20-F 1 dp65109_20f.htm FORM 20-F

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

☒

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015

☐

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

	☐	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 Mexico City
(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 Mexico City

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 ☐ 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:

U.S. 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.
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	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	8
C. Reasons for the Offer and Use of Proceeds	8
D. Risk Factors	8
ITEM 4. INFORMATION ON THE COMPANY	42
A. History and Development of the Company	42
B. Business Overview	47
C. Organizational Structure	150
D. Property, Plants and Equipment	151
ITEM 4A. UNRESOLVED STAFF COMMENTS	151
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS	152
A. Operating Results	156
B. Liquidity and Capital Resources	191
C. Research and Development, Patents and Licenses, etc.	202
D. Trend Information	202
E. Off-Balance Sheet Arrangements	203
F. Tabular Disclosure of Contractual Obligations	204
G. Safe Harbor	204
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	205
A. Directors and Senior Management	205
B. Compensation	212
C. Board Practices	214
D. Employees	218
E. Share Ownership	220
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	221
A. Major Shareholders	221
B. Related Party Transactions	222
C. Interests of Experts and Counsel	229
ITEM 8. FINANCIAL INFORMATION	229
A. Consolidated Statements and Other Financial Information	229
B. Significant Changes	230
ITEM 9. THE OFFER AND LISTING	230
A. Offering and Listing Details	230
B. Plan of Distribution	232
C. Markets	232
D. Selling Shareholders	239
E. Dilution	239
F. Expenses of the Issue	239
ITEM 10. ADDITIONAL INFORMATION	239
A. Share Capital	239

B. Memorandum and Articles of Association	239
C. Material Contracts	250
D. Exchange Controls	250
E. Taxation	250
F. Dividends and Paying Agents	255
G. Statement by Experts	255
H. Documents on Display	255
I. Subsidiary Information	256
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	256
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	274
A. Debt Securities	274
B. Warrants and Rights	274
C. Other Securities	274
D. American Depositary Shares	274
PART II	276
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	276
A. Defaults	276
B. Arrears and Delinquencies	276
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	276
A. Material Modifications to Instruments	276
B. Material Modifications to Rights	276
C. Withdrawal or Substitution of Assets	276
D. Change in Trustees or Paying Agents	276
E. Use of Proceeds	276
ITEM 15. CONTROLS AND PROCEDURES	276
A. Disclosure Controls and Procedures	276
B. Management’s Annual Report on Internal Control over Financial Reporting	276
C. Attestation Report of the Registered Public Accounting Firm	277
D. Changes in Internal Control over Financial Reporting	278
ITEM 16. [RESERVED]	278
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT	278
ITEM 16B. CODE OF ETHICS	278
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES	279
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	279
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	280
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	280
ITEM 16G. CORPORATE GOVERNANCE	280
ITEM 16H. MINE SAFETY DISCLOSURE	283
PART III	284
ITEM 17. FINANCIAL STATEMENTS	284
ITEM 18. FINANCIAL STATEMENTS	284
ITEM 19. EXHIBITS	284

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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,” the “Group,” “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 SAM Asset Management, S.A. de C.V., Sociedad Operadora de Sociedades de Inversión (formerly Gestión Santander, S.A. de C.V., Grupo Financiero Santander México) (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, 2014 and December 31, 2015, and for each of the fiscal years ended December 31, 2013, 2014 and 2015, 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.

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, 2015, one UDI was equal to Ps.5.38117 (U.S.$0.3119).

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.

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“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.$,” “U.S. dollars” and “dollars” are to United States dollars, and references to “Mexican pesos,” “pesos,” or “Ps.” are to Mexican pesos. References to “euros” or “U.S.$” are to the common legal currency of the member states participating in the European Economic and Monetary Union.

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, 2011, 2012, 2013, 2014 and 2015 and our consolidated balance sheet data as of December 31, 2011, 2012, 2013, 2014 and 2015, 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 Mexican Banking GAAP, 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, 2011, 2012, 2013, 2014 and 2015 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.17.2487 to U.S.$1.00, the rate calculated on December 31, 2015 (the last business day in December) and published on January 4, 2016 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

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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, 2011 and 2012 and previously presented consolidated balance sheet data as of December 31, 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. Operating and Financial Review and Prospects—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, 2011 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, 2011 and 2012 in addition to the amounts previously presented in this item regarding the Elavon transaction and the sale of Seguros Santander.

Refinements to our impairment models. During 2015, we revised our estimates for allowance for impairment losses on loans and receivables of all loan portfolios and for the provision for off-balance sheet risk with the purpose of making certain refinements to the impairment models as part of our policy to continuously refine the existing impairment models and accounting estimates. Our application of these refined models for the year ended December 31, 2015 does not materially affect the comparability of our financial position, results of operations and several financial measures when compared to prior years. See “Item 5. Operating and Financial Review and Prospects—Principal Factors Affecting our Financial Condition and Results of Operations—Critical Accounting Policies— Allowance for impairment losses and provisions for off-balance sheet risk” and Note 2.h to our audited financial statements for more details on our change in accounting estimates regarding our refinements to impairment models.

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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)

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CONDUSEF	Mexican National Commission for the Protection and Defense of Financial Service Users (Comisión Nacional para la Protección y Defensa de los Usuarios de Servicios Financieros)
CRM	Customer relationship management
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
Investment Services Rules	Disposiciones de Carácter General Aplicables a las Entidades Financieras y otras Personas que Proporcionan Servicios de Inversión
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

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Mexican Financial Groups Law	Ley para Regular las Agrupaciones Financieras
Mexican Mutual Funds Law	Ley de Sociedades de Inversión
Mexican Securities Market Law	Ley del Mercado de Valores
Mexican Stock Exchange	Bolsa Mexicana de Valores, S.A.B. de C.V.
MVE	Market value of equity
NAFIN	Nacional Financiera, Sociedad Nacional de Crédito, Institución de Banca de Desarrollo, a Mexican government bank that provides support for SMEs
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.200,000,000 (U.S.$11,595,077)
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

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

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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;

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;

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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 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.

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PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Directors and Senior Management

Not applicable.

Advisers

Not applicable.

Auditors

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Offer Statistics

Not applicable.

Method and Expected Timetable

Not applicable.

ITEM 3. KEY INFORMATION

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, 2011, 2012, 2013, 2014 and 2015 and our selected consolidated balance sheet data as of December 31, 2011, 2012, 2013, 2014 and 2015 from our audited financial statements, which have been prepared in accordance with IFRS.

During 2015, we have made certain refinements to our impairment models to determine our allowance for impairment losses as part of our policy to continuously refine our accounting estimates. Our application of these refined models for the year ended December 31, 2015 does not materially affect the comparability of our financial position, results of operations and several financial measures when compared to prior years. See Note 2.h to our audited financial statements for more details on our change in accounting estimates regarding our refinements to impairment models.

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CONSOLIDATED INCOME STATEMENT DATA IN ACCORDANCE WITH IFRS

	For the year ended December 31,
	2011			2012			2013			2014			2015(7)			2015
	(Millions of pesos)(1)															(Millions of U.S. dollars)(1)(2)
Interest income and similar income	Ps.	46,587		Ps.	55,521		Ps.	55,386		Ps.	57,916		Ps.	64,204		U.S.$	3,722
Interest expenses and similar charges		(17,976	)		(21,639	)		(19,539	)		(20,305	)		(21,178	)		(1,228	)
Net interest income		28,611			33,882			35,847			37,611			43,026			2,494
Income from equity instruments		299			212			245			153			117			7
Fee and commission income (net)		9,904			11,685			12,844			13,373			14,083			816
Gains/(losses) on financial assets and liabilities (net)		271			1,265			3,281			2,619			2,489			144
Exchange differences (net)		30			(6	)		—			(11	)		6			—
Other operating income		623			628			787			487			457			26
Other operating expenses		(1,590	)		(1,794	)		(2,078	)		(2,479	)		(3,011	)		(175	)
Total income		38,148			45,872			50,926			51,753			57,167			3,312
Administrative expenses		(14,918	)		(16,724	)		(18,630	)		(19,897	)		(21,332	)		(1,237	)
Personnel expenses		(7,297	)		(8,232	)		(9,261	)		(9,977	)		(11,033	)		(640	)
Other general administrative expenses		(7,621	)		(8,492	)		(9,369	)		(9,920	)		(10,299	)		(597	)
Depreciation and amortization		(1,457	)		(1,537	)		(1,620	)		(1,682	)		(1,864	)		(108	)
Impairment losses on financial assets (net)		(5,435	)		(8,970	)		(14,905	)		(13,132	)		(16,041	)		(930	)
Loans and receivables(3)		(5,435	)		(8,970	)		(14,905	)		(13,132	)		(16,041	)		(930	)
Impairment losses on other assets (net)		(100	)		(34	)		(22	)		(48	)		—			—
Other intangible assets		(30	)		—			—			—			—			—
Non-current assets held for sale		(70	)		(34	)		(22	)		(48	)		—			—
Provisions (net)(4)		1,890			680			(751	)		(157	)		270			16
Gains/(losses) on disposal of assets not classified as non-current assets held for sale		13			1,743			31			8			7			—
Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations		54			135			(16	)		(15	)		91			5
Operating profit before tax		18,195			21,165			15,013			16,830			18,298			1,058
Income tax		(4,776	)		(3,853	)		(2,670	)		(3,541	)		(4,294	)		(249	)
Profit from continuing operations		13,419			17,312			12,343			13,289			14,004			809
Profit from discontinued operations (net)		4,352			132			1,938			—			—			—
Profit for the year	Ps.	17,771		Ps.	17,444		Ps.	14,281		Ps.	13,289		Ps.	14,004		U.S.$	809
Profit attributable to the Parent		17,770			17,443			14,279			13,288			14,003			809
Profit attributable to non-controlling interests		1			1			2			1			1			—

Earnings per share from continuing and discontinued operations:
Basic earnings per share		2.62			2.57			2.11			1.96			2.07			0.12
Diluted earnings per share		2.62			2.57			2.11			1.96			2.06			0.12
Earnings per share from continuing operations:
Basic earnings per share		1.98			2.55			1.82			1.96			2.07			0.12
Diluted earnings per share(5)		1.98			2.55			1.82			1.96			2.06			0.12
Cash dividend per share (pesos) (6)		1.67			1.08			3.08			0.51			1.00			0.06
Cash dividend per share (U.S. dollar) (2)(6)		0.12			0.08			0.24			0.03			0.06			0.06
Weighted average shares outstanding		6,786,395			6,782,807			6,773,812			6,775,809			6,777,713			6,777,713
Dilutive effect of rights on shares(5)		-			13,401			12,583			10,586			8,682			8,682
Adjusted number of shares		6,786,395			6,796,208			6,786,395			6,786,395			6,786,395			6,786,395

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__________

(1)

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

(2)

Results for the year ended December 31, 2015 have been translated into U.S. dollars, for convenience purposes only, using the exchange rate of Ps.17.2487 per U.S.$1.00 as calculated on December 31, 2015 and reported by the Mexican Central Bank in the Official Gazette of the Federation (Diario Oficial de la Federación) on January 4, 2016 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 5.2.ii 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. On May 29, 2015, we paid a dividend of Ps. 3,534 million, equal to Ps.0.52 per share. On December 22, 2015, we paid a dividend of Ps.3,226 million, equal to Ps.0.48 per share.

(7)

See Note 2.h to our audited financial statements for more details on our change in accounting estimates regarding our refinements to impairment models.

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CONSOLIDATED BALANCE SHEET DATA IN ACCORDANCE WITH IFRS

	As of December 31,
	2011		2012		2013				2014		2015(3)			2015
	(Millions of pesos)													(Millions of U.S. dollars)(1)
Assets
Cash and balances with Mexican Central Bank	Ps.	44,143	Ps.	48,397	Ps.	49,681		Ps.	51,823			Ps.	59,788	U.S.$	3,466
Financial assets held for trading		242,463		198,250		176,907			208,371				328,117		19,023
Other financial assets at fair value through profit or loss		21,589		63,168		86,361			31,872				27,358		1,586
Available-for-sale financial assets		61,582		47,518		61,525			83,128				113,620		6,587
Loans and receivables		346,187		403,036		441,657			530,397				598,887		34,721
Hedging derivatives		897		300		300			4,740				12,121		703
Non-current assets held for sale		464		576		1,100			844				1,101		64
Tangible assets		5,607		4,113		4,767			5,262				5,551		322
Intangible assets		3,462		3,648		3,751			4,079				4,877		283
Tax assets		13,454		17,784		25,943			22,988				18,673		1,083
Other assets		4,426		6,242		5,826			6,479				5,942		343
Total assets	Ps.	744,274	Ps.	793,032	Ps.	857,818		Ps.	949,983			Ps.	1,176,035	U.S.$	68,181

Liabilities
Financial liabilities held for trading	Ps.	125,291	Ps.	141,101	Ps.	136,199		Ps.	136,805			Ps.	174, 576	U.S.$	10, 121
Other financial liabilities at fair value through profit or loss		118,269		71,192		76,025			108,784				204, 829		11,875
Financial liabilities at amortized cost		391,568		458,856		528,184			579,125				659,186		38,217
Hedging derivatives		2,501		1,637		1,392			4,403				9,568		555
Provisions(2)		7,069		6,294		5,710			6,086				6,694		388
Tax liabilities		866		758		856			80				673		39
Other liabilities		7,866		13,582		16,934			12,413				10,849		630
Total liabilities	Ps.	653,430	Ps.	693,420	Ps.	765,300		Ps.	847,696			Ps.	1,066,375	U.S.$	61,825

Shareholders’ equity
Share capital	Ps.	25,658	Ps.	25,658	Ps.	25,658		Ps.	25,658			Ps.	25,658	U.S.$	1,488
Share premium		11,415		11,415		11,415			11,415				11,415		662
Accumulated reserves		34,618		44,324		41,593			52,160				58,193		3,374
Profit for the year attributable to the Parent		17,770		17,443		14,279			13,288				14,003		809
Valuation adjustments		1,372		764		(436	)		(244	)			380		22
Non-controlling interests		11		8		9			10				11		1
Total equity		90,844		99,612		92,518			102,287				109,660		6,356
Total liabilities and equity	Ps.	744,274	Ps.	793,032	Ps.	857,818		Ps.	949,983			Ps.	1,176,035	U.S.$	68,181

__________

(1)

The balance as of December 31, 2015 has been translated into U.S. dollars, for convenience purposes only, using the exchange rate of Ps.17.2487 per U.S.$1.00 as calculated on December 31, 2015 and reported by the Mexican Central Bank in the Official Gazette of the Federation on January 4, 2016 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.”

(3)

See Note 2.h to our audited financial statements for more details on our change in accounting estimates regarding our refinements to impairment models.

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SELECTED RATIOS AND OTHER DATA

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

	As of and for the year ended December 31,
	2011			2012			2013			2014			2015
	(Millions of pesos or percentages, except per share, branch and employee data)
Profitability and performance
Net interest margin(1)		5.08	%		5.09	%		5.29	%		4.82	%		4.89	%
Total margin(2)		6.82	%		6.84	%		7.17	%		6.52	%		6.48	%
Return-on-average total assets (ROAA)(3)		2.67	%		2.24	%		1.83	%		1.43	%		1.35	%
Return-on-average equity (ROAE)(4)		22.01	%		18.25	%		14.16	%		13.54	%		13.22	%
Efficiency ratio(5)		42.92	%		39.81	%		39.76	%		41.70	%		40.58	%
Net fee and commission income as a percentage of operating expenses(6)		60.48	%		63.99	%		63.43	%		61.97	%		60.71	%
Yield on average interest-earning assets		8.18	%		8.29	%		8.12	%		7.39	%		7.27	%
Average cost of interest-bearing liabilities		3.71	%		3.66	%		3.26	%		2.85	%		2.61	%
Net interest spread		4.47	%		4.63	%		4.86	%		4.54	%		4.66	%
Common stock dividend payout ratio(7)		63.87	%		41.85	%		146.00	%		26.14	%		48.28	%
Average interest-earning assets		569,502			669,697			682,420			783,865			883,073
Average interest-bearing liabilities		483,925			590,861			598,484			713,105			812, 614
Capital adequacy
Total capital (Mexican Banking GAAP)		73,144			76,197			86,531			96,517			103,639
Tier 1 capital (Mexican Banking GAAP)		71,674			74,618			69,409			76,697			80,328
Tier 1 capital to risk-weighted assets (Mexican Banking GAAP)		14.53	%		14.47	%		12.79	%		12.85	%		12.10	%
Total capital to risk-weighted assets(8) (Mexican Banking GAAP)		14.82	%		14.78	%		15.94	%		16.17	%		15.61	%
Asset quality
Non-performing loans as a percentage of total loans(9)		1.98	%		2.06	%		3.81	%		3.90	%		3.56	%
Non-performing loans as a percentage of computable credit risk(9)(10)		1.83	%		1.92	%		3.56	%		3.66	%		3.32	%
Loan charge-offs as a percentage of average total loans		2.38	%		2.45	%		3.33	%		3.10	%		2.85	%
Loan charge-offs as a percentage of computable credit risk(10)		1.98	%		2.15	%		2.94	%		2.68	%		2.42	%
Allowance for impairment losses as a percentage of average total loans(11)		2.49	%		2.80	%		3.66	%		3.49	%		3.70	%
Allowance for impairment losses as a percentage of non-performing loans(9)(11)		113.55	%		128.08	%		90.70	%		82.46	%		94.97	%
Allowance for impairment losses as a percentage of loan charge-offs(11)		104.76	%		114.34	%		109.85	%		112.49	%		129.98	%
Allowance for impairment losses as a percentage of total loans(11)		2.25	%		2.64	%		3.45	%		3.22	%		3.38	%
Liquidity
Liquid assets as a percentage of deposits(12)		78.96	%		56.48	%		48.79	%		47.32	%		46.41	%
Total loans, net of allowance for impairment losses, as a percentage of deposits(13)		99.97	%		98.23	%		98.45	%		102.15	%		72.35	%
Total loans as a percentage of total funding(14)		65.86	%		70.49	%		67.86	%		69.97	%		65.17	%
Deposits as a percentage of total funding(13)(14)		64.39	%		69.86	%		66.55	%		66.29	%		87.03	%
Operations
Offices(15)		1,097			1,142			1,234			1,322			1,354
Employees (full-time equivalent)		12,395			13,385			14,260			16,427			17,208

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___________

(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)

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

(9)

Non-performing loans include (i) all credits past due by more than (x) 30 days, in the case of single-payment loans, (y) 60 days, in the case of revolving loans (including consumer loans and credit 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 the sum of all transactions of a customer when the loan balances of such customer classified as impaired are more than 25% of the total outstanding amounts, and (ii) loans to borrowers in doubtful financial situations such as bankruptcy.

Since 2015, classification of non-performing loans remain the same, except for (i) revolving consumer credit cards loans when payment is not received in up to 90 days after it becomes due, and (ii) the sum of all transactions of a customer is when the loan balances of the same customer classified as impaired are more than 20% of the total outstanding amounts.

(10)

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.

(11)

Allowance for impairment losses were Ps.7,247 million, Ps.9,387 million, Ps.13,764 million, Ps.15,198 million and Ps. 18,749 million, as of December 31, 2011, 2012, 2013, 2014 and 2015, respectively. See Note 2.h to our audited financial statements for more details on our change in accounting estimates regarding our refinements to impairment models.

(12)

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, 2011, 2012, 2013, 2014 and 2015, we had a total amount of liquid assets of Ps.248,505 million, Ps.198,777 million, Ps.190,678 million, Ps.211,821 million and Ps.343,353 million, respectively. For the years ended December 31, 2011, 2012, 2013, 2014 and 2015, the average amounts outstanding were Ps.220,444 million, Ps.215,274 million, Ps.188,614 million, Ps.203,061 million and Ps.291,828 million, respectively.

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.

As of December 31, 2015, liquid assets were composed of the following: 17.4% cash and balances with the Mexican Central Bank (cash at our branches and ATMs and the Depósito de Regulación Monetaria (Compulsory Deposits)); 35.3% debt instruments issued by the Mexican Government; and 47.2% debt instruments issued by the Mexican Central Bank.

(13)

(14)

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

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For December 31, 2011, 2012, 2013, 2014 and 2015, our deposits and repurchase agreements amounted to Ps.463,841 million, Ps.449,034 million, Ps.517,340 million, Ps.596,706 million and Ps.739,846 million, respectively, and our marketable debt securities amounted to Ps.23,894 million, Ps.54,703 million, Ps.53,118 million, Ps.59,077 million and Ps.87,449 million, respectively. For December 31, 2014 and 2015, our subordinated liabilities amounted to Ps.19,446 million and Ps.22,788 million, respectively.

(15)

Includes branches (including branches with Select service), SME’s offices, SME’s branches, cash desks (ventanillas – including cash desk with Select service), Santander Select offices (including Centros Select, Espacios Select, box offices and corner Select) and Santander Select units (módulos).

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 recent significant decline in oil prices and other economic factors negatively affected the year-end 2015 exchange rate, resulting in 17.03% depreciation of the peso against the U.S. dollar, from Ps.14.74 per U.S. dollar as of December 31, 2014 to Ps.17.25 as of December 31, 2015.

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 28, 2015, the exchange rate for U.S. dollars was Ps.17.2125 per U.S. dollar.

Year	Low		High		Average(1)		Period End
2011	Ps.	11.50	Ps.	14.24	Ps.	12.47	Ps.	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
2015		14.56		17.38		15.88		17.25

__________

(1)

Average end-of-month exchange rates for 2011, 2012, 2013, 2014 and 2015, respectively.

Month	Low		High		Average(1)		Period End
October 2015	Ps.	16.40	Ps.	16.86	Ps.	16.56	Ps.	16.52
November 2015		16.42		16.87		16.64		16.59
December 2015		16.51		17.38		17.07		17.25
January 2016		17.35		18.61		18.07		18.19
February 2016		18.06		19.18		18.47		18.10
March 2016		17.24		17.94		17.65		17.24
April 2016 (through April 28)		17.21		17.89		17.50		17.21

__________

(1)

Average daily exchange rates for October, November and December 2015 and January, February, March and April (through April 28) 2016.

Unless otherwise indicated, U.S. dollar amounts that have been translated from pesos have been so translated at an exchange rate of Ps.17.2487 to U.S.$1.00, the exchange rate as calculated on December 31, 2015 and reported by the Mexican Central Bank in the Official Gazette of the Federation on January 4, 2016 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.

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Capitalization and Indebtedness

Not applicable.

Reasons for the Offer and Use of Proceeds

Not applicable.

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 eight years, financial systems worldwide have experienced periods and events of difficult credit and liquidity conditions and disruptions leading to less liquidity and greater volatility (such as volatility in spreads). 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 four years, the sharp decline in oil prices, uncertainty of China’s future economic prospects, and diverging monetary policies around the world have exacerbated global imbalances and risks. 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. In recent years, there have also been runs on deposits at several financial institutions around the world, 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). Within this context, diminished oil prices and a continuous reduction in Mexico’s oil production, together with weaker-than-expected manufacturing activity in the U.S., constitute significant risks for the Mexican economy and its growth prospects, which could have an adverse effect on our business. In addition, the normalization of U.S. monetary policy, including the end of its quantitative easing stimulus, and different monetary policies around the world, including in Mexico, 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 will continue to increase our costs, may affect the pricing for our products and services, and may 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.

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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, and in particular the strength of domestic demand in Mexico, 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 in the U.S. and the uncertainty of its 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.

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;

volatility of credit spreads;

the market value of our securities holdings; and

gains from sales of securities and loans.

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 interest rates could affect our net interest income, which comprises the majority of our revenue, reducing our growth rate and potentially resulting in losses. This results from the varying effects that a change in interest rates may have on the interest earned on our assets and the interest paid on our borrowings. In addition, we may incur costs (which, in turn, will impact our results) as we implement strategies to reduce future interest rate exposure. 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, 2015, the 1% NIM sensitivity was Ps.688 million.

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

In addition, we may experience increased delinquencies in a low-interest-rate environment when such an environment is accompanied by high unemployment and recessionary conditions.

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

We are also exposed to equity price risk in our investments in equity securities in the banking book and in the trading portfolio. 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 equity securities 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 the level of non-performing loans increases or the credit quality deteriorates in the future, or if our allowance for impairment losses is insufficient to cover 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. 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. We cannot assure you that we will be able to effectively control the level of the impaired loans in our total loan portfolio. For example, on November 26, 2014, we entered into an agreement to acquire a non-revolving consumer loans portfolio from Scotiabank Inverlat, S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank Inverlat (“Scotiabank Inverlat”). The acquisition was finalized in April 2015 after obtaining the applicable regulatory approvals. The acquired portfolio consists of 39,252 loans with a face value of Ps.3,179 million and with a fair value of Ps.3,002 million. 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.

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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 current or future allowance for impairment 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 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 impairment losses and charge-offs.

A substantial number of our customers consist of individuals (approximately 38.9% of the value of the total gross loan portfolio as of December 31, 2015) and, to a lesser extent, SMEs (those companies with annual revenues of less than Ps.200,000,000 (U.S.$ 11,595,077)), which accounted for approximately 11.5% of the value of the total gross loan portfolio as of December 31, 2015. 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 economic 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, 2015, non-performing loans were Ps.19,742 million and total charge-offs against our allowance for impairment losses were Ps.14,424 million. Non-performing loans related to individuals and SMEs represented 51.3% and 8.1%, respectively, of our total non-performing loans for the year ended December 31, 2015, as compared to 48.0% and 8.4%, respectively, of our total non-performing loans for the year ended December 31, 2014. Charge-offs related to individual and SME loans represented 70.0% and 23.1%, respectively, of our total charge-offs for the year ended December 31, 2015, as compared to 77.1% and 18.4%, respectively, for the year ended December 31, 2015. 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 a greater allowance for impairment losses. As of December 31, 2015, our mortgage loan portfolio totaled Ps.122,918 million, representing 22.2% of our total loans and advances to customers (excluding reverse 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, 2015, the value at risk, or VaR, associated with our financial instruments sensitive to interest rates and foreign currency exchange rates was U.S.$3.47 million (Ps.59.87 million) and U.S.$0.25 million (Ps.4.30 million), respectively. Although we follow various risk management procedures in connection with our trading and treasury activities and are subject to regulations that

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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 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 global financial markets, mainly due to the fall in oil and commodity prices, slow economic activity in emerging markets and a “flight to quality” seen in global financial markets 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 Ps.12.87 per U.S. dollar compared to the exchange rate at the end of 2011. At the end of 2013, the peso had depreciated to Ps.13.08 per U.S. dollar compared to the exchange rate at the end of 2012. At the end of 2014, the peso had depreciated to Ps.14.74 per U.S. dollar compared to the exchange rate at the end of 2013. In 2015, the peso sharply depreciated to Ps.17.21 per U.S. dollar compared to the exchange rate at the end of 2014. As of April 28, 2015, the peso had appreciated to Ps.17.21 per U.S. dollar relative to the end of the December 2015 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, including auctions of U.S. dollars in the foreign exchange market, changes 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), the 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

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ordered the Mexican competition authorities to initiate an investigation into 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 SHC. Negative or deficient results of evaluations may result in corrective measures being ordered, including a requirement to 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 SHCP 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.

In June 2014, the first group of the Mexican Supreme Court of Justice issued a jurisprudential thesis, of mandatory application, allowing federal judges to determine ex officio if an interest rate agreed in a promissory note is evidently excessive, violating an individual’s human rights, and consequently establishing a reduced rate. The elements the judge should take into account to determine if a rate is evidently excessive are: (i) the type of relationship between the parties; (ii) the qualification of the persons intervening in the subscription of the note and if the activity of the creditor is regulated; (iii) the purpose of the credit; (iv) the amount of the loan; (v) the term of the loan; (vi) the existence of guaranties for the payment of the loan; (vii) the interest rates applied by financial institutions in transactions similar to the one under analysis, as a mere reference; (viii) the variation of the national inflation index during the term of the loan; (ix) market conditions; and (x) other issues that may be relevant for the judge. The mandatory and partly discretionary application of such criteria in the lawsuits affecting our portfolio could have a material adverse effect on the interest rates we charge and on our operating results.

We are subject to potential intervention by any of our regulators or supervisors

As noted above, our business and operations are subject to increasingly significant rules and regulations that are required to conduct banking and financial services business. These apply to business operations, affect financial returns, include reserve and reporting requirements, and prudential and conduct of business regulations.

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In their supervisory roles, the regulators seek to maintain the safety and soundness of financial institutions with the aim of strengthening the protection of customers and the financial system. The supervisors’ continuing supervision of financial institutions is conducted through a variety of regulatory tools, reports obtained from skilled persons, visits to firms and regular meetings with management to discuss issues such as performance, risk management and strategy. In general, these regulators have a more outcome-focused regulatory approach that involves more proactive enforcement and more punitive penalties for infringement, including intervening institutions and restricting dividends or bonuses to employees. As a result, we face increased supervisory scrutiny (resulting in increasing internal compliance costs and supervision fees), and in the event of a breach of our regulatory obligations we are likely to face more stringent regulatory fines. Some of the regulators are focusing intently on consumer protection and on conduct risk, including profiling clients considering role, and will continue to do so. This has included a focus on the design and operation of products, the behavior of customers and the operation of markets. These problems may potentially cause significant detriment to consumers because of certain product features or governance flaws or distribution strategies. Such rules may prevent institutions from entering into product agreements with customers until such problems have been solved. Regulations require us to be in compliance across all aspects of our business, including the training, authorization and supervision of personnel, systems, processes and documentation. If we fail to comply with the relevant regulations, there would be a risk of an adverse impact on our business from sanctions, fines or other actions imposed by the regulatory authorities, including the revocation of our authorization and the intervention in our operations. Customers of financial services institutions, including our customers, may seek redress if they consider that they have suffered loss as a result of the mis-selling of a particular product, or through incorrect application of the terms and conditions of a particular product. Given the inherent unpredictability of litigation and the evolution of judgments by the relevant authorities, it is possible that an adverse outcome in some matters could harm our reputation or have a material adverse effect on our operating results, financial condition and prospects arising from any penalties imposed or compensation awarded, together with the costs of defending such an action, thereby reducing our profitability.

Future Mexican government restrictions on interest rates 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. However, under the Law for the Transparency and Ordering of Financial Services (Ley para la Transparencia y Ordenamiento de los Servicios Financieros), 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 large 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.

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.1,228 million in 2011, Ps.1,342 million in 2012, Ps.1,544 million in 2013, Ps.1,887 million in 2014 and Ps. 2,238 million in 2015. 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 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.

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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. We could face adverse consequences as a result of decisions, which may lead to actions by management, based on models that are poorly developed, implemented or used, or as a result of the modeled outcome being misunderstood or the use of such information for purposes for which it was not designed. In addition, if existing or potential customers or counterparties believe our risk management is inadequate, they could take their business elsewhere or seek to limit their transactions with us. 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 or IT systems errors. In exercising their judgment on current or future credit risk behavior of our customers, our employees may not always be able to assign an accurate credit rating, which may result in our exposure to credit risks greater 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 all possible 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

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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.

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 impairment losses and allowance for impairment losses 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 low 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 or commissions 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 and disclosures of financial instruments, deferred tax assets, impairment of financial assets classified as available-for-sale, allowance for

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impairment losses and provisions for off-balance sheet risk, defined benefit plans, goodwill and business combinations, 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 that 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 audited 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, or 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 2014 or 2015, 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, are 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 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, 2015, Mexico’s ten largest domestic banks, measured in terms of assets, held 85.17% 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. Some foreign financial institutions, having greater resources than we do,

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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 interest rates offered on deposits or lower the interest 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, have affected and may materially and adversely affect the cost of funding our business, and extreme liquidity constraints may affect our current operations and our ability to fulfill regulatory liquidity requirements, 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

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in particular, and the availability and extent of deposit guarantees, as well as competition between banks for deposits or competition with other products, such as mutual funds. 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 interest 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 the cost of funding.

We anticipate that our customers will continue, in the near future, to make 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 some deposits 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.

Central banks have taken extraordinary measures to increase liquidity in the financial markets as a response to the financial crisis. If current facilities were rapidly removed or significantly reduced, this could have an adverse effect on our ability to access liquidity and on our funding costs.

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, 2015, approximately 62.7% of our credit card portfolio was included in the top five groups, which together had an average loss rate of 3.2%, 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. 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 2015, our credit card portfolio grew 13.5%. If Mexican economic growth slows or declines, or if we fail to effectively analyze the creditworthiness of

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our customers (including by targeting certain sectors), we may be faced with unexpected losses that could have a material adverse effect on us.

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, including local regulation that can reduce or eliminate expected synergies;

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 any or all of the above challenges associated with our growth plans, could have a material adverse effect on us.

In addition, any acquisition or venture could result in the loss of key employees and inconsistencies in standards, controls, procedures and policies.

Moreover, the success of the acquisition or venture will at least in part be subject to a number of political, economic and other factors that are beyond our control. Any of these factors, individually or collectively, 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, 2015, the loan-to-value ratio of our mortgage portfolio and the loan-to-value ratio for originations were 64.0% and 62.2% 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 allowance for impairment losses to cover actual impairment losses of our loans, which may adversely affect our results of operations and financial condition.

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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.

The long-term debt of Banco Santander, S.A., or Banco Santander Parent, is currently rated investment grade by the major rating agencies—A3 stable outlook by Moody’s Investors Service España, S.A., A- stable outlook by Standard & Poor’s Ratings Services and A- stable outlook by Fitch Ratings Ltd. In June 2015, Moody’s upgraded such rating from Baa1 to A3 in light of their new banking methodology, and in October 2015, Standard & Poor’s upgraded their rating from BBB+ to A- following the upgrade of the sovereign credit rating of Spain. We can provide no assurances that ratings agencies will not change their views based on changes in economic conditions or otherwise.

On April 4, 2016, Moody’s placed on review for downgrade the baseline credit assessment (BCA) and adjusted BCA, as well as the global and local foreign currency deposit ratings and senior unsecured debt ratings, the foreign currency subordinated rating and the long and short counterparty risk assessments of certain Mexican Banks, including Banco Santander México. 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 Fitch and A3 with a stable outlook by Moody’s. .

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 Aaa.mx and AAA(mex) by 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 15 to 25 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 40 to 60 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.$6.3 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, 2015.

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 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

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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.

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.

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

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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 at 2.2%, and at 2.5% in 2015, consistent with the Mexican cyclical economic history. We can provide no assurance that GDP growth rates will continue to increase, or that they will not regress.

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 2016, 23.9% 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 detect or prevent money laundering and other illicit 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 and procedures detailing what is required from those responsible. Our requirements also include anti-money laundering training for our employees and 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.”

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

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

Like other financial institutions with a large customer base, we manage and hold confidential personal information of customers in the conduct of our banking operations, as well as a large number of assets. Accordingly, our business depends 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. Disclosure controls and procedures over financial reporting are designed to provide reasonable assurance that information required to be disclosed by the company in reports filed or submitted under the Securities Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures have inherent limitations which include the possibility that judgments in decision-making can be faulty and that breakdowns occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by any unauthorized override of the controls. Although we work with our clients, vendors, service providers, counterparties and other third parties to develop secure transmission capabilities and prevent against information security risks, 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 any 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.

We have seen in recent years computer systems of companies and organizations being targeted, not only by cyber criminals, but also by activists and rogue states. We have been and continue to be subject to a range of cyber-attacks, such as denial of service, malware and phishing. Cyber-attacks could give rise to the loss of significant amounts of customer data and other sensitive information, as well as significant levels of liquid assets (including cash). In addition, cyber-attacks could give rise to the disablement of our information technology systems used to service our customers. As attempted attacks continue to evolve in scope and sophistication, we may incur significant costs in our attempt to modify or enhance our protective measures against such attacks, or to investigate or remediate any vulnerability or resulting breach, or in communicating cyber-attacks to our customers. If we fail to

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effectively manage our cybersecurity risk, e.g., by failing to update our systems and processes in response to new threats, this could harm our reputation and adversely affect our operating results, financial condition and prospects through the payment of customer compensation, regulatory penalties and fines and/or through the loss of assets. In addition, we may also be affected by cyber-attacks against critical infrastructures in Mexico. Our information technology systems are dependent on such national critical infrastructure and any cyber-attack against such critical infrastructure could negatively affect our ability to service our customers. As we do not operate such national critical infrastructure, we have limited ability to protect our information technology systems from the adverse effects of such a cyber-attack.

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. Further, our business is 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. It is not always possible to deter or prevent employee misconduct, and the precautions we take to detect and prevent this activity may not always be effective. 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. 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.

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

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

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

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 identify and manage potential conflicts of interest properly. 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.

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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 2015, the aggregate amount of our expenses related to the service agreements we have with our subsidiaries and affiliates was Ps.3,835 million, or 16.54% 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.

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, 2013 to December 31, 2014, our total loans and advances to customers (excluding reverse repurchase agreements) grew by 18.6% to Ps.472,453 million (U.S.$ 27,391 million), while our consumer loans to individuals grew by 9.7%. From December 31, 2014 to December 31, 2015, total loans and advances to customers (excluding reverse repurchase agreements) grew by 17.3% to Ps.554,026 million (U.S.$32,120 million), while our consumer loans to individuals grew by 20.8% to Ps.92,541 million (U.S.$5,365 million). In addition, on November 26, 2014, we entered into an agreement to acquire a non-revolving consumer loans portfolio from Scotiabank Inverlat. The acquisition was finalized in April 2015 after obtaining the applicable regulatory approvals. The acquired portfolio consists of 39,252 loans with a face value of Ps.3,179 million and the fair value of the acquired loan portfolio was Ps.3,002 million.

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.

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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 April and June 2014, two of the three principal Mexican companies in the home builder sector were declared bankrupt under the Commercial Bankruptcy Law. The companies emerged from bankruptcy in June and November 2015, respectively.

In early December 2014, the third such company in the home builder sector filed a request for a pre-arranged bankruptcy with the relevant court. In January 2015, the company was declared bankrupt under the Commercial Bankruptcy Law. Its bankruptcy was still ongoing as of December 31, 2015.

As of December 31, 2015, our loan portfolio with the three principal Mexican companies in the home builder sector stood at Ps.4,232 million, which represents 0.76% of our total loans and advances to customers (excluding reverse repurchase agreements) and 0.36% of our total assets, of which the full amount was composed of non-performing loans. As of December 31, 2015, 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.

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.

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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.

On July 27, 2015, as a result of the new requirements of the European Central Bank, the Bank of Spain and the regulators in different jurisdictions, Banco Santander Parent established a new corporate governance model for its subsidiaries, with the purpose of setting forth a clear and transparent conceptual framework to govern their relationship. The model reinforces Banco Santander Parent’s corporate governance and provides greater faculties and powers to the boards of directors of the subsidiaries. Our Board of Directors approved the new corporate governance model in January 2016, in compliance with local regulations.

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;

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 prepare our 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

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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 prepare our financial statements in accordance with IFRS. As a result, our financial data as of and for the years ended December 31, 2011, 2012, 2013, 2014 and 2015 presented in this annual report on Form 20-F has been derived from our audited financial statements prepared in accordance with IFRS. However, as per Mexican Central Bank regulations and CNBV reporting requirements, we also prepare our financial statements in accordance with Mexican Banking GAAP. Because IFRS differs in certain significant respects from Mexican Banking GAAP, any Mexican Banking GAAP financial information related to our business for any period is not directly comparable to our IFRS financial data. 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 party 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, 2015, we have set aside Ps.1,092 million (U.S.$63 million) as provisions for these legal actions (including tax-related litigation). See Note 24.e 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.

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.

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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 2009, the Mexican gross domestic product, or 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 1.3% and inflation reached 4.0%. In 2014, GDP increased 2.2% and inflation reached 4.1%. In 2015, GDP increased 2.5% and inflation reached 2.1%.

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 4.2%, 4.3%, 3.8%, 3.0% and 2.98% for 2011, 2012, 2013, 2014 and 2015, respectively. Relative to the U.S. dollar, the peso appreciated by 5.5% in 2010, depreciated by 12.9% in 2011, appreciated by 7.9% in 2012, depreciated by 1.7% in 2013, depreciated by 12.7% in 2014 and depreciated by 16.7% in 2015, closing at Ps.17.21 per dollar, 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 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. As part of its electoral platform, the current administration along with the Mexican Congress approved significant reforms such as labor, energy, fiscal, education, telecommunications, transparency and financial reforms, which are in different stages of implementation. In 2015, federal elections for the House of Deputies and nine governorships took place, with the PRI winning 207 seats, while the PAN and PRD won 109 and 60 seats, respectively. In 2016, 12 states will hold elections for governor. 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.

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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 2011, 2012, 2013 and 2014, the Dow Jones Industrial Average increased by 6%, 7%, 27% and 8%, respectively, but fell 2.2% in 2015, while Mexico’s Stock Exchange Prices and Quotations Index decreased by 3.8% in 2011, increased by 17.9% in 2012, decreased by 2.2% in 2013, increased by 1.0% in 2014 and decreased by 0.4% in 2015.

In addition, in recent years, economic conditions in Mexico have become increasingly correlated to economic conditions in the United States. Accordingly, any adverse changes in the U.S. economy, such as the termination of the North American Free Trade Agreement (“NAFTA”) or other related events or changes in fiscal and monetary policies in the U.S. may have an adverse impact on the Mexican Economy. In particular, the possibility of normalization of monetary policy in the U.S. has caused an increase in the volatility of the peso/dollar exchange rate. In addition, the relative strength of the dollar against other currencies, including the Mexican peso, could impact manufacturing’s contribution to growth, thus affecting economic activity in Mexico. Thus 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 and 2015, the U.S. economy showed signs of improvement with an annual GDP growth rates of 2.4% and 2.4%, respectively, which caused the Federal Reserve System to begin normalizing its monetary policy by ending its quantitative monetary stimulus, and increasing the U.S. Federal Reserve’s reference rate by 25 basis points in December 2015. Such monetary policy normalization, 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.

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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.

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.

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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 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

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these requirements may further limit and adversely affect our operating results, financial condition and prospects.

The 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.

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 application of those laws and regulations by regulators is also subject to change. Other regulatory reforms adopted or proposed in the wake of the financial crisis have increased and may continue to materially increase our operating costs and negatively impact our business model. In addition, the volume, granularity, frequency and scale of regulatory and other reporting requirements necessitate a clear data strategy to enable consistent data aggregation, reporting and management. Inadequate management information systems or processes, including those relating to risk data aggregation and risk reporting, could lead to a failure to meet regulatory reporting requirements or other internal or external information demands, and we may face supervisory measures as a result.

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.

Given that some of the banking laws and regulations have been recently adopted, such as regulations implementing Basel III in Mexico, the manner in which these laws and related regulations are applied to the operations of financial institutions is still evolving. No assurance can be given that laws or regulations will be adopted, enforced, applied 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 for operations of risk-weighted assets for credit, market and operational risk of 8%, along with back-up capital of 2.5% which gives a total of 10.5% minimum requirement. Any failure by us to maintain this minimum 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 capital and liquidity framework, known as Basel III. The Basel III framework includes heightened capital standards reflecting increases in both the quality and quantity of the regulatory capital base and enhancements to the risk coverage of the capital framework. The Basel III minimum risk-based capital ratio standards require a minimum ratio of 8% over total risk-weighted assets from which a minimum of 4.5% concerns Ordinary Level 1 Capital risk-weighted assets and a minimum of 6% over risk-weighted assets Total Capital Level 1 (Ordinary Level 1 Capital plus Additional Level 1). In addition to these minimum capital requirements, the Basel III capital standards also include capital buffers, that must be maintained above the minimum capital requirements in order to avoid corrective measures from CNBV. These capital buffers include, on a fully phased-in basis, a 2.5% capital conservation buffer, a variable surcharge of up to 2.5% for certain global systemically important banks and a countercyclical buffer of up to 2.5% (during excessive credit growth periods) and a systemic entities buffer up to 3.5%, to be deployed at the discretion of national regulators. Basel III also introduces a leverage ratio for institutions as a backstop measure, to be applied alongside the risk-based regulatory capital requirements. The Basel III capital standards are intended to be implemented at the national level subject to transitional arrangements, with the principal requirements being phased in from January 2013 to January 2019 and the remaining requirements fully effective in 2022. Since being first finalized in 2010, the Basel III capital standards have continued to evolve, with the Basel Committee issuing new standards on, among other things, the

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measurement of risk-weighted assets for counterparty credit risk, exposures to central counterparties and market risk.

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.

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 standard, 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.

As part of its liquidity management model, in recent years Banco Santander Mexico has been managing the implementation, monitoring and early compliance with the new liquidity requirements set by international financial legislation.

In 2014, following the approval by the Basel Committee of the final definition of the short-term liquidity coverage ratio (LCR), the delegated act of the European Commission was adopted, which, within the scope of the CRD IV, defines the criteria for calculating and implementing this metric in the European Union. The implementation has been delayed until October 2015, although the level of initial compliance remains at 60%, which should gradually increase to 100% by 2018.

The starting position in short-term liquidity, coupled with the autonomous management of the ratio in all major units, has enabled compliance levels exceeding 100% to be maintained throughout 2015, thereby surpassing regulatory requirements.

On December 31, 2014, the CNBV and the Mexican Central Bank published in the Federal Gazette the General Liquidity Requirements for Banking Institutions in Mexico as per the guidelines established by the Banking Liquidity Regulation Committee on October 17, 2014. The effective date of the aforementioned requirements was January 1, 2015.

In 2012, the Basel Committee established a Regulatory Consistency Assessment Program through which it monitors, assesses and evaluates national regulators’ implementation of regulations and the Basel Committee’s standards. The Basel Committee issues reports on individual countries, presenting findings on each country’s adoption of the risk-based capital standards. In response to these findings, some national authorities have developed modifications to their regulations to more closely align their regulations with the Basel Committee’s standards.

In consideration of the Basel Committee’s assessment of Mexico’s implementation of the Basel III framework, the CNBV modified the risk-based capital rules in six specific areas.

During 2015, the CNBV and the Mexican Central Bank modified general regulatory dispositions related to operational risk, counterparty risk, market risk, and credit risk, including the following modifications:

Operational risk: maximum and minimum capital requirement limits obtained with the basic index method were eliminated, along with operational risk mitigations such as reserves and insurances. Additionally, an advanced method was incorporated through which institutions are able to estimate their losses based on events faced at different points in time.

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Counterparty risk: a risk exposure was incorporated to account for the future potential increase of derivate positions and departure from their actual value. The focus on capital requirements was modified and directed to the counterparty, considering the benefits of compensation contracts that allow the counterparty assumption of the exposition risk in favor of the banks. Additionally, capital requirements were increased for standard derivate operations or operations liquidated through clearinghouses from 0% to 2% (minimum), and, furthermore, additional capital requirements for institutions with direct exposure to clearinghouses were established.

Market risk: a new capital requirement was established for short trading positions, along with a capital requirement for optional positions which consider changes on subjacent value (gamma) and market volatility (vega). A capital requirement was also set for merchandise, and gold was included in the currencies capital requirements. On the other hand, capital requirements for liquidation on stock positions were eliminated, and specific market capital requirements were adjusted to 8% considering the correlation of the portfolio with the market.

Credit risk: criteria to determine the credit risk applicable to different levels of exposure to financial entities, corporations and stocks were modified. For IRB models, the following requirements were modified: a loss severity of 10% for mortgages, changes in the default definition for restructured credits, and additional requirements to the interim models certification test.

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 under Mexican banking GAAP 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 loss given default or 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 and Mexican Banking GAAP 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. IFRS impairment models are under continuous refinements, and we may be required to reassess our allowance for impairment losses to comply with the change in such criteria.

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 impairment losses under Mexican banking GAAP 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, and 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 that is associated with 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 under Mexican banking GAAP, in order to change the model of creating allowance for impairment losses

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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 was no impact on our financial statements prepared under IFRS.

On March 26, 2014, the CNBV issued a resolution changing the methodology for calculation of the allowance for impairment losses under Mexican banking GAAP with respect to credits granted to entities under judicial restructuring in order to adapt such methodology to changes made to the Mexican Commercial Bankruptcy Law on January 10, 2014. The resolution was mainly related to the calculation of the guarantees granted under article 75 of the Bankruptcy Law to determine the magnitude of a loss, applying different adjustment factors or deductions with respect to each type of guarantee accepted. The changes implemented by the resolution did not have a material impact on our financial statements under Mexican Banking GAAP for the year ended December 31, 2014.

On August 27, 2015, the CNBV issued a resolution establishing the period for which credit institutions may continue to use the methodology for calculation of the allowance for impairment losses under Mexican banking GAAP with respect to credits granted to entities subject to judicial restructuring. The resolution sets forth that once an agreement between the entity under restructuring and its creditors is reached or once bankruptcy is declared, the methodology shall no longer be applied. Nevertheless, it also sets forth that a request may be presented to the CNBV to continue to employ the same methodology for calculation of the allowance for impairment losses in those cases, for a period that shall not exceed six months after the agreement between the company and creditors. The changes put in place by the resolution had no material impact on our Mexican Banking GAAP financial statements for the year ended December 31, 2015.

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

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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 impairment losses. 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.

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 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, 2015, approximately 24.1% of our total assets and 86.3% 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

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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.”

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 the same shareholder rights as a direct holder or ordinary shares;

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

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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 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, 2015, we had 6,786,394,913 shares of common stock outstanding, including 3,322,085,768 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 51.13% 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

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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.

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, 2015, total market capitalization amounted to U.S.$417.6 billion and the financial services sector in terms of market capitalization represented approximately 11.7% 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

Our principal executive offices are located at Avenida Prolongación Paseo de la Reforma 500, Colonia Lomas de Santa Fe, Delegación Álvaro Obregón, 01219, Mexico City, 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.

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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.

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 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.$431 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 Parent 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.

During 2014, we reached an agreement with Banco Santander Parent for the purchase of the custodial business to FINESP Holdings II B.V., an affiliate of Warburg Pincus (“Warburg Pincus”) and Temasek Holdings Private Limited (“Temasek”).

On June 19, 2014, Banco Santander Parent 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.

Moreover, on June 19, 2014, Banco Santander Parent made us an offer to purchase the custodial business and we accepted. The agreed sale price was Ps.2,030 million. This offer requires that we transfer the custodial business, but the obligation is subject to the following conditions: (i) the offer is valid until June 19, 2014; (ii) the offer is subject to the same conditions established in the global agreement signed by Banco Santander Parent; (iii) authorizations must be obtained from the Mexican authorities to establish a special purpose entity whose purpose is

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the operation of the custodial business in Mexico; (iv) the offer is dependent on the overall transaction, which, if terminated, will also lead to the termination in Mexico; and (v) the transaction should be formalized through the signing of the respective contracts.

The joint venture was approved by our board of directors and that of Banco Santander Parent, at their respective meetings on July 22, 2014.

On July 24, 2015, we received a notification from Banco Santander Parent announcing that the aforementioned transaction was automatically terminated, since the global operation established in the global agreement signed by Banco Santander Parent on June 2014 was not concluded within the twelve-month acceptance period. As a result, the closing of the transaction did not occur. However, Banco Santander Parent made us another offer to purchase the custodial business, which we accepted, at an agreed price of Ps.1,191 million. The offer requires us to transfer the custodial business and is subject to the following conditions: (i) the offer is valid until June 30, 2016; (ii) the offer is subject to the same conditions established in the global agreement signed by Banco Santander Parent; (iii) authorizations must be obtained from the Mexican authorities to establish a special purpose entity whose purpose is the operation of the custodial business in Mexico; (iv) the offer is dependent on the overall transaction, which, if terminated, will also lead to the termination in Mexico; and (v) the transaction should be formalized through the signing of the respective contracts.

Our aforementioned obligation to transfer the custodial business to a special purpose entity as a condition for completing the sale to Banco Santander Parent 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.

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.

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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.$118 million) and, in addition, we repaid at closing to GE Capital the Ps.21,009 million (U.S.$1,218 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.$1,386 million), including a total loan portfolio of Ps.21,926 million (U.S.$1,271 million), while the total volume of liabilities was Ps.21,494 million (U.S.$1,246 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.

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.$31.4 million) for ING Hipotecaria’s equity. This acquisition solidified 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 to 19.3% as of December 31, 2015. Since the acquisition, Banco Santander Mexico has closed 19 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.

During 2014, we reached an agreement with Banco Santander Parent for the purchase of the custodial business to FINESP Holdings II B.V., affiliate of Warburg Pincus and Temasek.

Moreover, on June 19, 2014, Banco Santander Parent made us an offer to purchase the custodial business. We accepted the offer. The agreed sale price was 2,030 million pesos. This offer requires us to transfer the custodial business, but the obligation is subject to the following conditions: ( i) the offer is valid until June 19, 2014; (ii) the offer is subject to the same conditions established in the global agreement signed by Banco Santander (Spain); (iii) authorizations must be obtained from the Mexican authorities to establish a special purpose entity whose purpose is the operation of the custodial business in Mexico; (iv) the offer is dependent on the overall transaction, which, if

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terminated, will also lead to the termination in Mexico; and (v) the transaction should be formalized through the signing of the respective contracts.

The joint venture was approved by our board of directors and that of Banco Santander Parent, at their respective meetings held on July 22, 2014.

On July 24, 2015, we received a notification from Banco Santander Parent announcing that the aforementioned transaction was automatically terminated, since the global operation established in the global agreement signed by Banco Santander Parent on June 2014 was not concluded within the twelve-month acceptation period. As a result, the closing of the purchase was not concluded. However, Banco Santander Parent made us another offer to purchase the custodial business, which we accepted, at an agreed sale price of Ps.1,191 million. The offer requires us to transfer the custodial business and is subject to the following conditions: (i) the offer is valid until June 30, 2016; (ii) the offer is subject to the same conditions established in the global agreement signed by Banco Santander Parent; (iii) authorizations must be obtained from the Mexican authorities to establish a special purpose entity whose purpose is the operation of the custodial business in Mexico; (iv) the offer is dependent on the overall transaction, which, if terminated, will also lead to the termination in Mexico; and (v) the transaction should be formalized through the signing of the respective contracts.

On November 26, 2014, we entered into an agreement to acquire a non-revolving consumer loans portfolio from Scotiabank Inverlat. The acquisition was finalized in April 2015 after obtaining the applicable regulatory approvals. The acquired portfolio consists of 39,252 loans with a face value of Ps.3,179 million and a fair value of Ps.3,002 million.

Capital Expenditures and Divestitures

In 2013, our capital expenditures were Ps.2,239 million (U.S.$129.8 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.$143.7), 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). In 2015, our capital expenditures were Ps.2,911 million (U.S.$168.8 million), 71.4% (Ps.2,078 million) of which was for technology and the remainder of which was for furniture, fixtures and equipment (Ps.833 million).

Our principal capital expenditure since January 1, 2013 has been the acquisition of ING Hipotecaria in 2013. The purchase price for the acquisition of ING Hipotecaria was Ps.541.1 million (U.S.$31.4 million). The transaction closed on November 29, 2013.

Our principal divestiture since January 1, 2013 has been the sale of our asset management subsidiary Gestión Santander in 2013.

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 26, 2014, we 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. The acquisition was finalized in April 2015 after obtaining the applicable regulatory approvals.

For 2016, we have a capital expenditures budget of Ps.2,946 million, 77.4% (Ps.2,279 million) of which will be spent on information technology and the rest of which will be spent on furniture, fixtures and equipment (Ps.667

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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 2016 capital expenditures. At the end of 2015, we finished our intended plan to add 200 new branches to our distribution network. The expansion cost approximately Ps.1.03 billion and it was funded using our working capital. At the end of 2015 we had opened 200 new branches; 15 branches during the fourth quarter of 2012, 75 branches during 2013, 95 branches during 2014 and 15 branches in 2015. We opened an additional 15 branches and invested Ps.46 million during 2015.

Public Takeover Offers

No matters to report.

Business Overview

Overview

We are the fourth-largest financial services holding company in Mexico based on net income, total assets and deposits, and the third-largest financial services holding company in Mexico based on total loans as of December 31, 2015, 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. 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, 2015, we had total assets of Ps.1,176,358 million (U.S.$68,200 million) and total equity of Ps.109,661 million (U.S.$6,358 million), and for the year ended December 31, 2015, we had net income of Ps.14,004 million (U.S.$812 million), which represented a return-on-average equity, or ROAE, of 13.22% for that period. Our most significant subsidiary is Banco Santander Mexico, which as of December 31, 2015 accounted for 99.88% of our total assets and 98.23% of our shareholders’ equity, and for the year ended December 31, 2015 accounted for 100.40% of our net income. As of December 31, 2015, Banco Santander Mexico had total loans, net of allowance for impairment losses, of Ps.535,600 million (U.S.$ 31,052 million), total deposits of Ps.736,181 million (U.S.$42,680 million) and 1,354 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 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, information technology systems and our internal practices, as well as enhancing our distribution channels in order to maximize service in our key client segments.

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

Retail Banking

Global Corporate 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.8 million

· SMEs, with annual gross revenues of less than Ps.200 million

· Middle-market corporations, with annual gross revenues of more than Ps.200 million that are not clients of Global Corporate 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 (GTB), 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 Corporate Banking products and solutions for retail customers, which offers retail segment clients tailor-made corporate 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 Corporate Banking segment, while the retail portion of our brokerage business is part of the Retail Banking segment. Our insurance activities are included in the Retail Banking segment.

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

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	IFRS
	Net interest income						Operating profit before tax
	For the year ended December 31,						For the year ended December 31,
	2013		2014		2015		2013		2014		2015
	(Millions of pesos)
Retail Banking	Ps.	29,767	Ps.	33,316	Ps.	37,515	Ps.	8,702	Ps.	12,270	Ps.	12,838
Global Corporate Banking		3,471		3,971		4,081		3,716		4,226		3,578
Corporate Activities		2,609		324		1,430		2,595		334		1,882
Total	Ps.	35,847	Ps.	37,611	Ps.	43,026	Ps.	15,013	Ps.	16,830	Ps.	18,298

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

	IFRS
	As of and for the year ended December 31,
	2013			2014			2015
	(Millions of pesos, except percentages, branch and customer data)
Offices(1)		1,234			1,322			1,354
Customers		10,728,823			11,725,423			12,503,177
Total assets	Ps.	857,818		Ps.	949,983		Ps.	1,176,035
Loans	Ps.	384,752		Ps.	457,255		Ps.	535,277
Deposits(2)	Ps.	390,813		Ps.	447,627		Ps.	739,846
Total equity	Ps.	92,518		Ps.	102,287		Ps.	109,660
Non-performing loans as a percentage of total loans(3)		3.81	%		3.90	%		3.56	%
Efficiency(4)		39.76	%		41.70	%		40.58	%
ROAE(5)		14.16	%		13.54	%		13.22	%

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(1)

Includes branches (including branches with Select service), SME’s offices, SME’s branches, cash desks (ventanillas — including cash desk with Select service), Santander Select offices (including Centros Select, Espacios Select and, box offices and corner Select) 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) the sum of all transactions of a customer when the loan balances of such customer classified as impaired are more than 25% of the total outstanding amounts; and (ii) loans to borrowers in doubtful financial situations such as bankruptcy.

Since 2015, classification of non-performing loans remain the same, except for (i) revolving consumer credit cards loans when payment is not received in up to 90 days after it becomes due; and (ii) the sum of all transactions of a customer is when the loan balances of the same customer classified as impaired are more than 20% of the total outstanding amounts.

See Note 2.g.i to our audited financial statements for more details on the classification of impaired loans. See Note 2.h to our audited financial statements for more details on our change in accounting estimates regarding our refinements to impairment models.

(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, 2015, the Santander Group had total assets of U.S.$1,340.3 billion (U.S.$1,459.8 billion), equity of U.S.$98,753.0 million (U.S.$107,561.9 million) and a market capitalization of U.S.$65,792.0 million (U.S.$71,660.7 million). It also generated an attributable profit of U.S.$5,966.0 million (U.S.$6,498.2 million) in the year ended December 31, 2015. We represented approximately 7% of the Santander Group’s attributable profit in the year ended December 31, 2015, making us the sixth largest contributor of attributable profits to the Santander Group. We also represented approximately 5% of the Santander Group’s assets in the year ended December 31, 2015, according to the annual report of the Santander Group for 2015.

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The Santander Group had 13,030 branches, 193,863 employees and an attributable profit of U.S.$5,966.0 million (U.S.$6,498.2 million) for the year ended December 31, 2015, according to the annual report of the Santander Group for 2015.

Our Competitive Strengths

Leading market position in select categories

We rank fourth in terms of net income, total assets and deposits, and third in terms of total loans among financial groups in Mexico as of December 31, 2015, according to information published by the CNBV, with market shares of 12.8%, 14.8%, 15.0% and 15.2%, 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 second in terms of net income and total assets among private-sector banks in Mexico, with market shares of 14.4% and 15.1%, respectively, as of December 31, 2015, 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, 2015
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		3		14.3	%		15.2	%
Deposits		3		4		14.0	%		15.0	%
Total assets		2		4		15.1	%		14.8	%
Asset quality(4)		6		6		—			—
Total equity		3		4		13.8	%		12.7	%
Net income		2		4		14.4	%		12.8	%
Efficiency(5)		2		3		—			—
ROAE(6)		4		4		—			—

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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.

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(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.

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 20.0%, 14.3% and 13.2% in 2013, 2014 and 2015, respectively, as determined in accordance with Mexican Banking GAAP, making us the fourth most profitable bank among the seven largest private-sector banks in Mexico under that metric in 2015, 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, 2011 to December 31, 2015, our commercial loans market share (which includes loans to middle-market corporations, institutions, corporate clients and SMEs) increased 130 basis points, from 14.4% to 15.7%, 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 2015, 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, which 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, 2015, we had approximately 1.57 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, 2015, 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

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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;

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 repurchase agreements, which represented Ps.540.0 billion, or 50.6%, of our total liabilities as of December 31, 2015. As of December 31, 2015, customer deposits represented 73.0% 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 near the median of the seven largest banks in Mexico over the past five years. As of December 31, 2015, our total capitalization ratio was 15.6%, comprised of Tier 1 capital ratio of 12.1% and Tier 2 capital ratio of 3.5%, in each case as calculated in accordance with Mexican Banking GAAP.

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Experienced management team and skilled workforce

We benefit from a highly experienced management team. Our senior management has an average of 23 years of experience in the financial industry and 14 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 7.5% since 2008, as determined in accordance with Mexican Banking GAAP, compared to 6.75% CAGR increase in the Mexican banking system as a whole over the same 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, SMEs lending and middle-market corporations). At the same time we intend to continue developing our profitable and client-centered global corporate banking. 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, development of lasting relationships with our customers and by cross-selling credit products, such as mortgage loans, credit card loans, payroll loans, personal loans and insurance products, such as life, automobile, home, health, accident, fraud and unemployment insurance, to our clients. 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

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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 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 portfolios and to approach customers with specific and tailored product offerings.

Finally, our contact centers enhance our ability to provide segmented customer service. At the end of 2015, we finished our intended plan to add 200 new branches to our branch network, 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 opened in 2015. The expansion cost approximately Ps.1.03 billion (including Ps.46 million in connection with the 15 new branches opened during 2015) and it was 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 Corporate 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, 2015, 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:

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

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

SAM Asset Management, S.A. de C.V., Sociedad Operadora de Sociedades de Inversión (formerly, Gestión Santander, S.A. de C.V., Grupo Financiero Santander México), 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, 2015, 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, S.A. de C.V., Sociedad Financiera de Objeto Múltiple Entidad Regulada, or 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, 2015.

	IFRS
	As of and for the year ended December 31, 2015
	Total assets		Net income			Total equity
	(Millions of pesos)
Banco Santander Mexico(1)	Ps.	1,174,565	Ps.	14,060		Ps.	107,716
Santander Consumo		66,405		3,237			15,395
Santander Hipotecario		30,828		237			5,534
Santander Vivienda		9,284		(106	)		1,475
Casa de Bolsa Santander		976		8			1,009

__________

(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, 2015 accounted for approximately 99.88% of our total assets, 98.23% of our total equity and 100.40% (excluding certain eliminations) 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, 2015, as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV. For the year ended December 31, 2015, Banco Santander Mexico had net income of Ps.14,060 million (U.S.$815 million), and as of December 31, 2015, Banco Santander Mexico had total assets of Ps.1,174,565 million (U.S.$68,096 million), total loans, net of allowance for impairment losses, of Ps.535,102 million (U.S.$31,023

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million), total deposits of Ps. 548,587 million (U.S.$ 31,805 million) and total equity of Ps.107,716 million (U.S.$6,245 million). As of December 31, 2015, Banco Santander Mexico had 1,354 offices located throughout Mexico and 17,016 employees. Its headquarters are located in Mexico City, and it operates in every state in Mexico.

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

SAM Asset Management, S.A. de C.V., Sociedad Operadora de Sociedades de Inversión (formerly, Gestión Santander)

Prior to its sale in December 2013, SAM Asset Management, S.A. de C.V., Sociedad Operadora de Sociedades de Inversión (formerly, 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, 2015, Casa de Bolsa Santander had 4,397 customer contracts and Ps.433.3 billion in assets under management, and accounted for 0.08% of our total assets and 0.92% of our total equity. In 2015, Casa de Bolsa Santander had net income of Ps.8 million (U.S.$1 million), which represented 0.06% 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, 2015, our Retail Banking segment accounted for approximately 77.0% of our total loan portfolio based on the aggregate principal amount of loans in this segment, approximately 71.5% of our total demand and time deposits, 87.2% of our net interest income, 85.6% of our fee and commissions income (net) and 70.2% of our operating profit before tax. Our Retail Banking operations served 12,108,173 customers as of December 31, 2015, an increase of 763,849 customers since December 31, 2014.

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In 2015, our branch network and alternative channels originated more than 717,269 credit cards, 485,459 consumer loans and 18,507 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.$4,058) and “premier,” if they have a monthly income between Ps.50,000 (U.S.$2,899) and Ps.70,000 (U.S.$4,058); mid-income, or “preferred,” if they have a monthly income between Ps.7,500 (U.S.$435) and Ps.50,000 (U.S.$2,889); and low-income, or “classic,” if they have a monthly income below Ps.7,500 (U.S.$435). 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 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, 2015, individuals accounted for 38.9% of our total loans outstanding and 27.7% of our deposits. As of December 31, 2015, individuals (including individuals served by our private banking business described below under “—Private Banking”) accounted for 59.0% of our fee income and 35.7% of our operating profit before tax in the year ended December 31, 2015.

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, 2015, our Select customers class included 304,538 customers, 166,354 of whom were attended to by 548 Select managers that specialize in investment services. About half of our select customers were attended to in 131 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, 2015, our premier customer class included 339,611 customers that were served by approximately 741 representatives throughout our 1,354 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, 2015, we had 4,121,784 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, 2015, we had 7,342,240 classic customers.

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Within the Retail Banking segment, customers classified as individuals, together with private banking customers, collectively accounted for 68.9% of our fee income and 50.9% of our operating profit before tax in 2015.

Private Banking

The goal for our Private Banking division is to grow as a market leader in the private banking business in the countries where we operate, offering our customers solutions for their financial needs, through a transparent and innovative approach, based on a long-term, respectful and trustful relationship.

Private Banking has 2,000 professionals across more than 100 offices worldwide, and is within the top twenty private banking operations in terms of asset volume. In Mexico we have 21 offices and 110 specialized bankers located throughout the country, which provide financial advice and financial services to more than 13,000 customers with Ps.186,487 million (U.S.$10,812 million) in assets and 15,144 accounts.

In 2015, The Banker Magazine recognized us as the best private bank in Latin America for the second year in a row and Global Finance Magazine chose us as the best private bank in Mexico.

We provide customized financial and investment services by offering innovative products developed via a rigorous risk management process adapted to each client’s specific needs and investment profile. These customers are assigned to a specialized banker who monitors their investment portfolio and remains in frequent contact with the client.

We offer different services to each customer, depending on the degree of involvement that such customer wishes to have with the bank, including Custody/Execution Services, Advisory Services and Centralized Management.

In order to provide a differentiated business model, we have two divisions:

Private banking customers, with net wealth in excess of Ps.8 million (U.S.$463,803); and

Private wealth customers, with net wealth in excess of Ps.300 million (U.S.$17.4 million). We offer our private wealth customers the same products and services that we offer to our private banking customers, in addition to estate planning advice and financing and real estate services.

SMEs

As of December 31, 2015, our SME line of business represented 11.5% of our total loans outstanding and 8.0% of our deposits. SMEs accounted for 9.9% of our fee and commission income (net) and 10.3% of our operating profit before tax in the year ended December 31, 2015. 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, in 2015 we strengthened our service model for “Medium-Sized Enterprises,” where through a specialized risk analysis channel we can work with SMEs of bigger size. We introduced sales forces for SMEs Agro business and sales force for SMEs International Commerce business, two important sectors for Medium-Sized Enterprises. The maximum level of credit extended to such companies is generally limited to approximately Ps.8,000,000 (U.S.$463,803). Approximately 52.8% 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.63,499 million of our total loan portfolio as of December 31, 2015, an increase of 22.5% from December 31, 2014. 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 in Mexico. We also continue to expand our specialized network of SME executives dedicated exclusively to attending SME customers. The specialized SME network included 838 dedicated SME specialists as well as 18 dedicated specialized offices (Centros Pyme, or SME Centers) as of December 31, 2015.

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Middle-Market Corporations

This business line is comprised of companies that generally have annual revenues of more than Ps.200 million (U.S.$11.6 million), are not clients of Global Corporate 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 global corporate banking customers. As of December 31, 2015, we had 34,882 middle-market corporations customers, and 29 specialized offices, 186 senior executives, 14 agro executives, 15 account directors, 8 subdirectors and 69 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.129,158 million (U.S.$7,488 million) of our total loan portfolio as of December 31, 2015, an increase of 22.4% from December 31, 2014. The quality of this portfolio has not been affected by its growth; the non-performance rate was 1.1% as of December 31, 2014 and 1.3% as of December 31, 2015. As of December 31, 2015, our middle-market corporations customers represented 23.3% of our total loans outstanding and 16.9% of our deposits. Middle-market corporations accounted for 14.0% of our fee and commission income (net) and 19.4% of our operating profit before tax in 2015.

