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

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

For the fiscal year ended December 31, 2013

OR

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

for the transition period from                      to                     

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

Date of event requiring this shell company report                     

Commission file number 001-12518

BANCO SANTANDER, S.A.

(Exact name of Registrant as specified in its charter)

Kingdom of Spain

(Jurisdiction of incorporation)

Ciudad Grupo Santander

28660 Boadilla del Monte (Madrid), Spain

(address of principal executive offices)

José Antonio Álvarez

Banco Santander, S.A.

Ciudad Grupo Santander

28660 Boadilla del Monte

Madrid, Spain

Tel: +34 91 289 32 80

Fax: +34 91 257 12 82

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

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, S.A., par value euro 0.50 each	New York Stock Exchange
Shares of Capital Stock of Banco Santander, S.A., par value euro 0.50 each	New York Stock Exchange *
Guarantee of Non-cumulative Guaranteed Preferred Stock of Santander Finance Preferred, S.A. Unipersonal, Series 1, 4, 5, 6, 10 and 11	New York Stock Exchange **

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

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

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

None.

(Title of Class)

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

None.

(Title of Class)

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

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

Large accelerated filer  x                Accelerated filer  ¨                Non-accelerated filer  ¨

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

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

If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ¨    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  x

Indicate the number of outstanding shares of each of the issuer’s classes of capital stock or common stock as of the close of business covered by the annual report. 11,561,067,147 shares

BANCO SANTANDER, S.A.

TABLE OF CONTENTS

		Page
Presentation of Financial and Other Information			5
Cautionary Statement Regarding Forward-Looking Statements			6
PART I
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS		8
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE		8
ITEM 3.	KEY INFORMATION		8
	A. Selected financial data		8
	B. Capitalization and indebtedness		15
	C. Reasons for the offer and use of proceeds		15
	D. Risk factors		15
ITEM 4.	INFORMATION ON THE COMPANY		34
	A. History and development of the company		34
	B. Business overview		49
	C. Organizational structure		122
	D. Property, plant and equipment		122
ITEM 4A.	UNRESOLVED STAFF COMMENTS		122
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS		123
	A. Operating results		132
	B. Liquidity and capital resources		164
	C. Research and development, patents and licenses, etc.		165
	D. Trend information		165
	E. Off-balance sheet arrangements		167
	F. Tabular disclosure of contractual obligations		168
	G. Other disclosures		169
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES		171
	A. Directors and senior management		171
	B. Compensation		179
	C. Board practices		192
	D. Employees		198
	E. Share ownership		200
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS		201
	A. Major shareholders		201
	B. Related party transactions		202
	C. Interests of experts and counsel		203
ITEM 8.	FINANCIAL INFORMATION		203
	A. Consolidated statements and other financial information		203
	B. Significant Changes		212

ITEM 9.	THE OFFER AND LISTING	212
	A. Offer and listing details	212
	B. Plan of distribution	214
	C. Markets	214
	D. Selling shareholders	219
	E. Dilution	219
	F. Expense of the issue	219
ITEM 10.	ADDITIONAL INFORMATION	219
	A. Share capital	219
	B. Memorandum and articles of association	219
	C. Material contracts	229
	D. Exchange controls	229
	E. Taxation	229
	F. Dividends and paying agents	234
	G. Statement by experts	234
	H. Documents on display	234
	I. Subsidiary information	234
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK	235
	Introduction	235
	Part 1. Corporate principles of risk management, control and risk appetite	235
	Part 2. Corporate governance of the risks function	240
	Part 3. Integrated risk control and internal risk validation	241
	Part 4. Cluster of risk	242
	Part 5. Credit risk	243
	Part 6. Market risk	264
	Part 7. Liquidity and funding risk	294
	Part 8. Operational risk	300
	Part 9. Compliance and reputational risk	305
	Part 10. Capital	312
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	317
	A. Debt Securities	317
	B. Warrants and Rights	317
	C. Other Securities	317
	D. American Depositary Shares	317
PART II
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	319
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	319
ITEM 15.	CONTROLS AND PROCEDURES	319
ITEM 16	[Reserved].
	A. Audit committee financial expert	322
	B. Code of Ethics	322
	C. Principal Accountant Fees and Services	323
	D. Exemptions from the Listing Standards for Audit Committees	323
	E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers	324
	F. Changes in Registrant’s Certifying Accountant	324
	G. Corporate Governance	324
	H. Mine Safety Disclosure	326

PART III
ITEM 17.	FINANCIAL STATEMENTS	326
ITEM 18.	FINANCIAL STATEMENTS	326
ITEM 19.	EXHIBITS	327

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Accounting Principles

Under Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of July 19, 2002, all companies governed by the law of an EU Member State and whose securities are admitted to trading on a regulated market of any Member State must prepare their consolidated financial statements in conformity with the International Financial Reporting Standards previously adopted by the European Union (“EU-IFRS”). The Bank of Spain Circular 4/2004 of December 22, 2004 on Public and Confidential Financial Reporting Rules and Formats (“Circular 4/2004”) requires Spanish credit institutions to adapt their accounting systems to the principles derived from the adoption by the European Union of International Financial Reporting Standards. Therefore, Grupo Santander (“the Group” or “Santander”) is required to prepare its consolidated financial statements for the year ended December 31, 2013 in conformity with the EU-IFRS and Bank of Spain’s Circular 4/2004. Differences between EU-IFRS, Bank of Spain’s Circular 4/2004 and International Financial Reporting Standards as issued by the International Accounting Standard Board (IFRS-IASB) are not material. Therefore, we assert that the financial information contained in this annual report on Form 20-F complies with IFRS-IASB.

We have formatted our financial information according to the classification format for banks used in Spain. We have not reclassified the line items to comply with Article 9 of Regulation S-X (see Note 55 of our consolidated financial statements). Article 9 is a regulation of the US Securities and Exchange Commission that contains formatting requirements for bank holding company financial statements.

Our auditors, Deloitte, S.L., an independent registered public accounting firm, have audited our consolidated financial statements in respect of the three years ended December 31, 2013, 2012 and 2011 in accordance with IFRS-IASB. See page F-1 to our consolidated financial statements for the 2013, 2012 and 2011 report prepared by Deloitte, S.L.

General Information

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

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

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

• “one billion”, we mean 1 billion.

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

When we refer to “loans”, we mean loans, leases, discounted bills and accounts receivable, unless otherwise noted. The loan to value “LTV” ratios disclosed in this report refer to LTV ratios upon origination unless otherwise noted. Additionally, if a loan is approaching a doubtful status, we update the appraisals which are then used to estimate allowances for loan losses.

When we refer to “impaired balances” or “non-performing balances”, we mean impaired or non-performing loans and contingent liabilities (“NPL”), securities and other assets to collect.

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

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

5

Management makes use of certain financial measures in local currency to help in the assessment of on-going operating performance. These non-GAAP financial measures include the results of operations of our subsidiary banks located outside the eurozone, excluding the impact of foreign exchange. We analyze these banks’ performance on a local currency basis to better measure the comparability of results between periods. Because changes in foreign currency exchange rates have a non-operating impact on the results of operations, we believe that evaluating their performance on a local currency basis provides an additional and meaningful assessment of performance to both management and the company’s investors. 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.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

• exposure to various types of market risks;

• management strategy;

• capital expenditures;

• earnings and other targets; and

• asset portfolios.

Forward-looking statements may be identified by words such as “expect,” “project,” “anticipate,” “should,” “intend,” “probability,” “risk,” “VaR,” “RORAC,” “target,” “goal,” “objective,” “estimate,” “future” and similar expressions. We include forward-looking statements in the “Operating and Financial Review and Prospects,” “Information on the Company,” and “Quantitative and Qualitative Disclosures About Risks” 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.

6

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

Economic and Industry Conditions

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

• general economic or industry conditions in Spain, the U.K., the U.S., other European countries, Brazil, other Latin American countries and the other areas in which we have significant business activities or investments;

• a default on, or a ratings downgrade of, the sovereign debt of Spain, and the other countries where we operate;

• a worsening of the economic environment in the U.K., other European countries, Brazil, other Latin American countries, and the U.S., and an increase of the volatility in the capital markets;

• a further deterioration of the Spanish economy;

• a widening of Spain’s “risk premium”, or the spread between the yields on Spanish government securities and comparable German government securities;

• the effects of a continued decline in real estate prices, particularly in Spain, the U.K. and the U.S.;

• 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 model we use;

• changes in competition and pricing environments;

• the inability to hedge some risks economically;

• the adequacy of loss reserves;

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

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

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

Political and Governmental Factors

• political stability in Spain, the United Kingdom, other European countries, Latin America and the U.S.;

• changes in Spanish, U.K., E.U., Latin American, U.S. or other jurisdictions’ laws, regulations or taxes, including changes in regulatory capital and liquidity requirements; and

• increased regulation in light of the global financial crisis.

Transaction and Commercial Factors

• damage to our reputation;

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

• the outcome of our negotiations with business partners and governments.

Operating Factors

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

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

• changes in the Group’s ability to access liquidity and funding on acceptable terms, including as a result of changes in our credit spreads or a downgrade in our credit ratings or those of our more significant subsidiaries;

• the Group’s exposure to operational losses (e.g., failed internal or external processes, people and systems);

• the occurrence of force majeure, such as natural disasters, that impact our operations or impair the asset quality of our loan portfolio; and

• the impact of changes in the composition of our balance sheet on future net interest income.

The forward-looking statements contained in this report speak only as of the date of this 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.

7

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.

In the F-pages of this annual report on Form 20-F, the audited financial statements for the years 2013, 2012 and 2011 are presented. The audited financial statements for 2010 and 2009 are not included in this document, but they can be found in our previous annual reports on Form 20-F.

In August 2013, we filed with the SEC a Form 6-K in which we recasted our audited financial statements included in our annual report on Form 20-F for the fiscal year ended December 31, 2012, as filed with the SEC on April 24, 2013 (the “2012 Form 20-F”) to reflect the change in International Accounting Standard 19 (“IAS 19”). IAS 19 requires that for periods beginning on or after January 1, 2013 actuarial gains and losses be immediately recognized against shareholders’ equity, without the possibility for deferred recognition through the income statement, as it was done in 2012 and prior periods. In addition, that 6-K recasted disclosures in the 2012 Form 20-F to give retroactive effect to the application of IAS 19 and to certain changes to our reporting methods in 2013, including the following:

• As a result of the envisaged disposal of the Santander UK card business that was formerly owned by General Electric (“GE”), its results have been eliminated from the various lines of the income statement and recorded, net, in profit from discontinued operations.

8

• As a result of business restructuring and other adjustments, segment information has been modified as follows (see Note 52 to our consolidated financial statements):

• Spain was incorporated as a unit under the Continental Europe segment, including the branch networks of Santander, Banesto and Banif (merged in 2013), Global Wholesale Banking, Asset Management and Insurance and the Spain ALCO portfolio.

• Spain’s run-off real estate became a unit within Continental Europe. This unit includes:

• loans from customers whose activity is mainly real estate development, which have a specially allocated management department in the Group;

• equity stakes in real estate companies; and

• foreclosed assets.

• Liquidity cost changed from applying rates to loans and deposits operations to applying the cost of Banco Santander senior debt to the difference between loans and deposits.

The impact of the change in IAS 19 as of December 31, 2012, 2011 and 2010 is as follows:

	Millions of euros
	2012			2011			2010
Deferred tax assets		1,185			694			378
Other assets		(1,213	)		(1,211	)		(922	)
Assets		(28	)		(517	)		(544	)
Deferred tax liabilities		254			208			199
Provisions for pensions and similar obligations		(3,276	)		(1,737	)		(1,072	)
Liabilities		(3,022	)		(1,529	)		(873	)
Valuation adjustment		2,884			1,933			1,412
Non-controlling interests		262			91			39
Equity		3,146			2,024			1,451
Provisions (net)		(138	)		26			(49	)
Income tax		43			(5	)		16
Consolidated profit for the year		(95	)		21			(33	)
Of which:
Profit attributable to the Parent		(90	)		21			(31	)
Profit attributable to non-controlling interest		(5	)		—			(2	)

The other adjustments described above did not have a material impact on our financial statements.

9

The following selected financial information includes the IAS 19 adjustments for 2012, 2011, 2010 and 2009 while the impacts of the envisaged disposal of the Santander UK card business is only included in the 2012, 2011 and 2010 data.

Under IFRS-IASB, revenues and expenses of discontinued businesses (mainly, Santander UK card business that was formerly owned by GE) must be reclassified from each income statement line item to “Profit from discontinued operations”. Revenues and expenses from prior years are also required to be reclassified for comparison purposes to present the same businesses as discontinued operations. This change in presentation does not affect “Consolidated profit for the year” (see Note 37 to our consolidated financial statements). The impact of Santander UK card business reclassification in the balance sheets as of December 31, 2012, 2011 and 2010 is as follows:

	Millions of euros
	2012			2011			2010
Loans and receivables - Loans and advances to customers		(1,370	)		(1,559	)		(1,649	)
Non-current assets held for sale		1,370			1,559			1,649
Assets		—			—			—

The income statement for the year ended December 31, 2013 includes the results from Kredyt Bank S.A. after the merger in early 2013 of the subsidiaries in Poland of Banco Santander, S.A. and KBC Bank NV (BZ WBK S.A. and Kredyt Bank S.A.). In addition, the income statement for the year ended December, 31, 2011 reflects the impact of the consolidation of Bank Zachodni WBK, S.A. and the income statement for the year ended December, 31, 2009 reflects the impact of the consolidation of Banco Real, Alliance & Leicester, Bradford & Bingley’s branch network and retail deposits, Sovereign (Santander Bank) and other consumer businesses.

10

	Year ended December 31,
	2013			2012			2011			2010			2009
	(in millions of euros, except percentages and per share data)
Interest and similar income		51,447			58,791			60,618			52,637			53,173
Interest expense and similar charges		(25,512	)		(28,868	)		(30,024	)		(23,672	)		(26,874	)
Interest income / (charges)		25,935			29,923			30,594			28,965			26,299
Income from equity instruments		378			423			394			362			436
Income from companies accounted for using the equity method		500			427			57			17			(1	)
Fee and commission income		12,473			12,732			12,640			11,559			10,726
Fee and commission expense		(2,712	)		(2,471	)		(2,232	)		(1,899	)		(1,646	)
Gains/losses on financial assets and liabilities (net)		3,234			3,329			2,838			2,166			3,802
Exchange differences (net)		160			(189	)		(522	)		441			444
Other operating income		5,903			6,693			8,050			8,190			7,929
Other operating expenses		(6,194	)		(6,583	)		(8,029	)		(8,089	)		(7,785	)
Total income		39,677			44,284			43,790			41,712			40,204
Administrative expenses		(17,452	)		(17,801	)		(17,644	)		(16,073	)		(14,825	)
Personnel expenses		(10,069	)		(10,306	)		(10,305	)		(9,296	)		(8,451	)
Other general administrative expenses		(7,383	)		(7,495	)		(7,339	)		(6,777	)		(6,374	)
Depreciation and amortization		(2,391	)		(2,183	)		(2,098	)		(1,937	)		(1,596	)
Provisions (net)		(2,182	)		(1,478	)		(2,616	)		(1,067	)		(1,747	)
Impairment losses on financial assets (net)		(11,227	)		(18,880	)		(11,794	)		(10,400	)		(11,578	)
Impairment losses on other assets (net)		(503	)		(508	)		(1,517	)		(286	)		(165	)
Gains/(losses) on disposal of assets not classified as non-current assets held for sale		2,152			906			1,846			351			1,565
Gains/(losses) on non-current assets held for sale not classified as discontinued operations		(422	)		(757	)		(2,109	)		(290	)		(1,225	)
Operating profit/(loss) before tax		7,652			3,583			7,858			12,010			10,633
Income tax		(2,113	)		(590	)		(1,755	)		(2,910	)		(1,222	)
Profit from continuing operations		5,539			2,993			6,103			9,100			9,411
Profit/(loss) from discontinued operations (net)		(15	)		70			15			35			31
Consolidated profit for the year		5,524			3,063			6,118			9,135			9,442
Profit attributable to the Parent		4,370			2,295			5,330			8,212			8,970
Profit attributable to non-controlling interest		1,154			768			788			923			472
Per share information:
Average number of shares (thousands) (1)		10,836,111			9,766,689			8,892,033			8,686,522			8,554,224
Basic earnings per share (euros)		0.40			0.23			0.60			0.94			1.05
Basic earnings per share continuing operation (euros)		0.40			0.22			0.60			0.94			1.04
Diluted earnings per share (euros)		0.40			0.23			0.60			0.94			1.04
Diluted earnings per share continuing operation (euros)		0.40			0.22			0.60			0.94			1.04
Remuneration paid (euros) (2)		0.60			0.60			0.60			0.60			0.60
Remuneration paid (US$) (2)		0.83			0.79			0.78			0.80			0.86

11

	Year ended December 31,
	2013			2012			2011			2010			2009
	(in millions of euros, except percentages and per share data)
Total assets		1,115,638			1,269,600			1,251,009			1,216,956			1,110,399
Loans and advances to credit institutions (net) (3)		74,964			73,900			51,726			79,855			79,837
Loans and advances to customers (net) (3)		668,856			719,112			748,541			722,504			682,551
Investment securities (net) (4)		142,234			152,066			154,015			174,258			173,990
Investments: Associates and joint venture		5,536			4,454			4,155			273			164
Contingent liabilities		41,049			45,033			48,042			59,795			59,256
Liabilities
Deposits from central banks and credit institutions (5)		109,397			152,966			143,138			140,112			142,091
Customer deposits (5)		607,837			626,639			632,533			616,376			506,975
Debt securities (5)		175,477			205,969			197,372			192,873			211,963
Capitalization
Guaranteed subordinated debt excluding preferred securities and preferred shares (6)		4,603			5,207			6,619			10,934			13,867
Other subordinated debt		7,483			8,291			10,477			12,189			15,193
Preferred securities (6)		3,652			4,319			5,447			6,917			7,315
Preferred shares (6)		401			421			449			435			430
Non-controlling interest (including net income of the period)		9,314			9,415			6,354			5,860			5,165
Stockholders’ equity (7)		70,588			71,860			74,460			73,637			67,276
Total capitalization		96,041			99,514			103,806			109,971			109,245
Stockholders’ equity per average share (7)		6.51			7.36			8.37			8.48			7.86
Stockholders’ equity per share at the year-end (7)		6.23			6.96			8.36			8.84			8.18
Other managed funds
Mutual funds		93,304			89,176			102,611			113,510			105,216
Pension funds		10,879			10,076			9,645			10,965			11,310
Managed portfolio		20,987			18,889			19,200			20,314			18,364
Total other managed funds (8)		125,170			118,141			131,456			144,789			134,890
Consolidated ratios
Profitability ratios:
Net yield (9)		2.31	%		2.51	%		2.72	%		2.66	%		2.62	%
Return on average total assets (ROA)		0.45	%		0.24	%		0.50	%		0.77	%		0.86	%
Return on average stockholders’ equity (ROE)		6.10	%		2.91	%		7.12	%		11.75	%		14.37	%
Capital ratio:
Average stockholders’ equity to average total assets		5.90	%		5.65	%		5.88	%		5.87	%		5.68	%
Ratio of earnings to fixed charges (10)
Excluding interest on deposits		1.72	%		1.27	%		1.62	%		2.27	%		2.02	%
Including interest on deposits		1.30	%		1.11	%		1.26	%		1.52	%		1.41	%
Credit quality data
Loans and advances to customers
Allowances for impaired balances including country risk and excluding contingent liabilities as a percentage of total gross loans		3.59	%		3.41	%		2.45	%		2.63	%		2.55	%
Impaired balances as a percentage of total gross loans (11)		5.81	%		4.74	%		4.07	%		3.76	%		3.43	%
Allowances for impaired balances as a percentage of impaired balances (11)		61.76	%		72.01	%		60.17	%		69.99	%		74.32	%
Net loan charge-offs as a percentage of total gross loans		1.38	%		1.36	%		1.39	%		1.31	%		1.27	%
Ratios adding contingent liabilities to loans and advances to customers and excluding country risk (*)
Allowances for impaired balances (**) as a percentage of total loans and contingent liabilities		3.48	%		3.29	%		2.38	%		2.56	%		2.44	%
Impaired balances as a percentage of total loans and contingent liabilities (**) (11)		5.64	%		4.54	%		3.90	%		3.54	%		3.24	%
Allowances for impaired balances as a percentage of impaired balances (**)(11)		61.65	%		72.41	%		61.02	%		72.17	%		75.33	%
Net loan and contingent liabilities charge-offs as a percentage of total loans and contingent liabilities		1.29	%		1.28	%		1.29	%		1.21	%		1.17	%

(*) We disclose these ratios because our credit risk exposure comprises loans and advances to customers as well as contingent liabilities, all of which are subject to impairment and, therefore, allowances are taken in respect thereof.

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(**) Impaired or non-performing loans and contingent liabilities, securities and other assets to collect.

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

(2) The shareholders at the annual shareholders’ meeting held on June 19, 2009 approved a new remuneration scheme (scrip dividend), whereby the Bank offered the shareholders the possibility to opt to receive an amount equivalent to the dividends in cash or new shares. The remuneration per share for 2009, 2010, 2011 and 2012 disclosed above, €0.60, is calculated assuming that the four dividends for these years were paid in cash. In 2013, assuming the same criteria, the remuneration per share will be €0.60.

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

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

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

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

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

(8) At December 31, 2013 we held a 50% ownership interest in Santander Asset Management (SAM) and controlled this company jointly with Warburg Pincus and General Atlantic. Funds under “Other managed funds” are mostly managed by SAM.

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

(10) For the purpose of calculating the ratio of earnings to fixed charges, earnings consist of pre-tax income from continuing operations before adjustment for income or loss from equity investees plus fixed charges. Fixed charges consist of total interest expense (including or excluding interest on deposits as appropriate) and the interest expense portion of rental expense.

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

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

	IFRS-IASB
	Year Ended December 31,
	2013		2012		2011		2010		2009
	(in millions of euros)
Allowances refers to:
Allowances for impaired balances (*) (excluding country risk)		25,681		26,112		19,531		20,553		18,497
Less: Allowances for contingent liabilities and commitments (excluding country risk)		688		614		648		1,011		623
Allowances for Balances of Loans (excluding country risk):		24,993		25,497		18,883		19,541		17,874
Allowances relating to country risk and other		154		98		210		121		192
Allowances for impaired balances (excluding contingent liabilities)		25,147		25,595		19,093		19,662		18,066
Of which:
Allowances for Loans and receivables:		24,959		25,467		18,858		19,544		17,899
Allowances for Customers		24,903		25,422		18,806		19,502		17,873
Allowances for Credit institutions and other financial assets		37		30		36		17		26
Allowances for Debt Instruments		19		15		16		25		—
Allowances for Debt Instruments available for sale		188		129		235		119		167

(*) Impaired or non-performing loans and contingent liabilities, securities and other assets to collect.

Exchange Rates

The exchange rates shown below are those published by the European Central Bank (“ECB”), and are based on the daily consultation procedures between central banks within and outside the European System of Central Banks, which normally takes place at 14:15 p.m. CET time.

	Rate During Period
Calendar Period	Period End ($)		Average Rate ($)
2009		1.44		1.39
2010		1.34		1.33
2011		1.29		1.39
2012		1.32		1.28
2013		1.38		1.33

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	Rate During Period
Last six months	High $		Low $
2013
October		1.38		1.35
November		1.36		1.34
December		1.38		1.35
2014
January		1.37		1.35
February		1.38		1.35
March		1.39		1.37
April (through April 28)		1.39		1.37

On April 28, 2014, the exchange rate for euros and dollars (expressed in dollars per euro), as published by the ECB, was $1.39.

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

B. Capitalization and indebtedness.

Not Applicable.

C. Reasons for the offer and use of proceeds.

Not Applicable.

D. Risk factors.

Macro-Economic Risks

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

Our loan portfolio is concentrated in Continental Europe (in particular, Spain), the United Kingdom and Latin America. At December 31, 2013, Continental Europe accounted for 40% of our total loan portfolio (Spain accounted for 24% of our total loan portfolio), while the United Kingdom (where the loan portfolio consists primarily of residential mortgages) and Latin America accounted for 35% and 20%, respectively. Accordingly, the recoverability of these loan portfolios in particular, and our ability to increase the amount of loans outstanding and our results of operations and financial condition in general, are dependent to a significant extent on the level of economic activity in Continental Europe (in particular, Spain), the United Kingdom and Latin America. A return to recessionary conditions in the economies of Continental Europe (in particular, Spain), in the United Kingdom or the Latin American countries in which 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”.

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

In the past six years, financial systems worldwide have experienced difficult credit and liquidity conditions and disruptions leading to less liquidity, greater volatility, general widening of spreads and, in some cases, lack of price transparency on interbank lending rates. Global economic conditions deteriorated significantly between 2007 and 2009, and many of the countries in which we operate fell into recession and some countries have only recently begun to recover and this recovery may not be sustainable. Many major financial institutions, including some of the world’s largest global commercial banks, investment banks, mortgage lenders, mortgage guarantors and insurance companies experienced, and some continue to experience, significant difficulties. Around the world, there have also been runs on deposits at several financial institutions, numerous institutions have sought additional capital or have been assisted by governments, and many lenders and institutional investors have reduced or ceased providing funding to borrowers (including to other financial institutions).

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

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

• Reduced demand for our products and services.

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

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

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

• Any worsening of global economic conditions may delay the recovery of the international financial industry and impact our financial condition and results of operations.

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

Despite recent improvements in certain segments of the global economy, uncertainty remains concerning the future economic environment. There can be no assurance that economic conditions in these segments will continue to improve or that the global economic condition as a whole will improve significantly. Such economic uncertainty could have a negative impact on our business and results of operations. Investors remain cautious and the downgrade of the sovereign debt of France, for example, has induced greater volatility in the capital markets. A slowing or failing of the economic recovery would likely aggravate the adverse effects of these difficult economic and market conditions on us and on others in the financial services industry.

Increased disruption and volatility in the global financial markets could have a material adverse effect on us, including our ability to access capital and liquidity on financial terms acceptable to us, if at all. If capital markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits to attract more customers and become unable to maintain certain liability maturities. Any such increase in capital markets funding availability or costs or in deposit rates could have a material adverse effect on our interest margins and liquidity.

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

We may suffer adverse effects as a result of the ongoing economic and sovereign debt tensions in the eurozone.

Our results of operations are materially affected by conditions in the capital markets and the economy generally in the eurozone, which, although improving recently, continue to show signs of fragility and volatility and in some cases only sporadic access to capital markets. Interest rate differentials among eurozone countries are affecting government finance and borrowing rates in those economies.

The European Central Bank (the “ECB”) and European Council took actions in 2012 and 2013 to aim to reduce the risk of contagion throughout and beyond the eurozone. These included the creation of the Open Market Transaction facility of the ECB and the decision by eurozone governments to create a banking union. A significant number of financial institutions throughout Europe have substantial exposures to sovereign debt issued by nations that are under financial pressure. Should any of those nations default on their debt, or experience a significant widening of credit spreads, major financial institutions and banking systems throughout Europe could be destabilized, resulting in the further spread of the ongoing economic crisis.

The continued high cost of capital for some European governments has impacted the wholesale markets and there has been a consequent increase in the cost of retail funding, with greater competition in a savings market that is growing slowly by historical standards. In the absence of a permanent resolution of the eurozone crisis, conditions could deteriorate.

We have direct and indirect exposure to financial and economic conditions throughout the eurozone economies. A deterioration of the economic and financial environment could have a material adverse impact on the whole financial sector, creating new challenges in sovereign and corporate lending and resulting in significant disruptions in financial activities at both the market and retail levels. This could materially and adversely affect our operating results, financial position and prospects.

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Exposure to sovereign debt could have a material adverse effect on us.

Like many other banks, we invest in debt securities of governments in the geographies in which we operate, including debt securities of the countries that have been most affected by the deterioration in economic conditions, such as Spain, Portugal, Italy and Ireland. Although doubts remain about the solvency of certain countries, the implementation of new regulations by the European Banking Authority may have reduced the risk associated with the sovereign debt of such countries. A failure by any such government to make timely payments under the terms of these securities, or a significant decrease in their market value, could have a material adverse effect on us.

Our growth, asset quality and profitability in Latin America may be adversely affected by volatile macroeconomic and political conditions.

The economies of some of the Latin American countries where we operate experienced significant volatility in recent decades, characterized, in some cases, by slow or regressive growth, declining investment and hyperinflation. This volatility resulted in fluctuations in the levels of deposits and in the relative economic strength of various segments of the economies to which we lend.

Negative and fluctuating economic conditions, such as a changing interest rate environment, impact our profitability by causing lending margins to decrease and leading to decreased demand for higher margin products and services. Negative and fluctuating economic conditions in these Latin American regions could also result in government defaults on public debt. This could affect us in two ways: directly, through portfolio losses, and indirectly, through instabilities that a default in public debt could cause to the banking system as a whole, particularly since commercial banks’ exposure to government debt is high in these Latin American regions.

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

No assurance can be given that our growth, asset quality and profitability will not be affected by volatile macroeconomic and political conditions.

Risks Relating to Our Business

Legal, Regulatory and Compliance Risks

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

We face risk of loss from legal and regulatory proceedings, including tax proceedings, that could subject us to monetary judgments, regulatory enforcement actions, fines and penalties. The current regulatory environment in the jurisdictions in which we operate reflects an increased supervisory focus on enforcement, combined with uncertainty about the evolution of the regulatory regime, and may lead to material operational and compliance costs.

We are from time to time subject to certain claims and parties to certain legal proceedings incidental to the normal course of our business, including in connection with conflicts of interest, lending activities, relationships with our employees and other commercial or tax matters. In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties or are in the early stages of discovery, we cannot state with confidence what the eventual outcome of these pending matters will be or what the eventual loss, fines or penalties related to each pending matter may be. We believe that we have made adequate reserves related to the costs anticipated to be incurred in connection with these various claims and legal proceedings. However, the amount of these provisions is substantially less than the total amount of the claims asserted against us and in light of the uncertainties involved in such claims and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by us. As a result, the outcome of a particular matter may be material to our operating results for a particular period, depending upon, among other factors, the size of the loss or liability imposed and our level of income for that period.

We are subject to substantial regulation which could adversely affect our business and operations.

As a financial institution, we are subject to extensive regulation, which materially affects our businesses. For example, we are subject to capital adequacy requirements which, among other things, require us to maintain minimum ratios of regulatory capital to risk-weighted assets. Any failure by us to comply with capital adequacy requirements may result in administrative actions or sanctions which may affect our ability to fulfill our obligations.

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Statutes, regulations and policies to which we are subject, in particular those relating to the banking sector and financial institutions, may be changed at any time. For example, in response to the recent financial crisis, regulators world-wide have imposed, and may continue to impose, more stringent capital adequacy requirements, including increasing the minimum regulatory capital requirements imposed on us. Regulators world-wide have also produced a range of proposals for future legislative and regulatory changes which could force us to comply with certain operational restrictions or take steps to raise further capital, or could increase our expenses, or otherwise adversely affect our operating results, financial condition and prospects. The interpretation and the application by regulators of the laws and regulations to which we are subject may also change from time to time. Any legislative or regulatory actions and any required changes to our business operations resulting from such legislation and regulations could result in significant loss of revenue, limit our ability to pursue business opportunities in which we might otherwise consider engaging, affect the value of assets that we hold, require us to increase our prices and therefore reduce demand for our products, impose additional costs on us or otherwise adversely affect our businesses. Accordingly, there can be no assurance that future changes in regulations or in their interpretation or application will not adversely affect us.

Changes in regulations may also cause us to face increased compliance costs and limitations on our ability to pursue certain business opportunities and provide certain products and services. As some of the banking laws and regulations have been recently adopted, the manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. Moreover, to the extent these recently adopted regulations are implemented inconsistently in the various jurisdictions in which we operate, it may face higher compliance costs. No assurance can be given generally that laws or regulations will be adopted, enforced or interpreted in a manner that will not have a material adverse effect on our business and results of operations.

Extensive legislation affecting the financial services industry has recently been adopted in regions that directly or indirectly affect our business, including Spain, the United States, the European Union, Latin America and other jurisdictions, and regulations are in the process of being implemented.

The European Union has created a European Systemic Risk Board to monitor financial stability and has implemented rules with the recommendations to increase capital requirements for certain trading instruments or exposures and to impose compensation limits on certain employees located in affected countries. In addition, the European Union Commission is considering a wide array of other initiatives, including new legislation that will affect derivatives trading, impose surcharges on “globally” systemically important firms and possibly impose new levies on bank balance sheets.

In December 2010, the Basel Committee on Banking Supervision (the “Basel Committee”) reached agreement on comprehensive changes to the capital adequacy framework, known as Basel III. A revised version of Basel III was published in June 2011. Basel III is intended to raise the resilience of the banking sector by increasing both the quality and quantity of the regulatory capital base and enhancing the risk coverage of the capital framework. Among other things, Basel III introduces new eligibility criteria for Common Equity Tier 1, Additional Tier 1 and Tier 2 capital instruments that are intended to raise the quality of regulatory capital, and increases the amount of regulatory capital that institutions are required to hold. Basel III also requires institutions to maintain a capital conservation buffer above the minimum capital ratios in order to avoid certain capital distribution constraints. The capital conservation buffer, to be comprised of Common Equity Tier 1 capital, would result in an effective Common Equity Tier 1 capital requirement of 7 percent of risk-weighted assets. In addition, Basel III directs national regulators to require certain institutions to maintain a counter-cyclical capital buffer during periods of excessive credit growth. Basel III introduces a leverage ratio for institutions as a backstop measure, to be applied from 2018 alongside current risk-based regulatory capital requirements. The changes in Basel III are intended to be phased in gradually between January 2013 and January 2022. The implementation of Basel III in the European Union is being performed through the Capital Requirements Directive IV (“CRD IV”) & Capital Requirements Regulation (“CRR”) legislative package. CRD IV was published in the Official Journal on June 27, 2013 entered into force in July 2013 (being CRR applicable from January 2014), with particular requirements being phased in over a period of time, to be effective by 2019, although requirements relating to certain deductions from Common Equity Tier 1 could be delayed until 2024. CRD IV substantially reflects the Basel III capital and liquidity standards and facilitates the applicable implementation timeframes. However, certain issues continue to remain under discussion and certain details remain to be clarified in further binding technical standards to be issued by the European Banking Authority.

In addition to the changes to the capital adequacy framework published in December 2010 and June 2011 described above, the Basel Committee also published its global quantitative liquidity framework, comprising the Liquidity Coverage Ratio (“LCR”) and Net Stable Funding Ratio (“NSFR”) metrics, with objectives to (1) promote the short-term resilience of banks’ liquidity risk profiles by ensuring they have sufficient high-quality liquid assets to survive a significant stress scenario; and (2) promote resilience over a longer time horizon by creating incentives for banks to fund their activities with more stable sources of funding on an ongoing basis. The LCR has been subsequently revised by the Basel Committee in January 2013 which amended the definition of high-quality liquid assets and agreed a revised timetable for phase-in of the standard from 2015 to 2019, as well as making some technical changes to some of the stress scenario assumptions. As with the Basel Committee’s proposed changes to the capital adequacy framework, the Basel III liquidity standards are being implemented within the European Union through the CRD IV legislative package. In January 2014 the Basel Committee published amendments to the Leverage Ratio and technical revisions to the NSFR ratio, confirming that it remains the intention that the latter ratio, including any future revisions, will become a minimum standard by January 1, 2018. Also, in January 2014, the Basel Committee proposed uniform disclosure standards related to the LCR and issued a new modification to the ratio, which should be adopted by banks from January 1, 2015.

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As a Spanish financial institution, the Bank is subject to CRD IV, through which the European Union has implemented the Basel III capital standards and which are in the process of being phased in until January 1, 2019. The CRR is applicable from January 1, 2014 and the CRD IV Directive has already been partially implemented in Spain as of January 1, 2014 by RD-L 14/2013. This Royal Decree-Law has repealed, with effect from January 1, 2014, any Spanish regulatory provisions that may be incompatible with CRR.

In addition to RD-L 14/2013, the Bank of Spain approved on January 31, 2014 its new Circular 2/2014, which derogates its previous Circular 7/2012, and makes certain regulatory determinations contained in CRR pursuant to the delegation contained in RD-L 14/2013, including, relevant rules concerning the applicable transitional regime on capital requirements and the treatment of deductions.

Despite the CRD IV/Basel III framework setting minimum transnational levels of regulatory capital and a measured phase-in, many national authorities have started a race to the top for capital by adopting requirements and interpretation calendars that are more stringent than Basel III’s.

For example, in the last three years the Bank of Spain and the European Banking Authority (the EBA) have imposed new capital requirements in advance of the entering into force of CRD IV. These measures have included Bank of Spain Circular 3/2008 (Circular 3/2008) of May 22, on the calculation and control of minimum capital requirements, which was amended by Bank of Spain Circular 4/2011 (Circular 4/2011) and implements Capital Requirements Directive III in Spain. In addition, some of the requirements of Basel III were already implemented by the Spanish Government in 2011 with Royal Decree-Law 2/2011 (RD-L 2/2011) of February 18 (as amended by Law 9/2012) which established a new minimum requirement in terms of capital on risk-weighted assets (Capital Principal) and required such capital to be greater than 9 per cent from January 1, 2013. RD-L 14/2013 specifically repealed, with effect from January 1, 2014, Title I of Royal Decree-Law 2/2011, which imposed the minimum Capital Principal requirement for credit institutions. Notwithstanding such repeal, as part of the assessment of additional capital requirements that could be required of credit institutions, the Bank of Spain has been given powers to stop or restrict, until December 31, 2014, any distributions of Tier 1 Capital which would have been caught by the minimum Capital Principal requirements stipulated in RD-L 2/2011, provided such distributions, accumulated over the year ended December 31, 2014, exceed in absolute terms the minimum Capital Principal legally required as at December 31, 2013 and further risk non-compliance with additional capital requirements that could be required by the Bank of Spain.

Furthermore, following an evaluation of the capital levels of 71 financial institutions throughout Europe (including the Bank) based on data available as of September 30, 2011, the EBA issued a recommendation on December 8, 2011 pursuant to which, on an exceptional and temporary basis, financial institutions based in the EU should reach a new minimum Core Tier 1 ratio (9 per cent.) by June 30, 2012. This recommendation has been replaced by the EBA recommendation of July 22, 2013 on the preservation of Core Tier 1 capital during the transition to CRD IV. This new recommendation provides for the maintenance of a nominal floor of capital denominated in the relevant reporting currency of Core Tier 1 capital corresponding to the amount of capital needed as at June 30, 2012 to meet the requirements of the above recommendation of December 8, 2011. Competent authorities may waive this requirement for institutions which maintain a minimum of 7 per cent of common equity Tier 1 capital under CRD IV rules applied after the transitional period.

In addition, in order to complete the implementation of CRD IV initiated by RD-L 14/2013, the Spanish Ministry of Economy and Competitiveness has prepared and recently published a draft of a new comprehensive law on the supervision and solvency of financial institutions (the Supervision and Solvency Law), that has been already approved by the Spanish Council of Ministers and is being reviewed in order to be approved by the Spanish Parliament.

There can be no assurance that the implementation of these new standards will not adversely affect the Bank’s ability to pay dividends or require it to issue additional securities that qualify as regulatory capital, to liquidate assets, to curtail business or to take any other actions, any of which may have adverse effects on the Bank’s business, financial condition and results of operations. Furthermore, increased capital requirements may negatively affect the Bank’s return on equity and other financial performance indicators.

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Finally, in February 2014 the IMF recommended that the Bank of Spain limit the amount of dividends payable in cash in 2014 by Spanish banking institutions to 25% of such bank’s attributable profits. The Bank of Spain has given this recommendation to the Spanish banking institutions.

Effective management of our capital position is important to our ability to operate our business, to continue to grow organically and to pursue our business strategy. However, in response to the global financial crisis, a number of changes to the regulatory capital framework have been adopted or continue to be considered. As these and other changes are implemented or future changes are considered or adopted that limit our ability to manage our balance sheet and capital resources effectively or to access funding on commercially acceptable terms, we may experience a material adverse effect on our financial condition and regulatory capital position.

In September 2011, the European Commission (the “Commission”) tabled a proposal for a common system of financial transactions taxes (“FTT”). Despite intense discussions on this proposal there was no unanimity amongst the 27 Member States. Eleven Member States (“participating Member States”) requested enhanced cooperation on a FTT based upon the Commission’s original proposal. The Commission presented a decision to this effect which was adopted by the EU’s Council of Finance Ministers at its committee meeting on January 22, 2013. The proposal of Directive was published on February 14, 2013, under which participating Member States may charge a FTT on all financial transactions where (i) at least one party to the transaction is established in the territory of a participating Member State and a financial institution established in the territory of a participating Member State is a party to the transaction acting either for its own account or for the account of another person, or is acting in the name of a party to the transaction or (ii) a financial institution is a party to a transaction with a financial instrument issued within the territory of a participating Member Estate. We are still assessing the proposals currently under discussion to determine the likely impact on Banco Santander and its affiliates.

The Spanish Government approved on February 3, 2012 the Royal Decree-Law 2/2012 and Law 8/2012, of October 20, 2012, on the clean-up of the financial sector (replacing Royal Decree-Law 18/2012, of May 11, 2012), through which the following actions were performed:

• Review of the minimum provisioning percentages to be taken into consideration in the estimate of the impairment losses relating to financing granted to the property sector in Spain and to the foreclosed assets and assets received in payment of debt arising from financing granted to that sector, as a result of the impairment of these assets.

• Increase in the level of minimum capital requirements of Spanish credit institutions on the basis of the assets relating to the property sector in Spain presented on the balance sheet of each entity at December 31, 2012.

The Spanish Government also approved Law 9/2012, of November 14, 2012 which established a new regime on restructuring and resolution of credit institutions and a statutory loss absorbency regime applicable within the framework of restructuring and resolution processes, both based on the legislative proposal for a directive providing for the establishment of an European Union wide framework for the recovery and resolution of credit institutions and investment firms, the first draft of which (and the draft upon which Law 9/2012 was based) was published by the European Commission on June 6, 2012.

In June 2012, a number of agreements were reached to reinforce the monetary union, including the definition of a broad roadmap towards a single banking and fiscal union. While support for a banking union in Europe is strong and significant advances have been made in terms of the development of a single-rule book through CRD IV, there is ongoing debate on the extent and pace of integration. On September 13, 2012, the European Parliament approved a proposal for the creation of the Single Supervisory Mechanism, so that 128 of the largest EU banks (including the Bank) will come under the ECB direct oversight from November 2014. The ECB comprehensive assessment includes a supervisory risk assessment, an asset quality review and a stress test to be conducted by national supervisors and the ECB in coordination with the EBA before the ECB becomes the single European bank supervisor in November 2014. The assessment is an important step in preparing the single supervisory mechanism and, more generally, towards bringing about greater transparency of the banks’ balance sheets and consistency of supervisory practices in Europe. The assessment started in November 2013 and will take 12 months to complete, ending in October 2014. The comprehensive assessment consists of three closely interlinked components:

• a supervisory risk assessment – to review, quantitatively and qualitatively, key risks, including liquidity, leverage and funding;

• an asset quality review (AQR) – to enhance the transparency of bank exposures by reviewing the quality of banks’ assets, including the adequacy of asset and collateral valuation and related provisions;

• a stress test – to examine the resilience of banks’ balance sheets to stress scenarios.

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The assessment will be based on a capital benchmark of 8% Common Equity Tier 1, drawing on the definition of the Capital Requirements Directive IV/Capital Requirements Regulation, including transitional arrangements, for both the AQR and the baseline stress test scenario.

Other open issues include the representation and voting power of non-eurozone countries, the accountability of the ECB to European institutions as part of the Single Supervision Mechanism, the final status of the EBA, the development of a new bank resolution regime and the creation of a common deposit-guarantee scheme. In particular, the Bank Recovery and Resolution Directive (BRRD) and the Deposit Guarantee Schemes Directive were submitted to the European Parliament in June 2013. They have been approved by the European Parliament on April 15, 2014 and approval by the European Council is expected in May 2014 for its official publication. The BRRD is expected to enter into force in 2015, but the bail-in tool will only be operational from 2016. The final regulation on direct recapitalization by the European Stability Mechanism is still pending. European leaders have also supported the reinforcement of the fiscal union but continue negotiating on how to achieve it.

Regulations adopted towards achieving a banking and/or fiscal union in the EU and decisions adopted by the ECB in its future capacity as the Bank’s main supervisory authority may have a material impact on the Bank’s business, financial condition and results of operations.

On January 29, 2014, the European Commission, taking into account the October 2002 report by the High Level Expert Group chaired by Erkki Likannen on the reform of the structure of the EU Banking Sector, proposed new rules to prevent the largest and most complex EU banks with significant trading activities (including us) from engaging in the activity of proprietary trading in financial instruments and commodities. The new proposed regulation would also grant supervisors the power and, in certain instances, the obligation to require the transfer of other high-risk trading activities (such as market-making, complex derivatives and securitization operations) to separate legal trading entities within their group (“subsidiarisation”). Notwithstanding this, banks would have the possibility of not separating activities if they can show to the satisfaction of their supervisor that the risks generated are mitigated by other means. The proposal would also provide rules on the economic, legal, governance, and operational links between the separated trading entity and the rest of the banking group. Furthermore, the proposal is also aimed at increasing transparency of certain transactions in the shadow banking sector.

The European Parliament approved the following dossiers in April 2014 to develop a European Banking Union:

• The proposal for the BRRD is expected to be approved by ECOFIN in May 2014 for its official publication. The BRRD is the single rulebook for the resolution of banks and large investment firms in all EU Member States. It harmonizes and upgrades the tools for dealing with bank crises across the EU. Banks will be required to prepare recovery plans to overcome financial distress, while authorities will lay out plans to resolve failed banks in a way which preserves their most critical functions and avoids taxpayer-funded bailouts. Authorities are granted a set of powers to intervene in the operations of banks to help prevent failure. If they do face failure, authorities are equipped with comprehensive powers and tools to restructure them, allocating losses to shareholders and creditors following a clearly defined hierarchy.

• The agreement with the EU Council on the Single Resolution Mechanism (SRM) is expected to be approved by the Parliament in July or September 2014. The agreement includes the creation of a Single Resolution Fund (SRF) which will be fully endowed in a maximum of eight years. It is expected that the agreement between governments will be signed in May 2014 and approved by national parliaments by year end. The SRM will complement the Single Supervisory Mechanism (SSM) and will ensure that, if a bank subject to the SSM faces serious difficulties, its resolution can be managed efficiently with minimal costs to taxpayers and the real economy. The SRM will apply to all banks in the Euro Area and other Member States that choose to participate. The division of powers between the Single Resolution Board and national resolution authorities broadly follows the division of supervisory powers between the ECB and national supervisors in the context of the Single Supervisory Mechanism.

The Single Resolution Fund will be financed with contributions from all banks in the participating Member States. It will be administrated by the Board. The Fund has a target level, to be reached over eight years, of €55 billion and can borrow from the markets by order of the Board. During the transition, the Fund will be divided among national compartments whose resources will be progressively mutualized, starting with 40% of funds in the first year. The Fund and decision-making on its use is regulated by the SRM Regulation, while the transfer of contributions raised nationally towards the Single Fund and the mutualization of the national compartments is set out in an inter-governmental agreement established among the participating Member States.

• The proposal for recast Directive on Deposit Guarantee Schemes (DGS) ensures that depositors will continue to benefit from a guaranteed coverage of €100,000 in case of bankruptcy backed by funds to be collected in advance from the banking sector. In principle, the target level for ex ante funds of DGS is 0.8% of covered deposits (i.e. about € 55billion) to be collected from banks over a 10-year period. Repayment deadlines will be gradually reduced from the current 20 working days to 7 working days in 2024. The new Directive will require that better information be provided to depositors to ensure that they are aware of how their deposits are protected by the guarantee schemes.

Regulations adopted on structural measures to improve the resilience of EU credit institutions may have a material impact on the Bank’s business, financial condition and results of operations. These regulations, if adopted, may also cause the Group to invest significant management attention and resources to make any necessary changes.

In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) which was adopted in 2010 will continue to result in significant structural reforms affecting the financial services industry. This legislation provides for, among other things, the establishment of a Consumer Financial Protection Bureau with broad authority to regulate the credit, savings, payment and other consumer financial products and services that we offer, the creation of a structure to regulate systemically important financial companies, more comprehensive regulation of the over-the-counter derivatives market, prohibitions on engagement in certain proprietary trading activities and restrictions on ownership of, investment in or sponsorship of hedge funds and private equity funds, restrictions on the interchange fees earned through debit card transactions, and a requirement that bank regulators phase out the treatment of trust preferred capital instruments as Tier 1 capital for regulatory capital purposes.

With respect to OTC derivatives, the Dodd-Frank Act provides for an extensive framework for the regulation of OTC derivatives, including mandatory clearing, exchange trading and transaction reporting of certain OTC derivatives. Entities that are swap dealers, security-based swap dealers, major swap participants or major security-based swap participants are required to register with the CFTC or the SEC, or both, and are or will be subject to new capital, margin, business conduct, recordkeeping, clearing, execution, reporting and other requirements. Banco Santander, S.A. and Abbey National Treasury Services plc became provisionally registered as swap dealers with the CFTC on July 8, 2013 and November 4, 2013, respectively. In addition, we may register one more subsidiary as swap dealer with the CFTC.

In July 2013, the U.S. bank regulators issued the U.S. Basel III final rules implementing the Basel III capital framework for U.S. banks and bank holding companies and other U.S. capital reform. Certain aspects of the U.S. Basel III final rules, such as new minimum capital ratios and a revised methodology for calculating risk-weighted assets, will become effective on January 1, 2015. Other aspects of the U.S. Basel III final rules, such as the capital conservation buffer and the new regulatory deductions from and adjustments to capital, will be phased in over several years beginning on January 1, 2015.

In addition, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and other U.S. regulators issued for public comment in October 2013 a proposed rule that would introduce a quantitative liquidity coverage ratio requirement on certain large banks and bank holding companies. The proposed liquidity coverage ratio is broadly consistent with the Basel Committee’s revised Basel III liquidity rules, but is more stringent in several important respects. The Federal Reserve has also stated that it intends, through future rulemakings, to apply the Basel III liquidity coverage ratio and net stable funding ratio to the U.S. operations of some or all large foreign banking organizations (“FBOs”).

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In February 2014, the Federal Reserve approved a final rule to enhance its supervision and regulation of the U.S. operations of FBOs such as us. Under the Federal Reserve’s rule, FBOs with $50 billion or more in U.S. assets held outside of their U.S. branches and agencies (“Large FBOs”), will be required to create a separately capitalized top-tier U.S. intermediate holding company (“IHC”) that will hold substantially all of the FBO’s U.S. bank and nonbank subsidiaries, such as Santander Bank, N.A. An IHC will be subject to U.S. risk-based and leverage capital, liquidity, risk management, stress testing and other enhanced prudential standards on a consolidated basis. Under the final rule, a Large FBO that is subject to the IHC requirement may request permission from the Federal Reserve to establish multiple IHCs or use an alternative organizational structure. The final rule also permits the Federal Reserve to apply the IHC requirement in a manner that takes into account the separate operations of multiple foreign banks that are owned by a single Large FBO. Although U.S. branches and agencies of a Large FBO will not be required to be held beneath an IHC, such branches and agencies will be subject to liquidity, and, in certain circumstances, asset maintenance requirements. Large FBOs generally will be required to establish IHCs and comply with the enhanced prudential standards beginning July 1, 2016. An IHC’s compliance with applicable U.S. leverage ratio requirements is generally delayed until January 1, 2018. FBOs that have $50 billion or more in non-branch/agency U.S. assets as of June 30, 2014 will be required to submit an implementation plan by January 1, 2015 on how the FBO will comply with the IHC requirement. Enhanced prudential standards will apply to our top-tier U.S.-based bank holding companies beginning on January 1, 2015 until we form or designate an IHC and the IHC becomes subject to corresponding enhanced prudential standards. The Federal Reserve has stated that it will issue, at a later date, final rules to implement certain other enhanced prudential standards under the Dodd-Frank Act for large bank holding companies and large FBOs, including single counterparty credit limits and an early remediation framework.

Within the Dodd-Frank Act, the Volcker Rule prohibits “banking entities” from engaging in certain forms of proprietary trading or from sponsoring or investing in certain covered funds, in each case subject to certain limited exceptions. The Volcker Rule became effective on July 21, 2012 and on December 10, 2013, U.S. regulators issued final rules implementing the Volcker Rule. The final rules also limit the ability of banking entities and their affiliates to enter into certain transactions with such funds with which they or their affiliates have certain relationships. The final rules contain exclusions and certain exemptions for market-making, hedging, underwriting, trading in U.S. government and agency obligations as well as certain foreign government obligations, trading solely outside the United States, and also permits certain ownership interests in certain types of funds to be retained. The final rules implementing the Volcker Rule extended the period for all banking entities to conform to the Volcker Rule and implement a compliance program until July 21, 2015, and additional extensions are possible. Banking entities must bring their activities and investments into compliance with the requirements of the Volcker Rule by the end of the conformance period. We are assessing how the final rules implementing the Volcker Rule will affect our businesses and are developing and implementing plans to bring affected businesses into compliance.

Furthermore, Title I of the Dodd-Frank Act and the implementing regulations issued by the Federal Reserve and the Federal Deposit Insurance Corporation (“FDIC”) require each bank holding company with assets of $50 billion or more, including us, to prepare and submit annually a plan for the orderly resolution of our subsidiaries and operations that are domiciled in the United States in the event of future material financial distress or failure. The plan must include information on resolution strategy, major counterparties and interdependencies, among other things, and requires substantial effort, time and cost. We submitted our U.S. resolution plan in December 2013. The resolution plan is subject to review by the Federal Reserve Board and the FDIC.

Each of these aspects of the Dodd-Frank Act, as well as others, may directly and indirectly impact various aspects of our business. The full spectrum of risks that the Dodd-Frank Act, including the Volcker Rule, poses to us is not yet known, however, such risks could be material and we could be materially and adversely affected by them.

These and any additional legislative or regulatory actions in Spain, the European Union, the United States, the U.K., Latin America or other countries, and any required changes to our business operations resulting from such legislation and regulations, could result in reduced capital availability, significant loss of revenue, limit our ability to continue organic growth (including increased lending), pursue business opportunities in which we might otherwise consider engaging and provide certain products and services, affect the value of assets that we hold, require us to increase our prices and therefore reduce demand for our products, impose additional costs on us or otherwise adversely affect our businesses. Accordingly, we cannot provide assurance that any such new legislation or regulations would not have an adverse effect on our business, results of operations or financial condition in the future.

We may also face increased compliance costs. 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, to the extent these recently adopted regulations are implemented inconsistently in the various jurisdictions in which we operate, we may face higher compliance costs. No assurance can be given generally that laws or regulations will be adopted, enforced or interpreted in a manner that will not have material adverse effect on our business and results of operations.

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We may not be able to detect money laundering and other illegal or improper activities fully or on a timely basis, which could expose us to additional liability and could have a material adverse effect on us.

We are required to comply with applicable anti-money laundering, anti-terrorism and other laws and regulations in the jurisdictions in which we operate. These laws and regulations require us, among other things, to adopt and enforce “know-your-customer” policies and procedures and to report suspicious and large transactions to the applicable regulatory authorities. These laws and regulations have become increasingly complex and detailed, require improved systems and sophisticated monitoring and compliance personnel and have become the subject of enhanced government supervision.

While we have adopted policies and procedures aimed at detecting and preventing the use of our banking network for money laundering and related activities, such policies and procedures may not completely eliminate instances where we may be used by other parties to engage in money laundering and other illegal or improper activities. To the extent we fail to fully comply with applicable laws and regulations, the relevant government agencies to which we report have the power and authority to impose fines and other penalties on us, including the revocation of licenses. In addition, our business and reputation could suffer if customers use our banking network for money laundering or illegal or improper purposes.

In addition, while we review our relevant counterparties’ internal policies and procedures with respect to such matters, we, to a large degree, rely upon our relevant counterparties to maintain and properly apply their own appropriate anti-money laundering procedures. Such measures, procedures and compliance may not be completely effective in preventing third parties from using our (and our relevant counterparties’) services as a conduit for money laundering (including illegal cash operations) without our (and our relevant counterparties’) knowledge. If we are associated with, or even accused of being associated with, or become a party to, money laundering, then our reputation could suffer and/or we could become subject to fines, sanctions and/or legal enforcement (including being added to any “black lists” that would prohibit certain parties from engaging in transactions with us), any one of which could have a material adverse effect on our operating results, financial condition and prospects.

Changes in taxes and other assessments may adversely affect us.

The legislatures and tax authorities in the tax jurisdictions in which we operate regularly enact reforms to the tax and other assessment regimes to which we and our customers are subject. Such reforms include changes in the rate of assessments and, occasionally, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. The effects of these changes and any other changes that result from enactment of additional tax reforms cannot be quantified and there can be no assurance that any such reforms would not have an adverse effect upon our business.

Financial Reporting and Control Risks

Changes in accounting standards could impact reported earnings.

The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.

Our financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement of the results of our operations and financial position.

The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgments and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. The accounting policies deemed critical to our results and financial position, based upon materiality and significant judgments and estimates, include impairment of loans and advances, goodwill impairment, valuation of financial instruments, impairment of available-for-sale financial assets, deferred tax assets and provision for liabilities.

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The valuation of financial instruments measured at fair value can be subjective, in particular where models are used which include unobservable inputs. Given the uncertainty and subjectivity associated with valuing such instruments it is possible that the results of our operations and financial position could be materially misstated if the estimates and assumptions used prove to be inaccurate.

If the judgment, estimates and assumptions we use in preparing our consolidated financial statements are subsequently found to be incorrect, there could be a material effect on our results of operations and a corresponding effect on our funding requirements and capital ratios.

The preparation of our tax returns requires the use of estimates and interpretations of complex tax laws and regulations and is subject to review by taxing authorities. We are subject to the income tax laws of Spain and certain foreign countries. These tax laws are complex and subject to different interpretations by the taxpayer and relevant governmental taxing authorities, which are sometimes subject to prolonged evaluation periods until a final resolution is reached. In establishing a provision for income tax expense and filing returns, we must make judgments and interpretations about the application of these inherently complex tax laws. If the judgment, estimates and assumptions we use in preparing our tax returns are subsequently found to be incorrect, there could be a material effect on our results of operations.

Disclosure controls and procedures over financial reporting may not prevent or detect all errors or acts of fraud.

Disclosure controls and procedures over financial reporting are designed to reasonably assure that information required to be disclosed by the company in reports filed or submitted under the Securities Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

These disclosure controls and procedures have inherent limitations which include the possibility that judgments in decision-making can be faulty and that breakdowns occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by any unauthorized override of the controls. Consequently, our businesses are exposed to risk from potential non-compliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions and serious reputational or financial harm. In recent years, a number of multinational financial institutions have suffered material losses due to the actions of ‘rogue traders’ or other employees. It is not always possible to deter employee misconduct and the precautions we take to prevent and detect this activity may not always be effective. Accordingly, because of the inherent limitations in the control system, misstatements due to error or fraud may occur and not be detected.

Liquidity and Financing Risks

Liquidity and funding risks are inherent in our business and could have a material adverse effect on us.

Liquidity risk is the risk that we either do not have available sufficient financial resources to meet our obligations as they fall due or can secure them only at excessive cost. This risk is inherent in any retail and commercial banking business and can be heightened by a number of enterprise-specific factors, including over-reliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation. While we implement liquidity management processes to seek to mitigate and control these risks, unforeseen systemic market factors in particular make it difficult to eliminate completely these risks. Adverse and continued constraints in the supply of liquidity, including inter-bank lending, has affected and may materially and adversely affect the cost of funding our business, and extreme liquidity constraints may affect our current operations as well as limit growth possibilities.

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

Our cost of obtaining funding is directly related to prevailing market interest rates and to our credit spreads. Increases in interest rates and our credit spreads can significantly increase the cost of our funding. Changes in our credit spreads are market-driven, and may be influenced by market perceptions of our creditworthiness. Changes to interest rates and our credit spreads occur continuously and may be unpredictable and highly volatile.

If wholesale markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits, with a view to attracting more customers, and/or to sell assets, potentially at depressed prices. The persistence or worsening of these adverse market conditions or an increase in base interest rates could have a material adverse effect on our ability to access liquidity and cost of funding (whether directly or indirectly).

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We rely, and will continue to rely, primarily on commercial deposits to fund lending activities. The ongoing availability of this type of funding is sensitive to a variety of factors outside our control, such as general economic conditions and the confidence of commercial depositors in the economy, in general, and the financial services industry in particular, and the availability and extent of deposit guarantees, as well as competition between banks for deposits. Any of these factors could significantly increase the amount of commercial deposit withdrawals in a short period of time, thereby reducing our ability to access commercial deposit funding on appropriate terms, or at all, in the future. If these circumstances were to arise, this could have a material adverse effect on our operating results, financial condition and prospects.

We anticipate that our customers will continue, in the near future, to make short-term deposits (particularly demand deposits and short-term time deposits), and we intend to maintain our emphasis on the use of banking deposits as a source of funds. The short-term nature of this funding source could cause liquidity problems for us in the future if deposits are not made in the volumes we expect or are not renewed. If a substantial number of our depositors withdraw their demand deposits or do not roll over their time deposits upon maturity, we may be materially and adversely affected.

We cannot assure you that in the event of a sudden or unexpected shortage of funds in the banking system, we will be able to maintain levels of funding without incurring high funding costs, a reduction in the term of funding instruments or the liquidation of certain assets. If this were to happen, we could be materially adversely affected.

Credit, market and liquidity risk may have an adverse effect on our credit ratings and our cost of funds. Any downgrading in our credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative contracts and adversely affect our interest margins and results of operations.

Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us, and their ratings of our debt are based on a number of factors, including our financial strength and conditions affecting the financial services industry generally. In addition, due to the methodology of the main rating agencies, our credit rating is affected by the rating of Spanish sovereign debt. If Spain’s sovereign debt is downgraded, our credit rating would also likely be downgraded by an equivalent amount.

Any downgrade in our debt credit ratings would likely increase our borrowing costs and require us to post additional collateral or take other actions under some of our derivative contracts, and could limit our access to capital markets and adversely affect our commercial business. For example, a ratings downgrade could adversely affect our ability to sell or market certain of our products, engage in certain longer-term and derivatives transactions and retain our customers, particularly customers who need a minimum rating threshold in order to invest. In addition, under the terms of certain of our derivative contracts, we may be required to maintain a minimum credit rating or terminate such contracts. Any of these results of a ratings downgrade, in turn, could reduce our liquidity and have an adverse effect on us, including our operating results and financial condition.

Banco Santander, S.A.’s long-term debt is currently rated investment grade by the major rating agencies—Baa1 by Moody’s Investors Service España, S.A., BBB by Standard & Poor’s Ratings Services and BBB+ by Fitch Ratings Ltd.— all of which have stable outlook. During 2012, following downgrades of Spanish sovereign debt, all three agencies downgraded Banco Santander, S.A.’s rating together with that of the other main Spanish banks, due to the weaker-than-previously-anticipated macroeconomic and financial environment in Spain with dimming growth prospects in the near term, depressed real estate market activity and heightened turbulence in the capital markets. In the fourth quarter of 2013 and first quarter of 2014 the three agencies revised our outlook from negative to stable reflecting the gradual improvement of the Spanish economy and the view that any further weakening of our credit profile was unlikely to be significant. In March 2014, Moody’s Investors Service upgraded our rating from Baa2 to Baa1 following the upgrade of Spain’s sovereign debt rating announced on February 21 along with the change of the outlook on Spain’s rating to positive from stable.

Santander UK’s long-term debt is currently rated investment grade by the major rating agencies: A2 with negative outlook by Moody’s Investors Service, A with negative outlook by Standard & Poor’s Ratings Services and A with stable outlook by Fitch Ratings. All three agencies revised Santander UK’s ratings during 2012 following the downgrades of the Spanish sovereign debt and remained unchanged in 2013. Negative outlooks by Moody’s and Standard & Poor’s reflect the negative trend that they see for the U.K. banking industry.

We conduct substantially all of our material derivative activities through Banco Santander, S.A. and Santander UK. We estimate that as of December 31, 2013, if all the rating agencies were to downgrade Banco Santander, S.A.’s long-term senior debt ratings by one notch we would be required to post up to €3 million in additional collateral pursuant to derivative and other financial contracts. A hypothetical two notch downgrade would result in a requirement to post up to €14 million in additional collateral. We estimate that as of December 31, 2013, if all the rating agencies were to downgrade Santander UK’s long-term credit ratings by one notch, and thereby trigger a short-term credit rating downgrade, this could result in contractual outflows from Santander UK’s total liquid assets of £7.6 billion of cash and additional collateral that Santander UK would be required to post under the terms of secured funding and derivatives contracts. A hypothetical two notch downgrade would result in an additional contractual outflow of £1.9 billion of cash and collateral under secured funding and derivatives contracts.

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While certain potential impacts of these downgrades are contractual and quantifiable, the full consequences of a credit rating downgrade are inherently uncertain, as they depend upon numerous dynamic, complex and inter-related factors and assumptions, including market conditions at the time of any downgrade, whether any downgrade of a firm’s long-term credit rating precipitates downgrades to its short-term credit rating, and assumptions about the potential behaviors of various customers, investors and counterparties. Actual outflows could be higher or lower than this hypothetical example, depending upon certain factors including which credit rating agency downgrades our credit rating, any management or restructuring actions that could be taken to reduce cash outflows and the potential liquidity impact from loss of unsecured funding (such as from money market funds) or loss of secured funding capacity. Although, unsecured and secured funding stresses are included in our stress testing scenarios and a portion of our total liquid assets is held against these risks, it is still the case that a credit rating downgrade could have a material adverse effect on Banco Santander, S.A., and/or its subsidiaries.

In addition, if we were required to cancel our derivatives contracts with certain counterparties and were unable to replace such contracts, our market risk profile could be altered.

In light of the difficulties in the financial services industry and the financial markets, there can be no assurance that the rating agencies will maintain the current ratings or outlooks. Failure to maintain favorable ratings and outlooks could increase our cost of funding and adversely affect interest margins, which could have a material adverse effect on us.

Risk Management

Failure to successfully implement and continue to improve our risk management policies, procedures and methods, including our credit risk management system, could materially and adversely affect us, and we may be exposed to unidentified or unanticipated risks.

The management of risk is an integral part of our activities. We seek to monitor and manage our risk exposure through a variety of separate but complementary financial, credit, market, operational, compliance and legal reporting systems. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, such techniques and strategies may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we fail to identify or anticipate.

Some of our qualitative tools and metrics for managing risk are based upon our use of observed historical market behavior. We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures. These qualitative tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses thus could be significantly greater than the historical measures indicate. In addition, our quantified modeling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses. If existing or potential customers believe our risk management is inadequate, they could take their business elsewhere. This could have a material adverse effect on our operating results, financial condition and prospects.

As a commercial bank, one of the main types of risks inherent in our business is credit risk. For example, an important feature of our credit risk management system is to employ an internal credit rating system to assess the particular risk profile of a customer. As this process involves detailed analyses of the customer, taking into account both quantitative and qualitative factors, it is subject to human error. In exercising their judgment, our employees may not always be able to assign an accurate credit rating to a customer or credit risk, which may result in our exposure to higher credit risks than indicated by our risk rating system.

In addition, we have been trying to refine our credit policies and guidelines to address potential risks associated with particular industries or types of customers. However, we may not be able to timely detect these risks before they occur, or due to limited tools available to us, our employees may not be able to effectively implement them, which may increase our credit risk. Failure to effectively implement, consistently follow or continuously refine our credit risk management system may result in an increase in the level of non-performing loans and a higher risk exposure for us, which could have a material adverse effect on us.

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Credit Risks

If we are unable to effectively control the level of non-performing or poor credit quality loans in the future, or if our loan loss reserves are insufficient to cover future loan losses, this could have a material adverse effect on us.

Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of our businesses. Non-performing or low credit quality loans have in the past and can continue to negatively impact our results of operations. We cannot assure you that we will be able to effectively control the level of the impaired loans in our total loan portfolio. In particular, the amount of our reported non-performing loans may increase in the future as a result of growth in our total loan portfolio, including as a result of loan portfolios that we may acquire in the future, or factors beyond our control, such as adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in economic conditions in Continental Europe, the United Kingdom, Latin America, the United States or global economic conditions, impact of political events, events affecting certain industries or events affecting financial markets and global economies.

Our current loan loss reserves may not be adequate to cover any increase in the amount of non-performing loans or any future deterioration in the overall credit quality of our total loan portfolio. Our loan loss reserves are based on our current assessment of and expectations concerning various factors affecting the quality of our loan portfolio. These factors include, among other things, our borrowers’ financial condition, repayment abilities and repayment intentions, the realizable value of any collateral, the prospects for support from any guarantor, government macroeconomic policies, interest rates and the legal and regulatory environment. As the recent global financial crisis has demonstrated, many of these factors are beyond our control. As a result, there is no precise method for predicting loan and credit losses, and we cannot assure you that our loan loss reserves will be sufficient to cover actual losses. If our assessment of and expectations concerning the above mentioned factors differ from actual developments, if the quality of our total loan portfolio deteriorates, for any reason, including the increase in lending to individuals and small and medium enterprises, the volume increase in the credit card portfolio and the introduction of new products, or if the future actual losses exceed our estimates of incurred losses, we may be required to increase our loan loss reserves, which may adversely affect us. If we were unable to control or reduce the level of our non-performing or poor credit quality loans, this could have a material adverse effect on us.

Mortgage loans are one of our principal assets, comprising 53% of our loan portfolio as of December 31, 2013. As a result, we are exposed to developments in housing markets, especially in Spain and the United Kingdom. In addition, we have exposure to a number of large real estate developers in Spain. From 2002 to 2007, demand for housing and mortgage financing in Spain increased significantly driven by, among other things, economic growth, declining unemployment rates, demographic and social trends, the desirability of Spain as a vacation destination and historically low interest rates in the eurozone. The United Kingdom also experienced an increase in housing and mortgage demand driven by, among other things, economic growth, declining unemployment rates, demographic trends and the increasing prominence of London as an international financial center. During late 2007, the housing market began to adjust in Spain and the United Kingdom as a result of excess supply (particularly in Spain) and higher interest rates. Since 2008, as economic growth stalled in Spain and the United Kingdom, persistent housing oversupply, decreased housing demand, rising unemployment, subdued earnings growth, greater pressure on disposable income, a decline in the availability of mortgage finance and the continued effect of global market volatility have caused home prices to decline, while mortgage delinquencies increased. As a result of these and other factors, our NPL ratio increased from 0.94% at December 31, 2007, to 2.02% at December 31, 2008, to 3.24% at December 31, 2009, to 3.55% at December 31, 2010, to 3.89% at December 31, 2011 and to 4.54% at December 31, 2012. At December 31, 2013, our NPL ratio was 5.64%. These trends, especially higher unemployment rates coupled with declining real estate prices, could have a material adverse impact on our mortgage payment delinquency rates, which in turn could have a material adverse effect on our business, financial condition and results of operations.

Our loan and investment portfolios are subject to risk of prepayment, which could have a material adverse effect on us.

Our fixed rate loan and investment portfolios are subject to prepayment risk, which results from the ability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in a declining interest rate environment, prepayment activity increases, which reduces the weighted average lives of our earning assets and could have a material adverse effect on us. We would also be required to amortize net premiums into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income. Prepayment risk also has a significant adverse impact on credit card and collateralized mortgage loans, since prepayments could shorten the weighted average life of these assets, which may result in a mismatch in our funding obligations and reinvestment at lower yields. Prepayment risk is inherent to our commercial activity and an increase in prepayments could have a material adverse effect on us.

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

The value of the collateral securing our loan portfolio may fluctuate or decline due to factors beyond our control, including macroeconomic factors affecting Europe, the United States and Latin American countries. The value of the collateral securing our loan portfolio may be adversely affected by force majeure events, such as natural disasters, particularly in locations where a significant portion of our loan portfolio is composed of real estate loans. Natural disasters such as earthquakes and floods may cause widespread damage which could impair the asset quality of our loan portfolio and could have an adverse impact on the economy of the affected region. We may also not have sufficiently recent information on the value of collateral, which may result in an inaccurate assessment for impairment losses of our loans secured by such collateral. If any of the above were to occur, we may need to make additional provisions to cover actual impairment losses of our loans, which may materially and adversely affect our results of operations and financial condition.

We are subject to counterparty risk in our banking business.

We are exposed to counterparty risk in addition to credit risks associated with lending activities. Counterparty risk may arise from, for example, investing in securities of third parties, entering into derivative contracts under which counterparties have obligations to make payments to us or executing securities, futures, currency or commodity trades from proprietary trading activities that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, clearing houses or other financial intermediaries.

We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, hedge funds and other institutional clients. Defaults by, and even rumors or questions about the solvency of, certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by other institutions. Many of the routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties.

Market Risks

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

Market risk refers to the probability of variations in our net interest income or in the market value of our assets and liabilities due to volatility of interest rate, exchange rate or equity price. Changes in interest rates affect the following areas, among others, of our business:

• net interest income;

• the volume of loans originated;

• the market value of our securities holdings;

• gains from sales of loans and securities; and

• gains and losses from derivatives.

Variations in short-term interest rates could affect our net interest income, which comprises the majority of our revenue, reducing our growth rate and potentially resulting in losses. When interest rates rise, we may be required to pay higher interest on our floating-rate borrowings while interest earned on our fixed-rate assets does not rise as quickly, which could cause profits to grow at a reduced rate or decline in some parts of our portfolio. Interest rates are highly sensitive to many factors beyond our control, including increased regulation of the financial sector, monetary policies, domestic and international economic and political conditions and other factors.

Increases in interest rates may reduce the volume of loans we originate. Sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets. Increases in interest rates may also reduce the propensity of our customers to prepay or refinance fixed-rate loans. Increases in interest rates may reduce the value of our financial assets and may reduce gains or require us to record losses on sales of our loans or securities.

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If interest rates decrease, although this is likely to reduce our funding costs, it is likely to compress our net interest margins, as well as adversely impact our income from investments in securities and loans with similar maturities, which could have a negative effect on us. In addition, we may also experience increased delinquencies in a low interest rate environment when such an environment is accompanied by high unemployment and recessionary conditions.

The market value of a security with a fixed interest rate generally decreases when prevailing interest rates rise, which may have an adverse effect on our earnings and financial condition. In addition, we may incur costs (which, in turn, will impact our results) as we implement strategies to reduce future interest rate exposure. The market value of an obligation with a floating interest rate can be adversely affected when interest rates increase, due to a lag in the implementation of repricing terms or an inability to refinance at lower rates.

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

We are also exposed to equity price risk in connection with our trading investments in equity securities. The performance of financial markets may cause changes in the value of our investment and trading portfolios. The volatility of world equity markets due to the continued economic uncertainty and sovereign debt crisis has had a particularly strong impact on the financial sector. Continued volatility may affect the value of our investments in entities in this sector and, depending on their fair value and future recovery expectations, could become a permanent impairment which would be subject to write-offs against our results. To the extent any of these risks materialize, our net interest income or the market value of our assets and liabilities could be materially adversely affected.

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

In the past six years, financial markets have been subject to significant stress resulting in steep falls in perceived or actual financial asset values, particularly due to volatility in global financial markets and the resulting widening of credit spreads. We have material exposures to securities, loans and other investments that are recorded at fair value and are therefore exposed to potential negative fair value adjustments. Asset valuations in future periods, reflecting then-prevailing market conditions, may result in negative changes in the fair values of our financial assets and these may also translate into increased impairments. In addition, the value ultimately realized by us on disposal may be lower than the current fair value. Any of these factors could require us to record negative fair value adjustments, which may have a material adverse effect on our operating results, financial condition or prospects.

In addition, to the extent that fair values are determined using financial valuation models, such values may be inaccurate or subject to change, as the data used by such models may not be available or may become unavailable due to changes in market conditions, particularly for illiquid assets, and particularly in times of economic instability. In such circumstances, our valuation methodologies require us to make assumptions, judgments and estimates in order to establish fair value, and reliable assumptions are difficult to make and are inherently uncertain and valuation models are complex, making them inherently imperfect predictors of actual results. Any consequential impairments or write-downs could have a material adverse effect on our operating results, financial condition and prospects.

We are subject to market, operational and other related risks associated with our derivative transactions that could have a material adverse effect on us.

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

Market practices and documentation for derivative transactions in the countries where we operate differ from each other. In addition, the execution and performance of these transactions depends on our ability to maintain adequate control and administration systems and to hire and retain qualified personnel. Moreover, our ability to adequately monitor, analyze and report derivative transactions continues to depend, to a great extent, on our information technology systems. This factor further increases the risks associated with these transactions and could have a material adverse effect on us.

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General Business and Industry Risks

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

Market turmoil and economic recession could materially and adversely affect the liquidity, businesses and/or financial conditions of our borrowers, which could in turn increase our non-performing loan ratios, impair our loan and other financial assets and result in decreased demand for borrowings in general. In addition, our customers may further significantly decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds, which would adversely affect our fee and commission income. Any of the conditions described above could have a material adverse effect on our business, financial condition and results of operations.

Changes in our pension liabilities and obligations could have a material adverse effect on us.

We provide retirement benefits for many of our former and current employees through a number of defined benefit pension plans. We calculate the amount of our defined benefit obligations using actuarial techniques and assumptions, including mortality rates, the rate of increase of salaries, discount rates, inflation, the expected rate of return on plan assets, or others. These calculations are based on IFRS and on those other requirements defined by the local supervisors. Given the nature of these obligations, changes in the assumptions that support valuations, including market conditions, can result in actuarial losses which would in turn impact the financial condition of our pension funds. Because pension obligations are generally long term obligations, fluctuations in interest rates have a material impact on the projected costs of our defined benefit obligations and therefore on the amount of pension expense that we accrue.

Any increase in the current size of the deficit in our defined benefit pension plans, due to reduction in the value of the pension fund assets (depending on the performance of financial markets) or an increase in the pension fund liabilities due to changes in mortality assumptions, the rate of increase of salaries, discount rate assumptions, inflation, the expected rate of return on plan assets, or other factors, could result in our having to make increased contributions to reduce or satisfy the deficits which would divert resources from use in other areas of our business and reduce our capital resources. While we can control a number of the above factors, there are some over which we have no or limited control. Increases in our pension liabilities and obligations could have a material adverse effect on our business, financial condition and results of operations.

We depend in part upon dividends and other funds from subsidiaries.

Some of our operations are conducted through our financial services subsidiaries. As a result, our ability to pay dividends, to the extent we decide to do so, depends in part on the ability of our subsidiaries to generate earnings and to pay dividends to us. Payment of dividends, distributions and advances by our subsidiaries will be contingent upon our subsidiaries’ earnings and business considerations and is or may be limited by legal, regulatory and contractual restrictions. Additionally, our right to receive any assets of any of our subsidiaries as an equity holder of such subsidiaries, upon their liquidation or reorganization, will be effectively subordinated to the claims of our subsidiaries’ creditors, including trade creditors.

Increased competition and industry consolidation may adversely affect our results of operations.

We face substantial competition in all parts of our business, including in originating loans and in attracting deposits. The competition in originating loans comes principally from other domestic and foreign banks, mortgage banking companies, consumer finance companies, insurance companies and other lenders and purchasers of loans.

In addition, there has been a trend towards consolidation in the banking industry, which has created larger and stronger banks with which we must now compete. There can be no assurance that this increased competition will not adversely affect our growth prospects, and therefore our operations. We also face competition from non-bank competitors, such as brokerage companies, department stores (for some credit products), leasing and factoring companies, mutual fund and pension fund management companies and insurance companies.

Increasing competition could require that we increase our rates offered on deposits or lower the rates we charge on loans, which could also have a material adverse effect on us, including our profitability. It may also negatively affect our business results and prospects by, among other things, limiting our ability to increase our customer base and expand our operations and increasing competition for investment opportunities.

In addition, if our customer service levels were perceived by the market to be materially below those of our competitor financial institutions, we could lose existing and potential business. If we are not successful in retaining and strengthening customer relationships, we may lose market share, incur losses on some or all of our activities or fail to attract new deposits or retain existing deposits, which could have a material adverse effect on our operating results, financial condition and prospects.

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Our ability to maintain our competitive position depends, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties, and we may not be able to manage various risks we face as we expand our range of products and services that could have a material adverse effect on us.

The success of our operations and our profitability depends, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties. However, we cannot guarantee that our new products and services will be responsive to client demands or successful once they are offered to our clients, or that they will be successful in the future. In addition, our clients’ needs or desires may change over time, and such changes may render our products and services obsolete, outdated or unattractive and we may not be able to develop new products that meet our clients’ changing needs. If we cannot respond in a timely fashion to the changing needs of our clients, we may lose clients, which could in turn materially and adversely affect us.

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

Further, our customers may issue complaints and seek redress if they consider that they have suffered loss from our products and services, for example, as a result of any alleged mis-selling or incorrect application of the terms and conditions of a particular product. This could in turn subject us to risks of potential legal action by our customers and intervention by our regulators. We have in the past experienced losses due to claims of mis-selling in the U.K., Spain and other jurisdictions and may do so in the future. For further detail on our legal and regulatory risk exposures, please see the Risk Factor entitled “We are exposed to risk of loss from legal and regulatory proceedings.”

If we are unable to manage the growth of our operations this could have an adverse impact on our profitability.

We allocate management and planning resources to develop strategic plans for organic growth, and to identify possible acquisitions and disposals and areas for restructuring our businesses. From time to time, we evaluate acquisition and partnership opportunities that we believe offer additional value to our shareholders and are consistent with our business strategy. However, we may not be able to identify suitable acquisition or partnership candidates, and our ability to benefit from any such acquisitions and partnerships will depend in part on our successful integration of those businesses. Any such integration entails significant risks such as unforeseen difficulties in integrating operations and systems and unexpected liabilities or contingencies relating to the acquired businesses, including legal claims. We can give no assurances that our expectations with regards to integration and synergies will materialize. We also cannot provide assurance that we will, in all cases, be able to manage our growth effectively or deliver our strategic growth objectives. Challenges that may result from our strategic growth decisions include our ability to:

• manage efficiently the operations and employees of expanding businesses;

• maintain or grow our existing customer base;

• assess the value, strengths and weaknesses of investment or acquisition candidates;

• finance strategic investments or acquisitions;

• fully integrate strategic investments, or newly-established entities or acquisitions in line with its strategy;

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

• apply our risk management policy effectively to an enlarged group; and

• manage a growing number of entities without over-committing management or losing key personnel.

Any failure to manage growth effectively, including relating to any or all of the above challenges associated with our growth plans, could have a material adverse effect on our operating results, financial condition and prospects.

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

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

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

We rely on third parties for important products and services.

Third party vendors provide key components of our business infrastructure such as loan and deposit servicing systems, internet connections and network access. Third parties can be sources of operational risk to us, including with respect to security breaches affecting such parties. We may be required to take steps to protect the integrity of our operational systems, thereby increasing our operational costs and potentially decreasing customer satisfaction. In addition, any problems caused by these third parties, including as a result of their not providing us their services for any reason, their performing their services poorly, or employee misconduct, could adversely affect our ability to deliver products and services to customers and otherwise to conduct business. Replacing these third party vendors could also entail significant delays and expense.

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

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

Actions by the financial services industry generally or by certain members of, or individuals in, the industry can also affect our reputation. For example, the role played by financial services firms in the financial crisis and the seeming shift toward increasing regulatory supervision and enforcement has caused public perception of us and others in the financial services industry to decline.

We could suffer significant reputational harm if we fail to properly identify and manage potential conflicts of interest. Management of potential conflicts of interest has become increasingly complex as we expand our business activities through more numerous transactions, obligations and interests with and among our clients. The failure to adequately address, or the perceived failure to adequately address, conflicts of interest could affect the willingness of clients to deal with us, or give rise to litigation or enforcement actions against us. Therefore, there can be no assurance that conflicts of interest will not arise in the future that could cause material harm to us.

We engage in transactions with our subsidiaries or affiliates that others may not consider to be on an arm’s-length basis.

We and our affiliates have entered into a number of services agreements pursuant to which we render services, such as administrative, accounting, finance, treasury, legal services and others.

Spanish law provides for several procedures designed to ensure that the transactions entered into with or among our financial subsidiaries and/or affiliates do not deviate from prevailing market conditions for those types of transactions.

We are likely to continue to engage in transactions with our affiliates. Future conflicts of interests between us and any of affiliates, or among our affiliates, may arise, which conflicts are not required to be and may not be resolved in our favor.

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Technology Risks

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

Our ability to remain competitive depends in part on our ability to upgrade our information technology on a timely and cost-effective basis. We must continually make significant investments and improvements in our information technology infrastructure in order to remain competitive. We cannot assure you that in the future we will be able to maintain the level of capital expenditures necessary to support the improvement or upgrading of our information technology infrastructure. Any failure to effectively improve or upgrade our information technology infrastructure and management information systems in a timely manner could have a material adverse effect on us.

Risks relating to data collection, processing and storage systems are inherent in our business.

Our businesses depend on the ability to process a large number of transactions efficiently and accurately, and on our ability to rely on our digital technologies, computer and email services, software and networks, as well as on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. The proper functioning of financial control, accounting or other data collection and processing systems is critical to our businesses and to our ability to compete effectively. Losses can result from inadequate personnel, inadequate or failed internal control processes and systems, or from external events that interrupt normal business operations. We also face the risk that the design of our controls and procedures prove to be inadequate or are circumvented. Although we work with our clients, vendors, service providers, counterparties and other third parties to develop secure transmission capabilities and prevent against cyber-attacks, we routinely exchange personal, confidential and proprietary information by electronic means, and we may be the target of attempted cyber-attacks. If we cannot maintain an effective data collection, management and processing system, we may be materially and adversely affected.

We take protective measures and continuously monitor and develop our systems to protect our technology infrastructure and data from misappropriation or corruption, but our systems, software and networks nevertheless may be vulnerable to unauthorized access, misuse, computer viruses or other malicious code and other events that could have a security impact. An interception, misuse or mishandling of personal, confidential or proprietary information sent to or received from a client, vendor, service provider, counterparty or third party could result in legal liability, regulatory action and reputational harm. There can be no assurance that we will not suffer material losses from operational risk in the future, including relating to cyber-attacks or other such security breaches. Further, as cyber-attacks continue to evolve, we may incur significant costs in its attempt to modify or enhance our protective measures or investigate or remediate any vulnerabilities.

Failure to protect personal information could adversely affect us.

We manage and hold confidential personal information of customers in the conduct of our banking operations. Although we have procedures and controls to safeguard personal information in our possession, unauthorized disclosures could subject us to legal actions and administrative sanctions as well as damages that could materially and adversely affect our operating results, financial condition and prospects.

Foreign Private Issuer and Other Risks

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

Issuers of securities in Spain are required to make public disclosures that are different from, and that may be reported under presentations that are not consistent with, disclosures required in other countries, including the United States. In particular, for regulatory purposes, we currently prepare and will continue to prepare and make available to our shareholders statutory financial statements in accordance with IFRS, which differs from US GAAP in a number of respects. In addition, as a foreign private issuer, we are not subject to the same disclosure requirements in the United States as a domestic U.S. registrant under the Exchange Act, including the requirements to prepare and issue quarterly reports, or the proxy rules applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules under Section 16 of the Exchange Act. Accordingly, the information about us available to you will not be the same as the information available to shareholders of a U.S. company and may be reported in a manner that you are not familiar with.

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

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

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

As a holder of ADSs you will have different shareholders’ rights than in the United States and certain other jurisdictions.

Our corporate affairs are governed by our Bylaws and Spanish corporate law, which may differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States or in certain other jurisdictions outside Spain. Under Spanish corporate law, you may have fewer and less well-defined rights to protect your interests than under the laws of other jurisdictions outside Spain.

Although Spanish corporate law imposes restrictions on insider trading and price manipulation, the form of these regulations and the manner of their enforcement may differ from that in the U.S. securities markets or markets in certain other jurisdictions. In addition, in Spain, self-dealing and the preservation of shareholder interests may be regulated differently, which could potentially disadvantage you as a holder of the shares underlying ADSs.

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

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

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

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

• the depositary may take or be required to take actions under the Deposit Agreement that may have adverse consequences for some ADS holders in their particular circumstances.

Item 4. Information on the Company

A. History and development of the company

Introduction

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

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

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

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The general shareholders’ meeting held on March 22, 2013 approved the merger by absorption of Banco Español de Crédito, S.A. (Banesto) and Banco Banif, S.A.

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

Principal Capital Expenditures and Divestitures

Acquisitions, Dispositions, Reorganizations

Our principal acquisitions and dispositions in 2013, 2012 and 2011 were as follows:

Invitation to tender American Securities for purchase

On March 6, 2013, we announced an invitation to all holders of callable subordinated notes series 22 issued by Santander Issuances, S.A. Unipersonal (the American Securities) to tender such Securities for purchase (the American Invitation). The American Securities are listed in the London Stock Exchange. The total principal amount of the American Securities comprising the American Invitation amounts to approximately US$ 257.5 million.

Banco Santander announced on March 14, 2013 the final aggregate principal amount accepted for purchase (US$ 26.6 million) and the final purchase prices as a consequence of the tender offers.

The invitation was undertaken as a part of the Group’s active management of liabilities and capital, and focused on core capital generation as well as the optimization of the future interest expense.

Invitation to tender European Securities for purchase

On March 6, 2013, we announced an invitation to all holders of certain securities issued by Santander Issuances, S.A. Unipersonal and Santander Perpetual, S.A. Unipersonal (the European Securities) to tender such securities for purchase (the European Invitation). The European Securities are subordinated and perpetual bonds listed in the Luxembourg Stock Exchange, corresponding to 15 different series. The total principal amount of the series comprising the Invitation amounts to approximately €6,575 million and GBP 2,243 million.

Banco Santander announced on March 14, 2013 the final aggregate principal amount accepted for purchase (€140.2 million and GBP 178.9 million) and the final purchase prices as a consequence of the European Invitation.

The European Invitation was undertaken as a part of the Group’s active management of liabilities and capital, and focused on core capital generation as well as the optimization of the future interest expense. The invitation was also designed to provide liquidity in the market and to offer the holders of the European Securities the possibility to exit their investment in the European Securities.

Santander sells 5.2% of its Polish unit as KBC places its 16.2% in the market

On March 18, 2013, KBC Bank NV (“KBC”) and Banco Santander announced a secondary offering of up to 19,978,913 shares in Bank Zachodni WBK S.A. (“BZ WBK”) by way of a fully marketed follow-on offering (the “WBK Offering”). Through the WBK Offering, KBC would sell 15,125,964 shares (constituting 16.17% of BZ WBK shares outstanding at that date) and Santander was expected to sell not less than 195,216 but up to 4,852,949 shares (constituting between 0.21% and 5.19% of BZ WBK shares outstanding at that date).

KBC and Banco Santander, as selling shareholders, granted the underwriters a reverse greenshoe option in relation to up to 10% of the final Offering size which was not used. KBC and Santander each committed to be locked-up for a period of 90 days, and BZ WBK for a period of 180 days, following the closing of the WBK Offering.

The WBK Offering was made to eligible institutional investors and within an indicative price range of PLN240 to PLN270. The final sale price was determined through a bookbuilding process that began on March 18, 2013, and ended on March 21, 2013.

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On March 22, 2013, Banco Santander, S.A. and KBC completed the placement of all the shares owned by KBC and 5.2% of the share capital of Bank Zachodni WBK S.A. held by the Group in the market for €285 million, which gave rise to an increase of €292 million in Non-controlling interests.

Following these transactions, we hold 70% of the share capital of Bank Zachodni WBK S.A. and the remaining 30% is held by non-controlling interests.

Agreement with Warburg Pincus and General Atlantic

On May 30, 2013, we announced that we had entered into an agreement with subsidiaries of Warburg Pincus and General Atlantic to foster the global development of our asset management unit, Santander Asset Management (SAM). Pursuant to the terms and conditions of the agreement, Warburg Pincus and General Atlantic together own 50% of the holding company which comprises the eleven management companies we have, mainly in Europe and Latin America, while the other 50% are held by us.

The purpose of the alliance is to enable SAM to improve its ability to compete with the large independent international asset management companies, since the businesses to be strengthened include asset management in the global institutional market, with the additional advantage of having knowledge and experience in those markets in which we are present. The agreement also envisages the distribution of products managed by SAM in the countries in which we have a commercial network for a period of ten years, renewable for five additional two-year periods, for which we will receive commissions at market rates, thus benefiting from broadening the range of products and services we offer our customers. SAM also distributes its products and services internationally, outside our commercial network.

Since the aforementioned asset management companies belonged to different Group companies, prior to the completion of the transaction a corporate restructuring took place whereby each of the asset management companies was sold, by its shareholders, for its fair value, to SAM Investment Holdings Limited (SAM), a holding company created by us. The aggregate value of the asset management companies was approximately €1.7 billion.

Subsequently, in December 2013, once the required authorizations had been obtained from the various regulators, the agreement was executed through the acquisition of a 50% ownership interest in SAM’s share capital by Sherbrooke Acquisition Corp SPC (an investee of Warburg Pincus and General Atlantic) for €449 million. At that date, SAM had financing from third parties for €845 million. The agreement includes deferred contingent amounts payable and receivable for the Group based on the achievement of the business plan targets over the coming five years.

Also, we entered into a shareholders’ agreement with these shareholders regulating, inter alia, the taking of strategic, financial, operational and other significant decisions regarding the ordinary management of SAM on a joint basis. Certain restrictions on the transferability of the shares were also agreed, and a commitment was made by the two parties to retain the restrictions for at least 18 months. Lastly, Sherbrooke Acquisition Corp SPC will be entitled to sell to the Group its ownership interest in the share capital of SAM at market value on the fifth and seventh anniversaries of the transaction, unless a public offering of SAM shares has taken place prior to those dates.

Following these transactions, at year-end we held a 50% ownership interest in SAM and controlled this company jointly with the aforementioned shareholders.

As a result of the aforementioned transaction, we recognized a gain of €1,372 million in the consolidated income statement for 2013, of which €671 million related to the fair value of the 50% ownership interest retained by us.

Banco Santander (Brasil) optimized its equity structure

On September 29, 2013, we announced that our subsidiary Banco Santander (Brasil) S.A. will optimize its equity structure by replacing common equity (Core Tier I) in an amount of Brazilian Reais 6 billion (amount which will be distributed pro rata among its shareholders) with newly-issued instruments of an equivalent amount qualifying as Additional Tier I and Tier II capital, and which will be offered to Banco Santander (Brasil) S.A.’s shareholders.

In January 2014 we subscribed a percentage of the newly issued instruments in proportion to our shareholding in Banco Santander (Brasil) S.A. (approximately 75%), as well as those not subscribed by the other shareholders of Banco Santander (Brasil) S.A.

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The new structure improves Banco Santander (Brasil) S.A.’s regulatory capital composition, by increasing the return on equity (ROE) while maintaining the total amount of regulatory capital and capital ratios (BIS II ratio of approximately 21.5% and fully loaded BIS III ratio of approximately 18.9%) above the other retail banks in Brazil.

Acquisition of a 51% interest in Financiera El Corte Inglés, E.F.C., S.A.

On October 7, 2013, we announced that Santander Consumer Finance, S.A. (“Santander Consumer”) had reached a strategic agreement with El Corte Inglés, S.A. (“El Corte Inglés”) in consumer finance and client financing which includes the acquisition from El Corte Inglés of a 51% interest in Financiera El Corte Inglés, E.F.C., S.A. (“Financiera El Corte Inglés”). El Corte Inglés will retain the remaining 49%. The transaction was closed in the first quarter of 2014.

Financiera El Corte Inglés is a consumer finance business that provides financing for the acquisition of all sorts of goods and services of the entities of the El Corte Inglés group. The El Corte Inglés group is a leading retailer in Spain and the largest department store business in the country.

The transaction values Financiera El Corte Inglés at €415 million. Prior to closing El Corte Inglés received a special dividend of approximately €140 million. Thus, Santander Consumer paid a price of approximately €140 million for the 51% stake of Financiera El Corte Inglés.

Financiera El Corte Inglés has a seven member Board, of which Santander Consumer has appointed four members and El Corte Inglés the remaining three.

Agreement with Apollo

On November 21, 2013, we announced that we had reached a preliminary agreement with Apollo European Principal Finance Fund II, a fund managed by subsidiaries of Apollo Global Management, LLC (“Apollo”), for the sale of the platform for managing the loan recovery activities of Banco Santander, S.A. in Spain and for managing and marketing the properties relating to this activity.

Following this transaction, we will retain the property assets and credit portfolio on our balance sheet, while management of these assets will be carried out from the platform owned by Apollo.

On January 3, 2014, we announced that we had sold to Altamira Asset Management Holdings, S.L., an investee of Apollo European Principal Finance Fund II, 85% of the share capital of Altamira Asset Management, S.L., our company that manages debt recovery services before the initiation of court action in Spain and the sale or lease of foreclosed property assets relating to this business, for €664 million.

Cooperation agreement with Bank of Shanghai and purchase of an 8% stake

On December 10, 2013 we announced that we reached a cooperation agreement with Bank of Shanghai (“BoS”) to buy an 8% equity stake in BoS. The transaction, which is subject to approval from the China Banking Regulatory Commission, will make Santander the second-largest shareholder in BoS and its strategic international partner. The transaction is expected to be completed in the first half of 2014. The cost of the investment, including the purchase of HSBC Ltd.’s stake and the cooperation agreement with Bank of Shanghai, is estimated at approximately €470 million. The transaction will have an impact of approximately 1 basis point on the Santander Group’s capital.

Under the terms of the agreement, Santander will provide BoS with a permanent team of professionals, who will contribute Santander’s knowledge and experience in risk management and commercial and retail banking. The two will develop joint wholesale banking activities.

Transfer of interest in Banco Santander (Brasil), S.A.

In January and March 2012 the Group transferred shares representing 4.41% and 0.77%, respectively, of the capital stock of Banco Santander (Brasil), S.A. to two leading international financial institutions. These institutions undertook to deliver these shares to the holders of bonds issued by Banco Santander in October 2010 which were exchangeable for Banco Santander (Brasil), S.A. shares upon maturity, in accordance with their terms.

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Santander and KBC agree to merge Bank Zachodni WBK and Kredyt Bank in Poland

On February 28, 2012, we announced that Banco Santander, S.A. and KBC had entered into an investment agreement to combine their Polish banking subsidiaries, BZ WBK and Kredyt Bank S.A. (‘Kredyt Bank’).

The transaction entailed a share capital increase in BZ WBK, where the newly issued shares in BZ WBK were offered and rendered to KBC and the other shareholders of Kredyt Bank in exchange for their shares in Kredyt Bank. Under the agreements BZ WBK would merge with Kredyt Bank at the ratio of 6.96 BZ WBK shares for every 100 Kredyt Bank shares. At market prices as of the date of the announcement, the transaction valued Kredyt Bank at PLN 15.75 a share and BZ WBK at PLN 226.4 a share. The combined bank’s total pro forma value would be PLN 20.8 billion (€5 billion). Both Bank Zachodni WBK and Kredyt Bank were listed on the Warsaw Stock Exchange. The merged bank would continue to be listed on the Warsaw Stock Exchange.

In 2013, following obtainment of the authorization from the Polish financial regulator (KNF), the aforementioned transaction was carried out. As a result, we controlled approximately 75.2% of the post-merger entity and KBC controlled approximately 16.2%, with the remaining 8.6% being owned by non-controlling interests.

Under the investment agreement, Santander also committed to acquire 100% of Zagiel, the consumer finance arm of KBC in Poland. In 2013 Zagiel was integrated into Santander Consumer Finance.

Valores Santander

On March 30, 2012, we informed that the Ordinary General Shareholders’ Meeting held that day had resolved to grant the holders of Valores Santander an option to convert their securities on four occasions before October 4, 2012, the mandatory conversion date for the outstanding Valores Santander. As a result on June 7, 2012, July 5, 2012, August 7, 2012 and September 6, 2012 we issued 73,927,779, 193,095,393, 37,833,193 and 14,333,873 new shares related to the conversion requests of 195,923, 511,769, 98,092 and 37,160 Valores Santander, respectively.

In October 2007, a total of 1,400,000 Valores Santander were issued. On October 2008, 2009, 2010 and 2011, and on June, July, August and September 2012 a total to 880,700 Valores Santander were voluntarily converted. On October 4, 2012, the mandatory conversion of the remaining 519,300 Valores Santander took place, representing 37.1% of the original issuance.

Invitation to tender certain securitization bonds for cash

On April 16, 2012, we announced an invitation to all holders of certain securities (the Securities) to tender such Securities for purchase by Banco Santander for cash (the Invitation). The Securities are fixed rate securities (securitization bonds) listed on the AIAF Fixed Rate Market which correspond to 33 different series issued by specific securitization funds managed by Santander de Titulización, S.G.F.T., S.A. series with an aggregate outstanding principal amount of €6 billion.

The rationale for the Invitation was to effectively manage the Group’s outstanding liabilities and to strengthen our balance sheet. The Invitation was also designed to provide liquidity to Security holders.

On April 25, 2012 we announced the aggregate outstanding principal amount of each of the Securities accepted for purchase, which for senior securities amounted to €388,537,762.18 and for mezzanine securities €61,703,163.58.

Sale of our Colombian unit to the Chilean group Corpbanca

In December 2011, we entered into an agreement with the Chilean group Corpbanca to sell our shareholding in Banco Santander Colombia S.A. and our other business subsidiaries in this country (Santander Investment Valores Colombia S.A., Comisionista de Bolsa Comercial, Santander Investment Colombia S.A., Santander Investment Trust Colombia S.A., Sociedad Fiduciaria y Agencia de Seguros Santander, Ltda.).

Following receipt of the regulatory authorizations from the competent authorities and the delisting of the shares of Banco Santander Colombia S.A., in the second quarter of 2012 we sold our shareholding in Banco Santander Colombia S.A. and our other business subsidiaries in Colombia to the Corpbanca Group for a total of $1,229 million (€983 million), giving rise to a gain of €619 million, which was recognized under Gains/(losses) on disposal of assets not classified as non-current assets held for sale in our 2012 consolidated income statement.

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Agreement with Abbey Life Assurance

On July 19, 2012, we reached an agreement with Abbey Life Assurance Ltd, a subsidiary of Deutsche Bank AG, under which Abbey Life Assurance Ltd reinsured 100% of the individual life risk portfolio of the insurance companies of Banco Santander in Spain and Portugal.

This reinsurance transaction enabled us to monetize our life risk insurance portfolio. This transaction gave rise to income of €435 million recognized under Other operating income - Income from insurance and reinsurance contracts issued in the consolidated income statement (€308 million net of tax).

The policies ceded to Abbey Life Assurance Ltd consist of the portfolio as of June 30, 2012. This reinsurance agreement does not involve any changes for our customers as services will continue to be provided by Santander’s insurance companies. Our branches in Spain and Portugal will continue to offer products designed by our insurance companies as the agreement reached with Abbey Life Assurance Ltd does not involve any commitment on future distribution and is limited to the portfolio existing at June 30, 2012.

Placement of shares of Grupo Financiero Santander, S.A.B. de C.V. on the secondary market

On August 16, 2012, we announced our intention to register with both the Mexican Comisión Nacional de Banca y Valores (National Commission of Banking and Securities) and the U.S. Securities & Exchange Commission the registration statements for the placement of shares of Grupo Financiero Santander, S.A.B. de C.V. on the secondary market. The selling institutions would be Banco Santander, S.A. and its subsidiary Santusa Holding, S.L.

On September 26, 2012, we announced that the price of the offering of shares of Grupo Financiero Santander Mexico was set at 31.25 Mexican pesos ($2.437) per share, valuing Santander Mexico at €12,730 million ($16,538 million), making it the 82^nd largest bank in the world by market capitalization.

The total volume of the offering represented 24.9% of the share capital of Santander Mexico after the exercise of the green shoe option. The value of the transaction was €3,178 million, making it the largest equity offering in Latin America in 2012 and one of the largest in the world.

The gains obtained by Banco Santander in this transaction were fully allocated to reserves, in line with accounting requirements, as Banco Santander will continue to maintain control over its Mexican subsidiary.

Of the total shares sold, 81% were placed in the United States and elsewhere outside Mexico and 19% in Mexico. The American Depositary Shares of Santander Mexico commenced trading on the New York Stock Exchange on September 26, 2012. The shares of Santander Mexico continue to trade on the Mexican Stock Exchange.

The IPO of our unit in Mexico was an important step in our strategy of having market listings for all of our significant subsidiaries.

Invitation to tender offer

On August 22, 2012, the Bank and Santander Financial Exchanges Limited (each an Offeror and, jointly, the Offerors) invited holders of 21 specific series of subordinated debt and preferred securities to sell them to the Offerors. The aggregate principal amount of the securities traded in euros and sterling amounted to €7,201 million and £3,373 million, respectively.

The rationale for the invitation was to effectively manage the Group’s outstanding liabilities and to strengthen our balance sheet. The invitation was also designed to provide liquidity to security holders.

On August 31, 2012, the Offerors announced that the holders had accepted to sell an aggregate principal amount of €755 million for the securities traded in euros and £311 million for the securities traded in sterling.

Termination of the agreement to purchase Royal Bank of Scotland branch offices

On October 15, 2012, we announced that the agreement for the sale by The Royal Bank of Scotland (“RBS”) to Santander UK of approximately 300 branches of RBS in England and Wales and NatWest in Scotland (the “Business”) would not be completed in view of the foreseeable lack of satisfaction of the conditions precedent by the agreed final deadline of February 2013.

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Santander and Elavon agreement

On October 19, 2012, we announced that we had reached an agreement with Elavon Financial Services Limited (“Elavon”) to jointly operate in Spain a payment services business for credit and debit cards through merchants’ point of sale terminals.

The transaction involves the incorporation of a joint venture company whose share capital will be held 51% by Elavon and 49% by the Bank, and to which Santander Group will transfer its aforementioned payment services business in Spain (excluding that of Banesto).

The agreement valued the transferred business at €165.8 million and generated a capital gain of approximately €87 million after tax.

As of March 31, 2013, all the necessary authorizations had been obtained. The transaction was closed in April 2013.

Mergers by absorption of Banesto and Banco Banif

On December 17, 2012, we announced that we had resolved to approve the plan for the merger by absorption of Banesto and Banco Banif, S.A. as part of the restructuring of the Spanish financial sector. These transactions are part of a commercial integration which brought Banesto and Banif under the Santander brand.

At their respective board of directors meetings held on January 9, 2013, the directors of the Bank and Banesto approved the common draft terms of the merger by absorption of Banesto into the Bank with the dissolution without liquidation of the former and the transfer en bloc of all its assets and liabilities to the Bank, which were acquired, by universal succession, the rights and obligations of the absorbed entity. As a result of the merger, the shareholders of Banesto, other than the Bank, received in exchange shares of the Bank.

January 1, 2013 was established as the date from which the transactions of Banesto shall be considered to have been performed for accounting purposes for the account of the Bank.

On March 22, 2013 and March 21, 2013, the general shareholders meetings of the Bank and Banesto, respectively, approved the terms of the merger.

On April 29, 2013, pursuant to the provisions of the terms of the merger and to the resolutions of the general shareholders’ meetings of both companies, the regime and procedure for the exchange of Banesto shares for shares of Banco Santander was made public. Banco Santander covered the exchange of Banesto shares with shares held as treasury stock based on the exchange ratio of 0.633 shares of Banco Santander, each with a nominal value of €0.50, for each share of Banesto, each with a nominal value of €0.79, without provision for any supplemental cash remuneration.

On May 3, 2013, the merger was registered with the Commercial Registry of Cantabria and the dissolution of Banesto was completed.

The directors of Banco Banif, S.A., at its board of directors meeting held on January 28, 2013, and the directors of Banco Santander, S.A., at its board of directors meeting held on that same day, approved the common drafts terms of the merger by absorption of Banco Banif, S.A. into Banco Santander, S.A. with the dissolution without liquidation of the former and the transfer en bloc of all its assets and liabilities to Banco Santander, S.A., which acquired, by universal succession, the rights and obligations of the absorbed entity.

January 1, 2013 was established as the date from which the transactions of Banif shall be considered to have been performed for accounting purposes for the account of the Bank.

On May 7, 2013, the merger was registered with the Commercial Registry of Cantabria and the dissolution of Banco Banif, S.A. was completed.

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Insurance business in Spain

On December 20, 2012, we announced that we had reached an agreement with Aegon. In this regard, we created two insurance companies, one for life insurance and the other for general insurance, in which Aegon would acquire ownership interests of 51%, and management responsibility would be shared by Aegon and the Group. We would hold 49% of the share capital of the companies and we would enter into a distribution agreement for the sale of insurance products in Spain through the commercial networks for a period of 25 years. The agreement would not affect savings, health and vehicle insurance, which would continue to be owned and managed by Santander.

In June 2013, after obtaining the relevant authorizations from the Directorate-General of Insurance and Pension Funds and from the European competition authorities, Aegon acquired a 51% ownership interest in the two insurance companies created by the Group for these purposes, one for life insurance and the other for general insurance (currently Aegon Santander Vida Seguros y Reaseguros, S.A. and Aegon Santander Generales Seguros y Reaseguros, S.A.), for which it paid €220 million, thereby gaining joint control together with the Group over the aforementioned companies. The agreement also includes payments to Aegon that are deferred over two years and amounts receivable for the Group that are deferred over five years, depending on the business plan.

The aforementioned agreement includes the execution of a distribution agreement for the sale of insurance products in Spain for 25 years through commercial networks, for which the Group will receive commissions at market rates.

This transaction gave rise to a gain of €385 million recognized under Gains (losses) on disposal of assets not classified as non-current assets held for sale (€270 million net of tax), of which €186 million related to the fair value recognition of the 49% ownership interest retained by the Group.

Acquisition of the Polish institution Bank Zachodni WBK

On September 10, 2010, we announced that we had reached an agreement with Allied Irish Banks (“AIB”) to acquire 70.36% of the Polish institution Bank Zachodni WBK (“BZ WBK”) for an amount of approximately €2.938 billion in cash. On February 7, 2011, we announced that we had launched a tender offer in Poland (the “Tender Offer”) for 100% of the share capital of BZ WBK in accordance with applicable Polish law and regulation. The Tender Offer forms part of the agreement of Banco Santander with AIB for the acquisition of AIB’s stake in BZ WBK announced in September 10, 2010.

Under the Tender Offer, Banco Santander offered PLN 226.89 in cash per share (approximately €58.74) resulting in a total maximum consideration of PLN 16,580,216,589.57 (approximately €4,293.4 million) for the total share capital of BZ WBK.

The Tender Offer was made in Poland subject to Polish law and subject to the terms and conditions included in the Tender Offer document (dokument wezwania) submitted to the Polish securities regulator - Polish Financial Supervision Commission (Komisja Nadzoru Finansowego) and the Warsaw Stock Exchange (Giełda Papierów Wartościowych w Warszawie S.A.). The consummation of the Tender Offer was subject to the satisfaction of the conditions indicated in the Tender Offer document, including the acceptance of the tender offer by holders of more than 70% of the outstanding shares of BZ WBK and the approval by the Polish regulatory authorities of the acquisition by Grupo Santander of BZ WBK.

The acceptance period of the tender offer commenced on February 24, 2011 and ended on March 25, 2011.

69,912,653 BZ WBK shares were tendered, representing 95.67% of BZ WBK’s capital. Since the Tender Offer was made at a cash price of PLN 226.89 per share (approximately €57.05), the purchase of the shares tendered in the offer resulted in a payment of PLN 15,862.48 million (approximately €3,987 million).

Since the 70% acceptance threshold (which was a condition of the Tender Offer) was exceeded and all the remaining conditions, including the obtaining of the appropriate regulatory authorizations, were met, the tender offer was settled and the transfer of the shares was made on April 1, 2011.

Additionally, on April 1, 2011, we acquired AIB’s 50% stake in BZ WBK Asset Management for €174 million in cash. Subsequently, based on the terms and conditions of the takeover bid, certain non-controlling shareholders of BZ WBK opted to sell their shares. As a result, the Group acquired 421,859 additional shares for €24 million.

Finally, in May and June 2011, we acquired and aggregate of 113,336 additional BZ WBK shares. As of December 31, 2011, the Group held a total of 70,334,512 shares of Bank Zachodni WBK S.A. (96.25%).

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Sales of 1.9% and 7.8% of Banco Santander Chile

On February 17, 2011, we announced that we had sold shares representing 1.9% of the share capital of Banco Santander Chile, for a total consideration of US$291 million. This transaction generated a capital gain for Banco Santander of approximately €110 million, entirely accounted for as reserves. Following the transaction, we held a 75% stake in the share capital of Banco Santander Chile.

On November 22, 2011, we announced the launch of a public secondary offering of approximately 14,741.6 million shares of common stock of Banco Santander Chile, representing 7.8% of the company’s share capital.

On December 7, 2011, we announced that we had successfully completed the offering. As a result, 7.82% of the capital of such bank was sold at a price of 33 Chilean pesos per share and US$66.88 per ADR. The placement amounted to US$950 million, with a positive impact on the core capital of the Group of 11 basis points. Following the transaction, we held 67% of the share capital of Banco Santander Chile.

Agreement with Zurich Financial Services Group

On February 22, 2011, we signed a Memorandum of Understanding with insurer Zurich Financial Services Group (“Zurich”) to form a strategic alliance to strengthen insurance distribution in five key Latin American markets: Brazil, Chile, Mexico, Argentina and Uruguay.

Once the required authorizations from the various regulators were obtained, in the fourth quarter of 2011 Zurich acquired, for €1,044 million 51% of the share capital of ZS Insurance América, S.L. (holding company for the Group’s insurance businesses in Latin America), thereby gaining control over this company, and it has taken over management of the companies concerned. The agreement also provides for deferred payments based on the achievement of the business plan targets over the coming 25 years.

Following this transaction Santander retained 49% of the share capital of the holding company and entered into a distribution agreement for the sale of insurance products in each of the relevant countries for 25 years.

As a result of the aforementioned transaction, the Group recognized a gain of €641 million (net of the related tax effect) under Gains (losses) on disposal of assets not classified as non-current assets held for sale in the consolidated income statement for 2011, of which €233 million related to the measurement at fair value of the 49% ownership interest retained in this company.

Santander Banif Inmobiliario

On December 3, 2010, exclusively for commercial reasons, we decided to contribute resources to the Santander Banif Inmobiliario, FII property investment fund (the “Fund”) through the subscription of new units and the granting of a two-year liquidity guarantee in order to meet any outstanding redemption claims by the unit holders of the Fund and to avoid winding up the Fund. We offered the unit holders of the Fund the opportunity to submit new requests for the total or partial redemption of their units or for the total or partial revocation of any redemption requests that they had previously submitted. Any such requests were required to be submitted before February 16, 2011.

Redemptions from the Fund, managed by Santander Real Estate, S.G.I.I.C. S.A., had been suspended for a period of two years in February 2009, in accordance with the request filed with the Spanish National Securities Market Commission (CNMV), due to the lack of sufficient liquidity to meet the redemptions requested at that date.

On March 1, 2011, we paid the full amount of the redemptions requested by the Fund’s unit holders, which amounted to €2,326 million (93.01% of the Fund’s net assets), through the subscription of the related units by us at their redemption value at February 28, 2011.

Following the aforementioned acquisition, we owned 95.54% of the Fund. The suspension of redemptions was lifted from said date and the Fund is operating normally.

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Metrovacesa, S.A. (“Metrovacesa”)

On March 17, 2011, Banco de Sabadell, S.A., Caja de Ahorros y Monte de Piedad de Madrid (now Bankia, S.A.), Banco Bilbao Vizcaya Argentaria, S.A., Banco Popular Español, S.A., Banco Santander, S.A. and Banco Español de Crédito, S.A., holders in aggregate of shares representing 65.52% of Metrovacesa’s share capital (of which a 23.63% stake was held by the Group), entered into a capitalization and voting agreement relating to Metrovacesa (which was subject to certain conditions precedent, including the implementation by Metrovacesa of a capital increase through cash contributions and the conversion of debt into equity referred to below) whereby said credit entities collectively undertook to capitalize approximately €1,360 million credits to Metrovacesa, the Group’s share of which was €492 million.

On June 28, 2011, Metrovacesa’s shareholders approved the aforementioned capital increase for a par value of €1,949 million, subject to certain conditions precedent including the CNMV releasing the Group from the obligation to launch a mandatory takeover bid for the entire share capital of Metrovacesa as a result of the increase of the Group’s holding in the share capital of Metrovacesa above 30% of the company’s voting rights. This release was granted by the CNMV on July 6, 2011. On August 1, 2011, and following the execution of the abovementioned capital increase of Metrovacesa, Banco Santander, S.A. and the individuals and legal entities whose voting rights are attributed to the Bank pursuant to the assumptions provided in article 5 of Royal Decree 1066/2007, of July 27, governing the legal framework for public take-over bids of securities, held 344,530,740 shares in Metrovacesa, representing 34.88% of the company’s voting rights.

On December 19, 2012, the creditor entities that took part in the aforementioned debt restructuring agreement announced that they had reached an agreement to promote the delisting of the shares of Metrovacesa, S.A. and they voted in favor of this at the general meeting held for this purpose on January 29, 2013. Following the approval of the delisting and the public takeover offer by the shareholders at the Metrovacesa, S.A. general meeting, the entities prepared a delisting public takeover offer aimed at the Metrovacesa, S.A. shareholders that did not enter into the agreement, at €2.28 per share. Our share of the delisting public takeover offer was 45.56% and, as a result, following 97.29% acceptance of the public takeover offer, we acquired an additional 1.953% of Metrovacesa, S.A. for which we paid €44 million. Following this transaction, at December 31, 2013, we held an ownership interest of 36.82% in the share capital of Metrovacesa, S.A.

New partners for Santander Consumer USA

On October 21, 2011 we announced that Santander Holdings USA, Inc. (“SHUSA”) and Santander Consumer USA Inc. (“SCUSA”), a majority-owned subsidiary of SHUSA, entered into an investment agreement with Sponsor Auto Finance Holdings Series LP, a Delaware limited partnership (“Auto Finance Holdings”). Auto Finance Holdings is jointly owned by investment funds affiliated with each of Warburg Pincus LLC, Kohlberg Kravis Roberts & Co. L.P. and Centerbridge Partners L.P. (collectively, the “New Investors”), as well as DFS Sponsor Investments LLC, a Delaware limited liability company affiliated with Thomas G. Dundon, the Chief Executive Officer of SCUSA and a Director of SHUSA, and Jason Kulas, Chief Financial Officer of SCUSA. As previously reported on October 20, 2011, SCUSA also entered into an investment agreement with DDFS LLC (“DDFS”), a Delaware limited liability company affiliated with Thomas G. Dundon.

On December 31, 2011, Auto Finance Holdings and DDFS completed their investments in SCUSA. SCUSA increased its share capital on that date through the issuance of shares to Auto Finance Holdings for an aggregate consideration of $1.0 billion and to DDFS for an aggregate consideration of $158.2 million.

The transaction valued SCUSA at $4 billion. Upon its completion, Banco Santander, S.A. realized a capital gain of €872 million under Gains (losses) on disposal of assets not classified as non-current assets held for sale, of which €649 million related to the measurement at fair value of the 65% ownership interest retained in SCUSA. The fair value of SCUSA was determined using comparable market data, recent transactions and discounted cash flow analyses, taking into account contingent payments.

As a result of these transactions, SHUSA, the New Investors (indirectly through Auto Finance Holdings) and Mr. Dundon (indirectly through DDFS and DFS Sponsor Investments LLC) owned approximately 65%, 24% and 11% of the common stock of SCUSA, respectively. Also on December 31, 2011, SHUSA, SCUSA, Auto Finance Holdings, DDFS, Thomas G. Dundon and Banco Santander, S.A. entered into a shareholders’ agreement (the “Shareholders’ Agreement”). The Shareholders’ Agreement provides each of SHUSA, DDFS and Auto Finance Holdings with certain board representation, governance, registration and other rights with respect to their ownership interests in SCUSA. Subject to the terms and conditions of the Shareholders’ Agreement, SHUSA, Auto Finance Holdings and DDFS jointly manage SCUSA and share control over it.

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Pursuant to the Shareholders’ Agreement, depending on SCUSA’s performance during 2014 and 2015, if SCUSA exceeds certain performance targets, SCUSA may be required to pay up to $595.0 million in favor of SHUSA. If SCUSA does not meet such performance targets during 2014 and 2015, SCUSA may be required to make a payment to Auto Finance Holdings of up to the same amount.

The Shareholders’ Agreement also provides that each of Auto Finance Holdings and DDFS will have the right to sell, and SHUSA will be required to purchase, their respective shares of SCUSA common stock, at its then fair market value, and Auto Finance Holdings and DDFS, if applicable, will receive the payment referred to above at that time (i) at the fourth, fifth and seventh anniversaries of the closing of the investments, unless an initial public offering of SCUSA common stock has been previously consummated or (ii) in the event there is a deadlock with respect to certain specified matters which require the approval of the board of directors or shareholders of SCUSA. See “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Recent events — Santander Consumer USA successfully completed its initial public offering”

Offer to exchange subordinated debt instruments for non-subordinated debt instruments

On November 15, 2011, we announced an offer (“the Offer”) to holders of certain securities (the “Existing Securities”), to exchange Existing Securities for new securities to be issued (the “New Securities”).

The Existing Securities constituted eight series of subordinated debt instruments issued by Santander Issuances, S.A.U., which are listed on the Luxembourg Stock Exchange.

The New Securities are senior debt instruments denominated in pounds sterling and euros with a maturity date of December 1, 2015. The New Securities trade on the Luxembourg Stock Exchange.

We used funds pursuant to the Offer from our ordinary available liquidity to comply with our payment obligations pursuant to the Offer.

The Offer allows managing more effectively the Group’s outstanding liabilities, taking into consideration prevailing market conditions.

The final nominal amount and interest rate of the New Securities are set forth below:

• €1,116,200,000 3.381% senior notes due December 1, 2015.

• GBP 189,800,000 3.160% senior notes due December 1, 2015.

The Offer generated gross capital gains of approximately €144 million, included in the 2011 accounts.

Offer to repurchase preferred securities and subscribe Banco Santander shares

On December 2, 2011, we announced an offer (the “Repurchase Offer”) to repurchase Series X Preferred Securities issued by Santander Finance Capital, S.A.U. in June 2009 and guaranteed by the Bank (the “Series X Preferred Securities”) and a simultaneous public offer to subscribe for newly-issued shares of Banco Santander (the “New Shares”), on the terms set out below. We refer to the Repurchase Offer and the issuance of New Shares as the “Capital Increase.”

In order to participate in the Repurchase Offer, holders of Series X Preferred Securities were required to irrevocably subscribe the number of New Shares which corresponded to the repurchase price of their Series X Preferred Securities. The New Shares were offered solely to the abovementioned holders of Series X Preferred Securities who accepted the Repurchase Offer.

The issue price of the New Shares (nominal plus premium) equaled the arithmetic mean of the average weighted prices of Banco Santander shares on the Spanish stock exchanges during the Acceptance Period. Consequently, the number of New Shares to be subscribed by each holder of Series X Preferred Securities who accepted the Repurchase Offer was the result of dividing the nominal value of the preferred securities (€25.00) by the issue price of the New Shares.

On December 28, 2011, we announced that during the acceptance period, the holders of 77,743,969 preferred securities, representing 98.88% of the preference shares outstanding, had accepted the repurchase offer.

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The holders of these preferred securities subscribed 341,802,171 shares under the Capital Increase. Consequently, the total amount (nominal plus premium) subscribed was €1,943,599,225, and the nominal value of the Capital Increase was €170,901,085.50. The New Shares represented 3.84% of the share capital of Banco Santander following the Capital Increase.

On December 30, 2011, Banco Santander acquired the Series X Preferred Securities and the new shares subscribed by the holders of those preferred securities were paid up.

The new shareholders were, as of December 30, 2011, entitled to all of the rights pertaining to the shares of Banco Santander and, in particular, have the right to participate in the Santander Dividendo Elección program.

The Capital Increase resulted in a raise in core capital of 34 basis points.

Capital requirements

On December 8, 2011, the European Banking Authority (“EBA”) published aggregate figures relating to capital requirements of a temporary and extraordinary nature applicable to financial institutions, calculated on the basis of data as of September 30, 2011.

According to the updated calculations, the additional capital required for Grupo Santander amounted to €15,302 million versus the €14,971 million published by the EBA on October 26, 2011, which was based on estimated figures for September 30, 2011. This amount was reached as follows: (i) €6,829 million of Valores Santander, which have to be converted into shares before October 2012; (ii) €1,943 million through the exchange of preferred shares for ordinary new shares; (iii) €1,660 million through the application of the Santander Dividendo Elección program (scrip dividend) at the time of the final dividend corresponding to fiscal year 2011; and (iv) €4,890 million through organic capital generation and the transfer of certain stakes, mainly in Chile and Brazil.

Capital Increases

As of December 31, 2011, our capital had increased by 579,921,105 shares, or 6.96% of our total capital as of December 31, 2010, to 8,909,043,203 shares as a result of the following transactions:

• Valores Santander: On October 6, 2011, 1,223,457 new shares were issued in exchange for 3,458 Valores Santander.

• Scrip Dividend: On February 1, 2011, we issued 111,152,906 ordinary shares par value €0.5 in the free-of-charge capital increase, corresponding to 1.33% of our share capital. The amount of the capital increase was €55,576,453. Additionally, on November 2, 2011, the Bank issued 125,742,571 ordinary shares par value €0.5 in the free-of-charge capital increase, corresponding to 1.49% of our share capital. The amount of the capital increase was €62,871,285.50.

• Repurchase of Series X Preferred Securities and subscription of Banco Santander shares: On December 28, 2011, we announced that the holders of 77,743,969 preference shares had accepted the Repurchase Offer. On December 30, 2011, the holders of these preference shares subscribed 341,802,171 shares. Consequently, the total amount (nominal plus premium) subscribed was €1,944 million and the nominal value was €170.9 million. The New Shares represent 3.84% of our share capital after the Capital Increase.

As of December 31, 2012, our capital had increased by 1,412,136,547 shares, or 15.85% of our total capital as of December 31, 2011, to 10,321,179,750 shares as a result of the following transactions:

• Valores Santander: On March 30, 2012, we informed that the Ordinary General Shareholders’ Meeting held that day had resolved to grant the holders of Valores Santander an option to convert their securities on four occasions before October 4, 2012, the mandatory conversion date for the outstanding Valores Santander. As a result on June 7, 2012, July 5, 2012, August 7, 2012, September 6, 2012 and October 9, 2012 we issued 73,927,779, 193,095,393, 37,833,193, 14,333,873 and 200,311,513 new shares related to the conversion requests of 195,923, 511,769, 98,092, 37,160 and 519,300 Valores Santander, respectively.

• Scrip Dividend: On January 31, 2012, May 2, 2012, July 30, 2012 and November 2, 2012, we issued 167,810,197 shares, 284,326,000 shares, 218,391,102 shares and 222,107,497 shares (1.88%, 3.13%, 2.27%, and 2.20% of the share capital, respectively), giving rise to capital increases of €83,905,098.50, €142,163,000, €109,195,551 and €111,053,748.50, respectively.

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As of December 31, 2013, our capital had increased by 1,012,240,738 shares, or 9.81% of our total capital as of December 31, 2012, to 11,333,420,488 shares as a result of the following transactions:

• Scrip Dividend: On January 30, 2013, April 30, 2013, July 31, 2013 and October 31, 2013, we issued 217,503,395 shares, 270,917,436 shares, 282,509,392 shares and 241,310,515 shares (2.06%, 2.51%, 2.55%, and 2.13% of the share capital, respectively), giving rise to capital increases of €108,751,697.50, €135,458,718, €141,254,696 and €120,655,257.50, respectively.

Other Material Events

Royal Decree-Law 2/2012 and Royal Decree-Law 18/2012

In 2012, the Spanish Government implemented a series of structural reforms including measures aimed at cleaning up the balance sheets of Spanish credit institutions affected by the impairment of their assets relating to the real estate sector.

Among the main actions carried out were the approval on February 3, 2012 of Royal Decree-Law 2/2012 and on May 18, 2012 of Royal Decree-Law 18/2012 on the clean-up of the financial sector, through which a review of the minimum provisioning percentages to be taken into consideration in the estimation of the impairment losses relating to financing granted to the real estate sector in Spain and to the foreclosed assets and assets received in payment of debt arising from financing granted to that sector was carried out. Spanish credit institutions were required to comply with the provisions of these regulations by December 31, 2012.

These requirements gave rise to new provisions in addition to those arising from the application of the minimum percentages established hitherto by the Bank of Spain amounting to approximately €6.8 billion, of which €1.8 billion were covered in 2011 as a result of the estimate of the impairment losses on the aforementioned assets and the recognition of the corresponding provisions. At the end of 2012, the Group had fully covered all the required provisions.

With respect to the recognition of the impact of those Royal Decree-Laws on our IFRS-IASB consolidated financial statements for 2012, we continued to apply our procedure with regard to Spanish regulatory requirements related to the loan provision and to the valuation of foreclosed assets, i.e. we compared the amount of the provisions for loans and foreclosed assets to be recognized at year end calculated pursuant to IFRSs (obtained from internal models for credit loss provisions and from external valuations and other evidence for foreclosed assets and assets received in payment of loans) with the amount of the provisions required by the Spanish regulatory requirements including Royal Decree-Laws in order to ascertain whether the difference between the two amounts was not material in relation to our consolidated financial statements as a whole and, accordingly, did not require any adjustment to be made for the preparation of the consolidated financial statements under IFRS-IASB.

The difference between loan loss provisions and provisions for foreclosed assets calculated using internal models and external valuations and those calculated under Spanish regulatory requirements was not material as of December 31, 2012.

Financial assistance to recapitalize the Spanish Banking Sector

1. Assessment of balance sheets

In 2012, in order to strengthen the credibility and confidence of the banks, an expert and independent assessment was conducted on all loans granted to the private resident sector, both to households (including mortgages) as well as to SMEs and all other non-financial companies.

This exercise was carried out on the 14 largest banks (90% of assets), and in two phases.

• First phase. A top-down analysis by the consultancies Oliver Wyman and Roland Berger assessed the whole sector’s capacity of resistance in 2012-14 under two scenarios in order to determine the systemwide capital needs. In an extremely adverse scenario, which is defined as being highly unlikely (less than 1% probability) and is tougher than any of the other stress tests carried out in Europe so far, the results showed that, in the worst case, capital requirements would range from €51 billion to €62 billion.

• Second phase. A bottom-up analysis. This consisted of analyzing one by one the portfolios of these banks in order to classify provision and measure their credit risks. The results of these audits were used to construct a wider exercise in which, on the basis of the specific data of each bank and applying a stress test, the individual capital needs were calculated under a baseline and an adverse scenario.

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The second phase was carried out by Oliver Wyman with the participation of the four main auditing firms in Spain (Deloitte, PwC, Ernst & Young and KPMG), six Spanish and international real estate assessment companies and a project manager, the Boston Consulting Group, which helped the Bank of Spain coordinate the exercise.

The adverse scenario (probability of less than 1%) was based on a 6.5% shrinkage in GDP between 2012 and 2014, a further rise in unemployment (to 27.2% in 2014) and a big fall in real estate prices.

The non-payment probability was multiplied by three in the case of the portfolios of companies and real estate developers (27% and 87%, respectively). In mortgages to individual borrowers, it was multiplied by five, to 15%, and in foreclosures an expected loss of 64% was considered.

The results of the bottom-up analysis for the banking system, for a three year period (2012-2014) were total systemwide losses on the credit portfolio (operations in Spain) of €270 billion in the adverse scenario (€183.3 billion in the baseline).

In comparing these losses with the system’s absorption capacity (provisions already made, pre-provision profit, the impact of the protection frameworks, the excess of capital versus the capital required in the adverse scenario), the system’s additional capital needs were estimated to amount to €57.3 billion in the adverse scenario (€53.7 billion after the tax effect) and €24 billion in the baseline scenario (€25.9 billion after the tax effect).

The main results from the analysis were the following:

• Seven banking groups, which accounted for 62% of the credit portfolio analyzed had no capital needs (Group 0). Among those banks is Grupo Santander.

• The four groups in which the FROB (Fund for the Orderly Restructuring of the Banking Sector) had a holding (Group 1) accounted for 86% of the sector’s capital needs.

• The rest of banks with capital needs, after presenting their recapitalization plans, formed Group 2 if they needed state aid and Group 3 if they obtained the funds by themselves.

In the adverse scenario, it was estimated that Banco Santander would be able to raise its capital ratio (from 9.7% to 10.8%) and to have a significant capital surplus (€25.3 billion in 2014).

2. Loan request to European authorities.

On June 9, 2012, the Spanish Government announced that it intended to request a special loan from the European authorities that would be used exclusively to recapitalize the more vulnerable Spanish financial institutions, most of which were former savings banks.

The financial assistance was formally requested on June 25, 2012 and approved on July 20, 2012. The basic conditions are as follows:

• Financial conditions: €100 billion credit line to the FROB with the guarantee of the Spanish state, an average maturity of 12.5 years, in preferential conditions and without having preference status over other debts.

• Other conditions: (i) individual assistance for banks that require recapitalization with public funds, that have a restructuring plan within the state’s rules and that segregate their problematic assets; (ii) for each single entity the minimum core capital ratio is 9%.

3. Creation of the Spanish Bank Restructuring Asset Management Company (“Sareb”).

The creation of Sareb is intended to increase confidence in the Spanish banking system, which could lead to a lower cost of funding and better ratings.

Its objective is to manage and sell in an orderly way the loans and real estate assets placed in it from banks in Groups 1 and 2 over no more than 15 years.

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In December 2012 we, together with other Spanish financial institutions, entered into an agreement to invest in Sareb whereby we undertook to invest of up to €840 million (25% in capital and 75% in subordinated debt), and at December 31, 2012, we had purchased €164 million of capital and €490 million of subordinated debt. Our equity stake is around 17% with two representatives on the board of directors.

In February 2013, following the review of the own funds that Sareb required, the aforementioned undertaking was reduced to €806 million, and the Group disbursed the remaining €44 million of capital and €108 million of subordinated debt.

4. Recapitalization and restructuring of the banks that needed state aid.

Following the review and approval of the recapitalization and restructuring plans of banks in need of capital (according to the Oliver Wyman report) by the Spanish and European authorities, the state aid that would be provided to each bank was determined. No state aid was determined to be necessary for Grupo Santander.

The capital to be injected by FROB into Group 1 banks amounted to €36,968 million. In December 2012, this amount was transferred from the European Stability Mechanism to FROB, together with €2.5 billion for FROB’s contribution to Sareb, which recapitalized these banks before the end of the year.

In the case of the four banks that comprise Group 2, FROB injected €1,865 million of capital. Two banks (in Group 3) in need of capital but which showed a capacity to cover their needs themselves did not receive state aid.

The total state aid for banks in need was €38,833 million, significantly below the €54 billion identified by Oliver Wyman for these banks. This lower amount was due to the losses assumed by hybrid instruments, the transfer of assets to Sareb and capital gains realized by the relevant banks.

The recapitalization of the financial sector enabled banks in need of capital to meet their targeted capital ratios.

In addition, and according to the aforementioned Memorandum of Understanding, a profound restructuring was underway in the eight banks receiving state aid, which must reduce their balance sheets before 2017.

The European Commission believes that these business reduction plans, which involve closures of branches and shedding of employees, strengthen the long-term viability of all these banks.

Recent Events

Scrip dividends

At its meeting of January 13, 2014, the Bank’s executive committee resolved to apply the Santander Dividendo Elección scrip dividend scheme on the dates on which the third interim dividend is traditionally paid, whereby the shareholders were offered the option of receiving an amount equivalent to said dividend, the gross amount of which was €0.152 per share, in shares or cash.

On January 30, 2014 we announced that the holders of 86.37% of the free allotment rights chose to receive new shares. Thus, the definitive number of ordinary shares of €0.5 of face value issued in the free-of charge capital increase was 227,646,659, corresponding to 2.01% of the share capital, and the amount of the capital increase was €113,823,329.50. The value of the remuneration corresponding to the holders of free allotment rights who have requested new shares amounts to €1,487,898,563.22. The shareholders holding the remaining 13.63% of the free allotment rights accepted the irrevocable undertaking to acquire free allotment rights assumed by Banco Santander. Consequently, Banco Santander acquired 1,544,614,122 rights for a total gross consideration of €234,781,346.54. Banco Santander waived the free allotment rights so acquired.

On April 10, 2014 we announced the information in connection with the flexible remuneration program Santander Dividendo Elección (scrip dividend scheme) to be applied to the final 2013 dividend. The shareholders were offered the option of receiving an amount equivalent to said dividend, the gross amount of which was €0.149 per share, in shares or cash.

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Santander Consumer USA successfully completed its initial public offering

On January 23, 2014, the public offering of shares of Santander Consumer USA Holdings Inc. (SCUSA) was completed and SCUSA’s shares were admitted to trading on the New York Stock Exchange. The placement represented 21.6% of SCUSA’s share capital, of which 4% related to the holding sold by the Group. Following this sale, we hold 60.7% of the share capital of SCUSA. Both Sponsor Auto Finance Holdings Series LP (Sponsor Holdings) -an investee of funds controlled by Warburg Pincus LLC, Kohlberg Kravis Roberts & Co. L.P. and Centerbridge Partners L.P.- and DDFS LLC (DDFS) - a company controlled by Thomas G. Dundon, the Chief Executive Officer of SCUSA- also reduced their holdings.

Since the ownership interests of the former shareholders were reduced to below certain percentages, the prevailing shareholder agreement was terminated, pursuant to the terms and conditions established in said agreement. This termination has included, inter alia, the cancellation of the contingent payment to be made by SCUSA on the basis of its results in 2014 and 2015. It has also entailed the termination of the agreements whereby, SCUSA was controlled jointly by all the above and, as a result, it has begun to be controlled by us on the basis of the percentage held in its share capital.

Issuance of contingent perpetual preferred convertible securities

On March 5, 2014, we announced that the Executive Committee had resolved to carry out an issue of contingent perpetual preferred securities convertible into newly issued ordinary shares of the Bank (“PCCS”), excluding pre-emptive subscription rights and for a nominal value of up to €1.5 billion (the “Issue”). The Issue was carried out through an accelerated bookbuilding process and was targeted only at qualified investors.

The PCCS were issued at par and the interest thereon, the payment of which is subject to certain conditions and is at the discretion of the Bank, was set at 6.25% per annum for the first five years. After that, it will be reviewed by applying a margin of 541 basis points on the five-year Mid-Swap Rate.

On March 25, 2014, Bank of Spain qualified the PCCS as additional tier 1 under the new European rules on capital requirements set by European Regulation 575/2013. The PCCS are perpetual although they may be called under certain circumstances and would be converted into newly issued ordinary shares of Banco Santander if the common equity Tier 1 ratio of the Bank or its consolidated group, calculated in accordance with European Regulation 575/2013, were to fall below 5.125%. At present, the PCCS are traded on the Global Exchange Market of the Irish Stock Exchange.

Agreement for the acquisition of Getnet

On April 7, 2014, we announced the agreement reached for the acquisition, through Banco Santander (Brasil) S.A.’s investee company Santander Getnet Serviços para Meios de Pagamento Socidade Anónima, of 100% of the company Getnet Tecnologia Em Captura e Processamento de Transações H.U.A.H. (“Getnet”) for an amount of 1,104 million reais (approximately €353 million). Following the acquisition, Banco Santander (Brasil) S.A. will hold indirectly an 88.5% stake in Getnet. The transaction will have no significant impact on Grupo Santander’s shareholders’ equity.

Getnet specializes in the development and management of technological solutions and services for businesses with electronic transactions. The transaction gives continuity to the growth strategy in the acquiring business. Santander Getnet Serviços para Meios de Pagamento Socidade Anónima is a payment service provider company in which Santander Brasil and Getnet presently hold 50% each.

It is expected that the transaction (which is subject to regulatory authorization) will be concluded during the second half of 2014.

Offer to acquire 25% of Santander’s Brazilian subsidiary

On April 29, 2014 we have announced that Banco Santander’s board of directors has resolved to make an offer to acquire all shares of Banco Santander Brasil not already held by Grupo Santander, representing approximately 25% of Santander Brasil’s share capital. The transaction would be paid for with up to 665 million shares of Banco Santander (parent company), equivalent to The offer will be subject to customary conditions for this type of transaction, including the granting of the relevant regulatory authorizations and approval at Santander Brasil €4,686 million.

Santander Brazil would remain listed on the Sao Paulo stock exchange and Banco Santander’s shares (parent company) would be listed on that market as well.

The offer will be subject to customary conditions for this type of transaction, including the granting of the relevant regulatory authorizations and approval at Santander Brasil’s and Banco Santander’s general shareholders’ meeting.

B. Business overview

At December 31, 2013, we had a market capitalization of €73.7 billion, stockholders’ equity of €70.6 billion and total assets of €1,115.6 billion. We had an additional €125.2 billion in mutual funds, pension funds and other assets under management at that date. As of December 31, 2013, we had 58,383 employees and 6,160 branch offices in Continental Europe, 25,368 employees and 1,157 branches in the United Kingdom, 87,069 employees and 5,904 branches in Latin America, 9,741 employees and 706 branches in the United States and 2,397 employees in Corporate Activities (for a full breakdown of employees by country, see Item 6 of Part I, “Directors, Senior Management and Employees—D. Employees” herein).

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

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

Grupo Santander maintains the general criteria used in our 2012 Form 20-F, with the following exceptions:

1) In the Group’s financial statements

• The change in International Accounting Standards 19 (IAS 19) requires that for periods beginning on or after January 1, 2013 actuarial gains and losses are immediately recognized against shareholders’ equity, without the possibility for deferred recognition through the income statement, as was done in the 2012 20-F and prior periods.

• As a result of the envisaged disposal of the Santander UK card business formerly owned by GE, its results have been eliminated from the various lines of the income statement and recorded, net, in profit from discontinued operations.

2) In businesses

• Spain was incorporated as a unit under the Continental Europe segment, including the branch networks of Santander, Banesto and Banif (merged in 2013), Global Wholesale Banking, Asset Management and Insurance and the Spain ALCO portfolio.

• Spain’s run-off real estate became a unit within Continental Europe. This unit includes: loans from customers whose activity is mainly real estate development, which have a specially allocated management department in the Group; equity stakes in real estate companies and foreclosed assets.

3) Other adjustments

• The annual adjustment was made to the Global Customer Relationship Model and resulted in a net increase of 60 new clients.

• The wholesale businesses in Poland and Banesto, previously in retail banking, were incorporated to Global Wholesale Banking.

• Corporate Activities was redefined due to funding allocation and transfer of real estate assets and their costs (already mentioned), as well as other reallocations of costs among units.

The financial statements of each business area have been drawn up by aggregating the Group’s basic operating units. The information relates to both the accounting data of the companies in each area as well as that provided by the management information systems. In all cases, the same general principles as those used in the Group are applied.

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

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

The reported segments are:

• Continental Europe. This covers all retail banking business, wholesale banking and asset management and insurance conducted in this region. This segment includes the following units: Spain, Portugal, Poland, Santander Consumer Finance (which includes the consumer business in Europe, including that of Spain, Portugal and Poland) and Spain’s run-off real estate.

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

• Latin America. This embraces all the Group’s financial activities conducted via its subsidiary banks and subsidiaries. It also includes the specialized units of Santander Private Banking, as an independent and globally managed unit, and the Bank’s New York branch’s business.

• United States. Includes the businesses of Santander Bank and Santander Consumer USA (accounted by the equity method).

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

• Retail Banking. This area covers all customer banking businesses, including private banking (except those of Corporate Banking, managed through the Global Customer Relationship Model). Also included in this business area are the results of the hedging positions taken in each country within the scope of the relevant ALCO portfolio.

• Global Wholesale Banking. This business reflects the revenues from global corporate banking, investment banking and markets worldwide including all treasuries managed globally, both trading and distribution to customers (after the appropriate distribution with Retail Banking customers), as well as equities business.

• Asset Management and Insurance. This includes our units that design and manage mutual and pension funds and insurance. The Group uses and remunerates the distribution networks for marketing these products through cost- and profit-sharing arrangements. This means that the segment’s profit/loss on this business is the gross income net of the cost of distribution which is the remuneration paid to the network.

• Spain’s run-off real estate. This unit includes loans to customers in Spain whose activity is mainly real estate development, equity stakes in real estate companies and foreclosed assets.

In addition to these operating units, which cover everything by geographic area and business, we continue to maintain a separate Corporate Activities area. This area incorporates the centralized activities relating to equity stakes in financial companies, financial management of the structural exchange rate position and of the Parent bank’s structural interest rate risk, as well as management of liquidity and of stockholders’ equity through issues and securitizations. As the Group’s holding entity, it manages all capital and reserves and allocations of capital and liquidity. It also incorporates the goodwill’s impairment but not the costs related to the Group’s central services except for corporate and institutional expenses related to the Group’s functioning.

For purposes of our financial statements and this annual report on Form 20-F, we have calculated the results of operations of the various units of the Group listed below using these criteria. As a result, the data set forth herein may not coincide with the data published independently by each unit individually.

First level (or geographic):

Continental Europe

Continental Europe includes all activities carried out in this region: retail banking, global wholesale banking, asset management and insurance, as well as Spain’s run-off real estate. During 2013, there were four main units within this area: Spain, Portugal, Poland and Santander Consumer Finance.

Continental Europe is the largest business area of Grupo Santander by assets. At the end of 2013, it accounted for 38.0% of total customer funds under management, 39.9% of total loans to customers and 18.0% of profit attributed to the Parent bank’s total operating areas.

The area had 6,160 branches and 58,383 employees (direct and assigned) at the end of 2013.

In 2013, this segment obtained attributable profit of €1,127 million, an increase of €3,872 million after the heavy impairment losses of Spain’s real estate portfolio in run-off accounted for in 2012. Return on equity (“ROE”) stood at 3.8%.

Spain

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

In order to consolidate the Group’s leadership in Spain and increase profitability and efficiency, Santander merged its two large retail networks (Santander and Banesto) and its private bank (Banif) in 2013. See “A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations”.

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The integration of these units is progressing on schedule, and is even ahead of the initial forecasts in some areas. The process of branch concentration and optimization began in July 2013, together with optimization of staff. This part of the integration is running ahead of schedule and has begun to realize some of the projected cost synergies.

At the end of 2013, we had 4,067 branches and a total of 27,406 employees (direct and assigned), of which 2 were hired on a temporary basis.

In 2013, profit attributable to the Parent bank in Spain was €478 million, 44.6% less than in 2012, while the ROE was 4.0% (as compared to 6.3% in 2012). This decrease was mainly due to a 15.4% reduction in net interest income which reflects the decrease in volumes and the repricing of mortgages. The decrease in the cost of new deposits has not yet been passed on to all of the stock.

The units in Spain did business in 2013 in a complicated environment, although there were signs of improvement in the second half of the year when GDP ended eight quarters of falls (+0.1% in the third quarter and +0.3% in the fourth quarter of 2013). There was a marked improvement in financial conditions with a sharp decrease in the sovereign debt risk premium and the banking system gained in soundness with stronger solvency and liquidity ratios.

Nevertheless, the banking system continued to be affected by the process of business and household deleveraging, by interest rates at all-time lows (with the ECB main reference rate at 0.5%), and a non-performing ratio that was still rising.

In 2013, Spain’s lending decreased by 10.5%, customer funds under management fell by 2.2% with deposits decreasing 3.3%, marketable debt securities diminishing 65.7%, mutual funds growing by 28.7% and pension funds increasing by 8.0%. The activity reflected the priority in the last quarters of 2013 of reducing the cost of deposits and developing a policy to retain customers via mutual funds and savings-insurance products.

The non-performing loans (“NPL”) ratio was 7.49% compared to 3.84% at December 2012. This rise was due to several components: (i) the impact of deleveraging on the loan portfolio, including the cancellation of the public sector financing pursuant to a government program to pay suppliers’ pending invoices, and (ii) some deterioration in the loan portfolio, mainly in the companies segment and real estate mortgages to individuals. The coverage level decreased to 44.0% as compared to 50.0% at the end of 2012.

Portugal

Our main Portuguese retail and investment banking operations are conducted by Banco Santander Totta, S.A. (“Santander Totta”).

At the end of 2013, Portugal had 640 branches and 5,635 employees (direct and assigned), of which 53 employees were temporary.

In 2013, profit attributable to the Parent bank was €114 million, a 6.3% decrease from 2012, as a result of a higher tax charge. Nevertheless, pretax profits increased by 18.5% mainly due to a 51% drop in provisions after the large amount provisioned in the first quarter of 2012.

Santander Totta’s strategy remained focused on increasing linkage and improving the transaction levels of customers and defending spreads on deposits and loans. Management of bad loans also remained a strategic priority.

Lending continued to decline, although at a more moderate rate (-1% in the fourth quarter of 2013 and -5% for the whole year). At the end of 2013, customer funds under management declined 4.4% with deposits at €24,191 million, 1% more than a year earlier (-4% excluding repos), marketable debt securities diminishing 33.3%, mutual funds decreasing 32.0% and pension funds increasing 7.8%.

Santander Totta’s NPL ratio was 8.12% at December 31, 2013, up from 6.56% at December 31, 2012 because of the difficult macroeconomic environment. The ROE was 4.5%, as compared to 4.8% in 2012.

Poland

On April 1, 2011, we completed the acquisition of 96% of BZ WBK along with the 50% of BZ WBK Asset Management. The BZ WBK Group is now integrated into Grupo Santander, consolidating its results and business as of the second quarter of 2011. In February 2012, Banco Santander, S.A. and KBC Bank NV (KBC) reached an investment agreement for the merger of their subsidiaries in Poland, BZ WBK S.A. and Kredyt Bank S.A., which was put into effect in early 2013, after the necessary approval was received from the Polish financial supervisor (KNF).

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On 22 March 2013, Banco Santander, S.A. and KBC completed the placement of all the shares owned by KBC and 5.2% of the share capital of Bank Zachodni WBK S.A. held by the Group in the market for €285 million, which gave rise to an increase of €292 million in Non-controlling interests.

The merger of BZ WBK and Kredyt Bank is one of the main focuses of management. The process is proceeding faster than envisaged, with a very effective cost management made possible by the efficiency measures taken and the implementation of the integration plan. All branches already have the same IT systems and display the same brand. This rebranding was aided by a marketing campaign across the country.

In two years, Santander has become the third largest bank in Poland in terms of loans and deposits (market shares of 7.4% and 8.4%, respectively). At the end of 2013, this unit had 12,363 employees (direct and assigned), of which 1,104 employees were temporary, and 830 branches.

In 2013, attributable profit was €334 million, 1.5% higher than 2012 impacted by the integration of Kredyt Bank and higher minority interests. Profit before minority interests was €447 million (+31.3%), with growth of more than 30% throughout the income statement. On a like-for-like basis (eliminating the perimeter effect of the integration of Kredyt Bank) and in local criteria, net profit was 3.9% higher.

Due to the integration of Kredyt Bank, customer loans increased 66.6% and customer funds under management grew by 56.3% with a 65.0% increase in deposits. The NPL ratio increased 3.12 percentage points to 7.84% also due to the integration of Kredyt Bank which had higher levels of non-performing loans. The ROE stood at 17.7% a 1.2 percentage points decrease from 18.9% in 2012.

Santander Consumer Finance

Our consumer financing activities are conducted through our subsidiary Santander Consumer Finance (SCF) and its group of companies. Most of the activity of SCF relates to auto financing, personal loans, credit cards, insurance and customer deposits. These consumer financing activities are mainly focused on Germany, Spain, Italy, Norway, Poland, Finland and Sweden. SCF also conducts business in Portugal, Austria and the Netherlands, among others.

At the end of 2013, this unit had 613 branches and 11,695 employees (direct and assigned), of which 1,446 employees were temporary.

In 2013, this unit generated €794 million in profit attributable to the Parent bank, a 9.6% increase from 2012, while the ROE reached 7.3% (as compared to 6.7% in 2012). The increase in profit attributable to the Parent bank is mainly explained by a 25% decrease in loan-loss provisions, which declined every quarter, bringing the cost of credit to the lowest level of the current economic cycle. This fall was mainly due to a decrease in NPL net entrees and a decline in the coverage ratio from 109.5% in 2012 to 105.3% in 2013.

Customer loans decreased by 1.2%, and customer funds under management increased by 8.8% mainly due to a 70.6% increase in marketable debt securities partially offset by a 3.2% decrease in customer deposits. The NPL ratio of 4.01% was in line with the figures in 2012 at 3.90% due to the previously mentioned decrease in customer loans and a 1.6% increase in NPL.

Spain real-estate run off

In order to enhance efficiency and specialization in the management of potentially problematic properties in Spain, we have reorganized the management of these assets under a unit that is separate from the units in which such assets were originated.

This unit focuses on: (i) managing real estate clients with whom the Groups holds potentially problematic exposures in order to reduce their exposure, and (ii) property and land management, which includes the sale of existing properties and, in certain cases, real estate development and subsequent marketing and sale.

At the end of 2013, this unit had 629 employees.

In 2013, this unit had €635 million of losses attributable to the Parent bank as compared to €4,768 million losses in 2012. The strong impairment losses accounted for during 2012, due to the deterioration of the real estate portfolio, stabilized in 2013.

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United Kingdom

As of December 31, 2013, the United Kingdom accounted for 31.3% of the total customer funds under management of the Group’s operating areas. Furthermore it also accounted for 34.6% of total loans to customers and 18.4% of profit attributed to the Parent bank’s total operating areas.

Santander UK is focused on the United Kingdom. Around 83% of customer loans are prime mortgages for homes in the U.K. The portfolio of mortgages is of high quality, with no exposure to self-certified or subprime mortgages while buy to let loans represent around 1% of customer loans. At December 31, 2013, the loan to deposit ratio was 123%, 5 percentage points lower than at December 31, 2012. This was a consequence of the reduction of loans exceeding the outflow of customer deposits due to the deleveraging of the loan portfolio consistent with the market.

At the end of 2013, we had 1,157 branches and a total of 25,368 employees (direct and assigned) of which 394 employees were temporary, in the United Kingdom.

In 2013, Santander UK contributed €1,149 million profit attributable to the Parent bank (a 3.1% increase from 2012). The ROE was 8.8% (as compared to 7.8% in 2012). Net interest income rose 3.4% and costs increased 3.1%, absorbing the investments in businesses. Provisions fell 28.1%, due to the improved quality in retail and corporate businesses.

As of December 31, 2013, loans and advances to customers decreased by 7.3% and customer funds under management decreased 7.2%, with a 13.3% drop in marketable debt securities, a 3.6% decrease in customer deposits and a 30.7% decrease in mutual funds all as compared to December 31, 2012. The NPL ratio stood still at 1.98%.

Latin America

At December 31, 2013, we had 5,904 branches and 87,069 employees (direct and assigned) in Latin America, of which 1,683 were temporary employees. At that date, Latin America accounted for 26.3% of the total customer funds under management, 19.9% of total loans to customers and 52.1% of profit attributed to the Parent bank’s total operating areas.

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

	Percentage held at December 31, 2013			Percentage held at December 31, 2013
Banco Santander (Brasil), S.A.		75.25	Banco Santander, S.A. (Uruguay)		100.00
Banco Santander Chile		67.01	Banco Santander Puerto Rico		100.00
Banco Santander (Mexico), S.A., Institución de Banca Múltiple, Grupo Financiero Santander		75.08	Banco Santander Perú, S.A.		100.00
Banco Santander Río, S.A. (Argentina)		99.30

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

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

Profit attributable to the Parent bank from Latin America in 2013 was €3,257 million, a decrease of 23.6% (-16.3% excluding the exchange rate impact), while the ROE reached 13.8% (as compared to 19.2% in 2012). Net interest income fell by €224 million or 15.1% (-5.5% in constant currency), affected by lower spreads (mainly in Brazil due to the change of business mix). Operating expenses decreased by €419 million, however, excluding the exchange rate impact, expenses grew by 5.9% because of investments in business development, mainly in Mexico, and inflationary pressures. Loan-loss provisions declined €897 million or 12.2% (-1.4% in constant currency) due to the improvement in Brazil.

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

Brazil. Santander Brazil is the country’s third largest private sector bank by assets and the largest foreign bank in the country. At the end of 2013, the institution had 3,566 branches, 49,459 employees and 29.5 million customers.

During 2013, total loans declined 10.8%. Nevertheless, in local currency total loans rose 7.4%. During the year Santander Brazil’s strategy was to prioritize the growth of lower risk products, mainly of mortgage loans, where the market is still incipient, and large companies, the segments registering the largest growth. We also launched projects to increase commercial productivity, based on best practices identified in other Group units and we implemented measures to increase efficiency in order to keep cost increases below the expected inflation rate. On the other hand, consumer finance dropped in the last 12 months.

Profit attributable to the Parent bank from Brazil in 2013 was €1,577 million, a 27.9% decrease as compared to 2012 (-17.8% in local currency). This was mainly due to: (i) a decline in net interest income of 21% (9.9% in local currency), due to the portfolio’s mix change and the narrowing of spreads on loans, particularly from the shift toward products with lower spreads and also a reduced cost of credit, and (ii) a fall of 20.1% (8.9% in local currency) in loan loss provisions, which were lower for the third straight quarter. The ROE was 11.9% (as compared to 17.7% in 2012).

Deposits fell 12.0% (+6.1% in local currency, improving the growth rate from the beginning of the year). The NPL ratio was 5.64% at December 31, 2013 (6.86% at December 31, 2012).

Mexico. Banco Santander (Mexico), S.A., Institución de Banca Múltiple, Grupo Financiero Santander, is one of the leading financial services companies in Mexico. In the fourth quarter of 2013, Mexico acquired ING Hipotecaria, which consolidated the Bank as the country’s second largest mortgage provider. Santander is the fourth largest banking group in Mexico by business volume, with a market share in loans of 13.9% and 15.1% in deposits. As of December 31, 2013, we had a network of 1,258 branches, 14,804 employees and 10.5 million customers in Mexico.

Profit attributable to the Parent bank from Mexico in 2013 declined 29.3% to €713 million. Net interest income rose 5.7%, backed by dynamic business activity and spreads management and total income grew 8.0%. Operating expenses grew 9.6%, in line with the expansion plan (increase of 88 branches in 2013, +8%). Loan-loss provisions were 72.2% higher, mainly due to homebuilders as result of the deterioration of this sector. The ROE was 18.6% (as compared to 24.9% in 2012).

Loans increased 9.3% and customer funds under management up by 4.7% mainly due to an increase of 43.3% in marketable debt securities.

At December 31, 2013, the NPL ratio stood at 3.66% as compared to 1.94% at December 31, 2012, mainly impacted by homebuilders, which accounted for 1.51 percentage points of the rise in the NPL ratio, and by the entry of the ING portfolio in the fourth quarter of 2013, which has a higher NPL ratio than the recurring business.

Chile. Banco Santander Chile is the principal component of the largest financial group in Chile in terms of assets. As of December 31, 2013, we had 493 branches, 12,290 employees and more than 3.5 million customers and market shares of 19.1% in loans and 16.8% in deposits.

Profit attributable to the Parent bank from Chile decreased 11.2% in 2013 to €435 million (a 6.6% decrease as compared to 2012 in local currency), mainly due to higher operating expenses relating to branches and IT investments, and impairment losses relating to specific companies. For 2013, the ROE was 18.5%, the NPL ratio increased to 5.91%.

In 2013, customer loans decreased 3.0%, however in local currency there was an 11.2% increase. Customer deposits declined 6.3% (+7.4% in local currency).

Argentina. Santander Río is the country’s leading private sector bank in terms of assets, customer funds and results, with market shares of 9.1% in lending and 9.6% in savings at December 2013. At that date, it had 377 branches, 6,874 employees and 2.5 million customers.

During the year, lending and deposits decreased 2.0% and 6.1%, respectively. Nevertheless, in local currency lending rose 35%, with notable growth in SMEs and companies, both above 50% and deposits grew 30% (+24% in demand and +42% in time).

Profit attributable to the Parent bank was €333 million, 2.0% higher (26.3% in local currency). At the end of 2013, the ROE was 39.4%, NPL ratio was 1.42%.

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Uruguay. Santander is the largest private sector bank in the country, with a market share in lending of 18.0% and 15.3% in deposits. Overall, the Group had 85 branches, 1,194 employees and 450,000 customers at December 31, 2013.

Profit attributable to the Parent bank was €53 million in 2013, 14.3% higher than in 2012 (an 18.8% increase in local currency) due to the growth in net interest income and fee income of 8.4% and 14.8%, respectively.

Puerto Rico. As of December 31, 2013 Santander Puerto Rico had 115 branches, 1,493 employees, 415,000 customers and market shares of 11.1% in loans and 13.7% in deposits.

Profit attributable to the Parent bank from Puerto Rico in 2013 was €77 million, a 36.1% increase as compared to 2012 (a 40.7% increase in U.S. dollars). The NPL ratio was 6.29%, after improving 85 basis points due to the rebalancing of credit portfolios and the positive performance of the commercial portfolio.

Peru. As of December 31, 2013, Banco Santander Perú, S.A. had 1 branch and 117 employees. The unit’s activity is focused on companies and on the Group’s global customers. A new auto finance company began to operate in 2013, together with a well-known international partner with considerable experience in Latin America. The company has a specialized business model, focused on service and with products that enable customers to acquire any brand of new car from any dealer in Peru.

Profit attributable to the Parent bank from Peru was €19 million in 2013, 21.2% higher than in 2012, (a 28.1% increase in local currency).

United States

The U.S. segment includes Santander Holdings USA (SHUSA), a bank holding company with two distinct lines of business: retail banking, via its subsidiary Santander Bank, and consumer finance business through its stake in Santander Consumer USA Inc. (SCUSA).

On October 17, 2013, Sovereign Bank changed its name to Santander Bank, successfully completing the rebranding. Santander Bank, with 706 branches, 2,074 ATMs, 1.7 million customer-households and 9,741 employees at December 31, 2013, is developing a business model focused on retail customers and companies.

SCUSA specializes in consumer finance, mainly auto finance. At December 31, 2013, our stake in the company was recorded by the equity method. In the first quarter 2014, SCUSA completed an initial public offering of shares at a price of $24 per share, and is now listed on the New York Stock Exchange. Demand was 10 times higher than the offering, valuing the company at $8.3 billion. After this transaction, we retain a 60.7% stake; as a result, since 2014 we are fully consolidating SCUSA’s financial statements.

In February 2013, SCUSA entered into a ten-year agreement with Chrysler Group LLC whereby we originate private-label loans and leases under the Chrysler Capital brand (“Chrysler Capital”) to facilitate Chrysler vehicle retail sales.

The U.S. segment accounted for 4.4% of the total customer funds under management, 5.6% of total loans to customers and 11.6% of profit attributed to the Parent bank’s total operating areas.

The U.S. segment obtained attributable profit of €725 million in 2013, which was 9.9% less than in 2012 (7.1% less in local currency). This reduction was due to: (i) lower net interest income (-16.9%) due to reduced volumes and the sale of part of the investment portfolio, (ii) higher costs (6.5%) related to the rebranding and investments to improve the IT infrastructure and (iii) greater regulatory pressure that resulted in reduced fee income and higher compliance costs, which was only partially offset by a sharp reduction in impairment losses on financial assets, which had net release of €4 million, due to the high credit quality.

For 2013, ROE was 12.4% and the NPL ratio was 2.23%, which represents a 3.0 and 0.06 percentage points reduction from 2012, respectively.

Second or business level:

Retail Banking

Profit attributable to the Parent bank of retail banking in 2013 was €5,077 million, 13.8% lower as compared to 2012. The results were due to: (i) lower interest income (-11.5%) in an environment of reduced business and low interest rates in mature markets and change of business mix in emerging markets, (ii) partly offset by lower impairment losses for financial assets (-22.0%) and costs (-1.6% or +4.4% deducting the exchange rate impact) growing below the inflation rate.

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Retail Banking generated in 2013 88% of the operating areas’ total income and 81.1% of profit attributable to the Parent bank. This segment had 170,971 employees as of December 31, 2013, of which 4,682 were temporary.

By geographic area, the main features in 2013 were as follows:

• Continental Europe posted a profit before minority interests 3.7% higher than in 2012, due to lower provisions and, to a lesser extent, the perimeter effect (integration of Kredyt Bank in Poland). Attributable profit was down 3.1% due to an increase in Poland’s minority interests.

• Attributable profit in the U.K. increased 18.4%, backed by an increase in net interest income (+2.5%), and reduced provisions (-30.5%).

• Latin America’s attributable profit decreased 27.5%, due to a 15.9% decrease in net interest income due to lower spreads which was partially offset by lower provisions (-14.9%).

• Attributable profit in the U.S. dropped 10.5% because of an 18.3% decrease in total income due to a reduction in net interest income and in the size of the portfolio and higher costs (+6.2%) due to rebranding and technology investment. Net releases of provisions for credit losses partially offset the decreasing income.

Global Wholesale Banking

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

Santander Global Banking and Markets conducted its business in an environment of markets that were more stable and with increased regulatory requirements. This segment contributed 12.6% of the operating areas’ total income and 24.0% of profit attributable to the Parent bank in 2013. Profit attributable to the Parent bank in 2013 by Global Wholesale Banking decreased by 21.3% to €1,504 million, primarily due to higher minority interests in the Latin American units, the depreciation of their currencies and, above all, higher loan-loss provisions (+126.7%) mainly in Spain and Mexico. In Spain, the increase in loan loss provisions was related to specific companies, and in Mexico mainly to homebuilders due to the deterioration of this sector. Those increases were partially offset by the solid revenues and the management of costs. This segment had 7,165 employees as of December 31, 2013, of which 2 were temporary.

Santander is present in global transaction banking (which includes cash management, trade finance and basic financing and custody), in corporate finance (comprising mergers and acquisitions, equity capital markets and investment solutions for corporate clients via derivatives), in credit markets (which include origination and distribution of corporate loans or structured finance, bond origination and securitization teams and asset and capital structuring) and in global markets (which include the sale and distribution of fixed income and equity derivatives, interest rates and inflation, the trading and hedging of exchange rates, short-term money markets for the Group’s wholesale and retail clients, management of books associated with distribution, brokerage of equities, and derivatives for investment and hedging solutions).

Asset Management and Insurance

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

In July 2012, we reached an agreement with Abbey Life Insurance ltd., a subsidiary of Deustche Bank AG, to reinsure the entire individual life risk portfolio of the insurance companies in Spain and Portugal. This transaction generated extraordinary gross results of €435 million accounted as other operating income under the Corporate Activities segment.

In December 2012, Santander agreed a strategic alliance with the insurer Aegon to boost its bancassurance business in Spain through commercial networks. The transaction closed in 2013 and resulted in a capital gain for the Group of €385 million. The agreement does not affect savings, auto and health insurance, which Santander continues to manage.

See “A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations”.

In 2013, this segment accounted for 1.9% of total income and 5.0% of profit attributable to the Parent bank. Profit attributable to the Parent bank by Asset Management and Insurance was €312 million in 2013 or 22.3% lower than in 2012. Excluding the corporate insurance transactions recorded in 2012 (reinsurance of life-risk assurance operations in Spain and Portugal) and the strategic alliance in bancassurance in Spain, attributable profit would have been 7.1% lower in 2013 after eliminating the exchange rate impact. This segment had 1,795 employees at the end of 2013, of which 13 were temporary.

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Asset Management

Attributable profit in 2013 was €80 million, 27.2% lower than in 2012, following a decrease of 4.6% in total income affected by exchange rates, higher costs. Excluding the exchange rate impact, gross income was virtually unchanged (-0.6%) and attributable profit dropped 23.8%.

In December 2013, we closed a strategic agreement with Warburg Pincus and General Atlantic to drive our global business through improvements in the range of products and services and strengthen institutional business where there is a high growth potential. See “A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations”.

At December 31, 2013, the total volume of managed funds was €156,400 million, (+2% year-on-year and +8% eliminating the exchange rate impact). Of this, €104,200 million were mutual and pension funds, €9 billion were client portfolios other than funds, including institutional mandates. The rest was management mandates on behalf of other Group units.

Insurance

Santander Insurance posted attributable profit in 2013 of €233 million, 20.5% less than in 2012, following the corporate transaction in Spain and Portugal. Eliminating this effect and the impact of exchange rates, attributable profit was almost the same (-1.0%).

Including the fees paid to the networks, the insurance business generated total revenues of €2,641 million for the Group (3.7% less year-on-year; +4.2% at constant perimeter and exchange rates). The total result for the Group (income before taxes of insurers and brokers plus fee income paid to the networks) was €2,510 million (-3.8% year-on-year; +4.3% at constant perimeter and exchange rates).

Spain’s run-off real estate

This segment focuses on: (i) managing real estate clients with whom the Group holds potentially problematic exposures in order to reduce their exposure, and (ii) property and land management, which includes the sale of existing properties and, in certain cases, real estate development and subsequent marketing and sale.

At the end of 2013, this segment had 629 employees.

In 2013, this segment had €635 million of losses attributable to the Parent bank as compared to €4,768 million losses in 2012. The strong impairment losses accounted for during 2012, due to the deterioration of the real estate portfolio, stabilized in 2013.

Corporate Activities

At the end of 2013, this area had 2,397 employees (direct and assigned) of which 1,577 were temporary.

This area is responsible for, on the one hand, a series of centralized activities to manage the structural risks of the Group and of the Parent bank. It executes the necessary activities for managing interest rates, exposure to exchange-rate movements and the required levels of liquidity in the Group. On the other hand, it acts as the Group’s holding entity, managing the Group’s global capital as well as that of each of the business units.

The Corporate Activities area had a loss of €1,888 million in 2013, a 65.3% increase as compared to 2012. This decrease was primarily due to greater provisions and impairment losses, and higher interest, which were charges partially offset by trading gains and gains on corporate transactions.

Within corporate activities, the financial management area conducts the global functions of balance sheet management, both structural interest rate and liquidity risk management (the latter via issues and securitizations), as well as the structural position of exchange rates:

• Interest rate risk is actively managed by taking market positions to soften the impact of interest rate changes on net interest income, and is done via bonds and derivatives of high credit quality and liquidity and low consumption of capital.

• The objective of structural liquidity management is to finance the Group’s recurring activity in optimum conditions of maturity and cost, maintaining an appropriate profile (in volumes and maturities) by diversifying the funding sources.

• Management of the exposure to exchange rate movements is also carried out on a centralized basis. This management (which is dynamic) is conducted through exchange-rate derivatives, seeking to optimize at all times the financial cost of hedging.

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Meanwhile, and separately from the financial management described here, Corporate Activities manages all capital and reserves and allocations of capital to each of the units, as well as providing any liquidity that business units might need. The price at which these transactions are carried out is the market rate (euribor or swap) plus a risk premium.

Lastly, and more marginally, the equity stakes of a financial nature that the Group takes within its policy of optimizing investments are reflected in Corporate Activities.

Total Revenues by Activity and Geographic Location

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

Selected Statistical Information

The following tables show our selected statistical information.

Average Balance Sheets and Interest Rates

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

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

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

• We have included loan arrangement 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-IASB. If these transactions did not qualify for such treatment, we have included income and expenses on these transactions elsewhere in our income statement. See Note 2 to our consolidated financial statements for a discussion of our accounting policies for hedging activities;

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

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

As stated above under “Presentation of Financial and Other Information”, we have prepared our financial statements for 2013, 2012, 2011, 2010 and 2009 under IFRS-IASB.

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Average Balance Sheet - Assets and Interest Income
	Year ended December, 31
ASSETS	2013							2012							2011
	Average Balance		Interest		Average Rate			Average Balance		Interest		Average Rate			Average Balance		Interest			Average Rate
	(in millions of euros, except percentages)
Cash and due from central banks
Domestic		6,590		54		0.82	%		21,172		91		0.44	%		8,436		187			2.22	%
International		77,467		2,647		3.42	%		75,572		2,602		3.44	%		73,259		3,005			4.10	%
		84,057		2,701		3.21	%		96,744		2,693		2.78	%		81,695		3,192			3.91	%
Due from credit entities
Domestic		28,206		152		0.54	%		25,257		136		0.54	%		22,140		190			0.86	%
International		56,983		614		1.08	%		45,600		898		1.97	%		53,123		871			1.64	%
		85,189		766		0.90	%		70,857		1,034		1.46	%		75,263		1,061			1.41	%
Loans and credits
Domestic		178,227		5,755		3.23	%		198,643		7,332		3.69	%		217,235		7,581			3.49	%
International		519,037		34,450		6.64	%		550,730		38,795		7.04	%		511,964		39,089			7.64	%
		697,264		40,205		5.77	%		749,373		46,127		6.16	%		729,199		46,670			6.40	%
Debt securities
Domestic		55,497		2,113		3.81	%		52,382		1,946		3.72	%		42,293		1,458			3.45	%
International		94,144		4,322		4.59	%		96,910		5,147		5.31	%		106,408		5,948			5.59	%
		149,641		6,435		4.30	%		149,292		7,093		4.75	%		148,701		7,406			4.98	%
Income from hedging operations
Domestic				85							211							378
International				125							472							(46	)
				210							683							332
Other interest-earning assets
Domestic		60,673		677		1.12	%		75,008		803		1.07	%		48,716		779			1.60	%
International		41,333		453		1.10	%		47,902		357		0.75	%		40,029		1,176			2.94	%
		102,006		1,130		1.11	%		122,910		1,160		0.94	%		88,745		1,955			2.20	%
Total interest-earning assets
Domestic		329,193		8,836		2.68	%		372,462		10,520		2.82	%		338,820		10,573			3.12	%
International		788,964		42,611		5.40	%		816,714		48,271		5.91	%		784,783		50,044			6.38	%
		1,118,157		51,447		4.60	%		1,189,176		58,791		4.94	%		1,123,603		60,617			5.39	%
Investments in affiliated companies
Domestic		1,223		—		0.00	%		1,147		—		0.00	%		443		—			0.00	%
International		3,632		—		0.00	%		3,459		—		0.00	%		546		—			0.00	%
		4,855		—		0.00	%		4,606		—		0.00	%		989		—			0.00	%
Total earning assets
Domestic		330,416		8,836		2.67	%		373,609		10,520		2.82	%		339,263		10,573			3.12	%
International		792,596		42,611		5.38	%		820,173		48,271		5.89	%		785,329		50,044			6.37	%
		1,123,012		51,447		4.58	%		1,193,782		58,791		4.92	%		1,124,592		60,617			5.39	%
Other assets		91,187							92,815							103,259
Assets from discontinued operations		—							—							—
Total average assets		1,214,199		51,447					1,286,597		58,791					1,227,851		60,617

60

Average Balance Sheet - Liabilities and Interest Expense
	Year ended December, 31
	2013								2012								2011
LIABILITIES AND STOCKHOLDERS EQUITY	Average Balance		Interest			Average Rate			Average Balance		Interest			Average Rate			Average Balance		Interest			Average Rate
Due to credit entities
Domestic		21,654		335			1.55	%		55,339		761			1.38	%		33,456		756			2.26	%
International		107,956		1,635			1.51	%		99,347		1,720			1.73	%		113,182		2,107			1.86	%
		129,610		1,970			1.52	%		154,686		2,481			1.60	%		146,638		2,863			1.95	%
Customers deposits
Domestic		173,833		3,053			1.76	%		153,399		2,850			1.86	%		164,980		2,895			1.75	%
International		458,506		11,752			2.56	%		482,952		13,554			2.81	%		451,710		13,924			3.08	%
		632,339		14,805			2.34	%		636,351		16,404			2.58	%		616,690		16,819			2.73	%
Marketable debt securities
Domestic		83,445		2,993			3.59	%		95,054		3,175			3.34	%		91,358		3,142			3.44	%
International		105,509		3,886			3.68	%		109,647		4,102			3.74	%		104,749		3,288			3.14	%
		188,954		6,879			3.64	%		204,701		7,277			3.55	%		196,107		6,430			3.28	%
Subordinated debt
Domestic		8,547		496			5.80	%		10,409		637			6.12	%		15,321		752			4.91	%
International		8,098		764			9.43	%		10,830		1,013			9.35	%		11,352		1,188			10.47	%
		16,645		1,260			7.57	%		21,239		1,650			7.77	%		26,673		1,940			7.27	%
Other interest-bearing liabilities
Domestic		75,386		962			1.28	%		91,492		1,113			1.22	%		68,103		1,242			1.82	%
International		57,778		1,064			1.84	%		63,062		684			1.08	%		53,353		1,166			2.19	%
		133,164		2,026			1.52	%		154,554		1,797			1.16	%		121,456		2,408			1.98	%
Expenses from hedging operations
Domestic				(1,138	)							(974	)							(805	)
International				(290	)							234								368
				(1,428	)							(740	)							(437	)
Total interest-bearing liabilities
Domestic		362,865		6,701			1.85	%		405,693		7,561			1.86	%		373,218		7,983			2.14	%
International		737,847		18,811			2.55	%		765,838		21,307			2.78	%		734,346		22,042			3.00	%
		1,100,712		25,512			2.32	%		1,171,531		28,868			2.46	%		1,107,564		30,025			2.71	%
Other liabilities		31,830								33,954								42,200
Non-controlling interest		10,066								8,424								5,934
Stockholders’ Equity		71,591								72,688								72,153
Liabilities from discontinued operations		—								—								—
Total average Liabilities and Stockholders’ Equity		1,214,199		25,512						1,286,597		28,868						1,227,851		30,025

61

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 2013 compared to 2012 and 2012 compared to 2011. We have calculated volume variances based on movements in average balances over the period and rate variance based on changes in interest rates on average interest-earning assets and average interest-bearing liabilities. We have allocated variances caused by changes in both volume and rate to volume. You should read the following tables and the footnotes thereto in light of our observations noted in the preceding sub-section entitled “—Average Balance Sheets and Interest Rates”, and the footnotes thereto.

Volume and rate analysis	IFRS-IASB 2013/2012
	Increase (Decrease) due to changes in
	Volume			Rate			Net change
	(in millions of euros)
Interest income
Cash and due from central banks
Domestic		(87	)		50			(37	)
International		65			(20	)		45
		(22	)		30			8
Due from credit entities
Domestic		16			—			16
International		188			(472	)		(284	)
		204			(472	)		(268	)
Loans and credits
Domestic		(711	)		(866	)		(1,577	)
International		(2,168	)		(2,177	)		(4,345	)
		(2,879	)		(3,043	)		(5,922	)
Debt securities
Domestic		118			49			167
International		(144	)		(681	)		(825	)
		(26	)		(632	)		(658	)
Other interest-earning assets
Domestic		(159	)		33			(126	)
International		(54	)		150			96
		(213	)		183			(30	)
Total interest-earning assets without hedging operations
Domestic		(823	)		(734	)		(1,557	)
International		(2,113	)		(3,200	)		(5,313	)
		(2,936	)		(3,934	)		(6,870	)
Income from hedging operations
Domestic		(127	)		—			(127	)
International		(347	)		—			(347	)
		(474	)		—			(474	)
Total interest-earning assets
Domestic		(950	)		(734	)		(1,684	)
International		(2,460	)		(3,200	)		(5,660	)
		(3,410	)		(3,934	)		(7,344	)

62

Volume and rate analysis	IFRS-IASB 2012/2011
	Increase (Decrease) due to changes in
	Volume			Rate			Net change
	(in millions of euros)
Interest income
Cash and due from central banks
Domestic		134			(230	)		(96	)
International		92			(496	)		(404	)
		226			(726	)		(500	)
Due from credit entities
Domestic		24			(78	)		(54	)
International		(134	)		160			26
		(110	)		82			(28	)
Loans and credits
Domestic		(670	)		422			(248	)
International		2,847			(3,141	)		(294	)
		2,177			(2,719	)		(542	)
Debt securities
Domestic		368			120			488
International		(515	)		(287	)		(802	)
		(147	)		(167	)		(314	)
Other interest-earning assets
Domestic		334			(310	)		24
International		195			(1,014	)		(819	)
		529			(1,324	)		(795	)
Total interest-earning assets without hedging operations
Domestic		190			(76	)		114
International		2,485			(4,778	)		(2,293	)
		2,675			(4,854	)		(2,179	)
Income from hedging operations
Domestic		(167	)		—			(167	)
International		518			—			518
		351			—			351
Total interest-earning assets
Domestic		23			(76	)		(53	)
International		3,003			(4,778	)		(1,775	)
		3,026			(4,854	)		(1,828	)

63

Volume and rate analysis	IFRS-IASB 2013/2012
	Increase (Decrease) due to changes in
	Volume			Rate			Net change
	(in millions of euros)
Interest charges
Due to credit entities		(511	)		85			(426	)
Domestic		141			(226	)		(85	)
International		(370	)		(141	)		(511	)
Customers’ deposits		365			(162	)		203
Domestic		(664	)		(1,138	)		(1,802	)
International		(299	)		(1,300	)		(1,599	)
Marketable debt securities		(406	)		224			(182	)
Domestic		(153	)		(63	)		(216	)
International		(559	)		161			(398	)
Subordinated debt		(109	)		(32	)		(141	)
Domestic		(258	)		9			(249	)
International		(367	)		(23	)		(390	)
Other interest-bearing liabilities		(204	)		54			(150	)
Domestic		(62	)		442			380
International		(266	)		496			230
Total interest-bearing liabilities without hedging operations		(865	)		169			(696	)
Domestic		(996	)		(976	)		(1,972	)
International		(1,861	)		(807	)		(2,668	)
Expenses from hedging operations		(164	)		—			(164	)
Domestic		(524	)		—			(524	)
International		(688	)		—			(688	)
Total interest-bearing liabilities		(1,029	)		169			(860	)
Domestic		(1,520	)		(976	)		(2,496	)
International		(2,549	)		(807	)		(3,356	)

64

	IFRS-IASB 2012/2011
	Increase (Decrease) due to changes in
	Volume			Rate			Net change
	(in millions of euros)
Interest charges
Due to credit entities
Domestic		373			(368	)		5
International		(246	)		(141	)		(387	)
		127			(509	)		(382	)
Customers deposits
Domestic		(210	)		165			(45	)
International		925			(1,296	)		(371	)
		715			(1,131	)		(416	)
Marketable debt securities
Domestic		125			(92	)		33
International		160			655			815
		285			563			848
Subordinated debt
Domestic		(275	)		159			(116	)
International		(53	)		(122	)		(175	)
		(328	)		37			(291	)
Other interest-bearing liabilities
Domestic		353			(482	)		(129	)
International		184			(667	)		(483	)
		537			(1,149	)		(612	)
Total interest-bearing liabilities without hedging operations
Domestic		366			(618	)		(252	)
International		970			(1,571	)		(601	)
		1,336			(2,189	)		(853	)
Expenses from hedging operations
Domestic		(169	)		—			(169	)
International		(134	)		—			(134	)
		(303	)		—			(303	)
Total interest-bearing liabilities
Domestic		197			(618	)		(421	)
International		836			(1,571	)		(735	)
		1,033			(2,189	)		(1,156	)

65

Assets

Earning Assets—Yield Spread

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

	IFRS-IASB
Earning Assets - Yield Spread	Year Ended December 31,
	2013			2012			2011
	(in millions of euros, except percentages)
Average earning assets
Domestic		330,416			373,609			339,264
International		792,596			820,173			785,329
		1,123,012			1,193,782			1,124,593
Interest
Domestic		8,836			10,520			10,573
International		42,611			48,271			50,044
		51,447			58,791			60,617
Net interest income (1)
Domestic		2,135			2,959			2,591
International		23,800			26,964			28,002
		25,935			29,923			30,594
Gross yield (2)
Domestic		2.67	%		2.82	%		3.12	%
International		5.38	%		5.89	%		6.37	%
		4.58	%		4.92	%		5.39	%
Net yield (3)
Domestic		0.65	%		0.79	%		0.76	%
International		3.00	%		3.29	%		3.57	%
		2.31	%		2.51	%		2.72	%
Yield spread (4)
Domestic		0.83	%		0.95	%		0.98	%
International		2.83	%		3.10	%		3.37	%
		2.26	%		2.46	%		2.68	%

(1) Net interest income is the net amount of interest and similar income and interest expense and similar charges. See “Income Statement” on page 11.

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

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

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

66

Return on Equity and Assets

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

	Year Ended December 31,
	2013			2012			2011
ROA: Return on average total assets		0.45	%		0.24	%		0.50	%
ROE: Return on average stockholders’ equity		6.10	%		2.91	%		7.12	%
PAY-OUT: Dividends per average share as a percentage of net attributable income per average share (*)		20.07	%		46.30	%		38.72	%
Average stockholders’ equity as a percentage of average total assets		5.90	%		5.65	%		5.88	%

(*) The pay-out ratio does not include in the numerator the amounts paid under the Santander Dividendo Elección program (scrip dividends) which are not dividends paid on account of the net attributable income of the period. Such amounts equivalent to dividends are €5,898 million, €5,066 million and €3,196 million, for 2013, 2012 and 2011, respectively. The pay-out ratio for 2013 is an estimate that includes the part of the final dividend expected to be paid in cash in May 2014.

Interest-Earning Assets

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

Interest-earning assets

	IFRS-IASB Year Ended December 31,
	2013			2012			2011
Cash and due from Central Banks
Domestic		0.58	%		1.78	%		0.75	%
International		6.93	%		6.35	%		6.52	%
		7.51	%		8.13	%		7.27	%
Due from credit entities
Domestic		2.52	%		2.12	%		1.97	%
International		5.10	%		3.83	%		4.73	%
		7.62	%		5.95	%		6.70	%
Loans and credits
Domestic		15.94	%		16.70	%		19.33	%
International		46.42	%		46.32	%		45.56	%
		62.36	%		63.02	%		64.89	%
Debt securities
Domestic		4.96	%		4.40	%		3.76	%
International		8.42	%		8.15	%		9.47	%
		13.38	%		12.55	%		13.23	%
Other interest-earning assets
Domestic		5.43	%		6.31	%		4.34	%
International		3.70	%		4.04	%		3.57	%
		9.13	%		10.35	%		7.91	%
Total interest-earning assets
Domestic		29.43	%		31.31	%		30.15	%
International		70.57	%		68.69	%		69.85	%
		100.00	%		100.00	%		100.00	%

67

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

	IFRS-IASB Year Ended December 31,
	2013			2012			2011			2010			2009
	(in millions of euros)
Reciprocal accounts		1,858			1,863			2,658			1,264			713
Time deposits		16,284			15,669			11,419			13,548			21,382
Reverse repurchase agreements		29,702			25,486			10,647			36,721			29,490
Other accounts		27,120			30,882			27,002			28,322			28,252
		74,964			73,900			51,726			79,855			79,837
Of which impairment allowances		(37	)		(30	)		(36	)		(17	)		(26	)

Investment Securities

At December 31, 2013, the book value of our investment securities was €142.2 billion (representing 13% of our total assets). These investment securities had a yield of 4.23% in 2013 compared with a yield of 4.69% in 2012, and a yield of 4.61% in 2011. Approximately €32.9 billion, or 23.1%, of our investment securities at December 31, 2013 consisted of Spanish Government and government agency securities. For a discussion of how we value our investment securities, see Note 2 to our consolidated financial statements.

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

	IFRS-IASB Year Ended December 31,
	2013			2012			2011
	(in millions of euros)
Debt securities
Domestic-
Spanish Government		31,160			35,380			37,698
Other domestic issuer:
Public authorities		1,720			1,761			1,611
Other domestic issuer		11,752			10,046			8,409
Total domestic		44,632			47,187			47,718
International-
United States:
U.S. Treasury and other U.S. Government agencies		2,620			132			514
States and political subdivisions		1,653			6,941			1,420
Other securities		5,945			7,648			11,115
Total United States		10,218			14,721			13,049
Other:
Governments		55,387			60,149			58,619
Other securities		22,416			19,431			24,647
Total Other		77,803			79,580			83,266
Total International		88,021			94,301			96,315
Less- Allowance for credit losses		(207	)		(144	)		(251	)
Total Debt Securities		132,446			141,344			143,782
Equity securities
Domestic		3,449			3,802			3,574
International-
United States		951			1,417			1,283
Other		5,388			5,503			5,376
Total international		6,339			6,920			6,659
Total Equity Securities		9,788			10,722			10,233
Total Investment Securities		142,234			152,066			154,015

68

The following table sets out the aggregate book value and aggregate market value of the securities of single issuers, other than the Government of the United States, which exceeded 10% of our stockholders’ equity as of December 31, 2013 (and other debt securities with aggregate values near to 10% of our stockholders’ equity).

	Aggregate as of December 31, 2013
	Book value		Market value
	(in millions of euros)
Debt securities:
Exceed 10% of stockholders’ equity:
Spanish Government and public authorities		32,880		32,880
Near 10% of stockholders’ equity:
LCH Clearnet Group Limited		6,374		6,374

The following table shows the maturities of our debt securities (before impairment allowances) as of December 31, 2013.

	Year Ended December 31, 2013
	Maturing Within 1 Year		Maturing Between 1 and 5 Years		Maturing Between 5 and 10 Years		Maturing After 10 Years		Total
Debt securities	(in millions of euros)
Domestic:
Spanish Government		4,055		5,130		14,871		7,104		31,160
Other domestic issuer:
Public authorities		323		1,328		63		6		1,720
Other domestic issuer		771		6,999		1,432		2,550		11,752
Total domestic		5,149		13,457		16,366		9,660		44,632
International:
United States:
U.S. Treasury and other U.S. Government agencies		777		511		69		1,263		2,620
States and political subdivisions		181		83		84		1,305		1,653
Other securities		312		2,038		934		2,661		5,945
Total United States		1,270		2,632		1,087		5,229		10,218
Other:
Governments		19,202		25,934		6,489		3,762		55,387
Other securities		5,901		9,887		4,604		2,024		22,416
Total Other		25,103		35,821		11,093		5,786		77,803
Total International		26,373		38,453		12,180		11,015		88,021
Total debt investment securities		31,522		51,910		28,546		20,675		132,653

69

Loan Portfolio

At December 31, 2013, our total loans and advances to customers equaled €693.8 billion (62.2% of our total assets). Net of allowances for credit losses, loans and advances to customers equaled €668.9 billion at December 31, 2013 (60.0% of our total assets). In addition to loans, we had outstanding as of December 31, 2013, 2012, 2011, 2010 and 2009 €154.3 billion, €187.7 billion, €181.6 billion, €180.0 billion and €150.6 billion respectively, of undrawn balances available to third parties.

Loans by Geographic Area and Type of Customer

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

	IFRS-IASB Year Ended December 31,
	2013			2012			2011			2010			2009
	(in millions of euros)
Loans to borrowers in Spain: (**):
Spanish Government		13,374			16,884			12,147			12,137			9,803
Commercial, financial, agricultural and industrial		47,583			61,527			65,935			67,940			70,137
Real estate and construction (*)		27,158			29,008			36,260			38,419			42,515
Other mortgages		62,180			63,886			69,297			74,462			68,866
Installment loans to individuals		8,668			12,775			12,964			15,985			20,070
Lease financing		3,372			3,857			5,043			6,195			7,534
Other		11,517			12,077			12,912			12,475			11,420
Total		173,852			200,014			214,558			227,613			230,345
Loans to borrowers outside Spain: (**):
Non-Spanish Governments		4,402			4,983			4,394			3,527			2,861
Commercial and industrial		209,820			217,358			225,961			217,747			174,763
Mortgage loans		275,739			290,825			296,330			269,893			249,065
Other		29,946			31,354			26,104			23,226			43,390
Total		519,907			544,520			552,789			514,393			470,079
Total loans and leases, gross		693,759			744,534			767,347			742,007			700,424
Allowance for loan losses (***)		(24,903	)		(25,422	)		(18,806	)		(19,502	)		(17,873	)
Loans and leases, net of allowances		668,856			719,112			748,541			722,504			682,551

(*) As of December 31, 2013, the portfolio of loans to real estate and construction companies included €12,105 million of loans, the proceeds of which were to be used for real estate purposes, defined in accordance with the Bank of Spain’s purpose-based classification guidelines, compared to €15,867 million of such loans in 2012.

(**) Credit of any nature granted to credit institutions is included in the “Loans and advances to credit institutions” caption of our balance sheet.

(***) Refers to loan losses of “Loans and Advances to customers”. See “Item 3. Key information - A. Selected Financial Data”.

At December 31, 2013, our loans and advances to associated companies and jointly controlled entities amounted to €1,331 million (see “Item 7. Major Shareholders and Related Party Transactions—B. Related party transactions”). Excluding government-related loans and advances, the largest outstanding exposure to a single counterparty at December 31, 2013 was €3.2 billion (0.5% of total loans and advances, including government-related loans), and the five next largest exposures totaled €7.2 billion (1.1% of total loans, including government-related loans).

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Maturity

The following table sets forth an analysis by maturity of our loans and advances to customers by domicile and type of customer as of December 31, 2013.

	Maturity
	Less than					One to five					Over five
	one year					years					years					Total
	Balance		% of Total			Balance		% of Total			Balance		% of Total			Balance		% of Total
	(in millions of euros, except percentages)
Loans to borrowers in Spain: (*)
Spanish Government		3,169		1.67	%		5,446		3.34	%		4,759		1.40	%		13,374		1.93	%
Commercial, financial, agriculture and industrial		18,728		9.87	%		19,303		11.84	%		9,552		2.80	%		47,583		6.86	%
Real estate and construction		2,276		1.20	%		3,263		2.00	%		21,619		6.34	%		27,158		3.91	%
Other mortgages		5,618		2.96	%		4,806		2.95	%		51,756		15.18	%		62,180		8.96	%
Installment loans to individuals		2,916		1.54	%		3,747		2.30	%		2,005		0.59	%		8,668		1.25	%
Lease financing		386		0.20	%		2,013		1.23	%		973		0.29	%		3,372		0.49	%
Other		7,569		3.99	%		1,189		0.73	%		2,759		0.81	%		11,517		1.66	%
Total borrowers in Spain		40,662		21.43	%		39,767		24.38	%		93,423		27.40	%		173,852		25.06	%
Loans to borrowers outside Spain: (*)
Non-Spanish Governments		1,651		0.87	%		1,250		0.77	%		1,501		0.44	%		4,402		0.63	%
Commercial and Industrial		103,361		54.47	%		81,955		50.25	%		24,504		7.19	%		209,820		30.24	%
Mortgage loans		22,397		11.80	%		34,287		21.02	%		219,055		64.25	%		275,739		39.75	%
Other		21,683		11.43	%		5,821		3.57	%		2,442		0.72	%		29,946		4.32	%
Total loans to borrowers outside Spain		149,092		78.57	%		123,313		75.62	%		247,502		72.60	%		519,907		74.94	%
Total loans and leases, gross		189,754		100.00	%		163,080		100.00	%		340,925		100.00	%		693,759		100.00	%

(*) Credit of any nature granted to credit institutions is included in the “Loans and advances to credit institutions” caption of our balance sheet.

For roll-over not due to client´s financial difficulties, the analysis of the situation is performed under standard acceptance terms and a comprehensive review of the client.

Fixed and Variable Rate Loans

The following table sets forth a breakdown of our fixed and variable rate loans having a maturity of more than one year at December 31, 2013.

	Fixed and variable rate loans having a maturity of more than one year
	Domestic		International		Total
	(in millions of euros)
Fixed rate		21,904		145,514		167,419
Variable rate		111,286		225,301		336,587
Total		133,190		370,815		504,005

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Cross-Border Outstandings

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

	2013					IFRS-IASB 2012					2011
			% of					% of					% of
			total					total					total
			assets					assets					assets
	(in millions of euros, except percentages)
OECD (1) (2) Countries:
Total OECD Countries		12,518		1.12	%		19,325		1.52	%		17,736		1.12	%
Non-OECD Countries:
Total Latin American Countries (2) (3)		10,962		0.98	%		10,861		0.86	%		11,000		0.88	%
Other Non-OECD		10,698		0.96	%		7,418		0.58	%		6,944		0.55	%
Total Non-OECD		21,660		1.94	%		18,279		1.44	%		17,944		1.73	%
Total		34,178		3.06	%		37,604		2.96	%		35,680		2.85	%

(1) The Organization for Economic Cooperation and Development.

