20-F 1 b413823-20f.htm FORM 20-F Prepared and Filed by St Ives Financial

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 20-F


(Mark One)


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

 


ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR

 


TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from                 to
Commission file number 001-12518

 


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

BANCO SANTANDER CENTRAL HISPANO, 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)


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

 

Title of each class

 

Name of each exchange
on which registered


 


American Depositary Shares, each representing the right to receive one Share of Capital Stock of Banco Santander Central Hispano, S.A., par value Euro 0.50 each

 

New York Stock Exchange

Shares of Capital Stock of Banco Santander Central Hispano, S.A., par value Euro 0.50 each

 

New York Stock Exchange

Non-cumulative Guaranteed Preferred Stock of Santander Finance Preferred, S.A. Unipersonal, Series 1

 

New York Stock Exchange

Guarantee of Non-cumulative Guaranteed Preferred Stock of Santander Finance Preferred, S.A. Unipersonal

 

 


*

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

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

None.

(Title of Class)

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

None.

(Title of Class)

The number of outstanding shares of each class of Stock of Banco Santander Central Hispano, S.A. at

December 31, 2005 was:

Shares par value Euro 0.50 each: 6,254,296,579

The number of outstanding shares of each class of stock of Santander Finance Preferred, S.A. Unipersonal benefiting from a guarantee of Banco Santander Central Hispano, S.A. at December 31, 2005 was:

Non-cumulative Preferred Securities, Series 1

 

7,600,000

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

Yes     No

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

Yes   No  

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    No

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

Large accelerated filer   Accelerated filer   Non-accelerated filer

Indicate by check mark which financial statement item the registrant has elected to follow.

Item  17     Item  18

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

Yes     No



BANCO SANTANDER CENTRAL HISPANO, S.A.


TABLE OF CONTENTS

 

 

 

 

Page

Presentation of Financial and Other Information

3

Cautionary Statement Regarding Forward-Looking Statements

3

 

 

 

 

PART I

 

 

 

 

 

 

 

ITEM 1.

 

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

6

 

 

 

 

ITEM 2.

 

OFFER STATISTICS AND EXPECTED TIMETABLE

6

 

 

 

 

ITEM 3.

 

KEY INFORMATION

6

 

 

 

 

 

 

A. Selected financial data

6

 

 

B. Capitalization and indebtedness

11

 

 

C. Reasons for the offer and use of proceeds

11

 

 

D. Risk factors

11

 

 

 

 

ITEM 4.

 

INFORMATION ON THE COMPANY

16

 

 

 

 

 

 

A. History and development of the company

16

 

 

B. Business overview

20

 

 

C. Organizational structure

81

 

 

D. Property, plants and equipment

82

 

 

 

 

ITEM 4A

 

UNRESOLVED STAFF COMMENTS

82

 

 

 

 

ITEM 5.

 

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

82

 

 

 

 

 

 

A. Operating results

86

 

 

B. Liquidity and capital resources

102

 

 

C. Research and development, patents and licenses, etc.

104

 

 

D. Trend information

105

 

 

E. Off-balance sheet arrangements

105

 

 

F. Tabular disclosure of contractual obligations

105

 

 

 

 

ITEM 6.

 

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

107

 

 

 

 

 

 

A. Directors and senior management

107

 

 

B. Compensation

113

 

 

C. Board practices

120

 

 

D. Employees

127

 

 

E. Share ownership

129

 

 

 

 

ITEM 7.

 

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

130

 

 

 

 

 

 

A. Major shareholders

130

 

 

B. Related party transactions

131

 

 

C. Interests of experts and counsel

132

 

 

 

 

ITEM 8.

 

FINANCIAL INFORMATION

132

 

 

 

 

 

 

A. Consolidated statements and other financial information

132

 

 

B. Significant changes

138

 

 

 

 

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ITEM 9.

 

THE OFFER AND LISTING

138

 

 

 

 

 

 

A. Offer and listing details

138

 

 

B. Plan of distribution

140

 

 

C. Markets

140

 

 

D. Selling shareholders

144

 

 

E. Dilution

144

 

 

F. Expense of the issue

144

 

 

 

 

ITEM 10.

 

ADDITIONAL INFORMATION

144

 

 

 

 

 

 

A. Share capital

144

 

 

B. Memorandum and articles of association

144

 

 

C. Material contracts

151

 

 

D. Exchange controls

151

 

 

E. Taxation

151

 

 

F. Dividends and paying agents

155

 

 

G. Statement by experts

155

 

 

H. Documents on display

155

 

 

I. Subsidiary information

155

 

 

 

 

ITEM 11.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

156

 

 

 

 

 

 

Introduction

156

 

 

Part 1. Organization of risk management

157

 

 

Part 2. Global risk analysis profile

160

 

 

Part 3. Credit risk

160

 

 

Part 4. Operational risk

178

 

 

Part 5. Reputational risk

183

 

 

Part 6. Risk training activities

185

 

 

Part 7. Market risk

186

 

 

 

 

ITEM 12.

 

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

202

 

 

 

 

 

 

A. Debt securities

202

 

 

B. Warrants and rights

202

 

 

C. Other securities

202

 

 

D. American Depositary Shares

202

 

 

 

 

PART II

 

 

 

 

 

 

 

ITEM 13.

 

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

203

 

 

 

 

ITEM 14.

 

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

203

 

 

 

 

ITEM 15.

 

CONTROLS AND PROCEDURES

203

 

 

 

 

ITEM 16.

 

A. Audit committee financial expert

203

 

 

B. Code of ethics

203

 

 

C. Principal accountant fees and services

204

 

 

D. Exemptions from the listing standards for audit committees

204

 

 

E. Purchases of equity securities by the issuer and affiliated purchasers

205

 

 

 

 

PART III

 

 

 

 

 

 

 

ITEM 17.

 

FINANCIAL STATEMENTS

206

 

 

 

 

ITEM 18.

 

FINANCIAL STATEMENTS

206

 

 

 

 

ITEM 19.

 

EXHIBITS

206

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Accounting Principles

Except where noted otherwise, the financial information contained in this report has been prepared according to the International Financial Reporting Standards as adopted by the European Union (“IFRS”) and the Bank of Spain Circular 4/2004. Because this is the first year that we have prepared our financial statements under IFRS, this report contains changes to our accounting principles, the presentation of our financial statements and the structure of our business areas. Our financial statements for the fiscal year ending December 31, 2004 have been restated using IFRS standards. Financial information prepared according to Bank of Spain Circular 4/91 (“previous Spanish GAAP”) is not comparable with that prepared under IFRS. A description of the significant differences between these accounting standards is included in Note 57 to our consolidated financial statements, and Note 58 to our consolidated financial statements contains a description of significant differences between IFRS and U.S. GAAP.

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 U.S. Securities and Exchange Commission that contains formatting requirements for bank holding company financial statements. We have, however, included summary financial information that reflects the required reclassifications in Note 58 to our consolidated financial statements.

Our auditors, Deloitte, S.L., have audited our consolidated financial statements in respect of the two years ended December 31, 2005 and 2004 in accordance with IFRS and without qualification. The IFRS data for 2004 differ from those contained in the statutory consolidated financial statements for that year, as approved at the Annual General Meeting on June 18, 2005, which were prepared in accordance with previous Spanish GAAP.

See page F-1 to our consolidated financial statements for the 2005 and 2004 reports prepared by our independent registered public accounting firm.

Acquisition of Abbey National plc

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

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; 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. We included in interest income 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 units.

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

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

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This annual report contains statements that constitute “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include information regarding:

exposure to various types of market risks;

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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 Prospects,” “Information on the Company” and “Qualitative and Quantitative 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 “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, other European countries, Latin America and the other areas in which we have significant business activities or investments;

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

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, including our acquisition of Abbey, or restructurings;

changes in demographics, consumer spending or saving habits; and

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

Political and Governmental Factors

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

changes in Spanish, UK, EU or foreign laws, regulations or taxes.

Transaction and Commercial Factors

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

the outcome of our negotiations with business partners and governments.

Operating Factors

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

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

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

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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. Auditors.

Not applicable.

Item 2. Offer Statistics and Expected Timetable

A. Offer Statistics.

Not applicable.

B. Method and Expected Timetable.

Not applicable.

Item 3. Key Information

A. Selected financial data.

Selected Consolidated Financial Information

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

Except where noted otherwise, the financial information contained in this report has been prepared according to IFRS and the Bank of Spain Circular 4/2004. Because this is the first year that we have prepared our financial statements under IFRS, this report contains changes to our accounting principles, the presentation of our financial statements and the structure of our business areas. Our financial statements for the fiscal year ending December 31, 2004 have been restated using IFRS standards. Financial information prepared according to previous Spanish GAAP is not comparable with that prepared under IFRS. A description of the significant differences between these accounting standards is included in Note 57 to our consolidated financial statements, and Note 58 to our consolidated financial statements contains a description of significant differences between IFRS and U.S. GAAP. In addition, our financial information is presented in Spanish format.

In the F-pages of this Form 20-F, audited financial statements for the years 2005 and 2004 are presented. Audited financial statements for the years 2003, 2002 and 2001 are not included in this document, but they can be found in our previous annual reports on Form 20-F.

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

 

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(IFRS)
Year Ended December 31,

 

 

 


 

 

 

2004

 

2005

 

 

 


 


 

Consolidated Income Statement Data   (thousands of euros, except
percentages and per
share data)
 

Interest and similar income

 

17,461,238

 

32,958,556

 

Interest expense and similar charges

 

(10,274,776

)

(22,800,696

)

Income from equity instruments

 

389,038

 

335,610

 

Net interest income

 

7,575,500

 

10,493,470

 

Share of results of entities accounted for using the equity method

 

449,011

 

619,166

 

Net fees and commissions (1)

 

4,768,637

 

6,313,849

 

Insurance activity income

 

161,374

 

815,519

 

Gains (losses) on financial transactions (2)

 

1,100,725

 

1,565,281

 

Gross income

 

14,055,247

 

19,807,285

 

Net income from non-financial activities (3)

 

347,811

 

426,032

 

Other operating income (4)

 

(62,941

)

(103,745

)

General administrative expenses

 

(6,839,867

)

(9,823,438

)

Personnel expenses

 

(4,324,662

)

(5,817,397

)

Other general administrative expenses

 

(2,515,205

)

(4,006,041

)

Depreciation and amortization

 

(838,674

)

(1,021,211

)

Net operating income

 

6,661,576

 

9,284,923

 

Impairment losses (net)

 

(1,843,415

)

(1,806,983

)

Net gains on disposal of investments in associates (5)

 

30,891

 

1,299,046

 

Net results on other disposals, provisions and other income (6)

 

(267,749

)

(622,517

)

Profit before tax

 

4,581,303

 

8,154,469

 

Income tax

 

(596,792

)

(1,391,176

)

Profit from continuing operations

 

3,984,511

 

6,763,293

 

Profit from discontinued operations (net)

 

11,723

 

(13,523

)

Consolidated profit for the year

 

3,996,234

 

6,749,770

 

Profit attributed to minority interests

 

390,364

 

529,666

 

Profit attributed to the Group

 

3,605,870

 

6,220,104

 

 

 


 


 

Per Share Information:

 

 

 

 

 

Average number of shares (thousands) (7)

 

4,950,498

 

6,240,611

 

Profit attributed to the Group per average share

 

0.7284

 

