Form 20-F

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)


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


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

For the fiscal year ended December 31, 2008


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

for the transition period from to


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

Date of event requiring this shell company report

Commission file number 001-12518

BANCO SANTANDER, S.A.

(Exact name of Registrant as specified in its charter)

Kingdom of Spain
(Jurisdiction of incorporation)

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

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

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


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


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

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

Securities registered or to be registered pursuant to Section 12(g) of the Act.
None.
(Title of Class)

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

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

Yes þ No o

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

Yes o No þ

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

Yes þ No o

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

Yes o No o

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


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

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


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

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

Item 17 o Item 18 þ

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

Yes o No þ

Indicate the number of outstanding shares of each of the issuer’s classes of capital stock or common stock as of the close of business covered by the annual report.
7,994,059,403 shares

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Accounting Principles

Under Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of July 19, 2002, all companies governed by the law of an EU Member State and whose securities are admitted to trading on a regulated market of any Member State must prepare their consolidated financial statements in conformity with the International Financial Reporting Standards previously adopted by the European Union (“EU-IFRS”). The Bank of Spain Circular 4/2004 of December 22, 2004 on Public and Confidential Financial Reporting Rules and Formats (“Circular 4/2004”) requires Spanish credit institutions to adapt their accounting systems to the principles derived from the adoption by the European Union of International Financial Reporting Standards. Therefore, Grupo Santander (“the Group” or “Santander”) is required to prepare its consolidated financial statements for the year ended December 31, 2008 in conformity with the EU-IFRS required to be applied under Bank of Spain’s Circular 4/2004. As described in the following paragraph, differences between EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and International Financial Reporting Standards as issued by the International Accounting Standard Board (“IFRS-IASB”) are not material for the periods subsequent to 2005.

Except where noted otherwise, the financial information contained in this report has been prepared according to the IFRS-IASB. In our 2007 Form 20-F, we presented financial statements and selected financial data using EU-IFRS as required to be applied under the Bank of Spain’s Circular 4/2004. This information was not consistent with IFRS-IASB and for periods 2005 and earlier the differences were material. We have concluded that the differences are not material for the periods subsequent to 2005 and therefore, have asserted that the financial statements for the periods 2006 to 2008 comply with IFRS-IASB. To present all periods on a basis consistent with IFRS-IASB for comparative purposes, we have restated the information presented for 2004 and 2005 (see “Item 3, Key Information – A. Selected Financial Data” for details of the significant differences between EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and IFRS-IASB, and reconciliation to amounts previously reported). As the periods subsequent to 2005 have not been restated, the ending shareholders’ equity balance as of December 31, 2005 does not equal the opening shareholders’ equity balance as of January 1, 2006. The difference is €555,588 thousand, which we concluded was not material.

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

In addition, the information contained in the consolidated income statement for the year ended December 31, 2006 differs from the consolidated income statement data for such periods included in our Annual Report on Form 20-F for the year ended December 31, 2006 due to the reclassification of amounts relating to operations that were discontinued in 2007, such as the sale of our Latin American pension management companies. (See “Item 4. Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations”). Under IFRS-IASB, revenues and expenses of discontinued businesses must be reclassified from each income statement line item to “Profit from discontinued operations”. Revenue and expenses from prior years are also required to be reclassified for comparison purposes to present the same businesses as discontinued operations. This change in presentation does not affect “Profit attributed to the Group” (see Note 37 to our consolidated financial statements).

Our auditors, Deloitte, S.L., an independent registered public accounting firm, have audited our consolidated financial statements in respect of the three years ended December 31, 2008, 2007 and 2006 in accordance with IFRS-IASB. See page F-1 to our consolidated financial statements for the 2008, 2007 and 2006 report prepared by Deloitte, S.L.

Acquisition of Abbey National plc

In November 2004, we acquired 100% of the capital of Abbey National plc (“Abbey”). Our acquisition of Abbey was reflected in our consolidated financial statements as if the acquisition had occurred on December 31, 2004. Accordingly, Abbey’s assets and liabilities were consolidated into our balance sheet as of December 31, 2004, but Abbey’s results of operations had no impact on our income statement for the year ended December 31, 2004. Therefore, the income statement for the year ended December 31, 2005 is the first to reflect the acquisition of Abbey.

General Information

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

•

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

•

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

•

“one billion”, we mean 1,000 million.

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

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

When we refer to “impaired assets”, we mean impaired loans, securities and other assets to collect.

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

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

•

exposure to various types of market risks;

•

management strategy;

•

capital expenditures;

•

earnings and other targets; and

•

asset portfolios.

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

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

Economic and Industry Conditions

•

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

•

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

•

continued deterioration in the global economy, and continued volatility in the capital markets;

•

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

•

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

•

inflation or deflation;

•

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

•

changes in competition and pricing environments;

•

the inability to hedge some risks economically;

•

the adequacy of loss reserves;

•

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

•

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

•

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

Political and Governmental Factors

•

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

•

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

•

increased regulation in light of the global financial crisis

Transaction and Commercial Factors

•

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

•

the outcome of our negotiations with business partners and governments.

Operating Factors

•

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

•

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

•

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

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

PART I

Item 1. Identity of Directors, Senior Management and Advisers

A. Directors and Senior Management

Not applicable.

B. Advisers

Not applicable.

C. Auditors

Not applicable.

Item 2. Offer Statistics and Expected Timetable

A. Offer Statistics

Not applicable.

B. Method and Expected Timetable

Not applicable.

Item 3. Key Information

A. Selected financial data

Selected Consolidated Financial Information

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

Except where noted otherwise, the financial information contained in this report has been prepared according to the International Financial Reporting Standards as issued by the International Accounting Standard Board (IFRS-IASB). In our 2007 Form 20-F, we presented financial statements and selected financial data using EU-IFRS as required to be applied under the Bank of Spain’s Circular 4/2004. This information was not consistent with IFRS as issued by the International Accounting Standards Board (IFRS-IASB) and for periods 2005 and earlier the differences were material. We have concluded that the differences are not material for the periods subsequent to 2005 and therefore, have asserted that the financial statements for the periods 2006 to 2008 comply with IFRS-IASB. To present all periods on a basis consistent with IFRS-IASB for comparability purposes, we have restated the information presented for 2004 and 2005 (see the end of this section for details of the significant differences between EU-IFRS required to be applied under Bank of Spain’s Circular 4/2004 and IFRS-IASB, and reconciliation to amounts previously reported). As the periods subsequent to 2005 have not been restated, the ending shareholders’ equity balance as of December 31, 2005 does not equal the opening shareholders’ equity balance as of January 1, 2006. The difference is €555,588 thousand, which we concluded was not material.

In the F-pages of this Form 20-F, the audited financial statements for the years 2008, 2007 and 2006 are presented. The audited financial statements for 2005 and 2004 are not included in this document, but they can be found in our previous annual reports on Form 20-F. However, in the previous annual reports on Form 20-F, the financial statements for 2005 and 2004 were prepared under the EU-IFRS required to be applied under Bank of Spain’s Circular 4/2004, and thus are not comparable to the financial data presented for those years in this Form 20-F.

In November 2004, we acquired 100% of the capital of Abbey. Under IFRS-IASB, our acquisition of Abbey was reflected on our financial statements as if the acquisition had occurred on December 31, 2004. Accordingly, Abbey’s assets and liabilities were consolidated into our balance sheet as of December 31, 2004, but Abbey’s results of operations had no impact on our income statement for the year ended December 31, 2004. Therefore, the income statement for the year ended December 31, 2005 is the first to reflect the acquisition of Abbey.

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


	Year Ended December 31,
	2008			2007			2006			*2005 ()**			*2004 ()**
	(in thousands of euros, except percentages and per share data)
Interest and similar income		56,207,656			46,312,706			37,239,602			33,827,323			17,915,307
Interest expense and similar charges		(38,035,863	)		(31,359,417	)		(25,118,665	)		(23,477,278	)		(10,741,775	)
Interest income / (charges)		18,171,793			14,953,289			12,120,937			10,350,045			7,173,532
Income from equity instruments		552,809			422,618			412,714			335,576			388,876
Income from companies accounting for by the equity method		797,300			441,457			426,921			619,157			448,220
Fee and commission income		9,942,097			9,479,986			8,288,580			7,153,947			5,417,676
Fee and commission expense		(1,491,491	)		(1,439,811	)		(1,264,385	)		(1,092,751	)		(866,923	)
Gains/losses on financial assets and liabilities (net)		2,963,672			2,331,696			2,062,471			1,457,847			728,878
Exchange differences (net)		579,827			650,734			96,635			76,513			361,465
Other operating income		9,440,461			6,741,246			6,076,845			3,355,378			2,968,389
Other operating expenses		(9,232,417	)		(6,503,829	)		(5,839,785	)		(3,058,935	)		(2,891,193	)
Total income		31,724,051			27,077,386			22,380,933			19,196,777			13,728,920
Administrative expenses		(11,979,348	)		(11,018,329	)		(9,969,171	)		(9,364,408	)		(6,683,623	)
Personnel expenses		(6,963,855	)		(6,551,201	)		(5,967,873	)		(5,611,308	)		(4,232,981	)
Other general expenses		(5,015,493	)		(4,467,128	)		(4,001,298	)		(3,753,100	)		(2,450,642	)
Depreciation and amortization		(1,269,527	)		(1,267,880	)		(1,146,547	)		(1,013,943	)		(830,621	)
Provisions (net)		(1,699,114	)		(1,023,563	)		(1,079,337	)		(1,807,381	)		(1,103,287	)
Impairment losses on financial assets (net)		(6,345,433	)		(3,502,604	)		(2,480,993	)		(1,938,956	)		(1,106,605	)
Impairment losses on other assets (net)		(1,049,704	)		(1,548,610	)		(20,781	)		(154,475	)		(81,402	)
Gains/(loss) on disposal of assets not classified as non-current assets held for sale		118,046			1,815,867			352,120			1,379,554			200,649
Gains/(loss) on non-current assets held for sale not classified as discontinued operations		1,730,781			642,974			959,162			1,061,696			740,735
Operating profit/(loss) before tax		11,229,752			11,175,241			8,995,386			7,358,864			4,864,766
Income tax		(1,884,223	)		(2,335,686	)		(2,254,598	)		(1,136,118	)		(670,087	)
Profit from continuing operations		9,345,529			8,839,555			6,740,788			6,222,746			4,194,679
Profit from discontinued operations (net)		(13,115	)		796,595			1,504,965			330,703			132,432
Consolidated profit for the year		9,332,414			9,636,150			8,245,753			6,553,449			4,327,111
Profit attributable to the parent		8,876,414			9,060,258			7,595,947			6,023,783			3,936,747
Profit attributable to minority interests		456,000			575,892			649,806			529,666			390,364

Per share information:
Average number of shares (thousands) (1)		7,271,470			6,801,899			6,701,728			6,693,400			5,309,682
Basic earnings per share (in euros)		1.2207			1.3320			1.1334			0.9000			0.7414
Basic earnings per share continuing operation (in euros)		1.2229			1.2279			0.9442			0.8656			0.7282
Diluted earnings per share (in euros)		1.2133			1.3191			1.1277			0.8968			0.7402
Diluted earnings per share continuing operation (in euros)		1.2155			1.2160			0.9394			0.8626			0.7270
Dividends paid (in euros) (2)		0.63			0.61			0.49			0.39			0.31
Dividends paid (in US$)		0.88			0.89			0.64			0.46			0.42


*()**		Restated using IFRS-IASB.


	Year Ended December 31,
	2008			2007			2006			*2005 ()**			*2004()**
	(in thousands of euros, except percentages and per share data)

Total assets		1,049,631,550			912,914,971			833,872,715			809,961,664			665,643,083
Loans and advances to credit insititutions (net) (3)		78,792,277			57,642,604			69,757,056			66,127,043			60,895,933
Loans and advances to customers (net) (3)		626,888,435			571,098,513			527,035,514			439,964,442			376,894,127
Investment Securities (net) (4)		124,673,342			132,035,268			136,760,433			203,938,360			138,753,764
Investments: Associates		1,323,453			15,689,127			5,006,109			3,031,482			3,747,564

Contingent liabilities (net)		65,323,194			76,216,585			58,769,309			48,453,575			31,813,882

Liabilities
Deposits from central banks and credit institutions (5)		129,877,370			112,897,308			113,038,061			148,624,811			83,750,339
Customer deposits (5)		420,229,450			355,406,519			330,947,770			305,631,794			285,710,616
Debt securities (5)		236,403,290			233,286,688			203,742,817			148,829,300			113,838,603

Capitalization
Guaranteed Subordinated debt excluding preferred securities and preferred shares (6)		15,747,915			16,742,134			11,186,480			8,973,699			9,369,939
Secured Subordinated debt		—			—			—			—			508,039
Other Subordinated debt		14,452,488			11,666,663			12,399,771			13,016,989			12,300,178
Preferred securities (6)		7,621,575			7,261,382			6,836,570			6,772,768			5,292,016
Preferred shares (6)		1,051,272			522,558			668,328			1,308,847			2,124,222
Minority interest (including net income of the period)		2,414,606			2,358,269			2,220,743			2,848,223			2,085,316
Stockholders’ equity (7)		57,586,886			55,199,882			44,851,559			40,334,064			35,166,851
Total capitalization		98,874,742			93,750,888			78,163,451			73,254,590			66,846,561
Stockholders’ Equity per Share (7)		7.92			8.12			6.69			6.03			6.62

Other managed funds
Mutual funds		90,305,714			119,210,503			119,838,418			109,480,095			97,837,724
Pension funds		11,127,918			11,952,437			29,450,103			28,619,183			21,678,522
Managed portfolio		17,289,448			19,814,340			17,835,031			14,746,329			8,998,388
Savings -insurance policies		12,338,405			9,008,968			6,384,994			15,145,607			16,843,995
Total other managed funds		131,061,485			159,986,248			173,508,546			167,991,214			145,358,629

Consolidated Ratios
Profitability Ratios:
Net Yield (8)		2.10	%		1.92	%		1.76	%		1.63	%		2.21	%
Return on average total assets (ROA)		1.00	%		1.10	%		1.01	%		0.89	%		1.09	%
Return on average stockholders’ equity (ROE)		17.07	%		21.91	%		21.39	%		18.84	%		20.70	%
Capital Ratio:
Average stockholders’ equity to average total assets		5.55	%		4.71	%		4.36	%		4.32	%		4.80	%
Ratio of earnings to fixed charges (9) Excluding interest on deposits		1.55	%		1.64	%		1.74	%		1.71	%		1.91	%
Including interest on deposits		1.27	%		1.34	%		1.34	%		1.28	%		1.42	%

Credit Quality Data (excluding country risk)
Allowances for impaired balances (**) (excluding country risk)		12,862,981			9,302,230			8,626,937			7,047,475			5,656,571
Allowances for impaired balances (**) as a percentage of total loans and contingent liabilities		1.83	%		1.42	%		1.45	%		1.43	%		1.37	%
Impaired balances (**) (10)		14,190,813			6,178,655			4,607,547			4,341,500			4,114,691
Impaired balances (**) as a percentage of total loansand contingent liabilities		2.02	%		0.94	%		0.78	%		0.88	%		0.99	%
Allowances for impaired balances () as a percentage of impaired balances ()		90.64	%		150.55	%		187.23	%		162.33	%		137.47	%
Net loan and contingent liabilities charge-offs as a percentage of total loans and contingent liabilities		0.55	%		0.41	%		0.31	%		0.21	%		0.15	%

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


	IFRS-IASB
	Year Ended December 31,
Allowances refers to:	2008			2007			2006			*2005 ()**			*2004 ()**
	(in thousands of euros)

Allowances for impaired balances (**) (excluding country risk)		12,862,981			9,302,230			8,626,937			7,047,475			5,656,571
Allowances for contingent liabilities (excluding country risk)		(603,372	)		(571,957	)		(541,519	)		(475,519	)		(43,482	)

Allowances for Balances of Loans:		12,259,609			8,730,273			8,085,418			6,571,956			5,613,089
Allowances referred to country risk		641,192			157,851			293,032			409,969			447,191

Allowances for impaired balances (excluding contingent liabilities)		12,900,801			8,888,124			8,378,450			6,981,925			6,060,280

Of which:
Allowances for customers and Credit institutions and other financial assets:		12,719,623			8,796,371			8,288,128			6,901,925			5,840,645
Allowances for Customers		12,466,056			8,695,204			8,163,444			6,755,175			5,688,432
Allowances for Credit institutions and other financial assets		253,567			101,167			124,684			146,750			152,213
Allowances for investment securities		181,178			91,753			90,322			80,000			219,635


*()**		Restated using IFRS-IASB.

(**)		Balances of loans and contingent liabilities.

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

(2)		The shareholders at the annual general meeting held on June 19, 2009 approved a dividend of €0.6508 per share to be paid out of our profits for 2008. In accordance with IAS 33, for comparative purposes, dividends per share paid, as disclosed in the table above, take into account the adjustment arising from the capital increase with pre-emptive subscription rights carried out in December 2008. As a result of this adjustment, the dividend per share for 2008 amounts to €0.6325.

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

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

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

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

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

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

(9)		For the purpose of calculating the ratio of earnings to fixed charges, earnings consist of income from continuing operations before taxation and minority interests plus fixed charges and after deduction of the unremitted pre-tax income of companies accounted for by the equity method. Fixed charges consist of total interest expense, including or excluding interest on deposits as appropriate, and the proportion of rental expense deemed representative of the interest factor. Fixed charges include dividends and interest paid on preferred shares.

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

As explained in Note 1 b) to our consolidated financial statements, the formats of the consolidated balance sheet, consolidated income statement, consolidated statement of recognized income and expense and consolidated cash flow statement presented in this Form 20-F differ from the presentation criteria of certain items and types of income from those presented in the Group’s consolidated financial statements included in the Form 20-F for the year ended December 31, 2007, because the former were prepared in accordance with models contained in the Bank of Spain Circular 4/2004 (as amended in 2008). Pursuant to IAS 1, the comparative figures were recast accordingly.

The differences between the format of the financial statements as presented in the Forms 20-F for the years ended December 31, 2008 and 2007, which mainly apply to the income statement, are as follows:


	(in thousands of euros)
	Year Ended December 31,
Previous format:	2007		2006		2005		2004
Net interest income		15,295,126		12,479,796		10,659,377		7,555,432
Gross income		27,068,469		22,333,170		19,075,556		13,789,277
Net operating income		14,815,693		11,217,740		8,764,677		6,332,277
Profit before tax		11,175,241		8,995,386		7,358,864		4,864,766
Profit from continuing operation		8,839,555		6,740,788		6,222,746		4,194,679
Consolidated profit for the year		9,636,150		8,245,753		6,553,449		4,327,111
Profit attributed to the Group		9,060,258		7,595,947		6,023,783		3,936,747
Profit attributed to minority interest		575,892		649,806		529,666		390,364


	(in thousands of euros)
	Year Ended December 31,
New format:	2007		2006		2005		2004
Interest income/ (charges)		14,953,289		12,120,937		10,350,045		7,173,532
Total Income		27,077,386		22,380,933		19,196,777		13,728,920
Operating Profit/(Loss) before tax		11,175,241		8,995,386		7,358,864		4,864,766
Profit from continuing operations		8,839,555		6,740,788		6,222,746		4,194,679
Consolidated profit for the year		9,636,150		8,245,753		6,553,449		4,327,111
a) Profit attributable to the parent		9,060,258		7,595,947		6,023,783		3,936,747
b) Profit attributable to minority interests		575,892		649,806		529,666		390,364

Specifically, the following table shows the Income Statement Reconciliation for the year ended December 31, 2007, in order to facilitate the understanding of the format changes produced in December 31, 2007, 2006, 2005 and 2004 respectively.


(Thousands of euros)	Previous format			Adjustments				New format
Interest and similar income		45,803,354			509,351		a)		46,312,706		Interest and similar income
Interest expenses and similar charges		(30,921,470	)		(437,947	)	a)		(31,359,417	)	Interest expense and similar charges
									14,953,289		INTEREST INCOME/(CHARGES)
Income from equity instruments		413,242			9,376		a)		422,618		Income from equity instruments
NET INTEREST INCOME		15,295,126
Shared of results of entities accounted for using the equity method		441,457							441,457		Income from companies accounted for by the equity method
Fee and commission income (net)		8,040,175							8,040,175		Fee and commission income (net)
Insurance activity income		319,353			(319,353	)	a)
Gains/losses on financial assets and liabilities (net)		2,321,624			10,072				2,331,696		Gains/ Losses on financial assets and liabilities (net)
Exchange differences (net)		650,734							650,734		Exchange differences (net)
GROSS INCOME		27,068,469
Net income from non-financial activities		152,072			(152,072	)	a)
Other operating income (net)		(118,639	)		356,056		a)		237,417		Other operating income (net)
									27,077,386		TOTAL INCOME
									(11,018,329	)	Administrative expenses
Personnel expenses		(6,551,201	)						(6,551,201	)	a) Personnel expenses
Other general administrative expenses		(4,467,128	)						(4,467,128	)	b) Other general expenses
Depreciation and amortisation		(1,267,880	)						(1,267,880	)	Depreciation and amortization
NET OPERATING INCOME		14,815,693
					(1,023,563	)	b)		(1,023,563	)	Provisions (net)
					(3,502,604	)	c)		(3,502,604	)	Impairment losses on financial assets (net)
Impairment losses (net)		(5,078,513	)		3,529,903		c)		(1,548,610	)	Impairment losses on other assets (net)
					1,815,867				1,815,867		Gains/ (Losses) on disposal of assets not classified as non-current assets held for sale
Net results on other disposals, provisions, and other income		1,438,061			(1,438,061	)	b)
					642,974				642,974		Gains/ (Losses) on non-current assets held for sale not classified as discontinued operations
PROFIT/ (LOSS) BEFORE TAX		11,175,241							11,175,241		OPERATING PROFIT/ (LOSS) BEFORE TAX
Income tax		(2,335,686	)						(2,335,686	)	Income tax
PROFIT FROM CONTINUING OPERATIONS		8,839,555							8,839,555		PROFIT FROM CONTINUING OPERATIONS
Profit from discontinued operations (net)		796,595							796,595		Profit from discontinued operations (net)

CONSOLIDATED PROFIT FOR THE YEAR		9,636,150							9,636,150		CONSOLIDATED PROFIT FOR THE YEAR
Profit attributed to minority interests		575,892							575,892		a) Profit attributable to minority interests
PROFIT ATTRIBUTED TO THE GROUP		9,060,258							9,060,258		b) Profit attributable to the parent


a)		Interest income (expense) from insurance and non-financial activities is classified as net interest income consistent with other financial activity. All other results are included within operating profit/loss.

b)		Provisions (net) is classified within operating profit/loss.

c)		Impairment losses on financial assets (net) is classified within operating profit/loss.

As noted above, the Group’s financial information included in our 2007 annual report on Form 20F is presented according to the EU-IFRS required to be applied under Bank of Spain’s Circular 4/2004. This information for periods 2005 and earlier was not consistent with IFRS as issued by the International Accounting Standards Board (IFRS-IASB) and the differences were material for such periods. We have concluded that the differences are not material for the periods subsequent to 2005 and therefore, have asserted that the financial statements for the periods 2006 to 2008 comply with IFRS-IASB. To present all periods on a basis consistent with IFRS-IASB for comparability purposes, we have restated the information presented for 2004 and 2005. As the periods subsequent to 2005 have not been restated, the ending shareholders’ equity balance as of December 31, 2005 does not equal the opening shareholders’ equity balances as of January 1, 2006. The difference is €555,588 thousand, which we concluded was not material. Set forth below is a table of the differences related to the amount of loan loss provisions between financial information for 2005 and 2004 as prepared under IFRS-IASB, compared with the financial information for those years prepared under the EU-IFRS required to be applied by the Bank of Spain. Under IFRS-IASB, the loan loss provision is calculated based on our internal risk models using our best estimates, taking into consideration our experience, the information about debtors profiles and the appraisal of the receivables in light of the current economic environment at the balance sheet date. Under the EU-IFRS required to be applied under Bank of Spain’s Circular 4/2004, we used “peer group” information in the calculation of allowances for inherent losses incurred but not yet identified.


	Year Ended December 31,
	2005									2004
In thousands of Euros
CONSOLIDATED PROFIT/(LOSS) DATA	EU-IFRS ()**			IFRS-IASB			Differences			EU-IFRS ()**			IFRS-IASB			Differences

Impairment losses on financial assets (net)		(1,636,923	)		(1,938,956	)		(302,033	)		(1,615,647	)		(1,106,605	)		509,042
Operating profit/loss before tax		7,660,897			7,358,864			(302,033	)		4,355,724			4,864,766			509,042
Income tax		(1,241,830	)		(1,136,118	)		105,712			(491,922	)		(670,087	)		(178,165	)
Profit from continuing operations		6,419,067			6,222,746			(196,321	)		3,863,802			4,194,679			330,877
Consolidated profit for the year		6,749,770			6,553,449			(196,321	)		3,996,234			4,327,111			330,877
Profit attributable to the parent		6,220,104			6,023,783			(196,321	)		3,605,870			3,936,747			330,877

BALANCE SHEET DATA	EU-IFRS ()**			IFRS-IASB			Differences			EU-IFRS ()**			IFRS-IASB			Differences


Loans and advances to customers (net)		439,109,692			439,964,442			854,750			375,737,344			376,894,127			1,156,783
*Allowances for impaired balances () (excluding country risk)**		7,902,225			7,047,475			(854,750	)		6,813,354			5,656,571			(1,156,783	)
Stockholders’ equity		39,778,476			40,334,064			555,588			34,414,942			35,166,851			751,909

CREDIT RATIOS (excluding country risk)	EU-IFRS ()**			IFRS-IASB			Differences			EU-IFRS ()**			IFRS-IASB			Differences


Allowances for impaired balances (*) as a percentage of total loans and contingent liabilities		1.60	%		1.43	%		(0.17	%)		1.64	%		1.37	%		(0.27	%)
Impaired balances (*) as a percentage of total loans and contingent liabilities		0.88	%		0.88	%		—			0.99	%		0.99	%		—
Allowances for impaired balances () as a percentage of impaired balances ()		182.02	%		162.33	%		(19.69	%)		165.59	%		137.47	%		(28.12	%)
Net loan and contingent liabilities charge-offs as a percentage of total loans and contingent liabilities		0.21	%		0.21	%		—			0.15	%		0.15	%		—

Exchange Rates

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

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

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


	Rate During Period
	Period End		Average Rate(1)
Calendar Period	($)		($)
2004		1.3538		1.2478
2005		1.1842		1.2449
2006		1.3197		1.2661
2007		1.4603		1.3797
2008		1.3919		1.4695


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


	Rate During Period
Last six months	High $		Low $
2008
December		1.4358		1.2634
2009
January		1.3866		1.2795
February		1.3008		1.2591
March		1.3671		1.2555
April		1.3496		1.2932
May		1.4098		1.3223
June (through June 24, 2009)		1.4238		1.3840

On June 24, 2009, the exchange rate for euros and dollars (expressed in dollars per euro), as published by the ECB, was $1.4029.

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

B. Capitalization and indebtedness

Not Applicable.

C. Reasons for the offer and use of proceeds

Not Applicable.

D. Risk factors

Risks Relating to Our Operations

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

Our loan portfolio is concentrated in Continental Europe (in particular, Spain), the United Kingdom and Latin America. At December 31, 2008, Continental Europe accounted for approximately 52% of our total loan portfolio (Spain accounted for 38% of our total loan portfolio), while the United Kingdom and Latin America accounted for 32% and 15%, respectively. Therefore, adverse changes affecting the economies of Continental Europe (in particular, Spain), the United Kingdom or the Latin American countries where we operate would likely have a significant adverse impact on our loan portfolio and, as a result, on our financial condition, cash flows and results of operations. See “Item 4. Information on the Company—B. Business Overview.”

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

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

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

Historically, our principal source of funds has been customer deposits (demand, time and notice deposits). At December 31, 2008, 20.6% of these customer deposits were time deposits in amounts greater than $100,000. Time deposits represented 48.8%, 48.9% and 44.2% of total customer deposits at the end of 2008, 2007 and 2006, respectively. Large-denomination time deposits may be a less stable source of deposits than other type of deposits. The loss of market liquidity, triggered by the deterioration of the US sub-prime credit market, continues to affect the supply and cost of liquidity and funding. The effects of the downturn have spread to the global economy, in particular to issuances in wholesale markets (principally asset-backed securities) and to availability of liquid resources via the interbank markets. In this context, there can be no assurance that we will not incur materially higher funding costs or be required to liquidate certain assets.

We are vulnerable to the current disruptions and volatility in the global financial markets as well as to government action intended to alleviate the effects of the current financial crisis.

Since August 2007, the global financial system has experienced difficult credit and liquidity conditions and disruptions leading to less liquidity, greater volatility, general widening of spreads and, in some cases, lack of price transparency on interbank lending rates. In September 2008, global financial markets deteriorated sharply following the bankruptcy filing by Lehman Brothers Holdings Inc. In the days that followed, it became apparent that a number of other major financial institutions, including some of the largest global commercial banks, investment banks, mortgage lenders, mortgage guarantors and insurance companies, were experiencing significant difficulties.

Following the bankruptcy filing by Lehman Brothers Holdings Inc., there were runs on deposits at several financial institutions and numerous institutions sought additional capital. Central banks around the world have coordinated efforts to increase liquidity in the financial markets by taking measures such as increasing the amounts they lend directly to financial institutions, lowering interest rates and significantly increasing temporary reciprocal currency arrangements (or “swap lines”).

In an attempt to prevent the failure of the financial system, the United States and European governments have intervened on an unprecedented scale. In the United States, the federal government has taken equity stakes in several financial institutions, has implemented a program to guarantee the short-term and certain medium-term debt of financial institutions, has increased consumer deposit guarantees, and has brokered the acquisitions of certain struggling financial institutions, among other measures. In the United Kingdom, the government has effectively nationalized some of the country’s largest banks, has provided a preferred equity program open to all financial institutions and a program to guarantee short-term and certain medium-term debt of financial institutions, among other measures. In Spain, the government has increased consumer deposit guarantees, has made available a program to guarantee the debt of certain financial institutions, has created a fund to purchase assets from financial institutions and the Spanish Ministry of Economy and Finance has been authorized, on an exceptional basis and until December 31, 2009, to acquire, at the request of credit institutions resident in Spain, shares and other capital instruments (including preferred shares) issued by such institutions. There is no assurance that these measures will successfully alleviate the current financial crisis. In addition, some of these measures could lead to increased government ownership and control over financial institutions and further consolidation in the financial industry, all of which could adversely affect our business, financial condition and results of operations.

Despite the extent of the aforementioned intervention, global investor confidence remains low and credit remains relatively scarce. In addition, the world’s largest developed economies, including the United States and United Kingdom, are in the midst of economic recessions. Continued or worsening disruption and volatility in the global financial markets could have a material adverse effect on our ability to access capital and liquidity on financial terms acceptable to it, if at all. If capital markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits to attract more customers. Any such increase in capital markets funding costs or deposit rates would entail a repricing of loans, which would result in a reduction of volumes, and may also have an adverse effect on our interest margins. A further economic downturn, especially in Spain, the United Kingdom, the United States and certain Latin American countries, could also result in a further reduction in business activity and a consequent loss of income for Santander.

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

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

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

Market turmoil and economic recession, especially in Spain, the United Kingdom, the United States and certain Latin American countries, could materially and adversely affect the liquidity, businesses and/or financial conditions of our borrowers, which could in turn further increase our non-performing loan ratios, impair our loan and other financial assets and result in decreased demand for borrowings in general. In the context of continued market turmoil, economic recession and increasing unemployment coupled with declining consumer spending, the value of assets collateralizing our secured loans, including homes and other real estate, could decline significantly, which could result in the impairment of the value of our loan assets. Moreover, in 2008 we experienced an increase in our non-performing ratios, a deterioration in asset quality and a slowdown in business volumes, as compared to 2007. In addition, our customers may further significantly decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds, which would adversely affect our fee and commission income. Any of the conditions described above could have a material adverse effect on our business, financial condition and results of operations.

We are exposed to risks faced by other financial institutions.

We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Defaults by, and even rumors or questions about the solvency of, certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by other institutions. These liquidity concerns have had, and may continue to have, a chilling effect on inter-institutional financial transactions in general. Many of the routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties. A default by a significant financial counterparty, or liquidity problems in the financial services industry in general, could have a material adverse effect on our business, financial condition and results of operations.

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

As mortgage loans are one of our principal assets, comprising 49% of our loan portfolio as of December 31, 2008, we are currently highly exposed to developments in real estate markets, especially in Spain, the United Kingdom and the US. In addition, we currently have exposure to certain real estate developers in Spain. From 2002 to 2007, demand for housing and mortgage financing in Spain increased significantly driven by, among other things, economic growth, declining unemployment rates, demographic and social trends, the desirability of Spain as a vacation destination and historically low interest rates in the Eurozone. The United Kingdom experienced a similar increase in housing and mortgage demand, driven by, among other things, economic growth, declining unemployment rates, demographic trends and the increasing prominence of London as an international financial center. During late 2007, the housing market began to adjust in Spain and the United Kingdom as a result of excess supply (particularly in Spain) and higher interest rates. In 2008, as economic growth came to a halt in Spain and the economy began to contract in the United Kingdom, retail interest rates continued to increase, housing oversupply persisted, unemployment continued to increase and demand continued to decrease in both countries, home prices declined while mortgage delinquencies increased. As a result, our non-performing loan ratio increased from 0.78% at December 31, 2006 to 0.94% at December 31, 2007 to 2.02% at December 31, 2008. These trends, especially higher interest and unemployment rates coupled with declining real estate prices, could have a material adverse impact on our mortgage payment delinquency rates, which in turn could have a material adverse effect on our business, financial condition and results of operations.

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

Market downturns are likely to lead to declines in the volume of transactions that we execute for our customers and, therefore, to declines 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 the our clients’ portfolios or increases the amount of withdrawals would reduce the revenues we receive from our asset management and private banking and custody businesses.

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

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

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

The increasing volatility of world equity markets due to the current credit crisis is having a particular impact on the financial sector. This may affect the value of our investments in entities in this sector and, depending on their fair value and future recovery expectations, could become a permanent impairment which would be subject to write-offs against our results.

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

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

As of December 31, 2008, our interest rate risk measured in daily Value at Risk (“VaRD”) terms amounted to €157.7 million.

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

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

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

As of December 31, 2008, our largest exposures on temporary positions (with a potential impact on the income statement) were concentrated, in descending order, on the pound sterling and the Brazilian real. On that day, our largest exposures on permanent positions (with a potential impact on equity) were concentrated, in descending order, on the Brazilian real, the pound sterling, the Mexican peso and the Chilean peso.

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

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

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

We have recently acquired certain financial institutions, including Sovereign Bancorp and Alliance & Leicester plc. We have also recently acquired the retail deposits, branch network and related employees of Bradford & Bingley plc. Our assessment of these acquisitions, especially Alliance and Leicester plc and Bradford & Bingley plc, is based on limited and potentially inexact information and on assumptions with respect to operations, profitability, asset quality and other matters that may prove to be incorrect. The aforementioned financial institutions have been adversely affected by the current financial crisis and in some cases, principally Alliance & Leicester plc, have material portfolios of securities that have suffered losses and could decline meaningfully in value. There can be no assurances that these institutions will not incur substantial further losses or that we will not be exposed to currently unknown liabilities resulting from these acquisitions. Any such losses or liabilities could have a material adverse effect on our business, financial condition and results of operations.

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

We may fail to realize the anticipated benefits of our recent acquisitions.

The success of our recent acquisitions will depend, in part, on our ability to realize the anticipated benefits from combining our business with the businesses of Sovereign Bancorp, Alliance & Leicester plc and Bradford & Bingley plc. It is possible that the integration process could take longer or be more costly than anticipated or could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the ability of each company to maintain relationships with clients, customers or employees. Our efforts to integrate these companies are also likely to divert management attention and resources. If we take longer than anticipated or are not able to integrate the aforementioned businesses, the anticipated benefits of our recent acquisitions may not be realized fully or at all, or may take longer to realize than expected.

Proposals for the restructuring of the businesses we acquired from ABN AMRO are complex and may not realize the anticipated benefits for the Group.

The restructuring plan in place for the separation and integration of ABN AMRO into and among the businesses and operations of the Group is complex and involves substantial reorganization of ABN AMRO’s operations and legal structure. In addition, it contemplates activities taking place simultaneously in a number of businesses and jurisdictions. Implementation of the reorganization and the realization of the forecast benefits within the planned timetable may be challenging. Execution of the restructuring requires management resources previously devoted to the Group’s businesses and the retention of appropriately skilled ABN AMRO staff. We may not realize the benefits of the acquisition or the restructuring when expected or to the extent projected. See Item 4 of Part I, “Information on the Company—A. History and Development of the Company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations—ABN AMRO Holding, N.V. (“ABN AMRO”)”.

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

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

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

As a result of the current financial crisis and ensuing government intervention, it is widely anticipated that there will be a substantial increase in government regulation of the financial services industry, including the imposition of higher capital requirements, heightened disclosure standards and restrictions on certain types of transaction structures. In addition, novel proposals for new regulatory initiatives, abound in the current environment. If enacted, new regulations could require us to inject further capital into our business as well as in businesses we acquire, restrict the type or volume of transactions we enter into, or set limits on or require the modification of rates or fees that we charge on certain loan or other products, any of which could lower the return on our investments, assets and equity. We may also face increased compliance costs and limitations on our ability to pursue certain business opportunities. Changes in regulations, which are beyond our control, may have a material effect on our business and operations. As some of the banking laws and regulations have been recently adopted, the manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. Moreover, no assurance can be given generally that laws or regulations will be adopted, enforced or interpreted in a manner that will not have material adverse affect on our business.

Operational risks are inherent in our business.

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

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

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

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

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

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

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

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

While the Group’s long-term debt is currently rated investment grade by the major rating agencies (Aa1 by Moody’s Investors Service España, S.A. and AA by each of Standard & Poor’s Ratings Services and Fitch Ratings Ltd., respectively), following the Group’s announcement of its proposed acquisition of Sovereign, Fitch Ratings Ltd. lowered the Group’s outlook to negative until all the necessary approvals relating to this acquisition have been received and they can better assess the scope of the risks of integration. In March 2009, Standard & Poor’s Ratings Services revised the outlook of the Group to negative based on lower expectation for economic growth in the countries in which the Group operates. In light of the difficulties in the financial services industry and the financial markets, there can be no assurance that the rating agencies will maintain their current ratings or outlooks, or with regard to those rating agencies who have a negative outlook on the Group, there can be no assurances that such agencies will revise such outlooks upward. The Group’s failure to maintain favorable ratings and outlooks could increase the cost of its funding and adversely affect the Group’s interest margins.

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

The economies of the nine Latin American countries where we operate have experienced significant volatility in recent decades, characterized, in some cases, by slow or regressive growth, declining investment and hyperinflation. This volatility has resulted in fluctuations in the levels of deposits and in the relative economic strength of various segments of the economies to which we lend. Latin American banking activities (including Retail Banking, Global Wholesale Banking, Asset Management and Private Banking) accounted for €2,945 million of our profit attributed to the Group for the year ended December 31, 2008 (an increase of 10% from €2,666 million for the year ended December 31, 2007). Negative and fluctuating economic conditions, such as a changing interest rate environment, impact our profitability by causing lending margins to decrease and leading to decreased demand for higher margin products and services. Negative and fluctuating economic conditions in some Latin American countries could also result in government defaults on public debt. This could affect us in two ways: directly, through portfolio losses, and indirectly, through instabilities that a default in public debt could cause to the banking system as a whole, particularly since commercial banks’ exposure to government debt is high in several Latin American countries in which we operate.

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

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

Recent events concerning our Venezuelan subsidiary.

In August 2008 we announced that we were considering the sale of Banco de Venezuela to a Venezuelan private investor group, with whom certain undertakings were entered into; however, no agreement was reached and the sale did not occur.

We have subsequently become aware of the interest of the Government of Venezuela in Banco de Venezuela. On May 22, 2009, we announced that we had reached a preliminary agreement for the sale of our stake in this bank to the Republic of Venezuela for $1,050 million.

The parties aim at entering into a definitive agreement and closing the transaction in early July 2009. No assurances can be given, however, that this sale will occur.

The profit attributed to the Group obtained from Banco de Venezuela in 2008 amounted to €352 million, which accounted for 3.97% of our results in that fiscal year.

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

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

Item 4. Information on the Company

A. History and development of the company

Introduction

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

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

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

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

Principal Capital Expenditures and Divestitures

Acquisitions, Dispositions, Reorganizations

Our principal acquisitions and dispositions in 2008, 2007 and 2006 are as follows:

Acquisition of Sovereign

On May 31, 2006, Santander acquired shares of common stock of Sovereign Bancorp, Inc. (“Sovereign”) equal to 19.8% of Sovereign’s outstanding shares after giving effect to such purchase. The purchase price was $27 per share ($25.65 post-stock dividend), for an aggregate purchase price of $2.4 billion and generated goodwill of $760 million. The proceeds of the sale were used by Sovereign to finance a portion of the $3.6 billion cash purchase price that Sovereign paid to acquire Independence Community Bank Corp.

Under the Investment Agreement dated October 24, 2005 between Santander and Sovereign, as amended (the “Investment Agreement”), Santander had the right to increase its stake to 24.99% of Sovereign’s outstanding shares.

From time to time, since May 31, 2006, Sovereign issued shares in the ordinary course of business pursuant to the exercise of employee stock options, resulting in dilution of Santander’s ownership interest. From time to time, Santander made purchases of additional shares from Sovereign or in open market transactions to offset, or partially offset, this dilution. In addition, to prevent further dilution of our holding, in May 2008, we invested $312 million to subscribe to a $1.25 billion common stock offering completed by Sovereign.

In June 2008, we acquired additional shares of Sovereign thereby increasing our stake in the company as of June 30, 2008 to 24.39%.

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

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

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

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

Acquisition of Alliance & Leicester plc

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

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

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

The acquisition was completed on October 10, 2008. As of that date we issued 140,950,944 new shares of Banco Santander par value €0.50 each, with a share premium of €10.73 per share. The consideration for such shares was 422,852,832 shares of Alliance & Leicester plc, par value £0.50 each, representing all of its issued ordinary capital. The new shares represent 2.2% of the total share capital of the Bank after the capital increase.

Alliance & Leicester plc is one of the UK’s major financial services group, offering a broad range of financial services and products to personal and commercial customers. At December 31, 2007, Alliance & Leicester plc Group had ordinary stockholders’ equity of £1,716 million and total assets of £79 billion. For the financial year ended December 31, 2007, the Alliance & Leicester plc Group reported profit attributable to ordinary shareholders of £257 million. At the end of 2007, Alliance & Leicester plc employed 7,293 people on a full time equivalent basis, had approximately 254 branches and some 5.5 million customers.

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

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

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

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

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

The acquisition of Bradford & Bingley’s customer base and its retail deposits further strengthens Abbey’s retail customer deposit base and franchise. It also allows Santander to increase its presence in the UK through greater distribution scale.

ABN AMRO Holding N.V. (“ABN AMRO”)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Agreement between Santander and RBS’s European consumer finance unit

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

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

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

Banco de Venezuela S.A., Banco Universal

Banco Santander announced on August 1, 2008 that it considered selling Banco de Venezuela to a Venezuelan private investor group, with whom certain undertakings were entered into. The sale however was not consummated.

Banco Santander thereafter became aware of the interest of the Government of Venezuela in Banco de Venezuela.

On May 22, 2009, we announced that we had reached a preliminary agreement for the sale of our stake in Banco de Venezuela to the Republic of Venezuela for $1,050 million.

The parties aim at entering into a definitive agreement and closing the transaction in early July 2009.

Sale and leaseback of real estate assets

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

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

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

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

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

Sale of Porterbrook Leasing Company

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

Banco BPI, S.A. (“BPI”). Grupo Santander announced in January 2007 that it had entered into a firm agreement with Banco Comercial Portugués (“BCP”) for the sale to this bank of 44.6 million shares of Portuguese bank BPI, representing 5.87% of BPI’s share capital, at a price of €5.70 per share. The price is equal to that offered by BCP in the tender offer launched by it for BPI, or at a higher price should BCP revise its public offer bid upwards. The agreement was subject to regulatory approvals.

In May 2007, the tender offer failed since it did not obtain the minimum required support by BPI’s shareholders on which the bid was conditioned. The Bank of Portugal had set out a maximum level of ownership by BCP in BPI in the event that the tender offer did not succeed. Grupo Santander sold to BCP 35.5 million shares of BPI, with capital gains of €107 million. As of December 31, 2007, the Group held 1.2% of BPI.

Santander Consumer Chile, S.A. Santander Consumer Finance and the Bergé Group, through its Chilean subsidiary SKBergé, a company formed by Sigdo Koppers and Bergé (“SKB”), reached a strategic agreement to set up a finance company in Chile. SKB will have an ownership interest of between 10% and 49%, with the remaining 90% to 51% to be held by Santander Consumer Finance. The new company, which will operate under the name of Santander Consumer Chile, will engage in consumer finance, focusing on both car and other durable consumer goods and credit cards. As of December 31, 2007, Santander Consumer Finance had acquired 89% of the capital stock of Santander Consumer Chile (at a cost of €13 million) and SKBergé the remaining 11%. As of December 31, 2008, the 89% holding remained unchanged.

Financiera Alcanza S.A. de C.V. SOFOL (“Alcanza”). On June 13, 2007, Santander Consumer Finance signed an agreement with the main shareholders of Alcanza to acquire and increase the capital base of Alcanza. At December 31, 2008, Santander Consumer controlled 70% of Alcanza. As in its other markets, Santander Consumer’s business in Mexico focuses on consumer finance and auto financing as part of its growth strategy.

Alcanza has 160 employees in 15 branches in Mexico. The total value of the acquisition together with the capital increase is an estimated US$39.5 million. The deal was closed in December 2007.

Bolsas y Mercados Españoles, S.A. (“BME”). On July 16, 2007, Santander Investment Bolsa, S.V., S.A. announced that it had carried out a private placement of shares in BME, for the account of Grupo Santander, among other institutional investors. A total of 2,842,929 shares of BME, representing 3.4% of the share capital of BME were placed, at a price of €42.90 per share. The transaction generated capital gains of €111 million for the Group.

Sale of Latin American pension fund management companies. In 2007, we sold our Latin American mandatory pension fund management companies (“AFPs”) to ING Group for US$1,314 million (€906 million), generating a capital gain of €747 million. The sale included fund management companies in Mexico (Afore Santander), Chile (AFP Bansander), Colombia (AFP and Cesantía Santander) and Uruguay (Afinidad AFAP).

During the fourth quarter 2007, we sold to ING Groep NV our stake in the pension fund manager Orígenes AFJP and in the annuity provider Orígenes Seguros de Retiro, in Argentina, for a total consideration of US$166 million (€112 million), generating a capital gain of €84 million for the Group.

CB Extrobank. (“Extrobank”). In 2007, we acquired 100% of the Russian bank Extrobank for €48 million and generated goodwill of €37 million.

Drive Consumer USA Inc. (“Drive”). On September 25, 2006, we reached an agreement to acquire 90% of Drive in the US for $637 million in cash. The transaction closed in 2006 and generated goodwill of $544 million. As of June 10, 2008, Grupo Santander has bought an additional 1% stake in Drive for $17 million.

Under the agreement, the total purchase price paid by Santander could increase by a maximum of $175 million, if Drive meets certain earning targets in 2007 and 2008. In July 2007, an agreement was reached for this payment to be made early in exchange for a reduction in its amount from $175 million to $135 million (€97 million), giving rise to additional goodwill for the amount disbursed.

Drive is one of the leading auto financing companies in the automotive subprime customer segment in the United States. Based in Dallas, Texas, it is present in 35 states, with approximately 50% of its activity concentrated in Texas, California, Florida and Georgia. Drive has around 600 employees and its products are distributed through more than 10,000 auto dealer partnerships.

Until our acquisition, 64.5% of Drive was owned by HBOS plc and 35.5% by Drive’s management team. Following the acquisition by Santander, the then chairman and COO of Drive has been acting as chief executive officer, maintaining ownership of 9% of Drive, a percentage on which the parties have signed a series of options which could enable Grupo Santander to buy this 9% between 2009 and 2013 at prices linked to Drive’s earnings performance.

Sale of Abbey’s life insurance business. On September 1, 2006, Abbey sold its entire life insurance business to Resolution plc (“Resolution”) for a fixed cash consideration of €5.3 billion (£3.6 billion). This represents 97% of the embedded value of the businesses sold as reported by Abbey as of December 31, 2005, and did not generate capital gains for Grupo Santander.

The life insurance businesses sold were Scottish Mutual Assurance plc, Scottish Provident Limited and Abbey National Life plc, as well as two offshore life insurance companies, Scottish Mutual International plc and Scottish Provident International Life Assurance Limited. Abbey retained its entire branch based investment and asset management business and James Hay, its self-invested personal pension company.

Separately, in order to provide continuity of product supply and service to its customers, Abbey entered into two distribution agreements with Resolution under which (i) Abbey would distribute through its retail network Abbey-branded life and pensions products created by Resolution; and (ii) Abbey would continue to be the exclusive distributor of Scottish Provident protection products to intermediaries.

In addition, Abbey secured exclusive access to provide retail banking products to Resolution’s five million policyholders.

Approximately 2,000 Abbey employees were transferred to Resolution as part of the transaction. Resolution continues to operate the life operations from the Abbey premises in Glasgow and also maintains the operations in Dublin, the Isle of Man and Hong Kong.

Intesa Sanpaolo. On December 29, 2006, we announced that we had sold shares representing 4.8% of the share capital of San Paolo-IMI, S.p.A. for a total consideration of €1,585 million. This transaction generated a capital gain of €705 million for Santander.

On June 19, 2007, we announced that we had sold our final stake of 1.79% that we held in the share capital of the Italian bank Intesa Sanpaolo (the entity resulting from the merger of San Paolo-IMI and Intesa), for a total consideration of €1,206 million. The transaction generated a capital gain of €566 million for the Group.

Banco Santander Chile. On November 27, 2006 Santander announced its intention to offer up to 7.23% of Banco Santander Chile’s common stock through a public offering registered with the US Securities and Exchange Commission.

Banco Santander Chile is Chile’s largest bank, in terms of total loans and total deposits, and is a key element in Santander’s strategy in Latin America. Santander’s current policy is to maintain ownership of at least 75% of Banco Santander Chile’s common stock as part of its long term investment strategy in Latin America.

The public offering was completed in December 2006 and generated gross capital gains for Grupo Santander of €270 million.

Fumagalli Soldan. On November 8, 2006, Santander reached an agreement with KBL Group to acquire via its specialized subsidiary, Banif, the Italian private bank, KBL Fumagalli Soldan, a subsidiary of the KBL Group. The deal was valued at €44 million. Fumagalli Soldan has offices in Rome and Milan and has assets under management of €400 million. Santander plans to integrate Fumagalli Soldan with Banif and offer its Italian customers a wider range of banking products and services. Santander already has a consumer credit activity in Italy via Santander Consumer Finance.

Antena 3 de Televisión, S.A. (“Antena 3TV”). On October 25, 2006, Antena 3TV announced that it would repurchase a 10% interest in itself which was held directly or indirectly by Santander. The transaction, approved at Antena 3TV shareholders’ general meeting held in November 2006, resulted in the acquisition by Antena 3TV of shares representing 5% of its share capital and a capital reduction through amortization of another 5%, in both cases at a price of €18 per share.

The acquisition was completed during 2006 and generated a capital gain of €294 million for Santander.

Merger of Banco Santander, S.A. and Riyal, S.L.(“Riyal”), Lodares Inversiones, S.L. Sociedad Unipersonal (“Lodares”), Somaen-Dos, S.L. Sociedad Unipersonal (“Somaen”), Gessinest Consulting, S.A. Sociedad Unipersonal (“Gessinest”) and Carvasa Inversiones, S.L. Sociedad Unipersonal (“Carvasa”). On October 23, 2006, the Bank held an extraordinary shareholders general meeting that approved the merger by absorption of Riyal, Lodares, Somaen, Gessinest and Carvasa, into Banco Santander. As a result, Banco Santander absorbed all of the other five companies mentioned above, which were wholly-owned, directly or indirectly, by Banco Santander. The absorbed companies have been terminated and all of their net corporate assets have been transferred to Banco Santander which has acquired, as universal successor, all of the rights and obligations making up the net assets of the absorbed companies.

Compañía Española de Petróleos, S.A. (“CEPSA”). In 2003 the Bank launched a takeover bid for up to 42,811,991 CEPSA shares, and the offer was accepted for 32,461,948 shares, representing an investment of €909 million.

Total, S.A. argued that the Bank’s takeover bid breached historical shareholders’ agreements between it (or its subsidiary, Elf Aquitaine, S.A. (“Elf”)) and the Bank in relation to CEPSA and, accordingly, filed a request for arbitration at the Netherlands Court of Arbitration.

On April 3, 2006, the partial award rendered by the Arbitral Tribunal which, in the framework of the Netherlands Arbitration Institute, resolved the request for arbitration filed by Total, S.A. against the Bank was notified to the parties. The Tribunal held that the side agreements contained in the agreements relating to CEPSA between the Bank and Total, S.A. (or Elf) were rendered invalid by application of Transitional Provision Three of Law 26/2003, of July 17. However, the fact that the Bank launched the aforementioned takeover bid without prior consultation with Total, S.A. caused, in the opinion of the Tribunal, an insurmountable disagreement between the two parties which, in application of the part of the agreements that was not rendered invalid, entitled Total, S.A. to repurchase from the Bank a 4.35% ownership interest in CEPSA at the price established in the agreements.

Also, the aforementioned partial award ordered the dissolution of Somaen-Dos, S.L. (sole-shareholder company), the sole purpose of which was to hold ownership interests in CEPSA, with a view to each shareholder recovering direct ownership of their respective CEPSA shares, in accordance with the agreements entered into between the Bank and Total, S.A. (or Elf). To this end, on August 2, 2006, the Bank and Riyal, S.L. entered into two agreements, one with Elf and Odival, S.A. and the other with Unión Fenosa, S.A. to enforce the partial award and separate the ownership interests that they each held through Somaen-Dos, S.L.

On October 13, 2006, Elf received notification from the European Commission communicating the authorization of the share ownership concentration resulting from the acquisition by Elf of shares representing 4.35% of the share capital of CEPSA. Consequently, we sold 11,650,893 CEPSA shares to Elf for €53 million. This sale gave rise to a loss of €158 million which was covered by a provision recognized for this purpose.

Banco Santander, S.A.’s holding in CEPSA was 32.5% of CEPSA’s share capital at December 31, 2008.

In the fourth quarter of 2008, the directors of the Bank classified the 32.5% ownership interest held in CEPSA as a non-current asset held for sale, since it intended to recover the value of the investment through the sale thereof in the short term.

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

The transaction is subject to certain conditions, which include the obtaining of the appropriate regulatory authorizations and the closing of the financing.

AFP Unión Vida. On July 25, 2006, Grupo Santander reached an agreement with Banco de Crédito Perú to sell to the latter the Peruvian pension company AFP Unión Vida for an amount, subject to adjustment, of $142 million. The transaction was completed on August 25, 2006 and generated for Santander capital gains of approximately $100 million.

Inmobiliaria Urbis, S.A (“Urbis”). In July 2006, the Group and Construcciones Reyal, S.A.U. (“Reyal”) entered into an agreement whereby Reyal undertook to launch a takeover bid for all the share capital of Urbis, at a price of €26 per share, provided that at least 50.267% of the share capital of Urbis was accepted. The Group undertook to transfer to Reyal all its ownership interest in Urbis and not to accept any competing offers. Upon completion of the terms stipulated by current legislation, on December 15, 2006, the National Securities Market Commission (Comisión Nacional del Mercado de Valores—“CNMV”) announced that the takeover bid was valid, since it had been accepted by 96.40% of the shares of Urbis. The transaction was definitively settled on December 21, 2006 and gave rise to pre-tax gains of €1,218 million.

Both Reyal and URBIS are among the largest real estate companies in Spain.

Unifin S.p.A. (“Unifin”). In May 2006, the Group acquired 70% of the Italian consumer finance entity Unifin for €44 million, giving rise to goodwill of €37 million.

Banco Santa Cruz S.A. (“Banco Santa Cruz”). On April 18, 2006, we sold our entire stake in the capital stock of our subsidiary in Bolivia, Banco Santa Cruz.

Island Finance. On January 23, 2006, our subsidiary in Puerto Rico, Santander BanCorp, and Wells Fargo & Company reached an agreement through which we would acquire the assets and business operations in Puerto Rico of Island Finance, a consumer finance company, from Wells Fargo for $742 million. The transaction was closed in the first quarter of 2006 and generated goodwill of $114 million. In 2007, we assessed our ownership interest in Island Finance and adjusted the value of the investment by $14 million. Island Finance provides consumer financing and mortgages to 205,000 customers through its 70 branches in Puerto Rico.

Interbanco S.A. (“Interbanco”). On September 14, 2005 we reached an agreement with Soluções Automóvel Globlais (“SAG”) of Portugal to form an alliance that will conduct consumer and vehicle financing operations in Portugal, as well as operational car leasing in Spain and Portugal. In January 2006, we paid €118 million to acquire 50.001% of Interbanco’s capital stock. At the close of this transaction, we combined our consumer and vehicle finance businesses in Portugal with those of SAG through the merger of Interbanco and Hispamer Portugal. Santander owns 60% of the capital stock of the combined company and SAG owns the remaining 40%.

In 2007, we acquired an additional 9.999% stake in Interbanco through Interbanco’s absorption of the branches in Portugal of Santander Consumer E.F.C, S.A. and Santander Consumer Finance, S.A. and consequently Interbanco changed its name to “Banco Santander Consumer Portugal, S.A.”. After this transaction, and subject to the original agreements, we acquired the remaining 40% for €138 million. These transactions generated goodwill of €74 million. At December 31, 2007 and December 31, 2008 we owned 100% of Banco Santander Consumer Portugal.

Capital Increases

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

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

Alliance & Leicester plc acquisition

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

Banco Santander rights offering

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

Sovereign acquisition

The acquisition of Sovereign involved the issuance, on January 30, 2009, of 0.3206 ordinary shares of Banco Santander for each ordinary share of Sovereign. To this end, 161,546,320 ordinary shares were issued by Santander for a cash amount (par value plus share premium) of €1.3 billion. At the date of filing of this report, our capital consisted of 8,155,605,723 fully subscribed and paid shares of €0.50 par value each.

Recent Events

Lehman Brothers, Inc. (“Lehman”)

On September 15, 2008, the Lehman bankruptcy was made public. Various customers of the Group were affected by this situation since they had invested in securities issued by Lehman or in other products which had such assets as their underlying security.

On November 12, 2008, the Group announced the implementation of a solution (which was of a strictly commercial, exceptional nature and did not imply any admission of mis-selling) for holders of one of the products sold, Seguro Banif Estructurado, issued by the insurance company Axa Aurora Vida, which had as its underlying security a bond issued and guaranteed by Lehman. The solution involved replacing the Lehman issuer risk with the issuer risk of Santander Group subsidiaries. The exchange period ended on December 23, 2008. As a result of the exchange, at 2008 year-end a loss was recognized under “Gains/losses on financial assets and liabilities (net)” in the consolidated income statement for the difference of €46 million (which was equivalent to €33 million after tax) between the fair value of the bonds received and the bonds delivered in the exchange.

In February 2009, the Group offered a similar solution to other customers affected by the Lehman bankruptcy. The cost of this transaction, before tax, was €143 million (equivalent to €100 million after tax), which was recognized under “Gains/losses on financial assets and liabilities (net)” in the consolidated income statement for 2008.

At the date of this report on Form 20-F, it was known that certain claims had been filed against a Group company in relation to the marketing of the bonds referred to above. The Bank’s directors and its legal advisers consider that the various Lehman products were sold in accordance with the applicable legal regulations in force at the time of each sale or subscription and that the fact that the Group acted as intermediary would not give rise to any liability in relation to the insolvency of Lehman. Accordingly, it was not necessary to recognize any liability in this connection in the consolidated financial statements.

Madoff

The investigation by the US Securities and Exchange Commission (“SEC”) into the alleged fraud of Bernard L. Madoff Investment Securities LLC (“Madoff Securities”) took place in December 2008. The exposure of customers of the Group through the subfund Optimal Strategic US Equity (Optimal Strategic) was €2,330 million, of which €2,010 million related to institutional investors and international private banking customers, and the remaining €320 million were in the investment portfolios of the Group’s private banking customers in Spain.

On January 27, 2009, the Group announced its decision to offer a solution to those of its private banking customers who had invested in Optimal Strategic and had been affected by the alleged fraud. This solution, which was applied to the principal amount invested, net of redemptions, totalled €1,380 million. It consisted of a replacement of assets whereby the private banking customers could exchange their investments in Optimal Strategic US for preferred participating securities to be issued by the Group for the aforementioned amount, with an annual coupon of 2% and a call option that can be exercised by the issuer in year ten. The pre-tax cost of this transaction for the Group was €500 million, and this amount was recognized under “Gains/losses on financial assets and liabilities (net)” in the consolidated income statement for 2008.

The Group believes it has at all times exercised diligence in the management of its customers’ investments in the Optimal Strategic fund. These products have always been sold in a transparent way pursuant to applicable legislation and established Group procedures and, accordingly, the decision to offer a solution was taken in view of the exceptional circumstances of this case and based solely on commercial reasons, due to the interest the Group has in maintaining its business relationship with these customers.

At the time of the intervention, Madoff Securities was a broker-dealer authorized, registered and supervised by the SEC and was also authorized as an investment advisor by the US Financial Industry Regulatory Authority (FINRA).

As of the date of this report on Form 20-F, it was known that certain claims had been filed in relation to this matter. The Santander Group is currently assessing the advisability of taking the appropriate legal action.

On March 18, 2009, the Group issued the preferred participating securities earmarked for the replacement of assets offered to the private banking customers affected by the fraud perpetrated by Madoff Securities and the bankruptcy of Lehman who were not able to participate in the exchange made on December 23, 2008 referred to earlier in this section. The preferred participating securities have been listed on the London Stock Exchange since March 23, 2009. The level of acceptance of the exchange proposal was 94%.

On May 26, 2009, two funds managed by Optimal Investment Services, a wholly owned indirect subsidiary of Banco Santander, S.A., announced that they had entered into an agreement with Irving H. Picard, the trustee for the liquidation of Madoff Securities. Under the agreement, in exchange for the funds’ payment of the reduced demands, the trustee will allow the funds’ claims in the liquidation proceeding and reduce his clawback demands on the funds. The funds are Optimal Strategic US Equity Limited and Optimal Arbitrage Limited. These are the only Optimal Funds that had customer accounts at Madoff Securities.

The agreement provides that the funds’ claims against Madoff Securities estate would be allowed in their full amounts, calculated on a cash-in, cash-out basis, of $1,540,141,278 and $9,807,768, respectively, and the funds would be entitled to Securities Investor Protection Corporation advances of $500,000 each. The funds will pay 85% of the clawback claims that the trustee has asserted so far against the funds. The payments will total $129,057,095 for Strategic US Equity and $106,323,953 for Arbitrage.

Optimal and Santander would agree not to file any other claims against Madoff Securities estate. The agreement also contains an “equal treatment” provision, so that if the trustee settles similar clawback claims for less than 85%, the funds will receive a rebate of a portion of their payments to equalize the percentages applied to the funds.

The agreement followed the trustee’s investigation of Optimal’s conduct in dealing with Madoff Securities, including a review of Optimal’s documents relating to due diligence conducted by Optimal, in which the Trustee concluded that their conduct does not provide grounds to assert any claim against the Optimal companies or any other entity of the Santander group (other than the clawback claims described above). The funds’ potential clawback liability did not imply any wrongdoing by the funds.

The agreement contains releases of all clawback and other claims the trustee may have against the funds for any matters arising out of the funds’ investments with Madoff Securities. The trustee’s release would apply to all potential claims against other Optimal companies, Santander companies and their investors, directors, officers and employees who agree to release the trustee and the Madoff Securities estate, to the extent the claims arose out of the funds’ dealings with Madoff Securities. It also releases both funds from potential clawback liability for any other withdrawals made by them.

Madoff Securities is currently undergoing liquidation under the Securities Investor Protection Act of 1970 in the United States Bankruptcy Court in New York. Madoff Securities’ principal, Bernard L. Madoff, has pled guilty to conducting probably the largest Ponzi scheme in history. The agreement was approved by the United States Bankruptcy court in New York on June 16, 2009.

Metrovacesa, S.A. (“Metrovacesa”)

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

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

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

Acquisition of Real Tokio Marine Vida e Previdencia

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

CEPSA

The transaction is subject to certain conditions, which include the obtaining of appropriate regulatory authorizations and the closing of the related financing.

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

On April 29, 2009, we announced that we had reached an agreement with the company Atlas Services Nederland BV (a 100%-owned affiliate of France Telecom) on the sale of the 5.01% share package held by Grupo Santander in France Telecom España, S.A. for an amount of €377.6 million.

B. Business overview

At December 31, 2008 we had a market capitalization of €54.0 billion, stockholders’ equity of €57.6 billion and total assets of €1,049.6 billion. We had an additional €118.7 billion in mutual funds, pension funds and other assets under management at that date. As of December 31, 2008, we had 48,467 employees and 5,998 branch offices in Continental Europe, 24,379 employees and 1,303 branches in the United Kingdom, 96,405 employees and 6,089 branches in Latin America and 1,710 employees in other geographic regions (for a full breakdown of employees by country, see Item 6 of Part I, “Directors, Senior Management and Employees—D. Employees”).

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

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

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

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

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

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

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

In future filings, the information about Sovereign will be disclosed under a new segment.

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

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

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

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

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

In 2008, Grupo Santander maintained the same primary and secondary operating segments as it had in 2007.

In addition, and in line with the criteria established in the IFRS-IASB, the results of businesses discontinued in 2007 (our Latin American pension management companies) and 2006 (Abbey’s insurance businesses, Urbis, Peru and Bolivia) and which were consolidated by global integration were eliminated from various lines of the income statement and included in “net profit from discontinued operations.”

Our financial statements for 2006, 2005 and 2004 have been restated and include the changes, at both the consolidated and business segment levels.

Principal level (or geographic):

Continental Europe

This area covers the banking activities of the different networks and specialized units in Europe, principally with individual clients and SMEs, as well as private and public institutions. During 2008, there were four main units within this area: the Santander Branch Network, Banesto, Santander Consumer Finance and Portugal including retail banking, global wholesale banking and asset management and insurance.

Continental Europe is the largest business area of Grupo Santander. At the end of 2008, it accounted for 43% of total customer and funds under management, 52% of total loans and credits and 54% of profit attributed to the Group of the Group’s main business areas.

The area had 5,998 branches and 48,467 employees (direct and assigned) at the end of 2008.

In 2008, the Continental Europe segment’s profit attributable to the Parent increased 11% to €4,908 million. Return on equity (“ROE”), in 2008 was 21.2%, a 0.1% decrease from 2007.

The Santander Branch Network

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

At the end of 2008, we had 2,933 branches and a total of 19,447 employees (direct and assigned), of which one employee was hired on a temporary basis, dedicated to retail banking in Spain. Compared to 2007, there was a net increase of 46 branches and a net increase of 55 employees.

In 2008, the Santander Branch Network grew by approximately 4.0% in lending and 16.2% in profit attributable to the Parent.

In 2008, profit attributable to the Parent from the Santander Branch Network was €2,098 million, 16.2% higher than 2007, while the ROE reached 25.3% (as compared to 22.7% in 2007).

The 4% growth in lending in 2008 versus 2007 reflects a 5% decrease in mortgage activity offset by a 9% increase in other types of credits. Impaired loans grew to 2.6% from 0.6% in 2007.

Customer funds under management experienced a reduction of 4.1% during 2008, which came principally from a decrease of 37.0% in mutual funds.

Banesto

At the end of 2008, Banesto had 1,915 branches and 10,440 employees (direct and assigned), of which 39 employees were temporary, a decrease of 31 branches and 336 employees as compared to the end of 2007.

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

In 2008, profit attributable to the Parent from Banesto was €754 million, a 12.8% increase from 2007, while the ROE reached 18.8% as compared to 18.3% in 2007.

In 2008, Banesto grew by approximately 3.0% in lending, 6.9% in customer deposits and decreased 30.5% in off-balance sheet customer funds due to the fall in mutual funds and, to a lesser extent, pension funds, as the balance of savings-insurance policies was 28% higher. Impaired loans grew to 1.6% in 2008 from 0.5% a year earlier.

Santander Consumer Finance

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

At the end of 2008, this unit had 290 branches (as compared to 285 at the end of 2007) and 8,052 employees (direct and assigned) (as compared to 7,221 employees at the end of 2007), of which 429 employees were temporary.

In 2008, this unit generated €696 million in profit attributable to the Parent, a 3.1% decrease from 2007, while the ROE reached 17.0% (as compared to 34.1% in 2007). Three countries account for 74% of the profit attributable to the Parent: Germany (55%), Spain (14%) and Italy (5%). Of note are the increases in profit in Germany by 19.3% and Nordic countries by 29.6%; together, these increases offset the reduction in profit in Spain (which fell by 54.3%) due to the strong increase in provisions.

At the end of 2008, total lending at this subsidiary amounted to €54 billion (a 17.8% increase as compared to 2007). Two-thirds of the lending is in auto finance, with a greater share of new vehicles (34% as compared to 28% for used vehicles), and the combined share of consumer loans via dealers, cards and direct credit represent 22% of the total portfolio.

The most notable factors affecting Santander Consumer Finance’s business in 2008 have been:

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The contraction of the European consumer market and particularly the car segment. The contraction, particularly in Spain, was however mitigated by the strength of the German market and the strong growth in Italy and the Nordic countries.

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Business diversification in Europe enabled us to offset the weak macroeconomic situation in some markets. Because of their strong revenues and low expenses, our operations in Germany and the Nordic countries were able to offset the much lower contribution to the Parent from Spain, which was affected by larger provisions.

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Profit attributable to the US unit rose by 5.6% in dollars and credit quality ratios remained sound for the standards of the business (NPL ratio of 4.9% and coverage of 88%).

Portugal

Our main Portuguese operations are conducted by Banco Santander Totta, S.A., and our Portuguese investment banking operations are conducted by Banco Santander de Negocios Portugal, S.A.

At the end of 2008, Portugal operated 770 branches (as compared to 763 branches at the end of 2007) and had 6,584 employees (direct and assigned) (as compared to 6,405 employees at the end of 2007), of which 248 employees were temporary.

In 2008, profit attributable to the Parent was €531 million, a 0.8% increase from 2007, while ROE was 27.0%, as compared to 28.6% in 2007.

Others

The rest of our businesses in the Continental Europe segment (Banif, Asset Management, Insurance and Global Wholesale Banking) generated profit attributable to the Parent of €829 million, 15.3% more than in 2007.

United Kingdom

As of December 31, 2008, United Kingdom accounted for 28% of the Group’s total customer and funds under management, 33% of total loans and credits and 14% of profit attributed to the Group of the Group’s main business areas.

Abbey is a significant financial services provider in the United Kingdom, being the country’s second largest residential mortgage lender and the third largest savings brand measured by outstanding balances, following the acquisitions in 2008 of Alliance & Leicester plc and Bradford and Bingley plc’s retail deposits and branch network. Abbey also provides a wide range of retail savings accounts, and operates across the full range of personal financial services.

At the end of 2008, the Group had 1,303 branches and a total of 24,379 employees (direct and assigned) of which 325 employees were temporary, in the United Kingdom. Compared to 2007, there was a net increase of 599 branches and 7,552 employees due mainly to the acquisitions described above.

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

The figures shown below do not include any impact on the results of Alliance & Leicester whose balance sheet was consolidated into Grupo Santander at the end of 2008. Bradford and Bingley’s fourth quarter results are included in these financial statements (such results contributed to a £10 million loss attributable to the Parent).

In 2008, Abbey contributed €1,247 million profit attributable to the Parent (a 3.8% increase from 2007) which represents 14% of the Group’s total operating areas. Loans and advances increased by 9.9% and customer funds under management increased 4.9% during the same period. ROE was 28.6% (as compared to 32.3% in 2007).

In 2008 personnel expenses and general administrative expenses decreased by 5.6% and 12.2% respectively, due to continuing cost reduction activity.

Impaired loans at the end of 2008 increased to 1.0% from 0.6% at the end of 2007, while the coverage ratio increased from 66% to 69%. The increase in impaired loans was due both to the acquisition of Alliance & Leicester and to the market decline.

In May 2009, Banco Santander, S.A. announced that Abbey, Alliance & Leicester and Bradford & Bingley will be changing their names to Santander in 2010. This means any Santander customer in the UK will be able to use any of the Bank’s 1,300 branches by the end of 2010.

Latin America

At December 31, 2008, we had 6,089 offices and 96,405 employees (direct and assigned) in Latin America (as compared to 4,498 offices and 65,628 employees, respectively, at December 31, 2007), of which 257 were temporary employees. On that date, Latin America accounted for 21% of the total customer and funds under management, 15% of total loans and credits and 32% of profit attributed to the Group of the Group’s main business areas.

Profit attributable to the Parent from Latin America was €2,945 million in 2008, a 10.4% increase from 2007, while the ROE reached 26.1% (as compared to 29.1% in 2007). At the end of 2008, Latin America accounted for 32% of the operating areas’ profit attributable to the Parent after the consolidation of Banco Real in Santander Brazil and the assets and liabilities of ABN-Amro Uruguay in Santander Uruguay.

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


	Percentage Held
	at December 31, 2008
Banco Santander Río, S.A. (Argentina)		99.30
Banco Santander, S.A. (Brazil)		97.93
Banco Santander Chile		76.73
Banco Santander Colombia, S.A.		97.85
Banco Santander (Mexico), S.A., Institución de Banca Múltiple		74.95
Banco Santander Puerto Rico		90.59
Banco Santander, S.A. (Uruguay)		100.00
Banco de Venezuela, S.A. Banco Universal		98.42

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

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

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

Brazil. Santander Brazil Group, made up by Banco Santander in Brazil and Banco Real, is the third largest private financial institution in this country as of December 31, 2008. Santander Brazil Group had 3,603 branches and 21.9 million individual customers.

Lending in Brazil rose 165% in local currency in 2008 as compared to 2007, mainly due to the consolidation of Banco Real. Excluding Banco Real, lending to individual customers in Brazil grew 14% in 2008 as compared to 2007 and lending to SMEs and companies grew 45% in 2008 as compared to 2007 (all percentages are based on values in local currency).

Deposits and mutual funds in Brazil increased by 126% in 2008 as compared to 2007 in local currency.

Profit attributable to the Parent from Brazil in 2008 was €1,105 million, a 22.0% increase when compared with 2007 (a 21.9% increase in local currency). At the end of 2008 ROE was 25.5%, the ratio of non-performing loans (“NPL”) was 3.6% and the NPL coverage was 102%.

Mexico. Banco Santander (Mexico), S.A., Institución de Banca Múltiple, is one of the leading financial services companies in Mexico. It leads the third largest banking group in Mexico in terms of business volume. As of December 31, 2008, the Group had a network of 1,129 branches and 8.8 million customers in Mexico.

Loans and credits in Mexico increased in 2008 by 8% as compared to 2007. Of note were the 4% decrease in consumer credits and the increase in mortgage lending by 23% and of commercial lending by 17%.

Profit attributable to the Parent from Mexico in 2008 decreased 8.2% to €600 million (a decrease of 0.2% in local currency as compared to 2007). ROE was 20.8%, the ratio of non-performing loans was 2.4% at the end of 2008 and the NPL coverage was 132.0%.

Chile. Banco Santander Chile leads the largest financial group in the country with substantial business in loans, deposits and mutual funds and pension funds. As of December 31, 2008 the Group had 507 branches and 3.1 million customers.

Lending in Chile grew by 20% in 2008 as compared to 2007 (with 17% attributed to individuals and 16% to companies) while deposits in Chile increased by 19%.

Profit attributable to the Parent from Chile increased 0.3% in 2008 to €545 million (a 6.3% increase as compared to 2007, in local currency). ROE was 37.3%, the ratio of non-performing loans was 2.6% and the NPL coverage was 102%.

Puerto Rico. Banco Santander Puerto Rico is one of the largest financial institutions in Puerto Rico. As of December 31, 2008, the Group has 133 branches and 0.5 million customers.

Loss attributable to the Parent from Puerto Rico in 2008 was €19 million, compared to the €1 million profit obtained in 2007 due to higher net loan-loss provisions in 2008. The ratio of non-performing loans stood at 6.9% and the NPL coverage was 61%.

Venezuela. Banco de Venezuela, S.A. Banco Universal is one of the country’s largest banks with 285 branches and 3.2 million banking customers as of December 31, 2008.

The Group focused in 2008 on maximizing the return on the balance sheet, keeping comfortable levels of liquidity and boosting recurring revenues through greater customer linkage (through growth in deposits and fee-generating services) and strict control of risks. Lending and deposits rose 14% and 9%, respectively in 2008 as compared to 2007.

Profit attributable to the Parent from Venezuela grew to €317 million in 2008 from €179 million a year earlier (a 89.4% increase, in local currency). ROE stood at 58.9%, the ratio of non-performing loans was 1.9% and the NPL coverage was 126% as of December 31, 2008.

Colombia. As of December 31, 2008, Banco Santander Colombia, S.A. had 76 branches and 0.5 million banking customers.

We are focusing on developing its franchise and selective growth in business, while maintaining appropriate levels of liquidity. Lending and deposits plus mutual funds increased 2% and 34%, respectively in 2008 as compared to 2007.

Profit attributable to the Parent from Colombia was €27 million in 2008, 73.8% higher than in 2007 in local currency. The ratio of non-performing loans was 1.79% and the NPL coverage was 204% as of December 31, 2008.

Argentina. Banco Santander Río S.A. is one of Argentina’s leading banks, with 292 branches and 2.1 million banking customers as of December 31, 2008.

We focused our strategy on linking customers rather than increasing their number. On the other hand, a more selective criterion in lending was applied with greater emphasis on capturing deposits and maintaining comfortable levels of liquidity. Lending and deposits increased by 18% and 12% respectively in 2008 as compared to 2007.

Banco Santander Río made a positive contribution to the Group’s earnings, with profit attributable to the Parent of €216 million in 2008, a 24.1% increase in local currency as compared to 2007.

Uruguay. In 2008, our operations in Uruguay generated profit attributable to the Parent of €9 million with no impact from the consolidation of ABN-Amro which took place at the end of December 2008.

Secondary or business level:

Retail Banking

The Group’s Retail Banking business generated 85% of the operating areas’ total income in 2008 and 75% of profit attributable to the Parent. In 2008, Retail Banking generated total income of €26,775 million, 16.9% higher than in 2007. Profit attributable to the Parent by Retail Banking was €6,875 million, 8.8% higher than in 2007. This segment had 165,244 employees at the end of 2008.

This segment growth was affected by two principal factors. Firstly, the performance in euro terms in UK and Latin America reflected the negative impact of exchange rates, with the growth of profits based in local currencies not being fully valued when converted to euros. Secondly, incorporating the operations of one quarter of Banco Real resulted in a 3% increase in our profits.

Retail Banking in Continental Europe continued the good growth trends in volumes and earnings of the last two years. Net interest income rose 20.5% and profit before tax rose 9.2%. The main units of growth were the Santander Branch Network and Banesto Retail. The main drivers were the good evolution of business compared to the market, although quarter-on-quarter growth eased; management of prices in a changing interest rates environment and selective control of expenses.

Retail Banking in the UK in euro terms was very conditioned by the negative impact of the sterling depreciation. The 12.7% growth in revenues and 5.9% rise in expenses in 2008 (as compared to 2007), both in sterling, resulted in a further improvement in efficiency. Net loan-loss provisions increased 44.3% in 2008 (as compared to 2007) and profit before tax was 12.1% in 2008 (as compared to 2007) higher (but turned into a loss of 3.5% when converted to euros).

The results of Retail Banking in Latin America were attributable to the growth in customer business, the good performance of net interest income and net fees, and control of costs compatible with ongoing business development. In addition to the entry of Banco Real, the factors behind this segment growth were the rise in the number of individual customers and SMEs, greater linkage and development of loyalty products.

Profit before tax for Retail Banking in 2008 was lower than 2007 because there was a large increase in net loan-loss provisions partly due to the deterioration of the global economy and partly due to the unification of provisioning criteria in Brazil after the integration of Banco Real. Excluding the exchange-rate effect, profit before tax, was comparable to that in 2007.

The Global Private Banking division, created in the second half of 2007, includes institutions that specialize in financial advice and asset management for high income clients: Banif and Allfunds in Spain; Cater Allen, James Hay, Abbey Sharedealing and Abbey International in the UK and Santander Private Banking in Latin America and Italy. As well as the units of domestic private banking in Portugal and Latin America, jointly managed with local retail banks.

Profit before tax for 2008 was 4.9% lower than 2007, at €429 million. This was due to two factors. First, the evolution of exchange rates, which reduced the profit growth by 6.6%. Second, the allowances made by Banif in the last part of the year, after Lehman’s collapse.

Global Wholesale Banking

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

This segment, managed by Santander Global Banking & Markets, contributed 13% of the operating areas’ total income and 20% of profit attributable to the Parent in 2008. Profit attributable to the Parent in 2008 by Global Wholesale Banking amounted to €1,854 million, a 20.5% increase from 2007. This segment had 2,572 employees as of December 31, 2008.

In the case of Santander Global Banking & Markets, the improvement was due to a customer-focused business model, the area’s global capacities and connection with local units, and the strength of the Group’s capital and liquidity which made it possible to increase profit. Four factors were at play:

• First, the significant increase in customer revenues by 35% in 2008 as compared to 2007, which accounted for more than 85% of the area’s total revenues. All zones registered double digit growth after absorbing the large negative impact of exchange rates. Customer revenues in the UK and Latin America rose 51% and 37% in 2008 as compared to 2007, respectively, in euros, while Spain’s grew by 26% in 2008 as compared to 2007. Among the large markets for Global Wholesale Banking, only Portugal fell by 11% in 2008 because of the large operations in 2007.

• Second, the 29% decrease in 2008 as compared to 2007 in the results of trading activity, affected by instability in markets.

• Third, strict adjustment in 2008 of expenses and structures to the new economic environment, as a result of which total operating expenses were 0.2% lower in 2008 than in 2007.

• Lastly, a large increase in provisions because of large operations in the second half of 2008, particularly in the fourth quarter. These provisions were more than four times higher than those recorded in 2007.

These factors were reflected in our consolidated income statement with operating profit before tax increasing 23% in 2008.

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

Asset Management and Insurance

This segment comprises all of our companies whose activity is the management of mutual and pension funds and insurance. At December 31, 2008, this segment accounted for 2.7% of total income and 4.1% of profit attributable to the Parent. Profit attributable to the Parent by Asset Management and Insurance was €371 million in 2008 or 17.2% lower than in 2007. This segment had 1,435 employees at the end of 2008.

Total income for this segment fell 2.8%, as the higher revenues from insurance did not offset the fall in fee income. The latter was hit by the decline in the volume of mutual funds in the main countries where the Group operates, particularly in Spain. Profit before tax for this segment was 1.3% lower in 2008 as compared to 2007. The pension fund business in Latin America played no part in the results as it was sold and discontinued in 2007. Total revenues contributed to the Group by asset management and insurance, including those recorded by the distribution networks, amounted to €3,689 million reflecting an increase of 1.3% as compared to 2007.

Asset Management

Santander Asset Management’s global business generated €1,542 million of fees in 2008 (compared to a reduction in 18.4% in 2007). Profit before tax for this segment, after deducting operating expenses (3.4% lower than in 2007) and fees paid to the networks, was 9.0% lower at €221 million. Total managed pension and mutual funds amounted to €100 billion.

Activity in developed countries was determined by the strong preference for liquidity and on-balance sheet funds. These trends, which in the fourth quarter spread to the other markets where we operate, influenced the volumes managed by Santander Asset Management.

As a result, most of our business, principally traditional management, was affected by the global fall in share prices in what was the worst year for stock markets in three decades.

Insurance

The global business of Santander Insurance generated income (fees and revenues from insurance activity) of €2,147 million in 2008 (reflecting an increase of 22.6% as compared to 2007), 6.9% of the operating areas’ total. Its total contribution to the Group’s results, the sum of profit before tax of the insurance companies and brokers (€316 million) and fees received by networks, was €2,020 million in 2008(reflecting an increase of 23.6% as compared to 2007).

The volume of premium income distributed in 2008 was more than €9.6 billion (reflecting an increase of 34% as compared to 2007). Life-savings products contributed 72% of the total, life-risk 15% and non-life 13%.

Of the total premium income, 84% was distributed by Group companies in 2008.

Santander Insurance made further progress in its global business model, developing new products and distribution channels. Of note was the launch of the “affinities channel”, which leverages relations with corporate clients to distribute insurance to their clients. Ten distribution agreements were signed. This supplements the strength of our branches (the main distribution channel) and of our direct channels.

Financial Management and Equity Stakes

At the end of 2008, this area had 1,710 employees (direct and assigned) (as compared to 1,526 employees at the end of 2007), of which 456 were temporary.

This area is responsible for a series of centralized activities and acts as the Group’s holding entity, managing all capital and reserves and assigning capital and liquidity to the other businesses. The cost of liquidity, via the transfer of funds to various businesses, is done at the short-term market rate, which was 4.26% in 2008 (as compared to 4.06% in 2007).

The area had a loss of €223 million in 2008 due to the following occurrences:

•

First, all the €3,572 million of capital gains generated in 2008, net of taxes, which equaled the amount of the extraordinary write-downs. The €586 million net extraordinary capital gains generated from the sale of Grupo Santander City, €741 million from the sale of ABN AMRO’s liabilities and the €2,245 million from the sale of the businesses in Italy acquired from ABN AMRO were assigned as follows: €1,430 million to writing down the stakes in Fortis and Royal Bank of Scotland; €904 million to amortizing the intangibles of Abbey; €386 million to a fund for restructuring costs; €382 million to an early retirement fund; €295 million to amortizing the goodwill of Santander Consumer Finance and writedowns in portfolios and €175 million to other funds. All figures are net of taxes.

In 2007, capital gains were higher than the allowances by €934 million net of taxes.

•

Second, the share of results of entities accounted for using the equity method was €780 million in 2008 compared to €427 million in 2007. This difference was due, on the one hand, to a greater contribution from RFS Holdings, B.V., which in 2008 consolidated nine months of profit after tax (in the fourth quarter it was consolidated by global integration), while in 2007 it was only accounted for by the equity method since October, the date of the acquisition, until the end of the year. CEPSA’s contribution, on the other hand, was lower because as of October 1, 2008, its profits ceased to be recorded by the equity method as the stake was transferred to non-current assets held for sale.

•

Third, gains on financial assets and liabilities were affected in 2008 by the creation of a €643 million fund (€450 million net of tax) for the victims of the Lehman collapse and the fraud by Bernard L. Madoff.

Equity Stakes: this sub-segment centralizes the management of equity stakes in financial and industrial companies.

The main events in 2007 and 2008 were the sale of 1.79% of Intesa Sanpaolo in the second quarter of 2007 (generating a capital gain of €566 million) and the consolidation of the assets acquired from ABN AMRO and the transfer of our investment in CEPSA to available for sale financial assets in 2008. On March 31, 2009, we announced that we had reached an agreement to sell our holding in CEPSA subject to certain conditions (see Item 4 of Part I, “A. History and development of the company—Principal Capital Expenditures and Divestitures—Recent events—CEPSA).

Financial Investments

Our most important financial investment as of December 31, 2008 was in Sovereign Bancorp where we had at that date a 24.99% stake. On October 13, 2008, Banco Santander, S.A. and Sovereign Bancorp Inc, the parent of Sovereign Bank, announced that Banco Santander would acquire Sovereign through a share exchange. This acquisition was completed in January 2009 (see Item 4 of Part I, “A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations—Sovereign Bancorp, Inc. (“Sovereign”)).

Industrial Portfolio

The majority of our industrial holdings portfolio consists of investments in strategic sectors related to the growth of the Spanish economy. Through our investments in these areas, we aim to contribute to the Group’s consolidated results.

The following table summarizes our main industrial holdings at December 31, 2008:


		Percentage Held
Company	Business	At December 31, 2008
France Telecom España, S.A.	Telecommunications		5.01
CEPSA	Oil and Petrochemicals		32.48
Cableuropa — Grupo ONO	Telecommunications		4.47

Financial Management: this area manages the Group’s structural exchange rate position, the structural interest rate risk of the Parent and liquidity risk. The management of liquidity risk is conducted through debt issuance and securitization.

The cost of hedging the capital of the Group’s non-euro denominated investments is another activity. The current hedging policy is aimed at protecting the capital invested and the year’s results through various instruments that are considered appropriate for their management. The main units that have exchange rate risk continued to be hedged in 2007 and 2008.

This sub-segment also manages stockholders’ equity, the allocation of capital to each business unit, and the cost of financing investments, with the result that the contribution to earnings is usually negative.

Total Revenues by Activity and Geographic Location

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

Selected Statistical Information

The following tables show our selected statistical information.

Average Balance Sheets and Interest Rates

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

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

•

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

•

We have included loan fees in interest income;

•

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

•

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

•

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

•

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

As stated above under Item 1 of Part I, “A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganization”, on November 12, 2004, we completed the acquisition of Abbey. For consolidation purposes, Abbey’s assets and liabilities were consolidated into our balance sheet as of December 31, 2004, but Abbey’s results of operations had no impact on our income statement for 2004. Therefore, 2005 is the first year to reflect the full impact of the acquisition of Abbey.

As stated above under “Presentation of Financial Information”, we have prepared or restated our financial statements for 2004, 2005, 2006, 2007 and 2008 under IFRS.

Average Balance Sheet—Assets and Interest Income


	2008							2007							2006
	Average Balance		Interest		Average Rate			Average Balance		Interest		Average Rate			Average Balance		Interest		Average Rate
	(in thousand of Euros, except percentages)
ASSETS

Cash and due from central banks
Domestic		7,629,805		242,954		3.18	%		3,502,564		123,432		3.52	%		1,974,832		68,969		3.49	%
International		23,485,926		585,195		2.49	%		15,546,087		506,675		3.26	%		12,436,361		405,884		3.26	%

		31,115,731		828,149		2.66	%		19,048,651		630,107		3.31	%		14,411,193		474,853		3.30	%
Due from credit entities
Domestic		10,975,976		726,670		6.62	%		8,928,024		578,484		6.48	%		11,519,832		460,640		4.00	%
International		56,052,449		3,139,768		5.60	%		56,819,791		2,306,065		4.06	%		48,664,439		2,044,393		4.20	%

		67,028,425		3,866,438		5.77	%		65,747,815		2,884,549		4.39	%		60,184,271		2,505,033		4.16	%
Loans and credits
Domestic		231,139,236		13,968,547		6.04	%		213,315,709		11,437,122		5.36	%		177,426,121		7,678,628		4.33	%
International		342,824,498		28,394,097		8.28	%		331,569,337		23,765,799		7.17	%		297,802,187		18,819,786		6.32	%

		573,963,734		42,362,644		7.38	%		544,885,046		35,202,921		6.46	%		475,228,308		26,498,414		5.58	%
Debt securities
Domestic		24,948,203		951,353		3.81	%		20,222,647		747,248		3.70	%		20,025,278		762,274		3.81	%
International		74,285,312		3,607,600		4.86	%		92,293,671		3,302,693		3.58	%		105,609,655		3,805,616		3.60	%

		99,233,515		4,558,953		4.59	%		112,516,318		4,049,941		3.60	%		125,634,933		4,567,890		3.64	%
Income from hedging operations
Domestic				695,086							580,530							225,696
International				2,548,537							2,010,890							2,017,358

				3,243,623							2,591,420							2,243,054
Other interest-earning assets
Domestic		48,863,457		618,246		1.27	%		34,107,718		692,339		2.03	%		23,798,216		597,032		2.51	%
International		31,527,678		729,603		2.31	%		21,172,214		261,428		1.23	%		19,471,268		353,326		1.81	%

		80,391,135		1,347,849		1.68	%		55,279,932		953,767		1.73	%		43,269,484		950,358		2.20	%
Total interest-earning assets
Domestic		323,556,677		17,202,856		5.32	%		280,076,662		14,159,155		5.06	%		234,744,279		9,793,239		4.17	%
International		528,175,863		39,004,800		7.38	%		517,401,100		32,153,550		6.21	%		483,983,910		27,446,363		5.67	%

		851,732,540		56,207,656		6.60	%		797,477,762		46,312,705		5.81	%		718,728,189		37,239,602		5.18	%
Investments in affiliated companies
Domestic		2,576,136		—		0.00	%		2,547,829		—		0.00	%		3,125,583		—		—
International		10,061,096		—		0.00	%		6,201,797		—		0.00	%		1,561,780		—		—

		12,637,232		—		0.00	%		8,749,626		—		0.00	%		4,687,363		—		—
Total earning assets
Domestic		326,132,813		17,202,856		5.27	%		282,624,491		14,159,155		5.01	%		237,869,862		9,793,239		4.12	%
International		538,236,959		39,004,800		7.25	%		523,602,897		32,153,550		6.14	%		485,545,690		27,446,363		5.65	%

		864,369,772		56,207,656		6.50	%		806,227,388		46,312,705		5.74	%		723,415,552		37,239,602		5.15	%

Other assets		76,735,959							70,521,710							66,552,292

Assets from discontinued operations		—							933,182							24,264,613


Total average assets		941,105,731							877,682,280							814,232,457

Average Balance Sheet—Liabilities and Interest Expense


	Year Ended December 31,
	2008							2007							2006
	Average Balance		Interest		Average Rate			Average Balance		Interest		Average Rate			Average Balance		Interest			Average Rate
	(in thousands of Euros, except percentages)
LIABILITIES AND STOCKHOLDERS EQUITY

Due to credit entities
Domestic		19,926,769		830,324		4.17	%		16,252,916		713,601		4.39	%		15,450,460		452,377			2.93	%
International		94,507,378		2,863,942		3.03	%		95,768,411		3,147,350		3.29	%		108,302,721		3,145,329			2.90	%

		114,434,147		3,694,266		3.23	%		112,021,327		3,860,951		3.45	%		123,753,181		3,597,706			2.91	%
Customers deposits
Domestic		119,431,124		3,830,610		3.21	%		111,318,636		2,974,509		2.67	%		104,310,458		2,479,998			2.38	%
International		241,755,987		11,682,573		4.83	%		225,121,982		9,370,167		4.16	%		211,167,728		8,603,441			4.07	%

		361,187,111		15,513,183		4.30	%		336,440,618		12,344,676		3.67	%		315,478,186		11,083,439			3.51	%
Marketable debt securities
Domestic		144,927,279		6,487,367		4.48	%		119,308,485		5,231,367		4.38	%		87,819,976		2,862,427			3.26	%
International		93,000,703		4,330,281		4.66	%		108,319,384		4,120,238		3.80	%		86,557,319		2,966,498			3.43	%

		237,927,982		10,817,648		4.55	%		227,627,869		9,351,605		4.11	%		174,377,295		5,828,925			3.34	%
Subordinated debt
Domestic		20,505,215		1,111,241		5.42	%		16,620,042		846,949		5.06	%		10,264,689		466,520			4.54	%
International		15,718,505		1,303,930		8.30	%		16,901,157		1,253,717		7.45	%		20,451,345		1,312,446			6.36	%

		36,223,720		2,415,171		6.67	%		33,521,199		2,100,666		6.24	%		30,716,034		1,778,966			5.73	%
Other interest-bearing liabilities
Domestic		55,511,051		876,041		1.58	%		46,303,178		1,001,797		2.16	%		31,366,911		891,733			2.84	%
International		33,907,070		585,957		1.73	%		29,728,313		207,522		0.70	%		33,980,821		530,565			1.56	%

		89,418,121		1,461,998		1.64	%		76,031,491		1,209,319		1.59	%		65,347,732		1,422,298			2.18	%
Expenses from hedging operations
Domestic				1,402,069							480,014							(298,065	)
International				2,731,528							2,012,186							1,705,396

				4,133,597							2,492,200							1,407,331
Total interest-bearing liabilities
Domestic		360,301,438		14,537,652		4.04	%		309,803,257		11,248,237		3.63	%		249,212,494		6,854,990			2.75	%
International		478,901,624		23,498,211		4.91	%		475,839,247		20,111,180		4.23	%		460,459,933		18,263,675			3.97	%

		839,203,062		38,035,863		4.53	%		785,642,504		31,359,417		3.99	%		709,672,427		25,118,665			3.54	%

Other liabilities		45,332,522							41,719,064							38,792,532

Minority interest		2,432,563							2,239,676							2,264,300

Stockholders’ Equity		54,149,565							47,147,854							39,308,194

Liabilities from discontinued operations		—							933,182							24,195,003


Total average Liabilities and Stockholders’ Equity		941,105,731		38,035,863					877,682,280		31,359,417					814,232,457		25,118,665

Changes in Net Interest Income—Volume and Rate Analysis

The following tables allocate, by domicile of customer, changes in our net interest income between changes in average volume and changes in average rate for 2008 compared to 2007 and 2007 compared to 2006. We have calculated volume variances based on movements in average balances over the period and rate variance based on changes in interest rates on average interest-earning assets and average interest-bearing liabilities. We have allocated variances caused by changes in both volume and rate to volume. You should read the following tables and the footnotes thereto in light of our observations noted in the preceding sub-section entitled “—Average Balance Sheets and Interest Rates”, and the footnotes thereto.

Volume and rate analysis


	IFRS-IASB
	2008/2007
	Increase (Decrease) due to changes in
	Volume			Rate			Net change
	(in thousands of euros)
Interest and similar revenues
Cash and due from central banks
Domestic		131,431			(11,909	)		119,522
International		198,225			(119,705	)		78,520

		329,656			(131,614	)		198,042
Due from credit entities
Domestic		135,687			12,499			148,186
International		(41,322	)		875,025			833,703

		94,365			887,524			981,889
Loans and credits
Domestic		1,080,878			1,450,547			2,531,425
International		947,878			3,680,420			4,628,298

		2,028,756			5,130,967			7,159,723
Debt securities
Domestic		181,860			22,245			204,105
International		(876,452	)		1,181,359			304,907

		(694,592	)		1,203,604			509,012
Other interest-earning assets
Domestic		185,126			(259,219	)		(74,093	)
International		239,515			228,660			468,175

		424,641			(30,559	)		394,082
Total interest-earning assets without hedging operations
Domestic		1,714,982			1,214,163			2,929,145
International		467,844			5,845,759			6,313,603

		2,182,826			7,059,922			9,242,748
Income from hedging operations
Domestic		114,556			—			114,556
International		537,647			—			537,647

		652,203			—			652,203
Total earning assets
Domestic		1,829,538			1,214,163			3,043,701
International		1,005,491			5,845,759			6,851,250

		2,835,029			7,059,922			9,894,951

Volume and rate analysis


	IFRS-IASB
	2007/2006
	Increase (Decrease) due to changes in
	Volume			Rate			Net change
	(in thousands of euros)
Interest and similar revenues
Cash and due from central banks
Domestic		53,871			592			54,463
International		100,791			—			100,791

		154,662			592			155,254
Due from credit entities
Domestic		(167,848	)		285,692			117,844
International		329,802			(68,130	)		261,672

		161,954			217,562			379,516
Loans and credits
Domestic		1,931,005			1,827,489			3,758,494
International		2,414,694			2,531,319			4,946,013

		4,345,699			4,358,808			8,704,507
Debt securities
Domestic		7,002			(22,028	)		(15,026	)
International		(481,801	)		(21,122	)		(502,923	)

		(474,799	)		(43,150	)		(517,949	)
Other interest-earning assets
Domestic		209,538			(114,231	)		95,307
International		21,035			(112,933	)		(91,898	)

		230,573			(227,164	)		3,409
Total interest-earning assets
Domestic		2,033,568			1,977,514			4,011,082
International		2,384,521			2,329,134			4,713,655

		4,418,089			4,306,648			8,724,737
Total earning assets without hedging operations
Domestic		2,033,568			1,977,514			4,011,082
International		2,384,521			2,329,134			4,713,655

		4,418,089			4,306,648			8,724,737
Income from hedging operations
Domestic		354,834			—			354,834
International		(6,468	)		—			(6,468	)

		348,366			—			348,366
Total earning assets
Domestic		2,388,402			1,977,514			4,365,916
International		2,378,053			2,329,134			4,707,187

		4,766,455			4,306,648			9,073,103

Volume and rate analysis


	IFRS-IASB
	2008/2007
	Increase (Decrease) due to changes in
	Volume			Rate			Net change
	(in thousands of euros)
Interest and similar expenses
Due to credit entities
Domestic		152,479			(35,756	)		116,723
International		(34,410	)		(248,998	)		(283,408	)

		118,069			(284,754	)		(166,685	)
Customers deposits
Domestic		254,980			601,121			856,101
International		804,089			1,508,317			2,312,406

		1,059,069			2,109,438			3,168,507
Marketable debt securities
Domestic		1,136,692			119,308			1,256,000
International		(721,504	)		931,547			210,043

		415,188			1,050,855			1,466,043
Subordinated debt
Domestic		211,108			53,184			264,292
International		(98,517	)		148,730			50,213

		112,591			201,914			314,505
Other interest-bearing liabilities
Domestic		142,802			(268,558	)		(125,756	)
International		72,233			306,202			378,435

		215,035			37,644			252,679
Total interest-bearing liabilities without hedging operations
Domestic		1,898,061			469,299			2,367,360
International		21,891			2,645,798			2,667,689

		1,919,952			3,115,097			5,035,049
Expenses from hedging operations
Domestic		922,055			—			922,055
International		719,342			—			719,342

		1,641,397			—			1,641,397
Total interest-bearing liabilities
Domestic		2,820,116			469,299			3,289,415
International		741,233			2,645,798			3,387,031

		3,561,349			3,115,097			6,676,446

Volume and rate analysis


	IFRS-IASB
	2007/2006
	Increase (Decrease) due to changes in
	Volume			Rate			Net change
	(in thousands of euros)
Interest and similar expenses
Due to credit entities
Domestic		35,647			225,577			261,224
International		(420,360	)		422,381			2,021

		(384,713	)		647,958			263,245
Customers deposits
Domestic		192,011			302,500			494,511
International		576,675			190,051			766,726

		768,686			492,551			1,261,237
Marketable debt securities
Domestic		1,385,356			983,584			2,368,940
International		833,478			320,262			1,153,740

		2,218,834			1,303,846			3,522,680
Subordinated debt
Domestic		322,947			57,482			380,429
International		(263,242	)		204,513			(58,729	)

		59,705			261,995			321,700
Other interest-bearing liabilities
Domestic		323,359			(213,295	)		110,064
International		(30,808	)		(292,235	)		(323,043	)

		292,551			(505,530	)		(212,979	)
Total interest-bearing liabilities without hedging operations
Domestic		2,259,320			1,355,848			3,615,168
International		695,743			844,972			1,540,715

		2,955,063			2,200,820			5,155,883
Expenses from hedging operations
Domestic		778,079			—			778,079
International		306,790			—			306,790

		1,084,869			—			1,084,869
Total interest-bearing liabilities
Domestic		3,037,399			1,355,848			4,393,247
International		1,002,533			844,972			1,847,505

		4,039,932			2,200,820			6,240,752

Assets

Earning Assets—Yield Spread

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

Earning Assets — Yield Spread


	IFRS-IASB
	Year Ended December 31,
	2008			2007			2006
	(in thousands of euros, except percentages)
Average earning assets
Domestic		326,132,813			282,624,491			237,869,862
International		538,236,959			523,602,897			485,545,690

		864,369,772			806,227,388			723,415,552
Interest
Domestic		17,202,856			14,159,155			9,793,239
International		39,004,800			32,153,550			27,446,363

		56,207,656			46,312,705			37,239,602
Net interest income
Domestic		2,665,204			2,910,919			2,938,249
International		15,506,589			12,042,370			9,182,688

		18,171,793			14,953,289			12,120,937
Gross yield (1)
Domestic		5.27	%		5.01	%		4.12	%
International		7.25	%		6.14	%		5.65	%

		6.50	%		5.74	%		5.15	%
Net yield (2)
Domestic		0.82	%		1.03	%		1.24	%
International		2.88	%		2.30	%		1.89	%

		2.10	%		1.85	%		1.68	%
Yield spread (3)
Domestic		1.23	%		1.38	%		1.37	%
International		2.34	%		1.91	%		1.68	%

		1.97	%		1.75	%		1.61	%


(1)		Gross yield is the quotient of interest on equity securities divided by average earning assets.

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

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

Return on Equity and Assets

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


	Year Ended December 31,
	2008			2007			2006

ROA: Return on average total assets		1.00	%		1.10	%		1.01	%
ROE: Return on average stockholders’ equity		17.07	%		21.91	%		21.39	%
PAY-OUT: Dividends per average share as a percentage of net attributable income per average share		54.21	%		44.92	%		42.87	%
Average stockholders’ equity as a percentage of average total assets		5.55	%		4.71	%		4.36	%

Interest-Earning Assets

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

Interest earning assets


	IFRS-IASB
	Year Ended December 31,
	2008			2007			2006

Cash and due from Central Banks
Domestic		0.89	%		0.44	%		0.28	%
International		2.76	%		1.95	%		1.73	%

		3.65	%		2.39	%		2.01	%
Due from credit entities
Domestic		1.29	%		1.12	%		1.60	%
International		6.58	%		7.12	%		6.77	%

		7.87	%		8.24	%		8.37	%
Loans and credits
Domestic		27.14	%		26.75	%		24.69	%
International		40.25	%		41.58	%		41.43	%

		67.39	%		68.33	%		66.12	%
Debt securities
Domestic		2.93	%		2.54	%		2.79	%
International		8.72	%		11.57	%		14.69	%

		11.65	%		14.11	%		17.48	%
Other interest earning assets
Domestic		5.74	%		4.28	%		3.31	%
International		3.70	%		2.65	%		2.71	%

		9.44	%		6.93	%		6.02	%
Total interest-earning assets
Domestic		37.99	%		35.13	%		32.67	%
International		62.01	%		64.87	%		67.33	%

		100.00	%		100.00	%		100.00	%

Loans and Advances to Credit Institutions

The Group’s financial information included in this annual report on Form 20-F in prior years was prepared according to the EU-IFRS required to be applied under Bank of Spain’s Circular 4/2004. In this annual report, our financial information is prepared under IFRS-IASB. Our financial information disclosed in this section of our annual report under IFRS-IASB, only differs from the financial information previously presented under EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 for the years 2004 and 2005, since the effects of the differences are not material for the years 2006 and 2007. See “Item 3. Selected Financial Data” for additional information.

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


	IFRS-IASB
	At December 31,
	2008			2007			2006			2005			2004
	(in thousands of euros)
Reciprocal accounts		663,230			417,438			503,299			345,104			118,536
Time deposits		25,455,903			13,569,362			16,842,601			21,962,477			23,204,031
Reverse repurchase agreements		18,568,747			30,276,080			37,010,008			33,634,326			31,495,786
Other accounts		34,104,397			13,379,724			15,401,148			10,185,136			6,077,580

		78,792,277			57,642,604			69,757,056			66,127,043			60,895,933
Of which Impairment allowances		(253,567	)		(18,487	)		(12,727	)		(36,046	)		(53,879	)

Investment Securities

At December 31, 2008, the book value of our investment securities was €124.7 billion (representing 11.9% of our total assets). These investment securities had a yield of 4.31% in 2008, compared with a yield of 3.29% in 2007, and a yield of 3.35% earned during 2006. Approximately €20.3 billion, or 16.3%, of our investment securities at December 31, 2008 consisted of Spanish Government and government agency securities. For a discussion of how we value our investment securities, see Note 2 to our consolidated financial statements.

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


	IFRS-IASB
	At December 31,
	2008			2007			2006
	(in thousands of euros)
Debt securities
Domestic-
Spanish Government		20,267,964			14,471,176			12,596,984
Other domestic issuer:
Public authorities		231,529			904,382			179,317
Other domestic issuer		9,076,563			9,988,779			5,900,637

Total domestic		29,576,057			25,364,338			18,676,938
International-
United States:
U.S. Treasury and other U.S. Government agencies		881,579			1,870,152			1,073,246
States and political subdivisions		1,260,494			281,453			50,218
Other securities		6,155,610			9,717,623			5,707,115

Total United States		8,297,682			11,869,229			6,830,579
Other:
Governments		20,990,003			19,465,853			21,127,122
Other securities		50,567,953			52,650,983			68,042,118

Total Other		71,557,956			72,116,836			89,169,240

Total International		79,855,638			83,986,065			95,999,820

Less- Allowance for credit losses		(181,178	)		(91,753	)		(90,322	)
Less- Price fluctuation allowance		—			—			—


Total Debt Securities		109,250,517			109,258,650			114,586,436

Equity securities
Domestic		4,447,197			8,283,198			7,312,113
International-
United States		938,266			1,629,755			604,922
Other		10,046,522			12,874,902			14,270,821

Total international		10,984,788			14,504,658			14,875,743

Less- Price fluctuation allowance		(9,159	)		(11,238	)		(13,859	)


Total Equity Securities		15,422,825			22,776,618			22,173,997


Total Investment Securities		124,673,342			132,035,268			136,760,433

The following table analyzes the aggregate book value and aggregate market value of the securities of single issuers, other than the Government of the United States, which exceeded 10% of our stockholders’ equity as of December 31, 2008 (and other debt securities with aggregate values near to 10% of our stockholders’ equity).


	Aggregate as of December 31, 2008
	Book value		Market value
	(in thousands of euros)
Debt securities:
Exceed 10% of stockholders’ equity:
Spanish Government		20,499,493		20,499,493
Near 10% of stockholders’ equity:
Banca Monte dei Paschi di Siena		5,393,737		5,393,737
Telefónica		5,304,409		5,304,409
ACS		5,167,568		5,167,568

The following table analyzes the maturities and weighted average yields of our debt investment securities (before impairment allowances) at December 31, 2008. Yields on tax-exempt obligations have not been calculated on a tax-equivalent basis because we do not believe the effect of such a calculation would be material.


	At December 31, 2008
			Maturing		Maturing
	Maturing		Between		Between		Maturing
	Within		1 and		5 and		After
	1 Year		5 Years		10 Years		10 Years		Total
	(in thousands of euros)
DEBT SECURITIES
Domestic:
Spanish Government		5,845,975		4,621,751		8,980,045		820,193		20,267,964
Other domestic issuer:
Public authorities		83,419		87,748		54,004		6,358		231,529
Other domestic issuer		1,906,066		2,844,639		1,176,759		3,149,099		9,076,563
Total domestic		7,835,460		7,554,138		10,210,809		3,975,650		29,576,057
International:
United States:
U.S. Treasury and other U.S. Government agencies		693,198		64,283		13,536		110,562		881,579
States and political subdivisions		13,381		1,236,181		7,177		3,755		1,260,494
Other securities		564,114		1,872,588		1,820,247		1,898,661		6,155,610
Total United States		1,270,693		3,173,052		1,840,959		2,012,978		8,297,682
Other:
Governments		4,502,484		10,410,753		1,508,962		4,567,804		20,990,003
Other securities		15,425,869		18,978,872		5,560,950		10,602,262		50,567,953
Total Other		19,928,353		29,389,625		7,069,911		15,170,066		71,557,956
Total International		21,199,047		32,562,677		8,910,871		17,183,044		79,855,638

Total debt investment securities		29,034,507		40,116,815		19,121,679		21,158,693		109,431,695

Loan Portfolio

At December 31, 2008, our total loans and advances to customers equaled €639.4 billion (60.9% of our total assets). Net of allowances for credit losses, loans and advances to customers equaled €626.9 billion at December 31, 2008 (59.9% of our total assets). In addition to loans, we had outstanding at December 31, 2004, 2005, 2006, 2007 and 2008 €63.1 billion, €77.7 billion, €91.7 billion, €102.2 billion and €123.3 billion, respectively, of undrawn balances available to third parties.

Loans by Geographic Area and Type of Customer

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


	IFRS-IASB
	At December 31,
	2008			2007			2006			*2005 ()**			*2004 ()**
	(in thousands of euros)
Borrowers in Spain:
Spanish Government		7,668,408			5,633,422			5,328,526			5,242,938			5,741,016
Commercial, financial, agricultural and industrial		56,289,775			45,169,824			71,412,545			54,799,113			48,110,367
Real estate-construction		48,098,886			46,837,281			12,391,306			7,834,447			5,417,473
Real estate-mortgage		59,784,116			59,268,463			81,718,186			65,940,697			53,456,477
Installment loans to individuals		21,505,725			21,533,074			20,058,666			14,343,281			11,295,350
Lease financing		9,252,949			9,643,516			8,668,599			7,276,200			6,097,620
Other		37,647,241			49,995,313			9,357,884			5,388,149			9,152,254

Total		240,247,100			238,080,893			208,935,712			160,824,825			139,270,557
Borrowers outside Spain:
Governments		3,029,373			2,295,763			4,969,713			6,608,103			5,713,770
Banks and other financial institutions		26,305,493			1,951,381			767,765			2,109,420			17,681,264
Commercial and industrial		127,838,494			143,045,869			128,438,265			108,145,797			55,500,956
Mortgage loans		201,112,142			179,163,680			177,631,731			161,147,496			144,827,500
Other		40,821,889			15,256,130			14,455,772			7,883,976			19,588,512

Total		399,107,390			341,712,824			326,263,246			285,894,792			243,312,002

Total loans and leases, gross		639,354,490			579,793,717			535,198,958			446,719,617			382,582,559

Allowance for possible loan losses (**)		(12,466,055	)		(8,695,204	)		(8,163,444	)		(6,755,175	)		(5,688,432	)

Loans and leases, net of allowances		626,888,435			571,098,513			527,035,514			439,964,442			376,894,127


(*)		Certain figures have changed from the figures reported in the Bank’s prior annual reports on Form 20-F as a result of the restatement of information presented for 2004 and 2005 to comply with IFRS-IASB (see “Item 3A. Selected Financial Data” for a discussion of the differences and a reconciliation of the amounts previously reported).

(**)		Refers to loan losses of “Loans and Advances to customers”, excluding balances to credit institutions. See “Item 3A. Selected Financial Data”.

At December 31, 2008, our loans and advances to associated companies and jointly controlled entities amounted to €221 million (see “Item 7. Major Shareholders and Related Party Transactions—B. Related party transactions”). Excluding government-related loans and advances, the largest outstanding exposure at December 31, 2008 was €4.8 billion (0.8% of total loans and advances, including government-related loans), and the five next largest exposures totaled €11.1 billion (1.7% of total loans, including government-related loans).

Maturity

The following table sets forth an analysis by maturity of our loans and advances to customers by domicile and type of customer at December 31, 2008.


	Maturity
	Less than					One to five					Over five
	one year					years					years					Total
	Balance		% of Total			Balance		% of Total			Balance		% of Total			Balance		% of Total
	(in thousands of euros, except percentages)
Loans to borrowers in Spain:
Spanish Government		3,334,739		1.89	%		1,433,878		0.82	%		2,899,791		1.01	%		7,668,408		1.20	%
Commercial, financial, agriculture and industrial		27,879,053		15.78	%		14,777,063		8.47	%		13,633,659		4.73	%		56,289,775		8.80	%
Real estate:
Construction		1,358,204		0.77	%		2,822,653		1.62	%		43,918,029		15.24	%		48,098,886		7.52	%
Mortgage		4,546,051		2.57	%		5,792,173		3.32	%		49,445,892		17.16	%		59,784,116		9.35	%
Installment loans to individuals		5,626,054		3.19	%		7,305,662		4.19	%		8,574,009		2.98	%		21,505,725		3.36	%
Lease financing		3,611,121		2.04	%		3,957,149		2.27	%		1,684,679		0.58	%		9,252,949		1.45	%
Other		17,997,681		10.19	%		13,577,276		7.78	%		6,072,284		2.11	%		37,647,241		5.89	%

Total borrowers in Spain		64,352,902		36.44	%		49,665,855		28.45	%		126,228,342		43.80	%		240,247,100		37.58	%

Loans to borrowers outside Spain
Other Governments		1,382,424		0.78	%		935,676		0.54	%		711,274		0.25	%		3,029,373		0.47	%
Financial		20,755,262		11.75	%		1,907,146		1.09	%		3,643,085		1.26	%		26,305,493		4.11	%
Commercial and Industrial		61,954,099		35.08	%		51,553,609		29.53	%		14,330,786		4.97	%		127,838,494		19.99	%
Mortgage loans		7,652,630		4.33	%		55,992,108		32.08	%		137,467,405		47.70	%		201,112,142		31.46	%
Other		20,525,590		11.62	%		14,504,454		8.31	%		5,791,844		2.01	%		40,821,889		6.38	%

Total loans to borrowers outside Spain		112,270,004		63.56	%		124,892,993		71.55	%		161,944,394		56.20	%		399,107,390		62.42	%

Total loans and leases, gross		176,622,906		100.00	%		174,558,848		100.00	%		288,172,736		100.00	%		639,354,490		100.00	%

Fixed and Variable Rate Loans

The following table sets forth a breakdown of our fixed and variable rate loans having a maturity of more than one year at December 31, 2008.

Fixed and variable rate loans

having a maturity of more than one year

Domestic

International

Total

(in thousands of euros, except percentages)

Fixed rate

32,340,831

144,815,848

177,156,679

Variable rate

143,553,366

142,021,539

285,574,905

Total

175,894,197

286,837,387

462,731,584

Cross-Border Outstandings

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


	IFRS-IASB
	2008					2007					2006
			% of					% of					% of
			total					total					total
			assets					assets					assets
	(in thousands of euros, except percentages)
OECD (1) Countries:
United Kingdom.		3,546,946		0.34	%		10,553,863		1.16	%		8,504,530		1.02	%
Other OECD Countries (2)		9,384,789		0.89	%		13,371,250		1.46	%		17,590,208		2.11	%

Total OECD		12,931,735		1.23	%		23,925,113		2.62	%		26,094,738		3.13	%


Non-OECD Countries
Brazil		10,169,495		0.97	%		3,732,687		0.41	%		3,566,010		0.43	%
Other Latin American Countries (2) (3)		7,728,016		0.74	%		4,488,341		0.49	%		6,540,052		0.78	%
Other (2)		5,847,895		0.56	%		2,379,944		0.26	%		2,028,035		0.24	%

Total Non-OECD		23,745,407		2.27	%		10,600,972		1.16	%		12,134,097		1.46	%


Total		36,677,142		3.50	%		34,526,085		3.78	%		38,228,835		4.58	%


(1)		The Organization for Economic Cooperation and Development.

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

(3)		With regards to these cross-border outstandings, at December 31, 2006, 2007 and 2008, we had allowances for country-risk equal to €151.0 million, €105.0 million and €555.5 million, respectively. Such allowances for country-risk exceeded the Bank of Spain’s minimum requirements at such dates.

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

Banks and other

Financial

Commercial and

Government

Institutions

Industrial

Total

(in thousands of euros)

2006

United Kingdom

2,796

5,626,606

2,875,127

8,504,530

Total

2,796

5,626,606

2,875,127

8,504,530

2007

United Kingdom

616

3,870,351

6,682,896

10,553,863

Total

616

3,870,351

6,682,896

10,553,863

2008

Brazil

193,734

3,939,252

6,036,509

10,169,495

Total

193,734

3,939,252

6,036,509

10,169,495

Classified Assets

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

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

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

Bank of Spain Classification Requirements

a) Standard Assets

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


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

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

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

		• Credits made to banks;

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

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

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

(ii) Low risk		Assets in this category include:

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

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

		• ordinary mortgage backed securities;

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

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

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

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


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

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

b) Sub-standard Assets

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

c) Non-Performing Past-Due Assets

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

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

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

d) Other Non-Performing Assets

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

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

e) Charged-off assets

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

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

Because the Bank of Spain does not permit partial write-offs of impaired loans, when a loan is deemed partially uncollectible, the credit loss is charged against earnings through provisions to credit allowances instead of through partial write-offs of the loan. If a loan becomes entirely uncollectible, its allowance is increased until it reaches 100% of the loan balance. The credit loss recognition process is independent of the process for the removal of impaired loans from the balance sheet. The entire loan balance is kept on the balance sheet until any portion of it has been classified as non-performing for 4 years, or up to 6 years for some secured mortgage loans (maximum period established in the Bank of Spain’s Circular 4/2004 depending on our management’s view as to the recoverability of the loan). After that period the loan balance and its 100% specific allowance are removed from the balance sheet and recorded in off-balance sheet accounts, with no resulting impact on net income at that time.

f) Country-Risk Outstandings

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

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

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

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

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

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


Country-Risk Categories		Description

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

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

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

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

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

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

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

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

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

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

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

Non-Accrual of Interest Requirements

The Group stops accruing interest on the principal amount of any asset that is classified as an impaired asset and on category 3 (transitory difficulties), category 4 (serious difficulties), category 5 (doubtful) and category 6 (bankrupt) country-risk outstandings, whether or not they are classified as impaired. The bank accounts for such collected interest on a cash basis, recording interest payments as interest income when collected.

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


	IFRS-IASB
	At December 31,
	2008		2007		2006
	(in thousands of euros)
Interest owed on non-accruing assets
Domestic		231,486		80,133		49,537
International		489,241		291,987		218,216
Total		720,727		372,120		267,754
Interest received on non-accruing assets
Domestic		95,428		81,233		86,370
International		137,550		110,015		70,435
Total		232,978		191,248		156,805

The balances of the recorded investment in impaired loans as of December 31, 2008, 2007 and 2006 are as follows:


	Thousands of Euros
	2008		2007		2006

Impaired loans less than ninety days past due		2,417,529		1,260,497		766,255
Impaired loans more than ninety days past due		11,773,284		4,918,158		3,841,292

Total impaired loans		14,190,813		6,178,655		4,607,547
The roll-forward of allowances (under IFRS-IASB) is shown in Note 10.

Guarantees

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

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

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

Allowances for Credit Losses and Country-Risk Requirements

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

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

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

Specific and General Allowances for Credit Losses

The Group methodology for calculation of loan credit loss allowances is summarized as follows:

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

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

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

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

The Group has been using since 1993 its internal models for assigning solvency and internal ratings, which measure the degree of risk of a client or transaction. Each rating corresponds to a certain probability of default or non-payment, the result of the Group’s past experience, except for some designated low default portfolios. The Group has approximately 200 internal rating models for risk admission and monitoring (models for corporate, sovereign, financial institutions; medium and small companies, retail, etc).

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

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

The process; credit rating and parameter estimation

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

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

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

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

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

	•		Exposure at default (EAD) is the amount of risk exposure at the date of default by the counterparty.

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

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

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

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

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

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

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

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

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

Control of the process

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

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

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

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

Allowances for Country-Risk

Guarantees

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

Bank of Spain Foreclosed Assets Requirements

If a Spanish bank eventually acquires the properties (residential or not) which secure loans or credits, the Bank of Spain requires that the credit risk allowances previously established be reversed, provided that the acquisition cost less the estimated selling costs (which shall be at least 30% of such value) exceeds the amount of the debt, disregarding allowances, unless the acquisition cost is greater than the mortgage value, in which case the latter shall be taken as the reference value.

Bank of Spain Charge-off Requirements

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

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

Movements in Allowances for Credit Losses

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


							IFRS-IASB
	Year Ended December 31,
	2008			2007			2006			*2005 ()**			*2004 ()**
				(in thousands of euros)
Allowance for credit losses at beginning of year
Borrowers in Spain		4,512,000			4,318,320			2,809,599			1,679,781			1,201,260
Borrowers outside Spain		4,284,371			3,969,808			4,092,326			4,160,864			3,172,452

Total		8,796,371			8,288,128			6,901,925			5,840,645			4,373,712

Inclusion of acquired companies’ credit loss allowances
Borrowers in Spain		—			—			—			—			1.972
Borrowers outside Spain		2,310,095			7,356			164,530			4,006			1,044,042

Total		2,310,095			7,356			164,530			4,006			1,046,014

Recoveries of loans previously charged off (1)
Borrowers in Spain		129,660			148,849			123,566			105,800			145,591
Borrowers outside Spain		584,857			475,371			428,040			381,217			259,777

Total		714,517			624,220			551,606			487,017			405,368

Net provisions for credit losses (1)
Borrowers in Spain		928,236			658,989			793,898			1,048,552			359,478
Borrowers outside Spain		5,036,169			2,837,069			1,689,964			1,001,381			713,220

Total		5,964,405			3,496,058			2,483,862			2,049,933			1,072,698

Charge offs against credit loss allowance
Borrowers in Spain		(731,588	)		(573,787	)		(269,559	)		(226,036	)		(344,392	)
Borrowers outside Spain		(3,820,805	)		(2,746,375	)		(2,100,306	)		(1,293,458	)		(681,036	)

Total		(4,552,393	)		(3,320,162	)		(2,369,865	)		(1,519,494	)		(1,025,428	)

Other movements (2)		(513,372	)		(299,229	)		556,070			39,818			(31,719	)

Allowance for credit losses at end of year ()**
Borrowers in Spain		5,948,950			4,512,000			4,318,320			2,809,599			1,679,781
Borrowers outside Spain		6,770,673			4,284,371			3,969,808			4,092,326			4,160,864

Total		12,719,623			8,796,371			8,288,128			6,901,925			5,840,645


(*)		Certain figures have changed from the figures reported in the Bank’s prior annual reports on Form 20-F as a result of the restatement of information presented for 2004 and 2005 to comply with IFRS-IASB (see “Item 3A. Selected Financial Data” for a discussion of the differences and a reconciliation of the amounts previously reported).

(**)		Allowances for the impairment losses on the assets making up the balances of “Loans and receivables — Loans and advances to customers” and “Loans and receivables — Loans and advances to credit institutions”. See “Item 3A. Selected Financial Data”.

(1) We have not included separate line items for charge-offs of loans not previously provided for (loans charged-off against income) and recoveries of loans previously charged-off as these are not permitted under Spanish regulation.

(2) The changes in “Other Movements” from 2004 to 2005, to 2006, to 2007 and to 2008 principally reflects foreign exchange differences.

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


	Year Ended December 31,
	2008			2007			2006			*2005 ()**		*2004 ()**
	(in thousands of euros)
Recoveries of loans previously charged off-
Domestic:
Commercial, financial, agricultural, industrial		30,136			32,045			37,879			51,649		60,113
Real estate-construction		4,860			10,718			5,646			140		2,488
Real estate-mortgage		11,480			17,644			11,249			5,226		24,799
Installment loans to individuals		74,973			70,082			59,726			32,303		44,340
Lease finance		6,198			4,517			5,023			2,903		4,050
Other		2,011			13,844			4,043			13,579		9,800

Total Borrowers in Spain		129,660			148,849			123,566			105,800		145,591
Borrowers outside Spain
Government and official institutions		—			8			1,126			1		1,958
Bank and other financial institutions		18,606			2,735			21			1,691		10,373
Commercial and industrial		483,589			397,126			299,302			292,279		141,324
Mortgage loans		28,494			30,360			7,751			3,468		8,288
Other		54,169			45,141			119,840			83,778		97,834

Borrowers outside Spain		584,857			475,371			428,040			381,217		259,777

Total		714,517			624,220			551,606			487,017		405,368
Net provisions for credit losses-
Domestic:
Commercial, financial, agricultural, industrial		265,121			(278,356	)		405,914			416,993		138,159
Real estate-construction		(76,668	)		240,462			20,430			70,124		(257	)
Real estate-mortgage		276,578			298,645			96,209			87,823		19,046
Installment loans to individuals		399,651			383,582			278,223			226,177		50,319
Lease finance		26,619			16,038			55,894			27,864		9,510
Other		36,936			(1,383	)		(62,772	)		269,571		142,701

Total Borrowers in Spain		928,236			658,989			793,898			1,048,552		359,478
Borrowers outside Spain
Government and official institutions		(8,344	)		(1,797	)		2,035			16,836		(5,085	)
Bank and other financial institutions		94,376			(35,598	)		72,479			1,698		46,117
Commercial and industrial		2,709,732			2,016,115			1,128,005			820,912		472,200
Mortgage loans		242,965			237,553			11,612			88,812		64,375
Other		1,997,441			620,796			475,833			73,123		135,613

Borrowers outside Spain		5,036,169			2,837,069			1,689,964			1,001,381		713,220

Total		5,964,405			3,496,058			2,483,862			2,049,933		1,072,698


(*)		Certain figures have changed from the figures reported in the Bank’s prior annual reports on Form 20-F as a result of the restatement of information presented for 2004 and 2005 to comply with IFRS-IASB (see “Item 3A. Selected Financial Data” for a discussion of the differences and a reconciliation of the amounts previously reported).


	Year Ended December 31,
	2008			2007			2006			*2005 ()**			*2004 ()**
Charge offs against credit loss allowance
Domestic:
Commercial, financial, agricultural, industrial		(121,751	)		(140,715	)		(55,982	)		(113,357	)		(158,248	)
Real estate-construction		(34,429	)		(29,466	)		(18,911	)		(8	)		(667	)
Real estate-mortgage		(61,618	)		(11,807	)		(7,284	)		(14,674	)		(36,253	)
Installment loans to individuals		(503,166	)		(356,532	)		(184,218	)		(67,554	)		(113,652	)
Lease finance		(2,693	)		(1,344	)		(1,775	)		(8,007	)		(2,249	)
Other		(7,931	)		(33,924	)		(1,389	)		(22,436	)		(33,323	)

Total Borrowers in Spain		(731,588	)		(573,787	)		(269,559	)		(226,036	)		(344,392	)
Borrowers outside Spain
Government and official institutions		—			—			(174	)		—			(1,706	)
Bank and other financial institutions		(25	)		(2,432	)		(12,189	)		(86	)		(85,339	)
Commercial and industrial		(2,807,232	)		(1,969,576	)		(1,333,617	)		(1,120,180	)		(551,804	)
Mortgage loans		(1,736	)		(6,693	)		(46,603	)		(30,562	)		(4,923	)
Other		(1,011,811	)		(767,674	)		(707,723	)		(142,630	)		(37,265	)

Borrowers outside Spain		(3,820,805	)		(2,746,375	)		(2,100,306	)		(1,293,458	)		(681,036	)

Total		(4,552,393	)		(3,320,162	)		(2,369,865	)		(1,519,494	)		(1,025,428	)



	IFRS-IASB
	December 31,
	2008		%		2007		%		2006		%		*2005 ()**		%		*2004 ()**		%
	(in thousands of euros, except percentages)
Allowances for Credit Losses
Borrowers in Spain:
Commercial, financial, agricultural, industrial		2,853,171		22.43		2,058,128		23.40		2,302,546		27.78		1,576,418		22.84		885,088		15.15
Real estate-construction		327,138		2.57		475,907		5.41		267,771		3.23		207,302		3.00		4,696		0.08
Real estate-mortgage		1,271,684		10.00		805,437		9.16		457,132		5.52		186,574		2.70		122,264		2.09
Installment loans to individuals		1,182,274		9.29		926,917		10.53		889,283		10.73		469,677		6.81		291,178		4.99
Lease finance		112,874		0.89		162,405		1.85		166,542		2.01		75,777		1.10		62,239		1.07
Other		201,809		1.59		83,207		0.95		235,046		2.84		293,851		4.26		314,317		5.38

Total Borrowers in Spain		5,948,950		46.77		4,512,000		51.30		4,318,320		52.10		2,809,599		40.71		1,679,781		28.76
Borrowers outside Spain:
Government and official institutions		13,653		0.11		25,650		0.29		30,054		0.36		41,302		0.60		53,966		0.92
Bank and other financial institutions		313,040		2.46		101,387		1.15		149,729		1.81		68,122		0.99		176,115		3.02
Commercial and industrial		4,517,625		35.52		2,762,325		31.40		2,670,075		32.22		3,413,736		49.46		3,551,929		60.81
Mortgage loans		1,615,112		12.70		1,354,866		15.40		831,972		10.04		363,980		5.27		199,022		3.41
Other		311,242		2.45		40,142		0.46		287,978		3.47		205,186		2.97		179,832		3.08

Total Borrowers outside Spain		6,770,673		53.23		4,284,371		48.70		3,969,808		47.90		4,092,326		59.29		4,160,864		71.24

Total		12,719,623		100.00		8,796,371		100.00		8,288,128		100.00		6,901,925		100.00		5,840,645		100.00


(*)		Certain figures have changed from the figures reported in the Bank’s prior annual reports on Form 20-F as a result of the restatement of information presented for 2004 and 2005 to comply with IFRS-IASB (see “Item 3A. Selected Financial Data” for a discussion of the differences and a reconciliation of the amounts previously reported).

Impaired Assets

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


	IFRS
	At December 31,
	2008			2007			2006			2005			2004
	(in thousands of euros, except percentages)
Non-performing assets
Past-due and other non-performing assets (1) (2) (3):
Domestic		6,405,803			1,887,167			1,288,857			1,110,784			1,018,088
International		7,785,010			4,291,488			3,318,690			3,230,716			3,096,603

Total		14,190,813			6,178,655			4,607,547			4,341,500			4,114,691

Non-performing loans as a percentage of total loans		2.02	%		0.94	%		0.78	%		0.88	%		0.96	%

Net loan charge-offs as a percentage of total loans		0.55	%		0.41	%		0.31	%		0.21	%		0.14	%


(1)		We estimate that the total amount of our non-performing assets fully provisioned under IFRS and which under US banking practices would have been charged-off from the balance sheet was €1,567.0 million, €1,302.6 million, €1,206.5 million, €1,582.0 million and €2,877.6 million at December 31, 2004, 2005, 2006, 2007 and 2008 respectively.

(2)		Non-performing assets due to country risk were €122.4 million, €121.1, million €83.0 million, €6.7 million and €2.6 million at December 31, 2004, 2005, 2006, 2007 and 2008 respectively.

(3)		We estimate that at December 31, 2004, 2005, 2006, 2007 and 2008 (i) the total amount of our non-performing past-due assets was €3,501.0 million, €3,367.1 million, €3,841.2 million, 4,918.2 million and €11,773.3 million respectively, and (ii) the total amount of our other non-performing assets was €613.7 million, €974.4 million, €766.3 million, €1,260.5 million and €2,417.5 million respectively.

We do not believe that there is a material amount of assets not included in the foregoing table where known information about credit risk at December 31, 2008 (unrelated to transfer risk inherent in cross-border lending activities) gave rise to serious doubts as to the ability of the borrowers to comply with the loan repayment terms at such date.

Evolution of Impaired Assets

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


	IFRS
		Quarter ended											Year ended			Year ended			Year ended			Year ended			Year ended
	Mar. 31,			Jun. 30,			Sep. 30,			Dec. 31,			Dec. 31,			Dec. 31,			Dec. 31,			Dec. 31,			Dec. 31,
(in thousands of euros)	2008			2008			2008			2008			2008			2007			2006			2005			2004

Opening balance		6,178,655			7,148,069			8,603,616			10,583,570			6,178,655			4,607,547			4,341,500			4,114,691			3,512,727
Net additions		1,853,853			2,451,266			3,097,305			5,604,341			13,006,765			4,891,270			2,635,912			1,737,692			1,627,392
Writeoffs		(884,439	)		(995,719	)		(1,117,351	)		(1,997,097	)		(4,994,606	)		(3,320,162	)		(2,369,865	)		(1,510,883	)		(1,025,428	)

Closing balance (1)		7,148,069			8,603,616			10,583,570			14,190,814			14,190,814			6,178,655			4,607,547			4,341,500			4,114,691


(1)		Non-performing assets due to country-risk were €2.6 million, €6.7 million, €83.0 million, €121.1 million and €122.4 million at December 31, 2008, 2007, 2006, 2005 and 2004 respectively.

Impaired Asset Ratios

The following tables show the ratio of our impaired assets to total computable credit risk and our coverage ratio at December 31, 2008, 2007, 2006, 2005 and 2004.


	IFRS
	At December 31,
	2008			2007			2006			*2005 ()**			*2004 ()**
				(in thousands of euros, except percentages)

Computable credit risk (1)		697,199,713			649,342,484			588,372,837			489,662,040			411,482,598

Non-performing assets
Mortgage loans		3,564,812			1,843,628			1,364,317			1,209,137			1,352,564
Other		10,626,001			4,335,027			3,243,230			3,132,363			2,762,127

Total non performing assets		14,190,813			6,178,655			4,607,547			4,341,500			4,114,691

Allowances for non-performing assets		12,862,981			9,302,230			8,626,937			7,047,475			5,656,571

Ratios
Non-performing assets to computable credit risk		2.04	%		0.95	%		0.78	%		0.89	%		1.00	%
Coverage ratio (2)		90.64	%		150.55	%		187.23	%		162.33	%		137.47	%


(*)		Certain figures have changed from the figures reported in the Bank’s prior annual reports on Form 20-F as a result of the differences described under “Item 3A. Selected Financial Data”.

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

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

Other Non-Accruing Assets

As described above under “—Bank of Spain Classification Requirements”, we do not classify our loans to borrowers in countries with transitory difficulties (category 3) and countries in serious difficulties (category 4) as impaired assets. However, as described above under “—Allowances for Credit Losses and Country-Risk Requirements—Allowances for Country-Risk” and “—Non-Accrual of Interest Requirements”, we account for such loans on a cash basis (non-accruing) and set aside certain allowances for such loans. We treat category 5 (doubtful countries) country-risk outstandings as both a non-accruing and impaired asset. Total non-accruing assets other than country risk at December 31, 2004, 2005, 2006, 2007 and 2008 were €717.5 million, €626.5 million, €874.5 million, €893.6 million and €5,413.2 million, respectively.


	IFRS-IASB
	Year Ended December 31,
	2008		2007		2006		2005		2004
			(in millions of euros)
Summary of non-accrual assets
Assets classified as Non Performing Assets		14,190.8		6,178.7		4,607.5		4,341.5		4,114.7
Non Performing Assets due to country risk		2.6		6.7		83.0		121.1		122.4
Other assets on non-accrual status due to country risk		5,413.2		893.6		874.5		626.5		717.5

Total non-accruing assets		19,606.6		7,078.9		5,565.1		5,089.1		4,954.5

As of December 31, 2006, 2007 and 2008, the amounts of “restructured loans”, none of which were classified as non-performing, were €403.0 million, €465.2 million and €648.7 million, respectively.

Foreclosed Assets

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


	IFRS-IASB
	Quarterly movements												Year Ended December 31,
	Mar. 31,			Jun. 30,			Sep. 30,			Dec. 31,
	2008			2008			2008			2008			2008			2007			2006
							(in thousands of euros, except percentages)
Opening balance		494,567			591,682			685,642			938,046			494,567			408,450			408,042
Foreclosures		293,339			282,504			497,317			639,661			1,712,821			851,152			639,808
Sales		(196,224	)		(188,544	)		(244,913	)		(267,718	)		(897,399	)		(765,035	)		(639,400	)
Gross foreclosed assets		591,682			685,642			938,046			1,309,989			1,309,989			494,567			408,450
Allowances established		(117,299	)		(131,458	)		(144,316	)		(169,030	)		(169,030	)		(111,026	)		(129,611	)
Allowance as a percentage of foreclosed assets		19.82	%		19.17	%		15.38	%		12.90	%		12.90	%		22.45	%		31.73	%

Closing balance (net)		474,383			554,184			793,730			1,140,959			1,140,959			383,541			278,839

Liabilities

Deposits

The principal components of our deposits are customer demand, time and notice deposits, and international and domestic interbank deposits. Our retail customers are the principal source of our demand, time and notice deposits. For an analysis, by domicile of customer, of average domestic and international deposits by type for 2005, 2006, 2007 and 2008, see “—Average Balance Sheets and Interest Rates—Liabilities and Interest Expense”.

We compete actively with other commercial banks and with savings banks for domestic deposits. Our share of customer deposits in the Spanish banking system (including Cajas de Ahorros) was 16.5% at December 31, 2008, according to figures published by the Spanish Banking Association (AEB) and the Confederación Española de Cajas de Ahorros (“CECA”). See “—Competition”.

The following tables analyze our year-end deposits.

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


	IFRS-IASB
	At December 31,
	2008		2007		2006
	(in thousands of euros)
Deposits from central banks and credit institutions-
Reciprocal accounts		509,282		562,619		411,314
Time deposits		82,559,946		71,227,723		63,600,204
Other demand accounts		2,527,834		2,466,369		2,225,037
Repurchase agreements		41,651,446		36,615,910		45,417,839
Central bank credit account drawdowns		2,626,262		2,008,927		1,348,815
Other financial liabilities associated with transferred financial assets		—		—		—
Hybrid financial liabilities		2,600		15,760		34,852

Total		129,877,370		112,897,308		113,038,061

Customer deposits-
Demand deposits-
Current accounts		94,773,159		87,136,743		89,151,030
Savings accounts		115,673,794		90,727,525		93,717,633
Other demand deposits		3,035,757		3,593,720		2,025,095
Time deposits-
Fixed-term deposits		143,130,514		92,375,364		86,070,957
Home-purchase savings accounts		295,458		296,768		324,262
Discount deposits		11,625,840		9,933,139		7,132,341
Funds received under financial asset transfers		2		0		0
Hybrid financial liabilities		8,159,893		8,494,773		4,994,535
Other financial liabilities associated with transferred financial assets		—		—		—
Other time deposits		290,053		113,562		470,140
Notice deposits		1,764,954		283,301		45,849
Repurchase agreements		41,480,026		62,451,624		47,015,928

Total		420,229,450		355,406,519		330,947,770


Total deposits		550,106,820		468,303,827		443,985,831

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


			IFRS-IASB
	At December 31,
	2008		2007		2006
	(in thousands of euros)
Deposits from central banks and credit institutions-
Due to credit institutions
Offices in Spain		61,175,697		66,139,163		45,788,408
Offices outside Spain:
Other EU countries		55,594,532		31,782,431		47,733,849
United States		722,833		421,513		300,336
Other OECD countries (1)		38,067		44,136		24,509
Central and South America (1)		12,291,897		14,502,083		19,146,367
Other		54,344		7,982		44,592
Total offices outside Spain		68,701,673		46,758,145		67,249,653

Total		129,877,370		112,897,308		113,038,061

Customer deposits
Offices in Spain		142,376,596		131,833,844		120,234,884
Offices outside Spain:
Other EU countries		170,778,310		134,505,644		136,706,618
United States		8,440,893		17,881,211		7,512,963
Other OECD countries (1)		470,721		189,548		79,117
Central and South America (1)		96,103,045		69,360,898		64,984,913
Other		2,059,885		1,635,374		1,429,275
Total offices outside Spain		277,852,854		223,572,675		210,712,886

Total		420,229,450		355,406,519		330,947,770


Total deposits		550,106,820		468,303,827		443,985,831


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

The following table shows the maturity of time deposits (excluding inter-bank deposits) in denominations of $100,000 or more for the year ended December 31, 2008. Large denomination customer deposits may be a less stable source of funds than demand and savings deposits.


	December 31, 2008
	Domestic		International		Total
	(in thousands of euros)

Under 3 months		17,421,199		21,444,265		38,865,464
3 to 6 months		4,752,135		6,871,811		11,623,946
6 to 12 months		9,469,904		9,906,166		19,376,070
Over 12 months		1,920,600		14,879,650		16,800,250

Total		33,563,838		53,101,892		86,665,730

The aggregate amount of deposits held by non-resident depositors (banks and customers) in our domestic branch network was €37.9 million, €48.7 million and €52.8 million at December 31, 2006, 2007 and 2008, respectively.

Short-Term Borrowings


						IFRS-IASB
	At December 31,
	2008					2007					2006
			Average					Average					Average
	Amount		Rate			Amount		Rate			Amount		Rate
			(in thousands of euros, except percentages)
Short-Term Borrowings
Securities sold under agreements to repurchase (principally Spanish Treasury notes and bills):
At December 31		83,531,515		4.12	%		99,067,534		3.66	%		92,433,767		4.39	%
Average during year		84,194,507		3.78	%		90,977,794		3.86	%		101,682,243		3.74	%
Maximum month-end balance		99,067,534					99,067,534					129,816,503
Other short-term borrowings:
At December 31		41,759,661		4.89	%		32,706,892		7.29	%		35,385,525		2.50	%
Average during year		45,106,644		5.13	%		27,071,238		5.42	%		25,501,630		2.66	%
Maximum month-end balance		49,522,970					44,052,354					35,385,525


Total short-term borrowings at year-end		125,291,176		4.37	%		131,774,426		4.56	%		127,819,292		3.87	%

Competition

We face strong competition in all of our principal areas of operation from other banks, savings banks, credit co-operatives, brokerage services, on-line banks, insurance companies and other financial services firms.

Banks

Two Spanish banking groups dominate the retail banking sector in Spain. These two groups are headed by Banco Bilbao Vizcaya Argentaria, S.A. and Santander.

At the end of December 2008, these two Spanish banking groups accounted for approximately 61.0% of loans and 64.2% of deposits of all Spanish banks, which in turn represented 29.2% of loans and 29.5% of deposits of the financial system, according to figures published by the Spanish Banking Association (AEB) and the Confederación Española de Cajas de Ahorro (“CECA”). These banking groups also hold significant investments in Spanish industry.

Foreign banks also have a presence in the Spanish banking system as a result of liberalization measures adopted by the Bank of Spain in 1978. At December 31, 2008, there were 89 foreign banks (of which 81 were from European Union countries) with branches in Spain. In addition, there were 18 Spanish subsidiary banks of foreign banks (of which 13 were from European Union countries).

Spanish law provides that any financial institution organized and licensed in another Member State of the European Union may conduct business in Spain from an office outside Spain. They do not need prior authorization from the Spanish authorities to do so. Once the Bank of Spain receives notice from the institution’s home country supervisory authority about the institution’s proposed activities in Spain, the institution is automatically registered and the proposed activities are automatically authorized.

The opening of a branch of any financial institution authorized in another Member State of the European Union does not need prior authorization or specific allocation of resources. The opening is subject to the reception by the Bank of Spain of a notice from the institution’s home country supervisory authority containing, at least, the following information:

	•		Program of activities detailing the transactions to be made and the corporate structure of the branch;

	•		Address in Spain of the branch;

	•		Name and curriculum vitae of the branch’s managers;

	•		Stockholders’ equity and solvency ratio of the financial institution and its consolidated group; and

	•		Detailed information about any deposit guarantee scheme that assures the protection of the branch’s depositors.

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

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

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

	•		amount of the investment;

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

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

	•		draft of the By-laws;

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

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

	•		list of partners with significant holdings, and

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

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

In addition, we face strong competition outside Spain, particularly in Argentina, Brazil, Chile, Mexico, Portugal, the United Kingdom, Germany and the United States. In these corporate and institutional banking markets, we compete with the large domestic banks active in these markets and with the major international banks.

The global banking crisis has reduced the capacity of many institutions to lend and has resulted in the withdrawal or disappearance of a number of market participants and significant consolidation of competitors, particularly in the US and UK. Competition for retail deposits has intensified significantly reflecting the difficulties in the wholesale money markets.

In a number of these markets there are regulatory barriers to entry or expansion, and the state ownership of banks. Competition is generally intensifying as more players enter markets that are perceived to be de-regulating and offer significant growth potential.

Competition for corporate and institutional customers in the UK is from UK banks and from large foreign financial institutions who are also active and offer combined investment and commercial banking capabilities. Abbey’s main competitors are established UK banks, building societies and insurance companies and other financial services providers (such as supermarket chains and large retailers).

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

In the United States, Sovereign competes in the Northwestern, New England and New York retail and mid-corporate banking markets with local and regional banks and other financial institutions. Sovereign also competes in the US in large corporate lending and specialized finance markets, and in fixed-income trading and sales. Competition is principally with the large US commercial and investment banks and international banks active in the US.

Savings Banks

Spanish savings banks (“Cajas de Ahorros”) are mutual organizations which engage in the same activities as banks, but primarily take deposits and make loans, principally to individual customers and small to medium-sized companies. The Spanish savings banks provide strong competition for the demand and savings deposits which form an important part of our deposit base. Spanish savings banks, which traditionally were regional institutions, are permitted to open branches and offices throughout Spain. In the last few years, mergers among savings banks increased. The Spanish savings banks’ share of domestic deposits and loans were 60.9% and 52.9%, at December 31, 2008.

Credit Co-operatives

Credit co-operatives are active principally in rural areas. They provide savings and loan services including financing of agricultural machinery and supplies. They are also a source of competition.

Brokerage Services

We face competition in our brokerage activities in Spain from brokerage houses of other financial institutions.

Spanish law provides that any investment services company authorized to operate in another Member State of the European Union may conduct business in Spain from an office outside Spain, once the National Securities Market Commission (Comisión Nacional del Mercado de Valores—”CNMV”) receives notice from the institution’s home country supervisory authority about the institution’s proposed activities in Spain.

Spanish law provides that credit entities have access, as members, to the Spanish stock exchanges, in accordance with the provisions established by the Investment Services Directive.

We also face strong competition in our mutual funds, pension funds and insurance activities from other banks, savings banks, insurance companies and other financial services firms.

On-line Banks and Insurance Companies

The entry of on-line banks into the Spanish banking system has increased competition, mainly in customer funds businesses such as deposits. Insurance companies and other financial service firms also compete for customer funds.

SUPERVISION AND REGULATION

Bank of Spain and the European Central Bank

The Bank of Spain, which operates as Spain’s autonomous central bank, supervises all Spanish financial institutions, including us. Until January 1, 1999, the Bank of Spain was also the entity responsible for implementing Spanish monetary policy. As of that date, the start of Stage III of the European Monetary Union, the European System of Central Banks and the European Central Bank became jointly responsible for Spain’s monetary policy. The European System of Central Banks consists of the national central banks of the twenty seven Member States belonging to the European Union, whether they have adopted the euro or not, and the European Central Bank. The “Eurosystem” is the term used to refer to the European Central Bank and the national central banks of the Member States which have adopted the euro. The European Central Bank is responsible for the monetary policy of the European Union. The Bank of Spain, as a member of the European System of Central Banks, takes part in the development of the European System of Central Banks’ powers including the design of the European Union’s monetary policy.

The European System of Central Banks is made up of three decision-making bodies:

	•		the Governing Council, comprised of the members of the Executive Board of the European Central Bank and the governors of the national central banks of the 15 Member States which have adopted the euro;

	•		the Executive Board, comprised of the president, vice-president and four other members; and

	•		the General Council of the European Central Bank, comprised of the president and vice-president of the European Central Bank and the governors of the national central banks of the 27 European Union Member States.

The Governing Council is the body in charge of formulating monetary policy for the euro area and adopting the guidelines and decisions necessary to perform the Euro system’s tasks. The Executive Board is the body in charge of implementing the monetary policy for the euro area laid out by the Governing Council and providing the instructions necessary to carry out monetary policy to the euro area’s national central banks.

The European Central Bank has delegated the authority to issue the euro to the central banks of each country participating in Stage III. These central banks are also in charge of executing the European Union’s monetary policy in their respective countries. The countries that have not adopted the euro will have a seat in the European System of Central Banks, but will not have a say in the monetary policy or instructions laid out by the governing council to the national central banks.

Since January 1, 1999, the Bank of Spain has performed the following basic functions attributed to the European System of Central Banks:

	•		executing the European Union monetary policy;

	•		conducting currency exchange operations consistent with the provisions of Article 109 of the Treaty on European Union, and holding and managing the States’ official currency reserves;

	•		promoting the sound working of payment systems in the euro area; and

	•		issuing legal tender bank notes.

Notwithstanding the European Monetary Union, the Bank of Spain continues to be responsible for:

	•		maintaining, administering and managing the foreign exchange and precious metal reserves;

	•		promoting the sound working and stability of the financial system and, without prejudice to the functions of the European System of Central Banks, of national payment systems;

	•		placing coins in circulation and the performance, on behalf of the State, of all such other functions entrusted to it in this connection;

	•		preparing and publishing statistics relating to its functions, and assisting the European Central Bank in the compilation of the necessary statistical information;

	•		rendering treasury services to the Spanish Treasury and to the regional governments, although the granting of loans or overdrafts in favor of the State, the regional governments or other bodies referred to in Article 104 of the European Union Treaty, is generally prohibited;

	•		rendering services related to public debt to the State and regional governments; and

	•		advising the Spanish Government and preparing the appropriate reports and studies.

The Bank of Spain has the following supervisory powers over Spanish banks, subject to applicable laws, rules and regulations issued by the Spanish Government and its Ministry of Economy and Finance:

	•		to conduct periodic inspections of Spanish banks to test compliance with current regulations concerning, among other matters, preparation of financial statements, account structure, credit policies and provisions and capital adequacy;

	•		to advise a bank’s board of directors and management when its dividend policy is deemed inconsistent with the bank’s financial results;

	•		to undertake extraordinary inspections of banks concerning any matters relating to their banking activities;

	•		to participate with, as the case may be, other authorities in appropriate cases in the imposition of penalties to banks for infringement or violation of applicable regulations; and

	•		to take control of credit entities and to replace directors of credit entities when a Spanish credit entity faces an exceptional situation that poses a risk to the financial status of the relevant entity.

Liquidity Ratio

European Central Bank regulations require credit institutions in each Member State that participates in the European Monetary Union, including us, to place a specific percentage of their “Qualifying Liabilities” with their respective central banks in the form of interest bearing deposits as specified below (the “Liquidity Ratio”).

The European Central Bank requires the maintenance of a minimum liquidity ratio by all credit institutions established in the Member States of the European Monetary Union. Branches located in the Eurozone of institutions not registered in this area are also subject to this ratio, while the branches located outside the Eurozone of institutions registered in the Eurozone are not subject to this ratio.

“Qualifying Liabilities” are broadly defined as deposits and debt securities issued. The Liquidity Ratio is 2% over Qualifying Liabilities except in relation to deposits with stated maturity greater than two years, deposits redeemable at notice after two years, repos and debt securities with a stated maturity greater than two years, for which the ratio is 0%.

Liabilities of institutions subject to the Liquidity Ratio and liabilities of the European Central Bank and national central banks of a participating Member State of the European Monetary Union are not included in the base of “Qualifying Liabilities”.

Investment Ratio

The Spanish Government has the power to require credit institutions to invest a portion of certain “Qualifying Liabilities” in certain kinds of public sector debt or public-interest financing (the “investment ratio”), and has exercised this power in the past. Although the investment ratio has been 0% since December 31, 1992, the law which authorizes it has not been abolished, and the Spanish Government could reimpose the ratio, subject to EU requirements.

Capital Adequacy Requirements

During 2007, the Bank and its Spanish bank subsidiaries were subject to Bank of Spain Circular 5/1993 on capital adequacy requirements. Additionally, Spain forms part of the Basel Committee on Banking Regulations and Supervisory Practices since February 2001 and we calculate our capital requirements under this committee’s criteria (the Basel I Accord). In June 2006 the European Union adopted a new regulatory framework (recast of Directives 2006/48/EC and 2006/49/EC) that promotes more risk sensitive approaches to the determination of minimum regulatory capital requirements in accordance with the New Basel Accord (“Basel II” or “BIS II”). Finally, the Royal Decree 216/2008 published on February 16, 2008, the Law 36/2007 amending Law 13/1985, and Bank of Spain Circular 3/2008 published on June 10, 2008, introduced these European Directives into the Spanish regulatory framework, and BIS II was incorporated into the Spanish regulations, following its adoption by the European Union.

The Spanish capital adequacy requirements applicable until June 30, 2008 distinguished between “basic” and “complementary” capital and require certain ratios of basic and total capital to risk-weighted assets. Basic capital generally includes ordinary shares, non-cumulative preferred securities and most reserves, less interim dividends, goodwill and intangible assets, treasury stock and financing for the acquisition (by persons other than the issuer’s employees) of the issuer’s shares. Complementary capital generally includes cumulative preferred securities, revaluation and similar reserves, dated and perpetual subordinated debt, generic credit allowances and capital gains. The Bank’s total capital was reduced by certain deductions that need to be made with respect to its investments in other financial institutions.

The computation of both basic and complementary capital was subject to provisions limiting the type of stockholding and the level of control which these stockholdings grant to a banking group. The level of dated subordinated debt taken into account for the calculation of complementary capital may not exceed 50% of basic capital, the level of non-cumulative preferred securities may not exceed 30% of basic capital, the level of step-up preferred securities may not exceed 15% of basic capital and the total amount of complementary capital admissible for computing total capital may not exceed the total amount of basic capital.

The consolidated total capital of a banking group calculated in the manner described above may not be less than 8% of the group’s risk-weighted assets net of specified provisions and amortizations. The calculation of total risk-weighted assets applies minimum multipliers of 0%, 10%, 20%, 50% and 100% to the group’s assets.

Spanish regulations provided that, if certain requirements are met, Spanish banks may include the net credit exposure arising from certain interest rate and foreign exchange related derivative contracts (rather than the entire notional amount of such contracts) in their total risk-adjusted assets for purposes of calculating their capital adequacy ratios.

Spanish banks were permitted to include the net credit exposure arising from interest rate and foreign exchange transactions related to derivative products provided that (i) all derivative related transactions between the parties form a single agreement; (ii) the incumbent bank has submitted to the Bank of Spain legal opinions with regard to the validity of the netting provisions; and (iii) the incumbent bank has implemented the appropriate procedures to revise the treatment of netting if there is an amendment of the regulations in force.

As a result of the new Basel capital accord issued by the Basel Committee (Basel II), a new regulatory framework (Directives 2006/48/EC and 2006/49/EC) was adopted in June 2006 by the European Union. Since then, each country has been going through the process of implementing the Directives, firstly in national laws and secondly in the specific regulations of each national supervisor. This new framework is applicable to all Spanish banks. Law 36/2007 (November 17), which amends Law 13/1985 on investment ratios, capital and reporting requirements of financial intermediaries and Royal Decree 216/2008 (February 15), transposes Directive 2006/48/EC and Directive 2006/49/EC into the Spanish Law.

