment
Cost:
Balances at January 1, 2013		7,434
Additions (*)		1,303
Disposals		(248	)
Balances at December 31, 2013		8,489
Additions		1,283
Disposals		(243	)
Balances at December 31, 2014		9,529
Accumulated depreciation:
Balances at January 1, 2013		(3,321	)
Additions		(649	)
Disposals		248
Balances at December 31, 2013		(3,722	)
Additions		(785	)
Disposals		240
Balances at December 31, 2014		(4,267	)
Balances at December 31, 2013		4,767
Balances at December 31, 2014		5,262

(*)  These additions include 11 million pesos of Tangible assets originated from the acquisition of Santander Vivienda (see Note 4).

As of December 31, 2014, there are no restrictions on title and no tangible assets have been pledged as security for liabilities.

In the second quarter of 2012, the Group entered into an agreement with a non-related party, Fibra Uno, S.A. de C.V. (hereinafter, “Fibra Uno”) regarding the sale of 220 properties (branches, offices and parking spaces) and the subsequent leaseback thereof for a term of 20 years. This sale was completed in May 2012 for the amount of 3,334 million pesos, which resulted in the recognition of net gains in the amount of 1,730 million pesos (see Note 44), included in Gains/(losses) on disposal of assets not classified as non-current assets held for sale in the consolidated income statement.

The lease contract, which is accounted for as an operating lease, is non-cancellable and includes an option to renew up to an additional four consecutive periods of five years each with a market rate to be determined on the date of the renewal. The lease agreement includes rent adjustments based on the Mexican National Consumer Price Index and does not contain volume-based or leveraged contingent rent payment clauses or purchase options, or impose any restrictions on the Group’s ability to pay dividends, engage in debt financing transactions or enter into further lease agreements. The lease payments are recognized as Other general administrative expenses in the consolidated income statement.

As of December 31, 2014, the future minimum lease payments required under the Group’s operating leases, are as follows:

F-86

	12/31/2014
Operating Lease Due	Fibra Uno		Other operating leases		Total
2015		253		161		414
2016		266		300		566
2017		276		482		758
2018		276		778		1,054
2019		276		398		674
2020 and thereafter		3,401		180		3,581
Total commitments for minimum payments under operating lease		4,748		2,299		7,047

b) Breakdown

The breakdown by asset class of Tangible assets for own use in the consolidated balance sheet is as follows:

	Cost		Accumulated Depreciation			Impairment Losses		Carrying Amount
Buildings		5,721		(2,444	)		-		3,277
IT equipment and fixtures		849		(521	)		-		328
Furniture and vehicles		1,420		(757	)		-		663
Others		499		-			-		499
Balances at December 31, 2013		8,489		(3,722	)		-		4,767
Buildings		6,282		(2,771	)		-		3,511
IT equipment and fixtures		1,018		(636	)		-		382
Furniture and vehicles		1,605		(860	)		-		745
Others		624		-			-		624
Balances at December 31, 2014		9,529		(4,267	)		-		5,262

16. Intangible assets – Goodwill

a) Breakdown

The breakdown of Goodwill based on the CGUs to which Goodwill has been allocated is as follows:

	12/31/2013		12/31/2014
Santander Hipotecario (Note 4)		1,588		1,588
Santander Vivienda (Note 4)		146		146
		1,734		1,734

F-87

b)   Changes

The changes in Goodwill were as follows:

	12/31/2013		12/31/2014
Beginning balance		1,588		1,734
Additions (Note 4)		146		-
Balance at year-end		1,734		1,734

c) Impairment test

Goodwill represents payment in advance by the acquiring entity for the future economic benefits from assets that cannot be individually identified and separately recognized. It is only recognized as goodwill when the businesses are acquired at a price. Goodwill is never amortized. It is subject periodically to an impairment analysis at the end of each reporting period or whenever there is any indication of impairment.

For the purposes of the impairment analysis, goodwill is allocated to one or more CGUs expected to benefit from the synergies arising from business combinations. The CGUs represent the Group’s smallest identifiable asset groups that generate cash flows for the Group and that are largely independent of the flows generated from other assets or groups of assets. Each unit or units to which goodwill is allocated:

- is the lowest level at which the entity manages goodwill internally; and

- is not larger than an operating segment.

The CGUs to which goodwill has been allocated are tested for impairment by including the allocated goodwill in their carrying amount. This analysis is performed at least annually as of December 31 and more frequently in cases where indicators of impairment are noted by management.

For the purpose of determining the impairment of a CGU unit to which a part of goodwill has been allocated, the carrying amount of that unit is compared with its recoverable amount.

The recoverable amount of a CGU is equal to the higher of the fair value less costs to sell and its value in use. Value in use is calculated as the discounted value of the cash flow projections that the Group estimates and is based on the latest budgets approved for the next five years. The principal hypotheses are a sustainable growth rate to extrapolate the cash flows indefinitely, and the discount rate used to discount the cash flows is equal to the cost of capital assigned to each CGU, which is made up of the risk-free rate plus a risk premium.

If the carrying amount of the CGU exceeds the related recoverable amount, the Group recognizes an impairment loss; the resulting loss is apportioned by reducing, first, the carrying amount of the goodwill allocated to that CGU and, second, if there are still impairment losses remaining to be recognized, the carrying amount of the rest of the assets. This is done by allocating the remaining loss in proportion to the carrying amount of each of the assets in the unit. No impairment of goodwill attributable to the minority interests may be recognized.

Impairment losses on goodwill are recognized under Impairment losses on other assets (net)-Goodwill and other intangible assets in the consolidated income statement.

The main assumptions used in the calculation of the impairment of Goodwill are as follows:

F-88

	Hypotheses (Santander Hipotecario)	Hypotheses  (Santander Vivienda)
Basis of valuation	Value in use: discounted cash flows	Value in use: discounted cash flows
Period of projection of cash flows (1)	5 years	5 years
Perpetual cash flow	(2)	(2)
Discount rate (6)	7.06%	8.02%
Of which:
Cost of Equity (3)	13.90%	13.90%
Cost of Debt (4)	6.01%	5.48%
Equity Structure (5)	13% Equity / 87% Debt	18% Equity / 82% Debt

(1) The period of projections of cash flow are prepared using internal budgets and growth plans of management, based on historical data, market expectations and conditions such as industry growth and inflation.

(2) The perpetual cash flow has been calculated based on the following formula over the last cash flow estimated [D*(1+g)//i-g)]*(1+i)^-n, where:

§ D = Last estimated cash flow,

§ g = Perpetual growth (0%), and

§ i = Discount rate.

§ n= Number of year of last estimated cash flow.

(3) The Cost of Equity has been calculated based on the following formula Rf+(ß*Pr) where:

§ Rf = Risk free rate (Average of the Sovereign Mexican Bond – 10 years –) (5.67%),

§ β = Beta (1.07), and

§ Pr = Premium Risk (7.40%).

(4) The Cost of Debt has been calculated based on the actual pretax financing cost of the Group.

(5) The Equity Structure has been calculated based on the following formula: Equity/(Total Liability+Equity). The Debt Structure has been calculated based on the following formula: Debt/(Total Liability+Equity).

(6) The Discount rate has been calculated based on the following formula: (Cost of Equity*Equity Structure) + (Cost of Debt*Debt Structure).

Based on the foregoing, and in accordance with the estimates, projections and measurements available to the Group's management in 2012, 2013 and 2014, the Group has not recognized any impairment losses on Goodwill.

17. Intangible assets-Other intangible assets

a) Changes

The changes in Other intangible assets in the consolidated balance sheet were as follows:

F-89

	Intangible Assets with Finite Useful Life
Cost:
Balances at January 1, 2013		4,638
Additions		928
Disposals		(114	)
Balances at December 31, 2013		5,452
Additions		1,225
Disposals		(2,099	)
Balances at December 31, 2014		4,578
Accumulated amortization and impairment:
Balances at January 1, 2013		(2,578	)
Additions		(971	)
Disposals		114
Balances at December 31, 2013		(3,435	)
Additions		(897	)
Disposals		2,099
Balances at December 31, 2014		(2,233	)
Balances at December 31, 2013		2,017
Balances at December 31, 2014		2,345

b) Breakdown

The breakdown of Other intangible assets in the consolidated balance sheet is as follows:

	Estimated Useful Life	Cost		Accumulated Amortization			Impairment Losses			Carrying Amount
IT developments	3 years		5,360		(3,343	)		-			2,017
Others	10 years		92		(35	)		(57	)		-
Balances at December 31, 2013			5,452		(3,378	)		(57	)		2,017
IT developments	3 years		4,486		(2,141	)		-			2,345
Others	10 years		92		(35	)		(57	)		-
Balances at December 31, 2014			4,578		(2,176	)		(57	)		2,345

F-90

As of December 31, 2014, there are no intangible assets with restricted title or intangible assets pledged as security for liabilities.

18. Other assets

The breakdown of Other assets is as follows:

	12/31/2013		12/31/2014
Credit card operating balances		794		985
Insurance commission receivables		761		747
Prepayments		881		1,060
Bank branches operating balances		55		-
Net pension plan assets		45		13
Indemnification asset		849		582
Other		2,441		3,092
		5,826		6,479

19. Deposits from Central Bank and Deposits from credit institutions

The breakdown by classification, type and currency of the balance is as follows:

	12/31/2013		12/31/2014
Classification:
Other financial liabilities at fair value   through profit or loss		18,519		33,752
Financial liabilities at amortized cost		51,697		48,326
		70,216		82,078
Type:
Reciprocal accounts		11,307		3,785
Time deposits		12,956		19,977
Overnight deposits		4,285		3,005
Reverse repurchase agreements		18,519		33,752
Other accounts		23,122		21,533
Accrued interest		27		26
		70,216		82,078
Currency:
Peso		56,145		56,108
US Dollar		14,070		25,970
Other currencies		1		-
		70,216		82,078

Note 45.a. includes a breakdown of the remaining maturity periods of Deposits from Central Bank and Deposits from credit institutions and of the related average interest rates. In addition, Note 45.c. contains the fair value amounts of these liabilities classified as Deposits from Central Bank and Deposits from credit institutions – Financial liabilities at amortized cost.

F-91

20. Customer deposits

The breakdown by classification, type and currency of the balance of Customer deposits is as follows:

	12/31/2013		12/31/2014
Classification:
Other financial liabilities at fair value  through profit or loss		57,506		69,726
Financial liabilities at amortized cost		389,618		444,902
		447,124		514,628
Type:
Reverse repurchase agreements		57,506		69,726
Demand deposits:
Current accounts		257,952		294,062
Savings accounts		2		1
Other deposits		11,579		17,069
Of which:
Collateral received for OTC transactions (Note 32)		4,944		6,033
Others		6,635		11,036
Time deposits:
Fixed-term deposits		119,903		133,587
Accrued interest		182		183
		447,124		514,628
Currency:
Peso		413,723		467,166
US Dollar		33,390		47,449
Other currencies		11		13
		447,124		514,628

As of December 31, 2013 and 2014, customer deposits of 79 million pesos and 55 million pesos, respectively, have been received in connection with derivatives transactions traded in organized markets (see Note 32).

As of December 31, 2013 and 2014, customer deposits of 4,944 million pesos and 6,033 million pesos, respectively, have been received in connection with OTC derivatives transactions (see Note 32).

Note 45.a. includes a breakdown of the remaining maturity periods of Customer deposits and of the related average interest rates. In addition, Note 45.c. contains the fair value amounts of these liabilities classified as Customer deposits – Financial liabilities at amortized cost.

F-92

21. Marketable debt securities

a) Breakdown

The breakdown by classification and type of issue of Marketable debt securities is as follows:

	12/31/2013		12/31/2014
Classification:
Other financial liabilities at fair value through profit or loss designated as such upon initial recognition		-		5,306
Financial liabilities at amortized cost		53,118		53,771
		53,118		59,077
Type:
Certificates of deposit (unsecured)		6,773		13,948
Senior notes		12,883		14,556
Structured bank bonds		766		5,614
Promissory notes		19,842		17,884
Unsecured bonds		12,568		6,839
Mortgage-backed bonds		286		236
		53,118		59,077

Note 45.a. includes a breakdown of the remaining maturity periods of Marketable debt securities and of the related average interest rates. In addition, Note 45.c. contains the fair value amounts of these liabilities classified as Marketable debt securities – Financial liabilities at amortized cost.

b) Changes in Marketable debt securities classified as financial liabilities at fair value through profit or loss

The changes in Marketable debt securities classified as financial liabilities at fair value through profit or loss were as follows:

	2014
Beginning balance		-
Issues		5,492
Of which:
Structured bank bonds		5,492
Of which:
Banco Santander (México), S.A.		5,492
Redemptions		(9	)
Of which:
Structured bank bonds		(9	)
Of which:
Banco Santander (México), S.A.		(9	)
Changes in fair value		(177	)
Balance at year-end		5,306

F-93

c) Changes in Marketable debt securities classified as financial liabilities at amortized cost

The changes in Marketable debt securities classified as financial liabilities at amortized cost were as follows:

	2013			2014
Beginning balance		54,703			53,118
Issues (*)		1,362,570			639,908
Of which:
Certificates of deposit (unsecured)		6,773			55,265
Senior notes		119			1,674
Structured bank bonds		17,578			19,584
Promissory notes		1,336,827			563,385
Unsecured bonds		987			-
Mortgage-backed bonds		286			-
Of which:
Banco Santander (México), S.A.		1,361,297			639,908
Santander Vivienda, S.A. de C.V.		1,273			-
Redemptions (*)		(1,363,903	)		(639,270	)
Of which:
Certificates of deposit		-			(48,098	)
Structured bank bonds		(18,336	)		(20,061	)
Promissory notes		(1,336,849	)		(565,332	)
Unsecured bonds		(8,718	)		(5,779	)
Of which:
Banco Santander (México), S.A.		(1,363,903	)		(639,221	)
Santander Vivienda, S.A. de C.V.		-			(49	)
Accrued interest		(252	)		15
Balance at year-end		53,118			53,771

(*)  Includes foreign exchange effect of marketable debt securities denominated in foreign currency.

d) Other disclosures

Issuance program

In April 2007, the Board of Directors authorized an issuance program for up to USD 4,000,000,000 of different types of instruments denominated in pesos, USD, euros or UDIS, up to 30 years. In October 2010, the Board of Directors renewed this authorization.

In October 2011, the Board of Directors authorized to increase the amount of issuance program up to USD 6,500,000,000. In October 2013, the Board of Directors endorsed the total amount of issuance program, establishing that the maximum term of the issuances must be 15 years.

F-94

As of December 31, 2013, the balance of the issues performed by the Group under the aforementioned program is as follows:

	Amount	Maturity Date	Rate
Certificates of deposit (unsecured)	4	01/03/2014	3.44%
Certificates of deposit (unsecured)	2	01/03/2014	3.44%
Certificates of deposit (unsecured)	1	01/10/2014	3.49%
Certificates of deposit (unsecured)	131	01/10/2014	0.65%
Certificates of deposit (unsecured)	392	01/10/2014	0.70%
Certificates of deposit (unsecured)	915	01/13/2014	0.70%
Certificates of deposit (unsecured)	39	01/13/2014	0.50%
Certificates of deposit (unsecured)	22	01/13/2014	0.50%
Certificates of deposit (unsecured)	18	01/14/2014	3.44%
Certificates of deposit (unsecured)	11	01/15/2014	3.44%
Certificates of deposit (unsecured)	2	01/15/2014	3.44%
Certificates of deposit (unsecured)	2	01/16/2014	3.44%
Certificates of deposit (unsecured)	1,710	01/22/2014	3.84%
Certificates of deposit (unsecured)	1,000	01/23/2014	3.84%
Certificates of deposit (unsecured)	16	01/31/2014	3.44%
Certificates of deposit (unsecured)	95	02/01/2014	3.28%
Certificates of deposit (unsecured)	17	02/05/2014	3.44%
Certificates of deposit (unsecured)	5	02/21/2014	3.49%
Certificates of deposit (unsecured)	1	02/24/2014	0.45%
Certificates of deposit (unsecured)	100	02/27/2014	3.81%
Certificates of deposit (unsecured)	700	03/06/2014	3.79%
Certificates of deposit (unsecured)	1,500	04/16/2014	3.75%
Certificates of deposit (unsecured)	4	04/16/2014	0.45%
Certificates of deposit (unsecured)	3	06/02/2014	0.50%
Certificates of deposit (unsecured)	3	06/02/2014	0.50%
Certificates of deposit (unsecured)	10	06/13/2014	3.44%
Certificates of deposit (unsecured)	6	06/27/2014	0.60%
Certificates of deposit (unsecured)	50	07/17/2014	3.44%
Certificates of deposit (unsecured)	1	10/03/2014	3.44%
Certificates of deposit (unsecured)	9	11/06/2014	3.44%
	6,769
Accrued interest	4
	6,773

F-95

Senior notes	12,825	11/09/2022	4.125%
Transaction costs and accrued interest	58
	12,883
Structured bank bonds	13	01/02/2014	5.50%
Structured bank bonds	150	01/10/2014	9.30%
Structured bank bonds	20	01/10/2014	6.00%
Structured bank bonds	11	01/13/2014	Guaranteed rate subject to exchange rate
Structured bank bonds	28	01/14/2014	TIIE
Structured bank bonds	10	01/17/2014	10%
Structured bank bonds	20	01/24/2014	Guaranteed rate subject to exchange rate
Structured bank bonds	13	01/28/2014	Guaranteed rate subject to exchange rate
Structured bank bonds	7	02/13/2014	Guaranteed rate subject to exchange rate
Structured bank bonds	13	02/27/2014	2.50%
Structured bank bonds	200	05/05/2014	TIIE
Structured bank bonds	93	05/29/2014	TIIE
Structured bank bonds	11	06/11/2014	TIIE
Structured bank bonds	11	08/28/2014	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds	15	11/28/2014	TIIE
Structured bank bonds	5	08/04/2015	TIIE
Structured bank bonds	8	08/18/2015	TIIE
Structured bank bonds	131	08/26/2015	TIIE
Structured bank bonds	20	10/15/2015	Guaranteed rate subject to IBEX 35
	779
Transaction costs and accrued interest	(13)
	766
Promissory notes	300	01/02/2014	3.60%
Promissory notes	17,531	01/02/2014	3.55%
Promissory notes	58	01/06/2014	3.45%
Promissory notes	50	01/10/2014	3.50%
Promissory notes	1,061	01/31/2014	4.15%
Promissory notes	812	02/28/2014	4.15%
	19,812
Accrued interest	30
	19,842
Unsecured bonds	5,000	01/27/2014	TIIE + 20 bps
Unsecured bonds	730	01/27/2014	TIIE + 20 bps
Unsecured bonds	2,800	09/21/2016	TIIE + 50 bps
Unsecured bonds	1,300	09/21/2016	TIIE + 50 bps
Unsecured bonds	978	11/23/2017	9.05%
Unsecured bonds	1,700	03/09/2021	8.91%
	12,508
Accrued interest	60
	12,568
Mortgage-backed bonds	270	05/25/2032	5.00%
Mortgage-backed bonds	16	05/25/2032	6.40%
	286
Accrued interest	-
	286

F-96

As of December 31, 2014, the balance of the issues performed by the Group under the aforementioned program is as follows:

	Amount	Maturity Date	Rate
Certificates of deposit (unsecured)	13	03/06/2015	2.96%
Certificates of deposit (unsecured)	17	02/04/2015	2.96%
Certificates of deposit (unsecured)	14	05/21/2015	2.96%
Certificates of deposit (unsecured)	2,315	06/04/2015	3.25%
Certificates of deposit (unsecured)	10	06/08/2015	2.96%
Certificates of deposit (unsecured)	3,415	06/11/2015	3.26%
Certificates of deposit (unsecured)	200	06/18/2015	3.24%
Certificates of deposit (unsecured)	600	06/18/2015	3.24%
Certificates of deposit (unsecured)	100	06/18/2015	3.24%
Certificates of deposit (unsecured)	500	06/18/2015	3.24%
Certificates of deposit (unsecured)	200	06/18/2015	3.24%
Certificates of deposit (unsecured)	28	06/26/2015	2.96%
Certificates of deposit (unsecured)	2,000	05/07/2015	3.25%
Certificates of deposit (unsecured)	18	01/14/2015	2.96%
Certificates of deposit (unsecured)	50	07/23/2015	2.96%
Certificates of deposit (unsecured)	16	08/28/2015	2.96%
Certificates of deposit (unsecured)	9	10/28/2015	2.96%
Certificates of deposit (unsecured)	2	08/28/2015	2.96%
Certificates of deposit (unsecured)	2	08/28/2015	2.96%
Certificates of deposit (unsecured)	5	04/23/2015	1.00%
Certificates of deposit (unsecured)	179	01/02/2015	0.34%
Certificates of deposit (unsecured)	145	01/06/2015	0.32%
Certificates of deposit (unsecured)	117	01/08/2015	0.31%
Certificates of deposit (unsecured)	267	01/05/2015	0.30%
Certificates of deposit (unsecured)	116	01/13/2015	0.37%
Certificates of deposit (unsecured)	115	01/15/2015	0.46%
Certificates of deposit (unsecured)	70	01/16/2015	0.30%
Certificates of deposit (unsecured)	88	01/20/2015	0.30%
Certificates of deposit (unsecured)	138	01/20/2015	0.65%
Certificates of deposit (unsecured)	133	01/06/2015	0.45%
Certificates of deposit (unsecured)	442	01/20/2015	0.41%
Certificates of deposit (unsecured)	166	01/23/2015	0.40%
Certificates of deposit (unsecured)	123	01/13/2015	0.30%
Certificates of deposit (unsecured)	146	01/27/2015	0.40%
Certificates of deposit (unsecured)	103	01/02/2015	2.78%
Certificates of deposit (unsecured)	84	01/29/2015	0.50%
Certificates of deposit (unsecured)	1,916	02/24/2015	0.51%
Certificates of deposit (unsecured)	7	05/27/2015	0.50%
Certificates of deposit (unsecured)	2	07/31/2015	0.55%
Certificates of deposit (unsecured)	66	05/27/2015	0.50%
	13,937
Accrued interest	11
	13,948

F-97

Senior notes	14,482	11/09/2022	4.125%
Transaction costs and accrued interest	74
	14,556
Structured bank bonds	20	10/15/2015	Guaranteed rate subject to IBEX 35
Structured bank bonds	5	08/04/2015	TIIE
Structured bank bonds	8	08/18/2015	TIIE
Structured bank bonds	11	01/20/2015	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds	58	08/26/2015	TIIE
Structured bank bonds	100	01/08/2015	Guaranteed rate subject to exchange rate
Structured bank bonds	20	01/06/2015	Guaranteed rate subject to exchange rate
Structured bank bonds	18	01/13/2015	Guaranteed rate subject to exchange rate
Structured bank bonds	11	01/30/2015	Guaranteed rate subject to exchange rate
Structured bank bonds	28	01/05/2015	Guaranteed rate subject to exchange rate
Structured bank bonds	23	02/17/2015	Guaranteed rate subject to exchange rate
Structured bank bonds (*)	87	03/13/2017	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds (*)	50	03/16/2017	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds (*)	12	03/24/2017	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds (*)	12	04/06//2017	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds (*)	10	05/26/2016	Guaranteed rate subject to Euro SX5E
Structured bank bonds (*)	20	06/08/2016	Guaranteed rate subject to Euro SX5E
Structured bank bonds (*)	9	06/18/2015	Guaranteed rate subject to Euro SX7E
Structured bank bonds (*)	25	06/19/2015	Guaranteed rate subject to NIKKEI 225
Structured bank bonds (*)	16	06/24/2015	Guaranteed rate subject to Euro SX7E
Structured bank bonds (*)	812	06/29/2017	Guaranteed rate subject to IBEX 35
Structured bank bonds (*)	55	04/07/2016	Guaranteed rate subject to Euro SX7E
Structured bank bonds (*)	237	08/24/2016	Guaranteed rate subject to HSCEI and S&P 500
Structured bank bonds (*)	362	09/08/2017	Guaranteed rate subject to Euro SX5E
Structured bank bonds (*)	15	09/09/2015	Guaranteed rate subject to Euro SX5E
Structured bank bonds (*)	35	10/14/2016	Guaranteed rate subject to Hang Seng
Structured bank bonds (*)	106	11/06/2017	Guaranteed rate subject to S&P 500
Structured bank bonds (*)	1,480	03/02/2017	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds (*)	248	11/17/2016	Guaranteed rate subject to IBEX 35
Structured bank bonds (*)	590	08/03/2017	Guaranteed rate subject to Euro SX5E
Structured bank bonds (*)	528	09/06/2017	Guaranteed rate subject to Euro SX5E
Structured bank bonds (*)	584	01/04/2018	Guaranteed rate subject to Euro Stoxx Oil & Gas
Structured bank bonds (*)	13	01/04/2018	Guaranteed rate subject to Euro Stoxx Oil & Gas
	5,608
Transaction costs and accrued interest	6
	5,614
Promissory notes	2,000	01/02/2015	2,96%
Promissory notes	5,000	01/02/2015	3.00%
Promissory notes	3,000	01/02/2015	3.05%
Promissory notes	5,000	01/02/2015	3.08%
Promissory notes	750	01/07/2015	3.00%
Promissory notes	52	02/13/2015	3.03%
Promissory notes	2,000	01/23/2015	3.09%
Promissory notes	64	01/05/2015	2.96%
	17,866
Accrued interest	18
	17,884

F-98

Unsecured bonds	2,800	09/21/2016	TIIE + 50 bps
Unsecured bonds	1,300	09/21/2016	TIIE + 50 bps
Unsecured bonds	979	11/23/2017	9.05%
Unsecured bonds	1,700	03/09/2021	8.91%
	6,779
Accrued interest	60
	6,839
Mortgage-backed bonds	223	05/25/2032	5.00%
Mortgage-backed bonds	13	05/25/2032	6.40%
	236
Accrued interest	-
	236

(*) Marketable debt securities classified as financial liabilities at fair value through profit or loss

22. Subordinated liabilities

a)   Breakdown

The breakdown of the balance of Subordinated liabilities is as follows:

					12/31/2014
					Outstanding Issue Amount in Foreign Currency(1)		Annual Interest Rate (%)
Currency of Issue	12/31/2013		12/31/2014
US Dollar		16,824		19,446		1,300,000,000		5.95	%
Balance at year-end		16,824		19,446

(1) See 21.d. Other disclosures

Note 45.a. includes a breakdown of the remaining maturity of Subordinated liabilities and of the related average interest rates. Additionally, Note 45.c. includes the fair value amounts of these liabilities.

b)   Changes

The changes in Subordinated liabilities were as follows:

	2013			2014
Beginning balance (million USD)		-			1,286
Issues
Of which:
Banco Santander (México) S.A.		1,300			-
Transaction costs and accrued interest		(14	)		33
Balance at year-end (million USD)		1,286			1,319
Exchange rate per one USD as of December 31,		13.0843			14.7414
Balance at year-end (million pesos)		16,824			19,446

F-99

c)   Other disclosures

On December 27, 2013, the Bank issued debt securities denominated as Tier II Subordinated Capital Notes in the amount of USD 1,300,000,000 equivalent to 1,300,000 securities with a nominal value of US 1,000 each with a 10 year maturity (January 30, 2024) and with an option to be prepaid in year five. The instruments were issued and placed in accordance with Rule 144A and Regulation S of the U.S. Securities Act of 1933, as amended with a discount of USD 10 million. Interest will be paid semiannually, on January 30 and July 30, respectively, beginning July 30, 2014. The instruments bear interest at an initial rate of 5.95% a year during the first five years.