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

(3) With regards to these cross-border outstandings, at December 31, 2013, 2012 and 2011, we had allowances for country-risk equal to €14.7 million, €8.5 million and €16.6 million, respectively. Such allowances for country-risk exceeded the Bank of Spain’s minimum requirements at such dates.

As of December 31, 2013, 2012 and 2011, we did not have any cross-border outstanding to any single borrower that exceeded 0.75% of total assets.

Exposure to sovereign counterparties by credit rating

Our exposure to sovereign counterparties (the exposure is included in the financial statement line items “Financial assets held for trading – Debt instruments”, “Other financial assets at fair value through profit or loss – Debt instruments”, “Available for sale financial assets – Debt instruments” and “Loans and receivables-Debt instruments”) organized by credit rating and our exposure to private and sovereign debt organized by origin of the issuer is included in Note 7 to the Financial Statements.

Additionally, in Note 10 to our consolidated financial statements we present the disclosure by credit rating of our exposure to sovereign counterparties recorded under the caption “loans and advances to customers”.

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The detail at December 31, 2013 and 2012, by type of financial instrument, of the Group’s sovereign risk exposure to Europe’s peripheral countries and of the short positions held with them, taking into consideration the criteria established by the European Banking Authority (EBA) –explained in Note 54– is as follows:

Sovereign risk by country of issuer/borrower as of December 31, 2013 (*)
	Millions of euros
	Debt instruments													Derivatives (***)
	Financial assets held for trading and other financial assets at fair value through profit or loss		Short positions			Available- for-sale financial assets		Loans and receivables		Loans and advances to customers (**)		Total net direct exposure		Other than CDSs			CDSs
Spain		4,783		(2,079	)		21,144		1,145		13,374		38,367		(153	)		—
Portugal		148		—			2,076		—		583		2,807		—			—
Italy		2,571		(1,262	)		77		—		—		1,386		—			2
Greece		—		—			—		—		—		—		—			—
Ireland		—		—			—		—		—		—		199			—

(*) Information prepared under EBA standards. Also, there are government debt securities on the insurance companies’ balance sheets amounting to €5,645 million (of which €4,783 million, €654 million and €208 million relate to Spain, Portugal and Italy, respectively) and off-balance-sheet exposure other than derivatives –contingent liabilities and commitments– amounting to €1,884 million (€1,627 million, €118 million, €137 million and €2 million to Spain, Portugal, Italy and Ireland, respectively).

(**) Presented without taking into account the valuation adjustments recognized (€20 million).

(***) “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

Sovereign risk by country of issuer/borrower as of December 31, 2012 (*)
	Millions of euros
	Debt instruments													Derivatives (***)
	Financial assets held for trading and other financial assets at fair value through profit or loss		Short positions			Available- for-sale financial assets		Loans and receivables		Loans and advances to customers (**)		Total net direct exposure		Other than CDSs			CDSs
Spain		6,473		(2,070	)		24,654		1,173		15,356		45,586		(234	)		—
Portugal		—		—			1,684		—		616		2,300		—			1
Italy		353		(425	)		76		—		—		4		—			—
Greece		—		—			—		—		—		—		—			—
Ireland		—		—			—		—		—		—		284			—

(*) Information prepared under EBA standards. Also, there are government debt securities on the insurance companies’ balance sheets amounting to €4,276 million (of which €3,935 million, €156 million and €185 million relate to Spain, Portugal and Italy, respectively) and off-balance-sheet exposure other than derivatives –contingent liabilities and commitments– amounting to €2,578 million (€2,341 million, €33 million and €204 million to Spain, Portugal and Italy, respectively).

(**) Presented without taking into account the valuation adjustments recognized (€20 million).

(***) “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

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The detail of the Group’s other exposure to other counterparties (private sector, central banks and other public entities that are not considered to be sovereign risks) in the aforementioned countries as of December 31, 2013 and 2012 is as follows:

Exposure to other counterparties by country of issuer/borrower as of December 31, 2013 (*)
	Millions of euros
					Debt instruments						Loans and advances to customers (**)		Total net direct exposure		Derivatives (***)
	Balances with central banks		Reverse repurchase agreements		Financial assets held for trading and other financial assets at fair value through profit or loss		Available- for-sale financial assets		Loans and receivables						Other than CDSs			CDSs
Spain		816		7,451		3,148		7,826		1,804		160,478		181,523		1,981			(44	)
Portugal		1,716		—		209		1,168		1,845		25,578		30,516		1,454			(1	)
Italy		11		—		368		273		93		6,490		7,235		(115	)		(2	)
Greece		—		—		—		—		—		80		80		—			—
Ireland		—		—		229		360		259		507		1,355		1,031			—

(*) Also, the Group has off-balance-sheet exposure other than derivatives –contingent liabilities and commitments– amounting to €48,659 million, €5,982 million, €2,717 million, €4 million and €93 million to counterparties in Spain, Portugal, Italy, Greece and Ireland, respectively.

(**) Presented excluding valuation adjustments and impairment losses recognized (€13,209 million).

(***) “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

Exposure to other counterparties by country of issuer/borrower as of December 31, 2012 (*)
	Millions of euros
					Debt instruments										Derivatives (***)
	Balances with central banks		Reverse repurchase agreements		Financial assets held for trading and other financial assets at fair value through profit or loss		Available- for-sale financial assets		Loans and receivables		Loans and advances to customers (**)		Total net direct exposure		Other than CDSs			CDSs
Spain		1,218		11,471		2,598		7,225		1,130		184,658		208,300		7,180			(40	)
Portugal		1,156		—		997		676		1,547		25,243		29,619		1,809			(4	)
Italy		3		—		176		122		83		7,513		7,897		(2	)		8
Greece		—		—		—		—		—		96		96		—			—
Ireland		—		—		146		414		179		481		1,220		344			—

(*) Also, the Group has off-balance-sheet exposure other than derivatives –contingent liabilities and commitments– amounting to €63,101 million, €7,397 million, €3,234 million, €135 million and €224 million to counterparties in Spain, Portugal, Italy, Greece and Ireland, respectively.

(**) Presented excluding valuation adjustments and impairment losses recognized (€12,671 million).

(***) “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

The following table presents certain information on the notional amount of the CDSs as of December 31, 2013 and 2012 detailed in the foregoing tables:

12/31/13
Millions of euros
		Notional amount							Fair value
		Bought		Sold		Net			Bought			Sold			Net
Spain	Sovereign		—		—		—			—			—			—
	Other		1,735		2,277		(542	)		(18	)		(26	)		(44	)
Portugal	Sovereign		192		174		18			5			(5	)		—
	Other		223		278		(55	)		1			(2	)		(1	)
Italy	Sovereign		603		570		33			(1	)		3			2
	Other		834		913		(79	)		(2	)		—			(2	)
Greece	Sovereign		—		—		—			—			—			—
	Other		5		5		—			—			—			—
Ireland	Sovereign		4		4		—			—			—			—
	Other		6		6		—			—			—			—

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12/31/12
Millions of euros
		Notional amount							Fair value
		Bought		Sold		Net			Bought		Sold			Net
Spain	Sovereign		—		—		—			—		—			—
	Other		2,202		2,952		(750	)		3		(43	)		(40	)
Portugal	Sovereign		225		207		18			14		(13	)		1
	Other		398		418		(20	)		7		(11	)		(4	)
Italy	Sovereign		518		608		(90	)		12		(12	)		—
	Other		1,077		1,025		52			40		(32	)		8
Greece	Sovereign		—		—		—			—		—			—
	Other		20		20		—			1		(1	)		—
Ireland	Sovereign		9		9		—			—		—			—
	Other		16		16		—			—		—			—

Classified Assets

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

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

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

Bank of Spain’s Classification Requirements

a) Standard Assets

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

b) Sub-standard Assets

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

c) Assets classified as impaired due to counterparty arrears

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

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

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

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d) Assets classified as impaired for reasons other than counterparty arrears

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

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

e) Charged-off Assets

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

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

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

f) Country-Risk Outstandings

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

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

• Outstandings guaranteed by residents in other countries in a better category or by the Spanish Government Export Credit Insurer (CESCE) or by residents in Spain, should be classified in the category of the guarantor.

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

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

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

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

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

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

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

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

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

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

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

• Any trade credits granted under specific export contracts with a due date of six months or less if the credits mature on the date of the export.

• Any interbank obligations of branches of foreign banks in the European Union and of the Spanish branches of foreign banks.

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

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

Non-Accrual of Interest Requirements

We stop accruing interest on the basis of contractual terms on the principal amount of any asset that is classified as an impaired asset and on category 5 (doubtful) and category 6 (bankrupt) country-risk outstandings. Thereafter, we recognize the passage of time (financial effect) releasing provisions for loan losses by calculating the present value of the estimated future cash flows using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. On the other hand, any collected interest for any assets classified as impaired are accounted for on a cash basis.

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

	IFRS-IASB
	At December 31,
	2013		2012		2011
	(in millions of euros)
Non accrued interest on the basis of contractual terms owed on impaired assets
Domestic		606		566		463
International		1,294		1,313		1,261
Total		1,900		1,879		1,724
Non accrued interest on the basis of contractual terms received on impaired assets
Domestic		190		190		215
International		265		229		199
Total		455		419		414

The balances of impaired loans as of December 31, 2013, 2012 and 2011 are as follows:

	Millions of Euros
	2013		2012		2011
Impaired loans more than ninety days past due		30,832		31,326		27,415
Other impaired loans and contingent liabilities (*)		10,820		4,735		4,591
Total impaired loans and contingent liabilities		41,652		36,061		32,006

(*) See above “Bank of Spain’s Classification Requirements- d) Assets classified as impaired for reasons other than counterparty arrears” for a detailed explanation of assets included under this category.

The roll-forward of allowances (under IFRS-IASB) is shown in Note 10 to our consolidated financial statements.

Guarantees

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

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

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

Allowances for Credit Losses and Country-Risk Requirements

The Bank of Spain requires that we develop internal models to manage credit risk and to calculate the allowances for both credit risk and country-risk based on historical experience. We detail below the main characteristics of our internal models.

Since 1993 we have used our internal models for assigning solvency and internal ratings, which measure the degree of risk of a client or transaction. Each rating corresponds to a certain probability of default or non-payment, the result of the Group’s past experience, except for some designated low default portfolios. We have different internal rating models for risk admission and monitoring (differentiating between segments; models for corporate, sovereign, financial institutions; medium and small companies, retail, etc.).

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

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

The process of credit rating and parameter estimation

Credit risk measurement quantification requires following two steps; the first one is the estimation, and the second one is the assignment of the parameters that define the credit risk: Probability of Default, Loss Given Default and Exposure at Default.

We cover our losses inherent in debt instruments not measured at fair value through profit or loss and in contingent liabilities taking into account the historical experience of impairment and other circumstances known at the time of assessment. For these purposes, impairment losses are losses incurred at the reporting date, calculated using statistical methods.

The parameters necessary for its calculation, with the corresponding adjustment are also used to calculate economic capital and to calculate BIS II regulatory capital under internal models.

Incurred loss is the cost of the credit risk of a transaction that will manifest within a one year lead time from the balance sheet date due to an event that had already occurred at the assessment date and considering the characteristics of the counterparty and the guarantees and collateral associated with the transaction.

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

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

• Probability of default (PD) is the probability of the counterparty failing to meet its principal and/or interest payment obligations. The probability of default is associated with the rating/scoring of each counterparty/transaction. PD estimation is based on the Group’s own internal experience, i.e. the historical records of default for each rating as well as the recoveries experience regarding non-performing loans:

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

• For the rest of portfolios, estimates are based on our own internal experience.

PD is measured using a time horizon of one year; i.e. it quantifies the probability of the counterparty defaulting in the coming year due to an event that had already occurred at the assessment date. The calculation of PD considers both to loans that are past-due by 90 days or more and cases in which there is no default but there are doubts as to the solvency of the counterparty (subjective impaired assets).

• Loss given default (“LGD”) is the loss arising in the event of default. It depends mainly on the present value of credit enhancements, such as collateral and guarantees associated with the transaction and other future flow that are expected to be recovered. The LGD calculation is based on the analysis of recoveries of past due transactions, considering not only revenues and loans associated with the collection process, but also the moment when these revenues and costs take place and all direct costs linked to the collecting activity.

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

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Control of the process

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

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

The calculation obtained based on the output from the internal models described above reflects the best estimate of the Group as to probable credit losses and constitute an appropriate basis for determining loan loss allowances.

As of July 2008, the Bank of Spain approved the Group’s internal models for regulatory capital calculation purposes with respect to the vast majority of the Group’s credit risk net exposure. The Bank of Spain continues to review the models for the purpose of calculating allowances for loan losses.

While these models are not yet approved by the Bank of Spain for loan loss allowance calculation, we are required to calculate the allowances according to the instructions described below:

a. Specific allowance (individual):

The allowance for debt instruments not measured at fair value through profit or loss that are classified as impaired is generally recognized in accordance with the criteria set forth below:

i. Assets classified as impaired due to counterparty arrears:

Debt instruments, whoever the obligor and whatever the guarantee or collateral, with amounts more than three months past due are assessed individually. The allowances percentages are determined taking into account the age of the past-due amounts, the guarantees or collateral provided and the financial situation of the counterparty and the guarantors. Loans are identified as impaired and income no longer accrued when it is determined that collection of interest or principal is impaired or when the interest or principal has been past due for 90 days or more, unless the loan is well secured and in the process of collection. According to Bank of Spain’s requirements, all non-performing loans not guaranteed by effective collateral must be fully provisioned (hence all the credit loss recognized) when they are more than 12 months overdue.

ii. Assets classified as impaired for reasons other than counterparty arrears:

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

b. General allowance for inherent losses (collective):

Based on its experience and on the information available to it on the Spanish banking industry, the Bank of Spain has established various categories of debt instruments and contingent liabilities, classified as standard risk, which are recognized at Spanish entities or relate to transactions performed on behalf of residents in Spain which are recognized in the accounting records of foreign subsidiaries, and has applied a range of required allowances to each category.

c. Country risk allowance:

Country risk is considered to be the risk associated with counterparties resident in a given country due to circumstances other than normal commercial risk (sovereign risk, transfer risk and risks arising from international financial activity). Based on the countries’ economic performance, political situation, regulatory and institutional framework, and payment capacity and record, the Group classifies all the transactions performed with third parties into six different groups, from group 1 (transactions with ultimate obligors resident in European Union countries, Norway, Switzerland, Iceland, the United States, Canada, Japan, Australia and New Zealand) to group 6 (transactions the recovery of which is considered remote due to circumstances attributable to the country), assigning to each group the credit loss allowance percentages resulting from the aforementioned analyses. However, due to the size of the Group and to the proactive management of its country risk exposure, the allowances recognized in respect of country risk are not material with respect to the credit loss allowances recognized.

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The difference between loan loss provisions calculated using internal models and those calculated under Bank of Spain Guidance, was not material for any of the three years ending December 31, 2013.

Guarantees

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

Bank of Spain’s Foreclosed Assets Requirements

If a Spanish bank eventually acquires the properties (residential or not) which secure loans or credits, the Bank of Spain requires that the value of the foreclosed assets should be the lesser of the amount of the debt net of allowances (which shall be at least 10% of the value) and the fair value of the foreclosed assets less the estimated selling costs (which shall be at least 10% of such value).

After the initial registration of a foreclosed assets, the Bank of Spain establishes that if the fair value of the foreclosed asset less the estimated selling cost is lower than the carrying amount, the entity should recognize the corresponding impairment.

The Bank of Spain considers the amount of time acquired assets have been held is a clear indication of impairment. Accordingly, it determines that Spanish entities will recognize impairment (unless the bids received indicate a higher amount) at least as large as the amount resulting from applying the following discounts to the initial valuation:

Terms from acquisition	% Coverage
Over 12 months		20
Over 24 month		30
Over 36 month		40

For the purpose of ensuring that the provisions determined in accordance with the abovementioned policy are reasonable under IFRS-IASB we develop an estimation of the fair value of our foreclosed assets using external valuations. The difference between both estimations was not material for any of the three years ending December 31, 2013.

Bank of Spain’s Charge-off Requirements

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

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

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Movements in Allowances for Credit Losses

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

	IFRS-IASB Year Ended December 31,
	2013			2012			2011			2010			2009
	(in millions of euros)
Allowance for credit losses at beginning of year
Borrowers in Spain		11,711			6,907			6,810			6,993			5,949
Borrowers outside Spain		13,756			11,951			12,734			10,906			6,771
Total		25,467			18,858			19,544			17,899			12,720
Consolidation/deconsolidation of companies’ credit loss allowances (1)
Borrowers in Spain		—			—			—			—			—
Borrowers outside Spain		—			(266	)		(1,267	)		—			1,426
Total		—			(266	)		(1,267	)		—			1,426
Net provisions for credit losses charged to income statement (2)
Borrowers in Spain		3,447			8,847			3,169			2,326			2,615
Borrowers outside Spain		8,607			10,992			9,581			9,078			9,388
Total		12,054			19,839			12,750			11,404			12,003
Charge offs against credit loss allowance
Borrowers in Spain		(2,580	)		(2,747	)		(2,798	)		(2,174	)		(1,237	)
Borrowers outside Spain		(8,046	)		(8,599	)		(9,495	)		(8,582	)		(8,558	)
Total		(10,626	)		(11,346	)		(12,293	)		(10,756	)		(9,795	)
Other movements (3)		(1,936	)		(1,618	)		124			997			1,545
Allowance for credit losses at end of year (4) (5)
Borrowers in Spain		12,279			11,711			6,907			6,810			6,993
Borrowers outside Spain		12,680			13,756			11,951			12,734			10,906
Total		24,959			25,467			18,858			19,544			17,899
Recoveries of loans previously charged off against income statement
Borrowers in Spain		395			272			297			201			115
Borrowers outside Spain		673			1,044			1,487			979			800
Total		1,068			1,316			1,784			1,180			915
Average loans outstanding
Borrowers in Spain		178,227			198,643			217,235			224,642			230,642
Borrowers outside Spain		519,037			550,730			511,964			480,885			436,857
Total		697,264			749,373			729,199			705,527			667,499
Net charge-offs against loan loss allowance to average loans ratio (6)
Borrowers in Spain		1.23	%		1.25	%		1.15	%		0.88	%		0.49	%
Borrowers outside Spain		1.42	%		1.37	%		1.56	%		1.58	%		1.78	%
Total		1.37	%		1.34	%		1.44	%		1.36	%		1.33	%

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(1) The negative net balance in 2011 is related to the deconsolidation of Santander Consumer USA Inc. (SCUSA) which was accounted for by the equity method in December 2011.

(2) We have not included a separate line item for charge-offs of loans not previously provided for (loans charged-off against income) as these are not permitted.

(3) The changes in “Other Movements” principally reflect foreign exchange differences.

(4) Allowances for the impairment losses on the assets making up the balances of “Loans and receivables - Loans and advances to customers”, “Loans and receivables - Loans and advances to credit institutions” and “Loans and receivables – Debt securities”. See “Item 3. Key information - A. Selected Financial Data”.

(5) The segregation of the allowance for credit losses between Spain and outside Spain was made by geographical location of the Group’s company that accounts for the risk.

(6) For the purpose of calculating the ratio, net charge-offs consist of Charge offs against credit loss allowance less Recoveries of loans previously charged off.

The net charge-offs against loan loss allowance to average loans ratio was lower in Spain than in foreign jurisdictions as of December 31, 2013, 2012, 2011 and 2010 primarily due to the different mix of products of our credit portfolio in the various countries in which we operate (our mortgage portfolio is focused in Spain and United Kingdom while in Latin America (including Brazil) the main products are non-collateral loans (credit cards or consumer loans)). In Spain, the percentage of loans with collateral (secured by mortgages on finished homes, offices and multi-purpose premises and rural properties or by pledges on monetary deposits, listed equity instruments and debt securities of issuers with high credit ratings) as of December 31, 2013 was 63%. The figure outside Spain includes certain countries such as Brazil where mortgages (which are Brazil’s main type of collateral) represent approximately 12% of the total lending in that country as of December 31, 2013 (5% as of December 31, 2012). This means that the amount of loan write-offs contributed each year by these countries is far higher than in Spain, since these entities of the Group have fewer possibilities of recovering the loans once they have fallen into arrears.

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

	Year Ended December 31,
	2013			2012			2011			2010			2009
	(in millions of euros)
Recoveries of loans previously charged off against income statement
Domestic:
Commercial, financial, agricultural, industrial		236			85			135			41			32
Real estate and construction		80			38			31			32			15
Other mortgages		7			10			37			32			24
Installment loans to individuals		48			137			92			89			43
Lease finance		19			—			1			1			1
Other		5			2			1			6			—
Total Borrowers in Spain		395			272			297			201			115
Borrowers outside Spain
Government and official institutions		—			—			—			4			—
Commercial and industrial		575			877			1,208			877			732
Mortgage loans		78			79			197			72			35
Other		20			88			82			26			33
Borrowers outside Spain		673			1,044			1,487			979			800
Total		1,068			1,316			1,784			1,180			915
Net provisions for credit losses charged to income statement
Domestic:
Commercial, financial, agricultural, industrial		1,842			1,290			1,070			688			785
Real estate and construction		176			5,378			672			706			543
Other mortgages		587			1,291			818			164			288
Installment loans to individuals		745			709			489			663			891
Lease finance		52			57			122			83			74
Other		45			122			(2	)		22			34
Total Borrowers in Spain		3,447			8,847			3,169			2,326			2,615
Borrowers outside Spain
Government and official institutions		1			—			(4	)		48			14
Commercial and industrial		7,772			9,673			7,962			8,134			8,400
Mortgage loans		553			624			1,163			525			568
Other		281			695			460			371			406
Borrowers outside Spain		8,607			10,992			9,581			9,078			9,388
Total		12,054			19,839			12,750			11,404			12,003
Charge offs against credit loss allowance
Domestic:
Commercial, financial, agricultural, industrial		(893	)		(755	)		(980	)		(704	)		(356	)
Real estate and construction		(717	)		(676	)		(133	)		(191	)		(137	)
Other mortgages		(278	)		(400	)		(592	)		(369	)		(236	)
Installment loans to individuals		(593	)		(839	)		(870	)		(841	)		(481	)
Lease finance		(60	)		(27	)		(220	)		(61	)		(26	)
Other		(39	)		(50	)		(3	)		(8	)		(1	)
Total Borrowers in Spain		(2,580	)		(2,747	)		(2,798	)		(2,174	)		(1,237	)
Borrowers outside Spain
Government and official institutions		—			—			—			(43	)		—
Commercial and industrial		(7,130	)		(7,402	)		(8,445	)		(7,994	)		(7,827	)
Mortgage loans		(459	)		(477	)		(791	)		(445	)		(393	)
Other		(457	)		(720	)		(259	)		(100	)		(338	)
Borrowers outside Spain		(8,046	)		(8,599	)		(9,495	)		(8,582	)		(8,558	)
Total		(10,626	)		(11,346	)		(12,293	)		(10,756	)		(9,795	)

The table below shows a breakdown of allowances for credit losses by type and domicile of borrower for the years indicated.

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Allowances for Credit Losses

	IFRS-IASB Year Ended December 31,
	2013		%		2012		%		2011		%		2010		%		2009		%
	(in millions of euros, except percentages)
Borrowers in Spain:
Commercial, financial, agricultural, industrial		2,681		10.74		1,775		6.97		1,579		8.37		1,499		7.67		1,743		9.74
Real estate and construction (*)		6,678		26.76		7,511		29.49		3,210		17.02		2,723		13.93		1,896		10.59
Other mortgages		1,810		7.25		1,420		5.58		1,325		7.03		1,329		6.80		1,375		7.68
Installment loans to individuals		967		3.87		823		3.23		690		3.66		1,065		5.45		1,674		9.35
Lease finance		113		0.46		103		0.40		101		0.54		169		0.87		216		1.21
Other		30		0.12		79		0.31		2		0.01		25		0.13		89		0.50
Total Borrowers in Spain		12,279		49.20		11,711		45.98		6,907		36.62		6,810		34.85		6,993		39.07
Borrowers outside Spain:
Government and official institutions		21		0.08		30		0.12		31		0.17		31		0.16		19		0.11
Commercial and industrial		9,765		39.12		10,628		41.74		9,334		49.50		9,811		50.20		8,529		47.65
Mortgage loans		2,223		8.91		2,054		8.06		1,791		9.50		1,876		9.60		1,555		8.69
Other		671		2.69		1,043		4.10		795		4.21		1,016		5.20		803		4.48
Total Borrowers outside Spain		12,680		50.80		13,756		54.02		11,951		63.38		12,734		65.15		10,906		60.93
Total		24,959		100.00		25,467		100.00		18,858		100.00		19,544		100.00		17,899		100.00

(*) As of December 31, 2013, the allowances of the portfolio of loans to construction and property development companies with real estate purposes, defined in accordance with the Bank of Spain’s purpose-based classification guidelines, amounted to €4,981 million. In this table and in the previous one, loans to construction and property development companies are defined as loans granted to companies that belong to that sector, irrespective of the purpose of the loan.

Impaired Balances

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

	IFRS-IASB At December 31,
Non-performing balances	2013		2012		2011		2010		2009
	(in millions of euros)
Past-due and other non-performing balances (1) (2) (3):
Domestic		22,658		16,623		15,340		12,474		10,406
International		18,994		19,438		16,666		16,004		14,148
Total		41,652		36,061		32,006		28,478		24,554

(1) We estimate that the total amount of our non-performing balances fully provisioned under IFRS and which under US GAAP would have been charged-off from the balance sheet was €5,312 million, €5,176 million, €5,106 million, €4,843 million, and €2,997 million, at December 31, 2013, 2012, 2011, 2010, and 2009, respectively.

(2) Non-performing balances due to country risk were €3 million, €6 million, €7 million, €8 million, and €8 million, at December 31, 2013, 2012, 2011, 2010, and 2009, respectively.

(3) We estimate that at December 31, 2013, 2012, 2011, 2010, and 2009 (i) the total amount of our non-performing past-due balances was €30,832 million, €31,326 million, €27,415 million, €23,606 million, and €21,270 million, respectively, and (ii) the total amount of our other non-performing was €10,820 million, €4,735 million, €4,591 million, €4,872 million, and €3,284 million, respectively.

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We do not believe that there is a material amount of assets not included in the foregoing table where known information about credit risk at December 31, 2013 (not related to transfer risk inherent in cross-border lending activities) gave rise to serious doubts as to the ability of the borrowers to comply with the loan repayment terms at such date.

The following table shows our financial assets classified as loans and receivables which are considered to be impaired due to credit risk at December 31, 2013, classified by geographical location of risk and by age of the oldest past-due amount (see Note 10.d, to our consolidated financial statements):

	Millions of euros
	With no		With balances past due by
	past-due balances or less than 3 months past due		3 to 6 months		6 to 9 months		9 to 12 months		More than 12 months		Total
Spain		6,876		3,327		1,707		1,700		8,255		21,865
European Union (excluding Spain)		1,791		3,141		994		763		3,461		10,150
United States and Puerto Rico		322		178		78		43		417		1,038
Other OECD countries		12		38		29		10		49		138
Latin America		819		2,671		1,194		1,050		1,393		7,127
Rest of the world		—		—		—		—		2		2
		9,820		9,355		4,002		3,566		13,577		40,320

Evolution of Impaired Balances

The following tables show the movement in our impaired assets and contingent liabilities (excluding country risk, see “—Country risk Outstandings” herein).

	IFRS-IASB
(in millions of euros)	Quarter ended												Year ended Dec. 31,			Year ended Dec. 31,			Year ended Dec. 31,			Year ended Dec. 31,			Year ended Dec. 31,
	Mar. 31, 2013			Jun. 30, 2013			Sep. 30, 2013			Dec. 31, 2013			2013			2012			2011			2010			2009
Opening balance		36,061			38,051			40,055			41,173			36,061			32,006			28,478			24,554			14,191
Increases		7,775			10,124			9,136			10,280			37,316			34,983			34,379			31,764			36,067
Cash recoveries		(3,351	)		(3,739	)		(4,642	)		(6,130	)		(17,863	)		(16,298	)		(15,466	)		(15,802	)		(15,951	)
Foreclosed assets		(626	)		(510	)		(372	)		(349	)		(1,857	)		(2,146	)		(2,791	)		(2,484	)		(1,882	)
Changes in scope of consolidation		743			—			—			—			743			(628	)		69			55			1,033
Exchange differences		278			(1,260	)		(401	)		(739	)		(2,122	)		(509	)		(370	)		1,147			890
Write-offs		(2,829	)		(2,611	)		(2,603	)		(2,583	)		(10,626	)		(11,347	)		(12,293	)		(10,756	)		(9,794	)
Closing balance		38,051			40,055			41,173			41,652			41,652			36,061			32,006			28,478			24,554

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Impaired Balances Ratios

The following table shows the total amount of our computable credit risk, our non-performing assets and contingent liabilities by category, our allowances for credit losses, the ratio of our impaired balances to total computable credit risk and our coverage ratio at the dates indicated.

	IFRS-IASB At December 31,
	2013			2012			2011			2010			2009
	(in millions of euros, except percentages)
Computable credit risk (1)		738,558			793,449			820,968			802,192			758,347
Non-performing balances by category:
Individuals		17,607			16,828			15,951			15,562			14,590
Mortgages		9,609			7,281			6,872			6,304			6,111
Consumer loans		5,129			5,961			6,254			6,487			6,164
Credit cards and others		2,869			3,586			2,825			2,771			2,315
Enterprises		21,538			18,155			14,995			11,321			7,812
Corporate Banking		2,408			991			954			1,550			2,127
Public sector		99			87			106			45			25
Total non-performing balances		41,652			36,061			32,006			28,478			24,554
Allowances for non-performing balances		25,681			26,112			19,531			20,552			18,497
Ratios
Non-performing balances (2) to computable credit risk		5.64	%		4.54	%		3.90	%		3.55	%		3.24	%
Coverage ratio (3)		61.65	%		72.41	%		61.02	%		72.17	%		75.33	%
Balances charged-off to total loans and contingent liabilities		1.29	%		1.27	%		1.29	%		1.21	%		1.17	%

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

(2) Impaired or non-performing loans and contingent liabilities, securities and other assets to collect.

(3) Allowances for non-performing balances as a percentage of non-performing balances.

Non-performing loan (NPL) balances were €41,652 million at December 31, 2013, a €5,591 million increase as compared to €36,061 million at December 31, 2012. The Group’s NPL ratio as of December 31, 2013 was 5.64%, as compared to 4.54% as of December 31, 2012.

The NPL coverage ratio as of December 31, 2013 was 61.7%, as compared to a coverage ratio of 72.4% at the end of 2012. This ratio is calculated as allowances for non-performing balances as a percentage of non-performing balances.

The main reasons for the increases in the NPL ratio are the following:

• The still weak situation in Spain continues to push up NPLs due to the rise in bad and impaired loans and the reduction in the lending volume.

• The integration of Kredyt Bank in Poland, with higher levels of non-performing loans.

• In 2013, lending levels in international markets fell as a result of exchange rates and as part of the strategy followed by the Group. See Item 5 of Part I, “Operating and Financial Review and Prospects—A. Operating results— Results of Operations for Santander—Interest Income/(Charges)”.

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• The increase in non-performing balances is also aggravated through the classification as non-performing of the entire outstanding principal amount and accrued interest on any loan on which any payment of principal, interest or agreed cost is 90 days or more past due. We refer to this effect as the “individual loan drag effect”. An additional impact occurs by the so-called “client drag effect”, through which Spanish banking groups classify as non-performing the aggregate risk exposure (including off-balance sheet risks) to a single obligor, whenever the amount of non-performing balances of such obligor exceeds 25% of its total outstanding risks (excluding non-accrued interest on loans to such borrower). Both drag effects have a larger impact in the case of mortgages and corporate loans due to the greater average amount of these loans.

The NPL ratios by country as of December 31, 2013 are set out below.

• The NPL ratio in Spain was 7.49% compared to 3.84% at December 2012. This rise was due to several components: (i) the impact of deleveraging on the loan portfolio, including the cancellation of the public sector financing pursuant to a government program to pay suppliers’ pending invoices, and (ii) some deterioration in the loan portfolio, mainly in the companies segment and real estate mortgages to individuals. The coverage level decreased to 44.0% as compared to 50.0% at the end of 2012.

• In Portugal, the NPL ratio increased to 8.12%, as compared to 6.56% as of December 31, 2012 due to the difficult economic environment and mainly concentrated in loans to enterprises. Coverage was 50% as compared to 53% as of December 31, 2012.

• Santander Consumer Finance’s NPL ratio was 4.01% as compared to 3.90% at the end of December 2012. Coverage was 105% as compared to 110% as of December 31, 2012.

• Poland’s Bank Zachodni WBK had a NPL ratio of 7.84% as compared to 4.72% at the end of December 2012. The NPL ratio increased 3.1 percentage points to 7.8% mainly due to the integration of Kredyt Bank with higher levels of non-performing loans. Coverage ratio was 62% as compared to 68% as of December 31, 2012.

• In the U.K., the NPL ratio was 1.98% (2.05% in December 2012). Coverage ratio was 42% as compared to 44% as of December 31, 2012.

• The NPL ratio for Latin America was 5.03% as compared to 5.42% in December 31, 2012 while the coverage ratio decreased from 88% to 85%. Brazil’s NPL ratio was 5.64% as compared to 6.86% as of December 2012 after a change in trend at the beginning of 2013. Coverage ratio in Brazil was 95% as compared to 90% as of December 31, 2012. On the other hand, Mexico’s NPL ratio increased 1.72 percentage points to 3.66% at December 2013, mainly impacted by homebuilders, which accounted for 1.51 percentage points of the rise in the NPL ratio, and by the entry of the ING portfolio in the fourth quarter of 2013, with an NPL ratio above that of recurring business.

• In the U.S., the NPL ratio was 2.23% (2.29% at the end of 2012) and coverage 94% (106% at the end of 2012).

Allowances for non-performing balances, excluding country risk, were €25,681 million at December 31, 2013, a €431 million decrease as compared to €26,112 million at December 31, 2012. The main developments in 2013 were; (i) a €1,201 million decrease in Brazil, mainly due to exchange rate differences, (ii) a €537 million increase in Poland, mainly due to higher levels of non-performing loans of Kredyt Bank, and (iii) a €509 million increase in Spain due to increased non-performing loans, as previously mentioned. For further details see Item 11 of Part I. “Quantitative and Qualitative Disclosures About Risk—Part 5. Credit Risk”.

Other non-accruing balances

As described previously herein under “Bank of Spain’s Classification Requirements”, we do not classify our loans and contingent liabilities to borrowers in countries with transitory difficulties (category 3) and countries in serious difficulties (category 4) as impaired balances. Loans and contingent liabilities in these categories do not stop accruing interest. However, we treat category 5 (doubtful countries) country-risk outstandings as both a non-accruing and impaired balance.

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Summary of non-accrual balances	IFRS-IASB Year Ended December 31,
	2013		2012		2011		2010		2009
	(in millions of euros)
Balances classified as non-performing balances		41,652		36,061		32,006		28,478		24,554
Non-performing balances due to country risk		3		6		7		8		7
Total non-accruing balances		41,655		36,067		32,013		28,486		24,561

Foreclosed Assets

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

	IFRS-IASB
	Quarterly movements												Year Ended December 31,
	Mar. 31, 2013			Jun. 30, 2013			Sep. 30, 2013			Dec. 31, 2013			2013			2012			2011
	(in millions of euros, except percentages)
Opening balance		8,611			8,866			9,102			9,393			8,611			9,624			8,376
Foreclosures		582			575			535			616			2,308			2,603			2,699
Sales		(330	)		(290	)		(211	)		(484	)		(1,315	)		(3,248	)		(1,591	)
Other movements		3			(49	)		(33	)		173			94			(368	)		140
Gross foreclosed assets		8,866			9,102			9,393			9,698			9,698			8,611			9,624
Of which: in Spain		8,057			8,395			8,709			8,831			8,831			7,846			8,552
Allowances established		4,524			4,655			4,809			4,956			4,956			4,416			4,512
Of which: in Spain		4,279			4,424			4,586			4,685			4,685			4,170			4,278
Closing balance (net)		4,342			4,447			4,584			4,742			4,742			4,195			5,112
Of which: in Spain		3,778			3,971			4,123			4,146			4,146			3,676			4,274
Allowance as a percentage of foreclosed assets		51.0	%		51.1	%		51.1	%		51.1	%		51.1	%		51.3	%		46.9	%
Of which: in Spain		53.1	%		52.7	%		52.7	%		53.1	%		53.1	%		53.1	%		50.0	%

Liabilities

Deposits

The principal components of our deposits are customer demand, time and notice deposits, and international and domestic interbank deposits. Our retail customers are the principal source of our demand, time and notice deposits. For an analysis, by domicile of customer, of average domestic and international deposits by type for 2013, 2012 and 2011 see “—Average Balance Sheets and Interest Rates—Liabilities and Interest Expense”.

We compete actively with other commercial banks and with savings banks for domestic deposits. Our share of customer deposits in the Spanish banking system (including Cajas de Ahorros) was 18.9% at November 30, 2013 (most recent available data), according to figures published by the Spanish Banking Association (“AEB”) and the Confederación Española de Cajas de Ahorros (“CECA”). See “—Competition” herein.

The following tables analyze our year-end deposits.

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

	IFRS-IASB At December 31,
	2013		2012		2011
	(in millions of euros)
Deposits from central banks and credit institutions-
Reciprocal accounts		755		508		604
Time deposits		55,839		92,491		82,817
Other demand accounts		3,425		3,225		3,396
Repurchase agreements		49,378		50,742		51,316
Central bank credit account drawdowns		—		6,000		5,005
Total		109,397		152,966		143,138
Customer deposits-
Demand deposits-
Current accounts		167,787		144,305		155,455
Savings accounts		164,214		167,389		140,583
Other demand deposits		3,512		3,443		3,179
Time deposits-
Fixed-term deposits		225,471		257,583		257,498
Home-purchase savings accounts		102		132		174
Discount deposits		1,156		1,345		732
Hybrid financial liabilities		3,324		3,128		4,594
Other time deposits		463		590		139
Notice deposits		21		969		1,338
Repurchase agreements		41,787		47,755		68,841
Total		607,837		626,639		632,533
Total deposits		717,234		779,605		775,671

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Deposits (from central banks and credit institutions and customers) by geographic location of the Group’s companies that account the deposits.

	IFRS-IASB At December 31,
	2013		2012		2011
	(in millions of euros)
Deposits from central banks and credit institutions-
Due to credit institutions
Offices in Spain		49,770		87,053		69,411
Offices outside Spain:
Other EU countries		35,472		34,894		33,989
United States		7,215		12,648		10,652
Other OECD countries (1)		15		55		82
Central and South America (1)		16,924		18,313		29,003
Other		1		3		1
Total offices outside Spain		59,627		65,913		73,727
Total		109,397		152,966		143,138
Customer deposits
Offices in Spain		185,460		192,588		202,022
Offices outside Spain:
Other EU countries		259,903		261,135		260,529
United States and Puerto Rico		43,773		45,129		43,437
Other OECD countries (1)		1,879		788		939
Central and South America (1)		116,666		126,842		125,343
Other		156		157		263
Total offices outside Spain		422,377		434,051		430,511
Total		607,837		626,639		632,533
Total deposits		717,234		779,605		775,671

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

The following table shows the maturity of time deposits (excluding inter-bank deposits) in denominations of $100,000 or more for the year ended December 31, 2013. Large denomination customer deposits may be a less stable source of funds than demand and savings deposits.

	Year Ended December 31, 2013
	Domestic		International		Total
	(in millions of euros)
Under 3 months		10,615		33,191		43,806
3 to 6 months		4,581		16,196		20,777
6 to 12 months		16,406		13,578		29,984
Over 12 months		11,814		13,828		25,642
Total		43,416		76,793		120,209

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The aggregate amount of deposits held by non-resident depositors (banks and customers) in our domestic branch network was €49 billion, €55 billion and €57 billion, at December 31, 2013, 2012 and 2011, respectively.

Short-Term Borrowings	IFRS-IASB At December 31,
	2013					2012					2011
	Amount		Average Rate			Amount		Average Rate			Amount		Average Rate
	(in millions of euros, except percentages)
Securities sold under agreements to repurchase (principally Spanish Treasury notes and bills):
At December 31		91,166		3.69	%		98,497		3.27	%		120,156		3.60	%
Average during year		109,191		3.08	%		115,755		3.34	%		124,788		3.46	%
Maximum month-end balance		122,226					133,725					129,570
Other short-term borrowings:
At December 31		13,945		3.48	%		21,984		3.01	%		11,774		1.78	%
Average during year		19,329		2.51	%		19,403		2.74	%		7,761		2.69	%
Maximum month-end balance		23,049					22,304					11,774
Total short-term borrowings at year-end		105,111		3.66	%		120,481		3.22	%		131,930		3.43	%

Competition

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

Banks

At the end of November 2013 (most recent available information), Banco Bilbao Vizcaya Argentaria, S.A. and Banco Santander, S.A. accounted for approximately 51.9% of loans and 56.0% of deposits of all Spanish banks, which in turn represented 35.7% of loans and 34.3% of deposits of the financial system, according to figures published by the AEB and the CECA.

Foreign banks also have a presence in the Spanish banking system as a result of liberalization measures adopted by the Bank of Spain in 1978. At December 31, 2013, there were 86 foreign banks (of which 78 were from European Union countries) with branches in Spain. In addition, there were 19 Spanish subsidiary banks of foreign banks (of which 14 were from European Union countries).

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

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

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

• Address in Spain of the branch;

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

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

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

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

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

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

• amount of the investment;

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

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

• draft of the Bylaws;

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

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

• list of partners with significant holdings; and

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

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

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

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

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

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

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

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

Savings Banks

Spanish savings banks (“Cajas de Ahorros”) are mutual organizations which engage in the same activities as banks, but primarily take deposits and make loans, principally to individual customers and small to medium-sized companies. The Spanish savings banks provided strong competition for the demand and savings deposits through a vast network of offices in Spain. Royal Decree-Law 2/2011, of February 18, was designed to reinforce the Spanish financial system and opened up a new stage in the process of restructuring and strengthening the Spanish savings banks. The focus was set on recapitalizing institutions that needed more capital and encouraging the savings banks to transfer their financial activity to a bank to ease their access to capital markets and wholesale funding. As of December 31, 2012, the downsizing of the savings sector within this framework was finalized and the savings banks have completed their conversion into commercial banks. Notwithstanding this, to address concerns in connection with the persistence of savings banks as controllers or significant shareholders of commercial banks the Spanish parliament adopted in December 2013 a comprehensive reform of the savings bank system as part of the ESM-supported program. The reform entailed a two-fold approach: a) strengthening the regulatory regime for the two small savings banks that still carry out banking activities directly; and b) providing that former savings banks that indirectly exercise banking activity (through ownership of a commercial bank) be transformed into “banking foundations”.

Credit Co-operatives

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

Brokerage Services

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

Spanish law provides that any investment services company authorized to operate in another Member State of the European Union may conduct business in Spain from an office outside Spain, once the CNMV receives notice from the institution’s home country supervisory authority about the institution’s proposed activities in Spain.

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

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

On-line Banks and Insurance Companies

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

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SUPERVISION AND REGULATION

Bank of Spain and the European Central Bank

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

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

• the Governing Council, comprised of the 6 members of the Executive Board of the European Central Bank and the governors of the national central banks of the 18 Member States which have adopted the euro;

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

• the General Council of the European Central Bank, comprised of the president and vice-president of the European Central Bank and the governors of the national central banks of the 28 European Union Member States.

The Governing Council is the body in charge of formulating monetary policy for the euro area and adopting the guidelines and decisions necessary to ensure the performance of the tasks entrusted to the Eurosystem. The Executive Board is the body in charge of implementing the monetary policy for the euro area laid out by the Governing Council and providing the instructions necessary to carry out monetary policy to the euro area’s national central banks. The General Council is the transitional body which carries out the tasks taken over from the European Monetary Institute which the ECB is required to perform in Stage III of the European Monetary Union on account of the fact that not all EU Member States have adopted the euro yet.

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

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

• defining and executing the European Union monetary policy;

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

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

• issuing legal tender bank notes.

Notwithstanding the European Monetary Union, the Bank of Spain, as the Spanish national central bank, continues to be responsible for:

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

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

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• supervising and compliance with the specific rules of credit institutions, other entities and financial markets, for which it has been assigned supervisory responsibility;

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

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

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

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

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

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

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

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

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

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

• to take control of credit entities and to replace directors of credit entities when a Spanish credit entity faces an exceptional situation that poses a risk to the financial status of the relevant entity.

Council Regulation (EU) No 1024/2013 of October 15, 2013, which came into force November, 3, 2013, confers on the ECB specific functions relating to the prudential supervision of the participating Member States’ credit institutions, without prejudice to the related responsibilities and powers of the competent authorities of these States. The ECB shall have exclusive powers to exercise, for prudential supervisory purposes, inter alia, the following functions in relation to credit institutions established in participating Member States: 1) to authorize credit institutions and, where appropriate, withdraw such authorizations, and to assess notifications of the acquisition and disposal of qualifying holdings in credit institutions, except in the case of a bank resolution, which shall be discussed in detail below; 2) to carry out the tasks which the competent authority of the home Member State shall have under the relevant European Union law in relation to credit institutions established in a participating Member State which wish to establish a branch or provide cross-border services in a non-participating Member State; 3) to ensure compliance with EU legislation and, where appropriate, national legislation, which impose prudential requirements on credit institutions in the areas of own funds requirements, securitization, large exposure limits, liquidity, leverage, and reporting and public disclosure of information on those matters; 4) to carry out supervisory reviews, including where appropriate stress tests, in order to determine whether the arrangements, strategies, processes and mechanisms set in place by credit institutions ensure a sound management and coverage of their risks, and 5) to carry out supervisory tasks in relation to recovery plans, and early intervention where a credit institution or group does not meet or is likely to breach the applicable prudential requirements, or where it is determined that the arrangements, strategies, processes and mechanisms set in place by the credit institution, and the own funds and liquidity that the institution holds, do not ensure a sound management and coverage of their risks. Lastly, the ECB shall adopt guidelines and recommendations, and it shall in particular be subject to binding regulatory and implementing technical standards developed by the EBA and adopted by the Commission, and to the provisions laid down in the European supervisory handbook to be developed by the EBA in accordance with Regulation 1022/2013.

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Cash Ratio

European Central Bank regulations require credit institutions in each Member State that participates in the European Monetary Union, including us, to place a specific percentage of their “Qualifying Liabilities” with their respective central banks in the form of interest bearing deposits as specified below (the “Cash Ratio”).

The European Central Bank requires the maintenance of a minimum cash ratio by all credit institutions established in the Member States of the European Monetary Union. Branches located in the eurozone of institutions not registered in this area are also subject to this ratio, while the branches located outside the eurozone of institutions registered in the eurozone are not subject to this ratio.

“Qualifying Liabilities” are broadly defined as deposits and debt securities issued. The Cash Ratio is 1% over Qualifying Liabilities except in relation to deposits with stated maturity greater than two years, deposits redeemable at notice after two years, repos and debt securities with a stated maturity greater than two years, for which the ratio is 0%.

Liabilities of institutions subject to the Cash Ratio and liabilities of the European Central Bank and national central banks of a participating Member State of the European Monetary Union are not included in the base of “Qualifying Liabilities”.

Investment Ratio

The Spanish Government has the power to require credit institutions to invest a portion of certain “Qualifying Liabilities” in certain kinds of public sector debt or public-interest financing (the “Investment Ratio”), and has exercised this power in the past. Although the Investment Ratio has been 0% since December 31, 1992, the law which authorizes it has not been abolished, and the Spanish Government could reimpose the Ratio, subject to EU requirements.

Capital Adequacy Requirements

The regulations known as Basel III, which establish new global capital and liquidity standards for financial institutions, came into force in 2014.

From the capital standpoint, Basel III redefines what is considered to be available capital at financial institutions (including new deductions and raising the requirements for eligible equity instruments), increases the minimum capital requirements, requires financial institutions to operate permanently with capital buffers, and adds new requirements in relation to the risks considered.

The Group shares the ultimate objective pursued by the regulator with this new framework, namely to endow the international financial system with greater stability and resilience. In this regard, for many years the Group has collaborated on the impact studies for calibrating the new rules conducted by the Basel Committee and the European Banking Authority (EBA) and coordinated at local level by the Bank of Spain.

In Europe, the new standards have been implemented through Directive 2013/36/EU, known as the Capital Requirements Directive (“CRD IV”), and the related Capital Requirements Regulation (“CRR”), which is directly applicable in all EU member states (as part of the Single Rulebook). In addition, the standards are subject to Implementing Technical Standards commissioned from the European Banking Authority (EBA), some of which will be issued in the coming months/years.

The Capital Requirements Regulation came into force on January 1, 2014, with many of its rules subject to various implementation timetables. This transitional implementation phase, which affects mainly the definition of eligible capital, concludes at the end of 2017, except with regard to the deduction for deferred tax assets, the transition period for which lasts until 2023.

Subsequent to the transposition of Basel III into European legislation, the Basel Committee has continued to issue additional standards, some in the form of public consultation processes, which will entail a future amendment of CRD IV and the CRR. The Group will continue to support the regulators by offering its opinions and participating in impact studies.

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The Group currently has robust capital ratios, in keeping with its business model and risk profile, which, coupled with its substantial capacity to generate capital organically and the gradual implementation timetable envisaged for the new requirements in the legislation, place it in a position to comply with Basel III.

With regard to credit risk, the Group is continuing to adopt its plan to implement the advanced internal ratings-based (AIRB) approach under Basel for substantially all its banks, and it intends to do so until the percentage of net exposure of the loan portfolio covered by this approach exceeds 90%. The attainment of this objective in the short term will also depend on the acquisitions of new entities and the need for the various supervisors to coordinate the validation processes for the internal approaches. The Group is present in geographical areas where there is a common legal framework among supervisors, as is the case in Europe through the Capital Requirements Directive. However, in other jurisdictions, the same process is subject to the framework of cooperation between the home and host country supervisors under different legislations, which in practice entails adapting to different criteria and timetables in order to obtain authorization to use the advanced approaches on a consolidated basis.

Accordingly, the Group continued in 2013 with the project for the progressive implementation of the technology platforms and methodological improvements required for the roll-out of the AIRB approaches for regulatory capital calculation purposes at the remaining Group units. To date the Group has obtained authorization from the supervisory authorities to use advanced approaches for the calculation of regulatory capital requirements for credit risk for the Parent, the main subsidiaries in Spain, the United Kingdom and Portugal, certain portfolios in Mexico, Brazil and Chile, as well as for Santander Consumer Finance in Spain and the United States. The Group’s Basel implementation strategy is focused on obtaining authorization for the use of AIRB approaches at the main entities in the Americas and Europe.

With regard to operational risk, the Group currently uses the standardized approach for regulatory capital calculation purposes and has embarked on a project to roll out AMA approaches once it has collated sufficient data using its own management model. The Group considers that the internal model should be developed primarily on the basis of the experience accumulated in managing an entity through the corporate guidelines and criteria established after assuming control, which are a distinctive feature.

As regards the other risks explicitly addressed in Pillar I of the Basel Capital Accord, Santander Group has been authorized to use its internal model for market risk on the treasury areas’ trading activities in Spain, Chile, Portugal and Mexico, thus continuing implementation of the roll-out plan it submitted to the Bank of Spain for the other units.

With respect to Pillar II, the Group uses an economic capital approach to quantify its global risk profile and its capital adequacy position as part of the internal capital adequacy assessment process (ICAAP) at consolidated level. This process includes regulatory and economic capital planning under several alternative economic scenarios, in order to ensure that the internal capital adequacy targets are met even in plausible but highly unlikely adverse scenarios. The ICAAP exercise is supplemented with a qualitative description of the risk management and internal control systems, is reviewed by internal audit and internal validation teams and is subject to a corporate governance structure that culminates in its approval by the Group’s board of directors, which also establishes the strategic factors relating to risk appetite and capital adequacy targets on an annual basis.

In accordance with the capital requirements set by the European Directive and Bank of Spain rules, the Group publishes its Pillar III disclosures report on an annual basis. This report comfortably meets the market transparency requirements in relation to Pillar III. The Group considers the market reporting requirements to be fundamental in order to complement the minimum capital requirements of Pillar I and the supervisory review process performed through Pillar II. In this respect, its Pillar III disclosures report incorporates the recommendations made by the European Banking Authority (EBA), thus making Santander Group an international benchmark in terms of market transparency, as is already the case with its annual report.

Parallel to the roll-out of advanced approaches at the various Group units, Santander Group is carrying out an ongoing training process on Basel at all levels of the organization, covering a significant number of professionals from all areas and divisions, with a particular focus on those most affected by the changes arising from the adoption of the new international capital standards

At December 31, 2013, our eligible capital exceeded the minimum required by the Bank of Spain by over €23.3 billion. Our Spanish subsidiary banks were, at December 31, 2013, each in compliance with these capital adequacy requirements, and all our foreign subsidiary banks were in compliance with their local regulations.

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Concentration of Risk

Spanish banks may not have exposure to a single person or group in excess of 25% of the bank’s own funds. Where that customer is a credit institution or investment firm, or where the economic group includes one or more credit institutions or investment firms, the value of all exposures may not exceed 25% of the bank’s own funds or €150 million, whichever the higher, provided that the sum of exposure values to all customers in the economic group that are not credit institutions or investment firms does not exceed 25% of the bank’s own funds. Any exposure to a person or group exceeding 10% of a bank’s own funds is deemed a concentration (excluding exposures to the Spanish Government, the Bank of Spain, the European Union and certain other exceptions).

Legal Reserve and Other Reserves

Spanish banks are subject to legal and other restricted reserves requirements. In addition, we must allocate profits to certain other reserves as described in Note 33 to our consolidated financial statements.

Allowances for Credit Losses and Country-Risk

For a discussion relating to allowances for credit losses and country-risk, see “—Classified Assets—Bank of Spain’s Classification Requirements” herein.

Employee Pension Plans

At December 31, 2013, our pension plans were all funded according to the criteria disclosed in Note 25 to our consolidated financial statements.

Restrictions on Dividends

We may only pay dividends (including interim dividends) if such payment is in compliance with the Bank of Spain’s minimum capital requirement (described under “—Capital Adequacy Requirements” herein) and other requirements or, as described below, under certain circumstances when we have capital that is 20% or less below the Bank of Spain’s minimum capital requirements.

If a banking group meets this capital requirement, it may dedicate all of its net profits to the payment of dividends, although in practice Spanish banks normally consult with the Bank of Spain before declaring a dividend. Even if a banking group meets the capital requirement as a group, any consolidated Spanish credit entity that is a subsidiary that does not meet the capital requirement on its own will be subject to the limitations on dividends described below. If a banking group or any Spanish credit entity subsidiary of the group has capital that is 20% or less below the Bank of Spain’s minimum capital requirement, it must devote an amount of net profits determined by the Bank of Spain to reserves, and dividends may be paid out of the remainder only with the prior approval of the Bank of Spain. If the capital is 20% or more, or its basic capital is 50% or more, below the minimum requirement, it may not pay any dividends and must allocate all profits to reserves unless otherwise authorized by the Bank of Spain. In the case of a banking group failing to meet the capital requirement, however, the Bank of Spain can authorize that the consolidated subsidiaries in the group pay dividends without restriction, so long as they are at least 50% owned by group companies and, if they are credit entities, independently comply with the capital requirement.

If a bank has no net profits, its board of directors may propose at the general meeting of shareholders that a dividend be declared out of retained earnings. However, once the board of directors has proposed the dividend to be paid, it must submit the proposal to the Minister of Economy and Competitiveness who, in consultation with the Bank of Spain, may in his discretion authorize or reject the proposal of the board.

Compliance with such requirements notwithstanding, the Bank of Spain is empowered to advise a bank against the payment of dividends on solvency and soundness grounds. If such advice is not followed, the Bank of Spain may require that notice of such advice be included in the bank’s annual report registered before the Mercantile Register. In no event may dividends be paid from certain legal reserves.

Interim dividends of any given year may not exceed the net profits for the period from the closing of the previous fiscal year to the date on which interim dividends are declared. In addition, the Bank of Spain recommends that interim dividends not exceed an amount equal to one-half of all net income from the beginning of the corresponding fiscal year. Although banks are not legally required to seek prior approval from the Bank of Spain before declaring interim dividends, the Bank of Spain has asked that banks consult with it on a voluntary basis before declaring interim dividends.

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In February 2014 the IMF recommended that the Bank of Spain limit the amount of dividends payable in cash in 2014 by Spanish banking institutions to 25% of such bank’s attributable profits. The Bank of Spain has given this recommendation to the Spanish banking institutions.

Limitations On Types Of Business

Spanish banks generally are not subject to any prohibitions on the types of businesses that they may conduct, although they are subject to certain limitations on the types of businesses they may conduct directly.

The activities that credit institutions authorized in another Member State of the European Union may conduct and which benefit from the mutual recognition within the European Union are detailed in article 52 of Law 26/1988 (July 29, 1988).

Deposit Guarantee Fund

The Deposit Guarantee Fund on Credit Institutions (Fondo de Garantía de Depósitos, or the “FGD”), which operates under the guidance of the Bank of Spain, guarantees in the case of the Bank and our Spanish banking subsidiaries: (i) bank deposits up to €100,000 per depositor; and (ii) securities and financial instruments which have been assigned to a credit institution for its deposit, register or for other such services, up to €100,000 per investor. Law 9/2012, of November 14, on restructuring and dissolution of credit entities (which enacts all the provisions of the Royal Decree-law 24/2012, of 31 August), which has strengthened the position of the Fund for the Orderly Restructuring of the Banking Sector (Fondo de Restructuración Ordenada Bancaria or “FROB”) giving it a prominent role within the restructuring and resolution processes of credit entities, clarified the role of the FGD, being now limited to guaranteeing deposits. However, taking into account the principle of minimal capital impact, the FGD may participate in resolution proceedings by granting financial support in exceptional cases.

The FGD is funded by annual contributions from member banks. The amount of such bank’s contributions will not exceed 3 per thousand of the year-end amount of deposits to which the guarantee extends depending of the kind of credit institution. Nevertheless, further contributions will be suspended when the FGD’s funds exceed the requirement by 1% or more of the calculation basis.

As of December 31, 2013, the Bank and its domestic bank subsidiaries were members of the FGD and thus were obligated to make annual contributions to it.

The Bank participates in the Deposit Guarantee Fund. The contributions made by the Bank to this Fund amounted to €260 million in 2013 (€156 million at the end of 2012). These contributions include the amounts incurred in 2013 in relation to the extraordinary contribution to be made based on the deposits as of December 31, 2012 established in Additional Provision Five of Royal Decree-Law 21/2012, of July 13, on liquidity measures of Public Authorities and in the financial sector, as determined by Article 2 of Royal Decree-Law 6/2013, on protection of holders of certain savings and investment products and other financial measures.

Data Protection

Law 15/1999, dated December 13, 1999, establishes the requirements relating to the treatment of customers’ personal data by credit entities. This law requires credit entities to notify the Spanish Data Protection Agency prior to creating files with a customer’s personal information. Furthermore, this law requires the credit entity to identify the persons who will be responsible for the files and the measures that will be taken to preserve the security of those files. The files must then be recorded in the Spanish Data Protection General Registry, once compliance with the relevant requirements has been confirmed. Credit entities that breach this law may be subject to claims by the interested parties before the Spanish Data Protection Agency. The Data Protection Agency, which has investigatory and sanctioning capabilities, is the Spanish Authority responsible for the control and supervision of the enforcement of this law.

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Recent Legislation

Law 6/2011 of April 11, 2011 amended Law 13/1985 of May 25, 1985 on investment ratios, own funds and reporting requirements for financial intermediaries, Law 24/1988 of July 28, 1988 on the securities market and Legislative Royal Decree 1298/1986 of June 28, 1986 on the adaptation of current regulatory credit institutions law to EU legislation. The purpose of this Law is to commence transposition of Directive 2009/111/EC of the European Parliament and of the Council of September 16, 2009 amending Directives 2006/48/EC, 2006/49/EC and 2007/64/EC as regards banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements and crisis management. In connection with this, Royal Decree 771/2011 of June 3, 2011 amended Royal Decree 216/2008 of February 15, 2008 on financial institutions’ own funds and Royal Decree 2606/1996 of December 20, 1996 on credit institutions deposit guarantee funds. The most noteworthy developments from this financial regulation are (i) that it makes it compulsory for credit institutions and investment firms to meet certain requirements to allow them to assume exposures to securitization positions and to initiate such securitization; (ii) adapts the legal regime governing credit institution preference shares to conform international requirements ensuring accordingly that they are an effective instrument for meeting solvency requirements; (iii) changes the limit on large exposures of credit institutions generally maintaining it such that the value of that exposures of a credit institution to a customer (entity or economic group) may not exceed 25% of its own funds; (iv) changes the risk management policy of credit institutions, especially that regarding liquidity risk, and sets up new credit institution remuneration policies; (v) strengths the competence and cooperation between supervisors; and (vi) amends the legislation on credit institution deposit guarantee funds, introducing a new regime for additional contributions to these funds based on the remuneration of the deposits in them. Circular 4/2011, of November 30, 2011, of the Bank of Spain, which amended Circular 3/2008, of May 22, 2008, on the determination and control of minimum own funds, completed the transposition of EU legislation on own funds in force at that time. This transposition was initiated with Sustainable Economy Law 2/2011 of March 4, 2011 and followed up by Law 6/2011 of April 11, 2011, which amended Law 13/1985 of May 25, 1985 on investment ratios, own funds and reporting requirements for financial intermediaries, Law 24/1988 of July 28, 1988 on the securities market and Legislative Royal Decree 1298/1986 of June 28, 1986 on the adaptation of current credit institution law to EU legislation, and, finally, by Royal Decree 771/2011 of June 3, 2011 amending Royal Decree 216/2008 of February 15, 2008 on the own funds of financial institutions.

Law 7/2011 of April 11, 2011 amended Law 41/2009 of November 12, 1999 on payment and securities settlement systems and Royal Decree-Law 5/2005 of March 11, 2005 on urgent reforms to boost productivity and improve public procurement. The purpose of this Law is to transpose Directive 2009/44/EC of the European Parliament and of the Council of May 6, 2009 amending Directive 98/26/EC on settlement finality in payment and securities settlement systems and Directive 2002/47/EC on financial collateral arrangements as regards linked systems and credit claims. More specifically, this Law is intended to recognize so-called interoperable systems and extend to them the legislation on settlement finality of credit transfer orders given through these systems. The main changes introduced by this law are (i) updates to the definition of “credit transfer order” and (ii) an extension to interoperable systems the rules on the irrevocability and finality of settlement of transfer orders given through such systems and to extend to these interoperable systems the legal regime under Law 41/2009 for insolvency of a system participant the procedures establishes and the effects on transfer orders and on collateral.

Law 15/2011 of June 16, 2011, which came into force last June 18, 2011, amended certain financial legislation applying to the Spanish legal system Regulation 1060/2009 of the European Parliament and of the Council of September 16, 2009 on credit rating agencies, and was aiming at establishing the obligation for certain financial institutions (specifically, credit institutions, investment firms, mortgage securitization special purposes entities and collective investment institution custodians) to use the ratings issued by credit ratings agencies, which, from the standpoint of solvency, shall require that these have been issued or endorsed by an ESMA established in the European Union and registered according to Regulation 1060/2009.

Law 16/2011 of June 24, 2011 on credit agreements for consumers, which transposed into Spanish Law Directive 2008/48/EC of the European Parliament and of the Council of April 23, 2008 on credit agreements for consumers and repealed Law 7/1995 of March 23, 1995 on consumer credit, and came into force on September 25, 2011, is basically intended to improve consumer information and applies to those contracts whereby a creditor grants to a consumer credit in the form of a deferred payment, loan, credit line or other similar financial accommodation.

Law 21/2011 of July 26, 2011 on electronic money establishes a new regulatory framework for electronic money institutions and for the issuance of electronic money, which partially transposed Directive 2009/110/EC of September 16, 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions amending Directive 200/46/EC of September 18, 2000.

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Law 25/2011 of August 1, 2011, which entered into force on October 2, 2011, partially amends the Spanish Corporate Enterprises Act and transposes Directive 2007/36/EC of the European Parliament and of the Council dated July 11, 2007. The most important novelties of the law are: (i) the recognition of the company’s electronic corporate address or corporate website for legal corporate purposes; (ii) the introduction of appraisal rights for dissenting shareholders in the event a substantial amendment to the corporate purposes and in the event of non-listed companies not distributing a third of distributable profits “derived from activities within their core corporate purpose” from their fifth year of the existence; (iii) the possibility for companies to introduce additional circumstances in the articles of association which would grant the company the right to forcibly redeem the shares of such shareholders; and (iv) other amendments of the Spanish Corporate Enterprises Act in relation to the winding-up and liquidation of all form of companies and the general shareholders meeting.

Royal Decree Law 16/2011 of October 14, 2011, as amended by Royal Decree Law 19/2011 of December 2, 2011, which came into force on October 15, 2011, establishes the Deposit Guarantee Fund for Credit Institutions, which replaces the three existing funds up to then and consolidates the existing funds in into the Single Deposit Guarantee Fund for Credit Institutions; and (ii) increases the possibility of improving the solvency of the affected institutions, expanding the situations in which the Fund may act.

Royal Decree-Law 9/2011 of August 19, provides certain temporary measures which affect corporate income tax, increasing the rate applied to determine the interim payments to be filed by certain large companies from October 2011 to December 2013; limiting for tax years 2011 to 2013 the maximum amount of carried forward tax losses that can be offset to 75% of the taxable base for companies whose turnover within the 12 months preceding the beginning of the tax year is between 20 and 60 million euros, and to 50% if such turnover is over 60 million euros; and reducing in those years the deduction for financial goodwill to a maximum annual limit of 1%. In addition, effective for tax periods beginning as of January 1 2012, the maximum period for offsetting tax losses from previous years is extended from 15 to 18 years.

Royal Decree-Law 13/2011, of September 16, temporarily restores the wealth tax for 2011 and 2012, abolishing the existing 100% tax rebate, and increases the value of the exemption for dwelling houses to €300,000 and the general tax-free amount to €700,000, extending this general tax-free amount to non-residents in Spain.

Law 31/2011, of October 4, 2011, amended Collective Investment Institutions Law 35/2003 of November 4 in order to adapt it to recent EU legislation. It introduced certain technical improvements and various qualifications in respect of the requirements for taking up and pursuing the activity of Collective Investment Institutions and also the “Community passport” for the cross-border management of investment funds, as envisaged by Directive 2009/65/EC.

Law 32/2011, of October 4, 2011, which came into force on October 6, 2011, amended Law 24/1988, of July 28, on the Securities Market, and is intended, among other aspects, to reform securities clearing, settlement and registration arrangements. The Law 32/2011 imposed the obligation to carry out all equity transactions traded, in both, official secondary markets and multilateral trading systems through a central counterparty. Likewise, it removed the references to the mechanism for ensuring delivery allowing, ultimately, for cash settlement when securities cannot be obtained. In addition, Law 32/2011 sets up the basis of the regulatory regime of the central counterparty, establishing, among others: (i) the obligation to take the form of public limited company; (ii) the need to be authorized by the Ministry of Economy and Finance; (iii) that it will be subject to the supervisory regime of Spanish Securities Exchange Commission (CNMV) and Bank of Spain; (iv) that it will be subject to the significant shareholding regime of Law 24/1988, of July 28, on the Securities Market; (v) regulation of the committees that will form part of the central counterparty; and (vi) regulation of the insolvency of the central counterparty, any of its members or any client of a member. The Law 32/2011 also amended IBERCLEAR’s regulatory regime in connection with: (i) new corporate law rules that will facilitate the relationship between IBERCLEAR and the other agents of the trading and post-trading system and (ii) the regulation on the agreements that IBERCLEAR may carry out is completed to provide a better coverage to the TARGET2-Securities project.

Royal Decree 1360/2011 of October 7, 2011, amending Royal Decree 1816/1991 of 20 December 1991, on cross-border economic transactions, and Ministerial Order EHA 2670/2011 of 7 October 2011, amending the Order dated December 27, 1991, which implemented Royal Decree 1816/1991, was aimed at aligning Spanish regulations in this area to those in force in practically all the Member States, and at acting in anticipation of the forthcoming reform of Regulation 924/2009, of the European Parliament and of the Council of September 16, 2009 on cross-border payments in the Community. Apart from certain improvements in aspects relating to the accreditation of resident and non-resident status, the main content of the recent regulations amended the reporting system for statistical purposes of cross-border economic transactions. Under the previous system, entities had to identify transactions entailing a cross-border payment, demanding data of customers to complete the information on the transactions in which they were taking part, and to submit such information to the Bank of Spain. The new regulations eliminated the obligation to submit that information which is not immediately available to them and automatable. Furthermore, for those making cross-border transactions, the obligation is included to furnish the information that the Bank of Spain may require of them. The Royal Decree and the Order became effective on June 1, 2012.

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Law 38/2011, of October 10, 2011, reforming Insolvency Law 22/2003 of July 9, which became effective on January 1, 2012, introduces a series of amendments in order to correct errors of approach detected in practice and to update the attendant regulations on the basis of the experience and the application thereof. It also affords insolvency proceedings greater legal certainty; the opening up of alternatives which seek to strike a balance between the firm’s viability and the necessary legal guarantees; the promotion of electronic media, and simplified and more flexible proceedings.

Royal Decree-Law 9/2012, of March 16, 2012, on simplification of reporting and documentation requirements in the case of mergers and divisions of share capital companies amended the consolidated text of the Share Capital Companies Law enacted by Legislative Royal Decree 1/2010 of July 2, 2010 and Law 3/2009 of April 3, 2009 on structural changes to companies, aiming at transposing into Spanish law Directive 2009/109/EC of the European Parliament and of the Council of September 16, 2009 amending Council Directives 77/91/EEC, 78/855/EEC and 82/891/EEC, and Directive 2005/56/EC regarding reporting and documentation requirements in the case of mergers and divisions. The Royal Decree-Law 9/2012 became effective on March 18, 2012. Law 1/2012, of June 22, 2012, on simplification of reporting and documentation requirements in the case of mergers and divisions of share capital companies, repealed Royal Decree-Law 9/2012 of March 16, 2012.

Royal Decree 778/2012 of May 4, 2012, on the legal regime for electronic money institutions (ELMIs), implementing Law 21/2011 of July 26, 2011 on electronic money, established a new regulatory framework for ELMIs and the issuance of electronic money. This Royal Decree completed the transposition of Directive 2009/110/EC of September 16, 2009 on the taking up, pursuit and prudential supervision of the business of ELMIs amending Directives 2005/60/EC of October 26, 2005 and 2006/48/EC of June 14, 2006 and repealing Directive 2000/46/EC of September 18, 2000. The Royal Decree became effective on May 6, 2012.

Royal Decree 1336/2012, of September 21, 2012 amended certain royal decrees relating to the powers of European Services Authorities (“ESAs”). This Royal Decree, which completes the transposition of Directive 2010/78/EU of the European Parliament and of the Council of November 24, 2010, incorporates into Spanish law the obligation of the competent authorities (Bank of Spain and CNMV) to cooperate with, inform and communicate with their European counterparts (the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA)) on certain matters, some of which were initially regulated in Royal Decree-Law 10/2012 of March 23, 2012 amending certain financial legal provisions relating to the powers of the ESAs, and which are now addressed in their respective implementing provisions.

Royal Decree 1082/2012 of July 13, 2012, approved the implementing Regulations of Collective Investment Institutions (CIIs) Law 35/2003 of November 4, 2012, ended by Law 31/2011 of October 4, 2012. It also repealed the previous regulations in Royal Decree 1309/2005 of November 4, 2005. Among other things, the Royal Decree includes the amendments recently made by Law 31/2011 to Law 35/2003 and advances the transposition of EU legislation. The Royal Decree became effective on July 21, 2012.

Royal Decree-Law 20/2012 of July 13, 2012 on measures to ensure budgetary stability and the promotion of competitiveness which, among other reforms, amended Law 24/1988 of July 28, 1988 on the Securities Market (and Law 44/2002 of November 22, 2002 on financial system reform measures) to include a new financial instrument in the Spanish legal system, the so-called “internationalization covered bonds” (cédulas de internacionalización). These bonds are similar to “territorial covered bonds” (cédulas territoriales), introduced by Law 44/2002 and are fixed-income securities that may be issued by credit institutions, whose capital and interest are especially secured by loans and credits granted for the internationalization of companies. The total amount of internationalization covered bonds issued by a credit institution may not exceed 70% of the amount of the unrepaid “eligible” loans and credits.

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The Royal Decree-Law 20/2012 also introduces new tax measures on a range of taxes which, in some cases, amends or expands the reforms previously introduced by the Royal Decree-Law 9/2011, 20/2011 and 12/2012. The following are the most important tax measures in the Corporate Income Tax: (i) In 2012 and 2013 the offsetting of negative tax bases generated in previous years will be restricted to 50% for those entities whose turnover during the previous year was between €20 million and €60 million (the figure was previously 75%) and to 25% if the turnover exceeds €60 million (previously 50%). Over this same period, the deduction for goodwill arising from acquisitions of businesses will be subject to the maximum annual limit of 1% of the related amount (5% previously) (ii) Likewise, for fiscal years 2012 and 2013, the ceiling on the tax deduction for intangible fixed assets with an indefinite useful life is reduced from 10% to 2%. Regarding indirect taxation, as from September 1, 2012, the Royal Decree-Law also sets up that the standard rate of VAT increases from 18% to 21%, the reduced rate from 8% to 10%, and the super-reduced rate is held at 4%, which is applicable to staple goods and services. Certain goods and services hitherto taxed at the reduced rate (8%) will now be taxed at the standard rate (21%). Finally, the tax rate applicable to the delivery of housing units is maintained at 4% until December 31, 2012.

Law 16/2012, of December 27, by which different tax measures are adopted in the aim of consolidating public finances and the impulse of the economic activity (the Tax Measures Act). The following are the most significant measures in the Corporate Income Tax: the legal and tax regime of Real Estate Investment Trusts (SOCIMI) has been modified; the tax neutrality regime has been broadened to cover certain transactions of restructuring and winding-up of credit institutions; and, only with effect for fiscal years starting in 2013 and 2014, the tax depreciation of fixed tangible and intangible assets and real estate properties has been limited for large sized companies to 70% of the amount that would have been tax deductible before the limitation. The Law also creates the “tax on deposits at credit institutions”, aimed to tax deposits of all types placed at credit institutions throughout the country, though an initial tax rate of 0% has been established. Additionally, this Law has extended the enforcement of Wealth Tax for tax year 2013.

Law 7/2012, of October 29, which amends taxation and budgetary regulations and adapts financial regulation to permit increased action to prevent and combat fraud. Among other measures, it introduces the obligation for Spanish tax residents (whether they are private people or companies located in Spain) to make a tax declaration informing of all the assets they might have abroad, and limits to €2,500 the amount for cash transactions involving a professional or a business. In the VAT, new cases of reverse VAT charge are included in the supply of real estate where certain exemptions are waived, or the supply derives from the execution of a guarantee imposed on that property. In addition, article 108 of the Stock Exchange Law (Law 24/1988), regarding indirect taxation in the transfer of securities of companies that hold real estate assets, has been modified and simplified reducing its scope and being characterized as an anti-abuse provision.

Organic Law 7/2012, of December 27, on the amendment of the Criminal Code with respect to transparency and fighting tax and social security fraud. The reform includes an increase of the penalties and an extension to ten years in the statute of limitations for those who commit tax fraud when the quota exceeds €600,000 defrauded, fraud is done through a criminal group or organization, or the tax fraud is committed by the interposition of entities, business, tax havens or tax-free jurisdictions. The reform also contemplates the possibility of mitigating a penalty where the alleged tax offender admits the commission of the offence and pays the tax liability due.

On January 14, 2013 the U.S. and the Kingdom of Spain signed a protocol amending the Tax Treaty, which needs to be ratified by both countries and will enter into force three months following the later of the dates on which any of the countries give notice that their internal procedures for entry into force have been fulfilled. Among the most significant changes included in the Tax Treaty was the elimination of the taxation at source for interest, royalties and for dividends if the beneficial owner is a company that has owned shares in the last year representing 80% of the voting capital (withholding will be 5% if the recipient does not reach that percentage, but at least 10%). Capital gains will not be subject to taxation at source, unless they derive from the sale of real estate or companies whose assets consist mainly of real estate.

Law 17/2012 of December 27, 2012 on the State Budget for 2013 authorized the Minister for Economic Affairs and Competitiveness to increase State debt for year 2013 with the limitation that the outstanding balance at the end of the year may not exceed that on January 1, 2013 by more than €71 billion. The collective action clauses (CAC) that apply as of January 1, 2013 to all issues of public debt with a maturity of more than a year are a set of clauses aggregating representative majorities among bondholders. In the event of a proposed modification of debt instruments’ conditions, this avoids the need to obtain unanimity among all bondholders and thus makes it possible to adopt binding modifications, avoiding a minority’s being able to block solutions approved by the majority. This allows, for example, the bonds’ terms governing their issue or management to be modified with the prior consent of the issuer and a vote in favor by at least 75% of the total principal of the bonds in circulation represented by a duly called meeting of bondholders, or a written resolution signed by or on behalf of the holders of at least 66% of the total principal of the bonds in circulation. The instruments and issue mechanisms used for State debt have, however, been left broadly unchanged. Thus, ordinary and special auctions (competitive and non-competitive bids) and other procedures will continue to be used for issues. In particular, issues may be granted, in whole or in part, to one or more financial institutions to ensure their placement. Outright sales or the sale under repos of newly issued securities or expanded existing issues that the Treasury might have in its securities account may also be performed.

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On February 23, 2013, came into force the Royal Decree-Law 4/2013 on measures to support entrepreneurs and stimulate growth and job creation. The main changes from the financial and fiscal standpoint are: a) The measures to promote business finance include an amendment to the Regulations on the organization and supervision of private insurance, enacted by Royal Decree 2486/1998 of November 20, 1998, to allow insurance undertakings to invest in shares admitted to trading on the alternative stock market (MAB) or any other multilateral trading facility, and in venture capital funds, and that these investments be eligible as part of their technical provisions. Similarly, the regulations on pension schemes and pension funds, enacted by Royal Decree 304/2004 of February 20, 2004, have been amended to allow pension funds to invest in these securities. In both cases, a specific maximum limit of 3% of insurance undertakings’ total technical provisions, or of the pension funds’ total assets, in the securities of a single entity is established. This ceiling rises to 6% when they are issued or backed by entities belonging to the same group; b) Another measure to encourage non-bank finance of share capital companies is the elimination of the limit set in the Law on Share Capital Companies. This relaxation of the rules will only be applicable in the case of issues aimed at institutional investors, to ensure adequate protection of retail investors. Specifically, it applies in the following cases: 1) when aimed solely at qualified investors; or 2) investors purchasing securities of a minimum value of €100,000 in each issue; or 3) when offering securities with a nominal unit value of at least €100,000; c) in order to stimulate business creation and reduce the tax burden on new firms in their first few years of operation, a more favorable tax framework has been created for self-employed persons starting a business. Thus, new businesses starting after January 1, 2013 will pay corporate income tax in the first tax year in which the company’s taxable earnings are positive and in the subsequent tax year at a rate of 15% on the first €300,000 of taxable income, and 20% on the remainder. In line with the above, a new reduction of 20% on net business and professional earnings has been established in personal income tax for persons starting a business or professional activity, applicable to the first tax year in which their earnings are positive and in the subsequent tax year. The current limit on the exemption for unemployment benefits received as a single payment has also been eliminated (this exemption was previously set at €15,500); d) The period in which debtors are to settle payment (unless stipulated otherwise in the contract) has been shortened from 60 to 30 calendar days after the receipt of the goods or provision of services, even if the invoice or demand for payment is received previously. This limit can be extended to 60 calendar days by agreement between the parties in exceptional cases. It is stipulated that, if the parties have agreed a deferred payment timetable, and either of them fails to meet payment on the agreed date, the interest on arrears will be calculated only on the overdue amounts. The legal interest rate the debtor is liable to pay in the event of late payment has been increased, such that it is now the interest rate applied by the ECB in its most recent main refinancing operation, plus eight percentage points. Late payment incurs a fixed charge of €40 that the creditor is entitled to collect from the debtor, which will be added to the principal without the need for an express demand. All duly substantiated costs of collection caused by the default will be added to this amount. As regards these costs, the legislation states that any agreement between the parties excluding compensation will be presumed to be an unfair contract term and thus null and void.

On July 28, 2013, Law 11/2013 of July 26 on business support measures and measures conducive to growth and job creation came into force. It revises the provisions in Royal Decree-Law 4/2013 of February 2013 on business support some of which affect the financial sector. More recently, Law 14/2013 of September 27, on support to and internationalization of business not only complements that mentioned above, but also introduces new fiscal and social security support for business and promotes channels of financing and growth in the international markets. The most notable changes introduced by Law 11/2013 and Law 14/2013 , particularly those of a financial and fiscal nature, are as follows: a) Own funds and core capital requirements of credit institutions in respect of risk-weighted exposure amounts for credit risk to SMEs have been reduced, since now the capital requirements for risks of this type will be multiplied by a supporting factor of 0.7619; b) The regulatory framework governing cédulas de internacionalización (internationalization covered bonds) was updated to address in greater detail the assets pledged as collateral for them, and a new instrument, bonos de internacionalización (internationalization bonds), was created to lend greater flexibility to the issuance of securities collateralized by loans linked to internationalization (without prejudice, in any case, to the unlimited liability of the issuer). Compared with the previous legislation, the list of eligible collateral is broadened and its scope is extended to include internationalization bonds. Thus the principal of and interest on covered bonds will be particularly collateralized by loans relating to the financing of goods and services export contracts or to the internationalization of firms meeting certain requirements. These requirements include, inter alia, that the firm has a high credit quality, and that the loan has been granted to general government or to EU or non-EU public sector entities or to multilateral development banks or international organizations or, regardless of the borrower, has been guaranteed by these bodies; c) Certain amendments were made to the regulations on the organization and supervision of private insurance enacted by Royal Decree 2486/1998 of November 20, 1998. In particular, it is provided that insurance companies may invest in securities admitted to trading on the Mercado Alternativo Bursátil (alternative stock market) or on the Mercado Alternativo de Renta Fija (alternative fixed-income market) and in venture-capital companies and that those investments qualify for the coverage of technical provisions under certain conditions, although they are not eligible for an amount above 10% of total technical provisions. In the same vein, amendments were made to the pension scheme and pension fund regulations enacted by Royal Decree 304/2004 of February 20, 2004 so as to allow pension funds to invest in these securities; d) The provisions of Royal Decree-Law 4/2013 regarding the removal, in certain cases, of the limit imposed on share capital companies are retained, and, accordingly, the total amount of debt securities issued may not exceed paid-in share capital plus reserves to ensure that retail investors are adequately protected, this flexibility will only apply in those cases in which the issues are targeted at institutional investors, specifically: 1) when they are targeted exclusively at qualified investors; 2) when the securities offering is directed at investors that purchase securities amounting to at least €100,000 per investor in each separate offering, or 3) when the offering is of securities with a unit nominal value of at least €100,000. Also, certain refinements are made in respect of the issuance by share capital companies of debt or other securities of which recognize or create debt and are to be admitted to trading in a multilateral trading system. Thus, it will not be required to execute a public deed, register the issue or perform other related acts in the Mercantile Register, including the Official Gazette of the Mercantile Register; and e) The tax framework of Royal Decree-Law 4/2013, which favors the self-employed who start up a business, with a view to encouraging the creation of businesses and to reducing the tax burden during the initial years of business activity, was retained.

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On March 24, 2013, came into force Royal Decree-Law 6/2013 of March 22, 2013 on the protection of the holders of certain savings and investment products and other financial measures was published. This Royal Decree-Law introduces certain mechanisms to speed up the resolution of disputes between credit institutions and their customers, primarily through arbitration, in relation to the marketing of certain savings and investment products, particularly hybrid capital instruments (generally preference shares) and subordinated debt. It also aims to offer liquidity to holders of shares received in exchange for these instruments, granting the Credit Institution Deposit Guarantee Fund (FGD) sufficient legal powers to create market mechanisms allowing liquidity alternatives for these shares. A monitoring committee has been set up as a decision-making body under the Ministry of Economy and Competitiveness to oversee hybrid capital and subordinated debt instruments, with specific responsibility for: 1) analyzing the factors behind judicial and extrajudicial claims by holders of this type of financial product against credit institutions in which the Fund for the Orderly Restructuring of the Banking Sector (FROB) has a shareholding; 2) quarterly submission of a report to the Spanish Parliament on the elements underlying these claims, and, where applicable, 3) making proposals to the competent authorities to improve the protection of purchasers of these products. The committee will also determine the basic criteria to be applied by credit institutions in which the FROB has a shareholding in order to offer their customers the option of submitting disputes arising in relation to the instruments mentioned to arbitration, so that they are appropriately compensated for the economic loss incurred. It will also specify the criteria to designate the group of customers whose claims, in view of their personal or family circumstances, should receive priority treatment by credit institutions in which the FROB has a shareholding. The committee will agree these criteria at its inaugural meeting and may review them on a quarterly basis. The commission will be chaired by the President of the CNMV, with the Deputy Governor of the Banco de España as deputy chairman, with a secretary appointed by the CNMV. The remaining members are the General Secretary for Health and Consumer Affairs, at the Ministry of Health, Social Services and Equality; the General Secretary for the Treasury and Financial Policy, at the Ministry of Economy and Competitiveness; and the President of Consumers’ and Users’ Council. Representatives appointed by the consumer affairs authorities at the regional government and the National Consumer Affairs Institute who have taken part in the claim and resolution mechanisms mentioned will also be invited to attend in an advisory capacity. The Royal Decree-Law also sets out a mechanism for providing liquidity through the Deposit Guarantee Fund (FGD) for shares due to be received by holders of the aforementioned instruments as a result of their being exchanged. Thus, first of all, the functions of the FGD have been expanded to allow it to subscribe for shares or subordinated debt instruments issued by Sareb. Moreover, it is empowered to purchase ordinary shares not admitted to trading on a regulated market issued by credit institutions transferring their assets to Sareb and which are the product of the conversion of hybrid capital instruments and subordinated debt. The FGD will primarily acquire the shares of the institution’s customers who are in situations of particular hardship as a result of their personal and family circumstances, in accordance with the criteria laid down by the committee. The foregoing instruments will be acquired at a price that does not exceed their market value and is in accordance with European Union rules on State aid. For the purposes of determining the market value, the FGD will commission an independent expert report. In order to maintain the FGD’s asset position healthy to ensure it is able to perform its role in supporting the stability of the Spanish financial system properly, a special one-off contribution to it by member institutions has been established, of 3 per mille of deposits held on December 31, 2012. This contribution will be made in two phases. A first tranche equivalent to 40% is to be paid within 20 business days of December 31, 2013. The management committee of the FGD may establish certain exemptions in relation to this tranche, such as: 1) non-application of this tranche to institutions in which the FROB has a majority shareholding; 2) a deduction of up to a maximum of 50% of the contributions of FGD member institutions whose basis for the calculation does not exceed €5 billion; and 3) a deduction of up to a maximum of 30% of the amounts invested by institutions in the subscription or purchase, before December 31, 2013, of shares or subordinated debt instruments issued by Sareb. The second tranche, which will account for the remaining 60%, must be paid within 7 days of January 1, 2014, in accordance with the timetable of payments laid down by the management committee. Without prejudice to the payment timetable, the amount due for this second tranche will be recognized on the assets of the FGD on the date of settlement of the first tranche.

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On May 15, 2013, Law 1/2013, on measures to strengthen the protection of mortgagors, debt restructuring, and rented social housing, came into force on May 15, 2013. The Law 1/2013 was partially amended by Law 8/2013, of June 26, on urban renewal, regeneration and rehabilitation. An immediate two-year moratorium on evictions of families considered to be especially vulnerable has been enacted. This exceptional temporary measure will affect any mortgage foreclosure proceedings or extrajudicial sale granting the property to the creditor affecting the principal residence of persons included in certain groups. Special vulnerability is defined here in similar terms as in Royal Decree-Law 27/2012 of November 15, 2012 (BOE of on urgent measures to strengthen the protection of mortgage debtors., namely applying to: 1) large families; 2) one-parent families with two dependent children; 3) families with a child aged under three years; 4) families with a member with a recognized level of disability of more than 33%, requiring long-term care, or suffering from illness accredited as permanently preventing them from working; 5) families in which the mortgagor is unemployed and has exhausted their unemployment benefits; 6) families living together in which one or more persons related to the mortgagor or their spouse by a family tie of up to the third degree of kinship is disabled, requires long term care, or suffers from a serious illness accredited as permanently preventing them from working; and 7) families in which there is a victim of domestic violence, provided the dwelling subject to repossession is their principal residence. Improvements have been made to the mortgage market with the amendment of the consolidated text of the Mortgage Law, promulgated by Decree on February 8, 1946; Law 2/1981 of March 25, 1981 on mortgage market regulation; and Law 41/2007 of December 7, 2007, amending Law 2/1981 of March 25, 1981 on mortgage market regulation and other rules of the mortgage and financial system, regulating reverse mortgages and long-term care insurance and establishing certain tax rules. The deed of mortgage on the property must state whether the mortgaged property is intended as the principal residence or not. Unless proven otherwise, at the time of foreclosure it will be deemed that the property is the principal residence if so stated in the deed. The deed will also be required to include, together with the customer’s signature, a handwritten statement, with the wording to be determined by the Bank of Spain, to the effect that the borrower has been adequately warned of the possible risks arising out of the contract. This will apply, in particular, in the following cases: 1) when limitations are placed on the variability of the interest rate, in the form of floor and ceiling clauses, in which the limit on downward variations is less than that on upward variations; 2) when the contract incorporates an interest rate hedging instrument, or 3) when the loan is in one or more foreign currencies. The Mortgage Law has also been strengthened as regards the arrangements for extrajudicial sales of mortgaged property, provided that this has been agreed in the mortgage deed in the event of a default on payment of principal or interest on the guaranteed amount. Various amendments have also been made to Law 1/2000 of January 7, 2000 on Civil procedure in order to ensure that mortgage foreclosure proceedings take place in a way that protects the rights and interests of mortgagors appropriately, and overall, to streamline foreclosure proceedings and make them more flexible. In particular, the legal costs that may be claimed from the foreclosed debtor may in no case exceed 5% of the amount demanded in the foreclosure order. The possibility of a reduction in the outstanding debt has been provided for, such that when part of the debt remains unpaid after mortgage foreclosure of the debtor’s principal residence, the debtor may be released from it if certain conditions are satisfied. These are, settlement of 65% of the remainder within five years, together with interest at the legal rate, or if that is not possible, 80% over a period of ten years. The debtor is also entitled to a share of any possible future revaluation of the foreclosed property. Specifically, if the foreclosed property is sold in the following ten years, the outstanding debt for which the debtor is liable will be reduced by 50% of the capital gain obtained from the sale. If, during the periods indicated above, the property is realized for a sum greater than that for which the debtor is liable, the latter will be released under the above rules and be entitled to the remainder of the proceeds. If these periods expire in 2013 they will be extended until January 1, 2014.

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Royal Decree-Law 11/2013, of August 2, on the protection of part-time workers and other urgent economic and social measures. Among other measures, in order to comply with the decision adopted by the European Commission last July 17, 2013, which concluded that the Spanish tax lease arrangements for the acquisition of vessels as worded till December 31, 2012 was partially incompatible with EU rules on state aid, introduces the transitional regime to be applied to all existing administrative authorizations affected by the content of that Decision.

Law 14/2013, of September 27, on support to entrepreneurs and their internationalization. Among other measures, it modifies the VAT regulation, introducing with effect from January 1, 2014, an optional cash basis regime for VAT tax payers whose turnover during the previous calendar year was less than €2 million.

Law 16/2013, of October 29, establishing certain measures on environmental taxation and taking other tax and financial measures on. It includes different changes to corporate income tax; among the most significant ones:

a) For tax periods beginning on or after January 1, 2013: (i) it has eliminated the tax deductibility of impairment losses on holdings in the capital or equity of entities, whether or not resident in Spain, and the possibility of deducting losses incurred abroad by permanent establishments (“PEs”); (ii) it has introduced a deferral regime for tax losses incurred on intragroup transfers of securities representing a holding in the capital or equity of entities, or on intragroup transfers of the PE, until the securities are transferred to third parties outside the group or the transferor or transferee cease to form part of the group; and new restrictions for the calculation of tax losses on the transfer of holdings.

b) It has renewed for tax periods beginning in 2014 and 2015, some temporary measures which were introduced exceptionally for years 2012 and 2013, among others: (i) the offsetting of tax losses carryforwards will be restricted to 50% of the tax base before such offset for those entities whose turnover during the previous year was between €20 million and €60 million, and to 25% if the turnover exceeds €60 million; though these limitations will not apply to income/gains subject to debt compositions as a result of an arrangement with creditors not related to the taxpayer that is approved in a tax period beginning on or after January 1, 2013 (ii) the limitations on the tax deductibility of goodwill to 1% per year, and of intangible assets with an indefinite useful life to 2% per year, (iii) the increase in the rates applicable for determining the amount of the tax prepayment for large companies

Royal-Decree-law 14/2013, of November 29, on urgent measures to adapt Spanish Law to European Union legislation on the supervision and solvency of financial institutions. The new legislation approved introduces important tax measures aimed at allowing for certain deferred tax assets (“DTAs”) to continue to be classed as capital, in line with legislation in force in other European Union member states, in such a way that Spanish credit institutions may operate in a uniform competitive environment. It states that certain temporary differences deriving from bad debts and pensions will receive a special treatment as regards their inclusion in the tax base, with retroactive effects for tax periods commencing on or after January 1, 2011. Moreover, for tax periods commencing on or after January 1, 2014, the timing differences which, after taking into account the aforementioned rules, cannot be used in certain circumstances (either because the taxpayer incurs accounting losses or because it is liquidated or has an insolvency order against it) can be “converted” into current credits against the tax authorities (which can be cash-settled or offset against other current tax debts, at the taxpayer’s option). Lastly, the provision establishes that after certain periods have elapsed without being able to use those tax assets, they can be exchanged for public debt securities.

Law 22/2013, of December 23, on 2014 National General Budget, among other tax measures, includes the extension for the year 2014 of certain temporary measures that had been introduce for tax years 2012 and 2013, among the most significant ones: (i) the supplementary levy scale on Individual Income Tax, (ii) the increase of the withholding tax rates for nonresident income to 24.75% (standard rate) and 21% (applicable on dividends, interest and capital gains), instead of 24% and 19% rates respectively, (iii) the extension of the Wealth Tax enforcement. Royal Decree-Law 1/2014, of January 24, has also extended until 31 December 2014 the increase of the 19% withholding rate in the Corporate Income Tax to 21%.

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Instrument of Ratification of the Convention between the Kingdom of Spain and Argentina for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and on capital, made in Buenos Aires on March 11, 2013, (published in BOE January 14, 2014). The new Convention entered into force on December 23, 2013, but new will apply retroactively to January 1, 2013, replacing the previous treaty that had been terminated unilaterally by Argentina with effects from the same date. In general the new treaty retains the terms of the previous treaty; however, it excludes relief from Argentina’s 0.5% wealth tax. The Argentine government terminated the previous treaty in 2012. Among the most significant changes included in the new Tax Treaty is the elimination of the exclusive taxation in the country of residence of assets consisting of shares in a company and the Most Favorable Nation clause (affecting interest, royalties and capital gains) of the previous protocol.

On March 14, 2013, a new Tax Treaty was signed between Spain and the United Kingdom. The ratification process was concluded in April 2014 and the new Treaty will apply in Spain from June 12, 2014 for withholding taxes and from January 1, 2015 for income taxes and other taxes, and in the U.K. from June 12, 2014 for withholding taxes, from April 6, 2015 for income and capital gains taxes, and from April 1, 2015 for corporation tax. Among the most relevant changes introduced by the new Treaty, the interests’ and royalties’ withholding tax rates have been reduced to 0%, and the dividend withholding tax rate has been reduced to 0% if the beneficial owner is a company that controls, directly or indirectly, at least 10% of the capital in the company paying the dividends or a pension scheme.

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In an attempt to deal with the international financial crisis, due to the exceptional circumstances notably beginning in the second half of 2008, the following laws were approved in Spain:

• Royal Decree-Law 1642/2008 of December 10 increased consumer deposit and investment guarantees up to €100,000 for each depositor or investor and Spanish entity.

• Royal Decree-Law 6/2008 of October 10 creates the Spanish Financial Asset Acquisition Fund, and Order EHA/3118/2008, dated October 31, enacts this Royal Decree. The purpose of the fund, which is managed by Spain’s Ministry of Economy and Competitiveness and has an initial endowment of €30 billion that can be increased to €50 billion, is to acquire, with public financing and based on market criteria via auctions, financial instruments issued by credit institutions and securitization funds (which are backed by loans granted to individuals, companies and non-financial entities) as a measure to increase liquidity.

• Royal Decree-Law 7/2008 of October 13 on Emergency Economic Measures in connection with the Concerted Euro Area Action Plan (“RD 7/2008”), and Order EHA/3364/2008, dated November 21, as amended by Order EHA/3748/2008 of December 23, enacting article 1 of the aforementioned Royal Decree, include the following measures:

– Article 1 of RD 7/2008, authorizes the granting of state guarantees for certain new financing transactions carried out by credit entities resident in Spain up to a maximum amount of €100 billion. The purpose of Order EHA/3364/2008, as amended by Order EHA/3748/2008 is to implement the provisions of RD 7/2008 and to specify certain essential aspects of the system for granting guarantees to credit entities, such as: (i) the characteristics of the guarantees to be granted; (ii) the requirements that the beneficiary entities and the transactions must fulfill; and (iii) the process to be followed in order to grant the guarantees. Debt issued under this state guarantee must form part of individual operations or issuance programs; not be subordinated or secured by any other class of guarantee; be traded on official Spanish secondary markets; mature within three months and three years (although this maturity can be extended to five years subject to prior notification to the Bank of Spain); be fixed or floating rate (subject to special conditions for floating-rate debt); be repaid in a single installment at maturity; not have any options or other derivatives attached to it; and, not be less than €10 million per issue. The deadline for issuing debt eligible for state guarantees was December 31, 2009 and the total amount of guarantees is €100 billion.

– Authorization, on an exceptional basis, until December 31, 2009, for the Spanish Ministry of Economy and Finance to acquire regulatory capital (including preferred securities and quotas) issued by credit entities resident in Spain that need to reinforce their capital and request such action. These acquisitions will require a report from the Bank of Spain.

• Royal Decree-Law 3/2009, of March 27 on urgent measures for tax, financial and insolvency matters, amends the Spanish Insolvency Law (in force since 2004), and aims: (i) to facilitate restructuring outside insolvency proceedings for companies undergoing financial difficulties; (ii) to expedite insolvency proceedings for companies which either decide or are bound to restructure in an insolvency situation; and (iii) to settle certain discrepancies concerning credit subordinations. Additionally, it authorizes the Consorcio de Compensación de Seguros to participate in the reassurance of credit insurance transactions.

• Royal Decree-Law 9/2009 of June 26 on bank restructuring and credit institutions equity reinforcement, which also aims at maintaining confidence in the financial system and enhancing its strength and solvency so that the surviving institutions are sound and able to provide credit normally, proposes a bank restructuring model based on the three Credit Institution Deposit Guarantee Funds and the use of the “Fund for the Orderly Bank Restructuring”, which has three different stages: (i) the search of a private solution by the credit institution itself; (ii) the adoption of measures aimed at dealing with any weakness that affect the viability of credit institutions, with the participation of the Credit Institution Deposit Guarantee Funds and (iii) restructuring processes with the intervention of the Fund for Orderly Bank Restructuring.

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This recapitalization scheme for credit institutions was approved by the European Commission until December 31, 2010, concluding the scheme is compatible with article 107.3.b of the Treaty on the Functioning of the European Union (“TFEU”).

• Royal Decree-Law 6/2010 of April 9 and Royal Decree-Law 13/2010, of December 3, have introduced different measures with the aim of promoting economic recovery and employment. Among the tax measures included, the most significant ones are the expansion and extension of the accelerated depreciation of new assets, the expansion of the small-and medium-sized businesses tax regime, which includes a reduction of taxation for those companies, and the exemption from stamp tax of the incorporation of companies or contributions to them.

• Royal Decree-Law 628/2010 of May 14, amending Royal Decree-Law 2606/1996 of December 20, 1996 on credit institution deposit guarantee funds and Royal Decree 948/2001 of August 3, 2001, on investor compensation schemes. The Royal Decree 628/2010, which was enacted in order to complete the transposition of Directive 2009/14/EC of the European Parliament and of the Council of March 11, 2009, came into force on June 4, 2010, and introduces a series of reforms in the regulation of deposit guarantee schemes, such as the obligation of credit institutions to inform depositors of the coverage of their deposits by foreign or domestic schemes and the reduction of the time period for the Bank of Spain to check that a credit institution is unable to repay deposits which are due and payable to five days.

• Royal Decree-Law 11/2010 of July 9 on governing bodies and other aspects of the legal regime of savings banks amending Law 13/1985 of May 25 on the investment ratios, ownership of funds and reporting obligations of financial intermediaries in respect of equity units and Law 31/1985 of August 2 on regulation of the basic rules on governing bodies of savings banks, is intended to improve savings banks’ possibilities of raising capital by reforming the legal regime for equity units, to promote the professionalization of their governing bodies, adapt certain aspects of institutional protection schemes formed by savings banks and design a new organizational model of savings banks financial activity. This Royal Decree-Law also modifies some aspects of the Royal Decree-Law 9/2009 on bank restructuring and credit institution equity strengthening.

• On February 15, 2011, the Spanish Parliament approved Law 2/2011 on sustainable economy, which is aimed to promote the sustainability of the Spanish economy and to improve the competitiveness of the Spanish economic model by eliminating administrative and tributary burdens through a series of reforms that affect the central areas of the model.

• Royal Decree-Law 2/2011 of February 18 on the strengthening of the banking system, which came into force on February 20, 2011, is aimed to dissipate the fears that have arisen regarding the capacity of the Spanish banking system to absorb the potential losses associated with the deterioration of assets and proposes to strengthen the solvency of Spanish banking entities and to accelerate the restructuring process of the Spanish savings banks. The Royal Decree-Law provides incentives for institutions to raise private capital to boost their solvency, which can be done through direct funds from third parties, public issuances or a combination of both.

• Royal Decree-Law 20/2011, of December 30, on urgent budgetary, tax and financial measures to correct the public deficit, introduces different temporary amendments in the tax system. The most significant of these are:

a) Individual Income Tax: effective for tax years 2012 and 2013, an additional tax (increase on the tax rate) ranging from 0.75% to 7% has been established on the general tax base, bringing the total tax rate to a range between 24.75% and 52%. Similarly, an additional tax ranging from 2% to 6% would be applicable on the “savings” tax base, bringing the total tax rate to a range between 21% and 27%. Withholdings rates have been modified accordingly.

b) Non-resident Income Tax: Effective on January 1, 2012 until December 31, 2013, the applicable tax rate to income obtained by non-resident taxpayers without a permanent establishment is increased from 24% to 24.75%. Over the same period, the tax rate applicable to dividends, branch profits distributions, interest payments and capital gains obtained from the transfer of assets is increased from 19% to 21%. These changes are mirrored in the withholding rates applicable.

c) VAT: the reduced 4% VAT rate for deliveries of buildings (or part of them) suitable to be used as dwellings introduced by Royal Decree-Law 9/2011 has been extended until December 31, 2012.

• Royal Decree-Law 12/2012 of March 30, which introduces several tax and administrative measures designed to reduce the public deficit. The most significant measures approved refer to the Corporate Income Tax, some of them with a permanent nature, such as the limitation of the deductibility of financial expenses, the non-deductibility of certain intragroup financial expenses, and the elimination of the accelerated depreciation regime for large sized companies; and others temporary which will only affect tax years beginning within 2012 and 2013, such as the limitation of the deductibility of goodwill, and the introduction of a minimum advanced staged payment for larger companies.

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• Royal Decree-Law 2/2012 of February 3, which came into force on February 4, is primarily aimed at strengthening and rationalizing the balance sheets of Spanish financial institutions and consolidated group of credit institutions in relation to the large exposures to real estate assets through loans to real estate developers and repossessed assets, by increased provisioning combined with a requirement for an additional capital buffer on impaired assets. This Royal Decree-Law is also aimed at promoting consolidation of the financial sector, giving incentives to new integration processes among the Spanish financial institutions and introducing operational changes to the Fund for Orderly Bank Restructuring (“FROB”) and reinforcing new corporate governance rules for financial institutions which have received financial support from the FROB. (See Item 4. Information on the Company - A. History and development of the company – Other Material Events’ herein)

• Royal Decree-Law 10/2012, of March 23, amended certain financial legislation in relation to the powers of the European Supervisory Authorities, aiming at adapting national supervisory arrangements to the new European supervisory framework so that Spain acts in coordination with the new European Supervisory Authorities, as well as with other Member States. In general, this Royal Decree-Law introduces the obligation for the Spanish supervisory authorities of the different financial institutions (Bank of Spain, CNMV and Directorate General of Insurance and Pension Funds) to cooperate with their European counterparts (European Banking Authority, European Securities and Markets Authority, and European Insurance and Occupational Pensions Authority, respectively), as well as with the European Systemic Risk Board. Furthermore, they shall provide these authorities with all the information that they need in order to perform their functions as conferred under European regulations.

• Royal Decree-Law 3/2012, of February 10, on urgent labor reform measures was enacted. From the standpoint of financial regulation, the seventh additional provision of Royal Decree-Law 3/2012 complements Royal Decree-Law 2/2012 of February 3, on clean-up of the financial sector balance sheet in respect to the establishment of a specific remuneration regime applicable to the directors and managers of credit institutions that receive government financial support for balance sheet clean-up and restructuring, as regards limitations on severance payments. Additionally, it sets certain rules on the termination of credit institution directors’ or managers’ contracts due to the imposition of sanctions and on the suspension of those contracts due to suspension of the directors or managers or certain cases of provisional replacement thereof. Credit institutions majority owned or financially supported by the FROB may in no case make severance payments for contract termination exceeding the lower of the following amounts: (i) twice the maximum bases set in Royal Decree-Law 2/2012 of February 3, 2012 on clean-up of the financial sector balance sheet; or (ii) two years of stipulated fixed remuneration.

• Royal Decree-Law 6/2012, of March 9, which became effective on March 11, 2012, on urgent measures to protect mortgagors without funds established measures to foster the restructuring of the mortgage debt of persons suffering extraordinary difficulty in meeting payments, and to set in place mechanisms to make mortgage foreclosure procedures more flexible. The protection model designed is based on a code of good practices for the viable restructuring of mortgage debts on the principle residence, which is supplemented by tax measures. It shall apply to debtors within the exclusion threshold who hold loans for the purchase of houses the purchase price of which does not exceed certain levels applicable at the date of its entry into force.

• Royal Decree-Law 4/2012, of February 24, set out information obligations and procedures necessary to establish a financing mechanism for payments to local government suppliers, and Royal Decree-Law 7/2012, both of March 9, amended by Royal Decree-Law 10/2012 of March 23, and set up the Fund for Financing Payments to Suppliers. Royal Decree-Law 4/2012 is aimed to provide the conditions necessary for local governments to meet their outstanding payment obligations to suppliers stemming from the tendering out of works, supplies or services. For this purpose it sets in place an extraordinary financing mechanism, of which regional governments can also avail themselves. Royal Decree-Law 7/2012 sets up the Fondo para la Financiación de los Pagos a Proveedores (Fund for Financing Payments to Suppliers) and regulates the terms and conditions of transactions for paying the outstanding obligations of local governments and, where applicable, of the regional governments that have availed themselves of this financing mechanism.

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• Royal Decree-Law 18/2012, of May 11, on write-downs and sales of the financial sector’s real estate assets, which builds on Royal Decree-Law 2/2012 of February 3, and which became effective on May 12, 2012, required credit institutions to create new provisions for their portfolio of loans and assets foreclosed or received in payment of debts relating to development land and to real estate construction or development. The new requirements must be complied with before December 31, 2012, except in the case of institutions that carry out integration processes during 2012, which will have 12 months from when such processes are authorized. These processes must involve a significant transformation of the institutions concerned, involve institutions that do not belong to the same group and comply with the following conditions: (i) They must be carried out through operations that entail structural modifications or the acquisition of institutions in which the Fund for the Orderly Restructuring of the Banking Sector (FROB) has a majority holding, or for which the latter has been appointed provisional administrator; (ii) they will include measures tending to improve their corporate governance; and (iii) they must incorporate a plan for the divestment of assets related to real estate exposures, as well as commitments to increase lending to households and small and medium-sized enterprises. For this purpose, credit institutions and consolidable groups of credit institutions had to submit a plan to the Bank of Spain, by June 11, 2012, detailing the measures they intended to adopt to comply with the new requirements.

Those institutions that, as a consequence of these write-downs, have a capital or core capital shortfall according to the rules in effect will have to capitalize themselves in the market or, failing that, request financial support from the FROB. This might consist in subscription for instruments convertible into shares (contingent convertible bonds, known as “CoCos”) or contributions to share capital, irrespective of whether they participate in integration processes. Institutions that seek this support must submit a restructuring plan which, inter alia, must set out the support measures that the envisaged FROB intervention would include.

In order for real estate assets to be identified and sold, the Royal Decree-Law 18/2012 envisages the creation of share capital companies to which credit institutions must transfer all the real estate assets foreclosed or received in payment of debts relating to land or real estate construction or development, and other real estate assets foreclosed or received in payment of debts since December 31, 2011.

The transfers must be made at fair value and by the end of the period for setting aside the new provisions established in Royal Decree-Laws 2/2012 and 18/2012 (i.e. before December 31, 2012, unless integration processes are carried out). In the event of absence of and difficulty estimating a fair value, the value in the accounts of the institution contributing the asset may be used instead, taking into account the provisions that must be created for the assets pursuant to Royal Decree-Laws 2/2012 and 18/2012.

Where credit institutions have received financial support from the FROB, the exclusive corporate objects of the companies to which they transfer their assets will be the management and disposal, directly or indirectly, of such assets. In addition, they will be obliged to dispose each year of at least 5% of their assets to a third party other than the transferor credit institution or any other company in the same group. The directors of such companies must have proven experience in the management of real estate assets.

Finally, these credit institutions will have a period of three years, from the effective date of this Royal Decree-Law, to adopt and implement the necessary measures to ensure that the link of the asset management company to the institution is, at most, that of an associate.

• Law 8/2012 of October 30, on write-downs and sales of the financial sector’s real estate assets, which became effective on October 31, 2012, gives the provisions of Royal Decree-Law 18/2012, May 11, the status of a law. Among other things, it required additional provisions to those already established in Royal Decree-Law 2/2012 of February 3, consolidating the financial sector in the wake of the impairment of its loans to the property business. These new requirements must have been complied with by the credit institutions by December 31, 2012. It also clarified a number of points regarding Royal Decree-Law 2/2012 to ensure consistency with Royal Decree-Law 18/2012, and the opportunity was taken to modify a number of financial regulations.

The Law 8/2012 also introduced special treatment for preference shares under the terms of Royal Decree-Law 18/2012. Thus, credit institutions facing equity capital difficulties as a result of applying the new provisions may include in their consolidation plan an application to defer for up to 12 months the envisaged remuneration on preference shares or mandatory convertible debt instruments in circulation before May 12, 2012 (date of entry into force of Royal Decree-Law 18/2012) or on instruments exchanged for the foregoing. Once this period has expired, deferred remuneration may only be paid if sufficient distributable profits or reserves are available and there is no capital shortfall at the parent credit institution. The Law also empowers the Government to stipulate under what circumstances institutions issuing preferred shares or subordinate bonds are to offer to exchange them for shares or subordinate bonds in the issuing institution or a member of its group, and the criteria for determining the percentage of the nominal value of the instruments to be exchanged.

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• Royal Decree-Law 21/2012 of July 13, on liquidity measures for general government and in the financial field, which became effective on July 15, 2012, introduced certain amendments to the Spanish regulation from the financial regulation standpoint. Among others, it authorized the FROB to subscribe to the agreements and contracts necessary to formalize and place at the disposal of the State and the FROB itself the financial assistance that it may receive, directly or indirectly through the State, in cash or in debt securities, not being this assistance subject to the limits envisaged in article 2.5 of Royal Decree-Law 9/2009 of June 26, on bank restructuring and the strengthening of credit institutions’ own funds. As part of the recapitalization processes envisaged in Royal Decree-Law 9/2009, the FROB may advance in the form of a loan, in cash, or in debt securities the amount of the financial support that the institutions participating in these processes had requested. The decision to grant these advances will be conditional upon a series of circumstances which, in the opinion of the Bank of Spain, may determine that the institution in question is subject to liquidity tensions that may affect its stability during the period needed for the effective subscription and disbursement of the support from the FROB.

The Royal Decree-Law also envisaged the institution of a territorial financing mechanism which involves the creation of a Regional Government Liquidity Fund that will be funded with a charge to the State budget with an extraordinary budgetary appropriation for an amount of €18 billion. The Fund was assigned to the Ministry of Economy and Competitiveness and General Government through the Secretariat of State for General Government, and it will be managed by the Official Credit Institute (OCI). It will extend loans to the Regional Governments, in order to cover their financial liquidity needs.

The Royal Decree-Law also exempted the Bank of Spain from the duty of professional secrecy so it may provide the European Commission, the European Central Bank, the European Banking Authority, the IMF, the European Financial Stability Facility and, where appropriate, the European Stability Mechanism with the information needed for the proper performance of their functions in respect of financial assistance for the recapitalization of Spanish financial institutions.

• Royal Decree-Law 24/2012 of August 31, on restructuring and resolution of credit institutions, which repeals Royal Decree-Law 9/2009 of June 26, on bank restructuring and strengthening of the capital of credit institutions, as well as certain sections of Royal Decree-Law 2/2011 of February 18, on the strengthening of the Spanish financial system, and of Royal Decree-Law 2/2012 of February 3, on restructuring of the financial sector, also, introduced various amendments to a large number of provisions with the status of Law. The Royal Decree-Law included the following measures: (i) a new enhanced framework for the management of credit institution crises, which will allow such institutions to be effectively restructured and, where necessary, resolved (wound up) in an orderly manner; (ii) new regulation of the FROB, which delimits its powers and significantly enhances the tools for intervention in all phases of the management of credit institution crises; (iii) a system of burden sharing to distribute the costs of credit institution restructuring and resolution between the public and private sectors; (iv) the legal framework for the incorporation of an Asset Management Company; (v) greater protection for retail investors; (vi) a new regime of “capital principal” requirements that must be complied with by institutions, which covers both the definition and level of such capital; (vii) the transfer of certain powers to the Bank of Spain; (viii) new functions of the Deposit Guarantee Fund for Credit Institutions, and (ix) new limits on the remuneration of executives of credit institutions that receive financial support.

The Royal Decree-Law, besides modifying the definition of “capital principal” (core capital) to adapt it to the one used by the European Banking Authority, also modified with effect from January 1, 2013, the “capital principal” (core capital) requirements established by Royal Decree-Law 2/2011 of February 18 on the strengthening of the financial system that institutions and consolidable groups must comply with. Specifically, the requirements of 8% (general) and 10% (for institutions that have not sold at least 20% of the securities representing their capital to third parties, and that have a wholesale funding ratio of more than 20%) were converted into a single 9% requirement. The Royal Decree-Law became effective on August 31, 2012. Law 9/2012, of November 14, on restructuring and resolution of credit institution was published on November 15, 2012, and raised the content of Royal Decree-Law 24/2012 of August 31, on restructuring and resolution of credit institutions (which it repeals) to the status of a Law, and introduces some significant new provisions on the regulation of asset management companies (AMCs), and the segregated assets of AMCs’, which the Law terms “bank asset funds” (FABs). The Law also makes a number of changes of relevance to the financial sphere.

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• Law 9/2012 of November 14, sets out the general framework for asset management companies (AMCs) established in Royal Decree-Law 24/2012 of August 31, which are envisaged as tools for credit institution restructuring and resolution, and introduces some significant changes. The general legal framework applicable to AMCs, the regulations governing them, and other additional details were recently enacted in Royal Decree 1559/2012 of November 15. AMCs’ purpose is to concentrate those assets considered problematic or which might be detrimental to credit institutions’ balance sheets or jeopardize their viability, by removing them from the balance sheet and allowing them to be independently managed. The objectives AMCs are to pursue through their operations are: (i) to help consolidate the financial system by acquiring the relevant assets, such that simultaneous with their change of ownership there is an effective transfer of the risks associated with them; (ii) to minimize public financial support; (iii) to pay the debts and obligations incurred in the course of conducting their activities; (iv) to minimize possible market distortions resulting from their activities; and (v) to dispose of the assets acquired in a way that optimizes their value within the timescale for which they have been constituted. The FROB may oblige a credit institution to transfer certain classes of assets on its balance sheet to an AMC, including those on the balance sheet of any entity over which the credit institution exercises control. Asset management companies regulated under Royal Decree Law 18/2012 of May 11, on the writing down and sale of the real estate assets of the financial sector, the regulations for which were given the status of law by Law 8/2012 of October 30, are not considered AMCs. Further details have been added to Law 9/2012 of November 14, on restructuring and resolution of credit institutions by the Royal Decree-Law 6/2013 of March 22, on the protection of the holders of certain savings and investment products and other financial measures. Firstly, new conditions have been added in relation to the framework for the transfer of assets to Sareb, namely: 1) transferred loans may not be classed as subordinated in the context of the debtor’s possible bankruptcy proceedings, even if Sareb is a shareholder in the debtor company. However, if already classed as subordinated prior to the transfer, they shall remain classed as such; 2) Sareb will be entitled to adhere to proposed agreements presented by any legitimate party and the right to vote at the shareholders’ meeting, in relation to any loans acquired by it following the declaration of bankruptcy proceedings; 3) Sareb may be the beneficiary of hipotecas de máximo (mortgages securing multiple debts or obligations up to a set maximum amount) encumbering assets it already holds or subsequently transferred to it; and 4) the contractual compensation and financial guarantee schemes regulated in Royal Decree-Law 5/2005 of March 11 on urgent reforms to promote productivity and improve public sector procurement shall be applicable to Sareb.

• Law 8/2013, June 26, on urban renewal, regeneration and rehabilitation, was published, the fifteenth final provision of which extends the period of application of hybrid capital and subordinated debt instrument management actions, as set out in Law 9/2012 from June 30, 2013 to December 31, 2013. Finally, this provision of Law 9/2012 of November 14, setting a deadline of December 31, 2013 for the application of Chapter VII of this law relative to the management of hybrid capital and subordinated debt instruments, has been eliminated by Royal Decree-Law 14/2013 of November 29. This elimination means the loss-absorption mechanisms derived from the restructuring or resolution of a credit institution, by its shareholders and subordinate creditors, prevail under Spanish regulations. Hence, the instruments needed to distribute the losses of an institution in keeping with the principle laid down in the Law regarding the correct assumption of risks and the minimum use of public funds are maintained.

• Royal Decree-Law 27/2012 of November 15, on urgent measures to strengthen the protection of mortgage debtors was approved and has two main objectives: to put in place a two year moratorium on evictions of vulnerable families from their primary residence, and to create a stock of social housing. For a period of two years from the effective date of the law, evictions of families considered to be particularly vulnerable for any of the reasons enumerated below will not be permitted. Moreover, for this purpose, the home must have been awarded to the creditor, or person acting on the latter’s behalf, during the mortgage foreclosure proceedings, and other financial circumstances must also apply. The Royal Decree came into force on November 16, 2012.

• On February 1, 2013, Royal Decree-Law 2/2013, on urgent measures in the electricity system and financial sector was published. In the financial area, this addressed the regulation of investments by insurance undertakings in securities or movable property rights issued by Sareb. Specifically, assets issued by Sareb may be included among those eligible to cover insurance undertakings’ technical reserves, provided they do not exceed the limit of 3% of total provisions. They will be valued at their cost of acquisition, as defined in the accounting plan for insurance companies. In addition, for the purposes of their solvency margin, unrealized capital gains or losses deriving from these assets, whether recognized on the accounts or not, will not be included in the calculation. The Royal Decree-Law came into force on February 2, 2013.

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• Royal Decree-Law 14/2013 of November 29, on urgent measures for the adaptation of Spanish law to EU supervisory and solvency regulations for financial institutions was published on November 30, 2013. The Royal Decree came into force on December 1, 2013, although certain provisions will be enforceable during 2014. The aim of this legislation is, on one hand, to incorporate directly into Spanish law Regulation (EU) 575/2013 of the European Parliament and of the Council of June 26, 2013 will came into force on January 1, 2014, extending and adapting the supervisory functions of the Bank of Spain and the CNMV to the new powers laid down in European Union Law, which considers them to be competent authorities in the area of their respective remits, and, on the other hand, to transpose Directive 2013/36/EU of the European Parliament and of the Council of June 26, 2013. The main new developments are: A) Law 13/1994 of June 1, on the Autonomy of the Bank of Spain has been amended to authorize the central bank to respond to consultations about the exercise of its executive powers in respect of the supervision and inspection of credit institutions. Replies to such consultations will be of an informative nature, and no appeal may be lodged by the parties concerned against them. However, they will be binding upon the bodies of the Bank of Spain entrusted with exercising the powers to which the consultation relates, provided that the circumstances, background information and other data contained therein do not change; B) Certain amendments have been made to Law 13/1985 of May 25, on investment ratios, own funds and reporting requirements for financial intermediaries in order to align it with European Union regulations as from January 1, 2014. Credit institutions, whether part of a consolidable group or not, shall thus maintain at all times a sufficient volume of own funds relative to investments made and risks assumed, as stipulated in Regulation (EU) No 575/2013. Likewise, they shall specifically set in place sound, effective and exhaustive strategies and procedures to assess and maintain at all times the amounts, types and distribution of internal capital considered appropriate to cover the nature and level of their risks. Moreover, as from the entry into force of the regulation the following may be imposed: 1) the obligation to have in place a minimum amount of liquid assets with which to withstand potential outflows of funds arising from liabilities and commitments, including in the event of serious incidents potentially affecting liquidity; 2) the maintenance of an appropriate structure of financing sources and of maturities in related assets, liabilities and commitments in order to avoid potential imbalances or liquidity tensions that may impair or jeopardize the institution’s financial situation, and 3) a ceiling on the ratio of the institution’s own funds to the total value of its exposures to the risks arising from its activity. These requirements may be stricter depending on the ability of each credit institution to obtain tier 1 capital. Changes have also been made regarding failure to comply with solvency rules, and the assumptions have been specified under which the Bank of Spain shall oblige credit institutions and their groups to hold own funds additional to the minimum levels required; C) The aforementioned Law 13/1985 includes a new section that sets out a series of corporate governance measures for financial institutions that will come into force on June 30, 2014. In particular, the limitations on remuneration for categories of employees whose professional activities have a bearing on the risk profile of the institution, its group, parent or subsidiaries are set out. In this respect, the variable remuneration component shall not exceed 100% of the fixed component. However, shareholders may approve a higher level provided that it does not exceed 200% of the fixed component. If it deems it appropriate, the Bank of Spain may authorize institutions to apply a theoretical discount rate, in accordance with EBA guidelines, of up to 25% of total variable remuneration, provided that it is paid through deferred instruments over a period of five or more years; D) A transitory regime has been established for specialized credit institutions which will continue to be considered as credit institutions until the specific legislation corresponding to them is approved; E) The Securities Market Law has been amended in order to introduce the reforms arising from Directive 2013/36/EU, relating to investment firms, which are akin to the reforms to credit institutions. The following, inter alia, are made extensive to the regulations governing investment firms: 1) the capacity of the CNMV, from January 1, 2014, to apply similar measures to those applicable to credit institutions when it has data allowing it to presume there are grounds denoting non-compliance with own-funds requirements or the failure to have in place an organizational structure, accounting or appropriate valuation internal control mechanisms and procedures, as well as establishing similar additional measures, and 2) corporate governance measures in respect of the limitations on the remuneration of certain categories of employees which, as at credit institutions, will come into force on June 30, 2014; F) regulations have been laid down for a legal entity identifier, envisaged by Regulation (EU) No 648/2012 of the European Parliament and of the Council of July 4, 2012, on OTC derivatives, central counterparties and trade repositories. Early next year, the central counterparties and trade repositories shall identify participants in a derivatives contract (for the purposes of their registration in the trade repositories) through the use of a code known as an entity identifier. In Spain, their issuance and management will be incumbent upon the Mercantile Register; G) Prudential treatment is established for all preference shares as own funds, in accordance with the provisions of Regulation (EU) No 575/2013. Thus, they will be considered as additional Tier 1 capital if they meet the conditions laid down in Chapter 3 of Title I of Part Two of this Regulation. However, those issued or that were eligible as own funds before December 31, 2011 shall count as Common Equity Tier 1 capital over the period from January 1, 2014 to May 31, 2021, as stipulated in Chapter 2 of Title I of Part Ten of the above-mentioned Regulation; H) As from the entry into force of the regulation, the core capital requirement regulated under Royal Decree-Law 2/2011 of February 18, 2011 on the reinforcement of the financial system is repealed. However, a transition period running to December 31, 2014 has been set in order to mitigate the effects its repeal could have; I) Law 9/2012 of November 14, 2012 on the restructuring and resolution of credit institutions has been amended in order to enable the Fund for the Orderly Restructuring of the Banking Sector (FROB) to increase its own funds through the capitalization of credits, loans or any other debt operation in which the State features as creditor. The management of its cash operations, previously in the hands exclusively of the Banco de España, has also been made more flexible; and J) The recast wording of the Law on Corporate Income Tax, approved by Royal Legislative Decree 4/2004 of March 5, has been amended to introduce specific measures aimed at allowing certain deferred tax assets (DTAs) not to have to be deducted on calculating common equity tier 1 capital. This is in line with the regulations in force in other EU Member States, so that Spanish credit institutions may operate on a level playing field. Accordingly, for tax periods beginning as from January 1, 2014, DTAs relating to provisions for the impairment of loans or other assets derived from possible bad debts of debtors unrelated to the taxable person, and those derived from endowments or contributions to social welfare and, where appropriate, early retirement arrangements, shall be converted into a claim on the Tax Authorities in the event of any of the following circumstances arising: 1) that the taxable party posts book losses in its annual accounts, these having been audited and approved by the corresponding body, or 2) that the entity is subject to legally declared winding-up or insolvency.

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On December 29, 2013, entered into force Law 26/2013 of December 27 on savings banks and bank foundations, which contains the new legal regime for savings banks, and the regulation of bank foundations for the first time in Spanish law. This law repeals Law 31/1985 of August 2, on the regulation of the basic rules relating to the governing bodies of savings banks; Royal Decree-Law 11/2010 of July 9, on governing bodies and other aspects of the legal regime for savings banks, except the paragraphs that refer to the tax regime for institutional protection schemes; and certain paragraphs of Article 7 of Law 13/1985 of May 25, on investment ratios, own funds and reporting obligations of financial intermediaries, insofar as they concern non-voting equity units. The main changes which has been introduced by Law 26/2013 are: A) It specifies and determines the object of their activity, which is the traditional object of savings banks, these being credit institutions with a charitable nature and social purpose, whose financial activity must be primarily oriented towards the acceptance of repayable funds and the provision of banking and investment services to retail customers and SMEs; B) It takes the important step of professionalizing the governing bodies of savings banks, basically by reducing the representation of government and public law entities and corporations, and by extending the requirements for integrity, experience and good governance to all the members of the board of directors (previously they only applied to the majority of directors), including general managers and similar officers, those responsible for the functions of internal control and those who perform other key duties for the daily activity of savings banks. In short, the legislation applicable to banks is extended to the members of the board of directors and equivalent officers; C) As envisaged by the previous legislation, it requires savings banks to publish a corporate governance report on an annual basis, which will be sent to the CNMV, to the Bank of Spain and to the competent regional government bodies; D) Mergers of savings banks will be subject to the authorization procedure provided for in the implementing regional legislation. The change in address of the registered office of a savings bank will be subject to the authorization procedure of the transfer project, in accordance with the provisions of the implementing regional legislation. The denial of authorization of the merger or of the transfer may only occur through a reasoned resolution when the resulting institution may not comply with any of the objective requirements laid down in the said legislation; and E) It introduces the regulation of bank foundations into the Spanish legal system. These entities have a direct or indirect holding of at least 10% of the capital or voting rights of a credit institution, or that enables them to appoint or replace one or more members of the board of directors of such institution.

United States Supervision and Regulation

Our operations are subject to extensive federal and state banking and securities regulation and supervision in the United States. We engage in U.S. banking activities directly through our New York branch and indirectly through Santander UK’s branch in Connecticut, our subsidiary Edge Act corporation, Banco Santander International, in Miami, Banco Santander Puerto Rico (“Santander Puerto Rico”) in Puerto Rico, Santander Bank, a national bank that has branches throughout the Northeast U.S., and Santander Consumer USA, an auto financing company. We also engage in securities activities in the United States directly through our broker-dealer subsidiaries, Santander Securities Corporation, Santander Investment Securities Inc., and Santander International Securities, Inc.

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Disclosure pursuant to Section 219 of the Iran threat reduction and Syria human rights act

Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law.

The following activities are disclosed in response to Section 13(r) with respect to affiliates of Santander UK within the Group. During the period covered by this annual report:

(a) A Santander UK customer, being an Iranian national resident in the U.K., was designated in September 2013 as acting for or on behalf of the Government of Iran. This accountholder’s current account and credit card with Santander UK were closed in December 2013. No revenue was generated by Santander UK on these products.

(b) In early October 2013, Santander UK opened an account for a Tunisian national, resident in the U.K., who is currently designated by the U.S. for terrorism. After becoming aware of this customer’s designation, Santander UK exited the relationship later in October 2013. No revenue was generated by Santander UK on these accounts.

(c) Santander UK holds frozen savings and current accounts for three customers resident in the U.K. who are currently designated by the U.S. for terrorism. The accounts held by each customer were blocked after the customer’s designation and have remained blocked and dormant throughout 2013. No revenue was generated by Santander UK on these accounts.

(d) A U.K. company maintained two commercial accounts at Santander UK that were used to provide payroll processing services for a U.K. entity that is currently designated by the U.S. under the Iran sanctions regime. The accounts may have been used to provide payroll services to other Iranian clients. Santander UK became aware of this account activity in September 2013 and exited the relationship in January 2014. No revenue was generated by Santander UK on these accounts.

(e) An Iranian national, resident in the U.K., who is currently designated by the U.S. and the U.K. under the Iran Sanctions regime held a mortgage with Santander UK that was issued prior to any such designation. No further drawdown has been made (or would be allowed) under this mortgage although we continue to receive repayment installments. In 2013, total revenue in connection with the mortgage was £10,421 whilst net profits were negligible relative to the overall profits of Santander UK. Santander UK does not intend to enter into any new relationships with this customer, and any disbursements will only be made in accordance with applicable sanctions. The same Iranian national also holds two investment accounts with Santander Asset Management UK Limited, part of the Group until December 2013 (see Item 4 of Part I, “Information on the Company—A. History and development of the company —Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations- Agreement with Warburg Pincus and General Atlantic”). The accounts have remained frozen throughout 2013. The investment returns are being automatically reinvested, and no disbursements have been made to the customer. Total revenue for the Group in connection with the investment accounts was £247 whilst net profits in 2013 were negligible relative to the overall profits of Banco Santander, S.A.

In addition, the Group has certain legacy export credits and performance guarantees with Bank Mellat, which are included in the U.S. Department of the Treasury’s Office of Foreign Assets Control’s Specially Designated Nationals and Blocked Persons List. The Bank entered into two bilateral credit facilities in February 2000 in an aggregate principal amount of €25.9 million. Both credit facilities matured in 2012. In addition, in 2005 Banco Santander participated in a syndicated credit facility for Bank Mellat of €15.5 million, which matures on July 6, 2015. As of December 31, 2013, the Group was owed €4.3 million under this credit facility.

Bank Mellat has been in default under all of these agreements in recent years and Banco Santander has been and expects to continue to be repaid any amounts due by official export credit agencies, which insure between 95% and 99% of the outstanding amounts under these credit facilities. No funds have been extended by Santander under these facilities since they were granted.

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The Group also has certain legacy performance guarantees for the benefit of Bank Sepah and Bank Mellat (stand-by letters of credit to guarantee the obligations – either under tender documents or under contracting agreements – of contractors who participated in public bids in Iran) that were in place prior to April 27, 2007. However, should any of the contractors default in their obligations under the public bids, the Group would not be able to pay any amounts due to Bank Sepah or Bank Mellat because any such payments would be frozen pursuant to Council Regulation (EU) No. 961/2010.

In the aggregate, all of the transactions described above resulted in approximately €72,000 gross revenues and approximately €123,000 net loss to the Group in 2013, all of which resulted from the performance of export credit agencies rather than any Iranian entity. The Group has undertaken significant steps to withdraw from the Iranian market such as closing its representative office in Iran and ceasing all banking activities therein, including correspondent relationships, deposit taking from Iranian entities and issuing export letters of credit, except for the legacy transactions described above. The Group is not contractually permitted to cancel these arrangements without either (i) paying the guaranteed amount – which payment would be frozen as explained above (in the case of the performance guarantees), or (ii) forfeiting the outstanding amounts due to it (in the case of the export credits). As such, the Group intends to continue to provide the guarantees and hold these assets in accordance with company policy and applicable laws.

Dodd-Frank Act

On July 21, 2010, the United States enacted the Dodd-Frank Act, which provides a broad framework for significant regulatory changes that will extend to almost every area of U.S. financial regulation. Implementation of the Dodd-Frank Act requires further detailed rulemaking over several years by different U.S. regulators, including the Office of the Comptroller of the Currency (the “OCC”), the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), the Securities and Exchange Commission (the “SEC”), the Federal Deposit Insurance Corporation (the “FDIC”), the Commodity Futures Trading Commission (the “CFTC”) and the newly created Financial Stability Oversight Council (the “Council”) and Consumer Financial Protection Bureau (the “CFPB”), although uncertainty remains about the final details, timing and impact of the rules.

Among other things, the Dodd-Frank Act’s so-called “Volcker Rule” prohibits “banking entities” from engaging in certain forms of proprietary trading or from sponsoring or investing in certain covered funds, in each case subject to certain limited exceptions. The Volcker Rule became effective on July 21, 2012 and on December 10, 2013, U.S. regulators issued final rules implementing the Volcker Rule. The final rules also limit the ability of banking entities and their affiliates to enter into certain transactions with such funds with which they or their affiliates have certain relationships. The final rules contain exclusions and certain exemptions for market-making, hedging, underwriting, trading in U.S. government and agency obligations as well as certain foreign government obligations, trading solely outside the United States, and also permits certain ownership interests in certain types of funds to be retained. The final rules implementing the Volcker Rule extended the period for all banking entities to conform with the Volcker Rule and implement a compliance program until July 21, 2015, and additional extensions are possible. Banking entities must bring their activities and investments into compliance with the requirements of the Volcker Rule by the end of the conformance period. We are assessing how the final rules implementing the Volcker Rule will affect our businesses and are developing and implementing plans to bring affected businesses into compliance. It is expected that our non-U.S. banking organizations, such as the Bank, will largely be able to continue its activities outside the United States in reliance on the “solely outside the U.S.” exemptions under the Volcker Rule and its implementing regulations.

The Dodd-Frank Act also provides regulators with tools to impose greater capital, leverage and liquidity requirements and other prudential standards, particularly for financial institutions that pose significant systemic risk. However, in imposing heightened capital, leverage, liquidity and other prudential standards on non-U.S. banks such as us, the Federal Reserve Board is directed to take into account the principle of national treatment and equality of competitive opportunity, and the extent to which the foreign bank is subject to comparable home country standards (although certain of our activities will be subject to the U.S. standards).

U.S. regulators will also be able to restrict the size and growth of systemically significant non-bank financial companies and large interconnected bank holding companies and will be required to impose bright-line debt-to-equity ratio limits on financial companies that the Council determines pose a grave threat to financial stability.

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Furthermore, the Dodd-Frank Act provides for an extensive framework for the regulation of over-the-counter (OTC) derivatives, including mandatory clearing, exchange trading and transaction reporting of certain OTC derivatives. Entities that are swap dealers, security-based swap dealers, major swap participants or major security-based swap participants are required to register with the CFTC or the SEC, or both, and are or will be subject to new capital, margin, business conduct, recordkeeping, clearing, execution, reporting and other requirements. Banco Santander, S.A. and Abbey National Treasury Services plc became provisionally registered as swap dealers with the CFTC on July 8, 2013 and November 4, 2013, respectively. In addition, we may register one more subsidiary as swap dealer with the CFTC.

In addition, Title I of the Dodd-Frank Act and the implementing regulations issued by the Federal Reserve and the FDIC require each bank holding company with assets of $50 billion or more, including us, to prepare and submit annually a plan for the orderly resolution of our subsidiaries and operations that are domiciled in the United States in the event of future material financial distress or failure. The plan must include information on resolution strategy, major counterparties and interdependencies, among other things, and requires substantial effort, time and cost. We submitted our U.S. resolution plan in December 2013. The resolution plan is subject to review by the Federal Reserve Board and the FDIC.

Regulations that the FDIC or CFPB may adopt could affect the nature of the activities that a bank, such as Santander Bank and Santander Puerto Rico, may conduct, and may impose restrictions and limitations on the conduct of such activities.

The Dodd-Frank Act also grants the SEC discretionary rule-making authority to impose a new fiduciary standard on brokers, dealers and investment advisers, and expands the extraterritorial jurisdiction of U.S. courts over actions brought by the SEC or the United States with respect to violations of the antifraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940.

Regulatory Authorities

We are a financial holding company and a bank holding company under the U.S. Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”), by virtue of our ownership of Santander Bank, Santander Holdings USA and Santander BanCorp. As a result, we and our U.S. operations are subject to regulation, supervision and examination by the Federal Reserve Board.

Banco Santander Puerto Rico is a Puerto Rico-chartered bank, and its deposits are insured by the FDIC. As such, Santander Puerto Rico is subject to regulation, supervision and examination by the Puerto Rico Office of Financial Institutions and the FDIC. Santander Bank is a federally-chartered national bank, the deposits of which are also insured by the FDIC. Santander Bank is subject to regulation, supervision and examination by the OCC and the FDIC. Our New York branch is supervised by the Federal Reserve Bank of New York and the New York State Department of Financial Services, but its deposits are not insured (or eligible to be insured) by the FDIC. Santander UK’s branch in Connecticut is supervised by the Federal Reserve Bank of New York and the Connecticut Department of Banking. Banco Santander International is supervised by the Federal Reserve Bank of Atlanta. Santander Consumer USA is regulated and supervised by the Federal Reserve Bank of Boston and various state regulators.

Restrictions on Activities

As described below, federal and state banking laws and regulations restrict our ability to engage, directly or indirectly through subsidiaries, in activities in the United States.

We are required to obtain the prior approval of the Federal Reserve Board before directly or indirectly acquiring the ownership or control of more than 5% of any class of voting shares of U.S. banks, certain other depository institutions, and bank or depository institution holding companies. Under the Bank Holding Company Act and Federal Reserve Board regulations, our U.S. banking operations (including our New York branch and Santander Puerto Rico) are also restricted from engaging in certain “tying” arrangements involving products and services.

Santander Puerto Rico and Santander Bank are subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be made and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of these subsidiaries.

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Under U.S. law, our activities and those of our subsidiaries in the United States are generally limited to the business of banking, and managing or controlling banks. So long as we are a financial holding company under U.S. law, we may also engage in nonbanking activities in the United States that are financial in nature, or incidental or complementary to such financial activity, including securities, merchant banking, insurance and other financial activities, subject to certain limitations on the conduct of such activities and to prior regulatory approval in some cases.

In addition, under U.S. federal banking laws, state-chartered banks (such as Santander Puerto Rico) and state-licensed branches and agencies of foreign banks (such as our New York branch) may not, as a general matter, engage as a principal in any type of activity not permissible for their federally chartered or licensed counterparts, unless (i) in the case of state-chartered banks (such as Santander Puerto Rico), the FDIC determines that the additional activity would pose no significant risk to the FDIC’s Deposit Insurance Fund and is consistent with sound banking practices, and (ii) in the case of state licensed branches and agencies (such as our New York branch), the Federal Reserve Board determines that the additional activity is consistent with sound banking practices. United States federal banking laws also subject state branches and agencies to the same single-borrower lending limits that apply to federal branches or agencies, which are substantially similar to the lending limits applicable to national banks. For our U.S. branches, these single-borrower lending limits are based on the worldwide capital of the entire foreign bank (e.g., Banco Santander, S.A. in the case of our New York branch).

Under the International Banking Act of 1978, as amended, the Federal Reserve Board may terminate the activities of any U.S. office of a foreign bank if it determines (i) that the foreign bank is not subject to comprehensive supervision on a consolidated basis in its home country (unless the home country is making demonstrable progress toward establishing such supervision), (ii) that there is reasonable cause to believe that such foreign bank or its affiliate has violated the law or engaged in an unsafe or unsound banking practice in the United States and, as a result of such violation or practice, the continued operation of the U.S. office would be inconsistent with the public interest or with the purposes of federal banking laws or, (iii) for a foreign bank that presents a risk to the stability of the United States financial system, the home country of the foreign bank has not adopted, or made demonstrable progress toward adopting, an appropriate system of financial regulation to mitigate such risk.

The Dodd-Frank Act removed, effective in July 2011, a longstanding prohibition on the payment of interest on demand deposits by our FDIC-insured bank subsidiaries and our New York branch. The Dodd-Frank Act also requires that the lending limits applicable to Santander Bank, Santander Puerto Rico, and our New York branch take into account credit exposure arising from derivative transactions, and that those applicable to Santander Bank and our New York branch also take into account securities borrowing and lending transactions and repurchase and reverse repurchase agreements with counterparties. The OCC has issued an interim final rule to implement the Dodd-Frank Act’s provisions relating to lending limits. Also, under the so-called swap “push-out” provisions of the Dodd-Frank Act, the derivatives activities of FDIC-insured banks and U.S. branch offices of foreign banks (including our New York branch) are restricted or prohibited, which may necessitate a restructuring of how we conduct our derivatives activities. We and other U.S. and foreign banking organizations must comply with the “push-out” provisions by July 2015.

There are various qualitative and quantitative restrictions on the extent to which we and our nonbank subsidiaries can borrow or otherwise obtain credit from our U.S. banking subsidiaries or engage in certain other transactions involving those subsidiaries. In general, these transactions must be on terms that would ordinarily be offered to unaffiliated entities must be secured by designated amounts of specified collateral and are subject to volume limitations. These restrictions also apply to certain transactions of our New York branch with certain of our U.S. affiliates. Effective in July 2012, the Dodd-Frank Act subjects credit exposure arising from derivative transactions, securities borrowing and lending transactions, and repurchase/reverse repurchase agreements to these collateral and volume limitations. The Federal Reserve Bank has not yet issued regulations to implement these changes made by the Dodd-Frank Act.

A major focus of U.S. governmental policy relating to financial institutions is aimed at preventing money laundering and terrorist financing and compliance with economic sanctions in respect of designated countries or activities. Failure of an institution to have policies and procedures and controls in place to prevent, detect and report money laundering and terrorist financing could in some cases have serious legal, financial and reputational consequences for the institution.

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In February 2014, the Federal Reserve approved a final rule to enhance its supervision and regulation of the U.S. operations of foreign banking organizations (“FBOs”) such as us. Under the Federal Reserve’s rule, FBOs with $50 billion or more in U.S. assets held outside of their U.S. branches and agencies (“Large FBOs”), will be required to create a separately capitalized top-tier U.S. intermediate holding company (“IHC”) that will hold substantially all of the FBO’s U.S. bank and nonbank subsidiaries, such as Santander Bank. An IHC will be subject to U.S. risk-based and leverage capital, liquidity, risk management, stress testing and other enhanced prudential standards on a consolidated basis. Under the final rule, a Large FBO that is subject to the IHC requirement may request permission from the Federal Reserve to establish multiple IHCs or use an alternative organizational structure. The final rule also permits the Federal Reserve to apply the IHC requirement in a manner that takes into account the separate operations of multiple foreign banks that are owned by a single Large FBO. Although U.S. branches and agencies of a Large FBO will not be required to be held beneath an IHC, such branches and agencies will be subject to liquidity, and, in certain circumstances, asset maintenance requirements. Large FBOs generally will be required to establish IHCs and comply with the enhanced prudential standards beginning July 1, 2016. An IHC’s compliance with applicable U.S. leverage ratio requirements is generally delayed until January 1, 2018. FBOs that have $50 billion or more in non-branch/agency U.S. assets as of June 30, 2014 will be required to submit an implementation plan by January 1, 2015 on how the FBO will comply with the IHC requirement. Enhanced prudential standards will apply to our top-tier U.S.-based bank holding companies beginning on January 1, 2015 until we form or designate an IHC and the IHC becomes subject to corresponding enhanced prudential standards. The Federal Reserve has stated that it will issue, at a later date, final rules to implement certain other enhanced prudential standards under the Dodd-Frank Act for large bank holding companies and large FBOs, including single counterparty credit limits and an early remediation framework.

Our New York branch

Our New York branch is licensed by the New York Superintendent of Financial Services to conduct a commercial banking business. Its activity is mainly focused on wholesale and investment banking, providing a full range of lending, investment banking, transactional banking and brokerage services to corporate and institutional investors. Under the New York State Banking Law and regulations, our New York branch is required to maintain eligible high-quality assets with banks in the State of New York, as security for the protection of depositors and certain other creditors.

The New York State Banking Law also empowers the Superintendent of Banks to establish asset maintenance requirements for branches of foreign banks, expressed as a percentage of each branch’s liabilities. The presently designated percentage is 0%, although the Superintendent may impose additional asset maintenance requirements upon individual branches on a case-by-case basis. No such requirement has been imposed upon our New York branch.

The New York State Banking Law authorizes the Superintendent of Financial Services to take possession of the business and property of a New York branch of a foreign bank under certain circumstances, generally involving violation of law, conduct of business in an unsafe manner, impairment of capital, suspension of payment of obligations, or initiation of liquidation proceedings against the foreign bank at its domicile or elsewhere. In liquidating or dealing with a branch’s business after taking possession of a branch, only the claims of depositors and other creditors that arose out of transactions with a branch are to be accepted by the Superintendent of Financial Services for payment out of the business and property of the foreign bank in the State of New York, without prejudice to the rights of the holders of such claims to be satisfied out of other assets of the foreign bank. After such claims are paid, the Superintendent of Financial Services will turn over the remaining assets, if any, to the foreign bank or its duly appointed liquidator or receiver.

Our U.S. Depository Institution Subsidiaries

The Federal Deposit Insurance Corporation Improvement Act of 1991 (the “FDICIA”) provides for extensive regulation of depository institutions (such as Santander Puerto Rico and Santander Bank), including requiring federal banking regulators to take “prompt corrective action” with respect to FDIC-insured depository institutions that do not meet minimum capital requirements. For this purpose, FDICIA establishes five tiers of institutions: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” As an insured depository institution’s capital level declines and the depository institution falls into lower categories (or if it is placed in a lower category by the discretionary action of its supervisor), greater limits are placed on its activities and federal banking regulators are authorized (and, in many cases, required) to take increasingly more stringent supervisory actions, which could ultimately include the appointment of a conservator or receiver for the depository institution (even if it is solvent). In addition, FDICIA generally prohibits an FDIC-insured bank from making any capital distribution (including payment of a dividend) or payment of a management fee to its holding company if the bank would thereafter be undercapitalized. If an insured depository institution becomes “undercapitalized,” it is required to submit to federal regulators a capital restoration plan guaranteed by the depository institution’s holding company. If an undercapitalized depository institution fails to submit an acceptable plan, it is treated as if it were “significantly undercapitalized.” Significantly undercapitalized depository institutions may be subject to a number of restrictions, including requirements to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and restrictions on accepting deposits from correspondent banks. “Critically undercapitalized” depository institutions are subject to appointment of a receiver or conservator.

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In July 2013, the U.S. bank regulators issued the U.S. Basel III final rules implementing the Basel III capital framework for U.S. banks and bank holding companies and other U.S. capital reform. Certain aspects of the U.S. Basel III final rules, such as new minimum capital ratios and a revised methodology for calculating risk-weighted assets, will become effective on January 1, 2015. Other aspects of the U.S. Basel III final rules, such as the capital conservation buffer and the new regulatory deductions from and adjustments to capital, will be phased in over several years beginning on January 1, 2015.

In addition, the Federal Reserve and other U.S. regulators issued for public comment in October 2013 a proposed rule that would introduce a quantitative liquidity coverage ratio requirement on certain large banks and bank holding companies. The proposed liquidity coverage ratio is broadly consistent with the Basel Committee’s revised Basel III liquidity rules, but is more stringent in several important respects. The Federal Reserve has also stated that it intends, through future rulemakings, to apply the Basel III liquidity coverage ratio and net stable funding ratio to the U.S. operations of some or all large FBOs.

Monetary Policy and Exchange Controls

The decisions of the European System of Central Banks influence conditions in the money and credit markets, thereby affecting interest rates, the growth in lending, the distribution of lending among various industry sectors and the growth of deposits. Monetary policy has had a significant effect on the operations and profitability of Spanish banks in the past and this effect is expected to continue in the future. Similarly, the monetary policies of governments in other countries in which we have operations, particularly in Latin America, the United States and the United Kingdom, affect our operations and profitability in those countries. We cannot predict the effect which any changes in such policies may have upon our operations in the future, but we do not expect it to be material.

The European Monetary Union has had a significant effect upon foreign exchange and bond markets and has involved modification of the internal operations and systems of banks and of inter-bank payments systems. Since January 1, 1999, the start of Stage III, see “—Supervision and Regulation—Bank of Spain and the European Central Bank,” Spanish monetary policy has been affected in several ways. The euro has become the national currency of the fifteen participating countries and the exchange rates between the currencies of these countries were fixed to the euro. Additionally, the European System of Central Banks became the entity in charge of the European Union’s monetary policy.

C. Organizational structure.

Banco Santander, S.A. is the parent company of the Group which was comprised at December 31, 2013 of 712 companies that consolidate by the global integration method. In addition, there are 191 companies that are accounted for by the equity method.

See Exhibits I, II and III to our consolidated financial statements included in this Form 20-F for details of our consolidated and non-consolidated companies.

D. Property, plant and equipment.

During 2013, the Bank and its banking subsidiaries either leased or owned premises in Spain and abroad, which at December 31, 2013 included 4,067 branch offices in Spain and 9,860 abroad. These figures include traditional branches and banking services points but do not include electronic service points. See Note 16 to our consolidated financial statements.

Item 4A. Unresolved Staff Comments

None.

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Item 5. Operating and Financial Review and Prospects

Critical Accounting Policies

The preparation of the Group’s consolidated financial statements requires a significant amount of judgment involving estimates and assumptions which can be inherently uncertain at the time they are made (see Note 1.c to our consolidated financial statements). Changes in assumptions may have a significant impact on the financial statements in the periods in which they are changed. Judgments or changes in assumptions are submitted to the audit and compliance committee of the board of directors and/or to our regulatory authorities and are disclosed in the notes to our consolidated financial statements.

Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under current circumstances. Actual results may differ from these estimates if assumptions and conditions change.

We believe that of our significant accounting policies, the following may involve a high degree of judgment:

Fair value of financial instruments

Trading assets or liabilities, financial instruments that are classified at fair value through profit or loss, available for sale securities, and all derivatives are recorded at fair value on the balance sheet. The fair value of a financial instrument on a given date is taken to be the price that would be received in a sale of an asset or paid to transfer a liability in an orderly transaction between market participants. The most objective and common reference for the fair value of a financial instrument is the price that would be paid for it on an active, transparent and deep market (quoted price or market price).

If there is no market price for a given financial instrument, its fair value is estimated on the basis of the price established in recent transactions involving similar instruments and, in the absence thereof, of valuation techniques commonly used by the international financial community, taking into account the specific features of the instrument to be measured and, particularly, the various types of risk associated with it.

We use derivative financial instruments for both trading and non-trading activities. The principal types of derivatives used are interest rate swaps, future rate agreements, interest rate options and futures, foreign exchange forwards, foreign exchange futures, foreign exchange options, foreign exchange swaps, cross currency swaps, equity index futures and equity options. The fair value of standard derivatives is calculated based on published price quotations. The fair value of over-the-counter (“OTC”) derivatives is taken to be the sum of the expected future cash flows arising from the instrument, discounted to present value at the date of measurement (“present value” or “theoretical close”) using valuation techniques commonly used by the financial markets: net present value (NPV), option pricing models and other methods.

The following subsections set forth the most important products and families of derivatives, and the related valuation techniques and inputs, by asset class.

• Fixed income and inflation

The fixed income asset class includes basic instruments such as interest rate forwards, interest rate swaps and cross currency swaps, which are valued using the net present value of the discounted estimated future cash flows taking into account basis swap and cross currency spreads, depending on the payment frequency and currency of each leg of the derivative. Vanilla options, including caps, floors and swaptions, are priced using the Black-Scholes model, which is one of the benchmark industry models. More exotic derivatives are priced using more complex models which are generally accepted as standard across institutions.

These pricing models are fed with observable data such as deposit interest rates, futures rates, cross currency swap and constant maturity swap rates, and basis spreads, on the basis of which different yield curves are calculated, depending on the payment frequency and discounting curves for each currency. In the case of options, implied volatilities are also used as model inputs. These volatilities are observable in the market for cap and floor options and swaptions, and interpolation and extrapolation of volatilities from the quoted ranges are carried out using generally accepted industry models. The pricing of more exotic derivatives may require the use of non-observable data or parameters, such as correlation (among interest rates and cross-asset), mean reversion rates and prepayment rates, which are usually defined from historical data or through calibration.

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Inflation-related assets include inflation-linked bonds and zero-coupon or year-on-year inflation-linked swaps, valued with the present value method using forward estimation and discounting. Derivatives on inflation indices are priced using standard and more complex bespoke models, as appropriate. Valuation inputs of these models consider inflation-linked swap spreads observable in the market and estimations of inflation seasonality, on the basis of which a forward inflation curve is calculated. Also, implied volatilities taken from zero-coupon and year-on-year inflation options are also inputs for the pricing of more complex derivatives.

• Equity and foreign exchange

The most important products in these asset classes are forward and futures contracts; they also include vanilla, listed and OTC (over-the-counter) derivatives on single underlying assets and baskets of assets. Vanilla options are priced using the standard Black-Scholes model and more exotic derivatives involving forward returns, average performance, or digital, barrier or callable features are priced using generally accepted industry models and bespoke models, as appropriate. For derivatives on illiquid stocks, hedging takes into account the liquidity constraints in models.

The inputs of equity models consider yield curves, spot prices, dividends, asset borrowing costs (repo margin spreads), implied volatilities, correlation among equity stocks and indices, and cross-asset correlation. Implied volatilities are obtained from market quotes of European and American vanilla call and put options. Various interpolation and extrapolation techniques are used to obtain continuous volatility surfaces for illiquid stocks. Dividends are usually estimated for the mid and long term. Correlations are implied, when possible, from market quotes of correlation-dependent products. In all other cases, proxies are used for correlations between benchmark underlyings or correlations are obtained from historical data.

The inputs of foreign exchange models include the interest rate curve for each currency, the spot foreign exchange price and the implied volatilities and correlation among assets of this type. Volatilities are obtained from European vanilla call and put options which are quoted in markets as at-the-money, risk reversal or butterfly options. Illiquid currency pairs are usually handled by using the data of the liquid pairs from which the illiquid currency can be derived. For more exotic products, unobservable model parameters may be estimated by fitting to reference prices provided by other non-quoted market sources.

• Credit

The most common instrument in this asset class is the credit default swap (CDS), which is used to hedge credit exposure to third parties. In addition, models for first-to-default (FTD), n-to-default (NTD) and single-tranche collateralized debt obligation (CDO) products are also available. These products are valued with standard industry models, which estimate probability of default of a single issuer (for CDSs) or the joint probability of default of more than one issuer for FTDs and CDOs.

Valuation inputs are the interest rate curve, the CDS spread curve and the recovery rate. The CDS spread curve is obtained in the market for indices and important individual issuers. For less liquid issuers, this spread curve is estimated using proxies or other credit-dependent instruments. Recovery rates are usually set to standard values. For listed single-tranche CDOs, the correlation of joint default of several issuers is implied from the market. For FTDs, NTDs and bespoke CDOs, the correlation is estimated from proxies or historical data when no other option is available.

Valuation adjustment for counterparty risk or default risk

The credit valuation adjustment (CVA) is a valuation adjustment to OTC derivatives as a result of the risk associated with the credit exposure assumed to each counterparty.

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The CVA is calculated taking into account potential exposure with each counterparty in each future period. The CVA for a specific counterparty is equal to the sum of the CVA for all the periods. The following inputs are used to calculate the CVA:

• Expected exposure: including for each transaction the mark-to-market (MtM) value plus an add-on for the potential future exposure for each period. Mitigating factors such as netting and collateral agreements are taken into account, as well as temporary impairment for derivatives with interim payments.

• LGD: percentage of final loss assumed in a counterparty credit event/default.

• Probability of default: for cases where there is no market information (the CDS quoted spread curve, etc.), probabilities based on ratings, preferably internal ones, are used.

• Discount factor curve.

The debt valuation adjustment (DVA) is a similar valuation adjustment to the CVA but, in this case, as a result of the own risk of the Group assumed by its counterparties in OTC derivatives.

The CVA and DVA recognized at December 31, 2013 amounted to €739 million and €234 million, respectively.

Valuation adjustments due to model risk

The valuation models described above are not significantly subjective, since they can be adjusted and recalibrated, where appropriate, through the internal calculation of the fair value and the subsequent comparison with the related actively traded price. However, fair value adjustments may be necessary when market quoted prices are not available for comparison purposes.

The sources of risk are associated with uncertain model parameters, illiquid underlying issuers, low quality market data or missing risk factors (sometimes the best available option is to use limited models with controllable risk). In these situations, we calculate and apply valuation adjustments in accordance with general industry practice.

The measurements obtained using the internal models might have been different had other methods or assumptions been used with respect to interest rate risk, to credit risk, market risk and foreign currency risk spreads, or to their related correlations and volatilities.

In Note 2. d) iii. to our consolidated financial statements additional information can be found regarding valuation techniques used by the Group, along with details of the principal assumptions and estimates used in these models and the effect on the fair value of a reasonable change in the assumptions used in the valuation.

Allowance for credit losses for financial instruments accounted for at amortized cost

Financial assets accounted for at amortized cost and contingent liabilities are assessed for objective evidence of impairment and any resulting allowances for credit losses are recognized and measured in accordance with IAS 39. Credit losses exist if the carrying amount of an asset or claim or a portfolio of assets or claims exceeds the present value of the estimated future cash flows.

When a loan is deemed partially uncollectible, a provision is recorded (charged against earnings) as opposed to a partial write-off (removal from the balance sheet), since a partial write-off of the loan is not permitted by the Bank of Spain. If a loan becomes entirely uncollectible, the provision is increased to 100% of the loan balance. Accordingly, we recognize a credit loss on any loan at the time it is deemed to be impaired.

The credit loss recognition process is independent of the process for the removal of impaired loans from the balance sheet. The balances relating to impaired transactions continue to be recognized on the balance sheet, for their full amounts, until we consider that the recovery of those amounts is remote.

We consider recovery to be remote when there has been a substantial and irreversible deterioration of the borrower’s solvency, when commencement of the liquidation phase of insolvency proceedings has been ordered or when more than four years have elapsed since the borrower’s transaction was classified as impaired due to arrears (the maximum period established by the Bank of Spain).

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When the recovery of a financial asset is considered remote, it is written-off, together with the related allowance, without prejudice to any actions that the consolidated entities may initiate to seek collection until their contractual rights are extinguished due to expiry of the statute-of-limitations period, forgiveness or any other cause.

For the purpose of determining impairment losses, we monitor our debtors as described below:

• Individually for significant debt instruments and for instruments which, although not material, are not susceptible to being classified in a group of financial assets with similar credit risk characteristics, which are classified by the Group as “individualized”. This category includes wholesale banking enterprises, financial institutions and certain retail banking enterprises.

• Collectively, in all other cases, which are classified by the Group as “standardized” by grouping together instruments having similar credit risk characteristics indicative of the debtors’ ability to pay all principal and interest amounts in accordance with the contractual terms. The credit risk characteristics considered for the purpose of grouping the assets are, inter alia, instrument type, debtor’s industry and geographical location, type of guarantee or collateral, age of past-due amounts and any other relevant factor for the estimation of future cash flows. This category includes exposures to individuals, individual entrepreneurs and retail banking enterprises not classified as individualized customers.

As regards impairment losses resulting from materialization of the insolvency risk of the obligors (credit risk), a debt instrument is impaired due to insolvency:

• When there is evidence of a deterioration of the obligor’s ability to pay, either because it is in arrears or for other reasons, and/or

• When country risk materializes: country risk is considered to be the risk associated with debtors resident in a given country due to circumstances other than normal commercial risk.

We have certain policies, methods and procedures for covering its credit risk arising both from insolvency allocable to counterparties and from country risk. These policies, methods and procedures are applied in the granting, examination and documentation of debt instruments and contingent liabilities and commitments, and in the identification of their impairment and the calculation of the amounts required to cover the related credit risk.

With respect to the coverage of loss arising from credit risk, we must meet the Bank of Spain requirements, which establish that, until the Spanish regulatory authority has verified and approved the internal models for the calculation of the allowance for losses arising from credit risk (to date it has only approved the internal models to be used to calculate regulatory capital), entities must calculate their credit risk coverage as set forth below:

a. Specific allowance (individuals):

The allowance for debt instruments not measured at fair value through profit or loss that are classified as impaired is generally recognized in accordance with the criteria set forth below:

i. Assets classified as impaired due to counterparty arrears:

Debt instruments, whoever the obligor and whatever the guarantee or collateral, with amounts more than three months past due are assessed individually, taking into account the age of the past-due amounts, the guarantees or collateral provided and the financial situation of the counterparty and the guarantors.

ii. Assets classified as impaired for reasons other than counterparty arrears:

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

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b. General allowance for inherent losses (collective):

Additionally, based on its experience and on the information available to it on the Spanish banking industry, the Bank of Spain has established various categories of debt instruments and contingent liabilities, classified as standard risk, which are recognized at Spanish entities or relate to transactions performed on behalf of residents in Spain which are recognized in the accounting records of foreign subsidiaries, and has applied a range of required allowances to each category.

c. Country risk allowance:

Country risk is considered to be the risk associated with counterparties resident in a given country due to circumstances other than normal commercial risk (sovereign risk, transfer risk and risks arising from international financial activity). Based on the countries’ economic performance, political situation, regulatory and institutional framework, and payment capacity and record, we classify all the transactions performed with third parties into six different groups, from group 1 (transactions with ultimate obligors resident in European Union countries, Norway, Switzerland, Iceland, the United States, Canada, Japan, Australia and New Zealand) to group 6 (transactions the recovery of which is considered remote due to circumstances attributable to the country), assigning to each group the credit loss allowance percentages resulting from the aforementioned analyses. However, due to the size of the Group and to the proactive management of our country risk exposure, the allowances recognized in this connection are not material with respect to the credit loss allowances recognized.

The allowance for credit losses for financial instruments accounted for at amortized cost and contingent liabilities recorded by Grupo Santander as at December 31, 2013, using the methodology outlined above, was €25,652 million.

However, the coverage of the Group’s losses arising from credit risk must also meet the regulatory requirements of IFRS-IASB and, therefore, we check the allowances calculated as described above with those obtained from our own internal models for the calculation of the coverage of losses arising from credit risk in order to confirm that there are no material differences.

Our internal models (a full description of our credit risk management system is included in Item 3 Information on the Company. B Business Overview- Allowance for Credit Losses and Country Risk Requirements and in Item 11. Quantitative and Qualitative Disclosures about Market Risk Part 4. Credit Risk) determine the impairment losses on debt instruments not measured at fair value through profit or loss and on contingent liabilities taking into account the historical experience of impairment and other circumstances known at the time of assessment. For these purposes, impairment losses on loans are losses incurred at the reporting date, calculated using statistical methods.

The amount of an impairment loss incurred on a debt instrument carried at amortized cost is equal to the difference between its carrying amount and the present value of its estimated future cash flows, and is presented as a reduction of the balance of the asset adjusted.

In estimating the future cash flows of debt instruments the following factors are taken into account:

• All the amounts that are expected to be obtained over the remaining life of the instrument, including, where appropriate, those which may result from the collateral provided for the instrument (less the costs for obtaining and subsequently selling the collateral). The impairment loss takes into account the likelihood of collecting accrued past-due interest receivable;

• The various types of risk to which each instrument is subject; and

• The circumstances in which collections will foreseeably be made.

These cash flows are subsequently discounted using the instrument’s effective interest rate (if its contractual rate is fixed) or the effective contractual rate at the discount date (if it is variable).

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Incurred loss is the cost of the credit risk of a transaction that will manifest within a one year lead time from the balance sheet date due to an event that had already occurred at the assessment date and considering the characteristics of the counterparty and the guarantees and collateral associated with the transaction.

The loss incurred is calculated by multiplying three factors: exposure at default, probability of default and loss given default. These parameters are also used to calculate economic capital and to calculate BIS II regulatory capital under internal models.

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

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

For the purposes of calculating the incurred losses PD is measured using a time horizon of one year; i.e. it quantifies the probability of the counterparty defaulting in the coming year due to an event that had already occurred at the assessment date. The definition of default used includes amounts past due by 90 days or more and cases in which there is no default but there are doubts as to the solvency of the counterparty (subjective impaired assets).

• Loss given default (LGD) is the loss arising in the event of default. It depends mainly on the present value of the guarantees associated with the transaction and other the future flows that are expected to be recovered.

In addition to all of the above, the calculation of the incurred loss takes into account the adjustment of the aforementioned factors (PD and LGD), historical experience and other specific information to reflect the current conditions.

At December 31, 2013 there is no material difference in the calculation of loan allowances between the EU-IFRS required to be applied under the Bank of Spain’s Circular 4/2004 (as explained above) and IFRS-IASB.

Impairment

Certain assets, including goodwill, other intangible assets, non-current assets held for sale, equity method investments, financial assets not carried at fair value through profit or loss and other assets are subject to impairment review. We record impairment charges when we believe there is objective evidence of impairment, or that the cost of the assets may not be recoverable. Assessment of what constitutes impairment is a matter of significant judgment.

Goodwill and other intangible assets are tested for impairment on an annual basis, or more frequently if events or changes in circumstances, such as an adverse change in business climate or observable market data, indicate that these assets may be impaired. An impairment loss recognized for goodwill may not be reversed in a subsequent period. The fair value determination used in the impairment assessment requires estimates based on quoted market prices, prices of comparable businesses, present value or other valuation techniques, or a combination thereof, requiring management to make subjective judgments and assumptions. Events and factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and technology, and changes in discount rates and specific industry or market sector conditions.

In relation to goodwill, the first step of the impairment review process requires the identification of the cash-generating units (“CGU”). These are the smallest identifiable group of assets that, as a result of continuing operations, generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Goodwill is then allocated to these CGUs; this allocation is reviewed following business reorganization.

The amount to be recovered of each cash-generating unit is determined taking into consideration the carrying amount (including any fair value adjustments arising on the business combination) of all the assets and liabilities of all the independent legal entities comprising the cash-generating unit, together with the related goodwill.

The amount to be recovered of the cash-generating unit is compared with its recoverable amount in order to determine whether there is any impairment.

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The Group assesses the existence of any indication that might be considered to be evidence of impairment of the cash-generating unit by reviewing information including the following: (i) certain macroeconomic variables that might affect its investments (population data, political situation, economic situation -including bankarization-, among others) and (ii) various microeconomic variables comparing our investments with the financial services industry of the country in which the Group carries on most of its business activities (balance sheet composition, total funds under management, results, efficiency ratio, capital adequacy ratio, return on equity, among others).

Regardless of whether there is any indication of impairment, every year the Group calculates the recoverable amount of each cash-generating unit to which goodwill has been allocated and, to this end, it uses price quotations, if available, market references (multiples), internal estimates and based in part on third-party appraisals.

Firstly, we determine the recoverable amount by calculating the fair value of each cash-generating unit on the basis of the quoted price of the cash-generating units, if available, and of the price earnings ratios of comparable local entities.

In addition, we perform estimates of the recoverable amounts of certain cash-generating units by calculating their value in use using discounted cash flow projections. The main assumptions used in this calculation are: (i) earnings projections based on the financial budgets approved by the directors which normally cover a five-year period (unless a longer time horizon can be justified), (ii) discount rates determined as the cost of capital taking into account the risk-free rate of return plus a risk premium in line with the market and the business in which the units operate and (iii) constant growth rates used in order to extrapolate earnings to perpetuity which do not exceed the long-term average growth rate for the market in which the cash-generating unit in question operates.

The cash flow projections used to obtain the values in use are based on the financial budgets approved by both local management of the related local units and the Group’s directors. Our budgetary estimation process is common for all the cash-generating units. The local management teams prepare their budgets using the following key assumptions:

a) Microeconomic variables of the cash-generating unit: management takes into consideration the current balance sheet structure, the product mix on offer and the business decisions taken by local management in this regard.

b) Macroeconomic variables: growth is estimated on the basis of the changing environment; taking into consideration expected GDP growth in the unit’s geographical location and forecast trends in interest and exchange rates. These data, which are based on external information sources, are provided by the Group’s economic research service.

c) Past performance variables: in addition, management takes into consideration in the projection the difference (both positive and negative) between the cash-generating unit’s past performance and that of the market.

Given the degree of uncertainty of these assumptions, we perform a sensitivity analysis thereof using reasonable changes in the key assumptions on which the recoverable amount of the cash-generating units is based in order to confirm whether their recoverable amount still exceeds their carrying amount. Following the sensitivity analysis performed, the value in use of all the cash-generating units still exceeds their recoverable amount.

Based on the foregoing, and in accordance with the estimates, projections and sensitivity analyses available to the Bank’s directors, in 2013 we recognized impairment losses on goodwill totaling €40 million (2012: €156 million; 2011: €660 million) under Impairment losses on other assets (net) - Goodwill and other intangible assets. In 2011 all the impairment losses recognized related to Group subsidiaries in Portugal. These losses were attributed to the macroeconomic deterioration in Portugal. In 2012 the impairment losses recognized, which were due mainly to the deterioration of business expectations, related mainly to Group subsidiaries in Italy.

At December 31, 2013, none of the cash-generating units with significant goodwill had a recoverable amount approximating their carrying amount. The recoverable amount is considered to be close to the carrying amount when reasonable changes in the main assumptions used in the valuation cause the recoverable amount to be below the amount to be recovered.

Non-current assets held for sale are measured at the lower of fair value less costs to sell and the carrying amount. Therefore, we annually conduct a review of the recoverable values of these assets, taking into account the features of our assets and based in part on third-party appraisals. After performing these assessments at December 31, 2013, 2012 and 2011 the allowance that covers the value of our non-current assets held for sale amounted to €4,955 million, €4,416 million and €4,512 million, respectively.

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Equity method investments are evaluated for impairment on an annual basis or more frequently if events or changes in circumstances indicate that these assets are impaired. An equity method investment is impaired if its fair value is deemed to be less than its cost. Accordingly, we evaluate whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. After performing this analysis, an impairment loss of €100 million on the investment in Metrovacesa was recorded in 2011. In 2013 and 2012 there was no evidence of material impairment on the Group’s equity method investments.

In relation to the available for sale securities (debt and equity instruments) at the end of each year, we make an assessment of whether there is any objective evidence that any our available for sale securities of is impaired. This assessment includes but is not limited to an analysis of the following information: (i) the issuer’s economic and financial position, the existence of default or late payment, analysis of the issuer’s solvency, the evolution of its business, short-term projections, trends observed with respect to its earnings and, if applicable, its dividend distribution policy; (ii) market-related information such as changes in the general economic situation, changes in the issuer’s sector which might affect its ability to pay; iii) changes in the fair value of the security analyzed, analysis of the origins of such changes - whether they are intrinsic or the result of the general uncertainty concerning the economy or the country - and iv) independent analysts’ reports and forecasts and other independent market information.

In the case of equity instruments, when the changes in the fair value of the instrument under analysis are assessed, the duration and significance of the fall in its market price below cost for us is taken into account. As a general rule, for these purposes we consider a significant fall to be a 40% drop in the value of the asset or a continued fall over a period of 18 months. Nevertheless, it should be noted that we assess, on a case-by-case basis each of the securities that have suffered losses, and monitors the performance of their prices, recognizing an impairment loss as soon as it is considered that the recoverable amount could be affected, even though the price may not have fallen by the percentage or for the duration mentioned above.

If, after the above assessment has been carried out, we consider that the presence of one or more of these factors could affect recovery of the cost of the asset, an impairment loss is recognized in the income statement for the amount of the loss in equity under valuation adjustments. Also, where we do not intend and/or are not able to hold the investment for a sufficient amount of time to recover the cost, the instrument is written down to its fair value.

Upon impairment, the full difference between amortized cost and fair value is removed from equity and recognized in net profit or loss. Impairments on debt securities may be reversed if there is a decrease in the amount of the impairment which can be objectively related to an observable event. Impairments on equity securities may not be reversed.

At the end of 2013 we performed the assessment described above and recognized in the consolidated income statement impairment losses of €89 million in respect of debt instruments (€18 million in 2012 and €125 million in 2011, of which €106 million related to Greek sovereign debt). At 2013, 2012 and 2011 year-end, we analyzed the additional unrealized revaluation losses related to debt instruments and we concluded that they were temporary and, therefore, there was no evidence of impairment since the interest payment schedules for all the securities had been complied with and there was no evidence that the issuers would not continue to meet their payment obligations or that the future payments (both principal and interest) would not be sufficient to recover the cost.

At the end of 2013, most of the losses on government debt securities recognized in the Group’s equity (approximately 68.71% of the total) related to the decline in value of the Spanish and Portuguese government debt securities. This decline in value was not prompted by interest rate changes but rather by an increase in the credit risk spreads due to eurozone debt market tensions in recent years; there had not been any default on payments of interest nor was there any evidence that the issuers would fail to continue to meet their payment obligations in the future, with respect both to principal and interest, and thus prevent recovery of the carrying amount of such securities.

During 2013, 2012 and 2011 we completed the analysis described above for equity securities and we recognized impairments amounting to €69 million (€344 million in 2012 and €704 million in 2011). The impairment losses recognized in 2011 included €592 million relating to the impairment of the ownership interests in Iberdrola, S.A. and Assicurazioni Generali SpA. These equity instruments had suffered a significant and prolonged fall in price as of December 31, 2011. No additional significant impairments were recorded in 2013 for the remainder of the equity securities that showed unrealized losses as of December 31, 2013 because, after carrying out the abovementioned analysis, we concluded that their carrying value was still recoverable.

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Retirement Benefit Obligations

We provide pension plans in most parts of the world. For defined contribution plans, the pension cost recognized in the consolidated income statement represents the contribution payable to the scheme. For defined benefit plans, the pension cost is assessed in accordance with the advice of a qualified external actuary using the projected unit credit method. This cost is annually charged to the consolidated income statement.

The actuarial valuation is dependent upon a series of assumptions; the principal ones are set forth below:

• annual discount rate-determined, when available, by reference to high-quality corporate bonds;

• mortality tables;

• annual social security pension revision rate;

• price inflation;

• annual salary growth rate; and

• the method used to calculate vested commitments to current employees.

The difference between the fair value of the plan assets and the present value of the defined benefit obligation at the balance sheet date is recognized as a liability in the balance sheet.

Further information on retirement benefit obligations is set out in Notes 2 and 25 to our consolidated financial statements.

Business combinations and goodwill

Goodwill and intangible assets include the cost of acquired subsidiaries in excess of the fair value of the tangible net assets recorded in connection with acquisitions as well as acquired intangible assets which include core deposits, customer lists, brands and assets under management. Accounting for goodwill and acquired intangible assets requires management’s estimates regarding: (1) the fair value of the acquired intangible assets and the initial amount of goodwill to be recorded, (2) the amortization period (for identified intangible assets other than goodwill) and (3) the recoverability of the carrying value of acquired intangible assets.

To determine the initial amount of goodwill to be recognized on an acquisition, we have to determine the fair value of the consideration and the fair value of the net assets acquired. We use independent appraisers and our internal analysis, generally based on discounted cash flow techniques, to determine the fair value of the net assets acquired and non-cash components of the consideration paid.

We test goodwill for impairment at the reporting unit level. We identify our reporting units as one level below our business segments, based on our management structure. We keep those reporting units unchanged unless business segment reorganization occurs. We disclose our goodwill impairment assessment methodology in “Critical Accounting Policies – Impairment”.

The useful lives of acquired intangible assets are estimated based on the period over which the assets are expected to contribute directly or indirectly to the future cash flows of the acquired entity.

For acquired intangible assets, the amortization period is reviewed annually. In making these assumptions, we consider historical results, adjusted to reflect current and anticipated operating conditions. Because a change in these assumptions can result in a significant change in the recorded amount of acquired intangible assets, we believe the accounting for business combinations is one of our critical accounting estimates.

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As a result of the first consolidation of the acquired subsidiaries, merger of Bank Zachodni WBK S.A. and Kredyt Bank S.A. (2013), Skandinaviska Enskilda Banken (SEB) Group’s commercial banking business in Germany (2011) and Bank Zachodni WBK, S.A. (2011), a significant amount of goodwill was recorded (see Note 3 and Note 17 to our consolidated financial statements). Management made this determination, based in part upon independent appraisals of intangible assets, which is initially estimated and subsequently revised within the one year time period allowed by IFRS-IASB.

Recent Accounting Pronouncements

See Note 1.b to our consolidated financial statements for the detail of standards and interpretations that came into force in 2013 and those with effective dates subsequent to December 31, 2013.

A. Operating results

We have based the following discussion on our consolidated financial statements. You should read it along with these financial statements, and it is qualified in its entirety by reference to them.

In a number of places in this report, in order to analyze changes in our business from period to period, we have isolated the effects of foreign exchange rates on our results of operations and financial position. In particular, we have isolated the effects of depreciation/appreciation of local currencies against the euro because we believe that doing so is useful in understanding the development of our business. For these purposes, we calculate the effect of movements in the exchange rates by multiplying the previous period balances in local currencies by the difference between the exchange rate to the euro of the current and the previous period.

General

We are a financial group whose main business focus is retail banking, complemented by global wholesale banking, asset management and insurance businesses.

Our main source of income is the interest that we earn from our lending activities, by borrowing funds from customers and money markets at certain rates and lending them to other customers at different rates. We also derive income from the interest and dividends that we receive from our investments in fixed/variable income and equity securities and from our trading activities in such securities and derivatives, by buying and selling them to take advantage of current and/or expected differences between purchase and sale prices.

Another source of income are the commissions that we earn from the different banking and other financial services that we provide (credit and debit cards, insurance, account management, bill discounting, guarantees and other contingent liabilities, advisory and custody services, etc.) and from our mutual and pension funds management services.

In addition, from time to time, we derive income from the capital gains we make from the sale of our holdings in Group companies.

2013 Overview

We conducted our business in an economic environment of slower growth than in 2012, with business activity decelerating in some countries for the whole year, but improving as the year progressed, backed by a cyclical improvement in developed economies. The year ended with the euro zone out of recession as of the second quarter and with the U.K. and the U.S. showing firm signs of recovery. Emerging countries, particularly China, maintained solid growth despite their slowdown. In this environment, the main central banks insisted on keeping interest rates low for a prolonged period of time, indicating that monetary stimulus would be maintained.

The euro zone took major steps towards establishing a banking union. Of note was the approval of the Single Supervisory Mechanism that will come into force in November 2014, and the first agreement on the Banking Recovery and Resolution Directive and the Single Resolution Mechanism, which is expected to be approved and operating in January 2015. All of this helped improve the conditions in the wholesale markets, particularly those related to sovereign debt, which led to sharp decreases in risk premiums.

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In the U.S., the upswing in private domestic demand, well established in an expanding housing sector, lower unemployment and the banking sector’s financing capacity, was the main driver of growth (fourth quarter GDP: +0.6% quarter-on-quarter; +2.5% year-on-year) and the recovery in employment produced growth of 1.9% for the whole of 2013. In this scenario, and after Congress’s agreement to reduce fiscal uncertainties, the Federal Reserve confirmed its tapering plan as of the beginning of 2014, although it remained committed to keeping short-term interest rates at their current levels until 2015.

Latin American economies and financial markets reflected in their currencies and investment flows the change envisaged in the Fed’s liquidity injection policy, although the impact varied by country. Its impact was very limited on the region’s growth, which remained in line with that of 2012, although it contributed to a general depreciation of emerging countries’ currencies in January 2014.

In Brazil, fourth quarter GDP growth eased to 1.9% year-on-year, bringing the growth for the whole year to 2.3%. This performance was driven by the strength of consumption and the labor market offsetting investor weakness. Inflation decreased from the beginning of the year, but remained high, which triggered several increases in the benchmark Selic rate to 10% at the end of 2013 (+275 basis points), and a further increase in January 2014 to 10.50%. These hikes did not stop the real from depreciating after the Fed’s first announcements regarding its tapering plan in May.

Mexico lost momentum in the fourth quarter (+0.2% quarter-on-quarter and +0.7% year-on-year) due to the reduced impulse from the public and industrial sectors, which brought growth to 1.1% for the whole of 2013. With inflation on target, the central bank focused on growth and reduced the benchmark rate in the second half of the year to 3.50% (-50 basis points), while the peso remained relatively stable.

Chile’s growth eased in the fourth quarter (-0.1% quarter-on-quarter and +2.7% year-on-year) due to a drop in equipment investments. The GDP growth for the whole year was 4.1%. With inflation under control, the central bank cut its benchmark rate by 50 basis points to 4.50%, the first reduction since January 2012, and the peso remained stable.

The euro zone, out of recession since the second quarter, expanded at a higher rate in the fourth quarter (+0.3% quarter-on-quarter; +0.5% year-on-year), backed by less restrictive fiscal and monetary conditions and upturns in the peripheral countries (quarter-on-quarter Portugal: +0.5%; Spain: +0.2% and Italy: +0.1%). Of note was the growth in Germany (+0.4%) and in France (+0.3%).

With inflation below 1%, the European Central Bank (ECB) cut its benchmark rate again to 0.25% (-50 basis points in 2013) and stated its intention to keep the benchmark rate low “for an extensive period of time” and continue to inject all the necessary liquidity into the financial system. Meanwhile, the early return by banks to the ECB of three-year borrowed funds reduced the surplus of liquidity, exerting pressure on short-term money market rates and contributing to the euro’s appreciation against the dollar.

In Spain, the economy registered in the third quarter positive growth over the second quarter (+0.1% quarter-on-quarter; -1.1% year-on-year), for the first time since the start of 2011. The recovery in private consumption and capital goods, added to the strength of exports, explains this upward trend. The 0.2% growth in the fourth quarter and the job creation figures on a seasonally adjusted basis confirmed the exit from recession. For the whole of 2013, GDP decreased 1.2%.

Throughout 2013, progress in correcting imbalances, the strength of the external sector, further improvements in competitiveness from the decline in unit labor costs and the advances in structural reforms, both in Spain as well as European governance, enabled relaxation of the markets, and reduced the risk premium sharply. This trend continued in early 2014. At the end of 2013, the premium over the benchmark 10-year German bond was 220 basis points, down from 395 basis points at the end of 2012 and a high of 637 basis points in July 2012.

The U.K. economy remained strong in the fourth quarter (+0.7% quarter-on-quarter and 2.7% year-on-year), thanks to private consumption, improvements in employment and lending, which joined the impulse from the residential and external sectors. The growth forecast for the whole of 2013 was 1.8%.

With inflation close to target, the Bank of England held its base rate. However, in the face of the strong economic improvement, particularly consumption and housing, the Bank of England recommended ending the Funding for Lending Scheme for households, while keeping it for companies. This would represent the first reduction in monetary stimulus measures. All of these factors strengthened sterling’s appreciation against the dollar and partially corrected its depreciation against the euro.

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The Polish economy continued to accelerate in the fourth quarter (+0.6% quarter-on-quarter and +2.7% year-on-year), with more balanced growth, a greater weight of consumption and private investment, as well as an upturn in employment and continued strength in the external sector. An important factor was the large cut in the central bank’s benchmark rate in the first half of the year (to 2.50% in July 2013 representing a 225 basis point reduction from September 2012) in an environment of contained inflation, and a depreciated zloty against the euro in the first half of the year. In the second half, part of this was corrected. The GDP growth for the whole year was 1.6%.

Results of Operations for Santander

Summary

Profit attributable to the Parent bank in 2013 was €4,370 million, a 90.4% or €2,075 million increase from €2,295 million in 2012, which represented a 56.9% or €3,035 million decrease from €5,330 million in 2011.

There are a number of factors that have an impact on the year-on-year comparison:

• The climate of macroeconomic slowdown and record low interest rates after appreciable decreases in some countries in which the Group was operating. This is combined with the strategy followed by the Group of giving preference to capital and liquidity which increased our financing costs.

• In 2012, substantial impairments were booked for real estate sector in Spain, which had a significant impact on the year’s financial statements.

• A net negative effect on attributable profit of €368 million (a decrease of 16 percentage points) due to the change in the scope of consolidation because of the difference between:

• a positive effect due to the inclusion of Kredyt Bank S.A.

• a negative effect due to (i) the removal of the Colombia subsidiary in the second quarter of 2012, (ii) the reinsurance of the individual life risk portfolio of the Santander insurance companies in Spain and Portugal, (iii) the increase in non-controlling interests in the subsidiaries in Mexico and Poland, and (iv) the lower earnings obtained at the Insurance unit due to the implementation of the transaction with Aegon. See “Item 4. Information on the Company— A. History and development of the company — Principal Capital Expenditures and Divestitures — Acquisitions, Dispositions, Reorganizations”.

• The impact of the exchange rates of the various currencies against the euro was 6 negative percentage points for the Group as a whole in the comparison of income and costs year on year. By country, the main negative impacts were in Brazil (-12 percentage points), the United Kingdom and Chile (-5 percentage points each), and the United States (-3 percentage points).

Interest Income / (Charges)

Net interest income was €25,935, a 13.3% or €3,988 million decrease from €29,923 million in 2012, which represented a 2.2% or €670 million decrease from €30,594 million in 2011.

2013 compared to 2012

The €3,988 million decrease in net interest income was mainly due to:

• The depreciation of some currencies (6 percentage point of the fall), particularly Brazil, the U.K., Argentina and Chile;

• The impact of the cost associated with the policy of strengthening liquidity that the Group has been implementing since the middle of 2012;

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• The decrease in lending due to deleveraging in some countries; and

• Reduced spreads in an environment of record low interest rates in mature markets and the change of mix toward lower risk products in some markets. These impacts were not offset by the reduction of the cost of funds, which is still not fully reflected across our sources of funding.

The performance of net interest income by countries was the following:

• Favorable evolution of Santander UK +3.4% (+8.3% rise in pound sterling).

• Drop of 15.4% in Spain, largely due to the country’s deleveraging process, mortgage repricing and the higher cost of funds. Our efforts to reduce the cost of funds in Spain is already beginning to be reflected in the last few quarters and we expect it to continue to improve.

• Latin America’s net interest income declined 15.1% (5.5% in local currency), due to Brazil. Mexico (+5.7%) and Chile (-1.7%), on the other hand, increased 5.9% and 3.4%, respectively, in local currency.

The average balance of interest earning assets in 2013 was €1,118,157 million, which was 6.0% or €71,019 million less than in 2012. This decrease occurred mainly in Spain (-€43,269 million), despite its lower relative weight. Within this, the biggest drops were in Loans and advances to customers (-€20,416 million), as a result of the deleveraging process, and Cash and due from central banks (-€14,582 million). The balances of the international component declined €27,750 million mainly due to the impact of changes in exchange rates.

The geographic distribution (principal segments) of customer loans was very different by market.

• In Continental Europe, the low demand for loans as a result of the economic situation of some countries affected balances in Spain and Portugal. Santander Consumer Finance’s total lending remained stable, while Poland registered positive growth both organically as well as from the increased perimeter. The balance of Spain’s run-off real estate activity was much lower, as we maintained the strategy of reducing this type of risk.

• In the United Kingdom, the balance of customer loans was 7% lower. In local criteria and currency, the balance of home mortgages dropped 5% because of the strategy of improving the risk profile, which meant discontinuing some products. Loans to companies, on the other hand, increased 13% in local currency.

• Lending in Latin America decreased 5% in nominal terms, but increased 10% excluding the exchange rate impact, with growth in all countries except Puerto Rico (-7%).

• Lending in the U.S. declined 9%, as a result of: (i) the fall in the run-off portfolios, which includes indirect lending to car dealers, home equity loans, student loans and others, (ii) and the strategy in the last year of mortgage origination for its subsequent sale.

At the end of 2013, Continental Europe accounted for 40% of the Group’s total net lending (24% Spain), the U.K. 36%, Latin America 20% (10% Brazil) and the U.S. 6%.

The average balance of interest-bearing liabilities in 2013 was €1,100,712 million, which was 6% or €70,819 million less than in 2012, with a 14 basis points improvement in their average cost, taking it to 2.32%. This improvement was primarily in the cost of customer deposits, which fell 24 basis points.

The main reason for the drop in average liabilities, as in the case of assets, was Spain (-€42,828 million), as a result of the decreases in transactions with credit institutions (-€33,685 million, mainly because of the repayment of the Long-term Refinancing Operation “LTRO” funds, obtained from the ECB at the end of 2011), marketable securities (-€11,609 million) and other interest-bearing liabilities (-€16,106 million). In contrast, domestic customer deposits increased by €20,434 million. Balances were also down in the international component (-€27,991 million), mainly due to lower customer deposits (-€24,446 million) affected by exchange rates.

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The development by geographic distribution (principal segments) of customer deposits as of December 31, 2013 as compared to December 31, 2012 was the following:

• Customer deposits in Continental Europe were flat as the decrease in Spain and Santander Consumer Finance was offset by the increase in Poland due to the entry of Kredyt Bank.

• In the U.K., customer deposits dropped 4% in 2013 due to the strategy of replacing expensive and less stable deposits with those that offer a better opportunity of linkage. Demand deposits grew because of the rise in current accounts as a result of the success of the 1|2|3 range of products, which partly offset the reduction in time deposits balances. The 1|2|3 World (current account, credit card, savings, etc.) is designed to build closer customer relationships, greater transactionality and increased loyalty.

• In Latin America customer deposits decreased 7%. However, as in lending, in constant currency, all countries except for Puerto Rico increased their deposits.

• Lastly, U.S. customer deposits continued to improve their mix and cost. Increasing demand deposits were offset by a greater decrease in time deposits. Total deposits were 7% lower (-3% in local currency).

Continental Europe accounted for 42% of customer deposits (30% Spain), the U.K. 31%, Latin America 21% (Brazil 10%) and the U.S. 6%.

2012 compared to 2011

The €670 million decrease in interest income compared to 2011 was mainly due to the change in consolidation method of SCUSA, which was accounted for by the equity method in December 2011. On a like for like basis (mainly deducting the change in consolidation method of SCUSA) net interest income increased 3.6%. This increase was mainly attributable to:

• The positive effect of the improvement in the loan spreads for the Group as a whole from 3.7% in 2011 to 3.9% in 2012. This was due, on the one hand, to the growth in volumes and the appropriate management of prices in emerging markets and, on the other, to the higher return on new lending in countries such as Spain, Portugal and the United Kingdom that are currently in a situation of lower volumes and low interest rates.

• The negative effect of the higher funding costs triggered by the increased cost of credit and a conservative liquidity strategy.

• The reduction of the deposit spread from 0.3% in 2011 to 0.1% in 2012 as a result of the increased financial cost in countries where there was strong competition for deposits at certain times in the year.

Our net interest income by geographic areas was as follows:

• Increase of 16.4% in Spain, within an environment of lower balances of loans due to deleveraging, and with appropriate management of prices and higher volumes of deposits.

• Latin America also did well and increased 8.5% (+14.7% excluding the perimeter and the exchange rate impact), with Brazil and Mexico up 6.4% and 20.6%, respectively. This growth reflected strong activity, with sustained rises in loans and deposits (in all countries), and management of spreads in an environment of stable or lower interest rates.

• Santander UK registered a fall of 19.2%, due to the higher cost of funding and low interest, and U.S. experienced a small decrease of 0.4%.

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Average total earning assets were €1,193,782 million for 2012, a 6.2% or €69,190 million increase from €1,124,592 million in 2011. This increase was divided among the international and domestic sectors, which grew €31,931 million and €33,642 million, respectively. By line items the growth in average total earning assets was due to: (i) an increase of €34,165 million in the average balances of our other interest earning assets (mainly hedging derivatives), (ii) a rise of €20,174 million in average loans and credits, and (iii) a growth of €15,049 million in average cash and due from central banks. Although average loans increased during 2012, by year end gross loans declined 4% as compared to 2011. The geographic distribution (principal segments) of customer loans was very different by market.

• In Continental Europe, customer lending continued to be affected by low demand (-6.5%), especially in Spain and Portugal.

• In the United Kingdom, the balance of customer loans was 2% lower. This was mainly due to: (i) a drop in the balance of residential mortgages due to the strategy followed to improve the risk profile, (ii) a decline in personal loans due to the continuation of the reduction policy, (iii) an increase in loans to SMEs which gained further market share and partially mitigated the above mentioned decreases.

• Customer loans in Latin America remained flat with a 0.2% increase.

• Lastly, customer loans in the U.S. increased 2.8%.

At the end of 2012, Continental Europe accounted for 40% of lending of the Group’s total operating areas (Spain 25%), the U.K. 34%, Latin America 20% (Brazil 11%) and the U.S. 6%. These shares in 2011 were: Continental Europe 41% (Spain 25%), the U.K. 34%, Latin America 19% (Brazil 11%) and the U.S. 6%.

Income from Equity Instruments

Income from equity instruments was €378 million in 2013, an 11% or €45 million decrease from €423 million in 2012, which was a 7% or €29 million increase from €394 million in 2011.

The €45 million decrease in 2013 and the €29 million increase in 2012, was mainly explained by the variation in dividends from our equity portfolio (mainly Spanish blue chips).

Income from Companies Accounted for by the Equity Method

Income from companies accounted for by the equity method was €500 million in 2013, a €73 million increase from €427 million in 2012, which was a €370 million increase from €57 million in 2011. In this line item we record the contribution to the Group of Santander Consumer USA and the corporate insurance transactions in Europe and Latin America. Starting in 2014, we are fully consolidating Santander Consumer USA financial statements. See Item 4 of Part I, “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Recent events”.

Fee and Commission Income (net)

Fee and commission income was €9,761 million in 2013, a 5% or €499 million decrease from €10,260 million in 2012. Excluding the exchange rate impact, it increased 0.8%. During 2012, fee and commission income decreased by 1% as compared to €10,409 million obtained in 2011.

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2013 compared to 2012

Fee and commission income for 2013 and 2012 was as follows:

	2013		2012		Amount Change			% Change
	(in millions of euros, except percentages)
Mutual and pension funds		1,121		1,178		(57	)		(4.8	%)
Insurance		2,284		2,317		(33	)		(1.4	%)
Securities services		678		702		(24	)		(3.4	%)
Commissions for services		5,678		6,063		(385	)		(6.3	%)
Credit and debit cards		1,611		1,543		68			4.4	%
Account management		1,163		1,209		(46	)		(3.8	%)
Bill discounting		325		327		(2	)		(0.6	%)
Contingent liabilities		404		398		6			1.5	%
Other operations		2,175		2,586		(411	)		(15.9	%)
Total fee and commission income (net)		9,761		10,260		(499	)		(4.9	%)

The 5% decrease in fee and commission income was mainly due to lesser commissions for services mainly due to overdrafts.