Bank of Spain Circular 3/2008 published on June 10, 2008 mandated Spanish entities to report capital ratios using the Basel II framework from June 30, 2008.

Basel II introduces more emphasis on risk sensitivity, supervisory review and market discipline (through more extensive disclosures). Banks have minimum capital requirements in order to support credit, market and operational risk.

The capital requirements can be calculated through standard or advanced internal models. The standardized model uses an approach to risk weighted assets calculation based on the quality of the assets and the available external agency ratings. Depending on the ratings, different risk weights are applied (20%, 35%, 50%, 75%, 100% and 150%).

The Group has been using, from the outset, advanced internal models to calculate the capital requirements for credit risk of the units with the largest credit risk exposure (the Parent Bank and Banesto in Spain and Abbey and Alliance & Leicester in the United Kingdom), and plans to extend these models to its other main units in the next few years. The use of advanced internal models is subject to stringent internal validation and supervisory approval requirements. Internal validation and supervisory review and approval of the models are not confined to the quantitative model, but also encompass qualitative requirements relating to the technological environment and the integration of the models into management. In the case of the Group, this has entailed review and approval by the Bank of Spain and the FSA of several credit risk models applicable to the various business segments. In June 2008, Bank of Spain authorized the use of internal models to determine the regulatory capital requirements of the above mentioned Group’s main units beginning as of June 30, 2008.

The new regulatory standards positively affect the Group’s capital ratios, as the use of internal models reduces the risk weighted exposure and, consequently, the Group’s capital needs are lower. This improvement is partly offset by the higher penalization from including operational risk and, second, by the limitation of the inclusion of generic provisions among second tier funds to 60%.

At December 31, 2008, our eligible capital exceeded the minimum required by the Bank of Spain by over €21 billion. Our Spanish subsidiary banks were, at December 31, 2008, each in compliance with these capital adequacy requirements, and all our foreign subsidiary banks were in compliance with their local regulations.

The calculation of the minimum capital requirements under the new regulations, referred to as Pillar I, is supplemented by an internal capital adequacy assessment process (“ICAAP”) and supervisory review, referred to as Pillar II. In the case of the Group, the ICAAP is based on an internal model which is used to quantify the economic capital required, given the Group’s global risk profile, to maintain a target AA rating. Lastly, Basel II regulations establish, through Pillar III, strict standards of transparency in the disclosure of risk information to the market.

Concentration of Risk

Spanish banks may not have exposure to a single person or group in excess of 25% (20% in the case of an affiliate) of the bank’s equity. Any exposure to a person or group exceeding 10% of a bank’s capital is deemed a concentration and the total amount of exposure represented by all of such concentrations must not exceed 800% of such capital (excluding exposures to the Spanish government, the Bank of Spain, the European Union and certain other exceptions).

Legal Reserve and Other Reserves

Spanish banks are subject to legal and other restricted reserves requirements. In addition, we must allocate profits to certain other reserves as described in Note 33 to our consolidated financial statements.

Allowances for Credit Losses and Country-Risk

For a discussion relating to allowances for credit losses and country-risk, see “—Classified Assets—Bank of Spain Classification Requirements”.

Employee Pension Plans

At December 31, 2008, our pension plans were all funded according to the criteria disclosed in Note 25 to our consolidated financial statements.

Restrictions on Dividends

We may only pay dividends (including interim dividends) if such payment is in compliance with the Bank of Spain’s minimum capital requirement (described under “—Capital Adequacy Requirements”) and other requirements or, as described below, under certain circumstances when we have capital that is 20% or less below the Bank of Spain’s minimum capital requirements.

If a banking group meets this capital requirement, it may dedicate all of its net profits to the payment of dividends, although in practice Spanish banks normally consult with the Bank of Spain before declaring a dividend. Even if a banking group meets the capital requirement as a group, any consolidated Spanish credit entity that is a subsidiary that does not meet the capital requirement on its own will be subject to the limitations on dividends described below. If a banking group or any Spanish credit entity subsidiary of the group has capital that is 20% or less below the Bank of Spain’s minimum capital requirement, it must devote an amount of net profits determined by the Bank of Spain to reserves, and dividends may be paid out of the remainder only with the prior approval of the Bank of Spain. If the capital is 20% or more, or its basic capital is 50% or more, below the minimum requirement, it may not pay any dividends and must allocate all profits to reserves unless otherwise authorized by the Bank of Spain. In the case of a banking group failing to meet the capital requirement, however, the Bank of Spain can authorize that the consolidated subsidiaries in the group pay dividends without restriction, so long as they are at least 50% owned by group companies and, if they are credit entities, independently comply with the capital requirement.

If a bank has no net profits, its board of directors may propose at the general meeting of shareholders that a dividend be declared out of retained earnings. However, once the board of directors has proposed the dividend to be paid, it must submit the proposal to the Minister of Economy and Finance who, in consultation with the Bank of Spain, may in his discretion authorize or reject the proposal of the board.

Compliance with such requirements notwithstanding, the Bank of Spain is empowered to advise a bank against the payment of dividends on security and soundness grounds. If such advice is not followed, the Bank of Spain may require that notice of such advice be included in the bank’s annual report registered before the Mercantile Register. In no event may dividends be paid from certain legal reserves.

Interim dividends of any given year may not exceed the net profits for the period from the closing of the previous fiscal year to the date on which interim dividends are declared. In addition, the Bank of Spain recommends that interim dividends not exceed an amount equal to one-half of all net income from the beginning of the corresponding fiscal year. Although banks are not legally required to seek prior approval from the Bank of Spain before declaring interim dividends, the Bank of Spain has asked that banks consult with it on a voluntary basis before declaring interim dividends.

Limitations On Types Of Business

Spanish banks generally are not subject to any prohibitions on the types of businesses that they may conduct, although they are subject to certain limitations on the types of businesses they may conduct directly.

The activities that credit institutions authorized in another Member State of the European Union may conduct and which benefit from the mutual recognition within the European Union are detailed in article 52 of Law 26/1988 (July 29, 1988).

Deposit Guarantee Fund

The Deposit Guarantee Fund on Credit Institutions (“Fondo de Garantía de Depósitos”, or the “FGD”), which operates under the guidance of the Bank of Spain, guarantees in the case of the Bank and our Spanish banking subsidiaries: (i) bank deposits up to €100,000 per depositor; and (ii) securities and financial instruments which have been assigned to a credit institution for its deposit, register or for other such services, up to €100,000 per investor. Pursuant to regulations affecting the FGD, the FGD may purchase non-performing loans or may acquire, recapitalize and sell banks which experience difficulties.

The FGD is funded by annual contributions from member banks. The amount of such bank’s contributions is currently 0.6 per thousand (0.4 per thousand for savings banks and 0.8 per thousand for credit cooperatives) of the year-end amount of deposits to which the guarantee extends. For that purpose, the calculation basis will take into consideration the bank deposits, plus 5% of the market quotation (or nominal value or redemption value in case the securities are not traded in any secondary market) of the guaranteed securities at the end of the financial year. Nevertheless, the Minister of Economy and Finance may reduce the member bank contributions once the capital of the FGD resources exceeds its requirements, and suspend further contributions when the FGD’s funds exceed the requirement by 1% or more of the calculation basis.

As of December 31, 2008, the Bank and its domestic bank subsidiaries were members of the FGD and thus were obligated to make annual contributions to it.

Data Protection

Law 15/1999, dated December 13, 1999, establishes the requirements relating to the treatment of customers’ personal data by credit entities. This law requires credit entities to notify the Spanish Data Protection Agency prior to creating files with a customer’s personal information. Furthermore, this law requires the credit entity to identify the persons who will be responsible for the files and the measures that will be taken to preserve the security of those files. The files must then be recorded in the Data Protection General Registry, once compliance with the relevant requirements has been confirmed. Credit entities that breach this law may be subject to claims by the interested parties before the Data Protection Agency. The Data Protection Agency, which has investigatory and sanctioning capabilities, is the Spanish Authority responsible for the control and supervision of the enforcement of this law.

Recent Legislation

Law 6/2007 (April 12) amending the Securities Market Law, in order to modify the rules for takeover bids and for issuers transparency. This law has been further developed by Royal Decree 1066/2007 (July 27) on rules applicable to takeover bids for securities and by Royal Decree 1362/2007 (October 19), on transparency requirements for issuers of listed securities (see Item 9 of Part I, “The Offer and Listing—C. Markets—Spanish Securities Market—Securities Market Legislation” and Item 10 of Part I, “Additional Information—B. Memorandum and Articles of Association—Tender Offers”).

Law 16/2007 (July 4) introduces a series of amendments to the Spanish mercantile legislation, Commercial Code and Companies Law, in order to adapt it to certain international accounting standards introduced by Regulation 1606/2002/EC of the European Union and of the Council with regard to international financial reporting standards.

Law 22/2007 (July 11) completes the incorporation into the Spanish legal system of Directive 2002/65/EC concerning the distance marketing of consumer financial services.

Law 36/2007 (November 17) introduces a series of amendments to Law 13/1985 (May 25), on investment ratios, capital and reporting requirements of financial intermediaries, in order to adapt it to Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions. The provisions of this Directive and the provisions in Directive 2006/49/EC on the minimum capital adequacy of investment firms and credit institutions, implements in the European Union the provisions of the 2004 New Basel Capital Accord (Basel II) which focuses on capital allocation as a primary means of controlling risk. Further implementation in Spain of the above mentioned Directives has been made by Royal Decree 216/2008 (February 15), on capital of financial institutions and by Bank of Spain Circular 3/2008, published on June 10, 2008 (see “Capital Adequacy Requirements” above).

Law 41/2007 (December 7) amends Law 2/1981 (March 25) on the mortgage market and regulations related to the mortgage and financial systems, by regulating reverse mortgages and long term care insurance and by setting out a specific tax rule. The purpose of this law is to provide the Spanish mortgage market with greater flexibility. A number of reforms have been introduced relating to (i) asset or financing transactions carried out by credit institutions; and (ii) liability transactions, i.e., those of moving mortgage loans and credits that credit institutions carried out as refinancing mechanisms (mortgage participations, mortgage bonds and covered bonds). A new Royal Decree 716/2009 of April 24, 2009 has been enacted implementing some of the reforms introduced by Law 41/2007 on the mortgage market.

Law 47/2007 (December 19) amends the Securities Market Law in order to adapt it to (i) Directive 2004/39/EC on markets in financial instruments (MiFID), (ii) Directive 2006/73/EC implementing Directive 2004/39/EC with respect to the organizational requirements and operating conditions for investment firms and defined terms for the purpose of that Directive; and (iii) Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions. Further Directive 2006/49/EC and MiFID implementation have been introduced by Royal Decrees 216/2008 and 217/2008 (both of February 15), respectively (see Item 9 of Part I, “The Offer and Listing—C. Markets. —Spanish Securities Market—Securities Market Legislation”).

Law 4/2008 (December 23, 2008) abolishes wealth tax, brings into general use the monthly refund system for value added tax, and introduces other amendments to tax legislation.

Law 3/2009, of April 3, on structural modifications of commercial companies (“Ley sobre modificaciones estructurales de las sociedades mercantiles”), entails a profound reform of our legal system in various areas of corporate Law:

(i) cross-border mergers and international transfers of a corporation’s registered office are regulated;

(ii) rules applicable to corporate restructuring transactions of the different types of commercial companies are unified;

(iii) the quantitative limitations for the acquisition of treasury stock by public limited companies are extended (10% for listed companies and 20% for unlisted companies).

(iv) preemptive rights are abolished in the case of non-monetary contributions, preemptive rights of the holders of convertible debentures are eliminated, and the ability to exclude preemptive rights of the shareholders for the issuance of convertible debentures is expressly provided.

This law will enter into force within three months of the publication thereof in the Spanish Official Gazette, except for the provisions relating to intra-European Union cross-border mergers, which entered into force on the day following publication thereof.

* * * * * *

In an attempt to deal with the international financial crisis, due to the exceptional circumstances notably beginning in the second half of 2008, the following laws were approved in Spain:

• Royal Decree 1642/2008, of December 10, increased consumer deposit and investment guarantees up to €100,000 for each depositor or investor and Spanish entity.

• Royal Decree 6/2008, of October 10, creates the Spanish Financial Asset Acquisition Fund, and Order EHA/3118/2008, dated October 31, enacts this Royal Decree. The purpose of the fund, which is managed by Spain’s Ministry of Economy and Finance and has an initial endowment of €30 billion that can be increased to €50 billion, is to acquire, with public financing and based on market criteria via auctions, financial instruments issued by credit institutions and securitization funds (which are backed by loans granted to individuals, companies and non-financial entities) as a measure to increase liquidity.

• Royal Decree-Law 7/2008, of October 13, on Emergency Economic Measures in connection with the Concerted Euro Area Action Plan (“RD 7/2008”), and Order EHA/3364/2008, dated November 21, as amended by Order EHA/3748/2008 of December 23, enacting article 1 of the aforementioned Royal Decree, include the following measures:

• Article 1 of RD 7/2008, authorizes the granting of state guarantees for certain new financing transactions carried out by credit entities resident in Spain up to a maximum amount of €100 billion. The purpose of Order EHA/3364/2008, as amended by Order EHA/3748/2008 is to implement the provisions of RD 7/2008 and to specify certain essential aspects of the system for granting guarantees to credit entities, such as: (i) the characteristics of the guarantees to be granted; (ii) the requirements that the beneficiary entities and the transactions must fulfil; and (iii) the process to be followed in order to grant the guarantees. Debt issued under this state guarantee must form part of individual operations or issuance programs; not be subordinated or secured by any other class of guarantee; be traded on official Spanish secondary markets; mature within three months and three years (although this maturity can be extended to five years subject to prior notification to the Bank of Spain); be fixed or floating rate (subject to special conditions for floating-rate debt); be repaid in a single installment at maturity; not have any options or other derivatives attached to it; and, not be less than €10 million per issue. The deadline for issuing debt eligible for state guarantees is December 31, 2009 and the total amount of guarantees is €100 billion.

• Authorization, on an exceptional basis, until December 31, 2009, for the Spanish Ministry of Economy and Finance to acquire regulatory capital (including preferred securities and quotas) issued by credit entities resident in Spain that need to reinforce their capital and request such action. These acquisitions will require a report from the Bank of Spain.

• Royal Decree-law 3/2009, of March 27, on urgent measures for tax, financial and insolvency matters, amends the Spanish Insolvency Law (in force since 2004), and aims: (i) to facilitate restructuring outside insolvency proceedings for companies undergoing financial difficulties; (ii) to expedite insolvency proceedings for companies which either decide or are bound to restructure in an insolvency situation; and (iii) to settle certain discrepancies concerning credit subordinations. Additionally, it authorizes the “Consorcio de Compensación de Seguros” to participate in the reassurance of credit insurance transactions.

United Kingdom Regulation

FSA

Both Abbey and our branch in the United Kingdom are regulated by the Financial Services Authority (“FSA”). The FSA is the single statutory regulator responsible for regulating deposit taking, mortgages, insurance and investment business pursuant to the Financial Services and Markets Act 2000 (“FSMA”). It is a criminal offense for any person to carry on any of the activities regulated under this Act in the United Kingdom by way of business unless that person is authorized by the FSA or falls under an exemption.

The FSA has authorized Abbey, as well as some of its subsidiaries, to carry on certain regulated activities. The regulated activities they are authorized to engage in depend upon permissions granted by the FSA. The main permitted activities of Abbey and its authorized subsidiaries are described below.

Mortgages

Lending secured on land, at least 40% of which is used as a dwelling by an individual borrower or relative, has been regulated by the FSA since October 31, 2004. Abbey is authorized to enter into, advise and arrange regulated mortgage contracts.

Banking

Deposit taking is a regulated activity that requires a firm to be authorized and supervised by the FSA. Abbey has permission to carry on deposit taking as do several of its subsidiaries, including Alliance & Leicester plc, Abbey National Treasury Services plc and Cater Allen Limited.

Insurance

United Kingdom banking groups may provide insurance services through other group companies. Insurance business in the United Kingdom is divided between two main categories: Long-term Assurance (such as whole of life, endowments, life insurance investment bonds) and General Insurance (such as buildings and contents coverage, annually renewable life, health and travel protection coverage and motor insurance).

Under the FSMA, effecting or carrying out any contract of insurance, whether general or long-term, is a regulated activity requiring authorization. Life insurance mediation has been subject to regulation for many years. General insurance mediation has been subject to regulation by the FSA since January 14, 2005.

Abbey is authorized by the FSA to sell both Long-term Assurance and General Insurance, and receives commissions for the policies arranged.

Investment business

Investment business such as dealing in, arranging deals in, managing and giving investment advice in respect of most types of securities and other investments, including options, futures and contracts for differences (which would include interest rate and currency swaps) and long-term assurance contracts are all regulated activities under the FSMA and require authorization by the FSA.

Abbey and a number of its subsidiaries have permission to engage in a wide range of wholesale and retail investment businesses including selling investment-backed life assurance and pension products, unit trust products and Individual Savings Accounts (tax exempt saving products) and providing certain retail equity products and services.

United States Supervision and Regulation

Our operations are subject to extensive federal and state banking and securities regulation and supervision in the United States. We engage in U.S. banking activities directly through our New York branch and indirectly through Banesto’s branch in New York, Abbey’s branch in Connecticut, our subsidiary Edge Act corporation, Banco Santander International, in Miami, Banco Santander Puerto Rico (“Santander Puerto Rico”) in Puerto Rico and Sovereign Bank, a federally-chartered savings bank that is headquartered in Pennsylvania and has branches in various states.

Regulatory Authorities

We are a bank holding company under the U.S. Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”), by virtue of our ownership of Santander Puerto Rico. As a result, we and our U.S. operations are subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).

Santander Puerto Rico is a Puerto Rico-chartered bank, and its deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”). As such, Santander Puerto Rico is subject to regulation, supervision and examination by the Puerto Rico Bureau of Financial Institutions and the FDIC. Sovereign Bank is a federally-chartered savings bank, the deposits of which are also insured by the FDIC. Sovereign Bank is subject to regulation, supervision and examination by the Office of Thrift Supervision and the FDIC. Our New York branch is supervised by the Federal Reserve Board and the New York State Banking Department, but its deposits are not insured (or eligible to be insured) by the FDIC. Banesto’s branch in New York is supervised by the Federal Reserve Board and the New York State Banking Department. Abbey’s branch in Connecticut is supervised by the Federal Reserve Board and the Connecticut Department of Banking. Banco Santander International is supervised by the Federal Reserve Board.

Restrictions on Activities

As described below, federal and state banking laws and regulations restrict our ability to engage, directly or indirectly through subsidiaries, in activities in the United States.

We are required to obtain the prior approval of the Federal Reserve Board before directly or indirectly acquiring the ownership or control of more than 5% of any class of voting shares of U.S. banks, certain other depository institutions, and bank or depository institution holding companies. Under the Bank Holding Company Act, Federal Reserve Board regulations and the Home Owner’s Loan Act, our U.S. banking operations (including our New York branch and Santander Puerto Rico) are also restricted from engaging in certain “tying” arrangements involving products and services.

Santander Puerto Rico and Sovereign Bank are subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be made and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of these subsidiaries.

The Gramm-Leach Bliley Act of 1999 (the “GLB Act”) and Federal Reserve Board regulations contain provisions that could affect our operations and the operations of all financial institutions. One of these provisions requires our depository institution subsidiaries to disclose our privacy policy to consumers and to offer them the ability to opt out of having their non-public information disclosed to third parties. In addition, individual states are permitted to adopt more extensive privacy protections through legislation or regulation. In addition, the so-called “push-out” provisions of the GLB Act narrow the exclusion of banks (including U.S. branches of foreign banks, such as our New York branch) from the definitions of “broker” and “dealer” under the Securities Exchange Act of 1934.

In addition, under U.S. federal banking laws, state-chartered banks (such as Santander Puerto Rico) and state-licensed branches and agencies of foreign banks (such as our New York branch) may not, as a general matter, engage as a principal in any type of activity not permissible for their federally chartered or licensed counterparts, unless (i) in the case of state-chartered banks (such as Santander Puerto Rico), the FDIC determines that the additional activity would pose no significant risk to the FDIC’s Deposit Insurance Fund and is consistent with sound banking practices, and (ii) in the case of state licensed branches and agencies (such as our New York branch), the Federal Reserve Board determines that the additional activity is consistent with sound banking practices. United States federal banking laws also subject state branches and agencies to the same single-borrower lending limits that apply to federal branches or agencies, which are substantially similar to the lending limits applicable to national banks. These single-borrower lending limits are based on the worldwide capital of the entire foreign bank (i.e., Banco Santander, S.A. in the case of our New York branch).

Under the International Banking Act of 1978, as amended, the Federal Reserve Board may terminate the activities of any U.S. office of a foreign bank if it determines that the foreign bank is not subject to comprehensive supervision on a consolidated basis in its home country (unless the home country is making demonstrable progress toward establishing such supervision), or that there is reasonable cause to believe that such foreign bank or its affiliate has violated the law or engaged in an unsafe or unsound banking practice in the United States and, as a result of such violation or practice, the continued operation of the U.S. office would be inconsistent with the public interest or with the purposes of federal banking laws.

There are various legal restrictions on the extent to which we and our nonbank subsidiaries can borrow or otherwise obtain credit from our U.S. banking subsidiaries or engage in certain other transactions involving those subsidiaries. In general, these transactions must be on terms that would ordinarily be offered to unaffiliated entities and must be secured by designated amounts of specified collateral. In addition, certain transactions, such as certain extensions of credit by a U.S. bank subsidiary to, or purchases of assets by such a subsidiary from, us or our nonbank subsidiaries are subject to volume limitations. These restrictions also apply to certain transactions of our New York Branch with certain of our U.S. affiliates.

Our New York Branch

Our New York branch is licensed by the New York Superintendent of Banks to conduct a commercial banking business. Under the New York State Banking Law and regulations, our New York branch is required to maintain eligible high-quality assets with banks in the State of New York, as security for the protection of depositors and certain other creditors.

The New York State Banking Law also empowers the Superintendent of Banks to establish asset maintenance requirements for branches of foreign banks, expressed as a percentage of each branch’s liabilities. The presently designated percentage is 0%, although the Superintendent may impose additional asset maintenance requirements upon individual branches on a case-by-case basis. No such requirement has been imposed upon our New York branch.

The New York State Banking Law authorizes the Superintendent of Banks to take possession of the business and property of a New York branch of a foreign bank under circumstances involving violation of law, conduct of business in an unsafe manner, impairment of capital, suspension of payment of obligations, or initiation of liquidation proceedings against the foreign bank at its domicile or elsewhere. In liquidating or dealing with a branch’s business after taking possession of a branch, only the claims of creditors which arose out of transactions with a branch are to be accepted by the Superintendent of Banks for payment out of the business and property of the foreign bank in the State of New York, without prejudice to the rights of the holders of such claims to be satisfied out of other assets of the foreign bank. After such claims are paid, the Superintendent of Banks will turn over the remaining assets, if any, to the foreign bank or its duly appointed liquidator or receiver.

Under the New York State Banking Law, our New York branch is generally subject to the same limits on lending to a single borrower, expressed as a ratio of capital, that apply to a New York state-chartered bank, except that for our New York branch such limits are based on our worldwide capital.

Our U.S. Depository Institution Subsidiaries

The Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDICIA”) provides for extensive regulation of depository institutions (such as Santander Puerto Rico and Sovereign Bank), including requiring federal banking regulators to take “prompt corrective action” with respect to FDIC-insured depository institutions that do not meet minimum capital requirements. For this purpose, FDICIA establishes five tiers of institutions: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” As an insured depository institution’s capital level declines and the depository institution falls into lower categories (or if it is placed in a lower category by the discretionary action of its supervisor), greater limits are placed on its activities and federal banking regulators are authorized (and, in many cases, required) to take increasingly more stringent supervisory actions, which could ultimately include the appointment of a conservator or receiver for the depository institution (even if it is solvent). In addition, FDICIA generally prohibits an FDIC-insured bank from making any capital distribution (including payment of a dividend) or payment of a management fee to its holding company if the bank would thereafter be undercapitalized. If an insured depository institution becomes “undercapitalized,” it is required to submit to federal regulators a capital restoration plan guaranteed by the depository institution’s holding company. The guarantee is limited to 5% of the depository institution’s assets at the time it becomes undercapitalized or, should the undercapitalized depository institution fail to comply with the plan, the amount of the capital deficiency at the time of failure, whichever is less. If an undercapitalized depository institution fails to submit an acceptable plan, it is treated as if it were “significantly undercapitalized.” Significantly undercapitalized depository institutions may be subject to a number of restrictions, including requirements to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and restrictions on accepting deposits from correspondent banks. “Critically undercapitalized” depository institutions are subject to appointment of a receiver or conservator.

Monetary Policy and Exchange Controls

The decisions of the European System of Central Banks influence conditions in the money and credit markets, thereby affecting interest rates, the growth in lending, the distribution of lending among various industry sectors and the growth of deposits. Monetary policy has had a significant effect on the operations and profitability of Spanish banks in the past and this effect is expected to continue in the future. Similarly, the monetary policies of governments in other countries in which we have operations, particularly in Latin America, the United States and the United Kingdom, affect our operations and profitability in those countries. We cannot predict the effect which any changes in such policies may have upon our operations in the future, but we do not expect it to be material.

The European Monetary Union has had a significant effect upon foreign exchange and bond markets and has involved modification of the internal operations and systems of banks and of inter-bank payments systems. Since January 1, 1999, the start of Stage III, see “—Supervision and Regulation—Bank of Spain and the European Central Bank,” Spanish monetary policy has been affected in several ways. The euro has become the national currency of the fifteen participating countries and the exchange rates between the currencies of these countries were fixed to the euro. Additionally, the European System of Central Banks became the entity in charge of the European Union’s monetary policy.

C. Organizational structure

Banco Santander, S.A. is the Parent company of the Group which was comprised at December 31, 2008 of 831 companies that consolidate by the global integration method. In addition, there are 149 companies that are accounted for by the equity method.

See Exhibits I, II and III to our consolidated financial statements included in this Form 20-F for details of our consolidated and non-consolidated companies.

D. Property, plant and equipment

During 2008, the Bank and its bank subsidiaries either leased or owned premises in Spain and abroad, which at December 31, 2008 included 5,022 branch offices in Spain and 8,368 abroad. These figures include traditional branches and banking services points but do not include electronic service points. See Item 1 of Part I, “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations and Recent events” and Note 16 to our consolidated financial statements.

Item 4A. Unresolved Staff Comments

None.

Item 5. Operating and Financial Review and Prospects

Critical Accounting Policies

The preparation of the Group’s consolidated financial statements requires a significant amount of judgment involving estimates and assumptions which can be inherently uncertain at the time they are made (see Note 1-c to our consolidated financial statements). Changes in assumptions may have a significant impact on the financial statements in the periods in which they are changed. Judgments or changes in assumptions are submitted to the audit and compliance committee of the board of directors and/or to our regulatory authorities and are disclosed in the notes to our consolidated financial statements.

Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under current circumstances. Actual results may differ from these estimates if assumptions and conditions change.

We believe that of our significant accounting policies, the following may involve a high degree of judgment:

Fair value of financial instruments

Trading assets or liabilities, financial instruments that are classified at fair value through profit or loss, available for sale securities, and all derivatives are recorded at fair value on the balance sheet. The fair value of a financial instrument is the value at which it could be bought or sold in a current transaction between willing parties. If a quoted price in an active market is available for an instrument, the fair value is calculated based on that price.

If there is no market price available for a financial instrument, its fair value is estimated on the basis of the price established in recent transactions involving the same or similar instruments and, in the absence thereof, on the basis of valuation techniques commonly used by the international financial community, taking into account the specific features of the instrument to be measured and, particularly, the various types of risk associated with it.

We use derivative financial instruments for both trading and non-trading activities. The principal types of derivatives used are interest rate swaps, future rate agreements, interest rate options and futures, foreign exchange forwards, foreign exchange futures, foreign exchange options, foreign exchange swaps, cross currency swaps, equity index futures and equity options. The fair value of standard derivatives is calculated based on published price quotations. The fair value of over-the-counter (“OTC”) derivatives is taken to be the sum of the expected future cash flows arising from the instrument, discounted to present value at the date of measurement (“present value” or “theoretical close”) using valuation techniques commonly used by the financial markets as follows:

•

In the valuation of financial instruments permitting static hedging (principally, forwards and swaps), and in the valuation of loans and advances, the “present value” method is used. Expected future cash flows are discounted using the interest rate curves of the applicable currencies. The interest rate curves are generally observable market data.

•

In the valuation of financial instruments requiring dynamic hedging (principally structured options and other structured instruments), the Black-Scholes model is generally used. Certain observable market inputs are used in the Black-Scholes model to generate variables such as the bid-offer spread, exchange rates, volatility, correlation between indexes and market liquidity, as appropriate.

•

In the valuation of financial instruments exposed to interest rate risk (such as interest rate futures, caps and floors), the present value method (futures) and Black-Scholes model (plain vanilla options) are used. For more structured instruments that require dynamic hedging, the Heath-Jarrow-Morton model is used. The main inputs used in these models are principally observable market data, including appropriate interest rate curves, volatilities, correlations and exchange rates.

•

In the case of linear instruments (such as bonds and fixed-income derivatives), credit risk is measured using dynamic models similar to those used in the measurement of interest rate risk. In the case of non-linear instruments, if they are exposed to portfolio credit risk (such as credit derivatives), the joint probability of default is determined using the Standard Gaussian Copula model. The main inputs used in the Standard Gaussian Copula model are generally data relating to individual issuers in the portfolio and correlations thereto. The main inputs used in determining the underlying cost of credit for credit risk derivatives are quoted credit spreads, and the correlation between individual issuers’ quoted credit derivatives.

The determination of fair value requires the use of estimates and certain assumptions. If quoted market prices are not available, fair value is calculated using widely accepted pricing models that consider contractual prices of the underlying financial instruments, yield curves, contract terms, observable market data, and other relevant factors. The use of different estimates or assumptions in these pricing models could lead to a different valuation being recorded in our consolidated financial statements.

In Note 2. d) iii. to our consolidated financial statements additional information can be found regarding valuation techniques used by the Group, along with details of the principal assumptions and estimates used in these models and the sensitivity of the valuation of financial instruments to changes in the principal assumptions used.

Allowance for credit losses

Financial assets accounted for at amortized cost and contingent liabilities are assessed for objective evidence of impairment and any resulting allowances for credit losses are recognized and measured in accordance with IAS 39. Credit losses exist if the carrying amount of an asset or claim or a portfolio of assets or claims exceeds the present value of the estimated future cash flows.

Credit losses on these impaired assets and contingent liabilities are assessed as follows:

	•		Individually, for all significant debt instruments and for instruments which, although not material, are not susceptible to being classified in homogeneous groups of instruments with similar risk characteristics: instrument type, debtor’s industry and geographical location, type of guarantee or collateral, and age of past-due amounts, taking into account: (i) the present value of future cash flows, discounted at an appropriate discount rate; (ii) the debtor’s financial situation; and (iii) any guarantees in place.

	•		Collectively, in all other cases, we group transactions on the basis of the nature of the obligors, the conditions of the countries in which they reside, transaction status, type of collateral or guarantee, and age of past-due amounts. For each group, we establish the appropriate impairment losses (“identified losses”) that must be recognized.

Additionally, we recognize an impairment allowance for credit losses when it is probable that a loss has been incurred, taking into account the historical loss experience and other circumstances known at the time of assessment. For this type of allowance, credit losses are losses incurred at the reporting date, calculated using statistical methods, that have not yet been allocated to specific transactions.

We have implemented a methodology which complies with IFRS-IASB and is consistent with the Bank of Spain requirements for the determination of the level of provisions required to cover inherent losses. This methodology initially classifies portfolios considered normal risk (debt instruments not classified at fair value through profit or loss, contingent risks and contingent commitments) into the following groups, according to the associated level of risk:

(i) No appreciable risk.

(ii) Low risk.

(iii) Medium-low risk.

(iv) Medium risk.

(v) Medium-high risk.

(vi) High risk.

Once these portfolios have been classified, the Bank of Spain, based on experience and information available to it with respect to the Spanish banking sector, has determined the methodology and parameters that entities should apply in the calculation of the provisions for inherent losses in debt instruments and contingent risks and commitments classified as normal risk.

The calculation establishes that the charge for inherent losses to be made in each period will be equal to: (i) the sum of multiplying the value, positive or negative, of the variation in the period of the balance of each class of risk by the constant a corresponding to that class, plus (ii) the sum of multiplying the total amount of the operations included in each class at the end of the period by the relevant b, minus (iii) the amount of the net charge for the specific allowance made in the period.

The parameters a and b as determined by the Bank of Spain’s guidance take into account historic inherent losses and adjustments to reflect the current economic circumstances.

The allowances for credit losses recorded by Grupo Santander as at December 31, 2008, using the methodology outlined above, was €12,863 million.

Additionally, with the objective of ensuring that the provisions resulting from the application of the criteria required by the Bank of Spain are reasonable, the Group estimates the allowances for credit losses using models based on its own credit loss experience and management’s estimate of future credit losses. The Group has developed internal risk models, based on historical information available for each country and type of risk (homogenous portfolios); a full description of our credit risk management system is included in Item 11. Quantitative and Qualitative Disclosures about Market Risk Part 3. Credit Risk. These models produce a result that substantially the same as the level of provisions at which we arrive using the model established by the Bank of Spain, as explained below. These internal models may be applied in future periods, though approved for regulatory capital calculations, are currently subject to local regulatory approval by the Bank of Spain for purposes of loan loss provisions. In order for each internal model to be considered valid by the local regulator for use, the calculation should be methodologically correct, and be supported by historical information which covers at least one complete economic cycle and is stored in databases which are consistent with information that has been audited by both the group internal auditing function and external auditors.

Since 1993, the Group has employed its own models for assigning solvency and internal ratings, which aim to measure the degree of risk associated with a client or transaction. Each rating corresponds to a certain probability of default or non-payment, based on the Group’s past experience. The development of the internal models has led to the introduction of databases that can be used to estimate the risk parameters required in the calculation of capital and expected loss, following market best practices and the guidelines of the New Capital Accord (Basel II).

There is no substantial difference in the calculation of loan allowances between the EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 and IFRS-IASB.

The estimates of a portfolio’s inherent risks and overall recovery vary with changes in the economy, individual industries, countries and individual borrowers’ or counterparties’ ability and willingness to repay their obligations. The degree to which any particular assumption affects the allowance for credit losses depends on the severity of the change and its relationship to the other assumptions.

Key judgments used in determining the allowance for loan losses include: (i) risk ratings for pools of commercial loans and leases, (ii) market and collateral values and discount rates for individually evaluated loans, (iii) product type classifications for consumer and commercial loans and leases, (iv) loss rates used for consumer and commercial loans and leases, (v) adjustments made for current events and conditions, (vi) domestic, global and individual countries economic uncertainty, and (vii) overall credit conditions.

Credit losses are generally recognized through allowances for credit losses. As a result of certain unusual circumstances (for example, bankruptcy or insolvency), the loss can be directly recognized through write-offs.

Specific allowances for credit losses come from the impairment process. Loans are identified as impaired and income no longer accrued when it is determined that collection of interest or principal is doubtful or when the interest or principal has been past due for 90 days or more, unless the loan is well secured and in the process of collection.

Globally managed clients, corporate, sovereign and other loans with significant balances are individually assessed based on the borrower’s overall financial condition, resources, guarantees and payment record. An impairment loss is recognized when there are doubts about collection, or when interest or principal is past due for 90 days or more.

Consumer mortgage, installment, revolving credit and other consumer loans are evaluated collectively, and an impairment loss is recognized when interest or principal is past due for 90 days or more.

According to Bank of Spain’s requirements, non-performing loans must be wholly provisioned (hence all the credit loss recognized) when they are more than 24 months overdue, or after more than 6 years for secured mortgage loans.

When a loan is deemed partially uncollectible, the credit loss is charged against earnings through allowances for credit losses instead of through a partial write-off of the loan, as this is not permitted by the Bank of Spain. If a loan becomes entirely uncollectible, its allowance is increased until it reaches 100% of the loan balance.

The credit loss recognition process is independent of the process for the removal of impaired loans from the balance sheet. The entire loan balance is kept on the balance sheet until any portion of it has been classified as non-performing for 4 years, or up to 6 years for some secured mortgage loans (the maximum period established in the Bank of Spain regulations), depending on management’s view as to the recoverability of the loan. After that period the loan balance and its specific allowance are removed from the balance sheet and recorded in off-balance sheet accounts, with no resulting impact on net income attributable to the Group.

An additional allowance for credit losses attributed to the remaining portfolio is established via a process that considers the potential loss inherent in the portfolio. Also, an allowance is recorded for those exposures where the sovereign risk, transfer risk and risks arising from international financial activity add some doubts as to the collection of debts (the Country-risk Allowance).

Impairment

Certain assets, including goodwill, other intangible assets, equity method investments, financial assets not carried at fair value through profit or loss and other assets are subject to impairment review. We record impairment charges when we believe there is objective evidence of impairment, or that the cost of the assets may not be recoverable. Assessment of what constitutes impairment is a matter of significant judgment.

Goodwill and other intangible assets are tested for impairment on an annual basis, or more frequently if events or changes in circumstances, such as an adverse change in business climate or observable market data, indicate that these assets may be impaired. An impairment loss recognized for goodwill may not be reversed in a subsequent period. The fair value determination used in the impairment assessment requires estimates based on quoted market prices, prices of comparable businesses, present value or other valuation techniques, or a combination thereof, requiring management to make subjective judgments and assumptions. Events and factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and technology, and changes in discount rates and specific industry or market sector conditions.

In relation to goodwill, the first step of the impairment review process requires the identification of cash-generating units (“CGU”). These are the smallest identifiable group of assets that, as a result of continuing operations, generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Goodwill is then allocated to these CGUs; this allocation is reviewed following a business reorganization. The carrying value of the CGU, including the allocated goodwill, is compared to its fair value to determine whether an impairment exists. To calculate these fair values, management may use quoted prices, if available, appraisals made by independent external experts or internal estimations. Assumptions about expected future cash flows require management to make estimations and judgments. For this purpose, management analyzes the following: (i) certain macroeconomic variables that might affect its investments (including population data, the political and economic environment, as well as the banking system’s penetration level); (ii) various microeconomic variables comparing our investments with the financial industry of the country in which we carry on most of our business activities (breakdown of the balance sheet, total funds under management, results, efficiency ratio, capital ratio and return on equity, among others); and (iii) the price earnings (“P/E”) ratio of the investments as compared with the P/E ratio of the stock market in the country in which the investments are located and those of comparable local financial institutions.

Equity method investments are evaluated for impairment on an annually basis, or more frequently if events or changes in circumstances indicate that these assets are impaired. An equity method investment is impaired if its fair value is deemed to be less than its cost. Accordingly, we evaluate whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment.

All debt and equity securities (other than those carried at fair value through profit or loss) are subject to impairment testing every reporting period. The carrying value is reviewed in order to determine whether an impairment loss has been incurred. Evaluation for impairment includes both quantitative and qualitative considerations. For debt securities, such considerations include actual and estimated incurred credit losses indicated by payment default, market data on (estimated) incurred losses and other current evidence that the issuer may not pay amounts when due. Equity securities are impaired when management believes that, based on (the combination of) a significant or prolonged decline of fair value below the acquisition price, there is sufficient reason to believe that the acquisition cost may not be recovered. ‘Significant’ and ‘prolonged’ are interpreted on a case-by-case basis for specific equity securities; generally 40% and 18 months are used as triggers.

Upon impairment, the full difference between amortized cost and fair value is removed from equity and recognized in net profit or loss. Impairments on debt securities may be reversed if there is a decrease in the amount of the impairment which can be objectively related to an observable event. Impairments on equity securities may not be reversed.

In 2008, our impairment reviews resulted in impairment charges of €2,042 million related to the write-down of the ownership interests in Fortis and The Royal Bank of Scotland and €911 million related to goodwill and other intangible assets, mainly, due to the write-down of the intangible assets arising from the acquisition of Abbey in 2004. Our impairment reviews in 2007 resulted in impairment charges of €1,053 million related principally to our equity method investment in Sovereign. Other than the impairment recognized by Sovereign itself, €586 million of the total impairment charges related to goodwill held by the Group and €104 million to exchange differences. Additionally, we recorded goodwill impairment of €15 million and other intangible asset impairments of €563 million. In 2006, equity method investments, goodwill and other intangible assets impairment losses amounted to €380 thousand, €13 million and €15 million, respectively.

Retirement Benefit Obligations

The Group provides pension plans in most parts of the world. For defined contribution plans, the pension cost recognized in the consolidated income statement represents the contribution payable to the scheme. For defined benefit plans, the pension cost is assessed in accordance with the advice of a qualified external actuary using the projected unit credit method. This cost is annually charged to the consolidated income statement.

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

•

assumed interest rates;

•

mortality tables;

•

annual social security pension revision rate;

•

price inflation;

•

annual salary growth rate, and

•

the method used to calculate vested commitments to current employees.

The difference between the fair value of the plan assets and the present value of the defined benefit obligation at the balance sheet date, adjusted for any historic unrecognized actuarial gains or losses and past service cost, is recognized as a liability in the balance sheet.

Further information on retirement benefit obligations is set out in Notes 2 and 25 to our consolidated financial statements.

Business combinations and goodwill

Goodwill and intangible assets include the cost of acquired subsidiaries in excess of the fair value of the tangible net assets recorded in connection with acquisitions as well as acquired intangible assets which include core deposits, customer lists, brands and assets under management. Accounting for goodwill and acquired intangible assets requires management’s estimates regarding: (1) the fair value of the acquired intangible assets and the initial amount of goodwill to be recorded, (2) the amortization period (for identified intangible assets other than goodwill) and (3) the recoverability of the carrying value of acquired intangible assets.

To determine the initial amount of goodwill to be recognized on an acquisition, we have to determine the fair value of the consideration and the fair value of the net assets acquired. We use independent appraisers and our internal analysis, generally based on discounted cash flow techniques, to determine the fair value of the net assets acquired and non-cash components of the consideration paid. The actual fair value of net assets acquired could differ from the fair value determined, resulting in an under- or over-statement of goodwill.

We test goodwill for impairment at the reporting unit level. We identify our reporting units as one level below our business segments, based on our management structure. We keep those reporting units unchanged unless business segment reorganization occurs.

The useful lives of acquired intangible assets are estimated based on the period over which the assets are expected to contribute directly or indirectly to the future cash flows of the acquired entity.

For acquired intangible assets, the amortization period is reviewed annually. In making these assumptions, we consider historical results, adjusted to reflect current and anticipated operating conditions. Because a change in these assumptions can result in a significant change in the recorded amount of acquired intangible assets, we believe the accounting for business combinations is one of our critical accounting estimates.

As a result of the first consolidation of the acquired subsidiaries Abbey (2004), Drive (2006) and Banco Real (2008), a significant amount of goodwill was recorded (see Note 17 to the consolidated financial statements). Management made this determination, based in part, upon independent appraisals of intangible assets, which is initially estimated and subsequently revised within the one year time period allowed by IFRS-IASB. Details can be found in Note 55.3 to the consolidated financial statements.

Investment Securities

Under IFRS-IASB when there is evidence that a reduction in the fair value of a debt security classified as available for sale or loans and receivables is due to impairment, the unrealized loss is charged to net income but, if it subsequently recovers its value, the impairment losses are reversed. The process is similar in the case of equity securities except that any recovery in the value of the equity security is registered as a positive valuation adjustment in equity.

We conduct reviews to assess whether an other-than-temporary impairment exists. These reviews consist of: (i) the identification of securities that have been impaired during the last six months, and (ii) the calculation of the value of the impairment that is not expected to be recovered. Changing global and regional conditions and conditions related to specific issuers or industries could adversely affect these values. Changes in the fair values of trading securities are recognized in earnings.

A. Operating results

We have based the following discussion on our consolidated financial statements. You should read it along with these financial statements, and it is qualified in its entirety by reference to them.

In a number of places in this report, in order to analyze changes in our business from period to period, we have isolated the effects of foreign exchange rates on our results of operations and financial position. In particular, we have isolated the effects of depreciation of local currencies against the euro because we believe that doing so is useful in understanding the development of our business. For these purposes, we calculate the effect of movements in the exchange rates by multiplying the previous period balances in local currencies by the difference between the exchange rate to the euro of the current and the previous period.

General

We are a financial group whose main business focus is retail banking, complemented by global wholesale banking, asset management and insurance businesses.

Our main source of income is the interest that we earn from our lending activities, by borrowing funds from customers and money markets at certain rates and lending them to other customers at different rates. We also derive income from the interest and dividends that we receive from our investments in fixed/variable income and equity securities and from our trading activities in such securities and derivatives, by buying and selling them to take advantage of current and/or expected differences between purchase and sale prices.

Another source of income are the commissions that we earn from the different banking and other financial services that we provide (credit and debit cards, insurance, account management, bill discounting, guarantees and other contingent liabilities, advisory and custody services, etc.) and from our mutual and pension funds management services.

In addition, from time to time, we derive income from the capital gains we make from the sale of our holdings in Group companies.

2008 Overview

We believe that the following factors had a significant impact on our results of operations and financial condition as of and for the year ended December 31, 2008.

Global economic growth slowed to 3.3% in 2008 from 4.8% in 2007. The downturn was particularly intense in the last part of the year when many developed economies went into recession and growth in emerging ones decelerated sharply.

While the first half of the year was affected by the rise in commodity prices, particularly oil, which increased inflation and curbed growth, the second half was hit by a deepening of the international financial crisis and the collapse of Lehman, in September, which exacerbated the downturn of the economic environment. Governments around the world adopted exceptional measures, though monetary policies (cutting interest rates, in some cases to 0%, and printing more money) and very expansive fiscal policies, which were combined with measures to inject liquidity and capital into financial institutions and bolster their balance sheets.

US economic growth was negative in the third and fourth quarters of 2008 and growth for the whole year was 1.3%. The decrease in oil prices reduced inflation to almost zero in December 2008, generating fears of deflation. The Federal Reserve cut its key rate to 0% and made strong injections of liquidity. Measures were also taken to recapitalize banks and in early 2009, President Barack Obama prepared a major stimulus package.

In the last part of 2008, the growth pace in Latin America also slowed down, as also happened in other emerging economies. The recession in numerous developed economies, the financial tensions and lower commodity prices in the second part of the year affected the region. However, the improvement in the region’s macroeconomic fundamentals meant that the economy and assets, in general, were more solid than those of many more developed countries. Latin America grew by more than 4%, although growth was on a downward trend for 2009. Brazil (which grew by 5.1% in 2008) and Chile (which grew by 3.5%) grew more briskly than Mexico (which grew by 1.4%) as the latter was affected by its strong ties to the US economy. Interest rates rose sharply in 2008 due to inflationary pressures from higher food prices in still buoyant economies. The euro zone, despite its solid fundamentals, also ended 2008 in recession. GDP growth was barely 1%, following three straight quarters of shrinkage. Inflation, which rose above 3% in the summer, delayed the European Central Bank’s response, but once economic growth and inflation (which was 1.5% in December) dropped, the European Central Bank cut its rates to 1.5% in March 2009. The euro reached a high in the middle of the year and remained relatively strong (€ 1/$1.30) throughout 2008.

Spain’s gradual economic downturn, which started in 2007, intensified in 2008 because of the global economic situation and, like the euro zone as a whole, the country ended 2008 in recession. Growth for the whole year, however, rose by 1.2%. Inflation, after spiking at around 5%, ended the year at 1.4%.

The profile of the UK economy was similar to that of other developed economies; there was a marked downturn in the last part of 2008 and an easing of inflation. The Bank of England cut its base rate to 1% in February 2009 and to 0.5% in March and the sterling depreciated from around € 1/£0.7 to € 1/£0.9. The UK authorities adopted many measures to support the financial system, but GDP growth in 2008 was only 0.7%.

Results of Operations for Santander

Summary

Profit attributable to the Parent as reported in our consolidated financial statements for the year ended December 31, 2008 was €8,876.4 million, a 2.0% or €183.8 million decrease from €9,060.3 million in 2007, which was a 19.28% or €1,464.3 million increase from €7,595.9 million in 2006. The 2008 decrease was mainly due to strong increases in provisions and impairment losses and a decrease of gains on disposal of assets, all of which were partially offset by increases in total income.

Interest Income / (Charges)

Interest income was €18,171.8 million in 2008, a 21.5% or €3,218.5 million increase from €14,953.3 million in 2007, which was a 23.4% or €2,832.4 million increase from €12,120.9 million in 2006.

2008 compared to 2007

The €3,218.5 million increase in interest income in 2008 was due to an improvement of customer spreads (which rose by €3,944.8 million) partially offset by a reduction of €726.3 million in business volumes, mainly in Spain. International net interest income grew more significantly than domestic net interest income. Of note was the growth of the Santander Branch Network, Santander Consumer Finance, United Kingdom and the businesses in Brazil and Chile. This was due to moderate growth in business volumes in most units (except Spain), which was higher in Latin America, as well as better customer spreads in the main units. Net interest income benefited from the consolidation of Banco Real in the fourth quarter.

Average total earning assets were €864,369.8 million for the year ended December 31, 2008, a 7.2% or €58,142.4 million increase from €806,227.4 million for the same period in 2007. This was due to an increase of €43,508.3 million in the average balances of our domestic total earning assets (mainly due to an increase of €17,823.5 million in the average balances of our domestic loans and credits portfolio and an increase of €14,755.7 million in the average balances of other interest earning assets (mainly derivatives) and an increase of €14,634.1 million in the average balance of our international total earning assets (mainly due to an increase of €11,255.2 million in the average balances of our international loan and credit portfolio and an increase of €10,355.5 million in the average balances of other interest earning assets (mainly derivatives), partially offset by a decrease of €18,008.4 million in the average balances of our debt securities portfolio).

The Group’s gross lending amounted to €639,354 million, 10.3% higher than in 2007. Lending to resident sectors increased by €5,306 million (reflecting an increase of 2.3%), with that to the public sector up 36.1%, secured loans 0.2% and other credits 7.5% (reflecting the better performance of balances with SMEs). Credit to the nonresident sector rose 15.9%, affected by perimeter changes and exchange rates.

Continental Europe’s total lending increased 4%. In Spain, the Santander Branch Network’s and Banesto’s lending increased 4%, with lower growth in mortgages and a better performance in SMEs.

Santander Consumer Finance increased its lending 18%, partly because of the integration of the assets acquired from Royal Bank of Scotland, while Portugal’s was 8% higher, with lending to individuals up 4% and those to SMEs 16%.

Abbey’s balances, excluding repos, were 13% lower in euros, hit by sterling’s slide of 23%. In sterling, mortgages rose 10% and personal loans, with a small relative share in total lending in line with the Group’s strategy, dropped 17%. Including Alliance & Leicester, lending in the UK in sterling at the end of 2008 was 43% higher than a year earlier.

Lastly, excluding Banco Real, Latin America’s lending was flat in euros, also hit by the depreciation of currencies. Growth in local currency was 15% on average (as Brazil’s growth in reais was 19%, Mexico’s growth in Mexican pesos was 8% and Chile’s growth in Chilean pesos was 20%). Including Banco Real and in local currency, total lending increased 51% (in Brazil it was 2.4 times higher than at the end of 2007).

Our overall net yield spread increased from 1.75% in 2007 to 1.97% in 2008. Domestic net yield spread decreased from 1.38% in 2007 to 1.23% in 2008. International net yield spreads increased from 1.91% in 2007 to 2.34% in 2008. In general, spreads improved during the period in most areas due to the focus on profitability rather than volume.

2007 compared to 2006

The €2,832.4 million increase in net interest income was due to continued expansion of business volumes (€726.5 million) and the improvement of customer spreads (€2,105.8 million). International net interest income grew more significantly than domestic net interest income. Net interest income grew most significantly in Brazil, Mexico and Chile and to a lesser extent in the Santander Branch Network and Banesto, due to larger business volumes, as well as the improvement in customer spreads in some of our main units.

Average total earning assets were €806,227.4 million for the year ended December 31, 2007, a 11.4% or €82,811.8 million increase from €723,415.6 million for the same period in 2006. This was due to an increase of €44,754.6 million in the average balances of our domestic total earning assets (mainly due to an increase of €35,889.6 million in the average balances of our domestic loans and credits portfolio and an increase of €10,309.5 million in the average balances of other interest earning assets (mainly derivatives), partially offset by a decrease of €2,591.8 million in the average balances due from credit entities) and an increase of €38,057.2 million in the average balance of our international total earning assets (mainly due to an increase of €33,767.1 million in the average balances of our international loan and credit portfolio, partially offset by a decrease of €13,316.0 million in the average balances of our debt securities portfolio). The growth rates of loans and credits in Spain slowed during the year (mainly mortgages) despite the increase in loans to SMEs and companies. Our loans and credits overseas grew in Latin America, most significantly in Brazil and Chile, grew less in Portugal because of the fall in the balances of wholesale banking which was offset by an increase in loans to individuals of 9% and to SMEs of 21%, and decreased in Abbey due to the high impact of exchange rates.

Our overall net yield spread increased from 1.61% in 2006 to 1.75% in 2007. Domestic net yield spread increased from 1.37% in 2006 to 1.38% in 2007. International net yield spreads increased from 1.68% in 2006 to 1.91% in 2007 due to the focus on profitability rather than on volume in Abbey and the decrease in interest rates in Latin America.

Income from Equity Instruments

Income from equity instruments was €552.8 million in 2008, a 30.8% or €130.2 million increase from €422.6 million in 2007, which was a 2.4% or €9.9 million increase from €412.7 million in 2006.

While in 2007 income from equity instruments remained flat as compared to 2006, in 2008 it increased by 30.8% due to an increase of dividends from available for sale financial assets, in particular from RBS and Fortis.

Income from companies accounted for by the Equity Method

Income from companies accounted for by the equity method increased 80.6% or €355.8 million during 2008, to €797.3 million. During 2007 these entities contributed €441.5 million to our net income, which was an increase of 3.4% or €14.6 million from the €426.9 million earned in 2006.

2008 compared to 2007

The increase in 2008 is mainly attributable to the contribution of Banco Real despite the negative results from Sovereign and the reduction in the share of results from our holding in CEPSA.

The entities which provided the main contributions in 2008 included the following:


	Percent Owned			Contributions to Net Income (1)
Investment	Dec. 31, 2008			2008
	(in millions of euros, except percentages)
RFS Holdings		27.9	%		711.1
CEPSA		32.5	%		130.9
Attijariwafa Bank Société Anonyme		14.5	%		27.6
Sovereign Bancorp		25.0	%		(110.3	)


(1)		Contributions to income from companies accounted for by the equity method include dividends.

At December 31, 2008, the Bank classified the ownership interest held in CEPSA as a “non-current asset held for sale”, since it intended to recover the value of the investment through the sale thereof in the short term. On March 31, 2009, we reached an agreement to sell our stake in CEPSA subject to certain conditions (see Item 4 of Part I, “Information on the Company —A History and development of the company—Principal Capital Expenditures and Divestitures—Recent events—CEPSA”). Additionally, during the third quarter of 2008, we transferred our holding in Attijariwafa Bank from “investments — associates” to “other equity instruments” and we fully consolidated Banco Real.

2007 compared to 2006

The increase in income from companies accounted for by the equity method in 2007 is mainly attributable to our stake in RFS Holdings and a greater contribution to net income from Sovereign Bancorp compared to the previous year. Together these entities contributed €184.7 million, which mitigated a reduction of €163.5 million in the share of results from our holding in CEPSA.

The entities which provided the main contributions in 2007 included the following:


	Percent Owned			Contributions to Net Income (1)
Investment	Dec. 31, 2007			2007
	(in millions of euros, except percentages)
CEPSA		31.6	%		206.7
RFS Holdings		27.9	%		141.3
Sovereign Bancorp		24.4	%		43.4
Attijariwafa Bank Société Anonyme		14.5	%		25.7


(1)		Contributions to income from companies accounted for by the equity method include dividends.

Fee and Commission income

Fee and commission income was €8,450.6 million in 2008, representing 5.1% growth compared to €8,040.2 million in 2007. During 2007, fee and commission income increased by 14.5% over the €7,024.2 million obtained in 2006.

2008 compared to 2007

Fee and commission income for 2008 and 2007 was as follows:


					Amount			%
	2008		2007		Change			Change
	(in thousands of euros, except percentages)
Commissions for services		6,196,311		5,168,366		1,027,945			19.89
Credit and debit cards		940,377		853,084		87,293			10.23
Insurance		1,780,468		1,431,876		348,592			24.35
Account management		580,095		571,394		8,701			1.52
Bill discounting		303,520		225,134		78,386			34.82
Contingent liabilities		393,430		349,878		43,552			12.45
Other operations		2,198,421		1,737,000		461,421			26.56
Mutual and pension funds		1,542,470		1,891,417		(348,947	)		(18.45	)
Securities services		711,825		980,392		(268,567	)		(27.39	)

Total fee and commission income		8,450,606		8,040,175		410,431			5.10

Fee and commission income rose 5.1% to €8,450.6 million in 2008 compared to 2007 due to the net difference between higher revenues from fee income from services and lower revenues from mutual and pension funds and from securities.

Fee and commission income grew by 18% in Latin America. Continental Europe was in line with 2007 as it was more affected by the decrease in fee income from managed funds, the lower revenues in some wholesale banking businesses and the impact of regulatory changes in Portugal.

Average balances of mutual funds under management in Spain decreased 28.4% from €69.2 billion in 2007 to €49.5 billion in 2008. This decrease was due to customer preference for time deposits and the deterioration in market conditions during 2008. Average balances of mutual funds abroad decreased by 2.4% from €58.5 billion in 2007 to €57.1 billion in 2008, mainly due to decreased activity in Portugal, the United Kingdom and Switzerland, partially offset by the increase in Brazil due to the consolidation of Banco Real.

Average balances of pension funds in Spain decreased by 1.0% from €10.1 billion in 2007 to €10.0 billion in 2008. Since we sold our pension funds businesses in Latin America, our remaining business abroad is in Portugal. Average balances of pension funds in Portugal decreased 4.4% from €1.5 billion in 2007 to €1.4 billion in 2008.

2007 compared to 2006

Fee and commission income for 2007 and 2006 was as follows:


					Amount			%
	2007		2006		Change			Change
	(in thousands of euros, except percentages)
Commissions for services		5,168,366		4,461,041		707,325			15.86
Credit and debit cards		853,084		663,717		189,367			28.53
Insurance		1,431,876		1,184,723		247,153			20.86
Account management		571,394		554,882		16,512			2.98
Bill discounting		225,134		231,585		(6,451	)		(2.79	)
Contingent liabilities		349,878		302,033		47,845			15.84
Other operations		1,737,000		1,524,101		212,899			13.97
Mutual and pension funds		1,891,417		1,785,467		96,012			5.87
Securities services		980,392		777,687		202,705			26.07

Total fee and commission income		8,040,175		7,024,195		1,015,980			14.46

100

Fee and commission income rose 14.5% to €8,040.2 million in 2007 compared to 2006. Particularly noteworthy was the 21.6% rise in Latin America, due to the focus on strengthening the most recurrent revenues and, specifically, developing fee-generating products and services (credit cards, cash management, foreign trade, mutual funds and insurance). Fee and commission income increased modestly by 13.3% in Continental Europe, which was strongly affected by the impact on fees from the Santander Branch Network as a result of new initiatives in the “We Want to be your Bank” campaign and the launch in Portugal of the “Comissões Zero” strategy to increase customer capturing and linkage. An increased growth in fees was reported by Santander Consumer Finance, Global Wholesale Banking, and Banif. Meanwhile, Abbey’s fee income dropped by 1.8% because of reduced revenue from commissions related to current accounts (due to the influence of regulatory aspects currently affecting the UK financial system). Nevertheless, this decrease in fees was almost fully offset by an increased range of products and improvements in cross-selling.

Fees from cards, securities and insurance increased significantly (with increases of 28.5%, 26.1% and 20.9%, respectively). Additionally there was growth in fees from guarantees and other contingent liabilities.

Average balances of mutual funds under management in Spain decreased 2.7% from €71.1 billion in 2006 to €69.2 billion in 2007. This decrease was due to customer preference for time deposits during 2007 and by the issue of “Valores Santander”. Average balances of mutual funds abroad increased by 32.9% from €44.0 billion in 2006 to €58.5 billion in 2007, mainly due to increased activity in Brazil, the United Kingdom, Mexico, Switzerland, and Chile.

Average balances of pension funds in Spain increased by 10.5% from €9.1 billion in 2006 to €10.1 billion in 2007, mainly due to increased activity in individual pension funds. Since we sold our pension funds businesses in Latin America, our remaining business abroad is in Portugal. Average balances of pension funds in Portugal grew 19.1% from €1.2 billion in 2006 to €1.5 billion in 2007.

Gains (Losses) on Financial Assets and Liabilities (net)

Net gains on financial assets and liabilities in 2008 were €2,963.7 million with a 27.1% growth from €2,331.7 million in 2007. During 2007, net gains on financial assets and liabilities increased by 13.1% over the €2,062.5 million earned in 2006. Gains (losses) on financial assets and liabilities include gains and losses arising from the following: marking to market our trading portfolio and derivative instruments, including spot market foreign exchange transactions, sales of investment securities and liquidation of our corresponding hedge or other derivative positions. For further details, see Note 44 to our consolidated financial statements.

2008 compared to 2007

Net gains on financial assets and liabilities rose 27.1% to €2,963.7 million. Principally due to the gains of €741 million obtained from the sale of subordinated liabilities from ABN AMRO, which were partially offset by the €643 million losses from the fund created for the Santander group customers, who suffered losses due to the collapse of Lehman and the Bernard L. Madoff fraud.

2007 compared to 2006

Net gains on financial assets and liabilities rose 13.1% to €2,331.7 million, principally due to the improvement of the performance of the available for sale financial assets compared to the negative impact in 2006 of the write-down of portfolios of structural interest rate risk hedging.

101

Other operating income / expenses

Net other operating income in 2008 was €208.0 million with a 12.4% decrease from €237.4 million in 2007. During 2007, net other operating income increased by 0.2% over the €237.1 million earned in 2006. Under this line item we include income and expenses from insurance activity, from non-financial services, other commissions and charges to the Fondo de Garantía de Depósitos.

In 2008, the 9.4% increase in insurance activity was offset by lower income from non-financial services and higher charges to the Fondo de Garantía de Depósitos.

In 2007, the 20.3% increase in insurance activity and the 27.9% increase in income from non-financial services were offset by a 10.6% increase in other commissions. As a result other operating income/expenses remained flat.

Administrative Expenses

Administrative expenses were €11,979.3 million in 2008, a 8.7% or €961.0 million increase from €11,018.3 million in 2007, which was a 10.5% or €1,049.2 million increase from €9,969.2 million in 2006.

2008 compared to 2007

Administrative expenses for 2008 and 2007 were as follows:


					Amount			%
	2008		2007		Change			Change
	(in thousands of euros, except percentages)
Personnel expenses		6,963,855		6,551,201		412,654			6.3
Other general expenses		5,015,493		4,467,128		548,365			12.28
Building and premises		1,235,634		989,663		245,971			24.85
Other expenses		1,070,834		912,621		158,213			17.34
Information technology		530,021		488,741		41,280			8.45
Advertising		545,854		563,986		(18,132	)		(3.21	)
Communications		469,197		417,587		51,610			12.36
Technical reports		303,463		298,175		5,288			1.77
Per diems and travel expenses		264,632		279,298		(14,666	)		(5.25	)
Taxes (other than income tax)		302,381		279,093		23,288			8.34
Guard and cash courier services		256,704		201,532		55,172			27.38
Insurance premiums		36,773		36,432		341			0.94

Total administrative expenses		11,979,348		11,018,329		961,019			8.72

The 8.7% increase in administrative expenses in 2008 reflected a 6.3% increase in personnel expenses and a 12.3% increase in other general expenses.

If Banco Real had been accounted for by the equity method in the fourth quarter of 2008, expenses would have increased at a notably slower pace than the equivalent rates in previous quarters. The current environment of lower revenue growth requires even stricter management of costs. All geographic as well as global units registered growth in administrative expenses that was in accord with the Group’s cost control and with ongoing business development plans. The Group’s targets of efficiency were met in 2008.

102

2007 compared to 2006

Administrative expenses for 2007 and 2006 were as follows:


					Amount		%
	2007		2006		Change		Change
	(in thousands of euros, except percentages)
Personnel expenses		6,551,201		5,967,873		583,328		9.77
Other general expenses		4,467,128		4,001,298		465,830		11.51
Building and premises		989,663		972,933		16,730		1.72
Other expenses		912,621		835,554		77,067		9.22
Information technology		488,741		417,977		70,764		16.93
Advertising		563,986		474,290		89,696		18.91
Communications		417,587		346,854		70,733		20.39
Technical reports		298,175		258,349		39,826		15.42
Per diems and travel expenses		279,298		242,444		36,854		15.20
Taxes (other than income tax)		279,093		227,835		51,258		22.50
Guard and cash courier services		201,532		189,474		12,058		6.36
Insurance premiums		36,432		35,588		844		2.37

Total administrative expenses		11,018,329		9,969,171		1,049,158		10.52

The 10.5% increase in administrative expenses in 2007 reflected a 9.8% increase in personnel expenses and an 11.5% increase in other general expenses.

In Continental Europe, expenses increased by 13.6% in 2007 as compared to 2006, with the commercial networks recording moderate growth while absorbing the expansion of the business. The Santander Branch Network, Banesto and Portugal opened 193 branches in net terms in 2007, with limited or zero real growth in expenses. The rise in Santander Consumer Finance’s costs was largely due to the consolidation of Drive in 2007 (although its impact on the Group’s increase in expenses was less than 1 percentage point but represents an increase of 12 percentage points for Santander Consumer Finance) and the launch of expansion projects, particularly in France, Denmark and Russia. Abbey continued to streamline its expenses in 2007 (which amounted to a reduction of 3.2% in euros).

Finally, Latin America’s expenses rose 10.8% in 2007 (reflecting an increase of 15.0% in local currency) and, as in Europe, growth was due to expansion plans and the launch of new products. At the end of 2007 we had 292 additional branches and 1,618 additional ATMs than in 2006.

The rise in expenses incurred in the Financial Management and Equity Stakes segment was due to spending on corporate projects, investment in technology and our single brand, as well as expenses related to the Bank’s 150th anniversary celebration.

Depreciation and Amortization

Depreciation and amortization was €1,269.5 million in 2008, a 0.1% or €1.6 million increase from €1,267.9 million in 2007, which was a 10.6% or €121.3 million increase from €1,146.5 million in 2006.

Provisions (net)

Net provisions were €1,699.1 million in 2008, a 66.0% or €675.6 million increase from €1,023.6 million in 2007, which was a 5.2% or €55.7 million decrease from €1,079.3 million in 2006. This item includes additions charged to the income statement in relation to provisions for pensions and similar obligations, provisions for contingent liabilities and commitments and other provisions (mainly provisions for restructuring costs and tax and legal litigation). See Note 25 to our consolidated financial statements.

103

Impairment Losses (net)

Impairment losses (net) were €7,395.1 million in 2008, a 46.41% or €2,343.9 million increase from €5,051.2 million in 2007, which was a 101.9% or €2,549.4 million increase from €2,501.8 million in 2006.

Impairment losses are divided in the income statement as follows:

2008

2007

2006

(in thousands of euros)

Impairment losses on financial assets:

6,345,433

3,502,604

2,480,993

Loans and receivables

5,964,405

3,496,058

2,483,862

Other financial assets not measured at fair value through profit and loss

381,028

6,546

2,869

Impairment losses on other assets:

1,049,704

1,548,610

20,781

Goodwill and other intangible assets

983,929

1,162,872

12,811

Other assets

65,775

385,738

7,970

Total impairment losses (net)

7,395,137

5,051,214

2,501,774

2008 compared to 2007

The €2,468.3 million increase in net impairment losses for loans and receivables in 2008 compared to 2007 (which amounted to an increase of 70.6%) reflected a €2,552.5 million net increase in allowances (€6,669.3 million in 2008 compared to €4,116.8 million in 2007), a €89.4 million increase in recoveries of loans previously charged-off (€713.6 million in 2008 compared to €624.2 million in 2007) and a €5.2 million increase in impairment losses of other assets.

Impairment losses increased in 2008 compared to 2007 in most business units for various reasons: firstly, and most importantly, the faster than expected deterioration in the macroeconomic environment; secondly, the growth in lending, which in some units was still 20%; thirdly, the change in the portfolio mix in previous years and lastly the integration in the fourth quarter of Banco Real.

Our total allowances for credit losses (excluding country-risk) increased by €3,560.8 million to €12,863.0 million at December 31, 2008, from €9,302.2 million at December 31, 2007.

Non-performing loans (excluding country-risk) increased by €8,012.2 million to €14,190.8 million at December 31, 2008, compared to €6,178.7 million at December 31, 2007. Our coverage ratio was 90.6% at December 31, 2008, and 150.5% at December 31, 2007. See Item 4 of Part I, “Information on the Company—B. Business Overview—Selected Statistical Information—Impaired Asset Ratios”.

2007 compared to 2006

Impairment losses in goodwill in 2007 reflect the loss in our investment in Sovereign.

The €1,012.2 million increase in net impairment losses for loans and receivables in 2007 compared to 2006 reflected a €1,100.4 million net increase in allowances (€4,116.8 million in 2007 compared to €3,016.4 million in 2006), a €72.6 million increase in recoveries of loans previously charged-off (€624.2 million in 2007 compared to €551.6 million in 2006) and a €15.6 million decrease in impairment losses of other assets. See Item 4 of Part I, “Information on the Company—B. Business Overview—Classified Assets—Bank of Spain Classification Requirements”.

104

This increase was largely due to the net difference between increased provisions for Latin America (which grew by €760 million), the impact of the consolidation of Drive (which grew by €407 million) and a reduced volume of generic provisions compared to 2006, mostly relating to Global Wholesale Banking.

Our total allowances for credit losses (excluding country-risk) increased by €675.3 million to €9,302.2 million at December 31, 2007, from €8,626.9 million at December 31, 2006.

Non-performing loans (excluding country-risk) increased by €1,571.2 million to €6,178.7 million at December 31, 2007, compared to €4,607.5 million at December 31, 2006. Our coverage ratio was 150.5% at December 31, 2007, and 187.2% at December 31, 2006. See Item 4 of Part I, “Information on the Company—B. Business Overview—Selected Statistical Information—Impaired Asset Ratios”.

Net gains / (losses) on other assets

Net gains on other assets were €1,848.8 million in 2008, a 24.8% or €610.0 million decrease from €2,458.8 million in 2007, which was a 87.5% or €1,147.5 million increase from €1,311.3 million in 2006.

2008 compared to 2007

Amount

2008

2007

Change

(in millions of euros, except percentages)

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

118.0

1,815.9

(1,697.9

)

(93.5

Of which:

Sale of real state assets

—

1,620.1

(1,620.1

)

—

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

1,730.8

643.0

1,087.8

169.2

Of which:

Sale of Grupo Santander City

836.7

—

836.7

—

Antonveneta

3,045.6

—

Intesa San Paolo

—

566.1

(566.1

)

—

Impairment and sale of RBS and Fortis (*)

(2,042.7

)

—

(2,042.7

)

—


(*)		Write-down recognized in the income statement of ownership interests in RBS and Fortis. See note 50 to our consolidated financial statements.

2007 compared to 2006

Amount

2007

2006

Change

(in millions of euros, except percentages)

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

1,815.9

352.1

1,463.8

415.7

Of which:

Sale of real state assets

1,620.1

—

1,620.1

—

Sale of ADRs Chile

—

269.8

(269.8

)

—

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

643.0

959.2

(316.2

)

(33.0

Of which:

Intesa San Paolo

566.1

704.9

(138.8

)

(19.7

Antena 3

—

294.3

(294.3

)

—

105

Income Tax

The provision for corporate income tax was €1,884.2 million in 2008, a 19.3% or €451.5 million decrease from €2,335.7 million in 2007, which was a 3.6% or €81.1 million increase from €2,254.6 million in 2006. The effective tax rate was 16.8% in 2008, 20.7% in 2007 and 23.9% in 2006. For information about factors affecting effective tax rates, see Note 27 to our consolidated financial statements.

Profit / (losses) from discontinued operations

Losses from discontinued operations were €13.1 million in 2008, a 101.6% or €809.7 million decrease from profits of €796.6 million in 2007. In 2007, profits from discontinued operations decreased 47.1% or €708.4 million from the €1,505.0 million earned in 2006.

During 2008, the Group did not discontinue any significant operation.

The 2007 divestment relates to the sale of our pension fund management businesses in Latin America to ING Groep NV (see Item 4 of Part I, “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations—Sale of Latin American pension fund management companies”).

Profit attributable to minority interests

Profit attributable to minority interests was €456.0 million in 2008, a 20.8% or €119.9 million decrease from €575.9 million in 2007, an 11.4% or €73.9 million decrease from €649.8 million in 2006. For further details, see Note 28 to our consolidated financial statements.

2008 compared to 2007

The €119.9 million decrease in profit attributable to minority shareholders in 2008 is principally due to the reduced net income of the consolidated company Grupo Financiero Santander, S.A. de C.V.

2007 compared to 2006

The €73.9 million decrease in profit attributable to minority shareholders in 2007 is principally the result of the reduced net income of two consolidated companies: Banesto and Somaen-Dos S.L, which was partially offset by increased income from Grupo Financiero Santander, S.A. de C.V.

106

Results of Operations by Business Areas

Our results of operations by business areas can be summarized as follows (see Item 4 of Part I, “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations”):

Principal level (geographic):

Continental Europe


										Variations
	2008			2007			2006			2008/2007			2007/2006
	(in millions of euros, except percentages)
INTEREST INCOME / CHARGES		9,413			7,742			6,008			21.6	%		28.9	%
Income from equity instruments		266			201			226			32.3	%		(11.1	%)
Income from companies accounted for by the equity method		(4	)		9			6			(144.4	%)		50.0	%
Net fees and commissions		4,086			4,137			3,653			(1.2	%)		13.2	%
Gains/losses on financial assets and liabilities		771			732			710			5.3	%		3.1	%
Other operating income/expenses		148			133			185			11.3	%		(28.1	%)
TOTAL INCOME		14,681			12,955			10,787			13.3	%		20.1	%
Administrative expenses		(4,756	)		(4,564	)		(3,990	)		(4.0	%)		14.4	%
Personnel expenses		(3,126	)		(3,037	)		(2,708	)		2.9	%		12.1	%
Other general expenses		(1,620	)		(1,527	)		(1,282	)		6.1	%		19.1	%
Depreciation and amortization		(580	)		(559	)		(522	)		3.8	%		7.1	%
Impairment losses on financial assets		(2,477	)		(1,557	)		(1,317	)		59.1	%		18.2	%
Net provisions		(37	)		30			(292	)		(223.3	%)		(110.3	%)
Impairment losses on other assets		(16	)		(8	)		(14	)		100.0	%		(42.9	%)
Gains/losses on other assets		(30	)		26			19			(215.4	%)		36.8	%
OPERATING PROFIT/LOSS BEFORE TAX		6,794			6,323			4,671			7.4	%		35.4	%
Income tax		(1,756	)		(1,777	)		(1,403	)		(1.2	%)		26.7	%
PROFIT FROM CONTINUING OPERATIONS		5,039			4,546			3,268			10.8	%		39.1	%
Profit from discontinued operations		(21	)		—			1,147			—			(100.0	%)
CONSOLIDATED PROFIT FOR THE YEAR		5,018			4,546			4,416			10.4	%		2.9	%
Profit attributable to minority interest		110			107			271			2.8	%		(60.5	%)
Profit attributable to the Parent		4,908			4,439			4,144			10.6	%		7.1	%

2008 compared to 2007

In 2008, Continental Europe contributed 53.9% of the profit attributable to the Group’s operating areas. The main drivers of growth in Continental Europe were the rise in interest income together with the selective control of costs.

Interest income was €9,413 million in 2008, which is a 21.6% or €1,671 million increase from the €7,742 million obtained in 2007 due in part, to the active management of spreads which partly offset the slowdown in volumes.

Net fees and commission income was €4,086 million in 2008, a 1.2% decrease from €4,137 million in 2007 because of the decrease in such income from Global Wholesale Banking while the retail units increased around 4%. Among the retail units there was a significant increase in Santander Consumer Finance (reflecting an increase of 35.1%) due to the improved conditions in the marketing of products while the other main units decreased slightly.

107

Gains/(losses) on financial assets and liabilities were €771 million in 2008, a 5.3% increase from €732 million in 2007 with a moderate or negative performance by the retail units reflecting the volatility of the markets on the selling of customer products and a higher growth from Global Wholesale Banking.

Administrative expenses were €4,746 million in 2008, a 4.0% increase from €4,564 million in 2007. Santander Branch Network and Portugal increased around 2% and Banesto increased 3.5% reflecting the strict control on expenses. Administrative expenses for Santander Consumer Finance increased by 12.7% after consolidating the new units of Netherlands and Germany. Excluding them, expenses in Santander Consumer Finance grew by 3%.

Impairment losses on financial assets were €2,477 million in 2008, a 59.1% increase from €1,557 million in 2007. Impairment losses grew significantly in all units due to the increase in non-performing loans as a result of the intensified economic downturn. NPL ratio increased from 0.9% in 2007 to 2.31% in 2008 while NPL coverage decreased from 188% in 2007 to 90% a year later.

Profit attributable to the Parent was €4,908 million in 2008, a 10.6% increase from €4,439 million in 2007. This increase was largely due to the units in Spain (reflecting an increase of 15.3%). By contrast, Portugal’s profit increased by only 0.7% and Santander Consumer Finance’s were slightly lower.

2007 compared to 2006

In 2007, Continental Europe contributed 53.4% of the profit attributed to the Group’s operating areas. The main drivers of growth in Continental Europe were the rise in net interest income and net fee and commission income, together with the selective control of costs.

Interest income was €7,742 million in 2007, which is a 28.9% or €1,734 million increase from the €6,008 million obtained in 2006 (after increasing for 11 consecutive quarters). This was due to the integration of Drive, increased business volumes, and the improvement in the customer spreads of the Santander Branch Network and Banesto. Although a US company, Drive is consolidated into Santander Consumer Finance due to its consumer financing activity.

Net fee and commission income increased €484 million or 13.25% during 2007 to €4,137 million when compared to €3,653 million in the previous year. The main drivers of growth were: (i) a 37.0% increase at Santander Consumer Finance, because of greater focus on cross-selling; (ii) 22.2% growth at Banif; (iii) a 9.2% increase at Asset Management and Insurance; and (iv) a 59.1% rise at Global Wholesale Banking due to greater activity with clients. The performance of the Santander Branch Network was almost flat because of the inclusion of other initiatives in the “We want to be your Bank” campaign and the launch of the “Comissões Zero” strategy in Portugal.

Gains/losses on financial assets and liabilities were €732 million in 2007, a 3.1% or €22 million increase from €710 million in 2006. This was largely due to revenue from proprietary trading, which benefited from a more positive environment in 2007.

Total income increased €2,168 million or 20.1% in 2007 to €12,955 million from gross income of €10,787 million in 2006.

Administrative expenses were €4,564 million in 2007, a 14.4% increase from €3,990 million in 2006. The increase was due to increases in spending on development projects by global areas, expenses related to the opening of 204 branches and those linked to the launch of start-ups in consumer business.

Impairment losses on financial assets were €1,557 million in 2007, a 18.2% increase from €1,317 million in 2006. The increase is principally due to the consolidation of Drive (which was not consolidated in 2006) which resulted in additional provisions of €407 million in 2007. However, offsetting this was a €288 million reduction in 2007 in the generic provision expense in the Global Wholesale Banking business. Excluding these effects, the provision expense has increased by less than 10%. Continenral Europe had an NPL ratio of 0.90% and a coverage ratio of 188% at the end of 2007.

108

Profit attributable to the Parent was €4,439 million in 2007, a 7.1% or €295 million increase from €4,144 million in 2006. This growth was due to the rise in commercial revenues and selective control of costs.

United Kingdom


										Variations
	2008			2007			2006			2008/2007			2007/2006
	(in millions of euros, except percentages)
INTEREST INCOME / CHARGES		2,411			2,334			2,107			3.3	%		10.8	%
Income from equity instruments		—			1			1			—			—
Income from companies accounted for by the equity method		—			2			3			—			(33.3	%)
Net fees and commissions		926			1,007			1,026			(8.0	%)		(1.9	%)
Gains/ losses on financial assets and liabilities		500			436			423			14.7	%		3.1	%
Other operating income/expenses		49			65			54			(24.6	%)		20.4	%
TOTAL INCOME		3,887			3,845			3,614			1.1	%		6.4	%
Administrative expenses		(1,604	)		(1,829	)		(1,889	)		(12.3	%)		(3.2	%)
Personnel expenses		(986	)		(1,045	)		(1,069	)		(5.6	%)		(2.2	%)
Other general expenses		(618	)		(784	)		(820	)		(21.2	%)		(4.4	%)
Depreciation and amortization		(157	)		(102	)		(105	)		53.9	%		(2.9	%)
Impairment losses on financial assets		(456	)		(312	)		(387	)		46.2	%		(19.4	%)
Net provisions		(29	)		5			(2	)		(680.0	%)		(350.0	%)
Impairment losses on other assets		—			—			—			—			—
Gains/losses on other assets		31			15			2			106.7	%		650.0	%
OPERATING PROFIT/LOSS BEFORE TAX		1,673			1,622			1,232			3.1	%		31.7	%
Income tax		(426	)		(421	)		(343	)		1.2	%		22.7	%
PROFIT FROM CONTINUING OPERATIONS		1,247			1,201			889			3.8	%		35.1	%
Profit from discontinued operations		—			—			114			—			(100.0	%)
CONSOLIDATED PROFIT FOR THE YEAR		1,247			1,201			1,003			3.8	%		19.7	%
Profit attributable to minority interest		—			—			—			—			—
Profit attributable to the Parent		1,247			1,201			1,003			3.8	%		19.7	%

2008 compared to 2007

In 2008, United Kingdom contributed 13.7% of the profit attributable to the Parent’s total operating areas. The 2008 results were affected by the challenging financial environment and by the sterling’s depreciation in the fourth quarter.

Interest income was €2,411 million in 2008, a 3.3% or €77 million increase from €2,334 million in 2007. In local currency, the increase was 20% reflecting the solid increase in assets and liabilities, as well as active management of spreads on capturing and retaining funds.

Net fees and commissions were €926 million in 2008, a 8.0% or €81 million decrease from €1,007 million in 2007. In local currency, net fees and commissions increased 6.7% due to greater activity. Despite difficult market conditions, Retail Banking continued in the UK to broaden its cross-selling activity, with increased commission from credit cards and investments. Growth in these areas was offset by lower mortgage redemption volumes, lower unsecured lending and continued pressure on current account charges.

109

Gains / losses on financial assets and liabilities were €500 million in 2008, a 14.7% or €64 million increase from €436 million in 2007. In local currency, gains on financial transactions rose 33.2% backed by the good developments in markets’ business in the second half of the year.

Administrative expenses were €1,604 million in 2008, a 12.3% or €225 million decrease from €1,829 million in 2007. In local currency, administrative expenses increased by 1.9% due to continuing cost reduction activity partially offset by costs relating to the Bradford & Bingley savings business and branch network.

Impairment losses on financial assets were €456 million in 2008, a 46.2% or €144 million increase from €312 million in 2007. In local currency, the increase was 69.5%, largely because of the release of generic provisions in 2007 as specific provisions only increased by 8.5%. The increase in specific provisions was low as compared with other units because, despite the deterioration in economic conditions, credit quality remained strong due to a continued reduction in the size of the unsecured personal lending book. The NPL ratio for the UK segment rose from 0.60% to 1.04% at the end of 2008, while coverage increased from 66% to 69%.

Profit attributable to the Parent was €1,247 million in 2008, a 3.8% or €46 million increase from €1,201 million in 2007. The comparison with 2007 is affected by the sterling’s depreciation; in local currency profit attributable to the Parent was 20.5%.

2007 compared to 2006

In 2007, the UK (through Abbey) contributed 14.5% of the profit attributed to the Group’s total operating areas. Of particular note in the 19.7% increase in Abbey’s profits was the growth in gross operating income in a worse than envisaged economic environment.

Interest income was €2,334 million in 2007, a 10.8% or €227 million increase from €2,107 million in 2006. This reflected the increase in business volumes and, above all, very active management of spreads, the main focus in 2007. This management was applied to loans, where the decrease in spreads on mortgages was limited and in personal loans they rose strongly, as well as customer deposits and investment products.

Net fee and commission income was €1,007 million. Net fees and commissions showed a positive trend in the sale of investment and protection products and in new business from cards. Offsetting this was the reduced revenue from fees related to current accounts and mortgages, which resulted in an overall decrease of 1.8%.

Gains/losses on financial assets and liabilities grew by 3.1% to €436 million. Less favorable conditions in financial markets in the second half of 2007 affected these items.

Total income was €3,845 million in 2007, a 6.4% or €231 million increase from €3,614 million in 2006.

Administrative expenses continued their downward trend to €1,829 million. For the third consecutive year, the synergies contemplated at the time of acquisition were exceeded. Administrative expenses were 3.2% lower in 2007, largely due to the savings resulting from the reduction of headcount in 2006.

Impairment losses on financial assets were 19.4% lower than in 2006. This reflected the continued good quality of mortgages and lower exposure to unsecured personal loans (“UPLs”), especially those generated via the Internet. The NPL ratio for the UK segment remained virtually unchanged at 0.60%, while coverage dropped from 86% to 66%. This reduction was mainly due to the change of mix in NPLs, as the strategy of lower activity in UPLs (which have higher coverage) produced a decline in their relative share of total lending, while the share of mortgage loans increased (lower coverage as mortgages have greater security).

Profit attributable to the Parent was €1,201 million in 2007, a 19.7% or €198 million increase from €1,003 million in 2006.

110

Latin America


										Variations
	2008			2007			2006			2008/2007			2007/2008
	(in millions of euros, except percentages)
INTEREST INCOME / CHARGES		8,659			6,654			5,280			30.1	%		26.0	%
Income from equity instruments		58			37			23			56.8	%		60.9	%
Income from companies accounted for by the equity method		21			4			7			425.0	%		(42.9	%)
Net fees and commissions		3,393			2,866			2,357			18.4	%		21.6	%
Gains/ losses on financial assets and liabilities		926			702			612			31.9	%		14.7	%
Other operating income/expenses		(54	)		(5	)		57			980.0	%		(108.8	%)
TOTAL INCOME		13,002			10,258			8,337			26.7	%		23.0	%
Administrative expenses		(4,959	)		(4,089	)		(3,700	)		21.3	%		10.5	%
Personnel expenses		(2,655	)		(2,222	)		(1,975	)		19.5	%		12.5	%
Other general expenses		(2,304	)		(1,867	)		(1,725	)		23.4	%		8.2	%
Depreciation and amortization		(437	)		(348	)		(305	)		25.6	%		14.1	%
Impairment losses on financial assets		(3,082	)		(1,619	)		(861	)		90.4	%		88.0	%
Net provisions		(565	)		(553	)		(349	)		2.2	%		58.5	%
Impairment losses on other assets		(7	)		(30	)		(6	)		(76.7	%)		400.0	%
Gains/looses on other assets		42			161			4			(73.9	%)		3,925.0	%
OPERATING PROFIT/LOSS BEFORE TAX		3,994			3,781			3,120			5.6	%		21.2	%
Income tax		(711	)		(822	)		(669	)		(13.5	%)		22.9	%
PROFIT FROM CONTINUING OPERATIONS		3,283			2,958			2,451			11.0	%		20.7	%
Profit from discontinued operations		7			112			124			(93.8	%)		(9.7	%)
CONSOLIDATED PROFIT FOR THE YEAR		3,290			3,071			2,575			7.1	%		19.3	%
Profit attributable to minority interest		346			404			289			(14.4	%)		39.8	%
Profit attributable to the Parent		2,945			2,666			2,287			10.5	%		16.6	%

2008 compared to 2007

In 2008, Latin America contributed 32.4% of the profit attributable to the Parent’s total operating areas after consolidating the fourth quarter results of Banco Real in Brazil. (Previously, Banco Real was accounted for by the equity method.) Economic growth in the main countries slowed down significantly in the second half of 2008, especially in the fourth quarter, reflecting the adverse impact of the global financial crisis and the downturn or recession in developed economies, particularly the US. The most visible and immediate impact of the financial crisis on Latin America is the sharp depreciation of currencies against the dollar (around 20% for some) as of the middle of September in 2008. Particularly, the Brazilian real and the Chilean peso appreciated against the dollar until the third quarter of 2008 and then slid sharply in the fourth quarter. The dollar, the currency used to manage business in Latin America, depreciated 7% against the euro in 2008 (annual average). The Chilean peso depreciated against the euro from 715 to 757, the Mexican peso from 15.0 to 16.3 and the Brazilian real remained virtually unchanged.

Interest income was €8,659 million in 2008, a 30.1% or €2,005 million increase from €6,654 million in 2007. Spreads on loans (varying from country to country) dropped 22 basis points in the fourth quarter (due to lower growth in consumer credit and cards). Spreads on deposits rose 30 basis points between the third and fourth quarters.

111

Net fees and commissions were €3,393 million in 2008, an 18.4% or €527 million increase from €2,866 million in 2007 due to the focus on recurring revenues and, specifically, on developing fee-generating products and services. Of note were the fees from insurance, which increased by 62% in local currency and credit cards, which increased by 27% in local currency. In light of the global economic downturn, the Group is placing less emphasis on market share in retail lending and, in wholesale businesses, focusing on the provision of services and the generation of fee income.

Gains / losses on financial assets and liabilities were €926 million in 2008, a 31.9% or €224 million increase from €702 million in 2007 due to customer activity and capital gains in portfolios.

Administrative expenses were €4,959 million in 2008, a 21.3% or €870 million increase from €4,089 million in 2007, affected by the consolidation of Banco Real in the fourth quarter.

Impairment losses on financial assets were €3,082 million in 2008, a 90.4% or €1,463 million increase from €1,619 million in 2007 because of the growth in lending and the greater focus, until recently, on the more profitable segments, but also with a higher risk premium, and the consolidation of Banco Real. The NPL ratio for Latin America was 2.95% at the end of 2008 (1.87% in 2007), while coverage was 108% (134% in 2007).

Profit attributable to the Parent was €2,945 million in 2008, a 10.5% (15.4% in local currency) or €279 million increase from €2,666 million in 2007.

2007 compared to 2006

In 2007, Latin America contributed 32.1% of the profit attributed to the Group’s total operating areas. The 16.6% growth in profits attributed to Latin America was affected by the sale of pension fund management companies AFP Unión Vida in Peru and Banco Santa Cruz in Bolivia, and a 7.23% interest in Banco Santander Chile. Furthermore, in 2007 we sold our pension fund management companies in Chile, Argentina, Colombia, Mexico and Uruguay (see Item 4 of Part I, “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations — Sale of Latin American pension fund management companies”). Excluding this, net profit from ordinary activities increased 20.7% (reflecting an increase of 26.7% without the exchange rate effect). Retail Banking continued to be the engine of the Group’s growth in the region with a rise in profit before tax of 37.2% (reflecting an increase of 45.6% excluding the exchange rate effect). This performance reflected the strategic focus on developing banking with individuals, SMEs and companies.

Interest income experienced a 26.0% growth, backed by the strong expansion of retail business, particularly loans to individuals and SMEs. Spreads behaved differently among individual countries, but ended the year slightly higher as a whole, both in loans and savings (spreads in deposits plus commissions in mutual funds). In those countries where sharp falls in interest rates compressed spreads (for example, Brazil), the impact was offset by the reduction in the cost of financing portfolios of securities.

Net fee and commission income increased by 21.6% to €2,866 million as we focused on strengthening the most recurrent revenues. Specifically, we developed fee-generating products like credit cards, cash management, foreign trade, mutual funds and insurance. The growth in fees from credit cards (reflecting an increase of 39.6%) and insurance (reflecting an increase of 34.6%) and the rise in fees from investment banking (reflecting an increase of 36.8%) was also noteworthy.

Gains/losses on financial assets and liabilities increased 14.7% because of customer activity and capital gains in portfolios, improved by an increase in value due to a fall in interest rates, particularly in Brazil.

Total income grew 23.0% to €10,258 million in 2007.

Administrative expenses grew 10.5% (with an average inflation of 5%) to €4,089 million, due to investment and spending incurred in specific business expansion programs (increasing capacity, technology expenditure, installing Santander’s single brand, and promotions).

112

Financial Management and Equity Stakes


										Variations
	2008			2007			2006			2008/2007			2007/2006
	(in millions of euros, except percentages)
INTEREST INCOME / CHARGES		(2,312	)		(1,777	)		(1,274	)		30.1	%		39.5	%
Income from equity instruments		229			183			162			25.1	%		13.0	%
Income from companies accounted for by the equity method		780			427			411			82.7	%		3.9	%
Net fees and commissions		46			30			(11	)		53.3	%		(372.7	%)
Gains/ losses on financial assets and liabilities		1,346			1,113			414			20.9	%		168.8	%
Other operating income/expenses		64			43			(59	)		48.8	%		(172.9	%)
TOTAL INCOME		154			19			(357	)		710.5	%		(105.3	%)
Administrative expenses		(671	)		(537	)		(390	)		24.95	%		37.69	%
Personnel expenses		(197	)		(248	)		(215	)		(20.6	%)		15.3	%
Other general expenses		(474	)		(289	)		(175	)		64.0	%		65.1	%
Depreciation and amortization		(96	)		(259	)		(214	)		(62.9	%)		21.0	%
Impairment losses on financial assets		(331	)		(13	)		84			2,446.2	%		(115.5	%)
Net provisions		(1,068	)		(506	)		(436	)		111.1	%		16.1	%
Impairment losses on other assets		(1,026	)		(1,511	)		(1	)		(32.1	%)		—
Gains/losses on other assets		1,806			2,257			1,286			(20.0	%)		75.5	%
OPERATING PROFIT/LOSS BEFORE TAX		(1,231	)		(550	)		(28	)		123.8	%		1,864.3	%
Income tax		1,009			685			160			47.3	%		328.1	%
PROFIT FROM CONTINUING OPERATIONS		(222	)		135			132			(264.4	%)		2.3	%
Profit from discontinued operations		—			684			120			(100.0	%)		470.0	%
CONSOLIDATED PROFIT FOR THE YEAR		(222	)		819			251			(127.1	%)		226.3	%
Profit attributable to minority interest		1			65			90			(98.5	%)		(27.8	%)
Profit attributable to the Parent		(223	)		754			162			(129.6	%)		365.4	%

2008 compared to 2007

Interest income decreased by €2,312 million in 2008, a 30.1% decrease as compared to 2007, largely due to the higher cost of financing the assets of ABN AMRO.

Income from equity instruments was €229 million in 2008, a 25.1% increase from 2007. This figure is the net result of the increase in the dividends from Royal Bank of Scotland and Fortis and the lower dividends from Intesa Sanpaolo (sold in 2007).

Income from companies accounted for by the equity method was €780 million in 2008 compared to €427 million in 2007. This difference was due, on the one hand, to a greater contribution from RFS Holdings, B.V. (basically Banco Real) which in 2008 consolidated nine months of profit after tax, while in 2007 it was only consolidated from October, the date of the acquisition, until the end of the year. CEPSA’s contribution, on the other hand, was lower because as of October 1, its profits ceased to be recorded by the equity method as the stake was transferred to non-current assets held for sale.

Gains / losses on financial assets and liabilities were €1,346 million in 2008, a 20.9% increase from €1,113 million in 2008. A major factor here was the creation of a €643 million fund (€450 million net of tax) for Santander Group customers who suffered losses due to the collapse of Lehman Brothers and the of Bernard L. Madoff fraud which was offset by the €741 million capital gains from the sale of ABN’s liabilities.

Administrative expenses were €671 million in 2008, a 25% increase as compared to 2007.

114

In 2008, net provisions were €1,068 million, impairment losses on other assets were €1,026 and gains / losses on other assets were €1,806 million. These line items include the capital gains generated from the sale of Grupo Santander City (€586 million) and from the sale of the businesses in Italy acquired from ABN (€2,245 million) partially offset by €386 million from a fund for restructuring costs, €382 million from an early retirement fund, and €175 million from other funds. Additionally, €1,430 million to write down the stakes in Fortis and Royal Bank of Scotland, €904 million to amortize the intangibles of Abbey and €295 million to amortize the goodwill of Santander Consumer Finance and writedowns in other portfolios (all figures net of taxes).

Loss attributable to the Parent was amounted to €223 million in 2008 as a result of the increase in impairments and provisions registered during the period.

2007 compared to 2006

The Financial Management and Equity Stakes segment contributed 8.3% of the profit attributed to the Group’s primary segment. The main contributors to the growth in profit from this area were the sale of properties, 1.79% of Intesa Sanpaolo, our pensions businesses in Latin America, and the positive effect of the euro/dollar and euro/sterling position (which offsets the negative impact of the depreciation of the respective currencies on the results in Latin America and the United Kingdom).

Interest income declined €503 million resulting in a €1,777 million loss. This negative performance was mainly due to the impact that the rise in interest rates had on the cost of financing, with increased costs from the increased volume of securitizations.

Income from companies accounted for by the equity method increased 3.9%, principally as a result of the €141 million additional revenue from RFS Holding’s (ABN AMRO) inclusion in the Group’s financial statements. A reduction in profits from CEPSA partially offset this increase.

Gains/losses on financial assets and liabilities increased by €699 million or 169%. This growth was principally due to the positive effect of the euro/dollar and euro/sterling position (which offsets the negative impact of the depreciation of the respective currencies on the results in Latin America and the United Kingdom), and the larger contribution from the portfolios of interest rate risk hedging. Due to write-downs, interest rate risk hedging recorded losses in 2006, whereas in 2007 made a slightly positive contribution.

Administrative expenses increased due to the increased expenses incurred in the development of the single brand and costs associated with sponsorship and Santander’s 150th anniversary.

Impairment losses on other assets increased to €1,511 million due to a valuation adjustment made to the investment in Sovereign of €737 million, a write-down of €351 million on intangible assets (customer lists in Brazil), and a €242 million increase in special allowances for retirement plans.

Gains / losses on other assets experienced a growth of 75.5% to €2,257 million. This is mainly due to capital gains from the sale of property (€1,076 million) and 1.79% of Intesa Sanpaolo (€566 million).

Profits from discontinued operations included gains of €622 million, principally related to the sale of our pensions business in Latin America.

115

Secondary level (business):

Retail Banking


										Variations
	2008			2007			2006			2008/2007			2007/2006
	(in millions of euros, except percentages)
INTEREST INCOME / CHARGES		18,362			15,235			12,252			20.5	%		24.3	%
Income from equity instruments		149			80			60			86.3	%		33.3	%
Income from companies accounted for by the equity method		16			13			16			23.1	%		—
Net fees and commissions		7,137			6,618			5,966			7.8	%		10.9	%
Gains/losses on financial assets and liabilities		1,144			962			689			18.9	%		39.6	%
Other operating income/expenses		(33	)		(5	)		140			560.0	%		(103.6	%)
TOTAL INCOME		26,775			22,901			19,123			16.9	%		19.8	%
Administrative expenses		(10,002	)		(9,172	)		(8,517	)		9.1	%		7.7	%
Personnel expenses		(5,987	)		(5,539	)		(5,097	)		8.1	%		8.7	%
Other general expenses		(4,015	)		(3,633	)		(3,420	)		10.5	%		6.2	%
Depreciation and amortization		(1,067	)		(898	)		(846	)		18.8	%		6.1	%
Impairment losses on financial assets		(5,740	)		(3,426	)		(2,258	)		67.5	%		51.7	%
Net provisions		(603	)		(459	)		(579	)		31.4	%		(20.7	%)
Impairment losses on other assets		(25	)		(37	)		(23	)		(32.4	%)		60.9	%
Gains/losses on other assets		38			202			25			(81.2	%)		—
OPERATING PROFIT/LOSS BEFORE TAX		9,376			9,110			6,926			2.9	%		31.5	%
Income tax		(2,066	)		(2,334	)		(1,833	)		(11.5	%)		27.3	%
PROFIT FROM CONTINUING OPERATIONS		7,311			6,776			5,093			7.9	%		33.0	%
Profit from discontinued operations		(13	)		—			1,155			—			(100.0	%)
CONSOLIDATED PROFIT FOR THE YEAR		7,297			6,776			6,248			7.7	%		8.5	%
Profit attributable to minority interest		422			457			499			(7.7	%)		(8.4	%)
Profit attributable to the Parent		6,875			6,319			5,749			8.8	%		9.9	%

2008 compared to 2007

The Group’s Retail Banking segment generated 75.5% of the operating areas’ total profit attributable to the Parent. This result is conditioned by two factors: on the one hand, the performance in euro terms in the UK and Latin America reflects the negative impact of exchange rates, which absorbed the growth in local currencies. On the other, the consolidation of one quarter of Banco Real has a positive impact of 3 percentage points on profits.

Interest income increased 20.5% to €18,362 million, due to the impact of increased business (including the entry of Banco Real) and better customer spreads.

Net fees and commissions were €7,137 million in 2008, a 7.8% increase from €6,618 million in 2007.

Gains / losses on financial assets and liabilities were €1,144 million in 2008, a 18.9% increase from €962 million in 2007.

Administrative expenses were €10,002 million in 2008, a 9.0% increase from €9,172 million in 2007. This increase is well below that of total income (16.9%) and is also affected by the entry of Banco Real in the fourth quarter.

Impairment losses on financial assets were €5,740 million in 2008, a 67.5% or €2,314 million increase from €3,426 million in 2007. This increase was due to the deterioration of the market together with the greater volume of lending and the greater risk premium caused by the entry into more profitable segments and products, as well as the consolidation of Banco Real.

116

Profit attributable to the Parent was €6,875 million in 2008, an 8.8% increase from €6,319 million in 2007.

Retail Banking in Continental Europe continued the growth trends in volumes and earnings of the last two years. The main units of growth were the Santander Branch Network and Banesto Retail and the main drivers were (1) the good evolution of business, that performed better than the market, although quarter-on-quarter growth eased; (2) the careful management of prices in a changing environment of interest rates and (3) selective control of expenses.

Retail Banking in the UK in euro terms was strongly affected by the negative impact of exchange rates. Profit before tax in 2008 in sterling was 12.1% higher than in 2007 but it was 3.5% lower in 2007 in euros.

The results of Retail Banking in Latin America came from growth in customer business, the good performance of interest income and net fees, and control of costs compatible with ongoing business development. The factors behind this growth were the rise in the number of individual customers and SMEs, and development of loyalty products.

As a result of the large rise in net loan-loss provisions (partly due to the deterioration of the economic environment and partly due to regulatory changes in Mexico and the unification of criteria in Brazil after the integration of Banco Real), together with a decrease of gains/losses on other assets because of the release in 2007 of a fund established in Brazil that was not needed, profit before tax was lower than in 2007.

2007 compared to 2006

The Group’s Retail Banking segment generated 76.1% of profit before tax in 2007. The increase in profits as compared to 2006 was principally due to the growth in interest income combined with a moderate increase in costs.

Interest income increased 24.3% to €15,235 million, due to the impact of increased business and better customer spreads.

Net fee and commission income was €6,618 million in 2007, an 11% or €652 million increase from €5,966 million in 2006, reflecting the Group’s strategy of targeting the most recurrent revenues.

Gains/losses on financial assets and liabilities were €962 million in 2007, a 39.6% or €273 million increase from €689 million in 2006.

Administrative expenses grew 7.7% in 2007, well below the rise in total income of 19.8%.

Impairment losses on financial assets were 51.7% higher than in 2006 because of the greater volume of lending and the entry into more profitable segments and products, which attract a greater risk premium, as well as the incorporation of the results of Drive which, given its business structure, has a proportionally greater impact on this item than on others.

Profit attributable to the Parent increased 9.9% to €6,319 million, with good performance in Continental Europe as well as at Abbey and in Latin America.

The drivers of growth in Retail Banking in Continental Europe continued to be: business expansion, with lending up by 15% and deposits increasing by 7% (affected by the issuance of “Valores Santander”), good management of prices in an environment of rising interest rates and selective control of costs.

Profit before tax in Abbey’s Retail Banking was 31.6% higher due to the combined effect of 7.2% rise in total income, a 1.7% reduction in operating expenses and 19.9% reduction in net loan-loss provisions.

Retail Banking in Latin America experienced an increase in profit before tax of 37.2% in euro terms. The increase in local currency was 45.6%. We based our growth strategy on increasing the number of individual customers and SMEs, developing loyalty products such as payroll and credit cards, and focusing on the more profitable products in all countries.

117

The performance of the three main countries of Latin America (Brazil, Mexico and Chile) was very good. Profit before tax (in euros) grew by 45.3%.

Global Wholesale Banking


										Variations
	2008			2007			2006			2008/2007			2007/2006
	(in millions of euros, except percentages)
INTEREST INCOME / CHARGES		1,934			1,364			1,061			41.8	%		28.6	%
Income from equity instruments		162			148			180			9.5	%		(17.8	%)
Income from companies accounted for by the equity method		2			2			—			—			—
Net fees and commissions		861			922			646			(6.6	%)		42.7	%
Gains/losses on financial assets and liabilities		1,027			878			1,042			17.0	%		(15.7	%)
Other operating income/expenses		(39	)		(30	)		(31	)		30.0	%		(3.2	%)
TOTAL INCOME		3,947			3,285			2,898			20.2	%		13.4	%
Administrative expenses		(1,027	)		(1,024	)		(848	)		0.4	%		20.8	%
Personnel expenses		(647	)		(632	)		(547	)		2.4	%		15.5	%
Other general expenses		(380	)		(392	)		(301	)		(3.1	%)		30.2	%
Depreciation and amortization		(88	)		(91	)		(70	)		(3.3	%)		30.0	%
Impairment losses on financial assets		(275	)		(63	)		(307	)		336.5	%		(79.5	%)
Net provisions		(13	)		(35	)		(50	)		(62.9	%)		(30.0	%)
Impairment losses on other assets		—			—			3			—			(100.0	%)
Gains/losses on other assets		5			—			—			—			—
OPERATING PROFIT/LOSS BEFORE TAX		2,548			2,072			1,626			23.0	%		27.4	%
Income tax		(684	)		(523	)		(426	)		30.8	%		22.8	%
PROFIT FROM CONTINUING OPERATIONS		1,865			1,548			1,201			20.5	%		28.9	%
Profit from discontinued operations		—			—			2			—			(100.0	%)
CONSOLIDATED PROFIT FOR THE YEAR		1,865			1,548			1,203			20.5	%		28.7	%
Profit attributable to minority interest		11			9			21			22.2	%		(57.1	%)
Profit attributable to the Parent		1,854			1,539			1,182			20.5	%		30.2	%

2008 compared to 2007

Global Wholesale Banking generated 20.4% of the operating areas’ profit attributable to the Parent in 2008. The area’s growth was due to a customer-focused business model, the area’s global capacities and connection with local units, and the strength of the Group’s capital and liquidity which made it possible to increase profit.

Interest income was €1,934 million in 2008, a 41.8% or €570 million increase from €1,364 million in 2007. The strong growth in customer revenues accounted for more than 85% of the area’s total revenues. Almost all segments of business and countries grew throughout the year especially in the fourth quarter, partly due to the improved spreads and the acceleration of revenues in hedging the positions of our clients.

Net fees and commissions were €861 million in 2008, a 6.6% decrease from €922 million in 2007, affected by the 29% decrease in the results of trading activity due to the instability of the markets.

Total income was €3,947 million in 2008, a 20.2% increase from €3,285 million in 2007.

118

Administrative expenses were €1,027 million in 2008, a 0.3% increase from €1,024 million in 2007 due to a strict adjustment of expenses and structures to the new environment.

Impairment losses on financial assets were €275 million in 2008, a €212 million increase from €63 million in 2007. The main reason is the increase in generic provisions because of large operations in the second half of the year, particularly in the fourth quarter.

2007 compared to 2006

Global Wholesale Banking generated 16.4% of the operating areas’ profit before tax in 2007. This growth was due to higher customer revenue and lower generic provisions.

Total income was €3,285 million, 13.4% higher, due to strong growth in customer revenues, which accounted for more than 77% of total revenues, and because of the increased contribution of value-added businesses (markets, investment banking and cash management). Fee and commission income rose 42.7%, driven by corporate finance activities, structured financing and the trading of securities.

The increased revenues were the result of the investments made to strengthen the global management capacities of the product and business areas, applied to markets very active in corporate operations particularly in the first half of the year, as well as the extension of Santander Global Connect.

Gains on financial assets and liabilities decreased by 15.7% due to the reduction in contribution from trading activity in the second half of the year, which was affected by instability in markets, compared to excellent results in the first half of the year.

Administrative expenses increased by 20.8%, which continued to reflect the investment made in developing markets and global transactional banking.

Impairment losses on financial assets were 79.5% lower compared with substantial allocations in 2006, generated by certain large operations.

119

Asset Management and Insurance


										Variations
	2008			2007			2006			2008/2007			2007/2006
	(in millions of euros, except percentages)
INTEREST INCOME / CHARGES		188			131			82			43.5	%		59.8	%
Income from equity instruments		13			12			10			8.3	%		20.0	%
Income from companies accounted for by the equity method		—			—			—			—			—
Net fees and comisions		407			470			423			(13.4	%)		11.1	%
Gains/ losses on financial assets and liabilities		26			29			14			(10.3	%)		107.1	%
Other operating income/expenses		215			229			187			(6.1	%)		22.5	%
TOTAL INCOME		848			872			716			(2.8	%)		21.8	%
Administrative expenses		(279	)		(285	)		(215	)		(2.11	%)		32.56	%
Personnel expenses		(132	)		(132	)		(109	)		—			21.1	%
Other general expenses		(147	)		(153	)		(106	)		(3.9	%)		44.3	%
Depreciation and amortization		(19	)		(19	)		(17	)		—			11.8	%
Impairment losses on financial assets		1			—			—			—			—
Net provisions		(16	)		(23	)		(15	)		(30.4	%)		53.3	%
Impairment losses on other assets		2			—			—			—			—
Gains/looses on other assets		—			—			—			—			—
OPERATING PROFIT/LOSS BEFORE TAX		537			544			471			(1.3	%)		15.5	%
Income tax		(144	)		(163	)		(156	)		(11.7	%)		4.5	%
PROFIT FROM CONTINUING OPERATIONS		393			381			315			3.1	%		21.0	%
Profit from discontinued operations		—			112			228			(100.0	%)		(50.9	%)
CONSOLIDATED PROFIT FOR THE YEAR		393			493			543			(20.3	%)		(9.2	%)
Profit attributable to minority interest		22			45			40			(51.1	%)		12.5	%
Profit attributable to the Parent		371			448			503			(17.2	%)		(10.9	%)

2008 compared to 2007

This segment accounted for 4.1% of profit attributable to the Parent in 2008.

Total income was €848 million in 2008, a 2.8% or €24 million from €872 million in 2007 as the higher revenues from insurance did not offset the fall in fee income. The latter was hit by the decline in the volume of mutual funds in the main countries where the Group operates, particularly Spain. In this market, customer demand and the focus of retail networks shifted to traditional and/or structured deposits.

Administrative expenses were €279 million in 2008, a 2.1% or €6 million decrease from €285 million in 2007 reflecting the area’s efforts to adapt its structures to the new environment of revenues, while absorbing the investments made to generate global businesses.

Asset Management. Santander Asset Management’s global business generated €1,542 million of fees in 2008 reflecting a drop of 18.4% as compared to 2007. Profit before tax, after deducting operating expenses (which was 3.4% lower than in 2007), and fees paid to the networks, was 9.0% lower at €221 million. Total managed pension and mutual funds amounted to €100 billion.

120

Insurance. The global business of Santander Insurance generated total income (fees and revenues from insurance activity) of €2,147 million (reflecting an increase of 22.6%), comprising 6.9% of the total income of the operating areas. Its total contribution to the Group’s results, comprising the sum of profit before tax of the insurance companies and brokers (€316 million) and fees received by networks, was €2,020 million (reflecting an increase of 23.6%).

The volume of premium income distributed in the year was more than €9.6 billion (reflecting an increase of 34%). Life-savings products contributed 72% of the total, life-risk by 15% and non-life by 13%. Of the total premium income, 84% was subscribed by Group companies.

2007 compared to 2006

This segment accounted for 4.8% of profit before tax. These figures, like the others in this section, do not include the contribution of our pensions businesses in Latin America, which were sold in 2007. The sale of these businesses in Colombia, Uruguay, Mexico, Chile and Argentina was the result of a strategic review and generated net capital gains of €622 million (recorded in the Financial Management and Equity Stakes segment).

Total income rose 21.8%, mainly driven by insurance activity. Net fee and commission income was virtually unchanged because of the slowdown in the mutual funds business in Spain and the strong impact of exchange rates on Latin America’s total income (in Chile and Mexico growth was between 8 and 12 percentage points lower when converted into euros).

Administrative expenses, which reflect the investment in building up these global businesses, increased 32.6%.

Asset Management. Santander Asset Management’s global business generated €1,891 million in fees in 2007 (reflecting an increase of 5.9%). Profit before tax, after deducting operating expenses and fees paid to the networks, was 8.1% higher at €243 million. Excluding the assets of the pension units that we sold, total managed assets amounted to €130 billion.

Insurance. The global business of Santander Insurance generated total income (comprising fees and revenues from insurance) of €1,751 million (reflecting an increase of 21.8%), which amounted to 6.5% of the operating areas’ total. Its total contribution to the Group’s results, the sum of profit before tax of the insurance companies and brokers (comprising €294 million) and fees received by networks, was €1,674 million (reflecting an increase of 21.5%).

Financial Condition

Assets and Liabilities

Our total assets were €1,049,631.6 million at December 31, 2008, a 15.0% or €136,716.6 million increase from total assets of €912,915.0 million at December 31, 2007. Our gross loans and advances to corporate clients, individual clients and government and public entities, including the trading portfolio, other financial assets at fair value and loans, increased by 10.3% to €639,354.5 million at December 31, 2008 from €579,793.7 million at December 31, 2007. This increase was caused by, first, a positive effect due to the consolidation of Banco Real, Alliance & Leicester and the consumer business units acquired from RBS and, second, by a negative exchange-rate impact from the depreciation, on the basis of year-end euro exchange rates, of 23% for the sterling and more than 15% for the main Latin American currencies.

Customer deposits, which comprise deposits from clients and securities sold to clients under agreements to repurchase, increased by 18.2% from €355,406.5 million at December 31, 2007, to €420,229.4 million at December 31, 2008. This percentage of increase was also affected by both the exchange-rate impact and the consolidation effect described above. Other managed funds, including mutual funds, pension funds, managed portfolios and savings-insurance policies, decreased by 18.1% from €159,986.2 million at December 31, 2007, to €131,061.5 million at December 31, 2008.

121

In addition, and as part of the global financing strategy, during 2008 the Group issued €76,786 million of senior debt (including through Abbey’s medium term program), of which €2,165 million are mortgage bonds (cédulas hipotecarias).

During 2008, €93,872 million of senior debt, €1,500 million of mortgage bonds and €1,315 million of subordinated debt matured.

Goodwill was €18,836 million at the end of 2008, of which €7,926 million corresponded to Latin America and €10,379 million to Europe. During 2008, goodwill increased by €5,005 million, mainly due to the acquisition of Banco Real which generated goodwill of €6,446 million. Excluding the effect of the change in the consolidation perimeter, goodwill decreased due to exchange rate differences relating to Abbey’s goodwill.

Capital

Stockholders’ equity, net of treasury stock, at December 31, 2008, was €57,586.9 million, an increase of €2,387.0 million or 4.3% from €55,199.9 million at December 31, 2007, mainly due to the increase of capital and reserves.

Our eligible stockholders’ equity was €62,277 million at December 31, 2008. The surplus over the minimum required by the Bank of Spain was €21,299 million. In accordance with the Basel II Accord criteria (which provide the framework under which Spanish entities must report capital ratios as of June 30, 2008), the BIS II ratio was 13.3%, Tier I Capital was 9.1% and core capital was 7.5%. See Item 4 of Part I, “Information on the Company—B. Business Overview—Supervision and Regulation—Capital Adequacy Requirements”.

B. Liquidity and capital resources

Management of liquidity

For information about our liquidity risk management process, see Item 11 of Part I, “Quantitative and Qualitative Disclosures About Market Risk—Part. 10 Market Risk—Statistical Tools for Measuring and Managing Market Risk—Non Trading activity—Liquidity Risk” and “—Quantitative analysis—B. Non Trading Activity—Asset and liability management— Management of structural liquidity”.

Sources of funding

As a financial group, a principal source of our liquidity is our customer deposits which consist primarily of demand, time and notice deposits. In addition, we complement the liquidity generated by our customer deposits through access to the domestic and international capital markets and to the interbank market (overnight and time deposits). For this purpose, we have in place a series of domestic and international programs for the issuance of commercial paper and medium and long- term debt. We also maintain a diversified portfolio of liquid and securitized assets throughout the year. In addition, another source of liquidity is the generation of cash flow.

At December 31, 2008, we had outstanding €236.4 billion of senior debt, of which €84.1 billion were mortgage bonds and €42.1 billion were promissory notes. Additionally, we had €38.9 billion in outstanding subordinated debt (which includes €7.6 billion preferred securities and €1.1 billion in preferred shares).

The following table shows the average balances during the years 2008, 2007 and 2006 of our principal sources of funds:


	2008		2007		2006
	(in thousands of euros)
Due to credit entities		114,434,146		112,021,327		123,753,200
Customer deposits		361,187,111		336,440,618		315,478,695
Marketable debt securities		237,927,982		227,627,869		174,377,295
Subordinated debt		36,223,720		32,902,151		29,554,497

Total		749,772,959		708,991,965		643,163,687

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The average maturity of our outstanding debt as of December 31, 2008 is as follows:


(1) Senior debt		3.9 years
(2) Mortgage debt		15.2 years
(3) Dated subordinated debt		8.9 years

For more information see Notes 22.b, 23.a and 51.a to our consolidated financial statements.

The cost and availability of debt financing are influenced by our credit ratings. A reduction in these ratings could increase the cost of, and reduce our market access to debt financing. Our credit ratings are as follows:

Long-Term

Short-Term

Financial Strength

Standard & Poor’s

A1+

Fitch

F1+

A/B

Moody’s

Aa1

DBRS

R1 (high)

Our total customer deposits, excluding assets sold under repurchase agreements, totaled €378.7 billion at December 31, 2008. Loans and advances to customers (gross) totaled €639.4 billion at the same date.

We remain well placed to access various wholesale funding sources from a wide range of counterparties and markets, and the changing mix between customer deposits and repos, deposits by banks and debt securities in issue primarily reflects comparative pricing, maturity considerations and investor counterparty demand rather than any material perceived trend.

We use our liquidity to fund our lending and investment securities activities, for the payment of interest expense, for dividends paid to shareholders and the repayment of debt.

We, Grupo Santander, are a European, Latin American and North American financial group. Although, at this moment, except for Venezuela, we are not aware of any legal or economic restrictions on the ability of our subsidiaries to transfer funds to the Bank (the Parent company) in the form of cash dividends, loans or advances, capital repatriation and other forms, or to have access to foreign currency at the official exchange rate, there is no assurance that in the future such restrictions will not be adopted or how they would affect our business. Nevertheless, the geographic diversification of our businesses limits the effect of any restrictions that could be adopted in any given country.

We believe that our working capital is sufficient for our present requirements and to pursue our planned business strategies.

As of December 31, 2008, and to the present date, we did not, and presently do not, have any material commitments for capital expenditures.

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C. Research and development, patents and licenses, etc.

We do not currently conduct any significant research and development activities.

D. Trend information

The global financial services sector is likely to remain competitive with a large number of financial service providers and alternative distribution channels. Additionally, consolidation in the sector (through mergers, acquisitions or alliances) is likely to occur as the other major banks look to increase their market share, combine with complementary businesses or strengthen their balance sheets. In addition, regulatory changes will take place in the future that we expect will increase the overall level of regulation in the markets.

The following are the most important trends, uncertainties and events that are reasonably likely to have a material adverse effect on the Bank or that would cause the disclosed financial information not to be indicative of our future operating results or our financial condition:

•

a continued downturn in the Spanish, the United Kingdom and the United States real estate markets, and a corresponding increase in mortgage defaults;

•

uncertainty regarding interest rates in the United States and other countries;

•

uncertainties relating to economic growth expectations and interest rates cycles, especially in the United States, Spain, the United Kingdom, other European countries and Latin America, and the impact they may have over the yield curve and exchange rates;

•

the effect that the current global economic slowdown will have over Europe, the US and Latin America and fluctuations in local interest and exchange rates;

•

continued changes in the macroeconomic environment could further deteriorate the quality of our customers’ credit;

•

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;

•

continued instability and volatility in the financial markets;

•

a drop in the value of the euro relative to the US dollar, the Sterling pound or Latin American currencies;

•

inflationary pressures, because of the effect they may have in relation to increases of interest rates and decreases of growth;

•

increased consolidation of the global financial services sector, which could further reduce our spreads;

•

although it is foreseeable that entry barriers to domestic markets in Europe will eventually be lowered, our possible plans of expansion into other markets could be affected by regulatory requirements of the national authorities of these countries;

•

acquisitions or restructurings of businesses that do not perform in accordance with our expectations or that subject us to previously unknown risks;

•

increased regulation and government intervention prompted by the recent turmoil in global financial markets;

•

the risk of further reductions in liquidity and increases of credit spreads as a consequence of the crisis in the financial markets, which could affect not only our cost of funding but also the value of our proprietary portfolios and our assets under management; and

•

future regulatory changes that may increase the overall level of regulation in the markets.

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E. Off-balance sheet arrangements

As of December 31, 2008, 2007 and 2006, we had outstanding the following contingent liabilities and commitments:


	2008		2007		2006
	(in thousands of euros)

Contingent liabilities:
Financial guarantees and other sureties		15,614,342		17,172,990		11,356,789
Financial guarantees		14,710,988		16,464,340		10,878,103
Credit derivatives sold		903,067		708,250		478,250
Other financial guarantees		287		400		436

Irrevocable documentary credits		3,590,454		5,803,088		5,029,484
Other guarantees		45,613,498		52,632,118		41,819,139
Other contingent liabilities		504,900		608,389		563,897

		65,323,194		76,216,585		58,769,309

Commitments:
Balances drawable by third parties		123,329,168		102,215,927		91,690,396
Other commitments		8,395,838		12,460,636		11,559,034

		131,725,006		114,676,563		103,249,430

		197,048,200		190,893,148		162,018,739

For more information see Note 55.7 to our Consolidated Financial Statements.

In addition to the contingent liabilities and commitments described above, the following table provides information regarding off-balance sheet funds managed by us as of December 31, 2008, 2007 and 2006:


	2008		2007		2006
	(in thousands of euros)

Off-balance sheet funds:
Mutual funds		90,305,714		119,210,503		119,838,418
Pension funds		11,127,918		11,952,437		29,450,103
Other managed funds		17,289,448		19,814,340		17,835,031

		118,723,080		150,977,280		167,123,552

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Relationship with unconsolidated companies

We have holdings in companies over which we are in a position to exercise significant influence, but that we do not control or jointly control. According to IFRS-IASB, these investments in associated companies are accounted for using the equity method (see further details of these companies in Exhibit II to our consolidated financial statements).

Transactions with these companies are made under market conditions and are closely monitored by our regulatory authorities. See Note 53 to our consolidated financial statements for further information.

Also, we use special purpose vehicles (“fondos de titulización”) in our securitization activity. According to the IFRS, only those vehicles that meet certain requirements are consolidated in the Group’s financial statements. We are not required to repurchase assets from or contribute additional assets to any of these special purpose vehicles. We do, however, provide in the ordinary course of business certain loans (amounting to €200.6 million to “fondos de titulización” in Spain as of December 31, 2008) to some of these special purpose vehicles, which are provided for in accordance with the risks involved. In 2008, the Group securitized €64 billion of medium and long-term assets. For liquidity management purposes, considering a securitization performed by Abbey at the end of December 2007, this figure amounts to €74 billion.

In the ordinary course of business, Abbey enters into securitization transactions using special purpose securitization companies which are consolidated and included in Abbey’s financial statements. Abbey is under no obligation to support any losses that may be incurred by the securitization companies or the holders of the securities, and has no right or obligation to repurchase any securitized loan. Abbey has made some interest-bearing subordinated loans to these securitization companies.

We do not have any further transactions with unconsolidated entities other than those mentioned above.

We have no other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

F. Tabular disclosure of contractual obligations

The following table summarizes our contractual obligations by remaining maturity at December 31, 2008:


			More than		More than
			1 year but		3 years but
Contractual obligations	Less than		less than 3		less than 5		More than
(in millions of euros)	1 year		years		years		5 years		Total

Deposits from credit institutions		61,404		4,006		3,740		1,432		70,582
Customer deposits		367,050		20,349		9,602		9,014		406,015
Marketable debt securities		80,784		42,132		23,508		81,218		227,642
Subordinated debt		1,905		3,506		1,283		32,179		38,873
Operating lease obligations		332		728		436		2,001		3,497
Purchase obligations		3		4		1		—		8
Other long-term liabilities (1)		—		—		—		11,198		11,198
Total		511,478		70,725		38,570		137,042		757,815


(1)		Other long-term liabilities relate to pensions and similar obligations.

For a description of our trading and hedging derivatives, which are not reflected in the above table, see Note 36 to our consolidated financial statements.

For more information on our marketable debt securities and subordinated debt, see Notes 22 and 23 to our consolidated financial statements.

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Item 6. Directors, senior management and employees

A. Directors and senior management

We are managed by our board of directors, which currently consists of 19 members. In accordance with our By-laws (Estatutos), the board shall consist of at least 14 and not more than 22 members. Each member of the board is elected to a five-year term by our shareholders at a general meeting, with approximately one-fifth of the members being elected each year, and they may be re-elected.

Our board of directors meets approximately nine times per year. In 2008, it met 11 times. Our board of directors elects our chairman and vice chairmen from among its members, as well as the chief executive officer. Between board meetings, lending and other board powers reside with the executive committee (comisión ejecutiva) and with the risk committee (comisión delegada de riesgos). The chairman is the Bank’s most senior officer and, as a result, has delegated to him all such powers as may be delegated under Spanish law, our By-laws and the Rules and Regulations of the board of directors¹. The chairman leads the bank’s management team, in accordance with the decisions made and the criteria set by our shareholders at the general shareholders’ meeting and by the board.

The chief executive officer by delegation and under the direction of the board and of the chairman (as the Bank’s most senior officer) leads the business and assumes the Bank’s highest executive functions.

Our board holds ultimate lending authority and it delegates such authority to the risk committee, which generally meets twice a week. Members of our senior management are appointed and removed by the board.


¹		The board of directors, at its meeting on March 23, 2009, resolved to approve new Rules and Regulations of the Board in order to bring some aspects of its internal regulations into line with the By-laws approved by the shareholders at the general shareholders’ meeting held on June 21, 2008. All references to the Rules and Regulations of the Board in this annual report on Form 20-F are references to the new Rules and Regulations approved by the board of directors.

		The Rules and Regulations of the Board are available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—Corporate governance—Board of directors—Rules and Regulations of the Board of Directors”.

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Our current executive officers are:


Name		Position with Banco Santander
Emilio Botín		Chairman of the board of directors and of the executive committee
Alfredo Sáenz		Second vice chairman of the board of directors and chief executive officer
Matías R. Inciarte		Third vice chairman of the board of directors and chairman of the risk committee
Ana P. Botín		Chairwoman, Banesto
Francisco Luzón		Director, executive vice president, America
Juan R. Inciarte		Director, executive vice president, strategy
José A. Alvarez		Executive vice president, financial management and investor relations
Nuno Amado		Executive vice president, Santander Totta
Ignacio Benjumea		Executive vice president, general secretariat
Juan Manuel Cendoya		Executive vice president, communications, corporate marketing and research
José María Espí		Executive vice president, risk
José María Fuster		Executive vice president, technology and operations
José Luis G. Alciturri		Executive vice president, human resources
Enrique G. Candelas		Executive vice president, Santander branch network — Spain
Joan-David Grimà		Executive vice president, asset management
Juan Guitard		Executive vice president, internal auditing
Gonzalo de las Heras		Executive vice president, global wholesale banking
Antonio H. Osorio		Chief executive officer, Abbey
Adolfo Lagos		Executive vice president, global wholesale banking
Jorge Maortua		Executive vice president, global wholesale banking
Javier Marín		Executive vice president, global private banking
Jorge Morán		Executive vice president, insurance
César Ortega		Executive vice president, general secretariat
Javier Peralta		Executive vice president, risk
Jaime P. Renovales		Executive vice president, general secretariat
Marcial Portela		Executive vice president, America
Magda Salarich		Executive vice president, Santander Consumer Finance
José Tejón		Executive vice president, financial accounting and control
Jesús M^a Zabalza		Executive vice president, America

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Following is a summary description of the relevant business experience and principal business activities of our current directors and executive officers:

Emilio Botín (chairman of the board of directors and of the executive committee)

Born in 1934. He joined the board of directors of Banco Santander in 1960, and in 1986 he was appointed chairman of the board. He is also a non-executive director of Shinsei Bank, Limited.

Fernando de Asúa (first vice chairman of the board of directors and chairman of the appointments and remuneration committee)

Born in 1932. Former vice chairman of Banco Central Hispanoamericano from 1991 to 1999. He was appointed director in April 1999 and first vice chairman in July 2004. He is a former chairman of IBM España, S.A., and he is currently the honorary chairman. In addition, he is non-executive director of CEPSA and a non-executive vice chairman of Técnicas Reunidas, S.A.

Alfredo Sáenz (second vice chairman of the board of directors and chief executive officer)

Born in 1942. Former chief executive officer and vice chairman of Banco Bilbao Vizcaya and chairman of Banca Catalana until 1993. In 1994, he was appointed chairman of Banesto and in February 2002, second vice chairman and chief executive officer of Santander. He is also non-executive vice chairman of CEPSA and a non-executive director of France Telecom España, S.A.

Matías R. Inciarte (third vice chairman of the board of directors and chairman of the risk committee)

Born in 1948. He joined Banco Santander in 1984 and was appointed executive vice president and chief financial officer in 1986. In 1988 he was appointed director and in 1994 second vice chairman. He is a non-executive director of Banesto, and since 2008, president of the Fundación Príncipe de Asturias. He was minister of the presidency of the Spanish Government from 1981 to 1982.

Manuel Soto (fourth vice chairman of the board of directors)

Born in 1940. He was appointed director in April 1999. He is non-executive vice chairman of Indra Sistemas, S.A. and a non-executive director of Corporación Financiera Alba, S.A and Cartera Industrial REA, S.A. In addition, he was formerly chairman of Arthur Andersen’s Global Board and manager for EMEA (Europe Middle East and Africa) and India.

Assicurazioni Generali, S.p.A. (“Assicurazioni”)

An Italian insurance company represented on our board by its chairman, Antoine Bernheim. Assicurazioni is a former director of Banco Central Hispanoamericano from 1994 to 1999. Assicurazioni was appointed director in April 1999.

Antoine Bernheim (Representative of the company director Assicurazioni)

Born in 1924. He joined the board of directors of Assicurazioni Generali in 1973, becoming the company’s vice chairman in 1990 and chairman from 1995 to 1999. He was re-elected chairman in 2002. He is vice chairman of the supervisory board of Intesa Sanpaolo S.p.A., vice chairman of the Assicurazioni group’s subsidiary Alleanza Assicurazioni S.p.A., member of the board of Mediobanca, vice chairman of LVMH Moët Hennessy-Louis Vuitton and of Bolloré Investissement. Antoine Bernheim is also a director of Generali France, Generali Deutchland Holding AG, Generali España Holding Entidades de Seguros S.A., BSI, Generali Holding Vienna and Christian Dior S.A. Finally, he is a member of the supervisory board of Eurazeo.

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Antonio Basagoiti

Born in 1942. Former executive vice president of Banco Central Hispanoamericano. He was appointed director in July 1999. He is non-executive proprietary vice chairman of Faes Farma, S.A., a non-executive director of Pescanova, S.A. and member of the external advisory committee of A.T. Kearney. He is a former chairman of Unión Fenosa, S.A., where he is currently the honorary chairman.

Ana P. Botín

Born in 1960. Former executive vice president of Banco Santander, S.A. and former chief executive officer of Banco Santander de Negocios from 1994 to 1999. In February 2002, she was appointed executive chairwoman of Banesto. She is also a non-executive director of Assicurazioni Generali, S.p.A. She is also a member of the International Advisory Board of the New York Stock Exchange, INSEAD, and Georgetown University.

Javier Botín

Born in 1973. He was appointed director in July 2004. He is chairman and chief executive officer of M&B Capital Markets, Sociedad de Valores, S.A.

Lord Burns

Born in 1944. He was appointed director in December 2004. He is also a non-executive chairman of Abbey National plc and Alliance & Leicester plc. In addition, he is a non-executive chairman of Glas Cymru (Welsh Water) and a non-executive director of Pearson Group plc. He was Permanent Secretary to the UK Treasury and chaired the UK Parliamentary Financial Services and Markets Bill Joint Committee and was a non-executive chairman of Marks & Spencer Group plc and a non-executive director of British Land plc and Legal & General Group plc.

Guillermo de la Dehesa

Born in 1941. Former secretary of state of economy and secretary general of commerce of the Spanish Government and chief executive officer of Banco Pastor. He is a state economist and Bank of Spain’s office manager (on leave). He was appointed director in June 2002. He is an international advisor of Goldman Sachs, and a non-executive director of Campofrío Food Group. He is also chairman of the Centre for Economic Policy Research (CEPR) in London, member of the Group of Thirty of Washington, and chairman of the board of trustees of the Instituto de Empresa.

Rodrigo Echenique

Born in 1946. Former director and chief executive officer of Banco Santander, S.A. from 1988 to 1994.

Antonio Escámez

Born in 1951. Former director and executive vice president of Banco Central Hispanoamericano from 1988 to 1999. He was appointed director in April 1999. He is also a non-executive chairman of Santander Consumer Finance, S.A., Open Bank Santander Consumer, S.A. and Arena Media Communications, and a non-executive vice chairman of Attijariwafa Bank.

Francisco Luzón

Born in 1948. He joined Banco Santander in 1996 as executive vice president, adjunct to the chairman. Former chairman of Banco Exterior de España (from 1988 to 1996), Caja Postal (from 1991 to 1996), Corporación Bancaria de España (from 1991 to 1996) and of Argentaria (1996). He is also a non-executive director of Industria de Diseño Textil, S.A. and world vice chairman of Universia.

Abel Matutes

Born in 1941. He joined Banco Santander in 2002 as member of the board. Former foreign minister of the Spanish Government and EU commissioner for the portfolios of Loans and Investment, Financial Engineering and Policy for Small and Medium-sized Companies (1989); North-South Relations, Mediterranean Policy and Relations with Latin America and Asia (1989) and of the Transport and Energy and Supply Agency of Euroatom (1993). He is also a chairman of Grupo de Empresas Matutes.

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Juan R. Inciarte

Born in 1952. He joined Banco Santander in 1985 as director and executive vice president of Banco Santander de Negocios. In 1989 he was appointed executive vice president and from 1991 to 1999 he was a director of Banco Santander. He is also a non-executive vice chairman of Abbey and a director of Santander Consumer Finance, Inc. He is also a director of CEPSA, Alliance & Leicester plc and RFS Holdings. Juan R. Inciarte was appointed director in January 2008.

Luis Ángel Rojo (chairman of the audit and compliance committee)

Born in 1934. He joined Banco Santander in 2005 as a member of the board. Former head of economics, Statistics and Research Department, deputy governor and governor of the Bank of Spain. He has been a member of the Governing Council of the European Central Bank, vice chairman of the European Monetary Institute, member of United Nations’ Development Planning Committee and treasurer of the International Association of Economy. He is a member of the Group of Wise Men appointed by the ECOFIN Council for the study of integration of the European financial markets, member of the Royal Academy of Moral and Political Sciences and of the Royal Academy of the Spanish Language.

Luis Alberto Salazar-Simpson

Born in 1940. He joined Banco Santander in 1999 as a member of the board. He is chairman of France Telecom España and a non-executive director of Mutua Madrileña Automovilista.

Isabel Tocino

Born in 1949. She joined Banco Santander in 2007 as a member of the board. Former minister for environment of the Spanish Government, former chairwoman of the European Affairs and of the Foreign Affairs Committees of Spanish Congress and former chairwoman for Spain and Portugal and former vice chairwoman for Europe of Siebel Systems. She is currently an elected member of the Spanish State Council, a professor of the Complutense University of Madrid, non-executive director of Climate Change Capital and member of the Royal Academy of Doctors.

José A. Alvarez

Born in 1960. He joined the Bank in 2002. In 2004, he was appointed executive vice president, Financial Management and Investor Relations.

Nuno Amado

Born in 1959. In 1997 he joined the Bank as a member of the executive committee of BCI/Banco Santander Portugal. In December 2004 he was appointed director and vice chairman of Santander Totta’s executive committee. He was appointed executive vice president in July 2006. Also in 2006 he was appointed Santander Totta’s chief executive officer.

Ignacio Benjumea

Born in 1952. He joined Banco Santander in 1987 as general secretary of Banco Santander de Negocios. In 1994 he was appointed executive vice president and general secretary and secretary of the board of Banco Santander. He is also a director of Bolsas y Mercados Españoles, Sociedad Holding de Mercados y Sistemas Financieros, S.A., Sociedad Rectora de la Bolsa de Madrid, S.A. and La Unión Resinera Española, S.A.

Juan Manuel Cendoya

Born in 1967. Former manager of the Legal and Tax Department of Bankinter, S.A. from 1999 to 2001. He joined the Bank on July 23, 2001 as executive vice president, communications, corporate marketing and research.

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José María Espí

Born in 1944. He joined the Bank in 1985 and, in 1988, was appointed executive vice president, human resources. In 1999 he was appointed executive vice president, risk. He is also chairman of Unión de Crédito Inmobiliario, S.A., E.F.C. and director of UCI, S.A.

José María Fuster

Born in 1958. He joined the Group in 1988. In 2004 he was appointed chief information officer of Grupo Santander. In the same year he was also named member of the board of Abbey National plc and of the board of Advisors of IBM Corporation. In 2006 he was appointed executive director of Banesto and in 2007 executive vice president of technology and operations at Banco Santander. At present, José María Fuster is also a director of Ingeniería de Software Bancario, S.A. (ISBAN).

José Luis G. Alciturri

Born in 1949. He joined the Bank in 1996. Since November 2003 he has been responsible for the Group’s human resources. In 2007, he was appointed executive vice president.

Enrique G. Candelas

Born in 1953. He joined Banco Santander in 1975 and was appointed senior vice president in 1993. He was appointed executive vice president, Santander Branch Network Spain in January 1999.

Joan-David Grimà

Born in 1953. He joined Banco Central Hispanoamericano in 1993. In June 2001 he was appointed executive vice president, industrial portfolio and in December 2005 he was appointed executive vice president, asset management. He was formerly vice chairman and chief executive officer of Auna Operadores de Telecomunicaciones, S.A. from January 2002 to November 2005. He is also a director of Teka Industrial, S.A. and ACS Actividades de Construcción y Servicios, S.A.

Juan Guitard

Born in 1960. Former general secretary of the board of Banco Santander de Negocios (from 1994 to 1999) and manager of the investment banking department of the Bank (from 1999 to 2000). He rejoined the Bank in 2002, being appointed executive vice president, vice-secretary general of the board. On March 15, 2009 he was appointed head of the internal audit division and was replaced as head of the legal service by Jaime P. Renovales.

Gonzalo de las Heras

Born in 1940. He joined the Bank in 1990. He was appointed executive vice president in 1991 and supervises the North American business of the Group. He is also a non-executive director of Sovereign Bancorp, Inc.

Antonio H. Osorio

Born in 1964. He joined Banco Santander in 1993 and was appointed executive vice president, Portugal, in January 2000 having previously been CEO of Banco Santander in Brazil. He was chairman of the executive committee of Banco Santander Totta, S.A., chairman of the executive committee of Banco Santander de Negocios Portugal, S.A. and non-executive director of Abbey. In 2006 he was appointed chief executive officer of Abbey and in 2008 he was appointed chief executive officer of Alliance & Leicester. In 2009, he was appointed non-executive director to the Court of the Bank of England.

Adolfo Lagos

Born in 1948. Former chief executive officer of Grupo Financiero Serfin since 1996. He was appointed executive vice president, America, in October 2002 and executive vice president, global wholesale banking, in April 2003.

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Jorge Maortua

Born in 1961. Former executive vice president of Banesto since 2001, he joined the Bank in 2003 as head of global treasury and was appointed executive vice president, global wholesale banking, in 2004.

Javier Marín

Born in 1966. He joined the Bank in 1991. After serving in various positions within the group, he was appointed executive vice president of the global private banking division in 2007.

Jorge Morán

Born in 1964. He joined the Bank in 2002. He was appointed executive vice president, asset management and insurance, in 2004. In December 2005, he was appointed executive vice president and chief operating officer of Abbey and in 2006 executive vice president in charge of the global insurance division.

César Ortega

Born in 1954. He joined the Bank in 2000 and was appointed executive vice president, general secretariat, in 2006. He is also a non-executive director of Fomento de Construcciones y Contratas, S.A.

Javier Peralta

Born in 1950. He joined the Bank in 1989 and in 1993 was appointed executive vice president. In 2002, he was appointed executive vice president, risk.

Jaime P. Renovales

Born in 1968. He joined the Group in 2003 as secretary of the board of Banco Español de Crédito (Banesto). In March 2009, he was appointed executive vice president of Banco Santander, vice-secretary general and vice-secretary of the board.

Marcial Portela

Born in 1945. He joined the Bank in 1998 as executive vice president. In 1999, he was appointed executive vice president, America. He is also a director of Best Global, S.A.

Magda Salarich

Born in 1956. She joined the Bank in 2008 as executive vice president responsible for Santander’s Consumer Finance Division. Previously, she has held several positions in the automobile industry, including the position of director and general manager of Citroën España and head of commerce and marketing for Europe of Citroën Automobiles.

José Tejón

Born in 1951. He joined the Bank in 1989. In 2002 he was appointed executive vice president, financial accounting and control.

Jesús M^a Zabalza

Born in 1958. Former executive vice president of La Caixa (from 1996 to 2002). He joined the Bank in 2002, being appointed executive vice president, America.

* * * * * *

134

In addition, Ramón Tellaeche, an adjunct to executive vice president of the Bank, is the head of the payment means division, and José A. Villasante, an adjunct to executive vice president of the Bank, is the head of the Santander Universidades division.

The following is a description of arrangements or understandings with major shareholders, customers, suppliers or others pursuant to which any person referred to above was appointed.

There is one director that is an international financial institution that holds shares in the Bank: Assicurazioni Generali S.p.A. (represented by Antoine Bernheim).

See also Item 7 of Part I, “Major Shareholders and Related Party Transactions — A. Major Shareholders — Shareholders’ agreements”.

B. Compensation

Directors’ compensation

By-law stipulated fees

Article 58 of the Bank’s new By-laws approved by the shareholders at the general meeting held on June 21, 2008 provides that directors will be entitled to receive up to 1% of the Bank’s net profit for serving as members of the board of directors including annual retainer and meeting attendance fees. However, the board of directors may resolve to reduce this percentage. In the previous By-laws this percentage represented the limit only with respect to the annual retainer and did not include attendance fees.

The amount set by the board of directors for 2008, calculated pursuant to Article 58 of the new By-laws, was 0.124% of the Bank’s profit for 2008. In 2007, it was 0.157%.

At the board meeting held on December 22, 2008, the directors resolved to reduce by 10% the annual retainer for the directors in 2008, and established the following compensation (the respective proportional amounts were allocated to any directors who did not sit on the board for the whole year): each board member received a gross retainer of €106,300 (2007: €118,100; 2006: €107,400) and, additionally, each member of the following board committees received the following gross retainers: executive committee, €213,200 (2007: €236,900; 2006: €215,400); audit and compliance committee, €50,000 (2007: €55,000; 2006: €50,000); appointments and remuneration committee, €30,000 (2007: €33,000; 2006: €30,000). In addition, the first vice chairman and the fourth vice chairman received a gross amount of €36,000 each (2007: €40,000; 2006: €36,000).

Furthermore, the directors receive the following fees for attending board and committee meetings, excluding executive committee meetings, since no attendance fees are received for this committee.

At the proposal of the appointments and remuneration committee, the directors at the board meeting held on December 7, 2007, approved the amounts of fees applicable from January 1, 2008, for attending the board and committee meetings, excluding the executive committee. The agreed-upon gross amounts are as follows:

•		Board of directors: €2,540 for resident directors and €2,057 for non-resident directors.

•		Risk committee and audit and compliance committee: €1,650 for resident directors and €1,335 for non-resident directors.

•		Other committees: €1,270 for resident directors and €1,028 for non-resident directors.

At the meeting held on December 17, 2008, the appointments and remuneration committee proposed to maintain unchanged the amount of fees for attending the meetings of the board of directors and the board committees (excluding the executive committee) as from January 1, 2009. This proposal was approved by the directors at the board meeting held on December 22, 2008.

135

Salary compensation

As provided by our By-laws, the members of the board and of the executive committee are entitled to be remunerated for discharging duties within the Bank other than those duties performed in their capacity as a director.

The table below shows the aggregate salaries received by the Bank’s executive directors, who at December 31, 2007 and 2006 were Emilio Botín, Alfredo Sáenz, Matías R. Inciarte, Ana P. Botín and Francisco Luzón (Juan R. Inciarte became an executive director in 2008, having become a member of the board of directors on March 24, 2008).

The table below includes, with respect to 2008, the total salary received by Juan R. Inciarte in 2008. The numbers for 2007 and 2006 in this table, however, do not include Juan R. Inciarte’s remuneration, therefore, are not comparable.

2008

2007

2006

(in thousands of euros)

Aggregate salaries

25,489

24,315

20,970

Of which: variable compensation

15,240

16,088

13,666

The amount of fixed remuneration received by the executive directors in 2008 were approved by the directors at the board meeting held on December 17, 2007, based on the appointments and remuneration committee’s proposal.

Also, at the board meetings of December 22, 2008 and January 26, 2009, based on the appointments and remuneration committee’s proposal, the directors resolved to reduce by 15% with respect to 2007 the variable remuneration (or bonus) to be received by the executive directors for 2008 (10% in the case of Ana P. Botín).

136

The remuneration and other compensation granted to the directors in 2008 is as follows:


	Thousands of Euros
	2008												2007	2006
	Bylaw-Stipulated Compensation						Salary of Executive			Other
	Annual Compensation				Attendance Fees		Directors (1)			Remuneration
				Appointments
			Audit and	and
		Executive	Compliance	Remuneration		Other		Variable		Three-Year
Directors	Board	Committee	Committee	Committee	Board	Fees	Fixed	(a)	Total	Share Plan	Other	Total	Total	Total

Emilio Botín	106	213	—	—	23	5	1,305	1,987	3,292	1,780	1	5,420	3,910	3,459
Fernando de Asúa	142	213	50	30	23	185	—	—	—	—	—	642	677	590
Alfredo Sáenz	106	213	—	—	23	5	3,595	4,745	8,340	—	608	9,295	9,604	8,099
Matías R. Inciarte	106	213	—	—	23	168	1,661	2,503	4,164	1,661	206	6,541	5,154	4,501
Manuel Soto	142	—	50	30	23	30	—	—	—	—	—	274	306	271
Assicurazioni Generali, Spa.	123	—	—	—	16	—	—	—	—	—	—	140	143	136
Antonio Basagoiti	106	213	—	—	23	168	—	—	—	—	7	517	523	3,477	(4)
Ana P. Botín	106	213	—	—	23	4	1,269	1,786	3,055	608	12	4,021	3,517	3,084
Javier Botín (2)	106	—	—	—	23	—	—	—	—	—	—	129	143	128
Lord Terence Burns	106	—	—	—	16	—	—	—	—	—	—	123	135	122
Guillermo de la Dehesa	106	213	—	30	23	11	—	—	—	—	—	384	427	381
Rodrigo Echenique (**)	106	213	—	30	20	42	—	—	—	—	32	443	562	1,388
Antonio Escámez	106	213	—	—	23	157	—	—	—	—	36	535	550	1,329
Francisco Luzón	106	213	—	—	23	3	1,461	2,753	4,215	1,473	818	6,851	5,620	4,601
Abel Matutes	106	—	50	—	23	16	—	—	—	—	—	194	213	189
Juan R. Inciarte (*)	82	—	—	—	20	106	958	1,466	2,425	1,090	107	3,830	—	—
Luis Ángel Rojo	106	—	50	30	18	25	—	—	—	—	—	229	249	232
Luis Alberto Salazar-Simpson	106	—	50	—	23	19	—	—	—	—	—	198	214	192
Isabel Tocino (***)	106	—	—	—	23	—	—	—	—	—	—	129	103	—
Mutua Madrileña Automovilista (3)	—	—	—	—	—	—	—	—	—	—	—	—	153	148
Jay S. Sidhu (b)	—	—	—	—	—	—	—	—	—	—	—	—	—	58

Total 2008	2,084	2,132	248	149	411	942	10,249	15,240	25,489	6,612	1,827	39,894	—	—

Total 2007	2,324	2,370	275	165	424	813	8,227	16,088	24,315	—	1,517	—	32,203

Total 2006	2,092	2,150	250	150	386	630	7,304	13,666	20,970	—	5,757	—	—	32,385


(*)		Appointed as a member of the board of directors on January 28, 2008. He took office on March 24, 2008, and on that same day he was designated as member of the risk committee.

(**)		Ceased to be a member of the risk committee on March 24, 2008.

(***)		Appointed by co-optation by the board of directors at its meeting on March 26, 2007. Isabel Tocino took office at the meeting held on April 23, 2007. Her appointment was ratified by the shareholders at the annual general meeting held on June 23, 2007.

(a)		Accrued in 2008.

(b)		Appointed by the shareholders at the annual general meeting on June 17, 2006 and ceased to be a director on December 31, 2006.

(1)		Accounted for as personnel expenses in the income statement of the Bank, except for the salary of Ana P. Botín, which is recognized at Banco Español de Crédito, S.A.

(2)		Amount contributed to the Marcelino Botín foundation.

(3)		Ceased to be a director on December 19, 2007.

(4)		Includes €3 million received for duties discharged on the board of directors of Unión Fenosa during the period in which he belonged to this board at the proposal of the Bank. At the proposal of the Appointments and Remuneration Committee, the Bank’s board of directors at its meeting on February 6, 2006 approved this remuneration.

137

The amount recorded under “Other remuneration — Three-year share plan” at December 31, 2008 in the foregoing table is €6.6 million in total. It relates to the remuneration in kind received in 2008 by the Bank’s directors due to the exercise of Banco Santander, S.A. share options granted under the I06 three-year incentive plan (Plan I06) approved by the shareholders at the annual general meeting of Banco Santander, S.A. held on June 18, 2005 and, in the case of Ana P. Botín, to that issued by Banco Español de Crédito, S.A. under a three-year incentive plan for executives of this entity approved by the shareholders at its annual general meeting held on February 28, 2006.

The amounts recorded under “Other remuneration — Other” include, among others, the life and medical insurance costs borne by the Group relating to the Bank’s directors

Compensation to the board members as representatives of the Bank and to Senior Management

Representation on other boards

By resolution of the executive committee, all the remuneration received by the Bank’s directors who represent the Bank on the boards of directors of listed companies in which the Bank has a stake (at the expense of those companies) and which relates to appointments made after March 18, 2002, will accrue to the Group. The compensation received with respect to representation duties of this kind, relating to appointments agreed upon before March 18, 2002, was as follows:

Thousands of euros

Company

2008

2007

2006

Emilio Botín

Shinsei Bank, Ltd.

53.0

50.1

59.9

Fernando de Asúa

CEPSA

97.2

95.6

Antonio Escámez

Attijariwafa Bank

14.8

9.9

5.0

165.0

157.2

160.5

In 2008, Emilio Botín received options to acquire 10,000 shares of Shinsei Bank, Ltd. (Shinsei) at a price of JPY 416 each. Previously, in 2007, 2006 and 2005, Emilio Botín had received, in each year, options to acquire 10,000 Shinsei shares at a price of JPY 555 each for those received in 2007, and options to acquire 25,000 Shinsei shares at a price of JPY 825 each for those received in 2006 and JPY 601 each for those received in 2005. At December 31, 2008, the market price of the Shinsei share was JPY 139 and, therefore, regardless of the stipulated exercise periods, the options granted in those years would not have given rise to any gains had they been exercised.

Furthermore, other directors of the Bank earned a total of €729,000 in 2008 as members of the boards of directors of Group companies (2007: €750,000; 2006: €732,000), the detail being as follows: Lord Burns (Abbey), €651,000; Rodrigo Echenique (Banco Banif, S.A.), €36,000; and Matías R. Inciarte (U.C.I., S.A.), €42,000.

Senior management

Below are the details of the aggregate compensation paid to the Bank’s executive officers (*) in 2008, 2007 and 2006:


	Number		In thousands of euros
	of		Salary Compensation						Other
Year	People (1)		Fixed		Variable		Total		Compensation		Total
2006		26		19,119		34,594		53,713		11,054		64,767
2007		26		19,504		42,768		62,272		10,092		72,364
2008		24		21,219		34,674		55,893		27,598		83,491


(*)		Excluding executive directors’ compensation, which is detailed above.

(1)		The amounts reflect the annual compensation regardless of the number of months in which the position of executive vice president was occupied.

138

Pension commitments, other insurance and other items

The total balance of supplementary pension obligations assumed by the Group relating to its current and retired employees, which amounted to €11,198 million (covered mostly by in-house provisions) at December 31, 2008, includes the obligations to those who have been directors of the Bank during the year and who discharge (or have discharged) executive functions. The total pension obligations to these directors, together with the total sum insured under life insurance policies and other items, amounted to €311 million at December 31, 2008 (December 31, 2007: €264 million; December 31, 2006: €234 million).

The following table provides information on the obligations undertaken and covered by the Group relating to pension commitments and other insurance for the Bank’s executive directors:


	In thousands of euros
	2008				2007				2006
	Total Accrued				Total Accrued				Total Accrued
	Pension		Other		Pension		Other		Pension		Other
	Obligations		Insurance		Obligations		Insurance		Obligations		Insurance
Emilio Botín		25,579		—		22,926		—		21,068		—
Alfredo Sáenz		80,049		10,785		68,070		9,378		55,537		8,155
Matías R. Inciarte		50,894		4,982		44,226		4,529		39,390		4,117
Ana P. Botín		21,737		1,403		17,975		1,403		15,045		1,402
Francisco Luzón		53,083		7,624		45,468		7,624		39,187		6,571
Juan R. Inciarte		9,918		2,875		—		—		—		—

Total		241,260		27,669		198,665		22,934		170,227		20,245

The amounts in the “Accrued pension obligations” column in the foregoing table relate to the accrued present actuarial value of the future annual payments to be made by the Group. These amounts were obtained using actuarial calculations and cover the obligations to pay the respective calculated pension supplements. In the case of Emilio Botín, Alfredo Sáenz, Matías R. Inciarte and Ana P. Botín, these supplements were calculated as 100% of the sum of the fixed annual salary received at the date of effective retirement plus 30% of the arithmetical mean of the last three variable salary payments received. In addition, in the case of Francisco Luzón, to the amount thus calculated will be added the amounts received by him in the year before retirement or early retirement in his capacity as a member of the board of directors or the committees of the Bank or of other Group companies and, in the case of Juan R. Inciarte, 100% of the gross fixed annual salary received at the date of his effective retirement.

On December 17, 2007 and March 24, 2008, the board of directors of the Bank resolved to authorize a change in the contracts of the executive directors and the other members of the Bank’s senior management -the senior executives- granting them the right, on the date of retirement -or pre-retirement, as appropriate- to opt to receive accrued pensions -or amounts similar thereto- in the form of income or capital, i.e. in one single payment, in full but not in part. In order to maintain the financial neutrality for the Group, the amount to be received in the form of capital by the beneficiary at the date of retirement must be the aliquot part of the market value of the assets assigned to cover the mathematical provisions of the policy instrumenting these commitments to senior executives. The senior executives who are still in service on reaching the age of retirement -or who at the date of the contract entered into have passed the age of retirement- must state whether they wish to opt for this form of benefit. Should the senior executive subsequently die while still in service and prior to retirement, the capital of the pension will correspond to his/her heirs.

139

At the board meetings held on July 21, 2008 and April 28, 2009, the directors approved the new terms and conditions of the Bank’s contractual relationship with the executive directors and the senior executives who are not executive directors, in order to comply with the new By-laws (Articles 49.2 and 58.4) and the new pensions regime. These terms and conditions include, among others, those implementing and executing the aforementioned resolutions of December 17, 2007 and the March 24, 2008 resolutions granting the executive directors and other senior executives the option to receive pensions or similar amounts in one single payment.

Pension provisions recognized and reversed in 2008 amounted to €27.0 million and €11,000, respectively, whereas they were €21.6 million and €580,000, respectively, in 2007; and €44.8 million and €629,000, respectively, in 2006.

Additionally, other directors have life insurance policies, the cost of which is borne by the Group. For the amount insured being €3 million at December 31, 2008, 2007 and 2006. Also, the payments made in 2008 to the members of the board entitled to post-employment benefits amounted to €2.6 million.

Share-based payments

Pursuant to Spanish law and our By-laws, the decision to grant compensation linked to the Bank’s commom shares must be made by the shareholders acting at a general shareholders’ meeting, at the proposal of the board of directors, following receipt of a report from the appointments and remuneration committee. Our policy provides that only executive directors may be beneficiaries of compensation systems consisting of the delivery of shares or rights thereto.