0.9967

 

Diluted earnings per share (in euros)

 

0.7271

 

0.9930

 

Dividends paid (in euros)

 

0.33

 

0.42

 

Dividends paid (in US$)

 

0.39

 

0.49

 

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Consolidated Balance Sheet Data:

 

(IFRS)
Year Ended December 31,

 

 

 


 

 

 

2004

 

2005

 

 

 


 


 

Consolidated Balance Sheet Data:

 

(thousands of euros, except
percentages and per share data)

 

Total assets

 

664,486,300

 

809,106,914

 

Loans and advances to credit institutions (8)

 

58,379,774

 

59,773,022

 

Loans and advances to customers (net) (8)

 

369,350,064

 

435,828,795

 

Investment Securities (9)

 

138,753,764

 

203,938,360

 

Investments: Associates

 

3,747,564

 

3,031,482

 

Liabilities

 

 

 

 

 

Deposits from central banks and credit institutions (10)

 

83,750,339

 

148,622,407

 

Customer deposits (10)

 

283,211,616

 

305,765,280

 

Debt securities (10)

 

113,838,603

 

148,840,346

 

Capitalization

 

 

 

 

 

Guaranteed Subordinated debt

 

9,369,939

 

8,973,699

 

Secured Subordinated debt

 

508,039

 

 

Other Subordinated debt

 

12,300,179

 

13,016,989

 

Preferred securities (11)

 

5,292,016

 

6,772,768

 

Preferred shares (11)

 

2,124,222

 

1,308,847

 

Minority interests (including profit attributed to minority interests)

 

2,085,316

 

2,848,223

 

Stockholders’ equity (12)

 

34,414,942

 

39,778,476

 

Total capitalization

 

66,094,652

 

72,699,002

 

Stockholders’ Equity per Share (12)

 

6.95

 

6.37

 

Other managed funds

 

 

 

 

 

Mutual funds

 

97,837,724

 

109,480,095

 

Pension funds

 

21,678,522

 

28,619,183

 

Managed portfolio

 

8,998,388

 

14,746,329

 

Total other managed funds

 

128,514,634

 

152,845,607

 

Consolidated Ratios

 

 

 

 

 

Profitability Ratios

 

 

 

 

 

Net Yield (13)

 

2.20

%

1.57

%

Efficiency ratio (14)

 

52.00

%

52.55

%

Return on average total assets (ROA)

 

1.01

%

0.91

%

Return on average stockholders’ equity (ROE)

 

19.74

%

19.86

%

Capital Ratio:

 

 

 

 

 

Average stockholders’ equity to average total assets

 

4.62

%

4.24

%

Ratio of earnings to fixed charges (15)

 

 

 

 

 

Excluding interest on deposits

 

1.89

%

1.82

%

Including interest on deposits

 

1.39

%

1.32

%

Credit Quality Data

 

 

 

 

 

Allowances for impaired assets (excluding country-risk)

 

6,813,354

 

7,902,225

 

Allowances for impaired assets as a percentage of total loans

 

1.81

%

1.78

%

Impaired assets (16)

 

4,114,691

 

4,341,500

 

Impaired assets as a percentage of total loans

 

1.09

%

0.98

%

Allowances for impaired assets as a percentage of impaired assets

 

165.59

%

182.02

%

Net loan charge-offs as a percentage of total loans

 

0.16

%

0.23

%

 

(1)

Equals “Fee and commission income” less “Fee and commission expense” as stated in our consolidated financial statements.

(2)

Equals the sum of “Gains/losses on financial assets and liabilities (net)” and “Exchange differences (net)” as stated in our consolidated financial statements.

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(3)

Equals the sum of “Sales and income from the provision of non-financial services” and “Cost of sales” as stated in our consolidated financial statements.

(4)

Equals the sum of “Other operating income” and “Other operating expenses” as stated in our consolidated financial statements.

(5)

Equals the sum of “Other gains: Gains on disposal of investments in associates” and “Other losses: Losses on disposal of investments in associates” as stated in our consolidated financial statements.

(6)

Includes “Provisions (net)”, “Finance income from non-financial activities”, “Finance expense from non-financial activities”, “Other gains: Gains on disposal of tangible assets”, “Other gains: Other”, “Other losses: Losses on disposal of tangible assets” and “Other losses: Other” as stated in our consolidated financial statements.

(7)

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

(8)

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.

(9)

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

(10)

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.

(11)

In our consolidated financial statements preferred securities are included under “Subordinated liabilities” and preferred shares are stated as “Equity having the substance of a financial liability”.

(12)

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.

(13)

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—Earnings Assets—Yield Spread”.

(14)

Efficiency ratio equals the sum of “General administrative expenses from financial activities”, “Depreciation and amortization costs” less “Offsetting fees” (see Note 48 to our consolidated financial statements), divided by the sum of “Gross income” and “Net income from non-financial activities” less “General administrative expenses from non-financial activities”.

(15)

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

(16)

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

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The following table shows net income, stockholders’ equity, total assets and certain ratios on a U.S. GAAP basis.

 

 

 

Year Ended December 31,

 

 


US GAAP

 

2001

 

2002

 

2003

 

2004

 

2005

 

 


 


 


 


 


 

 

(In thousands of euros, except ratios and per share data)

Net income (1)

 

2,176,711

 

2,286,959

 

2,264,332

 

3,940,866

 

6,318,460

Stockholders’ equity (1)(2)

 

29,944,012

 

23,114,475

 

25,093,234

 

38,671,623

 

43,784,335

Total assets

 

367,264,418

 

321,804,691

 

350,662,064

 

604,084,270

 

845,345,463

Net Income per share (3)

 

0.48

 

0.48

 

0.47

 

0.80

 

1.01

Stockholders’ equity per share (2)(3)

 

6.56

 

4.89

 

5.26

 

7.78

 

7.02

Ratio of earnings to fixed charges: (4)

 

 

 

 

 

 

 

 

 

 

Excluding interest on deposits

 

1.26

 

1.61

 

1.79

 

1.86

 

1.86

Including interest on deposits

 

1.10

 

1.22

 

1.30

 

1.36

 

1.33

Ratio of earnings to combined fixed charges and preferred stock dividends: (5)

 

 

 

 

 

 

 

 

 

 

Excluding interest on deposits

 

1.18

 

1.49

 

1.64

 

1.77

 

1.84

Including interest on deposits

 

1.07

 

1.18

 

1.26

 

1.33

 

1.32


(1)

For information concerning reconciliation between IFRS and U.S. GAAP and a discussion of the principal U.S. GAAP adjustments to net income and stockholders’ equity, see Note 58 to our consolidated financial statements.

(2)

As of the end of each period. The book value of our treasury stock has been deducted from stockholders’ equity.

(3)

Per share data have been calculated on the basis of the weighted average number of our shares outstanding in the relevant year, including treasury stock.

(4)

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

(5)

For the purpose of calculating the ratio of earnings to combined fixed charges and preferred stock dividends, earnings consist of income from continuing operations before taxation and minority interest, plus fixed charges and after deduction of the unremitted pre-tax income of companies accounted for by the equity method. Fixed charges consist of total interest expense, including or excluding interest on deposits as appropriate, preferred stock dividend requirements (corresponding to minority interest participation and, accordingly, not eliminated in consolidation), and the proportion of rental expense deemed representative of the interest factor. Preferred stock dividends for any year represent the amount of pre-tax earnings required to pay dividends on preferred stock outstanding during such year. Under IFRS all payments from preferred securities are accounted for as interest expenses and consequently this ratio is not necessary. (For details of the different accounting treatment given to preferred securities under IFRS and U.S.GAAP see Notes 58.2, 58.5 and 58.6.g to our consolidated financial statements).

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.

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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.

 

 

 

Rate During Period

 

 


Calendar Period

 

Period End
($)

 

Average Rate(1)
($)

 

 


 


2001

 

0.8901

 

0.8909

2002

 

1.0485

 

0.9495

2003

 

1.2597

 

1.411

2004

 

1.3538

 

1.2478

2005

 

1.1842

 

1.2449


(1)

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

 

 

 

Rate During Period

 

 


Last six months

 

High $

 

Low $

 

 


 


2005

 

 

 

 

December

 

1.2041

 

1.1699

2006

 

 

 

 

January

 

1.2287

 

1.1980

February

 

1.2100

 

1.1860

March

 

1.2197

 

1.1886

April

 

1.2624

 

1.2091

May

 

1.2888

 

1.2607

June (through June 23, 2006)

 

1.2953

 

1.2522

On June 23, 2006, the exchange rate for euros and dollars (expressed in dollars per euro), based on the Noon Buying Rate, was $1.2522.

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

B. Capitalization and indebtedness.

Not Applicable.

C. Reasons for the offer and use of proceeds.

Not Applicable.

D. Risk factors.

Risks Relating to Our Operations

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

Our loan portfolio is mainly concentrated in Continental Europe (in particular, Spain), the United Kingdom and Latin America. At December 31, 2005, Continental Europe accounted for approximately 49% of our total loan portfolio (Spain accounted for 36% of our total loan portfolio), while the United Kingdom and Latin America accounted for 39% and 12%, 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. While we attempt to diversify our businesses, negative cycles may adversely affect our income in the future.

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Since our principal source of funds is short term deposits, a sudden shortage of these funds could increase our cost of funding.

Historically, our principal source of funds has been customer deposits (demand, time and notice deposits). At December 31, 2005, 17.2% of these customer deposits are time deposits in amounts greater than $100,000. Time deposits have represented 51.7% (under previous Spanish GAAP) and 46.9% of total customer deposits at the end of 2003 and 2004, respectively, and 43.5% at the end of 2005. Large-denomination time deposits may be a less stable source of deposits than other type of deposits. In addition, since we rely heavily on short-term deposits for our funding, there can be no assurance that we will be able to maintain our levels of funding without incurring higher funding costs or liquidating certain assets.

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, UK, Latin American 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 provisions for credit losses. Deterioration in the economies in which we operate could reduce the profit margins for our banking and financial services businesses.

Increased exposure to real estate makes us more vulnerable to developments in this market.

The decrease in interest rates globally has caused an increase in the demand of mortgage loans in the last few years. This has had repercussions in housing prices, which have also risen significantly. As real estate mortgages are one of our main assets, comprising 53% of our loan portfolio at December 31, 2005, we are currently highly exposed to developments in real estate markets. A strong increase in interest rates might have a significant negative impact in mortgage payment delinquency rates. An increase in such delinquency rates could have an adverse effect on our business, financial condition and results of operations.

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

Market downturns are likely to lead to declines in the volume of transactions that the Group executes for its customers and, therefore, to declines in the Group’s non-interest revenues. In addition, because the fees that the Group charges for managing its clients’ portfolios are in many cases based on the value or performance of those portfolios, a market downturn that reduces the value of the Group’s clients’ portfolios or increases the amount of withdrawals would reduce the revenues the Group receives from its asset management and private banking and custody businesses.

Even the absence of a market downturn, below-market performance by the Group’s mutual funds may result in increased withdrawals and reduced inflows, which would reduce the revenue the Group receives from its asset management business.

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

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Despite the Group’s risk management policies, procedures and methods, the Group may nonetheless be exposed to unidentified or unanticipated risks.