The main features of this issue are as follows:

a) If notes are not redeemed in year five, the interest rate for the second five-year period shall be based on the interest rate on US five-year Treasury Notes in effect at that moment plus the spread defined in the offering memorandum.

b) Loss absorption mechanism through a write down of the issue being the trigger event a computation of the Bank’s Basic Capital index of 4.5%.

c) Partial write-down until the Bank achieves a Basic Capital index of 7.0%.

d) When the Bank computes a Basic Capital index of 8.0%:

 - Possible deferral of principal or interest or other remedies determined by the CNBV.

 - Possible write-down due to breach of remediation.

 - Possible early prepayment in an event of non-deductibility of interest or by the increase in the applicable withholding tax led by the consideration of the notes issued as Tier II Complementary Capital.

F-100

23. Other financial liabilities

The breakdown of Other financial liabilities is as follows:

	12/31/2013		12/31/2014
Trade payables		1,343		1,081
Collection accounts:
Tax payables		971		1,190
Financial transactions pending settlement		12,970		8,872
Other financial liabilities		1,643		1,537
		16,927		12,680

Note 45.a. includes a breakdown of the remaining maturity periods of Other financial liabilities and of the related average interest rates. In addition, Note 45.c. contains the fair value amounts of these liabilities.

The breakdown of unsettled financial transactions is as follows:

	12/31/2013		12/31/2014
Financial transactions pending settlement Of which:
M and M0 Mexican Government Bonds		3,490		1,890
Federal Treasury Securities (CETES)		8,374		4,705
Federal Mexican Government Development Bonds in UDIS (UDIBONDS)		779		1,977
Mexican Bank Saving Protection Bonds (BPATs)		50		-
Equity instruments		275		268
Other financial instruments		2		32
		12,970		8,872

The breakdown of Other financial liabilities is as follows:

	12/31/2013		12/31/2014
Retentions related to loans (*)		811		630
IPAB contingency		207		189
Other payable account		625		718
		1,643		1,537

(*) These amounts correspond to temporary retention accounts for customers that have their payroll deposits with the Bank and to whom the Bank has granted a loan.

F-101

Mexican Bank Savings Protection Institute Contingency

As of December 31, 2013 and 2014, the Group was the defendant in various legal proceedings and claims brought against it by clients as a result of the Group’s acquisition of Grupo Financiero Serfin, S.A. and Subsidiaries (hereinafter, “Grupo Financiero Serfin”) in May 23, 2000 from the Mexican Bank Savings Protection Institute (hereinafter, “IPAB”) (see Note 41). Later, in 2006, Grupo Financiero Serfin merged with Grupo Financiero Santander, S.A. de C.V. and subsidiaries (currently the Group), wherein the Group was the surviving company.

At the time of the acquisition, Grupo Financiero Serfin faced certain legal proceedings and claims brought by third parties and were taken over by the IPAB. The IPAB agreed to indemnify the Group, thereby, releasing the Group from liabilities exceeding the fixed amount of 637 million pesos, arising from legal, tax and labor contingencies arising from the operations of Grupo Financiero Serfin through the date of the acquisition. In connection with this arrangement, Grupo Financiero Serfin recognized a liability of 637 million pesos, which accrues interest at the CETES 28 days (Federal Treasury Securities) rate.

As of December 31, 2013 and 2014, the remaining balance of the IPAB liability and related accrued interest is 207 million pesos and 189 million pesos, respectively, which, at the discretion of the IPAB, may either be reimbursed to the IPAB, in which case IPAB is obligated to absorb all remaining contingencies, or it may be used to pay contingencies directly until the liability is reduced to zero.

24. Provisions

a) Breakdown

The breakdown of Provisions is as follows:

	12/31/2013		12/31/2014
Provisions for pensions and similar obligations		2,371		2,873
Provisions for tax and legal matters		1,332		1,308
Provisions for off-balance-sheet risk		1,524		1,359
Other provisions		483		546
Provisions		5,710		6,086

F-102

b) Changes

The changes in Provisions were as follows:

	2012															2013														2014
	Provisions for Pensions and Similar Obligations			Provisions for Tax and Legal Matters			Provisions for Off-Balance-Sheet Risk			Other Provisions			Total			Provisions for Pensions and Similar Obligations			Provisions for Tax and Legal Matters			Provisions for Off-Balance-Sheet Risk		Other Provisions			Total			Provisions for Pensions and Similar Obligations			Provisions for Tax and Legal Matters			Provisions for Off-Balance- Sheet Risk			Other Provisions			Total
Balance at beginning of year		2,713			1,409			2,513			434			7,069			3,189			1,435			1,164		506			6,294			2,371			1,332			1,524			483			5,710
Additions charged (credited) to net income:
Interest expense and similar charges		215			-			-			-			215			212			-			-		-			212			195			-			-			-			195
Personnel expenses – Defined Benefit Plan		154			-			-			-			154			191			-			-		-			191			170			-			-			-			170
Personnel expenses – Defined Contribution Plan (Note 42)		140			-			-			-			140			239			-			-		-			239			259			-			-			-			259
Other		65			-			-			-			65			5			-			-		-			5			(50	)		-			-			-			(50	)
Actuarial (gains)/losses recognized in the year in Other comprehensive income		543			-			-			-			543			(469	)		-			-		-			(469	)		382			-			-			-			382
Period provisions		-			273			(1,349	)		331			(745	)		-			153			360		233			746			-			230			(165	)		142			207
Contributions from the employer		(396	)		-			-			-			(396	)		(623	)										(623	)		(6	)											(6	)
Payments to pensioners and pre-retirees with a charge to internal provisions
		(112	)		-			-			-			(112	)		(130	)		-			-		-			(130	)		(174	)		-			-			-			(174	)
Other payments (*)					(247	)					(259	)		(506	)					(256	)				(256	)		(512	)					(254	)		-			(79	)		(333	)
Payments to Defined Contribution Plan		(133	)		-			-			-			(133	)		(243	)		-			-		-			(243	)		(259	)		-			-			-			(259	)
Transfers and other changes		-			-			-			-			-			-			-			-		-			-			(15	)		-			-			-			(15	)
Balances at end of year		3,189			1,435			1,164			506			6,294			2,371			1,332			1,524		483			5,710			2,873			1,308			1,359			546			6,086

(*) Included in these amounts are payments made by the Group to the Tax Administration Service of 35 million pesos in 2013 and 33 million pesos in 2014 due to the fact that the Group was not withholding income tax in their derivative transactions with certain counterparties.

F-103

c) Provisions for pensions and similar obligations

Defined contribution plan

The Group sponsors a defined contribution retirement benefit plan for all qualifying employees of its subsidiaries whereby the Group agrees to contribute pre-established cash amounts to a given investment fund, in which the employee’s benefits consists of the sum of such contributions, plus or minus the gains or losses from the management of such funds of those employees who form part of this defined contribution retirement benefit plan. The qualifying employees are those who began working for the Group after year 2006. The retirement age is 65 years.

The assets of the plan are held separately from those of the Group in funds under the control of trustees.

The Group recognized as personnel expenses in the consolidated income statement the amounts of 141 million pesos, 239 million pesos and 246 million pesos in 2012, 2013 and 2014, respectively (see Note 42), related to contributions payable to the defined contribution retirement benefit plan.

Defined benefit plan

According to Mexican Labor Law, the Group is liable for severance payments for employees who are terminated by the Group and seniority premiums which are statutory retirement benefits. In addition, the Group offers a defined benefit pension plan and other post-retirement benefits agreed under collective bargaining agreement. The defined benefit plans are administered in a separate fund that is legally separated from the Group. The trustee of the pension fund is required by law to act in the best interests of the plan participants and is responsible for setting certain policies (e.g. investment, contribution and indexation policies) of the fund.

During the year, the Group estimates and records the net periodic cost to create a provision that covers the net projected obligation from pensions, medical expenses, seniority premiums and severance payments. These estimates are related to the obligations derived from Mexican Labor Law, as well as the obligations derived from the collective bargaining agreement. Therefore, the liability is accrued at the present value of future cash flows required to settle the obligation from benefits projected to the estimated retirement date of the Group’s employees calculated based on the projected unit credit method.

The plans typically expose the Group to actuarial risks such as: investment risk, interest rate risk, longevity risk and salary risk.

Investment risk	The present value of the defined benefit plan liability is calculated using a discount rate determined by reference to high quality corporate bond yields; if the return on plan asset is below this rate, it will create a plan deficit. Currently the plan has a relatively balanced investment in debt instruments and equity securities. Due to the long-term nature of the plan liabilities, the board of the pension fund considers it appropriate that a reasonable portion of the plan assets should be invested in equity securities to leverage the return generated by the fund.
Interest risk	A decrease in the bond interest rate will increase the plan liability; however, this will be partially offset by an increase in the return on the plan’s debt investments.
Longevity risk	The present value of the defined benefit plan liability is calculated by reference to the best estimate of the mortality of plan participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the plan’s liability.
Salary risk	The present value of the defined benefit plan liability is calculated by reference to the future salaries of plan participants. As such, an increase in the salary of the plan participants will increase the plan’s liability.

F-104

Provisions for defined benefit post-employment plan, which benefits include a pension and medical expenses plan, severance payments and seniority premiums, amounted to 2,350 million pesos and 2,852 million pesos as of December 31, 2013 and 2014, respectively.

The investment fund of the defined benefit post-employment plan was 4,412 million pesos and 4,336 million pesos as of December 31, 2013 and 2014, respectively. Investments are well-diversified, such that the failure of any single investment would not have a material impact on the overall level of assets. Plan assets in 2013 and 2014 consist of debt and equity instruments. The Group believes that equities offer the best returns over the long-term with an acceptable level of risk.

Prior to January 1, 2006, the Group offered a defined benefit medical expenses plan to all eligible employees (and their families) that upon retirement provided for the payment of 100% of medical expenses due to illness or accidents. Under this medical expenses plan, the Group accrues the estimated medical expenses based upon actuarial calculations during the period of employment up to the date of retirement.

Beginning on January 1, 2006, the Group introduced a new defined contribution medical expenses plan referred to as the “Retirement Medical Coverage Plan”. All individuals employed after January 1, 2006 were automatically enrolled in the “Retirement Medical Coverage Plan”. Employees with more than six months of service as of January 1, 2006 were given the option of remaining under the defined benefit medical expenses plan or transfer to the “Retirement Medical Coverage Plan”. Under the “Retirement Medical Coverage Plan”, the Group pays pre-established cash amounts to a given investment fund. An employee’s benefit consists of the sum of such contributions, plus or minus the gains or losses from the management of such funds.

As of December 31, 2013 and 2014, approximately 2.08% and 1.80% of the Group’s employees, respectively, were still enrolled in the defined benefit pension plan while the rest of the employees were enrolled in the defined contribution pension plan.

As of December 31, 2013 and 2014, approximately 80.54% and 83.30% of the Group’s employees enrolled in the defined contribution pension plan have been included in the new “Retirement Medical Coverage Plan”.

The breakdown of Provisions for pensions and similar obligations is as follows:

	12/31/2013		12/31/2014
Provisions for post-employment plans
Of which: Defined benefit pension plan		2,350		2,852
Provisions for defined contribution pension plan		21		21
Provisions for pensions and similar obligations		2,371		2,873

The amount of the defined benefit obligations was determined 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: The most significant actuarial assumptions used in the calculations were as follows:

F-105

	Defined Benefit Pension Plan
	12/31/2013	12/31/2014
Annual discount rate	9.0%	8.25%
Mortality tables	EMSSA 1997	EMSSA 1997
Expected return on plan assets	9.0%	8.5%
Cumulative annual Consumer Price Index growth	4.0%	4.0%
Annual salary increase rate	5.0%	5.0%
Annual minimum salary increase rate	4.0%	4.0%
Medical cost trend rates	7.12%	7.12%

The determination of the discount rate considered the term and performance of high credit quality corporate bonds.

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 funding status of the defined benefit obligations is as follows:

	Defined Benefit Pension Plan
	12/31/2013			12/31/2014
Present value of the obligations:
Pension plan		2,170			2,272
Post-employment benefits		3,859			4,203
Other		733			713
		6,762			7,188
Less:
Fair value of plan assets		(4,412	)		(4,336	)
Provisions – Provisions for pensions		2,350			2,852
Of which:
Internal provisions for pensions		2,350			2,852

The amounts recognized in the consolidated income statement in relation to the aforementioned defined benefit obligations are as follows:

	Defined Benefit Pension Plan
	2012		2013		2014
Current service cost (Note 42)		154		191		170
Interest cost		215		212		195
Other		65		5		(50	)
		434		408		315

F-106

The changes in the present value of the accrued defined benefit obligations were as follows:

	Defined Benefit Pension Plans
	2013			2014
Present value of the obligations at beginning of year		7,488			6,762
Current service cost (Note 42)		191			170
Interest cost		522			581
Benefits paid		(563	)		(595	)
Actuarial (gains)/losses		(863	)		275
Other		(13	)		(5	)
Present value of the obligations at end of year		6,762			7,188

The weighted average duration of the defined benefit obligation is 13.05 years.

The changes in the fair value of plan assets were as follows:

	Defined Benefit Pension Plan
	2013			2014
Fair value of plan assets at beginning of year		4,322			4,412
Actual return on plan assets		(83	)		326
Contributions from the employer		623			6
Benefits paid		(433	)		(421	)
Other		(17	)		13
Fair value of plan assets at end of year		4,412			4,336

The fair values of the above (debt and equity instruments) are determined based on quoted market prices in active markets.

The Group does not expect to make contributions to post-employment benefit plans for the year ending December 31, 2015.

The major categories of plan assets as a percentage over the total plan assets are as follows:

	Defined Benefit Pension Plan
	12/31/2013	12/31/2014
Equity instruments	16%	26%
Debt instruments	84%	74%

The fair value measurement of the financial instruments that comprises the plan assets is categorized as Level 1 since the inputs to the fair value measurement are quoted market prices in active markets.

F-107

Sensitivity analysis

Significant actuarial assumptions for the determination of the defined benefit obligation are discount rate, medical cost trend rate, annual salary increase, annual consumer price index growth and mortality. The sensitivity analyses below have been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding all other assumptions constant.

• If the discount rate is 50 basis points higher (lower), the defined benefit obligation would decrease by 352 million pesos (increase by 385 million pesos).

• If the medical cost trend rate is 50 basis points higher (lower), the defined benefit obligation would increase by 334 million pesos (decrease by 301 million pesos).

• If the annual salary growth increases (decreases) by 0.50%, the defined benefit obligation would increase by 18 million pesos (decrease by 17 million pesos).

• If the annual consumer price index growth increases (decreases) by 0.50%, the defined benefit obligation would increase by 3 million pesos (decrease by 3 million pesos).

• If the mortality increases (decreases) by two years for men and women, the defined benefit obligation would decrease by 388 million pesos (increase by 379 million pesos).

The sensitivity analysis presented above may not be representative of the actual change in the defined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated.

Furthermore, in presenting the above sensitivity analysis, the present value of the defined benefit obligation has been calculated using the projected unit credit method at the end of the reporting period, which is the same as that applied in calculating the defined benefit obligation recognized in the consolidated balance sheet.

d) Other disclosures

In July 2001, the Group entered into a collective lifetime payment insurance operation agreement for certain retirees with Principal Mexico Compañía de Seguros, S.A. de C.V. (hereinafter, “Principal”). Such agreement establishes that with the payment of the single premium by the Group, Principal commits to paying insured retirees a lifetime payment until the death of the last insured retiree.

Under such agreement, the Group’s net worth would not be affected in the future by these insured persons, since the risk was transferred to Principal. However, in order to record the Group’s legal obligation to its retirees in the consolidated balance sheet, the Group records the projected benefit obligation of the insured retirees surrendered to Principal under Provisions - Provisions for pensions and similar obligations, and a long-term account receivable with Principal, which is recorded under Provisions - Provisions for pensions and similar obligations for the funds that it transferred thereto. The amount of the projected benefits obligation was calculated at the close of the year, based on the estimates used for labor liabilities and the remaining personnel. As of December 31, 2013 and 2014, such liability was 921 and 905 million pesos, respectively. For presentation purposes, the arrangement does not impact the consolidated balance sheet as the asset and liability are offset.

F-108

e) Provisions for tax and legal matters

i. Tax-related proceedings

The Group is a party to various tax claims for which it has recorded total provisions of 51 million pesos and 67 million pesos as of December 31, 2013 and 2014, respectively. The main tax-related proceeding concerning the Group was as follows:

• On January 23, 2008 the Group filed for annulment against the resolution issued by the Tax Administration Service, by which an additional employee profit sharing obligation was determined for the fiscal year 2004. By meeting of the First Circuit ruled deny the Group’s amparo suit and Protection of Federal Justice requested. The Group recognized a provision for an amount of 15 million pesos.

The total amount of payments made by the Group arising from this tax proceeding in 2012, 2013 and 2014 is not material with respect to these consolidated financial statements.

ii.   Other tax issues

The Group operates a branch in Nassau through which it carries out tax-free operations principally involving derivative instruments. The Tax Administration Service have reviewed the operations of the Nassau branch and determined that the Group is liable for Mexican withholding taxes. During December 2009, the Group negotiated a settlement with the Mexican tax authorities for cumulative back withholding taxes on transactions carried out from 2004 through 2009. The Group made settlement payments of 35 million pesos in 2013 and 38 million pesos in 2014. 

iii. Non-tax-related proceedings

As of December 31, 2013 and 2014, as a result of its business activities, the Group has had certain claims and lawsuits representing contingent liabilities filed against it. Notwithstanding, management and its internal and external legal and labor advisers do not expect such proceedings to have a material effect on the consolidated financial statements in the event of an unfavorable outcome. As of December 31, 2013 and 2014, the Group has recognized provisions for the amounts of 1,184 million pesos and 1,181 million pesos, respectively, for matters which based on the opinion of its internal and external legal advisers, management has assessed losses to be probable. Management considers such provisions to be adequate and, based on its best estimates, does not believe that actual losses will vary materially from the recorded provisions.

The total amount of payments made by the Group arising from litigation in 2012, 2013 and 2014 is not material with respect to these consolidated financial statements.

During 2013 and 2014, the amount paid by the Group to external lawyers was 190 million pesos and 176 million pesos, respectively, for the management of all the outstanding claims.

f) Provisions for off-balance-sheet risk

The provisions for off-balance-sheet risk are estimated with the same methodology used for calculating the impairment of loans and receivables. Refer to Note 2.g. above for further description.

F-109

The breakdown of the off-balance-sheet risks is as follows:

	12/31/2013		12/31/2014
Available lines of credit cards and non-revolving consumer loans		1,427		1,311
Guarantees and loan commitments of commercial and public sector loans		97		48
		1,524		1,359

25. Other liabilities

The breakdown of the balance of Other liabilities is as follows:

	12/31/2013		12/31/2014
Sundry creditors		1,839		1,923
Cash balances undrawn		11,492		5,697
Accrued personnel obligations		810		1,581
Other obligations		2,008		2,305
Credit card operation balances		785		907
		16,934		12,413

26. Tax matters

a) Income Tax expense

The components of income tax expense for 2012, 2013 and 2014 are as follows:

	2012			2013			2014
Current tax expense:
Tax expense for current year		5,803			4,897			2,133
Deferred tax expense (benefit):
Origination and reversal of temporary difference and usage (accrual) of tax carryforward benefits		(1,950	)		(2,227	)		1,408
Total Income Tax expense		3,853			2,670			3,541

F-110

b) Income Tax reconciliation

The reconciliation of the income tax expense calculated at the standard tax rate of 30% to the income tax expense recognized and the breakdown of the effective tax rate are as follows:

	2012			2013			2014
Profit before tax
Of which:
Continuing operations		21,165			15,013			16,830
Discontinued operations		190			2,782			-
Income tax at 30%
Of which:
Continuing operations		6,350			4,504			5,049
Discontinued operations - amount transferred to discontinued  operations		57			835			-
Increase/(Decrease) due to permanent differences
Of which:
Due to effect of inflation		(1,086	)		(1,116	)		(1,128	)
Due to effect of tangible assets		(58	)		35			(133	)
Due to effect of tax audit settlements (*)		(1,097	)		(322	)		-
Due to realization of previously unrecognized tax benefits		-			(252	)		(117	)
Due to effect of non-deductible expenses, non-taxable income and others		(256	)		(179	)		(130	)
Income Tax		3,853			2,670			3,541
Effective tax rate		18.20	%		17.78	%		21.04	%
Current tax liability		687			790			244
Income tax		3,853			2,670			3,541
Of which:
Current tax		5,803			4,897			2,133
Deferred taxes		(1,950	)		(2,227	)		1,408

(*) In 2012 the Group amended its 2009 to 2011 tax returns to recognize additional deductions arising mainly from inflationary benefits that it has concluded are permissible based on the results of favorable decisions issued by the tax courts. In 2013, the Group recognized additional deductions for inflation benefits as a result of favorable decisions issued by the tax courts during 2013, as well as favorable resolutions to matters arising in connection with the tax audit of the fiscal year 2008 tax return which concluded in 2013.

The Group is subject to regular reviews by the Mexican tax authorities. As of December 31, 2014, there is not any tax contingency for such tax reviews to be disclosed.

c) Tax recognized in equity

In addition to the income tax recognized in the consolidated income statement, the Group recognized the following amounts in equity:

F-111

	2012			2013			2014
Net tax credited/(charged) to equity:
Remeasurement of defined benefit obligation		151			(141	)		118
Measurement of Available-for-sale – Debt instruments		(96	)		482			(150	)
Measurement of Available-for-sale – Equity instruments		(4	)		3			1
Measurement of Financial Derivatives (Cash flow hedges)		360			30			(116	)
		411			374			(147	)

d) Deferred taxes

Main components of the Group’s gross deferred income tax assets and liabilities are as follows:

	12/31/2013			12/31/2014
Total deferred tax assets prior to offsetting		18,239			18,064
Of which:
Tangible assets and deferred charges		1,914			1,914
Provisions		1,227			1,529
Impairment losses on loans and receivables		10,917			10,671
Unrealized losses on financial instruments		410			14
Net operating losses carryforward (*)		154			176
Capital losses carryforward(*)		2,296			2,299
Labor provisions		592			702
Fees and interest collected in advance		729			759
Total deferred tax liabilities prior to offsetting		(1,055	)		(2,165	)
Of which:
Unrealized gains on financial instruments		(249	)		414
Exchange rate derivatives		(323	)		(1,937	)
Prepayments		(159	)		(205	)
Labor provisions		(7	)		11
Other		(317	)		(448	)

(*) The net operating losses carryforward and the capital losses carryforward can be deducted during the ten-year period following the fiscal year in which the net operating loss and the capital loss were originated.

As of December 31, 2014 the detail of Net operating losses carryforward is as follows:

Year of origination	Year of expiration	Amount		Deferred tax asset
2010	2020		280		84
2011	2021		171		51
2012	2022		5		2
2013	2023		22		7
2014	2024		107		32
			585		176

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As of December 31, 2014 the detail of Capital losses carryforward is as follows:

Year of origination	Year of expiration	Amount		Deferred tax asset
2013	2023		7,498		2,249
2014	2024		165		50
			7,663		2,299

After offsetting, deferred tax assets and liabilities are presented on the consolidated balance sheets as follows:

	12/31/2013			12/31/2014
Presented as deferred tax assets(*)		17,250			15,955
Presented as deferred tax liabilities		(66	)		(56	)
Net		17,184			15,899

  (*) This amount represents the deferred tax asset whose realization is dependent on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences. Management has concluded that the realization of such assets is probable based on the Group’s history of generating sufficient taxable income to utilize all available tax benefits.

The change in the balance of deferred tax assets and deferred tax liabilities does not equal the deferred tax expense/(benefit). This is due to (1) deferred taxes that are recognized directly in equity and (2) the acquisition and disposal of entities as part of ordinary activities.

The changes in the total deferred tax assets and liabilities, prior to offsetting, in the last two years were as follows:

						(Charge)/
						Credit to
				(Charge)/		Other
				Credit to		Comprehensive		Other
	01/01/2013			Income		Income		Movements		12/31/2013
Deferred tax assets		16,414			1,825	-		-			18,239
Deferred tax liabilities		(2,477	)		402		374		646		(1,055	)
		13,937			2,227		374		646		17,184

							(Charge)/
							Credit to
				(Charge)/			Other
				Credit to			Comprehensive			Other
	12/31/2013			Income			Income			Movements		12/31/2014
Deferred tax assets		18,239			(175	)	-			-			18,064
Deferred tax liabilities		(1,055	)		(1,233	)		(147	)		270		(2,165	)
		17,184			(1,408	)		(147	)		270		15,899

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e) Tax reforms 2014

In December 2013, the Mexican government enacted several tax reforms that are effective starting January 1, 2014. These reforms include changes to the Income Tax Law, to the Value Added Tax Law and to the Mexican Federal Tax Code. The tax reforms also repealed the Business Flat Tax Law and the Cash Deposits Tax Law.

The Group evaluated the effects of the amendments originated by these tax reforms, which were considered in the consolidated financial statements as of December 31, 2013 and 2014.