The middle-market business is an important source of deposits and most of its revenues come from credit products. This business line 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 2,732 Vinculados Transaccionales customers as of December 31, 2015, an increase of 18.3% from December 31, 2014.

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, 2015, these customers represented 3.4% of our total loan portfolio and 19.0% of our deposits. Institutions accounted for 2.7% of our fee income and 4.7% of our operating profit before tax in the year ended December 31, 2015. We had 31,971 institutional customers as of December 31, 2015.

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.

Global Corporate Banking

General

Global Corporate Banking 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 corporate products.

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The Global Corporate 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 Corporate 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.

In 2015, Global Corporate Banking was recognized as the “Best Investment Bank in México” in the International Finance Magazine Awards. This prize confirms Global Corporate Banking’s leadership in financing in Mexico, particularly in energy and infrastructure.

As of December 31, 2015, the Global Corporate Banking segment served 378 customers and accounted for 23.0% of our total loan portfolio, 14.4% of our total demand and time deposits, 14.4% of our fee and commission income (net) and 19.6% of our operating profit before tax.

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

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

Financial Solutions & Advisory (FS&A), which consolidates the Credit Markets and Corporate Finance areas due to the synergy between the advisory and financing activities, providing a more sophisticated service with sectoral and geographical expertise, comprehensive debt and equity advisory and linkage between mandates and deals financing.

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 Corporate Banking products and solutions for retail customers, which offers retail segment clients tailor-made corporate 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 Corporate 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. Banco Santander Mexico participated in financing a U.S.$103 million public project carried out by Comisión Federal de Electricidad (CFE) and Megacable. Additionally, the Bank participated in financing payments for public infrastructure projects (Pidiregas) for Ps.5 billion with a 10-year term.

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

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 2015, Trade Finance Magazine named Banco Santander Mexico the best bank in the “Best Trade Bank in Mexico” category, based on annual client polls. This is the fourth consecutive award and fifth in the last six years. Additionally, in 2015, Global Finance Magazine named Banco Santander Mexico the “Best Trade Finance Bank in Mexico.” Among our representative deals, we provided a supplier credit facility in favor of Dragados Offshore to finance a Pemex drilling platform valued at U.S.$150 million. Additionally, the Bank participated in financing a public infrastructure project valued at U.S.$476.8 million carried out by CFE and OHL Mexico, S.A.B. de C.V. to build a combined-cycle power plant. Santander Mexico’s participation was U.S.$82.5 million.

Credit Markets

The credit markets operations of Global Corporate 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. According to the Dealogic Data Base, in 2015 Banco Santander Mexico led the Mexican project finance market by number of financed projects as well as by amount financed, which resulted in 15% market share. Some of the representative deals in energy and infrastructure include our role as Joint Lead Arranger on the El Encino-La Laguna Pipeline, a 465 km CFE gas pipeline, in the amount of U.S.$604 million, with a 3.5-year term. Additionally, the Bank acted as Senior Mandated Lead Arranger in a 5-year U.S.$3 billion revolving credit line for financing the new Mexico City International Airport. Grupo Aeroportuario de la Ciudad de México participated as sponsor of the project. Banco Santander México was recognized as “Best Infrastructure Bank in Mexico” for the second year in a row by Latin Finance Magazine.

Syndicated Loans and Acquisition Finance. In 2015 we ranked among the top local banks in terms of deal count, closing a total of 10 deals for an aggregate amount of Ps.6,212 million according to information of Loan Connector and internal estimates. The deals included customers such as Pemex, IEnova, Cemex, Consorcio Ara, Elementia and Minera Frisco.

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, which ranked us third in the Mexican debt market. Representative deals include the issuances by Fibra Uno (total of Ps.10 billion), Holcim Capital México (Ps.1.7 billion), Fondo de la Vivienda del Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado (FOVISSSTE) (10.237 billion UDIs, and a second issuance for a total of 5.762 billion UDIs), Televisa (Ps.5 billion), Autopista Arco Norte (Ps.6.5 billon), FIRA (Ps.5 billon), Banco Santander Mexico (Ps.3 billon) and CFE (Ps.2.5 billon).

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. No deals closed during 2015.

Corporate Finance

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

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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.

Equity Capital Markets

We are one of the leading banks in the Mexican domestic capital markets. In 2015, we participated in 12 transactions for different clients in the international and Mexican equity capital markets, putting us in fifth place. We led the second Follow-On for Corporación Inmobiliaria Vesta, in a total amount of Ps.3.355 billion. We also participated as international and local bookrunner on the Elementia Initial Public Offering (IPO), in a total amount of U.S.$250 million. Additionally, the Bank acted as Sole Intermediary on the Grupo Modelo Mandatory Tender Offer in which 99.48% of the C series shares was acquired for U.S.$9.15 per share, in a total amount of U.S.$357.7 million.

Equity Custodial and Related Services

Our Global Corporate 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 2015, we led the market, ranking first in IPC Futures, TIIE 28 day Swaps and currency (U.S. dollars) Futures.

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 Corporate 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 Corporate Banking Products and Solutions for Retail Customers

We have specialized teams dedicated to bringing retail segment clients tailor-made corporate 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 and 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

Within the Dodd-Frank Act, the Volcker Rule prohibits “banking entities” from engaging in certain forms of proprietary trading subject to certain limited exceptions, and, in that sense, the Bank had in place processes to establish, maintain, enforce, review and test the compliance program designed to comply the Volcker Rule. Nevertheless, our Global Corporate 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.

Repurchase agreements totaled Ps.191,567 million at December 31, 2015, a 85.13% increase compared to the amount at December 31, 2014. We expect to continue using this funding source in the future due to its broad availability and low cost.

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

	At December 31,
	2013		2014		2015
	(Millions of pesos)
Demand deposits:
Interest-bearing deposits	Ps.	145,587	Ps.	169,950	Ps.	215,013
Non-interest-bearing deposits		112,367		124,113		132,725
Subtotal	Ps.	257,954	Ps.	294,063	Ps.	347,738
Time deposits:
Notes with interest payable at maturity	Ps.	115,711	Ps.	118,742	Ps.	109,568
Fixed-term deposits		146		205		874
Foreign currency time deposits		4,046		14,640		10,943
Subtotal	Ps.	119,903	Ps.	133,587	Ps.	121,385
Repurchase agreements	Ps.	57,506	Ps.	69,726	Ps.	46,083
Accrued interest(1)		182		183		155
Other deposits		11,579		17,069		24,652
Total customer deposits	Ps.	447,124	Ps.	514,628	Ps.	540,013
Deposits from the Mexican Central Bank and credit institutions(2)		70,216		82,078		199,833
Total deposits	Ps.	517,340	Ps.	596,706	Ps.	739,846

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(1)

Mainly from time deposits.

(2)

Includes Ps.18,519 million, Ps.33,752 million and Ps.145,484 million of repurchase agreements with the Mexican Central Bank and with credit institutions as of December 31, 2013, 2014 and 2015, 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, 2015 vs. December 31, 2014
	2014		2015		(Millions of pesos)		(%)
	(Millions of pesos)
Individuals	Ps.	184,770	Ps.	215,459	Ps.	30,689		16.6	%
SMEs		51,835		63,499		11,664		22.5
Middle-market corporations(1)		105,552		129,158		23,606		22.4
Institutions		18,283		18,724		441		2.4
Subtotal		360,440		426,840		66,400		18.4
Global corporate clients		112,013		127,186		15,173		13.5
Total(2)	Ps.	472,453	Ps.	554,026	Ps.	81,573		17.3	%

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(1)

Included private banking.

(2)

These amounts do not include reverse 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

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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.

	As of December 31,				Change, December 31, 2015 vs. December 31, 2014
	2014		2015		(Millions of pesos)		(%)
	(Millions of pesos)
Mortgages	Ps.	108,184	Ps.	122,918	Ps.	14,734		13.6	%
Credit cards		42,104		47,775		5,671		13.5	%
SMEs		51,835		63,499		11,664		22.5	%
Payroll loans		16,662		23,110		6,448		38.7	%
Personal loans		17,298		21,131		3,833		22.2	%
Other		522		525		3		0.6	%
Total	Ps.	236,605	Ps.	278,958	Ps.	42,353		17.9	%

The Santander Hipotecario residential mortgage portfolio amounted to Ps.35,480 and Ps.30,928 million as of December 31, 2014 and December 31, 2015, respectively.

The following table shows the annual interest rate applicable to the main categories of retail lending products at December 31, 2015.

	Annual interest rate
		(%)
Credit cards		23.60
Personal loans (includes payroll loans, personal loans and others)		25.30
Mortgages		9.80

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, 2015, payroll loans amounted to Ps.23,110 million (U.S.$1,340 million), representing approximately 4.2% of our total lending portfolio. We held approximately 11.7% of the market share in Mexico in payroll loans at December 31, 2015, 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, 2015, personal loans amounted to Ps.21,131 million (U.S.$1,225 million), representing approximately 3.8% of our total lending portfolio.

Credit Cards

We are the fourth-largest issuer of credit card loans in the Mexican market according to information published by the CNBV, and we had 2.9 million outstanding credit cards across 2.7 million accounts as of December 31, 2015. At this date, we held a 14.6% market share, with a Ps.47,775 million (U.S.$2,770 million) loan portfolio and a delinquency rate of 4.36%, 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, 2015, our total credit card loans outstanding represents approximately 8.6% of our total lending portfolio.

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We issue 16 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 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. We offer many benefits for customers of our different credit card brands, including: (i) the Fiesta Rewards program, where there is a bonus awarded for the first purchase within the first 100 days of the card’s authorization, points are awarded for each dollar of consumption in any establishment and participating hotels; redemption of points for hotel nights, airline tickets, car rentals, rewards catalog products and gifts can be made; there is a concierge service and access to over 600 VIP lounges at major airports in over 100 countries; (ii) the Delta Platinum program, where we offer a welcome bonus, priority boarding on certain flights, concierge services, SkyMiles program (granting one mile for every dollar spent at any establishment and two miles for every dollar spent on Delta), and concierge and parking benefits in the Mexico City International Airport for up to 15 days paying 50% of the fare; (iii) the Ferrari card provides access to major Formula 1 races, an opportunity to experience a course in sports driving and provides access to the Scuderia Ferrari community; and (iv) the American Express “AMEX” card awards points, special shopping offers in department stores, supermarkets and other shops, extra bonus with triple points, and purchases without interest for the first six months.

As of December 31, 2015, our credit card portfolio has the second 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,
	2011		2012		2013		2014		2015
Total credit card non-performing loans as a percentage of total credit card loans		3.11%		4.04%		3.35%		4.70%		3.86%

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.

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.

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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 and other countries. 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 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, 2015, held a 19.3% 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, 2015, we had a total mortgage portfolio of Ps.122,918 million (U.S.$7,126 million), representing approximately 22.2% 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.$118 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.$1,218 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.$1,386 million), including a total loan portfolio of Ps.21,926 million (U.S.$1,271 million), while the total volume of liabilities was Ps.21,494 million (U.S.$1,246 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 two 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. As part of the transaction, we made a cash payment of Ps.541.4 million (approximately U.S.$31.4 million) for ING Hipotecaria’s equity. Since the acquisition, Banco Santander Mexico has closed 19 of the original 20 ING Hipotecaria branches in an effort to consolidate the distribution network and increase operational efficiency.

As a result of our acquisitions of the GE Capital residential mortgage business and ING Hipotecaria, during 2014 and 2015, we currently have the second-largest mortgage loans portfolio of the system, 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 33% and 23% of our mortgage portfolio as of December 31, 2014 and 2015, respectively, as determined in accordance with Mexican Banking GAAP. The mortgage portfolio of Santander Vivienda (formerly known as ING Hipotecaria) represented approximately 8% of our mortgage portfolio as of December 31, 2015, as determined in accordance with Mexican Banking GAAP. We have also engaged in transactions involving the loan portability via mortgage replacement, a process in which the Bank cancels an outstanding client mortgage with another institution and generates a new debt for such client with the Bank. During 2015, Banco Santander Mexico was the market leader in the segment, with a placement of Ps.6,068 million, representing a market share of approximately 53%.

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On average, the loan-to-value ratio of our mortgage loans was 66% as of December 31, 2015. 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 12.8 million homes in Mexico in 2015. 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.

Insurance Brokerage

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 Financial Services Group, together with sales of products of its predecessor, Seguros Santander, represented approximately 27.8% and 23.1% of the commissions we earned in 2014 and 2015, respectively.

Total outstanding insurance premiums distributed by us increased 9.6%, or Ps.912 million, in 2015 as compared to 2014, and total insurance commissions collected by us increased 7.7% in 2015 as compared to 2014. This result was supported by strengthening of our offering with a client-segmented approach and 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 program has been advertised through a national publicity campaign, which has allowed us to position ourselves among the top companies in the automobile insurance sector. As of December 31, 2015, automobile insurance products generated commissions of Ps.866 million (U.S.$50 million) based on a portfolio of approximately 1,205,758 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, 2015, we had approximately 301,458 SME customers, 34,882 middle-market corporation customers and 31,971 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 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.

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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.

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 full 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, 2015, our distribution channels included:

Office network. We have 1,354 offices throughout Mexico.

ATMs. We have 5,989 ATMs with coverage throughout Mexico, with more than 32.2 million transactions per month in average.

Contact centers. We have 2,555 contact center positions with approximately 4,884 employees. We receive more than 2.9 million in-bound calls per month and generate 5.3 million transactions.

Internet banking. We had, on average, more than 46.6 million banking transactions per month in 2015, with more than 759,800 active customers.

Mobile banking. Our newly launched channel, which enables customers to complete transactions from their cell phones and tablets. As of December 31, 2015, we had more than 467,200 active customers and 20 million transactions per month on average.

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Specialized sales force. We have 183 agents in our Asesores Super Nómina network. See “—Alternative Distribution Channels—Specialized Sales Force.”

Third-party branches (corresponsalía). We have 17,849 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, 2015, approximately 45% 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 offices in our branch network, which includes our branches (sucursales), (traditional, traditional + Select, Centro Select, SMEs, Universities and Salud + Select) and cash tellers (ventanillas), (traditional, business, business + Select, Espacio Select, Box Select, Corner Select, Universities and customs) 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. 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, 2015 vs. December 31, 2014
	2013		2014		2015		#		%
Central		142		153		157		4		2.6%
Metro North		165		186		187		1		0.5
Metro South		157		169		183		14		8.3
Northeast		154		168		165		(3)		(1.8)
Northwest		117		122		123		1		0.8
North		106		110		111		1		0.9
West		125		135		139		4		3.0
South		111		114		117		3		2.6
Southeast		157		165		172		7		4.2
Total		1,234		1,322		1,354		32		2.4%

(Includes 18 SME business centers)

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.

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.

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ATMs

We operate an extensive network of 5,989 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, 2015 vs. December 31, 2014
	2013		2014		2015		#		%
Central		539		565		623		58		10%
Metro North		662		700		741		41		6
Metro South		551		594		628		34		6
Northeast		653		677		688		11		2
Northwest		506		512		569		57		11
North		434		453		505		52		11
West		455		481		502		21		4
South		614		633		679		46		7
Southeast		850		913		1,054		141		15
Total		5,264		5,528		5,989		461		8%

We designed a comprehensive strategy that includes installing additional ATMs to transfer operations currently performed by cashiers to ATMs, reducing the workload of cashiers and thus improving the quality of their services, by increasing the functions of ATMs to encourage self-servicing and replacing machines that were becoming obsolete. We have also devised an expansion plan to amplify the ATMs’ functions, including receiving credit card payments, payment services and deposit accounts.

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 35% of the consumer loans and approximately 41% of the credit cards that we issue.

Collecting receivables. With more than 2.4 million outbound and in-bound calls, we collect more than Ps.973 million (U.S.$56 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, 2015, we had approximately 759,804 active Internet banking clients. We had, on average, 46.6 million Internet banking transactions, either monetary or non-monetary, per month in the year ended December 31, 2015. The following table presents summarized operating statistics for our Internet banking channel:

	Monthly Average				Change, year ended December 31, 2015 vs. year ended December 31, 2014
	Year ended December 31,				#		%
	2014		2015
Monetary transactions		11,710,446		12,566,385		855,939		7	%
Non-monetary transactions		30,833,019		34,073,057		3,240,038		11	%
Total transactions		42,543,465		46,639,441		4,095,977		10	%

Mobile Banking

In March 2012, we launched our 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.

In December 2015, we had approximately 467,200 Mobile Banking active customers, with approximately 20 million monetary and non-monetary mobile banking transactions. The following table presents the statistical results of the mobile banking channel:

	Month average				Change, year ended December 31, 2015 vs. year ended December 31, 2014
	Year ended December 31,				#		%
	2014		2015
Monetary transactions		243,510		426,396		182,885		43	%
Non monetary transactions		9,917,926		19,320,683		9,402,756		49	%
Total transactions		10,161,437		19,747,078		9,585,642		49	%

Specialized Sales Force

Our Asesores Super Nómina 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, 2015, 183 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.

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We delivered a monthly average of 100,950 total payroll kits in 2015, a decrease of 7.6% from a monthly average of 109,217 payroll kits delivered in 2014.

Third-Party Branches

We provide banking services to our customers through 14,301 Grupo Oxxo stores, 1,881 Grupo Oxxo 7-Eleven stores and 1,667 complementary branches provided by our agent, Telecom, as of December 31, 2015. At these third-party branches, we process more than 1.32 million transactions per month, offering basic banking services, such as debit and credit deposits, withdrawals and balance inquiries. These branches strengthen our national coverage and fortify our payroll service to companies with local coverage.

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 17,849 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.10,000 per account per day. The agreement is renewable on an annual basis and we pay Grupo Oxxo a fixed amount per transaction.

In April 2010 we signed an agreement with Telecomm, a public entity created and operated by the SCT (Secretaria de Coomunicaciones y Transportes), with locations primarily in rural areas where we have no branch network presence. We serve our customers in more than 1,667 Telecomm offices, where they can (i) execute cash withdrawals and payments (up to $5,000 per account per day), (ii) make checking account deposits (up to $15,000 per account per day), (iii) check account balances, (iv) obtain information, and (v) and perform other transactions.

In November 2014 we signed an agreement with 7-Eleven, setting up a complementary network that enables us to serve our customers in more than 1,800 stores nationwide. In such stores, our customers can perform payments, Credit and Debit Card deposits (up to $5,000 per account per day), 365 days a year, from 8:00 a.m. to 8:00 p.m.

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. We are also considering providing other services, such as “Referenced Deposits” and “Cellphone Deposits.”

Third-Party Mortgage Brokers

The acquisition of the mortgage business of GE Capital reinforced our strategy to originate mortgages through independent mortgage brokers. Approximately 45% of our mortgages were originated through third-party mortgage brokers in 2015. We have a direct relationship with the largest mortgage brokers in Mexico and an indirect relationship with approximately 100 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 27% of their operations are for our benefit.

Funding

Our principal source of funding is customer deposits, including repurchase agreements, which represented Ps.539.8 billion (U.S.$31.3 billion), or 69.36%, of our total liabilities as of December 31, 2015. 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,
	2011					2012					2013					2014					2015
	(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.	357,430		12.1	%	Ps.	425,151		13.2	%	Ps.	460,636		13.4	%	Ps.	524,047		13.7	%	Ps.	600,436		14.0	%
BBVA Bancomer		666,673		22.5			697,077		21.7			743,952		21.7			847,427		22.2			973,984		22.7
Banamex		574,710		19.4			575,574		17.9			568,614		16.6			589,990		15.5			650,546		15.2
Banorte(2)		371,393		12.5			425,524		13.2			441,869		12.9			492,754		12.9			556,608		13.0
HSBC		330,668		11.2			318,601		9.9			308,318		9.0			341,279		8.9			318,064		7.4
Inbursa		147,878		5.0			156,067		4.8			169,872		5.0			180,948		4.7			183,225		4.3
Scotiabank		129,444		4.4			150,127		4.7			171,319		5.0			186,873		4.9			230,081		5.4
Santander + Top 6	Ps.	2,578,196		87.0	%	Ps.	2,748,121		85.4	%	Ps.	2,864,580		83.6	%	Ps.	3,163,318		82.9	%	Ps.	3,512,944		81.9	%
Total System	Ps.	2,964,687		100.0	%	Ps.	3,219,261		100.0	%	Ps.	3,424,998		100.0	%	Ps.	3,816,826		100.0	%	Ps.	4,290,853		100.0	%

__________

Source:

(1) Funding and 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.

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,
	2011					2012					2013					2014					2015
	(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.	178,490		10.8	%	Ps.	210,950		11.8	%	Ps.	257,927		12.9	%	Ps.	294,269		13.2	%	Ps.	347,827		13.6	%
BBVA Bancomer		438,267		26.5			472,832		26.5			526,225		26.4			578,467		25.9			682,242		26.7
Banamex		411,261		24.9			400,428		22.5			430,280		21.6			470,042		21.0			483,429		18.9
Banorte(2)		180,303		10.9			199,770		11.2			244,809		12.3			287,838		12.9			337,019		13.2
HSBC		172,808		10.5			187,271		10.5			178,358		8.9			177,870		8.0			187,259		7.3
Scotiabank		70,268		4.3			75,059		4.2			88,336		4.4			99,268		4.4			119,847		4.7
Inbursa		53,052		3.2			59,981		3.4			65,622		3.3			69,473		3.1			77,028		3.0
Santander + Top 6(3)	Ps.	1,504,449		91.0	%	Ps.	1,606,291		90.2	%	Ps.	1,791,557		89.9	%	Ps.	1,977,227		88.4	%	Ps.	2,234,651		87.6	%
Total System	Ps.	1,652,742		100.0	%	Ps.	1,781,714		100.0	%	Ps.	1,993,472		100.0	%	Ps.	2,237,273		100.0	%	Ps.	2,551,118		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,
	2011					2012					2013					2014					2015
	(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.	159,387		14.6	%	Ps.	186,739		15.5	%	Ps.	172,808		14.7	%	Ps.	192,547		14.9	%	Ps.	208,693		14.5	%
BBVA Bancomer		208,102		19.1			199,437		16.6			185,827		15.8			219,339		16.9			270,904		18.8
Banorte(2)		166,938		15.3			204,522		17.0			181,062		15.4			190,211		14.7			204,704		14.2
Banamex		119,883		11.0			132,013		11.0			116,591		9.9			111,989		8.6			142,330		9.9
HSBC		125,323		11.5			108,603		9.0			109,450		9.3			121,387		9.4			93,322		6.5
Inbursa		89,049		8.2			90,944		7.6			91,311		7.8			107,022		8.3			102,432		7.1
Scotiabank		53,571		4.9			69,480		5.8			70,855		6.0			79,155		6.1			95,531		6.6
Santander + Top 6	Ps.	922,253		84.6	%	Ps.	991,738		82.5	%	Ps.	927,904		78.8	%	Ps.	1,021,650		78.9	%	Ps.	1,117,916		77.6	%
Total System	Ps.	1,089,816		100.0	%	Ps.	1,202,330		100.0	%	Ps.	1,177,040		100.0	%	Ps.	1,295,564		100.0	%	Ps.	1,439,870		100.0	%

___________

Source:

(1) Total fixed-term deposits and 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.

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,
	2011					2012					2013					2014					2015
	(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.	19,553		8.8	%	Ps.	27,463		11.7	%	Ps.	29,901		11.7	%	Ps.	37,231		13.1	%	Ps.	43,916		14.6	%
BBVA Bancomer		20,304		9.1			24,808		10.5			31,900		12.5			49,621		17.5			20,838		6.9
Banamex		43,566		19.6			43,133		18.3			21,743		8.5			7,959		2.8			24,787		8.3
HSBC		32,537		14.6			22,727		9.7			20,510		8.1			42,021		14.8			37,482		12.5
Banorte(2)		24,152		10.9			21,232		9.0			15,998		6.3			14,705		5.2			14,885		5.0
Inbursa		5,776		2.6			5,143		2.2			12,940		5.1			4,454		1.6			3,765		1.3
Scotiabank		5,605		2.5			5,588		2.4			12,129		4.8			8,450		3.0			14,704		4.9
Santander + Top 6(3)	Ps.	151,493		68.2	%	Ps.	150,094		63.8	%	Ps.	145,121		57.0	%	Ps.	164,441		57.9	%	Ps.	160,377		53.5	%
Total System	Ps.	222,129		100.0	%	Ps.	235,216		100.0	%	Ps.	254,486		100.0	%	Ps.	283,989		100.0	%	Ps.	299,866		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 16 years in Mexico, Santander has become a role model leader in the Mexican financial services market. We are sixth among all banks in terms of advertising spending, according to December 2015 data provided by Ibope AGB México, an independent agency that monitors advertising and television audience levels. In addition, we are fourth 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 2015.

Our marketing strategy is derived from our solid business plan, which focuses on our select, premier, preferred, and SME 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.

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 high-income 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 2015, we had 130 Santander Select offices.

Our direct and clear quality-based strategy has led us to tie for third 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 2015. 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 and mortgage products, 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 thirteen 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 4,000 homes built over the past seven years. Additionally, together with other organizations, we actively support the Mexican Banking Association “Bécalos” program, which has awarded 247,000 student scholarships to date.

In 2015, 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 (SME, 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 Grand 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, Twitter and LinkedIn. At the end of 2015, we had more than 923,336 followers on Facebook, more than 85,400 on Twitter and more than 9,000 on LinkedIn.

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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 are growing our nationwide installed ATM capacity, adding new functions to the machines, and also updating the 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, which 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

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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 Inverlat. Some of the banks with which Banco Santander Mexico competes are significantly larger and have more financial resources than Banco 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, 2015, according to information published by the CNBV.

	Mexican Banking GAAP
	As of December 31, 2015
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		3		14.3%		15.2%
Deposits		3		4		14.0%		15.0%
Total assets		2		4		15.1%		14.8%
Asset quality(4)		6		6		—		—
Total equity		3		4		13.8%		12.7%
Net income		2		4		14.4%		12.8%
Efficiency(5)		2		3		—		—
ROAE(6)		4		4		—		—

__________

Source: CNBV.

(1)

(2)

(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 Magazine 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 Magazine 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. In 2015, Banco Santander Mexico was recognized as the best Trade Finance bank and best private banking group in Mexico by Global Finance Magazine. Its investment banking division was awarded deal of the year by Global Trade for operations with Aeromexico and Pemex. IJ Global recognized Santander Mexico as the best infrastructure bank and Latin Finance, Trade Finance and International

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Finance Magazine named it the best investment bank in Mexico. International Finance Magazine also recognized us as the most socially responsible bank in Mexico.

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, 2015, the four largest banks, BBVA Bancomer, Banamex, Banorte and Banco Santander Mexico, held in the aggregate 64.8% of the total deposits in Mexico, followed by a total of 17.0% held in the aggregate by HSBC, Scotiabank and Inbursa, all of which are established large banks. The remaining 18.2% was distributed among 37 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 36 other brokerage houses, 19 of which are part of a financial group and the rest of which are independent. As of December 31, 2015, Casa de Bolsa Santander ranked in tenth place in terms of amount traded on the Mexican Stock Exchange with a market share of 3.6%.

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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,
	2011					2012					2013					2014					2015
	(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.	18,683		20.9	%	Ps.	17,822		17.6	%	Ps.	20,878		16.7	%	Ps.	14,016		13.0	%	Ps.	14,142		12.8	%
BBVA Bancomer		28,834		32.3			28,123		27.8			37,871		30.3			31,007		28.8			34,486		31.3
Banamex		14,150		15.8			17,965		17.7			21,639		17.3			14,479		13.5			18,214		16.5
Banorte(2)		9,569		10.7			10,888		10.8			14,279		11.4			15,453		14.4			17,348		15.7
Inbursa		6,031		6.7			8,382		8.3			16,316		13.0			18,106		16.8			11,783		10.7
Scotiabank		3,132		3.5			4,399		4.3			3,179		2.5			3,976		3.7			5,417		4.9
HSBC		2,788		3.1			6,274		6.2			3,715		3.0			2,111		2.0			509		0.5
Others(3)		6,176		6.9			7,419		7.3			7,277		5.8			8,406		7.8			8,339		7.6
Financial groups	Ps.	89,364		100.0	%	Ps.	101,272		100.0	%	Ps.	125,154		100.0	%	Ps.	107,552		100.0	%	Ps.	110,238		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.

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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,
	2011					2012					2013					2014					2015
	(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.	739,173		12.8	%	Ps.	750,337		12.5	%	Ps.	821,799		12.6	%	Ps.	937,384		13.2	%	Ps.	1,184,856		14.8	%
BBVA Bancomer		1,324,736		22.9			1,383 ,800		23.1			1,501,965		23.0			1,677,899		23.7			1,850,465		23.1
Banamex		1,199,200		20.7			1,196,579		20.0			1,262,376		19.4			1,206,283		17.0			1,288,725		16.1
Banorte(2)		829,277		14.3			916,567		15.3			1,006,788		15.4			1,097,982		15.5			1,198,476		15.0
HSBC		508,721		8.8			504,526		8.4			530,540		8.1			613,377		8.7			578,158		7.2
Inbursa		340,436		5.9			339,958		5.7			360,194		5.5			385,743		5.5			439,722		5.5
Scotiabank		190,081		3.3			226,979		3.8			245,775		3.8			297,259		4.2			337,484		4.2
Others(3)		653,783		11.3			678,064		11.3			788,659		12.1			861,588		12.2			1,122,482		14.0
Financial groups	Ps.	5,785,407		100.0	%	Ps.	5,996,810		100.0	%	Ps.	6,518,096		100.0	%	Ps.	7,077,516		100.0	%	Ps.	8,000,368		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.

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,
	2011					2012					2013					2014					2015
	(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.	88,479		13.3	%	Ps.	97,826		13.7	%	Ps.	94,703		12.5	%	Ps.	105,384		12.7	%	Ps.	113,548		12.7	%
Banamex		155,987		23.5			160,413		22.5			160,816		21.3			172,041		20.7			179,660		20.2
BBVA Bancomer		136,120		20.5			144,084		20.2			156,984		20.8			166,873		20.1			178,274		20.0
Banorte(2)		77,082		11.6			88,509		12.4			108,691		14.4			124,672		15.0			137,351		15.4
Inbursa		73,198		11.0			78,011		11.0			82,165		10.9			97,305		11.7			106,120		11.9
HSBC		46,787		7.1			50,748		7.1			55,770		7.4			54,246		6.5			51,935		5.8
Scotiabank		29,654		4.5			33,005		4.6			33,826		4.5			34,441		4.2			39,764		4.5
Total for seven financial groups(3)	Ps.	607,307		91.6	%	Ps.	652,596		91.6	%	Ps.	692,954		91.6	%	Ps.	754,961		91.0	%	Ps.	806,652		90.5	%

__________

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.

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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,
	2011						2012						2013						2014						2015
	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		21.9	%		12.0	%		19.1	%		13.0	%		21.7	%		11.5	%		14.0	%		11.2	%		12.9	%		9.6	%
BBVA Bancomer		22.0			10.3			20.1			10.4			25.2			10.5			19.1			9.9			20.0			9.6
HSBC		5.8			9.2			12.9			10.1			7.0			10.5			3.8			8.8			1.0			9.0
Banorte(2)		15.0			9.3			13.2			9.7			14.5			10.8			13.2			14.4			13.2			11.5
Banamex		8.9			13.0			11.4			13.4			13.5			12.7			8.7			14.3			10.4			13.9
Scotiabank		10.5			15.6			14.0			14.5			9.5			13.8			11.6			11.6			14.6			11.8
Inbursa		8.5			21.5			11.1			22.9			20.4			22.8			20.2			25.2			11.6			24.1
Financial groups		13.9	%		11.5	%		14.9	%		11.9	%		17.5	%		11.6	%		13.7	%		11.7	%		12.8	%		11.1	%

__________

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, 2015, 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,
	2011			2012			2013			2014			2015
		(%)
Santander		44.2	%		39.5	%		35.5	%		43.0	%		42.0	%
Inbursa		37.5			28.8			23.3			25.1			33.2
BBVA Bancomer		41.2			42.1			42.1			42.7			41.9
Banamex		52.3			50.9			46.5			49.0			50.2
Banorte(1)		55.7			54.0			52.1			48.5			47.9
HSBC		70.7			63.9			63.0			68.3			61.8
Scotiabank		63.6			63.1			64.6			61.4			61.8
Financial groups		51.3	%		47.7	%		45.1	%		46.8	%		46.9	%

__________

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.

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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,
	2011					2012					2013					2014					2015
	(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.	313,672		13.5	%	Ps.	350,683		13.7	%	Ps.	394,932		14.0	%	Ps.	465,541		14.9	%	Ps.	547,744		15.2	%
BBVA Bancomer		629,897		27.1			663,857		25.9			720,423		25.6			808,382		25.8			904,068		25.1
Banamex		394,840		17.0			444,028		17.3			484,749		17.2			478,771		15.3			566,658		15.7
Banorte(2)		357,506		15.4			409,914		16.0			438,693		15.6			486,061		15.5			530,091		14.7
HSBC		187,639		8.1			198,979		7.8			204,990		7.3			231,460		7.4			247,725		6.9
Inbursa		174,108		7.5			177,043		6.9			199,079		7.1			202,981		6.5			237,479		6.6
Scotiabank		114,519		4.9			127,827		5.0			148,400		5.3			179,035		5.7			215,878		6.0
Total for seven financial groups(3)	Ps.	2,172,181		93.6	%	Ps.	2,372,331		92.6	%	Ps.	2,591,266		91.9	%	Ps.	2,852,231		91.2	%	Ps.	3,249,645		90.3	%

__________

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 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,
	2011					2012					2013					2014					2015
	(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.	309,193		12.8	%	Ps.	362,452		14.0	%	Ps.	404,668		14.8	%	Ps.	459,623		15.3	%	Ps.	516,432		15.1	%
BBVA Bancomer		591,574		24.5			614,634		23.8			652,459		23.9			723,759		24.1			857,321		25.1
Banamex		510,969		21.2			503,417		19.5			523,716		19.2			556,860		18.5			613,623		18.0
Banorte(2)		363,337		15.0			419,759		16.2			438,336		16.1			492,516		16.4			561,362		16.5
HSBC		293,185		12.1			291,081		11.2			281,484		10.3			292,384		9.7			274,006		8.0
Scotiabank		116,816		4.8			137,465		5.3			142,830		5.2			164,114		5.5			199,108		5.8
Inbursa		107,240		4.4			97,575		3.8			89,879		3.3			83,434		2.8			92,636		2.7
Total for seven financial groups(3)	Ps.	2,292,314		94.9	%	Ps.	2,426,383		93.8	%	Ps.	2,533,372		93.0	%	Ps.	2,772,690		92.3	%	Ps.	3,114,488		91.3	%

___________

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.

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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,
	2011			2012			2013			2014			2015
		(%)
Santander		1.7	%		1.7	%		3.6	%		3.7	%		3.3	%
Banamex		1.6			1.9			2.4			2.2			1.6
Banorte(1)		1.9			2.1			3.1			2.9			2.2
BBVA Bancomer		3.1			3.3			3.1			2.7			2.4
Scotiabank		2.7			2.3			2.9			3.3			2.9
Inbursa		3.3			3.7			4.4			3.7			3.1
HSBC		2.7			2.0			5.9			5.3			5.2
Financial groups		2.4	%		2.4	%		3.2	%		3.0	%		2.5	%

___________

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,
	2011			2012			2013			2014			2015
		(%)
Santander		210.5	%		190.0	%		115.5	%		97.1	%		108.2	%
Scotiabank		115.3			130.5			121.1			114.2			113.5
Banorte(1)		143.1			138.3			104.6			107.0			116.0
HSBC		214.5			233.8			100.6			103.7			121.1
BBVA Bancomer		126.4			128.8			120.6			118.8			127.9
Inbursa		398.8			389.1			308.5			206.7			147.4
Banamex		284.0			230.7			214.6			225.6			263.1
Median of seven financial groups		210.5	%		190.0	%		120.6	%		114.2	%		121.1	%

___________

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.

Table of Contents

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,
	2011			2012			2013			2014			2015
		(%)
Santander		2.4	%		2.8	%		3.4	%		3.3	%		3.4	%
Inbursa		1.9			3.1			1.7			1.7			1.7
Scotiabank		1.9			1.3			2.8			2.7			1.9
Banorte(1)		1.7			1.6			2.1			2.4			2.1
BBVA Bancomer		3.3			3.4			3.4			3.3			3.3
Banamex		4.9			4.5			5.5			6.0			4.8
HSBC		3.8			2.4			4.0			3.7			5.7
Median of seven financial groups		2.4	%		2.8	%		3.4	%		3.3	%		3.3	%

__________

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,
	2011			2012			2013			2014			2015
		(%)(1)
Santander		2.6	%		2.4	%		2.7	%		1.6	%		1.3	%
Inbursa		2.0			2.5			4.7			4.9			2.9
BBVA Bancomer		2.4			2.1			2.6			2.0			2.0
Banamex		1.2			1.5			1.8			1.2			1.5
Banorte(2)		1.3			1.2			1.5			1.5			1.5
Scotiabank		1.6			2.1			1.3			1.5			1.7
HSBC		0.6			1.2			0.7			0.4			0.1
Median of seven financial groups		1.6	%		2.1	%		1.8	%		1.5	%		1.5	%

___________

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.

Table of Contents

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,
	2011			2012			2013			2014			2015
		(%)
Santander		97.8	%		93.6	%		93.6	%		97.6	%		102.2	%
HSBC		60.3			65.1			68.5			74.8			84.7
Banamex		73.9			84.4			87.8			81.7			88.5
Banorte(1)		95.7			94.9			96.8			95.6			92.0
Scotiabank		95.0			90.2			100.2			105.0			104.8
BBVA Bancomer		102.3			103.5			106.2			108.1			102.3
Inbursa		141.1			155.0			191.5			224.9			244.8
Median of seven financial groups		95.7	%		93.6	%		96.8	%		97.6	%		102.2	%

__________

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, 2015, as calculated in accordance with Mexican Banking GAAP.

	As of December 31, 2015
	(Loans per branch in millions of pesos)(1)		(Deposits per branch in millions of pesos)(1)
Santander	Ps.	450	Ps.	425
BBVA Bancomer		498		472
Banamex		380		411
Banorte		445		471
Inbursa		441		172
Scotiabank		373		344
HSBC		254		281

___________

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.

Table of Contents

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, 2015, as calculated in accordance with Mexican Banking GAAP.

	As of December 31, 2015
	(Loans per employee in millions of pesos)(1)		(Deposits per employee in millions of pesos)(1)
Santander	Ps.	31	Ps.	29
BBVA Bancomer		30		28
Banamex		18		20
Banorte		26		27
Inbursa		56		22
Scotiabank		24		22
HSBC		15		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.

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, 2015, as calculated in accordance with Mexican Banking GAAP.

	As of December 31, 2015
		(%)
Santander		2.58	%
Inbursa		2.64
Banorte		2.93
BBVA Bancomer		3.23
Scotiabank		3.68
HSBC		4.34
Banamex		4.71	%

__________

Source:

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

Table of Contents

Net fees and commissions as a percentage of operating expenditures

The following table sets forth Grupo Financiero Santander Mexico’s and its peers’ net fees and commissions as a percentage of operating expenditures as of December 31, 2015, as calculated in accordance with Mexican Banking GAAP.

	As of December 31, 2015
		(%)
Santander		57.6	%
Banamex		56.8
BBVA Bancomer		39.9
Banorte		32.6
Scotiabank		28.7
HSBC		28.0
Inbursa		15.8	%

__________

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,
	2013					2014					2015
	(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)			(Market share (%))(1)
Santander	Ps.	18,903		17.7	%	Ps.	14,049		15.0	%	Ps.	14,182			14.4	%
BBVA Bancomer		30,829		28.8			24,792		26.4			28,612			29.0
Banamex		16,354		15.3			8,106		8.6			11,524			11.7
Banorte		12,065		11.3			11,892		12.7			13,518			13.7
Inbursa		11,797		11.0			14,776		15.8			9,968			10.1
Scotiabank		2,766		2.6			3,397		3.6			4,919			5.0
HSBC		2,146		2.0			1,089		1.2			(530	)		(0.5	)
Others(2)		12,213		11.4			15,710		16.7			16,560			16.8
Mexican financial system	Ps.	107,073		100.0	%	Ps.	93,811		100.0	%	Ps.	98,753			100.0	%

___________

Source: CNBV.

(1)

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

(2)

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

Table of Contents

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 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,
	2013					2014					2015
	(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)			(Millions of pesos)		(Market share (%))(1)
Santander	Ps.	92,820		13.7	%	Ps.	103,523		13.7	%	Ps.	111,550		13.8	%
Banamex		137,760		20.3			142,675		18.9			146,061		18.0
BBVA Bancomer		125,701		18.5			133,934		17.8			145,137		17.9
Banorte		77,859		11.5			94,681		12.6			102,473		12.7
Inbursa		57,006		8.4			71,232		9.5			80,308		9.9
HSBC		47,610		7.0			48,269		6.4			46,367		5.7
Scotiabank		26,756		3.9			30,248		4.0			35,586		4.4
Total for seven banks(2)	Ps.	565,512		83.3	%	Ps.	624,562		82.9	%	Ps.	667,482		82.5	%

___________

Source: CNBV.

(1)

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

(2)

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,
	2013						2014						2015
	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		20.0	%		11.3	%		14.3	%		11.3	%		13.2	%		9.6	%
HSBC		4.7			9.3			2.3			8.1			(1.1	)		8.3
BBVA Bancomer		25.4			9.2			19.1			8.7			20.5			8.5
Banorte		16.8			9.9			13.8			11.1			13.7			11.5
Scotiabank		9.8			11.1			11.9			10.4			14.9			10.4
Banamex		12.2			11.9			5.8			12.8			8.0			12.7
Inbursa		21.2			22.2			23.0			21.2			13.1			27.4
Mexican financial system		17.2	%		10.6	%		13.1	%		11.1	%		12.6	%		10.5	%

__________

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.

Table of Contents

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,
	2011			2012			2013			2014			2015
	(%)
Santander		14.5	%		14.5	%		12.8	%		12.8	%		12.0	%
Inbursa		18.9			20.0			18.1			20.3			18.9
Banamex		15.0			14.9			14.1			15.5			14.2
Banorte(1)		10.8			11.8			12.7			13.7			12.5
Scotiabank		15.5			15.5			12.1			12.2			11.5
BBVA Bancomer		11.3			11.0			11.9			11.6			11.0
HSBC		11.9			11.5			12.0			10.8			10.0
Median of seven banks		14.5	%		14.5	%		12.7	%		12.8	%		12.0	%

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, 2015, Banco Santander Mexico was the second most efficient bank among 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,
	2013			2014			2015
	(%)
Santander		34.8	%		42.4	%		41.4	%
Inbursa		19.8			22.8			29.4
BBVA Bancomer		44.6			46.6			44.1
Banorte		53.7			50.5			50.9
Banamex		49.4			53.3			54.3
Scotiabank		65.5			62.9			65.2
HSBC		66.7			72.1			64.9
Mexican financial system		47.0	%		49.6	%		49.1	%

__________

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

Table of Contents

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,
	2011					2012					2013					2014					2015
	(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.	313,672		12.7	%	Ps.	350,683		12.7	%	Ps.	394,930		13.0	%	Ps.	465,541		13.9	%	Ps.	547,744		14.3	%
BBVA Bancomer		624,742		25.4			659,258		24.0			713,505		23.5			802,468		24.0			898,811		23.4
Banamex		394,523		16.0			444,496		16.2			485,369		16.0			478,899		14.3			566,448		14.7
Banorte(2)		338,528		13.7			392,013		14.3			422,890		14.0			464,201		13.9			504,926		13.1
HSBC		188,046		7.6			198,979		7.2			204,990		6.8			231,460		6.9			247,725		6.4
Inbursa		177,705		7.2			174,569		6.3			197,549		6.5			199,844		6.0			238,043		6.2
Scotiabank		114,525		4.7			127,473		4.6			148,115		4.9			178,553		5.3			214,883		5.6
Total for seven banks(3)	Ps.	2,151,741		87.4	%	Ps.	2,347,471		85.3	%	Ps.	2,567,348		84.7	%	Ps.	2,820,966		84.3	%	Ps.	3,218,580		83.8	%

__________

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,
	2011					2012					2013					2014					2015
	(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.	63,361		15.4	%	Ps.	70,875		15.7	%	Ps.	90,711		17.7	%	Ps.	106,588		18.9%	%	Ps.	120,476		19.3%	%
BBVA Bancomer		146,809		35.6			153,849		34.0			155,582		30.3			161,697		28.7			170,398		27.3
Banorte(2)		62,752		15.2			71,389		15.8			81,715		15.9			89,767		16.0			99,511		16.0
Scotiabank		45,298		11.0			50,029		11.0			57,204		11.2			67,580		12.0			80,302		12.9
Banamex		58,144		14.1			67,048		14.8			74,885		14.6			77,407		13.8			79,165		12.7
HSBC		19,879		4.8			19,924		4.4			25,183		4.9			26,426		4.7			29,830		4.8
Inbursa		1,304		0.3			1,293		0.3			1,249		0.2			1,501		0.3			4,208		0.7
Santander + Top 6(3)	Ps.	397,547		96.4	%	Ps.	434,407		95.9	%	Ps.	486,528		94.9	%	Ps.	530,966		94.4	%	Ps.	583,890		93.7%	%
Total System	Ps.	412,206		100.0	%	Ps.	452,866		100.0	%	Ps.	512,865		100.0	%	Ps.	562,608		100.0	%	Ps.	623,205		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.

Table of Contents

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,
	2011					2012					2013					2014					2015
	(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.	50,612		10.2	%	Ps.	63,840		10.7	%	Ps.	69,305		10.3	%	Ps.	75,624		10.6	%	Ps.	91,693		11.5	%
BBVA Bancomer		152,215		30.7			173,404		29.1			187,702		27.9			200,618		28.1			225,415		28.3
Banamex		126,325		25.5			149,649		25.1			166,270		24.7			174,234		24.4			177,886		22.3
Banorte(2)		38,239		7.7			47,348		7.9			59,815		8.9			66,856		9.4			76,943		9.6
HSBC		30,536		6.2			34,887		5.8			39,463		5.9			37,940		5.3			48,233		6.0
Inbursa		10,255		2.1			5,387		0.9			15,966		2.4			18,843		2.6			41,107		5.2
Scotiabank		16,679		3.4			20,717		3.5			26,433		3.9			26,020		3.6			23,753		3.0
Santander + Top 6(3)	Ps.	424,862		85.6	%	Ps.	495,231		83.0	%	Ps.	564,954		83.9	%	Ps.	600,134		84.1	%	Ps.	685,030		85.9	%
Total System	Ps.	496,144		100.0	%	Ps.	596,601		100.0	%	Ps.	673,022		100.0	%	Ps.	713,200		100.0	%	Ps.	797,391		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,
	2011					2012					2013					2014					2015
	(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.	164,345		14.4	%	Ps.	176,853		14.5	%	Ps.	195,183		14.6	%	Ps.	221,822		15.4	%	Ps.	265,861		15.7	%
BBVA Bancomer		226,348		19.8			235,953		19.4			269,269		20.2			301,845		20.9			349,114		20.6
Banamex		154,966		13.6			169,929		14.0			179,604		13.5			167,115		11.6			209,478		12.3
Banorte(2)		154,351		13.5			170,912		14.1			170,522		12.8			172,219		11.9			182,589		10.8
Inbursa		142,986		12.5			125,129		10.3			139,493		10.5			146,056		10.1			168,870		9.9
HSBC		103,446		9.1			111,236		9.1			117,824		8.8			124,591		8.6			126,159		7.4
Scotiabank		42,187		3.7			42,660		3.5			50,968		3.8			60,921		4.2			78,813		4.6
Santander + Top 6(3)	Ps.	988,629		86.5	%	Ps.	1,032,672		84.9	%	Ps.	1,122,863		84.2	%	Ps.	1,194,569		82.9	%	Ps.	1,380,884		81.3	%
Total System	Ps.	1,142,790		100.0	%	Ps.	1,215,802		100.0	%	Ps.	1,333,143		100.0	%	Ps.	1,441,251		100.0	%	Ps.	1,698,183		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.

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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,
	2011					2012					2013					2014					2015
	(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.	35,355		8.6	%	Ps.	39,116		8.1	%	Ps.	39,731		7.8	%	Ps.	61,507		9.8	%	Ps.	69,714		9.6	%
BBVA Bancomer		99,370		24.2			96,052		19.8			100,954		19.7			138,308		22.0			153,885		21.2
Banorte(2)		83,186		20.2			102,364		21.1			110,838		21.7			135,360		21.5			145,884		20.1
Banamex		55,087		13.4			57,869		11.9			64,611		12.6			60,143		9.5			99,919		13.8
HSBC		34,184		8.3			32,933		6.8			22,520		4.4			42,504		6.7			43,504		6.0
Scotiabank		10,362		2.5			14,067		2.9			37,866		7.4			24,032		3.8			32,015		4.4
Inbursa		23,159		5.6			42,761		8.8			40,841		8.0			33,445		5.3			23,857		3.3
Santander + Top 6(3)	Ps.	340,703		82.8	%	Ps.	385,160		79.3	%	Ps.	417,361		81.6	%	Ps.	495,299		78.6	%	Ps.	568,778		78.5	%
Total System	Ps.	411,242		100.0	%	Ps.	485,586		100.0	%	Ps.	511,373		100.0	%	Ps.	629,867		100.0	%	Ps.	724,194		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,
	2013					2014					2015
	(Millions of pesos)		(Market share (%))			(Millions of pesos)		(Market share (%))			(Millions of pesos)		(Market share (%))
Santander	Ps.	405,469		13.7	%	Ps.	460,776		14.1	%	Ps.	517,386		13.9	%
BBVA Bancomer		656,449		22.2			726,940		22.2			862,127		23.2
Banamex		529,244		17.9			565,835		17.3			617,277		16.6
Banorte		421,868		14.2			473,539		14.5			541,723		14.6
HSBC		281,772		9.5			293,025		9.0			274,544		7.4
Scotiabank		147,340		5.0			165,981		5.1			200,794		5.4
Inbursa		91,802		3.1			84,708		2.6			94,623		2.6
Total for seven banks	Ps.	2,533,944		85.5	%	Ps.	2,770,804		84.7	%	Ps.	3,108,474		83.8	%

___________

Source:

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

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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,
	2013			2014			2015
	(Asset quality (%))			(Asset quality (%))			(Asset quality (%))
Santander		3.6	%		3.7	%		3.3	%
Banamex		2.4			2.2			1.6
Banorte		3.1			3.0			2.3
BBVA Bancomer		3.2			2.7			2.4
Scotiabank		2.9			3.1			2.7
Inbursa		4.2			3.4			3.0
HSBC		5.9			5.3			5.2
Mexican financial system		3.4	%		3.1	%		2.6	%

__________

Source: CNBV.

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,
	2011					2012					2013					2014					2015
	(Branches)		(Market share (%))(1)			(Branches)		(Market share (%))(1)			(Branches)		(Market share (%))(1)			(Branches)		(Market share (%))(1)			(Branches)		(Market share (%))(1)
Santander		1,097		9.3	%		1,142		9.2	%		1,234		9.8	%		1,209		9.5	%		1,216		9.9	%
BBVA Bancomer		1,810		15.4			1,799		14.5			1,793		14.3			1,830		14.4			1,817		14.9
Banamex		1,703		14.4			1,705		13.7			1,683		13.4			1,539		12.1			1,492		12.2
Banorte(2)		1,289		10.9			1,322		10.7			1,284		10.2			1,269		10.0			1,191		9.7
HSBC		1,067		9.1			1,040		8.4			987		7.8			984		7.7			974		8.0
Scotiabank		647		5.5			639		5.1			628		5.0			586		4.6			579		4.7
Inbursa		270		2.3			295		2.4			318		2.5			341		2.7			539		4.4
Santander + Top 6(3)		7,883		66.9	%		7,942		64.0	%		7,927		63.0	%		7,758		61.0	%		7,808		63.8	%
Total System		11,786		100.0	%		12,412		100.0	%		12,581		100.0	%		12,715		100.0	%		12,234		100.0	%

Source: CNBV, R1 regulatory report 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,
	2011					2012					2013					2014					2015
	(ATMs)		(Market share (%))(1)			(ATMs)		(Market share (%))(1)			(ATMs)		(Market share (%))(1)			(ATMs)		(Market share (%))(1)			(ATMs)		(Market share (%))(1)
Santander		4,689		12.9	%		4,946		12.3	%		5,262		12.9	%		5,517		12.9	%		5,989		13.1	%
BBVA Bancomer		7,710		21.2			7,746		19.3			7,749		19.0			8,996		21.0			10,772		23.5
Banorte(2)		5,179		14.2			6,716		16.8			7,049		17.3			7,297		17.0			7,425		16.2
Banamex		6,029		16.6			6,288		15.7			6,609		16.2			7,142		16.6			7,526		16.4
HSBC		6,195		17.0			6,490		16.2			6,120		15.0			5,780		13.5			5,625		12.3
Scotiabank		1,554		4.3			1,558		3.9			2,221		5.4			2,148		5.0			1,975		4.3
Inbursa		781		2.1			711		1.8			703		1.7			752		1.8			808		1.8
Santander + Top 6(3)		32,137		88.2	%		34,455		86.0	%		35,713		87.5	%		37,632		87.7	%		40,120		87.6	%
Total System		36,429		100.0	%		40,082		100.0	%		40,811		100.0	%		42,931		100.0	%		45,781		100.0	%

Source: CNBV, R1 regulatory report 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 (Programa de 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).

On August 2015, we obtained AENOR’s recertification of our ISO 14001:2004 certificate, which applies to the administration, management and maintenance of the SGA in our headquarters in Santa Fe, Mexico City. The rcertification has a three-year term 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.

Below is a list of the acknowledgments and certifications which we have obtained:

Corporate Center Santa Fe, Mexico City, Mexico

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Certification for its SGA ISO 14001: 2004

Technological Operations Center Santander, Querétaro, México

National Prize of the Mexican Institute of Intelligent Building (IMEI) for Intelligent Building in 2004.

Fifth Wellington Redwood Mexico Award in 2005, 2007 and 2008 (related to the optimization of internal processes) and the Socially Responsible Company Award in 2010.

Award for Innovation and Leadership in Sustainability awarded by the Municipal Government of Santiago de Queretaro Energy Efficiency Contest Winner in 2015.

Data Center Dynamics Awards 2015 in the category “Best Enterprise Data Center” for innovation in the design and implementation of the highest concepts applied to IT and electromechanical systems in a Data Center Level Latin America. Contest winner in 2015.

Contact Center Santander, Queretaro, Mexico

National Prize of the Mexican Institute of Intelligent Building (IMEI) for Intelligent Building in 2004.

National Award for Energy Savings PNAEE, 2012 by CFE through the Trust for Electric Energy Savings (FIDE).

Certificate in International Standard for Construction of Data Processing Centers International Computer Room Experts Association (ICREA). Level V certificate for five consecutive years. Gold Certified unique in the world.

Data Center, Queretaro, Mexico

National Prize of the Mexican Institute of Intelligent Building (IMEI) for Smart and Sustainable Building in 2013.

Award “Best Data Center of the World” International Computer Room Experts Association (ICREA) for the best grade obtained certification in the world project, facilities and operation of the CPD. Contest Winner 2015.

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, 2011 and 2012 and previously presented consolidated balance sheet data as of December 31, 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, 2011 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, 2011 and 2012 in addition to the amounts previously presented in this item regarding the Elavon transaction and the sale of Seguros Santander.

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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,
	2013									2014					2015
	Average balance		Interest		Average nominal rate					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.	31,365	Ps.	1,264		4.03	%	Ps.	32,546	Ps.	1,061		3.26	%	Ps.	35,872	Ps.	1,102		3.07	%
Total	Ps.	31,365	Ps.	1,264		4.03	%	Ps.	32,546	Ps.	1,061		3.26	%	Ps.	35,872	Ps.	1,102		3.07	%
Loans and advances to credit institutions
Pesos	Ps.	72,994	Ps.	2,989		4.09	%	Ps.	88,114	Ps.	2,899		3.29	%	Ps.	57,873	Ps.	1,965		3.40	%
Foreign currency(1)		19,696		30		0.15			11,084		14		0.13			9,716		100		1.03
Total	Ps.	92,690	Ps.	3,019		3.26	%	Ps.	99,198	Ps.	2,913		2.94	%	Ps.	67,589	Ps.	2,065		3.06	%
Loans and advances to customers—excluding credit cards
Pesos	Ps.	286,653	Ps.	29,757		10.38	%	Ps.	331,713	Ps.	32,360		9.76	%	Ps.	387,922	Ps.	37,653		9.71	%
Foreign currency(1)		50,923		1,816		3.57			63,011		2,020		3.21			74,982		2,258		3.01
Total	Ps.	337,576	Ps.	31,573		9.35	%	Ps.	394,724	Ps.	34,380		8.71	%	Ps.	462,904	Ps.	39,911		8.62	%
Loans and advances to customers—credit cards
Pesos	Ps.	38,666	Ps.	9,882		25.56	%	Ps.	41,053	Ps.	10,121		24.65	%	Ps.	43,713	Ps.	10,316		23.60	%
Total	Ps.	38,666	Ps.	9,882		25.56	%	Ps.	41,053	Ps.	10,121		24.65	%	Ps.	43,713	Ps.	10,316		23.60	%
Debt instruments
Pesos	Ps.	179,272	Ps.	8,802		4.91	%	Ps.	193,928	Ps.	8,231		4.24	%	Ps.	245,949	Ps.	9,244		3.76	%
Foreign currency(1)		2,851		26		0.91			22,416		864		3.85			27,046		1,280		4.73
Total	Ps.	182,123	Ps.	8,828		4.85	%	Ps.	216,344	Ps.	9,095		4.20	%	Ps.	272,995	Ps.	10,524		3.86	%
Income from hedging operations
Pesos			Ps.	728						Ps.	277						Ps.	237
Foreign currency(1)				—							—							—
Total			Ps.	728						Ps.	277						Ps.	237
Other interest-earning assets
Pesos			Ps.	80						Ps.	53						Ps.	31
Foreign currency(1)				12							16							18
Total			Ps.	92						Ps.	69						Ps.	49
Total interest-earning assets
Pesos	Ps.	608,950	Ps.	53,502		8.79	%	Ps.	687,354	Ps.	55,002		8.00	%	Ps.	771,329	Ps.	60,548		7.85	%
Foreign currency(1)		73,470		1,884		2.56			96,511		2,914		3.02			111,744		3,656		3.27
Total	Ps.	682,420	Ps.	55,386		8.12	%	Ps.	783,865	Ps.	57,916		7.39	%	Ps.	883,073	Ps.	64,204		7.27	%

___________

(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,
	2013								2014								2015
	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.	14,048							Ps.	13,916							Ps.	15,813
Foreign currency(1)		861								834								1,154
Total	Ps.	14,909							Ps.	14,750							Ps.	16,967
Allowance for impairment losses
Pesos	Ps.	(10,355	)						Ps.	(13,301	)						Ps.	(15,522	)
Foreign currency(1)		(424	)							(670	)							(1,163	)
Total	Ps.	(10,779	)						Ps.	(13,971	)						Ps.	(16,685	)
Tangible assets
Pesos	Ps.	6,458							Ps.	7,857							Ps.	8,214
Total	Ps.	6,458							Ps.	7,857							Ps.	8,214
Intangible assets
Pesos	Ps.	1,924							Ps.	2,039							Ps.	1,893
Total	Ps.	1,924							Ps.	2,039							Ps.	1,893
Other non-interest-earning assets
Pesos	Ps.	86,463							Ps.	124,645							Ps.	117,514
Foreign currency(1)		327								9,966								23,985
Total	Ps.	86,790							Ps.	134,611							Ps.	141,499
Total non-interest-earning assets
Pesos	Ps.	98,538							Ps.	135,156							Ps.	127,912
Foreign currency(1)		764								10,130								23,976
Total	Ps.	99,302							Ps.	145,286								151,888
Total average assets
Pesos	Ps.	707,488		Ps.	53,502		7.56	%	Ps.	822,510		Ps.	55,002		6.69	%	Ps.	899,241		Ps.	60,548		6.73	%
Foreign currency(1)		74,234			1,884		2.54			106,641			2,914		2.73			135,720			3,656		2.69
Total	Ps.	781,722		Ps.	55,386		7.09	%	Ps.	929,151		Ps.	57,916		6.23	%	Ps.	1,034,961		Ps.	64,204		6.20	%

__________

(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,
	2013							2014							2015
	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.	60,294	Ps.	2,505		4.15	%	Ps.	108,133	Ps.	4,094		3.79	%	Ps.	171,815	Ps.	5,848		3.40	%
Foreign currency(1)		16,741		144		0.86			17,849		89		0.50			23,924		153		0.64
Total	Ps.	77,035	Ps.	2,649		3.44	%	Ps.	125,982	Ps.	4,183		3.32	%	Ps.	195,739	Ps.	6,001		3.07	%
Customer deposits— Demand accounts
Pesos	Ps.	154,825	Ps.	2,866		1.85%	%	Ps.	193,255	Ps.	3,027		1.57	%	Ps.	214,629	Ps.	3,145		1.47	%
Foreign currency(1)		20,150		9		0.04			26,751		27		0.10			36,118		38		0.11
Total	Ps.	174,975	Ps.	2,875		1.64	%	Ps.	220,006	Ps.	3,054		1.39	%	Ps.	250,747	Ps.	3,183		1.27	%
Customer deposits—Savings accounts
Pesos	Ps.	18						Ps.	14						Ps.	15
Total	Ps.	18						Ps.	14						Ps.	15
Customer deposits— Time deposits
Pesos	Ps.	126,985	Ps.	4,971		3.91	%	Ps.	118,595	Ps.	3,776		3.18	%	Ps.	130,572	Ps.	3,938		3.02	%
Foreign currency(1)		9,707		26		0.27			11,049		32		0.29			25,500		52		0.20
Total	Ps.	136,692	Ps.	4,997		3.66	%	Ps.	129,644	Ps.	3,808		2.94	%	Ps.	156,072	Ps.	3,990		2.56	%
Customer deposits— Repurchase agreements
Pesos	Ps.	89,003	Ps.	3,393		3.81	%	Ps.	76,178	Ps.	2,306		3.03	%	Ps.	61,765	Ps.	1,781		2.88	%
Total	Ps.	89,003	Ps.	3,393		3.81	%	Ps.	76,178	Ps.	2,306		3.03	%	Ps.	61,765	Ps.	1,781		2.88	%
Subordinated debentures
Foreign currency(1)	Ps.	228	Ps.	11		4.82	%	Ps.	17,305	Ps.	1,051		6.07	%	Ps.	20,438	Ps.	1,259		6.16	%
Total	Ps.	228	Ps.	11		4.82	%	Ps.	17,305	Ps.	1,051		6.07	%	Ps.	20,438	Ps.	1,259		6.16	%
Marketable debt securities and other financial liabilities
Pesos	Ps.	28,634	Ps.	1,390		4.85	%	Ps.	32,328	Ps.	1,226		3.79	%	Ps.	35,047	Ps.	1,193		3.40	%
Foreign currency(1)		13,052		604		4.63			13,586		611		4.50			15,974		700		4.38
Total	Ps.	41,686	Ps.	1,994		4.78	%	Ps.	45,914	Ps.	1,837		4.00	%	Ps.	51,021	Ps.	1,893		3.71	%
Other liabilities
Pesos	Ps.	78,847	Ps.	3,084		3.91	%	Ps.	98,062	Ps.	3,132		3.19	%	Ps.	76,817	Ps.	2,388		3.11	%
Total	Ps.	78,847	Ps.	3,084		3.91	%	Ps.	98,062	Ps.	3,132		3.19	%	Ps.	76,817	Ps.	2,388		3.11	%
Expense from hedging operation
Pesos	Ps.	—	Ps.	320				Ps.	—	Ps.	735				Ps.	—	Ps.	466
Foreign currency (1)		—		—					—		—					—		—
Total	Ps.	—	Ps.	320				Ps.	—	Ps.	735				Ps.	—	Ps.	466
Other interest expense
Pesos	Ps.	—	Ps.	216				Ps.	—	Ps.	199				Ps.	—	Ps.	217
Foreign currency(1)		—		—					—		—					—		—
Total	Ps.	—	Ps.	216				Ps.	—	Ps.	199				Ps.	—	Ps.	217
Total interest-bearing liabilities
Pesos	Ps.	538,606	Ps.	18,745		3.48	%	Ps.	626,565	Ps.	18,495		2.95	%	Ps.	690,660	Ps.	18,976		2.75	%
Foreign currency(1)		59,878		794		1.33			86,540		1,810		2.09			121,954		2,202		1.81
Total	Ps.	598,484	Ps.	19,539		3.26	%	Ps.	713,105	Ps.	20,305		2.85	%	Ps.	812,614	Ps.	21,178		2.61	%

(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,
	2013						2014						2015
	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.	22,032					Ps.	28,032					Ps.	37,868
Foreign currency(1)		32						39						15
Total	Ps.	22,064					Ps.	28,071					Ps.	37,883
Other liabilities— non-interest-bearing
Pesos	Ps.	49,106					Ps.	68,451					Ps.	67,817
Foreign currency(1)		11,239						21,369						10,692
Total	Ps.	60,345					Ps.	89,820					Ps.	78,509
Total equity
Pesos	Ps.	100,829					Ps.	98,155					Ps.	105,955
Total	Ps.	100,829					Ps.	98,155					Ps.	105,955
Total non-interest-bearing liabilities and equity
Pesos	Ps.	171,967					Ps.	194,638					Ps.	211,640
Foreign currency(1)		11,271						21,408						10,707
Total	Ps.	183,238					Ps.	216,046					Ps.	222,347
Total liabilities and equity
Pesos	Ps.	710,573	Ps.	18,745		2.64%	Ps.	821,203	Ps.	18,495		2.25%	Ps.	902,300	Ps.	18,976		2.10%
Foreign currency(1)		71,149		794		1.12		107,948		1,810		1.68		132,661		2,202		1.66
Total	Ps.	781,722	Ps.	19,539		2.50%	Ps.	929,151	Ps.	20,305		2.19%	Ps.	1,034,961	Ps.	21,178		2.05%

__________

(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, 2015 compared to the year ended December 31, 2014. 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, 2015 and 2014
	Volume			Rate			Net Change
	(Millions of pesos)
INTEREST-EARNING ASSETS
Cash and balances with the Mexican Central Bank
Pesos	Ps.	102		Ps.	(61	)	Ps.	41
Total	Ps.	102		Ps.	(61	)	Ps.	41
Loans and advances to credit institutions
Pesos	Ps.	(1,027	)	Ps.	93		Ps.	(934	)
Foreign currency(1)		(14	)		100			86
Total	Ps.	(1,041	)	Ps.	193		Ps.	(848	)
Loans and advances to customers—excluding credit cards
Pesos	Ps.	5,456		Ps.	(163	)	Ps.	5,293
Foreign currency(1)		360			(122	)		238
Total	Ps.	5,816		Ps.	(285	)	Ps.	5,531
Loans and advances to customers—credit cards
Pesos	Ps.	628		Ps.	(433	)	Ps.	195
Total	Ps.	628		Ps.	(433	)	Ps.	195
Debt instruments
Pesos	Ps.	1,955		Ps.	(942	)	Ps.	1,013
Foreign currency(1)		219			197			416
Total	Ps.	2,174		Ps.	(745	)	Ps.	1,429
Income from hedging operations
Pesos	Ps.	(40	)	Ps.	—		Ps.	(40	)
Foreign currency(1)		—			—			—
Total	Ps.	(40	)	Ps.	—		Ps.	(40	)
Other interest-earning assets
Pesos	Ps.	(22	)	Ps.	—		Ps.	(22	)
Foreign currency(1)		2			—			2
Total	Ps.	(20	)	Ps.	—		Ps.	(20	)
Total interest-earning assets
Pesos	Ps.	7,052		Ps.	(1,506	)	Ps.	5,546
Foreign currency(1)		567			175			742
Total	Ps.	7,619		Ps.	(1,331	)	Ps.	6,288

__________

(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, 2015 and 2014
	Volume			Rate			Net Change
	(Millions of pesos)
INTEREST-BEARING LIABILITIES
Deposits from the Mexican Central Bank and credit institutions
Pesos	Ps.	2,168		Ps.	(414	)	Ps.	1,754
Foreign currency(1)		39			25			64
Total	Ps.	2,207		Ps.	(389	)	Ps.	1,818
Customer deposits—Demand accounts
Pesos	Ps.	313		Ps.	(195	)	Ps.	118
Foreign currency(1)		10			1			11
Total	Ps.	323		Ps.	(194	)	Ps.	129
Customer deposits—Savings accounts
Pesos	Ps.	—		Ps.	—		Ps.	—
Foreign currency(1)		—			—			—
Total	Ps.	—		Ps.	—		Ps.	—
Customer deposits—Time deposits
Pesos	Ps.	361		Ps.	(199	)	Ps.	162
Foreign currency(1)		29			(9	)		20
Total	Ps.	390		Ps.	(208	)	Ps.	182
Customer deposits—Repurchase agreements
Pesos	Ps.	(416	)	Ps.	(109	)	Ps.	(525	)
Foreign currency(1)		—			—			—
Total	Ps.	(416	)	Ps.	(109	)	Ps.	(525	)
Subordinated debentures
Foreign currency(1)	Ps.	193		Ps.	15		Ps.	208
Total	Ps.	193		Ps.	15		Ps.	208
Marketable debt securities and other financial liabilities
Pesos	Ps.	93		Ps.	(126	)	Ps.	(33	)
Foreign currency(1)		105			(16	)		89
Total	Ps.	198		Ps.	(142	)	Ps.	56
Other liabilities
Pesos	Ps.	(660	)	Ps.	(84	)	Ps.	(744	)
Foreign currency(1)		—			—			—
Total	Ps.	(660	)	Ps.	(84	)	Ps.	(744	)
Expense from hedging operations
Pesos	Ps.	(269	)	Ps.	—		Ps.	(269	)
Foreign currency(1)		—			—			—
Total	Ps.	(269	)	Ps.	—		Ps.	(269	)
Other interest expense
Pesos	Ps.	18		Ps.	—		Ps.	18
Foreign currency(1)		—			—			—
Total	Ps.	18		Ps.	—		Ps.	18
Total interest-bearing liabilities
Pesos	Ps.	1,608		Ps.	(1,127	)	Ps.	481
Foreign currency(1)		376			16			392
Total	Ps.	1,984		Ps.	(1,111	)	Ps.	873

__________

(1)

Represents assets or liabilities denominated in foreign currencies. Values are presented in pesos.