The Group has devoted significant resources to developing its risk management policies, procedures and assessment methods and intends to continue to do so in the future. Nonetheless, the Group’s risk management techniques and strategies may not be fully effective in mitigating the Group’s risk exposure in all economic market environments or against all types of risk, including risks that the Group fails to identify or anticipate. Some of the Group’s qualitative tools and metrics for managing risk are based upon the Group’s use of observed historical market behavior. The Group applies statistical and other tools to these observations to arrive at quantifications of its risk exposures. These tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors the Group did not anticipate or correctly evaluate in its statistical models. This would limit the Group’s ability to manage its risks. The Group’s losses thus could be significantly greater than the historical measures indicate. In addition, the Group’s quantified modeling does not take all risks into account. The Group’s more qualitative approach to managing those risks could prove insufficient, exposing it to material unanticipated losses. If existing or potential customers believe the Group’s risk management is inadequate, they could take their business elsewhere. This could harm the Group’s reputation as well as its revenues and profits.

Our acquisition of Abbey, and any future acquisitions may not be successful and may be disruptive to our business.

We have acquired controlling interests in various companies, and more recently, we completed the acquisition of Abbey. Although we expect to realize strategic, operational and financial benefits as a result of the Abbey acquisition, we cannot predict whether and to what extent such benefits will be achieved. In particular, the success of the Abbey acquisition will depend, in part, on our ability to realize the anticipated cost savings from assuming the control of Abbey’s business. In addition, we will face certain challenges as we work to integrate Abbey’s operations into our businesses. Moreover, the Abbey acquisition increased our total assets by 51.7% (under previous Spanish GAAP) as of December 31, 2004, thereby presenting us with significant challenges as we work to manage the increases in scale resulting from the acquisition. Our failure to successfully integrate and operate Abbey, and to realize the anticipated benefits of the acquisition, could adversely affect our operating, performing and financial results. 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. There can be no assurances that we will be successful in our plans regarding the operation of past or future acquisitions and strategic partnerships.

We can give you no assurance that our acquisition and partnership activities will perform in accordance with our expectations. Despite our due diligence efforts, we must necessarily base any assessment of potential acquisitions and partnerships on inexact and incomplete information and assumptions with respect to operations, profitability and other matters that may prove to be incorrect. We can give no assurance that our expectations with regards to integration and synergies will materialize.

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. Recent 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 and Latin America has increased recently. Our success in the European and Latin American 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 companies and factoring companies, mutual fund and pension fund management companies and insurance companies.

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

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

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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 U.S. dollar will affect the U.S. dollar equivalent of the price of our securities on the stock exchanges in which our shares and ADRs are traded. These fluctuations will also affect the conversion to U.S. dollars of cash dividends paid in euros on our shares.

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 U.S. dollar will depress earnings from our Latin American 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 ADRs trade could reduce the value of your investment.

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

A number of banking regulations designed to maintain the safety and soundness of banks and limit their exposure to risk apply in the different jurisdictions in which our subsidiaries operate. 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 an adverse affect on our business.

Operational risks are inherent in our business.

Our businesses depend on the ability to process a large number of transactions efficiently and accurately. Losses can result from inadequate personnel, inadequate or failed internal control processes and systems, or from external events that interrupt normal business operations.

Different disclosure and accounting principles between Spain and the U.S. 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 issuers under the Exchange Act is more limited than the disclosure required from U.S. issuers. Additionally, we present our financial statements under IFRS which differs from US GAAP. See Note 58 to our consolidated financial statements.

In 2005, the Group adopted IFRS, which has affected the manner in which the Group reports its financial results, as IFRS differs in significant respects from previous Spanish GAAP.

Until December 31, 2004, the Group prepared its financial statements in accordance with previous Spanish GAAP. In June 2002, the Council of Ministers of the EU adopted new regulations requiring all listed EU companies, including Santander, to apply IFRS (previously known as “International Accounting Standards” or “IAS”) in preparing their consolidated financial statements beginning January 1, 2005. Because IFRS emphasizes the measure of the fair value of certain assets and liabilities, applying these standards to our financial statements has had a considerable impact on a number of important areas, including, among others, goodwill and intangible assets, employee benefits and financial instruments, and accounting for share-based payments, long-term assets and business combinations. Because our financial statements prepared in accordance with IFRS differ from our financial statements prepared in accordance with previous Spanish GAAP, the methods used by the financial community to assess our financial performance and value our publicly-traded securities could be affected.

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If we are not able to adequately implement the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and are the subject of sanctions or investigation, our results of operations and our ability to provide timely and reliable financial information may be adversely affected.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related regulations implemented by the SEC are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. We are evaluating our internal control over financial reporting to allow management to report on, and our registered independent public accounting firm to attest to, our internal controls over financial reporting. We will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, which we are required to comply with in our annual report which we will file in 2007 for our 2006 fiscal year. As a result, we expect to incur substantial additional expenses and diversion of management’s time. While we anticipate being able to fully implement the requirements relating to internal controls and all other aspects of Section 404 by our deadline, we cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations since there is presently no precedent available by which to measure compliance adequacy. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities such as the SEC. Any such action could adversely affect our financial results or investors’ confidence in our company and could cause the price of our securities to fall. In addition, if we fail to develop and maintain effective controls and procedures, we may be unable to provide the financial information in a timely and reliable manner.

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

The Group and its subsidiaries are the subject of a number of legal proceedings and regulatory actions. An adverse result in one or more of these proceedings could have a material adverse effect on our operating results for any particular period. For information relating to the legal proceedings involving our businesses, see “Item 8 — Financial Information – A. Consolidated statements and other financial information. – Legal proceedings”.

Risks Relating to Latin America

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

The economy of the 9 Latin American countries where we operate has 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, Asset Management and Private Banking and Global Wholesale Banking) accounted for €1,776 million of our net attributable income for the year ended December 31, 2005 (an increase of 21% from €1,470 million for the year ended December 31, 2004). 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.

Additionally, the recent economic and political crisis in Argentina which led to the conversion by the Argentine government of all the U.S. dollar-denominated debt which was subject to Argentine laws and jurisdictions into Argentine peso-denominated debt had a negative impact on the Group’s Argentine banking subsidiaries. The negative effects on the Group’s operations in Argentina included losses generated by this forced conversion of U.S. dollar-denominated debt to Argentine pesos at below market rates, lower lending and deposit-making activities, increased restrictions on the transferability of funds and a larger number of defaults by Argentine customers. Although Argentina’s economy continued to recover in 2005, and the results of operations of the Group’s Argentine banking subsidiaries have also improved, it is possible that, despite its recent economic growth, Argentina could return to a period of economic and political instability. If this were to occur, the financial condition and results of operations of the Group’s Argentine subsidiaries could be materially and adversely affected.

Significant competition in some Latin American countries could intensify price competition and limit our ability to increase our market share in those markets.

Because some of the Latin American countries in which we operate (i) only raise limited regulatory barriers to market entry, (ii) generally do not make any differentiation between locally or foreign-owned banks, (iii) have permitted consolidation of their banks, and (iv) do not restrict capital movements, we face significant competition in Latin America from both domestic and foreign commercial and investment banks.

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

Financial and securities markets in 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 Central Hispano, S.A. (“Santander” or “the 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.

We are incorporated under, and governed by the laws of the Kingdom of Spain. We conduct business under the commercial name “Grupo 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

The principal holdings acquired by us in 2004 and 2005 and other significant corporate transactions were as follows:

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

Sovereign’s board of directors has elected two Santander designees to its board of directors, and Santander’s Annual General Meeting of Shareholders held on June 17, 2006 elected the chief executive officer of Sovereign to Santander’s Board of Directors. Sovereign and Independence together constitute the 18th largest bank in the United States as measured by assets and deposits with a significant presence in the Northeastern United States.

Under the Investment Agreement dated October 24, 2005 between Santander and Sovereign, as amended (the ‘‘Investment Agreement’’), Santander has the right to increase its stake to 24.99% of Sovereign’s outstanding shares at market prices. Unless otherwise approved by Sovereign’s shareholders, shares so purchased will be held in a voting trust and voted in direct proportion to the votes of Sovereign’s shareholders other than Santander and its affiliates. In addition, following the second anniversary of the closing and until the end of the fifth year after the closing, Santander will have the option to make an offer to acquire all of Sovereign, subject to certain conditions and limitations agreed between the parties. If such an offer is made by Santander and the offer is either the highest offer resulting from an auction of Sovereign or at least equal to a full and fair price for Sovereign as determined pursuant to a competitive valuation procedure agreed to by the parties, the Sovereign board must accept the offer; provided that, during the third year after the closing, any offer made by Santander must be at a price of at least $40 per share. Even if the Sovereign board accepts the offer, Santander will not be permitted to complete an acquisition of Sovereign unless a majority of the shareholders other than Santander and its affiliates who vote at the relevant Sovereign shareholder meeting approve the acquisition. In addition, for five years following the closing, Santander will have a right of first negotiation and a matching right with respect to third party offers to acquire Sovereign. Finally, with certain exceptions, Santander has agreed that, during this five year period, it will not sell or otherwise dispose of its Sovereign shares.

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Santander has several options with respect to its investment. Santander can hold its investment in Sovereign indefinitely, after two years seek to acquire 100% of Sovereign or, subject to the terms of the Investment Agreement, sell or otherwise dispose of its investment. Santander currently expects to seek to increase its interest in Sovereign to 24.99% through open market purchases. As of June 27, 2006, Santander held 22.1% of Sovereign’s outstanding shares.

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

Abbey National plc (“Abbey”). On July 25, 2004, our Board of Directors and the board of directors of Abbey announced that they had reached an agreement on the terms of a recommended acquisition by us of the total ordinary shares of Abbey by means of a scheme of arrangement under the United Kingdom Companies Act.

After the approval of shareholders at the respective shareholders’ meetings of both companies, held in October 2004, and once all conditions of the transaction were met, on November 12, 2004, the acquisition was completed through the delivery of one new share of Santander for every Abbey share. The capital increase amounted to €12,540.9 million, representing 1,485,893,636 new shares of €0.50 par value each and a share premium of €7.94 each.

ELCON Finans A.S. (“Elcon”) and Bankia Bank A.S.A. (“Bankia”). In September 2004, we acquired 100% of the capital stock of Elcon, a leading Norwegian vehicle finance company, for 3.44 billion Norwegian Kroners (approximately €400 million). Subsequently, we agreed to sell Elcon´s equipment leasing and factoring businesses for approximately €160 million. This transaction generated goodwill of €120 million.

In March 2005, we launched a tender offer for Bankia (a Norwegian bank). In May 2005, we acquired 100% of Bankia’s capital stock of for a total price of €54 million. This transaction generated goodwill of €45 million.

In December 2005, Elcon and Bankia were merged to form Santander Consumer Bank A.S.

Polskie Towarzystwo Finansowe, S.A. (“PTF”). In February 2004, we acquired 100% of the capital stock of PTF, a Polish consumer finance company (including its credit portfolio) for €524 million, of which €460 million represented the nominal value of the credit portfolio. This transaction generated goodwill of €59 million.

Abfin B.V. (“Abfin”). In September 2004, we acquired Abfin, a Dutch vehicle finance company, for €22 million. This transaction generated goodwill of €1.6 million.

Finconsumo Banca S.p.A. (“Finconsumo”). In 2003, we resolved to acquire the remaining 50% of the capital stock of Finconsumo that we did not own and acquired 20% of such capital stock for €60 million. In January 2004, we acquired the remaining 30% for €80 million, generating goodwill of €55 million.