Income tax

The following summarizes the most significant aspects of the new income tax law applicable to the Group. The new law:

- Maintains the current 30% corporate income tax rate, eliminating the scheduled reduction to 29% in 2014 and to 28% in 2015.

- Replace the deduction for certain estimated allowance for impairment losses recognized by banking institutions (Global Preventive Reserve) by the deduction of uncollectable loans when they are written down under the provisions established by the CNBV.

- Limits at 53%, deductions for tax-exempt salaries and benefits, as well as for contributions to pension and retirement plans. If the employer reduces the employees’ benefit package, then the deduction for tax-exempt salaries and benefits will be limited to 47%.

- Changes the procedure to determine the employee profit-sharing obligation. Cash payments for employee profit-sharing obligations and prior year´s tax losses are not deductible for purposes of determining employee profit payable.

- Establishes that deductions of social security fees charged to workers and paid by the employer are no longer allowed.

- Imposes a new 10% income tax withholding on dividends distributed to resident individuals or foreign residents (including foreign corporations). This new withholding tax will apply in 2014, but not to distributions of profits generated prior to 2014. This provides an opportunity to apply reduced withholding rates under an applicable tax treaty.

Value added tax (not subject to IAS 12)

The reforms to the VAT law will:

- Increase, from 11% to 16% the VAT rate applicable in the border area.

27. 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 Group, including the portion attributed to them of profit for the year.

a) Breakdown

The breakdown by subsidiary of Equity - Non-controlling interests is as follows:

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	12/31/2013		12/31/2014
Equity as of balance-sheet date attributable to non-controlling interests:
Of which:
Banco Santander (México), S.A.		9		10
		9		10
Profit for the year attributable to non-controlling interests:
Of which:
Banco Santander (México), S.A.		2		1

b) Changes

The changes in Non-controlling interests are summarized as follows:

	2013			2014
Beginning balance		8			9
Profit for the year attributable to non-controlling interests		2			1
Other movements		(1	)		-
Balance at year-end		9			10

The foregoing changes are shown in the consolidated statement of changes in equity.

28. Valuation adjustments

The balances of Valuation adjustments include the amounts, net of the related deferred tax effect, of the adjustments to assets and liabilities recognized temporarily in equity through the consolidated income statement and other comprehensive income until they are reclassified, when they are recognized definitively as shareholders’ equity through the consolidated income statement. The amounts arising from subsidiaries are presented, on a line by line basis, in the appropriate items according to their nature.

Other comprehensive income includes the following:

a) Unrealized gains and losses on Available-for-sale financial assets

The breakdown by type of instrument of Valuation adjustments - Available-for-sale financial assets at December 31, 2013 and 2014 is as follows:

	12/31/2013										12/31/2014
						Net										Net
						Revaluation										Revaluation
	Revaluation		Revaluation			Gains/			Fair		Revaluation		Revaluation			Gains/			Fair
	Gains		Losses			(Losses)			Value		Gains		Losses			(Losses)			Value
Debt instruments		43		(1,558	)		(1,515	)		61,423		923		(589	)		334			83,029
Equity instruments		8		(5	)		3			102		1		(3	)		(2	)		99

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At the end of each year, the Group makes an assessment of whether any of the Available-for-sale securities (debt and equity instruments) are impaired. The analysis includes, but is not limited to, the changes in the fair value of each asset, information about the issuer’s solvency and business, the near-term prospects of the issuer, the existence of any default on a credit agreement or material change in the financial position of the issuer, the trend in both net income and the dividend pay-out policy of the issuer, information about significant changes with an adverse effect that have taken place in the economic environment in which the issuer operates, changes in macroeconomic conditions, whether a security’s fair value is a consequence of factors intrinsic to such investment or, rather, is a consequence of uncertainties about the overall economy of the country in which the issuer is domiciled and conducts operations, independent analyst reports and forecasts and other independent market data. The Group also analyzes, on a security-by-security basis, the effect on the recoverable amount of each security of the significance and length of the decline in the fair value below cost.

If after completing the abovementioned analysis the Group considers that the presence of one or several of these factors could impact the recoverable amount, an impairment loss is recognized in the consolidated income statement. Additionally, in all circumstances, if the Group does not have the intent and ability to retain an investment in a debt or equity instrument for a period of time sufficient to allow for the anticipated recovery of its costs, the instrument is written down to fair value.

A summary of changes in the cumulative valuation adjustments recorded to Available-for-sale financial assets is as follows:

	Debt			Equity
	Instruments			Instruments			Total
Balance at January 1, 2012		421			21			442
Valuation adjustments		249			14			263
Amounts reclassified to consolidated income statement		68			-			68
Income taxes		(95	)		(5	)		(100	)
Balance at December 31, 2012		643			30			673
Valuation adjustments		(1,515	)		3			(1,512	)
Amounts reclassified to consolidated income statement		(91	)		(13	)		(104	)
Income taxes		482			3			485
Balance at December 31, 2013		(481	)		23			(458	)
Valuation adjustments		334			(2	)		332
Amounts reclassified to consolidated income statement		(261	)		(1	)		(262	)
Income taxes		(150	)		1			(149	)
Balance at December 31, 2014		(558	)		21			(537	)

b) Cash flow hedges

Valuation adjustments - Cash flow hedges include the gains or losses attributable to hedging instruments that qualify as effective hedges. These amounts will remain under this heading until they are reclassified in the consolidated income statement in the periods in which the hedged items affect profit and loss (see Note 13).

A reconciliation of the accumulated gain on the effective portion of the hedging to the cumulative valuation adjustment for cash flow hedges is presented as follows:

F-116

	2013			2014
Accumulated (loss)/gain on cash flow hedges		(133	)		232
Accumulated gain related to discontinued cash flow hedges (Note 13)		155			61
Balance at December 31		22			293

29. Shareholders’ equity

a) Share capital

As of December 31, 2013 and 2014, share capital, at par value, was as follows:

	Number of Shares				Total Par Value (Millions of Pesos)
	12/31/2013		12/31/2014		12/31/2013		12/31/2014
Fixed capital:
Series "F" Shares		1,078,456,241		1,078,456,241		4,078		4,078
Series "B" Shares		1,739,931,948		1,739,931,948		6,578		6,578
Variable capital:
Series "F" Shares		2,385,852,904		2,385,852,904		9,020		9,020
Series "B" Shares		1,582,153,820		1,582,153,820		5,982		5,982
		6,786,394,913		6,786,394,913		25,658		25,658

Share capital is comprised of fixed shares which cannot be increased and variable shares which may be increased without limit.

Series “F” share capital may only be directly or indirectly owned by a foreign financial institution, as defined by the Mexican Financial Groups Law (hereinafter, “LRAF”). Series “B” share capital are not subject to ownership limitations and are subject to the provisions of Article 18 of the LRAF.

At all times, Series “F” share capital shall represent at least 51% of share capital and Series “B” share capital can represent up to 49% of the share capital.

Foreign governments may not own under any circumstances any share capital of the Group. Similarly, Mexican financial entities, including those that form part of the Group are also prohibited from acquiring share capital in the Group, except when they act as institutional investors, pursuant to Article 19 of the LRAF.

Capital reductions will incur taxation on the excess of the amount distributed against the corresponding tax basis.

b) Share premium

Share premium includes the amount paid up by the Group's shareholders in capital issues in excess of the par value.

The Mexican General Law of Corporations 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.

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c) Accumulated reserves

Accumulated reserves (losses) includes the net amount of the accumulated profit or loss recognized in previous years through the consolidated income statement that was appropriated to equity and the differences between the selling price of treasury shares and the cost of acquisition thereof.

Legal reserve

The Group and its subsidiaries, except the Bank, are subject to the legal reserve provision whereby at least 5% of net profits each year must be allocated and transferred to a capital reserve fund until reaching the equivalent of 20% of paid-in share capital. With regard to the Bank, the legal reserve provision requires the creation of a legal reserve equal to 10% of net profits until reaching 100% of paid-in share capital. The reserve fund cannot be distributed to the shareholders during the existence of the aforementioned entities, except in the form of a stock dividend.

As of December 31, 2013 and 2014, the Group and its subsidiaries are in compliance with the maximum percentage of legal reserve required.

Accumulated reserves

This includes the accumulated profit not distributed to shareholders.

Treasury shares

The balance of treasury shares includes the amount paid for the purchase by the Group of its own shares. Transactions involving own equity instruments 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.

During the Ordinary General Meeting held on April 18, 2013, shareholders approved the creation of a reserve for treasury shares for an amount of 1,500 million pesos from the Accumulated reserves account.

The Group’s shares owned by the consolidated companies accounted for 0.11% of issued share capital at December 31, 2014 (December 31, 2013: 0.15%). As of December 31, 2013 and 2014, the Group holds 10,487,685 treasury shares for an amount of 332 million pesos and 7,794,635 treasury shares for an amount of 247 million pesos, respectively.

Dividend policy and payment of dividends

Income tax must be paid in the event that payment of dividends from profits is not previously subject to income tax. Accordingly, the Group must keep track of profits subject to each rate and maintain such accumulated profits in a Net tax profit account.

In accordance with amendments to the Income Tax Law, dividends paid from profits earned in fiscal year 2014 and thereafter by Mexican companies to Mexican resident individuals or foreign residents (including foreign corporations) are subject to an additional withholding tax of 10%. International tax treaties may apply to avoid double taxation on dividends paid to overseas shareholders (see Note 26.e.).

Dividends paid by the Group to Mexican resident individuals and foreign residents in 2014 are not subject to the 10% additional withholding tax as such dividends were paid from profits obtained prior to 2014.

F-118

d) Other disclosures

During the Ordinary General Meeting of shareholders on May 14, 2012, the following resolution was adopted:

 - The amount of 3,000 million pesos was allocated from the Accumulated reserves account for the payment of dividends. The amount of 3,000 million pesos was paid to shareholders on September 13, 2012. The aforementioned dividend paid to shareholders was taken from the Net tax profit account.

During the Ordinary General Meeting of August 13, 2012, the following resolution was adopted:

 - The amount of 4,300 million pesos was allocated from the Accumulated reserves account for the payment of dividends. The amount of 4,300 million pesos was paid to shareholders on September 13, 2012. The aforementioned dividend paid to shareholders was taken from the Net tax profit account.

During the Ordinary General Meeting of August 20, 2013, the following resolution was adopted:

 - The amount of 3,950 million pesos was allocated from the Accumulated reserves account for the payment of dividends. The amount of 3,950 million pesos was paid to shareholders on August 30, 2013. 3,939 million pesos of the aforementioned dividend paid to shareholders was taken from the Net tax profit account.

During the Ordinary and Extraordinary General Meeting of December 13, 2013, the following resolutions was adopted:

 - The amount of 4,900 million pesos was allocated from the Accumulated reserves account for the payment of dividends. The amount of 4,900 million pesos was paid to shareholders on December 27, 2013.

 - The amount of 12,000 million pesos was allocated from the Accumulated reserves account for the payment of an extraordinary dividend. The amount of 12,000 million pesos was paid to shareholders on December 27, 2013. 16,226 million pesos of the aforementioned dividend paid to shareholders was taken from the Net tax income account.

During the Ordinary and Extraordinary General Meeting of November 27, 2014, the following resolution was adopted:

 - The amount of 3,473 million pesos was allocated from the Accumulated reserves account for the payment of dividends. The amount of 3,473 million pesos was paid to shareholders on December 29, 2014. The aforementioned dividend paid to shareholders was taken from the Net tax profit account.

d) Other information

In October 2012, the Group completed the global public offering of 1,689,543,408 Series B shares, representing 24.90% of its share capital. The offering shares were priced at 31.25 pesos per unit or USD12.1849 per American Depositary Share (ADS) and are traded on the Bolsa Mexicana de Valores (BMV) and the New York Stock Exchange (NYSE) as of September 26, 2012. The conversion ratio is five Series B shares for each ADS. Of the total shares sold, 81% were placed in the USA and the remaining 19% in Mexico.

F-119

30. Minimum capital requirements

The Bank’s capital management is performing at regulatory and economic levels.

As established in the Sole Circular for Banks issued by the CNBV, the Bank must maintain a minimum net capital in relation to the market, credit and operational risks inherent to its operations, which is based on the Basel Agreements within the Mexican legislation. Such minimum capital is determined based on the sum of the capital requirements stipulated for each aforementioned type of risk.

Net Capital

Net capital is divided into two parts: Basic and Complementary. Additionally, Basic Capital is divided into two portions: Basic Capital 1 and Basic Capital 2. Basic Capital (Tier I) is the sum of Basic Capital 1 and Basic Capital 2.

 - Basic Capital 1 (Tier I Capital 1) is composed mainly of shareholders' equity plus other equity instruments, less stock investments on financial institutions, organization expenses, other intangibles, as well as excess of deferred tax assets derived from tax losses that exceed the 8% of Tier I Capital and excess of deferred taxes from temporary differences that exceed the 10% of Tier I Capital.

 - Basic Capital 2 (Tier I Capital 2) is composed mainly of bank’s equity instruments which are not included as Basic Capital 1 according to the current legislation.

 - Complementary Capital (Tier II) is composed mainly of bank’s equity instruments which are not included as Basic Capital according to the current legislation, plus the positive difference resulting from subtracting to the total allowable reserves, the total expected losses, up to an amount that doesn’t exceed 0.6% of the assets subject to credit risk.

Assets Subject to Credit Risk

Deposits, securities, loans and receivables, repurchase agreements, swaps, forward contracts, securities loans, options, certain derivative instruments and all other bank transactions exposed to credit risk in accordance with established regulations are classified in their respective risk groups and the weight factors stipulated for each group are applied, ranging from zero up to 150%, depending on the counterparty and scores determined by the ratings agencies accredited by the CNBV or by the Bank in the event it is an authorized institution for the use of internal models.

F-120

Assets Subject to Market Risk

In interest bearing transactions, the capital requirement is calculated by determining the residual term of the asset or liability, and by applying the corresponding Market Risk Charge Coefficient based on the term asset or liability and currency in which it is denominated.

For those transactions whose return is based on changes in the price of a share, basket of shares or market index, a 12% Market Risk Charge Coefficient is applied to the net position, to which additional risk requirements are added for long net positions and short net positions. An additional 4% requirement may apply to certain variable income positions with low or zero trading volumes.

For the foreign currency positions, a 12% Market Risk Charge Coefficient is applied on the higher of the sum of the long net position or short net position.

For transactions linked to Mexican inflation and denominated in UDIS, a capital requirement is calculated by applying a Market Risk Charge Coefficient of 1.25% over the increase of the Mexican National Consumer Price Index (calculated as the average of the previous twelve months) to the absolute value of the total net position.

For transactions linked to the minimum wage growth, a capital requirement is calculated by applying a Market Risk Charge Coefficient of 1.25% over the increase of the minimum wage growth (calculated as the average of the actual month and the previous eleven months) to the absolute value of the total net position.

The equivalent assets for market risk are determined by multiplying by 12.5, the sum of the capital requirements of all of the transactions described above.

Assets Subject to Operational Risk

The requirement is calculated by determining the average net revenues for the 36 months prior to the month being calculated, applying a 15% Operational Risk Charge Coefficient, in accordance with established limits. The equivalent assets for operational risk are determined by multiplying the capital requirement by 12.5.

At the date of these consolidated financial statements, the Group was in compliance with these minimum capital requirements (see below).

The minimum capital requirements calculated using the Mexican Banking GAAP for the Bank is as follows:

	12/31/2013			12/31/2014
Computable capital:		86,531			96,517
Core capital		92,820			103,523
Supplementary capital		17,122			19,820
Deductible items		(23,411	)		(26,826	)
Capital requirements:		43,431			47,756
Market risk		11,100			10,266
Credit risk		27,695			32,547
Operational risk		4,636			4,943
Excess of capital requirements		43,100			48,761
Risk-weighted assets		542,892			596,952

F-121

As of December 31, 2013 and 2014, in accordance with the capitalization requirements applicable to full service banks, the Bank has the following capitalization ratios, which exceed the minimum legal capital required by the CNBV:

	12/31/2013	12/31/2014
Net Capital / Required Capital	1.99	2.02
Minimum capital requirements	Not applicable	Not applicable
Basic Capital / Assets subject to Credit, Market and Operating Risk	12.79%	12.85%
Minimum capital requirements	Not applicable	Not applicable
Net Capital / Assets subject to Credit Risk	25.00%	23.72%
Minimum capital requirements	Not applicable	Not applicable
Net Capital / Assets subject to Credit, Market and Operating Risk	15.94%	16.17%
Minimum capital requirements	8%	8%

31. Memorandum accounts

Memorandum items relate to balances representing rights, obligations and other legal matters 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 Group, although they may not impinge on their net assets, including contingent commitments and financial instruments received as collateral in OTC derivative transactions, repurchase agreements and securities loans transactions in which the lender is the Group.

a) Contingent commitments

Contingent commitments include those irrevocable commitments that could give rise to the recognition of financial assets.

The breakdown is as follows:

Contingent commitments	12/31/2013		12/31/2014
Available lines of credit cards and non-revolving consumer loans		85,317		79,631
Guarantees, documentary credits and loan commitments of commercial and public sector loans		55,250		49,031
Guarantees, documentary credits and loan commitments of commercial loans (SMEs)		76		123
Total		140,643		128,785

F-122

At December 31, 2013 and 2014, the Group had recognized provisions for off-balance sheet risk of 1,524 million pesos and 1,359 million pesos, respectively, to cover contingent liabilities arising from available lines of credit cards and non-revolving consumer loans (see Note 24).

A significant portion of the guarantees and loan commitments will expire without any payment obligation materializing for the Group 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.

b) Financial instruments received as collateral

Financial instruments include those securities received by the Group in which there is not transfer of the contractual rights or risk and rewards of the financial instruments that could give rise to the recognition of financial assets since the Group received them to engage in OTC derivatives transactions, repurchase agreements and securities loans transactions in which the lender is the Group.

The breakdown is as follows:

Financial instruments received as collateral	12/31/2013		12/31/2014
Debt instruments received in OTC derivatives transactions		343		4,883
Debt instruments received in repurchase agreements transactions		86,444		31,951
Equity instruments received in securities loans transactions		144		605
Total		86,931		37,439

F-123

32. Derivatives-Nominal amounts and fair values of trading and hedging derivatives

The breakdown of the fair value and nominal amount of trading derivative assets as of December 31, 2013 and 2014 is as follows:

	12/31/2013				12/31/2014
Trading	Nominal		Fair Value		Nominal		Fair Value
Futures:
Foreign Currency Futures		4,279		45		-		-
Interest Rate Futures		413		17		20		20
Market Index Futures		7,688		192		9,997		363
Forwards:
Foreign Currency Forwards		83,211		1,177		120,155		7,274
Foreign Exchange Spot		29,825		30		-		39
Interest Rate Forwards		1,400		5		-		-
Equity Forwards		3,919		159		5,082		162
Options:
Foreign Currency Options		23,534		154		57,909		1,673
Interest Rate Options		213,838		3,507		167,057		2,414
Market Index Options		2,716		206		13,772		1,005
Equity Options		832		211		276		255
Swaps:
Interest Rate Swaps		1,649,378		41,058		1,425,837		35,150
Cross-Currency Swaps		307,517		26,160		380,855		44,069
		2,328,550		72,921		2,180,960		92,424

As of December 31, 2013 and 2014, 72,622 million pesos and 91,864 million pesos (assets) are OTC derivatives of the total amount of the trading derivative assets, respectively.

The breakdown of the fair value and nominal amount of hedging derivative assets as of December 31, 2013 and 2014 is as follows:

	12/31/2013				12/31/2014
Hedging	Nominal		Fair Value		Nominal		Fair Value
Cash flow:
Interest Rate Swaps		675		6		2,050		13
Cross-Currency Swaps		8,602		198		32,917		3,748
Foreign Currency Forwards		1,757		20		24,919		947
Fair value:
Interest Rate Swaps		4,391		73		4,998		32
Cross-Currency Swaps		100		3		-		-
		15,525		300		64,884		4,740
TOTAL ASSETS		2,344,075		73,221		2,245,844		97,164

F-124

The breakdown of the fair value and nominal amount of trading derivative liabilities as of December 31, 2013 and 2014 is as follows:

	12/31/2013				12/31/2014
Trading	Nominal		Fair Value		Nominal		Fair Value
Futures:
Foreign Currency Futures		654		1		718		11
Interest Rate Futures		319,031		947		177,784		550
Market Index Futures		3,686		65		1,595		30
Equity Futures		-		-		2		-
Forwards:
Foreign Currency Forwards		79,372		1,101		149,949		9,881
Foreign Exchange Spot		16,129		20		-		50
Interest Rate Forwards		-		-
Market Index Forwards		-		-		12,195		395
Equity Forwards		11,522		364		-		-
Options:
Foreign Currency Options		22,195		281		53,611		1,391
Interest Rate Options		212,699		4,603		187,366		3,333
Market Index Options		414		220		317,886		1,010
Equity Options		931		84		2,682		128
Swaps:
Interest Rate Swaps		1,661,867		39,066		1,574,784		33,687
Cross-Currency Swaps		305,145		25,021		336,462		44,376
		2,633,645		71,773		2,815,034		94,842

As of December 31, 2013 and 2014, 70,544 million pesos and 93,631 million pesos (liabilities) are OTC derivatives of the total amount of the trading portfolio, respectively.

The breakdown of the fair value and nominal amount of hedging derivative liabilities as of December 31, 2013 and 2014 is as follows:

	12/31/2013				12/31/2014
Hedging	Nominal		Fair Value		Nominal		Fair Value
Cash flow:
Interest Rate Swaps		2,050		19		-		-
Cross-Currency Swaps		10,599		270		7,517		720
Foreign Currency Forwards		5,478		102		26,754		1,954
Fair value:
Interest Rate Swaps		4,978		149		2,565		52
Cross-Currency Swaps		6,823		852		7,320		1,677
		29,928		1,392		44,156		4,403
TOTAL LIABILITIES		2,663,573		73,165		2,859,190		99,245

F-125

As of December 31, 2013 and 2014, the collateral provided to engage in derivative transactions in organized markets is as follows:

		12/31/2013		12/31/2014
Collateral provided:
Of which:
Mercado Mexicano de Derivados, S.A. de C.V. (MexDer)	Cash		2,585		1,468
Chicago Mercantile Exchange	Cash		357		893
Mercado Mexicano de Derivados, S.A. de C.V. (MexDer)	Shares		323		439
			3,265		2,800

Deposits of collateral cover positions operated on the MexDer such as interest rate futures, futures based on the Mexican Stock Exchange Prices and Quotations Index, US Dollar futures, listed option futures and also positions operated on the Chicago Mercantile Exchange such as Standard & Poor’s futures, US Treasury Notes futures and equity options.

The guarantees and/or collateral delivered for the OTC derivative transactions as of December 31, 2013 and 2014 are as follows:

		12/31/2013		12/31/2014
Loans and receivables – Loans and advances to credit institutions:
Of which (Note 8):
Mexican financial institutions	Cash		8,145		4,901
Foreign financial institutions	Cash		7,127		15,857
			15,272		20,758
Financial assets held for trading – Debt instruments:
Of which (Note 9):
Mexican financial institutions	Bonds		169		453
			169		453

The guarantees and/or collateral received for the OTC derivative transactions as of December 31, 2013 and 2014 are as follows:

		12/31/2013		12/31/2014
Customer deposits:
Of which (Note 20):
Mexican financial institutions	Cash		1,758		2,076
Foreign financial institutions	Cash		3,186		3,957
			4,944		6,033

F-126

		12/31/2013		12/31/2014
Memorandum accounts:
Of which (Note 31):
Mexican financial institutions	Bonds		343		4,215
Foreign financial institutions	Bonds		-		668
			343		4,883

Upon executing transactions with OTC derivatives, the Group agrees to deliver and/or receive collateral to cover any exposure to market risk and the credit risk of such transactions. Such collateral is contractually agreed to with each of the counterparties.

Currently, debt securities, mainly government bonds, are posted as collateral for transactions with domestic financial entities. Cash deposits are used for transactions with foreign financial entities and institutional customers.

The nominal 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. The net position is used by the Group basically to hedge interest rates, underlying asset prices or foreign currency risk. The results of these financial instruments are recognized in Gains/(losses) on financial assets and liabilities in the consolidated statements of income and increase or offset, as appropriate, of the gains or losses on the hedged investments.

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 cumulative credit risk exposure is measured in terms of Equivalent Credit Risk (hereinafter, “ECR”). ECR is composed of the current exposure of the contract (at fair value in the case of derivatives) plus the Potential Future Exposure (hereinafter, “PFE”) which is defined as the maximum expected credit exposure over a specified period of time calculated at a 97.5% level of confidence and which expresses its potential future exposure. This metric is used internally for management purposes.

ECR by Profiles Methodology introduces the concept of Exposure Profile per deal, where exposure may vary depending on the time-band considered. There is not a unique exposure figure per deal. However, many exposures figure as time-bands are affected and each time-band exposure equals the maximum exposure within the time-band.

Deal risk aggregation per counterparty and per time band requires adding up Potential Future Exposure of each of the time-bands and considering the netting agreement for the Current Exposure and also, if applicable, collateral mitigation; so there is an aggregated net exposure per counterparty as time-bands are affected.

For derivatives, where ECR = Current Exposure (MtM) + Nominal x Risk Factor (PFE), the Profiles Methodology implies that PFE figure is not unique but is calculated for each of the time-bands.

The Counterparty Credit Risk Area compares, on a monthly basis, the nominal amounts used to calculate PFE against nominal amounts recorded in the accounting records and also compares MtM amounts used for the Current Exposure of the ECR against MtM amounts also recognized in the accounting books.

As of December 31, 2013 and 2014, the cumulative net credit risk exposure of the Group was 245,729 million pesos and 330,543 million pesos, respectively.

F-127

33. Discontinued operations

a) Description of divestments

Seguros Santander, S.A.

In November 2011, the Group completed the sale of its insurance business to Inversiones ZS America, a holding company created by Banco Santander (Spain). The sale was undertaken in connection with a plan to form a strategic alliance to strengthen the insurance sales channel through the Group’s bank branches network in Mexico with the Zurich Insurance Group, which ultimately acquired 51% of Inversiones ZS America from Banco Santander (Spain).

The insurance business is classified as held for sale and presented as discontinued operations in the 2011 consolidated balance sheet and 2011 consolidated income statement.