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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,
	2013						2015
	(Millions of pesos, except percentages)
Net Interest Margin and Spread
Average earning assets
Pesos	Ps.	608,950		Ps.	687,354		Ps.	771,329
Foreign currency(1)		73,470			96,511			111,744
Total	Ps.	682,420		Ps.	783,865		Ps.	883,073
Net interest income
Pesos	Ps.	34,757		Ps.	36,507		Ps.	41,572
Foreign currency(1)		1,090			1,104			1,454
Total	Ps.	35,847		Ps.	37,611		Ps.	43,026
Gross yield(2)
Pesos		8.79	%		8.00	%		7.85	%
Foreign currency(1)		2.56			3.02			3.27
Total		8.12	%		7.39	%		7.27	%
Net yield(3)
Pesos		5.71	%		5.31	%		5.39	%
Foreign currency(1)		1.48			1.14			1.30
Total		5.25	%		5.05	%		4.87	%
Yield spread(4)
Pesos		5.31	%		4.85	%		5.10	%
Foreign currency(1)		1.23			0.93			1.46
Total		4.86	%		4.54	%		4.66	%

__________

(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,
	2013			2014			2015
	(Percentages)
Return-on-average Equity and Assets
ROAA: Return-on-average total assets		1.83	%		1.43	%		1.35	%
ROAE: Return-on-average equity		14.16			13.54			13.22
Dividend pay-out ratio(1)		146.00			26.13			48.27
Average equity as a percentage of average total assets		12.90	%		10.56	%		10.24	%

__________

(1)

Dividends declared per share divided by net income per share. 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. On May 29, 2015, we paid a dividend of Ps.3,534 million, equal to Ps.0.52 per share. On December 22, 2015, we paid a dividend of Ps.3,226 million, equal to Ps.0.48 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,
	2013			2014			2015
	(Percentages)
Average Interest-Earning Assets
Cash and balances with the Mexican Central Bank		4.60	%		4.15	%		4.06	%
Loans and advances to credit institutions		13.57			12.65			7.65
Loans and advances to customers–excluding credit cards		49.47			50.36			52.43
Loans and advances to customers–credit cards		5.67			5.24			4.95
Debt instruments		26.69			27.60			30.91
Total interest-earning assets		100.00	%		100.00	%		100.00	%

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Investment Securities

At December 31, 2013, 2014 and 2015, the book value of our investment securities was Ps.171.2 billion, Ps.204.9 billion and Ps.331.0 billion, respectively (representing 20.0%, 21.6% and 28.1% of our total assets at such dates). Mexican government securities and instruments issued by the Mexican Central Bank represented Ps.141.0 billion, or 82.4%, of our investment securities at December 31, 2013, Ps.160 billion, or 78.1%, of our investment securities at December 31, 2014 and Ps.284 billion, or 85.7%, of our investment securities at December 31, 2015. For a discussion of how we value our investment securities, see Note 2.d to our audited financial statements.

The following table shows the book value of our investment securities by type of counterparty at each of the dates indicated. As of December 31, 2013, 2014 and 2015, Ps.41.5 billion, Ps.52.1 billion and Ps.77.1 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, 2013, 2014 and 2015, the aggregate book value of our debt instruments issued by the Mexican government, excluding instruments issued by the Mexican Central Bank, was equal to 105.0%, 65.5% and 110.7%, of our total equity, respectively, and the aggregate book value of our debt instruments issued by the Mexican Central Bank was equal to 47.4%, 90.8% and 147.9 of our total equity, respectively.

	IFRS
	For the year ended December 31,
	2013		2014		2015
	(Millions of pesos)
Investment Securities
Debt instruments issued by the Mexican government (excluding Mexican Central Bank)	Ps.	97,172	Ps.	67,039	Ps.	121,365
Debt instruments issued by the Mexican Central Bank		43,825		92,959		162,200
Foreign government debt securities		13,440		24,734		31,162
Debt instruments issued by private sector		11,285		14,919		13,967
Total debt instruments		165,722		199,651		328,694
Total equity securities		5,448		5,259		2,273
Total investment securities	Ps.	171,170	Ps.	204,910	Ps.	330,967

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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, 2015.

	Maturity as of December 31, 2015
	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.	42,022		3.87	%	Ps.	59,078		4.55	%	Ps.	14,236	5.65	%	Ps.	6,029		6.17	%	Ps.	121,365
Debt instruments issued by the Mexican Central Bank		138		3.28			147,815		3.32			14,247	3.49			—		0.00			162,200
Foreign government debt securities		21,777		4.51			9,385		12.45			—	0.00			—		0.00			31,162
Debt instruments issued by the private sector		3,902		4.42			6,728		5.01			3,091	6.41			246		7.03			13,967
Total debt instruments	Ps.	67,839		4.02%		Ps.	223,006		6.33%		Ps.	31,574	3.89%		Ps.	6,275		3.30%		Ps.	328,694

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,
	2013		2014		2015
	(Millions of pesos)
Loans and Advances to Credit Institutions
Time deposits	Ps.	101	Ps.	98	Ps.	98
Call money transactions granted		17,560		11,098		—
Reverse repurchase agreements		70,594		27,379		735
Guarantee deposits—collateral delivered		15,272		20,758		30,223
Other demand accounts		8,316		9,186		13,086
Reciprocal accounts		9,997		26,167		14,192
Total	Ps.	121,840	Ps.	94,686	Ps.	58,334

Loan Portfolio

At December 31, 2013, 2014 and 2015 our total loans and advances to customers (excluding reverse repurchase agreements) equaled Ps.398,516 million, Ps.472,453 million and Ps.554,026 million, respectively, representing 46.45%, 49.7% and 47.1%, of our total assets at such dates, respectively. Loans and advances to customers, net of allowance for impairment losses equaled Ps.384,752 million, Ps.457,255 million and Ps.535,600 million at December 31, 2013, 2014 and 2015, respectively, representing 44.9%, 48.1% and 45.5% of our total assets at such dates. We also have loan commitments drawable by third parties, which amounted to Ps.140,643 million, Ps.128,785 million and Ps.98,643 million at December 31, 2013, 2014 and 2015, 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 reverse repurchase agreements), by type of customer loan, at each of the dates indicated. For each category of loan, we maintain specific risk management policies in line with the standards of the Santander Group, and as managed and monitored by the board

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of directors of Banco Santander Mexico 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.

	IFRS
	For the year ended December 31,
	2011			2012			2013			2014			2015(1)
	(Millions of pesos)
Loans by Type of Customer
Public sector	Ps.	33,378		Ps.	38,732		Ps.	37,387		Ps.	55,865		Ps.	59,922
Commercial, financial and industrial		173,357			179,802			199,474			231,818			278,645
Mortgage		64,043			72,290			91,859			108,184			122,918
Installment loans to individuals		51,097			64,265			69,796			76,586			92,541
Revolving consumer credit card loans		28,637			36,973			39,782			42,104			47,775
Non-revolving consumer loans		22,460			27,292			30,014			34,482			44,766
Total loans		321,875			355,089			398,516			472,453			554,026
Allowance for impairment losses		(7,247	)		(9,387	)		(13,764	)		(15,198	)		(18,749	)
Loans net of allowance for impairment losses	Ps.	314,628		Ps.	345,702		Ps.	384,752		Ps.	457,255		Ps.	535,277

(1)

See Note 2.h to our audited financial statements for more details on our change in accounting estimates regarding our refinements to impairment models.

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,
	2011			2012			2013			2014			2015(2)
	(Percentages)
Non-performing Loans as a Percentage of Total Loans by Type of Customer(1)
Public sector		0.0	%		0.0	%		0.0	%		0.00	%		0.0	%
Commercial, financial and industrial		1.5			1.1			4.2			4.1			3.5
Mortgage		3.5			3.4			3.9			4.9			5.3
Installment loans to individuals		3.0			4.6			4.7			4.7			3.8
Revolving consumer credit card loans		3.1			4.0			3.3			4.7			3.9
Non-revolving consumer loans		2.8			5.3			6.4			4.7			3.8
Total		2.0	%		2.1	%		3.8	%		3.9	%		3.6	%

__________

(1)

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) the sum of all transactions of a customer when the loan balances of such customer classified as impaired are more than 25% of the total outstanding amounts; and (ii) loans to borrowers in doubtful financial situations such as bankruptcy.

Since 2015, classification of non-performing loans remain the same, except for (i) revolving consumer credit cards loans when payment is not received in up to 90 days after it becomes due; and (ii) the sum of all transactions of a customer is when the loan balances of the same customer classified as impaired are more than 20% of the total outstanding amounts.

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See Note 2.g.i to our audited financial statements for more details on the classification of impaired loans.

(2)

See Note 2.h to our audited financial statements for more details on our change in accounting estimates regarding our refinements to impairment models.

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, 2015.

	IFRS as of December 31, 2015
	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.	16,362		7.16	%	Ps.	24,202		11.66	%	Ps.	19,358		16.38	%	Ps.	59,922			10.82	%
Commercial, financial and industrial		167,457		73.32			98,351		47.40			12,837		10.87			278,645			50.29
Mortgages		15,612		6.84			33,926		16.35			73,380		62.12			122,918			22.19
Installment loans to individuals		28,968		12.68			51,013		24.59			12,560		10.63			92,541			16.70
Revolving consumer credit card loans		12,042		5.27			23,190		11.18			12,543		10.62			47,775			8.62
Non-revolving consumer loans		16,926		7.41			27,823		13.41			17		0.01			44,766			8.08
Total loans		228,399		100.00%			207,492		100.00%			118,135		100.00%			554,026			100.00%
Allowance for impairment losses		(18,749	)														(18,749	)
Loans net of allowance for impairment losses	Ps.	209,650				Ps.	207,492				Ps.	118,135				Ps.	535,277

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, 2015.

	IFRS as of December 31, 2015
	(Millions of pesos)
Interest Rate Formula
Fixed interest rate	Ps.	204,288
Floating interest rate		349,738
Total	Ps.	554,026

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. In general, the total interest that we received on our restructured loans in 2011 through 2015 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,
	2011		2012		2013		2014		2015
	(Millions of pesos)
Non-accrued interest on the basis of contractual terms owed:
Non-accrual loans(1)	Ps.	171	Ps.	211	Ps.	561	Ps.	916	Ps.	1,103
Restructured loans(1)		299		413		503		412		375
Interest received:
Non-accrual loans(1)	Ps.	108	Ps.	72	Ps.	174	Ps.	250	Ps.	349
Restructured loans(1)		322		521		549		490		419

__________

(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.

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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 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,
	2013		2014		2015
	(Millions of pesos)
Commercial	Ps.	13,668	Ps.	11,120	Ps.	9,674
Consumer		715		638		641
Mortgage		1,906		4,174		3,628
Credit card		1,541		1,394		1,331
Total	Ps.	17,830	Ps.	17,326	Ps.	15,274

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, 2015 Compared to the Year Ended December 31, 2014—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, 2014 Compared to the Year Ended December 31, 2013—Impairment Losses on Financial Assets (Net).”

	IFRS
	For the year ended December 31,
		2011			2012			2013			2014			2015	(2)
		(Millions of pesos)
Movements in Allowance for Impairment Losses
Allowance for impairment losses at beginning of year	Ps.	7,558		Ps.	7,247		Ps.	9,387		Ps.	13,764		Ps.	15,198
Impairment losses on loans and receivables(1)		6,620			10,338			16,888			14,831			17,766
Others		(13	)		12			19			113			209
Charge-offs against allowance for impairment losses		(6,918	)		(8,210	)		(12,530	)		(13,510	)		(14,424	)
Allowance for impairment losses at end of year	Ps.	7,247		Ps.	9,387		Ps.	13,764		Ps.	15,198		Ps.	18,749

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__________

(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.1,185 million in 2011, Ps.1,368 million in 2012, Ps.1,983 million in 2013, Ps.1,699 million in 2014 and Ps. 1,725 million in 2015, is recorded under Impairment losses on financial assets (net)—Loans and receivables in the consolidated income statement.

(2)

See Note 2.h to our audited financial statements for more details on our change in accounting estimates regarding our refinements to impairment models.

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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,
	2011			2012			2013			2014			2015
	(Millions of pesos)
Recoveries of Loans Previously Charged Off – by type
Commercial, financial and industrial	Ps.	(437	)	Ps.	(536	)	Ps.	(809	)	Ps.	(534	)	Ps.	(735	)
Mortgage		(360	)		(658	)		(824	)		(888	)		(739	)
Installment loans to individuals		(889	)		(826	)		(923	)		(1,046	)		(1,075	)
Revolving consumer credit card loans		(722	)		(613	)		(706	)		(696	)		(698	)
Non-revolving consumer loans		(167	)		(213	)		(217	)		(350	)		(377	)
Expenses paid to recovery agencies		501			652			573			769			824
Total recoveries of loans previously charged off	Ps.	(1,185	)	Ps.	(1,368	)	Ps.	(1,983	)	Ps.	(1,699	)	Ps.	(1,725	)

	IFRS
	For the year ended December 31,
		2011		2012		2013		2014		2015	(2)
		(Millions of pesos)
Impairment Losses on Loans and Receivables
Commercial, financial and industrial	Ps.	1,261	Ps.	1,166	Ps.	5,331	Ps.	3,925	Ps.	6,173
Mortgage		726		1,014		1,071		1,203		1,039
Installment loans to individuals		4,633		8,158		10,486		9,703		10,554
Revolving consumer credit card loans		2,710		4,753		5,995		5,837		6,044
Non-revolving consumer loans		1,923		3,405		4,491		3,866		4,510
Total impairment losses on loans and receivables(1)	Ps.	6,620	Ps.	10,338	Ps.	16,888	Ps.	14,831	Ps.	17,766

__________

(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.1,185 million in 2011, Ps.1,368 million in 2012, Ps.1,983 million in 2013, Ps.1,699 million in 2014 and Ps.1,725 million in 2015, is recorded under Impairment losses on financial assets (net)—Loans and receivables in the consolidated income statement.

(2)

See Note 2.h to our audited financial statements for more details on our change in accounting estimates regarding our refinements to impairment models.

	IFRS
	For the year ended December 31,
	2011		2012		2013		2014		2015
	(Millions of pesos)
Charge-offs against Allowance for Impairment Losses(1)
Commercial, financial and industrial	Ps.	1,086	Ps.	1,449	Ps.	2,811	Ps.	3,139	Ps.	4,443
Mortgage		419		472		631		642		542
Installment loans to individuals		5,413		6,289		9,088		9,729		9,439
Revolving consumer credit card loans		3,857		4,055		5,467		5,631		5,449
Non-revolving consumer loans		1,556		2,234		3,621		4,098		3,990
Total charge-offs against allowance for impairment losses	Ps.	6,918	Ps.	8,210	Ps.	12,530	Ps.	13,510	Ps.	14,424

__________

(1)

See Note 12 to our audited financial statements 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,
	2011		% of total allowance			2012		% of total allowance			2013		% of total allowance			2014		% of total allowance			2015(1)		% of total allowance
	(Millions of pesos, except percentages)
Allowance for Impairment Losses
Commercial, financial and industrial	Ps.	2,913		40.20	%	Ps.	2,608		27.78	%	Ps.	5,147		37.39	%	Ps.	6,031		39.68	%	Ps.	7,944		42.37	%
Mortgage		461		6.36			1,038		11.06			1,478		10.74			2,054		13.51			2,558		13.64
Installment loans to individuals		3,873		53.44			5,741		61.16			7,139		51.87			7,113		46.81			8,247		43.99
Revolving consumer credit card loans		2,461		33.96			3,159		33.65			3,688		26.79			3,893		25.62			4,488		23.94
Non-revolving consumer loans		1,412		19.48			2,582		27.51			3,451		25.08			3,220		21.19			3,759		20.05
Total	Ps.	7,247		100.00%		Ps.	9,387		100.00%		Ps.	13,764		100.00%		Ps.	15,198		100.00%		Ps.	18,749		100.00%

__________

(1)

See Note 2.h to our audited financial statements for more details on our change in accounting estimates regarding our refinements to impairment models.

Impaired Loans

The following tables show our impaired loans.

	IFRS
	For the year ended December 31,
	2011			2012			2013			2014			2015(2)
	(Millions of pesos, except percentages)
Impaired Loans(1)
Non-performing loans	Ps.	6,382		Ps.	7,329		Ps.	15,175		Ps.	18,430		Ps.	19,742
Non-performing loans as a percentage of total loans		1.98	%		2.06	%		3.81	%		3.90	%		3.56	%
Loan charge-offs as a percentage of average total loans		2.38	%		2.45	%		3.33	%		3.10	%		2.85	%

__________

(1)

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) the sum of all transactions of a customer when the loan balances of such customer classified as impaired are more than 25% of the total outstanding amounts; and (ii) loans to borrowers in doubtful financial situations such as bankruptcy.

Since 2015, classification of non-performing loans remain the same, except for (i) revolving consumer credit cards loans when payment is not received in up to 90 days after it becomes due; and (ii) the sum of all transactions of a customer is when the loan balances of the same customer classified as impaired are more than 20% of the total outstanding amounts.

See Note 2.g.i to our audited financial statements for more details on the classification of impaired loans.

(2)

See Note 2.h to our audited financial statements for more details on our change in accounting estimates regarding our refinements to impairment models.

Movement of Impaired Loans

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The following tables show the movement in our impaired loans.

	IFRS
	For the year ended December 31,
	2011			2012			2013			2014			2015(2)
	(Millions of pesos)
Movement of impaired loans(1)
Beginning balance	Ps.	5,004		Ps.	6,382		Ps.	7,329		Ps.	15,175		Ps.	18,430
Additions		12,809			15,523			26,408			24,848			30,006
Transfers to performing loans		(4,513	)		(6,366	)		(6,032	)		(8,083	)		(14,270	)
Charge-off		(6,918	)		(8,210	)		(12,530	)		(13,510	)		(14,424	)
Balance at year-end	Ps.	6,382		Ps.	7,329		Ps.	15,175		Ps.	18,430		Ps.	19,742

__________

(1)

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) the sum of all transactions of a customer when the loan balances of such customer classified as impaired are more than 25% of the total outstanding amounts; and (ii) loans to borrowers in doubtful financial situations such as bankruptcy.

Since 2015, classification of non-performing loans remain the same, except for (i) revolving consumer credit cards loans when payment is not received in up to 90 days after it becomes due; and (ii) the sum of all transactions of a customer is when the loan balances of the same customer classified as impaired are more than 20% of the total outstanding amounts.

See Note 2.g.i to our audited financial statements for more details on the classification of impaired loans.

(2)

See Note 2.h to our audited financial statements for more details on our change in accounting estimates regarding our refinements to impairment models.

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.

	IFRS
	For the year ended December 31,
	2011			2012			2013			2014			2015(5)
	(Millions of pesos, except percentages)
Impaired assets and ratios
Computable credit risk(1)	Ps.	349,009		Ps.	381,660		Ps.	425,701		Ps.	503,232		Ps.	594,900
Non-performing loans(2)		6,382			7,329			15,175			18,430			19,742
Commercial, financial and industrial		2,609			1,912			8,325			9,575			9,673
Mortgage		2,249			2,472			3,590			5,249			6,514
Installment loans to individuals		1,524			2,945			3,260			3,606			3,555
Revolving consumer credit card loans		891			1,492			1,332			1,980			1,846
Non-revolving consumer loans		633			1,453			1,928			1,626			1,709
Allowance for impairment losses		7,247			9,387			13,764			15,198			18,749
Ratios
Non-performing loans to computable credit risk(1)		1.83	%		1.92	%		3.56	%		3.66	%		3.32	%
Coverage ratio(3)		113.55	%		128.08	%		90.70	%		82.46	%		94.97	%
Loan charge-off coverage ratio (4)		1.98	%		2.15	%		2.94	%		2.68	%		2.42	%

__________

(1)

(2)

Non-performing loans include (i) all credits past due by more than (x) 30 days, in the case of single-payment loans, (y) 60 days, in the case of revolving loans (including consumer loans and credit 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) the sum of all transactions of a customer when the loan balances of such customer classified as impaired are more than 25% of the total outstanding amounts; and (ii) loans to borrowers in doubtful financial situations such as bankruptcy.

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Since 2015, classification of non-performing loans remain the same, except for (i) revolving consumer credit cards loans when payment is not received in up to 90 days after it becomes due; and (ii) the sum of all transactions of a customer is when the loan balances of the same customer classified as impaired are more than 20% of the total outstanding amounts.

See Note 2.g.i to our audited financial statements for more details on the classification of impaired loans.

(3)

Allowance for impairment losses as a percentage of non-performing loans.

(4) Loan charge-offs as percentage of computable credit risk.

(5) See Note 2.h to our audited financial statements for more details on our change in accounting estimates regarding our refinements to impairment models.

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,
	2011		2012		2013		2014		2015
	(Millions of pesos)
Deposits from Mexican Central Bank and credit institutions
Reciprocal accounts and overnight deposits	Ps.	16,380	Ps.	9,643	Ps.	15,592	Ps.	6,790	Ps.	10,837
Repurchase agreements		45,707		19,603		18,519		33,752		145,484
Time deposits		8,006		9,578		12,956		19,977		18,950
Other accounts		5,043		4,064		23,122		21,533		24,537
Accrued interest		57		49		27		26		25
Total deposits from Mexican Central Bank and credit institutions	Ps.	75,193	Ps.	42,937	Ps.	70,216	Ps.	82,078	Ps.	199,833
Customer deposits
Current accounts		177,986		210,837		257,952		294,062		347,737
Savings accounts		24		24		2		1		1
Other deposits		9,122		11,965		11,579		17,069		24,652
Time deposits		128,695		131,476		119,903		133,587		121,385
Repurchase agreements		72,562		51,589		57,506		69,726		46,083
Accrued interest		259		206		182		183		155
Total customer deposits	Ps.	388,648	Ps.	406,097	Ps.	447,124	Ps.	514,628	Ps.	540,013
Total deposits	Ps.	463,841	Ps.	449,034	Ps.	517,340	Ps.	596,706	Ps.	739,846

Short-Term Borrowings

The following table shows our short-term borrowings including securities that we sold under 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,
	2013					2014					2015
	Amount		Average rate			Amount		Average rate			Amount		Average rate
	(Millions of pesos, except percentages)
Short-Term Borrowings
Repurchase agreements:
At December 31	Ps.	76,024		2.74	%	Ps.	102,646		2.99	%	Ps.	191,567		3.12	%
Average during year		116,505		3.38			156,689		3.12			199,040		2.96
Maximum month-end balance		155,413		3.94			188,532		3.40			256,412		3.12
Short positions:
At December 31(1)	Ps.	51,964		3.47	%	Ps.	27,297		3.11	%	Ps.	25,252		3.12
Average during year		55,075		3.64			84,363		3.23			50,479		3.04
Maximum month-end balance		113,751		4.31			109,596		3.52			95,081		3.16
Total short-term borrowings at year end	Ps.	127,988		3.11%		Ps.	129,943		3.05%		Ps.	216,819		3.12%

__________

(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.

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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 IPAB and 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.

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

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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 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.

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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 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

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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 Commercial 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.

Commercial Bankruptcy Law

The Mexican Commercial 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 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 Commercial 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%

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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 intervener (interventor), conciliator (conciliador) and receiver (síndico). The IPAB acts as the liquidator and receiver and the CONDUSEF may appoint up to three interveners.

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 Commercial Bankruptcy Law mandates the netting of derivative transactions upon the declaration of insolvency.

The Mexican Commercial 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 the Mexican Commercial Bankruptcy Law, 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 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

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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.

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

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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 otras 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.

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.

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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, which 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 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

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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 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.

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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 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

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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 accounting 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 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.

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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 Commercial 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.

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

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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 clearinghouse or central counterparty, or does not pay three or more checks for a total amount of two million UDIs, that have been excluded from a clearinghouse 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. The 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.

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.

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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 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.

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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%	Not Applicable	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 1Capital) 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) 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, 2015, we and our subsidiaries operating in the financial sector had set aside an aggregate of Ps.10,488 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.

Compliance with regulatory ratios

As part of its liquidity management model, in recent years the Bank has been managing the implementation, monitoring and early compliance with the new liquidity requirements set by international financial legislation.

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

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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

Under IFRS, we apply 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 after 90 days of the maturity date.

Loans with a single payment of principal at maturity and with periodic interest payments (interest-only loans) are considered impaired 90 days after principal or interest become 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.

Mortgage loans

Mortgage loans are considered impaired when a payment is past due more than 90 days.

Installment loans to individuals

Revolving consumer credit cards loans are considered impaired when payment is not received 90 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.

We also consider as impaired loans the sum of all transactions of a customer when the loan balances of the same customer classified as impaired are equivalent to more than 20% of the total outstanding amounts.

Loans and advances which are not impaired due to default but for which there are reasonable doubts about their full repayment (principal and interest) according to their contractual terms are considered impaired loans. This analysis includes, among others, customers in situations involving deterioration in their creditworthiness, such as negative equity, continued losses, general delay in payments, inadequate economic or financial structure, and insufficient cash flows to settle debt or inability to obtain additional financing, etc.

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Impaired loans which are renegotiated, will remain impaired until there is evidence of sustained payment, i.e., performance of payment by the borrower without payment delay for the total amount due and payable in terms of principal and interest during a certain period of time.

With regard to uncollected accrued interest on impaired loans, the Bank 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 relating to impaired assets continue to be recognized on the consolidated balance sheet, for their full amounts, 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 and irreversible deterioration of the borrower’s overall financial condition, resources, value of any guarantees and payment record which would lead a borrower to bankruptcy.

When the recovery of a loan is considered to be unlikely, it is written off together with the corresponding allowance for impairment losses from the consolidated balance sheet without prejudice to any actions that the consolidated entities may initiate to seek collection until their contractual rights are extinguished due to the expiration of the statute-of-limitations period, forgiveness or any other cause.

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, SME loans and revolving SME 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.

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.

In accordance with Mexican Banking GAAP, we apply 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.

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.

If the debtor files for bankruptcy protection, except for those loans:

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That continue to receive payments in terms of the provisions of section VIII of Article 43 of the Mexican Commercial Bankruptcy Law, or

That have been granted under Article 75, Sections II and III of Article 224 of the Mexican Commercial Bankruptcy Law, applying different adjustment factors or deductions with respect to each type of guarantee.

For Mexican Banking GAAP purposes, 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.

Classification of loans and allowance for impairment losses under Mexican Banking GAAP

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 October 1, 2015, to use our internal models to determine our allowance for impairment losses under Mexican Banking GAAP as an alternative to the standard generic models developed by the CNBV. Our approach is based on the Advanced 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 loan 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 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.

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

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statutory percentage be applied to loans that are past due for each level, as a means to create an allowance for impairment losses under Mexican Banking GAAP.

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. Our total loans portfolio 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.

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 under Mexican Banking GAAP. 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.

All charge-offs of uncollectible loans are charged against the allowance for impairment losses. Mexican banks are required to obtain authorization from their Board of Directors to charged-off loans.

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.

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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:

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

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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.”

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).

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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 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

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include terms and guidelines, similar to international standards such as International Swap and Derivatives Association (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.

The Bank 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.

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”) through certain publications on the Official Gazette of the Federation in 2010, 2011, 2013, 2014 and 2015.

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));

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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.

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

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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 amendments to the General Provisions on Money Laundering and Terrorist Financing published in the Official Gazette of the Federation (Diario Oficial de la Federación) on April 25, 2014, September 12, 2014 and December 31, 2014, added 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.

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 September 10, 2015, adding the following to the prevention of money laundering and terrorist financing:

An additional 30-day period was granted to submit unusual transactions reports, according to the guidelines to be published by the Ministry of Finance.

· Additional time, up to and including September 2016, to update the customer identification file for Trust Customers.

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

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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.

In June 2014, the first group of the Mexican Supreme Court of Justice issued a jurisprudential thesis, of mandatory application, allowing federal judges to determine ex officio if an interest rate agreed in a promissory note is evidently excessive, violating an individual’s human rights, and consequently establishing a reduced rate. The elements the judge should take into account to determine if a rate is evidently excessive are: (a) the type of relationship between the parties; (b) the qualification of the persons intervening in the subscription of the note and if the activity of the creditor is regulated; (c) the purpose of the credit; (d) the amount of the loan; (e) the term of the loan; (f) the existence of guaranties for the payment of the loan; (g) the interest rates applied by financial institutions in transactions similar to the one under analysis, as a mere reference; (h) the variation of the national inflation index during the term of the loan; (i) market conditions; and (j) other issues that may be relevant for the judge.

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.

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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 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.$124,790 as of December 31, 2015), 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, (iv)

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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, the broker-dealer (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 does 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, established and revised the 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 Trading 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 swap market participants to report all swaps transactions to swap data repositories and will require higher margin payments for uncleared swaps once the uncleared swap margin rules go into effect. 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 capital, margin, business conduct, recordkeeping, clearing, execution, reporting, and other requirements. The specific parameters of these requirements have been or will be implemented 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

The Volcker Rule, a statutory provision of the Dodd-Frank Act, 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 term “covered fund” is defined very broadly to include traditional hedge funds, private equity funds, certain securitization vehicles and other entities that must rely on Section 3(c)(1) or 3(c)(7) of the U.S. Investment Company Act of 1940 for an exemption under that Act, as well as certain similar foreign funds. The Volcker Rule became effective in July 2012 and in December 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, and trading solely outside the United States, and also permit certain ownership interests in certain types of funds to be retained. 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 applicable to each requirement.

In general, all banking entities were required to conform to the requirements of the Volcker Rule, except for provisions related to certain funds, and to implement a compliance program by July 21, 2015. In December 2014, the Federal Reserve Board 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

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after December 31, 2013. Banco Santander Parent, including Grupo Financiero Santander Mexico, has assessed how the final rules implementing the Volcker Rule affect the Group’s businesses and has adopted the necessary measures to bring our activities into compliance with the rules.

After a reasonable review, the CEO confirmed that, for the period of July 22, 2015 through December 31, 2015, the Bank had in place processes to establish, maintain, enforce, review and test the compliance program established in a manner reasonably designed to achieve compliance with the Volcker Rule.

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 the affiliates within the Santander Group.

During the period covered by this annual report:

(a) Santander UK holds frozen savings accounts and one current account for two 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 2015. Revenue generated by Santander UK on these accounts is negligible.

(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 2015, total revenue in connection with the mortgage was approximately £3,876 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 ISA Managers Limited. The funds within both accounts are invested in the same portfolio fund. The accounts have remained frozen during 2015. 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 £188 while net profits in 2015 were negligible relative to the overall profits of Banco Santander Parent.

(c) During the third quarter of 2015 two additional Santander UK customers were designated. A UK national is designated by the U.S. under the Specially Designated Global Terrorist (“SDGT”) sanctions program and is on the U.S. Department of the Treasury’s Office of Foreign Assets Control’s Specially Designated Nationals and Blocked Persons (“SDN”) List. This customer holds a bank account which generated revenue of approximately £180 during the third and fourth quarter of 2015. The account is blocked. Net profits in the third and fourth quarter of 2015 in connection with this account were negligible relative to the overall profits of Banco Santander Parent. A second UK national is designated by the U.S. under the SDGT sanctions program and is on the U.S. SDN List. No transactions were made in the third and fourth quarter of 2015 and his account is blocked and in arrears.

(d) In addition, during the fourth quarter of 2015, Santander UK has identified one additional customer. A UK national is designated by the U.S. under the SDGT sanctions program and is on the U.S. SDN List. The customer holds a bank account which generated negligible revenue during the fourth quarter of 2015. The account was closed during the fourth quarter of 2015. Net profits in the fourth quarter of 2015 were negligible relative to the overall profits of Banco Santander Parent.

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In addition, the Santander Group has an outstanding legacy export credit facility with Bank Mellat, which was on the U.S. SDN List at December 31, 2015. In 2005 Banco Santander Parent participated in a syndicated credit facility for Bank Mellat of U.S.$15.5 million, which matured on July 6, 2015. As of December 31, 2015, the Santander Group was owed U.S.$0.3 million not paid at maturity under this credit facility and 95% covered by official export credit agencies.

Banco Santander Parent has not been receiving payments from Bank Mellat under this or other 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. No funds have been extended by Banco Santander Parent under this facility since it was 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 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 need prior approval from the Spanish Government to pay any amounts due to Bank Sepah or Bank Mellat pursuant to Council Regulation (EU) No. 2015/1861.

In the aggregate, all of the transactions described above resulted in approximately U.S.$15,000 gross revenues and approximately U.S.$77,000 net loss to the Santander Group in 2015, 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 subject to prior approval (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, 2015, based on publicly available annual reports. As of December 31, 2015, the Santander Group had 13,030 branches and a presence in 10 core 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, 2015.

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IFRS at December 31, 2015

Total assets: Ps.1,174,565 million

(99.88% of total)

Net income: Ps.14,060 million

(100.40% of total)

Total equity: Ps.107,716 million

(98.23% of total)

Total assets: Ps.976 million

(0.08% of total)

Net income: Ps.8 million

(0.06% of total)

Total equity: Ps.1,009 million

(0.92% of total)

All of our principal subsidiaries are incorporated in Mexico.

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, Mexico City, Mexico.

We also own two other buildings in Queretaro and rent 152 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, 2015	Number
Central Offices
Owned		3
Rented		152
Total		155
Branches
Owned		4
Rented(1)		1,332
Total(2)		1,336
SME Center
Owned		0
Rented		18
Total		18
Other Property(3)
Owned		0
Rented		1,028
Total		1,028

__________

(1)

Includes 69 branches under bailment (comodato).

(2)

Consists mainly of back offices, storage, parking lots and ATMs.

For additional information about our property, plants and equipment, see Note 2.k 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.

At the end of 2015, we finished our intended plan to add 200 new branches to our branch network. This expansion cost approximately Ps.1.03 billion and it was funded using our working capital. We opened an additional 15 branches and invest Ps.46 million in connection with these new branches during 2015.

ITEM 4A. UNRESOLVED STAFF COMMENTS

Not applicable.

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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.

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 8.6%, 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 slowdown, with an annual GDP growth rate of just 1.4%. Service activities grew by 2.5% in 2013 compared to 2012, with a 2.3% 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 4.0%, 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.

In 2015, the Mexican economy grew at an annual GDP growth rate of 2.5%, supported mainly by domestic demand. At the same time, headline inflation posted a record low of 2.1%, mainly due to the effects of several measures related to the energy reform, while the peso depreciated 16.7% against the U.S. dollar during the year. The sharp drop in global oil prices and the significant reduction of oil production in Mexico, together with the increase of interest rates in the U.S. and Mexico and global economic uncertainty increased and will 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.

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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 reference 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 reference 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 3.0%. In December 2015, the Mexican Central Bank increased the target rate by 25 basis points (leaving the rate at 3.25%), in response to the 25 basis points increase in the fed funds rate. The absence of an adjustment in the reference rate could generate an additional and disorderly depreciation of the Mexican currency, affecting both inflation expectations and inflation itself. 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 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

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.

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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). 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 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.

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 and provisions for off-balance sheet risk

We recognize credit losses inherent in financial instruments not measured at fair value taking into account 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, which have not yet been allocated to specific transactions.

We use the concept of incurred loss to quantify the credit losses, using statistical models that consider the following four factors: “exposure at default,” “probability of default,” “loss given default” and the “loss identification period” 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 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

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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.

During 2015, we revised our estimates for allowance for impairment losses on loans and receivables of all loan portfolios and for the provision for off-balance sheet risk with the purpose of making certain refinements to the impairment models as part of our policy to continuously refine the existing impairment models and accounting estimates. Our application of these refined models for the year ended December 31, 2015 does not materially affect the comparability of our financial position, results of operations and several financial measures when compared to prior years. See Note 2.h to our audited financial statements for more details on our change in accounting estimates regarding our refinements to impairment models.

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, which 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.

Goodwill and business combinations

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 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.

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Application of New and Revised IFRS

In 2015, 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, 2015. 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, 2014 and 2015 and for the years ended December 31, 2013, 2014 and 2015, 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.”

Results of Operations for the Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014

The following table presents our consolidated results of operations for the year ended December 31, 2015 as compared to the year ended December 31, 2014.

	For the year ended December 31,
	2014			2015			2015			2015/2014
	(Millions of pesos)						(Millions of U.S. dollars)(1)			(% Change)
Interest income and similar income	Ps.	57,916		Ps.	64,204		U.S.$	3,722			10.86	%
Interest expenses and similar charges		(20,305	)		(21,178	)		(1,228	)		4.30	%
Net Interest Income	Ps.	37,611		Ps.	43,026		U.S.$	2,494			14.40	%
Income from equity instruments		153			117			7			(23.53	%)
Fee and commission income (net)		13,373			14,083			816			5.31	%
Gains/(losses) on financial assets and liabilities (net)		2,619			2,489			144			(4.96	%)
Exchange differences (net)		(11	)		6			—			(154.55	%)
Other operating income		487			457			26			(6.16	%)
Other operating expenses		(2,479	)		(3,011	)		(175	)		21.46	%
Total Income	Ps.	51,753		Ps.	57,167		U.S.$	3,312			10.46	%
Administrative expenses		(19,897	)		(21,332	)		(1,237	)		7.21	%
Personnel expenses		(9,977	)		(11,033	)		(640	)		10.58	%
Other general administrative expenses		(9,920	)		(10,299	)		(597	)		3.82	%
Depreciation and amortization		(1,682	)		(1,864	)		(108	)		10.82	%
Impairment losses on financial assets (net)		(13,132	)		(16,041	)		(930	)		22.15	%
Loans and receivables		(13,132	)		(16,041	)		(930	)		22.15	%
Impairment losses on other assets (net):		(48	)		—			—			(100.00	%)
Other intangible assets		—			—			—			—
Non-current assets held for sale		(48	)		—			—			(100.00	%)
Provisions (net)(2)		(157	)		270			16			(271.97	%)
Gains/(losses) on disposal of assets not classified as non-current assets held for sale		8			7			—			(12.50	%)
Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations		(15	)		91			5			(706.67	%)
Operating Profit Before Tax	Ps.	16,830		Ps.	18,298		U.S.$	1,058			8.72	%
Income tax		(3,541	)		(4,294	)		(249	)		21.27	%
Profit from Continuing Operations		13,289			14,004			809			5.38	%
Profit from Discontinued Operations (net)		—			—			—			—
Profit for the Year	Ps.	13,289		Ps.	14,004		U.S.$	809			5.38	%
Profit attributable to the Parent		13,288			14,003			809			5.38	%
Profit attributable to non-controlling interests		1			1			—			—

____________

(1)

(2)

Principally includes provisions for off-balance sheet risk and provisions for tax and legal matters. See Note 2.h to our audited financial statements for more details on our change in accounting estimates regarding our refinements to impairment models.

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Summary

Profit in 2015 was Ps.14,004 million, a 5.4% or Ps.715 million increase from Ps.13,289 million in 2014. These results reflect mainly:

a Ps. 5,415 million, or 14.4%, increase in net interest income due primarily to a growth in loans;

a Ps. 710 million, or 5.3%, increase in income from fees and commissions (net) to Ps.14,083 million, mainly resulting from: (i) growth in sales of insurance, (ii) collections and payments, (iii) foreign exchange and (iv) financial advisory service fees, which more than offset lower credit and debit card fees. The decline in credit and debit card fees during the year resulted from higher expenses incurred in connection with reward programs and placement fees related to selling credit cards outside our existing customer pool, including telemarketing in an effort to continue growing our volumes in this product segment.

These positive results were partially offset by:

a Ps.2,909 million, or 22.2%, increase in impairment losses on loans and receivables (net), principally as a result of (i) business volume growth across all segments, mainly in our commercial, financial and industrial portfolio, revolving consumer credit card loan portfolio and non-revolving consumer loan portfolio; and (ii) an increase in impairment losses in connection with our exposure to the Pemex suppliers and the three major homebuilders;

a Ps.1,435 million, or 7.2%, increase in administrative expenses, due primarily to increases in wages and salaries, as well as increases in rental expenses, technology and systems, taxes other than income tax, administrative services and advertising and communication expenses;

a Ps.753 million, or 21.3% increase in income tax that resulted in a 23.5% effective tax rate in the year as compared to 21.0% in 2014;

a Ps.532 million, or 21.5%, increase in other expenses, mainly due to higher contributions to the IPAB, resulting from an increase in customer deposits;

a Ps.130 million, or 5.0%, decrease in gains on financial assets and liabilities (net), mainly resulting from a decrease in gains from equity securities, driven by losses in equity derivatives mainly due to low yields from the main stock indexes, including the IPC, Ibex and S&P.

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Net Interest Income

Our interest income and similar income consists mainly of interest from lending activities to customers and credit institutions, which generated Ps.52,292 million, or 81.4%, of our total interest and similar income in 2015, with the remaining interest income of Ps.11,912 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 2015, interest expense on customer deposits was Ps.8,954 million, representing 42.3% of our total interest expenses and similar charges for that period. Interest expenses from time deposits, demand accounts and repurchase agreements relating to Mexican government securities with non-financial institution customers amounted to Ps.3,990 million, Ps.3,183 million and Ps.1,781 million, respectively, in 2015, representing 18.8%, 15.0% and 8.4% 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 repurchase agreements with financial institutions) was Ps.6,001 million, representing 28.3% of our total interest expense in 2015, while interest expense on subordinated debentures was Ps.1,259 million, representing 5.9% of our total interest expense in 2015. Interest expenses and similar charges increased by Ps.873 million, or 4.3%, in 2015 compared to 2014.

Our net interest income in 2015 was Ps.43,026 million, a Ps.5,415 million, or 14.4%, increase from Ps.37,611 million in 2014. This increase was mainly due to an increase in average total interest-earning assets, caused principally by growth in our lending activities, partly offset by an increase in our interest expense, mainly due to higher interest we paid on deposits from the Mexican Central Bank which include repurchase agreements of governmental bonds with financial institutions, which were in turn partially offset by decreases in interest paid on the funding obtained through repurchase agreements with non-financial institutions and other customers.

The following table sets forth the components of our interest income and similar income and interest expenses and similar charges in 2015 and 2014.

	For the year ended December 31,
	2014			2015			2014/2015
	(Millions of pesos)						(% Change)
Interest income and similar income
Cash and balances with the Mexican Central Bank	Ps.	1,061		Ps.	1,102			3.86	%
Loans and advances to credit institutions		2,913			2,065			(29.11	)
Loans and advances to customers—excluding credit cards		34,380			39,911			16.09
Loans and advances to customers—credit cards		10,121			10,316			1.93
Debt instruments		9,095			10,524			15.71
Income from hedging operations		277			237			(14.44	)
Other interest income		69			49			(28.99	)
Total	Ps.	57,916		Ps.	64,204			10.86	%

Interest expense and similar charges
Deposits from the Mexican Central Bank and credit institutions	Ps.	(4,183	)	Ps.	(6,001	)		43.46	%
Customer deposits—Demand accounts		(3,054	)		(3,183	)		4.22
Customer deposits—Time deposits		(3,808	)		(3,990	)		4.78
Customer deposits—Repurchase agreements		(2,306	)		(1,781	)		(22.77	)
Subordinated debentures		(1,051	)		(1,259	)		19.79
Marketable debt securities and other financial liabilities		(1,837	)		(1,893	)		3.05
Other liabilities		(3,132	)		(2,388	)		(23.75	)
Expenses from hedging operations		(735	)		(466	)		(36.60	)
Other interest expenses		(199	)		(217	)		9.05
Total	Ps.	(20,305	)	Ps.	(21,178	)		4.30	%
Net interest income	Ps.	37,611		Ps.	43,026			14.40	%

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The following table sets forth the components of our average loans and advances to customers in 2014 and 2015.

	As of December 31,
	2014		2015		2014/2015
	(Millions of pesos)				(% Change)
Average loans and advances to customers
Commercial, financial and industrial	Ps.	265,811	Ps.	310,391		16.77	%
Mortgage		98,341		112,948		14.85
Installment loans to individuals		71,625		83,278		16.27
Revolving consumer credit card loans		41,053		43,713		6.48
Non-revolving consumer loans		30,572		39,565		29.42
Total	Ps.	435,777	Ps.	506,617		16.26	%

Average total interest-earning assets were Ps.883,073 million in 2015, a 12.7% or Ps.99,208 million increase from Ps.783,865 million in 2014. This increase was due to (i) an increase in the average volume of loans and advances to customers excluding credit cards of Ps.68,180 million, or 17.3%, from Ps.394,724 million in 2014 to Ps.462,904 million in 2015, (ii) an increase in the average balance of debt instruments of Ps.56,651 million, or 26.2%, from Ps.216,344 million in 2014 to Ps.272,995 million in 2015, (iii) an increase in the average volume of cash and balances with the Mexican Central Bank of Ps.3,326 million, or 10.2%, from Ps.32,546 million in 2014 to Ps.35,872 million in 2015, and (iv) an increase in the average balance of revolving consumer credit card loans of Ps.2,660 million, or 6.5%, from Ps.41,053 million in 2014 to Ps.43,713 million in 2015. These increases were partly offset by a Ps.31,609 million, or 31.9%, decrease in the average volume of loans and advances to credit institutions, mainly due to a decrease in reverse repurchase agreements with these entities, as a result of a general reduction in the activities of the credit institutions.

Interest income and similar income from interest-earning assets increased by Ps.6,288 million, or 10.9%, from Ps.57,916 million in 2014 to Ps.64,204 million in 2015, 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 loans and advances to credit institutions. The increase in interest income on loans and advances to customers excluding credit cards was driven primarily by the Ps.68,180 million increase in average volumes in our customer loan portfolio excluding credit cards in 2015 compared to 2014, which was comprised of: (i) a Ps.44,580 million increase in average commercial, financial and industrial loans, (ii) a Ps.14,607 million increase in the average volume of our mortgage loan portfolio and (iii) an increase of Ps.8,993 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.2,660 million increase in the average volume of the credit card loan portfolio. The increase in the average volume of our mortgage loan portfolio was mainly due to organic growth resulting from streamlined approval processes. During 2015, in response to increased competition that started in 2014, we continued our strategy to originate lending mainly through relatively low-interest rate products, such as “Hipoteca Santander Premier” with an interest rate of 9.60%, 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, which are part of a diverse product offering for multiple purposes such as property acquisition, construction, completion of construction projects, mortgage substitutions, land purchase and liquidity. On October 2015, we were the first and only bank to work with federal government institutions in the launching of “Hipoteca RIF,” the first mortgage product for individuals that formalized their commercial activities and were incorporated to the fiscal system through the RIF (Régimen de Incorporación Fiscal). This program provides mortgages of up to 500,000 UDIs (approximately U.S.$2.7 million) with fixed interest rate payments, and offer a twelfth month free to those accounts that are current (with us and with their fiscal obligations) and have made timely payments. With respect to the commercial 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. As to our non-revolving consumer loan portfolio, both payroll and personal loans increased mainly due to a strategic sales effort focused on these two products.Finally, the increase in our revolving consumer credit card loan portfolio was mainly due to increased commercial activity and to effective promotions and reward programs launched during the year to incentivize credit card use and attract new clients outside our existing customer pool, targeting the mid and high-income segments while maintaining origination standards. These strategies, in combination with our strong focus on consumer loans, have allowed us to achieve above-market growth rates and

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market share gains of 70 basis points in credit cards and 150 basis points in consumer loans over the past twelve months.

Average interest rates on interest-earning assets decreased by 12 basis points, from 7.39% in 2014 to 7.27% in 2015, which was mainly due to a 9 basis points decrease in the average interest rate on loans and advances to customers excluding credit cards, from 8.71% in 2014 to 8.62% in 2015, which partially resulted from the prevailing low reference rate in 2015 following its reduction by the Mexican Central Bank during 2014 and most of 2015. The reference rate was increased in December 2015. Additionally, the average interest rate earned on our mortgage loan portfolio in 2015 decreased 21 basis points as we continued to originate new loans through lower interest rate products (i.e., Premier 9.60%), which were introduced in 2014 in response to a more competitive mortgage market. Amortizations of old vintages originated with relatively higher rate products and their substitution for new originations at current lower rates also contributed to such decrease. The average interest rate on commercial, financial and industrial loans decreased by 15 basis points from 6.22% in 2014 to 6.07% in 2015 and by 89 basis points on consumer loans (excluding credit cards) from 26.19% in 2014 to 25.30% in 2015. Additionally, these results were driven by (i) a 12 basis point decrease in the average interest rate on loans and advances to credit institutions, (ii) a 105 basis point decrease in the average interest rate on credit card loans from 24.65% in 2014 to 23.60% in 2015 as a consequence of change in mix in the composition of our credit card portfolio, as we are seeing more customers who pay their outstanding balances in full therefore not contributing to interest income; and (iii) a 35 basis point decrease in the average interest rate on debt instruments, from 4.20% in 2014 to 3.86% in 2015.

Average volume of commercial, financial and industrial loans increased by Ps.44,580 million, from Ps.265,811 million in 2014 to Ps.310,391 million in 2015. This increase was mainly comprised of an increase of (i) Ps.17,705 million in the average volume of loans to middle-market corporations, (ii) Ps.10,957 million in the average volume of loans to SMEs, (iii) Ps.12,657 million, in the average volume of loans to Global Corporate Banking clients, and (iv) Ps.3,636 million increase in the average volume of loans to Mexican governmental institutions. 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 a strong focus on promoting the agricultural and international businesses. Regarding the agricultural business, we have maintained strategic alliances with major brands in the segment that have allowed us to increase loan origination and attract new customers, while developing tailored products for each subsector, taking into account their production cycles. In the international business, we have maintained a solid performance and a continued positive trend by advising companies in their foreign trade transactions and foreign direct investments. This growth has also spurred from strategic agreements with Banco Nacional de Comercio Exterior, S.N.C., or Bancomex, and international financial institutions, as well as from the launching of platforms that use the Bank’s global presence to serve our customers, such as “Santander Trade,” “Club Santander” and a personalized attention model, called “Passport,” that serves our international customers worldwide wherever Santander Group has a presence. Additionally, the increase in average Global Corporate Banking segment loans, together with a decrease in the average loan yield of 63 basis points, resulted mainly from higher activity from clients who temporarily stopped issuing debt in the markets due to interest rate uncertainty and market volatility combined with strong competition in pricing. The average interest rate earned from loans to middle-market corporations increased by 30 basis points, from 5.96% in 2014 to 6.26% in 2015. The average interest rate earned from loans to SMEs decreased by 63 basis points, from 11.97% in 2014 to 11.34% in 2015, as a result of an increased volume of substitution loans to SMEs. Through our substitution loans to SMEs we continued to 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 2015, our substitution loans to SMEs accounted for approximately 13.3% of SME loans. Additionally, 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 also affected the average interest rate earned on loans to SMEs. During 2015, in response to client preferences in the face of potential interest rate increases we introduced products with interest rate caps and we continued developing our expanded client target base towards larger SMEs. The average interest rate earned from loans to institutions decreased by 33 basis points, from 5.16% in 2014 to 4.83% in 2015. Finally, the increase in the average volume of loans to Mexican governmental institutions was mainly due to loans to the federal government, and certain states and financial entities where we seek to maintain reciprocity in transactional business and payroll.

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The average interest rate earned from loans and advances to credit institutions increased by 12 basis points, from 2.94% in 2014 to 3.06% in 2015, mainly driven by a change in the portfolio mix, in which the decrease in volume of reverse repurchase agreements at low rates was partly offset with higher volumes in instruments such as certificados bursátiles bancarios and certificados de depósito, both at higher rates than the ones obtained through reverse repurchase agreement.

Interest income earned on our trading portfolio decreased by Ps.34 million, from Ps.403 million in 2014 to Ps.369 million in 2015, due to the combined effect of a decrease of Ps.221 million in the average balance of our trading portfolio, from Ps.12,067 million in 2014 to Ps.11,846 million in 2015, and a decrease of 23 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, while the average interest rate was affected by the reference rate.

Interest income earned from debt instruments increased by Ps.1,429 million, from Ps.9,095 million in 2014 to Ps.10,524 million in 2014, or 15.7%, reflecting an increase of Ps.56,651 million in the average balance of the portfolio, from Ps.216,344 million in 2014 to Ps.272,995 million in 2015. The increase in interest income from debt instruments was mainly explained by the combined effect of: (i) a Ps.45,586 million increase in the average volume of debt instruments administered by our Global Corporate Banking segment which was partly offset by a 95 basis point decrease in the average interest rate earned on these instruments, and (ii) a Ps.11,065 million increase in the average balance of debt instruments administered by our Corporate Activities segment, from Ps.70,309 million in 2014 to Ps.81,374 million in 2015 together with a 91 basis points increase from 2.95% in 2014 to 3.86% in 2015 in the average interest rate earned, mainly due to the replacement of maturing debt instruments with higher interest rate instruments. The increase in volume of debt instruments administered by the Global Corporate 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.

Average total interest-bearing liabilities in 2015 were Ps. 812,614 million, a 14.0% or Ps. 99,509 million increase from Ps.713,105 million in 2014. Interest expenses and similar charges increased by Ps.873 million, or 4.3%, from Ps.20,305 million in 2014 to Ps.21,178 million in 2015. The principal drivers of this increase were (i) an increase of Ps.1,818 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.69,757 million, from Ps.125,982 million in 2014 to Ps.195,739 million in 2015, mainly resulting from an increase in repurchase agreements which were required to provide short-term funding for short-term loans, (ii) an increase of Ps.208 million in interest expense on subordinated debentures, from Ps.1,051 million in 2014 to Ps.1,259 million in 2015, due to an increase of Ps.3,133 million in the average balance of subordinated debentures, (iii) an increase of Ps.182 million in interest expense on time deposits, due mainly to an increase in the average balance of Ps.26,428 million, and (iv) an increase of Ps.129 million in interest expense on demand deposits, due primarily to an increase of Ps.30,741 million in the average balance of demand deposits, from Ps.220,006 million in 2014 to Ps.250,747 million in 2015. These increases were partially offset by (i) a decrease of Ps.744 million in interest expense on other liabilities due to a decrease in the average balance of Ps.21,245 million, from Ps.98,062 million in 2014 to Ps. 76,817 million in 2015, together with a decrease in the average interest rate of 8 basis points, from 3.19% in 2014 to 3.11% in 2015; (ii) a decrease of Ps.525 million in interest expense on repurchase agreements due to a decrease in the average balance of Ps.14,413 million, from Ps.76,178 million in 2014 to Ps. 61,765 million in 2015, together with a decrease in the average interest rate of 14 basis points, from 3.03% in 2014 to 2.88% in 2015; and (iii) a decrease of Ps.269 million in interest expense on hedging operations mainly due to the 17% depreciation of the peso against the U.S. dollar, which offsets the increases in interests paid on subordinated debt and foreign marketable debt securities, as these instruments are used to hedge the foreign exchange exposure of our senior and subordinated debt.

The positive effect of the increases in our average balance of and interest income earned on, interest-earning assets, was partially offset by an increase in the average balance of our interest-bearing liabilities in 2015 compared to 2014 and a decrease in the average interest rate on interest-earning assets in 2015 compared to 2014. The combined effect of a decrease of 12 basis points in the average yield on our interest-earning assets together with a decrease of 24 basis points in the cost of our interest-bearing liabilities resulted in an increase in the net interest spread of 11 basis points. Net interest income increased by Ps.5,415 million, due mainly to the increase in the average volume of interest-earning assets of Ps.99,208 million with an average interest rate of 7.27%, whereas interest-bearing liabilities increased by Ps.99,509 million with an average cost of 2.61%. The average cost of interest-bearing liabilities decreased from 2.85% to 2.61%, mainly as a result of a decrease in reference rates enacted by the Mexican Central Bank during 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. The interest rate paid on term

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deposits, which accounted for 18.8% of interest expense and similar charges, decreased from 2.94% in 2014 to 2.56% in 2015, while the interest rate paid on demand deposits, which accounted for 15.0% of interest expense and similar charges, decreased from 1.39% in 2014 to 1.27% in 2015. Additionally, the interest rate paid on customer deposits repurchase agreements, which accounted for 11.4% of interest expense and similar charges, decreased from 3.03% in 2014 to 2.88% in 2015.

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 2015 was Ps.14,083 million, a 5.3% or Ps.710 million increase from Ps.13,373 million in 2014. The following table presents a breakdown, by product, of our fee and commission income and expense in 2014 and 2015.

	For the Year Ended December 31,
	2014			2015			2014/2015
	(Millions of pesos)						(% Change)
Fee and commission income
Service charges on deposits accounts	Ps.	816		Ps.	896			9.80	%
Credit and debit cards		4,378			4,687			7.06
Insurance		3,896			4,104			5.34
Collection and payment services		1,830			2,114			15.52
Investment funds management		1,369			1,363			(0.44	)
Foreign currency transactions		701			866			23.54
Checks and others		302			257			(14.90	)
Capital markets and securities activities		333			290			(12.91	)
Administration and custody		436			487			11.70
Financial advisory services		1,505			1,581			5.05
Other fees and commissions		980			1,111			13.37
Total	Ps.	16,546		Ps.	17,756			7.31	%
Fee and commission expense
Credit and debit cards	Ps.	(1,451	)	Ps.	(1,895	)		30.60	%
Fund management		(73	)		(25	)		(65.75	)
Checks and others		(33	)		(23	)		(30.30	)
Capital markets and securities activities		(110	)		(136	)		23.64
Collections and transactional services		(178	)		(123	)		(30.90	)
Other fees and commissions		(1,266	)		(1,425	)		12.56
Financial advisory services		(62	)		(46	)		(25.81	)
Total	Ps.	(3,173	)	Ps.	(3,673	)		15.76	%
Net fee and commission income	Ps.	13,373		Ps.	14,083			5.31	%

Fee and commission income was Ps.17,756 million in 2015, a 7.3%, or Ps.1,210 million increase from Ps.16,546 million in 2014, mainly due to: (i) an increase in fees and commissions earned from credit and debit cards of Ps.309 million, or 7.1%, (ii) an increase in fees and commissions earned from collection and payment services of Ps.284 million, or 15.5%, from Ps.1,830 million in 2014 to Ps.2,114 million in 2015, (iii) an increase in fees and commissions earned from the sale of insurance products of Ps.208 million, or 5.3%, from Ps.3,896 million in 2014 to Ps.4,104 million in 2015, (iv) an increase in fees and commissions earned from foreign currency transactions of Ps.165 million, or 23.5%, from Ps.701 million in 2014 to Ps.866 million in 2015 and (v) an increase in service charges on deposits accounts of Ps.80 million, or 9.8%, from Ps.816 million in 2014 to Ps.896 million in 2015. 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 1,837,095, or 13.9% in the total number of credit and debit cards outstanding as of December 31, 2015. The increase in fees and commissions earned from collection and payment services, foreign exchange and service charges on deposit accounts, resulted from our continued focus on being an integral part of our client’s liquidity management efforts, which led to increased transactional activity. Finally, the increase in fees and commissions earned from the sale of insurance products was mainly due to a 9.6% increase in insurance distribution

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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, focusing on improving the productivity of, and incentivizing, our sales force. Additionally, during 2015 we strengthened our focus on service quality and launched new life and damage insurance products.

Fee and commission expense was Ps.3,673 million in 2015, a 15.8%, or Ps.500 million increase from Ps.3,173 million in 2014, mainly due to an increase in fees and commissions paid on credit and debit cards of Ps.444 million, or 30.6%, and an increase in other fees and commissions paid of Ps.159 million, or 12.6%, compared with 2014. 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, as well as the higher expenses incurred in connection with reward programs. 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.135 million, or 4.6%, from Ps.2,927 million in 2014 to Ps.2,792 million in 2015. The decrease in net fees and commissions in 2015 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 2014 and 2015.

	For the Year Ended December 31,
	2014			2015			2014/2015
	(Millions of pesos)						(% Change)
Interest rate products	Ps.	1,194		Ps.	1,445			21.02	%
Debt instruments		878			601			(31.55	)
Interest rate derivatives		316			844			167.09
Equity securities		246			(632	)		(356.91	)
Equity positions		(70	)		45			(164.29	)
Equity derivatives		316			(677	)		(314.24	)
Exchange rate products		1,321			1,770			33.99
Foreign exchange positions		(682	)		279			(140.91	)
Foreign exchange derivatives		2,003			1,491			(25.56	)
Other(1)		(142	)		(94	)		(33.80	)
Total	Ps.	2,619		Ps.	2,489			(4.96	)%

____________

(1)

Corresponds to commissions paid to brokers.

Gains on financial assets and liabilities (net) in 2015 were Ps.2,489 million, a decrease of Ps.130 million from a gain of Ps.2,619 million in 2014, mainly due to the activities of our Global Corporate Banking segment, where gains decreased by Ps.483 million, or 30.6% in 2015 compared to 2014.

During 2015, the Mexican Central Bank maintained the interest rate benchmark funding at a low 3.0% until December in an effort to support the gradual recovery of the economy, as well as to maintain the differential against interest rates in the U.S. The interest rate benchmark was increased 25 basis points at the end of 2015.

Additionally, Mexico’s macroeconomic environment during 2015 slightly improved compared with 2014. However, the country risk, which had increased to 182 basis points in 2014, increased further to 232 basis points in 2015.

The peso depreciated 17.0% in 2015. As of December 31, 2014, the exchange rate for U.S. dollars was Ps.14.74 per U.S. dollar, and as of December 31, 2015, the exchange rate for U.S. dollars was Ps.17.25 per U.S. dollar. During the last quarter of 2015, the increased likelihood of the U.S. gradually increasing interest rates,

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combined with unexpectedly low oil prices, generated greater volatility in the currency markets, which therefore led to currency depreciation.

In this context, the result in gains on financial assets and liabilities (net) was mainly due to the following:

(i) A loss in equity securities of Ps.632 million, compared with a gain of Ps.246 million in 2014, a decrease of Ps.878 million. This loss in equity securities is mainly related to equity options that are used to hedge structured notes. The Ps.632 million loss in equity securities was mainly explained by a loss of Ps.677 million on equity derivatives, against a gain of Ps.316 million in 2014. During 2015 the main Stock Exchanges, such as the IPC, Ibex and S&P, reflected weak performances. As a reference, the Mexican Stock Exchange Prices and Quotations Index (IPC Futures) quote was 43,145.66 at the end of December 2014 and 42,977.50 at the end of December 2015. This represented a decrease of 0.39% in that index. None of our transactions in equity derivatives in 2014 or 2015 are related to proprietary trading;

(ii) An increase in gains on exchange rate products of Ps.449 million, from a gain of Ps.1,321 million in 2014 to a gain of Ps.1,770 million in 2015. Results from foreign exchange derivatives decreased by Ps.512 million, from a gain of Ps.2,003 million in 2014 to a gain of Ps.1,491 million in 2015 mainly due to lower gains in foreign exchange forwards and options which were partly offset by higher gains in foreign exchange futures. Gains in foreign exchange positions increased by Ps.961 million, from a loss of Ps.682 million in 2014 to a gain of Ps.279 million in 2015 in connection with foreign exchange swaps; and

(iii) Finally, an increase in gains on interest rate products of Ps.251 million, from a gain of Ps.1,194 million in 2014 to a gain of Ps.1,445 million. Gains from debt instruments decreased by Ps.277 million, from a gain of Ps.878 million in 2014 to a gain of Ps.601 million in 2015 mainly due to lower yields on our debt instrument positions which resulted from the 25 basis point increase in interest rates enacted by the Mexican Central Bank at the end of 2015. Gains in interest rate derivatives increased by Ps.528 million, from a gain of Ps.316 million in 2014 to a gain of Ps.844 million in 2015 mainly resulting from interest rates swaps.

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) increased Ps.17 million in 2015 compared to the Ps.11 million loss in 2014.

Other Operating Income (Net)

Other operating expense (net) increased by Ps.562 million, or 28.2%, from an expense of Ps.1,992 million in 2014 to Ps.2,554 million in 2015.

Other operating income decreased by Ps.30 million, or 6.2%, from Ps.487 million in 2014 to Ps.457 million in 2015.

Other operating expenses increased Ps.532 million, or 21.5%, from Ps.2,479 million in 2014 to Ps.3,011 million in 205, mainly due to the increase of Ps.351 million, or 18.6%, in the Mexican Institute for the Protection of Bank Savings (Instituto para la Protección al Ahorro Bancario, or IPAB) contributions, from Ps.1,887 million to Ps.2,238 million, due to the general increase in our funding sources, especially customer demand deposits, which grew 18%.

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.1,435 million, or 7.2%, from Ps.19,897 million in 2014 to Ps.21,332 million in 2015, primarily due to increased expenses for personnel, rents, other taxes, administrative services and advertising and communication.

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The following table sets forth administrative expenses in 2014 and 2015, by type.

	For the Year Ended December 31,
	2014			2015			2014/2015
	(Millions of pesos)						(% Change)
Personnel expenses	Ps.	(9,977	)	Ps.	(11,033	)		10.58	%
Other general expenses		(9,920	)		(10,299	)		3.82
Administrative services		(404	)		(486	)		20.30
Taxes other than income tax		(1,128	)		(1,288	)		14.18
Surveillance and cash courier services		(589	)		(611	)		3.74
Advertising and communication		(653	)		(722	)		10.57
Maintenance, conservation and repair		(1,134	)		(979	)		(13.67	)
Rents		(1,622	)		(1,843	)		13.63
Technology and systems		(2,441	)		(2,425	)		(0.66	)
Stationery and supplies		(201	)		(216	)		7.46
Insurance premiums		(42	)		(70	)		66.67
Credit cards		(285	)		(257	)		(9.82	)
Travel costs		(302	)		(304	)		0.66
Operating costs		(466	)		(445	)		(4.51	)
Other		(653	)		(653	)		—
Total administrative expenses	Ps.	(19,897	)	Ps.	(21,332	)		7.21	%

Our personnel expenses increased Ps.1,056 million, or 10.6%, from Ps.9,977 million in 2014 to Ps.11,033 million in 2015, primarily as a result of a 12.1% period-over-period average headcount increase, together with an overall increase of 25.3% in bonuses, 4.7% in salaries and 10.6% 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 12.2%. The increase in average headcount was mainly in our Retail Banking segment and is related to the hiring of additional employees to accompany business growth as well as additional personnel in connection with regulatory changes related to anti-money laundering and risk data aggregation (RDA).

The increase in personnel expenses resulted from an increase of Ps.771 million, or 8.8%, in retail banking, from Ps.8,799 million in 2014 to Ps.9,570 million in 2015, and an increase of Ps.243 million, or 22.9%, in wholesale banking, from Ps.1,063 million to Ps.1,306 million. The increase in retail banking was due to an increase of Ps.487 million in bonuses, from Ps.1,852 million in 2014 to Ps.2,339 million in 2015, an increase of Ps.179 million, or 3.8%, in salaries, from Ps.4,769 million in 2014 to Ps.4,948 million for the same period in 2015 and an increase of Ps.105 million in other personnel expenses, from Ps.2,178 million in 2014 to Ps.2,283 million in 2015. Additionally, personnel expenses in wholesale banking, increased due to an increase of Ps.154 million in other personnel expenses and increases of Ps.60 million and Ps.29 million in salaries and bonuses paid, respectively.

Other general expenses increased by Ps.379 million, or 3.8%, from Ps.9,920 million in 2014 to Ps.10,299 million in 2015, mainly due to an increase of Ps.221 million, or 13.6%, in expenses related to rents, mainly reflecting a larger number of branches which resulted from the branch expansion plan executed in the past two years. In addition, expenses related to taxes other than income taxes and administrative services increased by Ps.160 million, or 14.2% and by Ps.82 million, or 20.3%, respectively. Finally, advertising and communication increased by Ps.69 million, or 10.6% reflecting the increased investments during the fourth quarter to market the “Santander” brand at events such as Formula 1 in Mexico.

Impairment Losses on Financial Assets (Net)

Our impairment losses on loans and receivables increased by Ps.2,909 million, or 22.2%, from Ps.13,132 million in 2014 to Ps.16,041 million in 2015, mainly reflecting an increase in impairment losses of (i) Ps.2,047 million in our commercial, financial and industrial loan portfolio, (ii) Ps.617 million in our non-revolving consumer loan portfolio, and (iii) Ps.205 million in our revolving consumer credit card loan portfolio. The increase in impairment losses was mainly explained by: (i) significant business volume growth across all segments, primarily in the commercial, financial and industrial loan portfolio, the revolving consumer credit card loan portfolio and the non-revolving consumer loan portfolio, which increases our risk exposure; (ii) recognition of impairment losses in

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connection with our exposure to the Pemex suppliers and the three major homebuilders; and (iii) the refinements to our impairment models, where more customers from the commercial loan portfolio were included in our individualized assesment for credit losses. See Note 2.g.ii to our audited financial statements for more details on the methodology for individualized analysis.

Non-performing loans totaled Ps.18,430 million as of December 31, 2014 and increased to Ps.19,742 million as of December 31, 2015, an increase of Ps.1,312 million, or 7.1%, due to the increase of non-performing loans in our mortgage loan portfolio of Ps.1,265 million, an increase of non-performing loans in our commercial, financial and industrial loan portfolio of Ps.98 million, and an increase of Ps.83 million in our non-revolving consumer loan portfolio. These increases were partly offset by a decrease of non-performing loans in our revolving consumer credit card loan portfolio of Ps.134 million. The ratio of our non-performing loans as a percentage of total loans, or NPL ratio, decreased from 3.90% as of December 31, 2014 to 3.56% as of December 31, 2015.

The increase in non-performing loans in our mortgage loan portfolio resulted in a NPL ratio for 2015 of 5.30% from 4.85% in 2014, caused mainly by an internal change in our charge-off policy in 2014, which was extended from 12 months to 36 months for those mortgages originated by the Bank, which represents 84% of total mortgages.