The average balances of mutual funds under management decreased 7.5% from €99.3 billion in 2012 to €91.8 billion in 2013, mainly concentrated in the United Kingdom and Brazil. However, as of year-end 2013, mutual funds increased 4.6% mainly due to the increase in Spain +28.7%, as a result of greater marketing, partially offset by a 30.7% decrease in the United Kingdom.

The average balances of pension funds increased 7.0% from €9.7 billion in 2012 to €10.4 billion in 2013. Spain experienced a 7.4% increase from €8.9 billion in 2012 to €9.6 billion in 2013. Our only remaining pension business abroad is in Portugal. The average balances of pension funds in Portugal increased 2.9% from €766 million in 2012 to €788 million in 2013.

2012 compared to 2011

Fee and commission income for 2012 and 2011 was as follows:

	2012		2011		Amount Change			% Change
	(in millions of euros, except percentages)
Mutual and pension funds		1,178		1,236		(58	)		(4.7	%)
Insurance		2,317		2,366		(49	)		(2.1	%)
Securities services		702		668		34			5.1	%
Commissions for services		6,063		6,139		(75	)		(1.2	%)
Credit and debit cards		1,543		1,302		241			18.5	%
Account management		1,209		1,028		181			17.6	%
Bill discounting		327		309		18			6.1	%
Contingent liabilities		398		425		(27	)		(6.4	%)
Other operations		2,586		3,050		(219	)		7.1	%
Total fee and commission income (net)		10,260		10,409		(149	)		(1.4	%)

Fee and commission income decreased 1.4% to €10,260 million in 2012 compared to 2011 mainly due to lesser commissions for services, as well as mutual and pension funds and insurance.

138

The average balances of mutual funds under management decreased 9.6% from €109.9 billion in 2011 to €99.3 billion in 2012, mainly concentrated in Brazil and Spain. As of year-end 2012 mutual funds decreased 13% with falls in almost all countries, except in Poland, Mexico and Argentina, affected by the greater focus on capturing on-balance sheet funds.

The average balances of pension funds decreased 7.7% from €10.5 billion in 2011 to €9.7 billion in 2012. Spain experienced a 4.3% decrease from €9.3 billion in 2011 to €8.9 billion in 2012. Our only remaining pension business abroad is in Portugal. The average balances of pension funds in Portugal decreased 33.9% from €1.2 billion in 2011 to €0.8 billion in 2012.

Gains/(Losses) on Financial Assets and Liabilities (net)

Net gains on financial assets and liabilities in 2013 were €3,234 million, a 2.9% or €95 million decrease as compared to €3,329 million in 2012, which represented a 17.3% increase from €2,838 million in 2011. Gains (losses) on financial assets and liabilities include gains and losses arising from the following: marking to market our trading portfolio and derivative instruments, including spot market foreign exchange transactions, sales of investment securities and liquidation of our corresponding hedge or other derivative positions. For further details, see Note 44 to our consolidated financial statements.

2013 compared to 2012

The €95 million decrease was mainly due the net effect of: (i) a €273 million increase in trading gains, (ii) a €165 million decrease in other financial instruments at fair value through profit or loss relating to valuation fluctuations, and (iii) a €167 million decrease in financial instruments not measured at fair value through profit or loss, after the gains accounted in 2012 relating to repurchase transactions.

2012 compared to 2011

The 17.3% increase was due to several securities exchange and repurchase transactions for which the Group credited €870 million to income.

Other operating income / expenses (net)

Net other operating income in 2013 was a €291 million loss, a €401 million decrease from income of €110 million in 2012, which was a €89 million increase from income of €21 million in 2011. Under this line item we include income and expenses from insurance activity, non-financial services, other commissions and charges to the Deposit Guarantee Fund.

The main developments in insurance activity were:

• In July 2012, we reached an agreement with Abbey Life Insurance ltd., a subsidiary of Deustche Bank AG, to reinsure the entire individual life risk portfolio of the insurance companies in Spain and Portugal.

• In December 2012, Santander agreed a strategic alliance with the insurer Aegon to boost its bancassurance business in Spain through commercial networks. The agreement does not affect savings, auto and health insurance, which Santander continues to manage.

139

	2013			2012			Amount Change			% Change
	(in millions of euros, except percentages)
Insurance activity		117			593			(476	)		(80.3	%)
Income from insurance and reinsurance contracts issued		4,724			5,541			(817	)		(14.7	%)
Of which:
Insurance and reinsurance premium income		4,513			4,667			(154	)		(3.3	%)
Reinsurance income		211			874			(663	)		(75.9	%)
Expenses of insurance and reinsurance contracts		(4,607	)		(4,948	)		341			(6.9	%)
Of which:
Claims paid and other insurance-related expenses		(4,497	)		(4,440	)		(57	)		1.3	%
Net provisions for insurance contract liabilities		382			(323	)		705			n.a.
Reinsurance premiums paid		(492	)		(185	)		(307	)		165.9	%
Non-financial services		93			137			(44	)		(32.1	%)
Sales and income from the provision of non-financial services		322			369			(47	)		(12.7	%)
Cost of sales		(229	)		(232	)		3			(1.3	%)
Other operating income and expenses		(501	)		(620	)		119			(19.2	%)
Other operating income		857			783			74			9.5	%
Of which, fees and commissions offsetting direct costs		115			130			(15	)		(11.5	%)
Other operating expenses		(1,358	)		(1,403	)		45			(3.2	%)
Of which, Deposit Guarantee Fund		(559	)		(530	)		(29	)		5.5	%
Other operating income / expenses, net		(291	)		110			(401	)		n.a

The €401 million decrease in net other operating income in 2013 was mainly due to a decrease in insurance activity of €476 million mainly due to the previously mentioned agreements, partially offset by an increase of €119 million in other operating income and expenses.

140

	2012			2011			Amount Change			% Change
	(in millions of euros, except percentages)
Insurance activity		593			392			201			51.3	%
Income from insurance and reinsurance contracts issued		5,541			6,748			(1,207	)		(17.9	%)
Of which:
Insurance and reinsurance premium income		4,667			6,547			(1,880	)		(28.7	%)
Reinsurance income		874			201			673			334.8	%
Expenses of insurance and reinsurance contracts		(4,948	)		(6,356	)		1,408			(22.2	%)
Of which:
Claims paid and other insurance-related expenses		(4,440	)		(4,852	)		412			(8.5	%)
Net provisions for insurance contract liabilities		(323	)		(1,202	)		879			(73.1	%)
Reinsurance premiums paid		(185	)		(302	)		117			(38.7	%)
Non-financial services		137			151			(14	)		(9.3	%)
Sales and income from the provision of non-financial services		369			400			(31	)		(7.8	%)
Cost of sales		(232	)		(249	)		17			(6.8	%)
Other operating income and expenses		(620	)		(522	)		(98	)		18.8	%
Other operating income		783			902			(119	)		(13.2	%)
Of which, fees and commissions offsetting direct costs		130			119			11			9.2	%
Other operating expenses		(1,403	)		(1,424	)		21			(1.5	%)
Of which, Deposit Guarantee Fund		(530	)		(346	)		(184	)		53.2	%
Other operating income / expenses, net		110			21			89			423.8	%

The €89 million increase in net other operating income in 2012 was mainly due to an increase in insurance activity of €201 million partially offset by an increase of €98 million in other operating income and expenses.

Administrative Expenses

Administrative expenses declined 2.0% or €349 million to €17,452 million in 2013 from €17,801 million in 2012, which were flat from €17,644 million in 2011.

141

2013 compared to 2012

Administrative expenses for 2013 and 2012 were as follows:

	2013		2012		Amount Change			% Change
	(in millions of euros, except percentages)
Personnel expenses		10,069		10,306		(237	)		(2.3	%)
Other general administrative expenses		7,383		7,495		(112	)		(1.5	%)
Building and premises and supplies		1,980		1,916		64			3.3	%
Other expenses		1,556		1,694		(138	)		(8.1	%)
Information technology		992		889		103			11.6	%
Advertising		630		662		(32	)		(4.8	%)
Communications		519		638		(119	)		(18.7	%)
Technical reports		493		491		2			0.4	%
Taxes (other than income tax)		445		415		30			7.2	%
Guard and cash courier services		425		432		(7	)		(1.6	%)
Per diems and travel expenses		284		297		(13	)		(4.4	%)
Insurance premiums		59		61		(2	)		(3.3	%)
Total administrative expenses		17,452		17,801		(349	)		(2.0	%)

In 2013, administrative expenses decreased 2.0% or €349 million, positively affected by exchange rates. Excluding the impact of exchange rate differences administrative expenses increased by 3.6%.

Expenses in Europe, in both the big commercial units as well as the United Kingdom, continued to fall or rose below the inflation rate. Latin America was up as a result of the commercial network expansion and upgrade and the review of pay agreements in an environment of higher inflation. In the United States, the year-on-year comparison reflects the investments in technology and commercial structure, as well as costs associated with the change in brand.

2012 compared to 2011

Administrative expenses for 2012 and 2011 were as follows:

	2012		2011		Amount Change			% Change
	(in millions of euros, except percentages)
Personnel expenses		10,306		10,305		1			0.0	%
Other general administrative expenses		7,495		7,339		156			2.1	%
Building and premises and supplies		1,916		1,844		72			3.9	%
Other expenses		1,694		1,672		22			1.3	%
Information technology		889		828		61			7.4	%
Advertising		662		691		(29	)		(4.2	%)
Communications		638		649		(11	)		(1.7	%)
Technical reports		491		466		25			5.4	%
Per diems and travel expenses		297		312		(15	)		4.8	%
Taxes (other than income tax)		415		401		14			3.8	%
Guard and cash courier services		432		412		20			4.9	%
Insurance premiums		61		65		(4	)		(6.2	%)
Total administrative expenses		17,801		17,644		157			0.9	%

142

In 2012, administrative expenses experienced a slight increase of 0.9%. This reflects a flat personnel expenses and a 2.1% increase in other general administrative expenses.

In Europe, both the large retail units (Spain and Portugal) registered negative growth in cost in real terms, continuing the trend begun in 2011. United States also experienced a reduction in administrative expenses of 11.3%. In Latin America expenses rose due to the increase in business capacity and the revision of wage agreements in an environment of higher inflation.

Depreciation and Amortization

Depreciation and amortization was €2,391 million in 2013, a 9.5% or €208 million increase from €2,183 million in 2012, which was a 4.0% or €85 million increase from €2,098 million in 2011. This increase was mainly focused in Continental Europe.

Provisions (net)

Net provisions were €2,182 million in 2013, a 47.6% or €704 million increase from €1,478 million in 2012, which was a 43.5% or €1,138 million decrease from €2,616 million in 2011. This item includes additions charged to the income statement in relation to provisions for pensions and similar obligations, provisions for contingent liabilities and commitments and other provisions (mainly provisions for restructuring costs and tax and legal litigation). The variation in 2013 is mainly due to a €581 million increase in provisions for pensions and similar obligations. In Spain we recognized provisions of €334 million in 2013 to cover obligations arising from employees’ acceptances of an early retirement and voluntary redundancy offer. In addition, there was a €65 million increase in other provisions and a €58 million increase in contingent liabilities and commitments provisions.

The variation in 2012 was due to: (i) a €951 million decrease in other provisions, mainly due to the one-off charge in the second quarter of 2011 of €842 million from a provision made related to PPI remediation in Santander UK (€620 million net of tax); (ii) a €408 million decrease in provisions for pensions and; (iii) a €221 million increase in contingent liabilities and commitments provisions.

For further details, see Note 25 to our consolidated financial statements.

Impairment Losses (net)

Impairment losses (net) were €11,730 million in 2013, a 39.5% or €7,658 million decrease from €19,388 million in 2012, which was a 45.7% or €6,077 million increase from €13,311 million in 2011.

Impairment losses are divided in the income statement as follows:

	2013		2012		2011
Impairment losses on financial assets (net):		11,227		18,880		11,794
Loans and receivables		10,986		18,523		10,966
Other financial assets not measured at fair value through profit and loss		241		357		828
Impairment losses on other assets (net):		503		508		1,517
Goodwill and other intangible assets		41		151		1,161
Other assets		462		357		356
Total impairment losses (net)		11,730		19,388		13,311

143

2013 compared to 2012

The €7,537 million or 40.7% decrease in net impairment losses for loans and receivables in 2013 compared to 2012 reflected a €7,788 million decrease in provisions, a €248 million decrease in recoveries of loans previously charged-off and a €3 million increase in impairment losses of other assets.

Credit loss provisions accounted in 2013 decreased after the recorded rise in non-performing loans in the Spain’s real estate run-off segment in 2012. In other units, provisions were down in Brazil, the United Kingdom, Portugal, Santander Consumer Finance, the United States and, to a lesser extent, Spain. In contrast, they were up in the other Latin American countries, particularly Mexico, with a big impact from the one-off charge booked for housing developers.

Our total allowances for credit losses (excluding country-risk) decreased by €431 million to €25,681 million at December 31, 2013, from €26,112 million at December 31, 2012.

Net impairment losses on other assets in 2013 remained at the prior year level with €503 million compared to €508 million in 2012.

The impairment losses of other financial assets not measured at fair value through profit and loss in 2013 of €241 million were mainly due to equity instruments that had suffered a significant and prolonged fall in price.

Non-performing balances (excluding country-risk) increased by €5,591 million to €41,652 million at December 31, 2013, compared to €36,061 million at December 31, 2012. Our Non-performing balance ratio was 5.64% at December 31, 2013 as compared to 4.54% at December 31, 2012. This increase was mainly due to the 2.84 percentage points increase in Continental Europe. See Item 5 of Part I, “Operating and Financial Review and Prospects—A. Operating results— Results of Operations for Santander—Continental Europe”. Our coverage ratio was 62% at December 31, 2013 and 72% at December 31, 2012. See Item 4 of Part I, “Information on the Company—B. Business Overview—Selected Statistical Information—Impaired Balances Ratios”.

2012 compared to 2011

The €7,557 million or 68.9% increase in net impairment losses for loans and receivables in 2012 compared to 2011 reflected a €7,081 million increase in provisions, a €467 million decrease in recoveries of loans previously charged-off and a €9 million increase in impairment losses of other assets.

The increase in credit loss provisions recorded in 2012 was mainly due to two factors: (i) a rise in non-performing loans in the Spain’s real estate run-off segment which increased 206 basis points to 54.1%. This rise was caused by the worsening of Spain’s macroeconomic situation as a result of an economic slowdown, falling consumer spending and job market deterioration, and (ii) the upward shift in non-performing loan ratios in certain financial systems, including Brazil, Chile, and Portugal.

Our total allowances for credit losses (excluding country-risk) increased by €6,581 million to €26,112 million at December 31, 2012, from €19,531 million at December 31, 2011.

The €1,009 million decrease in 2012 in net impairment losses on other assets was mainly attributable to two impairments which occurred in 2011: (i) €601 million in goodwill related to Santander Totta and (ii) €491 million in other intangible assets.

The impairment losses of other financial assets not measured at fair value through profit and loss in 2012 of €357 million were mainly due to equity instruments that had suffered a significant and prolonged fall in price.

Non-performing balances (excluding country-risk) increased by €4,055 million to €36,061 million at December 31, 2012, compared to €32,006 million at December 31, 2011. Our coverage ratio was 72% at December 31, 2012 and 61% at December 31, 2011. See Item 4 of Part I, “Information on the Company—B. Business Overview—Selected Statistical Information—Impaired Balances Ratios”.

144

Net gains / (losses) on other assets

Net gains on other assets were €1,730 million in 2013, a €1,581 million increase from gains of €149 million in 2012, which was a €412 million increase from losses of €263 million in 2011.

The €2,152 million gains on disposal of assets not classified as non-current assets held for sale accounted in 2013 were mainly due to the sale of our management companies (pursuant to the agreement with Warburg Pincus and General Atlantic), the insurance companies in Spain, and the payment services company (agreement with Elavon Financial Services Limited). See Item 4 of Part I, “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Acquisitions, Dispositions, Reorganizations”.

Losses on non-current assets held for sale not classified as discontinued operations in 2013 totaled €422 million. This was mainly due to impairment of foreclosed assets recorded during the year and the sale of properties.

2013 compared to 2012

	2013			2012			Amount Change		% Change
	(in millions of euros, except percentages)
Gains / (losses) on disposal of assets not classified as non-current assets held for sale		2,152			906			1,246		137.5	%
Of which:
Disposal of investments		2,167			775			1,392		179.6	%
Gains / (losses) on non-current assets held for sale not classified as discontinued operations		(422	)		(757	)		335		(44.3	%)
Of which:
Impairment of non-current assets held for sale		(335	)		(449	)		114		(25.4	%)
Losses on sale of non-current assets held for sale		(87	)		(308	)		221		(71.8	%)
Net gains / (losses) on other assets		1,730			149			1,581		n/a

2012 compared to 2011

	2012			2011			Amount Change			% Change
	(in millions of euros, except percentages)
Gains / (losses) on disposal of assets not classified as non-current assets held for sale		906			1,846			(940	)		(50.9	%)
Of which:
Disposal of investments		775			1,794			(1,019	)		(56.8	%)
Gains / (losses) on non-current assets held for sale not classified as discontinued operations		(757	)		(2,109	)		1,352			(64.1	%)
Of which:
Impairment of non-current assets held for sale		(449	)		(2,037	)		1,588			(78.0	%)
Losses on sale of non-current assets held for sale		(308	)		(72	)		(236	)		327.8	%
Net gains / (losses) on other assets		149			(263	)		412			n/a

Income Tax

The provision for corporate income tax was €2,113 million in 2013, a 258.1% or €1,523 million increase from €590 million in 2012, which represented a 66.4% or €1,165 million decrease from €1,755 million in 2011. The effective tax rate was 27.6% in 2013, 16.5% in 2012 and 22.3% in 2011.

145

The increase in the effective tax rate in 2013 compared to the prior year is primarily due to the €4,069 million increase in consolidated operating profit before tax together with a reduction in the net adjustments to profit before tax that applied in 2013 as compared to 2012 (see the reconciliation in Note 27.c to our consolidated financial statements).

For more information about factors affecting effective tax rates, see Note 27 to our consolidated financial statements.

Profit / (losses) from discontinued operations

Losses from discontinued operations were €15 million in 2013, compared to a €70 million profit in 2012, which represented a €55 million increase from €15 million profit in 2011. During 2013 we did not discontinue any significant operations. In 2012, we discontinued our credit card business in U.K. which we had acquired from GE.

Profit attributable to non-controlling interest

Profit attributable to non-controlling interest was €1,154 million in 2013, a 50.3% or €386 million increase from €768 million in 2012, which represented a 2.5% or €20 million decrease from €788 million in 2011. For further details, see Note 28 to our consolidated financial statements.

2013 compared to 2012

The increase in 2013, was mainly due to a full year accounting of minority interest in Mexico as in the fourth quarter of 2012 Santander México finalized its placement of shares in the secondary market. Moreover, in 2013 we reduced our ownership interest in Bank Zachodni WBK S.A. to 70%, thereby generating an increase in the balance of non-controlling interests of €1,329 million (see Note 3 to our consolidated financial statements).

2012 compared to 2011

The main developments in 2012 regarding non-controlling interest were: (i) in January and March 2012 the Group transferred shares accounting for 4.41% and 0.77% of Banco Santander (Brasil) S.A. to two leading international financial institutions, and (ii) in 2012 the Group sold 24.9% of its ownership interest in Grupo Financiero Santander México, S.A.B. de C.V. The related increase in profits attributable to non-controlling interest in these units was offset by losses registered to non-controlling interest in Banesto.

Results of Operations by Business Areas

For a description of our segments see Item 4 of Part I, “Information on the Company—B. Business Overview”.

Our results of operations by business areas can be summarized as follows.

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First level (geographic):

Continental Europe

										Variations
	2013			2012			2011			2013/2012			2012/2011
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		8,123			8,854			7,976			(8.3	%)		11.0	%
Income from equity instruments		265			289			264			(8.3	%)		9.5	%
Income from companies accounted for by the equity method		(19	)		(88	)		17			(78.4	%)		(617.6	%)
Net fees and commissions		3,552			3,625			3,767			(2.0	%)		(3.8	%)
Gains/losses on financial assets and liabilities (net) *		775			306			254			153.3	%		20.5	%
Other operating income/(expenses) (net)		(111	)		(19	)		131			484.2	%		(114.5	%)
TOTAL INCOME		12,585			12,967			12,409			(2.9	%)		4.5	%
Administrative expenses		(5,807	)		(5,790	)		(5,805	)		0.3	%		(0.3	%)
Personnel expenses		(3,527	)		(3,498	)		(3,535	)		0.8	%		(1.0	%)
Other general expenses		(2,280	)		(2,292	)		(2,270	)		(0.5	%)		1.0	%
Depreciation and amortization		(769	)		(667	)		(590	)		15.3	%		13.1	%
Provisions (net)		(158	)		(130	)		(437	)		21.5	%		(70.3	%)
Impairment losses on financial assets (net)		(3,766	)		(9,903	)		(3,694	)		(62.0	%)		168.1	%
Impairment losses on other assets (net)		(65	)		(27	)		(75	)		140.7	%		(64.0	%)
Gains/(losses) on other assets (net)		(374	)		(757	)		(1,719	)		(50.6	%)		(55.9	%)
OPERATING PROFIT/(LOSS) BEFORE TAX		1,646			(4,307	)		89			n/a			n/a
Income tax		(376	)		1,490			133			n/a			1,020.3	%
PROFIT FROM CONTINUING OPERATIONS		1,270			(2,817	)		222			n/a			n/a
Profit/(loss) from discontinued operations (net)		(6	)		(7	)		(24	)		(14.3	%)		(70.8	%)
CONSOLIDATED PROFIT FOR THE YEAR		1,264			(2,824	)		198			n/a			n/a
Profit attributable to non-controlling interest		137			(79	)		28			n/a			n/a
Profit attributable to the Parent		1,127			(2,745	)		170			n/a			n/a

* Includes exchange differences (net)

2013 compared to 2012¹

In 2013, Continental Europe accounted for 18.0% of profit attributed to the Parent bank’s total operating areas.

The main actions in 2013 focused on integrating the mergers of retail networks in Spain and the banks in Poland. In a still weak environment and with low interest rates, the Group’s strategy over the last three years was maintained. These strategies were: (i) defending spreads on loans and on deposits, (ii) greater focus on reducing the cost of funds, after reaching a comfortable liquidity position, (iii) control of costs and (iv) active risk management.

Total income decreased by €382 million mainly due to the €731 million decrease in net interest income partially offset by a €469 million increase in gains on financial assets and liabilities. The fall in net interest income reflects the economic weakness, low interest rates, a still high average cost of deposits and repricing of mortgages. The increase in gains/(losses) on financial assets and liabilities was due to trading gains (wholesale business).

Operating expenses, which include administrative expenses and depreciation and amortization, rose by €119 million or 1.8%, primarily due to the perimeter in Poland, since on a like-for-like basis their performance was flat (-0.8%) with costs at all units either decreasing or stable.

¹  For a summary by countries see “Item 4. Information of the Company. B. Business Overview – Continental Europe”.

147

Provisions and impairment losses, which include provisions (net), impairment losses on financial assets (net), and impairment losses on other assets (net), decreased by €6,071 million or 60.3% after the strong increase in the deterioration of the real estate segment in Spain experienced in 2012 was not repeated in 2013.

The effort in provisions in the past years was combined with a strategy of reducing the real estate exposure in Spain. The balance sheet of Spain’s run-off real estate activity declined by €1,496 million (-12%). The reduction since December 2008 is approximately €30 billion (-73%). Of note was the sale of a stake in Altamira, which manages loan recoveries and properties in Spain and sells or rents foreclosed real estate assets. See “Item 4. Information on the Company— A. History and development of the company — Principal Capital Expenditures and Divestitures — Acquisitions, Dispositions, Reorganizations — Agreement with Apollo”.

The NPL ratio in Continental Europe increased from 6.29% in 2012 to 9.13% in 2013, while NPL coverage decreased from 73% in 2012 to 57% in 2013. The NPL ratio increase was mainly due to: (i) a rise in Spain’s non-performing loans, mainly related to specific clients and to real estate mortgages to individuals, (ii) a drop in Spain’s lending levels, partially due to the cancellation of the public sector financing pursuant to a government program to pay suppliers’ pending invoices, deleveraging in the real estate sector and the decrease in the demand for credit, and (iii) to the integration of Kredyt Bank S.A. in Poland, which has a higher NPL ratio than the rest of Continental Europe.

Profit attributable to the Parent increased by €3,872 million after the heavy impairment losses accounted in 2012 in the Spain’s real estate portfolio in run-off. Furthermore, comparisons with 2012 are affected by: the positive impact of the consolidation of Kredyt Bank in Poland, which was partially offset by the reinsurance transaction in Spain and Portugal. The overall impact of the change in perimeter was 2 percentage points increase in revenues and 6 percentage points negative in ordinary attributable profit.

2012 compared to 2011

In general, businesses developed in a difficult environment, characterized by shrinking GDP, domestic demand and consumption, rising unemployment and declining interest rates, at historic lows, with their impact on spreads.

Total income increased by €558 million as compared to 2011 mainly due to an 11% increase in net interest income related to the inclusion of SEB in Germany and the entry of Bank Zachodni WBK. A reduction of €143 million in net fees and commissions, due to lower activity, partially offset the previously mentioned change in the scope of consolidation. Gains/(losses) on financial assets and liabilities increased by €52 million primarily due to the results generated in the repurchase of preferred shares in Banesto and the repurchase of debt in Portugal.

In a weak environment and with low interest rates, the Group’s strategy over the last two years focused on defending spreads on the assets side (those on new ones are improving) and on the liabilities side.

Operating expenses, which include administrative expenses and depreciation and amortization, rose by €62 million (1.0%) year on year due to the impact of the changes in the scope of consolidation. Eliminating this effect, there was a slight reduction with all of the units flat or decreasing as the Group’s strategy focused on control of expenses. Noteworthy, however, was the 4.8% reduction in Portugal.

Provisions and impairment losses, which include provisions (net), impairment losses on financial assets (net), and impairment losses on other assets (net), increased by €5,854 million (1,135%). The main reason for this strong increase is the deterioration of the real estate segment in Spain. The segment was heavily affected by the impairment losses of Spain’s real estate portfolio in run-off accounted for during the year. Portugal experienced a rise in credit loss provisions also due to the increase in non-performing loans as a result of the economic cycle. A decrease of 11.7% in credit loss provisions in Santander Consumer Finance partially mitigated the increases in Spain and Portugal.

Exposure to the real estate industry has taken on particular importance for Spanish financial institutions since 2008 due to a slowdown in sales, an increase in defaults, the difficulties experienced by companies related to the real estate industry in accessing credit and a fall in property prices.

The NPL ratio in Continental Europe increased from 5.24% in 2011 to 6.29% in 2012, while NPL coverage increased from 59% in 2011 to 73% in 2012.

148

Profit attributable to the Parent decreased by €2,915 million heavily affected by the impairment losses of Spain’s real estate portfolio in run-off. Total income reflects the positive effect of the change in the scope of consolidation due to the inclusion in the Group of Bank Zachodni WBK and the SEB branches in Germany for the full year, and a slight negative effect from the agreement with Abbey Life Assurance for the reinsurance of the portfolio of individual life risk in Spain and Portugal.

United Kingdom

										Variations
	2013			2012			2011			2013/2012			2012/2011
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		3,451			3,336			4,128			3.4	%		(19.2	%)
Income from equity instruments		1			1			1			—			—
Income from companies accounted for by the equity method		4			(5	)		1			n/a			n/a
Net fees and commissions		991			1,190			1,015			(16.7	%)		17.1	%
Gains/losses on financial assets and liabilities (net) *		403			1,231			405			(67.3	%)		204.0	%
Other operating income/(expenses) (net)		30			24			28			25.0	%		(14.3	%)
TOTAL INCOME		4,880			5,777			5,578			(15.5	%)		3.6	%
Administrative expenses		(2,181	)		(2,311	)		(2,131	)		(5.6	%)		8.4	%
Personnel expenses		(1,401	)		(1,492	)		(1,407	)		(6.1	%)		6.0	%
Other general expenses		(780	)		(819	)		(724	)		(4.8	%)		13.1	%
Depreciation and amortization		(424	)		(379	)		(343	)		11.9	%		10.5	%
Provisions (net)		(232	)		(522	)		(964	)		(55.6	%)		(45.9	%)
Impairment losses on financial assets (net)		(580	)		(1,220	)		(559	)		(52.5	%)		118.2	%
Impairment losses on other assets (net)		(4	)		—			—			n/a			n/a
Gains/(losses) on other assets (net)		—			5			9			(100.0	%)		(44.4	%)
OPERATING PROFIT/(LOSS) BEFORE TAX		1,459			1,350			1,590			8.1	%		(15.1	%)
Income tax		(301	)		(312	)		(424	)		(3.5	%)		(26.4	%)
PROFIT FROM CONTINUING OPERATIONS		1,158			1,038			1,166			11.6	%		(11.0	%)
Profit/(loss) from discontinued operations (net)		(9	)		77			39			n/a			97.4	%
CONSOLIDATED PROFIT FOR THE YEAR		1,149			1,115			1,205			3.0	%		(7.5	%)
Profit attributable to non-controlling interest		—			—			—			n/a			n/a
Profit attributable to the Parent		1,149			1,115			1,205			3.0	%		(7.5	%)

* Includes exchange differences (net)

2013 compared to 2012

In 2013, the United Kingdom accounted for 18.4% of profit attributed to the Parent bank’s total operating areas.

Total income decreased by €897 million in 2013 mainly due to lesser gains / (losses) on financial assets and liabilities as in 2012 Santander UK accounted for the repurchase of debt capital instruments. Net interest income increased €115 million or 3.4% (+8.3% in pounds sterling), and rose in every quarter, thanks to the spread on the stock of mortgages and the maturity of costly deposits in the second half of the year. The ratio of net interest income to average customer assets improved to 1.71% in the last quarter of 2013 from 1.27% in the last quarter of 2012. Net fees and commissions were €199 million lower due to reduced Global Banking & Markets activity.

Operating expenses decreased €85 million in 2013. In local currency, operating expenses increased £32 million or 1.5% (below inflation and revenues), despite investments in retail and corporate banking.

Santander UK continued to invest in the growth of the SME business and Large Corporates. Moreover, the segment further developed its capacity to support their SME customers, with more customer-facing staff in its growing regional Corporate Business Centre network, and expansion into new financial centers across the U.K.. Santander UK also completed the rollout of and customer migration to the new transactional platform in 2013.

149

The increase was also driven by ongoing investment in business growth in Retail Banking, as well as increased regulatory compliance and control costs. These increases were partly offset by tight cost control, the consolidation of multi-branch locations.

Provisions and impairment losses decreased €926 million. The €290 million decrease in provisions was mainly due to a €264 million customer remediation provision charge principally relating to PPI remediation accounted in 2012 and not repeated in 2013. Impairment losses on financial assets decreased by €640 million mainly due to the significant provisions accounted in 2012 related to the review and full re-assessment of the assets held in the non-core corporate and legacy portfolios in run-off. The provisions related to assets acquired from Alliance & Leicester plc. (particularly the shipping portfolio) as well as certain assets within the old Abbey Commercial Mortgages book. The amount of the provision in 2012 reflected the increasing losses experienced in these portfolios. For further details see Item 11 of Part I. “Quantitative and Qualitative Disclosures About Risk—Part 4. Credit Risk”. No further significant provisions were required in 2013 as disposals of assets across the portfolios were consistent with provisioned levels.

In 2013, Santander UK improved its credit quality across the product range in retail and corporate banking. The NPL ratio experienced a small decrease of 7 basis points, from 2.05% to 1.98%, while the coverage decreased from 44% to 42%. The stock of residential properties in possession remained very low at 0.05% of the total portfolio, unchanged from 2012 and below the industry average, according to the Council of Mortgage Lenders.

Profit attributable to the Parent increased €34 million mainly due to lower provisions and impairment losses which were partially compensated by reduced gains on financial transactions. The results demonstrate a further improvement in performance and continued the progress evident through the year, particularly in net interest income.

2012 compared to 2011

This included a net gain of £65 million (€80 million, approximately) resulting from the repurchase of debt capital instruments made in the third quarter. Most of this gain was offset by provisions related to the non-core corporate and potential conduct remediation. Santander UK faced an environment of weak economic growth, low interest rates and higher funding costs.

Total income increased by €199 million mainly due to: (i) an €826 million increase in gains / (losses) on financial assets and liabilities largely due to the repurchase of debt capital instruments; (ii) a fall of €792 million in interest income reflecting the impact of the higher cost of funding (of both deposits and wholesale financing) and low interest rates. These impacts in interest income were partially offset by improved volumes and higher spreads on new lending to SMEs and businesses; and (iii) a €175 million rise in net fees and commissions due to increased fees and ancillary income from SME and large corporates.

Operating expenses increased by €216 million due to the impact of inflation and continued investment in business.

Provisions and impairment losses increased by €219 million. The €442 million decrease in provisions was mainly due to a fall in customer remediation principally due to remediation charges as in 2012 we provisioned €264 million compared to the €842 million (€620 million net of tax) of PPI-related charges registered in 2011 (see Item 8 of Part I, “Financial information—Legal proceedings, ii. Non-tax-related proceedings”). Offsetting the decrease in provision was a €661 million increase in impairment losses on financial assets mainly due to the review and full re-assessment of the assets held in the non-core corporate and legacy portfolios in run-off.

The NPL ratio was 2.05%, 0.20 percentage points higher than that of 2011. Both the stock of residential properties in possession (0.06%) as well as the NPL ratio of residential mortgages (1.74%) remained low with underlying performance stable and both were better than the sector average, according to the Council of Mortgage Lenders.

Profit attributable to the Parent decreased by €90 million as the income statement was affected by an environment of weak economic growth, low interest rates and higher funding costs. Gains on financial transactions were offset by heavy impairment losses and provisions related to the non-core corporate and potential conduct remediation. On the other hand, in local currency cost experienced a decline.

150

Latin America

										Variations
	2013			2012			2011			2013/2012			2012/2011
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		15,186			17,881			16,473			(15.1	%)		8.5	%
Income from equity instruments		54			60			72			(10.0	%)		(16.7	%)
Income from companies accounted for by the equity method		202			183			36			10.4	%		408.3	%
Net fees and commissions		4,874			5,097			4,992			(4.4	%)		2.1	%
Gains/losses on financial assets and liabilities (net) *		1,038			1,071			1,067			(3.1	%)		0.4	%
Other operating income/(expenses) (net)		(271	)		(358	)		(198	)		(24.3	%)		80.3	%
TOTAL INCOME		21,083			23,934			22,442			(11.9	%)		6.6	%
Administrative expenses		(7,801	)		(8,253	)		(8,037	)		(5.5	%)		2.7	%
Personnel expenses		(4,319	)		(4,643	)		(4,480	)		(7.0	%)		3.6	%
Other general expenses		(3,482	)		(3,610	)		(3,557	)		(3.6	%)		1.5	%
Depreciation and amortization		(904	)		(871	)		(932	)		3.8	%		(6.5	%)
Provisions (net)		(783	)		(1,027	)		(1,052	)		(23.8	%)		(2.4	%)
Impairment losses on financial assets (net)		(6,533	)		(7,380	)		(5,448	)		(11.5	%)		35.5	%
Impairment losses on other assets (net)		(25	)		(17	)		(39	)		47.1	%		(56.4	%)
Gains/(losses) on other assets (net)		307			226			62			35.8	%		264.5	%
OPERATING PROFIT/(LOSS) BEFORE TAX		5,344			6,612			6,996			(19.2	%)		(5.5	%)
Income tax		(1,208	)		(1,484	)		(1,636	)		(18.6	%)		(9.3	%)
PROFIT FROM CONTINUING OPERATIONS		4,136			5,128			5,360			(19.3	%)		(4.3	%)
Profit/(loss) from discontinued operations (net)		—			—			—			n/a			n/a
CONSOLIDATED PROFIT FOR THE YEAR		4,136			5,128			5,360			(19.3	%)		(4.3	%)
Profit attributable to non-controlling interest		879			866			738			1.5	%		17.3	%
Profit attributable to the Parent		3,257			4,262			4,622			(23.6	%)		(7.8	%)

* Includes exchange differences (net)

2013 compared to 2012²

As of December 31, 2013, Latin America accounted for 52.1% of profit attributable to the Parent’s total operating areas.

The strategy in 2013 was focused on the expansion and consolidation of the commercial franchise in the region. The specialized offering of products and services is being strengthened in line with customer requirements, with a view to enabling the Bank to boost long-term growth; all while maintaining constant vigilance of risk quality.

Total income decreased by €2,851 million due to a fall of €2,695 million in net interest income mainly focused in Brazil affected by lower spreads and the change of mix towards products with lower cost and margins. These effects were partially offset by higher volumes (in local currency). Net fees and commissions declined by €223 million or 4.4%. However, deducting the exchange rate impact, net fee and commission income increased 6.2%. Of note was the growth in local currency from cards (+17.9%) and foreign trade (+18.6%).

Operating expenses decreased by €419 million or 4.6%. Nevertheless, deducting the exchange rate impact, operating expenses grew 5.9% due to investment in networks and commercial projects (some traditional and others focused on priority customer segments), inflationary pressures on salary agreements and contracted services, and higher amortizations for technology.

²  For a summary by countries see “Item 4. Information of the Company. B. Business Overview—Latin America.”

151

Provisions and impairment losses decreased by €1,084 million. This fall was mainly concentrated in Brazil which, after the change in trend at the beginning of 2013, reduced its provisions between March and the end of the year. This was partially offset by rises in Mexico and Chile. The NPL ratio was 5.03%, 39 basis points lower than at the end of 2012, positively impacted by Brazil, while the coverage decreased 3 percentage points to 85%.

Profit attributable to the Parent decreased by €1,005 million mainly due to a fall in net interest income affected by lower spreads (primarily in Brazil due to the change of business mix) partially offset by lower provisions due to the improvement in Brazil.

2012 compared to 2011

Latin American financial systems displayed high levels of capital, liquidity and robust credit quality indicators. They also maintained double-digit rates of growth reflecting the dynamism of the economies. The scope of consolidation of this segment changed due to the sale of the subsidiary in Colombia, the agreement with Zurich Financial Services Group to strengthen insurance distribution and higher minority interests in Brazil, Mexico and Chile.

Total income increased by €1,492 million driven by greater net interest income which was €1,408 million higher due to increased volumes and improved management of spreads in a context of stable or declining interest rates, varying by country.

Net fees and commissions grew €105 million affected by regulatory pressures. Excluding the exchange rate impact, the main drivers of growth were cards (+18.7%), transactional banking (+9.8%), administration of accounts (+6.8%) and insurance (+2.5%). Mutual funds dropped 15.4% because of the shift into deposits.

Operating expenses increased by €155 million was mainly due to the opening of branches (some traditional and others focused on priority customer segments), new business projects and inflationary pressures on wage agreements and outsourcing of services.

Provisions and impairment losses increased by €1,885 million largely influenced by increased lending and a worsening of nonperforming loans in some markets. The NPL ratio increased 110 basis points, from 4.32% to 5.42%, while coverage decreased from 97% to 88%.

Profit attributable to the Parent decreased by €360 million mainly due to the sale of the subsidiary in Colombia, the sale of our insurance businesses with Zurich Financial Services Group to strengthen insurance distribution and the increase of non-controlling interests in Brazil, Mexico and Chile.

152

United States

										Variations
	2013			2012			2011			2013/2012			2012/2011
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		1,409			1,695			3,289			(16.9	%)		(48.5	%)
Income from equity instruments		23			20			1			15.0	%		1,900.0	%
Income from companies accounted for by the equity method		321			341			—			(5.9	%)		n/a
Net fees and commissions		394			378			643			4.2	%		(41.2	%)
Gains/losses on financial assets and liabilities (net) *		69			244			192			(71.7	%)		27.1	%
Other operating income/(expenses) (net)		(58	)		(73	)		(57	)		(20.5	%)		28.1	%
TOTAL INCOME		2,158			2,605			4,068			(17.2	%)		(36.0	%)
Administrative expenses		(1,097	)		(1,037	)		(1,169	)		5.8	%		(11.3	%)
Personnel expenses		(606	)		(571	)		(645	)		6.1	%		(11.5	%)
Other general expenses		(491	)		(466	)		(524	)		5.4	%		(11.1	%)
Depreciation and amortization		(163	)		(146	)		(126	)		11.6	%		15.9	%
Provisions (net)		(50	)		(170	)		(43	)		(70.6	%)		295.3	%
Impairment losses on financial assets (net)		4			(265	)		(1,006	)		n/a			(73.7	%)
Impairment losses on other assets (net)		(16	)		(24	)		(118	)		(33.3	%)		(79.7	%)
Gains/(losses) on other assets (net)		2			7			—			(71.4	%)		n/a
OPERATING PROFIT/(LOSS) BEFORE TAX		838			970			1,606			(13.6	%)		(39.6	%)
Income tax		(113	)		(165	)		(554	)		(31.5	%)		(70.2	%)
PROFIT FROM CONTINUING OPERATIONS		725			805			1,052			(9.9	%)		(23.5	%)
Profit/(loss) from discontinued operations (net)		—			—			—			n/a			n/a
CONSOLIDATED PROFIT FOR THE YEAR		725			805			1,052			(9.9	%)		(23.5	%)
Profit attributable to non-controlling interest		—			—			48			n/a			(100.0	%)
Profit attributable to the Parent		725			805			1,004			(9.9	%)		(19.8	%)

* Includes exchange differences (net).

2013 compared to 2012³

In 2013, United States contributed 11.6% of the profit attributable to the Parent’s bank total operating areas. Business was conducted in a setting of moderate growth in which the monetary authorities kept interest rates very low and implemented other unconventional stimulus measures such as quantitative easing.

During 2013, Sovereign Bank changed its name to Santander Bank and continued to capture new customers and expand its range of higher value-added products and services. The main strategy in the retail segment is to enhance customer attention via new ATMs, refurbish branches and give an impetus to alternative channels (mobile banking, etc.).

Santander Consumer USA’s strategy is to continue to strengthen its auto finance franchise. The growth drivers are organic growth supported by commercial agreements with brands and dealers, strategic alliances (such as the partnership with Chrysler), growth in the platform of direct credits to clients via Internet (Roadloans.com) and the opportunities of expansion offered by servicing.

Total income decreased by €447 million reflecting a €286 million reduction in net interest income and €175 million reduction in gains on financial assets and liabilities. The decrease in net interest income reflected the low interest rate environment, the reduction in the non-strategic loan portfolio and the sharp fall in the investment portfolio. Gains on financial assets and liabilities decreased due to lower trading gains.

³  For further information on the segment, see “Item 4. Information of the Company. B. Business Overview—United States”.

153

SCUSA’s contribution, which is accounted for as income from companies accounted for by the equity method, was €321 million, 5.9% less than in 2012. Although SCUSA’s net interest income increased by 27% in U.S. dollars, partly due to the agreement with Chrysler, this growth has not yet fed through to profits because of the higher provisions required for the faster pace of lending, which increased 35% in U.S. dollars in 2013.

Operating expenses increased by €78 million as a result of the investment in rebranding, technology (ATMs, mobile banking, cards) and higher spending on regulatory compliance.

Provisions and impairment losses decreased by €397 million due to the normalization of the cost of credit and the improvement in the economy. At December 31, 2013, the NPL ratio was 2.23%, a 6 basis point reduction as compared to 2012. Coverage stood at 94% at December 31, 2013, a 12 percentage points reduction as compared to 2012.

Profit attributable to the Parent decreased €80 million. This fall was mainly driven by Santander Bank as the sharp reduction in provisions due to the high credit quality was offset by a fall in net interest income and gains on financial assets and liabilities and higher operating expenses.

2012 compared to 2011

On December 31, 2011, SCUSA increased its capital to allow for new shareholders. As a result, SCUSA is subject to the joint control of all shareholders, which led the Group to stop consolidating this company by the global integration method and to record its stake by the equity method.

Total income decreased by €1,463 with the negative development of net interest income (-€1,594 million) and net fees and commissions (-€265 million) which were partially offset by the contribution of SCUSA recorded as income from companies accounted for by the equity method (+€341 million) and, to a lesser extent, greater net gains on financial assets and liabilities (+€52 million).

The €1,594 million decrease in net interest income was mainly due to the change in consolidation method of SCUSA. Eliminating SCUSA’s results in 2011 and in local currency, net interest income was down by 6.7%, reflecting the fall in long-term interest rates and the reduction in the non-strategic portfolio.

The €265 million decrease in net fees and commissions was mainly due to the deconsolidation of SCUSA. Eliminating SCUSA’s results in 2011 and in local currency, there was a 6.8% drop. The increased regulatory pressure resulted in a significant reduction in revenues linked to commissions from credit card transactions and overdrafts. This was partly offset by the business effort, which raised the quality of revenues associated with current accounts.

Net gains on financial assets and liabilities increased €52 million due to the increase in originations and sale of mortgages and greater customer activity.

Operating expenses decreased by €112 million due to the deconsolidation of SCUSA. Eliminating SCUSA’s results and in local currency, operating expenses grew almost 9% as compared to 2011. This increase reflects the investments in technology and in the sales and regulatory compliance teams needed to take advantage of the new status as a national bank.

Provisions and impairment losses decreased by €708 million in 2013 mainly due to lesser impairment losses on financial assets with a €741 million decrease principally relating to the deconsolidation of SCUSA. Eliminating SCUSA’s results in 2011 and in local currency, loan-loss provisions dropped by 34.7%, further lowering the NPL ratio to 2.29% from 2.85% in 2011, and coverage rose to 106% from 96% in 2011. This was mainly due to the improved composition of the portfolio and strict management of risk. On the other hand provisions (net) increased €127 million mainly due to provisions booked in respect of certain Trust Piers securities due to the court settlement reached to remunerate an investment at a higher rate of interest than it was earning.

Profit attributable to the Parent decreased by €199 million. The main developments were: (i) the entry of new shareholders in SCUSA, with the result that our stake in the company went from 91.5% to approximately 65%, (ii) the provision booked for the Trust Piers settlement.

154

Corporate Activities

										Variations
	2013			2012			2011			2013/2012			2012/2011
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		(2,234	)		(1,843	)		(1,272	)		21.2	%		44.8	%
Income from equity instruments		35			53			56			(34.0	%)		(5.4	%)
Income from companies accounted for by the equity method		(8	)		(4	)		3			100.0	%		n/a
Net fees and commissions		(50	)		(29	)		(9	)		72.4	%		222.2	%
Gains/losses on financial assets and liabilities (net) *		1,109			288			398			285.1	%		(27.6	%)
Other operating income/(expenses) (net)		119			536			117			(77.8	%)		358.1	%
TOTAL INCOME		(1,029	)		(999	)		(707	)		3.0	%		41.3	%
Administrative expenses		(566	)		(410	)		(502	)		37.7	%		(18.1	%)
Personnel expenses		(216	)		(102	)		(238	)		111.8	%		(57.1	%)
Other general expenses		(350	)		(308	)		(264	)		13.6	%		16.7	%
Depreciation and amortization		(131	)		(120	)		(107	)		9.2	%		12.1	%
Provisions (net)		(959	)		371			(120	)		n/a			n/a
Impairment losses on financial assets (net)		(352	)		(112	)		(1,087	)		214.3	%		(89.7	%)
Impairment losses on other assets (net)		(393	)		(440	)		(1,285	)		(10.7	%)		(65.8	%)
Gains/(losses) on other assets (net)		1,795			668			1,385			168.7	%		(51.8	%)
OPERATING PROFIT/(LOSS) BEFORE TAX		(1,635	)		(1,042	)		(2,423	)		56.9	%		(57.0	%)
Income tax		(115	)		(119	)		726			(3.4	%)		(116.4	%)
PROFIT FROM CONTINUING OPERATIONS		(1,750	)		(1,161	)		(1,697	)		(50.7	%)		(31.6	%)
Profit/(loss) from discontinued operations (net)		—			—			—			n/a			n/a
CONSOLIDATED PROFIT FOR THE YEAR		(1,750	)		(1,161	)		(1,697	)		(50.7	%)		(31.5	%)
Profit attributable to non-controlling interest		138			(19	)		(26	)		n/a			(23.1	%)
Profit attributable to the Parent		(1,888	)		(1,142	)		(1,671	)		65.3	%		(31.7	%)

* Includes exchange differences (net).

2013 compared to 2012

Total income decreased €30 million or 3.0%. Net interest income / (charges) worsened by €391 million due to our policy of strengthening liquidity since the middle of 2012, and which, combined with the current low level of market interest rates, caused net interest income to deteriorate temporarily. It also includes the cost of credit of issues in wholesale markets, which was partly absorbed by lower recourse to these markets (directly related to the lower funding needs from the gap between lending and deposits).

Other operating income decreased by €417 million mainly due to the €435 million accounted in 2012 as a result of the agreement reached with Abbey Life Insurance Ltd., a subsidiary of Deustche Bank AG. The agreement provided for the reinsurance of our entire individual life risk portfolio of our insurance companies in Spain and Portugal.

Gains/losses on financial assets and liabilities increased by €821 million due to gains derived from the ALCO portfolio. These gains reflect those derived from the centralized management of the interest rate and exchange rate risk of the parent bank as well as from equities.

Operating expenses increased €166 million mainly due to the execution in 2013 of projects originally planned for 2012. Administrative expenses increased, partly linked to higher indirect taxes.

Provisions and impairment losses increased €1,523 million mainly due to provisions for pensions and similar obligations relating to the pre-retirement and voluntary redundancy offer accepted by employees in 2013, charges made in the fourth quarter for goodwill in Italy, real estate provisions and for the integration costs of SEB in Germany.

155

Gains/(losses) on other assets (net) registered an increase of €1,127 million. Gains were mainly due to the sale of our management companies (+€1,372 million) to Warburg Pincus and General Atlantic, the insurance companies in Spain (+€385 million) to Aegon, and the payment services company (+€122 million) to Elavon Financial Services Limited.

Loss attributable to the Parent increased by €746 million primarily due to greater provisions and impairment losses, higher interest charges partially offset by trading gains and gains on corporate transactions.

2012 compared to 2011

Total income decreased by €292 million greater interest charges, lesser gains on financial assets and liabilities partially offset by increased other operating income. Net Interest income/(charges) increased €571 million largely due to a liquidity buffer kept in the European Central Bank and the greater cost of wholesale funding, which was partly offset by reduced recourse to wholesale markets because the need to finance the commercial gaps was lower. This higher cost also impacted the financing of the Group’s goodwill, which by definition has a negative nature, and which increased its cost proportionately.

Other operating income increased by €419 million mainly due to the €435 million accounted as a result of the agreement reached with Abbey Life Insurance Ltd.

Gains / (losses) on financial assets and liabilities decreased by €110 million. Of note were the results from liabilities management, the sale of small financial stakes and those arising from financial assets available for sale. The impact of hedging the results of subsidiaries was negative (it was positive in 2011) balancing the higher value in euros of the business units results.

Operating expenses decreased by €78 million mainly due to lower personnel expenses.

Provisions and impairment losses decreased by €2,312 million as impairment stabilized after the portfolio’s significant deterioration in 2011. Furthermore, the following impairment losses on other assets were solely recorded in 2011: €601 million to amortize goodwill related to Santander Totta, and the amortization of other intangibles, pensions and contingencies.

Gains/(losses) on other assets (net) registered a decrease of €717 million. The gains accounted in 2012 were mainly due to the sale of the business in Colombia and the reinsurance operation of the insurance portfolios in Spain and Portugal.

Loss attributable to the Parent decreased by €529 million primarily due to lower impairment losses on financial assets and on other assets.

156

Second level (business):

Retail Banking

										Variations
	2013			2012			2011			2013/2012			2012/2011
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		25,552			28,865			28,882			(11.5	%)		(0.1	%)
Income from equity instruments		78			86			72			(9.3	%)		19.4	%
Income from companies accounted for by the equity method		401			400			16			0.3	%		2,400.0	%
Net fees and commissions		8,193			8,471			8,703			(3.3	%)		(2.7	%)
Gains/losses on financial assets and liabilities (net) *		1,119			2,004			1,067			(44.2	%)		87.8	%
Other operating income/(expenses) (net)		(553	)		(630	)		(541	)		(12.2	%)		16.5	%
TOTAL INCOME		34,790			39,196			38,199			(11.2	%)		2.6	%
Administrative expenses		(14,890	)		(15,343	)		(15,100	)		(3.0	%)		1.6	%
Personnel expenses		(8,669	)		(8,986	)		(8,827	)		(3.5	%)		1.8	%
Other general expenses		(6,221	)		(6,357	)		(6,273	)		(2.1	%)		1.3	%
Depreciation and amortization		(2,027	)		(1,848	)		(1,803	)		9.7	%		2.5	%
Provisions (net)		(1,173	)		(1,815	)		(2,131	)		(35.4	%)		(14.8	%)
Impairment losses on financial assets (net)		(9,506	)		(12,182	)		(9,712	)		(22.0	%)		25.4	%
Impairment losses on other assets (net)		(73	)		(44	)		(150	)		65.9	%		70.7	%
Gains/(losses) on other assets (net)		249			219			(40	)		13.7	%		n/a
OPERATING PROFIT/(LOSS) BEFORE TAX		7,370			8,183			9,263			(9.9	%)		(11.7	%)
Income tax		(1,509	)		(1,675	)		(2,235	)		(9.9	%)		(25.1	%)
PROFIT FROM CONTINUING OPERATIONS		5,861			6,508			7,028			(9.9	%)		(7.4	%)
Profit/(loss) from discontinued operations (net)		(15	)		70			15			(121.4	%)		400.0	%
CONSOLIDATED PROFIT FOR THE YEAR		5,846			6,578			7,043			(11.1	%)		(6.6	%)
Profit attributable to non-controlling interest		769			686			571			12.1	%		20.1	%
Profit attributable to the Parent		5,077			5,892			6,472			(13.8	%)		(9.0	%)

* Includes exchange differences (net).

2013 compared to 2012

Retail Banking generated 81.0% of the operating areas’ profit attributable to the Parent bank in 2013.

The €4,406 million decrease in total income was mainly due to a €3,313 million fall in net interest income (-5.3% excluding the exchange rate impact). This reflected the environment of low growth and interest rates, the Group’s strategy of giving priority to liquidity and balance sheet strength and the change of business mix toward lower risk products. Further contributing to the fall in total income was a €885 million reduction in gains/losses on financial assets and liabilities as in 2012 Santander UK accounted for the repurchase of debt capital instruments.

Net fees and commissions decreased by €278 million. Excluding the exchange rate impact, they increased by 2.7% benefiting from the growth in commissions in cards in Latin America.

157

Operating expenses decreased by €274 million. Excluding the exchange rate impact they increased 4.4% mainly due to the increasing costs in Latin America related to business development and inflationary pressures on wage agreements. Santander Bank’s operating expenses also increased due to the rebranding process and technology investment.

Provisions and impairment losses decreased by €3,289 million mainly attributable to the improvement of the portfolio’s composition and its credit quality, and improvement in the economy.

Profit attributable to the Parent decreased by €815 million or 13.8% (8.9% lower excluding exchange rates) due to lower total income in an environment of reduced business and low interest rates in mature markets and change of business mix in emerging ones. Lower provisions partly offset the decrease in total income.

2012 compared to 2011

Compared to 2011, earnings were negatively affected due to the change in the scope of consolidation (equity-method accounting of SCUSA and insurance in Latin America, and increased non-controlling interests). The effect of interest rate variations was nearly zero.

Total income increased by €997 million mainly due to the gains from the repurchase of debt capital instruments in the U.K. registered as gains / (losses) on financial assets and liabilities. A €384 million increase in income from companies accounted for by the equity method, relating to the previously mentioned change in the scope of consolidation, was partially offset by a €232 million decrease in net fees and commissions.

Operating expenses increased by €288 million mainly due to the increasing costs in Latin America related to business development, inflationary pressures on wage agreements and outsourcing of services.

Provisions and impairment losses increased by €2,048 million mainly driven by (i) growth in loan loss provisions in Spain due to the worsening economic situation in 2012, including a contraction of the economy, which fell into recession; (ii) increased provisions in the rest of Europe mainly due to the rise in the NPL ratio in Portugal, the result of an economic cycle heading towards contraction, with falling domestic demand and private consumption, and to the increase in the United Kingdom; and (iii) growth in provisions in Brazil as a result of the increased volume of total lending and a slight rise in non-performing loans.

Profit attributable to the Parent decreased by €580 million because of higher loan-loss provisions and the negative impact of the change in the scope of consolidation (equity-method accounting of SCUSA and insurance in Latin America, and increased non-controlling interests).

158

Global Wholesale Banking

										Variations
	2013			2012			2011			2013/2012			2012/2011
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		2,464			2,708			2,637			(9.0	%)		2.7	%
Income from equity instruments		265			284			265			(6.7	%)		7.2	%
Income from companies accounted for by the equity method		(1	)		—			—			n/a			n/a
Net fees and commissions		1,254			1,360			1,248			(7.8	%)		9.0	%
Gains/losses on financial assets and liabilities (net) *		1,159			840			847			38.0	%		(0.8	%)
Other operating income/(expenses) (net)		7			(16	)		11			n/a			n/a
TOTAL INCOME		5,148			5,176			5,008			(0.5	%)		3.4	%
Administrative expenses		(1,549	)		(1,592	)		(1,544	)		(2.7	%)		3.1	%
Personnel expenses		(988	)		(1,013	)		(1,017	)		(2.5	%)		(0.4	%)
Other general expenses		(561	)		(579	)		(527	)		(3.1	%)		9.9	%
Depreciation and amortization		(186	)		(171	)		(137	)		8.8	%		24.8	%
Provisions (net)		(47	)		(17	)		(4	)		176.5	%		325.0	%
Impairment losses on financial assets (net)		(952	)		(420	)		(434	)		126.7	%		(3.2	%)
Impairment losses on other assets (net)		(37	)		(24	)		118			54.2	%		n/a
Gains/(losses) on other assets (net)		12			(5	)		—			n/a			n/a
OPERATING PROFIT/(LOSS) BEFORE TAX		2,389			2,947			3,007			(18.9	%)		(2.0	%)
Income tax		(661	)		(827	)		(827	)		(20.1	%)		0.0	%
PROFIT FROM CONTINUING OPERATIONS		1,728			2,120			2,180			(18.5	%)		(2.8	%)
Profit/(loss) from discontinued operations (net)		—			—			—			n/a			n/a
CONSOLIDATED PROFIT FOR THE YEAR		1,728			2,120			2,180			(18.5	%)		(2.8	%)
Profit attributable to non-controlling interest		224			209			212			7.2	%		(1.4	%)
Profit attributable to the Parent		1,504			1,911			1,968			(21.3	%)		(2.9	%)

* Includes exchange differences (net).

2013 compared to 2012

Santander Global Banking and Markets conducted its business in markets that were more stable and with increased regulatory requirements. This segment, contributed 24.0% of profit attributable to the Parent bank in 2013.

Total income decreased 0.5% or €28 million. However, it rose 4.9% year-on-year, excluding the exchange rate impact. Net interest income decreased €244 million mainly due to exchange rates and to a lesser extent a reduction in Spain’s business volume.

Operating expenses decreased 1.6% (+2.9% eliminating exchange rates), reflecting the investments in building up franchises in key markets.

159

Provisions and impairment losses increased by €575 million due to higher loan-loss provisions, mainly in Spain and Mexico. In the first case, they were related to specific companies, and in the second mainly to homebuilders.

Profit attributable to the Parent decreased by €407 million. The key drivers were higher minority interests in the Latin American units, the depreciation of their currencies and, above all, higher loan-loss provisions.

2012 compared to 2011

Total income increased by €168 million mainly due to a €71 million increase in net interest income and a €112 million increase in net fees and commissions. In an environment of reduced activity, these results were supported by the strength and diversification of client revenues.

Operating expenses increased by €82 million largely due higher amortizations for projects.

Provisions and impairment losses increased by €141 million as a result of increased loan loss provisions in Spain.

Profit attributable to the Parent decreased by €57 million. The increase in total income was offset by higher impairment losses. After a good start, the year experienced significant levels of volatility and uncertainty due to the worsening eurozone crisis. This conditioned business activity to a large extent.

160

Asset Management and Insurance

										Variations
	2013			2012			2011			2013/2012			2012/2011
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		115			119			258			(3.4	%)		(53.9	%)
Income from equity instruments		—			—			1			n/a			(100.0	%)
Income from companies accounted for by the equity method*		148			131			38			13.0	%		244.7	%
Net fees and commissions		349			418			409			(16.5	%)		2.0	%
Gains/losses on financial assets and liabilities (net)		6			3			—			100.0	%		n/a
Other operating income/(expenses) (net)		145			223			433			(35.0	%)		(48.5	%)
TOTAL INCOME		763			894			1,139			(14.7	%)		(21.5	%)
Administrative expenses		(285	)		(272	)		(319	)		4.8	%		(14.7	%)
Personnel expenses		(149	)		(160	)		(178	)		(6.9	%)		(10.1	%)
Other general expenses		(136	)		(112	)		(141	)		21.4	%		(20.6	%)
Depreciation and amortization		(33	)		(35	)		(43	)		(5.7	%)		(18.6	%)
Provisions (net)		(3	)		(17	)		(46	)		(82.4	%)		(63.0	%)
Impairment losses on financial assets (net)		(7	)		(2	)		(2	)		250.0	%		0.0	%
Impairment losses on other assets (net)		—			—			—			n/a			n/a
Gains/(losses) on other assets (net)		2			8			(9	)		(75.0	%)		n/a
OPERATING PROFIT/(LOSS) BEFORE TAX		437			576			720			(24.1	%)		(20.0	%)
Income tax		(101	)		(154	)		(232	)		(34.4	%)		(33.6	%)
PROFIT FROM CONTINUING OPERATIONS		336			422			488			(20.4	%)		(13.5	%)
Profit/(loss) from discontinued operations (net)		—			—			—			n/a			n/a
CONSOLIDATED PROFIT FOR THE YEAR		336			422			488			(20.4	%)		(13.5	%)
Profit attributable to non-controlling interest		24			20			51			20.0	%		(60.8	%)
Profit attributable to the Parent		312			402			437			(22.4	%)		(8.0	%)

* Includes exchange differences (net).

2013 compared to 2012

In 2013 this segment generated 5.0% of the operating areas’ total profit attributable to the Parent bank. In December 2012, Santander agreed to a strategic alliance with the insurer Aegon to boost its bancassurance business in Spain through commercial networks. This transaction closed in June 2013. The alliance does not affect savings, auto and health insurance, which Santander continues to manage.

Total income decreased by €131 million or 14.7% mainly due to a €69 million decrease in net fees and commission and a €78 million decrease in other operating income. These changes are mostly related to the agreement reached in July 2012, with Abbey Life Insurance Ltd. and the previously mentioned alliance with Aegon. Eliminating the perimeter and exchange rate effects, total income declined 3.6%.

Operating expenses increased by €11 million reflecting the costs of developing the franchise.

Profit attributable to the Parent decreased by €90 million or 22.4%. Excluding the agreement with Abbey Life Insurance Ltd., the alliance with Aegon and exchange rate effects, attributable profit would have been 7.1% lower in 2013.

161

2012 compared to 2011

Total income decreased by €245 million mainly due to a €139 million decrease in net interest income and a €210 million decrease in other operating income, partially offset by a €94 million increase in income from companies accounted for by the equity method. These changes are mostly related to the following impacts: (i) the reinsurance agreement reached with Abbey Life Insurance Ltd., and (ii) the sale of 51% of the Latin American insurers to Zurich which meant recording the contribution of these companies by the equity method.

Operating expenses decreased by €55 million reflecting two main changes: (i) the reduction in the stake in the Latin American insurance companies and (ii) the reinsurance agreement with Abbey Life Insurance Ltd. in Spain and Portugal.

Profit attributable to the Parent decreased by €35 million mainly due to the previously mentioned agreements.

Spain’s Run-Off Real Estate

										Variations
	2013			2012			2011			2013/2012			2012/2011
	(in millions of euros, except percentages)
INTEREST INCOME / (CHARGES)		38			74			89			(48.6	%)		(16.9	%)
Income from equity instruments		—			—			—			n/a			n/a
Income from companies accounted for by the equity method		(40	)		(100	)		—			(60.0	%)		n/a
Net fees and commissions		15			41			57			(63.4	%)		(28.1	%)
Gains/losses on financial assets and liabilities (net) *		1			5			4			(80.0	%)		25.0	%
Other operating income/(expenses) (net)		(8	)		(3	)		1			166.7	%		n/a
TOTAL INCOME		6			17			151			(64.7	%)		(88.7	%)
Administrative expenses		(162	)		(184	)		(179	)		(12.0	%)		2.8	%
Personnel expenses		(47	)		(45	)		(45	)		4.4	%		0.0	%
Other general expenses		(115	)		(139	)		(134	)		(17.3	%)		3.7	%
Depreciation and amortization		(13	)		(9	)		(8	)		44.4	%		12.5	%
Provisions (net)		—			—			(315	)		n/a			(100.0	%)
Impairment losses on financial assets (net)		(410	)		(6,164	)		(559	)		(93.3	%)		1002.7	%
Impairment losses on other assets (net)		—			—			(201	)		n/a			(100.0	%)
Gains/(losses) on other assets (net)		(328	)		(741	)		(1,598	)		(55.7	%)		(53.6	%)
OPERATING PROFIT/(LOSS) BEFORE TAX		(907	)		(7,080	)		(2,709	)		(87.2	%)		161.4	%
Income tax		272			2,185			813			(87.6	%)		168.8	%
PROFIT FROM CONTINUING OPERATIONS		(635	)		(4,896	)		(1,896	)		(87.0	%)		158.2	%
Profit/(loss) from discontinued operations (net)		—			—			—			n/a			n/a
CONSOLIDATED PROFIT FOR THE YEAR		(635	)		(4,896	)		(1,896	)		(87.0	%)		158.2	%
Profit attributable to non-controlling interest		—			(128	)		(20	)		n/a			540.0	%
Profit attributable to the Parent		(635	)		(4,768	)		(1,876	)		(86.7	%)		154.2	%

* Includes exchange differences (net).

162

2013 compared to 2012

In 2013, we began to manage a separate unit for run-off real estate activity in Spain, which has a specialized management model and, which includes loans to clients mainly for real estate promotion, stakes in real estate companies (Metrovacesa and Sareb) and foreclosed assets.

Losses attributable to the Parent decreased by €4,133 million after the heavy impairment losses accounted for during 2012 due to the deterioration of the real estate portfolio. Provisions and impairment losses decreased €5,754.

Losses on other assets decreased by €413 million mainly due to lesser provisions for foreclosed assets in 2013.

Income tax benefit decreased by €1,913 million as operating losses decreased by €6,173 million.

2012 compared to 2011

Losses attributable to the Parent increased by €2,893 million mainly due to impairment losses accounted for during the year due to the deterioration of the real estate portfolio.

Provisions and impairment losses increased by €5,089 million due to the strong rise in the deterioration of the real estate segment caused by the worsening of Spain’s macroeconomic situation as a result of an economic slowdown, falling consumer spending and job market deterioration. Particularly significant in this context was the increase in non-performing loan ratios of 206 basis points from 33.5% in 2011 to 54.1% at December 31, 2012, (for further details see Note 54 to our consolidated financial statements).

Losses on other assets decreased by €857 million mainly due to lower provisions for foreclosed assets in 2012 after the increased impairments accounted for in 2011.

Income tax benefit increased by €1,372 million as operating losses increased by €4,371 million.

Financial Condition

Assets and Liabilities

Our consolidated total assets were €1,115,638 million at December 31, 2013, a €153,962 million decrease from total assets of €1,269,600 million at December 31, 2012. Our gross loans and advances to corporate clients, individual clients and government and public entities, including the trading portfolio, other financial assets at fair value and loans, decreased by 6.8% to €693,759 million at December 31, 2013, from €744,534 million at December 31, 2012.

The decrease in customer loans was mainly due to the domestic component as a result of the deleveraging process in Spain and the cancellation of the public sector financing pursuant to a government program to pay suppliers’ pending invoices. Furthermore, the performance of balances in comparison with December 2012 was significantly impacted by the changes in exchange rates as a result of the depreciation of the main currencies in which the Group operates. This led to a negative impact of 4 percentage points on the year-on-year variations in lending to customers and customer funds.

There was a positive effect from the change in the scope of consolidation of less than one percentage point due to the merger in early 2013 of Bank Zachodni WBK S.A. and Kredyt Bank S.A. in Poland.

Customer deposits, which comprise deposits from clients and securities sold to clients under agreements to repurchase, decreased by 3.0% from €626,639 million at December 31, 2012, to €607,837 million at December 31, 2013, affected by exchange rates. Other managed funds, including mutual funds, pension funds, managed portfolios and savings-insurance policies, increased by 5.9% from €118,141 million at December 31, 2012, to €125,170 million at December 31, 2013. This increase was mainly concentrated in Spain, due to the greater marketing of mutual funds.

During 2013, the Group issued €61,754 million of senior debt (including Santander UK’s medium term program and €3,513 million in covered bonds), and €1,027 million of subordinated debt. As regards securitization activities, in 2013 the Group’s subsidiaries placed several securitizations for a total amount of €6,273 million, mainly through Santander UK and the Santander Consumer Finance units.

163

During 2013, €73,619 million of senior debt (including Santander UK’s medium term program), including €10,997 million of covered bonds and €1,915 million of subordinated debt, matured.

Regarding other balance sheet items, goodwill totaled €23,281 million, which was €1,345 million less than in 2012 as a result of the variations in exchange rates, particularly those of sterling and the Brazilian real. In contrast, the inclusion of Kredyt Bank S.A. brought an increase in goodwill.

Financial assets available for sale at December 31, 2013, totaled €83,799 million, which was €8,468 million (9%) less than a year earlier, due to the decrease in government bond positions, particularly in Spain, the United Kingdom, Brazil and the United States.

Capital

Stockholders’ equity, net of treasury stock, at December 31, 2013, was €70,588 million, a decrease of €1,272 million or 1.8% from €71,860 million at December 31, 2012, mainly due to the increase in the consolidated income for the year which was offset by the increase of negative valuation adjustments, mainly due to exchange differences.

Our eligible stockholders’ equity under BIS II was €71,453 million at December 31, 2013. The surplus over the minimum required by the Bank of Spain was €23,265 million. In accordance with the Basel II Accord criteria (which provide the framework under which Spanish entities must report capital ratios as of June 30, 2008), at December 31, 2013 the BIS II ratio was 14.59% (13.09% at December 31, 2012), Tier I Capital was 12.60% (11.17% at December 31, 2012) and core capital was 11.71% (10.33 at December 31, 2012). See Item 4 of Part I, “Information on the Company—B. Business Overview—Supervision and Regulation—Capital Adequacy Requirements”.

B. Liquidity and capital resources

Management of liquidity

For information about our liquidity risk management process, see Item 11 of Part I, “Corporate principles of risk management, control and risk appetite” and Part 7 “Liquidity and funding risk”.

Sources of funding

As a financial group, a principal source of our liquidity is our customer deposits which consist primarily of demand, time and notice deposits. In addition, we complement the liquidity generated by our customer deposits through access to the domestic and international capital markets and to the interbank market (overnight and time deposits). For this purpose, we have in place a series of domestic and international programs for the issuance of commercial paper and medium- and long-term debt. We also maintain a diversified portfolio of liquid and securitized assets throughout the year. In addition, another source of liquidity is the generation of cash flow.

At December 31, 2013, we had outstanding €175.5 billion of senior debt, of which €82.8 billion were mortgage bonds and €13.9 billion were promissory notes. Additionally, we had €16.1 billion in outstanding subordinated debt (which includes €3.7 billion preferred securities and €0.4 billion in preferred shares).

The following table shows the average balances during the years 2013, 2012 and 2011 of our principal sources of funds:

	2013		2012		2011
	(in millions of euros)
Due to credit entities		129,610		154,686		146,638
Customer deposits		632,339		636,351		616,690
Marketable debt securities		188,954		204,701		196,107
Subordinated debt		16,645		21,239		26,673
Total		967,548		1,016,977		986,108

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The average maturity of our outstanding debt as of December 31, 2013 is as follows:

(1) Senior debt	3.8 years
(2) Mortgage debt	13.9 years
(3) Dated subordinated debt	7.0 years

For more information see Notes 22.b, 23.a and 51.a to our consolidated financial statements.

The cost and availability of debt financing are influenced by our credit ratings. A reduction in these ratings could increase the cost of and reduce our market access to debt financing. Our credit ratings are as follows:

	Long-Term	Short-Term	Outlook
Moody’s	Baa1	P-2	Stable
Standard & Poor’s	BBB	A-2	Stable
Fitch	BBB+	F2	Stable
DBRS	A	R-1 (low)	Negative

Our total customer deposits, excluding assets sold under repurchase agreements, totaled €566.1 billion at December 31, 2013. Loans and advances to customers (gross) totaled €693.8 billion at the same date.

We remain well placed to access various wholesale funding sources from a wide range of counterparties and markets, and the changing mix between customer deposits and repos, deposits by banks and debt securities in issue primarily reflects comparative pricing, maturity considerations and investor counterparty demand rather than any material perceived trend.

We use our liquidity to fund our lending and investment securities activities, for the payment of interest expense, for dividends paid to shareholders and the repayment of debt.

We, Grupo Santander, are a European, Latin American and North American financial group. Although at this moment we are not aware of any material legal or economic restrictions on the ability of our subsidiaries to transfer funds to the Bank (the Parent company) in the form of cash dividends, loans or advances, capital repatriation and other forms, or to have access to foreign currency at the official exchange rate, there is no assurance that in the future such restrictions will not be adopted or how they would affect our business. Nevertheless, the geographic diversification of our businesses limits the effect of any restrictions that could be adopted in any given country.

We believe that our working capital is sufficient for our present requirements and to pursue our planned business strategies.

As of December 31, 2013, and to the present date, we did not, and presently do not, have any material commitments for capital expenditures.

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

During 2013, 2012 and 2011, we spent €1,229 million, €1,098 million, and €1,420 million, respectively, in research and development activities in connection with information technology projects.

D. Trend information

Overview

During the international economic and financial crisis of recent years, we maintained a high degree of recurrence in revenues and did not suffer any quarterly loss between 2007 and 2013. The elements of our business that explain our solid performance and enabled us to keep on growing in a stable and sustainable way are:

• Geographic diversification. We operate in 10 main countries, with a balance between mature and emerging markets (contributing 47% and 53%, respectively, of our profits in 2013). This geographic diversification has reduced the volatility of our earnings and enables us to capitalize on our experience and best practices on a global scale.

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• Focus on retail banking. Approximately 87% of our gross income in 2013 was derived from retail banking, which is a key factor for revenue stability.

• Subsidiaries model. The Group is composed of subsidiaries that are autonomous in capital and liquidity. This has clear strategic and regulatory advantages, as it reduces the risk of contagion between our units, imposes a double layer of global and local supervision and facilitates crisis management and resolution. Our goal is to publicly list a minority portion of our main subsidiaries when market circumstances make it advisable.

• Prudence in risks. The board gives particular importance to risk management and sets risk appetite at a medium-low level every year. We have a solid balance sheet, thanks to the retail nature of our business, and we maintain a limited exposure to sovereign risk, which is mainly used for interest rate hedging.

• Comfortable liquidity position. The strength of our commercial franchise enables us to finance most of our lending with deposits, and we access wholesale funding via many markets and instruments as needed.

• Solid solvency position. We generate capital organically and through active management of our business portfolio and core capital increased by 138 basis points in 2013.

• Corporate governance. The board’s composition maintains balance between non-executive (69%) and executive directors (31%) and seeks to comply with the best international practices in this sphere. We have also implemented corporate policies across our banks and global units for the supervision and control of the whole Group in certain risk-critical areas.

Our strategic position is better now than it was at the start of the international financial crisis, both in terms of geographic diversification and balance sheet strength. During this period, we:

• Boosted our presence in the U.K. and entered the retail banking business in Poland, Germany and the U.S., enhancing our international diversification.

• Set aside provisions totaling €65 billion.

• Captured €191 billion of deposits and reduced our liquidity gap by €149 billion. The loan-to-deposit ratio was 109% for the Group and 87% in Spain at the end of 2013.

Banco Santander is the only bank in the world whose debt is rated above that of its home country’s sovereign debt by the three main agencies (S&P, Moody’s and Fitch) and we achieved all of the above without the need for state aid in any of the countries where the Group operates.

International Banking Environment and Outlook

The forward-looking statements included below and in the following section are based on the current beliefs and expectations of our management and are subject to significant risks and uncertainties. These risks and uncertainties could cause the Group’s actual results to differ materially from those set forth in such forward-looking statements. See Forward-Looking Statements on page 7 of this Annual Report and the Risk Factors section on pages 15-34 of this Annual Report.

Independent economic forecasts for 2014 and 2015 point to an upswing in the international economic cycle, particularly in the markets that were hardest hit by the crisis.

However, the economic recovery is unlikely to be sufficient for the banking sector to return to pre-2008 levels of profitability. Many of the regulations introduced as a result of the international financial crisis are having and will continue to have a structural impact on banks’ profitability. This is particularly the case with the higher capital requirements, new short- and long-term liquidity and leverage ratios, higher cost of deposits as a result of the new bank resolution mechanisms and the cost of compliance with these and other new regulations. As of December 31, 2013, we were in compliance with all of the new regulatory requirements and we successfully passed the various stress tests conducted on European and Spanish banks and are prepared for the balance sheet analysis that the ECB will carry out prior to setting up the Single Supervisory Mechanism.

As of December 31, 2013:

• Our core capital ratio has increased by 413 basis points since the start of the crisis (2007) and we have strengthened our balance sheet, which is well-provisioned and has high levels of coverage.

• The loan-to-deposit ratio improved to 109%.

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After focusing on strengthening our balance sheet, liquidity and strategic positioning during the period from 2007 to 2013, management is now concentrating on increasing profits, while bearing in mind trends that will define the sector’s future, such as:

• The expansion of the middle classes in emerging markets, while the affluent segment gains importance globally;

• The recovery in companies’ productivity and profitability in a context of globalization that offers growing investment opportunities; and

• An increasingly demanding consumer with greater access to new technologies.

Future vision

We are closely involved in building a more stable, solid and efficient financial sector, focused on financing sustainable economic growth. Our business model, based on lasting and profitable relations with customers, increasing their linkage with the Bank and maintaining prudence in risks and discipline in the financial and capital sphere, has been vindicated by the crisis and is well regarded by regulators and rating agencies.

We are in a unique position as we enter what we expect will be a new cycle of growth in the global economy. We have a potential market of 600 million people in our 10 core markets. Our challenge is to generate greater value by focusing on our customers and attracting those who are not yet clients. Meanwhile, we will continue to help social development in the countries where we do business via Santander Universities, a program that has enabled us to create a unique alliance with more than 1,000 universities.

In the next three years, we will seek to regain our pre-crisis profit levels, which would enable us to maintain an adequate remuneration for shareholders, while at the same time comfortably meeting the new regulations for capital and liquidity.

E. Off-balance sheet arrangements

As of December 31, 2013, 2012 and 2011, we had outstanding the following contingent liabilities and commitments:

	2013		2012		2011
	(in millions of euros)
Contingent liabilities:
Financial guarantees and other sureties		13,479		14,437		15,417
Irrevocable documentary credits		2,430		2,866		2,978
Other guarantees		24,690		27,285		29,093
Other contingent liabilities		450		445		554
		41,049		45,033		48,042
Commitments:
Balances drawable by third parties		154,314		187,664		181,559
Other commitments		18,483		28,378		13,823
		172,797		216,042		195,382
Total:		213,846		261,075		243,424

For more information see Note 35 to our consolidated financial statements.

In addition to the contingent liabilities and commitments described above, the following table provides information regarding off-balance sheet funds managed by us and jointly controlled companies as of December 31, 2013, 2012 and 2011:

	2013		2012		2011
	(in millions of euros)
Off-balance sheet funds:
Mutual funds		93,304		89,176		102,611
Pension funds		10,879		10,076		9,645
Other managed funds		20,987		18,889		19,200
		125,170		118,141		131,456

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Relationship with unconsolidated companies

We have holdings in companies over which we are in a position to exercise significant influence, but that we do not control or jointly control. According to IFRS-IASB, these investments in associated companies are accounted for using the equity method (see further details of these companies in Exhibit II to our consolidated financial statements).

Transactions with these companies are made under market conditions and are closely monitored by our regulatory authorities. See Note 53 to our consolidated financial statements for further information.

Also, in our securitization activity we use structured entities (fondos de titulización) that are consolidated in the Group’s financial statements. According to IFRS, only those entities that meet certain requirements can be consolidated. We are not required to repurchase assets from or contribute additional assets to any of these structured entities. We do, however, provide in the ordinary course of business certain loans (amounting to €235.3 million as of December 31, 2013) to some of these structured entities, which are provided for in accordance with the risks involved. In 2013, the Group sold securitized bonds and structured medium and long-term operations with customers whose collateral is securitized bonds or mortgage bonds amounting to close to €6 billion.

We do not have any further transactions with unconsolidated entities other than those mentioned above.

We have no other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

F. Tabular disclosure of contractual obligations

The following table summarizes our contractual obligations by remaining maturity at December 31, 2013:

Contractual obligations

	Less than 1 year		More than 1 year but less than 3 years		More than 3 years but less than 5 years		More than 5 years		Total
(in millions of euros)
Deposits from credit institutions		54,595		18,734		7,837		5,156		86,322
Customer deposits		488,294		63,278		9,576		11,705		572,853
Marketable debt securities		52,987		53,966		20,667		43,770		171,390
Subordinated debt		1,006		2,468		2,723		9,942		16,139
Liabilities under insurance contracts (1)		—		—		—		1,430		1,430
Operating lease obligations		326		606		553		2,088		3,573
Capital lease obligations		33		37		39		100		209
Purchase obligations		2		6		2		3		13
Other long-term liabilities (2)		661		1,395		1,503		5,567		9,126
Contractual interest payments (3)		7,797		8,141		5,391		26,376		47,705
Total		605,701		148,631		48,291		106,137		908,760

(1) Includes life insurance contracts in which the investment risk is borne by the policy holder and insurance savings contracts.

(2) Other long-term liabilities relate to pensions and similar obligations.

(3) Calculated for all Deposits from credit institutions, Customer deposits, Marketable debt securities and Subordinated debt assuming a constant interest rate based on data as of December 31, 2013 over time for all maturities, and those obligations with maturities of more than five years have an average life of ten years.

The table above excludes the “fixed payments” of our derivatives since derivative contracts executed by the Group apply close-out netting across all outstanding transactions, that is, these agreements provide for settlements to be made on a maturity or settlement date for the differences that arise, and as such, the obligation to be settled in the future is not fixed at the present date and is not determined by the fixed payments.

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For a description of our trading and hedging derivatives, which are not reflected in the above table, see Note 36 to our consolidated financial statements.

For more information on our marketable debt securities and subordinated debt, see Notes 22 and 23 to our consolidated financial statements.

G. Other disclosures

Higher-Risk Loans

Grupo Santander does not have any significant exposure to higher-risk loans. Our credit profile is focused on retail banking with a medium-low risk profile and with broad diversification both by geography and segment, and 60% of the Group’s total loan portfolio is secured (in most cases, by real estate).

Mortgages to individuals represent approximately 41% of the Group’s total lending. These mortgages are focused on our core markets, Spain and the U.K., and are mainly residential mortgages with a low risk profile, low non-performing ratios (below the ratios of our peers) and an appropriate coverage ratio. This low risk profile allows us to envisage a relatively minor impact at Group level and a low final estimated loss.

In Spain, at December 31, 2013, the loan portfolio and thus its risk profile mainly comprises primary residence loans, with an average loan to value ratio (LTV) of 54,8% and an affordability rate of 29% under management criteria described below. Residential mortgages represent around 28% of the total credit risk portfolio in Spain, of which 88% has a LTV at inception of under 80%.

All customers applying for a prime residential mortgage are subject to a rigorous assessment of credit risk and affordability. In evaluating the payment capacity (affordability) of a potential customer, the credit analyst must determine if the income of the customer is sufficient to meet the payment of the loan installments taking into consideration other income that the customer may receive. In addition, the analyst must decide if the customer’s income will be stable over the term of the loan.

The U.K.’s mortgage portfolio is focused on primary residence mortgages with high risk quality in terms of LTV (50.7% as of December 31, 2013). Certain portfolios with high risk profiles (interest only and buy to let, among others) are subject to strict lending policies to mitigate risks and their performance is continuously monitored to ensure an adequate control.

The Group’s strategy in the last few years has been to reduce the volume of real estate exposure in Spain which at the end of 2013 stood at €10,821 million in net terms (around 3% of loans in Spain and less than 1% of the Group’s loans).

Changes in Practices

There have not been any significant changes in policies and practices in response to the effects of the current economic environment that might affect the quality of the credit information presented. This is due to the fact that the following policies and practices already formed part of our normal course of business:

a) Medium-low risk profile of the portfolio

Our risk profile is characterized by the prevalence of primary residence loans and a low effort rate of loan approval, which leads to a medium-low risk profile for the mortgage portfolio. This is due to the establishment of risk management frameworks and policies that reflect our risk management principles.

In addition to the tasks performed by the internal audit division, the risk unit has a specific risk monitoring function for adequate credit quality control with local and global teams.

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b) Suspended accrual interest of non-performing past-due assets

Balances are deemed to be impaired, and the interest accrual suspended, when there are reasonable doubts as to their full recovery and/or the collection of the related interest for the amounts and on the dates initially agreed upon, after taking into account the guarantees received to secure (fully or partially) collection of the related balances. For all non-performing past due assets, any collections relating to impaired loans and advances are used to recognize the accrued interest and the remainder, if any, is applied to reduce the principal amount outstanding.

When the recovery of any recognized amount is considered unlikely, the amount is written off, without prejudice to any actions that we may initiate to seek collection.

c) Allowances for credit losses and internal model

As of July 2008, the Bank of Spain had approved for regulatory capital calculation purposes the Group’s internal models affecting the vast majority of the Group’s credit risk net exposure. The Bank of Spain will continue to review the models for the purpose of calculating allowances for loan losses. The calculation obtained based on the output parameters of internal models is consistent with the best estimate of the Group as to the probable losses using possible scenarios which rely on the approved internally developed models, and which constitute an appropriate basis for determining loan loss allowances. While these models are not yet approved by the Bank of Spain for loan loss allowance calculation, we are required to calculate the allowances according to the instructions described in Item 4 in our annual report on Form 20-F for the year ended December 31, 2013, and are subject to continuing review by Bank of Spain, and subsequent continuous improvement of the processes within our internal model. The difference between loan loss provisions calculated using internal models and those calculated under Bank of Spain guidance, was not material for each one of the three years ending December 31, 2013.

Other

We use credit derivatives to cover loans and trading transactions. The volume of this activity is small compared to that of our peers and is subject to strict internal controls that minimize operational risk. Risk in these activities is controlled via a series of limits such as VaR, nominal by rating, sensitivity to the spread by rating and name, and sensitivity to the rate of recovery and to correlation. Jump-to-default limits are also set by geographic area, sector and liquidity.

Exposures related to complex structured assets

We have a very limited exposure to complex structured assets. See “Item 11. Quantitative and Qualitative Analysis About Market Risk—Part 6. Market Risk”.

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Item 6. Directors, senior management and employees

A. Directors and senior management

We are managed by our board of directors, which currently consists of 16 members. In accordance with our Bylaws (Estatutos), the board shall consist of at least 14 and not more than 22 members. Each member of the board is elected to a three-year term by our shareholders at a general meeting. One-third of the members are re-elected each year.

Our board of directors holds its meetings in accordance with an annual calendar. The Rules and Regulations of the Board⁴ provide that the board shall hold not less than nine annual ordinary meetings; in 2013, it met 15 times. Our board of directors elects our chairman, vice chairmen and chief executive officer from among its members. Between board meetings, lending and other board powers reside with the executive committee (comisión ejecutiva) and with the risk committee (comisión delegada de riesgos) of our board of directors.

The chairman of the board is the highest-ranking officer of the Bank (article 48.1 of the Bylaws and article 8.1 of the Rules and Regulations of the Board) and accordingly, all the powers that may be delegated under the Law, our Bylaws and the Rules and Regulations of the Board have been delegated to him.

However, it is the chief executive officer, in accordance with article 10.3 of the Rules and Regulations of the Board, in his capacity as such, who is entrusted with the day-to-day management of the different business areas and the highest executive functions.

There is a clear separation of duties between the executive chairman, the chief executive officer, the board and the committees thereof, as well as various checks and balances that assure proper equilibrium in the corporate governance structure of the Bank.

Our board has ultimate lending authority and it delegates such authority to the risk committee, which generally meets twice a week.

Members of our senior management are appointed and removed by the board.

⁴  The Rules and Regulations of the Board of Directors are available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—Corporate governance—Rules and Regulations of the Board of Directors”.

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The current members of our board of directors are:

Name	Position with Banco Santander	Director since
Emilio Botín (1)	Chairman	1960
Javier Marín	Chief executive officer	2013
Fernando de Asúa	First vice chairman	1999
Matías R. Inciarte (2)	Second vice chairman	1988
Guillermo de la Dehesa	Third vice chairman	2002
Sheila C. Bair	Director	2014
Ana P. Botín (1)	Director	1989
Javier Botín (1)	Director	2004
Vittorio Corbo	Director	2011
Rodrigo Echenique	Director	1988
Esther Giménez-Salinas	Director	2012
Ángel Jado	Director	2010
Abel Matutes	Director	2002
Juan R. Inciarte (2)	Director	2008
Isabel Tocino	Director	2007
Juan Miguel Villar Mir	Director	2013

(1) Ana P. Botín and Javier Botín are daughter and son, respectively, of Emilio Botín.

(2) Matías R. Inciarte and Juan R. Inciarte are brothers.

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Our current executive officers are:

Name	Position with Banco Santander
Emilio Botín	Chairman of the board of directors and of the executive committee
Javier Marín	Chief executive officer
Matías R. Inciarte	Second vice chairman of the board of directors and chairman of the risk committee
Ana P. Botín	Director and chief executive officer, United Kingdom
Juan R. Inciarte	Director and executive vice president, strategy and Asia
José A. Alvarez	Executive vice president, financial management and investor relations
Ignacio Benjumea	Executive vice president, general secretary and secretary of the board
Juan Manuel Cendoya	Executive vice president, communications, corporate marketing and research
Jesús Cepeda	Executive vice president, human resources, organization and costs
José F. Doncel	Executive vice president, internal audit
José María Espí	Executive vice president, risk
José María Fuster	Executive vice president, technology and operations
José Luis G. Alciturri	Executive vice president
Enrique G. Candelas	Executive vice president, Spain
José G. Cantera	Executive vice president, global wholesale banking
Juan Guitard	Executive vice president, risk
Jorge Maortua	Executive vice president, global wholesale banking
Remigio Iglesias	Executive vice president, asset recovery and restructuring
Luis Moreno	Executive vice president, private banking, asset management and insurance
José Mª Nus	Executive vice president, risk
César Ortega	Executive vice president, general secretariat
Ángel Rivera	Executive vice president, commercial banking
Magda Salarich	Executive vice president, consumer finance
Javier San Félix	Executive vice president, commercial banking
José Tejón	Executive vice president, financial accounting and control
José Antonio Villasante	Executive vice president, universities
Juan A. Yanes	Executive vice president, United States
Jesús Mª Zabalza	Executive vice president, Brazil

In addition, Román Blanco is the Group’s country head for Santander in the United States.

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The following is a summary of the relevant business experience and principal business activities of our current directors and executive officers:

Emilio Botín (chairman of the board of directors and of the executive committee)

Born in 1934. He joined the board of directors of Banco Santander in 1960 and was appointed chairman of the board in 1986.

Javier Marín (chief executive officer)

Born in 1966. He was appointed director and chief executive officer at board meeting of April 29, 2013. The appointment of Javier Marín as a director was ratified by our shareholders at the general meeting of shareholders held on March 28, 2014. He joined the Bank in 1991. After performing various duties within the Group, he was appointed executive vice president of the global private banking division in 2007. He was appointed head of the global private banking and asset management division in 2009 and of the global private banking, asset management and insurance division in 2010.

Fernando de Asúa (first vice chairman of the board of directors, lead director and chairman of the appointments and remuneration committee)

Born in 1932. Former vice chairman of Banco Central Hispanoamericano from 1991 to 1999. He was appointed director in 1999 and first vice chairman in 2004. He is a former chairman of IBM España, S.A. and he is currently the honorary chairman. In addition, he is a non-executive vice chairman of Técnicas Reunidas, S.A.

Matías R. Inciarte (second vice chairman of the board of directors and chairman of the risk committee)

Born in 1948. He joined Banco Santander in 1984 and was appointed executive vice president and chief financial officer in 1986. He was appointed director in 1988 and between 1999 and 2013 he was third vice chairman of the board. In 2013 he was appointed second vice chairman of the board. He is non-executive director of Sanitas, S.A. de Seguros and Financiera Ponferrada, S.A., SICAV and since 2008, president of the Fundación Príncipe de Asturias. Prior to joining Banco Santander, he was minister of the presidency of the Spanish Government from 1981 to 1982.

Guillermo de la Dehesa (third vice chairman of the board of directors and chairman of the audit and compliance committee)

Born in 1941. He was appointed director in 2002. He is a state economist and Bank of Spain’s office manager (on leave). He is an international advisor to Goldman Sachs International, former state secretary of Economy, general secretary of Trade and chief executive officer of Banco Pastor, S.A. He is currently non-executive vice chairman of Amadeus IT Holding, S.A., a non-executive director of Campofrío Food Group, S.A. and of Grupo Empresarial San José, S.A., chairman of the Centre for Economic Policy Research (CEPR) in London, a member of the Group of Thirty in Washington, chairman of the board of trustees of IE Business School and non-executive chairman of Aviva Grupo Corporativo, S.L. and of Aviva Vida y Pensiones, S.A. de Seguros y Reaseguros.

Sheila C. Bair

Born in 1954. She was appointed director at board meeting of January 27, 2014. The appointment of Sheila C. Bair as a director was ratified by our shareholders at the general meeting of shareholders held on March 28, 2014. She is senior advisor and chairman of the Systemic Risk Council at The Pew Charitable Trusts and columnist in Fortune Magazine. She is a former chairman of the Federal Deposit Insurance Corporation (2006-2011), Dean´s Professor of Financial Regulatory Policy for the Isenberg School of Management at the University of Massachusetts-Amherst (2002-2006) and Assistant Secretary for Financial Institutions at the U.S. Department of the Treasury (2001-2002).

Ana P. Botín

Born in 1960. She was appointed director in 1989. She is chief executive officer of Santander UK plc. She joined the Bank after a period at JP Morgan (1981-1988). She has been executive vice president of Banco Santander, S.A. since 1992 and was executive chairwoman of Banesto from 2002 to 2010. She is a member of the International Advisory Board of the New York Stock Exchange and a non-executive director of The Coca-Cola Company.

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Javier Botín

Born in 1973. He was appointed director in 2004. He is chairman and chief executive officer of JB Capital Markets, Sociedad de Valores, S.A.

Vittorio Corbo

Born in 1943. He was appointed director in 2011. He is the non-executive chairman of Banco Santander Chile and of Compañía de Seguros SURA Chile, non-executive director of Banco Santander (México), S.A., of CCU, S.A. and of Endesa Chile, and a financial advisor to various international institutions and Chilean businesses. He was previously chairman of the Central Bank of Chile (2003-2007), a professor of Economics at the Pontificia Catholic University of Chile (1981-1984 and 1991-2003) and at Concordia University in Montreal, Canada (1972-1981) and professorial lecturer at Georgetown University, Washington, DC (1985-1991), and held management positions at the World Bank in Washington, D.C. (1984-1991).

Rodrigo Echenique

Born in 1946. He was appointed director in 1988. Former chief executive officer of Banco Santander, S.A. from 1988 to 1994. He is currently also non-executive chairman of NH Hoteles, S.A. and non-executive chairman of Vocento, S.A.

Esther Giménez-Salinas

Born in 1949. She joined the board in 2012. She is a professor of Criminal Law for the ESADE-URL’s Law School. She has been rector of the Ramon Llull University, member of the Supreme Judicial Council, member of the standing committee of the Conference of Rectors of Spanish Universities (CRUE) and an executive vice president of the Center for Legal Studies of the Department of Justice of the Generalitat de Catalunya.

Ángel Jado

Born in 1945. He was appointed director in 2010. Former director of Banco Santander from 1972 to 1999 and former director of Banco Banif, S.A. from 2001 to 2013.

Abel Matutes

Born in 1941. He was appointed director in 2002. Former foreign minister of the Spanish Government and EU commissioner for the portfolios of Loans and Investment, Financial Engineering and Policy for Small and Medium-sized Companies (1989); North-South Relations, Mediterranean Policy and Relations with Latin America and Asia (1989) and of the Transport and Energy and Supply Agency of Euroatom (1993). He is also a chairman of Grupo de Empresas Matutes.

Juan R. Inciarte

Born in 1952. He joined the Group in 1985 as director and executive vice president of Banco Santander de Negocios. He is executive vice president since 1989 and between 1991 and 1999 he was director of Banco Santander. In 2008, he was again appointed director. In addition, he is a non-executive vice chairman of Santander UK and a director of Santander Consumer Finance, S.A. and of SAM Investment Holdings Limited.

Isabel Tocino

Born in 1949. She was appointed director in 2007. Former Minister for Environment of the Spanish Government, former chairwoman of the European Affairs and of the Foreign Affairs Committees of Spanish Congress. She is currently an elected member of the Spanish State Council, a professor of the Complutense University of Madrid, a member of the Royal Academy of Doctors and a non-executive director of ENCE Energía y Celulosa, S.A. and Enagás, S.A.

175

Juan Miguel Villar Mir

Born in 1931. He was appointed director at board meeting of April 29, 2013. The appointment of Juan Miguel Villar Mir as a director was ratified by our shareholders at the general meeting of shareholders held on March 28, 2014. He is chairman of the OHL Group and representative of the latter as vice chairman of Abertis Infraestructuras, S.A., he was Minister for Finance and vice president of the Spanish Government for economic affairs (1975-1976). He has also served as chairman of Electra de Viesgo, Altos Hornos de Vizcaya, Hidro Nitro Española, Empresa Nacional de Celulosa, Empresa Nacional Carbonífera del Sur, Cementos del Cinca, Cementos Portland Aragón and Puerto Sotogrande. Furthermore, he is presently a member of the Royal Academy of Engineering.

José A. Álvarez

Born in 1960. He joined the Bank in 2002. In 2004, he was appointed executive vice president, financial management and investor relations. José A. Alvarez is a director of Santander Consumer Finance, S.A., Santander Consumer Bank AG, Banco Santander (Brazil) SA and Santander Holdings USA. He is also a member of the supervisory board of Bank Zachodni WBK S.A.

Ignacio Benjumea

Born in 1952. He joined Banco Santander in 1987 as general secretary of Banco Santander de Negocios. In 1994 he was appointed executive vice president and general secretary and secretary of the board of Banco Santander.

Juan Manuel Cendoya

Born in 1967. Former manager of the Legal and Tax Department of Bankinter, S.A. from 1999 to 2001. He joined the Bank in July 2001 as executive vice president, communications, corporate marketing and research.

Jesús Cepeda

Born in 1961. He joined the Bank in 1990, having held positions as head of the management control area and deputy head of the financial accounting and control division prior to being appointed executive vice president and head of the human resources, organization and costs division in 2013.

José Doncel

Born in 1961. He worked for Arthur Andersen and Banco Santander before joining Banesto in 1994, where he served as head of accounting and financial management. In 2013, he joined Banco Santander, where he was appointed executive vice president and head of the internal audit division.

José María Espí

Born in 1944. He joined the Bank in 1985 and, in 1988, was appointed executive vice president, human resources. In 1999 he was appointed executive vice president, risk. He is also chairman of Unión de Crédito Inmobiliario, S.A., E.F.C. and director of UCI, S.A.

José María Fuster

Born in 1958. He joined the Group in 1988. In 2004, he was appointed chief information officer of Grupo Santander. In the same year, he was also named member of the board of Abbey National plc (now, Santander UK plc) and the board of Advisors of IBM Corporation. In 2007, he was appointed executive vice president of technology and operations at Banco Santander. Presently, José María Fuster is also a director of Openbank, S.A.

José Luis G. Alciturri

Born in 1949. He joined the Bank in 1966. Between 2007 and 2013 he was head of the human resources division. At present, he is executive vice president of the Bank.

176

Enrique G. Candelas

Born in 1953. He joined Banco Santander in 1975 and was appointed senior vice president in 1993. He was appointed executive vice president, Retail Banking Spain (Santander Branch Network) in 1999 and head of Santander Spain in 2013.

José G. Cantera

Born in 1966. He joined the Group in 2003. In 2006, he was appointed Banesto’s chief executive officer. Formerly, he was member of the executive committee of Citigroup EMEA and member of the board of directors of Citigroup Capital Markets Int. Ltd. and Citigroup Capital Markets UK. Former non-executive director of Banesto, in 2012 he was appointed executive vice president of global wholesale banking.

Juan Guitard

Born in 1960. Former general secretary of the board of Banco Santander de Negocios (from 1994 to 1999) and manager of the investment banking department of the Bank (from 1999 to 2000). He rejoined the Bank in 2002, being appointed executive vice president, vice-secretary general of the board. He was head of the internal audit division between 2009 and 2013. In 2013, he was appointed responsible for the risk division.

Remigio Iglesias

Born in 1954. He joined the Group in 1990, having held several positions in commercial banking. He was appointed executive vice president and head of the asset recoveries and restructuring division in 2013.

Jorge Maortua

Born in 1961. Former executive vice president of Banesto between 2001 and 2003. He joined the Bank in 2003 as head of global treasury and was appointed executive vice president, global wholesale banking in 2004.

Luis Moreno

Born in 1964. He joined the Bank in 1989, having held positions as head of products, marketing & electronic banking and head of the marketing & business development area of private banking, asset management and insurance division, prior to being appointed executive vice president in 2013.

José Mª Nus

Born in 1950. He joined Santander UK in 2010 as executive director and chief risk officer. In 2010, he was appointed executive director of Banco Santander and in March 2014, head of strategic planning of the risk division. He has also been executive vice president, risk in Argentaria and Bankinter, and member of the board of directors in Banesto, Banco de Vitoria, Banco de Negocios Argentaria, Banco de Crédito Local and Banco de Alicante. He is currently a member of the board of Societat Catalana d’Economia.

César Ortega

Born in 1954. He joined the Bank in 2000 and was appointed executive vice president, general secretariat in 2006. He is also a non-executive director of Fomento de Construcciones y Contratas, S.A.

Ángel Rivera

Born in 1966. He joined the Bank in 2013 as executive vice president responsible for companies and institutions, within the commercial banking division. Previously, he developed his professional career over 23 years with the Banco Popular Group.

177

Magda Salarich

Born in 1956. She joined the Bank in 2008 as executive vice president responsible for consumer finance division. Previously, she had held several positions in the automobile industry, including the position of director and executive vice president of Citroën España and head of commerce and marketing for Europe of Citroën Automobiles.

Javier San Félix

Born in 1967. He joined the Group in 2004 as head of strategic planning in the consumer finance division. In 2005 he was appointed director and executive vice president of Santander Consumer Finance in Spain and in 2006 he was appointed chief operating officer of the consumer finance division. Former chief executive officer of Banesto, he was appointed executive vice president of Banco Santander and head of commercial banking division in 2013.

José Tejón

Born in 1951. He joined the Bank in 1989. In 2002, he was appointed executive vice president, financial accounting and control.

José Antonio Villasante

Born in 1946. His entire professional career has been with Banco Santander, which he joined in 1964. He was appointed senior vice president in 1994 and deputy executive vice president in 2006. He is currently executive vice president, head of the universities division.

Juan A. Yanes

Born in 1962. He joined Grupo Santander in 1991 and worked in investment banking, corporate finance, and financial markets until 1999. In 1999, he was appointed as global head of market risk in U.S. and in 2010 executive vice president of the Bank.

Since 2013 he is the chief risk officer in charge of all Santander operations in the U.S. From 2009 to 2013, Juan A. Yanes was the chief corporate officer responsible for the consolidated supervision of all Banco Santander, S.A. activities in the U.S. and was also responsible for compliance and internal control.

Before joining the Group he worked for Citibank in the capital markets area in Venezuela.

Jesús Mª Zabalza

Born in 1958. Former executive vice president of La Caixa (from 1996 to 2002). He joined the Bank in 2002, being appointed executive vice president, America. He is currently chief executive officer of Banco Santander Brazil.

* * * * * *

In addition, following is a summary of the relevant business experience of Román Blanco (U.S., country head from 2013):

Román Blanco

Born in 1964. He joined the Bank in 2004 as director of business development for the America division and was later appointed vice-president of Banco Santander Banespa in Brazil. He was also country head for Santander in Colombia (2007) and in Puerto Rico (2012-2013).

He is chairman and chief executive officer of Santander Bank and Santander Holdings USA. In this role, he manages all the Group’s units in the United States. Before joining Santander, he worked for 13 years with McKinsey & Co., where he became senior partner.

* * * * * *

178

For a description of arrangements or understandings with major shareholders, customers, suppliers or others pursuant to which any person referred to above was appointed, see Item 7 of Part I, “Shareholders and Related Party Transactions—A. Major Shareholders—Shareholders’ agreements” herein.

B. Compensation

Directors’ compensation

Fees Stipulated in the Bylaws

Article 58 of the Bank’s Bylaws approved by the shareholders at their annual general meeting held on June 21, 2008 provided that the annual share in the Bank’s profit that the directors are entitled to receive for discharging their duties as members of the board of directors (annual retainer and attendance fees) will be equal to 1% of the Bank’s net profit for the year. However, the board of directors may resolve to reduce this percentage.

The amount set by the board of directors for 2012, calculated pursuant to the aforementioned Article 58 of the Bylaws, was 0.321% of the Bank’s profit for 2012.

The annual general meeting held on March 22, 2013 approved an amendment to the Bylaws, whereby the remuneration of directors in their capacity as board members now consists of an annual fixed amount determined by the shareholders at the annual general meeting. This amount shall remain in effect unless the shareholders resolve to change it at a general meeting. However, the board of directors may elect to reduce the amount in any years in which it deems such action justified. The remuneration established for 2013 by the annual general meeting was €6 million, with two components: (a) an annual retainer and (b) attendance fees.

The specific amount payable for the above-mentioned items to each of the directors is determined by the board of directors, which takes into consideration the positions held by each director on the board, their attendance of board meetings, their membership on various committees and their attendance of committee meetings.

The total Bylaws-stipulated retainer earned by the directors in 2013 amounted to €4.3 million.

The amounts received individually by each board member in 2013 and 2012 for each position held on the board and for each position held on a board committee are as follows:

	Euros
	2013-2012
Members of the board of directors		84,954
Members of the executive committee		170,383
Members of the audit and compliance committee		39,551
Members of the appointments and remuneration committee		23,730
First and fourth deputy chairmen(1)		28,477

(1) In 2013 the total amount of €28,477 was paid to the current third vice chairman and the former fourth vice chairman, in proportion to the time during which each held office in the year.

Furthermore, the directors received fees for attending board and committee meetings but not attending executive committee meetings, because no attendance fees are received for this committee.

By resolution of the board of directors, at the proposal of the appointments and remuneration committee, the fees for attending board and committee meetings (excluding executive committee meetings, for which no attendance fees have been established) have remained unchanged since 2008 and will be maintained at the same level as of January 1, 2014.

• Board of directors: €2,540 for directors residing in Spain and €2,057 for non-resident directors.

• Risk committee and audit and compliance committee: €1,650 for directors residing in Spain and €1,335 for non-resident directors.

• Other committees: €1,270 for directors residing in Spain and €1,028 for non-resident directors.

179

Salary for executive directors

Executive directors received the following salaries for 2013 and 2012, which were approved by the board at the proposal of the appointments and remuneration committee:

	Thousands of euros
	2013		2012
Emilio Botín		1,344		1,344
Javier Marín (1)		2,000		—
Matías R. Inciarte		1,710		1,710
Ana P. Botín (2)		2,005		2,100
Juan R. Inciarte		987		987
Alfredo Sáenz (3)		—		3,703
Total		8,046		9,844

(1) Annualized amount of the chief executive officer’s salary. However, the amount actually received in 2013 was €1,600,000, which is the sum of his remuneration as executive vice president of the Bank for the first four months of the year and his remuneration as chief executive officer for the remaining eight.

(2) The gross annual salary for 2011 was revised in the case of Ana P. Botín to reflect the assumption of new responsibilities as chief executive officer of Santander UK and was established at €2 million which, at the exchange rate published by the Bank of Spain on the business day prior to December 20, 2010 (the date on which the current fixed salary remuneration of the aforementioned executive director was approved by the board of directors), amounted to £1,702 thousand. The euro amounts shown in the above table are the equivalent values calculated by applying the average exchange rates for those years to her remuneration in pounds sterling.

(3) Retired from the board on April 29, 2013. The gross salary received until that date is shown, together with his other remuneration, on page number 182.

The maximum variable remuneration for executive directors for 2013 and 2012 approved by the board at the proposal of the appointments and remuneration committee was as follows:

	Thousands of euros
	2013		2012
Emilio Botín		1,412		1,412
Javier Marín (1)		2,500		—
Matías R. Inciarte		2,308		2,669
Ana P. Botín (2)		2,212		2,247
Juan R. Inciarte		1,480		1,557
Alfredo Sáenz		—		3,510
Total		9,912		11,395

(1) Appointed chief executive officer at the board meeting of April 29, 2013.

(2) Equivalent euro value of the original amount in pounds sterling.

The second and third cycles of the deferred conditional variable remuneration plan were approved in 2012 and 2013 under the same payment terms as the first cycle of the plan (see Note 5.e to our consolidated financial statements), whereby payment of a portion of the variable remuneration for these years is deferred over three years and paid, where appropriate, in three equal portions, 50% in cash and 50% in Santander shares, provided the conditions for entitlement to the remuneration are met. The portion of the variable remuneration that is not deferred (immediate payment) is also paid 50% in cash and 50% in shares.

The amounts shown in the foregoing table reflect the maximum total variable remuneration allocated to the executive directors for each year. These amounts include both the cash-based and share-based variable remuneration (according to the plans agreed in each year) and both the remuneration payable immediately and that which, as the case may be, is payable following a deferral period and deferred.

180

The following table shows the form of payment of the variable remuneration for 2012 and 2013:

	Thousands of euros
	2013								2012
	Immediate payment in cash (20%)		Immediate payment in shares (20%)		Deferred payment in cash (30%) (1)		Deferred payment in shares (30%) (1)		Immediate payment in cash (20%)		Immediate payment in shares (20%)		Deferred payment in cash (30%) (2)		Deferred payment in shares (30%) (2)
Emilio Botín		282		282		424		424		282		282		424		424
Javier Marín		500		500		750		750		—		—		—		—
Matías R. Inciarte		462		462		692		692		534		534		801		801
Ana P. Botín (3)		442		442		664		664		449		449		674		674
Juan R. Inciarte		296		296		444		444		311		311		467		467
Alfredo Sáenz		—		—		—		—		702		702		1,053		1,053
Total		1,982		1,982		2,974		2,974		2,278		2,278		3,419		3,419

(1) In 3 years: 2015, 2016 and 2017 subject to continued service, with the exceptions provided for, and the non-applicability of “malus” clauses.

(2) In 3 years: 2014, 2015 and 2016 subject to continued service, with the exceptions provided for, and the non-applicability of “malus” clauses.

(3) Equivalent euro value of the original amount in pounds sterling.

The amounts of immediate and deferred payments in shares shown in the table above correspond to the following numbers of shares:

	Number of shares
	2013						2012
	Immediate payment		Deferred payment (1)		Total		Immediate payment		Deferred payment (2)		Total
Emilio Botín		42,287		63,431		105,718		43,952		65,927		109,879
Javier Marín		74,850		112,275		187,125		—		—		—
Matías R. Inciarte		69,092		103,639		172,731		83,059		124,589		207,648
Ana P. Botín		66,241		99,362		165,603		69,916		104,874		174,790
Juan R. Inciarte		44,299		66,448		110,747		48,466		72,699		121,165
Alfredo Sáenz		—		—		—		109,211		163,817		273,028
Total		296,769		445,155		741,924		354,604		531,906		886,510

(1) In 3 years: 2015, 2016 and 2017 subject to continued service, with the exceptions provided for, and the non-applicability of “malus” clauses.

(2) In 3 years: 2014, 2015 and 2016 subject to continued service, with the exceptions provided for, and the non-applicability of “malus” clauses.

A breakdown of the remuneration for 2013 by Bank director is provided below. The salaries of the executive directors disclosed in the table below correspond to the maximum amounts for each item approved by the board of directors as period remuneration, irrespective of the actual year of payment and of any amounts paid to the directors under the agreed deferred remuneration scheme. Note 5.e to our consolidated financial statements includes disclosures on the shares delivered as part of the deferred remuneration schemes in place in previous years the conditions for delivery of which were met in the corresponding years.

181

	Thousands of euros																														Change (%)
	2013																												2012
	Fees Stipulated in the Bylaws																								Other remuneration (b)		Total		Total (c)
	Annual retainer								Attendance fees				Executive director salary remuneration
	Board		Executive committee		Audit and compliance committee		Appointments and remuneration committee		Board		Other fees		Fixed		Variable - immediate payment				Variable - deferred payment (a)
Directors															In cash		In shares		In cash		In shares		Total
Emilio Botín		85		170		—		—		33		5		1,344		282		282		424		424		2,757		1		3,051		3,061		(0.3	%)
Javier Marín (1)		57		115		—		—		15		3		1,600		500		500		750		750		4,100		51		4,341		—		—
Fernando de Asúa		113		170		40		24		33		199		—		—		—		—		—		—		—		579		567		2.1	%
Matías R. Inciarte		85		170		—		—		30		160		1,710		462		462		692		692		4,018		265		4,729		5,154		(8.2	%)
Guillermo de la Dehesa (2)		104		170		27		24		33		36		—		—		—		—		—		—		—		394		320		23.3	%
Ana P. Botín		85		170		—		—		25		4		2,005		442		442		664		664		4,217		339		4,840		5,140		(5.8	%)
Francisco Javier Botín (3)		85		—		—		—		28		—		—		—		—		—		—		—		—		113		108		4.7	%
Lord Burns (Terence) (4)		85		—		—		—		19		—		—		—		—		—		—		—		—		103		106		(1.9	%)
Vittorio Corbo		85		—		—		—		21		—		—		—		—		—		—		—		—		106		106		0	%
Rodrigo Echenique		85		170		40		24		33		111		—		—		—		—		—		—		30		493		415		18.7	%
Esther Giménez-Salinas (5)		85		—		—		—		28		1		—		—		—		—		—		—		—		114		82		39.1	%
Ángel Jado		85		—		—		—		30		—		—		—		—		—		—		—		—		115		110		4.6	%
Abel Matutes		85		—		40		—		25		19		—		—		—		—		—		—		—		169		169		0	%
Juan R. Inciarte		85		—		—		—		33		94		987		296		296		444		444		2,467		151		2,830		2,937		(3.7	%)
Isabel Tocino (6)		85		115		—		24		33		175		—		—		—		—		—		—		—		432		257		68.1	%
Juan Miguel Villar Mir (7)		56		—		—		—		15		—		—		—		—		—		—		—		—		71		—		—
Alfredo Sáenz (8)		28		56		—		—		18		3		1,234		—		—		—		—		1,234		561		1,899		8,237		(76.9	%)
Manuel Soto (8)		37		—		13		8		15		64		—		—		—		—		—		—		—		137		352		(61.2	%)
Francisco Luzón (9)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		130		—
Antonio Basagoiti (10)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		115		—
Antonio Escámez (10)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		118		—
Luis Alberto Salazar-Simpson (10)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		44		—
Total 2013		1,415		1,308		158		103		468		874		8,880		1,982		1,982		2,974		2,974		18,792		1,398		24,517		—		(10.9	%)
Total 2012		1,464		1,287		168		119		409		900		9,952		2,278		2,278		3,419		3,419		21,347		1,833		—		27,528

(1) Member of the board and the executive committee since April 29, 2013.

(2) Member of the audit and compliance committee and third deputy chairman since April 29, 2013.

(3) Amounts delivered to the Fundación Botin.

(4) Retired from the board on December 31, 2013.

(5) Board member since March 30, 2012 and member of the international committee since November 26, 2013.

(6) Member of the risk committee since March 30, 2012 and of the executive committee since April 29, 2013.

(7) Board member since May 7, 2013.

(8) Retired from the board on April 29, 2013.

(9) Retired from the board on January 23, 2012.

(10) Retired from the board on March 30, 2012.

(a) Maximum deferred variable remuneration for the period approved by the board of directors, at the related meetings, for each of the directors.

(b) Includes, inter alia, the life and medical insurance costs borne by the Group relating to Bank directors.

(c) Includes the corresponding deferred variable remuneration.

182

Compensation for service on other boards as representatives of the Bank

By resolution of the executive committee, all the remuneration received by the Bank’s directors who represent the Bank on the boards of directors of listed companies in which the Bank has a stake and are paid by those companies as well as remuneration relating to appointments made after March 18, 2002, accrues to the Group. In 2013 and 2012 the Bank’s directors did not receive any remuneration for such representative duties.

Three directors of the Bank received a total of €1,184 thousand in 2013 as members of the boards of directors of Group companies (2012: €1,317 thousand), the detail being as follows: Lord Burns received €736 thousand as non-executive chairman of the board of directors of Santander UK Plc.; Matías R. Inciarte received €42 thousand as non-executive director of U.C.I., S.A., and Vittorio Corbo received €406 thousand, of which he received €104 thousand as non-executive director of Banco Santander Chile, €284 thousand for advisory services provided to that entity and €18 thousand as non-executive director of Grupo Financiero Santander México, S.A.B. de C.V.

Pension commitments, other insurance and other items of directors

In 2012, within the framework of the measures implemented by the Group in order to mitigate the risks arising from the defined-benefit pension obligations payable to certain employees, which led to an agreement with the workers’ representatives to convert the defined-benefit obligations existing under the collective agreement into defined-contribution plans (see Note 25 to our consolidated financial statements), the contracts of the executive directors and the other members of the Bank’s senior management (the senior executives) which provided for defined-benefit pension obligations were amended to convert these obligations into a defined-contribution employee welfare system, which was externalized to Santander Seguros y Reaseguros, Compañía Aseguradora, S.A. The new system grants the executive directors the right to receive a pension benefit upon retirement, regardless of whether or not they are in the Bank’s employ on that date, based on the contributions made to the aforementioned system, and replaced the right to receive a pension supplement which had previously been payable to them upon retirement. The new system expressly excludes any obligation of the Bank to the executive directors other than the conversion of the previous system into the new employee welfare system, which took place in 2012, and, as the case may be, the annual contributions to be made as described below⁵. In the event of pre-retirement, the executive directors who have not exercised the option to receive their pensions in the form of a lump sum are entitled to receive an annual retainer until the date of retirement.

The initial balance for each executive director in the new defined-contribution welfare system was that corresponding to the market value of the assets in which the provisions for the respective accrued obligations had been invested, at the date on which the former pension obligations were converted into the new welfare system⁶.

Following the aforementioned amendment, from 2013 onwards the Bank makes annual contributions to the employee welfare system for the benefit of the executive directors and senior executives, in proportion to their respective pensionable bases, until they leave the Group, or until their retirement from the Group, death or disability (including, as the case may be, during the pre-retirement period). No contributions are made for the executive directors and senior executives who, prior to the conversion of the defined-benefit pension obligations into the current defined-contribution employee welfare system, had exercised the option to receive their pension rights in a lump sum.

The terms of the employee welfare system regulate the impact of the deferral of the computable variable remuneration on the benefit payments covered by the system upon retirement and, as the case may be, the withholding tax on shares arising from such remuneration.

In 2013, as a result of his appointment as chief executive officer, changes were introduced to the contract of Javier Marín with respect to the pension obligations stipulated in his senior management contract. The annual contribution to the employee welfare system is now calculated as 80% of the sum of: (i) fixed annual remuneration; and (ii) 30% of the arithmetic mean of the last three gross amounts of variable remuneration. Also, the pensionable base in relation to the death and permanent disability scheme provided for in his senior management contract is now 100% of fixed annual remuneration. Under his senior management contract, which is currently suspended, the annual contribution is 55% of his fixed remuneration, and the pensionable base in the event of death or disability is 80% of his fixed remuneration.

⁵  As provided for in the contracts of the executive directors and members of senior management prior to their modification, Emilio Botín and Matías R. Inciarte had exercised the option to receive the accrued pensions -or amounts similar thereto- in the form of a lump sum (i.e. in a single payment), which meant that no further pension benefit would accrue to them from that time, and the lump sum to be received, which would be updated at the agreed-upon interest rate, was fixed.

⁶  In the case of Emilio Botín and Matías R. Inciarte, the initial balance corresponded to the amounts that were set when, as described above, they exercised the option to receive a lump sum, and includes the interest accrued on these amounts from that date.

183

Following is a detail of the balances relating to each of the current executive directors under the new welfare system at December 31, 2013 and of the initial balances that corresponded to them in 2012 on the conversion of their obligations:

	Thousands of euros
	2013			2012
Emilio Botín		25,864			25,566
Javier Marín		4,346	(1)		—
Matías R. Inciarte		46,058			45,524
Ana P. Botín		37,202	(2)		34,941
Juan R. Inciarte		13,410			12,824
Alfredo Sáenz (3)		—			88,174
		126,880			207,029

(1) Includes both his rights under the welfare system described above and those to which he is entitled, for the period prior to his appointment as chief executive officer, under the executive pension scheme of which he became an inactive participant on his appointment.

(2) Includes the amounts relating to the period of provision of services at Banesto, externalized with another insurance company.

(3) In April 2013, upon his retirement, Alfredo Sáenz requested payment of the pensions to which he was entitled in a lump sum (€88.5 million gross). For such purpose, his pension rights were settled, in accordance with the applicable contractual and legal terms, through: i) the payment in cash of €38.2 million relating to the net amount of the pension calculated taking into account the fixed remuneration, and €12.2 million relating to the net amount of the pension calculated taking into account the accrued variable remuneration at the retirement date, and ii) the investment by Alfredo Sáenz of those €12.2 million in Santander shares (2,216,082 shares), which were deposited at the Bank on a restricted basis until April 29, 2018.

The Group also has pension obligations to other directors amounting to €18 million (December 31, 2012: €18 million). The payments made in 2013 to the members of the board entitled to post-employment benefits amounted to €1.2 million (2012: €1.6 million).

Lastly, the contracts of the executive directors who had not exercised the option referred to above prior to the conversion of the defined-benefit pension obligations into the current welfare system include a supplementary welfare regime for the contingency of death (surviving spouse and child benefits) and permanent disability of serving directors.

The provisions recognized in 2013 and 2012 for retirement pensions and supplementary benefits (surviving spouse and child benefits, and permanent disability) were as follows:

	Thousands of euros
	2013		2012
Emilio Botín		—		—
Javier Marín		2,006		—
Matías R. Inciarte		—		—
Ana P. Botín		1,443		2,078
Juan R. Inciarte		609		78
Alfredo Sáenz		—		—
		4,058		2,166

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The Group has taken out life insurance policies for the Bank’s directors, who will be entitled to receive benefits if they are declared disabled; in the event of death, the benefits will be payable to their heirs. The premiums paid by the Group are included in the Other remuneration column of the table shown in Note 5.a.iii to our consolidated financial statements. Also, the following table provides information on the sums insured for the Bank’s executive directors:

	Insured sum (Thousands of euros)
	2013		2012
Emilio Botín		—		—
Javier Marín		2,400		—
Matías R. Inciarte		5,131		5,131
Ana P. Botín		6,000		6,000
Juan R. Inciarte		2,961		2,961
Alfredo Sáenz		—		11,108
		16,492		25,200

Additionally, other directors have life insurance policies the cost of which is borne by the Group, the related insured sum being €1.4 million at December 31, 2013 (2012: €1.4 million).

Share-based payments to executive directors

Following is a description of the various share delivery plans instrumenting the directors’ share-based deferred variable remuneration. For more information on these plans see Note 47 to our consolidated financial statements:

i) Performance share plan

This plan involves successive three-year cycles of share deliveries to the beneficiaries, as part of their variable remuneration for the year in which each cycle begins, so that each year one cycle will begin and, from 2009 onwards, another cycle will also end. Following the changes implemented in 2011 to the remuneration policy for the executive directors, the latter ceased to be beneficiaries of the cycle approved in 2011.

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The table below shows the maximum number of rights granted to each executive director in each cycle and the number of shares received in 2012 and 2013 under the I12 and I13 incentive plans (Plans I12 and I13), respectively. As established in these plans, the number of shares received was determined by the degree of achievement of the targets to which each plan was tied. Plan I12 fell short of the maximum number and Plan I13 fell short of the minimum number.

	Rights at January 1, 2012		Shares delivered in 2012 (number)			Rights cancelled in 2012 (number)			Rights at December 31, 2012		Shares delivered in 2013 (number)		Rights cancelled in 2013 (number)			Rights at December 31, 2013		Grant date		Share delivery deadline
Plan I12:
Emilio Botín		82,941		24,882			(58,059	)		—		—		—			—		06/19/09		07/31/12
Alfredo Sáenz		228,445		68,534			(159,911	)		—		—		—			—		06/19/09		07/31/12
Matías R. Inciarte		105,520		31,656			(73,864	)		—		—		—			—		06/19/09		07/31/12
Ana P. Botín (1)		56,447		16,934	(2)		(39,513	)		—		—		—			—		06/19/09		07/31/12
Francisco Luzón (3)		92,862		—			(92,862	)		—		—		—			—		06/19/09		07/31/12
Juan R. Inciarte		60,904		18,271			(42,633	)		—		—		—			—		06/19/09		07/31/12
		627,119		160,277			(466,842	)		—		—		—			—
Plan I13
Emilio Botín		82,941		—			—			82,941		—		(82,941	)		—		06/11/10		07/31/13
Alfredo Sáenz (4)		228,445		—			—			228,445		—		(228,445	)		—		06/11/10		07/31/13
Matías R. Inciarte		105,520		—			—			105,520		—		(105,520	)		—		06/11/10		07/31/13
Ana P. Botín (1)		56,447		—			—			56,447		—		(56,447	)		—		06/11/10		07/31/13
Francisco Luzón (3)		92,862		—			(92,862	)		—		—		—			—		06/11/10		07/31/13
Juan R. Inciarte		60,904		—			—			60,904		—		(60,904	)		—		06/11/10		07/31/13
		627,119		—			(92,862	)		534,257		—		(534,257	)		—

(1) Without prejudice to the Banesto shares corresponding to Ana P. Botín by virtue of the various Banesto Share-Based Incentive Plans approved by the shareholders at the general meeting of Banesto (a maximum of 32,358 Banesto shares relating to her participation in the Banesto Share-Based Incentive Plan expiring in 2013).

(2) In 2012 Ana P. Botín received a further 14,022 Banesto shares relating to her participation in the Banesto Share-Based Incentive Plan approved by the shareholders at the annual general meeting of Banesto held on February 24, 2010.

(3) Following his resignation on January 23, 2012, Francisco Luzón lost his entitlement arising from his participation in these plans since he did not meet all the conditions stipulated for the shares to be received.

(4) Following his resignation on April 29, 2013, Alfredo Sáenz lost his entitlement arising from his participation in these plans since he did not meet all the conditions stipulated for the shares to be received.

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ii) Obligatory investment share plan

Pursuant to the obligatory investment share plan (see Note 47 to our consolidated financial statements), and also as part of the deferred share-based variable remuneration for each period, the current executive directors acquired, prior to February 28, 2009 and February 28, 2010, the number of Bank shares shown in the table below, corresponding to the second and third cycles of this plan. Executive directors who hold the shares acquired through the obligatory investment and remain in the Group’s employ for three years from the date on which the obligatory investment is made are entitled to receive the same number of Bank shares as that composing their initial obligatory investment.

The shareholders at the annual general meeting of June 19, 2009 introduced, for the third cycle, a requirement additional to that of remaining in the Group’s employ, which is that in the three-year period from the investment in the shares, none of the following circumstances should exist: (i) poor financial performance of the Group; (ii) breach by the beneficiary of the codes of conduct or other internal regulations, including, in particular, those relating to risks, where applicable to the executive in question; or (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards.

	Maximum number of shares to be delivered (3)
	3rd cycle 2010-2012		2nd cycle 2009-2011
Emilio Botín		20,515		19,968
Javier Marín (1)		11,092		—
Matías R. Inciarte		25,849		25,159
Ana P. Botín (2)		18,446		16,956
Juan R. Inciarte		15,142		14,738
		91,044		76,821

(1) Board member since April 29, 2013.

(2) The maximum number of shares corresponding to Ana P. Botín for the 2009-2011 and 2010-2012 cycles as beneficiary of this plan is in line with the resolution adopted by the shareholders at the annual general meeting of Banco Santander held on June 21, 2008 and by the shareholders at the annual general meeting of Banesto held on February 24, 2010.

(3) In addition, Alfredo Sáenz received 49,000 and 47,697 shares as a result of his participation in the third and second cycles of the aforementioned plan.

Since the conditions to retain the aforementioned shares and the additional requirement to stay in the Group for three years had been complied with, in February 2012 and 2013, as approved by the board, at the proposal of the appointments and remuneration committee, the gross number of shares detailed above relating to the second and third cycles accrued to the executive directors. This number is equal to the number of shares initially acquired by them.

iii) Deferred conditional delivery share plan

The 2010 variable remuneration of the executive directors and Group executives or employees whose variable remuneration or annual bonus for 2010 exceeded, in general, €300,000 (gross) was approved by the board of directors through the instrumentation of the first cycle of the deferred conditional delivery share plan, whereby a portion of the aforementioned variable remuneration or bonus is being deferred over a period of three years for it to be paid, where appropriate, in Santander shares. Application of this cycle, insofar as it entails the delivery of shares to the plan beneficiaries, was authorized by the annual general meeting held on June 11, 2010.

In addition to the requirement that the beneficiary remain in the Group’s employ, with the exceptions included in the plan regulations, the accrual of the share-based deferred remuneration is conditional upon none of the following circumstances existing, in the opinion of the board of directors, during the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in economic capital and the qualitative assessment of risk.

The share-based bonus will be deferred over three years and will be paid, where appropriate, in three instalments after the first year.

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The number of shares allocated to the executive directors for deferral purposes, the shares delivered in 2012 (first third), in 2013 (second third) and the shares that were approved by the board for delivery in February 2014 (third third), once the conditions for receiving them have been met, are as follows:

	Number of shares deferred on bonus for 2010 (2)		Number of shares delivered in 2012 (1st third) (2)		Number of shares delivered in 2013 (2nd third) (2)		Number of shares to be delivered in 2014 (3rd third) (2)
Emilio Botín		94,345		31,448		31,448		31,448
Javier Marín		37,749		12,583		12,583		12,583
Matías R. Inciarte		135,188		45,063		45,063		45,063
Ana P. Botín (1)		91,187		30,395		30,395		19,240
Juan R. Inciarte		61,386		20,462		20,462		20,462

(1) Shares of Banesto, as authorized by the shareholders of that bank at the annual general meeting of February 23, 2011. On February 12, 2014, following the merger of Banesto with the Bank, Ana P. Botín received 19,240 shares of the Bank, equivalent to the 30,395 shares of Banesto authorized by the annual general meeting.

(2) On January 23, 2012, Francisco Luzón took pre-retirement and resigned from his positions as director and head of the Americas division. In accordance with the plan regulations, Francisco Luzón received 51,660 shares in February 2014. Also, in both 2012 and 2013 he received 51,660 shares relating to the number of shares to which he was entitled as a result of the accrual of the first and second thirds of the deferred portion of his 2010 bonus.

Furthermore, Alfredo Sáenz ceased to discharge his duties as director on April 29, 2013. In accordance with the plan regulations, Alfredo Sáenz received 104,150 shares in February 2014. Also, in both 2012 and 2013 he received 104,150 shares relating to the number of shares to which he was entitled as a result of the accrual of the first and second thirds of the deferred portion of his 2010 bonus.

iv) Deferred conditional variable remuneration plan

The bonuses for 2011, 2012 and 2013 of the executive directors and certain executives (including senior management) and employees who assume risks, perform control functions or receive an overall remuneration placing them on the same remuneration level as senior executives and employees who assume risks (all of whom are referred to as identified staff, in accordance with the Guidelines on Remuneration Policies and Practices approved by the Committee of European Banking Supervisors on December 10, 2010) were approved by the board of directors and instrumented, respectively, through the first, second and third cycles of the deferred conditional variable remuneration plan. Application of theses cycles, insofar as they entail the delivery of shares to the plan beneficiaries, was authorized, respectively, by the annual general meetings held on June 17, 2011, March 30, 2012 and March 22, 2013.

The purpose of these plans is to defer a portion of the variable remuneration or bonus of the beneficiaries over a period of three years to be paid, where appropriate, in cash and in Santander shares; the other portion of the variable remuneration is also to be paid in cash and Santander shares, upon commencement of the cycles, in accordance with the rules set forth below.

The variable remuneration will be paid in accordance with the following percentages, based on the timing of the payment and the group to which the beneficiary belongs (the “immediate payment percentage” identifies the portion of the bonus for which payment is not deferred, and the “deferred percentage” identifies the portion of the bonus for which payment is deferred):

	Immediate payment percentage			Deferred percentage
Executive directors		40	%		60	%
Division directors and other executives of the Group with a similar profile		50	%		50	%
Other executives subject to supervision		60	%		40	%

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The payment of the deferred percentage of the bonus applicable in each case will be deferred over a period of three years and will be paid in thirds, within fifteen days following the anniversaries of the initial date (that on which the immediate payment percentage is paid) in 2013, 2014 and 2015 for the deferred remuneration of 2011; in 2014, 2015 and 2016 for the deferred remuneration of 2012; and in 2015, 2016 and 2017 for the deferred remuneration of 2013, 50% being paid in cash and 50% in shares, provided that the conditions indicated below are met.

In addition to the requirement that the beneficiary remain in the Group’s employ, with the exceptions included in the plan regulations, the accrual of the deferred remuneration is conditional upon none of the following circumstances existing (in the opinion of the board of directors and following a proposal of the appointments and remuneration committee) during the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in the Group’s economic capital or risk profile.

Upon delivery, the beneficiaries will be paid an amount in cash equal to the dividends paid on the amount deferred in shares and the interest on the amount deferred in cash. If the Santander Dividendo Elección scrip dividend scheme is applied, they will be paid the price offered by the Bank for the bonus share rights relating to those shares.

The maximum number of shares to be delivered is calculated taking into account the volume-weighted average prices for the 15 trading sessions prior to the date on which the board of directors approves the bonus for the Bank’s executive directors for each year.

The table below shows the number of Santander shares assigned, as variable remuneration for 2011, 2012 and 2013, to each executive director, and the gross shares delivered to them in 2012 and 2013, by way of either immediate payment or deferred payment, in the latter case once the board had determined, at the proposal of the appointments and remuneration committee, that the third relating to each plan had accrued:

189

Share-based variable remuneration	Maximum number of shares to be delivered at January 1, 2012		Shares delivered in 2012 (immediate payment of 2011 variable remuneration)			2012 variable remuneration (maximum number of shares to be delivered)		Maximum number of shares to be delivered at December 31, 2012		Shares delivered in 2013 (immediate payment of 2012 variable remuneration)			Shares delivered in 2013 (deferred payment of 2011 variable remuneration)			2013 variable remuneration (maximum number of shares to be delivered)		Maximum number of shares to be delivered at December 31, 2013
Variable remuneration (2011)
Emilio Botín		248,879		(99,552	)		—		149,327		—			(49,776	)		—		99,551
Javier Marín		155,764		(77,882	)		—		77,882		—			(25,961	)		—		51,921
Matías R. Inciarte		314,390		(125,756	)		—		188,634		—			(62,878	)		—		125,756
Ana P. Botín		235,004		(94,002	)		—		141,002		—			(47,001	)		—		94,001
Juan R. Inciarte		183,450		(73,380	)		—		110,070		—			(36,690	)		—		73,380
Francisco Luzón (1)		327,490		(130,996	)		—		196,494		—			(65,498	)		—		130,996
Alfredo Sáenz (2)		618,415		(247,366	)		—		371,049		—			(123,683	)		—		247,366
		2,083,392		(848,934	)		—		1,234,458		—			(411,487	)		—		822,971
Variable remuneration (2012)
Emilio Botín		—		—			109,879		109,879		(43,952	)		—			—		65,927
Javier Marín		—		—			116,908		116,908		(58,454	)		—			—		58,454
Matías R. Inciarte		—		—			207,648		207,648		(83,059	)		—			—		124,589
Ana P. Botín		—		—			174,790		174,790		(69,916	)		—			—		104,874
Juan R. Inciarte		—		—			121,165		121,165		(48,466	)		—			—		72,699
Alfredo Sáenz (2)		—		—			273,028		273,028		(109,211	)		—			—		163,817
		—		—			1,003,418		1,003,418		(413,058	)		—			—		590,360
Variable remuneration (2013)
Emilio Botín		—		—			—		—		—			—			105,718		105,718
Javier Marín		—		—			—		—		—			—			187,125		187,125
Matías R. Inciarte		—		—			—		—		—			—			172,731		172,731
Ana P. Botín		—		—			—		—		—			—			165,603		165,603
Juan R. Inciarte		—		—			—		—		—			—			110,747		110,747
		—		—			—		—		—			—			741,924		741,924

(1) On January 23, 2012, Francisco Luzón took pre-retirement and resigned from his positions as director and head of the Americas division. In relation to his 2011 variable remuneration to be received in cash and in Santander shares, the board resolved, at the appointments and remuneration committee’s proposal, to deliver him €743 thousand and 130,996 shares as an immediate payment. The deferred amounts in cash and in shares relating to the first and second third were paid in February 2013 and February 2014, respectively. The rest will be paid, if appropriate, on the dates and under the conditions approved by the board, subject to compliance with the requirements set forth in the related resolution of the general meeting and the plan’s regulations, as well as all other terms set forth therein (€371 thousand and 65,498 shares of the Bank in 2015). Upon each delivery of shares and, therefore, subject to the same requirements, he will be paid an amount in cash equal to the dividends paid on those shares and, if the Santander Dividendo Elección scrip dividend scheme is applied, the price offered by the Bank for the bonus share rights relating to the aforementioned shares, as well as the interest accrued on the amount deferred in cash.

(2) Alfredo Sáenz ceased to discharge his duties as director on April 29, 2013. The deferred amounts, in cash (one gross payment of €702 thousand, relating to the deferred variable remuneration for 2011, and two of €351 thousand each, relating to the deferred variable remuneration for 2012) and in shares (one delivery of 123,683 shares of the Bank, relating to the deferred variable remuneration for 2011, and two of 54,606 shares of the Bank, relating to the deferred variable remuneration for 2012), relating to the deferred variable remuneration for 2011 and 2012, will be paid to him on the corresponding maturity dates, together with the remuneration relating to the shares (dividends and amounts offered for the bonus share rights if the Santander Dividendo Elección scrip dividend scheme is applied) and the interest accrued on the cash amounts, subject to compliance with the requirements set forth in the related resolutions of the general meetings and the plans’ regulations, as well as all other terms set forth therein.

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Furthermore, the table below shows the cash delivered in 2012 and 2013, by way of either immediate payment or deferred payment, in the latter case once the board had determined, at the proposal of the appointments and remuneration committee, that the third relating to each plan had accrued:

	Thousands of euros
	2013						2012
	Cash paid (immediate payment of 2012 variable remuneration)			Cash paid (1st third deferred payment of 2011 variable remuneration)			Cash paid (immediate payment of 2011 variable remuneration)
Emilio Botín		282			282			565
Javier Marín		376			147			442
Matías R. Inciarte		534			357			714
Ana P. Botín		449	(1)		286	(1)		534	(1)
Juan R. Inciarte		311			208			416
Francisco Luzón		—			371			743
Alfredo Sáenz		702			702			1,404
		2,654			2,353			4,818

(1) Equivalent euro value of the original amount in pounds sterling.

Compensation for the senior management who are not also executive directors on our board

Following is a detail of the maximum remuneration approved for the Bank’s executive vice presidents (*) in 2013 and 2012:

	Number of managers (1)		Thousands of euros
			Salaries												Other remuneration (3)		Total
			Fixed		Variable - Immediate payment				Variable -Deferred payment (2)				Total
					In cash		In shares		In cash		In shares
2013		28		26,040		9,521		9,521		9,588		9,588		64,257		8,416		72,673
2012		24		24,580		10,689		10,689		10,769		10,769		67,495		6,615		74,111

(*) Excluding executive directors’ remuneration, which is detailed above.

(1) At some point in the year they occupied the position of executive vice president. The amounts reflect the remuneration for the full year regardless of the number of months in which the position of executive vice president was occupied.

(2) The shareholders at the annual general meetings of March 30, 2012 and March 22, 2013 approved the second and third cycles of the deferred conditional variable remuneration plan, whereby payment of a portion of the variable remuneration for 2012 and 2013 will be deferred over three years for it to be paid, where appropriate, in three equal portions, 50% in cash and 50% in Santander shares, provided that the conditions for entitlement to the remuneration are met. The amount of the immediate payment in shares for 2013 relates to 1,331,781 Santander shares and 165,100 Banco Santander Brasil shares (2012: 1,653,565 Santander shares and 61,328 Banco Santander Brasil shares). The shares relating to the amount of the deferred payment in shares are shown in the table below.

(3) Includes other remuneration items, such as life insurance premiums amounting to €1,499 thousand (2012: €1,355 thousand).

Following is a detail of the maximum number of Santander shares that the Bank’s executive vice presidents (excluding executive directors) were entitled to receive at December 31, 2013 and 2012 relating to the deferred portion under the various plans then in force (see Note 47 to our consolidated financial statements):

Maximum number of shares to be delivered	31/12/13			31/12/12
Plan I13		—			1,463,987	(1)
Third cycle - obligatory investment plan		—			286,317
Deferred conditional delivery plan (2010)		482,495			980,780	(2)
Deferred conditional variable remuneration plan (2011)		1,480,251	(5)		2,076,477	(3)
Deferred conditional variable remuneration plan (2012)		1,660,832	(5)		1,622,485	(4)
Deferred conditional variable remuneration plan (2013)		1,341,718	(6)		—

(1) In addition, they were entitled to a maximum of 114,160 Banesto shares at December 31, 2012.

(2) In addition, they were entitled to a maximum of 14,705 Banesto shares at December 31, 2012.

191

(3) In addition, they were entitled to a maximum of 123,973 Banesto shares and 79,696 Santander Brasil shares at December 31, 2012.

(4) In addition, they were entitled to a maximum of 61,328 Santander Brasil shares at 31 December 2012 and a maximum of 344,070 options on Santander Brasil shares at December 31, 2012 under the share option plan approved in 2011, the exercise of which, subject to the plan’s terms and conditions, may commence in July 2014.

(5) For the executives who joined from Banesto, the Banesto shares were converted into Santander shares at €0.633 per share.

(6) In addition, they were entitled to a maximum of 165,000 Santander Brasil shares at December 31, 2013 and to a maximum of 844,070 options on Santander Brasil shares (344,070 under the share option plan approved in 2011, the exercise of which, subject to the plan’s terms and conditions, may commence in July 2014, plus 500,000 under the share option plan approved in 2013, the exercise of which, subject to the plan’s terms and conditions, may commence in July 2016).

In 2013 and 2012, since the conditions established in the corresponding deferred share-based remuneration schemes for prior years had been met, in addition to the payment of the related cash amounts, the following number of Santander shares was delivered to the executive vice presidents:

Number of shares delivered	2013			2012
Plan I12		—			439,195	(1)
Second cycle - obligatory investment plan		—			442,319
Third cycle - obligatory investment plan		275,325			—
Deferred conditional delivery plan (2010)		482,494	(3)		490,388	(2)
Deferred conditional variable remuneration plan (2011)		708,375	(4)		—
		—

(1) In addition, 49,469 Banesto shares were delivered.

(2) In addition, 14,705 Banesto shares were delivered.

(3) In addition, 14,705 Banesto shares were delivered.

(4) In addition, 50,159 Banesto shares were delivered.

As indicated in Note 5.c to our consolidated financial statements, in 2012 the contracts of the members of the Bank’s senior management which provided for defined-benefit pension obligations were amended to convert these obligations into a defined-contribution employee welfare system, which was externalized to Santander Seguros y Reaseguros Compañía Aseguradora, S.A. The new system grants the senior executives the right to receive a pension benefit upon retirement, regardless of whether or not they are in the Bank’s employ on that date, based on the contributions made to the aforementioned system, and replaces the right to receive a pension supplement which had previously been payable to them upon retirement. The new system expressly excludes any obligation of the Bank to the executives other than the conversion of the previous system into the new employee welfare system, which took place in 2012, and, as the case may be, the annual contributions to be made. In the event of pre-retirement, the senior executives who have not exercised the option described in Note 5.c to our consolidated financial statements are entitled to an annual retainer until the date of retirement.

The senior executives’ beginning balance under the new employee welfare system amounted to €287 million. This balance reflects the market value, at the date of conversion of the former pension obligations into the new employee welfare system, of the assets in which the provisions for the respective accrued obligations had been invested. The balance at December 31, 2013 amounted to €312 million.

The contracts of the senior executives who had not exercised the option referred to in Note 5.c to our consolidated financial statements prior to the conversion of the defined-benefit pension obligations into the current welfare system include a supplementary welfare regime for the contingencies of death (surviving spouse and child benefits) and permanent disability of serving executives.

Additionally, the total sum insured under life and accident insurance policies relating to this group of employees amounted to €92 million at December 31, 2013 (December 31, 2012: €73 million).

Lastly, settlements of €10.7 million took place in 2012. The net charge to the consolidated income statement amounted to €19.7 million in 2013 (2012: €17.5 million).

C. Board practices

Date of expiration of the current term of office of the directors and the period during which the directors have served in that office:

The period during which the directors have served in their office is shown in the table under Section A of this Item 6.

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The date of expiration of the current term of office is shown in the table below:

Name	Date of expiration (1)
Emilio Botín	1st half 2015
Javier Marín	1st half 2016
Fernando de Asúa	1st half 2016
Matías R. Inciarte	1st half 2015
Guillermo de la Dehesa	1st half 2015
Sheila C. Bair	1st half 2016
Ana P. Botín	1st half 2017
Javier Botín	1st half 2016
Vittorio Corbo	1st half 2017
Rodrigo Echenique	1st half 2017
Esther Giménez-Salinas	1st half 2017
Ángel Jado	1st half 2016
Abel Matutes	1st half 2015
Juan R. Inciarte	1st half 2015
Isabel Tocino	1st half 2016
Juan Miguel Villar Mir	1st half 2015

(1) Pursuant to the provisions of our Bylaws, one-third of the board will be renewed every year, based on length of service and according to the date and order of their respective appointments.

At the annual general meeting held on March 28, 2014, our shareholders passed the following resolutions:

• To ratify the appointment of Javier Marín as a director, which appointment was approved by the board of directors at its meeting of April 29, 2013, and to re-elect him for a term of three years.

• To ratify the appointment of Juan Miguel Villar Mir as a director, which appointment was approved by the board of directors at its meeting of April 29, 2013.

• To ratify the appointment of Sheila C. Bair as a director, which appointment was approved by the board of directors at its meeting of January 27, 2014, and to re-elect her for a term of three years.

• To re-elect for a term of three years the following directors: Ana P. Botín, Rodrigo Echenique, Esther Giménez-Salinas and Vittorio Corbo.

The basic terms and conditions of the contracts of the executive directors, besides those relating to the remuneration thereof, are the following:

a) Exclusivity and non-competition

Executive directors may not enter into contracts for services with other companies or entities except where expressly authorized by the board of directors. In all cases, a duty of non-competition is established with respect to companies and activities similar in nature to those of the Bank and its consolidated Group.

Likewise, the contracts of the executive directors provide for certain prohibitions against competition and the taking of clients, employees and suppliers that may be enforced for 2 years after the termination thereof.

b) Code of conduct

There is an obligation to strictly observe the provisions of the Group’s General Code and of the Code of Conduct in the Securities Markets, specifically with respect to rules of confidentiality, professional ethics and conflicts of interest.

c) Pre-retirement and retirement

The following executive directors shall have the right to pre-retirement in the event of separation other than voluntarily or due to a breach of their duties, in which case they shall have the rights described below:

• Javier Marín will have the right to an annual allotment that at December 31, 2013 would be 800 thousand euros annually. Alternatively, he may choose to retake his position as executive vice president of the Bank.

• Ana P. Botín will have the right to an annual allotment that at December 31, 2013 would be 2,692 thousand euros annually (2,645 thousand euros annually at December 31, 2012).

• Juan R. Inciarte would have the right to an annual allotment that at December 31, 2013 would be 987 thousand euros annually (987 thousand euros annually at December 31, 2012).

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If Javier Marín, Ana P. Botín or Juan R. Inciarte enter into pre-retirement, they have the right to receive the annual allotments in the form of an annuity or a lump sum, i.e., in one single payment, in full but not in part.

For their part, the other executive directors may at any time enter into retirement and therefore claim the benefits corresponding thereto from the insurer with which the benefit system is outsourced as described in section —Pension commitments, other insurance and other items of directors— above, without any obligation on the part of the Bank in such circumstances.

d) Termination

Contracts are for an indefinite term. Termination of the employment relationship due to breach of an executive director’s obligations or by decision of the director shall not entitle the director to any financial compensation. In case of termination of the contract by the Bank for any reason, the directors will only have the right to legal severance to which they are legally entitled.

e) Insurance

The Group has obtained life insurance in favor of the Bank’s directors, who shall have the right to receive the insurance in the event of a declaration of disability, or whose heirs shall have such right in case of death. The premiums paid by the Group are included in the Other remuneration column of the table shown in Note 5.a.iii to our consolidated financial statements. The following table also provides information regarding insured lump sums for the Bank’s executive directors:

	Insured sum (Thousands of euros)
	2013		2012		Var. (%)
Emilio Botín		—		—		—
Javier Marín		2,400		—		—
Matías R. Inciarte		5,131		5,131		0.00	%
Ana P. Botín		6,000		6,000		0.00	%
Juan R. Inciarte		2,961		2,961		0.00	%
Alfredo Sáenz		—		11,108		—
		16,492		25,200		-35	%

f) Confidentiality and return of documents

A strict duty of confidentiality is established during the relationship and following termination thereof, pursuant to which executive directors must return to the Bank the documents and items related to their activities that are in their possession.

g) Other terms and conditions

The advance notice periods contained in the contracts with the executive directors are as follows:

Advance notice period	Date of current contract (month/day/year)	By decision of the Bank (months)			By decision of the director (months)
Emilio Botín	12/26/2012		(*	)		(*	)
Javier Marín	10/22/2013		(*	)		(*	)
Matías R. Inciarte	12/26/2012		4			4
Ana P. Botín	12/26/2012		4			4
Juan R. Inciarte	12/26/2012		4			4

(*) There is no contractual provision in this regard. In the other cases, payment clauses in place of pre-notice periods are not contemplated.

Audit and compliance committee and appointments and remuneration committee

An audit and compliance committee as well as an appointments and remuneration committee operate as part of the board of directors. The audit and compliance committee consists exclusively of 3 external directors (all of whom are independent in accordance with the principles set forth in Article 6.2(c) of the Rules and Regulations of the Board) and in Rule 10A-3 under the Exchange Act. The appointments and remuneration committee consists exclusively of 4 external directors (3 are independent in accordance with the Rules and Regulations of the Board and one, in the opinion of the board, is neither proprietary nor independent). The independence standards set forth in the Rules and Regulations of the Board may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE.

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The audit and compliance committee

The audit and compliance committee was created to provide support and specialization for the tasks of controlling and reviewing the Bank’s accounts and compliance function. Its mission, which has been defined and approved by the Board, is established in our Bylaws and in the Rules and Regulations of the Board.

The Rules and Regulations of the Board provide that only non-executive directors can be members of this committee with independent directors (as defined in the Rules and Regulations of the Board) having a majority representation. Nevertheless, we have determined that all of the members of our audit and compliance committee meet the independence criteria for foreign private issuers set forth in Rule 10A-3 under the Exchange Act. The committee’s chairman must always be an independent director (as defined in the Rules and Regulations of the Board) and someone who has the necessary knowledge and experience in matters of accounting, auditing or risk management. Currently, the chairman of the audit and compliance committee is Guillermo de la Dehesa, the third vice chairman of the board of directors, who our board of directors has determined is an “Audit Committee Financial Expert” in accordance with SEC rules and regulations.

The members of the audit and compliance committee are appointed by the board of directors, taking into account the directors’ knowledge, aptitude and experience in the areas of accounting, auditing or risk management.

Functions of the audit and compliance committee:

a) Have its chairman and/or secretary report to the shareholders at the general shareholders’ meeting with respect to matters raised therein by shareholders regarding its powers.

b) Propose the appointment of the auditor, as well as the conditions under which such auditor will be hired, the scope of its professional duties and, if applicable, the revocation or non-renewal of its appointment. The committee shall favor the Group’s auditor also assuming responsibility for auditing the companies making up the Group.

c) Review the accounts of the Company and the Group, monitor compliance with legal requirements and the proper application of generally accepted accounting principles, and report on the proposals for alterations to the accounting principles and standards suggested by management.

d) Supervise the internal audit services, and particularly:

(i) Proposing the selection, appointment and withdrawal of the party responsible for internal audit;

(ii) Reviewing the annual working plan for internal audit and the annual activities report;

(iii) Ensuring the independence and effectiveness of the internal audit function;

(iv) Proposing the budget for this service;

(v) Receiving periodic information regarding the activities thereof; and

(vi) Verifying that senior management takes into account the conclusions and recommendations of its reports.

e) Supervise the process for gathering financial information and for the internal control systems. In particular, the audit and compliance committee shall:

(i) Supervise the process of preparing and presenting the regulated financial information relating to the Company and the Group, as well as its integrity, reviewing compliance with regulatory requirements, the proper demarcation of group consolidation and the correct application of accounting standards; and

(ii) Supervise the effectiveness of the systems for the internal monitoring and management of risks, reviewing them periodically, so that the principal risks are identified, managed and properly disclosed.

(iii) Discuss with the external auditor any significant weaknesses detected in the internal control system during the course of the audit.

f) Report on, review and supervise the risk control policy established in accordance with the provisions of these rules and regulations.

g) Serve as a channel of communication between the board and the auditor, assess the results of each audit and the response of the management team to its recommendations, and act as a mediator in the event of disagreement between the board and the auditor regarding the principles and standards to be applied in the preparation of the financial statements. Specifically, it shall endeavor to ensure that the statements ultimately drawn up by the board are submitted to the shareholders at the general shareholders’ meeting without any qualifications or reservations in the auditor’s report.

h) Supervise the fulfilment of the audit contract, endeavoring to ensure that the opinion on the annual financial statements and the main contents of the auditor’s report are set forth in a clear and accurate fashion.

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i) Ensure the independence of the auditor, by taking notice of those circumstances or issues that might risk such independence and any others related to the development of the auditing procedure, as well as receive information and maintain such communication with the auditor as is provided for in legislation regarding the auditing of financial statements and in technical auditing regulations. And, specifically, verify the percentage represented by the fees paid for any and all reasons of the total income of the audit firm, and the length of service of the partner who leads the audit team in the provision of such services to the Company. The annual report shall set forth the fees paid to the audit firm, including information relating to fees paid for professional services other than audit work.

In any event, the audit and compliance committee should receive annually from the external auditor written confirmation of the latter’s independence versus the Company or institutions directly or indirectly linked to the Company, as well as information on any type of additional services provided to such institutions by the aforementioned auditor or by persons or institutions related to the latter, as stipulated in External Auditing Act 19/1988, of July 12⁷.

Likewise, prior to the issuing of the external auditor’s report, the committee shall issue annually a report expressing an opinion on the independence of the external auditor. In any event, such report should make a statement as to the providing of the additional services referred to in the preceding paragraph.

j) The committee shall ensure that the Company publicly communicates a change of auditor and accompanies such communication with a declaration regarding the possible existence of disagreements with the outgoing auditor and, if any, regarding the content thereof and, in the event of the resignation of the auditor, the committee shall examine the circumstances causing it.

k) Report to the board, in advance of the adoption by it of the corresponding decisions, regarding:

(i) The financial information that the Company must periodically make public, ensuring that such information is prepared in accordance with the same principles and practices applicable to the annual financial statements.

(ii) The creation or acquisition of equity interests in special purpose entities or entities domiciled in countries or territories that are considered to be tax havens.

l) Supervise the observance of the code of conduct of the Group in the securities markets, the manuals and procedures for the prevention of money laundering and, in general, the rules of governance and compliance in effect in the Company, and make such proposals as are deemed necessary for the improvement thereof. In particular, the committee shall have the duty to receive information and, if applicable, issue a report on disciplinary penalties to be imposed upon members of senior management.

m) Review compliance with such courses of action and measures as result from the reports issued or the inspection proceedings carried out by the administrative authorities having functions of supervision and control.

n) Know and, if applicable, respond to the initiatives, suggestions or complaints put forward or raised by the shareholders regarding the area of authority of this committee and which are submitted to it by the office of the general secretary of the Company. The committee shall also:

(i) Receive, deal with and keep a record of the claims received by the Bank on matters related to the process for gathering financial information, auditing and internal controls.

(ii) Receive on a confidential and anonymous basis possible communications from Group employees who express their concern on possible questionable practices in the areas of accounting or auditing.

o) Receive information from the person responsible for the Company’s taxation matters on the tax policies applied, at least prior to the drawing-up of the annual accounts and the filing of the Corporate Tax return, and where relevant, on the tax consequences of transactions or matters submitted to the board of directors or the executive committee for approval, unless such bodies have been informed directly, in which case this will be reported to the committee at the first subsequent meeting held by it. The audit and compliance committee shall transfer the information received to the board of directors.

p) Report on any proposed amendments to these rules and regulations prior to the approval thereof by the board of directors.

q) Evaluate, at least one a year, its operation and the quality of its work.

r) And the others specifically provided for in the Rules and Regulations of the Board.

⁷  Currently Legislative Royal Decree 1/2011, of 1 July, Spain’s Consolidated Audit Act.

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The Group’s 2013 audit and compliance committee report is available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—corporate governance—committees’ report”.

The following are the current members of the audit and compliance committee:

Name	Position
Guillermo de la Dehesa	Chairman
Fernando de Asúa	Member
Abel Matutes	Member

Ignacio Benjumea acts as secretary to the audit and compliance committee, but is classified as a non-member.

At the 2014 annual general meeting, held on March 28, 2014, our shareholders passed a resolution proposed by the board of directors to amend our Bylaws in compliance with the CRD IV to establish a new committee of the board to assist the latter on matters of risk, regulation and compliance.

Our amended Bylaws have not yet been filed with the Mercantile Register, which is required prior to their effectiveness. We expect that the amendments will become effective within the first semester of 2014.

Once such committee is set up, the risk committee will retain its powers with respect to risk management and the new committee will assume advisory and support functions on issues of supervision and risk control, the definition of Group’s risk policies, relations with supervisors and compliance issues, the latter being handed over from the current audit and compliance committee, which will henceforth be known as the audit committee.

The appointments and remuneration committee:

The Rules and Regulations of the Board state that the members of this committee must all be non-executive directors with independent directors (as defined in the Rules and Regulations of the Board) having a majority representation including an independent director as chairman (as defined in the Rules and Regulations of the Board).

Currently, the chairman of the appointments and remuneration committee is Fernando de Asúa, the first vice chairman of the board of directors.

The members of the appointments and remuneration committee are appointed by the board of directors, taking into account the directors’ knowledge, aptitudes and experience and the goals of the committee.

Functions of the appointments and remuneration committee:

a) Propose and review the internal criteria and procedures to be followed in order to determine the composition of the board and select those persons who will be proposed to serve as directors, as well as for the continuous evaluation of directors, reporting on such continuous evaluation. In particular, the appointments and remuneration committee:

(i) Shall establish the knowledge and experience necessary for directors, likewise assessing the time and dedication required for appropriately carrying out the position.

(ii) Shall receive for taking into consideration, the proposals of potential candidates for the covering of vacancies that the directors, where applicable, may propose.

b) Prepare, by following standards of objectiveness and conformance to the corporate interests, the proposals for appointment, re-election and ratification of directors provided for in section 2 of article 21 of the Rules and Regulations of the Board, as well as the proposals for appointment of the members of each of the committees of the board of directors. Likewise, it shall prepare, by following the same aforementioned standards, the proposals for the appointment of positions on the board of directors and its committees.

c) Annually verify the classification of each director (as executive, proprietary, independent or other) for the purpose of their confirmation or review at the ordinary general shareholders’ meeting and in the annual corporate governance report.

d) Report on proposals for appointment or withdrawal of the secretary of the board, prior to submission thereof to the board.

e) Propose and review the internal criteria and procedures for the selection and continuous evaluation of executive vice presidents or similar officers and other employees responsible for internal control functions or who hold key positions for the daily carrying-out of banking activity, and to report on their appointment and removal from office and their continuous evaluation.

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f) Propose to the board:

(i) The policy for compensation of directors and the corresponding report, upon the terms of article 29 of the Rules and Regulations of the Board.

(ii) The policy for compensation of the members of senior management.

(iii) The individual compensation of the directors.

(iv) The individual compensation of the executive directors and, if applicable, external directors, for the performance of duties other than those of a mere director, and other terms of their contracts.

(v) The basic terms of the contracts and compensation of the members of senior management.

(vi) The remuneration of those other officers who, whilst not members of senior management, receive significant compensation, particularly variable compensation, and whose activities may have a significant impact on the assumption of risk by the Group.

g) Ensure compliance with the policy established by the Company for compensation of the directors and the members of senior management.

h) Periodically review the compensation programs, assessing the appropriateness and yield thereof and endeavoring to ensure that the compensation of directors shall conform to standards of moderation and correspondence to the earnings of the Company.

i) Ensure the transparency of such compensation and the inclusion in the annual report and in the annual corporate governance report of information regarding the compensation of directors and, for such purposes, submit to the board any and all information that may be appropriate.

j) Ensure compliance by the directors with the duties prescribed in article 30 of the Rules and Regulations of the Board, prepare the reports provided for herein and receive information, and, if applicable, prepare a report on the measures to be adopted with respect to the directors in the event of non-compliance with the abovementioned duties or with the Code of Conduct of the Group in the securities markets.

k) Examine the information sent by the directors regarding their other professional obligations and assess whether such obligations might interfere with the dedication required of directors for the effective performance of their work.

l) Evaluate, at least once a year, its operation and the quality of its work.

m) Report on the process of evaluation of the board and of the members thereof.

n) And others specifically provided for in the Rules and Regulations of the Board.

The Group’s 2013 appointments and remuneration committee report is available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—Corporate governance—Committees report”.

The following are the members of the appointments and remuneration committee:

Name	Position
Fernando de Asúa	Chairman
Guillermo de la Dehesa	Member
Rodrigo Echenique	Member
Isabel Tocino	Member

Ignacio Benjumea acts as secretary to the appointments and remuneration committee but is classified as a non-member.

D. Employees

As of December 31, 2013, we had 182,958 employees (as compared to 186,763 in 2012 and 193,349 in 2011) of which 32,208 were employed in Spain (as compared to 34,862 in 2012 and 35,737 in 2011) and 150,750 were employed outside Spain (as compared to 151,901 in 2012 and 157,612 in 2011). The terms and conditions of employment in the non-government-owned banks in Spain are negotiated on an industry-wide basis with the trade unions. This process has historically produced collective agreements binding on all the non-government-owned banks and their employees. The 2011-2014 agreement was signed on March 14, 2012. The terms and conditions of employment in many of our subsidiaries outside Spain (including in Argentina, Portugal, Italy, Uruguay, Puerto Rico, Chile, Mexico, Germany, the U.K., Brazil and Poland) are negotiated either directly or indirectly (on an industry-wide basis) with the trade unions.

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The table below shows our employees by geographic area:

	Number of employees
	2013		2012		2011
SPAIN		32,208		34,862		35,737
LATIN AMERICA		86,017		89,622		90,821
Argentina		6,945		6,818		6,773
Brazil		49,187		53,543		54,197
Chile		12,217		12,336		12,204
Colombia		40		—		1,458
Mexico		14,819		14,068		13,168
Peru		127		66		60
Puerto Rico		1,462		1,578		1,753
Uruguay		1,220		1,209		1,166
Venezuela		—		4		42
EUROPE		54,456		52,209		53,859
Austria		423		360		399
Czech Republic		—		—		90
Germany		5,491		5,628		5,406
Belgium		22		22		23
Finland		140		146		151
France		52		48		52
Greece		—		—		24
Hungary		48		37		38
Ireland		34		21		16
Italy		737		840		894
Luxembourg		—		—		3
Norway		557		493		454
Poland		15,689		12,625		12,754
Portugal		6,029		6,105		6,300
Switzerland		148		159		170
The Netherlands		363		360		365
United Kingdom		24,723		25,365		26,720
USA		10,080		9,882		12,722
ASIA		154		144		141
Hong Kong		93		89		91
China		45		38		33
Japan		5		6		7
Others		11		11		10
OTHERS		43		44		69
Bahamas		24		24		46
Others		19		20		23
Total		182,958		186,763		193,349

In those cases where an employee is working from one country but is technically employed by a Group company located in a different country, we designate that employee as working from his/her country of residence.

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The table below shows our employees by type of business:

	Number of employees
	2013		2012		2011
Retail Banking		170,971		174,764		182,986
Asset Management and Insurance		1,795		1,881		1,560
Global Wholesale Banking		7,165		7,027		6,212
Corporate Activities		2,398		2,374		2,591
Spain’s Real Estate Run-Off		629		717		—
Total		182,958		186,763		193,349

As of December 31, 2013, we had 6,274 temporary employees (as compared to 6,875 as of December 31, 2012 and 5,109 as of December 31, 2011). In 2013, the average number of temporary employees working for the Group was 6,575 employees.

E. Share ownership

As of April 15, 2014, the direct, indirect and represented holdings of our current directors were as follows:

Directors	Direct Stake		Indirect stake		Represented stake		Total shares		% of Capital stock
Emilio Botín (1)		6,552,426		—		132,967,130		139,519,556		1.496	%
Javier Marín		362,719		3,030		—		365,749		0.003	%
Fernando de Asúa		85,772		67,306		—		153,078		0.001	%
Matías R. Inciarte (2)		1,385,728		111,084		83,452		1,580,264		0.014	%
Guillermo de la Dehesa		130		—		—		130		0.000	%
Sheila C. Bair		1		—		—		1		0.000	%
Ana P. Botín (1) (3)		5,183,057		11,995,761		—		17,178,818		0.000	%
Javier Botín (1) (3)		4,793,481		11,490,941		—		16,284,422		0.000	%
Vittorio Corbo		1		33,011		—		33,012		0.000	%
Rodrigo Echenique		658,758		12,485		—		671,243		0.006	%
Esther Giménez-Salinas		4,759		—		—		4,759		0.000	%
Ángel Jado		2,000,000		4,950,000		—		6,950,000		0.060	%
Abel Matutes		202,483		2,705,131		—		2,907,614		0.025	%
Juan R. Inciarte		1,590,616		—		—		1,590,616		0.014	%
Isabel Tocino		125,084		—		—		125,084		0.001	%
Juan Miguel Villar Mir		1,081		—		—		1,081		0.000	%
Total		22,946,096		31,368,749		133,050,582		187,365,427		1.621	%

(1) Emilio Botín has the right to vote, at the general shareholders’ meeting, 93,026,412 shares owned by the Botín Foundation (0.805% of the share capital), 468,295 shares owned by Jaime Botín (0.004% of the share capital), 6,128,787 shares owned by Nueva Azil, S.L. and Latimer Inversiones, S.L. (0.053% of the share capital); 8,634,634 shares owned by Carmen Botín (0.075% of the share capital); 7,835,293 shares owned by Paloma Botín (0.068% of the share capital); and 16,873,709 shares owned by Emilio Botín O. (0.146% of the share capital). Additionally, Emilio Botín has the right to vote 17,178,818 shares owned by Ana P. Botín (0.149% of the share capital) and 16,284,422 shares owned by Javier Botín (0.141% of the share capital). This table refers to the direct and indirect shareholding of each of the latter two, who are directors of the Bank, but in the column relating to total percentage of share capital, such shareholdings are calculated together with those owned or represented by Emilio Botín.

(2) Matías R. Inciarte has the right to vote 83,452 shares owned by two of his children.

(3) Javier Botín is a proprietary non-executive director because on the board of directors he represents the aggregate interests owned by the Botín Foundation, Bafimar, S.L., Cronje, S.L., Puente de San Miguel, S.L.U., Inversiones Zulú, S.L., Latimer Inversiones, S.L., Nueva Azil, S.L., Agropecuaria El Castaño, S.L.U., Bright Sky 2012, S.L., Emilio Botín, Ana P. Botín, Emilio Botín O., Carmen Botín, Paloma Botín, Jaime Botín, Jorge Botín, Javier Botín R., Marta Botín and his own interest.

Santander’s capital is comprised of only one class of shares, all of which are ordinary and have the same rights.

As of April 15, 2014, our current executive officers (not directors) referred to above under Section A of this Item 6 as a group beneficially owned, directly or indirectly, 6,570,101 ordinary shares, or 0.057% of our issued and outstanding share capital as of that date. No individual executive officer beneficially owns, directly or indirectly, one percent or more of the outstanding share capital as of that date.

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Item 7. Major Shareholders and Related Party Transactions

A. Major shareholders

As of December 31, 2013, to our knowledge no person beneficially owned, directly or indirectly, 5% or more of our shares.

As of December 31, 2013 a total of 1,374,949,687 shares, or 12.13% of our share capital, were held by 1,287 registered holders with registered addresses in the United States and Puerto Rico, including JPMorgan Chase, as depositary of our American Depositary Share Program. These ADSs were held by 19,039 record holders. Since certain of such shares and ADSs are held by nominees, the foregoing figures are not representative of the number of beneficial holders. Our directors and executive officers did not own any ADSs as of December 31, 2013.

To our knowledge, we are not controlled directly or indirectly, by any other corporation, government or any other natural or legal person. We do not know of any arrangements which would result in a change in our control. The Bylaws of Banco Santander provide for only one class of shares (ordinary shares), granting all holders thereof the same rights.

Shareholders’ agreements

In February 2006, three directors, together with other shareholders of the Bank, entered into a shareholder agreement that was notified to the Bank and to the Spanish Securities Markets Commission (“CNMV”). The document witnessing the aforementioned agreement was filed at both the CNMV Registry and the Cantabria Mercantile Registry.

The agreement, which was signed by Emilio Botín, Ana P. Botín, Emilio Botín O., Javier Botín, Simancas, S.A., Puente San Miguel, S.A. Puentepumar, S.L., Latimer Inversiones, S.L. and Cronje, S.L. Unipersonal, provides for the syndication of the Bank shares held by the signatories to the agreement or whose voting rights have been granted to them.

The aim of the syndication agreement through the restrictions established on the free transferability of the shares and the regulated exercise of the voting rights inherent thereto is to ensure, at all times, the concerted representation and actions of the syndicate members as shareholders of the Bank, for the purpose of developing a lasting, stable common policy and an effective, unitary presence and representation in the Bank’s corporate bodies.

At any given time, the chairman of the syndicate is the person then presiding over the Fundación Botín, currently Emilio Botín.

The members of the syndicate undertake to syndicate and pool the voting and other political rights attaching to the syndicated shares, so that these rights may be exercised and, in general, the syndicate members heading the Bank may act in a concerted manner, in accordance with the instructions and indications and with the voting criteria and orientation, necessarily unitary, issued by the syndicate, and, for this purpose, the representation of these shares is attributed to the chairman of the syndicate as the common representative of its members.

Except for transactions carried out in favor of other members of the syndicate or in favor of the Fundación Botín, prior authorization must be granted from the syndicate assembly, which may freely approve or refuse permission for the planned transfer.

Banco Santander informed the CNMV on August 3, and November 19, 2012, by means of the pertinent material fact filings, that it had been officially notified of amendments to this shareholder agreement in respect of the persons subscribing to it.

On October 17, 2013, the Bank filed a material fact with the CNMV updating the holders and distribution of the shares in the syndication to reflect the business reorganization of one of the pact members.

At the date of execution of the agreement, the syndicate comprised a total of 44,396,513 shares of the Bank (0.392% of its share capital at year-end 2013). In addition, as established in clause one of the shareholders’ agreement, the syndication extends, solely with respect to the exercise of the voting rights, to other Bank shares held either directly or indirectly by the signatories, or whose voting rights are assigned to them, in the future. Accordingly, at December 31, 2013, a further 34,900,836 shares (0,308% of share capital at the time) were also included in the syndicate.

201

At year-end 2013, the agreement encompassed a total of 79,297,349 Bank shares (0.7% of its share capital at such date), broken down as follows:

Parties to the shareholders’ agreement	No of shares syndicated		% of total share capital
Emilio Botín		6,464,149		0.057	%
Ana P. Botín (1)		17,082,380		0.151	%
Emilio Botín O. (2)		16,873,709		0.149	%
Javier Botín (3)		16,283,429		0.144	%
Paloma Botín (4)		7,830,897		0.069	%
Carmen Botín		8,633,998		0.076	%
Puente San Miguel, S.A.		—		0.000	%
Latimer Inversiones, S.L. (5)		553,508		0.005	%
Cronje, S.L., Unipersonal		4,024,136		0.036	%
Nueva Azil, S.L.		5,575,279		0.049	%
Total		79,297,349		0.700	%

1. Indirectly, 7,971,625 shares through Bafimar, S.L. and 4,024,136 shares corresponding to the Cronje holding detailed in the table.

2. 7,800,332 shares held indirectly through Puente San Miguel, S.L.U.

3. 4,652,747 shares held indirectly through Inversiones Zulú, S.L. and 6,794,391 through Apecaño, S.L.

4. 6,628,291 shares held indirectly through Bright Sky 2012, S.L.

5. Bare ownership (ownership without usufruct) of 553,508 shares corresponds to Fundación Botín, but the voting rights are assigned to Latimer Inversiones, S.L. as their beneficial owner.

In all other respects, the agreement remains unchanged. The aforementioned significant filings can be found on the Group’s website (www.santander.com).

B. Related party transactions

Loans made to members of our board of directors and to our executive officers

The Group’s direct risk exposure to the Bank’s directors and the guarantees provided for them are detailed below.

	Thousands of euros
	2013						2012
	Loans and credits		Guarantees		Total		Loans and credits		Guarantees		Total
Javier Marín (1)		707		—		707		—		—		—
Matías R. Inciarte		17		—		17		13		—		13
Ana P. Botín		—		—		—		7		—		7
Javier Botín		22		—		22		13		—		13
Vittorio Corbo		4		—		4		—		—		—
Rodrigo Echenique		650		—		650		1,178		—		1,178
Ángel Jado		7		—		7		7		—		7
Juan R. Inciarte		4,734		—		4,734		5,313		—		5,313
Isabel Tocino		20		—		20		42		—		42
Alfredo Sáenz (2)		—		—		—		17		—		17
		6,161		—		6,161		6,591		—		6,591

(1) Appointed chief executive officer on April 29, 2013.

(2) Retired from the board on April 29, 2013.

Additionally, the total amount of loans and credits made by us to our executive officers who are not directors, as of December 31, 2013 amounted to €36 million (see Note 53 to our consolidated financial statements).

Loans extended to related parties were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than normal risk of collectability or present other unfavorable features.

202

Loans made to other Related Parties

The companies of the Group engage, on a regular and routine basis, in a number of customary transactions among Group members, including:

• overnight call deposits;

• foreign exchange purchases and sales;

• derivative transactions, such as forward purchases and sales;

• money market fund transfers; and

• letters of credit for imports and exports

and others within the scope of the ordinary course of the banking business, such as loans and other banking services to our shareholders, to employees of all levels, and the associates and the members of the families of all these persons, as well as those other businesses conducted by the companies of the Group. All these transactions are made:

• in the ordinary course of business;

• on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with other persons; and

• did not involve more than the normal risk of collectability or other unfavorable features.

As of December 31, 2013 our loans and credits to associated and jointly controlled entities, amounted to €1,331 million. Those loans and credits represented 0.20% of our total net loans and credits and 1.89% of our total stockholders’ equity as of December 31, 2013.

For more information, see Notes 5 and 53 to our consolidated financial statements.

C. Interests of experts and counsel

Not Applicable.

Item 8. Financial Information

A. Consolidated statements and other financial information

Financial Statements

See Item 18 for our consolidated financial statements.

(a) Index to consolidated financial statements of Santander

	Page
Report of Deloitte, S.L.	F-1
Consolidated Balance Sheets as of December 31, 2013, 2012 and 2011	F-2
Consolidated Income Statements for the Years Ended December 31, 2013, 2012 and 2011	F-3
Consolidated Statements of Recognized Income and Expense for the Years Ended December  31, 2013, 2012 and 2011	F-4
Consolidated Statements of Changes in Total Equity for the Years Ended December 31, 2013, 2012 and 2011	F-5
Consolidated Statement of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011	F-8
Notes to the Consolidated Financial Statements	F-9

203

Legal Proceedings

Our general policy is to record provisions for tax and legal proceedings in which we assess the chances of loss to be probable and we do not record provisions when the chances of loss are possible or remote. We determine amounts to be provided as our best estimate of the expenditure required to settle the corresponding claim based, among others, on a case-by-case basis based on the analysis and legal opinion of internal and external counsel or by considering the historical average amount of loss of such category of lawsuits.

i. Tax-related proceedings

As of the date of this report, the main tax-related proceedings concerning the Group were as follows:

• Legal actions filed by Banco Santander (Brasil) S.A. and certain Group companies in Brazil challenging the increase in the rate of Brazilian social contribution tax on net income from 9% to 15% stipulated by Interim Measure 413/2008, ratified by Law 11,727/2008. A provision has been recognized for the amount of the estimated loss.

• Legal actions filed by certain Group companies in Brazil claiming their right to pay the Brazilian social contribution tax on net income at a rate of 8% and 10% from 1994 to 1998. Provisions were not recognized in connection with the amount considered to be a contingent liability.

• Legal actions filed by Banco Santander Brasil, S.A. (currently Banco Santander (Brasil), S.A.) and other Group entities claiming their right to pay the Brazilian PIS and COFINS social contributions only on the income from the provision of services. In the case of Banco Santander Brasil, S.A., the legal action was declared unwarranted and an appeal was filed at the Federal Regional Court. In September 2007 the Federal Regional Court found in favor of Banco Santander Brasil, S.A., but the Brazilian authorities appealed against the judgment at the Federal Supreme Court. In the case of Banco ABN AMRO Real, S.A. (currently Banco Santander (Brasil), S.A.), in March 2007 the court found in its favor, but the Brazilian authorities appealed against the judgment at the Federal Regional Court, which handed down a decision partly upholding the appeal in September 2009. Banco Santander (Brasil), S.A. filed an appeal at the Federal Supreme Court. Law 12,865/2013 established a program of payments or deferrals of certain tax and social security debts, exempting the entities availing themselves of the law from paying late-payment interest and resulting in the legal actions brought being withdrawn. In November 2013 Banco Santander (Brasil) S.A. partially availed itself of this program but only with respect to the legal actions brought by the former Banco ABN AMRO Real, S.A. in relation to the period from September 2006 to April 2009, and with respect to other minor actions brought by other entities in its Group. However, the legal actions brought by Banco Santander (Brasil), S.A. and those of Banco ABN AMRO Real, S.A. relating to the periods prior to September 2006, for which the estimated loss was provided for, are still pending.

• Banco Santander (Brasil), S.A. and other Group companies in Brazil have appealed against the assessments issued by the Brazilian tax authorities questioning the deduction of loan losses in their income tax returns (IRPJ and CSLL) on the ground that the relevant requirements under the applicable legislation were not met. Provisions were not recognized in connection with the amount considered to be a contingent liability.

• Banco Santander (Brasil), S.A. and other Group companies in Brazil are involved in several administrative and legal proceedings against various municipalities that demand payment of the Service Tax on certain items of income from transactions not classified as provisions of services. Provisions were not recognized in connection with the amount considered to be a contingent liability.

• In addition, Banco Santander (Brasil), S.A. and other Group companies in Brazil are involved in several administrative and legal proceedings against the tax authorities in connection with the taxation for social security purposes of certain items which are not considered to be employee remuneration. Provisions were not recognized in connection with the amount considered to be a contingent liability.

• In December 2008 the Brazilian tax authorities issued an infringement notice against Banco Santander (Brasil), S.A. in relation to income tax (IRPJ and CSLL) for 2002 to 2004. The tax authorities took the view that Banco Santander (Brasil), S.A. did not meet the necessary legal requirements to be able to deduct the amortization of the goodwill arising on the acquisition of Banespa (currently Banco Santander (Brasil), S.A.). Banco Santander (Brasil) S.A. filed an appeal against the infringement notice at Conselho Administrativo de Recursos Fiscais (CARF), which on October 21, 2011 unanimously decided to render the infringement notice null and void. The tax authorities have appealed against this decision at a higher administrative level. In June 2010 the Brazilian tax authorities issued infringement notices in relation to this same matter for 2005 to 2007. Banco Santander (Brasil), S.A. filed an appeal against these procedures at CARF, which was partially dismissed on October 8, 2013. This decision will be appealed at the higher instance of CARF (Tax Appeal High Chamber). In December 2013 the Brazilian tax authorities issued an infringement notice relating to 2008, the last year for amortization of the goodwill. This infringement notice will be appealed by Banco Santander (Brasil), S.A. Based on the advice of its external legal counsel and in view of the first decision by CARF, the Group considers that the stance taken by the Brazilian tax authorities is incorrect and that there are sound defense arguments to appeal against the infringement notices. Accordingly, the risk of incurring a loss is remote. Consequently, provisions were not recognized in connection with these proceedings because this matter should not affect the consolidated financial statements.

204

• In May 2003 the Brazilian tax authorities issued separate infringement notices against Santander Distribuidora de Títulos e Valores Mobiliarios Ltda. (DTVM) and Banco Santander Brasil, S.A. (currently Banco Santander (Brasil), S.A.) in relation to the Provisional Tax on Financial Movements (CPMF) with respect to certain transactions carried out by DTVM in the management of its customers’ funds and for the clearing services provided by Banco Santander Brasil, S.A. to DTVM in 2000, 2001 and the first two months of 2002. Both entities appealed against the infringement notices at CARF, with DTVM obtaining a favorable decision and Banco Santander Brasil, S.A. an unfavorable decision. Both decisions were appealed by the losing parties at the Higher Chamber of CARF, and the appeal relating to Banco Santander Brasil, S.A. is pending a decision. With respect to DTVM, on August 24, 2012, it was notified of a decision overturning the previous favorable judgment and lodged an appeal at the Higher Chamber of CARF on August 29, 2012. In the opinion of its legal advisors, the Group considers that the tax treatment applied in these transactions was correct. Provisions were not recognized in the consolidated financial statements in relation to this litigation as it was considered a contingent liability.

• In December 2010 the Brazilian tax authorities issued an infringement notice against Santander Seguros, S.A., as the successor by merger to ABN AMRO Brazil Dois Participacoes, S.A., in relation to income tax (IRPJ and CSL) for 2005. The tax authorities questioned the tax treatment applied to a sale of shares of Real Seguros, S.A. made in that year. The bank filed an appeal for reconsideration against this infringement notice. As the former parent of Santander Seguros, S.A. (Brasil), Banco Santander (Brasil), S.A. is liable in the event of any adverse outcome of this proceeding. No provision has been recognized in connection with this proceeding as it is considered to be a contingent liability.

• Also, in December 2010, the Brazilian tax authorities issued infringement notices against Banco Santander (Brasil), S.A. in connection with income tax (IRPJ and CSLL), questioning the tax treatment applied to the economic compensation received under the contractual guarantees provided by the sellers of the former Banco Meridional. The bank filed an appeal for reconsideration against this infringement notice. On November 23, 2011, CARF unanimously decided to render null and void an infringement notice relating to 2002 with regard to the same matter. In February 2012 this decision was declared final in respect of 2002. The proceedings relating to the 2003 to 2006 fiscal years are still in progress. No provision has been recognized in connection with this proceeding as it is considered to be a contingent liability.

• In June 2013, the Brazilian tax authorities issued an infringement notice against Banco Santander (Brasil), S.A. as the party liable for tax on the capital gain allegedly obtained in Brazil by Sterrebeeck B.V., an entity that is not a resident of Brazil, as a result of the “incorporação de ações” (merger of shares) transaction carried out in August 2008. As a result of the aforementioned transaction, Banco Santander (Brasil), S.A. acquired all of the shares of Banco ABN AMRO Real, S.A. and ABN AMRO Brasil Dois Participações, S.A. through the delivery to these entities’ shareholders of newly issued shares of Banco Santander (Brasil), S.A., issued in a capital increase carried out for that purpose. The Brazilian tax authorities take the view that in the aforementioned transaction Sterrebeeck B.V. recognized gain subject to tax in Brazil consisting of the difference between the issue value of the shares of Banco Santander (Brasil), S.A. that were received and the acquisition cost of the shares delivered in exchange. The Group lodged an appeal against the infringement notice at the Federal Tax Office and considers, based on the advice of its external legal counsel, that the stance taken by the Brazilian tax authorities is not correct, that there are sound defense arguments to appeal against the infringement notice and that, therefore, the risk of loss is remote. Consequently, the Group has not recognized any provisions in connection with these proceedings because this matter should not affect the consolidated financial statements.

• Legal action brought by Sovereign Bancorp, Inc. (currently Santander Holdings USA, Inc.) claiming its right to take a foreign tax credit in connection with taxes paid outside the United States in fiscal years 2003 to 2005 in relation to financing transactions carried out with an international bank. Santander Holdings USA Inc. considers that, in accordance with applicable tax legislation, it is entitled to claim these foreign tax credits taken with respect to the transactions and deduct the related issuance and financing costs. In addition, if the outcome of this legal action is favorable to the interests of Santander Holdings USA Inc., the amounts paid over by the entity in relation to this matter with respect to 2006 and 2007 would have to be refunded. In 2013 the U.S. courts found against two taxpayers in cases with a similar structure In the case of Santander Holdings USA, Inc. the proceeding was scheduled for October 7, 2013, although it was adjourned indefinitely when the judge found in favor of Santander Holdings USA Inc. with respect to one of the main grounds of the case. Santander Holdings USA Inc. expected the judge to rule in the coming months on whether his previous decision will result in the proceedings being stayed or whether other matters need to be analyzed before a final decision may be handed down. If the decision is favorable to Santander Holdings USA Inc., the U.S. government has stated its intention to appeal. The estimated loss relating to this proceeding has been provided for.

205

At the date of approval of this annual report on Form 20-F certain other less significant tax-related proceedings were also in progress.

ii. Non-tax-related proceedings

As of the date of this report, the main non-tax-related proceedings concerning the Group were as follows:

• Customer remediation: claims associated with the sale by Santander UK of certain financial products (principally payment protection insurance or PPI) to its customers.

Payment protection insurance is a UK insurance product offering payment protection on unsecured personal loans (and credit cards). The product was sold by all UK banks. The mis-selling issues are predominantly related to business written before 2009. The nature and profitability of the product has changed materially since 2008.

On July 1, 2008, the UK Financial Ombudsman Service (‘FOS’) referred concerns regarding the handling of PPI complaints to the UK Financial Services Authority (‘FSA’). On September 29, 2009 and March 9, 2010, the FSA issued consultation papers on PPI complaints handling as an issue of wider implication. The FSA published its Policy Statement on August 10, 2010, setting out the evidence and guidance on the fair assessment of a complaint and the calculation of redress, as well as a requirement for firms to reassess historically rejected complaints which had to be implemented by December 1, 2010.

On October 8, 2010, the British Bankers’ Association (‘BBA’), the principal trade association for the UK banking and financial services sector, filed on behalf of certain financial institutions (which did not include Santander UK plc) an application for permission to seek judicial review against the FSA and the FOS. The BBA sought an order quashing the FSA Policy Statement and an order quashing the decision of the FOS to determine PPI sales in accordance with the guidance published on its website in November 2008. The judicial review was heard in the courts in January 2011 and on April 20, 2011 judgment was handed down by the High Court dismissing the proceeding brought by the BBA.

Santander UK did not participate in the legal action undertaken by other UK banks and had been consistently making provisions and settling claims with regards to PPI complaints liabilities.

A detailed review of the provision was performed by Santander UK in the first half of 2011 which was necessary in light of the new situation, including the High Court judgment of April 2011, the BBA’s subsequent decision not to appeal and the consequent increase in actual claims levels. As a result, the provision has been revised.

In this context, in 2011 the Group recognized a provision, with a net effect on results of €620 million (GBP 538 million), which was calculated on the basis of the estimate of the number of claims that would be received, of the number of claims that would be upheld and of the estimated average amount of compensation in each case.

Following the payments made until December 31, 2013, the remaining provision recognized in relation to PPI sales totaled GBP 165 million.

206

The following table shows information on the total claims received up to December 31, 2013 and the resolution thereof:

(number of claims, in thousands)
	2013			2012			2011
Claims outstanding at the beginning of the period		31			1			—
Claims received		363			437			111
Claims rejected as being invalid (1)		(298	)		(258	)		(90	)
Resolved claims (2)		(82	)		(149	)		(20	)
Claims outstanding at the end of the period		14			31			1

⁽¹⁾  Includes rejected claims relating to customers that had never purchased payment protection insurance from Santander UK.

⁽²⁾  Customers are entitled to appeal to the Financial Ombudsman Service (FOS) if their claims are rejected. The FOS may uphold or reject an appeal and if an appeal is upheld, Santander UK is required to compensate the customer. The table shows the result of appeals relating to paid or rejected claims.

The amount settled in relation to paid claims in 2013 totaled GBP 217 million.

The main cause of the increase in claims in 2011 was the media coverage of this issue following the dismissal by the High Court of the appeal for judicial review filed by the British Bankers’ Association and the launch of campaigns by claim management companies in relation to these products.

There was also an increase in claims in 2012 due to greater media coverage of the issue, a rise in the activity of claims management companies and the proactive policy followed by Santander UK, which contacted over 300,000 customers directly.

Lastly, the number of claims received fell by 17% in 2013 compared to 2012 and the associated costs also fell significantly, particularly in the last quarter of 2013.

The provision recognized at the end of 2013 represents the best estimate by Group management, taking into account the opinion of its advisers and of the costs to be incurred in relation to any compensation that may result from the redress measures associated with the sales of payment protection insurance (PPI) in the UK. The provision was calculated on the basis of the following key assumptions resulting from judgments made by management:

• Volume of claims- estimated number of claims;

• Percentage of claims lost- estimated percentage of claims that are or will be in the customers’ favor; and

• Average cost - estimated payment to be made to customers, including compensation for direct loss plus interest.

These assumptions were based on the following information:

• A complete analysis of the causes of the claim, the probability of success, as well as the possibility that this probability could change in the future;

• Activity recorded with respect to the number of claims received;

• Level of compensation paid to customers, together with a projection of the probability that this level could change in the future;

• Impact on the level of claims in the event of proactive initiatives carried out by the Group through direct contact with customers; and

• Impact of the media coverage.

These assumptions are reviewed, updated and validated on a regular basis using the latest available information, such as, the number of claims received, the percentage of claims lost, the potential impact of any change in that percentage, etc. and any new evaluation of the estimated population.

207

Group management reviews the provision required at each relevant date, taking into account the latest available information on the aforementioned assumptions as well as past experience.

The most relevant factor for calculating the balance of the provision is the number of claims received as well as the expected level of future claims. The percentage of claims lost is calculated on the basis of the analysis of the sale process. The average cost of compensation is calculated in a reasonable manner as the Group manages a high volume of claims and the related population is homogenous.

• Proceeding under Civil Procedure Law filed by Galesa de Promociones, S.A. against the Bank at Elche Court of First Instance no. 5, Alicante (case no. 1946/2008). The claim sought damages amounting to €51 million as a result of a judgment handed down by the Supreme Court on November 24, 2004 setting aside a summary mortgage proceeding filed by the Bank against the plaintiff company.

On March 2, 2010, the court of first instance handed down a decision partly upholding both the claim filed against the Bank and the counterclaim. On November 11, 2010, the Alicante Provincial Appellate Court handed down a decision upholding the appeal filed by the Bank and dismissing the appeal brought by Galesa de Promociones, S.A., as a result of which and by way of offsetting the indemnity obligations payable by each party, the Bank became a creditor of Galesa in the amount €0.4 million.

Galesa de Promociones, S.A. filed a cassation appeal against the above decision at the Supreme Court. The appeal was dismissed in a Supreme Court judgment dated July 17, 2013, against which the appellant filed a motion for annulment, which was rejected. The Bank has not recognized a provision in this connection.

• After the Madrid Provincial Appellate Court had rendered null and void the award handed down in the previous arbitration proceeding, on September 8, 2011, Banco Santander, S.A. filed a new request for arbitration with the Spanish Arbitration Court against Delforca 2008, Sociedad de Valores, S.A. (formerly Gaesco Bolsa Sociedad de Valores, S.A.), claiming €66 million that the latter owes it as a result of the declaration on January 4, 2008 of the early termination by the Bank of all the financial transactions agreed upon between the parties.

On August 3, 2012, Delforca 2008, S.A. was declared to be in a position of voluntary insolvency by Barcelona Commercial Court no. 10, which had agreed as part of the insolvency proceeding to stay the arbitration proceeding and the effects of the arbitration agreement entered into by Banco Santander, S.A. and Delforca 2008, S.A. The Bank filed an appeal against this decision, which was dismissed and it then proceeded to prepare a challenge with a view to filing a future appeal. The Arbitration Court, in compliance with the decision of the Commercial Court, agreed on January 20, 2013 to stay the arbitration proceedings at the stage reached at that date until a decision could be reached in this respect in the insolvency proceeding.

In addition, as part of the insolvency proceeding of Delforca 2008, S.A., Banco Santander, S.A. notified its claim against the insolvent party with a view to having the claim recognized as a contingent ordinary claim without specified amount. However, the insolvency manager opted to exclude Banco Santander, S.A.’s claim from the provisional list of creditors and, accordingly, Banco Santander, S.A. filed an ancillary claim on which a decision has not yet been handed down. In this ancillary claim (still in progress), Delforca 2008, S.A. and the insolvency manager are seeking to obtain a decision from the Court on the merits of the dispute between Banco Santander, S.A. and Delforca 2008, S.A. and, accordingly, Banco Santander, S.A. has appealed against the interlocutory order that admitted for consideration the evidence proposed by them. The appeal was not given leave to proceed and Banco Santander has prepared the corresponding protest.

As part of the same insolvency proceeding, Delforca 2008, S.A. has filed another ancillary claim requesting the termination of the arbitration agreement included in the framework financial transactions agreement entered into by that party and Banco Santander, S.A. in 1998, as well as the termination of the obligation that allegedly binds the insolvent party to the High Council of Chambers of Commerce (Spanish Arbitration Court). Banco Santander, S.A. filed its reply to the complaint on June 21, 2013, although it has repeatedly questioned the court’s objective jurisdiction to hear the complaint, as has the High Council of Chambers of Commerce, Industry and Shipping. The Commercial Court dismissed the motions for declinatory exception filed by Banco Santander and also dismissed the motion for declinatory exception filed by the High Council. These decisions have been appealed.

On December 30, 2013, Banco Santander filed a complaint requesting the termination of the insolvency proceeding of Delforca 2008, S.A. due to supervening disappearance of the alleged insolvency of the company.