140

The detail of these plans granted to directors (see Note 47 to our financial statements) is as follows:

i) Plan I06

In 2004, a long-term incentive plan (I06) was designed which, consisting of options on shares of the Bank, is tied to the achievement of two targets which were achieved. The exercise period is from 15 January 2008 to 15 January 2009. At the date of these consolidated financial statements, Plan I06 had expired. The executive directors are beneficiaries of this plan; the number of Bank share options held by them is indicated below:


	Options										Options Exercised
	at				Options		Options							Number of				Market		Remuneration		Options				Date of		Date of
	December 31,		Exercise		Granted or		at		Options		Number of			Shares		Exercise		Price		Allocated		at		Exercise		Commencement		Expiration of
	2005 and		Price		Exercised		December 31,		Granted		Options			Acquired		Price		Applied		(Thousands		December 31,		Price		of Exercise		Exercise
	2006		(Euros)		Number		2007		Number		Exercised			(***)		(Euros)		(Euros)		of Euros)		2008		(Euros)		Period		Period

Plan I06
Emilio Botín		541,400		9.09		—		541,400		—		(541,400	)		541,400		9.09		12.40		1,780		—		—		—		—
Alfredo Sáenz		1,209,100		9.09		—		1,209,100		—		—					—		—		—		1,209,100		9.09		01/15/08		01/15/09
Matías R. Inciarte		665,200		9.09		—		665,200		—		(332,600	)		67,901		9.09		14.12		1,661		332,600		9.09		01/15/08		01/15/09
Ana P.Botín (*)		293,692		9.09		—		293,692		—		—					—		—		—		293,692		9.09		01/15/08		01/15/09
Francisco Luzón		639,400		9.09		—		639,400		—		(300,000	)		60,656		9.09		14.04		1,473		339,400		9.09		01/15/08		01/15/09
Juan R. Inciarte (**)		419,000		9.09		—		419,000		—		(419,000	)		419,000		9.09		11.72		1,090		—		—		—		—

		3,767,792		9.09		—		3,767,792		—		(1,593,000	)				—		—		6,004		2,174,792		9.09


(*)		Approved by Banesto’s shareholders at its annual general meeting on February 28, 2006.

(**)		Mr. Juan Rodríguez Inciarte was appointed as member of the board of directors in 2008. The data on his options for prior dates relate to the options granted to him as executive prior to his appointment as director.

(***)		Under the three-year I06 incentive plan (see Note 47 to our consolidated financial statements), each purchase option granted entitles the beneficiary to acquire one Bank share at a price of €9.09, and the number of shares acquired on the exercise of the options is determined on the basis of the settlement method used, which can be cash for stock or cashless for cash. In the case of cash-for-stock settlements, the number of shares granted as consideration for the payment in cash of the exercise price is equal to the number of options exercised.

		As detailed in the foregoing table, the remuneration allocated to executive directors due to the exercise of Banco Santander, S.A. share options arising from the I06 three-year incentive plan (see Note 47 to our consolidated financial statements) amounted to €6,004 thousand in 2008. Additionally, the remuneration allocated to Ana P. Botín due to the delivery of Banesto shares under the incentive plan for executives approved by the shareholders at the annual general meeting of Banesto amounted to €608 thousand. The share options under Plan I06 that had not been exercised at December 31, 2008 expired on 15 January 2009.

141

ii) Performance share plan

This multiannual incentive plan is payable in shares of the Bank. The beneficiaries of the plan include the executive directors. This plan will involve successive three-year cycles of share deliveries to the beneficiaries, so that each year one cycle will begin and, from 2009 onwards, another cycle will also end.


	Options				Options
	At		Options		At				Share
	December 31,		Granted		December 31,		Grant		Delivery
	2007		(Number)		2008		Date		Deadline
Plan I09:

Emilio Botín		41,785		—		41,785		06/23/07		07/31/09
Alfredo Sáenz		110,084		—		110,084		06/23/07		07/31/09
Matías R. Inciarte		53,160		—		53,160		06/23/07		07/31/09
Ana P.Botín (*)		27,929		—		27,929		06/23/07		07/31/09
Francisco Luzón		44,749		—		44,749		06/23/07		07/31/09
Juan R. Inciarte (**)		43,322		—		43,322		06/23/07		07/31/09

		321,029		—		321,029

Plan I10:

Emilio Botín		62,589		—		62,589		06/23/07		07/31/10
Alfredo Sáenz		164,894		—		164,894		06/23/07		07/31/10
Matías R. Inciarte		79,627		—		79,627		06/23/07		07/31/10
Ana P.Botín (*)		41,835		—		41,835		06/23/07		07/31/10
Francisco Luzón		67,029		—		67,029		06/23/07		07/31/10
Juan R. Inciarte (**)		64,983		—		64,983		06/23/07		07/31/10

		480,957		—		480,957

Plan I11:

Emilio Botín		—		68,848		68,848		06/21/08		07/31/11
Alfredo Sáenz		—		189,628		189,628		06/21/08		07/31/11
Matías R. Inciarte		—		87,590		87,590		06/21/08		07/31/11
Ana P.Botín (***)		—		46,855		46,855		06/21/08		07/31/11
Francisco Luzón		—		77,083		77,083		06/21/08		07/31/11
Juan R. Inciarte (**)		—		50,555		50,555		06/21/08		07/31/11

		—		520,559		520,559


(*)		Without prejudice to the Banesto shares relating to Ana P. Botín by virtue of the Banesto Share-Based Payment Incentive Plan approved by the shareholders at the annual general meeting of Banesto held on June 27, 2007, the maximum number of shares shown in the foregoing table relates to Ana P. Botin based on the resolution adopted at the Banesto annual general meeting.

(**)		Juan R. Inciarte was appointed as member of the board of directors in 2008. The data on his options for prior dates relate to the options granted to him as an executive prior to his appointment as director.

(***)		Without prejudice to the Banesto shares that might correspond to Ana P. Botín by virtue of any plans that might be approved by the shareholders at the annual general meeting of Banesto, the number of shares shown in the foregoing table relating to the aforementioned executive director must be submitted for approval by the Banesto annual general meeting.

142

iii) Matched deferred bonus plan

Additionally, pursuant to the Obligatory Investment Share Plan (see Note 47 to our financial statements), the current executive directors acquired, prior to February 29, 2008 and February 28, 2009, the number of Bank shares shown in the table below, which involved an investment of €1.5 million in 2008 and €0.8 million in 2009. Executive directors who hold the shares acquired through the Obligatory Investment and remain in the Group’s employ for three years from the date on which the Obligatory Investment is made will be entitled to receive the same number of Bank shares as that composing their initial Obligatory Investment.


	2008-2011		2009-2012
Executive Directors	Cycle		Cycle

Emilio Botín		16,306		19,968
Alfredo Sáenz		37,324		47,692
Matías R. Inciarte		20,195		25,159
Ana P.Botín (*)		13,610		16,956
Francisco Luzón		22,214		27,675
Juan R. Inciarte		14,617		14,738
		124,266		152,188


(*)		In accordance with the resolution adopted by the shareholders at the annual general meeting of Banco Santander held on June 23, 2007, the maximum number of shares relating to Ana P. Botín for the 2008-2011 cycle is that shown in the foregoing table, as approved by the annual general meeting of Banesto held on June 27, 2007. The number of shares relating to Ana P. Botín for the 2009-2012 cycle as beneficiary of this plan is in line with the resolution adopted by the shareholders at the annual general meeting of Banco Santander held on June 21, 2008 and will also be submitted for approval by the annual general meeting of Banesto.

Description of stock option plans and other share-based compensation plans

The Bank has a defined, clear and stable long-term incentive policy for its managers, which also applies to executive directors and other members of senior management, in order to align the interests of the management team with those of the shareholders.

This policy is currently reflected in the four following plans:

1.		Performance shares plan Plan de acciones vinculado a objetivos;

2.		Matched deferred bonus plan Plan de acciones vinculado a inversión obligatoria;

3.		Restricted shares plan Plan de entrega selectiva de acciones; and

4.		Minimum investment program Programa de inversión mínima.

In addition, the Bank had a long-term incentive plan (I-06 plan) that expired on January 15, 2009.

Under Spanish law and our By-laws, the implementation of the first three plans, as well as the I-06 share option plan, requires specific resolutions of the shareholders adopted at the general shareholders’ meeting, which, to date, have been the following:

•

The shareholders acting at the general shareholders meeting of June 18, 2005 authorized a share option plan of the Bank (I-06 plan) linked to certain targets.

•

The shareholders, acting at the general shareholders’ meeting of June 23, 2007, authorized, the first two cycles of the performance share plan (the I-09 and I-10 plans), the first cycle of the matched deferred bonus plan and the restricted shares plan, in the latter case for a 12-month period and up to a maximum of 2,189,004 shares. The maximum limit of all shares to be delivered by application of these programs was fixed at 28,144,334 shares (the “2007 Total Limit”).

•

The shareholders acting at the general shareholders’ meeting of June 21, 2008 authorized the third cycle of the performance share plan (the I-11 plan), the second cycle of the matched deferred bonus plan and the restricted shares plan, in the latter case for a 12-month period and up to a maximum of 1,900,000, shares. The maximum limit of all shares to be delivered by application of these programs was fixed at 19,960,000 shares (the “2008 Total Limit”).

•

The shareholders acting at the general shareholders’ meeting held on June 19, 2009 authorized the fourth cycle of the performance shares plan (the I-12 plan), the third cycle of the matched deferred bonus plan and the restricted shares plan, in the latter case for a 12-month period and up to a maximum of 2,478,000 shares. The aggregate maximum number of shares to be delivered pursuant to these programs was fixed at 26,027,580 shares (the “2009 Total Limit”).

143

I-06 Plan

During 2004, a long-term incentive plan (the I-06 plan) consisting of options on shares of the Bank and tied to the achievement of two targets (increase in the trading price of the Bank’s shares and growth in earnings per share — in both cases above a sampling of comparable banks) was approved at the general shareholders’ meeting of June 18, 2005. The appointments and remuneration committee and the board of directors, at their meetings on March 26, 2007, took note of compliance with the conditions to which the plan was subject, which gave participants therein the right to exercise options to purchase shares of the Bank during the period between January 15, 2008 and January 15, 2009.

As of the date of this annual report on Form 20-F, the plan was cancelled at the end of the exercise period.

Options not exercised as of January 15, 2009 expired without value.

At December 31, 2008, there were 957 Group executives who had not exercised all of their rights under the I-06 plan (2,512 at December 31, 2007), and who were entitled to 29,072,617 options to purchase shares of the Bank (95,056,019 options at December 31, 2007), at an exercise price of € 9.09.

The executive directors are beneficiaries under this plan; the number of Bank share options held by them is indicated previously in this section.

1. Performance shares plan “Plan de acciones vinculado a objetivos”

The performance shares plan aims to be the main instrument for providing medium/long-term incentives and aligning the interests of managers with those of the shareholders. It consists of a multi-year bonus plan payable in shares, in which the executives of the Group, including the executive directors of the Bank, may participate.

A certain number of shares will be promised to each participant every year. The number of shares offered will vary depending on the degree of responsibility of each participant, and the contribution and performance thereof, and the number of shares received will depend on the extent to which participants meet the targets and comply with the conditions set each year.

The plan is structured in three-year cycles, with one ending each year.

As of December 31, 2008, there were three cycles in effect, called I-09, I-10 and I-11. The table below describes the changes therein with respect to the number of participants and the maximum number of shares to be delivered.

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Stock Option Plans and Other Share-based Compensation Plans

Date of

Euros

Commencement

Expiration of

Number of

Exercise

Year

Employee

Number of

of Exercise

Exercise

Price

Granted

Group

Persons

Period

Plans outstanding at January 1, 2006

99,900,000

9.09

Managers

2,601

01/15/08

01/15/09

Options exercised

—

Options cancelled, net (Plan I-06)

(3,648,610

)

9.09

Managers

(44

)

01/15/08

01/15/09

Plans outstanding at December 31, 2006

96,251,390

Options granted (Plan I-09)

10,448,480

—

2007

Managers

5,476

06/23/07

07/31/09

Options granted (Plan I-10)

15,690,283

—

2007

Managers

5,506

06/23/07

07/31/10

Options cancelled, net (Plan I-06)

(1,195,371

)

9.09

Managers

(45

)

01/15/08

01/15/09

Plans outstanding at December 31, 2007

121,194,782

Options exercised (Plan I-06)

(65,983,402

)

9.09

—

Managers

(1,555

)

Options granted (Plan I-10)

46,560

—

2008

Managers

Options granted (Plan I-11)

17,122,650

—

2008

Managers

5,771

Plans outstanding at December 31, 2008

72,380,590

Of which:

Plan I-06

29,072,617

9.09

2006

Managers

957

01/15/08

01/15/09

Plan I-09

10,448,480

—

2007

Managers

5,476

06/23/07

07/31/09

Plan I-10

15,736,843

—

2007

Managers

5,507

06/23/07

07/31/10

Plan I-11

17,122,650

—

2008

Managers

5,771

06/21/08

07/31/11

The above table includes the maximum number of shares to be delivered to executive directors under each of the current cycles of this plan, which are the following:


Executive directors	First Cycle (I-09)		Second Cycle (I-10)		Third Cycle (I-11)
Emilio Botín		41,785		62,589		68,848
Alfredo Sáenz		110,084		164,894		189,628
Matías R. Inciarte		53,160		79,627		87,590
Ana P. Botín		27,929		41,835		46,855
Francisco Luzón		44,749		67,029		77,083
Juan R. Inciarte		43,322		64,983		50,555

1.1. First and second cycle (2007-2009) of the performance shares — I-09 and I-10 plans.

The I-09 and I-10 plans are subject to the following rules:

(i) Beneficiaries: The executive directors, the remaining members of senior management, and such other executives of Santander (excluding Banesto) as are determined by the board of directors, or the executive committee by delegation thereof. As of December 31, 2008, the number of participants under the I-09 plan was 5,476 and under the I-10 plan 5,507, although the board of directors, or the executive committee by delegation thereof, may include (by promotion or admission to the Group) or exclude other persons, without changing the total number of shares authorized for distribution at any time.

(ii) Objectives: The objectives used to determine the number of shares for distribution (the “Objectives”) are based on two parameters:

a) Total Shareholder Return (“TSR”); and

b) Growth in Earnings per Share (“EPS”).

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TSR is deemed to be the difference (expressed as a percentage) between the final value of an investment in ordinary shares in each of the institutions compared and the initial value of the same investment, bearing in mind that any calculation of the final value must take into account dividends or similar items received by the shareholder for this investment during the corresponding period of time as if an investment was made in more shares of the same kind on the first date on which the dividend was payable to shareholders and the average weighted share price on that date. In order to determine the aforementioned initial and final value, the share prices established in item (iii) below will be adopted.

Growth in EPS is deemed to be the percentage difference between earnings per ordinary share reported in the annual and consolidated financial statements at the beginning and the end of the comparison period, as established in item (iii) below.

At the end of the respective cycle, the TSR and the growth in EPS for Santander and each of the group institutions identified below (the “Reference Group”) will be calculated and listed in decreasing order. Each of these parameters (TSR and EPS growth) will have a 50% weighting in determining the percentage of shares to distribute, based on the following scale and Santander’s relative position within the Reference Group.


	Percentage of			Santander’s	Percentage of
	shares to be			position in the	shares to be
	delivered over			EPS growth	delivered over
Santander’s position in the TSR ranking	maximum			ranking	maximum
1^st to 6^th		50	%	1^st to 6^th		50	%
7^th		43	%	7^th		43	%
8^th		36	%	8^th		36	%
9^th		29	%	9^th		29	%
10^th		22	%	10^th		22	%
11^th		15	%	11^th		15	%
12^th or more		0	%	12^th or more		0	%

The Reference Group is composed of the following 21 entities:


Bank		Country
ABN AMRO Holding		The Netherlands
Banco Itau		Brazil
Bank of America		United States
Barclays		United Kingdom
BBVA		Spain
BNP Paribas		France
Citigroup		United States
Credit Agricole		France
HBOS		United Kingdom
HSBC Holdings		United Kingdom
Intesa Sanpaolo		Italy
JP Morgan Chase & Co.		United States
Lloyds TSB Group		United Kingdom
Mitsubishi		Japan
Nordea Bank		Sweden
Royal Bank of Canada		Canada
Royal Bank of Scotland Group		United Kingdom
Société Générale		France
UBS		Switzerland
Unicredito Italiano		Italy
Wells Fargo & Co.		United States

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If any of the Reference Group institutions are acquired by another company, cease to list their shares or are liquidated, they will be excluded from the Reference Group. In this case and any similar cases, comparison with the Reference Group will be conducted in a manner which, for each of the parameters studied (TSR and EPS growth), the maximum percentage of the shares will be earned if Santander falls within the first quartile (including the 25th percentile) of the Reference Group; no shares will be earned if Santander falls below the Reference Group median (50th percentile); a maximum of 30% of the shares will be earned at the median (50th percentile) and, at positions between (but not including) the median and the first quartile (25th percentile), the shares earned will be calculated by linear interpolation.

(iii) Duration: The I-09 plan covers the years 2007 and 2008. Therefore, the objectives linked to TSR will use the daily average weighted volume of the average weighted listing prices for the 15 trading sessions immediately preceding but not including April 1, 2007 to calculate the initial value and the 15 trading sessions immediately preceding but not including April 1, 2009 to calculate the final value; the objectives linked to EPS growth will use the consolidated financial statements for the year ended December 31, 2006 and the consolidated financial statements for the year ended December 31, 2008. To receive shares, those qualified must continue to be actively employed by the Group, except in the event of death or disability, through June 30, 2009. Any distribution of shares will be made no later than July 31, 2009, on the date established by the board of directors, or the executive committee by delegation thereof.

The I-10 plan covers the years 2007, 2008 and 2009. Therefore, the objectives linked to TSR will use the daily average weighted volume of the average weighted listing prices for the 15 trading sessions prior to April 1, 2007 to calculate the initial value and the 15 trading sessions immediately preceding but not including April 1, 2010 to calculate the final value; the objectives linked to EPS growth will use the consolidated financial statements for the year ended December 31, 2006 and the consolidated financial statements for the year ended December 31, 2009. To receive shares, those qualified must continue to be actively employed by the Group, except in the event of death or disability, through June 30, 2010. Any distribution of shares will be made no later than July 31, 2010, on the date established by the board of directors, or the executive committee by delegation thereof.

The shares will be distributed by the Bank or another Group company, as applicable.

(iv) Maximum number of shares to be distributed:

The maximum number of shares to be distributed to each of the beneficiaries will, subject to other limitations, be the product of dividing a percentage of the beneficiary’s fixed annual remuneration on the date of adoption of this resolution, by the daily average weighted volume of the average weighted listing prices of the Bank’s shares during the 15 trading sessions immediately preceding May 7, 2007, rounded up to the second decimal point, which was €13.46 per share.

For executive directors, the annual fixed compensation percentage will be 47.4% for the I-09 plan and 71% for the I-10 plan, except for Ana P. Botín, to whom 70% of these percentages shall apply.

Therefore, the maximum number of shares distributed to each of the executive directors will be the following:


Executive directors	First Cycle (Plan I-10)		Second Cycle (Plan I-11)
Emilio Botín		41,785		62,589
Alfredo Sáenz		110,084		164,894
Matías R. Inciarte		53,160		79,627
Ana P. Botín		27,929		41,835
Francisco Luzón		44,749		67,029

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Without prejudice to the Banesto shares which correspond to Ana P. Botín pursuant to the “Banesto share distribution Incentive Plan” approved by the shareholders at a general shareholders’ meeting of Banesto on June 27, 2007, the maximum number of shares attributable to this executive director is the number stated in the preceding table, pursuant to the resolution adopted at the general shareholder meeting mentioned in this paragraph.

Following approval of the I-09 and I-10 plans at the general shareholders’ meeting of Santander held on June 23, 2007, the board of directors, at its meeting of January 28, 2008, approved the interim appointment of the executive vice president Juan R. Inciarte to the position of director at its meeting on January 28, 2008. Such appointment was ratified by the shareholders acting at the general shareholders’ meeting held on June 21, 2008.

The maximum number of shares distributable to Juan R. Inciarte was approved by the executive committee at its meeting on December 3, 2007, after a report issued by the appointments and remuneration committee on November 26, 2007, and with the approval of the board of directors at its meeting on December 17, 2007, in the following amounts:


	First Cycle (Plan I-10)		Second Cycle (Plan I-11)
Juan R. Inciarte		43,322		64,983

Shares distributed to the remaining members of senior management are limited to a maximum of 845,787 shares in the I-09 plan and 1,268,482 shares in the I-10 plan.

Finally, at the aforementioned meeting on November 26, 2007, the committee reported favorably on the regulations for the I-09 and I-10 plans, which was approved by the executive committee on December 3, 2007.

1.2. Third cycle (2009-2011) of the performance shares — I-11 plan.

The I-11 plan is subject to the following rules:

(i) Beneficiaries: The board of directors or the executive committee may determine the beneficiaries comprising the executive directors and other members of the senior management as well as such other managers of the Santander Group (excluding Banesto). As of December 31, 2008, there were a total of 5,771 participants, although the board of directors, or the executive committee, may decide to include (by promotion or admission to the Group) or exclude others, without changing the total maximum number of shares authorized for distribution at any time.

(ii) Objectives: The objectives will determine the number of shares to be delivered (the “Objectives”). They are linked to two indicators:

	a)		Total Shareholder Return (“TSR”); and

	b)		Growth in Earnings per Share (“EPS”).

TSR shall mean here the difference (stated as a percentage ratio) between the value of an investment in common shares in each of the compared institutions at the end of the period and the value of the same investment at the beginning of the period. To calculate such value at the end of the period, the dividends or similar items received by the shareholders for such investment during the respective period of time will be considered as if they had been invested in additional shares of the same type on the first date on which the dividend is due to the shareholders and at the average weighted listing price on such date. The listing prices set forth in paragraph (iii) below shall be used to determine such values at the beginning and at the end of the period.

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EPS growth shall here mean the percentage ratio between the earnings per common share as disclosed in the consolidated annual financial statements at the beginning and at the end of the comparison period, as determined in paragraph (iii) below.

At the end of the cycle, the TSR and EPS growth of Santander and of each of the entities of the group defined below (“Reference Group”) will be calculated and will be ranked in descending order. Each of the two indicators (TSR and EPS growth) shall separately have a 50% weight in the determination of the percentage of shares to be delivered, on the basis of the following scale and according to Santander’s relative position within the Reference Group:


				Santander’s
	Percentage of			position in the	Percentage of
	shares earned over			EPS growth	shares earned over
Santander’s position in the TSR ranking	maximum			ranking	maximum
1st to 6th		50	%	1st to 6th		50	%
7th		43	%	7th		43	%
8th		36	%	8th		36	%
9th		29	%	9th		29	%
10th		22	%	10th		22	%
11th		15	%	11th		15	%
12th onwards		0	%	12th onwards		0	%

The Reference Group is composed of the following 21 entities:


Bank		Country
Itaú Unibanco		Brazil
Bank of America		United States
Barclays		United Kingdom
BBVA		Spain
BNP Paribas		France
Citigroup		United States
Credit Agricole		France
Deutsche Bank		Germany
HBOS		United Kingdom
HSBC Holdings		United Kingdom
Intesa Sanpaolo		Italy
JP Morgan Chase & Co.		United States
Lloyds TSB Group		United Kingdom
Mitsubishi		Japan
Nordea Bank		Sweden
Royal Bank of Canada		Canada
Royal Bank of Scotland Group		United Kingdom
Société Générale		France
UBS		Switzerland
Unicredito Italiano		Italy
Wells Fargo & Co.		United States

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If any of the entities of the Reference Group is acquired by another company, is delisted or otherwise no longer continues in existence, it will be removed from the Reference Group. In such case and in any other similar case, the comparison to the Reference Group will be made in such a way that, for each of the indicators considered (TSR and EPS growth), the maximum percentage of shares will be earned if Santander is included in the first quartile (including the 25%ile) of the Reference Group; no share will be earned if Santander is below the mean (50%ile) of the Reference Group; 30% of the maximum number of shares will be earned in the mean (50%ile) and, for intermediate positions between (but not including) the mean and the first quartile (not including the 25%ile), it will be calculated by linear interpolation.

(iii) Term: The I-11 plan will comprise 2008, 2009 and 2010. Accordingly, based on the objective of TSR, the daily average weighted volume of the average weighted listing prices of the fifteen trading sessions immediately preceding (but not including) April 1, 2008 will be taken into account (to calculate the value at the beginning of the period) and that of the fifteen trading sessions immediately preceding (but not including) April 1, 2011 (to calculate the value at the end of the period). Based on the objective of EPS growth, taking into account the distorting effect that the extraordinary circumstances affecting the financial markets have had on the results of some of the entities within the Reference Group in 2007, the consolidated financial statements for the period ended December 31, 2006, and the consolidated financial statements for the period ended December 31, 2010, will be taken into account. To receive the shares, the beneficiary in question will be required to have been in active service with the Group, except in the event of death or disability, through June 30, 2011. Delivery of the shares, if appropriate, will be made not later than July 31, 2011, on the date determined by the board of directors, or by the executive committee by delegation thereof.

The shares shall be delivered by the Bank or by another company of the Group, as the case may be.

(iv) Maximum number of shares to be delivered:

Subject to the other limits set forth in this resolution, the maximum number of shares to be delivered to each beneficiary shall be the result of dividing a percentage of the beneficiary’s fixed annual compensation on the date of adoption of this resolution by €13.46 per share, which is the same amount provided for such purposes for the I-09 and I-10 plans approved in 2007.

In the case of executive directors, such percentage of their fixed annual compensation shall be 71%, except for Ana P. Botín, for whom 70% of such percentage shall be applied.

Accordingly, the number of shares to be delivered to each executive director shall not exceed the following:


Executive directors	Third cycle (Plan I-11)
Emilio Botín		68,848
Alfredo Sáenz		189,628
Matías R. Inciarte		87,590
Ana P. Botín		46,855
Francisco Luzón		77,083
Juan R. Inciarte		50,555

The maximum number of shares referred to in the preceding table corresponding to Ana P. Botín must be submitted for approval at such meeting.

At its meeting of December 17, 2008, the appointments and remuneration committee reported favorably on the regulations for the third cycle of the performance shares plan, which was approved by the executive committee of the Bank on December 22, 2008.

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1.3. Fourth cycle (2010-2012) of the performance shares — I-12 plan.

The I-12 plan is subject to the following rules:

(i) Beneficiaries: The executive directors, other members of senior management and other managers of the Santander Group (excluding Banesto). The overall number of participants is expected to be approximately 6,500, although the board of directors, or the executive committee, may decide to include (by promotion or addition to the Group) or exclude other participants, without changing the maximum overall number of shares to be delivered that is authorized at any time.

(ii) Objectives: The criteria used to determine the number of shares for distribution (the “Objectives”) are linked to Total Shareholder Return (“TSR”). TSR shall mean here the difference (expressed as a percentage) between the final value of an investment in common shares in each of the compared institutions at the end of the period and the value of the same investment at the beginning of the period, taking into account that dividends or other similar items received by the shareholders for such investment during the corresponding period of time will be considered for the calculation of such final value as if they had been invested in more shares of the same kind on the first date on which the dividend or similar item was due to the shareholders and at the average weighted listing price on such date. The determination of such initial and final values will be based on the listing prices indicated in sub-section (iii) below.

At the end of the cycle, the TSR for Santander and each of the entities of the group identified below (the “Reference Group”) will be calculated and will be listed in descending order. The application of the TSR indicator will determine the percentage of shares to be distributed, based on the following scale and on the relative position of Santander within the Reference Group:


	Percentage of
	shares earned over
Santander’s position in the TSR ranking	maximum
1st to 5th		100.0	%
6th		82.5	%
7th		65.0	%
8th		47.5	%
9th		30.0	%
10th onwards		0	%

The Reference Group is made up of the following 16 entities:


Bank		Country
Itaú Unibanco Banco Múltiplo		Brazil
BBVA		Spain
BNP Paribas		France
Credit Suisse		Switzerland
HSBC Holdings		United Kingdom
ING Group		The Netherlands
Intesa Sanpaolo		Italy
JP Morgan Chase & Co.		United States of America
Mitsubishi UFJ Financial Group		Japan
Nordea Bank		Sweden
Royal Bank of Canada		Canada
Société Générale		France
Standard Chartered		United Kingdom
UBS		Switzerland
UniCredit		Italy
Wells Fargo & Co.		United States of America

151

The board, or the executive committee, will, after a report from the appointments and remuneration committee, have the power to change, if appropriate, the composition of the Reference Group in the event of unforeseen circumstances that may affect the entities initially comprised in such Group. In such cases, no shares will be earned if Santander ranks below the mean (50%ile) of the Reference Group; the maximum percentage of shares will be earned if Santander is included in the first quartile (including the 25%ile) of the Reference Group; 30% of the maximum number of shares will be earned at the mean (50%ile); and, for intermediate positions between (but excluding) the mean and the first quartile (excluding the 25%ile), it will be calculated by linear interpolation.

(iii) Duration: The I-12 plan will comprise 2009, 2010 and 2011. For purposes of the criteria related to TSR, the average weighted by daily volume of the average weighted listing prices of the fifteen trading sessions immediately preceding (but not including) April 1, 2009 will be taken into account (to calculate the value at the beginning of the period) and that of the fifteen trading sessions immediately preceding (but not including) April 1, 2012 (to calculate the value at the end of the period). To receive the shares, the beneficiary in question will be required to have been in active service with the Group, except in the event of death or disability, through June 30, 2012. Delivery of the shares, if appropriate, will be made not later than July 31, 2012, on the date determined by the board of directors, or by the executive committee.

The shares will be delivered by the Bank or by another company of the Group, as the case may be.

(iv) Maximum number of shares to be delivered:

The number of shares to be delivered to each executive director shall not exceed the following:


Executive directors	Fourth cycle (Plan I-12)
Emilio Botín		82,941
Alfredo Sáenz		228,445
Matías R. Inciarte		105,520
Ana P. Botín		56,447
Francisco Luzón		92,862
Juan R. Inciarte		60,904

The maximum number of shares referred to in the preceding table corresponding to Ana P. Botín must be submitted for approval at Banesto’s general shareholders’ meeting.

2. Obligatory investment plan with matched deferred bonus in shares or matched deferred bonus plan “Plan de acciones vinculado a inversión obligatoria”

Executive directors and other members of the Bank’s senior management, as well as other officers of the Group participate in this multi-year incentive plan payable in Santander shares, under which they were required to dedicate 10% of gross annual variable remuneration (or bonus) of 2007, 2008 and 2009 to acquire shares of the Bank, within the limits approved by the shareholders.

The holding of such shares and continuity of the participant with the Group for a period of three years shall entitle the participant to receive the same number of shares as that initially purchased on a mandatory basis (one share for each share purchased).

152

As of the date of this annual report on Form 20-F, the mandatory investment of each executive director, for each of the first two cycles of this plan, has been as follows:


Executive directors	First Cycle		Second Cycle
Emilio Botín		16,306		19,968
Alfredo Sáenz		37,324		47,692
Matías R. Inciarte		20,195		25,159
Francisco Luzón		22,214		27,675
Ana P. Botín		13,610		16,956
Juan R. Inciarte		14,617		14,738

The 10% investment has not been reached due to the limitation on the number of shares approved by the shareholders.

2.1. First Cycle (2008-2010) of the matched deferred bonus plan.

The first cycle of the plan is subject to the following rules:

(i) Beneficiaries: The executive committee, on its meeting of January 28, 2008, determined, by delegation of the board of directors, the 32 persons who are currently the beneficiaries. This group is comprised of the executive directors and other members of the Bank’s senior management as well as other main executives of Grupo Santander (excluding Banesto).

Without prejudice to the foregoing, new participants may be included in the plan following promotion, admission into the Group or for other reasons, without modifying its terms and conditions, at the discretion of the board of directors, or the executive committee acting under powers delegated to it by the board.

(ii) Operation: Beneficiaries must set aside 10% of their 2007 gross annual variable compensation (or bonus) to acquire Bank shares on the market (the “Mandatory Investment”). Pursuant to the resolution of the shareholders, the Mandatory Investment was made prior to February 29, 2008.

Retention of shares acquired by Mandatory Investment and participants’ continued service within Santander for a period of three years following the Mandatory Investment will entitle the participant to receive from the Bank or, as applicable, another Group company, a number of Santander shares equal to those initially acquired, i.e., based on a ratio of one share for each share acquired through the Mandatory Investment.

(iii) Duration: This first cycle corresponds to 2008-2010. The Bank will distribute shares, as applicable, between January 1 and April 1, 2011, on the date specified by the board, or the executive committee acting under powers delegated to it by the board, within a period of one month from the third anniversary of the Mandatory Investment.

The Mandatory Investment of each executive director has been as follows:


Executive directors	No. of shares
Emilio Botín		16,306
Alfredo Sáenz		37,324
Matías R. Inciarte		20,195
Ana P. Botín		13,610
Francisco Luzón		22,214

The number of shares acquired by Ana P. Botín as beneficiary of this plan is consistent with the resolutions agreed to by the shareholders acting at the General Shareholders’ Meeting of Banco Santander and Banesto held on June 23, 2007 and June 27, 2007, respectively.

The number of shares purchased by Juan R. Inciarte is 14,617.

153

In order to set the number of shares acquired by the executive directors in execution of this Mandatory Investment Plan, it has been taken into account the maximum number of shares agreed to by the shareholders acting at the general shareholders’ meeting held on June 23, 2007 (the 2007 Total Limit, as defined above).

2.2. Second Cycle (2009-2011) of the matched deferred bonus plan.

The second cycle of the plan is subject to the following rules:

(i) Beneficiaries: The executive committee, at its meeting of January 26, 2009 determined, by delegation of the board of directors, the 32 persons (currently 31) who are the beneficiaries of this plan and who include executive directors and other members of the Bank’s senior management, as well as other officers of the Santander Group (excluding Banesto). Without prejudice to the foregoing, new participants may be included in the plan as it may be advisable to include, at the discretion of the board of directors, or the executive committee by delegation thereof, as a result of promotion, admission to the Group or other reasons, without amending the other terms and conditions thereof.

(ii) Operation: Beneficiaries shall use 10% of their gross variable annual remuneration (or bonus) for 2008 to purchase shares of the Bank on the market (the “Mandatory Investment”). The Mandatory Investment has been made, pursuant to the resolution of the shareholders adopted at the general shareholders’ meeting, prior to February 28, 2009.

The holding of the shares acquired in the Mandatory Investment and the continuity of the participant with the Santander Group for a period of three years following the date of the Mandatory Investment, shall entitle the participant to receive from the Bank or another company of the Group, as the case may be, the same number of Santander shares as that initially purchased on a mandatory basis, i.e., at the rate of one share for each share purchased in the Mandatory Investment.

(iii) Term: This second cycle covers the 2009-2011 period. The Bank will deliver the shares, if applicable, between January 1 and April 1, 2012, on the specific date that may be determined by the board, or the executive committee by delegation thereof, within one month of the third anniversary of the Mandatory Investment.

The maximum number of shares that Ana P. Botín is entitled to receive will likewise be submitted for approval to the shareholders of Banesto at a general shareholders’ meeting.

The Mandatory Investment of each executive director has been as follows:


Executive directors	No. of shares
Emilio Botín		19,968
Alfredo Sáenz		47,692
Matías R. Inciarte		25,159
Ana P. Botín		16,956
Francisco Luzón		27,675
Juan R. Inciarte		14,738

The 2008 Total Limit mentioned above has been taken into account to determine the shares acquired by executive directors in the implementation of the second cycle of this matched deferred bonus plan.

2.3 Third cycle (2010-2012) of the matched deferred bonus plan.

The third cycle of the plan is subject to the following rules:

(i) Beneficiaries: The board of directors, or the executive committee, will determine the beneficiaries (currently expected to be 32 of them) comprising the executive directors, the other members of the senior management of the Bank, and the other executives of the Santander Group (excluding Banesto). New participants, however, may be added to the Plan as are appropriate as a result of promotion, admission to the group or other reasons, in the opinion of the board of directors or of the executive committee, without modifying the other terms and conditions thereof.

154

(ii) Operation: Beneficiaries shall mandatorily use 10% of their 2009 gross variable annual compensation (or bonus) to purchase Bank shares on the market (the “Mandatory Investment”). The Mandatory Investment shall be made not later than February 28, 2010. The board of directors, or the executive committee by delegation therefrom, may reduce such period.

The beneficiaries of the plan shall be entitled to receive from the Bank or from another company of the Group, as the case may be, the same number of Santander shares as that initially purchased on a mandatory basis, i.e., at the rate of one share for each share acquired in the Mandatory Investment, so long as the following conditions are fulfilled during a period of three years from the Mandatory Investment:

	a)		that the shares acquired in the Mandatory Investment are maintained;

	b)		that the participant remains with the Santander Group; and

	c)		that none of the following circumstances is present:

	•		deficient financial performance of the Group;

	•		non-compliance by the beneficiary of the codes of conduct and other internal regulations, including in particular the internal regulations on risks, which may be applicable to the manager; or

	•		a material restatement of the entity’s financial statements, except when it is appropriate in accordance with a change in the accounting laws and regulations.

The board of directors, after a report from the appointments and remuneration committee, will determine (i) the existence of the aforementioned circumstances and, in such case, (ii) their effects on the number of shares corresponding to each beneficiary, with the power to modulate them depending on the existing circumstances.

In addition, in the event that the sum of 10% of the annual variable compensation (bonus) for 2009 of plan beneficiaries, when invested in Bank shares, results in the Mandatory Investment of all beneficiaries exceeding the aggregate maximum number of shares set by the board of directors, or the executive committee by delegation therefrom, within the 2009 Total Limit, as defined above, the amount to be invested by each beneficiary shall be reduced proportionately so as not to exceed such Total Limit.

(iii) Term: This third cycle comprises 2010-2012. The delivery of shares by the Bank will be made, if appropriate, between January 1 and April 1, 2013, on the specific date to be determined by the board of directors, or the executive committee, within one month of the third anniversary of the date on which the Mandatory Investment was made.

The Mandatory Investment of each executive director shall be the result of applying sub-section (ii) above, with the following maximum limits:


Executive directors	Maximum no. of shares
Emilio Botín		44,359
Alfredo Sáenz		105,950
Matías R. Inciarte		55,893
Ana P. Botín		39,885
Francisco Luzón		61,482
Juan R. Inciarte		32,742

The maximum number of shares for Ana P. Botín will also be submitted to the shareholders at the Banesto general shareholders’ meeting for approval.

155

3. Restricted shares plan “Plan de entrega selectiva de acciones”

This plan consists of the delivery of shares free of charge subject to mandatory continuity with the Group for a period of three to four years. After completion of the required minimum established in each case, the participant will have the right to delivery of the shares.

The Bank plans the use thereof selectively as an instrument to retain or hire managers or employees at the Bank and other companies of the Group, with the exception of executive directors, and the board of directors, or the executive committee by delegation thereof, shall decide on the use of this instrument. It must also respect the total limits approved by the shareholders acting at the respective general shareholders’ meeting.

The limit authorized by the shareholders at the general shareholders’ meeting of June 23, 2007 and June 21, 2008 expired without any share delivery commitments having been assumed.

As of the date of this annual report on Form 20-F, the current limit is the one authorized by the shareholders at the ordinary general shareholders’ meeting of June 19, 2009, which is a maximum of 2,478,000 shares and in respect of which no delivery commitments had been assumed as of such date.

•

Maximum limit of shares of the Restricted Shares Plan.

The shareholders acting at the general shareholders’ meeting held on June 19, 2009, approved the delivery of Bank shares up to a maximum of 2,478,000 shares to be used selectively as an instrument to retain or hire managers or employees of the Bank or of other companies of the Group, with the exception of the executive directors. The board of directors, or the executive committee by delegation therefrom, shall make all decisions regarding the use of this instrument. The 2009 Total Limit as defined earlier in this section shall also be observed.

A minimum period of permanence with the Group of 3 to 4 years will be required of each participant. At the end of the minimum period established in each case, the participant will be entitled to delivery of the shares.

The authorization granted may be used to make commitments to deliver shares for 12 months following the date on which such authorization is granted.

4. Minimum investment program “Programa de inversión mínima”

Senior executives of the Group, including executive directors, must own a specific number of Santander shares on a permanent basis while serving at the Bank.

This obligation currently affects the Group’s 32 highest-ranking executives, including the Bank’s executive directors, and requires that they have invested in a number of Santander shares equivalent to one year’s fixed remuneration, and that they comply with this obligation within a maximum period of 5 years as from March 26, 2007.

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The option plans on shares of the Bank originally granted by management of Abbey to its employees (on Abbey shares) are as follows:

Pounds

Date of

Sterling (*)

Commencement

Date of Expiry

Number of

Exercise

Year

Employee

Number of

of Exercise

Price

Granted

Group

Persons

Period

Plans outstanding at January 1, 2006

14,122,681

3.41

Options granted (MTIP)

2,825,123

7.50

2005 and 2006

Managers

174

First half of 2008

Options exercised

(5,214,171

)

3.41

Of which:

Executive Options

(87,659

)

4.07

Employee Options

(33,000

)

5.90

Sharesave

(5,093,512

)

3.38

Options cancelled (net) or not exercised

(1,379,401

)

—

Plans outstanding at December 31, 2006

10,354,232

4.32

Of which:

Executive Options

178,026

4.11

2003/2004

Managers

03/26/06

03/24/13

Sharesave

7,638,791

3.32

1998/2004

Employees

4,512

(**)

04/01/06

09/01/11

MTIP

2,537,415

9.39

2005 and 2006

Managers

170

First half of 2008

Options granted (MTIP)

—

Options exercised

(1,535,325

)

3.81

Of which:

Executive Options

(33,904

)

3.96

Sharesave

(1,501,421

)

3.81

Options cancelled (net) or not exercised

(770,595

)

—

Plans outstanding at December 31, 2007

8,048,312

5.34

Of which:

Executive Options

144,122

4.15

2003/2004

Managers

03/26/06

03/24/13

Sharesave

5,684,340

3.18

1998/2004

Employees

2,239

(**)

04/01/06

09/01/11

MTIP

2,219,850

10.88

2005 and 2006

Managers

157

First half of 2008

Options granted (Sharesave)

5,196,807

7.69

2008

Employees

6,556

(**)

11/01/11

11/01/12

Options exercised

(6,829,255

)

4.91

Of which:

Executive Options

(132,107

)

4.11

Sharesave

(4,506,307

)

3.07

MTIP

(2,190,841

)

8.73

Options cancelled (net) or not exercised

(262,868

)

4.87

Of which:

Sharesave

(233,859

)

4.13

MTIP

(29,009

)

10.88

Plans outstanding at December 31, 2008

6,152,996

7.00

Of which:

Executive Options

12,015

4.54

2003/2004

Managers

03/26/06

03/24/13

Sharesave

6,140,981

7.00

1998/2004/2008

Employees

7,092

(**)

04/01/06

05/01/14


(*)		At December 31, 2008, the euro/pound sterling exchange rate was EUR 1.04987 / GBP 1 (December 31, 2007: EUR 1.36360 / GBP 1).

(**)		Number of accounts/contracts. A single employee may have more than one account/contract. On September 30, 2008, 4,493 contracts were delivered with an execution date three years thereafter and 2,063 contracts with an execution date five years thereafter. The date of commencement of all these contracts is November 1, 2008.

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In 2005 the Group designed a Medium-Term Incentive Plan (MTIP) involving the delivery of Bank shares to Abbey executives. Under the plan, the effective allocation of the shares in 2008 is tied to the achievement of business targets by Abbey (in terms of net profit and income). This Plan was approved by the shareholders at the annual general meeting on June 17, 2006. Subsequently, it was considered necessary to amend the conditions of the Plan in order to reflect the impact of the sale of Abbey’s life insurance business to Resolution on the income targets of Abbey for 2007. The board of directors, after obtaining a favorable report from the appointments and remuneration committee, submitted this amendment for ratification by the shareholders at the annual general meeting held on June 23, 2007. The amendment was approved. In the first half of 2008, all options under this plan were exercised, and the plan was cancelled on June 30, 2008.

In 2008 the Group launched a voluntary savings scheme for Abbey employees (“Sharesave Scheme”) whereby employees who join the scheme will have between GBP 5 and GBP 250 deducted from their net monthly pay over a period of three or five years. When this period has ended, the employees may use the amount saved to exercise options on shares of the Bank at an exercise price calculated by reducing by up to 20% the average purchase and sale prices of the Bank shares in the first three trading days of September 2008. This scheme was approved by the shareholders at the annual general meeting held on June 31, 2008 and is authorized by the UK tax authorities (HMRC).

The shareholders acting at the general shareholders’ meeting held on June 19, 2009 has approved a new voluntary savings plan applicable to the employees of Abbey National plc., of companies within the subgroup thereof and of the other companies of the Santander Group registered in the United Kingdom (and in which the Group directly or indirectly holds at least 90% of the capital), including employees at United Kingdom branches of Banco Santander, S.A. or of companies within its Group (in which the Group directly or indirectly holds at least 90% of the capital). Each of the subgroups and companies will finally decide whether or not to apply this plan to its employees. The characteristics of this plan (“sharesave scheme”) are as follows:

A plan in which between 5 and 250 pounds sterling is deducted from the employee’s net salary every month, as chosen by the employee, who may, at the end of the chosen period (3 or 5 years), choose between collecting the amount contributed, the interest accrued and a bonus (tax-exempt in the United Kingdom), or exercising options on shares of Banco Santander, S.A. in an amount equal to the sum of such three amounts at a fixed price. In case of voluntary resignation, the employee will recover the amount contributed to that time, without interest, and will receive a slightly reduced bonus, but will forfeit the right to exercise the options.

The exercise price in pounds sterling shall be the result of reducing by up to a maximum of 20% the average of the purchase and sale prices at the close of trading in London for the 3 trading days prior to the reference date. In the event that these listing prices are unavailable for any reason, such reduction shall be applied to the average price weighted by average traded volumes on the Spanish Continuous Market for the 15 trading days prior to the reference date. This amount shall be converted into pounds sterling for each day of listing at the average exchange rate for that day as published in the Financial Times, London edition, on the following day. The reference day shall be set as the day of final approval of the plan by the British Tax Authority (“invitation date”) and shall occur between 21 and 41 days following the date of publication of the consolidated results of Banco Santander, S.A. for the first half of 2009.

The employees must decide upon their participation in the plan within the period between 42 and 63 days following the publication of the consolidated results of Banco Santander, S.A. for the first half of 2009.

The maximum monthly amount that each employee may assign to all voluntary savings plans subscribed by him/her (whether for the plan referred to in this resolution or other past or future “sharesave” plans) is 250 pounds Sterling.

The maximum number of shares of Banco Santander, S.A. to deliver under this plan, approved for 2009 is 10,692,804, equal to 0.13% of the share capital as of the date hereof.

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The plan is subject to the approval of the Tax Authority of the United Kingdom.

C. Board practices

Date of expiration of the current term of office of the directors and the period during which the directors have served in that office:

The period during which the directors have served in their office is shown in the table under Section A of this Item 6.

The date of expiration of the current term of office is shown in the table below:


		Date of
Name		expiration (1)
Emilio Botín		1^st half 2013
Fernando de Asúa		1^st half 2011
Alfredo Sáenz		1^st half 2011
Matías R. Inciarte		1^st half 2014
Manuel Soto		1^st half 2014
Assicurazioni Generali, S.p.A.		1^st half 2012
Antonio Basagoiti		1^st half 2012
Ana P. Botín		1^st half 2011
Javier Botín		1^st half 2010
Lord Burns		1^st half 2011
Guillermo de la Dehesa		1^st half 2014
Rodrigo Echenique		1^st half 2011
Antonio Escámez		1^st half 2012
Francisco Luzón		1^st half 2012
Abel Matutes		1^st half 2014
Juan R. Inciarte		1^st half 2013
Luis Ángel Rojo		1^st half 2013
Luis Alberto Salazar-Simpson		1^st half 2013
Isabel Tocino		1^st half 2011


(1)		Pursuant to the provisions of our By-laws, one-fifth of the board will be renewed every year, based on length of service and according to the date and order of their respective appointments.

The principal terms and conditions of the contracts entered into by the Bank with its executive directors are as follows:

(i) Exclusivity and non-competition

Executive directors may not enter into other service contracts with other companies or institutions, unless prior authorization is obtained from the board of directors. In addition, the contracts contain non-compete provisions, prohibiting executive directors from providing services to companies engaged in activities of a nature similar to that of the Bank or the consolidated Group.

(ii) Code of conduct

Executive directors are required to observe the provisions contained in the Rules and Regulations of the Board. They also must observe the provisions of Grupo Santander’s General Code of Conduct and the Code of Conduct in the Securities Market, specifically with respect to rules of confidentiality, professional ethics and conflict of interests.

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(iii) Remuneration

The remuneration for undertaking their executive responsibilities is compatible with the joint participation in the year’s profits (annual retainer and attendance fees) to which directors are entitled, as it is expressly stated by the By-laws and the Rules and Regulations of the Board.

a. Fixed remuneration

The amount of fixed remuneration is established on the basis of market standards. In fiscal years 2006, 2007 and 2008, fixed remuneration represented on average, 34.8%, 33.8%, and 40.2%, respectively (with bonuses representing 65.2%, 66.2% and 59.8%, respectively).

b. Annual variable remuneration (or bonus)

The bonus for executive directors is set in accordance with market standards and is linked to meeting targets for profit before tax (PBT) and the quality of the results obtained. The quality of the results is assessed based on their recurrence (eliminating special or extraordinary transactions), the appropriate management of risk, and the efficient consumption of capital. In addition, the performance of results is contrasted with those of comparable entities. In the case of executive directors with general management duties within the Group, the variable remuneration (or bonus) will be determined primarily by the achievement of PBT targets by the Group as a whole with relevant adjustments, while remuneration for executive directors with management duties focusing more on a specific business division, the attainment of the PBT targets of such division, with relevant adjustments, will have greater weight. Based on such standards, a range of variable remuneration (or bonus) for executive directors is estimated at the beginning of the fiscal year.

c. Pension rights

Executive directors are entitled to receive a pension supplement upon retirement or early retirement, which the Bank may cause to be externally funded.

The Bank may request the early retirement of executive directors, provided they are over 50 years of age and have more than 10 years’ service with the Bank and/or other companies of the Group. Executive directors may also request early retirement themselves if they are over 55 years of age and have 10 years’ service with the Bank and/or other companies of the Group. Notice of the decision to retire or to take early retirement must in any event be given 60 days in advance.

Pension rights are also recognized in the event of incapacity, and in case of death of the executive director, in favor of the spouse (widow benefits) and children (orphan benefits).

Generally, the amount of the pension supplement consists of the amount necessary to reach an annual gross amount equal to 100% of the fixed salary received by the director at the time the director actually ceased working, plus 30% of the average of the last three variable remuneration amounts received. In certain cases, if early retirement occurs at the request of the director, the amount resulting from the application of the method described above would be reduced by percentages ranging from 20% to 4%, depending on the age of the director at the time of early retirement.

The board of directors of the Bank, by resolutions of December 17, 2007 and March 24, 2008, authorized the amendment of the contracts of executive directors and other members of the Bank’s senior management (the executives) such that they provide for the right of the senior executives, on the date of retirement (or early retirement, if applicable) to elect to receive the pension accrued (or the amounts similar thereto) in the form of income or of capital (i.e., in a single payment) in full but not in part. To maintain financial neutrality for the Group, the amount to be received by the beneficiary of the commitment in the form of capital upon retirement must be proportionate to the market value of the assets allocated to cover the mathematical provisions of the policy implementing such commitments to the executives.

Executives who are still in service on reaching retirement age (or who, on the date of the contract being signed, have passed the age of retirement) must state whether they wish to opt for this form of benefit. Should the executive subsequently die while still in service and prior to retirement, the capital of the pension will correspond to his/her heirs.

160

The board, at its meetings of July 21, 2008 and April 28, 2009, approved the new terms and conditions for the contractual relationship with the Bank of executive directors and executives other than executive directors, in order to bring them into line with the current By-laws (Articles 49.2 and 58.4) and with the new pension system. Such terms and conditions include, among other things, the granting to executive directors and other executives of the option to collect pensions or similar amounts in a single payment. Unless expressly authorized by the Bank, executives will not be permitted to receive pension supplements if they commence to work for competitors of the Bank or the Group.

d. Remuneration linked to the Bank shares

Lastly, there are also remuneration plans involving the grant of shares, stock options or amounts linked to the performance of the trading price of Santander shares.

Under the law and the By-laws, the decision to grant remuneration linked to the Bank’s shares must be made by the shareholders acting at a general shareholders’ meeting, at the proposal of the board of directors, following receipt of a report from the appointments and remuneration committee. The Group’s policy provides that only executive directors may be beneficiaries of remuneration systems consisting of the delivery of shares or rights thereto.

(iv) Termination

The Bank’s executive directors have indefinite-term employment contracts. However, executive directors whose contracts are terminated voluntarily or due to breach of duties are not entitled to receive any economic compensation. If the contracts are terminated for reasons attributable to the Bank or due to certain objective circumstances (such as those affecting the executive directors’ functional and organic statute), the directors will be entitled, at the date of termination of their employment relationships with the Bank, to the following:

	•		In the case of Emilio Botín, to retire and to accrue a pension supplement. At December 31, 2008, the annual pension supplement would amount to €1,878,000.

	•		In the case of Alfredo Sáenz, to retire or, alternatively, to receive a termination benefit equal to 40% of his annual fixed salary multiplied by the number of years of service at the Bank, up to a maximum of ten times his annual fixed salary. At December 31, 2008, the amount of the pension supplement relating to the first option would be €4,973,000 per year and the amount relating to the second option would be €35.9 million. The two alternatives are mutually exclusive and, therefore, if Alfredo Sáenz were to opt to receive the termination benefit he would not receive any pension supplement.

	•		In the cases of Matías R. Inciarte and Francisco Luzón, to take early retirement and to accrue pension supplements. At December 31, 2008, the annual pension supplements would amount to €2,416,000 for Matías R. Inciarte and €2,648,000 for Francisco Luzón.

	•		In the case of Ana P. Botín, to receive a termination benefit amounting to five years’ annual fixed salary at the date of termination. At December 31, 2008, this benefit would amount to €6,345,000. In the event of termination due to withdrawal at the will of the Bank, Ana P. Botín may opt to take early retirement and accrue an annual retainer. At December 31, 2008, this retainer would amount to €1,781,000 per year. The two alternatives are mutually exclusive and, therefore, if Ana P. Botín were to opt to receive the termination benefit she would not receive any retainer.

	•		In the case of Juan R. Inciarte, to receive a termination benefit amounting to five years’ annual fixed salary at the date of termination. At December 31, 2008, this benefit would amount to €4,792,000. In the event of termination due to withdrawal at the will of the Bank, Juan R. Inciarte may opt to take early retirement and accrue an annual retainer. At December 31, 2008, this annual retainer would amount to €958 thousand. The two alternatives are mutually exclusive and, therefore, if Juan R. Inciarte were to opt to receive the termination benefit he would not receive any retainer.

161

If the directors retire or take early retirement, they have the right to opt to receive the pensions accrued -or similar amounts, in the form of income or capital, i.e. in a single payment, in full but not in part (see Note 5-c to our consolidated financial statements).

(v) Insurance

The Bank provides to its executive directors life insurance, included in the column “Other insurance” in the table of page 139 above, accident insurance, whose coverage varies in each cases on the basis of the policy set by the Bank for its senior executives, and a reimbursement healthcare insurance.

(vi) Confidentiality and return of documents

The contracts provide for confidentiality during and after the termination of the employment relationship.

(vii) Other conditions

The contracts provide for the following advance notice periods for termination of the executive officers’ position by the Bank or resignation by the executive officer.

Date of current contract

By decision of the

Advance notice period

(month/day/year)

Bank (months)

director (months)

Emilio Botín

01/02/2007

)

Alfredo Sáenz

12/09/1997 and 02/13/2002

Matías R. Inciarte

10/07/2002

Ana P. Botín

02/13/2002

Francisco Luzón

01/12/2004

Juan R. Inciarte

11/14/2002


(*)		It is not contractually established.

Audit and compliance committee and appointments and remuneration committee

An audit and compliance committee and an appointments and remuneration committee operate as part of the board of directors. The audit and compliance committee consists exclusively of 5 external directors (all of whom are independent in accordance with the principles set forth in Article 6.2. c) of the Rules and Regulations of the Board). The appointments and remuneration committee consists of 5 external directors (4 of whom are independent in accordance with the principles set forth in Article 6.2. c) of the Rules and Regulations of the Board). These independence standards may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE.

The audit and compliance committee:

The audit and compliance committee was created to provide support and specialization for the tasks of controlling and reviewing the Bank’s accounts and compliance function. Its mission, which has been defined and approved by the board, is established in the By-laws and in the Rules and Regulations of the Board.

Only non-executive directors can be members of this committee with independent directors (as defined in the Rules and Regulations of the Board) having a majority representation. Its chairman must always be an independent director (as defined in the Rules and Regulations of the Board) and someone who has the necessary knowledge and experience in matters of accounting, auditing or risk management. Currently, the chairman of the audit and compliance committee is Luis Ángel Rojo.

162

The members of the audit and compliance committee are appointed by the board of directors, taking into account the directors’ knowledge, aptitude and experience in the areas of accounting, auditing or risk management.

Functions of the audit and compliance committee:

a) Have its chairman and/or secretary report to the general shareholders’ meeting with respect to matters raised therein by shareholders regarding its powers.

b) Propose the appointment of the auditor, as well as the conditions in which such auditor will be hired, the scope of its professional duties and, if applicable, the revocation or non-renewal of its appointment. The committee shall favor the Group’s auditor also assuming responsibility for auditing the companies which comprise the Group.

c) Review the accounts of the Company and the Group, monitor compliance with legal requirements and the proper application of generally accepted accounting principles, and report on the proposals for alterations to the accounting principles and standards suggested by management.

d) Supervise the Bank’s internal audit services, and particularly:

(i) Propose the selection, appointment and withdrawal of the party responsible for internal audit;

(ii) Reviewe the annual working plan for internal audit and the annual activities report;

(iii) Ensure the independence and effectiveness of the internal audit function;

(iv) Propose the budget for this service;

(v) Receive periodic information regarding the activities thereof; and

(vi) Verify that senior management takes into account the conclusions and recommendations of its reports.

e) Know the process for gathering financial information and the internal control systems. In particular, the audit and compliance committee shall:

(i) Supervise the process of preparing, and the integrity, of the financial information relating to the Company and the Group, reviewing compliance with regulatory requirements, the proper demarcation of group consolidation and the correct application of accounting standards; and

(ii) Periodically review the systems for the internal monitoring and management of risks, so that the principal risks are identified, managed and properly disclosed.

f) Report on, review and supervise the risk control policy established in accordance with the provisions of the Rules and Regulations of the Board.

g) Serve as a channel of communication between the board and the auditor, assess the results of each audit and the response of the management team to its recommendations, and act as a mediator in the event of disagreement between the board and the auditor regarding the principles and standards to be applied in the preparation of the financial statements. Specifically, it shall endeavor to ensure that the statements ultimately drawn up by the board are submitted to the general shareholders’ meeting without any qualifications or reservations in the auditor’s report.

h) Supervise the fulfillment of the audit contract, endeavoring to ensure that the opinion on the annual financial statements and the main contents of the auditor’s report are set forth in a clear and accurate fashion.

163

i) Ensure the independence of the auditor, by taking notice of those circumstances or issues that might risk such independence and any others related to the development of the auditing procedure, as well as receive information and maintain such communication with the auditor as is provided for in legislation regarding the auditing of financial statements and in technical auditing regulations. And, specifically, verify the percentage represented by the fees paid for any and all reasons of the total income of the audit firm, and the length of service of the partner who leads the audit team in the provision of such services to the Company. The annual report shall set forth the fees paid to the audit firm, including information relating to fees paid for professional services other than audit work. Furthermore, the committee shall ensure that the Company publicly communicates a change of auditor and accompanies such communication with a declaration regarding the possible existence of disagreements with the outgoing auditor and, if any, regarding the content thereof and, in the event of the resignation of the auditor, the committee shall examine the circumstances causing it.

j) Report to the board, in advance of its adoption of the corresponding decisions, regarding:

(i) The financial information that the Company must periodically make public, ensuring that such information is prepared in accordance with the same principles and practices applicable to the annual financial statements.

(ii) The creation or acquisition of equity interests in special purpose entities or entities domiciled in countries or territories that are considered to be tax havens.

k) Supervise the observance of the code of conduct of the Group in the securities markets, the manuals and procedures for the prevention of money laundering and, in general, the rules of governance and compliance in effect in the Company, and make such proposals as are deemed necessary for the improvement thereof. In particular, the committee shall have the duty to receive information and, if applicable, issue a report on disciplinary penalties to be imposed upon members of the senior management.

l) Review compliance with such courses of action and measures as result from the reports issued or the inspection proceedings carried out by the administrative authorities having functions of supervision and control.

m) Know and, if applicable, respond to the initiatives, suggestions or complaints put forward or raised by the shareholders regarding the area of authority of this committee and which are submitted to it by the office of the general secretary of the Company. The committee shall also:

(i) Receive, deal with and keep a record of the complaints received by the Bank on matters related to the process for gathering financial information, auditing and internal controls.

(ii) Receive on a confidential and anonymous basis communications from Group employees who express their concern on possible questionable practices in the areas of accounting or auditing.

n) Report on any proposed amendments to the Rules and Regulations of the Board prior to the approval thereof by the board of directors.

o) Evaluate, at least once a year, the committee’s operation and the quality of its work.

p) And the others specifically provided for in the Rules and Regulations of the Board.

The Group’s 2008 audit and compliance committee report is available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—Corporate governance—Committees report”.

164

The following are the current members of the audit and compliance committee:


Name		Position
Luis Ángel Rojo		Chairman
Fernando de Asúa		Member
Manuel Soto		Member
Abel Matutes		Member
Luis Alberto Salazar-Simpson		Member

Ignacio Benjumea also acts as secretary to the audit and compliance committee but is classified as a non-member.

The appointments and remuneration committee:

The shareholders acting at the ordinary general shareholders’ meeting held on June 21, 2008 approved new By-laws for Banco Santander, S.A., which include basic rules and regulations for the appointments and remuneration committee.

The Rules and Regulations of the Board state that the members of this committee must all be non-executive directors with independent directors (as defined in the Rules and Regulations of the Board) having a majority representation and an independent director as chairman (as defined in the Rules and Regulations of the Board).

Currently, the chairman of the appointments and remuneration committee is Fernando de Asúa, the first vice chairman of the board of directors.

The members of the appointments and remuneration committee are appointed by the board of directors, taking into account the directors’ knowledge, aptitudes and experience and the goals of the committee.

Functions of the appointments and remuneration committee:

a) Establish and review the standards to be followed in order to determine the composition of the board and select those persons who will be proposed for election to serve as directors. In particular, the appointments and remuneration committee:

(i) Shall evaluate the competencies, knowledge and experience required of the director;

(ii) Shall specify the duties and the aptitudes needed of the candidates to fill each vacancy, evaluating the time and dedication needed for them to properly carry out their commitments; and

(iii) Shall receive for consideration the proposals of potential candidates to fill vacancies that might be made by the directors.

b) Prepare the proposals for appointment, re-election and ratification of directors provided for the Rules and Regulations of the Board, as well as the proposals for appointment of the members of each of the committees of the board of directors. Likewise, it shall prepare, the proposals for the appointment of positions on the board of directors and its committees.

c) Annually verify the classification of each director (as executive, proprietary, independent or other) for the purpose of their confirmation or review at the ordinary general meeting and in the annual corporate governance report.

d) Report on proposals for appointment or withdrawal of the secretary of the board, prior to submission thereof to the board.

e) Report on appointments and withdrawals of the members of senior management.

f) Propose to the board:

165

(i) The policy for compensation of directors and the corresponding report.

(ii) The policy for compensation of the members of senior management.

(iii) The individual compensation of the directors.

(iv) The individual compensation of the executive directors and, if applicable, external directors, for the performance of duties other than those of a mere director, and other terms of their contracts.

(v) The basic terms of the contracts and compensation of the members of senior management.

g) Ensure compliance with the policy established by the Company for compensation of the directors and the members of senior management.

h) Periodically review the compensation programs, assessing the appropriateness and yield thereof and endeavoring to ensure that the compensation of directors shall conform to standards of moderation and correspond to the earnings of the Company.

i) Ensure the transparency of such compensation and the inclusion in the annual report and in the annual corporate governance report of information regarding the compensation of directors and, for such purposes, submit to the Board any and all information that may be appropriate.

j) Ensure compliance by the directors with the duties prescribed the Rules and Regulations of the Board, prepare the reports provided for therein and receive information, and, if applicable, prepare a report on the measures to be adopted with respect to the directors in the event of non-compliance with the above mentioned duties or with the Code of Conduct of the Group in the Securities Markets.

k) Examine the information sent by the directors regarding their other professional obligations and assess whether such obligations might interfere with the dedication required of directors for the effective performance of their work.

l) Evaluate, at least once a year, its operation and the quality of its work.

m) Report on the process of evaluation of the committee and of the members thereof.

n) And others specifically provided for in the Rules and Regulations of the Board.

The Group’s 2008 Appointments and Remuneration Committee report is available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—Corporate governance—Committees report”.

The following are the members of the appointments and remuneration committee:


Name		Position
Fernando de Asúa		Chairman
Manuel Soto		Member
Guillermo de la Dehesa		Member
Rodrigo Echenique		Member
Luis Ángel Rojo		Member

Ignacio Benjumea also acts as secretary to the appointments and remuneration committee but is classified as a non-member.

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The table below shows our employees by geographic area:


	Number of employees
	2008		2007		2006(*)
SPAIN		36,376		36,558		35,781

LATIN AMERICA		95,375		64,899		65,967
Argentina		6,313		6,621		6,566
Brazil		53,198		21,876		21,599
Chile		12,081		13,025		12,533
Colombia		1,415		1,312		1,893
Mexico		13,924		14,053		15,820
Peru		52		43		29
Puerto Rico		1,885		2,227		2,249
Uruguay		847		302		304
Venezuela		5,659		5,439		4,974

EUROPE		36,778		28,060		27,171
Czech Republic		205		195		179
Germany		2,431		1,846		1,845
Belgium		12		12		11
Finland		28		29		—
France		51		32		18
Greece		21		20		—
Hungary		84		90		77
Ireland		7		4		5
Italy		879		798		780
Luxembourg		3		—		—
Norway		361		330		285
Poland		852		638		588
Portugal		6,839		6,759		6,190
Slovakia		—		10		—
Switzerland		198		203		194
The Netherlands		289		51		57
United Kingdom		24,518		17,043		16,942

USA		2,051		1,978		734

ASIA		82		17		11
Hong Kong		75		13		7
Japan		5		4		4
Others		2		—		—

OTHERS		299		307		85
Bahamas		55		56		57
Others		244		251		28

Total		170,961		131,819		129,749


(*)		Figures for 2006 differ from those presented in our Annual Report. In the Annual Report, for comparison purposes, we do not include employees working for the companies that were discontinued during 2007 and 2006, such as our Latin American pension management companies or Abbey’s life insurance business. In this Annual Report on Form 20-F we include the total number of employees at those dates.

In those cases where an employee is working from one country but is technically employed by a Group company located in a different country, we designate that employee as working from his/her country of residence.

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The table below shows our employees by type of business:


	Number of employees
	2008		2007		2006
Retail Banking		165,244		126,119		119,346
Asset Management and Insurance		1,435		1,585		7,132
Global Wholesale Banking		2,572		2,589		1,774
Financial Management and Equity Stakes		1,710		1,526		1,498

Total		170,961		131,819		129,749

As of December 31, 2008, we had 1,814 temporary employees (as compared to 1,754 as of December 31, 2007 and 3,159 as of December 31, 2006). In 2008, the average number of temporary employees working for the Group was 1,760 employees.

E. Share ownership

As of June 24, 2009, the direct, indirect and represented holdings of our current directors were as follows:


	Direct		Indirect stake and				% of
Directors	Stake		represented		Total shares		Capital stock
Emilio Botín (1)		8,011,386		152,767,027		160,778,413		2.207	%
Fernando de Asúa		36,122		68,625		104,747		0.001	%
Alfredo Sáenz		705,802		1,243,532		1,949,334		0.024	%
Matías R. Inciarte (3)		829,799		158,431		988,230		0.012	%
Manuel Soto		60,000		510,000		570,000		0.007	%
Assicurazioni Generali S.p.A		12,243,277		78,673,780		90,917,057		1.115	%
Antonio Basagoiti		700,000		—		700,000		0.009	%
Ana P. Botín (1)		5,011,417		4,024,136		9,035,553		0.000	%
Javier Botín (1)(2)		4,793,481		5,350,000		10,143,481		0.000	%
Lord Burns (Terence)		30,100		27,001		57,101		0.001	%
Guillermo de la Dehesa		100		—		100		0.000	%
Rodrigo Echenique		651,598		9,180		660,778		0.008	%
Antonio Escámez		749,359		—		749,359		0.009	%
Francisco Luzón		1,236,321		97,470		1,333,791		0.016	%
Abel Matutes		122,048		2,588,937		2,710,985		0.033	%
Juan R. Inciarte		1,278,935		—		1,278,935		0.016	%
Luis Ángel Rojo		1		—		1		0.000	%
Luis Alberto Salazar-Simpson		183,750		5,580		189,330		0.002	%
Isabel Tocino		36,000		—		36,000		0.000	%

		36,679,496		245,523,699		282,203,195		3.460	%


(1)		Emilio Botín has attributed the right of vote in a general shareholders’ meeting of 94,691,035 shares (1.16% of the capital stock) held by the Marcelino Botín Foundation, of 8,096,742 shares held by Jaime Botín, of 384,190 shares held by Paloma O’Shea, of 9,042,777 shares held by Emilio Botín O., of 9,035,553 shares held by Ana P. Botín and of 10,143,481 shares held by Javier Botín. This table shows the direct and indirect shareholding of the two latter who are directors, but in the column showing the percentage of capital stock, these shareholdings are presented together with those that belong or are also represented by Emilio Botín.

(2)		Javier Botín is a proprietary director as he represents in the board of directors a 2.207% of the Bank’s capital stock which corresponds to the holdings of the Marcelino Botín Foundation, Emilio Botín, Ana P. Botín, Emilio Botín O., Jaime Botín, Paloma O’Shea and his own.

(3)		Matías R. Inciarte has the right to vote 76,806 shares owned by two of his children.

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The options granted to the Bank’s directors, managers and employees are described in the table under “—B. Compensation” above.

Santander’s capital comprised only one class of shares, all of which are ordinary and have the same rights.

As of June 24, 2009 our current executive officers (not directors) referred to above under Section A of this Item 6 as a group beneficially owned, directly or indirectly, 9,690,497 ordinary shares, or 0.06% of our issued and outstanding share capital as of that date. Together with the options granted, no individual executive officer beneficially owns, directly or indirectly, one percent or more of the outstanding share capital as of that date.

Item 7. Major Shareholders and Related Party Transactions

A. Major shareholders

As of December 31, 2008, to our knowledge no person beneficially owned, directly or indirectly, 5% or more of our shares.

At December 31, 2008 a total of 1,036,481,773 shares, or 12.71% of our share capital, were held by 901 registered holders with registered addresses in the United States and Puerto Rico, including JPMorgan Chase, as depositary of our American Depositary Share Program. These ADS’s were held by 1,917 record holders. Since certain of such shares and ADSs are held by nominees, the foregoing figures are not representative of the number of beneficial holders. Our directors and executive officers did not own any ADSs as of December 31, 2008.

To our knowledge, we are not controlled directly or indirectly, by any other corporation, government or any other natural or legal person. We do not know of any arrangements which would result in a change in our control.

Shareholders’ agreements

The Bank was informed in February 2006 of an agreement among certain shareholders. The agreement was also communicated to the CNMV, following the filing of the agreement both with the CNMV and in the Mercantile Registry of Cantabria.

The agreement was entered into by Emilio Botín, Ana P. Botín, Emilio Botín O., Javier Botín, Simancas, S.A., Puente San Miguel, S.A., Puentepumar, S.L., Latimer Inversiones, S.L. and Cronje, S.L. Unipersonal and relates to the shares of the Bank held by them or those over which they have voting rights.

Under this agreement and through the establishment of restrictions on the free transferability of their shares and the regulation of the exercise of the voting rights inherent in them, these shareholders have agreed to act in a coordinated manner, in order to develop a common, lasting and stable policy and an effective and unified presence and representation in the Bank’s governing bodies.

The agreement comprises a total of 44,396,513 shares of the Bank (0.555% of its share capital at the end of the year 2008). In addition, and in accordance with the first clause of the shareholders’ agreement, the agreement will be extended only in terms of the exercising of voting rights to other shares of the Bank that are subsequently held, directly or indirectly, by the signatories or those over which they have voting rights. As a result, as of December 31, 2008, another 32,352,043 shares (0.405% of the Bank’s share capital at the end of the year 2008) are also included in the syndicate of shareholders.

The chairman of the syndicate of shareholders is the person who is at any time the chairman of the Marcelino Botín Foundation, which is currently Emilio Botín.

Members of the syndicate are obliged to group together the voting rights and other political rights inherent in the syndicated shares, so that the exercising of such rights and, in general, the conduct of the members of the syndicate before the Bank, is done in a coordinated and unified fashion. For such purpose, the representation of such shares is attributed to the chairman of the syndicate as the common representative of the members of the syndicate.

Except for the transfers made to of other members of the syndicate or the Marcelino Botín Foundation, the prior authorization of the syndicate is required and it can freely authorize or deny any proposed transfer.

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B. Related party transactions

Loans made to members of our board of directors and to our executive officers

Our direct risk exposure to the Bank’s directors as of December 31, 2008, equaled €4.2 million (€1.2 million as of December 31, 2007) of loans and credits to such directors and €0.01 million (€0.01 million as of December 31, 2007) of guarantees provided to them.

The detail by director as of December 31, 2008, is as follows:


	In thousands of euros
	Loans and
	Credits		Guarantees		Total

Alfredo Sáenz		25		—		25
Matías R. Inciarte		20		10		30
Manuel Soto		5		—		5
Antonio Basagoiti		66		1		67
Ana P. Botín		5		—		5
Rodrigo Echenique		12		—		12
Antonio Escámez		1,473		—		1,473
Francisco Luzón		1,649		—		1,649
Luis Alberto Salazar-Simpson		461		—		461
Isabel Tocino		49		—		49
Juan R. Inciarte		465		—		465

		4,231		11		4,242

Additionally, the total amount of loans and credits made by us to our executive officers who are not directors, as of December 31, 2008, amounted to €21 million (see Note 53 to our consolidated financial statements).

Loans extended to related parties were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than normal risk of collectibility or present other unfavorable features.

Loans made to other Related Parties

The companies of the Group engage, on a regular and routine basis, in a number of customary transactions among Group members, including:

	•		overnight call deposits;

	•		foreign exchange purchases and sales;

	•		derivative transactions, such as forward purchases and sales;

	•		money market fund transfers;

	•		letters of credit for imports and exports;

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and others within the scope of the ordinary course of the banking business, such as loans and other banking services to our shareholders, to employees of all levels, and the associates and the members of the families of all these persons, as well as those other businesses conducted by the companies of the Group. All these transactions are made:

	•		in the ordinary course of business;

	•		on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with other persons; and

	•		did not involve more than the normal risk of collectibility or other unfavorable features.

As of December 31, 2008 our loans and credits to associated and jointly controlled entities, amounted to €221 million. Those loans and credits represented 0.04% of our total net loans and credits and 0.4% of our total stockholders’ equity as of December 31, 2008.

For more information, see Notes 3 and 53 to our consolidated financial statements.

C. Interests of experts and counsel

Not Applicable.

Item 8. Financial Information

A. Consolidated statements and other financial information

Financial Statements

See Item 18 for our consolidated financial statements.

(a)

Index to consolidated financial statements of Santander


	Page

Report of Deloitte, S.L.		F-1

Consolidated Balance Sheets as of December 31, 2008, 2007, and 2006		F-2

Consolidated Income Statements for the Years Ended December 31, 2008, 2007 and 2006		F-3

Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2008, 2007 and 2006		F-4

Consolidated Cash Flow Statement for the Years Ended December 31, 2008, 2007 and 2006		F-5

Notes to the Consolidated Financial Statements		F-9

Legal Proceedings

i. Tax disputes

As of the date hereof, the main tax disputes concerning the Group are as follows:

• The “Mandados de Segurança” filed by Banco Santander, S.A. and other Group companies in Brazil claiming their right to pay the Brazilian social contribution tax on net income at a rate of 8%. In the case of Banco Santander, S.A., on June 9, 2008 a special and extraordinary appeal was filed at the Federal Supreme Court against the unfavorable judgment of the Federal Regional Court of January 14, 2008. A decision has yet to be handed down on this appeal. In the case of Banco ABN AMRO Real S.A., two “Mandados de Segurança” were filed; for the first of these, an appeal was filed at the Supreme Court of Justice and the Federal Supreme Court and, for the second, an appeal was filed on February 12, 2008 at the Federal Regional Court further to the unfavorable judgment handed down on January 29, 2008.

• The “Mandados de Segurança” filed by Banco Santander, S.A. and other Group companies in Brazil claiming its right to consider the social contribution tax on net income (CSLL) as deductible in the calculation of Brazilian legal entities income tax (IRPJ). In the case of Banco Santander, S.A., this action was declared unwarranted and an appeal was filed at the Federal Regional Court, requesting, as a precautionary measure, to have the ability to claim the tax credit stayed and obtaining permission to deposit the disputed amounts with the courts. On October 1, 2007, an unfavorable judgment was handed down by the Federal Regional Court, which was appealed against by Banco Santander S.A. (Brazil) through the presentation of “Embargos de Declaraçao” on October 8, 2007. On March 6, 2008, the Federal Regional Court dismissed the “Embargos de Declaraçao”, and dismissed the subsequent appeal. On July 1, 2008, the related special and extraordinary appeal was filed.

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• The “Mandados de Segurança” filed by Banco Santander, S.A. and other Group entities claiming their right to pay the Brazilian PIS and COFINS social contributions only on the income from the provision of services. In the case of Banco Santander, S.A., the “Mandados de Segurança” was declared unwarranted and an appeal was filed at the Federal Regional Court. On September 13, 2007, this Court handed down a favorable judgment. Unión Federal has filed an appeal against this judgment at a higher court. In the case of Banco ABN AMRO Real S.A., on March 9, 2007, a favorable judgment was handed down against which Unión Federal has filed an appeal at a higher court.

• Legal proceeding filed on August 24, 2000, by ABN AMRO Arrendamiento Mercantil S.A. requesting the deductibility for income tax purposes of the depreciation and amortization expense in the same period as that in which the lease income is recognized. The entity received a favorable judgment on April 16, 2008 which was appealed against by the Brazilian tax authorities. A decision has yet to be handed down by the Federal Regional Court.

• Real Leasing S.A. Arrendamiento Mercantil and Banco ABN AMRO Real S.A. have filed various administrative and legal claims in connection with the deductibility of the provision for doubtful debts for 1995.

• Banco Santander S.A. and other Group companies in Brazil are involved in several administrative and legal proceedings against various municipalities that demand payment of the service tax on certain items of income from transactions not classified as provisions of services.

• A claim was filed against Abbey National Treasury Services plc by tax authorities abroad in relation to the refund of certain tax credits and other associated amounts. The legal advisers of Abbey National Treasury Services plc considered that the grounds to contest this claim were well-founded, proof of which is that a favorable judgment was handed down at first instance in September 2006, although the judgment was appealed against by the tax authorities in January 2007. However, in December 2006 an unfavorable judgment for another taxpayer was handed down on another proceeding which might affect this case.

ii. Legal litigation

As of the date hereof, the principal legal litigation proceeding concerning the Group is as follows:

• Misselling: claims associated with the sale by Abbey of certain financial products to its customers.

The provisions recorded by Abbey in this respect were calculated on the basis of the best estimate of the number of claims that will be received, of the percentage of claims that will be upheld and of the related amounts.

• LANETRO, S.A.: claim (ordinary lawsuit no. 558/2002) filed by LANETRO, S.A. against Banco Santander, S.A. at Madrid Court of First Instance no. 34, requesting that the Bank comply with the obligation to subscribe to €30.05 million of a capital increase of the plaintiff.

On December 16, 2003, a judgment was handed down dismissing the plaintiff’s request. The subsequent appeal filed by LANETRO was upheld by a decision of the Madrid Provincial Appellate Court on October 27, 2006. The Bank has filed extraordinary appeals on grounds of procedural infringements and an extraordinary appeal against the aforementioned decision.

• Ordinary proceeding filed by Galesa de Promociones, S.A., against the Bank, at Elche Court of First Instance no. 5, Alicante (proceeding no. 1946/2008). The claim requests damages amounting to €51,396,971.43 as a result of the judgment handed down by the Supreme Court on November 24, 2004 setting aside a summary mortgage proceeding filed by the Bank against the complainant company, which concluded in the foreclosure by the Bank of the mortgaged properties and their subsequent sale by the Bank to third-party buyers. The Supreme Court judgment ordered the reversal of the court foreclosure proceeding to prior to the date on which the auctions were held, a requirement impossible to comply with due to the sale by the Bank of the properties to the aforementioned third parties, which prevented the reincorporation of the properties into the debtor company’s assets and their re-auction.

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The damages claimed are broken down as follows: (i) €18,428,076.43 relating to the value of the property auctioned; (ii) €32,608,895 relating to the loss of profit on the properties lost by the plaintiff, which prevented the plaintiff company from continuing its business activity as a property developer; and (iii) €360,000 relating to the loss of rental income.

On October 31, 2008, the summons to respond to and oppose the claim was served on the Bank, which responded to and opposed the complainant’s requests on a timely basis and, at the same time, filed a counterclaim against Galesa de Promociones S.A. for the amount owed to the Bank, basing the calculation thereof on the difference between the value of the properties and the amount of the loan.

Galesa de Promociones S.A. responded to the counterclaim on January 12, 2009. The parties’ pre-trial hearing was held on April 7, 2009. The hearing has been scheduled to take place on September 30, 2009.

Declaratory large claims action brought at Madrid Court of First Instance no. 19 (case no. 87/2001) in connection with a claim filed by Inversión Hogar, S.A. against the Bank. This claim sought the termination of a settlement agreement entered into between the Bank and the plaintiff on December 11, 1992.

On May 19, 2006, a judgment was handed down at first instance, whereby the agreement was declared to be terminated and the Bank was ordered to pay €1.8 million, plus the related legal interest since February 1997, to return a property that was given in payment under the aforementioned agreement, to pay an additional €72.9 million relating to the replacement value of the assets foreclosed, and subsequently sold, by the Bank, and to pay all the related court costs. The Bank and Inversión Hogar, S.A. filed appeals against the judgment.

On July 30, 2007, the Madrid Provincial Appellate Court handed down a decision upholding in full the appeal filed by the Bank, revoking the ruling issued at first instance and dismissing the appeal filed by Inversión Hogar, S.A. On completion of the clarification procedure, as it had announced previously, Inversión Hogar, S.A. filed an appeal against the aforementioned decision at the Civil Chamber of the Supreme Court, which has been granted leave to proceed by the Madrid Provincial Appellate Court at the preliminary admission for consideration stage.

Complaint in an ordinary proceeding filed by Inés Arias Domínguez and an additional 17 persons against Santander Investment, S.A. at Madrid Court of First Instance no. 13 (case no. 928/2007), seeking damages of approximately €43 million, plus interest and costs. The plaintiffs, who are former shareholders of Yesocentro S.A. (Yesos y Prefabricados del Centro, S.A.) allege that Santander Investment, S.A. breached the advisory services agreement entered into on October 19, 1989 between the former Banco Santander de Negocios, S.A. and the plaintiffs, the purpose of which was the sale of shares owned by the plaintiffs to another company called Invercámara, S.A.

This complaint was duly contested by Santander Investment, S.A. on November 5, 2007. The preliminary hearing was set for April 28, 2008, although it was subsequently postponed until a related claim is resolved.

In a decision issued by the Madrid Court of First Instance no. 13 on September 11, 2008, the proceeding in connection with the civil preliminary ruling was stayed. The plaintiffs have appealed the decision and the Bank responded to and opposed the plaintiff’s appeal on December 16, 2008.

On February 6, 2008, Banco Santander, S.A. filed a request for arbitration with the Secretary of the Spanish Arbitral Court (Secretaría de la Corte Española de Arbitraje) against the business entity GAESCO BOLSA, SOCIEDAD DE VALORES, S.A. (“GAESCO”), a Spanish brokerage firm, in respect of a claim for €66,418,077.27 that the latter owes Banco Santander, S.A. as a result of the early termination of the financial transaction framework agreement entered into by GAESCO and the Bank and of the financial transactions undertaken under such agreement. On May 12, 2009, an arbitral ruling was handed down admitting Banco Santander, S.A.’s request and dismissing the counterclaim filed by GAESCO.

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• Former Banespa employees: claim filed in 1998 by the association of retired Banespa employees (AFABESP) on behalf of its members, requesting the payment of a half-yearly bonus initially envisaged in the entity’s by-laws in the event that the entity obtained a profit and that the distribution of this profit, in the form of bonus, was approved by the board of directors. The bonus was not paid in 1994 and 1995 since the bank did not make a profit; partial payments were made from 1996 to 2000 in variable percentages as agreed by the board of directors, and the aforementioned clause was eliminated from the by-laws in 2001. After the Regional Labor Court ordered Banco Santander Banespa, S.A. to pay the half-yearly bonus in September 2005, Banco Santander Banespa, S.A. filed an appeal at the High Labour Court which handed down a decision on June 25, 2008, ordering the Bank to pay the half-yearly bonus from 1994 onwards for a maximum amount equivalent to that of the share in profits. The related appeals against this decision will be filed at the High Labor Court and at the Federal Supreme Court, as applicable.

• Absorption of Banco Noroeste by Banco Santander Brasil: Three claims filed by minority shareholders of the former Banco Noroeste requesting, in addition to compensation for damage and losses, the annulment of the shareholders’ meeting that approved the merger between Banco Noroeste and Banco Santander Brasil, arguing that when the merger took place they should have been provided with a market value that would have enabled them to decide whether or not to sell their shares at that value.

In the three cases, judgments were handed down at first instance, one of which found in favor of the Bank and the other two against it. In the latter two cases the shareholders’ meeting was not declared null and void but rather the Bank was ordered to pay compensation. Appeals were filed against these judgments.

The Sao Paulo Court of Justice has recently handed down joint judgments on the three appeals at second instance, considering that Santander should have duly prepared a valuation report using the disposal value method thereby establishing that the minority shareholders be indemnified.

In the case of the shareholders that sold their shares, the Court indicated that they should receive the difference between the value at which they sold their shares (equity value) and market value (calculated as the disposal value) at that time, plus interest. In the case of the shareholders that did not sell, the Court considered that they should receive the market value at that time plus interest, less the present value of their shares. Unlike the judgments handed down at first instance, lost profits and damages were excluded and the amount of lawyers’ fees was reduced. Appeals against this judgment will be filed at higher courts.

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Disposition of previously reported litigation

Following is a description of the developments in 2008 in relation to the small claims proceeding at Elche Court of First Instance no. 4 (case no. 419/1994) in connection with a claim filed by Galesa de Promociones, S.A. (“Galesa”):

• Galesa requested the Court to annul a previous legal foreclosure proceeding brought by the Bank against the plaintiff in 1992, which culminated in the foreclosure of certain properties that were subsequently sold by auction.

The judgments handed down at first and second instance were in the Bank’s favor. The appeal filed by Galesa at the Supreme Court was upheld by virtue of a decision on November 24, 2004, which ordered the reversal of the legal foreclosure proceeding to before the date on which the auctions were held. On June 8, 2006, Galesa filed a claim for the enforcement of the decision handed down by the Supreme Court, requesting that the Bank be ordered to pay €56 million, the estimated value of the properties, plus a further € 33 million for loss of profit. The Bank challenged this claim on the grounds that the Supreme Court decision could not be enforced —since no order had been pronounced against the Bank, but rather a proceeding had merely been annulled—and it also argued that the damages requested would have to be ruled upon by an express court decision, which had not been pronounced.

The Elche Court of First Instance, by virtue of an order dated September 18, 2006, found in favor of the Bank, and referred the plaintiff to the appropriate ordinary proceeding for the valuation of the aforementioned damages.

Galesa filed an appeal for reconsideration, which was dismissed by a resolution on November 11, 2006. Galesa filed an appeal against this resolution at the Alicante Provincial Appellate Court. This appeal was in turn contested by the Bank and a favorable judgment was handed down.

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Other Litigation

In addition to the matters described above, the Bank and its subsidiaries are from time to time subject to certain claims and parties to certain legal proceedings incidental to the normal course of our business, including in connection with the Group’s lending activities, relationships with the Group’s employees and other commercial or tax matters. In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties or are in early stages of discovery, the Bank cannot state with confidence what the eventual outcome of these pending matters will be, what the timing of the ultimate resolution of these matters will be or what the eventual loss, fines or penalties related to each pending matter may be. The Bank believes that it has made adequate reserves related to the costs anticipated to be incurred in connection with these various claims and legal proceedings and believes that liabilities related to such claims and proceedings should not have, in the aggregate, a material adverse effect on the Group’s business, financial condition, or results of operations. However, in light of the uncertainties involved in such claims and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by the Bank; as a result, the outcome of a particular matter may be material to the Bank’s operating results for a particular period, depending upon, among other factors, the size of the loss or liability imposed and the level of the Bank’s income for that period.

Dividend Policy

We have normally paid an annual dividend in quarterly installments. The table below sets forth the historical per share and per ADS (each of which represents the right to receive one of our shares) amounts of interim and total dividends in respect of each fiscal year indicated.


	Euro per Share Interim										Dollars per ADS Interim
	First		Second		Third		Fourth		Total		First		Second		Third		Fourth		Total
2003		0.0775		0.0775		0.0775		0.0704		0.3029		0.08602		0.0899		0.0842		0.08801		0.36235
2004		0.0830		0.0830		0.0830		0.0842		0.3332		0.08484		0.08971		0.09175		0.09191		0.35821
2005		0.09296		0.09296		0.09296		0.13762		0.4165		0.09591		0.09466		0.09523		0.147016		0.432816
2006		0.106904		0.106904		0.106904		0.199913		0.5206		0.11582		0.11593		0.11400		0.222418		0.568168
2007		0.122940		0.122940		0.122940		0.281961		0.650781		0.137526		0.145308		0.149199		0.355829		0.787862
2008		0.135234		0.135234		0.122940		0.257373		0.650781		0.172148		0.137700		0.126043		0.266604		0.702495

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On August 1, 2009, we will pay the first dividend on account of the earnings for the 2009 financial year for a gross amount of €0.135234 per share.

The shareholders acting at the general shareholders’ meeting held on June 16, 2009, approved at the proposal of the board of directors, a €1 billion capital increase to enable shareholders to choose between receiving cash or shares equivalent to the amount of part of the annual dividend charged to the results of operations for 2009. With this initiative, the Bank has confirmed its policy of paying cash dividends, offering shareholders the option to receive part of them in shares with certain advantages.

For a discussion of regulatory and legal restrictions on our payments of dividends, see “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Restrictions on Dividends”.

For a discussion of Spanish taxation of dividends, see “Item 10. Additional Information—E. Taxation—Spanish tax considerations—Taxation of dividends”.

The dividends paid on the guaranteed non-cumulative preference stock of certain of our subsidiaries are limited by our Distributable Profits in the fiscal year preceding a dividend payment. “Distributable Profits” with respect to any year means our reported net profits after tax and extraordinary items for such year as derived from the Parent Bank’s non-consolidated audited profit and loss account prepared in accordance with Bank of Spain requirements and guidelines in effect at the time of such preparation. Such requirements and guidelines may be expected to reflect the Bank of Spain regulatory policies applicable to us, including without limitation those relating to the maintenance of minimum levels of capital. See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Capital Adequacy Requirements” and “—Restrictions on Dividends”. According to our interpretation of the relevant Bank of Spain requirements and guidelines, Distributable Profits during the preceding five years were:

Year Ended December 31,

Previous

Spanish

GAAP

IFRS-IASB

2004 (*)

2004

2005

2006

2007

2008

(in thousands of euros)

1,837,424

1,935,992

2,605,009

3,256,190

4,070,247

4,826,218


(*)		Statutory Distributable Profits.

The portion of our net income attributable to our subsidiaries has increased steadily in recent years as our subsidiaries have grown and we have acquired new subsidiaries. Such profits are available to us only in the form of dividends from our subsidiaries and we are dependent to a certain extent upon such dividends in order to have Distributable Profits sufficient to allow payment of dividends on our guaranteed preferred stock of our subsidiaries as well as dividends on our shares (although the payment of dividends on the shares is limited in the event of the non-payment of preference share dividends). We generally control a sufficient proportion of our consolidated subsidiaries’ voting capital to enable us to require such subsidiaries to pay dividends to the extent permitted under the applicable law. As a result of our growth, the Bank, as the holding entity of the shares of our various companies, has added investments in our subsidiaries, the financial costs of which are borne by us.

B. Significant Changes

For significant changes that have occurred since December 31, 2008, see our Form 6-K relating to our first quarter 2009 results filed with the Securities and Exchange Commission on May 1, 2009.

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Item 9. The Offer and Listing

A. Offer and listing details

Market Price and Volume Information

Santander’s Shares

During 2008, our shares were the shares with the highest trading volume on the Spanish stock exchanges. At December 31, 2008, our shares represented 16.72% of the IBEX 35 Stock Exchange Index, the second highest percentage among all Spanish issuers represented in this index. Our market capitalization of €53,960 million at 2008 year-end was the second largest of any Spanish company, according to information published by the Sociedad de Bolsas, S.A. (“Sociedad de Bolsas”).

At December 31, 2008, we had 3,034,816 registered holders of our shares and, as of such date, a total of 1,036,481,773 of our shares or 12.71% were held by 901 registered holders with registered addresses in the United States and Puerto Rico, including JP Morgan Chase, as depositary of our American Depositary Share program.

Our shares are traded on Spain’s automated “continuous market”, the national, centralized market which integrates by computer quotations originating in the four Spanish stock exchanges (Madrid, Barcelona, Valencia and Bilbao) (the “Automated Quotation Systems”). Our shares are also listed on the New York (in the form of American Depositary Shares), London, Milan, Lisbon, Buenos Aires and Mexico Stock Exchanges. At December 31, 2008, 59.95% of our shares were held of record by non-residents of Spain.

The table below sets forth the high, low and last daily sales prices in euros for our shares on the continuous market for the periods indicated.


	Euros per Share
	High		Low		Last

2004 Annual		9.77		7.70		9.13

2005 Annual		11.18		8.92		11.15

2006 Annual		14.37		10.54		14.14

2007 Annual		15.00		12.56		14.79
First Quarter		14.65		12.83		13.36
Second Quarter		14.50		13.06		13.69
Third Quarter		14.34		12.56		13.63
Fourth Quarter		15.00		13.64		14.79

2008 Annual		14.59		5.11		6.75
First Quarter		14.59		11.17		12.62
Second Quarter		14.22		11.67		11.67
Third Quarter		12.48		9.95		10.50
Fourth Quarter		11.69		5.11		6.75

Last six months
2008
December		6.85		6.00		6.75
2009
January		7.24		5.35		6.32
February		6.15		4.70		4.90
March		5.52		4.00		5.19
April		7.27		5.39		7.27
May		7.57		6.81		7.49
June (through June 24, 2009)		8.41		7.53		8.24

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The table below sets forth the reported high, low and last sale prices for our ADSs on the New York Stock Exchange for the periods indicated.


	Dollars Per ADS
	High		Low		Last

2004 Annual		12.47		9.43		12.37
2005 Annual		13.27		11.37		13.19
2006 Annual		18.73		13.16		18.66

2007
Annual		22.14		17.29		21.54
First Quarter		19.34		17.29		17.83
Second Quarter		19.46		17.67		18.38
Third Quarter		19.79		17.38		19.31
Fourth Quarter		22.14		19.24		21.54

2008
Annual		22.24		6.06		9.49
First Quarter		21.35		16.52		19.94
Second Quarter		22.24		18.19		18.19
Third Quarter		19.25		13.91		15.02
Fourth Quarter		16.44		6.06		9.49

Last six months
2008
December		9.73		7.48		9.49
2009
January		9.86		6.72		7.84
February		7.85		5.92		6.02
March		7.59		4.90		6.90
April		9.15		7.15		9.15
May		10.74		9.16		10.74
June (through June 24, 2009)		11.70		10.72		11.46

On June 24, 2009, the reported last sale price of our ADSs on the New York Stock Exchange was $11.46.

B. Plan of distribution

Not Applicable.

C. Markets

General

Spanish Securities Market

The Spanish securities market for equity securities (the “Spanish Stock Exchanges”) consists of four stock exchanges located in Madrid, Barcelona, Bilbao and Valencia (the “local exchanges”). The majority of the transactions conducted on them are done through the Automated Quotation System (Sistema Interbancario Bursátil Español or “S.I.B.E.”). During the year ended December 31, 2008, the Automated Quotation System accounted for the majority of the total trading volume of equity securities on the Spanish Stock Exchanges.

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Automated Quotation System

The Automated Quotation System was introduced in 1989 and links the four local exchanges, providing those securities listed on it with a uniform continuous market that eliminates most of the differences among the local exchanges. The principal feature of the system is the computerized matching of buy and sell orders at the time of entry of the order. Each order is executed as soon as a matching order is entered, but can be modified or canceled until executed. The activity of the market can be continuously monitored by investors and brokers. The Automated Quotation System is operated and regulated by the Sociedad de Bolsas, a corporation owned by the companies that manage the local exchanges. All trades on the Automated Quotation System must be placed through a bank, brokerage firm, an official stock broker or a dealer firm member of a Spanish stock exchange directly.

There is a pre-opening session held from 8:30 a.m. to 9:00 a.m. each trading day on which orders are placed at that time. The computerized trading hours are from 9:00 a.m. to 5:30 p.m. Each session will end with a 5 minute auction, between 5:30 and 5:35 p.m., with a random closedown of 30 seconds. The price resulting from each auction will be the closing price of the session.

From May 14, 2001, new rules came into effect regarding the maximum price fluctuations in the price of stocks. Under the new rules, each stock in the continuous market is assigned a static and a dynamic range within which the price of stocks can fluctuate. The price of a stock may rise or fall by its static range (which is published once a month and is calculated according to the stock’s average historic price volatility) above or below its opening price (which shall be the closing price of the previous session). When the stock trades outside of this range, the trading of the stock is suspended for 5 minutes, during which an auction takes place. After this auction, the price of the stock can once again rise or fall by its static range above or below its last auction price (which will be considered as the new static price before triggering another auction). Furthermore, the price of a stock cannot rise or fall by more than its dynamic price range (which is fixed and published once a month and is calculated according to the stock’s average intra-day volatility), from the last price at which it has traded. If the price variation exceeds the stock’s dynamic range a five minute auction is triggered.

Moreover, there is a block market (“el mercado de bloques”) allowing for block trades between buyers and sellers from 9:00 a.m. to 5:30 p.m. during the trading session. Under certain conditions, this market allows cross-transactions of trades at prices different from prevailing market prices. Trading in the block market is subject to certain limits with regard to price deviations and volumes.

Between 5:30 p.m. and 8:00 p.m., trades may occur outside the computerized matching system without prior authorization of the Sociedad de Bolsas, at a price within the range of 5% above the higher of the average price and closing price for the day and 5% below the lower of the average price and closing price for the day, if there are no outstanding bids or offers, as the case may be, on the system matching or bettering the terms of the proposed off-system transaction, and if the trade involves more than €300,000 and more than 20% of the average daily trading volume of the stock during the preceding quarter. At any time before 8:00 p.m., trades may take place (with the prior authorization of the Sociedad de Bolsas) at any price if:

	•		the trade involves more than €1.5 million and more than 40% of average daily trading volume of the stock during the preceding quarter;

	•		relates to a merger or spin-off of a listed company;

	•		relates to the reorganization of a business group;

	•		the transaction is executed for the purposes of settling litigation;

	•		involves certain types of contracts or complex transactions; or

	•		the Sociedad de Bolsas finds other justifiable cause.

184

Information with respect to computerized trades between 9:00 a.m. and 5:30 p.m. is made public immediately, and information with respect to trades outside the computerized matching system is reported to the Sociedad de Bolsas and published in the Boletín de Cotización and in the computer system by the next trading day.

Clearance and Settlement System

Until April 1, 2003, transactions carried out on the regional Spanish stock exchanges and the continuous market were cleared and settled through the Servicio de Compensación y Liquidación de Valores, S.A. (the “SCL”). Since April 1, 2003, the settlement and clearance of all trades on the Spanish stock exchanges, the Public Debt Market (Mercado de Deuda Pública), the AIAF Fixed Income Market (“Mercado AIAF de Renta Fija”) and Latibex — the Latin American stock exchange denominated in euros, are made through the Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S.A. (“Iberclear”), which was formed as a result of a merger between SCL and Central de Anotaciones del Mercado de Deuda Pública (CADE), which was managed by the Bank of Spain.

Book-Entry System

Ownership of shares listed on any Spanish stock exchange is required to be represented by entries in a register maintained by Iberclear, and transfers or changes in ownership are effected by entries in such register. The securities register system is structured in two levels: the central registry managed by Iberclear which keeps the securities balances of the participants, and a detailed registry managed by the participants where securities are listed by holder’s name.

Securities Market Legislation

The Spanish Securities Markets Act, which came into effect in 1989, among other things:

	•		established an independent regulatory authority, the CNMV, to supervise the securities markets;

	•		established a framework for the regulation of trading practices, tender offers and insider trading;

	•		required stock exchange members to be corporate entities;

	•		required companies listed on a Spanish stock exchange to file annual audited financial statements and to make public quarterly financial information;

	•		established a framework for integrating quotations on the four Spanish stock exchanges by computer;

	•		exempted the sale of securities from transfer and value added taxes;

	•		deregulated brokerage commissions as of 1992; and

	•		provided for transfer of shares by book-entry or by delivery of evidence of title.

The Securities Markets Act was amended by Law 37/1998, which implemented two European Union directives into Spanish law. The first is Directive 93/22/CE, relating to investment services within securities, later amended by Directive 95/26/CE of the European Parliament and Council. The second is Directive 97/9/CE of the European Parliament and Council, relating to indemnity systems.

Law 37/1998 introduced some innovations to the Securities Markets Act. The first was the recognition that both Spanish and other European Union Member State companies authorized to provide investment services have full access to the official secondary markets, with full capacity to operate, thereby enabling the direct admission of banking entities into the stock exchange area. The second innovation was that the scope of the Securities Markets Act was enlarged to include a list of financial instruments, such as financial exchange contracts, or installment financial contracts, which expanded the categories of securities included.

185

The Securities Markets Act has been further amended by Law 44/2002 (November 22, 2002) on reform measures of the financial system, which introduced certain modifications to the laws governing financial markets and corporations, generally, including:

	•		provisions regarding market transparency such as: requiring listed companies to establish an audit committee, redefining the reporting requirements for relevant events, rules relating to the treatment of confidential and insider information and related party transactions, and prevention of manipulative and fraudulent practices with respect to market prices;

	•		the establishment of Iberclear; and

	•		the authorization of the Minister of Economy and Finance to regulate financial services electronic contracts.

On July 17, 2003, the Securities Market law was amended by Law 26/2003 in order to reinforce the transparency of listed companies. It introduced:

	•		information and transparency obligations including detailed requirements of the contents of the corporate website of listed companies and the obligation to file with the CNMV an annual corporate governance report; and

	•		the obligation to implement a series of corporate governance rules including, among others, regulations regarding the boards of directors and the general shareholders’ meeting.

On March 11, 2005 Royal Decree Law 5/2005 was approved, modifying the Securities Market Law in order to implement the Directive 2003/71/EC of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading. The Directive: (i) harmonizes the requirements for the process of approval of prospectuses, which enables a prospectus to be valid throughout the European Union; and (ii) incorporates the application of the country of origin principle.

On April 22, 2005, the Securities Market Law was amended by Law 5/2005 on supervision of financial conglomerates in order to make the sectoral rules applicable to investment firms more consistent with other sectoral rules applicable to other groups with similar financial activities, such as credit institutions and insurance undertakings.

On November 14, 2005 the Securities Market Law was further amended by Law 19/2005, which refers to the European public limited-liability companies with registered offices in Spain and, on November 24, 2005, by Law 25/2005, of November 24, 2005, which regulates the capital risk entities.

Royal Decree 1310/2005 (November 4) partially developed the Securities Market Law 24/1988, in relation to the admission to trading of securities in the official secondary markets, the sale or subscription public offers and the prospectus required to those effects.

Royal Decree 1333/2005 (November 11), which developed the Securities Market Law 24/1988, in relation to market abuse.

Law 12/2006 (May 16) amended the Securities Market Law by (i) introducing a new article relating to notifications to the CNMV of transactions that might constitute insider dealing or market manipulation, (ii) completing the regulation of Bolsas y Mercados Españoles, and (iii) clarifying the regulation of significant participations on the entities which manage the clearing and settlement of securities and the Spanish secondary markets.

Law 36/2006 (November 30), relating to measures to prevent the tax fraud, among others, amends article 108 of the Securities Market Law.

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Law 6/2007 (April 12) amends the Securities Market Law, in order to modify the rules for takeover bids and for issuers transparency. This Law came into effect on August 13, 2007, and partially integrates into the Spanish legal system Directive 2004/25/EC of the European Parliament and of the Council of April 21, 2004 on takeover bids and Directive 2004/109/EC of the European Parliament and of the Council of December 15, 2004 on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC. This Law has been further developed by Royal Decree 1066/2007 (July 27) on rules applicable to takeover bids for securities and by Royal Decree 1362/2007 (October 19) on transparency requirements for issuers of listed securities. For a brief description of the provisions of Law 6/2007 as regards the rules applicable to takeover bids see “Item 10. Additional Information—B. Memorandum and Articles of Association—Tender Offers”.

Law 6/2007 (i) introduces several changes to the periodical financial information, annual, biannual and quarterly, to be published by issuers of listed securities; and (ii) introduces new developments to the system which establishes the duty to notify significant stakes in an enterprise, such as:

	•		anyone with a right to acquire, transfer or exercise voting rights granted by the shares, regardless of the actual ownership of the shares; and anyone owing, acquiring or transferring other securities or financial instruments which grant a right to acquire shares with voting rights, will also have to notify the holding of a significant stake in accordance with the developing regulations;

	•		Directors of listed companies, in addition to notifying any transaction concerning the shares or other securities or financial instruments of the issuer which are linked to these shares, will have to inform the CNMV of their stake upon appointment or resignation;

	•		Listed companies will be required to notify transactions concerning their treasury shares in certain cases, which will be established in the developing regulations.

Law 47/2007 (December 19) amends the Securities Market Law in order to adapt it to Directive 2004/39/EC on markets in financial instruments (MiFID), Directive 2006/73/EC implementing Directive 2004/39/EC with respect to the organizational requirements and operating conditions for investment firms and defining terms for the purpose of that Directive, and Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions. The amendments introduced by Law 47/2007 represent important reforms of the Securities Market Law and serve to (i) increase the number of investment services that can be performed by the entities; (ii) reinforce the measures for the protection of investors; (iii) establish new organizational procedures for investment firms; and (iv) reinforce the supervisory powers of the CNMV, establishing cooperation mechanisms among supervisory authorities. Directive 2006/49/EC and MiFID implementation have been introduced by Royal Decrees 216/2008 and 217/2008 (both of February 15), respectively.

Trading by Santander’s Subsidiaries in the Shares

Some of our subsidiaries, in accordance with customary practice in Spain, and as permitted under Spanish law, have regularly purchased and sold our shares both for their own account and for the accounts of customers. Our subsidiaries have intervened in the market for our shares primarily in connection with customer transactions and, occasionally, in connection with transactions by non-customers that are undertaken for commercial purposes or to supply liquidity to the market when it is reasonable to do so. Such trading activity also has provided a mechanism for accumulating shares that were used to meet conversions into our shares, of bonds issued by us and other affiliated companies and to make offerings of shares. We expect that our subsidiaries may continue to purchase and sell our shares from time to time.

Our trading activities in our shares are limited to those set forth above. No affiliated company acts as a “market maker” as that term is understood in the United States securities markets. The continuous market is driven by orders, which are matched by the market’s computer system according to price and time entered. Santander and Banesto’s broker subsidiaries, Santander Investment Bolsa, S.V., S.A., and Banesto Bolsa, S.A., S.V.B., and the other brokers authorized to trade on the continuous market (“Member Firms”) are not required to and do not serve as market makers maintaining independently established bid and ask prices. Rather, Member Firms place orders for their customers, or for their own account, into the market’s computer system. If an adequate counterparty order is not available on the continuous market at that time, the Member Firm may solicit counterparty orders from among its own clients and/or may accommodate the client by filling the client’s order as principal.

187

Under the Companies Law of Spain, a company and its subsidiaries are prohibited from purchasing shares of the company in the primary market. However, purchase of the shares is permitted in the secondary market provided that: (1) the aggregate of such purchases (referred to as “treasury stock” or “autocartera”) and the shares previously held by the company and its subsidiaries does not exceed 5% of the total capital stock of the company, (2) the purchases are authorized at a meeting of the shareholders of the acquiring company and, if the acquisition relates to shares in the parent company, the acquiring company’s parent, and (3) the acquiring company and its parent may create reserves equal to the book value of the parent company’s stock included in its assets.

The law requires that the CNMV be notified each time the acquisition of treasury stock made since the last notification reaches 1% of the voting rights of the company, regardless of any other preceding sales. The Companies Law establishes, in relation to the treasury stock shares (held by us and our affiliates), that the exercise of the right to vote and other non-financial rights attached to them shall be suspended. Financial rights arising from treasury stock held directly by us, with the exception of the right to allotment of new bonus shares, shall be attributed proportionately to the rest of the shares.

The portion of trading volume in the shares represented by purchases by our subsidiaries has varied widely from day to day and from month to month and may be expected to do so in the future. In 2008, 10.73% of the volume traded of the shares was effected not as principal by Santander Investment Bolsa, S.V., S.A. and 2.295% was effected not as principal by Banesto Bolsa, S.A., S.V.B. The portion of trading volume in shares allocable to purchases and sales as principal by our companies was approximately 5.7% in the same period. The monthly average percentage of outstanding shares held by our subsidiaries ranged from 0.075% to 0.784% in 2008. At December 31, 2008, the Parent Bank and our subsidiaries held 64,489,873 of our shares (0.807% of our total capital stock as of that date).

D. Selling shareholders

Not Applicable.

E. Dilution

Not Applicable.

F. Expense of the issue

Not Applicable.

Item 10. Additional Information

A. Share capital

Not Applicable.

B. Memorandum and articles of association

The following summary of the material terms of our By-laws is not meant to be complete and is qualified in its entirety by reference to our By-laws. Because this is a summary, it does not contain all the information that may be important to you. You should read our By-laws carefully before you decide to invest. Copies of our By-laws are incorporated by reference.

The current By-laws for Banco Santander, S.A., except for subsections 1 and 2 of Article 5 regarding the Bank’s share capital, were approved by our shareholders acting at the general shareholders’ meeting held on June 21, 2008.

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Since June 21, 2008, subsections 1 and 2 of Article 5 have been amended several times to reflect the recent capital increases carried out by the Bank. The current text for those subsections became effective on January 30, 2009, and updates the share capital of Banco Santander, S.A. and the number of shares representing such capital to accommodate the capital increase performed in conection with the Sovereign Bancorp acquisition. See “Item 4. Information on the Company—A History and development of the company Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations—Sovereign Bancorp, Inc. (“Sovereign”)”.

The current By-laws are included in Exhibit 1.1. The By-laws are also available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors General information By-laws”.

In connection with the amendment of our By-laws, the board of directors, at its meeting of March 23, 2009, resolved to approve new Rules and Regulations of the Board in order to bring some aspects of its internal regulations into line with the By-laws approved by the shareholders at the general shareholders’ meeting held on June 21, 2008. All references to the Rules and Regulations of the Board in this annual report on Form 20-F are references to the new text.

The Rules and Regulations of the Board are available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—Corporate governance—Board of directors—Rules and Regulations of the Board of Directors”.

General

As of December 31, 2008, the Bank’s share capital was €3,997,029,701.50, represented by a single class of 7,994,059,403 book-entry Santander shares with a nominal value of €0.50 each.

On January 26, 2009, the Bank issued 161,546,320 new shares to acquire the 75.65% of Sovereign that the Group did not own. Since that date, our share capital is €4,077,802,861.50, represented by a single class of 8,155,605,723 book-entry Santander shares with a nominal value of €0.50 each. All of our shares are fully paid and non-assessable. Spanish law requires that bank-listed equity securities be issued in book-entry form only.

Register

Santander is registered with the Commercial Registry of Santander (Finance Section). The Bank is also recorded in the Special Registry of Banks and Bankers with registration number 0049, and its fiscal identification number is A-39000013.

Corporate Object and Purpose

Article 2 of our By-laws states that the corporate objective and purpose of Santander consists of carrying-out all types of activities, operations and services specific to the banking business in general and which are permitted under current legislation and the acquisition, holding and disposal of all types of securities.

Certain Provisions Regarding Shareholder Rights

As of the date of the filing of this report, Santander’s capital is comprised of only one class of shares, all of which are ordinary shares and have the same rights. Santander may issue non-voting shares for a nominal amount of not more than one-half of the paid-up share capital, and redeemable shares for a nominal amount of not more than one-fourth of its share capital.

Our By-laws do not contain any provisions relating to sinking funds.

189

Our By-laws do not specify what actions or quorums are required to change the rights of holders of our stock. Under Spanish law, the rights of holders of stock may only be changed by an amendment to the By-laws of the company that complies with the requirements explained below under “—Meetings and Voting Rights.”

Meetings and Voting Rights

We hold our annual general shareholders’ meeting during the first six months of each fiscal year on a date fixed by the board of directors. Extraordinary meetings may be called from time to time by the board of directors whenever the board considers it advisable for corporate interests, and whenever so requested by shareholders representing at least 5% of the outstanding share capital of Santander. Notices of all meetings are published, at least one month prior to the date set for the meeting, in the Official Gazette of the Mercantile Register and in one of the local newspapers having the largest circulation in the province where the registered office of Santander is located. In addition, under Spanish law, the agenda of the meeting must be sent to the CNMV and the Spanish Stock Exchanges and published on the company’s website. Our last ordinary general meeting of shareholders was held on June 19, 2009 and our last extraordinary general meeting of shareholders was held on January 26, 2009.

Each Santander share entitles the holder to one vote. Registered holders of any number of shares who are current in the payment of capital calls will be entitled to attend shareholders’ meetings. Our By-laws do not contain provisions regarding cumulative voting.

Any Santander share may be voted by proxy. Subject to the limitations imposed by Spanish law, proxies may be given to any individual or legal person, must be in writing or by remote means of communication and are valid only for a single meeting except where the representative is the spouse or an ascendant or descendant of the shareholder giving the proxy, or where the proxy-holder holds a general power of attorney executed as a public instrument with powers to manage the assets of the represented party in the Spanish territory. According to Spanish law, if a director or another person solicits a proxy for a director thus obtaining more than three proxies and the director is subject to a conflict of interest, the director holding the proxies may not exercise the voting rights attaching to the represented shares in connection with decisions relating to:

	•		his appointment or ratification, removal, dismissal or withdrawal as director;

	•		the institution of a derivative action against him; or

	•		the approval or ratification of transactions between Santander and the director in question, companies controlled or represented by him, or persons acting for his account.

In accordance with the Rules and Regulations for the general shareholders’ meeting and in the manner established by such Rules and Regulations, the Group’s website includes from the date when the call of the general shareholders’ meeting is published, the text of all resolutions proposed by the board of directors with respect to the agenda items and the details regarding the manner and procedures for shareholders to follow to confer representation on any individual or legal entity. The manner and procedures for electronic delegation and voting via the Internet are also indicated.

At both general shareholders’ meetings held in 2004 (the Annual General Meeting of June 19, 2004 and the extraordinary general meeting of October 21, 2004) our shareholders could exercise their voting and representation rights prior to the meetings by electronic means (via the Internet). In addition, at the extraordinary general shareholders’ meeting of October 21, 2004, our shareholders could vote by mail and in the Annual General Meetings held on June 18, 2005, June 17, 2006, June 23, 2007, June 21, 2008 and June 19, 2009, and in the extraordinary general shareholders’ meeting of October 23, 2006, July 27, 2007 and January 26, 2009 our shareholders, besides exercising their voting and representation rights prior to the meeting by mail or via the Internet, were able to attend (besides attending and voting in person) via the Internet and were also able to vote in real time on the Internet on the resolutions considered at the meeting.

Only registered holders of Santander shares of record at least five days prior to the day on which a meeting is scheduled to be held may attend and vote at shareholders’ meetings. As a registered shareholder, the depositary will be entitled to vote the Santander shares underlying the Santander ADSs. The deposit agreement requires the depositary to accept voting instructions from holders of Santander ADSs and to execute such instructions to the extent permitted by law.

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In general, resolutions passed by a general meeting are binding upon all shareholders. In certain circumstances, Spanish law gives dissenting or absent shareholders the right to have their Santander shares redeemed by us at prices determined in accordance with established formulae or criteria. Santander shares held by the Bank or its affiliates are counted for purposes of determining quorums but may not be voted by the Bank or by its affiliates.

Resolutions at general meetings are passed provided that, regarding the voting capital present or represented at the meeting, the number of votes in favor is higher than the number of votes against or blank and abstentions.

In accordance with Spanish law, a quorum on first call for a duly constituted ordinary or extraordinary general meeting of shareholders requires the presence in person or by proxy of shareholders representing 25% of our subscribed voting capital. On second call there is no quorum requirement. Notwithstanding the above, a quorum of 50% of our subscribed voting capital is required on the first call to approve any of the following actions:

	•		issuance of bonds;

	•		increase or reduction of share capital;

	•		transformation of Santander (change in corporate nature);

	•		merger, split or spin-off;

	•		any other amendment of our By-laws; and

	•		dissolution.

A quorum of 25% of the subscribed voting capital is required to vote on such actions on the second call. A two-third majority of the present or represented voting capital is required to approve all of the above listed actions when the shareholders’ meeting is held on second call and less than 50% of the subscribed voting capital is present.

For purposes of determining the quorum, those shareholders who vote by mail or through the Internet are counted as being present at the meeting, as provided by the Rules and Regulations of the Bank’s general shareholders’ meetings.

Changes in Capital

Any increase or reduction in share capital must be approved at the general meeting in accordance with the procedures explained above in the section entitled “Meetings and Voting Rights”. However, the shareholders acting at the general shareholders’ meeting may delegate to the board of directors the power to increase share capital.

The capital increase may be effected by issuing new shares or by increasing the par value of existing shares. Capital reduction may be effected by reducing the par value of existing shares, by repurchasing them, or dividing them into groups for exchange.

Unpaid subscription amounts on partially paid-up shares must be paid by the shareholders at the time determined by the board of directors, within five years of the date of the resolution providing for the capital increase.

At the Bank’s annual meeting of shareholders held on June 19, 2009, the shareholders passed resolutions which, among other things, grant the Bank the authority to increase the Bank’s capital by up to €2,038,901,430.5 and also permit the Bank to issue bonds convertible or exchangeable into the Bank’s common stock in an amount up to €7 billion aggregate principal amount.

Dividends

We normally pay an annual dividend in advance in quarterly installments in August and November of the current year and February and generally in May, of the following year. We and our domestic banking subsidiaries are subject to certain restrictions on dividend payments, as prescribed by the Ministry of Economy and Finance and the Bank of Spain. See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Restrictions on Dividends”.

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Once the annual accounts have been approved, the shareholders at the general shareholders’ meeting will resolve on the allocation of the results for the fiscal year. Dividends may only be distributed out of the earnings for the fiscal year or with a charge to unappropriated reserves, after the payments required by the law and the By-laws have been made, provided that the stockholders’ equity disclosed in the accounts is not reduced , to less than the share capital as a result of the distribution. If there are any losses from prior fiscal years that reduce the Bank’s stockholders’ equity below the amount of the share capital, the earnings must be used to offset such losses.

The amount, time and form of payment of the dividends, to be distributed among the shareholders in proportion to their paid-in capital will be established by resolutions adopted at the general meeting. The shareholders at the general shareholders’ meeting and the board of directors may make resolutions as to the distribution of interim dividends, subject to limitations and in compliance with the requirements established by the law.

A shareholder’s dividend entitlement lapses five (5) years after the dividend payment date.

The shareholders at the general shareholders’ meeting may resolve that dividends in kind can be paid, provided that:

	•		the property or securities to be distributed are of the same nature;

	•		the property or securities have been admitted to listing on an official market as of the effective date of the resolution, or liquidity is guaranteed by Santander within a maximum period of one year; and

	•		the property or securities are not distributed for a value that is lower than the value at which they are recorded on Santander’s balance sheet.

Preemptive Rights

In the event of a capital increase each shareholder has a preferential right by operation of law to subscribe for shares in proportion to its shareholding in each new issue of Santander shares. The same right is vested on shareholders upon the issuance of convertible debt. Holders of convertible debt also have preemptive rights. However, preemptive rights of shareholders and holders of convertible debt may be excluded under certain circumstances by specific approval at the shareholders’ meeting (or upon its delegation by the board of directors) and preemptive rights are deemed excluded by operation of law in the relevant capital increase when the shareholders approve:

	•		capital increases following conversion of convertible bonds into Santander shares;

	•		capital increases due to the absorption of another company or of part of the spun-off assets of another company, when the new shares are issued in exchange for the new assets received; or

	•		capital increases due to Santander’s tender offer for securities using Santander’s shares as all or part of the consideration.

If capital is increased by the issuance of new shares in return for capital from certain reserves, the resulting new Santander shares will be distributed pro rata to existing shareholders.

Redemption

Our By-laws do not contain any provisions relating to redemption of shares except as set forth in connection with capital reductions. Nevertheless, pursuant to Spanish law, redemption rights may be created at a duly held general shareholders’ meeting. Such meeting will establish the specific terms of any redemption rights created.

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Registration and Transfers

The Santander shares are in book-entry form in the Iberclear system. We maintain a registry of shareholders. We do not recognize, at any given time, more than one person as the person entitled to vote each share in the shareholders meeting.

Under Spanish law and regulations, transfers of shares quoted on a stock exchange are normally made through a “Sociedad o Agencia de Valores”, credit entities and investment services companies, that are members of the Spanish stock exchange.

Transfers executed through stock exchange systems are implemented pursuant to the stock exchange clearing and settlement procedures of Iberclear. Transfers executed “over the counter” are implemented pursuant to the general legal regime for book entry transfer, including registration by Iberclear.

New shares may not be transferred until the capital increase is registered with the Commercial Registry.

Liquidation Rights

Upon a liquidation of Santander, our shareholders would be entitled to receive pro rata any assets remaining after the payment of our debts, taxes and expenses of the liquidation. Holders of non-voting shares, if any, are entitled to receive reimbursement of the amount paid before any amount is distributed to the holders of voting shares.

Change of Control

Our By-laws do not contain any provisions that would have an effect of delaying, deferring or preventing a change in control of the company and that would operate only with respect to a merger, acquisition or corporate restructuring involving Santander or any of our subsidiaries. Nonetheless, certain aspects of Spanish law described in the following section may delay, defer or prevent a change of control of the Bank or any of our subsidiaries in the event of a merger, acquisition or corporate restructuring.

Legal Restrictions on Acquisitions of Shares in Spanish Banks

Certain provisions of Spanish law require notice to the Bank of Spain prior to the acquisition by any individual or corporation of a substantial number of shares of a Spanish bank.

Any individual or corporation that wishes to acquire, directly or indirectly, a significant participation (participación significativa) in a Spanish bank must give advance notice to the Bank of Spain describing the size of such participation, its terms and conditions, and the anticipated closing date of the acquisition. “Significant participation” is defined as 5% of the outstanding share capital or voting rights of the bank or any lesser participation that gives the acquirer effective influence or control over the target bank.

In addition, advance notice must be given to the Bank of Spain of any increase, direct or indirect, in any significant participation at each of the following levels of ownership: 10%; 15%; 20%; 25%; 33%; 40%; 50%; 66% and 75%. Notice to the Bank of Spain is also required from anyone who, as a result of the contemplated acquisition, may attain sufficient power to control the credit entity.

Any acquisition mentioned in the preceding sentence to which the required notice was not given or even if given, a three month period after receipt of notice has not yet elapsed, or that is opposed by the Bank of Spain will have the following effects: (1) the acquired shares will have no voting rights, (2) the Bank of Spain may seize control of the bank or replace its board of directors, and (3) a fine may be levied on the acquirer.

The Bank of Spain has three months after the receipt of notice to object to a proposed transaction. Such objection may be based on finding the acquirer unsuitable on the basis, inter alia, of its commercial or professional reputation, its solvency or the transparency of its corporate structure. If three months elapse without any word from the Bank of Spain, its authorization is deemed granted. However, absent objection by the Bank of Spain, it may set forth a different maximum period for closing the proposed transaction.

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Any individual or institution that plans to sell its significant participation, or reduce it to one of the above-mentioned levels of ownership, or because of any sale will lose control of the entity, must provide advance notice to the Bank of Spain indicating the amount of the transaction and its anticipated closing date. Failure to comply with these requirements may subject the offending party to penalties.

Credit entities must notify the Bank of Spain as soon as they become aware of any acquisition or transfer of significant shares of its capital stock that exceeds the above-mentioned percentages. Furthermore, banks are required to inform the Bank of Spain as soon as they become aware, and in any case not later than 15 days after, any acquisition by a person or a group of at least 1% of such a bank’s total equity. The Bank of Spain also requires each bank to notify the Bank of Spain of a list, dated on the last day of each quarter and during April, July, October and January of all its shareholders that are financial institutions and all other shareholders that own at least 0.25% of the bank’s total equity.

If the Bank of Spain determines at any time that the influence of a person who owns a significant participation of a bank may adversely affect that bank’s financial situation, it may request that the Ministry of Economy and Finance: (1) suspend the voting rights of such person’s shares for a period not exceeding 3 years; (2) seize control of the bank or replace its board of directors; or (3) revoke the bank’s license in exceptional circumstances. A fine may also be levied on the relevant person.

Tender Offers

Law 6/2007, of April 12, which amends the Securities Market Law, has modified the rules for takeover bids. This Law, which came into effect on August 13, 2007, partially transposes into the Spanish legal system Directive 2004/25/EC of the European Parliament and of the Council of April 21, 2004 on takeover bids.

The new rules replace the traditional system where launching a takeover bid was compulsory prior to acquiring a significant shareholding in the target company and partial bids were permitted for a regime where takeover bids must be made for all the share capital after obtaining the control of a listed company (i.e. 30% of the voting rights or appointment of more than one-half of the members of the company’s board of directors) whether such control is obtained by means of an acquisition of securities or an agreement with other holders of securities.

The above does not prevent parties from making voluntary bids for a number that is less than the totality of securities in a listed company.

Law 6/2007 also regulates, among other things, (i) new obligations for the board of directors of the offeree company in terms of preventing the takeover bid (passivity rule); and (ii) the squeeze-out and sell-out rights when the offeror is a holder of securites representing at least 90% of the voting capital of the offeree company and the prior takeover bid has been accepted by holders of securities representing at least 90% of the voting rights covered by the bid.

Royal Decree 1066/2007 on rules applicable to takeover bids for securities further developed the regulations on takeover bids established by Law 6/2007, completing the amendments introduced by Law 6/2007, in order to ensure that takeover bids are carried out within a comprehensive legal framework and with absolute legal certainty. The Royal Decree contains provisions regarding: (i) the scope and application to all takeover bids, whether voluntary or mandatory, for a listed company; (ii) the rules applicable to mandatory takeover bids when control of a company is obtained; (iii) other cases of takeover bids, such as bids for de-listing of securities and bids that must be made when a company wishes to reduce capital through the acquisition of its own shares for subsequent redemption thereof; (iv) the consideration and guarantees offered in a bid; (v) stages of the procedure that must be followed in a takeover bid; (vi) the mandatory duty of passivity of the offeree company’s board of directors and the optional regime of neutralization of other preventive measures against bids; (vii) changes to, withdrawal of, and cessation of effects of the bid; (viii) the acceptance period, the calculation of the acceptances received and the settlement of the bid; (ix) the procedures applicable to competing offers; (x) the rules for squeeze-outs and sell-outs; and (xi) certain rules on supervision, inspection and sanctions applicable with respect to the regulations on takeover bids.

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Reporting Requirements

Royal Decree 1362/2007 requires that any entity which acquires or transfers shares and as a consequence the number of voting rights held exceeds, reaches or is below the threshold of 3%, 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% or 90%, of the voting rights of a company, for which Spain is the member state of origin, listed on a Spanish stock exchange or on any other regulated market in the European Union, must, within 4 days after that acquisition or transfer, report it to such company, and to the CNMV. This duty to report the holding of a significant stake is applicable not only to the acquisitions and transfers in the terms described above, but also to those cases in which in the absence of an acquisition or transfer of shares, the percentage of an individual’s voting rights exceeds, reaches or is below the thresholds that trigger the duty to report, as a consequence of an alteration in the total number of voting rights of an issuer. Similar disclosure obligations apply, among others, in the event of: (i) the acquisition or disposal of any financial instruments entitling the holder to acquire the company’s shares (such as options, futures, swaps, etc.); (ii) certain voting, deposit, temporary transfer or other agreements regarding the relevant shares; or (iii) custodians or proxy-holders who can exercise with discretion the voting rights attached to the relevant shares. The above mentioned threshold percentage will be 1% or any multiple of 1% whenever the person who has the duty to notify is a resident of a tax haven or of a country or territory where there is no taxation or where there is no obligation to exchange tax information (in accordance with Spanish law).

In addition, any Spanish company listed on the Spanish stock exchanges must report any acquisition by such company (or a subsidiary) of the company’s own shares if the acquisition, together with any acquisitions since the date of the last report and without deducting sales of its own shares by the company or by its subsidiaries, causes the company’s ownership of its own shares to exceed 1% of its voting rights. See “Item 9. The Offer and Listing—C. Markets—Trading by Santander’s Subsidiaries in the Shares.”

Members of the board of directors of listed companies, in addition to notifying the CNMV of any transaction concerning the shares or other securities or financial instruments of the issuer which are linked to these shares, are required to inform the CNMV of their ratio of voting rights upon appointment or resignation.

In addition, top managers of any listed company must report to the CNMV the acquisition or disposal of shares or other securities or financial instruments of the issuer which are linked to these shares.

Board of directors

Our board of directors may be made up of a minimum of 14 and a maximum of 22 members, appointed at the time of the general meeting of shareholders.

Members of the board of directors are elected for an initial term of five years but can be re-elected. One fifth of the members of the board are elected each year.

A director could serve for a term shorter than the one for which he or she has been initially elected if the shareholders acting at a duly called general meeting decide that that director be replaced before completing his or her term.

Although there is no provision in Spanish law regarding the composition of a board of directors, the Rules and Regulations of the Board provide that in exercising its powers to make proposals at the general shareholders’ meeting and to designate directors by interim appointment to fill vacancies, the board shall endeavor to ensure that the external or non-executive directors represent a wide majority over the executive directors and that the former include a reasonable number of independent directors. In addition, in all events, the board of directors shall endeavor such that the number of independent directors represent at least one-third of all directors.

Article 42.1 of our By-laws also provides that the shareholders at the general shareholders’ meeting shall endeavor to ensure that external or non-executive directors represent a large majority of the board of directors, and that a reasonable number of the board of directors are independent directors. In addition, the shareholders at the general shareholders’ meeting shall likewise endeavor to ensure that independent directors represent at least one-third of the total number of directors.

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These independence standards may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE. See Item 16G of Part II, “Corporate Governance—Independence of the directors on the board of directors”. The Bank currently complies with this requirement.

Certain powers of the board of directors

The actions of the members of the board are limited by Spanish law and certain general provisions contained in our By-laws. For instance, Article 57 of our By-laws states that the directors will be liable to Santander, to our shareholders and to our corporate creditors for any damages that they may cause by acts or omissions which are contrary to law or to the By-laws or by acts or omissions contrary to the duties inherent in the exercise of their office.

A director’s power to vote on a proposal, arrangement or contract in which such director is materially interested is not regulated by our By-laws. Conflicts of interest are regulated by Article 30 of the Rules and Regulations of the Board. Under Article 30, a director is obliged to inform the board of any direct or indirect conflict of interest which may exist with the Bank. If such a conflict relates to a particular transaction, then the director (i) may not undertake the transaction without the board’s authorization (such authorization can only be granted following a report of the appointments and remuneration committee); and (ii) the director may not take part in the discussion or voting regarding the transaction to which the conflict relates.

According to our By-laws, unpaid subscription amounts on partially paid-up shares shall be paid up by the shareholders at the time determined by the board of directors, within five years of the date of the resolution providing for the capital increase. The manner and other details of such payment shall be determined by the resolution providing for the capital increase. Without prejudice to the effects of default as set forth by law, any late payment of unpaid subscription amounts shall bear, for the benefit of the Bank, such interest as is provided by law in respect of late payments, starting from the day when payment is due and without any judicial or extra-judicial demand being required. In addition, the Bank shall be entitled to bring such legal actions as may be permitted by law in these cases.

Our current By-laws provide that the members of the board of directors are entitled to receive compensation for performing the duties entrusted to them by reason of their appointment, to be paid as a share in profits and by-law mandated compensation. This compensation has two components: an annual retainer and attendance fees. Attendance fees must be paid in advance on account of the profits for the fiscal year. The specific amount payable to each of the directors will be determined by the board of directors, taking into consideration the positions held by each director on the board and their membership in and attendance at the meetings of the various committees. The aggregate amount of the compensation for performing the duties entrusted to the directors by reason of their appointment is equal to one percent of Santander’s profit for the fiscal year, provided, however, that the board may resolve that such percentage be reduced in those years in which the board deems it justified.

Directors may also receive compensation in the form of shares of the Bank or options over the shares, or other remuneration linked to share value following a resolution adopted by the shareholders at the general shareholders’ meeting (conducted in accordance with our By-laws and applicable Spanish legislation).

Regardless of the limit set above, the directors are entitled to receive compensation (salaries, incentives, bonuses, pension, insurance and severance payments) that the board of directors consider appropriate, for the performance of duties in Santander other than the duties of supervision and collective decision-making that the directors perform as members of the board.

The board of directors must, on an annual basis, prepare a report, which sets forth the standards and basis used to determine the compensation of the directors and the compensation received by each director.

Board of directors Qualification

There are no mandatory retirement provisions due to age for board members in our By-laws or in the regulations of our board of directors. These regulations contain provisions relating to the cessation of directorship for other reasons.

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C. Material contracts

During the past two years, the Bank was not a party to any contract outside its ordinary course of business that was material to the Group as a whole, except as disclosed in Item 4 of Part I, “Information on the Company—A History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations—ABN AMRO Holding N.V. (“ABN AMRO”)” and Item 4 of Part I, “Information on the Company—A History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations—Sovereign Bancorp, Inc. (“Sovereign”)”.

D. Exchange controls

Restrictions on Foreign Investments

Under present regulations, foreign investors may transfer invested capital, capital gains and dividends out of Spain without limitation on the amount other than applicable taxes. See “—Taxation”. On July 4, 2003, Law 19/2003 was approved which updates Spanish exchange control and money laundering prevention provisions, by recognizing the principle of freedom of the movement of capital between Spanish residents and non residents. The law establishes procedures for the declaration of capital movements for purposes of administrative or statistical information and authorizes the Spanish Government to take measures which are justified on grounds of public policy or public security. It also provides the mechanism to take exceptional measures with regard to third countries if such measures have been approved by the European Union or by an international organization to which Spain is a party. The Spanish stock exchanges and securities markets are open to foreign investors. Royal Decree 664/1999, on Foreign Investments (April 23, 1999), established a new framework for the regulation of foreign investments in Spain which, on a general basis, will no longer require any prior consents or authorizations from authorities in Spain (without prejudice to specific regulations for several specific sectors, such as television, radio, mining, telecommunications, etc.). Royal Decree 664/1999 requires notification of all foreign investments in Spain and liquidations of such investments upon completion of such investments to the Investments Registry of the Ministry of Economy and Finance, strictly for administrative statistical and economical purposes. Only investments from “tax haven” countries (as they are defined in Royal Decree 1080/1991), shall require notice before and after performance of the investment, except that no prior notice shall be required for: (1) investments in securities or participations in collective investment schemes that are registered with the CNMV, and (2) investments that do not increase the foreign ownership of the capital stock of a Spanish company to over 50%. In specific instances, the Counsel of Ministers may agree to suspend, all or part of, Royal Decree 664/1999 following a proposal of the Minister of Economy and Finance, or, in some cases, a proposal by the head of the government department with authority for such matters and a report of the Foreign Investment Body. These specific instances include a determination that the investments, due to their nature, form or condition, affect activities, or may potentially affect activities relating to the exercise of public powers, national security or public health. Royal Decree 664/1999 is currently suspended for investments relating to national defense. Whenever Royal Decree 664/1999 is suspended, the affected investor must obtain prior administrative authorization in order to carry out the investment.

E. Taxation

The following is a discussion of the material Spanish and US federal income tax consequences to you of the ownership and disposition of the ADSs or shares.

The discussion of Spanish tax consequences below applies to you only if you are a non-resident of Spain and your ownership of ADSs or shares is not effectively connected with a permanent establishment or fiscal base in Spain and only if you are a US resident entitled to the benefits of the Convention Between the United States and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “Treaty”).

You should consult your own tax adviser as to the particular tax consequences to you of owning the shares or ADSs including your eligibility for the benefits of any treaty between Spain and the country of your residence for the avoidance of double taxation, the applicability or effect of any special rules to which you may be subject, and the applicability and effect of state, local, foreign and other tax laws and possible changes in tax law.

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Spanish tax considerations

The following is a summary of material Spanish tax matters and is not exhaustive of all the possible tax consequences to you of the acquisition, ownership and disposition of ADSs or shares. This discussion is based upon the tax laws of Spain and regulations thereunder, which are subject to change, possibly with retroactive effect.

Taxation of dividends

Under Spanish law, dividends paid by a Spanish resident company to a holder of ordinary shares or ADSs not residing in Spain for tax purposes and not operating through a permanent establishment in Spain are subject to Spanish Non-Resident Income Tax at an 18% rate.

In addition, according to Spanish Non Resident Income Tax Law, if you are resident in the European Union or at a country with which there is an effective exchange of information for tax purposes as defined in Spanish Law 36/2006 and you do not operate in Spain through a permanent establishment, dividends up to 1,500 euros, considering all Spanish source dividends you may obtain in the calendar year, are exempt from Spanish taxation. However, Spanish withholding tax will nevertheless be required to be deducted from the gross amount of the dividends, and you will have to seek a refund of such withholding taxes from the Spanish tax authorities, following the standard refund procedure described below.

We will levy an initial withholding tax on the gross amount of dividends at an 18% tax rate, following the procedures set forth by the Order of April 13, 2000. However, under the Treaty and subject to the fulfillment of certain requirements, you may be entitled to a reduced rate of 15%.

To benefit from the Treaty’s reduced rate of 15%, you must provide our depositary, JPMorgan Chase, with a certificate from the United States Internal Revenue Service (the “IRS”) stating that to the knowledge of the IRS, you are a resident of the United States within the meaning of the Treaty. The IRS certificate is valid for a period of one year.

According to the Order of April 13, 2000, to get a direct application of the Treaty-reduced rate of 15%, the certificate referred to above must be provided to our depositary before the tenth day following the end of the month in which the dividends were distributable by us. If you fail to timely provide us with the required documentation, you may obtain a refund of the 3% in excess withholding that would result from the Spanish tax authorities in accordance with the procedures below.

Spanish refund procedure

According to Spanish Regulations on Non-Resident Income Tax, approved by Royal Decree 1776/2004, dated July 30, 2004, as amended, a refund of the amount withheld in excess of the rate provided by the Treaty can be obtained from the relevant Spanish tax authorities. To pursue the refund claim, if you are a US resident entitled to the benefits of the Treaty, you are required to file all of the following:

	•		a Spanish 210 Form,

	•		the certificate referred to in the preceding section, and

	•		evidence that Spanish non-resident income tax was withheld with respect to you.

The refund claim must be filed within four years of the date on which the withheld tax was collected by the Spanish tax authorities. You are urged to consult your own tax advisor regarding refund procedures and any US tax implications of refund procedures.

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Taxation of capital gains

Under Spanish law, any capital gains derived from securities issued by persons residing in Spain for tax purposes are considered to be Spanish source income and, therefore, are taxable in Spain. For Spanish tax purposes, income obtained by you if you are a US resident from the sale of ADSs or shares will be treated as capital gains. As of January 1, 2007, Spanish non-resident income tax is currently levied at an 18% tax rate on capital gains obtained by persons not residing in Spain for tax purposes who are not entitled to the benefit of any applicable treaty for the avoidance of double taxation.

Notwithstanding the above, capital gains derived from the transfer of shares on an official Spanish secondary stock market by any holder who is a resident of a country that has entered into a treaty for the avoidance of double taxation with Spain containing an “exchange of information” clause will be exempt from taxation in Spain. In addition, under the Treaty, capital gains realized by you upon the disposition of ADSs or shares will not be taxed in Spain provided you have not held, directly or indirectly, 25% or more of our stock during the twelve months preceding the disposition of the stock. You are required to establish that you are entitled to this exemption by providing to the relevant Spanish tax authorities an IRS certificate of residence in the United States, together with the appropriate Spanish tax form, not later than 30 days after the capital gain was realized.

Spanish wealth tax

Individuals not residing in Spain who hold shares or ADSs located in Spain are subject to the Spanish wealth tax (Spanish Law 19/1991), which imposes a tax on property located in Spain on the last day of any year. The Spanish tax authorities may take the view that all shares of Spanish corporations and all ADSs representing such shares are located in Spain for Spanish tax purposes. However, Law 4/2008, dated December 23, 2008, has amended the Spanish wealth tax law, introducing a 100% tax rebate and eliminating the obligation to file any form. Consequently, no obligation for this tax arises for non resident individuals holding shares or ADSs on December 31, 2008.

Spanish inheritance and gift taxes

Transfers of shares or ADSs upon death or by gift are subject to Spanish inheritance and gift taxes (Spanish Law 29/1987) if the transferee is a resident in Spain for tax purposes, or if the shares or ADSs are located in Spain at the time of gift or death, or the rights attached thereto could be exercised or have to be fulfilled in the Spanish territory, regardless of the residence of the beneficiary. In this regard, the Spanish tax authorities may determine that all shares of Spanish corporations and all ADSs representing such shares are located in Spain for Spanish tax purposes. The applicable tax rate, after applying all relevant factors, ranges between 0% and 81.6% for individuals.

Gifts granted to corporations non-resident in Spain are subject to Spanish Non-Resident Income Tax at an 18% tax rate on the fair market value of the shares as a capital gain. Prior to January 1, 2007 the rate was 35%. If the donee is a United States corporation, the exclusions available under the Treaty described in the section “—Taxation of capital gains” above will be applicable.

Expenses of transfer

Transfers of ADSs or shares will be exempt from any transfer tax or value-added tax. Additionally, no stamp tax will be levied on such transfers.

US Tax Considerations

The following summary describes the material US federal income tax consequences of the ownership and disposition of ADSs or shares, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to acquire such securities. The summary applies only to US Holders (as defined below) that hold ADSs or shares as capital assets for tax purposes and does not address special classes of holders, such as:

	•		certain financial institutions;

	•		insurance companies;

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	•		dealers and traders in securities that use a mark-to-market method of tax accounting;

	•		holders holding ADSs or shares as part of a hedge, “straddle”, conversion transaction or integrated transaction;

	•		holders whose “functional currency” is not the US dollar;

	•		holders liable for the alternative minimum tax;

	•		tax exempt entities, including “individual retirement accounts” and “Roth IRAs”;

	•		partnerships or other entities classified as partnerships for US federal income tax purposes;

	•		holders that own or are deemed to own 10% or more of our voting shares;

	•		persons who acquired our ADSs or shares pursuant to the exercise of an employee stock option or otherwise as compensation;

	•		persons holding ADSs or shares in connection with a trade or business outside the United States.

If an entity that is classified as a partnership for US federal income tax purposes holds shares or ADSs, the US federal income tax treatment of a partner will generally depend on the status of the partner and upon the activities of the partnership. Partnerships holding shares or ADSs and partners in such partnerships should consult their tax advisers as to the particular US federal income tax consequences of holding and disposing of the shares or ADSs.

The summary is based upon tax laws of the United States including the Internal Revenue Code of 1986, as amended to the date hereof (the “Code”), administrative pronouncements, judicial decisions and final, temporary and proposed Treasury Regulations, all as of the date hereof, changes to any of which may affect the tax consequences described herein possibly with retroactive effect. In addition, the summary is based on the Treaty and is based in part on representations of the depositary and assumes that each obligation provided for in or otherwise contemplated by the deposit agreement or any other related document will be performed in accordance with its terms. US Holders are urged to consult their own tax advisers as to the US, Spanish or other tax consequences of the acquisition, ownership and disposition of ADSs or shares in their particular circumstances.

As used herein, a “US Holder” is, for US federal income tax purposes, a beneficial owner of ADSs or shares that is:

(i)		a citizen or resident of the United States;

(ii)		a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States or of any political subdivision thereof; or

(iii)		an estate or trust the income of which is subject to US federal income taxation regardless of its source.

In general, for US federal income tax purposes, US Holders of ADSs will be treated as the owners of the underlying shares represented by those ADSs. Accordingly, no gain or loss will be recognized if a US Holder exchanges ADSs for the underlying shares represented by those ADSs.

The US Treasury has expressed concerns that parties to whom American depositary shares are released before delivery of shares to the depositary (“pre-release”), or intermediaries in the chain of ownership between US holders and the issuer of the security underlying the American depositary shares, may be taking actions that are inconsistent with the claiming of foreign tax credits by US holders of American depositary shares. These actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate holders. Accordingly, the creditability of Spanish taxes and the availability of the reduced tax rate for dividends received by certain non-corporate holders, each described below, could be affected by actions taken by these parties or intermediaries.

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Taxation of Distributions

Subject to the discussion of the passive foreign investment company rules below, to the extent paid out of our current or accumulated earnings and profits (as determined in accordance with US federal income tax principles), distributions, including the amount of any Spanish withholding tax, made with respect to ADSs or shares (other than certain pro rata distributions of our capital stock or rights to subscribe for shares of our capital stock) will be includible in the income of a US Holder as foreign-source ordinary dividend income. Because we do not maintain calculations of our earnings and profits under US federal income tax principles, it is expected that distributions generally will be reported to US Holders as dividends. These dividends will be included in a US Holder’s income on the date of the US Holder’s (or in the case of ADSs, the depositary’s) receipt of the dividend, and will not be eligible for the “dividends received deduction” generally allowed to corporations receiving dividends from domestic corporations under the Code. The amount of the distribution will equal the US dollar value of the euros received, calculated by reference to the exchange rate in effect on the date that distribution is received (which, for US Holders of ADSs, will be the date that distribution is received by the depositary), whether or not the depositary or US Holder in fact converts any euros received into US dollars at that time. If the dividend is converted into US dollars on the date of receipt, a US Holder generally will not be required to recognize foreign currency gain or loss in respect of the dividend income. A US Holder may have foreign currency gain or loss if the dividend is converted into US dollars after the date of receipt. Any gains or losses resulting from the conversion of euros into US dollars will be treated as ordinary income or loss, as the case may be, of the US Holder and will be US-source.

Subject to applicable limitations and the discussion above regarding concerns expressed by the US Treasury, under current law, dividends paid to certain non-corporate US holders in taxable years beginning before January 1, 2011 will be taxed at favorable rates, up to a maximum rate of 15%. Non-corporate holders should consult their own tax advisers to determine the implications of the rules regarding this favorable rate in their particular circumstances.

Subject to certain generally applicable limitations that may vary depending upon your circumstances and subject to the discussion above regarding concerns expressed by the US Treasury, a US Holder will be entitled to a credit against its US federal income tax liability for Spanish withholding taxes at the rate provided by the Treaty. Spanish income taxes withheld in excess of the rate applicable under the Treaty will not be elegible for credit against a U.S Holder’s federal income tax liability. See “Spanish tax considerations — Spanish refund procedures —” for a discussion of how to obtain amounts withheld in excess of the applicable Treaty rate. The limitation on foreign taxes eligible for credit is calculated separately with regard to specific classes of income. Instead of claiming a credit, a US Holder may, at its election, deduct such otherwise creditable Spanish taxes in computing taxable income, subject to generally applicable limitations under US law.

A US Holder must satisfy minimum holding period requirements in order to be eligible to claim a foreign tax credit for foreign taxes withheld on dividends. The rules governing foreign tax credits are complex and, therefore, US Holders are urged to consult their own tax advisers to determine whether they are subject to any special rules that limit their ability to make effective use of foreign tax credits.

Sale and Other Disposition of ADSs or Shares

Subject to the discussion of the passive foreign investment company rules below, gain or loss realized by a US Holder on the sale or exchange of ADSs or shares will be subject to US federal income tax as capital gain or loss (and will be long-term capital gain or loss if the US Holder held the ADSs or shares for more than one year) in an amount equal to the difference between the US Holder’s tax basis in the ADSs or shares and the amount realized on the disposition, in each case as determined in US dollars. Gain or loss, if any, will be US-source for foreign tax credit purposes. The deductibility of capital losses is subject to limitations. Long-term capital gain of a non-corporate US holder is generally taxed at a preferential rate.

Passive Foreign Investment Company Rules

We believe that we were not a “passive foreign investment company” (“PFIC”) for US federal income tax purposes for the taxable year 2008. However, since our PFIC status depends upon the composition of our income and assets and the fair market value of our assets (including, among others, less than 25 percent owned equity investments) from time to time, and upon certain proposed Treasury Regulations that are not yet in effect but are proposed to become effective for taxable years after December 31, 1994, there can be no assurance that we will not be a PFIC for any taxable year.

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If we are a PFIC for any taxable year, any gain recognized by a US Holder on a sale or other disposition of ADSs or shares would be allocated ratably over the US Holder’s holding period for the ADSs or shares. The amounts allocated to the taxable year of the sale or other exchange and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to all other taxable years would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the amount allocated to those taxable years. Further, any distribution in respect of ADSs or shares in excess of 125 percent of the average of the annual distributions on ADSs or shares received by the US Holder during the preceding three years or the US Holder’s holding period, whichever is shorter, would be subject to taxation as described above. Certain elections may be available that would result in alternative treatments (such as mark-to-market treatment) of the ADSs or shares.

In addition, if we are a PFIC in a taxable year in which we pay a dividend or the prior taxable year, the 15% dividend rate discussed above with respect to dividends paid to non-corporate holders would not apply.

Information Reporting and Backup Withholding

Payment of dividends and sales proceeds that are made within the United States or through certain US-related financial intermediaries generally are subject to information reporting, and may be subject to backup withholding, unless (i) the US Holder is a corporation or other exempt recipient or (ii) in the case of backup withholding, the US Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. The amount of any backup withholding from a payment to a US Holder will be allowed as a credit against the US Holder’s US federal income tax liability and may entitle the US Holder to a refund, provided that the required information is timely furnished to the IRS.

F. Dividends and paying agents

Not Applicable.

G. Statement by experts

Not Applicable.

H. Documents on display

We are subject to the information requirements of the Exchange Act, except that as a foreign issuer, we are not subject to the proxy rules or the short-swing profit disclosure rules of the Exchange Act. In accordance with these statutory requirements, we file or furnish reports and other information with the SEC. Reports and other information filed or furnished by us with the SEC may be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, 100 F Street, N.E., Washington, D.C. 20549, and at the SEC’s regional offices at 233 Broadway, New York, New York 10279 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may also be inspected at the offices of the New York Stock Exchange, 11 Wall Street, New York, New York 10005, on which our ADSs are listed. In addition, the SEC maintains a website that contains information filed electronically with the SEC, which can be accessed over the internet at http://www.sec.gov. The information contained on this website does not form part of the present paper.

I. Subsidiary information

Not Applicable.

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Item 11. Quantitative and Qualitative Disclosures About Market Risk

Introduction

Our risk management activities involve the integrated qualification and quantification of the different types of risk (credit risk, operational risk, reputational risk and market risk) which are assumed by our business units in their activities.

We have divided this section into the following eight parts:

	•		Corporate principles of risk management;

	•		Corporate governance of the risk function;

	•		Credit risk;

	•		Operational risk;

	•		Reputational risk;

	•		Integral control of risk;

	•		Adjustment to the new regulatory framework;

	•		Economic capital;

	•		Risk training activities; and

	•		Market risk.

Part 1. Corporate principles of risk management

The vital importance for banks to have appropriate risk management was highlighted in 2008.

Quality management of risk is one of our hallmarks and thus a top priority in our business. For 150 years, we believe we have combined prudence in risk management with use of advanced risk management techniques, which we believe to have proven to be decisive in generating recurrent and balanced earnings, as well as creating shareholder value.

Our risk management is based on the following principles:

• Independence from the business areas. Matías R. Inciarte, the Group’s third vice-chairman and chairman of the board’s risk committee, reports directly to the executive committee and to the board.

• Support for business in achieving commercial goals by maintaining independence and the quality of risk. The organizational structure that manages risk is adapted to the commercial structure and ensures business and risk managers cooperate.

• Collective decision-making (including at the branch level). This ensures a variety of opinions are heard and results are not based on decisions made solely by individuals.

• Longstanding tradition of using tools for internal rating and scoring, such as risk adjusted return (RORAC), Value at Risk (VaR), economic capital, analysis of extreme scenarios, etc.

• Global focus through an integral treatment of all risk factors in all business units, and the utilization of economic capital as a homogeneous metric for the risk exposure and the basis for measuring management.

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• Set and achieve medium-low risk profiles as a target, and maintain their low volatility and predictable nature through:

	•		A high degree of risk diversification by limiting concentrations in customers, groups, sectors, products and geographic areas;

	•		Maintaining a low degree of complexity in market activity; and

	•		Continuous tracking of risks to prevent possible deterioration of portfolios by providing sufficient warning.

Risk management and control at Santander is structured around the following phases:

• Risk policies are formulated to reflect our risk management principles.

We have risk policies and procedures that constitute the regulatory framework. They are set forth in circulars, frameworks (previously Manuals of Risk Management Policies), and operating rules, through which risk activities and processes are regulated.

Under this regulatory framework, approved by senior risk management executives, the Corporate Risk Management Framework regulates the principles and standards for the general functioning of risk activities in Grupo Santander, based on organizational and management models.

The organizational model reflects the management structure and the function and governance of risks, as well as the regulatory framework, whereas the management model provides for (a) the basic pillars for risk management, (b) the channels for planning and setting objectives, (c) the process for drawing up budgets and risk limits, (d) the control of activities, (e) the information framework for managing risks for senior management and (e) the technological model.

One of the main features of this Corporate Risk Management Framework is that it paves the way for regulating, through a series of more specific frameworks, the functions emanating from the Directorate General of Risks.

• Risks are identified by reviewing and monitoring exposures, assessing new products and analyzing particular operations.

• Risks are measured using methodologies and models that have been widely tested and proven.

• The Group’s appetite for risks is quantified by setting global and specific limits for different types of risks, products, customers, groups, sectors and geographic areas.

• A complete series of reports are drawn up and distributed and reviewed on a daily basis by those responsible for the management of Santander at all levels.

• A system of risks control is executed to verify daily the extent to which our risk profile is in accord with the risk policies and limits established.

The Group has been using a series of techniques and tools for many years. Notable techniques and tools that were implemented ahead of time and in line with BIS II include:

• Internal rating and scoring models which, by assessing the various qualitative and quantitative components by client and operation, enable the probability of failure to be estimated first and, on the basis of estimates of severity, the expected loss.

• Economic capital, as the homogeneous metric of the risk assumed and the basis for measuring management.

• Return on Risk Adjusted Capital (RORAC), for pricing operations (bottom up) and analysis of portfolios and units (top down).

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• Value at Risk (VaR) as an element of control and for setting the market risk limits of different trading portfolios.

• Analysis of scenarios and stress testing to complement the analysis of market and credit risk to assess the impact of alternative scenarios, including the impact on provisions and capital.

For these reasons, we are in accord with BIS II, which recognizes and supports the banking industry’s most advanced practices and has been anticipating these changes.

Publication of Bank of Spain’s Circular 3/2008 on determining and controlling the minimum equity of credit institutions made it possible for us to use these internal models to determine our regulatory capital. Given the medium-low risk profile of our businesses, which are very focused on retail banking with companies, SMEs and individuals, the Bank of Spain’s authorization to use internal models in the units of the parent bank, Banesto and Abbey, granted in the second quarter of 2008, enabled regulatory capital savings in Pillar I (which establishes the capital requirements for covering credit, market and operational risks) to be generated.

Over the next few years we will extend to the rest of our business units the use of internal models for calculating regulatory capital in accordance with a schedule agreed upon with our supervisor, and we will dedicate the necessary human and technological resources to it, so as to satisfy the demanding requirements of the Bank of Spain, which is responsible for validating these internal models.

Part 2. Corporate governance of the risks function

The risk committee is responsible for proposing to the board of directors the Group’s risk policy. The board is responsible for approving the policy under its powers of administration and supervision. Furthermore, the committee ensures that the Group’s activities are consistent with its risk tolerance level and it sets global limits for the main risk exposures, reviews them systematically and resolves operations that exceed the powers delegated to lower bodies.

The committee, which has executive functions and makes decisions based on the powers delegated by the board, is chaired by the third vice-chairman of the board and also has four other members of the Bank’s board.

The committee met 102 times during 2008, underscoring the importance that we give to risk management.