The increase 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 in 2014 as some increased their non-performing loans during 2015. These clients, including mostly Pemex suppliers, were within our Global Corporate Banking segment. Our total exposure to these restructured clients as of December 31, 2015 accounted for Ps.2,271 million and contributed 17% of the increase in non-performing loans. This was partly offset by a decrease in the non-performing loans of the three principal Mexican companies in the home builder sector, where our exposure stood at Ps.4,233 million, of which Ps.4,014 million were non-performing loans, decreasing Ps.670 million from our exposure in 2014. This decrease is mainly explained by improvements relating to the home builders, where we charged-off Ps.544 million in the fourth quarter of 2015 after receiving shares of one of the three home builders as payment for the unsecured exposure. Additionally, in the third quarter of 2015 we received an asset as payment in connection with one of the residential construction projects. These variations in non-performing loans in combination with significant loan growth resulted in a NPL ratio for our commercial, financial and industrial loan portfolio of 3.47% as of December 31, 2015, improving from the 4.13% reported as of December 31, 2014.

Finally, the decrease in non-performing loans in our consumer loan portfolio was mainly due to conforming the definition of non-performing status, in which the standard for credit cards went from 60 days to 90 days past due. See Note 2.g.i to our audited financial statements for more details on the classification of impaired loans on the classification of impaired loans and Note 2.h to our audited financial statements for more details on our change in accounting estimates regarding our refinements to impairment models on our change in accounting estimates regarding our refinements to impairment models.

The following table shows the ratio of our impaired assets to total computable credit risk and our coverage ratio as of December 31, 2014 and 2015.

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	As of December 31,
	2014			2015(4)
	(Millions of pesos, except percentages)
Computable credit risk(1)	Ps.	503,232		Ps.	594,900
Non-performing loans(4)		18,430			19,742
Loan charge-offs		13,510			14,424
Allowance for impairment losses(4)		15,198			18,749
Ratios
Non-performing loans to computable credit risk		3.66	%		3.32	%
Non-performing loans coverage ratio(2)		82.46	%		94.97	%
Loan charge-off coverage ratio(3)		2.68	%		2.42	%

____________

(1)

(2)

Allowance for impairment losses as a percentage of non-performing loans.

(3)

Loan charge-offs as percentage of computable credit risk.

(4)

See Note 2.g.i and 2.h to our audited financial statements for more details on the classification of impaired loans and for more details on our change in accounting estimates regarding our refinements to impairment models, respectively, and for details on how the refinements to our impairment models impacted 2015 results.

The following table shows our non-performing loans by type of loan as of December 31, 2014 and 2015:

	As of December 31,
	2014		2015(1)		2014/2015
	(Millions of pesos)				(% Change)
Commercial, financial and industrial	Ps.	9,575	Ps.	9,673		1.02	%
Mortgage		5,249		6,514		24.10
Installment loans to individuals		3,606		3,555		(1.41	)
Revolving consumer credit card loans		1,980		1,846		(6.77	)
Non-revolving consumer loans		1,626		1,709		5.10
Total	Ps.	18,430	Ps.	19,742		7.12	%

____________

(1)

See Notes 2.g.1 and 2.h to our audited financial statements for more details.

Commercial, financial and industrial

Our impairment losses in our commercial, financial and industrial loans portfolio increased by 60.4% to Ps.5,438 million in 2015 from Ps.3,391 million in 2014. The increase is mainly the result of: (i) the significant growth in the middle market and SME loan portfolio; (ii) higher impairment losses related to the home builders and Pemex suppliers portfolios, where the expected probability of the loss increased; and (iii) the refinements to our impairment models, where more customers were included in our individualized assesment for credit losses. See Note 2.g.ii to our audited financial statements for more details on the methodology for individualized analysis.

Non-performing loans in our commercial, financial and industrial loan portfolio, which as of December 31, 2015 represented 49% of our total non-performing loans, increased by Ps.98 million, or 1.0%, from December 31, 2014 to December 31, 2015, 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, 2015, accounted for Ps.1,481 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 4.13% as of December 31, 2014 to 3.47% as of December 31, 2015.

Mortgage

Our impairment losses in our mortgage loans portfolio decreased by 4.8% or Ps.15 million in 2015, from Ps.315 million in 2014 to Ps.300 million in 2015. Meanwhile, non-performing loans in our mortgage loan portfolio, which as of December 31, 2015 represented 33% of our total non-performing loans, increased by Ps.1,265 million, or 24.1%, from December 31, 2014 to December 31, 2015, resulting in a non-performing loan ratio of 5.30%, as compared to 4.85% in 2014. The decrease in impairment losses for our mortgage portfolio and the increase in non-performing loans and the non-performing loan ratio was mainly due to a change in our charge-off policy in 2014, which was extended from 12 months to 36 months as explained above. With respect to the acquisition of ING

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Hipotecaria’s mortgage business, it did not negatively impact our level of non-performing loans as the NPL ratio of the portfolio has stabilized.

Installment loans to individuals

Our impairment losses in our installment loans to individuals portfolio increased by Ps.822 million, or 9.5% to Ps.10,544 million in 2015 from Ps.8,657 million in 2014. This increase in impairment losses was mainly due to significant loan growth, especially in payroll loans.

Non-performing loans in installment loans to individuals portfolio, which as of December 31, 2015 represented 18% of our total non-performing loans, decreased Ps.51 million, or 1.4%, from December 31, 2014 to December 31, 2015. This decrease was due to the reduction of non-performing loans in our revolving credit card loan portfolio of Ps.134 million, partially offset by an increase in the non-performing loans in our non-revolving consumer loan portfolio of Ps.83 million. The decrease in our revolving credit card non-performing loan portfolio was mainly a result of conforming the definition of non-performing status, in which the standard for credit cards went from 60 days to 90 days, as explained above, and additionally, due to strong credit quality of new loan originations, lower provisioning is required.

Our NPL ratio with respect to our installment loans to individuals portfolio in the revolving credit card loan portfolio improved from 4.70% as of December 31, 2014 to 3.86% as of December 31, 2015, due to (i) higher loan growth resulting from increased consumer demand and (ii) the previously mentioned change to our non-performing loan classification rule in order to conform criteria across all portfolios. See Notes 2.g.i and 2.h to our audited financial statements for more details.

Our NPL ratio with respect to our installment loans to individuals portfolio in the non-revolving consumer loan portfolio improved from 4.72% as of December 31, 2014 to 3.82% as of December 31, 2015, driven by (i) higher loan growth resulting from increased consumer demand, and (ii) strong credit quality of new loan originations.

Non-performing loan coverage ratio

The following table shows our non-performing loan coverage ratio by type of loan as of December 31, 2014 and 2015:

	As of December 31,
	2014			2015
	(Millions of pesos)
Commercial, financial and industrial		62.99	%		82.13	%
Mortgage		39.13	%		39.27	%
Installment loans to individuals		197.25	%		231.98	%
Revolving consumer credit card loans		196.62	%		243.12	%
Non-revolving consumer loans		198.03	%		219.95	%
Total		82.46	%		94.97	%

As a result of this year´s refinements to our impairment models, the non-performing loan coverage ratio increased from 82.46% to 94.97%, reflecting improvements across all loan portfolios. See Note 2.g.i and 2.h to our audited financial statements for more details on the classification of impaired loans and for more details on our change in accounting estimates regarding our refinements to impairment models, respectively.

The non-performing loan coverage ratio of our commercial loan portfolio increased from 62.99% in 2014 to 82.13% in 2015, mainly driven by an increase in the allowance for impairment losses to cover for: (i) significant growth of the loan portfolio, especially in the middle market and SME loan portfolio; (ii) higher impairment losses related to the home builders and Pemex suppliers portfolio, where the expected probability of the loss increased, based on the individualized assessment that considers expected cash flows and current collateral values; and (iii) as a result of the refinements to our impairment models, where more customers were included in our individualized assessment for credit losses. See Note 2.g.ii to our audited financial statements for more details on the methodology for individualized analysis.

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With respect to our installment loans to individuals portfolio, the non-performing loan coverage ratio for both the non-revolving consumer loans and the revolving consumer credit card loans improved. The non-performing loan coverage ratio for the non-revolving consumer loans increased from 197.25% to 243.12% mainly reflecting a more detailed historical data for the determination of certain inputs or variables. See Note 2.h to our audited financial statements for more details on our change in accounting estimates regarding our refinements to impairment models.

The increase in the credit card non-performing loan coverage ratio from 198.03% in 2014 to 219.95% in 2015, was mainly due to the decrease in non-performing loans in 2015, which resulted from the change to our non-performing loan classification rule in order to conform criteria across all portfolios, as explained above. See Note 2.g.i to our audited financial statements for more details on the classification of impaired loans.

Finally, regarding our mortgage loan portfolio, the non-performing loan coverage ratio stood at 39.27%, reflecting the combined effect of a 24.5% increase in allowances for impairment losses and a 24.1% increase in impaired assets, which resulted from the change in our charge-off policy in 2014, which was extended from 12 months to 36 months.

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, 2014 and December 31, 2015, the amounts recognized as available lines of credit amounted to Ps.128,785 million and Ps.113,715 million, respectively. Of these amounts, the amounts related to available credit card lines were Ps.69,418 million, or 53.9%, and Ps. 72,841 million, or 64.0%, of the total off-balance sheet risk, respectively.

Provisions (net) decreased by Ps.427 million, from a loss of Ps.157 million in 2014 to a gain of Ps.270 million in 2015. This decrease was mainly related to our provision for off-balance sheet risk, as a consequence of the refinements made to our impairment models since 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. The decrease in our provisions for off-balance sheet risk was due to the reduction of the probability of use of undrawn credit lines, based on more detailed historic data for the determination of certain inputs or variables, primarily the credit conversion factor, or CCF, thus reducing provision requirements for off-balance sheet available credit card lines (undrawn credit lines, guarantees and loan commitments). See note 2.g.i and 2.h to our audited financial statements for more details on the classification of impaired loans and for more details on our change in accounting estimates regarding our refinements to impairment models, respectively.

Income Tax

Income tax in 2015 was Ps.4,294 million, a Ps. 753 million or 21.3% increase from Ps.3,541 million in 2014. Our effective tax rates in 2014 and 2015 were 21.04% and 23.47%, respectively. Our effective tax rate increased 243 basis points in 2015 compared to 2014. The variation in income tax paid is primarily explained by (i) the increase in income before taxes in 2015 as compared to 2014 and (ii) the decrease in the inflation rate in 2015 from 2014, resulting in a lower benefit from this permanent tax item.

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Results of Operations by Segment for the Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014

The following table presents an overview of certain consolidated income statement data for each of our segments in 2014 and 2015.

	Retail Banking(1)						Global Corporate Banking(2)						Corporate Activities(3)
	For the Year Ended December 31,
	2014			2015			2014			2015			2014			2015
	(Millions of pesos)
Net interest income	Ps.	33,316		Ps.	37,515		Ps.	3,971		Ps.	4,081		Ps.	324		Ps.	1,430
Income from equity instruments		—			—			53			37			100			80
Fee and commission income (expense) (net)		11,658			12,056			1,798			2,034			(83	)		(7	)
Gains/(losses) on financial assets and liabilities and exchange differences (net)		697			866			1,578			1,095			333			534
Other operating income (expenses) (net)		(1,680	)		(2,101	)		(441	)		(466	)		129			13
Total income	Ps.	43,991		Ps.	48,336		Ps.	6,959		Ps.	6,781		Ps.	803		Ps.	2,050
Administrative expenses		(17,914	)		(18,922	)		(1,785	)		(2,149	)		(198	)		(261	)
Depreciation and amortization		(1,551	)		(1,760	)		(130	)		(94	)		(1	)		(10	)
Impairment losses on loans and receivables (net)		(12,314	)		(15,081	)		(818	)		(960	)		—			—
Impairment losses on other assets (net)		—			—			—			—			(48	)		—
Provisions (net)		58			265			—			—			(215	)		5
Gain/(losses) on disposal of assets not classified as non-current assets held for sale		—			—			—			—			8			7
Gain/(losses) on disposal of non-current assets held for sale not classified as discontinued operations		—			—			—			—			(15	)		91
Operating profit before tax	Ps.	12,270		Ps.	12,838		Ps.	4,226		Ps.	3,578		Ps.	334		Ps.	1,882

____________

(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 Corporate Banking segment reflects the returns on the corporate banking business, including managed treasury departments and the equities business. Our Global Corporate 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, 2014 and 2015.

	Retail Banking				Global Corporate Banking				Corporate Activities
	As of December 31,
	2014		2015		2014		2015		2014		2015
	(Millions of pesos)
Cash and balances with the Mexican Central Bank	Ps.	43,676	Ps.	50,063	Ps.	7,810	Ps.	8,424	Ps.	337	Ps.	1,301
Financial assets held for trading		—		—		207,999		327,363		372		754
Other financial assets at fair value through profit or loss		—		—		31,872		27,358		—		—
Available-for-sale financial assets		—		—		—		—		83,128		113,620
Loans and receivables		342,663		414,702		151,791		159,767		35,943		24,418
Hedging derivatives		—		—		—		—		4,740		12,121
Non-current assets held for sale		13		13		1		1		830		1,087
Tangible assets		4,428		4,670		746		787		88		94
Intangible assets		2,016		2,751		328		392		1,735		1,734
Tax assets		—		—		—		—		22,988		18,673
Other assets		1,309		1,203		30		28		5,140		4,711
Total assets	Ps.	394,105	Ps.	473,402	Ps.	400,577	Ps.	524,120	Ps.	155,301	Ps.	178, 513
Financial liabilities held for trading	Ps.	—	Ps.	—	Ps.	136,805	Ps.	174,576	Ps.	—	Ps.	—
Other financial liabilities at fair value through profit or loss		17,860		6,400		35,947		122,728		54,977		75,701
Financial liabilities at amortized cost		362,971		394,016		141,842		114,346		74,312		150,824
Hedging derivatives		—		—		—		—		4,403		9,568
Provisions(1)		1,359		952		237		267		4,490		5,475
Tax liabilities		—		—		—		—		80		673
Other liabilities		2,929		2,561		478		419		9,006		7,869
Total liabilities	Ps.	385,119	Ps.	403,929	Ps.	315,309	Ps.	412,336	Ps.	147,268	Ps.	250,110
Total equity	Ps.	46,300	Ps.	57,888	Ps.	14,469	Ps.	19,320	Ps.	41,518	Ps.	32,452
Total liabilities and equity	Ps.	431,419	Ps.	461,817	Ps.	329,778	Ps.	431,656	Ps.	188,786	Ps.	282,562

____________

(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 Corporate 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 2015 was Ps.12,838 million, a 4.6% or Ps.568 million increase from Ps.12,270 million in 2014. This increase was mainly due to:

a 12.6% or Ps.4,199 million increase in net interest income, mainly due to an increase of Ps.55,898 million, or 19.4% in the average balance of the loan portfolio excluding credit cards and an increase of Ps.2,660 million, or 6.5% in the average balance of the credit card loan portfolio, both resulting from the organic growth of the portfolio, which was offset by decreases of 25 basis points and 103 basis points, respectively, in the average interest rate of these portfolios, resulting mainly from the decrease in reference rates enacted by the Mexican Central Bank during 2014 and increased competition in the SME market. At the same time, the decrease in the average interest rate of our credit card loan portfolio decreased as a consequence of a change in the mix in the composition of such portfolio, with a greater percentage of customers paying their outstanding balances in full, therefore not contributing to interest income.

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a 3.4% or Ps.398 million increase in net fees and commissions income, from Ps.11,658 million in 204 to Ps.12,056 million in 2015, due mainly to an increase in fees and commissions earned from insurance products, collection and payment services, foreign exchange and service charges on deposits accounts, partially offset by a decrease in net credit and debit card fees.

a 24.2% or Ps.169 million increase in gains/(losses) on financial assets and liabilities and exchange differences, from a gain of Ps.697 million in 2014 to a gain of Ps.866 million in 2015, primarily due to: (i) trading gains related to interest rate products as a result of the introduction of SME lending products with interest rate caps in response to our clients’ preferences due to potentially higher interest rates; and (ii) higher sales of structured notes by our Private Banking division.

These positive effects were partially offset by:

a 22.5% or Ps.2,767 million increase in impairment losses on loans and receivables, reflecting mainly an increase in impairment losses of Ps.1,905 million in our commercial loan portfolio, Ps.616 million in our consumer loan portfolio, Ps.205 million in our credit card portfolio and Ps.55 million in loan collection and recovery expenses, partially offset by a decrease of Ps.14 million in our mortgage loan portfolio. The Ps.1,905 million increase in our commercial loan portfolio was mainly due to: (i) significant growth in the middle market and SME loan portfolios; and (ii) the refinements to our impairment models, where more customers from the commercial loan portfolio were included in our individualized assesment for credit losses. See Note 2.g.ii to our audited financial statements for more details on the methodology for individualized analysis.

a 5.6% or Ps.1,008 million increase in administrative expenses, from Ps.17,914 million in 2014 to Ps.18,922 million in 2015, mainly due to increases in headcount and salaries, which resulted in higher personnel expenses as well as higher rent expense. Personnel expenses increased Ps.771 million, or 8.8%, resulting from an increase of Ps.666 million, or 10.1%, in salaries and bonuses and an increase of Ps.105 million, or 4.8%, in other personnel expenses, while rents increased Ps.183 million, or 11.5%, mainly reflecting a larger number of branches due to our branch expansion plan executed in the past two years.

25.1% or Ps.421 million increase in other operating income/(expenses), from a loss of Ps.1,680 million in 2014 to a loss of Ps.2,101 million in 2015, mainly due to increases in contributions to IPAB that resulted from an increase in our funding sources.

Global Corporate Banking Segment

Our Global Corporate 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 Corporate Banking segment customers. This segment also includes our proprietary trading operations.

Operating profit before taxes attributable to the Global Corporate Banking segment in 2015 was Ps.3,578 million, representing a Ps.648 million, or 15.3%, decrease from Ps.4,226 million in 2014. This decrease was mainly due to:

a 30.6% or Ps.483 million decrease in gains/(losses) on financial assets and liabilities and exchange differences, from a gain of Ps.1,578 million in 2014 to a gain of Ps.1,095 million in 2015, primarily due to a loss of Ps.193 million in market making, resulting from lower client activity due to increased uncertainty in the market.

a 17.4% or Ps.142 million increase in net impairment losses on loans and receivables, from Ps.818 million in 2014 to Ps.960 million in 2015. This increase mainly resulted from: (i) higher impairment losses related to the home builders and Pemex suppliers portfolios, where the expected probability of the loss increased and to a lesser extent to refinements to our impairment models, where more customers from the commercial loan portfolio were included in our individualized assesment for credit losses. See Note 2.g.ii to our audited financial statements for more details on the methodology for individualized analysis.

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a 20.4% or Ps.364 million increase in administrative expenses, from Ps.1,785 million in 2014 to Ps.2,149 million in 2015, mainly due to increases in personnel expenses, administrative services and technology and systems expenses.

These negative results were partially offset by:

a 2.8% or Ps.110 million increase in net interest income, mainly due to an increase of Ps.606 million in interest income from debt instruments which was partly offset by a Ps.157 million decrease in interest income from loans and advances to customers. The increase from debt securities resulted from a Ps.45,586 million increase in the average portfolio of debt instruments, combined with a 95 basis point decrease in the average interest rate. As for the decrease in the interest income from loans and advances to customers, this resulted from an increase of Ps.12,657 million in the average balance of loans and advances to customers, more than offset by a 63 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 increased competition and the prevailing low benchmark reference rate during 2015 compared to 2014.

an 13.1% or Ps.236 million increase in net fees and commissions income, from Ps.1,798 million in 2014 to Ps.2,034 million in 2015, mainly due to an increase in income from commissions from administration and custody, financial advisory and capital markets and securities activities, reflecting the execution of certain projects in the investment banking activity pipeline. However, increased volatility in the markets and the cuts to the public spending budgets have led to a continued slowdown in the execution of the infrastructure and energy related projects pipeline.

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 Corporate 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.

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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 2015 was a gain of Ps.1,882 million, a Ps.1,548 million, or 463.5%, increase from a gain of Ps.334 million in 2014. This increase in operating profit before taxes was mainly due to a Ps.1,106 million increase in net interest income, from Ps.324 million in 2014 to Ps.1,430 million in 2015, mainly due to an increase in the average portfolio of debt instruments managed by the ALCO.

These positive results were further supported by a Ps.91 million gain from the sale of a portfolio of non-current assets.

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 4, 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 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 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.

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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.

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—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

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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 the average volume of debt instruments administered by our Global Corporate 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.

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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 Corporate Banking clients, which were partially offset by a decrease of Ps.562 million in the trading portfolio managed by the Global Corporate 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 Corporate Banking segment loans, together with a decrease in the 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 86 basis 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 Corporate 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 Corporate 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

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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 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.

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

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 currency transactions		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	%

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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 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)

	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.

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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 Corporate 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 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.

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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.

Administrative Expenses

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.

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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 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 Corporate 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

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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.

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)

(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.

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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 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 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)

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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.

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).

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.

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.

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	Retail Banking(1)						Global Corporate 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)

(2)

(3)

The following table presents an overview of certain consolidated balance sheet data for each of our segments as of December 31, 2013 and 2014.

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	Retail Banking				Global Corporate 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 Corporate 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; and

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; and

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 Corporate Banking Segment

Operating profit before taxes attributable to the Global Corporate 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 Corporate 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; and

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; and

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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 slowdown in the execution of the infrastructure and energy related projects pipeline.

Corporate Activities Segment

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 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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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 72.4% of our total deposits, 99.2% of our customer deposits and 114.2% of our demand and time deposits as of December 31, 2015. 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.

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. 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 10.5%. As of December 31, 2015, Banco Santander Mexico’s Capital Ratio was 15.61%.

The table below presents Banco Santander Mexico’s risk-weighted assets and Capital Ratios as of December 31, 2013, 2014 and 2015, calculated in accordance with Mexican Banking GAAP:

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	Mexican Banking GAAP
	As of December 31,
	2013			2014			2015
	(unaudited)
	(Thousands of pesos, except percentages)
Capital:
Tier 1	Ps.	69,409,388		Ps.	76,696,962		Ps.	80,327,825
Tier 2		17,122,049			19,820,482			23,311,400
Total capital		86,531,437			96,517,444			103,639,225
Risk-Weighted Assets:
Credit risk		346,193,899			406,832,485			487,439,953
Market risk		138,747,454			128,329,554			112,427,480
Operational risk		57,950,529			61,790,258			64,255,011
Total risk-weighted assets		542,891,882			596,952,297			664,122,444
Required Regulatory Capital:
Credit risk		27,695,512			32,546,599			38,995,196
Market risk		11,099,796			10,266,364			8,994,198
Operational risk		4,636,042			4,943,221			5,140,401
Total risk-weighted assets	Ps.	43,431,350		Ps.	47,756,184		Ps.	53,129,795
Capital Ratios (credit, market & operational risk):
Tier 1 capital to risk-weighted assets		12.79	%		12.85	%		12.10	%
Tier 2 capital to risk-weighted assets		3.15	%		3.32	%		3.51	%
Total capital to risk-weighted assets(1)(2)		15.94	%		16.17	%		15.61	%

____________

(1)

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.

(2)

Banco Santander Mexico’s Capital Ratio as of December 31, 2015, decreased by 56 basis points, from 16.17% as of December 31, 2014, to 15.61% as of December 31, 2015, mainly due to a 19.8% (Ps.6,449 million) increase in required regulatory capital associated with credit risk and a 4.0% (Ps.197 million) increase in required regulatory capital associated with operational risk, which were partly offset by an increase of 7.4% (Ps.7,122 million) in total capital and a decrease of 12.4% (Ps.1,272 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 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 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).

In December 2014, as a consequence of the comments of the RCAP (Basel III Regulatory Consistency Assessment Program) review team, the CNBV made changes to the capital requirement rules in order to align them with the Basel III standards. 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.”

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.

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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 has implemented a liquidity coverage ratio, or LCR, and is considering the definition of a Net Stable Funding Ratio, or NSFR. The LCR requires banks to maintain sufficient high-quality liquid assets to cover the net cash outflows that could be encountered under a stress scenario during a one-month period. 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) repurchase agreements.

The following table shows the composition of our short-term funding described above:

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	As of December 31,
	2013		2014		2015
	(Millions of pesos)
Demand deposits:
Interest-bearing deposits	Ps.	145,587	Ps.	169,950	Ps.	215,013
Non-interest-bearing deposits		112,367		124,113		132,725
Subtotal	Ps.	257,954	Ps.	294,063	Ps.	347,738
Time deposits:
Notes with interest payable at maturity	Ps.	115,711	Ps.	118,742	Ps.	109,568
Fixed-term deposits		146		205		874
Foreign currency time deposits		4,046		14,640		10,943
Subtotal	Ps.	119,903	Ps.	133,587	Ps.	121,385
Repurchase agreements		57,506		69,726		46,083
Accrued interest(1)		182		183		155
Other deposits		11,579		17,069		24,652
Total customer deposits	Ps.	447,124	Ps.	514,628	Ps.	540,013
Deposits from the Mexican Central Bank and credit institutions(2)		70,216		82,078		199,833
Total deposits(3)	Ps.	517,340	Ps.	596,706	Ps.	739,846

____________

(1)

Mainly from time deposits.

(2)

Includes Ps.18,519 million, Ps.33,752 million and Ps.145,484 of repurchase agreements with the Mexican Central Bank and with credit institutions as of December 31, 2013, 2014 and 2015, respectively.

(3)

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. As of December 31, 2015, we had deposits of Ps.540,013 million from customers and Ps.54,674 million from credit institutions and Ps.145,159 million from the Mexican Central Bank. See “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Liabilities—Deposits.”

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 6.9%, from Ps.124,113 million at December 31, 2014 to Ps.132,725 million at December 31, 2015, 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 repurchase agreements to achieve cost efficiencies and as an additional source of short-term funding.

The following tables show our short-term borrowings that we sold under 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 repurchase agreements. Short-term borrowings at year-end from 2014 to 2015 remain stable. See “Item 4. Information on the Company—B. Business Overview—Liabilities—Short-term Borrowings.”

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	IFRS for the year ended December 31,
	2013					2014					2015
	Amount		Average rate			Amount		Average rate			Amount		Average rate
	(Millions of pesos, except percentages)
Short-Term Borrowings
Repurchase agreements:
At December 31	Ps.	76,024		2.74	%	Ps.	102,646		2.99	%	Ps.	191,567		3.12	%
Average during year		116,505		3.38			156,689		3.12			199,040		2.96
Maximum month-end balance		155,413		3.94			188.532		3.40			256,412		3.12
Short positions:
At December 31(1)	Ps.	51,964		3.47	%	Ps.	27,297		3.11	%	Ps.	25,252		3.12
Average during year		55,075		3.64			84,363		3.23			50,479		3.04
Maximum month-end balance		113,751		4.31			109,596		3.52			95,081		3.16
Total short-term borrowings at year end	Ps.	127,988		3.11	%	Ps.	129,943		3.05	%	Ps.	216,819		3.12	%

____________

(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.

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 U.S. dollar-denominated issuances with longer maturities. As of December 31, 2015, the balance of our debt securities outstanding totaled Ps.110,237 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, Aaa.mx and AAA(mex) by 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. 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 2016 capital expenditures. For 2016, we have a capital expenditures budget of Ps.2,946 million (U.S.$171 million), 77.4% of which (Ps.2,279 million) will be spent on information technology and the rest on furniture, fixtures and equipment (Ps.667 million). In 2015, our capital expenditures were Ps.2,911 million (U.S.$169 million), 71.4% of which (Ps.2,078 million) was for information technology and the remainder was for furniture, fixtures and equipment (Ps.833 million).

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As of December 31, 2015, total interest-bearing liabilities denominated in dollars amounted to Ps.95,598 million, or U.S.$5,542 million, representing 12.9% of our total deposits and 17.7% of our customer deposits. The sources of such funding as of December 31, 2013, 2014 and 2015 were as follows:

	IFRS
	As of December 31,
	2013		2014		2015		2015
	(Millions of pesos)						(Millions of U.S.$) (1)
Demand deposits	Ps.	21,767	Ps.	27,949	Ps.	42,673	U.S.$	2,474
Time deposits		5,344		34,617		29,893		1,733
Bank and other loans		20,349		10,853		23,032		1,335
Total	Ps.	47,460	Ps.	73,419	Ps.	95,598	U.S.$	5,542

____________

(1)

Translated at the rate of Ps.17.2487 per U.S.$1.00, the exchange rate for U.S. dollars calculated on December 31, 2015 and published by the Mexican Central Bank in the Official Gazette of the Federation on January 4, 2016, 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.

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, 2015, our foreign currency-denominated assets, including derivative transactions, totaled U.S.$9,418 million (Ps.162,441 million) and our foreign currency-denominated liabilities, including derivative transactions, totaled U.S.$9,245 million (Ps.159,465 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, 2015, we are also in compliance with the limits established for us by the Mexican Central Bank for foreign currency-denominated liabilities, which was U.S.$8,805 million (Ps.151,875 million). As of such date, our foreign currency-denominated liabilities were U.S.$6,466 million (Ps.111,530 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, 2013, 2014 and 2015, 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.

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	IFRS
	For the year ended December 31,
	2013								2014								2015
	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.	174,993		22.39	%		1.64	%	Ps.	220,020		23.68	%		1.39	%	Ps.	250,762		24.23	%		1.27	%
Time deposits		136,692		17.49	%		3.66	%		129,644		13.95	%		2.94	%		156,072		15.08	%		2.56	%
Deposits from the Mexican Central Bank and credit institutions		77,035		9.85	%		3.44	%		125,982		13.56	%		3.32	%		195,739		18.91	%		3.07	%
Repurchase agreements		89,003		11.39	%		3.81	%		76,178		8.20	%		3.03	%		61,765		5.97	%		2.88	%
Marketable debt securities and other financial liabilities		41,686		5.33	%		4.78	%		45,914		4.94	%		4.00	%		51,021		4.93	%		3.71	%
Other liabilities(1)		78,847		10.09	%		3.91	%		98,062		10.55	%		3.19	%		76,817		7.42	%		3.11	%
Subordinated liabilities		228		0.02	%		4.82	%		17,305		1.86	%		6.07	%		20,438		1.97	%		6.16	%
Subtotal interest-bearing liabilities		598,484		76.56	%		3.26	%		713,105		76.74	%		2.85	%		812,614		78.51	%		2.61	%
Non-interest-bearing liabilities		82,409		10.54	%					117,891		12.70	%					116,392		11.25	%
Total equity		100,829		12.90	%					98,155		10.56	%					105,955		10.24	%
Subtotal non-interest-bearing liabilities and equity		183,238		23.44	%					216,046		23.26	%					222,347		21.49	%
Total liabilities and equity	Ps.	781,722		100.00	%				Ps.	929,151		100.00	%				Ps.	1,034, 961		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 increased from 13.95% as of December 31, 2014 to 15.08% as of December 31, 2015, while the ratio of average demand accounts to average total liabilities and equity increased from 23.68% to 24.23% over the same period.

Average non-interest-bearing liabilities as a share of average total liabilities and equity decreased from 12.70% as of December 31, 2014 to 11.24% as of December 31, 2015.

Composition of Deposits

The following table sets forth the composition of our demand and time deposits as of December 31, 2013, 2014 and 2015.

	IFRS
	As of December 31,
	2013		2014		2015
	(Millions of pesos)
Demand deposits
Interest-bearing deposits	Ps.	145,587	Ps.	169,950	Ps.	215,013
Non-interest-bearing deposits		112,367		124,113		132,725
Subtotal	Ps.	257,954	Ps.	294,063	Ps.	347,738
Time deposits
Notes with interest payable at maturity	Ps.	115,808	Ps.	118,742	Ps.	109,568
Fixed-term deposits(1)		146		205		874
Foreign currency time deposits(2)		16,905		34,617		10,943
Subtotal	Ps.	132,859	Ps.	153,564	Ps.	121,385
Total	Ps.	390,813	Ps.	447,627	Ps.	469,123

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____________

(1)

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. As of December 31, 2015, we had not received any fixed-term deposits from credit institutions, and had not received fixed-term deposits from the Mexican Central Bank.

(2)

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. As of December 31, 2015, includes Ps.18,950 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, 2015.

Instrument	Amount	Maturity Date	Rate
	(Millions of pesos)

Certificates of deposit (unsecured) (2)	157	01/04/2016	2.78%
Certificates of deposit (unsecured) (2)	1,000	02/18/2016	3.53%
Certificates of deposit (unsecured) (2)	2,300	02/18/2016	3.53%
Certificates of deposit (unsecured) (2)	350	03/03/2016	3.36%
Certificates of deposit (unsecured) (2)	1,150	03/03/2016	3.36%
Certificates of deposit (unsecured) (2)	800	03/10/2016	3.38%
Certificates of deposit (unsecured) (2)	300	03/17/2016	3.53%
Certificates of deposit (unsecured) (2)	1,000	03/31/2016	3.36%
Certificates of deposit (unsecured) (2)	2,000	04/28/2016	3.36%
Certificates of deposit (unsecured) (2)	500	05/04/2016	3.36%
Certificates of deposit (unsecured) (2)	500	05/04/2016	3.36%
Certificates of deposit (unsecured) (2)	14	05/16/2016	3.20%
Certificates of deposit (unsecured) (2)	450	05/26/2016	3.36%
Certificates of deposit (unsecured) (2)	2,140	05/26/2016	3.36%
Certificates of deposit (unsecured) (2)	750	06/02/2016	3.38%
Certificates of deposit (unsecured) (2)	1,170	06/09/2016	3.53%
Certificates of deposit (unsecured) (2)	1,200	06/17/2016	3.34%
Certificates of deposit (unsecured) (2)	300	05/20/2016	3.34%
Certificates of deposit (unsecured) (2)	1,700	06/30/2016	3.40%
Certificates of deposit (unsecured) (2)	450	07/21/2016	3.40%
Certificates of deposit (unsecured) (2)	550	07/21/2016	3.36%
Certificates of deposit (unsecured) (2)	50	07/21/2016	3.30%
Certificates of deposit (unsecured) (2)	17	02/08/2016	3.20%
Certificates of deposit (unsecured) (2)	600	08/25/2016	3.40%
Certificates of deposit (unsecured) (2)	1	08/29/2016	3.20%
Certificates of deposit (unsecured) (2)	1,500	11/03/2016	1.14%
Certificates of deposit (unsecured) (2)	1	08/29/2016	3.20%
Certificates of deposit (unsecured) (2)	12	02/19/2016	3.20%
Certificates of deposit (unsecured) (2)	2	01/25/2016	3.20%
Certificates of deposit (unsecured) (2)	500	11/24/2016	3.42%
Certificates of deposit (unsecured) (2)	19	02/12/2016	0.75%
Certificates of deposit (unsecured) (2)	19	02/25/2016	0.75%
Certificates of deposit (unsecured) (2)	6	10/17/2016	0.75%
Certificates of deposit (unsecured) (2)	86	05/17/2016	0.50%
Certificates of deposit (unsecured) (2)	82	01/05/2016	0.15%
Certificates of deposit (unsecured) (2)	124	01/05/2016	0.10%
Certificates of deposit (unsecured) (2)	78	01/05/2016	0.15%

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Instrument	Amount	Maturity Date	Rate
Certificates of deposit (unsecured) (2)	172	01/07/2016	0.10%
Certificates of deposit (unsecured) (2)	126	01/12/2016	0.10%
Certificates of deposit (unsecured) (2)	84	01/14/2016	0.25%
Certificates of deposit (unsecured) (2)	127	01/15/2016	0.25%
Certificates of deposit (unsecured) (2)	82	01/19/2016	0.35%
Certificates of deposit (unsecured) (2)	129	01/21/2016	0.35%
Certificates of deposit (unsecured) (2)	69	01/20/2016	0.30%
Certificates of deposit (unsecured) (2)	140	01/26/2016	0.35%
Certificates of deposit (unsecured) (2)	61	01/06/2016	0.20%
Certificates of deposit (unsecured) (2)	168	01/28/2016	0.35%
Certificates of deposit (unsecured) (2)	1	01/04/2016	0.15%
Certificates of deposit (unsecured) (2)	1	02/02/2016	0.18%
Structured bank bonds (3)	34	01/04/2016	5.00%
Structured bank bonds (3)	30	07/01/2016	TIIE
Structured bank bonds (3)	150	07/01/2016	Guaranteed rate subject to EXCHANGE RATE
Structured bank bonds (3)	150	07/14/2016	TIIE
Structured bank bonds (3)	10	07/25/2016	TIIE
Structured bank bonds (3)	185	08/11/2016	TIIE
Structured bank bonds (3)	53	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)	52	04/07/2016	Guaranteed rate subject to Euro SX7E
Structured bank bonds (3)	368	09/08/2017	Guaranteed rate subject to Euro SX7E
Structured bank bonds (3)	270	11/17/2016	Guaranteed rate subject to IBEX35
Structured bank bonds (3)	587	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
Structured bank bonds (3)	22	10/14/2016	Guaranteed rate subject to Hang Semg
Structured bank bonds (3)	42	03/13/2017	Guaranteed rate subject to Euro STOXX 50
Structured bank bonds (3)	9	06/29/2016	Guaranteed rate subject to NIKKEI 225
Structured bank bonds (3)	147	09/14/2017	Guaranteed rate subject to IPC
Structured bank bonds (3)	49	09/14/2017	Guaranteed rate subject to IPC
Structured bank bonds (3)	17	12/14/2017	Guaranteed rate subject to IBEX35
Structured bank bonds (3)	12	04/06/2017	Guaranteed rate subject to Euro STOXX 50
Structured bank bonds (3)	110	11/06/2017	Guaranteed rate subject to S&P500
Structured bank bonds (3)	228	08/24/2016	Guaranteed rate subject to HSCEI y S&P 500
Structured bank bonds (3)	321	02/19/2018	Guaranteed rate subject to IXE
Structured bank bonds (3)	1,083	03/02/2018	Guaranteed rate subject to FSTE 100
Structured bank bonds (3)	518	03/06/2017	Guaranteed rate subject to HSCEI, S&P 500, SX5E y NIKKEI 225
Structured bank bonds (3)	935	04/03/2018	Guaranteed rate subject to EURO STOXX Oil & Gas
Structured bank bonds (3)	16	04/19/2016	Guaranteed rate subject to S&P500
Structured bank bonds (3)	24	05/09/2017	Guaranteed rate subject to Euro SX5E
Structured bank bonds (3)	142	05/16/2018	Guaranteed rate subject to Euro SX5E
Structured bank bonds (3)	22	05/25/2017	Guaranteed rate subject to IBEX35
Structured bank bonds (3)	123	05/31/2018	Guaranteed rate subject to Euro SX5E
Structured bank bonds (3)	798	06/29/2017	Guaranteed rate subject to IBEX35
Structured bank bonds (3)	705	03/02/2017	Guaranteed rate subject to Euro STOXX 50
Structured bank bonds (3)	150	06/29/2018	Guaranteed rate subject to Euro SX6E
Structured bank bonds (3)	137	06/29/2018	Guaranteed rate subject to Euro SX6E
Structured bank bonds (3)	469	06/27/2018	Guaranteed rate subject to 2.00%

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Instrument	Amount	Maturity Date	Rate
Structured bank bonds (3)	9	06/29/2018	Guaranteed rate subject to Euro SX6E
Structured bank bonds (3)	567	08/03/2017	Guaranteed rate subject to Euro SX5E
Structured bank bonds (3)	491	09/06/2017	Guaranteed rate subject to Euro SX5E
Structured bank bonds (3)	115	07/12/2018	Guaranteed rate subject to Euro SX6E
Structured bank bonds (3)	10	08/02/2018	Guaranteed rate subject to DAX
Structured bank bonds (3)	118	08/10/2017	Guaranteed rate subject to IPC
Structured bank bonds (3)	149	08/30/2017	Guaranteed rate subject to IPC
Structured bank bonds (3)	123	08/30/2018	Guaranteed rate subject to Euro STOXX 50
Structured bank bonds (3)	98	09/20/2018	Guaranteed rate subject to Euro STOXX 50
Structured bank bonds (3)	124	09/27/2018	Guaranteed rate subject to Euro STOXX 50
Structured bank bonds (3)	142	10/19/2018	Guaranteed rate subject to INDU
Structured bank bonds (3)	543	10/26/2020	Guaranteed rate subject to SXDP
Structured bank bonds (3)	223	11/09/2020	Guaranteed rate subject to SXDP
Structured bank bonds (3)	47	11/09/2020	Guaranteed rate subject to SXDP
Structured bank bonds (3)	70	11/09/2020	Guaranteed rate subject to SXDP
Structured bank bonds (3)	941	10/23/2020	Guaranteed rate subject to TIIE
Structured bank bonds (3)	18	11/07/2019	Guaranteed rate subject to SXDP
Structured bank bonds (3)	928	06/29/2018	Guaranteed rate subject to Euro SX6E
Structured bank bonds (3)	159	11/14/2019	Guaranteed rate subject to SXDP
Structured bank bonds (3)	9	11/05/2020	Guaranteed rate subject to TIIE
Structured bank bonds (3)	135	11/23/2020	Guaranteed rate subject to SXDP
Structured bank bonds (3)	174	12/14/2020	Guaranteed rate subject to SXDP
Senior notes	16,984	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)	980	11/23/2017	9.05%
Unsecured bonds (4)	3,000	12/06/2018	TIIE + 18 bps
Promissory notes (6)	10,000	01/25/2016	3.47%
Promissory notes (6)	53	01/19/2016	3.25%
Promissory notes (6)	66	01/04/2016	3.20%
Promissory notes (6)	13,950	01/04/2016	3.25%
Mortgage-backed bonds (5)	183	05/25/2032	5.00%
Mortgage-backed bonds (5)	13	05/25/2032	6.40%
Tier II Subordinated Capital Notes	22,285	01/30/2024	5.95%

	109,538
Transaction costs and accrued interest	699
Total debt securities outstanding	110,237

____________

(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.

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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 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.

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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 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.

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;

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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.

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 particular, the possible trend of monetary policy in the U.S. and the effect on industrial production as a result of the appreciation of the U.S. dollar against other currencies, could negatively impact the Mexican economy and affect the volatility of its financial markets, interest rates and credit demand in Mexico, thus having 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 of certain activities to manage credit, market and operational risk. 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.140,643 million, Ps.128,785 million and Ps.98,643 million as of December 31, 2013, 2014 and 2015, 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, 2013, 2014 and 2015:

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	As of December 31,
	2013		2014		2015
	(Millions of pesos)
Proprietary record accounts:
Credit commitments	Ps.	140,643	Ps.	128,785	Ps.	113,715
Assets in trust or mandate:
Trusts		133,101		135,497		141,287
Mandates(1)		274		247		243
Assets in custody or under administration(2)		3,543,470		3,193,157		3,346,631
Subtotal	Ps.	3,817,488	Ps.	3,457,686	Ps.	3,601,876
Collateral received	Ps.	99,277	Ps.	51,680	Ps.	59,377
Collateral received and sold or pledged as guarantee(3)		50,891		26,794		22,609
Investment banking transaction on behalf of third parties (net)(4)		565,081		415,726		432,809
Subtotal		715,249		494,200		514,795
Total	Ps.	4,532,737	Ps.	3,951,886	Ps.	4,116,671

____________

(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.

(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, 2015.

	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.	347,738	Ps.	—	Ps.	—	Ps.	—	Ps.	347,738
Time deposits		140,206		85		35		9		140,335
Bank and other loans(1)		34,354		11,681		6,424		7,747		60,206
Marketable debt securities(1)		52,566		13,696		2,145		19,042		87,449
Subordinated liabilities		556		—		—		22,232		22,788
Repurchase agreements		191,567		—		—		—		191,567
Short positions		49,554		135		—		322		50,011
Operating lease obligations		428		1,635		1,309		5,034		8,406
Sundry creditors and other payables		27,357		77		—		4,041		31,475
Contractual interest payments(2)		11,010		6,343		5,314		8,381		31,048
Total	Ps.	855,336	Ps.	33,652	Ps.	15,227	Ps.	66,808	Ps.	971,023

____________

(1)

Includes interest payments that are calculated by applying the interest rate in effect at December 31, 2015.

(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, 2015 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 currently comprises of eleven 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 reelected. 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 Board members are 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 must 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 the alternate director corresponding to an independent director is also 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 SHCP, unless such shares must be transferred to the 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 on April 28, 2016, 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, Mexico City, Mexico.

Name	Position	Series	Director Since
Marcos Alejandro Martínez Gavica	Chairman	Series F	1997
Héctor Blas Grisi Checa	Director	Series F	2016
Rodrigo Echenique Gordillo	Director	Series F	2015
Ángel Rivera Congosto	Director	Series F	2016
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 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

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Name	Position	Series	Director Since
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.

Marcos Alejandro Martínez Gavica is of the Chairman 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 was our Executive President and Chief Executive Officer from 1997 to 2016. 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.

Héctor Blas Grisi Checa 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 Executive President and Chief Executive Officer and the Executive President and Chief Executive Officer of Banco Santander (México). He was Executive President and Chief Executive Officer of Credit Suisse México from 2001 to 2015. Prior to that, he was Chief Executive Officer of the same institution from 1997 to 2001, and also Director of Investment Banking of Credit Suisse México. Mr. Grisi was a member of the board of directors of Credit Suisse Americas, of the Global Committee of Credit Suisse and a member of the Operational Committee of the Americas. He held several positions in Grupo Financiero Inverméxico from 1991 to 1997, in the Investment Corporate Banking Department. From 1986 to 1991 he worked at Casa de Bolsa Inverlat, in the department of Corporate Banking. He has been the Vice-President of the Asociación de Bancos de México since 2011. He holds a degree in finance from the Universidad Iberoamericana, where he graduated with honors.

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.

Ángel Rivera Congosto 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 Director of the Comercial Bank Division of Banco Santander, S.A., and also a member of the board of directors of Banco Santander, S.A, Banco Santander Perú and Uruguay. Mr. Rivera started working at Grupo Santander Spain in April 2013 as a General Director of the Comercial Banking area. He worked at Grupo Banco Popular for 24 years, including positions in retail offices, the Presidential Cabinet, the International Bank Area, the corporate development and strategy area, the Human Resources department and Media Direction, covering the Directors of

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Technology, Organization, Operations and Human Resources, as well as its commercial network. He was a member of the Direction Committee and the Payment Arrears Management and Recoveries and of the Alco Committee. He holds a diploma in business and tourist activities from the School of Tourism in Spain, a specialization in enterprise direction from the Instituto Panamericano de Alta Dirección Empresarial (PADE) in IESE (Universidad de Navarra) and a program of development in corporate finance at the Instituto de Empresa in Madrid. He has also studied under various financial programs in the United States and Australia and is a member of the Australian Institute of Banking & Finance.

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 Research, Public Affairs and Marketing 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 Corporate 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 Corporate 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 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 Deputy 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

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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.

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

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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 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.

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 to 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

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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. 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, Mexico City, 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
Hector Blas Grisi Checa	Executive President and Chief Executive Officer	2015
Pedro José Moreno Cantalejo	Vice-president of Administration and Finance	2010
Francisco Javier Hidalgo Blázquez	Vice-president of Retail Banking	2014
Fernando Borja Mujica	Deputy General Legal Director	2014
Jorge Arturo Arce Gama	Deputy General Director of Global Corporate Banking	2016
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
Rodrigo Brand de Lara	Deputy General Director of Research, Public Affairs and Marketing	2011
Pablo Fernando Quesada Gómez	Deputy General Director of Business and Institutional Banking	2013

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Executive Officers	Position	Year of appointment to current position
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
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 in 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 to 2004. He holds a master’s degree in public accounting from the Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM).

Jorge Arturo Arce Gama, was appointed Deputy General Director of Global Corporate Banking at Grupo Financiero Santander Mexico since April 2016 after serving as the President and Chief Executive Officer of Deutsche Bank Mexico, S.A. for over four years. Previously, Mr. Arce was the head of PWM Northern Latin America for Deutsche Bank for approximately seven years. In his more than 20 years at Deutsche Bank, Mr. Arce held several positions including senior investment banker for Latin America. Mr. Arce started his professional career at Citibank Mexico in 1991, where he remained until 1995. Mr. Arce holds a degree in finance from Pace University in New York.

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.

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

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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 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, and on 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.

B. Compensation

The aggregate amount of compensation and benefits to our executive officers during fiscal year 2015 was Ps.282 million. For the same period, the independent directors who are members of our Board of Directors and the Audit Committee and the Corporate Practices, Nominating and Compensation Committee received an aggregate compensation of Ps.13 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.361 million as of December 31, 2015.

Global Program – Performance share plan

Banco Santander Parent 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.

The Board of Directors of Banco Santander Parent approved on March 26, 2008 the long-term incentive policy covering the executive officers and other executives of Banco Santander Parent and its affiliate companies (except

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Banesto). This policy provides for compensation tied to the performance of the stock of Banco Santander Parent, as established in the Annual Shareholders’ Meeting.

This multi-annual share-settled incentive plan is payable in shares of Banco Santander Parent. The beneficiaries of the plan are the executive officers and other members of management, together with any other executives of Banco Santander Parent and its affiliates as determined by the Board of Directors or, when delegated by it, the executive committee of Banco Santander Parent. 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 Parent shares is established for each beneficiary who remains within Banco Santander Parent 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 Parent‘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 Parent’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 Parent 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.

Local Program

The Group's Board of Directors approved in October 2012 a share-based equity-settled compensation plan for eligible executive officers subject to certain conditions described below. The 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 it, eligible executive officers will receive a cash incentive that must be used irrevocably to acquire shares of the Group at a price of Ps.31.25 per share.

The incentive is linked to the achievement each year of two independent objectives related to the increase in the stock price and performance of the stock price against the IPC. If the objectives are fulfilled, each year one-third of the total amount of the incentive would be paid to the eligible executive officers.

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 executive officers 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 executive officers is 396 million pesos equivalent to 13,309,760 shares at a price of 31.25 pesos per share.

During 2013, 2014 and 2015, the Group recognized in the consolidated income statement an amount of Ps.138 million, Ps. 159 million and Ps.63 million, respectively, as services rendered by the eligible executive officers.

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 executive officers.

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.

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The plan is denominated “Corporate performance shares plan 2014” 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 Banco Santander Mexico 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 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, 2015, Banco Santander Mexico has recognized Ps.8 million in its consolidated income statement with respect to this plan.

C. Board Practices

Our directors and alternate directors are elected for one-year terms at our annual ordinary general shareholders’ meeting and may be reelected. 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 assume 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, 2016 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;

Additionally, the board of directors of Banco Santander Mexico has created the following committees which report to their Board of Directors:

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.

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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.

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*

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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
Marcos A. Martinez Gavica	Chairman of the Board
Héctor Blas Grisi Checa	Executive President and Chief Executive Officer.
Juan Ramón Jiménez Lorenzo	Executive General Director of Internal Audit
José Antonio Quesada Palacios	External Auditor
Antonio Salinas Velasco	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

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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;

unusual or nonrecurring 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)

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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.

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	Chairman of the Board
Héctor Blas Grisi Checa	Executive President and Chief Executive Officer.
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
Jose Arturo Arce Gama	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

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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; and

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.

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	Chairman of the Board
Héctor Blas Grisi Checa	Executive President and Chief Executive Officer.
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	Deputy General Legal Director

____________

The Secretary of the Remuneration Committee is Alfredo Acevedo Rivas.

D. Employees

As of December 31, 2015, on a consolidated basis we had 17,208 employees, an increase of 4.8% since December 31, 2014. 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. At the end of 2015, we finished our intended plan to add 200 new branches to our branch network. We opened 15 branches during the fourth quarter of 2012, 75 branches during 2013, 95 branches during 2014 and 15 branches in 2015.

We have traditionally enjoyed good relations with our employees and their union. Of the total number of our employees, 3,775, 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, 2015. 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, in 2014 the collective bargaining agreement relating to salaries was renewed and in 2015, the collective bargaining agreement relating to both salaries and benefits 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.

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The following chart summarizes the number and type of our employees as of December 31, 2013, 2014 and 2015.

		As of December 31,
Employees		2013		2014		2015
	Executives		110		113		117
	Professionals		6,276		6,669		7,097
	Administrative		7,874		9,645		9,994
	Total		14,260		16,427		17,208

____________

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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
Marcos Martínez Gavica	799,865	(1)	(1)
Héctor Blas Grisi Checa	—	—	—
Rodrigo Brand de Lara	59,015	(1)	(1)
Francisco Javier Hidalgo Blazquez	106,936	(1)	(1)
Pedro José Moreno Cantalejo	261,770	(1)	(1)
Fernando Borja Mujica	38,037	(1)	(1)
Guillermo Güemez García	—	—	—
Joaquín Vargas Guajardo	—	—	—
Juan Gallardo Thurlow	—	—	—
Vittorio Corbo Lioi	—	—	—
Eduardo Carredano Fernández	—	—	—
Jesús Federico Reyes Heroles González Garza	—	—	—
Fernando Ruíz Sahagún	—	—	—
Alberto Torrado Martínez	—	—	—
Gina Lorenza Diez Barroso Azcárraga	—	—	—
Enrique Krauze Kleinbort	—	—	—
Antonio Purón Mier y Terán	—	—	—
Rodrigo Echenique Gordillo	—	—	—
Angel Rivera Congosto	—	—	—
Emilio de Eusebio Saiz	44,196	(1)	(1)
Estanislao de la Torre Álvarez	104,139	(1)	(1)
Juan Ramón Jimenez Lorenzo	16,826	(1)	(1)
Juan Garrido Otaola	88,147	(1)	(1)
Roberto d’Empaire Muskus	22,627	(1)	(1)
Juan Pedro Oechsle Bernos	123,425	(1)	(1)
Jorge Alberto Alfaro Lara	157,354	(1)	(1)
Pablo Fernando Quesada Gómez	35,645	(1)	(1)
Enrique Luis Mondragón Domínguez	84,212	(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.”

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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 standalone subsidiaries, was one of the largest foreign bank groups in Latin America in terms of assets as of December 31, 2015, based on publicly available annual reports. The Santander Group had a gross margin of U.S.$45,272 million, CET1capital ratio of 10.05% and a market capitalization of U.S.$65,792 million as of December 31, 2015, and net income attributable to shareholders of U.S.$5,966 million in 2015. As of December 31, 2015, the Santander Group had 13,030 branches and a presence in 10 core 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. is an affiliate 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)		14,428,432		0.43	%		3,464,309,145		100.00	%		51.26	%
Santusa Holding, S.L.(2)		1,623,491,117		48.87	%		0		0.00	%		23.92	%
Carmignac Gestión(3)		222,612,290		6.70	%		0		0.00	%		3.28	%
Minority shareholders		1,461,553,929		44.00	%		0		0.00	%		21.54	%
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)

Carmignac Gestion filed with the SEC a Schedule 13G dated February 9, 2016. Based solely on the disclosure set forth in such Schedule 13G, Carmignac Gestion has sole voting power with respect to 222,612,290 series B shares and sole dispositive power with respect to 222,612,290 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, 2015, we had one holder registered in Mexico in addition to JPMorgan Chase Bank, N.A. as depositary of the ADRs evidencing ADSs. As of December 31, 2015, there were a total of 125 ADR holders of record and 185,153,347 ADRs outstanding, representing 925,766,735 Series B shares or 27.87% 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 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.

On September 8, 2015 Banco Santander Parent acquired 14,428,432 Series “B” shares which were owned by Santander Overseas Bank Inc., representative of the 0.21% of the share capital of Grupo Financiero Santander Mexico, S.A.B. de C.V.

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

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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 of the Mexican Banking Law. In addition, certain filings must be made with the 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 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, 2015, our loans granted to related parties per Article 73, 73 Bis and 73 Bis 1 of the Mexican Banking Law totaled Ps.62,678 million (U.S.$3,634 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.40,000 million (U.S.$2,319 million), Ps.20,996 million (U.S.$1,217 million) and Ps.1,682 million (U.S.$98 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.0.3 million, Ps.0.6 million and Ps. 0.3 million as of December 31, 2013, December 31, 2014 and December 31, 2015, 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.84 million, Ps.69.7 million and Ps.51.8 million as of December 31, 2013, December 31, 2014 and December 31, 2015, 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, 2013, December 31, 2014 and December 31, 2015, 90%, 87% and 94% 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

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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.

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 2015 was 3.31%.

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, 2015
Nature of loan and transaction in which incurred	Mortgage (1)				Credit lines (2)
	Largest amount outstanding (3)		Amount outstanding		Largest amount outstanding (3)		Amount outstanding		Total amount outstanding
	(Millions of pesos)
Officer 1	Ps.	43.1	Ps.	24.9	Ps.	0	Ps.	0	Ps.	24.9
Officer 2		5.4		4.9		0		0		4.9
Officer 3		3.4		2.4		0.2		0.1		2.6
Officer 4		2.5		2.3		0		0		2.3
Officer 5		8.5		3.6		1.0		0.9		4.5
Officer 6		6.0		5.5		0		0		5.5
Officer 7		5.3		3.2		0		0		3.2
Officer 8		0		0		1.0		0.8		0.8
Total	Ps.	74.1	Ps.	46.9	Ps.	2.2	Ps.	1.8	Ps.	48.7

____________

(1)

Under our employee benefit plan, each officer can be granted up to a maximum of three mortgage loans. The amount outstanding column includes all the loans outstanding as of December 31, 2015.

(2)

Under our employee benefit plan, each officer can be granted up to a maximum of two credit lines (these are consumer loans without guarantees). The amount outstanding column includes all the loans outstanding as of December 31, 2015.

(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, SAM Asset Management, S.A. de C.V., Sociedad Operadora de Sociedades de Inversión (formerly Gestión Santander), 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:

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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;

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; and

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, 2013, 2014 and 2015:

	As of
	December 31, 2013				December 31, 2014				December 31, 2015
	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.	3,380		––	Ps.	2,341		––	Ps.	4,800		––
Santander Benelux, S.A., N.V.		––		––		––		––		––		––
Abbey National Treasury Services plc		––		––		––		––		––		––
Loans and advances to customers(1)
Produban Servicios Informáticos Generales, S.L.		––	Ps.	1,086		––	Ps.	1,413		––	Ps.	1,395
Santander Capital Structuring, S.A. de C.V.		––		1,751		––		1,245		––		125
Promociones y Servicios Polanco, S.A. de C.V.		––		336		––		––		––		––
Grupo Konectanet México, S.A. de C.V.		—		15		—		15		––		15
Banco Santander Rio, S.A.		—		—		—		23		—		—
Trading derivatives
Banco Santander, S.A.		12,095		—		27,256		—		38,304		—
Banco Santander (Brasil), S.A.		—		—		—		—		—		169
Santander Benelux, S.A., N.V.		—		7,822		—		—		—		—
Abbey National Treasury Services plc		––		70		––		828		—		1,668
Santander Investment Limited		––		––		––		––		—		—
Other		––		12		––		5		—		5
OTHER ASSETS
Banco Santander, S.A.		86		––		1,266		––		303		––
Zurich Santander Seguros México, S.A.		––		761		––		747		—		824

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	As of
	December 31, 2013				December 31, 2014				December 31, 2015
	Parent		Other Related Party		Parent		Other Related Party		Parent		Other Related Party
	(Millions of pesos)
SAM Asset Management, S.A. de C.V., Sociedad Operadora de Sociedades de Inversión		––		––		––		122		––		144
Other		—		60		—		88		––		13
LIABILITIES AND EQUITY
FINANCIAL LIABILITIES HELD FOR TRADING
Trading derivatives
Banco Santander, S.A.		12,599		––		28,340		––		37,214		––
Santander Benelux, S.A., N.V.		—		8,291		—		—		––		––
Abbey National Trveasury Services plc		—		42		—		426		––		671
Other		—		12		—		21		––		46
OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
Deposits from credit institutions – Repurchase agreements
Banco Santander, S.A.		—		—		1,525		—		—		—
FINANCIAL LIABILITIES AT AMORTIZED COST
Deposits from credit institutions
Banco Santander, S.A.		3,298		––		249		––		222		––
Banco Santander International		—		68		—		347		—		—
Zurich Santander Seguros México, S.A.		—		—		—		425		—		—
Abbey National Treasury Services plc.		—		—		—		419		—		—
Santander Capital Structuring, S.A. de C.V.		—		—		—		—		—		217
Other		—		20		—		77		—		57
Customer deposits
Banco Santander, S.A.		—		—		—		—		1,346		—
Abbey National Treasury Services plc		—		—		—		—		—		1,005
Isban México, S.A. de C.V.		—		676		—		837		—		856
Santander Global Facilities, S.A. de C.V.		—		—		—		—		—		322
Servicios de Cobranza, Recuperación y Seguimiento, S.A. de C.V.		—		—		—		—		—		180
Produban Servicios Informáticos Generales, S.L.		—		348		—		119		—		101
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		––		154		––		82		––		85

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	As of
	December 31, 2013				December 31, 2014				December 31, 2015
	Parent		Other Related Party		Parent		Other Related Party		Parent		Other Related Party
	(Millions of pesos)
Marketable Debt Securities
Banco Santander, S.A.		774		—		727		—		850		—
Zurich Santander Seguros México, S.A.		—		—		—		—		—		—
Subordinated debentures
Banco Santander, S.A.		12,766		—		14,630		—		18,440		—
Other financial liabilities
Banco Santander, S.A.		10		—		709		—		6,684		—
Other		—		—		—		—		—		15
OTHER LIABILITIES
Produban Servicios Informáticos Generales, S.L.		—		—		—		—		—		300
Isban México, S.A. de C.V.		—		—		—		—		—		128
Banco Santander, S.A.		176		—		1,387		—		728		—
Other		—		45		—		38		—		52

____________

(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.

The following table set forth our income and expense from related parties for the years ended December 31, 2013, 2014 and 2015:

	For the year ended December 31,
	2013				2014				2015
	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.	4	Ps.	––	Ps.	4	Ps.	––	Ps.	5	Ps.	—
Produban Servicios Informáticos Generales, S.L.		—		35		—		38		—		45
Santander Capital Structuring, S.A. de C.V.		—		79		—		83		—		22
Other		––		3		––		1		––		1
Interest expenses and similar charges
Banco Santander, S.A.		24		—		832		—		1,026		—
Isban México, S.A. de C.V.		—		17		—		16		—		12
Zurich Santander Seguros México, S.A.		—		—		—		—		—		—
Other		—		14		—		9		—		10
Fee and commission income
Banco Santander, S.A.		—		—		—		—		171		—
Zurich Santander Seguros México, S.A.		—		3,372		—		3,739		—		3,929

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	For the year ended December 31,
	December 31, 2013					December 31, 2014						December 31, 2015
	Parent			Other Related Party		Parent			Other Related Party			Parent		Other Related Party
	(Millions of pesos)
Santander Capital Structuring, S.A. de C.V.		—			30		—			38			—		—
Santander Investment Securities Inc		—			10		—			8			—		7
SAM Asset Management, S.A. de C.V., Sociedad Operadora de Sociedades de Inversión.		—			1,310		—			1,353			—		1,363
Other		––			6		––			9			––		4
Fee and commission expense
Banco Santander, S.A. (Spain)		––			––		––			––			1		––
Santander Global Facilities, S.A. de C.V.		––			––		––			––			––		131
Servicios de Cobranza, Recuperación y Seguimiento, S.A. de C.V.		––			––		––			––			––		92
Gains/(losses) on financial assets and liabilities (net)
Financial assets held for trading
Banco Santander, S.A.		(482	)		—		(1,641	)		—			813		—
Santander Benelux, S.A., N.V.		—			900		—			(233	)		—		—
Abbey National Treasury Services plc		—			72		—			117			—		622
Other		—			53		—			13			—		(194	)
Other operating income
Santander Global Facilities, S.A. de C.V.		—			—		—			—			—		62
Other		—			—		—			—			—		12
Administrative expenses
Produban Servicios Informáticos Generales, S.L.		—			1,382		—			1,546			—		1,377
Isban México, S.A. de C.V.		—			—		—			125			—		92
Santander Global Facilities, S.A. de C.V.		—			166		—			159			—		259
Ingeniería de Software Bancario, S.L.		—			—		—			106			—		110
Gesban México Servicios Administrative Globales, S.A. de C.V.		—			—		—			—			—		—
Aquanima México, S. de R.L. de C.V.		—			43		—			45			—		47
Geoban, S.A.		—			—		—			79			—		76
Other		—			354		—			79			—		131
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, 2015, we have recognized Ps.1,092 million (U.S.$63 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.

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.

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. On May 29, 2015, we paid a dividend in an aggregate amount of Ps. 3,534 million equivalent to Ps. 0.52 per share. On December 22, 2015 we paid a dividend in an aggregate amount of Ps. 3,226 million equivalent to Ps. 0.48 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

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shareholders having approved our financial statements and the payment of dividends, and such other factors as may be deemed relevant at the time. We cannot assure you that we will pay any dividends in the future.

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

Under Mexican law, dividends may only be paid from retained earnings resulting from the relevant year or prior years’ results if (i) the legal reserve has been created or maintained, by annually segregating 5% of net earnings, until the legal reserve equals at least 20% of the fully paid-in capital, (ii) shareholders, at a duly called meeting, have approved the results reflecting the earnings and the payment of dividends, and (iii) losses for prior fiscal years have been repaid or absorbed. The Mexican income tax law also sets forth an additional 10% tax over dividends paid when they are distributed to Mexican individuals or to companies or individuals based abroad, applicable to payments in connection with dividends generated since 2014 (for dividends related to years prior to 2014, the tax is not applicable). This additional tax is paid through its withholding and constitutes a definitive payment in charge of the shareholders. Treaties to avoid double taxation may be applied to foreigners.

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, 2015, 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 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:

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	Ps. per Series B share				U.S.$ equivalent per ADS(1)				Average daily trading volume of Series B shares
	High		Low		High		Low
Year
2015	Ps.	34.84	Ps.	24.52	U.S.$	10.10	U.S.$	7.11		3,732,166
2014		39.16		27.34		13.28		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
Quarter
First Quarter 2016		31.66		26.18		9.18		7.59		3,976,128
Fourth Quarter 2015		32.77		24.71		9.50		7.16		4,198,426
Third Quarter 2015		29.86		24.52		8.83		7.25		3,324,046
Second Quarter 2015		34.40		27.58		10.97		8.79		4,148,561
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
Month
April 2016 (through April 28)		32.34		29.42		9.39		8.55		3,607,078
March 2016		31.66		29.61		9.18		8.59		4,394,112
February 2016		29.47		26.52		8.14		7.33		4,185,419
January 2016		29.72		26.18		8.17		7.19		657,150
December 2015		31.63		29.15		9.17		8.45		4,028,144
November 2015		32.77		30.40		9.88		9.16		4,265,844
October 2015		30.35		24.71		9.18		7.48		4,310,483
September 2015		26.22		24.52		7.75		7.25		3,750,927

____________

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.

On April 28, 2016, the closing price for our Series B shares on the Mexican Stock Exchange was Ps.31.78 per share, or U.S.$9.23 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.17.2125 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 8.588 as of March 31, 2016, 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.

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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
2015	U.S.$	11.71	U.S.$	7.13
2014		15.06		9.43
2013		17.79		13.07
2012 (since September 26, 2012)		16.77		12.91
Quarter
First Quarter 2016		9.11		6.86
Fourth Quarter 2015		9.81		7.27
Third Quarter 2015		9.46		7.13
Second Quarter 2015		11.54		8.87
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
Month
April 2016 (through April 28)		9.43		8.12
March 2016		9.11		8.22
February 2016		8.12		6.86
January 2016		8.51		7.03
December 2015		9.50		8.37
November 2015		9.81		9.05
October 2015		9.15		7.27
September 2015		7.89		7.13

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.”

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 CNBV, the Mexican Stock Exchange, 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.

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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 U.S. 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;

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;

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

Reporting Obligations

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

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

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

reports disclosing material information promptly;

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

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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 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;

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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 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 Nonvoting Shares

The Mexican Securities Market Law does not permit issuers to implement mechanisms for common shares and limited or nonvoting shares to be jointly traded or offered to public investors, unless the limited or nonvoting 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 nonvoting 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 nonvoting shares exceeding 25% of the aggregate amount of publicly held shares are convertible into common shares within five years of their issuance.

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

approve the appointment or removal of the chief executive officer;

approve accounting and internal control policies; and

approve policies for disclosure of information.

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

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

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

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

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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.

Disclosure of Shareholders’ Agreements

Any shareholders’ agreements containing noncompete 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.

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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 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.

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 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, Ciudad de México, 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 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 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;

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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 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, 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 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.

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.

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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 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;

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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 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, for approval at our annual general ordinary shareholders’ meeting. Once our shareholders approve our financial statements, they are required to

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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 nonsubscribed 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 eleven directors and eight 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 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.

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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.

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

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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 consist only of independent Board members and it must comprise at least three directors.

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.”

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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 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

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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 ten 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.

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

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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.

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.

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Transfer Restrictions

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.

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.

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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.

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

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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, which may be relevant to a non-Mexican holder of ADSs or Series B shares.

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 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.

Nonresidents 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.

In addition to the withholding tax described above, if dividends are not paid from our net after-tax profit (“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.

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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 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;

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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:

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 prereleased, 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 noncorporate holders. Accordingly, the creditability of Mexican taxes, and the availability of the reduced tax rates for dividends received by certain noncorporate 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 noncorporate 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

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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. Noncorporate 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.

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 2015. 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

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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 noncorporate 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.

Certain U.S. Holders who are individuals (and under recently finalized Treasury Regulations, specified entities that are formed or availed of for purposes of holding certain foreign financial assets) 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 NE, 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.

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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 CNBV has issued regulations governing risk management applicable to credit institutions. The board of directors of Banco Santander Mexico has formed and maintains the Banco Santander Mexico Comprehensive Risk Management Committee (Comité de Administración Integral de Riesgos) based on the guidelines set forth in these regulations. The Comprehensive Risk Management Committee must comprise at least five members, including the head of the Comprehensive Risk Management Unit, our Chief Executive Officer, two Board members of Banco Santander Mexico (one of whom is the committee president) and our internal auditor. The 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.

The Comprehensive Risk Management Committee proposes to the board of directors of Banco Santander Mexico, 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); and

strategies for assigning resources related to the execution of operations.

In addition, the 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 risk; and

Execution of new transactions and services that involve risks.

The Comprehensive Risk Management Committee also monitors compliance with the risk limits established by the board of directors of Banco Santander Mexico.