208

In addition, in April 2009 Mobilaria Monesa, S.A. (parent of Delforca 2008, S.A.) filed a claim against Banco Santander, S.A. at Santander Court of First Instance no. 5, claiming damages which it says it incurred as a result of the (in its opinion) unwarranted claim filed by the Bank against its subsidiary, reproducing the same objections as Delforca 2008, S.A. This proceeding has currently been stayed on preliminary civil ruling grounds, against which Mobilaria Monesa, S.A. filed an appeal which was dismissed by the Cantabria Provincial Appellate Court in a judgment dated January 16, 2014.

Lastly, on April 11, 2012, Banco Santander, S.A. was notified of the claim filed by Delforca 2008, S.A., heard by Madrid Court of First Instance no. 21, in which it sought indemnification for the damage and losses it alleges it incurred due to the (in its opinion) unwarranted claim by the Bank. Delforca 2008, S.A. made the request in a counterclaim filed in the arbitration proceeding that concluded with the annulled award, putting the figure at up to €218 million, although in its present claim it invokes Article 219.3 of the Civil Procedure Law in order to leave for a subsequent proceeding the amount to be settled (as the case may be) by the Bank. The aforementioned Court has dismissed the motion for declinatory exception proposed by Banco Santander, S.A. as the matter has been referred for arbitration. This decision is pending appeal. The Group considers that the risk of loss arising as a result of these matters is remote and, accordingly, it has not recognized any provisions in connection with these proceedings.

• Former employees of Banco do Estado de São Paulo S.A., Santander Banespa, Cia. de Arrendamiento Mercantil: a claim was filed in 1998 by the association of retired Banespa employees (AFABESP) on behalf of its members, requesting the payment of a half-yearly bonus initially envisaged in the entity’s Bylaws in the event that the entity obtained a profit and that the distribution of this profit were approved by the board of directors. The bonus was not paid in 1994 and 1995 since the bank did not make a profit and partial payments were made from 1996 to 2000, as agreed by the board of directors, and the relevant clause was eliminated in 2001. The Regional Employment Court ordered the bank to pay this half-yearly bonus in September 2005 and the bank filed an appeal against the decision at the High Employment Court (“TST”) and, subsequently, at the Federal Supreme Court (“STF”). The TST confirmed the judgment against the bank, whereas the STF rejected the extraordinary appeal filed by the bank in a decision adopted by only one of the Court members, thereby also upholding the order issued to the bank. This decision was appealed by the bank and the association. Only the appeal lodged by the bank has been given leave to proceed and will be decided upon by the STF in plenary session.

• “Planos economicos”: Like the rest of the banking system, Santander Brazil has been the subject of claims from customers, mostly depositors, and of class actions brought for a common reason, arising from a series of legislative changes relating to the calculation of inflation (“planos economicos”). The claimants considered that their vested rights had been impaired due to the immediate application of these adjustments. In April 2010, the High Court of Justice (“STJ”) set the limitation period for these class actions at five years, as claimed by the banks, rather than twenty years, as sought by the claimants, which will probably significantly reduce the number of actions brought and the amounts claimed in this connection. As regards the substance of the matter, the decisions issued to date have been adverse for the banks, although two proceedings have been brought at the STJ and the Supreme Federal Court (“STF”) with which the matter is expected to be definitively settled. In August 2010, STJ handed down a decision finding for the plaintiffs in terms of substance, but excluding one of the “planos” from the claim, thereby reducing the amount thereof, and once again confirming the five-year statute of limitations period. Shortly thereafter, the STF issued an injunctive relief order whereby the proceedings in progress in this connection were stayed until this court issues a final decision on the matter. In spite of the fact STF started the judgement on November 2013, a formal ruling has not been issued and there is no assurance of when a formal ruling will be handed down by either the STJ or the STF.

• Proceeding under Civil Procedure Law (case no. 1043/2009) conducted at Madrid Court of First Instance no. 26, following a claim brought by Banco Occidental de Descuento, Banco Universal, C.A. against the Bank for USD 150 million in principal plus USD 4.7 million in interest, upon alleged termination of an escrow contract.

The court upheld the claim but did not make a specific pronouncement on costs. A judgment handed down by the Madrid Provincial Appellate Court on October 9, 2012 upheld the appeal lodged by the Bank and dismissed the appeal lodged by Banco Occidental de Descuento, Banco Universal, C.A., dismissing the claim. The dismissal of the claim was confirmed in an ancillary order to the judgment dated December 28, 2012. An appeal was filed at the Supreme Court by Banco Occidental de Descuento against the Madrid Provincial Appellate Court decision. The Bank has challenged the appeal. The Bank has not recognized any provisions in this connection.

• On January 26, 2011, notice was served on the Bank of an ancillary insolvency claim to annul acts detrimental to the assets available to creditors as part of the voluntary insolvency proceedings of Mediterráneo Hispa Group, S.A. at Murcia Commercial Court no. 2. The aim of the principal action is to request annulment of the application of the proceeds obtained by the company undergoing insolvency from an asset sale and purchase transaction involving €32 million in principal and €2.7 million in interest. On November 24, 2011, the hearing was held with the examination of the proposed evidence. Upon completion of the hearing, it was resolved to conduct a final taking of evidence. In a judgment dated November 13, 2013, the Court dismissed the complaint in full. The judgment has been appealed by the complainants.

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• The bankruptcy of various Lehman Group companies was made public on September 15, 2008. Various customers of Santander Group were affected by this situation since they had invested in securities issued by Lehman or in other products which had such assets as their underlying.

As of the date of this report, certain claims had been filed in relation to this matter. The Bank’s directors and its legal advisers consider that the various Lehman products were sold in accordance with the applicable legal regulations in force at the time of each sale or subscription and that the fact that the Group acted as intermediary would not give rise to any liability for it in relation to the insolvency of Lehman. Accordingly, the risk of loss is considered to be remote and, as a result, the Group has not recognized any provisions in this connection.

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

As of the date of this report, certain claims had been filed in relation to this matter. The Group considers that it has at all times exercised due diligence and that these products have always been sold in a transparent way pursuant to applicable legislation and established procedures. Therefore, except for a specific case in which the decisions handed down partially upheld the claim based on the particular circumstances of that case (which has been appealed against by the Bank), the risk of loss is considered to be remote. Accordingly, the Group has not recognized any provisions in this connection.

• At the end of the first quarter of 2013, news stories were published stating that the public sector was debating the validity of the interest rate swaps arranged between various financial institutions and public sector companies in Portugal, particularly in the public transport industry.

The swaps under debate included swaps arranged by Banco Santander Totta with the public companies Metropolitano de Lisboa, E.P.E. (MdL), Metro de Porto, S.A. (MdP), Sociedade de Transportes Colectivos do Porto, S.A. (STCP) and Companhia Carris de Ferro de Lisboa, S.A. (Carris). These swaps were arranged prior to 2008, i.e. before the start of the financial crisis, and had been executed without incident.

In view of this situation Banco Santander Totta took the initiative to request a court judgment on the validity of the swaps in the jurisdiction of the United Kingdom to which the swaps are subject. The corresponding claims were filed in May 2013.

After the Bank had filed the claims, the four companies (MdL, MdP, STCP and Carris) notified Banco Santander Totta that they were suspending payment of the amounts owed under the swaps until a final decision had been handed down in the UK jurisdiction in the proceedings. MdL, MdP and Carris suspended payment in September 2013 and STCP did the same in December 2013.

Consequently, Banco Santander Totta extended each of the claims to include the unpaid amounts.

On November 29, 2013, the companies presented their defences in which they claimed, namely, that the swaps were null and void under Portuguese law and, accordingly, that they should be refunded the amounts paid.

On February 14, 2014, Banco Santander Totta presented its replies and defences to counterclaims, restating its case and denying the companies’ arguments, as set out in their November 29 defences.

On April 4, 2014, the companies submitted their replies to the defences to counterclaims. These proceedings are still in progress.

The Bank and its legal advisers consider that the Bank acted at all times in accordance with applicable legislation and under the terms of the swaps, and take the view that the UK courts will confirm the full validity and effectiveness of the swaps. As a result, the Bank has not recognized any provisions in connection with this matter.

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The Bank and the other Group companies are subject to claims and, therefore, are party to certain legal proceedings incidental to the normal course of their business (including those in connection with lending activities, relationships with employees and other commercial or tax matters).

In this context, it must be considered that the outcome of court proceedings is uncertain, particularly in the case of claims for large or indeterminate amounts, those based on legal issues for which there are no precedents, those that affect a large number of parties or those at a very preliminary stage.

With the information available to it, the Group considers that at December 31, 2013, 2012 and 2011, it had reliably estimated the obligations associated with each proceeding and had recognized, where necessary, sufficient provisions to cover reasonably any liabilities that may arise as a result of these tax and legal situations. It also believes that any liability arising from such claims and proceedings will not have, overall, a material adverse effect on the Group’s business, financial position or results of operations.

In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties or are in early stages of discovery, the Group cannot state with confidence what the eventual outcome of any of these pending matters will be, what the timing of the ultimate resolution of such matters will be or what the eventual loss, fines or penalties related to each such pending matter may be. Consequently, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by the Group; and the outcome of a particular matter may be material to the Group’s operating results for a particular period, depending upon, among other factors, the size of the loss or liability imposed and the level of the Group’s income for that period.

Shareholders remuneration

The table below sets forth the historical per share and per ADS (each of which represents the right to receive one of our shares) amounts of interim and total remuneration in respect of each fiscal year indicated, distributed quarterly.

	Euro per Share										Dollars per ADS
	First		Second		Third		Fourth		Total		First		Second		Third		Fourth		Total
2007		0.12		0.12		0.12		0.28		0.65		0.14		0.15		0.15		0.36		0.79
2008		0.14		0.14		0.12		0.26		0.65		0.17		0.14		0.13		0.27		0.70
2009		0.14		0.12		0.12		0.22		0.60		0.16		0.14		0.14		0.24		0.67
2010		0.14		0.12		0.12		0.23		0.60		0.14		0.13		0.13		0.25		0.65
2011		0.14		0.13		0.12		0.22		0.60		0.15		0.14		0.12		0.23		0.64
2012		0.15		0.15		0.15		0.15		0.60		0.14		0.19		0.21		0.21		0.75
2013(*)		0.15		0.15		0.15		0.15		0.60		0.15		0.15		0.16		0.21		0.67

(*) As of the date of this annual report on Form 20-F, the fourth dividend has not yet been paid.

The shareholders at the annual shareholders’ meeting held on June 19, 2009 approved a dividend of €0.6508 per share to be paid out of our profits for 2008. In accordance with IAS 33, for comparative purposes, dividends per share paid, as disclosed in the table above, take into account the adjustment arising from the capital increase with pre-emptive subscription rights carried out in December 2008. As a result of this adjustment, the dividend per share for 2008 amounts to €0.6325. The shareholders also approved a new remuneration scheme (scrip dividend), whereby the Bank offered the shareholders the possibility to opt to receive an amount equivalent to the dividends in cash or new shares. The remuneration per share approved in subsequent annual shareholders’ meetings for 2009, 2010, 2011, 2012 and 2013 disclosed above, €0.60, is calculated assuming that the four payments for these years (either cash dividends or scrip dividends) were made in cash.

Banco Santander paid on account of 2013:

• A scrip dividend of €0.15 per share equivalent to the first interim dividend (August 2013);

• A scrip dividend of €0.15 per share equivalent to the second interim dividend (November 2013);

• A scrip dividend of €0.15 per share equivalent to the third interim dividend (February 2014); and

• A scrip dividend of €0.15 per share equivalent to the fourth dividend approved at the annual general shareholders’ meeting held on March 28, 2014 (to be paid in May 2014).

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Following the increase of capital of the third interim dividend, the Bank’s share capital at the date of this annual report on Form 20-F was €5,780,533,573.50 represented by 11,561,067,147 shares, par value €0.50 each.

Banco Santander assigned €6,775 million to shareholder remuneration in 2013, 11.3% more than in 2012.

For a discussion of regulatory and legal restrictions on our payments of dividends, see “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Restrictions on Dividends” herein.

For a discussion of Spanish taxation of dividends, see “Item 10. Additional Information—E. Taxation—Spanish tax considerations—Taxation of dividends” herein.

The dividends paid on the guaranteed non-cumulative preference stock of certain of our subsidiaries are limited by our Distributable Profits in the fiscal year preceding a dividend payment. “Distributable Profits” with respect to any year means our reported net profits after tax and extraordinary items for such year as derived from the Parent bank’s non-consolidated audited profit and loss account prepared in accordance with Bank of Spain requirements and guidelines in effect at the time of such preparation. Such requirements and guidelines may be expected to reflect the Bank of Spain regulatory policies applicable to us, including without limitation those relating to the maintenance of minimum levels of capital. See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Capital Adequacy Requirements” and “—Restrictions on Dividends” herein. According to our interpretation of the relevant Bank of Spain requirements and guidelines, Distributable Profits during the preceding five years were:

Year Ended December 31,
IFRS-IASB
2009		2010		2011		2012		2013
(in millions of euros)
	4,151		3,332		2,151		1,355		1,030

The portion of our net income attributable to our subsidiaries has increased steadily in recent years as our subsidiaries have grown and we have acquired new subsidiaries. Such profits are available to us only in the form of dividends from our subsidiaries and we are dependent to a certain extent upon such dividends in order to have Distributable Profits sufficient to allow payment of dividends on our guaranteed preferred stock of our subsidiaries as well as dividends on our shares (although the payment of dividends on the shares is limited in the event of the non-payment of preference share dividends). We generally control a sufficient proportion of our consolidated subsidiaries’ voting capital to enable us to require such subsidiaries to pay dividends to the extent permitted under the applicable law. As a result of our growth, the Bank, as the holding entity of the shares of our various companies, has added investments in our subsidiaries, the financial costs of which are borne by us.

B. Significant Changes

On April 29, 2014 we published our first quarter 2014 results, which are available on our website at www.santander.com under the heading “Investor Relations“, and will be furnished promptly to the SEC on Form 6-K. The information contained on, or that can be accessed through, our website does not form part of this annual report on Form 20-F.

Item 9. The Offer and Listing

A. Offer and listing details

Market Price and Volume Information

Santander’s Shares

In 2013, Santander was the most actively traded stock on the Spanish stock exchange. As at December 31, 2013, the stock had an 17.11% weighting in the IBEX 35 Index and was ranked first among all Spanish issuers represented in this index. Santander’s stock weighting in the Euro Stoxx 50 was, at year end, 3.84%, placing it in fifth position. Our market capitalization of €73,735 million at 2013 year-end was the largest bank in the euro zone by market capitalization and the 11^th in the world in 2013.

At December 31, 2013 a total of 1,374,949,687 shares, or 12.13% of our share capital, were held by 1,287 registered holders with registered addresses in the United States and Puerto Rico, including JPMorgan Chase, as depositary of our American Depositary Share Program.

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Our shares are traded on Spain’s automated “continuous market”, the national, centralized market which integrates by computer quotations originating in the four Spanish stock exchanges (Madrid, Barcelona, Valencia and Bilbao) (the “Automated Quotation Systems”). Our shares are also listed on the New York (in the form of American Depositary Shares), London, Milan, Lisbon, Buenos Aires and Mexico Stock Exchanges. At December 31, 2013, 53.82% of our shares were held of record by non-residents of Spain.

The table below sets forth the high and low of the daily closing prices and last daily sales prices in euros for our shares on the Spanish continuous market for the periods indicated.

	Euros per Share
	High		Low		Last
2009 Annual		11.96		4.00		11.55
2010 Annual		11.98		7.30		7.93
2011 Annual		9.32		5.13		5.87
2012 Annual		6.68		4.17		6.10
First Quarter		6.59		5.45		5.77
Second Quarter		5.78		4.25		5.22
Third Quarter		6.29		4.04		5.80
Fourth Quarter		6.13		5.43		5.88
2013 Annual		6.77		4.84		6.51
First Quarter		6.62		5.23		5.24
Second Quarter		5.63		4.84		4.90
Third Quarter		6.08		4.87		6.03
Fourth Quarter		6.77		6.04		6.51
2014 First Quarter		6.92		6.22		6.92
Last six months
2013
October		6.77		6.14		6.54
November		6.58		6.34		6.54
December		6.51		6.04		6.51
2014
January		6.83		6.26		6.41
February		6.62		6.22		6.57
March		6.92		6.36		6.92
April (through April 28, 2014)		7.23		6.93		7.05

On April 28, 2014, the reported last sale price of our shares on the continuous Spanish market was €7.05.

American Depositary Shares

Our ADSs have been listed and traded on the New York Stock Exchange since July 30, 1987. Each ADS represents one of our shares and is evidenced by an American Depositary Receipt or “ADR.” The deposit agreement, pursuant to which ADRs have been issued, is among us, JP Morgan Chase, as depositary, and the holders from time to time of ADRs. At December 31, 2013, a total of 373,784,479 of our ADSs were held by 19,039 registered holders. Since certain of such of our shares and our ADSs are held by nominees, the number of record holders may not be representative of the number of beneficial owners.

The table below sets forth the reported high and low of the daily closing prices and last daily sales prices for our ADSs on the New York Stock Exchange for the periods indicated.

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	Dollars Per ADS
	High		Low		Last
2009 Annual		17.83		4.90		16.44
2010 Annual		17.50		8.77		10.65
2011 Annual		12.69		6.80		7.52
2012 Annual		8.76		4.89		8.17
First Quarter		8.76		6.91		7.67
Second Quarter		7.74		5.25		6.56
Third Quarter		8.29		4.89		7.04
Fourth Quarter		8.17		6.92		8.17
2013 Annual		9.29		6.43		9.07
First Quarter		8.81		6.77		6.81
Second Quarter		7.47		6.46		6.47
Third Quarter		8.21		6.43		8.17
Fourth Quarter		9.29		8.31		9.07
2014 First Quarter		9.58		8.36		9.58
Last six months
2013
October		9.29		8.31		8.91
November		8.94		8.49		8.94
December		9.07		8.38		9.07
2014
January		9.40		8.60		8.64
February		9.11		8.36		9.05
March		9.58		8.80		9.58
April (through April 28, 2014)		9.93		9.58		9.78

On April 28, 2014, the reported last sale price of our ADSs on the New York Stock Exchange was $9.78.

B. Plan of distribution

Not Applicable

C. Markets

General

Spanish Securities Market

The Spanish securities market for equity securities (the “Spanish Stock Exchanges”) consists of four stock exchanges located in Madrid, Barcelona, Bilbao and Valencia (the “local exchanges”). The majority of the transactions conducted on them are done through the Automated Quotation System (Sistema Interbancario Bursátil Español or “S.I.B.E.”). During the year ended December 31, 2013, the Automated Quotation System accounted for the majority of the total trading volume of equity securities on the Spanish Stock Exchanges.

Automated Quotation System

The Automated Quotation System was introduced in 1989 and links the four local exchanges, providing those securities listed on it with a uniform continuous market that eliminates most of the differences among the local exchanges. The principal feature of the system is the computerized matching of buy and sell orders at the time of entry of the order. Each order is executed as soon as a matching order is entered, but can be modified or canceled until executed. The activity of the market can be continuously monitored by investors and brokers. The Automated Quotation System is operated and regulated by the Sociedad de Bolsas, a corporation owned by the companies that manage the local exchanges. All trades on the Automated Quotation System must be placed through a bank, brokerage firm, an official stock broker or a dealer firm member of a Spanish stock exchange directly.

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There is a pre-opening session held from 8:30 a.m. to 9:00 a.m. each trading day on which orders are placed at that time. The computerized trading hours are from 9:00 a.m. to 5:30 p.m. Each session will end with a 5 minute auction, between 5:30 and 5:35 p.m., with a random closedown of 30 seconds. The price resulting from each auction will be the closing price of the session.

From May 14, 2001, rules came into effect regarding the maximum price fluctuations in the price of stocks. Under the rules, each stock in the continuous market is assigned a static and a dynamic range within which the price of stocks can fluctuate. The price of a stock may rise or fall by its static range (which is published once a month and is calculated according to the stock’s average historic price volatility) above or below its opening price (which shall be the closing price of the previous session). When the stock trades outside of this range, the trading of the stock is suspended for 5 minutes, during which an auction takes place. After this auction, the price of the stock can once again rise or fall by its static range above or below its last auction price (which will be considered as the new static price before triggering another auction). Furthermore, the price of a stock cannot rise or fall by more than its dynamic price range (which is fixed and published once a month and is calculated according to the stock’s average intra-day volatility), from the last price at which it has traded. If the price variation exceeds the stock’s dynamic range a five minute auction is triggered.

Moreover, there is a block market (el mercado de bloques) allowing for block trades between buyers and sellers from 9:00 a.m. to 5:30 p.m. during the trading session. Under certain conditions, this market allows cross-transactions of trades at prices different from prevailing market prices. Trading in the block market is subject to certain limits with regard to price deviations and volumes.

Between 5:30 p.m. and 8:00 p.m., trades may occur outside the computerized matching system without prior authorization of the Sociedad de Bolsas, at a price within the range of 5% above the higher of the average price and closing price for the day and 5% below the lower of the average price and closing price for the day, if there are no outstanding bids or offers, as the case may be, on the system matching or bettering the terms of the proposed off-system transaction, and if the trade involves more than €300,000 and more than 20% of the average daily trading volume of the stock during the preceding quarter. At any time before 8:00 p.m., trades may take place (with the prior authorization of the Sociedad de Bolsas) at any price if:

• the trade involves more than €1.5 million and more than 40% of average daily trading volume of the stock during the preceding quarter;

• relates to a merger or spin-off of a listed company;

• relates to the reorganization of a business group;

• the transaction is executed for the purposes of settling litigation;

• involves certain types of contracts or complex transactions; or

• the Sociedad de Bolsas finds other justifiable cause.

Information with respect to computerized trades between 9:00 a.m. and 5:30 p.m. is made public immediately, and information with respect to trades outside the computerized matching system is reported to the Sociedad de Bolsas and published in the Boletín de Cotización and in the computer system by the next trading day.

Clearance and Settlement System

Until April 1, 2003, transactions carried out on the regional Spanish stock exchanges and the continuous market were cleared and settled through the Servicio de Compensación y Liquidación de Valores, S.A. (the “SCL”). Since April 1, 2003, the settlement and clearance of all trades on the Spanish stock exchanges, the Public Debt Market (Mercado de Deuda Pública), the AIAF Fixed Income Market (Mercado AIAF de Renta Fija) and Latibex - the Latin American stock exchange- denominated in euros, are made through the Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S.A. (“Iberclear”), which was formed as a result of a merger between SCL and Central de Anotaciones del Mercado de Deuda Pública (the latter of which was managed by the Bank of Spain).

Book-Entry System

Ownership of shares listed on any Spanish stock exchange is required to be represented by entries in a register maintained by Iberclear, which is the Spanish Central Securities Depositary, and transfers or changes in ownership are effected by entries in such register. The securities register system is structured in two levels: the central registry managed by Iberclear which keeps the securities balances of the participants, and a detailed registry managed by the participants where securities are listed by holder’s name.

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Securities Market Legislation

The Spanish Securities Markets Act, which came into effect in 1989, among other things:

• established an independent regulatory authority, the CNMV, to supervise the securities markets;

• established a framework for the regulation of trading practices, tender offers and insider trading;

• required stock exchange members to be corporate entities;

• required companies listed on a Spanish stock exchange to file annual audited financial statements and to make public quarterly financial information;

• established a framework for integrating quotations on the four Spanish stock exchanges by computer;

• exempted the sale of securities from transfer and value added taxes;

• deregulated brokerage commissions as of 1992; and

• provided for transfer of shares by book-entry or by delivery of evidence of title.

The Securities Markets Act was amended by Law 37/1998, which implemented two European Union directives into Spanish law. The first is Directive 93/22/CE, relating to investment services within securities, later amended by Directive 95/26/CE of the European Parliament and Council. The second is Directive 97/9/CE of the European Parliament and Council, relating to indemnity systems.

Law 37/1998 introduced some innovations to the Securities Markets Act. The first was the recognition that both Spanish and other European Union Member State companies authorized to provide investment services have full access to the official secondary markets, with full capacity to operate, thereby enabling the direct admission of banking entities into the stock exchange area. The second innovation was that the scope of the Securities Markets Act was enlarged to include a list of financial instruments, such as financial exchange contracts, or installment financial contracts, which expanded the categories of securities included.

The Securities Markets Act has been further amended by Law 44/2002 (November 22, 2002) on reform measures of the financial system, which introduced certain modifications to the laws governing financial markets and corporations, generally, including:

• provisions regarding market transparency such as: requiring listed companies to establish an audit committee, redefining the reporting requirements for material facts, rules relating to the treatment of confidential and insider information and related party transactions, and prevention of manipulative and fraudulent practices with respect to market prices;

• the establishment of Iberclear; and

• the authorization of the Minister of Economy and Competitiveness to regulate financial services electronic contracts.

On July 17, 2003, the Securities Market law was amended by Law 26/2003 in order to reinforce the transparency of listed companies. It introduced:

• information and transparency obligations including detailed requirements of the contents of the corporate website of listed companies and the obligation to file with the CNMV an annual corporate governance report; and

• the obligation to implement a series of corporate governance rules including, among others, regulations regarding the boards of directors and the general shareholders’ meetings.

On March 11, 2005, Royal Decree Law 5/2005 was approved, modifying the Securities Market Law in order to implement the Directive 2003/71/EC of the European Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading. The Directive: (i) harmonizes the requirements for the process of approval of prospectuses, which enables a prospectus to be valid throughout the European Union; and (ii) incorporates the application of the country of origin principle.

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On April 22, 2005, the Securities Market Law was amended by Law 5/2005 on supervision of financial conglomerates in order to make the sectorial rules applicable to investment firms more consistent with other sectorial rules applicable to other groups with similar financial activities, such as credit institutions and insurance undertakings.

On November 14, 2005, the Securities Market Law was further amended by Law 19/2005, which refers to the European public limited-liability companies with registered offices in Spain and, on November 24, 2005, by Law 25/2005, of November 24, 2005, which regulates the capital risk entities.

Royal Decree 1310/2005 (November 4) partially developed the Securities Market Law 24/1988, in relation to the admission to trading of securities in the official secondary markets, the sale or subscription public offers and the prospectus required to those effects.

Royal Decree 1333/2005 (November 11), which developed the Securities Market Law 24/1988, in relation to market abuse.

Law 12/2006 (May 16) amended the Securities Market Law by: (i) introducing a new article relating to notifications to the CNMV of transactions that might constitute insider dealing or market manipulation, (ii) completing the regulation of Bolsas y Mercados Españoles, and (iii) clarifying the regulation of significant participations on the entities which manage the clearing and settlement of securities and the Spanish secondary markets.

Law 36/2006 (November 30), relating to measures to prevent the tax fraud, among others, amends article 108 of the Securities Market Law.

Law 6/2007 (April 12) amends the Securities Market Law, in order to modify the rules for takeover bids and for issuers transparency. This Law came into effect on August 13, 2007, and partially integrates into the Spanish legal system Directive 2004/25/EC of the European Parliament and of the Council of April 21, 2004 on takeover bids and Directive 2004/109/EC of the European Parliament and of the Council of December 15, 2004 on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC. This Law has been further developed by Royal Decree 1066/2007 (July 27) on rules applicable to takeover bids for securities and by Royal Decree 1362/2007 (October 19) on transparency requirements for issuers of listed securities. For a brief description of the provisions of Law 6/2007 as regards the rules applicable to takeover bids see “Item 10. Additional Information—B. Memorandum and Articles of Association—Tender Offers”.

Law 6/2007 (i) introduces several changes to the periodical financial information, annual, biannual and quarterly, to be published by issuers of listed securities; and (ii) introduces new developments to the system which establishes the duty to notify significant stakes in an enterprise, such as:

• Anyone with a right to acquire, transfer or exercise voting rights granted by the shares, regardless of the actual ownership of the shares; and anyone owning, acquiring or transferring other securities or financial instruments which grant a right to acquire shares with voting rights, will also have to notify the holding of a significant stake in accordance with the developing regulations;

• Directors of listed companies, in addition to notifying any transaction concerning the shares or other securities or financial instruments of the issuer which are linked to these shares, will have to inform the CNMV of their stake upon appointment or resignation; and

• Listed companies will be required to notify transactions concerning their treasury shares in certain cases, which will be established in the developing regulations.

Law 47/2007 (December 19) amends the Securities Market Law in order to adapt it to Directive 2004/39/EC on markets in financial instruments (MiFID), Directive 2006/73/EC implementing Directive 2004/39/EC with respect to the organizational requirements and operating conditions for investment firms and defining terms for the purpose of that Directive, and Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions. The amendments introduced by Law 47/2007 represent important reforms of the Securities Market Law and serve to (i) increase the number of investment services that can be performed by the entities; (ii) reinforce the measures for the protection of investors; (iii) establish new organizational procedures for investment firms; and (iv) reinforce the supervisory powers of the CNMV, establishing cooperation mechanisms among supervisory authorities. Directive 2006/49/EC and MiFID implementation have been introduced by Royal Decrees 216/2008 and 217/2008 (both of February 15), respectively.

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Law 32/2011 of October 4, 2011, amending Law 24/1988 of July 28, 1988, on the securities market, introduced a central counterparty for equity transactions imposing the obligation to carry out all equity transactions traded through a central counterparty. Other relevant amendments of Law 32/2011 of October 4, 2011, include the introduction of a right of withdrawal in the event of insolvency of the entities in charge of keeping the registry and of participating entities and the pro rata rule. Modifications were also made to the regulatory regime of Iberclear, which is in charge of both the register of securities held in book-entry form and their clearing and settlement. Specifically, the new rules facilitate the relationship between Iberclear and the other agents of the trading and post-trading system and regulate the agreements that Iberclear may carry out to provide a better integration with to the TARGET2-Securities project, which aims to establish a eurozone-wide settlement system.

Royal Decree-Law 20/2012 of July 13, 2012 on measures to ensure budgetary stability and the promotion of competitiveness which, among other reforms, amended Law 24/1988 of July 28, 1988 on the Securities Market (and Law 44/2002 of November 22, 2002 on financial system reform measures) to include a new financial instrument in the Spanish legal system, the so-called “internationalization covered bonds” (cédulas de internacionalización). These bonds are similar to “territorial covered bonds” (cédulas territoriales), introduced by Law 44/2002 and are fixed-income securities that may be issued by credit institutions, whose capital and interest are especially secured by loans and credits granted for the internationalization of companies. The total amount of internationalization covered bonds issued by a credit institution may not exceed 70% of the amount of the unrepaid “eligible” loans and credits.

The Law 11/2012 of December 19, 2012 on urgent measures relating to the environment, which included transposition into Spanish legislation of the provisions of the Commission Regulation 1031/2010 of November 12, 2010 on the timing, administration and other aspects of auctioning of greenhouse gas emission allowances, amended by the Commission Regulation 1210/2011 of November 23, 2011, also amended Law 24/1988 of July 28, 1988 on the Securities Market to define the financial institutions that can participate in these auctions and grant the CNMV supervisory, inspection and sanctioning powers in relation to the aforementioned misconduct. It established that investment firms and credit institutions authorized to provide investment services may submit bids to greenhouse gas emission allowance auctions on their customers’ behalf, as well as conduct the activities envisaged in Law 24/1988.

Trading by Santander’s Subsidiaries in the Shares

Some of our subsidiaries, in accordance with customary practice in Spain, and as permitted under Spanish law, have regularly purchased and sold our shares both for their own account and for the accounts of customers. Our subsidiaries have intervened in the market for our shares primarily in connection with customer transactions and, occasionally, in connection with transactions by non-customers that are undertaken for commercial purposes or to supply liquidity to the market when it is reasonable to do so. Such trading activity also has provided a mechanism for accumulating shares that were used to meet conversions into our shares, of bonds issued by us and other affiliated companies and to make offerings of shares. We expect that our subsidiaries may continue to purchase and sell our shares from time to time.

Our trading activities in our shares are limited to those set forth above. The continuous market is driven by orders, which are matched by the market’s computer system according to price and time entered. Santander and Banesto’s broker subsidiaries, Santander Investment Bolsa, S.V., S.A., and Banesto Bolsa, S.A., S.V.B.⁸, and the other brokers authorized to trade on the continuous market (“Member Firms”) are not required to and do not serve as market makers maintaining independently established bid and ask prices. Rather, Member Firms place orders for their customers, or for their own account, into the market’s computer system. If an adequate counterparty order is not available on the continuous market at that time, the Member Firm may solicit counterparty orders from among its own clients and/or may accommodate the client by filling the client’s order as principal.

Under the Spanish Corporate Enterprises Act, a company and its subsidiaries are prohibited from purchasing shares of the company in the primary market. However, purchase of the shares is permitted in the secondary market provided that: (1) the aggregate nominal value of such purchases (referred to as “treasury stock” or “autocartera”) and of the shares previously held by the company and its subsidiaries does not exceed 10% of the total outstanding capital stock of the company, (2) the purchases are authorized at a meeting of the shareholders of the acquiring company and, if the acquisition relates to shares in the parent company, the acquiring company’s parent, and (3) such purchases, together with the shares previously held by the company and its subsidiaries, do not result in a net equity less than the company’s stock and its legal or Bylaws undisposable reserves.

The law requires that the CNMV be notified each time the acquisition of treasury stock made since the last notification reaches 1% of the voting rights of the company, regardless of any other preceding sales. The Spanish Corporate Enterprises Act establishes, in relation to the treasury stock shares (held by us and our affiliates), that the exercise of the right to vote and other non-financial rights attached to them shall be suspended. Financial rights arising from treasury stock held directly by us, with the exception of the right to allotment of new bonus shares, shall be attributed proportionately to the rest of the shares.

⁸  Santander Investment Bolsa, S.V., S.A., and Banesto Bolsa, S.A., S.V.B. merged in December 2013 in Santander Investment Bolsa S.V., S.A.U.

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The portion of overall trading volume in Santander ordinary shares transacted by Group subsidiaries continues to vary from day to day and from month to month, and is expected to continue to do so in the future. In 2013, 7.59% of the total volume traded in Santander ordinary shares executed on the Primary Spanish Stock Exchange (Bolsas y Mercados Españoles) was transacted by Santander Investment Bolsa S.V., S.A. and 0.94% by Banesto Bolsa S.A., S.V.B. The portion of trading volume in shares allocable to purchases and sales as principal by our companies (treasury shares) was approximately 4.6% in the same period. The monthly average percentage of outstanding shares held by our subsidiaries ranged from 0.171% to 1.264% in 2013. At December 31, 2013, the Parent bank and our subsidiaries held 1,425,239 of our shares (0.013% of our total capital stock as of that date).

D. Selling shareholders

Not Applicable.

E. Dilution

Not Applicable.

F. Expense of the issue

Not Applicable.

Item 10. Additional Information

A. Share capital

Not Applicable.

B. Memorandum and articles of association

The following summary of the material terms of our Bylaws is not meant to be complete and is qualified in its entirety by reference to our Bylaws. Because this is a summary, it does not contain all the information that may be important to you. You should read our Bylaws carefully before you decide to invest. Copies of our Bylaws are incorporated by reference.

The Bylaws of Banco Santander, S.A. were approved by our shareholders acting at the annual general shareholders’ meeting held on June 21, 2008 and incorporated with the office of the Mercantile Registry on August 11, 2008.

Subsequently, sub-subsections 1 and 2 of Article 5 of the Bank’s Bylaws have been updated several times to show the current share capital and the number of shares outstanding. The most recent of such amendments corresponds to the one required by the share capital increase carried out on January 31, 2014 and filed with the office of the Mercantile Registry on the following day.

At the 2012 annual general meeting, held on March 30, 2012, our shareholders resolved to amend our Bylaws primarily to bring them into line with statutory amendments affecting Spanish Corporate Enterprises Act, including, specifically, those arising from Act 25/2011, of August 1, partially amending the Spanish Corporate Enterprises Act, and from the adoption of Directive 2007/36/EC, of the European Parliament and of the Council, of July 11 2007, on the exercise of certain rights of shareholders in listed companies.

At the 2013 annual general meeting, held on March 22, 2013, our shareholders resolved to amend our Bylaws to achieve two separate goals: (i) to modify the rules on directors’ remuneration to conform them to the Bank’s practices; and (ii) to adjust the Bylaws to recent statutory amendments regarding capital companies (Ley de Sociedades de Capital) by Law 1/2012, of 22 June, on the simplification of the obligations to provide information and documentation regarding mergers and split-offs of capital companies (“Law 1/2012”).

The first goal was achieved by amending section 2 of article 58 of our Bylaws regarding the rules for the remuneration of directors for their duties of supervision and collective decision-making, which has changed from a system of profits participation to one of fixed amount remuneration. For more information on the amendment of section 2 of article 58 of our Bylaws, see below, “Certain Powers of the Board of Directors”.

The second goal was achieved by amending the title and sections 1 and 2 in article 61 of our Bylaws to conform the provision to the latest amendment of article 11 bis of the Spanish Corporate Enterprises Act pursuant to Law 1/2012. First, the amendment of the title of the article was intended to specify the corporate nature of the website, in line with the nomenclature used by the law. Second, section 1 includes now a new rule that gives the shareholders at the General Shareholders’ Meeting the power to create the corporate website, for which purpose the corresponding item should expressly appear in the agenda of the meeting. Legal provisions have also been included regarding the manner in which such resolution will be announced. The power to amend, relocate or remove the website still belongs to the board of directors, in line with the legal rule applicable by default. Third, in section 2, apart from including certain improvements to the text, the reference to “registration with the Commercial Registry” of the approval of the amendment, removal or relocation of the website is replaced with a reference to its “record on the Bank’s page maintained with the Commercial Registry”, thus conforming the text of the Bylaws to the tenor of the new text of article 11 bis of the Spanish Corporate Enterprises Act.

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At the 2014 annual general meeting, held on March 28, 2014, our shareholders resolved to amend our Bylaws to achieve two separate goals:

i) to adjust the Bylaws to statutory amendments regarding corporate governance introduced by: (a) Order EEC/461/2013 of March 20, which determines the content and structure of the annual corporate governance report, of the annual remuneration report and of other reporting instruments of listed corporations (sociedades anónimas), of savings associations and of other entities that issue securities admitted to trading on official securities markets, and (b) Royal Decree-law 14/2013 of November 29, on urgent measures to adjust Spanish Law to European Union regulations governing supervision and solvency of financial institutions; and

ii) to make certain changes in the Bylaws regarding the organization of the Bank, relating primarily to the provisions of Directive 2013/36/UE of the European Parliament and of the Council, of June 26, 2013, on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (“Directive CRD IV”). Such Directive, together with (UE) Regulation No. 575/2013 of the European Parliament and of the Council of June 26, 2013 on prudential requirements for credit institutions and investment firms, constitute the new supervision and solvency regulations for credit institutions applicable in the European Union since January 1, 2014.

Our amended Bylaws have not yet been filed with the Mercantile Register, which is required prior to their effectiveness. We expect that the amendments will become effective within the first semester of 2014.

Our current Bylaws are included as Exhibit 1.1. The Bylaws are also available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com, under the heading “Information for shareholders and investors — General information — Bylaws”.

In 2013, several amendments to the Rules and Regulations of the Board of Directors were recorded with the Companies Register of Cantabria. The purpose of such modifications was to adapt the Rules and Regulations to new legislative developments on corporate governance, specifically including those arising from Royal Decree 256/2013 of April 12, on the assessment of the suitability of members of the board of directors and key function holders, which incorporates into Spanish law the criteria contained in: i) the EBA Guidelines of December 27, 2011 on Corporate Governance, and ii) the EBA Guidelines of November 22, 2012 on the assessment of suitability of the members of the board, executive directors and key function holders at credit institutions. In addition, section 2 of article 28 of the Rules and Regulations were amended regarding the directors’ compensation system for their supervisory and collective decision-making duties, in order to conform it to the wording of article 58.2 of the Bylaws approved at the annual general shareholders’ meeting of March 22, 2013, whereby the profit sharing system was replaced by a system of fixed remuneration.

It is envisaged that the board of directors will modify the Rules and Regulations of the Board to conform them to the new wording of the Bylaws once the proposals to modify them have become effective. Such amendments consist of adapting to Order ECC/461/2013, Royal Decree-Law 14/2013 and the CRD IV Directive (Directive 2013/36/ EU) for the following purposes, among others: (i) to adjust director typology definitions; (ii) to regulate the sphere of competence of a new committee in charge of assisting the board with regards risk, regulation and compliance, adjusting where applicable the other responsibilities of the board committees; and (iii) to specify the requirement that the chairman may not simultaneously serve as chief executive officer.

All references to the Rules and Regulations of the Board in this annual report on Form 20-F are references to the current text.

The Rules and Regulations of the Board are available on the Group’s website, which does not form part of this annual report on Form 20-F, at www.santander.com, under the heading “Information for shareholders and investors—Corporate governance—Board of directors—Rules and Regulations of the Board of Directors”.

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General

As of December 31, 2013, the Bank’s share capital was €5,666,710,244, represented by a single class of 11,333,420,488 book-entry Santander shares with a nominal value of €0.50 each.

All of our shares are fully paid and non-assessable. Spanish law requires that bank-listed equity securities be issued in book-entry form only.

Register

Santander is registered with the Commercial Registry of Santander (Finance Section). The Bank is also recorded in the Special Registry of Banks and Bankers with registration number 0049, and its fiscal identification number is A-39000013.

Corporate Object and Purpose

Article 2 of our Bylaws states that the corporate objective and purpose of Santander consists of carrying-out all types of activities, operations and services specific to the banking business in general and which are permitted under current legislation and the acquisition, holding and disposal of all types of securities.

Certain Provisions Regarding Shareholder Rights

As of the date of the filing of this report, Santander’s capital is comprised of only one class of shares, all of which are ordinary shares and have the same rights. Santander may issue non-voting shares for a nominal amount of not more than one-half of the paid-up share capital, and redeemable shares for a nominal amount of not more than one-fourth of its share capital.

Our Bylaws do not contain any provisions relating to sinking funds.

Our Bylaws do not specify what actions or quorums are required to change the rights of holders of our stock. Under Spanish law, the rights of holders of stock may only be changed by an amendment to the Bylaws of the company that complies with the requirements explained below under “Meetings and Voting Rights”.

Meetings and Voting Rights

We hold our annual general shareholders’ meeting during the first six months of each fiscal year on a date fixed by the board of directors. Extraordinary meetings may be called from time to time by the board of directors whenever the board considers it advisable for corporate interests, and whenever so requested by shareholders representing at least 5% of the outstanding share capital of Santander. At our annual general shareholders’ meeting held on March 30, 2012, our shareholders approved an amendment to our Bylaws to require that notices of all meetings be published at least one month prior to the date set for the meeting, except in those instances in which a different period is established by law, in the Official Gazette of the Mercantile Register or in one of the local newspapers having the largest circulation in the province where the registered office of Santander is located, on the website of the National Securities Market Commission (CNMV) and on the Bank’s website (www.santander.com). In addition, under Spanish law, the agenda of the meeting must be sent to the CNMV and the Spanish Stock Exchanges and published on the company’s website. Our last ordinary general meeting of shareholders was held on March 28, 2014 and our last extraordinary general meeting of shareholders was held on January 26, 2009.

Each Santander share entitles the holder to one vote. Registered holders of any number of shares who are current in the payment of capital calls will be entitled to attend shareholders’ meetings. Our Bylaws do not contain provisions regarding cumulative voting.

Any Santander share may be voted by proxy. Subject to the limitations imposed by Spanish law, proxies may be given to any individual or legal person, must be in writing or by remote means of communication and are valid only for a single meeting. According to Spanish law, if a director or another person solicits a proxy for a director thus obtaining more than three proxies and the director is subject to a conflict of interest, the director holding the proxies may not exercise the voting rights attaching to the represented shares in connection with decisions relating to:

• his appointment or ratification, removal, dismissal or withdrawal as director;

• the institution of a derivative action against him; or

• the approval or ratification of transactions between Santander and the director in question, companies controlled or represented by him, or persons acting for his account.

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In accordance with the Rules and Regulations for the General Shareholders’ Meeting and in the manner established by such Rules and Regulations, the Group’s website includes from the date when the call of the general shareholders’ meeting is published, the text of all resolutions proposed by the board of directors with respect to the agenda items and the details regarding the manner and procedures for shareholders to follow to confer representation on any individual or legal entity. The manner and procedures for electronic delegation and voting via the Internet are also indicated.

At both general shareholders’ meetings held in 2004 (the annual shareholders’ meeting of June 19, 2004 and the extraordinary general meeting of October 21, 2004) our shareholders could exercise their voting and representation rights prior to the meetings by electronic means (via the Internet). In addition, at the extraordinary general shareholders’ meeting of October 21, 2004, our shareholders could vote by mail and in the annual general shareholders’ meetings held on June 18, 2005, June 17, 2006, June 23, 2007, June 21, 2008, June 19, 2009, June 11, 2010, June 17, 2011, March 30, 2012, March 22, 2013 and March 28, 2014, and in the extraordinary general shareholders’ meeting of October 23, 2006, July 27, 2007, September 22, 2008 and January 26, 2009 our shareholders, besides exercising their voting and representation rights prior to the meeting by mail or via the Internet, were able to attend (besides attending and voting in person) via the Internet and were also able to vote in real time on the Internet on the resolutions considered at the meeting.

Only registered holders of Santander shares of record at least five days prior to the day on which a meeting is scheduled to be held may attend and vote at shareholders’ meetings. As a registered shareholder, the depositary will be entitled to vote the Santander shares underlying the Santander ADSs. The deposit agreement requires the depositary to accept voting instructions from holders of Santander ADSs and to execute such instructions to the extent permitted by law.

In general, resolutions passed by a general meeting are binding upon all shareholders. In certain circumstances, Spanish law gives dissenting or absent shareholders the right to have their Santander shares redeemed by us at prices determined in accordance with established formula or criteria. Santander shares held by the Bank or its affiliates are counted for purposes of determining quorums but may not be voted by the Bank or by its affiliates.

Resolutions at general meetings are passed provided that, regarding the voting capital present or represented at the meeting, the number of votes in favor is higher than the number of votes against or blank and abstentions.

In accordance with Spanish law, a quorum on first call for a duly constituted ordinary or extraordinary general meeting of shareholders requires the presence in person or by proxy of shareholders representing at least 25% of the subscribed voting capital. On the second call there is no quorum requirement. Notwithstanding the above, a quorum of at least 50% of the subscribed voting capital is required on the first call of the ordinary or extraordinary general meeting of shareholders to validly approve any of the following actions:

• issuance of bonds;

• increase or reduction of share capital;

• rescission or limitation of the preferential right to subscribe new issuance of shares;

• change of the registered address of Santander to a foreign country;

• transformation of Santander, or merger, or spin-off, or global assignment of assets and liabilities; and

• any other amendment of our Bylaws.

A quorum of 25% of the subscribed voting capital is required to vote on such actions on the second call. A two-third majority of the present or represented voting capital is required to approve all of the above listed actions when the shareholders’ meeting is held on second call and less than 50% of the subscribed voting capital is present or represented.

For purposes of determining the quorum, those shareholders who vote by mail or through the Internet are counted as being present at the meeting, as provided by the Rules and Regulations of the Bank’s general shareholders’ meetings. The quorum at the 2014 annual general meeting was 58.820% of the Bank’s share capital.

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Changes in Capital

Any increase or reduction in share capital must be approved at the general meeting in accordance with the procedures explained above in the section entitled “Meetings and Voting Rights”. However, the shareholders acting at the general shareholders’ meeting may delegate to the board of directors the power to increase share capital.

The capital increase may be effected by issuing new shares or by increasing the par value of existing shares. Capital reduction may be effected by reducing the par value of existing shares, by repurchasing them, or dividing them into groups for exchange.

Unpaid subscription amounts on partially paid-up shares must be paid by the shareholders at the time determined by the board of directors, within five years of the date of the resolution providing for the capital increase.

At the Bank’s annual general shareholders’ meeting held on March 28, 2014, our shareholders passed a resolution which, among other things, withdrew, to the extent of the unused amount, the authorization granted by our shareholders at the annual meeting held on March 22, 2013, and gave the board the authority to increase, within a period of three years from the date of the meeting, the Bank’s capital by up to €2,890,266,786.50. Under this resolution, the board is authorized to totally or partially exclude pre-emptive rights, upon the terms of the Spanish law, provided, however, that this power is limited to capital increases carried out under this resolution up to the amount of €1,156,106,714.50.

At the Bank’s annual general shareholders’ meeting held on March 28, 2014, our shareholders passed a resolution which, among other things, withdrew, to the extent of the unused part, the authorization granted by our shareholders at the annual general shareholders meeting held on March 22, 2013, and permitted the Bank to issue, within five years from the date of the meeting, on one or more occasions, debentures, bonds, participating preference shares and other fixed-income securities or debt instruments of a similar nature (including warrants) that are convertible into and/or exchangeable for shares of the Bank in an amount up to €10 billion aggregate principal amount or the equivalent thereof in another currency.

At the Bank’s annual general shareholders’ meeting held on March 28, 2014, our shareholders also passed a resolution by which they authorized the board of directors to issue, on one or more occasions, up to €50 billion euros, or the equivalent thereof in another currency, in fixed-income securities in any of the forms admitted by Law, including bonds, certificates, promissory notes, debentures and preferred interests or debt instruments of a similar nature (including warrants payable by physical delivery or set-off). This power may be exercised by the board of directors within a maximum period of five years from the date of adoption of this resolution by our shareholders, at the end of which period it shall be cancelled to the extent of the unused amount.

Dividends

We normally pay dividends in quarterly installments in August and November of the relevant year and February and May of the following year. Such dividends may be either cash dividends or scrip dividends according to the Santander Dividendo Elección program, pursuant to which each shareholder receives a free allotment right for every Santander share held. These rights are listed on and may be traded on the Spanish Stock Exchanges during a 15 calendar day period. Following the end of this period, the rights will be automatically converted into new Santander shares. Each shareholder may opt for one of the following alternatives: (i) receive new Santander shares; (ii) receive a cash payment equivalent to the dividend. To this end, Banco Santander assumes an irrevocable undertaking to acquire the free allotment rights for a fixed price; or (iii) receive a cash payment through selling rights on market. We and our domestic banking subsidiaries are subject to certain restrictions on dividend payments, as prescribed by the Ministry of Economy and Competitiveness and the Bank of Spain. See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Restrictions on Dividends” herein.

Once the annual accounts are approved, our shareholders at the general shareholders’ meeting resolve on the allocation of the results for the fiscal year. Dividends may only be distributed out of the earnings for the fiscal year or with a charge to unappropriated reserves, after the payments required by the law and the Bylaws have been made, provided that the stockholders’ equity disclosed in the accounts is not reduced to less than the share capital as a result of the distribution. If there are any losses from prior fiscal years that reduce the Bank’s stockholders’ equity below the amount of the share capital, the earnings must be used to offset such losses.

The amount, time and form of payment of the dividends, to be distributed among our shareholders in proportion to their paid-in capital will be established by resolutions adopted at the general meeting. Our shareholders at the general shareholders’ meeting and the board of directors may make resolutions as to the distribution of interim dividends, subject to limitations and in compliance with the requirements established by the law.

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A shareholder’s dividend entitlement lapses five years after the dividend payment date.

Our shareholders at the annual general shareholders’ meeting may resolve that dividends in kind can be paid, provided that:

• the property or securities to be distributed are of the same nature;

• the property or securities have been admitted to listing on an official market as of the effective date of the resolution, or liquidity is guaranteed by Santander within a maximum period of one year; and

• the property or securities are not distributed for a value that is lower than the value at which they are recorded on Santander’s balance sheet.

Preemptive Rights

In the event of a capital increase each shareholder has a preferential right by operation of law to subscribe for shares in proportion to its shareholding in each new issue of Santander shares. The same right is vested on shareholders upon the issuance of convertible debt. However, preemptive rights of shareholders may be excluded under certain circumstances by specific approval at the shareholders’ meeting (or upon its delegation by the board of directors) and preemptive rights are deemed excluded by operation of law in the relevant capital increase when our shareholders approve:

• capital increases following conversion of convertible bonds into Santander shares;

• capital increases due to the absorption of another company or of part of the spun-off assets of another company, when the new shares are issued in exchange for the new assets received; or

• capital increases due to Santander’s tender offer for securities using Santander’s shares as all or part of the consideration.

If capital is increased by the issuance of new shares in return for capital from certain reserves, the resulting new Santander shares will be distributed pro rata to existing shareholders.

Redemption

Our Bylaws do not contain any provisions relating to redemption of shares except as set forth in connection with capital reductions. Nevertheless, pursuant to Spanish law, redemption rights may be created at a duly held general shareholders’ meeting. Such meeting will establish the specific terms of any redemption rights created.

Registration and Transfers

The Santander shares are in book-entry form in the Iberclear system. We maintain a registry of shareholders. We do not recognize, at any given time, more than one person as the person entitled to vote each share in the shareholders meeting.

Under Spanish law and regulations, transfers of shares quoted on a stock exchange are normally made through a Sociedad o Agencia de Valores, credit entities and investment services companies, that are members of the Spanish stock exchange.

Transfers executed through stock exchange systems are implemented pursuant to the stock exchange clearing and settlement procedures of Iberclear. Transfers executed “over the counter” are implemented pursuant to the general legal regime for book-entry transfer, including registration by Iberclear.

New shares may not be transferred until the capital increase is registered with the Commercial Registry.

Liquidation Rights

Upon a liquidation of Santander, our shareholders would be entitled to receive pro-rata any assets remaining after the payment of our debts, taxes and expenses of the liquidation. Holders of non-voting shares, if any, are entitled to receive reimbursement of the amount paid before any amount is distributed to the holders of voting shares.

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Change of Control

Our Bylaws do not contain any provisions that would have an effect of delaying, deferring or preventing a change in control of the company and that would operate only with respect to a merger, acquisition or corporate restructuring involving Santander or any of our subsidiaries. Nonetheless, certain aspects of Spanish law described in the following section may delay, defer or prevent a change of control of the Bank or any of our subsidiaries in the event of a merger, acquisition or corporate restructuring.

Legal Restrictions on Acquisitions of Shares in Spanish Banks

Certain provisions of Spanish law require notice to the Bank of Spain prior to the acquisition by any individual or corporation of a substantial number of shares of a Spanish financial institution.

Any individual or corporation that wishes to acquire, directly or indirectly, a significant holding (participación significativa) in a Spanish financial institution must give advance notice to the Bank of Spain describing the size of such participation, its terms and conditions, and the anticipated closing date of the acquisition. “Significant holding” is defined as 10% of the outstanding share capital or voting rights of the bank or any lesser participation that gives the acquirer effective influence or control over the target bank.

In addition, prior notice must be given to the Bank of Spain of any increase, direct or indirect, in any significant holding resulting in percentage equity interest or voting rights reaching or surpassing one of the following percentages: 20%, 30% or 50%. Notice to the Bank of Spain is also required from anyone who, as a result of the contemplated acquisition, may attain sufficient power to control the credit entity.

Any acquisition mentioned in the preceding sentence to which the required notice was not given or even if given, a three month period after receipt of notice has not yet elapsed, or that is opposed by the Bank of Spain will have the following effects: (1) the acquired shares will have no voting rights, (2) the Bank of Spain may seize control of the bank or replace its board of directors, and (3) a fine may be levied on the acquirer.

The Bank of Spain has sixty business days after the receipt of notice to object to a proposed transaction. Such objection may be based on finding the acquirer unsuitable on the basis, among others, of its commercial or professional reputation, its solvency or the transparency of its corporate structure. If sixty business days elapse without any word from the Bank of Spain, its authorization is deemed granted. However, absent objection by the Bank of Spain, it may set forth a different maximum period for closing the proposed transaction.

Any individual or institution that plans to sell its significant holding, or reduce it to one of the above-mentioned levels of ownership, or because of any sale will lose control of the entity, must provide advance notice to the Bank of Spain indicating the amount of the transaction and its anticipated closing date. Failure to comply with these requirements may subject the offending party to penalties.

Any individual or corporation which acquires, directly or indirectly, a participation in a Spanish financial institution and as a consequence the percentage of its share capital or voting rights reaches or exceeds 5%, must notify the Bank of Spain and the relevant financial institution, indicating the amount of the participation reached.

Credit entities must notify the Bank of Spain as soon as they become aware of any acquisition or transfer of significant shares of its capital stock that exceeds the above-mentioned percentages. Furthermore, banks are required to inform the Bank of Spain as soon as they become aware, and in any case not later than 15 days after, any acquisition by a person or a group of at least 1% of such a bank’s total equity. The Bank of Spain also requires each bank to notify the Bank of Spain of a list, dated on the last day of each quarter and during April, July, October and January of all its shareholders that are financial institutions and all other shareholders that own at least 0.25% of the bank’s total equity.

If the Bank of Spain determines at any time that the influence of a person who owns a significant participation of a bank may adversely affect that bank’s financial situation, it may request that the Ministry of Economy and Competitiveness: (1) suspend the voting rights of such person’s shares for a period not exceeding 3 years; (2) seize control of the bank or replace its board of directors; or (3) revoke the bank’s license in exceptional circumstances. A fine may also be levied on the relevant person.

Tender Offers

Law 6/2007, of April 12, which amends the Securities Market Law, has modified the rules for takeover bids. This Law, which came into effect on August 13, 2007, partially transposes into the Spanish legal system Directive 2004/25/EC of the European Parliament and of the Council of April 21, 2004 on takeover bids.

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The rules replaced the traditional system where launching a takeover bid was compulsory prior to acquiring a significant shareholding in the target company and partial bids were permitted for a regime where takeover bids must be made for all the share capital after obtaining the control of a listed company (i.e. 30% of the voting rights or appointment of more than one-half of the members of the company’s board of directors) whether such control is obtained by means of an acquisition of securities or an agreement with other holders of securities.

The above does not prevent parties from making voluntary bids for a number that is less than the totality of securities in a listed company.

Law 6/2007 also regulates, among other things: (i) obligations for the board of directors of the offeree company in terms of preventing the takeover bid (passivity rule); and (ii) the squeeze-out and sell-out rights when the offeror is a holder of securities representing at least 90% of the voting capital of the offeree company and the prior takeover bid has been accepted by holders of securities representing at least 90% of the voting rights covered by the bid.

Royal Decree 1066/2007 on rules applicable to takeover bids for securities further developed the regulations on takeover bids established by Law 6/2007, completing the amendments introduced by Law 6/2007, in order to ensure that takeover bids are carried out within a comprehensive legal framework and with absolute legal certainty. The Royal Decree contains provisions regarding: (i) the scope and application to all takeover bids, whether voluntary or mandatory, for a listed company; (ii) the rules applicable to mandatory takeover bids when control of a company is obtained; (iii) other cases of takeover bids, such as bids for de-listing of securities and bids that must be made when a company wishes to reduce capital through the acquisition of its own shares for subsequent redemption thereof; (iv) the consideration and guarantees offered in a bid; (v) stages of the procedure that must be followed in a takeover bid; (vi) the mandatory duty of passivity of the offeree company’s board of directors and the optional regime of neutralization of other preventive measures against bids; (vii) changes to, withdrawal of, and cessation of effects of the bid; (viii) the acceptance period, the calculation of the acceptances received and the settlement of the bid; (ix) the procedures applicable to competing offers; (x) the rules for squeeze-outs and sell-outs; and (xi) certain rules on supervision, inspection and sanctions applicable with respect to the regulations on takeover bids.

Reporting Requirements

Royal Decree 1362/2007 requires that any entity which acquires or transfers shares and as a consequence the number of voting rights held exceeds, reaches or is below the threshold of 3%, 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 60%, 70%, 75%, 80% or 90%, of the voting rights of a company, for which Spain is the member state of origin, listed on a Spanish stock exchange or on any other regulated market in the European Union, must, within 4 days after that acquisition or transfer, report it to such company, and to the CNMV. This duty to report the holding of a significant stake is applicable not only to the acquisitions and transfers in the terms described above, but also to those cases in which in the absence of an acquisition or transfer of shares, the percentage of an individual’s voting rights exceeds, reaches or is below the thresholds that trigger the duty to report, as a consequence of an alteration in the total number of voting rights of an issuer. Similar disclosure obligations apply, among others, in the event of: (i) the acquisition or disposal of any financial instruments entitling the holder to acquire the company’s shares (such as options, futures, swaps, etc.); (ii) certain voting, deposit, temporary transfer or other agreements regarding the relevant shares; or (iii) custodians or proxy-holders who can exercise with discretion the voting rights attached to the relevant shares. The above mentioned threshold percentage will be 1% or any multiple of 1% whenever the person who has the duty to notify is a resident of a tax haven or of a country or territory where there is no taxation or where there is no obligation to exchange tax information (in accordance with Spanish law).

In addition, any Spanish company listed on the Spanish stock exchanges must report any acquisition by such company (or a subsidiary) of the company’s own shares if the acquisition, together with any acquisitions since the date of the last report and without deducting sales of its own shares by the company or by its subsidiaries, causes the company’s ownership of its own shares to exceed 1% of its voting rights. See “Item 9. The Offer and Listing—C. Markets—Trading by Santander’s Subsidiaries in the Shares” herein.

Members of the board of directors of listed companies, in addition to notifying the CNMV of any transaction concerning the shares or other securities or financial instruments of the issuer which are linked to these shares, are required to inform the CNMV of their ratio of voting rights upon appointment or resignation.

In addition, top managers of any listed company must report to the CNMV the acquisition or disposal of shares or other securities or financial instruments of the issuer which are linked to these shares.

Board of Directors

Our board of directors may be made up of a minimum of 14 and a maximum of 22 members, appointed by our shareholders acting at the general meeting of shareholders.

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Members of the board of directors are elected for an initial term of three years but can be re-elected. One third of the members of the board are re-elected each year.

A director could serve for a term shorter than the one for which he or she has been initially elected if the shareholders acting at a duly called general meeting decide that that director be replaced before completing his or her term.

Although there is no provision in Spanish law regarding the composition of a board of directors, the Rules and Regulations of the Board provide that in exercising its powers to make proposals at the general shareholders’ meeting and to designate directors by interim appointment to fill vacancies (co-option), the board shall endeavor to ensure that the external or non-executive directors represent a wide majority over the executive directors and that the former include a reasonable number of independent directors. In addition, in all events, the board of directors shall endeavor such that the number of independent directors represent at least one-third of all directors.

Article 42.1 of our Bylaws also provides that the shareholders at the general shareholders’ meeting shall endeavor to ensure that external or non-executive directors represent a large majority of the board of directors, and that a reasonable number of the board of directors are independent directors. In addition, the shareholders at the general shareholders’ meeting shall likewise endeavor to ensure that independent directors represent at least one-third of the total number of directors.

Article 6.2. c) of the Rules and Regulations of the Board incorporates the definition of independent director established in the Unified Code.

This definition should be understood in conjunction with the provisions of article 8.4 of Order ECC/461/2013, introducing a legal definition of independent directors, and also considering the second transitional provision of the Order.

According to the above criteria, eight out of our 16 board members are external independent directors.

The independence standards set forth in the Rules and Regulations of the Board may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE. See Item 16G of Part II, “Corporate Governance—Independence of the directors on the board of directors” herein.

Certain Powers of the Board of Directors

The actions of the members of the board are limited by Spanish law and certain general provisions contained in our Bylaws. For instance, Article 57 of our Bylaws states that the directors will be liable to Santander, to our shareholders and to our corporate creditors for any damages that they may cause by acts or omissions which are contrary to law or to the Bylaws or by acts or omissions contrary to the duties inherent in the exercise of their office.

A director’s power to vote on a proposal, arrangement or contract in which such director is materially interested is not regulated by our Bylaws. Conflicts of interest are regulated by Article 30 of the Rules and Regulations of the Board. Under Article 30, a director is obliged to inform the board of any direct or indirect conflict of interest which may exist with the Bank. If such a conflict relates to a particular transaction with the Bank, then the director (i) may not undertake the transaction without the board’s authorization (such authorization can only be granted following a report of the appointments and remuneration committee); and (ii) the director may not take part in the discussion or voting regarding the transaction to which the conflict relates.

According to our Bylaws, unpaid subscription amounts on partially paid-up shares shall be paid up by the shareholders at the time determined by the board of directors, within five years of the date of the resolution providing for the capital increase. The manner and other details of such payment shall be determined by the resolution providing for the capital increase. Without prejudice to the effects of default as set forth by law, any late payment of unpaid subscription amounts shall bear, for the benefit of the Bank, such interest as is provided by law in respect of late payments, starting from the day when payment is due and without any judicial or extra-judicial demand being required. In addition, the Bank shall be entitled to bring such legal actions as may be permitted by law in these cases.

Our Bylaws provide that the members of the board of directors are entitled to receive compensation for performing the duties entrusted to them by reason of their appointment. The compensation has two components: an annual retainer and attendance fees.

At the Bank’s annual general shareholders’ meeting held on March 22, 2013, our shareholders passed a resolution to amend section 2 of article 58 of our Bylaws regarding the rules for the remuneration of directors for their duties of supervision and collective-decision making, which changed from the system of profits participation to one of fixed annual remuneration determined by the shareholders at the general shareholders’ meeting. Such amount shall remain in effect to the extent that the shareholders at the general shareholders’ meeting do not resolve to change it, although the board may reduce the amount thereof in those years in which it so believes justified. Such compensation shall have two components: (i) an annual amount, and (ii) attendance fees.

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The specific amount payable to each of the directors and the form of payment shall be determined by the board of directors. For such purpose, it shall take into consideration the positions held by each director on the board and their membership in and attendance at the meetings of the various committees.

At the Bank’s annual general shareholders’ meeting held on March 28, 2014, our shareholders resolved to amend section 6 of article 58 of our Bylaws in order to adjust the director remuneration system to the provisions of Royal Decree-law 14/2013 of November 29, on urgent measures to adjust Spanish Law to European Union regulations governing supervision and solvency of financial institutions and of Directive 2013/36/UE of the European Parliament and of the Council, of June 26, 2013, on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (“Directive CRD IV”) in connection with the limits for variable remuneration, which will affect executive directors. Pursuant to such provisions, the Bylaws have included the rule that the variable components of remuneration be set such that there is an appropriate ratio between the fixed and variable components of total remuneration, and the variable components may not exceed 100% of the fixed components, unless the shareholders at a general shareholders’ meeting approve a higher ratio, which shall under no circumstances exceed 200%.

In connection with the foregoing, our shareholders approved at the 2014 annual general meeting a maximum ratio between the fixed and variable components of remuneration for financial year 2014 of up to 200% for an identified staff consisting of a maximum of 785 members.

Our amended Bylaws have not yet been filed with the Mercantile Register, which is required prior to their effectiveness. We expect that the amendments will become effective within the first semester of 2014.

Regardless of the limit set above, the directors are entitled to receive compensation that the board of directors consider appropriate, for the performance of duties in Santander other than the duties of supervision and collective decision-making that the directors perform as members of the board.

Directors may also receive compensation in the form of shares of the Bank or options over the shares, or other remuneration linked to share value following a resolution adopted by the shareholders at the general shareholders’ meeting (conducted in accordance with our Bylaws and applicable Spanish legislation).

According to our Bylaws, the board of directors must, on an annual basis, approve the annual report on directors’ remuneration, which shall include complete, clear and understandable information regarding: (i) the overall summary of the application of such policy during the last fiscal year, including a breakdown of the individual compensation accrued by each director during such fiscal year, (ii) the policy approved by the board for the current year and (iii) the policy, if any, planned for future years. This report must be made available to the shareholders when the annual general shareholders’ meeting is called and must be submitted to a non-binding vote thereof as a separate item on the agenda.

Board of Directors Qualification

There are no mandatory retirement provisions due to age for board members in our Bylaws or in the regulations of our board of directors. These regulations contain provisions relating to the cessation of directorship for other reasons.

In addition, there are no share ownership requirements in our Bylaws or in the Rules and Regulations of the Board of Directors.

Pursuant to Spanish law, directors appointed by the board but whose appointment remains subject to ratification by the shareholders must be a shareholder of the Bank and, pursuant to the Rules and Regulations of the Board, proprietary directors must submit their resignation proportionately when the shareholder that they represent parts with its shareholdings or reduces them in a significant manner. Our Bylaws and Rules and Regulations of the Board do not otherwise require ownership of Santander shares for a director’s qualification.

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C. Material contracts

During the past two years, the Bank was not a party to any contract outside its ordinary course of business that was material to the Group as a whole.

D. Exchange controls

Restrictions on Foreign Investments

Under present regulations, foreign investors may transfer invested capital, capital gains and dividends out of Spain without limitation on the amount other than applicable taxes. See “—Taxation”. On July 4, 2003, Law 19/2003 was approved which updates Spanish exchange control and money laundering prevention provisions, by recognizing the principle of freedom of the movement of capital between Spanish residents and non-residents. The law establishes procedures for the declaration of capital movements for purposes of administrative or statistical information and authorizes the Spanish Government to take measures which are justified on grounds of public policy or public security. It also provides the mechanism to take exceptional measures with regard to third countries if such measures have been approved by the European Union or by an international organization to which Spain is a party. The Spanish stock exchanges and securities markets are open to foreign investors. Royal Decree 664/1999, on Foreign Investments (April 23, 1999), established a new framework for the regulation of foreign investments in Spain which, on a general basis, will no longer require any prior consents or authorizations from authorities in Spain (without prejudice to specific regulations for several specific sectors, such as television, radio, mining, telecommunications, etc.). Royal Decree 664/1999 requires notification of all foreign investments in Spain and liquidations of such investments upon completion of such investments to the Investments Registry of the Ministry of Economy and Finance, strictly for administrative statistical and economical purposes. Only investments from “tax haven” countries (as they are defined in Royal Decree 1080/1991), shall require notice before and after performance of the investment, except that no prior notice shall be required for: (1) investments in securities or participations in collective investment schemes that are registered with the CNMV, and (2) investments that do not increase the foreign ownership of the capital stock of a Spanish company to over 50%. In specific instances, the Council of Ministers may agree to suspend, all or part of, Royal Decree 664/1999 following a proposal of the Minister of Economy and Competitiveness, or, in some cases, a proposal by the head of the government department with authority for such matters and a report of the Foreign Investment Body. These specific instances include a determination that the investments, due to their nature, form or condition, affect activities, or may potentially affect activities relating to the exercise of public powers, national security or public health. Royal Decree 664/1999 is currently suspended for investments relating to national defense. Whenever Royal Decree 664/1999 is suspended, the affected investor must obtain prior administrative authorization in order to carry out the investment.

E. Taxation

The following is a discussion of the material Spanish and U.S. federal income tax consequences to you of the ownership and disposition of ADSs or shares.

The discussion of Spanish tax consequences below applies to you only if you are a non-resident of Spain and your ownership of ADSs or shares is not effectively connected with a permanent establishment or fiscal base in Spain and you are a U.S. resident entitled to the benefits of the Convention Between the United States of America and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “Treaty”).

On January 14, 2013, the United States of America and the Kingdom of Spain signed a protocol amending the Treaty, which needs to be ratified by both countries, and will become effective three months following the date on which notice is provided by the later of the countries to provide notice that its internal procedures for effectiveness have been fulfilled. When this protocol becomes effective, taxation described under the Treaty in this section may be altered.

You should consult your own tax adviser as to the particular tax consequences to you of owning the shares or ADSs including your eligibility for the benefits of any treaty between Spain and the country of your residence for the avoidance of double taxation, the applicability or effect of any special rules to which you may be subject, and the applicability and effect of state, local, foreign and other tax laws and possible changes in tax law.

Spanish tax considerations

The following is a summary of material Spanish tax matters and is not exhaustive of all the possible tax consequences to you of the acquisition, ownership and disposition of ADSs or shares. This discussion is based upon the tax laws of Spain and regulations thereunder, which are subject to change, possibly with retroactive effect.

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Taxation of dividends

Under Spanish law, dividends paid by a Spanish resident company to a holder of ordinary shares or ADSs not residing in Spain for tax purposes and not operating through a permanent establishment in Spain are subject to Spanish Non-Resident Income Tax at a 21% rate. Royal Decree-Law 20/2011 had temporarily increased from 19% to 21% the rate applicable until December 31, 2013, but Law 22/2013 has extended the increased rate until December 31, 2014.

In addition, according to the Spanish Non-Resident Income Tax Law, if you are resident in the European Union or in a country, such as the United States, with which there is an effective exchange of information for tax purposes as defined in Spanish Law 36/2006 and you do not operate in Spain through a permanent establishment, dividends up to 1,500 euros, considering all Spanish-source dividends you may obtain in the calendar year, are exempt from Spanish taxation. However, Spanish withholding tax will nevertheless be required to be deducted from the gross amount of the dividends, and you will have to seek a refund of such withholding taxes from the Spanish tax authorities, following the standard refund procedure described below.

We will withhold tax on the gross amount of dividends at a 21% tax rate, following the procedures set forth by the Order of April 13, 2000. However, under the Treaty and subject to the fulfillment of certain requirements, you may be entitled to a reduced rate of 15%.

To benefit from the Treaty’s reduced rate of 15%, you must provide our depositary, JPMorgan Chase Bank, N.A., with a certificate from the U.S. Internal Revenue Service (the “IRS”) stating that to the knowledge of the IRS, you are a resident of the United States within the meaning of the Treaty. The IRS certificate is valid for a period of one year.

According to the Order of April 13, 2000, to get a direct application of the Treaty-reduced rate of 15%, the certificate referred to above must be provided to our depositary before the tenth day following the end of the month in which the dividends were distributable by us. If you fail timely to provide our depositary with the required documentation, you may obtain a refund of the 6% in excess withholding that would result from the Spanish tax authorities in accordance with the procedures below.

A scrip dividend (see Item 4 of Part I, “Information on the Company—A. History and development of the company—Principal Capital Expenditures and Divestitures—Recent events”) will be treated as follows:

• If the holder of ordinary shares or ADSs elects to receive newly issued ordinary shares or ADSs it will be considered a delivery of fully paid-up shares free of charge and, hence, will not be considered income for purposes of the Spanish Non-Resident Income Tax. The acquisition value, both of the new ordinary shares or ADSs received in the scrip dividend and of the ordinary shares or ADSs from which they arise, will be the result of dividing the total original cost of the shareholder’s portfolio by the number of shares, both old and new. The acquisition date of the new shares will be that of the shares from which they arise.

• If the holder of ordinary shares or ADSs elects to sell the rights on the market, the amount obtained from the sale of rights will be deducted from the acquisition value of the shares from which the rights arose. If the amount obtained from such sale is higher than the acquisition value of the shares from which the rights arose, the excess amount will be treated as a capital gain for the holder in the fiscal year in which the transfer takes place (please refer to “Taxation of capital gains” below).

• If the holder of ordinary shares or ADSs elects to receive the proceeds from the sale of rights back to us at a fixed price, the tax regime applicable to the amounts received will be that applicable to cash dividends described above.

Spanish refund procedure

According to Spanish Regulations on Non-Resident Income Tax, approved by Royal Decree 1776/2004, dated July 30, 2004, as amended, a refund of the amount withheld in excess of the rate provided by the Treaty can be obtained from the relevant Spanish tax authorities. To pursue the refund claim, if you are a U.S. resident entitled to the benefits of the Treaty, you are required to file all of the following:

• a Spanish 210 Form,

• the certificate referred to in the preceding section, and

• evidence that Spanish Non-Resident Income Tax was withheld with respect to you.

The refund claim must be filed within four years of the date on which the withheld tax was collected by the Spanish tax authorities. According to Order EHA/3316 of December 17, 2010, the 210 Form may be filed on or after February 1^st of the calendar year following the year in which the dividend was paid.

You are urged to consult your own tax adviser regarding refund procedures and any U.S. tax implications of receipt of a refund.

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Taxation of capital gains

Under Spanish law, any capital gains derived from securities issued by persons residing in Spain for tax purposes are considered to be Spanish-source income and, therefore, are taxable in Spain. If you are a U.S. resident, income from the sale of ADSs or shares will be treated as capital gains for Spanish tax purposes. Since January 1, 2012, Spanish Non-Resident Income Tax is levied at a 21% rate on capital gains realized by persons not residing in Spain for tax purposes who are not entitled to the benefit of any applicable treaty for the avoidance of double taxation. Royal Decree-Law 20/2011 had temporarily increased the applicable rate from 19% to 21% until December 31, 2013, but Law 22/2013 has extended the increased rate until December 31, 2014.

Notwithstanding the above, capital gains derived from the transfer of shares on an official Spanish secondary stock market by any holder who is a resident of a country that has entered into a treaty for the avoidance of double taxation with Spain containing an “exchange of information” clause will be exempt from taxation in Spain. In addition, under the Treaty, if you are a U.S. resident, capital gains realized by you upon the disposition of ADSs or shares will not be taxed in Spain provided you have not held, directly or indirectly, 25% or more of our stock during the twelve months preceding the disposition of the stock. You are required to establish that you are entitled to this exemption by providing to the relevant Spanish tax authorities an IRS certificate of residence in the United States, together with the appropriate Spanish 210 Form, between January 1^st and January 20^th of the calendar year following the year in which the transfer of shares took place.

Spanish wealth tax

Individuals not residing in Spain who hold shares or ADSs located in Spain are subject to the Spanish wealth tax (Spanish Law 19/1991), which imposes a tax on property located in Spain on the last day of any year. The Spanish tax authorities might take the view that all shares of Spanish corporations and all ADSs representing such shares are located in Spain for Spanish tax purposes. If such a view were to prevail, non-residents of Spain who held shares or ADSs on the last day of any year would be subject to the Spanish wealth tax for such year on the average market value of such shares or ADSs during the last quarter of such year.

Law 4/2008 amended the Spanish wealth tax law, introducing a 100% tax rebate and eliminating the obligation to file any form for tax periods starting as of January 1, 2008. However, Royal Decree-Law 13/2011, extended by Law 16/2012 and Law 22/2013, has temporarily restored the wealth tax abolishing the 100% tax rebate until January 1, 2015 and introduced a €700,000 tax free amount.

As a result of the above legislation, non-residents of Spain who held shares, ADSs, or other assets or rights located in Spain according to Spanish wealth tax law, on the last day of 2012, 2013 or 2014, whose combined value exceeds €700,000 might be subject to the Spanish wealth tax on that excess amount at marginal rates varying between 0.2% and 2.5%, and would be obliged to file the corresponding wealth tax return.

Spanish inheritance and gift taxes

Transfers of shares or ADSs upon death or by gift are subject to Spanish inheritance and gift taxes (Spanish Law 29/1987) if the transferee is a resident of Spain for tax purposes, or if the shares or ADSs are located in Spain at the time of gift or death, or the rights attached thereto could be exercised or have to be fulfilled in the Spanish territory, regardless of the residence of the beneficiary. In this regard, the Spanish tax authorities might determine that all shares of Spanish corporations and all ADSs representing such shares are located in Spain for Spanish tax purposes. The applicable tax rate, after applying all relevant factors, ranges between 0% and 81.6% for individuals.

Gifts granted to corporations non-resident in Spain are subject to Spanish Non-Resident Income Tax at a 21% tax rate on the fair market value of the shares as a capital gain. Royal Decree-Law 20/2011 has temporarily increased from 19% to 21% the rate applicable until December 31, 2013 but Law 22/2013 has extended the increased rate until December 31, 2014. If the donee is a United States corporation, the exclusions available under the Treaty described in the section “Taxation of capital gains” above will be applicable.

Expenses of transfer

Transfers of ADSs or shares will be exempt from any Spanish transfer tax or value-added tax. Additionally, no Spanish stamp tax will be levied on such transfers.

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U.S. Federal Income Tax Considerations

The following summary describes the material U.S. federal income tax consequences of the ownership and disposition of ADSs or shares, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to acquire such securities. The summary applies only to U.S. Holders (as defined below) that hold ADSs or shares as capital assets for U.S. federal income tax purposes. In addition, it does not describe all of the tax consequences that may be relevant in light of the U.S. Holder’s particular circumstances, including the potential application of the provisions of the Internal Revenue Code of 1986, as amended (the “Code”) known as the Medicare contribution tax, state, local or non-United States tax laws, and tax consequences applicable to U.S. Holders subject to special rules, such as:

• financial institutions;

• insurance companies;

• dealers and traders in securities that use a mark-to-market method of tax accounting;

• persons holding ADSs or shares as part of a “straddle”, conversion transaction or integrated transaction;

• persons whose “functional currency” is not the U.S. dollar;

• persons liable for the alternative minimum tax;

• tax exempt entities, including “individual retirement accounts” and “Roth IRAs”;

• partnerships or other entities classified as partnerships for U.S. federal income tax purposes;

• persons that own or are deemed to own 10% or more of our voting shares;

• persons that acquired our ADSs or shares pursuant to the exercise of an employee stock option or otherwise as compensation; or

• persons holding ADSs or shares in connection with a trade or business outside the United States.

If an entity that is classified as a partnership for U.S. federal income tax purposes holds shares or ADSs, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships holding shares or ADSs and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of owning and disposing of the shares or ADSs.

This summary is based on the Code, administrative pronouncements, judicial decisions, final, temporary and proposed Treasury Regulations, and the Treaty, all as of the date hereof, changes to any of which may affect the tax consequences described herein, possibly with retroactive effect. In addition, this summary assumes that each obligation provided for in or otherwise contemplated by the deposit agreement or any other related document will be performed in accordance with its terms. U.S. Holders are urged to consult their own tax advisers as to the U.S., Spanish and other tax consequences of the ownership and disposition of ADSs or shares in their particular circumstances.

As used herein, a “U.S. Holder” is, for U.S. federal income tax purposes, a beneficial owner of ADSs or shares who is eligible for the benefits of the Treaty and is:

• a citizen or individual resident of the United States;

• a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state thereof or the District of Columbia; or

• an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.

In general, for U.S. federal income tax purposes, U.S. Holders of ADSs will be treated as the owners of the underlying shares represented by those ADSs. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying shares represented by those ADSs.

The U.S. Treasury has expressed concerns that parties to whom American depositary shares are released before delivery of shares to the depositary, or intermediaries in the chain of ownership between U.S. holders and the issuer of the security underlying the American depositary shares, may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. holders of American depositary shares. These actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate holders. Accordingly, the creditability of Spanish taxes and the availability of the reduced tax rate for dividends received by certain non-corporate U.S. Holders, each described below, could be affected by actions taken by these parties or intermediaries.

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Taxation of Distributions

To the extent paid out of our current or accumulated earnings and profits (as determined in accordance with U.S. federal income tax principles), distributions, including the amount of any Spanish withholding tax, made with respect to ADSs or shares (other than certain pro rata distributions of our capital stock or rights to subscribe for shares of our capital stock) will be includible in the income of a U.S. Holder as foreign-source ordinary dividend income. Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. These dividends will be included in a U.S. Holder’s income on the date of the U.S. Holder’s (or in the case of ADSs, the depositary’s) receipt of the dividends, and will not be eligible for the “dividends-received deduction” generally allowed to corporations receiving dividends from domestic corporations under the Code. The amount of the distribution will equal the U.S. dollar value of the euros received, calculated by reference to the exchange rate in effect on the date that distribution is received (which, for U.S. Holders of ADSs, will be the date that distribution is received by the depositary), whether or not the depositary or U.S. Holder in fact converts any euros received into U.S. dollars at that time. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder generally will not be required to recognize foreign currency gain or loss in respect thereof. A U.S. Holder may have foreign currency gain or loss if the euros are converted into U.S. dollars after the date of receipt. Any gain or loss resulting from the conversion of euros into U.S. dollars will be treated as ordinary income or loss, as the case may be, and will be U.S.-source.

A scrip dividend (see Item 4 of Part I, “Information on the Company – A. History and development of the company – Principal Capital Expenditures and Divestures – Recent Events”) will be treated as a distribution of cash, even if a U.S. Holder elects to receive the equivalent amount in shares. In that event, the U.S. Holder will be treated as having received the U.S. dollar fair market value of the shares on the date of receipt, and that amount will be the U.S. Holder’s tax basis in those shares. The holding period for the shares will begin on the following day.

Subject to generally applicable limitations that may vary depending upon a U.S. Holder’s individual circumstances, the discussion above regarding concerns expressed by the U.S. Treasury, and the discussion of the passive foreign investment company rules below, under current law, dividends paid to certain non-corporate U.S. holders may be taxable at rates applicable to long-term capital gains. A U.S. Holder must satisfy minimum holding period requirements in order to be eligible to be taxed at these favorable rates. Non-corporate holders are urged to consult their own tax advisers regarding the availability of the reduced rate on dividends in their particular circumstances.

Subject to certain generally applicable limitations that may vary depending upon a U.S. Holder’s circumstances and subject to the discussion above regarding concerns expressed by the U.S. Treasury, a U.S. Holder will be entitled to a credit against its U.S. federal income tax liability for Spanish income taxes withheld at a rate not exceeding the rate provided by the Treaty. Spanish income taxes withheld in excess of the rate applicable under the Treaty will not be eligible for credit against a U.S. Holder’s federal income tax liability. See “Spanish tax considerations – Spanish refund procedure” for a discussion of how to obtain amounts withheld in excess of the applicable Treaty rate. The limitation on foreign taxes eligible for credit is calculated separately with regard to specific classes of income. Instead of claiming a credit, a U.S. Holder may, at its election, deduct such otherwise creditable Spanish taxes in computing taxable income, subject to generally applicable limitations. An election to deduct foreign taxes instead of claiming foreign tax credits applies to all taxes paid or accrued in the taxable year to foreign countries and possessions of the United States.

A U.S. Holder must satisfy minimum holding period requirements in order to be eligible to claim a foreign tax credit for foreign taxes withheld on dividends. The rules governing foreign tax credits are complex, and U.S. Holders are urged to consult their own tax advisers to determine whether they are subject to any special rules that limit their ability to make effective use of foreign tax credits.

Sale or Exchange of ADSs or Shares

A U.S. Holder will realize gain or loss on the sale or exchange of ADSs or shares in an amount equal to the difference between the U.S. Holder’s tax basis in the ADSs or shares and the amount realized on the sale or exchange, in each case as determined in U.S. dollars. Subject to the discussion of the passive foreign investment company rules below, the gain or loss will be capital gain or loss and will be long-term capital gain or loss if the U.S. Holder held the ADSs or shares for more than one year. This gain or loss will generally be U.S.-source gain or loss for foreign tax credit purposes.

Passive Foreign Investment Company Rules

We believe that we were not a “passive foreign investment company” (“PFIC”) for U.S. federal income tax purposes for the 2013 taxable year. However, because our PFIC status depends upon the composition of our income and assets and the fair market value of our assets (including, among others, less than 25% owned equity investments) from time to time, and upon certain proposed Treasury Regulations that are not yet in effect but are proposed to become effective for taxable years after December 31, 1994, there can be no assurance that we were not or will not be a PFIC for any taxable year.

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If we were a PFIC for any taxable year, any gain recognized by a U.S. Holder on a sale or other disposition of ADSs or shares would be allocated ratably over the U.S. Holder’s holding period for the ADSs or shares. The amounts allocated to the taxable year of the sale or other exchange and to any year before we became a PFIC would be taxed as ordinary income. The amounts allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the amount allocated to each of those taxable years. Further, any distribution in respect of ADSs or shares in excess of 125% of the average of the annual distributions on ADSs or shares received by the U.S. Holder during the preceding three years or the U.S. Holder’s holding period, whichever is shorter, would be subject to taxation as described above. Certain elections may be available that would result in alternative treatments (such as mark-to-market treatment) of the ADSs or shares.

In addition, if we were a PFIC in a taxable year in which we paid a dividend or the prior taxable year, the reduced rate on dividends discussed above with respect to non-corporate U.S. Holders would not apply.

If we were a PFIC for any taxable year during which a U.S. Holder owned the ADSs or shares, the U.S. holder would generally be required to file IRS Form 8621 with their annual U.S. federal income tax returns, subject to certain exceptions.

Information Reporting and Backup Withholding

Payment of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting, and may be subject to backup withholding, unless (i) the U.S. Holder is an exempt recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle the U.S. Holder to a refund, provided that the required information is timely furnished to the IRS.

Certain U.S. Holders who are individuals may be required to report information relating to their ownership of an interest in certain foreign financial assets, including stock of a non-U.S. entity, subject to certain exceptions (including an exception for publicly traded stock and interests held in custodial accounts maintained by a U.S. financial institution). Certain U.S. Holders that are entities may be subject to similar rules in the future. U.S. Holders are urged to consult their tax advisers regarding the effect, if any, of this requirement on the ownership and disposition of ADSs or shares.

F. Dividends and paying agents

Not Applicable.

G. Statement by experts

Not Applicable.

H. Documents on display

We are subject to the information requirements of the Exchange Act, except that as a foreign issuer, we are not subject to the proxy rules or the short-swing profit disclosure rules of the Exchange Act. In accordance with these statutory requirements, we file or furnish reports and other information with the SEC. Reports and other information filed or furnished by us with the SEC may be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, 100 F Street, N.E., Washington, D.C. 20549, and at the SEC’s regional offices at 233 Broadway, New York, New York 10279 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may also be inspected at the offices of the New York Stock Exchange, 11 Wall Street, New York, New York 10005, on which our ADSs are listed. In addition, the SEC maintains a website that contains information filed electronically with the SEC, which can be accessed on the internet at http://www.sec.gov. The information contained on this website does not form part of this annual report on Form 20-F.

I. Subsidiary information

Not Applicable.

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Item 11. Quantitative and Qualitative Disclosures About Risk

Introduction

Our risk management activities involve the integrated qualification and quantification of the different types of risk (credit risk, operational risk, reputational risk and market risk) which are assumed by our business units in their activities.

We have divided this section into the following ten parts:

• Corporate principles of risk management, control and risk appetite;

• Corporate governance of the risk function;

• Integrated risk control and internal risk validation;

• Clusters of risk;

• Credit risk;

• Market risk.

• Liquidity and funding risk;

• Operational risk;

• Compliance and reputational risk; and

• Capital.

Part 1. Corporate principles of risk management, control and risk appetite

1.1 Corporate principles

The Group’s risk management model underlying the business model is based on the following principles:

• Independence of the risk function with respect to the business. The head of the Group’s risk division, as second deputy chairman and as chairman of the risk committee, reports directly to the executive committee and the board. The segregation of functions between the business areas and the risk areas entrusted with risk acceptance, measurement, analysis, control and reporting provides sufficient independence and autonomy for proper risk control.

• Direct involvement of senior management in the decision-making process.

• Decisions by consensus, in order to ensure that different opinions are taken into account and avoid individual decision making, even at branch level. Decisions on credit transactions taken jointly by the risk and commercial areas, and the ultimate decision lies with the risk area in the event of discrepancy.

• Definition of powers. The type of activities to be performed, segments, risks to be assumed and risk decisions to be made are clearly defined for each risk approval and risk management unit, based on their delegated powers. How transactions should be arranged and managed and where they should be recognized for accounting purposes is also defined.

• Corporate control. Risk is controlled and managed in an integrated fashion through a corporate structure with Group-wide responsibilities (all risk, all businesses, and all geographical areas).

At the Group, the risk management and control process is conducted as follows:

• Definition of risk appetite, the purpose of which is to delimit, synthetically and explicitly, the levels and types of risk the Group is willing to assume in the performance of its business.

• Establishment of risk policies and procedures, which constitute the basic regulatory framework governing risk activities and processes. The local risk units use the mirror structures they have established to transpose the corporate risk regulations into their internal policies.

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• Construction, independent validation and approval of the risk models developed pursuant to corporate methodological guidelines. These tools enable Santander to systematize the risk origination, monitoring and recovery processes, the calculation of expected loss and capital required, and the measurement of the held-for-trading portfolio.

• Implementation of a risk monitoring and control system which checks, on a daily basis and with the corresponding reports, the degree to which the Group’s risk profile matches the risk policies approved and the risk limits set.

1.2 Risk culture

The risk culture is based on the principles of the Group’s risk management model detailed above and is transmitted to all of the organization’s business and management units, supported, inter alia, by the following levers:

• At the Group, the risk function is independent from the business units. This allows its criteria and opinions to be taken into account in the various spheres in which the Group’s businesses are carried on.

• The structure of the delegation of powers at the Group requires a large number of transactions to be submitted for validation by one of the Group’s central services risk committees, namely the global risk unit committee, the risk committee or the Group’s executive committee. The highly frequent nature of the meetings of these validation and monitoring committees (twice a week in the case of the risk committee; once a week in the case of the executive committee) enables a high degree of agility in the resolution of proposals while, at the same time, ensuring the assiduous participation of senior management in the daily management of the Group’s various risks.

• The Group has action manuals and policies regarding risk management. The risk and business teams hold periodic business orientation meetings which establish approaches that are in line with the Group’s risk culture. Similarly, risk and business executives participate as speakers at the meetings of the Group central services’ various transaction resolution committees mentioned above, and this facilitates the transmission of the criteria and approaches emanating from senior management to both the teams of executives and the organization’s other risk committees. The non-assignment of personal powers requires all decisions to be taken by group bodies, which makes decision-making more rigorous and transparent.

• Limit plan: the Group has implemented a comprehensive risk limit system, which is updated at least once a year and encompasses both credit risk and the various trading, liquidity and structural market risk exposures (for each business unit and by risk factor). Credit risk management is supported by credit management programs (individual customers and small businesses), rating systems (exposures to medium-sized and large companies) and pre-classifications (large corporate customers and financial counterparties). There are also limits on operational risk.

• The exposure information and aggregation systems in place at the Group allow it to monitor exposures on a daily basis, to check that the approved limits are complied with systematically, and to adopt, if necessary, the appropriate corrective measures.

• The main risks are analyzed not only when they are originated or when problems arise in the ordinary recovery process, but also on an ongoing basis for all customers.

• Other procedures supporting the transmission of the risk culture are the training activities performed at the corporate risk school, the remuneration and incentives policy -which always includes performance-based variables that take into account risk quality and the Group’s long-term results-, employees’ adherence to the general codes of conduct and systematic, independent action taken by the internal audit services.

1.3 Risk appetite at the Group

Risk appetite is defined at the Group as the amount and type of risk that it considers reasonable to assume in implementing its business strategy, in order to ensure that it can continue to operate normally if unexpected events occur. To this end, severe scenarios are taken into account, which might have an adverse impact on its levels of capital or liquidity, its profits and/or its share price.

The board of directors is the body responsible for establishing and annually updating the Group’s risk appetite, for monitoring its actual risk profile and for ensuring consistency between the two. The risk appetite is determined both for the Group as a whole and for each of the main business units using a corporate methodology adapted to the circumstances of each unit/market. At local level, the boards of directors of the related subsidiaries are responsible for approving the respective risk appetite proposals once they have been validated by the Group’s executive committee.

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Senior management is responsible for achieving the desired risk profile -which is reflected in the approved annual budget and in the medium-term strategic plan-, and for the day-to-day management of risk. Thus, it ensures that the usual limit structures formalized for each risk are properly connected to the established risk appetite metrics.

These limit structures for each risk are complementary to the risk appetite and fundamental to the articulation of an effective management thereof on a day-to-day basis. If the established risk appetite levels are reached, the required management measures must be adopted so that the desired risk profile can be restored.

Every quarter, the risk committee and the executive committee of the Group check compliance with the risk appetite at both Group and business unit level.

In 2013 further progress was made in the effective application of the risk appetite framework at the Group through both the related quarterly reviews referred to above and its implementation in certain of the Group’s main units.

Risk appetite framework

The Group’s risk appetite framework contains both quantitative and qualitative elements making up a group of primary metrics and a separate series of supplementary indicators.

Quantitative elements of the risk appetite

The primary quantitative metrics of the risk appetite are as follows:

• The maximum losses the Group is willing to assume,

• The minimum capital position the Group wishes to maintain, and

• The minimum liquidity position the Group wishes to have.

These metrics are calculated for severe stress scenarios that are plausible but unlikely to occur.

Also, the Group has a series of transversal metrics aimed at limiting excessive concentration of the risk profile, both in terms of risk factors and from the perspective of customers, businesses, geographical areas and products.

Losses

One of the three primary metrics used to formulate the Group’s risk appetite is expressed in terms of the maximum unexpected effect on results that the Group is willing to accept in the event of adverse scenarios that are plausible but unlikely to occur.

These scenarios affect mainly both the losses arising from credit risk exposure of retail and wholesale portfolios (considering both the direct credit loss and the reduction in margin) and the potential adverse effect of the exposure to market risk. After applying these credit and market impacts to the budgeted results, in the context of the monitoring of the risk appetite, senior management assesses whether the resulting margin is sufficient to absorb any unexpected effects arising from technology and operational risk and compliance and reputational risk.

The time horizon for the materialization of the adverse effects for all the risks considered is generally three years, or one year for market risk. Accordingly, the risk appetite framework should be complied with for each of the following three years.

With regard to this loss metric, the Group’s risk appetite establishes that the combined effect on all risks arising from these scenarios must be lower than the net margin after ordinary provisions, i.e. ordinary operating profit/(loss) before tax.

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Capital position

The Group has decided to operate with an ample capital base that enables it not only to meet regulatory requirements but also to have a reasonable capital buffer.

Also, in view of the related stress scenarios referred to in the preceding section, the Group’s risk appetite establishes that its risk profile must be such that the unexpected effect of these stress scenarios does not impair the core capital ratio by more than 100 basis points.

This capital approach included in the risk appetite framework is complementary to and consistent with the capital target for the Group that was approved as part of the capital planning process (Pillar II) implemented at the Group for a period of three years.

Liquidity position

The Group has implemented a funding model based on autonomous subsidiaries that are responsible for covering their respective liquidity requirements. Based on this premise, liquidity management is performed at the level of each of the subsidiaries within the corporate management framework which implements its basic principles (decentralization, medium- and long-term balance between the source and the use of funds, high weighting of customer deposits, diversification of wholesale sources, low recourse to short-term funding, sufficient liquidity reserve) and it is based on three fundamental pillars (governance model, balance sheet analysis and liquidity risk measurement, and management adapted to the needs of the business).

The Group’s liquidity risk appetite establishes a structural funding ratio of over 100%, i.e. the medium- and long-term customer deposits, capital and issues must exceed the structural funding needs defined basically as loans and credits and investments in Group companies. In addition, liquidity position and horizon targets are set for local and global systemic stress scenarios and idiosyncratic stress scenarios.

Supplementary quantitative metrics of concentration risk appetite

The Group wishes to maintain a widely diversified risk portfolio from the perspective of its exposure to large risks, to certain markets and to specific products. This is obtained firstly by virtue of the Group’s focus on the retail banking business with a high level of international diversification.

Concentration risk is measured using the following metrics for which risk appetite thresholds are established as a proportion of capital or loans and credits (generally):

• Customer (in proportion to capital): a) maximum individual net exposure to corporate customers (also, customers with internal ratings below the investment grade equivalent and which exceed a certain exposure level are monitored); b) maximum aggregate net exposure to the Group’s 20 largest corporate customers (Top 20); c) maximum aggregate net exposure of the exposures considered to be large exposures (corporate and financial customers); and d) maximum effect on earnings before tax (EBT) of the simultaneous default of the five largest corporate exposures (jump to default Top 5).

• Sector: maximum exposure of the corporate portfolio in a given economic sector as a percentage of loans and credits (both total loans and credits and those to the corporate segment).

• Portfolios with a high risk profile (defined as retail portfolios with percentage risk premiums above the established threshold): maximum percentages of exposure to this type of portfolio as a proportion of loans and credits (both total and retail loans and credits) and for the various business units.

Non-financial risks

• Operational risk: a maximum ratio of net operational risk losses to total income is established (for both the Group and each unit). In addition, the Group assesses the management status, which is based on the results of indicators of various matters including, inter alia, governance and management, budgetary compliance, quality of events databases, and corporate self-assessment questionnaires on the control environment. In accordance with the Basel specifications, net losses include the losses that might arise from compliance risk.

• Compliance and reputational risk: zero risk appetite. Consequently, the Group’s objective is to minimize the incidence of this type of risk, which it monitors on a systematic basis through the compliance and reputational risk indicator resulting from the measurement matrix created for this purpose.

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Qualitative elements of the risk appetite

In general, the Group’s risk appetite framework is based on maintaining the following qualitative objectives:

• A predictable general medium-low risk profile based on a diversified business model focusing on retail banking with a diversified international presence and significant market shares, and a wholesale banking model which prioritizes the relationship with the customer base in the Group’s principal markets.

• A target rating of between AA- and A-, both at Group level and for the local units (at local scale), based on the environment and on the performance of sovereign risk.

• A stable, recurring earnings generation and shareholder remuneration policy based on a strong capital and liquidity base and a strategy to effectively diversify sources and maturities.

• A corporate structure based on autonomous subsidiaries that are self-sufficient in capital and liquidity terms, minimizing the use of non-operating or purely instrumental companies, and ensuring that no subsidiary has a risk profile that might jeopardize the Group’s solvency.

• An independent risk function with highly active involvement of senior management to guarantee a strong risk culture focused on protecting and ensuring an adequate return on capital.

• To maintain a management model that ensures that all risks are viewed in a global interrelated way through a robust corporate risk control and monitoring environment with global responsibilities: all risks, all businesses, and all geographical areas.

• A business model that focuses on the products with respect to which the Group considers that it has sufficient knowledge and management capacity (systems, processes and resources).

• The confidence of customers, shareholders, employees and professional counterparties, enabling the Group to conduct its business within the bounds of its social and reputational commitment, in accordance with its strategic objectives.

• The availability of sufficient and adequate human resources, systems and tools in order to enable Santander Group to maintain a risk profile compatible with the established risk appetite, at both global and local level.

• The application of a remuneration policy containing the incentives required to ensure that the individual interests of employees and executives are in line with the corporate risk appetite framework and that the incentives are consistent with the Group’s long-term earnings performance.

The Group’s risk appetite framework also contains specific qualitative objectives for the various types of risk considered:

Living wills (recovery and resolution plans)

The Group has a corporate structure based on autonomous subsidiaries that are self-sufficient in capital and liquidity terms and it ensures that none of these subsidiaries has a risk profile that might jeopardize the Group’s solvency.

In 2010 the Group filed its corporate living wills with the supervisor of the consolidated Group, the Bank of Spain. Moreover, although it was not required, in 2010 further summarized individual living wills were prepared for the important geographical units, including Brazil, Mexico, Chile, Portugal and the U.K..

In 2013 the fourth version of the corporate living wills was prepared. As with the first three versions in 2010, 2011 and 2012, the Group submitted the fourth version of the living wills to its CMG (Crisis Management Group) in September 2013. The 2013 living wills comprises the corporate plan (corresponding to Banco Santander, S.A.) and the individual plans for most of its most important local units (the U.K., Brazil, Mexico, the U.S. – Santander USA, Germany and Portugal). Particularly noteworthy are the cases of the U.K., Germany and Portugal, where, irrespective of the obligation to be part of the corporate living wills, a complete version was prepared in compliance with local regulatory initiatives.

We also submitted our U.S. resolution plan in December 2013. The resolution plan is subject to review by the Federal Reserve Board and the FDIC.

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Part 2. Corporate governance of the risk function

The risk committee is responsible for proposing the Group’s risk policy for approval by the board within its governing and supervisory powers. Furthermore, the committee ensures that the Group’s activities are consistent with its risk appetite level and, in this regard, it sets global limits for the main risk exposures, which it reviews systematically, and decides upon any transactions that exceed the powers delegated to lower-ranking bodies.

The risk committee, an executive body that adopts decisions within the scope of the powers delegated by the board, is presided over by the second vice-chairman of the Group and also comprises a further four directors of the Bank.

The responsibilities assigned to the risk committee are essentially as follows:

• To propose to the board the Group’s risk policy, which will identify, in particular:

• The various types of risk (financial, operational, technological, legal and reputational, inter alia) facing the Group.

• The information and internal control systems to be used to control and manage these risks.

• The level of risk deemed acceptable by the Group.

• The measures envisaged to mitigate the impact of the identified risks in the event that they materialize.

• To conduct systematic reviews of the Group’s exposure to its main customers, economic activity sectors, geographical areas and types of risk.

• To authorize the management tools and risk models and ascertain the result of their internal validation.

• To ensure that the Group’s actions are consistent with the previously defined risk appetite.

• To be informed of, assess and follow such remarks and recommendations as may periodically be made by the supervisory authorities in discharging their function.

• To resolve transactions outside the powers delegated to lower-ranking bodies and the overall limits for pre-classified risk categories for economic groups or in relation to exposure by type of risk.

The risk committee has delegated certain of its powers to risk subcommittees which are structured by geographical area, business line and type of risk, all of which are defined in the corporate risk governance model.

In addition, both the executive committee and the board of directors of the Bank pay particular attention to the management of the Group’s risks.

At the 2014 annual general meeting, held on March 28, 2014, our shareholders passed a resolution proposed by the board of directors to amend our Bylaws in compliance with the CRD IV to establish a new committee of the board to assist the latter on matters of risk, regulation and compliance.

Our amended Bylaws have not yet been filed with the Mercantile Register, which is required prior to their effectiveness. We expect that the amendments will become effective within the first semester of 2014.

Once such committee is set up, the risk committee will retain its powers with respect to risk management and the new committee will assume advisory and support functions on issues of supervision and risk control, the definition of Group’s risk policies, relations with supervisors and compliance issues, the latter being handed over from the current audit and compliance committee, which will henceforth be known as the audit committee.

The second vice-chairman of the Group is the person ultimately responsible for risk management. He is also a member of the board of directors and chairman of the risk committee, and two general risk units report to him. These units are independent of the business areas from both a hierarchical and functional standpoint, and their organizational and functional structure is as follows:

• The risk unit (“DGR”) is responsible for the executive credit risk and financial risk management functions and for the control of other risks (mainly technology, operational and compliance risk), and it is adapted to the structure of the business, both by type of customer and by activity and geographical area (global/local perspective).

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The areas of the risk unit are divided into three blocks:

• A structure for the management and control of financial risks (credit, market and structural risk) and the control of other risks. This block includes the following areas: loans to individuals, loans to companies, loan approval and monitoring, market and structural risks and non-financial risk control.

• A business structure, centered on the performance of the risk function in the Group’s global and local businesses. This block includes the following areas: Santander Consumer Finance risk management, global business risk management, and asset write-downs and recoveries.

• A structure for the establishment of frameworks, the development and implementation of models and information infrastructure. This block includes the following areas: risk policies, methodology and risk information management.

In compliance with the aforementioned structure, the Group has defined a planning and governance area responsible for the coordination of new projects and the internal management of all the units, and a risk monitoring and consolidation area responsible for overseeing all risks on an overall basis.

The scope of action of these functions is global, i.e. they feature in all the units in which the risk division acts and this structure is mirrored in the local units. The fundamental elements through which the global functions are replicated in each unit are the corporate frameworks. These are the central elements for disseminating and transferring global practices, reflecting the action policies and criteria for each area and establishing the Group’s compliance standards to be applied at all local units.

In general, it is possible to distinguish the main functions performed by the global areas of the DGR and by the units:

• The risk unit establishes risk policies and criteria, global limits and decision-making and control processes; it generates management schemes, systems and tools; and it adapts the best practices of both the banking industry and the various local units for their application in the Group.

• The local units apply the policies and systems to the local market; they adapt the management schemes and organization to the corporate frameworks; they contribute criticism and best practices; and they lead local projects.

• The integrated risk control and internal risk validation unit, with global-reaching corporate responsibilities, which provide support to the Group’s governing bodies, namely:

• Internal validation of the credit and market risk and economic capital models in order to measure their suitability for management and regulatory purposes. The validation exercise envisages the review of the theoretical fundamentals of the model, the quality of the data used to build and calibrate the model, and its use and the associated corporate governance process.

• Integrated risk control, the purpose of which is to supervise the quality of the Group’s risk management, seeking to ensure that the systems for the management and control of the risks inherent to its activity comply with the strictest criteria and the best practices observed in the industry and/or required by the regulators, and verifying that the risk profile actually assumed is within the guidelines laid down by senior management.

Part 3. Integrated risk control and internal risk validation

The integrated risk control and internal risk validation functions are located, at corporate level, within the integrated risk control and internal risk validation unit, reporting directly to the second vice-chairman of the Group and chairman of the risk committee, and provide support for the Group’s governing bodies in risk control and management matters.

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3.1 Integrated risk control function

In 2008 the Group launched the integrated risk control function in order to ensure an integrated view of the management of all the risks affecting the performance of the Group’s ordinary activities. The risks taken into consideration are: credit risk (including concentration and counterparty risks); market risk (including liquidity risk and structural interest rate and foreign currency risks); operational and technology risk; and compliance and reputational risk.

The integrated risk control function is articulated in three complementary activities:

1) To guarantee that the management and control systems for the various risks inherent in the Group’s activities comply with the most stringent criteria and the best practices observed in the industry and/or required by regulators;

2) To ensure that senior management has an all-embracing view of the profiles of the various risks assumed at any time and that these profiles are consistent with the pre-determined risk appetite; and

3) To supervise adequate compliance, in due time and form, with any recommendations on risk management and control made as a result of inspections conducted by internal audit and by the supervisors to which the Group is subject.

The function is characterized by having global and corporate scope and encompasses all risks, all businesses and all geographical areas. It is a third layer of control which follows the control performed in the first instance by the officer responsible for managing and controlling each risk at each business or functional unit (first layer of control) and by each officer responsible for the control of each risk at corporate level (second layer of control). This system ensures a vision and, therefore, the integrated monitoring of all the risks incurred by the Group in the performance of its business activities.

3.2 Independent internal validation of risk models

In addition to constituting a regulatory requirement, the internal validation of risk models function provides essential support to the board’s risk committee and the local and corporate risk committees in the performance of their duties to authorize the use of the models (for management and regulatory purposes) and to review them regularly.

To this end, a sufficiently independent specialized unit of the Group issues an expert opinion on the adequacy of the internal models for the intended internal management and/or regulatory purposes (calculation of regulatory capital, level of provisions, etc.), expressing a conclusion on their robustness, usefulness and effectiveness.

At the Group, internal validation covers all models used in the risk function, i.e. credit, market, structural and operational risk models and economic and regulatory capital models. The scope of the validation includes not only the more theoretical or methodological aspects, but also the technology systems and the data quality that facilitate and underpin the effective operation of the models and, in general, all the relevant aspects of risk management (controls, reporting, uses, involvement of senior management, etc.).

This function is performed at a global and corporate level in order to ensure uniformity of application, and is implemented through five regional centers located in Madrid, London, São Paulo, New York and Wroclaw (Poland). From a functional standpoint, these centers are fully accountable to the corporate center, which makes it possible to ensure consistency in the performance of their activities. This system facilitates the application of a corporate methodology that is supported by a set of tools developed internally by the Group that provide a robust corporate framework to be used at all the Group’s units and which automate certain verifications to ensure efficient reviews.

It should be noted that the Group’s corporate internal validation framework is fully consistent with the internal validation standards for advanced approaches issued by the Bank of Spain and by the other supervisors to which the Group is subject. Accordingly, the Group maintains the segregation of functions between internal validation and internal audit, which, in its role as the last layer of control at the Group, is responsible for reviewing the methodology, tools and work performed by internal validation and for giving its opinion on the degree of effective independence.

Part 4. Clusters of risk

The Group’s senior management considers that there are clusters of risk that affect its business and, therefore, the risks arising from it. These clusters and the actions adopted to mitigate them are as follows:

• Macroeconomic environment: at times of crisis it is particularly important to pay attention to the volatility of the macroeconomic environment. Geographical diversification protects the Group’s results by minimizing the impact of this volatility, and it enables the Group to maintain a medium-low risk profile. In addition, the Group uses scenario analysis techniques to ensure that its risk profile is maintained within the established risk appetite and that the balance sheet is resistant to potential adverse macroeconomic scenarios. These analyses are regularly submitted to senior management, and they include the potential impact on the income statement of the effect of the scenarios on margins, credit risk and counterparty risk losses and the trading portfolio. The analyses also consider the impact of adverse scenarios on the Group’s liquidity position.

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• Regulatory change: as a response to the financial crisis in recent years, the regulators and competent authorities in banking matters are designing a series of measures intended to avoid future crises and to mitigate their impact, if any. Compliance with these measures by financial institutions, especially those designated as systemic, is having an impact on various areas: capital requirements, liquidity, transparency, etc.

The constant monitoring of the changes in the regulatory framework and the anticipation of these changes to enable Santander to adapt swiftly to the new requirements constitute the basic pillars of the Bank’s approach to these matters.

The public policy department, which forms part of the communications, corporate marketing and research division, assumes the task of monitoring and managing regulatory alerts, in coordination with the general secretariat division, the controller’s unit, the finance and risk divisions and the support and business areas affected by these alerts. The persons responsible for public policy at division level hold meetings on a monthly basis and those responsible for public policy at country level hold a teleconference every month in order to ensure coordination at Group level.

This approach is encouraged and supported from the highest echelons of the Bank’s senior management. The public policy committee, which is chaired by the CEO, is the forum where the main regulatory changes are reported, the impact thereof is analyzed and the strategy to be adopted regarding these matters is designed.

• Reputational and conduct risk: in order to mitigate the impact of these risks, in recent years the Group has substantially reinforced its control of all matters relating to the marketing of products (including follow-up) and customer relations. This matter is currently the focus of considerable attention by both the supervisors and public opinion, not only in relation to investment products but also banking products and financial services in general.

Part 5. Credit risk

5.1 Introduction to the treatment of credit risk

Credit risk is the possibility of loss stemming from the total or partial failure of our customers or counterparties to meet their financial obligations to the Group.

In credit risk management terms, segmentation is based on the distinction between two types of customers:

• Individualized customers are defined as those to which a risk analyst has been assigned. This category includes global wholesale banking customers (corporates, financial institutions and sovereigns) and the retail banking companies whose risk level is above a set exposure threshold for each unit. Risk management is performed through expert analysis supplemented by decision-making support tools.

• Standardized risks: standardized customers are those which have not been assigned a risk analyst. This segment includes exposures to individuals, independent professionals and retail banking enterprises not classified as individualized customers. Management of these risks is based on internal risk assessment and automatic decision-making models, supplemented when required by the expert judgment of teams of analysts.

The Group has a mainly retail profile, with more than 80% of its total risk exposure being generated by its commercial banking business.

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5.2 Main aggregates and variations

5.2.1 Global credit risk map - 2013

Following are the main aggregates relating to credit risk arising on customer business:

	Credit risk exposure to customers(1) (millions of euros)						Non-performing loans ratio (%)						Coverage ratio (%)
	2013		2012		2011		2013		2012		2011		2013		2012		2011
Continental Europe		312,167		332,261		353,506		9.13		6.29		5.24		57.3		77.0		55.2
Spain		189,783		210,536		223,456		7.49		3.84		3.30		44.0		50.0		50.9
Santander Consumer Finance		58,628		59,387		59,442		4.01		3.90		3.97		105.3		109.5		109.3
Portugal		26,810		28,188		30,607		8.12		6.56		4.06		50.0		53.1		54.9
Poland		18,101		10,601		9,120		7.84		4.72		4.89		61.8		68.3		65
United Kingdom		235,627		254,066		257,698		1.98		2.05		1.85		41.6		44.1		37.5
Latin America		150,979		160,413		159,445		5.03		5.42		4.32		84.6		87.5		97.0
Brazil		79,216		89,142		91,035		5.64		6.86		5.38		95.1		90.2		95.2
Mexico		24,024		22,038		19,446		3.66		1.94		1.82		97.5		157.3		175.7
Chile		31,645		32,697		28,462		5.91		5.17		3.85		51.1		57.7		73.4
Puerto Rico		4,023		4,567		4,559		6.29		7.14		8.64		61.6		62.0		51.4
Argentina		5,283		5,378		4,957		1.42		1.71		1.15		140.4		143.3		206.9
United States		40,349		44,678		43,052		2.23		2.29		2.85		93.6		105.9		96.2
Total Group		738,558		793,448		820,968		5.64		4.54		3.90		61.7		72.4		61.0

(1) Including gross loans and advances to customers, guarantees, documentary credits and the mark-to-market of customer derivatives (€5,505 million).

At 2013 year-end credit risk exposure had fallen by 7%. This fall was experienced across the board, except for Brazil, Mexico, Chile and Poland, where growth was observed in 2013 in local currency terms. These lending levels, together with non-performing loans of €41,652 million, placed the Group’s non-performing loans ratio at 5.64% (up 110 basis points. from 2012).

The Group’s coverage ratio stood at 62%. It is important to take into account that the ratio benefits from the relative proportion of the mortgage portfolios (especially in the U.K. and Spain), which require lower on-balance-sheet provisions since they are secured by collateral.

5.3 Detail of geographical areas with the highest concentrations

Following is a description of the portfolios in the geographical areas where the Group’s risk concentration is highest:

5.3.1 U.K.

Credit risk exposure to U.K. customers amounted to €235,627 million at the end of December 2013, and represented 31.9% of the Group total.

Due to its importance, not only to Santander UK, but also to Santander Group’s lending activity as a whole, the mortgage loan portfolio (which totaled €177,617 million at the end of December 2013) must be highlighted.

This portfolio is composed entirely of first-mortgage home purchase or refurbishment loans to new and existing customers, since transactions involving second or successive liens on mortgaged properties are no longer originated.

The property on which the mortgage guarantee is constituted must be located in the U.K., irrespective of where the funding is to be employed, except for certain one-off transactions. Loans may be granted for the purchase of residences abroad, but the mortgage guarantee must in all cases be constituted on a property located in the U.K..

Geographically speaking, the credit risk exposure is concentrated mainly in the South East of England, where house price indices reflect a more stable behavior, even in times of economic slowdown.

Properties are appraised independently prior to the approval of each new transaction, in accordance with the Group’s risk management principles.

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For mortgage loans that have already been granted, the appraised value of the mortgaged property is updated quarterly by an independent agency using an automatic appraisal system in accordance with standard procedure in the market and in compliance with current legislation.

The non-performing loans ratio rose from 1.74% in 2012 to 1.88% at 2013 year-end.

This rise can be explained mainly by the fall in loans and credits due to the application of the strict lending and pricing policies implemented in recent years. The effect of these measures has been to reduce exposure to certain of the worst performing subsegments, such as interest-only mortgages, to a greater extent than the new lending generated, resulting in a corresponding reduction in total stock.

There was a significant improvement in the performance of non-performing loans as a result of the more favorable macroeconomic environment and the increase in re-performing loans due to the improved efficiency of the recovery teams. Thus, the amount of non-performing loans increased by 1.1% to €3,453 million, including foreclosed homes, compared with the 8.5% rise in 2012.

The credit policies limit the maximum loan-to-value criteria to 90% for loans on which principal and interest are repaid and to 50% for loans on which interest is paid periodically and the principal is repaid on maturity.

Current credit risk policies expressly prohibit loans considered to be high risk (subprime mortgages), and establish demanding requirements regarding the credit quality of both loans and customers. For example, the granting of mortgage loans with LTVs exceeding 100% has been forbidden since 2009. Between 2009 and 2012 less than 0.1% of new production had an LTV higher than 90%.

5.3.2 Spain

5.3.2.1 Portfolio overview

Total credit risk in Spain (including guarantees and documentary credits but excluding Spain’s run-off real estate unit) amounted to €189,783 million (26% of the Group total), with an adequate degree of diversification in terms of both products and customer segments. In 2013 lending levels continued to fall as a result of the decrease in the demand for credit and the economic situation. The non-performing loans ratio stood at 7.49%. The coverage ratio stood at 44%.

5.3.2.2 Portfolio of home purchase loans to families

Home purchase loans granted to families in Spain stood at €55,158 million at 2013 year-end. Of this amount, 98% was secured by mortgages.

In millions of euros	31-12-13
	Gross amount		Of which: Impaired
Home purchase loans		55,158		4,041
Without mortgage guarantee		863		461
With mortgage guarantee		54,295		3,580

The risk profile of the home purchase mortgage loan portfolio in Spain remained at a medium-low level, with limited prospects of additional impairment:

• All mortgage transactions include principal repayments from the very first day.

• There is a frequent practice of early repayment, as a result of which the average life of transactions is much shorter than the contractual term.

• Debtors provide all their assets as security, not just the home.

• High quality of the collateral, since the portfolio consists almost exclusively of principal-residence loans.

• 88% of the portfolio has an LTV of less than 80%.

• Stable average debt-to-income ratio at around 29%.

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The following table sets forth the loan to value ratio of our home purchase loan portfolio with mortgage guarantee in Spain as of December 31, 2013, taking into account guarantee values at the time of origination:

	12/31/13
	Loan-to-value ratio
In millions of euros	Less than or equal to 40%		More than 40% and less than 60%		More than 60% and less than 80%		More than 80% and less than or equal to 100%		More than 100%		Total
Initial gross amount		12,703		16,642		18,185		5,683		1,083		54,295
Of which: Impaired		277		641		1,353		951		358		3,580

For internal management purposes, the Group updates the LTV ratios at least once a year, taking into consideration published house price indices. Also, if a debtor becomes impaired the Group updates the appraisals undertaken by valuers, which are taken into account in the estimate of impairment losses.

5.3.2.3 Portfolio of loans to non-real estate companies

The €106,042 million of loans granted directly to SMEs and companies constitute the most important lending segment in Spain, representing 56% of the total.

Most of the portfolio relates to individualized customers to which a risk analyst has been assigned because of the risk assumed. The risk analyst monitors the customer on an ongoing basis in all the phases of the risk cycle.

The non-performing loans ratio of this portfolio was 8.72% in 2013, impacted by the continuity of the complicated economic environment and by the drop in lending.

5.3.2.4 Real estate loan portfolio

Gross real estate exposure in Spain amounted to €20,936 million at 2013 year-end, of which €12,105 million related to loans and €8,831 million to foreclosed properties. Of these amounts, €11,355 million of loans and €7,990 million of foreclosed properties are managed using a specialized management model in a separate unit called “Real estate operations discontinued in Spain” (Spain’s run-off real estate), which also manages investments in the real estate industry (Metrovacesa, S.A. and the Spanish Bank Restructuring Asset Management Company).

The policy of severely reducing the balances in this segment continued in 2013.

	Millions of euros
	31-12-13			31-12-12			31-12-11
Balance at beginning of year		15,867			23,442			27,334
Foreclosed assets		(848	)		(930	)		(914	)
Reductions (*)		(2,114	)		(5,670	)		(2,742	)
Written-off assets		(800	)		(975	)		(236	)
Balance at end of year (net)		12,105			15,867			23,442

^(*)  Includes sales of portfolios, cash recoveries and third-party subrogations

Third party subrogation correspond to the replacement of the original borrower (real estate developer) with a private individual who acquires a share to the loan equivalent to the house acquired from the developer by such individual. These loans are included in the “House purchase loan portfolio”.

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The NPL ratio of this portfolio ended the year at 61.7% (compared with 47.7% at December 2012) due to the increase in the proportion of impaired assets in the problem loan portfolio and, in particular, to the sharp reduction in lending in this segment. The table below shows the distribution of the portfolio. The coverage ratio of the real estate exposure in Spain stands at 41.1%.

Millions of euros	12/31/13
	Gross amount		Excess over collateral value		Specific allowance
Financing for construction and property development recorded by the Group’s credit institutions (business in Spain)		12,105		5,173		4,981
Of which: Impaired		7,473		3,869		3,960
Of which: Substandard		2,972		1,011		1,021
Memorandum item: Written-off assets		1,642

Memorandum item: Data from the public consolidated balance sheet	12/31/13
Millions of euros	Carrying amount
Total loans and advances to customers excluding the public sector (businesses in Spain)		160,478
Total consolidated assets		1,115,638
Impairment losses and credit risk allowances. Collective coverage (business in Spain)		213

The Group calculates the loan loss allowance individually as the difference between the carrying amount of the debt and the present value of its estimated cash flows over the life of the agreement, including those from the guarantees, less costs to sell.

At year-end, this portfolio had low concentration and an adequate level of collateral and allowances.

	Loans: Gross amount		Loans: Gross amount
	12/31/13		12/31/12
1. Without mortgage guarantee		1,562		2,225
2. With mortgage guarantee		10,543		13,642
2.1 Completed buildings		5,600		7,025
2.1.1 Residential		3,192		3,491
2.1.2 Other		2,408		3,534
2.2 Buildings under construction		685		1,493
2.2.1 Residential		573		1,080
2.2.2 Other		112		413
2.3 Land		4,258		5,124
2.3.1 Developed land		3,751		4,705
2.3.2 Other land		507		419
Total		12,105		15,867

Policies and strategies in place for the management of these risks

The policies in force for the management of this portfolio, which are reviewed and approved on a regular basis by the Group’s senior management, are currently geared towards reducing and securing the outstanding exposure, albeit without neglecting any viable new business that may be identified.

In order to manage this credit exposure, the Group has specialized teams that not only form part of the risk areas but also supplement the management of this exposure and cover the entire life cycle of these transactions: commercial management, legal processes, court procedures and potential recovery management.

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As has already been discussed in this section, the Group’s anticipatory management of these risks enabled it to significantly reduce its exposure, and it has a granular, geographically diversified portfolio in which the financing of second residences accounts for a very small proportion of the total.

Mortgage lending on non-urban land represents a low percentage of mortgage exposure to land, while the remainder relates to land already classified as urban or developable, which can therefore be developed.

In the case of home financing projects in which the construction work has already been completed, the significant reduction in the exposure is supported by various actions. As well as the specialized marketing channels already in existence, campaigns were carried out with the support of specific teams of managers for this function who, in the case of the Santander Network, were directly supervised by the recoveries business area. These campaigns, which involved the direct management of the projects with property developers and purchasers, reducing sale prices and adapting the lending conditions to the buyers’ needs, enabled loans already in force to be subrogated. These subrogations enable the Group to diversify its risk in a business segment that displays a clearly lower non-performing loans ratio.

The loan approval processes are managed by specialist teams which, working in direct coordination with the sales teams, have a set of clearly defined policies and criteria:

• Property developers with a strong solvency profile and a proven track record in the market.

• Strict criteria regarding the specific parameters of the transactions: exclusive financing for the construction cost, high percentages of accredited sales, principal residence financing, etc.

• Support of financing of government-subsidized housing, with accredited sales percentages.

• Restricted financing of land purchases, subject to the restoration of a sufficient level of coverage in existing financing arrangements or to the obtainment of increased collateral.

In addition to the permanent control performed by its risk monitoring teams, the Group has a specialist technical unit that monitors and controls this portfolio with regard to the stage of completion of construction work, planning compliance and sales control, and validates and controls progress billing payments. The Group has created a set of specific tools for this function. All mortgage distributions, amounts drawn down of any kind, changes made to the grace periods, etc. are authorized on a centralized basis.

In the case of construction-phase projects that are experiencing difficulties of any kind, the policy adopted is to ensure completion of the construction work so as to obtain completed buildings that can be sold in the market. To achieve this aim, the projects are analyzed on a case-by-case basis in order to adopt the most effective series of measures for each case (structured payments to suppliers to ensure completion of the work, specific schedules for drawing down amounts, etc.).

The management of on-balance-sheet property assets is performed by companies that specialize in the sale of property (Altamira Santander Real Estate, S.A.) and is supplemented by the commercial network structure. The sale prices are reduced in line with market conditions.

Foreclosed properties

As a last resort, the acquisition and foreclosure of property assets is one of the mechanisms adopted in Spain in order to manage the portfolio efficiently. At December 31, 2013, the net balance of these assets amounted to €4,146 million (gross amount: €8,831 million; recognized allowance: €4,685 million).

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The following table shows the detail of the assets acquired and foreclosed by the businesses in Spain at 2013 and 2012 year-end:

Millions of euros	12/31/13				12/31/12
	Carrying amount		Of which: Allowance		Carrying amount		Of which: Allowance
Property assets arising from financing provided to construction and property development companies		3,397		4,151		2,906		3,650
Of which:
Completed buildings		1,059		727		793		498
Residential		492		338		393		236
Other		567		389		400		262
Buildings under construction		366		369		283		281
Residential		366		368		274		273
Other		—		1		9		8
Land		1,972		3,055		1,830		2,871
Developed land		926		1,390		1,302		2,024
Other land		1,046		1,665		528		847
Property assets from home purchase mortgage loans to households		747		530		707		454
Other foreclosed property assets		2		4		61		60
Total property assets		4,146		4,685		3,674		4,164
Equity instruments, ownership interests and financing provided to non-consolidated companies holding these assets		647		751		649		749
Total		4,793		5,436		4,323		4,913

In recent years, the Group has considered asset acquisition/foreclosure to be a more efficient method for resolving cases of default than legal proceedings. The Group initially recognizes foreclosed assets at the lower of the carrying amount of the debt (net of provisions) and the fair value of the acquired/foreclosed asset (less estimated costs to sell). If fair value (less costs to sell) is lower than the net value of the debt, the difference is recognized under Impairment losses on financial assets (net) - Loans and receivables in the consolidated income statement for the year. Subsequent to initial recognition, the assets are measured at the lower of fair value (less costs to sell) and the amount initially recognized. The fair value of this type of assets is determined by the Group’s directors based on evidence obtained from qualified valuers or evidence of recent transactions.

The changes in foreclosed assets were as follows:

	Thousands of millions of euros
	2013		2012
Gross additions		1.9		2.1
Disposals		0.9		2.8
Difference		1.0		(0.7	)

5.3.3 Brazil

The loan portfolio in Brazil amounted to €79,216 million (11% of the Group total), and had an adequate degree of diversification and a predominantly retail profile. 55% of loans are loans to individuals, consumer loans and loans to SMEs.

In 2013 the portfolio grew by 7.1% (excluding changes in exchange rates) as compared with 11% in 2012. This growth is in line with the nominal growth of the Brazilian economy and the average performance of private banks in Brazil.

The NPL ratio was 5.64% at 2013 year-end, compared with 6.86% in 2012, reflecting the improvement in the credit quality of the portfolio, especially loans to individuals.

The non-performing loans coverage ratio stands at 95% (2012 year-end: 90%).

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5.4. Credit risk from other standpoints

5.4.1 Credit risk from financial market operations

This concept includes the credit risk arising in treasury operations with customers, mainly credit institutions. These operations are performed using both money market financing products arranged with various financial institutions and derivative products intended to provide service to the Group’s customers.

The exposure is measured using an MtM methodology (replacement value of derivatives or amount drawn down of committed facilities) plus potential future exposure (add-on). Calculations are also performed of capital at risk or unexpected loss (i.e. the loss which, once the expected loss is subtracted, constitutes the economic capital, net of guarantees and recoveries).

When the markets close, the exposures are recalculated by adjusting all the transactions to their new time horizon, the potential future exposure is adjusted and mitigation measures are applied (netting arrangements, collateral arrangements, etc.) so that the exposures can be controlled daily against the limits approved by senior management. Risk control is performed using an integrated, real-time system that enables the Group to know at any time the unused exposure limit with respect to any counterparty, any product and maturity and at any Group unit.

5.4.2 Concentration risk

Concentration risk control is key to the risk management process. The Group continuously monitors the degree of credit risk concentration, by country, sector and customer group.

The risk committee establishes the risk policies and reviews the exposure limits required to ensure adequate management of credit risk concentration.

The Group is subject to Bank of Spain regulations on large exposures. Pursuant to the rules contained in Bank of Spain Circular 3/2008 (on the calculation and control of minimum capital requirements) and subsequent amendments thereto, the value of a credit institution’s total exposure to a single individual, entity or economic group, including the non-consolidated portion of its own economic group, may not exceed 25% of its capital. Exposures to a single individual, legal entity or economic group are deemed to be large exposures when their value exceeds 10% of the credit institution’s capital. Exposures to governments and central banks belonging to the OECD are excluded from this treatment.

At December 31, 2013, there were certain economic groups with respect to which the Group’s exposure initially exceeded 10% of capital: seven financial institutions, one central government and one central counterparty in the EU. After applying risk mitigation techniques and the regulations applicable to large exposures, all of these exposures fell below 4% of eligible capital.

At December 31, 2013, the Group’s credit exposure to the top 20 borrower economic and financial groups, excluding AAA-rated governments and sovereign bonds denominated in local currency, accounted for 4.7% of the credit risk exposure to customers (lending plus off-balance-sheet exposures), slightly less than in 2012.

The Group does not have any exposures to central counterparties that exceed 5% of capital. The top 10 International Financial Institutions account for €14,769 million.

Santander Group’s risk division works closely with the financial accounting and control division in the active management of credit portfolios, which includes reducing the concentration of exposures through several techniques, such as the arrangement of credit derivatives for hedging purposes or the performance of securitization transactions, in order to optimize the risk/return ratio of the total portfolio.

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The detail, by activity and geographical area of the counterparty, of the concentration of the Group’s risk at December 31, 2013 is as follows:

Millions of euros	12/31/13
	Total		Spain		Other EU countries		Americas		Rest of the world
Credit institutions		147,993		26,142		69,665		48,481		3,705
Public sector		113,441		46,880		22,358		38,931		5,272
Of which:
Central government		92,780		32,216		21,646		33,649		5,269
Other		20,661		14,664		712		5,282		3
Other financial institutions		52,393		11,833		24,031		14,036		2,493
Non-financial companies and individual entrepreneurs		293,297		98,642		65,783		115,972		12,900
Of which:
Property construction and development		21,477		7,159		4,542		9,623		153
Civil engineering construction		6,849		4,611		2,030		139		69
Large companies		170,377		51,036		37,535		74,777		7,029
SMEs and individual entrepreneurs		94,594		35,836		21,676		31,433		5,649
Other households and non-profit institutions serving households		396,157		66,876		254,679		73,068		1,534
Of which:
Residential		291,267		54,441		205,536		30,349		941
Consumer loans		92,036		7,823		46,712		36,931		570
Other purposes		12,854		4,612		2,431		5,788		23
Subtotal		1,003,281		250,373		436,516		290,488		25,904
Less: collectively assessed impairment losses		3,439
Total (*)		999,842

(*) For the purposes of this table, the definition of risk includes the following items in the public balance sheet: Loans and advances to credit institutions, Loans and advances to customers, Debt instruments, Equity instruments, Trading derivatives, Hedging derivatives, Investments and Contingent liabilities.

5.4.3 Country risk

Country risk is a credit risk component inherent in all cross-border credit transactions due to circumstances other than ordinary commercial risk. Its main elements are sovereign risk, transfer risk and other risks that can affect international financial operations (war, natural disasters, balance of payments crises, etc.).

At December 31, 2013, the country risk exposure for which allowances must be recorded amounted to €382 million (December 31, 2012: €342 million). The allowance recognized in this connection at 2013 year-end amounted to €47 million, as compared with €45 million at 2012 year-end.

The country risk exposure for which allowances must be recorded is moderate. Total country risk exposure, irrespective of whether or not allowances must be recorded, is also moderate. Except for the group 1 countries (considered by the Bank of Spain to have the lowest level of risk⁽⁹⁾), exposure to an individual country in no case exceeds 1% of the Group’s total assets.

The Group’s country risk management policies continued to adhere to a principle of maximum prudence, and country risk is assumed, applying highly selective criteria, in transactions that are clearly profitable for the Group and bolster its overall relationship with its customers.

5.4.4 Sovereign risk

As a general rule, the Group considers sovereign risk to be the risk assumed in transactions with the central bank (including the regulatory cash reserve requirement), the issuer risk of the Treasury or similar body (government debt securities) and the risk arising from transactions with public entities that have the following features: their funds are obtained only from fiscal income; they are legally recognized as entities directly included in the government sector; and their activities are of a non-commercial nature.

This criterion, which has been employed historically by the Group, differs in certain respects from that requested by the European Banking Authority (EBA) for its periodic stress tests. The most significant differences are that the EBA’s criteria do not include risk exposure to central banks, the Group insurance companies’ exposures, exposure to public-sector companies or indirect exposure by means of guarantees or other instruments. However, they do include exposure to public authorities in general (including regional and local authorities), not only the central government sector.

⁹  This group includes transactions with ultimate obligors resident in European Union countries, Norway, Switzerland, Iceland, the U.S., Canada, Japan, Australia and New Zealand.

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Sovereign risk exposure (per the criteria applied at the Group) arises mainly from the subsidiary banks’ obligations to make certain deposits at the corresponding central banks and from the fixed-income portfolios held as part of the on-balance-sheet structural interest rate risk management strategy. The vast majority of these exposures are taken in local currency and are financed out of local customer deposits, also denominated in local currency.

In general, total exposure to sovereign risk has remained relatively stable in recent years, which seems reasonable if the strategic reasons for it, discussed above, are taken into account.

The detail at December 31, 2013 and 2012, based on the Group’s management of each portfolio, of the Group’s sovereign risk exposure, net of the short positions held with the respective countries, taking into consideration the aforementioned criterion established by the European Banking Authority (EBA), is as follows:

Country	12/31/13
	Millions of euros
	Portfolio
	Financial assets held for trading and Other financial assets at fair value through profit or loss (*)			Available-for-sale financial assets		Loans and receivables		Total net direct exposure
Spain		4,359			21,144		12,864		38,367
Portugal		148			2,076		583		2,807
Italy		1,309			77		—		1,386
Greece		—			—		—		—
Ireland		—			—		—		—
Rest of eurozone		(1,229	)		67		—		(1,161	)
U.K.		(1,375	)		3,777		—		2,402
Poland		216			4,770		43		5,030
Rest of Europe		5			117		—		122
U.S.		519			2,089		63		2,671
Brazil		8,618			8,901		223		17,743
Mexico		3,188			2,362		2,145		7,695
Chile		(485	)		1,037		534		1,086
Rest of Americas		268			619		663		1,550
Rest of world		5,219			596		146		5,964
Total		20,762			47,632		17,268		85,661

(*) Net of short positions amounting to €17,658 million.

In addition, at December 31, 2013, the Group had net direct derivatives exposures the fair value of which amounted to €(206) million and net indirect derivatives exposures the fair value of which amounted to €6 million. Also, the Group did not have any exposure to held-to-maturity investments.

	12/31/12
	Millions of euros
	Portfolio
Country	Financial assets held for trading and Other financial assets at fair value through profit or loss (*)			Available-for-sale financial assets		Loans and receivables		Total net direct exposure
Spain		4,403			24,654		16,528		45,586
Portugal		—			1,684		616		2,300
Italy		(71	)		76		—		4
Greece		—			—		—		—
Ireland		—			—		—		—
Rest of eurozone		943			789		—		1,731
U.K.		(2,628	)		4,419		—		1,792
Poland		669			2,898		26		3,592
Rest of Europe		10			—		—		10
U.S.		(101	)		1,783		30		1,712
Brazil		14,067			11,745		351		26,163
Mexico		4,510			2,444		2,381		9,335
Chile		(293	)		1,667		521		1,895
Rest of Americas		214			916		771		1,900
Rest of world		1,757			645		234		2,636
Total		23,480			53,718		21,457		98,655

(*) Net of short positions amounting to €15,282 million.

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In addition, at December 31, 2012, the Group had net direct derivatives exposures the fair value of which amounted to €-330 million and net indirect derivatives exposures the fair value of which amounted to €-33 million. Also, the Group did not have any exposure to held-to-maturity investments.

5.4.5 Environmental risk

In line with the Group’s commitment to sustainability, the environmental risk analysis of credit transactions is one of the main features of the strategic corporate social responsibility plan. The analysis is founded on two major cornerstones:

• The Equator Principles: an initiative of the International Finance Corporation of the World Bank. These principles constitute an international standard for the analysis of the social and environmental implications of project finance transactions. The assumption of these principles involves a commitment to assess and take into consideration social and environmental risk and, accordingly, to grant loans only to those projects that can evidence that their social and environmental impacts are properly managed.

• The VIDA tool: implemented since 2004, the main aim of this tool is to assess the environmental risk of both current and potential individualized companies in commercial banking (Spain), using a system that classifies each of the companies into one of seven categories, depending on the degree of environmental risk incurred.

5.5. Credit risk cycle

The credit risk management process consists of identifying, analyzing, controlling and deciding on, as appropriate, the risks incurred in the Group’s operations. The parties involved in this process are the business areas, senior management and the risk units.

The process involves the board of directors, the executive committee and the risk committee, which establishes the risk policies and procedures, and the limits and delegations of powers, and approves and supervises the scope of action of the risk function.

The risk cycle comprises three different phases: pre-sale, sale and post-sale. The process is being permanently updated, with the findings and conclusions of the post-sale phase being fed back into the risk analysis and planning of the pre-sale phase.

5.5.1. Risk analysis and credit rating process

In general, the risk analysis consists of examining the customer’s ability to meet its contractual obligations to the Bank. This involves analyzing the customer’s credit quality, its risk transactions, its solvency and the return to be obtained in view of the risk assumed.

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Since 1993 the Group has used internal rating models for this purpose. These mechanisms are used in all the individualized segments, both the wholesale segments (sovereigns, financial institutions and corporate banking) and the other individualized companies and institutions.

The rating is obtained from a quantitative module based on balance sheet ratios or macroeconomic variables and supplemented by the analyst’s expert judgment.

Ratings assigned to customers are reviewed periodically to include any new financial information available and the experience in the banking relationship. The frequency of the reviews is increased in the case of customers that reach certain levels in the automatic warning systems and of customers classified as requiring special monitoring. The rating tools themselves are also reviewed in order to progressively fine-tune the ratings they provide.

In contrast to the use of ratings in the individualized segments, in the standardized segment scoring techniques predominate; in general, these tools automatically assign a score to proposed transactions.

5.5.2 Risk limit planning and setting

The purpose of this phase is to efficiently and comprehensively limit the risk levels the Group assumes.

The credit risk planning process is used to establish the budgets and limits at portfolio or customer level depending on the segment in question.

Thus, in the case of standardized risks, the risk limits are planned and set using documents agreed upon by the business areas and the risk units and approved by the risk committee or its delegated committees, which contain the expected results of transactions in terms of risk and return, as well as the limits applicable to the activity and the related risk management.

For individualized risks, the analysis is conducted at customer level. When certain features concur for a given customer, an individual limit is established (pre-classification).

Thus, for large corporate groups a pre-classification model, based on an economic capital measurement and monitoring system, is used. The result of the pre-classification is the maximum level of risk that can be assumed vis-à-vis a customer or group in terms of amount or maturity. In the corporate segment, a simplified pre-classification model is applied for customers meeting certain requirements (thorough knowledge, rating, etc.).

Scenario analysis

An important aspect of the planning phase is the consideration of the volatility of the macroeconomic variables that affect the performance of the portfolios.

The Group simulates their performance in various adverse and stress scenarios (stress testing), which enables it to assess the Group’s capital adequacy in the event of certain future circumstantial situations.

These simulations are performed systematically on the Group’s most important portfolios in accordance with a corporate methodology which:

• Defines benchmark scenarios (at global level and for each of the Group units).

• Determines the sensitivity of the credit risk parameters (PD and LGD) to the significant macroeconomic variables for each portfolio, as well as their levels in the proposed scenarios.

• Estimates the expected loss associated with each of the scenarios considered and the changes in the risk profile of each portfolio in response to changes in the relevant macroeconomic variables.

The simulation models used by the Group rely on data from a complete economic cycle to calibrate the behavior of the credit risk parameters in response to changes in the macroeconomic variables. These models undergo regular backtesting and recalibration processes in order to ensure that they provide a correct reflection of the relationship between the macroeconomic variables and the risk parameters.

The scenario analysis enables senior management to gain a clearer understanding of the performance of the portfolio in response to changing market and circumstantial conditions and it is a basic tool for assessing the sufficiency of the provisions recognized to cater for stress scenarios.

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Definition of assumptions and (base/stress) scenarios

The risk and loss parameters are projected, usually with a three-year time horizon, using various economic scenarios that include the main macroeconomic variables (GDP, unemployment rate, housing prices, inflation, etc.).

The economic scenarios defined are based on different stress levels, ranging from the base or most probable scenario to more stressed economic scenarios which, although less probable, could possibly arise.

These scenarios are generally defined by the Group’s economic research service, in coordination with the research services of each unit, using as a reference the data published by the main international organizations.

A global stress scenario is defined that describes a situation of worldwide crisis and the manner in which it affects each of the main geographical regions in which the Group is present. In addition, a local stress scenario is defined which, affecting certain of the Group’s main units in an isolated fashion, includes a higher level of stress than the global stress scenario.

At the meetings of the capital coordination committee, senior management of the Group is apprised of, proposes any changes it deems appropriate and ultimately approves the definitive set of scenarios to be used in conducting the Group’s stress test.

Uses of the scenario analysis

The scenario analysis techniques are useful throughout the credit risk cycle. The various uses can be classified as follows:

• Regulatory uses: those in which an external agent or regulator requests the result of the test following implementation of the Group’s corporate methodology. Occasionally the test scenarios or assumptions are imposed by the party requesting the information. In other cases, the test is conducted by the requesting party itself based on information furnished by the Group.

• Planning and management uses: this category includes tests that aim to facilitate decision-making on the Group’s portfolios by ascertaining the sensitivity of the portfolios to changes in the macroeconomic variables affecting them. To this end the following aspects, among others, are analyzed and submitted to senior management:

• Impact on profit or loss and capital.

• Projected trend in the cost of credit over the next three years in light of the proposed business strategy.

• Sufficiency of funds and provisions.

• Measure of the level of sensitivity of each portfolio to the economic environment.

• Benefits of portfolio diversification in stress scenarios.

• Contrast with other estimates performed locally.

The planning and management applications of the tests include most notably their use in the preparation of the annual budget and the ongoing monitoring thereof. The use of the tests in establishing and monitoring the Group’s risk appetite is also of particular significance.

Results obtained

The various stress tests performed, for both regulatory and management purposes, have evidenced the strength and validity of the Group’s business model, as a result of its resilience to stress scenarios for both the Group as a whole and each of its main units.

In this regard, in each risk appetite update submitted to the board of directors, it has been confirmed that, even in the most adverse stress scenarios, the Group continues to report profits and maintain adequate capital levels.

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One of the most important conclusions to be drawn from the scenario analysis is the benefit contributed by the Group’s diversification in terms of geographical regions, industries and its low level customers concentration, which enables it to comfortably withstand adverse macroeconomic scenarios.

5.5.3 Transaction decision-making

The sale phase comprises the decision-making process, the aim of which is to analyze and resolve upon transactions, since approval by the risk unit is a pre-requisite for the arrangement of any risk transaction. This process must consider the transaction approval policies defined and take into account both the risk appetite and any transaction elements that are important in achieving a balance between risk and return.

In the standardized customer sphere, the management of large volumes of loan transactions is facilitated by the use of automatic decision-making models that rate the customer/loan relationship. Thus, loans are classified in homogeneous risk groups using the rating assigned to the transaction by the model on the basis of information on the features of each transaction and the borrower. These models are used in individual banking and business banking and for standardized SMEs.

As stated above, the previous limit-setting stage can follow two different paths, giving rise to different types of decisions in the individualized customer sphere:

• The decision can be automatic, consisting of verification by the business that the proposed transaction (in terms of amount, product, maturity and other conditions) falls within the limits authorized pursuant to the aforementioned pre-classification. This process is generally applied to corporate pre-classifications.

• It may always require the analyst’s authorization, even if the transaction meets the amount, maturity and other conditions established in the pre-classified limit. This process is applied to pre-classifications of individualized retail banking companies.

Credit risk mitigation techniques

The Group applies various methods of reducing credit risk, depending, inter alia, on the type of customer and product. As we shall see, some of these methods are specific to a particular type of transaction (e.g. real estate guarantees) while others apply to groups of transactions (e.g. netting and collateral arrangements).

The various mitigation techniques can be grouped into the following categories:

Determination of a net balance by counterparty.

Netting refers to the possibility of determining a net balance of transactions of the same type, under the umbrella of a framework agreement such as ISDA or similar agreements.

It consists of aggregating the positive and negative market values of the derivatives transactions entered into by us with a particular counterparty, so that, in the event of default, the counterparty owes the Group (or the Group owes the counterparty, if the net figure is negative) a single net figure and not a series of positive or negative amounts relating to each of the transactions entered into with the counterparty.

An important aspect of framework agreements is that they represent a single legal obligation encompassing all the transactions they cover. This is the key to being able to set off the risks of all the transactions covered by the contract with the same counterparty.

Collateral

Collateral refers to the assets pledged by the customer or a third party to secure the performance of an obligation. Collateral may be:

• Financial: cash, security deposits, gold, etc.

• Non-financial: property (both residential and commercial), other movable property, etc.

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From the risk acceptance standpoint, collateral of the highest possible quality is required. For regulatory capital calculation purposes, only collateral that meets the minimum quality requirements described in the Basel capital accords can be taken into consideration.

One very important example of financial collateral is the collateral agreement. Collateral agreements are a set of instruments with a determined economic value and high liquidity that are deposited or transferred by a counterparty in favor of another party in order to guarantee or reduce such counterparty credit risk as might arise from the portfolios of derivative transactions between the parties in which there is exposure to risk.

Collateral agreements vary in nature but, whichever the specific form of collateralization may be, the ultimate aim, as in the netting technique, is to reduce counterparty risk.

Transactions subject to collateral agreements are assessed periodically (normally on a daily basis). The agreed-upon parameters defined in the agreement are applied to the net balance arising from these assessments, from which the collateral amount (normally cash or securities) payable to or receivable from the counterparty is obtained.

With regard to real estate collateral, periodic re-appraisal processes are in place, based on the actual market values for the different types of real estate, which meet all the requirements established by the regulator.

When mitigation techniques are used, the minimum requirements established in the credit risk management policy manual are adhered to. In short, these consist of monitoring the following:

• Legal certainty. Collateral and guarantees must be examined to ensure that at all times it is possible to legally enforce the settlement thereof.

• A substantial positive correlation must not exist between the counterparty and the value of the collateral.

• Collateral and guarantees must be correctly documented.

• The availability of documentation of the methodologies used for each mitigation technique.

• The appropriate periodic monitoring and control of the methodologies.

Personal guarantees and credit derivatives

Personal guarantees are guarantees that make a third party liable for another party’s obligations to the Group. They include, for example, security deposits, suretyships and standby letters of credit. Only guarantees provided by third parties that meet the minimum requirements established by the supervisor can be recognized for capital calculation purposes.

Credit derivatives are financial instruments whose main purpose is to hedge credit risk by buying protection from a third party, whereby the Bank transfers the risk of the issuer of the underlying instrument. Credit derivatives are OTC instruments, i.e. they are not traded in organized markets. Credit derivative hedges, mainly credit default swaps, are entered into with leading financial institutions.

5.5.4 Monitoring

The monitoring function is founded on a process of ongoing observation, which makes it possible to detect early any changes that might arise in customers’ credit quality, so that action can be taken to correct any deviations with an adverse impact.

Monitoring is based on the segmentation of customers, is performed by dedicated local and global risk teams and is complemented by the work performed by internal audit.

The function involves, inter alia, identifying and monitoring companies under special surveillance, reviewing ratings and the ongoing monitoring of standardized customers’ indicators.

The system called “companies under special surveillance” (FEVE, using the Spanish acronym) distinguishes four categories based on the degree of concern raised by the circumstances observed (extinguish, secure, reduce and monitor). The inclusion of a position in the FEVE system does not mean that there has been a default, but rather that it is deemed advisable to adopt a specific policy for the position in question, to place a person in charge and to set the policy implementation period. Customers classified as FEVE are reviewed at least every six months, or every three months for those classified in the most severe categories. A company can be classified as FEVE as a result of the monitoring process itself, a review performed by internal audit, a decision made by the sales manager responsible for that company or the triggering of the automatic warning system.

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Assigned ratings are reviewed at least annually, but should any weakness be detected, or depending on the rating itself, more frequent reviews are performed.

For exposures to standardized customers, the key indicators are monitored in order to detect any variance in the performance of the loan portfolio with respect to the forecasts contained in the credit management programs.

5.5.5 Measurement and control

In addition to monitoring customers’ credit quality, the Group establishes the control procedures required to analyze the current credit risk portfolio and the changes therein over the various credit risk phases.

The risk control function is performed by assessing risks from various complementary perspectives, the main pillars being control by geographical location, business area, management model, product, etc., thus facilitating the early detection of specific areas of attention and the preparation of action plans to correct possible impairment.

Each control pillar can be analyzed in two ways:

1.- Quantitative and qualitative analysis of the portfolio

In the analysis of the portfolio, any variances in the Group’s risk exposure with respect to budgets, limits and benchmarks are controlled on an ongoing and systematic basis, and the impacts of these variances in certain future situations, both of an exogenous nature and those arising from strategic decisions, are assessed in order to establish measures that place the profile and amount of the loan portfolio within the parameters set by the Group.

In addition to the traditional metrics, the following, inter alia, are used in the credit risk control phase:

• Change in non-performing loans (VMG) VMG measures the change in non-performing loans in the period, excluding the loans written off and taking recoveries into account.

It is an aggregate measure at portfolio level that enables action to be taken in the event of deteriorations in the trend of non-performing loans.

VMG is calculated as the difference between the ending balance and the beginning balance of non-performing loans for the period in question, plus the loans written off in the period, less any previously written-off loans recovered in that same period.

VMG and its component parts play a decisive role as monitoring variables.

• EL (expected loss) and capital

Expected loss is the estimated financial loss that will occur over the next twelve months on the portfolio existing at any given time.

It is an additional cost of the activity and must be charged in the transaction price. It is calculated using three basic parameters:

• EAD (exposure at default): the maximum amount that could be lost as a result of a default.

• PD (probability of default): is the probability that a customer will default in the next twelve months.

• LGD (loss given default): represents the percentage of the exposure that will not be recovered in the event of default. To calculate the LGD, the amounts recovered throughout the recovery process are discounted to the time of default, and this figure is compared, on a percentage basis, with the amount owed by the customer at that date.

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Thus, other relevant factors are taken into account in estimating the risk involved in transactions, such as the quantification of off-balance-sheet exposures, or the expected percentage of recoveries, which is related to the guarantees associated with the transaction and other characteristics of the transaction: type of product, term, etc.

The risk parameters are also involved in the calculation of both economic and regulatory capital. The inclusion of capital metrics in management is fundamental to the rationalization of the use of capital.

2.- Assessment of the control processes

This includes a systematic periodic review of the procedures and methodology, and is performed over the entire credit risk cycle to ensure that they are in force and effective.

In 2006, within the corporate framework established in the Group for compliance with the Sarbanes-Oxley Act, a corporate tool was made available on the Group’s intranet for the documentation and certification of all the subprocesses, operational risks and related mitigating controls. In this connection, the risk division assesses the efficiency of the internal control of its activities on an annual basis.

Furthermore, the integrated risk control and internal risk validation unit, as part of its mission to supervise the quality of the Group’s risk management, guarantees that the systems for the management and control of the risks inherent to its activity comply with the strictest criteria and the best practices observed in the industry and/or required by the regulators. Also, internal audit is responsible for ensuring that the policies, methods and procedures are appropriate, effectively implemented and regularly reviewed.

5.5.6 Recovery management

The recovery activity is a significant function in the Group’s risk management area.

In order to manage recovery properly, action is taken in four main phases: arrears management, recovery of non-performing loans, recovery of written-off loans and management of foreclosed assets. In fact, the actions taken by the recovery function commence even before the first missed payment, i.e. when there are signs of a deterioration of the customer’s ability to pay, and they end when the customer’s debt has been paid or has returned to performing status. The recovery function aims to anticipate default events and focuses on preventive management.

The current macroeconomic environment has a direct effect on customer default and non-performing loans ratios. Therefore, the quality of the portfolios is fundamental to the development and growth of our businesses in the various countries, and particular attention is paid, on an permanent basis, to the debt collection and recovery functions in order to guarantee that this quality reaches the expected levels at all times.

The Group has in place a corporate management model that defines the general recovery action guidelines. These guidelines are applied in the various countries, always taking into account the local peculiarities required for the recovery activity, due either to the local economic environment, to the business model or to a combination of both. This corporate model is subject to the permanent review and enhancement of the management processes and methodology that underpin it. For the Group, recovery management entails the direct involvement of all areas of management (sales, technology and operations, human resources and risk), which has contributed to the incorporation of solutions improving the effectiveness and efficiency of the aforementioned model.

The differing characteristics of customers make segmentation necessary in order to ensure proper recovery management. The mass management of large groups of customers with similar profiles and products is performed using highly technological processes, while personalized and individualized management is reserved for customers who, due to their profile, require the assignment of a specific manager and a more tailored analysis.

The recovery activity has been aligned with the social and economic reality of the different countries, and various management mechanisms have been used, all involving appropriate prudential criteria, based on the age, collateral and conditions of the transaction, while always ensuring that at least the required ratings and provisions are maintained.

Within the recovery function particular emphasis has been placed on using the mechanisms referred to above for early arrears management, in accordance with corporate policies, considering the various local realities and closely monitoring the production, inventory and performance of those local areas. The aforementioned policies are reviewed and adapted periodically in order to reflect both best management practices and any applicable regulatory amendments.

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In addition to the measures aimed at adapting transactions to the customer’s ability to pay, special mention should be made of recovery management, in which alternative solutions to legal action are sought to ensure the early collection of debts.

One of the channels for the recovery of debts of customers whose ability to pay has deteriorated severely is foreclosure (either court-ordered or through dation in payment) of the property assets securing the transactions. In geographical regions that are highly exposed to real estate risk, such as Spain, the Group has very efficient instruments in place to manage the sale of such assets, thus making it possible for the Bank to recuperate its capital and reduce its on-balance-sheet stock of property assets at a much faster pace than other financial institutions.

Forborne loan portfolio

The term “forborne loan portfolio” refers, for the purposes of the Group’s risk management, to the concepts of “restructurings” and “refinancings” as defined in Bank of Spain Circular 6/2012, which relate to transactions in which the customer has, or might foreseeably have, financial difficulty in meeting its payment obligations under the terms and conditions of the current agreement and, accordingly, the agreement has been modified or cancelled or even a new transaction has been entered into.

The Group has a detailed corporate policy for debt forbearance that is applicable to all countries, complies with the aforementioned Bank of Spain Circular 6/2012 and follows the general principles recently published by the European Banking Authority for transactions of this kind.

This corporate policy establishes strict prudential criteria for the assessment of these loans:

• The use of this practice is restricted, and any actions that might defer the recognition of impairment must be avoided.

• The main aim must be to recover the amounts owed, and any amounts deemed unrecoverable must be recognized as soon as possible.

• Forbearance must always envisage maintaining the existing guarantees and, if possible, enhance them. Not only can effective guarantees serve to mitigate losses given default, but they might also reduce the probability of default.

• This practice must not give rise to the granting of additional funding, or be used to refinance loan of other entities or as a cross-selling instrument.

• All the alternatives to forbearance and their impacts must be assessed, making sure that the results of this practice will exceed those which would foreseeably be obtained if it were not performed.

• The new transaction may not give rise to an improvement in the classification of the exposure until such time as the experience with the customer has proven to be satisfactory. On the contrary, transactions originally classified as standard may be reclassified as impaired if a series of circumstances prevail that recommend this.

• In addition, in the case of individualized customers, it is particularly important to conduct an individual analysis of each specific case, for both the proper identification of the transaction and its subsequent classification, monitoring and adequate provisioning.

Also, the corporate policy sets out various criteria for determining the scope of transactions qualifying as forborne exposures by defining a detailed series of objective indicators that are indicative of situations of financial difficulty.

Accordingly, transactions not classified as impaired at the date of forbearance are generally considered to be experiencing financial difficulty if at that date they were more than one month past due. Where no payments have been missed or there are no payments more than one month past due, other indicators of financial difficulty are taken into account, including most notably the following:

• Transactions with customers who are already experiencing difficulties in other transactions.

• Situations where a transaction has to be modified prematurely, and the Group has not yet had a previous satisfactory experience with the customer.

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• Cases in which the necessary modifications entail the grant of special conditions, such as the establishment of a grace period, or where these new conditions are deemed to be more favorable for the customer than those which would have been granted for an ordinary loan approval.

• Where a customer submits successive loan modification requests at unreasonable time intervals.

• In any case, if once the modification has been made any payment irregularity arises during a given probation period (as evidenced by backtesting), even in the absence of any other symptoms, the transaction will be deemed to be within the scope of forborne exposures.

Once it has been determined that the reasons for the modification are effectively due to financial difficulties, a more precise classification is performed based on the degree of impairment and management status of the original transactions, distinguishing between the following types of forbearance:

• Ex-ante forbearance: where the original transaction has not been classified as impaired and has an amount more than one month (but not more than three months) past due at the time the modification is arranged. If the transaction has an amount past due by one month or less, or even if the transaction is current in its payment, it will also be considered as a case of ex-ante forbearance if, based on the aforementioned indicators, there is any sign evidencing the existence of financial difficulties.

• Ex-post forbearance: the ex-post concept refers to forbearance transactions in which, at the date of forbearance, the exposures have already been classified as impaired, either due to arrears or for other reasons (i.e. for subjective reasons or reasons other than arrears).

The corporate policy also establishes different treatments that are applicable to forbearance transactions in cases of advanced impairment. The classification requirements and criteria are more stringent for transactions of this kind than for other forbearance transactions.

As regards the strategies to be applied, corporate policy requires the customer’s ability and willingness to pay to be analyzed and a distinction to be drawn between the severity and the estimated duration of the impairment. The results of this analysis will be used as a basis for deciding whether the debt should be forborne and the most appropriate way of doing so for each case:

1. When borrowers display a severe but transitory deterioration in their ability to pay (which is expected to be recovered in a short space of time), short-term adjustment strategies are applied, such as a payment moratorium on the principal or the reduction of instalments for a short, limited period until the ability to pay is recovered.

2. When borrowers display a slight deterioration in their ability to pay (an early recovery of which is not expected), more long-term strategies are applied, such as reducing instalments by deferring either the maturity date or a portion of the principal, which would be paid at the same time as the last instalment, at all times securing its payment through the provision of effective guarantees.

In any case, through a case-by-case analysis, priority is given to modifications for customers displaying a slight but prolonged deterioration, since those experiencing severe but transitory deterioration carry a higher risk, as they depend on the accuracy of the estimated time of their future recovery. Cases of severe deterioration deemed to be prolonged over time are not considered for forbearance.

Corporate policy also establishes mechanisms for the management and control of loan forbearance, which allow it to handle forborne transactions in a differentiated way, paying particular attention to the processes of:

• Planning and budgeting, including preparing the pertinent business plans, projections and limits for the most relevant items.

• Monitoring portfolio evolution and assessing the degree of compliance with the projections prepared in the planning phase.

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Once forbearance measures have been adopted, transactions that have to remain classified as impaired because at the date of forbearance they do not meet the requirements to be classified in a different category⁽¹⁰⁾ must comply with a prudential payment schedule in order to assure reasonable certainty as to the recovery of the customer’s ability to pay.

If there is any (non-technical) irregularity in payments during that period, the probation period starts again.

On successful completion of the probation period, the duration of which depends on the customer’s situation and the transaction features (term and guarantees provided), the transaction is no longer classified as impaired, but is temporarily classified as substandard until the transaction becomes fully performing again. Once the transaction has returned to performing, in accordance with Bank of Spain Circular 6/2012, the monitoring and management of the forborne transaction continues until a series of requirements have been met, including most notably: a minimum period of two years must have elapsed since commencement of the forbearance; repayment of 20% of the principal and settlement of the amounts that were past due at the time of forbearance.

By contrast, if following arrangement of forbearance there is no improvement in the customer’s payment performance, the possibility of extending new forbearance measures will be considered, with the application of more stringent classification/return-to-performing criteria.

The forbearance of a transaction classified as impaired, irrespective of whether, as a result of the forbearance, the transaction becomes current in its payments, does not change the default date considered when the provision was determined. Also, the forbearance of a transaction classified as impaired does not give rise to any release of the related provisions.

Quantitative information required by Bank of Spain Circular 6/2012

Set forth below is the quantitative information required by Bank of Spain Circular 6/2012 on the restructured/refinanced transactions in force at December 31, 2013. The following terms are used in Bank of Spain Circular 6/2012 with the meanings specified:

• Refinancing transaction: transaction granted or used for reasons relating to -current or foreseeable- financial difficulties the borrower may have in repaying one or more of the transactions granted to it, or through which the payments on such transactions are brought fully or partially up to date, in order to enable the borrowers of cancelled or refinanced transactions to repay the debt (principal and interest) because the borrower is unable, or might foreseeably become unable, to comply with the conditions thereof in due time and form.

• Restructured transaction: transaction with respect to which, for economic or legal reasons relating to current or foreseeable financial difficulties of the borrower, the financial terms and conditions are modified in order to facilitate the payment of the debt (principal and interest) because the borrower is unable, or might foreseeably become unable, to comply with the aforementioned terms and conditions in due time and form, even if such modification is envisaged in the agreement.

¹⁰  Bank of Spain Circular 6/2012: the refinancing or restructuring of transactions that are not current in their payments does not interrupt their arrears, nor does it give rise to their reclassification to one of the previous categories, unless there is reasonable certainty that the customer will be able to meet its payment obligations within the established time frame or new effective collateral is provided, and, in both cases, unless at least the ordinary outstanding interest is received, late-payment interest is not taken into account.

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CURRENT REFINANCING AND RESTRUCTURING BALANCES (a)

	Millions of euros
	Standard (b)												Substandard														Impaired
	Full property mortgage guarantee				Other collateral (c)				Without collateral				Full property mortgage guarantee				Other collateral (c)				Without collateral						Full property mortgage guarantee				Other collateral (c)				Without collateral						Total
	Number of trans- actions		Gross amount		Number of trans- actions		Gross amount		Number of trans- actions		Gross amount		Number of trans- actions		Gross amount		Number of trans- actions		Gross amount		Number of trans- actions		Gross amount		Specific allowance		Number of trans- actions		Gross amount		Number of trans- actions		Gross amount		Number of trans- actions		Gross amount		Specific allowance		Number of trans- actions		Gross amount		Specific allowance
Public sector		—		—		7		203		140		391		—		—		—		—		5		1		—		1		1		—		—		20		30		7		173		626		7
Other legal entities and individual entrepreneurs		7,568		3,602		3,370		1,134		61,874		3,866		8,624		4,157		827		775		35,955		1,803		1,213		11,231		8,690		3,040		2,085		88,486		5,316		7,731		220,975		31,430		8,944
Of which: Financing for construction and property development		247		638		41		20		176		19		1,674		1,327		105		241		816		158		638		3,786		4,891		103		792		961		1,072		3,466		7,909		9,158		4,104
Other individuals		66,480		5,592		11,784		513		472,908		1,389		51,344		5,139		7,207		350		302,697		1,045		562		46,539		4,607		23,056		742		985,793		2,170		2,334		1,967,808		21,546		2,896
Total		74,048		9,194		15,161		1,850		534,922		5,646		59,968		9,296		8,034		1,125		338,657		2,849		1,775		57,771		13,298		26,096		2,827		1,074,299		7,516		10,072		2,188,956		53,602		11,847

(a) Including all refinanced or restructured transactions as defined in section 1.g) of Annex IX of Bank of Spain Circular 4/2004

(b) Standard risks classified as under special monitoring pursuant to section 7.a) of Annex IX of Bank of Spain Circular 4/2004

(c) Including transactions without a full property mortgage guarantee, i.e. with a loan-to-value ratio of more than 1, and transactions with collateral other than a real estate mortgage, irrespective of their loan-to-value ratio

The transactions presented in the foregoing tables were classified at December 31, 2013, by nature, as follows:

• Impaired: transactions that are in the process of being returned to performing status, those for which advantageous conditions had to be granted that would not have been granted for an ordinary loan approval or those which, having been classified as standard or substandard, have again encountered payment difficulties during the term of the transaction.

• Substandard: transactions previously classified as impaired with respect to which, following forbearance, sustained payments have been made for a certain period, depending on the transaction features and the type of guarantee, and transactions previously classified as standard: i) which have been granted an initial grace period and will remain in this category until three monthly instalments (or the equivalent) have been paid after the grace period, or ii) that following forbearance have become non-performing (default).

• Standard: transactions previously classified as impaired or substandard which have successfully completed the precautionary observation periods established in the corporate policy evidencing that payment capacity pursuant to the terms established has been restored, and transactions classified as standard at the date of forbearance, until they meet the requirements to cease to be subject to the special monitoring described above.

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The table below shows the changes in 2013 in the forborne loan portfolio:

Millions of euros	2013
Beginning balance		55,714
Of which: Other than impaired		37,497
Impaired assets		18,217
Additions		17,241
Reductions (*)		(19,353	)
Balance at end of year		53,602
Of which: Other than impaired		29,961
Impaired assets		23,641

(*) Including, mainly, debt repayments, foreclosures and write-offs and transactions that have ceased to be subject to special monitoring because the aforementioned requirements have been met.

The level of forbearance at the Group fell by 3.8% year-on-year as a result of the recovery effort, the exchange rate effect and the deleveraging of the real estate industry in Spain. The specific allowance of the total forborne loan portfolio increased by 5 percentage points to 22%.

56% of the forborne loan transactions are classified as other than impaired. Particularly noteworthy is the high level of existing guarantees (70% of transactions are secured by collateral) and the adequate coverage provided by specific allowances (43% specific coverage ratio for the impaired portfolio).

Spain accounts for 60% (€32,271 million) of the Group’s forborne loan portfolio, down €596 million year-on-year. The detail of the forborne loan portfolio in Spain by purpose is as follows:

• 27% of the loans were granted to real estate companies; they have a specific coverage ratio of 46%. This portfolio is subject to the real estate deleveraging process in Spain.

• Loans to non-real estate companies represent 45% of the total. Despite the downward trend in consumer markets and domestic demand, 57% of the portfolio is still classified in categories other than impaired.

• 28% relate to forbearance measures extended to individuals, mainly for mortgages with a high level of collateral.

In none of the other geographical regions in which the Group is present does the forborne loan portfolio represent more than 1% of the Group’s total lending to customers.

Part 6. Market Risk

A. Activities subject to market risk and types of market risk

The market risk area has a perimeter for measuring, controlling and monitoring that covers those transactions where equity risk is assumed as a result of changes in market factors. This risk comes from the change in risk factors - interest rates, inflation rates, exchange rates, share prices, the spread on loans, commodities prices and the volatility of each of these elements - as well as the liquidity risk of the various products and markets in which the Group operates.

• Interest rate risk is the possibility that changes in interest rates could adversely affect the value of a financial instrument, a portfolio or the Group as a whole. It affects, among others, loans, deposits, debt securities, most assets and liabilities of trading portfolios as well as derivatives.

• The inflation rate risk is the possibility that changes in inflation rates could adversely affect the value of a financial instrument, a portfolio or the Group as a whole. It affects, among others, loans, debt securities and derivatives, whose yield is linked to inflation or to a real rate of variation.

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• The exchange rate risk is the sensitivity of the value of a position in a currency different to the base currency to a potential change in exchange rates. A long position or one bought in a foreign currency would produce a loss in the event that the currency depreciates against the base currency. Among the positions affected by this risk are non-euro investments in subsidiaries, as well as loans, securities and derivatives denominated in foreign currencies.

• The equity risk is the sensitivity of the value of open positions in equity markets to adverse movements in the market prices or in expectations of future dividends. Among other instruments, this affects positions in shares, stock market indices, convertible bonds and derivatives using shares as the underlying asset (put, call, and equity swaps).

• The credit spread risk is the risk or sensitivity of the value of open positions in fixed income securities or in credit derivatives to movements in the credit spread curves or in recovery rates associated with issuers and specific types of debt. The spread is a differential between financial instruments that trade with a spread over other reference instruments, mainly the yield on government securities and interbank rates.

• The commodities price risk is the risk derived from the effect of potential change in prices. The Group’s exposure to this risk is not significant and is concentrated in derivative transactions on commodities with clients.

• Volatility risk is the risk or sensitivity of the value of a portfolio to changes in the volatility of risk factors: volatility of interest rates, exchange rates, shares, credit spreads and of commodities. This risk is incurred by financial instruments which have volatility as a variable in their valuation model. The most significant case is portfolios of financial options.

All these market risks can be partly or fully mitigated by using options, futures, forwards and swaps.

There are other types of market risk, whose coverage is more complex. They are the following:

• Correlation risk is the sensitivity of the value of a portfolio to changes in the relation between risk factors, either of the same type (for example, between two exchange rates) or of a different nature (for example, between an interest rate and the price of a commodity).

• Market liquidity risk is that of a Group entity or the Group as a whole finding itself unable to get out of or close a position in time without impacting on the market price or on the cost of the transaction. This risk can be caused by a fall in the number of market makers or institutional investors, the execution of large volumes of transactions, market instability and increases with the concentration existing in certain products and currencies.

• Risk of prepayment or cancellation. When in certain transactions the contract allows, explicitly or implicitly, cancellation before the maturity without negotiation there is a risk that the cash flows have to be reinvested at a potentially lower interest rate. This mainly affects loans or mortgage securities.

• Underwriting risk. This occurs as a result of an entity’s participation in underwriting a placement of securities or another type of debt, assuming the risk of partially owning the issue or the loan due to non-placement of all of it among potential buyers.

On the basis of the origin of the risk, activities are segmented in the following way:

(a) Trading. This includes financial services to customers and purchase-sale and positioning mainly in fixed income, equity and currency products.

(b) Structural risks. Market risks inherent in the balance sheet excluding the trading portfolio. They are:

• Structural interest rate risk. This arises from mismatches in the maturities and repricing of all assets and liabilities.

• Structural exchange rate risk/hedging of results. Exchange rate risk occurs when the currency in which the investment is made is different from the euro in companies that consolidate and those that do not (structural exchange rate). In addition, exchange rate hedging of future results generated in currencies other than the euro (hedging of results) are included.

• Structural equity risk. This involves investments via stakes in financial or non-financial companies that are not consolidated, as well as portfolios available for sale formed by equity positions.

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The global wholesale banking division is mainly responsible for managing the taking of trading activity positions, in order to develop the activity of clients in financial markets and to a much lesser extent take its own positions.

The financial management area is responsible for implementing the management strategy for structural risks, applying standardized methodologies adapted to each market where the Group operates, either directly in the case of the parent Bank or in coordination with the rest of units. The management decisions for these risks are taken by each country’s ALCO (ALM) committee in coordination with the Group’s markets committee. The aim is to inject stability and recurrence into the net interest margin of commercial activity and the Group’s economic value, while maintaining adequate levels of liquidity and solvency.

Each of these activities is measured and analyzed with different metrics in order to show their risk profile in the most precise way.

B. Management framework

1. Organizational and governance structure

The market and structural risks area is integrated into one of the Group’s two general risk directorates. The missions of the market risk function are:

• To define and supervise the market risk management model, which includes corporate policies, defining the risks map and segmentation criteria.

• Control and manage the consolidation, reporting and centralized admission process of market risks.

These missions rest on five basic pillars, vital for correct management of market risks:

• Measurement, analysis and control of market and liquidity risks.

• Calculation, analysis, explanation and conciliation of results.

• Defining, capturing, validating and distributing market data.

• Admission of limits, products and underlying assets.

• Consolidation of information.

In turn, market risks management is guided by the following basic principles:

• Involvement of senior management.

• Independence of the risk function from business.

• Clear definition of powers.

• Risk measurement.

• Limiting risks.

• Analysis and control of risk positions.

• Establishing risk policies and procedures.

• Assessing risk methodologies.

In the same way that the market risks function is structured at the corporate or global level, each local market risk unit has and arranges its functions, with the adjustments that arise in accordance with its specific business, operational and legal requirement features, etc.

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For the correct functioning of global policies and local execution, the global area of market risks and local units carry out different functions:

Global market risk:

• Establish, propose and document risk policies and criteria, the global limits and the decision-making and control processes.

• Generate management frameworks, systems and tools.

• Promote and support their implementation and ensure they function effectively in all units.

• Know, assimilate and adapt the best practices inside and outside the Group.

• Promote activity for obtaining results.

• Consolidate, analyze and control the market risk incurred by all units of the perimeter.

Local market risk units:

• Manage risks.

• Transfer, adapt and assume internally the corporate policies and procedures through local approval.

• Define and document policies and lead local sphere projects.

• Apply policies and decision-making systems to each market.

• Adapt the organization and management frameworks and corporate rules.

• Contribute critical and best practices, as well as local knowledge and proximity to customers/markets.

• Assume greater responsibilities in decisions, control and management of risks.

• Measure, analyze and control market risk within the sphere of responsibility.

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The committees, by hierarchical order, which have powers in decision-making, control and monitoring of market risks are set out above below.

COMMITTEES WITH RESPONSIBILITIES IN MARKET RISK:

Sphere	Hierarchical level	Name
CENTRALISED SPHERE	Executive	Executive Committee
		- Markets Committee
		Risks Committee
	Risks division	Risks Management Committee
		Global Committee of the Directorate General of Risks
		Permanent Committee of Risks
		Corporate Committee of Risks Brazil
	Areas and departments dependent on the Risk Division	Global Market Risks Committee
		Underwriting and Structured Products Committee
		Models Committee
DECENTRALISED SPHERE	Units	Risks Committee in the Banks of the Group/Countries
		Risks Committee of Branches Abroad
		Risks Committee in Business Units
		Local ALCOs
		Other committees

The collegiate body of the market risks area is the global market risk committee (GMRC). This committee is responsible for the functioning of market risk in Grupo Santander, both at the centralized level (global areas) and local level (local units). It gets its powers directly from the risk committee, the maximum body responsible for the risks function in Grupo Santander.

2. System for controlling limits

Setting market risk and liquidity limits is designed as a dynamic process which responds to the Group’s risk appetite level. This process is part of the annual limits plan, which is drawn up by the Group’s senior management and administered by the general directorate of risks in a way that involves all the Group’s institutions.

Definition of limits

The market risk limits used in Grupo Santander are established on different metrics and try to cover all activity subject to market risk from many perspectives, applying a conservative criterion. The main ones are:

Trading limits:

• VaR limits.

• Limits of equivalent positions and/or nominal.

• Sensitivity limits to interest rates.

• Vega limits.

• Risk limits of delivery by short positions in securities (fixed income and equities).

• Limits aimed at reducing the volume of effective losses or protecting results already generated during the period:

• Loss trigger.

• Stop loss.

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• Credit limits:

• Limit on the total exposure.

• Limit to the jump to default by issuer.

• Others.

• Limits for origination operations.

Structural interest rate risk of the balance sheet:

• Sensitivity limit of net interest margin at 1 year.

• Sensitivity limit of equity value.

Structural exchange rate risk:

• Net position in each currency (for positions of hedging results).

These general limits are complemented by sub-limits. In this way, the market risk area has a structure of limits sufficiently granular to conduct an effective control of the various types of market risk factors on which an exposure is maintained. Positions are tracked daily, both of each unit as well as globally. An exhaustive control is made of the changes in the portfolios, in order to detect possible incidents for their immediate correction. Meanwhile, the daily drawing up of the income statement by the market risks area is an excellent indicator of risks, as it allows the impact that changes in financial variables have had on portfolios to be identified.

Structure of limits

The table below shows the levels of applying limits, the categories and the sphere of control in which they are classified and their levels of approval.

STRUCTURE OF LIMITS:

STRUCTURE OF LIMITS
Levels	Category/Control	Approval
	Global/Global control	Risk Committee
Activity / Unity	Global/Local control	Global Market Risk Committee
	Local/Local control	Local market risks

• Global limits of global control: The risk committee approves the limits at the activity/unit level in the annual process of setting limits. Changes that are subsequently made can be approved by the global market risk committee, in accordance with the powers delegated in it.

These limits are requested by the relevant business executive in each country/entity on the basis of the nature of the business and the budget established, seeking consistency between limits and the return/risk ratio.

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• Global limits of local control: On the basis of the local features of products, and of the internal organization of business, sub-limits are set for the aforementioned activities in order to exercise greater control of the positions maintained in each business. Sub-limits are set by risk factor, currency positions, equity positions, sensitivity by currencies and maturities, vega by maturities, etc.

Compliance and control of limits

Business units must comply with the approved limits. The possible excesses trigger a series of actions by the local and global market risk areas, risk management committees or the risks committee in order to reduce the risk levels and control them more strictly or executive actions, which can make the risk takers reduce the risks levels assumed.

The local executives for market risk notify the excesses to the business executives. These have to explain the reasons for the excess and, where appropriate, provide the plan of action to correct the situation. The business executive must respond, in writing and on the day, to the requirement made. The alternatives are to reduce the position to the prevailing limits or set out the strategy that justifies an increase in the limits.

If the excess situation continues without a response by the business unit for three days, the market risks area contacts the relevant global business executives and informs them of this, and requests adjustment measures be taken. If this situation persists 10 days after the first excess, the market risks area will contact senior risk management so that a decision can be taken.

C. Statistical Tools for Measuring and Managing Market Risk

1. Trading activity

1.1. Value At Risk (VaR)

The standard methodology that Grupo Santander applied to trading activities during 2013 was Value at Risk (VaR). As calculated by us, VaR is an estimate of the expected maximum loss in the market value of a given portfolio over a one-day time horizon at a 99% confidence interval. It is the maximum one-day loss that we estimate we would suffer on a given portfolio 99% of the time, subject to certain assumptions and limitations discussed below. Conversely, it is the figure that we would expect to exceed only 1% of the time, or approximately two or three days per year. VaR provides a single estimate of market risk that is comparable among different portfolios or instruments.

The number of expected “exceptions” is an average number. Over a long period of time we would expect an average of two or three exceptions per year; however, there may be some years or periods where there are fewer exceptions than expected, as was the case in 2009 and 2010 when there were no exceptions, and other periods where there are more exceptions than expected. For example in 2012 there were three exceptions and in 2013 there were two exceptions (see more details in section Quantitative analysis: 1.5. Gauging and contrasting measures).

The standard methodology used is based on historical simulation (520 days). In order to capture recent market volatility in the model, the reported VaR is the maximum between two different VaR figures, both of which use a historical window of two years (one applies an exponential decline factor which gives a higher weight to the observations closer in time and another gives the same weight to all the observations). This methodology makes our VaR numbers react very quickly to changes in current volatility, significantly reducing the likelihood of backtesting exceptions. In addition, backtesting exceptions in 2010 were further reduced as a consequence of inclusion of the 2008 financial crisis in the historical series used for calculating the VaR.

We use VaR estimates to alert senior management whenever the statistically estimated losses in our portfolios exceed prudent levels.

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Assumptions and Limitations

Our VaR methodology should be interpreted in light of the limitations of our model, which include:

• A one-day time horizon may not fully capture the market risk of positions that cannot be liquidated or hedged within one day.

• At present, we compute VaR at the close of business and trading positions may change substantially during the course of the trading day.

1.2. Scenario Analysis and Calibration Measures

The VaR is not the only measurement. It is used because of its calculation simplicity and for being a good benchmark of the Group’s risk level, but other measures are also employed which allow for greater control of risks in all the markets where the Group operates.

Among these measures is analysis of scenarios, which consists of defining alternatives for the performance of different financial variables and obtain the impact on results by applying them to activities. These scenarios can replicate events that happened in the past (crisis) or determine possible alternatives that do not correspond to past events.

The potential impact on results of applying different stress scenarios to all the trading portfolios and considering the same suppositions by risk factor is calculated and analyzed at least monthly. Three types of scenario are defined: possible, severe and extreme, obtaining along with the VaR a fuller spectrum of the risk profile.

In addition, levels of warning (triggers) are set for global scenarios, on the basis of the historic results of these scenarios and of the capital associated with the portfolio in question. In the event of surpassing these levels, those responsible for management of the portfolio are informed so they can take the necessary measures. At the same time, the results of the stress exercises at the global level, as well as the possible breaching of the levels set, are regularly reviewed by the global committee of market risks so that, if required, senior management is informed.

In order to calibrate our VaR model, we use back testing processes. Back testing (BT) is a comparative analysis between VaR estimates and the daily clean P&L (i.e. real profit or loss obtained at the end of the day on the portfolio analyzed at the end of the preceding day valued at the following day prices). The purpose of these tests is to verify and measure the precision of the models used to calculate VaR.

Santander performs regular BT processes to calibrate and improve its VaR model. Back-testing is conducted based on several approaches: by unit (Madrid, Brazil, Mexico, etc.), by main portfolio/strategy (proprietary trading, market making rates, market making equity, etc.), and by type of profit & loss source. Three kinds of back-testing are conducted: “clean P&L” (which allows us to monitor market risk), “clean P&L” calculated with front platforms such as Murex (which allows us to monitor risks associated with our treasury positions) and “dirty P&L” (which includes commissions, mark ups and intraday trading results). The aim of the latter is to capture indirectly the importance of intra-day activity.

Whenever an anomaly is detected, we undertake a detailed examination of elements (such as “pricers”, inputs and configuration, among others, in order to correct such anomaly. Detailed results of our BT are regularly reported to Bank of Spain.

The analyses of our BT comply, at a minimum, with the BIS recommendations regarding the verification of the internal systems used to measure and manage market risks.

Besides the ongoing and regular calibration of our VaR methodology, there were no significant changes during the periods presented nor are any such changes contemplated at this time.

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1.3. Analysis of positions, sensitivities and results

The market risk area, in line with the principle of independence of the business units, monitors the positions daily, both those of each unit as well as globally, and conducts an exhaustive control of the changes in the portfolios in order to detect possible incidents so that they can be corrected immediately.

The positions are traditionally used to quantify the net volume of the market values of the transactions in portfolio, grouped by main risk factor, and considering the delta value of the futures and options that could exist. All the risk positions can be expressed in the base currency of the unit and in the currency of homogenizing information.

The market risk sensitivity measures are those that gauge the change (sensitivity) of the market value of an instrument or portfolio to changes in each of the risk factors. The sensitivity of the value of an instrument to changes in market factors can be obtained through analytical approximations by partial derivatives or through a full revaluation of the portfolio.

The daily drawing up of the income statement is also an excellent indicator of risks, as it enables the impact that changes in financial variables have on portfolios to be identified.

1.4. Credit management activity

Control of derivative activities and credit management should also be mentioned. This control, because of its atypical nature, is conducted daily according to specific measures. In the case of derivative activities, sensitivity to the price movements of the underlying asset (delta and gamma), volatility (vega) and time (theta) is controlled. In the case of credit management, measures such as the spread sensitivity, jump-to-default, and concentration of positions by rating levels, etc., are systematically reviewed.

Regarding the credit risk inherent in trading portfolios and in line with the recommendations of the Basel Committee on Banking Supervision and prevailing regulations, an additional measurement began to be calculated (incremental risk charge, IRC), in order to cover the risk of default and rating migration that is not adequately captured in the VaR, via changes in credit spreads. The controlled products are basically fixed-rate bonds, both public and private sector, derivatives on bonds (forwards, options, etc.) and credit derivatives (credit default swaps, asset-backed securities, etc.). The method for calculating the IRC is based on direct measurements of the tails of the distribution of losses to the appropriate percentile (99.9%). The Monte Carlo methodology is used, applying one million simulations.

1.5. Other measures: stressed VaR (sVaR) and expected shortfall

As well as the usual VaR, Santander began to calculate stressed VaR every day, as of October 2011, for the main portfolios. The methodology for calculation is the same as that used for the VaR, with the following two exceptions:

• Historic period of observation of factors: the stressed VaR uses a window of 250 figures, instead of one of 520 for the VaR.

• The maximum between the percentile uniformly weighted and the one exponentially weighted applied when calculating the VaR is not applied to obtain the stressed VaR. Instead, the percentile uniformly weighted is used directly.

All the other aspects regarding the methodology and the inputs for calculating the stressed VaR are the same as those for the VaR. As regards determining the period of observation, for each relevant portfolio, the methodology area has analyzed the history of a subseries of market risk factors that were chosen on the basis of expert criteria taking into account the most relevant positions of the books.

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Moreover, the expected shortfall (ES) has begun to be calculated in order to estimate the expected value of the potential loss when this is higher than the level set by the VaR. The ES, unlike the VaR, has the advantage of capturing better the tail risk and of being a subadditive metric¹³. With regard to the near future, the Basel Committee recommends replacing VaR with the expected shortfall as the reference metric for calculating the regulatory capital of the trading portfolios¹⁴.The committee believes that the confidence level of 97.5% is a risk level similar to that which VaR captures with a confidence level of 99%.

1.6. CVA and DVA

Grupo Santander incorporates credit valuation adjustment (CVA) and debt valuation adjustment (DVA) in the calculation of the results of trading portfolios. The credit valuation adjustment (CVA) is a valuation adjustment of over-the-counter (OTC) derivatives, as a result of the risk associated with the credit exposure assumed by each counterparty.

The CVA is calculated taking into account the potential exposure with each counterparty in each future maturity. The CVA for a certain counterparty would be equal to the sum of the CVA for all maturities. It is calculated on the basis of the following inputs:

• Expected exposure: including, for each transaction the current market value (MtM) as well as the potential future risk (add-on) to each maturity. Mitigants such as collateral and netting contracts are taken into account, as well as a factor of temporary decay for those derivatives with intermediate payments.

• Severity: the percentage of final loss assumed in case of credit/non-payment of the counterparty.

• Probability of default: for cases where there is no market information (spread curve traded via CDS, etc.) probabilities are employed on the basis of rating (preferably internal ones).

• Discount factors curve.

The debt valuation adjustment (DVA) is a valuation adjustment similar to the CVA, but in this case as a result of Grupo Santander’s risk that counterparties assume in the OTC derivatives

2. Structural market risks

2.1 Structural interest rate risk

The Group analyses the sensitivity of net interest margin and of equity value to changes in interest rates. This sensitivity arises from gaps in maturity dates and the review of interest rates in the different asset and liability items.

On the basis of the positioning of balance sheet interest rates, as well as the situation and outlook for the market, the financial measures are agreed to adjust the positioning to that desired by the Bank. These measures range from taking positions in markets to defining the interest rate features of commercial products.

The metrics used by the Group to control interest rate risk in these activities are: the interest rate gap, the sensitivity of net interest margin and of equity value to changes in interest rate levels, Value at Risk (VaR), for the purposes of calculating economic capital.

Interest rate gap of assets and liabilities

Interest rate gap analysis focuses on lags or mismatches between changes in the value of asset, liability and off-balance sheet items. It provides a basic representation of the balance sheet structure and allows for the detection of interest rate risk by concentration of maturities. It is also a useful tool for estimating the impact of eventual interest rate movements on net interest margin or equity value.

¹³  The sub-additive metric is one of the desirable properties which, according to French literature, should present a coherent risk metric. This property establishes that f (a+b) be lower or equal to f(a)+f(b). Intuitively, it supposes that the more instruments or risk factors there are, the less risky a portfolio due to the benefits of diversification. VaR does not meet this property for certain distributions, while the ES always does.

¹⁴  Fundamental review of the trading book: a revised market risk framework (consultative documents of the Basel Committee on banking supervision, October 2013)

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All on- and off-balance sheet items must be disaggregated by their flows and looked at in terms of repricing/maturity. In the case of those items that do not have a contractual maturity, an internal model of analysis is used and estimates made of the duration and sensitivity of them.

Net interest margin sensitivity (NIM)

The sensitivity of net interest margin measures the change in the short/medium term in the accruals expected over a particular period (12 months), in response to a shift in the yield curve.

It is calculated by simulating the net interest margin, both for a scenario of a shift in the yield curve as well as for the current situation. The sensitivity is the difference between the two margins calculated.

Market value of equity sensitivity (MVE)

The sensitivity of equity value is an additional measure to the sensitivity of the net interest margin.

It measures the interest risk implicit in the equity value on the basis of the impact of a change in interest rates on the current values of financial assets and liabilities.

Treatment of liabilities without defined maturity

In the corporate model, the total volume of the balances of accounts without maturity is divided between stable and unstable balances.

The separation between the stable and unstable balances is obtained from a model that is based on the relation between balances and their own moving averages.

From this simplified model the monthly cash flows are obtained and used to calculate the NIM and MVE sensitivities.

The model requires a variety of inputs:

• Parameters inherent in the product.

• Performance parameters of the customer (in this case analysis of historic data is combined with the expert business view).

• Market data.

• Historic data of the portfolio.

Pre-payment treatment for certain assets

The pre-payment issue mainly affects fixed-rate mortgages in units where the relevant interest rate curves for the balance sheet (specifically for the portfolio of investment in fixed rate mortgages) are at low levels. In these units the risk is modelized and some changes can also be made to assets without defined maturity (credit card businesses and similar).

The usual techniques used to value options cannot be applied directly because of the complexity of the factors that determine the pre-payment of borrowers. As a result, the models for assessing options must be combined with empirical statistical models which seek to capture the prepayment performance. Some of the factors are:

• Interest rate: the differential between the fixed rate of the mortgage and the market rate at which it could be refinanced, net of cancellation and opening costs;

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• Seasoning: pre-payment trend downward at the start of the instrument’s life cycle (signing of the contract) and upward and stabilizing as time passes;

• Seasonality: the amortizations or early cancellations tend to take place at specific dates.

• Burnout: decreasing trend in the speed of pre-payment as the instrument’s maturity approaches, which includes:

a) Age: defines low rates of pre-payment.

b) Cash pooling: defines as more stable those loans that have already overcome various waves of interest rate falls. In other words, when a portfolio of loans has passed one or more cycles of downward rates and thus high levels of pre-payment, the “surviving” loans have a significantly lower pre-payment probability.

c) Others: geographic mobility, demographic, social, available income factors, etc.

The series of econometric relations that seek to capture the impact of all these factors is the probability of pre-payment of a loan or pool of loans and is denominated the pre-payment model.

Value at Risk (VaR)

The Value at Risk for balance sheet activity and investment portfolios is calculated with the same standard as for trading: maximum expected loss under historic simulation with a confidence level of 99% and a time frame of one day. As for the trading portfolios, a time frame of two years, or 520 daily figures, is used, obtained from the reference date of the VaR calculation back in time.

2.2 Structural exchange rate risk/hedging of results

These activities are monitored via position measurements, VaR and results, on a daily basis.

2.3 Structural equity risk

These activities are monitored via position measurements, VaR and results, on a monthly basis.

D. Quantitative analysis

1. Trading activity¹⁵

1.1. Value at Risk (VaR) analysis

Grupo Santander maintained its strategy of concentrating its trading activity in customer business, minimizing where possible exposures of directional risk opened in net terms.

This was reflected in the VaR¹⁶ evolution, which was around the average of the last three years.

¹⁵  Trading activity in financial markets

¹⁶  The definition and methodology for calculating VaR is in Section Statistical Tools for Measuring and Managing Market Risk

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EVOLUTION OF VaR 2011-2013

Millions of euros. VaR at 99%, with a time frame of one day

VaR during 2013 fluctuated between €9.4 million and €25.6 million. The main increases were linked to changes in exposure to exchange rates in the Brazilian Treasury and to interest rates and credit spreads in Spain’s Treasury.

The average VaR of the Group’s trading portfolio in 2013 was €17.4 million, similar to the two previous years (€22.4 million in 2011 and €14.9million in 2012) for the reason already mentioned of the concentration of activity in customers. In relation to other comparable financial groups, the Group has a low risk trading profile.

The histogram below shows the distribution of average risk in terms of VaR between 2011 and 2013 where the accumulation of days with levels between €10.5 million and €26.5 million can be seen (91.5%). The values above €26.5 million (6.9%) were concentrated in periods mainly caused by one-off rises of volatility in the Brazilian currency and by the euro zone’s sovereign debt crisis.

