20-F 1 c17956e20vf.htm FORM 20-F Form 20-F
Table of Contents

 
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 20-F
 
(Mark One)
   
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2010
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
for the transition period from                      to                     
 
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
Commission file number 001-12518
BANCO SANTANDER, S.A.
(Exact name of Registrant as specified in its charter)
Kingdom of Spain
(Jurisdiction of incorporation)
Ciudad Grupo Santander
28660 Boadilla del Monte (Madrid), Spain
(address of principal executive offices)
José Antonio Álvarez
Banco Santander, S.A.
Ciudad Grupo Santander
28660 Boadilla del Monte
Madrid, Spain
Tel: +34 91 289 32 80
Fax: +34 91 257 12 82
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
 
Securities registered or to be registered, pursuant to Section 12(b) of the Act
     
    Name of each exchange
Title of each class   on which registered
American Depositary Shares, each representing the right to receive one Share of Capital Stock of Banco Santander, S.A., par value Euro 0.50 each
  New York Stock Exchange
Shares of Capital Stock of Banco Santander, S.A., par value Euro 0.50 each
  New York Stock Exchange *
Guarantee of Non-cumulative Guaranteed Preferred Stock of Santander Finance Preferred, S.A. Unipersonal, Series 1,4,5, 6, 10 and 11
  New York Stock Exchange **
     
*  
Banco Santander Shares are not listed for trading, but are only listed in connection with the registration of the American Depositary Shares, pursuant to requirements of the New York Stock Exchange.
 
**  
The guarantee is not listed for trading, but is listed only in connection with the registration of the corresponding Non-cumulative Guaranteed Preferred Stock of Santander Finance Preferred, S.A. Unipersonal (a wholly owned subsidiary of Banco Santander, S.A.)
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None.
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act

None.
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ     No o
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes o     No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
         
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
         
US GAAP o   International Financial Reporting Standards as issued
by the International Accounting Standards Board þ
  Other o
If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o     Item 18 þ
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o      No þ
Indicate the number of outstanding shares of each of the issuer’s classes of capital stock or common stock as of the close
of business covered by the annual report.

8,440,275,004 shares
 
 

 

 


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BANCO SANTANDER, S.A.
 
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 Exhibit 12.1
 Exhibit 12.2
 Exhibit 12.3
 Exhibit 13.1
 Exhibit 15.1

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION
Accounting Principles
Under Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of July 19, 2002, all companies governed by the law of an EU Member State and whose securities are admitted to trading on a regulated market of any Member State must prepare their consolidated financial statements in conformity with the International Financial Reporting Standards previously adopted by the European Union (“EU-IFRS”). The Bank of Spain Circular 4/2004 of December 22, 2004 on Public and Confidential Financial Reporting Rules and Formats (“Circular 4/2004”) requires Spanish credit institutions to adapt their accounting systems to the principles derived from the adoption by the European Union of International Financial Reporting Standards. Therefore, Grupo Santander (“the Group” or “Santander”) is required to prepare its consolidated financial statements for the year ended December 31, 2010 in conformity with the EU-IFRS and Bank of Spain’s Circular 4/2004. Differences between EU-IFRS, Bank of Spain’s Circular 4/2004 and International Financial Reporting Standards as issued by the International Accounting Standard Board (IFRS-IASB) are not material. Therefore, we assert that the financial information contained in this annual report on Form 20-F complies with IFRS-IASB.
We have formatted our financial information according to the classification format for banks used in Spain. We have not reclassified the line items to comply with Article 9 of Regulation S-X. Article 9 is a regulation of the US Securities and Exchange Commission that contains formatting requirements for bank holding company financial statements.
Our auditors, Deloitte, S.L., an independent registered public accounting firm, have audited our consolidated financial statements in respect of the three years ended December 31, 2010, 2009 and 2008 in accordance with IFRS-IASB. See page F-1 to our consolidated financial statements for the 2010, 2009 and 2008 report prepared by Deloitte, S.L.
General Information
Our consolidated financial statements are in Euros, which are denoted “euro”, “euros”, “EUR” or “” throughout this annual report. Also, throughout this annual report, when we refer to:
 
“dollars”, “US$” or “$”, we mean United States dollars;
 
 
“pounds” or “£”, we mean United Kingdom pounds; and
 
 
“one billion”, we mean 1,000 million.
When we refer to “average balances” for a particular period, we mean the average of the month-end balances for that period, unless otherwise noted. We do not believe that monthly averages present trends that are materially different from trends that daily averages would show. In calculating our interest income, we include any interest payments we received on non-accruing loans if they were received in the period when due. We have not reflected consolidation adjustments in any financial information about our subsidiaries or other business units.
When we refer to “loans”, we mean loans, leases, discounted bills and accounts receivable, unless otherwise noted.
When we refer to “impaired balances” or “non-performing balances”, we mean impaired or non-performing loans and contingent liabilities (“NPL”), securities and other assets to collect.
When we refer to “allowances for credit losses”, we mean the specific allowances for credit losses, and unless otherwise noted, the collectively assessed allowance for credit losses and any allowances for country-risk. See “Item 4. Information on the Company—B. Business Overview—Classified Assets—Bank of Spain Allowances for Credit Losses and Country-Risk Requirements”.
Where a translation of foreign exchange is given for any financial data, we use the exchange rates of the relevant period (as of the end of such period for balance sheet data and the average exchange rate of such period for income statement data) as published by the European Central Bank, unless otherwise noted.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains statements that constitute “forward-looking statements” within the meaning of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, information regarding:
   
exposure to various types of market risks;
 
   
management strategy;
 
   
capital expenditures;
 
   
earnings and other targets; and
 
   
asset portfolios.
Forward-looking statements may be identified by words such as “expect,” “project,” “anticipate,” “should,” “intend,” “probability,” “risk,” “VaR,” “DCaR,” “ACaR,” “RORAC,” “target,” “goal,” “objective,” “estimate,” “future” and similar expressions. We include forward-looking statements in the “Operating and Financial Review and Prospects,” “Information on the Company,” and “Quantitative and Qualitative Disclosures About Market Risk” sections. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those in the forward-looking statements.
You should understand that adverse changes in the following important factors, in addition to those discussed in “Key Information—Risk Factors”, “Operating and Financial Review and Prospects,” “Information on the Company” and elsewhere in this annual report, could affect our future results and could cause those results or other outcomes to differ materially from those anticipated in any forward-looking statement:
Economic and Industry Conditions
 
exposure to various types of market risks, principally including interest rate risk, foreign exchange rate risk and equity price risk;
 
 
general economic or industry conditions in Spain, the United Kingdom, the United States, other European countries, Latin America and the other areas in which we have significant business activities or investments;
 
 
the sovereign debt rating for Spain, and the other countries where we operate;
 
 
a decrease or reversal of the moderate economic recovery in the economies of the United Kingdom, other European countries, Latin America, and the United States, and an increase of the volatility in the capital markets;
 
 
a further deterioration of the Spanish economy;
 
 
the effects of a continued decline in real estate prices, particularly in Spain, the UK and the US;
 
 
monetary and interest rate policies of the European Central Bank and various central banks;
 
 
inflation or deflation;
 
 
the effects of non-linear market behavior that cannot be captured by linear statistical models, such as the VaR/DCaR/ACaR model we use;
 
 
changes in competition and pricing environments;
 
 
the inability to hedge some risks economically;
 
 
the adequacy of loss reserves;
 
 
acquisitions or restructurings of businesses that may not perform in accordance with our expectations;
 
 
changes in demographics, consumer spending, investment or saving habits; and
 
 
changes in competition and pricing environments as a result of the progressive adoption of the internet for conducting financial services and/or other factors.

 

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Political and Governmental Factors
 
political stability in Spain, the United Kingdom, other European countries, Latin America and the US;
 
 
changes in Spanish, UK, EU, Latin American, US or foreign laws, regulations or taxes, and
 
 
increased regulation in light of the global financial crisis.
Transaction and Commercial Factors
 
damage to our reputation;
 
 
our ability to integrate successfully our acquisitions and the challenges inherent in diverting management’s focus and resources from other strategic opportunities and from operational matters while we integrate these acquisitions; and
 
 
the outcome of our negotiations with business partners and governments.
Operating Factors
 
technical difficulties and the development and use of new technologies by us and our competitors;
 
 
the occurrence of force majeure, such as natural disasters, that impact our operations or impair the asset quality of our loan portfolio;
 
 
the impact of changes in the composition of our balance sheet on future net interest income; and
 
 
potential losses associated with an increase in the level of substandard loans or non-performance by counterparties to other types of financial instruments.
The forward-looking statements contained in this annual report speak only as of the date of this annual report. We do not undertake to update any forward-looking statement to reflect events or circumstances after that date or to reflect the occurrence of unanticipated events.

 

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PART I
Item 1. Identity of Directors, Senior Management and Advisers
A. Directors and Senior Management
Not applicable.
B. Advisers
Not applicable.
C. Auditor.
Not applicable.
Item 2. Offer Statistics and Expected Timetable
A. Offer Statistics
Not applicable.
B. Method and Expected Timetable
Not applicable.
Item 3. Key Information
A. Selected financial data
Selected Consolidated Financial Information
We have selected the following financial information from our consolidated financial statements. You should read this information in connection with, and it is qualified in its entirety by reference to, our consolidated financial statements.
In the F-pages of this Form 20-F, the audited financial statements for the years 2010, 2009 and 2008 are presented. The audited financial statements for 2007 and 2006 are not included in this document, but they can be found in our previous annual reports on Form 20-F.
Under IFRS-IASB, revenues and expenses of discontinued businesses must be reclassified from each income statement line item to “Profit from discontinued operations”. Revenues and expenses from prior years are also required to be reclassified for comparison purposes to present the same businesses as discontinued operations. This change in presentation does not affect “Consolidated profit for the year” (see Note 37 to our consolidated financial statements).
In addition, the income statement for the period ended December, 31, 2009 reflects the impact of the consolidation of Banco Real, Alliance & Leicester Bradford & Bingley, Sovereign and other consumer businesses.

 

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    Year ended December 31,  
    2010     2009     2008     2007     2006  
    (in thousands of euros, except percentages and per share data)  
 
Interest and similar income
    52,906,754       53,173,004       55,043,546       45,512,258       36,669,337  
Interest expense and similar charges
    (23,682,375 )     (26,874,462 )     (37,505,084 )     (31,069,486 )     (24,879,598 )
Interest income / (charges)
    29,224,379       26,298,542       17,538,462       14,442,772       11,789,739  
Income from equity instruments
    362,068       436,474       552,757       419,997       412,554  
Income from companies accounted for using the equity method
    16,921       (520 )     791,754       438,049       423,875  
Fee and commission income
    11,679,702       10,726,368       9,741,400       9,290,043       8,147,164  
Fee and commission expense
    (1,945,552 )     (1,646,234 )     (1,475,105 )     (1,421,538 )     (1,251,132 )
Gains/losses on financial assets and liabilities (net)
    2,164,423       3,801,645       2,892,249       2,306,384       2,048,725  
Exchange differences (net)
    441,148       444,127       582,215       648,528       95,936  
Other operating income
    8,195,567       7,928,538       9,436,308       6,739,670       6,075,564  
Other operating expenses
    (8,089,330 )     (7,784,621 )     (9,164,487 )     (6,449,120 )     (5,800,019 )
Total income
    42,049,326       40,204,319       30,895,553       26,414,785       21,942,406  
Administrative expenses
    (16,255,988 )     (14,824,605 )     (11,665,857 )     (10,776,670 )     (9,783,902 )
Personnel expenses
    (9,329,556 )     (8,450,283 )     (6,813,351 )     (6,434,343 )     (5,886,871 )
Other general administrative expenses
    (6,926,432 )     (6,374,322 )     (4,852,506 )     (4,342,327 )     (3,897,031 )
Depreciation and amortization
    (1,939,984 )     (1,596,445 )     (1,239,590 )     (1,247,207 )     (1,130,159 )
Provisions (net)
    (1,132,621 )     (1,792,123 )     (1,640,561 )     (895,552 )     (1,007,037 )
Impairment losses on financial assets (net)
    (10,443,149 )     (11,578,322 )     (6,283,052 )     (3,430,122 )     (2,454,985 )
Impairment losses on other assets (net)
    (285,864 )     (164,630 )     (1,049,226 )     (1,548,218 )     (20,066 )
Gains/(losses) on disposal of assets not classified as non-current assets held for sale
    350,323       1,565,013       101,156       1,810,428       348,199  
Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations
    (290,170 )     (1,225,407 )     1,730,902       643,050       959,318  
Operating profit/(loss) before tax
    12,051,873       10,587,800       10,849,325       10,970,494       8,853,774  
Income tax
    (2,923,190 )     (1,206,610 )     (1,836,052 )     (2,322,107 )     (2,255,585 )
Profit from continuing operations
    9,128,683       9,381,190       9,013,273       8,648,387       6,598,189  
Profit/(loss) from discontinued operations (net)
    (26,922 )     30,870       319,141       987,763       1,647,564  
Consolidated profit for the year
    9,101,761       9,412,060       9,332,414       9,636,150       8,245,753  
Profit attributable to the Parent
    8,180,909       8,942,538       8,876,414       9,060,258       7,595,947  
Profit attributable to non-controlling interest
    920,852       469,522       456,000       575,892       649,806  
 
                                       
Per share information:
                                       
Average number of shares (thousands) (1)
    8,686,522       8,554,224       7,271,470       6,801,899       6,701,728  
Basic earnings per share (euros)
    0.9418       1.0454       1.2207       1.3320       1.1334  
Basic earnings per share continuing operation (euros)
    0.9449       1.0422       1.1780       1.2003       0.9233  
Diluted earnings per share (euros)
    0.9356       1.0382       1.2133       1.3191       1.1277  
Diluted earnings per share continuing operation (euros)
    0.9387       1.0350       1.1709       1.1887       0.9186  
Remuneration paid (euros) (2)
    0.6000       0.6000       0.6325       0.6068       0.4854  
Remuneration paid (US$) (2)
    0.8017       0.8644       0.8802       0.8932       0.6393  

 

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    Year ended December 31,  
    2010     2009     2008     2007     2006  
    (in thousands of euros, except percentages and per share data)  
Total assets
    1,217,500,683       1,110,529,458       1,049,631,550       912,914,971       833,872,715  
Loans and advances to credit institutions (net) (3)
    79,855,351       79,836,607       78,792,277       57,642,604       69,757,056  
Loans and advances to customers (net) (3)
    724,153,897       682,550,926       626,888,435       571,098,513       527,035,514  
Investment securities (net) (4)
    174,257,145       173,990,918       124,673,342       132,035,268       136,760,433  
Investments: Associates
    272,915       164,473       1,323,453       15,689,127       5,006,109  
 
                                       
Contingent liabilities (net)
    59,795,253       59,256,076       65,323,194       76,216,585       58,769,309  
 
                                       
Liabilities
                                       
Deposits from central banks and credit institutions (5)
    140,112,185       142,091,587       129,877,370       112,897,308       113,038,061  
Customer deposits (5)
    616,375,819       506,976,237       420,229,450       355,406,519       330,947,770  
Debt securities (5)
    192,872,222       211,963,173       236,403,290       233,286,688       203,742,817  
 
                                       
Capitalization
                                       
Guaranteed subordinated debt excluding preferred securities and preferred shares (6)
    10,933,818       13,866,889       15,747,915       16,742,134       11,186,480  
Secured subordinated debt
                             
Other subordinated debt
    12,188,524       15,192,269       14,452,488       11,666,663       12,399,771  
Preferred securities (6)
    6,916,930       7,315,291       7,621,575       7,261,382       6,836,570  
Preferred shares (6)
    435,365       430,152       1,051,272       522,558       668,328  
Non-controlling interest (including net income of the period)
    5,896,119       5,204,058       2,414,606       2,358,269       2,220,743  
Stockholders’ equity (7)
    75,018,339       68,666,584       57,586,886       55,199,882       44,851,559  
Total capitalization
    111,389,095       110,675,243       98,874,742       93,750,888       78,163,451  
Stockholders’ equity per share (7)
    8.64       8.03       7.92       8.12       6.69  
 
                                       
Other managed funds
                                       
Mutual funds
    113,509,684       105,216,486       90,305,714       119,210,503       119,838,418  
Pension funds
    10,964,711       11,309,649       11,127,918       11,952,437       29,450,103  
Managed portfolio
    20,314,226       18,364,168       17,289,448       19,814,340       17,835,031  
Total other managed funds
    144,788,621       134,890,303       118,723,080       150,977,280       167,123,552  
 
                                       
Consolidated ratios
                                       
Profitability ratios:
                                       
Net yield (8)
    2.68 %     2.62 %     2.05 %     1.80 %     1.68 %
Return on average total assets (ROA)
    0.76 %     0.86 %     1.00 %     1.10 %     1.01 %
Return on average stockholders’ equity (ROE)
    11.80 %     13.90 %     17.07 %     21.91 %     21.39 %
Capital ratio:
                                       
Average stockholders’ equity to average total assets
    5.82 %     5.85 %     5.55 %     4.71 %     4.36 %
Ratio of earnings to fixed charges (9)
                                       
Excluding interest on deposits
    2.28 %     2.01 %     1.57 %     1.67 %     1.79 %
Including interest on deposits
    1.52 %     1.40 %     1.27 %     1.35 %     1.36 %
 
                                       
Credit quality data
                                       
Loans and advances to customers
                                       
Allowances for impaired balances including country risk and excluding contingent liabilities as a percentage of total gross loans
    2.65 %     2.55 %     1.95 %     1.50 %     1.53 %
Impaired balances as a percentage of total gross loans
    3.75 %     3.43 %     2.19 %     1.05 %     0.86 %
Allowances for impaired balances as a percentage of impaired balances
    70.6 %     74.3 %     89.1 %     143.2 %     177.0 %
Net loan charge-offs as a percentage of total gross loans
    1.31 %     1.27 %     0.60 %     0.46 %     0.34 %
Ratios adding contingent liabilities to loans and advances to customers and excluding country risk (*)
                                       
Allowances for impaired balances (**) as a percentage of total loans and contingent liabilities
    2.58 %     2.44 %     1.83 %     1.42 %     1.45 %
Impaired balances (**) (10) as a percentage of total loans and contingent liabilities
    3.55 %     3.24 %     2.02 %     0.94 %     0.78 %
Allowances for impaired balances (**) as a percentage of impaired balances (**)
    72.74 %     75.33 %     90.64 %     150.55 %     187.23 %
Net loan and contingent liabilities charge-offs as a percentage of total loans and contingent liabilities
    1.21 %     1.17 %     0.55 %     0.41 %     0.31 %

 

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(*)  
We disclose these ratios because our credit risk exposure comprises loans and advances to customers as well as contingent liabilities, all of which are subject to impairment and, therefore, allowances are taken in respect thereof.
 
(**)  
Impaired or non-performing loans and contingent liabilities, securities and other assets to collect.
 
(1)  
Average number of shares has been calculated on the basis of the weighted average number of shares outstanding in the relevant year, net of treasury stock.
 
(2)  
The shareholders at the annual shareholders’ meeting held on June 19, 2009 approved a dividend of 0.6508 per share to be paid out of our profits for 2008. In accordance with IAS 33, for comparative purposes, dividends per share paid, as disclosed in the table above, take into account the adjustment arising from the capital increase with pre-emptive subscription rights carried out in December 2008. As a result of this adjustment, the dividend per share for 2008 amounts to 0.6325. The shareholders also approved a new remuneration scheme (scrip dividend), whereby the Bank offered the shareholders the possibility to opt to receive an amount equivalent to the second interim dividend on account of the 2009 financial year in cash or new shares. In light of the acceptance of this remuneration program (81% of the capital opted to receive shares instead of cash), at the general shareholders’ meeting held on June 11, 2010, the shareholders approved to offer again this option to the shareholders as payment for the second and third interim dividends on account of 2010. The remuneration per share for 2009 and 2010 disclosed above, 0.60, are calculated assuming that the four dividends for both years were paid in cash.
 
(3)  
Equals the sum of the amounts included under the headings “Financial assets held for trading”, “Other financial assets at fair value through profit or loss” and “Loans and receivables” as stated in our consolidated financial statements.
 
(4)  
Equals the amounts included as “Debt instruments” and “Equity instruments” under the headings “Financial assets held for trading”, “Other financial assets at fair value through profit or loss”, “Available-for-sale financial assets” and “Loans and receivables” as stated in our consolidated financial statements.
 
(5)  
Equals the sum of the amounts included under the headings “Financial liabilities held for trading”, “Other financial liabilities at fair value through profit or loss” and “Financial liabilities at amortized cost” included in Notes 20, 21 and 22 to our consolidated financial statements.
 
(6)  
In our consolidated financial statements, preferred securities and preferred shares are included under “Subordinated liabilities”.
 
(7)  
Equals the sum of the amounts included at the end of each year as “Own funds” and “Valuation adjustments” as stated in our consolidated financial statements. We have deducted the book value of treasury stock from stockholders’ equity.
 
(8)  
Net yield is the total of net interest income (including dividends on equity securities) divided by average earning assets. See “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Assets—Earning Assets—Yield Spread”.
 
(9)  
For the purpose of calculating the ratio of earnings to fixed charges, earnings consist of pre-tax income from continuing operations before adjustment for income or loss from equity investees plus fixed charges. Fixed charges consist of total interest expense (including or excluding interest on deposits as appropriate) and the interest expense portion of rental expense.
 
(10)  
Impaired loans reflect Bank of Spain classifications. These classifications differ from the classifications applied by U.S. banks in reporting loans as non-accrual, past due, restructured and potential problem loans. See “Item 4. Information on the Company—B. Business Overview—Classified Assets—Bank of Spain Classification Requirements”.

 

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Set forth below is a table showing our allowances for impaired balances broken down by various categories as disclosed and discussed throughout this annual report on Form 20-F:
                                         
    IFRS-IASB  
    Year Ended December 31,  
Allowances refers to:   2010     2009     2008     2007     2006  
    (in thousands of euros)  
 
                                       
Allowances for impaired balances (*) (excluding country risk)
    20,747,651       18,497,070       12,862,981       9,302,230       8,626,937  
Allowances for contingent liabilities and commitments (excluding country risk)
    (1,011,448 )     (623,202 )     (622,330 )     (587,485 )     (541,519 )
                               
Allowances for Balances of Loans (excluding country risk):
    19,736,203       17,873,868       12,240,651       8,714,745       8,085,418  
Allowances referred to country risk and other
    121,409       191,486       660,150       173,379       293,032  
                               
Allowances for impaired balances (excluding contingent liabilities)
    19,857,612       18,065,354       12,900,801       8,888,124       8,378,450  
 
                                       
Of which:
                                       
Allowances for Loans and receivables:
    19,738,975       17,898,632       12,719,623       8,796,371       8,288,128  
Allowances for Customers
    19,696,998       17,873,096       12,466,056       8,695,204       8,163,444  
Allowances for Credit institutions and other financial assets
    16,559       25,536       253,567       101,167       124,684  
Allowances for Debt Instruments
    25,418                          
Allowances for Debt Instruments available for sale
    118,637       166,722       181,178       91,753       90,322  
     
(*)  
Impaired or non-performing loans and contingent liabilities, securities and other assets to collect.
Exchange Rates
Fluctuations in the exchange rate between euros and dollars have affected the dollar equivalent of the share prices on Spanish stock exchanges and, as a result, are likely to affect the dollar market price of our American Depositary Shares, or ADSs, in the United States. In addition, dividends paid to the depositary of the ADSs are denominated in euros and fluctuations in the exchange rate affect the dollar conversion by the depositary of cash dividends paid on the shares to the holders of the ADSs. Fluctuations in the exchange rate of euros against other currencies may also affect the euro value of our non-euro denominated assets, liabilities, earnings and expenses.
The following tables set forth, for the periods and dates indicated, certain information concerning the exchange rate for euros and dollars (expressed in dollars per euro), based on the Noon Buying Rate as announced by the Federal Reserve Bank of New York for the dates and periods indicated.
The New York Federal Reserve Bank announced its decision to discontinue the publication of foreign exchange rates on December 31, 2008. From that date, the exchange rates shown are those published by the European Central Bank (“ECB”), and are based on the daily consultation procedures between central banks within and outside the European System of Central Banks, which normally takes place at 14:15 p.m. ECB time.
                 
    Rate During Period  
    Period End     Average Rate(1)  
Calendar Period   ($)     ($)  
2006
    1.3197       1.2661  
2007
    1.4603       1.3797  
2008
    1.3919       1.4695  
2009
    1.4406       1.3948  
2010
    1.3362       1.3257  
 
     
(1)  
The average of the Noon Buying Rates for euros on the last day of each month during the period.

 

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    Rate During Period  
Last six months   High $     Low $  
2010
               
November
    1.4244       1.2998  
December
    1.3435       1.3064  
2011
               
January
    1.3716       1.2903  
February
    1.3834       1.3440  
March
    1.4211       1.3773  
April
    1.4860       1.4141  
May (through May 26)
    1.4882       1.4020  
On May 26, 2011, the exchange rate for euros and dollars (expressed in dollars per euro), as published by the ECB, was $1.4168.
For a discussion of the accounting principles used in translation of foreign currency-denominated assets and liabilities to euros, see Note 2 (a) of our consolidated financial statements.
B. Capitalization and indebtedness.
Not Applicable.
C. Reasons for the offer and use of proceeds.
Not Applicable.
D. Risk factors.
Because our loan portfolio is concentrated in Continental Europe, the United Kingdom and Latin America, adverse changes affecting the Continental European, the United Kingdom or certain Latin American economies could adversely affect our financial condition.
Our loan portfolio is concentrated in Continental Europe (in particular, Spain), the United Kingdom and Latin America. At December 31, 2010, Continental Europe accounted for approximately 45% of our total loan portfolio (Spain accounted for 31% of our total loan portfolio), while the United Kingdom and Latin America accounted for 32% and 18%, respectively. Therefore, adverse changes affecting the economies of Continental Europe (in particular, Spain), the United Kingdom or the Latin American countries where we operate would likely have a significant adverse impact on our loan portfolio and, as a result, on our financial condition, cash flows and results of operations. See “Item 4. Information on the Company—B. Business Overview.”
Some of our business is cyclical and our income may decrease when demand for certain products or services is in a down cycle.
The level of income we derive from certain of our products and services depends on the strength of the economies in the regions where we operate and certain market trends prevailing in those areas. Therefore, negative cycles may adversely affect our income in the future.
Our business could be affected if our capital is not managed effectively.
Effective management of our capital position is important to our ability to operate our business, to continue to grow organically and to pursue our business strategy. Any future change that limits our ability to manage our balance sheet and capital resources effectively or to access funding on commercially acceptable terms could have a material adverse effect on our financial condition and regulatory capital position.