The sales price for 99.99% of the shares of Seguros Santander, S.A. held by the Group was 7,441 million pesos, which generated an after-tax profit of 4,260 million pesos. This amount was recorded by the Group in November 2011 once this sale had been concluded pursuant to contractual clauses; the resulting effects were subsequently recognized in the consolidated income statement as Profit from discontinued operations (net).

Under the terms of the contract, the Group will continue selling insurance policies in return for commission income. In addition, the tangible goods property of the disposed business will be maintained on the Group’s premises, unless or until such time that Zurich and Inversiones ZS America agree otherwise or the contract is concluded.

For 2011, all revenues and costs relating to the discontinued operation are reported in the consolidated income statement as Profit from discontinued operations (net).

During June 2013, an adjustment to the sale price of 178 million pesos, net of income tax, was recorded derived from the review of the methodology used by Seguros Santander, S.A. to calculate the technical reserves. As a result of the review, both sides agreed to carry out a reduction in the price of the transaction. This price adjustment, net of income tax, was recognized in the consolidated income statement as Profit from discontinued operations (net).

Gestión Santander

On December 5, 2013, the Group completed the sale of its asset management business to Santander Asset Management, a joint venture between Banco Santander (Spain) and Warburg Pincus and General Atlantic. A 50% equity stake in Santander Asset Management is owned by Banco Santander (Spain) and the remaining 50% is owned by Warburg Pincus and General Atlantic. The sale will provide Santander Group with financial backers to expand its asset management business outside of Europe and Latin America.

The sales price for 100% of the shares of Gestión Santander held by the Group was 3,179 million pesos, which generated an after-tax profit of 1,944 million pesos. This amount was recorded by the Group in December 2013 once this sale had been concluded pursuant to contractual clauses; the resulting effects were subsequently recognized in the consolidated income statement as Profit from discontinued operations (net).

Under the terms of the contract, the Group has signed exclusive long-term distribution contracts so the Bank and Casa de Bolsa Santander, S.A. de C.V., would continue to offer mutual funds managed by Gestión Santander following the divestiture. Under this contract, the Group will receive an income from commission for distribution of funds.

F-128

For 2012 and 2013, all revenues and costs relating to the discontinued operation are reported in the consolidated income statement as Profit from discontinued operations (net).

b)   Profit or loss and net cash flows from discontinued operations of Gestión Santander

The breakdown of the profit or loss from discontinued operations is set forth below.

The comparative figures were presented in order to include the operations classified as discontinued.

	2012			2013
Fee and commission income		1,888			1,706
Fee and commission expenses		(1,528	)		(1,293	)
Gains/(losses) on financial assets and liabilities		7			19
Other operating income (net)		(86	)		(42	)
Total income		281			390
Administrative expenses:		(78	)		(121	)
Personnel expenses		(49	)		(83	)
Other general administrative expenses		(29	)		(38	)
Depreciation and amortization		(13	)		(23	)
Operating profit before tax (Note 26)		190			246
Income tax (Note 26)		(58	)		(74	)
		132			172
Gain on disposal of operation		-			2,790
Income tax		-			(846	)
Profit from discontinued operations (net) (*)		132			2,116

(*) Profit from discontinued operations of year 2013 presented in the consolidated income statement includes an adjustment to the sales price of 178 million pesos, net of income tax, derived from the review of the methodology used by Seguros Santander, S.A. to calculate the technical reserves.

The following is a breakdown of the net cash flows attributable to the operating, investing and financing activities of discontinued operations.

	12/31/2012			12/31/2013
Cash flows from operating activities		13			126
Cash flows from investing activities		(13	)		(5	)
Cash flows from financing activities		-			(121	)

34. Interest income and similar income

Interest income and similar income in the consolidated income statement comprises the interest accrued 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 reclassification of interest income as a result of hedge accounting.

The breakdown of the main interest income and similar income items earned in 2012, 2013 and 2014 is as follows:

F-129

	2012		2013		2014
Cash and balances with Central Bank		1,444		1,264		1,061
Loans and advances to credit institutions		2,790		3,019		2,913
Loans and advances to customers		38,085		41,455		44,501
Debt instruments		11,538		8,821		9,095
Hedging derivatives		1,540		735		277
Other interest income		124		92		69
		55,521		55,386		57,916

35. Interest expenses and similar charges

Interest expenses and similar charges in the consolidated income statement include the interest accrued during the year on all financial liabilities with an implicit or explicit return, calculated by applying the effective interest method, irrespective of fair value measurements and the net interest cost attributable to pension funds.

The breakdown of the main items of interest expenses and similar charges accrued in 2012, 2013 and 2014 is as follows:

	2012		2013		2014
Deposits from credit institutions		4,391		2,649		4,183
Customer deposits		12,261		11,265		9,168
Marketable debt securities		1,736		1,994		1,837
Subordinated liabilities		-		11		1,051
Hedging derivatives		9		320		735
Other interest expenses		3,242		3,300		3,331
		21,639		19,539		20,305

36. 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 breakdown of the balance is as follows:

	2012		2013		2014
Equity instruments classified as:
Financial assets held for trading		141		176		67
Of which:
NAFTRAC (ETF)		46		29		15
América Móvil, S.A.B, de C.V.		14		4		5
Grupo México, S.A.B. de C.V.		12		7		4
Industrias Peñoles, S.A.B. de C.V.		2		3		-
Wal-Mart de México, S.A.B. de C.V.		10		26		13
Kimberly-Clark de México, S.A.B. de C.V.		3		2		1
Fomento Económico Mexicano, S.A.B. de C.V.		4		8		-
Grupo Modelo, S.A.B. de C.V.		1		5		-
Others		49		92		29
Available-for-sale financial assets		71		69		86
Of which:
Controladora Prosa, S.A. de C.V.		-		-		12
Trans Unión de México, S.A.		53		57		56
Others		18		12		18
		212		245		153

F-130

37. Fee and commission income

Fee and commission income comprises the amount of all fees and commissions accruing in favor of the Group during the year, except those that form part of the effective interest rate on financial instruments.

The breakdown of the balance is as follows:

	2012		2013		2014
Collection and payment services:
Service charges on deposit accounts		707		746		816
Credit and debit cards		3,667		4,061		4,378
Checks and others		356		323		302
		4,730		5,130		5,496
Marketing of nonbanking
financial products:
Investment funds management		1,417		1,299		1,369
Capital markets and securities activities		360		393		333
Collection and payment services		1,434		1,596		1,830
Insurance		3,050		3,438		3,896
Financial advisory services		1,433		1,450		1,505
		7,694		8,176		8,933
Securities services:
Administration and custody		343		396		436
		343		396		436
Other:
Foreign exchange		527		569		701
Other fees and commissions		670		795		980
		1,197		1,364		1,681
		13,964		15,066		16,546

38. Fee and commission expenses

Fee and commission expenses show the amount of all fees and commissions paid or payable by the Group in the year, except those that form part of the effective interest rate on financial instruments.

The breakdown of the balance is as follows:

F-131

	2012		2013		2014
Credit and debit cards		1,325		964		1,451
Checks and others		37		33		33
Collections and transactional services		127		164		178
Fund management		46		50		73
Capital markets and securities activities		129		125		110
Financial advisory services		43		98		62
Other fees and commissions		572		788		1,266
		2,279		2,222		3,173

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

Gains/(losses) on financial assets and liabilities (net) include 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, impairment losses and the realized gains or losses obtained from the sale and purchase thereof.

The breakdown of the balance by type of instrument is as follows:

	2012			2013			2014
Financial instruments held for trading		1,572			3,269			2,467
Of which:
Debt instruments		893			(624	)		674
Equity instruments		1,492			(265	)		(96	)
Derivatives		(813	)		4,158			2,031
Others		-			-			(142	)
Recognized profit from sale of financial instruments available-for-sale		(68	)		7			155
Hedging derivatives		(239	)		5			(3	)
Of which:
Fair value hedge – hedged items (Note 13)		88			(131	)		65
Fair value hedge – hedging derivative instruments (Note 13)		(111	)		119			(71	)
Cash flow hedge inefficiency (Note 13)		(216	)		17			3
		1,265			3,281			2,619

40. Exchange differences (net)

Exchange differences (net) shows the gains or losses arising on the translation of foreign currency balances (other than the Group’s functional currency) to the functional currency as a result of changes in exchange rates.

F-132

41. Other operating income and other operating expenses

These items in the consolidated income statement include:

	2012			2013			2014
Other operating income:
Recovered taxes		101			-		-
Other operating income		527			787			487
		628			787			487
Other operating expenses:
IPAB fund contribution		(1,342	)		(1,544	)		(1,887	)
Other operating expenses		(452	)		(534	)		(592	)
		(1,794	)		(2,078	)		(2,479	)

On January 19, 1999, the IPAB was approved and created to establish a bank savings protection system in favor of depositors that perform guaranteed banking transactions (deposits, loans and credits), and to regulate financial support granted to full service banking institutions in order to protect the interests of depositors.

IPAB’s resources come from the mandatory contributions paid by financial entities, according to the risk to which they are exposed. Such contributions are calculated based on the capitalization level of each financial group and other indicators set forth in IPAB’s bylaws issued by its Board of Directors. These contributions must be equivalent to one-twelfth of four-thousandths of the monthly average of the daily balances of funding activities of the applicable month.

42. Personnel expenses

a) Breakdown

The breakdown of Personnel expenses is as follows:

	2012		2013		2014
Wages and salaries		4,248		4,690		5,181
Social security costs		674		741		845
Service expense related to defined
contribution pension plan (Note 24)		140		239		259
Service expense related to defined
benefit pension plan		167		201		170
Share-based payments		110		269		286
Other staff costs		918		1,023		1,158
Bonus and benefits granted to employees		1,975		2,098		2,078
		8,232		9,261		9,977

b) Global Program

Banco Santander (Spain) has one long-term share-based variable compensation plan linked to the market price of its own shares (the Global Program). Our executive officers and other executives are eligible under the Global Program.

F-133

The Board of Directors of Banco Santander (Spain) approved on March 26, 2008 the long-term incentive policy covering the executives of Banco Santander (Spain) and its affiliate companies (except Banesto). This policy provides for compensation tied to the performance of the stock of Banco Santander (Spain), as established in the Annual Shareholders’ Meeting.

This multi-annual share-settled incentive plan is payable in shares of Banco Santander (Spain). The beneficiaries of the plan are the executive directors and other members of management, together with any other executives of Banco Santander (Spain) and its affiliates as determined by the Board of Directors or, when delegated by it, the executive committee of Banco Santander (Spain). The plan involves six successive three-year cycles for the delivery of shares to the beneficiaries. Accordingly, except for the first cycle, which lasted for two years (Plan I-09), the other cycles last for three years each (Plan I-10 to Plan I-14).

For each cycle, a maximum number of Banco Santander (Spain) shares is established for each beneficiary who remains within Banco Santander (Spain) and its affiliates for the duration of the plan. The targets, which, if met, will determine the number of shares to be delivered, are defined by comparing Banco Santander (Spain)‘s performance against that of a benchmark group of financial institutions and are linked to two parameters, namely Total Shareholder Return (TSR) and growth in Earnings per Share (EPS). The targets for plan I-12 and later plans measure the Banco Santander (Spain)’s performance with respect to TSR only.

As of December 31, 2013, there was one cycle in effect (Plan I-14). The last cycle (Plan I-14) began on July 1, 2011 and expired on June 30, 2014. During 2013 and 2014, no awards under the Global Program share-based payment were granted.

The fair value of the Banco Santander (Spain) shares granted to the Group’s employees under this plan was 94 million pesos as of December 31, 2013. This plan expired on June 30, 2014. In 2013 and 2014, the Group recognized expenses of 39 million pesos and 10 million pesos, respectively, regarding this plan.

c) Local Program

The Group's Board of Directors approved in October 2012 a share-based equity-settled compensation plan for eligible top executives subject to certain conditions described below. This plan is paid out annually over the first three years after the global public offering of 24.90% of the share capital, in September 2012.

Under this plan, eligible top executives will receive a cash incentive that must be used irrevocably to acquire shares of the Group at a price of 31.25 pesos per share.

The incentive is linked to the achievement each year of two independent objectives related with increase in the stock price and performance of the stock price against the Mexican Stock Exchange Prices and Quotations Index (IPC). If the objectives are fulfilled, each year one-third of the total amount of the incentive would be paid to the eligible top executive.

The achievement of each objective will determine the payment of up to 50% of the maximum amount of incentive for each year to the plan's eligible top executives who continue as active officers of the Group at the time that each of the three plan payments is due.

The fair value of the plan is calculated based on the fair value of the stock price at the grant date. The total fair value of the plan to eligible top executives is 396 million pesos equivalent to 13,309,760 shares at a price of 31.25 pesos per share.

During 2012, 2013 and 2014, the Group recognized in the consolidated income statement an amount that of 35 million pesos, 138 million pesos and 159 million pesos, respectively, as services rendered by the eligible top executives.

F-134

During September 2013 and 2014, the objectives of this performance share plan were achieved at 100% and 97%, respectively, so the first and second payments of the cash incentive were proportionally made to the eligible top executives.

d) Corporate performance shares plan of Banco Santander (Spain)

The Shareholders´ Meeting of Banco Santander (Spain) approved on March 28, 2014 a new share-based payment plan applicable only to a certain group of executives (known as the “identified staff”) in each country.

The plan is denominated “Corporate performance shares plan” and provides for compensation tied to the performance of the stock of Banco Santander (Spain), as established in the Annual Shareholders’ Meeting of Banco Santander (Spain). This multiannual performance plan is payable in shares of the Group with annual deliveries of shares to the beneficiaries during a period of three years beginning on July 1, 2015.

The total number of shares that will be granted to each beneficiary will be established in early 2015 depending on Banco Santander (Spain)‘s performance (TSR) during 2014 against a peer group of financial institutions.

A percentage (0% to 100%) of one-third of the total number of vested shares will be paid at the end of each year (June 2016, 2017 and 2018) conditioned to Banco Santander (Spain)‘s cumulative performance (TSR) (2014 and 2015 for the first tranche; 2014 to 2016 for the second tranche and 2014 to 2017 for the third tranche) against that of a peer group of financial institutions.

As of December 31, 2014, the Group has not recognized any amount in the consolidated income statement with respect to this plan.

e) Bonus payment policies

An internal policy for Banco Santander (Spain) was approved in 2010, in which a portion of the bonus of our executive officers and employees whose annual variable remuneration or bonus generally exceeds EUR 300,000 gross (EUR 100,000 for Global Banking and Markets or GBM employees) is deferred in Banco Santander (Spain) shares for a period of three years, with one-third vesting each year. The amount to be deferred is calculated in tranches based on the table below:

Reference Bonus
(Thousands of Euros)	% Deferred
Less than or equal to 300 (100 for GBM)		0	%
More than 300 (100 for GBM) to 600 (inclusive)		20	%
More than 600 to 1,200 (inclusive)		30	%
More than 1,200 to 2,400 (inclusive)		40	%
More than 2,400		50	%

As a result of an internal policy of Banco Santander (Spain), approved in 2011, a portion of the annual variable remuneration or bonus for a certain group of executives (known as the “supervised group” or “identified staff” from 2014) is deferred for a period of three years, with one-third vesting each year.

Both the deferred and non-deferred portions are paid in cash and shares of Banco Santander (Spain), equally, for the corresponding payment periods. Once delivered, beneficiaries are obligated to keep the shares for a one-year period.

From year 2013, the deferred and non-deferred portion payable in shares is paid in shares of the Group instead of shares of Banco Santander (Spain).

F-135

In 2013 and 2014, the Group recognized in the consolidated income statement, the fair value of the benefits that will be equity-settled for an amount of 93 million pesos and 117 million pesos, respectively.

43. Other general administrative expenses

a) Breakdown

The breakdown of the balance is as follows:

	2012		2013		2014
Maintenance, conservation and repair		656		944		1,134
Technology and systems		1,865		2,232		2,441
Stationery and supplies		205		198		201
Advertising and communications		662		705		653
Rents		1,261		1,456		1,622
Administrative services		595		447		404
Taxes other than income tax		1,036		1,169		1,128
Surveillance and cash courier services		566		605		589
Insurance premiums		46		41		42
Travel costs		271		282		302
Other administrative expenses		1,329		1,290		1,404
		8,492		9,369		9,920

b) Other information

The fees for the audit of the financial statements of Group companies amounted to 10 million pesos in 2012, 14 million pesos in 2013 and 15 million pesos in 2014.

The fees for services similar to the audit of financial statements are as follows:

	2012		2013		2014
Other reports required by Banco Santander (Spain)		7		7		7
Other reports required by the different national supervisory bodies		18		66		35
		25		73		42

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

The breakdown of the balance is as follows:

	2012		2013		2014
Gains:
On disposal of tangible assets		13		31		8
On disposal of Fibra Uno Transaction (Note 15)		1,730		-		-
		1,743		31		8

F-136

45. Other disclosures

a) Remaining maturity periods and average interest rates

The breakdown by maturity of the balances of certain items in the consolidated balance sheets as of December 31, 2013, is as follows:

	12/31/2013
				Less											More				Average
	On			than 1			1 to 3		3 to 12		1 to 3		3 to 5		than 5				Interest
	Demand			Month			Months		Months		Years		Years		Years		Total		Rate
Assets:
Cash and balances with Central Bank		16,954			1,407			-		-		-		-		31,320		49,681		3.57	%
Financial assets held for trading
Debt instruments		-			1,300			4,169		11,255		-		-		81,916		98,640		4.96	%
Equity instruments		5,346			-			-		-		-		-		-		5,346		-
Trading derivatives		51			502			1,560		5,187		12,655		22,047		30,919		72,921		-
Other Financial Assets at Fair    Value through Profit or Loss -
Loans and advances to credit Institutions – Repurchase Agreements		-			70,594			-		-		-		-		-		70,594		3.56	%
Loans and advances to customers –Repurchase agreements		-			15,767			-		-		-		-		-		15,767		3.76	%
Available-for-sale financial assets -
Debt instruments		-			117			1,607		8,929		14,774		12,216		23,780		61,423		4.38	%
Equity instruments					-			-		-		-		-		102		102		-
Loans and receivables -
Loans and advances to credit
Institutions		15,162			35,983			-		-		-		-		101		51,246		3.50	%
Loans and advances to customers		11,964			16,896			32,016		86,930		109,718		42,438		84,790		384,752		11.02	%
Debt instruments		-			-			-		-		2,317		819		2,523		5,659		3.29	%
Hedging derivatives		-			1			1		9		21		-		268		300		-
		49,477			142,567			39,353		112,310		139,485		77,520		255,719		816,431
Liabilities:
Financial liabilities held for trading -
Trading derivatives		33			637			1,500		5,314		12,820		18,829		32,640		71,773		-
Short positions		-			64,426			-		-		-		-		-		64,426		3.47	%
Other Financial Liabilities at Fair   Value through Profit or Loss -
Deposits from Central Bank		-			18,512			-		-		-		-		-		18,512		3.52	%
Deposits from credit institutions		-			7			-		-		-		-		-		7		3.59	%
Customer deposits		-			55,116			2,390		-		-		-		-		57,506		2.74	%
Financial liabilities at amortized cost -
Deposits from Central Bank		4,741			-			-		-		-		-		-		4,741		3.57	%
Deposits from credit institutions		11			16,309			8,168		1,318		1,595		4,551		15,004		46,956		3.72	%
Customer deposits		257,708			117,821			9,542		2,992		708		556		291		389,618		1.02	%
Marketable debt securities		17,939			10,369			2,790		1,995		4,256		978		14,791		53,118		4.03	%
Subordinated liabilities		-			-			-		-		-		-		16,824		16,824		5.95	%
Other financial liabilities		1,172			13,930			1,217		408		187		13		-		16,927		-
Hedging derivatives		-			76			-		49		230		34		1,003		1,392		-
		281,604			297,203			25,607		12,076		19,796		24,961		80,553		741,800
Difference (assets less liabilities)		(232,127	)		(154,636	)		13,746		100,234		119,689		52,559		175,166		74,631

F-137

The breakdown by maturity of the balances of certain items in the consolidated balance sheets as of December 31, 2014, is as follows:

	12/31/2014
				Less												More				Average
	On			than 1			1 to 3			3 to 12		1 to 3		3 to 5		than 5				Interest
	Demand			Month			Months			Months		Years		Years		Years		Total		Rate
Assets:
Cash and balances with Central Bank		15,927			24		-			-		-		-			35,872		51,823		3.00	%
Financial assets held for trading
Debt instruments		-			3,942			602			13,815		19,844		50,042		22,542		110,787		3.40	%
Equity instruments		5,160			-			-			-		-		-		-		5,160		-
Trading derivatives		226			2,446			4,496			10,876		21,239		18,391		34,750		92,424		-
Other Financial Assets at Fair    Value through Profit or Loss -
Loans and advances to credit Institutions – Repurchase Agreements		-			27,379			-			-		-		-		-		27,379		3.05	%
Loans and advances to customers –Repurchase agreements		4,493			-			-			-		-		-		-		4,493		3.22	%
Available-for-sale financial assets -
Debt instruments		-			-			502			2,823		45,208		9,491		25,005		83,029		2.80	%
Equity instruments		-			-			-			-		-		-		99		99		-
Loans and receivables -
Loans and advances to credit
Institutions		-			67,209			-			-		-		-		98		67,307		3.12	%
Loans and advances to customers		15,689			35,220			41,457			98,820		124,484		40,506		101,079		457,255		10.21	%
Debt instruments		-			-			-			-		3,233		-		2,602		5,835		2.74	%
Hedging derivatives								33			26		933		2,120		1,628		4,740		-
		41,495			136,220			47,090			126,360		214,941		120,550		223,675		910,331		-
Liabilities:
Financial liabilities held for trading -
Trading derivatives		515			4,772			5,911			8,178		21,790		18,798		34,878		94,842		-
Short positions		-			41,379			182			392		-		-		10		41,963		2.90	%
Other Financial Liabilities at Fair   Value through Profit or Loss -
Deposits from Central Bank		-			5,006			-			-		-		-		-		5,006		3.25	%
Deposits from credit institutions		-			27,221			-			1,525		-		-		-		28,746		3.12	%
Customer deposits		-			68,868			858			-		-		-		-		69,726		2.29	%
Marketable debt securities		-			-			-			61		4,648		597		-		5,306		-
Financial liabilities at amortized cost -
Deposits from Central Bank
Deposits from credit institutions		4,204			6,797			19,348			229		2,182		10,543		5,023		48,326		2.19	%
Customer deposits		294,063			117,228			22,969			3,891		1,548		1,311		3,892		444,902		1.40	%
Marketable debt securities		-			20,488			2,067			9,726		4,100		988		16,402		53,771		3.41	%
Subordinated liabilities		-			475			-			-		-		-		18,971		19,446		5.95	%
Other financial liabilities		1,284			10,125			884			122		265		-		-		12,680		-
Hedging derivatives		42			68						45		2,105		261		1,882		4,403		-
		300,108			302,427			52,219			24,169		36,638		32,498		81,058		829,117		-
Difference (assets less liabilities)		(258,613	)		(166,207	)		(5,129	)		102,191		178,303		88,052		142,617		81,214		-

F-138

b) Foreign currency of assets and liabilities

The breakdown 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 Pesos
	12/31/2013				12/31/2014
	Assets		Liabilities		Assets		Liabilities
Cash and balances with Central Bank		918		-		993		-
Debt instruments (Note 9)		18,907		-		29,006		-
Equity instruments		711		-		850		-
Loans and advances to credit institutions (Note 8)		16,664		-		35,436		-
Loans and advances to customers		60,472		-		77,963		-
Other assets		215		-		581		-
Marketable debt securities		-		14,446		-		18,897
Subordinated liabilities		-		16,891		-		19,507
Derivatives		-		16,409		-		31,535
Deposits from credit institutions (Note 19)		-		14,071		-		25,970
Customer deposits (Note 20)		-		33,401		-		47,462
Other financial liabilities		-		600		-		881
Provisions		-		2		-		2
Other liabilities		-		2,580		-		1,540

c) Fair value of financial assets and financial liabilities that are not measured at fair value on a recurring basis (but fair value disclosures are required)

The financial assets owned by the Group are measured at fair value in the accompanying consolidated balance sheet, except for loans and receivables and equity instruments whose fair value cannot be estimated reliably.

The Group’s financial liabilities – except for financial liabilities held for trading – are measured at amortized cost in the accompanying consolidated balance sheet.

i. Financial assets measured at other than fair value

The following table sets out the fair values of financial assets not measured at fair value and analyses them by the level in the fair value hierarchy into which each fair value measurement is categorized.

Except as detailed in the following table, the Group considers the carrying amounts of financial assets recognized in the consolidated financial statements approximate their fair values.

F-139

As of December 31, 2013

							Total fair		Total
Assets	Level 1		Level 2		Level 3		values		carrying amount
Financial assets at amortized cost:
Balances with Central Bank (Note 7)		32,646		-		-		32,646		32,646
Loans and advances to credit institutions (Note 8)		16,084		17,560		17,598		51,242		51,246
Loans and advances to customers (Note 12)		2,209		-		406,583		408,792		384,752
Debt instruments (unlisted) (Note 9)		-		-		5,659		5,659		5,659

As of December 31, 2014

							Total fair		Total
Assets	Level 1		Level 2		Level 3		values		carrying amount
Financial assets at amortized cost:
Balances with Central Bank (Note 7)		35,896		-		-		35,896		35,896
Loans and advances to credit institutions (Note 8)		20,931		11,098		35,276		67,305		67,307
Loans and advances to customers (Note 12)		2,243		-		491,930		494,173		457,255
Debt instruments (unlisted) (Note 9)		-		-		5,835		5,835		5,835

ii. Financial liabilities measured at other than fair value

The following table sets out the fair values of financial liabilities not measured at fair value and analyses them by the level in the fair value hierarchy into which each fair value measurement is categorized.

Except as detailed in the following table, the Group considers the carrying amounts of financial liabilities recognized in the consolidated financial statements approximate their fair values.