VaR RISK HISTOGRAM

VaR at 99%, with a time frame of one day

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• Risk factor

The average and year-end values in VaR terms at 99% for the last three years as well as their minimum and maximum values and the expected shortfall (ES) at 97.5%¹⁷ in 2013 were as follows:

VaR STATISTICS BY RISK FACTOR^18,19

Millions of euros. VaR at 99%, with a time frame of one day

		2013															2012						2011
					VaR (99%)									ES (97.5%)			VaR						VaR
		Min			Average			Max			Year-End			Year-End			Average			Year-End			Average			Year-End
Total Trading	Total VaR		9.4			17.4			25.6			13.1			13.4			14.9			18.5			22.4			15.9
	Diversification effect		(9.6	)		(16.2	)		(34.7	)		(12.3	)		(12.3	)		(15.2	)		(13.5	)		(21.8	)		(16.7	)
	Interest Rate VaR		8.1			12.7			21.3			8.5			8.4			11.8			12.0			14.8			14.6
	Equity VaR		2.1			5.6			11.7			4.7			4.5			7.0			7.1			4.8			3.7
	FX VaR		1.6			5.4			14.5			4.7			4.8			5.0			3.5			9.0			4.2
	Credit Spread VaR		6.1			9.6			16.4			7.2			7.5			6.1			9.1			15.0			9.6
	Commodities VaR		0.1			0.3			0.7			0.3			0.4			0.4			0.3			0.6			0.4
EUROPE	Total VaR		8.2			13.9			21.6			9.9			9.7			11.0			16.4			15.5			10.1
	Diversification effect		(7.6	)		(14.1	)		(26.8	)		(9.0	)		(9.6	)		(12.9	)		(9.9	)		(15.1	)		(13.0	)
	Interest Rate VaR		6.1			9.3			18.5			6.6			6.4			7.9			6.8			11.5			11.9
	Equity VaR		1.6			4.3			9.2			2.6			2.5			6.2			6.3			3.9			3.6
	FX VaR		1.4			5.2			14.2			3.7			4.0			4.1			4.0			8.5			3.9
	Credit Spread VaR		4.2			9.0			15.1			5.8			6.0			5.4			8.9			6.0			3.3
	Commodities VaR		0.1			0.3			0.7			0.3			0.4			0.4			0.3			0.6			0.4
LATIN AMERICA	Total VaR		3.9			11.1			24.1			6.9			7.4			10.1			8.9			11.7			10.7
	Diversification effect		(1.2	)		(5.3	)		(16.1	)		(6.7	)		(7.4	)		(6.4	)		(3.8	)		(6.4	)		(8.7	)
	Interest Rate VaR		3.6			9.6			22.1			5.9			7.4			8.8			8.8			11.2			10.5
	Equity VaR		0.8			3.2			8.1			2.9			2.8			3.1			1.6			3.5			2.2
	FX VaR		0.7			3.5			11.7			4.7			4.6			3.1			1.3			3.7			1.2
USA & ASIA	Total VaR		0.4			0.8			1.7			0.5			0.5			0.9			0.8			1.2			0.9
	Diversification effect		0.0			(0.4	)		(1.1	)		(0.2	)		(0.2	)		(0.5	)		(0.3	)		(0.5	)		(0.4	)
	Interest Rate VaR		0.3			0.7			1.5			0.5			0.5			0.7			0.6			0.9			0.9
	Equity VaR		0.0			0.1			1.8			0.0			0.0			0.2			0.1			0.1			0.1
	FX VaR		0.1			0.4			1.2			0.2			0.2			0.6			0.4			0.6			0.4
GLOBAL ACTIVITIES	Total VaR		0.9			1.5			2.3			2.0			2.0			2.7			1.2			10.5			9.7
	Diversification effect		(0.1	)		(0.3	)		(0.8	)		(0.5	)		(0.4	)		(0.6	)		(0.3	)		(1.1	)		(0.9	)
	Interest Rate VaR		0.2			0.3			0.6			0.4			0.4			0.3			0.2			0.4			0.5
	Credit Spread VaR		0.9			1.5			2.3			2.1			2.0			2.6			1.3			10.3			8.4
	FX VaR		0.0			0.1			0.1			0.0			0.0			0.4			0.1			0.9			1.8

For the first time another risk metric is shown, the expected shortfall. Its proximity to VaR shows that the probability of high losses due to tail risk is not high, at least bearing in mind the historic window of the last two years.

The average VaR increased a little in 2013 by €2.5 million, although if compared with the year-end figures VaR declined by €5.4 million. By risk factor, the average VaR increased in interest rates, credit spreads and exchange rates, and declined in equities and commodities. By geographic zone, it rose in Europe and Latin America and dropped in the United States and Asia and global activities.

¹⁷  Item Other measures: Stressed VaR (SVaR) and expected shortfall (ES) sets out the definition of this metric. Following the recommendation of the Basel Committee in its Fundamental review of the trading book: A revised market risk framework (October 2013), the confidence level of 97.5% means approximately a risk level similar to that which the VaR captures with a 99% confidence level

¹⁸  The VaR of global activities includes operations that are not assigned to any particular country.

¹⁹  In Latin America, the U.S. and Asia, the VaR levels of the spread credit and commodity factors are not shown separately because of their scant or zero materiality.

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VaR BY RISK FACTOR.

Millions of euros, VaR at 99% with a time frame of one day (15-day moving average)

The VaR evolution by risk factor in general also declined, with peaks and troughs sharper in the case of the VaR by credit spread, partly due to the exclusion of the risk spread of securitizations and credit correlation which by BIS 2.5 is considered as banking book for the purposes of regulatory capital as of November 15, 2011. The temporary changes in the VaR of various factors was due more to the temporary rises in the volatility of market prices than to significant changes in positions.

Lastly, the table below compares the VaR figures²⁰ with stressed VaR figures for trading activity in Spain and Brazil, whose treasuries were those that experienced the Group’s largest average VaR in 2013. In Spain, unlike Brazil, the fact that the stressed VaR (with window of historic crisis) does not significantly exceed the VaR (with window of the two last years) indicates that the portfolio has not been significantly exposed to events not covered in the most recent past.

STRESSED VAR STATISTICS VERSUS VAR IN 2013: TREASURIES IN SPAIN AND BRAZIL Million of euros. Stressed VaR and VaR at 99% with time frame of one day

		2013
		Min		Average		Max		Year-End
Spain	VaR (99%)		5.4		10.7		19.3		6.0
	Stressed VaR (99%)		7.4		12.2		22.2		14.8
Brazil	VaR (99%)		5.0		9.1		22.6		5.3
	Stressed VaR (99%)		5.1		17.2		48.3		12.1

²⁰  Description in Other measures: Stressed VaR (SVaR) and expected shortfall (ES)

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1.2. Distribution of risks and management results²¹

• Geographic distribution

In trading activity, the average contribution of Latin America to the Group’s total VaR in 2013 was 38.5% compared with a contribution of 35.6% in economic results. Europe, with 60.7% of global risk, contributed 58.1% of results. In relation to prior years, there was a gradual homogenization in the profile of activity in the Group’s different units, focused generally on providing service to professional and institutional clients.

Below is the geographic contribution (by percentage), both in risks, measured in VaR terms, as well as in results (economic terms).

VaR BINOMIAL-MANAGEMENT RESULTS: GEOGRAPHIC DISTRIBUTION

Average VaR (at 99%, with a time frame of one day) and annual accumulated management result (millions of euros)

• Monthly distribution of risks and results

The next chart shows the risk assumption profile, in terms of VaR, compared to results in 2013. The average VaR remained relatively stable, although on a downward path to some extent, while results evolved in a more irregular way during the year. January and July were positive months and November negative, with results below the annual average.

²¹  Results in terms that can be assimilated to the gross margin (excluding operating costs, financial ones are the only cost).

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DISTRIBUTION OF RISK BY TIME AND RESULTS IN 2013: PERCENTAGES OF ANNUAL TOTALS

Average VaR (at 99%, with a time frame of one day) and annual accumulated management result (millions of euros)

The following histogram of frequencies shows the distribution of daily economic results on the basis of their size between 2011 and 2013. The daily yield²² was between -€15 and +€15 million on more than 95% of days when the market was open.

HISTOGRAM OF THE FREQUENCY OF DAILY RESULTS (MTM)

Daily results of management “clean” of commissions and intraday operations (millions of euros). Number of days (%) in each range

²²  Yields “clean” of commissions and results of intraday derivative operations

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1.3. Risk management of financial derivatives market

Financial derivatives activity is mainly focused on designing investment products and hedging risks for clients. Management is focused on ensuring that the net risk opened is the lowest possible. These transactions include options on equities, fixed-income and exchange rates. The units where this activity mainly takes place are: Spain, Santander U.K., and, to a lesser extent, Brazil and Mexico.

The chart below shows the VaR Vega²³ performance of structured derivatives business over the last three years. It fluctuated at around an average of €6.5 million. The periods with higher VaR levels related to events of significant rises in volatility in the markets. The evolution of VaR Vega in the second quarter of 2013 is the result of the increased volatility of euro and U.S. dollar interest rate curves, coinciding with a strategy of hedging client operations of significant amounts.

EVOLUTION OF RISK (VaR) OF THE BUSINESS OF FINANCIAL DERIVATIVES

Million euros. VaR Vega at 99%, with a time frame of one day.

As regards the VaR by risk factor, on average, the exposure was concentrated, in this order: interest rates, equities, exchange rates and commodities. This is shown in the table below:

STRUCTURED DERIVATIVES. RISK (VaR) BY RISK FACTOR

Millions of euros. VaR at 99%, with a time frame of one day

	2013											2012						2011
	Minimum		Average			Maximum			Year-end			Average			Year-end			Average			Year-end
Total VaR Vega		3.4		8.0			22.7			4.5			6.8			6.5			4.7			4.9
Diversification impact		2.8		(3.8	)		(7.0	)		(2.7	)		(3.0	)		(3.4	)		(2.9	)		(3.7	)
Interest rate VaR		1.4		6.6			22.7			4.1			2.3			2.8			2.0			2.0
Equity VaR		1.5		3.4			7.2			1.8			6.5			5.5			4.1			5.2
FX VaR		0.2		1.7			5.0			1.3			0.7			1.3			1.2			1.0
Commodities VaR		0.0		0.1			0.2			0.1			0.3			0.2			0.3			0.4

²³  Vega, a Greek term, means here the sensitivity of the value of a portfolio to changes in the price of market volatility.

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As regards the distribution by business unit, the exposure is concentrated, in this order: Spain, Santander UK, Brazil and Mexico.

STRUCTURED DERIVATIVES. RISK (VaR) BY UNIT

Millions of euros. VaR at 99%, with a time frame of one day

	2013								2012				2011
	Minimum		Average		Maximum		Year-end		Average		Year-end		Average		Year-end
Total VaR Vega		3.4		8.0		22.7		4.5		6.8		6.5		4.7		4.9
Spain		2.0		7.0		22.3		3.8		5.9		5.4		4.0		3.7
Santander U.K.		1.5		2.2		3.6		1.6		2.8		2.0		1.4		2.7
Brazil		0.8		1.2		2.8		0.9		1.0		2.8		0.8		0.3
Mexico		0.8		1.2		1.5		1.2		0.7		0.6		1.2		1.1

The average risk in 2013 (€8 million) was more than the combined average of the last three years, due to the increase in the second quarter of 2013.

Grupo Santander continues to have a very limited exposure to instruments or complex structured vehicles, reflecting a management culture of prudence in risk management. At the end of 2013, the Group had:

• CDOs and CLOs: the position continues to be not very significant (€194 million). An important part of it is the result of integrating the portfolio of Alliance & Leicester in 2008.

• Hedge funds: the total exposure is not significant (€317 million at the end of 2013) and most of it is via the financing of these funds (€136 million), with the rest direct participation in portfolio or via counterparty by derivatives to hedge funds. This exposure has low loan-to-value levels of around 25% (collateral of €1,260 million at the end of 2013). The risk with this type of counterparty is analyzed case by case, establishing percentages of collateralization on the basis of the features and assets of each fund.

• Conduits: no exposure.

• Monolines: Santander’s exposure to bond insurance companies (monolines) was €141 million²⁴ at the end of 2013, mainly indirect exposure (€138 million) by virtue of the guarantee provided by this type of entity to various financing or traditional securitization operations. The exposure in this case is double default, as the primary underlying assets are of high credit quality. The small remaining amount is direct exposure (for example, via purchase of protection from the risk of non-payment by any of these insurance companies through a credit default swap). The exposure was 7% lower than in 2012. In short, the exposure to this type of instrument, which is a result of the Group’s usual operations, continued to decline in 2013. This was mainly due to the integration of positions of institutions acquired by the Group, such as Alliance & Leicester and Santander Bank (in 2008 and 2009, respectively). All these positions were known at the time of purchase, having been duly provisioned. These positions, since their integration in the Group, have been notably reduced, with the ultimate goal of eliminating them from the balance sheet.

Santander’s policy for approving new transactions related to these products remains very prudent and conservative. It is subject to strict supervision by the Group’s senior management. Before approving a new transaction, product or underlying asset, the risks division verifies:

• The existence of an appropriate valuation model to monitor the value of each exposure: Mark-to-Market, Mark-to-Model or Mark-to-Liquidity.

• The availability in the market of observable data (inputs) needed to be able to apply this valuation model.

And provided these two points are always met:

• The availability of appropriate systems, duly adapted to calculate and monitor every day the results, positions and risks of new operations, and;

• The degree of liquidity of the product or underlying asset, in order to make possible their coverage when deemed opportune.

²⁴  Guarantees provided by monolines for bonds issued by U.S. states (municipal bonds) are not considered as exposure. They amounted to €566 million at the end of 2013.

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1.4. Issuer risk in trading portfolios

Trading activity in credit risk is mainly conducted in Treasury in Spain. It is done by taking positions in bonds and credit default swaps (CDS) at different maturities on corporate and financial references, as well as indexes (Itraxx, CDX).

The table below shows the largest positions at the end of the year, distinguishing between long positions (bond purchase or protection sale via CDS and short positions (bond sale or purchase protection via CDS):

Largest “long” positions (protection sale)						Largest “short” positions (purchase protection)
	Exposure at default (EaD)		% of total EaD				Exposure at default (EaD)		% of total EaD
1st reference		118		3.8	%	1st reference		-65		6.7	%
2nd reference		112		3.6	%	2nd reference		-45		4.7	%
3rd reference		94		3.0	%	3rd reference		-44		4.6	%
4TH reference		92		3.0	%	4TH reference		-29		3.0	%
5th reference		84		2.7	%	5th reference		-29		3.0	%
Sub-total top 5		500		16.1	%	Sub-total top 5		-212		22.0	%
Top 5 subtotal		3,103		100.0	%	Total		-965		100.0	%

Million euros. Note: zero recoveries are supposed (LCR=0) in the EaD calculation

1.5. Gauging and contrasting measures

In 2013, the Group continued to regularly conduct analysis and contrasting tests on the effectiveness of the Value at Risk (VaR) calculation model, obtaining the same conclusions that enable us to verify the model’s reliability. The objective of these tests is to determine whether it is possible to accept or reject the model used to estimate the maximum loss of a portfolio for a certain level of confidence and a specific time frame.

The most important test is backtesting, analyzed at the local and global levels by the market risk control units. The methodology of backtesting is implemented in the same way for all the Group’s portfolios and sub-portfolios.

Backtesting consists of comparing the forecast VaR measurements, with a certain level of confidence and time frame, with the real results of losses obtained in a same time frame.

Santander calculates and evaluates three types of backtesting:

• “Clean” backtesting: the daily VaR is compared with the results obtained without taking into account the intraday results or the changes in the portfolio’s positions. This method contrasts the effectiveness of the individual models used to assess and measure the risks of the different positions.

• Backtesting on complete results: the daily VaR is compared with the day’s net results, including the results of the intraday operations and those generated by commissions.

• Backtesting on complete results without mark-ups or commissions: the daily VaR is compared with the day’s net results from intraday operations but excluding those generated by mark- ups and commissions. This method aims to give an idea of the intraday risk assumed by the Group’s treasuries.

For the first case and the total portfolio, there were two exceptions in 2013 of VaR at 99% (days when the daily loss was higher than the VaR): May 31 - concentrated in Brazil due to a more than usually high rise in the Brazilian currency curves, both nominal as well as inflation-indexed (IPCA) - and July 11 - concentrated in Spain due movements in curves and their greater than usual volatility, and Brazil, because of the currency’s significant appreciation against the dollar.

The number of exceptions responded to the expected performance of the VaR calculation model, which works with a confidence level of 99% and an analysis period of one year (over a longer period of time, an average of two or three exceptions a year is expected).

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The backtesting exercises are regularly conducted for each relevant portfolio or strategy of the Group, and its main objective (as in the rest of contrasting tests) is to detect anomalies in the VaR model of each portfolio (for example, shortcomings in the parameterization of the valuation models of certain instruments, inappropriate proxies, etc.). This is a dynamic process contextualized in the framework of the procedure for reviewing and validating the model.

BACKTESTING OF BUSINESS PORTFOLIOS: DAILY RESULTS VERSUS PREVIOUS DAY’S VALUE AT RISK

(Millions of euros)

1.6. Analysis of scenarios

Various stress scenarios were calculated and analyzed regularly in 2013 (at least every month) at the local and global levels for all the trading portfolios and using the same suppositions by risk factor.

Maximum volatility scenario (Worst Case)

This scenario is given particular attention as it combines historic movements of risk factors with an ad hoc analysis in order to reject very unlikely combinations of variations (for example, sharp falls in stock markets together with a decline in volatility).

This scenario is given particular attention as it combines historic movements of risk factors with an ad-hoc analysis in order to reject very unlikely combinations of variations (for example, sharp falls in stock markets together with a decline in volatility). As regards the variations, an historic volatility equivalent to six typical deviations is applied. The scenario is defined by taking for each risk factor the movement which represents the greatest potential loss in the portfolio, rejecting the most unlikely combinations in economic financial terms. For year-end, that scenario implied, for the global portfolio, interest rate rises, falls in stock markets, depreciation of all currencies against the euro, rise in credit spreads and mixed volatility movements. The following table shows the results of this scenario at the end of 2013.

The stress test shows that the economic loss suffered by the Group in its trading portfolios, in terms of the Mark to Market (MtM) result would be, if the stress movements defined in the scenario materialized, €130.6 million, a loss that would be concentrated in Europe (in this order, credit spreads, interest rates and exchange rates) and Latin America (interest rates, equities and exchange rates).

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MAXIMUM VOLATILITY STRESS SCENARIO (WORST CASE)

€ million	Interest Rate		Equity		Exchange Rate		Credit Spread		Commodity		Total
Total Trading		-51.3		-21.5		-27.3		-30.3		-0.2		-130.6
Europe		-17.2		-7.7		-14.5		-24.5		-0.2		-64.1
Latin America		-30.4		-13.8		-12.7		0.0		0.0		-56.9
United States		-2.5		0.0		-0.1		0.0		0.0		-2.6
Global Activities		-1.2		0.0		0.0		-5.8		0.0		-7.0

Various global scenarios (similar for all the Group’s units) are established:

• Abrupt crisis: ad hoc scenario with very sudden movements in markets. Rise in interest rate curves, sharp falls in stock markets, large appreciation of the dollar against the rest of currencies, rise in volatility and in credit spreads.

• Crisis 11S: historic scenario of the September 11, 2001 attacks with a significant impact on the U.S. and global markets. It is sub-divided into two scenarios: 1) maximum accumulated loss until the worst moment of the crisis, and 2) maximum loss in a day. In both cases, there are drops in stock markets and in interest rates in core markets and rises in emerging markets, and the dollar appreciates against the rest of currencies.

• Subprime crisis. Historic scenario of the U.S. mortgage crisis. The objective of the analysis is to capture the impact on results of the reduction in liquidity in the markets. The scenarios have two time frames (one day and 10 days): in both cases there are drops in stock markets and in interest rates in core markets and rises in emerging markets, and the dollar appreciates against the rest of currencies.

• Sovereign crisis: the severest historic scenario by the Committee of European Banking Supervisors (CEBS) to measure the market’s shock capacity between April 15 and September 1, 2010. Given the Group’s international sphere, four geographic zones are distinguished (U.S., Europe, Latin America and Asia), interest rate rises, falls in stock markets and volatilities are established, rises in credit spreads and depreciation of the euro and Latin American currencies and appreciation of Asian currencies against the dollar.

Every month a consolidated stress test report is drawn up with explanations of the main changes in results for the various scenarios and units supervised by the global committee of market risks. An early warning mechanism has also been established so than when the loss of a scenario is high in historic terms and/or the capital consumed by the portfolio in question, the business executive is informed.

Here we show the results of the global scenarios for the last three years.

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STRESS TEST RESULTS : COMPARISON OF 2011, 2012 AND 2013 (ANNUAL AVERAGES)

(Millions of euros)

2. Non-Trading Activity²⁵

2.1. Structural interest rate risk

Europe and the United States

Generally, in these mature markets and in a context of low interest rates, the general positioning has been to maintain balance sheets with positive sensitivity to short-term interest rate rises for the net interest margin (NIM). In the case of economic value (MVE), the sense of risk is determined by expectations of long-term interest rates in each market, on the basis of their economic indicators.

In any case, the exposure level in all countries is very low in relation to the annual budget and the amount of equity. Moreover, in 2013 the most general trend was to maintain or reduce the exposure.

At the end of 2013, the sensitivity of the NIM at one year to parallel rises of 100 basis points was concentrated in the euro interest rate curve, the U.S. dollar and sterling, with the parent bank, the U.S. subsidiary and Santander UK the units that contributed the most (€111 million, $54 million and £39 million, respectively). The sensitivity of the margin to the rest of convertible currencies is not significant.

²⁵  Includes the entire balance sheet except for the trading portfolios.

286

NIM SENSITIVITY TO 100 BASIS POINTS

% of the total

Other: Portugal, SCF, SC USA, Poland and Santander Private Banking

At the same date, the main sensitivity of economic value to parallel rises in the yield curve of 100 basis points was in the euro interest rate curve in the parent bank (€1,478 million). As regards the dollar and sterling curves, the amounts were $285 million and £16 million, respectively).

MVE SENSITIVITY TO 100 BASIS POINTS

% of the total

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The tables below give the structure by maturity of interest rates at the parent bank and Santander UK at the end of 2013.

PARENT BANK: INTEREST RATES REPRICING GAP²⁶ (DECEMBER 31, 2013)

Millions of euros

	Total		3 months		1 year		3 years		5 years		> 5 years		Non sensitive
Assets		408,298		163,941		78,854		23,913		12,690		21,056		107,844
Liabilities		408,298		139,231		73,936		72,089		24,836		33,441		64,766
Off-balance sheet		0		-15,974		-2,378		13,411		3,509		1,433		0
Net Gap		0		8,736		2,540		-34,766		-8,637		-10,952		43,078

SANTANDER UK: INTEREST RATES REPRICING GAP²⁷ (DECEMBER 31, 2013)

Millions of euros

	Total		3 months		1 year		3 years		5 years		> 5 years		Non sensitive
Assets		287,814		190,079		21,650		48,057		12,761		301		14,966
Liabilities		287,814		182,894		38,628		23,061		14,815		638		27,778
Off-balance sheet		0		407		8,555		-4,970		-3,790		-187		-15
Net Gap		0		7,591		-8,423		20,026		-5,843		-524		-12,828

In general, the gaps by maturities remained at very low levels in relation to the size of the balance sheet, in order to minimize interest rate risk.

Latin America

Due to differences in the macroeconomic context and the degree of maturity of these markets, the positioning with regard to the NIM was not homogeneous. There are countries with balance sheets positioned to interest rate rises and others to interest rate falls. With regard to MVE, the general positioning of the balance sheets was such that the average duration of the asset was higher than that of the liability (negative sensitivity to interest rate rises).

The risk in the main countries was reduced or maintained in 2013. In any case, the exposure level in all countries is very low in relation to the annual budget and the amount of equity.

²⁶  Aggregate gap of all currencies in the balance sheet of Santander parent bank, expressed in euros.

²⁷  Aggregate gap of all currencies in the balance sheet of Santander UK, expressed in euros.

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EVOLUTION OF THE LATIN AMERICA STRUCTURAL INTEREST RISK PROFILE

Sensitivity of NIM and MVE to 100 basis points millions of euros

For Latin America as a whole, the consumption of risk at December 2013, measured to 100 basis points of the financial margin²⁸, stood at €103 million (€89 million at December 2012). It can be seen from the chart below that over 95% of the risk was concentrated in three countries: Brazil, Chile and Mexico.

NIM SENSITIVITY TO 100 BASIS POINTS

% of the total

Other: Argentina, Colombia, Panama, Peru, Puerto Rico, Santander Overseas and Uruguay

²⁸  Betas are used to aggregate the sensitivities of different curves.

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At the end of 2013, the risk consumption for the region, measured to 100 basis points of asset value²⁹, was €718 million (€916 million in 2012). That over 90% of the asset value risk was concentrated in three countries: Brazil, Chile and Mexico.

MVE SENSITIVITY TO 100 BASIS POINTS

% of the total

Other countries: Argentina, Colombia, Panama, Peru, Puerto Rico, Santander Overseas and Uruguay.

The gap tables show the interest-rate risk maturity structure in Brazil at the end of 2013

BRAZIL: INTEREST RATES REPRICING GAP³⁰ (DECEMBER 31, 2013)

Millions of euros

	Total		3 months		1 year		3 years		5 years		> 5 years		Non sensitive
Assets		158,399		71,197		22,683		19,896		9,169		7,428		28,027
Liabilities		158,399		88,456		17,659		10,495		3,473		3,371		34,945
Off-balance sheet		0		5,293		1,101		-6,854		302		159		0
Net Gap		0		-11,967		6,126		2,547		5,997		4,216		-6,918

D.2. Structural exchange-rate risk/hedging of results

Structural exchange rate risk arises from Group operations in currencies, mainly related to permanent financial investments, and the results and hedging of these investments.

This management is dynamic and seeks to limit the impact on equity of currency depreciations and optimize the financial cost of hedging.

²⁹  Betas are used to aggregate the sensitivities of different curves.

³⁰  Aggregate gap of all currencies in the balance sheet of Brazil, expressed in euros.

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As regards the exchange rate risk of permanent investments, the general policy is to finance them in the currency of the investment provided the depth of the market allows it and the cost is justified by the expected depreciation. One-off hedging is also done when a local currency could weaken against the euro beyond what the market estimates.

At the end of 2013, the largest exposures of a permanent nature (with potential impact on equity value) were concentrated, in this order, in sterling, Brazilian reais, U.S. dollars, Mexican pesos, Chilean pesos and Polish zlotys. The Group covers part of these positions of a permanent nature with exchange-rate derivatives.

In addition, financial management at the consolidated level is responsible for exchange rate management of the Group’s expected results and dividends in those units whose currency is not the euro.

D.3. Structural equity risk

Santander maintains equity positions in its banking book in addition to those of the trading portfolio. These positions are maintained as portfolios available for sale (capital instruments) or as equity stakes, depending on their envisaged time in the portfolio.

These positions are exposed to market risk. VaR calculations are made for these positions, using market price series for listed shares and proxies for those that do not. At the end of 2013, the VaR at 99% with a one day time frame was €253.3 million (€281.4 million and €305.7 million at the end of 2012 and 2011, respectively).

D.4. Balance sheet market risk

With a homogeneous metric such as the VaR, the total market risk in the banking book can be monitored, distinguishing between fixed income (both interest rate as well the credit spread for the ALCO portfolios), exchange rate and equities.

Figures in millions of EUR

			December 31, 2013
	December 31, 2012		Low		Average		High		Period End
TOTAL		666.5		683.5		862.5		1,054.5		736.6
Trading		18.5		9.4		17.4		25.6		13.1
Non-Trading		659.0		387.6		857.6		1,051.3		733.9
Diversification Impact		-11.0		286.4		-12.4		-22.4		-10.3

The diversification effect is calculated as the sum of the individual or “stand alone” VaR of each portfolio minus the total VaR of the consolidated portfolio.

We calculate the VaR for full revaluation (individual pricers for each position) or second-order Taylor approximation for the most complex portfolios. We include several individual factors such as each interest rate curve involved, individual share prices, currencies and volatility matrices. For reporting purposes, we group them based on the primary factor (interest rate, equity, foreign exchange, credit spread and commodities).

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Our daily VaR (considering each factor of interest rate risk, foreign exchange rate risk and equity price risk individually) were as set forth below.

Figures in millions of euros

Interest Rate Risk

			December 31, 2013
	December 31, 2012		Low		Average		High		Period End
Interest Rate Risk
Trading		12.0		8.1		12.7		21.3		8.5
Non-Trading		517.5		580.6		782.4		931.0		681.0
Diversification Impact		-11.8		-8.0		-12.6		-21.1		-8.5
TOTAL		517.6		580.6		782.6		931.2		681.0

Foreign Exchange Rate Risk

			December 31, 2013
	December 31, 2012		Low		Average		High		Period End
Exchange Rate Risk
Trading		3.5		1.6		5.4		14.5		4.7
Non-Trading		207.3		197.8		254.5		320.5		197.8
Diversification Impact		-3.5		-1.6		-5.4		-14.2		-4.6
TOTAL		207.3		197.8		254.5		320.8		197.9

Equity Price Risk

			December 31, 2013
	December 31, 2012		Low		Average		High		Period End
Equity Price Risk
Trading		7.1		2.1		5.6		11.7		4.7
Non-Trading		281.4		225.8		269.0		299.6		235.3
Diversification Impact		-7.0		-2.1		-5.5		-11.5		-4.6
TOTAL		281.5		225.8		269.1		299.8		235.3

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The Group’s daily VaR estimates by activity were as set forth below.

Figures in millions of EUR

			December 31, 2013
	December 31, 2012		Low		Average		High		Period End
Trading
Interest Rate		12.0		8.1		12.7		21.3		8.5
Exchange Rate		3.5		1.6		5.4		14.5		4.7
Equity		7.1		2.1		5.6		11.7		4.7
Credit Spread		9.1		6.1		9.6		16.4		7.2
Commodities		0.3		0.1		0.3		0.7		0.3
TOTAL		18.5		9.4		17.4		25.6		13.1
Non-Trading Interest Rate
Interest Rate		517.5		580.6		782.4		931.0		681.0
Exchange Rate
Non-Trading Foreign Exchange
Exchange Rate		207.3		197.8		254.5		320.5		197.8
Non-Trading Equity
Equity		281.4		225.8		269.0		299.6		235.3
TOTAL		666.5		683.5		862.5		1,054.5		736.6
Interest Rate		517.6		580.6		782.6		931.2		681.0
Exchange Rate		207.3		197.8		254.5		320.8		197.9
Equity		281.5		225.8		269.1		299.8		235.3

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E. Internal model

Grupo Santander had, at the end of 2013, approval from the Bank of Spain for its internal market risk model for calculating regulatory capital in the trading portfolios of units in Spain, Chile, Mexico and Portugal. The Group’s objective is to gradually increase approval to the rest of units.

The regulatory capital consolidated by the internal model of market risks for Grupo Santander is obtained by adding the regulatory capital of each of the units for which there is the corresponding Bank of Spain approval. A conservative criterion is used for consolidating the Group’s capital, as it does not take into account the savings in capital derived from the diversification impact among various countries.

As a result of this approval, the regulatory capital of trading activity for the commented perimeter is calculated via advanced methods, using as main metric the VaR , the stressed VaR and the incremental risk charge (IRC), in line with the new capital requirements demanded by the Basel agreements and, specifically in the European directive CRD-IV (transposition of the Basel III agreements).

We closely cooperate with the Bank of Spain in order to increase the entities that can enter into the internal model (at the geographic and operational levels), as well as in analysis of the impact of new requirements, in line with the documents published by the Basel Committee to strengthen the capital of banks.

Part 7. Liquidity and funding risk

7.1 Introduction to the treatment of liquidity and funding risk

Liquidity and funding risk management has always been a basic element of the Group’s business strategy and a fundamental cornerstone, together with capital, on which the strength of its balance sheet rests.

Liquidity has become increasingly important in recent years due to the growing stresses in the financial markets in the framework of a global economic crisis. This scenario has emphasized the importance of banks having appropriate funding structures and strategies to ensure their intermediation activity.

During this period of stress, the Group has enjoyed an adequate liquidity position, which has represented a competitive advantage in terms of carrying on and expanding its activity in a demanding environment.

This improved position held by the Group as a whole has been based on a decentralized funding model composed by subsidiaries that are autonomous and self-sufficient in terms of liquidity. Each subsidiary is responsible for covering the liquidity needs arising from its current and future activity, by means of either deposits taken from its customers in its area of influence, or through recourse to the wholesale markets where it operates, under management and supervision procedures coordinated at Group level.

This is a funding structure that is most effective in situations of high market stress as it prevents difficulties in one area from affecting funding capacity in other areas and, therefore, the Group as a whole, which could occur if a centralized funding model were used.

In addition, at the Group this funding structure also benefits from the advantages of having a commercial banking model with a significant presence (business shares of around 10% or more) in ten markets with great potential, with the focus on retail customers and a high level of efficiency. As a result, the subsidiaries have a considerable capacity to attract stable deposits, as well as a significant issue capacity in the wholesale markets of those countries, generally in their own currencies, which is bolstered by the strength afforded by their franchise and membership of a leading group.

7.2 Liquidity management framework - Monitoring and control of liquidity risk

Structural liquidity management seeks to finance the Group’s recurring business with optimal maturity and cost conditions, avoiding the need to assume undesired liquidity risks.

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Liquidity management at the Group is based on the following principles:

• Decentralized liquidity model.

• Medium and long-term liquidity needs arising from the business must be funded using medium and long-term instruments.

• High proportion of customer deposits, as a result of a commercial balance sheet.

• Diversification of wholesale funding sources by: instruments/investors; markets/currencies; and maturity periods.

• Restrictions on recourse to short-term financing.

• Availability of a sufficient liquidity reserve, including a capacity for discounting at central banks, to be drawn upon in adverse situations.

In order to ensure the effective application of these principles by all the Group entities, it was necessary to develop a single management framework resting on the following three cornerstones:

• A sound organizational and governance model to ensure that senior management of the subsidiaries is involved in the decision-making process and is included in the Group’s global strategy.

• An in-depth balance-sheet analysis and liquidity risk measurement to support the decision-making process and the control thereof.

• A management approach adapted in practice to the liquidity needs of each business.

7.2.1 Organizational and governance model

Decisions relating to all structural risks, including liquidity risk, are made though local asset-liability committees (ALCOs) in coordination with the markets committee.

The markets committee is the highest-ranking body at Group level responsible for coordinating and supervising all global decisions affecting liquidity risk measurement, management and control. It is chaired by the Bank’s chairman and its members are the second vice-chairman (who, in turn, is the chairman of the risk committee), the CEO, finance and risk executive vice presidents, and certain heads of business and analysis units.

Following the aforementioned principles, the local ALCO committees establish strategies to guarantee and/or anticipate the funding requirements of their business. They are assisted in the performance of their duties by the financial management area and the market risk area, which submit analyses and management proposals and monitor compliance with the respective limits set.

In line with governance best practice, the Group has traditionally maintained a clear division between the implementation of the financial management strategy (for which the financial management area is responsible) and its monitoring and control (which is the responsibility of the market risk area).

This governance model has been reinforced by being integrated into a more global vision of the Group’s risks, namely the Group risk appetite framework, which responds to the demands from market regulators and participants, as a result of the financial crisis, for banks to strengthen their risk management and control systems.

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With respect to the liquidity risk profile and appetite, the Group’s strategy when conducting its businesses aims to structure the balance sheet to make it as resilient as possible to potential liquidity stress scenarios. The liquidity appetite metrics are therefore structured by applying, on an individual basis, the principles of the Group’s liquidity management model, with specific levels for the structural funding ratio and minimum liquidity horizons under various stress scenarios, as detailed in the following sections.

7.2.2 Balance sheet analysis and liquidity risk measurement

Funding and liquidity decision-making is based on a thorough understanding of the Group’s current situation (environment, strategy, balance sheet and liquidity position), of the future liquidity needs of the businesses (liquidity projection) and of the accessibility and situation of the funding sources in wholesale markets.

Its aim is to ensure that the Group maintains optimum liquidity levels to cover its short- and long-term liquidity requirements with stable funding sources, optimizing the impact of funding costs on the income statement.

This requires the monitoring of the balance sheet structure, the preparation of short- and medium-term liquidity projections and the establishment of basic metrics.

Simultaneously, various scenario analyses are conducted considering the additional liquidity needs that could arise if certain very severe but very unlikely events occur. These events might have a varying effect on the various balance sheet items and/or funding sources (extent of roll-over of wholesale financing, run-off of deposits, impairment of liquid assets, etc.), due either to the global market conditions or to the Group’s specific situation.

The results of these balance-sheet, projection and scenario analyses provide the inputs required to prepare the Group’s various contingency plans, which, if necessary, would enable it to anticipate a broad spectrum of potential adverse situations.

All these measures are in line with the practices being promoted by the Basel Committee to strengthen the liquidity of financial institutions, the objective of which is to define a framework of principles and metrics that, in some cases, is currently in the observation phase and, in others, at the development stage.

The measurements, metrics and analyses used by the Group and subsidiaries in liquidity risk management and control are shown in greater detail below:

Methodology for liquidity risk monitoring and control

The liquidity risk measures adopted by the Group pursue the following goals:

• To attain the highest degree of effectiveness in liquidity risk measurement and control.

• To provide support for financial management, to which end the measures are adapted to the manner in which the Group’s liquidity is managed.

• To be aligned with Basel III, in order to avoid any conflicts between varying limits and to facilitate limit management.

• To constitute an early warning system that anticipates potential risk situations by monitoring certain indicators.

• To achieve involvement at country level. Although the metrics are developed on the basis of common, uniform concepts affecting liquidity, they have to be analyzed and adapted by each unit.

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Two kinds of basic metrics are used to control liquidity risk: short term and structural. Dynamic metrics include basically the liquidity gap, while static metrics feature the net structural balance-sheet position. The Group supplements these metrics by developing various stress scenarios. Following is a detailed description of these three metrics:

a) Liquidity gap

The liquidity gap provides information on potential cash inflows and outflows -both contractual and those estimated using assumptions- for a given period. Liquidity gap analyses are prepared for each of the main currencies in which the Group operates.

The gap supplies data on the projected sources and applications of funds of all on- and off-balance sheet items in specific time periods. This analysis tool is obtained by considering the net result of the maturity and cash flow structure for each of the time buckets established. The tool is constructed by including the available liquidity and contrasting it with the liquidity requirements resulting from maturities.

In practice, since the same item will behave differently at the various Group subsidiaries, a set of common standards and methodologies are in place to make it possible to construct the liquidity risk profiles of each unit in a uniform manner and to submit these profiles in a comparable form to the Bank’s senior management.

Consequently, as this analysis has to be performed on an individual basis for each subsidiary in view of their autonomous management, a consolidated view of the Group’s liquidity gaps is of very limited use for the management and understanding of liquidity risk.

The various analyses conducted using the liquidity gap as a basis include most notably the wholesale funding analysis. Based on this analysis, a metric has been defined the aim of which is to ensure that the Group has sufficient liquid assets to attain a minimum liquidity horizon in a scenario in which wholesale financing is not renewed on maturity; this minimum horizon is set at 90 days at the Group.

The minimum liquidity horizons are established at corporate level and on a uniform basis for all units/countries, which must calculate their wholesale liquidity metric for the main currencies in which they operate.

Bearing in mind the pressures experienced by the markets in recent years, the wholesale liquidity gap has been monitored particularly closely at the Parent and at the units in the euro zone.

At the end of 2013, all units were comfortably positioned with respect to the horizons set at corporate level for the aforementioned scenario.

b) Net structural position

The purpose of this metric is to determine the reasonableness of the balance-sheet funding structure. The Group’s aim is to ensure that its structural needs (lending, non-current assets, etc.) are satisfied by means of an appropriate combination of wholesale funding sources and a stable retail customer base.

Each unit prepares its liquidity balance sheet based on the nature of its business and compares its liquidity needs with the various funding sources available to it. The essential factors taken into account in determining this metric are the degree of recurrence of the business to be financed, the stability of the funding sources and the readiness with which assets can be converted into cash.

In practice, each subsidiary prepares its own liquidity balance sheet (different from the balance sheet for accounting purposes) by classifying the various asset, liability and off-balance-sheet items on the basis of their nature in terms of liquidity. Thus, the funding structure of each subsidiary is determined, which must at all times conform to a fundamental premise: namely that the basic businesses must be financed with stable funds and medium and long-term financing. The combination of these measures guarantees the robustness of the Bank’s financial structure and the sustainability of its business plans.

As of December 31, 2013, the Group’s structural liquidity surplus stood at €150 billion on a consolidated basis. This surplus is based mainly on fixed income securities (€108 billion), equities (€6 billion) and net deposits at central banks (€48 billion).

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c) Scenario analysis

In order to supplement the aforementioned metrics, the Group develops a series of stress scenarios. Its main objective is to identify the critical factors in each potential crisis and, at the same time, to define the most appropriate management measures to address each of the situations assessed.

In their liquidity analyses the units generally consider three different scenarios: systemic, idiosyncratic and hybrid which, given the Group’s characteristics, have been adapted to also take into account a local and a global systemic crisis. These scenarios constitute the minimum standard analysis established for all Group units to be reported to senior management. Also, each unit develops ad-hoc scenarios which replicate major historical crises or the liquidity risks specific to its particular environment.

The fundamental characteristics of the three base scenarios are as follows:

• Idiosyncratic crisis: affecting only the entity and not its environment. This is basically reflected in wholesale funds and in retail deposits, with various percentages of outflows based on the severity defined.

Within this category, a crisis at the Parent Bank, Banco Santander, S.A., which affect a local unit, is considered to be a specific scenario. This scenario was particularly relevant in 2012 in view of the tensions experienced in the peripheral eurozone countries.

• Systemic crisis: taken to be an attack by the international financial markets on the country in which the unit is located. Each entity is affected to a different extent depending on their relative positioning in the local market and the image of resilience they offer. The factors that would be affected in this scenario include, for example, the wholesale financing facilities, due to closure of the markets, and the liquid assets tied to the country, whose value would be significantly reduced.

• Hybrid crisis: in this scenario some of the factors described in the preceding paragraphs are stressed, paying particular attention to the most sensitive aspects from the standpoint of the unit’s liquidity risk.

These metrics and scenario definitions are directly related to the definition and execution of the liquidity contingency plan that is the responsibility of financial management.

At the end of 2013, in the event of a potential systemic crisis affecting the wholesale funding of the units located in Spain, Santander Group would have an adequate liquidity position. In particular, the wholesale liquidity horizon metric in Spain (included within the liquidity gap measures) would show levels exceeding 90 days in which the liquidity reserve would cover all wholesale financing maturities if they were not renewed.

In addition to these three metrics, the Group has defined a series of internal and market variables to act as early warning signals for potential crises; these signals are also capable of indicating the nature and severity of such crises. The incorporation of these variables in day-to-day liquidity management enables the Group to anticipate any situations that might have an adverse effect on its liquidity risk. Although these alerts vary from country to country and from entity to entity, based on the specific conditioning factors in each case, certain parameters are used across the Group, such as the price of Banco Santander CDSs, the changes in deposits and the trend in central bank official interest rates.

7.2.3 Management tailored to business needs

Santander Group performs its liquidity management at subsidiary and/or business unit level in order to finance its recurring activities with the appropriate terms and prices. In practice, in keeping with the funding principles mentioned above, the liquidity management at these units consists of the following:

• Preparation of a liquidity plan each year on the basis of the funding needs arising from the budgets of each business and the methodology described above. Based on these liquidity requirements and taking into account certain prudential limits on the raising of funds in the short-term markets, the financial management area establishes an issue and securitization plan for the year at subsidiary/global business level.

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• Year-round monitoring of the actual changes in the balance sheet and in the funding requirements of the subsidiaries/businesses, which results in the relevant updates of the plan.

• Continuous active presence in a wide range of wholesale funding markets, enabling the Group to maintain an adequate issue structure that is diversified in terms of product type and has a conservative average maturity.

The effectiveness of this management effort is based on the fact that it is implemented at all subsidiaries. Specifically, each subsidiary budgets the liquidity requirements resulting from its intermediation activity and assesses its own ability to raise funds in the wholesale markets so that, in ongoing coordination with the Group, it can establish an issue and securitization plan.

Traditionally, the Group’s main subsidiaries have been self-sufficient in terms of their structural funding. The exception has been Santander Consumer Finance (SCF) which, because it specializes in consumer financing mainly through dealer/retailer recommendations, has required the financial support of other Group units, especially the Parent.

7.3 Funding strategy and evolution of liquidity in 2013

7.3.1 Funding strategy

In the last few years the Group’s funding activity has achieved its goal of obtaining sufficient funds for the Group’s recurring business, in a highly demanding environment marked by a heightened perception of risk, scant liquidity at certain time horizons and the increased cost of funding.

This sound performance was underpinned by the extension of the management model to all Group subsidiaries, including recent acquisitions, and, above all, by the adaptation of subsidiaries’ strategies to the growing market demands. These demands were not uniform across the markets and reached far higher levels of difficulty and pressure in certain areas, such as the peripheral regions of Europe.

In any case, it is possible to identify a series of general trends in the policies implemented by Group’s subsidiaries in their funding and liquidity management strategies over the last five years, namely:

• Strong generation of liquidity from the commercial business due to the lower growth of credit and the greater emphasis on attracting customer funds.

• Maintenance of adequate, stable medium and long-term wholesale funding levels at Group level. Therefore, at 2013 year-end, this funding represented 20% of the liquidity balance sheet, a very similar level to the 21% in 2010, although significantly lower than the 28% at December 2008, when wholesale liquidity was an abundant, low-cost resource at worldwide level.

Following the tightening of conditions on the wholesale markets, the Group’s decentralized subsidiaries model, with proprietary issues and ratings programs, contributed to maintaining the Group’s high-level participation in the developed wholesale markets, even in the most demanding periods, such as the two-year period encompassing 2011 and 2012.

• Holding a sufficient volume of assets eligible for discount at central banks and other public bodies as part of the liquidity reserve for episodes of stress on wholesale markets.

In particular, the Group has raised its total discount capacity in recent years to around €145 billion.

In 2012, in view of the stresses on the euro markets, the Group pursued a prudent strategy of depositing most of the funds raised by it in the three-year auctions as an immediate liquidity reserve at the European System of central banks, while maintaining a very limited net global position. The reduction of the stresses enabled the Group in 2013 to repay the ECB all of the funds received by Spain in the three-year auctions, thereby reducing its net recourse to funding at the end of 2013 to the lowest levels in five years. Such funding was basically concentrated in Portugal. As of December 31, 2013, the liquidity reserve was located as follows: €103 billion in the U.K., €71 billion in the rest of the units in the convertible currencies area, and the remaining €26 billion mainly in Latin America and Poland.

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Thanks to all these developments, based on a sound liquidity management model, the Group currently enjoys a very robust funding structure. The basic features of this distinguishing structure are as follows:

• High proportion of customer deposits in a predominantly commercial balance sheet.

Customer deposits are the Group’s major source of funding. If retail promissory notes are included (given that in Spain they are a substitute for term deposits), these deposits represent around two thirds of the Group’s net liabilities (i.e. of the liquidity balance sheet) and at the end of 2013 they accounted for 91% of net loans.

• Diversified wholesale funding, primarily at medium and long term, with a very small proportion maturing in the short term.

Medium and long-term wholesale funding represents 20% of the Group’s funding and enables it to comfortably cater for the net loans not financed with customer deposits (commercial gap).

7.3.2 Evolution of liquidity in 2013

At the end of 2013, in comparison with 2012, the Group reported:

• A slight reduction in the ratio of loans to net assets (total assets less trading derivatives and interbank balances) to 73% due to the decrease in lending in the climate of deleveraging of the mature markets. Nevertheless, this figure still mirrors the commercial nature of the Group’s balance sheet.

• An improvement in the loan-to-deposit (LTD) ratio, which stood at 109% (including retail promissory notes), down from 113% at December 2012. This fall continues the downward trend that began in 2008 (150%), which relies heavily on the Group subsidiaries’ capacity to generate liquidity and attract retail deposits.

• An improvement also in the ratio of customer deposits plus medium and long-term funding to loans, owing to the combination of the liquidity resulting from commercial management efforts and the capacity of the Group units to issue and attract wholesale funds. This ratio stood at 119% (2012: 118%), by far surpassing the 104% reported in 2008.

• At the same time, there was a continuing limited recourse to short-term wholesale funds, at under 2%, in line with prior years.

• Lastly, the Group’s structural surplus (i.e. the excess of structural funding resources -deposits, medium and long-term funding, and capital- over structural liquidity requirements -non-current assets and loans-) stood at €150 billion at the end of 2013. This volume covers 16% of the Group’s net liabilities, similar to the 2012 level.

The Group maintains its capacity to access the various markets on which it operates, strengthened by the incorporation of new issuer units. In 2013 it launched issues and securitizations in 11 currencies, in which 17 significant issuers in 14 countries participated, with an average maturity of approximately 3.7 years. In 2012 the Group’s issues were made in 10 currencies, involving 13 issuers in 10 countries, with an average maturity of approximately 4.3 years.

Part 8. Operational risk

8.1 Definition and objectives

The Group defines operational risk as “the risk of loss resulting from inadequate or failed internal processes, human resources or systems or from external events”. Unlike other risks, this is generally a risk that is not associated with products or businesses, but is found in processes and/or assets and is generated internally (people, systems, processes) or as a result of external risks, such as natural disasters.

The aim pursued by the Group in operational risk control and management is primarily to identify, measure/assess, control/mitigate and report on this risk.

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The Group’s priority, therefore, is to identify and eliminate any clusters of operational risk, irrespective of whether losses have been incurred. Measurement of this risk also contributes to the establishment of priorities in operational risk management.

For the purpose of calculating regulatory capital for operational risk, the Group decided to opt for the standardized approach provided for under Basel II standards. In this regard, the Group embarked on a project for 2014 to shift to Advanced Measurement Approaches (AMA), for which it has already satisfied the majority of the regulatory requirements. In any event, it should be noted that the short-term priority in operational risk management continues to be focused on mitigation.

8.2 Corporate governance and organizational model

The organizational model for risk management and control follows the Basel guidelines and establishes three lines of defense:

• First line: identification, management and control functions at first instance performed by the Group’s business and support units. The Group’s various corporate areas themselves constitute an additional level of control over the performance of the different local units.

• Second line: independent control functions to ensure that risks are properly identified and managed by the first lines of defense, within the established general action frameworks.

It should be noted that in 2013 the Group bolstered the operational risk control function by creating, as part of the risk unit, the non-financial risk control area to complement the control function performed by the integrated risk control and internal risk validation area (CIVIR).

• Third line: verification functions performed on a recurring basis by the internal audit division.

The implementation, integration and local adaptation of the policies and guidelines established by the corporate area are the responsibility of the local areas, through the operational risk officers identified in each unit.

This operational risk management structure is based on the knowledge and experience of the executives and professionals of the various Group units, with particular importance being attached to the role of the local operational risk officers.

The Group has the following committees for operational risk management and control:

• The corporate technology and operational risk committee made up of the managers in charge of the Bank’s various divisions relating to the management and control of this risk: its objectives are to provide an overview of the Group’s operational risk and establish effective measures and corporate policies regarding the management, measurement, monitoring and mitigation of this risk.

• The corporate technology and operational risk control function committee: the committee meets every two months. It monitors the corporate area projects and the Group’s risk exposure and its meetings are attended by local and integrated risk control managers.

The Group oversees and controls technology and operational risk through its governing bodies. The Group’s board of directors, executive committee and management committee periodically address significant aspects concerning the management and mitigation of operational risk.

In addition, further to approval by the risk committee, the Group formally establishes the operational risk limits on an annual basis. A risk appetite is established which must fall within the low and medium-low risk profiles, which are defined in accordance with various ratio levels. Limits by country and for the Group are established based on the net loss to total income ratio. An assessment is also performed of the operational risk management status of the countries in accordance with certain internal indicators.

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8.3 Risk management model

The technology and operational risk management model includes the following phases:

• Identification of the operational risk inherent in all the Group’s activities, products, processes and systems.

• Objective and continued measurement and assessment of operational risk, consistent with the industry and regulatory standards (Basel, Bank of Spain, etc.), and setting of risk tolerance limits.

• Continuous monitoring of operational risk exposures, implementation of control procedures, improvement of internal awareness and mitigation of losses.

• Establishment of mitigation measures to eliminate or minimize operational risk.

• Generation of periodic reports on the exposure to operational risk and its level of control for senior management and the Group’s areas/units, and reporting to the market and the regulatory authorities.

• Definition and implementation of systems enabling the Group to monitor and control operational risk exposures. These systems are integrated into the Group’s daily management, using the current technology and maximizing the automation of applications.

• Definition and documentation of operational risk management policies and implementation of the related methodologies consistent with current regulations and best practices.

The operational risk control model implemented by the Group provides the following benefits:

• Integrated and effective management of operational risk (identification, measurement/ assessment, control/mitigation and reporting).

• Improved knowledge of actual and potential operational risks and better assignment to business and support lines.

• The information on operational risk helps improve processes and controls and reduce losses and income volatility.

• Setting of limits for operational risk appetite.

Model implementation: global initiatives and results

Substantially all the Group units are currently included in the model, with a high degree of uniformity. However, the different pace of the implementation, phases, timetables and historic depth of the respective databases gives rise to differences in the level of progress between one country and another.

In general, all the Group’s units continue to improve all matters relating to operational risk management, as disclosed in the annual review performed by internal audit.

The main functions, activities and global initiatives which have been adopted and seek to ensure the effective management of operational and technology risk, can be summarized as follows:

• Definition and implementation of the corporate technology and operational risk management framework.

• Designation of head coordinators and creation of operational risk departments at the local units.

• Training and experience sharing: communication of best practices within the Group.

• Fostering of mitigation plans: control of both the implementation of corrective measures and projects under development.

• Definition of policies and structures to minimize the impacts on the Group in the event of major disasters.

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• Adequate control of the activities carried out by third parties, enabling the Group to respond to potential critical situations.

• Provide adequate information on this type of risk.

With regard to technology risk management, the corporate function continues to strengthen significant aspects, such as the following:

• Security of information systems.

• Promotion of contingency and business continuity plans.

• Management of technology risk (risk associated with the use of technology -development and maintenance of applications, design, implementation and maintenance of technology platforms, production of computer processes, etc.).

In 2013 the corporate framework for agreements with third parties and control of suppliers was approved, and is applicable for all the entities over which the Group exercises effective control. The framework develops and defines the principle of operational responsibility, and establishes the benchmarks to be taken into consideration in agreements with suppliers, with the primary objective being to establish the principles governing the relationships between Group entities and suppliers, from start to finish, paying particular attention to the following:

• The decision to outsource new activities or services.

• Selection of suppliers.

• The establishment of each party’s rights and obligations.

• Control of the service and periodic review of the agreements entered into with suppliers.

• Termination of the agreements established.

This framework also establishes the necessary responsibility, while respecting an appropriate segregation of functions, in order to ensure that risks may be properly identified, the service controlled and supervision maintained within the Group.

8.4 Risk measurement and assessment model

In order to measure and assess technology and operational risk, the Group defined a set of quantitative and qualitative corporate techniques/tools that are combined to perform a diagnosis, based on the identified risks, and obtain a valuation, through the measurement/assessment, of the area/unit.

8.5 Business continuity plan

The Group has a business continuity management system (BCMS) to ensure the continuity of the business processes of its entities in the event of a disaster or serious incident.

This basic objective consists of the following:

• Minimizing possible damage to persons, as well as adverse financial and business impacts for the Group due to an interruption of normal business operations.

• Reducing the operational effects of a disaster by supplying a series of pre-defined, flexible guidelines and procedures to be employed in order to resume and recover processes.

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• Resuming time-sensitive business operations and associated support functions, in order to achieve business continuity, stable earnings and planned growth.

• Re-establishing the time-sensitive technology and support operations of the business if existing technologies are not operational.

• Protecting the public image of, and confidence in, the Group.

• Meeting the Group’s obligations to its employees, customers, shareholders and other interested third parties.

8.6 Other matters relating to operational risk control and monitoring

Analysis and monitoring of controls in market operations

In view of the specific features and complexity of financial markets, the Group considers it necessary to continuously strengthen the operational control of its financial market activities. Therefore, in 2013, the control model for this business continued to be improved, with particular emphasis on the following points:

• Analysis of the individual operations of each treasury operator to detect any possible anomalous conduct.

• Improvement of the monitoring of communications with counterparties through the various authorized arrangement methods.

• Implementation in progress of a new tool enabling compliance with new record-keeping requirements.

• Reinforcement of controls on contributions of prices to market indices.

The business is also undergoing a global transformation, combined with the modernization of the technology platforms and operating processes involving a robust control model that enables the operational risk associated with this activity to be reduced.

Operational risk information system

The Group has a corporate information system that supports the operational risk management tools and facilitates the information and reporting functions and needs at local and corporate level.

The system offers event recording modules, risk mapping and assessment, indicators, mitigation and reporting systems, and is applicable to all the Group entities.

Corporate information

The corporate technology and operational risk control area has a system for management of operational risk information that provides data on the Group’s main risk elements. The information available from each country/unit in the operational risk sphere is consolidated to provide a global view with the following features:

• Two levels of information: one corporate, with consolidated information, and the other individualized for each country/unit.

• Dissemination of the best practices among the countries/units of the Group, obtained from the combined study of the results of qualitative and quantitative analyses of operational risk.

Information is specifically prepared on the following aspects:

• The Group’s operational risk management model and its main units and geographical areas.

• The operational risk management scope.

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• Analysis of the internal event database and the database of significant external events.

• Analysis of the most significant risks arising from the operational and technology risk assessment exercises.

• Evaluation and analysis of risk indicators.

• Mitigating measures/active management.

• Business continuity plans and contingency plans.

• Regulatory framework: BIS II.

• Insurance.

This information acts as the basis for meeting reporting requirements to the risk committee, senior management, regulators, rating agencies, etc.

The role of insurance in operational risk management

The Group considers insurance as a key factor in operational risk management. Since 2004 the operational risk area has worked closely with the Group’s insurance management area in all activities leading to improvements in the two areas. Some notable examples are as follows:

• Cooperation in the presentation of the Group’s operational risk management and control model to insurers and reinsurers.

• Analysis and follow-up of the recommendations and suggestions for improving operational risks made by insurance companies, through previous audits performed by specialized companies, and of the subsequent implementation thereof.

• Sharing of the information generated in the two areas in order to strengthen the quality of error databases and the cover provided by the insurance policies of the various operational risks.

• Close cooperation between local operational risk officers and local insurance coordinators in order to enhance operational risk mitigation.

• Regular meetings to report on specific activities, statements of position and projects in the two areas.

• Active participation of the two areas in the global insurance sourcing desk, the highest technical body in the Group responsible for the definition of insurance coverage and arrangement strategies.

Part 9. Compliance and reputational risk

9.1 Definitions and objective

Compliance risk is the risk of receiving penalties (financial or otherwise) or being subject to other types of disciplinary measures by the supervisors as a result of failing to comply with laws, regulations, standards, the organization’s self-regulatory standards or codes of conduct applicable to the activity carried on.

Reputational risk is the risk associated with the perception of the Group held by the various internal and external stakeholders with which it is related as part of its business activities, which may have an adverse impact on results or business expectations. This risk includes legal, economic, financial, ethical, social and environmental aspects.

The Group’s objective regarding compliance risk is: (i) to minimize the probability of irregularities arising; and (ii) to identify, report and swiftly resolve any irregularities that might possibly arise. As for reputational risk, bearing in mind the diversity of sources from which it can arise, management of this risk aims to identify such sources and ensure that they are duly attended to so that the probability of their occurring is reduced and the possible impact thereof is mitigated.

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9.2 Corporate governance and organizational model

It is the responsibility of the Bank’s board of directors, as part of its supervisory function, to approve the Group’s general risk policy. In the corporate compliance and reputational risk area, the board is in charge of the Group’s general Code of Conduct, the global policy on the prevention of money laundering and terrorist financing and the product and service marketing policy.

The risk committee proposes the Group’s risk policy to the board. Also, as the body responsible for global risk management, it measures reputational risk in its area of activity and decision-making.

The audit and compliance committee is entrusted, inter alia, with the functions of supervising compliance with legal requirements, watching over the effectiveness of internal control and risk management systems, supervising compliance with the Group’s Code of Conduct in the securities markets, with the manuals and procedures for the prevention of money-laundering and, in general, with the bank’s rules of governance and compliance, and making any necessary proposals for improvement, as well as reviewing compliance of the actions and measures resulting from reports or actions of the administrative supervisory and control authorities.

The compliance function reports to the board on an ongoing basis, mainly through the audit and compliance committee, to which the Group’s head of compliance reported at the twelve meetings held by this committee in 2013. The Group’s head of compliance also reported to one meeting of the risk committee in 2013, without prejudice to attending other sessions of this committee when transactions with a possible impact from the reputational risk standpoint were submitted to it.

Lastly, the corporate committees for regulatory compliance, analysis and resolution and marketing (the last two specialize in their respective subjects: the prevention of money laundering and the marketing of products and services) are collective bodies with basic competencies which have a global scope (all geographical areas, all businesses) and are replicated at local level.

The risk unit monitors the compliance risk control framework both from the integrated risk control and internal risk validation area (CIVIR), in the exercise of its functions to support the risk committee, and from the non-financial risk control area created in 2013.

The organizational model revolves around the corporate compliance and reputational risk area, forming part of the general secretariat division, which is entrusted with managing the Group’s compliance and reputational risks. Within this area, which is led by the Group’s head of compliance, are the corporate regulatory compliance risk management office, the corporate reputational risk management office and the corporate financial intelligence unit (UCIF), which is responsible for the prevention of money laundering and terrorist financing. This structure is replicated at local level and also in the global businesses, the appropriate functional reporting channels to the corporate area having been established.

9.3 Risk appetite model

The risk committee was informed at its meeting held on October 2013 of the Group’s risk appetite model applicable to compliance and reputational risk. The model is characterized by the following three elements:

• It is based on an express declaration of zero appetite for compliance and reputational risk.

• The objective of the management performed by the Group is to minimize the incidence of compliance and reputational risk. Accordingly, systematic monitoring is performed using the compliance and reputational risk indicator resulting from the assessment matrices prepared for each country.

• Quarterly monitoring of risk appetite is performed on a country-by-country basis.

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Data of the communications received from the various supervisors each month is fed into the assessment matrix. Each of these communications is allocated a score depending on the risk they represent in terms of: (i) costs due to fines; (ii) process reorganization costs; and (iii) the impact on the brand and reputational risk. These assessments are compared with ratings assigned by internal audit with respect to compliance.

Each local unit is allocated a weighting based on its attributable profit and volume of assets, which can be used to obtain an overall score for the Group.

9.4 Risk management model

The main responsibility for compliance and reputational risk management is shared by the compliance department and the various business and support units that conduct the activities giving rise to risk. The responsibility for developing policies and implementing the corresponding controls lies with the compliance department, which is also responsible for advising senior management on these matters and fostering a culture of compliance, all as part of an annual program whose effectiveness is periodically evaluated.

The compliance department directly manages the basic components of these risks (money laundering, codes of conduct, product marketing, etc.) and ensures that the other components are duly addressed by the corresponding Group unit (responsible financing, data protection, customer claims, etc.), for which purpose it has established the appropriate control and verification systems.

The integrated risk control and internal risk validation area ensures that the risk management model is properly executed. Also, as part of its functions, internal audit performs the tests and reviews required to check that the standards and procedures established at the Group are being complied with.

The central plank of the Group’s compliance program is the general Code of Conduct. This code contains the ethical principles and standards of conduct that must guide the actions of all the Group employees and is complemented in certain matters by the standards contained in the industry-specific codes and manuals⁽³¹⁾.

Also, the code establishes: i) the functions and responsibilities regarding compliance by the Group’s relevant governing bodies and divisions; ii) the standards regulating the consequences of the failure to comply; and iii) a channel for reporting and processing notifications of allegedly unlawful actions.

It is the role of the corporate compliance office, under the supervision of the audit and compliance committee and the regulatory compliance committee, to ensure the effective implementation and monitoring of the general Code of Conduct.

The regulatory compliance committee, which is chaired by the Group’s general secretary, has authority on all matters relating to the compliance function, without prejudice to the matters assigned to the two specialist bodies in this area (the corporate marketing committee with regard to the marketing of products and services, and the analysis and resolution committee with regard to the prevention of money laundering and terrorist financing). The regulatory compliance committee is composed of representatives from internal audit, the general secretariat division, financial management, human resources, organization and costs, organization and costs and the most directly affected business units.

The Group’s compliance department has been entrusted with the following compliance and reputational risk management functions:

1. Implementing the Group’s general Code of Conduct and other codes and industry-specific manuals.

2. Supervising the training activities on the compliance program conducted by the human resources area.

³¹  The industry-specific codes and manuals include the prevention of money laundering and terrorist financing manual, the code of conduct in securities markets, the procedures manual for the sale of financial products, the analysis code of conduct, the research policy manual, the use of information and communications technology conduct manual, the property management conduct manual, the purchasing management conduct manual, etc., in addition to the notes and circulars implementing specific points of these codes and manuals.

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3. Directing investigations into any possible breaches, with help from internal audit, and proposing the appropriate penalties to the related committee.

4. Cooperating with internal audit in the periodic reviews carried out by internal audit on compliance with the general code and with the industry-specific codes and manuals, without prejudice to the periodic reviews of matters of regulatory compliance which are conducted by the compliance department directly.

5. Receiving and handling the complaints made by employees or third parties through the whistleblowing facility.

6. Advising on the resolution of doubts arising from the application of the codes and manuals.

7. Preparing an annual report on the application of the compliance program for submission to the audit and compliance committee.

8. Regularly reporting to the general secretary, the audit and compliance committee and the board of directors on the implementation of the compliance policy and the compliance program.

9. Assessing, every year, the changes that it might be appropriate to make to the compliance program, particularly in the event of detecting unregulated risk areas and improvable procedures, and proposing such changes to the audit and compliance committee.

As regards the industry-specific codes and manuals, the focus of the compliance program is on the following operational spheres, inter alia:

• Prevention of money laundering and the financing of terrorism.

• Marketing of products and services.

• Conduct in securities markets.

• Relations with regulators and supervisors.

• Preparation and dissemination of the Group’s institutional information.

Prevention of money laundering and the financing of terrorism

Policies

As a socially responsible organization, it is a strategic objective for the Group to have an advanced effective system for the prevention of money laundering and the financing of terrorism that is constantly adapted to the latest international regulations and has the capacity to respond to the appearance of new techniques employed by criminal organizations.

The prevention of money laundering and terrorist financing function is articulated in certain policies that establish minimum standards that the Group’s units must observe, and which are prepared in conformity with the principles contained in the 40 recommendations of the Financial Action Task Force (FATF) and the obligations and stipulations of Directive 2005/60/EC of the European Parliament and of the Council of October 26, 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing.

The corporate policy and the standards implementing it must obligatorily be complied with at all Group units worldwide. In this regard, units should be taken to be all the Group’s banks, subsidiaries, departments or branches, both in Spain and abroad, which, in accordance with their legal status, must be subject to the regulations on the prevention of money laundering and terrorist financing.

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Governance and organization

The organization of the prevention of money laundering and terrorist financing function is divided into three parts: the analysis and resolution committee (CAR), the corporate financial intelligence unit (UCIF) and the persons in charge of prevention at various levels.

The CAR is a collective body with a corporate scope which is chaired by the Group’s general secretary and is composed of representatives of internal audit, the general secretary division, human resources, organization and costs and the most directly affected business units. The CAR held four meetings in 2013.

The UCIF’s function is to establish, coordinate and supervise the systems and procedures for the prevention of money laundering and terrorist financing at all Group units.

Also, there are persons responsible for the prevention of money laundering and terrorist financing at four different levels: area, unit, branch and account. Their mission in each case is to support the UCIF from the position of proximity to customers and operations.

At consolidated level, a total of 781 professionals perform the prevention of money laundering and terrorist financing function at the Group (three-quarters of that number on a full-time basis) at 173 units established in 36 countries.

The Group has established corporate systems at all its units and business areas based on decentralized computer software which makes it possible to present directly to the account branches or the relationship managers the transactions and customers which need to be analyzed because of their risk. The aforementioned tools are supplemented by other tools used centrally by the teams of analysts in the prevention units and, based on certain risk profiles and changes in certain customer operational behavior patterns, they enable transactions that might be linked to money laundering or terrorist financing to be analyzed, identified on a preventative basis and monitored.

The Group is a founder member, along with ten other large international banks, of the Wolfsberg Group. The Wolfsberg Group’s objective is to establish international standards to increase the effectiveness of programs to combat money laundering and terrorist financing in the financial community. Various initiatives have been developed which have addressed, inter alia, issues such as the prevention of money laundering in private banking and correspondent banking, and the financing of terrorism. The regulatory authorities and experts in this area consider that the Wolfsberg Group and the principles and guidelines set by it represent an important step in the fight against money laundering, corruption, terrorism and other serious crimes.

Marketing of products and services

Policies

The Group manages the risk that may arise from an inadequate sale of products or an improper provision of services by the Group in accordance with the corporate policies regarding the marketing of products and services.

These corporate policies aim to establish a single corporate framework for all regions, businesses and entities that: (i) reinforces the organizational structures; (ii) ensures that decision-making committees oversee not only the approval of products and services, but also the monitoring thereof over their whole lives; and (iii) establishes the guidelines for defining uniform Group-wide criteria and procedures for the marketing of products and services, which encompass all its phases (approval, pre-sale, sale and follow-up or post-sale).

These policies are developed and specifically adapted to the actual local situation and to local regulatory requirements through the local internal rules of the various Group units, once authorization has been obtained from the corporate compliance and reputational risk area.

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Governance and organization

The management of the risk that might arise from the incorrect selling of products or services is organized by corporate and local marketing committees, the global consultative committee, the corporate monitoring committee, and corporate and local reputational risk management offices.

The corporate marketing committee (CCC) is the Group’s highest decision-making body regarding the approval of products and services. Chaired by the Group’s general secretary, it is composed of representatives of the following divisions: risk, financial accounting and control, technology and operations, general secretariat division, internal audit, commercial banking, global wholesale banking, private banking, asset management and insurance.

The CCC pays particular attention to the suitability of the product or service for the environment in which it is to be marketed, placing particular emphasis on ensuring that:

• Each product or service is sold by competent sales personnel.

• Customers are furnished with the required appropriate information.

• The product or service fits the customer’s risk profile.

• Each product or service is assigned to the appropriate market, not only from a legal or tax standpoint, but also with regard to the financial culture of that market.

• The product or service meets the requirements of the corporate marketing policies and, in general, the applicable internal or external regulations.

Also, local marketing committees are created at local level to channel proposals for the approval of new products to the CCC -after issuing a favorable opinion, since initially they do not have any delegated powers- and to approve products that are not new and the related marketing campaigns.

In their respective approval processes the marketing committees’ actions are guided by a risk-based approach, from the view point of both the Bank and the customer.

The global consultative committee is the advisory body of the corporate marketing committee and consists of area representatives who provide an insight into risks, regulations and markets. The global consultative committee, which meets roughly on a quarterly basis, may recommend the review of products affected by market changes, impaired solvency (country, sectors or companies) or changes in the Group’s market perception at medium and long term.

The corporate monitoring committee is the Group’s decision-making body regarding the monitoring of products and services. This committee is chaired by the general secretary and is attended by internal audit, legal advisory, compliance, customer care and the business areas concerned (with the ongoing representation of the commercial network). It meets weekly, and considers and resolves specific issues relating to the selling of products and services at a local level as well as at the level of the Group units outside Spain.

The purpose of the corporate reputational risk management office is to provide the relevant governing bodies with the information required to enable them: (i) to conduct an appropriate analysis of risk in the approval phase, with a twofold focus: impact on the Bank and impact on customers; and (ii) to monitor products over their life cycle.

At local level reputational risk management offices have been established, which are responsible for promoting corporate culture and for ensuring that products are approved and monitored in the respective local spheres in keeping with corporate guidelines.

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Conduct in securities markets

Policy

This is set by the Code of Conduct in the securities markets, complemented, inter alia, by the Code of Conduct for analysis activities, the research policy manual and the procedure for detecting, analyzing and communicating transactions suspected of market abuse.

Governance and organization

The organization is centered on the corporate compliance office and local and subsidiaries’ compliance divisions.

The Group’s compliance department performs the following main functions in relation to the rules of conduct in securities markets:

1. Registering and controlling sensitive information that is known by and/or generated at the Group;

2. Keeping lists of the securities affected and the initiated persons, and monitoring transactions with these securities;

3. Monitoring transactions with restricted securities depending on the type of activity, portfolios or groups to which the restriction applies;

4. Receiving and attending to notifications of, and requests for, authorization of transactions for own account;

5. Controlling transactions for own account of the persons subject to compliance with the Code of Conduct;

6. Managing breaches;

7. Resolving any issues raised concerning the Code of Conduct in Securities Markets (CCMV);

8. Recording and resolving conflicts of interest and the situations that might give rise to them;

9. Assessing and managing any conflicts that might arise in the analysis activity.

10. Maintain the files required to control compliance with the obligations established in the CCMV;

11. Develop ordinary contact with the regulators;

12. Organizing training and, in general, performing the actions required to apply the CCMV; and

13. Analyzing actions that might be suspected of constituting market abuse and, where appropriate, reporting them to the supervisors.

Criminal risk prevention

The Group’s compliance department has also been entrusted with the management of the criminal risk prevention model, which resulted from the entry into force of Organic Law 5/2010, which made legal entities criminally responsible for crimes committed on their account or for their benefit by directors or representatives or employees as a result of a lack of control.

Towards the end of 2013 a review certification process of the Group’s criminal risk prevention model was performed based in part on third-party appraisal, which verified the following: i) the effective implementation of the Group’s internal rules: ii) the existence of general control measures and; iii) the existence of specific control measures. Also, the criminal code reform project currently under way was monitored, with a view to anticipating as far as possible the adaptation tasks.

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Relationships with supervisors and dissemination of information to the markets

The compliance department is responsible for responding to the information requirements of the regulatory and supervisory bodies, both in Spain and in other countries where the Group operates, monitoring implementation of the measures arising from the reports or inspections conducted by these bodies and supervising the way in which the Group disseminates institutional information in the markets, transparently and in accordance with the regulators’ requirements. The audit and compliance committee is informed of the main issues at each of its meetings.

Part 10. Capital

10.1 Compliance with the new regulatory framework

The regulations known as Basel III, which establish new global capital and liquidity standards for financial institutions, came into force in 2014.

From the capital standpoint, Basel III redefines what is considered to be available capital at financial institutions (including new deductions and raising the requirements for eligible equity instruments), increases the minimum capital requirements, requires financial institutions to operate permanently with capital buffers, and adds new requirements in relation to the risks considered.

The Group shares the ultimate objective pursued by the regulator with this new framework, namely to endow the international financial system with greater stability and resilience. In this regard, for many years the Group has collaborated on the impact studies for calibrating the new rules conducted by the Basel Committee and the European Banking Authority (EBA) and coordinated at local level by the Bank of Spain.

In Europe, the new standards have been implemented through Directive 2013/36/EU, known as the Capital Requirements Directive (“CRD IV”), and the related Capital Requirements Regulation (“CRR”), which is directly applicable in all EU member states (as part of the Single Rulebook). In addition, the standards are subject to Implementing Technical Standards commissioned from the European Banking Authority (EBA), some of which will be issued in the coming months/years.

The Capital Requirements Regulation came into force on January 1, 2014, with many of its rules subject to various implementation timetables. This transitional implementation phase, which affects mainly the definition of eligible capital, concludes at the end of 2017, except with regard to the deduction for deferred tax assets, the transition period for which lasts until 2023.

Subsequent to the transposition of Basel III into European legislation, the Basel Committee has continued to issue additional standards, some in the form of public consultation processes, which will entail a future amendment of CRD IV and the CRR. The Group will continue to support the regulators by offering its opinions and participating in impact studies.

The Group currently has robust capital ratios, in keeping with its business model and risk profile, which, coupled with its substantial capacity to generate capital organically and the gradual implementation timetable envisaged for the new requirements in the legislation, place it in a position to comply with Basel III.

With regard to credit risk, the Group is continuing to adopt its plan to implement the advanced internal ratings-based (AIRB) approach under Basel for substantially all its banks, and it intends to do so until the percentage of net exposure of the loan portfolio covered by this approach exceeds 90%. The attainment of this objective in the short term will also depend on the acquisitions of new entities and the need for the various supervisors to coordinate the validation processes for the internal approaches. The Group is present in geographical areas where there is a common legal framework among supervisors, as is the case in Europe through the Capital Requirements Directive. However, in other jurisdictions, the same process is subject to the framework of cooperation between the home and host country supervisors under different legislations, which in practice entails adapting to different criteria and timetables in order to obtain authorization to use the advanced approaches on a consolidated basis.

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Accordingly, the Group continued in 2013 with the project for the progressive implementation of the technology platforms and methodological improvements required for the roll-out of the AIRB approaches for regulatory capital calculation purposes at the remaining Group units. To date the Group has obtained authorization from the supervisory authorities to use advanced approaches for the calculation of regulatory capital requirements for credit risk for the Parent, the main subsidiaries in Spain, the United Kingdom and Portugal, certain portfolios in Mexico, Brazil and Chile, as well as for Santander Consumer Finance in Spain and the United States. The Group’s Basel implementation strategy is focused on obtaining authorization for the use of AIRB approaches at the main entities in the Americas and Europe.

With regard to operational risk, the Group currently uses the standardized approach for regulatory capital calculation purposes and has embarked on a project to roll out AMA approaches once it has collated sufficient data using its own management model. The Group considers that the internal model should be developed primarily on the basis of the experience accumulated in managing an entity through the corporate guidelines and criteria established after assuming control, which are a distinctive feature.

As regards the other risks explicitly addressed in Pillar I of the Basel Capital Accord, Santander Group has been authorized to use its internal model for market risk on the treasury areas’ trading activities in Spain, Chile, Portugal and Mexico, thus continuing implementation of the roll-out plan it submitted to the Bank of Spain for the other units.

With respect to Pillar II, the Group uses an economic capital approach to quantify its global risk profile and its capital adequacy position as part of the internal capital adequacy assessment process (ICAAP) at consolidated level. This process includes regulatory and economic capital planning under several alternative economic scenarios, in order to ensure that the internal capital adequacy targets are met even in plausible but highly unlikely adverse scenarios. The ICAAP exercise is supplemented with a qualitative description of the risk management and internal control systems, is reviewed by internal audit and internal validation teams and is subject to a corporate governance structure that culminates in its approval by the Group’s board of directors, which also establishes the strategic factors relating to risk appetite and capital adequacy targets on an annual basis.

In accordance with the capital requirements set by the European Directive and Bank of Spain rules, the Group publishes its Pillar III disclosures report on an annual basis. This report comfortably meets the market transparency requirements in relation to Pillar III. The Group considers the market reporting requirements to be fundamental in order to complement the minimum capital requirements of Pillar I and the supervisory review process performed through Pillar II. In this respect, its Pillar III disclosures report incorporates the recommendations made by the European Banking Authority (EBA), thus making Santander Group an international benchmark in terms of market transparency, as is already the case with its annual report.

Parallel to the roll-out of advanced approaches at the various Group units, Santander Group is carrying out an ongoing training process on Basel at all levels of the organization, covering a significant number of professionals from all areas and divisions, with a particular focus on those most affected by the changes arising from the adoption of the new international capital standards.

10.2 Economic capital

Economic capital is the capital required, based on an internally-developed model, to support all the risks of the business activity with a given solvency level. In the case of Santander, the solvency level is determined by the AA-/A+ long-term target rating, which results in the application of a 99.95% confidence level (higher than the regulatory 99.90%) for the purpose of calculating the required capital.

The Group’s economic capital model complements the regulatory approach by including in its measurement all the significant risks incurred in the Group’s operations. Accordingly, it considers risks such as concentration risk, structural interest rate risk, business risk, pension risk and other risks outside the scope of regulatory Pillar I capital requirements. Economic capital also includes the diversification effect, which in the case of Santander Group, owing to the multinational, multibusiness nature of its operations, is of key importance in determining its overall risk and solvency profile.

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Comparison of regulatory and economic capital requirements is distorted because there are certain risks, such as goodwill, which for regulatory purposes are presented as deductions from the eligible capital base instead of being included as capital requirements. Similarly, the economic capital required for these risks can be presented as deductions from the internal capital base (following the regulatory method) or as part of the economic capital requirements, which is the preferred option within the Group. Furthermore, as we have mentioned above, measurement of economic capital includes certain risks that are not present in the regulatory approach (the so-called Pillar II risks).

The concept of diversification is fundamental for the proper measurement and understanding of the risk profile of a group with global operations such as Santander. The fact that the Group conducts its business activities in various countries through a structure of differentiated legal entities, across a broad spectrum of customer and product segments, thereby also incurring various types of risks, means that the Group’s earnings are less vulnerable to any adverse situation that might arise with respect to a particular market, portfolio, customer or risk. Despite the current high level of globalization of the world’s economies, the economic cycles are not the same and do not have the same intensity in the various geographical regions. As a result, groups with global presence display more stable results and have a greater capacity to withstand possible crises affecting specific markets or portfolios, which is synonymous with a lower level of risk. In other words, the risk and the associated economic capital borne by the Group as a whole is less than the risk and the capital arising from the sum of its various components considered separately.

Lastly, the economic capital measurement and aggregation model also considers the concentration risk for wholesale portfolios (large corporations, banks and sovereigns), in terms of both the size of their exposure and their industry-based or geographical concentration. Any geographical or product concentration in retail portfolios is captured through the application of an appropriate correlation model.

Economic capital is a fundamental tool for the internal management and implementation of the Group’s strategy, from the viewpoint of both the assessment of capital adequacy and the management of portfolio and business risk.

With regard to capital adequacy, in the context of Pillar II of the Basel Capital Accord, the Group conducts the internal capital adequacy assessment process using its economic capital model. To this end, the Group plans the business performance and the capital requirements under a central scenario and under alternative stress scenarios. With this planning the Group ensures that it will continue to meet its capital adequacy targets, even in adverse economic scenarios.

Also, the economic capital metrics make it possible to assess risk-return targets, price transactions on a risk basis and gauge the economic viability of projects, units or lines of business, with the ultimate objective of maximizing the generation of shareholder value.

Capital planning and stress tests

Capital stress tests have gained particular significance as a tool for the dynamic evaluation of banks’ risk exposure and capital adequacy. A new forward-looking assessment model is becoming a key component of capital adequacy analysis.

This forward-looking assessment is based on both macroeconomic and idiosyncratic scenarios that are highly improbable but nevertheless plausible. To conduct the assessment, it is necessary to have robust planning models capable of transferring the effects defined in the projected scenarios to the various elements that have a bearing on the adequacy of a bank’s capital.

The ultimate goal of capital stress tests is to perform a complete evaluation of banks’ risk exposure and capital adequacy in order to determine any possible capital requirements that would arise if banks failed to meet the regulatory or internal capital targets set.

In particular, the European Central Bank (ECB) has announced that the current comprehensive assessment that it will carry out in the course of 2014 ahead of taking up its role as the single supervisor (as part of the Single Supervisory Mechanism (SSM)) will culminate in a stress test to be conducted by the European Banking Authority (EBA) in collaboration with the ECB itself, which is scheduled to be completed in October 2014. The objective of this entire process is to eradicate any possible uncertainty as to the solvency of the European banking system, to provide transparency on the resilience and solvency of banks and, where required in light of the test results, to adopt any necessary measures (including possible additional capital requirements).

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More specifically, the forthcoming stress test will be conducted on a total sample of 124 banks covering at least 50% of the banking sector in each EU Member State (as expressed in terms of assets). The stress test will be carried out over a three-year time horizon and will assess the impact of risk drivers on the solvency of banks, including credit risk, market risk, sovereign risk, securitization and cost of funding.

The capital hurdle rates, measured in terms of Common Equity Tier 1 (CET1), are expected to be 8% CET1 for the baseline scenario and 5.5% CET1 for the adverse scenario. Publication of the results of the stress test is scheduled for the end of October 2014.

As a starting point for the stress test and within the scope of the comprehensive assessment, throughout 2014 the ECB will conduct an asset quality review (AQR), an in-depth analysis of banks’ balance sheets and the quality of their assets.

The Group has defined a capital planning and stress testing process not only to enable it to respond to the various regulatory exercises, but also to serve as a key tool forming an integral part of the Bank’s management and strategy.

The purpose of the internal capital planning and stress testing process is to ensure the current and future sufficiency of the Group’s capital, even in adverse but plausible economic scenarios. To this end, taking as a basis the Group’s initial position (as defined by its financial statements, its capital base, its risk parameters and its regulatory ratios), estimates are made of the expected outcomes for the Group in various business environments (including severe recessions as well as “normal” macroeconomic scenarios), and the Group’s capital adequacy ratios, projected generally over a three-year period, are obtained.

The process implemented provides a comprehensive view of the Group’s capital for the time horizon analyzed and in each of the scenarios defined. The analysis incorporates regulatory capital, economic capital and available capital metrics.

This process facilitates achievement of the ultimate goal pursued by capital planning, since it has become a strategically important element for the Group that:

• Guarantees current and future capital adequacy, even in adverse economic scenarios.

• Permits comprehensive capital management and includes an analysis of specific impacts, facilitating their integration in the Group’s strategic planning.

• Makes it possible to enhance efficiency in the use of capital.

• Supports the design of the Group’s capital management strategy.

• Facilitates reporting to the market and supervisors.

In addition, the entire process is carried out with the maximum involvement and under the close supervision of senior management, and within a framework that guarantees suitable governance and the application of adequate levels of challenge, review and analysis to all components of the process.

One of the key elements in the capital planning and stress testing exercises, since it plays a particularly important role in income statement projections for the adverse scenarios defined, is the calculation of the provisions that would be required in those scenarios, primarily the provisions recognized to cover losses on the loan portfolios. Specifically, in order to calculate the credit loss provisions for its loan portfolio, Santander Group uses a methodology which ensures that, at all times, it has a level of provisions sufficient to cover all the credit losses projected by its internal expected loss models.

This methodology is widely accepted and is similar to that used in previous stress-testing exercises (e.g. the 2011 EBA stress test or the 2012 stress test on the Spanish banking sector).

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Lastly, the capital planning and stress testing process culminates in an analysis of capital adequacy in the various scenarios designed and over the established time horizon. The aim is to assess the Group’s capital adequacy and to ensure that it meets both its internal capital targets and all regulatory requirements.

In the course of the recent economic crisis, the Group underwent four stress tests in which it proved its strength and solvency in the most extreme and severe macroeconomic scenarios. All the stress tests evidenced that, thanks mainly to the Group’s business model and geographical diversification, Banco Santander will continue to generate profit for its shareholders and to comply with the most stringent regulatory requirements.

RORAC and value creation

The Group has used RORAC methodology in its risk management since 1993, with the following objectives:

• Calculation of economic capital requirements and of the return thereon for the Group’s business units, segments, portfolios and customers, in order to facilitate an optimal allocation of economic capital.

• Budgeting of capital requirements and RORACs of the Group’s business units.

• Analysis and setting of prices in the decision-making process for transactions (loan approval) and customers (monitoring).

The RORAC methodology facilitates the comparison, on a like-for-like basis, of the performance of transactions, customers, portfolios and businesses, and identifies those which achieve a risk-adjusted return higher than the Group’s cost of capital, thus aligning risk management and business management with the aim of maximizing value creation, which is the ultimate objective of Group senior management.

The Group periodically assesses the level of and the changes in the value creation (VC) and return on risk-adjusted capital (RORAC) of the Group and of its main business units. The VC is the profit generated over and above the cost of the economic capital (EC) used, and is calculated using the following formula:

VC = Profit - (average EC x cost of capital)

The profit used is obtained by making the required adjustments to accounting profit in order to reflect only the recurring profit obtained by each unit from its business activity.

If a transaction or portfolio yields a positive return, it will be contributing to the Group’s profit, although it will only create shareholder value when this return exceeds the cost of capital.

2013 witnessed an uneven performance of the business units in terms of value creation, although the instances of decreasing value creation predominated. The Group’s results and, therefore, the RORAC and value creation figures were shaped by the weakness of the economic cycle of various Group units in Europe and, in particular, in Spain.

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Item 12. Description of Securities Other than Equity Securities.

A. Debt Securities

Not Applicable

B. Warrants and Rights

Not Applicable

C. Other Securities

Not Applicable

D. American Depositary Shares

Our Depositary is J.P. Morgan Chase & Co., with its principal executive office located at 270 Park Avenue, New York, NY 10017-2070.

Each ADS represents the right to receive one share of Capital Stock of Santander, par value €0.50 each.

• Fees charged to investors as outlined in the deposit agreement are the following:

Category of Service	Depositary Actions	Associated Fee
(a) Deposit or substituting the underlying shares	Each person to whom ADSs are issued against deposits of shares, including deposits in respect of share distributions, rights and other distributions.32 Each person surrendering ADRs for the withdrawal of deposited securities.	$5.00 for each 100 ADSs (or portion thereof) delivered or surrendered.
(b) Receiving or distributing dividends	Distribution of dividends.	$0.01 per ADS.
(c) Selling or Exercising Rights	Distribution or sale of securities, the fee being in an amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities.	$5.00 for each 100 ADSs (or portion thereof).
(d) Withdrawing an underlying security	Acceptance of ADRs surrendered for withdrawal of deposited securities.	$5.00 for each 100 ADSs (or portion thereof) evidenced by the ADRs surrendered.
(d) Expenses of the Depositary	Expenses incurred on behalf of Holders in connection with: i) Stock transfer or other taxes and other governmental charges. ii) Cable, telex and facsimile transmission and delivery. iii) Expenses of the Depositary in connection with the conversion of foreign currency into U.S. dollars (which are paid out of such foreign currency). iv) Such fees and expenses as are incurred by the Depositary (including without limitation expenses incurred on behalf of Holders in connection with compliance with foreign exchange control regulations or any law or regulation relating to foreign investment) in delivery of deposited securities or otherwise in connection with the Depositary’s or its Custodian’s compliance with applicable law, rule or regulation.	Expenses payable at the sole discretion of the depositary.

³²  The Depositary may sell (by public or private sale) sufficient securities and property received in respect of such share distributions, rights and other distributions prior to such deposit to cover such charge.

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• Fees received from our depositary in connection with the ADR program are the following:

Contract amount:

Fixed: $3,521,398.94

Variable: $414,151.13

Total: $3,935,550.07

Actually paid:

Fixed: $3,521,398.94

Variable: $0

Total: $3,521,398.94

Waived fees:

Ongoing program maintenance per contract year: $150,000

Annual meeting services: $15,000

Investor Relations advisory services: $185,000

Total: $350,000

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PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

A. Not Applicable

B. Not Applicable

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

A. Not Applicable

B. Not Applicable

C. Not Applicable

D. Not Applicable

E. Not Applicable

Item 15. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

As of December 31, 2013, Banco Santander, S.A., under the supervision and with the participation of its management, including its disclosure committee, its chief executive officer, chief financial officer, and chief accounting officer, performed an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15 (e) under the Exchange Act). There are, as described below, inherent limitations to the effectiveness of any control system, including disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable assurance of achieving their control objectives.

Based on such evaluation, Banco Santander, S.A.’s chief executive officer, chief financial officer and chief accounting officer concluded that Banco Santander, S.A.’s disclosure controls and procedures are effective in ensuring that information Banco Santander, S.A. is required to disclose in the reports it files or submits under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to Banco Santander, S.A.’s management, including its disclosure committee, chief executive officer, chief financial officer and the chief accounting officer, as appropriate to allow timely decisions regarding required disclosures.

(b) Management’s Report on Internal Control over Financial Reporting

The management of Banco Santander, S.A. is responsible for establishing and maintaining an adequate internal control over financial reporting as defined in Rule 13a-15 (f) under the Exchange Act.

Our internal control over financial reporting is a process designed by, or under the supervision of, the Bank’s principal executive and principal financial officers and effected by the Bank’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes, in accordance with generally accepted accounting principles. For Banco Santander, S.A., generally accepted accounting principles refer to the International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS-IASB”).

Our internal control over financial reporting includes those policies and procedures that:

• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

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• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We have adapted our internal control over financial reporting to the most rigorous international standards and comply with the guidelines set by the Committee of Sponsoring Organizations of the Treadway Commission in its Enterprise Risk Management Integrated Framework. These guidelines have been extended and installed in our Group companies, applying a common methodology and standardizing the procedures for identifying processes, risks and controls, based on the Enterprise Risk Management Integrated Framework.

The documentation, update and maintenance processes in the Group’s companies have been constantly directed and monitored by a global coordination team, which set the guidelines for its development and supervised its execution at the unit level.

The general framework is consistent, as it assigns to management specific responsibilities regarding the structure and effectiveness of the processes related directly and indirectly with the production of consolidated financial statements, as well as the controls needed to mitigate the risks inherent in these processes.

Under the supervision and with the participation of the management of the Group, including our chief executive officer, our chief financial officer and our chief accounting officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2013, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework (1992). Based on this assessment, management believes that, as of December 31, 2013, its internal control over financial reporting was effective based on those criteria.

Our independent registered public accounting firm has issued an audit report on the effectiveness of our internal control over financial reporting as of December 31, 2013. This report follows below.

(c) Attestation report of the registered public accounting firm

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Banco Santander, S.A.:

We have audited the internal control over financial reporting of Banco Santander, S.A. (the “Bank”) and Companies composing, together with the Bank, the Santander Group (the “Group”) as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Group’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States of America), the consolidated financial statements as of and for the year ended December 31, 2013 of the Group and our report dated April 29, 2014 expressed an unqualified opinion on those financial statements.

/s/ Deloitte, S.L.

DELOITTE, S.L.

Madrid, Spain

April 29, 2014

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(d) Changes in internal controls over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 16. [Reserved]

Item 16A. Audit committee financial expert

The audit and compliance committee has three members, all of whom are non-executive independent directors (as defined by Article 6.2 c) of the Rules and Regulations of the Board). All members of the audit and compliance committee also meet the independence criteria set by the NYSE for foreign private issuers. Our Rules and Regulations of the Board provide that all members of the audit and compliance committee must have knowledge, aptitude and experience in the areas of accounting, auditing or risk management. Currently, the chairman of the audit and compliance committee is Guillermo de la Dehesa, the third vice chairman of the board of directors. Our standards for director independence may not necessarily be consistent with, or as stringent as, the standards for director independence established by the NYSE for U.S. issuers.

Our board of directors has determined that Guillermo de la Dehesa is an “Audit Committee Financial Expert” in accordance with SEC rules and regulations.

Item 16B. Code of Ethics

We have adopted a code of ethics (the “General Code of Conduct”) that applies to members of the board and to all employees of Banco Santander, S.A. and of the Grupo Santander companies, notwithstanding the fact that certain persons are also subject to the Code of Conduct in Securities Markets or to other Codes of Conduct related specifically to the activity or lines of business in which they undertake their responsibilities. This Code establishes the principles that guide these officers’ and directors’ respective actions: ethical conduct, professional standards and confidentiality. It also establishes the limitations and defines the conflicts of interest arising from their status as senior executives or directors.

In 2012, a new General Code of Conduct was published. The current Code primarily broadened the scope of the previous one by: (i) including guidelines for certain specific situations not included in the previous version and (ii) listing additional responsibilities in relation to the Code for compliance management and for other bodies and divisions of the Group.

The current General Code of Conduct set an open door policy by which any Grupo Santander employee who becomes aware of an allegedly unlawful act or an act in breach of the General Code of Conduct or of our business specific codes and manuals may report such act directly to compliance management.

This Code is available on our website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—corporate governance—codes of conduct”.

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Item 16C. Principal Accountant Fees and Services

Amounts paid to the firms belonging to the Deloitte worldwide organization, the Group’s principal auditor, for statutory audit and other services were as follows

	2013		2012		2011
	(in millions of euros)
Audit Fees (1)		35.9		38.1		36.2
Audit Related Fees (1)		20.8		20.6		13.6
Tax Fees		4.6		4.3		3.8
All Other Fees (2)		6.5		8.1		5.7
		67.8		71.1		59.3

(1) See detail of most significant concepts included in Note 48 to the Consolidated Financial Statements.

(2) It includes €2.7 million in 2012, €1.5 million in 2011 for services related to adaptation of the Group to new regulations.

The services provided by the Group’s auditors meet the independence requirements stipulated by the Legislative Royal Decree 1/2011, of 1 July, approving the Consolidated Audit Act, as well as those included in the Sarbanes-Oxley Act of 2002, in the SEC and in the Rules and Regulations of the Board.

The audit and compliance committee is required to pre-approve the audit and non-audit services performed by the Group’s auditors in order to assure that the provision of such services do not impair the audit firm’s independence.

In the first months of each year the Audit and Compliance Committee proposes to the board the appointment of the independent auditor. At that time, the Audit and Compliance Committee pre-approves the audit and audit related services that the appointed auditors will be required to carry out during the year to comply with the applicable regulation. These services will be included in the corresponding audit contracts of the Bank and of any other company of the Group with its principal auditing firm.

In addition, non-recurring audit or audit-related services and all non-audit services provided by the Group’s principal auditing firm or other auditing firms are subject to case-by-case pre-approval by the Audit and Compliance Committee.

During 2013 the Audit and Compliance Committee reviewed the policies and procedures to manage the approval of services to be rendered by the auditor. A list of pre-approved services, including the most common non-prohibited services that may be required from the auditor, was adopted. Specific approval is required for other services not included in the list. The Chief Accounting Officer is in charge of managing the process and must report monthly to the Audit Committee detailing all services to be provided by auditors, including those pre-approved and others requiring individual approval.

All services provided by the Group’s principal auditing firm in 2013 detailed in the table above were approved by the Audit and Compliance Committee.

Item 16D. Exemption from the Listing Standards for Audit Committees

Not applicable.

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Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table shows the repurchases of shares made by the Bank or any of its Affiliated Purchasers during 2013:

2013	(a) Total number of shares (or units) purchased*		(b) Average price paid per share (or unit)		(c) Total number of shares (or units) purchased as part of publicly announced plans or programs		(d) Maximum number (or approximate dollar value) of shares (or units) that may yet  be purchased under the plans or programs
January		90,075,748		6.09		—		—
February		112,269,278		5.74		—		—
March		97,141,521		5.85		—		—
April		207,763,046		5.25		—		—
May		65,672,628		4.45		—		—
June		58,291,496		4.63		—		—
July		102,784,763		4.43		—		—
August		97,496,672		5.37		—		—
September		28,807,173		4.27		—		—
October		94,064,958		5.33		—		—
November		43,576,649		5.31		—		—
December		68,990,959		4.97		—		—
Total		1,066,934,891

* The number of shares purchased included securities lending and short positions.

During 2013, all purchases and sales of equity securities were made in open-market transactions.

Item 16F. Changes in Registrant’s Certifying Accountant

Not applicable

Item 16G. Corporate Governance

The following is a summary of the significant differences between our corporate governance practices and those applicable to domestic issuers under the NYSE listing standards.

Independence of the directors on the board of directors

Under the NYSE corporate governance rules, a majority of the board of directors of any U.S. company listed on the NYSE must be composed of independent directors, whose independence is determined in accordance with highly detailed rules promulgated by the NYSE. Spanish law does not contain any such requirements although there is a non-binding recommendation for listed companies in Spain that the number of independent directors be at least one third of the total size of the Board. Article 42.1 of our Bylaws establishes that the shareholders at the general shareholders’ meeting shall endeavor to ensure that independent directors represent at least one-third of the total number of directors. Article 6.1 of the Rules and Regulations of the Board of Directors establishes likewise that the board shall endeavor that the number of independent directors represent at least one-third of all directors. The board of directors of Santander has eight independent directors (out of sixteen directors total), as defined in Article 6.2.c) of the Rules and Regulations of the Board. We have not determined whether the directors on the Santander board would be considered independent under the NYSE rules except in the case of the members of our audit and compliance committee where we have determined that all of them meet the independence criteria for foreign private issuers set forth in Rule 10A-3 under the Exchange Act. Article 6.2.c) of the Rules and Regulations of the Board defines the concept of an independent director as follows:

“External or non-executive Directors who have been appointed based on their personal or professional status and who perform duties not conditioned by relationships with the Company, or with the significant shareholders or management thereof shall be considered independent directors.

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In no event may there be a classification as independent directors of those who:

a) Have been employees or executive directors of the Group’s companies, except after the passage of 3 or 5 years, respectively, since the cessation of such relationship.

b) Receive from the Company, or from another Group company, any amount or benefit for something other than director compensation, unless it is immaterial.

For purposes of the provisions of this sub-section, neither dividends nor pension supplements that a director receives by reason of the director’s prior professional or employment relationship shall be taken into account, provided that such supplements are unconditional and therefore, the Company paying them may not suspend, modify or revoke the accrual thereof without breaching its obligations.

c) Are, or have been during the preceding 3 years, a partner of the external auditor or the party responsible for auditing the Company or any other Group company during such period.

d) Are executive directors or senior managers of another company in which an executive director or senior manager of the Company is an external director.

e) Maintain, or have maintained during the last year, a significant business relationship with the Company or with any Group company, whether in their own name or as a significant shareholder, director or senior manager of an entity that maintains or has maintained such relationship.

Business relationships shall be considered the relationships of a provider of goods or services, including financial, advisory or consulting services.

f) Are significant shareholders, executive directors or senior managers of an entity that receives, or has received during the preceding 3 years, significant donations from the Company or the Group.

Those who are merely members of the board of a foundation that receives donations shall not be considered included in this letter.

g) Are spouses, persons connected by a similar relationship of affection, or relatives to the second degree of an executive director or senior manager of the Company.

h) Have not been proposed, whether for appointment or for renewal, by the appointments and remuneration committee.

i) Are, as regards a significant shareholder or shareholder represented on the board, in one of the circumstances set forth in letters (i), (v), (vi) or (vii) of this sub-section 2(c). In the event of a kinship relationship set forth in item (vii), the limitation shall apply not only with respect to the shareholder, but also with respect to the related proprietary directors thereof in the affiliate company”.

The independence standards set forth in the Rules and Regulations of the Board may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE.

Independence of the directors on the appointments and remuneration committee

In accordance with the NYSE corporate governance rules, all U.S. companies listed on the NYSE must have a compensation committee and a nominating and corporate governance committee and all members of such committees must be independent in accordance with highly detailed rules promulgated by the NYSE. The appointments and remuneration committee of the board of directors of Santander is composed of four external directors (3 are independent and one, in the opinion of the board, is neither proprietary nor independent) and its chairman is independent in accordance with the standards set forth in the previously mentioned Article 6.2. c) of the Rules and Regulations of the Board. These independence standards may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE. The composition of the appointments and remuneration committee is described under “—Audit and compliance committee and appointments and remuneration committee”.

During the fiscal year 2013, none of the members of the appointments and remuneration committee was an executive director, member of senior management or a Bank employee, and no executive director or member of senior management has held a position on the board (or its remuneration committee) of companies that employ members of the appointments and remuneration committee.

325

Separate meetings for non-management directors

In accordance with the NYSE corporate governance rules, non-management directors must meet periodically outside of the presence of management. Under Spanish law, this practice is not required and as such, the non-management directors on the board of directors of Santander do not meet outside of the presence of the directors who also serve in a management capacity.

The audit and compliance committee and the appointments and remuneration committee of the Bank’s board of directors consist entirely of non-management directors.

The audit and compliance committee and the appointments and remuneration committee met 12 and 17 times, respectively, during 2013.

Code of ethics

Under the NYSE corporate governance rules, all U.S. companies listed on the NYSE must adopt a Code of Business Conduct and Ethics which contains certain required topics. In March 2000, Santander adopted a General Code of Conduct that applies to members of the board and to all employees of Banco Santander, S.A. and of the Grupo Santander companies, notwithstanding the fact that certain persons are also subject to the Code of Conduct in Securities Markets or to other Codes of Conduct related specifically to the activity or lines of business in which they undertake their responsibilities. On July 28, 2003, the board approved amendments to the General Code of Conduct to conform it to the requirements of Law 44/2002 (November 2, 2002) on reform measures of the financial system. The code came into force on August 1, 2003 and replaced the previous one. The General Code of Conduct establishes the principles that guide the actions of officers and directors including ethical conduct, professional standards and confidentiality.

In 2012, a new General Code of Conduct was published. The current Code primarily broadened the scope of the previous one by: (i) including guidelines for certain specific situations not included in the previous version and (ii) listing additional responsibilities in relation to the Code for compliance management and for other bodies and divisions of the Group.

The current General Code of Conduct set an open door policy by which any Grupo Santander employee who becomes aware of an allegedly unlawful act or an act in breach of the General Code of Conduct or of our business specific codes and manuals may report such act directly to compliance management.

As of December 31, 2013, no waivers with respect to the General Code of Conduct had been applied for or granted.

In addition, the Group abides by a Code of Conduct in the Securities Markets, which was updated on July 28, 2003. This code establishes standards and obligations in relation to securities trading, conflicts of interest and the treatment of price sensitive information.

Both codes are available to the public on our website, which does not form part of this annual report on Form 20-F, at www.santander.com under the heading “Information for shareholders and investors—corporate governance—codes of conduct”.

Item 16H. Mine Safety Disclosure

Not applicable.

PART III

Item 17. Financial Statements

We have responded to Item 18 in lieu of this item.

Item 18. Financial Statements

Reference is made to Item 19 for a list of all financial statements filed as part of this Form 20-F.

326

Item 19. Exhibits

(a) Index to Financial Statements	Page
Report of Deloitte, S.L.		F-1
Consolidated Balance Sheets at December 31, 2013, 2012 and 2011		F-2
Consolidated Income Statements for the Years Ended December 31, 2013, 2012 and 2011		F-3
Consolidated Statements of Recognized Income and Expense for the Years Ended December  31, 2013, 2012 and 2011		F-4
Consolidated Statements of Changes In Total Equity for the Years Ended December 31, 2013, 2012 and 2011		F-5
Consolidated Cash Flow Statement for the Years Ended December 31, 2013, 2012 and 2011		F-8
Notes to the Consolidated Financial Statements		F-9

(b) List of Exhibits.

Exhibit Number	Description
1.1	Bylaws (Estatutos) of Banco Santander, S.A.
1.2	Bylaws (Estatutos) of Banco Santander, S.A., (English translation of Bylaws set forth in Exhibit 1.1 hereto).
8.1	List of Subsidiaries (incorporated by reference as Exhibits I, II and III of our Financial Statements filed with this Form 20-F).
12.1	Section 302 Certification by the chief executive officer.
12.2	Section 302 Certification by the chief financial officer.
12.3	Section 302 Certification by the chief accounting officer.
13.1	Section 906 Certification by the chief executive officer, the chief financial officer and the chief accounting officer.
15.1	Consent of Deloitte, S.L.

We will furnish to the SEC, upon request, copies of any unfiled instruments that define the rights of holders of long-term debt of Santander.

327

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

BANCO SANTANDER, S.A.
By:	/s/ José Antonio Álvarez
	Name:	José Antonio Álvarez
	Title:	Chief financial officer

Date: April 29, 2014

328

INDEX TO FINANCIAL STATEMENTS

(a) Index to Financial Statements

	Page
Report of Deloitte, S.L.		F-1
Consolidated Balance Sheets at December 31, 2013, 2012 and 2011		F-2
Consolidated Income Statements for the Years Ended December 31, 2013, 2012 and 2011		F-3
Consolidated Statements of Recognized Income and Expense for the Years Ended December  31, 2013, 2012 and 2011		F-4
Consolidated Statements of Changes in Total Equity for the Years Ended December 31, 2013, 2012 and 2011		F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011		F-8
Notes to the Consolidated Financial Statements		F-9

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Banco Santander, S.A.:

We have audited the accompanying consolidated balance sheets of Banco Santander, S.A. (the “Bank”) and Companies composing, together with the Bank, the Santander Group (the “Group”), as of December 31, 2013, 2012 and 2011, and the related consolidated income statements, statements of recognized income and expense, changes in total equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Bank’s directors. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Group as of December 31, 2013, 2012, and 2011, and the results of its operations, its changes in equity, and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with International Financial Reporting Standards, as issued by the International Accounting Standards Board (“IFRS-IASB”).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States of America), the Group’s internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 29, 2014 expressed an unqualified opinion on the Group’s internal control over financial reporting.

/s/ Deloitte, S.L.

DELOITTE, S.L.

Madrid, Spain

April 29, 2014

F-1

SANTANDER GROUP

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 2013, 2012 AND 2011

(Millions of Euros)

ASSETS	Note	2013		2012		2011
CASH AND BALANCES WITH CENTRAL BANKS			77,103		118,488		96,524
FINANCIAL ASSETS HELD FOR TRADING:			115,289		177,917		172,638
Loans and advances to credit institutions	6		5,503		9,843		4,636
Loans and advances to customers	10		5,079		9,162		8,056
Debt instruments	7		40,841		43,101		52,704
Equity instruments	8		4,967		5,492		4,744
Trading derivatives	9		58,899		110,319		102,498
OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS:			31,381		28,356		19,563
Loans and advances to credit institutions	6		13,444		10,272		4,701
Loans and advances to customers	10		13,196		13,936		11,748
Debt instruments	7		3,875		3,460		2,649
Equity instruments	8		866		688		465
AVAILABLE-FOR-SALE FINANCIAL ASSETS:			83,799		92,266		86,613
Debt instruments	7		79,844		87,724		81,589
Equity instruments	8		3,955		4,542		5,024
LOANS AND RECEIVABLES:			714,484		756,858		777,966
Loans and advances to credit institutions	6		56,017		53,785		42,389
Loans and advances to customers	10		650,581		696,014		728,737
Debt instruments	7		7,886		7,059		6,840
HELD-TO-MATURITY INVESTMENTS			—		—		—
CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK	36		1,627		2,274		2,024
HEDGING DERIVATIVES	11		8,301		7,936		9,898
NON-CURRENT ASSETS HELD FOR SALE	12		4,892		5,700		6,897
INVESTMENTS:	13		5,536		4,454		4,155
Associates	13		1,829		1,957		2,082
Jointly controlled entities	13		3,707		2,497		2,073
INSURANCE CONTRACTS LINKED TO PENSIONS	14		342		405		2,146
REINSURANCE ASSETS	15		356		424		254
TANGIBLE ASSETS:			13,654		13,860		13,846
Property, plant and equipment-			9,974		10,315		9,995
For own use	16		7,787		8,136		7,797
Leased out under an operating lease	16		2,187		2,179		2,198
Investment property	16		3,680		3,545		3,851
INTANGIBLE ASSETS:			26,241		28,062		28,083
Goodwill	17		23,281		24,626		25,089
Other intangible assets	18		2,960		3,436		2,994
TAX ASSETS:			26,819		27,053		23,595
Current			5,751		6,111		5,140
Deferred	27		21,068		20,942		18,455
OTHER ASSETS	19		5,814		5,547		6,807
Inventories			80		173		319
Other			5,734		5,374		6,488
TOTAL ASSETS			1,115,638		1,269,600		1,251,009

LIABILITIES AND EQUITY	Note	2013			2012			2011
FINANCIAL LIABILITIES HELD FOR TRADING:			94,673			143,242			146,948
Deposits from central banks	20		3,866			1,128			7,740
Deposits from credit institutions	20		7,468			8,292			9,287
Customer deposits	21		8,500			8,897			16,574
Marketable debt securities	22		1			1			77
Trading derivatives	9		58,887			109,743			103,083
Short positions	9		15,951			15,181			10,187
Other financial liabilities			—			—			—
OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS:			42,311			45,418			44,909
Deposits from central banks	20		2,097			1,014			1,510
Deposits from credit institutions	20		9,644			10,862			8,232
Customer deposits	21		26,484			28,638			26,982
Marketable debt securities	22		4,086			4,904			8,185
Subordinated liabilities			—			—			—
Other financial liabilities			—			—			—
FINANCIAL LIABILITIES AT AMORTISED COST:			863,114			959,321			935,669
Deposits from central banks	20		9,788			50,938			34,996
Deposits from credit institutions	20		76,534			80,732			81,373
Customer deposits	21		572,853			589,104			588,977
Marketable debt securities	22		171,390			201,064			189,110
Subordinated liabilities	23		16,139			18,238			22,992
Other financial liabilities	24		16,410			19,245			18,221
CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK	36		87			598			876
HEDGING DERIVATIVES	11		5,283			6,444			6,444
LIABILITIES ASSOCIATED WITH NON-CURRENT ASSETS HELD FOR SALE			1			2			41
LIABILITIES UNDER INSURANCE CONTRACTS	15		1,430			1,425			517
PROVISIONS:			14,475			16,148			17,309
Provision for pensions and similar obligations	25		9,126			10,353			10,782
Provisions for taxes and other legal contingencies	25		2,727			3,100			3,663
Provisions for contingent liabilities and commitments	25		693			617			659
Other provisions	25		1,929			2,078			2,205
TAX LIABILITIES:			6,079			7,765			7,966
Current			4,254			5,162			5,101
Deferred	27		1,825			2,603			2,865
OTHER LIABILITIES	26		8,283			7,962			9,516
TOTAL LIABILITIES			1,035,736			1,188,325			1,170,195
EQUITY
SHAREHOLDERS’ EQUITY:	30		84,740			81,334			80,875
Share capital	31		5,667			5,161			4,455
Registered			5,667			5,161			4,455
Less: Uncalled capital			—			—			—
Share premium	32		36,804			37,412			31,223
Reserves	33		38,121			37,153			32,980
Accumulated reserves (losses)	33		37,858			36,898			32,921
Reserves (losses) of entities accounted for using the equity method	33		263			255			59
Other equity instruments	34		193			250			8,708
Equity component of compound financial instruments	34		—			—			1,668
Other	34		193			250			7,040
Less: Treasury shares	34		(9	)		(287	)		(251	)
Profit for the year attributable to the Parent			4,370			2,295			5,330
Less: Dividends and remuneration	4		(406	)		(650	)		(1,570	)
VALUATION ADJUSTMENTS			(14,152	)		(9,474	)		(6,415	)
Available-for-sale financial assets	29		35			(249	)		(977	)
Cash flow hedges	36		(233	)		(219	)		(202	)
Hedges of net investments in foreign operations	29		(1,874	)		(2,957	)		(1,850	)
Exchange differences	29		(8,768	)		(3,013	)		(1,358	)
Non-current assets held for sale			—			—			—
Entities accounted for using the equity method	29		(446	)		(152	)		(95	)
Other valuation adjustments	29		(2,866	)		(2,884	)		(1,933	)
NON-CONTROLLING INTERESTS	28		9,314			9,415			6,354
Valuation adjustments			(1,541	)		(308	)		344
Other			10,855			9,723			6,010
TOTAL EQUITY			79,902			81,275			80,814
TOTAL LIABILITIES AND EQUITY			1,115,638			1,269,600			1,251,009
MEMORANDUM ITEMS:
CONTINGENT LIABILITIES	35		41,049			45,033			48,042
CONTINGENT COMMITMENTS	35		172,797			216,042			195,382

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated balance sheet at December 31, 2013.

F-2

SANTANDER GROUP

CONSOLIDATED INCOME STATEMENTS

FOR THE YEARS ENDED

DECEMBER 31, 2013, 2012 AND 2011

(Millions of Euros)

			(Debit) Credit
	Notes		2013			2012			2011
Interest and similar income		38		51,447			58,791			60,618
Interest expense and similar charges		39		(25,512	)		(28,868	)		(30,024	)
INTEREST INCOME/(CHARGES)				25,935			29,923			30,594
Income from equity instruments		40		378			423			394
Income from companies accounted for using the equity method		13 & 41		500			427			57
Fee and commission income		42		12,473			12,732			12,640
Fee and commission expense		43		(2,712	)		(2,471	)		(2,232	)
Gains/losses on financial assets and liabilities (net)		44		3,234			3,329			2,838
Held for trading				1,733			1,460			2,113
Other financial instruments at fair value through profit or loss				(6	)		159			21
Financial instruments not measured at fair value through profit or loss				1,622			1,789			803
Other				(115	)		(79	)		(99	)
Exchange differences (net)		45		160			(189	)		(522	)
Other operating income				5,903			6,693			8,050
Income from insurance and reinsurance contracts issued		46		4,724			5,541			6,748
Sales and income from the provision of non-financial services		46		322			369			400
Other		46		857			783			902
Other operating expenses				(6,194	)		(6,583	)		(8,029	)
Expenses of insurance and reinsurance contracts		46		(4,607	)		(4,948	)		(6,356	)
Changes in inventories		46		(229	)		(232	)		(249	)
Other		46		(1,358	)		(1,403	)		(1,424	)
TOTAL INCOME				39,677			44,284			43,790
Administrative expenses				(17,452	)		(17,801	)		(17,644	)
Personnel expenses		47		(10,069	)		(10,306	)		(10,305	)
Other general administrative expenses		48		(7,383	)		(7,495	)		(7,339	)
Depreciation and amortization		16 & 18		(2,391	)		(2,183	)		(2,098	)
Provisions (net)		25		(2,182	)		(1,478	)		(2,616	)
Impairment losses on financial assets (net)				(11,227	)		(18,880	)		(11,794	)
Loans and receivables		10		(10,986	)		(18,523	)		(10,966	)
Other financial instruments not measured at fair value through profit or loss		7 & 29		(241	)		(357	)		(828	)
Impairment losses on other assets (net)				(503	)		(508	)		(1,517	)
Goodwill and other intangible assets		17 & 18		(41	)		(151	)		(1,161	)
Other assets				(462	)		(357	)		(356	)
Gains/(losses) on disposal of assets not classified as non-current assets held for sale		49		2,152			906			1,846
Gains from bargain purchases arising in business combinations				—			—			—
Gains/(losses) of non-current assets held for sale not classified as discontinued operations		50		(422	)		(757	)		(2,109	)
OPERATING PROFIT/(LOSS) BEFORE TAX				7,652			3,583			7,858
Income tax		27		(2,113	)		(590	)		(1,755	)
PROFIT FROM CONTINUING OPERATIONS				5,539			2,993			6,103
PROFIT (LOSS) FROM DISCONTINUED OPERATIONS (net)		37		(15	)		70			15
CONSOLIDATED PROFIT FOR THE YEAR				5,524			3,063			6,118
Profit attributable to the Parent				4,370			2,295			5,330
Profit attributable to non-controlling interests		28		1,154			768			788
EARNINGS PER SHARE
From continuing and discontinued operations
Basic earnings per share (euros)		4		0.40			0.23			0.60
Diluted earnings per share (euros)		4		0.40			0.23			0.60
From continuing operations
Basic earnings per share (euros)		4		0.40			0.22			0.60
Diluted earnings per share (euros)		4		0.40			0.22			0.60

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated income statement for the year ended December 31, 2013.

F-3

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF RECOGNIZED INCOME AND EXPENSE

FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011

(Millions of Euros)

	2013			2012			2011
CONSOLIDATED PROFIT FOR THE YEAR		5,524			3,063			6,118
OTHER RECOGNIZED INCOME AND EXPENSE		(5,912	)		(3,711	)		(3,145	)
Items that will not be reclassified to profit or loss		188			(1,123	)		(575	)
Actuarial gains/(losses) on defined benefit pension plans		502			(1,708	)		(880	)
Non-current assets held for sale		—			—			—
Income tax relating to items that will not be reclassified to profit or loss		(314	)		585			305
Items that may be reclassified to profit or loss		(6,100	)		(2,588	)		(2,570	)
Available-for-sale financial assets:		(99	)		1,171			344
Revaluation gains/(losses)		1,150			1,729			231
Amounts transferred to income statement		(1,250	)		(558	)		156
Other reclassifications		1			—			(43	)
Cash flow hedges:		47			(84	)		(17	)
Revaluation gains/(losses)		463			129			(109	)
Amounts transferred to income statement		(416	)		(249	)		92
Amounts transferred to initial carrying amount of hedged items		—			—			—
Other reclassifications		—			36			—
Hedges of net investments in foreign operations:		1,117			(1,107	)		106
Revaluation gains/(losses)		1,074			(1,336	)		13
Amounts transferred to income statement		38			229			9
Other reclassifications		5			—			84
Exchange differences:		(7,027	)		(2,170	)		(2,824	)
Revaluation gains/(losses)		(7,019	)		(1,833	)		(2,906	)
Amounts transferred to income statement		(37	)		(330	)		85
Other reclassifications		29			(7	)		(3	)
Non-current assets held for sale:		—			—			—
Revaluation gains/(losses)		—			—			—
Amounts transferred to income statement		—			—			—
Other reclassifications		—			—			—
Entities accounted for using the equity method:		(294	)		(57	)		(95	)
Revaluation gains/(losses)		(283	)		(61	)		(37	)
Amounts transferred to income statement		23			21			—
Other reclassifications		(34	)		(17	)		(58	)
Other recognized income and expense		—			—			—
Income tax relating to items that may be reclassified to profit or loss		156			(341	)		(84	)
TOTAL RECOGNIZED INCOME AND EXPENSE		(388	)		(648	)		2,973
Attributable to the Parent		(308	)		(764	)		2,642
Attributable to non-controlling interests		(80	)		116			331

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of recognized income and expense for the year ended December 31, 2013.

F-4

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY

FOR THE YEARS ENDED

DECEMBER 31, 2013, 2012 AND 2011

(Millions of Euros)

	Equity attributable to the Parent
	Shareholders’ equity
	Share capital		Share premium			Reserves					Other equity instruments			Less: Treasury shares			Profit for the year attributable to the Parent			Less: Dividends and remuneration			Total shareholders’ equity
						Accumulated reserves (losses)			Reserves (losses) of entities accounted for using the equity method																	Valuation adjustments			Total			Non- controlling interests			Total equity
Ending balance at 12/31/12		5,161		37,412			36,898			255		250			(287	)		2,205			(650	)		81,244			(6,590	)		74,654			9,672			84,326
Adjustments due to changes in accounting policies		—		—			—			—		—			—			90			—			90			(2,884	)		(2,794	)		(257	)		(3,051	)
Adjustments due to errors		—		—			—			—		—			—			—			—			—			—			—			—			—
Adjusted beginning balance		5,161		37,412			36,898			255		250			(287	)		2,295			(650	)		81,334			(9,474	)		71,860			9,415			81,275
Total recognized income and expense		—		—			—			—		—			—			4,370			—			4,370			(4,678	)		(308	)		(80	)		(388	)
Other changes in equity		506		(608	)		960			8		(57	)		278			(2,295	)		244			(964	)		—			(964	)		(21	)		(985	)
Capital increases		506		(506	)		(7	)		—		—			—			—			—			(7	)		—			(7	)		(2	)		(9	)
Capital reductions		—		—			—			—		—			—			—			—			—			—			—			—			—
Conversion of financial liabilities into equity		—		—			—			—		—			—			—			—			—			—			—			—			—
Increases in other equity instruments		—		—			—			—		103			—			—			—			103			—			103			—			103
Reclassification of financial liabilities to other equity instruments		—		—			—			—		—			—			—			—			—			—			—			—			—
Reclassification of other equity instruments to financial liabilities		—		—			—			—		—			—			—			—			—			—			—			—			—
Distribution of dividends		—		—			(412	)		—		—			—			—			(406	)		(818	)		—			(818	)		(747	)		(1,565	)
Transactions involving own equity instruments (net)		—		—			(28	)		—		—			278			—			—			250			—			250			—			250
Transfers between equity items		—		(102	)		1,848			8		(109	)		—			(2,295	)		650			—			—			—			—			—
Increases (decreases) due to business combinations		—		—			—			—		—			—			—			—			—			—			—			169			169
Equity-instrument-based payments		—		—			—			—		(41	)		—			—			—			(41	)		—			(41	)		—			(41	)
Other increases/(decreases) in equity		—		—			(441	)		—		(10	)		—			—			—			(451	)		—			(451	)		559			108
Ending balance at 12/31/13		5,667		36,804			37,858			263		193			(9	)		4,370			(406	)		84,740			(14,152	)		70,588			9,314			79,902

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of changes in total equity for the year ended December 31, 2013.

F-5

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011

(Millions of Euros)

	Equity attributable to the Parent
	Shareholders’ equity
						Reserves
	Share capital		Share premium			Accumulated reserves (losses)			Reserves (losses) of entities accounted for using the equity method		Other equity instruments			Less: Treasury shares			Profit for the year attributable to the Parent			Less: Dividends and remuneration			Total shareholders’ equity			Valuation adjustments			Total			Non- controlling interests			Total equity
Ending balance at 12/31/11		4,455		31,223			32,921			59		8,708			(251	)		5,351			(1,570	)		80,896			(4,482	)		76,414			6,445			82,859
Adjustments due to changes in accounting policies		—		—			—			—		—			—			(21	)		—			(21	)		(1,933	)		(1,954	)		(91	)		(2,045	)
Adjustments due to errors		—		—			—			—		—			—			—			—			—			—			—			—			—
Adjusted beginning balance		4,455		31,223			32,921			59		8,708			(251	)		5,330			(1,570	)		80,875			(6,415	)		74,460			6,354			80,814
Total recognized income and expense		—		—			—			—		—			—			2,295			—			2,295			(3,059	)		(764	)		116			(648	)
Other changes in equity		706		6,189			3,977			196		(8,458	)		(36	)		(5,330	)		920			(1,836	)		—			(1,836	)		2,945			1,109
Capital increases		706		6,330			(235	)		—		(6,811	)		—			—			—			(10	)		—			(10	)		22			12
Capital reductions		—		—			—			—		—			—			—			—			—			—			—			(112	)		(112	)
Conversion of financial liabilities into equity		—		—			—			—		—			—			—			—			—			—			—			—			—
Increases in other equity instruments		—		—			—			—		133			—			—			—			133			—			133			—			133
Reclassification of financial liabilities to other equity instruments		—		—			—			—		—			—			—			—			—			—			—			—			—
Reclassification of other equity instruments to financial liabilities		—		—			—			—		—			—			—			—			—			—			—			—			—
Distribution of dividends		—		—			(496	)		—		—			—			—			(650	)		(1,146	)		—			(1,146	)		(409	)		(1,555	)
Transactions involving own equity instruments (net)		—		—			85			—		—			(36	)		—			—			49			—			49			—			49
Transfers between equity items		—		(141	)		3,768			196		(63	)		—			(5,330	)		1,570			—			—			—			—			—
Increases (decreases) due to business combinations		—		—			—			—		—			—			—			—			—			—			—			5			5
Equity-instrument-based payments		—		—			(2	)		—		(40	)		—			—			—			(42	)		—			(42	)		—			(42	)
Other increases/(decreases) in equity		—		—			857			—		(1,677	)		—			—			—			(820	)		—			(820	)		3,439			2,619
Ending balance at 12/31/12		5,161		37,412			36,898			255		250			(287	)		2,295			(650	)		81,334			(9,474	)		71,860			9,415			81,275

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of changes in total equity for the year ended December 31, 2013.

F-6

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011

(Millions of Euros)

	Equity attributable to the Parent
	Shareholders’ equity
	Share capital		Share premium			Reserves					Other equity instruments			Less: Treasury shares			Profit for the year attributable to the Parent			Less: Dividends and remuneration			Total shareholders’ equity
						Accumulated reserves (losses)			Reserves (losses) of entities accounted for using the equity method																	Valuation adjustments			Total			Non-controlling interests			Total equity
Ending balance at 12/31/10		4,164		29,457			28,255			52		8,686			(192	)		8,181			(1,270	)		77,333			(2,315	)		75,018			5,897			80,915
Adjustments due to changes in accounting policies		—		—			—			—		—			—			31			—			31			(1,412	)		(1,381	)		(37	)		(1,418	)
Adjustments due to errors		—		—			—			—		—			—			—			—			—			—			—			—			—
Adjusted beginning balance		4,164		29,457			28,255			52		8,686			(192	)		8,212			(1,270	)		77,364			(3,727	)		73,637			5,860			79,497
Total recognized income and expense		—		—			—			—		—			—			5,330			—			5,330			(2,688	)		2,642			331			2,973
Other changes in equity		291		1,766			4,666			7		22			(59	)		(8,212	)		(300	)		(1,819	)		—			(1,819	)		163			(1,656	)
Capital increases		120		17			(123	)		—		(17	)		—			—			—			(3	)		—			(3	)		—			(3	)
Capital reductions		—		—			—			—		—			—			—			—			—			—			—			(51	)		(51	)
Conversion of financial liabilities into equity		171		1,773			—			—		—			—			—			—			1,944			—			1,944			—			1,944
Increases in other equity instruments		—		—			—			—		185			—			—			—			185			—			185			—			185
Reclassification of financial liabilities to other equity instruments		—		—			—			—		—			—			—			—			—			—			—			—			—
Reclassification of other equity instruments to financial liabilities		—		—			—			—		—			—			—			—			—			—			—			—			—
Distribution of dividends		—		—			(2,060	)		—		—			—			—			(1,570	)		(3,630	)		—			(3,630	)		(431	)		(4,061	)
Transactions involving own equity instruments (net)		—		—			(31	)		—		—			(59	)		—			—			(90	)		—			(90	)		—			(90	)
Transfers between equity items		—		(24	)		7,000			7		(41	)		—			(8,212	)		1,270			—			—			—			—			—
Increases (decreases) due to business combinations		—		—			—			—		—			—			—			—			—			—			—			162			162
Equity-instrument-based payments		—		—			—			—		(105	)		—			—			—			(105	)		—			(105	)		—			(105	)
Other increases/(decreases) in equity		—		—			(120	)		—		—			—			—			—			(120	)		—			(120	)		483			363
Ending balance at 12/31/11		4,455		31,223			32,921			59		8,708			(251	)		5,330			(1,570	)		80,875			(6,415	)		74,460			6,354			80,814

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of changes in total equity for the year ended December 31, 2013.

F-7

SANTANDER GROUP

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011

(Millions of Euros)

	2013			2012			2011
A. CASH FLOWS FROM OPERATING ACTIVITIES:		(34,852	)		24,133			35,904
Consolidated profit for the year		5,524			3,063			6,118
Adjustments made to obtain the cash flows from operating activities-		17,699			24,373			21,898
Depreciation and amortization		2,391			2,183			2,098
Other adjustments		15,308			22,190			19,800
Net increase/decrease in operating assets-		(13,533	)		27,343			(246	)
Financial assets held for trading		(8,440	)		381			(7,561	)
Other financial assets at fair value through profit or loss		3,426			5,207			(12,221	)
Available-for-sale financial assets		(4,149	)		7,334			383
Loans and receivables		(2,767	)		11,854			20,660
Other operating assets		(1,603	)		2,567			(1,507	)
Net increase/decrease in operating liabilities-		(68,031	)		27,202			9,566
Financial liabilities held for trading		4,320			(9,970	)		(15,348	)
Other financial liabilities at fair value through profit or loss		(2,781	)		(3,010	)		(6,351	)
Financial liabilities at amortized cost		(63,939	)		39,216			32,901
Other operating liabilities		(5,631	)		966			(1,636	)
Income tax recovered/paid		(3,577	)		(3,162	)		(1,924	)
B. CASH FLOWS FROM INVESTING ACTIVITIES:		677			126			(7,008	)
Payments-		3,322			3,920			10,575
Tangible assets		1,877			2,161			1,858
Intangible assets		1,264			1,726			1,540
Investments		181			33			1
Subsidiaries and other business units		—			—			7,176
Non-current assets held for sale and associated liabilities		—			—			—
Held-to-maturity investments		—			—			—
Other payments related to investing activities		—			—			—
Proceeds-		3,999			4,046			3,567
Tangible assets		500			815			520
Intangible assets		39			6			—
Investments		295			2			10
Subsidiaries and other business units		1,578			991			1,044
Non-current assets held for sale and associated liabilities		1,587			2,232			1,993
Held-to-maturity investments		—			—			—
Other proceeds related to investing activities		—			—			—
C. CASH FLOWS FROM FINANCING ACTIVITIES:		(1,676	)		(703	)		(8,111	)
Payments-		8,528			12,549			16,259
Dividends		818			1,287			3,489
Subordinated liabilities		1,915			4,080			5,329
Redemption of own equity instruments		—			—			—
Acquisition of own equity instruments		5,592			6,957			6,937
Other payments related to financing activities		203			225			504
Proceeds-		6,852			11,846			8,148
Subordinated liabilities		1,027			2			171
Issuance of own equity instruments		—			—			—
Disposal of own equity instruments		5,560			7,005			6,848
Other proceeds related to financing activities		265			4,839			1,129
D. EFFECT OF FOREIGN EXCHANGE RATE CHANGES		(5,534	)		(1,592	)		(2,046	)
E. NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS		(41,385	)		21,964			18,738
F. CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		118,488			96,524			77,786
G. CASH AND CASH EQUIVALENTS AT END OF YEAR		77,103			118,488			96,524
COMPONENTS OF CASH AND CASH EQUIVALENTS AT END OF YEAR:
Cash		6,697			7,214			5,483
Cash equivalents at central banks		70,406			111,274			91,041
Other financial assets		—			—			—
Less: Bank overdrafts refundable on demand		—			—			—
TOTAL CASH AND CASH EQUIVALENTS AT END OF YEAR		77,103			118,488			96,524

The accompanying Notes 1 to 55 and Appendices are an integral part of the consolidated statement of cash flows for the year ended December 31, 2013.

F-8

Banco Santander, S.A. and Companies composing Santander Group

Notes to the Consolidated Financial Statements for the year ended December 31, 2013

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

a) Introduction

Banco Santander, S.A. (“the Bank” or Banco Santander) is a private-law entity subject to the rules and regulations applicable to banks operating in Spain. The Bylaws and other public information on the Bank can be consulted on the website of the Bank (www.santander.com) and at its registered office at Paseo de Pereda 9-12, Santander.

In addition to the operations carried on directly by it, the Bank is the head of a group of subsidiaries that engage in various business activities and which compose, together with it, the Santander Group (“the Group” or Santander Group). Therefore, the Bank is obliged to prepare, in addition to its own separate financial statements, the Group’s consolidated financial statements, which also include the interests in joint ventures and investments in associates.

b) Basis of presentation of the consolidated financial statements

Under Regulation (EC) no. 1606/2002 of the European Parliament and of the Council of July 19, 2002, all companies governed by the Law of an EU Member State and whose securities are admitted to trading on a regulated market of any Member State must prepare their consolidated financial statements for the years beginning on or after January 1, 2005 in conformity with the International Financial Reporting Standards (“IFRSs”) previously adopted by the European Union (“EU-IFRSs”).

In order to adapt the accounting system of Spanish credit institutions to the new standards, the Bank of Spain issued Circular 4/2004, of December 22, on Public and Confidential Financial Reporting Rules and Formats.

The Group’s consolidated financial statements for 2013 were formally prepared by the Bank’s directors (at the board meeting on January 27, 2014) in accordance with International Financial Reporting Standards as adopted by the European Union and with Bank of Spain Circular 4/2004 and Spanish corporate and commercial law applicable to the Group and in compliance with IFRS as issued by the International Accounting Standards Board (“IFRS – IASB” and together with IFRS adopted by the European Union, “IFRS”), using the basis of consolidation, accounting policies and measurement bases set forth in Note 2 to these consolidated financial statements and, accordingly, they present fairly the Group’s equity and financial position at December 31, 2013, 2012 and 2011 and the consolidated results of its operations, the changes in the consolidated equity and the consolidated cash flows in 2013, 2012 and 2011. These consolidated financial statements were prepared from the separate accounting records of the Bank and of each of the companies composing the Group, and include the adjustments and reclassifications required to unify the accounting policies and measurement bases applied by the Group.

F-9

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

Adoption of new standards and interpretations issued

The following standards came into force and were adopted by the European Union in 2013:

• Amendments to IAS 1, Presentation of Items of Other Comprehensive Income - the amendments require items to be classified into items that will be reclassified (recycled) to profit or loss in subsequent periods and items that will not be reclassified.

• Amendments to IAS 19, Employee Benefits - these amendments eliminate the corridor under which until January 1, 2013 entities were permitted to opt not to recognize at the end of the reporting period a certain portion of the actuarial gains and losses disclosed on measurement of the pension obligations and to defer said recognition (see Note 2.v to the consolidated financial statements for the year ended December 31, 2012). When these amendments come into effect, all actuarial gains and losses are recognized immediately. The amendments also include significant changes in the presentation of cost components, as a result of which the service cost relating to post-employment benefit obligations (past service cost and plan curtailments and settlements) and net interest cost will be recognized in profit or loss and the measurement component (comprising basically actuarial gains and losses) will be recognized in Equity - Valuation adjustments and may not be reclassified to profit or loss.

• IFRS 13, Fair Value Measurement - this IFRS replaces the previous rules concerning fair value contained in various standards with a single standard. It does not modify the criteria set out in other standards for measuring assets and liabilities at fair value, but rather contains more extensive guidance about how fair value should be determined. IFRS 13 is applicable to the measurement of both financial and non-financial items and it introduces new disclosure requirements.

• Amendments to IFRS 7, Offsetting Financial Assets and Financial Liabilities - these amendments introduce new disclosures to be included in the annual financial information for financial assets and financial liabilities that are presented net in the balance sheet and for other instruments subject to an enforceable netting arrangement.

Additionally, the Group opted to apply the following standards early under IFRS adopted by the European Union, as permitted by said standards, that came into force under IFRS-IASB:

• IFRS 10, Consolidated Financial Statements - this standard supersedes the previous IAS 27 and SIC 12, and introduces a single control-based consolidation model, irrespective of the nature of the investee. IFRS 10 modifies the previous definition of control. The new definition of control sets out the following three elements of control: power over the investee; exposure, or rights, to variable returns from involvement with the investee; and the ability to use power over the investee to affect the amount of the investor’s returns.

F-10

• IFRS 11, Joint Arrangements - this standard supersedes the previous IAS 31. The fundamental change introduced by IFRS 11 is the elimination of the option of proportionate consolidation for jointly controlled entities, which begin to be accounted for using the equity method.

• IFRS 12, Disclosure of Interests in Other Entities - this standard represents a single standard presenting the disclosure requirements for interests in other entities (whether they be subsidiaries, associates, joint arrangements or other interests) and includes new disclosure requirements. The objective of this standard is to require an entity to disclose information that enables users of its financial statements to evaluate the nature of its interests in other entities (control), the possible restrictions on its ability to access or use assets and settle liabilities, the risks associated with its interests in unconsolidated structured entities, etc.

• Amendments to IAS 27 and IAS 28 (revised) - these amendments reflect the changes arising from the new IFRS 10 and IFRS 11 described above.

The application of the aforementioned accounting standards and interpretations did not have any material effects on the Group’s financial statements, except for the application of the amendments to IAS 19, the impact of which is detailed in Note 1.e.

Also, the following standards whose effective dates are after December 31, 2013 were in force at the date of preparation of these consolidated financial statements:

• Amendments to IAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities (obligatory for reporting periods beginning on or after January 1, 2014, early application permitted) - these amendments introduce a series of additional clarifications on the requirements established by the standard for an entity to be able to offset a financial asset and a financial liability, indicating that they can only be offset when an entity currently has a legally enforceable right to set off the recognized amounts and this does not depend on the occurrence of future events.

• Amendments to IAS 36, Impairment of Assets - Recoverable Amount Disclosures for Non-Financial Assets (obligatory for reporting periods beginning on or after January 1, 2014, early application permitted) - these amendments eliminate the requirement to present certain disclosures on the recoverable amount of each cash-generating unit and introduce the obligation to disclose information on the recoverable amount of assets in relation to which an impairment loss was recognized or reversed in the year.

• Amendments to IAS 39 Financial Instruments: Recognition and Measurement - Novation of Derivatives and Continuation of Hedge Accounting (obligatory for reporting periods beginning on or after January 1, 2014, early application permitted) - these amendments introduce an exception to the application of the discontinuation of hedge accounting for novations in which, as a consequence of laws or regulations, the original counterparty of the hedging instrument is replaced by one or more central counterparties, such as clearing agencies, provided that other changes to the hedging instrument are limited to those that are necessary to effect such a replacement of the counterparty.

Lastly, at the date of preparation of these consolidated financial statements, the following standards and interpretations which effectively come into force after December 31, 2013 had not yet been adopted by the European Union:

• IFRS 9, Financial Instruments: Classification and Measurement and Hedge Accounting (without a defined mandatory effective date), which will in the future replace the part of the current IAS 39 relating to the classification and measurement of financial assets and hedge accounting. IFRS 9 presents significant differences regarding financial assets with respect to the current standard, including the approval of a new classification model based on only two categories, namely instruments measured at amortized cost and those measured at fair value, the disappearance of the current Held-to-maturity investments and Available-for-sale financial assets categories, impairment analyses only for assets measured at amortized cost and the non-separation of embedded derivatives in financial contracts. The main change introduced with regard to financial liabilities affects liabilities that an entity elects to measure at fair value. The portion of the change in the fair value of these liabilities attributable to changes in the entity’s own credit risk must be presented in Valuation adjustments instead of in the income statement. In relation to hedge accounting, the new model attempts to align the accounting rules with risk management. The three types of hedge accounting under the current standard are maintained (cash flow hedges, fair value hedges and hedges of net investments in foreign operations). However, there are very significant changes with respect to IAS 39 in several areas such as hedged items, hedging instruments, accounting for the time value of options and effectiveness assessment.

F-11

• Amendments to IAS 19, Employee Benefits: Defined Benefit Plans - Employee Contributions (obligatory for reporting periods beginning on or after July 1, 2014, early application permitted) - these amendments allow employee contributions to be deducted from the service cost in the same period in which they are paid, provided certain requirements are met, without the need to make calculations to attribute the reduction to each year of service.

• IFRIC 21, Levies (obligatory for reporting periods beginning on or after January 1, 2014, early application permitted) - provides clarifying guidance on when to recognize a liability to pay a fee, levy or tax that is accounted for in accordance with IAS 37 and whose timing and amount is certain. In these cases, the levy is recognized when the activity that triggers its payment occurs.

• Improvements to IFRSs, 2010-2012 cycle (obligatory for reporting periods beginning on or after July 1, 2014) - these improvements introduce minor amendments to IFRS 2, IFRS 3, IFRS 8, IFRS 13, IAS 16, IAS 24 and IAS 38.

• Improvements to IFRSs, 2011-2013 cycle (obligatory for reporting periods beginning on or after July 1, 2014) - these improvements introduce minor amendments to IFRS 3, IFRS 13 and IAS 40.

The Group is currently analyzing the possible effects of these new standards and interpretations.

All accounting policies and measurement bases with a material effect on the 2013, 2012 and 2011 consolidated financial statements were applied in their preparation.

c) Use of estimates

The consolidated results and the determination of consolidated equity are sensitive to the accounting policies, measurement bases and estimates used by the directors of the Bank in preparing the consolidated financial statements. The main accounting policies and measurement bases are set forth in Note 2.

In the consolidated financial statements estimates were occasionally made by the senior management of the Bank and of the consolidated entities in order to quantify certain of the assets, liabilities, income, expenses and obligations reported herein. These estimates, which were made on the basis of the best information available, relate basically to the following:

• The impairment losses on certain assets (see Notes 6, 7, 8, 10, 12, 13, 16, 17 and 18);

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• The assumptions used in the actuarial calculation of the post-employment benefit liabilities and commitments and other obligations (see Note 25);

• The useful life of the tangible and intangible assets (see Notes 16 and 18);

• The measurement of goodwill arising on consolidation (see Note 17);

• The fair value of certain unquoted assets and liabilities (see Notes 6, 7, 8, 9, 10, 11, 20, 21 and 22); and

• The recoverability of deferred tax assets (see Note 27).

Although these estimates were made on the basis of the best information available at 2013, 2012 and 2011 year-end, future events might make it necessary to change these estimates (upwards or downwards) in coming years. Changes in accounting estimates would be applied prospectively, recognizing the effects of the change in estimates in the related consolidated income statement.

d) Other matters

Credit assignment transactions

Following the prolonged investigations carried out since 1992 by the Madrid Central Examining Court number 3, and the repeated applications by the Public Prosecutor’s Office and the Government Lawyer, as the representative of the Public Treasury, to have the case against the Bank and its executives dismissed and struck off, the trial commenced at Panel One of the Criminal Chamber of the National Appellate Court and after the debate on preliminary issues was held at the end of November 2006, without the appearance of the Government Lawyer, in which the Public Prosecutor’s Office reiterated its appeal to set aside the trial and interrupt the proceedings, on December 20, 2006, the Criminal Chamber of the National Appellate Court ordered the dismissal of the proceedings, as requested by the Public Prosecutor’s Office and the private prosecution.

A cassation appeal was filed against the aforementioned order by the Association for the Defence of Investors and Customers and Iniciativa per Catalunya Verds and, following the opposition by the Public Prosecutor’s Office, the Government Lawyer and the remaining appearing parties, it was dismissed by a Supreme Court decision handed down on December 17, 2007.

In an interlocutory order of April 15, 2008, the Supreme Court dismissed the request filed by the Association for the Defence of Investors and Customers for the decision handed down in the judgment of December 17, 2007 to be set aside.

The appeal filed by the Association for the Defence of Investors and Customers against the aforementioned Supreme Court decision was given leave to proceed by the Spanish Constitutional Court, and the appearing parties submitted their pleadings. Subsequently, the appellant filed a document seeking dismissal of the appeal. By order of February 25, 2013, the Spanish Constitutional Court resolved to close the case.

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e) Information relating to 2012 and 2011

In August 2013, we filed with the SEC a Form 6-K in which we recasted our audited financial statements included in our annual report on Form 20-F for the fiscal year ended December 31, 2012, as filed with the SEC on April 24, 2013 (the “2012 Form 20-F”) to reflect the following changes:

a) Amendments to IAS 19, Employee Benefits (see Note 1.b): set forth below are the effects arising from the retrospective application of the aforementioned standard (the positive or negative sign shows whether the figures are increases or decreases with respect to the figures shown in the consolidated financial statements for said years):

	Millions of euros
	2012			2011
CONSOLIDATED BALANCE SHEET
Deferred tax assets		1,185			694
Other assets		(1,213	)		(1,211	)
Total assets		(28	)		(517	)
Deferred tax liabilities		(254	)		(208	)
Provisions for pensions and similar obligations		3,276			1,737
Total liabilities		3,022			1,529
Consolidated profit (loss) for the year		95			(21	)
Valuation adjustments		(2,884	)		(1,933	)
Non-controlling interests		(262	)		(91	)
Total equity		(3,051	)		(2,045	)
CONSOLIDATED INCOME STATEMENT
Provisions (net)		138			(26	)
Income tax		(43	)		5
Consolidated profit (loss) for the year		95			(21	)
Of which:
Profit (loss) attributable to the Parent		90			(21	)
Profit attributable to non-controlling interests		5			—

b) Presentation of the Santander UK card business, which was acquired from the GE (General Electric) Group in prior years, as discontinued operations since the sale was completed in 2013: the balances contributed by this unit (EUR 1,370 million and EUR 1,559 million at December 31, 2012 and 2011, respectively) were eliminated from Loans and receivables and were presented under Non-current assets held for sale (see Note 12); also, the profit contributed by this unit was eliminated from the relevant line items in the income statement, and it was presented in aggregate under Profit (loss) from discontinued operations (net) (see Note 37).

c) Note 52 includes a description of certain changes made in the business segment reporting.

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f) Capital management

i. Regulatory and economic capital

The Group’s capital management is performed at regulatory and economic levels.

Regulatory capital management is based on the analysis of the capital base, the capital ratios using various regulatory criteria and the scenarios used for capital planning. The aim is to achieve a capital structure that is as efficient as possible in terms of both cost and compliance with the requirements of regulators, ratings agencies and investors.

The regulations on the calculation and control of minimum capital requirements in Spain have been implemented, since June 2008, by Bank of Spain Circular 3/2008, which adapts Spanish legislation to European Directives 2006/48 and 2006/49 (known as Capital Requirements Directives, or CRD I), which include, inter alia, provisions equivalent to those defined in the Basel II framework agreement. The Basel regulatory framework is based on three pillars. Pillar I sets out the minimum capital requirements to be met, and provides for the possibility of using internal ratings and models (AIRB approach) in the calculation of risk-weighted exposures and including operational risk therein. The aim is to render regulatory requirements more sensitive to the risks actually borne by entities in carrying on their business activities. Pillar II establishes a supervisory review system to improve internal risk management and internal capital adequacy assessment based on the risk profile. Lastly, Pillar III defines the elements relating to disclosures and market discipline.

In July 2009, the Basel Committee on Banking Supervision published a reform of the Basel II framework which raised the regulatory capital requirements for the trading book and complex securitization exposures, known as Basel 2.5. At European level, these greater requirements were reflected in Directive 2009/111 (CRD II) and 2010/76 (CRD III), which were in turn included in Bank of Spain Circular 3/2008 through Circular 4/2011.

In December 2010, the Committee on Banking Supervision published a new global regulatory framework in order to strengthen international capital standards (Basel III), by enhancing the quality, consistency and transparency of the capital base and improving risk coverage. On June 26, 2013, the Basel III legal framework was included in European law through Directive 2013/36 (CRD IV), which repeals Directives 2006/48 and 2006/49; and Regulation 575/2013 on prudential requirements for credit institutions and investment firms (CRR) directly applicable in every Member State as from January 1, 2014.

In December 2011, the European Banking Authority (EBA) published a Recommendation with additional capital requirements for the main European credit institutions. These requirements are part of a package of measures adopted by the European Council in the second half of 2011 with the aim of restoring stability and confidence in the European markets. At June 30, 2012, the institutions selected for the EBA sample were required to have a Tier 1 core capital ratio, determined on the basis of EBA rules, of at least 9%. On July 22, 2013, following publication of the CRD IV and CRR, the EBA issued a new Recommendation, replacing the previous requirement, that was in percentage terms, by a fixed equivalent capital floor, in terms of nominal amount.

In Spain, Royal Decree-Law 2/2011 was approved on February 18, 2011, establishing the implementing regulations of the “Plan for Strengthening the Financial Sector”, which aimed, inter alia, to establish in advance certain capital requirements, established by Basel III, by setting a principal capital requirement of 8% or 10%, depending on the characteristics of each entity. Also, Royal Decree-Law 2/2012, on the clean-up of the financial sector, was published on February 3, 2012, setting forth additional principal capital requirements to be met by entities based on certain levels of assets relating to the property industry.

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Lastly, Law 9/2012, on restructuring and resolution of credit institutions, was published on November 14, 2012, which established, effective from January 1, 2013, a single principal capital requirement of 9%, phasing in both the eligible instruments and deductions with those used by the European Banking Authority. Law 9/2012 was partially implemented by Bank of Spain Circular 7/2012, on minimum principal capital requirements.

The application as from January 1, 2014 of the capital requirements established by the CRR will lead to the repeal of lower-ranking rules providing for additional capital requirements, in particular, the principal capital requirements established in Circular 7/2012.

At December 31, 2013, the Group met all the minimum capital requirements established by current legislation and those set forth in the EBA’s recommendation.

From an economic standpoint, capital management seeks to optimize value creation at the Group and at its constituent business units. To this end, the economic capital, RORAC and value creation data for each business unit are generated, analyzed and reported to the management committee on a quarterly basis. Within the framework of the internal capital adequacy assessment process (Pillar II of the Basel Capital Accord), the Group uses an economic capital measurement model with the objective of ensuring that there is sufficient capital available to support all the risks of its activity in various economic scenarios, with the solvency levels agreed upon by the Group.

In order to adequately manage the Group’s capital, it is essential to estimate and analyses future needs, in anticipation of the various phases of the business cycle. Projections of regulatory and economic capital are made based on the budgetary information (balance sheet, income statement, etc.), macroeconomic scenarios defined by the Group’s economic research service, and the impact, if any, of foreseeable regulatory changes. These estimates are used by the Group as a reference to plan the management actions (issues, securitizations, etc.) required to achieve its capital targets.

In addition, certain stress scenarios are simulated in order to assess the availability of capital in adverse situations. These scenarios are based on sharp fluctuations in macroeconomic variables, GDP, interest rates, values of equity instruments, etc. that mirror historical crises that could happen again or plausible but unlikely stress situations.

ii. Plan for the roll-out of advanced approaches and authorization from the supervisory authorities

The Group intends to adopt, over the next few years, the advanced internal ratings-based (AIRB) approach under Basel II for substantially all its banks, until the percentage of net exposure of the loan portfolio covered by this approach exceeds 90%.

Accordingly, the Group continued in 2013 with the project for the progressive implementation of the technology platforms and methodological improvements required for the roll-out of the AIRB approaches for regulatory capital calculation purposes at the various Group units.

The Group has obtained authorization from the supervisory authorities to use advanced approaches for the calculation of regulatory capital requirements for credit risk for the Parent and the main subsidiaries in Spain, the UK, Portugal, non-retail portfolios in Mexico and large corporate portfolios in Brazil, Chile and the US. In 2013 the Group obtained approval for the large corporate portfolio in the US and authorization to use an internal model for the authorized overdraft portfolio in the UK.

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As regards the other risks explicitly addressed under Pillar I of Basel II, the Group is authorized to use its internal model for market risk with respect to the treasury trading activities in Madrid, Chile, Portugal and Mexico.

Lastly, as part of the Basel 2.5 requirements, regulatory approval was obtained for the Group’s corporate methodology, enabling the Group to calculate, for the market risk of the trading book, the incremental default and migration risk charge (IRC) and stressed value at risk (Stressed VaR).

As far as operational risk is concerned, the Group uses the standardized approach for regulatory capital calculation purposes but is working towards requesting authorization for the use of AMA approaches, with the objective of gaining regulatory approval in the short term.

g) Environmental impact

In view of the business activities carried on by the Group entities, the Group does not have any environmental liability, expenses, assets, provisions or contingencies that might be material with respect to its consolidated equity, financial position or results. Therefore, no specific disclosures relating to environmental issues are included in these notes to the consolidated financial statements.

h) Events after the reporting period

It should be noted that from January 1, 2014 to April 29, 2014 on which these consolidated financial statements were authorized for issue, the following significant events occurred:

• On January 3, 2014, the Group announced that it had sold to Altamira Asset Management Holdings, S.L., an investee of Apollo European Principal Finance Fund II, an entity affiliated to Apollo Global Management, LLC (Apollo), 85% of the share capital of Altamira Asset Management, S.L., the Group company that manages debt recovery services before the initiation of court action in Spain and the sale or lease of foreclosed property assets relating to this business, for EUR 664 million (see Note 3.b.xviii).

• At its meeting of January 13, 2014, the Bank’s executive committee resolved to apply the Santander Dividendo Elección scrip dividend scheme on the dates on which the third interim dividend is traditionally paid, whereby the shareholders were offered the option of receiving an amount equivalent to said dividend, the gross amount of which was EUR 0.152 per share, in shares or cash. On April 10, 2014 the Group announced the information in connection with the flexible remuneration program “Santander Dividendo Elección” (scrip dividend scheme) to be applied to the final 2013 dividend. The shareholders were offered the option of receiving an amount equivalent to said dividend, the gross amount of which was EUR 0.149 per share, in shares or cash.

• On January 23, 2014, the public offering of shares of Santander Consumer USA Holdings Inc. (SCUSA) was completed and SCUSA’s share was admitted to trading on the New York Stock Exchange. The placement represented 21.6% of SCUSA’s share capital, of which 4% related to the holding sold by the Group. Following this sale, the Group held 60.7% of the share capital of SCUSA. Both Sponsor Auto Finance Holdings Series LP (Sponsor Holdings) -an investee of funds controlled by Warburg Pincus LLC, Kohlberg Kravis Roberts & Co. L.P. and Centerbridge Partners L.P.- and DDFS LLC (DDFS) - a company controlled by Thomas G. Dundon, the Chief Executive Officer of SCUSA- also reduced their holdings.

Since the ownership interests of the former shareholders were reduced to below certain percentages, the prevailing shareholder agreement was terminated, pursuant to the terms and conditions established in said agreement. This termination has included, inter alia, the cancellation of the contingent payment to be made by SCUSA on the basis of its results in 2014 and 2015 (see Note 3.b.v). It has also entailed the termination of the agreements whereby, inter alia, Sponsor Holdings and DDFS LLC were granted representation on the board of directors of SCUSA and a voting system was established whereby the strategic, financial and operating decisions, and other significant decisions associated with the ordinary management of SCUSA, were subject to joint approval by the Group and the aforementioned shareholders and, therefore, SCUSA ceased to be controlled jointly by all the above and, as a result, it has begun to be controlled by the Group on the basis of the percentage held in its share capital.

F-17

• During the first quarter of 2014, the Group completed the acquisition of the 51% interest in Financiera El Corte Inglés, E.F.C., S.A., after obtaining the relevant regulatory and competition authorizations. Therefore, on February 27, 2014 , SCF paid EUR 140 million, approximately, to acquire the aforementioned ownership interest in this company (see Note 3.xvii).

• On March 5, 2014, we announced that the Executive Committee had resolved to carry out an issue of contingent perpetual preferred securities convertible into newly issued ordinary shares of the Bank (“PCCS”), excluding pre-emptive subscription rights and for a nominal value of up to €1.5 billion (the “Issue”). The Issue was carried out through an accelerated bookbuilding process and was targeted only at qualified investors.

The PCCS were issued at par and the interest thereon, the payment of which is subject to certain conditions and is at the discretion of the Bank, was set at 6.25% per annum for the first five years. After that, it will be reviewed by applying a margin of 541 basis points on the five-year Mid-Swap Rate.

On March 25, 2014, Bank of Spain qualified the PCCS as additional tier 1 under the new European rules on capital requirements set by European Regulation 575/2013. The PCCS are perpetual although they may be called under certain circumstances and would be converted into newly issued ordinary shares of Banco Santander if the common equity Tier 1 ratio of the Bank or its consolidated group, calculated in accordance with European Regulation 575/2013, were to fall below 5.125%. At present, the PCCS are traded on the Global Exchange Market of the Irish Stock Exchange.

• On April 7, 2014, the Group announced the agreement reached for the acquisition, through Banco Santander (Brasil) S.A.’s investee company Santander Getnet Serviços para Meios de Pagamento Socidade Anónima, of 100% of the company Getnet Tecnologia Em Captura e Processamento de Transações H.U.A.H. (“Getnet”) for an amount of 1,104 million reais (approximately EUR 353 million). Following the acquisition, Banco Santander (Brasil) S.A. will hold indirectly an 88.5% stake in Getnet. The transaction will have no significant impact on Grupo Santander’s shareholders’ equity.

Getnet specializes in the development and management of technological solutions and services for businesses with electronic transactions. The transaction gives continuity to the growth strategy in the acquiring business. Santander Getnet Serviços para Meios de Pagamento Socidade Anónima is a payment service provider company in which Santander Brasil and Getnet presently hold 50% each.

It is expected that the transaction (which is subject to regulatory authorization) will be concluded during the second half of 2014.

• On April 29, 2014 we have announced that Banco Santander’s board of directors has resolved to make an offer to acquire all shares of Banco Santander Brasil not already held by Grupo Santander, representing approximately 25% of Santander Brasil’s share capital. The transaction would be paid for with up to 665 million shares of Banco Santander (parent company), equivalent to €4,686 million.

Santander Brazil would remain listed on the Sao Paulo stock exchange and Banco Santander’s shares (parent company) would be listed on that market as well.

The offer will be subject to customary conditions for this type of transaction, including the granting of the relevant regulatory authorizations and approval at Santander Brasil’s and Banco Santander’s general shareholders’ meeting.

F-18

2. Accounting policies

The accounting policies applied in preparing the consolidated financial statements were as follows:

a) Foreign currency transactions

i. Functional currency

The Group’s functional currency is the euro. Therefore, all balances and transactions denominated in currencies other than the euro are deemed to be denominated in foreign currency.

ii. Translation of foreign currency balances

Foreign currency balances are translated to euros in two consecutive stages:

• Translation of foreign currency to the functional currency (currency of the main economic environment in which the entity operates), and

• Translation to euros of the balances held in the functional currencies of entities whose functional currency is not the euro.

Translation of foreign currency to the functional currency

Foreign currency transactions performed by consolidated entities (or entities accounted for using the equity method) not located in EMU countries are initially recognized in their respective currencies. Monetary items in foreign currency are subsequently translated to their functional currencies using the closing rate.

Furthermore:

• Non-monetary items measured at historical cost are translated to the functional currency at the exchange rate at the date of acquisition.

• Non-monetary items measured at fair value are translated at the exchange rate at the date when the fair value was determined.

• Income and expenses are translated at the average exchange rates for the year for all the transactions performed during the year. When applying this criterion, the Group considers whether there have been significant changes in the exchange rates in the year which, in view of their materiality with respect to the consolidated financial statements taken as a whole, would make it necessary to use the exchange rates at the transaction date rather than the aforementioned average exchange rates.

• The balances arising from non-hedging forward foreign currency/foreign currency and foreign currency/euro purchase and sale transactions are translated at the closing rates prevailing in the forward foreign currency market for the related maturity.

F-19

Translation of functional currencies to euros

If the functional currency is not the euro, the balances in the financial statements of the consolidated entities (or entities accounted for using the equity method) are translated to euros as follows:

• Assets and liabilities, at the closing rates.

• Income and expenses, at the average exchange rates for the year.

• Equity items, at the historical exchange rates.

iii. Recognition of exchange differences

The exchange differences arising on the translation of foreign currency balances to the functional currency are generally recognized at their net amount under Exchange differences in the consolidated income statement, except for exchange differences arising on financial instruments at fair value through profit or loss, which are recognized in the consolidated income statement without distinguishing them from other changes in fair value, and for exchange differences arising on non-monetary items measured at fair value through equity, which are recognized under Valuation adjustments - Exchange differences.

The exchange differences arising on the translation to euros of the financial statements denominated in functional currencies other than the euro are recognized under Valuation adjustments - Exchange differences in the consolidated balance sheet, whereas those arising on the translation to euros of the financial statements of entities accounted for using the equity method are recognized under Valuation adjustments - Entities accounted for using the equity method, until the related item is derecognized, at which time they are recognized in the consolidated income statement.

iv. Entities located in hyperinflationary economies

In 2009 the Group sold substantially all its businesses in Venezuela and at December 31, 2013 its net assets in that country amounted to only EUR 1 million (December 31, 2012: EUR 3 million; December 31, 2011: EUR 10 million).

In view of the foregoing, at December 31, 2013, 2012 and 2011 none of the functional currencies of the consolidated entities and associates located abroad related to hyperinflationary economies as defined by International Financial Reporting Standards as adopted by the European Union. Accordingly, at 2013, 2012 and 2011 year-end it was not necessary to adjust the financial statements of any of the consolidated entities or associates to correct for the effect of inflation.

v. Exposure to foreign currency risk

The Group hedges a portion of these permanent positions using foreign exchange derivative financial instruments (see Note 36). Also, the Group manages foreign currency risk by dynamically hedging its position over time (with a potential impact on profit or loss) and attempting to limit the impact of currency depreciations and, in turn, optimizing the finance cost of the hedges.

F-20

The following tables show the sensitivity of consolidated profit and consolidated equity to changes in the foreign currency positions arising from all the Group’s items denominated in foreign currencies due to 1% variations in the various foreign currencies in which the Group has material balances.

The estimated effect on the Group’s consolidated equity and consolidated profit of a 1% appreciation of the euro against the related currency is as follows:

	Millions of euros
	Effect on consolidated equity									Effect on consolidated profit
Currency	2013			2012			2011			2013			2012			2011
US dollar		(74.2	)		(71.6	)		(43.6	)		(9.0	)		(8.3	)		(19.4	)
Chilean peso		(16.2	)		(19.3	)		(8.6	)		(6.7	)		(4.8	)		(1.4	)
Pounds sterling		(173.1	)		(165.4	)		(150.1	)		(7.9	)		(11.0	)		(0.6	)
Mexican peso		(9.7	)		(11.6	)		(17.5	)		(7.8	)		(9.8	)		(1.3	)
Brazilian real		(73.8	)		(149.6	)		(208.3	)		(3.9	)		(20.0	)		(23.0	)
Polish zloty		(32.5	)		(44.3	)		(37.9	)		(3.8	)		(3.3	)		(1.0	)

Similarly, the estimated effect on the Group’s consolidated equity and consolidated profit of a 1% depreciation of the euro against the related currency is as follows:

	Millions of euros
	Effect on consolidated equity						Effect on consolidated profit
Currency	2013		2012		2011		2013		2012		2011
US dollar		75.7		73.1		44.5		9.2		8.5		19.8
Chilean peso		16.5		19.6		8.8		6.9		4.9		1.1
Pounds sterling		176.6		168.8		153.2		8.0		11.2		0.6
Mexican peso		9.9		11.8		17.8		8.0		10.0		1.4
Brazilian real		75.4		147.8		117.9		4.0		20.5		23.5
Polish zloty		33.1		40.5		38.6		3.8		3.4		1.0

The foregoing data were obtained as follows:

a. Effect on consolidated equity: in accordance with the accounting policy detailed in Note 2.a.iii, the exchange differences arising on the translation to euros of the financial statements in the functional currencies of the Group entities whose functional currency is not the euro are recognized in consolidated equity. The possible effect that a change in the exchange rates of the related currency would have on the Group’s consolidated equity was therefore determined by applying the aforementioned change to the net value of each unit’s assets and liabilities -including, where appropriate, the related goodwill- and by taking into consideration the offsetting effect of the hedges of net investments in foreign operations.

b. Effect on consolidated profit: the effect was determined by applying the fluctuations in the average exchange rates used for the year, as indicated in Note 2.a.ii, to translate to euros the income and expenses of the consolidated entities whose functional currency is not the euro, taking into consideration, where appropriate, the offsetting effect of the various hedging transactions in place.

The estimates used to obtain the foregoing data were performed considering the effects of the exchange rate fluctuations in isolation from the effect of the performance of other variables, the changes in which would affect equity and profit, such as variations in the interest rates of the reference currencies or other market factors. Accordingly, all variables other than the exchange rate fluctuations were kept constant with respect to their positions at December 31, 2013, 2012 and 2011.

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b) Basis of consolidation

i. Subsidiaries

Subsidiaries are defined as entities over which the Bank has the capacity to exercise control; the Bank controls an entity when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

The financial statements of the subsidiaries are fully consolidated with those of the Bank. Accordingly, all balances and effects of the transactions among the consolidated entities are eliminated on consolidation.

On acquisition of control of a subsidiary, its assets, liabilities and contingent liabilities are recognized at their acquisition-date fair values. Any positive differences between the acquisition cost and the fair values of the identifiable net assets acquired are recognized as goodwill (see Note 17). Negative differences are recognized in profit or loss on the date of acquisition.

Additionally, the share of third parties of the Group’s equity is presented under Non-controlling interests in the consolidated balance sheet (see Note 28). Their share of the profit for the year is presented under Profit attributable to non-controlling interests in the consolidated income statement.

The results of subsidiaries acquired during the year are included in the consolidated income statement from the date of acquisition to year-end. Similarly, the results of subsidiaries disposed of during the year are included in the consolidated income statement from the beginning of the year to the date of disposal.

At December 31, 2013, the Group controlled the following companies in which it held an ownership interest of less than 50% of the share capital: (i) Luri 1, S.A., (ii) Luri 2, S.A. and (iii) Luri Land, S.A. The percentage ownership interest in the aforementioned companies was 5.8%, 5% and 5.36%, respectively (see Appendix I). Although the Group holds less than half the voting power, it manages and, as a result, exercises control over these entities. The company object of these entities is the acquisition of real estate and other general operations relating thereto, including the rental, purchase and sale of properties.

The impact of the consolidation of these companies on the Group’s consolidated financial statements is immaterial.

The Appendices contain information on the subsidiaries.

ii. Interests in joint ventures (jointly controlled entities)

Joint ventures are deemed to be ventures that are not subsidiaries but which are jointly controlled by two or more unrelated entities. This is evidenced by contractual arrangements whereby two or more entities have interest in entities so that decisions on significant activities require the unanimous consent of all the parties sharing control.

In the consolidated financial statements, investments in jointly controlled entities are accounted for using the equity method, i.e. at the Group’s share of net assets of the investee, after taking into account the dividends received therefrom and other equity eliminations. The profits and losses resulting from transactions with a jointly controlled entity are eliminated to the extent of the Group’s interest therein.

F-22

At December 31, 2013, 2012 and 2011, the Group exercised joint control of Santander Consumer USA Holdings Inc. (SCUSA), despite holding 65% of its share capital. As detailed in Note 3.b.v, this decision was based on the existence of a shareholders’ agreement that requires joint approval of certain strategic, financial and operating decisions, as well as other significant decisions associated with the ordinary management of SCUSA.

Also, at December 31, 2013, 2012, and 2011, the Group exercised joint control of Luri 3, S.A., despite holding 10% of its share capital. This decision is based on the Group’s presence on the company’s board of directors, in which the agreement of all members is required for decision-making.

The Appendices contain information on the jointly controlled entities.

iii. Associates

Associates are entities over which the Bank is in a position to exercise significant influence, but not control or joint control. It is presumed that the Bank exercises significant influence if it holds 20% or more of the voting power of the investee.

In the consolidated financial statements, investments in associates are accounted for using the equity method, i.e. at the Group’s share of net assets of the investee, after taking into account the dividends received therefrom and other equity eliminations. The profits and losses resulting from transactions with an associate are eliminated to the extent of the Group’s interest in the associate.

There are certain investments in entities (in which the Group owns 20% or more of the voting power) that are not considered to be associates, since the Group is not in a position to exercise significant influence over them. These investments are not significant for the Group and are recognized under Available-for-sale financial assets.

The Appendices contain information on the associates.

iv. Structured entities

When the Group incorporates entities, or holds ownership interests therein, to enable its customers to access certain investments, or for the transfer of risks or other purposes, also called structured entities since the voting or similar power is not a key factor in deciding who controls the entity, the Group determines, using internal criteria and procedures and taking into consideration the applicable legislation, whether control (as defined above) exists and, therefore, whether these entities should be consolidated. These entities include the securitization special purpose vehicles, which are consolidated in the case of the SPVs over which, based on the aforementioned analysis, it is considered that the Group continues to exercise control.

The balances associated with unconsolidated structured entities are not material with respect to the Group’s consolidated financial statements.

v. Business combinations

A business combination is the bringing together of two or more separate entities or economic units into one single entity or group of entities.

F-23

Business combinations whereby the Group obtains control over an entity are recognized for accounting purposes as follows:

• The Group measures the cost of the business combination, which is normally the consideration transferred, defined as the acquisition-date fair values of the assets transferred, the liabilities incurred to the former owners of the acquire and the equity instruments issued, if any, by the acquirer. In cases where the amount of the consideration to be transferred has not been definitively established at the acquisition date, but rather depends on future events, any contingent consideration is recognized as part of the consideration transferred and measured at its acquisition-date fair value; also, acquisition-related costs do not for these purposes form part of the cost of the business combination.

• The fair values of the assets, liabilities and contingent liabilities of the acquired entity or business, including any intangible assets which might not have been recognized by the acquire, are estimated and recognized in the consolidated balance sheet; the Group also estimates the amount of any non-controlling interests and the fair value of the previously held equity interest in the acquire.

• Any positive difference between the aforementioned items is recognized as discussed in Note 2.m. Any negative difference is recognized under Gains from bargain purchases arising in business combinations in the consolidated income statement.

Goodwill is only measured and recognized once, when control is obtained of a business.

vi. Changes in the levels of ownership interests in subsidiaries

Acquisitions and disposals not giving rise to a change in control are recognized as equity transactions, and no gain or loss is recognized in the income statement and the initially recognized goodwill is not remeasured. The difference between the consideration transferred or received and the decrease or increase in non-controlling interests, respectively, is recognized in reserves.

Similarly, when control over a subsidiary is lost, the assets, liabilities and non-controlling interests and any other items recognized in valuation adjustments of that company are derecognized from the consolidated balance sheet, and the fair value of the consideration received and of any remaining equity interest is recognized. The difference between these amounts is recognized in profit or loss.

With respect to non-monetary contributions of businesses to jointly controlled entities, the IASB has acknowledged the existence of a conflict between IFRS 10.25, which establishes that if control is lost the remaining equity interest is measured at fair value, recognizing the full amount of the gain or loss in profit or loss, and IAS 28.28, which -for transactions within its scope- would only permit recognition of the portion of the gain or loss attributable to the capital owned by the other venturers in the jointly controlled entity. The IASB is expected to issue a definitive positioning in this regard in the second quarter of 2014. Until that date, the Group has opted to apply, in a consistent manner, the provisions of IFRS 10 (previously IAS 27), a treatment that coincides with that proposed by the IASB in the latest drafts, to transactions under the scope of the aforementioned standards.

vii. Acquisitions and disposals

Note 3 provides information on the most significant acquisitions and disposals in 2013, 2012 and 2011.

F-24

c) Definitions and classification of financial instruments

i. Definitions

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

An equity instrument is any agreement that evidences a residual interest in the assets of the issuing entity after deducting all of its liabilities.

A financial derivative is a financial instrument whose value changes in response to the change in an observable market variable (such as an interest rate, foreign exchange rate, financial instrument price, market index or credit rating), whose initial investment is very small compared with other financial instruments with a similar response to changes in market factors, and which is generally settled at a future date.

Hybrid financial instruments are contracts that simultaneously include a non-derivative host contract together with a derivative, known as an embedded derivative, that is not separately transferable and has the effect that some of the cash flows of the hybrid contract vary in a way similar to a stand-alone derivative.

Compound financial instruments are contracts that simultaneously create for their issuer a financial liability and an own equity instrument (such as convertible bonds, which entitle their holders to convert them into equity instruments of the issuer).

The following transactions are not treated for accounting purposes as financial instruments:

• Investments in associates and jointly controlled entities (see Note 13).

• Rights and obligations under employee benefit plans (see Note 25).

• Rights and obligations under insurance contracts (see Note 15).

• Contracts and obligations relating to employee remuneration based on own equity instruments (see Note 34).

ii. Classification of financial assets for measurement purposes

Financial assets are initially classified into the various categories used for management and measurement purposes, unless they have to be presented as Non-current assets held for sale or they relate to Cash and balances with central banks, Changes in the fair value of hedged items in portfolio hedges of interest rate risk (asset side), Hedging derivatives and Investments, which are reported separately.

Financial assets are included for measurement purposes in one of the following categories:

• Financial assets held for trading (at fair value through profit or loss): this category includes the financial assets acquired for the purpose of generating a profit in the near term from fluctuations in their prices and financial derivatives that are not designated as hedging instruments.

• Other financial assets at fair value through profit or loss: this category includes hybrid financial assets not held for trading that are measured entirely at fair value and financial assets not held for trading that are included in this category in order to obtain more relevant information, either because this eliminates or significantly reduces recognition or measurement inconsistencies (accounting mismatches) that would otherwise arise from measuring assets or liabilities or recognizing the gains or losses on them on different bases, or because a group of financial assets or financial assets and liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided on that basis to the Group’s key management personnel. Financial assets may only be included in this category on the date they are acquired or originated.

F-25

• Available-for-sale financial assets: this category includes debt instruments not classified as Held-to-maturity investments, Loans and receivables or Financial assets at fair value through profit or loss, and equity instruments issued by entities other than subsidiaries, associates and jointly controlled entities, provided that such instruments have not been classified as Financial assets held for trading or as Other financial assets at fair value through profit or loss.

• Loans and receivables: this category includes the investment arising from ordinary lending activities, such as the cash amounts of loans drawn down and not yet repaid by customers or the deposits placed with other institutions, whatever the legal instrument, unquoted debt securities and receivables from the purchasers of goods, or the users of services, constituting part of the Group’s business.

The consolidated entities generally intend to hold the loans and credits granted by them until their final maturity and, therefore, they are presented in the consolidated balance sheet at their amortized cost (which includes any reductions required to reflect the estimated losses on their recovery).

• Held-to-maturity investments: this category includes debt instruments traded in an active market, with fixed maturity and with fixed or determinable payments, for which the Group has both the intention and proven ability to hold to maturity.

iii. Classification of financial assets for presentation purposes

Financial assets are classified by nature into the following items in the consolidated balance sheet:

• Cash and balances with central banks: cash balances and balances receivable on demand relating to deposits with the Bank of Spain and other central banks.

• Loans and advances: includes the debit balances of all credit and loans granted by the Group, other than those represented by securities, as well as finance lease receivables and other debit balances of a financial nature in favor of the Group, such as cheques drawn on credit institutions, balances receivable from clearing houses and settlement agencies for transactions on the stock exchange and organized markets, bonds given in cash, capital calls, fees and commissions receivable for financial guarantees and debit balances arising from transactions not originating in banking transactions and services, such as the collection of rentals and similar items. They are classified, depending on the institutional sector to which the debtor belongs, under:

• Loans and advances to credit institutions: credit of any nature, including deposits and money market operations, in the name of credit institutions.

• Loans and advances to customers: includes the remaining credit, including money market operations through central counterparties.

F-26

• Debt instruments: bonds and other securities that represent a debt for their issuer, that generate an interest return, and that are in the form of certificates or book entries.

• Equity instruments: financial instruments issued by other entities, such as shares, which have the nature of equity instruments for the issuer, unless they are investments in subsidiaries, jointly controlled entities or associates. Investment fund units are included in this item.

• Trading derivatives: includes the fair value in favor of the Group of derivatives which do not form part of hedge accounting, including embedded derivatives separated from hybrid financial instruments.

• Changes in the fair value of hedged items in portfolio hedges of interest rate risk: this item is the balancing entry for the amounts credited to the consolidated income statement in respect of the measurement of the portfolios of financial instruments which are effectively hedged against interest rate risk through fair value hedging derivatives.

• Hedging derivatives: includes the fair value in favor of the Group of derivatives, including embedded derivatives separated from hybrid financial instruments, designated as hedging instruments in hedge accounting.

iv. Classification of financial liabilities for measurement purposes

Financial liabilities are initially classified into the various categories used for management and measurement purposes, unless they have to be presented as Liabilities associated with non-current assets held for sale or they relate to Hedging derivatives or Changes in the fair value of hedged items in portfolio hedges of interest rate risk (liability side), which are reported separately.

Financial liabilities are classified for measurement purposes into one of the following categories:

• Financial liabilities held for trading (at fair value through profit or loss): this category includes the financial liabilities issued for the purpose of generating a profit in the near term from fluctuations in their prices, financial derivatives not considered to qualify for hedge accounting and financial liabilities arising from the outright sale of financial assets acquired under reverse repurchase agreements (“reverse repos”) or borrowed (short positions).

• Other financial liabilities at fair value through profit or loss: financial liabilities are included in this category when more relevant information is obtained, either because this eliminates or significantly reduces recognition or measurement inconsistencies (accounting mismatches) that would otherwise arise from measuring assets or liabilities or recognizing the gains or losses on them on different bases, or because a group of financial liabilities or financial assets and liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided on that basis to the Group’s key management personnel. Liabilities may only be included in this category on the date when they are issued or originated.

• Financial liabilities at amortized cost: financial liabilities, irrespective of their instrumentation and maturity, not included in any of the above-mentioned categories which arise from the ordinary borrowing activities carried on by financial institutions.

F-27

v. Classification of financial liabilities for presentation purposes

Financial liabilities are classified by nature into the following items in the consolidated balance sheet:

• Deposits: includes all repayable balances received in cash by the Group, other than those instrumented as marketable securities and those having the substance of subordinated liabilities. This item also includes cash bonds and cash consignments received the amount of which may be invested without restriction. Deposits are classified on the basis of the creditor’s institutional sector into:

• Deposits from central banks: deposits of any nature, including credit received and money market operations received from the Bank of Spain or other central banks.

• Deposits from credit institutions: deposits of any nature, including credit received and money market operations in the name of credit institutions.

• Customer deposits: includes the remaining deposits, including money market operations through central counterparties.

• Marketable debt securities: includes the amount of bonds and other debt represented by marketable securities, other than those having the substance of subordinated liabilities. This item includes the component considered to be a financial liability of issued securities that are compound financial instruments.

• Trading derivatives: includes the fair value, with a negative balance for the Group, of derivatives, including embedded derivatives separated from the host contract, which do not form part of hedge accounting.

• Short positions: includes the amount of financial liabilities arising from the outright sale of financial assets acquired under reverse repurchase agreements or borrowed.

• Subordinated liabilities: amount of financing received which, for the purposes of payment priority, ranks behind ordinary debt. This category also includes the financial instruments issued by the Group which, although capital for legal purposes, do not meet the requirements for classification as equity, such as certain preference shares issued.

• Other financial liabilities: includes the amount of payment obligations having the nature of financial liabilities not included in other items, and liabilities under financial guarantee contracts, unless they have been classified as doubtful.

• Changes in the fair value of hedged items in portfolio hedges of interest rate risk: this item is the balancing entry for the amounts charged to the consolidated income statement in respect of the measurement of the portfolios of financial instruments which are effectively hedged against interest rate risk through fair value hedging derivatives.

• Hedging derivatives: includes the fair value of the Group’s liability in respect of derivatives, including embedded derivatives separated from hybrid financial instruments, designated as hedging instruments in hedge accounting.

F-28

d) Measurement of financial assets and liabilities and recognition of fair value changes

In general, financial assets and liabilities are initially recognized at fair value which, in the absence of evidence to the contrary, is deemed to be the transaction price. Financial instruments not measured at fair value through profit or loss are adjusted by the transaction costs. Financial assets and liabilities are subsequently measured at each year-end as follows:

i. Measurement of financial assets

Financial assets are measured at fair value, without deducting any transaction costs that may be incurred on their disposal, except for loans and receivables, held-to-maturity investments, equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have those equity instruments as their underlying and are settled by delivery of those instruments.

The fair value of a financial asset on a given date is taken to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The most objective and common reference for the fair value of a financial instrument is the price that would be paid for it on an active, transparent and deep market (quoted price or market price). At December 31, 2013, there were no significant investments in quoted financial instruments which have ceased to be recognized at their quoted price because their market cannot be deemed to be active.

If there is no market price for a given financial instrument, its fair value is estimated on the basis of the price established in recent transactions involving similar instruments and, in the absence thereof, of valuation techniques commonly used by the international financial community, taking into account the specific features of the instrument to be measured and, particularly, the various types of risk associated with it.

All derivatives are recognized in the balance sheet at fair value from the trade date. If the fair value is positive, they are recognized as an asset and if the fair value is negative, they are recognized as a liability. The fair value on the trade date is deemed, in the absence of evidence to the contrary, to be the transaction price. The changes in the fair value of derivatives from the trade date are recognized in Gains/losses on financial assets and liabilities (net) in the consolidated income statement. Specifically, the fair value of financial derivatives traded in organized markets included in the portfolios of financial assets or liabilities held for trading is deemed to be their daily quoted price and if, for exceptional reasons, the quoted price cannot be determined on a given date, these financial derivatives are measured using methods similar to those used to measure OTC derivatives.

The fair value of OTC derivatives is taken to be the sum of the future cash flows arising from the instrument, discounted to present value at the date of measurement (present value or theoretical close) using valuation techniques commonly used by the financial markets: net present value (NPV), option pricing models and other methods.

Loans and receivables and Held-to-maturity investments are measured at amortized cost using the effective interest method. Amortized cost is understood to be the acquisition cost of a financial asset or liability plus or minus, as appropriate, the principal repayments and the cumulative amortization (taken to the income statement) of the difference between the initial cost and the maturity amount. In the case of financial assets, amortized cost furthermore includes any reductions for impairment or uncollectibility. In the case of loans and receivables hedged in fair value hedges, the changes in the fair value of these assets related to the risk or risks being hedged are recognized.

F-29

The effective interest rate is the discount rate that exactly matches the carrying amount of a financial instrument to all its estimated cash flows of all kinds over its remaining life. For fixed rate financial instruments, the effective interest rate coincides with the contractual interest rate established on the acquisition date plus, where applicable, the fees and transaction costs that, because of their nature, form part of their financial return. In the case of floating rate financial instruments, the effective interest rate coincides with the rate of return prevailing in all connections until the next benchmark interest reset date.

Equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have those instruments as their underlying and are settled by delivery of those instruments are measured at acquisition cost adjusted, where appropriate, by any related impairment loss.

The amounts at which the financial assets are recognized represent, in all material respects, the Group’s maximum exposure to credit risk at each reporting date. Also, the Group has received collateral and other credit enhancements to mitigate its exposure to credit risk, which consist mainly of mortgage guarantees, cash collateral, equity instruments and personal security, assets leased out under finance lease and full-service lease agreements, assets acquired under repurchase agreements, securities loans and credit derivatives.

ii. Measurement of financial liabilities

In general, financial liabilities are measured at amortized cost, as defined above, except for those included under Financial liabilities held for trading and Other financial liabilities at fair value through profit or loss and financial liabilities designated as hedged items (or hedging instruments) in fair value hedges, which are measured at fair value.

F-30

iii. Valuation techniques

The following table shows a summary of the fair values, at 2013, 2012 and 2011 year-end, of the financial assets and liabilities indicated below, classified on the basis of the various measurement methods used by the Group to determine their fair value:

	Millions of euros
	2013						2012						2011
	Published price quotations in active markets		Internal models		Total		Published price quotations in active markets		Internal models		Total		Published price quotations in active markets		Internal models		Total
Financial assets held for trading		46,472		68,817		115,289		48,014		129,903		177,917		45,528		127,110		172,638
Other financial assets at fair value through profit or loss		3,687		27,694		31,381		3,387		24,969		28,356		2,324		17,239		19,563
Available-for-sale financial assets (1)		62,343		20,995		83,338		65,720		26,039		91,759		68,325		17,830		86,155
Hedging derivatives (assets)		221		8,080		8,301		128		7,808		7,936		1,497		8,401		9,898
Financial liabilities held for trading		14,643		80,030		94,673		15,985		127,257		143,242		16,084		130,864		146,948
Other financial liabilities at fair value through profit or loss		—		42,311		42,311		—		45,418		45,418		—		44,909		44,909
Hedging derivatives (liabilities)		187		5,096		5,283		96		6,348		6,444		592		5,852		6,444
Liabilities under insurance contracts		—		1,430		1,430		—		1,425		1,425		—		517		517

(1) In addition to the financial instruments measured at fair value shown in the foregoing table, at December 31, 2013, 2012 and 2011, the Group held equity instruments classified as available-for-sale financial assets and carried at cost amounting to EUR 461 million, EUR 507 million and EUR 458 million, respectively (see Note 51.c).

Financial instruments at fair value, determined on the basis of published price quotations in active markets (Level 1), include government debt securities, private-sector debt securities, derivatives traded in organized markets, securitized assets, shares, short positions and fixed-income securities issued.

In cases where price quotations cannot be observed, management makes its best estimate of the price that the market would set, using its own internal models. In most cases, these internal models use data based on observable market parameters as significant inputs (Level 2) and, in very specific cases, they use significant inputs not observable in market data (Level 3). In order to make these estimates, various techniques are employed, including the extrapolation of observable market data. The best evidence of the fair value of a financial instrument on initial recognition is the transaction price, unless the fair value of the instrument can be obtained from other market transactions performed with the same or similar instruments or can be measured by using a valuation technique in which the variables used include only observable market data, mainly interest rates.

The Group did not make any material transfers of financial instruments between the measurement levels described above in 2013.

General measurement bases

The Group has developed a formal process for the systematic valuation and management of financial instruments, which has been implemented worldwide across all the Group’s units. The governance scheme for this process distributes responsibilities between two independent divisions: Treasury (development, marketing and daily management of financial products and market data) and Risk (on a periodic basis, validation of pricing models and market data, computation of risk metrics, new transaction approval policies, management of market risk and implementation of fair value adjustment policies).

F-31

The approval of new products follows a sequence of steps (request, development, validation, integration in corporate systems and quality assurance) before the product is brought into production. This process ensures that pricing systems have been properly reviewed and are stable before they are used.

The following subsections set forth the most important products and families of derivatives, and the related valuation techniques and inputs, by asset class:

Fixed income and inflation

The fixed income asset class includes basic instruments such as interest rate forwards, interest rate swaps and cross currency swaps, which are valued using the net present value of the discounted estimated future cash flows taking into account basis swap and cross currency spreads, depending on the payment frequency and currency of each leg of the derivative. Vanilla options, including caps, floors and swaptions, are priced using the Black-Scholes model, which is one of the benchmark industry models. More exotic derivatives are priced using more complex models which are generally accepted as standard across institutions.

These pricing models are fed with observable data such as deposit interest rates, futures rates, cross currency swap and constant maturity swap rates, and basis spreads, on the basis of which different yield curves are calculated, depending on the payment frequency and discounting curves for each currency. In the case of options, implied volatilities are also used as model inputs. These volatilities are observable in the market for cap and floor options and swaptions, and interpolation and extrapolation of volatilities from the quoted ranges are carried out using generally accepted industry models. The pricing of more exotic derivatives may require the use of non-observable data or parameters, such as correlation (among interest rates and cross-asset), mean reversion rates and prepayment rates, which are usually defined from historical data or through calibration.

Inflation-related assets include inflation-linked bonds and zero-coupon or year-on-year inflation-linked swaps, valued with the present value method using forward estimation and discounting. Derivatives on inflation indices are priced using standard and more complex bespoke models, as appropriate. Valuation inputs of these models consider inflation-linked swap spreads observable in the market and estimations of inflation seasonality, on the basis of which a forward inflation curve is calculated. Also, implied volatilities taken from zero-coupon and year-on-year inflation options are also inputs for the pricing of more complex derivatives.

Equity and foreign exchange

The most important products in these asset classes are forward and futures contracts; they also include vanilla, listed and OTC (over-the-counter) derivatives on single underlying assets and baskets of assets. Vanilla options are priced using the standard Black-Scholes model and more exotic derivatives involving forward returns, average performance, or digital, barrier or callable features are priced using generally accepted industry models and bespoke models, as appropriate. For derivatives on illiquid stocks, hedging takes into account the liquidity constraints in models.

The inputs of equity models consider yield curves, spot prices, dividends, asset borrowing costs (repo margin spreads), implied volatilities, correlation among equity stocks and indices, and cross-asset correlation. Implied volatilities are obtained from market quotes of European and American vanilla call and put options. Various interpolation and extrapolation techniques are used to obtain continuous volatility surfaces for illiquid stocks. Dividends are usually estimated for the mid and long term. Correlations are implied, when possible, from market quotes of correlation-dependent products. In all other cases, proxies are used for correlations between benchmark underlyings or correlations are obtained from historical data.

F-32

The inputs of foreign exchange models include the interest rate curve for each currency, the spot foreign exchange price and the implied volatilities and correlation among assets of this type. Volatilities are obtained from European vanilla call and put options which are quoted in markets as at-the-money, risk reversal or butterfly options. Illiquid currency pairs are usually handled by using the data of the liquid pairs from which the illiquid currency can be derived. For more exotic products, unobservable model parameters may be estimated by fitting to reference prices provided by other non-quoted market sources.

Credit

The most common instrument in this asset class is the credit default swap (CDS), which is used to hedge credit exposure to third parties. In addition, valuation models for first-to-default (FTD), n-to-default (NTD) and single-tranche collateralized debt obligation (CDO) products are also available. These products are valued with standard industry models, which estimate probability of default of a single issuer (for CDSs) or the joint probability of default of more than one issuer for FTDs and CDOs.

Valuation inputs are the interest rate curve, the CDS spread curve and the recovery rate. The CDS spread curve is obtained in the market for indices and important individual issuers. For less liquid issuers, this spread curve is estimated using proxies or other credit-dependent instruments. Recovery rates are usually set to standard values. For listed single-tranche CDOs, the correlation of joint default of several issuers is implied from the market. For FTDs, NTDs and bespoke CDOs, the correlation is estimated from proxies or historical data when no other option is available.

Valuation adjustment for counterparty risk or default risk

The credit valuation adjustment (CVA) is a valuation adjustment to OTC derivatives as a result of the risk associated with the credit exposure assumed to each counterparty.

The CVA is calculated taking into account potential exposure with each counterparty in each future period. The CVA for a specific counterparty is equal to the sum of the CVA for all the periods. The following inputs are used to calculate the CVA:

• Expected exposure: including for each transaction the mark-to-market (MtM) value plus an add-on for the potential future exposure for each period. Mitigating factors such as netting and collateral agreements are taken into account, as well as temporary impairment for derivatives with interim payments.

• LGD: percentage of final loss assumed in a counterparty credit event/default.

• Probability of default: for cases where there is no market information (the CDS quoted spread curve, etc.), probabilities based on ratings, preferably internal ones, are used.

• Discount factor curve.

The debt valuation adjustment (DVA) is a similar valuation adjustment to the CVA but, in this case, as a result of the own risk of the Group assumed by its counterparties in OTC derivatives.

The CVA and DVA recognized at December 31, 2013 amounted to EUR 739 million and EUR 234 million, respectively.

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Valuation adjustments due to model risk

The valuation models described above are not significantly subjective, since they can be adjusted and recalibrated, where appropriate, through the internal calculation of the fair value and the subsequent comparison with the related actively traded price. However, fair value adjustments may be necessary when market quoted prices are not available for comparison purposes.

The sources of risk are associated with uncertain model parameters, illiquid underlying issuers, low quality market data or missing risk factors (sometimes the best available option is to use limited models with controllable risk). In these situations, the Group calculates and applies valuation adjustments in accordance with general industry practice. The main sources of model risk are described below:

In fixed income markets, model risks include the correlation among fixed income indices, basis spread modelling, calibration risk of model parameters and the treatment of near-zero or negative interest rates. Other sources of risk arise from the estimation of market data, such as volatilities or interest rate curves, whether used for estimation or cash flow discounting purposes.

In equity markets, model risks include forward skew modelling, the impact of stochastic interest rates, correlation and multi-curve modelling. Also, other sources of risk arise from the hedging management of digital, callable and barrier option payments. In addition, sources of risk arising from the estimation of market data such as dividends, and correlation for quanto and composite options must also be considered.

For specific financial instruments relating to home mortgage loans secured by financial institutions in the UK (which are regulated and partially financed by the Government) and property asset derivatives, the main input is the Halifax House Price Index (HPI). In these cases, risk assumptions include estimates of the future growth and the volatility of the HPI, mortality and the implied credit spreads.

Inflation markets are exposed to model risk resulting from the uncertainty of modelling the correlation structure among various CPI (Consumer Price Index) rates. Another source of risk may arise from the bid-offer spread of inflation-linked swaps.

Foreign exchange markets are exposed to model risk resulting from forward skew modelling, the impact of stochastic interest rates and correlation modelling for multi-asset instruments. Risk may also arise from market data, due to the existence of specific illiquid foreign exchange pairs.

The most important source of model risk for credit derivatives relates to the estimation of the correlation between the probabilities of default of different underlying issuers. For illiquid underlying issuers, the CDS spread may not be well defined.