The Comprehensive Risk Management Committee reports existing risk exposure to the senior management and the board of directors of Banco Santander Mexico, 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

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Management Unit, which reports to the Comprehensive Risk Management Committee. The 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.

The Comprehensive Risk Management Committee has delegated to the 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. The 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 of Banco Santander Mexico. This person is also responsible for, among other things, presenting to the board of directors of Banco Santander Mexico the Comprehensive Risk Management Committee’s reports, approvals and the risk exposures.

The 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 of Banco Santander Mexico 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 the 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.

The Comprehensive Risk Management Committee may also create any subcommittees necessary to exercise its functions. The 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.

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

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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 nontrading 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 nontrading 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 nontrading 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.

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 nontrading activities, due to the maturity gap between assets and liabilities mostly in our retail banking business.

We use derivatives for both trading and nontrading 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 clearinghouses, such as the Mexican Derivatives Exchange. 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

The 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 the Comprehensive Risk Management Committee and to the board of directors of Banco Santander Mexico.

The measurement of market risk quantifies the potential change in the value of our positions as a result of changes in market risk factors.

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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; and

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.

For further information about our methodologies, see Note 48 to our audited financial statements.

The table below presents our portfolios as of December 31, 2014 and 2015:

	At December 31,
	2014					2015
	VaR (thousands of pesos)		Percentage of net capital (%)			VaR (thousands of pesos)		Percentage of net capital (%)
Trading desks	Ps.	51,608.91		0.05	%	Ps.	69,725.05		0.07	%
Market Making		36,909.53		0.04	%		58,240.89		0.06	%
Proprietary Trading		19,671.13		0.02	%		21,726.44		0.02	%
Risk factor
Interest Rate		43,593.72		0.05	%		59,867.56		0.06	%
Foreign Exchange		16,098.59		0.02	%		4,295.92		0.00	%
Equity		40,296.18		0.04	%		5,464.94		0.01	%

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The average VaR (based on month-end amounts) in 2015 was:

	VaR (thousands of pesos)		Percentage of net capital (%)
Trading desks	Ps.	72,249.34		0.07	%
Market Making		60,512.00		0.06	%
Proprietary Trading		24,905.78		0.02	%
Risk factor
Interest Rate		68,940.88		0.07	%
Foreign Exchange		8,907.15		0.01	%
Equity		16,946.15		0.02	%

____________

The risk performance of our trading portfolio with regard to trading activity in financial markets during 2015, measured by daily VaR in millions of pesos, is shown in the following graph.

____________

The above graph shows that daily VaR during 2015 remained at levels below the limit of U.S.$15 million (approximately Ps.192 million).

In 2015, the average daily VaR of the Group’s market trading operations was Ps.71 million, as compared to Ps.86 million in 2014. In 2015, 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 2015. At the end of December 2015, VaR was Ps.70 million.

During the first and second semester of 2015, the average daily VaR was Ps.71 million. VaR remained at levels between Ps.52 million and Ps.105 million, in the second semester, as a result of interest rate increase expectations.

The histogram below compares the distribution of risk in terms of daily VaR between 2014 and 2015. In 2014, the levels of VaR remained between Ps.47 million and Ps.120 million on 94% of the days for which it was calculated. Higher values of VaR (greater than Ps.120 million) represented 6% of the period. During 2015, the levels remained between Ps.46 million and Ps.120 million on 96% of the days for which they were calculated. Higher values (greater than Ps.120 million) represented 4% of the period.

Risk Histogram

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____________

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:

Interest rate (IR), volatility (Vol) and Exchange rate (FX) risk factors were increased by one standard deviation.

Equity risk factors (EQ) were decreased by one 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)
2015	Ps.	1		Ps.	(9	)	Ps.	(19	)	Ps.	(6	)
2014		(24	)		(71	)		(57	)		(10	)
2013		(104	)		(35	)		7			(37	)
2012		(84	)		(92	)		(27	)		(79	)
2011		(145	)		(122	)		(94	)		(90	)

____________

Possible Scenario

Under this scenario, risk factors were modified by 25%. In summary, the movements applied to each risk factor were as follows:

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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)
2015	Ps.	(204	)	Ps.	188		Ps.	(284	)	Ps.	(168	)
2014		(924	)		(859	)		(761	)		(26	)
2013		(755	)		(612	)		(451	)		(930	)
2012		(1,362	)		(811	)		(521	)		(493	)
2011		(1,268	)		(1,618	)		(1,122	)		(1,112	)

____________

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%).

	As of March 31			As of June 30			As of September 30			As of December 31
	(Millions of pesos)
2015	Ps.	(278	)	Ps.	648		Ps.	(343	)	Ps.	(149	)
2014		(2, 953	)		(2,240	)		(2,436	)		(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	)

____________

Assets and Liabilities Management (Banking Books)

Our retail banking activities generate significant balance sheet amounts. Our 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 repricing 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.

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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.5,700 million in local currency and U.S.$35 million in foreign currency) and net financial income, 1% NIM sensitivity (Ps.1,500 million in local currency and U.S.$20 million in foreign currency) in one year. The 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 above mentioned 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.

The following chart shows our NIM and MVE limit consumption for 2013 to 2015 at year-end as well as for each month in 2015.

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____________

In 2015, 1% MVE sensitivity remained stable with a maximum of 59% in December and a minimum of 35% in February. While 1% NIM sensitivity had a maximum of 83% in February and a minimum of 41% in November, these changes were due to short-term management activities that increased and decreased 1% NIM sensitivity beyond the average, respectively.

The internal risk units propose risk methodology and risk model changes to the 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, 2015. 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.	101,555		Ps.	75,574		Ps.	—		Ps.	1		Ps.	10		Ps.	37		Ps.	36		Ps.	9		Ps.	25,888
Loans		670,748			93,701			61,645			51,329			66,744			168,011			88,055			148,435			(7,173	)
Trade Finance		—			—			—			—			—			—			—			—			—
Intragroup		141			—			—			—			—			—			—			—			141
Securities		355,731			323,950			1			1			1			6,031			—			—			25,748
Permanent		5,321			—			—			—			—			—			—			—			5,321
Other Balance Sheet Assets		56,198			—			—			—			—			—			—			—			56,198
Total Balance Sheet Assets		1,189,694			493,225			61,646			51,331			66,755			174,080			88,091			148,444			106,123
Money Market		(251,504	)		(229,432	)		(519	)		(3,714	)		(12,572	)		(2,540	)		(1,348	)		—			(1,380	)
Deposits		(467,936	)		(154,085	)		(48,523	)		(86	)		(16,381	)		(248,860	)		—			—			-
Trade Finance		(518	)		—			—			—			—			—			—			—			(518	)
Intragroup		—			—			—			—			—			—			—			—			—
Long-Term Funding		(163,148	)		(27,491	)		(7,943	)		(13,383	)		(17,693	)		(40,129	)		(29,221	)		(27,289	)		-
Equity		(99,516	)		—			—			—			—			—			—			—			(99,516	)
Other Balance Sheet Liabilities		(76,457	)		—			—			—			—			—			—			—			(76,457	)
Total Balance Sheet Liabilities		(1,059,079	)		(411,008	)		(56,984	)		(17,183	)		(46,646	)		(291,528	)		(30,570	)		(27,289	)		(177,871	)
Total Balance Sheet Gap		130,615			82,217			4,662			34,148			20,109			(117,448	)		57,521			121,155			(71,748	)
Total Off-Balance Sheet Gap		(5,397	)		966			449			(451	)		(1,323	)		(623	)		2,147			(3,980	)		(2,583	)
Total Structural Gap				Ps.	83,183		Ps.	5,110		Ps.	33,696		Ps.	18,786		Ps.	(118,072	)	Ps.	59,669		Ps.	117,176		Ps.	(74,331	)
Accumulated Gap					83,183			88,293			121,990			140,775			22,703			82,372			199,548			125,217

____________

Interest Rate Risk Profile

The table below shows the distribution of interest rate risk by maturity as of December 31, 2015. 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.	101,555		Ps.	47,337		Ps.	-		Ps.	1		Ps.	10		Ps.	37		Ps.	36		Ps.	9		Ps.	54,124
Loans		603,401			287,578			50,897			42,918			24,782			75,456			35,830			93,113			(7,173	)
Trade Finance		—			—			—			—			—			—			—			—			—
Intragroup		141			—			—			—			—			—			—			—			141
Securities		370,698			29,778			11,311			4,971			3,061			54,743			11,938			16,862			238,033
Permanent		5,321			—			—			—			—			—			—			—			5,321
Other Balance Sheet Assets		56,198			—			—			—			—			—			—			—			56,198
Total Balance Sheet Assets		1,137,313			364,693			62,209			47,889			27,852			130,236			47,804			109,985			346,644
Money Market		(251,123	)		(24,661	)		(17,503	)		-			-			-			—			—			(208,959	)
Deposits		(467,936	)		(213,996	)		(7,887	)		(1,951	)		(22,852	)		(221,250	)		—			—			-
Trade Finance		(518	)		—			—			—			—			—			—			—			(518	)
Intragroup		—			—			—			—			—			—			—			—			-
Long-Term Funding		(162,331	)		(57,480	)		(395	)		(737	)		(1,801	)		(7,890	)		(26,924	)		(27,078	)		(40,027	)
Equity		(98,607	)		—			—			—			—			—			—			—			(98,607	)
Other Balance Sheet Liabilities		(76,457	)		—			—			—			—			—			—			—			(76,457	)
Total Balance Sheet Liabilities		(1,056,973	)		(296,136	)		(25,785	)		(2,688	)		(24,653	)		(229,140	)		(26,924	)		(27,078	)		(424,569	)
Total Balance Sheet Gap		80,340			68,557			36,424			45,201			3,199			(98,904	)		20,880			82,907			(77,925	)
Total Off-Balance Sheet Gap		(9,233	)		14,184			(896	)		(5,505	)		(638	)		(1,990	)		1,797			(3,916	)		(12,269	)
Total Structural Gap				Ps.	82,741		Ps.	35,527		Ps.	39,696		Ps.	2,561		Ps.	(100,894	)	Ps.	22,678		Ps.	78,991		Ps.	(90,194	)
Accumulated Gap					82,741			118,268			157,965			160,526			59,632			82,310			161,301			71,107

____________

Market Risk Limits

The 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 the 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.

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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	Net Interest Margin (NIM)
	Market Value of Equity	(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 2015 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; and

resolving issues with respect to any of our credit operations.

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;”

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periodically review, assess and recommend to our Board of Directors investment policies, criteria, guidelines and strategy for its approval; and

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 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, 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: 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.

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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 77%. 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 reclassify the loan as performing. Restructuring plans offered to our credit card holders have a recovery rate average of 43%. Six months after restructuring, approximately 46% of consumer loans are current in terms of repayment.

The following table shows the average during the last 72 months (renegotiation vintages from January 2010 to December 2015) 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		27	%		38	%		44	%
Non-performing at the time of the renegotiation		54	%		52	%		53	%
Total Consumer Loans		28	%		39	%		45	%
Commercial Loans(2)
Performing at the time of the renegotiation		26	%		25	%		27	%
Non-performing at the time of the renegotiation		25	%		26	%		25	%
Total Commercial Loans		26	%		25	%		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 2010 to December 2015 are as follows:

	Success Rates
	at 6 months			at 12 months			at 18 months
Consumer Loans(1)
Performing at the time of the renegotiation		72	%		61	%		55	%
Non-performing at the time of the renegotiation		46	%		48	%		47	%
Total Consumer Loans		72	%		61	%		55	%
Commercial Loans(2)
Performing at the time of the renegotiation		74	%		75	%		74	%
Non-performing at the time of the renegotiation		75	%		74	%		75	%
Total Commercial Loans		74	%		75	%		74	%

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(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 2014 vintage and 2015 vintage performance as of December 31, 2015, 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 12/31/2014												For the year ended 12/31/2015
	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		694			0			2,040			2,734			2,951		0		1,417		4,368
Mortgages		1			0			0			1			0		0		0		0
Consumer		542			0			799			1,341			1,192		0		253		1,445
Total		1,238			0			2,838			4,076			4,143		0		1,670		5,813

NPLs and charge offs		at December 31, 2015 (18 months)*												at December 31, 2015 (12 months)
Commercial		24	%		0	%		46	%		32	%		-		-		-		-
Consumer		52	%		0	%		66	%		53	%		-		-		-		-
Total		40	%		0	%		50	%		42	%		-		-		-		-

Success Rate		at December 31, 2015 (18 months)*											at December 31, 2015 (12 months)
Commercial		76	%		0	%		54	%		68	%		-		-		-		-
Consumer		48	%		0	%		34	%		47	%		-		-		-		-
Total		60	%		0	%		50	%		58	%		-		-		-		-

____________

From 12 to 24 months of performance at December 31, 2014 (18 months on average)

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 observed default frequencies in the consumer and mortgage loan portfolios, and based on ratings in the commercial portfolio.

Renegotiated loans have decreased from 2.7% of the total consumer loan portfolio as of December 31, 2014, to 2.2% as of December 31, 2015. 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. The net decrease in the percentage of renegotiated loans between December 31, 2014, and December 31, 2015, is attributed to the movements set forth in the table below:

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	% of Total Consumer Loans
Renegotiated Loans at December 31, 2014*		2.7	%
Collections/repayments on renegotiated loans		(0.6	)%
Charge-offs		(0.8	)%
Increase in consumer loan portfolio		0.0	%
New renegotiations		1.3	%
Renegotiated Loans at December 31, 2015		2.2	%

____________

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 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. REC takes into account the Current Credit Exposure, which is defined as the cost to substitute the transaction at market value provided that this value is positive for Grupo Financiero Santander, and it is measured as the market value of the transaction (“MtM”). Furthermore, the Gross Equivalent Credit Risk incorporates the Potential Credit Exposure or Potential Additional Risk (“RPA”), which represents the possible evolution of the current credit exposure until maturity, given the characteristics of the transaction and the possible variations in the market factors. The REC Gross considers definitions described above, without considering mitigating by netting or by mitigating collateral.

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 agreements and, in certain cases, with collateral agreements or revaluation agreements with the counterparties. This mitigated risk is called Net REC. The methodology continues to be effective.

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, the 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 approves these counterparty risk limits. The Financial Risk Senior Management is also responsible for communicating the limits, consumptions and any excesses incurred on a daily basis. Furthermore, the Financial Risk Senior Management reports monthly to the 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. In addition, on a monthly basis, a report is presented to the Global Banking Credit Committee and Retail Credit Committee with respect to incurred excesses and transactions with non-authorized customers. All of the above according to the methodologies and assumptions approved by the Comprehensive Risk Management Committee.

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.

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Set forth below are the NET REC of the Counterparty Risk Lines and Issuer Risk Lines of Grupo Financiero Santander Mexico as of December 31, 2015, 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 2015.

	NET REC
	As of December 31, 2015		Fourth quarter 2015 Average
			(Millions of dollars)
Risk Lines
Sovereign Risk, Development Banking and Financial Institutions		21,377.75		22,488.80
Corporates		1,070.01		1,193.49
Companies		174.01		158.08

Set forth below are our REC lines’ maximum gross counterparty risk as of December 31, 2015, corresponding to types of derivatives transactions.

	Maximum REC gross
	As of December 31, 2015
	(Millions of dollars)
Type of Derivative
Rate Derivatives		17,225
Exchange Rate Derivatives		24,332
Derivatives on bonds		3
Equity Derivatives		1,519
TOTAL		43,079

____________

In IRIS, the Gross Equivalent Credit Risk does not consider mitigation by netting agreements and by collateral agreements with counterparties.

The Expected Loss of Grupo Financiero Santander Mexico as of December 31, 2015, 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 2015, are concentrated as follows:

	Expected Loss
	As of December 31, 2015		Fourth quarter 2015 Average
			(Millions of dollars)
Risk Lines
Sovereign Risk, Development Banking and Financial Institutions		9.27		7.63
Corporates		2.60		2.71
Companies		1.51		1.27

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, 2015 is as follows:

Cash Collateral			68.42	%
Bonds Issued by the Mexican Federal Government Collateral			31.58	%

In respect to collateral management in derivatives transactions, counterparty’s positions are valuated according to the frequency established at each collateral agreement. In addition, all credit risk parameters, established at each collateral agreement are considered to obtain the amount of collateral to be delivered or to be received from the

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counterparty. These amounts, margin calls, will be requested from the counterparty which has the right to receive the collateral, according to the frequency established at the collateral agreement.

The counterparty which receives the margin call has the right to analyze the valuation and it could result on discrepancies to solve.

In respect to the correlation between the collateral and the counterparty in derivatives transactions, the Institution confirms that, at this time, the eligible collateral consists on government bonds and cash collateral, so as a result there are no adverse effects due to correlation between the counterparty and the collateral.

In the hypothetical stressed scenario, assuming that the Institution’s credit rating decreases and the impact of this credit rating decrease on the collateral that the Institution would have to deliver, this stressed test confirms that there would not be significant impact; a few of the Thresholds established on the Institution’s collateral agreements are dependent on the Institution’s credit rating.

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 events that may occur as a result of legal or regulatory risk, but excludes those that occur as a result of strategic risks and reputational risks

We have a nonfinancial risk management unit that is responsible for coordinating the implementation of policies and procedures according to the corporate model defined in Spain. This unit submits proposals to the Operational Risk Committee and/or the Committee of Integral Risk Management 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 nonfinancial risk unit reports directly to the Deputy General Risk Director in Mexico and to the corporate responsible for operational risk in Spain.

The key processes involved in the model for the management and control of the Operational Risk are summarized as follows:

strategic planning and budget;

identification, measurement and assessment of operational risk;

continuous monitoring of Operational Risk profile;

establishment of mitigation and risk transfer; and

communication.

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 Corporate 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, 2015, we received approximately U.S.$10.8 million as reimbursements from J.P. Morgan Chase Bank, N.A.

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PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Defaults

No matters to report.

Arrears and Delinquencies

No matters to report.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

Material Modifications to Instruments

None.

Material Modifications to Rights

None.

Withdrawal or Substitution of Assets

None.

Change in Trustees or Paying Agents

None.

Use of Proceeds

Not applicable.

ITEM 15. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of December 31, 2015, 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, 2015 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.

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

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reliability 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, 2015, 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, 2015, our internal control over financial reporting is effective.

Our internal control over financial reporting as of December 31, 2015, has been audited by an independent registered public accounting firm, as stated in its report, which follows below.

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. and Subsidiaries

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, 2015, 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 management and directors of the company; and (3) provide reasonable assurance

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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, 2015, 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, 2015 of the Group and our report dated April 18, 2016 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 18, 2016

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 nonexecutive independent directors, as determined in accordance with Article 36 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.

On October 22, 2015, the board of directors of the Bank and Casa de Bolsa Santander approved amendments to the General Code of Conduct in order to include the provisions of Disposiciones de carácter general aplicables a las sociedades de inversión y a las personas que les prestan servicios, due to the share distribution services of investment funds provided by the Bank and Casa de Bolsa Santander.

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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 2014 and 2015.

	2014		2015
	(Millions of pesos)
Audit fees	Ps.	57	Ps.	66
Audit-related fees		̶—		2
Tax fees		—		2

____________

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 2015 and 2014 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 2014 or 2015 for services other than audit, audit-related and tax services.

Preapproval Policies and Procedures

The Audit Committee is required to preapprove the audit and nonaudit 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 preapproves 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 nonaudit services provided by the Company’s principal auditing firm or other auditing firms are subject to case-by-case preapproval by the Audit Committee.

All of the audit fees, audit-related fees and tax fees described in this item 16C have been preapproved by the Audit Committee in accordance with these preapproval 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.

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ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

None.

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

On July 23, 2015, we announced that the Board of Directors selected PricewaterhouseCoopers, S.C. to be the independent registered public accounting firm of Groupo Financiero Santander Mexico for the 2016, 2017 and 2018 fiscal years. Such selection was adopted at the proposal of the Audit Committee in accordance with the corporate governance guidelines recommending periodic rotation of the independent registered public accounting firm, following a transparent selection process. Accordingly, on October 22, 2015, the Board of Directors resolved that Galaz, Yamazaki, Ruiz Urquiza, S.C., member firm of Deloitte Touche Tohmatsu Limited, was dismissed and was not reelected for another term as our independent registered public accounting firm.

The report of Galaz, Yamazaki, Ruiz Urquiza, S.C. on our financial statements for financial years ended December 31, 2014 and 2015 did not contain any adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. There was no disagreement whatsoever relating to the years ended December 31, 2014 and 2015 with Galaz, Yamazaki, Ruiz Urquiza, S.C. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of the former auditor, would have caused them to make reference to the subject matter of the disagreement in connection with their report, or any “reportable event” as described in Item 16F(a)(1)(v) of Form 20-F.

We have provided a copy of the above statements to Galaz, Yamazaki, Ruiz Urquiza, S.C. and requested that Galaz, Yamazaki, Ruiz Urquiza, S.C. furnish us with a letter addressed to the SEC stating whether or not they agree with the above disclosure. A copy of that letter, dated May 2, 2016, is filed as an exhibit to this Annual Report.

ITEM 16G. CORPORATE GOVERNANCE

Our corporate practices are governed by our bylaws (estatutos), the Mexican Securities Market Law and the regulations issued by the CNBV and the Mexican Stock Exchange. 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

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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 authority given to 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

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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 nonmanagement 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, 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.

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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.

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 Audited 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, 2014 and 2015	F-3
Consolidated Income Statements for the Years Ended December 31, 2013, 2014 and 2015	F-4
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013, 2014 and 2015	F-5
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2013, 2014 and 2015	F-6
Consolidated Statements of Cash Flow for the Years Ended December 31, 2013, 2014 and 2015	F-7
Notes to the Consolidated Financial Statements as of December 31, 2014 and 2015 and for each of the three years in the three-year period ended December 31, 2015	F-8
Financial Statement Schedules	F-209

(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.
15.2*	Letter of Galaz, Yamazaki, Ruiz Urquiza, S.C., member firm of Deloitte Touche Tohmatsu Limited, dated May 2, 2016, regarding change in the Group’s 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/ Hector Grisi Checa
	Name:	Hector Grisi Checa
	Title:	Executive President and Chief Executive Officer

Date: May 2, 2016

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

Consolidated Financial Statements in accordance with International Financial Reporting Standards and Related Financial Statement Schedules as of December 31, 2014 and 2015 and for each of the three years in the period ended December 31, 2015

Index
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets as of December 31, 2014 and 2015	F-3
Consolidated Income Statements for the Years Ended December 31, 2013, 2014 and 2015	F-4
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013, 2014 and 2015	F-5
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2013, 2014 and 2015	F-6
Consolidated Statements of Cash Flow for the Years Ended December 31, 2013, 2014 and 2015	F-7
Notes to the Consolidated Financial Statements as of December 31, 2014 and 2015 and for each of the three years in the three-year period ended December 31, 2015	F-8
Financial Statement Schedules	F-209

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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, 2014 and 2015, 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, 2015. Our audits also included the financial statement schedules presented in the condensed financial information of the Group included on pages 201 – 203, 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, 2014 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, 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, 2015, 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 18, 2016 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/ C.P.C. Erika Regalado García

C.P.C. Erika Regalado García

Mexico City, Mexico

April 18, 2016

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

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2014 AND 2015

(Millions of Pesos)


ASSETS	Note	12/31/2014	12/31/2015	LIABILITIES AND EQUITY	Note	12/31/2014	12/31/2015

CASH AND BALANCES WITH THE CENTRAL BANK	7	51,823	59,788	FINANCIAL LIABILITIES HELD FOR TRADING:		136,805	174,576
				Trading derivatives	11 and 32	94,842	124,565
				Short positions	11	41,963	50,011
FINANCIAL ASSETS HELD FOR TRADING:		208,371	328,117
Debt instruments	9	110,787	209,158
Equity instruments	10	5,160	2,178	OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS:		108,784	204,829
Trading derivatives	11 and 32	92,424	116,781	Deposits from the Central Bank – Repurchase agreements	19	5,006	145,159
				Deposits from credit institutions – Repurchase agreements	19	28,746	325
				Customer deposits – Repurchase agreements	20	69,726	46,083
				Customer deposits – Certificates of deposit	20	-	639
				Marketable debt securities	21	5,306	12,623
OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS:		31,872	27,358	FINANCIAL LIABILITIES AT AMORTIZED COST:		579,125	659,186

Loans and advances to credit institutions – Reverse repurchase agreements	8	27,379	735	Deposits from credit institutions	19	48,326	54,349
Loans and advances to customers – Reverse repurchase agreements	12	4,493	26,623	Customer deposits	20	444,902	493,291
				Marketable debt securities	21	53,771	74,826
				Subordinated liabilities	22	19,446	22,788
				Other financial liabilities	23	12,680	13,932
AVAILABLE-FOR-SALE FINANCIAL ASSETS:		83,128	113,620
Debt instruments	9	83,029	113,525
Equity instruments	10	99	95	HEDGING DERIVATIVES	13 and 32	4,403	9,568


LOANS AND RECEIVABLES:		530,397	598,887	PROVISIONS:	24	6,086	6,694
Loans and advances to credit institutions	8	67,307	57,599	Provisions for pensions and similar obligations		2,873	4,031
Loans and advances to customers	12	457,255	535,277	Provisions for tax and legal matters		1,308	1,092
Debt instruments	9	5,835	6,011	Provisions for off-balance sheet risk		1,359	952
				Other provisions		546	619
HEDGING DERIVATIVES	13 and 32	4,740	12,121
				TAX LIABILITIES:	26	80	673
				Current		24	642
NON-CURRENT ASSETS HELD FOR SALE	14	844	1,101	Deferred		56	31

				OTHER LIABILITIES	25	12,413	10,849
TANGIBLE ASSETS	15	5,262	5,551
				TOTAL LIABILITIES		847,696	1,066,375

INTANGIBLE ASSETS:		4,079	4,877	SHAREHOLDERS' EQUITY:	29	102,521	109,269
Goodwill	16	1,734	1,734	Share capital		25,658	25,658
Other intangible assets	17	2,345	3,143	Share premium		11,415	11,415
				Accumulated reserves		52,160	58,193
TAX ASSETS:	26	22,988	18,673	Profit for the year attributable to the Parent		13,288	14,003
Current		7,033	1,501
Deferred		15,955	17,172	VALUATION ADJUSTMENTS:	28	(244)	380
				Available-for-sale financial assets		(537)	(520)
				Cash flow hedges		293	900
OTHER ASSETS	18	6,479	5,942
				TOTAL SHAREHOLDERS’ EQUITY ATTRIBUTABLE TO THE PARENT		102,277	109,649

				NON-CONTROLLING INTERESTS	27	10	11


				TOTAL EQUITY		102,287	109,660
TOTAL ASSETS		949,983	1,176,035	TOTAL LIABILITIES AND EQUITY		949,983	1,176,035

The accompanying notes are an integral part of these consolidated financial statements.

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

CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 and 2015

(Millions of Pesos)

		(Debit)/Credit
	Note	2013			2014			2015

Interest income and similar income	34		55,386			57,916			64,204
Interest expenses and similar charges	35		(19,539	)		(20,305	)		(21,178	)
NET INTEREST INCOME			35,847			37,611			43,026
Income from equity instruments	36		245			153			117
Fee and commission income	37		15,066			16,546			17,756
Fee and commission expenses	38		(2,222	)		(3,173	)		(3,673	)
Gains/(losses) on financial assets and liabilities (net)	39		3,281			2,619			2,489
Exchange differences (net)	40		-			(11	)		6
Other operating income	41		787			487			457
Other operating expenses	41		(2,078	)		(2,479	)		(3,011	)
TOTAL INCOME			50,926			51,753			57,167
Administrative expenses:			(18,630	)		(19,897	)		(21,332	)
Personnel expenses	42		(9,261	)		(9,977	)		(11,033	)
Other general administrative expenses	43		(9,369	)		(9,920	)		(10,299	)
Depreciation and amortization	15 and 17		(1,620	)		(1,682	)		(1,864	)
Impairment losses on financial assets (net):			(14,905	)		(13,132	)		(16,041	)
Loans and receivables	12		(14,905	)		(13,132	)		(16,041	)
Impairment losses on other assets (net):			(22	)		(48	)		-
Non-current assets held for sale	14		(22	)		(48	)		-
Provisions (net)	24		(751	)		(157	)		270
Gains/(losses) on disposal of assets not classified as non-current assets held for sale (net)	44		31			8			7
Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations (net)			(16	)		(15	)		91
OPERATING PROFIT BEFORE TAX			15,013			16,830			18,298
Income tax	26		(2,670	)		(3,541	)		(4,294	)
PROFIT FROM CONTINUING OPERATIONS			12,343			13,289			14,004
PROFIT FROM DISCONTINUED OPERATIONS (net)	33		1,938			-			-
PROFIT FOR THE YEAR			14,281			13,289			14,004
Profit attributable to the Parent			14,279			13,288			14,003
Profit attributable to non-controlling interests			2			1			1

EARNINGS PER SHARE (pesos)
From continuing and discontinued operations
Basic earnings per share			2.11			1.96			2.07
Diluted earnings per share			2.11			1.96			2.06
From continuing operations
Basic earnings per share			1.82			1.96			2.07
Diluted earnings per share			1.82			1.96			2.06

The accompanying notes are an integral part of these consolidated financial statements.

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED

DECEMBER 31, 2013, 2014 and 2015

(Millions of Pesos)


	Note		2013			2014			2015

PROFIT FOR THE YEAR				14,281			13,289			14,004

OTHER COMPREHENSIVE INCOME/(LOSS):

Items that will not be reclassified subsequently to the consolidated income statement:
Remeasurement of defined benefit obligation from the year				469			(393	)		(964	)
Income tax relating to items that will not be reclassified subsequently				(141	)		118			289
				328			(275	)		(675	)

Items that may be reclassified subsequently to the consolidated income statement:
Available-for-sale financial assets:
Valuation adjustments		28		(1,512	)		332			(196	)
Amounts reclassified to consolidated income statement		28		(104	)		(262	)		161
Income tax		28		485			(149	)		52

Cash flow hedges:
Valuation adjustments		13		371			(1,161	)		(612	)
Amounts reclassified to consolidated income statement		13		(470	)		1,548			1,479
Income tax		26		30			(116	)		(260	)
				(1,200	)		192			624

Other comprehensive income/(loss) for the year, net of income tax				(872	)		(83	)		(51	)


TOTAL COMPREHENSIVE INCOME FOR THE YEAR				13,409			13,206			13,953

Attributable to the Parent				13,407			13,205			13,952
Attributable to non-controlling interests				2			1			1

The accompanying notes are an integral part of these consolidated financial statements.

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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, 2013, 2014 and 2015

(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, 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

Profit for the year		-		-		-			14,003			-			14,003			1			14,004
Other changes in equity:
Transfer to accumulated reserves		-		-		13,288			(13,288	)		-			-			-			-
Dividends declared		-		-		(6,760	)		-			-			(6,760	)		-			(6,760	)
Treasury shares		-		-		(36	)		-			-			(36	)		-			(36	)
Recognition of share-based payments		-		-		216			-			-			216			-			216
Other comprehensive income/(loss) for the year, net of income tax		-		-		(675	)		-			624			(51	)		-			(51	)
BALANCES AT DECEMBER 31, 2015		25,658		11,415		58,193			14,003			380			109,649			11			109,660

The accompanying notes are an integral part of these consolidated financial statements.

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

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 and 2015

(Millions of Pesos)

	2013			2014			2015
A. CASH FLOWS FROM OPERATING ACTIVITIES:		5,450			5,482			11,972
Profit for the year		14,281			13,289			14,004
Adjustments made to obtain the cash flows from operating activities-		2,227			2,681			543
Depreciation and amortization		1,620			1,682			1,864
Impairment losses on other assets (net)		22			48			-
(Gains)/losses on disposal of non-current assets held for sale not classified as discontinued operations		16			15			(91	)
(Gains)/losses on disposal of assets not classified as non-current assets held for sale		(31	)		(8	)		(7	)
Income tax expense recognized in consolidated income statement		2,670			3,541			4,294
Expense recognized with respect to equity-settled share-based payments		233			277			216
Gain on disposal of subsidiary		(2,116	)		-			-
Effect of foreign exchange rate changes on foreign currency cash deposits		(187	)		(2,874	)		(5,733	)
Net (increase)/decrease in operating assets-		(43,770	)		(84,752	)		(214,718	)
Financial assets held for trading		21,771			(31,531	)		(119,797	)
Other financial assets at fair value through profit or loss		(23,193	)		54,489			4,514
Available-for-sale financial assets		(15,035	)		(21,768	)		(31,930	)
Loans and receivables		(27,271	)		(87,834	)		(67,063	)
Other operating assets		(42	)		1,892			(442	)
Net increase/(decrease) in operating liabilities-		42,813			78,215			213,225
Financial liabilities held for trading		(4,904	)		606			37,771
Other financial liabilities at fair value through profit or loss		4,833			32,759			96,045
Financial liabilities at amortized cost		40,757			46,894			75,306
Other operating liabilities		2,127			(2,044	)		4,103
Income tax paid		(10,346	)		(4,104	)		(1,199	)
Dividends received from equity instruments		245			153			117

B. CASH FLOWS FROM INVESTING ACTIVITIES:		(442	)		(2,500	)		(2,944	)
Payments-		(2,740	)		(2,508	)		(2,951	)
Tangible assets		(1,303	)		(1,283	)		(1,190	)
Intangible assets		(928	)		(1,225	)		(1,761	)
Cash outflow on acquisition of subsidiary		(509	)		-			-
Proceeds-		2,298			8			7
Disposal of tangible assets		31			8			7
Cash inflow on disposal of subsidiary		2,445			-			-
Price adjustment on disposal of subsidiary		(178	)		-			-

C. CASH FLOWS FROM FINANCING ACTIVITIES:		(3,911	)		(3,714	)		(6,796	)
Payments-		(20,735	)		(3,714	)		(6,796	)
Dividends paid to owners		(20,850	)		(3,473	)		(6,760	)
Treasury shares		115			(241	)		(36	)
Proceeds-		16,824			-			-
Issue of subordinated notes		16,824			-			-

D. EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH DEPOSITS		187			2,874			5,733
E. NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS		1,284			2,142			7,965
F. CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR		48,397			49,681			51,823
G. CASH AND CASH EQUIVALENTS AT THE END OF YEAR		49,681			51,823			59,788

The accompanying notes are an integral part of these consolidated financial statements.

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

Notes to the Consolidated Financial Statements as of

December 31, 2014 and 2015 and for each of the three years

in the period ended December 31, 2015

(in millions of Mexican pesos)

1. Introduction, basis of presentation of the consolidated financial statements and other information

Introduction

Grupo Financiero Santander México, S.A.B. de C.V. together with its subsidiaries (hereinafter, the “Group”) is a subsidiary of Banco Santander, S.A. in Spain (hereinafter, “Banco Santander (Spain)”) and is authorized by the Mexican Ministry of Finance and Public Credit (“SHCP”) 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, “the Central Bank”, “Mexican Central Bank” or “Banco de México”). The Group and its subsidiaries are regulated, depending on their activities, by the CNBV, the 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).

The issuance of the consolidated financial statements was authorized by Héctor Blas Grisi Checa, Executive President and Chief Executive Officer and Director of the Group on April 21, 2016. Consequently, they do not reflect events occurring after that date. These consolidated financial statements are pending the approval of the ordinary shareholders’ meeting, where they may be modified, based on provisions set forth in Mexican General Corporate Law (“Ley General de Sociedades Mercantiles”).

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.

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 at the end of each reporting period, as explained in the accounting policies below (see Note 2).

Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.

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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 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, securities loans, consolidation of special purpose entities and foreclosed assets.

The most significant differences between Mexican Banking GAAP and IFRS, as they relate to the Group, are in regard to:

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.

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.

Actuarial gains and losses of the pension plan.

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.

Pension liability.

The net pension liability recognized under Mexican Banking GAAP represents the present value of the defined benefit obligation, plus (minus) the unrecognized actuarial gains or losses of the pension plan. IFRS requires that the net pension liability reflects the full value of the underfunded status of the pension plan.

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.

Consolidation of special purpose entities.

Mexican Banking GAAP does not require the consolidation of those special purpose entities created before January 1, 2009 over which control is exercised.

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The notes to the consolidated financial statements contain supplementary information to that presented in the consolidated balance sheet, consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in total equity and consolidated statement of cash flows. The notes provide, in a clear, relevant, reliable and comparable manner, narrative descriptions and breakdowns of these consolidated financial statements.

Application of new and revised IFRS

In the current year, the Group has applied a number of new or revised International Accounting Standards (hereinafter, “IAS”), or IFRS issued by the IASB that are mandatorily effective for the accounting period beginning on January 1, 2015.

Amendments to IAS 19 Defined Benefit Plans: Employee Contributions

(Effective for annual periods beginning on or after July 1, 2014)

The amendments to IAS 19 Employee Benefits clarify the accounting treatment for contributions from employees or third parties to a defined benefit plan. According to the amendments, discretionary contributions made by employees or third parties reduce service cost upon payment of these contributions to the plan. When the formal terms of the plan specify contributions from employees or third parties, the accounting depends on whether the contributions are linked to service, as follows:

If the contributions are not linked to services (e.g., contributions are required to reduce a deficit arising from losses on plan assets or from actuarial losses), they affect the remeasurement of the net defined benefit liability (asset).

If contributions are linked to services, they reduce service costs. If the amount of contribution is dependent on the number of years of service, the entity should reduce service cost by attributing it to the contributions to periods of service using the attribution method required by IAS 19 paragraph 70 (for the gross benefits). If the amount of contribution is independent of the number of years of service, the entity is permitted either to reduce service cost in the period in which the related service is rendered, or reduce service cost by attributing the contributions to the employees’ periods of service in accordance with IAS 19 paragraph 70.

The amendments have been applied retrospectively. As employees or third parties do not make any discretionary contributions to the defined benefit plan, the application of these amendments has had no impact on the amounts recognized in the Group’s consolidated financial statements.

Annual Improvements to IFRS 2010 – 2012 Cycle

(Effective for annual periods beginning on or after July 1, 2014, except as detailed below)

The Group has applied the amendments to IFRS included in the Annual Improvements to IFRS 2010-2012 Cycle for the first time in the current year. The Annual Improvements include amendments to a number of IFRS, which have been summarized below.

Standard

Subject of amendment

Details

IFRS 2

Share-based Payment

Definition of vesting condition

The amendment is to clarify the definition of vesting condition and market condition to ensure the consistent classification of conditions attached to a share-based payment. It also adds definitions for “performance condition” and “service condition” which were previously included as part of the definition of “vesting condition”.

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Standard

Subject of amendment

Details

Specifically:

· For “market condition”, the amendment indicates that it is a performance condition that relates to the market price or value of the entity’s equity instruments or the equity instruments of another entity in the same group. A market condition requires the counterparty to complete a specified period of service.

· For “performance condition”, the amendment specifies that the period over which the performance target is achieved should not extend beyond the service period and that it is defined by reference to the entity’s own operations or activities of another entity in the same group.

The amendment requires prospective application to share-based payment transactions for which the grant date is on or after July 1, 2014. The application of this amendment has had no impact on the amounts recognized in the Group’s consolidated financial statements.

IFRS 3

Business Combinations

Accounting for contingent consideration in a business combination

The amendment clarifies that contingent consideration should be measured at fair value at each reporting date, irrespective of whether or not the contingent consideration falls within the scope of IFRS 9 or IAS 39 Financial Instruments; Recognition and Measurement. Changes in fair value (other than measurement period adjustments as defined in IFRS 3) should be recognized in the consolidated income statement.

The amendment to IFRS 3 requires prospective application, i.e., entities should apply the amendment prospectively to business combinations for which the acquisition date is on or after July 1, 2014.

As the Group did not have any business combination on or after July 1, 2014, the application of this amendment has had no impact on the amounts recognized in the Group’s consolidated financial statements.

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Standard

Subject of amendment

Details

IFRS 8

Operating Segments

(i) Disclosure about judgments involved in deciding whether or not to aggregate operating segments

(ii) When reconciliation of the total of the reportable segments’ assets to the entity’s assets is required

The amendment (i) requires an entity to disclose the judgments made by management in applying the aggregation criteria to operating segments, including a brief description of the operating segments aggregated and the economic indicators assessed in determining whether the operating segments share similar economic characteristics; and (ii) clarifies that a reconciliation of the total of the reportable segments’ assets to the entity’s assets should only be provided if information about the amount of the segment assets is regularly provided to the chief operating decision-maker.

IFRS 13

Fair Value Measurement

Short-term receivables and payables

The amendment to the basis for conclusions of IFRS 13 clarifies that the issuance of IFRS 13 and consequential amendments to IAS 39 and IFRS 9 did not remove the ability to measure short-term receivables and payables with no stated interest rate at their invoice amounts without discounting, if the effect of discounting is immaterial. This amendment does not include any effective date because this is just to clarify the intended meaning in the basis for conclusions.

IAS 16

Property, Plant and Equipment;

IAS 38

Intangible Assets

Revaluation method – proportionate restatement of accumulated depreciation (amortization)

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.

IAS 24

Related Party Disclosures

Key management personnel

The amendment clarifies that a management entity providing key management personnel services to the reporting entity or to the parent of the 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 compensation to key management personnel that is paid by the management entity to the management entity’s employees or directors is not required.

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Annual Improvements to IFRS 2011 – 2013 Cycle

(Effective for annual periods beginning on or after July 1, 2014)

The Group has applied the amendments to IFRS included in the Annual Improvements to IFRS 2011-2013 Cycle for the first time in the current year. The Annual Improvements include amendments to a number of IFRS, which have been summarized below.

Standard

Subject of amendment

Details

IFRS 3

Business Combinations

Scope exceptions for joint ventures

The amendment clarifies that IFRS 3 does not apply to the accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself.

IFRS 13

Fair Value Measurement

Scope of portfolio exception

The amendment clarifies 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 Financial Instruments: Presentation.

IAS 40

Investment Property

Clarifying the interrelationship between IFRS 3 and IAS 40 when classifying property as investment property or owner-occupied property

The amendment clarifies that IAS 40 and IFRS 3 are not mutually exclusive and application of both standards may be required. Consequently, an entity acquiring an investment property must determine whether:

a) the property meets the definition of investment property in accordance with IAS 40; and

b) the transaction meets the definition of a business combination in accordance with IFRS 3.

An entity should apply the amendment prospectively for acquisitions of investment property from the beginning of the first period for which it adopts the amendment. Consequently, accounting for acquisitions of investment property in prior periods should not be restated. However, an entity may choose to apply the amendment to individual acquisitions of investment property that occurred prior to the beginning of the first annual period occurring on or after the effective date (i.e., July 1, 2014) if and only if information needed to apply the amendment to earlier transactions is available to the entity.

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New and revised IFRS that are not mandatorily effective (but allow early application) for the year ending December 31, 2015

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.

Amendments to IFRS 11 Accounting for Acquisitions of Interests in Joint Operations;

Amendments to IAS 1 Disclosure Initiative;

Amendments to IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortization;

Amendments to IAS 16 and IAS 41 Agriculture: Bearer Plants;

Amendments to IAS 27 Equity Method in Separate Financial Statements;

Amendments to IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception;

Annual Improvements to IFRS 2012-2014 Cycle;

Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture;

IFRS 9 Financial Instruments; and

IFRS 15 Revenue from Contracts with Customers.

Amendments to IFRS 11 Accounting for Acquisitions of Interests in Joint Operations

(Effective for annual periods beginning on or after January 1, 2016)

The amendments to IFRS 11 provide guidance on how to account for the acquisition of an interest in a joint operation in which the activities constitute 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 12 Income Taxes regarding recognition of deferred taxes at the time of acquisition and IAS 36 Impairment of Assets regarding impairment testing of a cash-generating unit 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 participates 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 should be applied prospectively to acquisitions of interests in joint operations (in which the activities of the joint operations constitute businesses as defined in IFRS 3) occurring from the beginning of annual periods beginning on or after January 1, 2016. Earlier application is permitted.

Management anticipates that the application of these amendments to IFRS 11 may have an impact on the Group’s consolidated financial statements in future periods should such transactions arise.

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Amendments to IAS 1 Disclosure Initiative

(Effective for annual periods beginning on or after January 1, 2016)

The amendments were a response to comments that there were difficulties in applying the concept of materiality in practice as the wording of some of the requirements in IAS 1 had in some cases been read to prevent the use of judgment. Certain key highlights in the amendments are as follows:

An entity should not reduce the understandability of its financial statements by obscuring material information with immaterial information or by aggregating material items that have different natures or functions.

An entity need not provide a specific disclosure required by an IFRS if the information resulting from that disclosure is not material.

In the statement of comprehensive income, the amendments require separate disclosures for the following items:

the share of other comprehensive income of associates and joint ventures accounted for using the equity method that will not be reclassified subsequently to the consolidated income statement; and

the share of other comprehensive income of associates and joint ventures accounted for using the equity method that will be reclassified subsequently to the consolidated income statement.

The amendments to IAS 1 are effective for annual periods beginning on or after January 1, 2016 with earlier application permitted. Application of the amendments need not be disclosed. Management does not anticipate that the application of these amendments to IAS 1 will have a material impact on the Group’s consolidated financial statements.

Amendments to IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortization

(Effective for annual periods beginning on or after January 1, 2016)

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 under the following two limited circumstances:

when the intangible asset is expressed as a measure of revenue; or

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, with earlier application permitted. 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 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

(Effective for annual periods beginning on or after January 1, 2016)

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. In terms of the amendments, bearer plants can be measured using either the cost model or the revaluation model set out in IAS 16.

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The produce growing on bearer plants continues to be accounted for in accordance with IAS 41.

The amendments apply retrospectively for annual periods beginning on or after January 1, 2016, with earlier application permitted. Management does not anticipate that 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 27 Equity Method in Separate Financial Statements

(Effective for annual periods beginning on or after January 1, 2016)

The amendments to IAS 27 focus on separate financial statements and allow the use of the equity method in such statements. Specifically, the amendments allow an entity to account for investments in subsidiaries, joint ventures and associates in its separate financial statements:

at cost;

in accordance with IFRS 9 (or IAS 39 for entities that have not yet adopted IFRS 9); or

using the equity method as described in IAS 28 Investments in Associates and Joint Ventures.

The same accounting must be applied to each category of investments.

The amendments also clarify that when a parent ceases to be an investment entity, or becomes an investment entity, it should account for the change from the date when the change in status occurs.

The amendments apply retrospectively for annual periods beginning on or after January 1, 2016, with earlier application permitted. Management does not anticipate that application of these amendments to IAS 27 will have a material impact on the Group’s consolidated financial statements.

Amendments to IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception

(Effective for annual periods beginning on or after January 1, 2016)

The amendments to IFRS 10, IFRS 12 and IAS 28 clarify that the exemption from preparing consolidated financial statements is available to a parent entity that is a subsidiary of an investment entity, even if the investment entity measures all its subsidiaries at fair value in accordance with IFRS 10. Consequential amendments have also been made to IAS 28 to clarify that the exemption from applying the equity method is also applicable to an investor in an associate or joint venture if that investor is a subsidiary of an investment entity that measures all its subsidiaries at fair value.

The amendments further clarify that the requirement for an investment entity to consolidate a subsidiary providing services related to the former’s investment activities applies only to subsidiaries that are not investment entities themselves.

Moreover, the amendments clarify that, in applying the equity method of accounting to an associate or a joint venture that is an investment entity, an investor may retain the fair value measurements that the associate or joint venture used for its subsidiaries.

Lastly, clarification is also made that an investment entity that measures all its subsidiaries at fair value should provide the disclosures required by IFRS 12 Disclosures of Interests in Other Entities.

The amendments apply retrospectively for annual periods beginning on or after January 1, 2016, with earlier application permitted. Management does not anticipate that the application of these amendments to IFRS 10, IFRS 12 and IAS 28 will have a material impact on the Group’s consolidated financial statements as the Group is not an investment entity and does not have any holding company, subsidiary, associate or joint venture that qualifies as an investment entity.

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Annual Improvements to IFRS 2012 – 2014 Cycle

(Effective for annual periods beginning on or after January 1, 2016)

Standard

Subject of amendment

Details

IFRS 5

Non-current Assets Held for Sale and Discontinued Operations

Changes in methods of disposal

The amendment introduces specific guidance in IFRS 5 for when an entity reclassifies an asset (or disposal group) from held for sale to held for distribution to owners (or vice versa), or when held-for-distribution accounting is discontinued. The amendments state that:

· Such reclassifications are not to be considered changes to a plan of sale or a plan of distribution to owners and that the classification, presentation and measurement requirements applicable to the new method of disposal should be applied; and

· Assets that no longer meet the criteria for held for distribution to owners (and do not meet the criteria for held for sale) should be treated in the same way as assets that cease to be classified as held for sale.

IFRS 7

Financial

Instruments:

Disclosure

Servicing contracts

The amendments provide additional guidance to clarify whether a servicing contract constitutes continuing involvement in a transferred asset for the purposes of the disclosures required in relation to transferred assets. Paragraph 42C(c) of IFRS 7 states that a pass-through arrangement under a servicing contract does not, in itself, constitute a continuing involvement for the purposes of the transfer disclosure requirements. However, in practice, most service contracts have additional features that lead to a continuing involvement in the asset, for example, when the amount and/or timing of the servicing fee depend on the amount and/or the timing of the cash flows collected. The amendments add guidance to this effect.

The amendments apply retrospectively but, to avoid the risk of hindsight being applied in determining the fair value disclosures required, an entity is not required to apply the amendments to any period beginning before the annual period in which the amendments are first applied. A consequential amendment to IFRS 1 First-time Adoption of International Financial Reporting Standards is also included in the amendments to avoid first-time adopters being disadvantaged.

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Standard	Subject of amendment	Details
	Applicability of the amendments to IFRS 7 on offsetting disclosure to condensed interim financial statements	Amendments to IFRS 7 were made to remove uncertainty as to whether the disclosure requirements on offsetting financial assets and financial liabilities (introduced in December 2011 and effective for periods beginning on or after January 1, 2013) should be included in condensed interim financial statements, and if so, whether in all condensed interim financial statements after January 1, 2013 or only in the first year. The amendments clarify that the offsetting disclosures are not explicitly required for all interim periods. However, the disclosures may need to be included in condensed interim financial statements to comply with IAS 34 Interim Financial Reporting. The amendments apply retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
IAS 19 Employee Benefits	Discount rate: regional market issue	The amendments to IAS 19 clarify that the high-quality corporate bonds used to estimate the discount rate for post-employment benefits should be issued in the same currency as the benefits to be paid. These amendments would result in the depth of the market for high-quality corporate bonds being assessed at currency level. The amendments apply from the beginning of the earliest comparative period presented in the financial statements in which the amendments are first applied. Any initial adjustment arising should be recognized in retained earnings at the beginning of that period.
IAS 34 Interim Financial Reporting	Disclosure of information “elsewhere in the interim report”	The amendments clarify the requirements relating to information required by IAS 34 that is presented elsewhere within the interim financial report but outside the interim financial statements. The amendments require that such information be incorporated by way of a cross-reference from the interim financial statements to the other part of the interim financial report that is available to users on the same terms and at the same time as the interim financial statements. The amendments apply retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

Management does not anticipate that the application of these amendments will have a material effect on the Group’s consolidated financial statements.

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Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

(Effective for annual periods beginning on or after a date to be determined by the IASB)

The amendments to IFRS 10 and IAS 28 deal with situations where there is a sale or contribution of assets between an investor and its associate or joint venture. IAS 28 and IFRS 10 are amended, as follows:

IAS 28 has been amended to reflect the following:

Gains and losses resulting from transactions involving assets that do not constitute a business between an investor and its associate or joint venture are recognized to the extent of unrelated investors’ interests in the associate or joint venture.

Gains or losses from downstream transactions involving assets that constitute a business between an investor and its associate or joint venture should be recognized in full in the investor’s financial statements.

IFRS 10 has been amended to reflect the following:

Gains or losses resulting from the loss of control of a subsidiary that does not contain a business in a transaction with an associate or a joint venture that is accounted for using the equity method, are recognized in the parent’s consolidated income statement only to the extent of the unrelated investors’ interests in that associate or joint venture. Similarly, gains and losses resulting from the remeasurement of investments retained in any former subsidiary (that has become an associate or a joint venture that is accounted for using the equity method) to fair value are recognized in the former parent’s consolidated income statement only to the extent of the unrelated investors’ interests in the new associate or joint venture.

The amendments should be applied prospectively to transactions occurring in annual periods beginning on or after January 1, 2016. Earlier application is permitted. Management anticipates that the application of these amendments to IFRS 10 and IAS 28 may have an impact on the Group’s consolidated financial statements in future periods should such transactions arise.

IFRS 9 Financial Instruments (as revised in 2014)

(Effective for annual periods beginning on or after January 1, 2018)

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

Phase 1: Classification and measurement of financial assets and financial liabilities

With respect to the classification and measurement, the number of categories of financial assets under IFRS 9 has been reduced and all recognized financial assets that are currently within the scope of IAS 39 will be subsequently measured at either amortized cost or fair value under IFRS 9.

Specifically:

a debt instrument that (i) is held within a business model whose objective is to collect the contractual cash flows and (ii) has contractual cash flows that are solely payments of principal and interest on the principal amount outstanding must be measured at amortized cost (net of any write-down for impairment), unless the asset is designated at fair value through profit or loss (FVTPL) under the fair value option;

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a debt instrument that (i) is held within a business model whose objective is achieved both by collecting contractual cash flows and selling financial assets and (ii) has contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding, must be measured FVTOCI, unless the asset is designated at FVTPL under the fair value option;

all other debt instruments must be measured at FVTPL; and

all equity investments are to be measured in the balance sheet at fair value, with gains and losses recognized in the consolidated income statement except that if an equity investment is not held for trading, an irrevocable election can be made at initial recognition to measure the investment at FVTOCI, with dividend income recognized in the consolidated income statement.

IFRS 9 also contains requirements for the classification and measurement of financial liabilities and derecognition requirements. One major change from IAS 39 relates to the presentation of changes in the fair value of a financial liability designated as at FVTPL attributable to changes in the credit risk of that liability. Under IFRS 9, such changes are presented in other comprehensive income, unless the presentation of the effect of the change in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in the consolidated income statement. Changes in fair value attributable to a financial liability’s credit risk are not subsequently reclassified to the consolidated income statement. Under IAS 39, the entire amount of the change in the fair value of the financial liability designated as FVTPL is presented in the consolidated income statement.

Phase 2: Impairment methodology

The impairment model under IFRS 9 reflects expected credit losses, as opposed to incurred credit losses under IAS 39. Under the impairment approach in IFRS 9, it is no longer necessary for a credit event to have occurred before credit losses are recognized. Instead, an entity always accounts for expected credit losses and changes in those expected credit losses. The amount of expected credit losses should be updated at each reporting date to reflect changes in credit risk since initial recognition.

Phase 3: Hedge accounting

The general hedge accounting requirements of IFRS 9 retain the three types of hedge accounting mechanisms in IAS 39. However, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify as 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 no longer required. Far more disclosure requirements about an entity’s risk management activities have been introduced.

The work on macro hedging by the IASB is still at a preliminary stage – a discussion paper was issued in April 2014 to gather preliminary views and direction from constituents with a comment period that ended on October 17, 2014. A second discussion paper is expected not before 2016.

Transitional provisions

IFRS 9 (as revised in 2014) is effective for annual periods beginning on or after January 1, 2018, with earlier application permitted. If an entity elects to apply IFRS 9 early, it must apply all of the requirements in IFRS 9 at the same time, except for those relating to:

the presentation of fair value gains and losses attributable to changes in the credit risk of financial liabilities designated as at FVTPL, the requirements for which an entity may early apply without applying the other requirements in IFRS 9; and

hedge accounting, for which an entity may choose to continue to apply the hedge accounting requirements of IAS 39 instead of the requirements of IFRS 9.

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An entity may early apply the earlier versions of IFRS 9 instead of the 2014 version if the entity’s date of initial application of IFRS 9 is before February 1, 2015. The date of initial application is the beginning of the reporting period when an entity first applies the requirements of IFRS 9.

IFRS 9 contains specific transitional provisions for i) classification and measurement of financial assets; ii) impairment of financial assets; and iii) hedge accounting.

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

(Effective for annual periods beginning on or after January 1, 2018)

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 following revenue Standards and Interpretations upon its effective date:

IAS 18 Revenue;

IAS 11 Construction Contracts;

IFRIC 13 Customer Loyalty Programmes;

IFRIC 15 Agreements for the Construction of Real Estate;

IFRIC 18 Transfers of Assets from Customers; and

SIC 31 Revenue-Barter Transactions Involving Advertising Services.

As suggested by the title of the new revenue Standard, IFRS 15 will only cover revenue arising from contracts with customers. Under IFRS 15, a customer of an entity is a party that has contracted with the entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration. Unlike the scope of IAS 18, the recognition and measurement of interest income and dividend income from debt and equity investments are no longer within the scope of IFRS 15. Instead, they are within the scope of IAS 39 Financial Instruments: Recognition and Measurement (or IFRS 9 Financial Instruments, if IFRS 9 is early adopted).

As mentioned above, the new revenue Standard has a single model to deal with revenue from contracts with customers. Its core principle 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.

The new revenue Standard introduces a five-step approach to revenue recognition and measurement:

Step 1: Identify the contract 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.

Far more prescriptive guidance has been introduced by the new revenue Standard:

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Whether or not a contract (or a combination of contracts) contains more than one promised good or service, and if so, when and how the promised goods or services should be unbundled.

Whether the transaction price allocated to each performance obligation should be recognized as revenue over time or at a point in time. Under IFRS 15, an entity recognizes revenue when a performance obligation is satisfied, which is when “control” of the goods or services underlying the particular performance obligation is transferred to the customer. Unlike IAS 18, the new Standard does not include separate guidance for “sales of goods” and “provision of services”; rather, the new Standard requires entities to assess whether revenue should be recognized over time or at a particular point in time regardless of whether revenue relates to “sales of goods” or “provision of services”.

When the transaction price includes a variable consideration element, how it will affect the amount and timing of revenue to be recognized. The concept of variable consideration is broad; a transaction price is considered variable due to discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties and contingency arrangements. The new Standard introduces a high hurdle for variable consideration to be recognized as revenue – that is, only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

When costs incurred to obtain a contract and costs to fulfill a contract can be recognized as an asset.

Extensive disclosures are required by the new Standard.

IFRS 15 is effective for reporting periods beginning on or after January 1, 2018 with early application permitted. Entities can choose to apply the Standard retrospectively or to use a modified transition approach, which is to apply the Standard retrospectively only to contracts that are not completed contracts at the date of initial application (for example, January 1, 2018 for an entity with a December 31 year-end).

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.

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.

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 Leases, and measurements that have some similarities to fair value but are not fair value, such as value in use in IAS 36.

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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.

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.

For financial instruments measured at amortized cost (which include balances with the Central Bank, loans and receivables, deposits and short-term 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.f).

Financial assets not measured at fair value are assessed for objective evidence of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the financial instrument have been affected.

In addition, the Group recognizes credit losses inherent in financial instruments not measured at fair value taking into account 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, which have not yet been allocated to specific transactions.

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The Group uses the concept of incurred loss to quantify the credit losses, using statistical models that consider the following four factors: “exposure at default”, “probability of default”, “loss given default” and the “loss identification period”, 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 results, particularly in circumstances of economic and financial uncertainty. Further, the statistical models incorporate numerous estimates and judgments (for example, probability of default, loss given default and segmentation of loans in groups with similar credit risk characteristics, etc.). 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 26).

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, 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 Notes 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, objective evidence of impairment would include, among other things, significant or prolonged decline in fair value of the security below its cost, specific conditions in an industry or geographical area, specific information regarding the financial condition of the company to which the investment relates or the disappearance of an active market for the financial asset due to financial difficulties. 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 recognized 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 the acquired intangible assets and the initial amount of goodwill to be recognized, (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.

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.

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.

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Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any.

Impairment of goodwill (see Note 16).

For the purposes of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (CGUs) (or groups of CGUs) that is expected to benefit from the synergies of the combination. A CGU to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the CGU may be impaired.

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. The impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to the other assets of the CGU pro rata based on the carrying amount of each asset in the CGU. Any impairment loss for goodwill is recognized directly in the consolidated income statement. An impairment loss recognized for goodwill is not reversed in subsequent periods.

On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

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 the projected unit credit method, with actuarial valuations being carried out at the end of each annual reporting period. 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).

Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event; it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (when the effect of the time value of money is material).

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.

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Events after the reporting period

No significant events occurred from January 1, 2016 to the date on which these consolidated financial statements were authorized for issue.

2. Accounting policies

The accounting policies and measurement bases applied in preparing the consolidated financial statements were as follows:

Foreign currency transactions

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 FVTPL, 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 FVTOCI, 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 the consolidated 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 pesos based on the exchange rates published by the Mexican Central Bank.

The “Fix” (48-hour) exchange rate used $14.7414 per one USD and $17.2487 per one USD as of December 31, 2014 and 2015, 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 its contingency plans and access longer term funding within a reasonable time frame.

Basis of consolidation

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.:

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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.

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 the consolidated income statement on the date of acquisition.

The consolidated income statement 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.

The share of third parties of the Group's equity is presented under Non-controlling interests in the consolidated balance sheet (see Note 27). Their share of the profit for the year is presented under Profit attributable to non-controlling interests in the consolidated income statement.

The results of subsidiaries acquired during the year are included in the consolidated income statement from the date of acquisition to year-end. Similarly, the results of subsidiaries disposed of during the year are included in the consolidated income statement from the beginning of the year to the date of disposal.

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A listing of the subsidiaries as of December 31, 2014 and 2015 is summarized in Note 49.

ii.

Investments in associates or joint ventures (jointly controlled entities)

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 adjusted thereafter to recognize the Group’s share of the consolidated income statement 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 the consolidated income statement in the period in which the investment is acquired.

The requirements of IAS 39 are applied to determine whether it is necessary to recognize any impairment loss with respect to the Group’s investment in an associate or a joint venture. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with IAS 36 Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs of disposal) with its carrying amount, Any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases.

The Group discontinues the use of the equity method from the date when the investment ceases to be an associate or a joint venture, or when the investment is classified as held for sale. When the Group retains an interest in the former associate or joint venture and the retained interest is a financial asset, the Group measures the retained interest at fair value at that date and the fair value is regarded as its fair value on initial recognition in accordance with IAS 39. The difference between the carrying amount of the associate or joint venture at the date the equity method was discontinued, and the fair value of any retained interest and any proceeds from disposing of a part interest in the associate or joint venture is included in the determination of the gain or loss on disposal of the associate or joint venture. In addition, the Group accounts for all amounts previously recognized in other comprehensive income in relation to that associate or joint venture on the same basis as would be required if that associate or joint venture had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognized in other comprehensive income by that associate or joint venture would be reclassified to the consolidated income statement on the disposal of the related assets or liabilities, the Group reclassifies the gain or loss from equity to the consolidated income statement (as a reclassification adjustment) when the equity method is discontinued.

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The Group continues to use the equity method when an investment in an associate becomes an investment in a joint venture or an investment in a joint venture becomes an investment in an associate. There is no remeasurement to fair value upon such changes in ownership interests.

When the Group reduces its ownership interest in an associate or a joint venture but the Group continues to use the equity method, the Group reclassifies to the consolidated income statement the proportion of the gain or loss that had previously been recognized in other comprehensive income relating to that reduction in ownership interest if that gain or loss would be reclassified to the consolidated income statement on the disposal of the related assets or liabilities.

When a group entity transacts with an associate or a joint venture of the Group, profits and losses resulting from the transactions with the associate or joint venture are recognized in the Group’s consolidated financial statements only to the extent of interests in the associate or joint venture that are not related to the Group.

As of December 31, 2014 and 2015 the Group did not have any associates.

As of December 31, 2014 and 2015 the Group has a commercial alliance with Elavon México in order to share revenues and expenses jointly related to the merchant services. This commercial alliance is not material to the Group’s consolidated financial statements.

iii.

Structured entities

When the Group incorporates entities, or holds ownership interests therein, to enable its customers to access certain investments, or for the transfer of risks or other purposes (also called structured entities since the voting or similar power is not a key factor in deciding who controls the entity), the Group determines, using internal criteria and procedures and taking into consideration the applicable legislation, whether control (as defined above) exists and, therefore, whether these entities should be consolidated.

These structured entities include securitization special purpose vehicles (SPV) and employee benefit trusts (EBT) established for employee share-based plans, which are consolidated over which it is considered that the Group continues to exercise control.

Note 12.g contains information regarding securitized mortgage assets.

Share-based payments are discussed in Note 42.b, 42.c and 42.d.

iv.

Business combinations

Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination 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 interests issued by the Group in exchange for control of the acquiree. Acquisition-related costs are generally recognized in the consolidated income statement 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.

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Goodwill is measured as the excess of 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 equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed (see Note 2.m). 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 the consolidated income statement as a bargain purchase gain in the consolidated income statement.

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.

When the consideration transferred by the Group in a business combination includes assets or liabilities resulting from a 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 the consolidated income statement.

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 the consolidated income statement. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognized in other comprehensive income are reclassified to the consolidated income statement 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.

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 and attributed to owners of the Group.

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When the Group loses control of a subsidiary, a gain or loss is recognized in the consolidated income statement 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 the consolidated income statement or transferred to another category of equity as specified/permitted by applicable IFRS). 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 2014.

Definitions and classification of financial instruments

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. Financial assets and financial liabilities are recognized when the Group becomes a party to the contractual provisions of the financial instruments.

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, c and d.).

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ii.

Classification of financial assets for measurement purposes

Financial assets are initially classified into the various categories used for management and measurement purposes, unless they relate to Cash and balances with central banks or Hedging derivatives, which are reported separately.

Financial assets are included for measurement purposes in one of the following categories:

Financial assets held for trading (at fair value through profit or loss): This category includes the financial assets acquired for the purpose of generating a profit in the near term from fluctuations in their prices and financial derivatives that are not designated as hedging instruments.

Other financial assets at fair value through profit or loss: This category includes hybrid financial assets not held for trading that are measured entirely at fair value and financial assets not held for trading that are included in this category in order to obtain more relevant information, either because this eliminates or significantly reduces recognition or measurement inconsistencies (accounting mismatches) that would otherwise arise from measuring assets or liabilities or recognizing the gains or losses on them on different bases, or because a group of financial assets or financial assets and liabilities is managed and its performance is evaluated on a fair value basis, such as Reverse 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.

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, 2014 and 2015, 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 the Central Bank: cash balances and balances receivable including the compulsory deposits with Banco de México.

Loans and receivables: includes the debit balances of all credit and loans granted by the Group, other than those classified as securities, as well as finance lease receivables and other receivables and other debit balances of a financial nature in favor of the Group, 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 debit balances arising from transactions not originating in banking transactions and services. Loans and receivables are classified in accordance with the institutional sector to which the debtor belongs, into:

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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, other than investments in subsidiaries, associates or jointly controlled entities.

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.

iv.

Classification of financial liabilities for measurement purposes

Financial liabilities are initially classified into the various categories used for management and measurement purposes, unless they relate to Hedging derivatives, which are reported separately.

Financial liabilities are classified for measurement purposes into one of the following categories:

Financial liabilities held for trading (at fair value through profit or loss): this category includes financial liabilities incurred for the purpose of generating a profit in the near term from fluctuations in their prices, financial derivatives not designated as hedging instruments and financial liabilities arising from the outright sale of financial assets acquired under reverse repurchase agreements, securities loans 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, such as the 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. Liabilities may only be included in this category on the date when they are incurred or originated.

Financial liabilities at amortized cost: this category includes financial liabilities, irrespective of their instrumentation and maturity, not included in any of the above-mentioned categories which arise from the ordinary borrowing activities.

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 amount of which may be invested without restriction. Deposits are classified based on type of depositor as follows:

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Deposits from the Central Bank: deposits of any nature received from the Banco de México.

Deposits from credit institutions: deposits of any nature, including credit received and money market operations in the name of credit institutions.

Customer deposits: includes the remaining deposits

Marketable debt securities: includes the amount of bonds and other debt represented by marketable securities, other than those having the substance of subordinated liabilities. This item includes the component considered to be a financial liability 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 do not form part of hedge accounting.

Short positions: includes the amount of financial liabilities arising from the outright sale of financial assets acquired under reverse repurchase agreements, securities loans and sales of borrowed securities.

Subordinated liabilities: amount of financing received which, for the purposes of payment priority, ranks behind ordinary debt. This category also includes the financial instruments issued by the Group which form part of the Group’s capital management for regulatory purposes, but do not meet the requirements for classification as equity for accounting purposes.

Other financial liabilities: includes the amount of payment obligations having the nature of financial liabilities that are not included in any of the aforementioned categories, including liabilities under financial guarantee contracts.

Hedging derivatives: includes the fair value of the Group's liability in respect of derivatives, including embedded derivatives separated from hybrid financial instruments, designated as qualified hedging instruments in hedge accounting.

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:

Measurement of financial assets

Financial assets are 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. The most objective and common reference for the fair value of a financial instrument is the price that would be paid for it on an active, transparent and deep market (quoted price or market price). At 31 December 2015, there were no significant investments in quoted financial instruments that had ceased to be recognized at their quoted price because their market could not be deemed to be active.

Fair value under IFRS is an exit price regardless of whether that price is directly observable or estimated using another valuation technique.

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If there is no market price for a given financial instrument, its fair value is estimated on the basis of the price established in recent transactions involving similar instruments and, in the absence thereof, of valuation techniques commonly used by the international financial community, taking into account the specific features of the instrument to be measured and, particularly, the various types of risk associated with it.

All derivatives are recognized in the 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. In the case of financial assets, amortized cost also includes any reduction for impairment or uncollectibility. In the case of loans and receivables hedged in fair value hedges, the changes in the fair value of these assets related to the risk or risks being hedged are recognized.

The effective interest rate is the discount rate that exactly matches the carrying amount of a financial instrument to all its estimated cash flows of all kinds over its remaining life. For fixed rate financial instruments, the effective interest rate coincides with the contractual interest rate established on the acquisition date plus, where applicable, the fees and transaction costs that, because of their nature, form part of 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.

Equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have those instruments as their underlying and are settled by delivery of those instruments are measured at acquisition cost adjusted, where appropriate, by any related impairment loss.