 

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A sudden shortage of funds could increase our cost of funding and have an adverse effect on our liquidity and funding.
Historically, our principal source of funds has been customer deposits (demand, time and notice deposits). At December 31, 2010, 25.2% of these customer deposits were time deposits in amounts greater than $100,000. Total time deposits (including repurchase agreements) represented 53.0%, 46.8% and 48.8% of total customer deposits at the end of 2010, 2009 and 2008, respectively. Large-denomination time deposits may be a less stable source of deposits than other type of deposits. The widespread crisis in investor confidence and resulting liquidity crisis experienced in 2008 and early 2009 increased our cost of funding and limited our access to some of our traditional sources of liquidity, such as domestic and international capital markets and the interbank market, and there can be no assurance that these conditions will not occur in the future.
The possibility of the moderate economic recovery returning to recessionary conditions or of turmoil or volatility in the financial markets would likely have an adverse effect on our business, financial position and results of operations.
The global economy began to recover from severe recessionary conditions in mid-2009 and is currently in the midst of a moderate economic recovery. The sustainability of the moderate recovery is dependent on a number of factors that are not within our control, such as a return of job growth and investment in the private sector, strengthening of housing sales and construction, continuation of the economic recovery globally and timing of the exit from government credit easing policies. We continue to face risks resulting from the aftermath of the severe recession and the moderate pace of the current recovery. A slowing or failing of the economic recovery could result in a return of some or all of the adverse effects of the earlier recessionary conditions.
Since the middle of 2007, there has been disruption and turmoil in financial markets around the world. Throughout many of our largest markets, including Spain, there have been dramatic declines in the housing market, with falling home prices and increasing foreclosures, high levels of unemployment and underemployment, and reduced earnings, or, in some cases, losses, for businesses across many industries, with reduced investments in growth.
This overall environment resulted in significant stress for the financial services industry, led to distress in credit markets, reduced liquidity for many types of financial assets, including loans and securities and caused concerns regarding the financial strength and adequacy of the capitalization of financial institutions. Some financial institutions around the world have failed, some have needed significant additional capital, and others have been forced to seek acquisition partners.
Concerned about the stability of the financial markets generally, the strength of counterparties and about their own capital and liquidity positions, many lenders and institutional investors reduced or ceased providing funding to borrowers. The resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets exacerbated the state of economic distress and hampered, and to some extent continues to hamper, efforts to bring about sustained economic recovery.
These economic conditions have had an adverse effect on our business and financial performance. While the global economy as a whole is currently experiencing a moderate recovery, we expect these conditions to continue to have an ongoing negative impact on us. A slowing or failing of the economic recovery would likely aggravate the adverse effects of these difficult economic and market conditions on us and on others in the financial services industry.
In an attempt to prevent the failure of the financial system, Spain, the United States and other European governments intervened on an unprecedented scale. In Spain, the government increased consumer deposit guarantees, made available a program to guarantee the debt of certain financial institutions, created a fund to purchase assets from financial institutions and the Spanish Ministry of Economy and Finance was authorized, on an exceptional basis and until December 31, 2009, to acquire, at the request of credit institutions resident in Spain, shares and other capital instruments (including preferred shares) issued by such institutions. Additionally, in 2009 the Spanish government created the Orderly Banking Restructuring Fund (FROB) to manage the restructuring processes of credit institutions and reinforce the equity of institutions undergoing integration. In the United States, the federal government took equity stakes in several financial institutions, implemented a program to guarantee the short-term and certain medium-term debt of financial institutions, increased consumer deposit guarantees, and brokered the acquisitions of certain struggling financial institutions, among other measures. In the United Kingdom, the government effectively nationalized some of the country’s largest banks, provided a preferred equity program open to all financial institutions and a program to guarantee short-term and certain medium-term debt of financial institutions, among other measures. For more information on recent regulatory changes, see “—Changes in the regulatory framework in the jurisdictions where we operate could adversely affect our business.”

 

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Despite the extent of the aforementioned intervention, global investor confidence remains cautious. The world’s largest developed economies, including the United States and United Kingdom, grew during 2010, although, in most cases, still at a slow pace. Spain, however, continued to suffer from a recession. In addition, recent downgrades of the sovereign debt of Greece, Portugal and Spain have caused volatility in the capital markets. Continued or worsening disruption and volatility in the global financial markets could have a material adverse effect on our ability to access capital and liquidity on financial terms acceptable to us, if at all. If capital markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits to attract more customers. Any such increase in capital markets funding costs or deposit rates would entail a repricing of loans, which would result in a reduction of volume, and may also have an adverse effect on our interest margins. A further economic downturn, especially in Spain, the United Kingdom, other European countries, the United States and certain Latin American countries, could also result in a further reduction in business activity and a consequent loss of income for us.
Risks concerning borrower credit quality and general economic conditions are inherent in our business.
Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of our businesses. Adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in Spanish, United Kingdom, Latin American, United States or global economic conditions, or arising from systemic risks in the financial systems, could reduce the recoverability and value of our assets and require an increase in our level of allowances for credit losses. Deterioration in the economies in which we operate could reduce the profit margins for our banking and financial services businesses.
The financial problems faced by our customers could adversely affect us.
Market turmoil and economic recession, especially in Spain, the United Kingdom, the United States and certain Latin American countries, could materially and adversely affect the liquidity, businesses and/or financial conditions of our borrowers, which could in turn increase our non-performing loan (“NPL”) ratios’, impair our loan and other financial assets and result in decreased demand for borrowings in general. In the context of recovery from the recent market turmoil and economic recession and with high unemployment coupled with low consumer spending, the value of assets collateralizing our secured loans, including homes and other real estate, could still decline significantly, which could result in the impairment of the value of our loan assets. Moreover, in 2010 we experienced an increase in our non-performing ratios and a deterioration in asset quality as compared to 2009. In addition, our customers may further significantly decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds, which would adversely affect our fee and commission income. Any of the conditions described above could have a material adverse effect on our business, financial condition and results of operations.
We are exposed to risks faced by other financial institutions.
We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, hedge funds and other institutional clients. Defaults by, and even rumors or questions about the solvency of, certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by other institutions. These liquidity concerns have had, and may continue to have, a chilling effect on inter-institutional financial transactions in general. Many of the routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties. A default by a significant financial counterparty, or liquidity problems in the financial services industry generally, could have a material adverse effect on our business, financial condition and results of operations.

 

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Our exposure to Spanish and UK real estate markets makes us more vulnerable to adverse developments in these markets.
Mortgage loans are one of our principal assets, comprising 51% of our loan portfolio as of December 31, 2010. As a result, we are highly exposed to developments in real estate markets, especially in Spain and the United Kingdom. In addition, we have exposure to a number of large real estate developers in Spain. From 2002 to 2007, demand for housing and mortgage financing in Spain increased significantly driven by, among other things, economic growth, declining unemployment rates, demographic and social trends, the desirability of Spain as a vacation destination and historically low interest rates in the Eurozone. The United Kingdom experienced a similar increase in housing and mortgage demand driven by, among other things, economic growth, declining unemployment rates, demographic trends and the increasing prominence of London as an international financial center. During late 2007, the housing market began to adjust in Spain and the United Kingdom as a result of excess supply (particularly in Spain) and higher interest rates. Since 2008, as economic growth stalled in Spain and the United Kingdom, housing oversupply has persisted, unemployment has continued to increase, housing demand has continued to decrease and home prices have declined while mortgage delinquencies increased. As a result, our NPL ratio increased from 0.94% at December 31, 2007, to 2.02% at December 31, 2008 and to 3.24% at December 31, 2009. On December 31, 2010, the ratio reached 3.55%, but has since begun to stabilize. These trends, especially higher unemployment rates coupled with declining real estate prices, could have a material adverse impact on our mortgage payment delinquency rates, which in turn could have a material adverse effect on our business, financial condition and results of operations.
Portions of our loan portfolio are subject to risks relating to force majeure events and any such event could materially adversely affect our operating results.
Our financial and operating performance may be adversely affected by force majeure events, such as natural disasters, particularly in locations where a significant portion of our loan portfolio is composed of real estate loans. Natural disasters such as earthquakes and floods may cause widespread damage which could impair the asset quality of our loan portfolio and could have an adverse impact on the economy of the affected region.
We may generate lower revenues from brokerage and other commission- and fee-based businesses.
Market downturns are likely to lead to a decline in the volume of transactions that we execute for our customers and, therefore, to a decline in our non-interest revenue. In addition, because the fees that we charge for managing our clients’ portfolios are in many cases based on the value or performance of those portfolios, a market downturn that reduces the value of our clients’ portfolios or increases the amount of withdrawals would reduce the revenues we receive from our asset management, private banking and custody businesses.
Even in the absence of a market downturn, below-market performance by our mutual funds may result in increased withdrawals and reduced inflows, which would reduce the revenue we receive from our asset management business.
Market risks associated with fluctuations in bond and equity prices and other market factors are inherent in our business. Protracted market declines can reduce liquidity in the markets, making it harder to sell assets and leading to material losses.
The performance of financial markets may cause changes in the value of our investment and trading portfolios. In some of our businesses, protracted adverse market movements, particularly asset price declines, can reduce the level of activity in the market, reducing market liquidity. These developments can lead to material losses if we cannot close out deteriorating positions in a timely way. This risk is especially great for assets with normally less liquid markets. Assets that are not traded on stock exchanges or other public trading markets, such as derivative contracts between banks, may have values that we calculate using models other than publicly quoted prices. Monitoring the deterioration of prices of assets like these is difficult and could lead to losses that we did not anticipate.
The volatility of world equity markets due to the recent economic uncertainty has had a particularly strong impact on the financial sector. Continued volatility may affect the value of our investments in entities in this sector and, depending on their fair value and future recovery expectations, could become a permanent impairment which would be subject to write-offs against our results.
Volatility in interest rates may negatively affect our net interest income and increase our non-performing loan portfolio.
Changes in market interest rates could affect the interest rates charged on our interest-earning assets differently than the interest rates paid on our interest-bearing liabilities. This difference could result in an increase in interest expense relative to interest income leading to a reduction in our net interest income. Income from treasury operations is particularly vulnerable to interest rate volatility. Because the majority of our loan portfolio reprices in less than one year, rising interest rates may also lead to an increasing non-performing loan portfolio. Interest rates are highly sensitive to many factors beyond our control, including deregulation of the financial sector, monetary policies, domestic and international economic and political conditions and other factors.

 

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As of December 31, 2010, our interest rate risk measured in daily Value at Risk (“VaRD”) terms amounted to 309.8 million.
Foreign exchange rate fluctuations may negatively affect our earnings and the value of our assets and shares.
Fluctuations in the exchange rate between the euro and the US dollar will affect the US dollar equivalent of the price of our securities on the stock exchanges in which our shares and ADSs are traded. These fluctuations will also affect the conversion to US dollars of cash dividends paid in euros on our ADSs.
In the ordinary course of our business, we have a percentage of our assets and liabilities denominated in currencies other than the euro. Fluctuations in the value of the euro against other currencies may adversely affect our profitability. For example, the appreciation of the euro against some Latin American currencies and the US dollar will depress earnings from our Latin American and US operations, and the appreciation of the euro against the sterling will depress earnings from our UK operations. Additionally, while most of the governments of the countries in which we operate have not imposed prohibitions on the repatriation of dividends, capital investment or other distributions, no assurance can be given that these governments will not institute restrictive exchange control policies in the future. Moreover, fluctuations among the currencies in which our shares and ADSs trade could reduce the value of your investment.
As of December 31, 2010, our largest exposures on temporary positions (with a potential impact on the income statement) were concentrated on, in descending order, the pound sterling, the Mexican peso and the Chilean peso. On December 31, 2010, our largest exposures on permanent positions (with a potential impact on equity) were concentrated on, in descending order, the Brazilian real, the pound sterling, the Mexican peso, the US dollar and the Chilean peso.
Despite our risk management policies, procedures and methods, we may nonetheless be exposed to unidentified or unanticipated risks.
Our risk management techniques and strategies may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we fail to identify or anticipate. Some of our qualitative tools and metrics for managing risk are based upon our use of observed historical market behavior. We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures. These qualitative tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses thus could be significantly greater than the historical measures indicate. In addition, our quantified modeling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses. If existing or potential customers believe our risk management is inadequate, they could take their business elsewhere. This could harm our reputation as well as our revenues and profits.
Our recent and future acquisitions may not be successful and may be disruptive to our business.
We have acquired controlling interests in various companies and have engaged in other strategic partnerships. See “Item 4. Information on the Company — A. History and development of the Company.” Additionally, we may consider other strategic acquisitions and partnerships from time to time. While we are optimistic about the acquisitions we have made, there can be no assurances that we will be successful in our plans regarding the operation of these or other acquisitions and strategic partnerships.
We can give no assurance that our recent and any future acquisition and partnership activities will perform in accordance with our expectations. We base our assessment of potential acquisitions and partnerships on limited and potentially inexact information and on assumptions with respect to operations, profitability and other matters that may prove to be incorrect. We can give no assurances that our expectations with regards to integration and synergies will materialize.

 

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Increased competition in the countries where we operate may adversely affect our growth prospects and operations.
Most of the financial systems in which we operate are highly competitive. Financial sector reforms in the markets in which we operate have increased competition among both local and foreign financial institutions, and we believe that this trend will continue. In particular, price competition in Europe, Latin America and the US has increased recently. Our success in the European, Latin American and US markets will depend on our ability to remain competitive with other financial institutions. In addition, there has been a trend towards consolidation in the banking industry, which has created larger and stronger banks with which we must now compete. There can be no assurance that this increased competition will not adversely affect our growth prospects, and therefore our operations. We also face competition from non-bank competitors, such as brokerage companies, department stores (for some credit products), leasing and factoring companies, mutual fund and pension fund management companies and insurance companies.
Changes in the regulatory framework in the jurisdictions where we operate could adversely affect our business.
Extensive legislation affecting the financial services industry has recently been adopted in Spain, the United States, the European Union and other jurisdictions, and regulations are in the process of being implemented. In Spain, the Bank of Spain issued Circular 9/2010 on December 22, 2010, which amends certain rules in order to establish more restrictive conditions regarding capital requirements for credit risk, credit risk mitigation techniques, securitization and treatment of counterparty and trading book risk. The Circular was issued following the passage of two EU Directives on risk management (Directive 2009/27/CE and Directive 2009/83/CE).
The European Union has created a European Systemic Risk Board to monitor financial stability and implemented rules that will increase capital requirements for certain trading instruments or exposures and impose compensation limits on certain employees located in affected countries. In addition, the European Union Commission is considering a wide array of other initiatives, including new legislation that will affect derivatives trading, impose surcharges on “globally” systemically important firms and possibly impose new levies on bank balance sheets.
In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act that was adopted in 2010 will result in significant structural reforms affecting the financial services industry. This legislation provides for, among other things: the establishment of a Bureau of Consumer Financial Protection which will have broad authority to regulate the credit, savings, payment and other consumer financial products and services that we offer; the creation of a structure to regulate systemically important financial companies; more comprehensive regulation of the over-the-counter derivatives market; prohibitions on us engaging in certain proprietary trading activities and restricting our ownership of, investment in or sponsorship of, hedge funds and private equity funds; restrictions on the interchange fees that we earn on debit card transactions; and a requirement that bank regulators phase out the treatment of trust preferred capital debt securities as Tier 1 capital for regulatory capital purposes.
In December 2010, the Basel Committee on Banking Supervision announced revisions to its Capital Accord, which will require higher capital ratio requirements for banks, narrow the definition of capital, and introduce short term liquidity and term funding standards, among other things. Also being considered is the imposition of a bank surcharge on institutions that are determined to be “globally significant financial institutions.” These requirements could increase our funding and operational costs.
These and any additional legislative or regulatory actions in Spain, the European Union, the United States or other countries, and any required changes to our business operations resulting from such legislation and regulations, could result in significant loss of revenue, limit our ability to pursue business opportunities in which we might otherwise consider engaging, affect the value of assets that we hold, require us to increase our prices and therefore reduce demand for our products, impose additional costs on us or otherwise adversely affect our businesses. Accordingly, we cannot provide assurance that any such new legislation or regulations would not have an adverse effect on our business, results of operations or financial condition in the future.
We may also face increased compliance costs and limitations on our ability to pursue certain business opportunities. Changes in regulations, which are beyond our control, may have a material effect on our business and operations. As some of the banking laws and regulations have been recently adopted, the manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. Moreover, no assurance can be given generally that laws or regulations will be adopted, enforced or interpreted in a manner that will not have material adverse effect on our business.

 

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Operational risks are inherent in our business.
Our businesses depend on the ability to process a large number of transactions efficiently and accurately. Losses can result from inadequate personnel, inadequate or failed internal control processes and systems or from external events that interrupt normal business operations. We also face the risk that the design of our controls and procedures prove to be inadequate or are circumvented. We have suffered losses from operational risk in the past and there can be no assurance that we will not suffer material losses from operational risk in the future.
We rely on recruiting, retaining and developing appropriate senior management and skilled personnel.
Our continued success depends in part on the continued service of key members of our management team. The ability to continue to attract, train, motivate and retain highly qualified professionals is a key element of our strategy. The successful implementation of our growth strategy depends on the availability of skilled management, both at our head office and at each of our business units. If we or one of our business units or other functions fails to staff our operations appropriately or loses one or more of our key senior executives and fails to replace them in a satisfactory and timely manner, our business, financial condition and results of operations, including control and operational risks, may be adversely affected. Likewise, if we fail to attract and appropriately train, motivate and retain qualified professionals, our business may also be affected.
Damage to our reputation could cause harm to our business prospects.
Maintaining a positive reputation is critical to our attracting and maintaining customers, investors and employees. Damage to our reputation can therefore cause significant harm to our business and prospects. Harm to our reputation can arise from numerous sources, including, among others, employee misconduct, litigation or regulatory outcomes, failure to deliver minimum standards of service and quality, compliance failures, unethical behavior, and the activities of customers and counterparties. Further, negative publicity regarding us, whether or not true, may harm our business prospects.
Actions by the financial services industry generally or by certain members of, or individuals in, the industry can also affect our reputation. For example, the role played by financial services firms in the financial crisis has damaged the reputation of the industry as a whole.
We could suffer significant reputational harm if we fail to properly identify and manage potential conflicts of interest. Management of potential conflicts of interest has become increasingly complex as we expand our business activities through more numerous transactions, obligations and interests with and among our clients. The failure to adequately address, or the perceived failure to adequately address, conflicts of interest could affect the willingness of clients to deal with us, or give rise to litigation or enforcement actions against us. Therefore, there can be no assurance that conflicts of interest will not arise in the future that could cause material harm to us.
Different disclosure and accounting principles between Spain and the US may provide you with different or less information about us than you expect.
There may be less publicly available information about us than is regularly published about companies in the United States. While we are subject to the periodic reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), the disclosure required from foreign private issuers under the Exchange Act is more limited than the disclosure required from US issuers. Additionally, we present our financial statements under IFRS-IASB which differs from U.S. GAAP.
We are exposed to risk of loss from legal and regulatory proceedings.
We face various issues that may give rise to risk of loss from legal and regulatory proceedings. These issues, including appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues and conduct by companies in which we hold strategic investments or joint venture partners, could increase the number of litigation claims and the amount of damages asserted against the Group or subject the Group to regulatory enforcement actions, fines and penalties. Currently, the Bank and its subsidiaries are the subject of a number of legal proceedings and regulatory actions. An adverse result in one or more of these proceedings could have a material adverse effect on our operating results for any particular period, could require changes to our business practices and may even require that we exit certain businesses. For information relating to the legal proceedings involving our businesses, see “Item 8. Financial Information—A. Consolidated statements and other financial information—Legal proceedings.”

 

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Credit, market and liquidity risks may have an adverse effect on our credit ratings and our cost of funds. Any reduction in our credit rating could increase our cost of funding and adversely affect our interest margins.
Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us and their ratings of our long-term debt are based on a number of factors, including our financial strength as well as conditions affecting the financial services industry generally.
Any downgrade in our ratings could increase our borrowing costs, limit our access to capital markets and adversely affect the ability of our business to sell or market our products, engage in business transactions—particularly longer-term and derivatives transactions—and retain our customers. This, in turn, could reduce our liquidity and have an adverse effect on our operating results and financial condition.
The Group’s long-term debt is currently rated investment grade by the major rating agencies (Aa2 by Moody’s Investors Service España, S.A. and AA by each of Standard & Poor’s Ratings Services and Fitch Ratings Ltd., respectively). Standard & Poor’s maintains our outlook at negative reflecting the higher credit risk of our Latin American exposures as well as likely high credit losses from exposures to the Spanish real estate market. Moody’s also maintains a negative outlook based on the Group’s high borrower concentration, the high exposure to developing markets with its Latin American franchise, and the ongoing macroeconomic challenges faced in many of Santander’s core markets (i.e. Spain, UK, US and, consequently, Mexico). In light of the difficulties in the financial services industry and the financial markets, there can be no assurance that the rating agencies will maintain their current ratings or outlooks, or with regard to those rating agencies who have a negative outlook on the Group, there can be no assurances that such agencies will revise such outlooks upward. The Group’s failure to maintain favorable ratings and outlooks could increase the cost of its funding and adversely affect the Group’s interest margins.
Our Latin American subsidiaries’ growth, asset quality and profitability may be adversely affected by volatile macroeconomic and political conditions.
The economies of the eight Latin American countries where we operate have experienced significant volatility in recent decades, characterized, in some cases, by slow or regressive growth, declining investment and hyperinflation. This volatility has resulted in fluctuations in the levels of deposits and in the relative economic strength of various segments of the economies to which we lend. Latin American banking activities (including Retail Banking, Global Wholesale Banking, Asset Management and Private Banking) accounted for 4,804 million of our profit attributable to the Parent bank for the year ended December 31, 2010 (an increase of 25% from 3,834 million for the year ended December 31, 2009). Negative and fluctuating economic conditions, such as a changing interest rate environment, impact our profitability by causing lending margins to decrease and leading to decreased demand for higher margin products and services. Negative and fluctuating economic conditions in some Latin American countries could also result in government defaults on public debt. This could affect us in two ways: directly, through portfolio losses, and indirectly, through instabilities that a default in public debt could cause to the banking system as a whole, particularly since commercial banks’ exposure to government debt is high in several of the Latin American countries in which we operate.
In addition, revenues from our Latin American subsidiaries are subject to risk of loss from unfavorable political and diplomatic developments, social instability, and changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest-rate caps and tax policies.
No assurance can be given that our growth, asset quality and profitability will not be affected by volatile macroeconomic and political conditions in the Latin American countries in which we operate.

 

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Latin American economies can be directly and negatively affected by adverse developments in other countries.
Financial and securities markets in the Latin American countries where we operate are, to varying degrees, influenced by economic and market conditions in other countries in Latin America and beyond. Negative developments in the economy or securities markets in one country, particularly in an emerging market, may have a negative impact on other emerging market economies. These developments may adversely affect the business, financial condition and operating results of our subsidiaries in Latin America.
Item 4. Information on the Company
A. History and development of the company
Introduction
Banco Santander, S.A. (“Santander”, the “Bank”, the “Parent” or the “Parent bank”) is the Parent bank of Grupo Santander. It was established on March 21, 1857 and incorporated in its present form by a public deed executed in Santander, Spain, on January 14, 1875.
On January 15, 1999, the boards of directors of Banco Santander, S.A. and Banco Central Hispanoamericano, S.A. agreed to merge Banco Central Hispanoamericano, S.A. into Banco Santander, S.A., and to change Banco Santander’s name to Banco Santander Central Hispano, S.A. The shareholders of Banco Santander, S.A. and Banco Central Hispanoamericano, S.A. approved the merger on March 6, 1999, at their respective general meetings. The merger and the name change were registered with the Mercantile Registry of Santander, Spain, by the filing of a merger deed. Effective April 17, 1999, Banco Central Hispanoamericano, S.A. shares were extinguished by operation of law and Banco Central Hispanoamericano, S.A. shareholders received new Banco Santander shares at a ratio of three shares of Banco Santander, S.A. for every five shares of Banco Central Hispanoamericano, S.A. formerly held. On the same day, Banco Santander, S.A. changed its legal name to Banco Santander Central Hispano, S.A.
The general shareholders’ meeting held on June 23, 2007 approved the proposal to change the name of the Bank to Banco Santander, S.A.
We are incorporated under, and governed by the laws of the Kingdom of Spain. We conduct business under the commercial name “Santander”. Our corporate offices are located in Ciudad Grupo Santander, Avda. de Cantabria s/n, 28660 Boadilla del Monte (Madrid), Spain. Telephone: (011) 34-91-259-6520.
Principal Capital Expenditures and Divestitures
Acquisitions, Dispositions, Reorganizations
Our principal acquisitions and dispositions in 2010, 2009 and 2008 are as follows:
Tender offer for subordinated notes
On January 11, 2010, Banco Santander, S.A. offered to purchase for cash 13 series of subordinated notes issued by several entities of Grupo Santander for an aggregate nominal amount of 3.3 billion.
The acceptance level of the exchange offers reached 60% and the nominal amount of the securities accepted for purchase was approximately 2 billion.
Also, on February 17, 2010, Banco Santander, S.A. offered to purchase for cash perpetual subordinated notes issued by Santander Perpetual, S.A.U. for a total nominal amount of US$1.5 billion (of which Santander held approximately US$350 million). The aggregate nominal amount of securities accepted for purchase was US$1.1 billion, representing 95% of the outstanding notes not held by Santander.
Bolsas y Mercados Españoles (“BME”)
On February 22, 2010, we sold to institutional investors 2,099,762 shares of BME representing approximately 2.5% of its share capital, at a price of 20.0 per share, which amounts to a total of approximately 42 million. The capital gain for Grupo Santander was of 30.4 million. Grupo Santander maintains a stake of 2.5% in the capital of BME and will continue to be represented on its board of directors.