F-34

Set forth below are the financial instruments at fair value whose measurement was based on internal models (Levels 2 and 3) at December 31, 2013, 2012 and 2011:

	Millions of euros
	Fair values calculated using internal models at 12/31/13
	Level 2		Level 3		Valuation techniques	Main assumptions
ASSETS:		124,079		1,507
Financial assets held for trading		68,535		282
Loans and advances to credit institutions		5,502		—	Present Value Method	Observable market data
Loans and advances to customers (a)		5,079		—	Present Value Method	Observable market data
Debt and equity instruments		1,585		50	Present Value Method	Observable market data, HPI
Trading derivatives		56,369		232
Swaps		40,380		56	Present Value Method, Gaussian Copula (b)	Observable market data, basis, liquidity
Exchange rate options		849		16	Black-Scholes Model	Observable market data, liquidity
Interest rate options		7,375		—	Black’s Model, Heath-Jarrow-Morton Model	Observable market data, liquidity, correlation
Interest rate futures		16		—	Present Value Method	Observable market data
Index and securities options		2,953		56	Black-Scholes Model	Observable market data, dividends, correlation, liquidity, HPI
Other		4,796		104	Present Value Method, Monte Carlo simulation and other	Observable market data and other
Hedging derivatives		8,080		—
Swaps		6,920		—	Present Value Method	Observable market data, basis
Exchange rate options		400		—	Black-Scholes Model	Observable market data
Interest rate options		24		—	Black’s Model	Observable market data
Other		736		—	N/A	N/A
Other financial assets at fair value through profit or loss		27,184		510
Loans and advances to credit institutions		13,444		—	Present Value Method	Observable market data
Loans and advances to customers (c)		13,135		61	Present Value Method	Observable market data, HPI
Debt and equity instruments		605		449	Present Value Method	Observable market data
Available-for-sale financial assets		20,280		715
Debt and equity instruments		20,280		715	Present Value Method	Observable market data
LIABILITIES:		128,762		105
Financial liabilities held for trading		79,970		60
Deposits from central banks		3,866		—	Present Value Method	Observable market data
Deposits from credit institutions		7,468		—	Present Value Method	Observable market data
Customer deposits		8,500		—	Present Value Method	Observable market data
Debt and equity instruments		1		—	Present Value Method	Observable market data, liquidity
Trading derivatives		57,260		60
Swaps		41,156		2	Present Value Method, Gaussian Copula (b)	Observable market data, basis, liquidity, HPI
Exchange rate options		660		—	Black-Scholes Model	Observable market data, liquidity
Interest rate options		8,457		—	Black’s Model, Heath-Jarrow-Morton Model	Observable market data, liquidity, correlation
Index and securities options		4,252		—	Black-Scholes Model	Observable market data, dividends, correlation, liquidity, HPI
Interest rate and equity futures		88		—	Present Value Method	Observable market data
Other		2,647		58	Present Value Method, Monte Carlo simulation and other	Observable market data and other
Short positions		2,875		—
Hedging derivatives		5,096		—
Swaps		4,961		—	Present Value Method	Observable market data, basis
Exchange rate options		1		—	Black-Scholes Model	Observable market data
Interest rate options		13		—	Black’s Model	Observable market data
Other		121		—	N/A	N/A
Other financial liabilities at fair value through profit or loss		42,266		45	Present Value Method	Observable market data
Liabilities under insurance contracts		1,430		—	See Note 15

F-35

	Millions of euros								Valuation techniques
	Fair values calculated using internal models
	12/31/12				12/31/11
	Level 2		Level 3		Level 2		Level 3
ASSETS:		187,431		1,288		169,542		1,037
Financial assets held for trading		129,508		395		126,663		447
Loans and advances to credit institutions		9,843		—		4,636		—	Present Value Method
Loans and advances to customers (a)		9,162		—		8,056		—	Present Value Method
Debt and equity instruments		1,320		—		19,674		—	Present Value Method
Trading derivatives		109,183		395		94,298		447
Swaps		90,759		109		74,520		145	Present Value Method, Gaussian Copula (b)
Exchange rate options		708		46		964		95	Black-Scholes Model
Interest rate options		9,141		—		7,936		—	Black’s Model, Heath-Jarrow-Morton Model
Interest rate futures		78		—		91		—	Present Value Method
Index and securities options		3,188		—		3,728		—	Black-Scholes Model
Other		5,309		240		7,059		207	Present Value Method, Monte Carlo simulation and other
Hedging derivatives		7,808		—		8,400		1
Swaps		7,609		—		8,172		1	Present Value Method
Exchange rate options		43		—		161		—	Black-Scholes Model
Interest rate options		36		—		45		—	Black’s Model
Other		120		—		22		—	N/A
Other financial assets at fair value through profit or loss		24,500		469		16,882		357
Loans and advances to credit institutions		10,272		—		4,701		—	Present Value Method
Loans and advances to customers (c)		13,863		74		11,694		54	Present Value Method
Debt and equity instruments		365		395		487		303	Present Value Method
Available-for-sale financial assets		25,615		424		17,597		233
Debt and equity instruments		25,615		424		17,597		233	Present Value Method
LIABILITIES:		180,243		205		181,864		279
Financial liabilities held for trading		127,158		99		130,755		110
Deposits from central banks		1,128		—		7,740		—	Present Value Method
Deposits from credit institutions		8,292		—		9,287		—	Present Value Method
Customer deposits		8,890		7		16,574		—	Present Value Method
Debt and equity instruments		1		—		2		—	Present Value Method
Trading derivatives		108,847		92		97,152		110
Swaps		88,450		8		73,614		2	Present Value Method, Gaussian Copula (b)
Exchange rate options		766		6		946		11	Black-Scholes Model
Interest rate options		10,772		—		9,722		—	Black’s Model, Heath-Jarrow-Morton Model
Index and securities options		121		—		7,036		—	Black-Scholes Model
Interest rate and equity futures		4,816		—		273		—	Present Value Method
Other		3,922		78		5,560		97	Present Value Method, Monte Carlo simulation and other
Hedging derivatives		6,348		—		5,852		—
Swaps		5,860		—		5,639		—	Present Value Method
Exchange rate options		76		—		169		—	Black-Scholes Model
Interest rate options		17		—		21		—	Black’s Model
Other		395		—		23		—	N/A
Other financial liabilities at fair value through profit or loss		45,312		106		44,740		169	Present Value Method
Liabilities under insurance contracts		1,425		—		517		—	See Note 15

(a) Includes mainly short-term loans and reverse repurchase agreements with corporate customers (mainly brokerage and investment companies).

(b) Includes credit risk derivatives with a positive net fair value of EUR 56 million at December 31, 2013 (December 31, 2012: a positive net fair value of EUR 18 million; December 31, 2011: a negative net fair value of EUR 60 million). These assets and liabilities are measured using the Standard Gaussian Copula Model.

(c) Includes home mortgage loans to financial institutions in the UK (which are regulated and partly financed by the Government). The fair value of these loans was obtained using observable market variables, including current market transactions with similar amounts and collateral facilitated by the UK Housing Association. Since the Government is involved in these financial institutions, the credit risk spreads have remained stable and are homogeneous in this sector. The results arising from the valuation model are checked against current market transactions.

F-36

The measurements obtained using the internal models might have been different had other methods or assumptions been used with respect to interest rate risk, to credit risk, market risk and foreign currency risk spreads, or to their related correlations and volatilities. Nevertheless, the Bank’s directors consider that the fair value of the financial assets and liabilities recognized in the consolidated balance sheet and the gains and losses arising from these financial instruments are reasonable.

The net loss recognized in the consolidated income statement for 2013 arising from the aforementioned valuation models amounted to EUR 298 million (2012: net loss of EUR 229 million; 2011: net gain of EUR 1,006 million), of which a loss of EUR 2 million related to models whose significant inputs are unobservable market data (2012: a gain of EUR 20 million; 2011: a gain of EUR 59 million).

Level 3 financial instruments

Set forth below are the Group’s main financial instruments measured using unobservable market data that constitute significant inputs of the internal models (Level 3):

• Instruments (loans, debt instruments and derivatives) linked to the House Price Index (HPI) in Santander UK’s portfolio. Even if the valuation techniques used for these instruments may be the same as those used to value similar products (present value in the case of loans and debt instruments, and the Black-Scholes model for derivatives), the main factors used in the valuation of these instruments are the HPI spot rate, the growth rate of that rate, its volatility and mortality rates, which are not always observable in the market and, accordingly, these instruments are considered illiquid.

• The HPI spot rate: for some instruments the NSA HPI spot rate, which is directly observable and published on a monthly basis, is used. For other instruments where regional HPI rates must be used (published quarterly), adjustments are made to reflect the different composition of the rates and adapt them to the regional composition of Santander UK’s portfolio.

• HPI growth rate: this is not always directly observable in the market, especially for long maturities, and is estimated in accordance with existing quoted prices. To reflect the uncertainty implicit in these estimates, adjustments are made based on an analysis of the historical volatility of the HPI, incorporating reversion to the mean.

• HPI volatility: the long-term volatility is not directly observable in the market but is estimated on the basis of more short-term quoted prices and by making an adjustment to reflect the existing uncertainty, based on the standard deviation of historical volatility over various time periods.

• Mortality rates: these are based on published official tables and adjusted to reflect the composition of the customer portfolio for this type of product at Santander UK.

• Illiquid CDOs and CLOs in the portfolio of the treasury unit in Madrid. These are measured by grouping together the securities by type of underlying (sector/country), payment hierarchy (prime, mezzanine, junior, etc.), and assuming forecast conditional prepayment rates (CPR) and default rates, adopting conservative criteria.

F-37

The table below shows the effect, at December 31, 2013, on the fair value of the main financial instruments classified as Level 3 of a reasonable change in the assumptions used in the valuation. This effect was determined by applying the probable valuation ranges of the main unobservable inputs detailed in the following table:

Portfolio/Instrument (Level 3)	Valuation technique	Main unobservable inputs	Range	Weighted average			Impacts (in millions of euros)
							Unfavorable scenario			Favorable scenario
Financial assets held for trading
Debt and equity instruments	Partial differential equations	Long-term volatility	33.7% - 42.9%		38.30	%		(14	)		14
Trading derivatives	Present Value Method	Curves on ABR indices (*)	(a)		(a	)		(7	)		7
	Present Value Method, Modified Black-Scholes Model	HPI forward growth rate	0%-5%		2.3	%		(19	)		19
	Present Value Method, Modified Black-Scholes Model	HPI spot rate	n/a		572	(**)		(22	)		23
	Standard Gaussian Copula Model	Probability of default	0.1%-1.2%		0.70	%		(4	)		4
Other financial assets at fair value through profit or loss
Loans and advances to customers	Weighted average by probability (according to forecast mortality rates) of European HPI options, using the Black-Scholes model	HPI forward growth rate	0%-5%		3	%		(1	)		1
Debt and equity instruments	Weighted average by probability (according to forecast mortality rates) of HPI forwards, using the present value model	HPI forward growth rate	0%-5%		2.7	%		(19	)		17
	Weighted average by probability (according to forecast mortality rates) of HPI forwards, using the present value model	HPI spot	n/a		578	(**)		(24	)		24
	Adjusted average of quoted prices from independent sources	Credit spread	5%-15%		7.5	%		(7	)		7
Available-for-sale financial assets
Debt and equity instruments	Present Value Method, others	Non-performing loans and prepayment ratios, cost of capital, long-term earnings growth rate	(a)		(a	)		(3	)		3
Financial liabilities held for trading
Trading derivatives	Present Value Method, Modified Black-Scholes Model	HPI forward growth rate	0%-5%		1.6	%		(2	)		2
	Present Value Method, Modified Black-Scholes Model	HPI spot rate	n/a		565	(**)		(12	)		12
	Present Value Method, Modified Black-Scholes Model	Curves on ABR indices (*)	(a)		(a	)		—			—
Other liabilities at fair value through profit or loss	—	—	—		—			(b	)		(b	)

(*) ABR: Active Bank Rate. Average deposit interest rates (over 30, 90, 180 and 360 days) published by the Chilean Association of Banks and Financial Institutions (ABIF) in nominal currency (Chilean peso) and in real terms, adjusted for inflation (Unidad de Fomento - UF).

(**) There is a national HPI index in the UK and regional indices. The HPI spot value is the weighted average of the indices that correspond to the positions of each portfolio.

(a) The exercise was conducted for the unobservable inputs described in the Main unobservable inputs column under probable scenarios. The range and weighted average value used are not shown because the aforementioned exercise was conducted jointly for various inputs or variants thereof, and it was not possible to break down the results separately by type of input.

(b) The Group calculates the potential effect on the valuation of each of these instruments on a joint basis, irrespective of whether their individual valuation is positive (asset) or negative (liability), and the global effect associated with these financial instruments is broken down in the Other financial assets at fair value through profit or loss line included.

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Lastly, the changes in the financial instruments classified as Level 3 in 2013 and 2012 were as follows:

	2012		Changes																					2013
Millions of euros	Fair value calculated using internal models (Level 3)		Purchases		Sales			Issues		Settlements			Changes in fair value recognized in profit or loss (unrealized)			Changes in fair value recognized in profit or loss (realized)			Changes in fair value recognized in equity		Other			Fair value calculated using internal models (Level 3)
Financial assets held for trading		395		131		(164	)		—		(44	)		(4	)		2			—		(34	)		282
Debt and equity instruments		—		46		—					—			8			—					(4	)		50
Trading derivatives		395		85		(164	)		—		(44	)		(12	)		2			—		(30	)		232
Swaps		109		—		(62	)		—		—			19			—			—		(10	)		56
Exchange rate options		46		—		(1	)		—		—			(8	)		(3	)		—		(18	)		16
Index and securities options		—		85		—					(39	)		—			—					10			56
Other		240		—		(101	)		—		5			(23	)		5			—		(12	)		104
Hedging derivatives		—		—		—			—		—			—			—			—		—			—
Swaps		—		—		—			—		—			—			—			—		—			—
Other financial assets at fair value through profit or loss		469		111		(32	)		—		(17	)		18			9			—		(48	)		510
Loans and advances to customers		74		—		—			—		(11	)		(8	)		6			—		—			61
Debt and equity instruments		395		111		(32	)		—		(6	)		26			3			—		(48	)		449
Available-for-sale financial assets		424		277		(48	)		—		—			(1	)		(2	)		73		(8	)		715
TOTAL ASSETS		1,288		519		(244	)		—		(61	)		13			9			73		(89	)		1,507
Financial liabilities held for trading		99		—		(18	)		—		(14	)		(11	)		13			—		(9	)		60
Customer deposits		7		—		—			—		—			—			—			—		(7	)		—
Trading derivatives		92		—		(18	)		—		(14	)		(11	)		13			—		(2	)		60
Swaps		8		—		(6	)		—		—			(1	)		—			—		1			2
Exchange rate options		6		—		(6	)		—		—			—			—			—		—			—
Other		78		—		(6	)		—		(14	)		(10	)		13			—		(3	)		58
Other liabilities at fair value through profit or loss		106		—		(42	)		—		—			(14	)		(12	)		—		7			45
TOTAL LIABILITIES		205		—		(60	)		—		(14	)		(25	)		1			—		(2	)		105

F-39

	2011		Changes																						2012
Millions of euros	Fair value calculated using internal models (Level 3)		Purchases		Sales			Issues		Settlements			Changes in fair value recognized in profit or loss (unrealized)			Changes in fair value recognized in profit or loss (realized)			Changes in fair value recognized in equity			Other			Fair value calculated using internal models (Level 3)
Financial assets held for trading		447		13		(23	)		—		(2	)		(12	)		(12	)		—			(16	)		395
Trading derivatives		447		13		(23	)		—		(2	)		(12	)		(12	)		—			(16	)		395
Swaps		145		—		(20	)		—		(2	)		(15	)		1			—			—			109
Exchange rate options		95		—		(3	)		—		—			(3	)		(22	)		—			(21	)		46
Other		207		13		—			—		—			6			9			—			5			240
Hedging derivatives		1		—		—			—		—			—			—			—			(1	)		—
Swaps		1		—		—			—		—			—			—			—			(1	)		—
Other financial assets at fair value through profit or loss		357		104		(28	)		—		—			21			(1	)		—			16			469
Loans and advances to customers		54		—		—			—		—			4			—			—			16			74
Debt and equity instruments		303		104		(28	)		—		—			17			(1	)		—			—			395
Available-for-sale financial assets		233		300		(131	)		—		—			2			(5	)		(16	)		41			424
TOTAL ASSETS		1,038		417		(182	)		—		(2	)		11			(18	)		(16	)		40			1,288
Financial liabilities held for trading		110		11		—			—		(5	)		—			(4	)		—			(13	)		99
Customer deposits		—		—		—			—		—			—			—			—			7			7
Trading derivatives		110		11		—			—		(5	)		—			(4	)		—			(20	)		92
Swaps		2		4		—			—		(1	)		—			1			—			2			8
Exchange rate options		11		—		—			—		—			—			(2	)		—			(3	)		6
Other		97		7		—			—		(4	)		—			(3	)		—			(19	)		78
Other liabilities at fair value through profit or loss		169		—		—			—		—			9			(35	)		—			(37	)		106
TOTAL LIABILITIES		279		11		—			—		(5	)		9			(39	)		—			(50	)		205

F-40

iv. Recognition of fair value changes

As a general rule, changes in the carrying amount of financial assets and liabilities are recognized in the consolidated income statement. A distinction is made between the changes resulting from the accrual of interest and similar items, which are recognized under Interest and similar income or Interest expense and similar charges, as appropriate, and those arising for other reasons, which are recognized at their net amount under Gains/losses on financial assets and liabilities (net).

Adjustments due to changes in fair value arising from:

• Available-for-sale financial assets are recognized temporarily in equity under Valuation adjustments - Available-for-sale financial assets, unless they relate to exchange differences, in which case they are recognized in Valuation adjustments - Exchange differences (net), or to exchange differences arising on monetary financial assets, which are recognized in Exchange differences (net) in the consolidated income statement.

• Items charged or credited to Valuation adjustments - Available-for-sale financial assets and Valuation adjustments - Exchange differences (net) remain in the Group’s consolidated equity until the asset giving rise to them is impaired or derecognized, at which time they are recognized in the consolidated income statement.

• Unrealized gains on available-for-sale financial assets classified as Non-current assets held for sale because they form part of a disposal group or a discontinued operation are recognized under Valuation adjustments - Non-current assets held for sale.

v. Hedging transactions

The consolidated entities use financial derivatives for the following purposes: i) to facilitate these instruments to customers who request them in the management of their market and credit risks; ii) to use these derivatives in the management of the risks of the Group entities’ own positions and assets and liabilities (hedging derivatives); and iii) to obtain gains from changes in the prices of these derivatives (trading derivatives).

Financial derivatives that do not qualify for hedge accounting are treated for accounting purposes as trading derivatives.

A derivative qualifies for hedge accounting if all the following conditions are met:

1. The derivative hedges one of the following three types of exposure:

a. Changes in the fair value of assets and liabilities due to fluctuations, among others, in the interest rate and/or exchange rate to which the position or balance to be hedged is subject (fair value hedge);

b. Changes in the estimated cash flows arising from financial assets and liabilities, commitments and highly probable forecast transactions (cash flow hedge);

c. The net investment in a foreign operation (hedge of a net investment in a foreign operation).

F-41

2. It is effective in offsetting exposure inherent in the hedged item or position throughout the expected term of the hedge, which means that:

a. At the date of arrangement the hedge is expected, under normal conditions, to be highly effective (prospective effectiveness).

b. There is sufficient evidence that the hedge was actually effective during the whole life of the hedged item or position (retrospective effectiveness). To this end, the Group checks that the results of the hedge were within a range of 80% to 125% of the results of the hedged item.

3. There must be adequate documentation evidencing the specific designation of the financial derivative to hedge certain balances or transactions and how this hedge was expected to be achieved and measured, provided that this is consistent with the Group’s management of own risks.

The changes in value of financial instruments qualifying for hedge accounting are recognized as follows:

a. In fair value hedges, the gains or losses arising on both the hedging instruments and the hedged items attributable to the type of risk being hedged are recognized directly in the consolidated income statement.

In fair value hedges of interest rate risk on a portfolio of financial instruments, the gains or losses that arise on measuring the hedging instruments are recognized directly in the consolidated income statement, whereas the gains or losses due to changes in the fair value of the hedged amount (attributable to the hedged risk) are recognized in the consolidated income statement with a balancing entry under Changes in the fair value of hedged items in portfolio hedges of interest rate risk on the asset or liability side of the balance sheet, as appropriate.

b. In cash flow hedges, the effective portion of the change in value of the hedging instrument is recognized temporarily in equity under Valuation adjustments - Cash flow hedges until the forecast transactions occur, when it is recognized in the consolidated income statement, unless, if the forecast transactions result in the recognition of non-financial assets or liabilities, it is included in the cost of the non-financial asset or liability.

c. In hedges of a net investment in a foreign operation, the gains and losses attributable to the portion of the hedging instruments qualifying as an effective hedge are recognized temporarily in equity under Valuation adjustments - Hedges of net investments in foreign operations until the gains or losses on the hedged item are recognized in the consolidated income statement.

d. The ineffective portion of the gains and losses on the hedging instruments of cash flow hedges and hedges of a net investment in a foreign operation are recognized directly under Gains/losses on financial assets and liabilities (net) in the consolidated income statement.

If a derivative designated as a hedge no longer meets the requirements described above due to expiration, ineffectiveness or for any other reason, the derivative is classified for accounting purposes as a trading derivative.

When fair value hedge accounting is discontinued, the adjustments previously recognized on the hedged item are transferred to profit or loss at the effective interest rate re-calculated at the date of hedge discontinuation. The adjustments must be fully amortized at maturity.

When cash flow hedges are discontinued, any cumulative gain or loss on the hedging instrument recognized in equity under Valuation adjustments (from the period when the hedge was effective) remains in this equity item until the forecast transaction occurs, at which time it is recognized in profit or loss, unless the transaction is no longer expected to occur, in which case the cumulative gain or loss is recognized immediately in profit or loss.

F-42

vi. Derivatives embedded in hybrid financial instruments

Derivatives embedded in other financial instruments or in other host contracts are accounted for separately as derivatives if their risks and characteristics are not closely related to those of the host contracts, provided that the host contracts are not classified as Other financial assets/liabilities at fair value through profit or loss or as Financial assets/liabilities held for trading.

e) Derecognition of financial assets and liabilities

The accounting treatment of transfers of financial assets depends on the extent to which the risks and rewards associated with the transferred assets are transferred to third parties:

1. If the Group transfers substantially all the risks and rewards to third parties -unconditional sale of financial assets, sale of financial assets under an agreement to repurchase them at their fair value at the date of repurchase, sale of financial assets with a purchased call option or written put option that is deeply out of the money, securitization of assets in which the transferor does not retain a subordinated debt or grant any credit enhancement to the new holders, and other similar cases-, the transferred financial asset is derecognized and any rights or obligations retained or created in the transfer are recognized simultaneously.

2. If the Group retains substantially all the risks and rewards associated with the transferred financial asset -sale of financial assets under an agreement to repurchase them at a fixed price or at the sale price plus interest, a securities lending agreement in which the borrower undertakes to return the same or similar assets, and other similar cases-, the transferred financial asset is not derecognized and continues to be measured by the same criteria as those used before the transfer. However, the following items are recognized:

a. An associated financial liability, which is recognized for an amount equal to the consideration received and is subsequently measured at amortized cost, unless it meets the requirements for classification under Other financial liabilities at fair value through profit or loss.

b. The income from the transferred financial asset not derecognized and any expense incurred on the new financial liability, without offsetting.

3. If the Group neither transfers nor retains substantially all the risks and rewards associated with the transferred financial asset -sale of financial assets with a purchased call option or written put option that is not deeply in or out of the money, securitization of assets in which the transferor retains a subordinated debt or other type of credit enhancement for a portion of the transferred asset, and other similar cases- the following distinction is made:

a. If the transferor does not retain control of the transferred financial asset, the asset is derecognized and any rights or obligations retained or created in the transfer are recognized.

b. If the transferor retains control of the transferred financial asset, it continues to recognize it for an amount equal to its exposure to changes in value and recognizes a financial liability associated with the transferred financial asset. The net carrying amount of the transferred asset and the associated liability is the amortized cost of the rights and obligations retained, if the transferred asset is measured at amortized cost, or the fair value of the rights and obligations retained, if the transferred asset is measured at fair value.

F-43

Accordingly, financial assets are only derecognized when the rights on the cash flows they generate have been extinguished or when substantially all the inherent risks and rewards have been transferred to third parties. Similarly, financial liabilities are only derecognized when the obligations they generate have been extinguished or when they are acquired, with the intention either to cancel them or to resell them.

f) Offsetting of financial instruments

Financial asset and liability balances are offset, i.e. reported in the consolidated balance sheet at their net amount, only if the Group entities currently have a legally enforceable right to set off the recognized amounts and intend either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

Following is the detail of financial assets and liabilities offset that were in the balance sheet at December 31, 2013:

	Millions of euros
Assets	Gross amount of financial assets		Gross amount of financial liabilities offset in the balance sheet			Net amount of financial assets presented in the balance sheet
Derivatives		86,813		(19,613	)		67,200
Reverse repurchase agreements		59,990		(12,463	)		47,527
Total		146,803		(32,076	)		114,727
	Millions of euros
Liabilities	Gross amount of financial liabilities		Gross amount of financial assets offset in the balance sheet			Net amount of financial liabilities presented in the balance sheet
Derivatives		83,783		(19,613	)		64,170
Reverse repurchase agreements		103,621		(12,463	)		91,158
Total		187,404		(32,076	)		155,328

Also, the Group has offset other items for EUR 2,267 million.

Most of the derivatives and repos not offset in the balance sheet are subject to netting and collateral arrangements.

g) Impairment of financial assets

i. Definition

A financial asset is considered to be impaired -and therefore its carrying amount is adjusted to reflect the effect of impairment- when there is objective evidence that events have occurred which:

• In the case of debt instruments (loans and debt securities), give rise to an adverse impact on the future cash flows that were estimated at the transaction date.

• In the case of equity instruments, mean that their carrying amount may not be fully recovered.

F-44

As a general rule, the carrying amount of impaired financial instruments is adjusted with a charge to the consolidated income statement for the period in which the impairment becomes evident, and the reversal, if any, of previously recognized impairment losses is recognized in the consolidated income statement for the period in which the impairment is reversed or reduced.

Balances are deemed to be impaired, and the interest accrual is suspended, when there are reasonable doubts as to their full recovery and/or the collection of the related interest for the amounts and on the dates initially agreed upon, after taking into account the guarantees received by the consolidated entities to secure (fully or partially) collection of the related balances. Collections relating to impaired loans and advances are used to recognize the accrued interest and the remainder, if any, to reduce the principal amount outstanding.

Transactions classified as impaired due to arrears are reclassified as performing if, as a result of the collection of a portion or the sum of the unpaid instalments, the reasons for classifying such transactions as impaired cease to exist, unless other subjective reasons remain for classifying them as impaired, i.e. no longer have any amount more than three months past due. The refinancing of impaired loans does not result in their reclassification to performing unless: there is certainty that the customer can make payment in accordance with the new schedule; the customer provides effective guarantees or collateral; the customer pays the current interest receivable; and the customer complies with the established cure period (see Note 54).

The following constitute effective guarantees or collateral: collateral in the form of cash deposits; quoted equity instruments and debt securities issued by creditworthy issuers; mortgages on completed housing, offices and multi-purpose premises and on rural property, net of any prior charges; and personal guarantees (bank guarantees, inclusion of new obligors, etc.) which entail the direct and joint liability of the new guarantors to the customer, these being persons or entities whose solvency is sufficiently demonstrated so as to ensure the full repayment of the transaction on the agreed terms.

The balances relating to impaired transactions continue to be recognized on the balance sheet, for their full amounts, until the Group considers that the recovery of those amounts is remote.

The Group considers recovery to be remote when there has been a substantial and irreversible deterioration of the borrower’s solvency, when commencement of the liquidation phase of insolvency proceedings has been ordered or when more than four years have elapsed since the borrower’s transaction was classified as impaired due to arrears (the maximum period established by the Bank of Spain).

When the recovery of a financial asset is considered unlikely, it is written off, together with the related allowance, without prejudice to any actions that the consolidated entities may initiate to seek collection until their contractual rights are extinguished due to expiry of the statute-of-limitations period, forgiveness or any other cause.

ii. Debt instruments carried at amortized cost

For the purpose of determining impairment losses, the Group monitors its debtors as described below:

• Individually for significant debt instruments and for instruments which, although not material, are not susceptible to being classified in a group of financial assets with similar credit risk characteristics -customers classified by the Group as “individualized”. This category includes wholesale banking enterprises, financial institutions and certain retail banking enterprises.

• Collectively, in all other cases -customers classified by the Group as “standardized”-, by grouping together instruments having similar credit risk characteristics indicative of the debtors’ ability to pay all principal and interest amounts in accordance with the contractual terms. The credit risk characteristics considered for the purpose of grouping the assets are, inter alia, instrument type, debtor’s industry and geographical location, type of guarantee or collateral, age of past-due amounts and any other relevant factor for the estimation of future cash flows. This category includes exposures to individuals, individual traders and retail banking enterprises not classified as individualized customers.

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As regards impairment losses resulting from materialization of the insolvency risk of the obligors (credit risk), a debt instrument is impaired due to insolvency:

• When there is evidence of a deterioration of the obligor’s ability to pay, either because it is in arrears or for other reasons, and/or

• When country risk materializes: country risk is considered to be the risk associated with debtors resident in a given country due to circumstances other than normal commercial risk.

The Group has certain policies, methods and procedures for covering its credit risk arising both from insolvency allocable to counterparties and from country risk. These policies, methods and procedures are applied in the granting, examination and documentation of debt instruments and contingent liabilities and commitments, and in the identification of their impairment and the calculation of the amounts required to cover the related credit risk.

With respect to the coverage of loss arising from credit risk, the Group must meet the Bank of Spain requirements, which establish that, until the Spanish regulatory authority has verified and approved the internal models for the calculation of the allowance for losses arising from credit risk (to date it has only approved the internal models to be used to calculate regulatory capital), entities must calculate their credit risk coverage as set forth below:

a. Specific allowance (individuals):

The allowance for debt instruments not measured at fair value through profit or loss that are classified as impaired is generally recognized in accordance with the criteria set forth below:

i. Assets classified as impaired due to counterparty arrears:

Debt instruments, whoever the obligor and whatever the guarantee or collateral, with amounts more than three months past due are assessed individually, taking into account the age of the past-due amounts, the guarantees or collateral provided and the financial situation of the counterparty and the guarantors.

ii. Assets classified as impaired for reasons other than counterparty arrears:

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

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b. General allowance for inherent losses (collective):

Based on its experience and on the information available to it on the Spanish banking industry, the Bank of Spain has established various categories of debt instruments and contingent liabilities, classified as standard risk, which are recognized at Spanish entities or relate to transactions performed on behalf of residents in Spain which are recognized in the accounting records of foreign subsidiaries, and has applied a range of required allowances to each category.

c. Country risk allowance:

Country risk is considered to be the risk associated with counterparties resident in a given country due to circumstances other than normal commercial risk (sovereign risk, transfer risk and risks arising from international financial activity). Based on the countries’ economic performance, political situation, regulatory and institutional framework, and payment capacity and record, the Group classifies all the transactions performed with third parties into six different groups, from group 1 (transactions with ultimate obligors resident in European Union countries, Norway, Switzerland, Iceland, the United States, Canada, Japan, Australia and New Zealand) to group 6 (transactions the recovery of which is considered remote due to circumstances attributable to the country), assigning to each group the credit loss allowance percentages resulting from the aforementioned analyses. However, due to the size of the Group and to the proactive management of its country risk exposure, the allowances recognized in this connection are not material with respect to the credit loss allowances recognized.

However, the coverage of the Group’s losses arising from credit risk must also meet the requirements of IFRSs and, therefore, the Group checks the allowances calculated as described above with those obtained from internal models for the calculation of the coverage of losses arising from credit risk in order to confirm that there are no material differences.

The Group’s internal models determine the impairment losses on debt instruments not measured at fair value through profit or loss and on contingent liabilities taking into account the historical experience of impairment and other circumstances known at the time of assessment. For these purposes, impairment losses on loans are losses incurred at the reporting date, calculated using statistical methods.

The amount of an impairment loss incurred on a debt instrument carried at amortized cost is equal to the difference between its carrying amount and the present value of its estimated future cash flows, and is presented as a reduction of the balance of the asset adjusted. In estimating the future cash flows of debt instruments the following factors are taken into account:

• All the amounts that are expected to be obtained over the remaining life of the instrument, including, where appropriate, those which may result from the collateral provided for the instrument (less the costs for obtaining and subsequently selling the collateral). The impairment loss takes into account the likelihood of collecting accrued past-due interest receivable;

• The various types of risk to which each instrument is subject; and

• The circumstances in which collections will foreseeably be made.

These cash flows are subsequently discounted using the instrument’s effective interest rate (if its contractual rate is fixed) or the effective contractual rate at the discount date (if it is variable).

Incurred loss is the cost of the credit risk of a transaction that will manifest within a one year lead time from the balance sheet date due to an event that had already occurred at the assessment date and considering the characteristics of the counterparty and the guarantees and collateral associated with the transaction.

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The loss incurred is calculated by multiplying three factors: exposure at default, probability of default and loss given default. These parameters are also used to calculate economic capital and to calculate BIS II regulatory capital under internal models (see Note 1.f).

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

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

For the purposes of calculating the incurred losses, PD is measured using a time horizon of one year; i.e. it quantifies the probability of the counterparty defaulting in the coming year due to an event that had already occurred at the assessment date. The definition of default used includes amounts past due by 90 days or more and cases in which there is no default but there are doubts as to the solvency of the counterparty (subjective impaired assets).

• Loss given default (LGD) is the loss arising in the event of default. It depends mainly on the present value of the guarantees associated with the transaction and other the future flows that are expected to be recovered.

In addition to all of the above, the calculation of the incurred loss takes into account the adjustment of the aforementioned factors (PD and LGD), historical experience and other specific information to reflect the current conditions.

At December 31, 2013, the estimated losses arising from credit risk calculated by the Group’s internal models did not differ materially from the allowances calculated on the basis of the Bank of Spain’s requirements.

iii. Debt or equity instruments classified as available for sale

The amount of the impairment losses on these instruments is the positive difference between their acquisition cost (net of any principal repayment or amortization in the case of debt instruments) and their fair value, less any impairment loss previously recognized in the consolidated income statement.

When there is objective evidence at the date of measurement of these instruments that the aforementioned differences are due to permanent impairment, they are no longer recognized in equity under Valuation adjustments - Available-for-sale financial assets and are reclassified, for the cumulative amount at that date, to the consolidated income statement.

If all or part of the impairment losses are subsequently reversed, the reversed amount is recognized, in the case of debt instruments, in the consolidated income statement for the year in which the reversal occurs (or in equity under Valuation adjustments - Available-for-sale financial assets in the case of equity instruments).

iv. Equity instruments carried at cost

The amount of the impairment losses on equity instruments carried at cost is the difference between the carrying amount and the present value of the expected future cash flows discounted at the market rate of return for similar securities.

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Impairment losses are recognized in the consolidated income statement for the period in which they arise as a direct reduction of the cost of the instrument. These losses can only be reversed subsequently if the related assets are sold.

h) Repurchase agreements and reverse repurchase agreements

Purchases (sales) of financial instruments under a non-optional resale (repurchase) agreement at a fixed price (repos) are recognized in the consolidated balance sheet as financing granted (received), based on the nature of the debtor (creditor), under Balances with central banks, Loans and advances to credit institutions or Loans and advances to customers (Deposits from central banks, Deposits from credit institutions or Customer deposits).

Differences between the purchase and sale prices are recognized as interest over the contract term.

i) Non-current assets held for sale and Liabilities associated with non-current assets held for sale

Non-current assets held for sale includes the carrying amount of individual items, disposal groups or items forming part of a business unit earmarked for disposal (discontinued operations), whose sale in their present condition is highly likely to be completed within one year from the reporting date. Therefore, the carrying amount of these items -which can be of a financial nature or otherwise- will foreseeably be recovered through the proceeds from their disposal.

Specifically, property or other non-current assets received by the consolidated entities as total or partial settlement of their debtors’ payment obligations to them are deemed to be non-current assets held for sale, unless the consolidated entities have decided to make continuing use of these assets. In this connection, for the purpose of its consideration in the initial recognition of these assets, the Group obtains, at the foreclosure date, the fair value of the related asset through a request for appraisal by external appraisal agencies.

The Group has in place a corporate policy that ensures the professional competence and the independence and objectivity of the external appraisal agencies, in accordance with the regulations, which require appraisal agencies to meet neutrality and credibility requirements, so that the use of their estimates does not reduce the reliability of its valuations. This policy establishes that all the appraisal companies and agencies with which the Group works in Spain should be registered in the Official Register of the Bank of Spain.

Liabilities associated with non-current assets held for sale includes the balances payable arising from the assets held for sale or disposal groups and from discontinued operations.

Non-current assets held for sale are generally measured at the lower of fair value less costs to sell and their carrying amount at the date of classification in this category. Non-current assets held for sale are not depreciated as long as they remain in this category.

Subsequent to initial recognition, the Group measures its non-current assets at the lower of their fair value less costs to sell and their carrying amount. The Group measures foreclosed property assets located in Spain by taking into consideration the appraisal value on the date of foreclosure and the length of time each asset has been recognized in the balance sheet. In addition, in order to check at the end of each reporting period that the measurement made using the aforementioned criteria does not differ from fair value, based in part on third party appraisals.

Impairment losses on an asset or disposal group arising from a reduction in its carrying amount to its fair value (less costs to sell) are recognized under Gains/(losses) of non-current assets held for sale not classified as discontinued operations in the consolidated income statement. The gains on a non-current asset held for sale resulting from subsequent increases in fair value (less costs to sell) increase its carrying amount and are recognized in the consolidated income statement up to an amount equal to the impairment losses previously recognized.

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j) Reinsurance assets and Liabilities under insurance contracts

Insurance contracts involve the transfer of a certain quantifiable risk in exchange for a periodic or one-off premium. The effects on the Group’s cash flows will arise from a deviation in the payments forecast and/or an insufficiency in the premium set.

The Group controls its insurance risk as follows:

• By applying a strict methodology in the launch of products and in the assignment of value thereto.

• By using deterministic and stochastic models for measuring commitments.

• By using reinsurance as a risk mitigation technique as part of the credit quality guidelines in line with the Group’s general risk policy.

• By establishing an operating framework for credit risks.

• By actively managing asset and liability matching.

• By applying security measures in processes.

Reinsurance assets includes the amounts that the consolidated entities are entitled to receive for reinsurance contracts with third parties and, specifically, the reinsurer’s share of the technical provisions recorded by the consolidated insurance entities.

At least once a year these assets are reviewed to ascertain whether they are impaired (i.e. there is objective evidence, as a result of an event that occurred after initial recognition of the reinsurance asset, that the Group may not receive all amounts due to it under the terms of the contract and the amount that will not be received can be reliably measured), and any impairment loss is recognized in the consolidated income statement and the assets are written down.

Liabilities under insurance contracts includes the technical provisions recorded by the consolidated entities to cover claims arising from insurance contracts in force at year-end.

Insurers’ results relating to their insurance business are recognized, according to their nature, under the related consolidated income statement items.

In accordance with standard accounting practice in the insurance industry, the consolidated insurance entities credit to the income statement the amounts of the premiums written and charge to income the cost of the claims incurred on final settlement thereof. Insurance entities are therefore required to accrue at period-end the unearned revenues credited to their income statements and the accrued costs not charged to income.

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At least at each reporting date the Group assesses whether the insurance contract liabilities recognized in the consolidated balance sheet are adequate. For this purpose, it calculates the difference between the following amounts:

• Current estimates of future cash flows under the insurance contracts of the consolidated entities. These estimates include all contractual cash flows and any related cash flows, such as claims handling costs; and

• The carrying amount recognized in the consolidated balance sheet of its insurance contract liabilities (see Note 15), less any related deferred acquisition costs or related intangible assets, such as the amount paid to acquire, in the event of purchase by the entity, the economic rights held by a broker deriving from policies in the entity’s portfolio.

If the calculation results in a positive amount, this deficiency is charged to the consolidated income statement. When unrealized gains or losses on assets of the Group’s insurance companies affect the measurement of liabilities under insurance contracts and/or the related deferred acquisition costs and/or the related intangible assets, these gains or losses are recognized directly in equity. The corresponding adjustment in the liabilities under insurance contracts (or in the deferred acquisition costs or in intangible assets) is also recognized in equity.

The most significant items forming part of the technical provisions (see Note 15) are detailed below:

• Non-life insurance provisions:

i) Provision for unearned premiums: relates to the portion of the premiums received at year-end that is allocable to the period from the reporting date to the end of the policy cover period.

ii) Provision for unexpired risks: this supplements the provision for unearned premiums to the extent that the amount of the latter is not sufficient to reflect all the assessed risks and expenses to be covered by the insurance companies in the policy period not elapsed at the reporting date.

• Life insurance provisions: represent the value of the net obligations acquired vis-à-vis life insurance policyholders. These provisions include:

i) Provision for unearned premiums and unexpired risks: this relates to the portion of the premiums received at year-end that is allocable to the period from the reporting date to the end of the policy cover period.

ii) Mathematical provisions: these relate to the value of the insurance companies’ obligations, net of the policyholders’ obligations. These provisions are calculated on a policy-by-policy basis using an individual capitalization system, taking as a basis for the calculation the premium accrued in the year, and in accordance with the technical bases of each type of insurance updated, where appropriate, by the local mortality tables.

• Provision for claims outstanding: this reflects the total obligations outstanding arising from claims incurred prior to the reporting date. This provision is calculated as the difference between the total estimated or certain cost of the claims not yet reported, settled or paid and all the amounts already paid in relation to such claims.

• Provision for bonuses and rebates: this provision includes the amount of the bonuses accruing to policyholders, insureds or beneficiaries and that of any premiums to be returned to policyholders or insureds, to the extent that such amounts have not been assigned at the reporting date. These amounts are calculated on the basis of the conditions of the related individual policies.

• Technical provisions for life insurance policies where the investment risk is borne by the policyholders: these provisions are calculated on the basis of the indices established as a reference to determine the economic value of the policyholders’ rights.

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k) Tangible assets

Tangible assets includes the amount of buildings, land, furniture, vehicles, computer hardware and other fixtures owned by the consolidated entities or acquired under finance leases. Tangible assets are classified by use as follows:

i. Property, plant and equipment for own use

Property, plant and equipment for own use –including tangible assets received by the consolidated entities in full or partial satisfaction of financial assets representing receivables from third parties which are intended to be held for continuing use and tangible assets acquired under finance leases– are presented at acquisition cost, less the related accumulated depreciation and any estimated impairment losses (carrying amount higher than recoverable amount).

Depreciation is calculated, using the straight-line method, on the basis of the acquisition cost of the assets less their residual value. The land on which the buildings and other structures stand has an indefinite life and, therefore, is not depreciated.

The period tangible asset depreciation charge is recognized in the consolidated income statement and is calculated using the following depreciation rates (based on the average years of estimated useful life of the various assets):

	Average annual rate
Buildings for own use		2.0	%
Furniture		7.7	%
Fixtures		7.0	%
Office and IT equipment		25.0	%
Leasehold improvements		7.0	%

The consolidated entities assess at the reporting date whether there is any indication that an asset may be impaired (i.e. its carrying amount exceeds its recoverable amount). If this is the case, the carrying amount of the asset is reduced to its recoverable amount and future depreciation charges are adjusted in proportion to the revised carrying amount and to the new remaining useful life (if the useful life has to be re-estimated).

Similarly, if there is an indication of a recovery in the value of a tangible asset, the consolidated entities recognize the reversal of the impairment loss recognized in prior periods and adjust the future depreciation charges accordingly. In no circumstances may the reversal of an impairment loss on an asset raise its carrying amount above that which it would have if no impairment losses had been recognized in prior years.

The estimated useful lives of the items of property, plant and equipment for own use are reviewed at least at the end of the reporting period with a view to detecting significant changes therein. If changes are detected, the useful lives of the assets are adjusted by correcting the depreciation charge to be recognized in the consolidated income statement in future years on the basis of the new useful lives.

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Upkeep and maintenance expenses relating to property, plant and equipment for own use are recognized as an expense in the period in which they are incurred, since they do not increase the useful lives of the assets.

ii. Investment property

Investment property reflects the net values of the land, buildings and other structures held either to earn rentals or for capital appreciation.

The criteria used to recognize the acquisition cost of investment property, to calculate its depreciation and its estimated useful life and to recognize any impairment losses thereon are consistent with those described in relation to property, plant and equipment for own use.

iii. Assets leased out under an operating lease

Property, plant and equipment - Leased out under an operating lease reflects the amount of the tangible assets, other than land and buildings, leased out by the Group under an operating lease.

The criteria used to recognize the acquisition cost of assets leased out under operating leases, to calculate their depreciation and their respective estimated useful lives and to recognize the impairment losses thereon are consistent with those described in relation to property, plant and equipment for own use.

l) Accounting for leases

i. Finance leases

Finance leases are leases that transfer substantially all the risks and rewards incidental to ownership of the leased asset to the lessee.

When the consolidated entities act as the lessors of an asset, the sum of the present value of the lease payments receivable from the lessee, including the exercise price of the lessee’s purchase option at the end of the lease term when such exercise price is sufficiently below fair value at the option date such that it is reasonably certain that the option will be exercised, is recognized as lending to third parties and is therefore included under Loans and receivables in the consolidated balance sheet.

When the consolidated entities act as the lessees, they present the cost of the leased assets in the consolidated balance sheet, based on the nature of the leased asset, and, simultaneously, recognize a liability for the same amount (which is the lower of the fair value of the leased asset and the sum of the present value of the lease payments payable to the lessor plus, if appropriate, the exercise price of the purchase option). The depreciation policy for these assets is consistent with that for property, plant and equipment for own use.

In both cases, the finance income and finance charges arising under finance lease agreements are credited and debited, respectively, to Interest and similar income and Interest expense and similar charges in the consolidated income statement so as to produce a constant rate of return over the lease term.

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ii. Operating leases

In operating leases, ownership of the leased asset and substantially all the risks and rewards incidental thereto remain with the lessor.

When the consolidated entities act as the lessors, they present the acquisition cost of the leased assets under Tangible assets (see Note 16). The depreciation policy for these assets is consistent with that for similar items of property, plant and equipment for own use, and income from operating leases is recognized on a straight-line basis under Other operating income in the consolidated income statement.

When the consolidated entities act as the lessees, the lease expenses, including any incentives granted by the lessor, are charged on a straight-line basis to Other general administrative expenses in their consolidated income statements.

iii. Sale and leaseback transactions

In sale and leaseback transactions where the sale is at fair value and the leaseback is an operating lease, any profit or loss is recognized at the time of sale. In the case of finance leasebacks, any profit or loss is amortized over the lease term.

In accordance with IAS 17, in determining whether a sale and leaseback transaction results in an operating lease, the Group should analyses, inter alia, whether at the inception of the lease there are purchase options whose terms and conditions make it reasonably certain that they will be exercised, and to whom the gains or losses from the fluctuations in the fair value of the residual value of the related asset will accrue.

m) Intangible assets

Intangible assets are identifiable non-monetary assets (separable from other assets) without physical substance which arise as a result of a legal transaction or which are developed internally by the consolidated entities. Only assets whose cost can be estimated reliably and from which the consolidated entities consider it probable that future economic benefits will be generated are recognized.

Intangible assets are recognized initially at acquisition or production cost and are subsequently measured at cost less any accumulated amortization and any accumulated impairment losses.

i. Goodwill

Any excess of the cost of the investments in the consolidated entities and entities accounted for using the equity method over the corresponding underlying carrying amounts acquired, adjusted at the date of first-time consolidation, is allocated as follows:

• If it is attributable to specific assets and liabilities of the companies acquired, by increasing the value of the assets (or reducing the value of the liabilities) whose fair values were higher (lower) than the carrying amounts at which they had been recognized in the acquired entities’ balance sheets.

• If it is attributable to specific intangible assets, by recognizing it explicitly in the consolidated balance sheet provided that the fair value of these assets within twelve months following the date of acquisition can be measured reliably.

• The remaining amount is recognized as goodwill, which is allocated to one or more cash-generating units (a cash-generating unit is the smallest identifiable group of assets that, as a result of continuing operation, generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets). The cash-generating units represent the Group’s geographical and/or business segments.

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Goodwill is only recognized when it has been acquired for consideration and represents, therefore, a payment made by the acquirer in anticipation of future economic benefits from assets of the acquired entity that are not capable of being individually identified and separately recognized.

At the end of each reporting period or whenever there is any indication of impairment goodwill is reviewed for impairment (i.e. a reduction in its recoverable amount to below its carrying amount) and, if there is any impairment, the goodwill is written down with a charge to Impairment losses on other assets (net) - Goodwill and other intangible assets in the consolidated income statement.

An impairment loss recognized for goodwill is not reversed in a subsequent period.

ii. Other intangible assets

Other intangible assets include the amount of identifiable intangible assets (such as purchased customer lists and computer software).

Other intangible assets can have an indefinite useful life -when, based on an analysis of all the relevant factors, it is concluded that there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the consolidated entities- or a finite useful life, in all other cases.

Intangible assets with indefinite useful lives are not amortized, but rather at the end of each reporting period or whenever there is any indication of impairment the consolidated entities review the remaining useful lives of the assets in order to determine whether they continue to be indefinite and, if this is not the case, to take the appropriate steps.

Intangible assets with finite useful lives are amortized over those useful lives using methods similar to those used to depreciate tangible assets.

The intangible asset amortization charge is recognized under Depreciation and amortization in the consolidated income statement.

In both cases the consolidated entities recognize any impairment loss on the carrying amount of these assets with a charge to Impairment losses on other assets (net) in the consolidated income statement. The criteria used to recognize the impairment losses on these assets and, where applicable, the reversal of impairment losses recognized in prior years are similar to those used for tangible assets (see Note 2.k).

Internally developed computer software

Internally developed computer software is recognized as an intangible asset if, among other requisites (basically the Group’s ability to use or sell it), it can be identified and its ability to generate future economic benefits can be demonstrated.

Expenditure on research activities is recognized as an expense in the year in which it is incurred and cannot be subsequently capitalized.

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n) Other assets

Other assets in the consolidated balance sheet includes the amount of assets not recorded in other items, the breakdown being as follows:

• Inventories: this item includes the amount of assets, other than financial instruments, that are held for sale in the ordinary course of business, that are in the process of production, construction or development for such purpose, or that are to be consumed in the production process or in the provision of services. Inventories include land and other property held for sale in the property development business.

Inventories are measured at the lower of cost and net realizable value, which is the estimated selling price of the inventories in the ordinary course of business, less the estimated costs of completion and the estimated costs required to make the sale.

Any write-downs of inventories -such as those due to damage, obsolescence or reduction of selling price- to net realizable value and other impairment losses are recognized as expenses for the year in which the impairment or loss occurs. Subsequent reversals are recognized in the consolidated income statement for the year in which they occur.

The carrying amount of inventories is derecognized and recognized as an expense in the period in which the revenue from their sale is recognized.

• Other: this item includes the balance of all prepayments and accrued income (excluding accrued interest, fees and commissions), the net amount of the difference between pension plan obligations and the value of the plan assets with a balance in the entity’s favor, when this net amount is to be reported in the consolidated balance sheet, and the amount of any other assets not included in other items.

ñ) Other liabilities

Other liabilities includes the balance of all accrued expenses and deferred income, excluding accrued interest, and the amount of any other liabilities not included in other categories.

o) Provisions and contingent assets and liabilities

When preparing the financial statements of the consolidated entities, the Bank’s directors made a distinction between:

• Provisions: credit balances covering present obligations at the reporting date arising from past events which could give rise to a loss for the consolidated entities, which is considered to be likely to occur and certain as to its nature but uncertain as to its amount and/or timing.

• Contingent liabilities: possible obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more future events not wholly within the control of the consolidated entities. They include the present obligations of the consolidated entities when it is not probable that an outflow of resources embodying economic benefits will be required to settle them.

• Contingent assets: possible assets that arise from past events and whose existence is conditional on, and will be confirmed only by, the occurrence or non-occurrence of events beyond the control of the Group. Contingent assets are not recognized in the consolidated balance sheet or in the consolidated income statement, but rather are disclosed in the notes, provided that it is probable that these assets will give rise to an increase in resources embodying economic benefits.

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The Group’s consolidated financial statements include all the material provisions with respect to which it is considered that it is more likely than not that the obligation will have to be settled. In accordance with accounting standards, contingent liabilities must not be recognized in the consolidated financial statements, but must rather be disclosed in the notes.

Provisions, which are quantified on the basis of the best information available on the consequences of the event giving rise to them and are reviewed and adjusted at the end of each year, are used to cater for the specific obligations for which they were originally recognized. Provisions are fully or partially reversed when such obligations cease to exist or are reduced.

Provisions are classified according to the obligations covered as follows (see Note 25):

• Provision for pensions and similar obligations: includes the amount of all the provisions made to cover post-employment benefits, including obligations to pre-retirees and similar obligations.

• Provisions for contingent liabilities and commitments: includes the amount of the provisions made to cover contingent liabilities -defined as those transactions in which the Group guarantees the obligations of a third party, arising as a result of financial guarantees granted or contracts of another kind- and contingent commitments -defined as irrevocable commitments that may give rise to the recognition of financial assets.

• Provisions for taxes and other legal contingencies and Other provisions: include the amount of the provisions recognized to cover tax and legal contingencies and litigation and the other provisions recognized by the consolidated entities. Other provisions includes, inter alia, any provisions for restructuring costs and environmental measures.

p) Court proceedings and/or claims in process

In addition to the disclosures made in Note 1, at the end of 2013 certain court proceedings and claims were in process against the consolidated entities arising from the ordinary course of their operations (see Note 25).

q) Own equity instruments

Own equity instruments are those meeting both of the following conditions:

• The instruments do not include any contractual obligation for the issuer: (i) to deliver cash or another financial asset to a third party; or (ii) to exchange financial assets or financial liabilities with a third party under conditions that are potentially unfavorable to the issuer.

• The instruments will or may be settled in the issuer’s own equity instruments and are: (i) a non-derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments; or (ii) a derivative that will be settled by the issuer through the exchange of a fixed amount of cash or another financial asset for a fixed number of its own equity instruments.

Transactions involving own equity instruments, including their issuance and cancellation, are deducted directly from equity.

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Changes in the value of instruments classified as own equity instruments are not recognized in the consolidated financial statements. Consideration received or paid in exchange for such instruments is directly added to or deducted from equity.

r) Equity-instrument-based employee remuneration

Own equity instruments delivered to employees in consideration for their services, if the instruments are delivered once the specific period of service has ended, are recognized as an expense for services (with the corresponding increase in equity) as the services are rendered by employees during the service period. At the grant date the services received (and the related increase in equity) are measured at the fair value of the equity instruments granted. If the equity instruments granted vest immediately, the Group recognizes in full, at the grant date, the expense for the services received.

When the requirements stipulated in the remuneration agreement include external market conditions (such as equity instruments reaching a certain quoted price), the amount ultimately to be recognized in equity will depend on the other conditions being met by the employees (normally length of service requirements), irrespective of whether the market conditions are satisfied. If the conditions of the agreement are met but the external market conditions are not satisfied, the amounts previously recognized in equity are not reversed, even if the employees do not exercise their right to receive the equity instruments.

s) Recognition of income and expenses

The most significant criteria used by the Group to recognize its income and expenses are summarized as follows:

i. Interest income, interest expenses and similar items

Interest income, interest expenses and similar items are generally recognized on an accrual basis using the effective interest method. Dividends received from other companies are recognized as income when the consolidated entities’ right to receive them arises.

However, the recognition of accrued interest in the consolidated income statement is suspended for debt instruments individually classified as impaired and for the instruments for which impairment losses have been assessed collectively because they have payments more than three months past due. Any interest that may have been recognized in the consolidated income statement before the corresponding debt instruments were classified as impaired, and that had not been collected at the date of that classification, is considered when determining the allowance for loan losses; accordingly, if subsequently collected, this interest is recognized as a reversal of the related impairment losses. Interest whose recognition in the consolidated income statement has been suspended is accounted for as interest income, when collected, on a cash basis.

ii. Commissions, fees and similar items

Fee and commission income and expenses are recognized in the consolidated income statement using criteria that vary according to their nature. The main criteria are as follows:

• Fee and commission income and expenses relating to financial assets and financial liabilities measured at fair value through profit or loss are recognized when paid.

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• Those arising from transactions or services that are performed over a period of time are recognized over the life of these transactions or services.

• Those relating to services provided in a single act are recognized when the single act is carried out.

iii. Non-finance income and expenses

These are recognized for accounting purposes on an accrual basis.

iv. Deferred collections and payments

These are recognized for accounting purposes at the amount resulting from discounting the expected cash flows at market rates.

v. Loan arrangement fees

Loan arrangement fees, mainly loan origination, application and information fees, are accrued and recognized in income over the term of the loan. In the case of loan origination fees, the portion relating to the associated direct costs incurred in the loan arrangement is recognized immediately in the consolidated income statement.

t) Financial guarantees

Financial guarantees are defined as contracts whereby an entity undertakes to make specific payments on behalf of a third party if the latter fails to do so, irrespective of the various legal forms they may have, such as guarantees, insurance policies or credit derivatives.

The Group initially recognizes the financial guarantees provided on the liability side of the consolidated balance sheet at fair value, which is generally the present value of the fees, commissions and interest receivable from these contracts over the term thereof, and simultaneously the Group recognizes a credit on the asset side of the consolidated balance sheet for the amount of the fees, commissions and similar interest received at the inception of the transactions and the amounts receivable at the present value of the fees, commissions and interest outstanding.

Financial guarantees, regardless of the guarantor, instrumentation or other circumstances, are reviewed periodically so as to determine the credit risk to which they are exposed and, if appropriate, to consider whether a provision is required. The credit risk is determined by application of criteria similar to those established for quantifying impairment losses on debt instruments carried at amortized cost (described in Note 2.g above).

The provisions made for these transactions are recognized under Provisions - Provisions for contingent liabilities and commitments in the consolidated balance sheet (see Note 25). These provisions are recognized and reversed with a charge or credit, respectively, to Provisions (net) in the consolidated income statement.

If a specific provision is required for financial guarantees, the related unearned commissions recognized under Financial liabilities at amortized cost - Other financial liabilities in the consolidated balance sheet are reclassified to the appropriate provision.

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u) Assets under management and investment and pension funds managed by the Group

Assets owned by third parties and managed by the consolidated entities are not presented on the face of the consolidated balance sheet. Management fees are included in Fee and commission income in the consolidated income statement.

The investment funds and pension funds managed by the consolidated entities are not presented on the face of the Group’s consolidated balance sheet since the related assets are owned by third parties. The fees and commissions earned in the year for the services rendered by the Group entities to these funds (asset management and custody services) are recognized under Fee and commission income in the consolidated income statement.

Note 2.b.iv describes the internal criteria and procedures used to determine whether control exists over the structured entities, which include, inter alia, investment funds and pension funds.

v) Post-employment benefits

Under the collective agreements currently in force and other arrangements, the Spanish banks included in the Group and certain other Spanish and foreign consolidated entities have undertaken to supplement the public social security system benefits accruing to certain employees, and to their beneficiary right holders, for retirement, permanent disability or death, and the post-employment welfare benefits.

The Group’s post-employment obligations to its employees are deemed to be defined contribution plans when the Group makes pre-determined contributions (recognized under Personnel expenses in the consolidated income statement) to a separate entity and will have no legal or effective obligation to make further contributions if the separate entity cannot pay the employee benefits relating to the service rendered in the current and prior periods. Post-employment obligations that do not meet the aforementioned conditions are classified as defined benefit plans (see Note 25).

Defined contribution plans

The contributions made in this connection in each year are recognized under Personnel expenses in the consolidated income statement. The amounts not yet contributed at each year-end are recognized, at their present value, under Provisions - Provision for pensions and similar obligations on the liability side of the consolidated balance sheet.

Defined benefit plans

The Group recognizes under Provisions - Provision for pensions and similar obligations on the liability side of the consolidated balance sheet (or under Other assets on the asset side, as appropriate) the present value of its defined benefit post-employment obligations, net of the fair value of the plan assets.

Plan assets are defined as those that will be directly used to settle obligations and that meet the following conditions:

• They are not owned by the consolidated entities, but by a legally separate third party that is not a party related to the Group.

• They are only available to pay or fund post-employment benefits and they cannot be returned to the consolidated entities unless the assets remaining in the plan are sufficient to meet all the benefit obligations of the plan and of the entity to current and former employees, or they are returned to reimburse employee benefits already paid by the Group.

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If the Group can look to an insurer to pay part or all of the expenditure required to settle a defined benefit obligation, and it is practically certain that said insurer will reimburse some or all of the expenditure required to settle that obligation, but the insurance policy does not qualify as a plan asset, the Group recognizes its right to reimbursement -which, in all other respects, is treated as a plan asset- under Insurance contracts linked to pensions on the asset side of the consolidated balance sheet.

Post-employment benefits are recognized as follows:

• Service cost is recognized in the consolidated income statement and includes the following items:

• Current service cost, i.e. the increase in the present value of the obligations resulting from employee service in the current period, is recognized under Personnel expenses.

• The past service cost, which arises from changes to existing post-employment benefits or from the introduction of new benefits and includes the cost of reductions, is recognized under Provisions (net).

• Any gain or loss arising from plan settlements is recognized under Provisions (net).

• Net interest on the net defined benefit liability (asset), i.e. the change in the year in the net defined benefit liability (asset) as a result of the passage of time, is recognized under Interest expense and similar charges (Interest and similar income if it constitutes income) in the consolidated income statement.

• The remeasurement of the net defined benefit liability (asset) is recognized under Valuation adjustments and includes:

• Actuarial gains and losses generated in the year, arising from the differences between the previous actuarial assumptions and what has actually occurred and from the effects of changes in actuarial assumptions.

• The return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset).

• Any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability (asset).

w) Other long-term employee benefits

Other long-term employee benefits, defined as obligations to pre-retirees -taken to be those who have ceased to render services at the entity but who, without being legally retired, continue to have economic rights vis-à-vis the entity until they acquire the legal status of retiree-, long-service bonuses, obligations for death of spouse or disability before retirement that depend on the employee’s length of service at the entity and other similar items, are treated for accounting purposes, where applicable, as established above for defined benefit post-employment plans, except that actuarial gains and losses are recognized under Provisions (net) in the consolidated income statement (see Note 25).

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x) Termination benefits

Termination benefits are recognized when there is a detailed formal plan identifying the basic changes to be made, provided that implementation of the plan has begun, its main features have been publicly announced or objective facts concerning its implementation have been disclosed.

y) Income tax

The expense for Spanish corporation tax and other similar taxes applicable to the foreign consolidated entities is recognized in the consolidated income statement, except when it results from a transaction recognized directly in equity, in which case the tax effect is also recognized in equity.

The current income tax expense is calculated as the sum of the current tax resulting from application of the appropriate tax rate to the taxable profit for the year (net of any deductions allowable for tax purposes), and of the changes in deferred tax assets and liabilities recognized in the consolidated income statement.

Deferred tax assets and liabilities include temporary differences, which are identified as the amounts expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities and their related tax bases, and tax loss and tax credit carryforwards. These amounts are measured at the tax rates that are expected to apply in the period when the asset is realized or the liability is settled.

Tax assets includes the amount of all tax assets, which are broken down into current -amounts of tax to be recovered within the next twelve months- and deferred -amounts of tax to be recovered in future years, including those arising from tax loss or tax credit carryforwards.

Tax liabilities includes the amount of all tax liabilities (except provisions for taxes), which are broken down into current -the amount payable in respect of the income tax on the taxable profit for the year and other taxes in the next twelve months- and deferred -the amount of income tax payable in future years.

Deferred tax liabilities are recognized in respect of taxable temporary differences associated with investments in subsidiaries, associates or joint ventures, except when the Group is able to control the timing of the reversal of the temporary difference and, in addition, it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax assets are only recognized for temporary differences to the extent that it is considered probable that the consolidated entities will have sufficient future taxable profits against which the deferred tax assets can be utilized, and the deferred tax assets do not arise from the initial recognition (except in a business combination) of other assets and liabilities in a transaction that affects neither taxable profit nor accounting profit. Other deferred tax assets (tax loss and tax credit carryforwards) are only recognized if it is considered probable that the consolidated entities will have sufficient future taxable profits against which they can be utilized.

Income and expenses recognized directly in equity are accounted for as temporary differences.

The deferred tax assets and liabilities recognized are reassessed at each reporting date in order to ascertain whether they still exist, and the appropriate adjustments are made on the basis of the findings of the analyses performed.

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z) Residual maturity periods and average interest rates

The analysis of the maturities of the balances of certain items in the consolidated balance sheet and the average interest rates at 2013, 2012 and 2011 year-end is provided in Note 51.

aa) Consolidated statements of cash flows

The following terms are used in the consolidated statements of cash flows with the meanings specified:

• Cash flows: inflows and outflows of cash and cash equivalents, which are short-term, highly liquid investments that are subject to an insignificant risk of changes in value, irrespective of the portfolio in which they are classified.

The Group classifies as cash and cash equivalents the balances recognized under Cash and balances with central banks in the consolidated balance sheet.

• Operating activities: the principal revenue-producing activities of credit institutions and other activities that are not investing or financing activities.

• Investing activities: the acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents.

• Financing activities: activities that result in changes in the size and composition of the equity and liabilities that are not operating activities.

ab) Consolidated statements of recognized income and expense

This statement presents the income and expenses generated by the Group as a result of its business activity in the year, and a distinction is made between the income and expenses recognized in the consolidated income statement for the year and the other income and expenses recognized directly in consolidated equity.

Accordingly, this statement presents:

a. Consolidated profit for the year.

b. The net amount of the income and expenses recognized temporarily in consolidated equity under Valuation adjustments.

c. The net amount of the income and expenses recognized definitively in consolidated equity.

d. The income tax incurred in respect of the items indicated in b) and c) above, except for the valuation adjustments arising from investments in associates or jointly controlled entities accounted for using the equity method, which are presented net.

e. Total consolidated recognized income and expense, calculated as the sum of a) to d) above, presenting separately the amount attributable to the Parent and the amount relating to non-controlling interests.

The amount of the income and expenses relating to entities accounted for using the equity method recognized directly in equity is presented in this statement, irrespective of the nature of the related items, under Entities accounted for using the equity method.

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The statement presents the items separately by nature, grouping together items that, in accordance with the applicable accounting standards, will not be reclassified subsequently to profit and loss since the requirements established by the corresponding accounting standards are met.

ac) Statements of changes in total equity

This statement presents all the changes in equity, including those arising from changes in accounting policies and from the correction of errors. Accordingly, this statement presents a reconciliation of the carrying amount at the beginning and end of the year of all the consolidated equity items, and the changes are grouped together on the basis of their nature into the following items:

a. Adjustments due to changes in accounting policies and to errors: include the changes in consolidated equity arising as a result of the retrospective restatement of the balances in the consolidated financial statements, distinguishing between those resulting from changes in accounting policies and those relating to the correction of errors.

b. Income and expense recognized in the year: includes, in aggregate form, the total of the aforementioned items recognized in the consolidated statement of recognized income and expense.

c. Other changes in equity: includes the remaining items recognized in equity, including, inter alia, increases and decreases in capital, distribution of profit, transactions involving own equity instruments, equity-instrument-based payments, transfers between equity items and any other increases or decreases in consolidated equity.

3. Santander Group

a) Banco Santander, S.A. and international Group structure

The growth of the Group in the last decade has led the Bank to also act, in practice, as a holding entity of the shares of the various companies in its Group, and its results are becoming progressively less representative of the performance and earnings of the Group. Therefore, each year the Bank determines the amount of the dividends to be distributed to its shareholders on the basis of the consolidated net profit, while maintaining the Group’s traditionally high level of capitalization and taking into account that the transactions of the Bank and of the rest of the Group are managed on a consolidated basis (notwithstanding the allocation to each company of the related net worth effect).

At international level, the various banks and other subsidiaries, jointly controlled entities and associates of the Group are integrated in a corporate structure comprising various holding companies which are the ultimate shareholders of the banks and subsidiaries abroad.

The purpose of this structure, all of which is controlled by the Bank, is to optimize the international organization from the strategic, economic, financial and tax standpoints, since it makes it possible to define the most appropriate units to be entrusted with acquiring, selling or holding stakes in other international entities, the most appropriate financing method for these transactions and the most appropriate means of remitting the profits obtained by the Group’s various operating units to Spain.

The Appendices provide relevant data on the consolidated Group companies and on the companies accounted for using the equity method.

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b) Acquisitions and disposals

Following is a summary of the main acquisitions and disposals of ownership interests in the share capital of other entities and other significant corporate transactions performed by the Group in the last three years:

i. Agreement with Skandinaviska Enskilda Banken (SEB Group) for the acquisition of its commercial banking business in Germany

On July 12, 2010, Santander Group announced the agreement with Skandinaviska Enskilda Banken (SEB Group) for the purchase by the German subsidiary Santander Consumer Bank AG of the SEB Group’s commercial banking business in Germany. As a result of the acquisition of this business, which comprises 173 branches and provides services to a million customers, the number of Santander Consumer Bank branches in Germany almost doubled and the Group’s headcount increased by approximately 2,200. The transaction was completed on January 31, 2011, after receiving the relevant regulatory approval, amounting to EUR 494 million.

The detail of the fair values of the identifiable assets acquired and liabilities assumed at the acquisition date, the cost of the investment and the goodwill is as follows:

	Millions of euros
Cash and balances with central banks		61
Loans and receivables - loans and advances to customers (*)		8,202
Tangible assets		8
Other assets		82
Total assets		8,353
Deposits from credit institutions		710
Customer deposits		4,486
Marketable debt securities and Other financial liabilities		2,467
Provisions (**)		299
Other liabilities		42
Total liabilities		8,004
Net asset value		349
Non-controlling interests		—
Cost of investment		(494	)
Goodwill at February 1, 2011 (***)		145

(*) Of which approximately 83% relate to mortgage loans and the remainder to consumer loans. The estimate of fair value included additional impairment losses of EUR 126 million on the acquired loans.

(**) Of which approximately EUR 66 million related to provisions for pensions and EUR 103 million to other provisions.

(***) Belongs to the Santander Consumer Holding cash-generating unit.

The acquired business contributed a loss of EUR 58 million to pre-tax profit for 2011.

ii. Acquisition of Santander Banif Inmobiliario

On December 3, 2010, for purely commercial reasons, the Group decided to contribute resources to the Santander Banif Inmobiliario, F.I.I. property investment fund (“the Fund”) through the subscription of new units and the granting of a two-year liquidity guarantee in order to meet any outstanding redemption claims by the unitholders and to avoid winding up the Fund. The Group offered the unitholders of the Fund the possibility, before February 16, 2011, to submit new requests for the total or partial redemption of their units or for the total or partial revocation of any redemption requests that they had previously submitted and had not been met.

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Redemptions from this Fund, which is managed by the Group entity Santander Real Estate, S.G.I.I.C. S.A., had been suspended for two years in February 2009, in accordance with the request filed with the Spanish National Securities Market Commission (CNMV), due to the lack of sufficient liquidity to meet the redemptions requested at that date, which were in excess of 10% of net assets.

On March 1, 2011, the Group paid the full amount of the redemptions requested by the Fund’s unitholders, i.e. EUR 2,326 million (93.01% of the Fund’s net assets), through the subscription of the related units by the Group at their redemption value at February 28, 2011.

Since the Group already had a non-controlling interest in the Fund, following the aforementioned acquisition the Group owned 95.54% of the Fund. Furthermore, the suspension of redemptions was lifted from said date and the Fund is operating normally.

The detail of the fair values of the identifiable assets acquired and liabilities assumed at the acquisition date, the cost of the investment and the goodwill is as follows:

	Millions of euros
Cash and balances with central banks and loans and advances to credit institutions		69
Loans and receivables		10
Tangible assets		2,756
Other assets		9
Total assets		2,844
Customer deposits		81
Deposits from credit institutions		245
Other liabilities		17
Total liabilities		343
Net asset value		2,501
Non-controlling interests		(112	)
Cost of investment		(2,389	)
Goodwill at March 1, 2011		—

At December 31, 2011, Santander Banif Inmobiliario F.I.I. had contributed a pre-tax loss of EUR 106 million to the Group.

In 2012 the Group acquired Fund units amounting to EUR 22 million and, accordingly, its ownership interest rose to 97.63% (in 2013 it rose to 99.65%).

iii. Chile

In 2011 the Group performed various sales of shares representing 9.72% of the share capital of Banco Santander Chile for a total of USD 1,241 million, which gave rise to increases of EUR 434 million in Group reserves and EUR 373 million in non-controlling interests. Following these transactions, the Group holds 67% of the share capital of this entity and undertook not to reduce its percentage of ownership for one year.

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iv. Latin American insurance companies

On February 22, 2011, Banco Santander, S.A. and the insurance company Zurich Financial Services Group entered into an agreement to create a strategic alliance aimed at boosting Santander Group’s bancassurance business in five key Latin American markets: Brazil, Chile, Mexico, Argentina and Uruguay.

Once the required authorizations had been obtained from the various regulators, in the fourth quarter of 2011 Zurich acquired, for EUR 1,044 million, 51% of the share capital of Zurich Santander Insurance América, S.L. (holding company for the Group’s insurance “factories” in Latin America), thereby gaining control over this company, and it took over management of the companies concerned. The agreement also provides for deferred payments based on the achievement of the business plan targets over the coming 25 years.

Following this transaction Banco Santander retained 49% of the share capital of the holding company and entered into a distribution agreement for the sale of insurance products in each of the signatory countries for 25 years (see Note 13).

As a result of the aforementioned transaction, the Group recognized a gain of EUR 641 million (net of the related tax effect) under Gains (losses) on disposal of assets not classified as non-current assets held for sale in the consolidated income statement for 2011 (see Note 49), of which EUR 233 million related to the measurement at fair value of the 49% ownership interest retained in this company.

v. SCUSA

In December 2011 Santander Consumer USA Inc. (SCUSA) increased capital by USD 1,158 million, of which USD 1,000 million were paid by Sponsor Auto Finance Holdings Series LP (Sponsor Holdings), an investee of funds controlled by Warburg Pincus LLC, Kohlberg Kravis Roberts & Co. L.P. and CenterbridgePartners L.P., and the remainder by DDFS LLC (DDFS), a company controlled by Thomas G. Dundon, the CEO of SCUSA. Following this capital increase, Sponsor Holdings and Thomas G. Dundon (indirectly) held equity interests of approximately 24% and 11%, respectively, in SCUSA, while the Group’s equity interest therein is 65%.

Also, the Group entered into an agreement with these shareholders which, inter alia, grants Sponsor Holdings and DDFS LLC representation on the board of directors of SCUSA and establishes a voting system whereby strategic, financial and operating decisions, as well as other significant decisions associated with the ordinary management of SCUSA, are subject to joint approval by Santander Group and the aforementioned shareholders and, accordingly, SCUSA became controlled jointly by all the shareholders.

As provided for in the shareholders’ agreement, if SCUSA’s earnings for 2014 and 2015 exceed certain targets, SCUSA may be required to pay up to USD 595 million to Santander Holdings USA, Inc. (SHUSA). If SCUSA’s earnings do not surpass those targets in 2014 and 2015, SCUSA may be obliged to make a payment of up to that same amount to Sponsor Holdings. The Bank’s directors considered that SCUSA would achieve the targets set for 2014 and 2015 and that it would therefore not have to make any significant payments to either of the aforementioned shareholders under the agreement.

Lastly, the shareholders’ agreement establishes that both Sponsor Holdings and DDFS will be entitled to sell to SHUSA their ownership interests in the share capital of SCUSA at market value on the fourth, fifth and seventh anniversaries of completion of the transaction, unless a public offering of SCUSA shares has taken place prior to those dates. The agreement also provides for this same entitlement in the event of an impasse in relation to any of the matters subject to joint approval by the general meeting or the board of directors of SCUSA.

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As a result of the aforementioned transaction, in 2011 the Group recognized a gain of EUR 872 million under Gains (losses) on disposal of assets not classified as non-current assets held for sale (see Note 49), of which EUR 649 million related to the measurement at fair value of the 65% ownership interest retained in this company. The fair value of SCUSA was determined using comparable market data, recent transactions and discounted cash flow analyses, taking into account contingent payments.

Following this transaction, at December 31, 2013, the Group held a 65% ownership interest in SCUSA and controlled this company jointly with the aforementioned shareholders (see Note 13).

In January 2014, a public offering of SCUSA shares took place and it was admitted to trading on the New York Stock Exchange, having placed 21.6% of its share capital. Following this placement, the aforementioned shareholders’ agreement was terminated and, accordingly, the Group controls SCUSA (see Note 1.h).

vi. Banco Santander (Brasil) S.A.

In January and March 2012 the Group transferred shares representing 4.41% and 0.77% of Banco Santander (Brasil), S.A. to two leading international financial institutions that have undertaken to deliver these shares to the holders of the bonds convertible into shares of Banco Santander (Brasil), S.A. issued by Banco Santander, S.A. in October 2010 upon maturity of the bonds. This transaction did not give rise to any change in the Group’s equity (see Note 34).

These shares were delivered on November 7, 2013.

vii. Colombia

In December 2011, the Group entered into an agreement with the Chilean group Corpbanca to sell its shareholding in Banco Santander Colombia S.A. and its other business subsidiaries in this country (Santander Investment Valores Colombia S.A., Comisionista de Bolsa Comercial, Santander Investment Colombia S.A., Santander Investment Trust Colombia S.A., Sociedad Fiduciaria y Agencia de Seguros Santander, Ltda.).

Following the obtainment of the regulatory authorizations from the competent authorities and the delisting of the shares of Banco Santander Colombia S.A., in the second quarter of 2012 the Group sold its shareholding in Banco Santander Colombia S.A. and its other business subsidiaries in this country to the Corpbanca Group for a total of USD 1,229 million (EUR 983 million), giving rise to a gain of EUR 619 million which was recognized by the Group under Gains/(losses) on disposal of assets not classified as non-current assets held for sale in the consolidated income statement for 2012 (see Note 49).

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

In August 2012 the Group announced its intention to file prospectuses with the Mexican National Banking and Securities Commission (CNBV) and the US Securities and Exchange Commission for the placement of shares of the subsidiary Grupo Financiero Santander México, S.A. B. de C.V. in the secondary market.

The public offering for 1,469,402,029 series B shares of Grupo Financiero Santander México, S.A. B. de C.V. was completed on September 26, 2012. The transaction was made up of a Mexican tranche, consisting of shares, and an international tranche, including the United States, consisting of American Depositary Shares (ADSs) representing five shares each.

The share placement was priced at MXN 31.25 (USD 2.437) per share.

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Also, the underwriters involved in the offering were granted an option, exercisable before October 25, to purchase an additional 220,410,304 shares.

Once the offering as a whole had been completed and the underwriters had exercised their options, the percentage sold was 24.9%, which gave rise to increases of EUR 1,092 million in Reserves, EUR 1,493 million in Non-controlling interests and EUR 263 million in Valuation adjustments - Exchange differences in 2012.

ix. Metrovacesa, S.A.

On March 17, 2011, the creditor entities that had been party to an agreement to restructure the Sanahuja Group’s debt in 2009, whereby they received Metrovacesa, S.A. shares as a dation in payment for the group’s debts, entered into a new capitalization and voting agreement relating to Metrovacesa, S.A., subject to certain conditions precedent, including the performance by Metrovacesa, S.A. of a capital increase through monetary contributions and the conversion of debt into capital, whereby the creditor entities taken as a whole would convert approximately EUR 1,360 million of Metrovacesa, S.A.’s financial debt into capital, of which EUR 492 million would relate to the Group.

On June 28, 2011, the shareholders at the annual general meeting of Metrovacesa, S.A. resolved to approve the aforementioned capital increase, subject to certain conditions precedent such as the Spanish National Securities Market Commission (CNMV) releasing the Group from the obligation to launch a takeover bid for all of the share capital, since the transaction might raise the Group’s holding in the share capital of Metrovacesa, S.A. above 30%. This release was granted on July 6, 2011.

Following the performance of the aforementioned capital increase, the Group became the owner of 34.88% of the shares of Metrovacesa, S.A. This ownership interest is recognized under Investments in the consolidated balance sheet and is accounted for using the equity method (see Note 13).

On December 19, 2012, the creditor entities that took part in the aforementioned debt restructuring agreement announced that they had reached an agreement to promote the delisting of the shares of Metrovacesa, S.A. and they voted in favor of this at the general meeting held for this purpose on January 29, 2013. Following the approval of the delisting and the public takeover offer by the shareholders at the Metrovacesa, S.A. general meeting, the entities prepared a delisting public takeover offer aimed at the Metrovacesa, S.A. shareholders that did not enter into the agreement, at EUR 2.28 per share. The Group’s share of the delisting public takeover offer was 45.56% and, as a result, following 97.29% acceptance of the public takeover offer, the Group acquired an additional 1.953% of Metrovacesa, S.A. for which it paid EUR 44 million. Following this transaction, at December 31, 2013, the Group held an ownership interest of 36.82% in the share capital of Metrovacesa, S.A.

x. Bank Zachodni WBK S.A.

On February 7, 2011, the Group announced the preparation in Poland of a takeover bid for all the shares of the Polish company Bank Zachodni WBK, S.A. (“BZ WBK”), which Allied Irish Bank (“AIB”), owner of 70.36% of BZ WBK, was obliged to accept, by virtue of the agreement entered into with Banco Santander, S.A. in September 2010.

On February 18, 2011, notification of non-opposition to the Group’s acquisition of a significant holding was received from the financial regulator in Poland -KNF.

On April 1, 2011, the Group acquired 69,912,653 shares of Bank Zachodni WBK, S.A. representing 95.67% of the capital of this entity. The purchase of the aforementioned shares gave rise to a disbursement of EUR 3,987 million. Also, as had already been announced, on the same date the Group acquired the 50% ownership interest held by AIB in Bank Zachodni WBK Asset Management, S.A. for EUR 174 million in cash. Subsequently, based on the terms and conditions of the takeover bid, certain non-controlling shareholders of BZ WBK opted to sell their shares. As a result, the Group acquired 421,859 additional shares for EUR 24 million.

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Following is the detail of the fair values of the identifiable assets acquired and liabilities assumed at the acquisition date, the cost of the investment and the goodwill translated to euros at the exchange rate at the date of acquisition:

	Millions of euros
Cash and balances with central banks		316
Loans and advances to credit institutions		386
Financial liabilities held for trading		691
Available-for-sale financial assets		3,422
Loans and receivables - loans and advances to customers (*)		8,346
Tangible assets		113
Intangible assets (**)		94
Other assets		226
Total assets		13,594
Customer deposits (***)		10,288
Deposits from credit institutions		797
Provisions		46
Other liabilities		464
Total liabilities		11,595
Net assets		1,999
Non-controlling interests		(75	)
Cost of investment		(4,185	)
Goodwill at April 1, 2011		2,261

(*) EUR 15 million of additional impairment losses were considered in estimating the fair value of the loans and receivables.

(**) The estimate identified a customer list amounting to approximately EUR 54 million.

(***) In the estimate customer deposits were reduced by approximately EUR 178 million.

At December 31, 2011, the Group held a total of 70,334,512 shares of Bank Zachodni WBK, S.A. (96.25%).

In 2011 Bank Zachodni WBK, S.A. contributed EUR 207 million to the profit of the Group. Had the acquisition taken place on January 1, 2011, the profit contributed to the Group in 2011 would have been approximately EUR 276 million.

In August 2012, Bank Zachodni WBK S.A. performed a capital increase amounting to PLN 332 million (EUR 81 million) which was not subscribed by the Group, giving rise to a reduction of EUR 12 million in Reserves and EUR 5 million in Valuation adjustments, and to an increase of EUR 93 million in Non-controlling interests, considering the Group’s effective ownership interest in the entity. Following the aforementioned transaction, the Group held 94.23% of the entity’s share capital.

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xi. Merger of Bank Zachodni WBK S.A. and Kredyt Bank S.A.

On February 28, 2012, the Group announced that Banco Santander, S.A. and KBC Bank NV (KBC) had entered into an investment agreement to merge their two subsidiaries in Poland, Bank Zachodni WBK S.A. and Kredyt Bank S.A., respectively, following which the Group controlled approximately 76.5% of the entity resulting from the merger and KBC controlled 16.4%, with the remaining 7.1% being owned by non-controlling interests. Also, the Group undertook to place a portion of its ownership interest among investors and to acquire up to 5% of the entity resulting from the merger in order to help KBC to reduce its holding in the merged entity to below 10%. KBC’s objective is to dispose of its entire investment in order to maximize its value.

It was agreed to carry out the transaction through a capital increase at Bank Zachodni WBK S.A., whose new shares would be offered to KBC and the other shareholders of Kredyt Bank S.A. in exchange for shares in Kredyt Bank S.A. The related exchange ratio was established at 6.96 shares of Bank Zachodni S.A. for every 100 shares of Kredyt Bank S.A.

In the first few days of 2013, following obtainment of the related authorization from the Polish financial regulator (KNF), the aforementioned transaction was carried out. As a result, the Group controlled approximately 75.2% of the post-merger entity and KBC controlled approximately 16.2%, with the remaining 8.6% being owned by non-controlling interests. This transaction gave rise to an increase of EUR 1,037 million in Non-controlling interests – EUR 169 million as a result of the acquisition of control of Kredyt Bank S.A. and EUR 868 million as a result of the reduction in the percentage of ownership of Bank Zachodni WBK S.A.

The detail of the provisional fair values of the identifiable assets acquired and liabilities assumed at the business combination date, the cost of the investment and the goodwill is as follows:

	Millions of euros
Cash and balances with central banks		351
Loans and receivables - loans and advances to customers (*)		6,767
Available-for-sale financial assets		2,547
Other assets (**)		692
Total assets		10,357
Deposits from credit institutions		1,414
Customer deposits		7,620
Other liabilities		642
Total liabilities		9,676
Net assets		681
Non-controlling interests		(169	)
Cost of investment		838
Goodwill at January 2013 (***)		326

(*) EUR 122 million of additional impairment losses were considered in estimating the fair value of the loans and receivables.

(**) The estimate identified intangible assets amounting to EUR 51 million.

(***) Belongs to the Bank Zachodni WBK S.A. cash-generating unit (see Note 17).

On March 22, 2013, Banco Santander, S.A. and KBC completed the placement of all the shares owned by KBC and 5.2% of the share capital of Bank Zachodni WBK S.A. held by the Group in the market for EUR 285 million, which gave rise to an increase of EUR 292 million in Non-controlling interests.

Following these transactions, the Group holds 70% of the share capital of Bank Zachodni WBK S.A. and the remaining 30% is held by non-controlling interests.

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xii. Agreement to purchase Royal Bank of Scotland branch offices

In August 2010 Santander UK plc announced that it had entered into an agreement to acquire the portion of the banking business carried on by Royal Bank of Scotland (RBS) through its branches in England and Wales and the NatWest network in Scotland, as well as certain SME and corporate banking centers.

On October 12, 2012, the Group announced that the agreement had become null and void due to the foreseeable breach of the terms and conditions thereof by the agreed deadline (February 2013).

xiii. Merger by absorption of Banesto and Banco Banif

On December 17, 2012, Banco Santander, S.A. announced that it had resolved to approve the plan for the merger by absorption of Banco Español de Crédito, S.A. (Banesto) and Banco Banif, S.A. (Sole-Shareholder Company) as part of the restructuring of the Spanish financial sector.

On January 9, 2013, the boards of directors of Banco Santander, S.A. and Banesto approved the common draft terms of merger. Also, on 28 January 2013, the boards of directors of Banco Santander, S.A. and Banco Banif, S.A. (Sole-Shareholder Company) approved the related common draft terms of merger. The draft terms of merger were approved by the shareholders of Banco Santander, S.A. and Banesto at the annual general meetings held on March 22 and 21, respectively.

On April 29, 2013, pursuant to the common draft terms of merger and the resolutions of the shareholders at annual general meetings of the two companies, Banco Santander, S.A. announced the regime and procedure for the exchange of shares of Banesto for those of Banco Santander, S.A. Banco Santander, S.A. exchanged the Banesto shares for treasury shares at a ratio of 0.633 shares of Banco Santander, S.A., of EUR 0.5 par value each, for each share of Banesto, of EUR 0.79 par value each, without any additional cash payment. As a result of this exchange, Non-controlling interests fell by EUR 455 million.

On May 3, 2013, the public deed of the merger by absorption of Banesto, which was extinguished, was registered at the Cantabria Mercantile Registry. Also, on April 30, the public deed of the merger by absorption of Banco Banif S.A. (Sole-Shareholder Company) was executed, and this entity was extinguished. The public deed was registered at the Cantabria Mercantile Registry on May 7, 2013.

xiv. Insurance business in Spain

On December 20, 2012, the Group announced that it had reached an agreement with Aegon to strengthen the bancassurance business in Spain. The agreement does not affect savings, health and vehicle insurance, which continue to be managed by Banco Santander.

In June 2013, having received the relevant authorizations from the Directorate-General of Insurance and Pension Funds and from the European competition authorities, Aegon acquired a 51% ownership interest in the two insurance companies created by the Group for these purposes, one for life insurance and the other for general insurance (currently Aegon Santander Vida Seguros y Reaseguros, S.A. and Aegon Santander Generales Seguros y Reaseguros, S.A.), for which it paid EUR 220 million, thereby gaining joint control together with the Group over the aforementioned companies. The agreement also includes payments to Aegon that are deferred over two years and amounts receivable for the Group that are deferred over five years, depending on the business plan.

The aforementioned agreement includes the execution of a distribution agreement for the sale of insurance products in Spain for 25 years through commercial networks, for which the Group will receive commissions at market rates.

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This transaction gave rise to a gain of EUR 385 million recognized under Gains (losses) on disposal of assets not classified as non-current assets held for sale (EUR 270 million net of tax), of which EUR 186 million related to the fair value recognition of the 49% ownership interest retained by the Group.

xv. Agreement with Elavon Financial Services Limited

On October 19, 2012, Banco Santander, S.A. announced that it had entered into an agreement with Elavon Financial Services Limited to jointly develop the payment services business in Spain through point-of-sale credit and debit card terminals at merchants.

This transaction involved the creation of a joint venture, 51% owned by Elavon and 49% owned by Banco Santander, to which Santander Group transferred its aforementioned payment services business in Spain (excluding the former Banesto).

The transaction was completed in the first half of 2013 and generated a gain of EUR 122 million (EUR 85 million net of tax).

xvi. Agreement with Warburg Pincus and General Atlantic

On May 30, 2013, the Group announced that it had entered into an agreement with subsidiaries of Warburg Pincus and General Atlantic to foster the global development of its asset management unit, Santander Asset Management (SAM). According to the terms and conditions of the agreement, Warburg Pincus and General Atlantic will together own 50% of the holding company created by the Group which will own the eleven management companies the Group has, mainly in Europe and Latin America, while the other 50% will be held by the Group.

The purpose of the alliance is to enable SAM to improve its ability to compete with the large independent international management companies, since the businesses to be strengthened include asset management in the global institutional market, with the additional advantage of having knowledge and experience in those markets in which the Group is present. The agreement also envisages the distribution of products managed by SAM in the countries in which the Group has a commercial network for a period of ten years, renewable for five additional two-year periods, for which the Group will receive commissions at market rates, thus benefiting from broadening the range of products and services to offer its customers. SAM will also distribute its products and services internationally, outside the Group’s commercial network.

Since the aforementioned management companies belonged to different Group companies, prior to the completion of the transaction a corporate restructuring took place whereby each of the management companies was sold, by its shareholders, for its fair value, to SAM Investment Holdings Limited (SAM), a holding company created by the Group. The aggregate value of the management companies was approximately EUR 1,700 million.

Subsequently, in December 2013, once the required authorizations had been received from the various regulators, the agreement was executed through the acquisition of a 50% ownership interest in SAM’s share capital by Sherbrooke Acquisition Corp SPC (an investee of Warburg Pincus and General Atlantic) for EUR 449 million. At that date, SAM had financing from third parties for EUR 845 million. The agreement includes deferred contingent amounts payable and receivable for the Group based on the achievement of the business plan targets over the coming five years.

Also, the Group entered into a shareholders agreement with these shareholders regulating, inter alia, the taking of strategic, financial, operational and other significant decisions regarding the ordinary management of SAM on a joint basis. Certain restrictions on the transferability of the shares were also agreed, and a commitment was made by the two parties to retain the restrictions for at least 18 months. Lastly, Sherbrooke Acquisition Corp SPC will be entitled to sell to the Group its ownership interest in the share capital of SAM at market value on the fifth and seventh anniversaries of the transaction, unless a public offering of SAM shares has taken place prior to those dates.

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Following these transactions, at year-end the Group held a 50% ownership interest in SAM and controlled this company jointly with the aforementioned shareholders (see Note 13).

As a result of the aforementioned transaction, the Group recognized a gain of EUR 1,372 million under Gains (losses) on disposal of assets not classified as non-current assets held for sale in the consolidated income statement for 2013 (see Note 49), of which EUR 671 million related to the fair value of the 50% ownership interest retained by the Group.

xvii. Agreement with El Corte Inglés

On October 7, 2013, the Group announced that it had entered into a strategic agreement through its subsidiary Santander Consumer Finance, S.A. with El Corte Inglés, S.A. in the area of consumer finance, which includes the acquisition of 51% of the share capital of Financiera El Corte Inglés E.F.C., S.A., with El Corte Inglés, S.A. retaining the remaining 49%. Santander Consumer will pay approximately EUR 140 million for 51% of the share capital of Financiera El Corte Inglés E.F.C., S.A. Completion of this transaction was subject to, among other conditions, obtainment of the relevant regulatory and competition authorizations, which were obtained in the first quarter of 2014 (see note 1.h).

xviii. Agreement with Apollo

On November 21, 2013, the Group announced that it had reached a preliminary agreement with Apollo European Principal Finance Fund II, a fund managed by subsidiaries of Apollo Global Management, LLC, for the sale of the platform for managing the loan recovery activities of Banco Santander, S.A. in Spain and for managing and marketing the properties relating to this activity.

Following this transaction, the Group will retain the property assets and credit portfolio on its balance sheet, while management of these assets will be carried out from the platform owned by Apollo.

This agreement was completed in January 2014 (see Note 1.h).

The cost, total assets and total income of the other consolidated companies acquired and disposed of in the last three years were not material with respect to the related consolidated totals.

c) Off-shore entities

The Group does not currently have any subsidiaries resident in off-shore territories considered tax havens according to the list published by the OECD.

In accordance with Spanish legislation, the Group has 12 subsidiaries resident in off-shore territories. One of these subsidiaries is currently in liquidation and, over the next few years, the liquidation of four more subsidiaries, all of which are substantially inactive or inactive, is expected.

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Following these planned disposals, the Group would have a total of seven off-shore subsidiaries pursuant to the criteria under Spanish legislation. These entities have 152 employees, located mainly in Jersey and the Isle of Man, and are classified by activity as detailed below:

i. Operating subsidiaries engaging in banking or financial activities or in services:

• Abbey National International Limited in Jersey, which engages mainly in remote banking for British customers, who are offered traditional savings products.

ii. Substantially inactive or inactive subsidiaries:

• Serfin International Bank and Trust, Limited (Cayman Islands), an inactive bank.

• Whitewick Limited (Jersey), an inactive company.

• ALIL Services Limited (Isle de Man), with a much reduced service activity (formerly Alliance & Leicester International Limited).

iii. Issuing companies:

The Group has three issuing companies located in the following jurisdictions:

Issuers of preference shares:

• Totta & Açores Financing, Limited (Cayman Islands)

Issuers of debt:

• Santander Central Hispano Financial Services, Ltd. (Cayman Islands)

• Santander Central Hispano Issuances, Ltd. (Cayman Islands)

The preference share and subordinated debt issues launched by the aforementioned issuers were authorized by the Bank of Spain or the Bank of Portugal as computable for eligible capital calculation purposes. Once the issues launched by these issuers have been redeemed, these entities will be liquidated.

It should be noted that the individual results include transactions performed with other Group companies, such as dividend collection, recognition and reversal of provisions and corporate restructuring results which, in accordance with accounting standards, are eliminated on consolidation in order to avoid the duplication of profit or the recognition of intra-Group results. Individual results also include the profit attributable to the holders of preference shares. Therefore, they are not representative of the Group’s operations in these countries or of the results contributed to the Group.

The banks and companies, whose activities are detailed above, contributed a profit of approximately EUR 24 million to the Group’s consolidated profit in 2013.

Also, the Group has five branches: three in the Cayman Islands, one in the Isle of Man and one in Jersey. These branches report to, and consolidate their balance sheets and income statements with, their respective foreign parents.

Spain will foreseeably enter into information exchange agreements with the Cayman Islands, the Isle of Man, Jersey and Guernsey and, accordingly, these territories would cease to be tax havens under Spanish law and, consequently, the Group would no longer have any entities in off-shore territories. It should be noted that, according to the list published by the OECD, none of these jurisdictions is considered a tax haven.

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Also, the Group controls from Brazil a securitization company called Brazil Foreign Diversified Payment Rights Finance Company and manages a segregated portfolio company called Santander Brazil Global Investment Fund SPC in the Cayman Islands, and manages from the UK a protected cell company in Guernsey called Guaranteed Investment Product 1 PCC Ltd. Additionally, the Group has, directly or indirectly, various financial investments located in tax havens including, inter alia, Asiabridge Fund I LLC in Mauritius, Olivant Limited in Guernsey and JC Flowers in the Cayman Islands.

Singapore and Hong Kong, where the Group has one subsidiary and two branches, are no longer considered off-shore centers from January and April 2013, respectively, following the application of the provisions contained in the international double taxation conventions signed with Spain in 2011.

The Group also has five subsidiaries domiciled in off-shore territories that are not considered to be off-shore entities since they are resident for tax purposes in, and operate exclusively from, the UK.

The Group has established procedures and controls (risk management, supervision, verification and review plans and periodic reports) to prevent reputational and legal risk arising at these entities. Also, the Group has continued to implement its policy to reduce the number of off-shore units. The financial statements of the Group’s off-shore units are audited by member firms of Deloitte.

4. Distribution of the Bank’s profit, Shareholder remuneration scheme and Earnings per share

a) Distribution of the Bank’s profit and Shareholder remuneration scheme

The distribution of the Bank’s net profit for 2013 that the board of directors will propose for approval by the shareholders at the annual general meeting is as follows:

	Millions of euros
Acquisition, with a waiver of exercise, of bonus share rights from the shareholders which, under the Santander Dividendo Elección scrip dividend scheme, opted to receive in cash the remuneration equivalent to the first, second and third interim dividends -EUR 641 million- and from the shareholders which are expected to opt to receive in cash the remuneration equivalent to the final dividend (EUR 236 million):		877
Of which:
Distributed at December 31, 2013 (*)		406
Third interim dividend Final dividend for 2013 (**)		235 236
To voluntary reserves		153
Net profit for the year		1,030

(*) Recognized under Shareholders’ equity - Dividends and remuneration.

(**) Assuming a percentage of cash requests of 13.6%. If the amount used to acquire rights from shareholders opting to receive in cash the remuneration equivalent to the final dividend were less than the figure indicated, the difference would be automatically allocated to increase voluntary reserves. Otherwise, the difference would be deducted from the amount allocated to increase voluntary reserves.

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In addition to the EUR 877 million indicated above, EUR 4,400 million in shares were allocated to the remuneration of shareholders under the shareholder remuneration scheme (Santander Dividendo Elección) approved by the shareholders at the annual general meeting held on March 22, 2013, whereby the Bank offered shareholders the possibility to opt to receive an amount equivalent to the first, second and third interim dividends out of 2013 profit in cash or new shares.

Similarly, within the framework of the shareholder remuneration scheme (Santander Dividendo Elección) the implementation of which will be submitted for approval by the annual general meeting, the Bank will offer shareholders the possibility of opting to receive an amount equivalent to the final dividend for 2013 in cash or new shares. The Bank’s directors consider that 86.4% of shareholders will request remuneration in shares and, therefore, it is anticipated that the shareholders will be paid approximately EUR 1,498 million in shares.

The board of directors will propose to the shareholders at the annual general meeting that remuneration of approximately EUR 0.60 per share be paid for 2013.

b) Earnings per share from continuing and discontinued operations

i. Basic earnings per share

Basic earnings per share are calculated by dividing the net profit attributable to the Group by the weighted average number of ordinary shares outstanding during the year, excluding the average number of treasury shares held in the year.

Accordingly:

	12/31/13			12/31/12		12/31/11
Profit attributable to the Group (millions of euros)		4,370			2,295		5,330
Profit (Loss) from discontinued operations (net of non-controlling interests) (millions of euros)		(15	)		70		15
Profit from continuing operations (net of non-controlling interests) (millions of euros)		4,385			2,225		5,315
Weighted average number of shares outstanding		10,836,110,583			9,451,734,994		8,408,973,592
Assumed conversion of convertible debt		—			314,953,901		483,059,180
Adjusted number of shares		10,836,110,583			9,766,688,895		8,892,032,772
Basic earnings per share (euros)		0.40			0.23		0.60
Basic earnings per share from discontinued operations (euros)		(0.00	)		0.01		0.00
Basic earnings per share from continuing operations (euros)		0.40			0.22		0.60

ii. Diluted earnings per share

In calculating diluted earnings per share, the amount of profit attributable to ordinary shareholders and the weighted average number of shares outstanding, net of treasury shares, are adjusted to take into account all the dilutive effects inherent to potential ordinary shares.

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Accordingly, diluted earnings per share were determined as follows:

	12/31/13			12/31/12		12/31/11
Profit attributable to the Group (millions of euros)		4,370			2,295		5,330
Profit (Loss) from discontinued operations (net of non-controlling interests) (millions of euros)		(15	)		70		15
Profit from continuing operations (net of non-controlling interests) (millions of euros)		4,385			2,225		5,315
Dilutive effect of changes in profit for the year arising from potential conversion of ordinary shares		—			—		—
Weighted average number of shares outstanding		10,836,110,583			9,451,734,994		8,408,973,592
Assumed conversion of convertible debt		—			314,953,901		483,059,180
Dilutive effect of options/rights on shares		51,722,251			66,057,677		64,715,094
Adjusted number of shares		10,887,832,834			9,832,746,572		8,956,747,866
Diluted earnings per share (euros)		0.40			0.23		0.60
Diluted earnings per share from discontinued operations (euros)		(0.00	)		0.01		0.00
Diluted earnings per share from continuing operations (euros)		0.40			0.22		0.60

5. Remuneration and other benefits paid to the Bank’s directors and senior managers

a) Remuneration of directors

i. Bylaw-stipulated emoluments

Article 58 of the Bank’s Bylaws approved by the shareholders at the annual general meeting held on June 21, 2008 established that the share in the Bank’s profit for each year that the directors will be entitled to receive for discharging their duties as members of the board of directors -annual emolument and attendance fees- will be equal to 1% of the Bank’s net profit for the year, although the board itself may resolve to reduce this percentage. The amount set by the board of directors for 2012, which was calculated pursuant to the aforementioned Article 58 of the Bylaws, was 0.321% of the Bank’s profit for 2012.

The annual general meeting held on March 22, 2013 approved an amendment to the Bylaws, whereby the remuneration of directors in their capacity as board members now consists of an annual fixed amount determined by the shareholders at the annual general meeting. This amount shall remain in effect unless the shareholders resolve to change it at a general meeting. However, the board of directors may elect to reduce the amount in any years in which it deems such action justified. The remuneration established for 2013 by the annual general meeting was EUR 6 million, with two components: (a) an annual emolument and (b) attendance fees.

The specific amount payable for the above-mentioned items to each of the directors is determined by the board of directors. For such purpose, it takes into consideration the positions held by each director on the board, their attendance of board meetings, their membership of the various committees and their attendance of committee meetings.

The total bylaw-stipulated emoluments earned by the directors in 2013 amounted to EUR 4.3 million.

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Annual emolument

The amounts received individually by each board member in 2013 and 2012 based on the positions held by them on the board and their membership of the board committees were as follows:

	Euros
	2013-2012
Members of the board of directors		84,954
Members of the executive committee		170,383
Members of the audit and compliance committee		39,551
Members of the appointments and remuneration committee		23,730
First and fourth deputy chairmen (1)		28,477

(1) In 2013 the total amount of EUR 28,477 was paid to the current third deputy chairman and the former fourth deputy chairman, in proportion to the time during which each held office in the year.

Attendance fees

The directors receive fees for attending board and committee meetings, excluding executive committee meetings, since no attendance fees are received for this committee.

By resolution of the board of directors, at the proposal of the appointments and remuneration committee, the fees for attending board and committee meetings -excluding executive committee meetings, for which no attendance fees have been established- have remained unchanged since 2008 and will be maintained at the same amounts as from January 1, 2014.

Attendance fees per meeting	Euros
	2008-2013
Board of directors
Resident directors		2,540
Non-resident directors		2,057
Risk committee and audit and compliance committee
Resident directors		1,650
Non-resident directors		1,335
All other committees
Resident directors		1,270
Non-resident directors		1,028

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ii. Salaries

The executive directors’ gross annual salary for 2013 and 2012 was as follows:

	Thousands of euros
	2013		2012
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		1,344		1,344
Mr Javier Marín Romano (1)		2,000		—
Mr Matías Rodríguez Inciarte		1,710		1,710
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea (2)		2,005		2,100
Mr Juan Rodríguez Inciarte		987		987
Mr Alfredo Sáenz Abad (3)		—		3,703
Total		8,046		9,844

(1) Annualized amount of the chief executive officer’s salary. However, the amount actually received in 2013 was EUR 1,600,000, which is the sum of his remuneration as executive vice president of the Bank for the first four months of the year and his remuneration as chief executive officer for the remaining eight.

(2) The gross annual salary for 2011 was revised in the case of Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea to reflect the assumption of new responsibilities as chief executive officer of Santander UK and was established at EUR 2 million which, at the exchange rate published by the Bank of Spain on the business day prior to December 20, 2010 -the date on which the current fixed salary remuneration of the aforementioned executive director was approved by the board of directors-, amounted to GBP 1,702 thousand. The euro amounts shown in the above table are the equivalent values calculated by applying the average exchange rates for those years to her remuneration in pounds sterling.

(3) Retired from the board on April 29, 2013. The gross salary received until that date is shown, together with his other remuneration, in section iii) below.

The maximum variable remuneration of the executive directors for 2013 and 2012 approved by the board at the proposal of the appointments and remuneration committee was as follows:

	Thousands of euros
	2013		2012
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		1,412		1,412
Mr Javier Marín Romano (1)		2,500		—
Mr Matías Rodríguez Inciarte		2,308		2,669
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea (2)		2,212		2,247
Mr Juan Rodríguez Inciarte		1,480		1,557
Mr Alfredo Sáenz Abad		—		3,510
Total		9,912		11,395

(1) Appointed chief executive officer at the board meeting of April 29, 2013.

(2) Equivalent euro value of the original amount in pounds sterling.

The second and third cycles of the deferred conditional variable remuneration plan were approved in 2012 and 2013 under the same payment terms as the first cycle of the plan (see Note 5.e), whereby payment of a portion of the variable remuneration for these years is deferred over three years for it to be paid, where appropriate, in three equal portions, 50% in cash and 50% in Santander shares, provided that the conditions for entitlement to the remuneration are met. Similarly, the portion of the variable remuneration that is not deferred (immediate payment) is paid 50% in cash and 50% in shares.

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The amounts shown in the foregoing table reflect the maximum total variable remuneration allocated to the executive directors for each year. These amounts include both the cash-based and share-based variable remuneration (according to the plans agreed in each year) and both the remuneration payable immediately and that which, as the case may be, is payable following a deferral period.

The following table shows the form of payment of the variable remuneration for 2012 and 2013:

	Thousands of euros
	2013								2012
	Immediate payment in cash (20%)		Immediate payment in shares (20%)		Deferred payment in cash (30%) (1)		Deferred payment in shares (30%) (1)		Immediate payment in cash (20%)		Immediate payment in shares (20%)		Deferred payment in cash (30%) (2)		Deferred payment in shares (30%) (2)
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		282		282		424		424		282		282		424		424
Mr Javier Marín Romano		500		500		750		750		—		—		—		—
Mr Matías Rodríguez Inciarte		462		462		692		692		534		534		801		801
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea (3)		442		442		664		664		449		449		674		674
Mr Juan Rodríguez Inciarte		296		296		444		444		311		311		467		467
Mr Alfredo Sáenz Abad		—		—		—		—		702		702		1,053		1,053
Total		1,982		1,982		2,974		2,974		2,278		2,278		3,419		3,419

(1) In 3 years: 2015, 2016 and 2017 subject to continued service, with the exceptions provided for, and the non-applicability of “malus” clauses.

(2) In 3 years: 2014, 2015 and 2016 subject to continued service, with the exceptions provided for, and the non-applicability of “malus” clauses.

(3) Equivalent euro value of the original amount in pounds sterling.

The amounts of immediate and deferred payments in shares shown in the table above correspond to the following numbers of shares:

	Number of shares
	2013						2012
	Immediate payment		Deferred payment (1)		Total		Immediate payment		Deferred payment (2)		Total
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		42,287		63,431		105,718		43,952		65,927		109,879
Mr Javier Marín Romano		74,850		112,275		187,125		—		—		—
Mr Matías Rodríguez Inciarte		69,092		103,639		172,731		83,059		124,589		207,648
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea		66,241		99,362		165,603		69,916		104,874		174,790
Mr Juan Rodríguez Inciarte		44,299		66,448		110,747		48,466		72,699		121,165
Mr Alfredo Sáenz Abad		—		—		—		109,211		163,817		273,028
Total		296,769		445,155		741,924		354,604		531,906		886,510

(1) In 3 years: 2015, 2016 and 2017 subject to continued service, with the exceptions provided for, and the non-applicability of “malus” clauses.

(2) In 3 years: 2014, 2015 and 2016 subject to continued service, with the exceptions provided for, and the non-applicability of “malus” clauses.

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iii. Detail by director

The detail, by Bank director, of the foregoing remuneration for 2013 is provided below. The salaries of the executive directors disclosed in the table below correspond to the maximum amounts for each item approved by the board of directors as period remuneration, irrespective of the actual year of payment and of any amounts paid to the directors under the agreed deferred remuneration scheme. Note 5.e) below includes disclosures on the shares delivered by virtue of the deferred remuneration schemes in place in previous years the conditions for delivery of which were met in the corresponding years.

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Directors	Thousands of euros																														Change (%)
	2013																												2012
	Bylaw-stipulated emoluments												Executive director salary remuneration												Other remuneration (b)		Total		Total (c)
	Annual emolument								Attendance fees
	Board		Executive committee		Audit and compliance committee		Appointments and remuneration committee		Board		Other fees
													Fixed		Variable - immediate payment				Variable - deferred payment (a)
															In cash		In shares		In cash		In shares		Total
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		85		170		—		—		33		5		1,344		282		282		424		424		2,757		1		3,051		3,061		(0.3	%)
Mr Javier Marín Romano (1)		57		115		—		—		15		3		1,600		500		500		750		750		4,100		51		4,341		—		—
Mr Fernando de Asúa Álvarez		113		170		40		24		33		199		—		—		—		—		—		—		—		579		567		2.1	%
Mr Matías Rodríguez Inciarte		85		170		—		—		30		160		1,710		462		462		692		692		4,018		265		4,729		5,154		(8.2	%)
Mr Guillermo de la Dehesa Romero (2)		104		170		27		24		33		36		—		—		—		—		—		—		—		394		320		23.3	%
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea		85		170		—		—		25		4		2,005		442		442		664		664		4,217		339		4,840		5,140		(5.8	%)
Mr Francisco Javier Botín-Sanz de Sautuola y O’Shea (3)		85		—		—		—		28		—		—		—		—		—		—		—		—		113		108		4.7	%
Lord Burns (Terence) (4)		85		—		—		—		19		—		—		—		—		—		—		—		—		103		106		(1.9	%)
Mr Vittorio Corbo Lioi		85		—		—		—		21		—		—		—		—		—		—		—		—		106		106		0	%
Mr Rodrigo Echenique Gordillo		85		170		40		24		33		111		—		—		—		—		—		—		30		493		415		18.7	%
Ms Esther Giménez-Salinas i Colomer (5)		85		—		—		—		28		1		—		—		—		—		—		—		—		114		82		39.1	%
Mr Ángel Jado Becerro de Bengoa		85		—		—		—		30		—		—		—		—		—		—		—		—		115		110		4.6	%
Mr Abel Matutes Juan		85		—		40		—		25		19		—		—		—		—		—		—		—		169		169		0	%
Mr Juan Rodríguez Inciarte		85		—		—		—		33		94		987		296		296		444		444		2,467		151		2,830		2,937		(3.7	%)
Ms Isabel Tocino Biscarolasaga (6)		85		115		—		24		33		175		—		—		—		—		—		—		—		432		257		68.1	%
Mr Juan Miguel Villar Mir (7)		56		—		—		—		15		—		—		—		—		—		—		—		—		71		—		—
Mr Alfredo Sáenz Abad (8)		28		56		—		—		18		3		1,234		—		—		—		—		1,234		561		1,899		8,237		(76.9	%)
Mr Manuel Soto Serrano (8)		37		—		13		8		15		64		—		—		—		—		—		—		—		137		352		(61.2	%)
Mr Francisco Luzón López (9)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		130		—
Mr Antonio Basagoiti García-Tuñón (10)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		115		—
Mr Antonio Escámez Torres (10)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		118		—
Mr Luis Alberto Salazar-Simpson Bos (10)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		44		—
Total 2013		1,415		1,308		158		103		468		874		8,880		1,982		1,982		2,974		2,974		18,792		1,398		24,517		—		(10.9	%)
Total 2012		1,464		1,287		168		119		409		900		9,952		2,278		2,278		3,419		3,419		21,347		1,833		—		27,528

(1) Member of the board and the executive committee since April 29, 2013.

(2) Member of the audit and compliance committee and third deputy chairman since April 29, 2013.

(3) Amounts delivered to the Fundación Botin.

(4) Retired from the board on December 31, 2013.

(5) Board member since March 30, 2012 and member of the international committee since November 26, 2013.

(6) Member of the risk committee since March 30, 2012 and of the executive committee since April 29, 2013.

(7) Board member since May 7, 2013.

(8) Retired from the board on April 29, 2013.

(9) Retired from the board on January 23, 2012.

(10) Retired from the board on March 30, 2012.

(a) Maximum deferred variable remuneration for the period approved by the board of directors, at the related meetings, for each of the directors.

(b) Includes, inter alia, the life and medical insurance costs borne by the Group relating to Bank directors.

(c) Includes the corresponding deferred variable remuneration.

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b) Remuneration of the board members as representatives of the Bank

By resolution of the executive committee, all the remuneration received by the Bank’s directors who represent the Bank on the boards of directors of listed companies in which the Bank has a stake, paid by those companies and relating to appointments made after March 18, 2002, accrues to the Group. In 2013 and 2012 the Bank’s directors did not receive any remuneration in respect of these representative duties.

Three directors of the Bank received a total of EUR 1,184 thousand in 2013 as members of the boards of directors of Group companies (2012: EUR 1,317 thousand), the detail being as follows: Lord Burns received EUR 736 thousand as non-executive chairman of the board of directors of Santander UK Plc.; Mr Matías Rodríguez Inciarte received EUR 42 thousand as non-executive director of U.C.I., S.A., and Mr Vittorio Corbo Lioi received EUR 406 thousand, of which he received EUR 104 thousand as non-executive director of Banco Santander Chile, EUR 284 thousand for advisory services provided to that entity and EUR 18 thousand as non-executive director of Grupo Financiero Santander México, S.A.B. de C.V.

c) Post-employment and other long-term benefits

In 2012, within the framework of the measures implemented by the Group in order to mitigate the risks arising from the defined-benefit pension obligations payable to certain employees, which led to an agreement with the workers’ representatives to convert the defined-benefit obligations existing under the collective agreement into defined-contribution plans (see Note 25), the contracts of the executive directors and the other members of the Bank’s senior management -the senior executives- which provided for defined-benefit pension obligations were amended to convert these obligations into a defined-contribution employee welfare system, which was externalized to Santander Seguros y Reaseguros, Compañía Aseguradora, S.A. The new system grants the executive directors the right to receive a pension benefit upon retirement, regardless of whether or not they are in the Bank’s employ on that date, based on the contributions made to the aforementioned system, and replaced the right to receive a pension supplement which had previously been payable to them upon retirement. The new system expressly excludes any obligation of the Bank to the executive directors other than the conversion of the previous system into the new employee welfare system, which took place in 2012, and, as the case may be, the annual contributions to be made as described below 1. In the event of pre-retirement, the executive directors who have not exercised the option to receive their pensions in the form of a lump sum are entitled to receive an annual emolument until the date of retirement.

The initial balance for each executive director in the new defined-contribution welfare system was that corresponding to the market value of the assets in which the provisions for the respective accrued obligations had been invested, at the date on which the former pension obligations were converted into the new welfare system.2.

Following the aforementioned amendment, from 2013 onwards the Bank will make annual contributions to the employee welfare system for the benefit of the executive directors and senior executives, in proportion to their respective pensionable bases, until they leave the Group, or until their retirement from the Group, death or disability (including, as the case may be, during the pre-retirement period). No contributions are made for the executive directors and senior executives who, prior to the conversion of the defined-benefit pension obligations into the current defined-contribution employee welfare system, had exercised the option to receive their pension rights in a lump sum.

¹  As provided for in the contracts of the executive directors and members of senior management prior to their modification, Mr Emilio Botín-Sanz de Sautuola y García de los Ríos and Mr Matías Rodríguez Inciarte had exercised the option to receive the accrued pensions -or amounts similar thereto- in the form of a lump sum (i.e. in a single payment), which meant that no further pension benefit would accrue to them from that time, and the lump sum to be received, which would be updated at the agreed-upon interest rate, was fixed.

²  In the case of Mr Emilio Botín-Sanz de Sautuola y García de los Ríos and Mr Matías Rodríguez Inciarte, the initial balance corresponded to the amounts that were set when, as described above, they exercised the option to receive a lump sum, and includes the interest accrued on these amounts from that date.

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The terms of the employee welfare system regulate the impact of the deferral of the computable variable remuneration on the benefit payments covered by the system upon retirement and, as the case may be, the withholding tax on shares arising from such remuneration.

In 2013, as a result of his appointment as chief executive officer, changes were introduced to the contract of Mr Javier Marín Romano with respect to the pension obligations stipulated in his senior management contract. The annual contribution to the employee welfare system is now calculated as 80% of the sum of: (i) fixed annual remuneration; and (ii) 30% of the arithmetic mean of the last three gross amounts of variable remuneration. Also, the pensionable base in relation to the death and permanent disability scheme provided for in his senior management contract is now 100% of fixed annual remuneration. Under his senior management contract, which is currently suspended, the annual contribution is 55% of his fixed remuneration, and the pensionable base in the event of death or disability is 80% of his fixed remuneration.

Following is a detail of the balances relating to each of the current executive directors under the new welfare system at December 31, 2013 and of the initial balances that corresponded to them in 2012 on the conversion of their obligations:

	Thousands of euros
	2013			2012
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		25,864			25,566
Mr Javier Marín Romano		4,346	(1)		—
Mr Matías Rodríguez Inciarte		46,058			45,524
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea		37,202	(2)		34,941
Mr Juan Rodríguez Inciarte		13,410			12,824
Mr Alfredo Sáenz Abad (3)		—			88,174
		126,880			207,029

(1) Includes both his rights under the welfare system described above and those to which he is entitled, for the period prior to his appointment as chief executive officer, under the executive pension scheme of which he became an inactive participant on his appointment.

(2) Includes the amounts relating to the period of provision of services at Banesto, externalized with another insurance company.

(3) In April 2013, upon his retirement, Mr Alfredo Sáenz Abad requested payment of the pensions to which he was entitled in a lump sum (EUR 88.5 million gross). For such purpose, his pension rights were settled, in accordance with the applicable contractual and legal terms, through: i) the payment in cash of EUR 38.2 million relating to the net amount of the pension calculated taking into account the fixed remuneration, and EUR 12.2 million relating to the net amount of the pension calculated taking into account the accrued variable remuneration at the retirement date, and ii) the investment by Mr Sáenz of those EUR 12.2 million in Santander shares (2,216,082 shares), which were deposited at the Bank on a restricted basis until April 29, 2018.

The Group also has pension obligations to other directors amounting to EUR 18 million (December 31, 2012: EUR 18 million). The payments made in 2013 to the members of the board entitled to post-employment benefits amounted to EUR 1.2 million (2012: EUR 1.6 million).

Lastly, the contracts of the executive directors who had not exercised the option referred to above prior to the conversion of the defined-benefit pension obligations into the current welfare system include a supplementary welfare regime for the contingency of death (surviving spouse and child benefits) and permanent disability of serving directors.

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The provisions recognized in 2013 and 2012 for retirement pensions and supplementary benefits (surviving spouse and child benefits, and permanent disability) were as follows:

	Thousands of euros
	2013		2012
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		—		—
Mr Javier Marín Romano		2,006		—
Mr Matías Rodríguez Inciarte		—		—
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea		1,443		2,078
Mr Juan Rodríguez Inciarte		609		78
Mr Alfredo Sáenz Abad		—		—
		4,058		2,166

d) Insurance

The Group has taken out life insurance policies for the Bank’s directors, who will be entitled to receive benefits if they are declared disabled; in the event of death, the benefits will be payable to their heirs. The premiums paid by the Group are included in the Other remuneration column of the table shown in Note 5.a.iii above. Also, the following table provides information on the sums insured for the Bank’s executive directors:

	Insured sum (Thousands of euros)
	2013		2012
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		—		—
Mr Javier Marín Romano		2,400		—
Mr Matías Rodríguez Inciarte		5,131		5,131
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea		6,000		6,000
Mr Juan Rodríguez Inciarte		2,961		2,961
Mr Alfredo Sáenz Abad		—		11,108
		16,492		25,200

Additionally, other directors have life insurance policies the cost of which is borne by the Group, the related insured sum being EUR 1.4 million at December 31, 2013 (2012: EUR 1.4 million).

e) Deferred variable remuneration systems

Following is a description of the various share delivery plans instrumenting the directors’ share-based deferred variable remuneration (see Note 47):

i) Performance share plan

This plan involves successive three-year cycles of share deliveries to the beneficiaries, as part of their variable remuneration for the year in which each cycle begins, so that each year one cycle will begin and, from 2009 onwards, another cycle will also end. Following the changes implemented in 2011 to the remuneration policy for the executive directors, the latter ceased to be beneficiaries of the cycle approved in 2011.

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The table below shows the maximum number of rights granted to each executive director in each cycle and the number of shares received in 2012 and 2013 under the I12 and I13 incentive plans (Plans I12 and I13), respectively. As established in these plans, the number of shares received was determined by the degree of achievement of the targets to which each plan was tied. Plan I12 fell short of the maximum number and Plan I13 fell short of the minimum number.

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	Rights at January 1, 2012		Shares delivered in 2012 (number)			Rights cancelled in 2012 (number)			Rights at December 31, 2012		Shares delivered in 2013 (number)		Rights cancelled in 2013 (number)			Rights at December 31, 2013		Grant date		Share delivery deadline
Plan I12:
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		82,941		24,882			(58,059	)		—		—		—			—		19/06/09		31/07/12
Mr Alfredo Sáenz Abad		228,445		68,534			(159,911	)		—		—		—			—		19/06/09		31/07/12
Mr Matías Rodríguez Inciarte		105,520		31,656			(73,864	)		—		—		—			—		19/06/09		31/07/12
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea (1)		56,447		16,934	(2)		(39,513	)		—		—		—			—		19/06/09		31/07/12
Mr Francisco Luzón López (3)		92,862		—			(92,862	)		—		—		—			—		19/06/09		31/07/12
Mr Juan Rodríguez Inciarte		60,904		18,271			(42,633	)		—		—		—			—		19/06/09		31/07/12
		627,119		160,277			(466,842	)		—		—		—			—
Plan I13
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		82,941		—			—			82,941		—		(82,941	)		—		11/06/10		31/07/13
Mr Alfredo Sáenz Abad (4)		228,445		—			—			228,445		—		(228,445	)		—		11/06/10		31/07/13
Mr Matías Rodríguez Inciarte		105,520		—			—			105,520		—		(105,520	)		—		11/06/10		31/07/13
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea (1)		56,447		—			—			56,447		—		(56,447	)		—		11/06/10		31/07/13
Mr Francisco Luzón López (3)		92,862		—			(92,862	)		—		—		—			—		11/06/10		31/07/13
Mr Juan Rodríguez Inciarte		60,904		—			—			60,904		—		(60,904	)		—		11/06/10		31/07/13
		627,119		—			(92,862	)		534,257		—		(534,257	)		—

(1) Without prejudice to the Banesto shares corresponding to Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea by virtue of the various Banesto Share-Based Incentive Plans approved by the shareholders at the general meeting of Banesto (a maximum of 32,358 Banesto shares relating to her participation in the Banesto Share-Based Incentive Plan expiring in 2013).

(2) In 2012 Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea received a further 14,022 Banesto shares relating to her participation in the Banesto Share-Based Incentive Plan approved by the shareholders at the annual general meeting of Banesto held on February 24, 2010.

(3) Following his resignation on January 23, 2012, Mr Francisco Luzón López lost his entitlement arising from his participation in these plans since he did not meet all the conditions stipulated for the shares to be received.

(4) Following his resignation on April 29, 2013, Mr Alfredo Sáenz Abad lost his entitlement arising from his participation in these plans since he did not meet all the conditions stipulated for the shares to be received.

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ii) Obligatory investment share plan

Pursuant to the obligatory investment share plan (see Note 47), and also as part of the deferred share-based variable remuneration for each period, the current executive directors acquired, prior to February 28, 2009 and February 28, 2010, the number of Bank shares shown in the table below, corresponding to the second and third cycles of this plan. Executive directors who hold the shares acquired through the obligatory investment and remain in the Group’s employ for three years from the date on which the obligatory investment is made are entitled to receive the same number of Bank shares as that composing their initial obligatory investment.

The shareholders at the annual general meeting of June 19, 2009 introduced, for the third cycle, a requirement additional to that of remaining in the Group’s employ, which is that in the three-year period from the investment in the shares, none of the following circumstances should exist: (i) poor financial performance of the Group; (ii) breach by the beneficiary of the codes of conduct or other internal regulations, including, in particular, those relating to risks, where applicable to the executive in question; or (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards.

	Maximum number of shares to be delivered (3)
	3rd cycle 2010-2012		2nd cycle 2009-2011
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		20,515		19,968
Mr Javier Marín Romano (1)		11,092		—
Mr Matías Rodríguez Inciarte		25,849		25,159
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea (2)		18,446		16,956
Mr Juan Rodríguez Inciarte		15,142		14,738
		91,044		76,821

(1) Board member since April 29, 2013.

(2) The maximum number of shares corresponding to Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea for the 2009-2011 and 2010-2012 cycles as beneficiary of this plan is in line with the resolution adopted by the shareholders at the annual general meeting of Banco Santander held on June 21, 2008 and by the shareholders at the annual general meeting of Banesto held on February 24, 2010.

(3) In addition, Mr Alfredo Sáenz Abad received 49,000 and 47,697 shares as a result of his participation in the third and second cycles of the aforementioned plan.

Since the condition to retain the aforementioned shares and the additional requirement to stay in the Group for three years had been complied with, in February 2012 and 2013, as approved by the board, at the proposal of the appointments and remuneration committee, the gross number of shares detailed above relating to the second and third cycles accrued to the executive directors, and this number is equal to the number of shares initially acquired by them.

iii) Deferred conditional delivery share plan

The 2010 variable remuneration of the executive directors and Group executives or employees whose variable remuneration or annual bonus for 2010 exceeded, in general, EUR 300,000 (gross) was approved by the board of directors through the instrumentation of the first cycle of the deferred conditional delivery share plan, whereby a portion of the aforementioned variable remuneration or bonus is being deferred over a period of three years for it to be paid, where appropriate, in Santander shares. Application of this cycle, insofar as it entails the delivery of shares to the plan beneficiaries, was authorized by the annual general meeting held on June 11, 2010.

In addition to the requirement that the beneficiary remains in the Group’s employ, with the exceptions included in the plan regulations, the accrual of the share-based deferred remuneration is conditional upon none of the following circumstances existing, in the opinion of the board of directors, during the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in economic capital and the qualitative assessment of risk.

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The share-based bonus will be deferred over three years and will be paid, where appropriate, in three instalments after the first year.

The number of shares allocated to the executive directors for deferral purposes, the shares delivered in 2012 (first third), in 2013 (second third) and the shares that were approved by the board for delivery in February 2014 (third third), once the conditions for receiving them have been met, are as follows:

	Number of shares deferred on bonus for 2010 (2)		Number of shares delivered in 2012 (1st third) (2)		Number of shares delivered in 2013 (2nd third) (2)		Number of shares to be delivered in 2014 (3rd third) (2)
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		94,345		31,448		31,448		31,448
Mr Javier Marín Romano		37,749		12,583		12,583		12,583
Mr Matías Rodríguez Inciarte		135,188		45,063		45,063		45,063
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea (1)		91,187		30,395		30,395		19,240
Mr Juan Rodríguez Inciarte		61,386		20,462		20,462		20,462

(1) Shares of Banesto, as authorized by the shareholders of that entity at the annual general meeting of February 23, 2011. Following the merger of Banesto with the Bank, 19,240 shares of the Bank will be delivered in 2014, equal to the 30,395 shares of Banesto authorized by the annual general meeting.

(2) On January 23, 2012, Mr Francisco Luzón López took pre-retirement and resigned from his positions as director and head of the Americas division. In accordance with the plan regulations, Mr Francisco Luzón López retains the right to receive, if appropriate, 51,660 shares in 2014, subject to compliance with the conditions established in the plan for them to be received. Also, in both 2012 and 2013 he received 51,660 shares relating to the number of shares to which he was entitled as a result of the accrual of the first and second thirds of the deferred portion of his 2010 bonus.

Furthermore, Mr Alfredo Sáenz Abad ceased to discharge his duties as director on April 29, 2013. In accordance with the plan regulations, Mr Alfredo Sáenz Abad retains the right to receive, if appropriate, 104,150 shares in 2014, subject to compliance with the conditions established in the plan for them to be received. Also, in both 2012 and 2013 he received 104,150 shares relating to the number of shares to which he was entitled as a result of the accrual of the first and second thirds of the deferred portion of his 2010 bonus.

iv) Deferred conditional variable remuneration plan

The bonuses for 2011, 2012 and 2013 of the executive directors and certain executives (including senior management) and employees who assume risks, perform control functions or receive an overall remuneration placing them on the same remuneration level as senior executives and employees who assume risks (all of whom are referred to as identified staff, in accordance with the Guidelines on Remuneration Policies and Practices approved by the Committee of European Banking Supervisors on December 10, 2010) were approved by the board of directors and instrumented, respectively, through the first, second and third cycles of the deferred conditional variable remuneration plan. Application of these cycles, insofar as they entail the delivery of shares to the plan beneficiaries, was authorized, respectively, by the annual general meetings held on June 17, 2011, March 30, 2012 and March 22, 2013.

The purpose of these plans is to defer a portion of the variable remuneration or bonus of the beneficiaries thereof over a period of three years for it to be paid, where appropriate, in cash and in Santander shares; the other portion of the variable remuneration is also to be paid in cash and Santander shares, upon commencement of the cycles, in accordance with the rules set forth below.

The variable remuneration will be paid in accordance with the following percentages, based on the timing of the payment and the group to which the beneficiary belongs (the “immediate payment percentage” identifies the portion of the bonus for which payment is not deferred, and the “deferred percentage” identifies the portion of the bonus for which payment is deferred):

	Immediate payment percentage			Deferred percentage
Executive directors		40	%		60	%
Division directors and other executives of the Group with a similar profile		50	%		50	%
Other executives subject to supervision		60	%		40	%

F-90

The payment of the deferred percentage of the bonus applicable in each case will be deferred over a period of three years and will be paid in thirds, within fifteen days following the anniversaries of the initial date (that on which the immediate payment percentage is paid) in 2013, 2014 and 2015 for the deferred remuneration of 2011; in 2014, 2015 and 2016 for the deferred remuneration of 2012; and in 2015, 2016 and 2017 for the deferred remuneration of 2013, 50% being paid in cash and 50% in shares, provided that the conditions indicated below are met.

In addition to the requirement that the beneficiary remains in the Group’s employ, with the exceptions included in the plan regulations, the accrual of the deferred remuneration is conditional upon none of the following circumstances existing -in the opinion of the board of directors and following a proposal of the appointments and remuneration committee- during the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in the Group’s economic capital or risk profile.

On each delivery, the beneficiaries will be paid an amount in cash equal to the dividends paid on the amount deferred in shares and the interest on the amount deferred in cash. If the Santander Dividendo Elección scrip dividend scheme is applied, they will be paid the price offered by the Bank for the bonus share rights relating to those shares.

The maximum number of shares to be delivered is calculated taking into account the volume-weighted average prices for the 15 trading sessions prior to the date on which the board of directors approves the bonus for the Bank’s executive directors for each year.

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The table below shows the number of Santander shares assigned, as variable remuneration for 2011, 2012 and 2013, to each executive director, and the gross shares delivered to them in 2012 and 2013, by way of either immediate payment or deferred payment, in the latter case once the board had determined, at the proposal of the appointments and remuneration committee, that the third relating to each plan had accrued:

Share-based variable remuneration	Maximum number of shares to be delivered at January 1, 2012		Shares delivered in 2012 (immediate payment of 2011 variable remuneration)			2012 variable remuneration (maximum number of shares to be delivered)		Maximum number of shares to be delivered at December 31, 2012		Shares delivered in 2013 (immediate payment of 2012 variable remuneration)			Shares delivered in 2013 (deferred payment of 2011 variable remuneration)			2013 variable remuneration (maximum number of shares to be delivered)		Maximum number of shares to be delivered at December 31, 2013
Variable remuneration (2011)
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		248,879		(99,552	)		—		149,327		—			(49,776	)		—		99,551
Mr Javier Marín Romano		155,764		(77,882	)		—		77,882		—			(25,961	)		—		51,921
Mr Matías Rodríguez Inciarte		314,390		(125,756	)		—		188,634		—			(62,878	)		—		125,756
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea		235,004		(94,002	)		—		141,002		—			(47,001	)		—		94,001
Mr Juan Rodríguez Inciarte		183,450		(73,380	)		—		110,070		—			(36,690	)		—		73,380
Mr Francisco Luzón López (1)		327,490		(130,996	)		—		196,494		—			(65,498	)		—		130,996
Mr Alfredo Sáenz Abad (2)		618,415		(247,366	)		—		371,049		—			(123,683	)		—		247,366
		2,083,392		(848,934	)		—		1,234,458		—			(411,487	)		—		822,971
Variable remuneration (2012)
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		—		—			109,879		109,879		(43,952	)		—			—		65,927
Mr Javier Marín Romano		—		—			116,908		116,908		(58,454	)		—			—		58,454
Mr Matías Rodríguez Inciarte		—		—			207,648		207,648		(83,059	)		—			—		124,589
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea		—		—			174,790		174,790		(69,916	)		—			—		104,874
Mr Juan Rodríguez Inciarte		—		—			121,165		121,165		(48,466	)		—			—		72,699
Mr Alfredo Sáenz Abad (2)		—		—			273,028		273,028		(109,211	)		—			—		163,817
		—		—			1,003,418		1,003,418		(413,058	)		—			—		590,360
Variable remuneration (2013)
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		—		—			—		—		—			—			105,718		105,718
Mr Javier Marín Romano		—		—			—		—		—			—			187,125		187,125
Mr Matías Rodríguez Inciarte		—		—			—		—		—			—			172,731		172,731
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea		—		—			—		—		—			—			165,603		165,603
Mr Juan Rodríguez Inciarte		—		—			—		—		—			—			110,747		110,747
		—		—			—		—		—			—			741,924		741,924

(1) On January 23, 2012, Mr Francisco Luzón López took pre-retirement and resigned from his positions as director and head of the Americas division. In relation to his 2011 variable remuneration to be received in cash and in Santander shares, the board resolved, at the committee’s proposal, to deliver him EUR 743 thousand and 130,996 shares as an immediate payment. The deferred amount in cash and in shares relating to the first third was paid in February 2013 and the rest will be paid, if appropriate, on the dates and under the conditions approved by the board, subject to compliance with the requirements set forth in the related resolution of the general meeting and the plan’s regulations, as well as all other terms set forth therein (EUR 371 thousand and 65,498 shares of the Bank in 2014 and 2015). Upon each delivery of shares and, therefore, subject to the same requirements, he will be paid an amount in cash equal to the dividends paid on those shares and, if the Santander Dividendo Elección scrip dividend scheme is applied, the price offered by the Bank for the bonus share rights relating to the aforementioned shares, as well as the interest accrued on the amount deferred in cash.

(2) Mr Alfredo Sáenz Abad ceased to discharge his duties as director on April 29, 2013. The deferred amounts, in cash (two gross payments of EUR 702 thousand each, relating to the deferred variable remuneration for 2011, and three of EUR 351 thousand each, relating to the deferred variable remuneration for 2012) and in shares (see table above), relating to the deferred variable remuneration for 2011 and 2012, will be paid to him on the corresponding maturity dates, together with the remuneration relating to the shares (dividends and amounts offered for the bonus share rights if the Santander Dividendo Elección scrip dividend scheme is applied) and the interest accrued on the cash amounts, subject to compliance with the requirements set forth in the related resolutions of the general meetings and the plans’ regulations, as well as all other terms set forth therein.

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Furthermore, the table below shows the cash delivered in 2012 and 2013, by way of either immediate payment or deferred payment, in the latter case once the board had determined, at the proposal of the appointments and remuneration committee, that the third relating to each plan had accrued:

	Thousands of euros
	2013						2012
	Cash paid (immediate payment of 2012 variable remuneration)			Cash paid (1st third deferred payment of 2011 variable remuneration)			Cash paid (immediate payment of 2011 variable remuneration)
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos		282			282			565
Mr Javier Marín Romano		376			147			442
Mr Matías Rodríguez Inciarte		534			357			714
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea		449	(1)		286	(1)		534	(1)
Mr Juan Rodríguez Inciarte		311			208			416
Mr Francisco Luzón López		—			371			743
Mr Alfredo Sáenz Abad		702			702			1,404
		2,654			2,353			4,818

(1) Equivalent euro value of the original amount in pounds sterling.

f) Loans

The Group’s direct risk exposure to the Bank’s directors and the guarantees provided for them are detailed below. These transactions were made on an arm’s-length basis or the related compensation in kind was recognized:

	Thousands of euros
	2013						2012
	Loans and credits		Guarantees		Total		Loans and credits		Guarantees		Total
Mr Javier Marín Romano (1)		707		—		707		—		—		—
Mr Matías Rodríguez Inciarte		17		—		17		13		—		13
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea		—		—		—		7		—		7
Mr Javier Botín-Sanz de Sautuola y O’Shea		22		—		22		13		—		13
Mr Vittorio Corbo Lioi		4		—		4		—		—		—
Mr Rodrigo Echenique Gordillo		650		—		650		1,178		—		1,178
Mr Ángel Jado Becerro de Bengoa		7		—		7		7		—		7
Mr Juan Rodríguez Inciarte		4,734		—		4,734		5,313		—		5,313
Ms Isabel Tocino Biscarolasaga		20		—		20		42		—		42
Mr Alfredo Sáenz Abad (2)		—		—		—		17		—		17
		6,161		—		6,161		6,591		—		6,591

(1) Appointed chief executive officer on April 29, 2013.

(2) Retired from the board on April 29, 2013.

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g) Senior managers

Following is a detail of the maximum remuneration approved for the Bank’s executive vice presidents ^(*) in 2013 and 2012:

	Number of managers (1)		Thousands of euros
			Salaries												Other remuneration (3)		Total
			Fixed		Variable - Immediate payment				Variable - Deferred payment (2)				Total
					In cash		In shares		In cash		In shares
2013		28		26,040		9,521		9,521		9,588		9,588		64,257		8,416		72,673
2012		24		24,580		10,689		10,689		10,769		10,769		67,495		6,615		74,111

(*) Excluding executive directors’ remuneration, which is detailed above.

(1) At some point in the year they occupied the position of executive vice president. The amounts reflect the remuneration for the full year regardless of the number of months in which the position of executive vice president was occupied.

(2) The shareholders at the annual general meetings of March 30, 2012 and March 22, 2013 approved the second and third cycles of the deferred conditional variable remuneration plan, whereby payment of a portion of the variable remuneration for 2012 and 2013 will be deferred over three years for it to be paid, where appropriate, in three equal portions, 50% in cash and 50% in Santander shares, provided that the conditions for entitlement to the remuneration are met. The amount of the immediate payment in shares for 2013 relates to 1,331,781 Santander shares and 165,100 Banco Santander Brasil shares (2012: 1,653,565 Santander shares and 61,328 Banco Santander Brasil shares). The shares relating to the amount of the deferred payment in shares are shown in the table below.

(3) Includes other remuneration items, such as life insurance premiums amounting to EUR 1,499 thousand (2012: EUR 1,355 thousand).

Following is a detail of the maximum number of Santander shares that the Bank’s executive vice presidents (excluding executive directors) were entitled to receive at December 31, 2013 and 2012 relating to the deferred portion under the various plans then in force (see Note 47):

Maximum number of shares to be delivered	12/31/13			12/31/12
Plan I13		—			1,463,987	(1)
Third cycle - obligatory investment plan		—			286,317
Deferred conditional delivery plan (2010)		482,495			980,780	(2)
Deferred conditional variable remuneration plan (2011)		1,480,251	(5)		2,076,477	(3)
Deferred conditional variable remuneration plan (2012)		1,660,832	(5)		1,622,485	(4)
Deferred conditional variable remuneration plan (2013)		1,341,718	(6)		—

(1) In addition, they were entitled to a maximum of 114,160 Banesto shares at December 31, 2012.

(2) In addition, they were entitled to a maximum of 14,705 Banesto shares at December 31, 2012.

(3) In addition, they were entitled to a maximum of 123,973 Banesto shares and 79,696 Santander Brasil shares at December 31, 2012.

(4) In addition, they were entitled to a maximum of 61,328 Santander Brasil shares at December 31, 2012 and a maximum of 344,070 options on Santander Brasil shares at December 31, 2012 under the share option plan approved in 2011, the exercise of which, subject to the plan’s terms and conditions, may commence in July 2014.

(5) For the executives who joined from Banesto, the Banesto shares were converted into Santander shares at EUR 0.633 per share.

(6) In addition, they were entitled to a maximum of 165,000 Santander Brasil shares at December 31, 2013 and to a maximum of 844,070 options on Santander Brasil shares (344,070 under the share option plan approved in 2011, the exercise of which, subject to the plan’s terms and conditions, may commence in July 2014, plus 500,000 under the share option plan approved in 2013, the exercise of which, subject to the plan’s terms and conditions, may commence in July 2016).

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In 2013 and 2012, since the conditions established in the corresponding deferred share-based remuneration schemes for prior years had been met, in addition to the payment of the related cash amounts, the following number of Santander shares was delivered to the executive vice presidents:

Number of shares delivered	2013			2012
Plan I12		—			439,195	(1)
Second cycle - obligatory investment plan		—			442,319
Third cycle - obligatory investment plan		275,325			—
Deferred conditional delivery plan (2010)		482,494	(3)		490,388	(2)
Deferred conditional variable remuneration plan (2011)		708,375	(4)		—

(1) In addition, 49,469 Banesto shares were delivered.

(2) In addition, 14,705 Banesto shares were delivered.

(3) In addition, 14,705 Banesto shares were delivered.

(4) In addition, 50,159 Banesto shares were delivered.

As indicated in Note 5.c, in 2012 the contracts of the members of the Bank’s senior management which provided for defined-benefit pension obligations were amended to convert these obligations into a defined-contribution employee welfare system, which was externalized to Santander Seguros y Reaseguros Compañía Aseguradora, S.A. The new system grants the senior executives the right to receive a pension benefit upon retirement, regardless of whether or not they are in the Bank’s employ on that date, based on the contributions made to the aforementioned system, and replaces the right to receive a pension supplement which had previously been payable to them upon retirement. The new system expressly excludes any obligation of the Bank to the executives other than the conversion of the previous system into the new employee welfare system, which took place in 2012, and, as the case may be, the annual contributions to be made. In the event of pre-retirement, the senior executives who have not exercised the option described in Note 5.c are entitled to an annual emolument until the date of retirement.

The senior executives’ beginning balance under the new employee welfare system amounted to EUR 287 million. This balance reflects the market value, at the date of conversion of the former pension obligations into the new employee welfare system, of the assets in which the provisions for the respective accrued obligations had been invested. The balance at December 31, 2013 amounted to EUR 312 million.

The contracts of the senior executives who had not exercised the option referred to in Note 5.c) prior to the conversion of the defined-benefit pension obligations into the current welfare system include a supplementary welfare regime for the contingencies of death (surviving spouse and child benefits) and permanent disability of serving executives.

Additionally, the total sum insured under life and accident insurance policies relating to this group of employees amounted to EUR 92 million at December 31, 2013 (December 31, 2012: EUR 73 million).

Lastly, settlements of EUR 10.7 million took place in 2012. The net charge to the consolidated income statement amounted to EUR 19.7 million in 2013 (2012: EUR 17.5 million).

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h) Post-employment benefits to former directors and former executive vice presidents

The post-employment benefits and settlements paid in 2013 to former directors of the Bank, other than those detailed in Note 5.c) and below³, amounted to EUR 7.2 million (2012: EUR 10 million). Also, the post-employment benefits and settlements paid in 2013 to former executive vice presidents amounted to EUR 21 million (2012: EUR 7.1 million).

In 2013 a release of EUR 707 thousand was recognized in the consolidated income statement in connection with the provisions for the Group’s pension and similar obligations to former directors of the Bank (including the insurance premiums for the supplementary surviving spouse/child and permanent disability benefits), and a period provision of EUR 1,153 thousand was recognized in relation to former executive vice presidents (2012: period provisions of EUR 2 thousand and EUR 509 thousand were recognized, respectively).

Furthermore, Provisions - Provision for pensions and similar obligations in the consolidated balance sheet at December 31, 2013 included EUR 93 million in respect of the post-employment benefit obligations to former directors of the Bank (December 31, 2012: EUR 162 million, including those relating to Mr Francisco Luzón) and EUR 121 million corresponding to former executive vice presidents (2012: EUR 120 million).

i) Pre-retirement and retirement

The following executive directors will be entitled to take pre-retirement in the event of termination for reasons other than voluntary termination or breach of duties, in which case they will be entitled to the benefits indicated below:

• Mr Javier Marín Romano will be entitled to an annual emolument that would amount to EUR 800 thousand at December 31, 2013. Alternatively, he may opt to return to the position of executive vice president of the Bank.

• Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea will be entitled to an annual emolument that would amount to EUR 2,692 thousand at December 31, 2013 (December 31, 2012: EUR 2,645 thousand).

• Mr Juan Rodríguez Inciarte will be entitled to an annual emolument that would amount to EUR 987 thousand at December 31, 2013 (December 31, 2012: EUR 987 thousand).

If Mr Javier Marín Romano, Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea or Mr Juan Rodríguez Inciarte take pre-retirement, they have the right to opt to receive the annual emoluments in the form of an annuity or a lump sum -i.e. in a single payment- in full but not in part.

³  In January 2013, upon his retirement, Mr Francisco Luzón López requested payment of the pensions to which he was entitled in a lump sum (EUR 65.4 million gross). For such purpose, his pension rights were settled, in accordance with the applicable contractual and legal terms, through: i) the payment in cash of EUR 21.1 million relating to the net amount of the pension calculated taking into account the fixed remuneration and the bylaw-stipulated emoluments, and EUR 7.1 million relating to the net amount of the pension calculated taking into account the accrued variable remuneration at the retirement date, ii) the investment by Mr Luzón of those EUR 7.1 million in Santander shares (1,144,110 shares), which shall be deposited on a restricted basis until 23 January 2017 and iii) the investment by the Bank of the gross remaining amount of the pension (EUR 6.6 million), calculated taking into account the unaccrued variable remuneration, in Santander shares (1,061,602 shares) that will be delivered to Mr Luzón (subject to the same restriction period mentioned above and net of tax) or will ultimately remain in the Bank’s possession depending on whether or not the variable remuneration giving rise to them finally accrues to him. Of these 1,061,602 shares, to date 400,148 have been delivered to Mr Luzón, on the accrual of the variable remuneration giving rise to them, and have been deposited on a restricted basis until 23 January 2017.

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For their part, the other executive directors may take retirement at any time and, therefore, claim from the insurer the benefits corresponding to them under the externalized employee welfare system described in Note 5.c, with no obligation whatsoever being incumbent upon the Bank in such circumstances.

j) Contract termination

The executive directors and senior executives have indefinite-term employment contracts. Executive directors or senior executives whose contracts are terminated voluntarily or due to breach of duties are not entitled to receive any economic compensation. If the Bank terminates the contract for any other reason, they will be entitled only to the corresponding legally-stipulated termination benefit.

Other non-director members of the Group’s senior management, other than those whose contracts were amended in 2012 as indicated above, have contracts which entitle them, in certain circumstances, to an extraordinary contribution to their welfare system in the event of termination for reasons other than voluntary redundancy, retirement, disability or serious breach of duties. These benefits are recognized as a provision for pensions and similar obligations and as a staff cost only when the employment relationship between the Bank and its executives is terminated before the normal retirement date.

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k) Information required by Articles 229 and 230 of the Spanish Limited Liability Companies Law

In accordance with the requirements of Articles 229 and 230 of the Spanish Limited Liability Companies Law, in order to enhance the transparency of listed companies, following is a detail of the investments held by the directors and persons related to them in the share capital of companies whose object is banking, financing or lending; and of the management or governing functions, if any, that the directors discharge thereat:

Director	Corporate name	Number of shares		Functions
Mr Emilio Botín-Sanz de Sautuola y García de los Ríos	Bankinter, S.A. (1)		330,314	—
	Bank of America Corporation		560	—
	Santander Investment, S.A.		—	Chairman (2)
Mr Javier Marín Romano	Allfunds Bank, S.A. Santander Investment, S.A.		—   —	Director (2) Deputy chairman (2)
Ms Ana Patricia Botín-Sanz de Sautuola y O’Shea	Bankinter, S.A. (*)		6,000,000	—
	Santander UK plc		—	Chief executive officer
Mr Javier Botín-Sanz de Sautuola y O’Shea	Bankinter, S.A.		7,929,853	—
Lord Burns (Terence)	Lloyds Banking Group plc (*)		3,745	—
	Barclays plc (*)		1,901	—
	Santander UK plc		—	Chairman (2)
Mr Vittorio Corbo Lioi	Banco Santander Chile		—	Director (2)
	Banco Santander (México), S.A. Institución de Banca Múltiple, Grupo Financiero Santander		—	Director (2)
	Santander Consumo, S.A. de C.V., Sofom.e.r.		—	Director (2)
	Santander Hipotecario, S.A. de C.V., Sofom.e.r.		—	Director (2)
Mr Guillermo de la Dehesa Romero	Goldman Sachs & Co. (The Goldman Sachs Group. Inc.)		19,546	—
	Banco Popular Español, S.A.		2,789	—
Mr Rodrigo Echenique Gordillo	Wells Fargo & Co.		4,500	—
	Bank of America Corporation		12,000	—
	Santander Investment, S.A.		—	Director (2)
	Allfunds Bank, S.A.		—	Deputy chairman (2)
	Banco Santander International		—	Director (2)
Ms Esther Giménez-Salinas i Colomer	Gawa Capital Partners, S.L.		—	Director (2)
Mr Ángel Jado Becerro de Bengoa	Bankinter, S.A. (3)		1,774,000	—
Mr Abel Matutes Juan	Banco Bilbao Vizcaya Argentaria, S.A. (*)		716,136	—
	Citibank		109,062	—
Mr Juan Rodríguez Inciarte	Banco Bilbao Vizcaya Argentaria, S.A. (4)		1,118	—
	Wells Fargo & Co.		107	—
	Santander UK plc		—	Deputy chairman (2)
	Santander Consumer Finance, S.A.		—	Director (2)
Mr Alfredo Sáenz Abad (5)	Banco Bilbao Vizcaya Argentaria, S.A. (*)		367,234	—
	HSBC Holdings plc		14,254	—
	Lloyds Banking Group plc		522	—
	Banco Bradesco S.A. (*)		1,815	—
	Caixabank, S.A. (*)		6,349	—
	Banco Popular Español, S.A. (*)		14,380	—
	Banco Banif, S.A.		—	Chairman (2)
	Santander Investment, S.A.		—	Deputy chairman (2)
	Santander Private Banking S.p.A.		—	Chairman (2)
Mr Manuel Soto Serrano (5)	Banco Bilbao Vizcaya Argentaria, S.A.		183,214	—
	Istituto per le Opere di Religione (IOR)		—	Member (5)
Ms Isabel Tocino Biscarolasaga	Banco Bilbao Vizcaya Argentaria, S.A.		2,608	—

(*) Ownership interests held by related persons.

(1) In addition, he is the direct holder of the right of usufruct over 3,422,836 shares of Bankinter, S.A.

(2) Non-executive.

(3) Of the shares indicated, 274,000 are held by related persons.

(4) Held jointly with a related person.

(5) Retired from the board on April 29, 2013. Data at 2012 year-end.

(6) Non-executive member of the control committee.

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None of the members of the board of directors perform, as independent professionals or as employees, any activities of the kind indicated in the foregoing table.

With regard to situations of conflict of interest, as stipulated in Article 30 of the Rules and Regulations of the Board, the directors must notify the board of any direct or indirect conflict with the interests of the Bank in which they may be involved. If the conflict arises from a transaction, the director shall not be allowed to conduct it unless the board, following a report from the appointments and remuneration committee, approves such transaction.

The director involved shall not participate in the deliberations and decisions on the transaction to which the conflict refers.

In the case of directors, the body responsible for resolving conflicts of interest is the board of directors itself.

In 2013, on the occasions listed below, certain directors abstained from participating in and voting on the deliberations of the meetings of the board of directors and its committees.

The board, without the involvement of the interested party, following a report by the appointments and remuneration committee, authorized the purchase on an arm’s-length basis of shares representing up to 0.25% of the Bank’s share capital by Espacio Activos Financieros, S.L.U., a company controlled indirectly by Mr Juan Miguel Villar Mir.

Also, 29 occasions involved proposals for the appointment or re-election of directors; 26 occasions related to the approval of remuneration conditions, and other terms and conditions of the directors’ contracts, including the authorization of the financing policy for executive directors; 18 occasions referred to the procedure required of the Bank, as a credit institution, to assess the suitability of the members of the board of directors and the holders of key functions, pursuant to Royal Decree 1245/1995, as worded in Royal Decree 256/2013; on 18 occasions the subject of debate were proposals to provide funding or guarantees for companies related to various directors; on five occasions the abstention occurred in connection with the annual verification of the directors’ status which, pursuant to Article 6.3 of the Rules and Regulations of the Board, the appointments and remuneration committee performed at its meeting of February 13, 2013; two occasions involved proposals for the appointment of two independent directors to positions at the Banco Santander Foundation and one related to the appointment of a relative of an executive director as a board member of a Group subsidiary; one occasion involved the approval of a contribution to a foundation chaired by a director; and a further three occasions involved the placing on record in the minutes the gratitude for the work performed by a director.

Lastly, Lord Burns abstained from participating in the resolutions adopted by the board in relation to his resignation as director with effect from December 31, 2013, and his appointment as a member of the international advisory board as from January 1, 2014.

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6. Loans and advances to credit institutions

The detail, by classification, type and currency, of Loans and advances to credit institutions in the consolidated balance sheets is as follows:

	Millions of euros
	2013			2012			2011
Classification:
Financial assets held for trading		5,503			9,843			4,636
Other financial assets at fair value through profit or loss		13,444			10,272			4,701
Loans and receivables		56,017			53,785			42,389
		74,964			73,900			51,726
Type:
Reciprocal accounts		1,858			1,863			2,658
Time deposits		16,284			15,669			11,419
Reverse repurchase agreements		29,702			25,486			10,647
Other accounts		27,120			30,882			27,002
		74,964			73,900			51,726
Currency:
Euro		33,699			36,955			26,066
Pound sterling		4,964			3,787			4,481
US dollar		14,915			13,567			9,784
Other currencies		21,423			19,621			11,431
Impairment losses (Note 10)		(37	)		(30	)		(36	)
Of which: due to country risk		(11	)		—			(2	)
		74,964			73,900			51,726

The loans and advances to credit institutions classified under Financial assets held for trading consist mainly of securities of foreign institutions acquired under reverse repurchase agreements, whereas those classified under Other financial assets at fair value through profit or loss consist of assets of Spanish and foreign institutions acquired under reverse repurchase agreements.

The loans and advances to credit institutions classified under Loans and receivables are mainly guarantees deposits to credit institutions and time deposits.

The impairment losses on financial assets recognized in Loans and receivables are disclosed in Note 10.

Note 51 contains a detail of the residual maturity periods of Loans and receivables and of the related average interest rates.

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7. Debt instruments

a) Detail

The detail, by classification, type and currency, of Debt instruments in the consolidated balance sheets is as follows:

	Millions of euros
	2013			2012			2011
Classification:
Financial assets held for trading		40,841			43,101			52,704
Other financial assets at fair value through profit or loss		3,875			3,460			2,649
Available-for-sale financial assets		79,844			87,724			81,589
Loans and receivables		7,886			7,059			6,840
		132,446			141,344			143,782
Type:
Spanish government debt securities		32,880			37,141			39,309
Foreign government debt securities		59,660			67,222			60,553
Issued by financial institutions		17,206			12,297			16,324
Other fixed-income securities		22,907			24,828			27,847
Impairment losses		(207	)		(144	)		(251	)
		132,446			141,344			143,782
Currency:
Euro		63,263			63,169			61,577
Pound sterling		7,709			9,240			5,394
US dollar		14,195			18,183			20,383
Other currencies		47,486			50,896			56,679
Impairment losses		(207	)		(144	)		(251	)
		132,446			141,344			143,782

F-101

b) Breakdown

The breakdown, by origin of the issuer, of Debt instruments at December 31, 2013, 2012 and 2011, net of impairment losses, is as follows:

	Millions of euros
	2013									2012									2011
	Private fixed- income		Public fixed- income		Total		%			Private fixed- income		Public fixed- income		Total		%			Private fixed- income		Public fixed- income		Total		%
Spain		11,752		32,880		44,632		33.70	%		10,046		37,141		47,187		33.38	%		8,409		39,309		47,718		33.19	%
United States		5,945		3,997		9,942		7.51	%		5,994		6,965		12,959		9.17	%		11,147		2,030		13,177		9.16	%
United Kingdom		3,268		5,112		8,380		6.33	%		3,865		7,528		11,393		8.06	%		8,529		1,654		10,183		7.08	%
Portugal		2,634		3,465		6,099		4.60	%		2,843		2,217		5,060		3.58	%		3,704		1,824		5,528		3.84	%
Poland		723		5,184		5,907		4.46	%		462		2,611		3,073		2.17	%		108		3,649		3,757		2.61	%
Italy		733		2,857		3,590		2.71	%		375		619		994		0.70	%		545		653		1,198		0.83	%
Ireland		848		—		848		0.64	%		739		—		739		0.52	%		642		—		642		0.45	%
Greece		—		—		—		—			—		—		—		—			—		84		84		0.06	%
Other European countries		5,357		3,607		8,964		6.77	%		4,244		6,009		10,253		7.25	%		3,329		4,174		7,503		5.22	%
Brazil		4,954		19,852		24,806		18.73	%		4,810		27,359		32,169		22.76	%		4,867		29,607		34,474		23.98	%
Mexico		566		8,156		8,722		6.59	%		501		8,817		9,318		6.59	%		534		11,426		11,960		8.32	%
Chile		1,467		1,272		2,739		2.07	%		1,377		2,124		3,501		2.48	%		577		2,528		3,105		2.16	%
Other American countries		1,384		995		2,379		1.80	%		1,208		1,163		2,371		1.68	%		1,275		1,583		2,858		1.99	%
Rest of the world		275		5,163		5,438		4.11	%		517		1,810		2,327		1.65	%		360		1,235		1,595		1.11	%
		39,906		92,540		132,446		100	%		36,981		104,363		141,344		100	%		44,026		99,756		143,782		100.00	%

The detail, by issuer rating, of Debt instruments at December 31, 2013, 2012 and 2011 is as follows:

	Millions of euros
	2013									2012									2011
	Private fixed- income		Public fixed- income		Total		%			Private fixed- income		Public fixed- income		Total		%			Private fixed- income		Public fixed- income		Total		%
AAA		10,357		7,847		18,204		13.74	%		15,754		11,711		27,465		19.43	%		19,250		5,205		24,455		17.01	%
AA		2,884		11,304		14,188		10.71	%		714		12,724		13,438		9.51	%		2,056		3,885		5,941		4.13	%
A		5,036		5,184		10,220		7.72	%		5,524		2,611		8,135		5.76	%		9,457		45,489		54,946		38.21	%
BBB		7,158		64,341		71,499		53.98	%		3,460		74,435		77,895		55.11	%		2,739		42,377		45,116		31.38	%
Below BBB		6,386		3,864		10,250		7.74	%		4,052		2,882		6,934		4.90	%		2,196		2,800		4,996		3.47	%
Unrated		8,085		—		8,085		6.11	%		7,477		—		7,477		5.29	%		8,328		—		8,328		5.79	%
		39,906		92,540		132,446		100.00	%		36,981		104,363		141,344		100.00	%		44,026		99,756		143,782		100.00	%

F-102

The distribution of exposure by rating shown in the foregoing table has been affected by the various reviews of sovereign issuer ratings conducted in recent years, the main reviews having been those of Spain (from A in 2011 to BBB in 2012) and Chile (from A in 2011 to AA in 2012). Also, at December 31, 2013 the exposures with BBB ratings included mainly, in addition to the Spanish sovereign exposures, the sovereign exposures in Mexico and Brazil, while those with ratings below BBB included the Portuguese sovereign exposures (BB).

The detail, by type of financial instrument, of Private fixed-income securities at December 31, 2013, 2012 and 2011, net of impairment losses, is as follows:

	Millions of euros
	2013		2012		2011
Securitized mortgage bonds		2,936		6,835		7,080
Other asset-backed bonds		2,781		1,497		3,100
Floating rate debt		10,857		15,883		16,668
Fixed rate debt		23,332		12,766		17,178
Total		39,906		36,981		44,026

c) Impairment losses

The changes in the impairment losses on Available-for-sale financial assets - Debt instruments are summarized below:

	Millions of euros
	2013			2012			2011
Balance at beginning of year		129			235			119
Net impairment losses for the year		72			13			124
Of which:
Impairment losses charged to income (Note 29)		89			18			125
Impairment losses reversed with a credit to income		(18	)		(5	)		(1	)
Assets written off		—			(109	)		—
Exchange differences and other items		(13	)		(10	)		(8	)
Balance at end of year		188			129			235
Of which:
By geographical location of risk:
European Union		105			51			155
Latin America		83			78			80

Also, the impairment losses on Loans and receivables (EUR 19 million, EUR 15 million and EUR 16 million at December 31, 2013, 2012 and 2011, respectively) are disclosed in Note 10.

F-103

d) Other information

At December 31, 2013, the nominal amount of debt securities assigned to certain own or third-party commitments, mainly to secure financing facilities received by the Group, amounted to EUR 42,433 million. Of these debt securities, EUR 12,550 million related to Spanish government debt.

The detail, by term to maturity, of the debt instruments pledged as security for certain commitments, is as follows:

	Maturity
	1 day			1 week			1 month			3 months			6 months			1 year			More than 12 months			Total
Government debt securities		11	%		53	%		16	%		13	%		4	%		0	%		2	%		100	%
Other debt instruments		65	%		4	%		2	%		4	%		11	%		4	%		10	%		100	%
Total		12	%		45	%		20	%		12	%		5	%		3	%		2	%		100	%

There are no particular conditions relating to the pledge of these assets that need to be disclosed.

Note 29 contains a detail of the valuation adjustments recognized in equity on available-for-sale financial assets.

Note 51 contains a detail of the residual maturity periods of Available-for-sale financial assets and of Loans and receivables and of the related average interest rates.

8. Equity instruments

a) Breakdown

The detail, by classification and type, of Equity instruments in the consolidated balance sheets is as follows:

	Millions of euros
	2013		2012		2011
Classification:
Financial assets held for trading		4,967		5,492		4,744
Other financial assets at fair value through profit or loss		866		688		465
Available-for-sale financial assets		3,955		4,542		5,024
		9,788		10,722		10,233
Type:
Shares of Spanish companies		2,629		3,338		2,960
Shares of foreign companies		4,711		4,726		4,582
Investment fund units and shares		2,448		2,658		2,691
		9,788		10,722		10,233

Note 29 contains a detail of the valuation adjustments recognized in equity on available-for-sale financial assets, and also the related impairment losses.

F-104

b) Changes

The changes in Available-for-sale financial assets - Equity instruments were as follows:

	Millions of euros
	2013			2012			2011
Balance at beginning of year		4,542			5,024			6,546
Changes in the scope of consolidation		—			—			(493	)
Of which:
Metrovacesa, S.A. (Note 3)		—			—			(402	)
Net additions (disposals)		(722	)		(666	)		(862	)
Of which:
Sareb		44			164			—
Valuation adjustments		135			184			(167	)
Balance at end of year		3,955			4,542			5,024

The main acquisitions and disposals made in 2013, 2012 and 2011 were as follows:

i. Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria,S.A. (Sareb)

In December 2012 the Group, together with other Spanish financial institutions, entered into an agreement to invest in the Spanish Bank Restructuring Asset Management Company (Sareb). The Group undertook to make an investment of up to EUR 840 million (25% in capital and 75% in subordinated debt), and at December 31, 2012, it had paid EUR 164 million of capital and EUR 490 million of subordinated debt.

In February 2013, following the review of the own funds that Sareb required, the aforementioned undertaking was reduced to EUR 806 million, and the Group disbursed the remaining EUR 44 million of capital and EUR 108 million of subordinated debt.

c) Notifications of acquisitions of investments

The notifications made by the Bank in 2013, in compliance with Article 155 of the Spanish Limited Liability Companies Law and Article 53 of Spanish Securities Market Law 24/1988, of the acquisitions and disposals of holdings in investees are listed in Appendix IV.

F-105

9. Trading derivatives (assets and liabilities) and Short positions

a) Trading derivatives

The detail, by type of inherent risk, of the fair value of the trading derivatives arranged by the Group is as follows (see Note 36):

	Millions of euros
	2013				2012				2011
	Debit balance		Credit balance		Debit balance		Credit balance		Debit balance		Credit balance
Interest rate risk		43,185		43,154		89,404		86,956		77,016		76,834
Currency risk		11,315		10,181		16,516		16,692		16,032		16,278
Price risk		3,247		4,609		3,289		5,081		5,853		7,068
Other risks		1,152		943		1,110		1,014		3,597		2,903
		58,899		58,887		110,319		109,743		102,498		103,083

b) Short positions

Following is a breakdown of the short positions:

	Millions of euros
	2013		2012		2011
Borrowed securities:
Debt instruments		3,921		5,371		1,775
Of which: Santander UK plc		3,260		4,989		850
Equity instruments		189		551		572
Short sales:
Debt instruments		11,840		9,259		7,836
Of which:
Banco Santander, S.A.		6,509		5,946		6,560
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander, Mexico		2,882		3,266		1,235
Banco Santander (Brasil), S.A.		2,388		—		—
Equity instruments		1		—		4
		15,951		15,181		10,187

F-106

10. Loans and advances to customers

a) Detail

The detail, by classification, of Loans and advances to customers in the consolidated balance sheets is as follows:

	Millions of euros
	2013			2012			2011
Financial assets held for trading		5,079			9,162			8,056
Other financial assets at fair value through profit or loss		13,196			13,936			11,748
Loans and receivables		650,581			696,014			728,737
Of which:
Disregarding impairment losses		675,484			721,436			747,543
Impairment losses		(24,903	)		(25,422	)		(18,806	)
Of which, due to country risk		(31	)		(42	)		(41	)
		668,856			719,112			748,541
Loans and advances to customers disregarding impairment losses (*)		693,759			744,534			767,347

(*) Includes Valuation adjustments for accrued interest receivable and other items amounting to EUR 2,593 million at December 31, 2013 (2012: EUR 3,481 million; 2011: EUR 2,950 million).

Note 51 contains a detail of the residual maturity periods of loans and receivables and of the related average interest rates.

Note 54 shows the Group’s total exposure, by origin of the issuer.

There are no loans and advances to customers for material amounts without fixed maturity dates.

F-107

b) Breakdown

Following is a breakdown, by loan type and status, geographical area of residence and interest rate formula, of the loans and advances to customers of the Group, which reflect the Group’s exposure to credit risk in its core business, disregarding impairment losses:

	Millions of euros
	2013		2012		2011
Loan type and status:
Commercial credit		11,898		12,054		13,581
Secured loans		396,432		428,259		446,882
Reverse repurchase agreements		13,223		19,383		18,365
Other term loans		203,267		218,728		227,093
Finance leases		15,871		16,241		18,326
Receivable on demand		10,155		11,087		8,893
Impaired assets		40,320		35,301		31,257
Valuation adjustments for Accrued interest receivable and other items		2,593		3,481		2,950
		693,759		744,534		767,347
Geographical area:
Spain		173,852		200,014		214,558
European Union (excluding Spain)		328,118		335,727		356,199
United States and Puerto Rico		43,566		51,186		48,596
Other OECD countries		9,184		10,894		7,760
Latin America		129,529		138,071		136,434
Rest of the world		9,510		8,642		3,800
		693,759		744,534		767,347
Interest rate formula:
Fixed rate		280,188		299,937		292,373
Floating rate		413,571		444,597		474,974
		693,759		744,534		767,347

At December 31, 2013, the Group had granted loans amounting to EUR 13,374 million (December 31, 2012: EUR 16,884 million; December 31, 2011: EUR 12,147 million) to the Spanish public sector (which had ratings of BBB, BBB and A at December 31, 2013, 2012 and 2011, respectively), and EUR 4,402 million to the public sector in other countries (December 31, 2012: EUR 4,983 million; December 31, 2011: EUR 4,394 million). At December 31, 2013, the breakdown of this amount by issuer rating was as follows: 12.8% AA, 0.8% A, 72.1% BBB and 14.2% below BBB.

At December 31, 2013, the Group had EUR 635,663 million of loans and advances to customers classified as other than non-performing (excluding loans granted to the public sector). The percentage breakdown of these loans and advances by counterparty credit quality is as follows: 8.29% AAA, 15.96% AA, 17.80% A, 24.36% BBB and 33.59% below BBB.

The above-mentioned ratings were obtained by converting the internal ratings awarded to customers by the Group into the external ratings classification established by Standard & Poor’s, in order to make them more readily comparable.

F-108

Following is a detail, by activity, of the loans and advances to customers at December 31, 2013, net of impairment losses:

	Millions of euros
	Total		Without collateral		Secured loans
					Net exposure				Loan-to-value ratio (a)
					Of which: Property collateral		Of which: Other collateral		Less than or equal to 40%		More than 40% and less than or equal to 60%		More than 60% and less than or equal to 80%		More than 80% and less than or equal to 100%		More than 100%
Public sector		17,756		16,834		107		815		316		333		30		29		214
Other financial institutions		29,220		4,561		16,994		7,665		8,140		822		2,836		10,133		2,728
Non-financial companies and individual traders		229,896		134,386		50,153		45,357		30,694		16,043		16,666		20,851		11,256
Of which:
Construction and property development		20,738		3,581		14,822		2,335		6,893		3,516		3,675		1,449		1,624
Civil engineering construction		3,470		2,361		636		473		220		208		151		249		281
Large companies		130,708		86,918		12,602		31,188		13,162		5,308		5,016		14,656		5,648
SMEs and individual traders		74,980		41,526		22,093		11,361		10,419		7,011		7,824		4,497		3,703
Other households and non-profit institutions serving households		395,329		89,156		293,343		12,830		63,475		76,642		104,267		49,708		12,081
Of which:
Residential		291,262		2,105		288,195		962		60,222		72,102		99,455		47,315		10,063
Consumer loans		91,984		79,969		2,025		9,990		2,316		3,547		3,699		894		1,559
Other purposes		12,083		7,082		3,123		1,878		937		993		1,113		1,499		459
Subtotal		672,201		244,937		360,597		66,667		102,625		93,840		123,799		80,721		26,279
Less: collectively assessed impairment losses		3,345
Total		668,856
Memorandum item
Refinanced and restructured transactions		41,755		11, 777		25,387		4,591		8,955		7,134		8,088		3,888		1,913

(a) The ratio of the carrying amount of the transactions at December 31, 2013 to the latest available appraisal value of the collateral.

Note 54 contains information relating to the restructured/refinanced loan book.

F-109

c) Impairment losses

The changes in the impairment losses on the assets making up the balances of Loans and receivables - Loans and advances to customers, Loans and receivables - Loans and advances to credit institutions (see Note 6) and Loans and receivables - Debt instruments (see Note 7) were as follows:

	Millions of euros
	2013			2012			2011
Balance at beginning of year		25,467			18,858			19,544
Net impairment losses charged to income for the year		12,054			19,839			12,750
Of which:
Impairment losses charged to income		17,551			23,002			16,781
Impairment losses reversed with a credit to income		(5,497	)		(3,163	)		(4,031	)
Changes in the scope of consolidation (Note 3)		—			(266	)		(1,267	)
Write-off of impaired balances against recorded impairment allowance		(10,626	)		(11,346	)		(12,293	)
Exchange differences and other changes		(1,936	)		(1,618	)		124
Balance at end of year		24,959			25,467			18,858
Of which:
By method of assessment:
Individually assessed		21,604			21,540			15,267
Of which: due to country risk (Note 2.g)		42			42			43
Collectively assessed		3,355			3,927			3,591
By geographical location of risk:
Spain		12,279			11,711			6,907
Rest of Europe		5,918			5,625			4,827
Americas		6,762			8,131			7,124
By classification of assets:
Loans and advances to credit institutions (Note 6)		37			30			36
Debt instruments (Note 7)		19			15			16
Loans and advances to customers		24,903			25,422			18,806

The increase in impairment losses experienced in 2012 was associated mainly with two factors: (i) the rise in non-performing loans ratios in certain sectors in Spain, caused by the worsening of Spain’s macroeconomic situation as a result of economic slowdown, falling consumer spending and job market deterioration, with the unemployment rate exceeding 25% (particularly significant in this context was the increase in the non-performing loans ratio in the real estate sector – 47.7% at December 31, 2012, compared with 28.6% in 2011); and (ii) the upward shift in non-performing loans ratios in certain financial industries (Brazil, Chile and Portugal).

The decrease in credit loss provisions experienced in 2013 was associated with two factors: (i) lower levels of provisioning in Brazil, the United Kingdom, Portugal, Santander Consumer Finance and the United States; and (ii) the continued stabilization of the Spanish economy, featuring a slower pace of GDP shrinkage in the year - in comparison with 2012 -, together with positive growth in the last two quarters, for the first time since 2011, a certain improvement in private consumer spending and a stabilization of the unemployment rate.

Previously written-off assets recovered in 2013, 2012 and 2011 amounted to EUR 1,068 million, EUR 1,316 million and EUR 1,784 million, respectively. Taking into account these amounts and those recognized in

F-110

Impairment losses charged to income for the year in the foregoing table, impairment losses on Loans and receivables amounted to EUR 10,986 million in 2013, EUR 18,523 million in 2012 and EUR 10,966 million in 2011.

d) Impaired and non-performing assets

The detail of the changes in the balance of the financial assets classified as Loans and receivables - Loans and advances to customers and considered to be impaired due to credit risk is as follows:

	Millions of euros
	2013			2012			2011
Balance at beginning of year		35,301			31,257			27,863
Net additions		16,438			16,167			15,920
Written-off assets		(10,626	)		(11,346	)		(12,293	)
Changes in the scope of consolidation		699			(626	)		69
Exchange differences and other		(1,492	)		(151	)		(302	)
Balance at end of year		40,320			35,301			31,257

This amount, after deducting the related allowances, represents the Group’s best estimate of the present value of the estimated future cash flows of the impaired assets.

At December 31, 2013, the Group’s written-off assets totaled EUR 30,006 million (December 31, 2012: EUR 28,745 million; December 31, 2011: EUR 26,763 million).

Following is a detail of the financial assets classified as Loans and receivables and considered to be impaired due to credit risk at December 31, 2013, classified by geographical location of risk and by age of the oldest past-due amount:

	Millions of euros
	With no past-due balances or less than 3 months past due		With balances past due by
			3 to 6 months		6 to 9 months		9 to 12 months		More than 12 months		Total
Spain		6,876		3,327		1,707		1,700		8,255		21,865
European Union (excluding Spain)		1,791		3,141		994		763		3,461		10,150
United States and Puerto Rico		322		178		78		43		417		1,038
Other OECD countries		12		38		29		10		49		138
Latin America		819		2,671		1,194		1,050		1,393		7,127
Rest of the world		—		—		—		—		2		2
		9,820		9,355		4,002		3,566		13,577		40,320

F-111

The detail at December 31, 2012 is as follows:

	Millions of euros
	With no past-due balances or less than 3 months past due		With balances past due by
			3 to 6 months		6 to 9 months		9 to 12 months		More than 12 months		Total
Spain		3,268		3,364		2,058		1,263		6,372		16,325
European Union (excluding Spain)		233		3,782		1,232		821		3,280		9,348
United States and Puerto Rico		327		216		111		83		484		1,221
Other OECD countries		12		42		40		43		—		137
Latin America		535		3,263		1,641		1,282		1,548		8,269
Rest of the world		—		—		—		—		1		1
		4,375		10,667		5,082		3,492		11,685		35,301

The detail at December 31, 2011 is as follows:

	Millions of euros
	With no past-due balances or less than 3 months past due		With balances past due by
			3 to 6 months		6 to 9 months		9 to 12 months		More than 12 months		Total
Spain		2,962		3,574		1,589		1,956		4,902		14,983
European Union (excluding Spain)		474		3,330		1,018		703		2,752		8,277
United States and Puerto Rico		406		282		137		118		533		1,476
Other OECD countries		9		34		37		43		1		124
Latin America		440		2,438		1,339		1,075		1,103		6,395
Rest of the world		—		2		—		—		—		2
		4,291		9,660		4,120		3,895		9,291		31,257

F-112

Set forth below for each class of impaired assets are the gross amount, associated allowances and information relating to the collateral and/or other credit enhancements obtained at December 31, 2013:

	Millions of euros
	Gross amount		Allowance recognized		Estimated collateral value (*)
Without associated collateral		15,697		10,600		—
With property collateral		24,423		8,068		15,361
With other collateral		200		109		88
Balance at end of year		40,320		18,777		15,449

(*) Includes the estimated collateral value associated with each loan. Accordingly, it does not include any other cash flows that might be obtained, such as those associated with the personal guarantees of the borrowers.

When classifying assets in the foregoing table, the main factors considered by the Group to determine whether an asset has become impaired are the existence of amounts past due -assets impaired due to arrears- or other circumstances that lead it to believe that not all the contractual cash flows will be recovered -assets impaired for reasons other than arrears-, such as a deterioration of the borrower’s financial situation, the worsening of its capacity to generate funds or difficulties experienced by it in accessing credit.

Loans classified as standard: past-due amounts receivable

In addition, at December 31, 2013, there were assets with amounts receivable that were past due by three months or less, the detail of which, by age of the oldest past-due amount, is as follows:

	Millions of euros
	Less than 1 month		1 to 2 months		2 to 3 months
Loans and advances to customers		2,450		631		416
Public sector		5		—		1
Private sector		2,445		631		415
Total		2,450		631		416

F-113

e) Securitization

Loans and advances to customers includes, inter alia, the securitized loans transferred to third parties on which the Group has retained the risks and rewards, albeit partially, and which therefore, in accordance with the applicable accounting standards, cannot be derecognized. The breakdown of the securitized loans, by type of original financial instrument, and of the securitized loans derecognized because the stipulated requirements were met (see Note 2.e) is shown below. Note 22 details the liabilities associated with these securitization transactions.

	Millions of euros
	2013		2012		2011
Derecognized		3,618		6,251		8,227
Of which
Securitized mortgage assets		3,618		6,249		8,221
Other securitized assets		—		2		6
Retained on the balance sheet		78,229		95,981		137,939
Of which
Securitized mortgage assets		56,277		69,354		103,655
Of which: UK assets		45,296		56,037		81,286
Other securitized assets		21,952		26,627		34,284
Total		81,847		102,232		146,166

Securitization is used as a tool for the management of regulatory capital and as a means of diversifying the Group’s liquidity sources. In 2013, 2012 and 2011 the Group did not derecognize any of the securitizations performed, and the balance shown as derecognized for those years relates to securitizations performed in prior years.

The loans derecognized include assets of Santander Holdings USA, Inc. amounting to approximately EUR 3,082 million at December 31, 2013 (December 31, 2012: EUR 5,603 million; December 31, 2011: EUR 7,188 million) that were sold, prior to this company’s inclusion in the Group, on the secondary market for multifamily loans, and over which control was transferred and substantially all the associated risks and rewards were not retained. At December 31, 2013, the Group recognized under Other liabilities an obligation amounting to EUR 49 million (December 31, 2012: EUR 91 million; December 31, 2011: EUR 105 million), which represents the fair value of the retained credit risk.

The loans retained on the face of the balance sheet include the loans associated with securitizations in which the Group retains a subordinated debt and/or grants any manner of credit enhancements to the new holders. In 2012, following the Bank of England’s decision to accept, as collateral in its liquidity programs, not only securitizations but also all mortgage loans with a given credit quality, the Group companies in the UK redeemed GBP 33,800 million of securitized mortgage assets in order to manage more efficiently the on-balance-sheet liquidity of Santander UK.

The loans transferred through securitization are mainly mortgage loans, loans to companies and consumer loans.

F-114

11. Hedging derivatives

The detail, by type of risk hedged, of the fair value of the derivatives qualifying for hedge accounting is as follows (see Note 36):

	Millions of euros
	2013				2012				2011
	Assets		Liabilities		Assets		Liabilities		Assets		Liabilities
Fair value hedges		5,403		4,146		7,467		5,492		9,424		5,501
Of which: Portfolio hedges		610		1,703		544		2,621		1,493		2,515
Cash flow hedges		1,766		1,023		344		553		313		773
Hedges of net investments in foreign operations		1,132		114		125		399		161		170
		8,301		5,283		7,936		6,444		9,898		6,444

Note 36 contains a description of the Group’s main hedges.

12. Non-current assets held for sale

The detail of Non-current assets held for sale in the consolidated balance sheets is as follows:

	Millions of euros
	2013		2012		2011
Tangible assets		4,845		4,259		5,171
Of which:
Foreclosed assets		4,742		4,196		5,112
Of which: Property assets in Spain (Note 54)		4,146		3,674		4,274
Other tangible assets held for sale		103		63		59
Other assets		47		1,441		1,726
		4,892		5,700		6,897

At December 31, 2013, the allowance covering the value of the foreclosed and acquired assets amounted to EUR 4,955 million (2012: EUR 4,416 million; 2011: EUR 4,512 million), which represents a coverage ratio of 51.1% of the assets’ gross value (2012: 51.3%; 2011: 46.9%). The net charges recorded in those years amounted to EUR 335 million, EUR 449 million and EUR 2,037 million, respectively (see Note 50).

In 2013 the Group sold, for EUR 735 million, foreclosed properties with a gross carrying amount of EUR 1,236 million, for which provisions totaling EUR 402 million had been recognized. These sales gave rise to losses of EUR 99 million; in addition, other tangible assets were sold for EUR 82 million, giving rise to a gain of EUR 12 million (see Note 50).

At December 31, 2012 and 2011, Other assets included assets amounting to EUR 1,370 million and EUR 1,559 million, respectively, corresponding to the Santander UK credit card business. This business was sold for EUR 770 million on May 10, 2013, giving rise to a loss of EUR 14 million, which was recognized under Profit (loss) from discontinued operations (net) in the accompanying consolidated income statement.

F-115

13. Investments

a) Breakdown

The detail, by company, of Investments (see Note 2.b) is as follows:

	Millions of euros
	2013		2012		2011
Associates
Zurich Santander Insurance América, S.L.		826		1,013		1,017
Metrovacesa, S.A.		647		649		772
Other companies		356		295		293
		1,829		1,957		2,082
Jointly controlled entities
Santander Consumer USA Inc.		2,159		2,026		2,063
SAM Investment Holdings Limited		449		—		—
Aegon Santander Seguros		213		—		—
Other companies		886		471		10
		3,707		2,497		2,073

F-116

b) Changes

The changes in Investments were as follows:

	Millions of euros
	2013			2012			2011
Balance at beginning of year		4,454			4,155			273
Acquisitions (disposals) and capital increases (reductions)		422			34			23
Santander Elavon Merchant Services Entidad de Pago, S.L.		88			—			—
Changes in the scope of consolidation (Note 3)		769			394			3,919
Of which:
SAM Investment Holdings Limited		449			—			—
Aegon Santander Seguros		211			—			—
Santander Consumer USA Inc.		—			—			2,063
Zurich Santander Insurance América, S.L.		—			—			932
Metrovacesa, S.A.		—			—			894
Effect of equity accounting		500			427			57
Impairment losses		—			—			(100	)
Dividends paid and reimbursements of share premium		(303	)		(508	)		(13	)
Exchange differences and other changes		(306	)		(48	)		(4	)
Balance at end of year		5,536			4,454			4,155

c) Impairment losses

In 2013 and 2012 there was no evidence of material impairment on the Group’s investments in associates. In 2011 an impairment loss of EUR 100 million on the investment in Metrovacesa, S.A. was recognized under Impairment losses on other assets (net) - Other assets in the consolidated income statement.

F-117

d) Other information

Following is a summary of the financial information on the companies accounted for using the equity method (obtained from the information available at the date of preparation of the financial statements):

	Millions of euros
	2013			2012			2011
Total assets		63,443			54,367			32,344
Total liabilities		(55,483	)		(46,933	)		(24,519	)
Net assets		7,960			7,434			7,825
Group’s share of net assets		3,755			2,769			2,473
Goodwill		1,781			1,685			1,682
Of which:
Santander Consumer USA Inc.		937			979			999
Zurich Santander Insurance América, S.L.		526			526			526
Total Group share		5,536			4,454			4,155
Total income		11,756			10,232			8,428
Total profit		1,029			612			1,212
Group’s share of profit		500			427			57

Following is a summary of the financial information for 2013 on the main associates and jointly controlled entities (obtained from the information available at the date of preparation of the financial statements):

	Millions of euros
	Total assets		Total liabilities			Total income		Total profit
Associates		22,305		(19,032	)		4,943		277
Of which:
Zurich Santander Insurance América, S.L.		10,340		(9,563	)		3,684		274
Jointly controlled entities		41,138		(36,451	)		6,813		752
Of which:
Santander Consumer USA Inc.		19,589		(17,708	)		4,175		495
SAM Investment Holdings Limited		1,185		(312	)		853		145
Unión de Créditos Inmobiliarios, S.A., EFC		12,553		(12,175	)		553		17
Total		63,443		(55,483	)		11,756		1,029

At December 31, 2013, the Group did not hold any ownership interests in jointly controlled entities or associates whose shares are listed. At December 31, 2012, the only investment in listed associates was the investment held in Metrovacesa, S.A., the fair value of which, taking into consideration its quoted price at December 31, 2012, was EUR 761 million (EUR 2.21 per share).

14. Insurance contracts linked to pensions

The detail of Insurance contracts linked to pensions in the consolidated balance sheets is as follows:

	Millions of euros
	2013		2012		2011
Assets relating to insurance contracts covering post-employment benefit plan obligations:
Banco Santander, S.A.		342		214		1,926
Banesto		—		190		191
Other Spanish companies		—		1		29
		342		405		2,146

In 2012 the Group entered into an agreement with Generali España, S.A. to terminate a portion of the insurance contracts linked to pensions which it held with this insurance company (see Note 25.c).

F-118

15. Liabilities under insurance contracts and Reinsurance assets

The detail of Liabilities under insurance contracts and Reinsurance assets in the consolidated balance sheets (see Note 2.j) is as follows:

	Millions of euros
	2013							2012							2011
Technical provisions for:	Direct insurance and reinsurance assumed		Reinsurance ceded			Total (balance payable)		Direct insurance and reinsurance assumed		Reinsurance ceded			Total (balance payable)		Direct insurance and reinsurance assumed		Reinsurance ceded			Total (balance payable)
Unearned premiums and unexpired risks		245		(36	)		209		137		(68	)		69		166		(86	)		80
Life insurance		546		(183	)		363		479		(229	)		250		229		(78	)		151
Claims outstanding		315		(55	)		261		391		(61	)		330		66		(55	)		11
Bonuses and rebates		25		(6	)		19		14		—			14		17		—			17
Other technical provisions		299		(76	)		222		404		(66	)		338		39		(35	)		4
		1,430		(356	)		1,074		1,425		(424	)		1,001		517		(254	)		263

On July 19, 2012 the Group entered into an agreement with Abbey Life Assurance Company Limited (“Abbey Life Assurance”), a subsidiary of Deutsche Bank, for Abbey Life Assurance to reinsure the entire individual life risk portfolios of the Santander Group insurance companies in Spain and Portugal. Under this agreement, the Group transferred to Abbey Life Assurance, in exchange for a non-refundable up-front amount calculated on the basis of market conditions, its annual renewable life insurance policy portfolio at June 30, 2012 and the potential renewals of these policies. Abbey Life Assurance will assume, from the agreement date, all the risks and rewards relating to the term of these policies and their potential renewals (i.e. both the risk of changes in the actual rates of mortality and permanent total disability compared with the estimated rates, and the lapse risk of the portfolio, credit risk on the part of the insureds, etc.). The Group will continue to carry out the administrative management (servicing) of these policies, as agent, and will receive in exchange from Abbey Life Assurance a market consideration independent of the up-front amount received.

Since the significant risks and rewards have been transferred, this transaction gave rise to income of EUR 435 million recognized under Other operating income - Income from insurance and reinsurance contracts issued in the 2012 consolidated income statement (EUR 308 million net of tax).

F-119

16. Tangible assets

a) Changes

The changes in Tangible assets in the consolidated balance sheets were as follows:

	Millions of euros
	For own use			Leased out under an operating lease			Investment property			Total
Cost:
Balances at January 1, 2011		13,389			3,226			1,561			18,176
Additions/disposals (net) due to change in the scope of consolidation		473			(187	)		2,759			3,045
Additions/disposals (net)		905			(13	)		59			951
Transfers, exchange differences and other items		(165	)		50			(72	)		(187	)
Balances at December 31, 2011		14,602			3,076			4,307			21,985
Additions/disposals (net) due to change in the scope of consolidation		41			(11	)		(69	)		(39	)
Additions/disposals (net)		795			(105	)		105			795
Transfers, exchange differences and other items		342			157			(78	)		421
Balances at December 31, 2012		15,780			3,117			4,265			23,162
Additions/disposals (net) due to change in the scope of consolidation		(17	)		—			541			524
Additions/disposals (net)		1,021			(124	)		(23	)		874
Transfers, exchange differences and other items		(989	)		212			(139	)		(916	)
Balances at December 31, 2013		15,795			3,205			4,644			23,644
Accumulated depreciation:
Balances at January 1, 2011		(5,847	)		(886	)		(54	)		(6,787	)
Disposals due to change in the scope of consolidation		22			43			—			65
Disposals		158			274			6			438
Charge for the year		(898	)		(2	)		(15	)		(915	)
Transfers, exchange differences and other items		(217	)		(261	)		(66	)		(544	)
Balances at December 31, 2011		(6,782	)		(832	)		(129	)		(7,743	)
Disposals due to change in the scope of consolidation		44			—			7			51
Disposals		423			229			8			660
Charge for the year		(1,059	)		(1	)		(13	)		(1,073	)
Transfers, exchange differences and other items		(252	)		(265	)		(37	)		(554	)
Balances at December 31, 2012		(7,626	)		(869	)		(164	)		(8,659	)
Disposals due to change in the scope of consolidation		16			—			—			16
Disposals		280			179			14			473
Charge for the year		(1,020	)		(1	)		(17	)		(1,038	)
Transfers, exchange differences and other items		416			(235	)		(36	)		145
Balances at December 31, 2013		(7,934	)		(926	)		(203	)		(9,063	)

F-120

	Millions of euros
	For own use			Leased out under an operating lease			Investment property			Total
Impairment losses:
Balances at January 1, 2011		(34	)		(16	)		(197	)		(247	)
Impairment charge for the year		2			(22	)		(131	)		(151	)
Exchange differences		9			(8	)		1			2
Balances at December 31, 2011		(23	)		(46	)		(327	)		(396	)
Impairment charge for the year		(10	)		(23	)		(185	)		(218	)
Disposals due to change in the scope of consolidation		—			—			(50	)		(50	)
Exchange differences		15			1			6			22
Balances at December 31, 2012		(18	)		(68	)		(556	)		(642	)
Impairment charge for the year		(53	)		(24	)		(260	)		(337	)
Disposals due to change in the scope of consolidation		—			—			39			39
Exchange differences		(3	)		—			16			13
Balances at December 31, 2013		(74	)		(92	)		(761	)		(927	)
Tangible assets, net:
Balances at December 31, 2011		7,797			2,198			3,851			13,846
Balances at December 31, 2012		8,136			2,179			3,545			13,860
Balances at December 31, 2013		7,787			2,187			3,680			13,654

F-121

b) Property, plant and equipment for own use

The detail, by class of asset, of Property, plant and equipment - For own use in the consolidated balance sheets is as follows:

	Millions of euros
	Cost		Accumulated depreciation			Impairment losses			Carrying amount
Land and buildings		5,654		(1,565	)		(23	)		4,066
IT equipment and fixtures		3,304		(2,419	)		—			885
Furniture and vehicles		5,239		(2,719	)		—			2,520
Construction in progress and other items		405		(79	)		—			326
Balances at December 31, 2011		14,602		(6,782	)		(23	)		7,797
Land and buildings		5,735		(1,583	)		(18	)		4,134
IT equipment and fixtures		4,174		(3,087	)		—			1,087
Furniture and vehicles		5,403		(2,873	)		—			2,530
Construction in progress and other items		468		(83	)		—			385
Balances at December 31, 2012		15,780		(7,626	)		(18	)		8,136
Land and buildings		5,781		(1,624	)		(74	)		4,083
IT equipment and fixtures		4,168		(3,271	)		—			897
Furniture and vehicles		5,616		(2,983	)		—			2,633
Construction in progress and other items		230		(56	)		—			174
Balances at December 31, 2013		15,795		(7,934	)		(74	)		7,787

The carrying amount at December 31, 2013 in the foregoing table includes the following approximate amounts:

• EUR 5,615 million (December 31, 2012: EUR 5,615 million; December 31, 2011: EUR 5,254 million) relating to property, plant and equipment owned by Group entities and branch offices located abroad.

• EUR 138 million (December 31, 2012: EUR 208 million; December 31, 2011: EUR 793 million) relating to property, plant and equipment being acquired under finance leases by the consolidated entities.

c) Investment property

The fair value of investment property at December 31, 2013 amounted to EUR 3,689 million (2012: EUR 3,548 million; 2011: EUR 3,860 million). A comparison of the fair value of investment property at December 31, 2013, 2012 and 2011 with the carrying amount gives rise to gross unrealized gains of EUR 9 million for 2013, EUR 3 million for 2012 and EUR 9 million for 2011, of which EUR 9 million, EUR 2 million and EUR 5 million, respectively, are attributable to the Group.

The rental income earned from investment property and the direct costs related both to investment properties that generated rental income in 2013, 2012 and 2011 and to investment properties that did not generate rental income in those years are not material in the context of the consolidated financial statements.

d) Sale of properties

In 2007 and 2008 the Group sold ten hallmark properties, 1,152 Bank branch offices in Spain and its head office complex (Ciudad Financiera or Santander Business Campus) to various buyers. Also, the Group entered into operating leases (with maintenance, insurance and taxes payable by the Group) on those properties with the buyers for various non-cancellable terms (12 to 15 years for the hallmark properties, 24 to 26 years for the branch offices and 40 years for the Santander Business Campus), with various rent review agreements applicable during those periods and the possible extensions thereof. The agreements between the parties also provided for purchase options that in general are exercisable by the Group on final expiry of the leases at the market value of the properties on the expiry dates; the market value will be determined, where appropriate, based in part on third party appraisals.

F-122

The rental expense recognized by the Group in 2013 in connection with these operating lease agreements amounted to EUR 286 million (2012: EUR 269 million; 2011: EUR 257 million). At December 31, 2013, the present value of the minimum future payments that the Group will incur in the compulsory term amounted to EUR 230 million payable within one year, EUR 847 million payable at between one and five years and EUR 1,821 million payable at more than five years.

17. Intangible assets – Goodwill

The detail of Goodwill, based on the cash-generating units giving rise thereto, is as follows:

	Millions of euros
	2013		2012		2011
Santander UK		8,913		9,105		8,896
Banco Santander (Brazil)		5,840		7,035		7,878
Bank Zachodni WBK		2,487		2,210		2,019
Santander Holdings USA		1,489		1,556		1,587
Santander Consumer Holding (Germany)		1,315		1,315		1,315
Banco Santander Totta		1,040		1,040		1,040
Banco Santander- Chile		687		788		742
Grupo Financiero Santander (Mexico)		541		558		531
Other companies		969		1,019		1,081
Total goodwill		23,281		24,626		25,089

The changes in Goodwill were as follows:

	Millions of euros
	2013			2012			2011
Balance at beginning of year		24,626			25,089			24,622
Additions (Note 3)		398			87			2,557
Of which:
Bank Zachodni WBK		326			—			2,261
Skandinaviska Enskilda Banken		—			—			145
Impairment losses		(40	)		(156	)		(660	)
Of which:
Santander Consumer Bank, S.p.A. (Italy)		—			(156	)		—
Banco Santander Totta, S.A.		—			—			(601	)
Disposals or changes in scope of consolidation (Note 3)		(39	)		—			(716	)
Of which:
Santander Consumer USA Inc.		—			—			(541	)
Santander Seguros S.A. (Brazil)		—			—			(173	)
Exchange differences and other items		(1,664	)		(394	)		(714	)
Balance at end of year		23,281			24,626			25,089

F-123

The Group has goodwill generated by cash-generating units located in non-euro currency countries (mainly the UK, Brazil, the United States, Poland, Mexico and Chile) and, therefore, this gives rise to exchange differences on the translation to euros, at closing rates, of the amounts of goodwill denominated in foreign currencies. In accordance with current regulations, these exchange differences were recognized with a charge to the heading Valuation adjustments - Exchange differences in equity and a credit to Goodwill in assets. The change in the balance of this heading is disclosed in the consolidated statement of recognized income and expense.