The amounts at which the financial assets are recognized represent, in all material respects, the Group’s maximum exposure to credit risk at each reporting date. Also, the Group has received collateral and other credit enhancements to mitigate its exposure to credit risk which consist mainly of mortgage guarantees, cash collateral, equity instruments, personal guarantees, leased assets, assets acquired under reverse repurchase agreements and securities loans.

The measurement of available-for-sale financial assets is described in further detail in iii. Valuation techniques.

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.

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iii.

Valuation techniques

The following table shows a summary of the fair values at December 31, 2014 and 2015, of the financial assets and liabilities indicated below, classified on the basis of the various measurement methods used by the Group to determine their fair value:

	12/31/2014						12/31/2015
	Published						Published
	Price						Price
	Quotations in						Quotations in
	Active						Active
	Markets – Level 1		Internal Models		Total		Markets – Level 1		Internal Models		Total

ASSETS:
Financial assets held for trading		69,507		138,864		208,371		210,349		117,768		328,117
Other financial assets at fair value through profit or loss		-		31,872		31,872		-		27,358		27,358
Available-for-sale financial assets		60,213		22,915		83,128		111,415		2,205		113,620
Hedging derivatives		-		4,740		4,740		-		12,121		12,121
		129,720		198,391		328,111		321,764		159,452		481,216
LIABILITIES:
Financial liabilities held for trading		10,911		125,894		136,805		429		174,147		174,576
Other financial liabilities at fair value through profit or loss		-		108,784		108,784		-		204,829		204,829
Hedging derivatives		-		4,403		4,403		-		9,568		9,568
		10,911		239,081		249,992		429		388,544		388,973

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 its own internal models (valuation techniques). These internal models use data based on observable market parameters as significant inputs (Level 2) and, in very specific cases, they use significant inputs not observable in market data (Level 3). The use of observable market data assumes that markets are efficient and therefore the data that is derived therefrom is representative. The best evidence of the fair value of a financial instrument on initial recognition is the transaction price, unless the fair value of the instrument can be obtained from other market transactions performed with the same or similar instruments or can be measured by using a valuation technique in which the variables used include only observable market data, mainly interest rates.

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.

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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

General measurement bases

The Group has implemented a formal process for systematic valuation and management of financial instruments. The governance scheme for this process distributes responsibilities between two independent divisions inside the Group: Treasury (development, marketing and daily management of financial products and market data) and Risk (on a periodic basis, validation of pricing models and market data, computation of risk metrics, new transactions approval policies, management of market risk and implementation of fair value adjustment policies).

The approval of new products follows a sequence of steps (request, development, validation, integration in corporate systems and quality assurance) before the product is brought into production. This process ensures that pricing systems have been properly reviewed and are stable before they are used.

The related valuation techniques and inputs by asset class are as follows:

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.

Loans and advances to credit institutions and customers – reverse repurchase agreements

The fair value is estimated by using the discounted cash flow (forward estimation) 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.

Short positions, deposits from the Central Bank and deposits from credit institutions and customers – repurchase agreements

The fair value of these financial instruments is calculated by using the discounted cash flow (forward estimation) technique based on the current incremental lending rates for similar types of deposits having similar maturities.

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.

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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-closed formula solution

In the valuation of financial instruments permitting static hedging (such as loans, deposits, forwards and swaps), the present value method (forward estimation) 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. Closed-formula solution

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: average positive exposure to the counterparty, across all paths, all evaluated on a certain future date using a Monte Carlo method to simulate the future values of the derivatives’ portfolio. Mitigating factors such as collateral and netting agreements are taken into account.

•

Loss given default (LGD): percentage of final loss assumed in a counterparty credit event /default.

•

Probability of default (PD): for cases where there is no market information, probabilities are inferred using a market proxy based on market information from companies in the same industry and with the same external ratings as the counterparty.

•

Discount factor curve.

The debt valuation adjustment (DVA) is a similar valuation adjustment to the CVA but, in this case, it arises as a result of the risk of the Group assumed by its counterparties in OTC derivatives.

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The CVA and DVA recognized at December 31, 2014 amounted to 375 million and 167 million, respectively. The CVA and DVA recognized at December 31, 2015 amounted to 519 million and 760 million, respectively.

All financial instruments fair values are calculated on a daily basis.

Set forth below are the financial instruments at fair value whose measurement was based on internal models (Level 2 and 3) at December 31, 2014 and 2015.

	Fair Values Calculated			Fair Values Calculated
	Using Internal Models at 12/31/2014			Using Internal Models at 12/31/2015			Valuation Techniques	Key Inputs
	Level 2	Level 3	Total	Level 2	Level 3	Total

ASSETS:
Financial assets held for trading:	137,961	903	138,864	117,549	219	117,768

Debt instruments	46,052	903	46,955	783	219	1,002	Present value (non-closed formula solution) 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	2,415	-	2,415	1,141	-	1,141	Black-Scholes model with closed-formula solution	Interest rate yield curves and implied volatility surface

Market index options:	1,110	-	1,110	1,238	-	1,238

European, composite, quanto and Asian strike options	1,056	-	1,056	1,188	-	1,188	Black-Scholes model with closed-formula solution	Interest rate yield curves, quoted equity, index prices, implied volatility surface, historical correlations and dividends estimation

Rainbow options	-	-	-	15	-	15	Local volatility model with partial differential equation method	Interest rate yield curves, quoted equity, index prices, implied volatility surface, historical correlations and dividends estimation

Asian spread options	54	-	54	35	-	35	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:	1,673	-	1,673	520	-	520

American forwards	10	-	10	22	-	22	Black-Scholes model with trinomial tree method	Interest rate yield curves, quoted exchange rates and implied volatility surface

European options	1,663	-	1,663	498	-	498	Black-Scholes model with closed-formula solution	Interest rate yield curves, quoted exchange rates and implied volatility surface

Swaps	79,217	-	79,217	106,670	-	106,670	Present value (non-closed formula solution)	Interest rate yield curves and quoted exchange rates

Market index futures	162	-	162	115	-	115	Present value (non-closed formula solution)	Interest rate yield curves, quoted equity prices and index levels

Interest rate futures	20	-	20	59	-	59	Hull-White model with analytic method	Interest rate yield curves, implied volatility surface and a mean reversion parameter assumption (2%)

Exchange rate futures	7,312	-	7,312	7,023	-	7,023	Present value (non-closed formula solution)	Interest rate yield curves and quoted exchange rates

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Other financial assets at fair value through profit or loss:	31,872	-	31,872	27,358	-	27,358

Loans and advances to credit institutions – Reverse repurchase agreements	27,379	-	27,379	735		735	Present value (non-closed formula solution)	Interest rate yield curves

Loans and advances to customers – Reverse repurchase agreements	4,493	-	4,493	26,623	-	26,623	Present value (non-closed formula solution)	Interest rate yield curves

Financial assets available-for-sale:	22,915	-	22,915	2,205	-	2,205

Debt instruments	22,845	-	22,845	2,135	-	2,135	Present value (non-closed formula solution)	Interest rate yield curves

Equity instruments	70	-	70	70	-	70	Other	Value of shareholders’ equity
Hedging derivatives:	4,740	-	4,740	12,121	-	12,121

Swaps	3,793	-	3,793	7,984	-	7,984	Present value (non-closed formula solution)	Interest rate yield curves and quoted exchange rates

Exchange Rate Futures	947	-	947	4,137	-	4,137	Present value (non-closed formula solution)	Interest rate yield curves and quoted exchange rates

	197,488	903	198,391	159,233	219	159,452

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	Fair Values Calculated			Fair Values Calculated
	Using Internal Models at 12/31/2014			Using Internal Models at 12/31/2015			Valuation Techniques	Key Inputs
	Level 2	Level 3	Total	Level 2	Level 3	Total

LIABILITIES:
Financial liabilities held for trading:	125,894	-	125,894	174,147	-	174,147

Trading derivatives:

Interest rate options	3,332	-	3,332	1,461	-	1,461	Black-Scholes model with closed-formula solution	Interest rate yield curves and implied volatility surface

Market index options:	534	-	534	844	-	844

European, composite, quanto and Asian strike options	440	-	440	582	-	582	Black-Scholes model with closed-formula solution	Interest rate yield curves, quoted equity, index prices, implied volatility surface, historical correlations and dividends estimation

Barrier options	40	-	40	-	-	-	Black-Scholes model with closed-formula solution	Interest rate yield curves, quoted equity, index prices, implied volatility surface, historical correlations and dividends estimation

Auto-callable	12	-	12	223	-	223	Local volatility model with partial differential equation method	Interest rate yield curves, quoted equity prices and index levels, implied volatility surface, historical correlations and dividends estimation

Asian spread options	42	-	42	39	-	39	Local volatility model with Monte Carlo method	Interest rate yield curves, quoted equity, implied volatility surface, historical correlations and dividends estimation

Exchange rate options:	1,390	-	1,390	452	-	452

American forwards	16	-	16	41	-	41	Black-Scholes model with trinomial tree method	Interest rate yield curves, quoted exchange rates and implied volatility surface

European options	1,364	-	1,364	411	-	411	Black-Scholes model with closed-formula solution	Interest rate yield curves, quoted exchange rates and implied volatility surface

Digital	10	-	10	-	-	-	Black-Scholes model with closed-formula solution	Interest rate yield curves, quoted exchange rates and implied volatility surface

Swaps	78,063	-	78,063	114,443	-	114,443	Present value (non-closed formula solution)	Interest rate yield curves and quoted exchange rates


Index and securities futures	31	-	31	163	-	163	Present value (non-closed formula solution)	Interest rate yield curves, quoted equity and index levels


Interest rate futures	550	-	550	343	-	343	Hull-White model with analytic method	Interest rate yield curves, implied volatility surface and a mean reversion parameter assumption (2%)

Exchange rate futures	31	-	31	6,430	-	6,430	Present value (non-closed formula solution)	Interest rate yield curves and quoted exchange rates

Short positions:

Debt instruments	41,963	-	41,963	50,011	-	50,011	Present value (non-closed formula solution)	Interest rate yield curves

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Other financial liabilities at fair value through profit or loss:	108,784	-	108,784	204,829	-	204,829

Deposits from the Central Bank – Repurchase agreements	5,006	-	5,006	145,159	-	145,159	Present value (non-closed formula solution)	Interest rate yield curves

Deposits from credit institutions – Repurchase agreements	28,746	-	28,746	325	-	325	Present value (non-closed formula solution)	Interest rate yield curves

Customer deposits – Repurchase agreements	69,726	-	69,726	46,083	-	46,083	Present value (non-closed formula solution)	Interest rate yield curves

Customer deposits – Certificates of deposits	-	-	-	639	-	639	Present value (non-closed formula solution)	Interest rate yield curves

Marketable debt securities	5,306	-	5,306	12,623	-	12,623	Present value (non-closed formula solution) and Black-Scholes model with closed-formula solution	Interest rate yield curve, quoted equity prices and index levels, implied volatility surface, historical correlations and dividends estimation

Hedging derivatives:	4,403	-	4,403	9,568	-	9,568

Swaps	2,448	-	2,448	3,907	-	3,907	Present value (non-closed formula solution)	Interest rate yield curves

Exchange rate futures	1,955	-	1,995	5,661	-	5,661	Present value (non-closed formula solution)	Interest rate yield curves
	239,081	-	239,081	388,544	-	388,544

Some of the financial 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

Set forth below are the Group’s main financial instruments measured using unobservable market data as significant inputs of the internal models (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 asset 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.

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:

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	Assets
	Debt and Equity Instruments

Balance at January 1, 2013		777
Total gains/losses recognized in the consolidated income statement:
Gains/(losses) on financial assets and liabilities (net)		219
Sales		(15	)
Settlements		(82	)
Balance at December 31, 2013		899
Total gains/losses recognized in the consolidated income statement:
Gains/(losses) on financial assets and liabilities (net)		78
Purchases		18
Sales		(12	)
Settlements		(80	)
Balance at December 31, 2014		903
Total gains/losses recognized in the consolidated income statement:		13
Gains/(losses) on financial assets and liabilities (net)
Purchases		1
Sales		(647	)
Settlements		(51	)
Balance at December 31, 2015		219

Unobservable inputs used in measuring fair value

The table below sets out information about significant unobservable inputs used at December 31, 2015 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

219

Local volatility model with partial differential equation method

Long-term implied volatility

31.24 – 39.26%

(35.25)

A significant increase in volatility would result in a lower fair value.

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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, 2015, 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:

	Potential Impact on Consolidated Income Statement as of December 31, 2015
	Most Favorable Input	Least Favorable Input

ASSETS:
Debt and equity instruments	1	(1)

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 prudent, 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 35.25% to 39.26%. The volatility used as input for the internal model 35.25% is an extrapolation of the observable volatility surface of a shorter-term option market of the underlying asset. 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 35.25% to 31.24%.

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, 2015, including all financial instruments in the trading book position of the Group are as follows:


	Average	High	Low	12/31/2015

All financial instruments	70.80	143.08	45.92	69.73
By category:
Instruments sensitive to interest rate	68.42	144.76	40.06	59.87
Instruments sensitive to equity market prices	16.73	47.60	3.50	5.46
Instruments sensitive to foreign currency exchange rates	9.89	41.32	2.60	4.30
Instruments sensitive to volatility movements	13.89	31.09	3.85	5.95

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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.

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.

vi.

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 at their net amount 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 temporarily 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.

vii.

Hedging transactions

The Group uses derivatives for the following purposes: (i) to facilitate 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.

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A derivative qualifies for hedge accounting if all the following conditions are met:

The derivative hedges one of the following three types of exposure:

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);

Changes in the estimated cash flows arising from financial assets and liabilities, commitments and highly probable forecast transactions (cash flow hedge); and

The net investment in a foreign operation (hedge of a net investment in a foreign operation).

It is effective in offsetting exposure inherent in the hedged item throughout the expected term of the hedge, which means that:

At the date of arrangement the hedge is expected, under normal conditions, to be highly effective (prospective effectiveness).

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.

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:

In fair value hedges, the gains or losses arising on both the hedging instruments and the hedged items attributable to the type of risk being hedged are recognized directly in the consolidated income statement.

In 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.

In hedges of a net investment in a foreign operation, the gains or 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.

The ineffective portion of the gains or 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.

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When fair-value hedge accounting is discontinued, the adjustments previously recognized on the hedged item are reclassified to the consolidated income statement 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 the consolidated income statement, unless the transaction is no longer expected to occur, in which case the cumulative gain or loss is recognized immediately in the consolidated income statement.

viii.

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.

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:

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.

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.

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:

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.

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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 expired or when substantially all the inherent risks and rewards have been transferred to third parties. Similarly, financial liabilities are only derecognized when the obligations they generate have been extinguished or when they are acquired with the intention either to cancel them or to resell them.

Offsetting of financial instruments

Financial asset and liability balances are offset, i.e., reported in the consolidated balance sheet at their net amount, only if the subsidiaries currently have a legally enforceable right to set-off the recognized amounts and intend either to settle on a net basis or to realize the asset and settle the liability simultaneously.

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.

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 connection with the following transactions:

•

Derivatives;

•

Repurchase agreements and reverse repurchase agreements; and

•

Securities lending and borrowing agreements.

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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, 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

Reverse 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

As at December 31, 2015

							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		128,902		-		128,902		(97,126	)		(7,276	)		(14,275	)		10,225

Reverse repurchase agreements		27,358		-		27,358		-			(27,364	)		-			(6	)
Equity instruments (see Note 10.a)		492		-		492		-			(551	)		-			(59	)


Total		156,752		-		156,752		(97,126	)		(35,191	)		(14,275	)		10,160

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The following financial liabilities are subject to offsetting, enforceable master netting arrangements and similar agreements:

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

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

As at December 31, 2015

							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		134,133		-		134,133		(97,126	)		(770	)		(24,076	)		12,161

Repurchase agreements		191,567		-		191,567		-			(195,833	)		-			(4,266	)

Short positions - Securities loans (see Note 11.b)		23,605		-		23,605		-			(24,413	)		-			(808	)

Short positions – Short sales (see Note 11.b)		25,252		-		25,252		-			(25,242	)		-			10


Total		374,557		-		374,557		(97,126	)		(246,258	)		(24,076	)		7,097

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Impairment of financial assets

Definition

Financial assets, other than those at 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 initial recognition.

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 assets is adjusted with a charge to the consolidated income statement for the period in which the impairment becomes evident, and the reversal, if any, of previously recognized impairment losses is recognized in the consolidated income statement for the period in which the impairment is reversed or reduced.

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 after 90 days of the maturity date.

Loans with a single payment of principal at maturity and with periodic interest payments (interest-only loans) are considered impaired after 90 days principal or interest become due.

Loans whose principal and interest payments have been agreed in periodic installments (amortizing loans) are considered impaired after 90 days an installment becomes due.

Mortgage loans

Mortgage loans are considered impaired when a payment is past due more than 90 days (see Note 2.h.).

Installment loans to individuals

Revolving consumer credit cards loans are considered impaired when payment is not received after 90 days it becomes due (see Note 2.h.).

Non-revolving consumer loans whose principal and interest payments have been agreed in periodic installments are considered impaired after 90 days an installment becomes due.

If the borrower is declared bankrupt in accordance with the Commercial Bankruptcy Law.

The Group considers also as impaired loans the sum of all transactions of a customer when the loan balances of the same customer classified as impaired are more than 20% of the total outstanding amounts.

Loans and advances which are not impaired due to default but for which there are reasonable doubts about their full repayment (principal and interest) according to its contractual terms are considered impaired loans. This analysis includes, among others: customers in situations involving deterioration in their creditworthiness, such as negative equity, continued losses, general delay in payments, inadequate economic or financial structure, insufficient cash flows to settle debt or inability to obtain additional financing, etc.

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Impaired loans which are renegotiated will remain impaired until there is evidence of sustained payment, i.e., performance of payment by the borrower without payment delay for the total amount due and payable in terms of principal and interest during a certain period of time.

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.

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.

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.

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.

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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 objective evidence of impairment of the customer’s ability to pay, either because it is past due 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.

In order to classify the customers for assessing the impairment losses resulting from credit risk, the Group distinguishes between:

Individually significant customers which present objective evidence of impairment,

Individually significant customers which do not present objective evidence of impairment, and

Non-individually significant customers.

The Group has defined as an “individually significant customer” those customers with a total current risk exposure amounting more than 8 million pesos. This threshold is reviewed annually in order to adapt it to the Group’s business circumstances.

Objective evidence of impairment exists when an individually significant customer is in the following situations:

Classified as impaired (more than 90 days in default).

Shows signs of impairment although not in default, inter alia, restructured loans, loans under special surveillance and loans with reasonable doubt about their full repayment.

Objective evidence of impairment exists when a non-individually significant customer is in the following situations:

Classified as impaired (more than 90 days in default).

Classified as restructured loans.

Once the Group has classified its customers according to the above, loan portfolios are assessed for impairment individually and collectively in order to recognize an allowance for impairment losses arising from credit risk, as follows:

Individualized analysis

Credit losses individually assessed are determined by calculating the present value of expected cash flows discounted at an appropriate discount rate of those individually significant customers presenting objective evidence of impairment considering the debtor’s financial situation and any guarantees in place. The Group takes into account all available information (external or internal), including expert judgment, to estimate the present value of expected cash flows.

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Collective analysis

Credit losses collectively assessed are determined for those individually significant customers that do not present an objective evidence of impairment and for those customers that are not individually significant. Credit losses are estimated taking into consideration the historical impairment loss experience at the time of assessment adjusted to reflect current economic conditions and taking into account the characteristics of the counterparty and the guarantees and collateral associated with the transaction.

Customers assessed collectively are grouped together considering financial instruments having similar credit risk characteristics indicative of the debtors’ ability to pay all principal and interest amounts in accordance with contractual terms. The credit risk characteristics considered for the purpose of grouping the financial assets are, inter alia, instrument type, debtor’s industry, type of guarantee or collateral, age of past due amounts and any other relevant factor for the estimation of future cash flows.

Impairment losses are determined by multiplying four factors: exposure at default (hereinafter, “EAD”), probability of default (hereinafter, “PD”), loss given default (hereinafter, “LGD”) and the loss identification period (hereinafter, “LIP”).

The EAD is the amount of risk exposure at the date of default (more than 90 days of default) by the counterparty. It is estimated as the drawn amount plus the undrawn risk multiplied by a credit conversion factor (hereinafter, “CCF”) which represents the percentage of undrawn balance that is expected to be used before default occurs.

The PD is the probability of the counterparty failing to meet its principal and/or interest payment obligations. The probability of default has been defined as the probability that an operation accumulates more than 90 days past due.

The Group uses transition models to determine PD (from a non-default to a default status) in which loans are segmented into bucket classifications primarily based on the number of days past due, and statistical analysis is applied to estimate the probability that loans will migrate through this status. These transition models are based on historical data gathered over a four-year period.

The LGD is the loss arising in the event of default. It depends on the guarantees and collateral associated with the transaction.

The LIP parameter is the time between the moment when the event giving rise to a certain loss occurs and when that loss is identified at an individual level. LIPs analysis is performed on the basis of homogeneous risk portfolios. This parameter is only determined and used to calculate credit losses for customers which do not present objective evidence of impairment.

The methodology for determining the allowance for impairment losses also seeks to identify the amount of incurred losses as of the consolidated balance sheet date of loans and receivables that have not yet been reported as impaired, but that the Group estimates based on its past history or other quantitative factors that the loss event has already occurred. As part of this methodology, management also considers qualitative factors that are possible to cause estimated credit losses associated with the Group’s loan portfolio to differ from historical loss experience, such as changes in gross domestic product, unemployment rate, housing prices, interest rates, IPC, etc., in order to adjust this historical loss experience to reflect current economic and market conditions as of the date of the consolidated financial statements.

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.

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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.

Change in accounting estimates

During 2015, the Group revised its estimates for allowance for impairment losses on loans and receivables of all loan portfolios and for the provision for off-balance sheet risk with the purpose of making certain refinements to the impairment models as part of its policy to continuously enhance the existing impairment models and accounting estimates.

The main refinements made to the impairment models in order to provide a greater level of precision of incurred losses are the following:

Specific and objective guidelines to classify customers according to their total current risk exposure (individually significant customers – See Note 2.g.) and deterioration in creditworthiness (objective evidence of impairment – See Note 2.g.), aligning such factors with credit risk management.

Finer segmentation of loans in groups with similar credit risk characteristics.

More detailed historical data for the determination of certain inputs or variables (PD, LGD, LIP and CCF – See Note 2.g.) used to calculate the allowance for impairment losses and the provisions for off-balance sheet risk.

Conformed definition of impaired assets with the aim of making it consistent across all the loan portfolios when determining the allowance for impairment losses (See Note 2.g.).

The change in accounting estimates did not have a material impact on the net loan portfolio as of December 31, 2015, on the provision for off-balance sheet risk as of December 31, 2015 and in the profit for the year then ended. However, the change resulted in a net decrease in the allowance for impairment losses of 176 million pesos, a net decrease in the provision for off-balance sheet risk of 436 million pesos, a decrease in impaired assets of 438 million pesos and an increase in the profit for the year of 428 million pesos.

Management considers that it is impracticable to estimate the effect on future periods of this change in accounting estimates due to the fact that the Group cannot reliably determine all the necessary inputs and factors to calculate this effect, such as risk exposure, PD, LGD, LIP, qualitative factors, etc.

Repurchase agreements and Reverse repurchase agreements

Purchases of financial instruments under a non-optional resale agreement are measured at fair value and recognized as assets in the consolidated balance sheet under Loans and advances to credit institutions – Reverse repurchase agreements or Loans and advances to customers – Reverse 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 recognized as liabilities in the consolidated balance sheet under Deposits from the Central Bank – Repurchase agreements, Deposits from credit institutions – Repurchase agreements or Customer deposits – Repurchase agreements.

The excess of the sales prices over the repurchase prices are recognized as interest expense over the contract term.

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.

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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 (net) 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.

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.

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 for own use	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 revised carrying amount and to the new remaining useful life (if the useful life has to be re-estimated).

Similarly, if there is an indication of a recovery in the value of a tangible asset, the 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 of 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.

Accounting for leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

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 over the term of the lease under Other operating income in the consolidated income statement. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized on a straight-line basis over the lease term.

When the Group acts as the lessees the lease expenses, including any incentives granted by the lessor, are charged on a straight-line basis over the lease term to Other general administrative expenses in the consolidated income statement.

In the event that lease incentives are received to enter into operating leases, such incentives are recognized as a liability. The aggregate benefit of incentives is recognized as a reduction of rental expense on a straight-line basis.

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 accordance with IAS 17, 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.

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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.

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 (such as computer software).

Other intangible assets can have an indefinite useful life - when, based on an analysis of all the relevant factors, it is concluded that there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the Group - or a finite useful life, in all other cases.

Intangible assets with indefinite useful lives acquired separately are not amortized and are carried at cost less accumulated impairment losses. 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 whether they continue to be indefinite and, if this is not the case, to take the appropriate steps.

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Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortization and accumulated impairment losses. Amortization is recognized on a straight-line basis over their estimated useful lives. The estimated useful lives are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. The intangible asset amortization charge is recognized under Depreciation and amortization in the consolidated income statement.

Intangible assets acquired in a business combination and recognized separately from goodwill are initially recognized at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.

An intangible asset is derecognized on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognized in the consolidated income statement when the asset is derecognized.

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.).

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

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

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The Group's consolidated financial statements include all the material provisions with respect to which it is considered that it is more likely than not that the obligation will have to be settled. In accordance with accounting standards, contingent liabilities must not be recognized in the consolidated financial statements, but must rather be disclosed in the notes.

Provisions are reviewed and adjusted at the end of each year. Provisions are also used to cater for the specific obligations for which they were originally recognized. Provisions are fully or partially reversed when such obligations cease to exist or are reduced.

Provisions are classified according to the obligations covered as follows:

Provisions for pensions and similar obligations: includes the amount of all the provisions made to cover post-employment benefits, including obligations to pre-retirees and similar obligations.

Provisions for 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).

Litigation and/or claims in process

At the end of 2014 and 2015, certain litigation and claims were in process against the Group arising from the ordinary course of their operations (see Note 24).

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 the consolidated income statement such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to Accumulated reserves.

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 the consolidated income statement for the year.

Share-based payments are discussed in Note 42.b, c. and d.

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Recognition of income and expenses

The most significant criteria used by the Group to recognize its income and expenses are summarized as follows:

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 FVTPL 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.

Loan arrangement fees

Loan arrangement fees that are an integral part of the effective interest rate of a financial instrument, mainly loan origination fees are accrued and recognized in income over the term of the loan as a part of the effective interest method.

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.

Financial guarantee contracts issued by the Group and, if not designated as at FVTPL, are subsequently measured at the higher of:

the amount of the obligation under the contract, as determined in accordance with IAS 37; and

the amount initially recognized less, where appropriate, cumulative amortization recognized in accordance with the revenue recognition policies.

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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 financial 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.

Post-employment benefits

The Group's post-employment obligations to its employees are deemed to be defined contribution plans when the Group makes pre-determined contributions to a separate entity and will have no legal or effective obligation to make further contributions if the separate entity cannot pay the employee benefits relating to the service rendered in the current and prior periods. Post-employment obligations that do not meet the aforementioned conditions are classified as defined benefit plans. See Note 24.c.

Defined contribution plans

The contributions made in this connection in each year are recognized under Personnel expenses in the consolidated income statement. The amounts not yet contributed at each year-end are recognized under Provisions - Provision for pensions and similar obligations on the liability side of the consolidated balance sheet.

Defined benefit plans

The Group recognizes under Provisions - Provision for pensions and similar obligations on the liability side of the consolidated balance sheet (or under Other assets on the asset side, as appropriate) the present value of its defined benefit post-employment obligations, net of the fair value of the plan assets.

Plan assets are defined as those that will be directly used to settle obligations and that meet the following conditions:

They are not owned by the Group, but by a legally separate third party that is not a party related to the Group.

They are only available to pay or fund post-employment benefits and they cannot be returned to the Group unless the assets remaining in the plan are sufficient to meet all the benefit obligations of the plan and of the Group to current and former employees, or they are returned to reimburse employee benefits already paid by the Group.

Post-employment benefits are recognized as follows:

Service cost is recognized in the consolidated income statement and includes the following items:

Current service cost, i.e., the increase in the present value of the obligations resulting from employee service in the current period, is recognized under Personnel expenses.

The past service cost, which arises from changes to existing post-employment benefits or from the introduction of new benefits and includes the cost of reductions, is recognized under Provisions (net).

Any gain or loss arising from plan settlements is recognized under Provisions (net).

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Net interest on the net defined benefit liability (asset), i.e., the change during the period in the net defined benefit liability (asset) that arises from the passage of time, is recognized under Interest expense and similar charges (Interest and similar income if it constitutes income) in the consolidated income statement.

The remeasurement of defined benefit obligation is recognized in Other comprehensive income and includes:

Actuarial gains and losses generated in the year, arising from the differences between the previous actuarial assumptions and what has actually occurred and from the effects of changes in actuarial assumptions.

The return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset).

Any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability (asset).

Further details about post-employment benefits are given in Note 24.c.

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.

Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

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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Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

The measurement of deferred tax assets and liabilities reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities

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 other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive income or directly in equity, respectively. 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.

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 2013, 2014 and 2015 year-end is provided in Note 45.

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 (CODM), who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer.

Dividend distribution

Dividend distributions to the Group’s shareholders are recognized as a liabilities in the Group’s consolidated financial statements in the period in which the dividends are approved by the Group’s shareholders.

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 coordinated 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.

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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 the consolidated income statement 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.

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 which they are classified. The Group classifies as cash and cash equivalents the balances recognized under Cash and balances with the 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:

Profit for the year.

The net amount of the income and expenses recognized directly to consolidated equity under Valuation adjustments that will not be reclassified subsequently to the consolidated income statement.

The net amount of the income and expenses recognized directly to consolidated equity under Valuation adjustments that may be reclassified subsequently to the consolidated income statement when certain conditions are met.

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.

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 consolidated statement, irrespective of the nature of the related items, under Entities accounted for using the equity method.

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This consolidated statement presents the items separately by nature, grouping together items that, in accordance with the applicable accounting standards, will not be reclassified subsequently to the consolidated income statement since the requirement established by the corresponding accounting standards are met.

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 and from the correction of errors.

Accordingly, this statement presents a reconciliation of the carrying amount at the beginning and end of the year of all the consolidated equity items, and the changes are grouped together on the basis of their nature into the following items:

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.

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.

Other changes in equity: include the remaining items recognized in equity, including, inter alia, increases and decreases in share capital, distribution of profit, transactions involving own equity instruments (treasury shares), share-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 Sale of SAM Asset Management, S.A. de C.V., Sociedad Operadora de Fondos de Inversión (formerly 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 SAM Asset Management, S.A. de C.V., Sociedad Operadora de Fondos de Inversión, ("SAM Asset Management") 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 SAM Asset Management 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 SAM Asset Management. For additional breakdown of items presented under discontinued operations, please refer to Note 33.

3.2 Acquisition of ING mortgage business in Mexico

This transaction is explained in Note 4.

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3.3 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 ten-year maturity with option to be prepaid in year five. The instruments were issued and placed in accordance with Rule 144A and Regulation S of the US Securities Act of 1933, as amended. 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.

The key terms of these securities of this issue are explained in Note 22 c.

3.4 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 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 June and November 2015, the Mexican authorities declared concluded the bankruptcy act for these two Mexican real estate companies.

In early December 2014, the remaining Mexican real estate company sent to the relevant court request to initiate a pre-arranged bankruptcy. In January 2015, the real estate company was declared bankrupt under the Commercial Bankruptcy Law which is still in force at December 31, 2015.

As of December 31, 2014 and 2015 the loan portfolio of the Group with the three principal Mexican real estate companies amounted to 4,903 and 4,232 million pesos, respectively, which represents 1.07% and 0.79% of loans and advances to customers and 0.52% and 0.36% of the total assets of the Group, of which 4,720 and 3,478 million pesos are impaired. As of December 31, 2014 and 2015, 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.

3.5 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.

3.6 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.

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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 Group to transfer the custodial business; however, this obligation is subject to the following conditions: i) is valid until June 19, 2014; ii) is subject to the same conditions established in the global agreement signed by Banco Santander (Spain); iii) authorizations must be obtained from the Mexican authorities to establish a special purpose entity whose purpose is the operation of the custodial business in Mexico; iv) is dependent on the overall transaction, if it is terminated, the transaction will also terminate in Mexico; and v) the transaction 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.

On July 24, 2015, the Group received a notification from Banco Santander (Spain) announcing that the aforementioned transaction was automatically terminated since the global operation established in the global agreement signed by Banco Santander (Spain) on June 2014 was not concluded within the twelve-month acceptation period. Therefore the closing of the purchase was not concluded. However, Banco Santander (Spain) made another offer to the Group to purchase the custodial business. This offer was accepted by the Group. The agreed sale price was 1,191 million pesos. This offer requires the Group to transfer the custodial business and it is subject to the following conditions: i) is valid until June 30, 2016; ii) is subject to the same conditions established in the global agreement signed by Banco Santander (Spain); iii) authorizations must be obtained from the Mexican authorities to establish a special purpose entity whose purpose is the operation of the custodial business in Mexico; iv) is dependent on the successful completion of the overall transaction, if it is terminated, the transaction also terminates in Mexico; and v) the transaction should be formalized through the signing of the respective contracts.

The aforementioned obligation of the Group to transfer the custodial business to a special purpose entity as a condition for completing the sale to Banco Santander (Spain) 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.

3.7 Scotiabank Inverlat loan portfolio acquisition

On November 26, 2014, the Group entered into an agreement to acquire a non-revolving consumer loans portfolio from Scotiabank Inverlat (Scotiabank).

On March 17, 2015, after having obtained applicable regulatory authorizations, the Group signed a contract with Scotiabank to acquire the non-revolving consumer loans portfolio. This acquisition was finalized on April 2015. The acquired portfolio consists of 39,252 loans with a face value of 3,179 million pesos.

The fair value of the acquired loan portfolio was 3,002 million pesos.

3.8 New auditors 2016

The Board of Directors of the Group by meeting on July 23, 2015, agreed to appoint PricewaterhouseCoopers, S.C., as the external auditor of the Group to conduct the audit of the consolidated financial statements from 2016, 2017 and 2018. This decision was taken in line with corporate governance guidelines recommendations periodic rotation of the external auditor, on the proposal of the Audit Committee.

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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. A 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:


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 reflected in the amounts presented in 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.

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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, 2014 and 2015 approved by the Board of Directors during the annual general meetings are as follows:


	2014		2015

Profit of the year		13,289		14,004
Dividends declared		3,473		6,760
Dividend per share (pesos)		0.51		1.00
Date of payment		12/29/2014		05/29/2015 and 12/22/2015

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:


	2013		2014		2015

Profit attributable to the Parent		14,279		13,288		14,003
Profit attributable to the Parent from discontinued operations (net of non-controlling interests)		1,938		-		-
Profit from continuing operations (net of non-controlling interests)		12,341		13,288		14,003
Weighted average number of shares outstanding		6,773,811,703		6,775,809,054		6,777,712,725
Basic earnings per share (pesos)		2.11		1.96		2.07
Basic earnings per share from discontinued operations (pesos)		0.29		-		-
Basic earnings per share from continuing operations (pesos)		1.82		1.96		2.07

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).

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Accordingly, diluted earnings per share were determined as follows:


	2013		2014		2015

Profit attributable to the Parent		14,279		13,288		14,003
Profit attributable to the Parent from discontinued operations (net of non-controlling interests)		1,938		-		-
Profit from continuing operations (net of non-controlling interests)		12,341		13,288		14,003
Weighted average number of shares outstanding		6,773,811,703		6,775,809,054		6,777,712,725
Dilutive effect of rights on shares		12,583,210		10,585,859		8,682,188
Adjusted number of shares		6,786,394,913		6,786,394,913		6,786,394,913
Diluted earnings per share (pesos)		2.11		1.96		2.06
Diluted earnings per share from discontinued operations (pesos)		0.29		-		-
Diluted earnings per share from continuing operations (pesos)		1.82		1.96		2.06

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.

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 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 13 million pesos during 2013, 11 million pesos during 2014 and 13 million pesos during 2015, paid as attendance fees.

Remuneration of executive officers

The aggregate amount for compensation and benefits generated during 2013 to executive officers amounted to 329 million pesos, 339 million pesos during 2014 and 282 million pesos during 2015. This amount includes annual salary, Christmas bonus, vacation bonus and performance bonus. Also, the amount paid at December 31, 2013 and December 31, 2014, 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.

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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 468 million pesos at December 31, 2014 and 361 million pesos at December 31, 2015.

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 executive officers and other executives 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.).

Local Program

The Group established a share-based variable compensation plan for its executive officers and other 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.

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 2014” applicable only to a certain group of executive officers. This plan provides for a variable compensation tied to the performance of the stock of Banco Santander (Spain). The Corporate performance shares plan 2014 is payable in shares of the Group and will begin on July 1, 2015. Details of the plan are presented in Note 42.d.

Loans to executive officers

The loans conferred to executive officers amount to 70 million pesos and 52 million pesos as of December 31, 2014 and 2015, respectively.

Cash and balances with the Central Bank

The breakdown by type of balances of Cash and balances with the Central Bank is as follows:


	12/31/2014		12/31/2015

Cash		15,927		23,040
Central Bank compulsory deposits		35,872		35,872
Deposits in the Central Bank		24		876
		51,823		59,788

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.

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Note 45.a. includes a breakdown of the remaining maturity of Cash and balances with the Central Bank and of the related average interest rates. The compulsory deposits required by the 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:


	12/31/2014		12/31/2015

Classification:
Other financial assets at fair value through profit or loss		27,379		735
Loans and receivables		67,307		57,599
		94,686		58,334
Type:
Reciprocal accounts		26,167		14,192
Time deposits		98		98
Guarantee deposits - Collateral delivered for OTC derivatives transactions (Note 32)		20,758		30,223
Reverse repurchase agreements		27,379		735
Call money transactions granted		11,098		-
Other accounts		9,186		13,086
		94,686		58,334
Currency:
Peso		59,250		23,334
US Dollar		35,416		34,975
Other currencies		20		25
5		94,686		58,334

As of December 31, 2014 and 2015, time deposits consist of 98 million pesos in both years 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, 2015 there are no call money transactions granted. As of December 31, 2014, these transactions are as follows:

	Days		Interest Rate (average)			12/31/2014

Mexican financial institutions		2		2.96	%		11,098
							11,098

As of December 31, 2014 and 2015, 173 million pesos and 311 million pesos, respectively, of loans and advances to credit institutions, have been pledged in connection with derivatives transactions in organized markets, and are classified as restricted assets within Loans and advances to credit institutions – Loans and receivables.

As of December 31, 2014 and 2015, 20,758 million pesos and 30,223 million pesos, respectively, of loans and advances to credit institutions, have been pledged in connection with OTC derivatives transactions, and are classified as restricted assets within Loans and advances to credit institutions – Loans and receivables (see Note 32).

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As of December 31, 2014 and 2015, 27,421 million pesos and 748 million pesos, respectively, of debt securities have been received as collaterals in connection with the reverse repurchase agreement 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

Breakdown

The breakdown by classification, type and currency of the balances of Debt instruments is as follows:

	12/31/2014		12/31/2015

Classification:
Financial assets held for trading		110,787		209,158
Available-for-sale financial assets		83,029		113,525
Loans and receivables		5,835		6,011
		199,651		328,694
Type:
Mexican government debt securities		159,998		283,565
Of which:
Collateral delivered for OTC transactions (Note 32)		453		770
Foreign government debt securities		24,734		31,162
Of which:
Brazilian Government Notes		24,693		20,813
US Government Treasury Bills (TBILLS)		41		10,349
Debt securities issued by financial institutions		4,818		7,826
Other debt securities		10,101		6,141
		199,651		328,694
Currency:
Peso		170,645		290,171
US Dollar		3,070		14,100
Brazilian Real		24,693		20,813
Other currencies		1,243		3,610
		199,651		328,694

As of December 31, 2014 and 2015, 453 million pesos and 770 million pesos, respectively, of debt instruments, have been pledged in connection with OTC derivatives transactions, and are classified as restricted assets within Debt instruments – Financial assets held for trading (see Note 32).

As of December 31, 2014 and 2015, 14,432 million pesos and 24,413 million pesos, respectively, of Debt instruments, have been pledged in connection with securities loans transactions in which the lender is the Central Bank and are classified as restricted assets within Debt instruments – Financial assets held for trading.

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The breakdown of the Debt instruments classified as Held for trading is as follows:

	12/31/2014		12/31/2015

Federal Treasury Securities (CETES)		11,001		27,788
United Mexican States Bonds (UMS)		564		529
Federal Mexican Government Development Bonds (BONDES)		32,317		99,230
M and M10 Mexican Government Bonds		2,421		11,029
Mexican Bank Saving Protection Bonds (BPATs)		46,076		47,176
Federal Mexican Government Development Bonds in UDIS⁽¹⁾ (UDIBONDS)		9,626		14,656
TBILLS		41		-
Other debt securities		8,741		8,750
		110,787		209,158

(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 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, 2015, one UDI was equal to 5.381175 pesos.

The breakdown of the Debt instruments classified as Available-for-sale is as follows:

	12/31/2014		12/31/2015

UMS		1,775		3,995
M, M3 and M5 Mexican Government Bonds		30,982		52,720
BPATs		14,566		15,794
UDIBONDS		4,835		4,637
TBILLS		-		10,349
Brazilian Government Notes		24,693		20,813
Other debt securities		6,178		5,217
		83,029		113,525
Of which:
Before allowance for impairment losses		83,029		113,525
Allowance for impairment losses		-		-
		83,029		113,525

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 by issuer rating of Debt instruments at December 31, 2015 is as follows:

	Private Debt		Sovereign Debt		Total		%

AAA		-		10,349		10,349		3.15	%
A		6,930		245,243		252,173		76.72	%
BBB		3,034		4,524		7,558		2.30	%
Below BBB		-		20,813		20,813		6.33	%
BB		3,784		33,798		37,582		11.43	%
Below BB		219		-		219		0.07	%
		13,967		314,727		328,694		100	%

The distribution of exposure by rating shown in the foregoing table has been affected by the reviews of sovereign issuer ratings conducted in recent years. The main review in 2015 was that of Brazil (from BBB to Below BBB). Also, at December 31, 2015 the exposures with BBB ratings included mainly the sovereign exposures in Mexico, while those with ratings Below BBB included the sovereign exposures in Brazil (as of March 31, 2016, the sovereign rating of Brazil is BB).

The breakdown of the Debt instruments classified as Loans and receivables is as follows:

	12/31/2014		12/31/2015

Special CETES - program of credit support and additional benefits to Mexican States and Municipalities		2,389		2,462
Special CETES - support program for housing loan debtors		3,446		3,549
		5,835		6,011

Type :
Unquoted		5,835		6,011
Of which:
Before allowance for impairment losses		5,835		6,011
Allowance for impairment losses		-		-
		5,835		6,011

Changes

The changes in Available-for-sale – Debt instruments, disregarding the allowance for impairment losses, were as follows:

	2013			2014			2015

Beginning balance		47,332			61,423			83,029
Net additions/(disposals)		15,697			21,533			30,527
Valuation adjustments		(1,515	)		334			(192	)
Amounts reclassified to consolidated income statement		(91	)		(261	)		161
Balance at year-end		61,423			83,029			113,525

As of December 31, 2014 and 2015, 17,370 million pesos and 22,831 million pesos, respectively, of Mexican government securities (M Bonds, BPATs, UMS and other debt securities) have been pledged in connection with repurchase agreements transactions, and are classified as restricted assets within Debt instruments – Available-for-sale.

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Allowance for impairment losses

As of December 31, 2014 and 2015 and during 2013, 2014 and 2015, the Group has not recognized any impairment on Debt Instruments – Available-for-sale (see Note 28).

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

Breakdown

The breakdown by classification and type of Equity instruments is as follows:

	12/31/2014		12/31/2015

Classification:
Financial assets held for trading		5,160		2,178
Available-for-sale financial assets		99		95
Of which:
Others		99		95
Of which:
Before allowance for impairment losses		99		95
Allowance for impairment losses		-		-
		5,259		2,273
Type:
Shares of Mexican companies		4,409		2,247
Shares of foreign companies		850		26
		5,259		2,273

As of December 31, 2014 and 2015, 439 million pesos and 52 million pesos, respectively, of equity instruments have been pledged in connection with derivatives traded in organized markets, and are classified as restricted assets within Equity instruments – Financial assets held for trading (see Note 32).

As of December 31, 2014 and 2015, 567 million pesos and 492 million pesos, respectively, of Equity Instruments have been pledged in connection with securities loan transactions in which the lender is the Group, and are classified as restricted assets within Equity instruments – Financial assets held for trading.

As of December 31, 2014 and 2015, 605 million pesos and 551 million pesos, respectively, of equity instruments 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.

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Changes

The changes in Available-for-sale – Equity instruments, disregarding the allowance for impairment losses, were as follows:

	2013			2014			2015

Beginning balance		186			102			99
Transfer to non-current assets held for sale		(97	)		-			-
Net additions/(disposals)		23			-			-
Valuation adjustments		3			(2	)		(4	)
Amounts reclassified to consolidated income statement		(13	)		(1	)		-
Balance at year-end		102			99			95

Note 28.a. includes a breakdown of the valuation adjustments recognized in Total equity on Available-for-sale financial assets.

Allowance for impairment losses

As of December 31, 2014 and 2015 and during 2013, 2014 and 2015, the Group has not recognized any impairment on Equity Instruments – Available-for-sale.

11.

Trading derivatives (assets and liabilities) and Short positions

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):

	12/31/2014				12/31/2015
	Debit Balance		Credit Balance		Debit Balance		Credit Balance

Interest rate risk		37,584		37,570		35,156		35,969
Currency risk		53,055		55,709		80,258		87,159
Market price risk		1,785		1,563		1,367		1,437
		92,424		94,842		116,781		124,565

Note 45.a. contains a breakdown of the remaining maturity periods of trading derivatives.

Short positions

Following is a breakdown of the carrying amount of the Short positions:

	12/31/2014		12/31/2015

Securities loans:
Debt instruments		13,695		23,475
Equity instruments		382		130
		14,077		23,605
Short sales:
Debt instruments (*)		27,886		26,406
		41,963		50,011

(*) These figures include financial liabilities arising from the outright sale of financial assets acquired under reverse repurchase agreements of 27,301 million pesos and 25,252 million pesos as of December 31, 2014 and December 31, 2015, respectively.

Note 45.a. contains a breakdown of the remaining maturity periods of these liabilities.

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12.

Loans and advances to customers

Detail

The detail by classification of Loans and advances to customers in the consolidated balance sheets is as follows:

	12/31/2014			12/31/2015

Other financial assets at fair value through profit or loss		4,493			26,623
Loans and receivables		457,255			535,277
		461,748			561,900
Of which:
Before allowance for impairment losses		476,946			580,649
Allowance for impairment losses		(15,198	)		(18,749	)
		461,748			561,900

As of December 31, 2014 and 2015, 2,243 million pesos and 1,609 million pesos, respectively, of loans and advances to customers have been pledged in connection with derivatives traded in organized markets, and are classified as restricted assets within Loans and advances to customers (see Note 32).

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.

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:

	12/31/2014		12/31/2015

By loan type:
Commercial, financial and industrial loans		222,246		268,972
Public sector loans		55,862		59,922
Mortgage loans		102,935		116,404
Reverse repurchase agreements		4,493		26,623
Installment loans to individuals-
Revolving consumer credit card loans		40,124		45,929
Non-revolving consumer loans		32,856		43,057
Impaired loans		18,430		19,742
		476,946		580,649
By borrower sector:
Public sector		55,865		59,925
Individuals		184,770		215,459
Communications and transportation		10,879		21,619
Construction		33,027		36,350
Manufacturing		48,242		58,309
Services		127,946		162,407
Tourism		6,309		12,436
Other sectors		9,908		14,144
		476,946		580,649
By geographical area:
Mexico		476,946		580,649
		476,946		580,649
By interest rate:
Fixed rate		183,069		230,911
Floating rate		293,877		349,738
		476,946		580,649

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As of December 31, 2014 and 2015, 4,530 million pesos and 26,616 million pesos, respectively, of debt securities have been received as collaterals in connection with the reverse repurchase agreement transactions within Loans and advances to customers – Other financial assets at fair value through profit or loss (see Note 31).

Allowance for impairment losses

The changes in the allowance for impairment losses on Loans and advances to customers were as follows:

	2013			2014			2015

Beginning balance		(9,387	)		(13,764	)		(15,198	)

Impairment losses on financial assets – Loans and receivables (*)		(16,888	)		(14,831	)		(17,766	)
Of which:
Individually assessed		(5,331	)		(3,925	)		(6,172	)
Collectively assessed		(11,557	)		(10,906	)		(11,594	)

Others		(19	)		(113	)		(209	)

Write-off of impaired balances against recorded allowance for impairment losses		12,530			13,510			14,424
Balance at year-end		(13,764	)		(15,198	)		(18,749	)

Of which:
By method of assessment:
Individually		(5,147	)		(6,031	)		(7,943	)
Collectively		(8,617	)		(9,167	)		(10,806	)
By geographical location of risk:
Mexico		(13,764	)		(15,198	)		(18,749	)
By classification of assets:
Loans and advances to customers		(13,764	)		(15,198	)		(18,749	)

(*)

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 1,983 million pesos in 2013, 1,699 million pesos in 2014 and 1,725 million pesos in 2015.

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:


	2013			2014			2015

Beginning balance		7,329			15,175			18,430
Additions		26,409			24,848			30,006
Transfers to performing loans		(6,033	)		(8,083	)		(14,270	)
Written-off assets		(12,530	)		(13,510	)		(14,424	)
Balance at year-end		15,175			18,430			19,742

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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, 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

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, 2015 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	2,449	1,050	699	337	5,138	9,673
Mortgage loans	1,446	553	909	673	2,933	6,514
Installment loans to individuals
Of which:
Revolving consumer credit card loans	263	1,583	-	-	-	1,846
Non-revolving consumer loans	381	803	508	9	8	1,709
	4,539	3,989	2,116	1,019	8,079	19,742

Renegotiated loans

Renegotiated loans include 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, 2013, 2014 and 2015 is as follows:

	For the Year Ended 12/31/2013				For the Year Ended 12/31/2014				For the Year Ended 12/31/2015
	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	Impaired Loans	Total	Due to Concerns About Current or Potential Credit Deterioration	Due to Other Factors	Impaired Loans	Total	Due to Concerns About Current or Potential Credit Deterioration	Due to Other Factors	Impaired Loans	Total

Commercial, financial and industrial loans	1,378	-	307	1,685	694	-	2,040	2,734	3,219	-	1,591	4,810
Mortgage loans	-	-	-	-	1	-	-	1	-	-	-	-
Installment loans to individuals	1,314	-	207	1,521	542	-	799	1,341	96	-	294	390
Total	2,692	-	514	3,206	1,237	-	2,839	4,076	3,315	-	1,885	5,200
Percentage	84%	-	16%	100%	30%	-	70%	100%	64%	-	36%	100%

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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.

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 (5.4.7 Recovery management) for additional information regarding restructured and refinanced loan portfolios.

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.

Collateral or guarantees are credit enhancements in the form of an asset or third-party obligation that serve 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 (debt or equity 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.

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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 has 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 (5.4.4 Transaction decision-making – Credit risk mitigation techniques) for additional information regarding collaterals.

The breakdown is as follows:

	Maximum Exposure to Credit Risk	12/31/2014
		Maximum Exposure to Credit Risk ⁽¹⁾		Collaterals		Other Credit Enhancements
		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.

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	Maximum Exposure to Credit Risk	12/31/2015
		Maximum Exposure to Credit Risk ⁽¹⁾		Collaterals		Other Credit Enhancements
		Unsecured	Secured	Cash Collateral Received	Collateralized by Securities	Collection Rights ⁽³⁾	Real Estate ⁽²⁾	Guarantees

Financial assets held for trading	325,939	-	-	1,891	7,879	-	-	-
Other financial assets at fair value through profit or loss	27,358	-	-	-	27,364	-	-	-
Available-for-sale financial assets	113,525	-	-	-	-	-	-	-
Loans and receivables:	617,636	309,188	308,448	-	-	104,812	187,603	36,966
Of which:
Loans and advances to credit institutions	57,599	57,599	-	-	-	-	-	-
Loans and advances to customers	554,026	245,578	308,448	-	-	104,812	187,603	36,966
Commercial, financial and industrial loans	278,642	99,812	178,830	-	-	49,169	80,805	34,463
Public sector loans	59,925	38,532	21,393	-	-	55,606	-	2,503
Mortgage loans	122,918	15,472	107,446	-	-	-	105,475	-
Installment loans to individuals:
Revolving consumer credit card loans	47,775	47,775	-	-	-	-	-	-
Non-revolving consumer loans	44,766	43,987	779	-	-	37	1,323	-
Debt instruments	6,011	6,011	-	-	-	-	-	-
Guarantees and loan commitments	40,874	40,874	-	-	-	-	-	-
Available lines of credit cards and non-revolving consumer loans	72,841	72,841	-	-	-	-	-	-
	1,198,173	422,903	308,448	1,891	35,243	104,812	187,603	36,966

⁽¹⁾

⁽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. The internal rating scale and mapping of external ratings are as follows:

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Internal Rating	Equivalence with
	Standard &	Moody’s
	Poor’s	Moody’s

9.3	AAA	Aaa
9.2	AA+	Aa1
9.0	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
5.0	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
1.0	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
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

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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:

	12/31/2014
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 (except SMEs)	-	-	-	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

	12/31/2015
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 (except SMEs)	-	-	-	-	10	7,566	14,835	12,905	40,732	57,104	48,015	10,669	5,064	2,303	704	303	62	-	4,175	10,696	215,143
Public sector loans	-	-	-	-	-	37,183	942	-	1,878	2,620	10,968	1,553	-	-	-	-	-	-	-	4,781	59,925
	-	-	-	-	10	44,749	15,777	12,905	42,610	59,724	58,983	12,222	5,064	2,303	704	303	62	-	4,175	15,477	275,068

Financial instruments not recognized on the balance sheet:
Guarantees	-	-	-	190	447	1,600	8,470	5,527	5,767	1,711	1,268	297	-	-	97	-	-	-	-	2,596	27,970
Loan commitments	-	-	-	25	349	99	845	388	2,280	4,117	1,733	159	55	81	23	-	-	-	58	2,427	12,639
	-	-	-	215	796	1,699	9,315	5,915	8,047	5,828	3,001	456	55	81	120	-	-	-	58	5,023	40,609
	-	-	-	215	806	46,448	25,092	18,820	50,657	65,552	61,984	12,678	5,119	2,384	824	303	62	-	4,233	20,500	315,677

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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:

	12/31/2014
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
	-	-	-	-	-	-	-	-	-	79,754	79,754
	118,854	49,332	12,276	11,706	13,592	9,132	7,012	11,045	1,101	82,310	316,360

	12/31/2015
Rating Category	A-1	A-2	B-1	B-2	B-3	C-1	C-2	D	E	Not Rated	Total

Commercial loans (SMEs)	39,504	9,717	2,084	2,394	5,106	1,722	743	2,108	117	4	63,499
Mortgage loans	80,018	15,196	4,984	7,391	1,753	4,279	1,818	4,373	665	2,441	122,918
Revolving consumer credit card loans	6,610	9,104	6,008	8,674	7,269	3,364	2,950	3,470	326	-	47,775
Non-revolving consumer loans	2,592	4,091	5,850	14,860	5,284	2,638	4,261	2,062	2,279	849	44,766
	128,724	38,108	18,926	33,319	19,412	12,003	9,772	12,013	3,387	3,294	278,958

Financial instruments not recognized on the balance sheet:
Available lines of credit cards and non-revolving consumer loans	-	-	-	-	-	-	-	-	-	72,841	72,841
Guarantees	-	-	-	-	-	-	-	-	-	-	-
Loan commitments	-	-	-	-	-	-	-	-	-	265	265
	-	-	-	-	-	-	-	-	-	73,106	73,106
	128,724	38,108	18,926	33,319	19,412	12,003	9,772	12,013	3,387	76,400	352,064

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The following is a breakdown of the retail portfolios that are past due but not impaired at December 31, 2014 and 2015, 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, 2014 are as follows:

			Balances Past Due by
	Current		1 to 30 Days		31 to 60 Days		61 to 90 Days		Total

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

Portions of the retail portfolio that are past due but not impaired as of December 31, 2015 are as follows:

			Balances Past Due by
	Current		1 to 30 Days		31 to 60 Days		61 to 90 Days		Total

By type of loan:
Commercial loans (SMEs)		57,943		2,516		889		785		62,133
Mortgage loans		107,441		5,366		2,620		977		116,404
Installment loans to individuals
Of which:
Revolving consumer credit card loans		43,441		1,121		776		591		45,929
Non-revolving consumer loans		38,583		3,309		612		553		43,057
		247,408		12,312		4,897		2,906		267,523

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. Note 21 details the liabilities associated with these securitization transactions (mortgage-backed bonds). 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.

	2014		2015

Retained on the balance sheet
Of which:
Securitized mortgage assets		282		226
		282		226

Securitization is used as a tool for diversifying the Group’s liquidity sources. The Group had not performed any securitization in 2013, 2014 and 2015 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.

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13.

Hedging derivatives

The Group, as part of its financial risk management strategy and for the purpose of reducing mismatches in the accounting treatment of its transactions, enters into interest rate and foreign currency hedging derivatives, depending on the nature of the hedged risk.

In line with its objective, the Group classifies its hedges into the following categories:

Cash flow hedges: hedging the exposure to variability in cash flows associated with an asset, liability or highly probable forecast transaction. Thus, floating rate issues in domestic and foreign currencies, fixed rate issues in non-local currency, floating rate interbank financing and floating rate assets (bonds, commercial credit, etc.) are hedged.

Fair value hedges: hedging the exposure to changes in the fair value of assets attributable to an identified, hedged risk. Thus, the interest rate risk of assets (bonds, loans, etc.) with coupons or fixed interest rates, investments in entities and issuances in foreign currencies are hedged.

Breakdown

The breakdown by type of hedge of the derivatives qualifying for hedge accounting is as follows:

	12/31/2014				12/31/2015
	Assets		Liabilities		Assets		Liabilities

Fair value hedges		32		1,729		1		1,720
Cash flow hedges		4,708		2,674		12,120		7,848
		4,740		4,403		12,121		9,568

Quantitative information

Fair value hedges

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

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As of December 31, 2015, 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	4,620	4,620	Peso	Loans and receivables – Interest rate risk
Interest Rate Swaps	1,659	96	US Dollar	Loans and receivables – Interest rate risk
Cross-Currency Swaps	182	14	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	251	15	Euro	Petroleos Mexicanos 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	1,118	86	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 2013, 2014 and 2015, 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 119 million pesos, (71) million pesos and 23 million pesos, respectively (see Note 39).

For 2013, 2014 and 2015, 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 (131) million pesos, 65 million pesos and (105) million pesos, respectively (see Note 39).

Each of these hedging derivative instruments is presented in the consolidated balance sheet under Hedging derivatives.

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Cash flow hedges

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	2,050	2,050	Peso	BPAGs Bonds – Interest rate risk

Cross-Currency Swaps	3,916	309	US Dollar	Loans and receivables – Foreign exchange risk

Cross-Currency Swaps	4,677	265	Euro	Loans and receivables – Foreign exchange risk

Cross-Currency Swaps	12,677	860	US Dollar	Senior Unsecured Notes – Foreign exchange risk

Cross-Currency Swaps	19,164	1,300	US Dollar	Tier II Subordinated Capital Notes – 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

As of December 31, 2015, 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	6,159	441	US Dollar	Loans and receivables – Foreign exchange risk

Cross-Currency Swaps	5,780	332	Euro	Loans and receivables – Foreign exchange risk

Cross-Currency Swaps	9,357	543	US Dollar	Senior Unsecured Notes – Foreign exchange risk

Cross-Currency Swaps	18,974	1,100	US Dollar	Tier II Subordinated Capital Notes – Foreign exchange risk

Cross-Currency Swaps	1,607	86	Euro	United Mexican States Bonds – Foreign exchange risk

Cross-Currency Swaps	260	10	Pound Sterling	United Mexican States Bonds – Foreign exchange risk

Forward Fx-BRL	13,376	2,377	Brazilian Real	Brazilian Government Notes – Foreign exchange risk

Forward Fx-USD	24,546	1,735	US Dollar	Brazilian Government Notes – Foreign exchange risk

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During April 2015, the Group discontinued a cash flow hedge of Senior Unsecured Notes for an amount of 318 million dollars (nominal value). This cash flow hedge began on December 2012 and February 2013, and at the date of discontinuance an amount of 64 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 the consolidated income statement over the original term of the Senior Unsecured Notes, which extended through the year 2022.

During April 2015, the Group discontinued a cash flow hedge of Tier II Subordinated Capital Notes for an amount of 200 million dollars (nominal value). This cash flow hedge began on April 2014 and at the date of discontinuance an amount of 44 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 the consolidated income statement over the original term of the subordinated capital notes, which extended through the year 2019.

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 the consolidated income statement over the original term of the Central Bank compulsory deposits, which extended through the year 2018.

As of December 31, 2014 and 2015, included in the balance recognized in equity under Valuation adjustments - Cash flow hedges are 61 million pesos and 71 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 Unsecured Notes, up to the year 2024 for United Mexican States Bonds and up to the year 2025 for Loans and receivables.

A reconciliation of Valuation adjustments – Cash flow hedges is as follows:

	2013			2014			2015

Valuation adjustments		371			(1,161	)		(612	)
Amounts reclassified to consolidated income statement		(470	)		1,548			1,479
Of which:
Income from cash flow hedging derivatives swaps and discontinued cash flow hedge accounting		(453	)		1,551			1,483
Cash flow hedges ineffectiveness (Note 39)		(17	)		(3	)		(4	)
		(99	)		387			867

The breakdown of the estimated cash flows of the cash flow hedges are as follows:

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	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		16,141			3,937			52,665			28,172			100,915
Cash flows to be paid		(15,941	)		(3,889	)		(67,034	)		(32,630	)		(119,494	)

Note 45.a. contains a breakdown of the remaining maturity periods of hedging derivatives.

14.

Non-current assets held for sale

Breakdown

The breakdown of Non-current assets held for sale is as follows:

	12/31/2014		12/31/2015

Non-current assets held for sale		844		1,101
Of which:
Foreclosed assets		844		1,101
		844		1,101

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 2013, 2014 and 2015, the Group recognized a loss of (16) million pesos, a loss of (15) million pesos and a gain of 91 million pesos, respectively, under Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations (net) in the consolidated income statement.

For the years ended December 31, 2013 and 2014, the Group has recognized an impairment of 22 million pesos and 48 million pesos, respectively, under Impairment losses on other assets (net) in the consolidated income statement. For the year ended December 31, 2015 there were no impairment losses recognized by the Group.

Changes

The changes in foreclosed assets in the consolidated balance sheet were as follows:

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	Foreclosed Assets

Cost:
Balances at January 1, 2014		1,100
Additions		524
Disposals		(732	)
Impairment losses		(48	)
Balances at December 31, 2014		844
Additions		516
Disposals		(259	)
Impairment losses		-
Balances at December 31, 2015		1,101

15.

Tangible assets

Changes

The changes in Tangible assets in the consolidated balance sheet were as follows:

Property, Plant and Equipment

Cost:
Balances at January 1, 2014	8,489
Additions	1,283
Disposals	(243	)
Balances at December 31, 2014	9,529
Additions	1,190
Disposals	(82	)
Balances at December 31, 2015	10,637

Accumulated depreciation:
Balances at January 1, 2014	(3,722	)
Additions	(785	)
Disposals	240
Balances at December 31, 2014	(4,267	)
Additions	(899	)
Disposals	80
Balances at December 31, 2015	(5,086	)

Balances at December 31, 2014	5,262
Balances at December 31, 2015	5,551

As of December 31, 2015, 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.

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

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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, 2015, the future minimum lease payments required under the Group’s operating leases are as follows:

Operating Lease Due		12/31/2015
		Fibra Uno		Other Operating Leases		Total

	2016		266		162		428
	2017		276		463		739
	2018		276		620		896
	2019		276		354		630
	2020		276		403		679
	2021 and thereafter		3,125		1,909		5,034
	Total commitments for minimum payments under operating lease		4,495		3,911		8,406

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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		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

Buildings		7,172		(3,322	)		-		3,850
IT equipment and fixtures		1,568		(910	)		-		658
Furniture and vehicles		1,522		(854	)		-		668
Others		375		-			-		375
Balances at December 31, 2015		10,637		(5,086	)		-		5,551

16.

Intangible assets – Goodwill

Breakdown

The breakdown of Goodwill based on the CGUs to which Goodwill has been allocated is as follows:

	12/31/2014		12/31/2015

Santander Hipotecario		1,588		1,588
Santander Vivienda (Note 4)		146		146
		1,734		1,734

Changes

The changes in Goodwill were as follows:

	12/31/2014		12/31/2015

Beginning balance		1,734		1,734
Additions (Note 4)		-		-
Balance at year-end		1,734		1,734

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.

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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:

	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)	7.58%	8.42%
Of which:
Cost of Equity(3)	12.91%	12.91%
Cost of Debt(4) Equity Structure(5)	6.39% 18% Equity / 82% Debt	7.25% 21% Equity / 79% 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 (3.05%),

β = Beta (1.15), and

Pr = Equity Risk Premium (8.57%).

(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 2013, 2014 and 2015, the Group has not recognized any impairment losses on Goodwill.

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17.

Intangible assets - Other intangible assets

Changes

The changes in Other intangible assets in the consolidated balance sheet were as follows:

	Intangible Assets with Finite Useful Life

Cost:
Balances at January 1, 2014		5,452
Additions		1,225
Disposals		(2,099	)
Balances at December 31, 2014		4,578
Additions		1,761
Disposals		(91	)
Balances at December 31, 2015		6,248

Accumulated amortization and impairment:
Balances at January 1, 2014		(3,435	)
Additions		(897	)
Disposals		2,099
Balances at December 31, 2014		(2,233	)
Additions		(963	)
Disposals		91
Balances at December 31, 2015		(3,105	)
Balances at December 31, 2014		2,345
Balances at December 31, 2015		3,143

Breakdown

The breakdown of Other intangible assets in the consolidated balance sheet is as follows:

			Accumulated Amortization	Impairment Losses	Carrying Amount
	Estimated Useful Life	Cost	Accumulated Amortization	Impairment Losses	Carrying Amount

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

IT developments	3 years	6,248	(3,105)	-	3,143
Balances at December 31, 2015		6,248	(3,105)	-	3,143

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As of December 31, 2015, 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:


	12/31/2014		12/31/2015

Credit card operating balances		985		1,076
Insurance commission receivables		747		824
Prepayments		1,060		947
Net pension plan assets		13		2
Indemnification asset		582		202
Other		3,092		2,891
		6,479		5,942

19.

Deposits from the Central Bank and Deposits from credit institutions

The breakdown by classification, type and currency of the balance is as follows:


	12/31/2014		12/31/2015

Classification:
Other financial liabilities at fair value through profit or loss		33,752		145,484
Financial liabilities at amortized cost		48,326		54,349
		82,078		199,833
Type:
Reciprocal accounts		3,785		1,609
Time deposits		19,977		18,950
Overnight deposits		3,005		9,228
Repurchase agreements		33,752		145,484
Other accounts		21,533		24,537
Accrued interest		26		25
		82,078		199,833
Currency:
Peso		56,108		170,076
US Dollar		25,970		29,757
		82,078		199,833

Note 45.a. includes a breakdown of the remaining maturity periods of Deposits from the 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 the Central Bank and Deposits from credit institutions – Financial liabilities at amortized cost.

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20.

Customer deposits

The breakdown by classification, type and currency of the balance of Customer deposits is as follows:


	12/31/2014		12/31/2015

Classification:
Other financial liabilities at fair value through profit or loss		69,726		46,722
Financial liabilities at amortized cost		444,902		493,291
		514,628		540,013
Type:
Repurchase agreements		69,726		46,083
Demand deposits:
Current accounts		294,062		347,737
Savings accounts		1		1
Other deposits		17,069		24,652
Of which:
Collateral received for OTC derivatives transactions (Note 32)		6,033		14,275
Others		11,036		10,377
Time deposits:
Fixed-term deposits		133,587		121,385
Accrued interest		183		155
		514,628		540,013
Currency:
Peso		467,166		474,153
US Dollar		47,449		65,841
Other currencies		13		19
		514,628		540,013

As of December 31, 2014 and 2015, customer deposits of 55 million pesos and 29 million pesos, respectively, have been received in connection with derivatives transactions traded in organized markets (see Note 32).

As of December 31, 2014 and 2015, customer deposits of 6,033 million pesos and 14,275 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.

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21.

Marketable debt securities

Breakdown

The breakdown by classification, type and currency of issue of Marketable debt securities is as follows:

	12/31/2014		12/31/2015

Classification:
Other financial liabilities at fair value through profit or loss designated as such upon initial recognition		5,306		12,623
Financial liabilities at amortized cost		53,771		74,826
		59,077		87,449
Type:
Certificates of deposit (unsecured)		13,948		23,068
Senior unsecured notes		14,556		17,073
Structured bank bonds		5,614		13,188
Promissory notes		17,884		24,078
Unsecured bonds		6,839		9,846
Mortgage-backed bonds		236		196
		59,077		87,449
Currency:
Peso		40,180		68,759
US Dollar		18,897		18,690
		59,077		87,449

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.