As of December 31, 2013

							Total fair		Total
Liabilities	Level 1		Level 2		Level 3		values		carrying amount
Financial liabilities at amortized cost:
Deposits from Central Bank (Note 19)		-		-		4,741		4,741		4,741
Deposits from credit institutions (Note 19)		-		40,648		6,566		47,214		46,956
Customer deposits (Note 20)		5,023		384,496		-		389,519		389,618
Marketable debt securities (Note 21)		12,468		40,877		-		53,345		53,118
Subordinated liabilities (Note 22)		17,307		-		-		17,307		16,824
Other financial liabilities (Note 23)		-		-		16,927		16,927		16,927

F-140

As of December 31, 2014

							Total fair		Total
Liabilities	Level 1		Level 2		Level 3		values		carrying amount
Financial liabilities at amortized cost:
Deposits from credit institutions (Note 19)		-		44,544		3,785		48,329		48,326
Customer deposits (Note 20)		6,088		426,144		-		432,232		444,902
Marketable debt securities (Note 21)		14,634		39,855		-		54,489		53,771
Subordinated liabilities (Note 22)		20,218		-		-		20,218		19,446
Other financial liabilities (Note 23)		-		-		12,680		12,680		12,680

The methodology and inputs used to calculate the fair value for each financial asset and liability class are as follows:

- Balances with Central Bank: Their fair value has been estimated to be equal to their amortized cost given that, because they are mainly composed by the compulsory deposit required by the Central Bank.

- Unlisted debt instruments: Their fair value has been estimated to be equal to their amortized cost given that, because they are non-negotiable financial instruments issued by the Mexican Government, this value would be considered to execute a prepayment transaction at fair value.

- Loans and receivables at amortized cost at a variable or fixed interest rate and maturing in less than one year: their fair value has been estimated to match their book value because there are no material differences.

- Remaining loans and receivables at amortized cost with maturity greater than one year: Fair value has been obtained using the present value model that discounts future cash flows at the current date using interest rates based on directly or indirectly observable market data to calculate the discount rate, but also using certain non-observable market input, such as the credit risk associated with the portfolio for the allowance of future flows and current portfolio conditions (net commissions, operating expenses, medium-term, etc.).

- Financial liabilities at amortized cost: Financial liabilities at amortized cost at a variable or fixed interest rate and maturing in less than one year: their fair value has been estimated to match their book value because there are no material differences.

- Remaining financial liabilities at amortized cost with maturity greater than one year: Their fair value has been obtained by using the present value model that discounts future cash flows at the current date using interest rates based on directly or indirectly observable market data to calculate the discount rate.

- Marketable debt securities and subordinated liabilities: Fair value has been obtained using quoted market price, if available, or the present value model that discounts future cash flows at the current date using interest rates based on directly or indirectly observable market data to calculate the discount rate.

d) Restricted availability assets

As of December 31, 2013 and 2014, the Group did not have any assets with restricted availability, except for the Central Bank compulsory deposits (see Note 7), repurchase agreements included as Debt instruments (see Note 9) and collaterals in derivatives transactions (organized markets and OTC) (see Note 32).

F-141

See Note 48.c for significant restrictions on the ability to access or use the assets and settle the liabilities of the Group as of December 31, 2103.

e) Restriction on earnings distribution

As of December 31, 2013 and 2014, the Group did not have any restriction on earnings distribution, except for the legal reserve as mentioned in Note 29 (9,310 million pesos in legal reserve that include 293 million pesos in legal reserve of the Group on an individual basis as of December 31, 2013 and 10,022 million pesos in legal reserve that include 386 million pesos in legal reserve of the Group on an individual basis as of December 31, 2014) and the unrealized gains of financial instruments under Mexican Banking GAAP in equity (24 million pesos as of December 31, 2013 and 266 million pesos as of December 31, 2014). In addition, the Group is restricted from distributing dividends that will result in noncompliance with minimum capitalization requirements established by the CNBV (see Note 30).

46. Operating segments

The Group has three operating segments, as described below, which are the Group’s strategic business units:

- Retail Banking: the Retail Banking segment encompasses the entire commercial banking business. The retail banking activities include products and services for SMEs such as personal loans, deposit-taking, employee payroll accounts for corporate customers, credit and debit cards and overdraft facilities.

- Global Wholesale Banking: this segment reflects the Corporate Banking business, and those on Investment Banking and Markets in Mexico, including all the managed treasury departments and the equities business. The global wholesale banking activities include products and services for our corporate customers, such as investment banking and project finance.

- Corporate Activities: this segment includes the centralized management business relating to financial and industrial investments, the financial management of the structural currency position and its structural interest rate risk position and the management of liquidity and equity through issues and securitizations and assets and liabilities management.

The Group does not have any customers that individually accounted for 10% or more of the Group’s interest and similar income for 2012, 2013 and 2014.

The Group does not carry out significant operations outside of Mexico and does not have any individual customers that account for 10% or more of the Group’s interest and similar income.

Management reporting for the Group is generally based on IFRS.

The 2012 consolidated income statement and other significant data are as follows:

F-142

				Global
2012	Retail Banking			Wholesale Banking			Corporate Activities			Total
Net interest income		26,533			3,723			3,626			33,882
Income from equity instruments		19			101			92			212
Net fee and commission income		9,884			1,882			(81	)		11,685
Gains/(losses) on financial assets and liabilities and exchange differences		612			1,000			(353	)		1,259
Other operating income/(expenses)		(1,107	)		(484	)		425			(1,166	)
Total income		35,941			6,222			3,709			45,872
Administrative expenses		(15,175	)		(1,368	)		(181	)		(16,724	)
Depreciation and amortization		(1,379	)		(156	)		(2	)		(1,537	)
Impairment losses on financial assets (net)		(8,802	)		(163	)		(5	)		(8,970	)
Impairment losses on other assets (net)		-			-			(34	)		(34	)
Provisions (net)		1,460			-			(780	)		680
Gains/(losses) on disposal of assets not classified as non-current assets held for sale		-			-			1,743			1,743
Gains/(losses) on disposal of non-current assets not classified as discontinued operations		-			-			135			135
Operating profit before tax		12,045			4,535			4,585			21,165
Income tax											(3,853	)
Profit from continuing operations											17,312
Profit from discontinued operations (net)											132
Profit for the year											17,444
Profit attributable to the Parent											17,443
Profit attributable to non-controlling interest											1
Total assets		293,294			402,354			97,384			793,032
Total liabilities		308,101			297,461			87,858			693,420

F-143

The 2013 consolidated income statement and other significant data are as follows:

				Global
	Retail			Wholesale			Corporate
2013	Banking			Banking			Activities			Total
Net interest income		29,767			3,471			2,609			35,847
Income from equity instruments		-			147			98			245
Net fee and commission income		10,969			1,962			(87	)		12,844
Gains/(losses) on financial assets and liabilities and exchange differences		756			2,431			94			3,281
Other operating income/(expenses)		(1,160	)		(561	)		430			(1,291	)
Total income		40,332			7,450			3,144			50,926
Administrative expenses		(16,802	)		(1,612	)		(216	)		(18,630	)
Depreciation and amortization		(1,488	)		(130	)		(2	)		(1,620	)
Impairment losses on financial assets (net)		(12,885	)		(1,992	)		(28	)		(14,905	)
Impairment losses on other assets (net)		-			-			(22	)		(22	)
Provisions (net)		(455	)		-			(296	)		(751	)
Gains/(losses) on disposal of assets not classified as non-current assets held for sale		-			-			31			31
Gains/(losses) on disposal of non-current assets not classified as discontinued operations		-			-			(16	)		(16	)
Operating profit before tax		8,702			3,716			2,595			15,013
Income tax											(2,670	)
Profit from continuing operations											12,343
Profit from discontinued operations (net)											1,938
Profit for the year											14,281
Profit attributable to the Parent											14,279
Profit attributable to non-controlling interest											2
Total assets		340,224			399,945			117,649			857,818
Total liabilities		380,766			240,253			144,281			765,300

F-144

The 2014 consolidated income statement and other significant data are as follows:

				Global
	Retail			Wholesale			Corporate
2014	Banking			Banking			Activities			Total
Net interest income		33,316			3,971			324			37,611
Income from equity instruments		-			53			100			153
Net fee and commission income		11,658			1,798			(83	)		13,373
Gains/(losses) on financial assets and liabilities and exchange differences		697			1,578			333			2,608
Other operating income/(expenses)		(1,680	)		(441	)		129			(1,992	)
Total income		43,991			6,959			803			51,753
Administrative expenses		(17,914	)		(1,785	)		(198	)		(19,897	)
Depreciation and amortization		(1,551	)		(130	)		(1	)		(1,682	)
Impairment losses on financial assets (net)		(12,314	)		(818	)		-			(13,132	)
Impairment losses on other assets (net)		-			-			(48	)		(48	)
Provisions (net)		58			-			(215	)		(157	)
Gains/(losses) on disposal of assets not classified
as non-current assets held for sale		-			-			8			8
Gains/(losses) on disposal of non-current assets not
classified as discontinued operations		-			-			(15	)		(15	)
Operating profit before tax		12,270			4,226			334			16,830
Income tax											(3,541	)
Profit from continuing operations											13,289
Profit from discontinued operations (net)											-
Profit for the year											13,289
Profit attributable to the Parent											13,288
Profit attributable to non-controlling interest											1
Total assets		394,105			400,577			155,301			949,983
Total liabilities		385,119			315,309			147,268			847,696

47. Related-party transactions

Transactions with related parties

In addition to subsidiaries, affiliates and associates, the Group’s “related parties” include its “key personnel” from the executive staff (members of the Group’s Board and the Managers of Grupo Financiero Santander México, S.A.B. de C.V. and its Affiliates, formerly Grupo Financiero Santander, S.A.B. de C.V., together with their close relatives), as well as the entities over which the key personnel could exercise significant influence or control.

The Group also considers the companies that are part of the Santander Group worldwide as related parties, given that all of them have a common parent, i.e., Banco Santander (Spain).

F-145

Transactions between the Group and its related parties are specified below. To facilitate comprehension, we have divided the information into the following categories:

Parent

This category includes balances with Banco Santander (Spain).

Santander Group Companies

This category includes all the companies that are controlled by Banco Santander (Spain) around the world, and hence, it also includes the companies over which the Group exercises any degree of control (Affiliates and special-purpose entities).

The Information related to Directors, Executive Officers and other key management personnel is detailed in Note 6.

Related-party transactions were made on terms equivalent to those prevailing in arm’s-length transactions or, when this was not the case, the related compensation in kind was recognized.

	12/31/2013				12/31/2014
			Santander				Santander
			Group				Group
	Parent		Companies		Parent		Companies
ASSETS:
Financial assets held for trading -
Loans and advances to credit institutions -
Of which -
Banco Santander, S.A. (Spain)		3,380		-		2,341		-
Loans and advances to customers -
Of which -
Santander Capital Structuring, S.A. de C.V.		-		1,751		-		1,245
Produban Servicios Informáticos Generales, S.L.		-		1,086		-		1,413
Promociones y Servicios Polanco, S.A. de C.V.		-		336		-		-
Grupo Konectanet México, S.A. de C.V.		-		15		-		15
Banco Santander Rio, S.A.		-		-		-		23
Trading derivatives -
Of which -
Banco Santander, S.A. (Spain)		12,095		-		27,256		-
Santander Benelux, S.A., N.V.		-		7,822		-		-
Abbey National Treasury Services plc.		-		70		-		828
Other		-		12		-		5
Other assets -
Of which -
Banco Santander, S.A. (Spain)		86		-		1,226		-
Zurich Santander Seguros México, S.A.		-		761		-		747
Gestión Santander, S.A. de C.V.		-		-		-		122
Other		-		60		-		88

F-146

	12/31/2013				12/31/2014
			Santander				Santander
			Group				Group
	Parent		Companies		Parent		Companies
LIABILITIES AND EQUITY:
Financial liabilities held for trading -
Trading derivatives -
Of which -
Banco Santander, S.A. (Spain)		12,599		-		28,340		-
Santander Benelux, S.A., N.V.		-		8,291		-		-
Abbey National Treasury Services plc.		-		42		-		426
Other		-		12		-		21
Other financial liabilities at fair value through profit or loss -
Deposits from credit institutions – Reverse repurchase agreements
Of which-
Banco Santander, S.A. (Spain)		-		-		1,525		-
Financial liabilities at amortized cost -
Deposits from credit institutions -
Of which -
Banco Santander, S.A. (Spain)		3,298		-		249		-
Banco Santander International		-		68		-		347
Zurich Santander Seguros México, S.A.		-		-		-		425
Abbey National Treasury Services plc.		-		-		-		419
Other		-		20		-		77
Subordinated liabilities -
Of which -
Banco Santander, S.A. (Spain)		12,766		-		14,630		-
Customer deposits -
Of which-
Isban México, S.A. de C.V.		-		676		-		837
Produban Servicios Informáticos Generales, S.L.		-		348		-		119
Santander Capital Structuring, S.A. de C.V.		-		114		-		117
Promociones y Servicios Santiago, S.A. de C.V.		-		-		-		1,790
Promociones y Servicios Monterrey, S.A. de C.V.		-		-		-		134
Other		-		154				82
Marketable Debt Securities -
Of which -
Banco Santander, S.A. (Spain)		774		-		727		-
Other financial liabilities -
Of which -
Banco Santander, S.A. (Spain)		10		-		709		-
Other liabilities -
Of which -
Banco Santander, S.A. (Spain)		176		-		1,387		-
Other		-		45		-		38

F-147

	2012						2013					2014
	Parent			Santander Group Companies			Parent			Santander Group Companies		Parent			Santander Group Companies
INCOME STATEMENT:
Interest income and similar income -
Of which -
Banco Santander, S.A. (Spain)		7			-			4			-		4			-
Produban Servicios Informáticos Generales, S.L.		-			28			-			35		-			38
Santander Capital Structuring, S.A. de C.V.		-			46			-			79		-			83
Other		-			6			-			3		-			1
Interest expenses and similar charges -
Of which -
Banco Santander, S.A. (Spain)		-			-			24			-		832
Isban México, S.A. de C.V.		-			27			-			17		-			16
Zurich Santander Seguros México, S.A.		-			11			-			-		-			-
Other		-			9			-			14		-			9
Fee and commission income - Of which -
Santander Investment Securities Inc.		-			-			-			10		-			8
Zurich Santander Seguros México, S.A.		-			2,973			-			3,372		-			3,739
Santander Capital Structuring, S.A. de C.V.		-			30			-			30		-			38
Gestión Santander, S.A. de C.V.		-			-			-			1,310		-			1,353
Other		-			14			-			6		-			9
Gains/(losses) on financial assets and liabilities (net) -
Of which -
Santander Benelux, S.A., N.V.		-			(833	)		-			900		-			(233	)
Banco Santander, S.A. (Spain)		(3,964	)		-			(482	)		-		(1,641	)		-
Abbey National Treasury Services plc.		-			(28	)		-			72		-			117
Other		-			(90	)		-			53		-			13
Administrative expenses -
Of which -
Produban Servicios Informáticos Generales, S.L.		-			1,220			-			1,382		-			1,546
Isban México, S.A. de C.V.		-			67			-			-		-			125
Santander Global Facilities, S.A. de C.V.		-			155			-			166		-			159
Ingeniería de Software Bancario, S.L.		-			68			-			-		-			106
Gesban México Servicios Administrativos     Globales, S.A. de C.V.		-			41			-			-		-			-
Geoban, S.A.		-			74			-			-		-			79
Aquanima México, S. de R.L. de C.V.		-			-			-			43		-			45
Other		-			68			-			354		-			79

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48. Risk management

1. Corporate risk management, appetite principles and control

1.1 Corporate principles

The Group’s risk management model underlying the business model is based on the following principles:

• Independence of the risk functions with respect to the business. The head of the Group’s risk division reports directly to Chief Executive Officer. 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 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. 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 for the 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.

• Corporate control. Risk is controlled and managed in an integrated fashion through a corporate structure with Group-wide responsibilities (all risk and all businesses).

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 risk unit 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 the Group 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.

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.

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• The structure of the delegation of powers at the Group requires a large number of transactions to be submitted for decision by the Group’s comprehensive risk management committee.

• The Group has 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.

• 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 Strategic Business Plan (PEC, using the Spanish acronym) for most of the Group’s portfolios, rating systems (exposures to medium-sized and large companies) and pre-classifications (large corporate customers and financial counterparties). There are also limits on operational risk.

• The exposure information and aggregation systems in place at the Group allow it to monitor exposures, 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 include 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.

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.

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, the required management measures must be adopted so that the desired risk profile can be restored.

Every quarter, the comprehensive risk management committee of the Group checks compliance with the risk appetite.

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:

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• 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 plausible but unlikely to occur.

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 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, management assesses whether the resulting margin is sufficient to absorb any unexpected effects arising from technology and operational risk and compliance and reputational risk.

The time horizon for the materialization of the adverse effects for all the risks considered is generally two or three years, or one year for market risk. Accordingly, the risk appetite framework should be complied with for each of the following three years.

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 provisions, i.e. 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.

This capital approach included in the risk appetite framework is complementary to and consistent with the capital target for the Group level that was approved as part of the capital planning process. (Pillar II)

Liquidity position

Liquidity management is performed by the Group within the corporate management framework. The basic principles of this corporate management framework are decentralization, medium- and long-term balance between liquidity sources and the use of funds, high weighting of customer deposits, diversification of wholesale sources, low recourse to short-term funding and a sufficient liquidity reserve. Additionally, it is based on three fundamental pillars (governance model, balance sheet analysis and liquidity risk measurement, and management adapted to the needs of the business).

The Group's liquidity risk appetite establishes a structural funding ratio of over 100%, i.e. the medium- and long-term funding resources, constituted mainly by stable customer deposits, capital, funding from development banks and issues must exceed the structural funding needs defined basically as loans and advances to customers. In addition, liquidity position and horizon targets are set for systemic stress scenarios and idiosyncratic stress scenarios.

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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 diversification.

Concentration risk is measured using the following metrics for which risk appetite thresholds are established as a proportion of capital or loans and receivables (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.

• Portfolios with a high risk profile.

Non-financial risks

• Operational risk: a maximum ratio of net operational risk losses to gross income is established. In addition, the Group assesses the management status, which is based on the results of indicators of various matters including, inter alia, governance and management, budgetary compliance, quality of events databases, and corporate self-assessment questionnaires on the control environment. In accordance with the Basel specifications, net losses include the losses that might arise from compliance risk.

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 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 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.

• An independent risk function with highly active involvement of 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 an interrelated way through a robust corporate risk control and monitoring environment with responsibilities: all risks and all businesses.

• 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.

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• The availability of sufficient and adequate human resources, systems and tools in order to enable the Group to maintain a risk profile compatible with the established risk appetite.

• 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.

2. Corporate Governance of the risk function

The comprehensive risk management 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 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 responsibilities assigned to the comprehensive risk management 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 and types of risk.

• To authorize the management tools and risk models and ascertains 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.

The risk function at the Group is performed through a risk unit, which is independent from the business areas from both a hierarchical and functional standpoint. This risk unit is responsible for the executive credit risk and financial risk management functions and for the control of other risks (mainly technology, operational and compliance risk), and it is adapted to the structure of the business, both by type of customer and by activity.

The risk unit areas are divided into three blocks:

• A structure for the management and control of financial risks (credit, market and structural risk) and the control of other risks. This block includes the following areas: loans to individuals, loans to companies, loan approval and monitoring, market and structural risks and non-financial risk control.

• A business structure, centered on the performance of the risk function in the Group's businesses. This block includes the following areas: Asset write-offs and recoveries.

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• A structure for the establishment of frameworks, the development and implementation of models and information infrastructure. This block includes the following areas: risk policies, methodology and risk information management.

3. Integrated risk control

The integrated risk control function ensures 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 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.

4. Clusters of risk

The Group's management considers that there are clusters of risk that affect its business and, therefore, the risks arising from it. These clusters and the actions adopted to mitigate them are as follows:

• Macroeconomic environment: at times of crisis it is particularly important to pay attention to the volatility of the macroeconomic environment.  Diversification protects the Group's results by minimizing the impact of volatility, and it enables the Group to maintain a medium-low risk profile. In addition, the Group uses scenario analysis techniques to ensure that its risk profile is maintained within the established risk appetite and that the balance sheet is resistant to potential adverse macroeconomic scenarios. These analyses are regularly submitted to management, and they include the potential impact on the consolidated income statement of the effect of the scenarios on margins, credit risk and counterparty risk losses and the trading portfolio. The analyses also consider the impact of adverse scenarios on the Group's liquidity position.

• Regulatory change: as a response to the financial crisis in recent years, the regulators and competent authorities in banking matters are designing a series of measures intended to avoid and/or mitigate future crises. Compliance with these measures by financial institutions is having an impact on various areas: capital requirements, liquidity, transparency, etc. The constant monitoring of the changes in the regulatory framework and the anticipation of these changes to enable the Group to adapt swiftly to the new requirements constitute the basic pillars of the approach to these matters.

• Reputational and conduct risk: in order to mitigate the impact of these risks, in recent years the Group has substantially reinforced its control of all matters relating to product marketing (including follow-up) and customer relations. This is currently the focus of considerable attention by both the regulators and public opinion, not only in relation to investment products but also banking products and financial services in general.

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5. Credit Risk

5.1 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: defined as those to which a risk analyst has been assigned. This category includes global wholesale banking customers (corporates and financial institutions) and the retail banking companies whose risk level is above a set exposure threshold. 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.

The Group has a mainly retail profile, with more than 76% of its total risk exposure being generated by its commercial banking business.

5.2 Credit risk map and credit risk parameters

The profile of the credit risk assumed by the Group is characterized by retail banking operations.

Certain information regarding maximum credit risk exposure is included in Note 12.f.

5.2.1 Credit risk map – 2013 and 2014

The following table shows the Group maximum credit risk exposure by type of product of Loans and advances to customers as of December 31, 2013 and 2014, without recognizing the availability of collateral or other credit enhancements to guarantee compliance:

Credit Risk Exposure to Customers	12/31/2013	12/31/2014	Change, December 31, 2014 vs. December 31, 2013
			Millions of Pesos	%
Payroll loans	15,572	16,662	1,090	7.00%
Personal loans	14,150	17,298	3,148	22.25%
Credit cards	39,782	42,104	2,322	5.84%
Mortgages	91,859	108,184	16,325	17.77%
SMEs	41,411	51,835	10,424	25.17%
Middle-market corporations	92,796	105,552	12,756	13.75%
Institutions	30,253	22,776	(7,477)	(24.71)%
Global corporate clients	88,168	112,013	23,845	27.04%
Guarantees and documentary credits	27,185	30,779	3,594	13.22%
Other	292	522	230	78.77%
	441,468	507,725	66,257	15.01%

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For financial assets recognized in the consolidated balance sheet, credit risk exposure is equal to the carrying amount excluding valuation adjustments (impairment losses, accrued interest receivable, derivatives and other), except for trading and hedging derivatives.

The maximum exposure to credit risk on financial guarantees is the maximum for which the Group would be liable if these guarantees were called in.

Rating tools are applied to the sovereign risk, financial institution and global wholesale banking segments. These tools assign a rating to each customer, which is derived from a quantitative or automatic module, based on balance sheet ratios or macroeconomic variables and supplemented by the analyst’s expert judgment.

For individualized corporations and institutions, the Group has defined a single methodology for the construction of a rating, based on an automatic module which includes the initial participation of the analyst that can be supplemented subsequently if required. The automatic module determines the rating in two phases, a quantitative phase and a qualitative phase. The quantitative rating is determined by analyzing the credit performance of a sample of customers and the correlation with their financial statements. The automatic rating (qualitative + quantitative) may in turn be modified by the analyst by overwriting it or using a manual scoring module. Certain automatic rating includes a module integrating Credit Bureau’s information of clients.

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 of credit conditions and for customers otherwise classified as requiring special monitoring. The rating tools themselves are also reviewed in order to progressively fine-tune the ratings they provide.

For standardized risk portfolios, of both legal entities and individuals, the Group has scoring tools that automatically assign a score to proposed transactions.

These systems are complemented by behavioral scoring models which are used for preventive actions as well as marketing and limit assignment at the product and customer level.

5.2.2 Credit risk parameters

The assessment of customers or transactions using rating or scoring systems constitutes a judgment of their credit quality, which is quantified through the probability of default (PD).

In addition to customer assessment, the quantification of credit risk requires the estimation of other parameters, such as exposure at default (EAD) and the percentage of exposure at default that will not be recovered (loss given default or LGD). Therefore, other relevant factors are taken into account in estimating the risk involved in transactions, such as the quantification of off-balance-sheet risk, which depends on the type of product, or the analysis of expected recoveries, which is related to the guarantees provided and other characteristics of the transaction such as product type, term, etc.

These factors are the main credit risk parameters. Their combination is used in the calculation of the probable loss or expected loss. This loss is considered to be an additional cost of the activity which is reflected in the risk premium and must be charged in the transaction price.

Regarding portfolios for which limited internal default experience information exists, such as banks, sovereign risk or global wholesale banking, estimates of the risk parameters (PD, LGD and EAD) are based on alternative sources such as market prices or studies conducted by external agencies gathering the shared experience of a sufficient number of entities. These portfolios are known as low default portfolios.

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For all other portfolios, parameter estimates are based on the Group internal experience. The PD is calculated by observing the cases of new arrears in relation to the final rating assigned to customers or to the scoring assigned to the related transactions.

LGD calculation is based on the observation of the recoveries of defaulted loans, taking into account not only the income and expenses associated with the recovery process, but also the timing when the income and expenses take place.

EAD is estimated by comparing the use of committed facilities at the time of default and their use under normal (performing) circumstances, so as to identify the actual use of the facilities at the time of default.

5.3. Credit risk from other standpoints

5.3.1 Credit risk from financial market operations

This concept includes the credit risk arising in treasury operations with customers, mainlysovereign risk, financial institutions and corporates. These operations are performed using both money market and fixed income financing products arranged with various financial institutions and derivative products intended to provide service to the Group’s counterparties.

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 Equivalent Credit Risk or ECR is defined as the sum of net replacement value plus the maximum potential value of the contracts in the future.

The exposure is measured using an MtM methodology (replacement value of derivatives or amount drawn down of committed facilities) plus potential future exposure (add-on). 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).

When the markets close, the exposures are recalculated by adjusting all the transactions to their new time horizon, the potential future exposure is adjusted and mitigation measures are applied (netting arrangements, collateral arrangements, etc.) so that the exposures can be controlled daily against the limits approved by management. Risk control is performed using an integrated, real-time system that enables the Group to know at any time the unused exposure limit with respect to any counterparty and any product and maturity.

Derivatives exposures

The net total credit risk exposure in derivatives activities, money market and fixed income financing products amounted to an average of 330,543 million pesos in the fourth quarter of 2014, and was concentrated at counterparties with high credit quality.