 

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James Hay Holdings Limited
On March 10, 2010, Santander Private Banking UK Limited completed the sale of James Hay Holdings Limited (including its five subsidiaries) through the transfer of all the shares of James Hay Holdings Limited to IFG UK Holdings Limited, a subsidiary of the IFG Group, for a total of £39 million.
Companhia Brasileira de Soluções e Serviços (“CBSS”) and Cielo S.A.
On April 25, 2010, we announced that we had reached an agreement with Banco do Brasil S.A. and Banco Bradesco S.A. for the sale of the entire stake held by Grupo Santander in the companies Companhia Brasileira de Soluções e Serviços (15.32% of the capital), and Cielo S.A. – formerly Visanet – (7.20% of the capital).
The total agreed sale price was BRL200 million (approximately 89 million) for the 15.32% of CBSS and BRL1,487 million (approximately 650.7 million) for the 7.20% of Cielo.
The net capital gain generated for Grupo Santander was approximately 245 million.
The closing of the transactions took place in July 2010.
Acquisition of AIG Bank Polska Spolka Akcyina
On June 8, 2010, Santander Consumer Bank S.A. (Poland) increased capital through the issuance of 1,560,000 new shares, fully subscribed by AIG Consumer Finance Group Inc. who made a contribution of 11,177,088 shares of AIG Bank Polska S.A. representing a 99.92% of its share capital. The amount of the capital increase amounted to 452 million Poland slotys (109 million approximately as of the date of the transaction).
The capital increase has diluted the Group’s share capital of Santander Consumer Bank S.A. (Poland), which is now 70%.
Acquisition of 24.9% of Banco Santander Mexico
On June 9, 2010, we announced that Banco Santander had reached an agreement with Bank of America to acquire the 24.9% stake held by the latter in Grupo Financiero Santander (“Banco Santander Mexico”) for an amount of US$ 2.5 billion. Following this transaction, our holding in Banco Santander Mexico will amount to 99.9%.
In 2003, Bank of America acquired this 24.9% stake from Santander for an amount of US$1.6 billion.
The transaction was completed on September 23, 2010.
Agreement for the acquisition of RBS branches
On June 18, 2010, we announced that our affiliate Santander UK had submitted an offer in the tender process of approximately 300 branches of Royal Bank of Scotland that was taking place in the United Kingdom.
On August 4, 2010, we announced that our affiliate Santander UK had reached an agreement to acquire the parts of the banking businesses of the Royal Bank of Scotland Group (“RBS”) which are carried out through its RBS branches in England and Wales and its NatWest branches in Scotland. The consideration for the acquisition of £1,650 million (approximately 1,987 million), subject to completion adjustments, which comprises £350 million (approximately 421 million) of goodwill.
The acquisition includes 311 RBS branches in England and Wales, 7 NatWest branches in Scotland, 40 SME banking centers, more than 400 relationship managers, 4 corporate banking centers and 3 private banking centers. The transaction affects 1.8 million retail customers, around 244,000 SME customers and around 1,200 midcorporate customers.
The European Commission authorized the transaction.

 

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Completion is expected during 2012 and is subject to necessary approvals.
Acquisition of CitiFinancial Auto’s auto loan portfolio
On June 24, 2010, we announced that we had reached an agreement with Citigroup Inc. (“Citi”) to purchase US$3.2 billion of CitiFinancial Auto’s auto loan portfolio. In addition, Santander and Citi have entered into an agreement under which Santander will service a portfolio of US$7.2 billion of auto loans that will be retained by Citi.
Santander purchased the US$ 3.2 billion portion of the portfolio at a price equal to 99% of the value of the gross receivables.
The transaction closed on September 3, 2010.
Acquisition of the commercial banking business of Skandinaviska Enskilda Banken in Germany
On July 12, 2010, we announced that we had reached an agreement with Skandinaviska Enskilda Banken (SEB Group) for the acquisition by our affiliate Santander Consumer Bank AG of SEB’s commercial banking business in Germany for an amount of approximately 494 million (555 million deducting certain amendments to the purchase price agreed between the parties).
Following the acquisition of SEB’s commercial banking business in Germany, which includes 173 branches and serves one million customers, the number of branches of Santander Consumer Bank’s network in Germany almost doubled.
The transaction closed on January 31, 2011, once the appropriate regulatory approvals were obtained.
Tender offer for Santander Bancorp shares
On July 23, 2010, we announced the completion of the tender offer by our wholly-owned subsidiary, Administración de Bancos Latinoamericanos Santander, S.L. (“ABLASA”), for all outstanding shares of common stock of Santander BanCorp not owned by ABLASA at US$12.69 per share.
The offer expired at 12:00 midnight, New York City time, on July 22, 2010. Based on information provided by BNY Mellon Shareowner Services, the depositary for the tender offer, 3,644,906 Santander BanCorp shares were validly tendered and not withdrawn. The tendered shares represented approximately 7.8% of Santander BanCorp’s outstanding shares of common stock. Together with the 90.6% of the outstanding shares already held by ABLASA, ABLASA held a total of approximately 45,886,244 shares or 98.4% of the 46,639,104 Santander BanCorp shares outstanding after the expiration of the tender offer. All Santander BanCorp shares that were validly tendered and not withdrawn immediately prior to the expiration of the tender offer were accepted and purchased by ABLASA.
ABLASA acquired the remaining publicly held shares of Santander BanCorp through a short-form merger under Puerto Rico law on July 29, 2010. As a result of the merger, any remaining shares of Santander BanCorp common stock were cancelled pursuant to the merger in consideration for the same offer price of US$12.69 cash paid in the tender offer, without interest and less any required withholding taxes (other than shares of Santander BanCorp common stock for which appraisal rights were validly exercised under Puerto Rico law). Upon completion of the merger, Santander BanCorp became a wholly owned subsidiary of Banco Santander, its shares ceased to be traded on the New York Stock Exchange, and Santander BanCorp was no longer required to file certain information and periodic reports with the U.S. Securities and Exchange Commission.
Acquisition of auto loan portfolio in the USA from HSBC
On August 27, 2010, we purchased a US$ 4.3 billion auto loan portfolio in the USA from HSBC, for a total consideration of approximately US$ 4 billion. The portfolio amount represents the carrying amount of the loans at June 30, 2010, and the purchase price is subject to final adjustments.
Santander Consumer USA is already servicing the auto loan portfolio that was acquired.

 

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The transaction required only US$ 342 million financing from Grupo Santander, since it carries financing from a third party as well as assumptions of existing securitizations pertaining to part of the portfolio.
Conversion of “Valores Santander”
With regard to the currently outstanding “Valores Santander”, which are securities mandatorily convertible into newly-issued ordinary shares of the Bank issued in 2007 to partially finance the takeover bid of ABN AMRO, we informed on October 13, 2010 that conversion of 33,544 of such “Valores Santander” was requested in the ordinary conversion period that ended on October 4, 2010. Pursuant to the terms of such securities, Banco Santander issued 11,582,632 new shares in exchange for those “Valores Santander”. The public deed formalizing the capital increase was registered with the Commercial Registry of Cantabria on October 8, 2010.
After this increase, Banco Santander’s share capital was 4,120,204,383.5 euros, represented by 8,240,408,767 shares, par value 0.50 each.
Agreement with Qatar Holding by which it will subscribe a bond issue
On October 18, 2010, Banco Santander announced that it had reached an agreement with Qatar Holding, by which the latter will subscribe bonds issued by Banco Santander amounting to US$ 2.719 billion, mandatorily exchangeable for existing or for new shares of Banco Santander Brasil, at the choice of Banco Santander.
This transaction represents 5% of the share capital of Banco Santander Brasil.
The bonds will mature on the third anniversary of the issuance date. The conversion or exchange price will be Brazilian reais 23.75 per share and the bonds will pay an annual coupon of 6.75% in U.S. dollars.
The transaction is part of Banco Santander’s commitment for its Brazilian affiliate to have a free float of 25% by the end of 2014.
Metrovacesa, S.A. (“Metrovacesa”)
On February 20, 2009, certain credit institutions, including Banco Santander, S.A. and Banco Español de Crédito, S.A., entered into an agreement for the restructuring of the debt of the Sanahuja Group, whereby they received shares representing 54.75% of the share capital of Metrovacesa in consideration for payment of the Sanahuja Group’s debt.
The agreement also included the acquisition by the creditor entities of an additional 10.77% of the share capital of Metrovacesa (shares for which the Sanahuja family was granted a call option for four years), which gave rise to an additional disbursement of 214 million for the Group, and other conditions concerning the administration of this company.
Following the execution of the agreement, Grupo Santander had an ownership interest of 23.63% in Metrovacesa, S.A., and 5.38% of the share capital was subject to the call option described above.
At 2009 year-end, the Group measured this investment at 25 per share, which gave rise to additional write-downs and impairment losses of 269 million net of tax.
At December 31, 2010, the value of this holding amounted to 402 million, after deducting the write-downs, equivalent to 24.4 per share. Also, the Group has granted the company loans amounting to 109 million, which were fully provisioned.

 

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Acquisition of Real Tokio Marine Vida e Previdencia
In March 2009, the Santander Brazil Group acquired the 50% of the insurance company Real Seguros Vida e Previdencia (formerly Real Tokio Marine Vida e Previdencia) that it did not already own from Tokio Marine for BRL 678 million (225 million).
CEPSA
On March 31, 2009, we announced that we had reached an agreement with the International Petroleum Investment Company (“IPIC”) of the Emirate of Abu Dhabi for the sale of our 32.5% stake in CEPSA to IPIC, at a price of 33 per share, which would be reduced by the amount of any dividends paid, prior to the closing of the transaction, charged to the 2009 fiscal year. With this transaction, our historical annual return derived from our investment in CEPSA was of 13%. The sale had no impact on Grupo Santander’s earnings.
On July 30, 2009, we announced that we had transferred to IPIC our 32.5% stake in CEPSA at the agreed price of 33 per share. The acquirer applied to the National Securities Market Commission for exemption from the obligation to launch a tender offer, in accordance with the provisions of article 4.2 of Royal Decree 1066/2007, owing to the existence of a shareholder with a higher stake in the share capital, the denial of which would be cause for termination of the contract. On September 15, 2009, the National Securities Market Commission granted this exemption.
France Telecom España, S.A. (“France Telecom”)
On April 29, 2009, we announced that we had reached an agreement with the company Atlas Services Nederland BV (a 100%-owned affiliate of France Telecom) on the sale of the 5.01% share package held by Grupo Santander in France Telecom España, S.A. for an amount of 378 million. The sale generated a loss for Grupo Santander of 14 million.
Triad Financial Corporation
In June 2008, Banco Santander’s executive committee authorized the acquisition by Santander Consumer USA Inc. of the vehicle purchase loan portfolio and an internet-based direct loan platform (www.roadloans.com) belonging to the US group Triad Financial Corporation. The acquisition price, US$615 million, was determined on the basis of an analysis of each individual loan. In July 2009, Banco Santander’s executive committee authorized Santander Consumer USA Inc. to acquire Triad Financial SM LLC with its remaining portfolio for US$260 million.
Banco de Venezuela
On July 6, 2009, we announced that we had closed the sale of our stake in Banco de Venezuela to Bank for Economic and Social Development of Venezuela (Banco de Desarrollo Económico y Social de Venezuela), a public institution of the Bolivarian Republic of Venezuela for US$1,050 million, of which US$630 million were paid on that date, US$210 million were paid in October 2009 and the remainder was paid in December 2009. This sale did not have a material impact on the Group’s income statement.
Offers to exchange perpetual issues for other financial instruments
On July 9, 2009, Banco Santander S.A. and its subsidiary Santander Financial Exchanges Limited launched various offers to exchange 30 issues of securities eligible to be included in capital for a total nominal amount of approximately 9.1 billion for securities to be issued by Santander and its subsidiaries. The exchange envisaged the delivery of new securities that meet the current market standards and regulatory requirements to be classified as equity at the consolidated Group level.
The purpose of these offers was to improve the efficiency of the Group’s capital structure and to strengthen Grupo Santander’s balance sheet. The Group’s annual borrowing costs were not increased as a result of exchange offers.
The acceptance level of the exchange offers reached 49.8% and the nominal amount of the new securities issued was 3,210 million.

 

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The capital gains generated by this transaction amounted to 724 million which were used to strengthen the Group’s balance sheet.
Purchase of securitizations
On August 24, 2009, Banco Santander invited holders of certain securitization bonds for a total nominal amount of 25,273 million to tender any or all of the bonds for purchase by Banco Santander for cash.
The aggregate outstanding nominal amount of securities accepted for purchase was 609 million. The capital gains generated amounted to 97 million which were used to strengthen the Group’s balance sheet.
Initial Public Offering of Banco Santander (Brasil) S.A.
On October 13, 2009, our subsidiary Banco Santander (Brasil) S.A. (Santander Brasil) closed its initial public offering of 525,000,000 units, each unit representing 55 ordinary shares and 50 preference shares, without par value. The offered securities (units) are share deposit certificates. The units were offered in a global offering consisting of an international tranche in the United States and in other countries other than Brazil, in the form of American depositary shares (“ADSs”), in which each ADS represented a unit, and a domestic tranche of units in Brazil.
The initial public offering price was BRL 23.50 per unit and USD 13.4033 per ADS.
Additionally, Santander Brasil granted the international underwriters an option, exercisable before November 6, 2009, to purchase an additional 42,750,000 ADSs to cover any over-allotments in connection with the international tranche. Santander Brasil also granted the domestic underwriters an option, exercisable during the same period, to purchase an additional 32,250,000 units to cover any over-allotments in connection with the Brazilian tranche.
Once the global offering was completed and after the underwriters exercised their options, the capital increase amount was BRL 13,182 million (5,092 million). The free float of Santander Brasil rose to approximately 16.45% of its share capital, from only 2.0% before the global offering. Santander Brasil undertook to raise the free float to at least 25% of its share capital within three years from the date of the initial public offering in order to maintain its listing on Level 2 of the Bolsa de Valores, Mercadorias e Futuros (BM&FBOVESPA). The ADSs are listed on the New York Stock Exchange.
Santander Group’s net gains from the placement amounted to 1,499 million.
Prior to the public offering, on August 14, 2009, the Group transferred to Santander Brasil, through share exchange transactions, all the share capital of certain Brazilian asset management, insurance and banking companies (including Santander Seguros S.A. and Santander Brasil Asset Management Distribuidora de Títulos e Valores Mobiliários S.A.) which were owned by Santander Group and certain non-controlling shareholders. The total equity of the transferred businesses was valued at BRL 2.5 billion. The purpose of these transactions was to consolidate in a single entity Santander Group’s investments in Brazil, thus streamlining the current corporate structure and grouping the ownership interests held by Santander Group and by the non-controlling shareholders in those entities in the share capital of Santander Brasil. As a result of these transactions, the share capital of Santander Brasil was increased by approximately BRL 2.5 billion through the issuance of 14,410,886,181 shares, of which 7,710,342,899 were ordinary shares and 6,700,543,282 were preference shares. Additionally, on September 17, 2009, Banco Santander sold to Santander Brasil a loan portfolio consisting of loans to Brazilian companies and their affiliates abroad for US$ 806.3 million.
Santander Brasil intends to use the net proceeds from the global offering to expand its business in Brazil by growing its physical presence and increasing its capital base. Santander Brasil also intends to improve its funding structure and, along with its traditional funding sources, increase its credit transactions.
Santander Brasil is the third largest private-sector bank in Brazil, the largest bank controlled by an international financial group and the fourth largest bank overall in Brazil in absolute terms, with a market share of 10.2% in terms of assets. Santander Brasil carries on its business activity across the country, although its presence is concentrated in the Southern and South Eastern regions, where it has one of the largest branch networks, according to the Central Bank of Brazil.

 

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In August 2008, Santander Brasil acquired Banco Real, which was then the fourth largest private-sector Brazilian bank in terms of volume of assets. At the time of the purchase, Santander Brasil was the fifth largest private-sector bank in Brazil in terms of volume of assets. The businesses of Banco Real and Santander Brasil were highly complementary before the acquisition. Santander Brasil considers that the acquisition provides considerable opportunities in terms of operational, commercial and technological synergies, building on the best practices of each bank. Banco Real’s strong representation in the states of Rio de Janeiro and Minas Gerais has further enhanced Santander Brasil’s position in the Southern and South Eastern regions of the country, adding to this entity’s already significant presence in those regions, particularly in the State of São Paulo. The acquisition of Banco Real consolidated Santander Brasil’s position as a full-service bank with nationwide coverage, whose size enables it to compete efficiently in its target markets.
In the third quarter of 2010, we sold 2.616% of the share capital of Santander Brasil. The sale price amounted to 867 million, which gave rise to increases of 162 million in Reserves and 790 million in Non-controlling interest, and a decrease of 85 million in Valuation adjustments — Exchange differences.
Sale of 10% of the share capital of Attijariwafa Bank
On December 28, 2009, we announced that we had sold to the Moroccan Société Nationale d’Investissement (SNI) 10% of the share capital of Attijariwafa Bank, at a price of Dirhams 4,149.4 million (approximately 367 million at the exchange rate on such date). The transaction generated for Grupo Santander a capital gain of approximately 218 million, which was recognized under Gains/(losses) on disposal of non-current assets held for sale in the consolidated income statement. Following the sale, Grupo Santander holds 4.55% of Attijariwafa Bank.
Acquisition of Sovereign
On October 13, 2008, we announced that we would acquire Sovereign through a share exchange. At the date of the announcement, we held 24.35% of the outstanding ordinary shares of Sovereign. The capital and finance committee of Sovereign, composed of independent directors, requested that Santander consider acquiring the 75.65% of the company that it did not own. The committee assessed the transaction and recommended it to the company’s board of directors.
Under the terms of the definitive transaction agreement, which was unanimously approved by the non-Santander directors of Sovereign and by the executive committee of Santander, Sovereign shareholders received 0.2924 Banco Santander American Depository Shares (ADSs) for every 1 ordinary Sovereign share they owned (or 1 Banco Santander ADS for every 3.42 Sovereign shares).
On January 26, 2009, Banco Santander held an extraordinary general meeting at which the shareholders approved the capital increase for the acquisition of 75.65% of Sovereign Bancorp Inc.
On January 28, 2009, the shareholders at the general meeting of Sovereign approved the acquisition.
On January 30, 2009, the acquisition of Sovereign was completed and Sovereign became a wholly-owned subsidiary of Grupo Santander. The transaction involved the issuance of 0.3206 ordinary shares of Banco Santander for each ordinary share of Sovereign (equivalent to the approved exchange of 0.2924 ADSs adjusted for the dilution arising from the capital increase carried out in December 2008). To this end, 161,546,320 ordinary shares were issued by Banco Santander for a cash amount (par value plus share premium) of 1.3 billion.
This transaction gave rise to initial goodwill of US$2,053 million (1,601 million at the exchange rate on the date of the acquisition, 1,425 million at the exchange rate on December 31, 2009).
Acquisition of Alliance & Leicester plc
On July 14, 2008, Banco Santander, S.A. and Alliance & Leicester plc reached an agreement in relation to the terms of a recommended acquisition by Banco Santander, S.A. of the entire share capital of Alliance & Leicester plc.
As part of the transaction, the shareholders of Alliance & Leicester plc received a Banco Santander share for each three shares of Alliance & Leicester plc. Prior to the share exchange date, Alliance & Leicester plc approved (and paid) an interim dividend in cash amounting to 18 pence per share. Our shareholders, acting at the general shareholders’ meeting held on September 22, 2008, agreed to increase the Bank’s capital up to a nominal amount of 71,688,495 through the issuance of a maximum of 143,376,990 shares par value 0.50 in order to consummate the acquisition of Alliance & Leicester.

 

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The acquisition, which was completed by means of a scheme of arrangement, was approved by the shareholders of Banco Santander, S.A. (in relation to the capital increase) and of Alliance & Leicester plc. In addition, the scheme of arrangement was approved by the UK courts and was granted the relevant permits by the UK and Spanish regulatory bodies and the relevant anti-trust authorities.
The acquisition was completed on October 10, 2008. As of that date we issued 140,950,944 new shares of Banco Santander par value 0.50 each, with a share premium of 10.73 per share. The consideration for such shares was 422,852,832 shares of Alliance & Leicester plc, par value £0.50 each, representing all of its issued ordinary capital. The new shares represent 2.2% of the total share capital of the Bank after the capital increase. The capital increase amounted to 1,583 million (share capital of 70 million and share premium of 1,513 million), giving rise to initial goodwill of £442 million (554 million based on the exchange rate at the acquisition date).
Acquisition of Bradford & Bingley’s branch network and retail deposits
In September 2008, following the announcement by the UK’s HM Treasury (on September 29, 2008) to take Bradford & Bingley plc into public ownership, the retail deposits and branch network were transferred, under the provisions of the Banking (Special Provisions) Act 2008, to Santander UK.
As outlined in the HM Treasury statement, all of Bradford & Bingley’s customer loans and treasury assets, which included the £41 billion of mortgage assets, were placed under public ownership and were not transferred to Santander.
The transfer to Santander UK consisted of £20 billion retail deposit base with 2.7 million customers and Bradford & Bingley’s branch network, including 197 retail branches, 141 agencies (distribution outlets in third party premises) and related employees.
The acquisition price was £612 million, including the transfer of £208 million worth of capital relating to off-shore companies. The transaction was financed with the cash generated by the Group’s ordinary operations. Goodwill generated by this acquisition was £160 million (equivalent to 202 million at the exchange rate of the date of the transaction).
ABN AMRO Holding N.V. (“ABN AMRO”)
On July 20, 2007, having obtained the regulatory authorizations required to publish the documentation on the takeover bid for ABN AMRO, the Bank, together with the Royal Bank of Scotland Group plc, Fortis N.V. and Fortis S.A./N.V. (together, the “Banks”) formally launched, through RFS Holdings B.V., the offer for all the ordinary shares, ADSs and previously convertible preference shares of ABN AMRO. The initial acceptance period of this offer (the “Offer”) ended on October 5, 2007.
On October 10, 2007, the Banks declared the Offer to be unconditional. On that date, the owners of 86% of the ordinary share capital of ABN AMRO had accepted the Offer (including certain shares that the Banks already owned and had undertaken to contribute to RFS Holdings B.V.).
On the same date, the commencement of an additional offer period was announced, during which the holders of ordinary shares and ADSs of ABN AMRO could tender them, under the same terms and conditions as those of the Offer, until October 31, 2007.
Once the aforementioned additional offer period ended, the owners of 98.8% of the ordinary share capital of ABN AMRO (excluding its treasury shares) definitively accepted the Offer.
At December 31, 2007, the investment made by the Bank in ABN AMRO amounted to 20.6 billion and consisted of the Bank’s 27.9% ownership interest in the share capital of RFS Holdings B.V., the holding entity of the shares of ABN AMRO.

 

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Following all of these actions, the business lines were spun off from ABN AMRO with a view to subsequently integrate them into each of the Banks. The following business lines corresponded to Banco Santander: the Latin American Business Unit of ABN AMRO, which primarily consists of Banco ABN AMRO Real S.A. (“Banco Real”) in Brazil and the Banca Antoniana Popolare Veneta Spa Banking Group (“Antonveneta”), the cash relating to the sale of the consumer banking unit of ABN AMRO in the Netherlands, Interbank and DMC Consumer Finance, plus 27.9% of the assets that were not allocated to any of the Banks of the consortium and which we intend to dispose of. The spin-off process continued in 2008.
Accordingly, on March 4, 2008, the Dutch Central Bank expressed its acceptance of the overall spin-off plan, and in July 2008, it approved the individual spin-off plan for Banco Real and the business activities in Brazil. Subsequently, the Central Bank of Brazil approved the acquisition of Banco Real by Banco Santander, whereby it became effective.
The Group’s assets in Brazil also comprise those corresponding to the asset management business of ABN AMRO in Brazil, which were initially allocated to Fortis in the process of spinning off and integrating the assets of ABN AMRO, and which were acquired therefrom by the Bank in the first half of 2008 for 209 million.
As part of the assets that were spun off, in December 2008, Banco Santander Uruguay acquired the assets and liabilities of the Montevideo branch of ABN AMRO, and subsequently proceeded to merge the businesses.
Also, on May 30, 2008, Banco Santander and Banca Monte dei Paschi di Siena announced the completion of the purchase and sale of Antonveneta (excluding Interbank, its corporate banking subsidiary) for 9 billion and executed the agreement announced on November 8, 2007, which was only subject to approval by the competent authorities.
On June 2, 2008, Banco Santander entered into a definitive agreement with General Electric whereby a General Electric Group company would acquire Interbanca, and various Grupo Santander entities would acquire the GE Money units in Germany, Finland and Austria, GE’s card units in the UK and Ireland and its car finance unit in the UK. The base price agreed for the two transactions was 1 billion each, subject to various adjustments. These transactions were completed with the acquisition of GE Germany in the fourth quarter of 2008, and the acquisition of the remaining General Electric units and the sale of Interbanca in the first quarter of 2009. The initial goodwill arising from the acquisition of the GE business amounted to 558 million at December 2009.
In the third quarter of 2008, the Group sold 45% of ABN Amro Asset Management Italy SGR S.p.A. to Banca Monte di Paschi di Siena for 35 million as Banca Monte di Paschi di Siena had already acquired the remaining 55% through the acquisition of Antonveneta.
The businesses shared by the members of the consortium included subordinated liabilities issued by ABN AMRO. The portion of these liabilities relating to Santander was transferred to RBS and Fortis at market prices, giving rise to gains for Santander amounting to 741 million, which were recognized under “Gains/losses on financial assets and liabilities (net)” in the income statement for 2008.
On September 22, 2008, RFS Holdings B.V. completed the squeeze-out of the minority shareholders of ABN AMRO through the payment of 712 million to these shareholders. From that date onwards, RFS Holdings B.V. has been the sole shareholder of ABN AMRO. Banco Santander had to pay 200 million to complete this process, on the basis of its ownership interest in RFS. The Dutch State replaced Fortis’s position as a shareholder of RFS Holding B.V. in December 2008.
Banco Real was fully consolidated in the Group’s financial statements in the fourth quarter of 2008. Previously, it had been accounted for by the equity method through the ownership interest in RFS Holding. Accordingly, the Group’s income statement includes all the results contributed to the Group by this entity since January 1, 2008. The volume of assets that Banco Real contributed to the Group amounted to approximately 44 billion, based on the exchange rate at year-end. The amount of the assets, liabilities and contingent liabilities contributed to the Group by this entity are detailed in the related notes to our consolidated financial statements.