At least once per year (or whenever there is any indication of impairment), the Group reviews goodwill for impairment (i.e. a potential reduction in its recoverable value to below its carrying amount). The first step that must be taken in order to perform this analysis is the identification of the cash-generating units, i.e. the Group’s smallest identifiable groups of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

The amount to be recovered of each cash-generating unit is determined taking into consideration the carrying amount (including any fair value adjustments arising on the business combination) of all the assets and liabilities of all the independent legal entities comprising the cash-generating unit, together with the related goodwill.

The amount to be recovered of the cash-generating unit is compared with its recoverable amount in order to determine whether there is any impairment.

The Group’s assesses the existence of any indication that might be considered to be evidence of impairment of the cash-generating unit by reviewing information including the following: (i) certain macroeconomic variables that might affect its investments (population data, political situation, economic situation -including bankarization-, among others) and (ii) various microeconomic variables comparing the investments of the Group with the financial services industry of the country in which the Group carries on most of its business activities (balance sheet composition, total funds under management, results, efficiency ratio, capital adequacy ratio, return on equity, among others).

Regardless of whether there is any indication of impairment, every year the Group calculates the recoverable amount of each cash-generating unit to which goodwill has been allocated and, to this end, it uses price quotations, if available, market references (multiples), internal estimates and based in part on third party appraisals.

Firstly, the Group determines the recoverable amount by calculating the fair value of each cash-generating unit on the basis of the quoted price of the cash-generating units, if available, and of the price earnings ratios of comparable local entities.

In addition, the Group performs estimates of the recoverable amounts of certain cash-generating units by calculating their value in use using discounted cash flow projections. The main assumptions used in this calculation are: (i) earnings projections based on the financial budgets approved by the directors which normally cover a five-year period (unless a longer time horizon can be justified), (ii) discount rates determined as the cost of capital taking into account the risk-free rate of return plus a risk premium in line with the market and the business in which the units operate and (iii) constant growth rates used in order to extrapolate earnings to perpetuity which do not exceed the long-term average growth rate for the market in which the cash-generating unit in question operates.

F-124

The cash flow projections used to obtain the values in use are based on the financial budgets approved by both local management of the related local units and the Group’s directors. The Group’s budgetary estimation process is common for all the cash-generating units. The local management teams prepare their budgets using the following key assumptions:

a) Microeconomic variables of the cash-generating unit: management takes into consideration the current balance sheet structure, the product mix on offer and the business decisions taken by local management in this regard.

b) Macroeconomic variables: growth is estimated on the basis of the changing environment, taking into consideration expected GDP growth in the unit’s geographical location and forecast trends in interest and exchange rates. These data, which are based on external information sources, are provided by the Group’s economic research service.

c) Past performance variables: in addition, management takes into consideration in the projection the difference (both positive and negative) between the cash-generating unit’s past performance and that of the market.

Following is a detail of the main assumptions used in determining the recoverable amount, at 2013 year-end, of the most significant cash-generating units which were valued using the discounted cash flow method:

	Projected period		Discount rate (*)			Nominal perpetual growth rate
Santander UK		5 years		10.3	%		2.5	%
Banco Santander (Brazil)		5 years		14.8	%		7.0	%
Santander Holdings USA		5 years		10.5	%		2.5	%
Santander Consumer Holding (Germany)		5 years		9.7	%		2.5	%
Banco Santander Totta		5 years		12.2	%		3.0	%

(*) Post-tax discount rate for the purpose of consistency with the earnings projections used.

Given the degree of uncertainty of these assumptions, the Group performs a sensitivity analysis thereof using reasonable changes in the key assumptions on which the recoverable amount of the cash-generating units is based in order to confirm whether their recoverable amount still exceeds their carrying amount. The sensitivity analysis involved adjusting the discount rate by +/- 50 basis points and the perpetuity growth rate by +/-50 basis points. Following the sensitivity analysis performed, the value in use of all the cash-generating units still exceeds their recoverable amount.

The amount to be recovered of Bank Zachodni WBK, Banco Santander –Chile and Grupo Financiero Santander México was calculated as the fair values of the aforementioned cash-generating units obtained from the market prices of their shares at year-end. This value exceeded the recoverable amount.

Based on the foregoing, and in accordance with the estimates, projections and sensitivity analyses available to the Bank’s directors, in 2013 the Group recognized impairment losses on goodwill totaling EUR 40 million (2012: EUR 156 million; 2011: EUR 660 million) under Impairment losses on other assets (net) - Goodwill and other intangible assets. In 2011 all the impairment losses recognized related to Group subsidiaries in Portugal. These losses were attributed to the macroeconomic deterioration in Portugal. In 2012 the impairment losses recognized, which were due mainly to the deterioration of business expectations, related mainly to Group subsidiaries in Italy.

At December 31, 2013, none of the cash-generating units with significant goodwill had a recoverable amount approximating their carrying amount. The recoverable amount is considered to be close to the carrying amount when reasonable changes in the main assumptions used in the valuation cause the recoverable amount to be below the amount to be recovered.

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18. Intangible assets - Other intangible assets

The detail of Intangible assets - Other intangible assets in the consolidated balance sheets and of the changes therein in 2013, 2012 and 2011 is as follows:

		Millions of euros
	Estimated useful life	December 31, 2012			Net additions and disposals			Change in scope of consolidation			Amortization and impairment			Application of amortization and impairment			Exchange differences and other			December 31, 2013
With indefinite useful life:
Brand names			14			2			—			—			—			(1	)		15
With finite useful life:
IT developments	3 to 7 years		5,285			1,229			4			—			(679	)		(293	)		5,546
Other			1,373			(46	)		37			—			(37	)		(195	)		1,132
Accumulated amortization			(3,106	)		—			(3	)		(1,353	)		715			144			(3,603	)
Impairment losses			(130	)		—			—			(1	)		1			—			(130	)
			3,436			1,185			38			(1,354	)		—			(345	)		2,960
		Millions of euros
	Estimated useful life	December 31, 2011			Net additions and disposals			Change in scope of consolidation			Amortization and impairment			Application of amortization and impairment			Exchange differences and other			December 31, 2012
With indefinite useful life:
Brand names			14			—			—			—			—			—			14
With finite useful life:
IT developments	3 to 7 years		5,127			1,098			45			—			(911	)		(74	)		5,285
Other			1,494			545			11			—			(552	)		(125	)		1,373
Accumulated amortization			(3,150	)		—			(28	)		(1,110	)		1,139			43			(3,106	)
Impairment losses			(491	)		—			—			5			324			32			(130	)
			2,994			1,643			28			(1,105	)		—			(124	)		3,436

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		Millions of euros
	Estimated useful life	December 31, 2010			Net additions and disposals		Change in scope of consolidation			Amortization and impairment			Application of amortization and impairment			Exchange differences and other			December 31, 2011
With indefinite useful life:
Brand names			44			—		(30	)		—			—			—			14
With finite useful life:
IT developments	3 to 7 years		4,237			1,420		145			—			(570	)		(105	)		5,127
Other			1,899			62		(104	)		—			(249	)		(114	)		1,494
Accumulated amortization			(2,732	)		—		(112	)		(1,183	)		794			83			(3,150	)
Impairment losses			(6	)		—		—			(501	)		25			(9	)		(491	)
			3,442			1,482		(101	)		(1,684	)		—			(145	)		2,994

19. Other assets

The detail of Other assets is as follows:

	Millions of euros
	2013		2012		2011
Transactions in transit		127		224		616
Net pension plan assets (Note 25)		149		348		299
Prepayments and accrued income		2,114		1,756		2,032
Other		3,344		3,046		3,541
Inventories		80		173		319
		5,814		5,547		6,807

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20. Deposits from central banks and Deposits from credit institutions

The detail, by classification, counterparty, type and currency, of Deposits from central banks and Deposits from credit institutions in the consolidated balance sheets is as follows:

	Millions of euros
	2013		2012		2011
Classification:
Financial liabilities held for trading		11,334		9,420		17,027
Of which:
Deposits from central banks		3,866		1,128		7,740
Deposits from credit institutions		7,468		8,292		9,287
Other financial liabilities at fair value through profit or loss		11,741		11,876		9,742
Of which:
Deposits from central banks		2,097		1,014		1,510
Deposits from credit institutions		9,644		10,862		8,232
Financial liabilities at amortized cost		86,322		131,670		116,369
Of which:
Deposits from central banks		9,788		50,938		34,996
Deposits from credit institutions		76,534		80,732		81,373
		109,397		152,966		143,138
Type:
Reciprocal accounts		755		508		604
Time deposits		55,839		92,491		82,817
Other demand accounts		3,425		3,225		3,396
Repurchase agreements		49,378		50,742		51,316
Central bank credit account drawdowns		—		6,000		5,005
		109,397		152,966		143,138
Currency:
Euro		63,947		98,808		81,044
Pound sterling		6,993		8,566		9,787
US dollar		27,509		34,904		31,175
Other currencies		10,948		10,688		21,132
		109,397		152,966		143,138

Both asset and liability balances with central banks increased in 2012 following the liquidity injections by the central banks in countries where the Group operates, particularly in the euro zone. The Group continued to attend these auctions and deposit at the ECB most of the funds captured, significantly increasing the liquidity buffer and improving its structure by replacing short-term maturities with longer term funding. The Group repaid most of these amounts in January 2013.

Note 51 contains a detail of the residual maturity periods of financial liabilities at amortized cost and of the related average interest rates.

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21. Customer deposits

The detail, by classification, geographical area and type, of Customer deposits is as follows:

	Millions of euros
	2013		2012		2011
Classification:
Financial liabilities held for trading		8,500		8,897		16,574
Other financial liabilities at fair value through profit or loss		26,484		28,638		26,982
Financial liabilities at amortized cost		572,853		589,104		588,977
		607,837		626,639		632,533
Geographical area:
Spain		185,460		192,588		202,022
European Union (excluding Spain)		259,903		261,135		260,529
United States and Puerto Rico		43,773		45,129		43,437
Latin America		116,666		126,842		125,343
Rest of the world		2,035		945		1,202
		607,837		626,639		632,533
Type:
Demand deposits-
Current accounts		167,787		144,305		155,455
Savings accounts		164,214		167,389		140,583
Other demand deposits		3,512		3,443		3,179
Time deposits-
Fixed-term deposits		225,471		257,583		257,498
Home-purchase savings accounts		102		132		174
Discount deposits		1,156		1,345		732
Hybrid financial liabilities		3,324		3,128		4,594
Other term deposits		463		590		139
Notice deposits		21		969		1,338
Repurchase agreements		41,787		47,755		68,841
		607,837		626,639		632,533

Note 51 contains a detail of the residual maturity periods of financial liabilities at amortized cost and of the related average interest rates.

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22. Marketable debt securities

a) Breakdown

The detail, by classification and type, of Marketable debt securities is as follows:

	Millions of euros
	2013		2012		2011
Classification:
Financial liabilities held for trading		1		1		77
Other financial liabilities at fair value through profit or loss		4,086		4,904		8,185
Financial liabilities at amortized cost		171,390		201,064		189,110
		175,477		205,969		197,372
Type:
Bonds and debentures outstanding		161,274		183,686		185,530
Notes and other securities		14,203		22,283		11,842
		175,477		205,969		197,372

At December 31, 2013 and 2012, none of these issues was convertible into Bank shares or granted privileges or rights which, in certain circumstances, make them convertible into shares. At December 31, 2011, the only issues with these features were the “Valores Santander” issue (described in Note 34.a), which were converted into shares in 2012.

Note 51 contains a detail of the residual maturity periods of financial liabilities at amortized cost at 2013, 2012 and 2011 year-end and of the related average interest rates in those years.

b) Bonds and debentures outstanding

The detail, by currency of issue, of Bonds and debentures outstanding is as follows:

							December 31, 2013
							Outstanding issue amount in foreign currency (millions)		Annual interest rate (%)
	Millions of euros
Currency of issue	2013		2012		2011
Euro		85,120		111,173		116,590		85,120		3.64	%
US dollar		25,641		26,186		28,995		35,361		2.88	%
Pound sterling		20,237		24,707		20,483		16,872		2.79	%
Brazilian real		15,017		14,581		12,790		48,920		7.73	%
Hong Kong dollar		5,026		170		283		53,748		3.72	%
Chilean peso		3,360		3,906		3,714		2,434,430		4.25	%
Other currencies		6,873		2,963		2,675
Balance at end of year		161,274		183,686		185,530

F-130

The changes in Bonds and debentures outstanding were as follows:

	Millions of euros
	2013			2012			2011
Balance at beginning of year		183,686			185,530			185,869
Net inclusion of entities in the Group		—			(1,649	)		(6,064	)
Of which:
Santander Consumer USA Inc.		—			—			(6,025	)
Issues		61,754			80,817			91,215
Of which:
Santander UK Group
Bonds in other currencies		23,491			32,162			49,497
Bond in pounds sterling		5,877			13,281			8,301
Banco Santander (Brasil), S.A.
Bonds		5,777			6,461			6,783
Real estate letters of credit		4,989			5,359			3,927
Agricultural letters of credit		478			1,612			1,274
Santander International Debt, S.A. Sole-Shareholder Company – Bonds		4,654			9,727			8,635
Banco Santander, S.A.
Territorial bonds - fixed rate		4,000			—			—
Mortgage-backed bonds - fixed rate		1,990			4,089			—
Bonds		323			—			3,978
Santander Consumer Finance, S.A. – Bonds		2,325			1,012			481
Banco Santander – Chile – Bonds		1,469			1,436			874
Motor 2013 PLC – Asset-backed securities		598			—			—
Bilkreditt 5 Limited – Asset-backed securities		494			—			—
Bilkreditt 3 Limited – Asset-backed securities		468			—			—
SC Germany Auto 2013-12 UG – Asset-backed securities		466			—			—
Santander Consumer Bank A.S. – Bonds		443			816			4
Dansk Auto Finansiering 1 Ltd. – Asset-backed securities		416			—			—
SC Germany Auto 2013-1 UG (Haftungsbeschraenkt) - Asset-backed securities		407			—			—
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander – Bonds		392			780			—
SCF Rahoituspalvelut 2013 Limited – Asset-backed securities		384			—			—
Santander Holdings USA, Inc. – Bonds		362			453			384
Bilkreditt 4 Limited- Asset-backed securities		357			—			—
Trade Maps 3 Ireland Limited – Debentures – floating rate		313			—			—
Santander Consumer Bank Spólka Akcyjna – Bonds		256			112			213
Fondo de Titulización de Activos PYMES Santander 6 – Asset-backed securities		235			—			—
Santander Consumer Bank S.P.A. – Bonos – floating rate		100			—			650
Santander International Products, Plc. – Bonds		65			—			—
Banesto
Mortgage-backed bonds – fixed rate		—			955			600
Bonds		—			949			1,452
Motor 2012 PLC – Asset-backed securities		—			895			—
Svensk Autofinans 1 Limited - Asset-backed securities		—			407			—
SCF Rahoituspalvelut Limited - Asset-backed securities		—			237			—
Banco Santander Totta, S.A.
Mortgage debentures		—			—			875
Bonds		—			—			359
SC Private Cars 2010- 1 Limited – Asset-backed securities		—			—			591
Motor 2011 PLC - Asset-backed securities		—			—			320
Bilkreditt 1Limited - Asset-backed securities		—			—			288
Brazil Foreign Diversified Payment Rights Finance Company
Asset-backed securities		—			—			193
Redemptions		(73,619	)		(78,706	)		(81,395	)
Of which:
Santander UK Group		(37,388	)		(41,862	)		(51,707	)
Banco Santander, S.A.		(11,434	)		(6,542	)		(2,968	)
Santander International Debt, S.A. Sole-Shareholder Company		(10,437	)		(8,479	)		(7,795	)
Banco Santander (Brasil), S.A.		(8,246	)		(9,346	)		(6,102	)
Santander International Products, Plc.		(1,605	)		—			—
Banco Santander- Chile		(1,263	)		(1,112	)		(520	)
Santander Consumer Finance, S.A.		(1,012	)		(481	)		(150	)
Banco Santander Totta, S.A.		(962	)		(1,014	)		(2,477	)
Santander US Debt, S.A. Sole-Shareholder Company		(947	)		(1,146	)		(1,118	)
Santander Consumer Bank Spolka Akcyjna		(48	)		(68	)		(167	)
Santander Consumer Bank AG		(6	)		(863	)		(317	)
Banesto		—			(6,401	)		(7,748	)
Santander Holdings USA, Inc.		—			(1,236	)		—
Totta (Ireland), PLC		—			—			(112	)
Exchange differences		(5,590	)		(636	)		(11	)
Other changes		(4,957	)		(1,670	)		(4,084	)
Balance at end of year		161,274			183,686			185,530

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c) Notes and other securities

These notes were issued basically by Banco Santander, S.A., Santander Consumer Finance, S.A., Santander Commercial Paper, S.A. (Sole-Shareholder Company), Abbey National North America LLC, Santander UK, plc, Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander, Santander Banco de Emisiones, S.A., Fondo de Titulización de Activos Santander 2 and Santander International Products, Plc.

d) Guarantees

Set forth below is information on the liabilities secured by financial assets:

	Millions of euros
	2013		2012		2011
Asset-backed securities		30,020		35,853		37,466
Of which, mortgage-backed securities		22,843		29,938		31,719
Other mortgage securities		59,984		67,214		76,243
Of which: mortgage-backed bonds		32,717		38,500		42,717
		90,004		103,067		113,709

The main characteristics of the assets underlying the aforementioned financial liabilities are as follows:

1. Asset-backed securities:

a. Mortgage-backed securities- these securities are secured by securitized mortgage assets (see Note 10.e) with average maturities of longer than ten years that must: be a first mortgage for acquisition of principal or second residence, be current in payments, have a loan-to-value ratio below 80% and have a liability insurance policy in force covering at least the appraisal value. The value of the financial liabilities broken down in the foregoing table is lower than the balance of the assets securing them - securitized assets retained on the balance sheet - mainly because the Group repurchases a portion of the bonds issued, and in such cases they are not recognized on the liabilities side of the consolidated balance sheet.

b. Other asset-backed securities- including asset-backed securities and notes issued by special-purpose vehicles secured mainly by mortgage loans that do not meet the foregoing requirements and other loans (mainly personal loans with average maturities of five years and loans to SMEs with average maturities of seven years).

2. Other mortgage securities include mainly: (i) mortgage-backed bonds with average maturities of more than ten years that are secured by a portfolio of mortgage loans and credits (included in secured loans - see Note 10.b) which must: not be classified as at procedural stage; have available appraisals performed by specialized entities; have a loan-to-value ratio below 80% in the case of home loans and below 60% for loans for other assets and have sufficient liability insurance, (ii) other debt securities issued as part of the Group’s liquidity strategy in the UK, mainly covered bonds in the UK secured by mortgage loans and other assets.

F-132

The fair value of the collateral or security received by the Group (financial and non-financial assets) which the Group is authorized to sell or pledge even if the collateral or security owner has not defaulted is not material taking into account the Group’s financial statements as a whole.

e) Spanish mortgage-market issues

The members of the board of directors hereby state that the Group entities operating in the Spanish mortgage-market issues area have established and implemented specific policies and procedures to cover all activities carried on and comply with mortgage-market regulations applicable to these activities as provided for in Royal Decree 716/2009, of April 24, implementing certain provisions of Mortgage Market Law 2/1981, of March 25, and, by application thereof, in Bank of Spain Circulars 7/2010 and 5/2011, and other financial and mortgage system regulations. Also, financial management defines the Group entities’ funding strategy.

The risk policies applicable to mortgage market transactions envisage maximum loan-to-value (LTV) ratios, and specific policies are also in place adapted to each mortgage product, which occasionally require the application of stricter limits.

The Bank’s general policies in this respect require the repayment capacity of each potential customer (the effort ratio in loan approval) to be analyzed using specific indicators that must be met. This analysis must determine whether each customer’s income is sufficient to meet the repayments of the loan requested. In addition, the analysis of each customer must include a conclusion on the stability over time of the customer’s income considered with respect to the life of the loan. The aforementioned indicator used to measure the repayment capacity (effort ratio) of each potential customer takes into account mainly the relationship between the potential debt and the income generated, considering on the one hand the monthly repayments of the loan requested and other transactions and, on the other, the monthly salary income and duly supported income.

The Group entities have document comparison procedures and tools for verifying customer information and solvency.

The Group entities’ procedures envisage that each mortgage originated in the mortgage market must be individually valued by an appraisal company not related to the Group.

In accordance with Article 5 of Mortgage Market Law 41/2007, any appraisal company approved by the Bank of Spain may issue valid appraisal reports. However, as permitted by this same article, the Group entities perform several checks and select, from among these companies, a small group with which they enter into cooperation agreements with special conditions and automated control mechanisms. The Group’s internal regulations specify, in detail, each of the internally approved companies, as well as the approval requirements and procedures and the controls established to uphold them. In this connection, the regulations establish the functions of an appraisal company committee on which the various areas of the Group related to these companies are represented. The aim of the committee is to regulate and adapt the internal regulations and the activities of the appraisal companies to the current market and business situation. Basically, the companies wishing to cooperate with the Group must have a significant level of activity in the mortgage market in the area in which they operate, they must pass a preliminary screening process based on criteria of independence, technical capacity and solvency -in order to ascertain the continuity of their business- and, lastly, they must pass a series of tests prior to obtaining definitive approval.

In order to comply in full with the legislation, any appraisal provided by the customer is reviewed, irrespective of which appraisal company issues it, to check that the requirements, procedures and methods used to prepare it are formally adapted to the valued asset pursuant to current legislation and that the values reported are customary in the market.

F-133

The information required by Bank of Spain Circulars 7/2010 and 5/2011, by application of Royal Decree 716/2009, of April 24, is as follows:

	Millions of euros
Face value of the outstanding mortgage loans and credits that support the issuance of mortgage-backed and mortgage bonds pursuant to Royal Decree 716/2009 (excluding securitized bonds)		80,538
Of which:
Loans eligible to cover issues of mortgage-backed securities		50,320
Transfers of assets retained on balance sheet: mortgage-backed certificates and other securitized mortgage assets		9,129

Mortgage-backed bonds

The mortgage-backed bonds (“cédulas hipotecarias”) issued by Group entities are securities the principal and interest of which are specifically secured by mortgages, there being no need for registration in the Property Register and without prejudice to the issuer’s unlimited liability.

The mortgage-backed bonds include the holder’s financial claim on the issuer, secured as indicated in the preceding paragraph, and may be enforced to claim payment from the issuer after maturity. The holders of these securities have the status of special preferential creditors vis-à-vis all other creditors (established in Article 1923.3 of the Spanish Civil Code) in relation to all the mortgage loans and credits registered in the issuer’s favor and, where appropriate, in relation to the cash flows generated by the derivative financial instruments associated with the issues.

In the event of insolvency, the holders of mortgage-backed bonds will enjoy the special privilege established in Article 90.1.1 of Insolvency Law 22/2003, of July 9. Without prejudice to the foregoing, in accordance with Article 84.2.7 of the Insolvency Law, during the insolvency proceedings, the payments relating to the repayment of the principal and interest of the bonds issued and outstanding at the date of the insolvency filing will be settled up to the amount of the income received by the insolvent party from the mortgage loans and credits and, where appropriate, from the replacement assets backing the bonds and from the cash flows generated by the financial instruments associated with the issues (Final Provision 19 of the Insolvency Law).

If, due to a timing mismatch, the income received by the insolvent party is insufficient to meet the payments described in the preceding paragraph, the insolvency managers must settle them by realizing the replacement assets set aside to cover the issue and, if this is not sufficient, they must obtain financing to meet the mandated payments to the holders of the mortgage-backed bonds, and the finance provider must be subrogated to the position of the bond-holders.

In the event that the measure indicated in Article 155.3 of the Insolvency Law were to be adopted, the payments to all holders of the mortgage-backed bonds issued would be made on a pro-rata basis, irrespective of the issue dates of the bonds.

The outstanding mortgage-backed bonds issued by the Group totaled EUR 32,717 million at December 31, 2013 (all of which were denominated in euros), of which EUR 32,071 million were issued by Banco Santander, S.A. and EUR 646 million were issued by Santander Consumer Finance, S.A. The issues outstanding at December 31, 2013 and 2012 are detailed in the separate financial statements of each of these companies.

Mortgage-backed bond issuers have an early redemption option solely for the purpose of complying with the limits on the volume of outstanding mortgage-backed bonds stipulated by mortgage market regulations.

None of the mortgage-backed bonds issued by the Group entities had replacement assets assigned to them.

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23. Subordinated liabilities

a) Breakdown

The detail, by currency of issue, of Subordinated liabilities in the consolidated balance sheets is as follows:

	Millions of euros						December 31, 2013
Currency of issue	2013		2012		2011		Outstanding issue amount in foreign currency (millions)		Annual interest rate (%)
Euro		4,600		5,214		6,848		4,600		3.59	%
US dollar		4,413		3,932		5,637		6,085		5.95	%
Pound sterling		2,750		3,292		4,568		2,293		8.90	%
Brazilian real		2,734		4,409		4,515		8,906		8.36	%
Other currencies		1,642		1,391		1,424
Balance at end of year		16,139		18,238		22,992
Of which, preference shares (acciones preferentes)		401		421		449
Of which, preference shares (participaciones preferentes)		3,652		4,319		5,447

Note 51 contains a detail of the residual maturity periods of subordinated liabilities at each year-end and of the related average interest rates in each year.

F-135

b) Changes

The changes in Subordinated liabilities in the last three years were as follows:

	Millions of euros
	2013			2012			2011
Balance at beginning of year		18,238			22,992			30,475
Net inclusion of entities in the Group (Note 3)		237			(1	)		99
Bank Zachodni WBK S.A.		—			—			99
Issues		1,027			2			171
Of which:
Santander UK plc		599			—			—
Banco Santander (México), S.A., Institución de Banca Múltiple		235			—			—
Banco Santander- Chile		191			—			169
Redemptions and repurchases		(1,915	)		(4,080	)		(8,616	)
Of which:
Banco Santander (Brasil) S.A.		(663	)		—			—
Santander Issuances, S.A., Sole-Shareholder Company		(608	)		(1,253	)		(3,190	)
Abbey National Capital Trust I		(278	)		(203	)		—
Santander Holdings USA, Inc.		(193	)		(264	)		(517	)
Santander PR Capital Trust I		(91	)		—			—
Santander Perpetual, S.A., Sole-Shareholder Company		(28	)		(155	)		(35	)
Banco Santander, S.A.		(28	)		(66	)		(294	)
Banco Santander – Chile		(7	)		(168	)		(8	)
Santander Finance Preferred, S.A., Sole-Shareholder Company		(7	)		(99	)		—
Santander Finance Capital, S.A., Sole-Shareholder Company		(4	)		—			(1,943	)(*)
Santander Banco de Emisiones, S.A.		(6	)		—			—
Santander UK plc		—			(1,166	)		(847	)
Banesto		—			(608	)		(506	)
Santander Central Hispano Issuances Limited		—			—			(1,195	)
Exchange differences		(923	)		(190	)		230
Other changes		(525	)		(485	)		633
Balance at end of year		16,139			18,238			22,992

(*) On December 30, 2011, 341,802,171 new shares were issued (3.837% of the share capital) as part of the repurchase offer made to the holders of Series X preference shares issued by Santander Finance Capital, S.A., Sole-Shareholder Company (see Note 31).

c) Other disclosures

This item includes the preference shares (participaciones preferentes) and other financial instruments issued by the consolidated companies which, although equity for legal purposes, do not meet the requirements for classification as equity (preference shares).

The preference shares do not carry any voting rights and are non-cumulative. They were subscribed to by non-Group third parties and, except for the shares of Santander UK plc referred to below, are redeemable at the discretion of the issuer, based on the terms and conditions of each issue.

F-136

For the purposes of payment priority, preference shares (participaciones preferentes) are junior to all general creditors and to subordinated deposits. The return on these securities, which have no voting rights, is dependent upon earning sufficient distributable profit and upon the limits imposed by Spanish banking regulations on equity.

The other issues are subordinated and, therefore, for the purposes of payment priority, they are junior to all general creditors of the issuers. The issues launched by Santander Central Hispano Issuances Limited, Santander Central Hispano Financial Services Limited, Santander Issuances, S.A. (Sole-Shareholder Company), Santander Perpetual, S.A. (Sole-Shareholder Company), Santander Finance Capital, S.A. (Sole-Shareholder Company), Santander International Preferred, S.A. (Sole-Shareholder Company), Santander Finance Preferred S.A. (Sole-Shareholder Company) and Santander Banco de Emisiones, S.A. are guaranteed by the Bank or by restricted deposits arranged by the Bank for this purpose. At December 31, 2013, the balance of these issues amounted to EUR 7,904 million.

At December 31, 2013, none of these issues was convertible into Bank shares or granted privileges or rights which, in certain circumstances, make them convertible into shares.

At December 31, 2013, Santander UK plc had a GBP 200 million subordinated issue which is convertible, at Santander UK plc’s option, into preference shares of Santander UK plc, at a price of GBP 1 per share.

The interest accrued on subordinated liabilities amounted to EUR 1,260 million in 2013 (2012: EUR 1,650 million; 2011: EUR 1,940 million) (see Note 39).

24. Other financial liabilities

The detail of Other financial liabilities in the consolidated balance sheets is as follows:

	Millions of euros
	2013		2012		2011
Trade payables		1,031		1,255		1,249
Clearing houses		841		573		1,330
Tax collection accounts:
Tax payables		2,197		2,021		1,949
Factoring accounts payable		194		201		390
Unsettled financial transactions		3,063		5,080		3,656
Other financial liabilities		9,084		10,115		9,647
		16,410		19,245		18,221

Note 51 contains a detail of the residual maturity periods of other financial liabilities at each year-end.

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25. Provisions

a) Breakdown

The detail of Provisions in the consolidated balance sheets is as follows:

	Millions of euros
	2013		2012		2011
Provisions for pensions and similar obligations		9,126		10,353		10,782
Provisions for taxes and other legal contingencies		2,727		3,100		3,663
Provisions for contingent liabilities and commitments (Note 2):		693		617		659
Of which: due to country risk		4		3		11
Other provisions		1,929		2,078		2,205
Provisions		14,475		16,148		17,309

F-138

b) Changes

The changes in Provisions in the last three years were as follows:

	Millions of euros
	2013												2012												2011
	Pensions			Contingent liabilities and commitments			Other provisions			Total			Pensions			Contingent liabilities and commitments			Other provisions			Total			Pensions			Contingent liabilities and commitments			Other provisions			Total
Balances at beginning of year		10,353			617			5,178			16,148			10,782			659			5,868			17,309			10,591			1,030			5,111			16,732
Net inclusion of entities in the Group		(1	)		15			—			14			(60	)		(1	)		(16	)		(77	)		71			4			(71	)		4
Additions charged to income:
Interest expense and similar charges (Note 39)		363			—			—			363			398			—			—			398			357			—			—			357
Personnel expenses (Note 47)		88			—			—			88			145			—			—			145			138			—			—			138
Period provisions		397			126			1,659			2,182			(184	)		68			1,594			1,478			225			(153	)		2,544			2,616
Other additions arising from insurance contracts linked to pensions		(27	)		—			—			(27	)		(161	)		—			—			(161	)		7			—			—			7
Changes in value recognized in equity		(90	)		—			—			(90	)		1,682			—			—			1,682			927			—			—			927
Payments to pensioners and pre-retirees with a charge to internal provisions		(1,086	)		—			—			(1,086	)		(980	)		—			—			(980	)		(1,051	)		—			—			(1,051	)
Benefits paid due to settlements		(2	)		—			—			(2	)		(1,006	)		—			—			(1,006	)		—			—			—			—
Insurance premiums paid		(6	)		—			—			(6	)		54			—			—			54			(2	)		—			—			(2	)
Payments to external funds		(217	)		—			—			(217	)		(268	)		—			—			(268	)		(614	)		—			—			(614	)
Amounts used		—			—			(1,661	)		(1,661	)		—			—			(2,161	)		(2,161	)		—			—			(1,473	)		(1,473	)
Transfers, exchange differences and other changes		(646	)		(65	)		(520	)		(1,231	)		(49	)		(109	)		(107	)		(265	)		133			(222	)		(243	)		(332	)
Balances at end of year		9,126			693			4,656			14,475			10,353			617			5,178			16,148			10,782			659			5,868			17,309

F-139

c) Provisions for pensions and similar obligations

The detail of Provisions for pensions and similar obligations is as follows:

	Millions of euros
	2013		2012		2011
Provisions for post-employment plans - Spanish entities		4,643		4,909		5,913
Of which: defined benefit		4,633		4,900		5,908
Provisions for other similar obligations - Spanish entities		2,161		2,404		2,781
Of which: pre-retirements		2,149		2,389		2,769
Provisions for post-employment plans - Santander UK plc		806		409		255
Provisions for post-employment plans and other similar obligations - Other foreign subsidiaries		1,516		2,631		1,833
Of which: defined benefit		1,512		2,626		1,827
Provisions for pensions and similar obligations		9,126		10,353		10,782

i. Spanish entities - Post-employment plans and other similar obligations

At December 31, 2013, 2012 and 2011, the Spanish entities had post-employment benefit obligations under defined contribution and defined benefit plans. In addition, in various years some of the consolidated entities offered certain of their employees the possibility of taking pre-retirement and, therefore, provisions are recognized each year for the obligations to employees taking pre-retirement -in terms of salaries and other employee benefit costs- from the date of their pre-retirement to the date of effective retirement. In 2013, 1,621 employees accepted the pre-retirement and voluntary redundancy offer, and the provision recognized to cover these obligations totaled EUR 334 million.

In 2012, the Bank and Banesto reached an agreement with the employees’ representatives to alter the form of the defined-benefit obligations arising from the collective agreement into defined-contribution plans. In addition, the senior executives’ contracts with defined-benefit pension obligations were amended to alter such obligations into a defined-contribution employee welfare system.

The amount of the obligations accrued with respect to all the current employees, both those subject to the collective agreement and executives, whose defined-benefit obligations were converted into defined-contribution plans, totaled EUR 1,389 million. The obligations thus altered were externalized through the execution of various insurance contracts with Spanish insurance companies. The effect of the settlement of such defined-benefit obligations is shown in the tables below.

The expenses incurred by the Group in respect of contributions to defined contribution plans amounted to EUR 108 million in 2013 (2012: EUR 54 million; 2011: EUR 50 million).

The amount of the defined benefit obligations was determined on the basis of the work performed by independent actuaries using the following actuarial techniques:

1. Valuation method: projected unit credit method, which sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately.

F-140

2. Actuarial assumptions used: unbiased and mutually compatible. Specifically, the most significant actuarial assumptions used in the calculations were as follows:

	Post-employment plans			Other similar obligations
	2013	2012	2011	2013	2012	2011
Annual discount rate	3.00%	2.75% and 3% in the case of Banesto	4.00%	3.00%	2.75% and 3% in the case of Banesto	4.00%
Mortality tables	PERM/F-2000	GRM/F-95 (PERM/F-2000 in the case of Banesto)	GRM/F-95 (PERM/F-2000 in the case of Banesto)	PERM/F-2000	GRM/F-95 (PERM/F-2000 in the case of Banesto)	GRM/F-95 (PERM/F-2000 in the case of Banesto)
Cumulative annual CPI growth	1.5%	1.5%	1.5%	1.5%	1.5%	1.5%
Annual salary increase rate	2.50% (*)	2% (*)	2.50% (2.9% in the case of Banesto)	n/a	n/a	n/a
Annual social security pension increase rate	1.5%	1.5%	1.5%	n/a	n/a	n/a
Annual benefit increase rate	n/a	n/a	n/a	0% to 1.5%	0% to 1.5%	0% to 1.5%

(*) Corresponds to the Group’s defined-benefit obligations.

The discount rate used for the flows was determined by reference to high-quality corporate bonds (at least AA in euros) that coincide with the terms of the obligations. The portfolio of bonds taken into consideration excludes callable, puttable and sinkable bonds which could distort the indices.

Any changes in the main assumptions could affect the calculation of the obligations. At December 31, 2013, if the discount rate used had been decreased or increased by 50 basis points, there would have been an increase or decrease in the present value of the post-employment obligations of +/- 5% and an increase or decrease in the present value of the long-term obligations of +/- 0.80%. These changes would be offset in part by increases or decreases in the fair value of the assets and insurance contracts linked to pensions.

3. The estimated retirement age of each employee is the first day at which the employee is entitled to retire or the agreed-upon age, as appropriate.

The fair value of insurance contracts was determined as the present value of the related payment obligations, taking into account the following assumptions:

	Post-employment plans			Other similar obligations
	2013	2012	2011	2013	2012	2011
Expected rate of return on plan assets	3.0%	2.75% and 3% in the case of Banesto	4.0%	n/a	n/a	—
Expected rate of return on reimbursement rights	3.0%	2.75% and 3% in the case of Banesto	4.0%	n/a	n/a	4.0%

F-141

The funding status of the defined benefit obligations in 2013 and the four preceding years is as follows:

	Millions of euros
	Post-employment plans											Other similar obligations
	2013			2012		2011		2010		2009		2013		2012		2011		2010		2009
Present value of the obligations:
To current employees		50			58		1,533		1,240		1,200		—		—		—		—		—
Vested obligations to retired employees		4,483			4,765		4,367		4,471		4,708		—		—		—		—		—
To pre-retirees		—			—		—		—		—		2,149		2,389		2,769		3,262		3,842
Long-service bonuses and other benefits		—			—		—		—		—		11		7		7		8		9
Other		257			221		185		181		183		1		8		5		3		—
		4,790			5,044		6,085		5,892		6,091		2,161		2,404		2,781		3,273		3,851
Less-
Fair value of plan assets		157			144		177		183		184		—		—		—		—		—
Provisions - Provisions for pensions		4,633			4,900		5,908		5,709		5,907		2,161		2,404		2,781		3,273		3,851
Of which:
Internal provisions for pensions		4,293			4,495		3,762		3,490		3,554		2,161		2,404		2,781		3,272		3,848
Insurance contracts linked to pensions (Note 14)		342			405		2,146		2,219		2,353		—		—		—		1		3
Unrecognized net assets for pensions		(2	)		—		—		—		—		—		—		—		—		—

The amounts recognized in the consolidated income statements in relation to the aforementioned defined benefit obligations are as follows:

	Millions of euros
	Post-employment plans									Other similar obligations
	2013			2012			2011			2013		2012		2011
Current service cost		10			53			52			—		1		1
Interest cost (net)		139			204			208			61		101		117
Expected return on insurance contracts linked to pensions		(11	)		(45	)		(86	)		—		—		—
Extraordinary charges (credits)-
Actuarial (gains)/losses recognized in the year		—			—			—			3		66		(3	)
Past service cost		30			22			25			34		21		—
Pre-retirement cost		8			—			2			326		55		55
Effect of curtailment/settlement		(6	)		(401	)		(7	)		—		1		—
		170			(167	)		194			424		245		170

In addition, in 2013 Valuation adjustments – Other valuation adjustments increased by EUR 52 million with respect to defined benefit obligations (2012: a decrease of EUR 533 million; 2011: a decrease of EUR 233 million).

F-142

The changes in the present value of the accrued defined benefit obligations were as follows:

	Millions of euros
	Post-employment plans									Other similar obligations
	2013			2012			2011			2013			2012			2011
Present value of the obligations at beginning of year		5,044			6,085			5,892			2,404			2,781			3,273
Net inclusion of entities in the Group		(5	)		—			—			—			—			—
Current service cost		10			53			52			—			1			1
Interest cost		145			211			215			61			101			117
Pre-retirement cost		8			—			2			326			55			55
Effect of curtailment/settlement		(6	)		(401	)		(7	)		—			—			—
Benefits paid due to settlements		—			(1,006	)		—			—			—			—
Other benefits paid		(394	)		(317	)		(330	)		(661	)		(624	)		(666	)
Past service cost		30			15			24			34			21			—
Actuarial (gains)/losses (*)		(79	)		382			235			3			66			(3	)
Other		37			22			2			(6	)		3			4
Present value of the obligations at end of year		4,790			5,044			6,085			2,161			2,404			2,781

(*) Including in 2013 demographic actuarial losses of EUR 19 million and financial actuarial gains of EUR 98 million in the post-employment plans.

The changes in the fair value of plan assets and of insurance contracts linked to pensions were as follows:

Plan assets

	Millions of euros
	Post-employment plans
	2013			2012			2011
Fair value of plan assets at beginning of year		144			177			183
Expected return on plan assets		6			7			7
Actuarial gains/(losses)		—			11			(5	)
Contributions/(surrenders)		5			(42	)		2
Benefits paid		(12	)		(9	)		(10	)
Other		14			—			—
Fair value of plan assets at end of year		157			144			177

Insurance contracts linked to pensions

	Millions of euros
	Post-employment plans									Other similar obligations
	2013			2012			2011			2013		2012			2011
Fair value of insurance contracts linked to pensions at beginning of year		405			2,146			2,219			—		—			1
Expected return on insurance contracts (Note 38)		11			45			86			—		—			—
Actuarial gains/(losses)		(27	)		(162	)		7			—		1			—
Premiums paid/(surrenders) (Note 14)		—			(1,565	)		(16	)		—		(1	)		—
Benefits paid		(47	)		(59	)		(150	)		—		—			(1	)
Fair value of insurance contracts linked to pensions at end of year		342			405			2,146			—		—			—

F-143

In view of the conversion of the defined-benefit obligations to defined-contribution obligations, the Group will not make material current contributions in Spain in 2014 to fund its defined-benefit pension obligations.

The plan assets and the insurance contracts linked to pensions are instrumented mainly through insurance policies.

The following table shows the estimated benefits payable at December 31, 2013 for the next ten years:

	Millions of euros
2014		928
2015		834
2016		727
2017		622
2018		531
2019 to 2023		1,797

ii. United Kingdom

At the end of each of the last three years, the businesses in the United Kingdom had post-employment benefit obligations under defined contribution and defined benefit plans. The expenses incurred in respect of contributions to defined contribution plans amounted to EUR 62 million in 2013 (2012: EUR 53 million; 2011: EUR 35 million).

The amount of the defined benefit obligations was determined on the basis of the work performed by independent actuaries using the following actuarial techniques:

1. Valuation method: projected unit credit method, which sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately.

2. Actuarial assumptions used: unbiased and mutually compatible. Specifically, the most significant actuarial assumptions used in the calculations were as follows:

	2013	2012	2011
Annual discount rate	4.45%	4.50%	4.95%
Mortality tables	103 S1 Light TMC	103 S1 Light TMC	103 S1 Light TMC
Cumulative annual CPI growth	3.40%	2.85%	3.10%
Annual salary increase rate	3.40%	2.85%	3.10%
Annual pension increase rate	3.15%	2.75%	3.00%

The discount rate used for the flows was determined by reference to high-quality corporate bonds. (at least AA in pounds sterling) that coincide with the terms of the obligations. The portfolio of bonds taken into consideration excludes callable, puttable and sinkable bonds which could distort the indices.

F-144

Any changes in the main assumptions could affect the calculation of the obligations. At December 31, 2013, if the discount rate used had been decreased or increased by 50 basis points, there would have been an increase or decrease in the present value of the obligations of +/- 10%. If the inflation assumption had been increased or decreased by 50 basis points, there would have been an increase or decrease in the present value of the obligations of +/- 7%. These changes would be offset in part by increases or decreases in the fair value of the assets.

The funding status of the defined benefit obligations in 2013 and the four preceding years is as follows:

	Millions of euros
	2013			2012			2011			2010			2009
Present value of the obligations		10,120			9,260			8,467			7,824			7,116
Less-
Fair value of plan assets		9,455			9,194			8,496			7,617			5,910
Provisions - Provisions for pensions		665			66			(29	)		207			1,206
Of which:
Internal provisions for pensions		806			409			255			261			1,207
Net assets for pensions		(141	)		(343	)		(284	)		(54	)		(1	)

The amounts recognized in the consolidated income statements in relation to the aforementioned defined benefit obligations are as follows:

	Millions of euros
	2013		2012		2011
Current service cost		32		49		46
Interest cost (net)		1		34		45
		33		83		91

In addition, in 2013 Valuation adjustments – Other valuation adjustments decreased by EUR 697 million with respect to defined benefit obligations (2012: a decrease of EUR 182 million; 2011: an increase of EUR 29 million).

The changes in the present value of the accrued defined benefit obligations were as follows:

	Millions of euros
	2013			2012			2011
Present value of the obligations at beginning of year		9,260			8,467			7,824
Current service cost		32			49			46
Interest cost		396			427			417
Benefits paid		(239	)		(258	)		(236	)
Actuarial (gains)/losses (*)		852			367			169
Exchange differences and other items		(181	)		208			247
Present value of the obligations at end of year		10,120			9,260			8,467

(*) Including in 2013 demographic actuarial losses of EUR 25 million and financial actuarial losses of EUR 827 million.

F-145

The changes in the fair value of the plan assets were as follows:

	Millions of euros
	2013			2012			2011
Fair value of plan assets at beginning of year		9,194			8,496			7,617
Expected return on plan assets		395			393			372
Actuarial gains/(losses)		155			186			198
Contributions		133			180			294
Benefits paid		(239	)		(258	)		(236	)
Exchange differences and other changes		(183	)		197			251
Fair value of plan assets at end of year		9,455			9,194			8,496

In 2014 the Group expects to make contributions to fund these obligations for amounts similar to those made in 2013.

The main categories of plan assets as a percentage of total plan assets are as follows:

	2013			2012			2011
Equity instruments		24	%		27	%		30	%
Debt instruments		59	%		56	%		54	%
Properties		11	%		3	%		2	%
Other		6	%		14	%		14	%

The following table shows the estimated benefits payable at December 31, 2013 for the next ten years:

	Millions of euros
2014		257
2015		274
2016		292
2017		311
2018		332
2019 to 2023		2,028

iii. Other foreign subsidiaries

Certain of the consolidated foreign entities have acquired commitments to their employees similar to post-employment benefits.

At December 31, 2013, 2012 and 2011, these entities had defined-contribution and defined-benefit post-employment benefit obligations. The expenses incurred in respect of contributions to defined contribution plans amounted to EUR 53 million in 2013 (2012: EUR 49 million; 2011: EUR 52 million).

F-146

The actuarial assumptions used by these entities (discount rates, mortality tables and cumulative annual CPI growth) are consistent with the economic and social conditions prevailing in the countries in which they are located.

Specifically, the discount rate used for the flows was determined by reference to high-quality corporate bonds, except in the case of Brazil where there is no extensive corporate bond market and, accordingly the discount rate was determined by reference to the series B bonds issued by the Brazilian National Treasury Secretariat for a term coinciding with that of the obligations.

Any changes in the main assumptions could affect the calculation of the obligations. At December 31, 2013, if the discount rate used had been decreased or increased by 50 basis points, there would have been a decrease or increase in the present value of the obligations of +/- 5%. These changes would be offset in part by increases or decreases in the fair value of the assets.

The funding status of the obligations similar to post-employment benefits and other long-term benefits in 2013 and the four preceding years is as follows:

	Millions of euros
	2013			2012			2011			2010			2009
Present value of the obligations		9,289			12,814			11,245			11,062			9,078
Less-
Of which: with a charge to the participants		133			125			—			—			—
Fair value of plan assets		7,938			10,410			9,745			10,176			8,497
Provisions - Provisions for pensions		1,218			2,279			1,500			886			581
Of which:
Internal provisions for pensions		1,512			2,626			1,827			1,340			1,165
Net assets for pensions		(8	)		(5	)		(15	)		(8	)		(8	)
Unrecognized net assets for pensions		(286	)		(342	)		(312	)		(446	)		(576	)

In December 2011, Portuguese financial institutions, including Banco Santander Totta, S.A., transferred in part their pension obligations to the social security authorities. As a result, Banco Santander Totta, S.A. transferred the related assets and liabilities and Provisions - Provisions for pensions and similar obligations at December 31, 2011 included the present value of the obligations, net of the fair value of the related plan assets.

F-147

The amounts recognized in the consolidated income statements in relation to these obligations are as follows:

	Millions of euros
	2013			2012			2011
Current service cost		46			42			39
Interest cost (net)		162			116			192
Extraordinary charges (credits):
Actuarial (gains)/losses recognized in the year		(1	)		7			1
Past service cost		7			2			—
Pre-retirement cost		—			(10	)		24
Other		(2	)		(4	)		(77	)
		212			153			179

In addition, in 2013 Valuation adjustments – Other valuation adjustments increased by EUR 735 million with respect to defined benefit obligations (2012: a decrease of EUR 968 million; 2011: a decrease of EUR 723 million).

The changes in the present value of the accrued obligations were as follows:

	Millions of euros
	2013			2012			2011
Present value of the obligations at beginning of year		12,814			11,245			11,062
Net inclusion of entities in the Group		4			(70	)		71
Current service cost		46			42			39
Interest cost		951			1,010			1,031
Pre-retirement cost		—			13			24
Effect of curtailment/settlement		(1	)		(16	)		(5	)
Benefits paid		(686	)		(735	)		(739	)
Benefits paid due to settlements		(2	)		(41	)		—
Past service cost		7			—			9
Actuarial (gains)/losses (*)		(2,039	)		2,352			553
Exchange differences and other items		(1,805	)		(986	)		(800	)
Present value of the obligations at end of year		9,289			12,814			11,245

(*) Including in 2013 demographic actuarial losses of EUR 28 million and financial actuarial gains of EUR 2,067 million.

F-148

The changes in the fair value of the plan assets were as follows:

	Millions of euros
	2013			2012			2011
Fair value of plan assets at beginning of year		10,410			9,745			10,176
Net inclusion of entities in the Group		—			10			—
Expected return on plan assets		789			894			839
Actuarial gains/(losses)		(1,314	)		1,259			(224	)
Contributions		239			165			353
Benefits paid		(641	)		(687	)		(674	)
Exchange differences and other items		(1,545	)		(976	)		(725	)
Fair value of plan assets at end of year		7,938			10,410			9,745

In 2014 the Group expects to make contributions to fund these obligations for amounts similar to those made in 2013.

The main categories of plan assets as a percentage of total plan assets are as follows:

	2013			2012			2011
Equity instruments		10	%		6	%		4	%
Debt instruments		85	%		86	%		85	%
Properties		2	%		4	%		3	%
Other		3	%		4	%		8	%

The following table shows the estimated benefits payable at December 31, 2013 for the next ten years:

	Millions of euros
2014		661
2015		683
2016		712
2017		737
2018		766
2019 to 2023		4,282

d) Provisions for taxes and other legal contingencies and Other provisions

Provisions - Provisions for taxes and other legal contingencies and Provisions - Other provisions, which include, inter alia, provisions for restructuring costs and tax-related and non-tax-related proceedings, were estimated using prudent calculation procedures in keeping with the uncertainty inherent to the obligations covered. The definitive date of the outflow of resources embodying economic benefits for the Group depends on each obligation. In certain cases, these obligations have no fixed settlement period and, in other cases, depend on the legal proceedings in progress.

F-149

The detail, by geographical area, of Provisions for taxes and other legal contingencies and Other provisions is as follows:

	Millions of euros
	2013		2012		2011
Recognized by Spanish companies		1,007		722		680
Recognized by other EU companies		1,134		1,483		1,523
Recognized by other companies		2,515		2,973		3,665
Of which:
Brazil		2,263		2,750		3,364
		4,656		5,178		5,868

Set forth below is the detail, by type of provision, of the balance at December 31, 2013, 2012 and 2011 of Provisions for taxes and other legal contingencies and Other provisions. The types of provision were determined by grouping together items of a similar nature:

	Millions of euros
	2013		2012		2011
Provisions for taxes		1,177		1,198		1,346
Provisions for employment-related proceedings (Brazil)		638		975		1,390
Provisions for other legal proceedings		912		927		927
Provision for customer remediation (UK)		465		803		863
Regulatory framework-related provisions (UK)		201		227		211
Provision for restructuring		378		120		98
Other		885		928		1,033
		4,656		5,178		5,868

Relevant information is set forth below in relation to each type of provision shown in the preceding table:

The provisions for taxes include provisions for tax-related proceedings.

The provisions for employment-related proceedings (Brazil) relate to claims filed by trade unions, associations, the prosecutor’s office and ex-employees claiming employment rights to which, in their view, they are entitled, particularly the payment of overtime and other employment rights, including litigation concerning retirement benefits. The number and nature of these proceedings, which are common for banks in Brazil, justify the classification of these provisions in a separate category or as a separate type from the rest. The Group calculates the provisions associated with these claims in accordance with past experience of payments made in relation to claims for similar items. When claims do not fall within these categories, a case-by-case assessment is performed and the amount of the provision is calculated in accordance with the status of each proceeding and the risk assessment carried out by the legal advisers. The average duration of the employment-related proceedings is eight years.

The provisions for other legal proceedings include provisions for court, arbitration or administrative proceedings (other than those included in other categories or types of provisions disclosed separately) brought against Santander Group companies.

The provisions for customer remediation (UK) include the estimated cost of payments to remedy errors relating to the sale of certain products in the UK. To calculate the provision for customer remediation, the best estimate of the provision made by management is used, which is based on the estimated number of claims to be received and, of these, the number that will be accepted, as well as the estimated average payment per case.

F-150

The regulatory framework-related provisions (UK) include mainly the provisions relating to the following issues concerning Santander UK:

• The provision for payments to the Financial Services Compensation Scheme (FSCS): the FSCS is the compensation fund for customers of financial services entities in the UK and is responsible for paying compensation if an entity cannot pay for rights claimed from it. The FSCS is financed through levies applied to the industry (and recoveries and loans, where appropriate).

• The provision for the payment of the bank levy in the UK: the 2011 Finance Act introduced an annual bank levy in the UK which is collected using the quarterly system in force for corporation tax. This levy is based on the total liabilities presented in the balance sheet at year-end, although certain amounts are excluded. In 2013 a rate of 0.13% was applied, and in 2012 a rate of 0.088%. In 2011 three different rates were applied with an average rate of 0.075%.

The provisions for restructuring include only the direct costs arising from restructuring processes carried out by various Group companies.

Qualitative information on the main litigation is provided in Note 25.e to the consolidated financial statements.

Our general policy is to record provisions for tax and legal proceedings in which we assess the chances of loss to be probable and we do not record provisions when the chances of loss are possible or remote. We determine the amounts to be provided for as our best estimate of the expenditure required to settle the corresponding claim based, among other factors, on a case-by-case analysis of the facts and the legal opinion of internal and external counsel or by considering the historical average amount of the loss incurred in claims of the same nature. The definitive date of the outflow of resources embodying economic benefits for the Group depends on each obligation. In certain cases, the obligations do not have a fixed settlement term and, in others, they depend on legal proceedings in progress.

The detail of the changes in Provisions for taxes and other legal contingencies and Other provisions is set forth in Note 25.b. With respect to Brazil, the main charges to the consolidated income statement in 2013 related to EUR 346 million due to provisions for restructuring, EUR 247 million due to civil contingencies and EUR 336 million due to employment-related claims in Brazil. This increase is offset in part by the use of the available provisions, of which EUR 500 million relate to employment-related payments, EUR 215 million to civil payments and EUR 62 million to the use of the restructuring provision, and to the effect of exchange differences. In the UK, provisions of EUR 312 million were recognized mainly in connection with the regulatory framework (the bank levy and the Financial Services Compensation Scheme (FSCS)), an increase offset by EUR 317 million in payments relating to the bank levy and the FSCS and the use of EUR 319 million of provisions for customer remediation.

The detail of the changes in 2012 in Provisions for taxes and other legal contingencies and Other provisions is set forth in Note 25.b and related mainly to the changes in the provisions in Brazil and in the UK. The main charges to the consolidated income statement in 2012 corresponded to EUR 573 million arising from the employment-related claims in Brazil and EUR 264 million due to provisions for customer remediation in the UK. This increase was comfortably offset by the use of the available provisions, of which EUR 730 million corresponded to employment-related claims in Brazil and EUR 392 million to customer remediation in the UK and the effect of exchange differences.

F-151

e) Litigation and other matters

i. Tax-related proceedings

As of the date of this report, the main tax-related proceedings concerning the Group were as follows:

• Legal actions filed by Banco Santander (Brasil) S.A. and certain Group companies in Brazil challenging the increase in the rate of Brazilian social contribution tax on net income from 9% to 15% stipulated by Interim Measure 413/2008, ratified by Law 11,727/2008. A provision has been recognized for the amount of the estimated loss.

• Legal actions filed by certain Group companies in Brazil claiming their right to pay the Brazilian social contribution tax on net income at a rate of 8% and 10% from 1994 to 1998. Provisions were not recognized in connection with the amount considered to be a contingent liability.

• Legal actions filed by Banco Santander Brasil, S.A. (currently Banco Santander (Brasil), S.A.) and other Group entities claiming their right to pay the Brazilian PIS and COFINS social contributions only on the income from the provision of services. In the case of Banco Santander Brasil, S.A., the legal action was declared unwarranted and an appeal was filed at the Federal Regional Court. In September 2007 the Federal Regional Court found in favor of Banco Santander Brasil, S.A., but the Brazilian authorities appealed against the judgment at the Federal Supreme Court. In the case of Banco ABN AMRO Real, S.A. (currently Banco Santander (Brasil), S.A.), in March 2007 the court found in its favor, but the Brazilian authorities appealed against the judgment at the Federal Regional Court, which handed down a decision partly upholding the appeal in September 2009. Banco Santander (Brasil), S.A. filed an appeal at the Federal Supreme Court. Law 12,865/2013 established a program of payments or deferrals of certain tax and social security debts, exempting the entities availing themselves of the law from paying late-payment interest and resulting in the legal actions brought being withdrawn. In November 2013 Banco Santander (Brasil) S.A. partially availed itself of this program but only with respect to the legal actions brought by the former Banco ABN AMRO Real, S.A. in relation to the period from September 2006 to April 2009, and with respect to other minor actions brought by other entities in its Group. However, the legal actions brought by Banco Santander (Brasil), S.A. and those of Banco ABN AMRO Real, S.A. relating to the periods prior to September 2006, for which the estimated loss was provided for, are still pending.

• Banco Santander (Brasil), S.A. and other Group companies in Brazil have appealed against the assessments issued by the Brazilian tax authorities questioning the deduction of loan losses in their income tax returns (IRPJ and CSLL) on the ground that the relevant requirements under the applicable legislation were not met. Provisions were not recognized in connection with the amount considered to be a contingent liability.

• Banco Santander (Brasil), S.A. and other Group companies in Brazil are involved in several administrative and legal proceedings against various municipalities that demand payment of the Service Tax on certain items of income from transactions not classified as provisions of services. Provisions were not recognized in connection with the amount considered to be a contingent liability.

• In addition, Banco Santander (Brasil), S.A. and other Group companies in Brazil are involved in several administrative and legal proceedings against the tax authorities in connection with the taxation for social security purposes of certain items which are not considered to be employee remuneration. Provisions were not recognized in connection with the amount considered to be a contingent liability.

F-152

• In December 2008 the Brazilian tax authorities issued an infringement notice against Banco Santander (Brasil), S.A. in relation to income tax (IRPJ and CSLL) for 2002 to 2004. The tax authorities took the view that Banco Santander (Brasil), S.A. did not meet the necessary legal requirements to be able to deduct the amortization of the goodwill arising on the acquisition of Banespa (currently Banco Santander (Brasil), S.A.). Banco Santander (Brasil) S.A. filed an appeal against the infringement notice at Conselho Administrativo de Recursos Fiscais (CARF), which on October 21, 2011 unanimously decided to render the infringement notice null and void. The tax authorities have appealed against this decision at a higher administrative level. In June 2010 the Brazilian tax authorities issued infringement notices in relation to this same matter for 2005 to 2007. Banco Santander (Brasil), S.A. filed an appeal against these procedures at CARF, which was partially dismissed on October 8, 2013. This decision will be appealed at the higher instance of CARF (Tax Appeal High Chamber). In December 2013 the Brazilian tax authorities issued an infringement notice relating to 2008, the last year for amortization of the goodwill. This infringement notice will be appealed by Banco Santander (Brasil), S.A. Based on the advice of its external legal counsel and in view of the first decision by CARF, the Group considers that the stance taken by the Brazilian tax authorities is incorrect and that there are sound defense arguments to appeal against the infringement notices. Accordingly, the risk of incurring a loss is remote. Consequently, provisions were not recognized in connection with these proceedings because this matter should not affect the consolidated financial statements.

• In May 2003 the Brazilian tax authorities issued separate infringement notices against Santander Distribuidora de Títulos e Valores Mobiliarios Ltda. (DTVM) and Banco Santander Brasil, S.A. (currently Banco Santander (Brasil), S.A.) in relation to the Provisional Tax on Financial Movements (CPMF) with respect to certain transactions carried out by DTVM in the management of its customers’ funds and for the clearing services provided by Banco Santander Brasil, S.A. to DTVM in 2000, 2001 and the first two months of 2002. Both entities appealed against the infringement notices at CARF, with DTVM obtaining a favorable decision and Banco Santander Brasil, S.A. an unfavorable decision. Both decisions were appealed by the losing parties at the Higher Chamber of CARF, and the appeal relating to Banco Santander Brasil, S.A. is pending a decision. With respect to DTVM, on August 24, 2012, it was notified of a decision overturning the previous favorable judgment and lodged an appeal at the Higher Chamber of CARF on August 29, 2012. In the opinion of its legal advisors, the Group considers that the tax treatment applied in these transactions was correct. Provisions were not recognized in the consolidated financial statements in relation to this litigation as it was considered a contingent liability.

• In December 2010 the Brazilian tax authorities issued an infringement notice against Santander Seguros, S.A., as the successor by merger to ABN AMRO Brazil Dois Participacoes, S.A., in relation to income tax (IRPJ and CSL) for 2005. The tax authorities questioned the tax treatment applied to a sale of shares of Real Seguros, S.A. made in that year. The bank filed an appeal for reconsideration against this infringement notice. As the former parent of Santander Seguros, S.A. (Brasil), Banco Santander (Brasil), S.A. is liable in the event of any adverse outcome of this proceeding. No provision has been recognized in connection with this proceeding as it is considered to be a contingent liability.

• Also, in December 2010, the Brazilian tax authorities issued infringement notices against Banco Santander (Brasil), S.A. in connection with income tax (IRPJ and CSLL), questioning the tax treatment applied to the economic compensation received under the contractual guarantees provided by the sellers of the former Banco Meridional. The bank filed an appeal for reconsideration against this infringement notice. On November 23, 2011, CARF unanimously decided to render null and void an infringement notice relating to 2002 with regard to the same matter. In February 2012 this decision was declared final in respect of 2002. The proceedings relating to the 2003 to 2006 fiscal years are still in progress. No provision has been recognized in connection with this proceeding as it is considered to be a contingent liability.

F-153

• In June 2013, the Brazilian tax authorities issued an infringement notice against Banco Santander (Brasil), S.A. as the party liable for tax on the capital gain allegedly obtained in Brazil by Sterrebeeck B.V., an entity that is not a resident of Brazil, as a result of the “incorporação de ações” (merger of shares) transaction carried out in August 2008. As a result of the aforementioned transaction, Banco Santander (Brasil), S.A. acquired all of the shares of Banco ABN AMRO Real, S.A. and ABN AMRO Brasil Dois Participações, S.A. through the delivery to these entities’ shareholders of newly issued shares of Banco Santander (Brasil), S.A., issued in a capital increase carried out for that purpose. The Brazilian tax authorities take the view that in the aforementioned transaction Sterrebeeck B.V. recognized gain subject to tax in Brazil consisting of the difference between the issue value of the shares of Banco Santander (Brasil), S.A. that were received and the acquisition cost of the shares delivered in exchange. The Group lodged an appeal against the infringement notice at the Federal Tax Office and considers, based on the advice of its external legal counsel, that the stance taken by the Brazilian tax authorities is not correct, that there are sound defense arguments to appeal against the infringement notice and that, therefore, the risk of loss is remote. Consequently, the Group has not recognized any provisions in connection with these proceedings because this matter should not affect the consolidated financial statements.

• Legal action brought by Sovereign Bancorp, Inc. (currently Santander Holdings USA, Inc.) claiming its right to take a foreign tax credit in connection with taxes paid outside the United States in fiscal years 2003 to 2005 in relation to financing transactions carried out with an international bank. Santander Holdings USA Inc. considers that, in accordance with applicable tax legislation, it is entitled to claim these foreign tax credits taken with respect to the transactions and deduct the related issuance and financing costs. In addition, if the outcome of this legal action is favorable to the interests of Santander Holdings USA Inc, the amounts paid over by the entity in relation to this matter with respect to 2006 and 2007 would have to be refunded. In 2013 the U.S. courts found against two taxpayers in cases with a similar structure In the case of Santander Holdings USA, Inc. the proceeding was scheduled for October 7, 2013, although it was adjourned indefinitely when the judge found in favor of Santander Holdings USA Inc. with respect to one of the main grounds of the case. Santander Holdings USA Inc. expected the judge to rule in the coming months on whether his previous decision will result in the proceedings being stayed or whether other matters need to be analyzed before a final decision may be handed down. If the decision is favorable to Santander Holdings USA Inc., the U.S. government has stated its intention to appeal. The estimated loss relating to this proceeding has been provided for.

At the date of approval of this annual report on Form 20-F certain other less significant tax-related proceedings were also in progress.

ii. Non-tax related proceedings

As of the date of this report, the main non-tax-related proceedings concerning the Group were as follows:

• Customer remediation: claims associated with the sale by Santander UK of certain financial products (principally payment protection insurance or PPI) to its customers.

Payment protection insurance is a UK insurance product offering payment protection on unsecured personal loans (and credit cards). The product was sold by all UK banks. The mis-selling issues are predominantly related to business written before 2009. The nature and profitability of the product has changed materially since 2008.

On July 1, 2008, the UK Financial Ombudsman Service (‘FOS’) referred concerns regarding the handling of PPI complaints to the UK Financial Services Authority (‘FSA’). On September 29, 2009 and March 9, 2010, the FSA issued consultation papers on PPI complaints handling as an issue of wider implication. The FSA published its Policy Statement on August 10, 2010, setting out the evidence and guidance on the fair assessment of a complaint and the calculation of redress, as well as a requirement for firms to reassess historically rejected complaints which had to be implemented by December 1, 2010.

F-154

On October 8, 2010, the British Bankers’ Association (‘BBA’), the principal trade association for the UK banking and financial services sector, filed on behalf of certain financial institutions (which did not include Santander UK plc) an application for permission to seek judicial review against the FSA and the FOS. The BBA sought an order quashing the FSA Policy Statement and an order quashing the decision of the FOS to determine PPI sales in accordance with the guidance published on its website in November 2008. The judicial review was heard in the courts in January 2011 and on April 20, 2011 judgment was handed down by the High Court dismissing the proceeding brought by the BBA.

Santander UK did not participate in the legal action undertaken by other UK banks and had been consistently making provisions and settling claims with regards to PPI complaints liabilities.

A detailed review of the provision was performed by Santander UK in the first half of 2011 which was necessary in light of the new situation, including the High Court judgment of April 2011, the BBA’s subsequent decision not to appeal and the consequent increase in actual claims levels. As a result, the provision has been revised.

In this context, in 2011 the Group recognized a provision, with a net effect on results of €620 million (GBP 538 million), which was calculated on the basis of the estimate of the number of claims that would be received, of the number of claims that would be upheld and of the estimated average amount of compensation in each case.

Following the payments made until December 31, 2013, the remaining provision recognized in relation to PPI sales totaled GBP 165 million.

The following table shows information on the total claims received up to December 31, 2013 and the resolution thereof:

(number of claims, in thousands)

	2013			2012			2011
Claims outstanding at the beginning of the period		31			1			—
Claims received		363			437			111
Claims rejected as being invalid (1)		(298	)		(258	)		(90	)
Resolved claims (2)		(82	)		(149	)		(20	)
Claims outstanding at the end of the period		14			31			1

⁽¹⁾  Includes rejected claims relating to customers that had never purchased payment protection insurance from Santander UK.

⁽²⁾  Customers are entitled to appeal to the Financial Ombudsman Service (FOS) if their claims are rejected. The FOS may uphold or reject an appeal and if an appeal is upheld, Santander UK is required to compensate the customer. The table shows the result of appeals relating to paid or rejected claims.

The amount settled in relation to paid claims in 2013 totaled GBP 217 million.

The main cause of the increase in claims in 2011 was the media coverage of this issue following the dismissal by the High Court of the appeal for judicial review filed by the British Bankers’ Association and the launch of campaigns by claim management companies in relation to these products.

F-155

There was also an increase in claims in 2012 due to greater media coverage of the issue, a rise in the activity of claims management companies and the proactive policy followed by Santander UK, which contacted over 300,000 customers directly.

Lastly, the number of claims received fell by 17% in 2013 compared to 2012 and the associated costs also fell significantly, particularly in the last quarter of 2013.

The provision recognized at the end of 2013 represents the best estimate by Group management, taking into account the opinion of its advisers and of the costs to be incurred in relation to any compensation that may result from the redress measures associated with the sales of payment protection insurance (PPI) in the UK. The provision was calculated on the basis of the following key assumptions resulting from judgments made by management:

• Volume of claims- estimated number of claims;

• Percentage of claims lost- estimated percentage of claims that are or will be in the customers’ favor; and

• Average cost - estimated payment to be made to customers, including compensation for direct loss plus interest.

These assumptions were based on the following information:

• A complete analysis of the causes of the claim, the probability of success, as well as the possibility that this probability could change in the future;

• Activity recorded with respect to the number of claims received;

• Level of compensation paid to customers, together with a projection of the probability that this level could change in the future;

• Impact on the level of claims in the event of proactive initiatives carried out by the Group through direct contact with customers; and

• Impact of the media coverage.

These assumptions are reviewed, updated and validated on a regular basis using the latest available information, such as, the number of claims received, the percentage of claims lost, the potential impact of any change in that percentage, etc. and any new evaluation of the estimated population.

Group management reviews the provision required at each relevant date, taking into account the latest available information on the aforementioned assumptions as well as past experience.

The most relevant factor for calculating the balance of the provision is the number of claims received as well as the expected level of future claims. The percentage of claims lost is calculated on the basis of the analysis of the sale process. The average cost of compensation is calculated in a reasonable manner as the Group manages a high volume of claims and the related population is homogenous.

F-156

• Proceeding under Civil Procedure Law filed by Galesa de Promociones, S.A. against the Bank at Elche Court of First Instance no. 5, Alicante (case no. 1946/2008). The claim sought damages amounting to €51 million as a result of a judgment handed down by the Supreme Court on November 24, 2004 setting aside a summary mortgage proceeding filed by the Bank against the plaintiff company.

On March 2, 2010, the court of first instance handed down a decision partly upholding both the claim filed against the Bank and the counterclaim. On November 11, 2010, the Alicante Provincial Appellate Court handed down a decision upholding the appeal filed by the Bank and dismissing the appeal brought by Galesa de Promociones, S.A., as a result of which and by way of offsetting the indemnity obligations payable by each party, the Bank became a creditor of Galesa in the amount €0.4 million.

Galesa de Promociones, S.A. filed a cassation appeal against the above decision at the Supreme Court. The appeal was dismissed in a Supreme Court judgment dated July 17, 2013, against which the appellant filed a motion for annulment, which was rejected. The Bank has not recognized a provision in this connection.

• After the Madrid Provincial Appellate Court had rendered null and void the award handed down in the previous arbitration proceeding, on September 8, 2011, Banco Santander, S.A. filed a new request for arbitration with the Spanish Arbitration Court against Delforca 2008, Sociedad de Valores, S.A. (formerly Gaesco Bolsa Sociedad de Valores, S.A.), claiming €66 million that the latter owes it as a result of the declaration on January 4, 2008 of the early termination by the Bank of all the financial transactions agreed upon between the parties.

On August 3, 2012, Delforca 2008, S.A. was declared to be in a position of voluntary insolvency by Barcelona Commercial Court no. 10, which had agreed as part of the insolvency proceeding to stay the arbitration proceeding and the effects of the arbitration agreement entered into by Banco Santander, S.A. and Delforca 2008, S.A. The Bank filed an appeal against this decision, which was dismissed and it then proceeded to prepare a challenge with a view to filing a future appeal. The Arbitration Court, in compliance with the decision of the Commercial Court, agreed on January 20, 2013 to stay the arbitration proceedings at the stage reached at that date until a decision could be reached in this respect in the insolvency proceeding.

In addition, as part of the insolvency proceeding of Delforca 2008, S.A., Banco Santander, S.A. notified its claim against the insolvent party with a view to having the claim recognized as a contingent ordinary claim without specified amount. However, the insolvency manager opted to exclude Banco Santander, S.A.‘s claim from the provisional list of creditors and, accordingly, Banco Santander, S.A. filed an ancillary claim on which a decision has not yet been handed down. In this ancillary claim (still in progress), Delforca 2008, S.A. and the insolvency manager are seeking to obtain a decision from the Court on the merits of the dispute between Banco Santander, S.A. and Delforca 2008, S.A. and, accordingly, Banco Santander, S.A. has appealed against the interlocutory order that admitted for consideration the evidence proposed by them. The appeal was not given leave to proceed and Banco Santander has prepared the corresponding protest.

As part of the same insolvency proceeding, Delforca 2008, S.A. has filed another ancillary claim requesting the termination of the arbitration agreement included in the framework financial transactions agreement entered into by that party and Banco Santander, S.A. in 1998, as well as the termination of the obligation that allegedly binds the insolvent party to the High Council of Chambers of Commerce (Spanish Arbitration Court). Banco Santander, S.A. filed its reply to the complaint on June 21, 2013, although it has repeatedly questioned the court’s objective jurisdiction to hear the complaint, as has the High Council of Chambers of Commerce, Industry and Shipping. The Commercial Court dismissed the motions for declinatory exception filed by Banco Santander and also dismissed the motion for declinatory exception filed by the High Council. These decisions have been appealed.

F-157

On December 30, 2013, Banco Santander filed a complaint requesting the termination of the insolvency proceeding of Delforca 2008, S.A. due to supervening disappearance of the alleged insolvency of the company.

In addition, in April 2009 Mobilaria Monesa, S.A. (parent of Delforca 2008, S.A.) filed a claim against Banco Santander, S.A. at Santander Court of First Instance no. 5, claiming damages which it says it incurred as a result of the (in its opinion) unwarranted claim filed by the Bank against its subsidiary, reproducing the same objections as Delforca 2008, S.A. This proceeding has currently been stayed on preliminary civil ruling grounds, against which Mobilaria Monesa, S.A. filed an appeal which was dismissed by the Cantabria Provincial Appellate Court in a judgment dated January 16, 2014.

Lastly, on April 11, 2012, Banco Santander, S.A. was notified of the claim filed by Delforca 2008, S.A., heard by Madrid Court of First Instance no. 21, in which it sought indemnification for the damage and losses it alleges it incurred due to the (in its opinion) unwarranted claim by the Bank. Delforca 2008, S.A. made the request in a counterclaim filed in the arbitration proceeding that concluded with the annulled award, putting the figure at up to €218 million, although in its present claim it invokes Article 219.3 of the Civil Procedure Law in order to leave for a subsequent proceeding the amount to be settled (as the case may be) by the Bank. The aforementioned Court has dismissed the motion for declinatory exception proposed by Banco Santander, S.A. as the matter has been referred for arbitration. This decision is pending appeal. The Group considers that the risk of loss arising as a result of these matters is remote and, accordingly, it has not recognized any provisions in connection with these proceedings.

• Former employees of Banco do Estado de São Paulo S.A., Santander Banespa, Cia. de Arrendamiento Mercantil: a claim was filed in 1998 by the association of retired Banespa employees (AFABESP) on behalf of its members, requesting the payment of a half-yearly bonus initially envisaged in the entity’s Bylaws in the event that the entity obtained a profit and that the distribution of this profit were approved by the board of directors. The bonus was not paid in 1994 and 1995 since the bank did not make a profit and partial payments were made from 1996 to 2000, as agreed by the board of directors, and the relevant clause was eliminated in 2001. The Regional Employment Court ordered the bank to pay this half-yearly bonus in September 2005 and the bank filed an appeal against the decision at the High Employment Court (“TST”) and, subsequently, at the Federal Supreme Court (“STF”). The TST confirmed the judgment against the bank, whereas the STF rejected the extraordinary appeal filed by the bank in a decision adopted by only one of the Court members, thereby also upholding the order issued to the bank. This decision was appealed by the bank and the association. Only the appeal lodged by the bank has been given leave to proceed and will be decided upon by the STF in plenary session.

• “Planos economicos”: Like the rest of the banking system, Santander Brazil has been the subject of claims from customers, mostly depositors, and of class actions brought for a common reason, arising from a series of legislative changes relating to the calculation of inflation (“planos economicos”). The claimants considered that their vested rights had been impaired due to the immediate application of these adjustments. In April 2010, the High Court of Justice (“STJ”) set the limitation period for these class actions at five years, as claimed by the banks, rather than twenty years, as sought by the claimants, which will probably significantly reduce the number of actions brought and the amounts claimed in this connection. As regards the substance of the matter, the decisions issued to date have been adverse for the banks, although two proceedings have been brought at the STJ and the Supreme Federal Court (“STF”) with which the matter is expected to be definitively settled. In August 2010, STJ handed down a decision finding for the plaintiffs in terms of substance, but excluding one of the “planos” from the claim, thereby reducing the amount thereof, and once again confirming the five-year statute of limitations period. Shortly thereafter, the STF issued an injunctive relief order whereby the proceedings in progress in this connection were stayed until this court issues a final decision on the matter. In spite of the fact STF started the judgement on November 2013, a formal ruling has not been issued and there is no assurance of when a formal ruling will be handed down by either the STJ or the STF.

F-158

• Proceeding under Civil Procedure Law (case no. 1043/2009) conducted at Madrid Court of First Instance no. 26, following a claim brought by Banco Occidental de Descuento, Banco Universal, C.A. against the Bank for USD 150 million in principal plus USD 4.7 million in interest, upon alleged termination of an escrow contract.

The court upheld the claim but did not make a specific pronouncement on costs. A judgment handed down by the Madrid Provincial Appellate Court on October 9, 2012 upheld the appeal lodged by the Bank and dismissed the appeal lodged by Banco Occidental de Descuento, Banco Universal, C.A., dismissing the claim. The dismissal of the claim was confirmed in an ancillary order to the judgment dated December 28, 2012. An appeal was filed at the Supreme Court by Banco Occidental de Descuento against the Madrid Provincial Appellate Court decision. The Bank has challenged the appeal. The Bank has not recognized any provisions in this connection.

• On January 26, 2011, notice was served on the Bank of an ancillary insolvency claim to annul acts detrimental to the assets available to creditors as part of the voluntary insolvency proceedings of Mediterráneo Hispa Group, S.A. at Murcia Commercial Court no. 2. The aim of the principal action is to request annulment of the application of the proceeds obtained by the company undergoing insolvency from an asset sale and purchase transaction involving €32 million in principal and €2.7 million in interest. On November 24, 2011, the hearing was held with the examination of the proposed evidence. Upon completion of the hearing, it was resolved to conduct a final taking of evidence. In a judgment dated November 13, 2013, the Court dismissed the complaint in full. The judgment has been appealed by the complainants.

• The bankruptcy of various Lehman Group companies was made public on September 15, 2008. Various customers of Santander Group were affected by this situation since they had invested in securities issued by Lehman or in other products which had such assets as their underlying.

As of the date of this report, certain claims had been filed in relation to this matter. The Bank’s directors and its legal advisers consider that the various Lehman products were sold in accordance with the applicable legal regulations in force at the time of each sale or subscription and that the fact that the Group acted as intermediary would not give rise to any liability for it in relation to the insolvency of Lehman. Accordingly, the risk of loss is considered to be remote and, as a result, the Group has not recognized any provisions in this connection.

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

As of the date of this report, certain claims had been filed in relation to this matter. The Group considers that it has at all times exercised due diligence and that these products have always been sold in a transparent way pursuant to applicable legislation and established procedures. Therefore, except for a specific case in which the decisions handed down partially upheld the claim based on the particular circumstances of that case (which has been appealed against by the Bank), the risk of loss is considered to be remote. Accordingly, the Group has not recognized any provisions in this connection.

• At the end of the first quarter of 2013, news stories were published stating that the public sector was debating the validity of the interest rate swaps arranged between various financial institutions and public sector companies in Portugal, particularly in the public transport industry.

F-159

The swaps under debate included swaps arranged by Banco Santander Totta with the public companies Metropolitano de Lisboa, E.P.E. (MdL), Metro de Porto, S.A. (MdP), Sociedade de Transportes Colectivos do Porto, S.A. (STCP) and Companhia Carris de Ferro de Lisboa, S.A. (Carris). These swaps were arranged prior to 2008, i.e. before the start of the financial crisis, and had been executed without incident.

In view of this situation Banco Santander Totta took the initiative to request a court judgment on the validity of the swaps in the jurisdiction of the United Kingdom to which the swaps are subject. The corresponding claims were filed in May 2013.

After the Bank had filed the claims, the four companies (MdL, MdP, STCP and Carris) notified Banco Santander Totta that they were suspending payment of the amounts owed under the swaps until a final decision had been handed down in the UK jurisdiction in the proceedings. MdL, MdP and Carris suspended payment in September 2013 and STCP did the same in December 2013.

Consequently, Banco Santander Totta extended each of the claims to include the unpaid amounts.

On November 29, 2013, the companies presented their defences in which they claimed, namely, that the swaps were null and void under Portuguese law and, accordingly, that they should be refunded the amounts paid.

On February 14, 2014, Banco Santander Totta presented its replies and defences to counterclaims, restating its case and denying the companies’ arguments, as set out in their November 29 defences.

On April 4, 2014, the companies submitted their replies to the defences to counterclaims. These proceedings are still in progress.

The Bank and its legal advisers consider that the Bank acted at all times in accordance with applicable legislation and under the terms of the swaps, and take the view that the UK courts will confirm the full validity and effectiveness of the swaps. As a result, the Bank has not recognized any provisions in connection with this matter.

The Bank and the other Group companies are subject to claims and, therefore, are party to certain legal proceedings incidental to the normal course of their business (including those in connection with lending activities, relationships with employees and other commercial or tax matters).

In this context, it must be considered that the outcome of court proceedings is uncertain, particularly in the case of claims for large or indeterminate amounts, those based on legal issues for which there are no precedents, those that affect a large number of parties or those at a very preliminary stage.

With the information available to it, the Group considers that at December 31, 2013, 2012 and 2011, it had reliably estimated the obligations associated with each proceeding and had recognized, where necessary, sufficient provisions to cover reasonably any liabilities that may arise as a result of these tax and legal situations. It also believes that any liability arising from such claims and proceedings will not have, overall, a material adverse effect on the Group’s business, financial position or results of operations.

F-160

26. Other liabilities

The detail of Other liabilities in the consolidated balance sheets is as follows:

	Millions of euros
	2013		2012		2011
Transactions in transit		505		784		866
Accrued expenses and deferred income		5,004		5,124		5,413
Other		2,774		2,054		3,237
		8,283		7,962		9,516

27. Tax matters

a) Consolidated Tax Group

Pursuant to current legislation, the Consolidated Tax Group includes Banco Santander, S.A. (as the Parent) and the Spanish subsidiaries that meet the requirements provided for in Spanish legislation regulating the taxation of the consolidated profits of corporate groups (as the controlled entities).

The other Group companies file income tax returns in accordance with the tax regulations applicable to them.

b) Years open for review by the tax authorities

At December 31, 2013, the Consolidated Tax Group had the years from 2005 to 2013 open for review in relation to the main taxes applicable to it.

The other entities have the corresponding years open for review, pursuant to their respective tax regulations.

In 2013 there were no developments with a significant impact in connection with the tax disputes at various instances which were pending resolution at December 31, 2012.

Because of the possible different interpretations which can be made of the tax regulations, the outcome of the tax audits of the years reviewed and of the open years might give rise to contingent tax liabilities which cannot be objectively quantified. However, the Group’s tax advisers consider that it is unlikely that such contingent liabilities will become actual liabilities, and that in any event the tax charge which might arise therefrom would not materially affect the consolidated financial statements of the Group.

F-161

c) Reconciliation

The reconciliation of the income tax expense calculated at the tax rate applicable in Spain (30%) to the income tax expense recognized and the detail of the effective tax rate are as follows:

	Millions of euros
	2013			2012			2011
Consolidated operating profit (loss) before tax:
From continuing operations		7,652			3,583			7,858
From discontinued operations		(18	)		99			32
		7,634			3,682			7,890
Income tax at tax rate applicable in Spain (30%)		2,290			1,105			2,367
Effect of application of the various tax rates applicable in each country (*)		96			170			390
Of which:
Brazil		304			318			390
United Kingdom		(90	)		(96	)		(52	)
United States		37			43			113
Chile		(105	)		(108	)		(112	)
Effect of profit or loss of associates and jointly controlled entities		(153	)		(128	)		(17	)
Effect of gains not subject to taxation (1)		(61	)		(186	)		(262	)
Effect of deduction of goodwill in Brazil		(274	)		(414	)		(414	)
Tax effect on local books of transactions eliminated on consolidation		(42	)		(86	)		(188	)
Permanent differences		254			158			(104	)
Current income tax		2,110			619			1,772
Effective tax rate		27.64	%		16.82	%		22.46	%
Of which:
Continuing operations		2,113			590			1,755
Discontinued operations (Note 37)		(3	)		29			17
Of which:
Current tax		3,511			3,066			3,206
Deferred taxes		(1,401	)		(2,447	)		(1,434	)
Taxes paid in the year		3,577			3,162			1,924

⁽*⁾  Calculated by applying the difference between the tax rate applicable in Spain and the tax rate applicable in each jurisdiction to the profit or loss contributed to the Group by the entities which operate in each jurisdiction.

(1) Tax effect of the sale of Banco Santander Colombia, S.A. in 2012 and of SCUSA in 2011 (see Note 3).

F-162

d) Tax recognized in equity

In addition to the income tax recognized in the consolidated income statement, the Group recognized the following amounts in consolidated equity in 2013, 2012 and 2011:

	Millions of euros
	2013			2012			2011
Net tax credited (charged) to equity:
Measurement of available-for-sale fixed-income securities		162			(283	)		9
Measurement of available-for-sale equity securities		(51	)		(64	)		(83	)
Measurement of cash flow hedges		(38	)		23			(1	)
Actuarial gains (losses)		(331	)		538			326
Measurement of entities accounted for using the equity method		39			(15	)		4
		(219	)		199			255

e) Deferred taxes

Tax assets in the consolidated balance sheets includes debit balances with the Spanish Public Treasury relating to deferred tax assets. Tax liabilities includes the liability for the Group’s various deferred tax liabilities.

On June 26, 2013, the Basel III legal framework was included in European law through Directive 2013/36 (CRD IV) and Regulation 575/2013 on prudential requirements for credit institutions and investment firms (CRR), directly applicable in every Member State as from January 1, 2014, albeit with a gradual timetable with respect to the application of, and compliance with, various requirements.

This new legislation establishes that deferred tax assets, the use of which relies on future profits being obtained, must be deducted from regulatory capital.

In this regard, pursuant to Basel III, in recent years several countries have amended their tax regimes with respect to certain deferred tax assets so that they may continue to be considered regulatory capital since their use does not rely on the future profits of the entities that generate them (referred to hereinafter as “monetisable tax assets”).

Italy had a very similar regime to that described above, which was introduced by Decree-Law no. 225, of December 29, 2010, and amended by Law no. 10, of February 26, 2011.

In addition, in 2013 in Brazil, by means of Provisional Measure no. 608, of February 28, 2013 and, in Spain, through Royal Decree-Law 14/2013, of November 29, tax regimes were established whereby certain deferred tax assets (arising from credit loss provisions in Brazil and credit loss provisions, provisions for foreclosed assets and pension and pre-retirement obligations in Spain), may be converted into tax receivables in specific circumstances. As a result, their use does not rely on the entities obtaining future profits and, accordingly, they are exempt from deduction from regulatory capital.

F-163

The detail of deferred tax assets, by classification as monetisable or non-monetisable assets, and of deferred tax liabilities at December 31, 2013 is as follows:

	Millions of euros
	2013				2012		2011
	Monetisable (*)		Other
Tax assets:		7,902		13,166		20,942		18,455
Tax losses and tax credits		—		5,523		7,643		5,862
Temporary differences		7,902		7,643		13,299		12,593
Of which:
Non-deductible provisions		—		2,365		2,353		2,212
Valuation of financial instruments		—		1,213		1,700		1,715
Credit losses		3,989		920		3,341		2,609
Pensions		3,286		553		2,897		2,482
Valuation of tangible and intangible assets		627		522		731		1,075
Tax liabilities:		—		1,825		2,603		2,865
Temporary differences		—		1,825		2,603		2,865
Of which:
Valuation of financial instruments		—		729		1,314		934
Leasing		—		461		760		1,094

(*) Not deducted from regulatory capital

The changes in Tax assets - Deferred and Tax liabilities - Deferred in the last three years were as follows:

	Millions of euros
	Balances at December 31, 2012			(Charge)/ Credit to income		Foreign currency balance translation differences and other items			(Charge)/ Credit to asset and liability valuation adjustments			Acquisitions for the year (net)			Balances at December 31, 2013
Deferred tax assets		20,942			1,236		(494	)		(616	)		—			21,068
Deferred tax liabilities		(2,603	)		165		259			361			(7	)		(1,825	)
		18,339			1,401		(235	)		(255	)		(7	)		19,243

F-164

	Millions of euros
	Balances at December 31, 2011			(Charge)/ Credit to income		Foreign currency balance translation differences and other items			(Charge)/ Credit to asset and liability valuation adjustments			Acquisitions for the year (net)			Balances at December 31, 2012
Deferred tax assets		18,455			2,211		(28	)		326			(22	)		20,942
Deferred tax liabilities		(2,865	)		236		197			(201	)		30			(2,603	)
		15,590			2,447		169			125			8			18,339

	Millions of euros
	Balances at December 31, 2010			(Charge)/ Credit to income		Foreign currency balance translation differences and other items			(Charge)/ Credit to asset and liability valuation adjustments		Acquisitions for the year (net)			Balances at December 31, 2011
Deferred tax assets		17,467			1,081		(198	)		299		(194	)		18,455
Deferred tax liabilities		(4,113	)		353		784			112		(1	)		(2,865	)
		13,354			1,434		586			411		(195	)		15,590

 f) Other information

In conformity with the Listing Rules Instrument 2005 published by the UK Financial Conduct Authority, it is hereby stated that shareholders of the Bank resident in the United Kingdom will be entitled to a tax credit in respect of the withholdings the Bank is required to make from the dividends to be paid to them. The shareholders of the Bank resident in the United Kingdom who hold their ownership interest in the Bank through Santander Nominee Service will be informed directly of the amount thus withheld and of any other data they may require to complete their tax returns in the United Kingdom. The other shareholders of the Bank resident in the United Kingdom should contact their bank or securities broker.

F-165

28. Non-controlling interests

Non-controlling interests include the net amount of the equity of subsidiaries attributable to equity instruments that do not belong, directly or indirectly, to the Bank, including the portion attributed to them of profit for the year.

a) Breakdown

The detail, by Group company, of Equity - Non-controlling interests is as follows:

	Millions of euros
	2013		2012			2011
Banco Santander (Brasil), S.A.		4,292		4,920			3,525
Bank Zachodni WBK S.A.		1,372		168			62
Grupo Financiero Santander México, S.A.B. de C.V.		978		1,296			5
Banco Santander - Chile		950		1,027			916
Banesto		—		627			559
Other companies		568		609			499
		8,160		8,647			5,566
Profit/(Loss) for the year attributable to non-controlling interests		1,154		768			788
Of which:
Banco Santander (Brasil), S.A.		494		585			516
Banco Santander - Chile		221		208			183
Grupo Financiero Santander México, S.A.B. de C.V.		251		59			2
Bank Zachodni WBK S.A.		123		13			8
Banesto		—		(138	)		3
Other companies		65		41			76
		9,314		9,415			6,354

b) Changes

The changes in Non-controlling interests are summarized as follows:

	Millions of euros
	2013			2012			2011
Balance at beginning of year		9,415			6,354			5,860
Banesto Group merger (Note 3)		(455	)		—			—
Changes in scope of consolidation		199			27			132
Change in proportion of ownership interest		925			3,337			405
Dividends paid to non-controlling interests		(747	)		(409	)		(431	)
Changes in capital and other items		57			(10	)		57
Profit for the year attributable to non-controlling interests		1,154			768			788
Valuation adjustments (including exchange differences)		(1,234	)		(652	)		(457	)
Balance at end of year		9,314			9,415			6,354

F-166

As described in Note 3, in 2011 the Group sold 9.72% of the share capital of Banco Santander - Chile. The selling price amounted to USD 1,241 million, which gave rise to increases of EUR 434 million in Reserves and EUR 373 million in Non-controlling interests.

Also, as indicated in Note 3, in 2012 the Group sold 24.9% of its ownership interest in Grupo Financiero Santander México, S.A.B. de C.V., thus giving rise to an increase of EUR 1,092 million in Reserves, EUR 1,493 million in Non-controlling interests and EUR 263 million in Valuation adjustments - Exchange differences.

In January and March 2012 the Group transferred shares accounting for 4.41% and 0.77% of Banco Santander (Brasil) S.A. to two leading international financial institutions, generating an increase in the balance of Non-controlling interests of EUR 1,532 million (see Note 34).

Lastly, in 2013 the Group reduced its ownership interest in Bank Zachodni WBK S.A. to 70%, thereby generating an increase in the balance of Non-controlling interests of EUR 1,329 million (see Note 3).

The foregoing changes are shown in the consolidated statement of changes in total equity.

c) Other information

The financial information on the subsidiaries with significant non-controlling interests at December 31, 2013 is summarized below:

	Millions of euros (*)
	Banco Santander (Brazil)		Banco Santander (Chile)		Grupo Financiero Santander (Mexico)		Bank Zachodni WBK
Total assets		133,925		38,553		48,398		25,106
Total liabilities		122,383		36,431		45,584		23,230
Net assets		11,542		2,122		2,814		1,876
Total income		13,565		2,261		3,040		1,331
Total profit		2,044		624		936		447

(*) Information prepared in accordance with the segment reporting criteria described in Note 52 and, therefore, it does not coincide with the information published separately by each entity.

F-167

29. Valuation adjustments

The balances of Valuation adjustments include the amounts, net of the related tax effect, of the adjustments to assets and liabilities recognized temporarily in equity through the consolidated statement of recognized income and expense. The amounts arising from subsidiaries are presented, on a line by line basis, in the appropriate items according to their nature.

It should be noted that the consolidated statement of recognized income and expense presents items separately according to their nature, grouping together those which, pursuant to the applicable accounting standards, will not be subsequently reclassified to profit or loss when the requirements established by the related accounting standards are met. Also, with respect to items that may be reclassified to profit or loss, the consolidated statement of recognized income and expense includes changes in Valuation adjustments as follows:

• Revaluation gains (losses): includes the amount of the income, net of the expenses incurred in the year, recognized directly in equity. The amounts recognized in equity in the year remain under this item, even if in the same year they are transferred to the income statement or to the initial carrying amount of the assets or liabilities or are reclassified to another line item.

• Amounts transferred to income statement: includes the amount of the revaluation gains and losses previously recognized in equity, even in the same year, which are recognized in the income statement.

• Amounts transferred to initial carrying amount of hedged items: includes the amount of the revaluation gains and losses previously recognized in equity, even in the same year, which are recognized in the initial carrying amount of assets or liabilities as a result of cash flow hedges.

• Other reclassifications: includes the amount of the transfers made in the year between the various valuation adjustment items.

The amounts of these items are recognized gross, including the amount of the valuation adjustments relating to non-controlling interests, and the corresponding tax effect is presented under a separate item, except in the case of entities accounted for using the equity method, the amounts for which are presented net of the tax effect.

a) Available-for-sale financial assets

Valuation adjustments - Available-for-sale financial assets includes the net amount of unrealized changes in the fair value of assets classified as available-for-sale financial assets (see Notes 7 and 8).

F-168

The breakdown, by type of instrument and geographical origin of the issuer, of Valuation adjustments - Available-for-sale financial assets at December 31, 2013, 2012 and 2011 is as follows:

	Millions of euros
	December 31, 2013										December 31, 2012										December 31, 2011
	Revaluation gains		Revaluation losses			Net revaluation gains/ (losses)			Fair value		Revaluation gains		Revaluation losses			Net revaluation gains/ (losses)			Fair value		Revaluation gains		Revaluation losses			Net revaluation gains/ (losses)			Fair value
Debt instruments
Government debt securities and debt instruments issued by central banks
Spain		356		(496	)		(140	)		25,664		68		(1,286	)		(1,218	)		29,288		125		(1,175	)		(1,050	)		29,976
Rest of Europe		28		(143	)		(115	)		12,080		112		(179	)		(66	)		10,891		18		(507	)		(489	)		4,959
Latin America and rest of the world		38		(217	)		(179	)		17,134		627		(37	)		589			23,759		426		(48	)		378			22,058
Private-sector debt securities		258		(280	)		(22	)		24,966		215		(184	)		31			23,786		264		(352	)		(88	)		24,596
		680		(1,136	)		(456	)		79,844		1,022		(1,686	)		(664	)		87,724		833		(2,082	)		(1,249	)		81,589
Equity instruments
Domestic
Spain		132		(10	)		122			1,432		201		(34	)		167			1,233		68		(91	)		(23	)		1,433
International
Rest of Europe		158		(25	)		133			974		75		(46	)		29			1,135		111		(160	)		(49	)		1,279
United States		20		(1	)		19			661		15		(5	)		10			1,022		94		(35	)		59			1,032
Latin America and rest of the world		235		(18	)		217			888		265		(56	)		209			1,152		352		(67	)		285			1,280
		545		(54	)		491			3,955		556		(141	)		415			4,542		625		(353	)		272			5,024
Of which:
Listed		313		(26	)		287			1,330		311		(68	)		243			1,849		424		(255	)		169			2,745
Unlisted		232		(28	)		204			2,625		245		(73	)		172			2,693		201		(98	)		103			2,279
		1,225		(1,190	)		35			83,799		1,578		(1,827	)		(249	)		92,266		1,458		(2,435	)		(977	)		86,613

F-169

At each reporting date the Group assesses whether there is any objective evidence that the instruments classified as available-for-sale (debt securities and equity instruments) are impaired.

This assessment includes but is not limited to an analysis of the following information: i) the issuer’s economic and financial position, the existence of default or late payment, analysis of the issuer’s solvency, the evolution of its business, short-term projections, trends observed with respect to its earnings and, if applicable, its dividend distribution policy; ii) market-related information such as changes in the general economic situation, changes in the issuer’s sector which might affect its ability to pay; iii) changes in the fair value of the security analyzed, analysis of the origins of such changes - whether they are intrinsic or the result of the general uncertainty concerning the economy or the country - and iv) independent analysts’ reports and forecasts and other independent market information.

In the case of quoted equity instruments, when the changes in the fair value of the instrument under analysis are assessed, the duration and significance of the fall in its market price below cost for the Group is taken into account. As a general rule, for these purposes the Group considers a significant fall to be a 40% drop in the value of the asset or a continued fall over a period of 18 months. Nevertheless, it should be noted that the Group assesses, on a case-by-case basis each of the securities that have suffered losses, and monitors the performance of their prices, recognizing an impairment loss as soon as it is considered that the recoverable amount could be affected, even though the price may not have fallen by the percentage or for the duration mentioned above.

If, after the above assessment has been carried out, the Group considers that the presence of one or more of these factors could affect recovery of the cost of the asset, an impairment loss is recognized in the income statement for the amount of the loss in equity under Valuation adjustments. Also, where the Group does not intend and/or is not able to hold the investment for a sufficient amount of time to recover the cost, the instrument is written down to its fair value.

At the end of 2013 the Group performed the assessment described above and recognized in the consolidated income statement impairment losses of EUR 89 million in respect of debt instruments (2012: EUR 18 million; 2011: EUR 125 million, of which EUR 106 million related to Greek sovereign debt) and of EUR 169 million in respect of equity instruments which had suffered a significant and prolonged fall in price at December 31, 2013 (2012: EUR 344 million; 2011: EUR 704 million, of which EUR 592 million related to the impairment of the ownership interests in Iberdrola, S.A. and Assicurazioni Generali SpA).

At the end of 2013, 65.05% of the losses recognized under Valuation adjustments - Available-for-sale financial assets arising from debt securities had been incurred in more than twelve months. Most of the losses on government debt securities recognized in the Group’s equity (approximately 68.71% of the total) related to the decline in value of Spanish and Portuguese government debt securities. This decline in value was not prompted by interest rate changes but rather by an increase in the credit risk spreads due to Eurozone debt market tensions in recent years; there had not been any default on payments of interest nor was there any evidence that the issuers would fail to continue to meet their payment obligations in the future, with respect both to principal and interest, and thus prevent recovery of the carrying amount of such securities.

At the end of 2013, 45.82% of the losses recognized under Valuation adjustments - Available-for-sale financial assets arising from equity instruments had been incurred in more than twelve months. After carrying out the aforementioned assessment, the Group concluded that, given its ability and intention to hold the securities in the long term, it did not expect the factors giving rise to the decline in value described above to have an impact on future cash flows and, therefore, no impairment loss was required to be recognized at year-end.

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b) Cash flow hedges

Valuation adjustments - Cash flow hedges includes the gains or losses attributable to hedging instruments that qualify as effective hedges. These amounts will remain under this heading until they are recognized in the consolidated income statement in the periods in which the hedged items affect it (see Note 11).

Accordingly, amounts representing valuation losses will be offset in the future by gains generated by the hedged instruments.

c) Hedges of net investments in foreign operations and Exchange differences

Valuation adjustments - Hedges of net investments in foreign operations includes the net amount of changes in the value of hedging instruments in hedges of net investments in foreign operations, for the portion of these changes considered as effective hedges (see Note 11).

Valuation adjustments - Exchange differences includes the net amount of exchange differences arising on non-monetary items whose fair value is adjusted against equity and the differences arising on the translation to euros of the balances of the consolidated entities whose functional currency is not the euro (see Note 2.a).

The changes in 2013 and 2012 reflect the effect arising from the depreciation of foreign currencies, mainly of the Brazilian real. The changes in 2011 reflect the effect arising from the appreciation or depreciation of foreign currencies, mainly of the pound sterling and the Brazilian real.

Of the change in the balance in these years, a loss of EUR 1,665 million in 2013, EUR 388 million in 2012 and EUR 771 million in 2011 related to the measurement of goodwill.

The detail, by country, of Valuation adjustments - Hedges of net investments in foreign operations and Valuation adjustments - Exchange differences is as follows:

	Millions of euros
	2013			2012			2011
Net balance at end of year		(10,642	)		(5,970	)		(3,208	)
Of which:
Arising on consolidation:
Subsidiaries:		(10,642	)		(5,970	)		(3,208	)
Brazil Group		(5,480	)		(2,627	)		713
Santander UK Group		(2,364	)		(2,096	)		(2,405	)
Mexico Group		(1,171	)		(900	)		(1,217	)
Argentina Group		(618	)		(287	)		(141	)
Chile Group		(453	)		(80	)		23
SHUSA Group		(352	)		(50	)		27
Other		(204	)		70			(208	)

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d) Entities accounted for using the equity method

Valuation adjustments - Entities accounted for using the equity method includes the amounts of valuation adjustments recognized in equity arising from associates and jointly controlled entities.

The changes in Valuation adjustments - Entities accounted for using the equity method were as follows:

	Millions of euros
	2013			2012			2011
Balance at beginning of year		(152	)		(95	)		—
Revaluation gains (losses)		(283	)		(61	)		(38	)
Net amounts transferred to profit or loss		23			21			—
Transfers		(34	)		(17	)		(57	)
Balance at end of year		(446	)		(152	)		(95	)
Of which:
Metrovacesa, S.A.		(63	)		(55	)		(34	)
Zurich Santander Insurance América S.L.		(90	)		49			(14	)
Santander Consumer USA Inc.		(145	)		(92	)		—

e) Other valuation adjustments

Valuation adjustments - Other valuation adjustments include the actuarial gains and losses and the return on plan assets, less the administrative expenses and taxes inherent to the plan, and any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability (asset).

The changes in this balance are shown in the consolidated statement of recognized income and expense, and the most significant changes in 2013 related to:

• Decrease of EUR 707 million in the cumulative actuarial gains and losses relating to the Group’s entities in Brazil, due basically to the change in the main actuarial assumptions – an increase in the discount rate from 8.70% to 11.24%.

• Increase of EUR 697 million in the cumulative actuarial gains and losses relating to the Group’s businesses in the UK, due basically to the change in the main actuarial assumptions – an increase in the CPI from 2.85% to 3.40% and a reduction in the discount rate from 4.5% to 4.45%.

• Also, changes arose as a result of fluctuations in exchange rates, mainly in Brazil.

30. Shareholders’ equity

Shareholders’ equity includes the amounts of equity contributions from shareholders, accumulated profit or loss recognized through the consolidated income statement, and components of compound financial instruments having the substance of permanent equity. Amounts arising from subsidiaries are presented in the appropriate items based on their nature.

The changes in Shareholders’ equity are presented in the consolidated statement of changes in total equity. Significant information on certain items of Shareholders’ equity and the changes therein in 2013 is set forth below.

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31. Issued capital

a) Changes

At December 31, 2010, the share capital consisted of 8,329,122,098 shares with a total par value of EUR 4,164.5 million.

On February 1, 2011, the bonus issue through which the “Santander Dividendo Elección” scrip dividend scheme (see Note 4) is instrumented took place, whereby 111,152,906 shares (1.33% of the share capital) relating to bonus share rights were issued in the proportion of one new share for 65 existing shares, for an amount of EUR 55.5 million.

Additionally, on October 7, 2011, after completion on October 3, 2011 of the period for the voluntary conversion of “Valores Santander” into shares, and in accordance with the terms established in the prospectus, 1,223,457 new shares were issued to cater for this exchange.

On November 2, 2011, the bonus issue through which the “Santander Dividendo Elección” scrip dividend scheme is instrumented took place, whereby 125,742,571 shares (1.49% of the share capital) were issued, corresponding to a capital increase of EUR 62.8 million.

Finally, 341,802,171 new shares (3.837% of the share capital) with a par value of EUR 171 million and a share premium of EUR 1,773 million were issued on December 30, 2011 within the framework of the repurchase offer made to the holders of Series X preference shares issued by Santander Finance Capital, who, upon accepting this offer, irrevocably requested to subscribe new shares of the Bank for the amount received by them in the repurchase.

At December 31, 2011, the Bank’s share capital consisted of 8,909,043,203 shares with a total par value of EUR 4,454.5 million.

On January 31, 2012 and May 2, 2012, the bonus issues through which the “Santander Dividendo Elección” scrip dividend scheme is instrumented took place, whereby 167,810,197 and 284,326,000 shares (1.85% and 3.04% of the share capital, respectively) were issued, giving rise to bonus issues of EUR 83.9 million and EUR 142.2 million, respectively.

The shareholders at the annual general meeting on March 30, 2012 resolved to grant holders of “Valores Santander” (see Note 34.a) the option to request the voluntary conversion of their shares on four occasions prior to October 4, 2012, the date of their mandatory conversion. As a result of the exercise of this option and of the mandatory conversion, 73,927,779 shares were issued on June 7, 193,095,393 on July 5, 37,833,193 on August 7, 14,333,873 on September 6 and 200,311,513 on October 9, 2012, relating to capital increases of EUR 37 million, EUR 97 million, EUR 19 million, EUR 7 million and EUR 100 million, respectively.

Also, on July 31, 2012 and November 2, 2012, the bonus issues through which the “Santander Dividendo Elección” scrip dividend scheme is instrumented took place, whereby 218,391,102 and 222,107,497 shares (2.22% and 2.15% of the share capital, respectively) were issued, giving rise to bonus issues of EUR 109.2 and EUR 111.1 million, respectively.

At December 31, 2012, the Bank’s share capital consisted of 10,321,179,750 shares with a total par value of EUR 5,161 million.

On January 30, 2013, April 30, 2013, July 31, 2013 and October 31, 2013, the bonus issues through which the “Santander Dividendo Elección” scrip dividend scheme is instrumented took place, whereby 217,503,395, 270,917,436, 282,509,392 and 241,310,515 shares (2.06%, 2.51%, 2.55% and 2.13% of the share capital, respectively) were issued, giving rise to bonus issues of EUR 108.8 million, EUR 135.5 million, EUR 141.3 million and EUR 120.7 million, respectively.

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At December 31, 2013, the Bank’s share capital consisted of 11,333,420,488 shares with a total par value of EUR 5,667 million.

The Bank’s shares are listed on the Spanish Stock Market Interconnection System and on the New York, London, Milan, Lisbon, Buenos Aires and Mexico Stock Exchanges, and all of them have the same features and rights. At December 31, 2013, the only shareholders listed in the Bank’s shareholders register with ownership interests of more than 3% were State Street Bank & Trust (with a 9.33% holding), Chase Nominees Limited (with a 7.05% holding), The Bank of New York Mellon (with a 5.35% holding), EC Nominees Ltd. (with a 4.57% holding), Clearstream Banking (with a 3.49% holding) and Guaranty Nominees (with a 3.29% holding).

However, the Bank understands that these ownership interests are held in custody on behalf of third parties and that none of the above, as far as the Bank is aware, has an ownership interest of more than 3% of the Bank’s share capital or voting power.

b) Other considerations

The shareholders at the annual general meeting held on March 22, 2013 authorized additional share capital of EUR 2,635 million. The Bank’s directors have until March 22, 2016 to carry out capital increases up to this limit. The resolution empowers the board to fully or partially disapply the pre-emption right in accordance with the terms of Article 506 of the Spanish Limited Liability Companies Law, although this power is limited to EUR 1,054 million.

The shareholders at the annual general meeting of March 22, 2013 resolved to increase the Bank’s capital by a par value of EUR 500 million and granted the board the broadest powers to set the date and establish the terms and conditions of this capital increase within one year from the date of the aforementioned annual general meeting. If the board does not exercise the powers delegated to it within the period established by the annual general meeting, these powers will be rendered null and void.

In addition, the aforementioned annual general meeting authorized the board to issue fixed-income securities, convertible into or exchangeable for shares of the Bank, for up to a total of EUR 10,000 million or the equivalent amount in another currency. The Bank’s directors have until March 22, 2018 to execute this resolution.

At December 31, 2013, the shares of the following companies were listed on official stock markets: Banco Santander Río, S.A.; Grupo Financiero Santander México, S.A.B. de C.V.; Banco Santander - Chile; Cartera Mobiliaria, S.A., SICAV; Santander Chile Holding S.A.; Banco Santander (Brasil) S.A. and Bank Zachodni WBK S.A.

At December 31, 2013, the number of Bank shares owned by third parties and managed by Group management companies (mainly portfolio, collective investment undertaking and pension fund managers) and managed jointly was 54 million, which represented 0.48% of the Bank’s share capital. In addition, the number of Bank shares owned by third parties and received as security was 227.2 million (equal to 2% of the Bank’s share capital).

At December 31, 2013, the capital increases in progress at Group companies and the additional capital authorized by their shareholders at the respective general meetings were not material at Group level (see Appendix V).

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32. Share premium

Share premium includes the amount paid up by the Bank’s shareholders in capital issues in excess of the par value.

The Spanish Limited Liability Companies Law expressly permits the use of the share premium account balance to increase capital at the entities at which it is recognized and does not establish any specific restrictions as to its use.

The increase in the balance of the Share premium in 2012 and 2011 relates to the capital increases detailed in Note 31.a. In 2013 the balance of the Share premium was reduced by EUR 506 million to cater for the capital increases arising from the “Santander Dividendo Elección” scrip dividend scheme. Also, in 2013 an amount of EUR 102 million was transferred from the Share premium account to the Legal reserve (2012: EUR 141 million; 2011: EUR 24 million) (see Note 33.b.i).

33. Reserves

a) Definitions

Shareholders’ equity - Reserves - Accumulated reserves (losses) includes the net amount of the accumulated profit or loss recognized in previous years through the consolidated income statement that, in the distribution of profit, was appropriated to equity, and the own equity instrument issuance expenses and the differences between the selling price of treasury shares and the cost of acquisition thereof.

Shareholders’ equity - Reserves (losses) of entities accounted for using the equity method includes the net amount of the accumulated profit or loss generated in previous years by entities accounted for using the equity method, recognized through the consolidated income statement.

b) Breakdown

The detail of Accumulated reserves (losses) and Reserves (losses) of entities accounted for using the equity method is as follows:

	Millions of euros
	2013		2012		2011
Accumulated reserves (losses):
Restricted reserves-
Legal reserve		1,134		1,032		857
Reserve for treasury shares		1,509		1,549		821
Revaluation reserve Royal Decree-Law 7/1996		43		43		43
Reserve for retired capital		11		11		11
Voluntary reserves		3,220		125		1,246
Consolidation reserves attributable to the Bank		7,968		8,551		7,107
Reserves at subsidiaries		23,973		25,587		22,836
		37,858		36,898		32,921
Reserves (losses) of entities accounted for using the equity method:
Associates		263		255		59
		38,121		37,153		32,980

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i. Legal reserve

Under the Consolidated Spanish Limited Liability Companies Law, 10% of net profit for each year must be transferred to the legal reserve. These transfers must be made until the balance of this reserve reaches 20% of the share capital. The legal reserve can be used to increase capital provided that the remaining reserve balance does not fall below 10% of the increased share capital amount.

In 2013 the Bank transferred EUR 102 million from the Share premium account to the Legal reserve. In 2012 the Bank transferred EUR 141 million from the Share premium account and EUR 34 million of 2011 profit to the Legal reserve. In 2011 the Bank transferred EUR 24 million from the Share premium account to the Legal reserve.

Consequently, once again, after the capital increases described in Note 31 had been carried out, the balance of the Legal reserve reached 20% of the share capital, and at December 31, 2013 the Legal reserve was at the stipulated level.

ii. Reserve for treasury shares

Pursuant to the Consolidated Spanish Limited Liability Companies Law, a restricted reserve has been recognized for an amount equal to the carrying amount of the Bank shares owned by subsidiaries. The balance of this reserve will become unrestricted when the circumstances that made it necessary to record it cease to exist. Additionally, this reserve covers the outstanding balance of loans granted by the Group secured by Bank shares and the amount equivalent to loans granted by Group companies to third parties for the acquisition of treasury shares.

iii. Revaluation reserve Royal Decree Law 7/1996, of June 7

The balance of Revaluation reserve Royal Decree-Law 7/1996 can be used, free of tax, to increase share capital. From January 1, 2007, the balance of this account can be taken to unrestricted reserves, provided that the monetary surplus has been realized. The surplus will be deemed to have been realized in respect of the portion on which depreciation has been taken for accounting purposes or when the revalued assets have been transferred or derecognized.

If the balance of this reserve were used in a manner other than that provided for in Royal Decree-Law 7/1996, of June 7, it would be subject to taxation.

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iv. Reserves of subsidiaries and jointly controlled entities

The detail, by company, of Reserves of subsidiaries and jointly controlled entities, based on the companies’ contribution to the Group (considering the effect of consolidation adjustments) is as follows:

	Millions of euros
	2013		2012		2011
Banco Santander (Brasil), S.A. (Consolidated Group)		6,478		5,237		4,395
Santander UK Group		5,428		4,764		4,189
Banesto (*)		—		4,327		4,341
Banco Santander – Chile		2,736		3,072		2,691
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander		2,573		2,104		2,399
Banco Santander Totta, S.A. (Consolidated Group)		1,890		1,860		1,985
Santander Consumer Finance Group		1,189		1,351		794
Santander Holdings USA		1,084		624		122
Santander Seguros y Reaseguros, Compañía Aseguradora, S.A.		515		387		432
Banco Banif, S.A. (*)		—		349		307
Banco Santander Río, S.A.		395		61		(77	)
Banco Santander International		348		288		245
Cartera Mobiliaria, S.A., SICAV		339		329		334
Banco Santander (Suisse) SA		242		333		84
Santander Investment, S.A.		222		219		247
Bank Zachodni WBK, S.A.		175		62		—
Exchange differences, consolidation adjustments and other companies (**)		359		220		348
		23,973		25,587		22,836
Of which: restricted		2,062		2,241		1,815

^(*)  The reserves of these entities are recognized at December 31, 2013 under Voluntary reserves and Consolidation reserves attributable to the Bank as a result of the merger by absorption of the two entities into the Bank (see Note 3).

^(**)  Includes the charge relating to cumulative exchange differences in the transition to International Financial Reporting Standards.

34. Other equity instruments and Treasury shares

a) Other equity instruments

Other equity instruments includes the equity component of compound financial instruments, the increase in equity due to personnel remuneration, and other items not recognized in other Shareholders’ equity items.

At December 31, 2011, Other equity instruments related mainly to “Valores Santander”, which are described below:

“Valores Santander”

In 2007, in order to partially finance the takeover bid launched on ABN AMRO, Santander Emisora 150, S.A. Sole-Shareholder Company issued securities mandatorily convertible into newly-issued ordinary shares of the Bank (“Valores Santander”) amounting to EUR 7,000 million. It was possible to exchange these securities voluntarily for Bank shares on October 4, 2011, 2010, 2009 and 2008 and they were mandatorily exchanged on October 4, 2012.

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The reference price of the Bank’s share for conversion purposes was set at EUR 16.04 per share, and the conversion ratio of the debt securities -i.e. the number of Bank shares corresponding to each “Valor Santander” for conversion purposes- is 311.76 shares for each “Valor Santander”. The nominal interest rate on these securities was 7.30% until October 4, 2008 and Euribor plus 2.75% thereafter until the securities are exchanged for shares.

Subsequent to issue, Banco Santander, S.A. resolved on several occasions, in accordance with the prospectus, to change the conversion ratio of these securities. The latest revision was carried out in view of the bonus share issue which took place on July 30, 2012, through which the “Santander Dividendo Elección” scrip dividend scheme was instrumented, and the new reference price of the shares of Banco Santander, S.A. for conversion purposes was set at EUR 12.96 per share. Consequently, the new conversion ratio applicable to the “Valores Santander” was 385,802 shares of Banco Santander, S.A. for each “Valor Santander”, the result of dividing the face value of each “Valor Santander” (EUR 5,000) by the aforementioned reference price (EUR 12.96).

The shareholders at the annual general meeting on March 30, 2012 resolved to grant holders of “Valores Santander” the option to request the voluntary conversion of their shares on four occasions prior to October 4, 2012, the date of their mandatory conversion. Specifically, holders of “Valores Santander” who so desired could request the conversion thereof in the 15 calendar days prior to June 4, July 4, August 4 and September 4, 2012. As a result of this option and of the mandatory conversion, on June 7, 2012 195,923 “Valores Santander” were voluntarily converted into Bank shares (July 5, 2012: 511,769 shares; August 7, 2012: 98,092 shares; September 6, 2012: 37,160 shares; October 9, 2012: 519,300 shares). This conversion caused a reduction of EUR 6,811 million in Other equity instruments and increases of EUR 260 million and EUR 6,551 million in Issued capital and Share premium, respectively.

In 2012 interest of EUR 226 million (2011: EUR 268 million) was paid on the “Valores Santander” with a charge to reserves. This interest was recognized under Other increases/(decreases) in equity in the consolidated statement of changes in total equity.

Agreement with Qatar Holding

In October 2010 several investors from the Emirate of Qatar subscribed and paid an issue launched by Banco Santander, S.A. of bonds mandatorily exchangeable for shares of Banco Santander (Brasil), S.A. The issue amounted to USD 2,819 million, of which Qatar Holding subscribed USD 2,719 million. The bonds were set to mature on October 29, 2013, at which time they would be automatically exchanged for shares of Banco Santander (Brasil), S.A. equivalent to 5% of its share capital at the issue date. The exchange price was BRL 23.75 per share (domestic unit) and the bonds pay a coupon in US dollars of 6.75% per annum.

At the issue date, the Group recognized EUR 366 million, relating to the present value of the interest payable, under Financial liabilities at amortized cost - Marketable debt securities and the remaining amount (EUR 1,668 million) in equity under Other equity instruments - Equity component of compound financial instruments.

In January and March 2012 the Group transferred shares representing 4.41% and 0.77% of Banco Santander (Brasil) S.A. to two leading international financial institutions that undertook to deliver these shares to the holders of the bonds convertible into shares of Banco Santander (Brasil) S.A. issued by Banco Santander, S.A. in October 2010 upon the maturity of the bonds and under the terms laid down therein. As a result of these transactions, the balances of Other equity instruments and Valuation adjustments were reduced by EUR 1,668 million and EUR 26 million, respectively, and the balances of Reserves and Non-controlling interests increased by EUR 162 million and EUR 1,532 million, respectively, and, accordingly, there was no impact on Equity.

The delivery of the aforementioned shares took place on November 7, 2013.

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b) Treasury shares

Shareholders’ equity - Treasury shares includes the amount of own equity instruments held by all the Group entities.

Transactions involving own equity instruments, including their issuance and cancellation, are recognized directly in equity, and no profit or loss may be recognized on these transactions. The costs of any transaction involving own equity instruments are deducted directly from equity, net of any related tax effect.

On October 21, 2013, the Bank’s board of directors amended the regulation of its treasury share policy in order to take into account the criteria recommended by the CNMV, establishing limits on average daily purchase trading and time limits. Also, a maximum price per share was set for purchase orders and a minimum price per share for sale orders.

The Bank’s shares owned by the consolidated companies accounted for 0.013% of issued share capital at December 31, 2013 (December 31, 2012 and 2011: 0.474%).

The average purchase price of the Bank’s shares in 2013 was EUR 5.74 per share and the average selling price was EUR 5.75 per share.

The effect on equity, net of tax, arising from the purchase and sale of Bank shares was a EUR 28 million reduction in 2013 (2012: EUR 85 million increase; 2011: EUR 31 million reduction).

35. Memorandum items

Memorandum items relates to balances representing rights, obligations and other legal situations that in the future may have an impact on net assets, as well as any other balances needed to reflect all transactions performed by the consolidated entities although they may not impinge on their net assets.

a) Contingent liabilities

Contingent liabilities includes all transactions under which an entity guarantees the obligations of a third party and which result from financial guarantees granted by the entity or from other types of contract. The detail is as follows:

	Millions of euros
	2013		2012		2011
Financial guarantees		13,479		14,437		15,417
Financial bank guarantees		12,186		13,706		14,697
Doubtful guarantees		1,293		731		720
Irrevocable documentary credits		2,430		2,866		2,978
Other bank guarantees and indemnities provided		24,690		27,285		29,093
Other guarantees		24,496		27,089		28,937
Undertakings to provide bank guarantees		194		196		156
Other contingent liabilities		450		445		554
Assets earmarked for third-party obligations		128		108		108
Other contingent liabilities		322		337		446
		41,049		45,033		48,042

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A significant portion of these guarantees will expire without any payment obligation materializing for the consolidated entities and, therefore, the aggregate balance of these commitments cannot be considered as an actual future need for financing or liquidity to be provided by the Group to third parties.

Income from guarantee instruments is recognized under Fee and commission income in the consolidated income statements and is calculated by applying the rate established in the related contract to the nominal amount of the guarantee.

At December 31, 2013, the Group had recognized provisions of EUR 693 million to cover contingent liabilities (December 31, 2012: EUR 617 million; December 31, 2011: EUR 659 million) (see Note 25).

i. Financial guarantees

Financial guarantees includes, inter alia, financial guarantee contracts such as financial bank guarantees, credit derivatives sold, and risks arising from derivatives arranged for the account of third parties.

ii. Other bank guarantees and indemnities provided

This item includes guarantees other than those classified as financial, such as technical guarantees, guarantees covering the import and export of goods and services, irrevocable formal undertakings to provide bank guarantees, legally enforceable letters of guarantee and other guarantees of any kind.

iii. Other contingent liabilities

Other contingent liabilities includes the amount of any contingent liability not included in other items.

b) Contingent commitments

Contingent commitments includes those irrevocable commitments that could give rise to the recognition of financial assets.

The detail is as follows:

	Millions of euros
	2013		2012		2011
Drawable by third parties		154,314		187,664		181,559
Financial asset forward purchase commitments		82		891		307
Regular way financial asset purchase contracts		8,222		15,040		2,324
Securities subscribed but not paid		12		15		20
Securities placement and underwriting commitments		6		5		5
Documents delivered to clearing houses		9,901		12,132		10,925
Other contingent commitments		260		295		242
		172,797		216,042		195,382

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c) Off-balance-sheet funds under management

The detail of off-balance-sheet funds managed by the Group and by jointly controlled companies is as follows:

	Millions of euros
	2013		2012		2011
Investment funds		93,304		89,176		102,611
Pension funds		10,879		10,076		9,645
Assets under management		20,987		18,889		19,200
		125,170		118,141		131,456

d) Third-party securities held in custody

At December 31, 2013, the Group held in custody debt securities and equity instruments totaling EUR 853,509 million (December 31, 2012: EUR 725,609 million; December 31, 2011: EUR 768,917 million) entrusted to it by third parties.

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36. Derivatives - Notional amounts and market values of trading and hedging derivatives

The detail of the notional and/or contractual amounts and the market values of the trading and hedging derivatives held by the Group is as follows:

	Millions of euros
	2013					2012					2011
	Notional amount		Market value			Notional amount		Market value			Notional amount		Market value
Trading derivatives:
Interest rate risk-
Forward rate agreements		120,773		(2	)		324,031		(7	)		205,780		(13	)
Interest rate swaps		2,454,752		1,190			2,114,198		2,942			2,344,783		366
Options, futures and other derivatives		605,532		(1,157	)		655,091		(487	)		782,874		(171	)
Credit risk-
Credit default swaps		79,822		49			90,119		18			107,026		(60	)
Foreign currency risk-
Foreign currency purchases and sales		186,207		1,935			187,976		278			232,619		(122	)
Foreign currency options		45,196		200			49,442		(18	)		50,376		32
Currency swaps		255,731		(1,001	)		277,392		(436	)		226,042		(157	)
Securities and commodities derivatives and other		95,634		(1,202	)		149,737		(1,714	)		187,497		(460	)
		3,843,647		12			3,847,986		576			4,136,997		(585	)
Hedging derivatives:
Interest rate risk-
Interest rate swaps		219,103		1,456			195,416		2,154			179,010		2,546
Options, futures and other derivatives		2,144		12			8,006		19			2,169		34
Credit risk-
Credit default swaps		760		(14	)		833		(7	)		1,405		50
Foreign currency risk-
Foreign currency purchases and sales		24,161		630			24,758		(278	)		3,351		(8	)
Foreign currency options		3,883		409			24,740		(34	)		37,724		(9	)
Currency swaps		38,760		525			38,895		(399	)		21,931		981
Securities and commodities derivatives and other		258		—			278		37			443		(140	)
		289,069		3,018			292,926		1,492			246,033		3,454

The notional and/or contractual amounts of the contracts entered into do not reflect the actual risk assumed by the Group, since the net position in these financial instruments is the result of offsetting and/or combining them. This net position is used by the Group basically to hedge the interest rate, underlying asset price or foreign currency risk; the results on these financial instruments are recognized under Gains/losses on financial assets and liabilities (net) in the consolidated income statements and increase or offset, as appropriate, the gains or losses on the investments hedged (see Note 11).

Additionally, in order to interpret correctly the results on the Securities and commodities derivatives shown in the foregoing table, it should be considered that these items relate mostly to securities options for which a premium has been received which offsets their negative market value. Also, this market value is offset by positive market values generated by symmetrical positions in the Group’s held-for-trading portfolio.

The Group manages the credit risk exposure of these contracts through netting arrangements with its main counterparties and by receiving assets as collateral for its risk positions (see Note 2.f).

F-182

The notional amounts and fair values of the hedging derivatives, by type of hedge, is as follows:

	Millions of euros
	2013				2012					2011
	Notional amount		Fair value		Notional amount		Fair value			Notional amount		Fair value
Fair value hedges		229,439		1,257		195,486		1,975			158,096		3,924
Cash flow hedges		55,417		743		56,311		(209	)		57,034		(461	)
Hedges of net investments in foreign operations		4,213		1,018		41,129		(274	)		30,903		(9	)
		289,069		3,018		292,926		1,492			246,033		3,454

Following is a description of the main hedges (including the results of the hedging instrument and the hedged item attributable to the hedged risk):

Hedge accounting

The Group, as part of its financial risk management strategy and for the purpose of reducing mismatches in the accounting treatment of its transactions, enters into interest rate, foreign currency or equity hedging derivatives, depending on the nature of the hedged risk.

In line with its objective, the Group classifies its hedges into the following categories:

• Cash flow hedges: hedge the exposure to variability in cash flows associated with an asset, liability or highly probable forecast transaction. Thus, floating rate issues in foreign currencies, fixed rate issues in non-local currency, floating rate interbank financing and floating rate assets (bonds, commercial credit, mortgages, etc.) are hedged.

• Fair value hedges: hedge the exposure to changes in the fair value of assets or liabilities attributable to an identified, hedged risk. Thus, the interest rate risk of assets and liabilities (bonds, loans, bills, issues, deposits, etc.) with coupons or fixed interest rates, investments in entities, issues in foreign currencies and deposits and other fixed rate liabilities are hedged.

• Hedges of net investments in foreign operations: hedge the foreign currency risk of investments in subsidiaries domiciled in countries outside the euro zone.

i. Cash flow hedges

The fair value of the cash flow hedges, net of the related tax effect, is recognized under Valuation adjustments - Cash flow hedges in the Group’s equity. The detail of the terms, from December 31, 2013, within which the amounts recognized under Valuation adjustments - Cash flow hedges in equity will be recognized in the consolidated income statements in the coming years is as follows:

	Millions of euros
2013	Within 1 year			1 to 5 Years			More than 5 Years			Total
Debit balances (losses)		(116	)		(54	)		(63	)		(233	)

F-183

The net amount recognized as an equity valuation adjustment in 2013, as a result of the cash flow hedges, was a reduction of EUR 14 million.

The net amount transferred from equity to 2013 profit was EUR 416 million, relating to the accrual to the net interest margin of the cash flow hedges.

The impact on 2013 profit and loss of the ineffectiveness of the Group’s cash flow hedges was a net gain of EUR 2 million (see Note 44).

ii. Fair value hedges

In 2013 a net loss of EUR 117 million was recognized (gains of EUR 1,205 million on hedged items and losses of EUR 1,322 million on hedging derivatives) on cash flow hedging transactions (see Note 44). The main transactions were performed by the Bank, the details being as follows:

The financial management area of the Bank, as Parent of the Group, uses derivatives to hedge the interest rate risk and foreign currency risk of the issues of instrumental companies of the Group guaranteed by the Bank. At December 31, 2013, it held hedging derivatives for a notional amount equivalent to EUR 42,101 million, the market value of which represented a gain of EUR 1,745 million which is offset in profit and loss on measurement of the hedged issues. The net result of this hedge is a net loss of EUR 82.3 million.

The main currencies of these fair value hedges are: the euro, with a notional amount of EUR 38,273 million and gains on derivatives of EUR 1,785 million, the US dollar, with a notional amount of EUR 1,692 million and gains on derivatives of EUR 91 million, and sterling, with a notional amount of EUR 1,526 million and a loss on derivatives of EUR 122 million.

Also, the Bank uses derivatives to hedge the interest rate risk of government and corporate bonds recognized as available-for-sale assets for accounting purposes. At December 31, 2013, the notional amount of these derivatives was EUR 3,935 million and their market value gave rise to a loss of EUR 621 million, which was offset by the result of measuring the bonds at their hedged risk, giving rise to a net overall gain on these hedges of EUR 1.8 million.

Lastly, the Bank has two fair value macro-hedges from its merger with Banesto in 2013. At year-end, the notional amount of the related derivatives was EUR 6,096 million and their market value gave rise to a loss of EUR 23.5 million. Including the measurement of the hedged items, the net result of the macro-hedges was a gain of EUR 5.2 million.

iii. Foreign currency hedges (net investments in foreign operations)

As part of its financial strategy, the Group hedges the foreign currency risk arising from its investments in non-euro-zone countries. To this end, it arranges foreign currency derivatives in order to take a long position in euros vis-à-vis the local currency of the investment.

At December 31, 2013, the total notional amount of the hedges of these investments was the equivalent of EUR 19,507 million, of which EUR 12,928 million related to foreign currency swaps, EUR 1,942 million to foreign currency options and EUR 4,638 million to spot foreign currency sales.

By currency,

• Hedges of the Brazilian real included hedging foreign currency options and swaps amounting to EUR 8,846 million. In 2013 losses amounting to EUR 214 million arising from options that had already expired were taken to reserves. At December 31, 2013, the value of outstanding options represented a net gain of EUR 399 million. Also, the hedging of the Brazilian real includes foreign currency swaps amounting to EUR 6,905 million, with a gain of EUR 720 million.

F-184

• The hedging of the Mexican peso includes foreign currency swaps with a notional amount of EUR 3,185 million and a loss of EUR 2 million.

• The hedging of the Polish zloty includes foreign currency swaps with a notional amount of EUR 1,651 million and a loss of EUR 40 million, as well as a gain of EUR 6 million on options that had already expired.

• Lastly, the hedging of the Chilean peso includes outstanding foreign currency swaps with a notional amount of EUR 1,187 million and a gain of EUR 139 million.

In addition to these hedges with derivatives, spot foreign currency sales were made to offset the structural foreign currency risk: spot sales were made of US dollars against euros, which amounted to EUR 1,293 million and gave rise to a gain of EUR 68 million, and of pounds sterling against euros, which totaled EUR 3,345 million and gave rise to a gain of EUR 214 million.

At 2012 year-end, the Group held foreign currency options in this connection with an equivalent euro notional amount of EUR 12,370 million, of which EUR 10,468 million were denominated in Brazilian reals and EUR 1,902 million in Polish zloty. In 2012 losses amounting to EUR 571 million, which arose from the settlement of options that were exercised, were taken to equity. At 2012 year-end, the market value of the options not yet exercised represented an unrealized net loss of EUR 33 million. In addition to foreign currency options, the Group had also arranged other hedging derivatives to round off its hedging of the structural foreign currency risk of its foreign currency investments: Chilean pesos for a notional amount of EUR 2,327 million, which gave rise to a loss of EUR 360 million; Brazilian reals for a notional amount of EUR 2,722 million, with a loss of EUR 377 million; and Mexican pesos for a total notional amount of EUR 4,172 million, with a loss of EUR 266 million.

Lastly, in addition to these hedges involving derivatives, foreign currency spot sales were made to offset structural foreign currency risk. By currency, spot sales were made of US dollars against euros, which amounted to EUR 1,805 million and gave rise to a gain of EUR 38 million, and of pounds sterling against euros, which totaled EUR 6,377 million and gave rise to a loss of EUR 170 million.

At 2011 year-end, the Group held foreign currency options in this connection with an equivalent euro nominal value of EUR 16,688 million, of which EUR 14,456 million were denominated in Brazilian reals, EUR 942 million in Mexican pesos and EUR 1,290 million in Polish zloty. In 2011 losses amounting to EUR 83 million arising from the settlement of options that were exercised in the year were taken to equity. At 2011 year-end, the market value of the options not yet exercised represented an unrealized loss of EUR 71 million. In addition to these foreign currency options, the Group had also arranged other hedging derivatives to round off its strategy for hedging the structural foreign currency risk of its investments in the following currencies: Chilean pesos for a total notional amount of EUR 3,515 million, which gave rise to a gain of EUR 95 million; pounds sterling for a notional amount of EUR 5,604 million, which gave rise to a loss of EUR 168 million in 2011; and Mexican pesos for a total notional amount in currency swaps of EUR 2,880 million, with a gain of EUR 86 million.

Lastly, in addition to these hedges involving derivatives, in 2011 the structural currency risk of the underlying carrying amount in US dollars was neutralized by hedging it directly through the spot sale of US dollars against euros, for a total amount of EUR 2,216 million, which gave rise to a loss of EUR 195 million in 2011.

In line with the purpose of hedging the underlying carrying amount of currency holdings, the overall gains or losses obtained from the aforementioned hedges are offset from an equity position by valuation adjustments in euros of the Group’s investments in its investees.

For their part, the hedges of net investments in foreign operations did not generate gains or losses for ineffectiveness in 2013.

F-185

37. Discontinued operations

No significant operations were discontinued in 2013, 2012 or 2011.

a) Profit or loss and net cash flows from discontinued operations

The detail of the profit or loss from discontinued operations is set forth below.

The balance sheets and income statements for 2011 and 2012 were restated in order to present Santander UK’s cards business that was acquired from GE (General Electric) in prior years as a discontinued operation (see Note 1.e):

	Millions of euros
	2013			2012			2011
Interest income/(charges)		84			232			242
Net fee and commission income		22			48			65
Gains/losses on financial assets and liabilities		—			—			—
Other operating income/(expenses)		—			(2	)		(3	)
Total income		106			278			304
Personnel expenses		(7	)		(19	)		(26	)
Other general administrative expenses		(23	)		(114	)		(123	)
Depreciation and amortization		(2	)		(6	)		(13	)
Provisions (net)		(6	)		(6	)		(11	)
Impairment losses on financial assets		(6	)		(36	)		(97	)
Gains (losses) on disposal of assets not classified as non-current assets held for sale		(80	)		2			(2	)
Profit (loss) before tax		(18	)		99			32
Income tax		3			(29	)		(17	)
Profit (loss) from discontinued operations		(15	)		70			15

Additionally, following is a detail of the net cash flows attributable to the operating, investing and financing activities of discontinued operations.

	Millions of euros
	2013			2012			2011
Cash and cash equivalents at beginning of year		—			—			—
Cash flows from operating activities		2			(3	)		13
Cash flows from investing activities		(2	)		3			(13	)
Cash flows from financing activities		—			—			—
Cash and cash equivalents at end of year		—			—			—

F-186

b) Earnings per share relating to discontinued operations

The earnings per share relating to discontinued operations were as follows:

	2013			2012		2011
Basic earnings per share (euros)		(0.00	)		0.01		0.00
Diluted earnings per share (euros)		(0.00	)		0.01		0.00

38. Interest and similar income

Interest and similar income in the consolidated income statement comprises the interest accruing in the year on all financial assets with an implicit or explicit return, calculated by applying the effective interest method, irrespective of measurement at fair value; and the rectifications of income as a result of hedge accounting. Interest is recognized gross, without deducting any tax withheld at source.

The detail of the main interest and similar income items earned in 2012, 2011 and 2010 is as follows:

	Millions of euros
	2013		2012		2011
Balances with the Bank of Spain and other central banks		2,701		2,693		3,192
Loans and advances to credit institutions		766		1,034		1,061
Debt instruments		6,435		7,093		7,406
Loans and advances to customers		40,206		46,127		46,670
Insurance contracts linked to pensions (Note 25)		11		45		86
Other interest		1,328		1,799		2,203
		51,447		58,791		60,618

Most of the interest and similar income was generated by the Group’s financial assets that are measured either at amortized cost or at fair value through equity.

39. Interest expense and similar charges

Interest expense and similar charges in the consolidated income statement includes the interest accruing in the year on all financial liabilities with an implicit or explicit return, including remuneration in kind, calculated by applying the effective interest method, irrespective of measurement at fair value; the rectifications of cost as a result of hedge accounting; and the interest cost attributable to provisions recorded for pensions.

F-187

The detail of the main items of interest expense and similar charges accrued in 2012, 2011 and 2010 is as follows:

	Millions of euros
	2013		2012		2011
Balances with the Bank of Spain and other central banks		118		522		448
Deposits from credit institutions		1,852		1,959		2,417
Customer deposits		14,805		16,403		16,818
Marketable debt securities		6,880		7,277		6,430
Subordinated liabilities (Note 23)		1,260		1,650		1,940
Provisions for pensions (Note 25)		363		398		357
Other interest		234		659		1,614
		25,512		28,868		30,024

Most of the interest expense and similar charges was generated by the Group’s financial liabilities that are measured at amortized cost.

40. Income from equity instruments

Income from equity instruments includes the dividends and payments on equity instruments out of profits generated by investees after the acquisition of the equity interest.

The detail of Income from equity instruments is as follows:

	Millions of euros
	2013		2012		2011
Equity instruments classified as:
Financial assets held for trading		264		290		268
Available-for-sale financial assets		114		133		126
		378		423		394

41. Income from companies accounted for using the equity method

Income from companies accounted for using the equity method comprises the amount of profit or loss attributable to the Group generated during the year by associates and jointly controlled entities.

The detail of Income from companies accounted for using the equity method is as follows:

	Millions of euros
	2013			2012			2011
Santander Consumer USA Inc.		322			349			—
Zurich Santander Insurance América, S.L.		138			134			59
Metrovacesa, S.A.		(40	)		(100	)		—
Other companies		80			44			(2	)
		500			427			57

F-188

42. Fee and commission income

Fee and commission income comprises the amount of all fees and commissions accruing in favor of the Group in the year, except those that form an integral part of the effective interest rate on financial instruments.

The detail of Fee and commission income is as follows:

	Millions of euros
	2013		2012		2011
Collection and payment services:
Bills		333		336		317
Demand accounts		1,163		1,209		1,028
Cards		2,890		2,746		2,291
Cheques and other		165		226		290
Orders		347		347		432
		4,898		4,864		4,358
Marketing of non-banking financial products:
Investment funds		1,040		1,074		1,195
Pension funds		163		143		145
Insurance		2,399		2,451		2,462
		3,602		3,668		3,802
Securities services:
Securities underwriting and placement		208		204		204
Securities trading		316		323		337
Administration and custody		212		214		217
Asset management		107		103		77
		843		844		835
Other:
Foreign exchange		243		229		252
Financial guarantees		476		484		501
Commitment fees		329		282		233
Other fees and commissions		2,082		2,361		2,659
		3,130		3,356		3,645
		12,473		12,732		12,640

43. Fee and commission expense

Fee and commission expense shows the amount of all fees and commissions paid or payable by the Group in the year, except those that form an integral part of the effective interest rate on financial instruments.

F-189

The detail of Fee and commission expense is as follows:

	Millions of euros
	2013		2012		2011
Fees and commissions assigned to third parties		1,718		1,616		1,404
Of which: Cards		1,279		1,203		990
Brokerage fees on lending and deposit transactions		37		36		44
Other fees and commissions		957		819		784
		2,712		2,471		2,232

44. Gains/losses on financial assets and liabilities

Gains/losses on financial assets and liabilities includes the amount of the valuation adjustments of financial instruments, except those attributable to interest accrued as a result of application of the effective interest method and to allowances, and the gains or losses obtained from the sale and purchase thereof.

a) Breakdown

The detail, by origin, of Gains/losses on financial assets and liabilities is as follows:

	Millions of euros
	2013			2012			2011
Financial assets and liabilities held for trading (*)		1,733			1,460			2,113
Other financial instruments at fair value through profit or loss (*)		(6	)		159			21
Financial instruments not measured at fair value through profit or loss		1,622			1,789			803
Of which: Available-for-sale financial assets		1,490			915			627
Of which:
Debt instruments		1,345			576			328
Equity instruments		145			339			299
Of which: Other		132			874			176
Of which:
Due to exchange and repurchase of securities		—			870			144
Hedging derivatives (Note 36)		(115	)		(79	)		(99	)
		3,234			3,329			2,838

⁽*⁾  Includes the net gain or loss arising from transactions involving debt securities, equity instruments and derivatives included in this portfolio, since the Group manages its risk in these instruments on a global basis.

Due to exchange and repurchase of securities

On November 15, 2011, Banco Santander, S.A. offered the holders of subordinated bonds issued by Santander Issuances, S.A. (Sole-Shareholder Company) with a combined outstanding nominal amount of approximately EUR 5,499 million and GBP 1,143 million the possibility of exchanging these securities for newly-issued, non-subordinated fixed-income securities of the Group denominated in pounds sterling and euros. Holders of securities with a cumulative nominal amount of EUR 1,256 million and GBP 217 million subscribed to this exchange. Since the characteristics of the securities received and delivered in the exchange differ substantially, the Group wrote down the original financial liability and recognized a new financial liability for the securities delivered, and credited to income an amount of EUR 144 million (EUR 100 million net of the related tax effect) relating to the difference between the carrying amount of the financial liability written down and the fair value of the consideration delivered.

F-190

In 2012 the Group performed several securities exchange and repurchase transactions for which EUR 870 million were credited to income in that year. In July the Group offered the holders of certain securities issued by Santander UK plc the possibility of exchanging these securities for newly-issued Santander UK plc securities; in August Banco Santander, S.A. and Santander Financial Exchanges Limited invited the holders of securities of various issues of Santander Finance Preferred, S.A. (Sole-Shareholder Company), Santander Perpetual, S.A. (Sole-Shareholder Company) and Santander Issuances, S.A. (Sole-Shareholder Company) to submit offers for the sale of their securities, to be purchased in cash; in February Banco Español de Crédito, S.A. offered the holders of preference shares of various issues the possibility of exchanging these securities for securities of a new non-convertible bond issue and in September it offered the holders of securities of various issues to submit an offer for the sale of their securities, to be purchased in cash.

b) Financial assets and liabilities at fair value through profit or loss

The detail of the amount of the asset balances is as follows:

	Millions of euros
	2013		2012		2011
Loans and advances to credit institutions		18,947		20,115		9,337
Loans and advances to customers		18,275		23,098		19,804
Debt instruments		44,716		46,561		55,353
Equity instruments		5,833		6,180		5,209
Derivatives		58,899		110,319		102,498
		146,670		206,273		192,201

The Group mitigates and reduces this exposure as follows:

• With respect to derivatives, the Group has entered into framework agreements with a large number of credit institutions and customers for the netting-off of asset positions and the provision of collateral for non-payment.

At December 31, 2013, the actual credit risk exposure of the derivatives was EUR 49,994 million.

• Loans and advances to credit institutions and Loans and advances to customers included reverse repos amounting to EUR 31,335 million at December 31, 2013.

Also, mortgage-backed assets totaled EUR 2,491 million.

• Debt instruments include EUR 36,047 million of Spanish and foreign government securities.

At December 31, 2013, the amount of the change in the year in the fair value of financial assets at fair value through profit or loss attributable to variations in their credit risk (spread) was not material.

F-191

The detail of the amount of the liability balances is as follows:

	Millions of euros
	2013			2012			2011
Deposits from central banks		(5,963	)		(2,142	)		(9,250	)
Deposits from credit institutions		(17,112	)		(19,154	)		(17,519	)
Customer deposits		(34,984	)		(37,535	)		(43,556	)
Marketable debt securities		(4,087	)		(4,905	)		(8,262	)
Short positions		(15,951	)		(15,181	)		(10,187	)
Derivatives		(58,887	)		(109,743	)		(103,083	)
		(136,984	)		(188,660	)		(191,857	)

45. Exchange differences

Exchange differences shows basically the gains or losses on currency dealings, the differences that arise on translations of monetary items in foreign currencies to the functional currency, and those disclosed on non-monetary assets in foreign currency at the time of their disposal.

46. Other operating income and Other operating expenses

Other operating income and Other operating expenses in the consolidated income statements include:

	Millions of euros
	2013			2012			2011
Insurance activity		117			593			392
Income from insurance and reinsurance contracts issued		4,724			5,541			6,748
Of which:
Insurance and reinsurance premium income		4,513			4,667			6,547
Reinsurance income (Note 15)		211			874			201
Expenses of insurance and reinsurance contracts		(4,607	)		(4,948	)		(6,356	)
Of which:
Claims paid and other insurance-related expenses		(4,497	)		(4,440	)		(4,852	)
Net provisions for insurance contract liabilities		382			(323	)		(1,202	)
Reinsurance premiums paid		(492	)		(185	)		(302	)
Non-financial services		93			137			151
Sales and income from the provision of non-financial services		322			369			400
Cost of sales		(229	)		(232	)		(249	)
Other operating income and expenses		(501	)		(620	)		(522	)
Other operating income		857			783			902
Of which, fees and commissions offsetting direct costs		115			130			119
Other operating expenses		(1,358	)		(1,403	)		(1,424	)
Of which, Deposit Guarantee Fund		(559	)		(530	)		(346	)
		(291	)		110			21

Most of the Bank’s insurance activity is carried on in life insurance.

F-192

47. Personnel expenses

a) Breakdown

The detail of Personnel expenses is as follows:

	Millions of euros
	2013		2012		2011
Wages and salaries		7,215		7,343		7,382
Social security costs		1,296		1,353		1,313
Additions to provisions for defined benefit pension plans (Note 25)		88		145		138
Contributions to defined contribution pension funds (Note 25)		223		155		137
Share-based remuneration costs		103		133		185
Of which, Bank directors (*)		1		4		4
Other personnel expenses		1,144		1,177		1,150
		10,069		10,306		10,305

(*) Relating to amounts associated with the performance share plans

b) Headcount

The average number of employees in the Group, by professional category, was as follows:

	Average number of employees (**)
	2013		2012		2011
The Bank (**):
Senior management (*)		133		96		100
Other line personnel		23,403		16,545		16,502
Clerical staff		3,421		2,845		3,048
General services personnel		28		29		30
		26,985		19,515		19,680
Banesto (**)		—		8,762		9,049
Rest of Spain		6,931		6,708		7,236
Santander UK plc		19,773		20,355		20,061
Banco Santander (Brasil), S.A.		51,462		53,543		53,431
Other companies (***)		81,222		79,752		77,596
		186,373		188,635		187,053

⁽*⁾  Categories of deputy assistant executive vice presidents and above, including senior management.

⁽**⁾  Banesto employees are included under Banco Santander, S.A. in 2013 following the merger (see Note 3.b.xiii).

⁽***⁾  Excluding personnel assigned to discontinued operations.

F-193

The functional breakdown, by gender, at December 31, 2013 is as follows:

	Functional breakdown by gender
	Senior executives				Other executives				Other personnel
	Men		Women		Men		Women		Men		Women
Continental Europe		1,339		269		5,824		2,711		23,035		28,770
United Kingdom		162		34		1,140		490		9,100		13,797
Latin America		660		117		5,387		3,109		36,213		50,801
		2,161		420		12,351		6,310		68,348		93,368

The same information, expressed in percentage terms at December 31, 2013, is as follows:

	Functional breakdown by gender
	Senior executives						Other executives						Other personnel
	Men			Women			Men			Women			Men			Women
Continental Europe		83	%		17	%		68	%		32	%		44	%		56	%
United Kingdom		83	%		17	%		70	%		30	%		40	%		60	%
Latin America		85	%		15	%		63	%		37	%		42	%		58	%
		84	%		16	%		66	%		34	%		42	%		58	%

The labor relations between employees and the various Group companies are governed by the related collective agreements or similar regulations.

c) Share-based payments

The main share-based payments granted by the Group in force at December 31, 2013, 2012 and 2011 are described below.

i. Bank

The variable remuneration policy for the Bank’s executive directors and certain executive personnel of the Bank and of other Group companies includes Bank share-based payments, the implementation of which requires, in conformity with the law and the Bank’s Bylaws, specific resolutions to be adopted by the general meeting.

Were it necessary or advisable for legal, regulatory or other similar reasons, the delivery mechanisms described below may be adapted in specific cases without altering the maximum number of shares linked to the plan or the essential conditions to which the delivery thereof is subject. These adaptations may involve replacing the delivery of shares with the delivery of cash amounts of an equal value.

F-194

The plans shaping the aforementioned incentive policy are as follows: (i) performance share plan; (ii) obligatory investment share plan; (iii) deferred conditional delivery share plan and (iv) deferred conditional variable remuneration plan. The characteristics of the plans are set forth below:

(i) Performance share plan

This deferred share-based variable remuneration was instrumented through a multiannual incentive plan payable in shares of the Bank. The beneficiaries of the plan are the executive directors and other members of senior management, together with any other Group executives determined by the board of directors or, when delegated by it, the executive committee, except for Plan PI14 (approved in 2011), of which the executive directors and senior executives who participate in the deferred conditional variable remuneration plan are not beneficiaries.

This plan involves successive three-year cycles of share deliveries to the beneficiaries. In June 2008, 2009, 2010 and 2011 the third, fourth, fifth and sixth and final cycles of the performance share plan (PI11, PI12, PI13 and Pl14, respectively) were approved. On July 31, 2011, 2012 and 2013 the third, fourth and fifth cycles (Pl11, P12 and PI13, respectively) were settled.

For each cycle a maximum number of shares is established for each beneficiary who remains in the Group’s employ for the duration of the plan. The target, which, if met, will determine the number of shares to be delivered, is defined by comparing the Total Shareholder Return (TSR) performance of the shares of Banco Santander, S.A. with the TSR of a benchmark group of financial institutions and, for Plan Pl11, also by comparing the growth in Earnings per Share (EPS) of the Group with the EPS of a benchmark group of entities.

The ultimate number of shares to be delivered in the aforementioned cycles was determined by the degree of achievement of the targets on the third anniversary of commencement of each cycle, and the shares would be delivered within a maximum period of seven months from the beginning of the year in which the corresponding cycle ended.

In the case of Plan PI14, the TSR criterion will be applied to determine the percentage of shares to be delivered, if any, before the end of July 2015, based on the following scale and in accordance with Santander’s relative position among the benchmark group of financial institutions:

Santander’s place in the TSR ranking	Percentage of maximum shares to be delivered
1st to 5th		100.0	%
6th		86.0	%
7th		72.0	%
8th		58.0	%
9th		44.0	%
10th		30.0	%
11th and below		0	%

Any benchmark group entity that is acquired by another company, whose shares cease trading or that ceases to exist, will be excluded from the benchmark group. In an event of this or any similar nature, the comparison with the benchmark group will be performed in such a way that the maximum percentage of shares will be received if Santander ranks within the first quartile (including the 25th percentile) of the benchmark group; no shares will be delivered if Santander ranks below the median (50th percentile); 30% of the maximum amount of shares will be delivered if Santander is placed at the median (50th percentile). The linear interpolation method will be used for calculating the corresponding percentage for positions between the median and the first quartile (25th percentile) (neither included).

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The fair value of the equity instruments granted under the plan in force at December 31, 2013 (Pl14) is EUR 64 million, and this amount is being charged to Personnel expenses, with a credit to equity, over the specific period in which the beneficiaries provide their services to the Group.

Plan PI13 expired in 2013, without any shares having been delivered to the plan beneficiaries, since the minimum target for shares to be delivered was not achieved.

Following is a summary of the changes in the cycles of this plan in the period from 2011 to 2013:

	No. of shares (thousands)			Year granted		Employee group		Number of persons			Date of commencement of exercise period		Date of expiry of exercise period
Plans outstanding at 01/01/11		55,602
Shares delivered (Plan PI11)		(13,472	)		2008		Executives		(5,379	)		06/21/08		07/31/11
Net rights cancelled (Plan PI11)		(3,650	)		2008		Executives		(392	)		06/21/08		07/31/11
Rights granted (Plan PI14)		16,286			2011		Executives		6,500			06/17/11		07/31/14
Plans outstanding at 12/31/11		54,766
Shares delivered (Plan PI12)		(5,056	)		2009		Executives		(5,749	)		06/17/09		07/31/12
Net rights cancelled (Plan PI12)		(13,811	)		2009		Executives		(761	)		06/19/09		07/31/12
Net rights cancelled (Plan PI14)		(1,810	)		2011		Executives		(199	)		06/17/11		07/31/14
Plans outstanding at 12/31/12		34,089
Net rights cancelled (Plan PI13)		(19,613	)		2010		Executives		(6,782	)		06/11/10		07/31/13
Plans outstanding at 12/31/13		14,476
Of which:
Plan PI14		14,476			2011		Executives		6,699			06/17/11		07/31/14

(ii) Obligatory investment share plan

This deferred share-based variable remuneration was instrumented through a multi-year incentive plan payable in shares of the Bank and conditional upon compliance with certain investment and continued Group service requirements. The beneficiaries of this plan were the executive directors, members of the Bank’s senior management and other Group executives determined by the board of directors.

This plan, which was discontinued in 2010, was structured in three-year cycles. The beneficiaries of the plan had to use 10% of their gross annual variable cash-based remuneration (or bonus) to acquire shares of the Bank in the market (the “Obligatory Investment”). In accordance with the terms and conditions of the corresponding cycles, the Obligatory Investments were made before February 29, 2008, February 28, 2009 and February 28, 2010, respectively.

Participants who held the shares acquired through the Obligatory Investment and remained in the Group’s employ for three years from the date on which the Obligatory Investment was made (until 2011, 2102 and 2013, respectively) were entitled to receive the same number of Bank shares as that composing their initial obligatory investment.

The shares would be delivered within a maximum period of one month from the third anniversary of the date on which the obligatory investment was made.

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In 2009 a requirement was introduced for the third cycle additional to that of remaining in the Group’s employ, which is that in the three-year period from the investment in the shares, none of the following circumstances should occur: (i) poor financial performance of the Group; (ii) breach by the beneficiary of the codes of conduct or other internal regulations, including, in particular, those relating to risks, where applicable to the executive in question; or (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards.

This plan was settled with the delivery of the shares of the third cycle in March 2013.

(iii) Deferred conditional delivery share plan

In 2011, 2012 and 2013 the Bank’s board of directors, at the proposal of the appointments and remuneration committee, approved the second, third and fourth cycles of the deferred conditional delivery share plan to instrument payment of the share-based bonus of the Group executives or employees whose variable remuneration or annual bonus for 2011, 2012 and 2013, respectively, exceeded, in general, EUR 0.3 million (gross), with a view to deferring a portion of the aforementioned variable remuneration or bonus over a period of three years in which it will be paid in Santander shares. Since these cycles entailed the delivery of Bank shares, the shareholders at the annual general meetings of June 17, 2011, March 30, 2012 and March 22, 2013 approved, respectively, the application of the second, third and fourth cycles of the deferred conditional delivery share plan. These cycles are not applicable to the executive directors or other members of senior management or other executives who are beneficiaries of the deferred conditional variable remuneration plan described below.

The share-based bonus is deferred over three years and will be paid, where appropriate, in three instalments starting in the first year. The amount in shares is calculated based on the tranches of the following scale established by the board of directors on the basis of the gross variable cash-based remuneration or annual bonus for the year:

Benchmark bonus (thousands of euros)	Percentage (deferred)
300 or less		0	%
300 to 600 (inclusive)		20	%
More than 600		30	%

The condition for accrual of the share-based deferred remuneration was, in addition to that of the beneficiary remaining in the Group’s employ, with the exceptions envisaged in the plan regulations, that none of the following circumstances should occur in the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in the Group’s economic capital or risk profile.

(iv) Deferred conditional variable remuneration plan

In 2011, 2012 and 2013 the Bank’s board of directors, at the proposal of the appointments and remuneration committee, approved the first, second and third cycles of the deferred conditional variable remuneration plan to instrument payment of the variable remuneration or bonus for 2011, 2012 and 2013, respectively, of the executive directors and certain executives (including senior management) and employees whose professional activities significantly impact the risk profile or who perform control functions or receive an overall remuneration which puts them on the same remuneration level as senior executives and employees whose professional activities significantly impact the risk profile (all of whom are referred to as identified staff, in accordance with the Guidelines on Remuneration Policies and Practices approved by the Committee of European Banking Supervisors on December 10, 2010). Since the aforementioned cycles entail the delivery of Bank shares, the shareholders at the annual general meetings of June 17, 2011, March 30, 2012 and March 22, 2013 approved, respectively, the application of the first, second and third cycles of the deferred conditional variable remuneration plan.

F-197

The purpose of these cycles is to defer a portion of the variable remuneration or bonus of the beneficiaries thereof over a period of three years for it to be paid, where appropriate, in cash and in Santander shares; the other portion of the variable remuneration is also to be paid in cash and Santander shares, upon commencement of the cycles, in accordance with the rules set forth below.

The variable remuneration will be paid in accordance with the following percentages, based on the timing of the payment and the group to which the beneficiary belongs (the “immediate payment percentage” identifies the portion of the bonus for which payment is not deferred, and the “deferred percentage” identifies the portion of the bonus for which payment is deferred):

	Immediate payment percentage (*)			Deferred percentage (*)
Executive directors		40	%		60	%
Division directors and other executives of the Group with a similar profile		50	%		50	%
Other executives subject to supervision		60	%		40	%

(*) Generally applicable percentages. In some countries deferred percentages may be higher for certain categories of executives, thereby giving rise to lower immediate payment percentages.

The payment of the deferred percentage of the bonus applicable in each case will be deferred over a period of three years and will be paid in three equal instalments, within 15 days following the anniversaries of the initial date (the date on which the immediate payment percentage is paid) in 2013, 2014 and 2015 for the first cycle and within 30 days following the anniversaries of the initial date in 2014, 2015 and 2016 for the second cycle, and in 2015, 2016 and 2017 for the third cycle, 50% being paid in cash and 50% in shares, provided that the conditions described below are met.

In addition to the requirement that the beneficiary remains in the Group’s employ, with the exceptions included in the plan regulations, the accrual of the deferred remuneration is conditional upon none of the following circumstances occurring -in the opinion of the board of directors following a proposal of the appointments and remuneration committee-, during the period prior to each of the deliveries: (i) poor financial performance of the Group; (ii) breach by the beneficiary of internal regulations, including, in particular, those relating to risks; (iii) material restatement of the Group’s financial statements, except when it is required pursuant to a change in accounting standards; or (iv) significant changes in the Group’s economic capital or risk profile.

On each delivery, the beneficiaries will be paid an amount in cash equal to the dividends paid on the deferred amount in shares and the interest on the amount accrued in cash. If the Santander Dividendo Elección scrip dividend scheme is applied, they will be paid the price offered by the Bank for the bonus share rights corresponding to those shares.

F-198

The maximum number of shares to be delivered is calculated taking into account the amount resulting from applying the applicable taxes and the volume-weighted average prices for the 15 trading sessions prior to the date on which the board of directors approves the bonus for the Bank’s executive directors for 2011, 2012 and 2013 for the first, second and third cycle, respectively.

ii. Santander UK plc

The long-term incentive plans on shares of the Bank granted by management of Santander UK plc to its employees are as follows:

	Number of shares (in thousands)			Exercise price in pounds sterling (*)		Year granted	Employee group	Number of persons			Date of commencement of exercise period	Date of expiry of exercise period
Plans outstanding at 01/01/11		8,939			7.09
Options granted (Sharesave)		7,725			4.46	2011	Employees		7,429	(**)	11/01/11	11/01/14
											11/01/11	11/01/16
Options exercised		(43	)		4.09
Options cancelled (net) or not exercised		(5,348	)		6.92
Plans outstanding at 12/31/11		11,273
Options granted (Sharesave)		10,012			3.66	2012	Employees		7,089	(**)	11/01/12	11/01/15
											11/01/12	11/01/17
Options exercised		(3	)		4.56
Options cancelled (net) or not exercised		(6,468	)		5.34
Plans outstanding at 12/31/12		14,814
Options granted (Sharesave)		4,340			3.69	2013	Employees		13,110	(**)	11/01/13	11/01/16
											11/01/13	11/01/18
Options exercised		(78	)		4.02
Options cancelled (net) or not exercised		(3,169	)		4.72
Plans outstanding at 12/31/13		15,907
Of which:
Executive Options		12			4.54	2004	Executives		2		03/26/06	03/24/13
Sharesave		15,895			3.98	2009-2013	Employees		14,189	(**)	04/01/09	05/01/18

(*) At December 31, 2013, 2012 and 2011, the euro/pound sterling exchange rate was EUR 1.19947/GBP 1; EUR 1.22534/GBP 1 and EUR 1.19717/GBP 1, respectively.

(**) Number of accounts/contracts. A single employee may have more than one account/contract.

In 2008 the Group launched a voluntary savings scheme for Santander UK employees (Sharesave Scheme) whereby employees who join the scheme will have between GBP 5 and GBP 250 deducted from their net monthly pay over a period of three or five years. When this period has ended, the employees may use the amount saved to exercise options on shares of the bank at an exercise price calculated by reducing by up to 20% the average purchase and sale prices of the bank shares in the three trading sessions prior to the approval of the scheme by the UK tax authorities (HMRC). This approval must be received within 21 to 41 days following the publication of the Group’s results for the first half of the year. This scheme was approved by the board of directors, at the proposal of the appointments and remuneration committee, and, since it involved the delivery of Bank shares, its application was authorized by the annual general meeting held on June 21, 2008. Also, the scheme was authorized by the UK tax authorities (HMRC) and commenced in September 2008. In 2009, 2010, 2011, 2012 and 2013, at the annual general meetings held on June 19, 2009, June 11, 2010, June 17, 2011, March 30, 2012 and March 22, 2013, respectively, the shareholders approved the application of schemes previously approved by the board and with similar features to the scheme approved in 2008.

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iii. Fair value

The fair value of each plan granted by the Group is calculated at the grant date. With the exception of the share option plans which include terms relating to market conditions, the transfer terms included in the vesting conditions are not taken into account to estimate fair value. The transfer terms that are not based on market conditions are taken into account by adjusting the number of shares or share options included in the measurement of the service cost of the employee so that, ultimately, the amount recognized in the consolidated income statement is based on the number of shares or share options transferred. When the transfer terms are related to market conditions, the charge for the services received is recognized regardless of whether the market conditions for the transfer are met, although the non-market transfer terms must be satisfied. The share price volatility is based on the implicit volatility scale for the Bank’s shares at the exercise prices and the duration corresponding to most of the sensitivities.

The fair value of the performance share plans was calculated as follows:

• It was assumed that the beneficiaries will not leave the Group’s employ during the term of each plan.

• The fair value of the Bank’s relative TSR position was calculated, on the grant date, based in part on third party appraisals whose assessment was carried out using a Monte Carlo valuation model to perform 10,000 simulations to determine the TSR of each of the companies in the benchmark group, taking into account the variables set forth below. The results (each of which represents the delivery of a number of shares) are classified in decreasing order by calculating the weighted average and discounting the amount at the risk-free interest rate.

	PI12			PI13			PI14
Expected volatility (*)		42.36	%		49.65	%		51.35	%
Annual dividend yield based on last few years		4.88	%		6.34	%		6.06	%
Risk-free interest rate (Treasury Bond yield (zero coupon) over the period of the plan)		2.04	%		3.33	%		4.073	%

(*) Calculated on the basis of historical volatility over the corresponding period (three years).

The application of the simulation model results in a percentage value of 55.42% for Plan I12, 62.62% for Plan I13 and 55.39% for Plan l14. Since this valuation refers to a market condition, it cannot be adjusted after the grant date.

The fair value of each option granted by Santander UK was estimated at the grant date using a European/American Partial Differential Equation model with the following assumptions:

	2013	2012	2011
Risk-free interest rate	1.2%-1.7%	0.73%-1.04%	1.41%-1.64%
Dividend increase	16%-19%	16%-17%	14%-16%
Volatility of underlying shares based on historical volatility over five years	32.15%-32.32%	38.62%-39.41%	41.03%-41.9%
Expected life of options granted	3 and 5 years	3 and 5 years	3 and 5 years

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48. Other general administrative expenses

a) Breakdown

The detail of Other general administrative expenses is as follows:

	Millions of euros
	2013		2012		2011
Property, fixtures and supplies		1,980		1,916		1,846
Technology and systems		992		889		828
Advertising		630		662		690
Communications		519		638		649
Technical reports		493		491		466
Taxes other than income tax		445		415		400
Surveillance and cash courier services		425		432		412
Per diems and travel expenses		284		297		312
Insurance premiums		59		61		65
Other administrative expenses		1,556		1,694		1,671
		7,383		7,495		7,339

b) Technical reports and other

Technical reports include the fees paid by the various Group companies (detailed in the accompanying Appendices) for the services provided by their respective auditors, the detail being as follows:

	Millions of euros
	2013		2012		2011
Audit fees		35.9		38.1		36.2
Audit-related fees		20.8		20.6		13.6
Tax fees		4.6		4.3		3.8
All other fees		6.5		8.1		5.7
Total		67.8		71.1		59.3

F-201

The detail of the main items included in Audit fees is as follows:

	Millions of euros
	2013		2012		2011
Audit of the financial statements of the companies audited by Deloitte		21.7		21.0		20.4
Of which:
Santander UK plc		5.0		4.4		3.9
Santander Holdings USA, Inc.		2.4		2.2		2.2
Banco Santander (Brasil), S.A.		1.7		1.8		1.6
Audit of the Bank’s separate and consolidated financial statements		2.1		2.0		2.0
Other audit engagements		14.2		17.1		15.8
Of which:
Internal control audit (SOX) and capital audit (Basel)		5.9		5.8		6.2
Audit of the Group’s half-yearly financial statements		6.0		5.8		5.5
Issue of comfort letters		2.3		2.5		2.1
Audit fees		35.9		38.1		36.2

The detail of the main items included in Audit-related fees is as follows:

	Millions of euros
	2013		2012		2011
Other recurring engagements and reports required by the various national supervisory bodies of the countries in which the Group operates		7.6		6.7		4.6
Non-recurring reviews required by regulators		1.1		2.1		0.2
Due diligence reviews		3.1		1.8		1.5
Issuance of other attest reports		3.7		2.8		1.8
Reviews of procedures, data and controls and other services		5.3		7.2		5.5
Total audit-related fees		20.8		20.6		13.6

Other information

The services provided by the Group’s auditors meet the independence requirements stipulated by the consolidated Audit Law (Legislative Royal Decree 1/2011, of July 31) and by the Sarbanes-Oxley Act of 2002, and they did not involve the performance of any work that is incompatible with the audit function.

Lastly, the Group commissioned services from audit firms other than Deloitte amounting to EUR 48.6 million (2012: EUR 38.7 million; 2011: EUR 37 million).

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49. Gains/(losses) on disposal of assets not classified as non-current assets held for sale

The detail of Gains/(losses) on disposal of assets not classified as non-current assets held for sale is as follows:

	Millions of euros
	2013			2012			2011
Gains:
On disposal of tangible assets (*)		74			219			128
On disposal of investments		2,167			775			1,795
Of which:
Management companies (Note 3)		1,372			—			—
Insurance companies in Spain (Note 3)		385			—			—
Payment services company (Note 3)		122			—			—
Santander Consumer USA Inc. (Note 3)		—			—			872
Latam insurance companies (Note 3)		—			—			908
Banco Santander Colombia (Note 3)		—			619			—
		2,241			994			1,923
Losses:
On disposal of tangible assets		(78	)		(87	)		(76	)
On disposal of investments		(11	)		(1	)		(1	)
		(89	)		(88	)		(77	)
		2,152			906			1,846

(*) Includes in 2012 the gains recognized on the sale of the Canalejas complex (Spain) (EUR 87 million), of certain branches and offices in Mexico (EUR 80 million) and of a property in New York (EUR 47 million).

50. Gains/(losses) of non-current assets held for sale not classified as discontinued operations

The detail of Gains/(losses) of non-current assets held for sale not classified as discontinued operations is as follows:

	Millions of euros
Net balance	2013			2012			2011
Non-current assets held for sale		(422	)		(757	)		(2,109	)
Impairment (Note 12)		(335	)		(449	)		(2,037	)
Loss on sale (Note 12)		(87	)		(308	)		(72	)
		(422	)		(757	)		(2,109	)

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51. Other disclosures

a) Residual maturity periods and average interest rates

The detail, by maturity, of the balances of certain items in the consolidated balance sheet is as follows:

	December 31, 2013
	Millions of euros																					Average interest rate
	On demand			Within 1 month			1 to 3 months			3 to 12 months			1 to 3 years			3 to 5 years		After 5 years		Total
Assets:
Cash and balances with central banks		70,303			4,565			1,410			706			—			—		119		77,103		2.53	%
Available-for-sale financial assets-
Debt instruments		200			3,034			2,194			5,100			13,243			16,965		39,108		79,844		4.60	%
Loans and receivables-
Loans and advances to credit institutions		13,794			25,619			3,710			2,120			3,360			2,415		4,999		56,017		2.36	%
Loans and advances to customers		13,475			45,117			28,939			70,130			88,822			67,727		336,371		650,581		5.69	%
Debt instruments		3			1,024			646			1,470			1,042			283		3,418		7,886		3.01	%
		97,775			79,359			36,899			79,526			106,467			87,390		384,015		871,431		5.07	%
Liabilities:
Financial liabilities at amortized cost:
Deposits from central banks		485			3,207			156			312			5,628			—		—		9,788		0.27	%
Deposits from credit institutions		2,756			27,665			5,578			14,436			13,106			7,837		5,156		76,534		2.18	%
Customer deposits		328,508			53,108			26,039			80,639			63,278			9,576		11,705		572,853		2.55	%
Marketable debt securities (*)		146			8,551			17,198			27,092			53,966			20,667		43,770		171,390		3.72	%
Subordinated liabilities		24			159			2			821			2,468			2,723		9,942		16,139		6.02	%
Other financial liabilities		5,524			7,476			1,613			312			486			115		884		16,410		n/a
		337,443			100,166			50,586			123,612			138,932			40,918		71,457		863,114		2.80	%
Difference (assets less liabilities)		(239,668	)		(20,807	)		(13,687	)		(44,086	)		(32,465	)		46,472		312,558		8,317

(*) Includes promissory notes, certificates of deposit and other short-term debt issues.

Both asset and liability balances with central banks increased in 2012 following the liquidity injections by the central banks in countries where the Group operates, particularly in the euro zone.

The Group continued to attend these auctions and deposit at the ECB most of the funds captured, which significantly increased the liquidity buffer and improved its structure by replacing short-term maturities with longer term funding. The Group repaid most of these amounts to the ECB in the first quarter of 2013. The Group’s net borrowing position from the ECB was EUR 6 thousand million at December 31, 2013, due mainly to Banco Santander Totta, S.A.

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	December 31, 2012
	Millions of euros																					Average interest rate
	On demand			Within 1 month			1 to 3 months			3 to 12 months			1 to 3 years			3 to 5 years		More than 5 years		Total
Assets:
Cash and balances with central banks		68,501			45,030			2,061			2,699			—			—		197		118,488		1.74	%
Available-for-sale financial assets-
Debt instruments		55			2,050			2,786			7,935			14,656			13,141		47,101		87,724		4.56	%
Loans and receivables-
Loans and advances to credit institutions		11,120			26,482			3,406			3,987			1,507			753		6,530		53,785		2.37	%
Loans and advances to customers		16,560			38,953			29,528			74,048			103,089			70,857		362,979		696,014		5.29	%
Debt instruments		3			945			277			527			1,541			421		3,345		7,059		2.90	%
		96,239			113,460			38,058			89,196			120,793			85,172		420,152		963,070		4.61	%
Liabilities:
Financial liabilities at amortized cost:
Deposits from central banks		948			4,678			1,173			1			44,138			—		—		50,938		0.77	%
Deposits from credit institutions		4,611			25,839			7,863			15,958			11,845			11,076		3,540		80,732		2.81	%
Customer deposits		306,051			79,513			34,738			88,012			60,827			13,992		5,971		589,104		1.90	%
Marketable debt securities (*)		707			13,616			13,924			44,466			54,158			27,291		46,902		201,064		3.76	%
Subordinated liabilities		203			230			280			1,226			1,377			5,169		9,753		18,238		5.45	%
Other financial liabilities		4,101			3,309			7,403			211			517			339		3,365		19,245		n.a.
		316,621			127,185			65,381			149,874			172,862			57,867		69,531		959,321		2.38	%
Difference (assets less liabilities)		(220,382	)		(13,725	)		(27,323	)		(60,678	)		(52,069	)		27,305		350,621		3,749

(*) Includes promissory notes, certificates of deposit and other short-term debt issues.

	December 31, 2011
	Millions of euros																						Average interest rate
	On demand			Within 1 month			1 to 3 months			3 to 12 months			1 to 3 years			3 to 5 years			More than 5 years		Total
Assets:
Cash and balances with central banks		68,634			21,921			2,772			3,130			66			—			1		96,524		5.59	%
Available-for-sale financial assets-
Debt instruments		84			3,650			2,288			9,131			14,734			11,446			40,256		81,589		5.25	%
Loans and receivables-
Loans and advances to credit institutions		12,963			16,476			1,385			2,652			1,547			1,841			5,525		42,389		4.22	%
Loans and advances to customers		24,467			39,832			32,459			79,274			102,134			67,195			383,376		728,737		6.74	%
Debt instruments		58			1,688			737			339			399			1,220			2,399		6,840		3.34	%
		106,206			83,567			39,641			94,526			118,880			81,702			431,557		956,079		6.36	%
Liabilities:
Financial liabilities at amortized cost:
Deposits from central banks		113			9,601			5			1			—			25,276			—		34,996		1.63	%
Deposits from credit institutions		2,276			27,970			10,756			14,897			10,983			14,331			160		81,373		5.69	%
Customer deposits		299,631			87,398			40,465			74,515			63,284			14,301			9,383		588,977		2.64	%
Marketable debt securities (*)		503			8,093			13,532			23,325			52,077			33,899			57,681		189,110		3.32	%
Subordinated liabilities		77			1			2			237			2,846			3,402			16,427		22,992		6.38	%
Other financial liabilities		6,184			2,637			6,274			367			1,632			420			707		18,221		n.a
		308,784			135,700			71,034			113,342			130,822			91,629			84,358		935,669		3.10	%
Difference (assets less liabilities)		(202,578	)		(52,133	)		(31,393	)		(18,816	)		(11,942	)		(9,927	)		347,199		20,410

(*) Includes promissory notes, certificates of deposit and other short-term debt issues.

F-205

The detail of the undiscounted contractual maturities of the existing financial liabilities at amortized cost at December 31, 2013 is as follows:

	December 31, 2013
	Millions of euros
	On demand		Within 1 month		1 to 3 months		3 to 12 months		1 to 3 years		3 to 5 years		More than 5 years		Total
Financial liabilities at amortized cost (*):
Deposits from central banks		482		3,185		155		310		5,589		—		—		9,720
Deposits from credit institutions		2,740		27,502		5,545		14,351		13,029		7,791		5,126		76,084
Customer deposits		327,853		53,002		25,987		80,478		63,152		9,557		11,682		571,712
Marketable debt securities		141		8,260		16,612		26,169		52,127		19,963		42,278		165,549
Subordinated liabilities		22		143		2		736		2,212		2,441		8,911		14,465
Other financial liabilities		5,524		7,476		1,613		312		486		115		884		16,410
		336,761		99,567		49,914		123,356		136,595		39,866		68,880		853,940

(*) The analysis of the expiry dates of the derivatives is not broken down because this is not essential to the comprehension of the cash flow schedule, since substantially all of them are subject to netting arrangements with other derivatives held with the same counterparty.

In the Group’s experience, no outflows of cash or other financial assets take place prior to the contractual maturity date that might affect the information broken down above.

b) Equivalent euro value of assets and liabilities

The detail of the main foreign currency balances in the consolidated balance sheet, based on the nature of the related items, is as follows:

	Equivalent value in millions of euros
	2013				2012				2011
	Assets		Liabilities		Assets		Liabilities		Assets		Liabilities
Cash and balances with central banks		71,328		—		70,756		—		73,487		—
Financial assets/liabilities held for trading		72,888		61,473		106,813		80,893		110,645		89,833
Other financial assets at fair value through profit or loss		9,177		9,953		10,448		10,480		7,457		23,442
Available-for-sale financial assets		43,558		—		50,144		—		44,248		—
Loans and receivables		454,791		—		466,933		—		468,555		—
Investments		3,941		—		3,336		—		3,161		—
Tangible assets		5,611		—		5,667		—		5,349		—
Intangible assets		22,422		—		24,269		—		24,374		—
Financial liabilities at amortized cost		—		526,588		—		560,483		—		544,218
Other		20,700		23,817		22,360		50,971		22,037		44,998
		704,416		621,831		760,726		702,827		759,313		702,491

F-206

c) Fair value of financial assets and liabilities not measured at fair value

The financial assets owned by the Group are measured at fair value in the accompanying consolidated balance sheet, except for cash and balances with central banks, loans and receivables, equity instruments whose market value cannot be estimated reliably and derivatives that have these instruments as their underlyings and are settled by delivery thereof.

Similarly, the Group’s financial liabilities -except for financial liabilities held for trading, those measured at fair value and derivatives other than those having as their underlying equity instruments whose market value cannot be estimated reliably- are measured at amortized cost in the accompanying consolidated balance sheet.

F-207

Following is a comparison of the carrying amounts of the Group’s financial instruments measured at other than fair value and their respective fair values at year-end:

i) Financial assets measured at other than fair value

	Millions of euros
	2013										2012				2011
Assets	Carrying amount		Fair value		Level 1		Level 2		Level 3		Carrying amount		Fair value		Carrying amount		Fair value
Loans and receivables:
Loans and advances to credit institutions		56,017		56,213		—		—		56,213		53,785		54,397		42,389		42,351
Loans and advances to customers		650,581		651,338		—		—		651,338		696,014		702,685		728,737		739,997
Debt instruments		7,886		7,858		—		3,017		4,841		7,059		7,241		6,840		6,583
		714,484		715,409		—		3,017		712,392		756,858		764,323		777,966		788,931

ii) Financial liabilities measured at other than fair value

	Millions of euros
	2013										2012				2011
Liabilities	Carrying amount		Fair value		Level 1		Level 2		Level 3		Carrying amount		Fair value		Carrying amount		Fair value
Financial liabilities at amortized cost:
Deposits from central banks		9,788		9,788		—		—		9,788		50,938		50,938		34,996		34,996
Deposits from credit institutions		76,534		76,636		—		76,636		—		80,732		81,819		81,373		82,287
Customer deposits		572,853		570,312		—		—		570,312		589,104		590,278		588,977		589,173
Marketable debt securities subordinated liabilities		171,390		170,787		41,355		129,432		—		201,064		204,014		189,110		190,410
Other financial liabilities		16,139		16,342		—		16,342		—		18,238		18,356		22,992		25,175
Financial liabilities at amortized cost:		16,410		16,407		—		—		16,407		19,245		19,246		18,221		18,195
		863,114		860,272		41,355		222,410		596,507		959,321		964,651		935,669		940,236

F-208

The main valuation methods and inputs used in the estimates at December 31, 2013 of the fair values of the financial assets and liabilities in the foregoing table were as follows:

• Loans and receivables: the fair value was estimated using the present value method. The estimates were made considering factors such as the expected maturity of the portfolio, market interest rates and spreads on newly approved transactions (or market spreads where these were not available).

• Financial liabilities at amortized cost:

i) The fair value of Deposits from central banks was taken to be their carrying amount since they are mainly short-term balances.

ii) Deposits from credit institutions: the fair value was obtained by the present value method using market interest rates and spreads.

iii) Customer deposits: the fair value was estimated using the present value method. The estimates were made considering factors such as the expected maturity of the transactions and the Group’s current cost of funding in similar transactions.

iv) Marketable debt securities and Subordinated liabilities: the fair value was calculated based on market prices for these instruments -when available- or by the present value method using market interest rates and spreads.

In addition, the fair value of Cash and balances with central banks was taken to be their carrying amount since they are mainly short-term balances.

Lastly, at December 31, 2013, 2012 and 2011, equity instruments amounting to EUR 461 million, EUR 507 million and EUR 458 million, respectively, and recognized as available-for-sale financial assets were measured at cost in the consolidated balance sheet because it was not possible to estimate their fair value reliably, since they related to investments in entities not listed on organized markets and, consequently, the non-observable inputs were significant.

F-209

d) Exposure of the Group to Europe’s peripheral countries

The detail at December 31, 2013 and 2012, by type of financial instrument, of the Group’s sovereign risk exposure to Europe’s peripheral countries and of the short positions held with them, taking into consideration the criteria established by the European Banking Authority (EBA) –explained in Note 54– is as follows:

Sovereign risk by country of issuer/borrower at December 31, 2013 (*)
	Millions of euros
	Debt instruments									Loans and advances to customers (**)		Total net direct exposure		Derivatives (***)
	Financial assets held for trading and other financial assets at fair value through profit or loss		Short positions			Available- for-sale financial assets		Loans and receivables						Other than CDSs			CDSs
Spain		4,783		(2,079	)		21,144		1,145		13,374		38,367		(153	)		—
Portugal		148		—			2,076		—		583		2,807		—			—
Italy		2,571		(1,262	)		77		—		—		1,386		—			2
Greece		—		—			—		—		—		—		—			—
Ireland		—		—			—		—		—		—		199			—

(*) Information prepared under EBA standards. Also, there are government debt securities on the insurance companies’ balance sheets amounting to EUR 5,645 million (of which EUR 4,783 million, EUR 654 million and EUR 208 million relate to Spain, Portugal and Italy, respectively) and off-balance-sheet exposure other than derivatives –contingent liabilities and commitments– amounting to EUR 1,884 million (EUR 1,627 million, EUR 118 million, EUR 137 million and EUR 2 million to Spain, Portugal, Italy and Ireland, respectively).

(**) Presented without taking into account the valuation adjustments recognized (EUR 20 million).

(***) “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

Sovereign risk by country of issuer/borrower at December 31, 2012 (*)
	Millions of euros
	Debt instruments									Loans and advances to customers (**)		Total net direct exposure		Derivatives (***)
	Financial assets held for trading and other financial assets at fair value through profit or loss		Short positions			Available- for-sale financial assets		Loans and receivables						Other than CDSs			CDSs
Spain		6,473		(2,070	)		24,654		1,173		15,356		45,586		(234	)		—
Portugal		—		—			1,684		—		616		2,300		—			1
Italy		353		(425	)		76		—		—		4		—			—
Greece		—		—			—		—		—		—		—			—
Ireland		—		—			—		—		—		—		284			—

(*) Information prepared under EBA standards. Also, there are government debt securities on the insurance companies’ balance sheets amounting to EUR 4,276 million (of which EUR 3,935 million, EUR 156 million and EUR 185 million relate to Spain, Portugal and Italy, respectively) and off-balance-sheet exposure other than derivatives –contingent liabilities and commitments– amounting to EUR 2,578 million (EUR 2,341 million, EUR 33 million and EUR 204 million to Spain, Portugal and Italy, respectively).

(**) Presented without taking into account the valuation adjustments recognized (EUR 20 million).

(***) “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

F-210

The detail of the Group’s other exposure to other counterparties (private sector, central banks and other public entities that are not considered to be sovereign risks) in the aforementioned countries at December 31, 2013 and 2012 is as follows:

Exposure to other counterparties by country of issuer/borrower at December 31, 2013 (*)
	Millions of euros
					Debt instruments										Derivatives (***)
	Balances with central banks		Reverse repurchase agreements		Financial assets held for trading and other financial assets at fair value through profit  or loss		Available- for-sale financial assets		Loans and receivables		Loans and advances to customers (**)		Total net direct exposure		Other than CDSs			CDSs
Spain		816		7,451		3,148		7,826		1,804		160,478		181,523		1,981			(44	)
Portugal		1,716		—		209		1,168		1,845		25,578		30,516		1,454			(1	)
Italy		11		—		368		273		93		6,490		7,235		(115	)		(2	)
Greece		—		—		—		—		—		80		80		—			—
Ireland		—		—		229		360		259		507		1,355		1,031			—

(*) Also, the Group has off-balance-sheet exposure other than derivatives –contingent liabilities and commitments– amounting to EUR 48.659 million, EUR 5.982 million, EUR 2,717 million, EUR 4 million and EUR 93 million to counterparties in Spain, Portugal, Italy, Greece and Ireland, respectively.

(**) Presented excluding valuation adjustments and impairment losses recognized (EUR 13,209 million).

(***) “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

Exposure to other counterparties by country of issuer/borrower at December 31, 2012 (*)
	Millions of euros
					Debt instruments										Derivatives (***)
	Balances with central banks		Reverse repurchase agreements		Financial assets held for trading and other financial assets at fair value through profit  or loss		Available- for-sale financial assets		Loans and receivables		Loans and advances to customers (**)		Total net direct exposure		Other than CDSs			CDSs
Spain		1,218		11,471		2,598		7,225		1,130		184,658		208,300		7,180			(40	)
Portugal		1,156		—		997		676		1,547		25,243		29,619		1,809			(4	)
Italy		3		—		176		122		83		7,513		7,897		(2	)		8
Greece		—		—		—		—		—		96		96		—			—
Ireland		—		—		146		414		179		481		1,220		344			—

(*) Also, the Group has off-balance-sheet exposure other than derivatives –contingent liabilities and commitments– amounting to EUR 63.101 million, EUR 7.397 million, EUR 3,234 million, EUR 135 million and EUR 224 million to counterparties in Spain, Portugal, Italy, Greece and Ireland, respectively.

(**) Presented excluding valuation adjustments and impairment losses recognized (EUR 12,671 million).

(***) “Other than CDSs” refers to the exposure to derivatives based on the location of the counterparty, irrespective of the location of the underlying. “CDSs” refers to the exposure to CDSs based on the location of the underlying.

F-211

Following is certain information on the notional amount of the CDSs at December 31, 2013 and 2012 detailed in the foregoing tables:

12/31/13
Millions of euros
		Notional amount							Fair value
		Bought		Sold		Net			Bought			Sold			Net
Spain	Sovereign Other		—		—		—			—			—			—
			1,735		2,277		(542	)		(18	)		(26	)		(44	)
Portugal	Sovereign Other		192		174		18			5			(5	)		—
			223		278		(55	)		1			(2	)		(1	)
Italy	Sovereign Other		603		570		33			(1	)		3			2
			834		913		(79	)		(2	)		—			(2	)
Greece	Sovereign Other		—		—		—			—			—			—
			5		5		—			—			—			—
Ireland	Sovereign Other		4		4		—			—			—			—
			6		6		—			—			—			—

12/31/12
Millions of euros
		Notional amount							Fair value
		Bought		Sold		Net			Bought		Sold			Net
Spain	Sovereign Other		—		—		—			—		—			—
			2,202		2,952		(750	)		3		(43	)		(40	)
Portugal	Sovereign Other		225		207		18			14		(13	)		1
			398		418		(20	)		7		(11	)		(4	)
Italy	Sovereign Other		518		608		(90	)		12		(12	)		—
			1,077		1,025		52			40		(32	)		8
Greece	Sovereign Other		—		—		—			—		—			—
			20		20		—			1		(1	)		—
Ireland	Sovereign Other		9		9		—			—		—			—
			16		16		—			—		—			—

52. Geographical and business segment reporting

a) Geographical segments

Business segment reporting is a basic tool used for monitoring and managing the Group’s various activities.

In 2013 the Group made the following changes to its criteria for the management and presentation of its financial information by segment compared to those employed for the year ended December 31, 2012:

• The following units have been created in the Continental Europe geographical segment:

• Spain: which now encompasses the former commercial networks of Banco Santander, S.A., Banesto and Banif (merged in 2013), global wholesale banking, asset management and insurance in Spain.

• Real estate operations discontinued in Spain: includes loans and credits to customers engaging mainly in property development, investments relating to the real estate industry and foreclosed assets in Spain, which are managed in a specialized manner.

F-212

• The secondary segment information, which is grouped by business, includes the real estate operations discontinued in Spain.

• The cost of liquidity applied to the units for management purposes has been changed so that the cost of Banco Santander, S.A.’s senior debt is applied to the difference between each unit’s loans and deposits.

Consequently, the segment information for 2012 and 2011 shown below has been recalculated using these criteria in order to make it comparable.

This primary level of segmentation, which is based on the Group’s management structure, comprises five segments: four operating areas plus the Corporate Activities Unit. The operating areas, which include all the business activities carried on therein by the Group, are Continental Europe, the United Kingdom, Latin America and the United States, based on the location of the Group’s assets.

The Continental Europe area encompasses all the commercial banking, wholesale banking, asset management and insurance business activities carried on in Europe with the exception of the United Kingdom, and the segment relating to real estate operations discontinued in Spain. Latin America includes all the financial activities carried on by the Group through its banks and subsidiaries, as well as the specialized units of Santander Private Banking, which is treated as a globally managed independent unit, and the New York business. The United States area includes the businesses of Santander Bank and Santander Consumer USA Inc.

The Corporate Activities segment includes the centralized management business relating to financial and industrial investments, the financial management of the Parent’s structural currency position and its structural interest rate risk position and the management of liquidity and equity through issues and securitizations.

The financial information of each operating segment is prepared by aggregating the figures for the Group’s various business units. The basic information used for segment reporting comprises the accounting data of the legal units composing each segment and the data available in the management information systems. All segment financial statements have been prepared on a basis consistent with the accounting policies used by the Group.

Consequently, the sum of the figures in the various segment income statements is equal to those in the consolidated income statement. With regard to the balance sheet, due to the required segregation of the various business units (included in a single consolidated balance sheet), the amounts lent and borrowed between the units are shown as increases in the assets and liabilities of each business. These amounts relating to intra-Group liquidity are eliminated and are shown in the Intra-Group eliminations column in the table below in order to reconcile the amounts contributed by each business unit to the consolidated Group’s balance sheet.

There are no customers located in areas other than those in which the Group’s assets are located that generate income exceeding 10% of total income.

F-213

The condensed balance sheets and income statements of the various geographical segments are as follows:

	Millions of euros
	2013
(Condensed) balance sheet	Continental Europe		United Kingdom		Latin America		United States		Corporate Activities		Intra-Group eliminations			Total
Total assets		436,641		323,744		249,978		54,331		181,722		(130,778	)		1,115,638
Loans and advances to customers		266,355		231,046		132,542		37,682		1,231		—			668,856
Financial assets held for trading (excluding loans and advances)		50,317		28,832		23,108		117		2,333		—			104,707
Available-for-sale financial assets		37,319		6,003		20,947		8,854		10,676		—			83,799
Loans and advances to credit institutions		38,506		17,136		28,213		348		28,774		(38,013	)		74,964
Non-current assets (*)		6,297		2,498		3,931		585		3,303		—			16,614
Other asset accounts		37,847		38,229		41,237		6,745		135,405		(92,765	)		166,698
Total liabilities and equity		436,641		323,744		249,978		54,331		181,722		(130,778	)		1,115,638
Customer deposits		256,138		187,467		125,844		35,537		2,851		—			607,837
Marketable debt securities		16,781		64,093		28,987		1,146		64,470		—			175,477
Subordinated liabilities		406		5,805		4,832		1,225		3,871		—			16,139
Liabilities under insurance contracts		1,430		—		—		—		—		—			1,430
Deposits from central banks and credit institutions		59,041		26,882		24,825		8,101		28,561		(38,013	)		109,397
Other accounts (**)		77,194		26,855		45,253		2,649		1,193		(28,562	)		124,582
Equity (share capital and reserves)		25,651		12,642		20,237		5,673		80,776		(64,203	)		80,776
Other customer funds under management		50,962		9,645		64,563		—		—		—			125,170
Investment funds		33,445		9,645		50,214		—		—		—			93,304
Pension funds		10,879		—		—		—		—		—			10,879
Assets under management		6,638		—		14,349		—		—		—			20,987
Customer funds under management (***)		324,287		267,010		224,226		37,908		71,192		—			924,623

(*) Including Tangible assets and Other intangible assets.

(**) Including, in addition to liability items not broken down, the balances of Valuation adjustments, Non-controlling interests and Profit for the year attributable to the Parent.

(***) Including Customer deposits, Marketable debt securities, Subordinated liabilities and Other customer funds under management.

The Corporate Activities segment acts as the Group’s holding company. Therefore, it manages all equity (share capital and reserves of all the units) and determines the allocation thereof to each unit. The Group’s equity (EUR 80,776 million) is initially assigned to this segment, and is then allocated in accordance with corporate policies to the business units (EUR 64,203 million). This allocation is shown as an asset of the Corporate Activities segment (included in Other asset accounts) and as a liability of each business unit (included in Equity (share capital and reserves)). Therefore, the allocation is reflected in the intra-Group elimination adjustment balance sheet in order not to duplicate the balances and obtain the total consolidated balance sheet for the Group.