Certain information regarding trading and hedging derivatives is presented in Notes 13 and 32.

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5.3.2. Concentration risk

Concentration risk control is key to the risk management process. The Group continuously monitors the degree of credit risk concentration by sector and customer group. The comprehensive risk management committee establishes the risk policies and reviews the exposure limits required to ensure adequate management of credit risk concentration.

The Group is subject to CNBV regulations on “Large Exposures” as follows:

a) As of December 31, 2013 and 2014 there is no financing granted to debtors or groups of individuals or entities representing a joint risk in an amount that exceeds 40% of the Bank’s Basic Capital (of the month immediately preceding the reporting date).

b) As of December 31, 2013 loans granted to the three main debtors or groups of individuals representing a joint risk for the aggregate amount of 14,736 million pesos and represent 21.23% of the Bank’s Basic Capital.

c) As of December 31, 2014 loans granted to the three main debtors or groups of individuals representing a joint risk for the aggregate amount of 34,430 million pesos and represent 44.89% of the Bank’s Basic Capital.

5.3.3 Sovereign risk

As a general rule, the Group considers sovereign risk to be the risk assumed in transactions with the Central Bank (including the compulsory deposits), the issuer risk of Mexican Government (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.

Sovereign risk exposure arises mainly from the Group’s obligations to maintain certain deposits in Central Bank and from the fixed-income portfolios held as part of the on-balance-sheet structural interest rate risk management strategy. The vast majorities of these exposures are taken in local currency and are financed out of local customer deposits, also denominated in local currency.

In general, total exposure to sovereign risk has remained relatively stable in recent years, which seems reasonable if the strategic reasons for it, discussed above, are taken into account.

5.3.4 Environmental risk

The environmental risk analysis of credit transactions by the Group is founded on 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.

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5.4 Credit risk cycle

The credit risk management process consists of identifying, measuring, analyzing, controlling, negotiating and deciding on, as appropriate, the risks incurred in the Group´s operations. The parties involved in this process are the risk-taking areas, management and the risk unit.

The process involves the Board of Directors and the comprehensive risk management committee, which establishes the risk policies and procedures, and the limits and delegations of powers, and approves and supervises the scope of action of the risk function.

The risk cycle comprises three different phases: pre-sale, sale and post-sale:

• Pre-sale: this phase includes the risk planning and target setting processes, determination of the Group’s risk appetite, approval of new products, risk analysis and credit rating process and limit setting.

• Sale: this is the decision-making phase for both pre-classified and specific transactions.

• Post-sale: this phase comprises the risk monitoring, measurement and control processes and the recovery process.

The process is being continuously 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.

5.4.1 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 Group. 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.

The Group uses 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.

5.4.2 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 Strategic Business Plan (PEC, using the Spanish acronym), a document agreed upon by the business areas and the risk units and approved by the comprehensive

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risk management committee, 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 materially, concur. Also in certain portfolios a Strategic Business Plan is furnished.

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 that affect the performance of the portfolios.

The Group simulates their performance in various adverse and stress scenarios (stress testing), which enables it to assess the Group's 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 methodology which:

• Designs benchmark scenarios.

• Determines the sensitivity of the credit risk parameters (PD and LGD) to the significant macroeconomic variables for each portfolio, as well as their levels in the proposed scenarios.

• Estimates the expected loss associated with each of the scenarios considered and the changes in the risk profile of each portfolio in response to changes in the relevant 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. These models undergo regular backtesting and recalibration processes in order to ensure that they provide a correct reflection of the relationship between the macroeconomic variables and the risk parameters

The scenario analysis enables 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.

Definitions of assumptions and (base/stress) scenarios

The risk and loss parameters are projected, usually with a three-year time horizon, using various economic scenarios that include the main macroeconomic variables (GDP, unemployment rate, housing prices, inflation, interest rates, etc.).

The economic scenarios defined are based on different stress levels, ranging from the base or most probable scenario to more stressed economic scenarios which, although less probable, could arise.

These scenarios are generally defined by the Group's economic research service unit using as a reference the data published by the main international organizations.

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Uses of the scenario analysis

The scenario analysis techniques are useful throughout the credit risk cycle. The various uses can be classified as follows:

• Regulatory uses: those in which an external agent or regulator requests the result of the test following implementation of the Group's corporate methodology. Occasionally the test scenarios or assumptions are imposed by the party requesting the information. In other cases, the test is conducted by the requesting party itself based on information furnished by the Group.

• Planning and management uses: this category includes tests that aim to facilitate decision-making on the Group's portfolios by ascertaining the sensitivity of the portfolios to changes in the macroeconomic variables-affecting them. To this end the following aspects, among others, are analyzed and submitted to management:

- Impact on profit or loss and capital.

- Projected trend in the cost of credit over the next three years in light of the proposed business strategy.

- Sufficiency of funds and provisions.

- Contrast with other estimates performed.

The use of the tests in establishing and monitoring the Group's risk appetite is also of particular significance.

Results obtained

The various stress tests performed, for both regulatory and management purposes have evidenced the strength and validity of the Group's business model, as a result of its resilience to stress scenarios for the Group.

In this regard, in each risk appetite update submitted to the Board of Directors, it has been confirmed that the Group continues to report profits and maintain adequate capital levels.

5.4.3 Transaction decision-making

The sale phase comprises the decision-making process, the aim of which is to analyze and resolve transactions, since approval by the risk unit is a pre-requisite for the arrangement of any risk transaction. This 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 is 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:

• The decision 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.

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• It may always require the analyst's authorization, even if the transaction meets the amount, maturity and other conditions established in the pre-classified limit. This process is applied to pre-classifications of individualized retail banking companies.

Credit risk mitigation techniques

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:

Determination of a net balance by counterparty

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 aggregating 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 of the CNBV can be taken into consideration.

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.

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.

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.

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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

Personal guarantees are guarantees that make a third party liable for another party’s obligations to the Group. They include, for example, security deposits, suretyships and standby letters of credit. Only guarantees provided by third parties that meet the minimum requirements established by the CNBV can be recognized for capital calculation purposes.

5.4.4 Monitoring

The monitoring function is based on the ongoing process of continuing observation to enable early detection of any changes that might arise in customers' credit quality, so that action can be taken to correct any deviations with an adverse impact.

Monitoring is based on the segmentation of customers, is performed by dedicated 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.

For exposures to standardized customers, the key indicators are monitored in order to detect any variance in the performance of the loan portfolio with respect to the forecasts contained in the credit management programs.

5.4.5 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.

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The risk control function is performed by assessing risks from various complementary perspectives, the main pillars being control by 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:

1.- 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.

It is obtained as the result of the ending balance less the beginning balance of non-performing loans for the period in question, plus the loans written off in the period, less any previously written-off loans recovered in that same period.

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 12 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 12 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 the use of capital.

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2.- 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 sub-processes, operational risks and related mitigating controls. In this regard, 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 managing and controlling 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.

5.4.6 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, 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 always taking into account the peculiarities required for the recovery activity, due either to the 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.

Restructured/refinanced portfolio

The term “restructured/refinanced portfolio” refers 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.

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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.

The principles of this policy include the following:

• The restricted use of this practice, which must be accompanied by additional guarantees or efforts by the customer, to avoid 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.

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.

The 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:

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• 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.

The 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 temporary deterioration in their ability to pay (which is expected to be recovered in a short period 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.

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This portfolio of loans is segregated into a separate loan pool for the purposes of determining the allowance for impairment losses.

Certain information regarding renegotiated loans is included in Note 12.e.

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.

6. Market risk

6.1 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 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 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, among others, loans and receivables, securities, derivatives, deposits, marketable debt securities and subordinated liabilities 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 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 government bonds and interbank interest rates.

• 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 equity prices. Volatility risk arises on financial instruments whose measurement model includes volatility as a variable, most notably financial option portfolios.

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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 an exchange rate).

• Market liquidity risk. The risk that the Group may not be 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 loans and receivables and 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.

Risk types measurement and control depend on the business objective of the activities, currently divided into two categories:

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 for the Group 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: arises from the Group’s operations in foreign currencies.

• Structural equities risk: this item includes equity investments in non-consolidated financial and non-financial companies and available-for-sale portfolios comprising equity positions.

• Structural liquidity Risk: arises as a result of the maturity gaps of all the assets and liabilities on the balance sheet.

The 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 area 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. Decisions affecting the management of these risks are taken through the Assets and Liabilities Committee (hereinafter, “ALCO”). 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.

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Each of these activities is measured and analyzed using different metrics in order to reflect their risk profiles as accurately as possible.

6.2 Risks and Results

6.2.1 Risks and results in 2012

Trading

The average VaR of the Group's market trading operations in 2012 stood at 87 million pesos, significantly lower than that for 2011 at 125 million pesos. In 2012, the changes in VaR were due mainly to changes in the interest rate risk and vega risk in interest rate derivatives that decreased as a result of the strategy of the trading book. VaR modeling did not change during 2012. At the end of December 2012, the VaR stood at 72 million pesos.

Average VaR fell by 38 million pesos with respect to 2011. This reduction was concentrated in interest rate VaR, which fell from 120 million pesos to 88 million pesos, in equities VaR from 42 million pesos to 14 million pesos, and in exchange rate VaR from 20 million pesos to 10 million pesos.

Distribution over time of risks and results

The risk assumption profile, in terms of VaR and results, showed that VaR during 2012 remained at levels below the limit of 260 million pesos. During the final quarter of 2012, the VaR decreased below 100 million pesos.

Calibration and test measures

Pursuant to the recommendations issued by the Basel Committee for the calibration and control of the efficiency of the internal market risk measurement and management systems, in 2012 the Group regularly performed the required benchmark tests and analyses, and drew conclusions which enabled it to verify the reliability of the model.

In 2012, one exception to 99% VaR occurred (i.e., days when the daily loss exceeded VaR) on December 31, 2012, due mainly to the changes in interests rates. During 2011, there were four 99% VaR exceptions. Also during 2012, there were four 99% Value at Earnings (VaE) breaks (i.e., days when the daily gain exceeded VaE), also due mainly to the changes in the medium- and long-term interest rates.

Besides the ongoing and regular calibration of our VaR methodology, there were no significant changes during 2012.

Balance sheet management

Interest rate risk

The interest rate risk in the balance sheet management portfolios, measured in terms of sensitivity of the net interest margin (NIM) at one year to a parallel increase of 100 basis points in the yield curve, remained stable throughout 2012 under 1,100 million pesos, mainly due to the short-term repricing of the credit portfolio. At the end of December 2012, the risk consumption measured in terms of 100 basis points sensitivity of the MVE stood under 2,900 million pesos.

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Interest Rate Risk Profile at December 31, 2012

The table below shows the distribution of interest rate risk by maturity as of December 31, 2012. The reported amounts include estimated interest on fixed and variable rate instruments. Interest on variable rate instruments is determined using the rate in effect as of the balance sheet date for the first scheduled interest payment and amounts are determined based on the contractual spread for each period thereafter. (Millions of pesos):

	Total			0 - 1 Months			1 - 3 Months			3 - 6 Months			6 - 12 Months			1 - 3 Years			3 - 5 Years			> 5 Years			Not Sensitive
Money Market		159,137			45,485			-			2			8			32			30			49			113,531
Loans		400,495			236,190			12,099			10,382			15,668			45,874			22,446			69,903			(12,067	)
Trade Finance		-			-			-			-			-			-			-			-			-
Intragroup		205			-			-			-			-			-			-			-			205
Securities		189,824			15,794			6,327			5,271			5,849			13,323			2,261			7,292			133,707
Permanent		(2,647	)		-			-			-			-			-			-			-			(2,647	)
Other Balance Sheet Assets		159,942			-			-			-			-			-			-			-			159,942
Total Balance Sheet Assets		906,956			297,469			18,426			15,655			21,525			59,229			24,737			77,244			392,671
Money Market		(155,926	)		(9,821	)		(5,348	)		(977	)		(198	)		-			-			-			(139,582	)
Deposits		(334,145	)		(180,783	)		(9,527	)		(528	)		(7,968	)		(135,339	)		-			-			-
Trade Finance		(917	)		-			-			-			-			-			-			-			(917	)
Intragroup		-			-			-			-			-			-			-			-			-
Long-Term Funding		(78,836	)		(35,415	)		(956	)		(269	)		(350	)		(1,391	)		(1,392	)		(17,915	)		(21,148	)
Equity		(112,233	)		-			-			-			-			-			-			-			(112,233	)
Other Balance Sheet Liabilities		(164,984	)		-			-			-			-			-			-			-			(164,984	)
Total Balance Sheet Liabilities		(847,041	)		(226,019	)		(15,831	)		(1,774	)		(8,516	)		(136,730	)		(1,392	)		(17,915	)		(438,864	)
Total Balance Sheet Gap		59,915			71,450			2,595			13,881			13,009			(77,501	)		23,345			59,329			(46,193	)
Total Off-Balance Sheet Gap		(11,124	)		578			(1,417	)		(2,287	)		(157	)		(1,246	)		(888	)		(5,707	)		-
Total Structural Gap		48,791			72,028			1,178			11,594			12,852			(78,747	)		22,457			53,622			(46,193	)
Accumulated Gap		-			72,028			73,206			84,800			97,652			18,905			41,362			94,984			48,791

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Funding and Liquidity risk

Liquidity Gap

The table below shows the distribution of the liquidity risk by maturity as of December 31, 2012. The reported amounts include cash flows from interest on fixed and variable rate instruments. The interest on variable rate instruments is determined using the forward interest rates for each period presented. (Millions of pesos):

	Total			0 - 1 Months			1 - 3 Months			3 - 6 Months			6 - 12 Months			1 - 3 Years			3 - 5 Years			> 5 Years			Not Sensitive
Money Market		159,140			111,372			10,035			2			8			32			30			49			37,612
Loans		432,213			62,816			34,394			33,479			47,129			123,026			45,587			97,849			(12,067	)
Trade Finance		-			-			-			-			-			-			-			-			-
Intragroup		205			-			-			-			-			-			-			-			205
Securities		169,523			146,322			208			1			1			5,482			-			-			17,509
Permanent		(2,647	)		-			-			-			-			-			-			-			(2,647	)
Other Balance Sheet Assets		159,942			-			-			-			-			-			-			-			159,942
Total Balance Sheet Assets		918,376			320,510			44,637			33,482			47,138			128,540			45,617			97,898			200,554
Money Market		(155,986	)		(139,364	)		(1,777	)		(4,109	)		(3,251	)		(525	)		-			-			(6,960	)
Deposits		(334,146	)		(144,579	)		(30,783	)		(319	)		(5,949	)		(152,516	)		-			-			-
Trade Finance		(917	)		-			-			-			-			-			-			-			(917	)
Intragroup		-			-			-			-			-			-			-			-			-
Long-Term Funding		(80,373	)		(20,092	)		(2,646	)		(10,467	)		(8,013	)		(15,556	)		(5,684	)		(17,915	)		-
Equity		(112,233	)		-			-			-			-			-			-			-			(112,233	)
Other Balance Sheet Liabilities		(164,984	)		-			-			-			-			-			-			-			(164,984	)
Total Balance Sheet Liabilities		(848,639	)		(304,035	)		(35,206	)		(14,895	)		(17,213	)		(168,597	)		(5,684	)		(17,915	)		(285,094	)
Total Balance Sheet Gap		69,737			16,475			9,431			18,587			29,925			(40,057	)		39,933			79,983			(84,540	)
Total Off-Balance Sheet Gap		8,512			(439	)		493			(1,078	)		(1,920	)		2,962			2,933			5,561			-
Total Structural Gap		78,249			16,036			9,924			17,509			28,005			(37,095	)		42,866			85,544			(84,540	)
Accumulated Gap		-			16,036			25,960			43,469			71,474			34,379			77,245			162,789			78,249

6.2.2 Risks and results in 2013

Trading

The average daily Total VaR of the Group's market trading operations in 2013 stood at 78 million pesos, lower than that for 2012 at 87 million pesos. In 2013, the changes in VaR were due mainly to changes in the interest rate risk factor as a result of the trading book´s strategy. VaR modeling did not change during 2013. At the end of December 2013, VaR stood at 69 million pesos.

Average daily Total VaR fell by 9 million pesos with respect to 2012. This reduction was concentrated in interest rate VaR, where the average daily fell from 88 million pesos to 73 million pesos. The average daily equity VaR and exchange rate VaR increased from 14 million pesos to 21 million pesos and from 10 million pesos to 12 million pesos, respectively.

Distribution over time of risks and results

The risk assumption profile, in terms of VaR and results, showed that VaR during 2013 remained at levels below the limit of 207 million pesos. During the first semester of 2013, the average daily Total VaR was 88 million pesos. However, in the second semester of 2013 the average daily Total VaR consumption decreased to 69 million pesos staying in levels between 53 million and 98 million, as a result of interest rates reduction expectation.

F-172

Calibration and test measures

Pursuant to the recommendations issued by the Basel Committee for the calibration and control of the efficiency of the internal market risk measurement and management systems, in 2013 the Group regularly performed the required benchmark tests and analyses, and drew conclusions which enabled it to verify the reliability of the model.

In 2013, one exception to 99% VaR occurred (i.e., days when the daily loss exceeded VaR) on June 12, 2013, due mainly to the changes in interests rates. During 2012, there was one 99% VaR exception. During 2013, there were not VaE breaks as occurred in 2012.

Besides the ongoing and regular calibration of our VaR methodology, there were no significant changes during 2013.

Balance sheet management

Interest rate risk

The interest rate risk in the balance sheet management portfolios, measured in terms of sensitivity of the net interest margin (NIM) at one year to a parallel increase of 100 basis points in the yield curve, remained stable throughout 2013 under 1,100 million pesos, mainly due to the short-term repricing of the credit portfolio. At the end of December 2013, the risk consumption measured in terms of 100 basis points sensitivity of the MVE stood under 2,600 million pesos.

Interest Rate Risk Profile at December 31, 2013

The table below shows the distribution of interest rate risk by maturity as of December 31, 2013. The reported amounts include estimated interest on fixed and variable rate instruments. Interest on variable rate instruments is determined using the rate in effect as of the balance sheet date for the first scheduled interest payment and amounts are determined based on the contractual spread for each period thereafter. (Millions of pesos):

	Total			0 - 1 Months			1 - 3 Months			3 - 6 Months			6 - 12 Months			1 - 3 Years			3 - 5 Years			> 5 Years			Not Sensitive
Money Market		175,194			40,402			-			2			8			32			30			35			134,685
Loans		435,075			253,272			9,280			10,410			19,668			51,245			24,336			75,615			(8,750	)
Trade Finance		-			-			-			-			-			-			-			-			-
Intragroup		(77	)		-			-			-			-			-			-			-			(77	)
Securities		194,481			12,228			14,239			6,932			1,474			16,457			9,582			13,600			119,969
Permanent		3,886			-			-			-			-			-			-			-			3,886
Other Balance Sheet Assets		158,610			-			-			-			-			-			-			-			158,610
Total Balance Sheet Assets		967,168			305,902			23,520			17,343			21,150			67,734			33,948			89,250			408,322
Money Market		(163,234	)		(8,859	)		(9,223	)		(1,622	)		-			-			-			-			(143,530	)
Deposits		(376,257	)		(196,985	)		(8,999	)		(513	)		(10,191	)		(159,568	)		-			-			-
Trade Finance		(818	)		-			-			-			-			-			-			-			(818	)
Intragroup		(1	)		-			-			-			-			-			-			-			(1	)
Long-Term Funding		(98,571	)		(27,788	)		(184	)		(271	)		(957	)		(3,457	)		(3,453	)		(40,018	)		(22,443	)
Equity		(107,565	)		-			-			-			-			-			-			-			(107,565	)
Other Balance Sheet Liabilities		(161,978	)		-			-			-			-			-			-			-			(161,978	)
Total Balance Sheet Liabilities		(908,424	)		(233,632	)		(18,405	)		(2,407	)		(11,148	)		(163,025	)		(3,453	)		(40,018	)		(436,335	)
Total Balance Sheet Gap		58,744			72,270			5,114			14,937			10,001			(95,292	)		30,495			49,232			(28,013	)
Total Off-Balance Sheet Gap		(2,556	)		3,562			4,060			545			(467	)		(1,692	)		(1,006	)		(7,559	)		-
Total Structural Gap		56,188			75,832			9,174			15,482			9,534			(96,984	)		29,489			41,672			(28,013	)
Accumulated Gap		-			75,832			85,006			100,488			100,023			13,039			42,528			84,200			56,168

F-173

Funding and Liquidity risk

Liquidity Gap

The table below shows the distribution of the liquidity risk by maturity as of December 31, 2013. The reported amounts include cash flows from interest on fixed and variable rate instruments. The interest on variable rate instruments is determined using the forward interest rates for each period presented. (Millions of pesos):

	Total			0 - 1 Months			1 - 3 Months			3 - 6 Months			6 - 12 Months			1 - 3 Years			3 - 5 Years			> 5 Years			Not Sensitive
Money Market		175,198			142,798			85			2			8			32			30			35			32,208
Loans		465,227			65,389			36,412			35,205			55,770			128,271			49,171			103,759			(8,750	)
Trade Finance		-			-			-			-			-			-			-			-			-
Intragroup		(77	)		-			-			-			-			-			-			-			(77	)
Securities		179,838			156,626			-			-			-			5,679			-			-			17,532
Permanent		3,886			-			-			-			-			-			-			-			3,886
Other Balance Sheet Assets		158,610			-			-			-			-			-			-			-			158,610
Total Balance Sheet Assets		982,680			364,813			36,497			35,207			55,778			133,981			49,201			103,794			203,408
Money Market		(163,287	)		(137,345	)		(4,284	)		(4,897	)		(5,446	)		-			-			-			(11,315	)
Deposits		(376,257	)		(163,702	)		(37,060	)		(295	)		(7,534	)		(167,665	)		-			-			-
Trade Finance		(818	)		-			-			-			-			-			-			-			(818	)
Intragroup		(1	)		-			-			-			-			-			-			-			(1	)
Long-Term Funding		(99,160	)		(28,928	)		(3,601	)		(3,214	)		(3,280	)		(16,666	)		(3,453	)		(40,018	)		-
Equity		(107,565	)		-			-			-			-			-			-			-			(107,565	)
Other Balance Sheet Liabilities		(161,978	)		-			-			-			-			-			-			-			(161,978	)
Total Balance Sheet Liabilities		(909,066	)		(329,975	)		(44,944	)		(8,406	)		(16,261	)		(184,331	)		(3,453	)		(40,018	)		(281,677	)
Total Balance Sheet Gap		73,614			34,837			(8,447	)		26,801			39,518			( 50,350	)		45,748			63,776			(78,269	)
Total Off-Balance Sheet Gap		1,776			(394	)		229			810			132			(15	)		(82	)		1,096			-
Total Structural Gap		75,391			34,443			(8,219	)		27,611			39,650			(50,365	)		45,666			64,873			(78,269	)
Accumulated Gap		-			34,443			26,225			53,836			93,486			43,121			88,787			153,660			75,391

6.2.3 Risks and results in 2014

5.   Trading

The average daily Total VaR of the Group's market trading operations in 2014 stood at 86 million pesos, higher than that for 2013 at 78 million pesos. In 2014, the changes in VaR were due mainly to changes in the interest rate risk factor as a result of the trading book´s strategy. VaR modeling did not change during 2014. At the end of December 2014, VaR stood at 52 million pesos.

Average daily Total VaR increased by 8 million pesos with respect to 2013. This increment was concentrated in interest rate VaR, where the average daily increased from 73 million pesos to 88 million pesos. The average daily equity VaR and exchange rate VaR fell from 21 million pesos to 18 million pesos, and increased from 12 million pesos to 14 million pesos, respectively.

Distribution over time of risks and results

The risk assumption profile, in terms of VaR and results, showed that VaR during 2014 remained at levels below the limit of 236 million pesos. During the first semester of 2014, the average daily Total VaR was 89 million pesos. However, in the second half of 2014 the average daily Total VaR consumption decreased to 83 million pesos staying in levels between 47 million and 118 million, as a result of interest rates reduction expectation.

F-174

Calibration and test measures

Pursuant to the recommendations issued by the Basel Committee for the calibration and control of the efficiency of the internal market risk measurement and management systems, in 2014 the Group regularly performed the required benchmark tests and analyses, and drew conclusions which enabled it to verify the reliability of the model.

In 2014, there were no exception to 99% VaR (i.e., days when the daily loss exceeded VaR). During 2013, there was one 99% VaR exception. During 2014, there were three VaE breaks (i.e., days when the daily gain exceeded VaE), due mainly to the changes in the medium- and long-term interest rates. During 2013, there were no 99% VaE breaks.

Besides the ongoing and regular calibration of our VaR methodology, there were no significant changes during 2014.

Exposures related to complex structured assets

The Group's policy with respect to the approval of new transactions involving complex structures is highly conservative and is subject to strict supervision by the Group's 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 used in the valuation model are observable in the market.

Provided the two aforementioned conditions are met, the market risk area ascertains:

- The availability of adequate systems duly adapted for the calculation and daily monitoring of the results, positions and risks of the planned transactions.

- The degree of liquidity of the product or underlying, with a view to arranging the related hedge on a timely basis.

Balance sheet management

Interest rate risk

The interest rate risk in the balance sheet management portfolios, measured in terms of sensitivity of the net interest margin (NIM) at one year to a parallel increase of 100 basis points in the yield curve, remained stable throughout 2014 under 1,100 million pesos, mainly due to the short-term repricing of the credit portfolio. At the end of December 2014, the risk consumption measured in terms of 100 basis points sensitivity of the MVE stood under 2,700 million pesos.