 

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The goodwill at the date of acquisition assigned to Banco Real following all the aforementioned transactions amounted to 8 billion (which was equivalent to 6,446 million at the exchange rate prevailing at the end of 2008).
In April 2009, ABN AMRO sold its branch in Asunción (Paraguay), after its conversion into a subsidiary, to Banco Regional (40% owned by the Rabobank group) for 42.2 million. This sale gave rise to a net gain of approximately 5 million.
On April 1, 2010, ABN AMRO was renamed The Royal Bank of Scotland Holding N.V.
On the same date, ABN AMRO Bank N.V., a newly established company with the purpose of holding most of the assets and liabilities belonging to the Dutch State became a wholly owned entity of this State. On the same date, we entered into a Restated Consortium and Shareholders Agreement, among the Royal Bank of Scotland Group plc, Banco Santander, S.A., The State of the Netherlands and RFS Holdings B.V.
At the date of this report on Form 20-F, Banco Santander still has a reduced economic interest in RFS Holdings B.V. as it owns a residual amount of the assets and liabilities shared with The Royal Bank of Scotland Group plc and the Dutch State.
Agreement between Santander and RBS’s European consumer finance unit
On April 4, 2008, Santander reached a preliminary agreement with RBS to acquire its continental European consumer finance business. The package includes activities in Germany, the Netherlands, Belgium and Austria. The acquisition was carried out by Santander Consumer Finance Germany GmbH.
The RBS European consumer finance business (RBS ECF) has 861 employees serving 2.3 million customers in Germany, the Netherlands, Belgium and Austria. Assets in 2007 averaged 2.2 billion. RBS ECF makes installment loans both directly and via partners. It has a strong presence in the credit card business both in terms of private and corporate customers, and provides consumer finance via retail chains.
The acquisition closed on July 1, 2008 for 306 million and gave rise to goodwill of 85 million.
Sale and leaseback of real estate assets
On November 14, 2007, we announced that we had sold ten real estate properties to two companies of Grupo Pontegadea for 458 million, obtaining a capital gain of 216 million. At the same time, we entered into a 40-year long lease contract in connection with these properties, with an option to repurchase those properties.
On November 23, 2007, we concluded the sale of 1,152 properties to a company belonging to the Pearl Group. Simultaneously, Grupo Santander entered into a lease agreement for these properties for a period between 45 to 47 years, with an option to repurchase those properties. The transaction amounted to 2,040 million, generating an approximate net capital gain of 860 million for Grupo Santander.
On September 12, 2008, we announced that we had completed a transaction with the consortium led by the United Kingdom property investor Propinvest for the sale of Ciudad Grupo Santander (our principal executive offices in Madrid, Spain) and its simultaneous lease-back for a period of 40 years, with a right to repurchase this property at the end of such period.
The amount of the sale transaction was 1.9 billion, as initially contemplated. The capital gains obtained by Santander from this sale were close to 600 million.
With this transaction, Banco Santander concluded the process involving the sale of its own buildings in Spain which commenced in 2007 within the framework of the ABN AMRO acquisition. The amount of assets sold was 4.4 billion, with capital gains of approximately 1.7 billion.

 

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Sale of Porterbrook Leasing Company
In October 2008, Santander UK reached an agreement to sell 100% of Porterbrook Leasing Company to a consortium of investors including Antin Infrastructure Partners (the BNP Paribas sponsored infrastructure fund), Deutsche Bank and Lloyds TSB, which was completed on December 8, 2008. Santander UK received approximately £1.6 billion in cash. This sale gave rise to a gain of 50 million (£40 million) recognized under “Gains on disposal of assets not classified as non-current assets held for sale” in our consolidated income statement for 2008.
Other Events
Lehman Brothers, Inc. (“Lehman”)
For information about the legal proceedings related to Lehman, see “Item 8. Financial Information—A. Consolidated statements and other financial information—Legal proceedings.”
Bernard L. Madoff Investment Securities (“Madoff Securities”)
For information about legal proceedings related to Madoff Securities, see “Item 8. Financial Information—A. Consolidated statements and other financial information—Legal proceedings.”
Capital Increases
As of December 31, 2006 and 2007, our capital stock consisted of 6,254,296,579 fully subscribed and paid shares of 0.50 par value each.
As of December 31, 2008, our capital had increased by 1,739,762,824 shares, or 27.82% of our total capital as of December 31, 2007, to 7,994,059,403 shares as a result of the following transactions:
   
Alliance & Leicester plc acquisition: There was a capital increase of 140,950,944 new shares of 0.50 par value each in accordance with the resolutions adopted by the Bank’s extraordinary shareholder general meeting held on September 22, 2008. One new Santander share was issued for every three Alliance & Leicester plc shares. These shares were issued on October 10, 2008.
 
   
Banco Santander rights offering: There was a capital increase of 1,598,811,880 new shares of 0.50 par value each at an issue price of 4.50 per share, which was fully paid on December 3, 2008, in connection with a right offering conducted by Banco Santander. The total amount of the issue was 7,194,653,460.
As of December 31, 2009, our capital had increased by 234,766,732 shares, or 2.94% of our total capital as of December 31, 2008, to 8,228,826,135 shares as a result of the following transactions:
   
Sovereign acquisition: The acquisition of Sovereign involved the issuance, on January 30, 2009, of 0.3206 ordinary shares of Banco Santander for each ordinary share of Sovereign. To this end, 161,546,320 ordinary shares were issued by Santander for a cash amount (par value plus share premium) of 1.3 billion.
 
   
“Valores Santander”: Conversion of 754 “Valores Santander” was requested in the ordinary conversion period that ended on October 5, 2009. Pursuant to the terms of such securities, we issued 257,647 new shares in exchange for those “Valores Santander” which commenced trading in the Spanish Stock Exchanges on October 15, 2009.
 
   
“Scrip Dividend”: On November 2, 2009 we issued 72,962,765 ordinary shares par value 0.5 in the free-of-charge capital increase, corresponding to 0.89% of our share capital. The amount of the capital increase was 36,481,382.50.

 

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As of December 31, 2010, our capital had increased by 100,295,963 shares, or 1.22% of our total capital as of December 31, 2009, to 8,329,122,098 shares as a result of the following transactions:
   
“Valores Santander”: On October 7, 2010, the Bank issued 11,582,632 new shares in exchange for 33,544 “Valores Santander”.
 
   
“Scrip Dividend”: On November 2, 2010 we issued 88,713,331 ordinary shares par value 0.5 in the free-of-charge capital increase, corresponding to 1.08% of our share capital. The amount of the capital increase was 44,356,665.50.
Recent Events
Acquisition of the Polish institution Bank Zachodni WBK
On September 10, 2010, we announced that we had reached an agreement with Allied Irish Banks (“AIB”) to acquire 70.36% of the Polish institution Bank Zachodni WBK (“BZ WBK”) for an amount of approximately 2.938 billion in cash. On February 7, 2011, we announced that we had launched a tender offer in Poland (the “Tender Offer”) for 100% of the share capital of the Polish entity Bank Zachodni WBK (“BZ WBK”) in accordance with applicable Polish law and regulation. The Tender Offer forms part of the agreement of Banco Santander with Allied Irish Banks (“AIB”) for the acquisition of AIB’s stake in BZ WBK announced in September 10, 2010.
Under the Tender Offer Banco Santander offered PLN 226.89 in cash per share (approximately 58.74) resulting in a total maximum consideration of PLN 16,580,216,589.57 (approximately 4,293.4 million) for the total share capital of BZ WBK.
The Tender Offer was made in Poland subject to Polish law and subject to the terms and conditions included in the Tender Offer document (dokument wezwania) submitted to the Polish securities regulator — Polish Financial Supervision Commission (Komisja Nadzoru Finansowego) and the Warsaw Stock Exchange (Giełda Papierów Wartościowych w Warszawie S.A.). The consummation of the Tender Offer was subject to the satisfaction of the conditions indicated in the Tender Offer document, including the acceptance of the tender offer by holders of more than 70% of the outstanding shares of BZ WBK and the approval by the Polish regulatory authorities of the acquisition by Grupo Santander of BZ WBK.
The acceptance period of the tender offer ended on March 25, 2011, having commenced on February 24, 2011.
69,912,653 BZ WBK shares were tendered, representing 95.67% of BZ WBK’s capital. Since the tender offer was made at a cash price of 226.89 PLN per share (approximately 57.05), the purchase of the shares tendered in the offer resulted in a payment of 15,862.48 million PLN (approximately 3,988.6 million).
Since the 70% acceptance threshold which was a condition of the tender offer was exceeded and all the remaining conditions, including the obtaining of the appropriate regulatory authorizations, were met, the tender offer was settled and the transfer of the shares were made on April 1, 2011.
Additionally, on the same date of April 1, 2011 we acquired AIB’s 50% stake in BZ WBK Asset Management for 150 million in cash.

 

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Scrip dividend
At its meeting on January 13, 2011, the Bank’s executive committee resolved to apply the Santander Dividendo Elección program on the dates on which the third interim dividend is traditionally paid, and offered shareholders the option of receiving an amount equal to this dividend of 0.117 per share, to be paid in shares or cash.
On February 1, 2011, we announced that the trading period for the free allotment rights corresponding to the free-of-charge capital increase by means of which the Santander Dividendo Elección program was carried out ended on January 31, 2011.
During the period set for that purpose, the holders of 13.26% of the free allotment rights accepted the irrevocable undertaking to waive their free allotment rights issued by Banco Santander. Consequently, Banco Santander has acquired 1,104,183,097 rights for a total gross consideration of 129,189,422.35. Banco Santander has waived the free allotment rights so acquired.
The holders of the remaining 86.74% of the free allotment rights have chosen to receive new shares. Thus, the definitive number of ordinary shares of 0.5 of face value issued in the free-of-charge capital increase is 111,152,906, corresponding to 1.33% of the share capital, and the amount of the capital increase is 55,576,453. The value of the remuneration corresponding to the shareholders who have requested new shares amounts to 845,317,850.13.
The authorization for the admission to listing of the new shares in the Spanish Stock Exchanges and in the other stock exchanges where Banco Santander is listed was granted in February 2011.
Payment of fourth dividend for 2010
On February 3, 2011, we announced the payment of the fourth dividend for 2010 for a gross amount of 0.228766 per share, which was paid in cash on May 1, 2011. If the proposed distribution of profit that will be submitted to the shareholders at the upcoming general meeting is approved, this will be our final dividend with respect to 2010, resulting in a total remuneration of 0.60 per share and a total of 4,999 million distributed to our shareholders.
Sale of 1.9% of Banco Santander Chile
On February 17, 2011, we announced that we had sold shares representing 1.9% of the share capital of Banco Santander — Chile, for a total consideration of US$291 million. This transaction generated a capital gain for Banco Santander of approximately 110 million, entirely accounted for as reserves. Following the transaction, we hold a 75% stake in the share capital of Banco Santander — Chile.
Agreement with Zurich Financial Services Group
On February 22, 2011, we signed a Memorandum of Understanding with insurer Zurich Financial Services Group (“Zurich”) to form a strategic alliance to strengthen insurance distribution in five Latin American markets key for Grupo Santander: Brazil, Chile, Mexico, Argentina and Uruguay.
We will create a holding company consisting of our insurance units in Latin America. Zurich will acquire 51% of the company and will manage the companies. We will retain a 49% stake and will enter into an agreement to distribute the alliance’s insurance products in each country for 25 years. According to the agreement, we will receive 100% of the revenues from commissions on the distribution of products.
The closing of this transaction is subject to final documentation and appropriate authorizations from the different regulators.

 

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Santander Banif Inmobiliario
On December 3, 2010, for purely commercial reasons, we decided to contribute resources to the Santander Banif Inmobiliario, FII property investment fund (“the Fund”) through the subscription of new units and the granting of a two-year liquidity guarantee in order to meet any outstanding redemption claims by the unit holders and to avoid winding up the Fund. We offered the unit holders of the Fund the opportunity to submit new requests for the total or partial redemption of their units or for the total or partial revocation of any redemption requests that they had previously submitted. Any such requests were required to be submitted before February 16, 2011.
Redemptions from the Fund, managed by Santander Real Estate, S.G.I.I.C. S.A., were suspended for a period of two years in February 2009, in accordance with the request filed with the Spanish National Securities Market Commission (CNMV), due to the lack of sufficient liquidity to meet the redemptions requested at that date.
On March 1, 2011, we paid the full amount of the redemptions requested by the Fund’s unit holders, i.e. 2,501 million (93.01% of the Fund’s net assets), through the subscription of the related units by us at their redemption value at February 28, 2011.
Following the aforementioned acquisition, we own 96.62% of the Fund. The suspension of redemptions was lifted from said date and the Fund is operating normally.
Public offering of Banco Santander Río, S.A.
On May 26, 2011, we announced that Banco Santander Río, S.A. had initiated proceedings to obtain authorization from the National Securities Commission of the Republic of Argentina and the U.S. Securities and Exchange Commission for a public offering of its Class B shares. No shares may be offered to the public until the aforementioned regulators have granted their respective authorizations.
We have notified Banco Santander Río of our intention to sell a yet undetermined number of our Banco Santander Río shares as part of the public offering.
B. Business overview
At December 31, 2010, we had a market capitalization of 66.0 billion, stockholders’ equity of 75.0 billion and total assets of 1,217.5 billion. We had an additional 144.8 billion in mutual funds, pension funds and other assets under management at that date. As of December 31, 2010, we had 54,518 employees and 6,063 branch offices in Continental Europe, 23,649 employees and 1,416 branches in the United Kingdom, 89,526 employees and 5,882 branches in Latin America, 8,647 employees and 721 branches in the United States (Sovereign Bancorp) and 2,529 employees in other geographic regions (for a full breakdown of employees by country, see Item 6 of Part I, “Directors, Senior Management and Employees—D. Employees”).
We are a financial group operating principally in Spain, the United Kingdom, other European countries, Brazil and other Latin American countries and the United States, offering a wide range of financial products.
In Latin America, we have majority shareholdings in banks in Argentina, Brazil, Chile, Colombia, Mexico, Peru, Puerto Rico and Uruguay.
The financial statements of each business area have been drawn up by aggregating the Group’s basic operating units. The information relates to both the accounting data of the companies in each area as well as that provided by the management information systems. In all cases, the same general principles as those used in the Group are applied.
In accordance with the criteria established by the IFRS-IASB, the structure of our operating business areas has been segmented into two levels:
First (or geographic) level. The activity of our operating units is segmented by geographical areas. This coincides with our first level of management and reflects our positioning in the world’s main currency areas. The reported segments are:
   
Continental Europe. This covers all retail banking business (including Banco Banif, S.A. (“Banif”), our specialized private bank), wholesale banking and asset management and insurance conducted in Europe, with the exception of the United Kingdom. This segment includes the following units: the Santander Branch Network, Banco Español de Crédito, S.A. (“Banesto”), Santander Consumer Finance (including Santander Consumer USA) and Portugal.

 

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United Kingdom. This includes retail and wholesale banking, asset management and insurance conducted by the various units and branches of the Group in the UK.
 
   
Latin America. This embraces all the financial activities conducted via our subsidiary banks and other subsidiaries in Latin America. It also includes the specialized units in Santander Private Banking, as an independent globally managed unit. Santander’s business in New York is also managed in this area.
 
   
Sovereign. This includes all the financial activities of Sovereign, including retail and wholesale banking, asset management and insurance. Sovereign’s operations are conducted solely in the U.S.
Second (or business) level. This segments the activity of our operating units by type of business. The reported segments are:
   
Retail Banking. This covers all customer banking businesses (except those of Corporate Banking, which are managed globally).
 
   
Global Wholesale Banking. This business reflects the returns from Global Corporate Banking, Investment Banking and Markets worldwide, including all treasury activities under global management, as well as our equities business.
 
   
Asset Management and Insurance. This includes our units that design and manage mutual and pension funds and insurance.
In addition to these operating units, which cover everything by geographic area and business, we continue to maintain a separate Corporate Activities area. This area incorporates the centralized activities relating to equity stakes in industrial and financial companies, financial management of the structural exchange rate position and of the Parent bank’s structural interest rate risk, as well as management of liquidity and of stockholders’ equity through issues and securitizations. As the Group’s holding entity, it manages all capital and reserves and allocations of capital and liquidity.
In 2010, Grupo Santander maintains the same primary and secondary operating segments as it had in 2009.
In addition, and in line with the criteria established by IFRS-IASB, the results of businesses discontinued in 2009 (Banco de Venezuela) which were consolidated by global integration, were eliminated from various lines of the income statement and included in “net profit from discontinued operations.”
First level (or geographic):
Continental Europe
This area covers the banking activities of the different networks and specialized units in Europe, principally with individual clients and SMEs, as well as private and public institutions. During 2010, there were four main units within this area: the Santander Branch Network, Banesto, Santander Consumer Finance and Portugal including retail banking, global wholesale banking and asset management and insurance.
Continental Europe is the largest business area of Grupo Santander. At the end of 2010, it accounted for 39.3% of total customer funds under management, 44.9% of total loans and credits and 35.0% of profit attributed to the Parent bank of the Group’s main business areas.
The area had 6,063 branches and 54,518 employees (direct and assigned) at the end of 2010.
In 2010, the Continental Europe segment’s profit attributable to the Parent bank decreased 18.9% to 3,885 million mainly due to the weak economic environment in Spain and Portugal. Return on equity (“ROE”) in 2010 was 14.1%, a 4.6% decrease from 2009.

 

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The Santander Branch Network
Our retail banking activity in Spain is carried out mainly through the branch network of Santander, with support from an increasing number of automated cash dispensers, savings books updaters, telephone banking services, electronic and internet banking.
At the end of 2010, we had 2,931 branches and a total of 18,893 employees (direct and assigned), none of which was hired on a temporary basis, dedicated to retail banking in Spain. Compared to 2009, there was a net decrease of three branches and 171 employees.
In 2010, profit attributable to the Parent bank from the Santander Branch Network was 1,243 million, 38.0% lower than 2009, while the ROE reached 17.4% (as compared to 26.6% in 2009).
In 2010, the Santander Branch Network lending decreased by approximately 3.4%, customer funds under management grew by 11.0%, deposits increased 18.3%, mutual funds fell 6.1% and pension funds decreased 1.1%. The decrease in lending in 2010 versus 2009 still reflects that demand from individuals and companies was lower than normal because of the economic environment in Spain. The ratio of non-performing loans (“NPL”) for Banco Santander, S.A. grew to 4.2% from 3.4% in 2009.
Banesto
At the end of 2010, Banesto had 1,762 branches and 9,742 employees (direct and assigned), of which 16 employees were temporary, a decrease of 11 branches and an increase of 15 employees as compared to the end of 2009.
For purposes of our financial statements and this annual report on Form 20-F, we have calculated Banesto’s results of operations using the criteria described before in this annual report on Form 20-F. As a result, the data set forth herein may not coincide with the data published independently by Banesto.
In 2010, profit attributable to the Parent bank from Banesto was 419 million, a 43.2% decrease from 2009, while the ROE reached 9.4% as compared to 11.7% in 2009.
At the end of 2010, the balance of loans was 0.2% higher than a year earlier, customer funds increased 0.5% and mutual funds and pension funds decreased 22.5% and 5.6%, respectively. NPL grew to 4.1% in 2010, up 1.1 percentage points from 2009.
Santander Consumer Finance
Our consumer financing activities are conducted through our subsidiary Santander Consumer Finance and its group of companies. Most of the activity of Santander Consumer Finance relates to auto financing, personal loans, credit cards, insurance and customer deposits. These consumer financing activities are mainly focused on Germany, Spain, Italy, Norway, Poland, Finland, Sweden, the US and the UK. We also conduct business in Portugal, Austria and the Netherlands, among others.
At the end of 2010, this unit had 519 branches (as compared to 311 at the end of 2009) and 13,852 employees (direct and assigned) (as compared to 9,362 employees at the end of 2009), of which 509 employees were temporary.
In 2010, this unit generated 811 million in profit attributable to the Parent bank, a 28.9% increase from 2009, while the ROE reached 10.3% (as compared to 9.0% in 2009).
In 2010, management focused on organic growth and cross-selling supported by agreements with manufacturers and penetration in the used car market in order to offset the drop in vehicle registrations in Europe following the end of the state incentives. Meanwhile, significant efforts were made in risk control and loan acceptance and recovery, which led to notable improvements in credit quality.
There was also expansion into high-potential markets. Of note was the acquisition of AIG Bank in Poland, which places Santander Consumer Poland as Poland’s leading specialized finance company, and the acquisition of assets at a discount in the US by Santander Consumer USA, which enhances the quality of its portfolio and broadens the profile of its target customers. During 2010, Santander Consumer USA increased its attributable profit 54.7% in dollars and became the second largest contributor to this unit.

 

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At the end of 2010, total lending at this unit amounted to 63 billion (an 11.4% increase as compared to 2009) due to organic growth and the acquisition of portfolios in the US and Poland. Additionally, this area services a portfolio of approximately 6 billion retained by third parties. NPL decreased to 4.9% in 2010 from 5.4% a year earlier.
Customer deposits increased 16.1% during 2010 mainly due to the rise in customer deposits in Germany and the acquisition in Poland.
Portugal
Our main Portuguese retail and investment banking operations are conducted by Banco Santander Totta, S.A. (“Santander Totta”).
At the end of 2010, Portugal operated 759 branches (as compared to 763 branches at the end of 2009) and had 6,214 employees (direct and assigned) (as compared to 6,294 employees at the end of 2009), of which 135 employees were temporary.
In 2010, profit attributable to the Parent bank was 456 million, a 14.2% decrease from 2009, while ROE was 20.3%, as compared to 25.4% in 2009.
In a very difficult economic and financial environment, which led to a slowdown in economic activity and a lack of liquidity in the markets, Santander Totta maintained its capital, efficiency and return ratios. Lending decreased 6.8% mainly due to the reduction in balances in the construction and real estate sectors and a shift in the financing plans of large companies, away from lending and towards financing via security issuances. Customer funds under management decreased 8.5% and mutual funds and pension funds decreased 19.4% and 5.9%, respectively. NPL increased in 2010 to 2.9% from 2.3% a year earlier.
Others
The rest of our businesses in the Continental Europe segment (Banif, Asset Management, Insurance and Global Wholesale Banking) generated profit attributable to the Parent bank of 957 million in 2010, 15.2% less than in 2009. Global Wholesale Banking, the main unit included here, posted a 9.0% year-on-year drop in attributable profit. Although income remained stable as compared with 2009, costs increased due to investments made to consolidate our positions attained in 2009 in target businesses and to higher provisions, as required by regulatory changes.
United Kingdom
As of December 31, 2010, the United Kingdom accounted for 30.3% of the Group’s total customer funds under management, 32.4% of total loans and credits and 17.9% of profit attributed to the Parent bank of the Group’s main business areas.
Our UK businesses include Abbey (since 2004), the deposits and branches of Bradford & Bingley (acquired in September 2008) and Alliance & Leicester (acquired in October 2008). They are referred to as Santander UK.
Santander UK is a significant financial services provider in the United Kingdom, being the country’s second largest residential mortgage lender and the second largest savings brand measured by outstanding balances. Santander UK also provides a wide range of retail savings accounts, and operates across the full range of personal financial services.
At the end of 2010, we had 1,416 branches and a total of 23,649 employees (direct and assigned) of which 430 employees were temporary, in the United Kingdom. Compared to 2009, there was a net increase of 94 branches and 700 employees.
The rebranding of Bradford & Bingley’s savings business and Abbey branches to Santander was completed in January 2010, and the rebranding of Alliance & Leicester branches was completed in December 2010. In 2010, we further expanded our network through the Santander Universities program and the acquisition of the Halifax agency network, which was rebranded as Santander and opened for business by the end of 2010.

 

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For purposes of our financial statements and this annual report on Form 20-F, we have calculated Santander UK’s results of operations using the criteria described before in this annual report on Form 20-F. As a result, the data set forth herein may not coincide with the data published independently by Santander UK.
In 2010, Santander UK contributed 1,985 million profit attributable to the Parent bank (a 15.0% increase from 2009). Loans and advances to customers increased by 2.7% and customer funds under management increased 10.9% during the same period. ROE was 22.7% (as compared to 29.6% in 2009). NPL at the end of 2010 increased to 1.8% from 1.7% at the end of 2009.
Latin America
At December 31, 2010, we had 5,882 offices and 89,526 employees (direct and assigned) in Latin America (as compared to 5,745 offices and 85,974 employees, respectively, at December 31, 2009), of which 101 were temporary employees. At that date, Latin America accounted for 26.3% of the total customer funds under management, 17.6% of total loans and credits and 43.3% of profit attributed to the Parent bank of the Group’s main business areas.
Profit attributable to the Parent bank from Latin America was 4,804 million in 2010, a 25.3% increase from 2009, while the ROE reached 22.7% (as compared to 23.7% in 2009).
Our Latin American banking business is principally conducted by the following banking subsidiaries:
                     
    Percentage held         Percentage held  
    at December 31, 2010         at December 31, 2010  
Banco Santander (Brasil), S.A.
    81.38     Banco Santander, S.A. (Uruguay)     100.00  
Banco Santander Chile
    76.74     Banco Santander Colombia, S.A.     97.85  
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander
    99.86     Banco Santander Puerto Rico     100.00  
Banco Santander Río, S.A. (Argentina)
    99.30     Banco Santander Perú, S.A.     100.00  
We engage in a full range of retail banking activities in Latin America, although the range of our activities varies from country to country. We seek to take advantage of whatever particular business opportunities local conditions present.
Our significant position in Latin America is attributable to our financial strength, high degree of diversification (by countries, businesses, products, etc.), and the breadth and depth of our franchise.
Detailed below are the performance highlights of the main Latin American countries in which we operate (1):
Brazil. Santander Brasil is the third largest private financial institution in this country as of December 31, 2010. After the integration of Banco Real into the Group, Santander Brasil had 3,702 branches, 53,900 employees and 24.7 million customers.
During 2010, lending increased 16% with significant growth across all the major segments. Particularly noteworthy was lending to individuals and SMEs, which grew by around 20%. Savings rose 6% in 2010, mainly in demand deposits, which increased by 16%. Santander Brasil obtained selective growth adapted to the interest rate rise process in the country (from 8.75% at the beginning of 2010 to 10.75% at the end of the year) (all variations in local currency).
Profit attributable to the Parent bank from Brazil in 2010 was 2,836 million, a 30.9% increase when compared with 2009 (+10.4% in local currency). This increase was obtained after deducting higher non-controlling interests (539 million in 2010 compared with 121 million in 2009) because of the listing of Santander Brasil in the second half of 2009. For 2010, ROE was 23.11% and at the end of 2010, the NPL ratio was 4.9% and the NPL coverage ratio was 101%.
Mexico. Banco Santander (Mexico), S.A., Institución de Banca Múltiple, Grupo Financiero Santander, is one of the leading financial services companies in Mexico. It leads the third largest banking group in Mexico in terms of business volume. As of December 31, 2010, we had a network of 1,100 branches, 12,500 employees and 9.1 million customers in Mexico.
 