In May 2006, Finconsumo changed its name to Santander Consumer Bank S.p.A.

Santander Central Hispano Previsión, S.A., de Seguros y Reaseguros (“Previsión”). In 2003, we reached an agreement for the sale of our entire investment in the capital stock of Previsión. Once all regulatory approvals were obtained, we completed the transaction in June 2004 for €162 million.

Grupo Financiero Santander Serfin, S.A. de C.V. (“Serfin”) and Banco Santander Mexicano, S.A. In December 2002, we reached an agreement with Bank of America Corporation whereby the latter acquired 24.9% of Serfin for $1,600 million, for which we recognized in 2003 capital gains of €681 million. Under this agreement, Bank of America Corporation must maintain its share holding in Serfin for at least three years, and after this period it may use, if it deems it appropriate, several liquidity mechanisms to reduce its share holding, including the listing of its Serfín shares on the stock exchange and the right to sell its Serfin shares to us, at one time, at its book value at the time of the sale, calculated in accordance with international accounting standards.

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The sale of the 24.9% stake was completed in the first quarter of 2003. As of December 31, 2003, we had a 74.0% holding in the capital stock of Serfin.

In June 2004, the shareholders of Serfin increased its capital by €163.4 million, of which we subscribed €122.5 million.

The shareholders, at the General Shareholders’ Meetings of Banco Santander Mexicano, S.A. (a 100% owned subsidiary of Serfin), Banca Serfin, S.A. (a 100% owned subsidiary of Serfin), Factoring Santander Serfin, S.A. de C.V. (a 98.8% owned subsidiary of Serfin) and Fonlyser, S.A. de C.V. (a 99.9% owned subsidiary of Serfin), held on November 29, 2004, agreed to the merger of these entities, with Banco Santander Mexicano, S.A. being the surviving entity. For accounting purposes, the merger was effective as of December 31, 2004. Banco Santander Mexicano, S.A. subsequently changed its legal name to Banco Santander Serfin, S.A.

Compañía Española de Petróleos, S.A. (“Cepsa”). In 2003, we launched a tender offer for up to 42,811,991 Cepsa shares. The offer was accepted by 32,461,948 shares, representing an investment by us of €909 million.

For a description of certain legal proceedings relating to the Cepsa tender offer, see “Item 8. Financial Information—A . Consolidated statements and other financial information—Legal Proceedings”.

The Royal Bank of Scotland Group, plc. (“RBS”). In 2002 we made a net divestment of 3% of our holding in RBS, giving rise to gains of approximately €806 million. As of December 31, 2002, our ownership interest was 5.04% in RBS.

As of December 31, 2003, following several purchases and sales made during the year, our holding in RBS was 5.05%. The sales gave rise to gains of €217 million.

In May 2004, we subscribed to a capital increase for sterling 150 million, in order to prevent dilution of our holding.

In September 2004, we sold 79 million of our RBS shares, representing 2.51% of our holding, at a capital gain of approximately €472 million. As of December 31, 2004, our ownership interest in RBS was 2.54%.

In January 2005, we sold our entire holding in RBS for €2,007 million at a capital gain of €717 million.

Unión Eléctrica Fenosa, S.A. (“Unión Fenosa”). In 2002, we acquired several holdings in the capital stock of Unión Fenosa for a total amount of €465 million. In 2004, we sold 1% of our holding that as of December 31, 2004, was 22.02%.

In September 2005, we agreed to sell our entire stake in Unión Fenosa, equivalent to 22.07% of its capital stock, to ACS Actividades de Construcción y Servicios, S.A. (ACS) for a price of €2,219 million. As a result of this sale, we realized capital gains of €1,157 million.

Grupo Sacyr-Vallehermoso, S.A. (“Sacyr-Vallehermoso”). In 2002, we divested 24.5% of our holding in Sacyr-Vallehermoso at a capital gain of approximately €301 million.

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In 2004, we sold our entire holding in Sacyr-Vallehermoso for €92 million at a capital gain of €47 million.

Vodafone Airtouch plc (“Vodafone”). During 2002, we reduced our stake in Vodafone from 1.53% to 0.97%, realizing capital gains of €274 million. In 2003, we sold 0.67% of our holding, realizing capital gains of €369 million. In 2004, we sold the remainder of our holding in Vodafone, realizing capital gains of €242 million.

Auna Operadores de Telecomunicaciones, S.A. (“Auna”). In 2002, we acquired a 12.62% stake in Auna for €939 million, thus increasing to 23.49% our total holding in this company. This stake was increased by an additional 2.5% in 2004, for approximately €217 million. Furthermore, during 2004, we made purchases for an additional 1.5% stake in Auna for approximately €120 million. As of December 31, 2004, we had a 27.34% holding in the capital stock of Auna, with an investment of €2,031 million.

In January 2005, we acquired an additional 4.74% stake in Auna for €422 million, thus increasing to 32.08% our total holding in this company.

In November 2005, we sold 27.07% of our holding in Auna to France Télécom at a capital gain of €355 million. As of December 31, 2005, we had a 5.01% holding in the capital stock of Auna.

Shinsei Bank, Ltd (“Shinsei”). In 2003, we increased our holding in the capital stock of the Japanese bank Shinsei from 6.5% as of December 31, 2002, to 11.4% as of December 31, 2003. The total cost of the investment at that date was approximately €144 million. During 2004, we sold 4.0% of our holding at a capital gain of approximately €118 million. After this transaction, we held 7.4% of the capital stock of Shinsei. In the first quarter of 2005, we sold 2.7% of our holding at a capital gain of €49 million. As of December 31, 2005, we held 4.82% of the capital stock of Shinsei.

Commerzbank AG (“Commerzbank”). During 2005 we sold our 3.38% holding in Commerzbank at a capital gain of €24 million.

In addition to expanding our existing operations, we continually review possible acquisitions of, and investments in, businesses in markets in which we believe we have particular advantages.

Capital Increases

As of December 31, 2002 and 2003, our capital stock consisted of 4,768,402,943 fully subscribed and paid shares of €0.5 par value each.

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As of December 31, 2004, our capital had increased by 1,485,893,636 shares, or 31.16% of our total capital as of December 31, 2003, to 6,254,296,579 shares through the following transaction:

Abbey Acquisition

 

Capital increase of 1,485,893,636 new shares of €0.5 par value each and share premium of €7.94 each for an effective amount of €12,540.9 million, which were paid in full through the contribution of shares representing all the capital stock of Abbey, in accordance with the resolutions adopted at our Extraordinary Shareholders’ Meeting held on October 21, 2004. These shares were issued on November 12, 2004.

As of December 31, 2005, our capital stock consisted of 6,254,296,579 fully subscribed and paid shares of €0.5 par value each.

Recent Events

Island Finance. On January 23, 2006, our subsidiary in Puerto Rico, Santander BanCorp, and Wells Fargo & Company reached an agreement through which we would acquire the assets and business operations in Puerto Rico of Island Finance, a consumer finance company, from Wells Fargo for $742 million. The transaction was closed in the first quarter of 2006 and generated goodwill of $116 million.

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

Abbey. On June, 7, 2006 we announced that Abbey has entered into an agreement with Resolution plc (“Resolution”) under which Abbey will sell its entire life insurance business to Resolution for a fixed cash consideration of €5.2 billion (£3.6 billion). This represents 97% of the embedded value of the businesses being sold as reported by Abbey as of December 31, 2005, and will not generate capital gains for Grupo Santander.

The life insurance businesses being sold are Scottish Mutual Assurance plc, Scottish Provident Limited and Abbey National Life plc, as well as the two offshore life insurance companies, Scottish Mutual International plc and Scottish Provident International Life Assurance Limited. Abbey will retain all of its branch-based investment and asset management business and James Hay, its self-invested personal pension company, and its Wrap business.

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

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

It is envisaged that some 2,000 Abbey employees will transfer to Resolution as part of the transaction. Resolution will continue to operate the life operations from the existing Abbey premises in Glasgow. Resolution will also maintain the operations in Dublin, the Isle of Man and Hong Kong.

We expect the transaction to be completed during the third quarter of 2006 and is conditional upon, among other things, approval from the U.K. Financial Services Authority and relevant overseas regulators and the approval of Resolution’s shareholders.

B. Business overview.

We are a financial group operating principally in Spain, the United Kingdom, other European countries and Latin America, offering a wide range of financial products. At December 31, 2005, we were one of the ten largest banking groups in the world by market capitalization and the largest banking group in the euro zone with a stock market capitalization of €69.7 billion, stockholders’ equity of €39.8 billion and total assets of €809.1 billion. We had an additional €152.8 billion in mutual funds, pension funds and other assets under management at that date. As of December 31, 2005, we had 45,207 employees and 5,389 branch offices in Continental Europe, 21,080 employees and 712 branches in the United Kingdom, 62,161 employees and 4,100 branches in Latin America and 748 employees in other geographic areas (For a full breakdown of employees by country, see “Item 6. Directors, Senior Management and Employees - D. Employees”).

Our principal operations are in Spain, the United Kingdom, Portugal, Germany, Italy and Latin America. We also have significant operations in New York as well as financial investments in San Paolo IMI, Attijariwafa Bank Société Anonyme (formerly, Banque Commerciale du Maroc) (Attijariwafa Bank”). In Latin America, we have majority shareholdings in banks in Argentina, Brazil, Chile, Colombia, Mexico, Puerto Rico, Uruguay and Venezuela.

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Recent Reorganization of Business Areas

As a result of the entry into force of the IFRS in 2005, we have redefined our business areas for 2004 and 2005 for financial reporting purposes. These areas are defined by management and reflect, in the case of the secondary level (or business), the way business is conducted.

The new areas reflect the incorporation of Abbey, following our consolidation of its balance sheet at the end of 2004. In addition to applying the general accounting changes set out in Note 2 to our consolidated financial statements to the different business areas, some internal criteria have been changed, in accordance with IFRS principles, to better identify the risks and returns of each business. The main changes are as follows:

 

Centralized costs. Although we maintain the principle of applying to each unit the costs of central services incurred by it for support and control, corporate and institutional expenses related to the Group are excluded. These are now recorded in Financial Management and Equity Stakes. On the other hand, the non-corporate costs related to projects underway, primarily spending on IT systems, have been applied to the corresponding business.

 

Provisions and allowances for country-risk. Both country-risk, as well as its provisions, are applied to the business area responsible for its management and where the net revenues of these operations are reflected. Only those intra-group operations which maintain the provisions, where risk disappears on an accounting basis, continue to be recorded, as before, in Financial Management and Equity Stakes.

 

Pension provisions. Each business generally assumes the cost for pensions, including both the normal allocation as well as that of possible deficits. The only exception relates to amortization derived from the initial deficit that surpasses the “corridor” (see Note 2.v to our consolidated financial statements). In these cases, as the aforementioned amortization occurred because of a corporate decision by the Group, and provided it happens within five years and with the limit of the initial deficit, its cost will be assumed by Financial Management and Equity Stakes.

 

Shareholders’ equity. In line with the development in the Group of processes for calculating and managing economic capital, the adjustment for regulatory capital maintained has been eliminated. Each business maintains the shareholders’ equity it manages. Use above this level will be penalized only in those cases where this figure is higher than the economic capital. Otherwise no payment will be made to the business.