The main responsibilities of the board’s risk committee are to:

• Propose to the board the risk policy for the Group, which must, in particular, identify:

	•		The different types of risk (operational, technological, financial, legal and reputational, among others) facing it;

	•		The internal information and control systems used to control and manage these risks;

	•		The level of risk that is considered acceptable; and

	•		The measures envisaged to mitigate the impact of identified risks, in the event that they materialize.

• Systematically review exposures with the main customers, economic sectors, geographic areas and types of risk.

• Authorize the management tools and risk models, as well as be familiar with the results of the internal validation.

• Ensure that the Group’s actions are consistent with the previously decided risk tolerance level.

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Part 3. Credit risk

3.1 Introduction to the treatment of credit risk

Credit risk is the possibility of losses stemming from the failure of our clients or counterparties to meet their financial obligations with us.

Our risks function is organized on the basis of the type of customer to distinguish between companies under individualized management and standardized customers.

• Those under individualized management are assigned, mainly because of the risk assumed, a risk analyst. This category includes companies of wholesale banking, financial institutions and companies of retail banking. Risk management is conducted through expert analysis backed up by tools to support decision-making based on internal models of risk assessment.

• Standardized customers refer to those who have not been specifically assigned a risk analyst. This category includes individuals, individual businessmen and retail banking companies that are not segmented. Management of these risks is based on internal models of assessment and automatic decisions.

3.2 Main magnitudes and evolution

Our credit risk profile is characterized by diversified geographic distribution and predominantly retail banking activity.

A. Global map of credit risk in 2008

The table below sets out the global credit risk exposure in nominal amounts (except for derivatives and repos exposure which is expressed in equivalent credit) at December 31, 2008.

Growth in lending slowed down in 2008, because of reduced demand. The nominal exposure to credit risk represented 21% of annual growth, particularly due to the outstanding risk in credit institutions and customers. Excluding Banco Real and Alliance & Leicester, growth was 5.5%.

Spain accounted for 46% of the nominal exposure to credit risk (reflecting an increase in 12% in absolute terms). Of note in the rest of Europe, which accounted for more than one-third of the credit exposure, is the presence in the UK which accounted for 25% of the total exposure. Overall, Europe accounted for 81% of the credit exposure.

Latin America contributed 18% of the credit exposure. Investment-grade countries accounted for 89% of the region’s exposure.

B. Changes in magnitudes in 2008

The changes in non-performing loans and the cost of credit, reflect the impact of the general deterioration of the economic environment in 2008 softened by prudent risk management, which kept the figures at reasonable levels. As a result, we maintained a significant level of coverage and generic provisions.

Our ratio of non-performing loans (NPLs) was 2.04% at the end of 2008, up from 0.95% at the end of 2007. NPL coverage was 90.6% compared to 150.6% at the end of 2007.

Specific provisions for loan losses, net of recoveries, amounted to €6,767 million, 0.99% of the average credit exposure with customers (the year’s average lending plus financial guarantees), up from 0.50% in 2007.

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Grupo Santander: Risk, NPLs, coverage, provisions and cost of credit


	Credit risk													Spec. prov net of re-
	with customers ⁽¹⁾					NPL ratio				Coverage				covered write-offs ⁽²⁾					Credit cost ⁽³⁾
	(million euros)					(%)				(%)				(million euros)					(% of risk)
	2008			2007		2008		2007		2008		2007		2008		2007			2008		2007
Continental Europe		368,509			358,933		2.31		0.90		90.0		188.1		3,201		1,042			0.89		0.30
Santander Branch Network		135,508			131,676		2.58		0.65		74.9		248.1		1,204		116			0.91		0.09
Banesto		87,925			86,601		1.64		0.47		106.5		332.9		450		72			0.53		0.09
Santander Consumer Finance		56,245			47,556		4.18		2.84		85.5		95.7		1,402		837			2.71		1.88
Portugal		34,760			32,178		1.72		1.25		77.2		117.4		7		(12	)		0.02		0.04
UK		217,063			203,225		1.04		0.60		68.5		65.8		442		474			0.23		0.23
Latin America		112,040			84,073		2.95		1.87		108.3		134.4		3,067		1,527			3.00		1.99
Brazil		53,764			26,414		3.58		2.74		102.4		101.5		1,478		787			3.86		3.78
Mexico		13,482			15,012		2.41		1.20		132.1		192.2		879		452			5.44		2.91
Chile		18,848			19,198		2.64		2.11		102.4		118.5		350		121			1.73		0.67
Puerto Rico		4,810			5,067		6.92		3.17		61.0		101.7		138		111			2.84		2.08
Venezuela		5,241			4,452		1.93		0.98		125.6		371.3		116		21			2.48		0.53
Colombia		1,464			1,464		1.79		1.21		204.1		217.1		44		12			2.83		0.80
Argentina		3,271			2,898		1.83		1.24		178.6		235.9		49		20			1.54		0.68
Rest		(412	)		3,110										57		90
Total Group		697,200			649,342		2.04		0.95		90.6		150.6		6,767		3,132			0.99		0.50
Memo item:
Spain		300,524			276,313		1.95		0.63		98.5		264.5		2,150		335			0.71		0.12

Data drawn up on the basis of management criteria. Memo item Spain 2008 on the basis of accounting criteria.


(1)		Includes gross loans to customers, guarantees and documentary credits.

(2)		Bad Debts recovered.

(3)		Excludes Banco Real and Alliance & Leicester.

C. Distribution of credit risk

The charts below show the credit risk diversification of our loans by countries and customer segments. We are present in more than 40 countries and are concentrated in their core markets.

Our profile comprises essentially retail (82.5%), and most products have a real guarantee (e.g. mortgages).

The distribution by geographic area and product in the segment of standardized risks is set out below (see definition of standardized risks in “Part 3. Credit risk. 3.1. Introduction to the treatment of credit risk”.

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3.3 Metrics and measurement tools

A. Rating tools

Since 1993, we have been using our own models for assigning solvency and internal ratings, which measure the degree of risk of a client or transaction. Each rating corresponds to a certain probability of default or non-payment, except for some termed low default portfolios. We have around 200 internal rating models for risk admission and monitoring.

Global rating tools are used for the segments of sovereign risk, financial institutions and global wholesale banking. Their management is centralized in the Group, both for determining their rating, as well as for monitoring the risk. These tools provide a rating for each customer, based on balance sheet ratios or macroeconomic variables, and supplemented by an analyst’s expert view.

In the case of companies and institutions under individualized management, the Parent company of our Group has defined a single methodology for formulating a rating in each country, based on the same models as the previous ratings: quantitative or automatic (in this case analyzing the credit performance of a selection of customers and the correlation with their financial statements), qualitative or review by the analyst, and final adjustments. On the basis of the specific data of the customers of each unit, the rating model is developed at a corporate level and applied in a decentralized way, ensuring proximity to and knowledge of the customer.

The ratings accorded to customers are regularly reviewed, incorporating new financial information and experiences in the development of the banking relation. The regularity of the reviews increases in the case of clients who reach certain levels in the automatic warning systems and in those classified as “special watch”. The rating tools are also reviewed so that their accuracy can be fine-tuned.

In the case of Standardized Risks, both for transactions with companies as well as individuals, there are scoring tools which automatically assess the operations.

These admission systems are complemented by performance assessment models which allow better prediction of the risk assumed. They are used for both preventive activities, as well as for sales.

B. Parameters of credit risk

The assessment of a customer or operation, with ratings or scorings, constitutes a judgment of the credit quality, which is quantified via probability of default (“PD”).

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As well as evaluating the customer, the quantitative analysis of the risk considers all aspects such as the period of the operations, the type of product and the guarantees. Not only does it take into account the probability of a customer failing to meet their contractual obligations (PD), but also it estimates the exposure at default (“EaD”) and the percentage of EaD that might not be recovered (loss given default or “LGD”).

These factors comprise the main credit risk parameters. Their combination enables the probable or expected loss (“EL”) to be calculated. This loss is considered an additional cost of the activity which reflects the risk premium and hence should be incorporated into the price of operations.

The following charts show the distribution of consumer loan and mortgage defaults since 2001 on the basis of the percentage recovered after discounting all the costs — including financial or opportunity — from the recovery process.

The risk parameters also calculate the regulatory capital in accordance with the rules of the new Basel Capital Accord (BIS II). The regulatory capital is the difference between the unexpected and the expected loss.

The unexpected loss provides the basis for calculating the capital and makes reference to a very high level of loss. But the loss is not very probable, not considered recurrent and must be tackled with equity.

Estimates of the risk parameters (PD, LGD and EaD) should be based on internal experience, i.e. on observations of defaults and experience in recovering these operations.

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

For the rest of portfolios, estimates are based on the institution’s internal experience. In SMEs, balance sheet information is used not only to assign a rating, but to explain the probability of default. In retail portfolios, the PD is calculated by observing the NPL entries and putting them in relation to the scoring assigned to the operations.

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

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

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The estimated parameters are then assigned to operations in a normal situation (i.e. not in default). The assignment is different for the low default portfolios and for the rest. In the low default parameters, which are also the global management portfolios, the parameters are assigned in all units of the Group. A financial institution with a rating of 8.5 will have the same PD, regardless of the unit in which its exposure is recorded.

On the other hand, retail portfolios have specific scoring systems in each unit of the Group. This requires separate estimates and specific assignment in each case.

C. Master scale of ratings

To make the internal ratings of the various models — corporate, sovereign, financial institutions, etc. — comparable and therefore to be able to make comparisons with the ratings of external rating agencies, the Group has a master ratings scale.

The comparisons are established via the probability of default associated with each rating. These internally estimated probabilities are compared with the rates of default associated with external ratings, which are regularly published by rating agencies.

Master scale of ratings


				Equivalence with:
	Probability			Standard &		Equivalence with:
Internal rating	of Default			Poor’s		Moody’s

9.3		0.017	%	AAA		Aaa
9.2		0.018	%	AA+		Aa1
9.0		0.022	%	AA		Aa2
8.5		0.035	%	AA-		Aa3
8.0		0.06	%		A+		A1
7.5		0.09	%		A		A2
7.0		0.14	%		A-		A3
6.5		0.23	%	BBB+		Baa1
6.0		0.36	%	BBB		Baa2
5.5		0.57	%	BBB-		Baa3
5.0		0.92	%	BB+		Ba1
4.5		1.46	%	BB		Ba2
4.0		2.33	%	BB/BB-		Ba2/Ba3
3.5		3.71	%	BB-/B+		Ba3/B1
3.0		5.92	%		B+/B		B1/B2
2.5		9.44	%		B		B2
2.0		15.05	%		B-		B3
1.5		24.00	%	CCC		Caa1
1.0		38.26	%	CC/C		Caa1/Caa2

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The following chart shows the segmentation of the portfolio of medium sized companies of the Parent bank at December 31, 2008 on the basis of their ratings.

D. Distribution of EaD and EL associated

The table below sets out the distribution by segments of the credit exposure in terms of EaD. Approximately 75% of the total risk associated with clients (excluding sovereign and counterparty risks) corresponds to SMEs and loans to individuals, underlining the retail focus of our business and our risks. The expected loss from customer exposure is 1.05%, or 0.89% of our total loan exposure, which can be considered a medium-to-low risk profile.

Segmentation of credit risk exposure


Million euros	*EAD ()**		%			Average PD			Average LGD			EL
Sovereign		61,644		7.05	%		0.10	%		12.4	%		0.01	%
Counterparty		70,604		8.08	%		0.19	%		50.1	%		0.09	%
Public sector		1,736		0.20	%		0.72	%		21.9	%		0.16	%
Corporate		181,968		20.82	%		0.94	%		31.5	%		0.30	%
SMEs		148,249		16.97	%		4.36	%		29.7	%		1.29	%
Mortgages (individuals)		259,021		29.64	%		3.26	%		7.4	%		0.24	%
Consumer loans		106,459		12.18	%		5.55	%		55.2	%		3.07	%
Credit cards		18,226		2.09	%		10.34	%		61.0	%		6.31	%
Other assets		25,900		2.96	%		1.90	%		43.8	%		0.83	%
Promemoria customers ⁽¹⁾		715,659		81.9	%		3.41	%		30.7	%		1.05	%
Total		873,807		100.00	%		2.87	%		31.0	%		0.89	%


(1)		Excluding sovereign, counterparty and other assets.

		Excludes doubtful assets and bad loans.

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3.4. Loss observed: measurements of credit cost

In addition to using these advanced models (their figures are shown in the Part 8 section on Economic Capital of this Item II), other ordinary measures are employed which provide prudent and effective management of credit risk on the basis of the loss observed.

Our cost of credit is measured by various means: change in net entries (final doubtful loans - initial doubtful loans and write offs — recovered write offs), net loan-loss provisions (specific provisions — recovered write-offs) and net write-offs (write-offs — recovered write-offs).

The three indicators measure the same reality and, consequently, converge in the long term, although they represent successive moments in credit cost measurement: flows of non-performing loans (non-performing loans management variation, NPLMV), coverage of doubtful loans (net loan-loss provisions, NLLPs) and write-offs (net write-offs), respectively. The three indicators, however, show differences at certain times, which are particularly significant at the start of a change of cycle. These differences are due to the different moments at which the losses are calculated, which are basically determined by accounting rules. (For example, mortgages have a calendar of coverage and become write-offs more “slowly” than consumer loans). In addition, the analysis can be complicated by changes in the policy of coverage and entry into write-offs, composition of the portfolio, doubtful loans of entities acquired, changes in accounting rules, sale of portfolios, etc.

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The risk cycle has three phases:

• Pre-sale: Includes the planning and setting of objectives, determining the appetite for risk, approving new products, studying the risk and rating loans, and establishing limits.

• Sale: Covers the phase of decision-making both for operations under pre-classification, as well as one-off transactions.

• After sale: Comprises monitoring, measurement, control and recovery management.

A. Planning and setting limits

Setting limits is a dynamic process which identifies our risk appetite by discussing business proposals and passing judgments on risks.

The global plan of limits was drawn up on the basis of consensus and provides management of the balance sheet and of the inherent risks, and establishes the risk appetite in the various factors.

The limits are based on two structures: customers/segments and products.

The most basic level is the customer and when certain features are present — generally of relative importance — an individual limit (pre-classification) is set.

A pre-classification model based on a system for measuring and monitoring economic capital is used for large corporate groups. A more simplified version is used for those companies that meet certain requirements (such as high knowledge, rating, etc).

In the sphere of standardized risk, the planning and setting of limits is done through credit management programs (CMPs), a document reached by consensus between the business and risk areas and approved by the risk committee(s) delegated by it. The CMPs set out the expected results of business in terms of risk and return, as well as the limits to which the activity is subject and the management of the associated risks.

B. Risk study and process of credit rating

The study of risk is obviously a prior requirement for authorizing transactions with customers.

It consists of analyzing the capacity of the counterparty to meet its contractual obligations with the Bank. This entails analyzing the customer’s credit quality, risk operations, solvency and return in accordance with the risk assumed.

The risk study is carried out every time there is a new customer or operation, or when there is a pre-established routine, depending on the segment. In addition, the rating is reviewed every time there is an alert or a matter that affects the counterparty/operation.

C. Decisions on transactions

The purpose of the decision-making process is to analyze and resolve transactions, taking into consideration both the risk appetite as well as those factors that are relevant in the search for the appropriate balance between risk and return.

We have been using RORAC methodology (return on risk adjusted capital) since 1993 to analyze and set prices for operations and businesses.

D. Monitoring and control

In addition to the tasks carried out by the Internal Auditing Division, the directorate general of risk controls credit quality, through local and global teams, by monitoring the risks and devoting the resources and specific people to handle it.

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The monitoring is based on a continuous process of permanent observation, which enables incidents in the areas of operations, customers etc, to be detected in advance in order that steps can be taken to remediate them. The monitoring is conducted on the basis of customer segmentation.

We have a system called companies in special watch (FEVE) which identifies four levels on the basis of the degree of concern arising from the circumstances observed (extinguish, secure, reduce, monitor). The inclusion of a company in FEVE does not mean there have been defaults, but rather reflects the advisability of adopting a specific policy toward that company. Clients in FEVE are reviewed at least every six months, or every quarter for the most serious cases. A company can end up in special watch as a result of monitoring, a review conducted by internal auditing, a decision of the person responsible for the company, or the entry into functioning of the system established for automatic warnings.

Ratings of risk balances according to the FEVE monitoring system


	Extinguish		Secure		Reduce		Monitor		Total

Retail banking Spain SAN		2,767		1,592		8,061		11,490		23,910
Banesto		3,886		627		2,617		9,365		16,495
Portugal		218		111		530		1,139		1,998
Latin America		459		147		1,083		4,054		5,743

Total		7,330		2,477		12,291		26,048		48,146


Million of euros at December 2008

Note: excluding Banco Real and Alliance & Leicester

Ratings are reviewed at least every year, but they are done more regularly if weaknesses are detected or on the basis of the rating.

Regarding the risks of standardized clients, the main indicators are monitored in order to detect shifts in the performance of the loan portfolio with respect to the forecasts made in the credit management programs.

Analysis of our Group’s main mortgage portfolios

Mortgage portfolios of Spain and Abbey are particularly noteworthy within the standardized risks because of their importance in the Group’s total lending portfolio.

The performance of these portfolios was affected by the economic downturn, which reduced demand for loans. The following charts show the significant decline in 2008 in the number of requests for mortgages in the portfolio of individuals of Spain (Parent bank), particularly during the second half of the year. In this context, the Group continued to apply its admission criteria and policies, with a rate of authorization that remained at around 75%.

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Loans for real estate development

Among our portfolios, the portfolio of loans to finance the building of homes (real estate developers) suffered to a greater extent because of the economic downturn. Its relative share in total Group lending, however, is low and most of it is in Spain. Our risks policies stipulate that the clients of these operations are clearly identified and have experience.

At the end of 2008, this portfolio in Spain (€13,462 million) accounted for less than 2% of our total portfolio.

Mortagages for real state developers

Figures in million of euros


	December 06		December 07		December 08
Santander		7,587		8,765		8,346
Banesto		4,118		5,401		5,116

Total		11,705		14,166		13,462

Its NPL ratio was 4.82%, higher than the Group’s overall average and reflected the sector’s situation.

At the end of 2008, the portfolio of loans for real estate development was distributed as follows:

• Development completed and with the final certificate of work: 32.99% of outstanding risk.

• Developments more than 75% completed: 22.96% of outstanding risk.

• The rest of the portfolio (44.05%) developments were in various stages of completion. Developments 25% or less completed account for only 8.6% of the portfolio.

These figures show that our portfolio of mortgage loans for real estate development in Spain evolved favorably regarding completion progress, with 55% of transactions underway and with the risk of construction already overcome or close to it.

There is a technical unit specialized in monitoring and controlling this type of risk for all the developments under construction and in addition to the tracking conducted by the Group’s risk teams: it is responsible for monitoring progress in construction and meeting plans, control of sales, validation and control of disbursements by certifications.

Acquisition of property assets (Spain)

One of the mechanisms adopted in Spain for efficient management of risk is the acquisition of property assets. These purchases, as opposed to the traditional system of initiating legal proceedings, are mainly explained by:

• The length of legal proceedings as against the immediate availability of these assets.

• Cost savings compared with legal procedures.

• Their ability to facilitate the viability of companies as liquidity is injected into their activity.

• The reduction in the possible loss of value in the loans of these clients; and

• The reduction in the exposure of the expected loss.

The target clients of these acquisitions are companies who could be affected by legal proceedings and the value of the loans to them.

• The volumes acquired in 2008 which accounted for €3,768 million.

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• The distribution to the Santander Branch Network and Banesto, amounting to €2,634 million and €1,134 million, respectively.

• The average price of acquisition which is 10% below the market.

We should also point out that the entire process is carried out with an appropriate policy of provisions (initial provision constituted of 10%). In cases where the appraised value of the assets is lower than the purchase price, a provision is constituted for an amount that covers the difference. The value of these assets is assessed every year to guarantee an appropriate level of provisions.

It is important to point out that this policy of acquisitions is to achieve a higher level of guarantees, as risk cancellations have been made in which 30% of them did not have tangible guarantees.

As well as the usual structure for management of these assets, specialized structures were created to manage and sell properties so that these assets can be treated more efficiently. Foreclosed properties have already begun to be sold.

Analysis of scenarios

Regular stress testing is carried out to monitor and control portfolios. Analysis of scenarios is an important tool for measuring the sensitivity of a portfolio’s value to changed circumstances in the environment. On the basis of factors such as interest rates, the unemployment rate and housing prices, we can verify whether the levels of generic provisions are sufficient in relation to the estimated effects in the stress tests.

Control function

The management process is also aided during the various phases of the risk cycle by the function of control. This provides a global vision of our portfolio of loans with sufficient level of detail, hence enabling the current risk position and its evolution to be assessed.

The control function is conducted by assessing risks from various perspectives. The main elements of control are divided by countries, business areas, management models, products and processes. This allows specific attention to be devoted to specific areas.

In 2006, under the corporate framework established in the Group for complying with the Sarbanes-Oxley Act of 2002, a tool was created in our intranet to document and certify all sub processes, operational risks and controls that mitigate them. The Risk Division, which is part of the Group, evaluates every year the efficiency of internal control of its activities.

E. Recovery activity

Our recovery management is a strategic and integral business activity. We have a global model which is applied and executed locally and takes into account the business features in each sphere.

The purpose of recovery activity is to:

• Obtain payment and regularization of the pending balances so that an account returns to its normal state; if this is not possible the objective is total or partial recovery of debts, in any of the accounting or management situations in which they find themselves; and

• Maintain and strengthen our relations with the customer and improve the payment performance.

Clients in this process are segmented (massive or standardized and those under individualized management) with specific management models in each case, in accordance with specialization criteria.

This segmented recovery management has various phases: preventative management, management of irregular customers and of non-performing loans, and write-offs which also have specific models, structures and strategies. This management is shared with other business areas.

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The segment for massive customers uses multi channel systems and then personalized management, in accordance with specific rules which take into account, among other issues, the market’s situation, products in non-compliance, etc.

The segment of individually managed customers has specialized staff.

The management models are proactive and are generally automated, thereby facilitating the generation of standardized work flows, “industrial” management methods and personalized treatment.

We have internal and external structures to tend to management needs and execute monthly capacity plans and regular training. The tools at its disposal facilitate management and solutions for customers.

Given the current situation, we further strengthened these structures with the creation of the Business Unit of Recoveries within the Santander Branch Network which, under the Bank’s criteria, policies and guidelines, and together with the Risk Division, carries out an integral focus of the management of nonperforming loans in all customer segments.

3.6 Other standpoints of credit risk

There are spheres and/or specific points in credit risk that deserve specialized attention and which complement global management.

A. Risk concentration

Risk concentration, within the sphere of credit risk, is a fundamental element of management. We continuously track the degree of concentration of our credit risk portfolios using various criteria: geographic areas and countries, economic sectors, products and groups of clients.

The board’s risk committee establishes the policies and reviews the appropriate exposure limits to appropriately manage the degree of concentration of credit risk portfolios.

We are subject to the Bank of Spain regulation on large risks. In accordance with Circular 3/2008, no individual or economic group exposure, including all types of credit risks and equities, can exceed 25% of the Group’s stockholders’ equity. Also, the total large risks (those that exceed 10% of eligible stockholders’ equity) cannot exceed equity by more than eight times (excluding exposures to OECD governments and central banks).

At December 31, 2008, there was no economic group with whom the Group had an exposure classified as a large risk. The largest exposure represented 8.7% of equity (35% of the limit) and corresponded to a Spanish company with an internal rating equivalent to A-.

At December 31, 2008, the 20 largest economic and financial groups, excluding AAA Governments and sovereign securities denominated in local currency, represented 8.2% of the outstanding credit risk of our clients (lending plus guarantees).

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The distribution of the portfolio of companies by sectors is also diversified. The chart below shows the distribution of our different units (excluding Banesto) in European Union countries.


Risk distribution by sector

Real estate activity	8	%
Transport and communications	4	%
Other manufacturing industries	4	%
Food, drink and tobacco	3	%
Individuals	53	%
Construction and public works	6	%
Commerce and repairs	4	%
Electricity, gas and water production and distribution	3	%
Rest	15	%


		Rest includes sectors with concentration below 2%.

The Group’s Risk Division works closely with the financial division to actively manage credit portfolios. Its activities include reducing the concentration of exposures through various techniques such as using credit derivatives and securitization to optimize the risk-return relation of the whole portfolio.

B. Credit risk by activities in financial markets

This section covers credit risk generated from treasury activities with clients, comprising mainly credit institutions. This is developed through financing products in the money market with different financial institutions, as well as through derivatives.

Risk is controlled through an integrated system and in real time which tells us the exposure limit available with any counterparty, in any product and maturity and in all our units.

Risk is measured by its prevailing market as well as potential value (value of risk positions taking into account the future variation of underlying market factors in contracts). The equivalent credit risk (“ECR”) is the net replacement value plus the maximum potential value of these contracts in the future. The capital at risk or unexpected loss is also calculated (i.e. the loss which, once the expected loss is subtracted, constitutes the economic capital, net of guarantees and recovery).

The total exposure to credit risk from activities in the financial markets was 70.4% with credit institutions. By product type, the exposure to derivatives was 52.3%, comprising mainly products without options, and it was 47.7% for liquidity products and traditional financing.

Derivative transactions are concentrated in high credit quality counterparties; 68.9% of risk with counterparties has a rating equal to or more than A-. The total exposure in 2008 in terms of equivalent credit risk amounted to €29,549 million.


Distribution of risk in OTC derivatives
by type of counterparty

AAA	2.4	%
AA	29.8	%
A	36.6	%
BBB	20.5	%
BB	7.2	%
B	0.3	%
Rest	3.1	%

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OTC derivatives distribution by net replacement value and equivalent credit risk*
Million euros


	Total ECR									Total net replacement value
	Trade			Hedge			Total			Trade			Hedge			Total
CDS protection acquired		1,685			1,245			2,930			10,621			1,447			12,068
CDS protection sold		2			0			2			(10,490	)		(185	)		(10,675	)
CDS options		0			103			103			0			437			437
Total Credit Derivatives		1,687			1,348			3,035			131			1,699			1,829

Equity forwards		1			242			243			0			235			235
Equity options		764			2,119			2,843			353			(490	)		(136	)
Equity swaps		0			557			557			0			119			119
Equity spot		0			0			0			0			0			0
Total Equity Derivatives		765			2,918			3,682			353			(135	)		218

Fixed-income forwards		3			0			3			0			0			0
Fixed-income options		0			0			0			0			0			0
Fixed-income spot		0			0			0			0			0			0
Total Fixed Income Derivatives		3			0			3			0			0			0

Asset swaps		975			2,536			3,511			549			1,021			1,570
Exchange-rate options		369			113			482			177			(23	)		154
Exchange-rate swaps		2,152			8,431			10,584			(742	)		1,743			1,001
Other exchange-rate derivatives		4			0			4			1			0			1
Total Exchange Rates		3,500			11,080			14,581			(15	)		2,740			2,726

Asset swaps		0			284			284			0			77			77
Call money swaps		453			74			527			(145	)		(264	)		(409	)
IRS		9,653			4,790			14,443			(165	)		1,178			1,014
Forward interest rates		18			134			152			(7	)		11			4
Other interest-rate derivatives		537			512			1,049			192			(725	)		(533	)
Interest rate structures		562			185			748			309			(43	)		267
Total Interest-Rate Derivatives		11,223			5,979			17,202			185			234			418

Commodities		0			138			138			0			143			143
Total commodity derivatives		0			138			138			0			143			143

Total OTC derivatives		17,178			21,463			38,640			654			4,681			5,335

Collateral		(361	)		(8,730	)		(9,091	)

Total		16,816			12,732			29,549


*		Excluding Banesto, Banco Real and Alliance & Leicester

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Notional OTC derivative products by maturity*
Million euros


	< 1 year		1-5 years			5-10 years		> 10 years		Total
CDS protection acquired		33		950			218		1,728		2,930
CDS protection sold		0		(2	)		4		0		2
CDS options		0		1			4		99		103
Total Credit Derivatives		33		949			226		1,826		3,035

Equity forwards		193		50			0		0		243
Equity options		694		2,008			150		30		2,883
Equity swaps		127		63			367		0		557
Equity spot		0		0			0		0		0
Total Equity Derivatives		1,013		2,122			517		30		3,682

Fixed-income forwards		3		0			0		0		3
Fixed-income options		0		0			0		0		0
Fixed-income spot		0		0			0		0		0
Total Fixed Income Derivatives		3		0			0		0		3

Asset swaps		2,813		586			27		85		3,511
Exchange-rate options		285		193			4		0		482
Exchange-rate swaps		2,439		3,111			2,849		2,185		10,584
Other exchange-rate derivatives		3		1			0		0		4
Total Exchange Rates		5,540		3,891			2,880		2,271		14,581

Asset swaps		4		52			30		197		284
Call money swaps		231		291			3		2		527
IRS		533		3,979			3,286		6,644		14,443
Forward interest rates		152		0			0		0		152
Other interest-rate derivatives		15		407			122		505		1,049
Interest rate structures		63		510			55		119		748
Total Interest-Rate Derivatives		998		5,239			3,497		7,468		17,202

Commodities		39		86			13		0		138
Total Commodity Derivatives		39		86			13		0		138

Total OTC Derivatives		7,625		12,287			7,133		11,595		38,640

Collateral											(9,091	)

Total											29,549


*		Excluding Banesto, Banco Real and Alliance & Leicester

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Activity in credit derivatives

We use credit derivatives to cover loans, and within trading operations. The volume of this activity is small compared to that of our peers and, moreover, is subject to strong internal controls and the minimization of operational risk.

The risk of these activities is controlled via a broad series of limits such as VaR, nominal by rating, sensitivity to the spread by rating and name, sensitivity to the rate of recovery and to correlation. Jump-to-default limits are also set by geographic area, sector and liquidity.

At December 31, 2008, for the Group’s trading activity, the sensitivity of lending to increases in spreads of one basis point was €820,000, and the average VaR during the year was €9.4 million.

In notional terms, the position in CDS incorporates €118,345 million of acquired protection and €109,911 million of sold protection.

C. Country risk

Country risk is a credit risk component in all cross-border credit operations for circumstances different from the usual commercial risk. Its main elements are sovereign risk, the risk of transfer and the other risks arising from international financial activity (such as wars, natural disasters, balance of payments crisis, etc).

The exposure susceptible to country-risk provisions at the end of 2008 was €5,422 million, of which €1,967 million corresponded to intragroup operations. At the end of 2007, the total country risk in need of provisions was €916 million, €4,506 million less than in 2008. See Item 4 of Part I, “Information on the Company—B. Business overview—Country—Risk Outstandings”.

These increases were largely due to the inclusion of transactions with Brazilian clients as a result of the acquisition of ABN/Banco Real. Trade finance accounts for 90% of this portfolio, with a similar distribution between intragroup and third parties.

D. Sovereign risk

As a general rule, sovereign risk is that contracted in transactions with a central bank (including the regulatory cash reserve requirement), the issuer risk of a state (portfolio of state debt) and that arising from operations with public institutions with the following features: their funds only come from institutions directly integrated into the state sector; and their activities are of a non-commercial nature.

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At December 31, 2008, excluding Banesto, the euro zone accounted for 50.3% of total risk, Latin America 48.6% and others 1.1%. Of note in the European Union were Spain (comprising 35.7% of the total), the UK (comprising 11.1%), and in Latin America, Brazil (comprising 27.6%) and Mexico (comprising 11.9%). The increase over the end of 2007 was around 26%, mainly as a result of incorporation of Banco Real in Brazil and ABN AMRO in Uruguay, as well as the increased positions in Europe.

Latin America’s exposure to sovereign risk mainly comes from the obligations to which our subsidiary banks are subject to maintain certain deposits in the corresponding central banks as well as from fixed-income portfolios maintained as part of the structural interest rate risk management strategy. These exposures are in local currency and are financed by locally captured customer deposits, also denominated in local currency. The exposures to sovereign risk of Latin American issuers denominated in currencies other than the official one of the country of issue amounted to €4,900 million (with 13% of total sovereign risk borne by the Latin American issuers).

E. Environmental risk

One of the main aspects of the Bank’s Strategic Plan of Corporate Social Responsibility is analysis of the environmental risk of credit operations. The main features are:

• Equator Principles: This is an initiative of the World Bank’s International Finance Corporation (IFC). It is an international standard for analyzing the social and environmental implications of project finance operations. We adhere to these principles, and incorporate into our analysis and evaluation of those projects financed in developing countries the social and environmental risk of such projects financed.

• VIDA tool: It has been in use since 2004. The main objective of this tool is to assess the environmental risk of current and potential corporate clients, through a system that classifies them into seven categories on the basis of the environmental risk assumed. A total of 37,084 companies were assessed by this tool by the Bank in Spain in 2008.

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Part 4. Operational risk

Definition and objectives

We define operational risk (“OR”) as “the risk of losses from defects or failures in internal processes, employees or systems, or those arising from unforeseen circumstances”. They are, in general, purely operational events, which make them different from market or credit risks, although they also include external risks, such as natural disasters.

The objective is to identify, valuate, mitigate and monitor this risk.

Our priority is to identify and eliminate risk focuses, whether they produce losses or not.

Measurement also helps management as it enables priorities to be established and the creation of a decision-making hierarchy.

We opted, in principle, to use the standard method for calculating regulatory capital by operational risk, envisaged by the BIS II rules. We are deciding on the best moment to adopt the Advanced Models (“AMs”), bearing in mind that a) the short-term priority centered on its mitigation; and b) most of the regulatory requirements established for being able to adopt the AMs must already be incorporated into the Standard Model (which has already been done in the case of our operational risk management model).

Management model

The organizational model for controlling and managing risks is the result of adapting to the new BIS II environment, which establishes three levels of control:

• First level: control functions conducted by the Group’s units.

• Second level: functions carried out by the corporate areas.

• Third level: integral control functions by the Risk Division- Integral Control Area and Internal Validation of Risk.

The Technology and Operations Division is responsible for management and control of operational risk. Within this division, the corporate area of technological and operational risk, established in 2008, formulates policies as well as manages and controls these risks. The implementation, integration and local adjustment of the policies and guidelines established by this area is the responsibility of local executives in each unit.

This structure for operational risk is based on the knowledge and experience of executives and professionals of the Group’s various units. Particular importance is attached to the role of local executives.

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Management is based on the following elements:

The different phases of the Technological and Operational Risk Management Model entail:

• Identifying the operational risk inherent in all activities, products, processes and banking systems.

• Measuring and assessing the operational risk objectively, continuously and in accord with the regulatory standards (Basel II, Bank of Spain) and the banking industry.

• Continuously monitoring the exposure of operational risk to detect the levels of non assumed risk, implement control procedures, improve internal knowledge and mitigate losses.

• Implementing control procedures to improve knowledge of the causes of operational risk as well as the implications.

• Establishing mitigating measures that eliminate or minimize operational risk.

• Producing regular reports on the exposure to operational risk and the level of control for senior management and the Group’s areas/units, as well as informing the market and regulatory bodies.

• Defining and implementing systems that enable operational risk exposures to be monitored and controlled and integrated into the Group’s daily management; and

• Defining and documenting operational risk management policies, and introducing methodologies for managing this risk in accordance with regulations and best practices.

Our operational risk management model contributes the following benefits:

• Integral and effective management of operational risk (identification, measurement /assessment, control/mitigation and information).

• Better knowledge of existing and potential operational risks and sets out the responsibility of business and support managers; and

• Operational risk information that helps to improve the processes and controls, reduce losses and the volatility of revenues.

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Implementing the model: global initiatives and results

The Corporate Department of Management and Control of Operational Risk, part of the Risk Division, has been operating since 2001. Its main functions, activities and global initiatives are to:

• Designate coordinators and create operational risk departments.

• Train and exchange experiences to promote the continuation of best practices within the Group; and

• Foster mitigation plans to ensure implementation of corrective measures as well as ongoing projects.

This system for managing technological risk was strengthened during 2008, including the following aspects:

• The security of the information systems.

• The contingency and business continuity plans; and

• The management of risk associated with the use of technologies (development and maintenance of applications, design, implementation and maintenance of technology platforms, output of computer processes, etc).

The management model for operational risk began to be installed in our different companies in 2002. Almost all these units are incorporated to the model with a high degree of uniformity. Due to the different pace of implementation, phases, schedules and the historical depth of the respective data bases, the degree of progress varies from country to country.

On a general basis:

• Data bases of losses classified by errors and operational types are received every month. The Group’s own data base shows events that are not truncated (i.e. without exclusions for reasons of amount and with both the accounting impact — including positive effects — as well as the non-accounting impact).

• Self-assessment questionnaires filled out by almost all our units are received and analyzed.

• The main management units are installing a new corporate system of operational risk indicators.

• The main events are identified and analyzed and mitigation measures taken which, in significant cases, are disseminated to our other units as a best practices guide.

• Processes are conducted to reconcile data bases with accounting data.

By consolidating the total information received, our operational risk profile is reflected in the following charts:

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Analysis and monitoring of controls in market operations

The turbulence in financial markets during 2007 and 2008, coupled with the increase in operational risk derived from the increasing complexity of financial instruments, make it necessary to continuously strengthen the operating control of our activity in financial markets, enhancing the very demanding and conservative risk and operating principles that we have been regularly applying for some time.

Over and above the regular tracking of all aspects regarding operating control, more attention was paid in all of our units to the following aspects, so that the review is validated every month by each unit’s management committee.

Of note, among other factors, are the following:

•		Review of the valuation models and in general the valuation of portfolios.

•		Capturing processes and independent validation of prices.

•		Appropriate confirmation of operations with counterparties.

•		Reviewing cancellations/modifications of operations; and

•		Reviewing and monitoring the effectiveness of guarantees, collateral and mitigation of risks.

Corporate Reporting

The Corporate Area of Operational Risk has a system for integral management of operational risk information, which every quarter consolidates the information available from each country/unit in the operational risk sphere and gives a global vision with the following features:

•		Two levels of information: one corporate and the other individualized for each country/unit.

•		Dissemination of the best practices among countries/units of our Group, obtained from the combined study of the results of qualitative and quantitative analysis of operational risk.

Information is also prepared on the following aspects:

•		Our management model for operational risk.

•		Human resources and perimeter of action.

•		Analysis of the data base of errors and events.

•		Operational risk cost and accounting reconciliation.

•		Self-assessment questionnaires.

•		Indicators.

•		Mitigating measures/asset management.

•		Contingency plans.

•		Regulatory framework: BIS II.

•		Insurance.

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This information acts as the basis for meeting the reporting needs of the board’s risk committee, senior management, regulators, rating agencies, etc.

Insurance in the management of operational risk

We have been a pioneer in using insurance as a key element in the management of operational risk. The area responsible for operational risk has been closely cooperating with the Group’s insurance area since 2004 in all activities that entail improvements in both areas. For example:

•		Cooperation in the exposure of our operational risk control and management model with insurance and reinsurance companies.

•		Analysis and monitoring of recommendations and suggestions to improve operational risks made by insurance companies, via prior audits conducted by specialized companies, as well as their subsequent implementation.

•		Exchange of information generated in both areas to reduce the bases of errors and enhance the perimeter of coverage of the insurance policies for the different operational risks.

•		Close cooperation between local operational risk executives and local coordinators of insurance to strengthen mitigation of operational risk.

•		Regular meetings on specific activities, and projects in both areas; and

•		Active participation of both areas in the Global Sourcing of Insurance Table, the Group’s technical body for defining coverage strategies and contracting insurance.

Part 5. Reputational risk

The risk committee, as the body responsible for global management of risk and all types of banking operations, assesses reputational risk, with the support of the Division of the General- Secretariat.

The audit and compliance committee supervises the Group’s reputational risk and, among other functions, monitors compliance with the Group’s Code of Conduct in the Securities Market, the manuals and procedures and, in general, our rules of governance and compliance. It also makes the necessary proposals for their improvement.

The main elements of the marketing of products and services are as follows:

Global committee of new products (“GCNP”)

All new products or services that any of our institutions seek to market must be first submitted to this committee for approval.

The committee held 15 meetings in 2008 at which 190 products or families of products were analyzed.

A local committee of new products is established in each country where one of our institutions is located. Once a new product or service is ready, this committee must request permission from the global committee for it to be marketed.

In Spain, the local committee is the global committee.

The areas that participate in the global committee of New Products, chaired by the secretary general, are: Tax Advice, Legal Advice, Customer Service, Internal Auditing, Retail Banking, Global Corporate Banking, Integral Control of Risks, Compliance, Financial Control and Management Control, Financial Operations and Markets, Operations and Services, Global Wholesale Banking Risks, Corporate Risks and IFIs, Credit Risks, Market Risks, Risks-Methodology, Solvency Risk, Technology and Operational Risk, Santander Private Banking, Technology, Global Treasury, Universities and, lastly, the unit proposing the new product or a representative of the local committee of New Products.

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Before a new product or service is launched, independent experts evaluate the risks that may be incurred and they analyze each product or service.

The GCNP, in light of the documentation received, and after checking that all the requirements for approving the new product or service have been met and bearing in mind the risk guidelines set by the board’s risk committee approves, rejects or sets conditions for the new product or service.

The GCNP gives particular consideration to the suitability of the new product or service to the framework where it is going to be marketed. Particular importance is attached to ensuring that:

•		Each product or service is sold by those who know how to sell it.

•		The client knows what he or she is investing in and the risk of each product or service.

•		Each product or service is sold where it is legally permitted, not only for legal or tax reasons (i.e. it fits into the legal and tax regime of each country), but also for financial ones; and

•		When a product or service is approved, the maximum limit is set for the amount that can be sold in each country.

Manual of procedures for the sale of financial products

This manual, which has been used by us since 2004 for the retail marketing of financial products in Spain, was reviewed in 2007, as a result of the entry into force on November 1 of Directive 2004/39 on Markets in Financial Instruments Directive (MiFID), which establishes new requirements for selling financial products.

The manual covers the provision of investment services for financial products including securities and other fixed-income or equity instruments, money market instruments, participations in collective investment institutions, savings and investment insurance, traded derivatives and OTC and atypical financial contracts. The global committee of new products can include other instruments in the sphere of the manual of procedures, as has been the case with structured deposits, savings insurance and pension plans.

The manual segments customers and products, and establishes different regimes of business treatment largely depending on the type of service being provided. The combination of these elements (category of client, type of product and commercial treatment) produces a matrix which determines the type of mechanism to be applied (test of advisability and suitability) in order to assess the adaptation of the client to the product, and the type of warnings to be issued to the client.

Customer and product segmentation comes from comparing the internal classification already applied by Santander before the MiFID (internal segmentation of customers and segmentation of products into green, yellow and red) with the classification established by the MiFID (segmentation of customers into retail, professionals and eligible counterparties and segmentation of products into complex and not complex), with which a level of protection above the minimum required by the MiFID is attained.

The different types of commercial treatment, graded on the basis of greater to lesser involvement of the Bank, are: (i) advised sale, including, portfolio advice and management; and (ii) unadvised sale, which covers marketing and execution.

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Part 6. Integral control of risk

We decided in 2008 to launch the function of Integral Control of Risks, in anticipation of the projects regarding new regulatory requirements currently being discussed in CEBS (Committee of European Banking Supervisors), FSF (Financial Stability Forum), etc., and the recommendations on best risk management practices formulated by various public and private bodies.

This function is part of the Directorate General of Integral Control and Internal Validation of Risk and is an autonomous unit within the Risk Division. Its responsibilities are of a global scope and corporate nature. This new function supports our governance bodies in risk management.

Its mission is to: (a) ensure that the management and control systems of the various risks inherent in our activity meet the most demanding criteria and the best practices observed in the industry and/or required by regulators; (b) ensure that senior management has at its disposal an integral vision of the profile of the various risks assumed and that these risks are in line with the previously agreed appetite for risks; and (c) supervise compliance based on the recommendations drawn up for risk management matters following the inspections by Internal Auditing and by the supervisors to whom we are subordinated.

The main features of this function, currently being implemented are:

•		The global focus which encompasses all risks, all businesses and all countries.

•		A third system of control. The first system of control is carried out by the person responsible for managing each risk in each business or functional unit, and the second system of control lies in the corporate control of each risk. This ensures the vision and thus integral control of all risks arising or incurred during the year.

•		The particular consideration given to credit risk (including risks of concentration and counterparty), market risk (including structural risk and liquidity risk), operational and technological risk and compliance and reputational risk; and

•		The special attention being given to future development of best practices in the financial industry.

The function supports the work of the risk committee by testing and assessing the risk management and control systems, proposing improvements and supervising implementation, all this via an integral map of our risks.

A methodology to systemize the function and a series of tools to formalize and trace its application were developed internally comprising tests or review guides for each risk; the risk control monitor as the repository of the results of each test and its working papers; and SEGRE which allows us to monitor the recommendations formulated by internal auditing and by the supervisors, as well as the recommendations that Integral Control might make.

Part 7. Adjustment to the new regulatory framework

We have been firmly committed right from the start to the principles behind the Revised Framework of International Convergence of Capital Measures and Rules (Basel II). This framework enables institutions to make internal estimates of capital to ensure solvency in the event of circumstances caused by different types of risk. Several years ago, a Basel II team was formed from within the Group’s different areas — mainly Risks, Technology and Operations, Financial Controller, Financial Management and Internal Auditing — to verify the whole process, especially in everything related to the integration of internal models into management. Furthermore, teams were formed to tackle various specific events so that the project’s most complex aspects could be appropriately managed.

As well as this Basel II operational team, senior management has been very involved from the onset. The management committee and the board were regularly apprised of the progress made in the project and the implications for the Group of the New Capital Accord.

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In the specific case of credit risk, Basel II means recognizing, for regulatory capital purposes, the internal models that have been used for management purposes.

We proposed adherence to the Advanced Internal Ratings Based (AIRB) models of Basel II for exposures which represent close to 95% of the Group’s total exposures. At the beginning of 2008, the Bank of Spain and the Financial Services Authority completed the process of supervisory validation. The institutions which have already installed this new system for calculating regulatory capital as of June 2008 (the first date allowed by the Bank of Spain) are Santander (parent bank), Banesto and Abbey whose portfolios accounted at the date of approval for close to 70% of the Group’s exposure, with regulatory capital requirements by credit risk at the consolidated level. The rest of the most significant units will gradually adopt the AIRB focus in accordance with the schedule sent to the Bank of Spain and communicated to the various local supervisors.

Given the medium-low risk profile characteristic of our businesses, very focused on retail banking (SMEs and individual customers), the Bank of Spain’s authorization has enabled the generation of significant capital savings in Pillar I (as it established the capital requirements for covering credit, market and operational risks). The significant diversification of the Group’s risk profile and businesses will offset the additional requirements of capital arising from the Process of Self- Assessment of Capital (which develops Pillar II). This takes into account the impact of the risks not considered in Pillar I, as well as the benefits related to the diversification in the areas of risks, businesses and geographic areas.

Aside from the supervisory validation process, we continued in 2008 with the project to gradually install technology platforms and the necessary methodological developments which will allow the progressive application of the advanced internal models to calculate regulatory capital in the rest of our units. During 2009 and after obtaining approval from the supervisory authorities, the Group expects to apply advanced models for calculating the regulatory capital requirements in its business units in Portugal.

Regarding the rest of risks explicitly envisaged in Pillar I of Basel II, Market Risk obtained authorization to use its internal model for treasury trading activity in Madrid. The Group is seeking authorization for the rest of units. In Operational Risk, the Group decided to adopt the standard focus for calculating regulatory capital as it believes it is still too early to use advanced models (“AMA”).

Pillar II is another important line of work of the Basel II Corporate Project. As well as reviewing and enhancing the methodology of the Economic Capital model, a technological approach to the platform supporting Pillar I was made so that all the information related to Credit Risk comes from the same source in the case of units with internal models authorized in Pillar 1. The Group’s Economic Capital model was subject in 2008 to a careful review by an international team of advisors of the Committee of European Banking Supervisors (“CEBS”) led by the Bank of Spain, as well as an internal review at the end of 2008 by the Group’s internal validation teams and the Group’s internal auditing.

Internal validation of internal risk models

Internal validation also provides fundamental support for the board’s risk committee and local committees when they authorize the use (management and regulatory) of models and in their periodic review, as senior management must ensure the entity has the appropriate procedures and systems for monitoring and controlling credit risk.

Our internal validation covers both credit risk models, market risk models and assessment of options as well as the economic capital model. The scope of validation includes not only the most theoretical or methodological aspects but also the technology systems and the quality of data that make implementation effective and, in general, all relevant aspects for the advanced management of risk (controls, reporting, uses, involvement of senior management, etc). The purpose of internal validation is thus to review quantitative, qualitative and technological aspects and those related to corporate governance.

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The function of Internal Validation is located, at the corporate level, within the Area of Integral Control and Internal Validation of Risk which reports directly to the Group’s third vice-chairman and chairman of the board’s risk committee. The function is global and corporate to ensure homogeneous application. The need to validate models in 13 units is subject to nine local supervisors, and the need for effectiveness and efficiency made it advisable to create three centers of corporate validation in Madrid, London and Sao Paulo. This facilitates application of a common methodology supported by a series of tools developed in Santander, which provide a robust corporate framework for use in all the Group’s units and which automate certain verifications in order to ensure the reviews are conducted efficiently.

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

Part 8. Economic capital

The concept of economic capital has traditionally been contrasted with that of regulatory capital, as this is the one required for the regulation of solvency. The new Basel II capital framework clearly brings both concepts closer together, although there are some significant differences such as recognition of the effects of diversification or concentration which economic capital models allow.

The Group’s model of economic capital quantifies the consolidated risk profile taking into account all the significant risks of activity, as well as the diversification effect on a multinational and multi-business group like Grupo Santander. This economic capital model serves as the Group’s base for preparing its Proposal of Self-assessment of capital in accordance with Bank of Spain regulations under the Basel II Pillar 2 framework.

The concept of diversification is fundamental for adequately measuring the risk profile of a group with global activity. Although it is an intuitive concept and is present in risk management right from the start of banking activity, we can also explain diversification in terms of imperfect correlation between the various risks and the largest events of losses do not occur simultaneously in all portfolios or types of risk. The sum of the economic capital of the various portfolios and types of risk, considered on its own, is higher than the Group’s total economic capital (i.e. the risk that the Group supports as a whole is less than the risk of the sum of the parts considered on their own).

In addition, within the framework of the model for measurement and aggregation of economic capital, the risk of concentration for wholesale portfolios (comprising large companies, banks and sovereigns) is also considered, both in its exposure dimension as well as concentration by sectors and geography.

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Global risk analysis profile

Our risk profile at December 31, 2008, measured in terms of economic capital, distributed by types of risk and the main business units, is reflected below:

Credit activity, which accounted for 66% of the Group’s economic capital requirement, continued to be the main source of risk. Its proportion was higher than in 2007 mainly because of the consolidation of Banco Real (previously accounted for by the equity method). Market risk accounted for 17% of the total and included, in addition to trading risk, the risk of the structural exchange-rate position, and the risk of equities and of fixed assets.

The distribution of economic capital among the main business units reflects the diversification of our business. Continental Europe and Latin America each represented more than one-third of total risk, the UK 11% and Financial Management and Equity Stakes (which assumed the risk of the structural exchange-rate position and most of the equity stakes, among other assets) represents 20%.

At the end of 2008, our total economic capital, including those corresponding to minority interests, was €40,041 million.

Our geographic diversification enables us to reduce economic capital needs by 25% with regard to the sum of the Group’s individual risks, while the capital saving from diversification between different types of business is 21% over the consolidated economic capital. The percentages cannot be added because of their different calculation methods.

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We periodically assess the level and evolution of the creation of value (“CV”) and the return on risk adjusted capital (“RORAC”) of our main business units. The CV is the profit generated above the cost of capital employed, and is done so with the following formula:

Creation of value = Economic profit – (average EC x cost of capital)

The economic profit is obtained by making the necessary adjustments to attributable profit so as to extract just the recurrent profit that each unit generates in the year of its activity. The cost of capital, which is the minimum remuneration required by shareholders, can be calculated objectively by adding to the risk-free return the premium that shareholders require to invest in our Group. This premium will essentially depend on the degree of volatility in the price of our share in relation to the market’s performance. The cost of capital calculated for 2008 was 9.2%.

All the main business units obtained in 2008 a RORAC higher than the cost of capital. The creation of value and the RORAC for the Group’s main business areas are shown below:


				Value
Main segments	RORAC			creation
Continental Europe		32.9	%		3,155
UK		33.9	%		814
Latin America		25.6	%		1,761
Subtotal operating areas		30.1	%		5,730
Financial management and participation		1.0	%		(1,016	)
Group Total		21.1	%		4,713

The creation of value (i.e. the economic profit less the average cost of capital used to achieve it) increased 8% in 2008 to €4,713 million. The Group’s RORAC comfortably exceeded the cost of capital estimated for 2008 and stood at 21.1% (24.1% in 2007 on a like-for-like basis). This reduction was due to the Group’s increased consolidation perimeter as the expected synergies in the integration processes (Banco Real in Brazil and Alliance & Leicester in the UK) have not yet materialized.

We also conduct capital planning with the main objective of obtaining future projections of economic and regulatory capital to assess situations of capital sufficiency. To optimize the Bank’s solvency situation and the return on capital, forecasts of results are incorporated into the various scenarios in a coherent way, with the identification of their strategic objectives (such as organic growth, M&A, pay-out ratio, etc), performance in the face of stress situations and capital management strategies.

Our capital planning framework provides a global picture of the capital sufficiency situation for various time periods and stress scenarios.

RORAC methodology

We have been using RORAC methodology in our credit risk management since 1993 for the following purposes:

•		To analyze and set prices during the decision-making process for operations and clients.

•		To estimate the capital consumption of each client, portfolio or business segment, in order to facilitate the optimal allocation of economic capital; and

•		To calculate the level of provisions that correspond to average expected losses.

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The economic capital calculation for each operation is based on the same variables needed to calculate the expected loss (i.e. the client’s rating, the maturity and the guarantees of the operation). By aggregation, the economic capital of the rest of the transactions of a client can be calculated, taking into account the appropriate factors of diversification/correlation, of a portfolio of clients, a business unit and the Bank as a whole.

The spread on operations must not only cover costs, including the expected loss or the cost of risk, but also be sufficient for an adequate return on the economic capital consumed by the operations.

RORAC methodology thus enables one to assess whether the return on a transaction covers the costs of the risk — expected loss — and the cost of the capital invested in the operation.

The minimum return on capital which a transaction must obtain is determined by the cost of capital. If a transaction or portfolio obtains a positive return, it is contributing to the Group’s profits. But it is not really creating value for the shareholder unless the return covers the cost of capital.

RORAC methodology enables the return on operations, clients, portfolios and businesses to be made on a homogeneous basis, identifying those that obtain a risk adjusted return higher than the cost of the Group’s capital, and so aligning risk and business management with the overall objective of maximizing the creation of value.

Part 9. Risk training activities

We have a corporate training program for risk management. Its purpose is to help to consolidate the risk management culture in Santander and ensure that all employees in the risks area are trained with the same criteria.

The training program, which provided a total of 27,621 hours of training to 1,949 employees, is the base for strengthening our leadership in this sphere and continuously enhancing the skills of our staff.

It also trains staff in other business segments, particularly in the retail banking area, and aligns the requirements of risk management with business goals.

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Part 10. Market Risk

Generally

We are exposed to market risk mainly as a result of the following activities:

	•		Trading in financial instruments, which involves interest rate, foreign exchange rate, equity price, commodity price and volatility risks.

	•		Engaging in retail banking activities, which involves interest rate risk since a change in interest rates affects interest income, interest expense and customer behavior. This interest rate risk arises from the gap (maturity and repricing) between assets and liabilities.

	•		Investing in assets (including subsidiaries) whose returns or accounts are denominated in currencies other than the Euro, which involves foreign exchange rate risk between the Euro and such other currencies.

	•		Investing in subsidiaries and other companies, which subject us to equity price risk; and

	•		Trading and non-trading activities which entail liquidity risk.

Primary Market Risks and How They Arise

The primary market risks to which we are exposed are interest rate risk, foreign exchange rate risk, equity price risk, volatility risk and liquidity risk. We are exposed to interest rate risk whenever there is a mismatch between interest rate sensitive assets and liabilities, subject to any hedging with interest rate swaps or other off-balance sheet derivative instruments. Interest rate risk arises in connection with both our trading and non-trading activities.

We are exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities, and off-balance sheet items denominated in different currencies, either as a result of trading or in the normal course of business. We maintain non-trading open currency positions arising from our investments in overseas subsidiaries, affiliates and their currency funding. The principal non-trading currency exposures are the euro to the US dollar and the British pound and the euro to the main Latin American currencies. Trading foreign exchange rate open risk is not material compared to non-trading foreign exchange risk.

We are exposed to equity price risk in connection with both our trading and non-trading investments in equity securities.

We are also exposed to liquidity risk. Market depth is the main liquidity driver in our trading portfolio, even though our policy is to trade the most liquid assets. Our liquidity risk also arises in non-trading activity due to the maturity gap between assets and liabilities in the retail banking business.

We use derivatives for both trading and non-trading activities. Trading derivatives are used to eliminate, to reduce or to modify risk in trading portfolios (interest rate, foreign exchange and equity), and to provide financial services to clients. Our principal counterparties for this activity are financial institutions. The principal types of derivatives used are: interest rate swaps, future rate agreements, interest rate options and futures, foreign exchange forwards, foreign exchange futures, foreign exchange options, foreign exchange swaps, cross currency swaps, equity index futures and equity options. The Group also has an incipient activity in commodity derivatives.

The Group also uses credit derivatives both to hedge credit risk in fixed income portfolios and to provide financial services to clients. To a lesser extent, they are used in proprietary trading and to diversify the global credit portfolio. Most of the activity is made in credit default swaps on individual names or indices.

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Procedures for Measuring and Managing Market Risk

Our board, through its risk committee, is responsible for establishing our policies, procedures and limits with respect to market risks, including which businesses to enter and maintain. The committee also monitors our overall performance in light of the risks assumed. Together with the local and global assets and liabilities committees (“ALCO”), each Market Risk Unit measures and monitors our market risks, and provides figures to ALCO to use in managing such risks, as well as liquidity risk.

Our market risk policy is to maintain a medium to low risk profile in business units. The risk activity is regulated and controlled through certain policies, documented in our Market and Liquidity Risk Management Policies Manual (as described below), and through a limit structure on our exposure to these market and liquidity risks which includes global limits for the entire Group (total risk limit unit) to specific portfolio limits; in addition, authorized products are listed and reviewed periodically.

These policies, procedures and limits on market risk are applicable to all units, businesses or portfolios susceptible to market risk.

1. Market and Liquidity Risk Management Policies Manual

The Market and Liquidity Risk Management Policies Manual is a compilation of policies that describe the control framework used by our Group to identify, measure and manage market risk exposures inherent to our activities in the financial markets. The Manual is employed for market risk management purposes at all involved levels in the Group and subsidiaries, providing a general and global action framework and establishing risk rules for all levels.

The Manual’s main objective is to describe and report all risk policies and controls that our board of directors has established as well as its risk predisposition.

All Group managers must ensure that each business activity is performed in accordance with the policies established in the Manual. The Manual is applied to all business units and activities, directly or indirectly, related to market risk decision-making.

2. Market Risk Management Procedures

All the functions developed by a risk manager are documented and regulated by different procedures, including measurement, control and reporting responsibilities. Internal and external auditors audit the compliance with this internal regulation control in order to ensure that our market risk policies are being followed.

3. Market Risk Limit Structure

The market risk limit structure can be defined as the board of director’s risk “appetite” and is managed by the Global Market Risk Function that accounts for all Group business units.

Its main functions are to:

	•		Identify and define the main types of risk incurred efficiently and comprehensively to be consistent with the management and strategy of the business.

	•		Quantify and inform the business areas of the risk levels and profile that senior management believes can be assumed, in order to avoid undesired risks.

	•		Give flexibility to the business areas to build risk positions efficiently and on a timely basis according to changes in the market and in the business strategies, and always within the risk levels regarded as acceptable by the Group.

	•		Allow the generators of business to take prudent risks which are sufficient to attain budgeted results.

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	•		Establish investment alternatives by limiting equity consumption.

	•		Define the range of products and underlying assets with which each unit of Treasury can operate, taking into consideration features such as the model and valuation systems, the liquidity of the tools used, etc. This will help to constrain all market risk within the business management and defined risk strategy.

The Global Market Risk Function defines the limit structure while the risk committee reviews and approves it. Business managers then administer their activities within these limits. The limit structure covers both our trading and non-trading portfolios and it includes limits on fixed income instruments, equity securities, foreign exchange and other derivative instruments.

Limits considered to be global limits refer to the business unit level. Local business managers set lower level limits, such as portfolio or trader limits. To date, system restrictions prevent intra-day limits.

Business units must always comply with approved limits. Potential excesses will require a range of actions carried out by the Global Market Risk Function unit including:

	•		Providing risk reducing levels suggestions and controls. These actions are the result of breaking “alarm” limits.

	•		Taking executive actions that require risk takers to close out positions to reduce risk levels.

Statistical Tools for Measuring and Managing Market Risk

1. Trading activity

The Trading Portfolio is defined as proprietary positions in financial instruments held for resale and/or bought to take advantage of current and/or expected differences between purchase and sale prices. These portfolios also include positions in financial instruments deriving from market-making, sale and brokering activity.

As a result of trading fixed income securities, equity securities and foreign exchange, we are exposed to interest rate, equity price and foreign exchange rate risks. We are also exposed to volatility when derivatives (options) are used.

Market risk arising from proprietary trading and market-making activities is actively managed through the use of cash and derivative financial instruments traded in OTC and organized markets.

Interest rate risk derived from market-making is typically hedged by buying or selling very liquid cash securities such as government bonds, or futures contracts listed in organized markets like Liffe, Eurex, Meff and CBOT.

Foreign exchange rate risk is managed through spot transactions executed in the global foreign exchange inter-bank market, as well as through forward foreign exchange, cross currency swaps and foreign exchange options.

Equity price risk is hedged by buying or selling the underlying individual stocks in the organized equity markets in which they are traded or futures contracts on individual stocks listed in organized markets like Meff and Liffe.

In the case of equity indexes such as S&P 500, Euro STOXX 50, or IBEX 35, the hedging is done through futures contracts listed in the aforementioned organized markets.

Volatility risk arising from market-making in options and option-related products is hedged by, either buying and selling option contracts listed in organized markets like Eurex, Meff, and CBOT, or entering risk reversal transactions in the inter-bank OTC market.

Credit risk is managed through the use of credit derivatives.

We use Value at Risk (“VaR”) to measure our market risk associated with all our trading activity.

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1.1 VaR Model

We use a variety of mathematical and statistical models, including VaR models, historical simulations, stress testing and evaluations of Return on Risk Adjusted Capital (“RORAC”) to measure, monitor, report and manage market risk. We call our VaR figures daily or annual “capital at risk” figures (“DCaR” or “ACaR”), depending on their time horizon, since we use them to allocate economic capital to various activities in order to evaluate the RORAC of such activities.

As calculated by us, DCaR is an estimate of the expected maximum loss in the market value of a given portfolio over a one-day time horizon at a 99% confidence interval. It is the maximum one-day loss that we estimate we would suffer on a given portfolio 99% of the time, subject to certain assumptions and limitations discussed below. Conversely, it is the figure that we would expect to exceed only 1% of the time, or approximately three days per year. DCaR provides a single estimate of market risk that is comparable from one market risk to the other.

The standard methodology used is based on historical simulation (520 days). In order to capture recent market volatility in the model, our DCaR figure is the maximum between the 1% percentile and the 1% weighted percentile of the simulated profit and loss distribution. This loss distribution is calculated by applying an exponential decline factor, which accords less weight to the observations furthest away in time.

We use DCaR estimates to alert senior management whenever the statistically estimated losses in our portfolios exceed prudent levels. Limits on DCaR are used to control exposure on a portfolio-by-portfolio basis. DCaR is also used to calculate the RORAC for a particular activity in order to make risk-adjusted performance evaluations.

Finally, in order to control derivative activities and credit management, because of their atypical nature, specific measures are evaluated daily. First, we look at the sensitivity to price movements of the underlying asset (delta and gamma), volatility (vega) and time (theta) and then measures are enacted such as the spread sensitivity, jump-to-default, and concentration of positions by rating levels.

To address the credit risk inherent in trading portfolios in accord with the recommendations of the Basel Committee on Banking Supervision, we also calculate an additional measurement (incremental default risk, IDR), in order to cover the risk of default that is not adequately captured in the VaR, via changes in lending spreads. The instruments affected are basically fixed-rate bonds, both public and private sector, derivatives on bonds (forwards, options, etc) and credit derivatives (credit default swaps, asset backed securities, etc). The method for calculating the IDR, in essence similar to that of the credit risk of positions outside trading, is based on direct measurements of the tails of the distribution of losses to the appropriate percentile (99.9%). The “saddle point” model is used, which provides estimates of total risk and the contributions of each counterparty to it. The calculations are also supplemented and calibrated with Monte Carlo simulations.

1.2 Assumptions and Limitations

Our DCaR and VaR methodology should be interpreted in light of the limitations of our model, which include:

	•		A one-day time horizon may not fully capture the market risk of positions that cannot be liquidated or hedged within one day.

	•		At present, we compute DCaR at the close of business and trading positions may change substantially during the course of the trading day.

1.3 Scenario Analysis and Calibration Measures

Because of these limitations in DCaR and VaR methodology, in addition to historical simulation, we use stress testing to analyze the impact of extreme market movements and to adopt policies and procedures in an effort to protect our capital and results of operation against such contingencies.

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In order to calibrate our VaR model, we use back testing processes. Back testing is a comparative analysis between VaR estimates and the daily clean P&L (theoretical result generated assuming the Mark-to-Market daily variation of the portfolio only considering the movement of the market variables). The purpose of these tests is to verify and measure the precision of the models used to calculate VaR.

The analyses of our back testing comply, at a minimum, with the BIS recommendations regarding the verification of the internal systems used to measure and manage market risks.

2. Non Trading activity

2.1 Foreign Exchange Risk and Equity Price Risk

Due to its nature, changes in strategic positions have to be approved by local/global functions in ALCO committee. Position limits with respect to these investments are established, although they will be measured under VaR and other methods that attempt to implement immediate action plans if a particular loss level is reached.

Our foreign exchange rate risk with respect to our non-trading activity can be either permanent or temporary. The permanent risk reflects the book value of investments net of the initial goodwill, while the temporary risk basically stems from purchase/sale operations made to hedge the exchange rate risk derived from dividend flows and expected results. The exchange rate differences generated for each position are recorded in reserves and in profit and loss account respectively.

In order to manage the exchange rate risk of the book value of permanent investments, our general policy is to finance the investment in local currency, provided there is a deep market which allows it and that the cost of doing so is justified by the expected depreciation. If local markets were not deep enough, our investments in foreign currency would be financed in euros and so would generate an exchange-rate risk. Certain one-off hedges of permanent investments are made when it is believed that a local currency could weaken against the euro more quickly than the market is discounting. In addition, operations are carried out to hedge the currency risk of the Group’s results and dividends in Latin America.

Our equity price risk arises from our portfolio of investments in industrial and strategic shareholdings. However, in the last few years the Group’s equity price risk has decreased due to divestments in the industrial and strategic equity portfolio.

2.2 Interest Rate Risk

The Group analyzes the sensitivity of net interest margin and market value of equity to changes in interest rates. This sensitivity arises from gaps in maturity dates and review of interest rates in the different asset and liability accounts. Certain re-pricing hypotheses are used for products without explicit contractual maturities based on the economic environment (financial and commercial).

On the basis of the positioning of balance sheet interest rates, as well as the market situation and outlook, the financial measures are agreed to adjust the positioning to levels desired by the Group. These measures range from taking positions in markets to defining the interest rate features of commercial products. We manage investments by determining a target range for each sensitivity and providing the appropriate hedge (mainly with government debt, interest rate swaps and interest rate options) in order to maintain these sensitivities within that range.

The measures used to control interest rate risk are the interest rate gap and the sensitivity of net interest margin and market value to changes in interest rates, VaR and analysis of scenarios.

a) Interest rate gap of assets and liabilities

Interest rate gap analysis focuses on lags or mismatches between changes in the value of asset, liability and off-balance sheet items. Gap analysis provides a basic representation of the balance sheet structure and allows for the detection of interest rate risk by concentration of maturities. It is also a useful tool for estimating the impact of eventual interest rate movements on net interest margin or equity.

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All on- and off-balance sheet items must be broken down by their flows and analyzed at in terms of repricing and maturity. In the case of those items that do not have a contractual maturity, an internal model of analysis is used and estimates are made of their duration and sensitivity.

b) Net interest margin sensitivity (NIM)

The sensitivity of net interest margin measures the change in the short/medium term in the accruals expected over a particular period (12 months), in response to a shift in the yield curve.

It is calculated by simulating the net interest margin, both for a scenario of a shift in the yield curve as well as for the current scenario. The sensitivity is the difference between the two margins calculated.

c) Market value of equity sensitivity (MVE)

Net worth sensitivity measures in the long term (the whole life of the operation) the interest risk implicit in net worth (equity) on the basis of the effect that a change in interest rates has on the current values of financial assets and liabilities. This is an additional measure to the sensitivity of the net interest margin.

d) Value at Risk (VaR)

The Value at Risk for balance sheet activity and investment portfolios is calculated with the same standard as for trading, historical simulation with a confidence level of 99% and a time frame of one day. Statistical adjustments are made, which effectively and quickly incorporates the latest developments that condition the risk levels assumed.

e) Analysis of scenarios

Two scenarios for the performance of interest rates are established: maximum volatility and sudden crisis. These scenarios are applied to the balance sheet, obtaining the impact on net worth as well as the projections of net interest revenue for the year.

2.3 Liquidity risk

Liquidity risk is associated with our capacity to finance our commitments, at reasonable market prices, as well as to carry out our business plans with stable sources of funding. We permanently monitor maximum gap profiles.

We have a diversified portfolio of assets that are liquid or can be made so in the short term. We also have an active presence in a wide and diversified series of financing and securitization markets, limiting our dependence on specific markets and keeping open the capacity of recourse to alternative markets.

The measures used to control liquidity risk are the liquidity gap, liquidity ratio, stress scenarios and contingency plans.

a) Liquidity gap

The liquidity gap provides information on contractual and expected cash inflows and outflows for a certain period of time, for each of the currencies in which we operate. The gap measures the net need or excess of funds at a particular date, and reflects the level of liquidity maintained under normal market conditions.

b) Liquidity ratios

The liquidity coefficient compares liquid assets available for sale (after applying the relevant discounts and adjustments) with total liabilities to be settled, including contingencies. This coefficient shows, for currencies that cannot be consolidated, the level of immediate response of the entity to firm commitments.

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Net accumulated illiquidity is defined as the 30-day accumulated gap obtained from the modified liquidity gap. The modified contractual liquidity gap is calculated on the basis of the contractual liquidity gap and by placing liquid assets or repos at the point of settlement and not at their point of maturity.

c) Analysis of scenarios/Contingency Plan

Our liquidity management focuses on preventing a crisis. Liquidity crises, and their immediate causes, cannot always be predicted. Consequently, our Contingency Plan concentrates on creating models of potential crises by analyzing different scenarios, identifying crisis types, internal and external communications and individual responsibilities.

The Contingency Plan covers the activity of a local unit and of central headquarters. Each local unit must prepare a Plan of Contingency Financing, indicating the amount it would potentially require as aid or financing from headquarters during a crisis. Each unit must inform headquarters (Madrid) of its plan at least every six months so that it can be reviewed and updated. These plans, however, must be updated more frequently if market circumstances make it advisable.

Quantitative analysis ⁽¹⁾

A. Trading activity ⁽²⁾

Quantitative analysis of daily VaR in 2008

Our risk performance regarding trading activity in financial markets during 2008, measured by daily Value at Risk “VaR”, is shown in the following graph.


(1)		All figures in this report are measured in euros. The exchange rate used is the one quoted in the market on the reference date.

(2)		Banco Real included since October 1, 2008.

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VaR during 2008 fluctuated more than 75% of the time in a range between €25 million and €40 million. The exception was between the middle of September and the beginning of December when the worsening of the international financial crisis after the collapse of Lehman Brothers and its spreading to emerging markets intensified the degree of volatility. In this context, given that volatility directly affected the VaR calculation, the maximum VaR for the year (amounting to €97.1 million) occured during the fourth quarter (the period of greatest volatility lay mainly in fixed income and exchange rates in Brazil and Mexico). VaR began a downward path in November due to reduced positions in Brazil and Mexico and the lower volatility ending at levels lower than the average for the year.

The average VaR of the Group’s trading portfolio in 2008 (amounting to €40 million) was higher than in 2007 but was solely due to the greater volatility and not to more risk taking. Compared to other financial groups, Grupo Santander has a low trading risk profile. Dynamic management of the trading risk profile enabled the Group to adopt changes of strategy to exploit opportunities in an environment of uncertainty.

The histogram below shows the distribution of average risk in terms of VaR during 2008. It was between €30 million and €40 million on 70.5% of days. Of note were the levels higher than $75 million because of the high volatility between September and December.

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Risk by factor

The minimum, maximum, average and year-end 2008 risk values in VaR terms were as follows:


		Minimum			Average			Maximum			Last
TOTAL TRADING	Total VaR		26.1			40.0			97.1			31.9

	Diversification effect		(7.0	)		(16.3	)		(66.6	)		(15.1	)

	Fixed-Income VaR		22.2			34.4			87.3			29.8
	Equity VaR		4.2			6.4			11.4			4.9
	FX VaR		6.6			15.5			67.6			12.4

LATIN AMERICA	VaR Total		16.4			30.0			87.8			20.2

	Diversification effect		(2.6	)		(7.1	)		(10.5	)		(5.7	)

	Fixed-Income VaR		14.4			26.2			80.4			16.2
	Equity VaR		4.5			11.0			9.6			6.8
	FX VaR		26.7			31.6			63.2			0.0

USA	VaR Total		0.6			1.2			4.1			1.8

	Diversification effect		0.7			(0.6	)		(1.8	)		(0.6	)

	Fixed-Income VaR		0.5			1.1			3.9			1.0
	Equity VaR		0.1			0.2			0.7			0.1
	FX VaR		0.1			0.5			1.4			0.9

EUROPE	VaR Total		16.7			27.8			43.8			24.7

	Diversification effect		(3.3	)		(12.8	)		(37.2	)		(18.7	)

	Fixed-Income VaR		14.4			24.7			40.0			28.1
	Equity VaR		4.3			6.8			12.6			4.5
	FX VaR		3.1			9.1			36.7			10.7

EUR million

The average VaR was €11.1 million higher than in 2007 due to the increased volatility in the fixed-income and currency markets. The average levels of VaR in these areas increased from €24.3 million to €34.4 million in the first case and from €9.8 million to €15.5 million in the second. The average risk in equities only rose from €5.8 million to €6.4 million despite the much higher volatility. The increased risk in fixed income was concentrated in Europe where the average VaR was €24.7 million as compared to €9.3 million in 2007.

Credit risk was included in the fixed-income factor. One of the causes of the higher risk in fixed income was the increased volatility of spreads on loans during 2008.

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Maximum volatility scenario

The table below shows at December 31, 2008, the results of each product (fixed income, equities, exchange rates, spreads on loans and the volatility of each one of them) in a scenario in which a volatility equivalent to six standard deviations in a normal distribution is applied. Under this scenario the inputs for each risk factor are those that represent the greater potential loss in the global portfolio at year-end. This scenario involved a rise in interest rates, fall in stock markets and the depreciation of the dollar against all currencies (except the euro and greater volatility and spreads on loans).

Maximum volatility Stress Test


€ million	Fixed income			Equities			Exchange rate			Volatility			Total
Total Trading		(45.1	)		(22.2	)		(34.3	)		(14.4	)		(116.0	)
Europe		(21.8	)		3.2			(17.0	)		(14.4	)		(50.0	)
Latin America		(23.9	)		(25.5	)		(15.3	)		0.0			(64.7	)
USA (New York)		0.6			0.0			(1.9	)		0.0			(1.3	)

The stress test shows what the economic loss suffered by the Group in its trading portfolios in terms of the Mark to Market (“MtM”) result would be had the stress movements depicted in the scenario resulted in a loss of €116 primarily in Latin American fixed-income equities and exchange-rate positions and in European fixed income, exchange rates and credit.

B. Non-Trading Activity

B.1. Asset and liability management

We actively manage the market risks inherent in retail banking. Management addresses the structural risks of interest rates, liquidity, exchange rates and credit.

The purpose of financial management is to make net interest revenue from our commercial activities more stable and recurrent, maintaining adequate levels of liquidity and solvency.

The Financial Management Area analyzes structural interest rate risk derived from mismatches in maturity and revision dates for assets and liabilities in each of the currencies in which we operate. For each currency, the risk measured is the interest gap, the sensitivity of net interest revenue, the economic value and the duration of equity.

The Financial Management Area manages structural risk on a centralized basis. This allows the use of homogenous methodologies, adapted to each local market where we operate.

In the euro-dollar area, the Financial Management Area directly manages the risks of the Parent Bank and coordinates management of the rest of the units that operate in convertible currencies. There are local teams in the banks in Latin America that manage balance sheet risks under the same frameworks, in coordination with the global Financial Management Area.

The Asset and Liability Committees (ALCOs) of each country and, where necessary, the markets committee of the Parent Bank, are responsible for the risk management decisions.

B.1.1. Quantitative analysis of interest rate risk in 2008

a) Convertible currencies

At the end of 2008, the sensitivity of net interest margin at one year to parallel rises of 100 basis points was concentrated in the euro interest rate curve (€119.6 million) with the Parent Bank contributing the most, and in the sterling interest rate curve (£63.6 million negative). The sensitivity of the rest of convertible currencies was not very significant.

At the same date, the sensitivity of equity to a parallel rise in the yield curve of 100 basis points in the euro interest rate curve was €239.1 million with most of it in the Parent Bank. As regards the curve in sterling it was £153.3 million negative.

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Bearing in mind the uncertainty in financial markets, especially in the second half of the year, we maintained a conservative position during 2008 in our exposure to interest rates.

Structural Gap. Santander Parent Company (December 31, 2008)


	Not		Up to 1									More than 5
€ million	sensitive		year			1-3 years			3-5 years			years			TOTAL
Money and securities market				60,452			860			1,460			5,586			68,358
Loans		64		126,961			11,629			2,120			1,791			142,565
Permanent equity stakes		69,258														69,258
Other assets		7,812		55,318			—			—			—			63,129
Total assets		77,134		242,730			12,489			3,580			7,376			343,311
Money market		—		28,982			—			—			300			29,282
Customer deposits		38		30,934			5,716			8,441			11,372			56,502
Debt Issues and securitizations		—		92,102			12,515			11,354			15,533			131,504
Stockholders’ equity and other liabilities		70,509		53,423			1,185			906			1,576			127,599
Total liabilities		70,547		205,441			19,415			20,701			28,782			344,887
Balance sheet Gap		6,587		37,289			(6,926	)		(17,121	)		(21,405	)		(1,576	)
Off-balance sheet structural Gap		—		(32,794	)		10,755			10,780			14,687			3,428
Total structural Gap		6,587		4,495			3,829			(6,341	)		(6,718	)		1,852

Accumulated Gap		—		4,495			8,324			1,983			(4,735	)		—

b) Latin America

The interest rate risk of Latin America’s balance sheet management portfolios, measured by the sensitivity of market value of the net interest margin (NIM) to a parallel movement of 100 basis points, remained at low levels during 2008 and moved within a narrow band (maximum of €51 million in February). In terms of equity sensitivity, it fluctuated in the range of €300 million and €360 million and was very stable during the whole year except in the fourth quarter with an increase mainly due to including Banco Real in Brazil.

At the end of 2008, the region’s risk consumption measured by the market value of equity sensitivity to 100 basis points, was €430 million (as compared to €326.1 million in 2007), while that of the net interest margin at one year measured by its sensitivity to 100 basis points, was €27.1 million (as compared to €21.2 million in 2007).

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Market Value of Equity (MVE) sensitivity

For the whole of Latin America the consumption at the end of 2008 was €430 million (sensitivity of MVE to rises of 100 basis points in interest rates). The geographic distribution is shown below.

More than 90% of risk is concentrated in four countries: Brazil, Chile, Mexico and Puerto Rico.

MVE Sensitivity by countries

Others: Colombia, Panama, Santander Overseas and Uruguay

B.1.2. Structural management of credit risk

The purpose of structural management of credit risk is to reduce the credit risk concentrations that can naturally occur as a result of business activity through the sale of assets. These operations are offset by acquiring other assets that diversify the credit portfolio. The Financial Management Area analyzes these strategies and makes proposals to the ALCO to minimize the exposure to credit risk and help create value.

During 2008:

•		€64 billion of assets were securitized. For liquidity management purposes, considering a securitization performed by Abbey at the end of December 2007, this figure amounts to €74 billion. Given the difficulties of the securitization market since August 2007, most of the issuances were retained by the Group’s various units. These securitizations significantly increased the Group’s liquidity position through its discounting capacity in central banks.

•		Repurchases were made in the secondary market of AAA securitization bonds by Group issuers (€1.6 billion) and some of the hedges made in 2007 were closed as we believe that due to the situation in the markets, the prices are well below their fundamental value, bearing in mind the underlying risk of the assets.

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B.1.3. Management of structural liquidity

Structural liquidity management aims to finance the Group’s recurring activity in optimum conditions of maturity and cost and avoid assuming undesired risks.

The Group’s structural liquidity position improved during 2008, thereby enhancing its balance sheet structure and increasing significantly the assets that can be discounted, which act as a liquidity cushion in the event of possible contingencies.

We manage our liquidity on the basis of a comfortable structural position as a result of its retail banking nature.

The main aspects of structural liquidity management in 2008 were:

	•		Comfortable positioning of structural liquidity. We are essentially a retail bank. Therefore, customer deposits are the main source of funds in our financing structure. These deposits, together with capital and similar instruments, enable us to address most of the Group’s liquidity needs. Accordingly, financing from the wholesale markets was small.

			In Latin America, the reduced financing needs of retail activity meant that financing in the wholesale markets was in practice residual, and principally for reasons of presence and diversification. For the rest of the Group (denominated as “area of convertible currencies”), the deposits added to the permanent funds in the balance sheet (capital and similar liabilities) covered more than 90% of loans net of securitizations. This meant an improvement of around 75% from 2007.

	•		Diversification of markets and instruments to obtain liquidity. We have an active presence in a broad and diversified series of financing markets. This limited our dependence on specific markets and allowed us to maintain a comfortable capacity of recourse to the markets.

	•		Appropriate structure of medium and long-term issues with moderate recourse to short-term wholesale financing. At the end of 2008, commercial paper and notes accounted for less than 10% of total wholesale financing. This structure is based on securitizations and a portfolio of medium and long-term issues (each one around 45% of the total) well diversified by products and with an average maturity of 3.8 years.

			Our units in the area of convertible currencies obtained a total of €20.5 billion in medium and long-term issues in the wholesale markets and securitized another €64 billion (for liquidity management purposes, considering a securitization performed by Abbey at the end of December 2007, this figure amounts to €74 billion).

	•		High capacity to obtain liquidity on the balance sheet. We have a diversified portfolio of liquid assets, or those that can become so in the short term appropriate to their positions. In addition, we have a large amount of assets which can be but have not been discounted in central banks (ECB, Bank of Spain, and the Fed). At the end of 2008, they amounted to more than €60 billion (€30 billion in Q1-08).

	•		Comfortable access to the wholesale markets for liquidity on the basis of high short and long-term ratings. At the end of 2008, all rating agencies maintained their long-term ratings for us at AA or higher (Moody’s Aa1 equivalent to AA+; the other three AA); and

	•		Independence of the subsidiaries in financing within a centralized management. The most important subsidiaries, except for Santander Consumer Finance, must obtain their financing in wholesale markets in accordance with their needs, establishing their own liquidity and contingency plans, without recourse to lines from the Parent Bank to finance their activity.

The Group, as a holding company, carries out the functions of control and management, which means planning the funding needs, structuring the financing sources, optimizing their diversification by maturities, instruments and markets, as well as defining contingency plans.

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In practice, the Group’s liquidity management consists of the following:

	•		A liquidity plan is drawn up every year, based on the financing needs resulting from the business budgets. On the basis of these needs, and bearing in mind the limits on recourse to short-term markets, the annual issuance and securitization plan is established.

	•		During the year the evolution of financing needs is regularly monitored, giving rise to changes to the plan; and

	•		Control and analysis of liquidity risk. The main objective is to ensure that the Group maintains acceptable levels of liquidity to cover its financing needs in the short and long-term under normal market situations. Various control measures are used such as the liquidity gap and liquidity ratios.

			Various scenarios are also analyzed (stress scenarios) in which additional needs are considered because of various rare but possible events. By doing this, a wide range of contingencies that could affect the Group with a greater or lesser probability are covered, which enable it to prepare the corresponding contingency plans.

The analysis of scenarios conducted during 2008 shows that the Group, even in a scenario of minimal demand for medium and long-term issues, maintained a comfortable liquidity situation.

B.2. Exchange rate risk; Portfolio of industrial and strategic shareholdings

B.2.1. Exchange rate risk

Structural exchange rate risk arises from our operations in currencies, mainly permanent financial investments, results and the dividends of these investments.

This exchange rate risk management is dynamic and seeks to limit the impact on equity of currency depreciations and to optimize the financial cost of hedging.

As regards the exchange-rate risk of permanent investments, the general policy is to finance them in the currency of the investment provided the depth of the market allows it and the cost is justified by the expected depreciation. One-off hedging is also done when a local currency could weaken against the euro significantly more quickly than the market is discounting.

At the end of 2008, the largest exposures of a permanent nature (with potential impact on net worth) were concentrated in the Brazilian real followed by sterling, Mexican pesos and Chilean pesos. The Group covered part of these positions of a permanent nature with exchange-rate derivatives.

In addition, Financial Management at the consolidated level is responsible for exchange-rate management of the Group’s expected results and dividends in those units whose currency is not the euro.

B.2.2. Portfolio of industrial and strategic shareholdings

In 2008, our exposure in industrial and strategic equity portfolios decreased 29% in mark to market terms, partly due to the negative revaluation of the market prices and partly due to the sale of some positions. Non-trading portfolios of Banco Real and Alliance & Leicester were integrated at the end of the year. All in all, the risk of the structural equity portfolio, measured in terms of VaR, increased €110.2 million as compared to the end of 2007, up to €521.5 million, due to the increase in market volatility.

The average daily VaR for the structural equity portfolio for the year 2008 was €609.7 million, with a minimum of €368.9 million and a maximum of €983.9 million, in May and October 2008, respectively.

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C. Exposures related to complex structured assets

We have not increased our exposure to instruments or complex structured vehicles, which remains very limited.

At the end of 2008, we had:

• CDOs and CLOs worth €75 million.

• Hedge Funds: The main exposure is through the financing of these funds (i.e. counterparty risk). This exposure, however, is not significant (€1,133 million at the end of 2008, including the direct participation in portfolio and €767 million of financing) and has approximately 38% of low loan-to-value levels (which amounted to €3,009 million of collateral at the end of 2008). The risk with this type of counterparty is analyzed case by case, establishing the percentages of collateralization on the basis of the features and assets of each fund. In short, the exposure is lower than in 2007.

• Conduits: The two conduits that we maintained in 2007, and which were always within the perimeter of consolidation, had no activity at the end of 2008; and

• Monolines: Our exposure to monoline insurance companies at the end of 2008 was €457 million, mainly concentrated in indirect exposure (which consist of €288 million), by virtue of the guarantee provided for this type of entity for various financing operations or traditional securitization. The exposure in this case is double default; the primary underlying assets are of high credit quality (i.e., mostly AA). The small remainder is direct exposure (for example, through purchase of protection against the risk of non-payment by some of these insurers via a credit default swap).

Our policy regarding the approval of new transactions related to these products remains very prudent and conservative, and is subject to strict supervision by senior management.

Before approving a new transaction, product or underlying asset, the Risk Division verifies:

• The existence of an appropriate valuation model to monitor the value of each exposure, i.e. Mark-to-Market, Mark-to-Model or Mark-to-Liquidity; and

• The availability in the market of the necessary inputs to be able to apply this valuation model.

If these two points are met, the Risk Division then verifies:

• The availability of appropriate systems, duly adapted to calculate and monitor every day the results, positions and risks of new operations; and

• The degree of liquidity of the product or underlying asset, in order to make their coverage possible when deemed necessary.

D. Alliance & Leicester

D.1.) Structured financing transactions

As a result of the acquisition of the Alliance & Leicester group in the UK, our participations in structured transactions were integrated. They consist of a diversified portfolio of specialized financing operations.

The committed exposure at the end of 2008 was £7,350 million (€7,717 million) corresponding to 281 transactions.

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D.2.) Exposures related to complex structured assets

The acquisition of Alliance & Leicester also increased the exposure to certain complex structured products. The exposure that Alliance & Leicester contributes in these products and vehicles is as follows:

	•		CDOs and CLOs: exposure of €509 million (72% of the portfolio has an AAA rating and 11% AA).

	•		Conduits: as a result of the acquisition of Alliance & Leicester, the Group integrated a conduit with assets of €900 million at the end of the year, 71% with AAA rating and 9% AA.

	•		Monolines: the exposure of Alliance & Leicester to monoline insurers was €38 million at the end of 2008, all of it indirect (exposure to double default) by virtue of the guarantee provided for this type of institution to various financing operations or traditional securitization.

All the positions were known when acquired, being duly provisioned.

E. Internal model

The Bank of Spain approved at the end of 2008 the use of our internal market risk model for calculating regulatory capital. The approval is for treasury trading activity in Madrid. The Group’s objective is to gradually increase approval for the rest of units.

As a result of this approval, the regulatory capital of trading activity is now calculated via advanced methods instead of the previous standard methods. The VaR calculated for the Market Risks Area is the fundamental metric and incorporates an incremental default risk.

F. Structured financing transactions

We have low exposure in this area and it is diversified in accordance with product, sector and the number of transactions. The committed exposure at the end of December 2008 was €19,616 million corresponding to 405 transactions, broken down as follows: €9,725 million (consisting of 120 transactions) in acquisition finance; €7,177 million (consisting of 247 transactions) in project finance and the rest in leveraged buy-outs (LBOs) and other forms (including margin loans). No writedowns were considered necessary, beyond €21 million of loan-loss provisions. There were no significant LBOs during 2008.

G. Capital Management

The objective of capital management is to optimize its structure and its cost, from the regulatory and economic perspectives. Therefore, different tools and policies are utilized, such as capital increases and computable issuances (preferred and subordinated), results, dividend policy and securitizations.

Our eligible stockholders’ equity was €62,277 million at December 31, 2008. The surplus over the minimum requirement was €21,299 million. Our capital ratios remained at comfortable levels. The BIS II ratio was 13.3%, Tier I Capital was 9.1% and core capital was 7.5%. During 2008, the Group maintained its short- and long-term ratings. In their annual review, the rating agencies kept their rating and outlook for the Group and its main subsidiaries, reflecting the strength of our retail franchises, the return, business diversification and quality of assets and capital. Subsequently, and after the announcement of the acquisition of Alliance & Leicester, the deposits of Bradford & Bingley and all the capital of Sovereign, all rating agencies confirmed their ratings.

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PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

Not Applicable

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

A. Not Applicable

B. Not Applicable

C. Not Applicable

D. Not Applicable

E. Not Applicable

Item 15. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

As of December 31, 2008, Banco Santander, S.A., under the supervision and with the participation of its management, including its disclosure committee, its chief executive officer, chief financial officer, and chief accounting officer, performed an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15 (e) under the Exchange Act). There are, as described below, inherent limitations to the effectiveness of any control system, including disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable assurance of achieving their control objectives.

Based on such evaluation, Banco Santander, S.A.’s chief executive officer, chief financial officer and chief accounting officer concluded that Banco Santander, S.A.’s disclosure controls and procedures are effective in ensuring that information Banco Santander, S.A. is required to disclose in the reports it files or submits under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to Banco Santander, S.A.’s management, including its disclosure committee, chief executive officer, chief financial officer and the chief accounting officer, as appropriate to allow timely decisions regarding required disclosures.

(b) Management’s Report on Internal Control over Financial Reporting

The management of Banco Santander, S.A. is responsible for establishing and maintaining an adequate internal control over financial reporting as defined in Rule 13a-15 (f) under the Exchange Act.

Our internal control over financial reporting is a process designed by, or under the supervision of, the Bank’s principal executive and principal financial officers and effected by the Bank’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes, in accordance with generally accepted accounting principles. For Banco Santander, S.A., generally accepted accounting principles refer to the International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS-IASB”).

Our internal control over financial reporting includes those policies and procedures that:

•

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

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	•		Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

	•		Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We have adapted our internal control over financial reporting to the most rigorous international standards and comply with the guidelines set by the Committee of Sponsoring Organizations of the Treadway Commission in its Enterprise Risk Management Integrated Framework. These guidelines have been extended and installed in our Group companies, applying a common methodology and standardizing the procedures for identifying processes, risks and controls, based on the Enterprise Risk Management Integrated Framework.

The documentation process in the Group’s companies has been constantly directed and monitored by a global coordination team, which set the guidelines for its development and supervised its execution at the unit level.

The general framework is consistent, as it assigns to management specific responsibilities regarding the structure and effectiveness of the processes related directly and indirectly with the production of consolidated financial statements, as well as the controls needed to mitigate the risks inherent in these processes.

Under the supervision and with the participation of the management of the Group, including our chief executive officer, our chief financial officer and our chief accounting officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2008, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Enterprise Risk Management — Integrated Framework. Based on this assessment, management believes that, as of December 31, 2008, its internal control over financial reporting was effective based on those criteria.

Our independent auditors have issued an audit report on the effectiveness of our internal control over financial reporting as of December 31, 2008. This report follows below.

264

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Banco Santander, S.A.:

We have audited the internal control over financial reporting of Banco Santander, S.A. (the “Bank”) and Companies composing, together with the Bank, the Santander Group (the “Group”) as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Group’s internal control over financial reporting based on our audit.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States of America), the consolidated financial statements as of and for the year ended December 31, 2008 of the Group and our report dated June 30, 2009 expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph stating that the consolidated financial statements referred to above have been prepared in accordance with IFRS-IASB and that, accordingly, the financial information for 2007 and 2006 differ from those contained in the consolidated financial statements filed on Form 20-F for the year ended December 31, 2007, which were prepared in accordance with International Financial Reporting Standards as adopted by the European Union required to be applied under Bank of Spain's Circular 4/2004.

/s/ Deloitte, S.L.
DELOITTE, S.L.

Madrid — Spain
June 30, 2009

265

(d) Changes in internal controls over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 16. [Reserved]

Item 16A. Audit committee financial expert

The audit and compliance committee has five members, all of whom are non-executive independent directors (as defined by Article 6.2 c) of the Rules and Regulations of the Board). All members of the audit and compliance committee also meet the independence criteria set by the NYSE for foreign private issuers. Our Rules and Regulations of the Board provide that all members of the audit and compliance must have knowledge, aptitude and experience in the areas of accounting, auditing or risk management. Currently, the chairman of the audit and compliance committee is Luis Ángel Rojo. Our standards for director independence may not necessarily be consistent with, or as stringent as, the standards for director independence established by the NYSE.

Our board of directors has determined that Manuel Soto is an “Audit Committee Financial Expert” in accordance with SEC rules and regulations.

Item 16B. Code of Ethics

We have adopted a code of ethics (the “General Code of Conduct”) that is applicable to all members of the boards of the companies of the Group, to all employees subject to the Code of Conduct of the Securities Market, including the Bank’s chairman, chief executive officer, chief financial officer and chief accounting officer, and to all those employees designated by the Human Resources Division that have been specifically informed of their subjection to this General Code of Conduct. This Code establishes the principles that guide these officers’ and directors’ respective actions: ethical conduct, professional standards and confidentiality. It also establishes the limitations and defines the conflicts of interest arising from their status as senior executives or directors.

This Code is available on our website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—corporate governance—internal code of conduct”.

Item 16C. Principal Accountant Fees and Services

Amounts paid to the firms belonging to the Deloitte worldwide organization, the Group’s principal auditor, for statutory audit and other services were as follows:


	2008		2007		2006
	(in millions of euros)

Audit fees (1)		18.2		15.9		15.6
Audit related fees (2)		10.4		9.9		10.5
Non-audit related fees (excluding tax sevices) (3)		3.4		2.8		3.6
Tax fees (4)		1.9		2.5		1.9
Other fees paid (5)		3.8		3.7		3.3

		37.7		34.8		34.9


(1)		In 2008, €15.9 million was paid for the audit of annual financial statements considering that the Group had the same composition as in the previous year, and €2.3 million was paid for the annual audit of the companies that became part of the Group in this year.

266


(2)		Comprising €5.9 million in 2008, €6.2 million in 2007 and €6.6 million in 2006 for the audit of internal control pursuant to the requirements of the Sarbanes-Oxley Act and the calculation of regulatory capital (Basel) and €4.5 million in 2008, €3.7 million in 2007 and €3.9 million in 2006 for other reports required by legal regulations issuing from the national supervisory bodies of the countries where the Group does business, notably the semi-annual audits and the reports prepared in compliance with the requirements of the US securities market (other than those required by the Sarbanes-Oxley Act).

(3)		The amounts invoiced for services other than audit which, during the past fiscal year, were principally those relating to securitization processes and preparation of financial studies.

(4)		All tax services have been approved by the Audit and Compliance Committee.

(5)		Amounts invoiced for audits on purchases and other corporate transactions (due diligence).

The services commissioned from the Group’s auditors meet the independence requirements stipulated by Law 44/2002, of November, 22 on Financial System Reform Measures and by the Sarbanes-Oxley Act of 2002, and they did not involve the performance of any work that is incompatible with the audit function.

The audit and compliance committee proposes to the board the fees to be paid to the external auditor and the scope of its professional mandate.

The audit and compliance committee is required to pre-approve the main audit contract of the Bank or of any other company of the Group with its principal auditing firm. This main contract sets forth the scope of the audit services and audit-related services to be provided by the auditing firm, the term (typically, three years), the fees to be paid and the Group companies to which it will be applied. Once the term of the first contract expires, it can be rolled over by subsequent periods of one year upon approval by the audit and compliance committee.

If a new Group company is required to engage an auditing firm for audit and audit-related services, those services have to be pre-approved by the audit and compliance committee.

All non-audit services provided by the Group’s principal auditing firm or other auditing firms in 2008 were approved by the audit and compliance committee, and all such non-audit services to be provided in the future will also require approval from the audit and compliance committee.

The audit and compliance committee is regularly informed of all fees paid to the auditing firms by the Group companies.

Item 16D. Exemption from the Listing Standards for Audit Companies

Not applicable.

267

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table shows the repurchases of shares made by the Bank or any of its Affiliated Purchasers during 2008:


					(c) Total number of		(d) Maximum number (or
					shares (or units)		approximate dollar value) of
	(a) Total number of		(b) Average		purchased as part of		shares (or units) that may yet be
	shares (or units)		price paid per		publicly announced		purchased under the plans or
2008	purchased		share (or unit)		plans or programs		programs
January		82,972,577	€	12.16		—		—
February		70,987,893	€	11.78		—		—
March		46,982,049	€	11.77		—		—
April		64,707,882	€	13.36		—		—
May		51,657,440	€	13.92		—		—
June		37,713,175	€	12.27		—		—
July		40,521,699	€	10.97		—		—
August		27,479,450	€	11.81		—		—
September		53,050,135	€	10.93		—		—
October		74,741,604	€	9.43		—		—
November		87,594,691	€	6.16		—		—
December		120,127,254	€	6.49		—		—
Total		758,535,849

During 2008, all purchases and sales of equity securities were made in open-market transactions.

Item 16F. Changes in Registrant’s Certifying Accountant

Not applicable

Item 16G. Corporate Governance

The following is a summary of the significant differences between our corporate governance practices and those applicable to domestic issuers under the New York Stock Exchange (“NYSE”) listing standards.

Independence of the directors on the board of directors

Under the NYSE corporate governance rules, a majority of the board of directors must be composed of independent directors, the independence of whom is determined in accordance with highly detailed rules promulgated by the NYSE. Spanish law does not contain any such requirements although there is a non-binding recommendation for listed companies in Spain that the number of independent directors be at least one third of the total size of the Board. Article 42.1 of our By-laws establishes that the shareholders at the general shareholders’ meeting shall endeavor to ensure that independent directors represent at least one-third of the total number of directors. Article 6.1 of the Rules and Regulations of the Board of Directors establishes likewise that the board shall endeavor that the number of independent directors represent at least one-third of all directors. The board of directors of Santander has nine independent directors (out of nineteen directors total), as defined in Article 6.2. c) of the Rules and Regulations of the Board. We have not determined whether or not the directors on the Santander Board would be considered independent under the NYSE rules except in the case of the members of our audit and compliance committee where we have determined that all of them meet the NYSE independence criteria for foreign private issuers. Article 6.2. c) of the Rules and Regulations of the Board defines the concept of an independent director as follows:

268

“External or non-executive Directors who have been appointed based on their personal or professional status and who perform duties not conditioned by relationships with the Company, or with the significant shareholders or management thereof shall be considered independent directors.

In no event may there be a classification as independent directors of those who:

a) Have been employees or executive directors of the Group’s companies, except after the passage of 3 or 5 years, respectively, since the cessation of such relationship.

b) Receive from the Company, or from another Group company, any amount or benefit for something other than director compensation, unless it is immaterial. For purposes of the provisions of this sub-section, neither dividends nor pension supplements that a director receives by reason of the director’s prior professional or employment relationship shall be taken into account, provided that such supplements are unconditional and therefore, the Company paying them may not suspend, modify or revoke the accrual thereof without breaching its obligations.

c) Are, or have been during the preceding 3 years, a partner of the external auditor or the party responsible for auditing the Company or any other Group company during such period.

d) Are executive directors or senior managers of another company in which an executive director or senior manager of the Company is an external director.

e) Maintain, or have maintained during the last year, a significant business relationship with the Company or with any Group company, whether in their own name or as a significant shareholder, director or senior manager of an entity that maintains or has maintained such relationship. Business relationships shall be considered the relationships of a provider of goods or services, including financial, advisory or consulting services.

f) Are significant shareholders, executive directors or senior managers of an entity that receives, or has received during the preceding 3 years, significant donations from the Company or the Group. Those who are merely members of the board of a foundation that receives donations shall not be considered included in this letter.

g) Are spouses, persons connected by a similar relationship of affection, or relatives to the second degree of an executive director or senior manager of the Company.

h) Have not been proposed, whether for appointment or for renewal, by the appointments and remuneration committee.

i) Are, as regards a significant shareholder or shareholder represented on the board, in one of the circumstances set forth in letters (i), (v), (vi) or (vii) of this sub-section 2(c). In the event of a kinship relationship set forth in item (vii), the limitation shall apply not only with respect to the shareholder, but also with respect to the related proprietary directors thereof in the affiliate company”.

The above independence criteria are the same as those set forth by the Unified Code of Good Governance, which is a non-binding code approved by the Spanish CNMV in 2006.

Independence of the directors on the audit and compliance committee

Under the NYSE corporate governance rules, all members of the audit committee must be independent. Independence is determined in accordance with highly detailed rules promulgated by the NYSE. Such independence criteria are met by all members of our audit and compliance committee.

269

The audit and compliance committee of the board of directors of Santander is composed of five directors. All members are non-executive independent directors and its chairman is independent in accordance with the standards set forth in the previously mentioned Article 6.2. c) of the Rules and Regulations of the Board. These independence standards may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE. Under Spanish law, a majority of the members and the chairman of the audit committee must be non-executive. The composition of the audit and compliance committee is described under “—Audit and compliance committee and appointments and remuneration committee”.

Independence of the directors on the appointments and remuneration committee

In accordance with the NYSE corporate governance rules, all US companies listed on the NYSE must have a compensation committee and a nominating and corporate governance committee and all members of such committees must be independent in accordance with highly detailed rules promulgated by the NYSE. Under Spanish law, these committees are not required, though there is a non-binding recommendation for listed companies in Spain to have these committees and for them to be composed of non-executive directors and chaired by a non-executive independent director. Santander satisfies this non-binding recommendation. The composition of the appointments and remuneration committee is described under “—Audit and compliance committee and appointments and remuneration committee”.

During the fiscal year 2008, none of the members of the appointments and remuneration committee was an executive director, member of senior management or a Bank employee, and no executive director or member of senior management has held a position on the board (or its remuneration committee) of companies that employ members of the appointments and remuneration committee.

Separate meetings for non-management directors

In accordance with the NYSE corporate governance rules, non-management directors must meet periodically outside of the presence of management. Under Spanish law, this practice is not required and as such, the non-management directors on the board of directors of Santander do not meet outside of the presence of the directors who also serve in a management capacity.

Code of ethics

Under the NYSE corporate governance rules, all US companies listed on the NYSE must adopt a Code of Business Conduct and Ethics which contains certain required topics. In March 2000, Santander adopted a “General Code of Conduct”, which applies to all members of the boards of the companies of the Group, to all employees subject to the Code of Conduct in the Securities Market, including the Bank’s chairman, chief executive officer, chief financial officer and chief accounting officer, and to all those employees designated by the human resources division that have been specifically informed of their subjection to this General Code of Conduct. On July 28, 2003, the board approved amendments to the General Code of Conduct to conform it to the requirements of Law 44/2002 (November 2, 2002) on reform measures of the financial system. The new Code came into force on August 1, 2003 and replaced the previous one. The General Code of Conduct establishes the principles that guide the actions of officers and directors including ethical conduct, professional standards and confidentiality.

The obligations of directors and the regulations concerning their conflict of interests are governed by the Rules and Regulations of the Board.

As of December 31, 2008, no waivers with respect to the General Code of Conduct had been applied for or granted.

In addition, the Group abides by a Code of Conduct in the Securities Market, which was also updated on July 28, 2003. This code establishes standards and obligations in relation to securities trading, conflicts of interest and the treatment of price sensitive information.

Both codes are available to the public on our website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—Corporate governance—Internal code of conduct”.

270

PART III

Item 17. Financial Statements

We have responded to Item 18 in lieu of this item.

Item 18. Financial Statements

Reference is made to Item 19 for a list of all financial statements filed as part of this Form 20-F.

Item 19. Exhibits

(a) Index to Financial Statements


	Page
Report of Deloitte, S.L.		F-1
Consolidated Balance Sheets as of December 31, 2008, 2007 and 2006		F-2
Consolidated Statements of Income for the Years Ended December 31, 2008, 2007 and 2006		F-3
Consolidated Statements Of Changes In Stockholders’ Equity for the Years Ended December 31, 2008, 2007 and 2006		F-4
Consolidated Cash Flow Statement for the Years Ended December 31, 2008, 2007 and 2006		F-8
Notes to the Consolidated Financial Statements		F-9

(b) List of Exhibits


Exhibit
Number		Description
	1.1	By-laws (Estatutos) of Banco Santander, S.A.

	1.2	By-laws (Estatutos) of Banco Santander, S.A., (English translation of By-laws set forth in Exhibit 1.1 hereto).

	4.1*	Consortium and Shareholders’ Agreement dated May 28, 2007, among the Royal Bank of Scotland Group plc, Banco Santander Central Hispano, S.A., Fortis SA/N.V. and RFS Holdings B.V. (incorporated by reference to Exhibit 4.1 to our Annual Report on Form 20-F for the year ended December 31, 2006, filed with the Securities and Exchange Commission on July 2, 2007)

	4.2	Transaction Agreement dated as of October 13, 2008 by and between Sovereign Bancorp, Inc. and Banco Santander, S.A. (incorporated by reference to Exhibit 2.1 to our Registration Statement on Form F-4, filed with the Securities and Exchange Commission on November 17, 2008)

	8.1	List of Subsidiaries (incorporated by reference as Exhibits I, II and III of our Financial Statements filed with this Form 20-F).

	12.1	Section 302 Certification by the chief executive officer

	12.2	Section 302 Certification by the chief financial officer

	12.3	Section 302 Certification by the chief accounting officer

	13.1	Section 906 Certification by the chief executive officer, the chief financial officer and the chief accounting officer

	15.1	Consent of Deloitte, S.L.

We will furnish to the Securities and Exchange Commission, upon request, copies of any unfiled instruments that define the rights of holders of long-term debt of Banco Santander, S.A.


*		Pursuant to a request for confidential treatment filed with the Securities and Exchange Commission, the confidential portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission.

271

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Banco Santander, S.A.:

We have audited the accompanying consolidated balance sheets of Banco Santander, S.A. (the “Bank”) and Companies composing, together with the Bank, the Santander Group (the “Group”), as of December 31, 2008, 2007 and 2006, and the related consolidated income statements, statements of changes in equity, and cash flow statements for the years then ended. These consolidated financial statements are the responsibility of the Bank’s directors. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Banco Santander, S.A. and Companies composing, together with the Bank, the Santander Group as of December 31, 2008, 2007 and 2006, and the results of their operations and their cash flows for the years then ended, in conformity with International Financial Reporting Standards, as issued by the International Accounting Standards Board (“IFRS-IASB”) (Note 1.b).

The consolidated financial statements referred to above have been prepared in accordance with IFRS-IASB. Accordingly, the financial information for 2007 and 2006 differ from those contained in the consolidated financial statements filed on Form 20-F for the year ended December 31, 2007, which were prepared in accordance with International Financial Reporting Standards as adopted by the European Union required to be applied under Bank of Spain’s Circular 4/2004. See Note 1.b.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States of America), the Group’s internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 30, 2009 expressed an unqualified opinion on the Group’s internal control over financial reporting.

/s/ Deloitte, S.L.

DELOITTE, S.L.
Madrid-Spain
June 30, 2009

F-1

SANTANDER GROUP

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 2008, 2007 AND 2006 (NOTES 1 to 4)

(Thousands of Euros)


	Note		2008			2007			2006
ASSETS
CASH AND BALANCES WITH CENTRAL BANKS				45,781,345			31,062,775			13,835,149

FINANCIAL ASSETS HELD FOR TRADING:				151,817,192			158,806,860			170,425,954
Loans and advances to credit institutions		6		5,149,584			12,294,559			14,627,738
Loans and advances to customers		10		684,348			23,704,481			30,582,982
Debt instruments		7		43,895,548			66,330,811			76,736,992
Equity instruments		8		6,272,403			9,744,466			13,490,719
Trading derivatives		9		95,815,309			46,732,543			34,987,523

OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS:				25,817,138			24,829,441			15,370,682
Loans and advances to credit institutions		6		8,911,906			6,865,073			185,485
Loans and advances to customers		10		8,972,707			8,021,623			7,972,544
Debt instruments		7		5,154,732			7,072,423			4,500,220
Equity instruments		8		2,777,793			2,870,322			2,712,433

AVAILABLE-FOR-SALE FINANCIAL ASSETS:				48,920,306			44,348,907			38,698,299
Debt instruments		7		42,547,677			34,187,077			32,727,454
Equity instruments		8		6,372,629			10,161,830			5,970,845

LOANS AND RECEIVABLES:				699,614,727			579,523,720			544,045,591
Loans and advances to credit institutions		6		64,730,787			38,482,972			54,943,833
Loans and advances to customers		10		617,231,380			539,372,409			488,479,988
Debt instruments		7		17,652,560			1,668,339			621,770

HELD-TO-MATURITY INVESTMENTS				—			—			—

CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK		36		2,402,736			297,131			(259,254	)

HEDGING DERIVATIVES		11		9,698,132			3,063,169			2,987,964

NON-CURRENT ASSETS HELD FOR SALE		12		9,267,486			10,156,429			327,384

INVESTMENTS:				1,323,453			15,689,127			5,006,109
Associates		13		1,323,453			15,689,127			5,006,109
Jointly controlled entities				—			—			—

INSURANCE CONTRACTS LINKED TO PENSIONS		14		2,446,989			2,525,550			2,604,535

REINSURANCE ASSETS		15		458,388			309,774			261,873

TANGIBLE ASSETS:				8,501,552			9,459,033			10,110,996
Property, plant and equipment-				7,630,935			8,998,308			9,736,449
For own use		16		5,664,616			4,287,612			5,284,177
Leased out under an operating lease		16		1,966,319			4,710,696			4,452,272
Investment property		16		870,617			460,725			374,547

INTANGIBLE ASSETS:				20,623,267			16,033,042			16,956,841
Goodwill		17		18,836,199			13,830,708			14,512,735
Other intangible assets		18		1,787,068			2,202,334			2,444,106

TAX ASSETS:				16,953,613			12,698,072			9,856,053
Current				2,309,465			1,845,310			699,746
Deferred		27		14,644,148			10,852,762			9,156,307

OTHER ASSETS:		19		6,005,226			4,111,941			3,644,539
Inventories				620,774			231,734			143,354
Other				5,384,452			3,880,207			3,501,185


TOTAL ASSETS				1,049,631,550			912,914,971			833,872,715


LIABILITIES AND EQUITY
FINANCIAL LIABILITIES HELD FOR TRADING:				136,620,235			123,398,293			124,595,725
Deposits from central banks		20		9,109,857			—			—
Deposits from credit institutions		20		26,841,854			23,254,111			39,690,713
Customer deposits		21		4,896,065			27,992,480			16,572,444
Marketable debt securities		22		3,569,795			17,090,935			17,522,108
Trading derivatives		9		89,167,433			49,447,533			39,337,398
Short positions		9		3,035,231			5,613,234			11,473,062
Other financial liabilities				—			—			—

OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS:				28,639,359			39,718,002			12,411,328
Deposits from central banks		20		4,396,901			6,562,328			—
Deposits from credit institutions		20		9,733,268			12,207,579			—
Customer deposits		21		9,318,117			10,669,058			273,079
Marketable debt securities		22		5,191,073			10,279,037			12,138,249
Subordinated liabilities				—			—			—
Other financial liabilities				—			—			—

FINANCIAL LIABILITIES AT AMORTIZED COST:				770,007,599			646,411,202			605,419,575
Deposits from central banks		20		9,211,957			22,185,751			16,529,557
Deposits from credit institutions		20		70,583,533			48,687,539			56,817,791
Customer deposits		21		406,015,268			316,744,981			314,102,247
Marketable debt securities		22		227,642,422			205,916,716			174,082,460
Subordinated liabilities		23		38,873,250			36,192,737			31,091,149
Other financial liabilities		24		17,681,169			16,683,478			12,796,371

CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK		36		440,136			(516,725	)		—

HEDGING DERIVATIVES		11		5,957,611			4,134,571			3,493,849

LIABILITIES ASSOCIATED WITH NON-CURRENT ASSETS HELD FOR SALE				49,688			63,420			—

LIABILITIES UNDER INSURANCE CONTRACTS		15		16,849,511			13,033,617			10,704,258

PROVISIONS:				17,736,259			16,570,899			19,226,513
Provisions for pensions and similar obligations		25		11,198,117			11,819,748			14,014,305
Provisions for taxes and other legal contingencies		25		2,363,706			1,715,967			1,884,305
Provisions for contingent liabilities and commitments		25		678,584			636,316			598,735
Other provisions		25		3,495,852			2,398,868			2,729,168

TAX LIABILITIES:		27		5,768,665			6,156,365			4,539,051
Current				2,304,599			2,412,133			761,529
Deferred				3,464,066			3,744,232			3,777,522

OTHER LIABILITIES		26		7,560,995			6,387,176			6,410,114


TOTAL LIABILITIES				989,630,058			855,356,820			786,800,413


EQUITY
SHAREHOLDERS’ EQUITY:		30		65,886,582			54,477,846			41,980,802
Capital or endowment fund		31		3,997,030			3,127,148			3,127,148
Registered				3,997,030			3,127,148			3,127,148
Less: Uncalled capital				—			—			—
Share premium		32		28,103,802			20,370,128			20,370,128
Reserves		33		20,868,406			16,371,430			12,289,480
Accumulated reserves (losses)		33		21,158,869			15,475,993			11,491,670
Reserves (losses) of entities accounted for using the equity method		33		(290,463	)		895,437			797,810
Other equity instruments:		34		7,155,566			7,086,881			62,118
Equity component of compound financial instruments				—			—			12,118
Other				7,155,566			7,086,881			50,000
Less: Treasury shares		34		(421,198	)		(192	)		(126,801	)
Profit for the year attributable to the Parent				8,876,414			9,060,258			7,595,947
Less: Dividends and remuneration				(2,693,438	)		(1,537,807	)		(1,337,218	)

VALUATION ADJUSTMENTS:				(8,299,696	)		722,036			2,870,757
Available-for-sale financial assets		29		79,293			1,393,202			2,225,886
Cash flow hedges		29		(309,883	)		(31,051	)		49,252
Hedges of net investments in foreign operations		29		1,467,289			638,474			(173,503	)
Exchange differences		29		(9,424,871	)		(1,276,749	)		711,685
Non-current assets held for sale				36,878			—			—
Entities accounted for using the equity method		29		(148,402	)		(1,840	)		57,437
Other valuation adjustments				—			—			—

MINORITY INTERESTS:		28		2,414,606			2,358,269			2,220,743
Valuation adjustments				(371,310	)		(73,622	)		62,870
Other				2,785,916			2,431,891			2,157,873


TOTAL EQUITY				60,001,492			57,558,151			47,072,302

TOTAL LIABILITIES AND EQUITY				1,049,631,550			912,914,971			833,872,715


MEMORANDUM ITEMS:
CONTINGENT LIABILITIES		35		65,323,194			76,216,585			58,769,309
CONTINGENT COMMITMENTS		35		131,725,006			114,676,563			103,249,430

The accompanying Notes 1 to 55 and Exhibits are an integral part of the consolidated balance sheets at December 31, 2008, 2007 and 2006.

F-2

SANTANDER GROUP

CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 (NOTES 1 to 4)
(Thousands of Euros)


			(Debit) Credit
	Note		2008			2007 (*)			2006 (*)

Interest and similar income		38		56,207,656			46,312,705			37,239,602
Interest expense and similar charges		39		(38,035,863	)		(31,359,417	)		(25,118,665	)
INTEREST INCOME / (CHARGES)				*18,171,793*			*14,953,289*			*12,120,937*
Income from equity instruments		40		552,809			422,618			412,714
Income from companies accounted for by the equity method		41		797,300			441,457			426,921
Fee and commission income		42		9,942,097			9,479,986			8,288,580
Fee and commission expense		43		(1,491,491	)		(1,439,811	)		(1,264,385	)
Gains/losses on financial assets and liabilities (net)		44		2,963,672			2,331,696			2,062,471
Held for trading				556,452			1,396,349			1,807,380
Other financial instruments at fair value through profit or loss				607,309			125,774			(109,928	)
Financial instruments not measured at fair value through profit or loss				1,804,450			909,919			416,782
Other				(4,539	)		(100,346	)		(51,763	)
Exchange differences (net)		45		579,827			650,734			96,635
Other operating income				9,440,461			6,741,246			6,076,845
Income from insurance and reinsurance contracts issued		46		8,385,788			5,529,987			4,766,041
Sales and income from the provision of non-financial services		46		586,872			771,027			734,602
Other		46		467,801			440,232			576,202
Other operating expenses				(9,232,417	)		(6,503,829	)		(5,839,785	)
Expenses of insurance and reinsurance contracts		46		(8,134,199	)		(5,300,054	)		(4,574,911	)
Changes in inventories		46		(469,154	)		(618,955	)		(615,689	)
Other		46		(629,064	)		(584,820	)		(649,185	)
TOTAL INCOME				31,724,051			27,077,386			22,380,933
Administrative expenses				(11,979,348	)		(11,018,329	)		(9,969,171	)
Personnel expenses		47		(6,963,855	)		(6,551,201	)		(5,967,873	)
Other general expenses		48		(5,015,493	)		(4,467,128	)		(4,001,298	)
Depreciation and amortization	16 and 18			(1,269,527	)		(1,267,880	)		(1,146,547	)
Provisions (net)		25		(1,699,114	)		(1,023,563	)		(1,079,337	)
Impairment losses on financial assets (net)				(6,345,433	)		(3,502,604	)		(2,480,993	)
Loans and receivables		10		(5,964,405	)		(3,496,058	)		(2,483,862	)
Other financial instruments not measured at fair value through profit or loss		8		(381,028	)		(6,546	)		2,869
Impairment losses on other assets (net)				(1,049,704	)		(1,548,610	)		(20,781	)
Goodwill and other intangible assets	17 and 18			(983,929	)		(1,162,872	)		(12,811	)
Other assets				(65,775	)		(385,738	)		(7,970	)
Gains/(losses) on disposal of assets not classified as non-current assets held for sale		49		118,046			1,815,867			352,120
Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations		50		1,730,781			642,974			959,162
OPERATING PROFIT / (LOSS) BEFORE TAX				11,229,752			11,175,241			8,995,386
Income tax		27		(1,884,223	)		(2,335,686	)		(2,254,598	)
PROFIT FROM CONTINUING OPERATIONS				9,345,529			8,839,555			6,740,788
PROFIT/(LOSS) FROM DISCONTINUED OPERATIONS (Net)		37		(13,115	)		796,595			1,504,965
CONSOLIDATED PROFIT FOR THE YEAR				9,332,414			9,636,150			8,245,753
Profit attributable to the Parent				8,876,414			9,060,258			7,595,947
Profit attributable to minority interests		28		456,000			575,892			649,806
EARNINGS PER SHARE
From continuing and discontinued operations
Basic earnings per share (euros)				1.2207			1.3320			1.1334
Diluted earnings per share (euros)				1.2133			1.3191			1.1277
From continuing operations
Basic earnings per share (euros)				1.2229			1.2279			0.9442
Diluted earnings per share (euros)				1.2155			1.2160			0.9394


(*)		Reclassified in order to reflect the operations classified as discontinued in 2007 (see Note 37).

The accompanying Notes 1 to 55 and Exhibits are an integral part of the consolidated income statements
for the years ended December 31, 2008, 2007 and 2006.

F-3

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 (NOTES 1 to 4)
(Thousands of Euros)

CONSOLIDATED STATEMENTS OF RECOGNIZED INCOME AND EXPENSE


	2008			2007			2006

CONSOLIDATED PROFIT FOR THE YEAR		9,332,414			9,636,150			8,245,753

OTHER RECOGNIZED INCOME AND EXPENSE		(9,319,420	)		(2,285,213	)		(358,351	)
Available-for-sale financial assets:		(2,043,666	)		(766,544	)		140,839
Revaluation gains/(losses)		(3,539,079	)		851,460			1,478,325
Amounts transferred to income statement		1,571,044			(1,618,004	)		(1,337,486	)
Other reclassifications		(75,631	)		—			—
Cash flow hedges:		(374,700	)		(185,603	)		18,317
Revaluation gains/(losses)		(479,905	)		(170,537	)		31,864
Amounts transferred to income statement		15,060			(15,066	)		(13,547	)
Amounts transferred to the initial carrying amount of hedged items		—			—			—
Other reclassifications		90,145			—			—
Hedges of net investments in foreign operations:		828,815			811,977			211,103
Revaluation gains/(losses)		828,815			811,977			211,103
Amounts transferred to income statement		—			—			—
Other reclassifications		—			—			—
Exchange differences:		(8,423,459	)		(2,062,211	)		(902,350	)
Revaluation gains/(losses)		(8,640,444	)		(2,122,207	)		(905,514	)
Amounts transferred to income statement		216,985			59,996			3,164
Other reclassifications		—			—			—
Non-current assets held for sale:		36,878			—			—
Revaluation gains/(losses)		—			—			—
Amounts transferred to income statement		—			—			—
Other reclassifications		36,878			—			—
Actuarial gains/(losses) on pension plans		—			—			—
Entities accounted for using the equity method:		(146,562	)		(59,277	)		57,437
Revaluation gains/(losses)		(149,073	)		(59,277	)		57,437
Amounts transferred to income statement		43,728			—			—
Other reclassifications		(41,217	)		—			—
Other recognized income and expense		—			—			—
Income tax		803,274			(23,555	)		116,303

TOTAL RECOGNIZED INCOME AND EXPENSE		12,994			7,350,937			7,887,402
Attributable to the Parent		(145,318	)		6,911,537			7,389,607
Attributable to minority interests		158,312			439,400			497,795

The accompanying Notes 1 to 55 and Exhibits are an integral part of the consolidated statements of changes in equity
(consolidated statement of recognized income and expense) for the years ended December 31, 2008, 2007 and 2006.

F-4

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 (NOTES 1 to 4) (Continued)
(Thousands of Euros)

CONSOLIDATED STATEMENT OF CHANGES IN TOTAL EQUITY


	Equity Attributable to the Parent
	Shareholders’ Equity
						Reserves
									Reserves
									(Losses) of									Profit for
									Entities									the Year
						Accumulated			Accounted for			Other			Less:			Attributable			Less:			Total
			Share			Reserves			using the			Equity			Treasury			to the			Dividends and			Shareholders’			Valuation						Minority			Total
	Capital		Premium			(Losses)			Equity Method			Instruments			Shares			Parent			Remuneration			Equity			Adjustments			Total			Interests			Equity

*Ending balance at 31/12/07 ()**		3,127,148		20,370,128			15,475,993			895,437			7,086,881			(192	)		9,060,258			(1,537,807	)		54,477,846			722,036			55,199,882			2,358,269			57,558,151
Adjustments due to changes in accounting policy		—		—			—			—			—			—			—			—			—			—			—			—			—
Adjustments made to correct errors		—		—			—			—			—			—			—			—			—			—			—			—			—
Adjusted beginning balance		3,127,148		20,370,128			15,475,993			895,437			7,086,881			(192	)		9,060,258			(1,537,807	)		54,477,846			722,036			55,199,882			2,358,269			57,558,151
Total recognized income and expense		—		—			—			—			—			—			8,876,414			—			8,876,414			(9,021,732	)		(145,318	)		158,312			12,994
Other changes in equity		869,882		7,733,674			5,682,876			(1,185,900	)		68,685			(421,006	)		(9,060,258	)		(1,155,631	)		2,532,322			—			2,532,322			(101,975	)		2,430,347
Capital increases		869,882		7,907,651			(134,197	)		—			—			—			—			—			8,643,336			—			8,643,336			73,975			8,717,311
Capital reductions		—		—			—			—			—			—			—			—			—			—			—			—			—
Conversion of financial liabilities into equity		—		—			—			—			—			—			—			—			—			—			—			—			—
Increases in other equity instruments		—		—			—			—			107,644			—			—			—			107,644			—			107,644			—			107,644
Reclassification of financial liabilities to other equity instruments		—		—			—			—			—			—			—			—			—			—			—			—			—
Reclassification of other equity instruments to financial liabilities		—		—			—			—			—			—			—			—			—			—			—			—			—
Distribution of dividends		—		—			(4,070,179	)		—			—			—			—			(1,155,631	)		(5,225,810	)		—			(5,225,810	)		(240,620	)		(5,466,430	)
Transactions involving own equity instruments (net)		—		—			12,249			—			—			(421,006	)		—			—			(408,757	)		—			(408,757	)		—			(408,757	)
Transfers between equity items		—		(173,977	)		10,421,154			(1,185,900	)		(1,019	)		—			(9,060,258	)		—			—			—			—			—			—
Increases/(Decreases) due to business combinations		—		—			—			—			—			—			—			—			—			—			—			—			—
Equity-instrument-based payments		—		—			—			—			(37,940	)		—			—			—			(37,940	)		—			(37,940	)		—			(37,940	)
Other increases/(decreases) in equity		—		—			(546,151	)		—			—			—			—			—			(546,151	)		—			(546,151	)		64,670			(481,481	)
Ending balance at 31/12/08		3,997,030		28,103,802			21,158,869			(290,463	)		7,155,566			(421,198	)		8,876,414			(2,693,438	)		65,886,582			(8,299,696	)		57,586,886			2,414,606			60,001,492

The accompanying Notes 1 to 55 and Exhibits are an integral part of the consolidated statements of changes in equity (statement of changes in total equity) for the years ended December 31, 2008, 2007 and 2006.

F-5

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 (NOTES 1 to 4) (Continued)
(Thousands of Euros)

CONSOLIDATED STATEMENT OF CHANGES IN TOTAL EQUITY


	Equity Attributable to the Parent
	Shareholders’ Equity
					Reserves
								Reserves
								(Losses) of									Profit for
								Entities									the Year
					Accumulated			Accounted for			Other			Less:			Attributable			Less:			Total
			Share		Reserves			using the			Equity			Treasury			to the			Dividends and			Shareholders’			Valuation						Minority			Total
	Capital		Premium		(Losses)			Equity Method			Instruments			Shares			Parent			Remuneration			Equity			Adjustments			Total			Interests			Equity

Ending balance at 31/12/06		3,127,148		20,370,128		11,491,670			797,810			62,118			(126,801	)		7,595,947			(1,337,218	)		41,980,802			2,870,757			44,851,559			2,220,743			47,072,302
Adjustments due to changes in accounting policy		—		—		—			—			—			—			—			—			—			—			—			—			—
Adjustments made to correct errors		—		—		—			—			—			—			—			—			—			—			—			—			—
Adjusted beginning balance		3,127,148		20,370,128		11,491,670			797,810			62,118			(126,801	)		7,595,947			(1,337,218	)		41,980,802			2,870,757			44,851,559			2,220,743			47,072,302
Total recognized income and expense		—		—		—			—			—			—			9,060,258			—			9,060,258			(2,148,721	)		6,911,537			439,400			7,350,937
Other changes in equity		—		—		3,984,323			97,627			7,024,763			126,609			(7,595,947	)		(200,589	)		3,436,786			—			3,436,786			(301,874	)		3,134,912
Capital increases		—		—		—			—			—			—			—			—			—			—			—			220,356			220,356
Capital reductions		—		—		—			—			—			—			—			—			—			—			—			—			—
Conversion of financial liabilities into equity		—		—		—			—			—			—			—			—			—			—			—			—			—
Increases in other equity instruments		—		—		—			—			7,048,548			—			—			—			7,048,548			—			7,048,548			—			7,048,548
Reclassification of financial liabilities to other equity instruments		—		—		—			—			—			—			—			—			—			—			—			—			—
Reclassification of other equity instruments to financial liabilities		—		—		—			—			—			—			—			—			—			—			—			—			—
Distribution of dividends		—		—		(3,117,057	)		(139,086	)		—			—			—			(200,589	)		(3,456,732	)		—			(3,456,732	)		(360,478	)		(3,817,210	)
Transactions involving own equity instruments (net)		—		—		4,575			—			—			126,609			—			—			131,184			—			131,184			—			131,184
Transfers between equity items		—		—		7,376,694			231,371			(12,118	)		—			(7,595,947	)		—			—			—			—			—			—
Increases/(Decreases) due to business combinations		—		—		—			—			—			—			—			—			—			—			—			—			—
Equity-instrument-based payments		—		—		—			—			—			—			—			—			—			—			—			—			—
Other increases/(decreases) in equity		—		—		(279,889	)		5,342			(11,667	)		—			—			—			(286,214	)		—			(286,214	)		(161,752	)		(447,966	)
Ending balance at 31/12/07		3,127,148		20,370,128		15,475,993			895,437			7,086,881			(192	)		9,060,258			(1,537,807	)		54,477,846			722,036			55,199,882			2,358,269			57,558,151

F-6

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 (NOTES 1 to 4) (Continued)
(Thousands of Euros)

CONSOLIDATED STATEMENT OF CHANGES IN TOTAL EQUITY


	Equity Attributable to the Parent
	Shareholders’ Equity
					Reserves
								Reserves
								(Losses) of									Profit for
								Entities									the Year
					Accumulated			Accounted for			Other			Less:			Attributable			Less:			Total
			Share		Reserves			Using the			Equity			Treasury			to the			Dividends and			Shareholders’			Valuation						Minority			Total
	Capital		Premium		(Losses)			Equity Method			Instruments			Shares			Parent			Remuneration			Equity			Adjustments			Total			Interests			Equity

Ending balance at 31/12/05		3,127,148		20,370,128		8,100,140			603,649			77,478			(53,068	)		6,220,104			(1,744,199	)		36,701,380			3,077,096			39,778,476			2,848,223			42,626,699
Adjustments due to changes in accounting policy		—		—		—			—			—			—			—			—			—			—			—			—			—
Adjustments made to correct errors		—		—		—			—			—			—			—			—			—			—			—			—			—
Adjusted beginning balance		3,127,148		20,370,128		8,100,140			603,649			77,478			(53,068	)		6,220,104			(1,744,199	)		36,701,380			3,077,096			39,778,476			2,848,223			42,626,699
Total recognized income and expense		—		—		—			—			—			—			7,595,947			—			7,595,947			(206,339	)		7,389,608			497,795			7,887,403
Other changes in equity		—		—		3,391,530			194,161			(15,360	)		(73,733	)		(6,220,104	)		406,981			(2,316,525	)		—			(2,316,525	)		(1,125,275	)		(3,441,800	)
Capital increases		—		—		—			—			—			—			—			—			—			—			—			1,642			1,642
Capital reductions		—		—		—			—			—			—			—			—			—			—			—			(31,058	)		(31,058	)
Conversion of financial liabilities into equity		—		—		—			—			—			—			—			—			—			—			—			—			—
Increases in other equity instruments		—		—		—			—			19,167			—			—			—			19,167			—			19,167			—			19,167
Reclassification of financial liabilities to other equity instruments		—		—		—			—			—			—			—			—			—			—			—			—			—
Reclassification of other equity instruments to financial liabilities		—		—		—			—			—			—			—			—			—			—			—			—			—
Distribution of dividends		—		—		(2,495,742	)		(109,173	)		—			—			—			406,981			(2,197,934	)		—			(2,197,934	)		(160,124	)		(2,358,058	)
Transactions involving own equity instruments (net)		—		—		9,627			—			—			(73,733	)		—			—			(64,106	)		—			(64,106	)		—			(64,106	)
Transfers between equity items		—		—		5,908,268			346,813			(34,977	)		—			(6,220,104	)		—			—			—			—			—			—
Increases/(Decreases) due to business combinations		—		—		—			—			—			—			—			—			—			—			—			—			—
Equity-instrument-based payments		—		—		—			—			—			—			—			—			—			—			—			(1,049,497	)		(1,049,497	)
Other increases/(decreases) in equity		—		—		(30,623	)		(43,479	)		450			—			—			—			(73,652	)		—			(73,652	)		113,762			40,110
Ending balance at 31/12/06		3,127,148		20,370,128		11,491,670			797,810			62,118			(126,801	)		7,595,947			(1,337,218	)		41,980,802			2,870,757			44,851,559			2,220,743			47,072,302

F-7

SANTANDER GROUP

CONSOLIDATED CASH FLOW STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 (NOTES 1 to 4)

(Thousands of Euros)


	2008			2007			2006

A. CASH FLOWS FROM OPERATING ACTIVITIES		15,827,165			31,645,675			(3,799,748	)

Consolidated profit for the year		9,332,414			9,636,150			8,245,753
Adjustments made to obtain the cash flows from operating activities:		10,254,304			9,603,413			7,736,747
Depreciation and amortization		1,269,527			1,267,880			1,146,547
Other adjustments		8,984,777			8,335,533			6,590,200
Net increase/decrease in operating assets:		70,560,851			47,926,000			72,084,831
Financial assets held for trading		(8,175,164	)		(11,285,918	)		17,666,031
Other financial assets at fair value through profit or loss		(453,996	)		(3,578,501	)		1,385,171
Available-for-sale financial assets		(3,249,597	)		6,392,745			(35,622,552	)
Loans and receivables		79,907,831			53,841,742			86,075,195
Other operating assets		2,531,777			2,555,932			2,580,986
Net increase/decrease in operating liabilities:		68,246,416			63,513,210			53,251,633
Financial liabilities held for trading		11,080,000			(1,197,432	)		11,987,168
Other financial liabilities at fair value through profit or loss		(11,078,643	)		1,682,061			1,433,731
Financial liabilities at amortized cost		70,455,437			61,529,461			36,947,906
Other operating liabilities		(2,210,378	)		1,499,120			2,882,828
Collections/Payments of income tax		(1,445,118	)		(3,181,098	)		(949,050	)

B. CASH FLOWS FROM INVESTING ACTIVITIES		950,026			(21,144,056	)		2,503,211

Payments:		4,241,797			26,303,306			7,546,963
Tangible assets		2,737,784			2,797,760			3,380,790
Intangible assets		750,440			1,862,422			1,472,324
Investments		753,573			12,285,132			2,693,849
Subsidiaries and other business units		—			—			—
Non-current assets held for sale and associated liabilities		—			9,357,992			—
Held-to-maturity investments		—			—			—
Other payments related to investing activities		—			—			—
Collections:		5,191,823			5,159,250			10,050,174
Tangible assets		1,509,291			3,496,430			1,957,246
Intangible assets		—			—			—
Investments		44,607			978,584			7,477,594
Subsidiaries and other business units		828,346			—			—
Non-current assets held for sale and associated liabilities		2,809,579			684,236			615,334
Held-to-maturity investments		—			—			—
Other collections related to investing activities		—			—			—

C. CASH FLOWS FROM FINANCING ACTIVITIES		432,327			6,897,537			(1,076,239	)

Payments:		14,321,999			17,056,690			12,621,116
Dividends		4,243,021			3,456,732			2,779,334
Subordinated liabilities		1,315,190			2,434,893			3,212,668
Redemption of own equity instruments		—			—			—
Acquisition of own equity instruments		7,842,820			8,473,038			5,722,309
Other payments related to financing activities		920,968			2,692,027			906,805
Collections:		14,754,326			23,954,227			11,544,877
Subordinated liabilities		311,835			8,329,817			5,896,301
Issuance of own equity instruments		7,020,677			—			—
Disposal of own equity instruments		7,421,814			8,599,647			5,648,576
Other collections related to financing activities		—			7,024,763			—
D. EFFECT OF CHANGES IN EXCHANGE RATES		(2,490,948	)		(171,530	)		121,467
E. NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS		14,718,570			17,227,626			(2,251,309	)
F. CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		31,062,775			13,835,149			16,086,458
G. CASH AND CASH EQUIVALENTS AT END OF YEAR		45,781,345			31,062,775			13,835,149
COMPONENTS OF CASH AND CASH EQUIVALENTS AT END OF YEAR
Cash		4,407,124			3,292,536			2,870,494
Cash equivalents at central banks		41,374,221			27,770,239			10,964,655
Other financial assets		—			—			—
Less: Bank overdrafts refundable on demand		—			—			—

TOTAL CASH AND CASH EQUIVALENTS AT END OF YEAR		45,781,345			31,062,775			13,835,149

The accompanying Notes 1 to 55 and Exhibits are an integral part of the consolidated cash flow
statements for the years ended December 31, 2008, 2007 and 2006.

F-8

Santander Group

Notes to the consolidated financial statements

for the years ended December 31, 2008, 2007 and 2006

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

Introduction

Banco Santander, S.A. (“the Bank” or “Banco Santander”) is a private-law entity subject to the rules and regulations applicable to banks operating in Spain. The Bylaws and other public information on the Bank can be consulted on the website of the Bank (www.santander.com) and at its registered office at Paseo de Pereda 9-12, Santander.

In addition to the operations carried on directly by it, the Bank is the head of a group of subsidiaries that engage in various business activities and which compose, together with it, the Santander Group (“the Group” or “the Santander Group”). Therefore, the Bank is obliged to prepare, in addition to its own individual financial statements, the Group’s consolidated financial statements, which also include the interests in joint ventures and investments in associates.

The Group’s consolidated financial statements for 2006 were approved by the shareholders at the Bank’s annual general meeting on June 23, 2007. The Group’s consolidated financial statements for 2007 were approved by the shareholders at the Bank’s annual general meeting on June 21, 2008. On June 19, 2009, the ordinary general shareholders meeting of the Bank, approved, among other resolutions, the 2008 consolidated financial statements of the Group.

F-9

	b)		*Basis of presentation of the consolidated financial statements*

			Under Regulation (EC) no. 1606/2002 of the European Parliament and of the Council of July 19, 2002, all companies governed by the law of an EU Member State and whose securities are admitted to trading on a regulated market of any Member State must prepare their consolidated financial statements for the years beginning on or after 1 January 2005 in conformity with the International Financial Reporting Standards (“IFRSs”) previously adopted by the European Union.

			In order to adapt the accounting system of Spanish credit institutions to the new standards, the Bank of Spain issued Circular 4/2004, of December 22, on Public and Confidential Financial Reporting Rules and Formats.

			The Group’s consolidated financial statements for 2008, 2007 and 2006 were formally prepared by the Bank’s directors (at the board meeting on March 23, 2009) in accordance with International Financial Reporting Standards as adopted by the European Union and with Bank of Spain Circular 4/2004, and in compliance with IFRS as issued by the International Accounting Standards Board (“IFRS-IASB” and together with IFRS previously adopted by the European Union “IFRS”) using the basis of consolidation, accounting policies and measurement bases set forth in Note 2 to these consolidated financial statements and, accordingly, they present fairly the Group’s equity and financial position at December 31, 2008, 2007 and 2006 and the consolidated results of its operations, the changes in the consolidated equity and the consolidated cash flows in 2008, 2007 and 2006. These consolidated financial statements were prepared from the individual accounting records of the Bank and of each of the companies composing the Group, and include the adjustments and reclassifications required to unify the accounting policies and measurement bases applied by the Group.

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

			All accounting policies and measurement bases with a material effect on the consolidated financial statements were applied in their preparation.

			Adoption of new standards and interpretations

			The following interpretations and amendments to standards came into force in 2008:

	•		IFRIC 11 IFRS 2 — Group and Treasury Share Transactions: in accordance with this interpretation, treasury share-based payment transactions must be accounted for as equity-settled, regardless of how the equity instruments needed are obtained.

	•		IFRIC 14 IAS 19 — The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction: this interpretation provides general guidance on how to ascertain the limit in IAS 19, Employee Benefits, on the amount of the surplus that can be recognized as an asset. It also explains how pension assets or liabilities can be affected when there is a statutory or contractual minimum funding requirement and establishes that the entity needs to recognize an additional liability if it has a contractual obligation to make additional contributions to the plan and its capacity to recover them is restricted. The interpretation standardizes the practice and ensures that the entities recognize an asset in relation to a surplus on a consistent basis.

	•		IFRIC 12 Service Concession Arrangements: owing to the nature of this interpretation, following its adoption by the European Union its application did not affect the consolidated financial statements.

	•		Amendments to IAS 39 Financial Instruments: Reclassification of financial assets The changes to IAS 39 permit an entity to reclassify non-derivative financial assets out of the ‘fair value through profit or loss’ (FVTPL) and ‘available-for-sale’ (AFS) categories in limited circumstances. Such reclassifications will trigger additional disclosure requirements. The amendments will only permit reclassification of certain non-derivative financial assets recognized in accordance with IAS 39. Financial liabilities, derivatives and financial assets that are designated as at FVTPL on initial recognition under the ‘fair value option’ cannot be reclassified. The amendments therefore only permit reclassification of debt and equity financial assets subject to meeting specified criteria. The amendments do not permit reclassification into FVTPL.

F-10

			Also, it should be noted that on November 26, 2008 the Bank of Spain approved Circular 6/2008, amending Bank of Spain Circular 4/2004, of December 22, on Public and Confidential Financial Reporting Rules and Formats. The most significant amendment introduced by Bank of Spain Circular 6/2008 relates to the formats of the statements to be presented. Accordingly, the consolidated balance sheet, consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement presented in these consolidated financial statements differ, solely as regards the basis of presentation of certain items and margins, from those presented in the statutory consolidated financial statements of the Group for 2007 and 2006, since they were prepared using the formats contained in the aforementioned Bank of Spain Circular 6/2008. Pursuant to IAS 1, the comparative figures were reclassified.

			The main differences between the financial statement formats presented with respect to the formats included in the statutory consolidated financial statements of the Group for 2007 and 2006 are as follows:

			Consolidated balance sheet

	•		“Other Assets” and “Other Liabilities” group together the balance sheet line items “Prepayments and Accrued Income” and “Other Assets”, and “Accrued Expenses and Deferred Income” and “Other Liabilities”, included in the Group’s consolidated financial statements for 2007 and 2006.

	•		The balance of “Equity Having the Substance of a Financial Liability” (because it is not refundable on demand) was transferred to “Financial Liabilities at Amortized Cost” on the liability side of the consolidated balance sheet.

	•		A new item included in the valuation adjustments in consolidated equity entitled “Entities Accounted for Using the Equity Method” was created, which includes separately the valuation adjustments recognized in equity originating from associates accounted for using the equity method.

	•		Balances with central banks are classified in the corresponding portfolios.

Consolidated income statement

	•		A new “Interest income / (charges)” margin is introduced which is calculated as the difference between “Interest and similar income” and “Interest expense and similar charges”. The aforementioned interest currently also includes financial income and expenses from insurance activities and other non-financial activities that used to be presented separately.

	•		Income and expenses from the Group’s insurance activity are no longer grouped together as a separate item and are recognized, according to their nature, under the various consolidated income statement items, with the consequent effect on each margin and item in this statement.

	•		A new margin entitled “Total Income” is presented which is similar to the former “Gross Income” (now eliminated), except, basically, for the fact that it includes other operating income and expenses, which formerly were not part of gross income, and for the effect of including the interest expenses and financial charges from non-financial activities according to their nature.

	•		“Sales and income from the provision of non-financial services” and “Cost of sales” are excluded and these items are recognized mainly under “Other operating income” and “Other operating expenses”, respectively.

	•		The balance of “Impairment losses (net)” is split into two line items: “Impairment losses on financial assets (net)”, which includes net impairment losses on financial assets other than equity instruments classified as “Investments”; and “Impairment losses on other assets (net)”, which includes the net impairment losses on equity instruments classified as “Investments” and on other non-financial assets.

	•		“Net operating income” is eliminated.

	•		The line items “Other gains” and “Other losses” are eliminated. They are replaced by the line items: “Gains/(losses) on disposal of assets not classified as non-current assets held for sale” and “Gains/(losses) on non-current assets held for sale not classified as discontinued operations”, which include mainly the balances of the excluded line items mentioned above. The remaining gains or losses which were recognized in the two

F-11

eliminated line items and are not now included in the aforementioned three new line items have been classified according to their nature in the consolidated income statement.

			Statement of changes in equity

			The consolidated statement of changes in equity consists of two parts: the consolidated statement of recognized income and expense, which was already presented as a statement under the previous formats, and the consolidated statement of changes in total equity, which includes all the changes in equity previously disclosed in the notes to the financial statements.

			Statement of recognized income and expense: the main change affecting the Group is the separate presentation under “Income tax” of the tax effect of the changes in the items recognized directly in equity, except for “Entities accounted for using the equity method”, which is presented net of the related tax effect. Previously, all the items were presented net of the related tax effect.

			All accounting policies and measurement bases with a material effect on the 2008 consolidated financial statements were applied in their preparation.

			Other regulatory changes

			At the date of preparation of these consolidated financial statements, the following standards and interpretations had been published but had not entered into force, because their effective date is subsequent to the date of these financial statements:

	•		Amendments to IFRS 1 and IAS 27, Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate: this amendment refers to separate financial statements and, therefore, is not applicable to consolidated financial statements.

	•		Amendments to IFRS 2 Share-based Payment: the objective of the amendment are basically to clarify the concepts of vesting conditions and cancellations in share-based payments.

	•		Revision of IFRS 3 Business Combinations and Amendment to IAS 27 Consolidated and Separate Financial Statements: introduce significant changes in several matters relating to accounting for business combinations. These changes include most notably the following: acquisition costs must be expensed, rather than recognized as an increase in the cost of the business combination; in step acquisitions the acquirer must remeasure at fair value the investment held prior to the date that control is obtained; and there is an option to measure at fair value the minority interests of the acquiree, as opposed to the single current treatment of measuring them as the proportionate share of the fair value of the net assets acquired. Since the standard will be applied prospectively, in general the directors do not expect significant modifications to arise in connection with the business combinations performed.

	•		Amendment to IFRS 7 Financial Instruments: the objective of the amendment is basically improving disclosures about financial instruments. The amendments require enhanced disclosures about fair value measurements and liquidity risk, such as:

	•		Clarify that the existing IFRS 7 fair value disclosures must be made separately for each class of financial instrument.

	•		Add disclosure of any change in the method for determining fair value and the reasons for the change.

	•		Establish a three-level hierarchy for making fair value measurements.

	•		Add disclosure, for each fair value measurement in the statement of financial position, of which level in the hierarchy was used and any transfers between levels, with additional disclosures whenever level 3 is used including a measure of sensitivity to a change in input data.

	•		Clarify that the current maturity analysis for non-derivative financial instruments should include issued financial guarantee contracts.

	•		Add disclosure of a maturity analysis for derivative financial liabilities

F-12

	•		IFRS 8 Operating Segments: this standard replaces IAS 14. A management approach is adopted for reporting on the financial performance of the business segments. The information to be reported will be that used internally by management to assess the performance of the segments and to allocate resources among them.

	•		Revision of IAS 1 Presentation of Financial Statements: introduces certain changes in the presentation of financial statements. The statement of changes in equity will only include changes in equity arising from transactions with owners acting in their capacity as owners. As regards “non-owner” changes (e.g. transactions with third parties or income and expenses recognized directly in equity), the revised standard provides the option of presenting income and expense items and components of other comprehensive income either in a single statement of comprehensive income with subtotals or in two separate statements (a separate income statement followed by a statement of recognized income and expense). IAS 1 also introduces new reporting requirements when the entity applies a change in accounting policy retrospectively, makes a restatement or reclassifies items in previously issued statements.

	•		Revision of IAS 23 Borrowing Costs: the option of the immediate recognition as an expense of the borrowing costs relating to assets that take a substantial period of time to get ready for use or sale is eliminated and, therefore, these borrowing costs must be capitalized.

	•		Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements: the amendments will permit certain financial instruments, whose features include that of being redeemable, to be classified as equity, provided that they meet certain criteria including that of being the most subordinated class, and provided that they evidence a residual interest in the net assets of the entity.

	•		Amendments to IAS 39 Financial Instruments: Recognition and Measurement: the objectives of the amendment is to establish that inflation may only be designated as a hedged item if it is a contractually specified portion of the cash flows to be hedged, also that only the intrinsic value and not the time value of a purchased option may be used as a hedging instrument.

	•		Amendment to IAS 39 & IFRIC 9. Clarify the accounting treatment of embedded derivatives for entities that make use of the reclassification amendment issued by the IASB.. The reclassification amendment allows entities to reclassify particular financial instruments out of the ‘fair value through profit or loss’ category in specific circumstances. These amendments to IFRIC 9 and IAS 39 clarify that on reclassification of a financial asset out of the ‘fair value through profit or loss’ category, all embedded derivatives have to be assessed and, if necessary, separately accounted for in financial statements.

	•		Improvements to IFRS 2008 and 2009: The improvement process is designed to make necessary, but non-urgent, amendments to IFRSs. The first standard published in 2008 under the IASB’s annual improvements process includes 35 amendments and the 2009 improvement Standard incorporates amendments to 12 IFRSs. A great part of the amendments consist on minor modifications that are not likely to have a big effect on the accounting of the Group except from:

	•		Amendment to IAS 17 — Leases: the objective of the amendment is basically to remove the specific guidance on classifying land as a lease so that only the general guidance remains.

	•		Amendment to IAS 36 — Impairment of Assets: the objective of the amendment is basically to clarify that the largest unit permitted for allocating goodwill acquired in a business combination is the operating segment, as defined in IFRS 8 before aggregation for reporting purposes. This may have a significant impact on entities that have performed their annual impairment test on an aggregated basis. Impairments may be identified as a result of this amendment.

	•		Amendment to IAS 39 — Financial Instruments: Recognition and Measurement: the objectives of the amendment are basically:

	•		Clarify that a prepayment option is considered closely related to the host contract when the exercise price of a prepayment option reimburses the lender up to the approximate present value of lost interest for the remaining term of the host contract. Prepayment penalties previously identified as embedded derivatives may no longer be required to be accounted as such as they are now considered closely related to the host contract

	•		Clarify that the scope exemption for contracts between an acquirer and a vendor in a business combination to buy or sell an acquire at a future date, applies only to binding forward contracts, and not derivative contracts where further actions by either party are still to be taken.

F-13

•

Clarify that gains or losses on cash flow hedges of a forecast transaction that subsequently results in the recognition of a financial instrument or on cash flow hedges of recognized financial instruments should be reclassified in the period that the hedged forecast cash flows affect profit or loss.

	•		Amendment to IFRS 2 Share-based Payment that clarify the accounting for group cash-settled share-based payment transactions. The amendment clarifies how an individual subsidiary in a group should account for some share-based payment arrangements in its own financial statements. In these arrangements, the subsidiary receives goods or services from employees or suppliers but its parent or another entity in the group must pay those suppliers. The amendments to IFRS 2 also incorporate guidance previously included in IFRIC 8 Scope of IFRS 2 and IFRIC 11 IFRS 2—Group and Treasury Share Transactions. As a result, IFRIC 8 and IFRIC 11 will be withdrawn.

	•		IFRIC 13 Customer Loyalty Programs: due to the nature of this interpretation, the application thereof will not have a material effect on the consolidated financial statements.

	•		IFRIC 15 Agreements for the Construction of Real Estate: this interpretation clarifies the recognition of revenue and expenses associated with the construction of real estate.

	•		IFRIC 16 Hedges of a Net Investment in a Foreign Operation: this interpretation clarifies the following matters: firstly, the exposure to foreign exchange differences between the functional currency of the foreign operation and the presentation currency of the parent cannot be designated as a hedged risk, and only the foreign currency exposure arising between the functional currency of the parent and that of its foreign operation qualifies for hedge accounting; secondly, the hedging instrument used to hedge the net investment may be held by any entity within the group, not necessarily by the parent of the foreign operation; and, lastly, it addresses how an entity should determine the amounts to be reclassified from equity to profit or loss on disposal of the foreign operation.

	•		IFRIC 17 Distributions of Non-cash Assets to Owners: this interpretation addresses the accounting treatment of the distribution of non-cash assets to owners (“dividends in kind”), although its scope does not include distributions of assets within a group or between jointly controlled entities. The interpretation requires an entity to measure the dividend payable at the fair value of the assets to be distributed and to recognize any difference with respect to the carrying amount of the asset in profit or loss.

	•		IFRIC 18 Transfer of assets from customers: clarifies the requirements of IFRSs for agreements in which an entity receives from a customer an item of property, plant, and equipment (or cash that must be used to acquire or construct it) that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services (such as a supply of electricity, gas or water).

			The Group does not expect the application of the above-mentioned standards and interpretations to have a material effect on the consolidated financial statements taken as a whole.

In light of the exceptional circumstances that arose in the financial markets, mainly in the second half of 2008, European governments undertook to preserve the stability of the international financial system. The main objectives of these measures were as follows: to ensure the appropriate liquidity conditions for the operation of financial institutions; to facilitate financial institutions’ access to financing; to establish the mechanisms required to permit, where appropriate, the provision of additional capital resources to the financial institutions in order to ensure the proper performance of the economy; to guarantee that accounting regulations are sufficiently flexible so as to take into account the exceptional circumstances in the market; and to strengthen and improve the mechanisms for coordination among European countries. Within this general framework, in the last quarter of 2008 the following measures were approved in Spain:

	•		Royal Decree-Law 6/2008, of October 10, creating the Fund for the Acquisition of Financial Assets (“FAAF”), and Ministry of Economy and Finance Order EHA/3118/2008, of October 31, implementing the aforementioned Royal Decree-Law. The purpose of the FAAF is to use Public Treasury money and market criteria to acquire, by means of the auction procedure, financial instruments issued by Spanish credit institutions and securitization special-purpose vehicles, backed by loans granted to individuals, companies and non-financial entities.

	•		Royal Decree-Law 7/2008, of October 13, on Urgent Economic Measures in relation to the Concerted European Action Plan of the Euro Area Countries, and Ministry of Economy and Finance Order EHA/3364/2008, of November 21, implementing Article 1 of the aforementioned Royal Decree-Law, which includes the following measures, applicable until December 31, 2009. Firstly, the grant of State guarantees for the issues of promissory notes, bonds and debentures launched by credit institutions resident in Spain which meet certain requirements; and, secondly, the exceptional authorization for the Ministry of Economy and Finance to acquire securities, including preferred participating securities and non-voting equity units, issued by credit institutions resident in Spain which need to strengthen their capital and request such acquisition.

F-14

Estimates made

The consolidated results and the determination of consolidated equity are sensitive to the accounting policies, measurement bases and estimates used by the directors of the Bank in preparing the consolidated financial statements. The main accounting policies and measurement bases are set forth in Note 2.

In the consolidated financial statements estimates were occasionally made by the senior executives of the Bank and of the consolidated entities in order to quantify certain of the assets, liabilities, income, expenses and commitments reported herein. These estimates, which were made on the basis of the best information available, relate basically to the following:

•

The impairment losses on certain assets (see Notes 6, 7, 8, 10, 12, 13, 16, 17 and 18);

•

The assumptions used in the actuarial calculation of the post-employment benefit liabilities and commitments and other obligations (see Note 25);

	•		The useful life of the tangible and intangible assets (see Notes 16 and 18);

	•		The measurement of goodwill arising on consolidation (see Note 17); and

	•		The fair value of certain unquoted assets (see Notes 7, 8, 9 and 11).

Other matters

i. Disputed corporate resolutions

The directors of the Bank and their legal advisers consider that the objection to certain resolutions adopted by the Bank’s shareholders at the general meetings on January 18, 2000, March 4, 2000, March 10, 2001, February 9, 2002, June 24, 2002, June 21, 2003, June 19, 2004 and June 18, 2005 will have no effect on the financial statements of the Bank and the Group.

The status of these matters at the date of preparation of the consolidated financial statements is detailed below:

On April 25, 2002, the Santander Court of First Instance number 1 dismissed in full the claim contesting the resolutions adopted by the shareholders at the general meeting on January 18, 2000. The plaintiff filed an appeal against the judgment. On December 2, 2002, the Cantabria Provincial Appellate Court dismissed the appeal. The Bank appeared as a party to the cassation appeal and filed pleadings with respect to the inadmissibility of the appeal. In the order dated November 4, 2008 the Supreme Court considered the appeal to have been withdrawn in view of the decease of the appellant and the failure to appear of his heirs.