     
(1)  
When we indicate “variations in local currency”, we calculate the variation of the balance sheet data in the currency of the country that is being described, eliminating the effect of exchange rates from the local currency to euros.

 

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In 2010, lending rebounded from negative growth early in the year to post an increase of 15% at year-end with strong growth as a result of lending to individuals and SMEs. In addition, bank savings rose by 14% compared with 2009, with a strong performance by demand and time deposits, and investment funds (all variations in local currency).
Profit attributable to the Parent bank from Mexico in 2010 increased 37.9% to 682 million (22.7% in local currency). For 2010, ROE was 19.5% and at the end of 2010, the NPL ratio was 1.8% and the NPL coverage ratio was 215%.
Chile. Banco Santander Chile is the principal component of the largest financial group in Chile in terms of the number of customers, business and results with substantial business in loans, deposits and mutual funds and pension funds. As of December 31, 2010, we had 504 branches, 11,595 employees and 3.1 million customers.
In 2010, lending increased 14% due to higher economic growth and the positive effects of the reconstruction following the February 2010 earthquake. Bank savings increased by 2% over 2009 led by growth in demand deposits.
Profit attributable to the Parent bank from Chile increased 21.3% in 2010 to 683 million (a 5.4% increase as compared to 2009, in local currency). For 2010, ROE was 30.5% and at the end of 2010, the NPL ratio was 3.7% and the NPL coverage ratio was 89%.
Argentina. Banco Santander Río, S.A. is one of Argentina’s leading banks, with 324 branches, 6,466 employees and 2.3 million banking customers as of December 31, 2010.
Our strategy in 2010 focused on taking advantage of the strengths of its commercial franchise with greater importance attached to customer linkage and transaction banking and selective growth in lending with particular attention paid to managing the whole risk cycle and controlling costs.
In 2010, lending rose 38% and savings increased 34%. Of note was the 42% growth in demand deposits. These increases were higher than the market’s and produced gains in the market shares of these three items (all variations in local currency).
Banco Santander Río made a positive contribution to the Group’s earnings, with profit attributable to the Parent bank of 297 million in 2010, a 31.5% increase as compared to 2009 (a 31.4% increase in local currency). At the end of 2010, the NPL ratio was 1.7% and the NPL coverage ratio was 149%.
Uruguay. Santander is the largest private sector bank in the country in terms of profits (67 million), number of branches (43) and business (market share of 17.1% in lending and 16.7% in deposits and mutual funds). The Group in Uruguay has 817 employees and 0.2 million banking customers.
Profit attributable to the Parent bank was 67 million in 2010, 30.3% higher than in 2009 (a 10.3% increase in local currency) and the NPL ratio was 0.22% as of December 31, 2010.
Colombia. As of December 31, 2010, Banco Santander Colombia, S.A. had 76 branches, 1,343 employees and 0.3 million banking customers.
We focused on credit risk management, selective growth in lending, preserving adequate levels of liquidity, strengthening transactional businesses and, in particular, containing costs.
Profit attributable to the Parent bank from Colombia was 41 million in 2010, 24.2% higher than in 2009 (a 4.2% increase in local currency). At the end of 2010, the NPL ratio was 1.6% and the NPL coverage ratio was 200%.
Puerto Rico. Banco Santander Puerto Rico is among the three largest financial institutions in Puerto Rico in terms of lending, deposits and mutual funds. As of December 31, 2010, Banco Santander Puerto Rico had 121 branches, 1,820 employees and 0.5 million customers.
Profit attributable to the Parent bank from Puerto Rico in 2010 was 38 million, a 15.2% increase as compared to 2009 (a 7.6% increase in dollars). At the end of 2010, the NPL ratio stood at 10.6% and the NPL coverage ratio was 58%.

 

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Peru. As of December 31, 2010, Banco Santander Perú, S.A. had 1 branch, 41 employees and 0.1 million banking customers. The unit’s activity is focused on companies and on attending to the Group’s global customers.
Profit attributable to the Parent bank from Peru was 7 million in 2010, 75% higher than in 2009.
Sovereign
At December 31, 2010, Sovereign had 721 branches, 2,337 ATMs, 8,647 employees and 1.7 million clients. At that date, Sovereign accounted for 4.1% of the total customer funds under management, 5.1% of total loans and credits and 3.8% of profit attributed to the Parent bank of the Group’s main business areas.
For purposes of our financial statements and this annual report on Form 20-F, we have calculated Sovereign’s results of operations using the criteria described before in this annual report on Form 20-F. As a result, the data set forth herein may not coincide with the data published independently by Sovereign.
In 2010, Sovereign contributed 426 million profit attributable to the Parent bank as compared to a 25 million loss a year earlier. For 2010, ROE was 14.9%. Loans and advances to customers at December 31, 2010 were 36.7 billion and customer funds under management 36.8 billion. Non-performing loans at the end of 2010 were 4.6% and NPL coverage was 75%.
Despite a difficult environment with reduced demand for loans and low interest rates, Sovereign obtained profits in 2010 thanks to effective management of spreads, an improved mix of loans and deposits, control of costs and enhanced credit quality. The goal for 2011 is to further improve the franchise and commercial efficiency with new products and better segmentation.
Second or business level:
Retail Banking
Attributable profit of the Retail Banking sector was 10.5% higher than 2009 at 7,940 million. Retail Banking generated 85% of the operating areas’ total income and 72% of profit attributable to the Parent bank. Total income increased 9.9% to 38,121 million due to the 12.4% rise in net interest income as a result of management of spreads against a background of weak business growth. All these variations were positively impacted by the change in the scope of consolidation and by exchange rates. This segment had 171,964 employees as of December 31, 2010.
The performance by geographic areas reflects the varying economic environments with lower growth in developed economies and a better macroeconomic environment in emerging countries.
Retail Banking in Continental Europe was the most affected by the economic environment. Total income declined 3.0% because of decreased lending, strong pressure on margins, low interest rates and moderating business volumes, partially offset by effective management of asset spreads and cost control. Profit attributable to the Parent bank dropped 23.1% mostly because of the provisions required by Bank of Spain’s Circular 3/2010 and the impact of the Group’s policy for capturing deposits.
The profit of Retail Banking in the United Kingdom was 16.0% higher in sterling than in 2009. Growth in total income was spurred by an increase in net interest income and lower costs.
Profit attributable to the Parent bank from Retail Banking in Latin America rose 41.6% (higher non-controlling interest). The increase in profit came from growth in basic revenues (net interest income and fee income), control of costs compatible with business development (benefiting from synergies in Brazil) and lower loan-loss provisions.
Global Private Banking includes institutions that specialize in financial advisory and asset management for high-income clients (mainly Banif in Spain and Santander Private Banking in the UK, Italy and Latin America), as well as the units of domestic private banking in Portugal and Latin America, jointly managed with local retail banks. Profit attributable to the Parent bank from this division was 283 million in 2010 as compared to 330 million in 2009 as a result of lower net interest income due to the evolution of interest rates.

 

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Global Wholesale Banking
This area covers our corporate banking, treasury and investment banking activities throughout the world.
This segment, managed by Santander Global Banking & Markets, contributed 12% of the operating areas’ total income and 24% of profit attributable to the Parent bank in 2010. Profit attributable to the Parent bank in 2010 by Global Wholesale Banking amounted to 2,697 million, a 1.9% decrease from 2009. This segment had 3,037 employees as of December 31, 2010.
The area strengthened its capacities in core markets in order to consolidate the liquidity positions attained in 2009. This greater potential enhanced the Group’s capital and liquidity positions and enabled it to sustain a high level of activity in 2010 in an environment of greater competition, while also maintaining rigorous management of risk. A good example of this was Santander’s notable participation in some of 2010 largest transactions, which solidified us as a major player.
Meanwhile, adjustment of structures achieved in the past and effective management of costs and operations enabled us to assume the increased capacity while maintaining our efficiency. However, the cost control and sustained efficiency were offset in 2010, by higher non-controlling interest in Brazil, because of the listing in October 2009 and higher provisions. This caused the rise in revenues to be offset by higher costs and provisions, contributing to the decrease in attributable profit.
In order to boost client revenues, Santander Global Banking & Markets continued to develop the global focus on the customer-relation model and foster inter-relations between the product areas and specialized units. The model, which focuses on management of global corporations and institutions, increased the segments revenues 15% and lifted its share of total revenues.
The product areas also made further progress in their increasingly global business vision, adapted to the changing needs of markets and clients.
Santander is present in global transaction banking (which includes cash management, trade finance and basic financing), in corporate finance (comprising mergers and acquisitions and asset and capital structuring), in credit markets (which include origination activities, risk management, distribution of structured products and debt), in rates (comprised of structuring and trading activities in financial markets of interest rate and exchange rate instruments) and in global equities (activities relating to the equity markets).
Asset Management and Insurance
This segment comprises all of our companies whose activity is the management of mutual and pension funds and insurance. At December 31, 2010, this segment accounted for 2.4% of total income and 4.2% of profit attributable to the Parent bank. Profit attributable to the Parent bank by Asset Management and Insurance was 463 million in 2010 or 16.0% higher than in 2009. This segment had 1,338 employees at the end of 2010.
In 2010, we formed a strategic alliance with the insurer Zurich to strengthen our bancassurance business in five key markets in Latin America: Brazil, Mexico, Chile, Argentina and Uruguay. Santander will create a holding company for its insurers in Latin America, which will be 49% owned by it and 51% owned by Zurich. This agreement combines Banco Santander’s commercial and distribution capacity with the experience of Zurich in developing and managing products. In each of the five countries, Banco Santander will distribute bancassurance products for 25 years.
Asset Management
Santander Asset Management obtained profit attributable to the Parent bank of 81 million, a 50% increase as compared to 2009 reflecting the recovery in volumes, the rise in average commissions in the main markets due to the better product mix and a reduction in provisions.
Total revenues from this area, before distribution to the commercial networks, amounted to 1,278 million (an increase of 8% from 2009). Volumes were weak in developed countries because of the strong preference of financial agents for on-balance sheet funds and the impact of the markets on portfolios, and stronger in Latin America due to the continuing economic recovery, which has begun in 2009.

 

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Total managed assets were more than 124 billion at the end of 2010 (an increase of 7% from 2009 attributable in part to the appreciation of currencies against the euro).
Insurance
The global area of Santander Insurance generated profit attributable to the Parent bank of 381 million, 9.0% more than in 2009. The main reason for this was greater activity which was partially offset by the higher non-controlling interest in Brazil.
Total revenues (the area’s total income plus fee income paid to the networks) were 2,688 million, 11% higher than in 2009 (+3.5% without the exchange rate impact) and representing 6% of the operating areas’ total gross income.
The total contribution to the Group’s results (profit before tax of the insurance companies and brokers and fees received by networks) increased 10.7% to 2,491 million (+3.3% excluding the exchange-rate impact).
Total premium income was 6% lower than in 2009 impacted by clients’ preference for liquidity and, consequently, lower demand for savings-investment products. This lower demand was partially offset, however, by premium income from protection insurance, which increased 16%.
Corporate Activities
At the end of 2010, this area had 2,529 employees (direct and assigned) (as compared to 1,820 employees at the end of 2009), of which 623 were temporary.
This area is responsible for, on the one hand, a series of centralized activities to manage the structural risks of the Group and of the Parent bank. It executes the necessary activities for managing interest rates, exposure to exchange-rate movements and the required levels of liquidity in the Group. On the other hand, it acts as the Group’s holding entity, managing the Group’s global capital as well as that of each of the business units.
The Corporate Activities area had a loss of 2,919 million in 2010 due to lower net interest income and losses on financial transactions. Net interest income was a loss of 2,678 million, a 21.2% increase as compared to 2009 due to higher financial costs of credit. Losses on financial transactions, which include those from centralized management of interest rate and currency risk of the Parent bank as well as from equities, were 141 million compared to a gain of 1,376 million in 2009. The difference was due to hedging. In 2009, the impact from hedging the results of business units was low. Moreover, there were positive returns on the ALCO portfolio of the Parent bank, which is the portfolio managed by the Assets and Liabilities Committee, and on the business of equity stakes. In 2010, the situation reversed with higher losses from the hedging of the results of subsidiaries (which were compensated in the business units with higher results in euros) and allowances for financial investments in the portfolio of equity stakes.
With respect to the area’s activities:
Interest rate management is conducted on a coordinated basis by all the units, but this business only registers the part relative to the balance sheet of the Parent bank via the ALCO portfolios (at the volume levels and duration considered optimum at each moment).
Management of the exposure to exchange-rate movements, both from investments in the shareholders’ equity of units in currencies other than the euro as well as from the results generated for the Group by each of the units, also in various currencies, is also conducted on a centralized basis. This management (dynamic) is carried out by exchange-rate derivative instruments minimizing at each moment the financial cost of hedging.
Management of structural liquidity aims to finance our recurrent activity in optimum conditions of maturity and cost. The decisions whether to go to the wholesale markets to capture funds and cover stable and permanent liquidity needs, the type of instrument used, the maturity date structure and management of the associated risks of interest rates and exchange rates of the various financing sources, are also conducted on a centralized basis.

 

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The financial management unit uses financial derivatives to cover the interest rate and exchange rate risks from new issuances. The net impact of this hedging is recorded in the gains/loss on financial transactions in corporate activities. The financial management area also analyzes the strategies for structural management of credit risk aiming to reduce concentrations by sectors, which naturally occur as a result of commercial activity. Derivative transactions achieve an effect similar to selling some assets and acquiring others enabling us to diversify the credit portfolio as a whole.
In addition, the area of Corporate Activities acts as the Group’s holding entity. It manages all capital and reserves and allocations of capital to each of the business units as well as provides liquidity that some of the business units might need (mainly the Santander Branch Network and corporate in Spain). The price at which these operations are carried out is the market rate (euribor or swap without liquidity premium for their duration) for each of the maturities of repricing operations.
Lastly, the equity stakes that the Group takes within its policy of optimizing investments is reflected in corporate activities. Since the disposal of Cepsa in 2009, this item was significantly reduced.
Total Revenues by Activity and Geographic Location
For a breakdown of our total revenues by category of activity and geographic market, please see Note 52 to our consolidated financial statements.
Selected Statistical Information
The following tables show our selected statistical information.
Average Balance Sheets and Interest Rates
The following tables show, by domicile of customer, our average balances and interest rates for each of the past three years.
You should read the following tables and the tables included under “—Changes in Net Interest Income—Volume and Rate Analysis” and “—Assets—Earning Assets—Yield Spread” in conjunction with the following:
   
We have included interest received on non-accruing assets in interest income only if we received such interest during the period in which it was due;
 
   
We have included loan fees in interest income;
 
   
We have not recalculated tax-exempt income on a tax-equivalent basis because the effect of doing so would not be significant;
 
   
We have included income and expenses from interest-rate hedging transactions as a separate line item under interest income and expenses if these transactions qualify for hedge accounting under IFRS. If these transactions did not qualify for such treatment, we have included income and expenses on these transactions elsewhere in our income statement. See Note 2 to our consolidated financial statements for a discussion of our accounting policies for hedging activities;
 
   
We have stated average balances on a gross basis, before netting our allowances for credit losses, except for the total average asset figures, which includes such netting; and
 
   
All average data have been calculated using month-end balances, which is not significantly different from having used daily averages.
As stated above under “Presentation of Financial and Other Information”, we have prepared our financial statements for 2006, 2007, 2008, 2009 and 2010 under IFRS.

 

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Average Balance Sheet—Assets and Interest Income
                                                                         
    Year ended December, 31  
    2010     2009     2008  
    Average             Average     Average             Average     Average             Average  
ASSETS   Balance     Interest     Rate     Balance     Interest     Rate     Balance     Interest     Rate  
    (in thousand of euros, except percentages)  
Cash and due from central banks
                                                                       
Domestic
    8,441,011       86,686       1.03 %     7,916,042       86,918       1.10 %     7,629,805       242,954       3.18 %
International
    52,935,719       1,846,399       3.49 %     25,933,209       268,921       1.04 %     21,224,830       514,997       2.43 %
 
                                                     
 
    61,376,730       1,933,085       3.15 %     33,849,251       355,839       1.05 %     28,854,635       757,951       2.63 %
 
                                                                       
Due from credit entities
                                                                       
Domestic
    29,392,464       205,857       0.70 %     20,934,738       366,521       1.75 %     14,858,817       726,287       4.89 %
International
    51,382,325       839,110       1.63 %     58,290,277       2,155,515       3.70 %     61,173,074       3,095,167       5.06 %
 
                                                     
 
    80,774,789       1,044,967       1.29 %     79,225,015       2,522,036       3.18 %     76,031,891       3,821,454       5.03 %
 
                                                                       
Loans and credits
                                                                       
Domestic
    224,641,828       7,312,206       3.26 %     230,641,779       10,297,581       4.46 %     235,002,141       13,968,547       5.94 %
International
    482,406,776       34,541,844       7.16 %     436,857,260       31,784,344       7.28 %     340,938,627       27,397,524       8.04 %
 
                                                     
 
    707,048,604       41,854,050       5.92 %     667,499,039       42,081,925       6.30 %     575,940,768       41,366,071       7.18 %
 
                                                                       
Debt securities
                                                                       
Domestic
    44,783,466       1,136,082       2.54 %     40,146,418       1,157,953       2.88 %     24,948,203       951,353       3.81 %
International
    107,662,252       5,095,843       4.73 %     92,776,382       4,428,624       4.77 %     73,645,946       3,555,521       4.83 %
 
                                                     
 
    152,445,718       6,231,925       4.09 %     132,922,800       5,586,577       4.20 %     98,594,149       4,506,874       4.57 %
 
                                                                       
Income from hedging operations
                                                                       
Domestic
            169,394                       304,669                       695,086          
International
            (76,312 )                     586,600                       2,548,537          
 
                                                                 
 
            93,082                       891,269                       3,243,623          
 
                                                                       
Other interest-earning assets
                                                                       
Domestic
    27,769,273       697,464       2.51 %     29,389,475       609,652       2.07 %     23,577,214       618,246       2.62 %
International
    62,756,952       1,052,180       1.68 %     60,208,919       1,125,706       1.87 %     41,486,705       729,327       1.76 %
 
                                                     
 
    90,526,225       1,749,644       1.93 %     89,598,394       1,735,358       1.94 %     65,063,919       1,347,573       2.07 %
 
                                                                       
Total interest-earning assets
                                                                       
Domestic
    335,028,042       9,607,689       2.87 %     329,028,452       12,823,294       3.90 %     306,016,180       17,202,473       5.62 %
International
    757,144,024       43,299,064       5.72 %     674,066,047       40,349,710       5.99 %     538,469,182       37,841,073       7.03 %
 
                                                     
 
    1,092,172,066       52,906,753       4.84 %     1,003,094,499       53,173,004       5.30 %     844,485,362       55,043,546       6.52 %
 
                                                                       
Investments in affiliated companies
                                                                       
Domestic
    200,604             0.00 %     152,893             0.00 %     2,576,136             0.00 %
International
    52,278             0.00 %     708,988             0.00 %     10,044,991             0.00 %
 
                                                     
 
    252,882             0.00 %     861,881             0.00 %     12,621,127             0.00 %
 
                                                                       
Total earning assets
                                                                       
Domestic
    335,228,646       9,607,689       2.87 %     329,181,345       12,823,294       3.90 %     308,592,316       17,202,473       5.57 %
International
    757,196,302       43,299,064       5.72 %     674,775,035       40,349,710       5.98 %     548,514,173       37,841,073       6.90 %
 
                                                     
 
    1,092,424,948       52,906,753       4.84 %     1,003,956,380       53,173,004       5.30 %     857,106,489       55,043,546       6.42 %
 
                                                                       
Other assets
    97,936,085                       90,198,410                       75,975,026                  
Assets from discontinued operations
                          4,980,696                       8,024,216                  
 
                                                           
 
Total average assets
    1,190,361,033       52,906,753               1,099,135,486       53,173,004               941,105,731       55,043,546          

 

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Average Balance Sheet—Liabilities and Interest Expense
                                                                         
    Year Ended December, 31  
    2010     2009     2008  
    Average             Average     Average             Average     Average             Average  
LIABILITIES AND STOCKHOLDERS EQUITY   Balance     Interest     Rate     Balance     Interest     Rate     Balance     Interest     Rate  
    (in thousands of euros, except percentages)  
Due to credit entities
                                                                       
Domestic
    28,586,452       389,318       1.36 %     21,713,054       424,084       1.95 %     18,468,695       830,324       4.50 %
International
    105,990,880       1,283,290       1.21 %     120,217,372       2,861,280       2.38 %     95,892,266       2,858,266       2.98 %
 
                                                     
 
    134,577,332       1,672,608       1.24 %     141,930,426       3,285,364       2.31 %     114,360,961       3,688,590       3.23 %
 
                                                                       
Customers deposits
                                                                       
Domestic
    155,244,435       2,838,550       1.83 %     130,580,883       2,694,867       2.06 %     119,381,247       3,830,610       3.21 %
International
    413,670,307       10,607,001       2.56 %     333,021,416       9,115,847       2.74 %     234,812,668       11,169,783       4.76 %
 
                                                     
 
    568,914,742       13,445,551       2.36 %     463,602,299       11,810,714       2.55 %     354,193,915       15,000,393       4.24 %
 
                                                                       
Marketable debt securities
                                                                       
Domestic
    105,410,789       2,876,114       2.73 %     125,931,287       3,598,181       2.86 %     145,061,770       6,487,367       4.47 %
International
    103,595,017       2,082,989       2.01 %     95,298,804       2,638,566       2.77 %     92,762,877       4,330,281       4.67 %
 
                                                     
 
    209,005,806       4,959,103       2.37 %     221,230,091       6,236,747       2.82 %     237,824,647       10,817,648       4.55 %
 
                                                                       
Subordinated debt
                                                                       
Domestic
    19,701,845       1,019,055       5.17 %     21,704,442       1,028,748       4.74 %     20,532,672       1,111,241       5.41 %
International
    14,393,767       1,211,225       8.41 %     17,304,105       1,325,301       7.66 %     15,724,436       1,303,801       8.29 %
 
                                                     
 
    34,095,612       2,230,280       6.54 %     39,008,547       2,354,049       6.03 %     36,257,108       2,415,042       6.66 %
 
                                                                       
Other interest-bearing liabilities
                                                                       
Domestic
    39,728,726       1,031,180       2.60 %     37,347,808       1,128,882       3.02 %     36,605,703       876,041       2.39 %
International
    81,998,874       1,184,135       1.44 %     70,461,483       1,241,760       1.76 %     52,981,507       573,773       1.08 %
 
                                                     
 
    121,727,600       2,215,315       1.82 %     107,809,291       2,370,642       2.20 %     89,587,210       1,449,814       1.62 %
 
                                                                       
Expenses from hedging operations
                                                                       
Domestic
            (1,362,521 )                     (622,758 )                     1,402,069          
International
            522,040                       1,439,704                       2,731,528          
 
                                                                 
 
            (840,481 )                     816,946                       4,133,597          
 
                                                                       
Total interest-bearing liabilities
                                                                       
Domestic
    348,672,247       6,791,696       1.95 %     337,277,474       8,252,004       2.45 %     340,050,087       14,537,652       4.28 %
International
    719,648,845       16,890,680       2.35 %     636,303,180       18,622,458       2.93 %     492,173,754       22,967,432       4.67 %
 
                                                     
 
    1,068,321,092       23,682,376       2.22 %     973,580,654       26,874,462       2.76 %     832,223,841       37,505,084       4.51 %
 
                                                                       
Other liabilities
    45,192,441                       54,382,807                       44,784,845                  
 
                                                                       
Non-controlling interest
    5,694,541                       3,191,835                       2,432,563                  
 
                                                                       
Stockholders’ Equity
    71,152,959                       63,393,172                       54,149,565                  
 
                                                                       
Liabilities from discontinued operations
                          4,587,018                       7,514,918                  
 
                                                           
 
Total average Liabilities and Stockholders’ Equity
    1,190,361,033       23,682,376               1,099,135,486       26,874,462               941,105,732       37,505,084          

 

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Changes in Net Interest Income — Volume and Rate Analysis
The following tables allocate, by domicile of customer, changes in our net interest income between changes in average volume and changes in average rate for 2010 compared to 2009 and 2009 compared to 2008. We have calculated volume variances based on movements in average balances over the period and rate variance based on changes in interest rates on average interest-earning assets and average interest-bearing liabilities. We have allocated variances caused by changes in both volume and rate to volume. You should read the following tables and the footnotes thereto in light of our observations noted in the preceding sub-section entitled “—Average Balance Sheets and Interest Rates”, and the footnotes thereto.
Volume and rate analysis
                         
    IFRS-IASB  
    2010/2009  
    Increase (Decrease) due to changes in  
    Volume     Rate     Net change  
    (in thousands of euros)  
Interest income
                       
Cash and due from central banks
                       
Domestic
    5,575       (5,807 )     (232 )
International
    482,405       1,095,073       1,577,478  
 
                 
 
    487,980       1,089,266       1,577,246  
 
                       
Due from credit entities
                       
Domestic
    112,326       (272,991 )     (160,665 )
International
    (230,476 )     (1,085,928 )     (1,316,404 )
 
                 
 
    (118,150 )     (1,358,919 )     (1,477,069 )
 