F-175

Interest Rate Risk Profile at December 31, 2014

The table below shows the distribution of interest rate risk by maturity as of December 31, 2014. The reported amounts include estimated interest on fixed and variable rate instruments. Interest on variable rate instruments is determined using the rate in effect as of the balance sheet date for the first scheduled interest payment and amounts are determined based on the contractual spread for each period thereafter. (Millions of pesos):

	Total			0 - 1 Months			1 - 3 Months			3 - 6 Months			6 - 12 Months			1 - 3 Years			3 - 5 Years			> 5 Years			Not Sensitive
Money Market		124,955			60,052			7			-			8			32			32			15			64,808
Loans		534,838			252,567			38,524			37,058			27,248			60,122			30,793			93,805			(5,279	)
Trade Finance		-			-			-			-			-			-			-			-			-
Intragroup		(228	)		-			-			-			-			-			-			-			(228	)
Securities		237,891			11,378			11,265			361			4,118			50,090			9,820			15,381			135,477
Permanent		4,658			-			-			-			-			-			-			-			4,658
Other Balance Sheet Assets		68,547			-			-			-			-			-			-			-			68,547
Total Balance Sheet Assets		970,661			323,997			49,796			37,419			31,375			110,244			40,645			109,201			267,985
Money Market		(152,529	)		(16,753	)		(19,615	)		(1,550	)		-			-			-			-			(114,611	)
Deposits		(412,118	)		(184,451	)		(7,580	)		(317	)		(22,135	)		(197,635	)		-			-			-
Trade Finance		(719	)		-			-			-			-			-			-			-			(719	)
Intragroup		-			-			-			-			-			-			-			-			-
Long-Term Funding		(220,050	)		(135,694	)		(469	)		(681	)		(1,679	)		(6,440	)		(24,741	)		(26,392	)		(23,955	)
Equity		(125,578	)		-			-			-			-			-			-			-			(125,578	)
Other Balance Sheet Liabilities		(56,283	)		-			-			-			-			-			-			-			(56,283	)
Total Balance Sheet Liabilities		(967,276	)		(336,898	)		(27,664	)		(2,547	)		(23,814	)		(204,075	)		(24,741	)		(26,392	)		(321,146	)
Total Balance Sheet Gap		3,385			(12,901	)		22,132			34,872			7,561			(93,831	)		15,904			82,809			(53,161	)
Total Off-Balance Sheet Gap		(1,912	)		9,694			836			(3,251	)		(1,332	)		(7,253	)		(791	)		(6,034	)		6,220
Total Structural Gap		-			(3,207	)		22,968			31,620			6,229			(101,083	)		15,113			76,775			(46,941	)
Accumulated Gap		-			(3,207	)		19,761			51,381			57,610			(43,473	)		(28,360	)		48,414			1,473

F-176

Funding and Liquidity risk

Liquidity Gap

The table below shows the distribution of the liquidity risk by maturity as of December 31, 2014. The reported amounts include cash flows from interest on fixed and variable rate instruments. The interest on variable rate instruments is determined using the forward interest rates for each period presented. (Millions of pesos):

	Total			0 - 1 Months			1 - 3 Months			3 - 6 Months			6 - 12 Months			1 - 3 Years			3 - 5 Years			> 5 Years			Not Sensitive
Money Market		136,146			122,599			61			1			8			32			32			15			13,399
Loans		571,076			80,794			50,330			43,781			58,872			148,276			56,949			137,353			(5,279	)
Trade Finance		-			-			-			-			-			-			-			-			-
Intragroup		(228	)		-			-			-			-			-			-			-			(228	)
Securities		220,743			192,457			1			1			1			5,855			-			-			22,429
Permanent		4,658			-			-			-			-			-			-			-			4,658
Other Balance Sheet Assets		68,547			-			-			-			-			-			-			-			68,547
Total Balance Sheet Assets		1,000,943			395,849			50,392			43,782			58,881			154,163			56,981			137,368			103,526
Money Market		(162,462	)		(155,404	)		(2,950	)		(9,899	)		(8,890	)		(1,607	)		(68	)		(1,116	)		17,472
Deposits		(430,155	)		(140,852	)		(42,264	)		(74	)		(11,382	)		(235,583	)		-			-			-
Trade Finance		(719	)		-			-			-			-			-			-			-			(719	)
Intragroup		-			-			-			-			-			-			-			-			-
Long-Term Funding		(123,910	)		(19,785	)		(1,868	)		(12,300	)		(6,105	)		(32,074	)		(25,361	)		(26,417	)		-
Equity		(125,578	)		-			-			-			-			-			-			-			(125,578	)
Other Balance Sheet Liabilities		(56,283	)		-			-			-			-			-			-			-			(56,283	)
Total Balance Sheet Liabilities		(899,107	)		(316,041	)		(47,082	)		(22,272	)		(26,377	)		(269,264	)		(25,429	)		(27,533	)		(165,109	)
Total Balance Sheet Gap		101,836			79,808			3,310			21,510			32,504			(115,101	)		31,552			109,835			(61,583	)
Total Off-Balance Sheet Gap		(1,912	)		(2,869	)		(973	)		284			400			(3,729	)		(109	)		(1,587	)		6,672
Total Structural Gap		-			76,940			2,336			21,794			32,904			(118,830	)		31,443			108,248			(54,910	)
Accumulated Gap		-			76,940			79,276			101,070			133,974			15,144			46,587			154,835			99,924

Current liquidity position

Management believes that the Group’s structural liquidity position allows for the ability to cope with further stress market conditions, as reflected by the following factors:

- Robust balance sheet

The balance sheet had a sound structure consistent with its commercial nature. Loans and advances to customers accounted for 48.1% of the consolidated total assets at the end of 2014, and were funded entirely by customer deposits comprised of interest-bearing and non-interest-bearing demand deposits and time deposits. Other sources of short-term funding include promissory notes with interest payable at maturity and reverse repurchase agreements.

We also have access to long-term funding through the issuance of unsecured bonds and structured bank bonds in the local and foreign market. As of December 31, 2014, the balance of our long-term funding outstanding totaled 45,770 million pesos with a weighted average maturity of eight years. At the end of 2012, the Group issued 10-year US dollar-denominated Senior Notes for an amount of USD 1,000,000,000, aimed to extend the duration of our liabilities and refinance indebtedness maturing in the first half of 2013. Additionally in December 2013, the Group issued 10-year US dollar-denominated Tier II Subordinated Capital Notes with an option to be prepaid in year five for an amount of USD 1,300,000,000 in order to enhance its capital structure.

F-177

- Solid regulatory framework

Under the Law of Banco de México, the Mexican Central Bank has the authority to order a percentage of the liabilities of the financial institutions that must be deposited in interest- or non-interest-bearing deposits with Banco de México. These deposits may not exceed 20% of the aggregate liabilities of the relevant financial institution. The Central Bank imposes compulsory deposits requirements on Mexican commercial banks. The amount of the compulsory deposit that each bank had to make was determined based on each bank’s pro rata share of total Mexican financial institution time deposits allocated as of May 31, 2014.

The compulsory deposits required under the terms of the Bulletin 9/2014 and 11/2014 have an indefinite term. During the time these compulsory deposits are maintained on deposit with the Central Bank, each banking institution receives interest on such deposits every 28 days. The Mexican Central Bank will provide advance notice of the date and the procedure to withdraw the balance of these compulsory deposits at such time, if any, that the compulsory deposits are suspended or terminated. These compulsory deposits represent 3.78% of the consolidated total assets at the end of 2014.

These resources are part of Central Bank’s tools to promote the healthy development of the financial system and improve the implementation of monetary policy. Other instruments used by Central Bank to support this function are deposit auctions (draining liquidity) and liquidity auctions (injecting liquidity)

Finally, it is important to note that the Central Bank acts as lender of last resort, against several classes of collateral, of which the Bank has relevant positions: sovereign debt and the compulsory deposit previously mentioned.

During 2014, the CNBV published guidelines related to the measurement, control, management and disclosure of liquidity risk, aiming to promote that banks comply with their obligations, at all times, even considering adverse conditions, reinforcing the stability of the financial system.

- Funding dynamics

As described previously, customer deposits funded all loans and advances to customers at the end of 2014. At the end of 2012, the Group issued 10-year US dollar-denominated Senior Notes for an amount of USD 1,000,000,000 and at the end of 2013, issued 10-year US dollar-denominated Tier II Subordinated Capital Notes with an option to be prepaid in year five. These issues are aimed at extending the duration of our liabilities and refinancing indebtedness.

F-178

The breakdown of the total issuances (long-term) outstanding, including the issuance of the Senior Notes and the Tier II Subordinated Capital Notes, as of December 31, 2014 is as follows:

	Amount	Issue Date	Maturity Date	Rate
Structured bank bonds	55	04/08/2014	04/07/2016	Guaranteed rate subject to Euro SX7E
Structured bank bonds	10	05/26/2014	05/26/2016	Guaranteed rate subject to Euro SX5E
Structured bank bonds	20	06/05/2014	06/08/2016	Guaranteed rate subject to Euro SX5E
Structured bank bonds	237	08/21/2014	08/24/2016	Guaranteed rate subject to HSCEI y S&P 500
Structured bank bonds	35	10/14/2014	10/14/2016	Guaranteed rate subject to Hang Seng
Structured bank bonds	248	11/19/2014	11/17/2016	Guaranteed rate subject to IBEX 35
Structured bank bonds	1,480	02/28/2014	03/02/2017	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds	87	03/13/2014	03/13/2017	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds	50	03/13/2014	03/16/2017	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds	12	03/21/2014	03/24/2017	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds	12	04/03/2014	04/06/2017	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds	812	06/27/2014	06/29/2017	Guaranteed rate subject to IBEX 35
Structured bank bonds	590	08/06/2014	08/03/2017	Guaranteed rate subject to Euro SX5E
Structured bank bonds	528	09/05/2014	09/06/2017	Guaranteed rate subject to Euro SX5E
Structured bank bonds	362	09/09/2014	09/08/2017	Guaranteed rate subject to Euro SX5E
Structured bank bonds	106	10/31/2014	11/06/2017	Guaranteed rate subject to S&P 500
Structured bank bonds	584	12/23/2014	01/04/2018	Guaranteed rate subject to Euro Stoxx Oil & Gas
Structured bank bonds	13	12/24/2014	01/04/2018	Guaranteed rate subject to Euro Stoxx Oil & Gas
Unsecured bonds	2,800	09/28/2011	09/21/2016	TIIE + 50 bps
Unsecured bonds	1,300	10/20/2011	09/21/2016	TIIE + 50 bps
Unsecured bonds	979	10/20/2011	11/23/2017	9.05%
Unsecured bonds	1,700	03/22/2011	03/09/2021	8.91%
Senior notes	14,482	11/09/2012	11/09/2022	4.125%
Tier II Subordinated Capital Notes	19,032	12/27/2013	01/30/2024	5.95%
Mortgage-backed bonds	223	09/22/2016	05/25/2032	5.00%
Mortgage-backed bonds	13	09/22/2016	05/25/2032	6.40%
	45,770

F-179

6.3 Methodologies

6.3.1. Trading

The standard methodology applied to trading activities by the Group in 2014 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 are incorporated into the level of risk assumed. Specifically, the Group uses data derived from the 521 days preceding 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 on a daily basis to management was 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.

Certain of these limitations are corrected by using stressed VaR (see below), by calculating a VaR with exponential decline and by applying conservative valuation adjustments.

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.

In addition, certain warning triggers are in place for the scenarios, based on the historical results of those scenarios and on the capital associated with the portfolio in question. If the levels triggering the warning are surpassed, the persons responsible for managing the portfolio in question are informed so that they can take the appropriate measures. Furthermore, the results of the stress tests, and any possible excesses over the warning levels set, are reviewed regularly by the comprehensive risk management committee, which, if it considers it necessary, informs management.

The market risk area, in accordance with the principle of independence of the business units, also monitors daily the positions of each unit and the global positions, through an exhaustive control of changes in the portfolios, the aim being to detect possible incidents and correct them immediately.

The positions are traditionally used to quantify the net volume of the market values of the portfolio transactions, grouped by main risk factor, considering the delta value of any futures and options that might exist. All the risk positions can be expressed in the base currency of the unit and in the reporting currency.

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Market risk sensitivity measures are those which measure the changes (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 estimates using partial derivatives or through a complete revaluation of the portfolio.

Also, the daily preparation of an income statement is an excellent risk indicator, insofar as it allows us to identify the impact of changes in financial variables on the portfolios.

Particularly worthy of note is the control of derivatives and credit management activities which, due to their atypical nature, is performed daily using specific measures. In the case of derivatives, a control is conducted of sensitivities to fluctuations in the price of the underlying (delta and gamma), in volatility (vega) and in time (theta). For credit management activities, measures such as sensitivity to spread, jump-to-default and risk concentrations by rating level are reviewed systematically.

With respect to the credit risk inherent in the trading portfolios, and in keeping with the recommendations made by the Basel Committee on Banking Supervision and with current regulations, an additional 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 and derivatives on bonds (forwards, options, etc.). The method used to calculate the IRC is based on direct measurements on the loss distribution tails at the appropriate percentile (99.9%) over a one-year time horizon. The Monte Carlo method is used and one million simulations are applied.

6.3.2 Structural market risk

6.3.2.1 Structural interest rate risk

The Group analyzes 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 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 both on and off-balance-sheet assets and liabilities. This analysis facilitates a basic snapshot of the balance-sheet structure and enables concentrations of interest rate risks in the various maturity buckets to be detected. Additionally, it is a useful tool for estimating the possible impact of potential changes in interest rates on the Group’s net interest margin and market value of equity.

The flows of all the on- and off-balance-sheet aggregates must be broken down and placed at the point of repricing or maturity. The duration and sensitivity of aggregates that do not have a contractual maturity date are analyzed and estimated using an internal model.

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Net interest margin (NIM) sensitivity

The sensitivity of the net interest margin measures the change in the expected net interest income for a specific period (12 months) given a parallel 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.

6.3.2.2 Structural equity risk

These activities are monitored by measuring positions, VaR and results on a monthly basis

6.4 Management framework

Organizational and governance structure

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 management.

•   Independence of the risk function from the business.

•   Clear definition of powers.

•   Risk measurement.

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•   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.

The market risk unit performs these functions:

•   Manage market risks.

•   Transpose, adapt and internalize corporate policies and procedures.

•   Define and document policies and lead projects.

•   Apply the decision-making policies and systems.

•   Contribute criticism, best practices, knowledge and proximity to customers/markets.

•   Assume greater responsibilities in risk decision-making and control.

•   Measure, analyze and control market risk within the scope of their responsibilities.

Limit control system

Market and liquidity risk limit setting is a dynamic process that depends on the Group's risk appetite level. This process forms part of the annual limits plan, which is promoted by the Group's management and is led by the market and liquidity risk area.

1. Limit setting

The market risk limits applied at the Group are set on the basis of different metrics and seek to cover all activities subject to market risk from multiple perspectives, by applying conservative criteria. The main limits are:

Trading limits

•   VaR limits.

•   Equivalent and/or nominal position limits.

•   Interest rate sensitivity limits.

•   Vega limits.

•   Limits on delivery risk on short securities positions (fixed income and equity).

•   Limits aimed at restricting the volume of effective losses or protecting profits already generated in the period.

•   Credit limits.

•   Limits on origination transactions.

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On-balance-sheet structural interest rate risk

•   Limit on net interest margin sensitivity at one year

•   Limit on the sensitivity of the market value of equity

•   Limit on liquidity position

Structural foreign currency risk

• Net position in each currency

On trading positions

• Value at risk (VaR)

These general limits are complemented by other sub-limits. Accordingly, the market risk area has a sufficiently granular limit structure to effectively control the various market risk factors to which the Group is exposed. Thus, it monitors daily the positions through an exhaustive control of changes in the portfolios, the aim being to detect possible incidents and correct them immediately. Also, the daily preparation of an income statement by the market risk area is an excellent risk indicator, insofar as it allows us to identify the impact of changes in financial variables on the portfolios.

2. Limit structure

The comprehensive risk management committee approves limits at business level in an annual limit setting process. These limits are requested by the head of business on the basis of the specific nature of the business and upon the achievement of the budget set, seeking consistency between the limits and the risk-return ratio.

Sub-limits to the aforementioned activities are set on the basis of the particular characteristics of the products and of the internal organization of the business, in order to increase the control of the positions held in each business.

Sub-limits are set by risk factor, currency position, equity position, sensitivity by currency and maturity, etc.

3. Limit compliance and control

The business units must comply with the approved limits at all times. Any possible excesses would trigger a series of actions by the market risk area or the comprehensive risk management committee aimed at leading to reductions in risk levels and a stricter risk control or executive actions which could oblige the risk takers to reduce the levels of risk assumed.

The persons in charge of market risk notify the heads of business of excesses. The heads of business must explain the reasons for the excess and, where appropriate, provide an action plan to remedy the situation. The business unit must reply, in writing and on the same day, to the requirement made of it to either reduce the position to within the limits in force or to detail a strategy that justifies an increase in the limits.

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7. Liquidity and funding risk

7.1 Introduction to the treatment of liquidity and funding risk

Liquidity and funding risk management has always been a basic element of the Group's business strategy and a fundamental cornerstone, together with capital, on which the strength of its balance sheet rests.

Liquidity has become increasingly important in recent years due to the growing stresses in the financial markets in the framework of a global economic crisis. This scenario has emphasized the importance of banks having appropriate funding structures and strategies to ensure their activity.

During this period of stress, the Group has enjoyed an adequate liquidity position, at reasonable costs.

The Group is responsible for covering the liquidity needs arising from its current and future activity, by means of either stable deposits taken from its customers in its area of influence, or through recourse to the wholesale markets where it operates. This is a funding structure that is most effective in situations of high market stress as it prevents difficulties in one area from affecting funding capacity in other.

7.2 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.

Corporate liquidity management is based on the following principles:

•   Decentralized liquidity model.

•   High proportion of customer deposits, as a result of a commercial balance sheet.

•   Diversification of wholesale funding sources by: instruments/investors; markets/currencies; and maturity periods.

•   Closely monitored 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 the Group, it was necessary to develop a single management framework resting on the following three cornerstones:

•   A sound organizational and governance model to ensure that management is involved in the decision-making process and is included in the global strategy.

•   An in-depth balance-sheet analysis and liquidity risk measurement to support the decision-making process and the control thereof (including forecast).

•   A management approach adapted in practice to the liquidity needs of each business.

7.2.1 Organizational and governance model

Decisions relating to all structural risks, including liquidity risk, are made though the ALCO within the framework and limits approved in the comprehensive risk management committee.

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Following the aforementioned principles, the ALCO establishes strategies to guarantee and/or anticipate the funding requirements of the commercial 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 respective limits set.

In line with governance best practice, the Group has traditionally maintained 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).

This governance model operates within the Group's risk appetite framework, which responds to the demands from market regulators and participants, as a result of the financial crisis, for banks to strengthen their risk management and control systems.

With respect to the liquidity risk profile and appetite, the Group's strategy when conducting its businesses aims to structure the balance sheet to make it as resilient as possible to potential liquidity stress scenarios. The liquidity appetite metrics are therefore structured by applying, on an individual basis, the principles of the Group's liquidity management model, with specific levels for the structural funding ratio and minimum liquidity horizons under various stress scenarios, as detailed in the following sections.

7.2.2 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 requirements projection) and of the accessibility and situation of the funding sources in wholesale markets (availability of liquidity).

Its aim is to ensure that the Group maintains optimum liquidity levels to cover its short, medium and long-term liquidity requirements with stable funding sources, optimizing the impact of funding costs on the consolidated income statement.

This requires the monitoring of the balance sheet structure, the preparation of short, medium and long-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 very severe but very unlikely 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 contingency plan, 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, in which Mexican Regulation is already adopted.

The measurements, metrics and analyses used by the Group in liquidity risk management and control are shown in greater detail below:

Methodology for liquidity risk monitoring and control

The liquidity risk measures adopted by the Group pursue the following goals:

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•   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.

Two kinds of basic metrics are used to control liquidity risk: short-term and structural. 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 potential 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.

The various analyses conducted using the liquidity gap as a basis includes 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 Group set a 90-day survival horizon for local currency and all currency consolidated balance and a 30-day survival horizon for foreign currency.

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.

The Group 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.

The Group prepares its 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 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.

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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 Group generally considers three different scenarios: systemic, idiosyncratic and hybrid which, given the Group's characteristics, have been adapted to also take into account a local and a global systemic crisis. These scenarios constitute the minimum standard analysis established to be reported to management. Also, the Group develops ad-hoc scenarios which replicate major historical crises or the liquidity risks specific to its particular environment.

The fundamental characteristics of the three base scenarios are as follows:

•   Idiosyncratic crisis: affecting only the entity and not its environment. This is basically reflected in wholesale funds and in retail deposits, with various percentages of outflows based on the severity defined.

•   Systemic crisis: a crisis that affects the whole financial system, reducing the possibility of using local sources to face short-term obligations, as well as limited possibilities of buyers for asset sell off.

•   Hybrid crisis: in this scenario some of the factors described in the preceding paragraphs are stressed, paying particular attention to the most sensitive aspects from the standpoint of the Group’s liquidity risk.

These metrics and scenario definitions are directly related to the definition and execution of the liquidity contingency plan that is the responsibility of financial management.

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.

7.2.3 Management tailored to business needs

The Group performs its liquidity management in order to finance its recurring activities with the appropriate terms and prices. In practice, in keeping with the funding principles mentioned above, the 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 plan for the year.

•   year-round monitoring of the actual changes in the balance sheet and in the funding requirements of the businesses, which results in the relevant updates of the plan.

•   Developing the relationship with investors 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 Group is self-sufficient in terms of their structural funding and do not require support from its Parent.

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7.3 Funding strategy and evolution of liquidity in 2014

7.3.1 Funding strategy

In the last 5 years, the Group's funding activity has increased the amount of medium - and long-term sources of funding; aiming to increase diversification while keeping reasonable cost control.

The Group has a series of general trends in its policies implemented for its funding and liquidity management strategies, namely:

•   Strong generation of liquidity from the commercial business due to the moderate growth of Mexican economic activity and the greater emphasis on attracting customer funds.

•   Maintenance of adequate, stable medium and long-term wholesale funding levels.

•   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.

Thanks to all these developments, based on a sound liquidity management model, the Group currently enjoys a very robust funding structure. The basic features of this distinguishing structure are as follows:

•   High proportion of customer deposits (not including reverse and repurchase agreements) in a predominantly commercial balance sheet.

Customer deposits are the Group's major source of funding. These deposits represent around 52.5% of the Group's total liabilities and at the end of 2014 they accounted for 97.3% of loans and advances to customers.

•   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 13.7% of the Group's retail funding (including deposits from Central Bank and credit institutions) and enables it to comfortably cater for the loans and advances to customers not financed with customer deposits (commercial gap).

7.3.2 Evolution of liquidity in 2014

At the end of 2014, in comparison with 2013, the Group reported:

•   An increase in loans and advances to customers of 18.8% in 2014 compared with 2013.

•   An increase in the ratio of loans and advances to customers to consolidated total assets from 44.9% to 48.1%. This figure mirrors the strong commercial nature of the Group's consolidated balance sheet.

•   An increase in the loan-to-deposit (LTD) ratio, which stood at 102.8%, up from 98.8% at December 2013. These figures show the Group´s' capacity to fund loans with retail deposits (strong commercial activity).

•   Lastly, the Group's structural surplus (i.e. the excess of structural funding resources – customer deposits, medium and long-term funding and capital – over structural liquidity requirements – loans and advances to customers –) stood at 140,154 million pesos at the end of 2014.

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8. Operational risk

8.1 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 uses the basic approach provided for under Basel II standards. The regulatory capital for operational risk is calculated under Mexican Banking GAAP.

8.2 Corporate governance and organizational model

The operational risk management structure is based on the knowledge and experience of the executives and professionals of the Group, with particular importance being attached to the role of the operational risk officer.

The Group oversees and controls technology and operational risk through its governing bodies. The Group's Board of Directors and the comprehensive risk management committee periodically address significant aspects concerning the management and mitigation of operational risk.

In addition, further to approval by the comprehensive risk management committee, the Group establishes operational risk limits on an annual basis. The established risk appetite must fall within the low and medium-low risk profiles, which are defined in accordance with certain ratio levels. Limits are established based on the net loss to gross income ratio. An assessment is also performed of the operational risk management status in accordance with certain internal indicators.

8.3. Risk management model

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, CNBV, 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 management and the Group’s areas/units.

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• 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.

Model implementation

The main functions, activities and 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.

• Creation of an operational risk department.

• Training and experience sharing: communication of best practices within the Santander 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.

With regard to technology risk management, the corporate function continues to strengthen significant aspects, such as the following:

• 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.).

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8.4 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.

8.5 Business continuity plan

The Group has a business continuity management system (BCMS) to ensure the continuity of the business processes of its entities in the event of a disaster or serious incident. This basic objective consists of the following:

•   Minimizing possible damage to persons, as well as adverse financial and business impacts for the Group due to an interruption of normal business operations.

•   Reducing the operational effects of a disaster by supplying a series of pre-defined, flexible guidelines and procedures to be employed in order to resume and recover processes.

•   Resuming time-sensitive business operations and associated support functions, in order to achieve business continuity, stable earnings and planned growth.

•   Re-establishing the time-sensitive technology and support operations of the business if existing technologies are not operational.

•   Protecting the public image of, and confidence in, the Group.

•   Meeting the Group's obligations to its employees, customers, shareholders and other interested third parties.

8.6 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, Therefore, in 2014, the control model for this business continued to be improved, with particular emphasis on the following points:

•   Analysis of the individual operations of each treasury operator to detect any possible anomalous conduct.

•   Improvement of the monitoring of communications with counterparties through the various authorized arrangement methods.

•   Implementation in progress of a new tool enabling compliance with new record-keeping requirements.

•   Reinforcement of controls on contributions of prices to market indices.

The business is also undergoing a global transformation, combined with the modernization of the technology platforms and operating processes involving a robust control model that enables the operational risk associated with this activity to be reduced.

Operational risk information system

The Group has a corporate information system that supports the operational risk management tools and facilitates the information and reporting functions and needs.

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The system offers event recording modules, risk mapping and assessment, indicators, mitigation and reporting systems.

Information is specifically prepared on the following aspects:

• The Group’s operational risk management model.

• The operational risk management scope.

• Analysis of the internal event database and the database of significant external events.

• Analysis of the most significant risks arising from the operational and technology risk assessment exercises.

• Evaluation and analysis of risk 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 comprehensive risk management committee, management, regulators, rating agencies, etc.

9. Compliance and reputational risk

9.1 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.

9.2 Corporate governance and organizational model

It is the responsibility of the Group’s Board of Directors, as part of its supervisory function, to approve the Group’s general risk policy. In the compliance and reputational risk area, the board is in charge of the Group’s general code of conduct, the policy on the prevention of money laundering and terrorist financing and the product and service marketing policy.

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The comprehensive risk management committee proposes the Group’s risk policy to the board. Also, as the body responsible for risk management, it measures reputational risk in its area of activity and decision-making.