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:

	2015

Beginning balance		5,306
Issues		8,866
Of which:
Structured bank bonds		8,866
Of which:
Banco Santander (México), S.A.		8,866
Redemptions		(1,144	)
Of which:
Structured bank bonds		(1,144	)
Of which:
Banco Santander (México), S.A.		(1,144	)
Changes in fair value		(405	)
Balance at year-end		12,623

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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:

	2014			2015

Beginning balance		53,118			53,771
Issues (*)		639,908			3,286,887
Of which:
Certificates of deposit (unsecured)		55,265			326,837
Senior unsecured notes		1,674			2,507
Structured bank bonds		19,584			18,499
Promissory notes		563,385			2,936,044
Unsecured bonds		-			3,000
Of which:
Banco Santander (México), S.A.		639,908			3,286,887
Redemptions (*)		(639,270	)		(3,265,860	)
Of which:
Certificates of deposit		(48,098	)		(317,735	)
Structured bank bonds		(20,061	)		(18,240	)
Promissory notes		(565,332	)		(2,929,841	)
Unsecured bonds		(5,779	)		(40	)
Senior unsecured notes		-			(4	)
Of which:
Banco Santander (México), S.A.		(639,221	)		(3,265,820	)
Santander Vivienda, S.A. de C.V.		(49	)		(40	)
Accrued interest		15			28
Balance at year-end		53,771			74,826

(*) Includes foreign exchange effect of marketable debt securities denominated in foreign currency.

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.

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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

Senior unsecured notes	14,482	11/09/2022	4.125%
Transaction costs and accrued interest	74
	14,556

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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

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

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(*) Marketable debt securities classified as financial liabilities at fair value through profit or loss.

As of December 31, 2015, the balance of the issues performed by the Group under the aforementioned program is as follows:

	Amount	Maturity Date	Rate

Certificates of deposit (unsecured)	157	01/04/2016	2.78%
Certificates of deposit (unsecured)	1,000	02/18/2016	3.53%
Certificates of deposit (unsecured)	2,300	02/18/2016	3.53%
Certificates of deposit (unsecured)	350	03/03/2016	3.36%
Certificates of deposit (unsecured)	1,150	03/03/2016	3.36%
Certificates of deposit (unsecured)	800	03/10/2016	3.38%
Certificates of deposit (unsecured)	300	03/17/2016	3.53%
Certificates of deposit (unsecured)	1,000	03/31/2016	3.36%
Certificates of deposit (unsecured)	2,000	04/28/2016	3.36%
Certificates of deposit (unsecured)	500	05/04/2016	3.36%
Certificates of deposit (unsecured)	500	05/04/2016	3.36%
Certificates of deposit (unsecured)	14	05/16/2016	3.20%
Certificates of deposit (unsecured)	450	05/26/2016	3.36%
Certificates of deposit (unsecured)	2,140	05/26/2016	3.36%
Certificates of deposit (unsecured)	750	06/02/2016	3.38%
Certificates of deposit (unsecured)	1,170	06/09/2016	3.53%
Certificates of deposit (unsecured)	1,200	06/17/2016	3.34%
Certificates of deposit (unsecured)	300	05/20/2016	3.34%
Certificates of deposit (unsecured)	1,700	06/30/2016	3.40%
Certificates of deposit (unsecured)	450	07/21/2016	3.40%
Certificates of deposit (unsecured)	550	07/21/2016	3.36%
Certificates of deposit (unsecured)	50	07/21/2016	3.30%
Certificates of deposit (unsecured)	17	02/08/2016	3.20%
Certificates of deposit (unsecured)	600	08/25/2016	3.40%
Certificates of deposit (unsecured)	1	08/29/2016	3.20%
Certificates of deposit (unsecured)	1,500	11/03/2016	1.14%
Certificates of deposit (unsecured)	1	08/29/2016	3.20%
Certificates of deposit (unsecured)	12	02/19/2016	3.20%
Certificates of deposit (unsecured)	2	01/25/2016	3.20%
Certificates of deposit (unsecured)	500	11/24/2016	3.42%
Certificates of deposit (unsecured)	19	02/12/2016	0.75%
Certificates of deposit (unsecured)	19	02/25/2016	0.75%
Certificates of deposit (unsecured)	6	10/17/2016	0.75%
Certificates of deposit (unsecured)	86	05/17/2016	0.50%
Certificates of deposit (unsecured)	82	01/05/2016	0.15%
Certificates of deposit (unsecured)	124	01/05/2016	0.10%
Certificates of deposit (unsecured)	78	01/05/2016	0.15%
Certificates of deposit (unsecured)	172	01/07/2016	0.10%
Certificates of deposit (unsecured)	126	01/12/2016	0.10%
Certificates of deposit (unsecured)	84	01/14/2016	0.25%
Certificates of deposit (unsecured)	127	01/15/2016	0.25%
Certificates of deposit (unsecured)	82	01/19/2016	0.35%
Certificates of deposit (unsecured)	129	01/21/2016	0.35%
Certificates of deposit (unsecured)	69	01/20/2016	0.30%
Certificates of deposit (unsecured)	140	01/26/2016	0.35%
Certificates of deposit (unsecured)	61	01/06/2016	0.20%
Certificates of deposit (unsecured)	168	01/28/2016	0.35%
Certificates of deposit (unsecured)	1	01/04/2016	0.15%
Certificates of deposit (unsecured)	1	02/02/2016	0.18%
	23,038
Accrued interest	30
	23,068

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Senior unsecured notes	16,984	11/09/2022	4.125%
Accrued interest	89
	17,073

Structured bank bonds	34	01/04/2016	5.00%
Structured bank bonds	30	07/01/2016	TIIE
Structured bank bonds	150	07/01/2016	Guaranteed rate subject to exchange rate
Structured bank bonds	150	07/14/2016	TIIE
Structured bank bonds	10	07/25/2016	TIIE
Structured bank bonds	185	08/11/2016	TIIE
Structured bank bonds^(*)	53	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^(*)	52	04/07/2016	Guaranteed rate subject to Euro SX7E
Structured bank bonds^(*)	368	09/08/2017	Guaranteed rate subject to Euro SX7E
Structured bank bonds^(*)	270	11/17/2016	Guaranteed rate subject to IBEX35
Structured bank bonds^(*)	587	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
Structured bank bonds^(*)	22	10/14/2016	Guaranteed rate subject to Hang Seng
Structured bank bonds^(*)	42	03/13/2017	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds^(*)	9	06/29/2016	Guaranteed rate subject to NIKKEI 225
Structured bank bonds^(*)	147	09/14/2017	Guaranteed rate subject to IPC
Structured bank bonds^(*)	49	09/14/2017	Guaranteed rate subject to IPC
Structured bank bonds^(*)	17	12/14/2017	Guaranteed rate subject to IBEX35
Structured bank bonds^(*)	12	04/06/2017	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds^(*)	110	11/06/2017	Guaranteed rate subject to S&P 500
Structured bank bonds^(*)	228	08/24/2016	Guaranteed rate subject to HSCEI and S&P 500
Structured bank bonds^(*)	321	02/19/2018	Guaranteed rate subject to IXE
Structured bank bonds^(*)	1,083	03/02/2018	Guaranteed rate subject to FSTE 100
Structured bank bonds^(*)	518	03/06/2017	Guaranteed rate subject to HSCEI, S&P 500, SX5E and NIKKEI 225
Structured bank bonds^(*)	935	04/03/2018	Guaranteed rate subject to Euro Stoxx Oil & Gas
Structured bank bonds^(*)	16	04/19/2016	Guaranteed rate subject to S&P500
Structured bank bonds^(*)	24	05/09/2017	Guaranteed rate subject to Euro SX5E
Structured bank bonds^(*)	142	05/16/2018	Guaranteed rate subject to Euro SX5E
Structured bank bonds^(*)	22	05/25/2017	Guaranteed rate subject to IBEX35
Structured bank bonds^(*)	123	05/31/2018	Guaranteed rate subject to Euro SX5E
Structured bank bonds^(*)	798	06/29/2017	Guaranteed rate subject to IBEX35
Structured bank bonds^(*)	705	03/02/2017	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds^(*)	150	06/29/2018	Guaranteed rate subject to Euro SX6E
Structured bank bonds^(*)	137	06/29/2018	Guaranteed rate subject to Euro SX6E
Structured bank bonds^(*)	469	06/27/2018	2.00%
Structured bank bonds^(*)	9	06/29/2018	Guaranteed rate subject to Euro SX6E
Structured bank bonds^(*)	567	08/03/2017	Guaranteed rate subject to Euro SX5E
Structured bank bonds^(*)	491	09/06/2017	Guaranteed rate subject to Euro SX5E
Structured bank bonds^(*)	115	07/12/2018	Guaranteed rate subject to Euro SX6E
Structured bank bonds^(*)	10	08/02/2018	Guaranteed rate subject to DAX
Structured bank bonds^(*)	118	08/10/2017	Guaranteed rate subject to IPC
Structured bank bonds^(*)	149	08/30/2017	Guaranteed rate subject to IPC
Structured bank bonds^(*)	123	08/30/2018	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds^(*)	98	09/20/2018	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds^(*)	124	09/27/2018	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds^(*)	142	10/19/2018	Guaranteed rate subject to INDU
Structured bank bonds^(*)	543	10/26/2020	Guaranteed rate subject to SXDP
Structured bank bonds^(*)	223	11/09/2020	Guaranteed rate subject to SXDP
Structured bank bonds^(*)	47	11/09/2020	Guaranteed rate subject to SXDP
Structured bank bonds^(*)	70	11/09/2020	Guaranteed rate subject to SXDP
Structured bank bonds^(*)	941	10/23/2020	TIIE
Structured bank bonds^(*)	18	11/07/2019	Guaranteed rate subject to SXDP
Structured bank bonds^(*)	928	06/29/2018	Guaranteed rate subject to Euro SX6E
Structured bank bonds^(*)	159	11/14/2019	Guaranteed rate subject to SXDP
Structured bank bonds^(*)	9	11/05/2020	TIIE
Structured bank bonds^(*)	135	11/23/2020	Guaranteed rate subject to SXDP
Structured bank bonds^(*)	174	12/14/2020	Guaranteed rate subject to SXDP
	13,186

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Transaction costs and accrued interest (net)	2
	13,188

Promissory notes	10,000	01/25/2016	3.47%
Promissory notes	53	01/19/2016	3.25%
Promissory notes	66	01/04/2016	3.20%
Promissory notes	13,950	01/04/2016	3.25%
	24,069
Accrued interest	9
	24,078

Unsecured bonds	1,700	03/09/2021	8.91%
Unsecured bonds	2,800	09/21/2016	TIIE + 50 bps
Unsecured bonds	1,300	09/21/2016	TIIE + 50 bps
Unsecured bonds	980	11/23/2017	9.05%
Unsecured bonds	3,000	12/06/2018	TIIE + 18 bps
	9,780
Accrued interest	66
	9,846

Mortgage-backed bonds	183	05/25/2032	5.00%
Mortgage-backed bonds	13	05/25/2032	6.40%
	196
Accrued interest	-
	196

(*) Marketable debt securities classified as financial liabilities at fair value through profit or loss.

22.

Subordinated liabilities

Breakdown

The breakdown of the balance of Subordinated liabilities is as follows:

					12/31/2015
Currency of Issue	12/31/2014		12/31/2015		Outstanding Issue Amount in Foreign Currency		Annual Interest Rate (%)

US Dollar		19,446		22,788		1,300,000,000		5.95	%
Balance at year-end		19,446		22,788

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.

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Changes

The changes in Subordinated liabilities were as follows:


	2014		2015
Beginning balance (million USD)		1,286		1,319
Issues
Of which:
Banco Santander (México) S.A.		-		-
Transaction costs and accrued interest		33		2
Balance at year-end (million USD)		1,319		1,321
Exchange rate per one USD as of December 31,		14.7414		17.2487
Balance at year-end (million pesos)		19,446		22,788

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 ten-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 US 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:

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.

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%.

Partial write-down until the Bank achieves a Basic Capital index of 7.0%.

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.

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23.

Other financial liabilities

The breakdown of Other financial liabilities is as follows:

	12/31/2014		12/31/2015

Trade payables		1,081		1,183
Collection accounts:
Tax payables		1,190		969
Financial transactions pending settlement		8,872		10,092
Other financial liabilities		1,537		1,688
		12,680		13,932

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:

	12/31/2014		12/31/2015

Financial transactions pending settlement Of which:
M and M0 Mexican Government Bonds		1,890		9,310
CETES		4,705		-
UDIBONDS		1,977		720
Equity instruments		268		18
Other financial instruments		32		44
		8,872		10,092

The breakdown of Other financial liabilities is as follows:

	12/31/2014		12/31/2015

Retentions related to loans (*)		630		674
Mexican Bank Savings Protection Institute (IPAB) contingency		189		187
Other payable account		718		827
		1,537		1,688

(*)

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.

Mexican Bank Savings Protection Institute Contingency

As of December 31, 2014 and 2015, the Group was the defendant in various legal proceedings and claims brought against it by clients as a result of the Groupʼs 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, related to 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-day rate.

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As of December 31, 2014 and 2015, the remaining balance of the IPAB liability and related accrued interest is 189 million pesos and 187 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

Breakdown

The breakdown of Provisions is as follows:

	12/31/2014		12/31/2015

Provisions for pensions and similar obligations		2,873		4,031
Provisions for tax and legal matters		1,308		1,092
Provisions for off-balance-sheet risk		1,359		952
Other provisions		546		619
Provisions		6,086		6,694

Changes

The changes in Provisions were as follows:

	2013														2014															2015
	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 the beginning 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
Additions charged (credited) to net income:
Interest expense and similar charges		212			-			-		-			212			195			-			-			-			195			214			-			-			-			214
Personnel expenses – Defined Benefit Plan		191			-			-		-			191			170			-			-			-			170			189			-			-			-			189
Personnel expenses – Defined Contribution Plan (Note 42)		239			-			-		-			239			259			-			-			-			259			284			-			-			-			284
Other		5			-			-		-			5			(50	)		-			-			-			(50	)		(21	)		-			-			-			(21	)
Actuarial (gains)/losses recognized in the year in Other comprehensive income		(469	)		-			-		-			(469	)		382			-			-						382			964			-			-			-			964
Period provisions		-			153			360		233			746			-			230			(165	)		142			207			-			(32	)		(407	)		205			(234	)
Contributions from the employer		(623	)										(623	)		(6	)		-									(6	)		15			-			-			-			15
Payments to pensioners and pre-retirees with a charge to internal provisions
(130)					-			-		-			(130	)		(174	)		-									(174	)		(190	)		-			-			-			(190	)
Other payments (*)					(256	)				(256	)		(512	)					(254	)		-			(79	)		(333	)		-			(184	)		-			(132	)		(316	)
Payments to Defined Contribution Plan		(243	)		-			-		-			(243	)		(259	)		-			-			-			(259	)		(284	)		-			-			-			(284	)
Transfers and other changes		-			-			-		-			-			(15	)		-			-			-			(15	)		(13	)		-			-			-			(13	)
Balances at the end of year		2,371			1,332			1,524		483			5,710			2,873			1,308			1,359			546			6,086			4,031			1,092			952			619			6,694

(*)

Included in these amounts are payments made by the Group to the Tax Administration Service of 33 million pesos in 2014 and 22 million pesos in 2015 due to the fact that the Group was not withholding income tax in their derivative transactions with certain counterparties.

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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 consist 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 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 239 million pesos, 259 million pesos and 284 million pesos in 2013, 2014 and 2015, 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 a 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.

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Provisions for defined benefit post-employment plan, which benefits include a pension and medical expenses plan, severance payments and seniority premiums, amounted to 2,852 million pesos and 4,010 million pesos as of December 31, 2014 and 2015, respectively.

The investment fund of the defined benefit post-employment plan was 4,336 million pesos and 3,887 million pesos as of December 31, 2014 and 2015, 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 2014 and 2015 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, 2014 and 2015, approximately 1.08% and 1.48% 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, 2014 and 2015, approximately 83.30% and 78.61% 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:


	12/31/2014		12/31/2015

Provisions for post-employment plans
Of which: Defined benefit pension plan		2,852		4,010
Provisions for defined contribution pension plan		21		21
Provisions for pensions and similar obligations		2,873		4,031

The amount of the defined benefit obligations was determined using the following actuarial techniques:

Valuation method: projected unit credit method which sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately.

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Actuarial assumptions used: The most significant actuarial assumptions used in the calculations were as follows:

	Defined Benefit Pension Plan
	12/31/2014	12/31/2015

Annual discount rate	8.25%	8.5%
Mortality tables	EMSSA 1997	EMSSA 1997
Expected return on plan assets	8.5%	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.

The estimated retirement age of each employee is the first year in 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
	12/31/2014			12/31/2015

Present value of the obligations:
Pension plan		2,272			2,392
Post-employment benefits		4,203			4,620
Other		713			885
		7,188			7,897
Less:
Fair value of plan assets		(4,336	)		(3,887	)

Provisions – Provisions for pensions		2,852			4,010
Of which:
Internal provisions for pensions		2,852			4,010

The amounts recognized in the consolidated income statement in relation to the aforementioned defined benefit obligations are as follows:

	Defined Benefit Pension Plan
	2013		2014			2015

Current service cost (Note 42)		191		170			189
Interest cost		212		195			214
Other		5		(50	)		(21	)
		408		315			382

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The changes in the present value of the accrued defined benefit obligations were as follows:

	Defined Benefit Pension Plans
	2014			2015

Present value of the obligations at the beginning of year		6,762			7,188
Current service cost (Note 42)		170			189
Interest cost		581			581
Benefits paid		(595	)		(611	)
Actuarial (gains)/losses		275			416
Other		(5	)		134
Present value of the obligations at the end of year		7,188			7,897

The duration of the defined benefit obligation is 11.49 years.

The changes in the fair value of plan assets were as follows:

	Defined Benefit Pension Plan
	2014			2015

Fair value of plan assets at the beginning of year		4,412			4,336
Actual return on plan assets		326			(166	)
Contributions from the employer		6			(15	)
Benefits paid		(421	)		(421	)
Other		13			153
Fair value of plan assets at the end of year		4,336			3,887

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
	12/31/2014			12/31/2015

Equity instruments		26	%		26	%
Debt instruments		74	%		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.

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.

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•

If the discount rate is 50 basis points higher (lower), the defined benefit obligation would decrease by 369 million pesos (increase by 405 million pesos).

•

If the medical cost trend rate is 50 basis points higher (lower), the defined benefit obligation would increase by 406 million pesos (decrease by 366 million pesos).

•

If the annual salary growth increases (decreases) by 0.50%, the defined benefit obligation would increase by 18 million pesos (decrease by 18 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 4 million pesos).

•

If the mortality increases (decreases) by two years for men and women, the defined benefit obligation would decrease by 410 million pesos (increase by 415 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.

Other disclosures

In July 2001, the Group entered into a collective lifetime payment insurance operation agreement for certain retirees with Principal México 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, 2014 and 2015, such liability was 905 and 906 million pesos, respectively. For presentation purposes, the arrangement has not impact on net assets as the asset and liability are offset.

Provisions for tax and legal matters

Tax-related proceedings

The Group is a party to various tax claims for which it has recorded total provisions of 67 million pesos and 29 million pesos as of December 31, 2014 and 2015, 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 denied the Group’s amparo suit and the protection of the Federal Justice requested. In 2014 the Group recognized a provision for an amount of 15 million pesos. This provision was canceled because it prescribed legally in 2015.

The total amount of payments made by the Group arising from this tax proceeding in 2013, 2014 and 2015 is not material with respect to these consolidated financial statements.

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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 has 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 38 million pesos in 2014 and 19 million pesos in 2015.

iii.

Non-tax-related proceedings

As of December 31, 2014 and 2015, 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, 2014 and 2015, the Group has recognized provisions for the amounts of 1,181 million pesos and 991 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 2013, 2014 and 2015 is not material with respect to these consolidated financial statements.

During 2014 and 2015, the amount paid by the Group to external lawyers was 176 million pesos and 181 million pesos, respectively, for the management of all the outstanding claims.

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.

The breakdown of the off-balance-sheet risks is as follows:

	12/31/2014		12/31/2015

Available lines of credit cards and non-revolving consumer loans		1,311		857
Guarantees and loan commitments of commercial and public sector loans		48		95
		1,359		952

25.

Other liabilities

The breakdown of the balance of Other liabilities is as follows:

	12/31/2014		12/31/2015

Sundry creditors		1,923		2,691
Cash balances undrawn		5,697		3,642
Accrued personnel obligations		1,581		1,353
Other obligations		2,305		2,085
Credit card operation balances		907		1,078
		12,413		10,849

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26.

Tax matters

Income Tax expense

The components of income tax expense for 2013, 2014 and 2015 are as follows:

	2013			2014		2015

Current tax expense:
Tax expense for current year		4,897			2,133		4,993
Deferred tax expense (benefit):
Origination and reversal of temporary difference and usage (accrual) of tax carryforward benefits		(2,227	)		1,408		(699	)
Total Income Tax expense		2,670			3,541		4,294

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:

	2013			2014			2015

Profit before tax
Of which:
Continuing operations		15,013			16,830			18,298
Discontinued operations		2,782			-			-
Income tax at 30%
Of which:
Continuing operations		4,504			5,049			5,490
Discontinued operations - amount transferred to discontinued operations		835			-			-
Increase/(Decrease) due to permanent differences
Of which:
Due to effect of inflation		(1,116	)		(1,128	)		(992	)
Due to effect of tangible assets		35			(133	)		(87	)
Due to effect of tax audit settlements (*)		(322	)		-			(31	)
Due to realization of previously unrecognized tax benefits		(252	)		(117	)		-
Due to effect of non-deductible expenses, non-taxable income and others		(179	)		(130	)		(86	)
Income Tax		2,670			3,541			4,294

Effective tax rate		17.78	%		21.04	%		23.47	%
Current tax liability		790			244			-

Income tax		2,670			3,541			4,294
Of which:
Current tax		4,897			2,133			4,993
Deferred taxes		(2,227	)		1,408			(699	)

(*)

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. In 2015, the Group recognized a net tax benefit effect as a result of a self-correction from 2011 tax year.

The Group is subject to regular reviews by the Mexican tax authorities. As of December 31, 2015, there are no tax contingencies arising as a result of such tax reviews requiring disclosure.

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Tax recognized in equity

In addition to the income tax recognized in the consolidated income statement, the Group recognized the following amounts in equity:

	2013			2014			2015

Net tax credited/(charged) to equity:
Remeasurement of defined benefit obligation		(141	)		118			289
Measurement of Available-for-sale – Debt instruments		482			(150	)		51
Measurement of Available-for-sale – Equity instruments		3			1			1
Measurement of Financial derivatives (Cash flow hedges)		30			(116	)		(260	)
		374			(147	)		81

Deferred taxes

Main components of the Group’s gross deferred income tax assets and liabilities are as follows:

	12/31/2014			12/31/2015

Total deferred tax assets prior to offsetting		18,064			18,611
Of which:
Tangible assets and deferred charges		1,914			2,236
Provisions		1,529			1,406
Impairment losses on loans and receivables		10,671			10,411
Unrealized losses on financial instruments		14			(86	)
Net operating losses carryforward (*)		176			162
Capital losses carryforward(*)		2,299			2,394
Labor provisions		702			1,203
Fees and interest collected in advance		759			885
Total deferred tax liabilities prior to offsetting		(2,165	)		(1,470	)
Of which:
Unrealized gains on financial instruments		414			(1,405	)
Exchange rate derivatives		(1,937	)		641
Prepayments		(205	)		(281	)
Labor provisions		11			(33	)
Other		(448	)		(392	)

(*) 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, 2015 the detail of Net operating losses carryforward is as follows:

Year of origination		Year of expiration		Amount		Deferred tax asset

	2010		2020		260		78
	2011		2021		174		52
	2012		2022		3		1
	2013		2023		23		7
	2014		2024		80		24
					540		162

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As of December 31, 2015 the detail of Capital losses carryforward is as follows:

Year of origination		Year of expiration		Amount		Deferred tax asset

	2014		2024		7,719		2,316
	2015		2025		259		78
					7,978		2,394

The Group only recognizes deferred tax assets for temporary differences and tax credit carryforwards where it is considered probable that the consolidated entities that generated them will have sufficient future taxable profits against which they can be utilized.

After offsetting, deferred tax assets and liabilities are presented on the consolidated balance sheets as follows:

	12/31/2014			12/31/2015

Presented as deferred tax assets (*)		15,955			17,172
Presented as deferred tax liabilities		(56	)		(31	)
Net		15,899			17,141

(*) 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 deferred taxes that are recognized directly in equity and 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
	01/01/2014			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

						(Charge)/
						Credit to
				(Charge)/		Other
				Credit to		Comprehensive		Other
	01/01/2015			Income		Income		Movements		12/31/2015

Deferred tax assets		18,064			547		-		-		18,611
Deferred tax liabilities		(2,165	)		152		81		462		(1,470	)
		15,899			699		81		462		17,141

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Tax reforms 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.

Replaces 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 2015, 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.

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Breakdown

The breakdown by subsidiary of Equity - Non-controlling interests is as follows:

	12/31/2014		12/31/2015

Equity as of balance-sheet date attributable to non-controlling interests:
Of which:
Banco Santander (México), S.A.		10		11
		10		11
Profit for the year attributable to non-controlling interests:
Of which:
Banco Santander (México), S.A.		1		1

Changes

The changes in Non-controlling interests are summarized as follows:

	2014		2015

Beginning balance		9		10
Profit for the year attributable to non-controlling interests		1		1
Other movements		-		-
Balance at year-end		10		11

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 statement of comprehensive income. The amounts arising from subsidiaries are presented, on a line by line basis, in the appropriate items according to their nature.

It should be noted that the consolidated statement of comprehensive income presents items separately according to their nature, grouping together those which, pursuant to the applicable accounting standards, will not be subsequently reclassified to the consolidated income statement when the requirements established by the related accounting standards are met. Also, with respect to items that may be reclassified to the consolidated income statement, the consolidated statement of comprehensive income includes changes in Valuation adjustments as follows:

Available-for-sale financial assets

Valuation adjustments - Available-for-sale financial assets includes the net amount of unrealized changes in the fair value of assets classified as available-for-sale financial assets (see Notes 9 and 10).

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The breakdown by type of instrument of Valuation adjustments - Available-for-sale financial assets at December 31, 2014 and 2015 is as follows:

	12/31/2014										12/31/2015
	Revaluation Gains		Revaluation Losses			Net Revaluation Gains/ (Losses)			Fair Value		Revaluation Gains		Revaluation Losses			Net Revaluation Gains/ (Losses)			Fair Value

Debt instruments		923		(589	)		334			83,029		769		(961	)		(192	)		113,525
Equity instruments		1		(3	)		(2	)		99		-		(4	)		(4	)		95

At the end of each year, the Group assesses whether there is any objective evidence that the instruments classified as available-for-sale (debt securities and equity instruments) are impaired.

This assessment includes but is not limited to an analysis of the following information: i) the issuer's economic and financial position, the existence of default or late payment, analysis of the issuer's solvency, the evolution of its business, short-term projections, trends observed with respect to its earnings and, if applicable, its dividend distribution policy; ii) market-related information such as changes in the general economic situation, changes in the issuer's sector which might affect its ability to pay; iii) changes in the fair value of the security analyzed, analysis of the origins of such changes - whether they are intrinsic or the result of the general uncertainty concerning the economy or the country - and iv) independent analysts' reports and forecasts and other independent market information.

If, after the above assessment has been carried out, the Group considers that the presence of one or more of these factors could affect recovery of the cost of the asset, an impairment loss is recognized in the consolidated income statement for the amount of the loss in equity under Valuation adjustments. Also, where the Group does not intend and/or is not able to hold the investment for a sufficient amount of time to recover the cost, the instrument is written down and its valuation recognized temporarily under Valuation adjustments is reclassified to the consolidated income statement.

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, 2013		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	)
Valuation adjustments		(192	)		(4	)		(196	)
Amounts reclassified to consolidated income statement		161			-			161
Income taxes		51			1			52
Balance at December 31, 2015		(538	)		18			(520	)

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Cash flow hedges

Valuation adjustments - Cash flow hedges includes the gains or losses attributable to hedging instruments that qualify as effective hedges. These amounts will remain under this heading until they are reclassified in the consolidated income statement in the periods in which the hedged items affect profit or 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:


	2014		2015

Accumulated (loss)/gain on cash flow hedges		232		829
Accumulated gain related to discontinued cash flow hedges (Note 13)		61		71
Balance at December 31		293		900

29.

Shareholders’ equity

Share capital

As of December 31, 2014 and 2015, share capital, at par value, was as follows:

	Number of Shares				Total Par Value (Millions of Pesos)
	12/31/2014		12/31/2015		12/31/2014		12/31/2015

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 the ownership limitations established in Article 28 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 27 of the LRAF.

Capital reductions will incur taxation on the excess of the amount distributed against the corresponding tax basis.

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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.

Accumulated reserves

Accumulated reserves includes the net amount of the accumulated profit recognized in previous years through the consolidated income statement that was appropriated to equity, the legal reserve, the differences between the selling price of treasury shares and the cost of acquisition thereof, the remeasurement of defined benefit obligation and the recognition effects of share-based payments.

Accumulated profit

This includes the accumulated profit not distributed to shareholders.

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 2015 and 2014 are not subject to the 10% additional withholding tax as such dividends were paid from profits obtained prior to 2014.

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, 2014 and 2015, the Group and its subsidiaries are in compliance with the maximum percentage of legal reserve required.

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.

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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 0.14% of issued share capital at December 31, 2015 (December 31, 2014: 0.11%). As of December 31, 2014 and 2015, the Group holds 7,794,635 treasury shares for an amount of 247 million pesos and 9,201,706 treasury shares for an amount of 35 million pesos, respectively.

Other disclosures

During the Ordinary General Meeting of August 20, 2013, the following resolution was adopted:

The amount of 3,950 million pesos was allocated from Accumulated reserves 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 were adopted:

The amount of 4,900 million pesos was allocated from Accumulated reserves 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 Accumulated reserves 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 Accumulated reserves 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.

During the Ordinary General Annual Meeting of April 28, 2015, the following resolution was adopted:

The amount of 3,534 million pesos was allocated from Accumulated reserves for the payment of dividends. The amount of 3,534 million pesos was paid to shareholders on May 29, 2015.

The aforementioned dividend paid to shareholders was taken from the Net tax profit account.

During the Ordinary and Extraordinary General Meeting of November 25, 2015, the following resolution was adopted:

The amount of 3,226 million pesos was allocated from Accumulated reserves for the payment of dividends. The amount of 3,226 million pesos was paid to shareholders on December 22, 2015.

The aforementioned dividend paid to shareholders was taken from the Net tax profit account.

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30.

Minimum capital requirements

The Bank’s risk-weighted assets and capitalization ratios are calculated in accordance with Mexican Banking GAAP. The management of capital is performed 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: Fundamental Capital and Non Fundamental Basic Capital. Basic Capital (Tier I) is the sum of Fundamental Basic Capital and Non Fundamental Basic Capital.

Fundamental Basic Capital 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 6% of Tier I Capital and excess of deferred taxes from temporary differences that exceed the 10% of Tier I Capital.

Non Fundamental Basic Capital is composed mainly of a bank’s equity instruments which are not included as Basic Capital according to the current legislation.

Complementary Capital (Tier II) is composed mainly of a 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, reverse 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. Counterparty risk is calculated by incorporating an add-on and additionally calculating a Credit Valuation Adjustment for OTC derivatives transactions.

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 22.23% of General Market Risk is applied to the net position, to which additional specific market risk requirements are added for long net positions and short net positions by 8%.

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.

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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. 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 in accordance with the Mexican Banking GAAP for the Bank is as follows:

	12/31/2014			12/31/2015

Computable capital:		96,517			103,639
Core capital		103,523			111,550
Supplementary capital		19,820			23,311
Deductible items		(26,826	)		(31,222	)

Capital requirements:		47,756			53,130
Market risk		10,266			8,994
Credit risk		32,547			38,995
Operational risk		4,943			5,141

Excess of capital requirements		48,761			50,509
Risk-weighted assets		596,952			664,122

As of December 31, 2014 and 2015, 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:

	12/31/2014	12/31/2015

Net Capital / Required Capital	2.02	1.95
Minimum capital requirements	Not applicable	Not applicable

Basic Capital / Assets subject to Credit, Market and Operating Risk	12.85%	12.10%
Minimum capital requirements	8.50%	8.50%

Net Capital / Assets subject to Credit Risk	23.72%	21.26%
Minimum capital requirements	Not applicable	Not applicable

Net Capital / Assets subject to Credit, Market and Operating Risk	16.17%	15.61%

Minimum capital requirements	10.50%	10.50%

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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, reverse repurchase agreements and securities loans transactions in which the lender is the Group.

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	12/31/2014		12/31/2015

Available lines of credit cards and non-revolving consumer loans		79,631		72,841
Guarantees, documentary credits and loan commitments of commercial and public sector loans		49,031		40,609
Guarantees, documentary credits and loan commitments of commercial loans (SMEs)		123		265
Total		128,785		113,715

At December 31, 2014 and 2015, the Group had recognized provisions for off-balance sheet risk of 1,359 million pesos and 952 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.

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, reverse repurchase agreements and securities loan transactions in which the lender is the Group.

The breakdown is as follows:

Financial instruments received as collateral	12/31/2014		12/31/2015

Debt instruments received in OTC derivatives transactions		4,883		7,276
Debt instruments received in reverse repurchase agreement transactions		31,951		27,364
Equity instruments received in securities loans transactions		605		551
Total		37,439		35,191

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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, 2014 and 2015 is as follows:

	12/31/2014				12/31/2015
Trading	Nominal		Fair Value		Nominal		Fair Value

Futures:
Interest Rate Futures		20		20		724		54
Market Index Futures		9,997		363		1,115		13

Forwards:
Foreign Currency Forwards		120,155		7,274		111,044		6,730
Foreign Exchange Spot		-		39		41,655		293
Interest Rate Forwards		-		-		2,000		5
Equity Forwards		5,082		162		2,221		115

Options:
Foreign Currency Options		57,909		1,673		14,799		521
Interest Rate Options		167,057		2,414		128,301		1,141
Market Index Options		13,772		1,005		16,307		1,239
Equity Options		276		255		-		-

Swaps:
Interest Rate Swaps		1,425,837		35,150		1,933,917		33,956
Cross-Currency Swaps		380,855		44,069		452,868		72,714
		2,180,960		92,424		2,704,951		116,781

As of December 31, 2014 and 2015, 91,864 million pesos and 116,695 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, 2014 and 2015 is as follows:

	12/31/2014				12/31/2015
Hedging	Nominal		Fair Value		Nominal		Fair Value

Cash flow:
Interest Rate Swaps		2,050		13		2,050		21
Cross-Currency Swaps		32,917		3,748		28,331		7,961
Foreign Currency Forwards		24,919		947		13,376		4,138

Fair value:
Interest Rate Swaps		4,998		32		734		1
Cross-Currency Swaps		-		-
		64,884		4,740		44,491		12,121
Total Assets		2,245,844		97,164		2,749,442		128,902

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The breakdown of the fair value and nominal amount of trading derivative liabilities as of December 31, 2014 and 2015 is as follows:

	12/31/2014				12/31/2015
Trading	Nominal		Fair Value		Nominal		Fair Value

Futures:
Foreign Currency Futures		718		11		86		-
Interest Rate Futures		177,784		550		101,915		343
Market Index Futures		1,595		30		6,334		81
Equity Futures		2		-		-		-

Forwards:
Foreign Currency Forwards		149,949		9,881		129,408		6,158
Foreign Exchange Spot		-		50		55,462		271
Interest Rate Forwards						20		-
Market Index Forwards		12,195		395		8,347		163

Options:
Foreign Currency Options		53,611		1,391		15,361		452
Interest Rate Options		187,366		3,333		128,454		1,461
Market Index Options		317,886		1,010		111,180		1,163
Equity Options		2,682		128		500		30

Swaps:
Interest Rate Swaps		1,574,784		33,687		2,064,378		34,165
Cross-Currency Swaps		336,462		44,376		364,774		80,278
		2,815,034		94,842		2,986,219		124,565

As of December 31, 2014 and 2015, 93,631 million pesos and 123,780 million pesos (liabilities), respectively are OTC derivatives of the total amount of the trading portfolio.

The breakdown of the fair value and nominal amount of hedging derivative liabilities as of December 31, 2014 and 2015 is as follows:

	12/31/2014				12/31/2015
Hedging	Nominal		Fair Value		Nominal		Fair Value

Cash flow:
Cross-Currency Swaps		7,517		720		13,806		2,188
Foreign Currency Forwards		26,754		1,954		24,546		5,660

Fair value:
Interest Rate Swaps		2,565		52		5,545		79
Cross-Currency Swaps		7,320		1,677		6,291		1,641
		44,156		4,403		50,188		9,568
Total Liabilities		2,859,190		99,245		3,036,407		134,133

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As of December 31, 2014 and 2015, the collateral provided to engage in derivative transactions in organized markets is as follows:

		12/31/2014		12/31/2015

Collateral provided:
Of which:
Mercado Mexicano de Derivados, S.A. de C.V. (MexDer)	Cash		1,468		1,465
Chicago Mercantile Exchange	Cash		893		115
Foreign Financial Institutions	Cash		-		311
Mercado Mexicano de Derivados, S.A. de C.V. (MexDer)	Shares		439		52
			2,800		1,943

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, 2014 and 2015 are as follows:

		12/31/2014		12/31/2015

Loans and receivables – Loans and advances to credit institutions:
Of which (Note 8):
Mexican financial institutions	Cash		4,901		7,645
Foreign financial institutions	Cash		15,857		22,578
			20,758		30,223
Financial assets held for trading – Debt instruments:
Of which (Note 9):
Mexican financial institutions	Bonds		453		770
			453		770

The guarantees and/or collateral received for the OTC derivative transactions as of December 31, 2014 and 2015 are as follows:

		12/31/2014		12/31/2015

Customer deposits:
Of which (Note 20):
Mexican financial institutions	Cash		2,076		4,571
Foreign financial institutions	Cash		3,957		9,704
			6,033		14,275

		12/31/2014		12/31/2015

Memorandum accounts:
Of which (Note 31):
Mexican financial institutions	Bonds		4,215		7,276
Foreign financial institutions	Bonds		668		-
			4,883		7,276

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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 (net) in the consolidated statements of income and increase or offset, as appropriate, of the gains or losses on the investments hedged (see Note 13).

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 (see Note 2.f).

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, 2014 and 2015, the cumulative net credit risk exposure of the Group was 330,543 million pesos and 411,215 million pesos, respectively.

33.

Discontinued operations

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).

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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).

SAM Asset Management

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 SAM Asset Management 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 SAM Asset Management following the divestiture. Under this contract, the Group will receive an income from commission for distribution of funds.

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).

Profit or loss and net cash flows from discontinued operations of SAM Asset Management

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.

	2013

Fee and commission income		1,706
Fee and commission expenses		(1,293	)
Gains/(losses) on financial assets and liabilities		19
Other operating income (net)		(42	)
Total income		390
Administrative expenses:		(121	)
Personnel expenses		(83	)
Other general administrative expenses		(38	)
Depreciation and amortization		(23	)
Operating profit before tax (Note 26)		246
Income tax (Note 26)		(74	)
		172
Gain on disposal of operation		2,790
Income tax		(846	)
*Profit from discontinued operations (net) ()**		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.

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The following is a breakdown of the net cash flows attributable to the operating, investing and financing activities of discontinued operations.

	12/31/2013

Cash flows from operating activities		126
Cash flows from investing activities		(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 rectifications of interest income as a result of hedge accounting.

The breakdown of the main interest income and similar income items earned in 2013, 2014 and 2015 is as follows:

	2013		2014		2015

Cash and balances with the Central Bank		1,264		1,061		1,102
Loans and advances to credit institutions		3,019		2,913		2,065
Loans and advances to customers		41,455		44,501		50,227
Debt instruments		8,821		9,095		10,524
Hedging derivatives		735		277		237
Other interest income		92		69		49
		55,386		57,916		64,204

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 measurement at fair value, the rectifications of cost as a result of hedge accounting; and the net interest cost attributable to pension funds.

The breakdown of the main items of interest expenses and similar charges accrued in 2013, 2014 and 2015 is as follows:

	2013		2014		2015

Deposits from credit institutions		2,649		4,183		6,001
Customer deposits		11,265		9,168		8,954
Marketable debt securities		1,994		1,837		1,893
Subordinated liabilities		11		1,051		1,259
Hedging derivatives		320		735		466
Other interest expenses		3,300		3,331		2,605
		19,539		20,305		21,178

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.

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The breakdown of Income from equity instruments is as follows:

	2013		2014		2015

Equity instruments classified as:
Financial assets held for trading		176		67		51
Of which:
NAFTRAC (ETF)		29		15		14
América Móvil, S.A.B, de C.V.		4		5		2
Grupo México, S.A.B. de C.V.		7		4		2
Industrias Peñoles, S.A.B. de C.V.		3		-		-
Wal-Mart de México, S.A.B. de C.V.		26		13		6
Kimberly-Clark de México, S.A.B. de C.V.		2		1		-
Fomento Económico Mexicano, S.A.B. de C.V.		8		-		1
Grupo Modelo, S.A.B. de C.V.		5		-		-
Others		92		29		26

Available-for-sale financial assets		69		86		66
Of which:
Controladora Prosa, S.A. de C.V.		-		12		-
Trans Unión de México, S.A.		57		56		51
Others		12		18		15
		245		153		117

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 Fee and commission income is as follows:

	2013		2014		2015

Collection and payment services:
Service charges on deposit accounts		746		816		896
Credit and debit cards		4,061		4,378		4,687
Checks and others		323		302		257
		5,130		5,496		5,840
Marketing of nonbanking
financial products:
Investment funds management		1,299		1,369		1,363
Capital markets and securities activities		393		333		290
Collection and payment services		1,596		1,830		2,114
Insurance		3,438		3,896		4,104
Financial advisory services		1,450		1,505		1,581
		8,176		8,933		9,452
Securities services:
Administration and custody		396		436		487
		396		436		487
Other:
Foreign currency transactions		569		701		866
Other fees and commissions		795		980		1,111
		1,364		1,681		1,977
		15,066		16,546		17,756

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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 Fee and commission expenses is as follows:

	2013		2014		2015

Credit and debit cards		964		1,451		1,895
Checks and others		33		33		23
Collections and transactional services		164		178		123
Fund management		50		73		25
Capital markets and securities activities		125		110		136
Financial advisory services		98		62		46
Other fees and commissions		788		1,266		1,425
		2,222		3,173		3,673

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 Gains/(losses) on financial assets and liabilities (net) by type of instrument is as follows:

	2013			2014			2015

Financial instruments held for trading		3,269			2,467			2,390
Of which:
Debt instruments		(624	)		674			521
Equity instruments		(265	)		(96	)		45
Derivatives		4,158			2,031			1,917
Others		-			(142	)		(93	)
Recognized profit from sale of financial instruments available-for-sale		7			155			177
Hedging derivatives		5			(3	)		(78	)
Of which:
Fair value hedge – hedged items (Note 13)		(131	)		65			(105	)
Fair value hedge – hedging derivative instruments (Note 13)		119			(71	)		23
Cash flow hedge inefficiency (Note 13)		17			3			4
		3,281			2,619			2,489

40.

Exchange differences (net)

Exchange differences (net) shows the gains or losses arising on the translation of monetary items in foreign currency to the functional currency as a result of changes in foreign exchange rates.

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41. Other operating income and other operating expenses

Other operating income and other operating expenses in the consolidated income statement include:

	2013			2014			2015

Other operating income:
Other operating income		787			487			457
		787			487			457
Other operating expenses:
IPAB fund contribution		(1,544	)		(1,887	)		(2,238	)
Other operating expenses		(534	)		(592	)		(773	)
		(2,078	)		(2,479	)		(3,011	)

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

Breakdown

The breakdown of Personnel expenses is as follows:

	2013		2014		2015

Wages and salaries		4,690		5,181		5,425
Social security costs		741		845		932
Service expense related to defined
contribution pension plan (Note 24)		239		259		284
Service expense related to defined
benefit pension plan (Note 24)		201		170		189
Share-based payments		269		286		237
Other staff costs		1,023		1,158		1,596
Bonus and benefits granted to employees		2,098		2,078		2,370
		9,261		9,977		11,033

Global Program – Performance Shares Plan

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.

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The Board of Directors of Banco Santander (Spain) approved on March 26, 2008 the long-term incentive policy covering the executive officers and other 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 officers 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.

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.

Local Program

Under this plan, eligible executive officers 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 IPC. If the objectives are fulfilled, each year one-third of the total amount of the incentive would be paid to the eligible executive officers.

During 2013, 2014 and 2015, the Group recognized in the consolidated income statement an amount that of 138 million pesos, 159 million pesos and 63 million pesos, respectively, as services rendered by the eligible executive officers.

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Corporate performance shares plan

During the Shareholders’ Meeting of Banco Santander (Spain) on March 28, 2014, a new share-based payment plan was approved that is applicable only to a certain group of executives (known as the “identified staff”) in each country.

The plan is denominated “Corporate performance shares plan 2014” 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) based on 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, 2015, the Group recognized 8 million pesos in the consolidated income statement with respect to this plan.

Bonus payment policies

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 executive officers (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).

In 2013, 2014 and 2015, the Group recognized in the consolidated income statement, the fair value of the benefits that will be equity-settled for an amount of 93, 117 and 166 million pesos, respectively.

The bonus of the beneficiaries for financial year 2015 will be paid according to the following percentages, depending on the time of payment and on the group to which the beneficiary belongs (the “Immediate Payment Percentage” to identify the portion for which payment is not deferred, and the “Deferred Percentage” to identify the portion for which payment is deferred):

Beneficiaries (millions of Euros)	Immediate payment percentage	Deferred percentage	Deferred period

Executive directors and members of the identified staff whose total variable remuneration is ≥ 2.6	40%	60%	5 years
Country heads and other executives members of the identified staff whose total variable remuneration is ≥ 1.7 (< 2.6)	50%	50%	5 years
Other beneficiaries	60%	40%	3 years

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Taking the foregoing into account, the bonus for financial year 2015 will be paid as follows:

Each beneficiary will receive in 2016, depending on the group to which such beneficiary belongs, the Immediate Payment Percentage applicable in each case, in halves and net of taxes (or withholdings), in cash and in Santander shares (the “Initial Date”, meaning the specific date on which the Immediate Payment Percentage is paid).

Payment of the Deferred Percentage of the bonus applicable in each case depending on the group to which the beneficiary belongs will be deferred over a period of 3 or 5 years (the “Deferral Period”) and will be paid in thirds or fifths, as applicable, within thirty days of the anniversaries of the Initial Date in 2017, 2018 and 2019 and, if applicable, 2020 and 2021 (the “Anniversaries”), provided that the conditions described below are met.

After deduction of any taxes (or withholdings) applicable at any time, the net amount of the deferred portion will be paid in thirds or fifths, 50% in cash and the other 50% in Santander shares.

The beneficiaries receiving Santander shares may not transfer them or hedge them directly or indirectly for one year as from each delivery of shares.

The beneficiaries may likewise not hedge the shares directly or indirectly prior to delivery thereof.

In addition to continuity of the beneficiary within the Santander Group, the accrual of the deferred remuneration is subject to none of the following circumstances arising, in the opinion of the board of directors at the proposal of the remuneration committee, during the period before each delivery as a consequence of actions taken in 2015:

Poor financial performance of the Group;

Violation by the beneficiary of internal regulations, particularly those relating to risks;

Material restatement of the Group’s financial statements, when so considered by the external auditors, except when appropriate pursuant to a change in accounting standards; or significant changes in the financial capital or risk profile of the Group.

The board of directors, at the proposal of the remuneration committee and based on the level of achievement of such conditions, shall determine the specific amount of deferred remuneration to be paid on each occasion.

If the foregoing requirements are met on each anniversary, the beneficiaries shall receive the cash and shares, in thirds or fifths, as applicable, within thirty days of the first, second, third and, if applicable, fourth and fifth anniversary.

On the occasion of each delivery of shares and cash, if applicable, the beneficiary shall be paid an amount in cash equal to the dividends paid on the deferred amount in shares of the Bonus and the interest accrued on the deferred cash amount of the bonus, in both cases from the initial date through the corresponding date of payment of the shares and cash.

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43.

Other general administrative expenses

Breakdown

The breakdown of Other general administrative expenses is as follows:

	2013		2014		2015

Maintenance, conservation and repair		944		1,134		979
Technology and systems		2,232		2,441		2,425
Stationery and supplies		198		201		216
Advertising and communications		705		653		722
Rents		1,456		1,622		1,843
Administrative services		447		404		486
Taxes other than income tax		1,169		1,128		1,288
Surveillance and cash courier services		605		589		611
Insurance premiums		41		42		70
Travel costs		282		302		304
Other administrative expenses		1,290		1,404		1,355
		9,369		9,920		10,299

Other information

The fees for audit and tax services to the audit of financial statements are as follows:

	2013		2014		2015

Audit fees and audit-related fees (*)		87		57		68
Tax fees		-		-		2
		87		57		70

(*) The audit-related fees amounted to 16 million pesos in 2013 and 2 million pesos in 2015.

44.

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

The breakdown of Gains/(losses) on disposal of assets not classified as non-current assets held for sale (net) is as follows:

	2013		2014		2015

Gains:
On disposal of tangible assets		31		8		7

		31		8		7

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45.

Other disclosures

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, 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 the 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 – Reverse repurchase Agreements	-		27,379		-		-	-	-	-	27,379	3.05	%
Loans and advances to customers –Reverse 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 the 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 the 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

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The breakdown by maturity of the balances of certain items in the consolidated balance sheets as of December 31, 2015, is as follows:

	12/31/2015
			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 the Central Bank	23,040		876		-	-	-	-	35,872	59,788	3.07	%
Financial assets held for trading
Debt instruments	-		5,953		7,790	28,565	107,112	48,993	10,745	209,158	4.05	%
Equity instruments	2,178		-		-	-	-	-	-	2,178
Trading derivatives	697		1,911		5,928	9,475	29,366	12,177	57,227	116,781
Other Financial Assets at Fair Value through Profit or Loss -
Loans and advances to credit Institutions – Reverse repurchase Agreements	-		735		-	-	-	-	-	735	3.13	%
Loans and advances to customers –Reverse repurchase agreements	-		26,623		-	-	-	-	-	26,623	3.36	%
Available-for-sale financial assets -
Debt instruments	-		21,776		-	1,293	53,127	12,904	24,425	113,525	5.38	%
Equity instruments	-		-		-	-	-	-	95	95
Loans and receivables -
Loans and advances to credit
Institutions	-		57,502		-	-	-	-	97	57,599	3.06	%
Loans and advances to customers	12,493		29,195		57,220	110,742	146,712	60,780	118,135	535,277	9.91	%
Debt instruments	-		-		-	2,462	870	-	2,679	6,011	3.05	%
Hedging derivatives	-		-		-	173	3,987	5,087	2,874	12,121
	38,408		144,571		70,938	152,710	341,174	139,941	252,149	1,139,891
Liabilities:
Financial liabilities held for trading -
Trading derivatives	1,212		2,722		5,189	12,394	29,376	14,359	59,313	124,565
Short positions	-		48,857		100	597	135	-	322	50,011	3.12	%
Other Financial Liabilities at Fair Value through Profit or Loss -
Deposits from the Central Bank	-		145,008		151	-	-	-	-	145,159	3.24	%
Deposits from credit institutions	-		325		-	-	-	-	-	325	2.84	%
Customer deposits	-		45,828		255	-	-	-	-	46,083	2.32	%
Customer deposits-Certificates of deposit	-		-		-	639	-	-	-	639
Marketable debt securities	-		-		-	596	9,708	2,145	174	12,623
Financial liabilities at amortized cost -
Deposits from the Central Bank
Deposits from credit institutions	3,933		13,660		17,586	91	9,535	4,535	5,009	54,349	2.11	%
Customer deposits	347,778		107,255		24,456	6,900	2,231	1,924	2,747	493,291	1.51	%
Marketable debt securities	-		25,911		6,014	20,045	3,988	-	18,868	74,826	3.57	%
Subordinated liabilities	-		556		-	-	-	-	22,232	22,788	5.95	%
Other financial liabilities	-		11,940		1,244	723	25	-	-	13,932
Hedging derivatives	2,662		481		252	420	2,518	705	2,530	9,568
	355,585		402,543		55,247	42,405	57,516	23,668	111,195	1,048,159
Difference (assets less liabilities)	(317,177	)	(257,972	)	15,691	110,305	283,658	116,273	140,954	91,732

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Foreign currency balances

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
		12/31/2014		12/31/2015
		Assets	Liabilities	Assets	Liabilities

Cash and balances with the Central Bank		993	-	1,636	-
Debt instruments (Note 9)		29,006	-	38,523	-
Equity instruments (Note 10)		850	-	26	-
Loans and advances to credit institutions (Note 8)		35,436	-	35,000	-
Loans and advances to customers		77,963	-	86,727	-
Other assets		581	-	529	-
Marketable debt securities (Note 21)		-	18,897	-	18,690
Subordinated liabilities		-	19,507	-	22,842
Derivatives		-	31,535	-	20,856
Deposits from credit institutions (Note 19)		-	25,970	-	29,757
Customer deposits (Note 20)		-	47,462	-	65,860
Other financial liabilities		-	881	-	742
Provisions		-	2	-	-
Other liabilities		-	1,540	-	718

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.

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.

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As of December 31, 2014

Assets	Level 1		Level 2		Level 3		Total fair values		Total carrying amount

Financial assets at amortized cost:
Balances with the 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

As of December 31, 2015

Assets	Level 1		Level 2		Level 3		Total fair values		Total carrying amount

Financial assets at amortized cost:
Balances with the Central Bank (Note 7)		36,748		-		-		36,748		36,748
Loans and advances to credit institutions (Note 8)		30,534		-		27,066		57,600		57,599
Loans and advances to customers (Note 12)		1,609		-		575,461		577,070		535,277
Debt instruments (unlisted) (Note 9)		-		-		6,011		6,011		6,011

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, 2014

Liabilities	Level 1		Level 2		Level 3		Total fair values		Total 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

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As of December 31, 2015

Liabilities	Level 1		Level 2		Level 3		Total fair values		Total carrying amount

Financial liabilities at amortized cost:
Deposits from credit institutions (Note 19)		-		52,552		1,609		54,161		54,349
Customer deposits (Note 20)		14,304		480,062		-		494,366		493,291
Marketable debt securities (Note 21)		18,459		56,641		-		75,100		74,826
Subordinated liabilities (Note 22)		22,984		-		-		22,984		22,788
Other financial liabilities (Note 23)		13,932		-		-		13,932		13,932

The methodology and inputs used to calculate the fair value for each financial asset and liability class are as follows:

Balances with the 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.

Significant restrictions

See Note 49.c for significant restrictions on the ability to access or use the assets and settle the liabilities of the Group as of December 31, 2015.

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Restriction on accumulated reserves distribution

As of December 31, 2014 and 2015, the Group did not have any restriction on accumulated reserves distribution, except for the legal reserve as mentioned in Note 29 (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 10,488 million pesos in legal reserve that include 386 million pesos in legal reserve of the Group on an individual basis as of December 31, 2015), the differences between the selling price of treasury shares and the cost of acquisition thereof, the remeasurement of defined benefit obligation and the recognition effects of share-based payments. 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:

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 Corporate Banking: this segment reflects the Global Corporate Banking business in Mexico, including all the managed treasury departments and the equities business. The global corporate 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 2013, 2014 and 2015.

The Group does not carry out significant operations outside Mexico and does not have any individual customers that account for 10% or more of the Group’s interest and similar income.

The 2013 consolidated income statement and other significant data are as follows:

				Global
	Retail			Corporate			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 (net)		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 (net)		-			-			31			31
Gains/(losses) on disposal of non-current assets not
classified as discontinued operations (net)		-			-			(16	)		(16	)
Operating profit before tax		8,702			3,716			2,595			15,013

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			Global
	Retail		Corporate		Corporate
2013	Banking		Banking		Activities		Total

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

The 2014 consolidated income statement and other significant data are as follows:

				Global
	Retail			Corporate			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 (net)		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 (net)		-			-			8			8
Gains/(losses) on disposal of non-current assets not
classified as discontinued operations (net)		-			-			(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

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The 2015 consolidated income statement and other significant data are as follows:

				Global
	Retail			Corporate			Corporate
2015	Banking			Banking			Activities			Total

Net interest income		37,515			4,081			1,430			43,026
Income from equity instruments		-			37			80			117
Net fee and commission income		12,056			2,034			(7	)		14,083
Gains/(losses) on financial assets and liabilities and exchange differences (net)		866			1,095			534			2,495
Other operating income/(expenses)		(2,101	)		(466	)		13			(2,554	)
Total income		48,336			6,781			2,050			57,167
Administrative expenses		(18,922	)		(2,149	)		(261	)		(21,332	)
Depreciation and amortization		(1,760	)		(94	)		(10	)		(1,864	)
Impairment losses on financial assets (net)		(15,081	)		(960	)		-			(16,041	)
Impairment losses on other assets (net)		-			-			-			-
Provisions (net)		265			-			5			270
Gains/(losses) on disposal of assets not classified
as non-current assets held for sale (net)		-			-			7			7
Gains/(losses) on disposal of non-current assets not
classified as discontinued operations (net)		-			-			91			91
Operating profit before tax		12,838			3,578			1,882			18,298
Income tax											(4,294	)
Profit from continuing operations											14,004
Profit from discontinued operations (net)											-
Profit for the year											14,004
Profit attributable to the Parent											14,003
Profit attributable to non-controlling interest											1
Total assets		473,402			524,120			178,513			1,176,035
Total liabilities		403,929			412,336			250,110			1,066,375

47.

Related-party transactions

Transactions with related parties

The parties related to the Group are deemed to include, in addition to its subsidiaries and jointly controlled entities, the Group’s key management personnel (the member of its Board of Directors, executive officers and other key management personnel, together with their close family members) and the entities over which the key management personnel may 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).

Transactions between the Group and its related parties are specified below. To facilitate comprehension, we have divided the information into the following categories:

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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.

	12/31/2014		12/31/2015
		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)	2,341	-	4,800	-
Loans and advances to customers -
Of which -
Santander Capital Structuring, S.A. de C.V.	-	1,245	-	125
Produban Servicios Informáticos Generales, S.L.	-	1,413	-	1,395
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)	27,256	-	38,304	-
Banco Santander (Brasil), S.A.	-	-	-	169
Abbey National Treasury Services plc.	-	828	-	1,668
Other	-	5	-	5
Other assets -
Of which -
Banco Santander, S.A. (Spain)	1,226	-	303	-
Zurich Santander Seguros México, S.A.	-	747	-	824
SAM Asset Management, S.A. de C.V., Sociedad Operadora de Fondos de Inversión	-	122	-	144
Other	-	88	-	13

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	12/31/2014		12/31/2015
		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)	28,340	-	37,214	-
Abbey National Treasury Services plc.	-	426	-	671
Other	-	21	-	46
Other financial liabilities at fair value through profit or loss -
Deposits from credit institutions – 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)	249	-	222	-
Banco Santander International	-	347
Zurich Santander Seguros México, S.A.	-	425
Abbey National Treasury Services plc.	-	419
Santander Capital Structuring, S.A. de C.V.	-	-	-	217
Other	-	77	-	57
Subordinated liabilities -
Of which -
Banco Santander, S.A. (Spain)	14,630	-	18,440	-
Customer deposits -
Of which-
Banco Santander, S.A. (Spain)	-	-	1,346	-
Abbey National Treasury Services plc.	-	-	-	1,005
Isban México, S.A. de C.V.	-	837	-	856
Santander Global Facilities, S.A. de C.V.	-	-	-	322
Servicios de Cobranza, Recuperación y Seguimiento, S.A. de C.V.	-	-	-	180
Produban Servicios Informáticos Generales, S.L.	-	119	-	101
Santander Capital Structuring, S.A. de C.V.	-	117	-	-
Promociones y Servicios Santiago, S.A. de C.V.	-	1,790	-	-
Promociones y Servicios Monterrey, S.A. de C.V.	-	134	-	-
Other		82	-	85
Marketable Debt Securities -
Of which -
Banco Santander, S.A. (Spain)	727	-	850	-
Other financial liabilities -
Of which -
Banco Santander, S.A. (Spain)	709	-	6,684	-
Other	-	-	-	15
Other liabilities -
Of which -
Banco Santander, S.A. (Spain)	1,387	-	728	-
Produban Servicios Informáticos Generales, S.L.	-	-	-	300
Isban México, S.A. de C.V.	-	-	-	128
Other	-	38	-	52

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	2013				2014					2015
		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)		4		-		4		-			5	-
Produban Servicios Informáticos Generales, S.L.		-		35		-		38			-	45
Santander Capital Structuring, S.A. de C.V.		-		79		-		83			-	22
Other		-		3		-		1			-	1
Interest expenses and similar charges -
Of which -
Banco Santander, S.A. (Spain)		24		-		832					1,026	-
Isban México, S.A. de C.V.		-		17		-		16			-	12
Other		-		14		-		9			-	10
Fee and commission income -
Of which -
Banco Santander, S.A. (Spain)		-		-		-		-			171	-
Santander Investment Securities Inc.		-		10		-		8			-	7
Zurich Santander Seguros México, S.A.		-		3,372		-		3,739			-	3,929
Santander Capital Structuring, S.A. de C.V.		-		30		-		38			-	-
SAM Asset Management, S.A. de C.V., Sociedad Operadora de Fondos de Inversión		-		1,310		-		1,353			-	1,363
Other		-		6		-		9			-	4
Fee and commission expense-
Of which -
Banco Santander, S.A. (Spain)		-		-		-		-			1	-
Santander Global Facilities, S.A. de C.V.		-		-		-		-			-	131
Servicios de Cobranza, Recuperación y Seguimiento, S.A. de C.V.		-		-		-		-			-	92
Gains/(losses) on financial assets and liabilities (net) -
Of which -
Santander Benelux, S.A., N.V.		-		900		-		(233	)		-	-
Banco Santander, S.A. (Spain)		(482	)	-		(1,641	)	-			813	-
Abbey National Treasury Services plc.		-		72		-		117			-	622
Other		-		53		-		13			-	(194	)
Other operating income
Of which -
Santander Global Facilities, S.A. de C.V.		-		-		-		-			-	62
Other		-		-		-		-			-	12
Administrative expenses -
Of which -
Produban Servicios Informáticos Generales, S.L.		-		1,382		-		1,546			-	1,377
Isban México, S.A. de C.V.		-		-		-		125			-	92
Santander Global Facilities, S.A. de C.V.		-		166		-		159			-	259
Ingeniería de Software Bancario, S.L.		-		-		-		106			-	110
Geoban, S.A.		-		-		-		79			-	76
Aquanima México, S. de R.L. de C.V.		-		43		-		45			-	47
Other		-		354		-		79			-	131

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48.

Risk management

1. Corporate risk management, appetite principles and control environment

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 the 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, credit 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).

A forward-looking vision of all types of risks should be included in the risk identification, assessment and management processes.

A risk culture integrated throughout the organization, consisting of a series of attitudes, values, skills and guidelines for action vis-à-vis all risks.

The risk management and control model ensures that the risk profile remains within the levels set for the risk appetite and other limits. Similarly, it includes the adoption of the corrective and mitigating measures required to keep risk levels in line with the defined objectives.

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.

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.

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1.2 Risk culture

The Group’s risk culture is based on the principles of the Group’s risk management model detailed above and is transmitted to all of the organization’s business and management business units, supported, inter alia, by the following levers:

At the Group, the risk function is independent from the business units. This allows its criteria and opinions to be taken into account in the various spheres in which the Group’s businesses are carried on.

The structure of the delegation of powers at the Group requires a large number of transactions to be submitted for decision by the Group’s comprehensive risk management committee or Comité de Administración Integral de Riesgos (“CAIR).

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 a strategic business plan 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, 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 map

The risk map covers the main risk categories in which the Group has its most significant current and/or potential exposures, thus facilitating the identification thereof.

The risk map includes the following:

Financial risks

Credit risk: risk that might arise from the failure to meet agreed-upon contractual obligations in financial transactions.

Market risk: that which is incurred as a result of the possibility of changes in market factors affecting the value of positions in the trading portfolios.

Liquidity and funding risk: risk of non-compliance with payment obligations on time or of complying with them at an excessive cost.

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Structural and capital risks: risk caused by the management of the various balance sheet items, including those relating to the adequacy of capital and those arising from the insurance and pensions businesses.

Non-financial risks

Operational risk: the risk of incurring losses due to the inadequacy or failure of processes, staff and internal systems or due to external events.

Conduct risk: the risk caused by inappropriate practices in the Group's dealings with its customers, and the treatment and products offered to each particular customer and the adequacy thereof.

Compliance and legal risk: risk arising from non-compliance with the legal framework, internal rules or the requirements of regulators and supervisors.

Transversal risks

Model risk: includes losses arising from decisions based mainly on the results of models, due to errors in the design, application or use of the aforementioned models.

Reputational risk: risk of damage in the perception of the Group by public opinion, its customers, investors or any other interested party.

Strategic risk: the risk that results diverge significantly from the Group's strategy or business plan due to changes in general business conditions and risks associated with strategic decisions. This includes the risk of poor implementation of decisions or lack of capacity to respond to changes in the business environment.

1.4 Risk appetite and limits structure

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 both.

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.

Banking business model and fundamentals of the risk appetite

The definition and establishment of the Group's risk appetite is consistent with its risk culture and its banking business model from the risk perspective. The main features defining the business model, which form the basis of the risk appetite at the Group, are as follows:

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A predictable general medium to low risk profile based on a business model focusing on retail banking significant market shares, and a global corporate 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 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 conduct of the Group’s business activity on the basis of a behavior model that safeguards the interests of its customers and shareholders.

The availability of sufficient and adequate human resources, systems and tools 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, executives and executive officers are in line with the corporate risk appetite framework and that the incentives are consistent with the Group's long-term earnings performance.

Corporate risk appetite principles

The Group's risk appetite is governed by the following principles:

Responsibility of the Board of Directors and of executive officers. The Board of Directors is the body ultimately responsible for establishing the risk appetite and its supporting regulations, as well as for overseeing compliance therewith.

Integral view of risk, involving the checking and questioning of the risk profile. The risk appetite should take into consideration all the significant risks to which the Group may be exposed, providing an aggregate view of the Group's risk profile through the use of quantitative metrics and qualitative indicators.

Future risk estimate. The risk appetite should take into consideration the desirable risk profile at the present time and in the medium term considering both the most likely circumstances and stress scenarios.

Links with strategic and business plans and integration in management. The risk appetite is a benchmark in strategic and business planning.

Risk appetites that are consistent across the various business units and risk language that is common to the entire organization.

Periodic review, ongoing checking and adaptation to best practices and regulatory requirements.

Limits, monitoring and control structure

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The risk appetite exercise is performed annually and includes a series of metrics and limits on the aforementioned metrics that express in quantitative and qualitative terms the maximum risk exposure that the Group is willing to assume. Compliance with risk appetite limits is subject to ongoing monitoring.

The linking of the risk appetite limits with the limits used in the management of the business units and of the portfolios is a key element for ensuring that the use of the risk appetite as a risk management tool is effective.

Pillars of the risk appetite

The risk appetite is expressed through limits on quantitative metrics and qualitative indicators that measure the Group's exposure or risk profile by type of risk, portfolio, segment and business line, in both current and stressed conditions. The aforementioned risk appetite metrics and limits are structured around five main pillars that define the position that the Group's management wishes to adopt or maintain in developing its business model.

The volatility in the consolidated income statement that the Group is willing to assume.

The solvency position the Group wishes to maintain.

The minimum liquidity position the Group wishes to have.

The maximum concentration levels that the Group considers as reasonable to assume.

Qualitative aspects and complementary metrics.

1.5 Principles of risk governance

Governance of the risk function should seek to ensure that risk decisions are taken appropriately and efficiently and that risks are effectively controlled, and also guarantee that risks are managed in accordance with the risk appetite level defined by the Board of Directors.

For this purpose, the following principles were established:

Separation of decision-making from risk control.

Strengthening of the responsibility of the risk generating functions in decision-making.

Ensuring that all risk decisions have a formal approval process.

Ensuring an aggregate view of all risks.

Strengthening of the comprehensive risk management committee.

Maintenance of a simple comprehensive risk management committee.

1.6 Lines of defense

The Group follows a risk management and control model based on three lines of defense.

The business functions or activities that take or generate risk exposure comprise the first line of defense against it. The assumption or generation of risks in the first line of defense must comply with the defined risk appetite and limits. In order to perform its function, the first line of defense must have available the means to identify, measure, handle and report the risks assumed.

The second line of defense comprises the risk control and oversight function and the compliance function. This second line seeks to ensure effective control of risks and guarantees that risks are managed in accordance with the defined risk appetite level.

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Internal audit, as the third line of defense and in its role as the last control layer, performs regular assessments to ensure that the policies, methods and procedures are appropriate and checks their effective implementation.

The risk control function, the compliance function and the internal audit function are sufficiently separated and independent of each other and of the other functions that they control or supervise for the performance of their duties, and they have access to the Board of Directors and/or its committees, through their presiding executive officers.

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1.7 Control environment

The risk management model has a control environment that ensures appropriate control of all risks and provides an integrated view thereof. This control is performed at all the Group's business units and for each type of risk in order to ensure that the Group's exposures and overall risk profile are within the framework of the mandates established by both the Board of Directors and the regulators.

The main elements ensuring effective control are:

The allocation of responsibilities in risk-generating functions through decision-making and the due control of their activity.

Specialized control of each risk factor.

The supervision and aggregate consolidation of all risks.

The assessment of control mechanisms.

Independent assessment by internal audit.

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 of Directors within its governing and supervisory powers. Furthermore, the comprehensive risk management 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 of Directors, the Group’s risk policy, which will identify, in particular:

The various types of risk (financial, operational, technological, legal and reputational, inter alia) the Group faces;

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.

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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 is 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.

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 integrated risk control function is articulated in three complementary activities:

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.

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.

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 consolidated balance sheet is resistant to potential adverse macroeconomic scenarios. These analysis 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 analysis also considers 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.

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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 to banking products and financial services in general.

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 three types of customers:

The individuals segment includes all individuals, except for those engaging in a business activity. This segment is in turn divided into various sub-segments based on income levels, which makes it possible to tailor risk management to each type of customer.

The SMEs, companies and institutions segment includes legal entities and individuals engaging in a business activity. It also includes public-sector entities in general and not-for-profit private-sector entities.