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

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

 

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

 

In addition, small units outside the three geographic areas, whose relative importance to our total business is not significant and which are extensions of the main areas, are included in Continental Europe.

 

United Kingdom (Abbey). This covers only Abbey’s business, mainly focused on retail banking and insurance in the UK.

 

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

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Secondary level (or business). 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 throughout the world).

 

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

 

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

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

Principal level (or geographic):

Continental Europe

This area covers the banking activities of the different networks and specialized units in Europe, principally with individual clients and small and medium sized companies (“SMEs”), as well as private and public institutions. During 2005 there were four units within this area: Santander Network, Banesto, Santander Consumer Finance and Portugal including retail banking, asset management, insurance and global wholesale banking.

Continental Europe is the largest business area of Grupo Santander. At the end of 2005, it accounted for 43% of total customer funds under management, 49% of total loans and credits and 54% of net attributable income of the Group’s main business areas.

The area had 5,389 branches and 43,867 employees (direct and assigned) at the end of 2005.

The area experienced a 19.8% increase in net operating income, primarily due to increased revenue from commissions, contained costs, improved efficiency and growth in net interest income.

In 2005, the efficiency ratio improved by 3.1% to 42.9% (from 46.8% in 2004). Net attributable income increased 38.2% to €2,984.3 million. Return on equity, “ROE”, in 2005 was 22.1%, a 3.8% increase from 2004.

Santander Network

The retail banking activity is carried out 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 2005, we had 2,669 branches and a total of 19,092 employees (direct and assigned), of which 827 employees were temporary, dedicated to retail banking in Spain. Compared to 2004, there was a net increase of 98 branches and a net reduction of 88 employees.

In 2005, the Santander Network grew by approximately 17.1% in lending, 17.2% in net operating income and 44.1% in net attributable income. It also improved its efficiency ratio from 48.3% in 2004 to 44.0% in 2005 and continued high standards of quality in credit risk.

Gross income from the Santander Network was €3,826 million in 2005, an 8.3% increase from 2004.

In 2005, net attributable income from the Santander Network was €1,285 million, 44.1% higher than net attributable income in 2004, while the ROE reached 22.8% (as compared to 17.8% in 2004).

The 17.1% growth in lending in 2005 versus 2004 came from mortgages (16% increase as compared to 2004, mainly for individual customers) as well as other loans and credits (19% increase as compared to 2004), leasing and renting (14% increase as compared to 2004) and commercial bills (1% increase as compared to 2004).

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Customer deposits increased by 2.7%, while mutual and pension funds increased by 13.8% and 5.9%, respectively.

Banesto

At the end of 2005, Banesto had 1,703 branches and 10,577 employees (direct and assigned), of which 514 employees were temporary (an increase of 20 branches and a reduction of 507 employees as compared to the end of 2004).

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 on page 21 of 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 2005, Banesto grew by approximately 26.7% in lending, 24.4% in customer deposits and 14.8% in off-balance sheet customer funds.

In 2005, gross income from Banesto was €1,794 million, an 8.4% increase from 2004. Net attributable income from Banesto was €498 million, a 24.0% increase from 2004, while the ROE reached 19.4% (as compared to 16.9% in 2004) and the efficiency ratio improved to 42.6% (as compared to 46.6% in 2004).

Santander Consumer Finance

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

At the end of 2005, this unit had 267 branches (as compared to 256 at the end of 2004) and 5,118 employees (direct and assigned) (as compared to 5,245 employees at the end of 2004), of which 310 employees were temporary.

In 2005, this unit generated gross income of €1,604 million, a 25.9% increase from 2004. Net attributable income was €487 million, a 46.3% increase from 2004, while the ROE reached 46.1% (as compared to 47.6% in 2004) and the efficiency ratio improved to 33.9% (as compared to 37.6% in 2004).

At the end of 2005 total managed assets equaled €31,849 million. New lending increased 24% to €18,999 million (17% increase as compared to 2004, excluding the new incorporations of Bankia in Norway and Interbanco in Portugal). Of note was the 22% rise in auto finance, which outpaced the sale of cars in Europe producing a further gain in market share. The three large traditional markets, which account for 88% of total business, also registered strong growth: Spain and Portugal grew 15% as compared to 2004, Germany grew 9% as compared to 2004 and Italy grew 30% as compared to 2004.

Portugal

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

At the end of 2005, Portugal operated 693 branches (as compared to 670 branches at the end of 2004) and had 6,308 employees (direct and assigned) (as compared to 6,478 employees at the end of 2004), of which 170 employees were temporary.

In 2005, gross income from our activities in Portugal was €995 million, a 7.2% increase from 2004. Net attributable income was €345 million, 35.7% higher than in 2004, while the ROE reached 20.8% (16.5% in 2004) and the efficiency ratio improved to 49.4% (from 52.4% in 2004).

Others

The rest of our businesses (Banif, Asset Management, Insurance and Global Wholesale Banking) generated attributable income of €368 million, 32.1% more than in 2004.

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United Kingdom (Abbey)

Abbey became part of Grupo Santander on November 12, 2004 and only its balance sheet was consolidated with the Group as of December 31, 2004. Its results were consolidated with the Group’s for the first time in 2005.

Abbey is a significant financial services provider in the United Kingdom, being the second largest residential mortgage lender, third largest savings brand, and operates across the full range of personal financial services serving approximately 18 million customers.

At the end of 2005, Abbey had 712 branches and a total of 21,121 employees (direct and assigned) of which 244 employees were temporary. Compared to 2004, there was a net decrease of 18 branches and a net reduction of 4,210 employees.

For purposes of our financial statements and this annual report on Form 20-F, we have calculated Abbey’s results of operations using the criteria described on page 21 of this annual report on Form 20-F. As a result, the data set forth herein may not coincide with the data published independently by Abbey.

In 2005, Abbey contributed net operating income of €1,408 million and €811 million of attributable income (14% of the Group’s total operating areas). Loans and advances experienced growth of approximately 9.6% and customer funds under management increased by 4.3% during the same period. ROE was 35.7% and the efficiency ratio was 63.2%.

Gross income was €3,787 million for 2005.

Operating costs were €2,416 million, excluding restructuring costs of €219 million.

The 9.6% increase in loans and credits was accompanied by good credit risk quality. The non-performing loans ratio was 0.67% at the end of 2005, 0.03% less than in 2004. For mortgage loans, Abbey’s credit quality indices (0.65% in arrears of more than three months) are better than the market’s average.

Latin America

At December 31, 2005, we had 4,100 offices and 62,746 employees (direct and assigned) in Latin America (as compared to 4,011 offices and 60,503 employees, respectively, at December 31, 2004), of which 1,267 were temporary employees.

Net attributable income from Latin America was €1,776 million, a 20.8% increase from 2004, while the ROE reached 23.1% (as compared to 24.0% in 2004) and the efficiency ratio improved to 52.2% (as compared to 54.9% in 2004). Our Latin American banking business is principally conducted by the following banking subsidiaries:



Percentage Held
at December 31, 2005

 

 

Percentage Held
at December 31, 2005

 


 

 


Banco Río de la Plata, S.A. (Argentina)

99.30

 

Banco Santander Colombia, S.A.

97.64

 

Banco Santa Cruz, S.A. (Bolivia) (*)

96.33

 

Banco Santander Serfin, S.A.

74.92

 

Banco Santander Brasil, S.A. (Brazil)

97.93

 

Banco Santander Puerto Rico

90.77

 

Banco Santander Meridional, S.A. (Brazil)

98.18

 

Banco Santander, S.A. (Uruguay)

100.00

 

Banco do Estado de Sao Paulo, S.A. (Brazil)

98.06

 

Banco de Venezuela, S.A. Banco Universal

98.42

 

Banco Santander Chile

83.94

 

 

 

 

(*) As of April 18, 2006, we sold our stake in Banco Santa Cruz, S.A. See “-A. History and development of the company - Recent events”.

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. We engage in a wide array of deposit taking activities throughout Latin America, and other retail banking activities in Argentina, Brazil, Chile and Mexico. Our primary lending operations are in Chile, Mexico, Brazil and Puerto Rico. Our principal mutual fund operations are in Brazil, Mexico, Chile and Puerto Rico, and our main pension fund operations are in Chile, Mexico, Argentina, Peru and Colombia.

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

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

Brazil. Santander Banespa is one of the main financial franchises in Brazil. We have 1,897 branches and 7.1 million individual customers.

Santander Banespa focused in 2005 on growing its retail businesses and on gaining market share. Lending rose 42%, in local currency, with strong growth to individual customers (credit cards, loans linked to payrolls, auto financing, etc.), SMEs and companies. Our market share in total loans reached 5.8%. Deposits (excluding REPOs) and mutual funds increased 24% (market share of deposits and mutual funds equaled approximately 4.4%). The emphasis on growth in retail savings pushed up this segment’s market share in mutual funds to 8.0%.

Net attributable income from Brazil in 2005 was €591 million (a 14% decrease in local currency). The efficiency ratio was 52.5%, ROE was 23.1%, the ratio of non-performing loans (“NPL”) was 2.9% at the end of 2005 and the NPL coverage was 138.5%.

Mexico. Banco Santander Serfin, S.A. is one of the leading financial services companies in Mexico. It heads the third largest banking group in Mexico in terms of business volume, with a market share in total loans of 15.2%, 15.8% in deposits and mutual funds and 7.8% in pensions. The Group has a network of 1,005 branches and 6.3 million banking customers in Mexico.

Net attributable income from Mexico increased 16.0% to €376 million (an increase of 12.1% in local currency). The efficiency ratio was 54.1%, ROE was 20.4%, the ratio of non-performing loans was 0.9% at the end of 2005 and the NPL coverage was 273.4%.

Chile. Banco Santander Chile heads the largest financial group in the country with substantial business in loans, deposits and mutual funds and pension funds. The Group has 401 branches and 2.2 million banking customers.

In 2005, lending increased 19% (including a 25% increase to individuals), while deposits (without REPOs) and mutual funds grew 16% (in local currency).

Net attributable income from Chile increased 45.2% to €338 million (a 33.2% increase in local currency). The efficiency ratio stood at 45.4%, ROE was 25.0%, the ratio of non-performing loans was 2.3% and the NPL coverage was 165.6%.

Puerto Rico. Banco Santander Puerto Rico is one of the largest financial institutions in Puerto Rico. The Group has 73 branches and market shares of 10.9% in total loans, 12.9% in deposits and 21.3% in mutual funds.

In 2005, Santander Puerto Rico focused on growth in consumer loans and mortgages and loans to medium-sized companies. Lending increased 9% and deposits (excluding REPOs) and mutual funds rose 13%, representing a gain of 0.5 points in market share to 15.3%.

Net attributable income from Puerto Rico was €49 million, 2.5% higher than in 2004 (a 2.7% increase in local currency). The efficiency ratio was 65.8%, ROE was 12.5%, the ratio of non-performing loans stood at 1.8% and the NPL coverage was 168%.

Venezuela. Banco de Venezuela, S.A. Banco Universal is one of the country’s largest banks with market shares of 13.6% in total loans and 11.6% in deposits. It has 252 branches and 2.2 million banking customers.

Management’s main focus in 2005 was growth in the profitability of business and increasing recurrent revenues. Lending, after eliminating the exchange rate impact, increased 46% (including a 75% increase to individual customers) and the aggregate of deposits (excluding REPOs) and mutual funds rose 27%.