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On November 29, 2002, the Santander Court of First Instance number 2 dismissed in full the claims contesting the resolutions adopted at the general meeting on March 4, 2000. The plaintiffs filed an appeal against the judgment. On July 5, 2004, the Cantabria Provincial Appellate Court dismissed the appeal. One of the appellants prepared and filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against the judgment, which were not given leave to proceed by order of the Supreme Court of July 31, 2007.

On March 12, 2002, the Santander Court of First Instance number 4 dismissed in full the claims contesting the resolutions adopted at the general meeting on March 10, 2001. The plaintiffs filed an appeal against the judgment. On April 13, 2004, the Cantabria Provincial Appellate Court dismissed the appeals. One of the appellants prepared and filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against the judgment, which were not given leave to proceed by order of the Supreme Court of November 6, 2007.

On September 9, 2002, the Santander Court of First Instance number 5 dismissed in full the claim contesting the resolutions adopted at the general meeting on February 9, 2002. The plaintiff filed an appeal against the judgment. On January 14, 2004, the Cantabria Provincial Appellate Court dismissed the appeal. The appellant prepared and filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against the judgment, which were not given leave to proceed by order of the Supreme Court of May 8, 2007.

On May 29, 2003, the Santander Court of First Instance number 6 dismissed in full the claim contesting the resolutions adopted at the general meeting on June 24, 2002. The plaintiffs filed an appeal against the judgment. On November 15, 2005, the Cantabria Provincial Appellate Court dismissed the appeal in full. The appellants filed an extraordinary appeal on grounds of procedural infringements and a cassation appeal against the judgment. The Bank appeared as a party to the two appeals and filed pleadings with respect to the inadmissibility thereof. In the order dated September 23, 2008 the Supreme Court refused leave to proceed with the aforementioned appeals.

On November 23, 2007, the Santander Court of First Instance number 7 dismissed in full the claims contesting the resolutions adopted at the general meeting on June 21, 2003. An appeal was filed against the judgment. The Court was notified of the decease of one of the appellants and the Court considered his appeal to have been withdrawn on the grounds of his decease and the failure to appear of his heirs. The other three appeals filed are still being processed at the Cantabria Provincial Appellate Court.

On October 28, 2005, the Santander Court of First Instance number 8 dismissed in full the claims contesting the resolutions adopted at the general meeting on June 19, 2004. The plaintiffs filed an appeal against the judgment. In a judgment dated June 28, 2007 the Cantabria Provincial Appellate Court dismissed the appeals in full. Against this judgment the plaintiffs prepared and filed a cassation appeal and an extraordinary appeal on the grounds of procedural infringements. The cassation and extraordinary appeals for procedural infringement filed by one of the appellants were refused leave to proceed due to the death of the appellant and the non-appearance of his heirs. The other two appeals filed are still being processed at the Supreme Court.

On July 13, 2007, the Santander Court of First Instance number 10 dismissed in full the claims contesting the resolutions adopted at the general meeting on June 18, 2005. An appeal was filed against the judgment. In a judgment dated May 14, 2009, the Cantabria Provincial Appellate Court dismissed the appeals in full. Against this judgment the plaintiffs prepared an extraordinary appeal on the grounds of procedural infringements and a cassation appeal.

ii. Credit assignment transactions

Following the investigations carried out since 1992 by the Madrid Central Examining Court number 3, and despite the fact that the Government Lawyer, as the representative of the Public Treasury, and the Public Prosecutor’s Office have repeatedly applied to have the case against the Bank and its executives dismissed and struck out, a decision was rendered on June 27, 2002 to turn the preliminary court proceedings into an “abbreviated” proceeding. The Public Prosecutor’s Office, the Bank and its executives have appealed against this decision.

On June 23, 2003, Panel Two of the Criminal Chamber of the National Appellate Court partially upheld these appeals, and explicitly recognized that the assignments of naked credit ownership were lawfully marketed and reduced the proceedings from 138 to 38 customer transactions (it should be noted that the Government Lawyer and the Public Prosecutor’s Office had also requested dismissal and strike-out of the case on grounds that no offence had been committed) with respect to which the Bank’s possible involvement continued to be alleged.

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Following the submissions phase, in which the Public Prosecutor’s Office and the Government Lawyer reiterated their petition to have the proceedings dismissed and struck out, based on the class accusation filed by the Association for the Defense of Investors and Customers, on October 6, 2004 the Court ordered commencement of a trial against the chairman of the Bank and three executives.

Once the trial had commenced at Panel One of the Criminal Chamber of the National Appellate Court and after the debate on preliminary issues was held at the end of November 2006, without the appearance of the Government Lawyer, in which the Public Prosecutor’s Office reiterated its appeal to set aside the trial and interrupt the proceedings, on December 20, 2006, the Criminal Chamber of the National Appellate Court ordered the dismissal of the proceedings, as requested by the Public Prosecutor’s Office and the private prosecution.

A cassation appeal was filed against the aforementioned order by the Association for the Defense of Investors and Customers and “Iniciativa per Catalunya Verds” and, following the opposition by the Public Prosecutor’s Office, the Government Lawyer and the remaining appearing parties, it was dismissed by a Supreme Court Decision handed down on December 17, 2007.

In an interlocutory order of April 15, 2008, the Supreme Court dismissed the request filed by the Association for the Defense of Investors and Customers for the decision handed down in the judgment of December 17, 2007 to be set aside.

Information relating to 2007 and 2006

The information relating to 2007 and 2006 contained in these notes to the consolidated financial statements does not constitute the Group’s statutory consolidated financial statements for those years.

As indicated in Note 1-b above, the comparative information was modified to adapt its presentation to the presentation formats of the main financial statements established in Bank of Spain Circular 6/2008, of November 26.

Capital management

The Group’s capital management is performed at regulatory and economic levels.

Regulatory capital management is based on the analysis of the capital base and the capital ratios using the criteria of Bank of Spain Circular 3/2008. The aim is to achieve a capital structure that is as efficient as possible in terms of both cost and compliance with the requirements of regulators, ratings agencies and investors. Active capital management includes securitizations, sales of assets, preference and subordinated issues of equity instruments and hybrid instruments.

From an economic standpoint, capital management seeks to optimize value creation at the Group and at its different business units. To this end, the economic capital, RORAC (return on risk-adjusted capital) and value creation data for each business unit are generated, analyzed and reported to the management committee on a quarterly basis. Within the framework of the internal capital adequacy assessment process (Pillar 2 of the Basel Capital Accord), the Group uses an economic capital measurement model with the objective of ensuring that there is sufficient capital available to support all the risks of its activity in different economic scenarios, with the solvency levels agreed upon by the Group.

In order to adequately manage the Group’s capital, it is essential to estimate and analyze future needs, in anticipation of the various phases of the business cycle. Projections of regulatory and economic capital are made based on reference to the budgetary information (balance sheet, income statement, etc.) and on macroeconomic scenarios defined by the Economic Research Service. These estimates are used by the Group as a reference to plan the management actions (issues, securitizations, etc.) required to achieve its capital targets.

In addition, certain stress scenarios are simulated in order to assess the availability of capital in adverse situations. These scenarios are based on sharp fluctuations in macroeconomic variables, GDP, interest rates, stock market indexes, etc. that mirror historical crises that could happen again.

It should be noted that the regulations governing compliance with minimum capital requirements for credit institutions, both as individual entities and as consolidated groups, came into force through the publication of Law 13/1992, of June 1, and of Bank of Spain Circular 5/1993 and subsequent amendments thereto.

F-17

Royal Decree 216/2008, of February 15, on the capital of financial institutions was published on February 16, 2008. A series of amendments were previously introduced to Law 13/1985, of May 25, on investment ratios, capital and reporting requirements of financial intermediaries. The main purpose of these new regulations is to transpose into Spanish law Directive 2006/48/EC and Directive 2006/49/EC which, in turn, transpose into Community law the New Basel Capital Accord (“Basel II”- BIS II).

Bank of Spain Circular 3/2008 on the calculation and control of minimum capital requirements came into force on June 11. This Circular completes the transposition into Spanish legislation of the guidelines on capital requirements established by the Basel Committee on Banking Supervision (BIS II), after their adoption by the European Union. This Circular replaced Circular 5/1993, of the same name, which had been in force until that date.

The main new developments introduced by the new Circular as regards capital requirements (Pillar 1) relate to the possibility of using internal ratings and models (IRB approach) to calculate the risk-weighted exposures, and to the inclusion of operational risk in these exposures. The objective is to render the regulatory requirements more sensitive to the risks actually borne by the entities in the performance of their business activities.

Also, the new Circular establishes a supervisory review system to improve internal risk management and internal capital adequacy assessment (Pillar 2), and incorporates elements relating to disclosures and market discipline (Pillar 3).

In this connection, on June 25, the Santander Group obtained authorization from the Bank of Spain to adopt the internal ratings-based approach (IRB) for calculating the capital requirements for credit risk of Banco Santander (the Parent), Banesto and Abbey, in conjunction with the UK Financial Services Authority (FSA) in the case of Abbey. Additionally, the acquisition of Alliance & Leicester by the Santander Group led to the inclusion of new portfolios under the advanced approach, since prior to the acquisition this entity had obtained the related supervisory approval for the use of internal risk models. The Group expects to obtain the approval of the advanced approaches of its Portuguese subsidiary Santander Totta in the course of 2009.

At year-end these entities represented a substantial portion of the significant net credit risk exposure at consolidated level. The Santander Group has undertaken with the Bank of Spain to gradually apply, in the coming years, the internal models for determining capital for credit risk at substantially all the Group’s banks, until it reaches coverage levels of close to 100% of net loan portfolio exposure under IRB models. This entire process will be validated in a coordinated manner between the Bank of Spain and the supervisors of each country in which the Group has an international presence, mainly Europe and the US.

The Bank of Spain valued particularly highly the efforts made in the implementation of advanced approaches, and indicated that this implementation had been possible due both to the robust and consistent technological platforms, advanced internal model methodologies and risk information systems that the Group has had in place for several years and to the high level of integration in management.

The implementation of the new regulatory standards has a positive impact on the Santander Group’s capital ratios, since as a result of the application of internal models the risk-weighted exposure better reflects the levels of capital required on the basis of the risks assumed.

In short, under current legislation, following the €7,195 million capital increase (see Note 31), the Santander Group’s eligible capital amounted to €62,277 million at 2008 year-end, with a cushion of €21,299 million with respect to the minimum capital requirements.

Environmental impact

In view of the business activities carried on by the Group entities, the Group does not have any environmental liability, expenses, assets, provisions or contingencies that might be material with respect to its consolidated equity, financial position or results. Therefore, no specific disclosures relating to environmental issues are included in these notes to the consolidated financial statements.

F-18

Events after the balance sheet date

It should be noted that from December 31, 2008 to the date on which these financial statements were authorized for issue, the following significant events occurred in the Santander Group:

Acquisition of 75.65% of Sovereign Bancorp

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

Under the terms of the definitive transaction agreement, which was unanimously approved by the non-Santander directors of Sovereign and by the executive committee of Santander, Sovereign shareholders will receive 0.2924 Banco Santander American Depository Shares (ADSs) for every 1 ordinary Sovereign share they own (or 1 Banco Santander ADS for every 3.42 Sovereign shares). Based on the closing price of Santander ADSs on Friday, October 10, 2008, the transaction had an aggregate value of approximately USD 1,900 million (€1,400 million), or USD 3.81 per share, and met Santander’s criteria for acquisitions, both strategically, by significantly enhancing the geographical diversification of the Group, and financially, with a projected net profit for Sovereign of USD 750 million in 2011.

On January 26, 2009, Banco Santander held an extraordinary general meeting at which the shareholders approved the capital increase to cater for the acquisition of 75.65% of the US entity Sovereign Bancorp Inc., which was agreed upon in October 2008. The resolution was adopted with the vote of 96.9% of the capital present in person or by proxy.

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

On January 30, 2009, the acquisition of Sovereign was completed and Sovereign became a wholly-owned subsidiary of the Santander Group. The transaction involved the issue of 0.3206 ordinary shares of Banco Santander for each ordinary share of Sovereign (equivalent to the approved exchange of 0.2924 ADSs adjusted for the dilution arising from the capital increase carried out in December 2008). To this end, 161,546,320 ordinary shares were issued for a cash amount (par value plus share premium) of €1,302,063,339.20.

Lehman Brothers (“Lehman”)

F-19

Madoff

F-20

Metrovacesa, S.A. (“Metrovacesa”)

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

Acquisition of Real Tokio Marine Vida e Previdência

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

CEPSA

The transaction is subject to certain conditions which include the obtaining of the appropriate regulatory authorizations and the closing of the related financing.

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

Banco de Venezuela, S.A. Banco Universal

On May 22, 2009, we announced that we had reached a preliminary agreement for the sale of our stake in Banco de Venezuela to the Republic of Venezuela for $1,050 million.

The parties aim at entering into a definitive agreement and closing the transaction in early July 2009.

Comparative information

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The accompanying consolidated income statement for 2006 differs from the consolidated income statement approved by the Bank’s annual general meeting in that, as a result of the Group’s divestment of the pensions business in Latin America, the results arising from the consolidation of these companies (€116 million) were reclassified for comparison purposes, as stipulated by the accounting standards, from the headings under which they were recorded in the approved consolidated financial statements for 2006 to “Profit from discontinued operations” in the consolidated income statement for 2006 (see Note 37).

In 2008 the Group obtained gains totaling €3,572 million, net of tax, which equaled on amount the extraordinary write-downs. Accordingly, the net gains arising on the sale of the business campus (€586 million, recognized gross under “Gains/losses on disposal of non-current assets held for sale not classified as discontinued operations” — see Note 50), ABN’s liabilities (€741 million, recognized under “Gains/losses on financial assets and liabilities (net)”) and the Italian businesses acquired from ABN (€2,245 million, recognized gross under “Gains/losses on disposal of non-current assets held for sale not classified as discontinued operations” — see Note 50) were allocated to the write-down of the ownership interests in Fortis and The Royal Bank of Scotland (€1,430 million, recognized gross under “Gains/losses on disposal of non-current assets held for sale not classified as discontinued operations”), to the write-down of the intangible assets of Abbey (€904 million, recognized under “Impairment losses on other assets (net)” — see Note 18), to additions to provisions for restructuring costs and for early retirement benefits (€386 million and €382 million, respectively, recognized under “Provisions (net)”), to the amortization of goodwill at the Santander Consumer Finance Group and portfolio write-downs (€295 million) and to other period provisions (€175 million).

Also, the results for 2008 include a full year’s figures for Banco Real (accounted for using the equity method for the first nine months and fully consolidated for the last three), whereas in 2007 Banco Real was only included in the fourth quarter (it was purchased in October), accounted for using the equity method.

The gains arising in 2007 on the disposal of the investment in Intesa Sanpaolo and of the properties in Spain (€566 million and €1,620 million, respectively, recognized under “Gains/losses on disposal of non-current assets held for sale not classified as discontinued operations” and “Gains/losses on disposal of assets not classified as non-current assets held for sale” — see Notes 50 and 49), the proceeds from the divestment of the pensions business in Latin America (€831 million, recognized under “Profit/loss from discontinued operations (net)” — see Note 37) and the gains on the disposal of the investment in Banco Português do Investimento (€107 million, recognized under “Gains/losses on financial assets and liabilities” — see Note 44) equaled in aggregate amount the write-down of the investment in Sovereign (€1,053 million — see Note 13-c), to the write-down of intangible assets (€542 million — see Note 18), to the recognition of special provisions for retirement and pension plans (€317 million — see Note 25) and to other provisions and write-downs (€117 million). Therefore, the gross gains obtained in 2007 (€3,124 million) contributed €950 million, after the aforementioned allocations and net of tax and minority interests, to “Profit attributable to the Parent”.

The gains arising in 2006 on the disposal of the investments in Banco Santander Chile, San Paolo IMI, S.p.A. (San Paolo) and Antena 3 (€270 million, €705 million and €294 million, respectively; see Notes 49 and 50) and on the divestment of Urbis (€1,218 million, recognized under “Profit/loss from discontinued operations” — see Note 37) were allocated to fund a significant portion of the retirement plans detailed in Note 25-c (€716 million), to the re-estimation of the deferred tax assets and liabilities (detailed in Note 2-y) as a result of the reduction in the standard corporation tax rate in Spain (€491 million) and to the recognition of the expense relating to the delivery of 100 Bank shares to each Group employee (€179 million). Accordingly, the gains realized in 2006 (€2,487 million, before tax) contributed €1,014 million, after the aforementioned allocations and net of tax and minority interests, to the profit attributable to the Parent.

Accounting policies and measurement bases

The accounting policies and measurement bases applied in preparing the consolidated financial statements were as follows:

Foreign currency transactions

i. Functional currency

The Group’s functional currency is the euro. Therefore, all balances and transactions denominated in currencies other than the euro are deemed to be denominated in “foreign currency”.

F-22

ii. Translation of foreign currency balances

Foreign currency balances are translated to euros in two consecutive stages:

•

Translation of foreign currency to the functional currency (currency of the main economic environment in which the Group operates), and

•

Translation to euros of the balances held in the functional currencies of entities whose functional currency is not the euro.

Translation of foreign currency to the functional currency

Foreign currency transactions performed by consolidated entities (or entities accounted for using the equity method) not located in EMU countries are initially recognized in their respective currencies. Monetary items in foreign currency are subsequently translated to their functional currencies using the closing rate.

Furthermore:

•

Non-monetary items measured at historical cost are translated to the functional currency at the exchange rate at the date of acquisition.

•

Non-monetary items measured at fair value are translated at the exchange rate on the date when the fair value was determined.

•

Income and expenses are translated at the average exchange rates for the period for all the transactions performed during the year. When applying this criterion, the Group considers whether there have been significant changes in the exchange rates in the year which, in view of their materiality with respect to the consolidated financial statements taken as a whole, would make it necessary to use the exchange rates at the transaction date rather than the aforementioned average exchange rates.

•

The balances arising from non-hedging forward foreign currency/foreign currency and foreign currency/euro purchase and sale transactions are translated at the closing rates prevailing in the forward foreign currency market for the related maturity.

Translation of functional currencies to euros

If the functional currency is not the euro, the balances in the financial statements of the consolidated entities (or entities accounted for using the equity method) are translated to euros as follows:

	•		Assets and liabilities, at the closing rates.

	•		Income and expenses, at the average exchange rates for the year.

	•		Equity items, at the historical exchange rates.

iii. Recognition of exchange differences

The exchange differences arising on the translation of foreign currency balances to the functional currency are generally recognized at their net amount under “Exchange differences” in the consolidated income statement, except for exchange differences arising on financial instruments at fair value through profit or loss, which are recognized in the consolidated income statement without distinguishing them from other changes in fair value, and for exchange differences arising on non-monetary items measured at fair value through equity, which are recognized under “Valuation adjustments — Exchange differences”.

The exchange differences arising on the translation to euros of the financial statements denominated in functional currencies other than the euro are recognized under “Valuation adjustments — Exchange differences” in the consolidated balance sheet, whereas those arising on the translation to euros of the financial statements of entities accounted for using the equity method are recognized under “Valuation adjustments — Entities accounted for using the equity method”, until the related item is derecognized, at which time they are recognized in the consolidated income statement.

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iv. Entities located in hyperinflationary economies

None of the functional currencies of the consolidated entities and associates located abroad relate to hyperinflationary economies as defined by the International Financial Reporting Standards as adopted by the European Union. Accordingly, at 2008, 2007 and 2006 year-end it was not necessary to adjust the financial statements of any of the consolidated entities or associates to correct for the effect of inflation.

v. Exposure to foreign currency risk

At December 31, 2008, the Group’s largest exposures on temporary positions (with a potential impact on the income statement) were concentrated, in descending order, on the pound sterling and the Brazilian real. At that date, its largest exposures on permanent positions (with a potential impact on equity) were concentrated, in descending order, on the Brazilian real, the pound sterling, the Mexican peso and the Chilean peso. The Group hedges a portion of these permanent positions using foreign exchange derivative financial instruments (see Note 36-a).

At December 31, 2007, the Group’s largest exposures on temporary positions (with a potential impact on the income statement) were concentrated, in descending order, on the US dollar and the pound sterling. At that date, its largest exposures on permanent positions (with a potential impact on equity) were concentrated, in descending order, on the Brazilian real, the pound sterling, the Mexican peso and the Chilean peso. The Group hedges a portion of these permanent positions using foreign exchange derivative financial instruments (see Note 36-a).

At December 31, 2006, the Group’s largest exposures on temporary positions (with a potential impact on the income statement) were concentrated, in descending order, on the US dollar, the pound sterling and the Chilean peso. At that date, its largest exposure on permanent positions (with a potential impact on equity) were concentrated, in descending order, on the pound sterling, the Brazilian real, the Mexican peso and the Chilean peso. The Group hedges a portion of these permanent positions using foreign exchange derivative financial instruments (see Note 36-a).

The following tables show the sensitivity of consolidated profit and consolidated equity to changes in the Group’s foreign currency positions due to 1% variations in the various foreign currencies in which the Group has material balances.

The estimated effect on the Group’s consolidated equity and consolidated profit of a 1% appreciation of the euro against the related currency is as follows:


	Millions of Euros
	Effect on Consolidated									Effect on Consolidated
	Equity									Profit
Currency	2008			2007			2006			2008		2007		2006

US dollar		—			—			0.1			3.9		20.1		30.2
Chilean peso		(12.4	)		(13.7	)		(9.8	)		3.1		—		2.2
Pound sterling		(5.2	)		(4.3	)		(49.0	)		14.4		12.2		23.2
Mexican peso		(23.1	)		(16.3	)		(20.5	)		3.6		—		5.2
Brazilian real		(60.1	)		(68.5	)		(25.4	)		13.6		—		—

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Similarly, the estimated effect on the Group’s consolidated equity and consolidated profit of a 1% depreciation of the euro against the related currency is as follows:


	Millions of Euros
	Effect on Consolidated							Effect on Consolidated
			Equity								Profit
Currency	2008		2007		2006			2008			2007			2006

US dollar		—		—		(0.1	)		(4.0	)		(20.5	)		(30.8	)
Chilean peso		12.6		14.5		10.9			(3.0	)		—			(6.0	)
Pound sterling		5.3		8.5		33.1			(14.7	)		(12.5	)		(16.7	)
Mexican peso		26.8		16.5		24.7			(3.6	)		—			(7.3	)
Brazilian real		65.2		69.4		26.0			(13.4	)		—			—

The foregoing data were obtained by calculating the possible effect of a variation in the exchange rates on the various asset and liability items, excluding the foreign exchange positions arising from goodwill, and on other foreign currency-denominated items, such as the Group’s derivative instruments, considering the offsetting effect of the various hedging transactions on these items. This effect was estimated using the exchange difference recognition methods set forth in Note 2-a-iii above.

Also, the estimated effect on the Group’s consolidated equity of a 1% appreciation or depreciation of the euro against the foreign currencies in which goodwill is denominated at December 31, 2008 would be a decrease or increase, respectively, in equity due to valuation adjustments of €68.5 million and €69.9 million in the case of the pound sterling, €67.8 million and 69.2 million in the case of the Brazilian real, and €15.9 million and €16.2 million for the other currencies. These changes are offset by a decrease or increase, respectively, in the balance of goodwill at that date and, therefore, they have no impact on the calculation of the Group’s equity.

The estimates used to obtain the foregoing data were performed taking into account the effects of the exchange rate fluctuations isolated from the effect of the performance of other variables, the changes in which would affect equity and profit, such as variations in the interest rates of the reference currencies or other market factors. Accordingly, all variables other than the exchange rate fluctuations remained unchanged with respect to their positions at December 31, 2008, 2007 and 2006.

Basis of consolidation

i. Subsidiaries

“Subsidiaries” are defined as entities over which the Bank has the capacity to exercise control; this capacity is, in general but not exclusively, presumed to exist when the Parent owns directly or indirectly half or more of the voting power of the investee or, even if this percentage is lower or zero, when, as in the case of agreements with shareholders of the investee, the Bank is granted control. Control is the power to govern the financial and operating policies of an entity, as stipulated by the law, the Bylaws or agreement, so as to obtain benefits from its activities.

The financial statements of the subsidiaries are fully consolidated with those of the Bank. Accordingly, all balances and transactions between consolidated entities are eliminated on consolidation.

On acquisition of a subsidiary, its assets, liabilities and contingent liabilities are recognized at fair value at the date of acquisition. Any positive differences between the acquisition cost and the fair values of the identifiable net assets acquired are recognized as goodwill (see Note 17). Negative differences are charged to income on the date of acquisition.

Additionally, the share of third parties of the Group’s equity is presented under “Minority interests” in the consolidated balance sheet (see Note 28). Their share of the profit for the year is presented under “Profit attributable to minority interests” in the consolidated income statement.

The results of subsidiaries acquired during the year are included in the consolidated income statement from the date of acquisition to year-end. Similarly, the results of subsidiaries disposed of during the year are included in the consolidated income statement from the beginning of the year to the date of disposal.

The Exhibits contain significant information on these entities.

F-25

ii. Interests in joint ventures (jointly controlled entities)

“Joint ventures” are deemed to be ventures that are not subsidiaries but which are jointly controlled by two or more unrelated entities. This is evidenced by contractual arrangements whereby two or more entities (“venturers”) acquire interests in entities (jointly controlled entities) or undertake operations or hold assets so that strategic financial and operating decisions affecting the joint venture require the unanimous consent of the venturers.

The financial statements of investees classified as joint ventures are proportionately consolidated with those of the Bank and, therefore, the aggregation of balances and subsequent eliminations are made only in proportion to the Group’s ownership interest in the capital of these entities.

The Exhibits contain significant information on these entities.

iii. Associates

Associates are entities over which the Bank is in a position to exercise significant influence, but not control or joint control, usually because it holds 20% or more of the voting power of the investee.

In the consolidated financial statements, investments in associates are accounted for using the equity method, i.e. at the Group’s share of net assets of the investee, after taking into account the dividends received therefrom and other equity eliminations. In the case of transactions with an associate, the related profits or losses are eliminated to the extent of the Group’s investment in the associate.

The Exhibits contain significant information on these entities.

iv. Special purpose entities

When the Group incorporates special purpose entities, or holds ownership interests therein, to enable its customers to access certain investments, or for the transfer of risks or other purposes, it determines, using internal criteria and procedures, and taking into consideration the applicable legislation, whether control (as defined above) exists and, therefore, whether these entities should be consolidated. These criteria and procedures take into account, inter alia, the risks and rewards retained by the Group and, accordingly, all relevant matters are taken into consideration, including any guarantees granted or any losses associated with the collection of the related assets retained by the Group. These entities include the securitization special purpose vehicles, which are fully consolidated in the case of the SPVs over which, based on the aforementioned analysis, it is considered that the Group continues to exercise control.

v. Other matters

The companies less than 50% owned by the Group that constituted a decision-making unit at December 31, 2008 and which, therefore, were accounted for as subsidiaries are: (i) Luri 1, S.A., (ii) Luri 2, S.A., (iii) Luri 3, S.A. and (iv) Luri Land, S.A., in which the Group held ownership interests of 5.58%, 4.81%, 9.61% and 5.15%, respectively, at that date (see Exhibit I).

vi. Business combinations

A business combination is the bringing together of two or more separate entities or economic units into one single entity or group of entities.

Business combinations performed on or after 1 January 2004 whereby the Group obtains control over an entity are recognized for accounting purposes as follows:

•

The Group measures the cost of the business combination, defined as the fair value of the assets given, the liabilities incurred and the equity instruments issued, if any, by the entity, plus any cost directly attributable to the business combinations, including the fees paid to the auditors, legal advisers, investment banks and other consultants. The amount recognized as an increase in the cost of the business combinations effected in 2008 (see Note 3), which involved the issuance of reports by our auditors, was €6.2 million.

F-26

•

The fair values of the assets, liabilities and contingent liabilities of the acquired entity or business, including any intangible assets which might not have been recognized by the acquiree, are estimated and recognized in the consolidated balance sheet.

•

Any negative difference between the net fair value of the assets, liabilities and contingent liabilities of the acquiree and the cost of the business combination is recognized as discussed in Note 2-m; any positive difference is recognized in “Negative goodwill on business combinations” in the consolidated income statement.

vii. Acquisitions and disposals

Note 3 provides information on the most significant acquisitions and disposals in 2008, 2007 and 2006.

Definitions and classification of financial instruments

i. Definitions

A “financial instrument” is any contract that gives rise to a financial asset of one entity and, simultaneously, to a financial liability or equity instrument of another entity.

An “equity instrument” is any agreement that evidences a residual interest in the assets of the issuing entity after deducting all of its liabilities.

A “financial derivative” is a financial instrument whose value changes in response to the change in an observable market variable (such as an interest rate, foreign exchange rate, financial instrument price, market index or credit rating), whose initial investment is very small compared with other financial instruments with a similar response to changes in market factors, and which is generally settled at a future date.

“Hybrid financial instruments” are contracts that simultaneously include a non-derivative host contract together with a derivative, known as an embedded derivative, that is not separately transferable and has the effect that some of the cash flows of the hybrid contract vary in a way similar to a stand-alone derivative.

“Compound financial instruments” are contracts that simultaneously create for their issuer a financial liability and an own equity instrument (such as convertible bonds, which entitle their holders to convert them into equity instruments of the issuer). The following transactions are not treated for accounting purposes as financial instruments:

	•		Investments in subsidiaries, jointly controlled entities and associates (see Note 13).

	•		Rights and obligations under employee benefit plans (see Note 25).

	•		Rights and obligations under insurance contracts (see Note 15).

•

Contracts and obligations relating to employee remuneration based on own equity instruments (see Note 34).

ii. Classification of financial assets for measurement purposes

Financial assets are initially classified into the various categories used for management and measurement purposes, unless they have to be presented as “Non-current assets held for sale” or they relate to “Cash and balances with central banks”, “Changes in the fair value of hedged items in portfolio hedges of interest rate risk” (asset side), “Hedging derivatives” and “Investments”, which are reported separately.

Financial assets are included for measurement purposes in one of the following categories:

•

Financial assets held for trading (at fair value through profit or loss): this category includes the financial assets acquired for the purpose of generating a profit in the near term from fluctuations in their prices and financial derivatives that are not designated as hedging instruments.

F-27

•

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 arise from measuring assets or liabilities or recognizing the gains or losses on them on different bases, or because a group of financial assets or financial assets and liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided on that basis to the Group’s key management personnel.

Financial instruments included in this category (and “Other financial liabilities at fair value through profit or loss”) are permanently subject to an integrated and consistent system of measuring, managing and controlling risks and returns that enables all the financial instruments involved to be monitored and identified and allows the effective reduction of risk to be checked. Financial assets may only be included in this category on the date they are acquired or originated.

•

Available-for-sale financial assets: this category includes debt instruments not classified as “Held-to-maturity investments”, “Loans and receivables” or “Financial assets at fair value through profit or loss”, and equity instruments issued by entities other than subsidiaries, associates and jointly controlled entities, provided that such instruments have not been classified as “Financial assets held for trading” or as “Other financial assets at fair value through profit or loss”.

•

Loans and receivables: this category includes financing granted to third parties, based on their nature, irrespective of the type of borrower and the form of financing, including finance lease transactions in which the consolidated entities act as lessors.

The consolidated entities generally intend to hold the loans and credits granted by them until their final maturity and, therefore, they are presented in the consolidated balance sheet at their amortized cost (which includes the required adjustments to reflect estimated 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.

iii. Classification of financial assets for presentation purposes

Financial assets are classified by nature into the following items in the consolidated balance sheet:

•

Cash and balances with central banks: cash balances and balances receivable on demand relating to deposits with the Bank of Spain and other central banks.

•

Loans and advances: includes the debit balances of all credit and loans granted by the Group, other than those represented by securities, as well as finance lease receivables and other debit balances of a financial nature in favor of the Group, such as cheques drawn on credit institutions, balances receivable from clearing houses and settlement agencies for transactions on the stock exchange and organized markets, bonds given in cash, capital calls, fees and commissions receivable for financial guarantees and debit balances arising from transactions not originating in banking transactions and services, such as the collection of rentals and similar items:

•

Loans and advances to credit institutions: credit of any nature in the name of credit institutions.

•

Loans and advances to customers: includes the debit balances of all the remaining credit and loans granted by the Group, other than those represented by securities, including money market operations through central counterparties.

•

Debt instruments: bonds and other securities that represent a debt for their issuer, that generate an interest return, and that are in the form of certificates or book entries.

•

Other equity instruments: financial instruments issued by other entities, such as shares, which have the nature of equity instruments for the issuer, unless they are investments in subsidiaries, jointly controlled entities or associates. Investment fund units are included in this item.

F-28

•

Trading derivatives: includes the fair value in favor of the Group of derivatives which do not form part of hedge accounting, including embedded derivatives separated from hybrid financial instruments.

•

Changes in the fair value of hedged items in portfolio hedges of interest rate risk: this item is the balancing entry for the amounts credited to the consolidated income statement in respect of the measurement of the portfolios of financial instruments which are efficiently hedged against interest rate risk through fair value hedging derivatives.

•

Hedging derivatives: includes the fair value in favor of the Group of derivatives designated as hedging instruments in hedge accounting, including the embedded derivatives separated from hybrid financial instruments designated as hedging instruments in hedge accounting.

•

Investments: includes the investments in the share capital of associates.

iv. Classification of financial liabilities for measurement purposes

Financial liabilities are initially classified into the various categories used for management and measurement purposes, unless they have to be presented as “Liabilities associated with non-current assets held for sale” or they relate to “Hedging derivatives” or “Changes in the fair value of hedged items in portfolio hedges of interest rate risk” (liability side), which are reported separately.

Financial liabilities are classified for measurement purposes into one of the following categories:

•

Financial liabilities held for trading (at fair value through profit or loss): this category includes the financial liabilities issued for the purpose of generating a profit in the near term from fluctuations in their prices, financial derivatives not considered to qualify for hedge accounting and financial liabilities arising from the outright sale of financial assets purchased under resale agreements or borrowed (“short positions”).

•

Other financial liabilities at fair value through profit or loss: financial liabilities are included in this category when more relevant information is obtained, either because this eliminates or significantly reduces recognition or measurement inconsistencies (“accounting mismatches”) that would arise from measuring assets or liabilities or recognizing the gains or losses on them on different bases, or because a group of financial liabilities or financial assets and liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided on that basis to the Group’s key management personnel.

•

Financial liabilities at amortized cost: financial liabilities, irrespective of their instrumentation and maturity, not included in any of the above-mentioned categories which arise from the funding-taking activities carried on by financial institutions.

v. Classification of financial liabilities for presentation purposes

Financial liabilities are classified by nature into the following items in the consolidated balance sheet:

•

Deposits from central banks: deposits of any nature received from the Bank of Spain or other central banks.

•

Deposits from credit institutions: deposits of any nature, including credit and money market operations received in the name of credit institutions.

•

Customer deposits: includes all repayable balances received in cash by the Group, other than those represented by marketable securities, money market operations through central counterparties, subordinated liabilities and deposits from central banks and credit institutions.

•

Marketable debt securities: includes the amount of bonds and other debt represented by marketable securities, other than subordinated liabilities. This item includes the component considered to be a financial liability of issued securities that are compound financial instruments.

•

Trading derivatives: includes the fair value, with a negative balance for the Group, of derivatives which do not form part of hedge accounting and embedded derivatives separated from the host contract.

F-29

•

Short positions: includes the amount of financial liabilities arising from the outright sale of financial assets purchased under reverse repurchase agreements or borrowed.

•

Subordinated liabilities: amount of financing received which, for the purposes of payment priority, ranks behind ordinary debt. This category also includes the financial instruments issued by the Group which, although equity for legal purposes, do not meet the requirements for classification as equity, such as certain preference shares issued.

•

Other financial liabilities: includes the amount of payment obligations having the nature of financial liabilities not included in other items, and liabilities under financial guarantee contracts, unless they have been classified as doubtful.

•

Changes in the fair value of hedged items in portfolio hedges of interest rate risk: this item is the balancing entry for the amounts charged to the consolidated income statement in respect of the measurement of the portfolios of financial instruments which are efficiently hedged against interest rate risk through fair value hedging derivatives.

•

Hedging derivatives: includes the fair value of the Group’s liability in respect of derivatives designated as hedging instruments in hedge accounting, including embedded derivatives separated from hybrid financial instruments designated as 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. Financial instruments not measured at fair value through profit or loss are, adjusted by the transaction costs. Financial assets and liabilities are subsequently measured at each period-end as follows:

i. Measurement of financial assets

Financial assets are measured at fair value, without deducting any transaction costs that may be incurred on their disposal, except for loans and receivables, held-to-maturity investments, equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have those equity instruments as their underlying and are settled by delivery of those instruments.

The “fair value” of a financial instrument on a given date is taken to be the amount for which it could be bought or sold on that date by two knowledgeable, willing parties in an arm’s length transaction acting prudently. The most objective and common reference for the fair value of a financial instrument is the price that would be paid for it on an active, transparent and deep market (“quoted price” or “market price”).

If there is no market price for a given financial instrument, its fair value is estimated on the basis of the price established in recent transactions involving similar instruments and, in the absence thereof, of valuation techniques commonly used by the international financial community, taking into account the specific features of the instrument to be measured and, particularly, the various types of risk associated with it.

All derivatives are recognized in the balance sheet at fair value from the trade date. If the fair value is positive, they are recognized as an asset and if the fair value is negative, they are recognized as a liability. The fair value on the trade date is deemed, in the absence of evidence to the contrary, to be the transaction price. The changes in the fair value of derivatives from the trade date are recognized in “Gains/losses on financial assets and liabilities” in the consolidated income statement. Specifically, the fair value of standard financial derivatives included in the portfolios of financial assets or liabilities held for trading is deemed to be their daily quoted price and if, for exceptional reasons, the quoted price cannot be determined on a given date, these financial derivatives are measured using methods similar to those used to measure OTC derivatives.

The fair value of OTC derivatives is taken to be the sum of the future cash flows arising from the instrument, discounted to present value at the date of measurement (“present value” or “theoretical close”) using valuation techniques commonly used by the financial markets: “net present value” (NPV), option pricing models and other methods.

F-30

“Loans and receivables” and “Held-to-maturity investments” are measured at amortized cost using the effective interest method. “Amortized cost” is understood to be the acquisition cost of a financial asset or liability plus or minus, as appropriate, the principal repayments and the cumulative amortization (taken to the income statement) of the difference between the initial cost and the maturity amount. In the case of financial assets, amortized cost furthermore includes any reductions for impairment or uncollectibility. In the case of loans and receivables hedged in fair value hedges, the changes in the fair value of these assets related to the risk or risks being hedged are recognized.

The “effective interest rate” is the discount rate that exactly matches the initial amount of a financial instrument to all its estimated cash flows of all kinds over its remaining life. For fixed rate financial instruments, the effective interest rate coincides with the contractual interest rate established on the acquisition date plus, where applicable, the fees and transaction costs that, because of their nature, form part of their financial return. In the case of floating rate financial instruments, the effective interest rate coincides with the rate of return prevailing in all connections until the next benchmark interest reset date.

Equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have those instruments as their underlying and are settled by delivery of those instruments are measured at acquisition cost adjusted, where appropriate, by any related impairment loss.

The amounts at which the financial assets are recognized represent, in all material respects, the Group’s maximum exposure to credit risk at each reporting date. Also, the Group has received collateral and other credit enhancements to mitigate its exposure to credit risk, which consist mainly of mortgage guarantees, cash collateral, equity instruments and personal security, assets leased out under leasing and renting agreements, assets acquired under repurchase agreements, securities loans and derivatives.

ii. Measurement of financial liabilities

In general, financial liabilities are measured at amortized cost, as defined above, except for those included under “Financial liabilities held for trading” and “Other financial liabilities at fair value through profit or loss” and financial liabilities designated as hedged items (or hedging instruments) in fair value hedges, which are measured at fair value.

iii. Valuation techniques

The following table shows a summary of the fair values, at 2008, 2007 and 2006 year-end, of the financial assets and liabilities indicated below, classified on the basis of the various measurement methods used by the Group to determine their fair value:


	Millions of Euros
	2008						2007						2006
	Published						Published						Published
	Price						Price						Price
	Quotations in						Quotations in						Quotations in
	Active		Internal				Active		Internal				Active		Internal
	Markets		Models		Total		Markets		Models		Total		Markets		Models		Total

Financial assets held for trading		51,947		99,870		151,817		76,310		82,497		158,807		84,010		86,416		170,426
Other financial assets at fair value through profit or loss		6,137		19,680		25,817		6,945		17,884		24,829		4,543		10,828		15,371
Available-for-sale financial assets		43,747		5,173		48,920		37,908		6,441		44,349		32,111		6,587		38,698
Hedging derivatives (assets)		244		9,454		9,698		—		3,063		3,063		—		2,988		2,988
Financial liabilities held for trading		12,265		124,355		136,620		24,447		98,951		123,398		30,657		93,939		124,596
Other financial liabilities at fair value through profit or loss		—		28,639		28,639		117		39,601		39,718		259		12,152		12,411
Hedging derivatives (liabilities)		261		5,697		5,958		111		4,024		4,135		—		3,494		3,494
Liabilities under insurance contracts		5,286		11,564		16,850		5,678		7,356		13,034		5,760		4,944		10,704

F-31

Financial instruments at fair value, determined on the basis of public price quotations in active markets (Level 1), include government debt securities, private-sector debt securities, securitized assets, shares, short positions and fixed-income securities issued.

In cases where price quotations cannot be observed, management makes its best estimate of the price that the market would set using its own internal models. In most cases, these models use data based on observable market parameters as significant inputs (Level 2) and, in very specific cases, they use significant inputs not observable in market data (Level 3). In order to make these estimates, various techniques are employed, including the extrapolation of observable market data and extrapolation techniques. The best evidence of the fair value of a financial instrument on initial recognition is the transaction price, unless the fair value of the instrument can be obtained from other market transactions performed with the same or similar instruments or can be measured by using a valuation technique in which the variables used include only observable market data, mainly interest rates. In accordance with the standards in force (EU-IFRSs), any difference between the transaction price and the fair value based on valuation techniques is not initially recognized in the income statement.

The main techniques used at December 31, 2008, 2007 and 2006 by the Group’s internal models to determine the fair value of the financial instruments detailed in the foregoing table are as follows:

•

In the valuation of financial instruments permitting static hedging (basically forwards and swaps) and in the valuation of loans and advances to customers, the “present value” method is used. Estimated future cash flows are discounted using the interest rate curves of the related currencies. The interest rate curves are generally observable market data.

•

In the valuation of financial instruments requiring dynamic hedging (basically structured options and other structured instruments), the Black-Scholes model is normally used. Where appropriate, observable market inputs are used to obtain factors such as the bid-offer spread, exchange rates, volatility, correlation between indexes and market liquidity. In certain very specific cases, unobservable market inputs can be used, such as the volatility of the UK Halifax House Price Index (“HPI”), the estimated future HPI growth, the HPI spot rate, and mortality.

•

In the valuation of certain financial instruments exposed to interest rate risk, such as interest rate futures, caps and floors, the present value method (futures) and the Black-Scholes model (plain vanilla options) are used; in the case of more structured instruments requiring dynamic hedging, the Heath-Jarrow-Morton and Hull-White models are used. The main inputs used in these models are basically observable market data, including the related interest rate curves, volatilities, correlations and exchange rates. In certain very specific cases, unobservable market inputs can be used, such as the volatility of the UK Halifax House Price Index (“HPI”), the estimated future HPI growth, the HPI spot rate, mortality, and the credit spread for the specific financial instrument.

•

In the case of linear instruments (e.g. credit risk and fixed-income derivatives), credit risk is measured using dynamic models similar to those used in the measurement of interest rate risk. In the case of non-linear instruments, if the portfolio is exposed to credit risk (e.g. credit derivatives), the joint probability of default is determined using the Standard Gaussian Copula model. The main inputs used to determine the underlying cost of credit of credit derivatives are quoted credit risk premiums and the correlation between the quoted credit derivatives of various issuers.

The fair value of the financial instruments arising from the aforementioned internal models takes into account, inter alia, the contract terms and observable market data, which include interest rates, credit risk, exchange rates, the quoted market price of raw materials and shares, volatility and prepayments. The valuation models are not significantly subjective, since these methodologies can be adjusted and gauged, as appropriate, through the internal calculation of fair value and the subsequent comparison with the related actively traded price.

F-32

Set forth below are the financial instruments at fair value whose measurement was based on internal models (Levels 2 and 3) at December 31, 2008, 2007 and 2006 and the potential effect on their measurement of a shift towards other reasonably probable scenarios in the main assumptions that are not based on observable market data:


	Millions of Euros
	Fair Values
	Calculated
	Using				Reasonable Assumptions
	Internal				More			Less
	Models		Valuation Techniques	Main Assumptions	Favorable			Favorable

ASSETS:
Financial assets held for trading		99,870				84			(58	)
Loans and advances to credit institutions		5,100	Present Value Method	Observable market data		—			—
Loans and advances to customers (**)		684	Present Value Method	Observable market data		—			—
Debt and equity interests		6,074	Present Value Method	Observable market data, HPI		14			(14	)
Trading derivatives		87,962				70			(44	)
Swaps		72,693	Present Value Method, Gaussian Copula (***)	Observable market data, liquidity		35			(30	)
Exchange rate options		3,524	Black-Scholes Model	Observable market data, liquidity		3			(3	)
Interest rate options		4,926	Black-Scholes Model, Heath-Jarrow-Morton Model	Observable market data, liquidity, correlation		3			(3	)
Interest rate futures		339	Present Value Method	Observable market data		—			—
Index and securities options		6,127	Black-Scholes Model	Observable market data, dividends, correlation, liquidity, HPI		29			(8	)
Investment futures		—	Present Value Method	Observable market data		—			—
Other		353	N/A	N/A		—			—
Hedging derivatives		9,454				—			—
Swaps		9,029	Present Value Method	Observable market data		—			—
Exchange rate options		265	Black-Scholes Model	Observable market data		—			—
Interest rate options		157	Black-Scholes Model	Observable market data		—			—
Other		3	N/A	N/A
Other financial assets at fair value through profit or loss		19,681				28			(28	)
Loans and advances to credit institutions		8,912	Present Value Method	Observable market data		—			—
Loans and advances to customers (****)		8,973	Present Value Method	Observable market data		28			(28	)
Debt and equity interests		1,796	Present Value Method	Observable market data
Available-for-sale financial assets		5,173				—			—
Debt and equity interests			Present Value Method	Observable market data		—			—
LIABILITIES:
Financial liabilities held for trading		124,355				106			(83	)
Deposits from central banks		9,110	Present Value Method	Observable market data		—			—
Deposits from credit institutions		26,842	Present Value Method	Observable market data		—			—
Customer deposits		4,896	Present Value Method	Observable market data		—			—
Debt and equity interests		1,075	Present Value Method	Observable market data, liquidity		(*	)		(*	)
Trading derivatives		82,432				106			(83	)
Swaps		67,288	Present Value Method, Gaussian Copula (***)	Observable market data, liquidity, HPI		39			(29	)
Exchange rate options		3,515	Black-Scholes Model	Observable market data, liquidity		3			(3	)
Interest rate options		5,402	Black-Scholes Model HJM Model	Observable market data, liquidity, correlation		38			(33	)
Index and securities options		4,694	Black-Scholes Model	Observable market data, dividends, correlation, liquidity, HPI		26			(18	)
Forward purchase and sale contracts		—	N/A	N/A		—			—
Interest rate and investment futures		1,189	Present Value Method	Observable market data		—			—
Other		344	N/A	N/A		—			—
Hedging derivatives		5,697
Swaps		5,586	Present Value Method	Observable market data		—			—
Exchange rate options		20	Black-Scholes Model	Observable market data		—			—
Interest rate options		91	Black-Scholes Model	Observable market data		—			—
Other financial liabilities at fair value through profit or loss		28,639	Present Value Method	Observable market data		—			—
Liabilities under insurance contracts		11,564	Note 15			—			—

TOTAL		304,433				218			(169	)


(*)		The sensitivity of the issued debt and equity instruments in liabilities calculated using HPI assumptions is not detailed, since these instruments are perfectly hedged. Consequently, any change in the valuation of these issued instruments would be offset exactly by an equal and opposite change in the valuation of the associated foreign currency derivatives.

(**)		Includes mainly short-term loans and reverse repurchase agreements with corporate customers (mainly brokerage and investment companies).

(***)		Includes credit risk derivatives with a positive net fair value of €900 million recognized in the consolidated balance sheet. These assets and liabilities are measured using the aforementioned Standard Gaussian Copula model.

(****)		Includes home mortgage loans to financial institutions in the UK (which are regulated and partly financed by the Government). The fair value of these loans was obtained using observable market variables, including current market transactions with similar amounts and collateral facilitated by the UK Housing Association. Since the Government is involved in these financial institutions, the credit risk spreads have remained stable and are homogenous in this sector. The results arising from the valuation model are checked against current market transactions.

F-33

The use of observable market data assumes that the markets in which the Group operates are functioning efficiently and, therefore, that these data are representative. The main assumptions used in the measurement of the financial instruments included in the foregoing table that were valued by means of internal models employing unobservable market data are as follows:

•

Correlation: the assumptions relating to the correlation between the value of quoted and unquoted assets are based on historical correlations between the impact of adverse changes in market variables and the corresponding valuation of the associated unquoted assets. The measurement of the assets will vary depending on whether a more or less conservative scenario is selected.

•

Dividends: the estimates of the dividends used as inputs in the internal models are based on the expected dividend payments of the issuers. Since the dividend expectations can change or vary depending on the source of the price (normally historical data or market consensus for the measurement of options) and the companies’ dividend policies can vary, the valuation is adjusted to the best estimate of the reasonable dividend level expected in more or less conservative scenarios.

•

Liquidity: the assumptions include estimates in response to market liquidity. For example, they take market liquidity into consideration when very long-term estimates of exchange rates or interest rates are used, or when the instrument is part of a new or developing market where, due to the absence of market prices that reflect a reasonable price for these products, the standard valuation methods and the estimates available might give rise to less precise results in the measurement of these instruments at that time.

•

Halifax House Price Index (HPI): the assumptions include estimates of the future growth and the volatility of the HPI, mortality and the credit spreads of the specific financial instruments in relation to home mortgage loans to financial institutions in the UK (which are regulated and partially financed by the Government), credit derivatives and property asset derivatives.

The unobservable market data that constitute significant inputs of the internal models (Level 3) are, basically, those related to the House Price Index. The detail of the financial assets and liabilities measured using these models, included in the foregoing table, is as follows:


	Fair Value
	Calculated
	Using Internal
	Models
	Millions of Euros

ASSETS:
Level 2		130,812
Level 3		1,316

		132,128


LIABILITIES:
Level 2		169,380
Level 3		626

		170,006

		302,134

The measurements obtained using the internal models might have been different had other methods or assumptions been used with respect to interest rate risk, to credit risk, market risk and foreign currency risk spreads, or to their related correlations and volatilities. Nevertheless, Group management considers that the fair value of the financial assets and liabilities recognized in the consolidated balance sheet and the gains and losses arising from these financial instruments are reasonable.

As detailed in the foregoing tables, at December 31, 2008 the potential effect on the measurement of the financial instruments of a change in the main assumptions (liquidity, correlations, dividends and HPI) to less favorable reasonably probable assumptions, taking the lowest value within the range that is considered probable, would be to reduce gains or increase losses by €169 million (December 31, 2007: €178 million; December 31, 2006: €141 million). The effect of using other more favorable reasonably probable assumptions, taking the highest value within the range that is considered probable, would be to increase gains or reduce losses by €218 million (December 31, 2007: €211 million; December 31, 2006: €183 million).

The net gain recognized in the consolidated income statement for 2008 arising from the aforementioned valuation models amounted to €1,624 million (2007: net loss of €479 million; 2006: net loss of €1,005 million), of which a gain of €1,555 million related to hedging derivatives and a gain of €196 million related to models whose significant inputs are unobservable market data.

F-34

iv. Recognition of fair value changes

As a general rule, changes in the carrying amount of financial assets and liabilities are recognized in the consolidated income statement, distinguishing between those arising from the accrual of interest and similar items -which are recognized under “Interest and similar income” or “Interest expense and similar charges”, as appropriate- and those arising for other reasons, which are recognized at their net amount under “Gains/losses on financial assets and liabilities”.

Adjustments due to changes in fair value arising from:

•

“Available-for-sale financial assets” are recognized temporarily in equity under “Valuation adjustments — Available-for-sale financial assets”, unless they relate to exchange differences, in which case they are recognized in “Valuation adjustments - Exchange differences” (exchange differences arising on monetary financial assets are recognized in “Exchange differences” in the consolidated income statement).

•

Items charged or credited to “Valuation adjustments — Available-for-sale financial assets” and “Valuation adjustments — Exchange differences” remain in the Group’s consolidated equity until the related assets are derecognized, whereupon they are charged to 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 in “Valuation adjustments — Non-current assets held for sale”.

v. Hedging transactions

The consolidated entities use financial derivatives for the following purposes: i) to facilitate these instruments to customers who request them in the management of their market and credit risks; ii) to use these derivatives in the management of the risks of the Group entities’ own positions and assets and liabilities (“hedging derivatives”); and iii) to obtain gains from changes in the prices of these derivatives (“trading derivatives”).

Financial derivatives that do not qualify for hedge accounting are treated for accounting purposes as trading derivatives.

A derivative qualifies for hedge accounting if all the following conditions are met:

The derivative hedges one of the following three types of exposure:

Changes in the fair value of assets and liabilities due to fluctuations, among others, in the interest rate and/or exchange rate to which the position or balance to be hedged is subject (“fair value hedge”);

Changes in the estimated cash flows arising from financial assets and liabilities, commitments and highly probable forecast transactions (“cash flow hedge”);

The net investment in a foreign operation (“hedge of a net investment in a foreign operation”).

It is effective in offsetting exposure inherent in the hedged item or position throughout the expected term of the hedge, which means that:

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 or position (“retrospective effectiveness”).

F-35

There must be adequate documentation evidencing the specific designation of the financial derivative to hedge certain balances or transactions and how this effective hedge was expected to be achieved and measured, provided that this is consistent with the Group’s management of own risks.

The changes in value of financial instruments qualifying for hedge accounting are recognized as follows:

In fair value hedges, the gains or losses arising on both the hedging instruments and the hedged items (attributable to the type of risk being hedged) are recognized directly in the consolidated income statement.

In fair value hedges of interest rate risk on a portfolio of financial instruments, the gains or losses that arise on measuring the hedging instruments are recognized directly in the consolidated income statement, whereas the gains or losses due to changes in the fair value of the hedged amount (attributable to the hedged risk) are recognized in the consolidated income statement with a balancing entry under “Changes in the fair value of hedged items in portfolio hedges of interest rate risk” on the asset or liability side of the balance sheet, as appropriate.

In cash flow hedges, the effective portion of the change in value of the hedging instrument is recognized temporarily in equity under “Valuation adjustments — Cash flow hedges” until the forecast transactions occur, when it is recognized in the consolidated income statement, unless, if the forecast transactions result in the recognition of non-financial assets or liabilities, it is included in the cost of the non-financial asset or liability. The ineffective portion of the change in value of hedging derivatives is recognized directly in the consolidated income statement.

In hedges of a net investment in a foreign operation, the gains and losses attributable to the portion of the hedging instruments qualifying as an effective hedge are recognized temporarily in equity under “Valuation adjustments — Hedges of net investments in foreign operations” until the gains or losses on the hedged item are recognized in the consolidated income statement.

The ineffective portion of the gains and losses on the hedging instruments of cash flow hedges and hedges of a net investment in a foreign operation are recognized directly under “Gains/losses on financial assets and liabilities” in the consolidated income statement.

If a derivative designated as a hedge no longer meets the requirements described above due to expiration, ineffectiveness or for any other reason, the derivative is classified as a trading derivative.

When fair value hedge accounting is discontinued, the adjustments previously recognized on the hedged item are transferred to profit or loss at the effective interest rate re-calculated at the date of hedge discontinuation. The adjustments must be fully amortized at maturity.

When cash flow hedges are discontinued, any cumulative gain or loss on the hedging instrument recognized in equity under “Valuation adjustments” (from the period when the hedge was effective) remains recognized in equity until the forecast transaction occurs at which time it is recognized in profit or loss, unless the transaction is no longer expected to occur, in which case any cumulative gain or loss is recognized immediately in profit or loss.

vi. Derivatives embedded in hybrid financial instruments

Derivatives embedded in other financial instruments or in other host contracts are accounted for separately as derivatives if their risks and characteristics are not closely related to those of the host contracts, provided that the host contracts are not classified as “Other financial assets/liabilities at fair value through profit or loss” or as “Financial assets/liabilities held for trading”.

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.

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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, for an amount equal to the consideration received; this liability is subsequently measured at amortized cost.

The income from the transferred financial asset not derecognized and any expense incurred on the new financial liability.

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.

If the transferor retains control, it continues to recognize the transferred financial asset for an amount equal to its exposure to changes in value and recognizes a financial liability associated with the transferred financial asset. The net carrying amount of the transferred asset and the associated liability is the amortized cost of the rights and obligations retained, if the transferred asset is measured at amortized cost, or the fair value of the rights and obligations retained, if the transferred asset is measured at fair value.

Accordingly, financial assets are only derecognized when the rights on the cash flows they generate have been extinguished or when substantially all the inherent risks and rewards have been transferred to third parties. Similarly, financial liabilities are only derecognized when the obligations they generate have been extinguished or when they are acquired, with the intention either to cancel them or to resell them.

Offsetting of financial instruments

Financial asset and liability balances are offset, i.e. reported in the consolidated balance sheet at their net amount, only if the subsidiaries currently have a legally enforceable right to set off the recognized amounts and intends either to settle them on a net basis or to realize the asset and settle the liability simultaneously.

Impairment of financial assets

i. Definition

A financial asset is considered to be impaired -and therefore its carrying amount is adjusted to reflect the effect of impairment- when there is objective evidence that events have occurred which:

•

In the case of debt instruments (loans and debt securities), give rise to an adverse impact on the future cash flows that were estimated at the transaction date.

•

In the case of equity instruments, mean that their carrying amount cannot be fully recovered.

As a general rule, the carrying amount of impaired financial instruments is adjusted with a charge to the consolidated income statement for the period in which the impairment becomes evident, and the reversal, if any, of previously recognized impairment losses is recognized in the consolidated income statement for the period in which the impairment is reversed or reduced.

Balances are deemed to be impaired, and the interest accrual is suspended, when there are reasonable doubts as to their full recovery and/or the collection of the related interest for the amounts and on the dates initially agreed upon, after taking into account the guarantees received by the consolidated entities to secure (fully or partially) collection of the related balances. Collections relating to impaired loans and advances are used to recognize the accrued interest and the remainder, if any, to reduce the principal amount outstanding. The amount of the financial assets that would be deemed to be impaired had the conditions thereof not been renegotiated is not material with respect to the Group’s financial statements taken as a whole.

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When the recovery of any recognized amount is considered unlikely, the amount is written off, without prejudice to any actions that the consolidated entities may initiate to seek collection until their contractual rights are extinguished due to expiry of the statute-of-limitations period, forgiveness or any other cause.

ii. Debt instruments carried at amortized cost

The amount of an impairment loss incurred on a debt instrument measured at amortized cost is equal to the difference between its carrying amount and the present value of its estimated future cash flows, and is presented as a reduction of the balance of the asset adjusted.

In estimating the future cash flows of debt instruments the following factors are taken into account:

•

All the amounts that are expected to be obtained over the remaining life of the instrument; including, where appropriate, those which may result from the collateral provided for the instrument (less the costs for obtaining and subsequently selling the collateral). The impairment loss takes into account the likelihood of collecting accrued interest receivable.

•

The various types of risk to which each instrument is subject, and

•

The circumstances in which collections will foreseeably be made.

These cash flows are subsequently discounted using the instrument’s effective interest rate (if its contractual rate is fixed) or the effective contractual rate at the discount date (if it is variable).

Specifically as regards impairment losses resulting from materialization of the insolvency risk of the obligors (credit risk), a debt instrument is impaired due to insolvency:

•

When there is evidence of a deterioration of the obligor’s ability to pay, either because it is in arrears or for other reasons, and/or

•

When country risk materializes: country risk is considered to be the risk associated with debtors resident in a given country due to circumstances other than normal commercial risk.

* * * * *

The Group has certain policies, methods and procedures for covering its credit risk arising both from insolvency allocable to counterparties and from country risk.

These policies, methods and procedures are applied in the granting, examination and documentation of debt instruments, and contingent liabilities and commitments, the identification of their impairment and the calculation of the amounts necessary to cover the related credit risk.

With respect to the allowance for loss arising from credit risk, the Group makes the following distinction:

Specific credit risk allowance:

Specific allowance:

The impairment of debt instruments not measured at fair value through profit or loss that are classified as doubtful are generally recognized in accordance with the criteria set forth below:

Assets classified as doubtful due to counterparty arrears:

Debt instruments, whoever the obligor and whatever the guarantee or collateral, with amounts more than three months past due are assessed individually, taking into account the age of the past-due amounts, the guarantees or collateral provided and the financial situation of the counterparty and the guarantors.

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ii.

Assets classified as doubtful for reasons other than counterparty arrears:

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

General allowance for inherent losses:

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

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

•

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

•

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

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

•

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

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

The approach described above is used as a general rule. However, in certain cases, as a result of its particular characteristics, this approach is not applied and alternative approaches are used:

Low default portfolios

In certain portfolios (sovereign risk, credit institutions or large corporations) the number of defaults observed is very small or zero. In these cases, the Group opted to use the data contained in the credit derivative spreads to estimate the expected loss discounted by the market and break it down into PD and LGD.

Top-down units

In the exceptional cases in which the Group does not have sufficient data to construct a sufficiently robust credit risk measurement model, the expected loss on the loan portfolios is estimated based on a top-down approximation in which the historically observed average cost of the loan portfolios is used as the best estimate of the expected loss. As the credit models are developed and bottom-up measurements are obtained, the top-down measurements used for these units are gradually replaced.

* * * * *

However, as required by the Bank of Spain, until the Spanish regulatory authority has verified and approved these internal models for the calculation of the general allowance for inherent losses (to date it has only approved the internal models to be used to calculate regulatory capital), the inherent losses must be calculated as set forth below.

Country risk allowance:

Country risk is considered to be the risk associated with counterparties resident in a given country due to circumstances other than normal commercial risk (sovereign risk, transfer risk and risks arising from international financial activity). Based on the countries’ economic performance, political situation, regulatory and institutional framework, and payment capacity and record, the Group classifies all the transactions performed with third parties into six different groups, from group 1 (transactions with ultimate obligors resident in European Union countries, Norway, Switzerland, Iceland, the United States, Canada, Japan, Australia and New Zealand) to group 6 (transactions the recovery of which is considered remote due to circumstances attributable to the country), assigning to each group the credit loss allowance percentages resulting from the aforementioned analyses.

However, due to the size of the Group and to the proactive management of its country risk exposure, the allowances recognized in this connection are not material with respect to the credit loss allowances recognized.

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iii. Debt or equity instruments classified as available for sale

The amount of the impairment losses on these instruments is the positive difference between their acquisition cost (net of any principal repayment or amortization in the case of debt instruments) and their fair value, less any impairment loss previously recognized in the consolidated income statement.

When there is objective evidence at the date of measurement of these instruments that the aforementioned differences are due to permanent impairment, they are no longer recognized in equity under “Valuation adjustments — Available-for-sale financial assets” and are reclassified, for the cumulative amount at that date, to the consolidated income statement.

If all or part of the impairment losses are subsequently reversed, the reversed amount is recognized, in the case of debt instruments, in the consolidated income statement for the year in which the reversal occurred (or in equity under “Valuation adjustments — Available-for-sale financial assets” in the case of equity instruments).

iv. Equity instruments measured at cost

The impairment loss on equity instruments measured at cost is the difference between the carrying amount and the present value of the expected future cash flows discounted at the market rate of return for similar securities.

Impairment losses are recognized in the consolidated income statement for the period in which they arise as a direct reduction of the cost of the instrument. These losses can only be reversed subsequently if the related assets are sold.

Repurchase agreements and reverse repurchase agreements

Purchases (sales) of financial assets under a non-optional resale (repurchase) agreement at a fixed price (“repos”) are recognized in the consolidated balance sheet as financing granted (received), based on the nature of the debtor (creditor), under “Balances with central banks”, “Loans and advances to credit institutions” or “Loans and advances to customers” (“Deposits from central banks”, “Deposits from credit institutions” or “Customer deposits”).

Differences between the purchase and sale prices are recognized as interest over the contract term.

Non-current assets held for sale and Liabilities associated with non-current assets held for sale

“Non-current assets held for sale” includes the carrying amount of individual items or disposal groups or items forming part of a business unit earmarked for disposal (“Discontinued operations”), whose sale in their present condition is highly probable and is expected to occur within one year from the reporting date. Therefore, the carrying amount of these items -which can be of a financial nature or otherwise- will foreseeably be recovered through the proceeds from their disposal. Specifically, property or other non-current assets received by the consolidated entities as total or partial settlement of their debtors’ payment obligations to them are deemed to be non-current assets held for sale, unless the consolidated entities have decided to make continuing use of these assets.

“Liabilities associated with non-current assets” includes the credit balances arising from assets or disposal groups and from discontinued operations.

Non-current assets held for sale are generally measured at the lower of fair value less costs to sell and their carrying amount at the date of classification in this category. Non-current assets held for sale are not depreciated as long as they remain in this category.

Impairment losses on an asset or disposal group arising from a reduction in its carrying amount to its fair value (less costs to sell) are recognized under “Gains/ (losses) on non-current assets held for sale not classified as discontinued operations” in the consolidated income statement. The gains on a non-current asset held for sale resulting from subsequent increases in fair value (less costs to sell) increase its carrying amount and are recognized in the consolidated income statement up to an amount equal to the impairment losses previously recognized.

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Reinsurance assets and Liabilities under insurance contracts

Insurance contracts involve the transfer of a certain quantifiable risk in exchange for a periodic or one-off premium. The effects on the Group’s cash flow will arise from a deviation in the payments forecast and/or an insufficiency in the premium set.

The Group controls its insurance risk as follows:

	•		By applying of a strict methodology in the launch of products and in the assignment of value thereto.

	•		By using deterministic and stochastic models for measuring commitments.

•

By using reinsurance as a risk mitigation technique as part of the credit quality guidelines in line with the Group’s general risk policy.

	•		By establishing an operating framework for credit risks.

	•		By actively managing asset and liability matching.

	•		By applying security measures in processes.

“Reinsurance assets” includes the amounts that the consolidated entities are entitled to receive for reinsurance contracts with third parties and, specifically, the reinsurer’s share of the technical provisions recorded by the consolidated insurance entities.

At least once a year these assets are reviewed for impairment (if there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all amounts due to it under the terms of the contract and the amount that will not be received can be reliably measured), and any impairment loss is recognized in the consolidated income statement and the assets are derecognized.

“Liabilities under insurance contracts” includes the technical provisions recorded by the consolidated entities to cover claims arising from insurance contracts in force at year-end.

Insurers’ results relating to their insurance business are recognized, according to their nature, under the related consolidated income statement items.

In accordance with standard accounting practice in the insurance industry, the consolidated insurance entities credit to the consolidated income statement the amounts of the premiums written and charge to income the cost of the claims incurred on final settlement thereof. Insurance entities are required to accrue at year-end the unearned revenues credited to their income statements and the accrued costs not charged to income.

At least at each reporting date the Group assesses whether the insurance contract liabilities recognized in the consolidated balance sheet are adequately measured. For this purpose, it calculates the difference between the following amounts:

•

Current estimates of future cash flows under the insurance contracts of the consolidated entities. These estimates include all contractual cash flows and any related cash flows, such as claims handling costs; and

•

The value recognized in the consolidated balance sheet for insurance liabilities (see Note 15), net of any related deferred acquisition costs or related intangible assets, such as the amount paid to acquire, in the event of purchase by the entity, the economic rights held by a broker deriving from policies in the entity’s portfolio.

If the calculation results in a positive amount, this deficiency is charged to the consolidated income statement. When unrealized gains or losses on assets of the Group’s insurance companies affect the measurement of liabilities under insurance contracts and/or the related deferred acquisition costs and/or the related intangible assets, these gains or losses are recognized directly in equity. The corresponding adjustment in the liabilities under insurance contracts (or in the deferred acquisition costs or in intangible assets) is also recognized in equity.

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Tangible assets

“Tangible assets” includes the amount of buildings, land, furniture, vehicles, computer hardware and other fixtures owned by the consolidated entities or acquired under finance leases. Tangible assets are classified by use as follows:

i. Property, plant and equipment for own use

Property, plant and equipment for own use -including tangible assets received by the consolidated entities in full or partial satisfaction of financial assets representing receivables from third parties which are intended to be held for continuing use and tangible assets acquired under finance leases- are presented at acquisition cost, less the related accumulated depreciation and any impairment losses (net carrying amount higher than recoverable amount).

Depreciation is calculated, using the straight-line method, on the basis of the acquisition cost of the assets less their residual value. The land on which the buildings and other structures stand has an indefinite life and, therefore, is not depreciated.

The tangible asset depreciation charge is recognized in the consolidated income statement and is calculated basically using the following depreciation rates (based on the average years of estimated useful life of the various assets):


		Annual
		Rate

Buildings for own use		2
Furniture		7.5 to 10
Fixtures		6 to 10
Office and IT equipment		10 to 25
Leasehold improvements		5 to 10

The consolidated entities assess at the reporting date whether there is any indication that an asset may be impaired (i.e. its carrying amount exceeds its recoverable amount). If this is the case, the carrying amount of the asset is reduced to its recoverable amount and future depreciation charges are adjusted in proportion to the revised carrying amount and to the new remaining useful life (if the useful life has to be re-estimated).

Similarly, if there is an indication of a recovery in the value of a tangible asset, the consolidated entities recognize the reversal of the impairment loss recognized in prior periods and adjust the future depreciation charges accordingly. In no circumstances may the reversal of an impairment loss on an asset raise its carrying amount above that which it would have if no impairment losses had been recognized in prior years.

The estimated useful lives of the items of property, plant and equipment for own use are reviewed at least at the end of the reporting period with a view to detecting significant changes therein. If changes are detected, the useful lives of the assets are adjusted by correcting the depreciation charge to be recognized in the consolidated income statement in future years on the basis of the new useful lives.

Upkeep and maintenance expenses relating to property, plant and equipment for own use are recognized as an expense in the period in which they are incurred.

ii. Investment property

“Investment property” reflects the net values of the land, buildings and other structures held either to earn rentals or for capital appreciation.

The criteria used to recognize the acquisition cost of investment property, to calculate its depreciation and its estimated useful life and to recognize any impairment losses thereon are consistent with those described in relation to property, plant and equipment for own use.

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iii. Assets leased out under an operating lease

“Property, plant and equipment — Leased out under an operating lease” reflects the amount of the tangible assets, other than land and buildings, leased out by the Group under an operating lease.

The criteria used to recognize the acquisition cost of assets leased out under operating leases, to calculate their depreciation and their respective estimated useful lives and to recognize the impairment losses thereon are consistent with those described in relation to property, plant and equipment for own use.

Accounting for leases

i. Finance leases

Finance leases are leases that transfer substantially all the risks and rewards incidental to ownership of the leased asset to the lessee.

When the consolidated entities act as the lessors of an asset, the sum of the present value of the lease payments receivable from the lessee plus the guaranteed residual value -which is generally the exercise price of the purchase option of the lessee at the end of the lease term- is recognized as lending to third parties and is therefore included under “Loans and receivables” in the consolidated balance sheet.

When the consolidated entities act as the lessees, they present the cost of the leased assets in the consolidated balance sheet, based on the nature of the leased asset, and, simultaneously, recognize a liability for the same amount (which is the lower of the fair value of the leased asset and the sum of the present value of the lease payments payable to the lessor plus, if appropriate, the exercise price of the purchase option). The depreciation policy for these assets is consistent with that for property, plant and equipment for own use.

In both cases, the finance income and finance expense arising from these contracts is credited and debited, respectively, to “Interest and similar income” and “Interest expense and similar charges” in the consolidated income statement so as to achieve a constant rate of return over the lease term.

ii. Operating leases

In operating leases, ownership of the leased asset and substantially all the risks and rewards incidental thereto remain with the lessor.

When the consolidated entities act as the lessors, they present the acquisition cost of the leased assets under “Tangible assets” (see Note 16). The depreciation policy for these assets is consistent with that for similar items of property, plant and equipment for own use and income from operating leases is recognized on a straight-line basis under “Other operating income” in the consolidated income statement.

When the consolidated entities act as the lessees, the lease expenses, including any incentives granted by the lessor, are charged on a straight-line basis to “Other general administrative expenses” in their consolidated income statements.

iii. Sale and leaseback transactions

In the case of sale at fair value and operating leasebacks, the profit or loss generated is recognized at the time of sale. In the case of finance leasebacks, the profit or loss generated is amortized over the lease term.

Under IFRS (IAS 17), in order for a given transaction to qualify as a sale and leaseback, the repurchase option needs to be assessed to determine whether there is reasonable certainty at the beginning of the operating lease term that it will be exercised, and to whom the gains and losses in fluctuations of fair value of the residual value flow. After completing such assessment of the transaction, we concluded that there is no reasonable certainty that the repurchase option will be exercised, because it is at fair value, and there are no other indicators that we expect would economically force us to exercise the repurchase option; thus we concluded to use sale and lease-back accounting under IFRS.

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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 consolidated entities. Only assets whose cost can be estimated reliably and from which the consolidated entities consider it probable that future economic benefits will be generated are recognized.

Intangible assets are recognized initially at acquisition or production cost and are subsequently measured at cost less any accumulated amortization and any accumulated impairment losses.

i. Goodwill

Any excess of the cost of the investments in the consolidated entities and entities accounted for using the equity method over the corresponding underlying carrying amounts acquired, adjusted at the date of first-time consolidation, is allocated as follows:

•

If it is attributable to specific assets and liabilities of the companies acquired, by increasing the value of the assets (or reducing the value of the liabilities) whose fair values were higher (lower) than the carrying amounts at which they had been recognized in the balance sheets of the acquirees.

•

If it is attributable to specific intangible assets, by recognizing it explicitly in the consolidated balance sheet provided that the fair value of these assets within 12 months following the date of acquisition can be measured reliably.

•

The remaining amount is recognized as goodwill, which is allocated to one or more specific cash-generating units (a cash generating unit is the smallest identifiable group of assets that, as a result of continuing operation, generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets). The cash-generating units primarily represent the Group’s geographical and/or business segments.

Goodwill -which is only recognized when it has been acquired for consideration- 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 when a triggering event occurs goodwill is reviewed for impairment (i.e. a reduction in its recoverable amount to below its carrying amount) and any impairment is written down with a charge to “Impairment losses on other assets (net) — Goodwill and other intangible assets” in the consolidated income statement.

An impairment loss recognized for goodwill is not reversed in a subsequent period.

ii. Other intangible assets

“Other intangible assets” includes the amount of identifiable intangible assets (such as purchased customer lists and computer software).

Other intangible assets can have an indefinite useful life -when, based on an analysis of all the relevant factors, it is concluded that there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the consolidated entities- or a finite useful life, in all other cases.

Intangible assets with indefinite useful lives are not amortized, but rather at the end of each reporting period or when a triggering event occurs the consolidated entities review the remaining useful lives of the assets in order to determine whether they continue to be indefinite and, if this is not the case, to take the appropriate steps.

Intangible assets with finite useful lives are amortized over those useful lives using methods similar to those used to depreciate tangible assets.

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The intangible asset amortization charge is recognized under “Depreciation and amortization” in the consolidated income statement.

In both cases the consolidated entities recognize any impairment loss on the carrying amount of these assets with a charge to “Impairment losses on other assets” in the consolidated income statement. The criteria used to recognize the impairment losses on these assets and, where applicable, the reversal of impairment losses recognized in prior years are similar to those used for tangible assets (see Note 2-k).

Internally developed computer software

Internally developed computer software is recognized as an intangible asset if, among other requisites (basically the Group’s ability to use or sell it), it can be identified and its ability to generate future economic benefits can be demonstrated.

Expenditure on research activities is recognized as an expense in the year in which it is incurred and cannot be subsequently capitalized.

Other assets

“Other assets” in the consolidated balance sheet includes the amount of assets not recorded in other items, the breakdown being as follows:

•

Inventories: this item includes the amount of assets, other than financial instruments, that are held for sale in the ordinary course of business, that are in the process of production, construction or development for such purpose, or that are to be consumed in the production process or in the provision of services. “Inventories” includes land and other property held for sale in the property development business.

Inventories are measured at the lower of cost and net realizable value, which is the estimated selling price of the inventories in the ordinary course of business, less the estimated costs of completion and the estimated costs required to make the sale.

Any write-downs of inventories -such as those due to damage, obsolescence or reduction of selling price- to net realizable value and other impairment losses are recognized as expenses for the year in which the impairment or loss occurs. Subsequent reversals are recognized in the consolidated income statement for the year in which they occur.

The carrying amount of inventories is derecognized and recognized as an expense in the period in which the revenue from their sale is recognized.

•

Other: this item includes the balance of all prepayments and accrued income (excluding accrued interest), the net amount of the difference between pension plan obligations and the value of the plan assets with a balance in the entity’s favor, when this net amount is to be reported in the consolidated balance sheet, and the amount of any other assets not included in other items.

ñ)

Other liabilities

“Other liabilities” includes the balance of all accrued expenses and deferred income, excluding accrued interest, and the amount of any other liabilities not included in other categories.

Provisions and contingent assets and liabilities

The directors of the consolidated entities, in preparing their respective financial statements, made a distinction between:

•

Provisions: credit balances covering present obligations at the balance sheet date arising from past events which could give rise to a loss for the consolidated entities, which is considered to be likely to occur and certain as to its nature but uncertain as to its amount and/or timing.

•

Contingent liabilities: possible obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more future events not wholly within the control of the consolidated entities. They include the present obligations of the consolidated entities when it is not probable that an outflow of resources embodying economic benefits will be required to settle them.

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•

Contingent assets: possible assets that arise from past events and whose existence is conditional on, and will be confirmed only by, the occurrence or non-occurrence of events beyond the control of the Group. Contingent assets are not recognized in the consolidated balance sheet or in the consolidated income statement, but rather are disclosed in the notes, provided that it is probable that these assets will give rise to an increase in resources embodying economic benefits.

The Group’s consolidated financial statements include all the material provisions with respect to which it is considered that it is more likely than not that the obligation will have to be settled. In accordance with accounting standards, contingent liabilities must not be recognized in the consolidated financial statements, but must rather be disclosed in the notes. In this respect, the financial statements of Abbey disclose the contingent liability arising from the claims made by the customers of the main UK financial institutions in relation to certain fees and commissions charged by them.

Provisions, which are quantified on the basis of the best information available on the consequences of the event giving rise to them and are reviewed and adjusted at the end of each year, are used to cater for the specific obligations for which they were originally recognized. Provisions are fully or partially reversed when such obligations cease to exist or are reduced.

Provisions are classified according to the obligations covered as follows:

•

Provisions for pensions and similar obligations: includes the amount of all the provisions made to cover post-employment benefits, including obligations to early retirees and similar obligations.

•

Provisions for contingent liabilities and commitments: includes the amount of the provisions made to cover contingent liabilities -defined as those transactions in which the Group guarantees the obligations of a third party, arising as a result of financial guarantees granted or contracts of another kind- and contingent commitments -defined as irrevocable commitments that may give rise to the recognition of financial assets.

•

Provisions for taxes and other legal contingencies and Other provisions: include the amount of the provisions recognized to cover tax and legal contingencies and litigation and the other provisions recognized by the consolidated entities. “Other provisions” includes, inter alia, any provisions for restructuring costs and environmental measures (see Note 25).

Litigation and/or claims in process

In addition to the disclosures made in Note 1, at the end of 2008 certain litigation and claims were in process against the consolidated entities arising from the ordinary course of their operations (see Note 25).

Own equity instruments

Own equity instruments are those meeting both of the following conditions:

•

The instruments do not include any contractual obligation for the issuer: (i) to deliver cash or another financial asset to a third party; or (ii) to exchange financial assets or financial liabilities with a third party under conditions that are potentially unfavorable to the issuer.

•

The instruments will or may be settled in the issuer’s own equity instruments and are: (i) a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or (ii) a derivative that will be settled by the issuer through the exchange of a fixed amount of cash or another financial asset for a fixed number of its own equity instruments.

Transactions involving own equity instruments, including their issuance and cancellation, are deducted from equity.

Changes in the value of instruments classified as own equity instruments are not recognized in the consolidated financial statements. Consideration received or paid in exchange for such instruments are directly added to or deducted from equity.

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Equity-instrument-based employee remuneration

Equity instruments delivered to employees in consideration for their services, if the instruments are delivered once the specific period of service has ended, are recognized as an expense for services (with the corresponding increase in equity) as the services are rendered by employees during the service period. At the grant date the services received (and the related increase in equity) are measured at the fair value of the equity instruments granted. If the equity instruments granted are vested immediately, the Group recognizes in full, at the grant date, the expense for the services received.

When the requirements stipulated in the remuneration agreement include external market conditions (such as equity instruments reaching a certain quoted price), the amount ultimately to be recognized in equity will depend on the other conditions being met by the employees (normally length of service requirements), irrespective of whether the market conditions are satisfied. If the conditions of the agreement are met but the external market conditions are not satisfied, the amounts previously recognized in equity are not reversed, even if the employees do not exercise their right to receive the equity instruments.

Recognition of income and expenses

The most significant criteria used by the Group to recognize its income and expenses are summarized as follows:

i. Interest income, interest expenses and similar items

Interest income, interest expenses and similar items are generally recognized on an accrual basis using the effective interest method. Dividends received from other companies are recognized as income when the consolidated entities’ right to receive them arises.

However, the recognition of accrued interest in the consolidated income statement is suspended for debt instruments individually classified as impaired and for the instruments for which impairment losses have been assessed collectively because they have payments more than three months past due. This interest is recognized as income, when collected, as a reversal of the related impairment losses.

ii. Commissions, fees and similar items

Fee and commission income and expenses are recognized in the consolidated income statement using criteria that vary according to their nature. The main criteria are as follows:

•

Fee and commission income and expenses relating to financial assets and financial liabilities measured at fair value through profit or loss are recognized when paid.

•

Those arising from transactions or services that are performed over a period of time are recognized over the life of these transactions or services.

•

Those relating to services provided in a single act are recognized when the single act is carried out.

iii. Non-finance income and expenses

These are recognized for accounting purposes on an accrual basis.

iv. Deferred collections and payments

These are recognized for accounting purposes at the amount resulting from discounting the expected cash flows at market rates.

v. Loan arrangement fees

Loan arrangement fees, mainly loan origination and application fees, are accrued and recognized in income over the term of the loan. In the case of loan origination fees, the portion relating to the associated direct costs incurred in the loan arrangement is recognized immediately in the consolidated income statement.

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Financial guarantees

“Financial guarantees” are defined as contracts whereby an entity undertakes to make specific payments for a third party if the latter does not do so, irrespective of the various legal forms they may have, such as guarantees, irrevocable documentary credits issued or confirmed by the entity, etc.

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 similar interest receivable from these contracts over the term thereof, and simultaneously the Group recognizes, on the asset side of the consolidated balance sheet, the amount of the fees, commissions and interest received at the start of the transactions and the amounts receivable at the present value of the fees, commissions and interest receivable.

Financial guarantees, regardless of the guarantor, instrumentation or other circumstances, are reviewed periodically so as to determine the credit risk to which they are exposed and, if appropriate, to consider whether a provision is required. The credit risk is determined by application of criteria similar to those established for quantifying impairment losses on debt instruments measured at amortized cost as described in section g) above.

The provisions made for these transactions are recognized under “Provisions — Provisions for contingent liabilities and commitments” in the consolidated balance sheet (see Note 25). These provisions are recognized and reversed with a charge or credit, respectively, to “Provisions (net)” in the consolidated income statement.

If a specific provision is required for financial guarantees, the related unearned commissions recognized under “Financial liabilities at amortized cost — Other financial liabilities” in the consolidated balance sheet are reclassified to the appropriate provision.

Assets under management and investment and pension funds managed by the Group

Assets owned by third parties and managed by the consolidated entities are not presented on the face of the consolidated balance sheet. Management fees are included in “Fee and commission income” in the consolidated income statement. Note 36-b contains information on the third-party assets managed by the Group.

The investment funds and pension funds managed by the consolidated entities are not presented on the face of the Group’s consolidated balance sheet since the related assets are owned by third parties. The fees and commissions earned in the year for the services rendered by the Group entities to these funds (asset management and custody services) are recognized under “Fee and commission income” in the consolidated income statement.

Post-employment benefits

Under the collective labor agreements currently in force and other arrangements, the Spanish banks included in the Group and certain other Spanish and foreign consolidated entities have undertaken to supplement the public social security system benefits accruing to certain employees, and to their beneficiary right holders, for retirement, permanent disability or death, the benefits and indemnity payments payable, the contributions to employee welfare systems for early retirees and the post-employment welfare benefits.

The Group’s post-employment obligations to its employees are deemed to be “defined contribution plans” when the Group makes pre-determined contributions (recognized in “Staff costs” in the consolidated income statement) to a separate entity and will have no legal or effective obligation to make further contributions if the separate entity cannot pay the employee benefits relating to the service rendered in the current and prior periods. Post-employment obligations that do not meet the aforementioned conditions are classified as “defined benefit plans” (see Note 25).

Defined contribution plans

The contributions made in this connection in each year are recognized under “Staff costs” in the consolidated income statement. The amounts not yet contributed at each year-end are recognized, at their present value, under “Provisions — Provisions for pensions and similar obligations” on the liability side of the consolidated balance sheet.

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Defined benefit plans

The Group recognizes under “Provisions — Provisions for pensions and similar obligations” on the liability side of the consolidated balance sheet (or under “Other assets” on the asset side, as appropriate) the present value of its defined benefit post-employment obligations, net of the fair value of the plan assets and of the net unrecognized cumulative actuarial gains and/or losses disclosed in the valuation of these obligations, which are deferred using a corridor approach, and net of the past service cost, which is deferred over time, as explained below.

“Plan assets” are defined as those that will be directly used to settle obligations and that meet the following conditions:

•

They are not owned by the consolidated entities, but by a legally separate third party that is not a party related to the Group.

•

They can only be used to pay or finance post-employment benefits and cannot be returned to the consolidated entities unless the assets remaining in the plan are sufficient to meet all obligations of the plan and of the entity relating to current or former employee benefits, or to reimburse employee benefits already paid by the Group.

If the Group can look to an insurer to pay part or all of the expenditure required to settle a defined benefit obligation, and it is practically certain that said insurer will reimburse some or all of the expenditure required to settle that obligation, but the insurance policy does not qualify as a plan asset, the Group recognizes its right to reimbursement as an asset item in the consolidated balance sheet under “Insurance contracts linked to pensions”, which, in all other respects, is treated as a plan asset.

“Actuarial gains and losses” are defined as those arising from differences between the previous actuarial assumptions and what has actually occurred and from the effects of changes in actuarial assumptions. The Group uses, on a plan-by-plan basis, the corridor method and recognizes in the consolidated income statement the amount resulting from dividing by five the net amount of the cumulative actuarial gains and/or losses not recognized at the beginning of each year which exceeds 10% of the present value of the obligations or 10% of the fair value of the plan assets at the beginning of the year, whichever amount is higher. The maximum five-year allocation period, which is required by the Bank of Spain for all Spanish financial institutions, is shorter than the average number of remaining years of active service relating to the employees participating in the plans, and is applied systematically.

The “past service cost” -which arises from changes to current post-employment benefits or from the introduction of new benefits- is recognized on a straight-line basis in the consolidated income statement over the period from the time the new commitments arise to the date on which the employee has an irrevocable right to receive the new benefits.

Post-employment benefits are recognized in the consolidated income statement as follows:

•

Current service cost -defined as the increase in the present value of the obligations resulting from employee service in the current period-, under “Staff costs”.

•

Interest cost -defined as the increase during the year in the present value of the obligations as a result of the passage of time-, under “Interest expense and similar charges”. When obligations are presented on the liability side of the consolidated balance sheet, net of the plan assets, the cost of the liabilities recognized in the income statement relates exclusively to the obligations recognized as liabilities.

•

The expected return on plan assets and the gains or losses on the value of the plan assets under “Interest and similar income”.

•

The actuarial gains and losses calculated using the corridor approach and the unrecognized past service cost, under “Provisions (net)” in the consolidated income statement.

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Other long-term employee benefits

“Other long-term employee benefits”, defined as obligations to early retirees -taken to be those who have ceased to render services at the entity but who, without being legally retired, continue to have economic rights vis-à-vis the entity until they acquire the legal status of retiree-, long-service bonuses, obligations for death of spouse or disability before retirement that depend on the employee’s length of service at the entity and other similar items, are treated for accounting purposes, where applicable, as established above for defined benefit post-employment plans, except that all past service costs and actuarial gains and losses are recognized immediately (see Note 25).

Termination benefits

Termination benefits are recognized when there is a detailed formal plan identifying the basic changes to be made, provided that implementation of the plan has begun, its main features have been publicly announced or objective facts concerning its implementation have been disclosed.

Income tax

The expense for Spanish corporation tax and other similar taxes applicable to the foreign consolidated entities is recognized in the consolidated income statement, except when it results from a transaction recognized directly in equity, in which case the tax effect is also recognized in equity.

The current income tax expense is calculated as the sum of the current tax resulting from application of the appropriate tax rate to the taxable profit for the year (net of any deductions allowable for tax purposes), and of the changes in deferred tax assets and liabilities recognized in the consolidated income statement.

Deferred tax assets and liabilities include temporary differences, which are identified as the amounts expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities and their related tax bases, and tax loss and tax credit carryforwards. These amounts are measured at the tax rates that are expected to apply in the period when the asset is realized or the liability is settled.

“Tax assets” includes the amount of all tax assets, which are broken down into “current” -amounts of tax to be recovered within the next twelve months- and “deferred” -amounts of tax to be recovered in future years, including those arising from unused tax losses or tax credits.

“Tax liabilities” includes the amount of all tax liabilities (except provisions for taxes), which are broken down into “current” -the amount payable in respect of the income tax on the taxable profit for the year and other taxes in the next twelve months- and “deferred” -the amount of income tax payable in future years.

Deferred tax liabilities are recognized in respect of taxable temporary differences associated with investments in subsidiaries, associates or joint ventures, except when the Group is able to control the timing of the reversal of the temporary difference and, in addition, it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax assets are only recognized for temporary differences to the extent that it is considered probable that the consolidated entities will have sufficient future taxable profits against which the deferred tax assets can be utilized, and the deferred tax assets do not arise from the initial recognition (except in a business combination) of other assets and liabilities in a transaction that affects neither taxable profit or accounting profit. Other deferred tax assets (tax loss and tax credit carryforwards) are only recognized if it is considered probable that the consolidated entities will have sufficient future taxable profits against which they can be utilized.

Income and expenses recognized directly in equity are accounted for as temporary differences.

The deferred tax assets and liabilities recognized are reassessed at each balance sheet date in order to ascertain whether they still exist, and the appropriate adjustments are made on the basis of the findings of the analyses performed.

F-51

Law 35/2006, of November 28, on personal income tax and partially amending the Spanish Corporation Tax, Non-resident Income Tax and Wealth Tax Laws, establishes, inter alia, a reduction over two years of the standard tax rate for Spanish corporation tax purposes, which until December 31, 2006 was 35%, as follows:


Tax Periods Beginning on or after	Tax Rate

January 1, 2007		32.5	%
January 1, 2008		30.0	%

Accordingly, in 2006 the Group estimated the deferred tax assets and liabilities and the tax credit and tax loss carryforwards recognized in the consolidated balance sheet, taking into account the year in which the related reversal will foreseeably take place. As a result, a net charge of €491 million relating to 2006 was recognized under “Income tax” in the consolidated income statement (see Note 27).

Residual maturity periods and average interest rates

The analysis of the maturities of the balances of certain items in the consolidated balance sheets and the average interest rates at 2008, 2007 and 2006 year-end is provided in Note 51.

aa)

Consolidated cash flow statements

The following terms are used in the consolidated cash flow statements 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.

•

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.

In preparing the consolidated cash flow statement, short-term highly liquid investments that are subject to an insignificant risk of changes in value were classified as “Cash and cash equivalents”. Accordingly, the Group classifies as cash and cash equivalents the balances recognized under “Cash and balances with central banks” in the consolidated balance sheet.

ab)

Consolidated statement of changes in equity

The consolidated statement of changes in equity presented in these consolidated financial statements shows the total changes in consolidated equity in the year. This information is in turn presented in two statements: the consolidated statement of recognized income and expense and the consolidated statement of changes in total equity. The main characteristics of the information contained in the two parts of the statement are explained below:

Consolidated statement of recognized income and expense

This part of the consolidated statement of changes in equity presents the income and expenses generated by the Group as a result of its business activity in the year, and a distinction is made between the income and expenses recognized in the consolidated income statement for the year and the other income and expenses recognized directly in consolidated equity.

Accordingly, this statement presents:

Consolidated profit for the year.

The net amount of the income and expenses recognized temporarily in consolidated equity under “Valuation Adjustments”.

The net amount of the income and expenses recognized definitively in consolidated equity.

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The income tax incurred by 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 recognized income and expense, calculated as the sum of the items in a) to d) above, presenting separately the amount attributable to the Parent and the amount relating to minority interests.

The amount of the income and expenses relating to entities accounted for using the equity method recognized directly in equity is presented in this statement, irrespective of its nature, under “Entities accounted for using the equity method”.

Statement of changes in total equity

This part of the statement of changes in equity 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 any changes are grouped together on the basis of their nature into the following items:

Adjustments due to changes in accounting policy and adjustments made to correct errors: include the changes in consolidated equity arising as a result of the retrospective restatement of the balances in the consolidated financial statements due to changes in accounting policy or 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: includes the remaining items recognized in equity, including, inter alia, increases and decreases in the endowment fund, distribution of profit, transactions involving own equity instruments, equity-instrument-based payments, transfers between equity items and any other increases or decreases in consolidated equity.

Santander Group

Banco Santander, S.A. and international Group structure

The growth of the Group in the last decade has led the Bank to also act, in practice, as a holding entity of the shares of the various companies in its Group, and its results are becoming progressively less representative of the performance and earnings of the Group. Therefore, each year the Bank determines the amount of the dividends to be distributed to its shareholders on the basis of the consolidated net profit, while maintaining the Group’s traditionally high level of capitalization and taking into account that the transactions of the Bank and of the rest of the Group are managed on a consolidated basis (notwithstanding the allocation to each company of the related net worth effect).

At international level, the various banks and other subsidiaries, jointly controlled entities and associates of the Group are integrated in a corporate structure comprising various holding companies which are the ultimate shareholders of the banks and subsidiaries abroad.

The purpose of this structure, all of which is controlled by the Bank, is to optimize the international organization from the strategic, economic, financial and tax standpoints, since it makes it possible to define the most appropriate units to be entrusted with acquiring, selling or holding stakes in other international entities, the most appropriate financing method for these transactions and the most appropriate means of remitting the profits obtained by the Group’s various operating units to Spain.

The Exhibits provide relevant data on the consolidated Group companies and on the companies accounted for using the equity method.

ABN AMRO Holding N.V. (“ABN AMRO”)

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

F-53

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

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

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

At December 31, 2007, the investment made by the Bank amounted to €20,615 million and consisted of the Bank’s 27.9% ownership interest in the share capital of RFS Holdings B.V., the holding entity of the shares of ABN AMRO.

Following all these actions, the spin-off of the business lines of ABN AMRO commenced with a view to their subsequent integration into each of the Banks. The following correspond to Banco Santander: the Latin American Business Unit of ABN AMRO -basically Banco ABN AMRO Real S.A. (“Banco Real”) in Brazil-, the Banca Antoniana Popolare Veneta Spa Banking Group (“Antonveneta”), the cash relating to the sale of the consumer banking unit of ABN AMRO in the Netherlands -Interbank and DMC Consumer Finance, plus 27.9% of the assets that were not allocated to any of the Banks of the consortium and which are intended to be disposed of. The spin-off process continued in 2008.

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

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

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

Also, on May 30, 2008 Banco Santander and Banca Monte dei Paschi di Siena announced the completion of the purchase and sale of Antonveneta (excluding Interbanca, its corporate banking subsidiary) for €9,000 million, in execution of the agreement announced on November 8, 2007 which was only subject to approval by the competent authorities.

On June 2, 2008, Banco Santander entered into a definitive agreement with General Electric whereby a General Electric Group company would acquire Interbanca and various Santander Group entities would acquire the GE Money units in Germany, Finland and Austria, GE’s card units in the UK and Ireland and its car finance unit in the UK. The base price agreed for the two transactions is €1,000 million each, subject to various adjustments. These transactions were completed with the acquisition of GE Germany in the fourth quarter of 2008 and the acquisition of the remaining GE units and the sale of Interbanca in the first quarter of 2009.

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

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

On September 22, 2008, RFS completed the squeeze-out of the minority shareholders of ABN AMRO through the payment of €712 million to these shareholders. Consequently, from that date RFS has been the sole shareholder of ABN AMRO. Banco Santander had to pay €200 million to complete this process, on the basis of its ownership interest in RFS.

F-54

Banco Real was fully consolidated in the Group’s financial statements in the fourth quarter of 2008; previously it had been accounted for using the equity method through the ownership interest in RFS Holding. Accordingly, the Group’s income statement includes all the results contributed to the Group by this entity from 1 January 2008. The volume of assets that Banco Real contributed to the Group amounted to approximately €44,000 million, based on the exchange rate ruling at year-end. The amounts of the main assets, liabilities and contingent liabilities contributed to the Group by this entity are detailed in the related notes to these consolidated financial statements.

The goodwill at the date of acquisition assigned to Banco Real following all the aforementioned transactions amounted to €8,000 million (€6,446 million at the exchange rate prevailing at 2008 year-end).

Acquisitions and disposals

In addition to the transactions detailed above, the other main equity investments acquired and sold by the Group in 2008, 2007 and 2006 and other significant corporate transactions were as follows:

i. Abbey’s insurance business

In June 2006 Abbey entered into an agreement with Resolution plc (“Resolution”) to sell its life insurance business to the latter for €5,340 million (GBP 3,600 million). The transaction did not give rise to any gains for the Group.

The main insurance companies sold were Scottish Mutual Assurance plc, Scottish Provident Limited and Abbey National Life plc, including their subsidiaries Scottish Mutual International plc (Dublin) and Scottish Provident International Life Assurance Limited (Isle of Man).

ii. Interbanco, S.A. (Interbanco)

In September 2005 the Group and the Portuguese company SAG (Soluções Automóvel Globais) reached an agreement to jointly provide consumer finance and vehicle financing services in Portugal and operate the vehicle full-service lease (“renting”) business in Spain and Portugal.

In January 2006 the Group paid €118 million for a 50.001% interest in the share capital of Interbanco.

At the beginning of 2007 the Group acquired an additional 9.999% of Interbanco through the integration in the latter of the branches of Santander Consumer EFC, S.A. and Santander Consumer Finance, S.A. located in Portugal. As a result, Interbanco changed its name to Banco Santander Consumer Portugal, S.A. Following this transaction, by virtue of the initial purchase agreements, the Group acquired the remaining 40% of this entity for €138 million. These transactions gave rise to goodwill of €74 million. At December 31, 2007, the Group owned all the shares of Banco Santander Consumer Portugal, S.A.

iii. Compañía Española de Petróleos, S.A. (Cepsa)

In 2003 the Bank launched a takeover bid for up to 42,811,991 Cepsa shares, and the offer was accepted for 32,461,948 shares, representing an investment of €909 million.

Total, S.A. considered that the takeover bid breached historical shareholder agreements between it (or its subsidiary, Elf Aquitaine, S.A.-Elf) and the Bank in relation to Cepsa and, accordingly, filed a request for arbitration at the Netherlands Court of Arbitration.

On April 3, 2006, the partial award rendered by the Arbitral Tribunal which, in the framework of the Netherlands Arbitration Institute, resolved the request for arbitration filed by Total, S.A. against the Bank was notified to the parties. The Tribunal considered that the shareholder agreements contained in the agreements relating to Cepsa between the Bank and Total, S.A. (or its subsidiary, Elf) were rendered invalid by application of Transitional Provision Three of Law 26/2003, of July 17. However, the fact that the Bank launched the aforementioned takeover bid without prior consultation with Total, S.A. caused, in the opinion of the Tribunal, an insurmountable disagreement between the two parties which, in application of the part of the agreements that was not rendered invalid, entitled Total, S.A. to repurchase from the Bank a 4.35% ownership interest in Cepsa at the price established in the agreements.

F-55

Also, the aforementioned partial award ordered the dissolution of Somaen-Dos, S.L. (Sole-Shareholder Company), the sole company object of which was the holding of ownership interests in Cepsa, with a view to each shareholder recovering direct ownership of their respective Cepsa shares, in accordance with the agreements entered into between the Bank and Total, S.A. (or its subsidiary, Elf). To this end, on August 2, 2006, Banco Santander, S.A. and Riyal, S.L. entered into two agreements with Elf Aquitaine, S.A. and Odival, S.A., on the one hand, and with Unión Fenosa, S.A., on the other, to enforce the partial award and separate the ownership interests that they each held in Cepsa through Somaen-Dos, S.L.

On October 13, 2006, Elf received notification from the European Commission communicating the authorization of the concentration resulting from the acquisition by Elf of shares representing 4.35% of the share capital of Cepsa. Consequently, the Group sold 11,650,893 Cepsa shares to Elf for €53 million. This disposal gave rise to a loss of €158 million which was covered by a provision recognized for this purpose.

At December 31, 2008, the directors of the Bank classified the 32.5% ownership interest held in Compañía Española de Petróleos, S.A. (Cepsa) as a non-current asset held for sale, since it intended to recover the value of the investment through the sale thereof in the short term (see Note 12).

iv. Sovereign Bancorp Inc. (Sovereign)

In October 2005 the Group reached an agreement with Sovereign, an entity located in the United States, for the acquisition of a 19.8% stake in the US bank.

Under this agreement the Group subscribed to a USD 1,931 million capital increase and purchased treasury shares amounting to approximately USD 464 million, in both cases at USD 27 per share, giving rise to a total investment of USD 2,395 million (approximately €1,883 million) and goodwill amounting to USD 760 million.

This agreement entitled the Group to increase its ownership interest to 24.99% through the purchase of shares in the market, but, unless expressly authorized otherwise by the shareholders of Sovereign at an annual general meeting, the shares purchased for the purpose of this increase had to be deposited in a voting trust and its votes exercised in the same proportion as the votes of the shareholders of Sovereign other than Santander and its shareholders. On May 3, 2007, Sovereign’s shareholders approved an amendment to the entity’s Bylaws which, inter alia, authorizes Santander to exercise the vote relating to the shares held in the voting trust and any other Sovereign shares that Santander might acquire in the future. On May 16, 2007, the voting trust held 4.9% of the voting shares of Sovereign. Santander and Sovereign took the appropriate steps to terminate the voting trust and to transfer the shares held therein to Santander. As from June 6, 2007, Santander could exercise the voting right on 24.7% of Sovereign shares. Except with the consent of the board of directors of Sovereign or through the procedures described below, Santander could not increase its percentage of ownership to over 24.99% until the end of the period established by the Investment Agreement (June 1, 2010, unless a takeover bid is launched by the Group or by a third party before that date).

In 2007 the Group measured its ownership interest in Sovereign and adjusted its value by €1,053 million (see Note 13).

In May 2008 the Group participated in the capital increase carried out by Sovereign through the subscription of shares amounting to USD 312 million and, subsequently, in June 2008 the Bank acquired shares amounting to USD 43 million under the green shoe option.

Subsequently, as indicated in Note 1-h, on October 13, 2008 Banco Santander, S.A. and Sovereign Bancorp Inc, the parent of Sovereign Bank, announced that Banco Santander would acquire Sovereign through a share exchange. This acquisition was completed in January 2009.

v. Island Finance

In January 2006 the Group’s subsidiary in Puerto Rico (Santander BanCorp) and Wells Fargo & Company entered into a definitive agreement for the acquisition from the latter of the assets and operations of Island Finance in Puerto Rico. At December 31, 2005, Island Finance’s loans in Puerto Rico amounted to approximately USD 627 million.

The deal provided for the acquisition by the Group of all the operations of Island Finance, except for its debt and the remaining liabilities.

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The deal was completed in the first quarter of 2006 for USD 742 million, giving rise to goodwill of USD 114 million (see Note 17-a). In 2007, the Group assessed its ownership interest in Island Finance and adjusted the value of the investment by €14 million (see Note 17).

Island Finance provides consumer and mortgage lending to approximately 205,000 customers through its 70 branch offices in Puerto Rico, as well as installment sales through retail businesses. Island Finance belonged to Wells Fargo Financial, the consumer finance subsidiary of Wells Fargo & Company.

vi. Drive Consumer USA, Inc. (Drive)

In 2006 the Group entered into an agreement to acquire 90% of Drive for USD 637 million in cash (approximately €494 million), which is 6.8 times the estimated profit for 2006.

The transaction gave rise to goodwill of USD 544 million.

The agreement established that the price paid by the Group could be increased by up to USD 175 million if the company meets certain profit targets for 2007 and 2008. In July 2007, an agreement was reached for this payment to be made early in exchange for a reduction in its amount from USD 175 million to USD 135 million (€97 million), giving rise to additional goodwill for the amount disbursed.

Drive is one of the leading vehicle financing entities in the subprime segment in the United States. Its headquarters are located in Dallas (Texas), it is present in 35 states and close to 50% of its business activities are concentrated in the states of Texas, California, Florida and Georgia. It has approximately 600 employees and its products are distributed through more than 10,000 car dealers with which it has commercial agreements.

Drive was previously 64.5%-owned by HBOS plc and 35.5%-owned by management. Following the acquisition, the then chairman and COO of Drive performs the functions of CEO and holds an ownership interest in the company of 9%, a percentage on which there are certain purchase and sale options which might lead to the Group acquiring a further 9% stake between 2009 and 2013 at prices linked to the company’s earnings performance.

vii. Banco Santander Chile

In 2006 the Group placed 7.23% of the share capital of Banco Santander Chile through a public offering registered with the US Securities and Exchange Commission, giving rise to gross gains of €270 million (see Note 49) which are recognized under “Gains on disposal of assets not classified as non-current assets held for sale”.

viii. Merger

At the extraordinary general meeting of Banco Santander, S.A. held on October 23, 2006, the shareholders approved the merger of Riyal, S.L., Lodares Inversiones, S.L., Sole-Shareholder Company, Somaen-Dos, S.L., Sole-Shareholder Company, Gessinest Consulting, S.A., Sole-Shareholder Company, and Carvasa Inversiones, S.L., Sole-Shareholder Company (the absorbed entities) into Banco Santander, S.A. (the absorbing entity), through the dissolution without liquidation of the five absorbed entities and the transfer en bloc, by universal succession, of their assets and liabilities to Banco Santander, S.A.

ix. Inmobiliaria Urbis, S.A. (Urbis)

On July 27, 2006, the Group and Construcciones Reyal, S.A.U. (Reyal) entered into an agreement whereby Reyal undertook to launch a takeover bid for all the share capital of Urbis, at a price of €26 per share, provided that at least 50.267% of the share capital of Urbis was accepted. The Group undertook to transfer to Reyal all its ownership interest in Urbis and not to accept any competing offers. Upon completion of the terms stipulated by current legislation, on December 15, 2006, the Spanish National Securities Market Commission (CNMV) announced that the takeover bid was valid, since it had been accepted by 96.40% of the shares of Urbis. The transaction was definitively settled on December 21, 2006 and gave rise to pre-tax gains of €1,218 million (see Note 37).

F-57

x. Unifin S.p.A. (Unifin)

In May 2006 the Group acquired 70% of the Italian consumer finance entity Unifin for €44 million, giving rise to goodwill of €37 million.

xi. Banco Português de Investimento (BPI)

The Santander Group announced in January 2007 that it had entered into a definitive agreement with Banco Comercial Português (BCP) for the sale to this bank of 44.6 million shares of the Portuguese bank BPI, representing 5.87% of its share capital, at €5.70 per share, equal to that offered by BCP in the takeover bid launched by it on BPI, or at the higher price resulting from any upward revision of the offer price. The transaction was conditional upon the relevant regulatory authorizations being obtained.

The takeover bid was closed in May 2007 and was unsuccessful since the minimum acceptance level upon which it was conditional was not reached. The Bank of Portugal had established certain limits on BCP’s ownership interest in BPI in the event that the takeover bid failed. Ultimately, 35.5 million shares of BPI were sold to BCP, giving rise to gains of €107 million for the Group (see Note 44).

xii. Santander Consumer Chile, S.A.

Santander Consumer Finance and the Bergé Group, through its Chilean subsidiary SKBergé, a company formed by Sigdo Koppers and Bergé (SKB), reached a strategic agreement to set up a finance company in Chile, whereby Santander Consumer Finance will subscribe to between 90% and 51% of the share capital and SKBergé will subscribe to between 10% and 49% of the share capital. The new company, which operates under the name of Santander Consumer Chile, engages in consumer finance, focusing both on the automotive and other durable consumer goods industry and on the credit cards business. At December 31, 2007, Santander Consumer Finance had subscribed to 89% of the share capital of Santander Consumer Chile S.A. (with a disbursement of €13 million), the remaining 11% corresponding to SKBergé.

xiii. Orígenes AFJP, S.A. and Orígenes Seguros de Retiro, S.A.

In 2007 the Group entered into an agreement with ING Groep NV for the sale to the latter of the Group’s ownership interests in the pension fund manager Orígenes AFJP, S.A. and in Orígenes Seguros de Retiro, S.A., in Argentina, for USD 166 million (€112 million), giving rise to gross gains of €84 million for the Group (see Note 37).

xiv. Pension fund managers

In 2007 the Group completed the sale of its obligatory pension fund managers in Latin America to ING Groep NV for USD 1,314 million (€906 million), giving rise to a gross gain of €747 million (see Note 37). This transaction included the pension fund managers in Mexico (Afore Santander, S.A. de C.V.), Chile (AFP Bansander, S.A.), Colombia (AFP, Administradora de Fondos de Pensiones y Cesantías Santander, S.A.) and Uruguay (Afinidad AFAP, S.A.).

xv. CB Extrobank

In 2007 the Group acquired all the shares of the Russian bank CB Extrobank (currently JSC Santander Consumer Bank) for €48 million, giving rise to goodwill of €37 million.

xvi. Acquisition of the European consumer finance business from The Royal Bank of Scotland (RBS)

On July 1, 2008, the Group completed the acquisition (announced in the first quarter of 2008) of the consumer finance business of The Royal Bank of Scotland (RBS) in continental Europe, including its business activities in Germany, the Netherlands, Belgium and Austria. The price of this transaction amounted to €306 million, giving rise to goodwill of €85 million.

The RBS consumer finance unit in Europe (“RBS ECF”) provides services to 2.3 million customers. RBS ECF facilitates installment sales directly and through its partners. It has a significant presence in the credit card business in terms of both individual and corporate customers, and provides consumer finance through various distribution channels. The business acquired in Germany was included in Santander Consumer Bank in December 2008.

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xvii. Alliance & Leicester plc

On July 14, 2008, Banco Santander, S.A. and Alliance & Leicester plc entered into an agreement in relation to the terms of a recommended acquisition by Banco Santander, S.A. of the entire share capital, whether issued or yet to be issued, of Alliance & Leicester plc.

Under the aforementioned terms, the shareholders of Alliance & Leicester plc received one Banco Santander share for each three shares of Alliance & Leicester plc. Prior to the share exchange date, Alliance & Leicester approved and paid an interim dividend in cash amounting to 18 pence per share.

Key features of the acquisition

•

At the time of the announcement each Alliance & Leicester plc share was worth 299 pence, and the total issued share capital, approximately GBP 1,259 million, whereby the proposed exchange represented a premium of approximately 36.4% on the closing price at July 11, 2008. Considering the above interim dividend, the premium amounts to approximately 44.6% on the aforementioned closing price.

•

The acquisition affords the integration of the ancillary businesses of Alliance & Leicester and Abbey, thereby strengthening the competitive positioning of the products and services offered by the Group and benefiting its customers. It can be expected that the combined group will also benefit in terms of increased efficiency and that the borrowing costs relating to Alliance & Leicester may be reduced over time from the current high levels.

•

It will increase the critical mass of the Group’s business in the UK market, as part of our vertical strategy.

•

In-market cost synergies through the Group’s presence in the UK, estimated at GBP 180 million per year (before tax) at the end of 2011.

•

Complementary geographical nature of both distribution networks (Alliance & Leicester has a major presence in the Midlands and Abbey in the London area).

•

Abbey’s expansion process in the SMEs and retail business will be speeded up 2-3 years.

•

This transaction complies with the Santander Group’s financial requirements. It is anticipated that it will be accretive from 2009 onwards and that the ROI will be 19% in 2011. These estimates do not guarantee that Santander’s EPS will necessarily reach or exceed the levels achieved in prior years.

The acquisition was completed on October 10, 2008 through the issuance of 140,950,944 new Banco Santander shares of €0.50 par value each, with a share premium of €10.73 per share, and the capital increase amounted to €1,583 million (share capital: €70 million; share premium: €1,513 million), giving rise to goodwill of GBP 442 million (€554 million based on the exchange rate at the acquisition date).

This acquisition was performed by means of a scheme of arrangement and was approved by the shareholders of Banco Santander, S.A. (with respect to the capital increase) and of Alliance & Leicester plc. Additionally, the scheme of arrangement through which the acquisition was performed was approved by the competent UK court and the appropriate authorizations were obtained from the UK Financial Services Authority and the Bank of Spain.

Alliance & Leicester contributed total assets of approximately €79,000 million at year-end and did not contribute any results in 2008. The amounts of the main assets, liabilities and contingent liabilities contributed to the Group by this entity are detailed in the related notes to these consolidated financial statements.

In 2008 Alliance & Leicester did not contribute any results to the Group. The information on the results that this entity would have contributed to the Group had it been acquired on January 1, 2008 is not considered to be representative and, therefore, is not disclosed in these notes to the financial statements.

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xviii. Acquisition of the distribution channels and retail deposits of Bradford & Bingley

On September 29, 2008, further to the notification by the UK Treasury that Bradford & Bingley plc (B&B) would be taken into public ownership, the Group announced that the retail deposits, the branch network and the related employees would be acquired by Abbey National plc, under the terms and conditions of the Banking (Special Provisions) Act 2008.

According to the statements made by the UK Treasury, all the loans and advances to customers and treasury assets of B&B, including mortgage assets of GBP 41,000 million, have been taken into public ownership.

The following were transferred to Abbey:

•

Retail deposits totaling GBP 20,000 million; and

•

The direct distribution channels, including 197 commercial branches, 141 agencies (distribution points in third-party premises) and the related employees.

The acquisition price was GBP 612 million, including the transfer of GBP 208 million of capital relating to off-shore companies. The goodwill assigned to this business amounts to GBP 160 million (€202 million based on the exchange rate at the transaction date).

xix. Sale of Porterbrook Leasing Company

On December 8, 2008, Abbey National plc completed the disposal of Porterbrook, its leasing business, through the sale of all the shares of Porterbrook Leasing Company and its subsidiaries to a consortium of investors including Antin Infrastructure Partners (the infrastructure fund sponsored by BNP Paribas), Deutsche Bank and Lloyds TSB, and received approximately GBP 1,600 million in cash. This disposal gave rise to a gain of €50 million (GBP 40 million) recognized under “Gains on disposal of assets not classified as non-current assets held for sale” in the consolidated income statement (see Note 49).

* * * * *

The cost, total assets and gross income of the other consolidated companies acquired and disposed of in the last three years were not material with respect to the related consolidated totals.

Off-shore entities

(i) The Santander Group prior to the acquisitions in the UK and the acquisition of Sovereign

At December 31, 2008, the Group had ownership interests in the share capital of 17 subsidiaries resident in off-shore territories, of which only four are operational. Since 2005 the Group has reduced by 24 the number of units resident in off-shore territories.

The individual results of these subsidiaries, calculated in accordance with local accounting principles, are shown in the Exhibits to these notes to the consolidated financial statements together with other data thereon.

It should be noted that the individual results include transactions performed with other Group companies, such as dividend collection, recognition and reversal of provisions and corporate restructuring results which, in accordance with accounting standards, are eliminated on consolidation in order to avoid the duplication of profit or the recognition of intra-Group results. Individual results also include the profit attributable to the holders of preferred participating securities. Therefore, they are not representative of the Group’s operations in these countries or of the results contributed to the Santander Group.

These subsidiaries, whose activities are detailed below, contributed €193 million to the Group’s consolidated profit, operate mainly in the Bahamas and have a total of 120 employees.

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The business activities of these entities are classified into four categories, namely:

i. Operating subsidiaries engaging in banking or financial activities or in services

The subsidiaries engaging in banking or financial activities or in services at 2008 year-end were as follows:

•

Santander Bank and Trust, Ltd., a bank resident in the Bahamas which engages mainly in international private banking for foreign customers. It also handles investments in bonds and equities and financing transactions.

•

Banco Santander Bahamas International, Limited, an entity resident in the Bahamas which engages mainly in financing transactions and, to a much lesser extent, in equities trading.

•

Santander Investment Limited, a company resident in the Bahamas which is managed from the New York branch. It performs brokerage and investment activities in the US market, mainly related to Latin American fixed-income securities.

•

Santander Trade Services, Ltd. (Hong Kong), an intermediary in export documentary credits.

ii. Inactive, scantly active or mere asset holding subsidiaries

At 2008 year-end, the following companies were inactive or scantly active or mere asset holding companies:

•

Santander Merchant Bank, Limited (Bahamas), inactive.

•

Santander Investment Bank, Limited (Bahamas), a mere asset holding company.

•

Pan American Bank, Limited, a Bahamas-resident bank which is inactive.

•

Serfin International Bank and Trust, Limited (Cayman Islands), a bank which is virtually inactive.

•

Optimal Investment Services (Asia) Pte. Ltd., a commercial support entity resident in the Republic of Singapore.

•

Banco Santander (Panamá), S.A., which conducts a scant banking activity.

iii. Holding companies

The two holding companies (Holbah, Limited and Holbah II, Limited), which are resident in the Bahamas, basically hold investments in other Group companies abroad.

These companies do not perform any business activity other than equity investment management. Their assets consist mainly of permanent equity investments, cash and accounts receivable. They are funded through their own funds and Group loans.

iv. Issuing companies

The Group has five issuing companies located in the following jurisdictions:

Issuers of preferred participating securities:

•

Banesto Holdings, Ltd. (Guernsey)

•

Totta & Açores Financing, Limited (Cayman Islands)

Issuers of debt:

•

Santander Central Hispano Financial Services, Ltd. (Cayman Islands)

•

Santander Central Hispano International, Ltd. (Cayman Islands)

•

Santander Central Hispano Issuances, Ltd. (Cayman Islands)

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The preferred participating securities and subordinated debt issues launched by the aforementioned issuers were authorized by the Bank of Spain or the Bank of Portugal as computable for eligible capital calculation purposes. Once the issues launched by these issuers have been redeemed, these entities will be liquidated.

The results contributed to the Group in 2008 by the main subsidiaries described above, including those arising from their financial position, are detailed below:


Unit	Location	Millions of Euros

Santander Bank & Trust, Ltd.	Bahamas		185
Santander Investment Limited	Bahamas		3
Banco Santander Bahamas International, Limited	Bahamas		114
Holbah, Limited	Bahamas		(113	)
Holbah II, Limited	Bahamas		3

Additionally, the Group has six branches, one located in the Bahamas, one in the Netherlands Antilles, one in Hong Kong and three in the Cayman Islands (two of these branches were included in the acquisition of Banco Real, of which one was disposed of in February 2009). These branches report to, and consolidate their balance sheets and income statements with, their respective parents.

(ii) Off-shore entities included in the Group as a result of the acquisitions in the UK and of Sovereign

a) Abbey

At the date of Abbey’s incorporation in the Santander Group -November 2004- this bank had 41 units located in off-shore territories. At December 31, 2008, Abbey had 13 subsidiaries. These companies contributed an aggregate amount of €55 million to the Group’s consolidated profit. The individual results of these entities, which operate mainly in Jersey and have a total of 130 employees, are shown in the Exhibits to these notes to the consolidated financial statements.

Their grouping by line of business is as follows:

•

Insurance, carried on by two subsidiaries: James Hay Insurance Company Limited located in Jersey and resident in the UK for tax purposes, and Baker Street Risk and Insurance (Guernsey) Limited in Guernsey.

•

Issuance, carried on by two subsidiaries in Jersey: Abbey National GP (Jersey) Limited and AN Structured Issues Limited, resident in the UK for tax purposes.

•

Banking, performed by one subsidiary in Jersey: Abbey National International Limited.

•

Portfolio or mere asset holding business, conducted by four companies, of which three are located in Jersey -Abbey National Offshore Holdings Limited (resident in the UK for tax purposes), Abbey National Jersey International Limited (resident in the UK for tax purposes) and Brettwood Limited- and one in Gibraltar -Abbey National (Gibraltar) Limited (which was virtually inactive at year-end).

•

Also, four subsidiaries continued to be inactive at 2008 year-end. Two are resident in Jersey -Whitewick Limited and Cater Allen Trust Company (Jersey) Limited (now called Bluewick Limited)-, one in the Isle of Man -Abbey National Treasury International (IOM) Limited-, and one is domiciled in Guernsey and resident in the UK for tax purposes -Carfax (Guernsey) Limited.

Additionally, Abbey has three branches -one located in the Cayman Islands and two in the Isle of Man-, one of which is inactive and is pending liquidation. The balance sheets and income statements of these branches are consolidated with those of their respective parents.

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b) Alliance & Leicester and Bradford & Bingley

As a result of the acquisition of Alliance & Leicester and Bradford & Bingley in 2008, the Group acquired 19 subsidiaries which are classified, by activity, as follows:

•

Banking or financial activity, carried on by four subsidiaries acquired from Alliance & Leicester and by one subsidiary acquired from Bradford & Bingley: Alliance & Leicester Finance Company Limited, located in the Cayman Islands and resident in the UK for tax purposes; A&L CF (Guernsey) Limited, located in Guernsey and resident in the UK for tax purposes; Alliance & Leicester International Limited in the Isle of Man; Alliance & Leicester Trade Services Limited in Hong Kong; and Bradford & Bingley International Limited in the Isle of Man.

•

Leasing, carried on by seven subsidiaries, of which two are located in Jersey and resident in the UK for tax purposes -A&L CF (Jersey) Limited and A&L CF (Jersey) No. 2 Limited-, and five are located in Bermuda and resident in the UK for tax purposes -Sovereign Freeze Limited, Sovereign Hilli Limited, Sovereign Gimi Limited, Sovereign Khannnur Limited and Sovereign Spirit Limited.

•

Securitization fund management, carried on by two subsidiaries resident in Jersey: Fosse Trustees Limited and Langton Mortgages Trustee Limited.

•

Portfolio or mere asset holding business, conducted by four subsidiaries, of which two are located in Jersey and resident in the UK for tax purposes -Alliance & Leicester Investments (Derivatives No. 2) Limited and Giro Investments (Jersey) Limited-, one is located in the Cayman Islands and resident for tax purposes in the UK -Giro Investments Limited-, and one is resident in the Isle of Man -Alliance & Leicester International Holdings Limited.

•

There is also one inactive subsidiary located in Jersey and resident in the UK for tax purposes: SK Charter Hire (No.1) Limited.

Additionally, Alliance & Leicester plc. has one unoperational branch located in the Isle of Man. The balance sheet and income statement of this branch are consolidated with those of its parent.

c) Sovereign

Lastly, the recent acquisition of the Sovereign Group led to the inclusion in the Santander Group of three more operational off-shore subsidiaries (one in Hong Kong and two in the Cayman Islands) and one branch in the Cayman Islands.

(iii) Other entities and financial investments

The Group controls, from Brazil, a securitization special-purpose vehicle in the Cayman Islands, called Brazil Foreign Diversified Payment Rights Finance Company; it manages a protected cell company in Guernsey, called Guaranteed Investment Product 1 PCC, Ltd; and it holds a 14.56% ownership interest in Companhia Brasileira de Meios de Pagamento SA (Cayman Islands). Additionally, the Group has, directly or indirectly, various financial investments located in tax havens including, inter alia, Asiabridge Fund I LLC in Mauritius (21.24%), The HSH Coinvest (Cayman) Trust B in the Cayman Islands (13.47%), Olivant Limited in Guernsey (10.21%) and Algebris Global Financials Fund in the Cayman Islands (8.64%).

* * * * *

The Group has established the proper procedures and controls (risk management, supervision, verification and review plans and periodic reports) to prevent reputational and legal risk arising at these entities. Also, the Group has continued to implement its policy to reduce the number of off-shore units and plans to reduce the number as far as possible in the short term. The financial statements of the Group’s off-shore units are audited by member firms of the Deloitte worldwide organization.

F-63

Distribution of the Bank’s profit and earnings per share

	a)		*Distribution of the Bank’s profit*

			The distribution of the Bank’s net profit for 2008 that the board of directors proposed and the shareholders at the annual general meeting approved is as follows:


	Millions
	of Euros

Interim dividends		4,812
Of which:
Distributed at December 31, 2008 ()*		1,711
Third interim dividend		1,003
Fourth interim dividend		2,099

Voluntary reserves		14

Net profit for the year		4,826


(*)		Recognized under “Shareholders’ equity — Dividends and remuneration”.

The provisional accounting statements prepared by the Bank pursuant to legal requirements evidencing the existence of sufficient funds for the distribution of the interim dividends were as follows:


	Millions of Euros
	31/05/08		30/09/08			31/12/08			31/12/08
	First		Second			Third (*)			Fourth (*)

Profit after tax		1,043		2,865			4,826			4,826
Dividends paid		—		(846	)		(1,711	)		(2,713	)

		1,043		2,019			3,115			2,113

Interim dividends		846		865			1,003			2,099

Accumulated interim dividends		846		1,711			2,713			4,812

Gross dividend per share (euros)		0.12609		0.12609			0.12294			0.25737

Date of payment		01/08/08		01/11/08			01/02/09			01/05/09


(*)		Dividends not distributed at December 31, 2008.

The board of directors proposed and the shareholders at the annual general meeting approved that a dividend of €0.6508 per share be paid out of 2008 profit. In accordance with IAS 33, the foregoing table takes into account the adjustment arising from the capital increase with pre-emptive subscription rights carried out in December 2008. As a result of this adjustment, the dividend per share amounts to €0.6325.

Earnings per share in ordinary activities and discontinued operations

i. Basic earnings per share

Basic earnings per share are calculated by dividing the net profit attributable to the Group by the weighted average number of ordinary shares outstanding during the year, excluding the average number of treasury shares held in the year.

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Accordingly:


	31/12/08			31/12/07		31/12/06

Profit attributable to the Group (thousands of euros)		8,876,414			9,060,258		7,595,947
Profit/(loss) from discontinued operations (net of minority interests) (thousands of euros)		(16,146	)		708,317		1,268,304
Profit from continuing operations (net of minority interests) (thousands of euros)		8,892,560			8,351,941		6,327,643

Weighted average number of shares outstanding		6,802,545,788			6,693,869,621		6,701,727,841
Assumed conversion of convertible debt		468,923,871			108,029,643		—

Adjusted number of shares		7,271,469,659			6,801,899,264		6,701,727,841

Basic earnings per share (euros)		1.2207			1.3320		1.1334

Basic earnings per share from discontinued operations (euros)		(0.0022	)		0.1041		0.1893

Basic earnings per share from continuing operations (euros)		1.2229			1.2279		0.9442

ii. Diluted earnings per share

			In calculating diluted earnings per share, the amount of profit attributable to ordinary shareholders and the weighted average number of shares outstanding, net of treasury shares, are adjusted to take into account all the dilutive effects inherent to potential ordinary shares (share options, warrants and convertible debt instruments).

			Accordingly, diluted earnings per share were determined as follows:


	31/12/08			31/12/07		31/12/06

Profit attributable to the Group (thousands of euros)		8,876,414			9,060,258		7,595,947
Profit/(loss) from discontinued operations (net of minority interests) (thousands of euros)		(16,146	)		708,317		1,268,304
Profit from continuing operations (net of minority interests) (thousands of euros)		8,892,560			8,351,941		6,327,643
Dilutive effect of changes in profit for the year arising from potential conversion of ordinary shares		—			—		—


Weighted average number of shares outstanding		6,802,545,788			6,693,869,621		6,701,727,841

Assumed conversion of convertible debt		468,923,871			108,029,643		—

Dilutive effect of options		44,244,806			66,362,931		34,052,536

Adjusted number of shares		7,315,714,465			6,868,262,195		6,735,780,377

Diluted earnings per share (euros)		1.2133			1.3191		1.1277

Diluted earnings per share from discontinued operations (euros)		(0.0022	)		0.1031		0.1883

Diluted earnings per share from continuing operations (euros)		1.2155			1.2160		0.9394

The calculation of the weighted average number of shares outstanding, for the years presented, included the adjustment arising from the capital increase with pre-emptive subscription rights carried out in December 2008 (see Note 31).

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Remuneration and other benefits paid to the Bank’s directors and senior managers

Remuneration of directors

i. Bylaw-stipulated directors’ emoluments and attendance fees

			Article 58 of the Bank’s new Bylaws approved by the shareholders at the general meeting held on June 21, 2008 provides that the share in the Bank’s profit for each year that the directors will be entitled to receive for discharging their duties as members of the board of directors -annual emolument and attendance fees- will be equal to 1% of the Bank’s net profit for the year. However, the board of directors may resolve to reduce this percentage. In the previous Bylaws, this percentage represented the limit only with respect to the annual emolument and did not include attendance fees.

			The amount set by the board of directors for 2008, calculated pursuant to the aforementioned Article 58 of the new Bylaws, was 0.124% of the Bank’s profit for 2008 (2007: 0.157% in like-for-like terms).

			At the board meeting held on December 22, 2008, under the powers conferred on them, the directors resolved to reduce by 10% the annual emolument relating to the directors for 2008, and established the following amounts in this connection (the respective proportional amounts were allocated to any directors who did not sit on the board for the whole year): each board member received a gross emolument of €106.3 thousand (2007: €118.1 thousand; 2006: €107.4 thousand) and, additionally, each member of the following board committees received the following gross emoluments: executive committee, €213.2 thousand (2007: €236.9 thousand; 2006: €215.4 thousand); audit and compliance committee, €50 thousand (2007: €55 thousand; 2006: €50 thousand); appointments and remuneration committee, €30 thousand (2007: €33 thousand; 2006: €30 thousand). Also, the first deputy chairman and the fourth deputy chairman received a gross amount of €36 thousand each (2007: €40 thousand; 2006: €36 thousand).

			Furthermore, the directors receive fees for attending board and committee meetings, excluding executive committee meetings, since no attendance fees are received for this committee.

			At the proposal of the appointments and remuneration committee, the directors at the board meeting held on December 17, 2007 approved the amounts of fees applicable from January 1, 2008 for attending the board and committee meetings, excluding the executive committee. The agreed-upon gross amounts are as follows:

			• Board of directors: €2,540 for resident directors and €2,057 for non-resident directors.

			• Risk committee and audit and compliance committee: €1,650 for resident directors and €1,335 for non-resident directors.

			• Other committees: €1,270 for resident directors and €1,028 for non-resident directors.

			At the meeting held on December 17, 2008, the appointments and remuneration committee proposed to maintain unchanged the amount of fees for attending the meetings of the board of directors and the board committees (excluding the executive committee) as from January 1, 2009. This proposal was approved by the directors at the board meeting held on December 22, 2008.

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ii. Salaries

			Following is the detail of the salaries received by the Bank’s executive directors, who at December 31, 2007 and 2006 were Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos, Mr. Alfredo Sáenz Abad, Mr. Matías Rodríguez Inciarte, Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea and Mr. Francisco Luzón López (Mr. Juan Rodríguez Inciarte became an executive director in 2008, having taken office as member of the board of directors on March 24, 2008).

			The table below includes, with respect to 2008, the total salary received by Mr. Juan Rodríguez Inciarte for 2008. The balances for 2007 and 2006 in this table do not include the remuneration of the aforementioned director and, therefore, they are not comparable.

Thousands of Euros

2008

2007

2006

Total salaries

25,489

24,315

20,970

Of which: variable remuneration

15,240

16,088

13,666

			The amounts of fixed remuneration received by the executive directors in 2008 were approved by the directors at the board meeting held on December 17, 2007, at the proposal of the appointments and remuneration committee.

			Also, at the board meetings of December 22, 2008 and January 26, 2009, at the proposal of the appointments and remuneration committee, the directors resolved to reduce by 15% with respect to 2007 the variable remuneration (or bonus) to be received by the executive directors for 2008 (10% in the case of Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea).

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iii. Detail by director

The detail, by director, of the remuneration earned by the Bank’s directors in 2008 is as follows:


	Thousands of Euros
	2008																								2007		2006
	Bylaw-Stipulated Emoluments												Salary of Executive						Other
	Annual Emolument								Attendance Fees				Directors (1)						Remuneration
							Nomination
					Audit and		and
			Executive		Compliance		Remuneration				Other				Variable				Three-Year
Directors	Board		Committee		Committee		Committee		Board		Fees		Fixed		(a)		Total		Share Plan		Other		Total		Total		Total

Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		106		213		—		—		23		5		1,305		1,987		3,292		1,780		1		5,420		3,910		3,459
Mr. Fernando de Asúa Álvarez		142		213		50		30		23		185		—		—		—		—		—		642		677		590
Mr. Alfredo Sáenz Abad		106		213		—		—		23		5		3,595		4,745		8,340		—		608		9,295		9,604		8,099
Mr. Matías Rodríguez Inciarte		106		213		—		—		23		168		1,661		2,503		4,164		1,661		206		6,541		5,154		4,501
Mr. Manuel Soto Serrano		142		—		50		30		23		30		—		—		—		—		—		274		306		271
Assicurazioni Generali, Spa.		123		—		—		—		16		—		—		—		—		—		—		140		143		136
Mr. Antonio Basagoiti García-Tuñón		106		213		—		—		23		168		—		—		—		—		7		517		523		3,477	(4)
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea		106		213		—		—		23		4		1,269		1,786		3,055		608		12		4,021		3,517		3,084
Mr. Francisco Javier Botín-Sanz de Sautuola y O’Shea (2)		106		—		—		—		23		—		—		—		—		—		—		129		143		128
Lord Terence Burns		106		—		—		—		16		—		—		—		—		—		—		123		135		122
Mr. Guillermo de la Dehesa Romero		106		213		—		30		23		11		—		—		—		—		—		384		427		381
Mr. Rodrigo Echenique Gordillo (**)		106		213		—		30		20		42		—		—		—		—		32		443		562		1,388
Mr. Antonio Escámez Torres		106		213		—		—		23		157		—		—		—		—		36		535		550		1,329
Mr. Francisco Luzón López		106		213		—		—		23		3		1,461		2,753		4,215		1,473		818		6,851		5,620		4,601
Mr. Abel Matutes Juan		106		—		50		—		23		16		—		—		—		—		—		194		213		189
Mr. Juan Rodríguez Inciarte (*)		82		—		—		—		20		106		958		1,466		2,425		1,090		107		3,830		—		—
Mr. Luis Ángel Rojo Duque		106		—		50		30		18		25		—		—		—		—		—		229		249		232
Mr. Luis Alberto Salazar-Simpson Bos		106		—		50		—		23		19		—		—		—		—		—		198		214		192
Ms. Isabel Tocino Biscarolasaga (***)		106		—		—		—		23		—		—		—		—		—		—		129		103		—
Mutua Madrileña Automovilista (3)		—		—		—		—		—		—		—		—		—		—		—		—		153		148
Mr. Jay S. Sidhu (b)		—		—		—		—		—		—		—		—		—		—		—		—		—		58

Total 2008		2,084		2,132		248		149		411		942		10,249		15,240		25,489		6,612		1,827		39,894		—		—

Total 2007		2,324		2,370		275		165		424		813		8,227		16,088		24,315		—		1,517		—		32,203		—

Total 2006		2,092		2,150		250		150		386		630		7,304		13,666		20,970		—		5,757		—		—		32,385


(*)		Appointed as member of the Bank’s board of directors on 28 January 2008, Mr. Juan Rodríguez Inciarte took office on March 24, 2008. He was appointed as a member of the risk committee on March 24, 2008.

(**)		Ceased to be a member of the risk committee on March 24, 2008.

(***)		Appointed by co-optation by the board of directors at its meeting on March 26, 2007, Ms. Isabel Tocino Biscarolasaga took office at the meeting held on April 23, 2007. Her appointment was ratified by the shareholders at the annual general meeting held on June 23, 2007.

(a)		Accrued in 2008.

(b)		Appointed by the shareholders at the annual general meeting on June 17, 2006 and ceased to discharge his duties on December 31, 2006.

(1)		Recognized under “Staff costs” in the income statement of the Bank, except for the salary of Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea, which is recognized at Banco Español de Crédito, S.A.

(2)		Amounts contributed to Marcelino Botín foundation.

(3)		Ceased to be a director on December 19, 2007.

(4)		Includes €3 million received for duties discharged on the board of directors of Unión Fenosa during the period in which he belonged to this board at the proposal of the Bank. At the proposal of the appointments and remuneration committee, this remuneration was approved by the Bank’s board of directors at its meeting on February 6, 2006.

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iv. Other remuneration

			Three-year share plan

			The amount at December 31, 2008 relates to the remuneration in kind received in 2008 by the Bank’s directors due to the exercise of Banco Santander, S.A. share options granted under the I06 three-year incentive plan (Plan I06) approved by the shareholders at the annual general meeting of Banco Santander, S.A. held on June 18, 2005 and, in the case of Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea, to the delivery of shares of Banco Español de Crédito, S.A. under a three-year incentive plan for executives of this entity approved by the shareholders at its annual general meeting held on February 28, 2006, for a total of €6,612 thousand (see Note 5-d).

			Other

			The amounts recorded under “Other remuneration — Other” in the foregoing table include, inter alia, the life and medical insurance costs borne by the Group relating to the Bank’s directors.

Remuneration of the board members as representatives of the Bank

By resolution of the executive committee, all the remuneration received by the Bank’s directors who represent the Bank on the boards of directors of listed companies in which the Bank has a stake (at the expense of those companies) and which relates to appointments made after March 18, 2002, will accrue to the Group. The remuneration received in respect of representation duties of this kind, relating to appointments agreed upon before March 18, 2002, was as follows:


		Thousands of Euros
	Company	2008		2007		2006
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos	Shinsei Bank, Ltd.		53.0		50.1		59.9
Mr. Fernando de Asúa Álvarez	Cepsa		97.2		97.2		95.6
Mr. Antonio Escámez Torres	Attijariwafa Bank Société Anonyme		14.8		9.9		5.0

			165.0		157.2		160.5

			In 2008 Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos received options to acquire 10,000 shares of Shinsei Bank, Ltd. (Shinsei) at a price of JPY 416 each. Previously, in 2007, 2006 and 2005, Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos had received, in each year, options to acquire 10,000 Shinsei shares at a price of JPY 555 each for those received in 2007, and options to acquire 25,000 Shinsei shares at a price of JPY 825 each for those received in 2006 and JPY 601 each for those received in 2005. At December 31, 2008, the market price of the Shinsei share was JPY 139 and, therefore, regardless of the stipulated exercise periods, the options granted in those years would not have given rise to any gains had they been exercised.

			Furthermore, other directors of the Bank earned a total of €729 thousand in 2008 as members of the boards of directors of Group companies (2007: €750 thousand; 2006: €732 thousand), the detail being as follows: Lord Burns (Abbey), €651 thousand; Mr. Rodrigo Echenique (Banco Banif, S.A.), €36 thousand; and Mr. Matías Rodríguez Inciarte (U.C.I., S.A.), €42 thousand.

Post-employment and other long-term benefits

The total balance of supplementary pension obligations assumed by the Group over the years to its current and retired employees, which amounted to €11,198 million (covered mostly by in-house provisions) at December 31, 2008, includes the obligations to those who have been directors of the Bank during the year and who discharge (or have discharged) executive functions. The total pension obligations to these directors, together with the total sum insured under life insurance policies and other items, amounted to €311 million at December 31, 2008 (December 31, 2007: €264 million; December 31, 2006: €234 million).

F-69

The following table provides information on: (i) the pension obligations assumed and covered by the Group; and (ii) other insurance -the premiums of which are paid by the Group, the related cost being included in the “Other remuneration” column in the table in Note 5-a.iii-, in both cases in respect of the Bank’s executive directors:


	Thousands of Euros
	2008				2007				2006
	Accrued				Accrued				Accrued
	Pension		Other		Pension		Other		Pension		Other
	Obligations		Insurance		Obligations		Insurance		Obligations		Insurance

Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		25,579		—		22,926		—		21,068		—
Mr. Alfredo Sáenz Abad		80,049		10,785		68,070		9,378		55,537		8,155
Mr. Matías Rodríguez Inciarte		50,894		4,982		44,226		4,529		39,390		4,117
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea		21,737		1,403		17,975		1,403		15,045		1,402
Mr. Francisco Luzón López		53,083		7,624		45,468		7,624		39,187		6,571
Mr. Juan Rodríguez Inciarte		9,918		2,875		—		—		—		—

		241,260		27,668		198,665		22,934		170,227		20,245

			The amounts in the “Accrued pension obligations” column in the foregoing table relate to the accrued present actuarial value of the future annual payments to be made by the Group. These amounts were obtained using in part an actuarial calculation and cover the obligations to pay the respective calculated pension supplements. In the case of Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos, Mr. Alfredo Sáenz Abad, Mr. Matías Rodríguez Inciarte and Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea, these supplements were calculated as 100% of the sum of the fixed annual salary received at the date of effective retirement plus 30% of the arithmetical mean of the last three variable salary payments received. In addition, in the case of Mr. Francisco Luzón López, to the amount thus calculated will be added the amounts received by him in the year before retirement or early retirement in his capacity as a member of the board of directors or the committees of the Bank or of other consolidable Group companies and, in the case of Mr. Juan Rodríguez Inciarte, 100% of the gross fixed annual salary received at the date of effective retirement.

			On December 17, 2007 and March 24, 2008, the board of directors of the Bank resolved to authorize a change in the contracts of the executive directors and the other members of the Bank’s senior management -the senior executives- granting them the right, on the date of retirement -or pre-retirement, as appropriate- to opt to receive accrued pensions -or amounts similar thereto- in the form of income or capital, i.e. in one single payment, in full but not in part. In order to maintain the financial neutrality for the Group, the amount to be received in the form of capital by the commitment beneficiary at the date of retirement must be the aliquot part of the market value of the assets assigned to cover the mathematical provisions of the policy instrumenting these commitments to senior executives. The senior executives who are still in service on reaching the age of retirement -or who at the date of the contract entered into have passed the age of retirement- must state whether they wish to opt for this form of benefit. Should the senior executive subsequently die whilst still in service and prior to retirement, the capital of the pension will correspond to his/her heirs.

			At the board meetings held on July 21, 2008 and April 28, 2009, the directors approved the new terms and conditions of the Bank’s contractual relationship with the executive directors and the senior executives who are not executive directors, in order to adapt them to the new Bylaws (Articles 49.2 and 58.4) and to the new pensions regime. Those terms and conditions include, inter alia, those implementing and executing the aforementioned resolutions of December 17, 2007 and March 24, 2008 granting the executive directors and other senior executives the option to receive pensions or similar amounts in one single payment.

			Pension provisions recognized and reversed in 2008 amounted to €26,974 thousand and €11 thousand, respectively (2007: €21,615 thousand and €580 thousand, respectively; 2006: €44,819 thousand and €629 thousand, respectively).

			Additionally, other directors have life insurance policies the cost of which is borne by the Group, the related insured sum being €3 million at December 31, 2008 (2007 and 2006: €3 million). Also, the payments made in 2008 to the members of the board entitled to post-employment benefits amounted to €2.6 million.

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	d)		*Long-term share-based remuneration systems*

			The detail of these plans granted to directors (see Note 47) is as follows:

i) Plan I06 (see Note 47)

In 2004 a long-term incentive plan (I06) was designed which, consisting of options on shares of the Bank, is tied to the achievement of two targets which were achieved. The exercise period is from 15 January 2008 to 15 January 2009. At the date of these consolidated financial statements, Plan I06 had expired. The executive directors are beneficiaries of this plan; the number of Bank share options held by them is indicated below:


	Options										Options Exercised
	at				Options		Options							Number of				Market		Remuneration		Options				Date of		Date of
	December 31,		Exercise		Granted or		at		Options		Number of			Shares		Exercise		Price		Allocated		at		Exercise		Commencement		Expiry of
	2005 and		Price		Exercised		December 31,		Granted		Options			Acquired		Price		Applied		(Thousands		December 31,		Price		of Exercise		Exercise
	2006		(Euros)		Number		2007		Number		Exercised			(***)		(Euros)		(Euros)		of Euros)		2008		(Euros)		Period		Period

Plan I06
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		541,400		9.09		—		541,400		—		(541,400	)		541,400		9.09		12.40		1,780		—		—		—		—
Mr. Alfredo Sáenz Abad		1,209,100		9.09		—		1,209,100		—		—					—		—		—		1,209,100		9.09		01/15/08		01/15/09
Mr. Matías Rodríguez Inciarte		665,200		9.09		—		665,200		—		(332,600	)		67,901		9.09		14.12		1,661		332,600		9.09		01/15/08		01/15/09
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea (*)		293,692		9.09		—		293,692		—		—					—		—		—		293,692		9.09		01/15/08		01/15/09
Mr. Francisco Luzón López		639,400		9.09		—		639,400		—		(300,000	)		60,656		9.09		14.04		1,473		339,400		9.09		01/15/08		01/15/09
Mr. Juan Rodríguez Inciarte (**)		419,000		9.09		—		419,000		—		(419,000	)		419,000		9.09		11.72		1,090		—		—		—		—

		3,767,792		9.09		—		3,767,792		—		(1,593,000	)		—		—		—		6,004		2,174,792		9.09


(*)		Approved by Banesto’s shareholders at its annual general meeting on February 28, 2006.

(**)		Mr. Juan Rodríguez Inciarte was appointed as member of the board of directors in 2008. The data on his options for prior dates relate to the options granted to him as executive prior to his appointment as director.

(***)		Under the three-year I06 incentive plan (see Note 47), each purchase option granted entitles the beneficiary to acquire one Bank share at a price of €9.09, and the number of shares acquired on the exercise of the options is determined on the basis of the settlement method used, which can be cash for stock or cashless for cash. In the case of cash-for-stock settlements, the number of shares granted as consideration for the payment in cash of the exercise price is equal to the number of options exercised.

		As detailed in the foregoing table, the remuneration allocated to executive directors due to the exercise of Banco Santander, S.A. share options arising from the I06 three-year incentive plan (see Note 47) amounted to €6,004 thousand in 2008. Additionally, the remuneration allocated to Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea due to the delivery of Banesto shares under the incentive plan for executives approved by the shareholders at the annual general meeting of this entity on February 28, 2006 amounted to €608 thousand. The share options under Plan I06 that had not been exercised at December 31, 2008 expired on 15 January 2009.

F-71

ii) Performance share plan (see Note 47)


	Options				Options
	At		Options		At				Share
	December 31,		Granted		December 31,		Grant		Delivery
	2007		(Number)		2008		Date		Deadline

Plan I09:
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		41,785		—		41,785		23/06/07		31/07/09
Mr. Alfredo Sáenz Abad		110,084		—		110,084		23/06/07		31/07/09
Mr. Matías Rodríguez Inciarte		53,160		—		53,160		23/06/07		31/07/09
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea (*)		27,929		—		27,929		23/06/07		31/07/09
Mr. Francisco Luzón López		44,749		—		44,749		23/06/07		31/07/09
Mr. Juan Rodríguez Inciarte (**)		43,322		—		43,322		23/06/07		31/07/09

		321,029		—		321,029

Plan I10:
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		62,589		—		62,589		23/06/07		31/07/10
Mr. Alfredo Sáenz Abad		164,894		—		164,894		23/06/07		31/07/10
Mr. Matías Rodríguez Inciarte		79,627		—		79,627		23/06/07		31/07/10
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea (*)		41,835		—		41,835		23/06/07		31/07/10
Mr. Francisco Luzón López		67,029		—		67,029		23/06/07		31/07/10
Mr. Juan Rodríguez Inciarte (**)		64,983		—		64,983		23/06/07		31/07/10

		480,957		—		480,957

Plan I11:
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		—		68,848		68,848		21/06/08		31/07/11
Mr. Alfredo Sáenz Abad		—		189,628		189,628		21/06/08		31/07/11
Mr. Matías Rodríguez Inciarte		—		87,590		87,590		21/06/08		31/07/11
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea (***)		—		46,855		46,855		21/06/08		31/07/11
Mr. Francisco Luzón López		—		77,083		77,083		21/06/08		31/07/11
Mr. Juan Rodríguez Inciarte (**)		—		50,555		50,555		21/06/08		31/07/11

		—		520,559		520,559


(*)		Without prejudice to the Banesto shares relating to Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea by virtue of the Banesto Share-Based Payment Incentive Plan approved by the shareholders at the annual general meeting of Banesto held on June 27, 2007, the maximum number of shares shown in the foregoing table relates to the aforementioned executive director, based on the resolution adopted at the aforementioned annual general meeting.

(**)		Mr. Juan Rodríguez Inciarte was appointed as member of the board of directors in 2008. The data on his options for prior dates relate to the options granted to him as an executive prior to his appointment as director.

(***)		Without prejudice to the Banesto shares that might correspond to Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea by virtue of any plans that might be approved by the shareholders at the annual general meeting of Banesto, the number of shares shown in the foregoing table relating to the aforementioned executive director must be submitted for approval by the Banesto AGM.

iii) Obligatory Investment Share Plan

Additionally, pursuant to the Obligatory Investment Share Plan (see Note 47), the current executive directors acquired, prior to February 29, 2008 and 28 February 2009, the number of Bank shares shown in the table below, which involved an investment of €1.5 million in 2008 and €0.8 million in 2009. Executive directors who hold the shares acquired through the Obligatory Investment and remain in the Group’s employ for three years from the date on which the Obligatory Investment is made will be entitled to receive the same number of Bank shares as that composing their initial Obligatory Investment.

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	2008-2011		2009-2012
Executive Directors	Cycle		Cycle

Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos		16,306		19,968
Mr. Alfredo Sáenz Abad		37,324		47,692
Mr. Matías Rodríguez Inciarte		20,195		25,159
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea (*)		13,610		16,956
Mr. Francisco Luzón López		22,214		27,675
Mr. Juan Rodríguez Inciarte		14,617		14,738

		124,266		152,188


(*)		In accordance with the resolution adopted by the shareholders at the annual general meeting of Banco Santander held on June 23, 2007, the maximum number of shares relating to Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea for the 2008-2011 cycle is that shown in the foregoing table, as approved by the annual general meeting of Banesto held on June 27, 2007. The number of shares relating to Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea for the 2009-2012 cycle as beneficiary of this plan is in line with the resolution adopted by the shareholders at the annual general meeting of Banco Santander held on June 21, 2008 and will also be submitted for approval by the annual general meeting of Banesto.

	e)		*Loans*

			The Group’s direct risk exposure to the Bank’s directors and the guarantees provided for them are detailed below. These transactions were made on an arm’s-length basis or the related compensation in kind was charged:


	Thousands of Euros
	2008						2007						2006
	Loans and						Loans and						Loans and
	Credits		Guarantees		Total		Credits		Guarantees		Total		Credits		Guarantees		Total

Mr. Alfredo Sáenz Abad		25		—		25		6		—		6		21		—		21
Mr. Matías Rodríguez Inciarte		20		10		30		18		10		28		—		—		—
Mr. Manuel Soto Serrano		5		—		5		4		—		4		4		—		4
Mr. Antonio Basagoiti García-Tuñón		66		1		67		94		1		95		125		1		126
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea		5		—		5		—		—		—		2		—		2
Mr. Rodrigo Echenique Gordillo		12		—		12		7		—		7		33		—		33
Mr. Antonio Escámez Torres		1,473		—		1,473		309		—		309		289		—		289
Mr. Francisco Luzón López		1,649		—		1,649		722		—		722		875		—		875
Mr. Luis Alberto Salazar-Simpson Bos		461		—		461		—		—		—		—		—		—
Ms. Isabel Tocino Biscarolasaga		49		—		49		—		—		—		—		—		—
Mr. Juan Rodríguez Inciarte		465		—		465		—		—		—		—		—		—
Mutua Madrileña Automovilista		—		—		—		—		—		—		140		63		203

		4,231		11		4,242		1,160		11		1,171		1,489		64		1,553

	f)		*Senior managers*

			Following is a detail of the remuneration paid to the Bank’s General Managers (*) in 2008, 2007 and 2006:


			Thousands of Euros
	Number of		Salary						Other
Year	Managers ⁽¹⁾		Fixed		Variable		Total		Remuneration		Total

2006		26		19,119		34,594		53,713		11,054		64,767
2007		26		19,504		42,768		62,272		10,092		72,364
2008		24		21,219		34,674		55,893		27,598		83,491


(*)		Excluding executive directors’ remuneration, which is detailed above.

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(1)		At some point in the year they occupied the position of General Manager. The amounts reflect the annual remuneration regardless of the number of months in which the position of General Manager was occupied.

			The foregoing table includes all the items of remuneration paid to the senior managers, including the life insurance (€1,029 thousand in 2008), the termination or retirement benefits, and the three-year share-based remuneration systems. The remuneration relating to these systems, which amounted to €22,410 thousand in 2008, corresponded to the remuneration allocated to the General Managers on the exercise of 5,317,978 Santander share options under the three-year I06 incentive plan (see Note 47) and to the delivery of Banesto shares under the incentive plan for executives approved by the shareholders at the general meeting of this entity held on February 28, 2006. No remuneration was paid in this connection in 2007 and 2006.

			Following is a detail of the maximum number of options or shares that the Bank’s General Managers (excluding executive directors) were entitled to receive at December 31, 2008, 2007 and 2006 under the various plans then in force.


Maximum Number of Options/Shares	31/12/08		31/12/07		31/12/06

Plan I06 (*)		1,499,010		7,235,988		7,268,572
Plan I09		822,508		889,109		—
Plan I10		1,280,124		1,333,465		—
Plan I11		1,446,259		—		—


(*)		The exercise period is from 15 January 2008 to 15 January 2009.

			Additionally, with respect to the first cycle of the Obligatory Investment Share Plan, the investment was made in February 2008 by the General Managers (excluding current executive directors) for a total of €3.4 million (equal to 289,223 shares). Also, the amount invested in the second cycle of the Obligatory Investment Share Plan in February 2009 totaled €2.9 million (equal to 525,007 shares).

			The actuarial liability recognized in respect of post-employment benefits earned by the Bank’s senior managers totaled €240 million at December 31, 2008 (December 31, 2007: €202 million; December 31, 2006: €186 million). The charge to the consolidated income statement in this connection amounted to €41 million in 2008 (2007: €24 million; 2006: €46 million). Additionally, the total sum insured under life and accident insurance policies relating to this group amounted to €59 million at December 31, 2008 (December 31, 2007: €56 million; December 31, 2006: €52 million).

	g)		*Post-employment benefits to former directors and former general managers*

			The post-employment benefits paid in 2008 to former directors of the Bank and former general managers amounted to €7.7 million and €19.1 million, respectively (2007: €7.9 million and €8.7 million, respectively; 2006: €7.6 million and €6.7 million, respectively).

			The expense recognized in the consolidated income statement for 2008 in connection with pension and similar obligations assumed by the Group to former directors of the Bank and former general managers amounted to €1,064 thousand and €570 thousand, respectively (2007: €308 thousand and €99 thousand, respectively; 2006: €2.8 million and €0.3 million, respectively.

			Furthermore, “Provisions — Provisions for pensions and similar obligations” in the consolidated balance sheet at December 31, 2008 included €88.8 million and €132.2 million in respect of the post-employment benefit obligations to former directors of the Bank and former general managers, respectively (2007: €89.2 million and €142.9 million, respectively; 2006: €91.7 million and €95.9 million, respectively).

F-74

	h)		*Termination benefits*

			The Bank has signed contracts with all its executive directors.

			The Bank’s executive directors have indefinite-term employment contracts. However, executive directors whose contracts are terminated voluntarily or due to breach of duties are not entitled to receive any economic compensation. If the contracts are terminated for reasons attributable to the Bank or due to objective circumstances (such as those affecting the executive directors’ functional and organic statute), the directors will be entitled, at the date of termination of their employment relationships with the Bank, to the following:

	•		In the case of Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos, to retire and to accrue a pension supplement. At December 31, 2008, the annual pension supplement would amount to €1,878 thousand (2007: €1,706 thousand; 2006: €1,529 thousand).

	•		In the case of Mr. Alfredo Sáenz Abad, to retire or, alternatively, to receive a termination benefit equal to 40% of his annual fixed salary multiplied by the number of years of service at the Bank, up to a maximum of ten times his annual fixed salary. At December 31, 2008, the amount of the pension supplement relating to the first option would be €4,973 thousand per year and the amount relating to the second option would be €35.9 million (December 31, 2007: €4,257 thousand per year and €31.3 million, respectively; December 31, 2006: €3,657 thousand per year and €27.2 million, respectively). The two alternatives are mutually exclusive and, therefore, if Mr. Alfredo Sáenz Abad were to opt to receive the termination benefit he would not receive any pension supplement.