The Global Corporate Banking - segment comprises corporate customers, financial institutions and sovereigns, which make up a closed list of entities that is reviewed on an annual basis. Inclusion of an entity on this list is determined on the basis of a comprehensive analysis of the enterprise (business, countries in which it operates, types of products used, level of income it represents for the Bank, length of relationship with the customer, etc.).

The Group has a mainly retail profile, with more than 72% 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 – 2014 and 2015

The following table shows the Group’s maximum credit risk exposure by type of product of Loans and advances to customers as of December 31, 2014 and 2015, without recognizing the availability of collateral or other credit enhancements to guarantee compliance:

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			Change, December 31, 2015 vs. December 31, 2014
Credit Risk Exposure to Customers	12/31/2014	12/31/2015	Millions of Pesos	%

Payroll loans	16,662	23,110	6,448	38.70	%
Personal loans	17,298	21,131	3,833	22.16	%
Credit cards	42,104	47,775	5,671	13.47	%
Mortgages	108,184	122,918	14,734	13.62	%
SMEs	51,835	63,499	11,664	22.50	%
Middle-market corporations	105,552	129,158	23,606	22.36	%
Institutions	22,776	45,347	22,571	99.10	%
Global corporate clients	112,013	127,186	15,173	13.55	%
Guarantees and documentary credits	30,779	40,874	10,095	32.80	%
Other	522	525	3	0.57	%
	507,725	621,523	113,798	22.41	%

For financial assets recognized in the consolidated balance sheet, credit risk exposure is equal to the carrying amount excluding impairment losses.

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.

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, the loss identification period 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 incurred 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 corporate 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.

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 non-default population in a previous observation point.

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.

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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, mainly credit institutions. These operations are performed using both money market financing products arranged with various financial institutions and products with counterparty risk intended to provide service to the Group's customers.

Counterparty credit risk is defined as the risk that the counterparty to a transaction could default before the final settlement of the transaction's cash flows. It includes the following types of transaction: derivative instruments, repurchase agreements, securities lending transactions, deferred settlement transactions and guarantee financing transactions.

The Group uses two methods to measure its exposure to this risk: a mark-to-market method (replacement cost for derivatives or amount drawn down for committed facilities) including an add-on for potential future exposure; and another method for certain products, which calculates exposure using Monte Carlo simulations. 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.

Certain information regarding trading and hedging derivatives is presented in Notes 13 and 32.

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 Board of Directors, by reference to the risk appetite, determines the maximum levels of concentration. In keeping with the risk appetite, the comprehensive risk management committee establishes the risk policies and reviews the appropriate exposure limits to ensure the adequate management of credit risk concentration.

The Group is subject to CNBV regulations on “Large Exposures” as follows:

As of December 31, 2014 and 2015, 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).

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.

As of December 31, 2015, loans granted to the three main debtors or groups of individuals representing a joint risk for the aggregate amount of 36,121 million pesos and represent 44.97% of the Bank’s Basic Capital.

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5.3.3 Sovereign risk and exposure to other public sector entities

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 (federal 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 the Central Bank, and from the fixed-income portfolios held as part of the on-balance-sheet structural interest rate risk management strategy and in the trading books of the treasury departments. The vast majorities of these exposures are taken in pesos and are financed through repurchase agreements or customer deposits, denominated, in pesos.

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 Social and environmental risk

The Group considers social and environmental issues to be key to the risk analysis and decision-making processes in its financing transactions. It has implemented processes to identify, analyze and assess risk in the credit transactions that are subject to the Group’s policies, which are based on the Equator Principles, an initiative in which the Group has participated since 2009. In accordance with these principles, an analysis is performed of the social and environmental risk of Project Finance transactions and corporate loans granted for known purposes (bridge loans that are intended to be refinanced through Project Finance, and corporate loans for the construction or extension of a particular project).

5.4 Credit risk cycle

The credit risk management process consists of identifying, measuring, analyzing, controlling and deciding on, as appropriate, the risks incurred in the Group’s operations. The parties involved in this process are the business areas, 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 permanently updated, with the findings and conclusions of the post-sale phase being fed back into the risk analysis and planning of the pre-sale phase.

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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 and to other creditors. 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.

Rating tools are applied to the sovereign risk, financial institution and global corporate 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.

5.4.2 Planning

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 level.

Risk limit planning is instrumented through a commercial strategic plan, thus ensuring the coordination of the strategic business plan, the risk-appetite-based lending policy and the resources required to implement it.

Approval and monitoring is the responsibility of the comprehensive risk management committee.

The commercial strategic plan enables the map of all the Group's loan portfolios to be defined.

Scenario analysis

Credit risk scenario analysis enables management to gain a clearer understanding of the performance of the portfolio in response to changing market and circumstantial conditions and it is a basic tool for assessing the adequacy of the allowance for impairment losses recognized and the capital held to cater for stress scenarios.

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These analysis, which are performed for all the Group's significant portfolios, comprise the following milestones:

Definition of benchmark scenarios.

Determination of the value of the risk parameters (probability of default, loss given default) in various scenarios.

Estimation of the expected loss associated with each of the scenarios considered and of the other salient credit risk metrics derived from the parameters obtained (non-performing loans, allowance for impairment losses, ratios, etc.).

Analysis of the changes in the credit risk profile at portfolio, segment and Group level in various scenarios and in comparison with previous years.

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 allowance for impairment losses recognized to cater for stress scenarios.

The process is completed with a package of controls and checks that ensure that the metrics and calculations are appropriate.

The risk and loss parameters are projected, usually with a three-year time horizon, using various economic scenarios that include the main macroeconomic variables (Gross domestic product or 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 possibly 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.

5.4.3. Limit setting/pre-classifications

The risk limits are planned and set using documents agreed upon by the business areas and risk unit and approved by the comprehensive risk management committee, which contain the expected results of transactions in terms of risk and return, as well as the limits applicable to the activity and the management of the related risk by group/customer.

Also, an analysis is conducted at customer level in the global corporate banking and other companies and institutions segments. When certain features concur, an individual limit is established for the customer (pre-classification).

Thus, for large corporate groups a pre-classification model based on an economic capital measurement and monitoring system is used. The result of the pre-classification is the maximum level of risk that can be assumed vis-à-vis a customer or group in terms of amount or maturity. In the companies segment, a simplified pre-classification model is applied for customers meeting certain requirements (thorough knowledge, rating, etc.).

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5.4.4 Transaction decision-making

The sale phase comprises the decision-making process, the aim of which is to analyze and resolve upon 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 sphere of lower-revenue individuals, businesses and SMEs, 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 the transaction and the borrower.

The preliminary limit-setting stage can follow two different paths, giving rise to different types of decisions in the sphere:

Automatic decisions, 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.

Decisions requiring the analyst's authorization, even if the transaction meets the amount, maturity and other conditions established in the pre-classified limit. This process applies to pre-classifications of 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:

Netting by counterparty

Netting refers to the possibility of determining a net balance of transactions of the same type, under the umbrella of a master agreement such as an ISDA or similar agreement.

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 master agreements is that they represent a single legal obligation encompassing all the transactions they cover. This is the key to being able to set off 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.

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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 highly liquid instruments with certain economic value that are deposited or transferred 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 derivative 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 with 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 the net balance arising from these assessments, from which the collateral amount (normally cash or securities), 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 CNBV.

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.

5.4.5 Monitoring/anticipation

The monitoring function is founded on a process of ongoing observation, which makes it possible to detect early 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. In the individuals model this function is performed using customer behavior valuation models.

The function involves, inter alia, identifying and monitoring companies under special surveillance, reviewing ratings and ongoing monitoring 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 the position in question, to place a person in charge and to set the policy implementation period.

Customers classified as FEVE are reviewed at least every six months, or every three months for those classified in the most severe categories. A company can be classified as FEVE as a result of the monitoring process itself, a review performed by internal audit, a decision made by the sales manager responsible for that company or the triggering of the automatic warning system.

Assigned ratings are reviewed at least annually, but should any weakness be detected, or depending on the rating itself, more frequent reviews are performed.

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For exposures to lower-revenue individuals, business and SMEs, the key indicators are monitored in order to detect any variance in the performance of the loan portfolio with respect to the forecasts made in the credit management programs.

5.4.6 Measurement and control

In addition to monitoring customers’ credit quality, the Group establishes the control procedures required to analyze the current credit risk portfolio and the changes therein over the various credit risk phases.

The risk control function is performed by assessing risks from various complementary perspectives, the main pillars being control by business area, management model, product, etc., thus facilitating the early detection of specific areas of attention and the preparation of action plans to correct possible impairment.

Each control pillar can be analyzed in two ways:

Quantitative and qualitative analysis of the portfolio

In the analysis of the portfolio, any variances in the Group’s risk exposure with respect to budgets, limits and benchmarks are controlled on an ongoing and systematic basis, and the impacts of these variances in certain future situations, both of an exogenous nature and those arising from strategic decisions, are assessed in order to establish measures aimed at placing the profile and amount of the risk 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, expected loss and capital.

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 connection, the Group’s risk division assesses the efficiency of the internal control of its activities on an annual basis.

5.4.7 Recovery management

Recovery is a significant function within the sphere of the Group's risk management. This function is performed by the recovery unit, which defines an integrated approach to recovery management.

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. The recovery unit is a business area involving direct customer management and, accordingly, this corporate model has a business approach that creates value sustainably over time on the basis of effective and efficient collection management, achieved through either the return of unpaid balances to performing status or the full recovery thereof.

The recovery management model requires the proper coordination of all management areas (recovery business, commercial, technology and operations, human resources and risk) and the management processes and methodology supporting it are reviewed and enhanced on an ongoing basis.

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In order to manage recovery properly, action is taken in four main phases: early 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 macroeconomic environment has a direct effect on the customer default rate. Therefore, the quality of the portfolios is fundamental to the development and growth of our businesses, and particular attention is paid, on a permanent basis, to the debt collection and recovery functions in order to guarantee that this quality remains at the expected levels at all times.

The different characteristics of customers make segmentation necessary in order to ensure proper recovery management. The mass management of large groups of customers with similar profiles and products is performed using highly technological processes, while personalized management is reserved for customers who, due to their profile, require the assignment of a specific manager and a more tailored analysis.

The recovery activity has been aligned with the social and economic reality, and various management mechanisms have been used, all involving appropriate prudential criteria, based on the age, collateral and conditions of the transaction, while always ensuring that, at least, the required ratings and provisions are maintained.

Within the recovery function particular emphasis has been placed on using the mechanisms referred to above for early arrears management, considering the social and economic reality, and closely monitoring the production, inventory and performance of those areas. The aforementioned policies are reviewed and adapted periodically in order to reflect both best management practices and any applicable regulatory amendments.

In addition to the measures aimed at adapting transactions to the customer's ability to pay, special mention should be made of recovery management, in which alternative solutions to legal action are sought to ensure the early collection of debts.

One of the channels for the recovery of debts of customers whose ability to pay has deteriorated severely is foreclosure (either court-ordered or through lieu in payment) of the property assets securing the transactions.

Restructured/refinanced portfolio

The term “restructured/refinanced portfolio” refers, for the purposes of the Group's risk management, to those transactions in which the customer has, or might foreseeably have, financial difficulty that might materially affect its payment obligations under the terms and conditions of the current agreement and, accordingly, the agreement has been modified or cancelled or even a new transaction has been entered into.

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 the aforementioned transactions.

This policy establishes strict prudential criteria for the assessment of these loans:

The use of this practice is restricted, and any actions that might defer the recognition of impairment must be avoided.

The main aim must be to recover the amounts owed, and any amounts deemed unrecoverable must be recognized as soon as possible.

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It must always envisage maintaining the existing guarantees and, if possible, enhance them. Not only can effective guarantees serve to mitigate losses given default, but they might also reduce the probability of default.

This practice must not give rise to the granting of additional funding, or be used to refinance debt of other entities or as a cross-selling instrument.

All the alternatives and their impacts must be assessed, making sure that the results of this practice will exceed those which would foreseeably be obtained if it were not performed.

The transactions are classified using criteria which ensure that the customer's ability to pay is restored from the date of deterioration and for an adequate period of time thereafter.

In addition, in the case of customers that have been assigned a risk analyst, it is particularly important to conduct an individual analysis of each specific case, for both the proper identification of the transaction and its subsequent classification, monitoring and adequate provisioning.

This policy also sets out various criteria for determining the scope of transactions qualifying as deteriorated exposures by defining a detailed series of objective indicators to facilitate the identification of situations of financial difficulty that might materially affect whether payment obligations are met.

The corporate policy requires the customer's ability and willingness to pay to be analyzed and a distinction to be drawn between the severity and the estimated duration of the impairment. The results of this analysis will be used as a basis for deciding whether the debt should be restructured/refinanced and the most appropriate way of doing so for each case:

When borrowers display a severe but transitory deterioration in their ability to pay (which is expected to be recovered in a short space of time), short-term adjustment strategies are applied, such as a payment moratorium on the principal or the reduction of installments for a short, limited period until the ability to pay is recovered.

When borrowers display a slight deterioration in their ability to pay (an early recovery of which is not expected), more long-term strategies are applied, such as reducing installments by deferring either the maturity date or a portion of the principal, which would be paid at the same time as the last installment, at all times securing its payment through the provision of effective guarantees.

In any case, through a case-by-case analysis, priority is given to modifications for customers displaying a slight but prolonged deterioration, since those experiencing severe but transitory deterioration carry a higher risk, as they depend on the accuracy of the estimated time of their future recovery. Cases of severe deterioration deemed to be prolonged over time are not considered for restructuring/refinancing.

The Group has a series of mechanisms for the management and control of loan restructuring/refinancing, allowing them to be treated in a differentiated way from other transactions, with paying particular attention to the processes of:

Planning and budgeting, including preparing the pertinent business plans, projections and limits for the most relevant aggregates.

Monitoring the performance of the portfolio and assessing the degree of compliance of the projections prepared in the planning phase.

Once restructuring/refinancing measures have been adopted, transactions that have to remain classified as non-performing because at the date of restructuring/refinancing they do not meet the regulatory requirements to be classified in a different category must comply with a continuous prudential payment schedule in order to assure reasonable certainty as to the recovery of the ability to pay.

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If there is any (non-technical) default in payments during that period, the aforementioned payment schedule starts again.

On successful completion of the period, the duration of which depends on the customer's situation and the transaction features (term and guarantees provided), the transaction is no longer considered to be nonperforming, although it continues to be subject to a probation period during which it undergoes special monitoring.

This monitoring continues until a series of requirements have been met, including most notably: a minimum observation period; repayment of a substantial percentage of the outstanding amounts; and settlement of the amounts that were past due at the time of restructuring/refinancing.

By contrast, if following arrangement of restructuring/refinancing there is no improvement in the customer's payment performance, the possibility of extending new restructuring/refinancing measures will be considered, with the application of more stringent classification/return-to-performing criteria, including the establishment of a longer period of uninterrupted payments before the transaction can return to performing status, which could last up to 36 months in certain circumstances. The duration of this period is determined by any collateral provided and the residual maturity of the loan. The Group’s policy permits a maximum of one modification per year and three modifications every five years.

For provisioning purposes the Group considers restructuring/refinancing transactions as a distinct segment with its own probability of default calculated on the basis of past experience, considering, among other factors, the performance of the successive restructuring/refinancing measures.

Certain information regarding renegotiated loans is included in Note 12.e.

6. Market risk and structural risk

6.1 Activities subject to market risk and types of market risk

The scope of activities subject to market risk encompasses all operations exposed to net worth risk as a result of changes in market factors. It includes both risks arising from trading activities and the structural risks that are also affected by market fluctuations.

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 held for trading and derivatives.

Inflation rate risk is the possibility that fluctuations in inflation rates might have an adverse effect on the value of a financial instrument, on a portfolio or on the Group as a whole. Inflation rate risk affects, inter alia, loans, debt securities and derivatives, the returns on which are indexed 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.).

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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 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: interest rates, exchange rates, share prices and credit spreads. Volatility risk arises on financial instruments whose measurement model includes volatility as a variable, most notably financial option portfolios.

All these market risks can be mitigated in part or in full through the use of derivatives such as options, futures, forwards and swaps.

In addition, there are other market risks, which are more difficult to hedge and are 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, and it increases as a result of the current 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 or securities.

Underwriting risk. Underwriting risk arises as a result of an entity’s involvement in the underwriting of a placement of securities or other type of debt, thus assuming the risk of owning part of the issue or the loan if the entire issue is not placed among the potential buyers.

Pensions risk is also affected by changes in market factors.

The activities are segmented by risk type as follows:

Trading: financial services for customers, trading operations and positions taken mainly in fixed-income, equity and foreign currency products. This activity is managed mainly by the global corporate banking division.

Structural risks: a distinction is made between on-balance-sheet risks and pensions risks:

b.1) Structural balance sheet risks: market risks inherent to the balance sheet, excluding financial assets and liabilities held for trading. Decisions affecting the management of these risks are taken by the Assets and Liabilities Committee (hereinafter, “ALCO”) and are implemented by the financial management area. 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. The structural balance sheet risks are as follows:

Structural interest rate risk: arises as a result of the maturity and repricing gaps of all the assets and liabilities on the balance sheet, as well as of the different coupon calculation types (i.e., floating, fixed, indexed, etc.) for each item in the balance sheet.

Structural foreign currency risk: arises from the Group’s operations in foreign currencies.

Structural equity risk: this item includes equity investments in non-consolidated financial and non-financial companies and available-for-sale portfolios comprising equity positions.

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Structural liquidity risk: arises as a result of the maturity gaps of all the assets and liabilities on the balance sheet.

b.2) Pensions risk

Pensions risk: the risk assumed by the entity in relation to pension obligations to its employees. This relates to the possibility that the fund may not cover such obligations in the accrual period of the benefits and the return obtained by the portfolio may not be sufficient and might oblige the Group to increase the level of contributions.

6.2 Risks and Results

6.2.1 Risks and results in 2013

Trading market risk

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.

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.

Structural balance sheet risks

Structural 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.

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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		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

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

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6.2.2 Risks and results in 2014

Trading market risk

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.

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 exceptions 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.

Structural balance sheet risks

Structural 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.

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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

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

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

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6.2.3 Risks and results in 2015

Trading

The average daily Total VaR of the Group's market trading operations in 2015 stood at 71 million pesos, lower than that for 2014 at 86 million pesos. In 2015, 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 2015. At the end of December 2015, VaR stood at 70 million pesos.

Average daily Total VaR decreased by 15 million pesos with respect to 2014. This decrement was concentrated in interest rate VaR, where the average daily decreased from 88 million pesos to 68 million pesos. The average daily equity VaR and exchange rate VaR fell from 18 million pesos to 17 million pesos, and 14 million pesos to 10 million pesos, respectively.

Distribution over time of risks and results

The risk assumption profile, in terms of VaR and results, showed that VaR during 2015 remained at levels below the limit of 192 million pesos. During the first and second semester of 2015, the average daily Total VaR was 71 million pesos. VaR stayed in levels between 52 million pesos and 105 million pesos in the second semester, as a result of interest rates increase expectation.

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 2015 the Group regularly performed the required benchmark tests and analyses, and drew conclusions which enabled it to verify the reliability of the model.

In 2015, there were no exception to 99% VaR (i.e., days when the daily loss exceeded VaR). During 2014, there were no exception to 99% VaR. During 2015, there were five VaE breaks (i.e., days when the daily gain exceeded VaE), due mainly to the changes in the interest rates. During 2014, there were three VaE breaks, 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 2015.

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.

Structural balance sheet risks

Structural 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 2015 under 1,247 million pesos, mainly due to the short-term repricing of the credit portfolio. At the end of December 2015, the risk consumption measured in terms of 100 basis points sensitivity of the MVE stood under 3,389 million pesos.

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The table below shows the distribution of interest rate risk by maturity as of December 31, 2015. 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		101,554			47,337			-			1			10			37			36			9			54,124
Loans		603,402			287,578			50,898			42,918			24,782			75,456			35,830			93,113			(7,173	)
Trade Finance					-			-			-			-			-			-			-			-
Intragroup		141			-			-			-			-			-			-			-			141
Securities		370,697			29,778			11,311			4,971			3,061			54,743			11,938			16,862			238,033
Permanent		5,321			-			_-			-			-			-			-			-			5,321
Other Balance Sheet Assets		56,198			-			-			-			-			-			-			-			56,198
Total Balance Sheet Assets		1,137,313			364,693			62,209			47,890			27,853			130,236			47,804			109,984			346,644
Money Market		(251,123	)		(24,661	)		(17,503	)		-			-			0			-			-			(208,959	)
Deposits		(467,936	)		(213,996	)		(7,887	)		(1,951	)		(22,852	)		(221,250	)		-			-			-
Trade Finance		(518	)		-			-			-			-			-			-			-			(518	)
Intragroup		-			-			-			-			-			-			-			-			-
Long-Term Funding		(162,331	)		(57,480	)		(395	)		(737	)		(1,801	)		(7,890	)		(26,924	)		(27,078	)		(40,026	)
Equity		(98,607	)		-			-			-			-			-			-			-			(98,607	)
Other Balance Sheet Liabilities		(76,457	)		-			-			-			-			-			-			-			(76,457	)
Total Balance Sheet Liabilities		(1,056,972	)		(296,137	)		(25,785	)		(2,688	)		(24,653	)		(229,140	)		(26,924	)		(27,078	)		(424,567	)
Total Balance Sheet Gap		80,341			68,556			36,424			45,202			3,200			(98,904	)		20,880			82,906			(77,923	)
Total Off-Balance Sheet Gap		(9,233	)		14,184			(896	)		(5,505	)		(638	)		(1,990	)		1,797			(3,916	)		(12,269	)
Total Structural Gap					82,741			35,527			39,696			2,561			(100,894	)		22,678			78,991			(90,194	)
Accumulated Gap					82,741			118,268			157,965			160,526			59,632			82,310			161,301			71,107

Funding and liquidity risk

Liquidity Gap

The table below shows the distribution of the liquidity risk by maturity as of December 31, 2015. 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		101,555			75,574			-			1			10			37			36			9			25,888
Loans		670,748			93,701			61,645			51,329			66,744			168,012			88,055			148,435			(7,173	)
Trade Finance		-			-			-			-			-			-			-			-			-
Intragroup		141			-			-			-			-			-			-			-			141
Securities		355,731			323,950			-			1			1			6,031			-			-			25,748
Permanent		5,321			-			-			-			-			-			-			-			5,321
Other Balance Sheet Assets		56,198			-			-			-			-			-			-			-			56,198
Total Balance Sheet Assets		1,189,694			493,225			61,645			51,331			66,755			174,080			88,091			148,444			106,123
Money Market		(251,504	)		(229,432	)		(519	)		(3,714	)		(12,572	)		(2,539	)		(1,348	)		-			(1,380	)
Deposits		(467,936	)		(154,085	)		(48,524	)		(86	)		(16,381	)		(248,860	)		-			-			-
Trade Finance		(518	)		-			-			-			-			-			-			-			(518	)
Intragroup		-			-			-			-			-			-			-			-			-
Long-Term Funding		(163,148	)		(27,491	)		(7,943	)		(13,383	)		(17,693	)		(40,129	)		(29,220	)		(27,289	)		-
Equity		(99,516	)		-			-			-			-			-			-			-			(99,516	)
Other Balance Sheet Liabilities		(76,457	)		-			-			-			-			-			-			-			(76,457	)
Total Balance Sheet Liabilities		(1,059,079	)		(411,008	)		(56,986	)		(17,183	)		(46,646	)		(291,528	)		(30,568	)		(27,289	)		(177,871	)
Total Balance Sheet Gap		130,615			82,217			4,659			34,148			20,109			(117,448	)		57,523			121,155			(71,748	)
Total Off-Balance Sheet Gap		(5,397	)		966			449			(451	)		(1,323	)		(623	)		2,147			(3,980	)		(2,583	)
Total Structural Gap					83,183			5,110			33,696			18,786			(118,072	)		59,669			117,176			(74,331	)
Accumulated Gap					83,183			88,293			121,990			140,775			22,703			82,372			199,548			125,217

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Value at risk (VaR) of on-balance-sheet structural interest rate risk

In addition to sensitivities to interest rate fluctuations, the Group uses other methods to monitor on-balance-sheet structural interest rate risk including, inter alia, scenario analysis and VaR calculations, using a methodology similar to that used for the trading book.

Structural liquidity position

Management believes that the Group’s current structural liquidity position allows for the ability to cope with business as usual projected growth and 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 45.5% of the consolidated total assets at the end of 2015, and were funded mainlyby 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 execution of credit facilities with other commercial and/or development banks, the issuance of unsecured bonds and structured bank bonds in domestic and foreign markets. As of December 31, 2015, the outstanding balance of our long-term funding totaled 57,175 million pesos with a weighted average maturity of 6 years. At the end of 2012, the Group issued 10-year US dollar-denominated Senior Unsecured Notes for an amount of USD 1,000,000,000, aimed to extend the duration of our liabilities. 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.

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 3.05% of the consolidated total assets at the end of 2015.

These resources are part of the Central Bank’s tools to promote the healthy development of the financial system and improve the implementation of monetary policy. Other instruments used by the 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.

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Funding dynamics

The breakdown of the total issuances (long-term) outstanding, including the issuance of the Senior Unsecured Notes and the Tier II Subordinated Capital Notes, as of December 31, 2015 is as follows:


	Amount	Issue Date	Maturity Date	Rate

Structured bank bonds	705	02/28/2014	03/02/2017	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds	518	03/09/2015	03/06/2017	Guaranteed rate subject to INDEX (HSCEI, S&P 500, SX5E y NIKKEI 225)
Structured bank bonds	42	03/13/2014	03/13/2017	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds	53	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	24	05/06/2015	05/09/2017	Guaranteed rate subject to Euro SX5E
Structured bank bonds	22	05/22/2015	05/25/2017	Guaranteed rate subject to IBEX35
Structured bank bonds	798	06/27/2014	06/29/2017	Guaranteed rate subject to IBEX35
Structured bank bonds	567	08/06/2014	08/03/2017	Guaranteed rate subject to Euro SX5E
Structured bank bonds	118	08/10/2015	08/10/2017	Guaranteed rate subject to IPC
Structured bank bonds	149	08/27/2015	08/30/2017	Guaranteed rate subject to IPC
Structured bank bonds	491	09/05/2014	09/06/2017	Guaranteed rate subject to Euro SX5E
Structured bank bonds	368	09/09/2014	09/08/2017	Guaranteed rate subject to Euro SX7E
Structured bank bonds	147	09/15/2015	09/14/2017	Guaranteed rate subject to IPC
Structured bank bonds	49	09/15/2015	09/14/2017	Guaranteed rate subject to IPC
Structured bank bonds	110	10/31/2014	11/06/2017	Guaranteed rate subject to S&P 500
Structured bank bonds	17	12/14/2015	12/14/2017	Guaranteed rate subject to IBEX35
Structured bank bonds	587	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
Structured bank bonds	321	02/24/2015	02/19/2018	Guaranteed rate subject to IXE
Structured bank bonds	1,083	02/27/2015	03/02/2018	Guaranteed rate subject to FSTE 100
Structured bank bonds	935	03/31/2015	04/03/2018	Guaranteed rate subject to Euro Stoxx Oil & Gas
Structured bank bonds	142	05/13/2015	05/16/2018	Guaranteed rate subject to Euro SX5E
Structured bank bonds	123	05/28/2015	05/31/2018	Guaranteed rate subject to Euro SX5E
Structured bank bonds	469	06/30/2015	06/27/2018	2.00%
Structured bank bonds	150	06/30/2015	06/29/2018	Guaranteed rate subject to Euro SX6E
Structured bank bonds	137	06/30/2015	06/29/2018	Guaranteed rate subject to Euro SX6E
Structured bank bonds	9	06/30/2015	06/29/2018	Guaranteed rate subject to Euro SX6E
Structured bank bonds	928	06/30/2015	06/29/2018	Guaranteed rate subject to Euro SX6E
Structured bank bonds	115	07/13/2015	07/12/2018	Guaranteed rate subject to Euro SX6E
Structured bank bonds	10	07/31/2015	08/02/2018	Guaranteed rate subject to DAX
Structured bank bonds	123	08/28/2015	08/30/2018	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds	98	09/18/2015	09/20/2018	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds	124	09/25/2015	09/27/2018	Guaranteed rate subject to Euro Stoxx 50
Structured bank bonds	142	10/20/2015	10/19/2018	Guaranteed rate subject to INDU
Structured bank bonds	18	11/06/2015	11/07/2019	Guaranteed rate subject to SXDP
Structured bank bonds	159	11/11/2015	11/14/2019	Guaranteed rate subject to SXDP
Structured bank bonds	941	11/04/2015	10/23/2020	TIIE
Structured bank bonds	543	10/23/2015	10/26/2020	Guaranteed rate subject to SXDP
Structured bank bonds	9	11/13/2015	11/05/2020	TIIE
Structured bank bonds	223	10/30/2015	11/09/2020	Guaranteed rate subject to SXDP
Structured bank bonds	47	10/30/2015	11/09/2020	Guaranteed rate subject to SXDP
Structured bank bonds	70	10/30/2015	11/09/2020	Guaranteed rate subject to SXDP
Structured bank bonds	135	11/13/2015	11/23/2020	Guaranteed rate subject to SXDP
Structured bank bonds	174	12/04/2015	12/14/2020	Guaranteed rate subject to SXDP

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	Amount	Issue Date	Maturity Date	Rate

Unsecured bonds	980	10/20/2011	11/23/2017	9.05%
Unsecured bonds	3,000	10/12/2015	12/06/2018	TIIE + 18 bps
Unsecured bonds	1,700	03/22/2011	03/09/2021	8.91%
Senior unsecured notes	16,984	09/11/2011	11/09/2022	4.125%
Tier II Subordinated Capital Notes	22,285	12/27/2013	01/30/2024	5.95%
Mortgage-backed bonds	183	09/22/2006	05/25/2032	5.00%
Mortgage-backed bonds	13	09/22/2006	05/25/2032	6.40%

	57,175

Structural foreign currency risk

Structural foreign currency risk arises from the Group's operations in foreign currencies.

At 2015 year-end, long-term exposures corresponded to the US dollar, the Euro, the pound sterling, and the Brazilian real. The Group hedges a portion of these long-term exposures through foreign exchange derivatives.

Structural equity risk

The Group has equity positions in its balance sheet (banking book) in addition to the trading positions. These positions are classified as available-for-sale financial assets (equity instruments) or as investments, depending on the length of time they are expected to remain in the portfolio.

The structural equity positions are exposed to market risk. VaR is calculated for these positions using series of market prices or proxies.

Structural VaR

A homogeneous metric such as VaR can be used to monitor the total on-balance-sheet market risk (excluding the global corporate banking activity), distinguishing between fixed-income (considering both interest rates and credit spreads for ALCO portfolios), exchange rate and equities.

In general, it can be said that structural VaR is not high in terms of the Group's volume of assets or capital.

6.3 Methodologies

6.3.1. Trading

The standard methodology applied to trading activities by the Group in 2015 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.

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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 risk unit, in accordance with the principle of independence of the business units, also monitors daily the positions of each business unit, 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.

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.

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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 balance sheet risks

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.

Taking into consideration the balance-sheet interest rate position and 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 for economic capital purposes.

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.

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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6.3.2.2 Structural foreign currency risk

These activities are monitored by measuring positions, VaR and results on a daily basis.

6.3.2.3 Structural equity risk

These activities are monitored by measuring positions, VaR and results on a monthly basis.

6.3.2.4 Limit control system

For trading market risk, structural balance sheet risk limits are established, within the framework of the annual limit plan, in response to the level of the Group's risk appetite.

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

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.

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The business units must comply with the approved limits at all times. Any possible excesses would trigger a series of actions by the risk unit 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 in the risk unit 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.

6.3.3 Pensions risk

In managing the risk associated with the defined-benefit employee pension funds, the Group assumes the financial, market, credit and liquidity risks incurred in connection with the fund's assets and investments and the actuarial risks arising from the fund's liabilities, i.e., the pension obligations to its employees.

The aim pursued by the Group in pensions risk control and management is primarily to identify, measure, follow up, control, mitigate and report this risk. The Group’s priority, therefore, is to identify and mitigate all clusters of pensions risk.

Therefore, in the methodology used by the Group, the total losses on assets and liabilities in a stress scenario defined by changes in interest rates, inflation and stock markets, as well as credit and operational risk, are estimated every year.

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.

The Group is responsible for covering the liquidity needs arising from its current and future activity, either by taking deposits from its customers in its area of influence, or by resorting to the wholesale markets where it operates.

This funding structure has proven to be most effective in situations of high market stress as it prevents difficulties in one area from affecting funding capacity in other areas.

7.2 Liquidity management

Structural liquidity management seeks to finance the Group's recurring business with optimal maturity and cost conditions, avoiding the need to assume undesired liquidity risks.

Liquidity management at the Group is based on the following principles:

Decentralized liquidity model.

Medium- and long-term liquidity needs arising from the business must be funded using medium- and long-term instruments.

High proportion of customer deposits, as a result of a commercial balance sheet.

Diversification of wholesale funding sources by: instruments/investors; markets/currency; and maturity.

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Restrictions on recourse to short-term wholesale financing.

Availability of a sufficient liquidity reserve, including a capacity for discounting at the Central Bank, to be drawn upon adverse situations.

Compliance with the regulatory liquidity requirements.

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 Group’s strategy.

An in-depth balance-sheet analysis and liquidity risk measurement to support the decision-making process and the control thereof.

A management approach adapted in practice to the liquidity needs of each business.

7.2.1 Organizational and governance model

Decisions relating to all structural risks, including liquidity and funding risk, are made though the ALCO within the framework and limits approved in the comprehensive risk management committee.

The ALCO is the body empowered by the Board of Directors to coordinate the asset and liability management (ALM) function throughout the Group, including the management of liquidity and funding.

The liquidity risk profile and appetite aim to reflect the Group's strategy in conducting its business, which consists of structuring the balance sheet to render it as resilient as possible to potential liquidity stress scenarios. To this end, appetite metrics have been structured to reflect the application of the principles of the Group's management model, with specific levels for the structural funding ratio and minimum liquidity horizons under various stress scenarios.

Simultaneously, various scenario analysis are conducted considering the additional liquidity needs that could arise if certain very severe but highly unlikely events occur.

7.2.2 Balance sheet analysis and liquidity risk measurement

Liquidity and funding 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 various business units (liquidity projection) and of the accessibility and situation of the funding sources in wholesale markets.

Its aim is to ensure that the Group maintains adequate liquidity levels to cover its short- and long-term 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- and medium-term liquidity projections and the establishment of basic metrics.

The results of these balance sheet, projection and scenario analysis 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 to strengthen the liquidity of financial institutions by the Basel Committee. The objective is to define a framework of principles and metrics in which Mexican Regulation is already adopted.

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The measurements, metrics and analysis used by the Group in liquidity risk management and control are shown in greater detail below.

Methodology for liquidity risk monitoring and control

The aim of the liquidity risk metrics adopted by the Group are:

•

To attain the highest degree of effectiveness in liquidity risk measurement and control.

•

To provide support for financial management, to which end the metrics 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 limits and to facilitate limit management.

•

To act as 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. Short-term metrics include basically liquidity coverage ratio and the liquidity gap, while structural 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 certain assumptions - for a given period. Liquidity gap analysis are prepared for each of the main currencies in which the Group operates.

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, as well as capital and other non-current liabilities.

c) Scenario analysis

The Group supplements the aforementioned metrics by developing various stress scenarios. Its main objective is to identify the critical factors of potential crises and, at the same time, to define the most appropriate management measures to address each of the situations assessed.

In their liquidity analysis, the Group generally considers three different scenarios: idiosyncratic, local systemic and global systemic. 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 specific liquidity risks.

The definition of scenarios and the calculation of metrics under each of them are directly related to the definition and execution of the liquidity contingency plan, which is the responsibility of financial management.

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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. Based on these liquidity requirements and taking into consideration 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.

Monitoring and management of compliance with the regulatory ratios.

The Group is self-sufficient in terms of their structural funding and does not require support from its Parent.

7.3 Funding strategy and evolution of liquidity in 2015

7.3.1 Funding strategy

In the last few years, the Group's funding activity has increased the amount of medium - and long-term sources of funding; aiming to increase liability duration and 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 the Central Bank as part of the liquidity reserve to cater for episodes of stress on wholesale markets.

Thanks to all these market and business developments, based on a sound liquidity management model, the Group currently enjoys a very robust funding structure, the main features of which are as follows:

High proportion of customer deposits (not including repurchase agreements and certificates of deposit) in a predominantly commercial balance sheet.

Customer deposits are the Group's major source of funding. These deposits represent around 46.3% of the Group's total liabilities and at the end of 2015 they accounted for 92.2% of loans and advances to customers.

Diversified wholesale funding, primarily at medium - and long-term, with a small proportion maturing in the short term.

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Medium - and long-term wholesale funding represents 16.80% of the Group's retail funding (including deposits from the 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 2015

At the end of 2015, in comparison with 2014, the Group reported:

An increase in loans and advances to customers of 17.06% in 2015 compared with 2014.

A decrease in the ratio of loans and advances to customers to consolidated total assets from 48.1% to 45.5%. This figure mirrors the strong commercial nature of the Group's consolidated balance sheet as well as the strong banking and markets activity of the Group.

An increase in the loan-to-deposit (LTD) ratio, which stood at 108.5%, up from 102.8% at December 2015. 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 148,258 million pesos at the end of 2015.

7.3.3. Compliance with regulatory ratios

As part of its liquidity management model, in recent years the Group has been managing, monitoring and complying with the liquidity requirements set by local and international financial legislation.

LCR (Liquidity Coverage Ratio)

On December 31, 2014, the CNBV and the Mexican Central Bank published in the Federal Official Gazette, the General Provisions on Liquidity Requirements for Banking Institutions, which establish liquidity requirements that credit institutions must comply at all times in accordance with the guidelines established by the Committee on Regulation of Bank Liquidity at its meeting held on October 17, 2014.

The objectives of the liquidity requirements are as follows:

To anticipate that banking institutions in Mexico has available liquid assets with high credit quality to manage their obligations and liquidity necessities along 30 days

To establish a liquidity coverage ratio as per a methodology in line with the international standards, which must include all foreign currencies

To include both on and off balance transactions in the liquidity coverage ratio calculation, as long as those transactions represent a liquidity potential risk for banking institutions

To anticipate that banking institutions in Mexico consolidate their subsidiaries which core business relates to financial operations.

The liquidity coverage ratio is the result of dividing the liquid assets by the net cash flow.

During the fourth quarter of 2015, the weighted average LCR for the Bank is 107.45%, complying with the Group´s desired risk profile and well above the regulatory minimum established in the regulations.

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8. Operational risk

8.1 Definition and objectives

The Group defines operational (OR) risk as “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events".

Operational risk is inherent in all products, activities, processes and systems, and is generated in all business and support areas; accordingly, all employees are responsible for managing and controlling the risks arising in their area of activity.

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 mitigate any clusters of operational risk, irrespective of whether or not they have given rise to any losses. 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 Operational risk management and control model

8.2.1 Corporate governance and organizational model

The operational risk management structure is based on the knowledge and experience of the executive officers 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 to the 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.

8.2.2 Operational risk management cycle

The operational risk management and control model includes the following phases:

Identification of the operational risk inherent in all the Group’s activities, products, processes and systems.

Definition of the target operational risk profile, specifying the strategies by business unit and time horizon, through the establishment of the operational risk appetite and tolerance, the annual loss budget and the monitoring thereof.

Encouragement of the involvement of all employees in the operational risk culture, through appropriate training for all areas and levels of the organization

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Objective and ongoing measurement and assessment of operational risk, consistent with the industry and regulatory standards (Basel, CNBV, Bank of Spain, etc.).

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.

Preparation of periodic reports on the exposure to operational risk and its level of control for management and the Group’s business units, and reporting to the market and the regulatory authorities.

Definition and implementation of the methodology required for internal calculation of capital in terms of expected and unexpected loss.

The following is required for each of the key processes indicated above:

Definition and implementation of systems enabling the Group to monitor and control operational risk exposures.

Definition and documentation of operational risk management policies and implementation of the related methodologies consistent with current regulations and best practices.

8.2.3 Risk identification, measurement and assessment model

In order to identify, measure and assess operational risk, the Group defined a set of quantitative and qualitative techniques/tools that are combined to perform a diagnosis, based on the identified risks, and obtain a valuation, through the measurement/assessment of the business unit.

The quantitative analysis of this risk is carried out mainly using tools that record and quantify the potential level of losses associated with operational risk events.

The tools defined for the qualitative analysis aim to assess aspects (coverage/exposure) linked to the risk profile, thereby making it possible to capture the control environment in place.

8.2.4 Operational risk information system

The Group has an information system that supports the operational risk management tools and facilitates the information and reporting functions and requirements.

8.3 Mitigation measures

The model requires the Group to monitor the mitigation measures established in response to the main sources of risk, which were identified through an analysis of the tools used in managing operational risk, and as a result of the organizational and development model and the preventive implementation of operational risk management and control policies and procedures.

The most significant mitigation measures have focused on the improvement of security for customers in their day-to-day transactions, the management of external fraud, the ongoing improvement of processes and technology, and on taking steps to ensure that products are sold and services are provided in an appropriate manner.

Cyber-security and data security plans

In 2015 the Group continued to devote its full attention to cyber-security-related risks, which affect all types of companies and institutions, including those in the financial sector.

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This situation, which is generating concern among entities and regulators, is prompting the adoption of preventive measures in order to be prepared for cyber-attacks.

In order to step up and supplement the actions already in progress, the Group has prepared a cyber-security program, which stipulates: i) a governance integrating the three lines of defense; ii) a cyber-resilience-oriented line of action envisaging measures in the areas of identification, prevention, protection, detection and reaction; iii) aspects of cyber-security with an impact on training, access control and segregation of functions, as well as secure software development; and iv) initiatives for organizational reinforcement.

8.4 Business continuity plan

The Group has a business continuity management system (BCMS) to ensure the continuity of the business processes in the event of a disaster or serious incident.

This basic objective consists of the following:

Minimizing possible injury to persons, as well as adverse financial and business impacts for the Group, resulting from 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.

Protecting the public image of, and confidence in, the Group.

Meeting the Group's obligations to its employees, customers, shareholders and other interested third-party stakeholders.

In 2015 the Group continued to make progress in the implementation and ongoing improvement of its business continuity management system.

8.5 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 continually improves its operational control procedures in order to remain in line with new regulations and best market practices. Thus, in 2015, further improvements were made to the control model for this business, placing particular emphasis on the following points:

Analysis of trading operations to detect any possible anomalous conduct.

Tightening of controls on transaction cancellations and modifications.

Adaptation of existing controls and development of new controls to comply with Volcker Rule requirements.

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.

Information is specifically prepared on the following aspects:

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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.

The role of insurance in operational risk management

The Group considers insurance as a key factor in operational risk management. 2015 saw the reinforcement of the common guidelines for coordinating the various functions involved in the management cycle for operational risk-mitigating insurance, but also the various front-line risk management areas, based on the procedure designed in 2014.

9. Compliance and conduct risk

9.1 Scope, mission, definitions and objective

The compliance function encompasses all matters relating to regulatory compliance, the prevention of money laundering and terrorist financing, product governance and consumer protection, and reputational risk.

To this end, the compliance function promotes adherence by the Group to the rules, oversight requirements, principles and values of good conduct by establishing standards, holding debates and providing advice and information in the interest of employees, customers, shareholders and society in general.

Based on the current arrangement of the Group's three lines of defense, the compliance function is a second-line control function with access to the Board of Directors and its committees through the Chief Compliance Officer (CCO), who has access to these bodies on a regular basis. This structure is in line with banking regulatory requirements and supervisory expectations.

Compliance risks are defined as including the following:

Compliance risk: the risk arising from non-compliance with the legal framework, internal rules or the requirements of regulators and supervisors.

Conduct risk: the risk caused by inappropriate practices vis-a-vis the Bank's relationship with its customers, the treatment and products offered to customers, and their suitability for each particular customer.

Reputational risk: the risk arising from negative perception of the Bank on the part of public opinion, its customers, investors or any other stakeholder.

The Group's objective regarding compliance and conduct risk is to minimize the likelihood of non-compliance and irregularities occurring and to ensure that, should they ultimately occur, they are promptly identified, assessed, reported and resolved.

9.2 Control and supervision of compliance risks

Based on the arrangement of the Group's lines of defense, in particular within the compliance function, primary responsibility for managing compliance risks is shared, in the first line of defense, by the business units directly originating those risks and the compliance function, acting either directly or by reviewing compliance activities, controls or tasks of that first line.

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Furthermore, as the second line of defense, in its control and oversight capacity, the compliance function is charged with establishing, encouraging and achieving adherence by the business units to the frameworks, policies and standards in place across the Group. To this end, a set of controls is established, the application of which is monitored and verified.

In the sphere of compliance, the CCO is responsible for reporting to the governing and managing bodies, and also for advising and informing management about compliance matters and for fostering a compliance culture, within the framework of an annual program, the effectiveness of which is assessed on a regular basis.

The compliance function provides the basic components for the management of these risks (frameworks and policies for anti-money laundering measures, codes of conduct, product marketing, reputational risk, etc.) and ensures that the other components are duly addressed by the corresponding Group business units (responsible financing, data protection, customer claims, etc.), for which purpose it has established the appropriate control and supervision systems, within the second line of defense against compliance risk.

Also, internal audit, as part of its functions in the third line of defense, conducts the tests and reviews required to check that the appropriate supervision controls and components are applied, and that the standards and procedures established at the Group are being complied with.

The essential components of compliance risk management are based on resolutions adopted by the Board of Directors, as the highest authority for such matters, through the approval of frameworks – which regulate the relevant matters - and the Group's general code of conduct.

The frameworks for the compliance function are as follows:

General compliance framework.

Product and service marketing framework.

Claims management framework.

Framework for the prevention of money laundering and of terrorist financing.

These frameworks are developed within the sphere of the Group's internal governance model.

For its part, the general code of conduct contains the rules of behavior and ethical principles that must govern the actions of all Group employees and is supplemented in certain matters by the rules contained in other codes and the related internal implementing regulations.

Also, the code establishes:

The functions and responsibilities relating to the compliance matters addressed by it.

The rules regulating the consequences of failure to observe the code.

The channel for submitting and processing notifications of allegedly irregular actions.

The regulatory compliance function, is responsible for ensuring the effective implementation and monitoring of the general code of conduct.

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9.3 Governance and organizational model

It is the responsibility of the Board of Directors of the Bank, as part of its general supervisory function, to approve the appointment of the person ultimately responsible for the compliance function (the CCO), as well as for its framework and its development policies. In addition, the Board of Directors is in charge of the Group's general code of conduct and the frameworks developed by the compliance function

The compliance function reports to the Board of Directors and its committees on a quarterly basis.

Also worthy of mention is the appropriate coordination in place with the operational risk function, which compiles the various loss events arising from compliance and conduct risks and which, using a risk governance featuring a combined view of all the Group's risks, also reports to the Board of Directors and its committees.

9.3.1 Governance

The committees listed below are collective bodies with responsibilities in the sphere of compliance:

The regulatory compliance committee: this is the collective governance body for regulatory compliance, without prejudice to the responsibilities assigned to the specialist bodies currently existing in the function (namely the product and service marketing committee, the monitoring committee and the committee for the prevention of money laundering and terrorist financing).

The product and service marketing committee: this is the collective governance body for the validation of products and services. The committee's objectives and functions are based on minimizing the improper marketing of products and services for customers, taking into account consumer protection principles. Its functions are performed at both corporate and local level.

The monitoring committee is the Group's collective governance body for the monitoring of products and services and the evaluation of customer claims. Approved products and services are monitored by the monitoring committees or equivalent bodies.

The committee for the prevention of money laundering and terrorist financing is the collective body in this sphere that defines the related action frameworks, policies and general objectives.

In order to reinforce the governance of the function and safeguard its independence, the objectives and duties of the aforementioned committees have been revised to bring them into line with the Group's governance model.

9.3.2 Organizational model

In order to ensure a vision and integrated management of the various compliance risks, the organizational structure of the function uses a hybrid approach, so as to make the specialist compliance risks (vertical functions) converge with the standardized aggregate vision of those risks (transversal functions).

9.4 Regulatory compliance

The following functions are in place to ensure the proper control and supervision of regulatory compliance risks:

Application of the Group’s general code of conduct and the other codes and rules implementing it. Provision of advice on the resolution of any doubts arising from their application.

Cooperation with internal audit in the periodic reviews conducted by it on compliance with the general code of conduct and with the other codes and rules implementing it, without prejudice to any periodic reviews of compliance matters that have to be conducted directly.

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Preparation (or amendment) of compliance programs on specific regulations, for submission for approval by the Board of Directors or its committees.

Presentation of periodic reports to the Board of Directors on the development of the framework and the application of the compliance program.

Assessment of any changes that may need to be made to the compliance program, in particular where unregulated risk situations and improvable procedures are detected.

Receipt and handling of the complaints made by employees through the whistleblowing facility.

Direction and coordination of any investigations into breaches, with possible support from internal audit, and proposal of the appropriate penalties to the related committee.

Supervision of the compulsory training activity for the compliance program.

The focus of the regulatory compliance program is on the following areas:

Compliance in employee-related matters.

Compliance in organizational matters.

Compliance with market regulations.

Conduct in securities markets.

9.5 Product governance and consumer protection

The main responsibilities of the compliance function are the adequate control and oversight of product and service marketing risks, to foster transparency and a simple, personal and fair approach to customers in order to protect their rights, and to ensure that policies and procedures take the consumers' perspective into account. For this purpose, the functions listed below were established, based on two frameworks and a set of policies that define the basic principles and rules of action in this area:

Frameworks:

Marketing framework: a uniform system for the marketing of products and services, aimed at minimizing exposure to the risks and possible claims arising in all phases of the marketing process (validation, pre-sale, sale, monitoring).

Claims management framework: a uniform system for the systematized management of the recording, control, management and analysis of the causes of claims, based on their various types; this makes it possible to identify the reasons for customer dissatisfaction, to provide suitable solutions for each case and to improve, where appropriate, the processes that gave rise to the claims.

Functions:

To promote the adherence to the above-mentioned frameworks.

To guarantee the proper validation, prior to its launch, of any new product or service proposed by the Group.

To safeguard the internal protection of consumers, with the aim of improving their relationships with the Group, by effectively promoting their rights and providing solutions to possible disputes, in accordance with best practices through any channel, as well as by fostering consumers' financial knowledge. All these efforts are geared towards building lasting relationships with customers.

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To identify, analyze and control the fiduciary risk generated by the private banking and the custody services for customers' financial instruments. Fiduciary risk is considered to be that arising from the management of financial instruments on behalf of customers.

To compile, analyze, and report to the Group's governance bodies, the information required to conduct a proper analysis of product and service marketing risk and of claims risk, from a two-fold perspective: the possible impact on customers and on the Group, as well as on the monitoring of products and services throughout their life-cycle.

To supervise the marketing and claims management processes, making proposals for improvements and monitoring the mitigating actions taken for the risks detected.

9.6 Prevention of money laundering and of terrorist financing

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. The Group also observes 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

The Group is responsible for directing and coordinating the systems and procedures for the prevention of money laundering and terrorist financing, as well as for investigating and reporting suspect transactions and meeting the related supervisory reporting requirements.

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 business units. 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 systems and processes based on technology systems, which make it possible to obtain managed information and data, as well as reporting, monitoring and control information. These systems enable the Group to take an active and preventive approach in analyzing, identifying and monitoring any transactions that could be linked to money laundering or terrorist financing activities.

9.7. Reputational risk

The specific nature of reputational risk, which arises from a wide variety of sources, combined with the highly variable perception of this risk, as it is understood by the various stakeholders, requires an approach and a management and control model that is unique, different from those used for other risks.

The reputational risk model is based on an eminently preventive approach, but also on effective crisis management processes.

Therefore, the Group's intention is for reputational risk management to be integrated both in business and support activities and in internal processes, thus allowing the risk control and supervision functions to integrate it in their activities.

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Also, the reputational risk model requires a comprehensive understanding, not only of the Group's business activities and processes, but also of how it is perceived by its stakeholders (employees, customers, shareholders, investors and society in general) in its different environments. This approach requires close coordination between the management, support and control functions and the various stakeholders.

As mentioned above, reputational risk governance is one of the components of compliance governance. The compliance function reports on reputational risk to management, once the information on sources of reputational risk has been consolidated.

9.8 Compliance risk assessment model and risk appetite

The Group's risk appetite, in relation to compliance, is set by its statement that it is not willing to accept any risks of this nature, the clear objective being to minimize any economic, regulatory or reputational impact on the Group.

10. Model risk

The Group understands a model as being any metric based on a quantitative method, system or approach that provides a simplified representation of reality by applying statistical, economic, financial or mathematical techniques to process data and obtain a result based on a series of assumptions subject to a certain degree of uncertainty. Using models makes it possible to take swifter, more objective decisions, generally supported by the analysis of large quantities of information.

The use of models invariably presents model risk, which is defined as the potential for adverse consequences, including losses, from decisions based on incorrect or misused models.

According to this definition, the sources of model risk are as follows:

The model itself, due to the use of incorrect or incomplete data in its construction, and due to the modelling method used and its implementation in the systems.

The misuse of the model.

In recent years the Group has been working on the definition, management and control of model risk.

A control framework has been defined for this function detailing, inter alia, matters relating to organization, governance and model management and validation.

Model risk management and control are structured around the life cycle of a model, as defined by the Group:

Definition of standards

The Group has defined a series of standards for the development, monitoring and validation of its models. All models used within the Group -both those developed in-house and those acquired from third parties- must meet these standards. Thus, the quality of the models used at the Group for decision-making purposes is assured.

Inventory

A key component of good model risk management is a complete, exhaustive inventory of the models in use.

The Group has a centralized inventory that has been constructed using a uniform taxonomy for all the models used in the various business units. This inventory contains all the relevant information on each of the models, which permits an appropriate monitoring of the models based on their importance.

The inventory also makes it possible to perform cross data analysis (by type of model, materiality, etc.), thus facilitating the taking of strategic decisions in relation to the models.

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Planning

This phase features the participation of all those involved in the life-cycle of the model (users, developers, validators, data providers, technology personnel, etc.), who agree upon and set the relevant priorities.

Model planning is performed annually at each of the Group's main business units and is approved by the governance bodies.

Compilation of information

As indicated above, the data used in the construction of a model constitute one of the potential sources of model risk. These data must be reliable, complete and have sufficient historical depth to guarantee the suitability of the model developed.

The Group has teams that specialize in providing model construction data that have previously been certified by the data owners.

Development

This is the phase in which the model is constructed, based on the needs established in the model plan and using the information provided by specialists for this purpose.

Most of the models used by the Group are developed by in-house methodology teams, although certain models are also acquired from external providers. In both cases, the models must be developed in accordance with the established standards.

Pre-implementation testing

Once a model has been constructed, the developers, together with the model owners, subject it to various tests in order to ensure that the model functions as expected and, where appropriate, they make the necessary adjustments.

Materiality

Each of the Group's models must have an associated level of materiality that is set by consensus of the parties involved.

The criteria for establishing materiality are documented in a policy approved by the Group.

Materiality determines the thoroughness, frequency and scope of the validations and follow-ups performed on the model, as well as the governance bodies in which decisions on the model have to be taken.

Materiality is one of the basic data for the proper management of model risk and one of the attributes contained in the inventory.

Independent validation

In addition to being a regulatory requirement in certain cases, the independent validation of models is a fundamental cornerstone for the proper management and control of model risk at the Group.

Therefore, as mentioned earlier, the Group has a specialist unit, fully independent of the developers and users, which issues a technical opinion on the suitability of the internal models for the intended purposes and concludes on their robustness, usefulness and effectiveness.

Internal validation currently covers all models used in the risk function, i.e., credit, market, structural and operational risk models, as well as capital models, allowance models and stress test models.

The scope of the validation includes not only the more theoretical or methodological aspects, but also the technology systems and the data quality that underpin the effective operation of the models. In general, it includes

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all the relevant aspects of model management: controls, reporting, uses, involvement of management, etc.

After each model has been reviewed, the opinion issued is translated into a rating which, on a scale of one to five, summarizes the model risk perceived by the internal validation team.

It should be noted that the Group's internal validation environment is fully consistent with the criteria for internal validation of advanced approaches issued by the supervisory authorities to which the Group is subject. Accordingly, the Group maintains a segregation of functions between the business units that develop and use models (first line of defense), the internal validation units (second line of defense) and internal audit (third line), which, in its role as the last layer of control, is responsible for reviewing the efficiency of the function, compliance with internal and external policies and procedures and for giving its opinion on the degree of effective independence.

Approval

Before it is implemented -and, therefore, used- each model must be submitted for approval by the body corresponding to it on the basis of its materiality.

Implementation

This is the phase in which the developed model is implemented in the system through which it is intended to be used. As mentioned above, the implementation phase is another possible source of model risk and, therefore, it is absolutely essential that the technical teams and model owners conduct tests to certify that the model has been implemented as defined in the relevant methodology.

Monitoring

A model is designed and constructed using certain information and in specific circumstances which may change in the course of time. Consequently, models must be reviewed periodically in order to ensure that they continue to function correctly and, if this is not the case, they are adapted or redesigned.

The frequency and thoroughness with which a model is monitored is established on the basis of that model's materiality.

Governance

According to the model risk control framework, the models area is the body responsible for authorizing the use of models in management. Each business unit has a models area that is responsible for deciding on the approval of the use of models once the consent of the corporate models area has been obtained.

Pursuant to current Group policy, all models submitted to a models area must be accompanied by an internal validation report.

11. Strategic risk

Strategic risk is one of the risks considered by the Group to be transversal. This model includes the definition of strategic risk, the functional and governance-related matters and a description of the main processes associated with the management and control of this risk.

Strategic risk is the risk associated with strategic decisions and with changes in an entity's general conditions that have a significant impact on its business model and its medium- and long-term strategy.

An entity's business model is a key element around which strategic risk revolves. It must be viable and sustainable, i.e., capable of generating acceptable results each year and for at least three years into the future.

Three categories or subtypes of strategic risk can be distinguished:

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Business model risk: the risk associated with an entity's business model. This includes, inter alia, the risk that the business model may become outdated or irrelevant and/or may no longer have the value to generate the desired results. This risk is caused both by external factors (macroeconomic, regulatory, social and political matters, changes in the banking industry, etc.) and by internal factors (strength and stability of the consolidated income statement, distribution model/channels, income and cost structure, operational efficiency, suitability of human resources and systems, etc.).

Strategy design risk: the risk associated with the strategy reflected in the entity's five-year strategic plan. More specifically, it includes the risk that this plan may prove to be inadequate in terms of its nature or due to the assumptions considered, leading to unexpected results. Another factor that should be borne in mind is the opportunity cost of designing another more effective strategy or even that arising from a lack of action if no such strategy is designed.

Strategy execution risk: the risk associated with the implementation processes of three- and five-year strategic plans. Due to the medium- and long-term nature of such plans, their execution often entails risk, as a result of its complexity and the numerous variables involved. Other sources of risk to be considered are inadequate resources, change management and, lastly, the inability to respond to changes in the business environment.

In addition, for the purpose of managing and controlling strategic risk, the transversal risks associated with corporate development transactions must be taken into consideration, since they can represent a significant source of risk for the business model. These transactions are understood to be: those resulting in a change in an entity's scope and activity, acquisitions or transfers of significant ownership interests or assets, joint ventures, strategic alliances, shareholders agreements and capital transactions.

Lastly, other types of risk must be taken into account the origin of which may be other than strategic in nature (credit, market, operational and compliance risks, etc.). These risks may have a significant impact on an entity's financial health and also affect its strategy and business model; therefore, they must be identified, assessed, managed and controlled.

Thus, top risks are those risks with a material impact on an entity's earnings, liquidity or capital or risks that may have undesired concentrations. These risks can reduce the entity's distance to default.

In addition, emerging and evolving risks are those risks that had not appeared before or which have taken on a different form. Although these risks often involve a high level of uncertainty and are very difficult to quantify, their impact could be significant over a medium to long term time horizon.

12. Capital risk

The Group defines capital risk as the risk that the Group may have an insufficient amount and/or quality of capital to: meet the minimum regulatory requirements in order to operate as a bank; respond to market expectations regarding its creditworthiness; and support its business growth and any strategic possibilities that might arise, in accordance with its strategic plan.

The objectives in this connection include most notably:

To meet the internal capital and capital adequacy targets.

To meet the regulatory requirements.

To align the Bank’s strategic plan with the capital expectations of external agents (rating agencies, shareholders and investors, customers, supervisors, etc.).

To support the growth of the businesses and any strategic opportunities that may arise.

The Group has a capital adequacy position that surpasses the levels required by regulations.

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12.1 Compliance with the regulatory framework

The Basel III regulatory framework implemented in Mexico since January 2013 establishes 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.

Model roll-out

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: CGB, financial Institutions (banks) and other individualized customers.

For market risk, the calculation of the capital requirement is made under the standard method according to the provisions established by CNBV.

With regard to operational risk, the CNBV considers the application of the Basic Indicator method for calculating the capital requirement for this type of risk. As a result of regulatory changes published in October 2015 by the CNBV, it is allowed the application of the Standard method, the Alternative Standard method or the Advanced method for calculating the capital requirement for operational risk (CNBV approval is required). As of December 31, 2015 the Group applied the Basic Indicator method.

With regard to operational risk, Santander Group currently uses the standardized approach for regulatory capital calculation provided for in the European Capital Directive.

Disclosure rules (Pillar III) are determined by the CNBV and are mandatory for all financial institutions, with the principles of this Pillar III met, by: a) disclosing information to allow market participants to assess key information relating to capital, risk exposures and capital adequacy of financial institutions, b) informing 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.

12.2 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 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.

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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 provides 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.

The banks will also present sensitivity exercises considering the assumptions provided by the CNBV, among others, which 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 in 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, 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 exist.

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

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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 it 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.

12.3 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 A long-term target rating, which results in the application of a 99.95% confidence level for the purpose of calculating the required capital.

The Group's economic capital model includes in its measurement all the significant risks incurred by it in its 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 1 capital requirements.

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 regard to capital adequacy, in the context of Pillar II of the Basel Capital Accord, the Group conducts the internal capital adequacy assessment process (ICAAP) using its economic capital model. To this end, it plans the evolution of the business and the capital requirements under a central scenario and under alternative stress scenarios. With this planning the Group ensures that it will continue to meet its capital adequacy targets, even in adverse economic scenarios.

Also, the economic capital-based metrics make it possible to assess risk-return targets, price transactions on a risk basis and gauge the economic viability of projects, units or lines of business, with the ultimate objective of maximizing the generation of shareholder value.

Since it is a uniform risk measure, economic capital makes it possible to explain the distribution of risk across the Group, placing different activities and types of risk in a comparable metric.

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)

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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.

In 2015 value creation was 7,984 million pesos compared to a value creation of 7,843 in 2014. The Group’s results and, therefore, the RORAC and value creation figures were shaped by the weakness of the economic cycle of Mexico.

49. Consolidated Subsidiaries

Composition of the Group

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%

The subsidiaries of the Group, all of which have been included in the consolidated financial statements at 31 December 2015, 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%

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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 total non-controlling interest as of December 31, 2014 and 2015 is 10 million pesos and 11 million pesos respectively, which is attributed to Banco Santander (México), S.A.

Information in respect to non-controlling interest is presented in Note 27.

Change in the Group’s ownership interest in a subsidiary

During 2013, the Group disposed of 100% of its interest in SAM Asset Management. 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 2015, the Group did not dispose of any subsidiary.

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, 2015:

Compulsory deposit with the 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

22,831 million pesos of Mexican government securities (M Bonds, BPAT’s, UMS and other debt securities) have been pledged in connection with repurchase agreements operations (see Note 9).

Securities loans

24,413 million pesos of Mexican government securities (CETES and UDIBONDS) have been pledged in connection with securities loans transactions (see Note 9).

492 million pesos of Equity Instruments have been pledged in connection with securities loans transactions in which the lender is the Group (see Note 10).

Collaterals in derivatives transactions traded in organized markets

52 million pesos equity instruments classified as held for trading have been pledged in connection with derivatives traded in organized markets (see Note 32).

310 million pesos of loans and advances to credit institutions have been pledged in connection with derivatives transactions in organized markets (see Note 8).

1,609 million pesos of loans and advances to customers have been pledged in connection with derivatives traded in organized markets (see Note 12).

29 million pesos of customer deposits have been received in connection with derivatives transactions traded in organized markets (see Note 20).

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Collaterals in OTC derivatives transactions

30,223 million pesos of loans and advances to credit institutions have been pledged in connection with OTC derivatives transactions (see Note 8).

770 million pesos of debt instruments classified as held for trading have been pledged in connection with OTC derivatives transactions (see Note 9).

14,275 million pesos of customer deposits have been received in connection with OTC derivatives transactions (see Note 32).

Earnings distribution

The Group has restrictions on earnings distribution related to the legal reserve of 10,488 million pesos that include 386 million pesos in legal reserve of the Group on an individual basis (see Note 29). 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.

Financial support

The Group did not give any financial support to a consolidated structured entity during 2014 and 2015.

*****

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

CONDENSED PARENT COMPANY ONLY BALANCE SHEETS AS OF DECEMBER 31, 2014 AND 2015

(Millions of pesos)


ASSETS	12/31/2014		12/31/2015		LIABILITIES AND EQUITY	12/31/2014			12/31/2015

CASH AND BALANCES WITH CENTRAL BANK		-		-	FINANCIAL LIABILITIES HELD FOR TRADING:		-			-
					Trading derivatives		-			-
					Short positions		-			-
FINANCIAL ASSETS HELD FOR TRADING:		554		999
Debt instruments		254		999			-			-
Equity instruments		300		-	OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS:
Trading derivatives					Deposits from the 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:		191			197
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		191			197
Equity instruments		-		-
					HEDGING DERIVATIVES		-			-

LOANS AND RECEIVABLES:		522		7
Loans and advances to credit institutions		522		7	LIABILITIES ASSOCIATED WITH NON-CURRENT ASSETS 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:		-			-
INVESTMENTS IN SUBSIDIARIES		101,421		108,666	Current
Banco Santander (México) S.A.		100,415		107,651	Deferred		-			-
Others		1,006		1,015			-			-

REINSURANCE ASSETS		-		-	OTHER LIABILITIES		31			13

					TOTAL LIABILITIES		222			210
TANGIBLE ASSETS		-		-
Property, plant and equipment					SHAREHOLDERS' EQUITY:		102,538			109,107
					Share capital		25,658			25,658
INTANGIBLE ASSETS:		-		-	Share premium		11,415			11,415
Goodwill		-		-
Other intangible assets		-		-	Accumulated reserves		52,180			58,031
					Profit for the year attributable to the Parent		13,285			14,003

TAX ASSETS:		19		10
Current		15		6	VALUATION ADJUSTMENTS:		(244	)		380
Deferred		4		4	Available-for-sale financial assets		(537	)		(520	)
					Cash flow hedges		293			900
OTHER ASSETS		-		15	Non-current assets held for sale

					TOTAL SHAREHOLDERS’ EQUITY ATTRIBUTABLE TO THE PARENT		102,294			109,487

					TOTAL EQUITY		102,294			109,487
TOTAL ASSETS		102,516		109,697	TOTAL LIABILITIES AND EQUITY		102,516			109,697

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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, 2013, 2014 AND 2015

(Millions of pesos)

	(Debit)/Credit

	2013		2014		2015

Interest income and similar income	22		21		22
Interest expenses and similar charges	(8	)	(6	)	(6	)
NET INTEREST INCOME	14		15		16
Income from equity instruments	12,397		13,328		14,055
Banco Santander (México), S.A.	12,263		13,330		14,046
Others	134		(2	)	9
Fee and commission income	-		-		-
Fee and commission expenses	(4	)	(4	)	(5	)
Gains/(losses) on financial assets and liabilities (net)	-		1		3
Exchange differences (net)	-		1		-
Other operating income	-		1		-
Other operating expenses	-		-		-
TOTAL INCOME	12,407		13,342		14,069
Administrative expenses:	(56	)	(58	)	(80	)
Personnel expenses	(29	)	(30	)	(48	)
Other general administrative expenses	(27	)	(28	)	(32	)
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)	-		-		15
Gains/(losses) on disposal of assets not classified as
non-current assets held for sale (net)	-		-		-
Gains/(losses) on disposal of non-current assets held
for sale not classified as discontinued operations (net)	-		-		-
OPERATING PROFIT BEFORE TAX	12,351		13,284		14,004
Income tax	(8	)	1		(1	)
PROFIT FROM CONTINUING OPERATIONS	12,343		13,285		14,003
PROFIT FROM DISCONTINUED OPERATIONS (net)	1,938		-		-
PROFIT FOR THE YEAR	14,281		13,285		14,003

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

CONDENSED PARENT COMPANY ONLY STATEMENTS OF CASH FLOW FOR THE YEARS ENDED DECEMBER 31, 2013, 2014 AND 2015

(Millions of Pesos)

	2013			2014			2015

A. CASH FLOWS FROM OPERATING ACTIVITIES:		18,583			3,473			6,760
Profit for the year		14,281			13,285			14,003
Adjustments made to obtain the cash flows from operating activities		(14,327	)		(13,329	)		(14,054	)
Income from equity instruments		(12,397	)		(13,328	)		(14,055	)
Income tax expense recognized in income statement		8			(1	)		1
Profit on discontinued operations		(1,938	)		-			-
Net change in other operating assets and liabilities		81			(66	)		53
Income tax paid		-			(464	)		(1	)
Dividends received		18,548			4,047			6,759

B. CASH FLOWS FROM INVESTING ACTIVITIES:		2,267			-			-
Proceeds
Discontinued operations		2,267			-			-

C. CASH FLOWS FROM FINANCING ACTIVITIES:		(20,850	)		(3,473	)		(6,760	)
Payments
Dividends		(20,850	)		(3,473	)		(6,760	)

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 THE BEGINNING OF YEAR		-			-			-
G. CASH AND CASH EQUIVALENTS AT THE END OF YEAR		-			-			-

During 2013, 2014 and 2015, Grupo Financiero Santander México, S.A.B. de C.V. received cash dividends from subsidiaries as follows:

	2013		2014		2015

Dividends received		18,548		4,047		6,759

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