Net attributable income from Venezuela grew to €133 million (a 55.4% increase in local currency). The efficiency ratio was 48.4%, ROE stood at 42.2%, the ratio of non-performing loans was 1.5% and the NPL coverage was 400%.

Colombia. The Colombian economy grew by approximately 5% in 2005. We concentrated on selective growth on business and efficient management of costs. Lending increased 11% and deposits (excluding REPOs) and mutual funds rose 22%.

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Net attributable income from Colombia was €40 million, 60.90% higher than in 2004 in local currency.

Others

Argentina consolidated its economic recovery during 2005 and made a positive contribution to Group earnings (net attributable income was €78 million in 2005). Lending to the private sector rose 73% and was very focused on SMEs and individuals, while deposits (excluding REPOs) and mutual funds increased 33%.

Uruguay improved notably, generating net attributable income of €29 million in 2005, 28.2% higher than 2004 in local currency.

Peru, where we focus on pension funds, generated net attributable income of €16 million in 2005 (13.9% increase in local currency).

Net attributable income from Bolivia during 2005 grew to €10 million in 2005 (159% increase as compared to 2004). On April 18, 2006 we sold our entire stake in the capital stock of our subsidiary in Bolivia, Banco Santa Cruz.

Santander Private Banking performed well with attributable income up 25% (in dollars) during 2005.

Secondary level (or business)

Retail Banking

Retail Banking generated 84% of total gross income and 78% of income before taxes of the operating areas. This segment had 117,655 employees at the end of 2005.

Retail Banking in Continental Europe continued its growth in volume and earnings. Net interest income increased 14.3%, net operating income increased 21.3% and income before taxes increased 39.1%. All units (Santander Network, Banesto Retail, Santander Consumer Finance, Portugal Retail and Banif) grew at double digit rates in net operating income and income before taxes.

There were four main drivers of these results: business growth, better price management in a more stable interest rate environment, cost control and the lower needs for loan-loss provisions.

In its first year as part of Grupo Santander, Abbey’s Retail Banking operations generated gross income of €3,232 million, net operating income of €1,228 million and income before taxes of €986 million.

The strong earnings from Retail Banking in Latin America was based on growth in customer business, the excellent results in net interest income and net fees and costs. These were reflected in a 22.9% rise in commercial revenue, 38.2% in net operating income and 36.2% in income before taxes.

Asset Management and Insurance

This segment comprises all of our companies whose activity is the management of mutual and pension funds and insurance.

In 2005, Asset Management and Insurance generated gross income of €1,367 million, 113.4% higher than in 2004. Income before taxes was €688 million, 85.6% higher than in 2004. This segment had 7,902 employees at the end of 2005.

This segment accounted for 7% of the Group’s gross income in 2005 and 9% of income before taxes which, at €688 million, was 85.6% higher than in 2004 (37.2% increase excluding Abbey).

Total revenues from mutual and pension funds and insurance activity, including those recorded by the distribution networks, amounted to €3,696 million, 62.9% more than in 2004 (20.3% increase excluding Abbey). These revenues are of high quality and recurrence and represented 20% of our commercial revenue.

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Managed assets in mutual and pension funds increased 16% to more than €138,000 million and the liabilities from insurance contracts totaled €45,000 million (5% increase from 2004).

Asset Management. The global business of mutual and pension funds integrated in Santander Asset Management generated total fees of €1,956 million, 23.5% higher than in 2004 (15.9% increase without Abbey). Income before taxes, after deducting the fees paid to the distribution networks and operating costs, was €349 million (29.0% increase from 2004).

In Spain, Santander Asset Management managed more than €75,000 million in funds and investment companies, making it the sector’s leader (with a market share of 25% in mutual and real estate funds, according to Inverco).

In Portugal, mutual and pension funds managed by Asset Management increased 17% and 7%, respectively, to a total of €7,000 million.

In Latin America, Santander Asset Management had €22,500 million under management in its mutual funds, 24% more than in 2004 excluding the exchange rate effect. Mexico, Brazil and Chile, which account for more than 90% of assets, registered strong growth. Knowledge of the markets and of local needs combined with exploiting the Group’s global capacities in managing and developing high value-added products resulted in higher growth than the markets. Mexico’s managed mutual funds increased 36% (excluding the exchange rate effect) to €6,700 million and increased its market share by almost 1% to 17%. Brazil, whose managed assets increased 21% (excluding the exchange rate impact) to €11,100 million, focused on the retail segment where its market share reached 8% (a 0.3% increase). Chile’s managed assets rose 11% to €2,700 million (excluding the exchange rate impact) and market share increased by close to 1%.

Insurance. Total revenues generated by our insurance companies, including fees paid to branch networks, amounted to €1,740 million (increases of 153.8% and 30.4% excluding Abbey from 2004). Income before taxes rose three fold to €340 million due to the incorporation of Abbey, which contributed €179 million, and the good performance of other insurance activity (59.2% increase in income before taxes).

In Spain, Santander Seguros y Reaseguros, Compañía Aseguradora, S.A. consolidated its bancassurance business, developing new businesses and boosting its sales capacity (two new channels, Hispamer and Unión de Crédito Inmobiliario S.A. (UCI), joined Santander Branch Network). Their total contribution to the Group, including net fees and income before taxes, was €205 million, 25% more than in 2004. Premium income increased 28%.

In Portugal, the distribution of risk insurance, largely linked to credit operations and capitalization-savings products, was expanded to include new and unlinked life-risk products. Premium income increased 49% and the total contribution to the Group rose 36%.

In the rest of Continental Europe, the various units of Santander Consumer Finance, which mainly sells products linked to consumer lending, generated €263 million of fees, 30% more than in 2004.

In the United Kingdom, Abbey’s insurance business continued to be strong. At the end of 2005, Abbey’s insurance activity balance stood at €36,500 million, and its total contribution to the Group (fees plus income before taxes) was €437 million, following a significant reduction in the area’s costs. On June 7, 2006, we announced that Abbey had entered into an agreement with Resolution under which Abbey will sell its entire life insurance business to Resolution (see “- A. History and development of the company – Recent events”).

In Latin America, the Group continued to develop its strategy of growth in the distribution of insurance via local banks. Further progress was made in selling bancassurance products through personalized offers (life, auto and household products).

Global Wholesale Banking

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

This segment contributed 9% of gross income and 13% of income before taxes. Income before taxes amounted to €1,069 million, a 21.9% increase from 2004. This segment had 2,177 employees at the end of 2005.

Gross operating revenue increased 9.2%. Revenue from value-added businesses (transactional banking, trade finance, custody, investment banking, equities and treasury for customers) rose 22%.

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Operating costs grew 11.9%, due to business expansion and new project launches in Europe, such as Santander Global Connect (SGC) and Santander Global Markets (SGM).

In 2005, we consolidated a new Global Wholesale Banking model based on a double vector (product-customer) system. In the customer vector, the Global Customer Relation Model, established in 2003 to foster global management by product and country, consists of global teams comprising an executive responsible at the global level, local executives in the markets where customers operate and product specialists. The model generated gross income of €501 million, after six straight quarters of sustained growth.

The product vector consists of three large areas:

 

Corporate products. This covers transactional banking, trade finance, custody and basic financing. Their gross income increased 8.8% from 2004.

 

Investment Banking. This embraces financing solutions and corporate finance. Gross income increased 16.0%, strongly backed by corporate finance. Project finance operations formalized in 2005 amounted to €1,074 million. In financing of acquisitions, operations amounted to €962 million. Syndicated loans amounted to €3,700 million.

 

Markets. This integrates equities and treasuries. Gross income rose 6.3%, supported by customer related revenues and a lower contribution from own-account activity.

By businesses, the gross income from equities was 28.0% higher, consolidating leadership in brokerage in Spain (13% market share including Banesto Bolsa, S.A., S.V.B.) and in Portugal (9% market share).

Global Treasury performed well in 2005 with SGC and SGM driving growth in Spain. SGM develops the distribution capacities for corporate and institutional clients in target markets and supports the production and distribution of structured products in the main Latin American countries, while obtaining synergies in products, books and organization.

In Spain, sales revenues attributed to both projects – SGC for retail clients and SGM for wholesale clients – increased 34.7%. Portugal’s growth was 33.3% following the extension of SGC and the good performance of the wholesale sector.

Treasury in New York consolidated its structure in order to help the Latin American treasuries sell structured derivatives and increase the range of value-added products on offer.

Our treasury operations manage money, foreign exchange and fixed-income trading, using conventional instruments and derivatives, for our own account and for the accounts of our customers. We also participate in fixed income capital market activities.

In Latin America, our treasury operations continued to be preeminent in the region. The increasing coordination of local treasuries with Madrid and New York is enabling more global solutions to be offered to clients and greater cross-selling of products. This is producing notable growth in revenues (+22.2%) and is enhancing our presence in the professional markets.

Financial Management and Equity Stakes

This area is responsible for a series of centralized activities and acts as our holding entity, managing all capital and reserves and assigning capital and liquidity to the other businesses. It also incorporates centrally managed business, which can be divided into the following sub areas:

 

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

               Net attributable income from industrial stakes was €1,739 million, up from €492 million in 2004. The much higher figure was mainly due to the larger capital gains and the greater contribution from companies accounted for by the equity method, principally Cepsa.

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Financial management: this area carries out the global functions of managing our structural exchange rate position, the structural interest rate risk of the parent Bank and the liquidity risk. The latter is conducted through securities issuances and securitizations. It also manages shareholders’ equity.

       The cost of hedging the capital of our non euro-denominated investments is another activity managed by this sub-area. The hedging policy is aimed at protecting the capital invested and the year’s results through various instruments that are deemed to be the most appropriate for their management. The main units with exchange risk, except for Brazil, were hedged during 2005.

This sub-area also manages shareholders’ equity, the allocation of capital to each business unit, and the cost of financing investments.

Gross income from Financial Management and Equity Stakes was €-222 million in 2005, compared with €112 million in 2004. Net attributable income was €650 million in 2005 compared with a net attributable loss of €24 million in 2004.

At the end of 2005, this area had 1,462 employees (direct and assigned) (1,433 employees at the end of 2004), of which 404 were temporary.

Equity Stakes

Alliances and Financial Investments

We have financial investments in a number of banking companies, principally in Europe. The following summarizes our most important financial investments:

San Paolo IMI. At December 31, 2005, we owned 8.5% of the capital stock of San Paolo IMI, one of the largest banking groups in Italy in terms of assets. San Paolo IMI controls Intereuropa Bank, a Hungarian bank in which we own a 10% stake.

Attijariwafa Bank. At December 31, 2005, we had a 14.5% interest in Attijariwafa Bank, which engages mainly in trade finance and foreign investment activities. Together with Attijariwafa Bank we have a 50% joint venture in Attijari International Bank Société Anonyme, which specializes in trade finance in Tangier’s free trade zone.

Industrial Portfolio

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

The following table summarizes our main industrial holdings at December 31, 2005:

 

Company

 

Business

 

Percentage Held
At December 31, 2005


 


 


Antena 3 de Televisión, S.A.

 

Mass Media

 

10.01

Cepsa (*)

 

Oil and Petrochemicals

 

32.27

Grupo Corporativo ONO, S.A.