                       
Loans and credits
                       
Domestic
    (261,524 )     (2,723,850 )     (2,985,374 )
International
    3,268,425       (510,925 )     2,757,500  
 
                 
 
    3,006,901       (3,234,775 )     (227,874 )
 
                       
Debt securities
                       
Domestic
    125,861       (147,731 )     (21,870 )
International
    704,873       (37,655 )     667,218  
 
                 
 
    830,734       (185,386 )     645,348  
 
                       
Other interest-earning assets
                       
Domestic
    (35,078 )     122,890       87,812  
International
    46,210       (119,736 )     (73,526 )
 
                 
 
    11,132       3,154       14,286  
 
                       
Total interest-earning assets without hedging operations
                       
Domestic
    (52,840 )     (3,027,489 )     (3,080,329 )
International
    4,271,437       (659,171 )     3,612,266  
 
                 
 
    4,218,597       (3,686,660 )     531,937  
 
                       
Income from hedging operations
                       
Domestic
    (135,275 )           (135,275 )
International
    (662,912 )           (662,912 )
 
                 
 
    (798,187 )           (798,187 )
 
                       
Total interest-earning assets
                       
Domestic
    (188.115 )     (3,027,489 )     (3,215,604 )
International
    3,608,525       (659,171 )     2,949,354  
 
                 
 
    3,420,410       (3,686,660 )     (266,250 )

 

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Volume and rate analysis
                         
    IFRS-IASB  
    2009/2008  
    Increase (Decrease) due to changes in  
    Volume     Rate     Net change  
    (in thousands of euros)  
Interest income
                       
Cash and due from central banks
                       
Domestic
    2,664       (158,700 )     (156,036 )
International
    48,949       (295,025 )     (246,076 )
 
                 
 
    51,613       (453,725 )     (402,112 )
 
                       
Due from credit entities
                       
Domestic
    106,801       (466,567 )     (359,766 )
International
    (107,698 )     (831,954 )     (939,652 )
 
                 
 
    (897 )     (1,298,521 )     (1,299,418 )
 
                       
Loans and credits
                       
Domestic
    (192,934 )     (3,478,032 )     (3,670,966 )
International
    6,977,954       (2,591,134 )     4,386,820  
 
                 
 
    6,785,020       (6,069,166 )     715,854  
 
                       
Debt securities
                       
Domestic
    438,618       (232,018 )     206,600  
International
    917,291       (44,188 )     873,103  
 
                 
 
    1,355,909       (276,206 )     1,079,703  
 
                       
Other interest-earning assets
                       
Domestic
    121,081       (129,675 )     (8,594 )
International
    350,744       45,635       396,379  
 
                 
 
    471,825       (84,040 )     387,785  
 
                       
Total interest-earning assets without hedging operations                
Domestic
    476,230       (4,464,992 )     (3,988,762 )
International
    8,187,240       (3,716,666 )     4,470,574  
 
                 
 
    8,663,470       (8,181,658 )     481,812  
 
                       
Income from hedging operations
                       
Domestic
    (390,417 )           (390,417 )
International
    (1,961,937 )           (1,961,937 )
 
                 
 
    (2,352,354 )           (2,352,354 )
 
                       
Total interest-earning assets
                       
Domestic
    85,813       (4,464,992 )     (4,379,179 )
International
    6,225,303       (3,716,666 )     2,508,637  
 
                 
 
    6,311,116       (8,181,658 )     (1,870,542 )
 
                 

 

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    IFRS-IASB  
    2010/2009  
    Increase (Decrease) due to changes in  
    Volume     Rate     Net change  
    (in thousands of euros)  
Interest charges
                       
Due to credit entities
                       
Domestic
    113,473       (148,239 )     (34,766 )
International
    (306,311 )     (1,271,679 )     (1,577,990 )
 
                 
 
    (192,838 )     (1,419,918 )     (1,612,756 )
 
                       
Customers deposits
                       
Domestic
    472,805       (329,122 )     143,683  
International
    2,096,869       (605,714 )     1,491,155  
 
                 
 
    2,569,674       (934,836 )     1,634,838  
 
                       
Marketable debt securities
                       
Domestic
    (565,623 )     (156,444 )     (722,067 )
International
    214,527       (770,105 )     (555,578 )
 
                 
 
    (351,096 )     (926,549 )     (1,277,645 )
 
                       
Subordinated debt
                       
Domestic
    (99,274 )     89,581       (9,693 )
International
    (236,765 )     122,689       (114,076 )
 
                 
 
    (336,039 )     212,270       (123,769 )
 
                       
Other interest-bearing liabilities
                       
Domestic
    68,805       (166,507 )     (97,702 )
International
    185,866       (243,491 )     (57,625 )
 
                 
 
    254,671       (409,998 )     (155,327 )
 
                       
Total interest-bearing liabilities without hedging operations
                       
Domestic
    (9,814 )     (710,731 )     (720,545 )
International
    1,954,186       (2,768,300 )     (814,114 )
 
                 
 
    1,944,372       (3,479,031 )     (1,534,659 )
 
                       
Expenses from hedging operations
                       
Domestic
    (739.763 )           (739,763 )
International
    (917,664 )           (917,664 )
 
                 
 
    (1,657,427 )           (1,657,427 )
 
                       
Total interest-bearing liabilities
                       
Domestic
    (749,577 )     (710,731 )     (1,460,308 )
International
    1,036,522       (2,768,300 )     (1,731,778 )
 
                 
 
    286,945       (3,479,031 )     (3,192,086 )

 

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Volume and rate analysis
                         
    IFRS-IASB  
    2009/2008  
    Increase (Decrease) due to changes in  
    Volume     Rate     Net change  
    (in thousands of euros)  
Interest charges
                       
Due to credit entities
                       
Domestic
    64,712       (470,952 )     (406,240 )
International
    578,368       (575,354 )     3,014  
 
                 
 
    643,080       (1,046,306 )     (403,226 )
 
                       
Customers deposits
                       
Domestic
    237,141       (1,372,884 )     (1,135,743 )
International
    2,689,280       (4,743,216 )     (2,053,936 )
 
                 
 
    2,926,421       (6,116,100 )     (3,189,679 )
 
                       
Marketable debt securities
                       
Domestic
    (553,692 )     (2,335,494 )     (2,889,186 )
International
    70,780       (1,762,495 )     (1,691,715 )
 
                 
 
    (482,912 )     (4,097,989 )     (4,580,901 )
 
                       
Subordinated debt
                       
Domestic
    55,076       (137,569 )     (82,493 )
International
    120,564       (99,064 )     21,500  
 
                 
 
    175,640       (236,633 )     (60,993 )
 
                       
Other interest-bearing liabilities
                       
Domestic
    22,225       230,616       252,841  
International
    307,713       360,274       667,987  
 
                 
 
    329,938       590,890       920,828  
 
                       
Total interest-bearing liabilities without hedging operations                
Domestic
    (174,538 )     (4,086,283 )     (4,260,821 )
International
    3,766,705       (6,819,855 )     (3,053,150 )
 
                 
 
    3,592,167       (10,906,138 )     (7,313,971 )
 
                       
Expenses from hedging operations
                       
Domestic
    (2,024,827 )           (2,024,827 )
International
    (1,291,824 )           (1,291,824 )
 
                 
 
    (3,316,651 )           (3,316,651 )
 
                       
Total interest-bearing liabilities
                       
Domestic
    (2,199,365 )     (4,086,283 )     (6,285,648 )
International
    2,474,881       (6,819,855 )     (4,344,974 )
 
                 
 
    275,516       (10,906,138 )     (10,630,622 )

 

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Table of Contents

Assets
Earning Assets—Yield Spread
The following table analyzes, by domicile of customer, our average earning assets, interest income and dividends on equity securities and net interest income and shows gross yields, net yields and yield spread for each of the years indicated. You should read this table and the footnotes thereto in light of our observations noted in the preceding sub-section entitled “—Average Balance Sheets and Interest Rates”, and the footnotes thereto.
Earning Assets — Yield Spread
                         
    IFRS-IASB  
    Year Ended December 31,  
    2010     2009     2008  
    (in thousands of euros, except percentages)  
Average earning assets
                       
Domestic
    335,228,646       329,181,345       308,592,316  
International
    757,196,302       674,775,035       548,514,173  
 
                 
 
    1,092,424,948       1,003,956,380       857,106,489  
 
                       
Interest
                       
Domestic
    9,607,689       12,823,294       17,202,473  
International
    43,299,065       40,349,710       37,841,073  
 
                 
 
    52,906,754       53,173,004       55,043,546  
 
                       
Net interest income (1)
                       
Domestic
    2,815,995       4,571,290       2,664,821  
International
    26,408,384       21,727,252       14,873,641  
 
                 
 
    29,224,379       26,298,542       17,538,462  
 
                       
Gross yield (2)
                       
Domestic
    2.87 %     3.90 %     5.57 %
International
    5.72 %     5.98 %     6.90 %
 
                 
 
    4.84 %     5.30 %     6.42 %
 
                       
Net yield (3)
                       
Domestic
    0.84 %     1.39 %     0.86 %
International
    3.49 %     3.22 %     2.71 %
 
                 
 
    2.68 %     2.62 %     2.05 %
 
                       
Yield spread (4)
                       
Domestic
    0.92 %     1.45 %     1.29 %
International
    3.37 %     3.05 %     2.23 %
 
                 
 
    2.62 %     2.54 %     1.91 %
 
     
(1)  
Net interest income is the net amount of interest and similar income and interest expense and similar charges. — See “Income Statement” on page 9. —
 
(2)  
Gross yield is the quotient of interest income divided by average earning assets.
 
(3)  
Net yield is the quotient of net interest income divided by average earning assets.
 
(4)  
Yield spread is the difference between gross yield on earning assets and the average cost of interest-bearing liabilities. For a discussion of the changes in yield spread over the periods presented, see “Item 5. Operating and Financial Review and Prospects—A. Operating results—Results of Operations for Santander—Interest Income / (Charges)”.

 

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Return on Equity and Assets
The following table presents our selected financial ratios for the years indicated.
                         
    Year Ended December 31,  
    2010     2009     2008  
ROA: Return on average total assets
    0.76 %     0.86 %     1.00 %
ROE: Return on average stockholders’ equity
    11.80 %     13.90 %     17.07 %
PAY-OUT: Dividends per average share as a percentage of net attributable income per average share (*)
    40.70 %     46.09 %     54.21 %
Average stockholders’ equity as a percentage of average total assets
    5.82 %     5.85 %     5.55 %
     
(*)  
The pay-out ratio does not include in the numerator the amounts paid under the Santander Dividendo Elección program (scrip dividends) which are not dividends paid on account of the net attributable income of the period. Such dividends amount to 1,668.8 million and 796.8 million for 2010 and 2009, respectively.
Interest-Earning Assets
The following table shows, by domicile of customer, the percentage mix of our average interest-earning assets for the years indicated. You should read this table in light of our observations noted in the preceding sub-section entitled “—Average Balance Sheets and Interest Rates”, and the footnotes thereto.
Interest-earning assets
                         
    IFRS-IASB  
    Year Ended December 31,  
    2010     2009     2008  
 
                       
Cash and due from Central Banks
                       
Domestic
    0.77 %     0.79 %     0.92 %
International
    4.85 %     2.59 %     2.51 %
 
                 
 
    5.62 %     3.38 %     3.43 %
 
                       
Due from credit entities
                       
Domestic
    2.69 %     2.09 %     1.76 %
International
    4.70 %     5.81 %     7.24 %
 
                 
 
    7.39 %     7.90 %     9.00 %
 
                       
Loans and credits
                       
Domestic
    20.56 %     22.99 %     27.83 %
International
    44.18 %     43.55 %     40.37 %
 
                 
 
    64.74 %     66.54 %     68.20 %
 
                       
Debt securities
                       
Domestic
    4.10 %     4.00 %     2.95 %
International
    9.86 %     9.25 %     8.72 %
 
                 
 
    13.96 %     13.25 %     11.67 %
 
                       
Other interest-earning assets
                       
Domestic
    2.53 %     2.93 %     2.79 %
International
    5.76 %     6.00 %     4.91 %
 
                 
 
    8.29 %     8.93 %     7.70 %
 
                       
Total interest-earning assets
                       
Domestic
    30.65 %     32.80 %     36.25 %
International
    69.35 %     67.20 %     63.75 %
 
                 
 
    100.00 %     100.00 %     100.00 %

 

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Loans and Advances to Credit Institutions
Our financial information included in this annual report on Form 20-F has been prepared since 2008 under IFRS-IASB. There are no material differences between the financial information disclosed in this section of our annual report under IFRS-IASB and the periods prior to 2008 previously presented under EU-IFRS. See “Item 3. Key information — A. Selected Financial Data” in our 2008 Form 20-F for additional information.
The following tables show our short-term funds deposited with other banks at each of the dates indicated.
                                         
    IFRS-IASB  
    At December 31,  
    2010     2009     2008     2007     2006  
    (in thousands of euros)  
Reciprocal accounts
    1,264,072       712,503       663,230       417,438       503,299  
Time deposits
    13,548,408       21,382,542       25,455,903       13,569,362       16,842,601  
Reverse repurchase agreements
    36,720,631       29,489,895       18,568,747       30,276,080       37,010,008  
Other accounts
    28,322,240       28,251,667       34,104,397       13,379,724       15,401,148  
 
                             
 
    79,855,351       79,836,607       78,792,277       57,642,604       69,757,056  
Of which Impairment allowances
    (16,559 )     (25,536 )     (253,567 )     (18,487 )     (12,727 )
Investment Securities
At December 31, 2010, the book value of our investment securities was 174.3 billion (representing 14.3% of our total assets). These investment securities had a yield of 3.76% in 2010 compared with a yield of 3.94% in 2009, and a yield of 4.31% in 2008. Approximately 35.1 billion, or 20.1%, of our investment securities at December 31, 2010 consisted of Spanish Government and government agency securities. For a discussion of how we value our investment securities, see Note 2 to our consolidated financial statements.

 

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The following tables show the book values of our investment securities by type and domicile of counterparty at each of the dates indicated.
                         
    IFRS-IASB  
    At December 31,  
    2010     2009     2008  
    (in thousands of euros)  
Debt securities
                       
Domestic-
                       
Spanish Government
    35,109,766       37,770,101       20,267,964  
Other domestic issuer:
                       
Public authorities
    553,390       542,577       231,529  
Other domestic issuer
    7,915,055       8,124,835       9,076,564  
 
                 
Total domestic
    43,578,211       46,437,513       29,576,057  
International-
                       
United States:
                       
U.S. Treasury and other U.S. Government agencies
    1,121,904       1,183,550       881,579  
States and political subdivisions
    1,741,307       1,714,940       1,260,494  
Other securities
    11,598,384       12,964,869       6,155,609  
 
                 
Total United States
    14,461,595       15,863,359       8,297,682  
Other:
                       
Governments
    60,736,942       41,108,209       20,990,003  
Other securities
    31,960,770       48,292,040       50,567,953  
 
                 
Total Other
    92,697,712       89,400,249       71,557,956  
 
                 
Total International
    107,159,307       105,263,608       79,855,638  
 
                       
Less- Allowance for credit losses
    (144,055 )     (166,722 )     (181,178 )
Less- Price fluctuation allowance
                 
 
                 
 
                       
Total Debt Securities
    150,593,463       151,534,399       109,250,517  
 
                       
Equity securities
                       
Domestic
    5,458,251       6,070,228       4,447,197  
International-
                       
United States
    1,931,078       1,489,681       938,265  
Other
    16,274,353       14,896,610       10,046,522  
 
                 
Total international
    18,205,431       16,386,291       10,984,787  
 
                       
Less- Price fluctuation allowance
                (9,159 )
 
                 
 
                       
Total Equity Securities
    23,663,682       22,456,519       15,422,825  
 
                 
 
                       
Total Investment Securities
    174,257,145       173,990,918       124,673,342  

 

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The following table analyzes the aggregate book value and aggregate market value of the securities of single issuers, other than the Government of the United States, which exceeded 10% of our stockholders’ equity as of December 31, 2010 (and other debt securities with aggregate values near to 10% of our stockholders’ equity).
                 
    Aggregate as of December 31, 2010  
    Book value     Market value  
    (in thousands of euros)  
Debt securities:
               
Exceed 10% of stockholders’ equity:
               
Spanish Government
    35,663,155       35,663,155  
Near 10% of stockholders’ equity:
               
Telefónica
    6,449,567       6,449,567  
República Federal do Brasil
    5,925,144       5,925,144  
The following table analyzes the maturities and weighted average yields of our debt investment securities (before impairment allowances) at December 31, 2010. Yields on tax-exempt obligations have not been calculated on a tax-equivalent basis because we do not believe the effect of such a calculation would be material.
                                         
    At December 31, 2010  
            Maturing     Maturing              
    Maturing     Between     Between     Maturing        
    Within     1 and     5 and     After        
    1 Year     5 Years     10 Years     10 Years     Total  
    (in thousands of euros)  
DEBT SECURITIES
                                       
Domestic:
                                       
Spanish Government
    7,522,658       9,391,929       14,162,508       4,032,671       35,109,766  
Other domestic issuer:
                                       
Public authorities
    32,272       206,117       313,476       1,525       553,390  
Other domestic issuer
    1,170,848       4,554,481       551,093       1,638,633       7,915,055  
Total domestic
    8,725,778       14,152,527       15,027,077       5,672,829       43,578,211  
International:
                                       
United States:
                                       
U.S. Treasury and other U.S. Government agencies
    883,202       27,875       29,426       181,401       1,121,904  
States and political subdivisions
    10,180       130,940       19,344       1,580,843       1,741,307  
Other securities
    1,019,309       3,464,639       1,885,836       5,228,600       11,598,384  
Total United States
    1,912,691       3,623,454       1,934,606       6,990,844       14,461,595  
Other:
                                       
Governments
    19,734,439       31,220,289       4,654,725       5,127,489       60,736,942  
Other securities
    8,918,767       14,689,885       3,474,800       4,877,318       31,960,770  
Total Other
    28,653,206       45,910,174       8,129,525       10,004,807       92,697,712  
Total International
    30,565,897       49,533,628       10,064,131       16,995,651       107,159,307  
 
                                       
Total debt investment securities
    39,291,675       63,686,155       25,091,208       22,668,480       150,737,518  

 

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Loan Portfolio
At December 31, 2010, our total loans and advances to customers equaled 743.9 billion (61.1% of our total assets). Net of allowances for credit losses, loans and advances to customers equaled 724.2 billion at December 31, 2010 (59.5% of our total assets). In addition to loans, we had outstanding at December 31, 2006, 2007, 2008, 2009 and 2010 91.7 billion, 102.2 billion, 123.3 billion, 150.6 billion and 180.0 billion, respectively, of undrawn balances available to third parties.
Loans by Geographic Area and Type of Customer
The following tables analyze our loans and advances to customers (including securities purchased under agreement to resell), by domicile and type of customer, at each of the dates indicated.
                                         
    IFRS-IASB  
    At December 31,  
    2010     2009     2008     2007     2006  
    (in thousands of euros)  
Loans to borrowers in Spain:
                                       
Spanish Government
    12,137,098       9,802,511       7,668,408       5,633,422       5,328,526  
Commercial, financial, agricultural and industrial
    67,940,259       70,136,946       56,289,775       45,169,824       71,412,545  
Real estate and construction (*)
    38,419,193       42,514,809       48,098,886       46,837,281       12,391,306  
Other mortgages
    74,462,191       68,865,914       59,784,116       59,268,463       81,718,186  
Installment loans to individuals
    15,984,557       20,070,626       21,505,725       21,533,074       20,058,666  
Lease financing
    6,195,295       7,533,857       9,252,949       9,643,516       8,668,599  
Other
    12,474,313       11,420,172       37,647,241       49,995,313       9,357,884  
 
                             
Total
    227,612,906       230,344,835       240,247,100       238,080,893       208,935,712  
 
                                       
Loans to borrowers outside Spain (**):
                                       
Non-Spanish Governments
    3,527,188       2,860,902       3,029,373       2,295,763       4,969,713  
Commercial and industrial
    217,747,143       174,763,552       127,838,494       143,045,869       128,438,265  
Mortgage loans
    269,893,288       249,065,126       201,112,142       179,163,680       177,631,731  
Other
    25,070,370       43,389,607       67,127,381       17,207,512       15,223,537  
 
                             
Total
    516,237,989       470,079,187       399,107,390       341,712,824       326,263,246  
 
                                       
Total loans and leases, gross
    743,850,895       700,424,022       639,354,490       579,793,717       535,198,958  
 
                                       
Allowance for possible loan losses (***)
    (19,696,998 )     (17,873,096 )     (12,466,055 )     (8,695,204 )     (8,163,444 )
 
                             
 
                                       
Loans and leases, net of allowances
    724,153,897       682,550,926       626,888,435       571,098,513       527,035,514  
 
     
(*)  
As of December 31, 2010, the portfolio of loans to construction and property development companies with real estate purposes, defined in accordance with the Bank of Spain’s purpose-based classification guidelines, amounted to 27,334 million.
 
(**)  
Credit of any nature in the name of credit institutions is included in the “Loans and advances to credit institutions” caption of our balance sheet.
 
(***)  
Refers to loan losses of “Loans and Advances to customers”. See “Item 3. Key information — A. Selected Financial Data”.
At December 31, 2010, our loans and advances to associated companies and jointly controlled entities amounted to 144 million (see “Item 7. Major Shareholders and Related Party Transactions—B. Related party transactions”). Excluding government-related loans and advances, the largest outstanding exposure to a single counterparty at December 31, 2010 was 3.9 billion (0.5% of total loans and advances, including government-related loans), and the five next largest exposures totaled 8.5 billion (1.1% of total loans, including government-related loans).

 

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Maturity
The following table sets forth an analysis by maturity of our loans and advances to customers by domicile and type of customer at December 31, 2010.
                                                                 
    Maturity  
    Less than     One to five     Over five        
    one year     years     years     Total  
    Balance     % of Total     Balance     % of Total     Balance     % of Total     Balance     % of Total  
    (in thousands of euros, except percentages)  
Loans to borrowers in Spain:
                                                               
Spanish Government
    3,460,176       2.02 %     2,822,277       1.54 %     5,854,645       1.50 %     12,137,098       1.63 %
Commercial, financial, agriculture and industrial
    29,973,685       17.52 %     21,387,835       11.70 %     16,578,739       4.25 %     67,940,259       9.13 %
Real estate and construction
    2,578,028       1.51 %     2,987,685       1.64 %     32,853,480       8.42 %     38,419,193       5.16 %
Other mortgages
    5,444,769       3.18 %     7,603,566       4.16 %     61,413,856       15.75 %     74,462,191       10.02 %
Installment loans to individuals
    6,822,886       3.99 %     6,460,833       3.54 %     2,700,838       0.69 %     15,984,557       2.15 %
Lease financing
    1,158,186       0.68 %     3,135,190       1.72 %     1,901,919       0.49 %     6,195,295       0.83 %
Other
    2,583,892       1.51 %     2,287,188       1.25 %     7,603,233       1.95 %     12,474,313       1.68 %
 
                                               
Total borrowers in Spain
    52,021,622       30.41 %     46,684,574       25.55 %     128,906,710       33.05 %     227,612,906       30.60 %
 
                                                               
Loans to borrowers outside Spain (*)
                                                               
Non-Spanish Governments
    1,378,011       0.81 %     804,835       0.44 %     1,344,342       0.34 %     3,527,188       0.47 %
Commercial and Industrial
    92,985,048       54.36 %     93,619,861       51.24 %     31,142,233       7.98 %     217,747,143       29.27 %
Mortgage loans
    15,709,736       9.18 %     34,527,245       18.90 %     219,656,306       56.31 %     269,893,288       36.29 %
Other
    8,963,764       5.24 %     7,072,674       3.87 %     9,033,933       2.32 %     25,070,370       3.37 %
 
                                               
Total loans to borrowers outside Spain
    119,036,559       69.59 %     136,024,615       74.45 %     261,176,814       66.95 %     516,237,989       69.40 %
 
                                                               
Total loans and leases, gross
    171,058,181       100.00 %     182,709,189       100.00 %     390,083,524       100.00 %     743,850,895       100.00 %
     
(*)  
Credit of any nature in the name of credit institutions is included in the “Loans and advances to credit institutions” caption of our balance sheet.
Fixed and Variable Rate Loans
The following table sets forth a breakdown of our fixed and variable rate loans having a maturity of more than one year at December 31, 2010.
                         
    Fixed and variable rate loans  
    having a maturity of more than one year  
    Domestic     International     Total  
    (in thousands of euros)  
 
Fixed rate
    34,509,184       175,056,724       209,565,907  
Variable rate
    141,082,101       222,144,705       363,226,806  
 
                       
Total
    175,591,285       397,201,429       572,792,713  

 

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Cross-Border Outstandings
The following table sets forth, as of the end of the years indicated, the aggregate amount of our cross-border outstandings (which consist of loans, interest-bearing deposits with other banks, acceptances and other monetary assets denominated in a currency other than the home-country currency of the office where the item is booked) where outstandings in the borrower’s country exceeded 0.75% of our total assets. Cross-border outstandings do not include local currency loans made by subsidiary banks in other countries to the extent that such loans are funded in the local currency or hedged. As a result, they do not include the vast majority of the loans by Santander UK or our Latin American subsidiaries.
                                                 
    IFRS-IASB  
    2010     2009     2008  
            % of             % of             % of  
            total             total             total  
            assets             assets             assets  
    (in thousands of euros, except percentages)  
OECD (1) (2) Countries:
                                               
Total OECD Countries
    13,612,706       1.12 %     14,327,184       1.29 %     12,931,735       1.24 %
 
                                               
Non-OECD Countries
                                               
Brazil
    6,058,247       0.50 %     5,316,717       0.48 %     10,169,495       0.97 %
Other Latin American Countries (2) (3)
    7,885,167       0.65 %     8,297,908       0.75 %     7,728,016       0.74 %
Other (2)
    7,153,022       0.59 %     6,600,333       0.59 %     5,847,896       0.56 %
Total Non-OECD
    21,096,436       1.73 %     20,214,958       1.82 %     23,745,407       2.27 %
 
                                               
Total
    34,709,142       2.85 %     34,542,142       3.11 %     36,677,142       3.50 %
 
     
(1)  
The Organization for Economic Cooperation and Development.
 