The audit committee 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 Group´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 is to inform the board on an ongoing basis, mainly through the audit committee which reported on the following dates: January 22, April 21, July 21 and October 20 and the compliance committee, in which the head of compliance reported on, the following dates: January 20, April 14, July 14 and October 13.

Lastly, the committees for 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) are collective bodies with basic competencies.

The organizational model revolves around the compliance and reputational risk area, 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 regulatory compliance risk management office, the reputational risk management office and the department for the prevention of money-laundering and terrorist financing.

9.3 Risk appetite model

The Group's risk appetite model is characterized by the following two elements:

•   The objective of the management performed by the Group is to minimize the incidence of compliance and reputational risk. Accordingly, systematic monitoring is performed using the compliance and reputational risk indicator resulting from the assessment matrices prepared.

•   Quarterly monitoring of risk appetite is performed.

Data of the communications received from the various supervisors each month is fed into the assessment matrix. Each of these communications is allocated a score depending on the risk they represent in terms of: (i) costs due to fines; (ii) process reorganization costs; and (iii) the impact on the brand and reputational risk. These assessments are compared with ratings assigned by internal audit with respect to compliance.

9.4 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 management on these matters and fostering a culture of compliance, all as part of an annual program 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.

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The integrated risk control 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.

The general code of conduct is the central plank of the Group’s compliance program. 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 manuals1.

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.

It is the role of the compliance officer, under the supervision of the audit committee and the compliance committee to ensure the effective implementation and monitoring of the general code of conduct.

The compliance committee 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 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 compliance committee is composed of the Executive Chairman and Chief Executive Officer, Vice President of Commercial Banking, Vice President of Administration and Finance, Deputy Directors of General Intervention and Control, Technology, Operations and Quality and Legal and Internal Audit Executive Directors.

The Group’s compliance department has been entrusted with the following compliance and reputational risk management functions:

1. Implementing the Group’s general code of conduct and other codes and industry-specific manuals.

2. Supervising the training activities on the compliance program conducted by the human resources area.

3. Directing investigations into any possible breaches, with help from internal audit, and propose the appropriate penalties to the related committee.

4. Cooperating 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. Receiving and handling the complaints made by employees or third parties through the complaints channel or the whistleblowing facility.

6. Advising on the resolution of doubts arising from the application of the codes and manuals.

7. Preparing an annual report on the application of the compliance program for submission to the audit committee and compliance committee.

8. Regularly reporting to the Deputy General Counsel, to the audit committee and compliance committee and the Board of Directors on the implementation of the compliance policy and the compliance program.

9. Assessing, every year, the changes that might be appropriate to make to the compliance program, particularly in the event of detecting unregulated risk areas and improvable procedures, and propose such changes to the audit committee and compliance committee.

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As regards the industry-specific codes and manuals, the focus of the compliance program is on the following operational spheres, inter alia:

• Prevention of money-laundering and terrorist financing.

• 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 must observe, and which are prepared in conformity with the provisions prescribed in Article 115 of the Credit Institutions Law, nevertheless the Group complies with other local standards of strict application to the Group in terms of prevention of money laundering and terrorist financing. We also observe the principles standards 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.

1 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.

Governance and organization

The organization of the prevention of money-laundering and terrorist financing unit (UPLDyFT, using the Spanish acronym) function is based on three areas: the monitoring, the analysis and the regulations and risk management. The main function is to establish, coordinate and supervise the systems and procedures for the prevention of money-laundering and terrorist financing.

Also, there are persons responsible for the prevention of money-laundering and terrorist financing at different areas. In each case their role is to provide support to the UPLDyFT based on their proximity to the customer and transactions.

The Group has established corporate systems at all its 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 (Spain) 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 programs 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.

Marketing of products and services

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 policies aim to establish a corporate framework 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).

Governance and organization

The management of the risk that might arise from the incorrect selling of products or services is organized by the marketing committee and the reputational risk management office.

The marketing committee is the Group’s highest decision-making body regarding the approval of products and services. Chaired by the Executive Management of Competitive Strategy, it is composed of representatives of the following divisions: intervention and control management, operation technology and quality, risk, human resources, organization and costs, legal, internal control unit, internal audit, commercial banking, global wholesale banking, private banking and credit individual banking.

The marketing committee pays 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.

• The product or service meets the requirements of the marketing policies and the local regulations.

Marketing committee is the organ responsible for the approval of new products 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 Group and the customer.

The consultative committee is the advisory body of the marketing committee and consists of area representatives who provide an insight into risks, regulations and markets. The consultative committee may recommend the review of products affected by market changes, impaired solvency (sectors or companies) or changes in the Group's market perception at medium and long-term.

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The monitoring committee is the Group's decision-making body regarding the monitoring of products and services. This committee is chaired by the Executive Management of Competitive Strategy and is attended by internal audit, legal advisory, compliance, customer care and the business areas concerned (with the ongoing representation of the commercial network). It meets weekly, and considers and resolves specific issues relating to the selling of products and services.

The purpose of the reputational risk management office 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 Group and impact on customers; and (ii) to monitor products over their life cycle.

A reputational risk management office has been established, which is responsible for promoting corporate culture and for ensuring that products are approved and monitored in the respective 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 compliance department. The compliance department performs the following main functions in relation to the rules of conduct in the securities markets:

1. Registering and controlling sensitive information that is known by and/or generated at the Group;

2. Keeping lists of the securities affected and the initiated persons, and monitor transactions with these securities;

3. Monitoring transactions with restricted securities depending on the type of activity, portfolios or groups to which the restriction applies;

4. Receiving and attending to notifications of and requests for authorization of transactions for own account;

5. Controlling transactions for own account of the persons subject to compliance with the code of conduct;

6. Managing breaches;

7. Resolving any issues concerning the code of conduct in the securities markets ;

8. Recording and resolving conflicts of interest and the situations that might give rise to them;

9. Assessing and managing any conflicts that might arise in the analysis activity;

10. Maintain the files required to control compliance with the obligations established in the code of conduct in the securities markets;

11. Develop ordinary contact with the regulators and financial authorities;

12. Organizing training and, in general, perform the actions required to apply the code of conduct in the securities markets; and

13. Analyzing actions that are suspected of constituting market abuse and, where appropriate, reporting them to the supervisors.

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Relationships with supervisors and dissemination of information to the markets

Compliance department is responsible for responding to the information requirements of the regulatory and supervisory bodies, 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. Audit committee and compliance committee are informed of the main issues at each of its meetings.

10. Capital

10.1 Compliance with the new regulatory framework

The new Basel III regulatory framework implemented in Mexico since January 2013 established new minimum capital levels in a very significant manner, both quantitatively (increased minimum requirements for Core Capital and Tier 1 Basic Capital, plus higher deductions from capital base) and from a qualitative point of view (higher quality of required capital). The Basel III measures implemented in January 2013 on capital management had no significant effect on the capital index of the Bank due to its strong capital structure.

From the capital standpoint, Basel III redefines what is considered to be available capital at financial institutions (including new deductions and raising the requirements for eligible equity instruments), increases the minimum capital requirements, requires financial institutions to operate permanently with capital buffers, and adds new requirements in relation to the risks considered.

The Group currently has robust capital ratios, in keeping with its business model and risk profile, which, coupled with its substantial capacity to generate capital organically and the gradual implementation timetable envisaged for the new requirements in the legislation, place it in a position to comply with Basel III.

With regard to credit risk, since December 2013, the Group began calculating the capital requirement using a basic approach of internal rating model for loan portfolios authorized by the CNBV: GBM, financial Institutions (banks) and other individualized customers. Currently these models are in the process of authorization by CNBV for the application of an advance approach of internal rating model.

For market risk, the calculation of the capital requirement is made under the standard method according to the provisions established by CNBV.

With respect to operational risk, the CNBV considers the application of the Basic Indicator method for calculating the capital requirement for this type of risk.

Disclosure rules (Pillar III) are determined by the CNBV and are mandatory for all financial institutions, with the principles of this Pillar III met, on: a) disclose information to allow market participants to assess key information relating to capital, risk exposures and capital adequacy of financial institutions, b) inform the market in time and reliably regarding the level of capitalization of financial institutions and c) the existence of a coherent scheme and comprehensible disclosure that facilitates making comparisons.

Parallel to the implementation of the advanced approaches that the CNBV allows, the Group is undertaking a process of continuous training on Basel rules at all levels of the organization, covering in particular the areas most involved in the changes resulting from the adoption of new international capital standards.

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10.2 Capital planning and stress tests

Capital stress tests have gained particular significance as a tool for the dynamic evaluation of banks' risk exposure and capital adequacy. A new forward-looking assessment model is becoming a key component of capital adequacy analysis.

This forward-looking assessment is based on both macroeconomic and idiosyncratic scenarios that are highly improbable but nevertheless plausible. To conduct the assessment, it is necessary to have robust planning models capable of transferring the effects defined in the projected scenarios to the various elements that have a bearing on the adequacy of a bank's capital.

The ultimate goal of capital stress tests is to perform a complete evaluation of banks' risk exposure and capital adequacy in order to determine any possible capital requirements that would arise if banks failed to meet the regulatory or internal capital targets set.

During 2013, the Mexican Central Bank performed stress tests to assess the Mexican financial system’ resilience to exogenous shocks in risk factors. A high number of simulation scenarios with varying levels of severity –representing extreme, albeit plausible situations− made it possible to assess the level of the system’s overall exposure, as well as that of brokerage firms and banks. Results show that banks and brokerage firms would maintain reasonable solvency levels. Nevertheless, market stress tests showed that, in extreme albeit plausible scenarios, some financial institutions could suffer significant losses. Last, in credit stress tests, a number of banks displayed capital adequacy ratios below the minimum level of 10.5 percent in both years.

The Group underwent the aforementioned regulatory stress tests in which it proved its strength and solvency in adverse and severe macroeconomic scenarios. All the stress tests evidenced that, thanks mainly to the Group's business model, the Group will continue to generate profit for its shareholders and to comply with the most stringent regulatory requirements.

New 2014 financial reform

Since the new 2014 financial reform, the CNBV will require two stress test exercises:

1) Regulatory scenarios

The new financial reform in Mexico empowers the CNBV to establish general provisions under which the banks assess, at least once a year, if the capital that have be sufficient to cover possible losses arising from the risks they may incur, including those in which prevailing adverse economic conditions.

The CNBV establishes at least two regulatory scenarios: a base in which to evaluate the performance of banks under the expected macroeconomic assumptions, considering the projections of the Central Bank, the Secretariat of Finance and Public Credit (SHCP) and the consensus of experts (Private Initiative), and other adverse to consider a set of unfavorable macroeconomic projections and risk variables to assess their strength in an adverse and possible scenario.

The banks will consider, for each regulatory scenario, assumptions about macroeconomic variables and other risk variables such as expected loss for the portfolio of loans, capital charges for market positions and funding rates that the CNBV provide them, which should be considered in the estimates of the financial statements.

Some of macroeconomic variables that the CNBV can provide are: 28 day TIIE; benchmark interest rates in US dollars; inflation rates; exchange rates for foreign currency transactions; unemployment rates; real changes of GDP; changes in the IPC and non-oil exports.

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The banks also will present sensitivity exercises considering the assumptions that provides the CNBV, among others, may be: the breakdown of the 10 counterparty or group of counterparties that represent larger common risk and its effect on the capitalization ratio; and the withdrawal of funds of less than 30 days by the 10 largest depositors of banks and their effect on liquid assets.

The CNBV establishes that if as a result of the assessment of capital adequacy under regulatory scenarios, the capitalization ratio is not sufficient for the bank to be classified as Category I, and it shall submit a preventive action plan, which must be approved by the CNBV.

These regulatory exercises, beyond those already made in 2013 and 2014, are officially required from January 2015.

2) Self-assessment of capital adequacy

In addition to the regulatory scenarios and in order that banks have, at all times, an adequate level of capital relative to their risk profile, banks must make at least once a year, an assessment of capital adequacy to determine if the net capital is sufficient to cover any losses they may face in different scenarios, including those in which prevailing adverse economic conditions.

The assessment of capital adequacy must include an estimate of capital that reflects the current and future level of the bank, which would be associated with its risk profile. If as a result of the assessment of capital adequacy the bank identifies missing capital, the bank must have a capitalization plan in order to cover that missing capital. If CNBV considers that missing capital determined by the bank is not sufficient may require maintaining a higher level of capital requirements.

Since June 2016, banks must submit to CNBV an annual report on the results of the assessment of capital adequacy, which must be signed by the Chief Executive Officer.

10.3 Economic capital

Economic capital is the capital required, based on an internally-developed model, to support all the risks of the business activity with a given solvency level. In the case of the Group, the solvency level is determined by  the AA-/A+ long-term target rating, which results in the application of a 99.95% confidence level (higher than the regulatory 99.90%) for the purpose of calculating the required capital.

The Group's economic capital model complements the regulatory approach by including in its measurement all the significant risks incurred in the Group's operations. Accordingly, it considers risks such as concentration risk, structural interest rate risk, business risk, pension risk and other risks outside the scope of regulatory Pillar I capital requirements.

Comparison of regulatory and economic capital requirements is distorted because there are certain risks, such as goodwill, which for regulatory purposes are presented as deductions from the eligible capital base instead of being included as capital requirements. Similarly, the economic capital required for these risks can be presented as deductions from the internal capital base (following the regulatory method) or as part of the economic capital requirements, which is the preferred option within the Group. Furthermore, as we have mentioned above, measurement of economic capital includes certain risks that are not present in the regulatory approach (the so-called Pillar II risks).

The concept of diversification is fundamental for the proper measurement and understanding of the Group´s risk profile. The fact that the Group conducts its business activities 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,

F-201

portfolio, customer or 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 concentration. Any 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 portfolio and business risk.

With regards to the capital adequacy, in the context of Pillar II 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. 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 uses RORAC methodology in its risk management, 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 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.

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.

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In 2014 value creation was 7,843 million pesos compared to a value creation of 9,706 in 2013. The Group’s results and, therefore, the RORAC and value creation figures were shaped by the weakness of the economic cycle of México.

49. Consolidated Subsidiaries

a) Composition of the Group

The subsidiaries of the Group, all of which have been included in the consolidated financial statements at 31 December 2013, are as follows:

Name of subsidiary	Principal activity	Proportion of ownership interest held by the Group	Proportion of voting power held by the Group
Banco Santander (México), S.A.	Banking	99.99114%	100%
Casa de Bolsa Santander, S.A. de C.V.	Brokerage house	99.96681%	100%
Santander Consumo, S.A. de C.V.	Credit card loans	99.99999%	100%
Santander Hipotecario, S.A. de C.V.	Mortgage loans	100.00000%	100%
Santander Vivienda, S.A. de C.V.	Mortgage loans	100.00000%	100%
Fideicomiso 361 (HICOACB06U y HICOACB06-2U)	Securitization trust	100.00000%	100%
Instituto Santander Serfin, A.C.	Not-for-profit (Educational institute)	99.99999%	100%
Santander Holding Vivienda, S.A. de C.V.	Intermediate holding	100.00000%	100%
Banco Santander, S.A. Fideicomiso 100740	Settlement trust	100.00000%	100%
Fideicomiso GFSSLPT, Banco Santander, S.A.	Settlement trust	100.00000%	100%
Santander Servicios Corporativos, S.A. de C.V.	Services	100.00000%	100%
Santander Servicios Especializados, S.A. de C.V.	Services	100.00000%	100%

The subsidiaries of the Group, all of which have been included in the consolidated financial statements at 31 December 2014, are as follows:

Name of subsidiary	Principal activity	Proportion of ownership interest held by the Group	Proportion of voting power held by the Group
Banco Santander (México), S.A.	Banking	99.99114%	100%
Casa de Bolsa Santander, S.A. de C.V.	Brokerage house	99.96681%	100%
Santander Consumo, S.A. de C.V.	Credit card loans	99.99999%	100%
Santander Hipotecario, S.A. de C.V.	Mortgage loans	100.00000%	100%
Santander Vivienda, S.A. de C.V.	Mortgage loans	100.00000%	100%
Fideicomiso 361 (HICOACB06U y HICOACB06-2U)	Securitization trust	100.00000%	100%
Instituto Santander Serfin, A.C.	Not-for-profit (Educational institute)	99.99999%	100%
Santander Holding Vivienda, S.A. de C.V.	Intermediate holding	100.00000%	100%
Banco Santander, S.A. Fideicomiso 100740	Settlement trust	100.00000%	100%
Fideicomiso GFSSLPT, Banco Santander, S.A.	Settlement trust	100.00000%	100%
Santander Servicios Corporativos, S.A. de C.V.	Services	100.00000%	100%
Santander Servicios Especializados, S.A. de C.V.	Services	100.00000%	100%

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The total non-controlling interest as of December 31, 2014 is 10 million pesos, which is attributed to Banco Santander (México), S.A.

Information in respect to non-controlling interest is presented in Note 27.

b) Change in the Group’s ownership interest in a subsidiary

During 2013, the Group disposed of 100% of its interest in Gestión Santander. The proceeds on disposal of 3,179 million pesos were received in cash. This sale generated an after-tax profit of 1,944 million pesos. This amount was recognized in the consolidated income statement as Profit from discontinued operations (net) (see Note 33).

During 2014, the Group did not dispose of any subsidiary.

c) Significant restrictions

The Group has the following significant restrictions on its ability to access or use the assets and settle the liabilities of the Group as of December 31, 2014:

•   Compulsory deposit with Central Bank

Compulsory deposit relates to a minimum balance financial institutions are required to maintain with the Central Bank based on a percentage of deposits received by third parties. The amount of this compulsory deposit is 35,872 million pesos (see Note 7).

•   Repurchase agreements

17,370 million pesos of Mexican government securities (M Bonds, BONDES, UMS and other debt securities) have been pledged in connection with repurchase agreements operations.

•   Securities loans

14,432 million pesos of Mexican government securities (CETES and UDIBONDS) have been pledged in connection with securities loans transactions.

567 million pesos of Equity Instruments have been pledged in connection with securities loans transactions in which the lender is the Group.

•   Collaterals in derivatives transactions traded in organized markets

439 million pesos equity instruments classified as held for trading have been pledged in connection with derivatives traded in organized markets (see Note 32).

173 million pesos of loans and advances to credit institutions have been pledged in connection with derivatives transactions in organized markets (see Note 32).

2,243 million pesos of loans and advances to customers have been pledged in connection with derivatives traded in organized markets (see Note 32).

55 million pesos of customer deposits have been received in connection with derivatives transactions traded in organized markets.

•   Collaterals in OTC derivatives transactions

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20,758 million pesos of loans and advances to credit institutions have been pledged in connection with OTC derivatives transactions (see Note 32).

453 million pesos of debt instruments classified as held for trading have been pledged in connection with OTC derivatives transactions (see Note 32).

6,033 million pesos of customer deposits have been received in connection with OTC derivatives transactions.

•   Earnings distribution

The Group has restriction on earnings distribution related to the legal reserve of 10,022 million pesos that include 386 million pesos in legal reserve of the Group on an individual basis (see Note 29) and to the unrealized gains on financial instruments under Mexican Banking GAAP recognized in equity of 266 million pesos (see Note 45.e.). In addition, the Group is restricted from distributing dividends that will result in noncompliance with minimum capitalization requirements established by the CNBV (see Note 30).

•   Loans to other entities within the Group

The Bank granted a loan to Santander Consumo, S.A. de C.V., Santander Hipotecario, S.A. de C.V. and to Santander Vivienda, S.A. de C.V. for 33,689 million pesos, 27,263 million pesos and 2,234 million pesos, respectively, which were eliminated from the consolidated balance sheet for consolidation purposes.

d) Financial support

The Group did not give any financial support to a consolidated structured entity during 2013 and 2014.

50. Joint operations

As of December 31, 2013 and 2014 the Group has a commercial alliance with Elavon Mexico in order to share revenues and expenses jointly related to the merchant services. This commercial alliance is non-material to the Group’s consolidated financial statements.

*****

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

CONDENSED PARENT COMPANY ONLY BALANCE SHEETS AS OF December 31, 2013 and 2014

(Millions of pesos)

ASSETS	12/31/2013	12/31/2014	LIABILITIES AND EQUITY	12/31/2013	12/31/2014
CASH AND BALANCES WITH CENTRAL BANK	-	-	FINANCIAL LIABILITIES HELD FOR TRADING:	-	-
			Trading derivatives
			Short positions
FINANCIAL ASSETS HELD FOR TRADING:	596	554
Debt instruments	596	254	OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH	-	-
Equity instruments		300	PROFIT OR LOSS:
Trading derivatives			Deposits from Central Bank – Reverse repurchase agreements
			Deposits from credit institutions – Reverse repurchase agreements
			Customer deposits – Reverse repurchase agreements
OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH
PROFIT OR LOSS:	-	-	FINANCIAL LIABILITIES AT AMORTIZED COST:	210	191
Loans and advances to credit institutions - Repurchase agreements			Deposits from Central Bank
Loans and advances to customers - Repurchase agreements			Deposits from credit institutions
			Customer deposits
			Marketable debt securities
AVAILABLE-FOR-SALE FINANCIAL ASSETS:	-	-	Dividends payable
Debt instruments			Other financial liabilities	210	191
Equity instruments
			HEDGING DERIVATIVES	-	-
LOANS AND RECEIVABLES:	417	522	LIABILITIES ASSOCIATED WITH NON-CURRENT ASSETS
Loans and advances to credit institutions	417	522	HELD FOR SALE	-	-
Loans and advances to customers
Debt instruments			LIABILITIES UNDER INSURANCE CONTRACTS	-	-
			PROVISIONS:	-	-
HEDGING DERIVATIVES	-	-	Provisions for pensions and similar obligations
			Provisions for tax and legal matters
			Provisions for off-balance sheet risk
NON-CURRENT ASSETS HELD FOR SALE	-	-	Other provisions
			TAX LIABILITIES:	771	-
INVESTMENTS IN SUBSIDIARIES	92,202	101,421	Current	771
Banco Santander (México) S.A.	90,631	100,415	Deferred
Others	1,571	1,006
REINSURANCE ASSETS	-	-	OTHER LIABILITIES	23	31
			TOTAL LIABILITIES	1,004	222
TANGIBLE ASSETS	-	-
Property, plant and equipment			SHAREHOLDERS' EQUITY:	92,979	102,538
			Share capital	25,658	25,658
INTANGIBLE ASSETS:	-	-	Share premium	11,415	11,415
Goodwill
Other intangible assets			Accumulated reserves	41,625	52,180
			Profit for the year attributable to the Parent	14,281	13,285
TAX ASSETS:	332	19
Current	330	15	VALUATION ADJUSTMENTS:	(436)	(244)
Deferred	2	4	Available-for-sale financial assets	(458)	(537)
			Cash flow hedges	22	293
OTHER ASSETS	-	-	Non-current assets held for sale
			TOTAL SHAREHOLDERS’ EQUITY ATTRIBUTABLE
			TO THE PARENT	92,543	102,294
			TOTAL EQUITY	92,543	102,294
TOTAL ASSETS	93,547	102,516	TOTAL LIABILITIES AND EQUITY	93,547	102,516

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

CONDENSED PARENT COMPANY ONLY INCOME STATEMENTS FOR THE YEARS ENDED

DECEMBER 31, 2012, 2013 and 2014

(Millions of pesos)

	(Debit)/Credit
	2012			2013			2014
Interest income and similar income		86			22			21
Interest expenses and similar charges		(9	)		(8	)		(6	)
NET INTEREST INCOME		77			14			15
Income from equity instruments		17,285			12,397			13,328
Banco Santander (México), S.A.		16,850			12,263			13,330
Others		435			134			(2	)
Fee and commission income		-			-			-
Fee and commission expenses		-			(4	)		(4	)
Gains/(losses) on financial assets and liabilities (net)		-			-			1
Exchange differences (net)		-			-			1
Other operating income		-			-			1
Other operating expenses		-			-			-
TOTAL INCOME		17,362			12,407			13,342
Administrative expenses:		(55	)		(56	)		(58	)
Personnel expenses		(27	)		(29	)		(30	)
Other general administrative expenses		(28	)		(27	)		(28	)
Depreciation and amortization		-			-			-
Impairment losses on financial assets (net):		-			-			-
Loans and receivables		-			-			-
Impairment losses on other assets (net):		-			-			-
Other intangible assets		-			-			-
Non-current assets held for sale		-			-			-
Provisions (net)		-			-			-
Gains/(losses) on disposal of assets not classified as
non-current assets held for sale		21			-			-
Gains/(losses) on disposal of non-current assets held
for sale not classified as discontinued operations		-			-			-
OPERATING PROFIT BEFORE TAX		17,328			12,351			13,284
Income tax		(16	)		(8	)		1
PROFIT FROM CONTINUING OPERATIONS		17,312			12,343			13,285
PROFIT FROM DISCONTINUED OPERATIONS (net)		132			1,938			-
PROFIT FOR THE YEAR		17,444			14,281			13,285

F-207

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

CONDENSED PARENT COMPANY ONLYSTATEMENTS OF CASH FLOW FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 and 2014

(Millions of Pesos)

	2012			2013			2014
A. CASH FLOWS FROM OPERATING ACTIVITIES:		18,650			18,583			3,473
Profit for the year		17,444			14,281			13,285
Adjustments made to obtain the cash flows from operating activities		(17,401	)		(14,327	)		(13,329	)
Income from equity instruments		(17,285	)		(12,397	)		(13,328	)
Income tax expense recognized in income statement		16			8			(1	)
Profit on discontinued operations		(132	)		(1,938	)		-
Net change in other operating assets and liabilities		3,257			81			(66	)
Income tax paid		(24	)		-			(464	)
Dividends received		15,374			18,548			4,047
B. CASH FLOWS FROM INVESTING ACTIVITIES:		-			2,267			-
Proceeds
Discontinued operations		-			2,267			-
C. CASH FLOWS FROM FINANCING ACTIVITIES:		(18,650	)		(20,850	)		(3,473	)
Payments
Dividends		(18,650	)		(20,850	)		(3,473	)
D. EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH DEPOSITS		-			-			-
E. NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS		-			-			-
F. CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		-			-			-
G. CASH AND CASH EQUIVALENTS AT END OF YEAR		-			-			-

During 2012, 2013 and 2014, Grupo Financiero Santander México, S.A.B. de C.V. received cash dividends from subsidiaries as follows:

	2012		2013		2014
Dividends received		15,374		18,548		4,047

F-208