	•		In the cases of Mr. Matías Rodríguez Inciarte and Mr. Francisco Luzón López, to take early retirement and to accrue pension supplements. At December 31, 2008, the annual pension supplements would amount to €2,416 thousand for Mr. Matías Rodríguez Inciarte and €2,648 thousand for Mr. Francisco Luzón López (2007: €2,146 thousand and €2,293 thousand, respectively; 2006: €1,916 thousand and €1,972 thousand, respectively).

	•		In the case of Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea, to receive a termination benefit amounting to five years’ annual fixed salary at the date of termination. At December 31, 2008, this benefit would amount to €6,345 thousand (December 31, 2007: €3,399 thousand; December 31, 2006: €4,120 thousand). In the event of termination due to withdrawal at the will of the Bank, Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea may opt to take early retirement and accrue an annual emolument. At December 31, 2008, this emolument would amount to €1,781 thousand per year. The two alternatives are mutually exclusive and, therefore, if Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea were to opt to receive the termination benefit she would not receive any emolument.

	•		In the case of Mr. Juan Rodríguez Inciarte, to receive a termination benefit amounting to five years’ annual fixed salary at the date of termination. At December 31, 2008, this benefit would amount to €4,792 thousand (December 31, 2007: €4,652 thousand). In the event of termination due to withdrawal at the will of the Bank, Mr. Juan Rodríguez Inciarte may opt to take early retirement and accrue an annual emolument. At December 31, 2008, this annual emolument would amount to €958 thousand (December 31, 2007: €930 thousand). The two alternatives are mutually exclusive and, therefore, if Mr. Juan Rodríguez Inciarte were to opt to receive the termination benefit he would not receive any emolument.

			If the directors retire or take early retirement, they have the right to opt to receive the pensions accrued -or similar amounts- in the form of income or capital -i.e. in a single payment- in full but not in part (see Note 5-c).

			Additionally, other members of the Group’s senior management have contracts which entitle them to receive benefits in the event of termination for reasons other than voluntary redundancy, retirement, disability or serious breach of duties. These benefits are recognized as a provision for pensions and similar obligations and as a personnel expense only when the employment relationship between the Bank and its managers is terminated before the normal retirement date.

F-75

	i)		*Detail of the directors’ investments in companies with similar business activities and performance by directors, as independent professionals or as employees, of similar activities*

			In accordance with the requirements of Article 127 ter.4 of the Spanish Companies Act (Ley de Sociedades Anónimas), in order to enhance the transparency of listed companies, following is a detail of the directors’ investments in the share capital of entities engaging in banking, financing or lending; and of the management or governing functions, if any, that the directors discharge thereat:


	Corporate	Number of
Director	Name	Shares		Functions
Mr. Emilio Botín-Sanz de Sautuola y García de los Ríos	Bankinter, S.A.		3,138,885	—
	Shinsei Bank, Limited		—	Director (1)
	Bank of America Corporation		560	—
	Santander Investment, S.A.		—	Chairman (1)
Mr. Alfredo Sáenz Abad	Banco Bilbao Vizcaya Argentaria, S.A.		25,000	—
	HSBC Holdings		8,885	—
	Lloyds TSB		218	—
	Banco Banif, S.A.		—	Chairman (1)
	Santander Investment, S.A.		—	Deputy Chairman (1)
Mr. Matías Rodríguez Inciarte	Banesto		27,575	Director (1)
	Banco Santander Totta, S.A.		—	Deputy Chairman (1)
Mr. Manuel Soto Serrano	Intesa Sanpaolo		534,100	—
	UniCredito Italiano S.p.A.		340,000	—
	Istituto per le Opere di Religione (IOR)		—	Director (2)
Assicurazioni Generali S.p.A. (3)	Commerzbank, AG		66,531,286	—
	Intesa Sanpaolo		617,113,776	—
	Mediobanca - Banca di Credito Finanziario S.p.A.		16,381,963	—
	Bank Leumi le-Israel B.M.		51,781,602	—
	Erste Group Bank AG		3,734,656	—
	UniCredito Italiano S.p.A.		116,658,064	—
	Banca Monte dei Paschi di Siena S.p.A.		26,431,550	—
	Crédit Agricole, S.A.		3,993,037	—
	Société Générale		1,245,012	—
	Banco Bilbao Vizcaya Argentaria, S.A.		6,773,892	—
	Deustche Bank, A.G.		772,452	—
	Banesto		753,429	—
Mr. Antonio Basagoiti García-Tuñón	Banco Popular Español, S.A.		500	—
	Banco Bilbao Vizcaya Argentaria, S.A.		850	—
Ms. Ana Patricia Botín-Sanz de Sautuola y O’Shea	Banesto		560,214	Chairman
	Santander Investment, S.A.		—	Director (1)
	BSN - Banco Santander de Negocios Portugal, S.A.		—	Director (1)
Lord Burns (Terence)	Abbey National plc		—	Chairman (1)
Mr. Guillermo de la Dehesa Romero	Goldman Sachs & Co.		12,888	—
	Goldman Sachs Europe Ltd.		—	Director (1)
	Banco Pastor, S.A.		11,088	—
Mr. Rodrigo Echenique Gordillo	Banco Bilbao Vizcaya Argentaria, S.A.		13,580	—
	Mitsubishi UFJ Financial Group		6,000	—
	Mizuho Financial Group, Inc.		5,000	—
	Banco Banif, S.A.		—	2nd Deputy Chairman(1)
	Santander Investment, S.A.		—	Director (1)
	Allfunds Bank, S.A.		—	Chairman (1)
	Banco Santander International		—	Director (1)
Mr. Antonio Escámez Torres	Attijariwafa Bank		10	Deputy Chairman (1)
	Banco de Valencia, S.A.		349	—
	Santander Consumer Finance, S.A.		—	Chairman (1)
	Open Bank Santander Consumer, S.A.		—	Chairman (1)
Mr. Francisco Luzón López	Banco Santander (México), S.A.		—	Director (1)
	Banco Santander International		—	Director (1)
Mr. Abel Matutes Juan	Intesa Sanpaolo		3,619,665	—
	Eurizon Financial Group		—	Director (1)
	Banco Bilbao Vizcaya Argentaria, S.A.		2,154,025	—
	Banesto		11,980	—

F-76


	Corporate	Number of
Director	Name	Shares		Functions
Mr. Juan Rodríguez Inciarte	Banco Bilbao Vizcaya Argentaria, S.A.		1,000	—
	Wachovia		540	—
	Abbey National, plc		—	Deputy Chairman (1)
	Banco Banif, S.A.		—	Director (1)
	Santander Consumer Finance, S.A.		—	Director (1)
	RFS Holding NV		—	Director
	ABN AMRO Holding NV		—	Director (4)
	ABN AMRO Bank NV		—	Director (4)
	Sovereign Bancorp		—	Director (1) (5)
	Sovereign Bank		—	Director (1) (5)
	Alliance & Leicester plc		—	Director (1)
Mr. Luis Alberto Salazar-Simpson Bos	Bankinter, S.A.		2,798	—
Ms. Isabel Tocino Biscarolasaga	Banco Bilbao Vizcaya Argentaria, S.A.		1,000	—
Mr. Antoine Bernheim (6)	Credit Suisse		40,900	—
	BNP Paribas		14,400	—
	UBS		82,863	—
	Intesa Sanpaolo		398,533	Deputy Chairman (7)
	Mediobanca - Banca di Credito Finanziario S.p.A.		60,000	Director (1)
	UniCredito Italiano S.p.A.		126,455	—
	Royal Bank of Scotland Group plc		12,298	—
	Bank of New York Mellon		10,000	—
	BSI SA		—	Director (1)


(1)		Non-executive.

(2)		Non-executive member of the control committee.

(3)		More detailed information on the ownership interests held by Assicurazioni Generali, S.p.A. can be consulted in the notes to the financial statements of this company or on its website (www.generali.it).

(4)		Non-executive member of the supervisory board.

(5)		Ceased to be a director on June 19, 2008.

(6)		Representative on the Bank’s board of directors of the non-executive nominee director Assicurazioni Generali S.p.A.

(7)		(Non-executive) deputy chairman of the supervisory board.

None of the members of the board of directors perform, as independent professionals or as employees, activities referred to in this Note.

F-77

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:


	Thousands of Euros
	2008			2007			2006

Classification:
Financial liabilities held for trading		5,149,584			12,294,559			14,627,738
Other financial assets at fair value through profit or loss		8,911,906			6,865,073			185,485
Loans and receivables		64,730,787			38,482,972			54,943,833

		78,792,277			57,642,604			69,757,056

Type:
Reciprocal accounts		663,230			417,438			503,299
Time deposits		25,455,903			13,569,362			16,842,601
Reverse repurchase agreements		18,568,747			30,276,080			37,010,008
Other accounts		34,104,397			13,379,724			15,401,148

		78,792,277			57,642,604			69,757,056

Currency:
Euro		44,157,708			32,327,552			38,702,671
Pound sterling		8,094,238			6,952,096			5,059,998
US dollar		13,079,671			13,007,374			18,726,081
Other currencies		13,714,227			5,374,069			7,281,033
Impairment losses		(253,567	)		(18,487	)		(12,727	)
Of which: country risk		(250,024	)		(16,748	)		(7,895	)

		78,792,277			57,642,604			69,757,056

		The impairment losses on financial assets classified as loans and receivables are disclosed in Note 10.

		Note 51 contains a detail of the residual maturity periods of loans and receivables and of the related average interest rates.

7.		Debt instruments

		The breakdown, by classification, type and currency, of the balances of “Debt instruments” is as follows:


	Thousands of Euros
	2008			2007			2006

Classification:
Financial assets held for trading		43,895,548			66,330,811			76,736,992
Other financial assets at fair value through profit or loss		5,154,732			7,072,423			4,500,220
Available-for-sale financial assets		42,547,677			34,187,077			32,727,454
Loans and receivables		17,652,560			1,668,339			621,770

		109,250,517			109,258,650			114,586,436

Type:
Spanish government debt securities-
Treasury bills		5,544,658			5,558,420			3,160,674
Government bonds		419,083			376,393			535,584
Other book-entry debt securities		14,535,752			9,440,746			9,080,043
Foreign government debt securities		23,132,075			21,617,457			22,250,587
Issued by financial institutions		39,096,714			43,443,566			56,063,543
Other fixed-income securities		26,703,413			28,913,821			23,586,327
Impairment losses		(181,178	)		(91,753	)		(90,322	)

		109,250,517			109,258,650			114,586,436

Currency:
Euro		51,577,517			55,013,063			43,708,401
Pound sterling		16,345,483			16,164,296			22,488,577
US dollar		15,396,510			13,341,949			12,483,749
Other currencies		26,112,185			24,831,095			35,996,031
Impairment losses		(181,178	)		(91,753	)		(90,322	)

		109,250,517			109,258,650			114,586,436

F-78

		At December 31, 2008, the nominal amount of Spanish government debt securities pledged to certain Group or third-party commitments amounted to €2,674 million (December 31, 2007 and 2006: €695 million).

		Additionally, at December 31, 2008, other debt securities totaling €22,487 million had been assigned to own obligations.

		The impairment losses on available-for-sale financial assets are disclosed in Note 8.

		Note 51 contains a detail of the residual maturity periods of available-for-sale financial assets and of loans and receivables and of the related average interest rates.

Other equity instruments

	a)		*Breakdown*

			The breakdown, by classification and type, of the balances of “Other equity instruments” is as follows:


	Thousands of Euros
	2008			2007			2006

Classification:
Financial assets held for trading		6,272,403			9,744,466			13,490,719
Other financial assets at fair value through profit or loss		2,777,793			2,870,322			2,712,433
Available-for-sale financial assets		6,372,629			10,161,830			5,970,845
Of which:
Disregarding allowances for impairment losses		6,381,788			10,173,068			5,984,704
Allowances for impairment losses		(9,159	)		(11,238	)		(13,859	)

		15,422,825			22,776,618			22,173,997

Type:
Shares of Spanish companies		3,219,901			6,375,891			5,185,206
Shares of foreign companies		5,897,681			9,787,139			11,138,458
Investment fund units and shares		3,614,329			4,068,215			3,410,494
Of which: Abbey		267,067			602,067			669,689
Pension fund units		—			—			144,320
Other securities		2,700,073			2,556,611			2,309,378
Of which: unit linked		2,700,073			2,556,611			2,309,378
Impairment losses		(9,159	)		(11,238	)		(13,859	)

		15,422,825			22,776,618			22,173,997

F-79

	b)		*Changes*

			The changes in the balance of “Available-for-sale financial assets”, disregarding the allowances for impairment losses, were as follows:


	Millions of Euros
	2008			2007			2006

Balance at beginning of year		10,173			5,985			5,909
Changes in the scope of consolidation		366			—			—
Transfers (Note 13)		204
Net additions /disposals		(454	)		3,096			(1,232	)
Of which:
Shinsei		322			—			—
Antena 3 Televisión, S.A.		—			—			(398	)
San Paolo IMI, S.p.A.		—			—			(1,499	)
Royal Bank of Scotland Group, plc		—			1,368			—
Fortis SA/NV		—			892			—
Assicurazioni Generali		—			—			399
Iberdrola, S.A.		(846	)		1,503			—
BPI		—			(229	)		—
Intesa Sanpaolo		—			(1,206	)		—
Valuation adjustments		(1,514	)		1,092			1,308
Write-downs		(2,393	)		—			—
Of which:
Royal Bank of Scotland Group, plc (Note 1-i)		(1,293	)		—			—
Fortis SA/NV (Note 1-i)		(749	)		—			—

Balance at end of year		6,382			10,173			5,985

			The main acquisitions and disposals made in 2008, 2007 and 2006 were as follows:

			i. Antena 3 Televisión, S.A. (“Antena 3”)

			On October 25, 2006, Antena 3 announced its acquisition of a 10% stake owned by the Group. This transaction gave rise to a gain of €294 million for the Group, which was recognized under “Gains on non-current assets held for sale not classified as discontinued operations” (see Note 50).

			ii. San Paolo IMI, S.p.A. (“San Paolo”)

			In December 2006, the Group sold 89.9 million shares of San Paolo, representing 4.8% of its share capital, giving rise to a gain of €705 million which was recognized under “Gains on non-current assets held for sale not classified as discontinued operations” (see Note 50).

			iii. Intesa Sanpaolo

			In 2007 the Group sold its 1.79% ownership interest in the share capital of the Italian entity Intesa Sanpaolo, for a total amount of €1,206 million. This transaction gave rise to a gain of €566 million which was recognized under “Gains on non-current assets held for sale not classified as discontinued operations” (see Note 50).

			iv. Banco BPI, S.A. (“BPI”)

			In 2007 the Group sold 35.5 million shares of BPI, for a total amount of €228 million, giving rise to a gain of €107 million. The ownership interest in BPI at December 31, 2007 was 1.2%.

F-80

			v. The Royal Bank of Scotland Group Plc (RBS)

			In 2007 the Group acquired a 2.3% stake in the share capital of RBS. At 2008 year-end, this investment had fallen to 0.9% due basically to the dilutive effect of the capital contributions made by the UK Government.

			vi. Other holdings

			In 2007 the Group acquired ownership interests in Iberdrola, S.A. and Fortis, N.V. At December 31, 2007, it had stakes of 3.3% and 2.1%, respectively, in the share capital of these companies. In 2008 the Group sold 2% of Iberdrola and 0.2% of Fortis, and the ownership interests fell to 1.3% and 1.9%, respectively, at year-end.

	c)		*Notifications of acquisitions of holdings*

			The notifications made by the Bank in 2008, in compliance with Article 86 of the Spanish Companies Act (Ley de Sociedades Anónimas) and Article 53 of Securities Market Law 24/1998 (Ley del Mercado de Valores), of the acquisitions and disposals of holdings in investees are listed in Exhibit IV.

	d)		*Allowances for impairment losses*

			Following is a summary of the changes in the impairment losses on these items and on debt instruments classified as “Available-for-sale financial assets” (see Note 7):

Thousands of Euros

2008

2007

2006

Balance at beginning of year

102,991

104,181

97,658

Net impairment losses for the year

381,028

6,546

(2,869

)

Of which:

Impairment losses charged to income

395,722

34,341

6,737

Impairment losses reversed with a credit to income

(14,694

)

(27,795

)

(9,606

)

Net changes in the scope of consolidation

19,654

(6,737

)

—

Write-off of assets due to impairment

(370,498

)

(97

)

(4,009

)

Exchange differences and other items

57,162

(902

)

13,401

Balance at end of year

190,337

102,991

104,181

Of which:

By geographical location of risk:

Spain

144,796

57,931

52,225

Rest of Europe

1,271

6,964

3,122

Latin America

44,270

38,096

48,834

By type of asset covered:

Debt instruments — Available-for-sale financial assets (Note 7)

181,178

91,753

90,322

Other equity instruments — Available-for-sale financial assets

9,159

11,238

13,859

Trading derivatives (assets and liabilities) and Short positions

	a)		*Trading derivatives*

			The detail, by type of inherent risk, of the fair value of the trading derivatives arranged by the Group is as follows (see Note 36):


	Thousands of Euros
	2008				2007				2006
	Debit		Credit		Debit		Credit		Debit		Credit
	Balance		Balance		Balance		Balance		Balance		Balance

Interest rate risk		68,145,560		67,005,552		33,298,794		35,195,843		24,525,543		25,385,084
Foreign currency risk		19,001,043		14,381,752		4,369,032		6,809,887		3,416,681		4,204,816
Price risk		8,129,606		7,237,843		6,365,243		6,589,179		5,121,227		7,938,554
Other risks		539,100		542,286		2,669,474		852,624		1,924,072		1,808,944

		95,815,309		89,167,433		46,732,543		49,447,533		34,987,523		39,337,398

F-81

	b)		*Short positions*

			Following is a breakdown of the short positions:

Thousands of Euros

2008

2007

2006

Borrowed securities:

Debt instruments

1,054,527

2,424,447

5,459,927

Of which: Abbey

775,094

1,783,832

4,574,639

Equity instruments

57,263

1,596,775

4,151,317

Of which:

Bank

22,113

277,595

8,800

Abbey

13,670

1,285,989

3,995,291

Short sales:

Debt instruments

1,912,854

1,582,052

1,842,729

Of which: the Bank

1,903,554

1,485,173

1,721,742

Equity instruments

10,587

9,960

19,089

3,035,231

5,613,234

11,473,062

10.

Loans and advances to customers

	a)		*Breakdown*

			The breakdown, by classification, of the balances of “Loans and advances to customers” in the consolidated balance sheets is as follows:


	Thousands of Euros
	2008			2007			2006

Financial assets held for trading		684,348			23,704,481			30,582,982
Other financial assets at fair value through profit or loss		8,972,707			8,021,623			7,972,544
Loans and receivables		617,231,380			539,372,409			488,479,988
Of which:
Disregarding impairment losses		629,697,436			548,067,613			496,643,432
Impairment losses		(12,466,056	)		(8,695,204	)		(8,163,444	)
Of which, country risk		(304,207	)		(51,522	)		(159,024	)

		626,888,435			571,098,513			527,035,514

Loans and advances to customers disregarding impairment losses		639,354,490			579,793,717			535,198,958

			Note 51 contains a detail of the residual maturity periods of loans and receivables and of the related average interest rates.

			There are no loans and advances to customers for material amounts without fixed maturity dates.

F-82

	b)		*Detail*

			Following is a detail, by loan type and status, borrower sector, geographical area of residence and interest rate formula, of the loans and advances to customers, which reflect the Group’s exposure to credit risk in its core business, disregarding impairment losses:


	Millions of Euros
	2008		2007		2006

Loan type and status:
Commercial credit		22,250		22,364		21,565
Secured loans		351,609		322,269		302,361
Reverse repurchase agreements		5,228		29,089		30,503
Other term loans		216,690		177,553		151,799
Finance leases		21,011		15,727		13,991
Receivable on demand		8,572		6,722		10,367
Impaired assets		13,994		6,070		4,613

		639,354		579,794		535,199

Borrower sector:
Public sector — Spain		7,668		5,633		5,329
Public sector — Other countries		3,029		2,296		4,970
Households		347,201		316,129		302,451
Energy		10,476		7,820		4,616
Construction		24,341		21,137		19,659
Manufacturing		43,993		31,839		28,682
Services		123,895		98,548		91,592
Other sectors		78,751		96,391		77,900

		639,354		579,794		535,199

Geographical area:
Spain		240,247		238,081		208,936
European Union (excluding Spain)		279,664		237,535		231,445
United States and Puerto Rico		15,096		32,070		31,385
Other OECD countries		8,104		6,633		6,020
Latin America		88,720		60,753		54,274
Rest of the world		7,523		4,721		3,139

		639,354		579,794		535,199

Interest rate formula:
Fixed interest rate		256,506		228,434		178,423
Floating rate		382,848		351,360		356,776

		639,354		579,794		535,199

F-83

	c)		*Impairment losses*

			The changes in the allowances for the impairment losses on the assets making up the balances of “Loans and receivables — Loans and advances to customers” and “Loans and receivables - Loans and advances to credit institutions” (see Note 6) were as follows:

Thousands of Euros

2008

2007

2006

Balance at beginning of year

8,796,371

8,288,128

7,756,675

Impairment losses charged to income for the year:

6,678,922

4,120,278

3,035,468

Of which:

Individually assessed

7,815,934

4,223,069

2,584,434

Collectively assessed

599,966

1,077,785

1,151,376

Impairment losses reversed with a credit to income

(1,736,978

)

(1,180,576

)

(700,342

)

Inclusion of entities in the Group in the year (Note 3)

2,310,095

7,356

164,530

Write-off of impaired balances against recorded impairment allowance

(4,552,393

)

(3,320,162

)

(2,369,865

)

Exchange differences and other changes

(615,134

)

(316,169

)

(261,034

)

Transfers between allowances

101,762

16,940

(37,646

)

Balance at end of year

12,719,623

8,796,371

8,288,128

Of which:

By method of assessment:

Individually assessed

7,183,237

3,356,264

3,190,220

Of which: country risk (Note 2-g)

554,230

75,171

166,919

Collectively assessed

5,536,386

5,440,107

5,097,908

By geographical location of risk:

Spain

5,948,950

4,512,000

4,318,320

Rest of Europe

3,307,314

2,250,127

2,358,448

Americas

3,463,360

2,034,244

1,611,360

			Previously written-off assets recovered in 2008, 2007 and 2006 amounted to €714,517 thousand, €624,220 thousand and €551,606 thousand, respectively. Taking into account these amounts and those recognized in “Impairment losses charged to income for the year” in the foregoing table, impairment losses on “Loans and receivables” amounted to €5,964,405 thousand in 2008, €3,496,058 thousand in 2007 and €2,483,862 thousand in 2006.

	d)		*Impaired assets*

			The detail of the changes in the balance of the financial assets classified as “Loans and receivables – loans and advances to customers” and considered to be impaired due to credit risk is as follows:


	Millions of Euros
	2008			2007			2006

Balance at beginning of year		6,070			4,613			4,356
Net additions		11,200			4,898			2,559
Written-off assets		(4,552	)		(3,320	)		(2,370	)
Increase in scope of consolidation		1,945			1			164
Exchange differences and other		(669	)		(122	)		(96	)

Balance at end of year		13,994			6,070			4,613

This amount, after deducting the related allowances, represents the Group’s best estimate of the fair value of the impaired assets.

F-84

Following is a detail of the financial assets classified as loans and receivables and considered to be impaired due to credit risk at December 31, 2008, classified by geographical location of risk and by age of the oldest past-due amount:


	Millions of Euros
	With no
	Past-Due
	Balances or
	Less than 3		With Balances Past Due by
	Months Past		3 to 6		6 to 12		12 to 18		18 to 24		More than
	Due		Months		Months		Months		Months		24 Months		Total

Spain		637		2,461		1,678		981		211		294		6,262
European Union (excluding Spain)		38		2,447		938		306		174		336		4,239
United States and Puerto Rico		102		261		106		55		10		20		554
Other OECD countries		28		284		5		3		1		—		321
Latin America		274		1,359		780		94		50		56		2,613
Rest of the world		2		1		1		—		—		1		5

		1,081		6,813		3,508		1,439		446		707		13,994

The breakdown at December 31, 2007 is as follows:


	Millions of Euros
	With no
	Past-Due
	Balances or
	Less than 3		With Balances Past Due by
	Months Past		3 to 6		6 to 12		12 to 18		18 to 24		More than
	Due		Months		Months		Months		Months		24 Months		Total

Spain		209		708		524		206		71		64		1,782
European Union (excluding Spain)		121		1,422		530		172		115		244		2,604
United States and Puerto Rico		32		168		22		15		8		35		279
Other OECD countries		15		146		14		2		1		1		178
Latin America		53		350		348		42		17		409		1,219
Rest of the world		—		6		1		—		—		—		7

		429		2,799		1,440		436		212		754		6,070

The breakdown at December 31, 2006 is as follows:


	Millions of Euros
	With no
	Past-Due
	Balances or
	Less than 3		With Balances Past Due by
	Months Past		3 to 6		6 to 12		12 to 18		18 to 24		More than
	Due		Months		Months		Months		Months		24 Months		Total

Spain		159		491		210		370		73		98		1,401
European Union (excluding Spain)		15		515		275		1,060		87		173		2,125
United States and Puerto Rico		—		118		8		41		3		15		185
Other OECD countries		4		19		21		4		2		83		133
Latin America		40		180		177		103		10		252		762
Rest of the world		5		—		—		—		—		2		7

		223		1,323		691		1,578		175		623		4,613

	e)		*Securitization*

			“Loans and advances to customers” includes, inter alia, the securitized loans transferred to third parties on which the Group has retained risks, albeit partially, and which therefore, in accordance with the applicable accounting standards, cannot be derecognized. The breakdown of the securitized loans, by type of financial instrument, and of the securitized loans derecognized because the stipulated requirements were met (see Note 2-e) is shown below. Note 22 details the liabilities associated with these securitization transactions.

F-85

Millions of Euros

2008

2007

2006

Derecognized

2,882

3,742

4,901

Of which: mortgage-backed securities

2,088

2,479

2,981

Retained on the balance sheet

126,497

92,023

59,426

Of which: mortgage-backed securities

90,264

60,056

36,363

Total

129,380

95,765

64,327

The growth in securitization in 2007 and 2008 was the result of its use as a tool for the management of regulatory capital and as a means of diversifying the Group’s liquidity sources.

11.		Hedging derivatives

		The detail, by type of risk hedged, of the fair value of the derivatives qualifying for hedge accounting is as follows (see Note 36):


	Thousands of Euros
	2008				2007				2006
	Assets		Liabilities		Assets		Liabilities		Assets		Liabilities

Fair value hedges		8,553,353		5,213,389		2,662,762		3,862,500		2,866,213		3,340,480
Of which: Portfolio hedges		971,284		2,956,415		398,143		826,178		—		—
Cash flow hedges		879,230		694,328		101,629		238,277		98,220		132,658
Of which: Recognized in equity (Note 29)		—		309,883		—		31,051		—		49,252
Hedges of net investments in foreign operations		265,549		49,894		298,778		33,794		23,531		20,711

		9,698,132		5,957,611		3,063,169		4,134,571		2,987,964		3,493,849

Note 36

contains a description of the Group’s main hedges.

12.		Non-current assets held for sale

		The breakdown of “Non-current assets held for sale” is as follows:


	Thousands of Euros
	2008		2007		2006

Equity instruments		3,890,215		9,025,936		—
Of which:
Cepsa		2,846,300		—		—
Interbanca (Note 3-b)		1,000,000		—		—

Tangible assets		5,265,868		1,061,743		327,384
Of which:
Foreclosed assets		1,113,006		364,345		265,311
Other tangible assets held for sale ()*		4,152,862		697,398		62,073
Of which: Ciudad Financiera business campus		—		625,124		—

Other assets		111,403		68,750		—

		9,267,486		10,156,429		327,384


(*)		In 2008 this balance includes land and properties acquired from borrowers in payment of their debts. The amount of this balance, net of impairment losses and costs to sell, was €3,768 million

F-86

			Sale of Santander business campus

			In the first half of 2008 Banco Santander entered into an agreement with the consortium led by Propinvest in relation to the sale of the Ciudad Financiera Santander business campus and the subsequent leaseback thereof for a term of 40 years, with the Bank reserving the right to a purchase option at market price at the end of the aforementioned term. This transaction, which was completed on September 12, 2008, was performed within the framework of the restricted private competition organized by Banco Santander for the sale and subsequent leaseback of a portfolio of properties owned by it in Spain, of which the business campus is the last part. The price agreed upon for the Santander business campus was €1,900 million. The gains obtained by Banco Santander on this sale were recognized under “Gains/ (losses) on non-current assets held for sale not classified as discontinued operations” in the consolidated income statement and amounted to €586 million, net (€836 million, gross – see Note 50). Other relevant information on this transaction is provided in Note 16.

			Cepsa

			At December 31, 2008, the Bank’s directors classified the ownership interest held in Compañía Española de Petróleos, S.A. (Cepsa) as a “non-current asset held for sale”, since it intended to recover the value of the investment through the sale thereof in the short term. The Cepsa shares were previously recognized under “Investments” in the consolidated balance sheet, since the entity was deemed to be an associate, and the investment was accounted for using the equity method. The balance at which this asset is recognized relates basically to the carrying amount of the ownership interest when the decision to sell it was taken; this amount is lower than the fair value of the ownership interest less costs to sell at year-end.

Impairment losses of €178,495 thousand, €112,030 thousand and €138,246 thousand were deducted from the balance of this item at December 31, 2008, 2007 and 2006, respectively. The net charges recorded in those years amounted to €70,148 thousand, €27,299 thousand and €48,796 thousand, respectively.

13.

Investments — Associates

	a)		*Breakdown*

			The breakdown, by company, of the balance of “Investments — Associates” (see Note 2-c) is as follows:


	Thousands of Euros
	2008		2007		2006

Sovereign		1,103,623		1,026,826		2,246,824
RFS Holdings B.V. (Note 3-b)		—		11,778,624		—
Cepsa		—		2,548,035		2,291,599
Other companies		219,830		335,642		467,686

		1,323,453		15,689,127		5,006,109


Of which:
Euros		130,079		14,431,945		2,544,864
Listed		1,130,623		3,763,010		4,715,471

			At December 31, 2007 and 2006, the unrealized gains on the Group’s portfolio of investments in associates amounted to €3,771 million and €2,899 million, respectively.

			At December 31, 2008, the cost of the investments detailed in the foregoing table included €9 million relating to goodwill (December 31, 2007: €8,943 million; December 31, 2006: €1,502 million). The most significant amount in 2007 related to Banco Real, which was transferred in 2008 to “Goodwill” (see Note 17), since this entity was fully consolidated.

F-87

	b)		*Changes*

			The changes in the balance of this item were as follows:


	Millions of Euros
	2008			2007			2006

Balance at beginning of year		15,689			5,006			3,031
Acquisitions and capital increases (Note 3)		754			11,774			2,618
Of which:
Sovereign		228			—			2,300
RFS Holdings B.V.		408			11,615			—
Disposals and capital reductions (Note 3)		(41	)		(27	)		(753	)
Of which:
RFS Holdings B.V.		(36	)		—			—
Cepsa		—			—			(711	)
Transfers		(3,955	)		—			—
Of which:
Interbanca (Note 12)		(800	)		—			—
Cepsa (Note 12)		(2,736	)		—			—
Attijariwaffa (Note 8)		(204	)		—			—
Effect of equity accounting		797			441			427
Impairment losses		(8	)		(1,053	)		—
Dividends paid		(550	)		(148	)		(165	)
Change in consolidation method (Note 3-b)		(10,658	)		(13	)		(84	)
Exchange differences and other changes (*)		(705	)		(291	)		(68	)

Balance at end of year		1,323			15,689			5,006


(*)		In 2008 “Exchange differences and other changes” included €723 million relating to the exchange losses incurred on RFS Holdings B.V.

	c)		*Impairment losses*

			No significant impairment was disclosed with respect to investments in associates in 2008. In 2007 the Group adjusted the value of its ownership interest in Sovereign by €1,053 million. Of this amount, €586 million relate to goodwill inherent in Sovereign and are recognized under “Impairment losses on other assets (net) – Goodwill and other intangible assets”, €363 million are recognized under “Impairment losses on other assets (net) – Other assets” and €104 million relate to exchange differences and are recognized under “Exchange differences” in the consolidated income statement.

	d)		*Other disclosures*

			Following is a summary of the financial information on the associates (obtained from the information available at the reporting date):


	Millions of Euros
	2008			2007

Total assets		59,915			168,320
Total liabilities		(54,643	)		(151,891	)
Minority interests		196			(355	)

Net assets		5,076			16,074


Group’s share of the net assets of associates		1,314			6,746
Goodwill		9			8,943

Total Group share		1,323			15,689

Total income		21,849			16,058

Total profit		1,050			1,211

Group’s share of the profit of associates		797			441

F-88

14.		Insurance contracts linked to pensions

		The detail of the balance of “Insurance contracts linked to pensions“ (see Note 25-c) is as follows:


	Thousands of Euros
	2008		2007		2006

Assets relating to insurance contracts covering post-employment benefit plan obligations:
Bank		2,159,707		2,220,638		2,272,786
Banesto		248,025		257,633		274,400
Other Spanish companies		32,035		33,286		34,442
Assets relating to insurance contracts covering other similar obligations:
Bank		4,794		10,663		18,713
Other Spanish companies		2,428		3,330		4,194

		2,446,989		2,525,550		2,604,535

15.		Liabilities under insurance contracts and Reinsurance assets

		The breakdown of the balances of “Liabilities under insurance contracts” and “Reinsurance assets” in the consolidated balance sheets (see Note 2-j) is as follows:


	Thousands of Euros
	2008							2007							2006
															Direct
	Direct							Direct							Insurance
	Insurance and					Total		Insurance and					Total		and					Total
	Reinsurance		Reinsurance			(Balance		Reinsurance		Reinsurance			(Balance		Reinsurance		Reinsurance			(Balance
Technical Provisions for:	Assumed		Ceded			Payable)		Assumed		Ceded			Payable)		Assumed		Ceded			Payable)

Unearned premiums and unexpired risks		409,187		(194,646	)		214,541		351,799		(128,663	)		223,136		172,226		(78,340	)		93,886
Life insurance:
Unearned premiums and risks		332,507		(25,401	)		307,106		120,747		(23,580	)		97,167		119,867		(11,031	)		108,836
Mathematical provisions		3,798,070		(26,244	)		3,771,826		2,885,581		(17,727	)		2,867,854		3,049,875		(10,496	)		3,039,379
Claims		407,121		(46,856	)		360,265		364,878		(29,213	)		335,665		162,484		(37,362	)		125,122
Bonuses and rebates		17,440		(5,937	)		11,503		15,957		(13,359	)		2,598		11,414		(5,399	)		6,015
Equalization		—		—			—		—		—			—		—		—			—
Life insurance policies where the investment risk is borne by the policyholders		11,713,993		(135,854	)		11,578,139		9,097,620		(90,395	)		9,007,225		7,175,926		(118,993	)		7,056,933
Other technical provisions		171,193		(23,450	)		147,743		197,035		(6,837	)		190,198		12,466		(252	)		12,214

		16,849,511		(458,388	)		16,391,123		13,033,617		(309,774	)		12,723,843		10,704,258		(261,873	)		10,442,385

F-89

16.

Tangible assets

	a)		*Changes*

			The changes in “Tangible assets” in the consolidated balance sheets were as follows:


	Thousands of Euros
	Property,			Leased
	Plant and			out under
	Equipment			Operating			Investment
	for Own Use			Lease			Property			Total

Cost:
Balances at 1 January 2006		10,418,188			5,973,823			717,698			17,109,710
Additions/Reductions (net) due to change in the scope of consolidation		(3,938	)		180,492			(557,549	)		(380,995	)
Additions/Disposals (net)		(358,066	)		366,485			240,900			249,319
Transfers and other changes		(32,271	)		—			—			(32,271	)
Exchange differences		(182,605	)		97,526			(55	)		(85,134	)

Balances at December 31, 2006		9,841,308			6,618,326			400,994			16,860,629
Additions/Reductions (net) due to change in the scope of consolidation		(43,055	)		—			—			(43,055	)
Additions/Disposals (net)		(1,156,036	)		545,769			77,285			(532,982	)
Transfers and other changes		(713,511	)		86,768			9,680			(617,063	)
Exchange differences (net)		(97,641	)		(411,297	)		(511	)		(509,449	)

Balances at December 31, 2007		7,831,065			6,839,566			487,448			15,158,079
Additions/Reductions (net) due to change in the scope of consolidation (*)		1,569,298			(3,634,372	)		190,232			(1,874,842	)
Additions/Disposals (net)		1,168,177			(38,474	)		98,790			1,228,493
Transfers and other changes		(126,811	)		(140,635	)		130,857			(136,589	)
Exchange differences (net)		(535,316	)		(551,757	)		5			(1,087,068	)

Balances at December 31, 2008		9,906,413			2,474,328			907,332			13,288,073


Accumulated depreciation:
Balances at 1 January 2006		(5,200,104	)		(1,783,050	)		(39,182	)		(7,022,336	)
Additions/Reductions (net) due to change in the scope of consolidation		8,421			(35,748	)		24,743			(2,584	)
Disposals		1,174,842			274,008			1,314			1,450,164
Transfers and other changes		7,624			(508,549	)		—			(500,925	)
Charge for the year		(618,135	)		(7,526	)		(2,876	)		(628,537	)
Exchange differences		81,301			(33,805	)		2			47,498

Balances at December 31, 2006		(4,546,051	)		(2,094,670	)		(15,999	)		(6,656,720	)
Additions/Reductions (net) due to change in the scope of consolidation		21,681			—			—			21,681
Disposals		1,440,435			202,503			14,363			1,657,301
Transfers and other changes		110,941			(304,805	)		(12,629	)		(206,493	)
Charge for the year		(600,454	)		(17,256	)		(3,561	)		(621,271	)
Exchange differences and other items		40,848			156,020			1,451			198,319

Balances at December 31, 2007		(3,532,600	)		(2,058,208	)		(16,375	)		(5,607,183	)
Additions/Reductions (net) due to change in the scope of consolidation (*)		(816,487	)		1,529,887			(4,206	)		709,194
Disposals		347,031			56,819			2,402			406,252
Transfers and other changes		99,030			(233,015	)		(3,220	)		(137,205	)
Charge for the year		(592,408	)		(3,091	)		(3,997	)		(599,496	)
Exchange differences and other items		266,094			199,599			(2	)		465,690

Balances at December 31, 2008		(4,229,340	)		(508,009	)		(25,399	)		(4,762,748	)

F-90


	Thousands of Euros
	Property,			Leased
	Plant and			out under
	Equipment			Operating			Investment
	for Own Use			Lease			Property			Total

Impairment losses:
Balances at December 31, 2005		(13,152	)		(69,947	)		(11,068	)		(94,167	)
Additions/Reductions (net) due to change in the scope of consolidation		755			—			—			755
Net impairment charge		(7,091	)		—			634			(6,457	)
Exchange differences and other changes		8,408			(1,438	)		(14	)		6,956

Balances at December 31, 2006		(11,080	)		(71,385	)		(10,448	)		(92,913	)
Impairment charge for the year		(1,452	)		—			8			(1,444	)
Additions/Reductions (net) due to change in the scope of consolidation		549			—			—			549
Exchange differences		1,130			723			92			1,945

Balances at December 31, 2007		(10,853	)		(70,662	)		(10,348	)		(91,863	)
Impairment charge for the year		(17,177	)		—			(1,801	)		(18,978	)
Additions/Reductions (net) due to change in the scope of consolidation(*)		(2,406	)		54,404			—			51,998
Exchange differences and other		17,979			16,258			833			35,070

Balances at December 31, 2008		(12,457	)		—			(11,316	)		(23,773	)


Tangible assets, net:
Balances at December 31, 2006		5,284,177			4,452,272			374,547			10,110,996
Balances at December 31, 2007		4,287,612			4,710,696			460,725			9,459,033

Balances at December 31, 2008		5,664,616			1,966,319			870,617			8,501,552


(*)		The additions relate mainly to the acquisition of Banco Real and the reductions relate mainly to the disposal of Porterbrook.

	b)		*Property, plant and equipment for own use*

			The detail, by class of asset, of the balance of “Property, plant and equipment for own use” in the consolidated balance sheets is as follows:


	Millions of Euros
			Accumulated			Impairment			Net
	Cost		Depreciation			Losses			Balance

Land and buildings		3,704		(848	)		(11	)		2,845
IT equipment and fixtures		2,059		(1,495	)		—			564
Furniture and vehicles		3,838		(2,114	)		—			1,724
Construction in progress and other items		240		(89	)		—			151

Balances at December 31, 2006		9,841		(4,546	)		(11	)		5,284


Land and buildings		2,632		(682	)		(11	)		1,939
IT equipment and fixtures		1,903		(1,303	)		—			601
Furniture and vehicles		3,019		(1,460	)		—			1,559
Construction in progress and other items		277		(88	)		—			189

Balances at December 31, 2007		7,831		(3,533	)		(11	)		4,288


Land and buildings		3,767		(923	)		(12	)		2,832
IT equipment and fixtures		2,093		(1,410	)		—			683
Furniture and vehicles		3,705		(1,814	)		—			1,891
Construction in progress and other items		341		(82	)		—			259

Balances at December 31, 2008		9,906		(4,229	)		(12	)		5,665

F-91

The net balance at December 31, 2008 in the foregoing table includes the following amounts:

	•		Approximately €4,063 million relating to property, plant and equipment owned by Group entities and branches located abroad (December 31, 2007: €5,335 million; December 31, 2006: €5,272 million).

	•		Approximately €118 million relating to property, plant and equipment being acquired under finance leases by the consolidated entities (Note 2-l discloses additional information on these items — December 31, 2007: €394 million; December 31, 2006: €183 million).

	c)		*Investment property*

			The comparison of the fair value of the investment property at December 31, 2008 with the carrying amount at that date results in unrealized gains of €18 million (December 31, 2007: €127 million; December 31, 2006: €50 million.

			The rental income earned from investment property and the direct costs related both to investment properties that generated rental income in 2008, 2007 and 2006 and to investment properties that did not generate rental income in those years are not material in the context of the consolidated financial statements.

	d)		*Sale of properties*

			On November 14, 2007, the Group sold ten singular properties to two companies in the Pontegadea Group for €458 million and recognized a net gain of €216 million. At the same time, an operating lease agreement for the aforementioned properties (with maintenance, insurance and taxes payable by the Group) was entered into with these companies, with compulsory terms of between 12 and 15 years, during which the rent (currently set at €1,722 thousand per month) will be reviewed annually on the date of completion of each year of the lease term, based on the percentage variation in the Spanish Consumer Price Index (CPI) in the preceding twelve months, except in the fifth year (effective from the sixth year), in which the rent for nine of the ten properties will be reviewed on the basis of the CPI plus three percentage points. In nine of the ten lease agreements, the agreement is renewable for five additional five-year periods and a last three-year renewal period, up to a total of 40 years. In one of the ten lease agreements, the agreement is renewable for five additional five-year periods up to a total of 40 years. Nine of the ten lease agreements provide for adjustment of the rent to market in each renewal period. One of the ten lease agreements provides for adjustment of the rent to market in 2017, with subsequent adjustments to market taking place every five years from 2017 onwards. Also, the lease agreements include a purchase option exercisable by the Group on final expiry of the agreements (2047), with the exception of one of the leases, which envisages the possibility of exercising the purchase option in March 2023, March 2028, March 2033, March 2038, March 2043 and March 2047. In all the lease agreements, the value of the properties in the event that the purchase option is exercised shall be the market value of the properties on the related dates; this market value will be determined, if appropriate, by independent experts.

			Also, on November 23, 2007 the Group sold 1,152 of its branch offices to the Pearl Group for €2,040 million and recognized a net gain of €860 million. Simultaneously, an operating lease agreement for the aforementioned branch offices (with maintenance, insurance and taxes payable by the Group) was entered into with the Pearl Group, with compulsory terms of 24, 25 or 26 years (depending on the property), during which the rent (currently set at €8,417 thousand per month, payable quarterly) will be reviewed annually on the date of completion of each year of the lease term: (i) during the first ten years of the agreement, based on the percentage variation in the Spanish CPI in the preceding twelve months, plus 215 basis points; and (ii) from the eleventh year onwards, based on variations in the CPI. The agreement is renewable for a maximum of three additional seven-year periods, up to a total of 45, 46 or 47 years (depending on the property), the rent being adjusted to market at the end of the compulsory term and of each renewal period, and includes an option, exercisable by the Group on final expiry of the lease (45, 46 or 47 years, depending on the property) to purchase the properties at their market value on the expiry date; this market value will be determined, if appropriate, by independent experts.

			Lastly, on September 12, 2008 the Group completed the sale of its head offices (the Santander business campus) to Marme Inversiones 2007, S.L. for €1,904 million and recognized a net gain of €586 million (not including any gains relating to certain projects in progress that the Group has undertaken to complete). Simultaneously, an operating lease agreement for the aforementioned offices (with maintenance, insurance and taxes payable by the Group) was entered into with Marme Inversiones 2007, S.L., with a compulsory term of 40 years, during which the rent (currently set at

F-92

			€6,891 thousand per month, payable quarterly) will be reviewed annually based on the variation in the preceding twelve months in the Harmonized Consumer Price Index of the euro zone multiplied by 1.74, with a minimum of 2.20% during the first ten years and a maximum of 6% throughout the lease term. The agreement includes an option exercisable by the Group on final expiry of the lease to purchase the business campus at its market value on the expiry date -the market value will be determined, if appropriate, by independent experts-, and a right of first refusal if the lessor should wish to sell the business campus. In addition to the two aforementioned agreements, the Group entered into a third additional promotion agreement, whereby during the first 20 years of the lease term it can request Marme Inversiones 2007, S.L. to construct buildings additional to those already existing at the business campus or to acquire additional land (from the third year onwards) to be included in the business campus, all under certain terms and conditions and with a maximum total cost of approximately €296 million, which would subsequently be included in the lease agreement.

			The most noteworthy feature of the other agreed terms and conditions, all of which are customary market conditions for operating lease agreements, is that none of the aforementioned lease agreements provides for the transfer of ownership of the properties to the Group on expiry thereof, and the Group is entitled not to renew the rentals beyond the minimum compulsory term. Furthermore, the Group has not granted any guarantee to the buyers for any losses that might arise from the early termination of the agreements or for possible fluctuations in the residual value of the aforementioned properties.

			The Group was advised in the above-mentioned transactions by independent experts, who estimated the economic lives of the transferred properties at the transaction date, which in all cases were more than 60 years (more than 80 years in the case of the business campus). These experts also analyzed both the selling prices of the properties and the agreed subsequent rental payments, and concluded that they had been set at fair market values at that date.

			The rental expense recognized by the Group in 2008 in connection with these agreements amounted to €144 million (December 31, 2007: €10 million). At December 31, 2008, the present value of the minimum future payments that the Group will incur during the compulsory term (since it is considered that the agreements will not be renewed and the existing purchase options will not be exercised) amounted to €208 million payable within one year (December 31, 2007: €122 million), €835 million payable at between one and five years (December 31, 2007: €443 million) -€208 million in the second year (December 31, 2007: €117 million), €209 million in the third year (December 31, 2007: €113 million), €209 million in the fourth year (December 31, 2007: €109 million) and €210 million (December 31, 2007: €105 million) in the fifth year-, and €1,906 million payable at more than five years (December 31, 2007: €1,253 million).

17.		Intangible assets — Goodwill

		The breakdown of “Goodwill”, based on the companies giving rise thereto (see Note 3-c), is as follows:


	Millions of Euros
	2008		2007		2006

Abbey (UK)		6,456		8,168		8,920
Banco Real (Brazil)		6,446		—		—
Totta Group (Portugal)		1,641		1,641		1,641
Santander Consumer Bank AG (formerly CC Holding) (Germany)		824		824		824
Banco Santander Chile		563		681		718
Grupo Financiero Santander Serfin (Mexico)		416		498		560
Meridional Group (Brazil)		404		501		458
Drive Group		484		419		413
Alliance & Leicester		464		—		—
Banesto		369		373		373
Santander Consumer Bank AS (Norway)		112		134		116
Finconsumo (Italy)		106		106		106
Banco Santander Consumer Portugal, S.A.		122		163		90
Other companies		429		323		294

		18,836		13,831		14,513

F-93

At least once per year (or whenever there is any indication of impairment), the Group reviews goodwill for impairment (i.e. a potential reduction in its recoverable value to below its carrying amount). For this purpose, it analyses the following: (i) certain macroeconomic variables that might affect its investments (population data, political situation, economic situation -including balkanization-, among others); (ii) various microeconomic variables comparing the investments of the Group with the financial services industry of the country in which the Group carries on most of its business activities (balance sheet composition, total funds under management, results, efficiency ratio, capital ratio, return on equity, among others); and (iii) the price earnings (P/E) ratio of the investments as compared with the P/E ratio of the stock market in the country in which the investments are located and that of comparable local financial institutions.

Based on the foregoing, and in accordance with the estimates, projections and measurements available to the Bank’s directors in 2008, the Group recognized impairment losses on goodwill totaling €73 million (2007: €15 million; 2006: €13 million) under “Impairment losses on other assets — Goodwill and other intangible assets”.

The changes in “Goodwill” were as follows:


	Millions of Euros
	2008			2007			2006

Balance at beginning of year		13,831			14,513			14,018
Transfer of goodwill from “Investments” (Note 3)		8,000			—			—
Additions (Note 3)		941			252			650
Of which:
Abbey National Bank (Bradford & Bingley)		202
Alliance & Leicester		554
Drive Group		42			97			422
Santander Financial Services Inc. (Island Finance)		—			—			96
Banco Santander Consumer Portugal, S.A.		—			74			90
Unifin S.p.A.		—			—			37
JSC Santander Consumer Bank		—			38			—
Adjustments to acquisition price allocation		(413	)		(50	)		—
Of which, transfer to other intangible assets		(447	)		—
Impairment losses		(73	)		(15	)		(13	)
Disposals		(3	)		(6	)		(76	)
Of which:
Banco Santander Chile		—			—			(67	)
Exchange differences and other items		(3,447	)		(863	)		(66	)

Balance at end of year		18,836			13,831			14,513

The changes in goodwill in 2008 relate mostly to the goodwill that arose on the full consolidation of Banco Real (see Note 3-b), to the acquisition of Alliance & Leicester and to the exchange differences arising on the translation to euros, at the closing rates, of the amount of the goodwill expressed in foreign currency, mainly that resulting from the purchases of Abbey and Banco Real. In accordance with current regulations, these exchange differences were recognized with a charge to “Valuation adjustments — Exchange differences” in equity and a credit to “Goodwill” in assets. The change in the balance of this heading is disclosed in the consolidated statement of recognized income and expense.

F-94

18.		Intangible assets — Other intangible assets

		The breakdown of the balance of “Other intangible assets” is as follows:


	Estimated	Millions of Euros
	Useful Life	2008			2007			2006

With indefinite useful life:
Brand name	—		41			446			487
Of which: Abbey	—		—			429			469
With finite useful life:
Customer deposits (Abbey)	10 years		—			1,175			1,284
Credit cards (Abbey)	5 years		25			33			36
IT developments	3 years		2,174			1,575			1,310
Other assets	—		886			233			323
Accumulated amortization			(1,332	)		(1,235	)		(981	)
Impairment losses			(7	)		(25	)		(15	)

			1,787			2,202			2,444

The changes in “Other intangible assets” were as follows:


	Millions of Euros
	2008			2007			2006

Balance at beginning of year		2,202			2,444			2,211
Transfers from “Goodwill”		447			1			—
Change in the scope of consolidation		222			—			—
Additions/Disposals (net)		750			1,074			757
Amortization		(670	)		(647	)		(518	)
Impairment losses		(911	)		(563	)		—
Exchange differences and other changes (net)		(253	)		(107	)		(6	)

Balance at end of year		1,787			2,202			2,444

At December 31, 2008 and 2007, the Group reviewed the useful lives of its intangible assets and adjusted the carrying amounts of these assets on the basis of the estimated economic benefits currently expected to be obtained therefrom. As a result of this review, in 2008 the Group recognized under “Impairment losses on other assets — Goodwill and other intangible assets” impairment losses amounting to €911 million relating substantially in full to intangible assets arising from the acquisition of Abbey in 2004. The impairment losses recorded in 2007 amounted to €563 million.

19.		Other assets

		The breakdown of the balance of “Other assets” is as follows:


	Thousands of Euros
	2008		2007		2006

Transactions in transit		204,780		147,392		163,655
Net pension plan assets (Note 25)		510,028		239,392		223,851
Prepayments and accrued income		1,952,843		1,749,193		1,581,843
Other		2,716,801		1,744,230		1,531,836
Inventories		620,774		231,734		143,354

		6,005,226		4,111,941		3,644,539

F-95

20.		Deposits from central banks and Deposits from credit institutions

		The breakdown, by classification, counterparty, type and currency, of the balances of these items is as follows:


	Thousands of Euros
	2008		2007		2006

Classification:
Financial liabilities held for trading		35,951,711		23,254,111		39,690,713
Of which:
Deposits from central banks		9,109,857		—		—
Deposits from credit institutions		26,841,854		23,254,111		39,690,713
Other financial liabilities at fair value through profit or loss		14,130,169		18,769,907		—
Of which:
Deposits from central banks		4,396,901		6,562,328		—
Deposits from credit institutions		9,733,268		12,207,579		—
Financial liabilities at amortized cost		79,795,490		70,873,290		73,347,348
Of which:
Deposits from central banks		9,211,957		22,185,751		16,529,557
Deposits from credit institutions		70,583,533		48,687,539		56,817,791

		129,877,370		112,897,308		113,038,061

Type:
Reciprocal accounts		509,282		562,619		411,314
Time deposits		82,559,946		71,227,723		63,600,204
Other demand accounts		2,527,834		2,466,369		2,225,037
Repurchase agreements		41,651,446		36,615,910		45,417,839
Central bank credit account drawdowns		2,626,262		2,008,927		1,348,815
Hybrid financial liabilities		2,600		15,760		34,852

		129,877,370		112,897,308		113,038,061

Currency:
Euro		59,833,384		58,327,694		43,829,129
Pound sterling		27,275,168		14,948,909		24,543,702
US dollar		33,490,478		28,930,017		27,883,743
Other currencies		9,278,340		10,690,688		16,781,487

		129,877,370		112,897,308		113,038,061

Note 51 contains a detail of the residual maturity periods of financial liabilities at amortized cost and of the related average interest rates.

F-96

21.		Customer deposits

		The breakdown, by classification, geographical area and type, of the balance of “Customer deposits” is as follows:


	Thousands of Euros
	2008		2007		2006

Classification:
Financial liabilities held for trading		4,896,065		27,992,480		16,572,444
Other financial liabilities at fair value through profit or loss		9,318,117		10,669,058		273,079
Financial liabilities at amortized cost		406,015,268		316,744,981		314,102,247

		420,229,450		355,406,519		330,947,770

Geographical area:
Spain		142,376,596		131,833,844		120,234,884
European Union (excluding Spain)		170,778,310		134,505,644		136,706,618
United States and Puerto Rico		8,440,893		17,881,211		7,512,963
Other OECD countries		470,721		189,548		79,117
Latin America		96,103,045		69,360,898		64,984,913
Rest of the world		2,059,885		1,635,374		1,429,275

		420,229,450		355,406,519		330,947,770

Type:
Demand deposits-
Current accounts		94,773,159		87,136,743		89,151,030
Savings accounts		115,673,794		90,727,525		93,717,633
Other demand deposits		3,035,757		3,593,720		2,025,095
Time deposits-
Fixed-term deposits		143,130,514		92,375,364		86,070,957
Home-purchase savings accounts		295,458		296,768		324,262
Discount deposits		11,625,840		9,933,139		7,132,341
Hybrid financial liabilities		8,159,893		8,494,773		4,994,535
Other time deposits		290,053		113,562		470,140
Notice deposits		1,764,954		283,301		45,849
Repurchase agreements		41,480,026		62,451,624		47,015,928

		420,229,450		355,406,519		330,947,770

		Note 51 contains a detail of the residual maturity periods of financial liabilities at amortized cost and of the related average interest rates.

22.		Marketable debt securities

	a)		*Breakdown*

			The breakdown, by classification and type, of the balance of “Marketable debt securities” is as follows:


	Thousands of Euros
	2008		2007		2006

Classification:
Financial liabilities held for trading		3,569,795		17,090,935		17,522,108
Other financial liabilities at fair value through profit or loss		5,191,073		10,279,037		12,138,249
Financial liabilities at amortized cost		227,642,422		205,916,716		174,082,460

		236,403,290		233,286,688		203,742,817

Type:
Bonds and debentures outstanding		194,291,014		200,557,274		168,334,783
Notes and other securities		42,112,276		32,729,414		35,408,034

		236,403,290		233,286,688		203,742,817

At December 31, 2008, 2007 and 2006, none of these issues was convertible into Bank shares or granted privileges or rights which, in certain circumstances, make them convertible into shares (except for the Santander Securities (“Valores Santander”), which are described in Note 34-a.

At December 31, 2008, asset-backed securities amounted to €50,153 million. In 2008 asset-backed securities amounting to €1,539 million were issued, of which €677 million were issued by Santander Consumer Bank AG, €507 million by the Alliance & Leicester Group and €352 million by Brazil Foreign Diversified Payment Right.

F-97

Additionally, total mortgage bonds at December 31, 2008 amounted to €47,758 million. In 2008 various Group entities issued mortgage bonds (cédulas hipotecarias) totaling €2,165 million (of which €1,065 million were recognized under “Customer Deposits” due to their private nature). The registered mortgage bonds outstanding in connection with these issues totaled €38,726 million at December 31, 2008 (December 31, 2007: €39,264 million).

At December 31, 2007, asset-backed securities amounted to €63,172 million (December 31, 2006: €48,226 million). In 2007 asset-backed securities amounting to €28,520 million were issued, of which €15,924 million were issued by the Abbey Group, €2,666 million by Fondo de Titulización de Activos Santander Empresas 3, €2,585 million by Santander Consumer Bank AG, €1,733 million by Hipototta No. 5 plc. and €1,659 million by Fondo de Titulización de Activos Santander Consumer Spain Auto 07-1.

Additionally, total mortgage bonds at December 31, 2007 amounted to €45,664 million. In 2007 the Bank and Banesto issued mortgage bonds (cédulas hipotecarias) amounting to €4,500 million and €1,750 million, respectively. The mortgage bonds outstanding in connection with these issues totaled €39,264 million at December 31, 2007 (December 31, 2006: €36,224 million).

Note 51 contains a detail of the residual maturity periods of financial liabilities at amortized cost and of the related average interest rates in each year.

	b)		*Bonds and debentures outstanding*

			The breakdown, by currency of issue, of the balance of this account is as follows:


							December 31, 2008
							Outstanding
							Issue Amount
							in Foreign		Annual
	Millions of Euros						Currency		Interest
Currency of Issue	2008		2007		2006		(Millions)		Rate (%)

Euro		135,330		131,684		112,295		135,330		4.13	%
US dollar		27,459		38,864		30,001		38,215		4.06	%
Pound sterling		21,493		23,154		21,128		20,472		5.43	%
Chilean peso		2,380		2,239		1,725		2,111,051		4.45	%
Other currencies		7,629		4,616		3,185

Balance at end of year		194,291		200,557		168,334

F-98

The changes in “Bonds and debentures outstanding” were as follows:


	Millions of Euros
	2008			2007			2006

Balance at beginning of year		200,557			168,335			123,556
Net inclusion of entities in the Group		20,333			36			1,895
Of which, Alliance & Leicester Group		18,676			—			—
Issues		76,786			122,530			76,956
Of which:
Banco Santander, S.A.-
Non-convertible debentures February and December — floating rate		—			—			4,374
Mortgage bonds — fixed rate		—			4,500			7,500
Banesto-
Mortgage bonds — fixed rate		100			1,708			3,000
Bonds		3,818			5,006			5,547
Santander International Debt, S.A., Sole-Shareholder Company-
Bonds — floating rate		16,007			10,059			11,709
Abbey-
Holmes Financing (Nº 10) plc		—			—			5,581
Holmes Master Issuer plc		—			15,924			5,153
Bonds in pounds sterling		21,667			26,613			6,608
Bonds in other currencies		29,599			41,122			7,284
Santander US Debt, S.A., Sole-Shareholder Company-
Debentures — floating rate					2,038			3,785
Santander Consumer Bank AG-
Asset-backed securities		677			2,585			1,769
Banco Santander Totta, S.A.-
Bonds		1,496			890			3,808
Mortgage debentures		1,000			—			—
FTA Santander Consumer Spain Auto 06-
Asset-backed securities		—			—			1,350
Totta (Ireland Plc) — floating rate bonds		849			—			—
Banco Santander S.A. (formerly Banespa)		—			—			—
Real estate letters of credit		663			—			—
Bonds		556
Redemptions		(93,872	)		(85,674	)		(30,510	)
Of which:
Banco Santander, S.A.		(1,783	)		(3,987	)		(3,038	)
Banesto		(7,407	)		(2,358	)		(2,037	)
Santander Consumer Bank S.p.A.		(217	)		(26	)		(179	)
Abbey National plc		(65,039	)		(70,535	)		(21,210	)
Banco Santander S.A. (formerly Banespa)		(555	)		—			—
Santander Consumer Bank AG		(203	)		—			—
Santander Central Hispano International Limited		(979	)		—			—
Banco Santander Totta, S.A.		(2,637	)		—			—
Totta (Ireland) Plc		(1,189	)		—			—
Santander US Debt, S.A. Sole-Shareholder Company		(4,178	)		(1,329	)		—
Santander International Debt, S.A. Sole-Shareholder Company		(6,239	)		(3,037	)		—
Drive Group		(960	)		—			—
Fondo de Titulización de Activos Santander Empresas 1		(468	)		—			—
Fondo de Titulización de Activos Santander Empresas 2		(691	)		—			—
Fondo de Titulización de Activos Santander Empresas 3		(883	)		—			—
Exchange differences		(5,806	)		(2,864	)		(1,557	)
Other changes		(3,707	)		(1,806	)		(2,005	)

Balance at end of year		194,291			200,557			168,335

	c)		*Notes and other securities*

			These notes were issued basically by Banco Santander, S.A.; Santander Commercial Paper, S.A., Sole-Shareholder Company; Abbey National North America LLC; Abbey National Treasury Services, plc; Abbey National plc, Santander Central Hispano Finance (Delaware) Inc.; Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander; Santander Consumer Finance, S.A.; Banco Santander Puerto Rico; Banesto; Services and Promotions Miami LLC and JSC Santander Consumer Bank.

F-99

	d)		*Guarantees*

			At December 31, 2008, liabilities or contingent liabilities secured by financial assets amounted to €97,911 million, the detail being as follows:


	Millions of Euros
	2008		2007

Commercial paper (promissory notes)		—		183
Asset-backed securities		50,153		63,172
Other mortgage securities		47,758		45,664
Of which: mortgage bonds (“cédulas hipotecarias”)		37,726		39,264

Total		97,911		109,019

The mortgage-backed securities and other mortgage securities are secured by mortgage loans with average maturities of more than ten years. The main terms and conditions of these loans are listed below:

Transactions securing mortgage-backed securities:

• First mortgage for acquisition of principal or second residence, which at the date of securitization must not have any amounts more than 30 days past due. For these purposes, financing granted to property developers is excluded.

• Within the credit worthiness analysis, consideration is given to an appraisal conducted by a valuation specialist.

• The amount of the loan must not exceed 80% of the lower of the appraised value and the purchase price, unless additional guarantees are provided (borrower’s payment capacity, other collateral, guarantors of solvency or mortgage credit insurance), in which case this limit may be extended up to a maximum of 120%.

• Each of the mortgaged properties must have at least one liability insurance policy in force. The capital insured must not be lower than either the appraised value (excluding the land) or the amount of the loan.

With respect to mortgage bond issues (cédulas hipotecarias), in order to calculate the amount of the qualifying assets, the following transactions are excluded from the total base of the unsecuritized mortgage portfolio:

• Transactions classified as non-performing, at pre-action stage and at procedural stage.

• Transactions without appraisal by a specialist valuer.

• Transactions exceeding 80% of the appraised value in residential financing and 60% in the case of other assets.

• Second mortgages or mortgages with insufficient collateral.

• Transactions without insurance or with insufficient insurance.

The other securitizations are secured by SME and consumer loan portfolios with average maturities of seven and five years, respectively.

The fair value of the guarantees received by the Group (financial and non-financial assets) which the Group is authorized to sell or pledge even if the owner of the guarantee has not defaulted is scantly material taking into account the Group’s financial statements as a whole.

F-100

23.

Subordinated liabilities

	a)		*Breakdown*

			The detail, by currency of issue, of the balance of “Subordinated liabilities” is as follows:


							December 31, 2008
							Outstanding
							Issue Amount
							in Foreign		Annual
	Thousands of Euros						Currency		Interest Rate
Currency of Issue	2008		2007		2006		(Millions)		(%)

Euros		19,660,053		19,224,529		16,309,049		19,660		4.54	%
US dollar		7,877,340		7,412,454		7,055,103		10,963		6.75	%
Pound sterling		7,952,179		7,387,191		6,143,547		7,574		7.39	%
Other currencies		3,383,678		2,168,563		1,583,450

Balance at end of year		38,873,250		36,192,737		31,091,149

Of which, preference shares		1,051,272		522,558		668,328

			Note 51 contains a detail of the residual maturity periods of subordinated liabilities at each year-end and of the related average interest rates in each year.

	b)		*Changes*

			The changes in the balance of “Subordinated liabilities” were as follows:


	Millions of Euros
	2008			2007			2006

Balance at beginning of year		36,193			31,091			30,072
Net inclusion of entities in the Group		2,776			—			(459	)
Of which:
Scottish Mutual Pensions Limited		—			—			(292	)
Alliance & Leicester Group		1,648			—			—
Banco ABN AMRO Real S.A.		1,128			—			—
Issues		312			8,330			5,881
Of which:
Santander Consumer Finance, S.A.		—			—			500
Banco Santander S.A. (Banespa)		—			—			995
Santander Central Hispano Issuances Limited		—			5,908			3,484
Santander Perpetual, S.A., Sole-Shareholder Company		—			1,019			—
Santander Finance Preferred, S.A., Sole-Shareholder Company		—			1,072			—
Redemptions		(1,315	)		(2,340	)		(2,265	)
Of which:
Abbey National plc		(409	)		(944	)		(763	)
Santander Central Hispano Issuances Limited		(153	)		(1,188	)		(1,369	)
Banesto		(500	)		—			—
Exchange differences		(2,066	)		(1,353	)		(1,093	)
Other changes		2,973			465			(1,045	)

Balance at end of year		38,873			36,193			31,091

Other information

This item includes the preferred participating securities and other financial instruments issued by the consolidated companies which, although equity for legal purposes, do not meet the requirements for classification as equity (preference shares).

The preference shares do not carry any voting rights and are non-cumulative. They were subscribed to by non-Group third parties and, except for the shares of Abbey referred to below, are redeemable at the discretion of the issuer, based on the terms and conditions of each issue.

F-101

For the purposes of payment priority, preferred participating securities are junior to all general creditors and to subordinated deposits. The remuneration of these securities, which have no voting rights, is conditional upon the obtainment of sufficient distributable profit and upon the limits imposed by Spanish banking regulations on equity.

The other issues are subordinated and, therefore, rank junior to all general creditors of the issuers. The issues launched by Santander Central Hispano Issuances, Limited, Santander Central Hispano Financial Services Limited, Santander Issuances, S.A. (Sole-Shareholder Company), Santander Perpetual, S.A. (Sole-Shareholder Company), Santander Finance Capital, S.A. (Sole-Shareholder Company) and Santander Finance Preferred S.A. (Sole-Shareholder Company) are guaranteed by the Bank or by restricted deposits arranged by the Bank for this purpose.

Except for those described in Note 34-a, at December 31, 2008 none of these issues was convertible into Bank shares or granted privileges or rights which, in certain circumstances, make them convertible into shares. Abbey has a GBP 200 million subordinated debt issue which is convertible, at Abbey’s option, into preference shares of Abbey, at a price of GBP 1 per share. Banco Santander (México), S.A. Institución de Banca Múltiple, Grupo Financiero Santander has two USD 150 million issues of unguaranteed subordinated preference debentures that are voluntarily convertible into ordinary shares of Banco Santander (México), S.A. Institución de Banca Múltiple, Grupo Financiero Santander.

The accrued interest on the subordinated liabilities amounted to €2,415 thousand in 2008 (2007: €2,101 thousand).

24.		Other financial liabilities

		The breakdown of the balances of these items is as follows:


	Thousands of Euros
	2008		2007		2006

Trade payables		2,282,759		3,350,422		3,070,870
Clearing houses		761,534		1,106,714		544,004
Tax collection accounts -
Tax payables		2,066,685		2,040,547		2,031,137
Factoring accounts payable		283,478		326,107		284,331
Bonds		1,159,960		994,572		41,447
Unsettled financial transactions		3,628,473		2,994,299		1,978,120
Other financial liabilities		7,498,280		5,870,817		4,846,462

		17,681,169		16,683,478		12,796,371

		Note 51 contains a detail of the residual maturity periods of other financial assets and liabilities at each year-end.

25.		Provisions

	a)		*Breakdown*

			The breakdown of the balance of “Provisions” is as follows:


	Thousands of Euros
	2008		2007		2006

Provisions for pensions and similar obligations		11,198,117		11,819,748		14,014,305
Provisions for taxes and other legal contingencies		2,363,706		1,715,967		1,884,305
Provisions for contingent liabilities and commitments (Note 2):		678,584		636,316		598,735
Of which: country risk		56,254		48,831		57,216
Other provisions		3,495,852		2,398,868		2,729,168

Provisions		17,736,259		16,570,899		19,226,513

F-102

	b)		*Changes*

			The changes in “Provisions” were as follows:


	Millions of Euros
	2008												2007												2006
				Contingent												Contingent												Contingent
				Liabilities and			Other									Liabilities and			Other									Liabilities and		Other
	Pensions			Commitments			Provisions			Total			Pensions			Commitments			Provisions			Total			Pensions			Commitments		Provisions			Total

Balances at beginning of year		11,820			636			4,115			16,571			14,014			599			4,614			19,227			14,173			487		5,163			19,823
Net inclusion of entities in the Group		175			73			2,816			3,064			(2	)		—			(35	)		(37	)		—			—		1			1
Additions charged to income:
Interest expense and similar charges (Note 39)		456			—			—			456			488			—			—			488			735			—		—			735
Staff costs (Note 47)		185			—			—			185			209			—			—			209			223			—		—			223
Additions to provisions		601			(3	)		1,101			1,699			431			96			497			1,024			984			96		(1	)		1,079
Other additions arising from insurance contracts linked to pensions		(17	)		—			—			(17	)		(17	)		—			—			(17	)		(6	)		—		—			(6	)
Payments to pensioners and early retirees with a charge to internal provisions		(1,086	)		—			—			(1,086	)		(1,109	)		—			—			(1,109	)		(1,422	)		—		—			(1,422	)
Insurance premiums paid		(8	)		—			—			(8	)		(6	)		—			—			(6	)		(2	)		—		—			(2	)
Payments to external funds		(563	)		—			—			(563	)		(2,168	)		—			—			(2,168	)		(743	)		—		—			(743	)
Amount used		—			—			(1,523	)		(1,532	)		—			—			(921	)		(921	)		—			—		(982	)		(982	)
Transfers, exchange differences and other changes		(363	)		(27	)		(649	)		(1,042	)		(20	)		(59	)		(40	)		(119	)		72			16		433			521

Balances at end of year		11,198			679			5,860			17,736			11,820			636			4,115			16,571			14,014			599		4,614			19,227

F-103

	c)		*Provisions for pensions and similar obligations*

			The breakdown of the balance of “Provisions for pensions and similar obligations” is as follows:


	Millions of Euros
	2008		2007		2006

Provisions for post-employment plans — Spanish entities		5,596		5,723		5,647
Of which: defined benefit		5,593		5,626		5,647
Provisions for other similar obligations—Spanish entities		4,166		4,001		4,527
Of which: early retirements		4,158		3,950		4,481
Provisions for post-employment plans — Abbey		744		1,275		1,642
Provisions for post-employment plans and other similar obligations — Other foreign subsidiaries		692		821		2,198
Of which: defined benefit		688		821		2,198

Provisions for pensions and similar obligations		11,198		11,820		14,014

i. Spanish entities — Post-employment plans and other similar obligations

At each year-end, the Spanish consolidated entities had post-employment benefit obligations under defined benefit plans. On July 25, 2006, the Bank entered into an agreement with the employee representatives to promote a defined contribution plan aimed at all current personnel. Subsequently, at its meeting on December 17, 2007, the Bank’s board of directors approved the implementation of a defined contribution retirement plan for executives of the Bank. In 2008, in accordance with the aforementioned plan, an extraordinary contribution totaling €111 million was made for past service, together with a current contribution which amounted to €19 million. Lastly, in various years some of the consolidated entities offered certain of their employees the possibility of taking early retirement and, therefore, provisions were recognized in those years for the obligations to employees taking early retirement -in terms of salaries and other employee welfare costs- from the date of early retirement to the date of effective retirement.

At each year-end, the Spanish entities had post-employment benefit obligations under defined contribution and defined benefit plans. The expenses incurred in respect of contributions to defined contribution plans amounted to €40 million in 2008, €14 million in 2007 and €13 million in 2006.

The amount of the defined benefit obligations was determined based in part upon independent actuaries using the following actuarial techniques:

	1.		Valuation method: projected unit credit method, which sees each year of service as giving rise to an additional unit of benefit entitlement and measures each unit separately.

	2.		Actuarial assumptions used: unbiased and mutually compatible. Specifically, the most significant actuarial assumptions used in the calculations were as follows:

Post-Employment Plans

Other Similar Obligations

2008

2007

2006

2008

2007

2006

Annual discount rate

4.0%

Mortality tables

GRM/F-95

(PERM/F-2000 in

(PERM/F-2000

the case of

in the case of

Banesto)

Cumulative annual CPI growth

1.5%

Annual salary increase rate

2.50% (2.9% in

n/a

the case of

Banesto)

Annual social security pension increase rate

1.5%

n/a

Annual benefit increase rate

n/a

0% to 1.5%

F-104

			The discount rate used is that required by Spanish legislation for measuring similar obligations, which is published annually by the Directorate-General of Insurance (Resolution of February 26, 2008). The maximum rate to be used in 2008 was set at 4.32%. This figure relates to 100% of the average interest rates of Government bonds for the last quarter of year prior to that in which the rate is applicable.

	3.		The estimated retirement age of each employee is the first at which the employee is entitled to retire or the agreed-upon age, as appropriate.

			The fair value of insurance contracts was determined as the present value of the related payment obligations, taking into account the following assumptions:


										Other Similar
	Post-Employment Plans									Obligations
	2008			2007			2006			2008			2007			2006

Expected rate of return on plan assets		4.0	%		4.0	%		4.0	%		—			—			—
Expected rate of return on reimbursement rights		4.0	%		4.0	%		4.0	%		4.0	%		4.0	%		4.0	%

The funding status of the defined benefit obligations in 2008 and the four preceding years is as follows:


	Millions of Euros
	Post-Employment Plans										Other Similar Obligations
	2008		2007		2006		2005		2004		2008		2007		2006		2005		2004

Present value of the obligations:
To current employees		1,273		1,259		1,215		1,207		1,180		—		—		—		—		—
Vested obligations to retired employees		4,828		4,876		4,958		4,942		5,005		—		—		—		—		—
To early retirees		—		—		—		—		—		4,158		3,950		4,481		4,215		4,051
Long-service bonuses and other obligations		—		—		—		—		—		8		50		46		54		48
Other		181		174		164		225		248		—		1		—		—		—

		6,282		6,309		6,337		6,374		6,433		4,166		4,001		4,527		4,269		4,099
Less:
Fair value of plan assets		193		192		203		211		212		—		—		—		—		—
Unrecognized actuarial (gains)/losses		489		487		482		506		536		—		—		—		—		—
Unrecognized past service cost		7		4		5		—		—		—		—		—		—		—

Provisions — Provisions for pensions		5,593		5,626		5,647		5,657		5,685		4,166		4,001		4,527		4,269		4,099

Of which:
Internal provisions for pensions		3,153		3,114		3,065		3,015		2,982		4,159		3,987		4,504		4,235		4,048
Insurance contracts linked to pensions (Note 14)		2,440		2,512		2,582		2,642		2,703		7		14		23		34		51

The amounts recognized in the consolidated income statement in relation to the aforementioned defined benefit obligations are as follows:


	Millions of Euros
	Post-Employment Plans									Other Similar Obligations
	2008			2007			2006			2008			2007			2006

Current service cost		56			56			55			5			5			3
Interest cost		240			242			239			145			166			156
Expected return on plan assets		(8	)		(8	)		(8	)		—			—			—
Expected return on insurance contracts linked to pensions		(95	)		(102	)		(103	)		—			(1	)		(1	)
Extraordinary charges-
Actuarial (gains)/losses recognized in the year		6			6			8			4			13			16
Past service cost		63			58			151			—			—			—
Early retirement cost		(23	)		2			(24	)		587			39			799
Other		(21	)		(16	)		(21	)		(53	)		(22	)		(10	)

Total		219			238			297			688			201			963

F-105

The changes in the present value of the accrued defined benefit obligations were as follows:


	Millions of Euros
	Post-Employment Plans									Other Similar Obligations
	2008			2007			2006			2008			2007			2006

Present value of the obligations at beginning of year		6,309			6,337			6,374			4,001			4,527			4,269
Net inclusion of entities in the Group		—			—			—						—			—
Current service cost		56			56			55			5			5			3
Interest cost		240			242			239			145			166			156
Early retirement cost		(23	)		2			(24	)		587			39			799
Effect of curtailment/settlement		(21	)		(16	)		(21	)		(54	)		(22	)		(10	)
Benefits paid		(334	)		(350	)		(415	)		(726	)		(729	)		(708	)
Past service cost		66			58			156			—			1			—
Actuarial (gains)/losses		(11	)		(19	)		(25	)		4			13			16
Other		—			(1	)		(2	)		204			1			2

Present value of the obligations at end of year		6,282			6,309			6,337			4,166			4,001			4,527

		The changes in the fair value of plan assets and of insurance contracts linked to pensions were as follows:

		Plan assets


	Millions of Euros
	Post-Employment Plans
	2008			2007			2006

Fair value of plan assets at beginning of year		192			203			211
Expected return on plan assets		8			8			8
Actuarial gains/(losses)		(2	)		(12	)		(4	)
Contributions		8			6			2
Benefits paid		(13	)		(13	)		(14	)

Fair value of plan assets at end of year		193			192			203

Insurance contracts linked to pensions


	Millions of Euros
	Post-Employment Plans									Other Similar Obligations
	2008			2007			2006			2008			2007			2006

Fair value of insurance contracts linked to pensions at beginning of year		2,512			2,582			2,642			14			23			34
Expected return on insurance contracts (Note 38)		95			102			103			—			1			1
Actuarial gains/(losses)		(17	)		(17	)		(6	)		—			—			—
Premiums paid		11			12			11			—			—			—
Benefits paid		(161	)		(165	)		(168	)		(7	)		(10	)		(12	)
Exchange differences		—			(2	)		—			—			—			—

Fair value of insurance contracts linked to pensions at end of year		2,440			2,512			2,582			7			14			23

In 2009 the Group expects to make contributions in Spain to fund its defined benefit pension obligations for amounts similar to those made in 2008.

The plan assets and the insurance contracts linked to pensions are instrumented through insurance policies.

F-106

The following table shows the estimated benefits payable at December 31, 2008 for the next ten years:


	Millions
	of Euros

2009		1,095
2010		1,035
2011		972
2012		915
2013		858
2014 to 2018		3,038

		7,913

ii. United Kingdom

At the end of each of the last three years, the businesses in the UK (basically Abbey and Alliance & Leicester in 2008 and Abbey in 2007 and 2006) had post-employment benefit obligations under defined contribution and defined benefit plans. The expenses incurred in respect of contributions to defined contribution plans amounted to €10 million in 2008, €10 million in 2007 and €5 million in 2006.

The amount of the defined benefit obligations was determined based in part upon independent actuaries using the following actuarial techniques:

	1.		Valuation method: projected unit credit method, which sees each year of service as giving rise to an additional unit of benefit entitlement and measures each unit separately.

	2.		Actuarial assumptions used: unbiased and mutually compatible. Specifically, the most significant actuarial assumptions used in the calculations were as follows:


	2008			2007			2006

Annual discount rate		6.40	%		5.30	%		5.20	%
Mortality tables	PX92MC C2008			PA92MC C2006			PA92MC C2006
Cumulative annual CPI growth		3.0	%		3.0	%		3.0	%
Annual salary increase rate		3.5	%		4.0	%		4.0	%
Annual pension increase rate		3.0	%		3.0	%		3.0	%

The funding status of the defined benefit obligations in 2008 and the four preceding years is as follows:


	Millions of Euros
	2008			2007		2006			2005		2004

Present value of the obligations		5,445			6,248		6,350			6,337		5,232

Less:
Fair value of plan assets		4,591			4,913		4,810			4,326		3,504
Unrecognized actuarial (gains)/losses		202			60		(102	)		223		—
Unrecognized past service cost		—			—		—			—		—

Provisions — Provisions for pensions		652			1,275		1,642			1,788		1,728

Of which:
Internal provisions for pensions		744			1,275		1,642			1,788		1,728
Net assets for pensions		(92	)		—		—			—		—

F-107

The amounts recognized in the consolidated income statement in relation to the aforementioned defined benefit obligations are as follows:


	Millions of Euros
	2008			2007			2006

Current service cost		69			97			119
Interest cost		331			322			309
Expected return on plan assets		(298	)		(284	)		(263	)
Extraordinary charges:
Actuarial gains/losses recognized in the year		(1	)		(1	)		—
Past service cost		—			—			—
Early retirement cost		—			—			3

Total		101			134			168

The changes in the present value of the accrued defined benefit obligations were as follows:


	Millions of Euros
	2008			2007			2006

Present value of the obligations at beginning of year		6,248			6,350			6,337
Net inclusion of entities in the Group		1,252			—			—
Current service cost		69			97			119
Interest cost		331			322			309
Early retirement cost					—			3
Benefits paid		(199	)		(175	)		(178	)
Actuarial (gains)/losses		(802	)		200			(342	)
Exchange differences and other items		(1,454	)		(546	)		102

Present value of the obligations at end of year		5,445			6,248			6,350

The net inclusion of entities in the Group relates mainly to Alliance & Leicester.

The changes in the fair value of the plan assets were as follows:


	Millions of Euros
	2008			2007			2006

Fair value of plan assets at beginning of year		4,913			4,810			4,326
Net inclusion of entities in the Group		1,335			—			—
Expected return on plan assets		298			284			263
Actuarial gains/losses		(954	)		45			(13	)
Contributions		413			387			303
Benefits paid		(199	)		(175	)		(178	)
Exchange differences		(1,215	)		(438	)		109

Fair value of plan assets at end of year		4,591			4,913			4,810

The net inclusion of entities in the Group relates mainly to Alliance & Leicester.

Due to the inclusion of Alliance & Leicester in the Group, the contributions relating to these defined benefit pension obligations are expected to rise by approximately €14 million in 2009 compared with those for 2008.

F-108

The main categories of plan assets as a percentage of total plan assets are as follows:


	2008			2007			2006

Equity instruments		41	%		46	%		46	%
Debt instruments		56	%		52	%		51	%
Properties		2	%		—			—
Other		1	%		2	%		3	%

The expected return on plan assets was determined on the basis of the market expectations for returns over the duration of the related obligations.

The following table shows the estimated benefits payable at December 31, 2008 for the next ten years:


	Millions
	of Euros

2009		205
2010		217
2011		235
2012		254
2013		273
2014 to 2018		1,706

		2,890

iii. Other foreign subsidiaries

Certain of the consolidated foreign entities have acquired commitments to their employees similar to post-employment benefits.

At December 31, 2008, 2007 and 2006, these entities had defined contribution and defined benefit post-employment benefit obligations. The expenses incurred in respect of contributions to defined contribution plans amounted to €28 million in 2008, €23 million in 2007 and €19 million in 2006.

The actuarial assumptions used by these entities (discount rates, mortality tables and cumulative annual CPI growth) are consistent with the economic and social conditions prevailing in the countries in which they are located.

The funding status of the obligations similar to post-employment benefits and other long-term benefits in 2008 and the four preceding years is as follows:


	Millions of Euros
	2008			2007			2006			2005			2004

Present value of the obligations		6,735			7,264			6,198			5,481			4,092

Less:
Fair value of plan assets		6,307			6,725			3,917			2,523			1,962
Unrecognized actuarial (gains)/losses		386			134			517			760			315
Unrecognized past service cost		—			—			—			2			—

Provisions — Provisions for pensions		42			405			1,764			2,196			1,815


Of which:
Internal provisions for pensions		688			821			2,198			2,459			1,929
Net assets for pensions		(418	)		(239	)		(224	)		(55	)		(10	)
Unrecognized net assets for pensions		(228	)		(177	)		(210	)		(208	)		(104	)

F-109

In January 2007 Banco do Estado de Sao Paulo, S.A.- Banespa (which merged with Banco Santander Banespa, S.A. on August 31, 2006) externalized a portion of the pension obligations to employees for which it still recognized an internal provision and for this purpose arranged an external plan or fund managed by Banesprev. As a result of this externalization, the related assets and liabilities were transferred to Banesprev, and “Provisions — Provisions for Pensions and Similar Obligations” at December 31, 2007 included the present value of the aforementioned obligations, net of the fair value of the related plan assets and the net unrecognized cumulative actuarial gains and/or losses.

The amounts recognized in the consolidated income statement in relation to these obligations are as follows:


	Millions of Euros
	2008			2007			2006

Current service cost		55			51			46
Interest cost		673			608			574
Expected return on plan assets		(628	)		(559	)		(271	)
Extraordinary charges:
Actuarial gains/losses recognized in the year		34			22			93
Past service cost		—			—			29
Early retirement cost		5			16			72
Other		(2	)		216			(132	)

Total		137			354			411

The changes in the present value of the accrued obligations were as follows:


	Millions of Euros
	2008			2007			2006

Present value of the obligations at beginning of year		7,264			6,198			5,481
Net inclusion of entities in the Group		673			—			—
Current service cost		55			51			46
Interest cost		673			608			574
Early retirement cost		5			16			72
Effect of curtailment/settlement		(2	)		(4	)		(132	)
Benefits paid		(535	)		(492	)		(513	)
Past service cost		—			—			27
Actuarial (gains)/losses		(10	)		707			72
Exchange differences and other items		(1,391	)		180			571

Present value of the obligations at end of year		6,735			7,264			6,198

The net inclusion of entities in the Group relates mainly to Banco Real.

The changes in the fair value of the plan assets were as follows:


	Millions of Euros
	2008			2007			2006

Fair value of plan assets at beginning of year		6,725			3,917			2,523
Net inclusion of entities in the Group		618			—			—
Expected return on plan assets		628			559			271
Actuarial gains/(losses)		(351	)		586			12
Contributions		285			1,863			461
Benefits paid		(495	)		(452	)		(199	)
Exchange differences and other items		(1,103	)		252			849

Fair value of plan assets at end of year		6,307			6,725			3,917

F-110

The net inclusion of entities in the Group relates mainly to Banco Real.

In 2009 the Group expects to make contributions to fund these obligations for amounts similar to those made in 2008.

The main categories of plan assets as a percentage of total plan assets are as follows:


	2008			2007			2006

Equity instruments		12	%		27	%		27	%
Debt instruments		83	%		66	%		61	%
Properties		2	%		2	%		3	%
Other		3	%		5	%		9	%

The expected return on plan assets was determined on the basis of the market expectations for returns over the duration of the related obligations.

The following table shows the estimated benefits payable at December 31, 2008 for the next ten years:


	Millions
	of Euros

2009		470
2010		485
2011		504
2012		523
2013		541
2014 to 2018		2,991

		5,514

Provisions for taxes and other legal contingencies and other provisions

The balance of “Provisions — Provisions for taxes and other legal contingencies” and “Provisions - Other provisions”, which includes, inter alia, provisions for restructuring costs and tax and legal litigation, was estimated using prudent calculation procedures in keeping with the uncertainty inherent in the obligations covered. The definitive date of the outflow of resources embodying economic benefits for the Group depends on each obligation; in certain cases, these obligations have no fixed settlement period and, in other cases, are based on litigation in progress.

The breakdown of the balance of “Provisions — Other provisions” is as follows:


	Millions of Euros
	2008		2007		2006

Provisions for contingencies and commitments in operating units:
Recognized by Spanish companies		1,061		814		892
Recognized by other EU companies		721		886		1,230
Recognized by other companies		4,078		2,415		2,492
Of which:
Brazil		2,920		1,989		1,795

		5,860		4,115		4,614

F-111

Litigation

i. Tax litigation

At December 31, 2008, the main tax litigation concerning the Group was as follows:

	•		The “Mandados de Segurança” filed by Banco Santander, S.A. and other Group companies in Brazil claiming their right to pay the Brazilian social contribution tax on net income at a rate of 8%. In the case of Banco Santander, S.A., on June 9, 2008 a special and extraordinary appeal was filed at the Federal Supreme Court against the unfavorable judgment of the Federal Regional Court of January 14, 2008. A decision has yet to be handed down on this appeal. In the case of Banco ABN AMRO Real S.A., two “Mandados de Segurança” were filed; for the first of these, an appeal was filed at the Supreme Court of Justice and the Federal Supreme Court and, for the second, an appeal was filed on February 12, 2008 at the Federal Regional Court further to the unfavorable judgment handed down on January 29, 2008.

	•		The “Mandados de Segurança” filed by Banco Santander, S.A. and other Group companies in Brazil claiming its right to consider the social contribution tax on net income (CSLL) as deductible in the calculation of Brazilian legal entities income tax (IRPJ). In the case of Banco Santander, S.A., this action was declared unwarranted and an appeal was filed at the Federal Regional Court, requesting, as a precautionary measure, to have the ability to claim of the tax credit stayed and obtaining permission to deposit the disputed amounts with the courts. On October 1, 2007, an unfavorable judgment was handed down by the Federal Regional Court, which was appealed against by Banco Santander S.A. (Brazil) through the presentation of “Embargos de Declaraçao” on October 8, 2007. On March 6, 2008, the Federal Regional Court dismissed the “Embargos de Declaraçao” and dismissed the subsequent appeal. On July 1, 2008, the related special and extraordinary appeal was filed.

	•		The “Mandados de Segurança” filed by Banco Santander, S.A. and other Group entities claiming their right to pay the Brazilian PIS and COFINS social contributions only on the income from the provision of services. In the case of Banco Santander, S.A., the “Mandados de Segurança” was declared unwarranted and an appeal was filed at the Federal Regional Court. On September 13, 2007, this Court handed down a favorable judgment. Unión Federal has filed an appeal against this judgment at a higher court. In the case of Banco ABN AMRO Real, S.A., on March 9, 2007 a favorable judgment was handed down against which Unión Federal has filed an appeal at a higher court.

	•		Legal proceeding filed on August 24, 2000 by ABN AMRO Arrendamiento Mercantil S.A. requesting the deductibility for income tax purposes of the depreciation and amortization expense in the same period as that in which the lease income is recognized. The entity received a favorable judgment on April 16, 2008 which was appealed against by the Brazilian tax authorities. A decision has yet to be handed down by the Federal Regional Court.

	•		Real Leasing S.A. Arrendamiento Mercantil and Banco ABN AMRO Real S.A. have filed various administrative and legal claims in connection with the deductibility of the provision for doubtful debts for 1995.

	•		Banco Santander S.A. and other Group companies in Brazil are involved in several administrative and legal proceedings against various municipalities that demand payment of the service tax on certain items of income from transactions not classified as provisions of services.

	•		A claim was filed against Abbey National Treasury Services plc by tax authorities abroad in relation to the refund of certain tax credits and other associated amounts. The legal advisers of Abbey National Treasury Services plc considered that the grounds to contest this claim were well-founded, proof of which is that a favorable judgment was handed down at first instance in September 2006, although the judgment was appealed against by the tax authorities in January 2007. However, in December 2006 an unfavorable judgment for another taxpayer was handed down on another proceeding which might affect this case.

F-112

ii. Legal litigation

At December 31, 2008, the main legal litigation concerning the Group was as follows:

	•		Misselling: claims associated with the sale by Abbey of certain financial products to its customers.

			The provisions recorded by Abbey in this respect were calculated on the basis of the best estimate of the number of claims that will be received, of the percentage of claims that will be upheld and of the related amounts.

	•		LANETRO, S.A.: claim (ordinary lawsuit no. 558/2002) filed by LANETRO, S.A. against Banco Santander, S.A. at Madrid Court of First Instance no. 34, requesting that the Bank comply with the obligation to subscribe to €30.05 million of a capital increase at the plaintiff.

			On December 16, 2003, a judgment was handed down dismissing the plaintiffs request. The subsequent appeal filed by LANETRO was upheld by a decision of the Madrid Provincial Appellate Court on October 27, 2006. The Bank has filed an extraordinary appeals on grounds of procedural infringements and an extraordinary cassation appeal against the aforementioned decision.

	•		Ordinary proceeding filed by Galesa de Promociones, S.A., against the Bank, at Elche Court of First Instance no. 5, Alicante (proceeding no. 1946/2008). The claim requests damages amounting to €51,396,971.43 as a result of the judgment handed down by the Supreme Court on November 24, 2004 setting aside a summary mortgage proceeding filed by the Bank against the complainant company, which concluded in the foreclosure by the Bank of the mortgaged properties and their subsequent sale by The Bank to third-party buyers. The Supreme Court judgment ordered the reversal of the court foreclosure proceeding to prior to the date on which the auctions were held, a requirement impossible to comply with due to the sale by the Bank of the properties to the aforementioned third parties, which prevented the reincorporation of the properties into the debtor company’s assets and their re-auction.

			The damages claimed are broken down as follows: (i) €18,428,076.43 relating to the value of the property auctioned; (ii) €32,608,895 relating to the loss of profit on the properties lost by the plaintiff, which prevented the plaintiff company from continuing its business activity as a property developer; and (iii) €360,000 relating to the loss of rental income.

			On October 31 2008, the summons to respond to and oppose the claim was served on the Bank, which responded to and opposed the complainant’s requests on a timely basis and, at the same time, filed a counterclaim against Galesa de Promociones S.A. for the amount owed to the Bank, basing the calculation thereof on the difference between the value of the properties and the amount of the loan.

			Galesa de Promociones S.A. responded to the counterclaim on January 12, 2009. The parties’ pre-trial hearing was held on April 7, 2009. The hearing has been scheduled to take place on September 30, 2009.

	•		Declaratory large claims action brought at Madrid Court of First Instance no. 19 (case no. 87/2001) in connection with a claim filed by Inversión Hogar, S.A. against the Bank. This claim sought the termination of a settlement agreement entered into between the Bank and the plaintiff on December 11, 1992.

			On May 19, 2006, a judgment was handed down at first instance, whereby the agreement was declared to be terminated and the Bank was ordered to pay €1.8 million, plus the related legal interest since February 1997, to return a property that was given in payment under the aforementioned agreement, to pay an additional €72.9 million relating to the replacement value of the assets foreclosed, and subsequently sold, by the Bank, and to pay all the related court costs. The Bank and Inversión Hogar, S.A. filed appeals against the judgment.

			On July 30, 2007, the Madrid Provincial Appellate Court handed down a decision upholding in full the appeal filed by the Bank, revoking the ruling issued at first instance and dismissing the appeal filed by Inversión Hogar, S.A. On completion of the clarification procedure, as it had announced previously, Inversión Hogar, S.A. filed an appeal against the aforementioned decision at the Civil Chamber of the Supreme Court, which has been granted leave to proceed by the Madrid Provincial Appellate Court at the preliminary admission for consideration stage.

	•		Complaint in an ordinary proceeding filed by Inés Arias Domínguez and an additional 17 persons against Santander Investment, S.A. at Madrid Court of First Instance no. 13 (case no. 928/2007), seeking damages of approximately €43 million, plus interest and costs. The plaintiffs, who are former shareholders of Yesocentro S.A. (Yesos y Prefabricados del Centro, S.A.) allege that Santander Investment, S.A. breached the advisory services agreement entered into on October 19, 1989 between the former Banco Santander de Negocios, S.A. and the plaintiffs, the purpose of which was the sale of shares owned by the plaintiffs to another company called Invercámara, S.A.

F-113

			This complaint was duly contested by Santander Investment, S.A. on November 5, 2007. The preliminary hearing was set for April 28, 2008 although it was subsequently postponed until a related claim is resolved.

			In a decision issued by the Madrid Court of First Instance no. 13 on September 11, 2008, the proceeding in connection with the civil preliminary ruling was stayed. The plaintiffs have appealed the decision and the Bank responded to and opposed the plaintiff’s appeal on December 16, 2008.

	•		On February 6, 2008, Banco Santander, S.A. filed a request for arbitration with the Secretary of the Spanish Arbitral Court (Secretaría de la Corte Española de Arbitraje) against the business entity GAESCO BOLSA, SOCIEDAD DE VALORES, S.A., (“GAESCO”), a Spanish brokerage firm in respect of the claim for €66,418,077.27 that the latter owes Banco Santander, S.A. as a result of the early termination of the financial transaction framework agreement entered into GAESCO and the Bank and of the financial transactions undertaken under such agreement. On May 12, 2009 an arbitral ruling was handed down admitting Banco Santander, S.A.’s request and dismissing the counterclaim filed by GAESCO.

	•		Former Banespa employees: claim filed in 1998 by the association of retired Banespa employees (AFABESP) on behalf of its members, requesting the payment of a half-yearly bonus initially envisaged in the entity’s by-laws in the event that the entity obtained a profit and that the distribution of this profit, in the form of bonus, were approved by the board of directors. The bonus was not paid in 1994 and 1995 since the bank did not make a profit; partial payments were made from 1996 to 2000 in variable percentages as agreed by the board of directors, and the aforementioned clause was eliminated from the by-laws in 2001. After the Regional Labor Court ordered Banco Santander Banespa, S.A. to pay the half-yearly bonus in September 2005, Banco Santander Banespa, S.A. lodged an appeal at the High Labor Court which handed down a decision on June 25, 2008, ordering the Bank to pay the half-yearly bonus from 1994 onwards for a maximum amount equivalent to that of the share in profits. The related appeals against this decision will be filed at the High Labor Court and at the Federal Supreme Court, as applicable.

	•		Absorption of Banco Noroeste by Banco Santander Brasil: Three claims filed by minority shareholders of the former Banco Noroeste requesting, in addition to compensation for damage and losses, the annulment of the shareholders’ meeting that approved the merger between Banco Noroeste and Banco Santander Brasil, arguing that when the merger took place they should have been provided with a market value that would have enabled them to decide whether or not to sell their shares at that value.

			In the three cases, judgments were handed down at first instance, one of which found in favor of the Bank and the other two against it. In the latter two cases the shareholders’ meeting was not declared null and void but rather the Bank was ordered to pay compensation. Appeals were filed against these judgments.

			The Sao Paulo Court of Justice has recently handed down joint judgments on the three appeals at second instance, considering that Santander should have duly prepared a valuation report using the disposal value method thereby establishing that the minority shareholders be indemnified.

			In the case of the shareholders that sold their shares, the Court indicated that they should receive the difference between the value at which they sold their shares (equity value) and market value (calculated as the disposal value) at that time, plus interest. In the case of the shareholders that did not sell, the Court considered that they should receive the market value at that time plus interest, less the present value of their shares. Unlike the judgments handed down at first instance, lost profits and damages were excluded and the amount of lawyers’ fees was reduced. Appeals against this judgment will be filed at higher courts.

	•		In relation to the alleged fraud committed by Bernard L. Madoff and the firm Bernard L. Madoff Investment Securities LLC, and the Lehman Brothers bankruptcy, please see the comments in Note 1-h).

The total amount of payments made by the Group arising from lawsuits in 2008, 2007 and 2006 is not material with respect to the accompanying consolidated financial statements.

* * * * * *

At the end of each of the last three years, the Group had recorded provisions that reasonably cover any contingencies that might arise from the aforementioned tax and legal litigation.

F-114

Following is a description of the developments in 2007 in the litigation against Casa de Bolsa Santander, S.A. de C.V. Grupo Financiero Santander (Casa de Bolsa):

	•		In 1997 Casa de Bolsa was sued for an alleged breach of various stock brokerage contracts. On July 6, 1999, Civil Court number thirty-one of the Federal District handed down a judgment ordering Casa de Bolsa to return to the plaintiff 2,401,588 shares of México 1 and 11,219,730 shares of México 4 at their market value and to pay MXP 15 million, plus interest calculated at the average percentage borrowing cost (C.P.P.) multiplied by four.

			After numerous appeals were filed concerning the method used for calculating this interest, a final judgment was handed down ruling that the interest should not be capitalized.

			Following this judgment, the amount owed was paid in full and there are currently no claims outstanding in this connection.

26.		Other liabilities

		The breakdown of the balance of “Other Liabilities” is as follows:


	Thousands of Euros
	2008		2007		2006

Transactions in transit		401,977		150,609		311,283
Accrued expenses and deferred income		4,593,557		3,907,719		2,951,374
Other		2,565,461		2,328,848		3,147,457

		7,560,995		6,387,176		6,410,114

27.

Tax matters

	a)		*Consolidated tax group*

			Pursuant to current legislation, the consolidated tax group includes Banco Santander, S.A. (as the Parent) and the Spanish subsidiaries that meet the requirements provided for in Spanish legislation regulating the taxation of the consolidated profits of corporate groups (as the controlled entities).

			The other Group banks and companies file income tax returns in accordance with the tax regulations applicable in each country.

	b)		*Years open for review by the tax authorities*

			At December 31, 2008, the consolidated tax group had, in addition to the two years mentioned below, 2003, 2004, 2005, 2006, 2007 and 2008 open for review in relation to the main taxes applicable to it.

			The other consolidated entities have the corresponding years open for review, pursuant to their respective tax regulations.

			The tax audit of 2001 and 2002 for the main taxes applicable to the consolidated tax group was completed in March 2007. Most of the tax assessments issued were signed on a contested basis.

			In 2008 there were no significant developments in connection with the tax disputes at the different instances, which were pending resolution at December 31, 2007.

			Because of the possible different interpretations which can be made of the tax regulations, the outcome of the tax audits of the years reviewed and of the open years might give rise to contingent tax liabilities which cannot be objectively quantified. However, the Group’s tax advisers consider that the possibility of such contingent liabilities becoming actual liabilities is remote, and that in any event the tax charge which might arise therefrom would not materially affect the consolidated financial statements of the Group.

F-115

	c)		*Reconciliation*

			The reconciliation of the income tax expense calculated at the standard tax rate to the income tax expense recognized is as follows:


	Millions of Euros
	2008			2007			2006

Consolidated profit before tax:
From ordinary activities		11,230			11,175			8,995
From discontinued operations		(9	)		973			1,840

		11,221			12,148			10,835

Corporation tax at 30% (*)		3,366			3,948			3,792
Decreases due to permanent differences		(1,419	)		(1,062	)		(1,022	)
Of which:
Due to effect of different tax rates		(1,039	)		(851	)		(1,364	)
Due to effect on deferred taxes of change in Spanish tax rate		—			—			491

Income tax of Group companies, per local books		1,947			2,886			2,770

Net increases (decreases) due to other permanent differences		(346	)		(577	)		(568	)
Other, net		287			204			388

Current income tax		1,888			2,513			2,590


Of which:
Ordinary activities		1,884			2,336			2,255
Discontinued operations		4			177			335
Of which:
Current tax		2,689			2,805			2,003
Deferred taxes		(801	)		(292	)		587
Taxes paid in the year		1,445			3,181			949


(*)		32.5% for 2007 and 35% for 2006.

The effective tax rate is as follows:


	Millions of Euros
	2008			2007			2006

Consolidated tax group		5,164			5,043			4,212
Other Spanish entities		121			50			1,518
Foreign entities		5,936			7,055			5,105

		11,221			12,148			10,835

Income tax		1,888			2,513			2,590

Effective tax rate		16.83	%		20.69	%		23.90	%

Tax recognized in equity

In addition to the income tax recognized in the consolidated income statement, the Group recognized the following amounts in consolidated equity:


	Millions of Euros
	2008			2007			2006

Tax charged to equity:		(16	)		(497	)		(418	)
Measurement of non-current assets held for sale		(16	)		—			—
Measurement of available-for-sale fixed-income securities		—			(104	)		(276	)
Measurement of available-for-sale equity securities		—			(393	)		(99	)
Measurement of cash flow hedges		—			—			(43	)

Tax credited to equity:		440			20			—
Measurement of available-for-sale fixed-income securities		30			—			—
Measurement of available-for-sale equity securities		247			—			—
Measurement of cash flow hedges		163			20			—

Total		424			(477	)		(418	)

F-116

Deferred taxes

The balance of “Tax assets” in the consolidated balance sheets includes debit balances with the tax authorities relating to deferred tax assets. The balance of “Tax liabilities” includes the liability for the Group’s various deferred tax liabilities.

The detail of the balances of “Tax assets - Deferred” and “Tax liabilities - Deferred” is as follows:

Millions of Euros

2008

2007

2006

Tax assets

14,644

10,853

9,156

Of which:

Banco Santander SA (Banespa)

1,775

1,905

1,577

Banco ABN AMRO Real S.A.

2,191

—

Abbey National plc

629

1,257

1,517

Alliance & Leicester plc

674

—

Early retirements

1,242

1,167

1,482

Other pensions

1,084

1,167

966

Prepaid taxes — Investments

965

—

Tax liabilities

3,464

3,744

3,778

Of which:

Banco Santander SA (Banespa)

472

253

149

Banco ABN AMRO Real S.A.

376

—

Abbey National plc

107

741

799

Alliance & Leicester plc

311

—

Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander

113

101

159

Santander Consumer Bank AG

104

Valuation adjustments

341

534

425

The changes in the balances of “Tax Assets - Deferred” and “Tax Liabilities - Deferred” in the last three years were as follows:


	Millions of Euros
							Foreign
							Currency			Charge/
							Balance			Credit to
							Translation			Asset and
	Balances at			(Charge)/			Differences			Liability				Acquisitions			Balances at
	December 31,			Credit to			and Other			Revaluation		Prepaid		for the			December 31,
	2007			Income			Items			Reserve		Taxes		Year (Net)			2008

Deferred tax assets		10,853			837			(374	)		696		—		2,632			14,644
Deferred tax liabilities		(3,744	)		(36	)		461			107		—		(252	)		(3,464	)

Total		7,109			801			87			803		—		2,380			11,180

Millions of Euros

Foreign

Currency

Charge/

Balance

Credit to

Translation

Asset and

Balances at

(Charge)/

Differences

Liability

Acquisitions

Balances at

December 31,

Credit to

and Other

Revaluation

Prepaid

for the

December 31,

2006

Income

Items

Reserve

Taxes

Year (Net)

2007

Deferred tax assets

9,156

419

230

110

965

(27

)

10,853

Deferred tax liabilities

(3,778

)

(127

)

252

(128

)

—

(3,744

)

Total

5,378

292

482

(18

)

965

7,109

F-117


	Millions of Euros
							Foreign
							Currency			Charge/
							Balance			Credit to
							Translation			Asset and
	Balances at			(Charge)/			Differences			Liability					Acquisitions			Balances at
	December 31,			Credit to			and Other			Revaluation			Prepaid		for the			December 31,
	2005			Income			Items			Reserve			Taxes		Year (Net)			2006

Deferred tax assets		8,909			148			225			(22	)		—		(104	)		9,156
Deferred tax liabilities		(2,767	)		(735	)		(252	)		(112	)		—		(136	)		(3,778	)

Total		6,142			(587	)		(27	)		90			—		(240	)		5,378

Other disclosures

In conformity with the Listing Rules Instrument 2005 published by the UK Financial Services Authority, it is hereby stated that shareholders of the Bank resident in the United Kingdom will be entitled to a tax credit in respect of the withholdings the Bank is required to make from the dividends to be paid to them. The shareholders of the Bank resident in the United Kingdom who hold their ownership interest in the Bank through Grupo Santander Nominee Service and Santander UK Nominee will be informed directly of the amount thus withheld and of any other data they may require to complete their tax returns in the United Kingdom. The other shareholders of the Bank resident in the United Kingdom should contact their bank or securities broker.

28.

Minority interests

“Minority interests” include the net amount of the equity of subsidiaries attributable to equity instruments that do not belong, directly or indirectly, to the Bank, including the portion attributed to them of profit for the year.

Breakdown

The detail, by Group company, of the balance of “Equity - Minority interests” is as follows:


	Thousands of Euros
	2008		2007		2006

Grupo Financiero Santander, S.A. de C.V.		707,603		649,291		657,013
Banesto		495,021		476,152		303,889
Banco Santander Chile		245,229		241,726		234,726
Brazil Group		122,067		56,062		45,161
Santander BanCorp		34,751		30,701		31,311
Other companies		353,935		328,445		298,837

		1,958,606		1,782,377		1,570,937


Profit for the year attributed to minority interests		456,000		575,892		649,806
Of which:
Banesto Group		75,294		81,467		260,591
Grupo Financiero Santander, S.A. de C.V.		182,927		281,186		166,103
Banco Santander Chile		129,758		138,781		84,640
Somaen-Dos, S.L.		—		—		77,177
Brazil Group		22,042		7,005		10,568
Santander BanCorp		2,434		1,626		3,053

		2,414,606		2,358,269		2,220,743

F-118

Changes

The changes in the balance of “Minority interests” are summarized as follows:


	Millions of Euros
	2008			2007			2006

Balance at beginning of year		2,358			2,221			2,848
Change in consolidation method		105			—			—
(Net) inclusion of companies in the Group and changes in scope of consolidation		13			(9	)		(1,050	)
Change in proportion of ownership interest		(41	)		(117	)		72
Valuation adjustments		(26	)		(57	)		15
Dividends paid to minority interests		(241	)		(360	)		(160	)
Changes in share capital		74			220			(29	)
Exchange differences and other items		(283	)		(116	)		(125	)
Profit for the year attributable to minority interests		456			576			650

Balance at end of year		2,415			2,358			2,221

29.

Valuation adjustments

The balances of “Valuation adjustments” include the amounts, net of the related tax effect, of the adjustments to assets and liabilities recognized temporarily in equity through the statement of changes in equity (recognized income and expense) until they are extinguished or realized, when they are recognized definitively as shareholders’ equity through the consolidated income statement. The amounts arising from subsidiaries and jointly controlled entities are presented, on a line by line basis, in the appropriate items according to their nature.

It should be noted that the statement of recognized income and expense includes the changes to “Valuation adjustments” as follows:

• Revaluation gains/ (losses): includes the amount of the income, net of the expenses incurred in the year, recognized directly in equity. The amounts recognized in equity in the year remain under this item, even if in the same year they are transferred to the income statement or to the initial carrying amount of the assets or liabilities or are reclassified to another line item.

• Amounts transferred to income statement: includes the amount of the revaluation gains and losses previously recognized in equity, even in the same year, which are recognized in the income statement.

• Amounts transferred to the initial carrying amount of hedged items: includes the amount of the revaluation gains and losses previously recognized in equity, even in the same year, which are recognized in the initial carrying amount of assets or liabilities as a result of cash flow hedges.

• Other reclassifications: includes the amount of the transfers made in the year between the various valuation adjustment items.

The amounts of these items are recognized gross, including the amount of the valuation adjustments relating to minority interests, and the corresponding tax effect is presented under a separate item, except in the case of entities accounted for using the equity method, the amounts for which are presented net of the tax effect.

Available-for-sale financial assets

This item includes the net amount of unrealized changes in the fair value of assets classified as available-for-sale financial assets.

At December 31, 2008, the consolidated statement of recognized income and expense includes €2,042 million, the result of the negative balance of revaluation gains/losses and the positive balance of amounts transferred to the income statement, relating to the write-down recognized in income of the ownership interests in Royal Bank of Scotland and Fortis (see Notes 1-i and 50).

The remaining changes in the balance at December 31, 2008 with respect to the previous year relate mainly to the reduction arising from the loss of unrealized gains that were recognized in equity at 2007 year-end.

F-119

Cash flow hedges

This item includes the gains or losses attributable to hedging instruments that qualify as effective hedges. These amounts will remain under this heading until they are recognized in the consolidated income statement in the periods in which the hedged items affect it (see Note 11).

Accordingly, amounts representing valuation losses will be offset in the future by gains generated by the hedged instruments.

Hedges of net investments in foreign operations and exchange differences

“Hedges of net investments in foreign operations” include the net amount of changes in the value of hedging instruments in hedges of net investments in foreign operations, for the portion of these changes considered as effective hedges (see Note 11).

“Exchange differences” include the net amount of exchange differences arising on non-monetary items whose fair value is adjusted against equity and the differences arising on the translation to euros of the balances of the consolidated entities whose functional currency is not the euro (see Note 2-a).

The net changes in these two headings in the consolidated statement of recognized income and expense include the valuation gain or loss relating to the exchange difference arising from the goodwill held by the Group in foreign currency. At December 31, 2008, the balance recognized in the consolidated statement of recognized income and expense in this connection represented a loss of approximately €3,500 million. This change was offset by a negative change in the balance of goodwill at the corresponding date and, accordingly, it did not affect the Group’s equity (see Note 17).

The breakdown, by country, of the balance of this item is as follows:

Thousands of Euros

2008

2007

2006

Balance at end of year

(7,957,582

)

(638,275

)

538,182

Of which:

Arising on consolidation:

Subsidiaries:

(7,949,868

)

(663,779

)

549,211

Brazil Group

(2,819,871

)

696,462

456,412

Chile Group

(475,525

)

(130,186

)

(40,677

)

Mexico Group

(977,254

)

(508,264

)

(217,746

)

Abbey Group

(3,280,445

)

(562,990

)

490,771

Other

(396,773

)

(158,801

)

(139,549

)

Associates

7,714

25,504

(11,029

)

F-120

Entities accounted for using the equity method

This item includes the amounts of valuation adjustments recognized in equity arising from associates.

The net changes in the balance of this item were as follows:


	Thousands of Euros
	2008			2007			2006

Balance at beginning of year		(1,840	)		57,437			—
Revaluation gains (losses)		(149,073	)		(59,277	)		57,437
Amounts transferred to income		43,728			—			—
Transfers		(41,217	)		—			—

Balance at end of year		(148,402	)		(1,840	)		57,437


Of which:
Sovereign		(148,402	)		(27,068	)		31,364
Cepsa		—			25,213			26,073

30.

Shareholders’ equity

“Shareholders’ equity” includes the amounts of equity contributions from shareholders, accumulated profit or loss recognized through the consolidated income statement, and components of compound financial instruments having the substance of permanent equity. Amounts arising from subsidiaries and jointly controlled entities are presented in the appropriate items based on their nature.

The changes in “Shareholders’ equity” are presented in the consolidated statement of changes in total equity. Significant information on certain items of “Shareholders’ equity” and the changes therein in 2008 is set forth below.

31.

Issued capital

Changes

At December 31, 2007 and 2006, the share capital consisted of 6,254,296,579 shares with a total par value of €3,127,148,289.50.

On November 9, 2008, the Bank’s executive committee, availing itself of the authorization granted to the board of directors by the shareholders at the extraordinary general meeting of the Bank held on July 27, 2007 (which included the power of delegation in favor of the executive committee) and of the resolution of the Bank’s board of directors of the same date, in which the powers received by the board in the aforementioned extraordinary general meeting were delegated in favor of the executive committee, resolved to increase capital, thereby recognizing Banco Santander’s shareholders’ pre-emptive subscription rights, at a ratio of one new share for each four old shares of the Bank outstanding. All the new shares had been subscribed when the pre-emptive subscription period ended on November 27, 2008.

On December 3, 2008, the capital increase carried out by the Bank was fully paid up. The operation consisted of a capital increase for a total par value of seven hundred and ninety-nine million four hundred and five thousand nine hundred and forty euros (€799,405,940) and a total cash amount of seven thousand one hundred and ninety-four million six hundred and fifty-three thousand four hundred and sixty euros (€7,194,653,460) through the issue of 1,598,811,880 book-entry shares of Banco Santander, with a par value of fifty euro cents (€0.50) each, of the same class and series as the outstanding shares.

Following this capital increase and the capital increase carried out in connection with the acquisition of Alliance & Leicester described in Note 3-c, the Bank’s share capital at December 31, 2008 consisted of 7,994,059,403 shares with a total par value of €3,997,029,701.50.

The Bank’s shares are listed on the computerized trading system of the Spanish stock exchanges and on the New York, London, Milan, Lisbon, Buenos Aires and Mexico stock exchanges, and all of them have the same features and rights. At December 31, 2008, the only shareholders with an ownership interest of more than 3% in the Bank’s share capital were Chase Nominees Ltd. (10.73%), EC Nominees Ltd. (8.61%), State Street Bank & Trust (7.56%) and Société Générale (3.08%).

F-121

Other considerations

The additional share capital authorized by the shareholders at the extraordinary general meeting of July 27, 2007 was €1,563,574,144.5. The Bank’s directors have until July 27, 2010 to carry out capital increases up to this limit. The resolution empowers the board to fully or partially disapply the pre-emption right in accordance with the terms of Article 159.2 of the Spanish Companies Act (Ley de Sociedades Anónimas).

At 2008 year-end, the limit available under the aforementioned authorization was €623,718,766.50, since a total of €939,855,378 had been used, of which €799,405,940 were used in the capital increase of December 3, 2008 and €140,449,438 were used under the board resolution to increase capital to partially cater for the exchange of Santander Securities, as and when required.

The shareholders at the annual general meeting on June 21, 2008 resolved to increase capital by €375 million, and fully empowered the board of directors to set and establish, within a period of one year, the terms and conditions for this capital increase in all matters not already provided for by the annual general meeting. In exercising these powers, the board of directors must determine whether the capital increase is to be performed through the issuance of new shares or by increasing the par value of the shares outstanding.

Also, the aforementioned annual general meeting authorized the Bank’s board of directors to issue fixed-income securities for up to a maximum amount of €35,000 million (or the equivalent amount in another currency) by any lawful means. The shareholders at the annual general meeting on June 21, 2008 authorized the board to issue fixed-income securities, convertible into new shares or exchangeable for outstanding shares, for up to €7,000 million over a five-year period, and empowered the Bank’s board of directors to increase capital by the required amount to cater for the requests for conversion.

At December 31, 2008, the shares of the following companies were listed on official stock markets: Banco Santander Río, S.A.; Banco de Venezuela, S.A., Banco Universal; Banco Santander Colombia, S.A.; Santander BanCorp (Puerto Rico); Grupo Financiero Santander, S.A. de C.V.; Banco Santander Chile; Cartera Mobiliaria, S.A., S.I.C.A.V.; Inversiones Tesoreras, S.I.C.A.V., S.A.; Santander Chile Holding, S.A.; Inmuebles B de V 1985 C.A.; Banco Santander, S.A. (Brazil); Banco Español de Crédito, S.A.; Portada, S.A. and Capital Variable S.I.C.A.V., S.A.

At December 31, 2008, the number of Bank shares owned by third parties and managed by Group management companies (mainly portfolio, collective investment undertaking and pension fund managers) was 29,852,499, which represented 0.37% of the Bank’s share capital. In addition, the number of Bank shares owned by third parties and received as security was 38.5 million (equal to 0.48% of the Bank’s share capital).

At December 31, 2008, the capital increases in progress at Group companies and the additional capital authorized by their shareholders at the respective annual general meetings were not material at Group level.

32.

Share premium

“Share premium” includes the amount paid up by the Bank’s shareholders in capital issues in excess of the par value.

The Consolidated Spanish Companies Act (Ley de Sociedades Anónimas) expressly permits the use of the share premium account balance to increase capital at the entities at which it is recognized and does not establish any specific restrictions as to its use.

The increase in the balance of the share premium in 2008 relates to the capital increases detailed in Note 31-a. Also in 2008, an amount of €174 million was transferred from the share premium account to the legal reserve (see Note 33-b.i).

33.

Reserves

Definitions

The balance of “Shareholders’ equity - Reserves - Accumulated reserves” includes the net amount of the accumulated profit or loss recognized in previous years through the consolidated income statement that, in the distribution of profit, was appropriated to equity, and the own equity instrument issuance expenses and the differences between the selling price of treasury shares and the cost of acquisition thereof.

F-122

The balance of “Shareholders’ equity - Reserves of entities accounted for using the equity method” includes the net amount of the accumulated profit or loss generated in previous years by entities accounted for using the equity method, recognized through the consolidated income statement.

Breakdown

The breakdown of the balances of these reserve accounts is as follows:


	Thousands of Euros
	2008			2007		2006

Accumulated reserves:
Restricted reserves-
Legal reserve		799,406			625,430		625,430
Reserve for treasury shares		871,994			218,603		378,700
Revaluation reserve Royal Decree-Law 7/1996		42,666			42,666		42,666
Reserve for retired capital		10,610			10,610		10,610
Voluntary reserves (*)		2,479,352			3,668,316		3,711,534
Consolidation reserves attributed to the Bank		5,591,045			3,131,239		1,831,093
Reserves at subsidiaries		11,363,796			7,779,129		4,891,637

		21,158,869			15,475,993		11,491,670
Reserves of entities accounted for using the equity method:
Associates		(290,463	)		895,437		797,810
Of which:
Sovereign		(352,986	)		3,357		3,052
Cepsa		—			734,719		662,172
Attijariwafa Bank		—			126,626		111,701

		20,868,406			16,371,430		12,289,480


(*)		Include the reserves stipulated by Article 81 of the Consolidated Spanish Companies Act (Ley de Sociedades Anónimas). for an amount equal to the loans granted by Group companies to third parties for the acquisition of treasury shares.

i. Legal reserve

Under the Consolidated Companies Act (Ley de Sociedades Anónimas), Spanish entities must transfer 10% of net profit for each year to the legal reserve. These transfers must be made until the balance of this reserve reaches 20% of the share capital. The legal reserve can be used to increase capital provided that the remaining reserve balance does not fall below 10% of the increased share capital amount.

In 2008 the Bank transferred €174 million from the share premium account to the legal reserve so that, once again, after the capital increases described in Note 31 had been carried out, the balance of the legal reserve reached 20% of the share capital, and at December 31, 2008 the legal reserve was at the stipulated level.

ii. Reserve for treasury shares

Pursuant to the Consolidated Companies Act (Ley de Sociedades Anónimas), a restricted reserve has been recorded for an amount equal to the carrying amount of the Bank shares owned by subsidiaries. The balance of this reserve will become unrestricted when the circumstances which gave rise to its mandatory recording cease to exist. Additionally, this reserve covers the outstanding balance of loans granted by the Group secured by Bank shares.

iii. Revaluation reserve Royal Decree Law 7/1996, of June 7

The balance of “Revaluation Reserve Royal Decree-Law 7/1996” can be used, free of tax, to increase share capital. From 1 January 2007, the balance of this account can be taken to unrestricted reserves, provided that the monetary surplus has been realized. The surplus will be deemed to have been realized in respect of the portion on which depreciation has been taken for accounting purposes or when the revalued assets have been transferred or derecognized.

F-123

If the balance of this reserve were used in a manner other than that provided for in Royal Decree-Law 7/1996, of June 7, it would be subject to taxation.

iv. Reserves at subsidiaries and jointly controlled entities

The detail, by company, of the balance of “Reserves at subsidiaries”, based on the subsidiaries’ contribution to the Group (considering the effect of consolidation adjustments) is as follows:


	Millions of Euros
	2008			2007			2006

Banco Español de Crédito, S.A. (Banesto) (Consolidated Group)		3,703			3,319			2,312
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander (Consolidated Group)		1,630			1,819			1,336
Abbey Group		2,040			1,419			742
Banco Santander, S.A. (Banespa) (Consolidated Group)		1,596			1,036			976
Banco Santander Totta, S.A. (Consolidated Group)		1,273			939			784
Banco Santander Chile (Consolidated Group)		1,031			589			473
Banco de Venezuela, S.A., Banco Universal (Consolidated Group)		663			502			402
Grupo Santander Consumer Finance, S.A.		559			323			304
Cartera Mobiliaria, S.A., S.I.C.A.V.		324			298			281
Santander Investment, S.A.		207			181			167
Banco Santander International (United States)		203			178			156
Banco Banif, S.A.		188			133			94
Banco Santander (Suisse) SA		175			139			110
Santander Seguros y Reaseguros, Compañía Aseguradora, S.A.		149			72			27
BSN - Banco Santander de Negocios Portugal, S.A.		116			78			63
Banco Santander Río, S.A.		(449	)		(525	)		(587	)
Exchange differences, consolidation adjustments and other companies (*)		(2,044	)		(2,721	)		(2,748	)

Total		11,364			7,779			4,892


Of which: restricted		1,466			925			740


(*)		Includes the charge relating to cumulative exchange differences in the transition to International Financial Reporting Standards.

34.

Other equity instruments and treasury shares

Other equity instruments

“Other equity instruments” includes the equity component of compound financial instruments, the increase in equity due to personnel remuneration, and other items not recognized in other “Shareholders’ equity” items.

Valores Santander

In 2007, in order to partially finance the takeover bid launched on ABN AMRO (see Note 3-b), Santander Emisora 150, S.A.U. issued securities mandatorily convertible into newly-issued ordinary shares of the Bank (“Valores Santander”) amounting to €7,000 million. These securities can be voluntarily exchanged for Bank shares on October 4, 2009, 2010 and 2011, and must be mandatorily exchanged on October 4, 2012.

The reference price of the Bank’s share for conversion purposes was set at €14.63 per share, and the conversion ratio of the bonds -i.e. the number of Bank shares corresponding to each Valor Santander for conversion purposes- is 341.7635 shares for each Valor Santander. The nominal interest rate on these securities was 7.30% until October 4, 2008 and Euribor plus 2.75% thereafter until the securities are exchanged for shares.

F-124

Treasury shares

The balance of “Shareholders’ equity - Treasury shares” includes the amount of own equity instruments held by all the Group entities.

Transactions involving own equity instruments, including their issuance and cancellation, are recognized directly in equity, and no profit or loss may be recognized on these transactions. The costs of any transaction involving own equity instruments are deducted directly from equity, net of any related tax effect.

The shareholders at the Bank’s annual general meeting on June 21, 2008 set the maximum number of Bank shares that the Bank and/or any Group subsidiary are authorized to acquire at a number equivalent to 5% of the fully paid share capital amount, at a minimum share price not lower than par value and a maximum share price of up to 3% higher than the latest quoted price with respect to which the Bank did not trade for its own account in the Spanish Stock Market Interconnection System (including the block market) on the acquisition date concerned.

The Bank’s shares owned by the consolidated companies accounted for 0.81% of issued share capital at December 31, 2008 (December 31, 2007: less than 0.01%; December 31, 2006: 0.15%).

The average purchase price of the Bank’s shares in 2008 was €10.28 per share and the average selling price was €10.64 per share.

The effect on equity arising from transactions involving Bank shares (gains of €12 million in 2008, gains of €5 million in 2007 and gains of €10 million in 2006) was recognized in equity.

35.

Off-balance-sheet items

“Off-balance-sheet items” relate to balances representing rights, obligations and other legal situations that in the future may have an impact on net assets, as well as any other balances needed to reflect all transactions performed by the consolidated entities although they may not impinge on their net assets.

Contingent liabilities

“Contingent liabilities” includes all transactions under which an entity guarantees the obligations of a third party and which result from financial guarantees granted by the entity or from other types of contract. The breakdown is as follows:


	Millions of Euros
	2008		2007		2006

Financial guarantees		15,614		17,269		11,357
Financial bank guarantees		14,711		16,464		10,878
Credit derivatives sold		903		708		478
Irrevocable documentary credits		3,590		5,803		5,029
Other bank guarantees and indemnities provided		45,613		52,632		41,819
Other contingent liabilities		506		609		564

		65,323		76,216		58,769

A significant portion of these guarantees will expire without any payment obligation materializing for the consolidated entities and, therefore, the aggregate balance of these commitments cannot be considered as 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.

i. Financial guarantees

This item includes, inter alia, financial guarantee contracts such as financial bank guarantees, credit derivatives sold, and risks arising from derivatives arranged for the account of third parties.

F-125

ii. Other bank guarantees and indemnities provided

This item includes guarantees other than those classified as financial, such as technical guarantees, guarantees covering the import and export of goods and services, irrevocable formal undertakings to provide bank guarantees, legally enforceable letters of guarantee and other guarantees of any kind.

iii. Other contingent liabilities

This item includes the amount of any contingent liability not included in other items.

Contingent commitments

“Contingent commitments” includes those irrevocable commitments that could give rise to the recognition of financial assets.

The breakdown of “Contingent commitments” is as follows:


	Millions of Euros
	2008		2007		2006

Drawable by third parties		123,329		102,216		91,690
Financial asset forward purchase commitments		856		1,440		1,449
Regular way financial asset purchase contracts		1,626		4,181		3,202
Securities subscribed but not paid		42		107		83
Securities placement and underwriting commitments		50		33		3
Documents delivered to clearing houses		5,349		5,988		6,013
Other contingent commitments		473		711		809

		131,725		114,676		103,249

36.

Other disclosures

Notional amounts and market values of trading and hedging derivatives

The breakdown of the notional and/or contractual amounts and the market values of the trading and hedging derivatives held by the Group is as follows:


	Millions of Euros
	2008					2007					2006
	Notional		Market			Notional		Market			Notional		Market
	Amount		Value			Amount		Value			Amount		Value

Trading derivatives:
Interest rate risk-
Forward rate agreements		328,743		(31	)		330,315		(995	)		116,858		(267	)
Interest rate swaps		1,742,448		2,424			1,923,372		(455	)		1,466,880		165
Options and futures		848,479		(1,252	)		953,315		(463	)		825,795		(780	)
Foreign currency risk-
Foreign currency purchases and sales		110,049		(1,261	)		117,868		(505	)		81,612		(142	)
Foreign currency options		71,114		9			62,723		(566	)		62,852		(464	)
Currency swaps		82,080		5,871			75,090		(1,020	)		56,096		(366	)
Securities and commodities derivatives		156,094		888			157,807		1,288			138,628		(2,496	)

		3,339,007		6,648			3,620,490		(2,716	)		2,748,721		(4,350	)

Hedging derivatives:
Interest rate risk-
Forward rate agreements		653		1			—		—			1		—
Interest rate swaps		164,800		2,205			120,822		(1,159	)		103,564		547
Options and futures		27,140		33			10,660		(112	)		9,793		(66	)
Foreign currency risk-
Foreign currency purchases and sales		8,329		(69	)		28		6			1,745		3
Foreign currency options		4,209		246			16,630		292			15,266		6
Currency swaps		12,889		1,595			16,372		(99	)		26,372		(989	)
Securities and commodities derivatives		3,593		(270	)		155		1			622		(7	)

		221,613		3,741			164,667		(1,071	)		157,363		(506	)

Total		3,560,620		10,389			3,785,157		(3,787	)		2,906,084		(4,856	)

F-126

The notional and/or contractual amounts of the contracts entered into do not reflect the actual risk assumed by the Group, since the net position in these financial instruments is the result of offsetting and/or combining them. This net position is used by the Group basically to hedge the interest rate, underlying asset price or foreign currency risk; the results on these financial instruments are recognized under “Gains/losses on financial assets and liabilities (net)” in the consolidated income statements and increase or offset, as appropriate, the gains or losses on the investments hedged (see Note 11).

Additionally, in order to interpret correctly the results on the “Securities and Commodities Derivatives” shown in the foregoing table, it should be considered that these items relate mostly to securities options for which a premium has been received which offsets their negative market value. Also, this market value is offset by positive market values generated by symmetrical positions in the Group’s held-for-trading portfolio.

The Group manages the credit risk exposure of these contracts through netting arrangements with its main counterparties and by receiving assets as collateral for its risk positions.

The detail of the cumulative credit risk exposure, by financial derivative, is as follows:


	Millions of Euros
	2008			2007			2006

Credit derivatives		3,186			1,008			709
Securities derivatives		4,322			3,227			2,148
Fixed-income derivatives		345			405			9
Currency derivatives		15,277			7,990			7,498
Interest rate derivatives		25,117			17,507			18,084
Commodities derivatives		138			23			4
Collateral received		(9,366	)		(3,084	)		(1,562	)

Total		39,019			27,076			26,890

The fair value of hedging derivatives, by type of hedge, is as follows:


	Millions of Euros
	2008		2007			2006

Fair value hedges		3,340		(1,199	)		(474	)
Cash flow hedges		185		(137	)		(35	)
Hedges of net investments in foreign operations		216		265			3

		3,741		(1,071	)		(506	)

Following is the description of the main hedges (including the results of the hedging instrument and the hedged item attributable to the hedged risk):

i. Fair value and cash flow hedges

Micro-hedges

The Group hedges the interest rate risk of the issues guaranteed by the Parent Bank. At 2008 year-end, the Group held derivative contracts to hedge the interest rate risk of issues, with an equivalent euro nominal value of €52,369 million, of which €41,180 million were denominated in euros, €5,263 million in US dollars and €4,263 million in pounds sterling. The fair value of these transactions at that date represented a gain of €2,305.5 million, which was offset by the loss on the hedged items, giving rise to a net loss of €150.9 million. In addition, there was an unrealized gain of €4.2 million relating to a cash flow hedge on a floating rate issue.

At 2007 year-end the Group held IRS contracts with an equivalent euro nominal value of €49,593 million, of which €37,125 million were denominated in euros, €5,655 million in US dollars and €5,557 million in pounds sterling. The fair value of these transactions at that date represented a loss of €964.7 million, which was offset by the gain on the hedged items, giving rise to a net loss of €17.1 million. In addition, there was an unrealized gain of €18.9 million relating to a cash flow hedge on a floating rate issue.

F-127

Interest rate risk hedges of portfolios of financial instruments

The main hedges of portfolios of financial instruments in the Group are described below:

	•		Hedges for the purpose of eliminating exposure to the interest rate risk of mortgage loan portfolios

	•		Hedges for the purpose of covering the interest rate risk of issued liabilities -issues of subordinated debt and mortgage bonds (cédulas hipotecarias)

	•		Hedges for the purpose of covering the interest rate risk of fixed-rate consumer loans

These hedges are mainly recognized in the financial statements of Abbey, Alliance & Leicester, Banesto and the Santander Consumer Finance Group.

In the case of fair value and cash flow hedges of interest rate risk on financial instrument portfolios, the gain or loss on the hedged items is recognized in assets or liabilities under “Changes in the fair value of hedged items in portfolio hedges of interest rate risk”. At December 31, 2008, there were gains of €2,402 million and losses of €440 million, associated with assets and liabilities thus hedged, respectively (December 31, 2007: gains of €297 million and €517 million, respectively). The change in 2008 compared with 2007 was caused by falling interest rates in the euro zone and the United Kingdom, where the Group’s main hedges are concentrated.

In 2008 a revenue of €4,685 million and an expense of €4,776 million, attributable to the hedged risk, were recognized in profit or loss (see Note 44) on the hedging instruments and on the hedged items, respectively (2007: an expense of €1,274.9 million and a revenue of €1,196.4 million, respectively).

ii. Foreign currency hedges (net investments in foreign operations)

As part of its financial strategy, the Group hedges the foreign currency risk arising from its investments in non-euro-zone countries. To this end, it arranges foreign currency derivatives in order to take a long position in euros vis-à-vis the local currency of the investment. At 2008 year-end, the Group held foreign currency options in this connection with an equivalent euro nominal value of €3,438 million, of which €1,151 million were denominated in Brazilian reais, €1,520 million in Mexican pesos and €767 million in Chilean pesos. In addition to these options, the underlying carrying amount in pounds sterling was hedged through short positions for a notional amount of GBP 4,832 million. In 2008 gains amounting to €499.8 million arising from the settlement of options were exercised in the year were taken to reserves. At December 31, 2008, the market-value of the options not yet exercised represented an unrealized gain of €379 million, which was supplemented by the gain of €306 million on the sterling hedge.

At 2007 year-end, the Group held foreign currency options in this connection with an equivalent euro nominal value of €12,878 million, of which €5,046 million were denominated in pounds sterling, €3,592 million in Brazilian reais, €2,560 million in Mexican pesos and €1,320 million in Chilean pesos. In 2007 gains amounting to €37.6 million arising from the settlement of options that matured in the year were taken to reserves. At 2007 year-end, the unrealized gain on the options not yet exercised amounted to €256 million.

At 2006 year-end, the Group held foreign currency options in this connection with an equivalent euro nominal value of €8,900 million, of which €4,939 million were denominated in pounds sterling, €2,570 million in Mexican pesos and €1,390 million in Chilean pesos. In 2006 losses amounting to €45.9 million arising from the settlement of options that matured in the year were allocated to reserves. At 2006 year-end, the unrealized gains on the options not yet exercised amounted to €15.2 million.

F-128

Off-balance-sheet funds under management

The detail of off-balance-sheet funds managed by the Group is as follows:


	Millions of Euros
	2008		2007		2006

Investment funds		90,305		119,211		119,838
Pension funds		11,128		11,952		29,450
Assets under management		17,289		19,814		17,836

		118,722		150,977		167,124

Third-party securities held in custody

At December 31, 2008, the Group held in custody debt securities and equity instruments totaling €965,961 million entrusted to it by third parties.

37.

Discontinued operations

No significant operations were discontinued in 2008. Information relating to 2007 and 2006 is set forth below.

Description of divestments (see Note 3-c)

i. Abbey’s insurance business

In the third quarter of 2006 an agreement was entered into with Resolution plc (“Resolution”) for the sale to the latter of Abbey’s life insurance business for €5,340 million (GBP 3,600 million). The transaction did not give rise to any gains for the Group.

ii. Inmobiliaria Urbis

The agreement to sell the Group’s 53.62% ownership interest in Urbis to Construcciones Reyal for €1,776 million was executed in December 2006. This divestment gave rise to a pre-tax gain of €1,218 million.

Additionally, the Group made other less significant disposals totaling €128 million, giving rise to a gain of €89 million.

iii. Pension fund managers (AFPs)

The agreement to sell the obligatory pension fund managers in Latin America (AFPs) to ING Groep NV for €906 million was executed in December 2007. The agreement covered the AFPs in Chile (AFP Bansander, S.A.), Colombia (AFP Cesantías Santander), Mexico (Afore Santander S.A. de C.V.) and Uruguay (Afinidad AFAP, S.A.). These disposals gave rise to gross gains totaling €747 million.

Also, an agreement was entered into for the sale of the Argentine companies Orígenes AFJP, S.A. and Orígenes Seguro de Retiro, S.A. to ING Groep NV. The agreement was executed in December 2007 for €112 million, giving rise to a pre-tax gain of €84 million.

F-129

Profit and net cash flows from discontinued operations

The detail of the profit from discontinued operations is set forth below.

The comparative figures for 2007 and 2006 were restated in order to include the operations classified as discontinued in 2008.


	Millions of Euros
	2007			2006

Interest income/charges		5			(75	)
Income from equity instruments		—			—
Income from companies accounted for by the equity method		—			—
Net fee and commission income		178			221
Gains/Losses on financial assets and liabilities		18			49
Other operating income (net)		72			654

Total income		273			849
Sales and income from the provision of non-financial services		—			—
Personnel expenses		(73	)		(172	)
Other general expenses		(45	)		(132	)
Depreciation and amortization		(5	)		(8	)
Provisions (net)		(8	)		(3	)
Impairment losses on financial assets (net)		—			(1	)
Gains/(losses) on disposal of assets not classified as non-current assets held for sale		—			—

Operating profit/(loss) before tax		142			533

Income tax		(30	)		(152	)
Gains on divestments (Note 1-i)		831			1,307
Income tax on gains on divestments		(147	)		(183	)

Profit from discontinued operations		796			1,505

Additionally, following is a detail of the net cash flows attributable to the operating, investing and financing activities of discontinued operations.


	Millions of Euros
	2007			2006

Cash and cash equivalents at beginning of year		—			79
Cash flows from operating activities		29			180
Cash flows from investing activities		—			(64	)
Cash flows from financing activities		(29	)		(127	)

Cash and cash equivalents at end of year		—			67

F-130

Consideration received

The breakdown of the assets and liabilities associated with discontinued operations is as follows:


	Millions of Euros
	2007			2006

ASSETS:
Cash and balances with central banks		—			68
Financial assets held for trading		426			1,495
Of which: Abbey Insurance		—			1,482
Orígenes Seguros de Retiro		348			—

Other financial assets at fair value through profit or loss		110			35,837
Of which: Abbey Insurance		—			35,812
Available-for-sale financial assets		43			6
Loans and receivables		422			1,461
Of which: Abbey Insurance		—			1,105
Orígenes Seguros de Retiro		410			—
Non-current assets held for sale		—			8
Investments		—			10
Reinsurance assets		—			2,361
Of which: Abbey Insurance		—			2,361
Tangible assets		18			726
Intangible assets		—			31
Tax assets		—			89
Prepayments and accrued income		—			1,135
Of which: Abbey		—			1,134
Other assets		62			2,910
Of which: Urbis		—			2,904

LIABILITIES:
Other financial liabilities at fair value through profit or loss		—			(845	)
Financial liabilities at amortized cost		(68	)		(4,355	)
Of which: Urbis		—			(2,707	)

Liabilities under insurance contracts		(640	)		(34,355	)
Of which: Abbey Insurance		—			(34,355	)
Orígenes Seguro de Retiro		(640	)		—
Provisions		(55	)		(57	)
Tax liabilities		—			(147	)
Accrued expenses and deferred income		—			(16	)
Other liabilities		(117	)		(6	)

Net asset value		201			6,356

Goodwill		5			46
Minority interests		(19	)		(464	)

Net amount		187			5,938

Profit from divestments		831			1,307

Consideration received		1,018			7,245

Of which: in cash		1,018			7,245

Earnings per share relating to discontinued operations

The earnings per share relating to discontinued operations were as follows:


	2007		2006

Basic earnings per share (euros)		0.1117		0.2030
Diluted earnings per share (euros)		0.1105		0.2019

38.

Interest and similar income

“Interest and similar income” in the consolidated income statement comprises the interest accruing in the year on all financial assets with an implicit or explicit return, calculated by applying the effective interest method, irrespective of measurement at fair value; and the rectifications of income as a result of hedge accounting. Interest is recognized gross, without deducting any tax withheld at source.

F-131

The breakdown of the main interest and similar income items earned in 2008, 2007 and 2006 is as follows:


	Thousands of Euros
	2008		2007		2006

Balances with the Bank of Spain and other central banks		830,150		633,417		616,125
Loans and advances to credit institutions		3,864,437		2,881,240		2,363,762
Debt instruments		4,558,953		4,049,941		4,567,889
Loans and advances to customers		42,362,644		35,202,921		26,498,414
Insurance contracts linked to pensions (Note 25)		95,319		102,604		103,821
Other interest		4,496,153		3,442,582		3,089,591

Total		56,207,656		46,312,705		37,239,602

39.

Interest expense and similar charges

“Interest expense and similar charges” in the consolidated income statement includes the interest accruing in the year on all financial liabilities with an implicit or explicit return, including remuneration in kind, calculated by applying the effective interest method, irrespective of measurement at fair value; the rectifications of cost as a result of hedge accounting; and the interest cost attributable to pension funds.

The breakdown of the main items of interest expense and similar charges accrued in 2008, 2007 and 2006 is as follows:


	Thousands of Euros
	2008		2007		2006

Deposits from the Bank of Spain and other central banks		422,265		279,624		300,374
Deposits from credit institutions		3,271,999		3,581,327		3,297,332
Customer deposits		15,513,183		12,344,676		11,083,439
Marketable debt securities and subordinated liabilities		13,232,819		11,452,273		7,607,891
Marketable debt securities		10,817,648		9,351,606		5,828,925
Subordinated liabilities (Note 23)		2,415,171		2,100,667		1,778,966
Pension funds (Note 25)		455,626		487,911		735,004
Other interest		5,139,971		3,213,606		2,094,625

Total		38,035,863		31,359,417		25,118,665

40.

Income from equity instruments

“Income from equity instruments” includes the dividends and payments on equity instruments out of profits generated by investees after the acquisition of the equity interest.

The breakdown of the balance of this item is as follows:


	Thousands of Euros
	2008		2007		2006

Equity instruments classified as:
Financial assets held for trading		222,795		210,562		266,840
Available-for-sale financial assets		330,014		212,056		145,874
Of which:
San Paolo IMI S.p.A.		—		80,500		90,037
Royal Bank of Scotland		74,575		—		—

		552,809		422,618		412,714

F-132

41.

Income from companies accounted for by the equity method - Associates

“Income from companies accounted for by the equity method - Associates” comprises the amount of profit or loss attributable to the Group generated during the year by associates.

The breakdown of the balance of this item is as follows:


	Thousands of Euros
	2008			2007		2006

Cepsa		130,932			206,706		370,169
Attijariwafa		27,560			25,700		24,230
Sovereign		(110,251	)		43,355		9,199
RFS Holdings B.V. (*)		711,146			141,348		—
Other companies		37,913			24,348		23,323

		797,300			441,457		426,921


(*)		Of the 2008 result of entities accounted for using the equity method relating to RFS Holdings B.V., €675 million correspond to Banco Real, an entity which was accounted for using the equity method in the first three quarters of 2008 and was fully consolidated in the last quarter of the year (see Note 3-a).

42.

Fee and commission income

“Fee and commission income” comprises the amount of all fees and commissions accruing in favor of the Group in the year, except those that form an integral part of the effective interest rate on financial instruments.

The breakdown of the balance of this item is as follows:


	Thousands of Euros
	2008		2007		2006

Collection and payment services:
Bills		317,098		240,976		247,129
Demand accounts		580,095		571,394		554,882
Cards		1,665,356		1,524,161		1,291,327
Cheques and other		353,248		411,256		455,194
Orders		273,945		252,052		213,982

		3,189,742		2,999,839		2,762,514

Marketing of non-banking financial products:
Investment funds		1,458,148		1,812,975		1,685,459
Pension funds		160,331		171,935		155,059
Insurance		1,889,241		1,476,202		1,207,905

		3,507,720		3,461,112		3,048,423

Securities services:
Securities underwriting and placement		102,780		262,645		113,712
Securities trading		353,603		434,182		350,801
Administration and custody		248,167		266,598		263,529
Asset management		85,934		94,594		76,613

		790,484		1,058,019		804,655

Other:
Foreign exchange		105,751		65,502		70,680
Financial guarantees		400,456		360,893		306,853
Commitment fees		265,807		166,374		106,412
Other fees and commissions		1,682,137		1,368,247		1,189,043

		2,454,151		1,961,016		1,672,988

		9,942,097		9,479,986		8,288,580

F-133

43.

Fee and commission expense

“Fee and commission expense” shows the amount of all fees and commissions paid or payable by the Group in the year, except those that form an integral part of the effective interest rate on financial instruments.

The breakdown of the balance of this item is as follows:


	Thousands of Euros
	2008		2007		2006

Fees and commissions assigned to third parties		952,676		924,801		798,034
Of which: Cards		724,979		671,077		627,610
Brokerage fees on lending and deposit transactions		26,925		21,882		55,105
Other fees and commissions		511,890		493,128		411,246

		1,491,491		1,439,811		1,264,385

44.

Gains/losses on financial assets and liabilities

“Gains/losses on financial assets and liabilities” includes the amount of the valuation adjustments of financial instruments, except those attributable to interest accrued as a result of application of the effective interest method and to allowances, and the gains or losses obtained from the sale and purchase thereof.

Breakdown

The breakdown of the balance of this item, by type of instrument, is as follows:


	Thousands of Euros
	2008			2007			2006

Other financial instruments at fair value through profit or loss (*)		607,309			125,774			(109,928	)

Financial instruments not measured at fair value through profit or loss		1,804,450			909,919			416,782
Of which: Available-for-sale financial assets		848,930			1,051,914			338,263
Debt instruments		465,838			347,193			(35,887	)
Equity instruments		383,092			704,721			374,150
Bolsas y Mercados Españoles, Sociedad Holding de Mercados y Sistemas Financieros		—			110,587			106,197
BPI		—			107,000			—
Telefónica, S.A.		—			138,410			—
Of which: Other		955,520			(141,995	)		78,519
Disposal of ABN liabilities (Note 1-i)		741,100			—			—
Hedging derivatives and other		(4,539	)		(100,346	)		(51,763	)
Losses on assets to be delivered to Madoff/Lehman victims (Note 1-h)		(643,000	)		—			—
Other financial assets and liabilities held for trading (*)		1,199,452			1,396,349			1,807,380

		2,963,672			2,331,696			2,062,471


(*)		Includes the net gain or loss arising from transactions involving debt securities, equity instruments and derivatives included in this portfolio, since the Group manages its risk in these instruments on a global basis.

F-134

Financial assets and liabilities at fair value through profit or loss

The detail of the amount of the asset balances is as follows:


	Millions of Euros
	2008		2007		2006

Loans and advances to credit institutions		14,061		19,160		14,813
Loans and advances to customers		9,657		31,726		38,556
Debt instruments		49,050		73,403		81,237
Other equity instruments		9,051		12,614		16,203
Derivatives		95,815		46,733		34,988

		177,634		183,636		185,797

The foregoing table shows the maximum credit risk exposure of these assets. The Group mitigates and reduces this exposure as explained below.

With respect to derivatives, the Group has entered into framework agreements with a large number of credit institutions and customers for the netting-off of asset positions and the provision of collateral for non-payment. For derivatives arranged with customers, the Group applies a risk premium accrual policy. At December 31, 2008, the actual credit risk exposure of the derivatives was €39,015 million (see Note 36).

“Loans and advances to credit institutions” and “Loans and advances to customers” included repos amounting to €9,028 million at December 31, 2008. Also, mortgage-backed assets totaled €7,020 million.

Debt instruments include €17,049 million of Spanish and foreign government securities.

At December 31, 2008, the amount of the change in the year in the fair value of financial assets at fair value through profit or loss attributable to variations in their credit risk (spread) was not material, taking into account the Group’s management of these risks by purchasing protection through credit derivatives.

The detail of the amount of the liability balances is as follows:


	Millions of Euros
	2008			2007			2006

Derivatives		(89,167	)		(49,448	)		(39,337	)
Other liabilities		(76,093	)		(113,668	)		(97,670	)

		(165,260	)		(163,116	)		(137,007	)

The difference between the amount recognized as liabilities at fair value and the amount which the Group would contractually be required to pay to the holders of the related obligations at maturity, in other than derivative transactions, was €605 million at December 31, 2008.

45.

Exchange differences

“Exchange differences” shows basically the gains or losses on currency dealings, the differences that arise on translations of monetary items in foreign currencies to the functional currency, and those disclosed on non-monetary assets in foreign currency at the time of their disposal.

F-135

46.

Other operating income and other operating expenses

These items in the consolidated income statement include:


	Thousands of Euros
	2008			2007			2006

Insurance activity income		251,589			229,933			191,130
Income from insurance and reinsurance contracts issued		8,385,788			5,529,987			4,766,041
Of which:
Insurance and reinsurance premium income		8,150,685			5,377,949			4,664,812
Reinsurance income		235,103			152,038			101,229

Expenses of insurance and reinsurance contracts		(8,134,199	)		(5,300,054	)		(4,574,911	)
Of which:
Claims paid and other insurance-related expenses		(3,480,255	)		(2,862,786	)		(2,049,620	)
Net provisions for insurance contract liabilities		(4,381,487	)		(2,239,778	)		(2,388,162	)
Reinsurance premiums paid		(272,457	)		(197,490	)		(137,129	)

Non-financial services		117,718			152,072			118,913
Sales and income from the provision of non-financial services		586,872			771,027			734,602
Cost of sales		(469,154	)		(618,955	)		(615,689	)

Other operating income and expenses		(161,263	)		(144,588	)		(72,983	)
Other operating income — Other		467,801			440,232			576,202
Of which, fees and commissions offsetting direct costs		155,785			195,272			176,536
Other operating expense — Other		(629,064	)		(584,820	)		(649,185	)
Of which, Deposit Guarantee Fund		(205,594	)		(168,617	)		(179,209	)

		208,044			237,417			237,060

Most of the Bank’s insurance activity is carried on in life insurance.

47.

Personnel expenses

	a)		*Breakdown*

			The breakdown of “Staff costs” is as follows:


	Thousands of Euros
	2008		2007		2006

Wages and salaries		5,014,440		4,819,751		4,364,858
Social security costs		822,854		729,496		673,338
Additions to provisions for defined benefit pension plans (Note 25)		184,865		209,193		222,257
Contributions to defined contribution pension funds (Note 25)		77,703		47,485		36,653
Share-based payment costs		107,644		48,546		19,167
Of which:
Payments granted to the Bank’s directors		3,560		1,424		641
Other staff costs		756,349		696,730		651,600

		6,963,855		6,551,201		5,967,873

F-136

	b)		*Headcount*

			The average number of employees in the Group, by professional category, was as follows:


	Average Number of Employees (**)
	2008		2007		2006

The Bank:
Senior executives (*)		90		93		81
Other line personnel		16,364		16,153		15,729
Clerical staff		3,816		4,147		4,231
General services personnel		36		42		45

		20,306		20,435		20,086

Banesto		10,330		10,524		10,188
Rest of Spain		5,940		5,582		4,996
Abbey		15,593		15,771		17,461
Other companies		87,519		76,820		70,477

		139,688		129,132		123,208


(*)		Categories of Deputy Assistant General Manager and above, including senior management.

(**)		Excluding personnel assigned to discontinued operations.

The functional breakdown, by gender, at December 31, 2008 is as follows:


	Functional Breakdown by Gender
	Managers				Other Line Personnel				Clerical Staff
	Men		Women		Men		Women		Men		Women

Continental Europe		2,175		457		19,496		13,956		7,216		5,536
United Kingdom		350		117		3,464		3,777		3,113		6,942
Latin America		1,577		817		20,519		19,000		22,778		32,916

Total		4,102		1,391		43,479		36,733		33,107		45,394

The same functional breakdown, in percentage terms, at December 31, 2008 is as follows:


	Functional Breakdown by Gender
	Managers						Other Line Personnel						Clerical Staff
	Men			Women			Men			Women			Men			Women

Continental Europe		83	%		17	%		58	%		42	%		56	%		43	%
United Kingdom		75	%		25	%		48	%		52	%		31	%		69	%
Latin America		66	%		34	%		52	%		48	%		41	%		59	%

Total		75	%		25	%		54	%		46	%		42	%		58	%

The labor relations between employees and the various Group companies are governed by the related collective labor agreements or similar regulations.

F-137

Share-based payments

i. The Bank

In recent years the Group has set up remuneration systems tied to the performance of the stock market price of the shares of the Bank, based on the achievement of certain targets indicated below:

Date of

Euros

Commencement

Expiry of

Number of

Exercise

Year

Employee

Number of

of Exercise

Exercise

Price

Granted

Group

Persons

Period

Plans outstanding at 1 January 2006

99,900,000

9.09

Managers

2,601

15/01/08

15/01/09

Options exercised

—

Options cancelled, net (Plan I06)

(3,648,610

)

9.09

Managers

(44

)

15/01/08

15/01/09

Plans outstanding at December 31, 2006

96,251,390

Options granted (Plan I09)

10,448,480

—

2007

Managers

5,476

23/06/07

31/07/09

Options granted (Plan I10)

15,690,283

—

2007

Managers

5,506

23/06/07

31/07/10

Options cancelled, net (Plan I06)

(1,195,371

)

9.09

Managers

(45

)

15/01/08

15/01/09

Plans outstanding at December 31, 2007

121,194,782

Options exercised (Plan I06)

(65,983,402

)

9.09

—

Managers

(1,555

)

Options granted (Plan I10)

46,560

—

2008

Managers

Options granted (Plan I11)

17,122,650

—

2008

Managers

5,771

Plans outstanding at December 31, 2008

72,380,590

Of which:

Plan I06

29,072,617

9.09

2006

Managers

957

15/01/08

15/01/09

Plan I09

10,448,480

—

2007

Managers

5,476

23/06/07

31/07/09

Plan I10

15,736,843

—

2007

Managers

5,507

23/06/07

31/07/10

Plan I11

17,122,650

—

2008

Managers

5,771

21/06/08

31/07/11

Plan I06

In 2004 a long-term incentive plan (I06) was designed which, consisting of options on shares of the Bank, is tied to the achievement of two targets: appreciation of the Bank’s share price and growth in earnings per share, in both cases above a sample of comparable banks. These targets were achieved. The exercise period is from 15 January 2008 to 15 January 2009. This plan was approved by the shareholders at the annual general meeting on June 18, 2005.

The fair value of the equity instruments granted (€57.5 million) was charged to income (see Note 47-a), with a credit to equity, in the specific period in which the beneficiaries provided their services to the Group.

The executive directors are beneficiaries under this plan; the number of Bank share options held by them is indicated in Note 5-d.

Long-term incentive policy

At its meeting on March 26, 2007, following the report of the appointments and remuneration committee, the Bank’s board of directors approved a long-term incentive policy aimed at the Bank’s executive directors and certain executive personnel of the Bank and of other Santander Group companies (excluding Banesto). Implementation of this policy, which includes Bank share-based payments, requires, in conformity with the Law and the Bank’s Bylaws, specific resolutions to be adopted by the annual general meeting.

Were it necessary or advisable for legal, regulatory or other similar reasons, the delivery mechanisms described below may be adapted in specific cases without altering the maximum number of shares linked to the plan or the essential conditions to which the delivery thereof is subject. These adaptations may involve replacing the delivery of shares with the delivery of cash amounts of an equal value.

F-138

The plans shaping the aforementioned incentive policy are as follows: (i) Performance Share Plan; (ii) Obligatory Investment Share Plan; (iii) Selective Delivery Share Plan; and (iv) Minimum Investment Program. The characteristics of the plans are set forth below:

(i) Performance share plan

This multiannual incentive plan is payable in shares of the Bank. The beneficiaries of the plan are the executive directors and other members of senior management, together with any other Group executives determined by the board of directors or, when delegated by it, the executive committee.