 

Cable

 

15.91

Inmobiliaria Urbis, S.A.(**)

 

Real Estate

 

45.34

         

(*)

12.35% is held directly and 19.92% is held indirectly by the Group through Somaen Dos, S.L. The latter figure represents the Group’s indirect economic participation in Cepsa since Santander only controls the percentage of shares of Somaen Dos, S.L. that it owns, which in turn corresponds to 19.92% of Cepsa’s capital stock.

(**)

As of December 31, 2005, Santander held 51.11% of the voting rights.

In 2005, we realized capital gains of more than €1,650 million with divestments in Unión Fenosa, S,A. (22.02%), Auna (27.07%), MRBS Capital Partners (31.03%), Técnicas Reunidas, S.A. (38.02%) and Probitas Pharma, S.A. (11.62%), among others.

As of December 31, 2005, our unrealized capital gains in listed industrial and financial stakes were approximately €2,500 million.

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Total Revenues by Activity and Geographic Location

For a breakdown of our total revenues by category of activity and geographic market please see Note 54 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 “Earning Assets—Yield Spread” in light of the following observations:

 

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 (or previous Spanish GAAP under the 2003 table). If these transactions did not qualify for such treatment, we included income and expenses on these transactions elsewhere in our income statement;

 

We have stated average balance on a gross basis, before netting our allowances for credit losses, except for the total average asset figures, which reflect such netting. See Note 2 to our consolidated financial statements for a discussion of our accounting policies for hedging activities; and

 

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

As stated above under “Item 4. Information on the Company – A. History and development of the company – Principal Capital Expenditures and Divestitures – Acquisitions, Dispositions and Divestitures”, on November 12, 2004, we completed the acquisition of Abbey. For consolidation purposes, Abbey’s assets and liabilities were consolidated into our balance sheet as of December 31, 2004, but Abbey’s results of operations had no impact on our income statement for 2004. Therefore, 2005 is the first year to reflect the full impact of the acquisition of Abbey.

As stated above under “Presentation of Financial Information”, we have prepared our financial statements for 2004 and 2005 under IFRS. Data for earlier years has been prepared under previous Spanish GAAP, which is not comparable to data prepared under IFRS.

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Average Balance Sheet - Assets and Interest Income

 

 

 

(IFRS)
Year Ended December 31,

 

 

 


 

 

 

2004

 

2005

 

 

 


 


 

ASSETS

 

Average Balance

 

Interest

 

Average Rate

 

Average Balance

 

Interest

 

Average Rate

 


 


 


 


 


 


 


 

 

 

(in thousand of Euros, except percentages)

 

Cash and due from central banks

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

2,699,593

 

35,957

 

1.33

%

3,137,115

 

44,121

 

1.41

%

International

 

5,373,324

 

200,573

 

3.73

%

8,562,044

 

227,184

 

2.65

%

 

 


 


 


 


 


 


 

 

8,072,917

 

236,530

 

2.93

%

11,699,159

 

271,305

 

2.32

%

Due from credit entities

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

11,777,227

 

282,136

 

2.40

%

13,676,170

 

340,950

 

2.49

%

International

 

29,431,662

 

808,519

 

2.75

%

54,178,617

 

2,032,721

 

3.75

%

 

 


 


 


 


 


 


 

 

41,208,889

 

1,090,655

 

2.65

%

67,854,787

 

2,373,671

 

3.50

%

Loans and credits

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

120,245,790

 

4,504,867

 

3.75

%

141,072,158

 

5,291,967

 

3.75

%

International

 

75,723,096

 

5,934,723

 

7.84

%

248,794,772

 

16,127,608

 

6.48

%

 

 


 


 


 


 


 


 

 

195,968,886

 

10,439,590

 

5.33

%

389,866,930

 

21,419,575

 

5.49

%

Debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

29,007,318

 

933,402

 

3.22

%

23,461,903

 

778,971

 

3.32

%

International

 

41,231,435

 

2,709,512

 

6.57

%

99,314,211

 

3,558,943

 

3.58

%

 

 


 


 


 


 


 


 

 

70,238,753

 

3,642,914

 

5.19

%

122,776,114

 

4,337,914

 

3.53

%

Income from hedging operations

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

 

 

280,562

 

 

 

 

 

2,404,944

 

 

 

International

 

 

 

1,425,634

 

 

 

 

 

1,709,334

 

 

 

 

 

 


 

 

   
   

 

 

 

 

1,706,196

 

 

 

 

 

4,114,278

 

 

 

Other interest earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

10,654,166

 

345,353

 

3.24

%

37,428,241

 

441,813

 

1.18

%

International

 

 

 

 

 

 

 

 

 


 


 


 


 


 


 

 

10,654,166

 

345,353

 

3.24

%

37,428,241

 

441,813

 

1.18

%

Total interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

174,384,094

 

6,382,277

 

3.66

%

218,775,587

 

9,302,766

 

4.25

%

International

 

151,759,517

 

11,078,961

 

7.30

%

410,849,644

 

23,655,790

 

5.76

%

 

 


 


 


 


 


 


 

 

326,143,611

 

17,461,238

 

5.35

%

629,625,231

 

32,958,556

 

5.23

%

Investments in equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

4,024,823

 

261,357

 

6.49

%

5,823,044

 

196,263

 

3.37

%

International

 

11,111,874

 

127,681

 

1.15

%

28,060,383

 

139,347

 

0.50

%

 

 


 


 


 


 


 


 

 

15,136,697

 

389,038

 

2.57

%

33,883,427

 

335,610

 

0.99

%

Investments in affiliated companies

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

3,168,233

 

 

 

3,218,629

 

 

 

International

 

389,031

 

 

 

391,826

 

 

 

 

 


 


 


 


 


 


 

 

3,557,264

 

 

 

3,610,455

 

 

 

Total earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

181,577,150

 

6,643,634

 

3.66

%

227,817,260

 

9,499,029

 

4.17

%

International

 

163,260,422

 

11,206,642

 

6.86

%

439,301,853

 

23,795,137

 

5.42

%

 

 


 


 


 


 


 


 

 

344,837,572

 

17,850,276

 

5.18

%

667,119,113

 

33,294,166

 

4.99

%

Other assets

 

29,486,845

 

 

 

 

 

53,780,152

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average assets

 

374,324,417

 

17,850,276

 

4.77

%

720,899,265

 

33,294,166

 

4.62

%

 

 


 


 


 


 


 


 

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Average Balance Sheet - Liabilities and Interest Expense

 

 

 

(IFRS)
Year Ended December 31,

 

 


 

 

 

2004

 

2005

 

 


 


 

LIABILITY AND STOCKHOLDERS EQUITY

 

Average Balance

 

Interest

 

Average Rate

 

Average Balance

 

Interest

 

Average Rate

 


 


 


 


 


 


 


 

 

 

(in thousand of Euros, except percentages)

 

Due to credit entities

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

19,029,151

 

436,035

 

2.29

%

17,084,225

 

410,174

 

2.40

%

International

 

44,897,644

 

1,703,731

 

3.79

%

97,676,422

 

3,182,489

 

3.26

%

 

 


 


 


 


 


 


 

 

63,926,795

 

2,139,766

 

3.35

%

114,760,647

 

3,592,663

 

3.13

%

Customers deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

92,514,205

 

1,357,707

 

1.47

%

98,217,404

 

1,653,302

 

1.68

%

International

 

74,258,287

 

2,370,509

 

3.19

%

187,638,987

 

7,742,070

 

4.13

%

 

 


 


 


 


 


 


 

 

166,772,492

 

3,728,216

 

2.24

%

285,856,391

 

9,395,372

 

3.29

%

Marketable debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

30,654,245

 

967,251

 

3.16

%

56,259,922

 

1,507,745

 

2.68

%

International

 

23,338,251

 

873,060

 

3.74

%

67,836,730

 

2,754,656

 

4.06

%

 

 


 


 


 


 


 


 

 

53,992,496

 

1,840,311

 

3.41

%

124,096,652

 

4,262,401

 

3.43

%

Subordinated debt

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

4,377,978

 

168,965

 

3.86

%

7,457,156

 

329,883

 

4.42

%

International

 

10,126,460

 

571,906

 

5.65

%

20,310,747

 

1,261,618

 

6.21

%

 

 


 


 


 


 


 


 

 

14,504,438

 

740,871

 

5.11

%

27,767,903

 

1,591,501

 

5.73

%

Equity having the substance of a financial liability

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

 

 

 

 

 

 

International

 

2,201,122

 

151,952

 

6.90

%

1,614,121

 

118,389

 

7.33

%

 

 


 


 


 


 


 


 

 

2,201,122

 

151,952

 

6.90

%

1,614,121

 

118,389

 

7.33

%

Other interest bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

18,116,991

 

802,069

 

4.43

%

56,739,036

 

876,092

 

1.54

%

International

 

 

 

 

 

 

 

 

 


 


 


 


 


 


 

 

18,116,991

 

802,069

 

4.43

%

56,739,036

 

876,092

 

1.54

%

Expenses from hedging operations

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

 

 

(314,413

)

 

 

 

 

1,638,632

 

 

 

International

 

 

 

1,186,004

 

 

 

 

 

1,325,646

 

 

 

 

 

 

 


 

 

 

 

 


 

 

 

 

 

 

871,591

 

 

 

 

 

2,964,278

 

 

 

Total interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

164,692,570

 

3,417,614

 

2.08

%

235,757,743

 

6,415,828

 

2.72

%

International

 

154,821,764

 

6,857,162

 

4.43

%

375,077,007

 

16,384,868

 

4.37

%

 

 


 


 


 


 


 


 

 

319,514,334

 

10,274,776

 

3.22

%

610,834,750

 

22,800,696

 

3.73

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

29,548,078

 

 

 

 

 

70,851,390

 

 

 

 

 

Minority interest

 

2,028,335

 

 

 

 

 

2,449,118

 

 

 

 

 

Stockholders’ Equity

 

23,233,670

 

 

 

 

 

36,764,007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average Liabilities and Stockholders’ Equity

 

374,324,417

 

10,274,776

 

2.74

%

720,899,265

 

22,800,696

 

3.16

%

 

 


 


 


 


 


 


 

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Average Balance Sheet - Assets and Interest Income

 

(Previous Spanish GAAP)
Year Ended December 31,

 

 

 


 

 

 

2003

 

 

 


 

 

 

Average Balance

 

Interest

 

Average Rate

 

 

 


 


 


 

 

 

(in thousands of euros, except percentages)

 

ASSETS

             

Cash and due from central banks

 

 

 

 

 

 

 

Domestic

 

3,075,228

 

37,266

 

1.21

%

International

 

4,596,131

 

258,840

 

5.63

%

 

 


 


 


 

 

 

7,671,359

 

296,106

 

3.86

%

Due from credit institutions (1)

 

 

 

 

 

 

 

Domestic

 

12,760,763

 

315,720

 

2.47

%

International

 

25,886,472

 

1,062,087

 

4.10

%

 

 


 


 


 

 

 

38,647,235

 

1,377,807

 

3.57

%

Government debt securities

 

 

 

 

 

 

 

Domestic

 

29,809,839

 

1,228,723

 

4.12

%

International

 

 

 

 

 

 


 


 


 

 

 

29,809,839

 

1,228,723

 

4.12

%

Debentures and other fixed-income securities

 

 

 

 

 

 

 

Domestic

 

3,404,886

 

100,830

 

2.96

%

International

 

32,132,708

 

2,084,048

 

6.49

%

 

 


 


 


 

 

 