(2)  
Aggregate outstandings in any single country in this category do not exceed 0.75% of our total assets.
 
(3)  
With regards to these cross-border outstandings, at December 31, 2008, 2009 and 2010, we had allowances for country-risk equal to 555.5 million, 30.3 million, and 30.3 million, respectively. Such allowances for country-risk exceeded the Bank of Spain’s minimum requirements at such dates.
The following table sets forth, as of December 31, 2010, 2009 and 2008, the amounts of our cross-border outstandings by type of borrower where outstandings in the borrower’s country exceeded 0.75% of total assets.
                                 
            Banks and other              
            Financial     Commercial and        
    Government     Institutions     Industrial     Total  
    (in thousands of euros)  
 
2008
                               
Brazil
    193,734       3,939,252       6,036,509       10,169,495  
 
                       
Total
    193,734       3,939,252       6,036,509       10,169,495  
 
                               
2009
                               
N/A
                       
 
                       
 
                               
2010
                               
N/A
                       
 
                       

 

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Exposure to sovereign counterparties by credit rating
Our exposure to sovereign counterparties (the exposure is included in the financial statement line items “Financial assets held for trading — Debt instruments”, “Other financial assets at fair value through profit or loss — Debt instruments”, “Available for sale financial assets — Debt instruments” and “Loans and receivables-Debt instruments”) organized by credit rating as of December 31, 2010 is as follows:
         
Rating of sovereign        
counterparties (Fitch and   In millions of euros  
S&P)   Sovereign debt  
 
       
AAA
    14,036  
AA
    35,842  
A
    6,067  
BBB (*)
    41,732  
Below BBB
    1,586  
Unrated
     
TOTAL
    99,263  
     
(*)  
Including mainly Brazil and Mexico.
Additionally, in note 10 to the Financial Statements we present the disclosure by credit rating of our exposure to sovereign counterparties recorded under the caption “loans and advances to customers”.
Specifically, our exposure (sovereign debt) to Ireland, Greece, Portugal and Spain as of December 31, 2010 is 0.0, 0.2, 2.8 and 35.7 billion, respectively. Other than these four countries, there are no other sovereign counterparties whose debt we hold and whose credit rating was downgraded in the past 12 months. See Note 7 to our 2010 consolidated financial statements.
As of December 31, 2010, the Group has negligible direct exposure to Greek or Irish sovereign or bank debt. However, the downgrading by Standard & Poor’s of the sovereign ratings for Spain (on April 2010 from AA+ to AA) and Portugal (on April 2010 from A+ to A- and on March 2011 to BBB-) may (i) negatively impact the value of our Spanish and Portuguese sovereign debt holdings, (ii) increase our funding costs should the spread between Spanish and Portuguese sovereign debt and German sovereign debt (the benchmark for the euro zone) increase, although this would be partially offset by the related increase in mark to market value of the Bank’s German sovereign debt holdings, and (iii) negatively impact the trading price of the Bank’s common shares as a result of the increased risk premium and the related increase in the Bank’s cost of capital.
Classified Assets
In the following pages, we describe the Bank of Spain requirements for classification of non-performing assets. The Group has established a credit loss recognition process that is independent of the process for balance sheet classification and removal of impaired loans from the balance sheet.
The description below sets forth the minimum requirements that are followed and applied by all of our subsidiaries. Nevertheless, if the regulatory authority of the country where a particular subsidiary is located imposes stricter or more conservative requirements for classification of the non-performing balances, the more strict or conservative requirements are followed for classification purposes.
The classification described below applies to all debt instruments not measured at fair value through profit or loss, and to contingent liabilities.

 

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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.

 

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  (iii) Medium-low risk        Assets in this category include financial leases and mortgages and pledges on tangible assets that are not included in other categories, provided that the estimated value of the financial leases and the collateral totally covers the outstanding risk.
 
       
 
  (iv) Medium risk        Assets in this category include those with Spanish residents or residents of countries classified in categories 1 or 2, provided that such assets are not included in other categories.
 
       
 
  (v) Medium-high risk        Assets in this category include (unless these assets qualify as “high risk” assets) loans to individuals for the acquisition of durable consumption goods, other goods or current services not for professional use, except those registered in the Registry of Sales of Movable Assets (Registro de Ventas de Bienes Muebles); and risks with residents of countries classified in categories 3 to 6, to the extent not covered by country-risk allowances.
 
       
 
  (vi) High risk        Assets in this category include credit card balances; current account overdrafts and excesses in credit accounts (except those included in categories (i) and (ii)).
b) Sub-standard Assets
This category includes all types of credits and off-balance sheet risks that cannot be classified as non performing or charged-off assets but that have certain weaknesses that may result in losses for the bank higher than those described in the previous category. Credits and off-balance sheet risks with insufficient documentation must also be classified under this category.
c) Non-Performing Past-Due Assets
The Bank of Spain requires Spanish banks to classify as non-performing the entire outstanding principal amount and accrued interest on any loan, fixed-income security, guarantee and certain other extensions of credit on which any payment of principal or interest or agreed cost is 90 days or more past due (“non-performing past-due assets”).
In relation to the aggregate risk exposure (including off-balance sheet risks) to a single obligor, if the amount of non-performing balances exceeds 25% of the total outstanding risks (excluding non-accrued interest on loans to such borrower), then banks must classify all outstanding risks to such borrower as non-performing.
Once any portion of a loan is classified as non-performing, the entire loan is placed on a non-accrual status. Accordingly, even the portion of any such a loan which may still be identified as performing will be recorded on non-accrual status.
d) Other Non-Performing Assets
The Bank of Spain requires Spanish banks to classify any loan, fixed-income security, guarantee and certain other extensions of credit as non-performing if they have a reasonable doubt that these extensions of credit will be collected (“other non-performing assets”), even if any past due payments have been outstanding for less than 90 days or the asset is otherwise performing. When a bank classifies an asset as non-performing on this basis, it must classify the entire principal amount of the asset as non-performing.
Once any such asset is classified as non-performing, it is placed on a non-accrual status.

 

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e) Charged-off assets
Credit losses are generally recognized through provisions for allowances for credit losses, well before they are removed from the balance sheet. Under certain unusual circumstances (such as bankruptcy, insolvency, etc.), the loss is directly recognized through write-offs.
The Bank of Spain requires Spanish banks to charge-off immediately those non-performing assets that management believes will never be repaid. Otherwise, the Bank of Spain requires Spanish banks to charge-off non-performing assets four years after they were classified as non-performing. Accordingly, even if allowances have been established equal to 100% of a non-performing asset, Spanish banks may maintain that non-performing asset, fully provisioned, on their balance sheet for the full four-year period if management believes based on objective factors that there is some possibility of recoverability of that asset.
Because the Bank of Spain does not permit partial write-offs of impaired loans, when a loan is deemed partially uncollectible, the credit loss is charged against earnings through provisions to credit allowances instead of through partial write-offs of the loan. If a loan becomes entirely uncollectible, its allowance is increased until it reaches 100% of the loan balance. The credit loss recognition process is independent of the process for the removal of impaired loans from the balance sheet. The entire loan balance is kept on the balance sheet until any portion of it has been classified as non-performing for 4 years. Loans can be written-off earlier depending on our management’s view as to the recoverability of the loan. After that period, the loan balance and its 100% specific allowance are removed from the balance sheet and recorded in off-balance sheet accounts, with no resulting impact on net income at that time.
f) Country-Risk Outstandings
The Bank of Spain requires Spanish banks to classify as country-risk outstandings all loans, fixed-income securities and other outstandings to any countries, or residents of countries, that the Bank of Spain has identified as being subject to transfer risk or sovereign risk and the remaining risks derived from the international financial activity.
All outstandings must be assigned to the country of residence of the client except in the following cases:
 
Outstandings guaranteed by residents in other countries in a better category should be classified in the category of the guarantor.
 
 
Fully secured loans, when the security covers sufficiently the outstanding risk and can be enforced in Spain or in any other “category 1” country, should be classified as category 1.
 
 
Outstanding risks with foreign branches of a bank should be classified according to the residence of the headquarters of those branches.
The Bank of Spain has established six categories to classify such countries, as shown in the following table:
     
Country-Risk Categories   Description
 
   
1
  European Union, Norway, Switzerland, Iceland, USA, Canada, Japan, Australia and New Zealand
2
  Low risk countries not included in 1
3
  Countries with transitory difficulties
4
  Countries with serious difficulties
5
  Doubtful countries
6
  Bankrupt countries

 

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The Bank of Spain allows each bank to decide how to classify the listed countries within this classification scheme, subject to the Bank of Spain’s oversight. The classification is made based on criteria such as the payment record (in particular, compliance with renegotiation agreements), the level of the outstanding debt and of the charges for debt services, the debt quotations in the international secondary markets and other indicators and factors of each country as well as all the criteria indicated by the Bank of Spain. All credit extensions and off-balance sheet risks included in country-risk categories 3 to 6, except the excluded cases described below, will be classified as follows:
 
Sub-standard assets: All outstandings in categories 3 and 4 except when they should be classified as non-performing or charged-off assets due to credit risk attributable to the client.
 
 
Non-performing assets: All outstandings in category 5 and off-balance sheet risks classified in category 6, except when they should be classified as non-performing or charged-off assets due to credit risk attributable to the client.
 
 
Charged-off assets: All other outstandings in category 6 except when they should be classified as charged-off assets due to credit risk attributable to the client.
Among others, the Bank of Spain excludes from country-risk outstandings:
– regardless of the currency of denomination of the asset, risks with residents in a country registered in subsidiary companies or multigroup companies in the country of residence of the holder;
– any trade credits established by letter of credit or documentary credit with a due date of one year or less after the drawdown date;
– any interbank obligations of branches of foreign banks in the European Union and of the Spanish branches of foreign banks;
– private sector risks in countries included in the monetary zone of a currency issued by a country classified in category 1; and
– any negotiable financial assets purchased at market prices for placement with third parties within the framework of a portfolio separately managed for that purpose, held for less than six months by the company.
Non-Accrual of Interest Requirements
We stop accruing interest on the basis of contractual terms on the principal amount of any asset that is classified as an impaired asset and on category 5 (doubtful) and category 6 (bankrupt) country-risk outstandings. Thereafter, we recognize the passage of time (financial effect) releasing provisions for loan losses by calculating the present value of the estimated future cash flows using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. On the other hand, any collected interest for any assets classified as impaired are accounted for on a cash basis.
The following table shows the amount of non accrued interest owed on impaired assets and the amount of such interest that was received:
                         
    IFRS-IASB  
    At December 31,  
    2010     2009     2008  
    (in thousands of euros)  
Non accrued interest on the basis of contractual terms owed on impaired assets
                       
Domestic
    717,338       765,101       231,486  
International
    2,235,336       1,829,676       489,241  
 
                 
Total
    2,952,674       2,594,777       720,727  
Non accrued interest on the basis of contractual terms received on impaired assets
                       
Domestic
    165,498       151,459       95,428  
International
    179,668       157,724       125,386  
 
                 
Total
    345,166       309,183       220,814  

 

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The balances of impaired loans as of December 31, 2010, 2009 and 2008 are as follows:
                         
    Thousands of Euros  
    2010     2009     2008  
Other impaired loans (*)
    4,872,163       3,283,860       2,417,529  
Impaired loans more than ninety days past due
    23,650,203       21,269,764       11,773,284  
 
                 
Total impaired loans
    28,522,366       24,553,624       14,190,813  
     
(*)  
See above “Bank of Spain Classification Requirements- d) Other Non-Performing Assets” for a detailed explanation of assets included under this category.
The roll-forward of allowances (under IFRS-IASB) is shown in Note 10 to our consolidated financial statements.
Guarantees
The Bank of Spain requires some guarantees to be classified as non-performing in the following amounts:
in cases involving past-due guaranteed debt: (i) for non-financial guarantees, the amount demanded by the beneficiary and outstanding under the guarantee; and (ii) for financial guarantees, at least the amount classified as non-performing of the guaranteed risk; and
in all other cases, the entire amount of the guaranteed debt when the debtor has declared bankruptcy or has demonstrated serious solvency problems, even if the guaranteed beneficiary has not reclaimed payment.
Allowances for Credit Losses and Country-Risk Requirements
We calculate simultaneously the allowances required due to credit risk attributable to the client and to country-risk and apply the ones that are more demanding.
The Bank of Spain requires that we develop internal models to calculate the allowances for both credit risk and country-risk based on historical experience. As of July 2008, the Bank of Spain had approved for regulatory capital calculation purposes the Group’s internal models affecting the vast majority of the Group’s credit risk net exposure. The Bank of Spain will continue to review the models for the purpose of calculating allowances for loan losses. The calculation obtained based on the output parameters of internal models is consistent with the best estimate of the Group as to the probable losses using possible scenarios which rely on the approved internally developed models, and which constitute an appropriate basis for determining loan loss allowances. While these models are not yet approved by the Bank of Spain for loan loss allowance calculation, we are required to calculate the allowances according to the instructions described below. The difference between loan loss provisions calculated using internal models and those calculated under Bank of Spain Guidance, was not material for any of the three years ending December 31, 2010.
The global allowances will be the sum of those corresponding to losses in specific transactions (Specific Allowances) and those not specifically assigned (Collectively Assessed Allowance) due to credit risk, plus the Allowances for Country-Risk.
Specific and Collectively Assessed Allowances for Credit Losses
Our methodology for calculation of loan loss allowances is summarized as follows:
   
Assets classified as doubtful due to counterparty arrears: debt instruments, whoever the obligor and whatever the guarantee or collateral, with amounts more than three months past due are assessed individually, taking into account the age of the past-due amounts, the guarantees or collateral provided and the financial situation of the counterparty and the guarantors. The allowance percentages applied, based on the age of the past-due amounts, are described in Note 2.g) to our consolidated financial statements.
 
   
Assets classified as doubtful for reasons other than counterparty arrears: Debt instruments which are not classifiable as doubtful due to arrears but for which there are reasonable doubts as to their repayment under the contractual terms are assessed individually, and their allowance is the difference between the amount recognized in assets and the present value of the cash flows expected to be received.

 

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Collectively assessed allowance for inherent losses: We cover our losses inherent in debt instruments not measured at fair value through profit or loss and in contingent liabilities taking into account the historical experience of impairment and other circumstances known at the time of assessment. For these purposes, inherent losses are losses incurred at the reporting date, calculated using statistical methods that have not yet been allocated to specific transactions.
 
     
Our methodology for determining the collectively assessed allowance for incurred loan losses, intends to identify the amount of incurred losses as of the balance sheet date of loans that have not yet been identified as impaired, but that we estimate based on our past history and specific facts that will manifest within a one year lead time period from the balance sheet date. The above demonstrates those loans were having problems as of the balance sheet date. That is what we call inherent losses in the context of our internal models in which loan loss allowances are calculated.
Since 1993 we have used our internal models for assigning solvency and internal ratings, which measure the degree of risk of a client or transaction. Each rating corresponds to a certain probability of default or non-payment, the result of the Group’s past experience, except for some designated low default portfolios. We have approximately 300 internal rating models for risk admission and monitoring (models for corporate, sovereign, financial institutions; medium and small companies, retail, etc).
The ratings accorded to customers are regularly reviewed, incorporating new financial information and the experience in the development of the banking relationship with the customer. The regularity of the reviews increases in the case of clients who reach certain levels in the automatic warning systems and for those classified as special watch. The rating tools are also reviewed so that Group’s accuracy can be fine-tuned.
In order to make the internal ratings of the various models comparable and to be able to make comparisons with the ratings of external rating agencies, the Group has a master ratings scale. The comparisons are established via the probability of default associated with each rating.
The process: credit rating and parameter estimation
The credit risk associated to each transaction is quantified by means of its incurred loss. Risk measurement quantification requires following two steps; the first one is the estimation, and the second one is the assignment of the parameters that define the credit risk: Probability of Default, Loss Given Default and Exposure at Default.
We cover our losses inherent in debt instruments not measured at fair value through profit or loss and in contingent liabilities taking into account the historical experience of impairment and other circumstances known at the time of assessment. For these purposes, inherent losses are losses incurred at the reporting date, calculated using statistical methods that have not yet been allocated to specific transactions.
We use the concept of incurred loss to quantify the cost of the credit risk and include it in the calculation of the risk-adjusted return of its transactions. The parameters necessary for its calculation are also used to calculate economic capital and to calculate BIS II regulatory capital under internal models.
Incurred loss is the cost of the credit risk of a transaction that will manifest within a one year lead time from the balance sheet date considering the characteristics of the counterparty and the guarantees and collateral associated with the transaction.
The loss is calculated using statistical models that consider the following three factors: “exposure at default”, “probability of default” and “loss given default”.

 

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  -  
Exposure at default (EaD) is the amount of risk exposure at the date of default by the counterparty.
 
  -  
Probability of default (PD) is the probability of the counterparty failing to meet its principal and/or interest payment obligations. The probability of default is associated with the rating/scoring of each counterparty/transaction.
 
     
PD is measured using a time horizon of one year; i.e. it quantifies the probability of the counterparty defaulting in the coming year. The definition of default used includes past-dues by 90 days or more and cases in which there is no default but there are doubts as to the solvency of the counterparty (subjective doubtful assets).
 
  -  
Loss given default (LGD) is the loss arising in the event of default. It depends mainly on the guarantees associated with the transaction.
Estimation is based on the Group’s own internal experience, i.e. the historical records of default for each rating as well as the recoveries experience regarding non performing loans:
  -  
In portfolios where the internal experience of defaults is scant, such as banks, sovereigns or global wholesale banking, estimates of the parameters come from alternative sources: market prices or studies of outside agencies which draw on the shared experience of a sufficient number of institutions. These portfolios are called low default portfolios.
 
  -  
For the rest of portfolios, estimates are based on the institution’s internal experience.
The LGD calculation is based on the analysis of recoveries of past due transactions, considering not only revenues and costs associated with the collection process, but also the moment when these revenues and costs take place and all indirect costs linked to the collecting activity.
The estimation of the EaD comes from comparing the use of the lines committed at the moment of default and a normal situation, in order to identify the real consumption of the lines at the time of default.
Once estimated, the credit risk parameters are assigned to assets that are not past due and play an essential role in the risk management and decision taking processes. These parameters are used by several management tools such as (1) pre-classifications, (2) economic capital, (3) return on risk adjusted capital (RORAC) or (4) stress scenarios.
Control of the process
Internal validation is a prerequisite for supervisory validation and consists of a specialized and sufficiently independent unit obtaining a technical opinion on whether the internal model is appropriate for the purposes used (internal and regulatory) and concluding on its usefulness and effectiveness. Moreover, it must evaluate whether the risk management and control procedures are appropriate for the entity’s strategy and risk profile.
Grupo Santander’s corporate framework of internal validation is fully aligned with the criteria for internal validation of advanced models issued by the Bank of Spain. The criterion of separation of functions is maintained between Internal Validation and Internal Auditing which, as the last element of control in the Group, is responsible for reviewing the methodology, tools and work done by Internal Validation and to give its opinion on its degree of effective independence.
Other Non-Performing Assets. If a non-performing asset is an “other non-performing asset”, see “—Bank of Spain Classification Requirements—Other Non-Performing Assets”, the amount of the required allowance will be the difference between the amount outstanding and the current value of the expected collectable cash flows. The minimum allowance will be 25% and up to 100% of the amounts treated as non-performing, depending on management’s opinion of the loan recovery expectations. When the treatment of such asset as a non-performing asset is due to, in management’s opinion, an inadequate financial or economical condition of the borrower, and the amount estimated as non-collectible is less than 25% of the outstanding debt, the amount of the required allowance will be at least 10% of the outstanding debt.
Sub-standard Assets. The necessary allowance for assets classified in this category is determined as the difference between its outstanding balance and the current value of the expected collectable cash flows. In every case, the amount of the required allowance must be higher than the collectively assessed allowance that would correspond in case of being classified as standard asset and lower than would correspond if classified as non-performing asset. When assets are classified as sub-standard due to insufficient documentation and have an outstanding balance higher than 25,000, the applicable allowance is 10%.

 

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Allowances for Country-Risk
Country risk is considered to be the risk associated with counterparties resident in a given country due to circumstances other than normal commercial risk (sovereign risk, transfer risk and risks arising from international financial activity). Based on the countries’ economic performance, political situation, regulatory and institutional framework, and payment capacity and record, we classify all the transactions performed with third parties into six different groups assigning to each group the credit loss allowance percentages.
Guarantees
Allowances for non-performing guarantees will be equal to the amount that, using prudent criteria, is considered irrecoverable.
Bank of Spain Foreclosed Assets Requirements
If a Spanish bank eventually acquires the properties (residential or not) which secure loans or credits, the Bank of Spain requires that the value of the foreclosed assets should be the lesser of the amount of the debt (net of allowances) and the fair value of the foreclosed assets less the estimated selling costs (which shall be at least 10% of such value).
Bank of Spain Charge-off Requirements
The Bank of Spain does not permit non-performing assets to be partially charged-off.
The Bank of Spain requires Spanish banks to charge-off immediately those non-performing assets that management believes will never be repaid or that were made to category 6 (“bankrupt”) countries or residents of such category 6 countries. See the above sub-section entitled “—Bank of Spain Classification Requirements—Country-Risk Outstandings”. Otherwise, the Bank of Spain requires Spanish banks to charge-off non-performing assets four years after they were classified as non-performing. Accordingly, even if allowances have been established equal to 100% of a non-performing asset (in accordance with the Bank of Spain criteria discussed above), the Spanish bank may maintain that non-performing asset, fully provisioned, on its balance sheet for the full four year period if management believes based on objective factors that there is some possibility of recoverability of that asset.

 

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Movements in Allowances for Credit Losses
The following table analyzes movements in our allowances for credit losses and movements, by domicile of customer, for the years indicated. See “Presentation of Financial and Other Information”. For further discussion of movements in the allowances for credit losses, see “Item 5. Operating and Financial Review and Prospects—A. Operating results—Results of Operations for Santander—Impairment Losses (net)”.
                                         
    IFRS-IASB  
    Year Ended December 31,  
    2010     2009     2008     2007     2006  
    (in thousands of euros)  
Allowance for credit losses at beginning of year
                                       
Borrowers in Spain
    6,992,818       5,948,950       4,512,000       4,318,320       2,809,599  
Borrowers outside Spain
    10,905,814       6,770,673       4,284,371       3,969,808       4,092,326  
 
                             
Total
    17,898,632       12,719,623       8,796,371       8,288,128       6,901,925  
 
                                       
Addition of acquired companies’ credit loss allowances (1)
                                       
Borrowers in Spain
                             
Borrowers outside Spain
          1,426,104       2,310,095       7,356       164,530  
 
                             
Total
          1,426,104       2,310,095       7,356       164,530  
 
                                       
Recoveries of loans previously charged off (2)
                                       
Borrowers in Spain
    201,545       115,069       129,660       148,849       123,566  
Borrowers outside Spain
    999,772       799,652       570,087       463,602       418,402  
 
                             
Total
    1,201,317       914,721       699,747       612,451       541,968  
 
                                       
Net provisions for credit losses (2)
                                       
Borrowers in Spain
    2,124,521       2,499,843       928,236       658,990       793,898  
Borrowers outside Spain
    8,142,378       8,588,153       4,968,652       2,761,606       1,669,466  
 
                             
Total
    10,266,899       11,087,996       5,896,888       3,420,596       2,463,364  
 
                                       
Charge offs against credit loss allowance
                                       
Borrowers in Spain
    (2,173,734 )     (1,236,859 )     (731,588 )     (573,787 )     (269,559 )
Borrowers outside Spain
    (8,739,438 )     (8,557,769 )     (3,820,805 )     (2,746,375 )     (2,100,306 )
 
                             
Total
    (10,913,172 )     (9,794,628 )     (4,552,393 )     (3,320,162 )     (2,369,865 )
 
                                       
Other movements (3)
    1,285,299       1,544,817       (431,084 )     (211,998 )     586,206  
 
                                       
Allowance for credit losses at end of year (*)
                                       
Borrowers in Spain
    6,810,296       6,992,818       5,948,950       4,512,000       4,318,320  
Borrowers outside Spain
    12,928,679       10,905,814       6,770,673       4,284,371       3,969,808  
 
                             
Total
    19,738,975       17,898,632       12,719,623       8,796,371       8,288,128  
 
                                       
Average loans outstanding
                                       
Borrowers in Spain
    224,641,828       230,641,779       235,002,141       215,521,349       177,426,121  
Borrowers outside Spain
    482,406,776       436,857,260       340,938,627       330,253,241       297,802,187  
 
                             
Total
    707,048,604       667,499,039       575,940,768       545,774,590       475,228,308  
Net charge-offs against loan loss allowance to average loans ratio
                                       
Borrowers in Spain
    0.88 %     0.49 %     0.26 %     0.20 %     0.08 %
Borrowers outside Spain
    1.60 %     1.78 %     0.95 %     0.69 %     0.56 %
 
                             
Total
    2.48 %     2.26 %     1.21 %     0.89 %     0.65 %

 

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(*)  
Allowances for the impairment losses on the assets making up the balances of “Loans and receivables — Loans and advances to customers”, “Loans and receivables — Loans and advances to credit institutions” and “Loans and receivables — Debt securities”. See “Item 3. Key information — A. Selected Financial Data”
 
(1)  
The line items titled “Addition of acquired companies’ credit loss allowances” refer to the valuation allowance as of the acquisition date for the loans acquired in the business combinations carried out during the period after the acquired receivables have been measured at their acquisition fair values. This disclosure is no longer applicable in 2010 because the fair value of loans acquired in business combinations is disclosed net of allowances.
 
(2)  
We have not included separate line items for charge-offs of loans not previously provided for (loans charged-off against income) and recoveries of loans previously charged-off as these are not permitted.
 
(3)  
The changes in “Other Movements” from 2006, to 2007, to 2008, to 2009 and to 2010 principally reflect foreign exchange differences.