This plan will involve successive three-year cycles of share deliveries to the beneficiaries, so that each year one cycle will begin and, from 2009 onwards, another cycle will also end. The aim is to establish an adequate sequence between the end of the incentive program linked to the previous Plan I06 and the successive cycles of this plan. Thus, the first two cycles commenced in July 2007, the first cycle having a duration of two years (PI09) and the second cycle having a standard three-year term (PI10). In June 2008 the third cycle of the performance share plan (PI11), to run for three years, was approved.

For each cycle a maximum number of shares is established for each beneficiary who remains in the Group’s employ for the duration of the plan. The targets, which, if met, will determine the number of shares to be delivered, are defined by comparing the Group’s performance with 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 ultimate number of shares to be delivered will be determined in each of the cycles by the degree of achievement of the targets on the third anniversary of commencement of each cycle (with the exception of the first cycle, for which the second anniversary will be considered), and the shares will be delivered within a maximum period of seven months from the end of the cycle.

At the end of each cycle, the TSR and the EPS growth will be calculated for Santander and each of the benchmark entities and the results will be ranked from first to last. Each of the two criteria (TSR and EPS growth) will be weighted at 50% in the calculation of the percentage of shares to be delivered, based on the following scale and in accordance with Santander’s relative position among the group of benchmark financial institutions:


Santander’s	Percentage of			Santander’s Place	Percentage of
Place in the TSR	Maximum Shares			in the EPS	Maximum Shares
Ranking	to Be Delivered			Growth Ranking	to Be Delivered

1^st to 6^th		50	%	1^st to 6^th		50	%
7^th		43	%	7^th		43	%
8^th		36	%	8^th		36	%
9^th		29	%	9^th		29	%
10^th		22	%	10^th		22	%
11^th		15	%	11^th		15	%
12^th and below		0	%	12^th and below		0	%

Any benchmark group entity that is acquired by another company, whose shares cease trading or that ceases to exist will be excluded from the benchmark group. In an event of this or any similar nature, the comparison with the benchmark group will be performed in such a way that, for each of the measures considered (TSR and EPS growth) the maximum percentage of shares will be delivered if Santander ranks within the first quartile (including the 25^th percentile) of the benchmark group; no shares will be delivered if Santander ranks below the median (50^th percentile); 30% of the maximum amount of shares will be delivered if Santander is placed at the median (50^th percentile). The linear interpolation method will be used for calculating the corresponding percentage for positions between the median and the first quartile (25th percentile) (neither included).

The fair value of the equity instruments granted under this plan is €242 million, and this amount is being charged to “Staff costs”, with a credit to equity, over the specific period in which the beneficiaries provide their services to the Group.

F-139

(ii) Obligatory investment share plan

This multiannual incentive plan is payable in shares of the Bank and is conditional upon compliance with certain investment and continued service requirements.

The current beneficiaries of the plan are the Group’s top 32 executives, who include the executive directors, non-director members of senior management and other executives (see Note 5).

This plan is structured in three-year cycles which start each year. The beneficiaries of the plan must use 10% of their gross annual variable remuneration (or bonus) to acquire shares of the Bank in the market (the “Obligatory Investment”). As resolved by the shareholders at the relevant general meeting, the Obligatory Investments were made before February 29, 2008 and February 28, 2009, respectively.

Participants who hold the shares acquired through the Obligatory Investment and remain in the Group’s employ for three years from the date on which the Obligatory Investment is made will be entitled to receive the same number of Bank shares as that composing their initial Obligatory Investment.

The shares will be delivered within a maximum period of one month from the third anniversary of the date on which the Obligatory Investment was made.

(iii) Selective delivery share plan

This plan envisages the selective delivery of shares in special circumstances relating to the hiring or retention of employees. All employees and executives, except for the Bank’s executive directors, are eligible for this plan, provided that they have completed a minimum of three to four years of service at the Group. Each participant will be entitled to receive the shares upon completion of the minimum period of service.

(iv) Minimum investment program

This program consists of the obligation of the Group’s top 32 executives (including executive directors) to hold Bank shares equal to one year’s fixed remuneration. This amount must be reached within a maximum period of five years.

F-140

ii. Abbey

The option plans on shares of the Bank originally granted by management of Abbey to its employees (on Abbey shares) are as follows:

Pounds

Date of

Sterling (*)

Commencement

Date of Expiry

Number of

Exercise

Year

Employee

Number of

of Exercise

Price

Granted

Group

Persons

Period

Plans outstanding at 1 January 2006

14,122,681

3.41

Options granted (MTIP)

2,825,123

7.50

2005 and 2006

Managers

174

First half of 2008

Options exercised

(5,214,171

)

3.41

Of which:

Executive Options

(87,659

)

4.07

Employee Options

(33,000

)

5.90

Sharesave

(5,093,512

)

3.38

Options cancelled (net) or not exercised

(1,379,401

)

Plans outstanding at December 31, 2006

10,354,232

4.32

Of which:

Executive Options

178,026

4.11

2003/2004

Managers

26/03/06

24/03/13

Sharesave

7,638,791

3.32

1998/2004

Employees

4,512

(**)

01/04/06

01/09/11

MTIP

2,537,415

9.39

2005 and 2006

Managers

170

First half of 2008

Options granted (MTIP)

—

Options exercised

(1,535,325

)

3.81

Of which:

Executive Options

(33,904

)

3.96

Sharesave

(1,501,421

)

3.81

Options cancelled (net) or not exercised

(770,595

)

—

Plans outstanding at December 31, 2007

8,048,312

5.34

Of which:

Executive Options

144,122

4.15

2003/2004

Managers

26/03/06

24/03/13

Sharesave

5,684,340

3.18

1998/2004

Employees

2,239

(**)

01/04/06

01/09/11

MTIP

2,219,850

10.88

2005 and 2006

Managers

157

First half of 2008

Options granted (Sharesave)

5,196,807

7.69

2008

Employees

6,556

(**)

1/11/11

1/11/12

Options exercised

(6,829,255

)

4.91

Of which:

Executive Options

(132,107

)

4.11

Sharesave

(4,506,307

)

3.07

MTIP

(2,190,841

)

8.73

Options cancelled (net) or not exercised

(262,868

)

4.87

Of which:

Sharesave

(233,859

)

4.13

MTIP

(29,009

)

10.88

Plans outstanding at December 31, 2008

6,152,996

7.00

Of which:

Executive Options

12,015

4.54

2003/2004

Managers

26/03/06

24/03/13

Sharesave

6,140,981

7.00

1998/2004/2008

Employees

7,092

(**)

01/04/06

01/05/14


(*)		At December 31, 2008, the euro/pound sterling exchange rate was €1.04987 / GBP 1 (December 31, 2007: €1.36360 / GBP 1).

(**)		Number of accounts/contracts. A single employee may have more than one account/contract. On September 30, 2008, 4,493 contracts were delivered with an execution date three years thereafter and 2,063 contracts with an execution date five years thereafter. The date of commencement of all these contracts is November 1, 2008.

In 2005 the Group designed a Medium-Term Incentive Plan (MTIP) involving the delivery of Bank shares to Abbey executives. Under the plan, effective allocation of the shares in 2008 is tied to the achievement of business targets by Abbey (in terms of net profit and income). This Plan was approved by the shareholders at the annual general meeting on June 17, 2006. Subsequently, it was considered necessary to amend the conditions of the Plan in order to reflect the impact of the sale of Abbey’s life insurance business to Resolution on the income targets of Abbey for 2007. The board of directors, after obtaining a favorable report from the appointments and remuneration committee, submitted this amendment for ratification by the shareholders at the annual general meeting held on June 23 2007. The amendment was approved thereat. In the first half of 2008, all options under this plan were exercised, and the plan was cancelled on June 30, 2008.

In 2008 the Group launched a voluntary savings scheme for Abbey employees (“Sharesave Scheme”) whereby employees who join the scheme will have between GBP 5 and GBP 250 deducted from their net monthly pay over a period of three or five years. When this period has ended, the employees may use the amount saved to exercise options on shares of the Bank at an exercise price calculated by reducing by up to 20% the average purchase and sale prices of the Bank shares in the first three trading days of September 2008. This scheme was approved by the shareholders at the annual general meeting held on June 21, 2008 and is authorized by the UK tax authorities (HMRC).

F-141

iii. Fair value

The fair value of each option granted by the Group is calculated at the grant date. In order to value Plan I06 two valuation reports were performed by two multinational investment banks upon wich our valuation was in part based. These experts used the Black-Scholes equity option pricing model considering the following parameters: the expected life of the options, interest rates, volatility, exercise price, market price and dividends of the Bank shares and the shares of comparable banks. The fair value of the options granted was calculated as the average value resulting from the two valuations.

With the exception of the share option plans which include terms relating to market conditions, the transfer terms included in the vesting conditions are not taken into account to estimate fair value. The transfer terms that are not based on market conditions are taken into account by adjusting the number of shares or share options included in the measurement of the service cost of the employee so that, ultimately the amount recognized in the consolidated income statement is based on the number of shares or share options transferred. When the transfer terms are related to market conditions, the charge for the services received is recognized regardless of whether the market conditions for the transfer are met, although the non-market transfer terms must be satisfied. The share price volatility is based on the implicit volatility scale for the Bank’s shares at the exercise prices and the duration corresponding to most of the sensitivities.

The fair value of the Performance Share Plans was calculated as follows:

•

It was assumed that the beneficiaries will not leave the Group’s employ during the term of each plan.

•

The fair value of the 50% linked to the Bank’s relative TSR position was calculated, on the grant date, on the basis of the report of an independent expert whose assessment was carried out using a Monte Carlo valuation model, performing 10,000 simulations to determine the TSR of each of the companies in the Benchmark Group, taking into account the variables set forth below. The results (each of which represents the delivery of a number of shares) are classified in decreasing order by calculating the weighted average and discounting the amount at the risk-free interest rate.


	PI09			PI10			PI11

Expected volatility (*)		16.25	%		15.67	%		19.31	%
Annual dividend yield based on last few years		3.23	%		3.24	%		3.47	%
Risk-free interest rate (Treasury Bond yield -zero coupon) over the period of the plan		4.473	%		4.497	%		4.835	%


(*)		calculated on the basis of historical volatility over the corresponding period (two or three years)

The application of the simulation model results in percentage values of 42.7% for PI09, 42.3% for PI10 and 44.9% for PI11, which are applied to 50% of the value of the options granted, in order to determine the cost per books of the TSR-based portion of the incentive. Since this valuation refers to a market condition, it cannot be adjusted after the grant date.

•

In view of the high correlation between TSR and EPS, it was considered feasible to extrapolate that, in a high percentage of cases, the TSR value is also valid for EPS. Therefore, it was initially determined that the fair value of the portion of the plans linked to the Bank’s relative EPS position, i.e. of the remaining 50% of the options granted, was the same as that of the 50% corresponding to the TSR. Since this valuation refers to a non-market condition, it is reviewed and adjusted on a yearly basis.

F-142

The fair value of each option granted by Abbey was estimated at the grant date using a European/American Partial Differential Equation model with the following assumptions:


	2008	2007

Risk-free interest rate	2.9%-6.5%	5.0%-5.8%
Dividend increase, based solely on the average increase since 1989	10%	10%

Volatility of underlying shares based on historical volatility over 5 years	20.2%-29.6%	19.80%-26.90%
Expected life of options granted under:
Employee Sharesave Plan	3, 5 and 7 years	3, 5 and 7 years
Executive Share Option Plan	10 years	10 years
Medium-Term Incentive Plan	—	3 years

48.

Other general expenses

	a)		*Breakdown*

			The breakdown of the balance of this item is as follows:


	Thousands of Euros
	2008		2007		2006

Property, fixtures and supplies		1,235,634		989,663		972,933
Other administrative expenses		1,070,834		912,621		835,554
Technology and systems		530,021		488,741		417,977
Advertising		545,854		563,986		474,290
Communications		469,197		417,587		346,854
Technical reports		303,463		298,175		258,349
Per diems and travel expenses		264,632		279,298		242,444
Taxes other than income tax		302,381		279,093		227,835
Surveillance and cash courier services		256,704		201,532		189,474
Insurance premiums		36,773		36,432		35,588

		5,015,493		4,467,128		4,001,298

	b)		*Other information*

			The balance of “Technical reports” includes the fees paid by the various Group companies (detailed in the accompanying Exhibits) to their respective auditors, the detail being as follows:


	Millions of Euros
	2008		2007		2006

Audit of the annual financial statements of the companies audited by Deloitte (constant scope of consolidation)		15.9		15.9		15.6
Of which:
Abbey		3.3		4.1		4.1
Audit of the Bank’s individual and consolidated financial statements		1.0		1.0		1.0

Audit of the annual financial statements of the companies audited by Deloitte (additions to scope of consolidation)		2.3		—		—
Of which: Banco Real		1.5		—		—

F-143

In recent years, in addition to the audits of financial statements, the internal control audit (Sarbanes-Oxley) and the regulatory capital audit (BIS) were performed (for €5.9 million in 2008, €6.2 million in 2007 and €6.6 million in 2006) and other reports were prepared in accordance with the requirements of the legal and tax regulations issued by the national supervisory authorities of the countries in which the Group operates, including most notably the six-monthly auditors’ reports and those which comply with the US SEC requirements (other than the Sarbanes-Oxley Act), totaling €4.5 million, €3.7 million and €3.9 million in 2008, 2007 and 2006, respectively.

The detail of the other services provided to the various Group companies is as follows:

Due diligence review and other corporate transaction services: €3.8 million (2007: €3.7 million; 2006: €3.3 million). Additionally, the Group’s auditors provided other non-attest services to various Group companies for €5.3 million in 2008, €5.3 million in 2007 and €5.5 million in 2006.

The services commissioned from the Group’s auditors meet the independence requirements stipulated by Law 44/2002, of November 22, on Financial System Reform Measures and by the Sarbanes-Oxley Act of 2002, and they did not involve the performance of any work that is incompatible with the audit function.

Services provided by audit firms other than Deloitte: €13.9 million (2007: €12.5 million; 2006: €14.6 million).

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

		The breakdown of the balance of this item is as follows:


	Millions of Euros
	2008			2007			2006

Gains		185			1,872			412
On disposal of tangible assets		132			1,854			138
Of which:
Disposal of properties (Note 16)		—			1,620			—
On disposal of investments		53			17			274
Of which:
Disposal of investment in B. Santander Chile (Note 3)		—			—			270
Disposal of Porterbrook (Note 3)		50			—			—
Losses		(67	)		(56	)		(60	)
On disposal of tangible assets		(64	)		(55	)		(58	)
On disposal of investments		(3	)		(1	)		(2	)


		118			1,816			352

F-144

51.

Other disclosures

	a)		*Residual maturity periods and Average interest rates*

			The breakdown, by maturity, of the balances of certain items in the consolidated balance sheets is as follows:


	December 31, 2008
	Millions of Euros
																				Average
	On			Within 1			1 to			3 to		1 to		3 to		After 5				Interest
	Demand			Month			3 Months			12 Months		3 Years		5 Years		Years		Total		Rate

Assets:
Cash and balances with central banks		20,920			22,121			846			621		—		—		1,272		45,781		4.51	%
Available-for-sale financial assets — Debt instruments		21			4,630			385			5,123		9,534		6,522		16,333		42,548		5.13	%
Loans and receivables:
Loans and advances to credit institutions		16,111			15,394			6,448			20,947		367		2,598		2,865		64,731		4.98	%
Loans and advances to customer		35,010			29,706			51,500			64,061		103,164		72,172		261,619		617,231		7.56	%
Debt instruments		38			—			600			6,071		30		173		10,741		17,652		3.15	%

		72,100			71,851			59,779			96,824		113,096		81,464		292,829		787,944		6.94	%

Liabilities:
Financial liabilities at amortized cost:
Deposits from central banks		1,681			366			2,427			4,720		—		14		4		9,212		4.38	%
Deposits from credit institutions		10,411			16,243			24,200			10,550		4,006		3,740		1,432		70,584		3.20	%
Customer deposits		182,475			64,213			70,655			49,707		20,349		9,602		9,014		406,015		5.08	%
Marketable debt securities (*)		7,250			22,168			26,241			25,125		42,132		23,509		81,218		227,642		4.21	%
Subordinated liabilities		190			571			41			1,103		3,506		1,283		32,179		38,873		5.69	%
Other financial liabilities		9,453			2,646			1,760			1,209		461		1,873		278		17,681

		211,461			106,208			125,324			92,415		70,453		40,022		124,124		770,008		4.66	%

Difference (assets less liabilities)		(139,361	)		(34,356	)		(65,545	)		4,409		42,642		41,442		168,705		17,936


(*)		Includes promissory notes, certificates of deposit and other short-term debt issues.


	December 31, 2007
	Millions of Euros
																					Average
	On			Within 1			1 to 3			3 to 12		1 to 3		3 to 5		After 5					Interest
	Demand			Month			Months			Months		Years		Years		Years		Total			Rate

Assets:
Cash and balances with central banks		14,102			10,278			5			10		1,265		4,295		1,108		31,063			5.93	%
Available-for-sale financial assets- Debt instruments		31			953			1,070			2,060		5,837		6,450		17,786		34,187			5.11	%
Loans and receivables:
Loans and advances to credit institutions		8,227			13,147			6,333			4,113		884		759		5,021		38,483			4.53	%
Loans and advances to customers		9,848			29,446			34,228			65,696		58,124		62,048		279,982		539,732			6.75	%
Debt instruments		1			4			—			5		634		65		959		1,668			4.55	%

		32,209			53,828			41,636			71,884		66,744		73,617		304,856		644,773			6.51	%

Liabilities:
Financial liabilities at amortized cost:
Deposits from central banks		2,727			16,387			2,917			155		—		—		—		22,186			4.45	%
Deposits from credit institutions		5,706			22,412			6,504			6,197		3,002		3,111		1,756		48,688			4.55	%
Customer deposits		178,240			55,381			27,839			28,959		13,141		11,145		2,040		316,745			4.12	%
Marketable debt securities		520			13,310			17,600			24,198		35,294		26,745		88,250		205,917			4.61	%
Subordinated liabilities		88			8			61			569		4,065		2,357		29,045		36,193			5.69	%
Other financial liabilities		11,393			931			1,343			1,034		79		1,780		123		16,683			—

		198,674			108,429			56,264			61,112		55,581		45,138		121,214		646,412			4.41	%

Difference (assets less liabilities)		(166,466	)		(54,602	)		(14,628	)		10,772		11,163		28,479		183,642		(1,639	)

F-146


	December 31, 2006
	Millions of Euros
																					Average
	On			Within 1			1 to			3 to		1 to		3 to		After 5					Interest
	Demand			Month			3 Months			12 Months		3 Years		5 Years		Years		Total			Rate

Assets:
Cash and balances with central banks		9,725			3,281			—			1		—		—		828		13,835			3.99	%
Available-for-sale financial assets- Debt instruments		26			2,260			2,501			3,771		4,564		5,035		14,570		32,727			5.96	%
Loans and receivables:
Loans and advances to credit institutions		10,460			24,865			6,459			6,118		1,903		2,099		3,041		54,944			3.85	%
Loans and advances to customers		10,291			19,607			34,315			56,311		53,564		59,080		255,312		488,480			5.86	%
Debt instruments		565			—			—			—		—		—		57		622			3.02	%

		31,067			50,013			43,275			66,201		60,032		66,213		273,808		590,608			5.66	%

Liabilities:
Financial liabilities at amortized cost:
Deposits from central banks		2			14,366			1,657			503		1		1		—		16,530			5.25	%
Deposits from credit institutions		6,447			21,646			9,981			11,680		3,005		2,441		1,618		56,818			4.07	%
Customer deposits		198,331			54,331			24,976			22,199		6,950		5,644		1,671		314,102			3.90	%
Marketable debt securities		1,961			14,079			16,489			14,701		20,512		16,658		89,682		174,082			3.91	%
Subordinated liabilities		253			—			234			108		3,078		2,499		24,919		31,091			5.74	%
Other financial liabilities		6,844			1,653			1,161			2,378		147		119		494		12,796			—

		213,838			106,075			54,498			51,569		33,693		27,362		118,384		605,419			4.05	%

Difference (assets less liabilities)		(182,772	)		(56,063	)		(11,223	)		14,632		26,339		38,851		155,424		(14,811	)

	b)		*Equivalent euro value of assets and liabilities*

			The detail of the main foreign currency balances in the consolidated balance sheet, based on the nature of the related items, is as follows:


	Equivalent Value in Millions of Euros
	2008				2007				2006
	Assets		Liabilities		Assets		Liabilities		Assets		Liabilities

Cash and balances with central banks		26,685		—		16,155		—		10,042		—
Financial assets/liabilities held for trading		104,429		96,666		124,409		100,719		139,783		106,075
Other financial instruments at fair value		14,478		22,025		15,815		28,553		10,414		12,140
Available-for-sale financial assets		25,338		—		15,395		—		18,530		—
Loans and receivables		351,302		—		260,435		—		248,977		—
Investments		1,169		—		13,036		—		2,461		—
Tangible assets		3,286		—		4,665		—		4,696		—
Intangible assets		16,940		—		12,557		—		13,626		—
Financial liabilities at amortized cost		—		406,270		—		308,166		—		309,610
Liabilities under insurance contracts		—		2,985		—		2,139		—		2,157
Other		18,945		25,230		8,388		19,120		7,793		20,598

		562,572		553,176		470,855		458,697		456,322		450,580

F-147

Fair value of financial assets and liabilities not measured at fair value

The financial assets owned by the Group are measured at fair value in the accompanying consolidated balance sheet, except for loans and receivables and held-to-maturity investments, equity instruments whose market value cannot be estimated reliably and derivatives that have these instruments as their underlyings and are settled by delivery thereof.

Similarly, the Group’s financial liabilities -except for financial liabilities held for trading, those measured at fair value and derivatives other than those having as their underlyings equity instruments whose market value cannot be estimated reliably- are measured at amortized cost in the consolidated balance sheet.

i) Financial assets measured at other than fair value

Following is a comparison of the carrying amounts of the Group’s financial assets measured at other than fair value and their respective fair values at year-end:


	Millions of Euros
	2008				2007				2006
	Carrying		Fair		Carrying		Fair		Carrying		Fair
Assets	Amount		Value		Amount		Value		Amount		Value

Loans and receivables:
Loans and advances to credit institutions		64,731		65,059		38,483		38,482		54,943		54,940
Loans and advances to customers		617,231		627,006		539,372		541,129		488,480		491,224
Debt instruments		17,652		17,645		1,668		1,668		622		622

		699,614		709,710		579,524		581,280		544,045		546,786

ii) Financial liabilities measured at other than fair value

Following is a comparison of the carrying amounts of the Group’s financial liabilities measured at other than fair value and their respective fair values at year-end:


	Millions of Euros
	2008				2007				2006
	Carrying		Fair		Carrying		Fair		Carrying		Fair
Liabilities	Amount		Value		Amount		Value		Amount		Value

Financial liabilities at amortized cost:
Deposits from central banks		9,212		9,212		22,186		22,186		16,530		16,528
Deposits from credit institutions		70,583		70,740		48,687		48,728		56,818		56,828
Customer deposits (*)		406,015		407,537		316,745		316,886		314,102		314,045
Marketable debt securities		227,642		227,413		205,917		206,132		174,082		174,551
Subordinated liabilities		38,873		36,705		36,193		36,808		31,091		32,490
Other financial liabilities		17,681		17,677		16,683		16,681		12,796		12,799

		770,007		769,285		646,412		647,422		605,419		607,243


(*)		For these purposes, the fair value of customer demand deposits is taken to be the same as their carrying amount.

F-148

52.

Geographical and business segment reporting

	a)		*Geographical segments*

			This primary level of segmentation, which is based on the Group’s management structure, comprises four segments: three operating areas plus the Financial Management and Holdings Unit. The operating areas, which include all the business activities carried on therein by the Group, are Continental Europe, the United Kingdom (Abbey) and Latin America, based on the location of the Group’s assets.

			The Continental Europe area encompasses all the Commercial Banking (including the Private Banking entity Banif), Wholesale Banking and Asset Management and Insurance business activities carried on in Europe with the exception of the United Kingdom. Latin America includes all the financial activities carried on by the Group through its banks and subsidiaries, as well as the specialized units of Santander Private Banking, which is treated as a globally managed independent unit, and the New York business.

			The Financial Management and Holdings segment includes the centralized management business relating to financial and industrial investments, the financial management of the Parent’s structural currency position and its structural interest rate risk position and the management of liquidity and equity through issues and securitizations. As the Group’s holding unit, this segment handles the total capital and reserves, capital allocations and liquidity with the other businesses.

			The financial statements of each operating segment are prepared by aggregating the figures for the Group’s various business units. The basic information used for segment reporting comprises the accounting data of the legal units composing each segment and the data available from the management information systems. All segment financial statements have been prepared on a basis consistent with the accounting policies used by the Group.

			Consequently, the sum of the figures in the income statements of the various segments is equal to those in the consolidated income statement. With regard to the balance sheet, due to the required segregation of the various business units (included in a single consolidated balance sheet), the amounts lent and borrowed between the units are shown as increases in the assets and liabilities of each business. These amounts relating to intra-Group liquidity are classified under “Loans and advances to credit institutions/Deposits from credit institutions” and, therefore, the sum of these line items exceeds the figure for the consolidated Group.

			Additionally, for segment presentation purposes, the equity of each geographical unit is that reflected in the related individual financial statements and is offset by a capital endowment made by the Financial Management and Holdings Unit which, as explained earlier, acts as the holding unit for the other businesses and, therefore, reflects the Group’s total equity.

			There are no customers located in areas other than those in which the Group’s assets are located that generate income exceeding 10% of gross income.

F-149

The condensed balance sheets and income statements of the various geographical segments are as follows:


	Millions of Euros
	2008										2007											2006
							Financial										Financial											Financial
	Continental		United		Latin		Management				Continental		United		Latin		Management					Continental		United		Latin		Management
(Condensed) Balance Sheet	Europe		Kingdom		America		and Holdings		Total		Europe		Kingdom		America		and Holdings			Total		Europe		Kingdom		America		and Holdings		Total

Loans and advances to customers		325,379		202,623		96,054		2,833		626,888		314,714		184,080		70,228		2,076			571,099		274,328		190,509		61,210		989		527,036
Financial assets held for trading (excluding loans and advances)		72,303		50,028		20,966		2,686		145,983		44,846		53,787		22,846		1,328			122,808		33,831		61,510		27,846		2,029		125,215
Available-for-sale financial assets		12,806		2,785		19,208		14,122		48,920		10,149		44		12,628		21,528			44,349		13,126		23		17,943		7,605		38,698
Loans and advances to credit institutions		63,296		31,518		19,946		48,222		162,981		54,798		22,165		12,847		26,502			116,312		69,383		21,644		22,008		25,060		138,095
Non-current assets		5,562		1,210		3,272		245		10,289		5,373		4,685		1,805		(202	)		11,661		4,558		5,059		1,695		1,243		12,555
Other asset accounts		17,644		30,626		30,496		179,522		258,288		20,185		7,103		21,630		168,925			217,844		13,620		5,233		14,106		123,909		156,869

Total assets / liabilities		496,989		318,790		189,941		247,630		1,253,350		450,067		271,865		141,985		220,156			1,084,073		408,846		283,977		144,809		160,836		*998,468*

Customer deposits		165,763		143,200		108,257		3,009		420,229		149,061		122,500		82,046		1,800			355,407		139,985		115,180		75,293		490		330,948
Marketable debt securities		52,076		67,996		8,674		107,657		236,404		70,004		76,056		5,031		82,196			233,287		47,319		72,857		5,245		78,321		203,743
Subordinated liabilities		1,752		9,890		3,847		23,384		38,873		2,433		8,345		2,540		22,874			36,193		2,519		9,942		2,383		16,247		31,091
Liabilities under insurance contracts		13,889		3		2,958		—		16,850		10,907		6		2,121		—			13,034		8,547		71		2,086		—		10,704
Deposits from credit institutions		85,044		60,063		29,998		38,961		214,066		66,027		38,688		19,064		47,789			171,567		89,016		51,020		32,403		8,938		181,376
Other liability accounts		154,812		32,306		23,623		14,915		225,656		131,362		23,094		22,595		18,541			195,593		103,493		31,579		19,551		21,142		175,764
Equity		23,653		5,332		12,583		59,704		101,272		20,273		3,177		8,588		46,955			78,993		17,967		3,328		7,847		35,699		64,842
Off-balance-sheet customer funds		63,332		7,180		48,210		—		118,723		92,761		10,225		47,990		—			150,977		102,465		8,307		56,352		—		167,124

Total funds under management		560,321		325,970		238,150		247,630		*1,372,073*		542,828		282,091		189,975		220,155			*1,235,051*		511,311		292,284		201,160		160,837		*1,165,592*


	Millions of Euros
	*2008*															*2007*															*2006*
										Financial															Financial															Financial
	Continental			United			Latin			Management						Continental			United			Latin			Management						Continental			United			Latin			Management
(Condensed) Income Statement	Europe			Kingdom			America			and Holdings			Total			Europe			Kingdom			America			and Holdings			Total			Europe			Kingdom			America			and Holdings			Total

NET INTEREST INCOME		9,413			2,411			8,659			(2,312	)		18,172			7,742			2,334			6,654			(1,777	)		14,953			6,008			2,107			5,280			(1,274	)		12,121
Income from equity instruments		266			—			58			229			553			201			1			37			183			423			226			1			23			162			413
Income from companies accounted for by the equity method		(4	)		—			21			780			797			9			2			4			427			441			6			3			7			411			427
Net fee and commission income		4,086			926			3,393			46			8,451			4,137			1,007			2,866			30			8,040			3,653			1,026			2,357			(11	)		7,024
Gains/losses on financial assets and liabilities		771			500			926			1,346			3,543			732			436			702			1,113			2,982			710			423			612			414			2,159
Other operating income/(expenses)		148			49			(54	)		64			208			133			65			(5	)		43			237			185			54			57			(59	)		237
TOTAL INCOME		14,681			3,887			13,002			154			31,724			12,955			3,845			10,258			19			27,077			10,787			3,614			8,337			(357	)		22,381
Personnel expenses		(3,126	)		(986	)		(2,655	)		(197	)		(6,964	)		(3,037	)		(1,045	)		(2,222	)		(248	)		(6,551	)		(2,708	)		(1,069	)		(1,975	)		(215	)		(5,968	)
Other expenses		(1,620	)		(618	)		(2,304	)		(474	)		(5,015	)		(1,527	)		(784	)		(1,867	)		(289	)		(4,467	)		(1,282	)		(820	)		(1,725	)		(175	)		(4,001	)
Depreciation and amortization		(580	)		(157	)		(437	)		(96	)		(1,270	)		(559	)		(102	)		(348	)		(259	)		(1,268	)		(522	)		(105	)		(305	)		(214	)		(1,147	)
Impairment losses on financial assets		(2,477	)		(456	)		(3,082	)		(331	)		(6,345	)		(1,557	)		(312	)		(1,619	)		(13	)		(3,502	)		(1,317	)		(387	)		(861	)		84			(2,481	)
Provisions (net)		(37	)		(29	)		(565	)		(1,068	)		(1,699	)		30			5			(553	)		(506	)		(1,024	)		(292	)		(2	)		(349	)		(436	)		(1,079	)
Impairment losses on other assets (net)		(16	)		—			(7	)		(1,026	)		(1,050	)		(8	)		—			(30	)		(1,511	)		(1,549	)		(14	)		—			(6	)		(1	)		(21	)
Other non-financial gains/(losses)		(30	)		31			42			1,806			1,849			26			15			161			2,257			(2,459	)		19			2			4			1,286			1,311
OPERATING PROFIT/(LOSS) BEFORE TAX		6,794			1,673			3,994			(1,231	)		11,230			6,323			1,622			3,781			(550	)		11,175			4,671			1,232			3,120			(28	)		8,995
Income tax		(1,756	)		(426	)		(711	)		1,009			(1,884	)		(1,777	)		(421	)		(822	)		685			(2,336	)		(1,403	)		(343	)		(669	)		160			(2,254	)
PROFIT/(LOSS) FROM CONTINUING OPERATIONS		5,039			1,247			3,283			(222	)		9,346			4,546			1,201			2,958			135			8,840			3,268			889			2,451			132			6,741
Profit/(loss) from discontinued operations (net)		(21	)		—			7			—			(13	)		—			—			112			684			797			1,147			114			124			120			1,505
CONSOLIDATED PROFIT FOR THE YEAR		5,018			1,247			3,290			(222	)		9,332			4,546			1,201			3,071			819			9,636			4,416			1,003			2,575			251			8,246
Profit attributable to minority interests		110			—			346			1			456			107			—			404			65			576			271			—			289			90			650
PROFIT ATTRIBUTABLE TO THE PARENT		4,908			1,247			2,945			(223	)		8,876			4,439			1,201			2,666			754			9,060			4,144			1,003			2,287			162			7,596

F-150


	Millions of Euros
	2008															2007															2006
				Global			Asset			Financial									Global			Asset			Financial									Global			Asset			Financial
	Commercial			Wholesale			Management			Management						Commercial			Wholesale			Management			Management						Commercial			Wholesale			Management			Management
(Condensed) Income Statement	Banking			Banking			and Insurance			and Holdings			Total			Banking			Banking			and Insurance			and Holdings			Total			Banking			Banking			and Insurance			and Holdings			Total

NET INTEREST INCOME		18,362			1,934			188			(2,312	)		18,172			15,235			1,364			131			(1,777	)		14,953			12,252			1,061			82			(1,274	)		12,121
Income from equity instruments		149			162			13			229			553			80			148			12			183			423			60			180			10			162			412
Income from companies accounted for by the equity method		16			2			—			780			797			13			2			—			427			441			16			—			—			411			427
Net fee and commission income		7,137			861			407			46			8,451			6,618			922			470			30			8,040			5,966			646			423			(11	)		7,024
Gains/losses on financial assets and liabilities		1,144			1,027			26			1,346			3,543			962			878			29			1,113			2,982			689			1,042			14			414			2,159
Other operating income/(expenses)		(33	)		(39	)		215			64			208			(5	)		(30	)		229			43			237			140			(31	)		187			(59	)		237
TOTAL INCOME		26,775			3,947			848			154			31,724			22,901			3,285			872			19			27,077			19,123			2,898			716			(357	)		22,381
Personnel expenses		(5,987	)		(647	)		(132	)		(197	)		(6,964	)		(5,539	)		(632	)		(132	)		(248	)		(6,551	)		(5,097	)		(547	)		(109	)		(215	)		(5,968	)
Other expenses		(4,015	)		(380	)		(147	)		(474	)		(5,015	)		(3,633	)		(392	)		(153	)		(289	)		(4,467	)		(3,420	)		(301	)		(106	)		(174	)		(4,001	)
Depreciation and amortization		(1,067	)		(88	)		(19	)		(96	)		(1,270	)		(898	)		(91	)		(19	)		(259	)		(1,268	)		(846	)		(70	)		(17	)		(214	)		(1,147	)
Impairment losses on financial assets		(5,740	)		(275	)		1			(331	)		(6,345	)		(3,426	)		(63	)		—			(13	)		(3,502	)		(2,258	)		(307	)		—			84			(2,481	)
Provisions (net)		(603	)		(13	)		(16	)		(1,068	)		(1,699	)		(459	)		(35	)		(23	)		(506	)		(1,024	)		(579	)		(50	)		(15	)		(436	)		(1,079	)
Impairment losses on other assets (net)		(25	)		—			2			(1,026	)		(1,050	)		(37	)		—			—			(1,511	)		(1,549	)		(23	)		3			—			(1	)		(21	)
Other non-financial gains/(losses)		38			5			—			1,806			1,849			202			—			—			2,257			(2,459	)		25			—			—			1,286			1,311
OPERATING PROFIT/(LOSS) BEFORE TAX		9,376			2,548			537			(1,231	)		11,230			9,110			2,072			544			(550	)		11,175			6,926			1,626			471			(28	)		8,995
Income tax		(2,066	)		(684	)		(144	)		1,009			(1,884	)		(2,334	)		(523	)		(163	)		685			(2,336	)		(1,833	)		(426	)		(156	)		160			(2,255	)
PROFIT/(LOSS) FROM CONTINUING OPERATIONS		7,311			1,865			393			(222	)		9,346			6,776			1,548			381			134			8,840			5,093			1,201			315			132			6,741
Profit/(loss) from discontinued operations (net)		(13	)		—			—			—			(13	)		—			—			112			684			797			1,155			2			228			120			1,505
CONSOLIDATED PROFIT FOR THE YEAR		7,297			1,865			393			(222	)		9,332			6,776			1,548			493			819			9,636			6,248			1,203			543			252			8,246
Profit attributable to minority interests		422			11			22			1			456			457			9			45			65			576			499			21			40			90			650
PROFIT ATTRIBUTABLE TO THE PARENT		6,875			1,854			371			(223	)		8,876			6,319			1,539			448			754			9,060			5,749			1,182			503			162			7,596

F-152


	Millions of Euros
	2008												2007												2006
	Associates												Associates												Associates			Members
	and Jointly			Members of									and Jointly			Members of						Other			and Jointly			of the						Other
	Controlled			the Board of			General			Other Related			Controlled			the Board of			General			Related			Controlled			Board of			General			Related
	Entities			Directors			Managers			Parties			Entities			Directors			Managers			Parties			Entities			Directors			Managers			Parties

Assets:
Loans and advances to credit institutions		4,019			—			—			—			3,169			—			—			136			2,051			—			—			97
Loans and advances to customers		221			4			21			1,728			262			1			14			2,040			246			1			10			3,198
Debt instruments		510			—			—			464			—			—			—			293			103			—			—			51

Liabilities:
Deposits from credit institutions		(136	)		—			—			—			(284	)		—			—			—			(115	)		—			—			(4	)
Customer deposits		(143	)		(11	)		(22	)		(405	)		(4	)		(7	)		(18	)		(265	)		(249	)		(63	)		(8	)		(133	)
Subordinated liabilities		—			—			—			—			—			—			—			—			(98	)		—			—			—

Income statement:
Interest and similar income		203			—			1			83			110			—			—			117			80			—			—			35
Interest expense and similar charges		(25	)		—			1			(10	)		(11	)		—			—			(6	)		(25	)		(2	)		—			(3	)
Gains/losses on financial assets and liabilities		3			—			1			32			6			—			—			21			—			—			—			22
Fee and commission income		28			—			—			25			48			—			—			15			30			1			—			36
Fee and commission expense		(23	)		—			—			—			(16	)		—			—			—			(12	)		—			—			—

Other:
Contingent liabilities		293			—			—			479			365			—			2			968			40			—			2			1,333
Contingent commitments		164			1			7			13			358			1			1			280			467			—			1			2
Derivative financial instruments		7,074			—			—			1,314			7,823			—			4			831			6,121			—			—			245

F-154

54.

Risk management

Risk management at the Santander Group is based on the following principles:

•

Independence of the risk function with respect to the business. The head of the Group’s Risk Division, Mr. Matías Rodríguez Inciarte, as third deputy chairman and in his capacity as chairman of the risk committee, reports directly to the executive committee and the board.

•

Commitment to supporting the business by contributing, without undermining the preceding principle, to the achievement of commercial objectives whilst safeguarding risk quality. To this end, the organizational structure responsible for implementing risk policies is adapted to the commercial structure so as to encourage cooperation between business and risk managers.

•

Collective decisions (even at branch level), which ensure that different opinions are taken into account and avoid situations in which decisions are taken individually.

•

Well-established tradition of using internal rating and scoring tools, return on risk-adjusted capital (RORAC), value-at-risk (VaR), economic capital, extreme scenario analyses, etc.

•

Global approach, achieved by addressing on an integrated basis all the risk factors in all the business units and geographical locations, and using the concept of economic capital as a consistent measure of the risk assumed and as the basis for assessing the management performed.

•

Desire to continue to target a medium-low risk profile, emphasizing its low volatility and its predictability, by:

•

seeking to achieve a high degree of risk diversification, thus limiting risk concentration on particular customers, groups, sectors, products or geographical locations;

•

maintaining a low level of complexity in Markets operations;

•

paying ongoing attention to risk monitoring in order to prevent potential portfolio impairment sufficiently in advance.

At Santander, the risk management and control process is structured into the following phases:

•

Establishment of risk management frameworks and policies that reflect Santander’s risk management principles.

The Santander Group has a series of risk policies and procedures that constitute its regulatory framework, which, taking the form of circulars, frameworks (formerly the Risk Management Policy Manuals) and operating rules, regulates the risk activities and processes.

Within this regulatory framework, the Corporate Risk Management Framework, approved by Senior Management (Risks), regulates the principles and standards governing the general modus operandi of the Santander Group’s risk activities, based on an organizational model and a management model.

The organizational model comprises the management map, the risk function and governance, and the regulatory framework itself. The management model contains the basic pillars for risk management, the channels for the planning and setting of targets, the budgeting and risk limit setting process, the control of operations, the framework for risk reporting to senior management and the technological reference model for risk management.

One of the main characteristics of this Corporate Risk Management Framework is that it leads to the regulation, through a series of more specific corporate frameworks, of the functions reporting to the Risk Unit.

•

Identification of risks, through the constant review and monitoring of exposures, the assessment of new products and businesses and the specific analysis of singular transactions;

•

Measurement of risks using extensively tested methods and models;

•

Definition of the Group’s risk appetite by setting overall and specific limits for the various types of risks, products, customers, groups, sectors and geographical locations;

•

Preparation and distribution of a complete set of reports that are reviewed daily by the heads at all levels of Santander management;

•

Implementation of a risk control system which checks, on a daily basis, the degree to which Santander’s risk profile matches the risk policies approved and the risk limits set.

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For many years the Santander Group has managed risk using a number of techniques and tools which are described in detail in this Note. The most noteworthy of these techniques and tools, due to the foresight with which Santander implemented them at the time and their current significance in light of the New Basel Capital Accord (BIS II), are as follows:

•

Internal ratings- and scorings-based models which, by assessing the various qualitative and quantitative risk components by customer and transaction, make it possible to estimate, firstly, the probability of default and, subsequently, the expected loss, based on LGD estimates.

•

Economic capital, as a homogeneous measure of the risk assumed and a basis for the measurement of the management performed.

•

RORAC, which is used both as a transaction pricing tool (bottom-up approach) and in the analysis of portfolios and units (top-down approach).

•

VaR, which is used for controlling market risk and setting the market risk limits for the various trading portfolios.

•

Scenario analysis and stress testing to supplement market and credit risk analyses in order to assess the impact of alternative scenarios, even on provisions and capital.

Consequently, Santander’s risk management fully identifies with BIS II principles, insofar as it recognizes and supports the leading-edge industry practices that the Group has implemented in advance.

The publication of Bank of Spain Circular 3/2008 on the calculation and control of minimum capital requirements for credit institutions enabled Santander to use these internal models to calculate its regulatory capital. Given the medium-low risk profile characterizing Santander’s business activities, since it focuses primarily on retail banking (corporations, SMEs and individuals), the authorization granted by the Bank of Spain in the second quarter of 2008, approving the use of the internal models at the Parent, Banesto and Abbey, gave rise to regulatory capital savings under the so-called Pillar 1 (which establishes the capital requirements to cover credit, market and operational risks), in keeping with forecasts.

In the coming years, the Santander Group will extend the use of the internal models for the calculation of regulatory capital to the remaining business units, based on a timetable agreed on with its supervisor. The Santander Group will assign for this purpose all the human and technology resources necessary to meet the stringent requirements established by the Bank of Spain, the supervisory authority responsible for the validation of these internal models.

I. CORPORATE GOVERNANCE OF THE RISK FUNCTION

The risk committee is responsible for proposing the Group’s risk policy for approval by the board within its governing and supervisory powers. Furthermore, the committee ensures that the Group’s activities are consistent with its risk tolerance level and, in this regard, it sets global limits for the main risk exposures, which it reviews systematically, and decides upon any transactions that exceed the powers delegated to lower-ranking bodies.

The risk committee, an executive body that adopts decisions within the scope of the powers delegated by the board, is presided over by the third deputy chairman of the Santander Group and also comprises a further four directors of the Bank.

In 2008 the risk committee held 102 meetings, evidencing the importance that the Santander Group attaches to the proper management of its risks.

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The responsibilities assigned to the risk committee are essentially as follows:

•

To propose to the board the Group’s risk policy, which will identify, in particular:

	•		The various types of risk (financial, operational, technological, legal and reputational, inter alia) facing the Group;

	•		The information and internal control systems to be used to control and manage these risks;

	•		The level of risk deemed acceptable by the Group;

•

The measures envisaged to mitigate the impact of the identified risks in the event that they materialize.

•

To conduct systematic reviews of the Group’s exposure to its main customers, economic activity sectors, geographical areas and types of risk.

•

To authorize the management tools and risk models and ascertain the result of their internal validation.

•

To ensure that the Group’s actions are consistent with the level of risk tolerance previously defined.

•

To be informed of, assess and follow any remarks and recommendations that may be periodically made by the supervisory authorities in discharging their function.

•

To resolve transactions outside the powers delegated to lower-ranking bodies and the overall limits for pre-classified risk categories in favor of economic groups or in relation to exposure by type of risk.

The risk committee has delegated certain of its powers to risk committees which are structured by geographical area, business line and type of risk. Although Banesto has been granted autonomous risk management powers within the Santander Group, the executive committee ensures that its risk management policy is consistent with the Group’s policies.

The risk function at the Santander Group is performed through two Risk Units, which are independent from the business areas from both a hierarchical and a functional standpoint. The two Risk Units are directly linked to the board of directors through the risk committee and the third deputy chairman of the Group, who is ultimately responsible for the Group’s risk management.

In order to meet the requirements of Basel II and to enhance the Group’s capacity to cater for its business growth, in 2008 the risk committee approved the organizational and functional adaptation of its two Units:

•

The Risk Unit, whose functions are divided into two blocks:

•

A corporate structure, with global-reaching responsibilities (“all risks, all geographical areas”), which establishes the risk policies, methodologies and control systems and consists of several units organized by type of risk (solvency and market risks).

•

A business structure, centered on the performance and management integration of the risk function in the Group’s commercial, global and local businesses.

•

The Integrated Risk Control and Internal Risk Validation Unit, with global-reaching corporate responsibilities, which provide support to the Group’s governing bodies, namely:

•

Validation of the internal risk models in order to assess the appropriateness and adequacy of rating systems, internal processes and data processing, in conformity with Basel II.

•

Integrated Risk Control in order to ensure that the risk management and control systems are consistent with the Bank’s global risk profile.

The Santander Group’s risk policy is oriented towards maintaining a predictable medium-low risk profile, as regards both credit and market risks. Following is an analysis of the Group’s main types of risk: credit, market, operational and reputational risks.

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II. CREDIT RISK

II.1 Introduction to the treatment of credit risk

Credit risk is the possibility of loss stemming from the total or partial failure of our customers or counterparties to meet their financial obligations to the Group.

The specialization of the Santander Group’s risk function is based on the type of customer and, accordingly, a distinction is made between individualized customers and standardized customers in the risk management process:

•

Individualized customers are defined as those to which a risk analyst has been assigned, basically because of the risk assumed. This category includes wholesale banking customers, financial institutions and certain enterprises belonging to retail banking. Risk management is performed through expert analysis supplemented by decision-making support tools based on internal risk assessment models.

•

Standardized customers are those which have not been expressly assigned a risk analyst. This category generally includes individuals, individual entrepreneurs, and retail banking enterprises not classified as individualized customers. Management of these risks is based on internal risk assessment and automatic decision-making models, supplemented subsidiarily, when the model is not comprehensive enough or is not sufficiently accurate, by teams of analysts specializing in this type of risk.

II.2 Main aggregates and variations

The profile of the credit risk assumed by the Group is characterized by a diversified geographical distribution and the prevalence of retail banking operations.

a. Global map of credit risk — 2008

The following table shows the global map of credit risk, expressed in nominal amounts (with the exception of exposure in derivatives and repos, which is expressed in credit risk equivalent), to which the Group was exposed at December 31, 2008.


	SANTANDER GROUP - GROSS CREDIT RISK EXPOSURE
							Sovereign			Private
	Customer			Drawable			Fixed-			Fixed-			Credit			Drawable			Derivatives
	Draw			by			Income			Income			Institution			by Credit			and									Change/
	-Downs			Customers			(Excl. Trad.)			(Excl. Trad.)			Drawdowns			Institutions			Repos (CRE)			Total			%			Dec-07
SPAIN		301,729			59,514			13,673			9,211			51,585			5,831			25,520			467,062			46.2	%		12.4	%
Parent bank		181,946			40,667			8,923			4,402			43,395			583			20,345			300,262			29.7	%		15.1	%
Banesto		83,551			10,984			4,115			2,275			5,373			260			4,971			111,530			11.0	%		4.7	%
Other		36,232			7,863			635			2,533			2,816			4,988			203			55,270			5,5	%		14.8	%

OTHER EUROPEAN COUNTRIES		283,385			23,309			5,213			15,584			14,831			152			9,923			352,396			34.8	%		23.5	%

Germany		21,980			1,533			31			66			451			0			5			24,066			2.4	%		20.8	%
Portugal		24,305			6,913			477			1.029			1,035			4			2,263			36,027			3.6	%		7.8	%
UK		208,369			13,139			4,533			14,123			10,455			148			7,520			258,286			25.5	%		40.0	%
Other		28,731			1,724			172			365			2,889			0			135			34,017			3.4	%		-28.4	%

LATIN AMERICA		100,272			33,919			14,597			1,868			19,918			16			9,569			180,160			17.8	%		41.2	%

Brazil		51,978			20,368			8,680			808			10,521			0			3,065			95,420			9.4	%		116.8	%
Chile		17,994			4,542			945			458			887			16			3,252			28,094			2.8	%		8.2	%
Mexico		12,485			5,405			3,956			181			3,639			0			2,780			28,445			2.8	%		-11.8	%
Other		17,816			3,604			1,015			422			4,871			0			473			28,201			2.8	%		11.2	%

REST OF THE WORLD*		6,859			589			1,846			76			2,248			0			95			11,713			1.2	%		15.4	%

TOTAL GROUP		692,245			117,331			35,329			26,739			88,581			5,998			45,108			1,011,331			100	%		20.6	%

% / Total		68.4	%		11.6	%		3.5	%		2.6	%		8.8	%		0.6	%		4.5	%		100.0	%
% Change/Dec-07		11.6	%		18.3	%		46.4	%		73.0	%		86.6	%		99.3	%		55.4	%		20.6	%


Data at 31/12/08, prepared on the basis of legal-entity criteria.

CRE (Credit Risk Equivalent: net replacement value plus maximum potential value. Includes credit risk mitigants).

Derivatives and repos do not include Banco Real or Alliance & Leicester.

Balances drawn down by customers exclude repos (€5,201 million).

Balances with credit institutions (excluding repos and trading portfolio) include €41,374 million of deposits at central banks.

*		Includes, inter alia, the assets of Drive (Santander Consumer Finance).

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2008 was characterized by a slowdown in lending growth, reflecting the lower demand for credit. The nominal credit risk exposure increased by 21% year-on-year, particularly as a result of the rise in credit institution and customer drawdowns. Annual growth excluding Banco Real and Alliance & Leicester was 5.5%.

Spain accounts for 46% of the nominal credit risk exposure, with absolute growth of 12% on December 2007. Other European countries represent more than one third of credit risk exposure. Particularly noteworthy in this respect is the presence in the United Kingdom, which accounts for 25% of the exposure. Taken as a whole, Europe represents 81% of credit risk exposure.

Latin America accounts for 18% of credit risk exposure, with 89% of this contribution being concentrated in countries with an investment-grade credit rating.

b. Variations in main aggregates in 2008

The changes in non-performing loans and the cost of credit reflect the impact of the across-the-board deterioration of the economic environment, mitigated by prudent risk management, which enabled the Group to hold these data at adequate levels. As a result, the Group maintained a significant NPL coverage ratio and a high level of general allowances.

The non-performing loans ratio increased by 109 basis points in the year to stand at 2.04% in December 2008. The NPL coverage ratio was 90.6%, as compared with a coverage ratio of 150.6% at 2007 year-end.


														Specific Credit Loss
	Credit Risk Exposure					Non-Performing								Provisions, Net of
	to Customers*					Loans Ratio				Coverage Ratio				RAWO^**					Cost of Credit⁽¹⁾
	(Millions of Euros)					(%)				(%)				(Millions of Euros)					(% of Risk)
	2008			2007		2008		2007		2008		2007		2008		2007			2008		2007

Continental Europe		368,509			358,933		2.31		0.90		90.0		188.1		3,201		1,042			0.89		0.30
Santander Network		135,508			131,676		2.58		0.65		74.9		248.1		1,204		116			0.91		0.09
Banesto		87,925			86,601		1.64		0.47		106.5		332.9		450		72			0.53		0.09
Santander Consumer Finance		56,245			47,556		4.18		2.84		85.5		95.7		1,402		837			2.71		1.88
Portugal		34,760			32,178		1.72		1.25		77.2		117.4		7		(12	)		0.02		0.04
United Kingdom		217,063			203,225		1.04		0.60		68.5		65.8		442		474			0.23		0.23

Latin America		112,040			84,073		2.95		1.87		108.3		134.4		3,067		1,527			3.00		1.99
Brazil		53,764			26,414		3.58		2.74		102.4		101.5		1,478		787			3.86		3.78
Mexico		13,482			15,012		2.41		1.20		132.1		192.2		879		452			5.44		2.91
Chile		18,848			19,198		2.64		2.11		102.4		118.5		350		121			1.73		0.67
Puerto Rico		4,810			5,067		6.92		3.17		61.0		101.7		138		111			2.84		2.08
Venezuela		5,241			4,452		1.93		0.98		125.6		371.3		116		21			2.48		0.53
Colombia		1,464			1,464		1.79		1.21		204.1		217.1		44		12			2.83		0.80
Argentina		3,271			2,898		1.83		1.24		178.6		235.9		49		20			1.54		0.68
Rest of the world		(412	)		3,110										57		90

Total Group		697,200			649,342		2.04		0.95		90.6		150.6		6,767		3,132			0.99		0.50

Memorandum item:
Spain		300,524			276,313		1.95		0.63		98.5		264.5		2,150		335			0.71		0.12


Data prepared on the basis of management criteria. Memorandum item Spain for 2008, on basis of controller’s unit accounting criteria.

*		Includes gross loans and advances to customers, guarantees and documentary credits.

**		RAWO = Recoveries of Assets Written Off

⁽¹⁾		Excludes Banco Real and Alliance & Leicester

c. Distribution of credit risk

The Group is geographically diversified, since it is present in more than 40 countries, and concentrates its activities on its core markets. The Santander Group has a mainly retail profile (82.5% commercial banking) and its portfolios consist mostly of products secured with collateral.

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II.3 Measures and measurement tools

a. Rating tools

Since 1993 the Group has used proprietary internal rating models to measure the credit quality of a given customer or transaction. Each rating relates to a certain probability of default or non-payment, determined on the basis of the Entity’s historical experience, with the exception of certain portfolios classified as “low default portfolios”. More than 200 internal rating models are used in the Group’s loan approval and risk monitoring process.

Global rating tools are applied to the sovereign risk, financial institutions and global wholesale banking segments. Management of these segments is centralized at Group level, for both rating calculation and risk monitoring purposes. These tools assign a rating to each customer, which is obtained from a quantitative or automatic module, based on balance sheet ratios or macroeconomic variables, supplemented by the analyst’s expert judgment.

For the corporate and individualized institutions segments, the Parent of the Santander Group has defined a single methodology for the construction of a rating system in each country, based on the same modules as the above-mentioned ratings: a quantitative or automatic module (analyzing the credit performance of a sample of customers and the correlation with their financial statements), a qualitative or analyst judgment module, and final reviews. On the basis of each unit’s specific customer data, the rating model is developed at corporate level and is subsequently applied in a decentralized manner, thus ensuring closeness to customers and knowledge thereof.

Ratings assigned to customers are reviewed periodically to include any new financial information available and the experience in the banking relationship. The frequency of the reviews is increased in the case of customers that reach certain levels in the automatic warning systems and of customers classified as requiring special monitoring. The rating tools themselves are also reviewed in order to progressively fine-tune the ratings they provide.

For standardized customers, both legal entities and individuals, the Group has scoring tools that automatically assign a score to the proposed transactions.

These loan approval systems are supplemented by performance rating models. These tools provide enhanced predictability of the risk assumed and are used for preventive and marketing activities.

b. 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 accordance with Basel II terminology.

In addition to customer assessment, the quantitative risk analysis considers other factors, such as the transaction term, the type of product and any existing guarantees. Accordingly, not only the probability of the customer failing to meet its contractual obligations (PD) is taken into account, but also the estimate of Exposure at Default (EAD) and the percentage of EAD that will not be recovered (Loss Given Default or LGD).

These factors are the main “credit risk parameters”. Their combination facilitates calculation of the probable loss or expected loss (EL). This loss is considered as an additional cost of the activity which is reflected in the risk premium and must be charged in the transaction price.

These risk parameters also make it possible to calculate the regulatory capital in accordance with the regulations deriving from the new Basel Capital Accord (BIS II). Regulatory capital is determined as the difference between unexpected loss and expected loss.

Unexpected loss is the basis for the capital calculation and refers to a very high, albeit scantly probable level of loss, which is not deemed to be recurring and must be catered for using capital.

The estimates of the risk parameters (PD, LGD and EAD) should be based on internal experience, i.e. on default observations and on the experience in defaulted loan recoveries.

For portfolios with scant internal default experience, such as banks, sovereign risk or global wholesale banking, parameter estimates are based on alternative sources: market prices or studies conducted by external agencies gathering the shared experience of a sufficient number of entities. These portfolios are known as “low default portfolios”.

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For all other portfolios, parameter estimates are based on the Bank’s internal experience. In the case of SMEs, the balance sheet information is used not only to assign the rating, but also to obtain factors which explain the probability of default. In retail portfolios, the PD is calculated by observing the cases of new arrears in relation to the scoring assigned to the related transactions.

LGD calculation is based on the observation of the recoveries of defaulted loans, taking into account not only the income and expenses associated with the recovery process, but also the timing thereof and the indirect costs arising from the recovery process.

EAD is estimated by comparing the use of committed facilities at the time of default and their use under normal (performing) circumstances, so as to identify the actual use of the facilities at the time of default.

The estimated parameters are then assigned to performing, i.e. non-defaulted, loans. The assignment is different for low-default portfolios and for other portfolios. In the case of low-default portfolios, which are also global management portfolios, parameters are assigned in the same way in all the Group units.

By contrast, the retail portfolios have specific scoring systems in each of the Group’s units, which require the performance of separate estimates and the assignation of parameters in a particular manner in each case.

c. Master rating scale

In order to achieve equivalent internal ratings in the different models available -corporate, sovereign risk, financial institutions and other segments- and to make them comparable with the external ratings of rating agencies, the Group has a so-called master rating scale.

The equivalence is established through the probability of default 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.


				Equivalence with:
Internal Rating	Probability of Default			Standard & Poor’s	Moody’s

9.3		0.017	%	AAA	Aaa
9.2		0.018	%	AA+	Aa1
9.0		0.022	%	AA	Aa2
8.5		0.035	%	AA-	Aa3
8.0		0.06	%	A+	A1
7.5		0.09	%	A	A2
7.0		0.14	%	A-	A3
6.5		0.23	%	BBB+	Baa1
6.0		0.36	%	BBB	Baa2
5.5		0.57	%	BBB-	Baa3
5.0		0.92	%	BB+	Ba1
4.5		1.46	%	BB	Ba2
4.0		2.33	%	BB/BB-	Ba2/Ba3
3.5		3.71	%	BB-/B+	Ba3/B1
3.0		5.92	%	B+/B	B1/B2
2.5		9.44	%	B	B2
2.0		15.05	%	B-	B3
1.5		24.00	%	CCC	Caa1
1.0		38.26	%	CC/C	Caa1/Caa2

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The following table shows the segmentation of the portfolio of individualized companies in Spain (Parent) at 31 December 2008, based on the related ratings:

d. Distribution of EAD and associated EL

The table below details the distribution, by segment, of the credit risk exposure in terms of EAD. Approximately 75% of total risk exposure to customers (excluding sovereign and counterparty risk and other Assets) relates to the SME and individuals financing segments, which reflects the commercial orientation of the Santander Group’s business and risks. The expected loss arising from customer exposure is 1.05%, as compared with 0.89% for the Group’s total credit risk exposure, and, accordingly, the profile of the credit risk assumed can be classified as medium-low.


	Segmentation of Credit Risk Exposure
	EAD
	(Millions of								Average
	Euros)		%			Average PD			LGD			EL
Sovereign debt		61,644		7.05	%		0.10	%		12.4	%		0.01	%
Counterparty		70,604		8.08	%		0.19	%		50.1	%		0.09	%
Public sector		1,736		0.20	%		0.72	%		21.9	%		0.16	%
Corporate		181,968		20.82	%		0.94	%		31.5	%		0.30	%
SMEs		148,249		16.97	%		4.36	%		29.7	%		1.29	%
Mortgage loans to individuals		259,021		29.64	%		3.26	%		7.4	%		0.24	%
Consumer loans to individuals		106,459		12.18	%		5.55	%		55.2	%		3.07	%
Credit cards_ individuals		18,226		2.09	%		10.34	%		61.0	%		6.31	%
Other assets		25,900		2.96	%		1.90	%		43.8	%		0.83	%
Memorandum item — customers (1)		715,659		81.9	%		3.41	%		30.7	%		1.05	%

Total		873,807		100.00	%		2.87	%		31.0	%		0.89	%


Data at December 2008

(1)		Excluding sovereign, counterparty and other assets

Excluding doubtful assets/non-performing loans

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II.4. Observed loss: measures of cost of credit

To supplement the use of the advanced models described above (see related data in the “Economic Capital” section), other habitual measures are used to facilitate prudent and effective management of credit risk based on observed loss.

The cost of credit risk at the Santander Group is measured using different approaches: variation in non-performing loans in the recovery process (ending doubtful assets — beginning doubtful assets + assets written off — recovery of assets written off), net credit loss provisions (provisions to specific allowances — recovery of assets written off); and net assets written off (assets written off — recovery of assets written off).

II.5 Credit risk cycle

The risk management process consists of identifying, measuring, analyzing, controlling, negotiating and deciding on, as appropriate, the risks incurred in the Group’s operations. The parties involved in this process are the risk taking areas, senior management and the risk function.

The process begins at senior management level, through the board of directors and the risk committee, which establishes the risk policies and procedures, and the limits and delegations of powers, and approves and supervises the scope of action of the risk function.

The risk cycle comprises three different phases: pre-sale, sale and post-sale:

•

Pre-sale: this phase includes the risk planning and target setting processes, determination of the Group’s risk appetite, approval of new products, risk analysis and credit rating process, and limit setting.

•

Sale: this is the decision-making phase for both pre-classified and specific transactions.

•

Post-sale: this phase comprises the risk monitoring, measurement and control processes and the recovery process.

a. Risk limit planning and setting

Risk limit setting is a dynamic process that identifies the Group’s risk appetite by assessing business proposals and the attitude to risk.

This process is defined in the global risk limit plan, an agreed-upon comprehensive document for the integrated management of the balance sheet and the inherent risks, which establishes risk appetite on the basis of the various factors involved.

The risk limits are founded on two basic structures: customers/segments and products.

For individualized risks, customers represent the most basic level, and individual limits are established (pre-classification) when certain features, generally of relative importance, concur.

For large corporate groups a pre-classification model, based on an economic capital measurement and monitoring system, is used. As regards the corporate segment, a simplified pre-classification model is applied for customers meeting certain requirements (thorough knowledge, rating, etc.).

In the case of standardized risks, the risk limits are planned and set using the credit management programs (PGC, using the Spanish acronym), a document agreed upon by the business areas and the risk units and approved by the risk committee or its delegated committees, which contains the expected results of transactions in terms of risk and return, as well as the limits applicable to the activity and the related risk management.

b. Risk analysis and credit rating process

Risk analysis is a pre-requisite for the approval of loans to customers by the Group. This analysis consists of examining the counterparty’s ability to meet its contractual obligations to the Bank, which involves analyzing the customer’s credit quality, its risk transactions, its solvency and the return to be obtained in view of the risk assumed.

The risk analysis is conducted with a pre-established frequency or every time a new customer or transaction arises, depending on the segment involved. Additionally, the credit rating is examined and reviewed whenever a warning system is triggered or an event affecting the counterparty/transaction occurs.

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c. Transaction decision-making

The purpose of the transaction decision-making process is to analyze transactions and adopt resolutions thereon, taking into account the risk appetite and any transaction elements that are important in achieving a balance between risk and return.

Since 1993 the Group has been using, among others, the RORAC (return on risk-adjusted capital) methodology for the risk analysis and pricing in the decision-making process on transactions and deals.

d. Risk monitoring and control

In addition to the tasks performed by the Internal Audit Division, the Risk Unit has a specific risk monitoring function for adequate credit quality control, which consists of local and global teams to which specific resources and persons in charge have been assigned.

This monitoring function is based on an ongoing process of permanent observation to enable early detection of any incidents that might arise in the evolution of the risk, the transactions, the customers and their environment, and the adoption of mitigating actions. The risk monitoring function is specialized by customer segment.

For this purpose a system called “special surveillance firms” (FEVE, using the Spanish acronym) has been designed that distinguishes four categories based on the degree of concern raised by the circumstances observed (extinguish, secure, reduce and monitor). The inclusion of a company in the FEVE system does not mean that there has been a default, but rather that it is deemed advisable to adopt a specific policy for this company, to place a person in charge and to set the policy implementation period. Customers classified as FEVE are revised at least every six months, or every three months for those classified in the most severe categories. A company is classified as FEVE as a result of the monitoring process itself, a review performed by Internal Audit, a decision made by the sales manager responsible for that company or the triggering of the automatic warning system.

Assigned ratings are reviewed at least annually, but should any weakness be detected, or depending on the rating itself, more frequent reviews are performed.

For exposures to standardized customers, the key indicators are monitored in order to detect any variance in the performance of the loan portfolio with respect to the forecasts contained in the credit management programs.

Analysis of the Group’s main mortgage portfolios

As regards standardized risks, the mortgage loan portfolios of Spain and Abbey are particularly noteworthy due to their importance with respect to the Santander Group’s total loans and receivables.

The medium-low risk profile of the mortgage portfolio permits an estimation, in view of the expected impairment, of a relative impact at Group level and a low estimated final loss, due also to the existing collateral for the loans. The mortgage portfolio and, therefore, its risk profile, is characterized by the prevalence of principal residence loans, an average LTV ratio of 54% and an effort rate of 30% in loan approval.

Residential mortgage loans account for 27.8% of total credit risk in Spain, with 85% of the residential mortgage portfolio having an LTV ratio lower than 80%.

At Abbey the mortgage portfolio is focused on principal residence mortgages, showing a high risk quality in terms of the LTV ratio, which stands at 51% on average. The mortgage loans with the highest risk profile (buy to let) represent a minimum percentage (barely 1%) of the total portfolio amount.

Loans for the construction of real estate developments

Of the Santander Group’s portfolios, the portfolio of loans for the construction of dwellings (developer mortgage loans) was the most affected by the deterioration of the business cycle. However, its relative weight with respect to the Santander Group’s total lending is low and the related risk is located mainly in Spain. As a result of the Group’s current risk policies, these loans were granted to amply identified customers with experience in real estate development, and the loan approval criteria were not limited to the specific projects in question.

At 2008 year-end, this portfolio in Spain accounted for slightly less than 2% of the Santander Group’s total loan portfolio.

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Scenario analysis

Stress tests are performed periodically in order to monitor and control the various loan portfolios. The scenario analysis is a relevant tool intended to measure the sensitivity of a portfolio value to changes in the surrounding circumstances. Thus, taking into account factors such as interest rate variations, the unemployment rate or home prices, the Group was able to ascertain that the general allowances recognized are adequate in relation to the estimated impacts obtained in the stress tests.

Risk control function

Supplementing the management process, the risk control function obtains a global view of the Group’s loan portfolio, through the various phases of the risk cycle, with a level of detail sufficient to permit the assessment of the current situation of the exposure and any changes therein.

Any changes in the Group’s risk exposure are controlled on an ongoing and systematic basis against budgets, limits and benchmarks, and the impacts of these changes in certain future situations, both of an exogenous nature and those arising from strategic decisions, are assessed in order to establish measures that place the profile and amount of the loan portfolio within the parameters set by the Group.

The risk control function is performed by assessing risks from various complementary perspectives, the main pillars being control by geographical location, business area, management model, product and process, thus facilitating the detection of specific areas warranting action and for which decisions have to be taken.

In 2006, within the corporate framework established in the Group for compliance with the Sarbanes-Oxley Act, a corporate tool was made available on the Group’s intranet for the documentation and certification of all the subprocesses, operational risks and related mitigating controls. The Risk Division, as part of the Group, assesses annually the efficiency of the internal control of its activities.

II.6 Credit risk from other standpoints

Certain areas and/or specific views of credit risk deserve specialist attention, complementary to global risk management.

a. Concentration risk

Concentration risk is an essential factor in the area of credit risk management. The Group constantly monitors the degree of concentration of its credit risk portfolios, by geographical area/country, economic sector, product and customer group.

The risk committee establishes the risk policies and reviews the exposure limits required to ensure adequate management of credit risk portfolio concentration.

The Group is subject to Bank of Spain regulations on large exposures. In accordance with Bank of Spain Circular 3/2008, no exposure to a single individual or economic group, including all types of credit and equity risks, should exceed 25% of the Group’s capital. Also, the total amount of large exposures (defined as exceeding 10% of eligible capital) may not exceed 8 times the Group’s capital. Exposures to governments and central banks belonging to the OECD are excluded from this treatment.

At December 31, 2008, the Santander Group had no exposure to any economic group which would be classified as a “large exposure”. The Group’s largest exposure represented 8.7% of capital (35% of the 25% limit established by the Bank of Spain) and related to a Spanish company with an internal rating equal to “A-”.

At December 31, 2008, the Group’s credit exposure to the top 20 borrower financial groups, excluding AAA rated governments and sovereign bonds denominated in local currency, accounted for 8.2% of the used credit risk exposure to customers (lending plus off-balance-sheet exposures).

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From the sectorial standpoint, the distribution of the corporate portfolio is adequately diversified.

The Group’s Risk Division works closely with the Finance Division in the active management of credit portfolios, which includes reducing the concentration of exposures through several techniques, such as the arrangement of credit derivatives for hedging purposes or the performance of securitization transactions, in order to optimize the risk/return ratio of the total portfolio.

b. Credit risk from financial market operations

This heading includes the credit risk arising in treasury operations with customers, mainly credit institutions. These operations are performed both via money market financing products with different financial institutions and via derivative instruments arranged for the purpose of serving our customers.

Risk control is performed using an integrated, real-time system that enables the Group to know at any time the unused exposure limit with respect to any counterparty, any product and maturity and at any Group unit.

Credit risk is measured at its current market value and its potential value (exposure value considering the future variation in the underlying market factors). Therefore, the credit risk equivalent (CRE) is defined as the sum of net replacement value plus the maximum potential value of the contracts in the future.

The total credit risk exposure to credit institutions from financial market operations stands at 70.4%. By type of product, 52.3% relates to derivative transactions, mainly products without optionality, and the remaining 47.7% to liquidity and traditional financing products.

Derivative transactions are concentrated on counterparties with high credit ratings and, therefore, 68.9% of the risk exposure is to counterparties with a credit rating of A- or above. In 2008, the total exposure arising from these transactions in terms of credit risk equivalent was €29,549 million.

Distribution of OTC-derivative credit risk exposure by counterparty rating


RATING	%
AAA		2.4	%
AA		29.8	%
A		36.6	%
BBB		20.5	%
BB		7.2	%
B		0.3	%
Resto		3.1	%

The distribution of the credit risk exposure arising from derivatives, by counterparty, is as follows: 52% to banks, 34% to large corporations and 11% to SMEs.

Credit derivative transactions

The Santander Group uses credit derivatives to hedge credit transactions and as part of its trading operations. Credit derivatives represent a small portion of the Group’s operations as compared with other similar banks and are subject to strict internal controls and to operational risk minimization policies.

The risk inherent in these transactions is controlled using a broad set of limits such as VaR, nominal value per rating, sensitivity to spread by rating and name, sensitivity to recovery rate and sensitivity to correlation. Jump-to-default limits are also set by geographical area, sector and liquidity.

In notional terms, the position in CDS includes protection purchased for €118,345 million and protection sold for €109,911 million.

c. Country risk

Country risk is a credit risk component inherent in all cross-border credit transactions due to circumstances other than ordinary commercial risk. Its main elements are sovereign risk, transfer risk and other risks stemming from cross-border financial operations (war, natural disasters, balance of payments crisis, etc.).

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At December 31, 2008, the country risk exposure for which allowances must be recorded amounted to €5,422 million, €1,967 million of which related to intra-Group transactions. At 2007 year-end, the total regulatory country risk exposure amounted to €916 million, i.e. there was an increase of €4,506 million in 2008. The period provisions recognized in this connection in 2008 amounted to €612 million, as compared with €142 million in 2007.

These increases are due mainly to the inclusion of the transactions with Brazilian customers as a result of the acquisition of ABN/Banco Real. 90% of this portfolio corresponds to trade finance operations, with a similar intra-Group/third party distribution.

d. Sovereign risk

As a general rule, sovereign risk is the risk assumed in transactions with the central bank (including the regulatory cash reserve requirement), the issuer risk of the Treasury or Republic (government debt securities) and the risk arising from transactions with public entities with the following features: their funds are obtained only from fiscal income; they are legally recognized as entities directly included in the government sector; and their activities are of a non-commercial nature.

At December 31, 2008, the sovereign risk, excluding Banesto, was distributed among Europe (50.3% of total risk), Latin America (48.6%) and other regions (1.1%). Noteworthy were the contributions from Spain (35.7% of the total) and the United Kingdom (11.1%) in Europe and from Brazil (27.6% of the total) and Mexico (11.9%) in Latin America. The total increase in this risk with respect to the figure at 2007 year-end was approximately 26%, due mainly to the inclusion in consolidation of Banco Real in Brazil and of ABN AMRO in Uruguay and, additionally, to the increase in sovereign risk exposures in the European Union.

As regards Latin America as a whole, the sovereign risk exposure arose mainly from the Group’s subsidiary banks’ obligations to make certain deposits at the related central banks and from the fixed-income portfolios held as part of the structural interest rate risk management structure. These exposures are taken in local currency and are financed out of local customer deposits, also denominated in local currency. The exposures to the sovereign risk of Latin American issuers denominated in currencies other than the official currency of the issuer country totaled €4,900 million, which accounts for 13% of the total sovereign risk exposure to Latin American issuers.

e. Environmental risk

The environmental risk analysis of credit transactions is one of the main features of the Strategic Corporate Social Responsibility Plan. The analysis is founded on two major cornerstones:

•

The Equator Principles: an initiative of the International Finance Corporation of the World Bank. These principles constitute an international standard for the analysis of the social and environmental implications of project finance transactions. Banco Santander adheres to these principles and its management incorporates the analysis and assessment of the social and environmental risks of projects financed in developing countries.

•

The VIDA tool: implemented since 2004, the main aim of this tool is to assess the environmental risk of both current and potential customer companies, using a system that classifies each of the companies into one of seven categories, depending on the degree of environmental risk incurred.

III. MARKET RISK

III.1 Activities subject to market risk

The measurement, control and monitoring of the market risk area comprises all operations in which net worth risk is assumed. This risk arises from changes in the risk factors -interest rate, exchange rate, equities, commodity prices and the volatility thereof- and from the solvency and liquidity risk of the various products and markets in which the Group operates.

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The activities are segmented by risk type as follows:

	1.		Trading: this item includes financial services for customers, trading operations and positioning mainly in fixed-income, equity and foreign currency products.

	2.		Balance sheet management: interest rate risk and liquidity risk arising as a result of the maturity and repricing gaps of all assets and liabilities. This item also includes the active management of the credit risk inherent in the Group’s balance sheet.

	3.		Structural risks:

	a.		Structural foreign currency risk/hedges of results: foreign currency risk arising from the currency in which investments in consolidable and non-consolidable companies are made (*structural exchange rate). This item also includes the positions taken to hedge the foreign currency risk on future results generated in currencies other than the euro (hedges of results*).

	b.		Structural equities risk: this item includes equity investments in non-consolidated financial and non-financial companies that give rise to equities risk.

The Treasury area is responsible for managing the positions taken in the trading activity.

The Financial Management area is responsible for managing the balance sheet management risk and structural risks centrally through the application of uniform methodologies adapted to the situation of each market in which the Group operates. Thus, in the convertible currencies area, Financial Management directly manages the Parent’s risks and coordinates the management of the other units operating in these currencies. Decisions affecting the management of these risks are taken through the ALCO committees in the respective countries and, ultimately, by the Parent’s markets committee.

The aim pursued by Financial Management is to ensure the stability and recurring nature of both the net interest margin of the commercial activity and the Group’s economic value, whilst maintaining adequate liquidity and solvency levels.

Each of these activities is measured and analyzed using different tools in order to reflect their risk profiles as accurately as possible.

III.2 Methodologies

Trading

The standard methodology applied to trading activities by the Santander Group in 2008 was value at risk (VaR), which measures the maximum expected loss with a given confidence level and time horizon. This methodology was based on a standard historical simulation with a 99% confidence level and a one-day time horizon. Statistical adjustments were made to enable the swift and efficient incorporation of the most recent events that condition the level of risk assumed. Specifically, the Group uses a time window of two years or 520 daily data obtained retrospectively from the reference date of the VaR calculation. Two figures are calculated each day, one by applying an exponential decline factor which gives a lesser weighting to more distant observations in time, and another with uniform weightings for all observations. The VaR reported is the higher of these two figures.

VaR is not the only measure. It is used because it is easy to calculate and because it provides a good reference of the level of risk incurred by the Group. However, other measures are simultaneously being implemented to enable the Group to exercise greater risk control in all the markets in which it operates.

One of these measures is scenario analysis, which consists of defining behavior scenarios for various financial variables and determining the impact on results of applying them to the Group’s activities. These scenarios can replicate past events (such as crises) or, conversely, determine plausible scenarios that are unrelated to past events. A minimum of three types of scenarios are defined (plausible, severe and extreme) which, together with VaR, make it possible to obtain a much more complete spectrum of the risk profile.

The positions are monitored daily through an exhaustive control of changes in the portfolios, the aim being to detect possible incidents and correct them immediately. The daily preparation of an income statement is an excellent risk indicator, insofar as it allows us to observe and detect the impact of changes in financial variables on the portfolios.

Lastly, due to their atypical nature, derivatives and credit management activities are controlled by assessing specific measures on a daily basis. In the case of derivatives, these measures are sensitivities to fluctuations in the price of the underlying (delta and gamma), in volatility (vega) and in time (theta). For credit management activities, the measures controlled include sensitivity to spread, jump-to-default and position concentrations by rating level.

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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 of Banking Supervision, an additional measure has been introduced, the Incremental Default Risk (IDR), in order to cover the default risk which is not properly captured in the VaR, through the variation of the related credit spreads. The instruments affected are basically fixed-income bonds, issued by the public and the private sector, derivatives on bonds (forwards, options, etc.) and credit derivatives (credit default swaps, asset-backed securities, etc.). The method used to calculate the IDR, which in essence is similar to that applied to the credit risk on non-trading positions, is based on direct measurements on the loss distribution tails at the appropriate percentile (99.9%). The saddle point method, which provides estimates of total risk and the contributions of each counterparty thereto, is used. At the same time, the calculations are supplemented and calibrated using Monte Carlo simulations.

Balance-sheet management

Interest rate risk

The Group analyses the sensitivity of the net interest margin and market value of equity to changes in interest rates. This sensitivity arises from maturity and interest rate repricing gaps in the various balance sheet items.

On the basis of the balance-sheet interest rate position, and considering the market situation and outlook, the necessary financial measures are adopted to align this position with that desired by the Bank. These measures can range from the taking of positions on markets to the definition of the interest rate features of commercial products.

The measures used by the Group to control interest rate risk in these activities are the interest rate gap, the sensitivity of net interest margin and market value of equity to changes in interest rates, the duration of capital, value at risk (VaR) and scenario analysis.

Interest rate gap of assets and liabilities

The interest rate gap analysis focuses on the mismatches between the interest reset periods of on-balance-sheet assets and liabilities and of off-balance-sheet items. This analysis facilitates a basic snapshot of the balance sheet structure and enables concentrations of interest rate risk in the various maturities to be detected. Additionally, it is a useful tool for estimating the possible impact of potential changes in interest rates on the entity’s net interest margin and market value of equity.

The flows of all the on- and off-balance-sheet aggregates must be broken down and placed at the point of repricing or maturity. The duration and sensitivity of aggregates that do not have a contractual maturity date are analyzed and estimated using an internal model.

Net interest margin (NIM) sensitivity

The sensitivity of the net interest margin measures the change in the expected accruals for a specific period (12 months) given a shift in the interest rate curve.

The sensitivity of the net interest margin is calculated by simulating the margin both for a scenario of changes in the interest rate curve and for the current scenario, the sensitivity being the difference between the two margins so calculated.

Market value of equity (MVE) sensitivity

The sensitivity of the market value of equity is a complementary measure to the sensitivity of the net interest margin.

This sensitivity measures the interest rate risk implicit in the market value of equity based on the effect of changes in interest rates on the present values of financial assets and liabilities.

Value at risk (VaR)

The value at risk for balance sheet aggregates and investment portfolios is calculated by applying the same standard as that used for trading: historical simulation with a confidence interval of 99% and a one-day time horizon. Statistical adjustments were made to enable the swift and efficient incorporation of the most recent events that condition the level of risk assumed.

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Scenario analysis

Two interest rate performance scenarios are established: maximum volatility and sudden crisis. These scenarios are applied to the activities under analysis, thus obtaining the impact on the market value of equity and the net interest margin projections for the year.

Liquidity risk

Liquidity risk is associated with the Group’s ability to finance its commitments at reasonable market prices and to carry out its business plans with stable sources of funding. The Group permanently monitors maximum gap profiles.

The measures used to control liquidity risk in balance sheet management are the liquidity gap, liquidity ratios, stress scenarios and contingency plans.

Liquidity gap

The liquidity gap provides information on contractual and expected cash inflows and outflows for a given period for each currency in which the Group operates. The gap measures net cash requirements or surpluses at a given date and reflects the liquidity level maintained under normal market conditions.

The Group conducts two types of liquidity gap analyses, depending on the balance sheet item in question:

1.-

Contractual liquidity gap: all cash-flow generating on- and off-balance-sheet items are analyzed and placed at the point of contractual maturity. For assets and liabilities without contractual maturities, an internal analysis model is used based on a statistical study of the time series of the products, and the so-called stable or instable balance for liquidity purposes is determined.

2.-

Operational liquidity gap: this is a scenario for normal liquidity profile conditions, since the cash flows of the on-balance-sheet items are placed at the point of probable liquidity rather than at the point of contractual maturity. In this analysis, the definition of the behavior scenario (renewal of liabilities, discounts in portfolio disposals, renewal of assets, etc.) is the fundamental point.

Liquidity ratios

The liquidity ratio compares liquid assets available for sale or transfer (after the relevant discounts and adjustments have been applied) with the total amount of liabilities (including contingencies). This ratio shows, by non-consolidable currency, the Entity’s capacity to immediately respond to its commitments.

Cumulative net illiquidity is defined as the 30-day cumulative gap obtained from the modified liquidity gap. The modified contractual liquidity gap is calculated on the basis of the contractual liquidity gap, and places liquid assets at the point of settlement or transfer rather than at the point of maturity.

Scenario analysis/Contingency plan

The Santander Group’s liquidity management focuses on adopting all the measures required to prevent a crisis. It is not always possible to predict the causes of a liquidity crisis and, therefore, contingency plans focus on the modeling of potential crises by analyzing various scenarios, the identification of crisis types, internal and external communications, and individual responsibilities.

The contingency plan spans management activity from local unit to head office level. At the first sign of a crisis, it specifies clear lines of communication and suggests a wide range of responses to different levels of crisis.

Since a crisis can occur locally or globally, each local unit must prepare a contingency funding plan, in which it indicates the amount of aid or funding that might be required from headquarters during a crisis. Each local unit must inform headquarters (Madrid) of its contingency plan at least every six months so that it can be reviewed and updated. However, these plans must be updated more frequently if market conditions make this advisable.

Structural foreign currency risk / Hedges of results / Structural equities risk

These activities are monitored by measuring positions, VaR and results.

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Complementary measures

Calibration and test measures

Back-testing consists of performing a comparative analysis between VaR estimates and daily “clean” results (profit or loss on the portfolios at the end of the preceding day valued at following-day prices). The aim of these tests is to verify and provide a measure of the accuracy of the models used to calculate VaR.

Back-testing analyses performed at the Santander Group comply, at the very least, with the BIS recommendations regarding the verification of the internal systems used to measure and manage financial risks. Additionally, the Santander Group also conducts hypothesis tests: excess tests, normality tests, Spearman’s rank correlation, average excess measures, etc.

The assessment models are regularly calibrated and tested by a specialized unit.

III.3 Control system

Limit setting

The limit setting process is performed together with the budgeting activity and is the tool used to establish the assets and liabilities available to each business activity. Limit setting is a dynamic process that responds to the level of risk considered acceptable by senior management.

Objectives of the limits structure

The limits structure requires a process to be performed that pursues, inter alia, the following objectives:

	1.		To identify and delimit, in an efficient and comprehensive manner, the main types of financial risk incurred, so that they are consistent with business management and the defined strategy.

	2.		To quantify and communicate to the business areas the risk levels and profile deemed acceptable by senior management so as to avoid undesired risks.

	3.		To give flexibility to the business areas for the efficient and timely assumption of financial risks, depending on market changes, and for the implementation of the business strategies, provided that the acceptable levels of risk are not exceeded.

	4.		To allow business makers to assume risks which, although prudent, are sufficient to obtain the budgeted results.

	5.		To delimit the range of products and underlyings with which each Treasury unit can operate, taking into account features such as assessment model and systems, liquidity of the instruments involved, etc.

III.4 Risks and results in 2008

Trading

The average VaR of the Group’s trading portfolio in 2008, at €40 million, was higher than that for 2007. However, the increase was due entirely to the rise in volatility and not to a higher level of risk assumed. Also, as compared with other financial groups, the Group’s trading risk profile can be classified as low. The dynamic management of this profile enables the Group to change its strategy in order to capitalize on the opportunities offered by an environment of uncertainty.

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A. Balance sheet management¹

A1. Interest rate risk

Convertible currencies

At 2008 year-end, the sensitivity of the net interest margin at one year to parallel increases of 100 basis points was concentrated on the euro interest rate curve (€119.6 million), the Parent bank being the main contributor, and on the pound sterling interest rate curve (negative by GBP 63.6 million). The sensitivity of the margin for other convertible currencies is scantly material.

Also at 2008 year-end, the sensitivity of value to parallel increases of 100 basis points in the euro interest rate curve was €239.1 million and was mostly concentrated on the Parent bank. With respect to the pound sterling curve, the sensitivity was negative by GBP 153.3 million.

2008 was characterized by a conservative stance with respect to exposure to interest rates, reflecting the uncertainty prevailing in the financial markets, which was particularly accentuated in the second half of the year.

Latin America

Quantitative risk analysis

The interest rate risk in balance sheet management portfolios in Latin America, measured in terms of sensitivity of the net interest margin (NIM) at one year to a parallel increase of 100 b.p. in the interest rate curve, remained at low levels throughout 2008, fluctuating within a narrow band and reaching a high of €51 million in February. Measured in terms of value sensitivity, it fluctuated between €300 million and €360 million, showing a very stable trend throughout the year, except for the last quarter, when the increase observed was due mainly to the inclusion of Banco Real in Brazil.

At 2008 year-end, the risk consumption for the region, measured in terms of 100 b.p. sensitivity of the MVE, stood at €430 million (December 2007: €326.1 million), while the net interest margin risk at one year, measured in terms of 100 b.p. sensitivity of this margin, was €27.1 million (December 2007: €21.2 million).

Geographical distribution

Net interest margin sensitivity

For Latin America taken as a whole, the consumption at December 2008 was €27 million (sensitivity of the net interest margin at one year to increases of 100 basis points).

Market value of equity sensitivity

For Latin America taken as a whole, the consumption at December 2008 was €430 million (sensitivity of the market value of equity to a parallel increase of 100 basis points in interest rates).

The balance sheet management risk in Latin America, measured in terms of VaR, amounted to €75.2 million at 2008 year-end.

A2. Structural credit risk management

The aim of structural credit risk management is to reduce, through the sale of assets, the concentrations that arise naturally as a result of commercial activity. These sales are offset by the acquisition of other assets which permit diversification of the loan portfolio as a whole. The Financial Management area analyses these strategies and submits management proposals to the ALCO with a view to optimizing credit risk exposure and contributing to the creation of value.


¹		Includes the balance sheet total, except for the financial assets and liabilities held for trading.

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In 2008:

	1.		Assets amounting to €64,000 million were securitized (including covered bonds) — for liquidity management purposes, considering a securitization performed by Abbey at the end of December 2007, this figure amounts to €74,000 million. In view of the difficulties experienced by the securitization market since August 2007, all the issues were retained by the Group’s various units. These transactions significantly increase the Group’s liquidity position since they can be discounted at central banks.

	2.		AAA asset-backed bonds issued by Group issuers were repurchased in the secondary market (€1,600 million) and certain of the hedges arranged in 2007 were closed, since the Group considered that, in view of the market situation, prices were well below their fundamental value considering the risk underlying the assets.

A3. Structural 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.

The Group’s structural liquidity position improved with respect to 2007, strengthening its balance sheet structure and showing a significant increase in discountable assets which act as a liquidity buffer against contingencies.

The main features of the structural liquidity management in 2008 were as follows:

	•		Ample structural liquidity position. Since Santander is basically a commercial bank, customer deposits constitute the main source of liquidity in its financing structure. These deposits, combined with capital and other similar instruments, enable the Group to cover most of its liquidity requirements and, as a result, the financing raised in wholesale markets is moderate with respect to the size of its balance sheet.

			Thus, in Latin America the low financing requirements of the commercial activity mean that, in practice, the raising of financing in wholesale markets is residual, corresponding basically to the need to maintain a presence and to achieve diversification. As regards the rest of the Group (referred to as the “convertible currencies area”), deposits plus long-term on-balance-sheet funds (capital and similar liabilities) cover more than 90% of loans (excluding securitizations), which represents an improvement of the ratio of approximately 75% recorded in 2007.

	•		Obtainment of liquidity through diversification in markets and instruments. The Group is actively present in a wide, diverse range of financing markets, thus limiting its dependence on specific markets and ensuring the availability of ample market funding.

			This enables the Group to have an adequate structure of medium- and long-term issues, with moderate short-term wholesale financing (at 2008 year-end, commercial paper and notes represented less than 10% of total wholesale financing). This structure is based on securitizations and a medium- and long-term issue portfolio (each accounting for around 45% of the total) featuring high product diversification and an average maturity of 3.8 years.

	•		In 2008 the Group’s units in the convertible currencies area raised a total of €25,000 million in medium- and long-term issues in wholesale markets and securitized assets for a further €64,000 million (including covered bonds) — for liquidity management purposes, when a securitization performed by Abbey at the end of December 2007 is taken into account, this figure amounts to €74,000.

	•		High capacity to obtain on-balance-sheet liquidity. The Group has on its balance sheet, aligned with its positions, a diversified portfolio of liquid assets and assets convertible into cash in the short term. Additionally, the Group has a substantial amount of eligible assets at central banks (ECB, BOE, FED), which at 2008 year-end totaled more than €83,000 million.

	•		Broad access to wholesale liquidity markets based on high short- and long-term ratings. At 2008 year-end, all the rating agencies maintained the long-term rating of Santander as AA or above (Aa1 rating by Moody’s, equivalent to AA+; AA rating by the other three agencies).

	•		Independent financing of subsidiaries within a centralized management structure. The main legal entities, with the exception of Santander Consumer Finance, must obtain financing in the wholesale markets based on their needs and establish their own liquidity and contingency plans, without resorting to credit facilities from the Parent to fund their activities.

			The Group, as a holding, performs control and management functions, which involves planning its funding requirements, structuring the sources of financing to achieve optimum diversification in terms of maturities, instruments and markets, and defining contingency plans.

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In practice, the liquidity management performed by the Group consists of the following:

•

Each year, a liquidity plan is prepared on the basis of the financing needs arising from the budgets of each business. Based on these liquidity requirements and taking into account certain prudential limits on the obtainment of short-term market financing, the Group establishes an issue and securitization plan for the year.

•

Throughout the year the Group periodically monitors the actual changes in financing requirements and updates this plan accordingly.

•

Control and analysis of liquidity risk. The primary objective is to guarantee that the Group has sufficient liquidity to meet its short- and long-term financing requirements in normal market situations. To this end, the Group employs certain balance-sheet control measures, such as the liquidity gap and liquidity ratios.

Simultaneously, various scenario (or stress-scenario) analyses are conducted which consider the additional requirements that could arise if certain extreme but plausible events occur. The aim pursued is to cover a broad spectrum of situations that are more or less likely to affect the Group, thus enabling it to prepare the related contingency plans.

The scenario analyses conducted through December 2008 evidenced how the Group, even in a scenario of scant demand for medium- and long-term issues, maintained ample liquidity conditions.

B. Structural foreign currency risk/ hedges of results

Structural foreign currency risk arises from the Group’s operations in foreign currencies, and relates mainly to long-term investments, and the results and hedges of those investments.

Foreign currency risk is managed dynamically in order to limit the impact on capital of currency depreciations and optimize the financial cost of hedges.

The Group’s general policy for managing the foreign currency risk on long-term investments is to finance these investments in the currency in which they are denominated, provided that the market is sufficiently deep and the cost is justified by the expected currency depreciation. Also, hedges are arranged on an as-needed basis when it is considered that a local currency may weaken against the euro at a significantly quicker pace than that at which it is being discounted in the market.

At 2008 year-end, the largest long-term exposures (with their potential impact on equity) were concentrated, in descending order, on the Brazilian real, the pound sterling, the Mexican peso and the Chilean peso. The Group hedges a portion of these long-term exposures through foreign exchange derivatives.

Additionally, the Financial Management area at consolidated level is responsible for managing the foreign currency risk inherent in the expected results and dividends of the Group at the units whose base currency is not the euro.

C. Structured financing operations

The Santander Group’s structured financing operations are subject to low exposure and are diversified in terms of product type, sector and number of transactions. The committed exposure at 2008 year-end amounted to €19,616 million relating to 405 transactions. The breakdown is as follows: €9,725 million (120 transactions) in acquisition finance operations; €7,177 million (247 transactions) in project finance operations; and the remainder in LBOs and other modalities (including margin loans and other). No writedowns of the investment portfolio, in addition to the credit loss allowances amounting to €21 million, are considered necessary. No significant leveraged buy-outs (LBOs) were carried out in 2008.

It should be noted that a transaction amounting to €500 million was formally executed in December 2008, which released €40 million of regulatory capital as a result of the reduction in the related risk assets.

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D. Exposures related to complex structured assets

In the ordinary course of its business, the Santander Group did not increase its exposure to complex structured instruments or vehicles, which continued to be highly limited. Specifically, at 2008 year-end, the Group had:

•

CDOs / CLOs: €75 million.

•

Hedge funds: the total exposure was not material (€1,133 million) and largely consisted of the financing provided to these funds (€767 million), the remainder being direct portfolio investment. This exposure involved low levels of loan-to-value risk -around 38% (collateral of €3,009 million at year-end). The risk to this type to counterparty is analyzed on a case-by-case basis, and the percentages of collateral are established according to the features and assets of each fund. In short, exposure decreased compared to the previous year.

•

Conduits: The two conduits held by the Group in 2007 and which had always been included in the scope of consolidation had not carried on any activity at 2008 year-end.

•

Monolines: Santander’s exposure to monoline insurers amounted to €457 million in December 2008 and was concentrated mainly on an indirect exposure amounting to €288 million, by virtue of the guarantee provided by entities of this kind for various traditional financing or securitization transactions. The exposure was to double-default risk in this case. The primary underlyings had high credit ratings, mostly “AA”. The small remainder was direct exposure (e.g. through the purchase of a credit default swap to protect it against the risk of default of these insurance companies).

The Santander Group’s policy with respect to the approval of new transactions relating to these products continues to be very prudent and conservative, and is subject to strict supervision by the Group’s senior management. Before approval is given for a new transaction, product or underlying, the Risk Division checks:

•

whether there is an adequate valuation model (mark-to-market, mark-to-model or mark-to-liquidity) to monitor the value of each exposure.

•

whether the inputs enabling application of the valuation model are observable in the market.

Provided the two aforementioned conditions are met, the Division ascertains:

•

the availability of adequate systems duly adapted for the calculation and daily monitoring of the results, positions and risks of the new transactions envisaged.

•

the degree of liquidity of the product or underlying, with a view to arranging the related hedge on a timely basis.

E. Alliance & Leicester

E.1.) Structured financing operations

As a result of the acquisition of the Alliance & Leicester group in the United Kingdom, the structured transactions in which this entity participated were integrated with those of the Group. This is a diversified portfolio consisting entirely of specialized lending transactions. The committed exposure at 2008 year-end was GBP 7,350 million (€7,717 million) relating to 281 transactions.

E.2.) Exposures related to complex structured assets

The acquisition of Alliance & Leicester also increased the exposure to certain complex structured products. The exposure contributed by Alliance & Leicester in these special products and vehicles was as follows:

	1.		CDOs and CLOs: exposure amounting to €509 million. Of this portfolio, 72% is rated AAA and 11% is rated AA.

	2.		Conduits: as a result of the acquisition of Alliance & Leicester, the Group integrated a conduit with assets amounting to €900 million at 2008 year-end, of which 71% were rated AAA and 9% had an AA rating.

	3.		Monolines: Alliance & Leicester’s exposure to monoline insurers amounted to €34 million at 2008 year-end and consisted in full of double default exposures, by virtue of the guarantee provided by these entities for traditional financing or securitization transactions.

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All these exposures were known and were duly provisioned at the time of the purchase.

III.5 Internal model

The Bank of Spain approved the use of the Internal Market Risk Model for the calculation of regulatory capital at 2008 year-end. The approval is effective for the Treasury area’s trading activities in Madrid, although the Group intends to progressively extend the approval to the other units.

As a result of this approval, the regulatory capital of the trading activities is now calculated using advanced approaches rather than standardized approaches, applying as a fundamental measure the VaR calculated by the Market Risk area and, additionally, capturing an incremental charge for default risk (incremental default risk).

IV. OPERATIONAL RISK

Definition and objectives

The Santander Group defines operational risk as “the risk of loss resulting from inadequate or failed internal processes, human resources or systems or from external events”. This risk generally relates to events of a purely operational nature, which differentiates it from market or credit risk, although it also includes external risks, such as natural disasters.

The basic aim pursued by the Group in operational risk control and management is to identify, measure/assess, control/mitigate and inform about this risk.

The Group’s priority, therefore, is to identify and eliminate any clusters of operational risk, irrespective of whether losses have been incurred. Measurement of this risk also contributes to the establishment of priorities in operational risk management.

For the purpose of calculating regulatory capital for operational risk, the Santander Group decided to opt initially for the Standardized Approach provided for under Basel II standards. The Group is assessing the most appropriate time to shift to Advanced Measurement Approaches (AMA) taking into account, however, that: a) the short-term priority in operational risk management is focused on mitigation; and b) most of the regulatory requirements established for use of the AMA must now be incorporated in the Standardized Approach and, at the present time, these requirements have already been included in the operational risk management approach used by the Santander Group.

Management model

The organizational model for risk management and control is the result of the adaptation to the new Basel II environment implemented by the Group, which establishes three levels of control:

	•		First level: control functions performed by the Group’s units.

	•		Second level: functions performed by the corporate areas.

	•		Third level: integrated control functions performed by the Risk Division — Integrated Risk Control and Internal Risk Validation Area (CIVIR).

Operational risk management and control are conducted by the Technology and Operations Division. Within this division, the corporate Technology and Operational Risk area, created in 2008, is responsible for the definition of policies and for the management and control of technology and operational risks. The implementation, integration and local adaptation of the policies and guidelines established by the area are entrusted to the local operational risk officers identified in each unit.

This operational risk management structure is based on the knowledge and experience of the executives and professionals of the various Group units, with particular importance being attached to the role of the local operational risk officers.

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The benefits of the Santander Group’s operational risk management model are as follows:

	1.		Integrated and effective management of operational risk (identification, measurement / assessment, control / mitigation and information).

	2.		Improved knowledge of actual and potential operational risks and better assignment to business and support lines.

	3.		The information on operational risk helps improve processes and controls and reduce losses and income volatility.

Model implementation: global initiatives and results

The corporate function for operational risk management and control was created in 2001 and has been operating since then. The main duties and activities performed and global initiatives adopted by this function are summarized as follows:

	1.		Designation of head coordinators and creation of operational risk departments.

	2.		Training and experience sharing: communication of best practices in the Group.

	3.		Fostering of mitigation plans: control of both the implementation of corrective measures and projects under development.

In 2008 the corporate function strengthened technology risk management and fostered the following aspects, inter alia:

	1.		Security of information systems.

	2.		Promotion of contingency and business continuity plans.

	3.		Management of technology risk (risk associated with the use of technology -development and maintenance of applications, design, implementation and maintenance of technology platforms, production of computer processes, etc.).

Analysis and monitoring of controls in market operations

The turmoil in financial markets in 2007 and 2008 and the increased operational risk arising from the growing complexity of financial instruments prompted the Group to steadily strengthen the operational control of its financial market activities, thus bolstering the highly stringent and conservative risk and operational principles already applied on a regular basis by the Santander Group.

In addition to monitoring all operational control-related matters, in all its units the Group placed greater emphasis on a number of aspects, the reviews conducted being validated on a monthly basis by the management committee of each unit. The most noteworthy of these aspects are as follows:

	1.		Review of the valuation models and, in general, of the values of the portfolios.

	2.		Processes for the capture and independent validation of prices.

	3.		Adequate confirmation of transactions with counterparties.

	4.		Review of transaction cancellations/modifications.

	5.		Review and monitoring of the effectiveness of guarantees, collateral and risk mitigators.

Role of insurance in operational risk management

The Santander Group was a pioneer in considering insurance as a key factor in operational risk management. Since 2004 the operational risk area has worked closely with the insurance area in the Santander Group in all activities leading to improvements in the two areas.

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V. REPUTATIONAL RISK

The Santander Group considers reputational risk management to be an essential feature of its activities in all areas of the organization.

The risk committee, in its capacity as the body ultimately responsible for global risk management and for all banking operations, assesses, with the support of the general secretary’s division, the reputational risk within its scope of competence in areas for which it has decision-making powers.

The audit and compliance committee supervises the Group’s reputational risk. Amongst other functions, it monitors compliance with the Group’s Code of Conduct in Securities Markets, the manuals and procedures for the prevention of money laundering and, in general, the Bank’s governance and compliance rules, and makes any required proposals for improvement.

The main instruments for the management of this risk with regard to the marketing of products and services for Group customers are as follows:

Global new products committee (CGNP)

Any new product or service that a Santander Group entity intends to market must be authorized by this committee.

In 2008 the committee held 15 meetings, at which a total of 190 products or product families were analyzed.

A local new products committee is set up in each country in which a Santander Group entity is based. Once a new product or service has undergone the required procedures, this committee must seek the approval of the global new products committee. In Spain, the functions of the local new products committee are discharged by the global new products committee.

The areas represented on the global new products committee, which is chaired by the general secretary, are: Tax Advisory, Legal Advisory, Customer Care, Internal Audit, Commercial Banking, Global Corporate Banking, CIVIR/Integrated Risk Control, Compliance, the Controller’s Unit, Financial Transactions and Markets, Operations and Services, Global Wholesale Banking Risks, Corporate Banking Risks and IFIs, Credit Risk, Market Risks, Risks — Systematic, Solvency Risk, Technology and Operational Risk, Santander Private Banking, Technology, Global Treasury, Universities and, lastly, the unit proposing the new product or a representative of the local new products committee.

Before a new product or service is launched, the aforementioned areas, together with any independent experts required to correctly evaluate the risks incurred (such as, for example, Money Laundering Prevention), conduct an exhaustive analysis of all the matters involved and express their opinion as to whether the product or service should be marketed.

On the basis of the documentation received, the global new products committee, after checking that all requirements for the approval of the new product or service have been met and considering the risk guidelines established by the Santander Group’s risk committee, either approves, rejects or sets conditions for the proposed new product or service.

The global new products committee pays particular attention to the suitability of the new product or service for the environment in which it is to be marketed. To this end, it places particular emphasis on ensuring that:

	1.		Each product or service is sold by people who know how to sell it.

	2.		Customers know what they are investing in and are aware of the risk involved in the particular product or service, and this can be evidenced by supporting documentation.

	3.		The product or service fits the customer’s risk profile.

	4.		Each product or service is sold where its sale is possible, not only from a legal or tax standpoint (i.e. it complies with the legal or tax regime of the country in question), but also with regard to the local financial culture.

	5.		When a given product or service is approved, maximum placement limits are set.

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Procedures manual for the sale of financial products

This manual, which has been used at Banco Santander since 2004 in the retail sale of financial products in Spain, was fully updated in 2007 as a result of the entry into force on November 1 of Directive 2004/39 on Markets in Financial Instruments (“MiFID”), which establishes new requirements governing the sale of financial products.

This manual is applied to investment services for financial products, including: fixed-income or equity securities or other financial instruments, money market instruments, shares or units in collective investment undertakings, traded derivatives, OTC derivatives and atypical financial contracts. Nevertheless, the global new products committee may opt to include other financial products within the scope of the procedures manual, as was the case with structured deposits, savings and investment insurance, and pension plans.

The manual starts out with a segmentation of customers and products and establishes various categories of commercial treatment, which basically depend on the type of service to be provided. The combination of these elements (customer category, product type and commercial treatment) produces a matrix that determines the mechanism to be applied (advisability test, suitability test) in order to assess a customer’s suitability for a given product, and to establish the warnings that should be given to the customer.

The customer and product segmentation is the result of uniting the internal classification already used by Santander prior to MiFID (internal customer segmentation and product segmentation into green, yellow or red products) with that established by the Directive (segmentation of customers into retail clients, professional clients and eligible counterparties, and product segmentation into complex and non-complex products), giving rise to a level of protection that surpasses the minimum required under MiFID.

The various types of commercial treatment, arranged on a scale of descending involvement of the Bank, are as follows: (i) advised sale, which includes, in turn, portfolio advice and management; and (ii) non-advised sale, which encompasses marketing and mere performance of the sale.

In 2008, 164 products subject to this manual were submitted for approval. Although most of these products were investment funds, authorization was also granted for the marketing of other kinds of products, such as warrants, derivatives, structured deposits and savings and investment insurance.

Of these 164 products, 80 were new products submitted to the global new products committee and 84 were existing products submitted to the Office for the Manual (this specific body created to oversee implementation of the manual forms part of the Compliance department). Of the 164 products, 5 were not approved because of their high reputational risk. Of the 159 products approved, 33 were not assigned a specific color, a different color being assigned on the basis of the target customers. The remaining 126 products were categorized as follows: 47 were classified as green products (37%), 43 as yellow products (34%) and 36 as red products (29%). The red, yellow and green colors are assigned, not only on the basis of the risk of loss inherent in a product, but also taking into account the relative degree of difficulty experienced by the public in understanding its features.

Of the 159 products approved, 86 were classified under MiFID as complex products and 57 as non-complex products. The remaining 16 products are savings or investment insurance or pension plans subject to the manual but not governed by MiFID and, therefore, they are not classified as complex or non-complex.

VI. INTEGRATED RISK CONTROL

The integrated risk control function is located in the Integrated Risk Control and Internal Risk Validation Unit, which is an autonomous unit within the Risk Division. It has global-reaching, corporate responsibilities. This new function was created to provide risk management support to the Group’s governing bodies.

The mission of integrated risk control is (a) to guarantee that the management and control systems for the various risks inherent in the Santander Group’s activities comply with the most stringent criteria and the best practices observed in the industry and/or established by regulators; (b) to ensure that senior management has an all-embracing view of the profiles of the various risks assumed at any time and that these profiles are consistent with the pre-determined risk appetite; and (c) to supervise adequate compliance, in due time and form, with any recommendations on risk management made as a result of inspections conducted by Internal Audit and by the competent supervisory authorities.

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The main features of the function, which is currently in the implementation phase, are as follows:

	1.		Global approach: all risks, all businesses, all geographical areas.

	2.		It is a third layer of control, which follows the control performed at first instance by the officer responsible for managing each risk at each business or functional unit (first layer of control) and by the officer responsible for the control of each risk at corporate level (second layer of control). This system ensures a vision and, therefore, the integrated control of all the risks arising or incurred as a result of the Santander Group’s business activities.

	3.		A special focus is placed on credit risk (including concentration and counterparty risks), market risk (including structural and liquidity risks), operational and technology risks, and compliance and reputational risks.

	4.		Special attention is paid to the future development of best practices in the financial services industry, so that the Group is in a position to promptly incorporate any relevant advance.

The integrated risk control function provides support to the risk committee by monitoring and assessing the risk management and control systems, proposing, if appropriate, improvements thereto, and supervising their implementation, all through the preparation of an integrated risk map for the Group.

The Group has developed internally a methodology to systematize this function and a set of tools to formalize its implementation, making it traceable and objectifiable: guidelines for tests or reviews to be performed for each risk; the risk control monitor, serving as a repository for the findings of each test and of the related working papers; and SEGRE, which enables the Group to follow up the recommendations made by Internal Audit or by the supervisory authorities, in addition to the recommendations made by the Integrated Risk Control function itself.

VII. COMPLIANCE WITH THE NEW REGULATORY FRAMEWORK

The Santander Group has assumed from the outset a firm commitment to the principles underlying the “Revised Framework of International Convergence of Capital Measurement and Capital Standards” (Basel II). This framework allows entities to make internal estimates of the capital they are required to hold in order to safeguard their solvency against events caused by various types of risk. As a result of this commitment, the Santander Group has devoted all the human and material resources required to ensure the success of the Basel II implementation plan. For this purpose, a Basel II team was created in the past, consisting of qualified professionals from the Group’s different areas: mainly Risks, Technology and Operations, the Controller’s Unit, Financial Management, Internal Audit -to verify the whole process, as the last layer of control at the entity-, and Business -particularly as regards the integration of the internal models into management. Additionally, specific work teams have been set up to guarantee the proper management of the most complex aspects of the implementation.

Supplementing the efforts of the Basel II operating team, Santander Group senior management has displayed total involvement from the very beginning. Thus, the progress of the project and the implications of the implementation of the New Capital Accord for the Santander Group have been reported to the management committee and to the board of directors on a regular basis.

In the specific case of credit risk, the implementation of Basel II entails the recognition, for regulatory capital purposes, of the internal models that have been used for management purposes.

The Group intends to apply, over the next few years, the advanced internal ratings-based (AIRB) approach under Basel II for substantially all its banks, until the percentage of net exposure of the loan portfolio covered by this approach is close to 100%. The supervisory validation process performed by the Bank of Spain and by the Financial Services Authority (FSA) was completed in early 2008. The institutions that have implemented this new system of regulatory capital calculation since June 2008 (the earliest date permitted by the Bank of Spain) are Santander (parent bank), Banesto and Abbey, whose combined portfolios accounted for substantially all the Group’s total exposure at the approval date. The other significant units will progressively adopt the AIRB approach in accordance with a timetable agreed upon with the Bank of Spain and notified to the various local supervisors.

Given the medium-low risk profile characterizing Santander’s business activities, since it focuses primarily on commercial banking (corporations, SMEs and individuals), the authorization granted by the Bank of Spain gave rise to significant capital savings under the so-called Pillar 1, which establishes the capital requirements to cover credit, market and operational risks. Similarly, the significant diversification of the Group’s risk and business profiles will enable it to offset the additional capital requirements arising from the Internal Capital Adequacy Assessment Process (presented under Pillar 2), which takes into account the impact of risks not addressed under Pillar 1 and the benefits arising from the diversification among risks, businesses and geographical locations.

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In addition to the supervisory validation and approval process, the Santander Group continued in 2008 with the project for the progressive implementation of the technology platforms and methodological developments required for the roll-out of the AIRB approaches for regulatory capital calculation purposes at the remaining Group units. Therefore, the Group expects to apply advanced approaches for the calculation of regulatory capital requirements at its business units in Portugal in the first half of 2009, after the required approval from the supervisory authorities has been obtained.

As regards the other risks explicitly addressed under Pillar 1 of Basel II, the Santander Group was authorized to use its internal model for market risk with respect to the Treasury area’s trading activities in Madrid, although it intends to extend this approval to the other units. As far as operational risk is concerned, the Group decided to use the standardized approach for regulatory capital calculation purposes, since it considers that the use of AMA approaches for this risk is somewhat premature.

Pillar 2 is another significant line of action under the Basel II Corporate Framework. In addition to reviewing and strengthening the methodology supporting the economic capital model, the technology was brought into line with the platform supporting Pillar 1, so that all the information on credit risk will come from this source in the case of units using authorized internal models under Pillar 1. In 2008 the Santander Group’s economic capital model was submitted to a thorough review by an international team of CEBS supervisors led by the Bank of Spain, in addition to the internal review conducted at the end of 2008 by the Group’s internal validation and internal audit teams.

Internal validation of risk models

Internal validation is a pre-requisite for the supervisory validation process. A specialized unit of the Entity, with sufficient independence, obtains a technical opinion on the adequacy of the internal models for the intended internal or regulatory purposes, and concludes on their usefulness and effectiveness. This unit must also assess whether the risk management and control procedures are adequate for the Entity’s risk strategy and profile.

In addition to complying with the regulatory requirement, the internal validation function provides an essential support to the risk committee and the local risk committees in the performance of their duties to authorize the use of the models (for management and regulatory purposes) and in their regular reviews, since senior management must ensure that the Entity has appropriate procedures and systems in place for the monitoring and control of credit risk.

Internal model validation at the Santander Group encompasses credit risk models, market risk models, option pricing models and the economic capital model. The scope of the validation includes not only the more theoretical or methodological aspects, but also the technology systems and the quality of the data they provide, on which their effective operation relies, and, in general, all the relevant aspects of advanced risk management (controls, reporting, uses, involvement of senior management, etc.). Therefore, the aim of internal validation is to review quantitative, qualitative, technological and corporate governance-related aspects.

The internal validation function is located, at corporate level, within the Integrated Risk Control and Internal Risk Validation area (CIVIR) and reports directly to the third deputy chairman of the Group and to the chairman of the risk committee. This function is performed at a global and corporate level in order to ensure uniformity of application. The need to validate models implemented at thirteen different units subject to nine different local supervisors, combining efficiency and effectiveness, made it advisable to create three corporate validation centers located in Madrid, London and Sao Paulo. This facilitates the application of a corporate methodology that is supported by a set of tools developed internally by the Santander Group which provide a robust corporate framework for application at all the Group’s units and which automate certain verifications to ensure efficient reviews.

It should be noted that the Santander Group’s corporate internal validation framework is fully consistent with the internal validation criteria for advanced approaches issued by the Bank of Spain. Accordingly, the Group maintains the segregation of functions between internal validation and internal audit, which, in its role as the last layer of control at the Group, is responsible for reviewing the methodology, tools and work performed by internal validation and for giving its opinion on the degree of effective independence.

VIII. ECONOMIC CAPITAL

The concept of economic capital has traditionally been contrasted with that of regulatory capital, the latter being the measure required by solvency regulations. The new Basel II capital framework has without doubt brought the two concepts closer together, although certain significant differences still remain, such as the recognition of the effects of diversification or concentration, which is allowed under economic capital models.

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The Group’s economic capital model enables it to quantify the consolidated risk profile taking into account all the significant risks of the business, as well as the diversification effect inherent in a multi-national, multi-business group such as Santander. The Group used this model to prepare its Internal Capital Assessment Report in accordance with Bank of Spain regulations within the framework of Pillar 2 of Basel II.

The concept of diversification is fundamental to the proper measurement of the risk profile of a group with global operations. Although it is an intuitive concept that has been a part of risk management since the very beginnings of the banking business, diversification can also be explained in terms of the imperfect correlation between the various risks, which means that the largest loss events do not occur simultaneously in all portfolios or for all types of risk. Consequently, the sum of the economic capital of the various portfolios and types of risk, taken separately, is higher than the Group’s total economic capital. In other words, the risk borne by the Group as a whole is less than the risk of the sum of its various components considered separately.

Additionally, the economic capital measurement and aggregation model also considers the concentration risk for wholesale portfolios (large corporations, banks and sovereigns), in terms of both the size of their exposure and their sector-based or geographical concentration.

Analysis of the global risk profile

Following is a description of the distribution, by type of risk and main business units, of the Group’s global risk profile at December 31, 2008, measured in terms of economic capital.

The lending business, which accounts for 66% of the Group’s economic capital requirement, continues to be the main source of risk. Its relative importance increased with respect to 2007, due mainly to the inclusion in consolidation of Banco Real (previously accounted for using the equity method). Market risk represents 17% of the Group’s total risk exposure and includes, in addition to trading risk, structural foreign exchange position risk, equities risk and non-current assets risk.

The distribution of the economic capital among the main business areas reflects the diversified nature of the Group’s risk. Continental Europe and Latin America each account for slightly more than one third of total risk, and the United Kingdom 11%, while the corporate area of Financial Management and Holdings (which assumes the risk of the structural foreign exchange position and of most of the equity investments, among other assets) represents the remaining 20%.

At December 31, 2008, the Group’s total economic capital, including the portion relating to minority interests, amounted to €40,041 million.

The Group’s geographical diversification reduces the economic capital requirement by 25% with respect to that which would be obtained from the sum of the Group’s individual risks, while the capital saving resulting from diversification among different types of business is 21% of consolidated economic capital. The two percentages cannot be aggregated, since the bases for their calculation are different.

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:

Value creation = Economic profit — (average EC x cost of capital)

Economic profit is obtained by making the required adjustments to accounting attributable profit in order to reflect only the recurring profit or loss that each unit obtains from its business activity. Cost of capital, which is the minimum remuneration required by the shareholders, can be calculated objectively by adding to the risk-free return the premium that shareholders demand for investing in the Group. This premium depends essentially on the degree of volatility of the market price of the Santander share in relation to the market trend. The cost of capital calculated for 2008 was 9.2%.

All the main business units generated value in 2008, i.e. they obtained a RORAC that exceeded the cost of capital.

Value creation, i.e. economic profit less the cost of the average capital used to obtain it, grew by 8% in 2008 to reach €4,713 million. The Group’s return on risk-adjusted capital (RORAC) amply exceeded the estimated cost of capital for 2008, standing at 21.1% (2007: 24.1%, using uniform methodology). This decline was due to the additions to the Group’s scope of consolidation and to the delay in the appearance of the synergies expected to arise from the integration processes (Banco Real in Brazil and Alliance & Leicester in the UK).

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The main aim of the Group’s capital planning is to obtain future projections of economic and regulatory capital and thus assess capital adequacy situations. Capital planning incorporates the Bank’s earnings forecasts in various scenarios, in a manner consistent with both its strategic targets (organic and inorganic growth, pay-out ratio, etc.) and the changes in the economic situation, and in stress situations, and identifies possible capital management strategies to enable it to optimize the Bank’s solvency position and the return on capital.

More specifically, the capital planning framework defined at the Santander Group makes it possible to provide an overview of the capital adequacy situation in various time horizons and stress scenarios.

RORAC (return on risk-adjusted capital) methodology

The Santander Group has used RORAC methodology in its credit risk management since 1993, with the following objectives:

	•		Analysis and setting of prices in the decision-making process for transactions (loan approval) and customers (monitoring).

	•		Estimation of the use of capital for each customer, portfolio, business segment or unit, in order to facilitate an optimal allocation of economic capital.

	•		Calculation of the level of allowances required in accordance with the average expected losses.

Drilling down to individual transaction level, the calculation of economic capital is based on the same variables as those required to calculate expected loss, i.e. the customer’s rating and the term and guarantees of the transaction. By aggregation, it is possible to calculate the economic capital for the customer’s other transactions and, if the appropriate diversification/correlation factors are taken into account, the economic capital for a portfolio of customers, a business unit or the Bank as a whole.

The margin on transactions should not only cover costs, including the expected loss or cost of the risk, but should also be sufficient to achieve an adequate return on the economic capital used up in those transactions.

Thus, RORAC methodology makes it possible to assess whether the return obtained on a transaction covers the cost of the risk -expected loss- and the cost of the economic capital invested in the transaction by the entity.

The minimum rate of return on capital that should be obtained on a transaction is determined by the cost of capital. If a transaction or portfolio obtains a positive return, it will be contributing to the Group’s profit, although it will not actually create shareholder value unless this return covers the cost of capital.

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 ultimate aim of maximizing value creation.

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CONSOLIDATED BALANCE SHEET

Thousands of Euros

2008

2007

2006

Assets

Cash and due from banks

41,131,292

25,341,083

12,092,021

Interest earning deposits in other banks

43,553,958

16,766,716

18,744,258

Securities purchased under agreements to resell

19,391,367

26,147,541

29,553,485

Trading account assets

177,451,940

183,629,876

185,793,404

Banks

13,998,287

19,159,632

14,813,223

Loans

9,537,868

31,726,104

38,555,526

Derivatives

95,815,309

46,726,118

34,984,291

Debt securities

49,050,280

73,403,234

81,237,212

Equity securities

9,050,196

12,614,788

16,203,152

Investment securities

66,572,866

46,017,246

39,320,069

Available-for-sale

66,572,866

46,017,246

39,320,069

Net Loans and leases

607,424,343

528,318,209

483,797,093

Loans and leases, net of unearned income

619,890,400

537,013,413

491,960,537

Less-Allowance for loan losses

(12,466,057

)

(8,695,204

)

(8,163,444

)

Premises and equipment, net

11,953,856

9,272,962

8,941,963

Investment in affiliated companies

1,323,452

15,689,127

5,006,109

Other assets

78,381,486

59,206,661

48,019,778

Intangible Assets

1,787,068

2,202,334

2,444,106

Goodwill in consolidation

18,836,199

13,830,708

14,512,735

Accrual Accounts

1,952,843

1,749,193

1,581,843

Hedge derivatives

9,698,132

3,063,169

2,987,964

Others

46,107,244

38,361,257

26,493,130

Total assets

1,047,184,560

910,389,421

831,268,180

Liabilities

Deposits

468,641,990

371,573,338

353,855,908

Non interest deposits

4,608,242

4,507,057

4,256,369

Interest bearing

464,033,748

367,066,281

349,599,539

Demand deposits

99,670,268

91,576,243

91,633,288

Savings deposits

115,673,794

90,727,525

93,717,633

Time deposits

248,689,686

184,762,513

164,248,618

Certificates of deposit

—

Short-term debt

125,291,176

131,774,426

127,819,292

Long-term debt

233,516,879

237,120,341

199,775,014

Other liabilities

159,733,023

112,363,165

102,745,664

Taxes Payable

5,768,665

6,156,365

4,539,051

Accounts Payable

8,738,047

7,656,262

6,405,232

Accrual Accounts

4,669,160

4,050,992

2,999,080

Pension Allowance

8,751,128

9,294,198

11,409,770

Stock borrowing liabilities

—

Derivatives

95,125,044

52,937,798

42,231,967

Liabilities under insurance contracts

16,849,511

13,033,617

10,704,258

Other Provisions

6,538,142

4,751,151

5,212,208

Short securities positions

3,035,231

5,613,234

11,473,062

Others

10,258,095

8,869,548

7,771,036

Total liabilities

987,183,068

852,831,270

784,195,878

Minority interest

2,414,606

2,358,269

2,220,743

Stockholders’ equity

Capital stock

3,997,030

3,127,148

Additional paid-in-capital

28,103,802

20,370,128

Other additional capital

(3,114,636

)

(1,537,999

)

(1,442,379

)

Current year earnings

8,876,414

9,060,258

7,595,947

Other reserves

19,724,276

24,180,347

15,200,715

Total stockholders’ equity

57,586,886

55,199,882

44,851,559

Total liabilities and Stockholders’ equity

1,047,184,560

910,389,421

831,268,180

The Group has issued Mortgage backed securities, called “Cédulas Hipotecarias”. These securities issued pursuant the Mortgage Market law amount as a maximum 90% of the amount of the mortgage loans assigned as guarantee of them. As of December 31, 2008, 2007 and 2006, the minimum amount of mortgage loans allocated as guarantee of those securities was €48,682 million, €48,017 million and €41,837 million, respectively.

F-185

Additionally, as of December 31, 2008, 2007 and 2006, the investment debt securities assigned to certain Group or third-party commitments amounted to €25,161 million, €16,866 million and €695 million, respectively.

CONSOLIDATED STATEMENTS OF INCOME


	Thousands of Euros
	2008			2007			2006
Interest income:
Interest and fees on loans and leases		43,570,988			36,236,456			27,368,822
Interest on deposits in other banks		5,648,122			3,347,664			3,793,418
Interest on securities purchased under agreements to resell		1,817,017			2,077,343			1,349,838
Interest on investment securities		5,619,405			5,050,032			5,461,868
Dividends		95,889			146,648			164,606

Total interest income		56,751,421			46,858,143			38,138,552

Interest expenses:
Interest on deposits		(19,284,196	)		(14,589,567	)		(13,110,588	)
Interest on short-term borrowings		(5,496,602	)		(4,979,889	)		(4,483,245	)
Interest on long-term debt		(12,174,907	)		(10,864,835	)		(6,652,185	)

Total interest expense		(36,955,705	)		(30,434,291	)		(24,246,018	)

Net interest income		19,795,716			16,423,852			13,892,534
Provision for credit losses		(5,975,688	)		(3,499,080	)		(2,467,297	)

Net interest income after provision for credit losses		13,820,028			12,924,772			11,425,237

Non interest income:
Commissions and fees from fiduciary activities		1,618,479			1,984,910			1,879,163
Commissions and fees from securities activities, net		711,825			980,392			777,687
Fees and commissions from insurance activities		10,002,573			6,808,699			5,836,817
Other Fees and commissions, net		4,231,061			3,598,671			3,159,440
Gains (losses) from:
Affiliated companies’ securities		3,797,025			311,197			534,276
Investment securities		(6,697,212	)		818,288			3,518,449
Foreign exchange, derivatives and other, net		7,755,436			1,170,408			(2,977,281	)
Sale of premises		904,821			1,804,108			88,894
Other income		1,190,822			2,547,144			3,978,476

Total non interest income		23,514,830			20,023,817			16,795,921

Non interest expense:
Salaries and employee benefits		(7,933,882	)		(7,379,582	)		(7,583,372	)
Occupancy expense of premises, depreciation and maintenance, net		(1,700,725	)		(1,490,461	)		(1,494,886	)
General and administrative expenses		(3,914,264	)		(3,597,938	)		(3,135,511	)
Impairment of goodwill		(72,726	)		(599,989	)		200,006
Impairment / amortization of intangible assets		(1,581,234	)		(646,609	)		(519,950	)
Provisions for specific allowances		(1,082,318	)		(586,437	)		(94,352	)
Payments to Deposit Guarantee Fund		(205,594	)		(168,617	)		(178,274	)
Insurance claims		(8,472,523	)		(5,601,487	)		(5,196,701	)
Other expenses		(1,141,840	)		(1,702,228	)		(1,222,732	)

Total non interest expense		(26,105,106	)		(21,773,348	)		(19,225,772	)
Income before income taxes		11,229,752			11,175,241			8,995,386
Income tax expense		(1,884,223	)		(2,335,686	)		(2,254,598	)
Net consolidated income for the year		9,345,529			8,839,555			6,740,788
Net income attributed to minority interest		(452,969	)		(487,614	)		(413,145	)
Income from discontinued operation, net of taxes		(16,146	)		708,317			1,268,304
NET INCOME ATTRIBUTED TO THE GROUP		*8,876,414*			9,060,258			7,595,947

F-186

Following are the summarized balance sheets of Banco Santander, S.A. as of December 31, 2008, 2007 and 2006.


CONDENSED BALANCE SHEETS (Parent company only)	2008		2007		2006
	(Thousands of Euros)
Assets
Cash and due from banks		78,827,627		52,548,200		40,677,959
Trading account assets		79,641,722		51,349,204		35,657,947
Investment securities		16,061,930		17,074,175		10,149,175
Net Loans and leases		183,754,083		163,903,007		141,139,269
Investment in affiliated companies		62,232,929		59,256,377		39,339,174
Premises and equipment, net		728,588		714,212		1,503,788
Other assets		13,943,826		18,543,369		16,208,699

Total assets		435,190,705		363,388,544		284,676,011

Liabilities
Deposits		213,464,786		173,660,916		153,757,709
Short-term debt		34,337,021		35,077,018		16,823,769
Long-term debt		57,769,675		57,005,977		43,272,302
Other liabilities		84,257,494		59,762,058		40,452,656

Total liabilities		389,828,976		325,505,969		254,306,436

Stockholders’ equity
Capital stock		3,997,030		3,127,148		3,127,148
Retained earnings and other reserves		41,364,699		34,755,427		27,242,427

Total stockholders’ equity		45,361,729		37,882,575		30,369,575


Total liabilities and Stockholders’ equity		435,190,705		363,388,544		284,676,011

Following are the summarized statements of income of Banco Santander, S.A. for the years ended December 31, 2008, 2007 and 2006.


CONDENSED STATEMENTS OF INCOME (Parent company only)	2008			2007			2006
	(Thousands of Euros)

Interest income
Interest from earning assets		15,233,869			11,766,647			8,380,873
Dividends from affiliated companies		4,541,565			2,863,829			3,630,403

		19,775,434			14,630,476			12,011,276
Interest expense		(13,318,953	)		(10,028,500	)		(6,877,205	)

Net interest income		6,456,481			4,601,976			5,134,071
Provision for credit losses		(1,387,505	)		(288,386	)		(506,281	)

Net interest income after provision for credit losses		5,068,976			4,313,590			4,627,790
Non interest income:		4,369,576			2,996,666			1,968,709
Non interest expense:		(4,555,202	)		(3,231,707	)		(3,337,769	)

Income before income taxes		4,883,350			4,078,549			3,258,730
Income tax expense		(57,132	)		(8,302	)		(2,540	)

Net income		4,826,218			4,070,247			3,256,190

F-188

Following are the summarized cash flow statements of Banco Santander, S.A. for the years ended December 31, 2008, 2007 and 2006.


CONDENSED CASH FLOW STATEMENTS (Parent company only)	2008			2007			2006
	(Thousands of Euros)
1. Cash flows from operating activities
Consolidated profit		4,826,218			4,070,247			3,256,190
Adjustments to profit		2,895,285			164,914			1,355,483
Net increase/decrease in operating assets		63,231,280			49,949,433			79,815
Net increase/decrease in operating liabilities		61,252,781			56,657,109			(4,701,176	)
Total net cash flows from operating activities (1)		5,800,136			10,951,139			(169,318	)

2. Cash flows from investing activities
Investments (-)		(3,686,280	)		(22,068,312	)		(5,334,303	)
Divestments (+)		524,116			3,438,200			743,157
Total net cash flows from investment activities (2)		(3,162,164	)		(18,630,112	)		(4,591,146	)

3. Cash flows from financing activities
Disposal of own equity instruments		61,471			21,640			—
Acquisition of own equity instruments		—			—			(21,640	)
Issuance of debt securities		200,039			13,132,494			11,613,661
Redemption of debt securities		—			—			(4,357,781	)
Dividends paid		(4,243,021	)		(3,456,731	)		(2,779,334	)
Issuance/Redemption of equity instruments		8,182,694			7,560,549			19,085
Total net cash flows from financing activities (3)		4,078,241			17,257,952			4,473,991

4. Effect of exchange rate changes on cash and cash equivalents (4)		(468,668	)		445,695			(88,802	)

5. Net increase/decrease in cash and cash equivalents (1+2+3+4)		6,247,545			10,024,676			(375,277	)
Cash and cash equivalents at beginning of period		12,306,554			2,281,878			2,657,154
Cash and cash equivalents at end of period		18,554,099			12,306,554			2,281,877

F-189

55.2

Preference Shares and Preferred Securities

The following table shows the balance of the preference shares and preferred securities as of December 31, 2008, 2007 and 2006:

2008

2007

2006

(Thousands of Euros)

Preference shares

1,051,272

522,558

668,328

Preferred securities

7,621,575

7,261,382

6,836,570

Total at year-end

8,672,847

7,783,940

7,504,898

Both Preference Shares and Preferred Securities are recorded under the “Financial liabilities at amortized cost — Subordinated Liabilities” caption in the consolidated balance sheet as of December 31, 2008, 2007 and 2006.

Preference Shares include the financial instruments issued by the consolidated companies which, although equity for legal purposes, do not meet the requirements for classification as equity in the financial statements. These shares do not carry any voting rights and are non-cumulative. They were subscribed to by non-Group third parties except for the shares of Abbey amounting to GBP 325 million, are redeemable at the discretion of the issuer, based on the conditions of the issuer. None of these issues are convertible into Bank shares or granted privileges or right which, in certain circumstances, make them convertibles into shares.

This category includes non-cumulative preferred non-voting shares issued by Banesto Holdings, Abbey National plc and Alliance & Leicester plc.

For the purposes of payment priority, Preferred Securities are junior to all general creditors and to subordinated deposits. The payment of dividends on these securities, which have no voting rights, is conditional upon the obtainment of sufficient distributable profit and upon the limits imposed by Spanish banking regulations on equity.

This category includes non-cumulative preferred non-voting securities issued by Santander Finance Capital, S.A. (Unipersonal), and Santander Finance Preferred, S.A. (Unipersonal), guaranteed by the Bank. It also includes non-cumulative preferred non-voting securities issued by Banesto Preferentes, S.A, Banco Español de Crédito, S.A., Santander PR Capital Trust and Abbey Group.

F-190

Except the issues of Santander PR Capital Trust I, which redeems in 2036, all preference shares and preferred securities are perpetual securities and there is no obligation that requires the Group to redeem them. All securities have been fully subscribed by third parties outside the Group. In the consolidated balance sheets, these securities are shown net of any temporary operations relating to liquidity guarantees (see Note 23 and Exhibit III), and are described in the table below:


	Outstanding at December 31, 2008
		Amount in
Preference Shares		currency
Issuer/Date of issue	Currency	(million)		Interest rate			Redemption Option (1)

Banesto Holding, Ltd, December 1992	US Dollar		77.3		10.50	%	June 30, 2012
Abbey National plc, October 1995	Pounds Sterling		100		10.375	%	No option
Abbey National plc, February 1996	Pounds Sterling		100		10.375	%	No option
Abbey National plc, June 1997	Pounds Sterling		125		8.625	%	No option
Alliance & Leicester plc, March 2004	Pounds Sterling		300		5.827	%	March 22, 2016
Alliance & Leicester plc, May 2006	Pounds Sterling		300		6.222	%(2)	May 24, 2019

Outstanding at December 31, 2008

Amount in

Preferred Securities

currency

Issuer/Date of issue

Currency

(million)

Interest rate

Maturity date

Banesto Group

Banesto Preferentes, S.A. December 2003

Euro

131.14

Euribor (3M) + 0.2%

Perpetuity

Banco Español de Crédito, October 2004

Euro

125

€CMS 10 + 0.125%

Perpetuity

Banco Español de Crédito (1), November 2004

Euro

200

5.5

Perpetuity

Santander Finance Capital, S.A. (Unipersonal)

October 2003

Euro

450

Euribor (3M) + 0.1%

Perpetuity

February 2004

Euro

400

Euribor (3M) + 0.1%

Perpetuity

July 2004

Euro

750

Euribor (3M) + 0.1%

Perpetuity

September 2004

Euro

680

Euribor (3M) + 0.1%

Perpetuity

April 2005

Euro

1,000

Euribor (3M) + 0.1%

Perpetuity

Santander Finance Preferred, S.A. (Unipersonal)

March 2004

US Dollar

190

6.41

Perpetuity

September 2004

Euro

300

€CMS 10 +0.05%
subject to a maximum distribution of 8% per annum

Perpetuity

October 2004

Euro

200

5.75

Perpetuity

November 2006

US Dollar

500

6.80

Perpetuity

January 2007

US Dollar

600

6.50

Perpetuity

March 2007

US Dollar

350

US3M + 0.52%

Perpetuity

July 2007

Pounds Sterling

250

7.01

Perpetuity

Abbey Group

Abbey National Capital Trust I, February 2000

US Dollar

1,000

Fixed to 8.963% until June 30, 2030, and from this date, 2.825% + Libor USD (3M)

Perpetuity

Abbey National Plc, February 2001(3)

Pounds Sterling

300

7.037

Perpetuity

Abbey National Plc, August 2002

Pounds Sterling

175

Fixed to 6.984% until February 9, 2018, and thereafter, at a rate reset semi-annually of 1.86% per annum + Libor GBP (6M)

Perpetuity

Santander PR Capital Trust I

February 2006

US Dollar

125

6.750

July 2036


(1)		From these date the issuer can redeem the shares, subject to prior authorization by the national supervisor.

(2)		That issuance is a Fixed/Floating Rate Non-Cumulative Callable Preference Shares. Dividends will accrue on a principal amount equal to £1,000 per Preference Share at a rate of 6.222 per cent. per annum in respect of the period from (and including) May 24, 2006 (the Issue Date) to (but excluding) May 24, 2019 (the First Call Date) and thereafter at a rate reset quarterly equal to 1.13 per cent. per annum above the London interbank offered rate for three-month sterling deposits. From (and including) the Issue Date to (but excluding) the First Call Date, dividends, if declared, will be paid annually in arrear on May 24, in each year. Subject as provided herein, the first such dividend payment date will be May 24, 2007 and the last such dividend payment date will be the First Call Date. From (and including) the First Call Date, dividends, if declared, will be paid quarterly in arrear on May 24, August 24, November 24 and February 24, in each year. Subject as provided herein, the first such dividend payment date will be August 24, 2019.

(3)		From February 14, 2026, this issue will bear interest at a rate, reset every five years, of 3.75% per annum above the gross redemption yield on a five-year specified United Kingdom government security.

F-191

In accordance with Reg. S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered, Santander Finance Capital, S.A. (Unipersonal) and Santander Finance Preferred, S.A. (Unipersonal) — issuers of registered preferred securities guaranteed by Banco Santander, S.A. — do not file the financial statements required for a registrant by Regulation S-X as:

	•		Santander Finance Preferred, S.A. (Unipersonal) is 100% owned finance subsidiary of Banco Santander, S.A. who fully and unconditionally guarantees the preferred securities (Series 1, 4, 5 and 6 are listed in the United States). No other subsidiary of the Bank guarantees such securities.

	•		Santander Finance Capital, S.A. (Unipersonal) is 100% owned finance subsidiary of Banco Santander, S.A. that fully and unconditionally guarantees the preferred securities (not listed in United States). No other subsidiary of the Bank guarantees such securities.

The condensed financial statements of Santander Finance Capital, S.A. (Unipersonal) and Santander Finance Preferred, S.A. (Unipersonal) for the years ended December 31, 2008, 2007 and 2006 are the following:

SANTANDER FINANCE CAPITAL, S.A. (UNIPERSONAL)

Santander Finance Capital, S.A. (Unipersonal) was established in Spain on July 8, 2003.

The common stock of the company is wholly owned by Banco Santander, S.A.

Presented below are the condensed balance sheet, condensed statements of income and statements of changes in the stockholders’ equity for Santander Finance Capital, S.A. (Unipersonal), prepared in conformity with IFRS.

Balance sheets


	Thousands of Euros
SANTANDER FINANCE CAPITAL, S.A. (UNIPERSONAL)	2008		2007
Assets:
Cash		56,490		43,480
Deposits with Parent Bank		3,214,769		3,214,769
Accrual accounts		27,756		25,901
Other assets		—		18

Total Assets		3,299,015		3,284,168

Liabilities and stockholders’ equity:

LIABILITIES:
Public entities		1,567		1,436
Accrual accounts		26,153		24,037
Non-commercial debts		—		—
Commercial debts		40		37
Debts with Group companies		18		30
Provisions for taxes		—		—
Preferred securities		3,270,842		3,258,354

Total Liabilities		3,298,620		3,283,894
STOCKHOLDERS’ EQUITY:
Capital stock		151		151
Retained earnings		123		70
Net income		121		53

Total Stockholders’ Equity		395		274

Total Liabilities and Stockholders’ Equity		3,299,015		3,284,168

F-192

Statement of income


	Thousands of Euros
SANTANDER FINANCE CAPITAL, S.A. (UNIPERSONAL)	2008			2007

Interest income		175,020			151,399
Interest expenses		(174,770	)		(151,258	)
Non interest expenses		(77	)		(63	)
Corporate income tax		(52	)		(25	)

Net income / (loss)		121			53

Statement of changes in stockholders’ equity


										Total
	Capital stock				Retained					Stockholders’
Changes in Stockholders’	Common				Earnings		Net income			Equity
Equity	Shares		Thousands of Euros
Balance at January 1, 2007		1,505		151		31		39			221

2006 Income allocation		—		—		39		(39	)		—

Net income 2007		—		—		—		53			53

Balance at December 31, 2007		1,505		151		70		53			274


2007 Income allocation		—		—		53
Net income 2008		—		—		—		121			121

Balance at December 31, 2008		1,505		151		123		121			395

In October 2005, the board of directors authorized a capital increase of 903 shares of common stock with a €100 par value. This capital increase was fully subscribed and paid by Banco Santander, S.A.

After this capital increase, the capital stock of Santander Finance Capital S.A. (Unipersonal), as of December 31, 2005, amounted to 1,505 shares of common stock with a €100 par value, fully subscribed and paid by Banco Santander, S.A. (wholly owner of this company).

Preferred Securities


			Thousands of
Issuances	Issue Date		Euros at 12/31/08

Series I		10/3/2003		450,000
Series II		02/18/2004		400,000
Series III		07/30/2004		750,000
Series IV		09/30/2004		680,000
Series V		04/12/2005		1,000,000

Total				3,280,000

Issuances expenses
Series I				—
Series II				(213	)
Series III				(1,747	)
Series IV				(2,049	)
Series V				(5,149	)

Total				(9,158	)


Total				3,270,842

F-193

	•		On October 3, 2003, Santander Finance Capital, S.A. (Unipersonal) issued 18,000,000 preference securities, at €25 par value.

	•		On February 18, 2004, Santander Finance Capital, S.A. (Unipersonal) issued 16,000,000 preference securities, at €25 par value.

	•		On July 30, 2004, Santander Finance Capital, S.A. (Unipersonal) issued 30,000,000 preference securities, at €25 par value.

	•		On September 30, 2004, Santander Finance Capital, S.A. (Unipersonal) issued 27,200,000 preference securities, at €25 par value.

	•		On April 12, 2005, Santander Finance Capital, S.A. (Unipersonal) issued 40,000,000 preference securities, at €25 par value.

	•		These issues are perpetual and can be redeemable at the option of the issuer, subject to the consent of the Bank of Spain, in whole or in part, at any time after five years from the issue date.

	•		All the issues of Santander Finance Capital, S.A. (Unipersonal) are guaranteed by Banco Santander, S.A.

SANTANDER FINANCE PREFERRED, S.A. (UNIPERSONAL)

Santander Finance Preferred, S.A. (Unipersonal) was established in Spain on February 27, 2004.

The common stock of the company is wholly owned by Banco Santander, S.A.

Presented below are the condensed balance sheet, condensed statements of income and statements of changes in the stockholders’ equity for Santander Finance Preferred, S.A. (Unipersonal), prepared in conformity with IFRS.

Balance sheets


	Thousands of Euros
SANTANDER FINANCE PREFERRED, S.A. (UNIPERSONAL)	2008			2007
Assets:
Cash		16,086			11,416
Deposits with Parent Bank		1,912,206			1,927,344
Accrual accounts		26,735			27,864

Total Assets		1,955,027			1,966,624

Liabilities and stockholders’ equity:

LIABILITIES:
Public entities		153			185
Accrual accounts		23,485			26,097
Commercial debts		—			8
Non-commercial debts		36			102
Deferred income		863			863
Debts with group companies		9			4
Provisions for taxes		—			—
Preferred securities		1,928,990			1,937,130

Total Liabilities		1,953,536			1,964,389

STOCKHOLDERS’ EQUITY:
Capital stock		151			151
Retained earnings		2,084			421
Net income		(744	)		1,663

Total Stockholders’ Equity		1,491			2,235

Total Liabilities and Stockholders’ Equity		1,955,027			1,966,624

F-194

Preferred Securities


			Thousands of
	Issue Date		Euros at 12/31/08
Issuances
Series 1- $190,000		03/11/2004		136,524
Series 2- €300,000		09/30/2004		300,000
Series 3- €200,000		10/08/2004		200,000
Series 4- $500,000		11/21/2006		359,273
Series 5- $600,000		31/01/2007		431,127
Series 6- $350,000		05/03/2007		251,491
Series 7- £250,000		10/07/2007		262,467

				1,940,882

Issuances expenses
Series 1		—		(135	)
Series 2		—		(913	)
Series 3		—		(314	)
Series 4		—		(4,619	)
Series 5		—		(5,689	)
Series 6		—		(160	)
Series 7		—		(62	)

				(11,892	)

Total				1,928,990

	•		On March 11, 2004, Santander Finance Preferred, S.A. (Unipersonal) issued 7,600,000 preferred securities, at $25 par value.

	•		On September 30, 2004, Santander Finance Preferred, S.A. (Unipersonal) issued 300,000 preferred securities, at €1,000 par value.

	•		On October 8, 2004, Santander Finance Preferred, S.A. (Unipersonal) issued 200,000 preferred securities, at €1,000 par value.

	•		On November 21, 2006 Santander Finance Preferred, S.A. (Unipersonal) issued 20,000,000 preferred securities, at €25 par value.

	•		On January 31, 2007 Santander Finance Preferred, S.A. (Unipersonal) issued 24,000,000 preferred securities, at $25 par value.

	•		On March 5, 2007 Santander Finance Preferred, S.A. (Unipersonal) issued 14,000,000 preferred securities, at $25 par value.

	•		On July 10, 2007 Santander Finance Preferred, S.A. (Unipersonal) issued 5,000 preferred securities, at £50,000 par value.

	•		These issues are perpetual and can be redeemable at the option of the issuer, subject to the consent of the Bank of Spain, in whole or in part, at any time after five years from the issue date.

	•		All the issues of Santander Finance Preferred, S.A. (Unipersonal) are guaranteed by Banco Santander, S.A.

F-196

55.3

Business combinations: Goodwill and Other assets and liabilities

The components of intangible assets other than goodwill were as follows:


					Additions &
					Sales, net of						Impairments &
	Estimated	December 31,			exchange			Amortization &			Amortization			December 31,
Thousands of Euros	Useful Life	2005			differences			Impairments			Applications			2006

With indefinite useful life:
Brand name (Abbey)			459,680			9,419			—			—			469,099
Other brand names			—			18,078			—			—			18,078
With finite useful life:
Customer deposits (Abbey)	10 years		1,257,843			25,850			—			—			1,283,693
Credit cards (Abbey)	5 years		35,021			720			—			—			35,741
IT developments	3 years		1,207,606			295,371			—			(193,299	)		1,309,678
Other assets			163,199			159,827			—			—			323,026
Accumulated amortization			(704,345	)		243,768			(519,953	)		—			(980,530	)
Impairment losses			(207,978	)		—			—			193,299			(14,679	)

Subtotal			2,211,026			753,033			(519,953	)		—			2,444,106

Present value of future profits (Abbey)			1,230,339			(1,230,339	)		—			—			—

Total			3,441,365			(477,306	)		(519,953	)		—			2,444,106


					Additions &
					Sales, net of			Amortization			Impairments &
	Estimated	December 31,			exchange			&			Amortization			December 31,
Thousands of Euros	Useful Life	2006			differences			Impairments			Applications			2007

With indefinite useful life:
Brand name (Abbey)			469,099			(39,563	)		—			—			429,536
Other brand names			18,078			(1,439	)		—			—			16,639
With finite useful life:
Customer deposits (Abbey)	10 years		1,283,693			(108,265	)		—			—			1,175,428
Credit cards (Abbey)	5 years		35,741			(3,014	)		—			—			32,727
IT developments	3 years		1,309,678			657,592			—			(392,301	)		1,574,969
Other assets			323,026			465,913			—			(555,587	)		233,352
Accumulated amortization			(980,530	)		—			(646,609	)		392,301			(1,234,838	)
Impairment losses			(14,679	)		(3,504	)		(562,883	)		555,587			(25,479	)

Total			2,444,106			967,720			(1,209,492	)		—			2,202,334


					Additions &
					Sales, net of			Amortization			Impairments &
	Estimated	December 31,			exchange			&			Amortization			December 31,
Thousands of Euros	Useful Life	2007			differences			Impairments			Applications			2008

With indefinite useful life:
Brand name (Abbey)			429,536			(97,707	)		—			(331,829	)		—
Other brand names			16,639			24,372			—			—			41,011
With finite useful life:
Customer deposits (Abbey)	10 years		1,175,428			(271,561	)		—			(903,867	)		—
Credit cards (Abbey)	5 years		32,727			(7,530	)		—			—			25,197
IT developments	3 years		1,574,969			849,502			—			(249,943	)		2,174,528
Other assets			233,352			668,892			—			(16,667	)		885,577
Accumulated amortization			(1,234,838	)		—			(670,031	)		572,682			(1,332,187	)
Impairment losses			(25,479	)		—			(911,203	)		929,624			(7,058	)

Total			2,202,334			1,165,968			(1,581,234	)		—			1,787,068

F-197

Abbey was consolidated in Santander Group for the first time on December 31, 2004. Accordingly, the 2004 consolidated balance sheet includes the effect of the acquisition, whereas the 2004 consolidated statement of income does not include the results obtained by Abbey from the date of completion of the acquisition, which were not material. The acquisition of 100% of Abbey generated goodwill under previous Spanish GAAP of €10,263,893 thousand of the Santander Group’s total goodwill at 2004 year-end of €16,964,201 thousand (€15,090,541 thousand under IFRS). The goodwill arising from the acquisition included the adjustments and valuations required for it to be presented in conformity with the accounting principles and valuation methods described in Note 2.

Due to the complexity of the analysis, the evaluation was based in part upon independent advisors. The goodwill and its allocation process was not considered definitive at the end of 2004 and was revised in 2005 after further work.

In 2005, after these calculations, some intangibles assets were valued and identified reducing the goodwill as shown in the table below. These include trademarks & trade names and core deposits among others:


	Initial						Final		Estimated
*(Thousands of Euros)*	*calculation ()**			Differences			*calculation ()**		useful life
Trademarks & trade names		566,000			(116,385	)		449,615	Indefinite
Core deposits		1,451,000			(220,626	)		1,230,374	10 years
Credit card relationship		33,000			1,256			34,256	5 years
Distribution channels		25,692			(25,692	)		—
Deferred tax liability		(717,500	)		717,500			—

Total Intangible assets:		1,358,192			356,053			1,714,245


()*		Amounts valued at acquisition exchange rate

The deferred tax liability has been excluded from the final goodwill calculation.

The value of trademarks and trade name, has been estimated following the income approach method by discounting the interest spread that customers are willing to pay in its operations with a well-known entity, after having been corrected for the expenses needed to support the trademark.

Core deposits are those deposits that are expected to remain with a savings institution for a relatively long period of time. Such deposits are attracted by the convenience and service offered by the institution rather than by interest rates paid. Its value has been estimated using the income approach, calculating the present value of the differential between the cost of the core deposits and the cost of alternative financing. It was going to be amortized in 10 years.

Credit card relationship value was initially calculated using profits to be collected in the next 14-16 years. However, the Company decided to amortize it in 5 years.

The Bank finally decided not to recognize distribution channels as intangible assets, after having been impaired in Abbey’s books.

At 31 December 2008 and 2007, the Group reviewed the useful lives of its intangible assets and adjusted the carrying amounts of these assets on the basis of the estimated economic benefits currently expected to be obtained therefrom. As a result of this review, in 2008 the Group recognized under “Impairment losses on other assets — Goodwill and other intangible assets” impairment losses amounting to EUR 911 million relating substantially in full to intangible assets arising from the acquisition of Abbey in 2004. The impairment losses recorded in 2007 amounted to EUR 563 million.

As explained in Note 3.c.i and 37.a.i, in June 2006 Abbey entered into an agreement with Resolution plc (“Resolution”) to sell its life insurance business to the latter for €5,340 million (GBP 3,600 million). The transaction was completed in the third quarter of 2006 and did not give rise to any gains for the Group.

F-198

55.4

Securitization

Under IFRS, as disclosed in Note 2.e)., 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. Securitizations may result in continued recognition of the securitized assets; continued recognition of the assets to the extent of the Group’s continuing involvement in those assets; or derecognition of the assets. Under SIC-12 a Special Purpose Entity (“SPE”) is consolidated by the entity that is deemed to control it. Indicators of control include when the SPE conducts activities on behalf of another entity or where an entity is entitled to the majority of the benefits or exposed to the majority of the risks of the SPE.

The Group securitized mortgages and other loans during 2008, the total amount of which was not accounted for as a sale under the IFRS.

The balances of assets securitized at December 31, 2008, 2007 and 2006 under the IFRS were as follows:

IFRS

Thousands of Euros

2008

2007

2006

Accounted for as a sale

2,882,352

3,742,020

4,901,712

Mortgage loans

2,087,688

2,478,869

2,980,911

Of which Abbey

—

Other securitized assets

794,664

1,263,151

1,920,801

Continued recognition of the assets

126,497,296

92,022,693

59,425,910

Mortgage loans

90,264,543

60,055,842

36,363,009

Of which Abbey

66,615,125

40,216,503

22,565,396

Other securitized assets

36,232,753

31,966,851

23,062,901

TOTAL

129,379,648

95,764,713

64,327,622

F-199

55.5

Derivative Financial Instruments

Derivatives accounted for as hedging operations include instruments that meet specific criteria in accordance with IAS 39. Derivatives accounted for as trading operations include instruments held for trading purposes and those that do not meet our hedging requirements. A full description of the principles applied by the Group in accounting for derivative financial instruments is disclosed in Note 2.d.v to the financial statements.

In the Group, the use of derivatives for trading purposes is subject to clearly defined limits (at all levels: trader, entity, business segment, country, etc.) and controlled using Value at Risk (VaR) methodology. Derivatives are also used for hedging purposes when a reduction of risk is desired. However, risk reduction is not in itself sufficient to qualify for hedge accounting.

We have procedures in place that ensure that the requirements with respect to the designation as a hedge or speculative transaction, the documentation of the hedging relationship, the identification of hedged items and the hedging instruments, and the assessment and testing of hedge effectiveness are met under IFRS.

Accordingly, the Group’s policies require that an effectiveness test is performed for each hedge position at inception and on a monthly basis. The Group has established the following effectiveness tests to ensure the effectiveness of each hedging relationship:

• Prospective test: Upon designation of a hedging relationship (as well as on ongoing basis), the Group must be able to justify an expectation that the relationship will be highly effective over future periods in achieving offsetting changes in fair value or cash flows, and;

• Retrospective test: At least quarterly, the Group must determine whether the hedging relationship has been highly effective in having achieved offsetting changes in fair value or cash flows through the date of the periodic assessment.

Only if the hedge effectiveness percentages are between 80% and 125% is the hedge considered to be highly effective. If the calculated percentages are outside this range the hedge is not considered to be effective and hedge accounting is discontinued (the hedging instruments are accounted for as speculative derivatives).

We use derivatives for both trading and non-trading activities.

The Group uses derivatives to eliminate, reduce or modify risk in trading portfolios (interest rate, foreign exchange and equity prices), and to provide financial services to clients. Our principal counterparties for this activity are financial institutions. The principal types of derivatives used are: interest rate swaps, future rate agreements, interest rate options and futures, foreign exchange forwards, foreign exchange futures, foreign exchange options, foreign exchange swaps, cross currency swaps, equity index futures and equity options.

Derivatives are also used in non-trading activity in order to manage the interest rate risk and foreign exchange risk arising from asset and liability management activity. Interest rate and foreign exchange non-optional derivatives are used in non-trading activity. Some of these non-trading transactions could be accounted for as accounting hedges if they meet specific criteria.

The Group has established policies, procedures and limits in relation to market risk. These limits are defined as a structure which considers different levels from business segment or legal entity levels to portfolio or trader levels. Market risk is monitored by risk committees together with Assets and Liabilities Committees both at the local and global levels.

More detailed information about market risks and control over them can be found in Note 54.

Accounting principles-

The Group enters into thousands of derivative transactions for trading purposes and to hedge asset and liability exposures. Only a limited amount of these hedging transactions receive hedge accounting treatment under the IFRS due to the strict qualifying requirements. The general rule is that all derivatives are accounted for as trading operations, and only those derivatives that comply with the specific criteria required by the IFRS are accounted for as hedging operations. A full description of the principles applied by the Group in accounting for derivative financial instruments is disclosed in Note 2.d.v.

The IFRS consider as hedging transactions only those that meet the following criteria (summarized):

	a.		The hedge relationship must be documented at inception. At that moment the objective and the hedge strategy must be assessed.

	b.		The hedge relationship should be highly effective during the entire estimated term to compensate the changes in the value or in the cash flows attributable to the identified risk, and in accordance with the hedging strategy documented at inception.

F-200

	c.		Forecasted transactions may be hedged only if it is highly probable that they will occur and when they are subject to any risk that could have an effect on cash flows that could affect the net income.

	d.		To qualify as highly effective, the hedge relationship should meet, both at the inception and in any moment, the following requirements:

	a)		Prospectively: it should be expected that the changes in the fair value or in the cash flows of the hedged financial instruments will almost be offset by the changes in the fair value or in the cash flows of the hedging instruments.

	b)		Retrospectively: The offsetting effects should be within 80% and 125% of the changes in the hedged item.

	c)		All the values should be reliably calculated.

	d)		Effectiveness should be tested quarterly and at least, each time that the financial statements are prepared.