35,537,594

 

2,184,878

 

6.15

%

Loans and credits (1)

 

 

 

 

 

 

 

Domestic

 

100,009,531

 

4,551,898

 

4.55

%

International

 

72,349,184

 

5,785,164

 

8.00

%

 

 


 


 


 

 

 

172,358,715

 

10,337,062

 

6.00

%

Income from hedging operations (2)

 

 

 

 

 

 

 

Domestic

 

 

 

437,209

 

 

 

International

 

 

 

1,341,955

 

 

 

 

 

 

 


 

 

 

 

 

 

 

1,779,164

 

 

 

Total interest-earning assets

 

 

 

 

 

 

 

Domestic

 

149,060,247

 

6,671,646

 

4.48

%

International

 

134,964,495

 

10,532,094

 

7.80

%

 

 


 


 


 

 

 

284,024,742

 

17,203,740

 

6.06

%

Equity securities (3)

 

 

 

 

 

 

 

Domestic

 

7,085,648

 

310,074

 

4.38

%

International

 

7,730,451

 

131,419

 

1.70

%

 

 


 


 


 

 

 

14,816,099

 

441,493

 

2.98

%

Total earning assets

 

 

 

 

 

 

 

Domestic

 

156,145,895

 

6,981,720

 

4.47

%

International

 

142,694,946

 

10,663,513

 

7.47

%

 

 


 


 


 

 

 

298,840,841

 

17,645,233

 

5.90

%

Allowance for credit losses

 

(5,019,135

)

 

 

 

 

Premises and equipment

 

4,583,335

 

 

 

 

 

Other assets

 

40,596,589

 

 

 

 

 

Total average assets

 

339,001,630

 

17,645,233

 

5.21

%

 

 


 


 


 


(1)

Includes securities purchased under agreements to resell.

(2)

Includes income from instruments to hedge interest-rate transactions.

(3)

Includes both portfolio investments in equity securities and investments in Group and non-Group companies. Amounts shown as “interest” consist of dividends received. Includes dividends from companies accounted for by the equity method of €309,506 thousands for 2003.

 

33


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Average Balance Sheet - Liabilities and Interest Expense

 

(Previous Spanish GAAP)
Year Ended December 31,

 

 

 


 

 

 

2003

 

 

 


 

 

 

Average Balance

 

Interest

 

Average Rate

 

 

 


 


 


 

 

 

(in thousands of euros, except percentages)

 

LIABILITY AND STOCKHOLDERS’ EQUITY

             

Due to credit institutions (1)

 

 

 

 

 

 

 

Domestic

 

20,123,870

 

451,448

 

2.24

%

International

 

41,598,221

 

1,516,954

 

3.65

%

 

 


 


 


 

 

 

61,722,091

 

1,968,402

 

3.19

%

Customers deposits (1)

 

 

 

 

 

 

 

Domestic

 

90,777,806

 

1,522,022

 

1.68

%

International

 

72,815,172

 

2,793,579

 

3.84

%

 

 


 


 


 

 

 

163,592,978

 

4,315,601

 

2.64

%

Marketable debt securities

 

 

 

 

 

 

 

Domestic

 

12,825,157

 

541,583

 

4.22

%

International

 

24,062,569

 

799,861

 

3.32

%

 

 


 


 


 

 

 

36,887,726

 

1,341,444

 

3.64

%

Subordinated debt

 

 

 

 

 

 

 

Domestic

 

1,361,897

 

51,351

 

3.77

%

International

 

10,505,451

 

627,469

 

5.97

%

 

 


 


 


 

 

 

11,867,348

 

678,820

 

5.72

%

Expenses from hedging operations (2)

 

 

 

 

 

 

 

Domestic

 

 

 

 

 

 

International

 

 

 

663,903

 

 

 

 

 

 

 


 

 

 

 

 

 

 

663,903

 

 

 

Total interest-bearing liabilities

 

 

 

 

 

 

 

Domestic

 

125,088,730

 

2,566,404

 

2.05

%

International

 

148,981,413

 

6,401,766

 

4.30

%

 

 


 


 


 

 

 

274,070,143

 

8,968,170

 

3.27

%

Other liabilities (3)

 

38,749,780

 

718,726

 

 

 

Minority interest

 

6,602,448

 

 

 

 

 

Stockholders’ Equity (4)

 

19,579,259

 

 

 

 

 

Total average Liabilities and Stockholders’ Equity

 

339,001,630

 

9,686,896

 

2.86

%

 

 


 


 


 



(1)

Includes securities sold under agreements to repurchase.

(2)

Includes expenses from instruments to hedge interest-rate transactions.

(3)

Includes interest allocated to Grupo Santander pension plans.

(4)

For calculation of the ROE ratio and the average stockholders’ equity as a percentage of average total assets ratio, the amount of average stockholders’ equity considered was €18,035,039 thousand for the year 2003. The main difference is the effect of net attributable income on average stockholders’ equity.

 

34


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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 2005 compared to 2004. 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.

 

 

 

(IFRS)
2005/2004

 

Volume and rate analysis

 

Increase (Decrease) due to changes in

 

   
 

 

 

Volume

 

Rate

 

Net change

 

   
 
 
 

 

 

(in thousand of Euros)

 

Interest and similar revenues (1)

 

 

 

 

 

 

 

Cash and due from central banks

 

 

 

 

 

 

 

Domestic

 

6,004

 

2,160

 

8,164

 

International

 

84,643

 

(58,032

)

26,611

 

 

 


 


 


 

 

 

90,647

 

(55,872

)

34,775

 

Due from credit entities

 

 

 

 

 

 

 

Domestic

 

48,214

 

10,600

 

58,814

 

International

 

929,885

 

294,317

 

1,224,202

 

 

 


 


 


 

 

 

978,099

 

304,917

 

1,283,016

 

Loans and credits (1)

 

 

 

 

 

 

 

Domestic

 

787,100

 

 

787,100

 

International

 

11,222,719

 

(1,029,834

)

10,192,885

 

 

 


 


 


 

 

 

12,009,819

 

(1,029,834

)

10,979,985

 

Debt securities

 

 

 

 

 

 

 

Domestic

 

(183,438

)

29,007

 

(154,431

)

International

 

2,082,251

 

(1,232,820

)

849,431

 

 

 


 


 


 

 

 

1,898,813

 

(1,203,813

)

695,000

 

Other interest earning assets

 

 

 

 

 

 

 

Domestic

 

315,936

 

(219,476

)

96,460

 

International

 

 

 

 

 

 


 


 


 

 

 

315,936

 

(219,476

)

96,460

 

Total interest-earning assets

 

 

 

 

 

 

 

Domestic

 

973,816

 

(177,709

)

796,107

 

International

 

14,319,498

 

(2,026,369

)

12,293,129

 

 

 


 


 


 

 

 

17,701,396

 

(2,204,078

)

15,497,318

 

Investments in equity securities

 

 

 

 

 

 

 

Domestic

 

60,480

 

(125,574

)

(65,094

)

International

 

83,893

 

(72,227

)

11,666

 

 

 


 


 


 

 

 

144,373

 

(197,801

)

(53,428

)

Total earning assets

 

 

 

 

 

 

 

Domestic

 

1,034,296

 

(303,283

)

731,013

 

International

 

14,403,391

 

(2,098,596

)

12,304,795

 

 

 


 


 


 

 

 

15,437,687

 

(2,401,879

)

13,035,808

 


(1)      Without interest income or interest expense from interest-rate hedging transactions.

35


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Volume and rate analysis

 

(Previous Spanish GAAP)
2004/2003

 

 

 


 

 

 

Increase (Decrease) due to changes in

 

 

 


 

 

 

Volume

 

Rate

 

Net change

 

 

 


 


 


 

 

 

(in thousand of Euros)

 

Interest and similar revenues (1)

             

Cash and due from central banks

 

 

 

 

 

 

 

Domestic

 

1,151

 

(2,460

)

(1,309

)

International

 

12,973

 

(71,240

)

(58,267

)

 

 


 


 


 

 

14,124

 

(73,700

)

(59,576

)

Due from credit institutions

 

 

 

 

 

 

 

Domestic

 

(78,565

)

48,491

 

(30,074

)

International

 

66,317

 

(326,170

)

(259,853

)

 

 


 


 


 

 

(12,248

)

(277,679

)

(289,927

)

Government debt securities

 

 

 

 

 

 

 

Domestic

 

(312,736

)

(113,277

)

(426,013

)

International

 

 

 

 

 

 


 


 


 

 

(312,736

)

(113,277

)

(426,013

)

Domestic

 

74,072

 

(13,620

)

60,452

 

International

 

660,011

 

(51,412

)

608,599

 

 

 


 


 


 

 

734,083

 

(65,032

)

669,051

 

Loans and credits (1)

 

 

 

 

 

 

 

Domestic

 

721,299

 

(580,055

)

141,244

 

International

 

853,293

 

(687,317

)

165,976

 

 

 


 


 


 

 

1,574,592

 

(1,267,372

)

307,220

 

Total interest-earning assets

 

 

 

 

 

 

 

Domestic

 

405,221

 

(660,921

)

(255,700

)

International

 

1,592,594

 

(1,136,139

)

456,455

 

 

 


 


 


 

 

1,997,815

 

(1,797,060

)

200,755

 

Equity securities

 

 

 

 

 

 

 

Domestic

 

58,709

 

87,862

 

146,571

 

International

 

6,042

 

53,340

 

59,382

 

 

 


 


 


 

 

64,751

 

141,202

 

205,953

 

Total earning assets

 

 

 

 

 

 

 

Domestic

 

463,930

 

(573,059

)

(109,129

)

International

 

1,598,636

 

(1,082,799

)

515,837

 

 

 


 


 


 

 

2,062,566

 

(1,655,858

)

406,708

 

 

 


 


 


 

(1)

Without interest income or interest expense from interest-rate hedging transactions.

36


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Volume and rate analysis

 

 

(IFRS)
2005/2004

 

 

 


 

 

 

Increase (Decrease) due to changes in

 

 

 


 

 

 

Volume

 

Rate

 

Net change

 

 

 


 


 


 

 

 

(in thousand of Euros)

 

Interest and similar expenses (1)

 

 

 

 

 

 

 

Due to credit entities

 

 

 

 

 

 

 

Domestic

 

(46,793

)

20,932

 

(25,861

)

International

 

1,716,716

 

(237,958

)

1,478,758

 

 

 


 


 


 

 

1,669,923

 

(217,026

)

1,452,897

 

Customers deposits

 

 

 

 

 

 

 

Domestic

 

101,315

 

194,280

 

295,595

 

International

 

4,673,533

 

698,028

 

5,371,561

 

 

 


 


 


 

 

4,774,848

 

892,308

 

5,667,156

 

Marketable debt securities

 

 

 

 

 

 

 

Domestic

 

687,634

 

(147,140

)

540,494

 

International

 

1,806,914

 

74,682

 

1,881,596

 

 

 


 


 


 

 

2,494,548

 

(72,458

)

2,422,090

 

Subordinated debt

 

 

 

 

 

 

 

Domestic

 

136,401

 

24,517

 

160,918

 

International

 

633,004

 

56,708

 

689,712

 

 

 


 


 


 

 

769,405

 

81,225

 

850,630

 

Equity having the substance of a financial liability

 

 

 

 

 

 

 

Domestic

 

 

 

 

International

 

(43,028