 

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The table below shows a breakdown of recoveries, net provisions and charge-offs against credit loss allowance by type and domicile of borrower for the years indicated.
                                         
    Year Ended December 31,  
    2010     2009     2008     2007     2006  
    (in thousands of euros)  
Recoveries of loans previously charged off-
                                       
Domestic:
                                       
Commercial, financial, agricultural, industrial
    40,605       31,969       30,136       32,045       37,879  
Real estate and construction
    31,690       15,162       4,860       10,718       5,646  
Other mortgages
    32,143       24,340       11,480       17,644       11,249  
Installment loans to individuals
    89,285       42,946       74,974       70,082       59,726  
Lease finance
    1,386       621       6,198       4,517       5,023  
Other
    6,436       31       2,012       13,843       4,043  
 
                             
Total Borrowers in Spain
    201,545       115,069       129,660       148,849       123,566  
Borrowers outside Spain
                                       
Government and official institutions
    4,261       34             8       1,126  
Commercial and industrial
    876,956       731,641       483,589       397,126       299,302  
Mortgage loans
    72,051       35,047       28,494       30,360       7,751  
Other
    46,504       32,930       58,004       36,108       110,223  
 
                             
Borrowers outside Spain
    999,772       799,652       570,087       463,602       418,402  
 
                             
Total
    1,201,317       914,721       699,747       612,451       541,968  
Net provisions for credit losses-
                                       
Domestic:
                                       
Commercial, financial, agricultural, industrial
    647,088       752,961       265,121       (278,355 )     405,914  
Real estate and construction
    674,447       528,124       (76,668 )     240,462       20,430  
Other mortgages
    131,361       263,700       276,578       298,645       96,209  
Installment loans to individuals
    573,827       848,450       399,651       383,582       278,223  
Lease finance
    82,103       73,055       26,619       16,038       55,894  
Other
    15,695       33,553       36,935       (1,382 )     (62,772 )
 
                             
Total Borrowers in Spain
    2,124,521       2,499,843       928,236       658,990       793,898  
Borrowers outside Spain
                                       
Government and official institutions
    44,057       14,218       (8,344 )     (1,797 )     2,035  
Commercial and industrial
    7,257,093       7,667,916       2,709,732       2,016,115       1,128,005  
Mortgage loans
    452,650       532,539       242,965       237,553       11,612  
Other
    388,578       373,480       2,024,299       509,735       527,814  
 
                             
Borrowers outside Spain
    8,142,378       8,588,153       4,968,652       2,761,606       1,669,466  
 
                             
Total
    10,266,899       11,087,996       5,896,888       3,420,596       2,463,364  
Charge offs against credit loss allowance
                                       
Domestic:
                                       
Commercial, financial, agricultural, industrial
    (704,422 )     (355,554 )     (121,751 )     (140,715 )     (55,982 )
Real estate and construction
    (191,194 )     (137,183 )     (34,429 )     (29,466 )     (18,911 )
Other mortgages
    (369,433 )     (235,659 )     (61,618 )     (11,807 )     (7,284 )
Installment loans to individuals
    (840,733 )     (481,164 )     (503,166 )     (356,532 )     (184,218 )
Lease finance
    (60,960 )     (25,681 )     (2,693 )     (1,344 )     (1,775 )
Other
    (6,992 )     (1,618 )     (7,931 )     (33,923 )     (1,389 )
 
                             
Total Borrowers in Spain
    (2,173,734 )     (1,236,859 )     (731,588 )     (573,787 )     (269,559 )
Borrowers outside Spain
                                       
Government and official institutions
    (43,254 )     (213 )                 (174 )
Commercial and industrial
    (7,993,694 )     (7,826,967 )     (2,807,232 )     (1,969,576 )     (1,333,617 )
Mortgage loans
    (444,849 )     (393,104 )     (1,736 )     (6,693 )     (46,603 )
Other
    (257,641 )     (337,485 )     (1,011,837 )     (770,106 )     (719,912 )
 
                             
Borrowers outside Spain
    (8,739,438 )     (8,557,769 )     (3,820,805 )     (2,746,375 )     (2,100,306 )
 
                             
Total
    (10,913,172 )     (9,794,628 )     (4,552,393 )     (3,320,162 )     (2,369,865 )

 

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Allowances for Credit Losses
The table below shows a breakdown of allowances for credit losses by type and domicile of borrower for the years indicated.
                                                                                 
    IFRS-IASB  
    Year Ended December 31,  
    2010     %     2009     %     2008     %     2007     %     2006     %  
    (in thousands of euros, except percentages)  
Borrowers in Spain:
                                                                               
Commercial, financial, agricultural, industrial
    1,498,686       7.59       1,742,508       9.74       1,690,171       13.29       1,121,382       12.75       2,054,720       24.79  
Real estate and construction (*)
    2,723,155       13.80       1,896,177       10.59       1,490,138       11.72       1,412,652       16.06       515,597       6.22  
Other mortgages
    1,329,421       6.73       1,375,447       7.68       1,271,684       10.00       805,437       9.16       457,132       5.52  
Installment loans to individuals
    1,065,189       5.40       1,673,557       9.35       1,182,274       9.29       926,917       10.53       889,283       10.73  
Lease finance
    169,148       0.85       215,785       1.21       112,874       0.89       162,405       1.85       166,542       2.01  
Other
    24,697       0.13       89,344       0.50       201,809       1.59       83,207       0.95       235,046       2.84  
 
                                                           
Total Borrowers in Spain
    6,810,296       34.50       6,992,818       39.07       5,948,950       46.77       4,512,000       51.30       4,318,320       52.10  
Borrowers outside Spain:
                                                                               
Government and official institutions
    31,190       0.16       19,149       0.11       13,653       0.11       25,650       0.29       30,054       0.36  
Commercial and industrial
    9,810,664       49,70       8,529,010       47.65       4,517,625       35.52       2,762,325       31.40       2,670,075       32.22  
Mortgage loans
    1,875,810       9.50       1,555,212       8.69       1,615,112       12.70       1,354,866       15.40       831,972       10.04  
Other
    1,211,015       6.14       802,443       4.48       624,283       4.91       141,530       1.61       437,707       5.28  
 
                                                           
Total Borrowers outside Spain
    12,928,679       65.50       10,905,814       60.93       6,770,673       53.23       4,284,371       48.70       3,969,808       47.90  
 
                                                           
Total
    19,738,975       100.00       17,898,632       100.00       12,719,623       100.00       8,796,371       100.00       8,288,128       100.00  
     
(*)  
As of December 31, 2010, the allowances of the portfolio of loans to construction and property development companies with real estate purposes, defined in accordance with the Bank of Spain’s purpose-based classification guidelines, amounted to 1,890 million.
Impaired Balances
The following tables show our impaired assets (loans, securities and other assets to collect) and contingent liabilities, excluding country-risk. We do not keep records classifying balances as non-accrual, past due, restructured or potential problem loans, as those terms are defined by the SEC. However, we have estimated the amount of our balances that would have been so classified, to the extent possible, below.
                                         
    IFRS  
    At December 31,  
Non-performing balances   2010     2009     2008     2007     2006  
    (in thousands of euros)  
Past-due and other non-performing balances (1) (2) (3):
                                       
Domestic
    12,474,076       10,405,450       6,405,803       1,887,167       1,288,857  
International
    16,048,290       14,148,174       7,785,010       4,291,488       3,318,690  
 
                             
Total
    28,522,366       24,553,624       14,190,813       6,178,655       4,607,547  
 
     
(1)  
We estimate that the total amount of our non-performing balances fully provisioned under IFRS and which under U.S. GAAP would have been charged-off from the balance sheet was 1,206.5 million, 1,582.0 million, 2,877.6 million, 2,996.6 million and 4,843.1 million at December 31, 2006, 2007, 2008, 2009 and 2010, respectively.
 
(2)  
Non-performing balances due to country risk were 83.0 million, 6.7 million, 2.6 million, 7.8 million and 7.9 million at December 31, 2006, 2007, 2008, 2009 and 2010, respectively.
 
(3)  
We estimate that at December 31, 2006, 2007, 2008, 2009 and 2010 (i) the total amount of our non-performing past-due balances was 3,841.2 million, 4,918.2 million, 11,773.3 million, 21,269.8 million and 23,650.2 million respectively, and (ii) the total amount of our other non-performing balances was 766.3 million, 1,260.5 million, 2,417.5 million, 3,283.9 million and 4,872.2 million, respectively.

 

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We do not believe that there is a material amount of assets not included in the foregoing table where known information about credit risk at December 31, 2010 (not related to transfer risk inherent in cross-border lending activities) gave rise to serious doubts as to the ability of the borrowers to comply with the loan repayment terms at such date.
The following table shows our financial assets classified as loans and receivables which are considered to be impaired due to credit risk at December 31, 2010, classified by geographical location of risk and by age of the oldest past-due amount (see Note 10.d to our consolidated financial statements):
                                                 
    Millions of euros  
    With no
past-due
       
    balances or        
    less than 3     With balances past due by  
    months
past due
    3 to 6
months
    6 to 9
months
    9 to 12
months
    More than
12 months
    Total  
Spain
    2,726       1,835       1,511       1,001       5,240       12,313  
European Union (excluding Spain)
    308       2,782       1,192       759       2,190       7,231  
United States and Puerto Rico
    898       567       231       139       817       2,652  
Other OECD countries
    18       35       37       34             124  
Latin America
    768       2,310       894       791       822       5,585  
Rest of the world
          3                         3  
 
                                   
 
    4,718       7,532       3,865       2,724       9,069       27,908  
 
                                   
The financial assets classified under the caption “loans and receivables” of our balance sheet as of December 31, 2010 that are considered to be impaired due to credit risk and bear past-due amounts of more than 12 months amounted to 9,069 million (32.5% of total impaired loans). From this balance, 81% are between 12 and 24 months past due, 18% between 24 and 36 months past due and 1% between 36 and 48 months past due.
Evolution of Impaired Balances
The following tables show the movement in our impaired assets and contingent liabilities (excluding country-risk, see “—Country-Risk Outstandings”).
                                                                         
    IFRS  
                                    Year ended     Year ended     Year ended     Year ended     Year ended  
    Quarter ended     Dec. 31,     Dec. 31,     Dec. 31,     Dec. 31,     Dec. 31,  
(in thousands of euros)   Mar. 31, 2010     Jun. 30, 2010     Sep. 30, 2010     Dec. 31, 2010     2010     2009     2008     2007     2006  
Opening balance
    24,553,624       25,511,694       27,324,576       27,194,565       24,553,624       14,190,813       6,178,655       4,607,547       4,341,500  
Net additions
    3,423,414       3,388,930       2,894,984       3,771,040       13,478,368       18,234,330       11,346,183       5,014,270       2,567,912  
Increase in scope of consolidation
                253,868       3,008       256,876       1,033,001       2,088,943       1,000       164,000  
Exchange differences
    419,574       1,307,477       (1,060,011 )     479,629       1,146,669       890,109       (870,575 )     (124,000 )     (96,000 )
Writeoffs
    (2,884,918 )     (2,883,525 )     (2,218,852 )     (2,925,876 )     (10,913,171 )     (9,794,629 )     (4,552,393 )     (3,320,162 )     (2,369,865 )
 
                                                     
Closing balance
    25,511,694       27,324,576       27,194,565       28,522,366       28,522,366       24,553,624       14,190,813       6,178,655       4,607,547  

 

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Non-performing loan (NPL) balances increased in 2010 by 3,969 million to 28,522 million (an increase of 16% as compared to the increase of 73% in 2009 and to the increase of 130% in 2008). This variation reflects the impact of continued weak economic environments in some markets, mitigated in part by risk management activities. The pace of growth in non-performing balances decelerated, as active management produced a positive evolution of net additions to NPL and of the risk premium for the whole Group and the main business units. In 2010, net additions to non-performing balances decreased by a total amount of 4,756 million as compared to 2009, consistent with the gradual recovery of the economic environment.
Charge-offs increased from 2009 to 2010 by 1,119 million as compared to a 5,243 million increase from 2008 to 2009. The increase during 2010 was more significant in Spain (+936.9 million) while charge-offs outside Spain increased to a significantly lesser degree (+181.7 million). This was due to the still weak Spanish economy which ended 2010 with a negative growth of -0.1% while the main foreign economies either grew strongly or were showing signs of recovery. We estimate that this trend will continue during 2011 due to the expected evolution of the macroeconomic environment and the increase in non-performing loan balances in 2010.
During 2009 the increase in charge-offs in Spain was of 506 million, while outside Spain it amounted to 4,737 million. The increase outside Spain was explained by changes in the scope of consolidated entities (2,390 million), the weak macroeconomic environment (1,453 million) and the impact of exchange rates (894 million).
The increase in “Changes in the scope of consolidated entities” in 2009 compared to 2008 was mainly due to the following as explained in Note 1.h to our 2009 consolidated financial statements: Banco Real was fully consolidated in the Group’s consolidated financial statements since the fourth quarter of 2008; prior to then, it was accounted for using the equity method. Accordingly, 2008 charge-offs correspond to only three months, while the 2009 figure included a complete year. In addition, other significant acquisitions were carried out in the last months of 2008 (Alliance & Leicester) and in January of 2009 (Sovereign Bancorp).
Additionally, the deterioration of the macroeconomic environment during 2009 and the preceding two years caused an increase of impaired assets and, consequently, an increase of charge-offs. Market turmoil, economic recession and increasing unemployment coupled with declining consumer spending and declining values of asset collateral, especially in the United Kingdom, the United States and certain Latin American countries (as well as Spain) affected the financial conditions of our borrowers. That has, in turn, caused an increase in our non-performing ratios and, consequently, in an increase in charge-offs.

 

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Impaired Balances Ratios
The following table shows the total amount of our computable credit risk, our non-performing assets and contingent liabilities by category, our allowances for credit losses, the ratio of our impaired balances to total computable credit risk and our coverage ratio at the dates indicated.
                                         
    IFRS  
    At December 31,  
    2010     2009     2008     2007     2006  
    (in thousands of euros, except percentages)  
Computable credit risk (1)
    804,035,990       758,346,873       697,199,713       649,342,484       588,372,837  
 
Non-performing balances by segments:
                                       
Individuals
    15,605,820       14,589,806       10,113,539       4,774,589       3,707,554  
Mortgages
    6,303,854       6,110,013       3,238,670       1,584,517       1,230,406  
Consumer loans
    6,486,893       6,164,477       5,711,326       2,695,997       2,093,490  
Credit cards and others
    2,815,073       2,315,316       1,163,543       494,075       383,658  
Enterprises
    11,320,871       7,811,870       2,860,333       1,309,738       843,807  
Corporate Banking
    1,549,980       2,127,493       1,130,459       62,224       38,300  
Public sector
    45,695       24,455       86,481       32,105       17,886  
 
                             
Total non performing balances
    28,522,366       24,553,624       14,190,812       6,178,656       4,607,547  
 
                                       
Allowances for non-performing balances
    20,747,651       18,497,070       12,862,981       9,302,230       8,626,937  
 
                                       
Ratios
                                       
Non-performing balances to computable credit risk
    3.55 %     3.24 %     2.04 %     0.95 %     0.78 %
Coverage ratio (2)
    72.74 %     75.33 %     90.64 %     150.55 %     187.23 %
Balances charged-off to total loans and contingent liabilities
    1.21 %     1.17 %     0.55 %     0.41 %     0.31 %
     
(1)  
Computable credit risk is the sum of the face amounts of loans and leases (including non-performing assets but excluding country risk loans), guarantees and documentary credits.
 
(2)  
Allowances for non-performing balances as a percentage of non-performing balances.
The ratio of non-performing balances to computable credit risk was 0.78%, 0.95%, 2.04%, 3.24% and 3.55% for the Group as a whole as of December 31, 2006, 2007, 2008, 2009 and 2010, respectively. The increase in 2010 was mainly due to the weak economic environment. We expect it will stabilize as highlighted by the recent quarterly trend of diminishing net additions to non-performing balances discussed above.
The non-performing balances ratio stood at 3.55% in December 2010, up 31 basis points in the year, reflecting a slowdown in the growth experienced by this ratio in recent years. Non-performing balances fell at Santander Consumer Finance, Santander Brazil and Sovereign, but increased in our businesses in Spain. In Spain, more than 80% of the portfolio (including mortgages and companies) had non-performing balance ratios of 3% or lower. Of note were home purchase mortgages -with a gross amount of 62 billion accounting for 26% of total lending in Spain- whose NPL ratio was 2.2% as compared to 2.5% in 2009. With respect to loans to the construction and real estate development sectors, the NPL ratio for loans not related to real estate was 4.4%, while that for loans with a real estate purpose (with a gross amount of 27 billion) was 17.0% confirming that the downturn experienced by this sector continued to persist in 2010. For more detailed information on credit risk, particularly real estate risk in Spain, please see Item 11. Quantitative And Qualitative Disclosures About Market Risk. Part 4. Credit Risk.
The increase in non-performing balances is also aggravated through the classification as non-performing of the entire outstanding principal amount and accrued interest on any loan on which any payment of principal, interest or agreed cost is 90 days or more past due. We refer to this effect as the “individual loan drag effect”. An additional impact occurs by the so-called “client drag effect”, through which Spanish banking groups classify as non-performing the aggregate risk exposure (including off-balance sheet risks) to a single obligor, whenever the amount of non-performing balances of such obligor exceeds 25% of its total outstanding risks (excluding non-accrued interest on loans to such borrower). Both drag effects have a larger impact in the case of mortgages and corporate loans due to the greater average amount of these loans.

 

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The Group’s coverage ratio fell to 75% in December 2009, and further to 73% in December 2010. That decrease was lower than the fall from 2008 to 2009 (from 91% to 75%). This ratio is calculated as allowances for non-performing balances as a percentage of non-performing balances.
In 2009, the Group’s non-performing balances increased mainly due to (1) the rapid deterioration of the global macroeconomic environment and (2) the increase in the Bank’s scope of consolidation (due to the acquisitions of Alliance & Leicester, Sovereign, Banco Real, GE Money and RBS Europe). Other factors leading to the increase in the Group’s non-performing balances were the higher volumes of lending in recent years and the change of mix (principally in Latin America) toward more profitable but higher risk products. The principal geographic drivers of the increase in non-performing balances, other than through acquisitions, were Spain, the United Kingdom and Brazil.
We establish our expectations of credit loss (and our corresponding allowances) for our entire loan portfolio, not just for our non-performing balances. Our expectations of credit loss for our entire portfolio typically increase at a slower rate than the rate at which our non-performing balances increase, particularly during an economic downturn, when non-performing loans grow quickly but the performing loan portfolio grows at a slower pace and with lower-risk loans, reflecting caution due to macroeconomic conditions. As a result, the ratio of our non-performing balances to computable credit risk typically increases since the numerator (non-performing balances) increases faster than the denominator (computable credit risk). Similarly, our coverage ratio typically decreases since, for the reasons discussed above, the numerator (allowances for credit losses) does not increase as fast as the denominator (non-performing balances).
We are currently highly exposed to real estate markets, especially in Spain and the United Kingdom. Mortgage loans are one of our principal assets, comprising 51% of our loan portfolio as of December 31, 2010, and we are focused on first home mortgages. From 2002 to 2007, demand for housing and mortgage financing in Spain increased significantly driven by, among other things, economic growth, declining unemployment rates, demographic and social trends, and historically low interest rates in the Eurozone. The United Kingdom experienced a similar increase in housing and mortgage demand, driven by, among other things, economic growth, declining unemployment rates, demographic trends and the increasing prominence of London as an international financial center. In this favorable environment, we maintained prudent risk management with a mortgage portfolio focused on first homes with average loan to values in Spain and the United Kingdom of 50% and 51%, respectively, as of December 31, 2010. As a result of the general macroeconomic deterioration in the second half of 2008, a percentage of these assets became non-performing and, as a result of the quality of the collateral, the inexistence of both option adjustable rate mortgage (ARM) loans and of monthly payments below accrued interest, the requirements of allowances for these non-performing assets have remained low.
Our net impairment for credit losses was 10,266.9 million for 2010, a 7.4% or 821.1 million decrease from 11,088.0 million for 2009. This reduction was due to lower provisions in Latin America, which is beginning to benefit from the improvement in the economic cycle and the change in mix of products, and the good trend in the UK and Sovereign. Spain and Portugal, on the other hand, still required higher provisions in 2010 because of the increase in bad loans and the review carried out by the Bank of Spain of the references established in the Circular 4/2004 to determine the provisions for credit risk after taking into account the experience from recent years and the current economic situation.
Other Non-Accruing Balances
As described above under “—Bank of Spain Classification Requirements”, we do not classify our loans and contingent liabilities to borrowers in countries with transitory difficulties (category 3) and countries in serious difficulties (category 4) as impaired balances. Loans and contingent liabilities in these categories do not stop accruing interests. However, we treat category 5 (doubtful countries) country-risk outstandings as both a non-accruing and impaired balance.

 

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    IFRS-IASB  
    Year Ended December 31,  
Summary of non-accrual balances   2010     2009     2008     2007     2006  
    (in millions of euros)  
Balances classified as Non-Performing Balances
    28,522.4       24,553.6       14,190.8       6,178.7       4,607.5  
Non-Performing Balances due to country risk
    7.9       7.8       2.6       6.7       83.0  
 
                             
Total non-accruing balances
    28,530.3       24,561.4       14,193.4       6,185.4       4,690.5  
As of December 31, 2006, 2007, 2008, 2009 and 2010, the amounts of refinanced loans were 403 million, 465.2 million, 648.7 million, 3,829 million, and 5,956 million, respectively. A definition of refinanced loans and a detailed explanation of the corporate policy of restructurings can be found under “Item 11. Quantitative and Qualitative Disclosures About Market Risk — Part 4. Credit risk — Credit exposure in Spain — Restructuring and Payment Agreements”. The strong increase in 2009 and 2010 was directly related to the increase in non-performing loans explained above.
Foreclosed Assets
The tables below set forth the movements in our foreclosed assets for the periods shown.
                                                         
    IFRS-IASB  
    Quarterly movements     Year Ended  
    Mar. 31,     Jun. 30,     Sep. 30,     Dec. 31,     December 31,  
    2010     2010     2010     2010     2010     2009     2008  
    (in thousands of euros, except percentages)  
Opening balance
    2,715,874       3,043,490       3,395,469       3,780,483       2,715,874       1,309,989       494,567  
Foreclosures
    702,325       823,206       807,868       831,087       3,164,487       3,383,892       1,712,821  
Sales
    (374,709 )     (471,227 )     (422,853 )     (565,547 )     (1,834,338 )     (1,978,007 )     (897,399 )
 
                                         
Gross foreclosed assets
    3,043,490       3,395,469       3,780,484       4,046,023       4,046,023       2,715,874       1,309,989  
Allowances established
    (832,299 )     (894,543 )     (991,686 )     (1,138,454 )     (1,138,454 )     (713,373 )     (169,030 )
 
                                         
Closing balance (net)
    2,211,191       2,500,926       2,788,798       2,907,569       2,907,569       2,002,501       1,140,959  
Allowance as a percentage of foreclosed assets
    27.35 %     26.35 %     26.23 %     28.14 %     28.14 %     26.27 %     12.90 %
 
                                         
Additionally, the measures adopted in Spain to achieve more efficient risk management included the acquisition of real estate assets in payment of customer’s debts. At December 31, 2010, the net amount of properties acquired in Spain was 2,956 million (as compared to €2,936 million at 2009 year end). The allowance covering the value of these assets was approximately 31%.
Liabilities
Deposits
The principal components of our deposits are customer demand, time and notice deposits, and international and domestic interbank deposits. Our retail customers are the principal source of our demand, time and notice deposits. For an analysis, by domicile of customer, of average domestic and international deposits by type for 2007, 2008, 2009 and 2010 see “—Average Balance Sheets and Interest Rates—Liabilities and Interest Expense”.
We compete actively with other commercial banks and with savings banks for domestic deposits. Our share of customer deposits in the Spanish banking system (including Cajas de Ahorros) was 19.9% at December 31, 2010, according to figures published by the Spanish Banking Association (AEB) and the Confederación Española de Cajas de Ahorros (“CECA”). See “—Competition”.

 

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The following tables analyze our year-end deposits.
Deposits (from central banks and credit institutions and customers) by type of deposit
                         
    IFRS-IASB  
    At December 31,  
Deposits from central banks and credit institutions-   2010     2009     2008  
    (in thousands of euros)  
Reciprocal accounts
    423,304       948,049       509,282  
Time deposits
    57,233,213       78,325,126       82,559,946  
Other demand accounts
    2,677,990       3,340,932       2,527,834  
Repurchase agreements
    78,196,555       56,818,092       41,651,446  
Central bank credit account drawdowns
    1,579,723       2,658,925       2,626,262  
Other financial liabilities associated with transferred financial assets
                 
Hybrid financial liabilities
    1,400       463       2,600  
 
                 
Total
    140,112,185       142,091,587       129,877,370  
Customer deposits-
                       
Demand deposits-
                       
Current accounts
    148,066,306       135,895,002       94,773,159  
Savings accounts
    136,693,907       127,940,647       115,673,794  
Other demand deposits
    3,430,804       3,570,326       3,035,757  
Time deposits-
                       
Fixed-term deposits
    275,628,965       192,244,789       143,130,514  
Home-purchase savings accounts
    230,791       315,867       295,458  
Discount deposits
    448,432       448,432       11,625,840  
Funds received under financial asset transfers
          2       2  
Hybrid financial liabilities
    4,754,258       5,447,496       8,159,893  
Other financial liabilities associated with transferred financial assets
                 
Other time deposits
    153,812       212,111       290,053  
Notice deposits
    1,316,203       2,208,116       1,764,954  
Repurchase agreements
    45,652,341       38,693,449       41,480,026  
 
                 
Total
    616,375,819       506,976,237       420,229,450  
 
                       
Total deposits
    756,488,004       649,067,824       550,106,820  

 

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Deposits (from central banks and credit institutions and customers) by location of office
                         
    IFRS-IASB  
    At December 31,  
Deposits from central banks and credit institutions-   2010     2009     2008  
    (in thousands of euros)  
Due to credit institutions
                       
Offices in Spain
    43,998,347       68,500,717       61,175,697  
Offices outside Spain:
                       
Other EU countries
    60,145,164       56,157,152       55,594,532  
United States
    11,529,173       1,002,056       722,833  
Other OECD countries (1)
    25,421       38,669       38,067  
Central and South America (1)
    24,414,050       16,371,115       12,291,897  
Other
    30       21,878       54,344  
Total offices outside Spain
    96,113,838       73,590,870       68,701,673  
 
                 
Total
    140,112,185       142,091,587       129,877,370