We have procedures in place that ensure that the requirements with respect to the designation as hedge or speculative, transaction documentation, identification of hedged items and hedging instrument, and the assessment and testing of hedge effectiveness are met.

The vast majority of our hedges are simple hedges: the notional value of the hedging instruments is the same as the face value of the hedged item; the hedging instrument is tailored solely to the hedged risk (either benchmark rate of interest or foreign currency); the settlement methods are standard ones, with settlement periods similar to those for the item to be hedged; there are no pre-payable amounts on the item to be hedged, nor are there any options in the hedged items unless such options are completely offset with an opposite option in the hedging instruments.

The Group includes derivatives that hedge the foreign currency exposure of a net investment in a foreign subsidiary. The currency of these hedging derivatives is that of the country in which the foreign subsidiary is located, and the amounts to be hedged are closely watched by our risk committees.

Our Group’s companies enter into intercompany derivative transactions for the purposes of managing their own risks.

Usually, in each country in which our Group operates, there is a subsidiary (an individual entity) that acts as the treasury services provider or center for the Group’s financial activities in that country. The remaining subsidiaries operating in that country usually hedge their own risks through transactions entered into with that treasury services provider. In addition, some of our subsidiaries may enter into intercompany derivative transactions with subsidiaries located in other countries.

For accounting purposes, these transactions are recorded as intercompany derivatives on the individual books and records of each company entering into such transactions, but are eliminated in the consolidation process.

Fair value methods-

The methods and assumptions used by the Group in estimating its fair value disclosures for derivative financial instruments are disclosed in Note 2.d.

The following table shows a detail of our consolidated trading and hedging transactions broken down into notional amounts and their fair value in accordance with IFRS.

December 31,

2008

2007

2006

Notional

Millions of Euros

Amount

Fair Value

Amount

Fair Value

Amount

Fair Value

• Trading

3,339,007.3

6,647.9

3,620,490.1

(2,077.6

)

2,748,721.0

(3,753.7

)

• Hedging

221,612.8

3,740.5

164,666.9

(1,071.4

)

157,363.1

(505.9

)

Fair Value Hedges

169,623.2

3,340.0

126,388.3

(1,199.7

)

131,214.4

(474.3

)

Cash Flow Hedges

45,161.5

184.9

10,695.5

(136.7

)

9,472.8

(34.4

)

Hedges of the foreign currency of a net investment in a foreign subsidiary

6,828.1

215.7

27,583.1

265.0

16,675.9

2.8

3,560,620.1

10,388.4

3,785,157.0

(3,149.0

)

2,906,084.1

(4,259.6

)

F-201

55.6

Short Term Borrowings

Following is an analysis of the components of the “Short-term borrowings” caption for 2008, 2007 and 2006:


	2008					2007					2006
			Average					Average					Average
Thousands of Euros	Amount		Rate			Amount		Rate			Amount		Rate
Securities sold under agreements to repurchase:
At December 31		83,531,515		4.12	%		99,067,534		3.66	%		92,433,767		4.39	%
Average during year		84,194,507		3.78	%		90,977,794		3.86	%		101,682,243		3.74	%
Maximum month-end balance		99,067,534					99,067,534					129,816,503

Other short-term borrowings:
At December 31		41,759,661		4.89	%		32,706,892		7.29	%		35,385,525		2.50	%
Average during year		45,106,644		5.13	%		27,071,238		5.42	%		25,501,630		2.66	%
Maximum month-end balance		49,522,970					44,052,354					35,385,525

Total short-term borrowings at year-end		125,291,176		4.56	%		131,774,426		4.56	%		127,819,292		3.87	%

This short-term indebtedness is denominated in different currencies, mostly Euro, US$, GBP and Latin-American currencies. Interest rates of these currencies have not followed the same trend.

55.7

Guarantees

The Group provides a variety of guarantees to its customers to improve their credit standing and allow them to compete. The following table summarizes at December 31, 2008, 2007 and 2006 all of the guarantees.

As required, the “maximum potential amount of future payments” represents the notional amounts that could be lost if there were a total default by the guaranteed parties, without consideration of possible recoveries from collateral held or pledged, or recoveries under recourse provisions. There is no relationship between these amounts and probable losses on these guarantees. In fact, maximum potential amount of future payments significantly exceeds inherent losses.

F-202


	*Maximum potential amount of future*
	*payments*
*Guarantees disclosures*	2008		2007		2006
	(*Thousands of Euros)*
*Contingent liabilities:*
Assets earmarked for third-party obligations		4		3		4
Guarantees and other sureties		61,227,840		69,804,996		53,175,766
Guaranties promises		6,707,586		17,974,960		11,961,391
Performance guarantees		38,905,912		34,657,158		29,857,748
Financial standby letters of credit		14,514,126		16,386,413		10,816,103
Doubtful guarantees		196,862		77,815		61,838
Credit Default Swaps		903,067		708,250		478,250
Other		287		400		436
Other contingent exposures		4,095,350		6,411,586		5,593,539
Documentary Credits		3,590,454		5,803,088		5,029,484
Other contingent liabilities		504,896		608,386		563,893
Doubtful contingent liabilities		—		112		162

Total Contingent Liabilities		65,323,194		76,216,585		58,769,309
*Commitments*
Loan commitments drawable by third parties		123,329,168		102,215,927		91,690,396
Other commitments		8,395,838		12,460,636		11,559,034
Securities placement commitments		50,006		33,032		3,463
Securities subscribed and pending payment		42,467		107,244		83,368
Compensation room delivered bills		8,303,365		12,320,360		11,472,203

Total Commitments		131,725,006		114,676,563		103,249,430

Performance guarantees are issued to guarantee customers obligations such as to make contractually specified investments, to supply specified products, commodities, or maintenance or warranty services to a third party, completion of projects in accordance with contract terms, etc. Financial standby letters of credit include guarantees of payment of loans, credit facilities, promissory notes and trade acceptances. The Group always requires collateral to grant this kind of financial guarantees. In Documentary Credits, the Group acts as a payment mediator between trading companies located in different countries (import-export transactions). Under a documentary credit transaction, the parties involved deal with the documents rather than the commodities to which the documents may relate. Usually the traded commodities are used as collateral to the transaction and the Bank may provide some credit facilities. Loan commitments drawable by third parties include mostly credit card lines and commercial commitments. Credit card lines are unconditionally cancelable by the issuer. Commercial commitments are mostly 1 year facilities subject to information requirements to be provided by our customers.

In the UK it is normal to issue check guarantee cards to current account customers holding checkbooks, as retailers do not generally accept cheques without such form of guarantee. Accordingly, Abbey issues guaranteed cheques that represent its commitment to guarantee the cheques of some of its customers up to a certain limit, typically £50-£100. Bank account facilities to which guaranteed cheques relate are regularly assessed based on customers’ behavior, and amended where necessary. Prior notice of changes is given to customers. The maximum potential amount of future payments is €6,501 million on December 2008 (€7,955 million in 2007 and €7,696 in 2006) and there is no stated maturity.

Also, Abbey, as is normal in such activity, gives representations and warranties on the sale of subsidiaries. The maximum potential amount of any claims made against these is significantly higher than actual settlements. The maximum potential amount of future payments is €4,415 million on December 31, 2008 (€5,354 million in 2007 and €6,849 in 2006).

The risk criteria followed to issue all kinds of guarantees, financial standby letters of credit, documentary credits and any risks of signature are in general the same as those used for other products of credit risk, and therefore subject to the same admission and tracking standards. The guarantees granted on behalf of our customers are subject to the same credit quality review process as any other risk product. On a regular basis, at least once a year, the solvency of the mentioned customers is checked as well as the probability of those guarantees to be executed. In case that any doubt on the customer’s solvency may arise we create allowances with charge to net income, by the amount of the inherent losses even if there is no claim to us.

As of December 31, 2008, the Group had allowances to cover inherent losses on guarantees of €678,584 thousands, (2007: €636,316 and 2006: €598,735).

F-203

55.8

Acquisition of Alliance & Leicester.

On October 10, 2008, Banco Santander, S.A. acquired the entire share capital of Alliance & Leicester plc. Alliance & Leicester plc is one of the UK’s major financial services group, offering a broad range of financial services and products to personal and commercial customers.

We present below the summarized audited balance sheet of Alliance & Leicester under IFRS as of December 31, 2008 and the audited income statement for the year ended December 31, 2008, as follows:


CONSOLIDATED INCOME STATEMENT — ALLIANCE & LEICESTER	2008
	(€ million)

Interest and similar income		5,075

Interest expense and similar charges		(4,592	)
Net interest income		483
Fee and commission income		593
Fee and commission expense		(99	)
Net fee and commission income		493
Net trading and other income		60
Total operating income		1,037
Administration expenses		(1,167	)
Depreciation and amortisation		(143	)
Total operating expenses excluding provisions and charges		(1,310	)
Impairment losses on loans and advances to customers		(764	)
Impairment losses on treasury investment securities and loans to banks		(536	)
Provisions for other liabilities and charges		(48	)
Total operating provisions and charges		(1,348	)
(Loss)/profit before tax		(1,621	)
Tax credit/(charge)		466
(Loss)/profit for the year from continuing operations		(1,156	)


CONSOLIDATED BALANCE SHEET — ALLIANCE & LEICESTER	2008
	(€ million)

Assets
Cash and balances at central banks		1,630
Trading assets		—
Derivative financial instruments		3,019
Financial assets designated at fair value		66
Loans and advances to banks		1,301
Loans and advances to customers		53,965
Available-for-sale securities		1,741
Held-to-maturity securities		—
Loan and receivable securities		14,961
Macro hedge of interest rate risk		749
Intangible assets		18
Property, plant and equipment		234
Operating lease assets		365
Current tax assets		18
Deferred tax assets		657
Other assets		272
Retirement benefit obligations		4
Total assets		79,001
Liabilities
Deposits by banks		12,090
Deposits by customers		41,748
Derivative financial instruments		1,609
Financial liabilities designated at fair value		764
Debt securities in issue		18,349
Subordinated liabilities		1,508
Other liabilities		662
Provisions		36
Current tax liabilities		1
Deferred tax liabilities		292
Retirement benefit obligations		22
Total liabilities		77,081

F-204


CONSOLIDATED BALANCE SHEET — ALLIANCE & LEICESTER	2008
	(€ million)
Equity
Innovative tier 1		327
Preference shares		309
Minority interest		—

Share capital		344
Share premium account		760

Capital redemption reserve		94
Reserve for share based payments		—
Available-for-sale reserve		(308	)
Cash flow hedging reserve		172
Retained earnings		220
Total ordinary shareholders’ equity		1,284
Total liabilities and equity		79,001

55.9

Acquisition of Sovereign Bancorp, Inc (“Sovereign”)

On May 31, 2006, Santander acquired shares of common stock of Sovereign equal to 19.8% of Sovereign’s outstanding shares after giving effect to such purchase. The purchase price was $27 per share ($25.65 post-stock dividend), for an aggregate purchase price of $2.4 billion and generated goodwill of $760 million.

Under the terms of the definitive transaction agreement, which was unanimously approved by the non-Santander directors of Sovereign and by the Executive Committee of Santander, Sovereign shareholders will receive 0.2924 Banco Santander American Depository Shares (ADSs) for every 1 ordinary Sovereign share they own (or 1 Banco Santander ADS for every 3.42 Sovereign shares). Based on the closing price of Santander ADSs on Friday, October 10, 2008, the transaction had an aggregate value of approximately USD 1,900 million (€1,400 million), or USD 3.81 per share, and met Santander’s criteria for acquisitions, both strategically, by significantly enhancing the geographical diversification of the Group, and financially, with a projected net profit for Sovereign of USD 750 million in 2011.

We present below the summarized audited balance sheet of Sovereign under U.S. GAAP as of December 31, 2008, 2007 and 2006 and audited income statements for the fiscal years ended December 31, 2008, 2007 and 2006.


CONSOLIDATED BALANCE SHEET — SOVEREIGN BANCORP, INC.	2008		2007		2006
	(Thousands of euros)
Assets
Cash and amounts due from depository institutions		2,697,796		2,126,737		1,369,869
Investment securities available for sale		6,683,437		9,470,720		10,535,025
Investment securities held to maturity		—		—		—
Other investments		516,470		815,532		761,588
Net loans held for investment		39,017,474		38,395,880		41,386,215
Loans held for sale		235,203		372,094		5,779,743
Premises and equipment		395,308		381,993		459,914
Accrued interest receivable		180,795		238,118		321,109
Goodwill		2,465,676		2,327,455		3,800,444
Core deposits and other intangibles		192,909		252,779		378,451
Bank owned life insurance		1,327,648		1,218,734		1,309,964
Other assets		1,682,605		1,968,326		1,962,863
Total assets		55,395,321		57,568,369		68,065,185

Liabilities
Deposits and other customer accounts		34,805,327		33,907,958		39,775,667
Borrowings and other debt obligations		14,957,407		17,747,491		20,387,029
Advance payments by borrowers for taxes and insurance		66,986		56,444		74,443
Other liabilities		1,437,789		1,007,108		1,145,598
Total liabilities		51,267,510		52,719,001		61,382,737

Minority interest-preferred securities of subsidiaries		106,317		99,470		118,743

F-205


CONSOLIDATED BALANCE SHEET — SOVEREIGN BANCORP, INC.	2008			2007			2006
	(Thousands of euros)
Stockholders’ Equity
Preferred stock		140,436			132,766			148,402
Common stock		5,546,289			4,276,593			4,694,974
Warrants and employee stock options issued		251,902			236,645			260,737
Unallocated common stock held by Employee Stock Ownership Plan		—			—			(14,441	)
Treasury stock		(6,739	)		(13,486	)		(37,227	)
Accumulated other comprehensive loss		(564,643	)		(221,543	)		(18,790	)
Retained earnings		(1,345,751	)		338,923			1,530,049
Total Stockholders’ Equity		4,021,495			4,749,898			6,563,705
Total Liabilities and Stockholders’ Equity		55,395,321			57,568,369			68,065,185


CONSOLIDATED INCOME STATEMENT — SOVEREIGN BANCORP, INC.	2008			2007			2006
	(Thousands of euros)
Interest income		2,679,882			3,402,988			3,451,424
Interest expense		(1,379,745	)		(2,040,682	)		(1,998,269	)
Provision for credit losses		(622,297	)		(297,958	)		(386,483	)
Net interest income after provision for credit losses		677,840			1,064,347			1,066,672
Fees and other income		434,746			387,895			476,689
Net (loss)/gain on investment securities		(994,022	)		(128,888	)		(248,870	)
Non-interest income		(559,277	)		259,008			227,819
General and administrative expenses		(1,052,924	)		(983,595	)		(1,029,099	)
Other expenses		(181,561	)		(1,370,037	)		(250,130	)
Income before income taxes		(1,115,922	)		(1,030,277	)		15,262
Income tax benefit/(provision)		(494,269	)		44,179			93,960
Net income		(1,610,191	)		(986,098	)		109,222

F-206

Exhibit I

Subsidiaries of Banco Santander, S.A. (1)


												Millions of Euros (a)
								% of							Net Profit			Amount of
		% of Ownership Held by the Bank						Voting				Capital and			(Loss) for the			Ownership
Entity	Location	Direct			Indirect			Rights (k)			Line of Business	Reserves			Year			Interest
A & L CF (Guernsey) Limited	Guernsey		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF (Jersey) Limited	Jersey		0.00	%		100.00	%		100.00	%	LEASING		81			2			80
A & L CF (Jersey) No.2 Limited	Jersey		0.00	%		100.00	%		100.00	%	LEASING		84			3			79
A & L CF December (1) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		9			2			0
A & L CF December (10) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		33			0			30
A & L CF December (11) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		(2	)		13			10
A & L CF December (2) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			1			0
A & L CF June (1) Limited (e)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		2			1			1
A & L CF June (2) Limited (e)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		1			0			0
A & L CF June (3) Limited (e)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		(1	)		0			0
A & L CF June (4) Limited (e)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF June (5) Limited (e)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF June (6) Limited (e)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF June (7) Limited (e)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF June (8) Limited (e)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF March (1) Limited (d)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		(3	)		1			0
A & L CF March (3) Limited (d)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF March (4) Limited (d)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		4			0			2
A & L CF March (5) Limited (d)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		(1	)		1			0
A & L CF March (6) Limited (d)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		(1	)		0			0
A & L CF March (7) Limited (d)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF March (8) Limited (d)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF March (9) Limited (d)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF September (1) Limited (f)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		1			1			0
A & L CF September (2) Limited (f)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF September (3) Limited (f)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
A & L CF September (4) Limited (f)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			(3	)		0
A & L CF September (5) Limited (f)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		2			0			0
A & L Direct Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
A & L Insurance Services plc	United Kingdom		0.00	%		100.00	%		100.00	%	INSURANCE		0			0			0
A & L Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
A N (123) plc	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		897			41			935
Abbey Business Services (India) Private Limited (d)	India		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		0			0			0
Abbey Covered Bonds (Holdings) Limited	United Kingdom		—			(b)			—		FINANCE		0			0			0
Abbey Covered Bonds (LM) Limited	United Kingdom		—			(b)			—		FINANCE		0			0			0
Abbey Covered Bonds LLP	United Kingdom		—			(b)			—		FINANCE		106			(617	)		0
Abbey National (America) Holdings Inc.	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		33			0			33
Abbey National (America) Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		33			0			25
Abbey National (CF Trustee) Limited (d)	United Kingdom		0.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY		0			0			0
Abbey National (Gibraltar) Limited	Gibraltar		0.00	%		100.00	%		100.00	%	BROKER-DEALER		5			0			5

F-207


												Millions of Euros (a)
								% of							Net Profit			Amount of
		% of Ownership Held by the Bank						Voting				Capital and			(Loss) for the			Ownership
Entity	Location	Direct			Indirect			Rights (k)			Line of Business	Reserves			Year			Interest
Abbey National (Holdings) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		20			0			17
Abbey National Alpha Investments (d)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		47			0			1
Abbey National American Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		299			14			266
Abbey National Baker Street Investments	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		130			0			4
Abbey National Beta Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		116			5			89
Abbey National Business Asset Leasing Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
Abbey National Business Cashflow Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FACTORING		4			0			5
Abbey National Business Equipment Leasing Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			1			6
Abbey National Business Office Equipment Leasing Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		5			0			0
Abbey National Business Sales Aid Leasing Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		1			0			0
Abbey National Business Vendor Plan Leasing Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
Abbey National Capital LP I	United States		—			(b)			—		FINANCE		0			0			0
Abbey National Charitable Trust Limited	United Kingdom		0.00	%		100.00	%		100.00	%	CHARITABLE SERVICES		0			0			0
Abbey National Financial Investments 3 B.V.	Netherlands		0.00	%		100.00	%		100.00	%	FINANCE		3			2			1
Abbey National Financial Investments 4 B.V.	Netherlands		0.00	%		100.00	%		100.00	%	FINANCE		266			12			263
Abbey National Funding plc	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Abbey National General Insurance Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%	ADVISORY SERVICES		(40	)		0			0
Abbey National 1986 Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		6			0			5
Abbey National Global Investments	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Abbey National GP (Jersey) Limited	Jersey		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Abbey National Group Pension Schemes Trustees Limited (d)	United Kingdom		0.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY		0			0			0
Abbey National Guarantee Company	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		4			0			3
Abbey National Homes Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		(38	)		(2	)		0
Abbey National International Limited	Jersey		0.00	%		100.00	%		100.00	%	BANKING		244			30			157
Abbey National Investments	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		129			5			112
Abbey National Investments Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		(13	)		(5	)		0
Abbey National Jersey International Limited	Jersey		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		223			2			194
Abbey National Legacy Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		146			(5	)		157
Abbey National Legacy Leasing Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		113			458			522
Abbey National Legacy Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		269			37			314
Abbey National Mortgage Finance plc	United Kingdom		0.00	%		100.00	%		100.00	%	MORTGAGE LOAN COMPANY		0			0			0
Abbey National Nominees Limited	United Kingdom		0.00	%		100.00	%		100.00	%	BROKER-DEALER		0			0			0
Abbey National North America Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		0			0			0
Abbey National North America LLC	United States		0.00	%		100.00	%		100.00	%	FINANCE		0			1			0
Abbey National Offshore Holdings Limited	Jersey		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		195			13			203
Abbey National Pension (Escrow Services) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PENSION FUND MANAGEMENT COMPANY		9			4			0
Abbey National PEP & ISA Managers Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FUND AND PORTFOLIO MANAGEMENT		40			2			39
Abbey National Personal Pensions Trustee Limited	United Kingdom		0.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY		0			0			0
Abbey National plc	United Kingdom		100.00	%		0.00	%		100.00	%	BANKING		3,733			1,394			13,064
Abbey National PLP (UK) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Abbey National Properties (2) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		(2	)		0			0

F-208


												Millions of Euros (a)
								% of							Net Profit			Amount of
		% of Ownership Held by the Bank						Voting				Capital and			(Loss) for the			Ownership
Entity	Location	Direct			Indirect			Rights (k)			Line of Business	Reserves			Year			Interest
Abbey National Property Investments	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		320			23			145
Abbey National Property Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PROPERTY		(14	)		0			0
Abbey National Secretariat Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FUND AND PORTFOLIO MANAGEMENT		0			0			0
Abbey National Securities Inc.	United States		0.00	%		100.00	%		100.00	%	BROKER-DEALER		44			(3	)		33
Abbey National September Leasing (3) Limited (f)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		(8	)		0			0
Abbey National Shelf Co. (4) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	INACTIVE		0			0			0
Abbey National Sterling Capital plc	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		3			0			0
Abbey National Treasury International (IOM) Limited	Isle of Man		0.00	%		100.00	%		100.00	%	BANKING		8			0			7
Abbey National Treasury Investments	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		272			14			193
Abbey National Treasury Services (Transport Holdings) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		0			0			0
Abbey National Treasury Services Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		863			23			787
Abbey National Treasury Services Overseas Holdings	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		1,148			42			1,069
Abbey National Treasury Services plc	United Kingdom		0.00	%		100.00	%		100.00	%	BANKING		2,871			499			2,991
Abbey National UK Investments	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		834			38			636
Abbey Stockbrokers (Nominees) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	BROKER-DEALER		0			0			0
Abbey Stockbrokers Limited	United Kingdom		0.00	%		100.00	%		100.00	%	BROKER-DEALER		6			0			7
ABN AMRO Administradora de Cartões de Crédito Ltda.	Brazil		0.00	%		97.93	%		100.00	%	CARDS		285			13			277
ABN AMRO Advisory Services S.A.	Brazil		0.00	%		97.93	%		100.00	%	ADVISORY SERVICES		0			0			1
ABN AMRO Arrendamento Mercantil S.A.	Brazil		0.00	%		97.93	%		100.00	%	LEASING		172			9			169
ABN AMRO Asset Management Distribuidora de Títulos e Valores Mobiliários S.A.	Brazil		0.00	%		100.00	%		100.00	%	ASSET MANAGEMENT		13			11			28
ABN AMRO Brasil dois Participações S.A.	Brazil		0.00	%		97.93	%		100.00	%	HOLDING COMPANY		42			63			240
ABN AMRO Brasil Partipações e Investimentos S.A.	Brazil		0.00	%		97.93	%		100.00	%	HOLDING COMPANY		5			0			5
ABN AMRO Real Administradora de Consórcio Ltda.	Brazil		0.00	%		97.93	%		100.00	%	SERVICES		7			9			8
ABN AMRO Real Corretora de Câmbio e Valores Mobiliários S.A.	Brazil		0.00	%		97.74	%		100.00	%	BROKER-DEALER		12			2			13
ABN AMRO Securities (Brasil) Corretora de Valores Mobiliários S.A.	Brazil		0.00	%		97.93	%		100.00	%	BROKER-DEALER		20			0			19
Acacia Instalaciones Fotovoltáicas, S.L.	Spain		0.00	%		100.00	%		100.00	%	ELECTRICITY		1			(1	)		0
Administración de Bancos Latinoamericanos Santander, S.L.	Spain		24.11	%		75.89	%		100.00	%	HOLDING COMPANY		503			25			156
AEH Purchasing, Ltd.	Ireland		—			(b)			—		SECURITISATION		0			0			0
Afisa S.A.	Chile		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY		6			0			2
Agencia de Seguros Santander, Ltda.	Colombia		0.00	%		100.00	%		100.00	%	INSURANCE		1			0			2
Agrícola Tabaibal, S.A.	Spain		0.00	%		66.60	%		100.00	%	AGRICULTURE AND LIVESTOCK		0			0			0
Agropecuaria Tapirapé S.A.	Brazil		0.00	%		97.02	%		99.07	%	AGRICULTURE AND LIVESTOCK		2			0			0
AKB Marketing Services Sp. Z.o.o.	Poland		0.00	%		100.00	%		100.00	%	MARKETING		5			0			0
Aktua Soluciones Financieras, S.A.	Spain		0.00	%		89.78	%		100.00	%	ELECTRICITY		1			0			0
Alcaidesa Golf, S.L.	Spain		0.00	%		44.90	%		50.01	%	SPORTS OPERATIONS		6			(2	)		0

F-209


												Millions of Euros (a)
								% of							Net Profit			Amount of
		% of Ownership Held by the Bank						Voting				Capital and			(Loss) for the			Ownership
Entity	Location	Direct			Indirect			Rights (k)			Line of Business	Reserves			Year			Interest
Alcaidesa Holding, S.A. (consolidated)	Spain		0.00	%		44.90	%		50.01	%	PROPERTY		77			(9	)		28
Alcaidesa Inmobiliaria, S.A.	Spain		0.00	%		44.90	%		50.01	%	PROPERTY		68			(9	)		15
Alcaidesa Servicios, S.A.	Spain		0.00	%		44.90	%		50.01	%	SERVICES		5			0			1
Alce Tenedora, S.L.	Spain		99.99	%		0.01	%		100.00	%	SECURITIES INVESTMENT		(9	)		0			0
ALCF Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alhambra 2000, S.L.	Spain		0.00	%		89.78	%		100.00	%	VEHICLE CLEANING		3			0			3
Aljarafe Golf, S.A.	Spain		0.00	%		80.28	%		89.41	%	PROPERTY		14			0			1
Aljardi SGPS, Lda.	Portugal		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		1,661			21			1,148
Alliance & Leicester (Europe) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance & Leicester (Holdings) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		0			0			0
Alliance & Leicester (Isle of Man) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	BANKING		5			0			5
Alliance & Leicester (Jersey) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		8			0			0
Alliance & Leicester Cash Solutions Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		(21	)		0			0
Alliance & Leicester Commercial Bank plc	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		23			0			23
Alliance & Leicester Commercial Finance (Holdings) plc	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		41			0			72
Alliance & Leicester Commercial Finance plc	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		122			(47	)		152
Alliance & Leicester Covered Bonds LLP	United Kingdom		—			(b)			—		FINANCE		0			0			0
Alliance & Leicester Direct Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance & Leicester Employee Share Scheme Trustees Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance & Leicester Equity Investments (Guarantee) Limited	United Kingdom		—			(b)			—		FINANCE		0			0			0
Alliance & Leicester Estate Agents (Holdings) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		0			0			0
Alliance & Leicester Estate Agents (Mortgage & Finance) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance & Leicester Estates Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PROPERTY		5			0			0
Alliance & Leicester Finance Company Limited	Cayman Islands		0.00	%		100.00	%		100.00	%	FINANCE		215			9			167
Alliance & Leicester Financing plc	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		7			0			6
Alliance & Leicester Independent Financial Advisers Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance & Leicester International Holdings Limited	Isle of Man		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		0			0			27
Alliance & Leicester International Limited	Isle of Man		0.00	%		100.00	%		100.00	%	BANKING		181			8			27
Alliance & Leicester Investment (Derivatives) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance & Leicester Investment (Derivatives No 3) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		17			0			15
Alliance & Leicester Investment (No 3) LLP	United Kingdom		—			(b)			—		FINANCE		21			1			0
Alliance & Leicester Investment (No 4) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		11			1			10
Alliance & Leicester Investments (Derivatives No.2) Limited	Jersey		0.00	%		100.00	%		100.00	%	FINANCE		5			0			5
Alliance & Leicester Investments (Jersey) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance & Leicester Investments (No 2) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		522			20			237
Alliance & Leicester Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		601			24			419

F-210


												Millions of Euros (a)
								% of							Net Profit			Amount of
		% of Ownership Held by the Bank						Voting				Capital and			(Loss) for the			Ownership
Entity	Location	Direct			Indirect			Rights (k)			Line of Business	Reserves			Year			Interest
Alliance & Leicester LM Holdings Limited	United Kingdom		—			(b)			—		FINANCE		0			0			0
Alliance & Leicester Mortgage Loans Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance & Leicester North America	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance & Leicester Personal Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		112			(166	)		42
Alliance & Leicester plc	United Kingdom		100.00	%		0.00	%		100.00	%	BANKING		1,838			(326	)		1,330
Alliance & Leicester Print Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%	SERVICES		2			1			0
Alliance & Leicester QUEST Trustee Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance & Leicester Share Incentive Plan Trustees Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance & Leicester Share Ownership Trustee Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance & Leicester Syndicated Loans Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance & Leicester Trade Services Limited	Hong Kong		0.00	%		100.00	%		100.00	%	SERVICES		0			0			0
Alliance & Leicester Unit Trust Managers Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FUND AND PORTFOLIO MANAGEMENT		5			3			5
Alliance Bank (UK) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance Bank Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance Business Bank Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance Business Banking Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance Business Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance Cash Solutions Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance Commercial Bank Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance Commercial Banking Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance Corporate Banking Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance Corporate Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		9			0			0
Alliance Estate Agents Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PROPERTY		0			0			0
Alliance Group Public Limited Company	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance Life Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Alliance Mutual plc	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Almacenadora Serfin, S.A. De C.V.	Mexico		0.00	%		73.89	%		98.58	%	WAREHOUSING		0			0			1
Almacenadora Somex, S.A. De C.V.	Mexico		0.00	%		72.88	%		97.24	%	WAREHOUSING		6			1			1
Altamira Funding LLC.	United States		—			(b)			—		SECURITISATION		0			0			0
Altamira Santander Real Estate, S.A.	Spain		93.62	%		6.38	%		100.00	%	PROPERTY		(63	)		631			45
Altec Brasil S.A.	Brazil		0.00	%		100.00	%		100.00	%	SERVICES		12			0			22
Altec S.A.	Chile		0.00	%		100.00	%		100.00	%	IT SERVICES		8			1			17
América Latina Tecnología de México, S.A. De C.V.	Mexico		100.00	%		0.00	%		100.00	%	IT SERVICES		54			10			43
América Latina Tecnología S.A.	Argentina		87.42	%		12.58	%		100.00	%	HOLDING COMPANY		2			0			2
AN Structured Issues Limited	Jersey		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Andaluza de Inversiones, S.A.	Spain		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		41			1			27
ANDSH Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		2			0			2
ANFP (US) LLC	United States		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
ANITCO Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		0			0			0
Aquanima Brasil Ltda.	Brazil		0.00	%		99.43	%		100.00	%	e-COMMERCE		0			0			0
Aquanima Chile S.A.	Chile		0.00	%		99.43	%		100.00	%	e-COMMERCE		0			0			0
Aquanima México S. de R.L. de C.V.	Mexico		0.00	%		99.43	%		100.00	%	e-COMMERCE		1			1			1

F-211


												Millions of Euros (a)
								% of						Net Profit			Amount of
		% of Ownership Held by the Bank						Voting				Capital and		(Loss) for the			Ownership
Entity	Location	Direct			Indirect			Rights (k)			Line of Business	Reserves		Year			Interest
Aquanima S.A.	Argentina		0.00	%		99.43	%		100.00	%	SERVICES		0		0			0
Argenline, S.A.	Uruguay		0.00	%		100.00	%		100.00	%	FINANCE		0		0			0
Asesora de Titulización, S.A., S.G.F.T.	Spain		70.00	%		29.60	%		100.00	%	ADVISORY SERVICES		2		0			2
Asesoría Estratega, S.C.	Mexico		0.00	%		70.00	%		100.00	%	SERVICES		0		0			0
Aurum, S.A.	Chile		0.72	%		99.28	%		100.00	%	HOLDING COMPANY		2		0			56
Ausant Holding Gesellschaft m.b.H.	Austria		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		9		0			10
Aviación Real, A.I.E.	Spain		99.99	%		0.01	%		100.00	%	LEASING		11		1			11
Aviación Regional Cántabra, A.I.E.	Spain		73.58	%		0.00	%		73.58	%	LEASING		28		1			22
Aymoré Crédito, Financiamento e Investimento S.A.	Brazil		0.00	%		97.93	%		100.00	%	FINANCE		225		(33	)		229
Bajondillo, S.A.	Spain		0.00	%		89.78	%		100.00	%	PROPERTY		0		0			0
Baker Street Risk and Insurance (Guernsey) Limited (e)	Guernsey		0.00	%		100.00	%		100.00	%	INSURANCE BROKERAGE		11		2			2
BANBY PRO S.C.I.	France		0.00	%		90.00	%		100.00	%	PROPERTY		37		(1	)		33
BANBY S.A.S.	France		0.00	%		90.00	%		90.00	%	PROPERTY		38		0			34
Banco ABN AMRO Real S.A.	Brazil		0.00	%		97.93	%		100.00	%	BANKING		3,502		153			11,231
Banco Alicantino de Comercio, S.A.	Spain		0.00	%		89.78	%		100.00	%	BANKING		9		0			8
Banco Banif, S.A.	Spain		100.00	%		0.00	%		100.00	%	BANKING		243		22			84
Banco Comercial e de Investimento Sudameris S.A.	Brazil		0.00	%		97.74	%		99.80	%	BANKING		563		57			547
Banco de Albacete, S.A.	Spain		100.00	%		0.00	%		100.00	%	BANKING		12		0			9
Banco de Asunción, S.A.	Paraguay		0.00	%		99.33	%		99.33	%	BANKING		1		0			27
Banco de Pernambuco S.A.	Brazil		0.00	%		97.93	%		100.00	%	BANKING		1,058		74			1,036
Banco de Venezuela, S.A., Banco Universal (j)	Venezuela		96.78	%		1.64	%		98.42	%	BANKING		488		352			144
Banco Español de Crédito, S.A.	Spain		88.71	%		1.07	%		89.78	%	BANKING		4,333		671			1,295
Banco Madesant — Sociedade Unipessoal, S.A.	Portugal		0.00	%		100.00	%		100.00	%	BANKING		1,277		6			1,159
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander	Mexico		0.00	%		74.95	%		99.99	%	BANKING		3,127		404			1,560
Banco Santander (Panamá), S.A.	Panama		0.00	%		100.00	%		100.00	%	BANKING		9		0			58
Banco Santander (Suisse) SA	Switzerland		0.00	%		100.00	%		100.00	%	BANKING		138		40			15
Banco Santander Bahamas International Limited	Bahamas		0.00	%		100.00	%		100.00	%	BANKING		1,035		126			785
Banco Santander — Chile	Chile		0.00	%		76.73	%		76.91	%	BANKING		1,520		370			945
Banco Santander Colombia, S.A.	Colombia		0.00	%		97.85	%		97.85	%	BANKING		164		14			479
Banco Santander Consumer Portugal S.A.	Portugal		0.00	%		100.00	%		100.00	%	BANKING		108		11			237
Banco Santander International	United States		95.88	%		4.12	%		100.00	%	BANKING		224		40			98
Banco Santander Perú S.A.	Peru		99.00	%		1.00	%		100.00	%	BANKING		21		(3	)		22
Banco Santander Puerto Rico	Puerto Rico		0.00	%		90.59	%		100.00	%	BANKING		451		(2	)		364
Banco Santander Río S.A.	Argentina		8.23	%		91.07	%		99.30	%	BANKING		337		72			285
Banco Santander S.A.	Brazil		0.00	%		97.93	%		97.93	%	BANKING		14,716		327			9,212
Banco Santander Totta, S.A.	Portugal		0.00	%		99.72	%		99.86	%	BANKING		1,554		355			2,343
Banco Santander, S.A.	Uruguay		90.93	%		9.07	%		100.00	%	BANKING		206		(27	)		227
Banco Totta de Angola, SARL	Angola		0.00	%		99.71	%		99.99	%	BANKING		70		20			21
Banesto Banca Privada Gestión, S.A. S.G.I.I.C.	Spain		0.00	%		89.78	%		100.00	%	FUND MANAGEMENT COMPANY		2		0			0
Banesto Banco de Emisiones, S.A.	Spain		0.00	%		89.78	%		100.00	%	BANKING		100		1			87
Banesto Bolsa, S.A., Sdad. Valores y Bolsa	Spain		0.00	%		89.78	%		100.00	%	BROKER-DEALER		103		9			31
Banesto Factoring, S.A. Establecimiento Financiero de Crédito	Spain		0.00	%		89.78	%		100.00	%	FACTORING		116		10			106

F-212


												Millions of Euros (a)
								% of						Net Profit			Amount of
		% of Ownership Held by the Bank						Voting				Capital and		(Loss) for the			Ownership
Entity	Location	Direct			Indirect			Rights (k)			Line of Business	Reserves		Year			Interest
Banesto Financial Products, Plc.	Ireland		0.00	%		89.78	%		100.00	%	FINANCE		0		0			0
Banesto Renting, S.A.	Spain		0.00	%		89.78	%		100.00	%	FINANCE		10		2			2
Banesto Securities, Inc.	United States		0.00	%		89.78	%		100.00	%	FINANCE		3		1			2
Banesto, S.A.	Spain		0.00	%		89.78	%		100.00	%	FINANCE		0		0			0
Banif Gestión, S.A., S.G.I.I.C.	Spain		0.00	%		97.96	%		100.00	%	FUND MANAGEMENT COMPANY		25		1			15
Banif Inmobiliario, S.A., Sole-Shareholder Company	Spain		0.00	%		100.00	%		100.00	%	PROPERTY		2		1			0
Bansa Santander S.A.	Chile		0.00	%		99.99	%		99.99	%	PROPERTY		2		0			19
Bansalease, S.A., E.F.C.	Spain		100.00	%		0.00	%		100.00	%	LEASING		95		(9	)		67
Bansamex, S.A.	Spain		50.00	%		0.00	%		50.00	%	CARDS		4		1			1
Bansander, S.A., Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%	SECURITIES INVESTMENT		0		0			0
Bel Canto SICAV Erodiade	Luxembourg		0.00	%		100.00	%		100.00	%	OPEN-END INVESTMENT COMPANY		1		0			1
Beta Cero, S.A.	Spain		0.00	%		79.01	%		88.00	%	FINANCE		0		0			0
Billpay Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0		0			0
Bracken Securities Holdings Limited	United Kingdom		—			(b)			—		FINANCE		0		0			0
Bracken Securities Option Limited	United Kingdom		—			(b)			—		FINANCE		0		0			0
Bracken Securities plc	United Kingdom		—			(b)			—		FINANCE		0		0			0
Bradford & Bingley International Limited	Isle of Man		0.00	%		100.00	%		100.00	%	BANKING		201		26			221
Brazil Foreign Diversified Payment Rights Finance Company	Cayman Islands		—			(b)			—		SECURITISATION		0		0			0
Brettwood Limited	Jersey		0.00	%		100.00	%		100.00	%	SERVICES		0		0			0
BRS Investments S.A.	Argentina		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		23		3			77
BSN — Banco Santander de Negocios Portugal, S.A.	Portugal		0.00	%		99.86	%		100.00	%	BANKING		83		8			28
BST International Bank, Inc.	Puerto Rico		0.00	%		99.72	%		100.00	%	BANKING		263		18			4
Buhal Leasing, Ltd.	United Kingdom		100.00	%		0.00	%		100.00	%	LEASING		0		0			0
CA Premier Banking Limited	United Kingdom		0.00	%		100.00	%		100.00	%	BANKING		4		0			4
Caetra Iberia, S.L., Sole-Shareholder Company	Spain		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		4		0			3
Caja de Emisiones con Garantía de Anualidades Debidas por el Estado, S.A.	Spain		0.00	%		56.45	%		62.87	%	FINANCE		0		0			0
Cántabra de Inversiones, S.A.	Spain		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		126		(73	)		218
Cantabric Financing LLC.	United States		—			(b)			—		SECURITISATION		0		0			0
Cantabric Financing, Plc.	Ireland		—			(b)			—		SECURITISATION		0		0			0
Cántabro Catalana de Inversiones, S.A.	Spain		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		181		41			140
Capital Riesgo Global, SCR de Régimen Simplificado, S.A.	Spain		88.19	%		11.81	%		100.00	%	VENTURE CAPITAL COMPANY		505		50			421
Capital Variable SICAV, S.A.	Spain		0.00	%		93.90	%		95.86	%	OPEN-END INVESTMENT COMPANY		7		0			3
Carfax (Guernsey) Limited	Guernsey		0.00	%		100.00	%		100.00	%	INSURANCE BROKERAGE		22		1			21
Carlton Park Developments Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PROPERTY		0		0			0
Carlton Park Properties Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PROPERTY		0		0			0
Carlton Park Property (Holdings) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		0		0			0
Carpe Diem Salud, S.L.	Spain		100.00	%		0.00	%		100.00	%	SECURITIES INVESTMENT		0		0			0
Cartera Mobiliaria, S.A., SICAV	Spain		0.00	%		79.29	%		92.09	%	SECURITIES INVESTMENT		613		(11	)		221
Casa de Bolsa Santander, S.A. de C.V., Grupo Financiero Santander	Mexico		0.00	%		74.93	%		99.97	%	BROKER-DEALER		32		16			24
Cater Allen Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		110		2			90
Cater Allen International Limited	United Kingdom		0.00	%		100.00	%		100.00	%	BROKER-DEALER		298		113			124

F-213


												Millions of Euros (a)
								% of							Net Profit			Amount of
		% of Ownership Held by the Bank						Voting				Capital and			(Loss) for the			Ownership
Entity	Location	Direct			Indirect			Rights (k)			Line of Business	Reserves			Year			Interest
Cater Allen Limited	United Kingdom		0.00	%		100.00	%		100.00	%	BANKING		204			25			234
Cater Allen Lloyd’s Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		(10	)		0			0
Cater Allen Pensions Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PENSION FUND MANAGEMENT COMPANY		0			0			0
Cater Allen Syndicate Management Limited	United Kingdom		0.00	%		100.00	%		100.00	%	ADVISORY SERVICES		2			0			0
Cater Allen Trust Company (Jersey) Limited	Jersey		0.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY		0			0			0
Cater Tyndall Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		20			9			140
Catmoll, S.L.	Spain		100.00	%		0.00	%		100.00	%	CONCESSION HOLDER		8			1			6
Central Inmobiliaria de Santiago, S.A. de C.V.	Mexico		100.00	%		0.00	%		100.00	%	PROPERTY MANAGEMENT		107			0			112
Certidesa, S.L.	Spain		0.00	%		100.00	%		100.00	%	LEASE OF AIRCRAFT		(6	)		(7	)		3
Chatsworth Securities (LM) Holdings Limited	United Kingdom		—			(b)			—		FINANCE		0			0			0
Chatsworth Securities LLP	United Kingdom		—			(b)			—		FINANCE		0			0			0
Clínica Sear, S.A.	Spain		0.00	%		45.41	%		50.58	%	HEALTHCARE		5			0			1
Club Zaudin Golf, S.A.	Spain		0.00	%		76.34	%		95.11	%	SERVICES		15			0			13
Comercializadora Al-fin, S.A. de C.V.	Mexico		0.00	%		70.00	%		100.00	%	RETAIL TRADE		0			0			0
Companhia Real de Valores Distribuidora de Títulos e Valores Mobiliários S.A.	Brazil		0.00	%		97.93	%		100.00	%	ASSET MANAGEMENT		23			0			23
Corpoban, S.A.	Spain		0.00	%		89.78	%		100.00	%	SECURITIES INVESTMENT		73			3			67
Costa Canaria de Veneguera, S.A.	Spain		0.00	%		66.60	%		74.18	%	PROPERTY		13			0			9
Crawfall S.A.	Uruguay		100.00	%		0.00	%		100.00	%	SERVICES		5			(8	)		0
Credicenter Empreendimentos e Promoçôes Ltda.	Brazil		0.00	%		97.93	%		100.00	%	FINANCIAL SERVICES		85			10			80
Credisol, S.A.	Uruguay		0.00	%		100.00	%		100.00	%	CARDS		0			0			7
Crefisa, Inc.	Puerto Rico		100.00	%		0.00	%		100.00	%	FINANCE		295			1			243
Cruzeiro Factoring Sociedade de Fomento Comercial Ltda.	Brazil		0.00	%		97.93	%		100.00	%	FACTORING		36			3			34
Darep Limited	Ireland		0.00	%		100.00	%		100.00	%	REINSURANCE		4			1			4
Debt Management and Recovery Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%	COLLECTION AND PAYMENT SERVICES		0			0			0
Depósitos Portuarios, S.A.	Spain		0.00	%		89.78	%		100.00	%	SERVICES		0			0			0
Digital Procurement Holdings N.V.	Netherlands		0.00	%		99.43	%		100.00	%	HOLDING COMPANY		4			1			1
Diners Club Spain, S.A.	Spain		75.00	%		0.00	%		75.00	%	CARDS		9			2			9
Dirección Estratega, S.C.	Mexico		0.00	%		70.00	%		100.00	%	SERVICES		0			0			0
Diseño e Integración de Soluciones, S.A.	Spain		0.00	%		89.78	%		100.00	%	IT		3			0			1
Drive ABS GP LLC	United States		0.00	%		91.00	%		100.00	%	INACTIVE		0			0			0
Drive ABS LP	United States		0.00	%		91.00	%		100.00	%	INACTIVE		34			0			0
Drive Auto Receivables Trust 2005-2	United States		—			(b)			—		SECURITISATION		0			0			0
Drive Auto Receivables Trust 2005-3	United States		—			(b)			—		SECURITISATION		0			0			0
Drive Auto Receivables Trust 2006-1	United States		—			(b)			—		SECURITISATION		0			0			0
Drive Auto Receivables Trust 2006-2	United States		—			(b)			—		SECURITISATION		0			0			0
Drive Consumer GP LLC	United States		0.00	%		91.00	%		100.00	%	INACTIVE		0			0			0
Drive Consumer LP	United States		0.00	%		91.00	%		100.00	%	INACTIVE		25			0			25
Drive One LLC	United States		0.00	%		91.00	%		100.00	%	AUXILIARY		0			0			0
Drive Receivables Corp. 10	United States		0.00	%		91.00	%		100.00	%	SECURITISATION		0			0			0
Drive Receivables Corp. 11	United States		0.00	%		91.00	%		100.00	%	SECURITISATION		0			0			0
Drive Receivables Corp. 12	United States		0.00	%		91.00	%		100.00	%	SECURITISATION		0			0			0
Drive Receivables Corp. 9	United States		0.00	%		91.00	%		100.00	%	SECURITISATION		0			0			0
Drive Residual Holdings GP LLC	United States		0.00	%		91.00	%		100.00	%	HOLDING COMPANY		0			0			0

F-214


												Millions of Euros (a)
								% of							Net Profit			Amount of
		% of Ownership Held by the Bank						Voting				Capital and			(Loss) for the			Ownership
Entity	Location	Direct			Indirect			Rights (k)			Line of Business	Reserves			Year			Interest
Drive Residual Holdings LP	United States		0.00	%		91.00	%		100.00	%	AUXILIARY		0			0			0
Drive Trademark Holdings LP	United States		0.00	%		91.00	%		100.00	%	AUXILIARY		0			0			0
Drive VFC GP LLC	United States		0.00	%		91.00	%		100.00	%	INACTIVE		(55	)		196			0
Drive VFC LP	United States		0.00	%		91.00	%		100.00	%	INACTIVE		0			0			0
Drive Warehouse GP LLC	United States		0.00	%		91.00	%		100.00	%	HOLDING COMPANY		0			0			0
Drive Warehouse LP	United States		0.00	%		91.00	%		100.00	%	AUXILIARY		0			0			0
Duchess Parade Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		2			0			1
Dudebasa, S.A.	Spain		0.00	%		89.78	%		100.00	%	FINANCE		46			(14	)		22
Efearvi, S.A.	Spain		0.00	%		89.78	%		100.00	%	PROPERTY		0			0			0
Elerco, S.A.	Spain		0.00	%		89.78	%		100.00	%	LEASING		285			(23	)		125
Euro Alliance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Eurobank Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Eurogiro Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Evansgrove Limited (f)	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Fábricas Agrupadas de Muñecas de Onil, S.A. (consolidated) (g)	Spain		0.00	%		95.05	%		95.05	%	HOLDING COMPANY		12			(31	)		62
FFB — Participaçoes e Serviços, Sociedade Unipessoal, S.A.	Portugal		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		3,733			136			1,020
Fideicomiso 100740 SLPT	Mexico		0.00	%		74.95	%		100.00	%	FINANCE		36			7			23
Fideicomiso Financiero Río Personales I	Argentina		—			(b)			—		SECURITIES		6			1			0
Fideicomiso GFSSLPT Banca Serfín, S.A.	Mexico		0.00	%		74.95	%		100.00	%	FINANCE		34			6			20
Fideicomiso Super Letras Hipotecarias Clase I	Argentina		—			(b)			—		SECURITIES		2			0			0
Fideicomiso Super Letras Hipotecarias Clase II	Argentina		—			(b)			—		SECURITIES		3			0			0
Financiación Banesto 1, F.T.A.	Spain		—			(b)			—		SECURITISATION		0			0			0
Financiera Alcanza, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada	Mexico		0.00	%		70.00	%		100.00	%	FINANCE		18			(5	)		9
First National Motor Business Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
First National Motor Contracts Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		(1	)		0			0
First National Motor Facilities Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
First National Motor Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	ADVISORY SERVICES		0			0			0
First National Motor Leasing Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
First National Motor plc	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		(14	)		9			0
Fomento e Inversiones, S.A.	Spain		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		65			(30	)		17
Fondo de Titulización de Activos Santander 1	Spain		—			(b)			—		SECURITISATION		0			0			0
Fondo de Titulización de Activos Santander 2	Spain		—			(b)			—		SECURITISATION		0			0			0
Fondo de Titulización de Activos Santander Empresas 1	Spain		—			(b)			—		SECURITISATION		0			0			0
Fondo de Titulización de Activos Santander Empresas 2	Spain		—			(b)			—		SECURITISATION		0			0			0
Fondo de Titulización de Activos Santander Empresas 3	Spain		—			(b)			—		SECURITISATION		0			0			0
Fondo de Titulización de Activos Santander Empresas 4	Spain		—			(b)			—		SECURITISATION		0			0			0
Fondo de Titulización de Activos Santander Empresas 5	Spain		—			(b)			—		SECURITISATION		0			0			0

F-215


												Millions of Euros (a)
								% of							Net Profit			Amount of
		% of Ownership Held by the Bank						Voting				Capital and			(Loss) for the			Ownership
Entity	Location	Direct			Indirect			Rights (k)			Line of Business	Reserves			Year			Interest
Fondo de Titulización de Activos Santander Público 1	Spain		—			(b)			—		SECURITISATION		0			0			0
Fondo de Titulización Santander Financiación 1	Spain		—			(b)			—		SECURITISATION		0			0			0
Fondo de Titulización Santander Financiación 2	Spain		—			(b)			—		SECURITISATION		0			0			0
Fondo de Titulización Santander Financiación 3	Spain		—			(b)			—		SECURITISATION		0			0			0
Fondos Santander, S.A. Administradora de Fondos de Inversión	Uruguay		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY		0			0			1
Fonet Brasil S.A.	Brazil		0.00	%		49.93	%		50.98	%	SERVICES		5			0			3
Formación Integral, S.A.	Spain		0.00	%		89.78	%		100.00	%	TRAINING		1			0			1
Fortensky Trading, Ltd.	Ireland		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Fosse (Master Issuer) Holdings Limited	United Kingdom		—			(b)			—		FINANCE		0			0			0
Fosse Funding (No.1) Limited	United Kingdom		—			(b)			—		FINANCE		(2	)		(76	)		0
Fosse Holdings Limited (l)	United Kingdom		—			(b)			—		FINANCE		0			0			0
Fosse Master Issuer PLC	United Kingdom		—			(b)			—		FINANCE		(1	)		(1	)		0
Fosse Options No.1 Limited	United Kingdom		—			(b)			—		FINANCE		0			0			0
Fosse PECOH Limited	United Kingdom		—			(b)			—		FINANCE		0			0			0
Fosse Securities No.1 plc (l)	United Kingdom		—			(b)			—		FINANCE		0			0			0
Fosse Trustee Limited	Jersey		—			(b)			—		FINANCE		0			0			0
FTA Santander Consumer Spain Auto 06	Spain		—			(b)			—		SECURITISATION		0			0			0
FTA Santander Consumer Spain Auto 08-1	Spain		—			(b)			—		SECURITISATION		0			0			0
FTPYME Banesto 2 Fondo de Titulización de Activos	Spain		—			(b)			—		SECURITISATION		0			0			0
FTPYME Santander 2 Fondo de Titulización de Activos	Spain		—			(b)			—		SECURITISATION		0			0			0
Gamo Tenedora, S.L.	Spain		0.00	%		100.00	%		100.00	%	SERVICES		0			0			0
GE Money Bank GmbH	Germany		0.00	%		100.00	%		100.00	%	BANKING		188			(32	)		272
GE Money Services GmbH	Germany		0.00	%		100.00	%		100.00	%	SERVICES		2			1			0
Gedinver e Inmuebles, S.A.	Spain		0.00	%		89.78	%		100.00	%	FINANCE		6			0			6
General Electric Capital Deutschland GmbH	Germany		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		285			(6	)		165
Geoban UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%	SERVICES		0			0			0
Geoban, S.A.	Spain		99.99	%		0.01	%		100.00	%	SERVICES		17			1			24
Gesban Santander Servicios Profesionales Contable Limitada	Chile		0.00	%		100.00	%		100.00	%	INTERNET		0			0			0
Gesban Servicios Administrativos Globales, S.L.	Spain		99.99	%		0.01	%		100.00	%	SERVICES		0			0			1
Gescoban Soluciones, S.A.	Spain		0.00	%		89.78	%		100.00	%	FINANCE		3			2			1
Gestión de Actividades Tecnológicas, S.A.	Spain		99.98	%		0.02	%		100.00	%	SECURITIES INVESTMENT		(19	)		0			0
Gestión de Instalaciones Fotovoltáicas, S.L., Sole-Shareholder Company	Spain		0.00	%		100.00	%		100.00	%	ELECTRICITY		0			0			0
Gestión Industrial Hispamer, S.A.	Spain		99.99	%		0.01	%		100.00	%	SECURITIES INVESTMENT		(37	)		0			0
Gestión Santander, S.A. de C.V., Sociedad Operadora de Sociedades de Inversión, Grupo Financiero Santander	Mexico		0.00	%		74.96	%		100.00	%	FINANCE		20			6			0
Gestora de Procesos S.A., in liquidation (l)	Peru		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		3			(2	)		326
Gire, S.A.	Argentina		0.00	%		57.92	%		58.33	%	COLLECTION AND PAYMENT SERVICES		7			3			1
Giro Investments (Jersey) Limited	Jersey		0.00	%		100.00	%		100.00	%	FINANCE		163			6			144

F-216


												Millions of Euros (a)
								% of							Net Profit			Amount of
		% of Ownership Held by the Bank						Voting				Capital and			(Loss) for the			Ownership
Entity	Location	Direct			Indirect			Rights (k)			Line of Business	Reserves			Year			Interest
Giro Investments Limited	Cayman Islands		0.00	%		100.00	%		100.00	%	FINANCE		133			18			105
Girobank Carlton Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		106			17			106
Girobank Investments Ltd	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		4			0			0
Girobank Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Girobank Service Company Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Global Debt Management Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%	COLLECTION AND PAYMENT SERVICES		0			0			0
Golden Bar (Securitisation) S.r.l.	Italy		—			(b)			—		SECURITISATION		0			0			0
Golden Bar Securitization Programme I	Italy		—			(b)			—		SECURITISATION		0			0			0
Golden Bar Securitization Programme II	Italy		—			(b)			—		SECURITISATION		0			0			0
Golden Bar Securitization Programme III	Italy		—			(b)			—		SECURITISATION		0			0			0
Grupo Alcanza, S.A. de C.V.	Mexico		70.00	%		0.00	%		70.00	%	HOLDING COMPANY		19			(6	)		9
Grupo Empresarial Santander, S.L.	Spain		99.11	%		0.89	%		100.00	%	HOLDING COMPANY		3,155			149			3,770
Grupo Financiero Santander, S.A. de C.V.	Mexico		74.75	%		0.21	%		74.96	%	HOLDING COMPANY		3,255			443			1,759
Grupo Inmobiliario La Corporación Banesto, S.A.	Spain		0.00	%		89.78	%		100.00	%	SECURITIES INVESTMENT		12			(4	)		22
Guaranty Car, S.A., Sole-Shareholder Company	Spain		0.00	%		100.00	%		100.00	%	AUTOMOTIVE		3			0			0
Hansar Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		8			0			3
HBF Aluguer e Comercio de Viaturas, S.A.	Portugal		0.00	%		100.00	%		100.00	%	FULL-SERVICE LEASE		0			0			0
Hipotebansa EFC, S.A.	Spain		100.00	%		0.00	%		100.00	%	MORTGAGE LOAN COMPANY		47			1			36
Hipototta No. 1 FTC	Portugal		—			(b)			—		SECURITISATION		2			(1	)		0
Hipototta No. 1 plc	Ireland		—			(b)			—		SECURITISATION		(3	)		(1	)		0
Hipototta No. 2 FTC	Portugal		—			(b)			—		SECURITISATION		8			(3	)		0
Hipototta No. 2 plc	Ireland		—			(b)			—		SECURITISATION		(10	)		(3	)		0
Hipototta No. 3 FTC	Portugal		—			(b)			—		SECURITISATION		11			(5	)		0
Hipototta No. 3 plc	Ireland		—			(b)			—		SECURITISATION		(15	)		(4	)		0
Hipototta No. 4 FTC	Portugal		—			(b)			—		SECURITISATION		10			(4	)		0
Hipototta No. 4 plc	Ireland		—			(b)			—		SECURITISATION		(14	)		(4	)		0
Hipototta No. 5 FTC	Portugal		—			(b)			—		SECURITISATION		6			(1	)		0
Hipototta No. 5 plc	Ireland		—			(b)			—		SECURITISATION		(7	)		(1	)		0
Hipototta No. 6 FTC	Portugal		—			(b)			—		SECURITISATION		7			(1	)		0
Hipototta No. 6 plc	Ireland		—			(b)			—		SECURITISATION		(8	)		(1	)		0
Hipototta No. 7 FTC	Portugal		—			(b)			—		SECURITISATION		0			(1	)		0
Hipototta No. 7 plc	Ireland		—			(b)			—		SECURITISATION		(1	)		(1	)		0
Hipototta No. 8 FTC	Portugal		—			(b)			—		SECURITISATION		0			0			0
Hipototta No. 8 plc	Ireland		—			(b)			—		SECURITISATION		0			0			0
Hipototta No. 9 FTC	Portugal		—			(b)			—		SECURITISATION		0			0			0
Hipototta No. 9 plc	Ireland		—			(b)			—		SECURITISATION		0			0			0
Hispamer Renting, S.A.U.	Spain		0.00	%		100.00	%		100.00	%	FULL-SERVICE LEASE		13			0			1
Holbah II Limited	Bahamas		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		972			502			1,242
Holbah Limited	Bahamas		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		63			(31	)		0
Holmes Financing (Nº1) plc	United Kingdom		—			(b)			—		FINANCE		1			(1	)		0
Holmes Financing (Nº10) plc	United Kingdom		—			(b)			—		FINANCE		(18	)		19			0
Holmes Financing (Nº2) plc	United Kingdom		—			(b)			—		FINANCE		0			0			0
Holmes Financing (Nº3) plc	United Kingdom		—			(b)			—		FINANCE		0			0			0
Holmes Financing (Nº4) plc	United Kingdom		—			(b)			—		FINANCE		0			0			0
Holmes Financing (Nº5) plc	United Kingdom		—			(b)			—		FINANCE		0			0			0

F-217


												Millions of Euros (a)
								% of							Net Profit			Amount of
		% of Ownership Held by the Bank						Voting				Capital and			(Loss) for the			Ownership
Entity	Location	Direct			Indirect			Rights (k)			Line of Business	Reserves			Year			Interest
Holmes Financing (Nº6) plc	United Kingdom		—			(b)			—		FINANCE		0			0			0
Holmes Financing (Nº7) plc	United Kingdom		—			(b)			—		FINANCE		0			0			0
Holmes Financing (Nº8) plc	United Kingdom		—			(b)			—		FINANCE		1			(1	)		0
Holmes Financing (Nº9) plc	United Kingdom		—			(b)			—		FINANCE		0			0			0
Holmes Funding Limited	United Kingdom		—			(b)			—		FINANCE		119			(113	)		0
Holmes Holdings Limited	United Kingdom		—			(b)			—		HOLDING COMPANY		0			0			0
Holmes Master Issuer plc	United Kingdom		—			(b)			—		FINANCE		(11	)		299			0
Holmes Trustees Limited	United Kingdom		—			(b)			—		FINANCE		0			0			0
Holneth B.V.	Netherlands		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		43			78			10
Honeycomb SB Limited	United Kingdom		0.00	%		100.00	%		100.00	%	SERVICES		0			0			0
HRE Investment Holdings II-A S.à.r.l. (m)	Luxembourg		0.00	%		69.50	%		0.00	%	HOLDING COMPANY		0			0			4
HSH Delaware L.P. (c)	United States		0.00	%		69.20	%		0.00	%	HOLDING COMPANY		41			(14	)		69
Hualle, S.A.	Spain		0.00	%		89.78	%		100.00	%	SECURITIES INVESTMENT		47			35			5
Ibérica de Compras Corporativas, S.L.	Spain		91.63	%		7.80	%		100.00	%	e-COMMERCE		5			2			5
IEM (Holland) Aircraft Lease B.V.	Netherlands		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
IEM 757 Leasing I B.V.	Netherlands		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
IEM Airfinance B.V.	Netherlands		0.00	%		100.00	%		100.00	%	LEASING		(1	)		0			0
IEM Lease Aircraft B.V.	Netherlands		0.00	%		100.00	%		100.00	%	LEASING		0			0			0
Infraestructuras Americanas, S.L.	Spain		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		13			0			13
Ingeniería de Software Bancario, S.L.	Spain		100.00	%		0.00	%		100.00	%	IT SERVICES		61			8			76
Inmo Francia 2, S.A.	Spain		0.00	%		100.00	%		100.00	%	PROPERTY		37			0			37
Inmuebles B de V 1985 C.A.	Venezuela		0.00	%		60.38	%		100.00	%	PROPERTY MANAGEMENT		1			0			2
Instituto Santander Serfin, A.C.	Mexico		0.00	%		74.95	%		100.00	%	NOT-FOR-PROFIT INSTITUTE		1			0			0
Insurance Funding Solutions Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		(12	)		5			0
Integrated Securities Services, S.A.	Spain		0.00	%		100.00	%		100.00	%	SERVICES		1			0			1
Integritas (Canada) Trustee Corporation Ltd.	Canada		100.00	%		0.00	%		100.00	%	ASSET MANAGEMENT COMPANY		0			0			0
Integritas New Zealand Ltd.	New Zealand		0.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY		0			0			0
Integritas Trust SA	Switzerland		0.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY		2			1			0
Interbanca International Holding, S.A.	Belgium		0.10	%		99.90	%		100.00	%	HOLDING COMPANY		2			1			4
Interbanca S.p.A. (consolidated) (c)	Italy		0.00	%		99.99	%		99.99	%	BANKING		630			(10	)		1,000
Internacional Compañía de Seguros de Vida S.A.	Argentina		0.00	%		59.20	%		59.20	%	INSURANCE		19			3			10
Intursa, S.A.	Spain		0.00	%		89.78	%		100.00	%	HOSPITALITY		5			15			14
Inversiones ASP S.A. (m)	Chile		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		—			—			223
Inversiones AyS Uno Limitada (m)	Chile		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		—			—			127
Inversiones AyS Dos Limitada (m)	Chile		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		—			—			125
Inversiones AyS Tres Limitada (m)	Chile		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		—			—			226
Inversiones AyS Cuatro Limitada (m)	Chile		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		—			—			223
Inversiones Marítimas del Mediterráneo, S.A.	Spain		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		3			9			1
Inversiones Tesoreras SICAV, S.A.	Spain		0.00	%		100.00	%		100.00	%	OPEN-END INVESTMENT COMPANY		6			0			8
Isban DE GmbH	Germany		0.00	%		100.00	%		100.00	%	IT SERVICES		0			6			0
ISBAN PT — Engenheria e Software Bancário, S.A.	Portugal		0.00	%		99.93	%		100.00	%	IT SERVICES		1			0			0
Isban U.K., Ltd.	United Kingdom		0.00	%		100.00	%		100.00	%	IT SERVICES		3			0			0
Island Insurance Corporation	Puerto Rico		0.00	%		90.59	%		100.00	%	INSURANCE		4			0			4
Itasant Sociedade Gestora de Participações Sociais Sociedade Unipessoal, Lda.	Portugal		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		281			(28	)		92

F-218


												Millions of Euros (a)
								% of							Net Profit			Amount of
		% of Ownership Held by the Bank						Voting				Capital and			(Loss) for the			Ownership
Entity	Location	Direct			Indirect			Rights (k)			Line of Business	Reserves			Year			Interest
J.C. Flowers II-A L.P. (c)	Canada		0.00	%		69.90	%		4.43	%	HOLDING COMPANY		54			1			54
James Hay Administration Company Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FUND AND PORTFOLIO MANAGEMENT		13			2			9
James Hay Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		(6	)		1			194
James Hay Insurance Company Limited	Jersey		0.00	%		100.00	%		100.00	%	INSURANCE BROKERAGE		14			1			12
James Hay Pension Trustees Limited	United Kingdom		0.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY		2			0			2
James Hay Wrap Managers Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FUND AND PORTFOLIO MANAGEMENT		3			1			16
JCF II-A AIV K L.P. (c)	Canada		0.00	%		69.54	%		0.00	%	HOLDING COMPANY		0			0			3
JCF II-A BIN (c)	Mauritania		0.00	%		69.90	%		4.43	%	HOLDING COMPANY		0			0			3
JCF II-A Special AIV K L.P. (c)	Canada		0.00	%		72.29	%		4.99	%	HOLDING COMPANY		0			0			3
JCF Jupiter AIV II A C.V. (m)	Netherlands		0.00	%		69.51	%		4.99	%	HOLDING COMPANY		—			—			44
JSC Santander Consumer Bank	Russia		0.00	%		100.00	%		100.00	%	BANKING		35			7			58
Jupiter III C.V. (m)	Netherlands		0.00	%		72.65	%		4.99	%	HOLDING COMPANY		—			—			280
La Unión Resinera Española, S.A. (consolidated)	Spain		74.87	%		21.28	%		96.24	%	CHEMICALS		48			(1	)		28
Laboratorios Indas, S.A. (e)	Spain		0.00	%		73.41	%		100.00	%	PHARMACEUTICALS		77			22			277
Lanebridge Securities Limited	United Kingdom		0.00	%		51.00	%		51.00	%	HOLDING COMPANY		0			(4	)		0
Langton Funding (No.1) Limited	United Kingdom		—			(b)			—		FINANCE		0			0			0
Langton Mortgages Trustee Limited	Jersey		—			(b)			—		FINANCE		0			0			0
Langton PECOH Limited	United Kingdom		—			(b)			—		FINANCE		0			0			0
Langton Securities (2008-1) plc	United Kingdom		—			(b)			—		FINANCE		0			0			0
Langton Securities (2008-2) plc	United Kingdom		—			(b)			—		FINANCE		0			0			0
Langton Securities (2008-3) PLC	United Kingdom		—			(b)			—		FINANCE		0			0			0
Langton Securities Holdings Limited	United Kingdom		—			(b)			—		FINANCE		0			0			0
Laparanza, S.A. (c)	Spain		61.59	%		0.00	%		61.59	%	AGRICULTURE AND LIVESTOCK		29			0			16
Larix Chile Inversiones Limitada	Chile		0.00	%		89.78	%		100.00	%	PROPERTY		0			0			0
Larix Spain, S.L.	Spain		0.00	%		89.78	%		100.00	%	PROPERTY		1			0			1
Latinoenvíos, S.A.	Spain		100.00	%		0.00	%		100.00	%	IMMIGRANT REMITTANCES		1			0			1
Legal Debt Recovery Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%	COLLECTION AND PAYMENT SERVICES		0			0			0
LLC Finance Analize	Russia		0.00	%		100.00	%		100.00	%	INACTIVE		4			0			6
Luresa Inmobiliaria, S.A.	Spain		0.00	%		96.15	%		100.00	%	PROPERTY		20			1			9
Luri 1, S.A.	Spain		0.00	%		5.58	%		100.00	%	PROPERTY		100			0			6
Luri 2, S.A.	Spain		0.00	%		4.81	%		100.00	%	PROPERTY		100			(4	)		5
Luri 3, S.A.	Spain		0.00	%		9.61	%		10.00	%	PROPERTY		30			1			3
Luri Land, S.A.	Belgium		0.00	%		5.15	%		100.00	%	PROPERTY		6			0			0
MAC No. 1 Limited (i)	United Kingdom		—			(b)			—		MORTGAGE LOAN COMPANY		0			0			0
Madeisisa — SGPS Sociedade Unipessoal, Lda.	Portugal		0.00	%		99.72	%		100.00	%	HOLDING COMPANY		11			0			3
Marylebone Road CBO 3 BV	Netherlands		—			(b)			—		FINANCE		0			0			0
Mata Alta, S.L.	Spain		0.00	%		61.59	%		100.00	%	PROPERTY		0			0			0
Mercado de Dinero, S.A.	Spain		0.00	%		89.78	%		100.00	%	SECURITIES INVESTMENT		0			0			0
Merciver, S.L.	Spain		0.00	%		89.78	%		100.00	%	SHIPPING COMPANY		0			0			0
Mitre Capital Partners Limited	United Kingdom		0.00	%		100.00	%		100.00	%	MORTGAGE LOAN COMPANY		(2	)		(39	)		0
Money Card (Holdings) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		1			1			0
Money Card Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCIAL SERVICES		(4	)		23			0
Money Movers Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Mortgage Alliance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Multinegocios S.A.	Chile		—			(b)			—		ADVISORY SERVICES		0			0			0

F-219


												Millions of Euros (a)
								% of							Net Profit			Amount of
		% of Ownership Held by the Bank						Voting				Capital and			(Loss) for the			Ownership
Entity	Location	Direct			Indirect			Rights (k)			Line of Business	Reserves			Year			Interest
MultiRent — Aluguer e Comércio de Automóveis, S.A.	Portugal		0.00	%		60.00	%		100.00	%	FULL-SERVICE LEASE		(5	)		(3	)		17
Multiservicios de Negocios Limitada	Chile		—			(b)			—		FINANCIAL SERVICES		0			0			0
N&P (B.E.S.) Loans Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		119			1			3
National Alliance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Naviera Mirambel, S.L.	Spain		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Naviera Trans Gas, A.I.E.	Spain		99.99	%		0.01	%		100.00	%	SHIPPING COMPANY		26			(3	)		35
Naviera Tritón, A.I.E.	Spain		99.99	%		0.01	%		100.00	%	SHIPPING COMPANY		0			0			0
Netbank Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
NIB Special Investors IV-A LP (c)	Canada		0.00	%		99.70	%		4.99	%	HOLDING COMPANY		40			(5	)		66
NIB Special Investors IV-B LP (c)	Canada		0.00	%		95.86	%		4.99	%	HOLDING COMPANY		32			(10	)		29
Norbest AS	Norway		7.94	%		92.06	%		100.00	%	SECURITIES INVESTMENT		605			(359	)		953
NW Services CO.	United States		0.00	%		99.43	%		100.00	%	e-COMMERCE		1			0			2
Oil-Dor, S.A.	Spain		0.00	%		89.78	%		100.00	%	FINANCE		149			4			110
Open Bank Santander Consumer, S.A.	Spain		0.00	%		100.00	%		100.00	%	BANKING		68			17			47
Optimal Alternative Investments, S.G.I.I.C., S.A.	Spain		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY		2			(1	)		1
Optimal Investment Services (Asia) Pte. Ltd.	Singapore		0.00	%		99.99	%		100.00	%	FUND MANAGEMENT COMPANY		0			0			0
Optimal Investment Services SA	Switzerland		0.00	%		99.99	%		99.99	%	FUND MANAGEMENT COMPANY		31			7			5
Pan American Bank Limited	Bahamas		0.00	%		100.00	%		100.00	%	BANKING		2			0			22
Parasant SA	Switzerland		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		1,243			495			1,213
Patagon Euro, S.L.	Spain		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		698			21			587
PECOH Limited	United Kingdom		—			(b)			—		FINANCE		0			0			0
Peninsular, S.A.R.L.	France		99.99	%		0.00	%		99.99	%	PROPERTY		2			8			9
Pereda Gestión, S.A.	Spain		99.99	%		0.01	%		100.00	%	HOLDING COMPANY		351			(275	)		4
Pingham International, S.A.	Uruguay		0.00	%		100.00	%		100.00	%	SERVICES		0			0			0
Plus Direct Insurance Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Plus Direct Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Plus Insurance Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Plus Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0			0			0
Polskie Towarzystwo Finansowe S.A.	Poland		0.00	%		100.00	%		100.00	%	SERVICES		3			0			35
Portada S.A., in liquidation	Chile		0.00	%		96.17	%		96.17	%	FINANCE		5			0			4
Portal Universia Argentina, S.A.	Argentina		0.00	%		92.00	%		92.00	%	INTERNET		1			(1	)		0
Portal Universia Portugal, Prestaçao de Serviços de Informática, S.A.	Portugal		0.00	%		100.00	%		100.00	%	INTERNET		1			0			0
Portal Universia, S.A.	Spain		0.00	%		67.77	%		67.77	%	INTERNET		4			(2	)		3
Préstamos de Consumo, S.A.	Argentina		0.00	%		99.97	%		100.00	%	FINANCE		0			0			4
Procura Digital de Venezuela, S.A.	Venezuela		0.00	%		99.43	%		100.00	%	e-COMMERCE		1			0			2
Produban Servicios Informáticos Generales, S.L.	Spain		98.00	%		2.00	%		100.00	%	SERVICES		(13	)		1			0
Produban Serviços de Informática S.A.	Brazil		0.00	%		100.00	%		100.00	%	IT		2			3			5
Programa Hogar Montigalá, S.A.	Spain		0.00	%		89.78	%		100.00	%	PROPERTY		8			(6	)		3
Promoción de Servicios Integrales, S.A. De C.V.	Mexico		0.00	%		99.98	%		99.98	%	SERVICES		0			0			0
Promociones y Servicios Monterrey, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	PROPERTY		6			0			7
Promociones y Servicios Polanco, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	PROPERTY		26			0			33
Promociones y Servicios Santiago, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	SERVICES		38			0			47
Promodomus Desarrollo de Activos, S.L.	Spain		0.00	%		45.79	%		51.00	%	PROPERTY		2			(1	)		1

F-220


												Millions of Euros (a)
								% of							Net Profit			Amount of
		% of Ownership Held by the Bank						Voting				Capital and			(Loss) for the			Ownership
Entity	Location	Direct			Indirect			Rights (k)			Line of Business	Reserves			Year			Interest
Promotora AFR de Venezuela, S.A.	Venezuela		0.00	%		98.40	%		99.98	%	ADVISORY SERVICES		0			0			4
Promotora Herlosacantos, S.A. (c)	Spain		0.00	%		50.00	%		50.00	%	PROPERTY		0			0			0
PSB Inmobilien GmbH	Germany		0.00	%		100.00	%		100.00	%	PROPERTY		0			0			0
Real Capitalização S.A.	Brazil		0.00	%		97.93	%		100.00	%	FINANCE		37			22			44
Real CHP S.A.	Brazil		0.00	%		90.86	%		92.78	%	ASSET MANAGEMENT		0			1			1
Real Corretora de Seguros S.A.	Brazil		0.00	%		97.93	%		100.00	%	INSURANCE		5			18			15
Real Argentina S.A.	Argentina		0.00	%		96.95	%		99.00	%	PROPERTY		0			0			0
Real Leasing S.A. Arrendamento Mercantil	Brazil		0.00	%		97.92	%		99.99	%	LEASING		2,765			185			2,706
Real Microcrédito Assessoria Financeira S.A.	Brazil		0.00	%		97.93	%		100.00	%	FINANCIAL SERVICES		1			1			1
REB Empreendimentos e Administradora de Bens S.A.	Brazil		0.00	%		97.93	%		100.00	%	PROPERTY		4			7			7
Redes y Procesos, S.A.	Spain		52.17	%		13.20	%		66.87	%	CARDS		1			0			1
Riobank International (Uruguay) SAIFE (l)	Uruguay		0.00	%		100.00	%		100.00	%	BANKING		0			0			0
Ruevilliot 26, S.L.	Spain		0.00	%		70.00	%		70.00	%	PROPERTY		25			0			18
S C Servicios y Cobranzas S.A.	Colombia		0.00	%		97.76	%		100.00	%	COLLECTION AND PAYMENT SERVICES		0			0			0
SAG International Finance Company Limited	Ireland		0.00	%		60.00	%		100.00	%	SECURITISATION		1			0			1
Sánchez Ramade Santander Financiera, S.L.	Spain		0.00	%		50.00	%		50.00	%	FINANCIAL SERVICES		0			0			0
Sandgate S.á.r.l. (c)	Luxembourg		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		0			0			0
Saninv Gestao e Investimentos, S.A.	Portugal		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		101			(75	)		32
Santander Administradora de Consórcios Ltda.	Brazil		0.00	%		97.93	%		100.00	%	FINANCE		1			0			1
Santander Airplus Corporate Payment Solutions, S.A.	Spain		75.00	%		0.00	%		75.00	%	PAYMENT SYSTEMS		0			0			0
Santander AM Holding, S.L.	Spain		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		100			57			6
Santander Asset Management — Sociedade Gestora de Fundos de Investimento Mobiliário, S.A.	Portugal		0.00	%		99.86	%		100.00	%	FUND MANAGEMENT COMPANY		28			7			7
Santander Asset Management Chile S.A.	Chile		0.01	%		99.83	%		100.00	%	SECURITIES INVESTMENT		0			0			7
Santander Asset Management Corporation	Puerto Rico		0.00	%		90.59	%		100.00	%	ASSET MANAGEMENT		(3	)		9			2
Santander Asset Management Distribuidora de Títulos e Valores Mobiliários Ltda.	Brazil		0.00	%		97.93	%		100.00	%	ASSET MANAGEMENT		20			12			18
Santander Asset Management Ireland, Ltd.	Ireland		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY		17			(1	)		0
Santander Asset Management Luxembourg, S.A.	Luxembourg		0.00	%		97.96	%		100.00	%	FUND MANAGEMENT COMPANY		4			2			0
Santander Asset Management S.A. Administradora General de Fondos	Chile		0.00	%		76.74	%		100.00	%	FUND MANAGEMENT COMPANY		68			18			6
Santander Asset Management UK Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		141			0			141
Santander Asset Management UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FUND AND PORTFOLIO MANAGEMENT		11			1			9
Santander Asset Management, S.A., S.G.I.I.C.	Spain		28.30	%		69.66	%		100.00	%	FUND MANAGEMENT COMPANY		90			49			33
Santander BanCorp	Puerto Rico		0.00	%		90.59	%		90.59	%	HOLDING COMPANY		446			11			202
Santander Bank & Trust Ltd.	Bahamas		0.00	%		100.00	%		100.00	%	BANKING		1,304			202			1,141
Santander Benelux, S.A./N.V.	Belgium		100.00	%		0.00	%		100.00	%	BANKING		943			60			925
Santander Brasil Arrendamento Mercantil S.A.	Brazil		0.00	%		97.93	%		100.00	%	LEASING		148			14			100
Santander Brasil S.A. Corretora de Títulos e Valores Mobiliários	Brazil		0.00	%		97.93	%		100.00	%	BROKER-DEALER		(3	)		4			0
Santander Brasil Seguros S.A.	Brazil		0.00	%		99.37	%		100.00	%	INSURANCE		36			5			36
Santander Capital Desarrollo, SGECR, S.A.	Spain		100.00	%		0.00	%		100.00	%	VENTURE CAPITAL COMPANY		1			1			0
Santander Capitalização S.A.	Brazil		0.00	%		99.37	%		100.00	%	FINANCE		(12	)		22			5

F-221


												Millions of Euros (a)
								% of						Net Profit			Amount of
		% of Ownership Held by the Bank						Voting				Capital and		(Loss) for the			Ownership
Entity	Location	Direct			Indirect			Rights (k)			Line of Business	Reserves		Year			Interest
Santander Cards Limited	United Kingdom		100.00	%		0.00	%		100.00	%	FINANCIAL SERVICES		116		(47	)		216
Santander Carteras, S.G.C., S.A.	Spain		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY		20		0			8
Santander Central Hispano Finance (Delaware) Inc.	United States		100.00	%		0.00	%		100.00	%	FINANCE		2		0			0
Santander Central Hispano Financial Services Limited	Cayman Islands		100.00	%		0.00	%		100.00	%	FINANCE		2		0			0
Santander Central Hispano International Limited	Cayman Islands		100.00	%		0.00	%		100.00	%	FINANCE		4		0			0
Santander Central Hispano Issuances Limited	Cayman Islands		100.00	%		0.00	%		100.00	%	FINANCE		2		0			0
Santander Chile Holding, S.A.	Chile		22.11	%		77.40	%		99.51	%	HOLDING COMPANY		581		337			238
Santander Commercial Paper, S.A., Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%	FINANCE		0		0			0
Santander Consumer (UK) plc	United Kingdom		0.00	%		100.00	%		100.00	%	ADVISORY SERVICES		71		(1	)		99
Santander Consumer autoboerse.de AG	Germany		0.00	%		100.00	%		100.00	%	INTERNET		1		0			1
Santander Consumer Bank AG	Germany		0.00	%		100.00	%		100.00	%	BANKING		1,187		424			1,192
Santander Consumer Bank AS	Norway		0.00	%		100.00	%		100.00	%	FINANCE		307		44			468
Santander Consumer Bank S.p.A.	Italy		0.00	%		100.00	%		100.00	%	FINANCE		153		23			312
Santander Consumer Bank Spólka Akcyjna	Poland		0.00	%		100.00	%		100.00	%	BANKING		165		24			176
Santander Consumer Chile S.A.	Chile		89.00	%		0.00	%		89.00	%	FINANCE		12		(1	)		12
Santander Consumer Debit GmbH	Germany		0.00	%		100.00	%		100.00	%	SERVICES		0		11			0
Santander Consumer Finance a.s.	Czech Republic		0.00	%		100.00	%		100.00	%	LEASING		43		4			36
Santander Consumer Finance B.V.	Netherlands		0.00	%		100.00	%		100.00	%	FINANCE		37		(1	)		32
Santander Consumer Finance Benelux B.V.	Netherlands		0.00	%		100.00	%		100.00	%	FINANCE		6		(7	)		0
Santander Consumer Finance Correduría de Seguros, S.A.	Spain		0.00	%		100.00	%		100.00	%	INSURANCE BROKERAGE		1		1			0
Santander Consumer Finance Media S.r.l.	Italy		0.00	%		65.00	%		65.00	%	FINANCE		7		0			5
Santander Consumer Finance Oy	Finland		0.00	%		100.00	%		100.00	%	FINANCE		34		(2	)		34
Santander Consumer Finance Zrt.	Hungary		0.00	%		100.00	%		100.00	%	FINANCE		6		(7	)		4
Santander Consumer Finance, Germany GmbH	Germany		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		3,061		(11	)		3,061
Santander Consumer Finance, S.A.	Spain		63.19	%		36.81	%		100.00	%	BANKING		4,745		483			3,138
Santander Consumer Finanzia S.r.l.	Italy		0.00	%		100.00	%		100.00	%	FACTORING		2		0			1
Santander Consumer France	France		0.00	%		100.00	%		100.00	%	FINANCE		35		(21	)		37
Santander Consumer Holding GmbH	Germany		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		928		204			1,891
Santander Consumer Iber-Rent, S.L.	Spain		0.00	%		60.00	%		60.00	%	FULL-SERVICE LEASE		62		2			18
Santander Consumer Leasing Austria GmbH	Austria		0.00	%		100.00	%		100.00	%	LEASING		0		0			0
Santander Consumer Leasing GmbH	Germany		0.00	%		100.00	%		100.00	%	LEASING		6		7			6
Santander Consumer Leasing s.r.o.	Czech Republic		0.00	%		100.00	%		100.00	%	FINANCE		1		0			2
Santander Consumer Multirent Spólka z ograniczoną odpowiedzialnościa	Poland		0.00	%		60.00	%		60.00	%	LEASING		7		(1	)		4
Santander Consumer Receivables LLC	United States		0.00	%		91.00	%		100.00	%	AUXILIARY		0		0			0
Santander Consumer Spain Auto 07-1	Spain		—			(b)			—		SECURITISATION		0		0			0
Santander Consumer Spain Auto 07-2	Spain		—			(b)			—		SECURITISATION		0		0			0
Santander Consumer USA Inc.	United States		91.00	%		0.00	%		91.00	%	FINANCE		214		(75	)		599
Santander Consumer, EFC, S.A.	Spain		0.00	%		100.00	%		100.00	%	FINANCE		239		(27	)		169
Santander Consumo, S.A. de C.V., SOFOM, E.R.	Mexico		0.00	%		74.95	%		100.00	%	PROPERTY MANAGEMENT		307		(38	)		265
Santander Corredora de Seguros Limitada	Chile		0.00	%		76.85	%		100.00	%	INSURANCE BROKERAGE		77		3			40
Santander de Desarrollos Inmobiliarios, S.A.	Spain		98.39	%		1.61	%		100.00	%	PROPERTY		0		0			0

F-222


												Millions of Euros (a)
								% of							Net Profit			Amount of
		% of Ownership Held by the Bank						Voting				Capital and			(Loss) for the			Ownership
Entity	Location	Direct			Indirect			Rights (k)			Line of Business	Reserves			Year			Interest
Santander de Leasing, S.A., E.F.C.	Spain		70.00	%		30.00	%		100.00	%	LEASING		46			17			35
Santander de Renting, S.A.	Spain		99.99	%		0.01	%		100.00	%	FULL-SERVICE LEASE		21			(2	)		18
Santander de Titulización S.G.F.T., S.A.	Spain		81.00	%		19.00	%		100.00	%	FUND MANAGEMENT COMPANY		1			1			1
Santander Drive Auto Receivables LLC	United States		0.00	%		91.00	%		100.00	%	AUXILIARY		0			0			0
Santander Drive Auto Receivables Trust 2007-1	United States		—			(b)			—		SECURITISATION		0			0			0
Santander Drive Auto Receivables Trust 2007-2	United States		—			(b)			—		SECURITISATION		0			0			0
Santander Drive Auto Receivables Trust 2007-3	United States		—			(b)			—		SECURITISATION		0			0			0
Santander Energías Renovables I, SCR de Régimen Simplificado, S.A.	Spain		62.16	%		0.00	%		62.16	%	VENTURE CAPITAL COMPANY		19			0			6
Santander Factoring y Confirming, S.A., E.F.C.	Spain		100.00	%		0.00	%		100.00	%	FACTORING		106			19			76
Santander Factoring, S.A.	Chile		0.00	%		99.51	%		100.00	%	FACTORING		21			2			5
Santander Financial Products plc	Ireland		0.00	%		100.00	%		100.00	%	FINANCE		184			6			162
Santander Financial Services, Inc.	Puerto Rico		0.00	%		90.59	%		100.00	%	LENDING COMPANY		58			4			89
Santander Gestâo de Activos, SGPS, S.A.	Portugal		0.00	%		99.86	%		100.00	%	HOLDING COMPANY		15			10			7
Santander Gestión de Recaudación y Cobranzas, Ltda.	Chile		0.00	%		98.97	%		99.45	%	FINANCIAL SERVICES		0			5			1
Santander Gestión Inmobiliaria, S.A.	Spain		0.01	%		99.99	%		100.00	%	PROPERTY		0			2			0
Santander Global Facilities, S.A.	Spain		99.94	%		0.06	%		100.00	%	SERVICES		2			0			1
Santander Global Property Alemania GmbH	Germany		0.00	%		100.00	%		100.00	%	SERVICES		0			0			0
Santander Global Property México, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	PROPERTY		0			0			0
Santander Global Property USA Inc.	United States		0.00	%		100.00	%		100.00	%	SERVICES		0			0			0
Santander Global Property, S.L.	Spain		97.21	%		2.79	%		100.00	%	SECURITIES INVESTMENT		238			0			227
Santander Global Services, S.A.	Uruguay		0.00	%		100.00	%		100.00	%	SERVICES		1			0			0
Santander Global Sport, S.A.	Spain		100.00	%		0.00	%		100.00	%	SPORTS OPERATIONS		36			(3	)		32
Santander Hipotecario 1 Fondo de Titulización de Activos	Spain		—			(b)			—		SECURITISATION		0			0			0
Santander Hipotecario 2 Fondo de Titulización de Activos	Spain		—			(b)			—		SECURITISATION		0			0			0
Santander Hipotecario 3 Fondo de Titulización de Activos	Spain		—			(b)			—		SECURITISATION		0			0			0
Santander Hipotecario 4 Fondo de Titulización de Activos	Spain		—			(b)			—		SECURITISATION		0			0			0
Santander Hipotecario 5 Fondo de Titulización de Activos	Spain		—			(b)			—		SECURITISATION		0			0			0
Santander Holanda B.V.	Netherlands		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		11			0			0
Santander Holding Gestión, S.L.	Spain		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		(79	)		0			0
Santander Holding Internacional, S.A.	Spain		99.95	%		0.05	%		100.00	%	HOLDING COMPANY		28			315			0
Santander Infraestructuras II, SCR de Régimen Simplificado, S.A.	Spain		100.00	%		0.00	%		100.00	%	VENTURE CAPITAL COMPANY		1			0			1
Santander Infrastructure Capital Limited	United Kingdom		100.00	%		0.00	%		100.00	%	LEASING		0			0			0
Santander Infrastructure Capital Management Limited	United Kingdom		100.00	%		0.00	%		100.00	%	LEASING		2			0			2
Santander Insurance Agency, Inc.	Puerto Rico		0.00	%		90.59	%		100.00	%	INSURANCE BROKERAGE		2			2			3
Santander Insurance Holding, S.L.	Spain		99.99	%		0.01	%		100.00	%	HOLDING COMPANY		383			(6	)		357
Santander Insurance Services UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY		22			1			35

F-223


												Millions of Euros (a)
								% of							Net Profit			Amount of
		% of Ownership Held by the Bank						Voting				Capital and			(Loss) for the			Ownership
Entity	Location	Direct			Indirect			Rights (k)			Line of Business	Reserves			Year			Interest
Santander International Bank of Puerto Rico, Inc.	Puerto Rico		0.00	%		90.59	%		100.00	%	BANKING		115			4			66
Santander International Debt, S.A., Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%	FINANCE		0			0			0
Santander Inversiones Limitada	Chile		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		662			110			578
Santander Investimentos em Participações S.A.	Brazil		0.00	%		97.93	%		100.00	%	COLLECTION AND PAYMENT SERVICES		249			49			321
Santander Investment Bank Limited	Bahamas		0.00	%		100.00	%		100.00	%	BANKING		94			0			181
Santander Investment Bolsa, S.V., S.A.	Spain		0.00	%		100.00	%		100.00	%	BROKER-DEALER		126			54			104
Santander Investment Chile, Limitada	Chile		0.00	%		100.00	%		100.00	%	FINANCE		160			23			128
Santander Investment Colombia S.A.	Colombia		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		6			0			44
Santander Investment I, S.A.	Spain		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		(1,503	)		(17	)		0
Santander Investment Limited	Bahamas		0.00	%		100.00	%		100.00	%	BROKER-DEALER		(57	)		0			0
Santander Investment Securities Inc.	United States		0.00	%		100.00	%		100.00	%	BROKER-DEALER		59			(4	)		295
Santander Investment Trust Colombia S.A., Sociedad Fiduciaria	Colombia		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY		8			1			9
Santander Investment Valores Colombia S.A., Comisionista de Bolsa Comercial	Colombia		0.00	%		97.76	%		100.00	%	BROKER-DEALER		3			0			1
Santander Investment, S.A.	Spain		100.00	%		0.00	%		100.00	%	BANKING		228			175			14
Santander Issuances, S.A., Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%	FINANCE		0			0			0
Santander Mediación Operador de Banca-Seguros Vinculado, S.A.	Spain		20.00	%		76.38	%		100.00	%	ADVISORY SERVICES		1			1			1
Santander Merchant Bank Limited	Bahamas		0.00	%		100.00	%		100.00	%	BANKING		4			0			53
Santander Merchant, S.A.	Argentina		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		2			0			19
Santander Overseas Bank, Inc. (h)	Puerto Rico		0.00	%		100.00	%		100.00	%	BANKING		384			26			198
Santander PB UK (Holdings) Limited	United Kingdom		100.00	%		0.00	%		100.00	%	FINANCE		213			0			282
Santander Pensiones, S.A., E.G.F.P.	Spain		21.20	%		76.76	%		100.00	%	PENSION FUND MANAGEMENT COMPANY		46			14			50
Santander Pensôes — Sociedade Gestora de Fundos de Pensôes, S.A.	Portugal		0.00	%		99.86	%		100.00	%	PENSION FUND MANAGEMENT COMPANY		5			2			1
Santander Perpetual, S.A., Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%	FINANCE		0			0			0
Santander Portfolio Management UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		31			0			24
Santander PR Capital Trust I	Puerto Rico		0.00	%		90.59	%		100.00	%	FINANCE		3			6			3
Santander Private Advisors, Ltd.	United States		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		1			0			0
Santander Private Banking s.p.a.	Italy		0.00	%		100.00	%		100.00	%	BANKING		53			(14	)		73
Santander Private Banking UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PROPERTY		435			0			435
Santander Private Equity, S.A., S.G.E.C.R.	Spain		90.00	%		9.97	%		100.00	%	VENTURE CAPITAL MANAGEMENT COMPANY		5			(2	)		4
Santander Professional Services, S.A.	Spain		0.00	%		100.00	%		100.00	%	SPORTS OPERATIONS		0			0			0
Santander Real Estate, S.G.I.I.C., S.A.	Spain		0.00	%		99.18	%		100.00	%	FUND MANAGEMENT COMPANY		70			30			6
Santander Río Asset Management Gerente de Fondos Comunes de Inversión S.A.	Argentina		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY		4			1			2
Santander Río Seguros S.A.	Argentina		0.00	%		100.00	%		100.00	%	INSURANCE		8			4			6
Santander Río Servicios S.A.	Argentina		0.00	%		99.97	%		100.00	%	ADVISORY SERVICES		0			1			0
Santander Río Sociedad de Bolsa S.A.	Argentina		0.00	%		99.34	%		100.00	%	BROKER-DEALER		4			1			2
Santander Río Trust S.A.	Argentina		0.00	%		99.97	%		100.00	%	FINANCIAL SERVICES		0			0			0

F-224


												Millions of Euros (a)
								% of						Net Profit			Amount of
		% of Ownership Held by the Bank						Voting				Capital and		(Loss) for the			Ownership
Entity	Location	Direct			Indirect			Rights (k)			Line of Business	Reserves		Year			Interest
Santander S.A. — Corretora de Câmbio e Títulos	Brazil		0.00	%		97.93	%		100.00	%	BROKER-DEALER		47		13			26
Santander S.A. — Serviços Técnicos, Administrativos e de Corretagem de Seguros	Brazil		0.00	%		97.93	%		100.00	%	INSURANCE BROKERAGE		8		9			28
Santander S.A. Agente de Valores	Chile		0.00	%		76.95	%		100.00	%	BROKER-DEALER		165		8			17
Santander S.A. Corredores de Bolsa	Chile		0.00	%		88.13	%		100.00	%	BROKER-DEALER		46		7			23
Santander S.A. Sociedad Securitizadora	Chile		0.00	%		76.82	%		100.00	%	FUND MANAGEMENT COMPANY		1		0			0
Santander Securities Corporation	Puerto Rico		0.00	%		90.59	%		100.00	%	BROKER-DEALER		32		10			16
Santander Seguros de Vida, S.A.	Chile		0.00	%		100.00	%		100.00	%	INSURANCE		81		32			8
Santander Seguros Generales S.A.	Chile		99.50	%		0.50	%		100.00	%	INSURANCE		10		(1	)		11
Santander Seguros S.A.	Brazil		0.00	%		99.38	%		99.38	%	INSURANCE		89		32			100
Santander Seguros y Reaseguros, Compañía Aseguradora, S.A.	Spain		0.00	%		96.02	%		100.00	%	INSURANCE		369		91			215
Santander Seguros, S.A.	Uruguay		0.00	%		100.00	%		100.00	%	INSURANCE		4		(3	)		4
Santander Service GmbH	Germany		0.00	%		100.00	%		100.00	%	LEASING		0		1			0
Santander Servicios de Recaudación y Pagos Limitada	Chile		0.00	%		76.73	%		100.00	%	SERVICES		5		0			3
Santander Totta Seguros, Companhia de Seguros de Vida, S.A.	Portugal		0.00	%		99.86	%		100.00	%	INSURANCE		137		25			107
Santander Totta, SGPS, S.A.	Portugal		0.00	%		99.86	%		99.86	%	HOLDING COMPANY		2,641		259			3,321
Santander Trade Services, Ltd.	Hong Kong		0.00	%		100.00	%		100.00	%	SERVICES		15		1			32
Santander UK Investments	United Kingdom		100.00	%		0.00	%		100.00	%	LEASING		45		3			42
Santander UK Nominee Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FINANCE		0		0			0
Santander Unit Trust Managers UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%	FUND AND PORTFOLIO MANAGEMENT		18		(1	)		16
Santander US Debt, S.A., Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%	FINANCE		0		0			0
Santander Venezuela Sociedad Administradora de Entidades de Inversión Colectiva, C.A.	Venezuela		0.00	%		90.00	%		100.00	%	FUND MANAGEMENT COMPANY		1		0			0
Santander Warehouse LLC	United States		0.00	%		91.00	%		100.00	%	AUXILIARY		0		0			0
Santusa Holding, S.L.	Spain		69.64	%		30.36	%		100.00	%	HOLDING COMPANY		10,616		(1,092	)		9,158
Sarum Trustees Limited	United Kingdom		0.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY		0		0			0
Saturn Japan III Sub C.V. (m)	Netherlands		0.00	%		72.61	%		0.00	%	HOLDING COMPANY		—		—			280
Saturn Japan II Sub C.V. (m)	Netherlands		0.00	%		69.37	%		0.00	%	HOLDING COMPANY		—		—			44
Saturn Japan V C.V. (m)	Netherlands		0.00	%		100.00	%		99.99	%	HOLDING COMPANY		—		—			114
SC Germany Auto 08-02 Limited	Germany		—			(b)			—		SECURITISATION		0		0			0
SC Germany Consumer 08-01	Germany		—			(b)			—		SECURITISATION		0		0			0
Scottish Mutual Pensions Limited	United Kingdom		0.00	%		100.00	%		100.00	%	INSURANCE		5		0			76
Seguros Santander, S.A., Grupo Financiero Santander	Mexico		0.00	%		74.96	%		100.00	%	INSURANCE		46		23			21
Sercoban, Gestión Administrativa de Empresas, S.A.	Spain		0.00	%		100.00	%		100.00	%	SERVICES		9		0			10
Serfin International Bank and Trust, Limited	Cayman Islands		0.00	%		99.72	%		100.00	%	BANKING		30		1			23
Services and Promotions Delaware Corporation	United States		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		82		0			72
Services and Promotions Miami LLC	United States		0.00	%		100.00	%		100.00	%	PROPERTY		82		0			82
Servicio de Alarmas Controladas por Ordenador, S.A.	Spain		99.99	%		0.01	%		100.00	%	SECURITY		2		0			1
Servicios Administrativos y Financieros, Ltda.	Chile		—			(b)			—		SERVICES		0		0			0

F-225


												Millions of Euros (a)
								% of						Net Profit			Amount of
		% of Ownership Held by the Bank						Voting				Capital and		(Loss) for the			Ownership
Entity	Location	Direct			Indirect			Rights (k)			Line of Business	Reserves		Year			Interest
Servicios Corporativos Seguros Serfin, S.A. De C.V.	Mexico		0.00	%		75.46	%		100.00	%	SERVICES		0		0			0
Servicios de Cobranza, Recuperación y Seguimiento, S.A. De C.V.	Mexico		0.00	%		100.00	%		100.00	%	SERVICES		0		4			1
Servicios de Cobranzas Fiscalex Ltda.	Chile		—			(b)			—		SERVICES		0		0			0
Servicios Universia Venezuela S.U.V., S.A.	Venezuela		0.00	%		81.26	%		81.26	%	INTERNET		1		0			1
Sheppards Moneybrokers Limited	United Kingdom		0.00	%		100.00	%		100.00	%	ADVISORY SERVICES		17		0			15
Sinvest Inversiones y Asesorías Limitada	Chile		0.00	%		100.00	%		100.00	%	FINANCE		53		3			2
Sistema 4B, S.A.	Spain		52.17	%		13.20	%		66.87	%	CARDS		13		74			9
SK Charter Hire (No.1) Limited	Jersey		0.00	%		100.00	%		100.00	%	LEASING		51		0			51
SK Charter Hire (No.2) Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		7		0			1
SK Marine Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0		0			0
Sociedad Integral de Valoraciones Automatizadas, S.A.	Spain		0.00	%		100.00	%		100.00	%	APPRAISALS		1		1			1
Sodepro, S.A.	Spain		0.00	%		89.78	%		100.00	%	FINANCE		15		1			12
Solarlaser Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PROPERTY		49		2			42
Sovereign Finance (Northern) Limited (g)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		1		0			0
Sovereign Finance (Scotland) Limited (e)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0		0			0
Sovereign Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0		0			0
Sovereign Freeze Limited	Bermuda		0.00	%		100.00	%		100.00	%	LEASING		0		0			0
Sovereign Gimi Limited	Bermuda		0.00	%		100.00	%		100.00	%	LEASING		0		0			0
Sovereign Hilli Limited	Bermuda		0.00	%		100.00	%		100.00	%	LEASING		0		0			0
Sovereign Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		0		0			0
Sovereign Khannnur Limited	Bermuda		0.00	%		100.00	%		100.00	%	LEASING		0		0			0
Sovereign Leasing (Scotland) Limited (e)	United Kingdom		0.00	%		100.00	%		100.00	%	LEASING		0		0			0
Sovereign Spirit Limited	Bermuda		0.00	%		100.00	%		100.00	%	LEASING		0		0			0
Sterrebeeck B.V.	Netherlands		100.00	%		0.00	%		100.00	%	HOLDING COMPANY		5,185		378			15,309
Sudameris Distribuidora de Títulos e Valores Mobiliários S.A.	Brazil		0.00	%		97.93	%		100.00	%	ASSET MANAGEMENT		601		58			633
Suleyado 2003, S.L.	Spain		0.00	%		100.00	%		100.00	%	SECURITIES INVESTMENT		7		0			7
Suzuki Servicios Financieros, S.L.	Spain		0.00	%		51.00	%		51.00	%	INTERMEDIATION		0		0			0
Swesant Merchant SA, in liquidation (l)	Switzerland		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		2		0			2
Swesant SA	Switzerland		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		1		458			0
Task Moraza, S.L. (e)	Spain		0.00	%		73.41	%		73.41	%	HOLDING COMPANY		36		0			27
Taxagest Sociedade Gestora de Participaçoes Sociais, S.A.	Portugal		0.00	%		99.86	%		100.00	%	HOLDING COMPANY		59		0			0
Teatinos Siglo XXI Inversiones Limitada	Chile		50.00	%		50.00	%		100.00	%	HOLDING COMPANY		556		150			403
Teylada, S.A.	Spain		11.11	%		88.89	%		100.00	%	SECURITIES INVESTMENT		0		0			0
The Alliance & Leicester Corporation Limited	United Kingdom		0.00	%		100.00	%		100.00	%	PROPERTY		13		0			15
The HSH AIV 4 Trust (c)	United States		0.00	%		69.20	%		4.99	%	HOLDING COMPANY		41		(14	)		69
The JCF HRE AIV II-A Trust (m)	United States		0.00	%		69.68	%		4.99	%	HOLDING COMPANY		—		—			4
The National & Provincial Building Society Pension Fund Trustees Limited (d)	United Kingdom		—			(b)			—		ASSET MANAGEMENT COMPANY		0		0			0
The Prepaid Card Company Limited	United Kingdom		0.00	%		80.00	%		80.00	%	FINANCE		6		(26	)		0
The WF Company Limited	United Kingdom		0.00	%		100.00	%		100.00	%	ADVISORY SERVICES		0		0			0
Títulos de Renta Fija, S.A.	Spain		100.00	%		0.00	%		100.00	%	SECURITIES INVESTMENT		0		0			0

F-226


												Millions of Euros (a)
								% of							Net Profit			Amount of
		% of Ownership Held by the Bank						Voting				Capital and			(Loss) for the			Ownership
Entity	Location	Direct			Indirect			Rights (k)			Line of Business	Reserves			Year			Interest
Tornquist Asesores de Seguros, S.A. (1)	Argentina		0.00	%		99.99	%		99.99	%	ADVISORY SERVICES		0			0			0
Totta & Açores Inc. Newark	United States		0.00	%		99.72	%		100.00	%	BANKING		1			0			1
Totta & Açores Financing, Limited	Cayman Islands		0.00	%		99.72	%		100.00	%	FINANCE		0			12			0
Totta (Ireland), PLC (h)	Ireland		0.00	%		99.72	%		100.00	%	FINANCE		352			107			341
Totta Crédito Especializado, Instituiçao Financeira de Crédito, S.A. (IFIC)	Portugal		0.00	%		99.84	%		100.00	%	LEASING		106			24			42
Totta Urbe — Empresa de Administraçâo e Construçôes, S.A.	Portugal		0.00	%		99.72	%		100.00	%	PROPERTY		110			2			148
UNIFIN S.p.A.	Italy		0.00	%		70.00	%		70.00	%	FINANCE		18			6			44
Universia Brasil S.A.	Brazil		0.00	%		100.00	%		100.00	%	INTERNET		1			(1	)		1
Universia Chile S.A.	Chile		0.00	%		99.94	%		99.94	%	INTERNET		1			(1	)		0
Universia Colombia, S.A.	Colombia		0.00	%		99.89	%		99.89	%	INTERNET		1			(1	)		0
Universia Holding, S.L.	Spain		99.94	%		0.06	%		100.00	%	HOLDING COMPANY		27			(19	)		5
Universia México, S.A. De C.V.	Mexico		0.00	%		100.00	%		100.00	%	INTERNET		1			(1	)		0
Universia Perú, S.A.	Peru		0.00	%		91.00	%		91.00	%	INTERNET		1			(1	)		0
Universia Puerto Rico, Inc.	Puerto Rico		0.00	%		100.00	%		100.00	%	INTERNET		1			0			1
Valores Santander Casa de Bolsa, C.A.	Venezuela		0.00	%		90.00	%		90.00	%	BROKER-DEALER		19			7			7
Vista Capital de Expansión, S.A. SGECR	Spain		0.00	%		50.00	%		50.00	%	VENTURE CAPITAL MANAGEMENT COMPANY		1			1			0
Vista Desarrollo, S.A. SCR	Spain		100.00	%		0.00	%		100.00	%	VENTURE CAPITAL COMPANY		261			11			158
W.N.P.H. Gestao e Investimentos Sociedade Unipessoal, S.A.	Portugal		0.00	%		100.00	%		100.00	%	SECURITIES INVESTMENT		35			1			0
Wallcesa, S.A.	Spain		100.00	%		0.00	%		100.00	%	SECURITIES INVESTMENT		(21	)		(759	)		0
Webmotors S.A.	Brazil		0.00	%		97.93	%		100.00	%	SERVICES		7			5			6
Wex Point España, S.L.	Spain		0.00	%		89.78	%		100.00	%	SERVICES		1			0			1
Whitewick Limited	Jersey		0.00	%		100.00	%		100.00	%	HOLDING COMPANY		1			0			0
WIM Servicios Corporativos, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%	ADVISORY SERVICES		0			0			0


(a)		Amount per books of each company at December 31, 2008, disregarding, where appropriate, any interim dividends paid in the year. The amount of the ownership interest (net of allowances) is the figure per the books of each holding company multiplied by the Group’s percentage of ownership, disregarding impairment of goodwill on consolidation. The data on foreign companies were translated to euros at the year-end exchange rates.

(b)		Companies over which effective control is exercised.

(c)		Data from the latest approved financial statements at December 31, 2007.

(d)		Data from the latest approved financial statements at March 31, 2008.

(e)		Data from the latest approved financial statements at June 30, 2008.

(f)		Data from the latest approved financial statements at September 30, 2008.

(g)		Data from the latest approved financial statements at April 30, 2008.

(h)		Data from the latest approved financial statements at November 30, 2008.

(i)		Data from the latest approved financial statements at August 31, 2008.

(j)		Data uniform with 2008 calendar year.

(k)		Pursuant to Article 3 of Royal Decree 1815/1991, of 20 December, approving the rules for the preparation of consolidated financial statements, in order to determine voting rights, the voting rights relating to subsidiaries or to other parties acting in their own name but on behalf of Group companies were added to the voting rights directly held by the Parent. Accordingly, the number of votes corresponding to the Parent in relation to companies over which it exercises indirect control is the number corresponding to each subsidiary holding a direct ownership interest in such companies.

(l)		Companies in liquidation at 31 December 2008.

(m)		Companies newly incorporated in 2008 for which no approved financial statements are available.

(1)		The preference share and preferred participating security issuer companies are detailed in Exhibit III, together with other relevant information.

F-227

Exhibit II

Listed companies in which the Santander Group has ownership interests of more than 5% (g), Associates of the Santander Group and Jointly Controlled Entities


												Millions of Euros (a)
								% of									Net Profit
		% of Ownership Held by the Bank						Voting						Capital and			(Loss) for the
Entity	Location	Direct			Indirect			Rights (f)			Line of Business	Assets		Reserves			Year
26 Rue Villiot S.A.S.	France		0.00	%		35.00	%		50.00	%	PROPERTY		135		49			0
ABSLine Multimedia, S.L.	Spain		0.00	%		47.50	%		47.50	%	MARKETING		1		1			0
Accordfin España, E.F.C., S.A.	Spain		0.00	%		49.00	%		49.00	%	FINANCE		441		33			(13	)
ACI Soluciones, S.L.	Spain		0.00	%		32.03	%		49.00	%	SERVICES		3		2			0
Administrador Financiero de Transantiago S.A.	Chile		0.00	%		15.35	%		20.00	%	COLLECTION AND PAYMENT SERVICES		577		2			1
Affirmative Insurance Holdings Inc. (b)	United States		0.00	%		5.00	%		5.00	%	INSURANCE		648		107			5
Affirmative Investment LLC	United States		0.00	%		9.86	%		9.86	%	HOLDING COMPANY		8		(42	)		50
Agres, Agrupación Restauradores, S.L.	Spain		0.00	%		38.62	%		43.01	%	RESTAURANTS		4		2			0
Aguas de Fuensanta, S.A.	Spain		0.00	%		37.90	%		42.21	%	FOOD		35		9			0
Algebris Global Financials Fund (b)	Cayman Islands		8.64	%		0.00	%		8.64	%	HOLDING COMPANY		1,506		1,210			99
Allfunds Alternative, S.V., S.A. (Sole-Shareholder Company)	Spain		0.00	%		50.00	%		50.00	%	BROKER-DEALER		5		5			0
Allfunds Bank, S.A.	Spain		0.00	%		50.00	%		50.00	%	BANKING		164		78			18
Allfunds International S.A.	Luxembourg		0.00	%		50.00	%		50.00	%	FINANCIAL SERVICES		2		2			(1	)
Allfunds Nominee Limited	United Kingdom		0.00	%		50.00	%		50.00	%	HOLDING COMPANY		0		0			0
Alliance & Leicester Covered Bonds (LM) Limited	United Kingdom		0.00	%		20.00	%		20.00	%	FINANCE		0		0			0
Andalucarthage Holding Société Holding Offshore S.A.	Morocco		0.00	%		28.48	%		28.48	%	HOLDING COMPANY		149		126			0
Anekis, S.A.	Spain		24.75	%		24.75	%		49.50	%	ADVERTISING		3		2			1
Arena Communications Network, S.L.	Spain		20.00	%		0.00	%		20.00	%	ADVERTISING		9		3			0
Asajanet Servicios Agropecuarios, S.L. (b)	Spain		30.00	%		0.00	%		30.00	%	MARKETING		0		1			0
Attijariwafa Bank Société Anonyme (consolidated) (b)	Tunisia		0.00	%		15.25	%		15.25	%	BANKING		1,323		77			(5	)
Attijari Factoring Maroc, S.A. (b)	Morocco		0.00	%		35.91	%		35.91	%	FACTORING		52		5			1
Attijari International Bank Société Anonyme (b)	Morocco		50.00	%		0.00	%		50.00	%	BANKING		515		5			2
Attijariwafa Bank Société Anonyme (consolidated) (b)	Morocco		0.00	%		14.55	%		14.55	%	BANKING		14,920		1,120			190
Autopistas del Sol, S.A. (b)	Argentina		0.00	%		14.17	%		14.17	%	MOTORWAY CONCESSIONS		316		75			(9	)
Baie Placements S.à.r.l.	Luxembourg		0.00	%		24.93	%		25.00	%	HOLDING COMPANY		0		0			0
Banco Internacional da Guiné-Bissau, S.A. (d)	Guinea Bissau		0.00	%		48.86	%		49.00	%	BANKING		12		(30	)		(1	)
Banesto Banca Privada Inversiones SICAV, S.A.	Spain		0.00	%		43.70	%		48.67	%	OPEN-END INVESTMENT COMPANY		3		7			0
Base Central — Rede Serviços Imobiliarios, S.A.	Portugal		0.00	%		49.80	%		49.80	%	PROPERTY SERVICES		2		1			(1	)
Benim — Sociedade Imobiliária, S.A. (b)	Portugal		0.00	%		24.93	%		25.00	%	PROPERTY		12		8			0
Bolsas y Mercados Españoles, Sociedad Holding de Mercados y Sistemas Financieros, S.A. (consolidated) (b)	Spain		2.70	%		2.34	%		5.04	%	FINANCIAL SERVICES		5,176		378			201
Cantabria Capital, SGECR, S.A.	Spain		50.00	%		0.00	%		50.00	%	VENTURE CAPITAL MANAGEMENT COMPANY		0		0			0
Carnes Estellés, S.A.	Spain		0.00	%		19.22	%		21.41	%	FOOD		36		9			0
Cartera del Norte, S.A.	Spain		0.00	%		32.41	%		36.10	%	FINANCE		1		1			0
Celta Holding S.A.	Brazil		0.00	%		25.46	%		26.00	%	HOLDING COMPANY		100		67			6
Centradia Group, Ltd. (b)	United Kingdom		30.45	%		0.00	%		30.45	%	ADVISORY SERVICES		1		1			0
Centro de Compensación Automatizado, S.A.	Chile		0.00	%		25.58	%		33.33	%	COLLECTION AND PAYMENT SERVICES		1		1			0
Centro para el Desarrollo, Investigación y Aplicación de Nuevas Tecnologías, S.A.	Spain		0.00	%		43.99	%		49.00	%	TECHNOLOGY		1		1			0

F-228


												Millions of Euros (a)
								% of									Net Profit
		% of Ownership Held by the Bank						Voting						Capital and			(Loss) for the
Entity	Location	Direct			Indirect			Rights (f)			Line of Business	Assets		Reserves			Year
Charta Leasing No.1 Limited (l)	United Kingdom		0.00	%		50.00	%		50.00	%	LEASING		105		1			(5	)
Charta Leasing No.2 Limited	United Kingdom		0.00	%		50.00	%		50.00	%	LEASING		57		(1	)		(4	)
Chatsworth Securities (LM) Limited	United Kingdom		0.00	%		20.00	%		20.00	%	FINANCE		0		0			0
Cía. De Arrendamento Mercantil Renault do Brasil	Brazil		0.00	%		38.98	%		39.88	%	LEASING		173		132			6
Cía de Crédito, Financiamento e Investimento Renault do Brasil	Brazil		0.00	%		38.75	%		39.65	%	FINANCE		446		56			8
Companhia Brasileira de Meios de Pagamento (consolidated)	Brazil		0.00	%		14.56	%		14.87	%	CARDS		829		(213	)		430
Companhia Brasileira de Meios de Pagamento (Cayman)	Cayman Islands		0.00	%		14.56	%		14.56	%	CARDS		154		2			1
Compañía Concesionaria del Túnel de Soller, S.A.	Spain		0.00	%		29.36	%		32.70	%	CONSTRUCTION		47		19			0
Compañía Española de Petróleos, S.A. (consolidated) (b)	Spain		28.71	%		3.77	%		32.48	%	OIL REFINING		9,441		4,517			765
Compañía Española de Seguros de Crédito a la Exportación, S.A., Compañía de Seguros y Reaseguros (b)	Spain		13.95	%		6.45	%		21.08	%	CREDIT INSURANCE		556		174			2
Comprarcasa Servicios Inmobiliarios, S.A.	Spain		0.00	%		47.50	%		47.50	%	PROPERTY SERVICES		2		1			0
Consorcio Credicard, C.A.	Venezuela		0.00	%		32.80	%		33.33	%	CARDS		119		12			15
Corporación Suiche 7B, C.A.	Venezuela		0.00	%		31.75	%		32.26	%	SERVICES		8		5			3
Diamond Finance Promotora de Vendas S.A.	Brazil		0.00	%		24.97	%		25.50	%	ADVISORY SERVICES		3		0			1
Ensafeca Holding Empresarial, S.L.	Spain		0.00	%		31.82	%		31.82	%	SECURITIES INVESTMENT		84		8			56
Espais Promocat, S.L.	Spain		0.00	%		44.89	%		50.00	%	PROPERTY		28		1			0
FC2Egestión, S.L.	Spain		0.00	%		50.00	%		50.00	%	ENVIRONMENTAL MANAGEMENT		2		1			1
Fidelización de Consumidores, S.A.	Spain		0.00	%		39.60	%		39.60	%	HOLDING COMPANY		0		0			0
Fondo de Titulización de Activos UCI 11	Spain		—			(h)			—		SECURITISATION		351		0			0
Fondo de Titulización de Activos UCI 14	Spain		—			(h)			—		SECURITISATION		877		0			0
Fondo de Titulización de Activos UCI 15	Spain		—			(h)			—		SECURITISATION		996		0			0
Fondo de Titulización de Activos UCI 18	Spain		—			(h)			—		SECURITISATION		1,647		0			0
Fondo de Titulización Hipotecaria UCI 10	Spain		—			(h)			—		SECURITISATION		252		0			0
Fondo de Titulización Hipotecaria UCI 12	Spain		—			(h)			—		SECURITISATION		464		0			0
Fondo de Titulización Hipotecaria UCI 16	Spain		—			(h)			—		SECURITISATION		1,434		0			0
Fondo de Titulización Hipotecaria UCI 17	Spain		—			(h)			—		SECURITISATION		1,225		0			0
France Telecom España, S.A. (b)	Spain		0.00	%		5.01	%		5.01	%	TELECOMMUNICATIONS		9,231		4,510			(1,586	)
Friedrichstrasse, S.L.	Spain		0.00	%		35.68	%		35.68	%	PROPERTY		43		43			0
Granoller’s Broker, S.L.	Spain		0.00	%		12.50	%		25.00	%	FINANCE		0		3			(3	)
Grupo Alimentario de Exclusivas, S.A.	Spain		0.00	%		36.33	%		40.46	%	FOOD		7		0			0
Grupo Financiero Galicia (consolidated) (b)	Argentina		0.00	%		6.67	%		3.50	%	BANKING		4,752		335			10
Grupo Konecta Maroc S.A.R.L. à associé unique	Morocco		0.00	%		48.26	%		48.26	%	TELEMARKETING		0		0			(1	)
Grupo Konecta UK Limited	United Kingdom		0.00	%		48.26	%		48.26	%	FINANCE		0		0			0
Grupo Konectanet, S.L.	Spain		0.00	%		48.26	%		48.26	%	HOLDING COMPANY		17		4			(2	)
Habitat Elpi, S.L.	Spain		0.00	%		44.89	%		50.00	%	PROPERTY		7		6			(5	)
HLC — Centrais de Cogeraçao, S.A. (c)	Portugal		0.00	%		24.46	%		24.49	%	ELECTRICITY		2		(2	)		(2	)
HSH Luxembourg Coinvest S.à.r.l. (b)	Luxembourg		0.00	%		13.47	%		0.00	%	HOLDING COMPANY		206		77			1
Imperial Holding S.C.A. (i)	Luxembourg		0.00	%		36.36	%		36.36	%	SECURITIES INVESTMENT		161		39			0
Inmobiliaria Sitio de Baldeazores, S.A.	Spain		0.00	%		44.89	%		50.00	%	PROPERTY		4		2			(7	)
JC Flowers I L.P. (b)	United States		14.34	%		0.00	%		4.99	%	HOLDING COMPANY		170		169			(16	)
JC Flowers AIV II L.P. (b)	United States		0.00	%		9.80	%		4.99	%	HOLDING COMPANY		20		16			2
JC Flowers AIV P.L.P. (b)	Canada		0.00	%		6.90	%		4.99	%	HOLDING COMPANY		149		148			0
Kapitalia Credit House Global, S.L.	Spain		0.00	%		48.26	%		48.26	%	SERVICES		0		0			0
Kassadesign 2005, S.L.	Spain		0.00	%		44.89	%		50.00	%	PROPERTY		64		13			(3	)
Kepler Weber S.A. (b)	Brazil		0.00	%		6.38	%		6.51	%	STORAGE SYSTEMS		97		56			(3	)

F-229


												Millions of Euros (a)
								% of									Net Profit
		% of Ownership Held by the Bank						Voting						Capital and			(Loss) for the
Entity	Location	Direct			Indirect			Rights (f)			Line of Business	Assets		Reserves			Year
Konecta Activos Inmobiliarios, S.L.	Spain		0.00	%		49.08	%		49.08	%	PROPERTY		10		0			0
Konecta Brazil Outsourcing Ltda.	Brazil		0.00	%		48.25	%		48.25	%	SERVICES		0		0			0
Konecta Broker, S.L.	Spain		0.00	%		48.26	%		48.26	%	SERVICES		0		0			1
Konecta Bto, S.L.	Spain		0.00	%		48.26	%		48.26	%	TELECOMMUNICATIONS		16		20			(2	)
Konecta Centro Especial de Empleo Madrid, S.L.	Spain		0.00	%		48.26	%		48.26	%	TELEMARKETING		0		0			0
Konecta Centro Especial de Empleo, S.A.	Spain		0.00	%		48.26	%		48.26	%	TELEMARKETING		7		5			2
Konecta Chile, S.A.	Chile		0.00	%		35.71	%		35.71	%	SERVICES		3		1			2
Konecta Colombia Grupo Konecta Colombia Ltda	Colombia		0.00	%		48.26	%		48.26	%	TELEMARKETING		0		0			0
Konecta Field Marketing, S.A.	Spain		0.00	%		48.26	%		48.26	%	MARKETING		0		0			0
Konecta Portugal, Lda.	Portugal		0.00	%		48.26	%		48.26	%	MARKETING		0		0			0
Konecta Servicios Administrativos y Tecnológicos, S.L.	Spain		0.00	%		48.26	%		48.26	%	SERVICES		1		0			0
Konecta Servicios Auxiliares, S.L.	Spain		0.00	%		48.26	%		48.26	%	SERVICES		1		0			0
Konecta Servicios de Empleo ETT, S.A.	Spain		0.00	%		38.61	%		38.61	%	TEMPORARY EMPLOYMENT AGENCY		1		0			1
Konecta Servicios Integrales de Consultoría, S.L.	Spain		0.00	%		36.67	%		36.67	%	ADVERTISING		0		0			0
Konecta Servicios Integrales de Marketing, S.L.	Spain		0.00	%		48.26	%		48.26	%	SERVICES		0		0			0
Konectanet Andalucía, S.L.	Spain		0.00	%		48.26	%		48.26	%	SERVICES		0		0			0
Konectanet Canarias, S.A.	Spain		0.00	%		48.26	%		48.26	%	MARKETING		12		9			4
Konectanet Comercialización, S.L.	Spain		0.00	%		48.23	%		48.23	%	MARKETING		1		0			1
Kontacta Comunicaciones, S.A.	Spain		0.00	%		36.19	%		36.19	%	SERVICES		1		1			1
Kontacta Top Ten, S.L.	Spain		0.00	%		36.18	%		36.18	%	SERVICES		0		0			0
Maxamcorp Holding, S.L. (consolidated) (e)	Spain		0.00	%		22.62	%		22.62	%	HOLDING COMPANY		808		142			17
Medimobiliario Ediçoes Period. e Multimedia, S.A	Portugal		0.00	%		29.38	%		29.38	%	PROPERTY SERVICES		0		0			0
New Affirmative LLC	United States		0.00	%		9.86	%		0.00	%	HOLDING COMPANY		8		(42	)		50
New PEL S.à.r.l.	Luxembourg		0.00	%		6.90	%		0.00	%	HOLDING COMPANY		46		24			10
Norchem Holdings e Negocios S.A.	Brazil		0.00	%		21.30	%		21.75	%	HOLDING COMPANY		71		27			3
Norchem Participaçoes e Consultoria S.A.	Brazil		0.00	%		48.97	%		50.00	%	BROKER-DEALER		40		15			2
Olivant Investments Switzerland S.A. (k)	Luxembourg		0.00	%		35.15	%		35.15	%	HOLDING COMPANY		—		—			—
Olivant Limited (consolidated) (b)	Guernsey		0.00	%		10.21	%		10.21	%	HOLDING COMPANY		256		62			24
Omega Financial Services GmbH	Germany		0.00	%		50.00	%		50.00	%	SERVICES		2		0			1
Operadora de Activos Alfa, S.A. De C.V.	Mexico		0.00	%		49.98	%		49.98	%	FINANCE		2		2			0
Operadora de Activos Beta, S.A. de C.V.	Mexico		0.00	%		49.99	%		49.99	%	FINANCE		2		2			0
Paranapanema S.A. (consolidated) (b)	Brazil		0.00	%		6.32	%		6.45	%	MINING-METALS PRODUCTION		400		16			(34	)
Private Estate Life S.A. (b)	Luxembourg		0.00	%		5.87	%		0.00	%	INSURANCE		3,545		56			10
Prodesur Mediterráneo, S.L.	Spain		0.00	%		44.89	%		50.00	%	PROPERTY		64		20			(1	)
Programa Multi Sponsor PMS, S.A. (b)	Spain		24.75	%		24.75	%		49.50	%	ADVERTISING		5		4			0
Proinsur Mediterráneo, S.L.	Spain		0.00	%		44.89	%		50.00	%	PROPERTY		76		30			(7	)
PSA Finance PLC	United Kingdom		0.00	%		50.00	%		50.00	%	LEASING		5		4			0
Puntoform, S.L.	Spain		0.00	%		48.23	%		48.23	%	TRAINING		0		0			0
Q 205 Real Estate GmbH (b)	Germany		0.00	%		17.84	%		17.84	%	PROPERTY		284		81			0
Quiero Televisión, S.A., Sole-Shareholder Company	Spain		0.00	%		31.82	%		31.82	%	TELECOMMUNICATIONS		7		7			0
Real Estate Investment Society España, S.A.	Spain		31.80	%		0.00	%		31.80	%	PROPERTY		89		97			(8	)
Real Tokio Marine Vida e Previdência S.A.	Brazil		0.00	%		48.97	%		50.00	%	INSURANCE		2,054		24			30
Redbanc, S.A.	Chile		0.00	%		25.65	%		33.43	%	SERVICES		10		5			0
Redbanc, S.A.	Uruguay		0.00	%		25.00	%		25.00	%	e-COMMERCE		2		0			0
Reintegra Contact Center, S.L.U.	Spain		0.00	%		45.00	%		45.00	%	SERVICES		0		0			0
Reintegra, S.A.	Spain		0.00	%		45.00	%		45.00	%	COLLECTION AND PAYMENT SERVICES		5		4			1
RFS Holdings B.V. (m)	Netherlands		27.91	%		0.00	%		27.91	%	HOLDING COMPANY		37,577		55,038			(17,480	)

F-230


												Millions of Euros (a)
								% of								Net Profit
		% of Ownership Held by the Bank						Voting						Capital and		(Loss) for the
Entity	Location	Direct			Indirect			Rights (f)			Line of Business	Assets		Reserves		Year
Servicio Pan Americano de Protección, S.A. de C.V.	Mexico		0.00	%		15.78	%		21.05	%	SECURITY		120		58		2
Servicios Financieros Enlace S.A. de C.V.	El Salvador		21.48	%		0.00	%		21.48	%	NOT-FOR-PROFIT COMPANY		6		3		0
Shinsei Bank, Ltd. (consolidated) (e)	Japan		0.00	%		8.46	%		0.00	%	BANKING		91,372		7,175		476
Sociedad Interbancaria de Depósitos de Valores, S.A.	Chile		0.00	%		22.48	%		29.29	%	SECURITIES DEPOSITORY INSTITUTION		2		1		0
Sociedad Promotora Bilbao Plaza Financiera, S.A. (b)	España		7.74	%		25.01	%		33.91	%	ADVISORY SERVICES		2		1		0
SolarCap Partners S.à.r.l.	Luxembourg		0.00	%		33.33	%		33.33	%	HOLDING COMPANY		6		1		0
Sovereign Bancorp, Inc. (consolidated) (b)	United States		24.99	%		0.00	%		24.99	%	BANKING		60,894		5,994		(970	)
Teka Industrial, S.A. (consolidated) (b)	Spain		0.00	%		10.00	%		10.00	%	ELECTRICAL APPLIANCES		839		256		57
The HSH Coinvest (Cayman) Trust-B (b)	Cayman Islands		0.00	%		13.47	%		4.99	%	HOLDING COMPANY		66		66		(30	)
Trabajando.com Chile S.A.	Chile		0.00	%		33.33	%		33.33	%	SERVICES		3		3		0
Transbank, S.A.	Chile		0.00	%		25.10	%		32.71	%	CARDS		188		6		2
Transolver Finance EFC, S.A.	Spain		0.00	%		50.00	%		50.00	%	LEASING		386		30		(1	)
Turyocio Viajes y Fidelización, S.A.	Spain		0.00	%		32.21	%		32.21	%	TRAVEL		1		0		0
U.C.I., S.A.	Spain		50.00	%		0.00	%		50.00	%	HOLDING COMPANY		209		114		1
UCI Servicios Inmobiliarios y Profesionales, S.L.	Spain		0.00	%		50.00	%		50.00	%	SERVICES		13		3		(1	)
UFI Servizi S.r.l. (b)	Italy		0.00	%		16.22	%		23.17	%	SERVICES		0		0		0
Unión de Créditos Inmobiliarios, S.A., EFC	Spain		0.00	%		50.00	%		50.00	%	MORTGAGE LOAN COMPANY		7,528		136		23
Vector Software Factory, S.L.	Spain		0.00	%		21.60	%		21.60	%	IT		7		1		1
Viking Consortium Holdings Limited (consolidated)	United Kingdom		0.00	%		24.99	%		24.99	%	HOLDING COMPANY		779		239		(32	)
Wtorre Empreendimentos Imobiliários S.A. (consolidated) (b)	Brazil		0.00	%		8.37	%		8.55	%	PROPERTY		481		95		(34	)


(a)		Amounts per the books of each company generally at December 31, 2008, unless otherwise stated, because the financial statements have not yet been authorized for issue. The data on foreign companies were translated to euros at the year-end exchange rates.

(b)		Data from the latest approved financial statements at December 31, 2007.

(c)		Data from the latest approved financial statements at December 31, 2003.

(d)		Data from the latest approved financial statements at April 30, 2002.

(e)		Data at March 31, 2008, the closing date of these entities.

(f)		Pursuant to Article 3 of Royal Decree 1815/1991, of December 20, approving the rules for the preparation of consolidated financial statements, in order to determine voting rights, the voting rights relating to subsidiaries or to other parties acting in their own name but on behalf of Group companies were added to the voting rights directly held by the Parent. Accordingly, the number of votes corresponding to the Parent in relation to companies over which it exercises indirect control is the number corresponding to each subsidiary holding a direct ownership interest in such companies.

(g)		Excluding the Group companies listed in Exhibit I.

(h)		Companies over which effective control is exercised.

(i)		Data from the latest approved financial statements at August 31, 2008.

(j)		Data from the latest approved financial statements at June 30, 2008.

(k)		Company newly incorporated in 2008 for which no approved financial statements are available.

(l)		Data from the latest approved financial statements at September 30, 2008.

(m)		The loss is not attributable to the Santander Group’s ownership interest in RFS Holdings B.V.

F-231

Exhibit IV

Notifications of acquisitions and disposals of investments in 2008

(Article 86 of the Consolidated Spanish Companies Act (Ley de Sociedades Anónimas) and Article 53 of Securities Market Law 24/1998 )

On January 3, 2008, the CNMV registered a notification from Banco Santander which disclosed that, at Group level, the ownership interest in the share capital of SOS CUETARA, S.A. had reached 5.1%.

On January 3, 2008, the CNMV registered a notification from Banco Santander which disclosed that it held, at Group level, an ownership interest of 3.342% in the share capital of IBERDROLA, S.A.

On January 11, 2008, the CNMV registered a notification from Banco Santander which disclosed that, at Group level, its significant ownership interest in SOS CUETARA, S.A. had been reduced to 3.925%.

On January 17, 2008, the CNMV registered a notification from Banco Santander which disclosed that the Santander Group’s ownership interest in IBERDROLA, S.A. had fallen to below 3%.

On January 23, 2008, the CNMV registered a notification from Banco Santander which disclosed that the Santander Group’s ownership interest in SOS CUETARA, S.A. had fallen to below 3%.

On May 19, 2008, the CNMV registered a notification from Banco Santander which disclosed that the Santander Group held a significant ownership interest of 3.313% in GRUPO FERROVIAL, S.A.

On July 22, 2008, the CNMV registered a notification from Banco Santander which disclosed that the Santander Group’s ownership interest in GRUPO FERROVIAL, S.A. had fallen to below 3%.

On July 29, 2008, the CNMV registered a notification from Banco Santander which disclosed that the Santander Group held a significant ownership interest of 3.616% in BANKINTER, S.A.

On July 29, 2008, the CNMV registered a notification from Banco Santander which disclosed that the Santander Group’s ownership interest in BANKINTER, S.A. had fallen to below 3%.

On November 24, 2008, the CNMV registered a notification from Banco Santander which disclosed that the Santander Group held a significant ownership interest of 3.062% in GRUPO FERROVIAL, S.A.

On November 24, 2008, the CNMV registered a notification from Banco Santander which disclosed that the Santander Group’s ownership interest in GRUPO FERROVIAL, S.A. had fallen to below 3%.

F-233

Exhibit V

Other information on the share capital of the Group’s banks

Following is certain information on the share capital of the Group’s banks.

Banco Santander S.A. (formerly Banco Santander Banespa, S.A.)

Number of equity instruments held by the Group

The Santander Group holds 171,552,856,622 ordinary shares and 147,471,330,933 preference shares through its subsidiaries Sterrebeeck B.V., Grupo Empresarial Santander, S.L. and Santander Seguros, S.A. The shares composing the share capital of Banespa have no par value.

The preference shares have no voting rights and are not convertible into ordinary shares. However, they have the following advantages:

	1.		Their dividends are 10% higher than those on ordinary shares.

	2.		Priority in the distribution of dividends.

	3.		Participation, on the same terms as ordinary shares, in capital increases resulting from the capitalization of reserves and profits and in the distribution of bonus shares arising from the capitalization of retained earnings, reserves or any other funds.

	4.		Priority in the reimbursement of capital in the event of the dissolution of the company.

There is no unpaid capital.

Capital increases in progress

No approved capital increases are in progress.

Capital authorized by the shareholders at the annual general meeting

The company is authorized to increase share capital, subject to approval by the board of directors but without the need to amend the Bylaws, up to a limit of 250,000,000,000 shares (125,000,000,000 ordinary shares and 125,000,000,000 preference shares). At present the share capital consists of 325,758,282,571 shares (174,292,415,394 ordinary shares and 151,465,867,177 preference shares).

Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

There are no rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights.

Specific circumstances that restrict the availability of reserves

The only restriction on the availability of Banco Santander, S.A.’s reserves relates to the legal reserve (restricted reserves), which can only be used to offset losses or to increase capital.

Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

Listed equity instruments

All the shares are listed on the São Paulo Stock Exchange BM&F BOVESPA S.A. Bolsa de Valores, Mercaderías e Futuros.

F-234

Banco Español de Crédito, S.A. (Banesto)

Number of equity instruments held by the Group

At December 31, 2008, the Parent and its subsidiaries held 613,696,098 fully subscribed and paid ordinary shares of €0.79 par value each, all of which carry the same voting and dividend rights.

The annual general meeting of Banco Español de Crédito, S.A. held at first call on February 26, 2008 resolved to reduce the entity’s share capital by €5,485,207 through the retirement of 6,943,300 treasury shares, previously acquired under authorization of the annual general meeting, within the limits envisaged in Articles 75 et seq.

Capital increases in progress

No approved capital increases are in progress.

Capital authorized by the shareholders at the annual general meeting

The annual general meeting of Banco Español de Crédito, S.A. held at first call on February 26, 2008 authorized the board of directors to increase capital at one or several times, within five years from the date of the annual general meeting, by an amount (par value) of up to half the share capital of the Bank at the date of the meeting, through the issuance of new shares, with or without share premium and with or without voting rights; the consideration for the new shares to be issued will be monetary contributions, and the board may set the terms and conditions of the capital increase. Also, the board was empowered to disapply preemptive subscription rights, fully or partially, in accordance with Article 159.2 of the Spanish Companies Act (Ley de Sociedades Anónimas).

Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

At December 31, 2008, no shares with these characteristics had been issued.

Specific circumstances that restrict the availability of reserves

The legal reserve can be used to increase capital provided that the remaining reserve balance does not fall below 10% of the increased share capital amount (10% of any net profit reported each year must be transferred to the legal reserve until the balance of this reserve reaches 20% of the share capital). Pursuant to the Spanish Companies Act (Ley de Sociedades Anónimas), a restricted reserve has been recorded for an amount equal to the carrying amount of the Banesto shares owned by subsidiaries.

The revaluation reserve recorded pursuant to Royal Decree-Law 7/1996, of June 7, can be used to increase capital.

The capital reduction described in section a) above was carried out with a charge to voluntary reserves and the corresponding amount was deducted from the restricted reserve to which Article 79.3 of the Spanish Companies Act (Ley de Sociedades Anónimas) refers and a reserve for retired capital of €5,485,207 (the same amount as the par value of the retired shares) was recorded. This reserve will be unrestricted under the same conditions as for the share capital reduction, in accordance with Article 167.3 of the Spanish Companies Act (Ley de Sociedades Anónimas).

Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

Listed equity instruments

All the shares are listed on the Spanish Stock Exchanges.

Banco Santander Totta, S.A. (Totta)

Number of equity instruments held by the Group

The Group holds 574,356,881 ordinary shares through Santander Totta, SGPS, S.A. and 14,593,315 ordinary shares through Taxagest Sociedade Gestora de Participaçoes Sociais, S.A., and Banco Santander Totta, S.A. holds 52,741 treasury shares, all of which have a par value of €1 each, are fully subscribed and paid and carry the same voting and dividend rights.

F-235

Capital increases in progress

No approved capital increases are in progress.

Capital authorized by the shareholders at the annual general meeting

Not applicable.

Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

At December 31, 2008, no shares with these characteristics had been issued.

Specific circumstances that restrict the availability of reserves

Under Article 296 of the Companies’ Code, the legal and merger reserves can only be used to offset losses or to increase capital.

Non-current asset revaluation reserves are regulated by Decree-Law 31/1998, under which losses can be offset or capital increased by the amounts for which the underlying asset is depreciated, amortized or sold.

Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

Listed equity instruments

Totta’s shares are not listed.

Banco Santander Chile

Number of equity instruments held by the Group

The Group holds 66,822,519,695 ordinary shares through Santander Chile Holding, S.A., 78,108,391,607 ordinary shares through Teatinos Siglo XXI Inversiones Limitada and 16,577 ordinary shares through Santander Inversiones Limitada (Chile), all of which have no par value, are fully subscribed and paid and carry the same voting and dividend rights.

Capital increases in progress

No approved capital increases are in progress.

Capital authorized by the shareholders at the annual general meeting

Due to the effect of the monetary adjustment, share capital amounted to CLP 891,302,881,691 at December 31, 2008. However, each year the annual general meeting must approve the balance sheet at December 31 of the previous year and, therefore, approve the share capital amount.

Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

At December 31, 2008, no shares with these characteristics had been issued.

Specific circumstances that restrict the availability of reserves

Remittances to foreign investors in relation to investments made under the Statute of Foreign Investment (Decree-Law 600/1974) and the amendments thereto require the prior authorization of the foreign investment committee.

Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

F-236

Listed equity instruments

All the shares are listed on the Chilean Stock Exchanges and, through American Depositary Receipts (ADRs), on the New York Stock Exchange.

Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander.

Number of equity instruments held by the Group

The Santander Group holds 78,290,230,897 ordinary shares through Grupo Financiero Santander, S.A. B. de C.V., representing 99.99% of the share capital of Banca Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander at December 31, 2008.

Capital increases in progress

No approved capital increases are in progress.

Capital authorized by the shareholders at the annual general meeting

The shareholders at the Annual and extraordinary general meeting held on August 18, 2008 resolved to set the authorized share capital of Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander at MXN 7,829,149,572, represented by a total of 78,291,495,726 fully subscribed and paid shares.

Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

In previous years the entity issued unsecured subordinated preference debentures totaling USD 300 million that are voluntarily convertible into shares by the holder. These issues are private and the purchasers of the entire issue were the current shareholders of Grupo Santander Financiero.

Specific circumstances that restrict the availability of reserves

Not applicable.

Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

Listed equity instruments

The company does not have any equity instruments listed on a stock exchange.

Abbey National plc

Number of equity instruments held by the Group

The Group holds 11,485,893,636 fully subscribed and paid ordinary shares of GBP 0.10 par value each, all of which carry the same voting and dividend rights.

Capital increases in progress

No approved capital increases are in progress.

Capital authorized by the shareholders at the annual general meeting

The company is authorized to increase share capital, subject to approval by the board of directors, by up to GBP 2,475,000,000 (24,750,000,000 ordinary shares), GBP 1,000,000,000 of sterling preference shares (1,000,000,000 shares), USD 10,080,000 of US dollar preference shares (1,008,000,000 shares) and €10,000,000 of euro preference shares (1,000,000,000 shares).

F-237

Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

Abbey issued GBP 200 million of subordinated debentures with a 10.06% coupon convertible into preference shares with a par value of GBP 1 each, at the issuer’s discretion. The exchange can be made at any time, provided the holders are given between 30 and 60 days’ notice.

Specific circumstances that restrict the availability of reserves

Not applicable.

Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

Listed equity instruments

Not applicable.

Alliance & Leicester plc

Number of equity instruments held by the Group

The Group holds 656,966,544 fully subscribed and paid ordinary shares of GBP 0.5 par value each, all of which carry the same voting and dividend rights.

Capital increases in progress

No approved capital increases are in progress.

Capital authorized by the shareholders at the annual general meeting

The company is authorized to increase share capital, subject to approval by the board of directors, up to a limit of GBP 388,000,000 (776,000,000 ordinary shares), GBP 300,000,000 of sterling preference shares (300,000,000 shares), USD 500,000,000 of US dollar preference shares (500,000,000 shares) and €400,000,000 of euro preference shares (400,000,000 shares).

Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

Not applicable.

Specific circumstances that restrict the availability of reserves

Not applicable.

Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

Listed equity instruments

Not applicable.

F-238

EXHIBIT INDEX


Exhibit
Number		Description
	1.1	By-laws (Estatutos) of Banco Santander, S.A.

	1.2	By-laws (Estatutos) of Banco Santander, S.A., (English translation of By-laws set forth in Exhibit 1.1 hereto).

	4.1*	Consortium and Shareholders’ Agreement dated May 28, 2007, among the Royal Bank of Scotland Group plc, Banco Santander Central Hispano, S.A., Fortis SA/N.V. and RFS Holdings B.V. (incorporated by reference to Exhibit 4.1 to our Annual Report on Form 20-F for the year ended December 31, 2006, filed with the Securities and Exchange Commission on July 2, 2007)

	4.2	Transaction Agreement dated as of October 13, 2008 by and between Sovereign Bancorp, Inc. and Banco Santander, S.A. (incorporated by reference to Exhibit 2.1 to our Registration Statement on Form F-4, filed with the Securities and Exchange Commission on November 17, 2008)

	8.1	List of Subsidiaries (incorporated by reference as Exhibits I, II and III of our Financial Statements filed with this Form 20-F).

	12.1	Section 302 Certification by the chief executive officer

	12.2	Section 302 Certification by the chief financial officer

	12.3	Section 302 Certification by the chief accounting officer

	13.1	Section 906 Certification by the chief executive officer, the chief financial officer and the chief accounting officer

	15.1	Consent of Deloitte, S.L.


*		Pursuant to a request for confidential treatment filed with the Securities and Exchange Commission, the confidential portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission.


	Page

Presentation of Financial and Other Information		5

Cautionary Statement Regarding Forward-Looking Statements		6

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS		8

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE		8

ITEM 3. KEY INFORMATION		8

A. Selected financial data		8

B. Capitalization and indebtedness		16

C. Reasons for the offer and use of proceeds		16

D. Risk factors		17

ITEM 4. INFORMATION ON THE COMPANY		24

A. History and development of the company		24

B. Business overview		35

C. Organizational structure		89

D. Property, plant and equipment		89

ITEM 4A. UNRESOLVED STAFF COMMENTS		90

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS		90

A. Operating results		96

B. Liquidity and capital resources		122

C. Research and development, patents and licenses, etc.		124

D. Trend information		124

E. Non Accrual and past due loans		125

F. Off-balance sheet arrangements		125

G. Tabular disclosure of contractual obligations		126

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES		127

A. Directors and senior management		127

B. Compensation		135

C. Board practices		159

D. Employees		167

E. Share ownership		169

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS		170

A. Major shareholders		170

B. Related party transactions		171

C. Interests of experts and counsel		172

ITEM 8. FINANCIAL INFORMATION		172

A. Consolidated statements and other financial information		172

B. Significant Changes		180


	Page

ITEM 9. THE OFFER AND LISTING		181

A. Offer and listing details		181

B. Plan of distribution		183

C. Markets		183

D. Selling shareholders		188

E. Dilution		188

F. Expense of the issue		188

ITEM 10. ADDITIONAL INFORMATION		188

A. Share capital		188

B. Memorandum and articles of association		188

C. Material contracts		197

D. Exchange controls		197

E. Taxation		197

F. Dividends and paying agents		202

G. Statement by experts		202

H. Documents on display		202

I. Subsidiary information		202

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		203

Introduction		203

Part 1. Corporate principles of risk management		203

Part 2. Corporate governance of the risks function		205

Part 3. Credit risk		207

Part 4. Operational risk		228

Part 5. Reputational risk		232

Part 6. Integral control of risk		234

Part 7. Adjustment to the new regulatory framework		234

Part 8. Economic capital		236

Part 9. Risk training activities		239

Part 10. Market risk		240

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES		262

A. Debt Securities		262

B. Warrants and Rights		262

C. Other Securities		262

D. American Depositary Shares		262

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES		263

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS		263

ITEM 15. CONTROLS AND PROCEDURES		263


	Page

ITEM 16. [Reserved]

A. Audit committee financial expert		266

B. Code of Ethics		266

C. Principal Accountant Fees and Services		266

D. Exemptions from the Listing Standards for Audit Companies		267

E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers		268

F. Changes in Registrant’s Certifying Accountant		268

G. Corporate Governance		268

PART III

ITEM 17. FINANCIAL STATEMENTS		271

ITEM 18. FINANCIAL STATEMENTS		271

ITEM 19. EXHIBITS		271

Exhibit 1.1
Exhibit 1.2
Exhibit 12.1
Exhibit 12.2
Exhibit 12.3
Exhibit 13.1
Exhibit 15.1


OTHER RATIOS (excluding country risk)	EU-IFRS ()**			IFRS-IASB			Differences			EU-IFRS ()**			IFRS-IASB			Differences


		0.9293			0.9000			(0.0293	)		0.6791			0.7414			0.0623
Basic earnings per share continuing operation (in euros)		0.8950			0.8656			(0.0294	)		0.6659			0.7282			0.0623
Diluted earnings per share (in euros)		0.9261			0.8968			(0.0293	)		0.6780			0.7402			0.0622
Diluted earnings per share continuing operation (in euros)		0.8919			0.8626			(0.0293	)		0.6648			0.7270			0.0622
Stockholders’ Equity per Share		5.94			6.03			0.09			6.48			6.62			0.1400
Net Yield		1.63	%		1.63	%		—			2.21	%		2.21	%		0.0000
Return on average total assets (ROA)		0.91	%		0.89	%		(0.02	%)		1.01	%		1.09	%		0.08	%
Return on average stockholders’ equity (ROE)		19.86	%		18.84	%		(1.02	%)		19.74	%		20.70	%		0.96	%
Average stockholders’ equity to average total assets		4.24	%		4.32	%		0.08	%		4.62	%		4.80	%		0.18	%
Ratio of earnings to fixed charges:
Excluding interest on deposits		1.74	%		1.71	%		(0.03	%)		1.81	%		1.91	%		0.10	%
Including interest on deposits		1.30	%		1.28	%		(0.02	%)		1.37	%		1.42	%		0.05	%


(*)		Balances of loans and contingent liabilities.

(**)		The EU-IFRS required to be applied under Bank of Spain’s Circular 4/2004.


		Director
Name	Position with Santander	Since
Emilio Botín (1)	Chairman	1960
Fernando de Asúa	First vice chairman	1999
Alfredo Sáenz	Second vice chairman and chief executive officer	1994
Matías R. Inciarte (2)	Third vice chairman	1988
Manuel Soto	Fourth vice chairman	1999
Assicurazioni Generali, S.p.A.	Director	1999
Antonio Basagoiti	Director	1999
Ana P. Botín (1)	Director	1989
Javier Botín (1)	Director	2004
Lord Burns	Director	2004
Guillermo de la Dehesa	Director	2002
Rodrigo Echenique	Director	1988
Antonio Escámez	Director	1999
Francisco Luzón	Director	1997
Abel Matutes	Director	2002
Juan R. Inciarte (2)	Director	2008
Luis Ángel Rojo	Director	2005
Luis Alberto Salazar-Simpson	Director	1999
Isabel Tocino	Director	2007


(1)		Ana P. Botín and Javier Botín are daughter and son, respectively, of Emilio Botín.

(2)		Matías R. Inciarte and Juan R. Inciarte are brothers.


December 2008	Portfolio		%
Residential mortgages		79,119		27.8	%*
First home		75,962		96	%
Second home and others		3,157		4	%


*		On Abbey’s total portfolio

(1)		First time buyer: customers who buy a home for the first time.

(2)		Mover: customers who change home with or without change in the bank that granted the mortgage.

(3)		Remortgage: customers who transfer their mortgage from another bank.


Gaps in Local Currency	TOTAL		0-6 months			6-12 months			1-3 years			> 3 years		Not sensitive
Assets		164,935		88,552			11,631			18,364			13,286		33,102
Liabilities		170,561		101,081			16,704			9,515			2,262		41,000
Off-balance sheet		5,780		(26,598	)		(1,858	)		(3,132	)		37,416		(47	)

Gap		154		(39,127	)		(6,931	)		5,718			48,440		(7,945	)


Gaps in Foreign Currency	TOTAL			0-6 months			6-12 months			1-3 years			> 3 years		Not sensitive
Assets		44,543			29,472			3,190			2,940			4,933		4,007
Liabilities		38,917			25,066			4,314			3,558			4,187		1,792
Off-balance sheet		(5,780	)		(4,835	)		(522	)		(830	)		456		(49	)

Gap		(154	)		(429	)		(1,646	)		(1,448	)		1,202		2,166


				Dec. 31, 2008
	*Dec. 31, 2007*			Low			Average			High			*Period End*

TOTAL		586.5			469.0			778.5			1,516.8			782.0

Trading		28.0			26.1			40.0			97.1			31.9
Non-Trading		585.8			449.9			767.6			1,441.2			807.4
Diversification Effect		(27.4	)		(7.0	)		(29.1	)		(21.5	)		(57.3	)


BANCO SANTANDER, S.A.
By:	/s/ José Antonio Álvarez
	Name:	José Antonio Álvarez
	Title:	Chief financial officer

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

		The breakdown of the net balance of this item is as follows:


	Millions of Euros
Net Balance	2008			2007			2006

Gains		3,919			671			1,009
On disposal of tangible assets		873			5			9
Of which, on disposal of the Ciudad Financiera business campus (Note 16)		837			—			—

Other gains		3,046			666			1,000
Of which:
Antonveneta (Note 1-i)		3,046			—			—
Intesa San Paolo (Note 1-i)		—			566			705
Antena 3 (Note 1-i)		—			—			294

Losses		(2,188	)		(28	)		(50	)
On impairment of tangible assets		(70	)		(27	)		(49	)
On disposal of tangible assets		(4	)		(1	)		(1	)
Other losses		(2,114	)		—			—
Of which:
Write-down of ownership interests in Royal Bank of Scotland and Fortis (Note 1-i)		(2,042	)		—			—

Net gains		1,731			643			959

	b)		*Business segments*

			At this secondary level of segment reporting, the Group is structured into Commercial Banking, Asset Management and Insurance and Global Wholesale Banking; the sum of these three segments is equal to that of the three primary operating geographical segments. Total figures for the Group are obtained by adding to the business segments the data for the Financial Management and Holdings segment.

			The Commercial Banking segment encompasses the entire commercial banking business (except for the Corporate Banking business managed globally using the Global Relationship Model). The Asset Management and Insurance segment includes the contribution to the Group arising from the design and management of the investment fund, pension and insurance businesses of the various units. The Global Wholesale Banking segment reflects the returns on the Global Corporate Banking business, those on Investment Banking and Markets worldwide, including all the globally managed treasury departments and the equities business.

			The condensed income statements and other significant data are as follows:

53.		Related party transactions

		The parties related to the Group are deemed to include, in addition to its subsidiaries, associates and jointly controlled entities, the Bank’s key management personnel (the members of its board of directors and the General Managers, together with their close family members) and the entities over which the key management personnel may exercise significant influence or control.

		Following is a detail of the ordinary business transactions performed by the Group with its related parties, distinguishing between associates and jointly controlled entities, members of the Bank’s board of directors, the Bank’s General Managers, and other related parties. Related-party transactions were made on terms equivalent to those prevailing in arm’s-length transactions or, when this was not the case, the related compensation in kind was recognized.


										Total
	Capital stock				Retained					Stockholders’
Changes in Stockholders’	Common				Earnings		Net income			Equity
Equity	Shares		Thousands of Euros
Balance at January 1, 2007		1,505		151		9		412			572

2006 Income allocation		—		—		412		(412	)		—

Net income 2007		—		—		—		1,663			1,663
Balance at December 31, 2007		1,505		151		421		1,663			2,235
2007 Income allocation		—		—		1,663		(1,663	)		—
Net income 2008		—		—		—		(744	)		(744	)
Balance at December 31, 2008		1,505		151		2,084		(744	)		1,491


									Millions of Euros (a)
													Preference/
													Preferred
		% of Ownership Held by the Bank											Participating-		Net Profit (Loss)
Entity	Location	Direct			Indirect			Line of Business	Capital		Reserves		Cost		for the year
Abbey National Capital Trust I	United States		—			(b)		FINANCE		0		0		0		0
Banesto Holdings, Ltd.	Guernsey		0.00	%		89.78	%	SECURITIES INVESTMENT		0		47		5		(2	)
Banesto Preferentes, S.A.	Spain		0.00	%		89.78	%	FINANCE		0		0		7		0
Santander Emisora 150, S.A., Sole-Shareholder Company	Spain		100.00	%		0.00	%	FINANCE		0		0		526		0
Santander Finance Capital, S.A., Sole-Shareholder Company	Spain		100.00	%		0.00	%	FINANCE		0		0		162		0
Santander Finance Preferred, S.A., Sole-Shareholder Company	Spain		100.00	%		0.00	%	FINANCE		0		2		116		(1	)


(a)		Amounts per the books of each company at December 31, 2008, translated to euros (in the case of foreign companies) at the year-end exchange rates.

(b)		Companies over which effective control is exercised.


	Year end December 31,
	2008						2007						2006
	Including			Excluding			Including			Excluding			Including			Excluding
	interest on			interest on			interest on			interest on			interest on			interest on
IFRS:	deposits			deposits			deposits			deposits			deposits			deposits
FIXED CHARGES:
Fixed charges		37,571,794			18,287,598			30,859,894			16,270,327			24,383,034			11,272,446

EARNINGS:
Income from continuing operations before taxes, minority interest and extraordinary items		10,776,783			10,776,783			10,687,627			10,687,627			8,582,241			8,582,241
Distributed earnings from associated companies		(701,426	)		(701,426	)		(294,809	)		(294,809	)		(262,315	)		(262,315	)
Fixed charges		37,571,794			18,287,598			30,859,894			16,270,327			24,383,034			11,272,446

Total earnings for ratio calculation		47,647,151			28,362,955			41,252,712			26,663,145			32,702,960			19,592,372

Ratio of earnings to fixed charges		1.27			1.55			1.34			1.64			1.34			1.74