F-214

	Millions of euros
	2012
(Condensed) balance sheet	Continental Europe		United Kingdom		Latin America		United States		Corporate Activities		Intra-Group eliminations			Total
Total assets		495,272		359,058		269,627		62,950		243,455		(160,762	)		1,269,600
Loans and advances to customers		283,427		249,157		140,090		41,331		5,107		—			719,112
Financial assets held for trading (excluding loans and advances)		87,992		38,177		28,403		275		4,065		—			158,912
Available-for-sale financial assets		38,309		6,718		23,499		14,791		8,949		—			92,266
Loans and advances to credit institutions		49,020		18,124		25,799		714		50,422		(70,179	)		73,900
Non-current assets (*)		5,697		2,561		4,490		560		3,988		—			17,296
Other asset accounts		30,827		44,321		47,346		5,279		170,924		(90,583	)		208,114
Total liabilities and equity		495,272		359,058		269,627		62,950		243,455		(160,762	)		1,269,600
Customer deposits		256,154		194,452		134,765		38,116		3,152		—			626,639
Marketable debt securities		21,119		73,919		28,107		820		82,002		2			205,969
Subordinated liabilities		118		5,534		5,734		1,986		4,866		—			18,238
Liabilities under insurance contracts		1,425		—		—		—		—		—			1,425
Deposits from central banks and credit institutions		78,177		29,313		32,131		14,221		69,304		(70,180	)		152,966
Other accounts (**)		107,245		42,689		48,481		2,628		4,442		(20,811	)		184,674
Equity (share capital and reserves)		31,034		13,151		20,409		5,179		79,689		(69,773	)		79,689
Other customer funds under management		43,391		13,919		60,831		—		—		—			118,141
Investment funds		27,080		13,919		48,177		—		—		—			89,176
Pension funds		10,076		—		—		—		—		—			10,076
Assets under management		6,235		—		12,654		—		—		—			18,889
Customer funds under management (***)		320,782		287,824		229,437		40,922		90,020		2			968,987

(*) Including Tangible assets and Other intangible assets.

(**) Including, in addition to liability items not broken down, the balances of Valuation adjustments, Non-controlling interests and Profit for the year attributable to the Parent.

(***) Including Customer deposits, Marketable debt securities, Subordinated liabilities and Other customer funds under management.

F-215

	Millions of euros
	2011
(Condensed) balance sheet	Continental Europe		United Kingdom		Latin America		United States		Corporate Activities			Intra-Group eliminations			Total
Total assets		497,157		355,542		275,105		59,785		289,766			(226,346	)		1,251,009
Loans and advances to customers		303,117		254,140		139,867		40,194		5,078			6,145			748,541
Financial assets held for trading (excluding loans and advances)		79,230		41,440		31,705		271		7,300			—			159,946
Available-for-sale financial assets		40,424		55		26,186		12,435		7,513			—			86,613
Loans and advances to credit institutions		43,635		16,808		19,181		677		68,502			(97,077	)		51,726
Non-current assets (*)		5,359		2,290		4,312		493		4,385			1			16,840
Other asset accounts		25,392		40,809		53,854		5,715		196,988			(135,415	)		187,343
Total liabilities and equity		497,157		355,542		275,105		59,785		289,766			(226,346	)		1,251,009
Customer deposits		244,836		194,317		134,078		36,884		22,418			—			632,533
Marketable debt securities		16,586		70,823		23,253		1,653		83,721			1,336			197,372
Subordinated liabilities		181		8,260		6,015		2,275		6,260			1			22,992
Liabilities under insurance contracts		517		—		—		—		—			—			517
Deposits from central banks and credit institutions		72,239		31,203		46,832		11,570		139,668			(158,374	)		143,138
Other accounts (**)		133,418		37,922		45,435		2,862		(39,416	)		(2,879	)		177,342
Equity (share capital and reserves)		29,380		13,017		19,492		4,541		77,115			(66,430	)		77,115
Other customer funds under management		40,050		15,744		69,902		1		5,759			—			131,456
Investment funds		27,124		15,744		55,829		—		3,914			—			102,611
Pension funds		8,159		—		—		—		1,486			—			9,645
Assets under management		4,767		—		14,073		1		359			—			19,200
Customer funds under management		301,653		289,144		233,248		40,813		118,158			1,337			984,353

(*) Including Tangible assets and Other intangible assets.

(**) Including, in addition to liability items not broken down, the balances of Valuation adjustments, Non-controlling interests and Profit for the year attributable to the Parent.

(***) Including Customer deposits, Marketable debt securities, Subordinated liabilities and Other customer funds under management.

F-216

	Millions of euros
	2013
(Condensed) income statement	Continental Europe			United Kingdom			Latin America			United States			Corporate Activities			Total
INTEREST INCOME/(CHARGES)		8,123			3,451			15,186			1,409			(2,234	)		25,935
Dividends		265			1			54			23			35			378
Income from companies accounted for using the equity method		(19	)		4			202			321			(8	)		500
Net fee and commission income (expense)		3,552			991			4,874			394			(50	)		9,761
Gains/losses on financial assets and liabilities (net) and exchange differences (net)		775			403			1,038			69			1,109			3,394
Other operating income (expenses)		(111	)		30			(271	)		(58	)		119			(291	)
TOTAL INCOME		12,585			4,880			21,083			2,158			(1,029	)		39,677
General administrative expenses		(5,807	)		(2,181	)		(7,801	)		(1,097	)		(566	)		(17,452	)
Personnel expenses		(3,527	)		(1,401	)		(4,319	)		(606	)		(216	)		(10,069	)
Other general administrative expenses		(2,280	)		(780	)		(3,482	)		(491	)		(350	)		(7,382	)
Depreciation and amortization		(769	)		(424	)		(904	)		(163	)		(131	)		(2,391	)
Provisions (net)		(158	)		(232	)		(783	)		(50	)		(959	)		(2,182	)
Impairment losses		(3,766	)		(580	)		(6,533	)		4			(352	)		(11,227	)
Impairment losses on non-financial assets		(65	)		(4	)		(25	)		(16	)		(393	)		(503	)
Other income and charges		(374	)		—			307			2			1,795			1,730
PROFIT (LOSS) BEFORE TAX		1,646			1,459			5,344			838			(1,635	)		7,652
Income tax		(376	)		(301	)		(1,208	)		(113	)		(115	)		(2,113	)
PROFIT (LOSS) FROM CONTINUING OPERATIONS		1,270			1,158			4,136			725			(1,750	)		5,539
Loss from discontinued operations		(6	)		(9	)		—			—			—			(15	)
CONSOLIDATED PROFIT (LOSS) FOR THE YEAR		1,264			1,149			4,136			725			(1,750	)		5,524
Attributable to non-controlling interests		137			—			879			—			138			1,154
PROFIT (LOSS) ATTRIBUTABLE TO THE PARENT		1,127			1,149			3,257			725			(1,888	)		4,370

F-217

	Millions of euros
	2012																		2011
(Condensed) income statement	Continental Europe			United Kingdom			Latin America			United States			Corporate Activities			Total			Continental Europe			United Kingdom			Latin America			United States			Corporate Activities			Total
INTEREST INCOME/(CHARGES)		8,854			3,336			17,881			1,695			(1,843	)		29,923			7,976			4,128			16,473			3,289			(1,272	)		30,594
Dividends		289			1			60			20			53			423			264			1			72			1			56			394
Income from companies accounted for using the equity method		(88	)		(5	)		183			341			(4	)		427			17			1			36			—			3			57
Net fee and commission income (expense)		3,625			1,190			5,097			378			(29	)		10,261			3,767			1,015			4,992			643			(9	)		10,408
Gains/losses on financial assets and liabilities (net) and exchange differences (net)		306			1,231			1,071			244			288			3,140			254			405			1,067			192			398			2,316
Other operating income (expenses)		(19	)		24			(358	)		(73	)		536			110			131			28			(198	)		(57	)		117			21
TOTAL INCOME		12,967			5,777			23,934			2,605			(999	)		44,284			12,409			5,578			22,442			4,068			(707	)		43,790
General administrative expenses		(5,790	)		(2,311	)		(8,253	)		(1,037	)		(410	)		(17,801	)		(5,805	)		(2,131	)		(8,037	)		(1,169	)		(502	)		(17,644	)
Personnel expenses		(3,498	)		(1,492	)		(4,643	)		(571	)		(102	)		(10,306	)		(3,535	)		(1,407	)		(4,480	)		(645	)		(238	)		(10,305	)
Other general administrative expenses		(2,292	)		(819	)		(3,610	)		(466	)		(308	)		(7,495	)		(2,270	)		(724	)		(3,557	)		(524	)		(264	)		(7,339	)
Depreciation and amortization		(667	)		(379	)		(871	)		(146	)		(120	)		(2,183	)		(590	)		(343	)		(932	)		(126	)		(107	)		(2,098	)
Provisions (net)		(130	)		(522	)		(1,027	)		(170	)		371			(1,478	)		(437	)		(964	)		(1,052	)		(43	)		(120	)		(2,616	)
Impairment losses		(9,903	)		(1,220	)		(7,380	)		(265	)		(112	)		(18,880	)		(3,694	)		(559	)		(5,448	)		(1,006	)		(1,087	)		(11,794	)
Impairment losses on non-financial assets		(27	)		—			(17	)		(24	)		(440	)		(508	)		(75	)		—			(39	)		(118	)		(1,285	)		(1,517	)
Other income and charges		(757	)		5			226			7			668			149			(1,719	)		9			62			—			1,385			(263	)
PROFIT (LOSS) BEFORE TAX		(4,307	)		1,350			6,612			970			(1,042	)		3,583			89			1,590			6,996			1,606			(2,423	)		7,858
Income tax		1,490			(312	)		(1,484	)		(165	)		(119	)		(590	)		133			(424	)		(1,636	)		(554	)		726			(1,755	)
PROFIT (LOSS) FROM CONTINUING OPERATIONS		(2,817	)		1,038			5,128			805			(1,161	)		2,993			222			1,166			5,360			1,052			(1,697	)		6,103
Profit (Loss) from discontinued operations		(7	)		77			—			—			—			70			(24	)		39			—			—			—			15
CONSOLIDATED PROFIT (LOSS) FOR THE YEAR		(2,824	)		1,115			5,128			805			(1,161	)		3,063			198			1,205			5,360			1,052			(1,697	)		6,118
Attributable to non-controlling interests		(79	)		—			866			—			(19	)		768			28			—			738			48			(26	)		788
PROFIT (LOSS) ATTRIBUTABLE TO THE PARENT		(2,745	)		1,115			4,262			805			(1,142	)		2,295			170			1,205			4,622			1,004			(1,671	)		5,330

F-218

Following is the detail of revenue by the geographical segments used by the Group. For the purposes of the table below, revenue is deemed to be that recognized under Interest and similar income, Income from equity instruments, Fee and commission income, Gains/Losses on financial assets and liabilities (net) and Other operating income in the accompanying consolidated income statements for 2013 and 2012.

	Revenue (millions of euros)
	Revenue from external customers				Inter-segment revenue						Total revenue
	2013		2012		2013			2012			2013			2012
Continental Europe		24,369		27,139		1,141			248			25,510			27,387
United Kingdom		9,612		11,019		1,180			1,294			10,792			12,313
Latin America		33,071		37,025		388			262			33,459			37,287
United States		2,369		3,066		119			(62	)		2,488			3,004
Corporate Activities		4,015		3,718		6,862			9,056			10,877			12,774
Inter-segment revenue adjustments and eliminations		—		—		(9,690	)		(10,798	)		(9,690	)		(10,798	)
		73,436		81,967		—			—			73,436			81,967

b) Business segments

At this secondary level of segment reporting, the Group is structured into commercial banking, asset management and insurance, global wholesale banking and the segment relating to real estate operations discontinued in Spain; the sum of these four segments is equal to that of the primary geographical operating segments. Total figures for the Group are obtained by adding to the business segments the data for the corporate activities segment.

The commercial banking segment encompasses the entire commercial banking business (except for the corporate banking business managed globally using the global relationship model). The asset management and insurance segment includes the contribution to the Group arising from the design and management of the investment fund, pension and insurance businesses of the various units. The global wholesale banking segment reflects the returns on the global corporate banking business, those on investment banking and markets worldwide, including all the globally managed treasury departments and the equities business.

F-219

The condensed income statements and other significant data are as follows:

	Millions of euros
	2013																		2012
(Condensed) income statement	Commercial banking			Global whole-sale banking			Asset management and insurance			Real estate operations discontinued in Spain			Corporate Activities			Total			Commercial banking			Global whole-sale banking			Asset management and insurance			Real estate operations discontinued in Spain			Corporate Activities			Total
INTEREST INCOME/(CHARGES)		25,552			2,464			115			38			(2,234	)		25,935			28,865			2,708			119			74			(1,843	)		29,923
Income from equity instruments		78			265			—			—			35			378			86			284			—			—			53			423
Income from companies accounted for using the equity method		401			(1	)		148			(40	)		(8	)		500			400			—			131			(100	)		(4	)		427
Net fee and commission income (expense)		8,193			1,254			349			15			(50	)		9,761			8,471			1,360			418			41			(29	)		10,261
Gains/losses on financial assets and liabilities (net) and exchange differences (net)		1,119			1,159			6			1			1,109			3,394			2,004			840			3			5			288			3,140
Other operating income (expenses)		(553	)		7			145			(8	)		118			(291	)		(630	)		(16	)		223			(3	)		536			110
TOTAL INCOME		34,790			5,148			763			6			(1,030	)		39,677			39,196			5,176			894			17			(999	)		44,284
General administrative expenses		(14,890	)		(1,549	)		(285	)		(162	)		(566	)		(17,452	)		(15,343	)		(1,592	)		(272	)		(184	)		(410	)		(17,801	)
Personnel expenses		(8,669	)		(988	)		(149	)		(47	)		(216	)		(10,069	)		(8,986	)		(1,013	)		(160	)		(45	)		(102	)		(10,306	)
Other general administrative expenses		(6,221	)		(561	)		(136	)		(115	)		(350	)		(7,383	)		(6,357	)		(579	)		(112	)		(139	)		(308	)		(7,495	)
Depreciation and amortization		(2,027	)		(186	)		(33	)		(13	)		(132	)		(2,391	)		(1,848	)		(171	)		(35	)		(9	)		(120	)		(2,183	)
Provisions (net)		(1,173	)		(47	)		(3	)		—			(959	)		(2,182	)		(1,815	)		(17	)		(17	)		—			371			(1,478	)
Impairment losses		(9,506	)		(952	)		(7	)		(410	)		(352	)		(11,227	)		(12,182	)		(420	)		(2	)		(6,164	)		(112	)		(18,880	)
Net impairment losses on non-financial assets		(73	)		(37	)		—			—			(393	)		(503	)		(44	)		(24	)		—			—			(440	)		(508	)
Other non-financial gains (losses)		249			12			2			(328	)		1,795			1,730			219			(5	)		8			(741	)		668			149
PROFIT (LOSS) BEFORE TAX		7,370			2,389			437			(907	)		(1,637	)		7,652			8,183			2,947			576			(7,081	)		(1,042	)		3,583
Income tax		(1,509	)		(661	)		(101	)		272			(114	)		(2,113	)		(1,675	)		(827	)		(154	)		2,185			(119	)		(590	)
PROFIT (LOSS) FROM CONTINUING OPERATIONS		5,861			1,728			336			(635	)		(1,751	)		5,539			6,508			2,120			422			(4,896	)		(1,161	)		2,993
Profit (Loss) from discontinued operations		(15	)		—			—			—			—			(15	)		70			—			—			—			—			70
CONSOLIDATED PROFIT (LOSS) FOR THE YEAR		5,846			1,728			336			(635	)		(1,751	)		5,524			6,578			2,120			422			(4,896	)		(1,161	)		3,063
Attributable to non-controlling interests		769			224			24			—			137			1,154			686			209			20			(128	)		(19	)		768
PROFIT (LOSS) ATTRIBUTABLE TO THE PARENT		5,077			1,504			312			(635	)		(1,888	)		4,370			5,892			1,911			402			(4,768	)		(1,142	)		2,295

F-220

53. Related parties

The parties related to the Group are deemed to include, in addition to its subsidiaries, associates and jointly controlled entities, the Bank’s key management personnel (the members of its board of directors and the executive vice presidents, together with their close family members) and the entities over which the key management personnel may exercise significant influence or control.

Following is a detail of the ordinary business transactions performed by the Group with its related parties, distinguishing between associates and jointly controlled entities, members of the Bank’s board of directors, the Bank’s executive vice presidents, and other related parties. Related-party transactions were made on terms equivalent to those that prevail in arm’s-length transactions or, when this was not the case, the related compensation in kind was recognized.

F-221

	Millions of euros
	2013												2012												2011
	Associates and jointly controlled entities			Members of the board of directors			Executive vice presidents			Other related parties			Associates and jointly controlled entities			Members of the board of directors			Executive vice presidents			Other related parties			Associates and jointly controlled entities			Members of the board of directors			Executive vice presidents			Other related parties
Assets:		9,425			6			36			1,599			6,626			7			33			1,417			6,507			19			31			1,902
Loans and advances to credit institutions		7,392			—			—			—			5,635			—			—			—			5,855			—			—			—
Loans and advances to customers		1,331			6			36			424			544			7			33			1,233			146			19			31			1,508
Debt instruments		702			—			—			1,175			447			—			—			184			506			—			—			394
Liabilities:		(946	)		(9	)		(10	)		(197	)		(544	)		(14	)		(15	)		(529	)		(1,250	)		(22	)		(27	)		(364	)
Deposits from credit institutions		(440	)		—			—			—			(422	)		—			—			—			(1,136	)		—			—			—
Customer deposits		(498	)		(9	)		(10	)		(197	)		(122	)		(14	)		(15	)		(529	)		(114	)		(22	)		(27	)		(364	)
Marketable debt securities		(8	)		—			—			—			—			—			—			—			—			—			—			—
Income statement:		143			—			—			29			161			—			(1	)		69			177			—			(1	)		60
Interest and similar income		112			—			—			8			94			—			—			36			155			—			—			35
Interest expense and similar charges		(22	)		—			—			(7	)		(4	)		—			(1	)		(5	)		(2	)		—			(1	)		(4	)
Gains/losses on financial assets and liabilities		12			—			—			25			59			—			—			24			12			—			—			20
Fee and commission income		502			—			—			(5	)		43			—			—			14			50			—			—			9
Fee and commission expense		(31	)		—			—			—			(31	)		—			—			—			(38	)		—			—			—
Other:		14,029			—			4			4,137			12,573			1			7			2,958			10,866			1			10			5,051
Contingent liabilities		74			—			—			145			—			—			—			303			222			—			—			590
Contingent commitments		1,063			—			4			96			3,431			1			7			3			257			1			10			3
Derivative financial instruments		12,892			—			—			3,897			9,142			—			—			2,652			10,387			—			—			4,458

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In addition to the detail provided above, there were insurance contracts linked to pensions amounting to EUR 342 million at December 31, 2013 (December 31, 2012: EUR 405 million; December 31, 2011: EUR 2,146 million).

54. Risk management

1. CORPORATE RISK MANAGEMENT, CONTROL AND APPETITE PRINCIPLES

1.1 Corporate principles

The Group’s risk management model underlying the business model is based on the following principles:

• Independence of the risk function with respect to the business. The head of the Group’s risk division, as second deputy chairman and as chairman of the risk committee, reports directly to the executive committee and the board. The segregation of functions between the business areas and the risk areas entrusted with risk acceptance, measurement, analysis, control and reporting provides sufficient independence and autonomy for proper risk control.

• Direct involvement of senior management in the decision-making process.

• Decisions by consensus, in order to ensure that different opinions are taken into account and avoid individual decision making, even at branch level. Decisions on credit transactions taken jointly by the risk and commercial areas, and the ultimate decision lies with the risk area in the event of discrepancy.

• Definition of powers. The type of activities to be performed, segments, risks to be assumed and risk decisions to be made are clearly defined for each risk approval and risk management unit, based on their delegated powers. How transactions should be arranged and managed and where they should be recognized for accounting purposes is also defined.

• Corporate control. Risk is controlled and managed in an integrated fashion through a corporate structure with Group-wide responsibilities (all risk, all businesses, and all geographical areas).

At the Group, the risk management and control process is conducted as follows:

• Definition of risk appetite, the purpose of which is to delimit, synthetically and explicitly, the levels and types of risk the Group is willing to assume in the performance of its business.

• Establishment of risk policies and procedures, which constitute the basic regulatory framework governing risk activities and processes. The local risk units use the mirror structures they have established to transpose the corporate risk regulations into their internal policies.

• Construction, independent validation and approval of the risk models developed pursuant to corporate methodological guidelines. These tools enable Santander Group to systematize the risk origination, monitoring and recovery processes, the calculation of expected loss and capital required, and the measurement of the held-for-trading portfolio.

• Implementation of a risk monitoring and control system which checks, on a daily basis and with the corresponding reports, the degree to which the Group’s risk profile matches the risk policies approved and the risk limits set.

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1.2 Risk culture

The risk culture is based on the principles of the Group’s risk management model detailed above and is transmitted to all of the organization’s business and management units, supported, inter alia, by the following levers:

• At the Group, the risk function is independent from the business units. This allows its criteria and opinions to be taken into account in the various spheres in which the Group’s businesses are carried on.

• The structure of the delegation of powers at the Group requires a large number of transactions to be submitted for validation by one of the Group’s central services risk committees, namely the global risk unit committee, the risk committee or the Group’s executive committee. The highly frequent nature of the meetings of these validation and monitoring committees (twice a week in the case of the risk committee; once a week in the case of the executive committee) enables a high degree of agility in the resolution of proposals while, at the same time, ensuring the assiduous participation of senior management in the daily management of the Group’s various risks.

• The Group has action manuals and policies regarding risk management. The risk and business teams hold periodic business orientation meetings which establish approaches that are in line with the Group’s risk culture. Similarly, risk and business executives participate as speakers at the meetings of the Group central services’ various transaction resolution committees mentioned above, and this facilitates the transmission of the criteria and approaches emanating from senior management to both the teams of executives and the organization’s other risk committees. The non-assignment of personal powers requires all decisions to be taken by group bodies, which makes decision-making more rigorous and transparent.

• Limit plan: the Group has implemented a comprehensive risk limit system, which is updated at least once a year and encompasses both credit risk and the various trading, liquidity and structural market risk exposures (for each business unit and by risk factor). Credit risk management is supported by credit management programs (individual customers and small businesses), rating systems (exposures to medium-sized and large companies) and pre-classifications (large corporate customers and financial counterparties). There are also limits on operational risk.

• The exposure information and aggregation systems in place at the Group allow it to monitor exposures on a daily basis, to check that the approved limits are complied with systematically, and to adopt, if necessary, the appropriate corrective measures.

• The main risks are analyzed not only when they are originated or when problems arise in the ordinary recovery process, but also on an ongoing basis for all customers.

• Other procedures supporting the transmission of the risk culture are the training activities performed at the corporate risk school, the remuneration and incentives policy -which always includes performance-based variables that take into account risk quality and the Group’s long-term results-, employees’ adherence to the general codes of conduct and systematic, independent action taken by the internal audit services.

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1.3 Risk appetite at the Group

Risk appetite is defined at the Group as the amount and type of risk that it considers reasonable to assume in implementing its business strategy, in order to ensure that it can continue to operate normally if unexpected events occur. To this end, severe scenarios are taken into account, which might have an adverse impact on its levels of capital or liquidity, its profits and/or its share price.

The board of directors is the body responsible for establishing and annually updating the Group’s risk appetite, for monitoring its actual risk profile and for ensuring consistency between the two. The risk appetite is determined both for the Group as a whole and for each of the main business units using a corporate methodology adapted to the circumstances of each unit/market. At local level, the boards of directors of the related subsidiaries are responsible for approving the respective risk appetite proposals once they have been validated by the Group’s executive committee.

Senior management is responsible for achieving the desired risk profile -which is reflected in the approved annual budget and in the medium-term strategic plan-, and for the day-to-day management of risk. Thus, it ensures that the habitual limit structures formalized for each risk are properly connected to the established risk appetite metrics.

These limit structures for each risk are complementary to the risk appetite and fundamental to the articulation of an effective management thereof on a day-to-day basis. If the established risk appetite levels are reached, the required management measures must be adopted so that the desired risk profile can be restored.

Every quarter, the risk committee and the executive committee of the Group check compliance with the risk appetite at both Group and business unit level.

In 2013 further progress was made in the effective application of the risk appetite framework at the Group through both the related quarterly reviews referred to above and its implementation in certain of the Group’s main units.

Risk appetite framework

The Group’s risk appetite framework contains both quantitative and qualitative elements making up a group of primary metrics and a separate series of supplementary indicators.

Quantitative elements of the risk appetite

The primary quantitative metrics of the risk appetite are as follows:

• The maximum losses the Group is willing to assume,

• The minimum capital position the Group wishes to maintain, and

• The minimum liquidity position the Group wishes to have.

These metrics are calculated for severe stress scenarios that are plausible but unlikely to occur.

Also, the Group has a series of transversal metrics aimed at limiting excessive concentration of the risk profile, both in terms of risk factors and from the perspective of customers, businesses, geographical areas and products.

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Losses

One of the three primary metrics used to formulate the Group’s risk appetite is expressed in terms of the maximum unexpected effect on results that the Group is willing to accept in the event of adverse scenarios that are plausible but unlikely to occur.

These scenarios affect mainly both the losses arising from credit risk exposure of retail and wholesale portfolios (considering both the direct credit loss and the reduction in margin) and the potential adverse effect of the exposure to market risk. After applying these credit and market impacts to the budgeted results, in the context of the monitoring of the risk appetite, senior management assesses whether the resulting margin is sufficient to absorb any unexpected effects arising from technology and operational risk and compliance and reputational risk.

The time horizon for the materialization of the adverse effects for all the risks considered is generally three years, or one year for market risk. Accordingly, the risk appetite framework should be complied with for each of the following three years.

With regard to this loss metric, the Group’s risk appetite establishes that the combined effect on all risks arising from these scenarios must be lower than the net margin after ordinary provisions, i.e. ordinary operating profit/(loss) before tax.

Capital position

The Group has decided to operate with an ample capital base that enables it not only to meet regulatory requirements but also to have a reasonable capital buffer.

Also, in view of the related stress scenarios referred to in the preceding section, the Group’s risk appetite establishes that its risk profile must be such that the unexpected effect of these stress scenarios does not impair the core capital ratio by more than 100 basis points.

This capital approach included in the risk appetite framework is complementary to and consistent with the capital target for the Group that was approved as part of the capital planning process (Pillar II) implemented at the Group for a period of three years.

Liquidity position

The Group has implemented a funding model based on autonomous subsidiaries that are responsible for covering its liquidity requirements. Based on this premise, liquidity management is performed at the level of each of the subsidiaries within the corporate management framework which implements its basic principles (decentralization, medium- and long-term balance between the source and the use of funds, high weighting of customer deposits, diversification of wholesale sources, low recourse to short-term funding, sufficient liquidity reserve) and it is based on three fundamental pillars (governance model, balance sheet analysis and liquidity risk measurement, and management adapted to the needs of the business).

The Group’s liquidity risk appetite establishes a structural funding ratio of over 100%, i.e. the medium- and long-term customer deposits, capital and issues must exceed the structural funding needs defined basically as loans and credits and investments in Group companies. In addition, liquidity position and horizon targets are set for local and global systemic stress scenarios and idiosyncratic stress scenarios.

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Supplementary quantitative metrics of concentration risk appetite

The Group wishes to maintain a widely diversified risk portfolio from the perspective of its exposure to large risks, to certain markets and to specific products. This is obtained firstly by virtue of the Group’s focus on the retail banking business with a high level of international diversification.

Concentration risk is measured using the following metrics for which risk appetite thresholds are established as a proportion of capital or loans and credits (generally):

• Customer (in proportion to capital): a) maximum individual net exposure to corporate customers (also, customers with internal ratings below the investment grade equivalent and which exceed a certain exposure level are monitored); b) maximum aggregate net exposure to the Group’s 20 largest corporate customers (Top 20); c) maximum aggregate net exposure of the exposures considered to be large exposures (corporate and financial customers); and d) maximum effect on earnings before tax (EBT) of the simultaneous default of the five largest corporate exposures (jump to default Top 5).

• Sector: maximum exposure of the corporate portfolio in a given economic sector as a percentage of loans and credits (both total loans and credits and those to the corporate segment).

• Portfolios with a high risk profile (defined as retail portfolios with percentage risk premiums above the established threshold): maximum percentages of exposure to this type of portfolio as a proportion of loans and credits (both total and retail loans and credits) and for the various business units.

Non-financial risks

• Operational risk: a maximum ratio of net operational risk losses to total income is established (for both the Group and each unit). In addition, the Group assesses the management status, which is based on the results of indicators of various matters including, inter alia, governance and management, budgetary compliance, quality of events databases, and corporate self-assessment questionnaires on the control environment. In accordance with the Basel specifications, net losses include the losses that might arise from compliance risk.

• Compliance and reputational risk: zero risk appetite. Consequently, the Group’s objective is to minimize the incidence of this type of risk, which it monitors on a systematic basis through the compliance and reputational risk indicator resulting from the measurement matrix created for this purpose.

Qualitative elements of the risk appetite

In general, the Group’s risk appetite framework is based on maintaining the following qualitative objectives:

• A predictable general medium-low risk profile based on a diversified business model focusing on retail banking with a diversified international presence and significant market shares, and a wholesale banking model which prioritizes the relationship with the customer base in the Group’s principal markets.

• A target rating of between AA- and A-, both at Group level and for the local units (at local scale), based on the environment and on the performance of sovereign risk.

• A stable, recurring earnings generation and shareholder remuneration policy based on a strong capital and liquidity base and a strategy to effectively diversify sources and maturities.

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• A corporate structure based on autonomous subsidiaries that are self-sufficient in capital and liquidity terms, minimizing the use of non-operating or purely instrumental companies, and ensuring that no subsidiary has a risk profile that might jeopardize the Group’s solvency.

• An independent risk function with highly active involvement of senior management to guarantee a strong risk culture focused on protecting and ensuring an adequate return on capital.

• To maintain a management model that ensures that all risks are viewed in a global interrelated way through a robust corporate risk control and monitoring environment with global responsibilities: all risks, all businesses, and all geographical areas.

• A business model that focuses on the products with respect to which the Group considers that it has sufficient knowledge and management capacity (systems, processes and resources).

• The confidence of customers, shareholders, employees and professional counterparties, enabling the Group to conduct its business within the bounds of its social and reputational commitment, in accordance with its strategic objectives.

• The availability of sufficient and adequate human resources, systems and tools in order to enable Santander Group to maintain a risk profile compatible with the established risk appetite, at both global and local level.

• The application of a remuneration policy containing the incentives required to ensure that the individual interests of employees and executives are in line with the corporate risk appetite framework and that the incentives are consistent with the Group’s long-term earnings performance.

The Group’s risk appetite framework also contains specific qualitative objectives for the various types of risk considered:

Living wills (recovery and resolution plans)

The Group has a corporate structure based on autonomous subsidiaries that are self-sufficient in capital and liquidity terms and it ensures that none of these subsidiaries has a risk profile that might jeopardize the Group’s solvency.

In 2010 the Group filed its corporate living will with the supervisor of the consolidated Group, the Bank of Spain. Also, although it was not required, in 2010 more summarized individual living wills were prepared for the important geographical units, including Brazil, Mexico, Chile, Portugal and the UK.

In 2013 the fourth version of the corporate living will was prepared. As with the first three versions in 2010, 2011 and 2012, the Group submitted the fourth version of the living will to its CMG (Crisis Management Group) in September 2013. The 2013 living will comprises the corporate plan (corresponding to Banco Santander, S.A.) and the individual plans for most of its most important local units (the UK, Brazil, Mexico, the US – Santander USA, Germany and Portugal). Particularly noteworthy are the cases of the UK, Germany and Portugal, where, irrespective of the obligation to be part of the corporate living will, a complete version was prepared in compliance with local regulatory initiatives.

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2. CORPORATE GOVERNANCE OF THE RISK FUNCTION

The risk committee is responsible for proposing the Group’s risk policy for approval by the board within its governing and supervisory powers. Furthermore, the committee ensures that the Group’s activities are consistent with its risk appetite level and, in this regard, it sets global limits for the main risk exposures, which it reviews systematically, and decides upon any transactions that exceed the powers delegated to lower-ranking bodies.

The risk committee, an executive body that adopts decisions within the scope of the powers delegated by the board, is presided over by the second deputy chairman of the Group and also comprises a further four directors of the Bank.

The responsibilities assigned to the risk committee are essentially as follows:

• To propose to the board the Group’s risk policy, which will identify, in particular:

• The various types of risk (financial, operational, technological, legal and reputational, inter alia) facing the Group.

• The information and internal control systems to be used to control and manage these risks.

• The level of risk deemed acceptable by the Group.

• The measures envisaged to mitigate the impact of the identified risks in the event that they materialize.

• To conduct systematic reviews of the Group’s exposure to its main customers, economic activity sectors, geographical areas and types of risk.

• To authorize the management tools and risk models and ascertain the result of their internal validation.

• To ensure that the Group’s actions are consistent with the previously defined risk appetite.

• To be informed of, assess and follow such remarks and recommendations as may periodically be made by the supervisory authorities in discharging their function.

• To resolve transactions outside the powers delegated to lower-ranking bodies and the overall limits for pre-classified risk categories for economic groups or in relation to exposure by type of risk.

The risk committee has delegated certain of its powers to risk subcommittees which are structured by geographical area, business line and type of risk, all of which are defined in the corporate risk governance model.

In addition, both the executive committee and the board of directors of the Bank pay particular attention to the management of the Group’s risks.

The board of directors will propose to the shareholders at the 2014 annual general meeting that the Bylaws be amended to provide, in compliance with the recent CRD IV Directive, for the creation of a new committee responsible for assisting the board on matters relating to risk oversight. When this committee has been created, the risk committee will retain its competencies regarding risk management.

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The second deputy chairman of the Group is the person ultimately responsible for risk management. He is also a member of the board of directors and chairman of the risk committee, and two general risk units report to him. These units are independent of the business areas from both a hierarchical and functional standpoint, and their organizational and functional structure is as follows:

• The risk unit (“DGR”) is responsible for the executive credit risk and financial risk management functions and for the control of other risks (mainly technology, operational and compliance risk), and it is adapted to the structure of the business, both by type of customer and by activity and geographical area (global/local perspective).

The areas of the risk unit are divided into three blocks:

• A structure for the management and control of financial risks (credit, market and structural risk) and the control of other risks. This block includes the following areas: loans to individuals, loans to companies, loan approval and monitoring, market and structural risks and non-financial risk control.

• A business structure, centered on the performance of the risk function in the Group’s global and local businesses. This block includes the following areas: Santander Consumer Finance risk management, global business risk management, and asset write-downs and recoveries.

• A structure for the establishment of frameworks, the development and implementation of models and information infrastructure. This block includes the following areas: risk policies, methodology and risk information management.

In compliance with the aforementioned structure, the Group has defined a planning and governance area responsible for the coordination of new projects and the internal management of all the units, and a risk monitoring and consolidation area responsible for overseeing all risks on an overall basis.

The scope of action of these functions is global, i.e. they feature in all the units in which the risk division acts and this structure is mirrored in the local units. The fundamental elements through which the global functions are replicated in each unit are the corporate frameworks. These are the central elements for disseminating and transferring global practices, reflecting the action policies and criteria for each area and establishing the Group’s compliance standards to be applied at all local units.

In general, it is possible to distinguish the main functions performed by the global areas of the DGR and by the units:

• The risk unit establishes risk policies and criteria, global limits and decision-making and control processes; it generates management schemes, systems and tools; and it adapts the best practices of both the banking industry and the various local units for their application in the Group.

• The local units apply the policies and systems to the local market; they adapt the management schemes and organization to the corporate frameworks; they contribute criticism and best practices; and they lead local projects.

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• The integrated risk control and internal risk validation unit, with global-reaching corporate responsibilities, which provide support to the Group’s governing bodies, namely:

• Internal validation of the credit and market risk and economic capital models in order to measure their suitability for management and regulatory purposes. The validation exercise envisages the review of the theoretical fundamentals of the model, the quality of the data used to build and calibrate the model, and its use and the associated corporate governance process.

• Integrated risk control, the purpose of which is to supervise the quality of the Group’s risk management, seeking to ensure that the systems for the management and control of the risks inherent to its activity comply with the strictest criteria and the best practices observed in the industry and/or required by the regulators, and verifying that the risk profile actually assumed is within the guidelines laid down by senior management.

3. INTEGRATED RISK CONTROL AND INTERNAL RISK VALIDATION

The integrated risk control and internal risk validation functions are located, at corporate level, within the integrated risk control and internal risk validation unit, reporting directly to the second deputy chairman of the Group and chairman of the risk committee, and provide support for the Group’s governing bodies in risk control and management matters.

3.1 Integrated risk control function

In 2008 the Group launched the integrated risk control function in order to ensure an integrated view of the management of all the risks affecting the performance of the Group’s ordinary activities. The risks taken into consideration are: credit risk (including concentration and counterparty risks); market risk (including liquidity risk and structural interest rate and foreign currency risks); operational and technology risk; and compliance and reputational risk.

The integrated risk control function is articulated in three complementary activities:

1) To guarantee that the management and control systems for the various risks inherent in the Group’s activities comply with the most stringent criteria and the best practices observed in the industry and/or required by regulators;

2) To ensure that senior management has an all-embracing view of the profiles of the various risks assumed at any time and that these profiles are consistent with the pre-determined risk appetite; and

3) To supervise adequate compliance, in due time and form, with any recommendations on risk management and control made as a result of inspections conducted by internal audit and by the supervisors to which the Group is subject.

The function is characterized by having global and corporate scope and encompasses all risks, all businesses and all geographical areas. It is a third layer of control which follows the control performed in the first instance by the officer responsible for managing and controlling each risk at each business or functional unit (first layer of control) and by each officer responsible for the control of each risk at corporate level (second layer of control). This system ensures a vision and, therefore, the integrated monitoring of all the risks incurred by the Group in the performance of its business activities.

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3.2 Independent internal validation of risk models

In addition to constituting a regulatory requirement, the internal validation of risk models function provides essential support to the board’s risk committee and the local and corporate risk committees in the performance of their duties to authorize the use of the models (for management and regulatory purposes) and to review them regularly.

To this end, a sufficiently independent specialized unit of the Group issues an expert opinion on the adequacy of the internal models for the intended internal management and/or regulatory purposes (calculation of regulatory capital, level of provisions, etc.), expressing a conclusion on their robustness, usefulness and effectiveness.

At the Group, internal validation covers all models used in the risk function, i.e. credit, market, structural and operational risk models and economic and regulatory capital models. The scope of the validation includes not only the more theoretical or methodological aspects, but also the technology systems and the data quality that facilitate and underpin the effective operation of the models and, in general, all the relevant aspects of risk management (controls, reporting, uses, involvement of senior management, etc.).

This function is performed at a global and corporate level in order to ensure uniformity of application, and is implemented through five regional centers located in Madrid, London, São Paulo, New York and Wroclaw (Poland). From a functional standpoint, these centers are fully accountable to the corporate center, which makes it possible to ensure consistency in the performance of their activities. This system facilitates the application of a corporate methodology that is supported by a set of tools developed internally by the Group that provide a robust corporate framework to be used at all the Group’s units and which automate certain verifications to ensure efficient reviews.

It should be noted that the Group’s corporate internal validation framework is fully consistent with the internal validation standards for advanced approaches issued by the Bank of Spain and by the other supervisors to which the Group is subject. Accordingly, the Group maintains the segregation of functions between internal validation and internal audit, which, in its role as the last layer of control at the Group, is responsible for reviewing the methodology, tools and work performed by internal validation and for giving its opinion on the degree of effective independence.

4. CLUSTERS OF RISK

The Group’s senior management considers that there are clusters of risk that affect its business and, therefore, the risks arising from it. These clusters and the actions adopted to mitigate them are as follows:

• Macroeconomic environment: at times of crisis it is particularly important to pay attention to the volatility of the macroeconomic environment. Geographical diversification protects the Group’s results by minimizing the impact of this volatility, and it enables the Group to maintain a medium-low risk profile. In addition, the Group uses scenario analysis techniques to ensure that its risk profile is maintained within the established risk appetite and that the balance sheet is resistant to potential adverse macroeconomic scenarios. These analyses are regularly submitted to senior management, and they include the potential impact on the income statement of the effect of the scenarios on margins, credit risk and counterparty risk losses and the trading portfolio. The analyses also consider the impact of adverse scenarios on the Group’s liquidity position.

• Regulatory change: as a response to the financial crisis in recent years, the regulators and competent authorities in banking matters are designing a series of measures intended to avoid future crises and to mitigate their impact, if any. Compliance with these measures by financial institutions, especially those designated as systemic, is having an impact on various areas: capital requirements, liquidity, transparency, etc.

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The constant monitoring of the changes in the regulatory framework and the anticipation of these changes to enable Banco Santander to adapt swiftly to the new requirements constitute the basic pillars of the Bank’s approach to these matters.

The public policy department, which forms part of the communication, corporate marketing and studies division, assumes the task of monitoring and managing regulatory alerts, in coordination with the general secretary’s division, the controller’s unit, the finance and risk divisions and the support and business areas affected by these alerts. The persons responsible for public policy at division level hold meetings on a monthly basis and those responsible for public policy at country level hold a teleconference every month in order to ensure coordination at Group level.

This approach is encouraged and supported from the highest echelons of the Bank’s senior management. The public policy committee, which is chaired by the CEO, is the forum where the main regulatory changes are reported, the impact thereof is analyzed and the strategy to be adopted regarding these matters is designed.

• Reputational and conduct risk: in order to mitigate the impact of these risks, in recent years the Group has substantially reinforced its control of all matters relating to the marketing of products (including follow-up) and customer relations. This matter is currently the focus of considerable attention by both the supervisors and public opinion, not only in relation to investment products but also banking products and financial services in general.

5. CREDIT RISK

5.1 Introduction to the treatment of credit risk

Credit risk is the possibility of loss stemming from the total or partial failure of our customers or counterparties to meet their financial obligations to the Group.

In credit risk management terms, segmentation is based on the distinction between two types of customers:

• Individualized customers are defined as those to which a risk analyst has been assigned. This category includes global wholesale banking customers (corporates, financial institutions and sovereigns) and the retail banking companies whose risk level is above a set exposure threshold for each unit. Risk management is performed through expert analysis supplemented by decision-making support tools.

• Standardized risks: standardized customers are those which have not been assigned a risk analyst. This segment includes exposures to individuals, independent professionals and retail banking enterprises not classified as individualized customers. Management of these risks is based on internal risk assessment and automatic decision-making models, supplemented when required by the expert judgment of teams of analysts.

The Group has a mainly retail profile, with more than 80% of its total risk exposure being generated by its commercial banking business.

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5.2 Main aggregates and variations

5.2.1 Global credit risk map - 2013

Following are the main aggregates relating to credit risk arising on customer business:

	Credit risk exposure to customers (1) (millions of euros)						Non-performing loans ratio (%)						Coverage ratio (%)
	2013		2012		2011		2013		2012		2011		2013		2012		2011
Continental Europe		312,167		332,261		353,506		9.13		6.29		5.24		57.3		77.0		55.2
Spain		189,783		210,536		223,456		7.49		3.84		3.30		44.0		50.0		50.9
Santander Consumer Finance		50,628		59,387		59,442		4.01		3.90		3.97		105.3		109.5		109.3
Portugal		26,810		28,188		30,607		8.12		6.56		4.06		50.0		53.1		54.9
Poland		18,101		10,601		9,120		7.84		4.72		4.89		61.8		68.3		65
United Kingdom		235,627		254,066		257,698		1.98		2.05		1.85		41.6		44.1		37.5
Latin America		150,979		160,413		159,445		5.03		5.42		4.32		84.6		87.5		97.0
Brazil		79,216		89,142		91,035		5.64		6.86		5.38		95.1		90.2		95.2
Mexico		24,024		22,038		19,446		3.66		1.94		1.82		97.5		157.3		175.7
Chile		31,645		32,697		28,462		5.91		5.17		3.85		51.1		57.7		73.4
Puerto Rico		4,023		4,567		4,559		6.29		7.14		8.64		61.6		62.0		51.4
Argentina		5,283		5,378		4,957		1.42		1.71		1.15		140.4		143.3		206.9
United States		40,349		44,678		43,052		2.23		2.29		2.85		93.6		105.9		96.2
Total Group		738,558		793,448		820,968		5.64		4.54		3.90		61.7		72.4		61.0

(1) Including gross loans and advances to customers, guarantees, documentary credits and the mark-to-market of customer derivatives (EUR 5,505 million).

At 2013 year-end credit risk exposure had fallen by 7%. This fall was experienced across the board, except for Brazil, Mexico, Chile and Poland, where growth was observed in 2013 in local currency terms. These lending levels, together with non-performing loans of EUR 41,652 million, placed the Group’s non-performing loans ratio at 5.64% (up 110 basis points. on 2012).

The Group’s coverage ratio stood at 62%. It is important to take into account that the ratio is reduced by the relative proportion of the mortgage portfolios (especially in the UK and Spain), which require lower on-balance-sheet provisions since they are secured by collateral.

5.3 Detail of geographical areas with the highest concentrations

Following is a description of the portfolios in the geographical areas where the Group’s risk concentration is highest:

5.3.1 UK

Credit risk exposure to UK customers amounted to EUR 235,627 million at the end of December 2013, and represented 31.9% of the Group total.

Due to its importance, not only to Santander UK, but also to Santander Group’s lending activity as a whole, the mortgage loan portfolio (which totaled EUR 177,617 million at the end of December 2013) must be highlighted.

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This portfolio is composed entirely of first-mortgage home purchase or refurbishment loans to new and existing customers, since transactions involving second or successive liens on mortgaged properties are no longer originated.

The property on which the mortgage guarantee is constituted must be located in the UK, irrespective of where the funding is to be employed, except for certain one-off transactions. Loans may be granted for the purchase of residences abroad, but the mortgage guarantee must in all cases be constituted on a property located in the UK.

Geographically speaking, the credit risk exposure is concentrated mainly in the South East of England, where house price indices reflect a more stable behavior, even in times of economic slowdown.

Properties are appraised independently prior to the approval of each new transaction, in accordance with the Group’s risk management principles.

For mortgage loans that have already been granted, the appraised value of the mortgaged property is updated quarterly by an independent agency using an automatic appraisal system in accordance with standard procedure in the market and in compliance with current legislation.

The non-performing loans ratio rose from 1.74% in 2012 to 1.88% at 2013 year-end.

This rise can be explained mainly by the fall in loans and credits due to the application of the strict lending and pricing policies implemented in recent years. The effect of these measures has been to reduce exposure to certain worst performing subsegments, such as interest-only mortgages, to a greater extent than the new lending generated, with the corresponding reduction in total stock.

There was a significant improvement in the performance of non-performing loans as a result of the more favorable macroeconomic environment and the increase in re-performing loans due to the improved efficiency of the recovery teams. Thus, the amount of non-performing loans increased by 1.1% to EUR 3,453 million, including foreclosed homes, compared with the 8.5% rise in 2012.

The credit policies limit the maximum loan-to-value criteria to 90% for loans on which principal and interest are repaid and to 50% for loans on which interest is paid periodically and the principal is repaid on maturity.

Current credit risk policies expressly prohibit loans considered to be high risk (subprime mortgages), and establish demanding requirements regarding the credit quality of both loans and customers. For example, the granting of mortgage loans with LTVs exceeding 100% has been forbidden since 2009. Between 2009 and 2012 less than 0.1% of new production had an LTV higher than 90%.

5.3.2 Spain

5.3.2.1 Portfolio overview

Total credit risk in Spain (including guarantees and documentary credits but excluding the real-estate run off unit) amounted to EUR 189,783 million (26% of the Group total), with an adequate degree of diversification in terms of both products and customer segments. In 2013 lending levels continued to fall as a result of the decrease in the demand for credit and the economic situation. The non-performing loans ratio stood at 7.49%. The coverage ratio stood at 44%.

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5.3.2.2 Portfolio of home purchase loans to families

Home purchase loans granted to families in Spain stood at EUR 55,158 million at 2013 year-end. Of this amount, 98% was secured by mortgages.

	31-12-13
In millions of euros	Gross amount		Of which: Impaired
Home purchase loans		55,158		4,041
Without mortgage guarantee		863		461
With mortgage guarantee		54,295		3,580

The risk profile of the home purchase mortgage loan portfolio in Spain remained at a medium-low level, with limited prospects of additional impairment:

• All mortgage transactions include principal repayments from the very first day.

• There is a habitual practice of early repayment, as a result of which the average life of transactions is much shorter than the contractual term.

• Debtors provide all their assets as security, not just the home.

• High quality of the collateral, since the portfolio consists almost exclusively of principal-residence loans.

• 88% of the portfolio has an LTV of less than 80%.

• Stable average debt-to-income ratio at around 29%.

	12/31/13
	Loan-to-value ratio
In millions of euros	Less than or equal to 40%		More than 40% and less than 60%		More than 60% and less than 80%		More than 80% and less than or equal to 100%		More than 100%		Total
Initial gross amount		12,703		16,642		18,185		5,683		1,083		54,295
Of which: Impaired		277		641		1,353		951		358		3,580

For internal management purposes, the Group updates the LTV ratios at least once a year, taking into consideration published house price indices. Also, if a debtor becomes impaired the Group updates the appraisals undertaken by valuers, which are taken into account in the estimate of impairment losses.

5.3.2.3 Portfolio of loans to non-real estate companies

The EUR 106,042 million of loans granted directly to SMEs and companies constitute the most important lending segment in Spain, representing 56% of the total.

Most of the portfolio relates to individualized customers to which a risk analyst has been assigned because of the risk assumed. The risk analyst monitors the customer on an ongoing basis in all the phases of the risk cycle.

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The non-performing loans ratio of this portfolio was 8.72% in 2013, impacted by the continuity of the complicated economic environment and by the drop in lending.

5.3.2.4 Real estate loan portfolio

Gross real estate exposure in Spain amounted to EUR 20,936 million at 2013 year-end, of which EUR 12,105 million relate to loans and EUR 8,831 million to foreclosed properties. Of these amounts, EUR 11,355 million of loans and EUR 7,990 million of foreclosed properties are managed using a specialized management model in a separate unit called “Real estate operations discontinued in Spain”, which also manages investments in the real estate industry (Metrovacesa, S.A. and the Spanish Bank Restructuring Asset Management Company).

The policy of severely reducing the balances in this segment continued in 2013.

	Millions of euros
	31-12-13			31-12-12			31-12-11
Balance at beginning of year		15,867			23,442			27,334
Foreclosed assets		(848	)		(930	)		(914	)
Reductions (1)		(2,114	)		(5,670	)		(2,742	)
Written-off assets		(800	)		(975	)		(236	)
Balance at end of year (net)		12,105			15,867			23,442

⁽¹⁾  Includes sales of portfolios, cash recoveries and third-party subrogations

The NPL ratio of this portfolio ended the year at 61.7% (compared with 47.7% at December 2012) due to the increase in the proportion of impaired assets in the problem loan portfolio and, in particular, to the sharp reduction in lending in this segment. The table below shows the distribution of the portfolio. The coverage ratio of the real estate exposure in Spain stands at 41.1%.

	12/31/13
Millions of euros	Gross amount		Excess over collateral value		Specific allowance
Financing for construction and property development recorded by the Group’s credit institutions (business in Spain)		12,105		5,173		4,981
Of which: Impaired		7,473		3,869		3,960
Of which: Substandard		2,972		1,011		1,021
Memorandum item: Written-off assets		1,642

Memorandum item: Data from the public consolidated balance sheet	12/31/13
Millions of euros	Carrying amount
Total loans and advances to customers excluding the public sector (businesses in Spain)		160,478
Total consolidated assets		1,115,638
Impairment losses and credit risk allowances. Collective coverage (business in Spain)		213

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The Group calculates the loan loss allowance individually as the difference between the carrying amount of the debt and the present value of its estimated cash flows over the life of the agreement, including those from the guarantees, less costs to sell.

At year-end, this portfolio had low concentration and an adequate level of collateral and allowances.

	Loans: Gross amount		Loans: Gross amount
	12/31/13		12/31/12
1. Without mortgage guarantee		1,562		2,225
2. With mortgage guarantee		10,543		13,642
2.1 Completed buildings		5,600		7,025
2.1.1 Residential		3,192		3,491
2.1.2 Other		2,408		3,534
2.2 Buildings under construction		685		1,493
2.2.1 Residential		573		1,080
2.2.2 Other		112		413
2.3 Land		4,258		5,124
2.3.1 Developed land		3,751		4,705
2.3.2 Other land		507		419
Total		12,105		15,867

Policies and strategies in place for the management of these risks

The policies in force for the management of this portfolio, which are reviewed and approved on a regular basis by the Group’s senior management, are currently geared towards reducing and securing the outstanding exposure, albeit without neglecting any viable new business that may be identified.

In order to manage this credit exposure, the Group has specialized teams that not only form part of the risk areas but also supplement the management of this exposure and cover the entire life cycle of these transactions: commercial management, legal processes, court procedures and potential recovery management.

As has already been discussed in this section, the Group’s anticipatory management of these risks enabled it to significantly reduce its exposure, and it has a granular, geographically diversified portfolio in which the financing of second residences accounts for a very small proportion of the total.

Mortgage lending on non-urban land represents a low percentage of mortgage exposure to land, while the remainder relates to land already classified as urban or developable, which can therefore be developed.

In the case of home financing projects in which the construction work has already been completed, the significant reduction in the exposure is supported by various actions. As well as the specialized marketing channels already in existence, campaigns were carried out with the support of specific teams of managers for this function who, in the case of the Santander Network, were directly supervised by the recoveries business area. These campaigns, which involved the direct management of the projects with property developers and purchasers, reducing sale prices and adapting the lending conditions to the buyers’ needs, enabled loans already in force to be subrogated. These subrogations enable the Group to diversify its risk in a business segment that displays a clearly lower non-performing loans ratio.

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The loan approval processes are managed by specialist teams which, working in direct coordination with the sales teams, have a set of clearly defined policies and criteria:

• Property developers with a strong solvency profile and a proven track record in the market.

• Strict criteria regarding the specific parameters of the transactions: exclusive financing for the construction cost, high percentages of accredited sales, principal residence financing, etc.

• Support of financing of government-subsidized housing, with accredited sales percentages.

• Restricted financing of land purchases, subject to the restoration of a sufficient level of coverage in existing financing arrangements or to the obtainment of increased collateral.

In addition to the permanent control performed by its risk monitoring teams, the Group has a specialist technical unit that monitors and controls this portfolio with regard to the stage of completion of construction work, planning compliance and sales control, and validates and controls progress billing payments. The Group has created a set of specific tools for this function. All mortgage distributions, amounts drawn down of any kind, changes made to the grace periods, etc. are authorized on a centralized basis.

In the case of construction-phase projects that are experiencing difficulties of any kind, the policy adopted is to ensure completion of the construction work so as to obtain completed buildings that can be sold in the market. To achieve this aim, the projects are analyzed on a case-by-case basis in order to adopt the most effective series of measures for each case (structured payments to suppliers to ensure completion of the work, specific schedules for drawing down amounts, etc.).

The management of on-balance-sheet property assets is performed by companies that specialize in the sale of property (Altamira Santander Real Estate, S.A.) and is supplemented by the commercial network structure. The sale prices are reduced in line with market conditions.

Foreclosed properties

As a last resort, the acquisition and foreclosure of property assets is one of the mechanisms adopted in Spain in order to manage the portfolio efficiently. At December 31, 2013, the net balance of these assets amounted to EUR 4,146 million (gross amount: EUR 8,831 million; recognized allowance: EUR 4,685 million).

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The following table shows the detail of the foreclosure of property assets by the businesses in Spain at 2013 and 2012 year-end:

	12/31/13				12/31/12
Millions of euros	Carrying amount		Of which: Allowance		Carrying amount		Of which: Allowance
Property assets arising from financing provided to construction and property development companies		3,397		4,151		2,906		3,650
Of which:
Completed buildings		1,059		727		793		498
Residential		492		338		393		236
Other		567		389		400		262
Buildings under construction		366		369		283		281
Residential		366		368		274		273
Other		—		1		9		8
Land		1,972		3,055		1,830		2,871
Developed land		926		1,390		1,302		2,024
Other land		1,046		1,665		528		847
Property assets from home purchase mortgage loans to households		747		530		707		454
Other foreclosed property assets		2		4		61		60
Total property assets		4,146		4,685		3,674		4,164
Equity instruments, ownership interests and financing provided to non-consolidated companies holding these assets		647		751		649		749
Total		4,793		5,436		4,323		4,913

In recent years, the Group has considered asset acquisition/foreclosure to be a more efficient method for resolving cases of default than legal proceedings. The Group initially recognizes foreclosed assets at the lower of the carrying amount of the debt (net of provisions) and the fair value of the acquired/foreclosed asset (less estimated costs to sell). If fair value (less costs to sell) is lower than the net value of the debt, the difference is recognized under Impairment losses on financial assets (net) - Loans and receivables in the consolidated income statement for the year. Subsequent to initial recognition, the assets are measured at the lower of fair value (less costs to sell) and the amount initially recognized. The fair value of this type of assets is determined by the Group’s directors based on evidence obtained from qualified valuers or evidence of recent transactions.

The changes in foreclosed assets were as follows:

	Thousands of millions of euros
	2013		2012
Gross additions		1.9		2.1
Disposals		0.9		2.8
Difference		1		(0.7	)

5.3.3 Brazil

The loan portfolio in Brazil amounted to EUR 79,216 million (11% of the Group total), and had an adequate degree of diversification and a predominantly retail profile. 55% of loans are loans to individuals, consumer loans and loans to SMEs.

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In 2013 the portfolio grew by 7.1% (excluding changes in exchange rates) as compared with 11% in 2012. This growth is in line with the nominal growth of the Brazilian economy and the average performance of private banks in Brazil.

The NPL ratio was 5.64% at 2013 year-end, compared with 6.86% in 2012, reflecting the improvement in the credit quality of the portfolio, especially loans to individuals.

The non-performing loans coverage ratio stands at 95% (2012 year-end: 90%).

5.4. Credit risk from other standpoints

5.4.1 Credit risk from financial market operations

This concept includes the credit risk arising in treasury operations with customers, mainly credit institutions. These operations are performed using both money market financing products arranged with various financial institutions and derivative products intended to provide service to the Group’s customers.

The exposure is measured using an MtM methodology (replacement value of derivatives or amount drawn down of committed facilities) plus potential future exposure (add-on). Calculations are also performed of capital at risk or unexpected loss (i.e. the loss which, once the expected loss is subtracted, constitutes the economic capital, net of guarantees and recoveries).

When the markets close, the exposures are recalculated by adjusting all the transactions to their new time horizon, the potential future exposure is adjusted and mitigation measures are applied (netting arrangements, collateral arrangements, etc.) so that the exposures can be controlled daily against the limits approved by senior management. Risk control is performed using an integrated, real-time system that enables the Group to know at any time the unused exposure limit with respect to any counterparty, any product and maturity and at any Group unit.

5.4.2 Concentration risk

Concentration risk control is key to the risk management process. The Group continuously monitors the degree of credit risk concentration, by country, sector and customer group.

The risk committee establishes the risk policies and reviews the exposure limits required to ensure adequate management of credit risk concentration.

The Group is subject to Bank of Spain regulations on large exposures. Pursuant to the rules contained in Bank of Spain Circular 3/2008 (on the calculation and control of minimum capital requirements) and subsequent amendments thereto, the value of a credit institution’s total exposure to a single individual, entity or economic group, including the non-consolidated portion of its own economic group, may not exceed 25% of its capital. Exposures to a single individual, legal entity or economic group are deemed to be large exposures when their value exceeds 10% of the credit institution’s capital. Exposures to governments and central banks belonging to the OECD are excluded from this treatment.

At December 31, 2013, there were certain economic groups with respect to which the Group’s exposure initially exceeded 10% of capital: seven financial institutions, one central government and one central counterparty in the EU. After applying risk mitigation techniques and the regulations applicable to large exposures, all of these exposures fell below 4% of eligible capital.

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At December 31, 2013, the Group’s credit exposure to the top 20 borrower economic and financial groups, excluding AAA-rated governments and sovereign bonds denominated in local currency, accounted for 4.7% of the credit risk exposure to customers (lending plus off-balance-sheet exposures), slightly less than in 2012.

The Group does not have any exposures to central counterparties that exceed 5% of capital. The top 10 IFIs account for EUR 14,769 million.

Santander Group’s risk division works closely with the finance division in the active management of credit portfolios, which includes reducing the concentration of exposures through several techniques, such as the arrangement of credit derivatives for hedging purposes or the performance of securitization transactions, in order to optimize the risk/return ratio of the total portfolio.

The detail, by activity and geographical area of the counterparty, of the concentration of the Group’s risk at December 31, 2013 is as follows:

	12/31/13
Millions of euros	Total		Spain		Other EU countries		Americas		Rest of the world
Credit institutions		147,993		26,142		69,665		48,481		3,705
Public sector		113,441		46,880		22,358		38,931		5,272
Of which:
Central government		92,780		32,216		21,646		33,649		5,269
Other		20,661		14,664		712		5,282		3
Other financial institutions		52,393		11,833		24,031		14,036		2,493
Non-financial companies and individual entrepreneurs		293,297		98,642		65,783		115,972		12,900
Of which:
Property construction and development		21,477		7,159		4,542		9,623		153
Civil engineering construction		6,849		4,611		2,030		139		69
Large companies		170,377		51,036		37,535		74,777		7,029
SMEs and individual entrepreneurs		94,594		35,836		21,676		31,433		5,649
Other households and non-profit institutions serving households		396,157		66,876		254,679		73,068		1,534
Of which:
Residential		291,267		54,441		205,536		30,349		941
Consumer loans		92,036		7,823		46,712		36,931		570
Other purposes		12,854		4,612		2,431		5,788		23
Subtotal		1,003,281		250,373		436,516		290,488		25,904
Less: collectively assessed impairment losses		3,439
Total (*)		999,842

(*) For the purposes of this table, the definition of risk includes the following items in the public balance sheet: Loans and advances to credit institutions, Loans and advances to customers, Debt instruments, Equity instruments, Trading derivatives, Hedging derivatives, Investments and Contingent liabilities.

5.4.3 Country risk

Country risk is a credit risk component inherent in all cross-border credit transactions due to circumstances other than ordinary commercial risk. Its main elements are sovereign risk, transfer risk and other risks that can affect international financial operations (war, natural disasters, balance of payments crises, etc.).

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At December 31, 2013, the country risk exposure for which allowances must be recorded amounted to EUR 382 million (December 31, 2012: EUR 342 million). The allowance recognized in this connection at 2013 year-end amounted to EUR 47 million, as compared with EUR 45 million at 2012 year-end.

The country risk exposure for which allowances must be recorded is moderate. Total country risk exposure, irrespective of whether or not allowances must be recorded, is also moderate. Except for the group 1 countries (considered by the Bank of Spain to have the lowest level of risk⁽⁴⁾), exposure to an individual country in no case exceeds 1% of the Group’s total assets.

The Group’s country risk management policies continued to adhere to a principle of maximum prudence, and country risk is assumed, applying highly selective criteria, in transactions that are clearly profitable for the Group and bolster its overall relationship with its customers.

5.4.4 Sovereign risk

As a general rule, the Group considers sovereign risk to be the risk assumed in transactions with the central bank (including the regulatory cash reserve requirement), the issuer risk of the Treasury or similar body (government debt securities) and the risk arising from transactions with public entities that have the following features: their funds are obtained only from fiscal income; they are legally recognized as entities directly included in the government sector; and their activities are of a non-commercial nature.

This criterion, which has been employed historically by the Group, differs in certain respects from that requested by the European Banking Authority (EBA) for its periodic stress tests. The most significant differences are that the EBA’s criteria do not include risk exposure to central banks, the Group insurance companies’ exposures, exposure to public-sector companies or indirect exposure by means of guarantees or other instruments. However, they do include exposure to public authorities in general (including regional and local authorities), not only the central government sector.

Sovereign risk exposure (per the criteria applied at the Group) arises mainly from the subsidiary banks’ obligations to make certain deposits at the corresponding central banks and from the fixed-income portfolios held as part of the on-balance-sheet structural interest rate risk management strategy. The vast majority of these exposures are taken in local currency and are financed out of local customer deposits, also denominated in local currency.

In general, total exposure to sovereign risk has remained relatively stable in recent years, which seems reasonable if the strategic reasons for it, discussed above, are taken into account.

^4.  This group includes transactions with ultimate obligors resident in European Union countries, Norway, Switzerland, Iceland, the US, Canada, Japan, Australia and New Zealand.

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The detail at December 31, 2013 and 2012, based on the Group’s management of each portfolio, of the Group’s sovereign risk exposure, net of the short positions held with the respective countries, taking into consideration the aforementioned criterion established by the European Banking Authority (EBA), is as follows:

	12/31/13
	Millions of euros
	Portfolio
Country	Financial assets held for trading and Other financial assets at fair value through profit or loss (*)			Available-for-sale financial assets		Loans and receivables		Total net direct exposure
Spain		4,359			21,144		12,864		38,367
Portugal		148			2,076		583		2,807
Italy		1,309			77		—		1,386
Greece		—			—		—		—
Ireland		—			—		—		—
Rest of eurozone		(1,229	)		67		—		(1,161	)
UK		(1,375	)		3,777		—		2,402
Poland		216			4,770		43		5,030
Rest of Europe		5			117		—		122
US		519			2,089		63		2,671
Brazil		8,618			8,901		223		17,743
Mexico		3,188			2,362		2,145		7,695
Chile		(485	)		1,037		534		1,086
Rest of Americas		268			619		663		1,550
Rest of world		5,219			596		146		5,964
Total		20,762			47,632		17,268		85,661

(*) Net of short positions amounting to EUR 17,658 million.

In addition, at December 31, 2013, the Group had net direct derivatives exposures the fair value of which amounted to EUR (206) million and net indirect derivatives exposures the fair value of which amounted to EUR 6 million. Also, the Group did not have any exposure to held-to-maturity investments.

	12/31/12
	Millions of euros
	Portfolio
Country	Financial assets held for trading and Other financial assets at fair value through profit or loss (*)			Available-for-sale financial assets		Loans and receivables		Total net direct exposure
Spain		4,403			24,654		16,528		45,586
Portugal		—			1,684		616		2,300
Italy		(71	)		76		—		4
Greece		—			—		—		—
Ireland		—			—		—		—
Rest of eurozone		943			789		—		1,731
UK		(2,628	)		4,419		—		1,792
Poland		669			2,898		26		3,592
Rest of Europe		10			—		—		10
US		(101	)		1,783		30		1,712
Brazil		14,067			11,745		351		26,163
Mexico		4,510			2,444		2,381		9,335
Chile		(293	)		1,667		521		1,895
Rest of Americas		214			916		771		1,900
Rest of world		1,757			645		234		2,636
Total		23,480			53,718		21,457		98,655

(*) Net of short positions amounting to EUR 15,282 million.

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In addition, at December 31, 2012, the Group had net direct derivatives exposures the fair value of which amounted to EUR (330) million and net indirect derivatives exposures the fair value of which amounted to EUR (33) million. Also, the Group did not have any exposure to held-to-maturity investments.

5.4.5 Environmental risk

In line with the Group’s commitment to sustainability, the environmental risk analysis of credit transactions is one of the main features of the strategic corporate social responsibility plan. The analysis is founded on two major cornerstones:

• The Equator Principles: an initiative of the International Finance Corporation of the World Bank. These principles constitute an international standard for the analysis of the social and environmental implications of project finance transactions. The assumption of these principles involves a commitment to assess and take into consideration social and environmental risk and, accordingly, to grant loans only to those projects that can evidence that their social and environmental impacts are properly managed.

• The VIDA tool: implemented since 2004, the main aim of this tool is to assess the environmental risk of both current and potential individualized companies in commercial banking (Spain), using a system that classifies each of the companies into one of seven categories, depending on the degree of environmental risk incurred.

5.5. Credit risk cycle

The credit risk management process consists of identifying, analyzing, controlling and deciding on, as appropriate, the risks incurred in the Group’s operations. The parties involved in this process are the business areas, senior management and the risk units.

The process involves the board of directors, the executive committee and the risk committee, which establishes the risk policies and procedures, and the limits and delegations of powers, and approves and supervises the scope of action of the risk function.

The risk cycle comprises three different phases: pre-sale, sale and post-sale. The process is being permanently updated, with the findings and conclusions of the post-sale phase being fed back into the risk analysis and planning of the pre-sale phase.

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5.5.1. Risk analysis and credit rating process

In general, the risk analysis consists of examining the customer’s ability to meet its contractual obligations to the Bank. This involves analyzing the customer’s credit quality, its risk transactions, its solvency and the return to be obtained in view of the risk assumed.

Since 1993 the Group has used internal rating models for this purpose. These mechanisms are used in all the individualized segments, both the wholesale segments (sovereigns, financial institutions and corporate banking) and the other individualized companies and institutions.

The rating is obtained from a quantitative module based on balance sheet ratios or macroeconomic variables and supplemented by the analyst’s expert judgment.

Ratings assigned to customers are reviewed periodically to include any new financial information available and the experience in the banking relationship. The frequency of the reviews is increased in the case of customers that reach certain levels in the automatic warning systems and of customers classified as requiring special monitoring. The rating tools themselves are also reviewed in order to progressively fine-tune the ratings they provide.

In contrast to the use of ratings in the individualized segments, in the standardized segment scoring techniques predominate; in general, these tools automatically assign a score to proposed transactions.

5.5.2 Risk limit planning and setting

The purpose of this phase is to efficiently and comprehensively limit the risk levels the Group assumes.

The credit risk planning process is used to establish the budgets and limits at portfolio or customer level depending on the segment in question.

Thus, in the case of standardized risks, the risk limits are planned and set using documents agreed upon by the business areas and the risk units and approved by the risk committee or its delegated committees, which contain the expected results of transactions in terms of risk and return, as well as the limits applicable to the activity and the related risk management.

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For individualized risks, the analysis is conducted at customer level. When certain features concur for a given customer, an individual limit is established (pre-classification).

Thus, for large corporate groups a pre-classification model, based on an economic capital measurement and monitoring system, is used. The result of the pre-classification is the maximum level of risk that can be assumed vis-à-vis a customer or group in terms of amount or maturity. In the corporate segment, a simplified pre-classification model is applied for customers meeting certain requirements (thorough knowledge, rating, etc.).

Scenario analysis

An important aspect of the planning phase is the consideration of the volatility of the macroeconomic variables that affect the performance of the portfolios.

The Group simulates their performance in various adverse and stress scenarios (stress testing), which enables it to assess the Group’s capital adequacy in the event of certain future circumstantial situations.

These simulations are performed systematically on the Group’s most important portfolios in accordance with a corporate methodology which:

• Defines benchmark scenarios (at global level and for each of the Group units).

• Determines the sensitivity of the credit risk parameters (PD and LGD) to the significant macroeconomic variables for each portfolio, as well as their levels in the proposed scenarios.

• Estimates the expected loss associated with each of the scenarios considered and the changes in the risk profile of each portfolio in response to changes in the relevant macroeconomic variables.

The simulation models used by the Group rely on data from a complete economic cycle to calibrate the behavior of the credit risk parameters in response to changes in the macroeconomic variables. These models undergo regular backtesting and recalibration processes in order to ensure that they provide a correct reflection of the relationship between the macroeconomic variables and the risk parameters.

The scenario analysis enables senior management to gain a clearer understanding of the performance of the portfolio in response to changing market and circumstantial conditions and it is a basic tool for assessing the sufficiency of the provisions recognized to cater for stress scenarios.

Definition of assumptions and (base/stress) scenarios

The risk and loss parameters are projected, usually with a three-year time horizon, using various economic scenarios that include the main macroeconomic variables (GDP, unemployment rate, housing prices, inflation, etc.).

The economic scenarios defined are based on different stress levels, ranging from the base or most probable scenario to more stressed economic scenarios which, although less probable, could possibly arise.

These scenarios are generally defined by the Group’s economic research service, in coordination with the research services of each unit, using as a reference the data published by the main international organizations.

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A global stress scenario is defined that describes a situation of worldwide crisis and the manner in which it affects each of the main geographical regions in which Santander Group is present. In addition, a local stress scenario is defined which, affecting certain of the Group’s main units in an isolated fashion, includes a higher level of stress than the global stress scenario.

At the meetings of the capital coordination committee, senior management of the Group is apprised of, proposes any changes it deems appropriate and ultimately approves the definitive set of scenarios to be used in conducting the Group’s stress test.

Uses of the scenario analysis

The scenario analysis techniques are useful throughout the credit risk cycle. The various uses can be classified as follows:

• Regulatory uses: those in which an external agent or regulator requests the result of the test following implementation of the Group’s corporate methodology. Occasionally the test scenarios or assumptions are imposed by the party requesting the information. In other cases, the test is conducted by the requesting party itself based on information furnished by the Group.

• Planning and management uses: this category includes tests that aim to facilitate decision-making on the Group’s portfolios by ascertaining the sensitivity of the portfolios to changes in the macroeconomic variables affecting them. To this end the following aspects, among others, are analyzed and submitted to senior management:

• Impact on profit or loss and capital.

• Projected trend in the cost of credit over the next three years in light of the proposed business strategy.

• Sufficiency of funds and provisions.

• Measure of the level of sensitivity of each portfolio to the economic environment.

• Benefits of portfolio diversification in stress scenarios.

• Contrast with other estimates performed locally.

The planning and management applications of the tests include most notably their use in the preparation of the annual budget and the ongoing monitoring thereof. The use of the tests in establishing and monitoring the Group’s risk appetite is also of particular significance.

Results obtained

The various stress tests performed, for both regulatory and management purposes, have evidenced the strength and validity of the Group’s business model, as a result of its resilience to stress scenarios for both the Group as a whole and each of its main units.

In this regard, in each risk appetite update submitted to the board of directors, it has been confirmed that, even in the most adverse stress scenarios, the Group continues to report profits and maintain adequate capital levels.

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One of the most important conclusions to be drawn from the scenario analysis is the benefit contributed by the Group’s diversification in terms of geographical regions, industries and its non-concentration on major customers, which enables it to comfortably withstand adverse macroeconomic scenarios.

5.5.3 Transaction decision-making

The sale phase comprises the decision-making process, the aim of which is to analyses and resolve upon transactions, since approval by the risk unit is a pre-requisite for the arrangement of any risk transaction. This process must consider the transaction approval policies defined and take into account both the risk appetite and any transaction elements that are important in achieving a balance between risk and return.

In the standardized customer sphere, the management of large volumes of loan transactions is facilitated by the use of automatic decision-making models that rate the customer/loan relationship. Thus, loans are classified in homogeneous risk groups using the rating assigned to the transaction by the model on the basis of information on the features of each transaction and the borrower. These models are used in individual banking and business banking and for standardized SMEs.

As stated above, the previous limit-setting stage can follow two different paths, giving rise to different types of decisions in the individualized customer sphere:

• The decision can be automatic, consisting of verification by the business that the proposed transaction (in terms of amount, product, maturity and other conditions) falls within the limits authorized pursuant to the aforementioned pre-classification. This process is generally applied to corporate pre-classifications.

• It may always require the analyst’s authorization, even if the transaction meets the amount, maturity and other conditions established in the pre-classified limit. This process is applied to pre-classifications of individualized retail banking companies.

Credit risk mitigation techniques

The Group applies various methods of reducing credit risk, depending, inter alia, on the type of customer and product. As we shall see, some of these methods are specific to a particular type of transaction (e.g. real estate guarantees) while others apply to groups of transactions (e.g. netting and collateral arrangements).

The various mitigation techniques can be grouped into the following categories:

Determination of a net balance by counterparty.

Netting refers to the possibility of determining a net balance of transactions of the same type, under the umbrella of a framework agreement such as ISDA or similar agreements.

It consists of aggregating the positive and negative market values of the derivatives transactions entered into by us with a particular counterparty, so that, in the event of default, the counterparty owes the Group (or the Group owes the counterparty, if the net figure is negative) a single net figure and not a series of positive or negative amounts relating to each of the transactions entered into with the counterparty.

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An important aspect of framework agreements is that they represent a single legal obligation encompassing all the transactions they cover. This is the key to being able to set off the risks of all the transactions covered by the contract with the same counterparty.

Collateral

Collateral refers to the assets pledged by the customer or a third party to secure the performance of an obligation. Collateral may be:

• Financial: cash, security deposits, gold, etc.

• Non-financial: property (both residential and commercial), other movable property, etc.

From the risk acceptance standpoint, collateral of the highest possible quality is required. For regulatory capital calculation purposes, only collateral that meets the minimum quality requirements described in the Basel capital accords can be taken into consideration.

One very important example of financial collateral is the collateral agreement. Collateral agreements are a set of instruments with a determined economic value and high liquidity that are deposited or transferred by a counterparty in favor of another party in order to guarantee or reduce such counterparty credit risk as might arise from the portfolios of derivative transactions between the parties in which there is exposure to risk.

Collateral agreements vary in nature but, whichever the specific form of collateralization may be, the ultimate aim, as in the netting technique, is to reduce counterparty risk.

Transactions subject to collateral agreements are assessed periodically (normally on a daily basis). The agreed-upon parameters defined in the agreement are applied to the net balance arising from these assessments, from which the collateral amount (normally cash or securities) payable to or receivable from the counterparty is obtained.

With regard to real estate collateral, periodic re-appraisal processes are in place, based on the actual market values for the different types of real estate, which meet all the requirements established by the regulator.

When mitigation techniques are used, the minimum requirements established in the credit risk management policy manual are adhered to. In short, these consist of monitoring the following:

• Legal certainty. Collateral and guarantees must be examined to ensure that at all times it is possible to legally enforce the settlement thereof.

• A substantial positive correlation must not exist between the counterparty and the value of the collateral.

• Collateral and guarantees must be correctly documented.

• The availability of documentation of the methodologies used for each mitigation technique.

• The appropriate periodic monitoring and control of the methodologies.

Personal guarantees and credit derivatives

Personal guarantees are guarantees that make a third party liable for another party’s obligations to the Group. They include, for example, security deposits, suretyships and standby letters of credit. Only guarantees provided by third parties that meet the minimum requirements established by the supervisor can be recognized for capital calculation purposes.

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Credit derivatives are financial instruments whose main purpose is to hedge credit risk by buying protection from a third party, whereby the Bank transfers the risk of the issuer of the underlying instrument. Credit derivatives are OTC instruments, i.e. they are not traded in organized markets. Credit derivative hedges, mainly credit default swaps, are entered into with leading financial institutions.

5.5.4 Monitoring

The monitoring function is founded on a process of ongoing observation, which makes it possible to detect early any changes that might arise in customers’ credit quality, so that action can be taken to correct any deviations with an adverse impact.

Monitoring is based on the segmentation of customers, is performed by dedicated local and global risk teams and is complemented by the work performed by internal audit.

The function involves, inter alia, identifying and monitoring companies under special surveillance, reviewing ratings and the ongoing monitoring of standardized customers’ indicators.

The system called “companies under special surveillance” (FEVE, using the Spanish acronym) distinguishes four categories based on the degree of concern raised by the circumstances observed (extinguish, secure, reduce and monitor). The inclusion of a position in the FEVE system does not mean that there has been a default, but rather that it is deemed advisable to adopt a specific policy for the position in question, to place a person in charge and to set the policy implementation period. Customers classified as FEVE are reviewed at least every six months, or every three months for those classified in the most severe categories. A company can be classified as FEVE as a result of the monitoring process itself, a review performed by internal audit, a decision made by the sales manager responsible for that company or the triggering of the automatic warning system.

Assigned ratings are reviewed at least annually, but should any weakness be detected, or depending on the rating itself, more frequent reviews are performed.

For exposures to standardized customers, the key indicators are monitored in order to detect any variance in the performance of the loan portfolio with respect to the forecasts contained in the credit management programs.

5.5.5 Measurement and control

In addition to monitoring customers’ credit quality, the Group establishes the control procedures required to analyze the current credit risk portfolio and the changes therein over the various credit risk phases.

The risk control function is performed by assessing risks from various complementary perspectives, the main pillars being control by geographical location, business area, management model, product, etc., thus facilitating the early detection of specific areas of attention and the preparation of action plans to correct possible impairment.

Each control pillar can be analyzed in two ways:

1.- Quantitative and qualitative analysis of the portfolio

In the analysis of the portfolio, any variances in the Group’s risk exposure with respect to budgets, limits and benchmarks are controlled on an ongoing and systematic basis, and the impacts of these variances in certain future situations, both of an exogenous nature and those arising from strategic decisions, are assessed in order to establish measures that place the profile and amount of the loan portfolio within the parameters set by the Group.

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In addition to the traditional metrics, the following, inter alia, are used in the credit risk control phase:

• Change in non-performing loans (VMG)

VMG measures the change in non-performing loans in the period, discounting the loans written off and taking recoveries into account.

It is an aggregate measure at portfolio level that enables action to be taken in the event of deteriorations in the trend of non-performing loans.

It is obtained as the result of the ending balance less the beginning balance of non-performing loans for the period in question, plus the loans written off in the period, less any previously written-off loans recovered in that same period.

VMG and its component parts play a decisive role as monitoring variables.

• EL (expected loss) and capital

Expected loss is the estimated financial loss that will occur over the next twelve months on the portfolio existing at any given time.

It is an additional cost of the activity and must be charged in the transaction price. It is calculated using three basic parameters:

• EaD (exposure at default): the maximum amount that could be lost as a result of a default.

• PD (probability of default): is the probability that a customer will default in the next twelve months.

• LGD (loss given default): represents the percentage of the exposure that will not be recovered in the event of default. To calculate the LGD, the amounts recovered throughout the recovery process are discounted to the time of default, and this figure is compared, on a percentage basis, with the amount owed by the customer at that date.

Thus, other relevant factors are taken into account in estimating the risk involved in transactions, such as the quantification of off-balance-sheet exposures, or the expected percentage of recoveries, which is related to the guarantees associated with the transaction and other characteristics of the transaction: type of product, term, etc.

The risk parameters are also involved in the calculation of both economic and regulatory capital. The inclusion of capital metrics in management is fundamental to the rationalization of the use of capital.

2.- Assessment of the control processes

This includes a systematic periodic review of the procedures and methodology, and is performed over the entire credit risk cycle to ensure that they are in force and effective.

In 2006, within the corporate framework established in the Group for compliance with the Sarbanes-Oxley Act, a corporate tool was made available on the Group’s intranet for the documentation and certification of all the subprocesses, operational risks and related mitigating controls. In this connection, the risk division assesses the efficiency of the internal control of its activities on an annual basis.

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Furthermore, the integrated risk control and internal risk validation unit, as part of its mission to supervise the quality of the Group’s risk management, guarantees that the systems for the management and control of the risks inherent to its activity comply with the strictest criteria and the best practices observed in the industry and/or required by the regulators. Also, internal audit is responsible for ensuring that the policies, methods and procedures are appropriate, effectively implemented and regularly reviewed.

5.5.6 Recovery management

The recovery activity is a significant function in the Group’s risk management area.

In order to manage recovery properly, action is taken in four main phases: arrears management, recovery of non-performing loans, recovery of written-off loans and management of foreclosed assets. In fact, the actions taken by the recovery function commence even before the first missed payment, i.e. when there are signs of a deterioration of the customer’s ability to pay, and they end when the customer’s debt has been paid or has returned to performing status. The recovery function aims to anticipate default events and focuses on preventive management.

The current macroeconomic environment has a direct effect on customer default and non-performing loans ratios. Therefore, the quality of the portfolios is fundamental to the development and growth of our businesses in the various countries, and particular attention is paid, on an permanent basis, to the debt collection and recovery functions in order to guarantee that this quality reaches the expected levels at all times.

The Group has in place a corporate management model that defines the general recovery action guidelines. These guidelines are applied in the various countries, always taking into account the local peculiarities required for the recovery activity, due either to the local economic environment, to the business model or to a combination of both. This corporate model is subject to the permanent review and enhancement of the management processes and methodology that underpin it. For the Group, recovery management entails the direct involvement of all areas of management (sales, technology and operations, human resources and risk), which has contributed to the incorporation of solutions improving the effectiveness and efficiency of the aforementioned model.

The differing characteristics of customers make segmentation necessary in order to ensure proper recovery management. The mass management of large groups of customers with similar profiles and products is performed using highly technological processes, while personalized and individualized management is reserved for customers who, due to their profile, require the assignment of a specific manager and a more tailored analysis.

The recovery activity has been aligned with the social and economic reality of the different countries, and various management mechanisms have been used, all involving appropriate prudential criteria, based on the age, collateral and conditions of the transaction, while always ensuring that at least the required ratings and provisions are maintained.

Within the recovery function particular emphasis has been placed on using the mechanisms referred to above for early arrears management, in accordance with corporate policies, considering the various local realities and closely monitoring the production, inventory and performance of those local areas. The aforementioned policies are reviewed and adapted periodically in order to reflect both best management practices and any applicable regulatory amendments.

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In addition to the measures aimed at adapting transactions to the customer’s ability to pay, special mention should be made of recovery management, in which alternative solutions to legal action are sought to ensure the early collection of debts.

One of the channels for the recovery of debts of customers whose ability to pay has deteriorated severely is foreclosure (either court-ordered or through dation in payment) of the property assets securing the transactions. In geographical regions that are highly exposed to real estate risk, such as Spain, the Group has very efficient instruments in place to manage the sale of such assets, thus making it possible for the Bank to recuperate its capital and reduce its on-balance-sheet stock of property assets at a much faster pace than other financial institutions.

Forborne loan portfolio

The term “forborne loan portfolio” refers, for the purposes of the Group’s risk management, to the concepts of “restructurings” and “refinancings” as defined in Bank of Spain Circular 6/2012, which relate to transactions in which the customer has, or might foreseeably have, financial difficulty in meeting its payment obligations under the terms and conditions of the current agreement and, accordingly, the agreement has been modified or cancelled or even a new transaction has been entered into.

The Group has a detailed corporate policy for debt forbearance that is applicable to all countries, complies with the aforementioned Bank of Spain Circular 6/2012 and follows the general principles recently published by the European Banking Authority for transactions of this kind.

This corporate policy establishes strict prudential criteria for the assessment of these loans:

• The use of this practice is restricted, and any actions that might defer the recognition of impairment must be avoided.

• The main aim must be to recover the amounts owed, and any amounts deemed unrecoverable must be recognized as soon as possible.

• Forbearance must always envisage maintaining the existing guarantees and, if possible, enhance them. Not only can effective guarantees serve to mitigate losses given default, but they might also reduce the probability of default.

• This practice must not give rise to the granting of additional funding, or be used to refinance debt of other entities or as a cross-selling instrument.

• All the alternatives to forbearance and their impacts must be assessed, making sure that the results of this practice will exceed those which would foreseeably be obtained if it were not performed.

• The new transaction may not give rise to an improvement in the classification of the exposure until such time as the experience with the customer has proven to be satisfactory. On the contrary, transactions originally classified as standard may be reclassified as impaired if a series of circumstances prevail that recommend this.

• In addition, in the case of individualized customers, it is particularly important to conduct an individual analysis of each specific case, for both the proper identification of the transaction and its subsequent classification, monitoring and adequate provisioning.

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Also, the corporate policy sets out various criteria for determining the scope of transactions qualifying as forborne exposures by defining a detailed series of objective indicators that are indicative of situations of financial difficulty.

Accordingly, transactions not classified as impaired at the date of forbearance are generally considered to be experiencing financial difficulty if at that date they were more than one month past due. Where no payments have been missed or there are no payments more than one month past due, other indicators of financial difficulty are taken into account, including most notably the following:

• Transactions with customers who are already experiencing difficulties in other transactions.

• Situations where a transaction has to be modified prematurely, and the Group has not yet had a previous satisfactory experience with the customer.

• Cases in which the necessary modifications entail the grant of special conditions, such as the establishment of a grace period, or where these new conditions are deemed to be more favorable for the customer than those which would have been granted for an ordinary loan approval.

• Where a customer submits successive loan modification requests at unreasonable time intervals.

• In any case, if once the modification has been made any payment irregularity arises during a given probation period (as evidenced by backtesting), even in the absence of any other symptoms, the transaction will be deemed to be within the scope of forborne exposures.

Once it has been determined that the reasons for the modification are effectively due to financial difficulties, a more precise classification is performed based on the degree of impairment and management status of the original transactions, distinguishing between the following types of forbearance:

• Ex-ante forbearance: where the original transaction has not been classified as impaired and has an amount more than one month (but not more than three months) past due at the time the modification is arranged. If the transaction has an amount past due by one month or less, or even if the transaction is current in its payment, it will also be considered as a case of ex-ante forbearance if, based on the aforementioned indicators, there is any sign evidencing the existence of financial difficulties.

• Ex-post forbearance: the ex-post concept refers to forbearance transactions in which, at the date of forbearance, the exposures have already been classified as impaired, either due to arrears or for other reasons (i.e. for subjective reasons or reasons other than arrears).

The corporate policy also establishes different treatments that are applicable to forbearance transactions in cases of advanced impairment. The classification requirements and criteria are more stringent for transactions of this kind than for other forbearance transactions.

As regards the strategies to be applied, corporate policy requires the customer’s ability and willingness to pay to be analyzed and a distinction to be drawn between the severity and the estimated duration of the impairment. The results of this analysis will be used as a basis for deciding whether the debt should be forborne and the most appropriate way of doing so for each case:

1. When borrowers display a severe but transitory deterioration in their ability to pay (which is expected to be recovered in a short space of time), short-term adjustment strategies are applied, such as a payment moratorium on the principal or the reduction of instalments for a short, limited period until the ability to pay is recovered.

2. When borrowers display a slight deterioration in their ability to pay (an early recovery of which is not expected), more long-term strategies are applied, such as reducing instalments by deferring either the maturity date or a portion of the principal, which would be paid at the same time as the last instalment, at all times securing its payment through the provision of effective guarantees.

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In any case, through a case-by-case analysis, priority is given to modifications for customers displaying a slight but prolonged deterioration, since those experiencing severe but transitory deterioration carry a higher risk, as they depend on the accuracy of the estimated time of their future recovery. Cases of severe deterioration deemed to be prolonged over time are not considered for forbearance.

Corporate policy also establishes mechanisms for the management and control of loan forbearance, which allow it to handle forborne transactions in a differentiated way, paying particular attention to the processes of:

• Planning and budgeting, including preparing the pertinent business plans, projections and limits for the most relevant items.

• Monitoring portfolio evolution and assessing the degree of compliance with the projections prepared in the planning phase.

Once forbearance measures have been adopted, transactions that have to remain classified as impaired because at the date of forbearance they do not meet the requirements to be classified in a different category⁽⁵⁾ must comply with a prudential payment schedule in order to assure reasonable certainty as to the recovery of the customer’s ability to pay.

If there is any (non-technical) irregularity in payments during that period, the probation period starts again.

On successful completion of the probation period, the duration of which depends on the customer’s situation and the transaction features (term and guarantees provided), the transaction is no longer classified as impaired, but is temporarily classified as substandard until the transaction becomes fully performing again. Once the transaction has returned to performing, the monitoring and management of the forborne transaction continues until a series of requirements have been met, including most notably: a minimum period of two years must have elapsed since commencement of the forbearance; repayment of 20% of the principal and settlement of the amounts that were past due at the time of forbearance.

By contrast, if following arrangement of forbearance there is no improvement in the customer’s payment performance, the possibility of extending new forbearance measures will be considered, with the application of more stringent classification/return-to-performing criteria.

The forbearance of a transaction classified as impaired, irrespective of whether, as a result of the forbearance, the transaction becomes current in its payments, does not change the default date considered when the provision was determined. Also, the forbearance of a transaction classified as impaired does not give rise to any release of the related provisions.

5 Bank of Spain Circular 6/2012: the refinancing or restructuring of transactions that are not current in their payments does not interrupt their arrears, nor does it give rise to their reclassification to one of the previous categories, unless there is reasonable certainty that the customer will be able to meet its payment obligations within the established time frame or new effective collateral is provided, and, in both cases, unless at least the ordinary outstanding interest is received, late-payment interest is not taken into account.

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Quantitative information required by Bank of Spain Circular 6/2012

Set forth below is the quantitative information required by Bank of Spain Circular 6/2012 on the restructured/refinanced transactions in force at December 31, 2013. The following terms are used in Bank of Spain Circular 6/2012 with the meanings specified:

• Refinancing transaction: transaction granted or used for reasons relating to -current or foreseeable- financial difficulties the borrower may have in repaying one or more of the transactions granted to it, or through which the payments on such transactions are brought fully or partially up to date, in order to enable the borrowers of cancelled or refinanced transactions to repay the debt (principal and interest) because the borrower is unable, or might foreseeably become unable, to comply with the conditions thereof in due time and form.

• Restructured transaction: transaction with respect to which, for economic or legal reasons relating to current or foreseeable financial difficulties of the borrower, the financial terms and conditions are modified in order to facilitate the payment of the debt (principal and interest) because the borrower is unable, or might foreseeably become unable, to comply with the aforementioned terms and conditions in due time and form, even if such modification is envisaged in the agreement.

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CURRENT REFINANCING AND RESTRUCTURING BALANCES (a)

	Millions of euros
	Standard (b)												Substandard														Impaired														Total
	Full property mortgage guarantee				Other collateral (c)				Without collateral				Full property mortgage guarantee				Other collateral (c)				Without collateral				Specific allowance		Full property mortgage guarantee				Other collateral (c)				Without collateral				Specific allowance
	Number of trans- actions		Gross amount		Number of trans- actions		Gross amount		Number of trans- actions		Gross amount		Number of trans- actions		Gross amount		Number of trans- actions		Gross amount		Number of trans- actions		Gross amount				Number of trans- actions		Gross amount		Number of trans- actions		Gross amount		Number of trans- actions		Gross amount				Number of trans- actions		Gross amount		Specific allowance
Public sector		—		—		7		203		140		391		—		—		—		—		5		1		—		1		1		—		—		20		30		7		173		626		7
Other legal entities and individual entrepreneurs		7,568		3,602		3,370		1,134		61,874		3,866		8,624		4,157		827		775		35,955		1,803		1,213		11,231		8,690		3,040		2,085		88,486		5,316		7,731		220,975		31,430		8,944
Of which: Financing for construction and property development		247		638		41		20		176		19		1,674		1,327		105		241		816		158		638		3,786		4,891		103		792		961		1,072		3,466		7,909		9,158		4,104
Other individuals		66,480		5,592		11,784		513		472,908		1,389		51,344		5,139		7,207		350		302,697		1,045		562		46,539		4,607		23,056		742		985,793		2,170		2,334		1,967,808		21,546		2,896
Total		74,048		9,194		15,161		1,850		534,922		5,646		59,968		9,296		8,034		1,125		338,657		2,849		1,775		57,771		13,298		26,096		2,827		1,074,299		7,516		10,072		2,188,956		53,602		11,847

(a) Including all refinanced or restructured transactions as defined in section 1.g) of Annex IX of Bank of Spain Circular 4/2004

(b) Standard risks classified as under special monitoring pursuant to section 7.a) of Annex IX of Bank of Spain Circular 4/2004

(c) Including transactions without a full property mortgage guarantee, i.e. with a loan-to-value ratio of more than 1, and transactions with collateral other than a real estate mortgage, irrespective of their loan-to-value ratio

The transactions presented in the foregoing tables were classified at December 31, 2013, by nature, as follows:

• Impaired: transactions that are in the process of being returned to performing status, those for which advantageous conditions had to be granted that would not have been granted for an ordinary loan approval or those which, having been classified as standard or substandard, have again encountered payment difficulties during the term of the transaction.

• Substandard: transactions previously classified as impaired with respect to which, following forbearance, sustained payments have been made for a certain period, depending on the transaction features and the type of guarantee, and transactions previously classified as standard: i) which have been granted an initial grace period and will remain in this category until three monthly instalments (or the equivalent) have been paid after the grace period, or ii) that following forbearance have become non-performing (default).

• Standard: transactions previously classified as impaired or substandard which have successfully completed the precautionary observation periods established in the corporate policy evidencing that payment capacity pursuant to the terms established has been restored, and transactions classified as standard at the date of forbearance, until they meet the requirements to cease to be subject to the special monitoring described above.

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The table below shows the changes in 2013 in the forborne loan portfolio:

Millions of euros	2013
Beginning balance		55,714
Of which: Other than impaired		37,497
Impaired assets		18,217
Additions		17,241
Reductions (*)		(19,353	)
Balance at end of year		53,602
Of which: Other than impaired		29,961
Impaired assets		23,641

(*) Including, mainly, debt repayments, foreclosures and write-offs and transactions that have ceased to be subject to special monitoring because the aforementioned requirements have been met.

The level of forbearance at the Group fell by 3.8% year-on-year as a result of the recovery effort, the exchange rate effect and the deleveraging of the real estate industry in Spain. The specific allowance of the total forborne loan portfolio increased by 5 percentage points to 22%.

56% of the forborne loan transactions are classified as other than impaired. Particularly noteworthy is the high level of existing guarantees (70% of transactions are secured by collateral) and the adequate coverage provided by specific allowances (43% specific coverage ratio for the impaired portfolio).

Spain accounts for 60% (EUR 32,271 million) of the Group’s forborne loan portfolio, down EUR 596 million year-on-year. The detail of the forborne loan portfolio by purpose is as follows:

• 27% of the loans were granted to real estate companies; they have a specific coverage ratio of 46%. This portfolio is subject to the real estate deleveraging process in Spain.

• Loans to non-real estate companies represent 45% of the total. Despite the downward trend in consumer markets and domestic demand, 57% of the portfolio is still classified in categories other than impaired.

• 28% relate to forbearance measures extended to individuals, mainly for mortgages with a high level of collateral.

In none of the other geographical regions in which the Group is present does the forborne loan portfolio represent more than 1% of the Group’s total lending to customers.

6. MARKET RISK

6.1 Activities subject to market risk and types of market risk

The measurement, control and monitoring of the market risk area comprises all financial activities in which net worth risk is assumed as a result of changes in market factors. This risk arises from changes in the risk factors -interest rates, inflation rates, exchange rates, equity prices, credit spreads, commodity prices and the volatility thereof- and from the liquidity risk of the various products and markets in which the Group operates.

• Interest rate risk is the possibility that fluctuations in interest rates might have an adverse effect on the value of a financial instrument, on a portfolio or on the Group as a whole. Interest rate risk affects, inter alia, loans, deposits, debt securities, most financial assets and liabilities held for trading and derivatives.

• Inflation rate risk is defined as the possibility that fluctuations in inflation rates might have an adverse effect on the value of a financial instrument, on a portfolio or on the Group as a whole. Inflation rate risk affects, inter alia, loans, debt securities and derivatives, the returns on which are linked to inflation or to an actual variation rate.

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• Foreign currency risk is defined as the sensitivity of the value of a position in a currency other than the base currency to a potential change in exchange rates. Accordingly, a long position in a foreign currency will generate a loss if this currency depreciates against the base currency. The positions affected by this risk include investments in subsidiaries in currencies other than the euro, and loans, securities and derivatives denominated in foreign currencies.

• Equity risk is the sensitivity of the value of the open positions in equity securities to adverse changes in the market prices of those equity securities or in future dividend expectations. Equities risk affects, among other instruments, positions in shares, equity indices, convertible bonds and equity derivatives (puts, calls, equity swaps, etc.).

• Credit spread risk is the sensitivity of the value of open positions in fixed-income securities or in credit derivatives to fluctuations in the credit spread curves or in the recovery rates (RR) of specific issuers and types of debt. The spread is the differential between the quoted price of certain financial instruments over other benchmark instruments, mainly the IRR of government bonds and interbank interest rates.

• Commodity price risk arises from the effect of potential changes in commodity prices. The Group’s exposure to commodity price risk is not material and it is concentrated in commodity derivatives with customers.

• Volatility risk is the sensitivity of the value of the portfolio to changes in the volatility of risk factors, i.e. the volatility of interest rates, exchange rates, credit spreads and commodities. Volatility risk arises on financial instruments whose measurement model includes volatility as a variable, most notably financial option portfolios.

All these market risks can be mitigated in part or in full through the use of derivatives such as options, futures, forwards and swaps.

In addition, there are other market risks, which are more difficult to hedge, the detail being as follows:

• Correlation risk. Correlation risk is defined as the sensitivity of the value of the portfolio to changes in the relationship between risk factors (correlation), whether they are the same type (e.g. between two exchange rates) or different (e.g. between an interest rate and a commodity price).

• Market liquidity risk. Market liquidity risk arises when a Group entity or the Group as a whole may not able to unwind or close a position on time without affecting the market price or the cost of the transaction. Market liquidity risk may be caused by the reduction in the number of market makers or institutional investors, the execution of large volumes of transactions, market instability or the increase in concentration in certain products and currencies.

• Prepayment or termination risk. When the contractual relationship in certain transactions explicitly or implicitly permits early repayment before maturity without negotiation, there is a risk that the cash flows might have to be reinvested at a potentially lower interest rate. It mainly affects mortgage loans or securities.

• Underwriting risk. Underwriting risk arises as a result of an entity’s involvement in the underwriting of a placement of securities or other type of debt, if the entire issue is not placed among the potential buyers.

The activities are segmented by risk type as follows:

a) Trading: this item includes financial services for customers, trading operations and positions taken mainly in fixed-income, equity and foreign currency products.

b) Structural risks: these consist of the market risks inherent in the balance sheet, excluding financial assets and liabilities held for trading. The structural risks are as follows:

• Structural interest rate risk: arises as a result of the maturity and repricing gaps of all the assets and liabilities on the balance sheet.

• Structural foreign currency risk/hedges of results: arises as a result of the fact that investments in consolidable and non-consolidable companies are made in currencies other than the euro (structural exchange rate). In addition, this item includes the positions to hedge the foreign currency risk on future results generated in currencies other than the euro (hedges of results).

• Structural equities risk: this item includes equity investments in non-consolidated financial and non-financial companies and available-for-sale portfolios comprising equity positions.

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The Global Banking and Markets division carries the main responsibility for managing the positions taken in the trading business in order to develop customer business in financial markets and, secondly, to a lesser extent, to take own-account positions.

The financial management division is responsible for executing the structural risk management strategy through the application of uniform methodologies adapted to the situation of each market in which the Group operates, either directly through the Parent or in coordination with the other units. Decisions affecting the management of these risks are taken through the ALCO committees in the respective countries in coordination with the Group’s markets committee. The aim pursued is to ensure the stability and recurring nature of both the net interest margin of the commercial activity and the Group’s economic value, whilst maintaining adequate liquidity and solvency levels.

Each of these activities is measured and analyzed using different metrics in order to reflect their risk profiles as accurately as possible.

6.2. Market risks in 2013

6.2.1 Trading

In 2013 the Group maintained its strategy of focusing its trading activity on the customer business and minimizing as far as possible the outstanding directional risk exposures in net terms. This was reflected in the VaR, which performed in line with the average of the last three years.

The derivative activity is focused mainly on marketing investment products and hedging risk for customers. Management is geared towards ensuring that the net outstanding risk is as low as possible.

This type of transaction includes equity, fixed-income and foreign currency options. The management units in which this activity was carried out are primarily Spain, Santander UK and, to a lesser extent, Brazil and Mexico.

The Group continued to have very limited exposure to complex structured instruments or vehicles, as a reflection of its culture of management in which prudence in risk management constitutes one of its principal symbols of identity. Specifically, at 2013 year-end, the Group had:

• CDOs and CLOs: the Group’s position continued to be scantly material, at EUR 194 million. This position is largely a result of the integration of the Alliance&Leicester portfolio in 2008.

• Hedge funds: the total exposure was not material (EUR 317 million at December 31, 2013) and consisted largely of the financing provided to these funds (EUR 136 million), the remainder being through direct portfolio investment or derivatives with the hedge funds. This exposure featured low loan-to-value ratios, at around 25% (collateral of EUR 1,260 million at the end of December). The risk exposure to this type of counterparty is analyzed on a case-by-case basis, and the percentages of collateral are established according to the features and assets of each fund.

• Conduits: there was no exposure.

• Monolines: Santander Group’s exposure to monoline insurers amounted to EUR 141 million in December 2013⁽⁶⁾⁾, and was concentrated mainly on an indirect exposure amounting to EUR 138 million, by virtue of the guarantee provided by entities of this kind for various traditional financing or securitization transactions. The exposure was to double-default risk in this case. The primary underlyings had high credit ratings. The small remainder was direct exposure (e.g. through the purchase of a credit default swap to protect it against the risk of default of these insurance companies). Exposure decreased by 7% with respect to 2012.

In short, it can be affirmed that, in general, the exposure to instruments of this kind in the ordinary course of the Group’s business continued to decrease in 2013. It is due mainly to the integration of exposures at entities acquired by the Group, such as Alliance&Leicester and Sovereign (in 2008 and 2009, respectively). All these exposures were known at the time of the purchase and adequate provisions were recognized. Since their integration in the Group these exposures have been reduced notably, the final objective being their derecognition.

6 The guarantees provided by monoline insurers in US Municipal Bonds are not treated as exposure. These bonds amounted to EUR 566 million at December 2013.

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The Group’s policy with respect to the approval of new transactions involving these products continues to be very prudent and conservative and is subject to strict supervision by the Group’s senior management. Before authorizing a new transaction, product or underlying, the risk division checks:

• whether there is an adequate valuation model (mark-to-market, mark-to-model or mark-to-liquidity) to monitor the value of each exposure.

• whether the inputs enabling application of this valuation model are observable in the market.

Provided the two aforementioned conditions are met, the risk division ascertains:

• the availability of adequate systems duly adapted for the daily calculation and monitoring of the results, positions and risks of the new transactions envisaged.

• the degree of liquidity of the product or underlying, with a view to arranging the related hedge on a timely basis.

Calibration and test measures

In 2013 the Group continued to perform regular analyses and tests to check the accuracy of the value-at-risk (VaR) calculation model, and drew conclusions which enabled it to verify the reliability of the model. The objective of these tests is to determine whether it is possible to accept or reject the model used to estimate the maximum loss of a portfolio for a given confidence level and time horizon.

The most important tests are the backtesting exercises, which are analyzed at local and global level by the market risk control units. The backtesting methodology is applied homogenously to all the Group’s portfolios and sub-portfolios.

The backtesting exercise consists of comparing the projected VaR measurements, for a given confidence level and time horizon, with the actual losses obtained in the same time horizon.

Three types of backtesting are calculated and assessed at the Group:

• Clean backtesting: the daily VaR is compared with the results obtained without taking into account the intra-day results or the changes in the portfolio’s positions. This model serves to check the accuracy of the individual models used to assess and measure the risks of the various positions.

• Backtesting on complete results: daily VaR is compared with the day’s net results, including the results of intra-day operations and those generated by fees and commissions.

• Backtesting on complete results without mark-ups or fees and commissions: daily VaR is compared with the day’s net results, including the results of intra-day operations but excluding those generated by mark-ups and fees and commissions. This method is intended to obtain an idea of the intra-day risk assumed by the Group’s treasury areas.

In the first case, for the entire portfolio, in 2013 there were two violations of VaR at 99% (i.e. days when the daily loss was higher than VaR): on May 31, mainly in Brazil, due to the sharper-than-normal increase in the Brazilian real curves, both the nominal curve and the curve indexed to inflation (IPCA); and on July 11, mainly in Spain, due to sharper-than-normal changes in curves and their volatility, and in Brazil, due to a significant appreciation of the Brazilian real against the dollar.

The number of violations is in line with the expected performance of the VaR calculation model, given that a confidence level of 99% and a time horizon of one year are used (with a longer time horizon one could expect an average of two or three violations a year).

The backtesting exercises are carried out regularly for each significant portfolio or strategy of each Group trading unit, and their main objective (as in the case of the other benchmark tests) is to detect anomalies in the VaR model of each portfolio in question (e.g. deficiencies in the parameterization of the valuation models of certain instruments, scantly adequate proxies, etc.). This is a dynamic process in the context of the procedure to review and validate the model.

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6.2.2 Structural market risks ⁽⁷⁾

6.2.2.1 Structural interest rate risk

Europe and the United States

In these mature markets which are witnessing a scenario of low interest rates, the general positioning has been to maintain balance sheets with a positive sensitivity to short-term interest rate rises in terms of the net interest margin (NIM). In the case of the market value of equity (MVE), the risk is determined by the long-term interest rate expectations in each market, based on their economic performance indicators.

In any case, the level of exposure in all countries is very low in relation to the annual budget and the amount of capital. Also, in 2013 the general trend was for exposure to remain unchanged or decrease.

At the end of December 2013, the sensitivity of the net interest margin at one year to parallel shifts of 100 basis points was concentrated on the euro, US dollar and pound sterling yield curves, the Parent bank, the US subsidiary and Santander UK being the main contributors with EUR 111 million, USD 54 million and GBP 39 million, respectively. The sensitivity of the margin for other convertible currencies was scantly material.

Also at 2012 year-end, the most significant sensitivity of the market value of equity to parallel shifts of 100 basis points (EUR 1,478 million at the Parent bank) was that of the euro yield curve. With respect to the US dollar and pound sterling curves, the sensitivities were USD 285 million and GBP 16 million, respectively.

Latin America

Due to the differences in macroeconomic context and the degree of maturity of these markets, the positions with respect to the net interest margin (NIM) were not homogenous. Accordingly, in certain geographical areas the balance sheets were positioned for rising interest rates and in others they were positioned for falling rates.

In relation to the sensitivity of the market value of equity (MVE), the general positioning of the balance sheets was such that the average term of the assets exceeded that of the liabilities (negative sensitivity to interest rate rises).

The risk in the main geographical areas was reduced or maintained in 2013. In any case, the level of exposure in all countries is very low in relation to the annual budget and the amount of capital.

For Latin America taken as a whole, the risk consumption at December 2013, measured in terms of 100 basis points. sensitivity of the net interest margin⁽⁸⁾, stood at EUR 103 million (December 2012: EUR 89 million).

6.2.2.1 VaR of on-balance-sheet structural interest rate risk

In addition to sensitivities to interest rate fluctuations (it assess changes of +/- 25, +/- 50, +/- 75 and +/- 100 basis points.), the Group uses other methods to monitor on-balance-sheet structural interest rate risk including, inter alia, scenario analysis and VaR calculations, using a methodology similar to that used for financial assets held for trading.

Structural interest rate risk, measured in terms of one-day VaR at 99%, averaged EUR 782 million in 2013. The contribution to structural interest rate risk by the balance sheets in Europe and the US is considerably higher than the balance sheets in Latin America. Worthy of note are the large difference between the two areas and the increased volatility in the emerging countries at 2013 year-end.

⁽⁷⁾  Includes the total balance sheet, except for financial assets and liabilities held for trading

⁽⁸⁾  Betas are used to aggregate sensitivities of various curves.

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6.2.2.2 Structural foreign currency risk/hedges of results

Structural foreign currency risk arises from the Group’s operations in foreign currencies, and relates mainly to long-term investments, and the results and hedges of those investments.

Foreign currency risk is managed dynamically in order to limit the impact on capital of currency depreciations and optimize the financial cost of hedges.

The Group’s general policy for managing the foreign currency risk on long-term investments is to finance these investments in the currency in which they are denominated, provided that the market is sufficiently deep and the cost is justified by the expected currency depreciation. Also, hedges are arranged on an as-needed basis when it is considered that a local currency may weaken against the euro more quickly than it is being discounted in the market.

At 2013 year-end, the largest long-term exposures (with their potential impact on equity) were, in descending order, in the pound sterling, the Brazilian real, the US dollar, the Mexican peso, the Chilean peso and the Polish zloty. The Group hedges a portion of these long-term exposures through foreign exchange derivatives.

Additionally, the financial management division at consolidated level is responsible for managing the foreign currency risk inherent in the expected results and dividends of the Group at the units whose base currency is not the euro.

6.2.2.3 Structural equity risk

The Group has equity positions in its balance sheet (banking book) in addition to the trading positions. These positions are classified as available-for-sale financial assets (equity instruments) or as investments, depending on the length of time they are expected to remain in the portfolio.

These positions are exposed to market risk. VaR is calculated for these positions using series of market prices for listed shares and proxies for unlisted securities. At December 31, 2013, one-day VaR at 99% was EUR 235.3 million (December 31, 2012: EUR 281.4 million; December 31, 2011: EUR 305.7 million).

6.2.2.4 On-balance-sheet market risk

In short, a homogeneous metric such as VaR can be used to monitor the total market risk inherent in the balance sheet (banking book), distinguishing between fixed-income (considering both interest rates and credit spreads for ALCO portfolios), exchange rate and equities.

In general, it can be said that total on-balance-sheet VaR is not high in terms of the Group’s volume of assets or capital. In recent years it has shown a downward trend due to the decrease in foreign currency risk and structural equities risk.

6.3 Methodologies

6.3.1 Trading

The standard methodology applied to trading activities by the Group in 2013 was Value at Risk (VaR), which measures the maximum expected loss with a given confidence level and time horizon. This methodology was based on a standard historical simulation with a 99% confidence level and a one-day time horizon. Statistical adjustments were made to enable the swift and efficient incorporation of the most recent events that condition the level of risk assumed. Specifically, the Group uses a time window of 2 years or 520 daily data obtained retrospectively from the reference date of the VaR calculation. Two figures are calculated each day, one by applying an exponential decline factor which gives a lesser weighting to more distant observations in time, and another with uniform weightings for all observations. The VaR reported is the higher of these two figures.

The historical simulation VaR has many advantages as a risk metric (it summarizes in one single number a portfolio’s market risk, it is based on market changes that have actually occurred without having to make assumptions regarding functions or correlation between market factors, etc.), but it also has limitations. The most significant limitations are the high sensitivity of the historical window used, the inability to capture plausible events with a major impact if they do not occur in the historical window used, the existence of measurement parameters in which there is no market input available (such as correlations, dividends and recovery rates) and the slow adaptation to new volatilities and correlations if the most recent data are given the same weight as the oldest data.

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Certain of these limitations are corrected by using stressed VaR (see below), by calculating a VaR with exponential decline and by applying conservative valuation adjustments.

VaR is not the only measure. It is used because it is easy to calculate and because it provides a good reference of the level of risk incurred by the Group. However, other measures are simultaneously being taken to enable the Group to exercise greater risk control in all the markets in which it operates.

One of these measures is scenario analysis, which consists of defining behavior scenarios for various financial variables and determining the impact on results of applying them to the Group’s activities. These scenarios can replicate past events (such as crises) or, conversely, determine plausible scenarios that are unrelated to past events.

On a regular basis (at least once a month) the Group calculates and analyses the potential impact on results of applying different stress scenarios to all the trading portfolios, considering the same situations by risk factor. A minimum of three types of scenarios (possible, severe and extreme) are defined which, together with VaR, make it possible to obtain a much more complete spectrum of the risk profile.

In addition, certain warning triggers are in place for the global scenarios, based on the historical results of those scenarios and on the capital associated with the portfolio in question. If the levels triggering the warning are surpassed, the persons responsible for managing the portfolio in question are informed so that they can take the appropriate measures. Furthermore, the results of the global stress tests, and any possible excesses over the warning levels set, are reviewed regularly by the global market risks committee, which, if it considers it necessary, informs senior management.

The market risk area, in accordance with the principle of independence of the business units, also monitors daily the positions of each unit and the global positions, through an exhaustive control of changes in the portfolios, the aim being to detect possible incidents and correct them immediately.

The positions are traditionally used to quantify the net volume of the market values of the portfolio transactions, grouped by main risk factor, considering the delta value of any futures and options that might exist. All the risk positions can be expressed in the base currency of the unit and in the reporting currency.

Market risk sensitivity measures are those which measure the changes (sensitivity) of the market value of an instrument or portfolio to changes in each of the risk factors. The sensitivity of the value of an instrument to changes in market factors can be obtained through analytical estimates using partial derivatives or through a complete revaluation of the portfolio.

Also, the daily preparation of an income statement is an excellent risk indicator, insofar as it allows us to identify the impact of changes in financial variables on the portfolios.

Particularly worthy of note is the control of derivatives and credit management activities which, due to their atypical nature, is performed daily using specific measures. In the case of derivatives, a control is conducted of sensitivities to fluctuations in the price of the underlying (delta and gamma), in volatility (vega) and in time (theta). For credit management activities, measures such as sensitivity to spread, jump-to-default and risk concentrations by rating level are reviewed systematically.

With respect to the credit risk inherent in the trading portfolios, and in keeping with the recommendations made by the Basel Committee on Banking Supervision and with current regulations, an additional metric, the incremental risk charge (IRC), is calculated to cover the default risk and rating migration risk not properly captured in the VaR, by measuring the variation in the related credit spreads. The instruments subject to control are basically fixed-income government and corporate bonds, derivatives on bonds (forwards, options, etc.) and credit derivatives (credit default swaps, asset-backed securities, etc.). The method used to calculate the IRC is based on direct measurements on the loss distribution tails at the appropriate percentile (99.9%) over a one-year time horizon. The Monte Carlo method is used and one million simulations are applied.

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6.3.2 Structural market risks

6.3.2.1 Structural interest rate risk

The Group analyses the sensitivity of the net interest margin and market value of equity to changes in interest rates. This sensitivity arises from maturity and interest rate repricing gaps in the various balance sheet items.

On the basis of the balance-sheet interest rate position, and considering the market situation and outlook, the necessary financial measures are adopted to align this position with that desired by the Group. These measures can range from the taking of positions on markets to the definition of the interest rate features of commercial products.

The metrics used by the Group to control interest rate risk in these activities are the interest rate gap, the sensitivity of net interest margin and market value of equity to changes in interest rates, the duration of capital and value at risk (VaR) in order to calculate economic capital.

Interest rate gap of assets and liabilities

The interest rate gap analysis focuses on the mismatches between the interest reset periods of on-balance-sheet assets and liabilities and of off-balance-sheet items. This analysis facilitates a basic snapshot of the balance sheet structure and enables concentrations of interest rate risk in the various maturities to be detected. Additionally, it is a useful tool for estimating the possible impact of potential changes in interest rates on the Group’s net interest margin and market value of equity.

The flows of all the on- and off-balance-sheet aggregates must be broken down and placed at the point of repricing or maturity. The duration and sensitivity of aggregates that do not have a contractual maturity date are analyzed and estimated using an internal model.

Net interest margin (NIM) sensitivity

The sensitivity of the net interest margin measures the change in the expected net interest income for a specific period (twelve months) given a shift in the yield curve.

The sensitivity of the net interest margin is calculated by simulating the margin both for a scenario of changes in the yield curve and for the current scenario, the sensitivity being the difference between the two margins so calculated.

Market value of equity (MVE) sensitivity

The sensitivity of the market value of equity is a complementary measure to the sensitivity of the net interest margin.

This sensitivity measures the interest rate risk implicit in the market value of equity based on the effect of changes in interest rates on the present values of financial assets and liabilities.

6.3.2.2 Structural foreign currency risk / hedges of results

These activities are monitored by measuring positions, VaR and results on a daily basis.

6.3.2.3 Structural equity risk

These activities are monitored by measuring positions, VaR and results on a monthly basis.

6.4 Management framework

Organizational and governance structure

The market and structural risk area forms part of one of the two Group risk units. The tasks of the market risk function are as follows:

• Definition and supervision of the market risk management model, which includes corporate policies, definition of the risk map and segmentation criteria.

• Control, consolidation, reporting and centralized approval of market risks.

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These tasks are based on five basic pillars that are crucial for a correct market risk management:

• Measurement, analysis and control of market and liquidity risk.

• Calculation, analysis, explanation and reconciliation of results.

• Definition, capture, validation and distribution of market data.

• Approval of limits, products and underlyings.

• Consolidation of data.

Market risk management is in turn guided by the following basic principles:

• Involvement of senior management.

• Independence of the risk function from the business.

• Clear definition of powers.

• Risk measurement.

• Risk limitation.

• Analysis and control of risk positions.

• Establishment of risk policies and procedures.

• Assessment of risk methodologies validated or developed by the methodology area.

Also, in the same way as the market risk function is structured at corporate or global level, each local market risk unit adapts its functions to its specific business, operational and legal requirement characteristics.

For the correct functioning of global policies and their local implementation, the global market risk area and the local units perform different functions:

• Global market risk area:

• Establishes, proposes and documents the risk policies and criteria, the global limits and the decision-making and control processes.

• Generates management structures, systems and tools.

• Promotes and supports their implementation and ensures they work effectively at all units.

• Gains knowledge of, assimilates and adapts the best practices inside and outside the Group.

• Boosts activity in order to obtain results.

• Consolidates, analyses and controls the market risk incurred by all units the area is responsible for.

• Local market risk units:

• Manage risks.

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• Transpose, adapt and internalize corporate policies and procedures through their local approval.

• Define and document policies and lead local projects.

• Apply the decision-making policies and systems to each market.

• Adapt management structures and organization to the corporate action frameworks and rules.

• Contribute criticism, best practices, local knowledge and proximity to customers/markets.

• Assume greater responsibilities in risk decision-making, control and management.

Measure, analyze and control market risk within the scope of their responsibilities.

The market risk area’s exclusive collective body is the global market risk committee (CGRM).

The CGRM is the body responsible for the Group’s market risk function at both centralized level (global area) and local level (local units). The CGRM reports directly to the risk committee, the body ultimately responsible for the risk function at the Group.

Limit control system.

Market and liquidity risk limit setting is a dynamic process that depends on the Group’s risk appetite level. This process forms part of the annual limits plan, which is promoted by the Group’s senior management and is led by the risk unit and, therefore, it involves all the entities comprising the Group.

1. Limit setting

The market risk limits applied at the Group are set on the basis of different metrics and seek to cover all activities subject to market risk from multiple perspectives, by applying conservative criteria. The main limits are:

Trading limits:

• VaR limits:

• Equivalent and/or nominal position limits

• Interest rate sensitivity limits

• Vega limits

• Limits on delivery risk on short securities positions (fixed-income and equity)

• Limits aimed at restricting the volume of effective losses or protecting profits already generated in the period

• Credit limits

• Limits on origination transactions

On-balance-sheet structural interest rate risk

• Limit on net interest margin sensitivity at one year

• Limit on the sensitivity of the market value of equity

Structural foreign currency risk

• Net position in each currency (for positions hedging results)

These general limits are complemented by other sub-limits. Accordingly, the market risk area has a sufficiently granular limit structure to effectively control the various market risk factors to which the Group is exposed. Thus, it monitors daily the positions of each unit and the global positions, through an exhaustive control of changes in the portfolios, the aim being to detect possible incidents and correct them immediately. Also, the daily preparation of an income statement by the market risk area is an excellent risk indicator, insofar as it allows us to identify the impact of changes in financial variables on the portfolios.

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2. Limit structure

• Overall global control limits

The risk committee approves limits at business/unit level in an annual limit setting process. Changes that are subsequently requested may be approved by the global market risk committee, in accordance with its delegated powers.

These limits are requested by the head of business in each country/entity on the basis of the specific nature of the business and upon the achievement of the budget set, seeking consistency between the limits and the risk-return ratio.

• Overall local control limits

Sub-limits to the aforementioned activities are set on the basis of the particular local characteristics of the products and of the internal organization of the business, in order to increase the control of the positions held in each business. Sub-limits are set by risk factor, currency position, equity position, sensitivity by currency and maturity, vega by maturity, etc.

3. Limit compliance and control

The business units must comply with the approved limits at all times. Any possible excesses would trigger a series of actions by the local and global market risk areas, the risk management committees or the risk committee aimed at leading to reductions in risk levels and a stricter risk control or executive actions which could oblige the risk takers to reduce the levels of risk assumed.

The persons responsible for market risk at local level notify the heads of business of excesses. The heads of business must explain the reasons for the excess and, where appropriate, provide an action plan to remedy the situation. The business unit must reply, in writing and on the same day, to the requirement made of it to either reduce the position to within the limits in force or to detail a strategy that justifies an increase in the limits.

6.5 Internal model

At 2013 year-end, the Group had obtained the Bank of Spain’s approval for the internal market risk model for the calculation of regulatory capital in the trading portfolios of the Spain, Chile, Mexico and Portugal units. The Group intends to gradually extend this approval to its other units.

The consolidated regulatory capital for the Group per the internal market risk model is obtained by adding the regulatory capital of each of the units for which the related approval has been obtained from the Bank of Spain. This criterion for consolidating the Group’s capital is conservative, since it does not take into account the savings in capital arising from the diversification effect among the various geographical areas.

Following this approval, the regulatory capital of the trading activities for the above-mentioned scope is calculated using advanced approaches, applying as fundamental metrics VaR, Stressed VaR and the incremental risk capital charge (IRC) for default risk and rating migration risk, in keeping with the new banking capital requirements in the Basel accords and, in particular, in the European CRD IV directive (which transposes the Basel III accord).

The Group cooperates closely with the Bank of Spain to make further progress in the scope of application of the internal model (at geographical and operational levels) and in the impact analysis of new requirements, in line with the documents issued by the Basel Committee to strengthen the capital of financial institutions.

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7. LIQUIDITY AND FUNDING RISK

7.1 Introduction to the treatment of liquidity and funding risk

Liquidity and funding risk management has always been a basic element of the Group’s business strategy and a fundamental cornerstone, together with capital, on which the strength of its balance sheet rests.

Liquidity has become increasingly important in recent years due to the growing stresses in the financial markets in the framework of a global economic crisis. This scenario has emphasized the importance of banks having appropriate funding structures and strategies to ensure their intermediation activity.

During this period of stress, the Group has enjoyed an adequate liquidity position, which has represented a competitive advantage in terms of carrying on and expanding its activity in a demanding environment.

This improved position held by the Group as a whole has been based on a decentralized funding model composed by subsidiaries that are autonomous and self-sufficient in terms of liquidity. Each subsidiary is responsible for covering the liquidity needs arising from its current and future activity, by means of either deposits taken from its customers in its area of influence, or through recourse to the wholesale markets where it operates, under management and supervision procedures coordinated at Group level.

This is a funding structure that is most effective in situations of high market stress as it prevents difficulties in one area from affecting funding capacity in other areas and, therefore, the Group as a whole, which could occur if a centralized funding model were used.

In addition, at the Group this funding structure also benefits from the advantages of having a commercial banking model with a significant presence (business shares of around 10% or more) in ten markets with great potential, with the focus on retail customers and a high level of efficiency. As a result, the subsidiaries have a considerable capacity to attract stable deposits, as well as a significant issue capacity in the wholesale markets of those countries, generally in their own currencies, which is bolstered by the strength afforded by their franchise and membership of a leading group.

7.2 Liquidity management framework - Monitoring and control of liquidity risk

Structural liquidity management seeks to finance the Group’s recurring business with optimal maturity and cost conditions, avoiding the need to assume undesired liquidity risks.

Liquidity management at the Group is based on the following principles:

• Decentralized liquidity model.

• Medium and long-term liquidity needs arising from the business must be funded using medium and long-term instruments.

• High proportion of customer deposits, as a result of a commercial balance sheet.

• Diversification of wholesale funding sources by: instruments/investors; markets/currencies; and maturity periods.

• Restrictions on recourse to short-term financing.

• Availability of a sufficient liquidity reserve, including a capacity for discounting at central banks, to be drawn upon in adverse situations.

In order to ensure the effective application of these principles by all the Group entities, it was necessary to develop a single management framework resting on the following three cornerstones:

• A sound organizational and governance model to ensure that senior management of the subsidiaries is involved in the decision-making process and is included in the Group’s global strategy.

• An in-depth balance-sheet analysis and liquidity risk measurement to support the decision-making process and the control thereof.

• A management approach adapted in practice to the liquidity needs of each business.

7.2.1 Organizational and governance model

Decisions relating to all structural risks, including liquidity risk, are made though local asset-liability committees (ALCOs) in coordination with the markets committee.

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The markets committee is the highest-ranking body at Group level responsible for coordinating and supervising all global decisions affecting liquidity risk measurement, management and control. It is chaired by the Bank’s chairman and its members are the second deputy chairman (who, in turn, is the chairman of the risk committee), the CEO, finance and risk executive vice presidents, and certain heads of business and analysis units.

Following the aforementioned principles, the local ALCO committees establish strategies to guarantee and/or anticipate the funding requirements of their business. They are assisted in the performance of their duties by the financial management area and the market risk area, which submit analyses and management proposals and monitor compliance with the respective limits set.

In line with governance best practice, the Group has traditionally maintained a clear division between the implementation of the financial management strategy (for which the financial management area is responsible) and its monitoring and control (which is the responsibility of the market risk area).

This governance model has been reinforced by being integrated into a more global vision of the Group’s risks, namely the Group risk appetite framework, which responds to the demands from market regulators and participants, as a result of the financial crisis, for banks to strengthen their risk management and control systems.

With respect to the liquidity risk profile and appetite, the Group’s strategy when conducting its businesses aims to structure the balance sheet to make it as resilient as possible to potential liquidity stress scenarios. The liquidity appetite metrics are therefore structured by applying, on an individual basis, the principles of the Group’s liquidity management model, with specific levels for the structural funding ratio and minimum liquidity horizons under various stress scenarios, as detailed in the following sections.

7.2.2 Balance sheet analysis and liquidity risk measurement

Funding and liquidity decision-making is based on a thorough understanding of the Group’s current situation (environment, strategy, balance sheet and liquidity position), of the future liquidity needs of the businesses (liquidity projection) and of the accessibility and situation of the funding sources in wholesale markets.

Its aim is to ensure that the Group maintains optimum liquidity levels to cover its short- and long-term liquidity requirements with stable funding sources, optimizing the impact of funding costs on the income statement.

This requires the monitoring of the balance sheet structure, the preparation of short- and medium-term liquidity projections and the establishment of basic metrics.

Simultaneously, various scenario analyses are conducted considering the additional liquidity needs that could arise if certain very severe but very unlikely events occur. These events might have a varying effect on the various balance sheet items and/or funding sources (extent of roll-over of wholesale financing, run-off of deposits, impairment of liquid assets, etc.), due either to the global market conditions or to the Group’s specific situation.

The results of these balance-sheet, projection and scenario analyses provide the inputs required to prepare the Group’s various contingency plans, which, if necessary, would enable it to anticipate a broad spectrum of potential adverse situations.

All these measures are in line with the practices being promoted by the Basel Committee to strengthen the liquidity of financial institutions, the objective of which is to define a framework of principles and metrics that, in some cases, is currently in the observation phase and, in others, at the development stage.

The measurements, metrics and analyses used by the Group and subsidiaries in liquidity risk management and control are shown in greater detail below:

Methodology for liquidity risk monitoring and control

The liquidity risk measures adopted by the Group pursue the following goals:

• To attain the highest degree of effectiveness in liquidity risk measurement and control.

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• To provide support for financial management, to which end the measures are adapted to the manner in which the Group’s liquidity is managed.

• To be aligned with Basel III, in order to avoid any conflicts between varying limits and to facilitate limit management.

• To constitute an early warning system that anticipates potential risk situations by monitoring certain indicators.

• To achieve involvement at country level. Although the metrics are developed on the basis of common, uniform concepts affecting liquidity, they have to be analyzed and adapted by each unit.

Two kinds of basic metrics are used to control liquidity risk: short term and structural. Dynamic metrics include basically the liquidity gap, while static metrics feature the net structural balance-sheet position. The Group supplements these metrics by developing various stress scenarios. Following is a detailed description of these three metrics:

a) Liquidity gap

The liquidity gap provides information on potential cash inflows and outflows -both contractual and those estimated using assumptions- for a given period. Liquidity gap analyses are prepared for each of the main currencies in which the Group operates.

The gap supplies data on the projected sources and applications of funds of all on- and off-balance sheet items in specific time periods. This analysis tool is obtained by considering the net result of the maturity and cash flow structure for each of the time buckets established. The tool is constructed by including the available liquidity and contrasting it with the liquidity requirements resulting from maturities.

In practice, since the same item will behave differently at the various Group subsidiaries, a set of common standards and methodologies are in place to make it possible to construct the liquidity risk profiles of each unit in a uniform manner and to submit these profiles in a comparable form to the Bank’s senior management.

Consequently, as this analysis has to be performed on an individual basis for each subsidiary in view of their autonomous management, a consolidated view of the Group’s liquidity gaps is of very limited use for the management and understanding of liquidity risk.

The various analyses conducted using the liquidity gap as a basis include most notably the wholesale funding analysis. Based on this analysis, a metric has been defined the aim of which is to ensure that the Group has sufficient liquid assets to attain a minimum liquidity horizon in a scenario in which wholesale financing is not renewed on maturity; this minimum horizon is set at 90 days at the Group.

The minimum liquidity horizons are established at corporate level and on a uniform basis for all units/countries, which must calculate their wholesale liquidity metric for the main currencies in which they operate.

Bearing in mind the pressures experienced by the markets in recent years, the wholesale liquidity gap has been monitored particularly closely at the Parent and at the units in the euro zone.

At the end of 2013, all units were comfortably positioned with respect to the horizons set at corporate level for the aforementioned scenario.

b) Net structural position

The purpose of this metric is to determine the reasonableness of the balance-sheet funding structure. The Group’s aim is to ensure that its structural needs (lending, non-current assets, etc.) are satisfied by means of an appropriate combination of wholesale funding sources and a stable retail customer base.

Each unit prepares its liquidity balance sheet based on the nature of its business and compares its liquidity needs with the various funding sources available to it. The essential factors taken into account in determining this metric are the degree of recurrence of the business to be financed, the stability of the funding sources and the readiness with which assets can be converted into cash.

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In practice, each subsidiary prepares its own liquidity balance sheet (different from the balance sheet for accounting purposes) by classifying the various asset, liability and off-balance-sheet items on the basis of their nature in terms of liquidity. Thus, the funding structure of each subsidiary is determined, which must at all times conform to a fundamental premise: namely that the basic businesses must be financed with stable funds and medium and long-term financing. The combination of these measures guarantees the robustness of the Bank’s financial structure and the sustainability of its business plans.

At the end of 2013, the Group had a structural liquidity surplus of EUR 150,000 million.

c) Scenario analysis

In order to supplement the aforementioned metrics, the Group develops a series of stress scenarios. Its main objective is to identify the critical factors in each potential crisis and, at the same time, to define the most appropriate management measures to address each of the situations assessed.

In their liquidity analyses the units generally consider three different scenarios: systemic, idiosyncratic and hybrid which, given the Group’s characteristics, have been adapted to also take into account a local and a global systemic crisis. These scenarios constitute the minimum standard analysis established for all Group units to be reported to senior management. Also, each unit develops ad-hoc scenarios which replicate major historical crises or the liquidity risks specific to its particular environment.

The fundamental characteristics of the three base scenarios are as follows:

• Idiosyncratic crisis: affecting only the entity and not its environment. This is basically reflected in wholesale funds and in retail deposits, with various percentages of outflows based on the severity defined.

Within this category, the crisis that a local unit might suffer as a result of a crisis at the Parent, Banco Santander, S.A., is considered to be a specific scenario. This scenario was particularly relevant in 2012 in view of the tensions experienced in the peripheral eurozone countries.

• Systemic crisis: taken to be an attack by the international financial markets on the country in which the unit is located. Each entity is affected to a different extent depending on their relative positioning in the local market and the image of resilience they offer. The factors that would be affected in this scenario include, for example, the wholesale financing facilities, due to closure of the markets, and the liquid assets tied to the country, whose value would be significantly reduced.

• Hybrid crisis: in this scenario some of the factors described in the preceding paragraphs are stressed, paying particular attention to the most sensitive aspects from the standpoint of the unit’s liquidity risk.

These metrics and scenario definitions are directly related to the definition and execution of the liquidity contingency plan that is the responsibility of financial management.

At the end of 2013, in the event of a potential systemic crisis affecting the wholesale funding of the units located in Spain, Santander Group would have an adequate liquidity position. In particular, the wholesale liquidity horizon metric in Spain (included within the liquidity gap measures) would show levels exceeding 90 days in which the liquidity reserve would cover all wholesale financing maturities if they were not renewed.

In addition to these three metrics, the Group has defined a series of internal and market variables to act as early warning signals for potential crises; these signals are also capable of indicating the nature and severity of such crises. The incorporation of these variables in day-to-day liquidity management enables the Group to anticipate any situations that might have an adverse effect on its liquidity risk. Although these alerts vary from country to country and from entity to entity, based on the specific conditioning factors in each case, certain parameters are used across the Group, such as the price of Banco Santander CDSs, the changes in deposits and the trend in central bank official interest rates.

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7.2.3 Management tailored to business needs

Santander Group performs its liquidity management at subsidiary and/or business unit level in order to finance its recurring activities with the appropriate terms and prices. In practice, in keeping with the funding principles mentioned above, the liquidity management at these units consists of the following:

• Preparation of a liquidity plan each year on the basis of the funding needs arising from the budgets of each business and the methodology described above. Based on these liquidity requirements and taking into account certain prudential limits on the raising of funds in the short-term markets, the financial management area establishes an issue and securitization plan for the year at subsidiary/global business level.

• Year-round monitoring of the actual changes in the balance sheet and in the funding requirements of the subsidiaries/businesses, which results in the relevant updates of the plan.

• Continuous active presence in a wide range of wholesale funding markets, enabling the Group to maintain an adequate issue structure that is diversified in terms of product type and has a conservative average maturity.

The effectiveness of this management effort is based on the fact that it is implemented at all subsidiaries. Specifically, each subsidiary budgets the liquidity requirements resulting from its intermediation activity and assesses its own ability to raise funds in the wholesale markets so that, in ongoing coordination with the Group, it can establish an issue and securitization plan.

Traditionally, the Group’s main subsidiaries have been self-sufficient in terms of their structural funding. The exception has been Santander Consumer Finance (SCF) which, because it specializes in consumer financing mainly through dealer/retailer recommendations, has required the financial support of other Group units, especially the Parent.

7.3 Funding strategy and evolution of liquidity in 2013

7.3.1 Funding strategy

In the last few years the Group’s funding activity has achieved its goal of obtaining sufficient funds for the Group’s recurring business, in a highly demanding environment marked by a heightened perception of risk, scant liquidity at certain time horizons and the increased cost of funding.

This sound performance was underpinned by the extension of the management model to all Group subsidiaries, including recent acquisitions, and, above all, by the adaptation of subsidiaries’ strategies to the growing market demands. These demands were not uniform across the markets and reached far higher levels of difficulty and pressure in certain areas, such as the peripheral regions of Europe.

In any case, it is possible to identify a series of general trends in the policies implemented by Group’s subsidiaries in their funding and liquidity management strategies over the last five years, namely:

• Strong generation of liquidity from the commercial business due to the lower growth of credit and the greater emphasis on attracting customer funds.

• Maintenance of adequate, stable medium and long-term wholesale funding levels at Group level. Therefore, at 2013 year-end, this funding represented 20% of the liquidity balance sheet, a very similar level to the 21% in 2010, although significantly lower than the 28% at December 2008, when wholesale liquidity was an abundant, low-cost resource at worldwide level.

Following the tightening of conditions on the wholesale markets, the Group’s decentralized subsidiaries model, with proprietary issues and ratings programs, contributed to maintaining the Group’s high-level participation in the developed wholesale markets, even in the most demanding periods, such as the two-year period encompassing 2011 and 2012.

• Holding a sufficient volume of assets eligible for discount at central banks and other public bodies as part of the liquidity reserve to cater for episodes of stress on wholesale markets.

In particular, the Group has raised its total discount capacity in recent years to around EUR 145,000 million.

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In 2012, in view of the stresses on the euro markets, the Group pursued a prudent strategy of depositing most of the funds raised by it in the three-year auctions as an immediate liquidity reserve at the European System of central banks, while maintaining a very limited net global position. The reduction of the stresses enabled the Group in 2013 to repay the ECB all of the funds received by Spain in the three-year auctions, thereby reducing its net recourse to funding at the end of 2013 to the lowest levels in five years. Such funding was basically concentrated in Portugal.

Thanks to all these developments, based on a sound liquidity management model, the Group currently enjoys a very robust funding structure. The basic features of this distinguishing structure are as follows:

• High proportion of customer deposits in a predominantly commercial balance sheet.

Customer deposits are the Group’s major source of funding. If retail promissory notes are included (given that in Spain they are a substitute for term deposits), these deposits represent around two thirds of the Group’s net liabilities (i.e. of the liquidity balance sheet) and at the end of 2013 they accounted for 91% of net loans.

• Diversified wholesale funding, primarily at medium and long term, with a very small proportion maturing in the short term.

Medium and long-term wholesale funding represents 20% of the Group’s funding and enables it to comfortably cater for the net loans not financed with customer deposits (commercial gap).

7.3.2 Evolution of liquidity in 2013

At the end of 2013, in comparison with 2012, the Group reported:

• A slight reduction in the ratio of loans to net assets (total assets less trading derivatives and interbank balances) to 73% due to the decrease in lending in the climate of deleveraging of the mature markets. Nevertheless, this figure still mirrors the commercial nature of the Group’s balance sheet.

• An improvement in the loan-to-deposit (LTD) ratio, which stood at 109% (including retail promissory notes), down from 113% at December 2012. This fall continues the downward trend that began in 2008 (150%), which relies heavily on the Group subsidiaries’ capacity to generate liquidity and attract retail deposits.

• An improvement also in the ratio of customer deposits plus medium and long-term funding to loans, owing to the combination of the liquidity resulting from commercial management efforts and the capacity of the Group units to issue and attract wholesale funds. This ratio stood at 119% (2012: 118%), by far surpassing the 104% reported in 2008.

• At the same time, there was a continuing limited recourse to short-term wholesale funds, at under 2%, in line with prior years.

• Lastly, the Group’s structural surplus (i.e. the excess of structural funding resources -deposits, medium and long-term funding, and capital- over structural liquidity requirements -non-current assets and loans-) stood at EUR 150,000 million at the end of 2013. This volume covers 16% of the Group’s net liabilities, similar to the 2012 level.

The Group maintains its capacity to access the various markets on which it operates, strengthened by the incorporation of new issuer units. In 2013 it launched issues and securitizations in 11 currencies, in which 17 significant issuers in 14 countries participated, with an average maturity of approximately 3.7 years.

8. OPERATIONAL RISK

8.1 Definition and objectives

The Group defines operational risk as “the risk of loss resulting from inadequate or failed internal processes, human resources or systems or from external events”. Unlike other risks, this is generally a risk that is not associated with products or businesses, but is found in processes and/or assets and is generated internally (people, systems, processes) or as a result of external risks, such as natural disasters.

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The aim pursued by the Group in operational risk control and management is primarily to identify, measure/assess, control/mitigate and report on this risk.

The Group’s priority, therefore, is to identify and eliminate any clusters of operational risk, irrespective of whether losses have been incurred. Measurement of this risk also contributes to the establishment of priorities in operational risk management.

For the purpose of calculating regulatory capital for operational risk, the Group decided to opt for the standardized approach provided for under Basel II standards. In this regard, the Group embarked on a project for 2014 to shift to Advanced Measurement Approaches (AMA), for which it has already satisfied the majority of the regulatory requirements. In any event, it should be noted that the short-term priority in operational risk management continues to be focused on mitigation.

8.2 Corporate governance and organizational model

The organizational model for risk management and control follows the Basel guidelines and establishes three lines of defence:

• First line: identification, management and control functions at first instance performed by the Group’s business and support units. The Group’s various corporate areas themselves constitute an additional level of control over the performance of the different local units.

• Second line: independent control functions to ensure that risks are properly identified and managed by the first lines of defence, within the established general action frameworks.

It should be noted that in 2013 the Group bolstered the operational risk control function by creating, as part of the risk unit, the non-financial risk control area to complement the control function performed by the integrated risk control and internal risk validation area (CIVIR).

• Third line: verification functions performed on a recurring basis by the internal audit division.

The implementation, integration and local adaptation of the policies and guidelines established by the corporate area are the responsibility of the local areas, through the operational risk officers identified in each unit.

This operational risk management structure is based on the knowledge and experience of the executives and professionals of the various Group units, with particular importance being attached to the role of the local operational risk officers.

The Group has the following committees for operational risk management and control:

• The corporate technology and operational risk committee made up of the managers in charge of the Bank’s various divisions relating to the management and control of this risk: its objectives are to provide an overview of the Group’s operational risk and establish effective measures and corporate policies regarding the management, measurement, monitoring and mitigation of this risk.

• The corporate technology and operational risk control function committee: the committee meets every two months. It monitors the corporate area projects and the Group’s risk exposure and its meetings are attended by local and integrated risk control managers.

The Group oversees and controls technology and operational risk through its governing bodies. The Group’s board of directors, executive committee and management committee periodically address significant aspects concerning the management and mitigation of operational risk.

In addition, further to approval by the risk committee, the Group formally establishes the operational risk limits on an annual basis. A risk appetite is established which must fall within the low and medium-low risk profiles, which are defined in accordance with various ratio levels. Limits by country and for the Group are established based on the net loss to total income ratio. An assessment is also performed of the operational risk management status of the countries in accordance with certain internal indicators.

8.3 Risk management model

The technology and operational risk management model includes the following phases:

• Identification of the operational risk inherent in all the Group’s activities, products, processes and systems.

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• Objective and continued measurement and assessment of operational risk, consistent with the industry and regulatory standards (Basel, Bank of Spain, etc.), and setting of risk tolerance limits.

• Continuous monitoring of operational risk exposures, implementation of control procedures, improvement of internal awareness and mitigation of losses.

• Establishment of mitigation measures to eliminate or minimize operational risk.

• Generation of periodic reports on the exposure to operational risk and its level of control for senior management and the Group’s areas/units, and reporting to the market and the regulatory authorities.

• Definition and implementation of systems enabling the Group to monitor and control operational risk exposures. These systems are integrated into the Group’s daily management, using the current technology and maximizing the automation of applications.

• Definition and documentation of operational risk management policies and implementation of the related methodologies consistent with current regulations and best practices.

The operational risk control model implemented by the Group provides the following benefits:

• Integrated and effective management of operational risk (identification, measurement/ assessment, control/mitigation and reporting).

• Improved knowledge of actual and potential operational risks and better assignment to business and support lines.

• The information on operational risk helps improve processes and controls and reduce losses and income volatility.

• Setting of limits for operational risk appetite.

Model implementation: global initiatives and results

Substantially all the Group units are currently included in the model, with a high degree of uniformity. However, the different pace of the implementation, phases, timetables and historic depth of the respective databases gives rise to differences in the level of progress between one country and another.

In general, all the Group’s units continue to improve all matters relating to operational risk management, as disclosed in the annual review performed by internal audit.

The main functions, activities and global initiatives which have been adopted and seek to ensure the effective management of operational and technology risk, can be summarized as follows:

• Definition and implementation of the corporate technology and operational risk management framework.

• Designation of head coordinators and creation of operational risk departments at the local units.

• Training and experience sharing: communication of best practices within the Group.

• Fostering of mitigation plans: control of both the implementation of corrective measures and projects under development.

• Definition of policies and structures to minimize the impacts on the Group in the event of major disasters.

• Adequate control of the activities carried out by third parties, enabling the Group to respond to potential critical situations.

• Provide adequate information on this type of risk.

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With regard to technology risk management, the corporate function continues to strengthen significant aspects, such as the following:

• Security of information systems.

• Promotion of contingency and business continuity plans.

• Management of technology risk (risk associated with the use of technology -development and maintenance of applications, design, implementation and maintenance of technology platforms, production of computer processes, etc.).

In 2013 the corporate framework for agreements with third parties and control of suppliers was approved, and is applicable for all the entities over which the Group exercises effective control. The framework develops and defines the principle of operational responsibility, and establishes the benchmarks to be taken into consideration in agreements with suppliers, with the primary objective being to establish the principles governing the relationships between Group entities and suppliers, from start to finish, paying particular attention to the following:

• The decision to outsource new activities or services

• Selection of suppliers

• The establishment of each party’s rights and obligations

• Control of the service and periodic review of the agreements entered into with suppliers

• Termination of the agreements established

This framework also establishes the necessary responsibility, while respecting an appropriate segregation of functions, in order to ensure that risks may be properly identified, the service controlled and supervision maintained within the Group.

8.4 Risk measurement and assessment model

In order to measure and assess technology and operational risk, the Group defined a set of quantitative and qualitative corporate techniques/tools that are combined to perform a diagnosis, based on the identified risks, and obtain a valuation, through the measurement/assessment, of the area/unit.

8.5 Business continuity plan

The Group has a business continuity management system (BCMS) to ensure the continuity of the business processes of its entities in the event of a disaster or serious incident.

This basic objective consists of the following:

• Minimizing possible damage to persons, as well as adverse financial and business impacts for the Group due to an interruption of normal business operations.

• Reducing the operational effects of a disaster by supplying a series of pre-defined, flexible guidelines and procedures to be employed in order to resume and recover processes.

• Resuming time-sensitive business operations and associated support functions, in order to achieve business continuity, stable earnings and planned growth.

• Re-establishing the time-sensitive technology and support operations of the business if existing technologies are not operational.

• Protecting the public image of, and confidence in, the Group.

• Meeting the Group’s obligations to its employees, customers, shareholders and other interested third parties.

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8.6 Other matters relating to operational risk control and monitoring

Analysis and monitoring of controls in market operations

In view of the specific features and complexity of financial markets, the Group considers it necessary to continuously strengthen the operational control of its financial market activities. Therefore, in 2013, the control model for this business continued to be improved, with particular emphasis on the following points:

• Analysis of the individual operations of each treasury operator to detect any possible anomalous conduct.

• Improvement of the monitoring of communications with counterparties through the various authorized arrangement methods.

• Implementation in progress of a new tool enabling compliance with new record-keeping requirements.

• Reinforcement of controls on contributions of prices to market indices.

The business is also undergoing a global transformation, combined with the modernization of the technology platforms and operating processes involving a robust control model that enables the operational risk associated with this activity to be reduced.

Operational risk information system

The Group has a corporate information system that supports the operational risk management tools and facilitates the information and reporting functions and needs at local and corporate level.

The system offers event recording modules, risk mapping and assessment, indicators, mitigation and reporting systems, and is applicable to all the Group entities.

Corporate information

The corporate technology and operational risk control area has a system for management of operational risk information that provides data on the Group’s main risk elements. The information available from each country/unit in the operational risk sphere is consolidated to provide a global view with the following features:

• Two levels of information: one corporate, with consolidated information, and the other individualized for each country/unit.

• Dissemination of the best practices among the countries/units of the Group, obtained from the combined study of the results of qualitative and quantitative analyses of operational risk.

Information is specifically prepared on the following aspects:

• The Group’s operational risk management model and its main units and geographical areas.

• The operational risk management scope.

• Analysis of the internal event database and the database of significant external events.

• Analysis of the most significant risks arising from the operational and technology risk assessment exercises.

• Evaluation and analysis of risk indicators.

• Mitigating measures/active management.

• Business continuity plans and contingency plans.

• Regulatory framework: BIS II.

• Insurance.

This information acts as the basis for meeting reporting requirements to the risk committee, senior management, regulators, rating agencies, etc.

The role of insurance in operational risk management

The Group considers insurance as a key factor in operational risk management. Since 2004 the operational risk area has worked closely with the Group’s insurance management area in all activities leading to improvements in the two areas. Some notable examples are as follows:

• Cooperation in the presentation of the Group’s operational risk management and control model to insurers and reinsurers.

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• Analysis and follow-up of the recommendations and suggestions for improving operational risks made by insurance companies, through previous audits performed by specialized companies, and of the subsequent implementation thereof.

• Sharing of the information generated in the two areas in order to strengthen the quality of error databases and the cover provided by the insurance policies of the various operational risks.

• Close cooperation between local operational risk officers and local insurance coordinators in order to enhance operational risk mitigation.

• Regular meetings to report on specific activities, statements of position and projects in the two areas.

• Active participation of the two areas in the global insurance sourcing desk, the highest technical body in the Group responsible for the definition of insurance coverage and arrangement strategies.

9. COMPLIANCE AND REPUTATIONAL RISK

9.1 Definitions and objective

Compliance risk is the risk of receiving penalties (financial or otherwise) or being subject to other types of disciplinary measures by the supervisors as a result of failing to comply with laws, regulations, standards, the organization’s self-regulatory standards or codes of conduct applicable to the activity carried on.

Reputational risk is the risk associated with the perception of the Group held by the various internal and external stakeholders with which it is related as part of its business activities, which may have an adverse impact on results or business expectations. This risk includes legal, economic, financial, ethical, social and environmental aspects.

The Group’s objective regarding compliance risk is: (i) to minimize the probability of irregularities arising; and (ii) to identify, report and swiftly resolve any irregularities that might possibly arise. As for reputational risk, bearing in mind the diversity of sources from which it can arise, management of this risk aims to identify such sources and ensure that they are duly attended to so that the probability of their occurring is reduced and the possible impact thereof is mitigated.

9.2 Corporate governance and organizational model

It is the responsibility of the Bank’s board of directors, as part of its supervisory function, to approve the Group’s general risk policy. In the corporate compliance and reputational risk area, the board is in charge of the Group’s general code of conduct, the global policy on the prevention of money laundering and terrorist financing and the product and service marketing policy.

The risk committee proposes the Group’s risk policy to the board. Also, as the body responsible for global risk management, it measures reputational risk in its area of activity and decision-making.

The audit and compliance committee is entrusted, inter alia, with the functions of supervising compliance with legal requirements, watching over the effectiveness of internal control and risk management systems, supervising compliance with the Group’s code of conduct in the securities markets, with the manuals and procedures for the prevention of money-laundering and, in general, with the bank’s rules of governance and compliance, and making any necessary proposals for improvement, as well as reviewing compliance of the actions and measures resulting from reports or actions of the administrative supervisory and control authorities.

The compliance function reports to the board on an ongoing basis, mainly through the audit and compliance committee, to which the Group’s head of compliance reported at the twelve meetings held by this committee in 2013. The Group’s head of compliance also reported to one meeting of the risk committee in 2013, without prejudice to attending other sessions of this committee when transactions with a possible impact from the reputational risk standpoint were submitted to it.

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Lastly, the corporate committees for regulatory compliance, analysis and resolution and marketing (the last two specialize in their respective subjects: the prevention of money laundering and the marketing of products and services) are collective bodies with basic competencies which have a global scope (all geographical areas, all businesses) and are replicated at local level.

The risk unit monitors the compliance risk control framework both from the integrated risk control and internal risk validation area (CIVIR), in the exercise of its functions to support the risk committee, and from the non-financial risk control area created in 2013.

The organizational model revolves around the corporate compliance and reputational risk area, forming part of the general secretary’s division, which is entrusted with managing the Group’s compliance and reputational risks. Within this area, which is led by the Group’s head of compliance, are the corporate regulatory compliance risk management office, the corporate reputational risk management office and the corporate financial intelligence unit (UCIF), which is responsible for the prevention of money laundering and terrorist financing. This structure is replicated at local level and also in the global businesses, the appropriate functional reporting channels to the corporate area having been established.

9.3 Risk appetite model

The risk committee was informed at its meeting held on October 2013 of the Group’s risk appetite model applicable to compliance and reputational risk. The model is characterized by the following three elements:

• It is based on an express declaration of zero appetite for compliance and reputational risk.

• The objective of the management performed by the Group is to minimize the incidence of compliance and reputational risk. Accordingly, systematic monitoring is performed using the compliance and reputational risk indicator resulting from the assessment matrices prepared for each country.

• Quarterly monitoring of risk appetite is performed on a country-by-country basis.

Data of the communications received from the various supervisors each month is fed into the assessment matrix. Each of these communications is allocated a score depending on the risk they represent in terms of: (i) costs due to fines; (ii) process reorganization costs; and (iii) the impact on the brand and reputational risk. These assessments are compared with ratings assigned by internal audit with respect to compliance.

Each local unit is allocated a weighting based on its attributable profit and volume of assets, which can be used to obtain an overall score for the Group.

9.4 Risk management model

The main responsibility for compliance and reputational risk management is shared by the compliance department and the various business and support units that conduct the activities giving rise to risk. The responsibility for developing policies and implementing the corresponding controls lies with the compliance department, which is also responsible for advising senior management on these matters and fostering a culture of compliance, all as part of an annual program whose effectiveness is periodically evaluated.

The compliance department directly manages the basic components of these risks (money laundering, codes of conduct, product marketing, etc.) and ensures that the other components are duly addressed by the corresponding Group unit (responsible financing, data protection, customer claims, etc.), for which purpose it has established the appropriate control and verification systems.

The integrated risk control and internal risk validation area ensures that the risk management model is properly executed. Also, as part of its functions, internal audit performs the tests and reviews required to check that the standards and procedures established at the Group are being complied with.

The central plank of the Group’s compliance program is the general code of conduct. This code contains the ethical principles and standards of conduct that must guide the actions of all the Group employees and is complemented in certain matters by the standards contained in the industry-specific codes and manuals⁽⁹⁾

9 The industry-specific codes and manuals include the prevention of money laundering and terrorist financing manual, the code of conduct in securities markets, the procedures manual for the sale of financial products, the analysis code of conduct, the research policy manual, the use of information and communications technology conduct manual, the property management conduct manual, the purchasing management conduct manual, etc., in addition to the notes and circulars implementing specific points of these codes and manuals.

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Also, the code establishes: i) the functions and responsibilities regarding compliance by the Group’s relevant governing bodies and divisions; ii) the standards regulating the consequences of the failure to comply; and iii) a channel for reporting and processing notifications of allegedly unlawful actions.

It is the role of the corporate compliance office, under the supervision of the audit and compliance committee and the regulatory compliance committee, to ensure the effective implementation and monitoring of the general code of conduct.

The regulatory compliance committee, which is chaired by the Group’s general secretary, has authority on all matters relating to the compliance function, without prejudice to the matters assigned to the two specialist bodies in this area (the corporate marketing committee with regard to the marketing of products and services, and the analysis and resolution committee with regard to the prevention of money laundering and terrorist financing). The regulatory compliance committee is composed of representatives from internal audit, the general secretary’s division, financial management, human resources and the most directly affected business units.

The Group’s compliance department has been entrusted with the following compliance and reputational risk management functions:

1. Implementing the Group’s general code of conduct and other codes and industry-specific manuals.

2. Supervising the training activities on the compliance program conducted by the human resources area.

3. Directing investigations into any possible breaches, with help from internal audit, and proposing the appropriate penalties to the related committee.

4. Cooperating with internal audit in the periodic reviews carried out by internal audit on compliance with the general code and with the industry-specific codes and manuals, without prejudice to the periodic reviews of matters of regulatory compliance which are conducted by the compliance department directly.

5. Receiving and handling the complaints made by employees or third parties through the whistleblowing facility.

6. Advising on the resolution of doubts arising from the application of the codes and manuals.

7. Preparing an annual report on the application of the compliance program for submission to the audit and compliance committee.

8. Regularly reporting to the general secretary, the audit and compliance committee and the board of directors on the implementation of the compliance policy and the compliance program.

9. Assessing, every year, the changes that it might be appropriate to make to the compliance program, particularly in the event of detecting unregulated risk areas and improvable procedures, and proposing such changes to the audit and compliance committee.

As regards the industry-specific codes and manuals, the focus of the compliance program is on the following operational spheres, inter alia:

• Prevention of money laundering and the financing of terrorism.

• Marketing of products and services.

• Conduct in securities markets.

• Relations with regulators and supervisors.

• Preparation and dissemination of the Group’s institutional information.

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Prevention of money laundering and the financing of terrorism

Policies

As a socially responsible organization, it is a strategic objective for the Group to have an advanced effective system for the prevention of money laundering and the financing of terrorism that is constantly adapted to the latest international regulations and has the capacity to respond to the appearance of new techniques employed by criminal organizations.

The prevention of money laundering and terrorist financing function is articulated in certain policies that establish minimum standards that the Group’s units must observe, and which are prepared in conformity with the principles contained in the 40 recommendations of the Financial Action Task Force (FATF) and the obligations and stipulations of Directive 2005/60/EC of the European Parliament and of the Council of October 26, 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing.

The corporate policy and the standards implementing it must obligatorily be complied with at all Group units worldwide. In this regard, units should be taken to be all the Group’s banks, subsidiaries, departments or branches, both in Spain and abroad, which, in accordance with their legal status, must be subject to the regulations on the prevention of money laundering and terrorist financing.

Governance and organization

The organization of the prevention of money laundering and terrorist financing function is divided into three parts: the analysis and resolution committee (CAR), the corporate financial intelligence unit (UCIF) and the persons in charge of prevention at various levels.

The CAR is a collective body with a corporate scope which is chaired by the Group’s general secretary and is composed of representatives of internal audit, the general secretary’s division, human resources and the most directly affected business units. The CAR held four meetings in 2013.

The UCIF’s function is to establish, coordinate and supervise the systems and procedures for the prevention of money laundering and terrorist financing at all Group units.

Also, there are persons responsible for the prevention of money laundering and terrorist financing at four different levels: area, unit, branch and account. Their mission in each case is to support the UCIF from the position of proximity to customers and operations.

At consolidated level, a total of 781 professionals perform the prevention of money laundering and terrorist financing function at the Group (three-quarters of that number on a full-time basis) at 173 units established in 36 countries.

The Group has established corporate systems at all its units and business areas based on decentralized computer software which makes it possible to present directly to the account branches or the relationship managers the transactions and customers which need to be analyzed because of their risk. The aforementioned tools are supplemented by other tools used centrally by the teams of analysts in the prevention units and, based on certain risk profiles and changes in certain customer operational behavior patterns, they enable transactions that might be linked to money laundering or terrorist financing to be analyzed, identified on a preventative basis and monitored.

The Group is a founder member, along with ten other large international banks, of the Wolfsberg Group. The Wolfsberg Group’s objective is to establish international standards to increase the effectiveness of programs to combat money laundering and terrorist financing in the financial community. Various initiatives have been developed which have addressed, inter alia, issues such as the prevention of money laundering in private banking and correspondent banking, and the financing of terrorism. The regulatory authorities and experts in this area consider that the Wolfsberg Group and the principles and guidelines set by it represent an important step in the fight against money laundering, corruption, terrorism and other serious crimes.

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Marketing of products and services

Policies

The Group manages the risk that may arise from an inadequate sale of products or an improper provision of services by the Group in accordance with the corporate policies regarding the marketing of products and services.

These corporate policies aim to establish a single corporate framework for all regions, businesses and entities that: (i) reinforces the organizational structures; (ii) ensures that decision-making committees oversee not only the approval of products and services, but also the monitoring thereof over their whole lives; and (iii) establishes the guidelines for defining uniform Group-wide criteria and procedures for the marketing of products and services, which encompass all its phases (approval, pre-sale, sale and follow-up or post-sale).

These policies are developed and specifically adapted to the actual local situation and to local regulatory requirements through the local internal rules of the various Group units, once authorization has been obtained from the corporate compliance and reputational risk area.

Governance and organization

The management of the risk that might arise from the incorrect selling of products or services is organized by corporate and local marketing committees, the global consultative committee, the corporate monitoring committee, and corporate and local reputational risk management offices.

The corporate marketing committee (CCC) is the Group’s highest decision-making body regarding the approval of products and services. Chaired by the Group’s general secretary, it is composed of representatives of the following divisions: risk, financial management, technology and operations, general secretary’s division, the controller’s unit, internal audit, commercial banking, global wholesale banking, private banking, asset management and insurance.

The CCC pays particular attention to the suitability of the product or service for the environment in which it is to be marketed, placing particular emphasis on ensuring that:

• Each product or service is sold by competent sales personnel.

• Customers are furnished with the required appropriate information.

• The product or service fits the customer’s risk profile.

• Each product or service is assigned to the appropriate market, not only from a legal or tax standpoint, but also with regard to the financial culture of that market.

• The product or service meets the requirements of the corporate marketing policies and, in general, the applicable internal or external regulations.

Also, local marketing committees (CLCs) are created at local level to channel proposals for the approval of new products to the CCC -after issuing a favorable opinion, since initially they do not have any delegated powers- and to approve products that are not new and the related marketing campaigns.

In their respective approval processes the marketing committees’ actions are guided by a risk-based approach, from the view point of both the Bank and the customer.

The global consultative committee (CGC) is the advisory body of the corporate marketing committee and consists of area representatives who provide an insight into risks, regulations and markets. The CGC, which meets roughly on a quarterly basis, may recommend the review of products affected by market changes, impaired solvency (country, sectors or companies) or changes in the Group’s market perception at medium and long term.

The corporate monitoring committee (CCS) is the Group’s decision-making body regarding the monitoring of products and services. This committee is chaired by the general secretary and is attended by internal audit, legal advisory, compliance, customer care and the business areas concerned (with the ongoing representation of the commercial network). It meets weekly, and considers and resolves specific issues relating to the selling of products and services at a local level as well as at the level of the Group units outside Spain.

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The purpose of the corporate reputational risk management office (OCGRR) is to provide the relevant governing bodies with the information required to enable them: (i) to conduct an appropriate analysis of risk in the approval phase, with a twofold focus: impact on the Bank and impact on customers; and (ii) to monitor products over their life cycle.

At local level reputational risk management offices have been established, which are responsible for promoting corporate culture and for ensuring that products are approved and monitored in the respective local spheres in keeping with corporate guidelines.

Conduct in securities markets

Policy

This is set by the code of conduct in the securities markets, complemented, inter alia, by the code of conduct for analysis activities, the research policy manual and the procedure for detecting, analyzing and communicating transactions suspected of market abuse.

Governance and organization

The organization is centered on the corporate compliance office and local and subsidiaries’ compliance divisions.

The Group’s compliance department performs the following main functions in relation to the rules of conduct in securities markets:

1. Registering and controlling sensitive information that is known by and/or generated at the Group;

2. Keeping lists of the securities affected and the initiated persons, and monitoring transactions with these securities;

3. Monitoring transactions with restricted securities depending on the type of activity, portfolios or groups to which the restriction applies;

4. Receiving and attending to notifications of, and requests for, authorization of transactions for own account;

5. Controlling transactions for own account of the persons subject to compliance with the code of conduct;

6. Managing breaches;

7. Resolving any issues raised concerning the Code of Conduct in Securities Markets (CCMV);

8. Recording and resolving conflicts of interest and the situations that might give rise to them;

9. Assessing and managing any conflicts that might arise in the analysis activity.

10. Maintain the files required to control compliance with the obligations established in the CCMV;

11. Develop ordinary contact with the regulators;

12. Organizing training and, in general, performing the actions required to apply the CCMV; and

13. Analyzing actions that might be suspected of constituting market abuse and, where appropriate, reporting them to the supervisors.

Criminal risk prevention

The Group’s compliance department has also been entrusted with the management of the criminal risk prevention model, which resulted from the entry into force of Organic Law 5/2010, which made legal entities criminally responsible for crimes committed on their account or for their benefit by directors or representatives or employees as a result of a lack of control.

Towards the end of 2013 an review certification process of the Group’s criminal risk prevention model was performed by an external expert, which verified the following: i) the effective implementation of the Group’s internal rules, ii) the existence of general control measures and; iii) the existence of specific control measures. The conclusions were satisfactory. Also, the criminal code reform project currently under way was monitored, with a view to anticipating as far as possible the adaptation tasks.

Relationships with supervisors and dissemination of information to the markets

The compliance department is responsible for responding to the information requirements of the regulatory and supervisory bodies, both in Spain and in other countries where the Group operates, monitoring implementation of the measures arising from the reports or inspections conducted by these bodies and supervising the way in which the Group disseminates institutional information in the markets, transparently and in accordance with the regulators’ requirements. The audit and compliance committee is informed of the main issues at each of its meetings.

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10. CAPITAL

10.1 Compliance with the new regulatory framework

The regulations known as Basel III, which establish new global capital and liquidity standards for financial institutions, came into force in 2014.

From the capital standpoint, Basel III redefines what is considered to be available capital at financial institutions (including new deductions and raising the requirements for eligible equity instruments), increases the minimum capital requirements, requires financial institutions to operate permanently with capital buffers, and adds new requirements in relation to the risks considered.

The Group shares the ultimate objective pursued by the regulator with this new framework, namely to endow the international financial system with greater stability and resilience. In this regard, for many years the Group has collaborated on the impact studies for calibrating the new rules conducted by the Basel Committee and the European Banking Authority (EBA) and coordinated at local level by the Bank of Spain.

In Europe, the new standards have been implemented through Directive 2013/36/EU, known as the Capital Requirements Directive (“CRD IV”), and the related Capital Requirements Regulation (“CRR”), which is directly applicable in all EU member states (as part of the Single Rulebook). In addition, the standards are subject to Implementing Technical Standards commissioned from the European Banking Authority (EBA), some of which will be issued in the coming months/years.

The Capital Requirements Regulation came into force on January 1, 2014, with many of its rules subject to various implementation timetables. This transitional implementation phase, which affects mainly the definition of eligible capital, concludes at the end of 2017, except with regard to the deduction for deferred tax assets, the transition period for which lasts until 2023.

Subsequent to the transposition of Basel III into European legislation, the Basel Committee has continued to issue additional standards, some in the form of public consultation processes, which will entail a future amendment of CRD IV and the CRR. The Group will continue to support the regulators by offering its opinions and participating in impact studies.

The Group currently has robust capital ratios, in keeping with its business model and risk profile, which, coupled with its substantial capacity to generate capital organically and the gradual implementation timetable envisaged for the new requirements in the legislation, place it in a position to comply with Basel III.

With regard to credit risk, the Group is continuing to adopt its plan to implement the advanced internal ratings-based (AIRB) approach under Basel for substantially all its banks, and it intends to do so until the percentage of net exposure of the loan portfolio covered by this approach exceeds 90%. The attainment of this objective in the short term will also depend on the acquisitions of new entities and the need for the various supervisors to coordinate the validation processes for the internal approaches. The Group is present in geographical areas where there is a common legal framework among supervisors, as is the case in Europe through the Capital Requirements Directive. However, in other jurisdictions, the same process is subject to the framework of cooperation between the home and host country supervisors under different legislations, which in practice entails adapting to different criteria and timetables in order to obtain authorization to use the advanced approaches on a consolidated basis.

Accordingly, the Group continued in 2013 with the project for the progressive implementation of the technology platforms and methodological improvements required for the roll-out of the AIRB approaches for regulatory capital calculation purposes at the remaining Group units. To date the Group has obtained authorization from the supervisory authorities to use advanced approaches for the calculation of regulatory capital requirements for credit risk for the Parent, the main subsidiaries in Spain, the United Kingdom and Portugal, certain portfolios in Mexico, Brazil and Chile, as well as for Santander Consumer Finance in Spain and the United States. The Group’s Basel implementation strategy is focused on obtaining authorization for the use of AIRB approaches at the main entities in the Americas and Europe.

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With regard to operational risk, the Group currently uses the standardized approach for regulatory capital calculation purposes and has embarked on a project to roll out AMA approaches once it has collated sufficient data using its own management model. The Group considers that the internal model should be developed primarily on the basis of the experience accumulated in managing an entity through the corporate guidelines and criteria established after assuming control, which are a distinctive feature.

As regards the other risks explicitly addressed in Pillar I of the Basel Capital Accord, Santander Group has been authorized to use its internal model for market risk on the treasury areas’ trading activities in Spain, Chile, Portugal and Mexico, thus continuing implementation of the roll-out plan it submitted to the Bank of Spain for the other units.

With respect to Pillar II, the Group uses an economic capital approach to quantify its global risk profile and its capital adequacy position as part of the internal capital adequacy assessment process (ICAAP) at consolidated level. This process includes regulatory and economic capital planning under several alternative economic scenarios, in order to ensure that the internal capital adequacy targets are met even in plausible but highly unlikely adverse scenarios. The ICAAP exercise is supplemented with a qualitative description of the risk management and internal control systems, is reviewed by internal audit and internal validation teams and is subject to a corporate governance structure that culminates in its approval by the Group’s board of directors, which also establishes the strategic factors relating to risk appetite and capital adequacy targets on an annual basis.

In accordance with the capital requirements set by the European Directive and Bank of Spain rules, the Group publishes its Pillar III disclosures report on an annual basis. This report comfortably meets the market transparency requirements in relation to Pillar III. The Group considers the market reporting requirements to be fundamental in order to complement the minimum capital requirements of Pillar I and the supervisory review process performed through Pillar II. In this respect, its Pillar III disclosures report incorporates the recommendations made by the European Banking Authority (EBA), thus making Santander Group an international benchmark in terms of market transparency, as is already the case with its annual report.

Parallel to the roll-out of advanced approaches at the various Group units, Santander Group is carrying out an ongoing training process on Basel at all levels of the organization, covering a significant number of professionals from all areas and divisions, with a particular focus on those most affected by the changes arising from the adoption of the new international capital standards.

10.2 Economic capital

Economic capital is the capital required, based on an internally-developed model, to support all the risks of the business activity with a given solvency level. In the case of Santander Group, the solvency level is determined by the AA-/A+ long-term target rating, which results in the application of a 99.95% confidence level (higher than the regulatory 99.90%) for the purpose of calculating the required capital.

The Group’s economic capital model complements the regulatory approach by including in its measurement all the significant risks incurred in the Group’s operations. Accordingly, it considers risks such as concentration risk, structural interest rate risk, business risk, pension risk and other risks outside the scope of regulatory Pillar I capital requirements. Economic capital also includes the diversification effect, which in the case of Santander Group, owing to the multinational, multibusiness nature of its operations, is of key importance in determining its overall risk and solvency profile.

Comparison of regulatory and economic capital requirements is distorted because there are certain risks, such as goodwill, which for regulatory purposes are presented as deductions from the eligible capital base instead of being included as capital requirements. Similarly, the economic capital required for these risks can be presented as deductions from the internal capital base (following the regulatory method) or as part of the economic capital requirements, which is the preferred option within the Group. Furthermore, as we have mentioned above, measurement of economic capital includes certain risks that are not present in the regulatory approach (the so-called Pillar II risks).

The concept of diversification is fundamental for the proper measurement and understanding of the risk profile of a group with global operations such as Santander Group. The fact that the Group conducts its business activities in various countries through a structure of differentiated legal entities, across a broad spectrum of customer and product segments, thereby also incurring various types of risks, means that the Group’s earnings are less vulnerable to any adverse situation that might arise with respect to a particular market, portfolio, customer or risk. Despite the current high level of globalization of the world’s economies, the economic cycles are not the same and do not have the same intensity in the various geographical regions. As a result, groups with global presence display more stable results and have a greater capacity to withstand possible crises affecting specific markets or portfolios, which is synonymous with a lower level of risk. In other words, the risk and the associated economic capital borne by the Group as a whole is less than the risk and the capital arising from the sum of its various components considered separately.

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Lastly, the economic capital measurement and aggregation model also considers the concentration risk for wholesale portfolios (large corporations, banks and sovereigns), in terms of both the size of their exposure and their industry-based or geographical concentration. Any geographical or product concentration in retail portfolios is captured through the application of an appropriate correlation model.

Economic capital is a fundamental tool for the internal management and implementation of the Group’s strategy, from the viewpoint of both the assessment of capital adequacy and the management of portfolio and business risk.

With regard to capital adequacy, in the context of Pillar II of the Basel Capital Accord, the Group conducts the internal capital adequacy assessment process using its economic capital model. To this end, the Group plans the business performance and the capital requirements under a central scenario and under alternative stress scenarios. With this planning the Group ensures that it will continue to meet its capital adequacy targets, even in adverse economic scenarios.

Also, the economic capital metrics make it possible to assess risk-return targets, price transactions on a risk basis and gauge the economic viability of projects, units or lines of business, with the ultimate objective of maximizing the generation of shareholder value.

Capital planning and stress tests

Capital stress tests have gained particular significance as a tool for the dynamic evaluation of banks’ risk exposure and capital adequacy. A new forward-looking assessment model is becoming a key component of capital adequacy analysis.

This forward-looking assessment is based on both macroeconomic and idiosyncratic scenarios that are highly improbable but nevertheless plausible. To conduct the assessment, it is necessary to have robust planning models capable of transferring the effects defined in the projected scenarios to the various elements that have a bearing on the adequacy of a bank’s capital.

The ultimate goal of capital stress tests is to perform a complete evaluation of banks’ risk exposure and capital adequacy in order to determine any possible capital requirements that would arise if banks failed to meet the regulatory or internal capital targets set.

In particular, the European Central Bank (ECB) has announced that the current comprehensive assessment that it will carry out in the course of 2014 ahead of taking up its role as the single supervisor (as part of the Single Supervisory Mechanism (SSM)) will culminate in a stress test to be conducted by the European Banking Authority (EBA) in collaboration with the ECB itself, which is scheduled to be completed by November 2014. The objective of this entire process is to eradicate any possible uncertainty as to the solvency of the European banking system, to provide transparency on the resilience and solvency of banks and, where required in light of the test results, to adopt any necessary measures (including possible additional capital requirements).

More specifically, the forthcoming stress test will be conducted on a total sample of 124 banks covering at least 50% of the banking sector in each EU Member State (as expressed in terms of assets). The stress test will be carried out over a three-year time horizon and will assess the impact of risk drivers on the solvency of banks, including credit risk, market risk, sovereign risk, securitization and cost of funding.

The capital hurdle rates, measured in terms of Common Equity Tier 1 (CET1), are expected to be 8% CET1 for the baseline scenario and 5.5% CET1 for the adverse scenario. Publication of the results of the stress test is scheduled for the end of October 2014.

As a starting point for the stress test and within the scope of the comprehensive assessment, throughout 2014 the ECB will conduct an asset quality review (AQR), an in-depth analysis of banks’ balance sheets and the quality of their assets.

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The Group has defined a capital planning and stress testing process not only to enable it to respond to the various regulatory exercises, but also to serve as a key tool forming an integral part of the Bank’s management and strategy.

The purpose of the internal capital planning and stress testing process is to ensure the current and future sufficiency of the Group’s capital, even in adverse but plausible economic scenarios. To this end, taking as a basis the Group’s initial position (as defined by its financial statements, its capital base, its risk parameters and its regulatory ratios), estimates are made of the expected outcomes for the Group in various business environments (including severe recessions as well as “normal” macroeconomic scenarios), and the Group’s capital adequacy ratios, projected generally over a three-year period, are obtained.

The process implemented provides a comprehensive view of the Group’s capital for the time horizon analyzed and in each of the scenarios defined. The analysis incorporates regulatory capital, economic capital and available capital metrics.

This process facilitates achievement of the ultimate goal pursued by capital planning, since it has become a strategically important element for the Group that:

• Guarantees current and future capital adequacy, even in adverse economic scenarios.

• Permits comprehensive capital management and includes an analysis of specific impacts, facilitating their integration in the Group’s strategic planning.

• Makes it possible to enhance efficiency in the use of capital.

• Supports the design of the Group’s capital management strategy.

• Facilitates reporting to the market and supervisors.

In addition, the entire process is carried out with the maximum involvement and under the close supervision of senior management, and within a framework that guarantees suitable governance and the application of adequate levels of challenge, review and analysis to all components of the process.

One of the key elements in the capital planning and stress testing exercises, since it plays a particularly important role in income statement projections for the adverse scenarios defined, is the calculation of the provisions that would be required in those scenarios, primarily the provisions recognized to cover losses on the loan portfolios. Specifically, in order to calculate the credit loss provisions for its loan portfolio, Santander Group uses a methodology which ensures that, at all times, it has a level of provisions sufficient to cover all the credit losses projected by its internal expected loss models.

This methodology is widely accepted and is similar to that used in previous stress-testing exercises (e.g. the 2011 EBA stress test or the 2012 stress test on the Spanish banking sector).

Lastly, the capital planning and stress testing process culminates in an analysis of capital adequacy in the various scenarios designed and over the established time horizon. The aim is to assess the Group’s capital adequacy and to ensure that it meets both its internal capital targets and all regulatory requirements.

In the course of the recent economic crisis, the Group underwent four stress tests in which it proved its strength and solvency in the most extreme and severe macroeconomic scenarios. All the stress tests evidenced that, thanks mainly to the Group’s business model and geographical diversification, Banco Santander will continue to generate profit for its shareholders and to comply with the most stringent regulatory requirements.

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RORAC and value creation

The Group has used RORAC methodology in its risk management since 1993, with the following objectives:

• Calculation of economic capital requirements and of the return thereon for the Group’s business units, segments, portfolios and customers, in order to facilitate an optimal allocation of economic capital.

• Budgeting of capital requirements and RORACs of the Group’s business units.

• Analysis and setting of prices in the decision-making process for transactions (loan approval) and customers (monitoring).

The RORAC methodology facilitates the comparison, on a like-for-like basis, of the performance of transactions, customers, portfolios and businesses, and identifies those which achieve a risk-adjusted return higher than the Group’s cost of capital, thus aligning risk management and business management with the aim of maximizing value creation, which is the ultimate objective of Group senior management.

The Group periodically assesses the level of and the changes in the value creation (VC) and return on risk-adjusted capital (RORAC) of the Group and of its main business units. The VC is the profit generated over and above the cost of the economic capital (EC) used, and is calculated using the following formula:

VC = Profit - (average EC x cost of capital)

The profit used is obtained by making the required adjustments to accounting profit in order to reflect only the recurring profit obtained by each unit from its business activity.

If a transaction or portfolio yields a positive return, it will be contributing to the Group’s profit, although it will only create shareholder value when this return exceeds the cost of capital.

2013 witnessed an uneven performance of the business units in terms of value creation, although the instances of decreasing value creation predominated. The Group’s results and, therefore, the RORAC and value creation figures were shaped by the weakness of the economic cycle of various Group units in Europe and, in particular, in Spain.

55. Other Disclosures

This Note includes relevant information about additional disclosure requirements.

55.1 Consolidated financial statements

Following are the consolidated balance sheets and consolidated statements of income of the Group under the IFRS reformatted to conform to the presentation guidelines for bank holding companies set forth in Regulation S-X Article 9 of the Securities and Exchange Commission of the United States of America.

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts and allocations of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

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CONSOLIDATED BALANCE SHEET

	Millions of Euros
	2013			2012			2011
Assets
Cash and due from banks		72,512			111,663			87,085
Interest earning deposits in other banks		26,405			28,214			25,042
Securities purchased under agreements to resell		16,192			13,527			11,817
Trading account assets		146,670			206,273			192,201
Banks		29,792			31,644			14,146
Loans		7,430			11,569			14,995
Derivatives		58,899			110,319			102,498
Debt securities		44,716			46,561			55,353
Equity securities		5,833			6,180			5,209
Investment securities		91,685			99,325			93,453
Available-for-sale		91,685			99,325			93,453
Net Loans and leases		642,441			683,449			712,920
Loans and leases, net of unearned income		667,270			708,831			731,675
Less-Allowance for loan losses		(24,829	)		(25,382	)		(18,755	)
Premises and equipment, net		13,812			14,483			13,985
Investment in affiliated companies		5,536			4,454			4,155
Other assets		100,042			107,806			108,206
Intangible Assets		2,960			3,436			2,994
Goodwill in consolidation		23,281			24,626			25,089
Accrual Accounts		2,112			1,757			2,032
Hedge derivatives		8,301			7,936			9,898
Others		63,388			70,051			68,193
Total assets		1,115,295			1,269,194			1,248,864
Liabilities
Deposits		624,616			678,383			653,036
Non interest deposits		5,623			5,285			5,380
Interest bearing		618,993			673,098			647,656
Demand deposits		172,074			149,186			160,540
Savings deposits		164,214			167,389			140,583
Time deposits		282,705			356,523			346,533
Certificates of deposit		—			—			—
Short-term debt		105,111			120,481			131,930
Long-term debt		177,671			202,223			208,590
Other liabilities		127,996			186,832			174,494
Taxes Payable		6,079			7,765			7,966
Accounts Payable		4,731			4,908			6,632
Accrual Accounts		5,068			5,181			5,470
Pension Allowance		8,784			9,948			8,636
Stock borrowing liabilities		—			—			—
Derivatives		64,170			116,187			109,527
Liabilities under insurance contracts		1,430			1,425			517
Other Provisions		5,348			5,795			6,526
Short securities positions		15,951			15,181			10,187
Others		16,435			20,442			19,033
Total liabilities		1,035,394			1,187,919			1,168,050
Equity
Stockholders’ equity
Capital stock		5,667			5,161			4,455
Additional paid-in-capital		36,804			37,412			31,223
Other additional capital		(415	)		(937	)		(1,821	)
Current year earnings		4,370			2,295			5,330
Other reserves		24,161			27,929			35,273
Total stockholders’ equity		70,587			71,860			74,460
Non-controlling interests		9,314			9,415			6,354
Total Equity		79,901			81,275			80,814
Total liabilities and Equity		1,115,295			1,269,194			1,248,864

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The Group has issued Mortgage backed securities, called Cédulas Hipotecarias (see Note 22). Additionally, as of December 31, 2013, 2012 and 2011, the investment debt securities assigned to certain Group or third-party commitments amounted to € 42,433 million, €61,335 million and €43,899 million, respectively.

CONSOLIDATED STATEMENTS OF INCOME

	Millions of Euros
	2013			2012			2011
Interest income:
Interest and fees on loans and leases		41,378			47,076			47,793
Interest on deposits in other banks		1,778			2,851			3,806
Interest on securities purchased under agreements to resell		1,813			1,474			1,175
Interest on investment securities		6,846			7,767			8,152
Dividends		—			—			—
Total interest income		51,815			59,168			60,926
Interest expenses:
Interest on deposits		(14,663	)		(16,563	)		(17,034	)
Interest on short-term borrowings		(3,852	)		(4,397	)		(4,531	)
Interest on long-term debt		(5,901	)		(6,731	)		(6,928	)
Total interest expense		(24,416	)		(27,691	)		(28,493	)
Interest income / (Charges)		27,399			31,477			32,433
Provision for credit losses		(11,058	)		(18,536	)		(11,090	)
Interest income / (Charges) after provision for credit losses		16,341			12,941			21,343
Non interest income:
Commissions and fees from fiduciary activities		1,204			1,217			1,340
Commissions and fees from securities activities, net		678			702			668
Fees and commissions from insurance activities		6,631			7,807			8,908
Other Fees and commissions, net		5,480			5,890			5,938
Gains (losses) from:
Affiliated companies’ securities		2,662			1,200			1,851
Investment securities		3,350			2,483			(540	)
Foreign exchange, derivatives and other, net		(137	)		339			2,169
Sale of premises		(4	)		133			52
Income from non financial entities		322			369			401
Gains on sale of non-current assets / liabilities held for sale not classified as discontinued operations		122			325			92
Other income		962			1,110			1,113
Total non interest income		21,270			21,575			21,992
Non interest expense:
Salaries and employee benefits		(10,838	)		(10,501	)		(10,865	)
Occupancy expense of premises, depreciation and maintenance, net		(2,969	)		(2,940	)		(2,688	)
General and administrative expenses		(5,451	)		(5,626	)		(5,566	)
Impairment of goodwill		(40	)		(156	)		(760	)
Impairment / amortization of intangible assets		(1,355	)		(1,106	)		(1,685	)
Impairment of tangible assets		(764	)		(1,019	)		(2,176	)
Provisions for specific allowances		(1,761	)		(1,646	)		(2,375	)
Payments to Deposit Guarantee Fund		(559	)		(530	)		(346	)
Insurance claims		(4,831	)		(5,516	)		(7,164	)
Expenses of non financial entities		(231	)		(232	)		(249	)
Losses on sale of non-current assets / liabilities held for sale not classified as discontinued operations		(210	)		(633	)		(404	)
Other expenses		(950	)		(1,028	)		(1,199	)
Total non interest expense		(29,959	)		(30,933	)		(35,477	)
Income before income taxes		7,652			3,583			7,858
Income tax expense		(2,113	)		(590	)		(1,755	)
Net consolidated income for the year		5,539			2,993			6,103
Net income attributed to non-controlling interests		1,154			768			788
Income from discontinued operation, net of taxes		(15	)		70			15
NET INCOME ATTRIBUTED TO THE GROUP		4,370			2,295			5,330

F-292

	2013			2012			2011
CONSOLIDATED PROFIT FOR THE YEAR		5,524			3,063			6,118
OTHER RECOGNIZED INCOME AND EXPENSE		(5,912	)		(3,711	)		(3,145	)
Items that will not be reclassified to profit or loss		188			(1,123	)		(575	)
Actuarial gains/(losses) on defined benefit pension plans		502			(1,708	)		(880	)
Non-current assets held for sale		—			—			—
Income tax relating to items that will not be reclassified to profit or loss		(314	)		585			305
Items that may be reclassified to profit or loss		(6,100	)		(2,588	)		(2,570	)
Available-for-sale financial assets:		(99	)		1,171			344
Revaluation gains/(losses)		1,150			1,729			231
Amounts transferred to income statement		(1,250	)		(558	)		156
Other reclassifications		1			—			(43	)
Cash flow hedges:		47			(84	)		(17	)
Revaluation gains/(losses)		463			129			(109	)
Amounts transferred to income statement		(416	)		(249	)		92
Amounts transferred to initial carrying amount of hedged items		—			—			—
Other reclassifications		—			36			—
Hedges of net investments in foreign operations:		1,117			(1,107	)		106
Revaluation gains/(losses)		1,074			(1,336	)		13
Amounts transferred to income statement		38			229			9
Other reclassifications		5			—			84
Exchange differences:		(7,027	)		(2,170	)		(2,824	)
Revaluation gains/(losses)		(7,019	)		(1,833	)		(2,906	)
Amounts transferred to income statement		(37	)		(330	)		85
Other reclassifications		29			(7	)		(3	)
Non-current assets held for sale:		—			—			—
Revaluation gains/(losses)		—			—			—
Amounts transferred to income statement		—			—			—
Other reclassifications		—			—			—
Entities accounted for using the equity method:		(294	)		(57	)		(95	)
Revaluation gains/(losses)		(283	)		(61	)		(37	)
Amounts transferred to income statement		23			21			—
Other reclassifications		(34	)		(17	)		(58	)
Other recognized income and expense		—			—			—
Income tax relating to items that may be reclassified to profit or loss		156			(341	)		(84	)
TOTAL RECOGNIZED INCOME AND EXPENSE		(388	)		(648	)		2,973
Attributable to the Parent		(308	)		(764	)		2,642
Attributable to non-controlling interests		(80	)		116			331

F-293

Following are the condensed balance sheets of Banco Santander, S.A. as of December 31, 2013, 2012 and 2011.

	2013		2012		2011
CONDENSED BALANCE SHEETS (Parent company only)	(Millions of Euros)
Assets
Cash and due from banks		64,402		94,931		73,254
Of which:
To bank subsidiaries		27,244		30,004		35,270
Trading account assets		63,928		95,556		91,330
Investment securities		53,598		47,097		43,746
Of which:
To bank subsidiaries		20,656		18,491		16,581
To non-bank subsidiaries		—		164		—
Net Loans and leases		187,758		152,933		174,775
Of which:
To non-bank subsidiaries		23,549		26,553		37,602
Investment in affiliated companies		70,527		72,714		68,559
Of which:
To bank subsidiaries		62,234		64,550		62,988
To non-bank subsidiaries		8,293		8,163		5,571
Premises and equipment, net		1,851		990		1,211
Other assets		16,829		11,694		13,282
Total assets		458,893		475,915		466,157
Liabilities
Deposits		247,206		249,928		225,232
Of which:
To bank subsidiaries		21,610		20,775		17,447
To non-bank subsidiaries		46,347		54,300		56,818
Short-term debt		38,391		34,080		42,785
Long-term debt		54,632		48,643		56,486
Total debt		93,023		82,723		99,271
Of which:
To bank subsidiaries		1,883		4,474		4,009
To non-bank subsidiaries		18,680		18,174		25,815
Other liabilities		69,919		98,707		96,619
Total liabilities		410,148		431,358		421,122
Stockholders’ equity
Capital stock		5,667		5,161		4,455
Retained earnings and other reserves		43,078		39,396		40,580
Total stockholders’ equity		48,745		44,557		45,035
Total liabilities and Stockholders’ Equity		458,893		475,915		466,157

In the financial statements of the Parent Company, investments in subsidiaries, jointly controlled entities and associates are recorded at cost.

F-294

Following are the condensed statements of income of Banco Santander, S.A. for the years ended December 31, 2012, 2012 and 2011.

CONDENSED STATEMENTS OF INCOME (Parent company only)	2013			2012			2011
	(Millions of Euros)
Interest income
Interest from earning assets		10,568			10,448			10,355
Dividends from affiliated companies		2,769			5,311			3,913
Of which:
From bank subsidiaries		1,788			4,716			3,557
From non-bank subsidiaries		981			595			356
		13,337			15,759			14,268
Interest expense		(7,178	)		(6,677	)		(7,193	)
Interest income / (Charges)		6,159			9,082			7,075
Provision for credit losses		(2,887	)		(6,072	)		(1,985	)
Interest income / (Charges) after provision for credit losses		3,272			3,010			5,090
Non interest income:		4,875			4,638			393
Non interest expense:		(7,509	)		(6,649	)		(3,293	)
Income before income taxes		638			999			2,190
Income tax expense		392			384			(37	)
Net income		1,030			1,383			2,153

Following are the condensed statement of comprehensive income of Banco Santander, S.A. for the years ended December 31, 2013, 2012 and 2011:

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (Parent company only)	Millions of Euros
	2013			2012			2011
NET INCOME		1,030			1,383			2,153
OTHER COMPREHENSIVE INCOME		1,380			(450	)		345
Items that may be reclassified subsequently to profit or loss		1,315			(111	)		446
Available-for-sale financial assets:		1,759			(135	)		617
Revaluation gains/(losses)		2,767			(112	)		357
Amounts transferred to income statement		(1,008	)		(23	)		260
Other reclassifications		—			—			—
Cash flow hedges:		3			—			—
Revaluation gains/(losses)		10			—			—
Amounts transferred to income statement		(7	)		—			—
Amounts transferred to initial carrying amount of hedged items		—			—			—
Other reclassifications		—			—			—
Hedges of net investments in foreign operations:		118			(20	)		17
Revaluation gains/(losses)		118			(20	)		21
Amounts transferred to income statement		—			—			(4	)
Other reclassifications		—			—			—
Exchange differences:		—			—			—
Non-current assets held for sale:		—			—			—
Actuarial gains/(losses) on pension plans		—			—			—
Other comprehensive income		—			—			—
Income tax		(565	)		44			(188	)
Items that will not be reclassified to profit or loss:		65			(339	)		(101	)
Actuarial gains/(losses) on pension plans		93			(470	)		(145	)
Income tax		(28	)		131			44
TOTAL COMPREHENSIVE INCOME		2,410			933			2,498

F-295

Following are the condensed cash flow statements of Banco Santander, S.A. for the years ended December 31, 2013, 2012 and 2011.

CONDENSED CASH FLOW STATEMENTS (Parent company only)	2013			2012			2011
	(Millions of Euros)
1. Cash flows from operating activities
Consolidated profit		1,030			1,383			2,153
Adjustments to profit		6,426			6,814			4,170
Net increase/decrease in operating assets		50,394			18,872			2,958
Net increase/decrease in operating liabilities		(93,431	)		5,784			17,295
Reimbursements/payments of income tax		99			82			6
Total net cash flows from operating activities (1)		(35,482	)		32,935			26,582
2. Cash flows from investing activities
Investments (-)		(1,398	)		(6,235	)		(9,377	)
Divestments (+)		698			4,281			1,470
Total net cash flows from investment activities (2)		(700	)		(1,954	)		(7,907	)
3. Cash flows from financing activities
Disposal of own equity instruments		2,893			1,266			2,621
Acquisition of own equity instruments		(2,857	)		(1,324	)		(2,621	)
Issuance of debt securities		—			—			—
Redemption of debt securities		(36	)		(6,891	)		(3,881	)
Dividends paid		(818	)		(1,287	)		(3,489	)
Issuance/Redemption of equity instruments		—			—			—
Other collections/payments related to financing activities		(286	)		(675	)		(115	)
Total net cash flows from financing activities (3)		(1,104	)		(8,911	)		(7,485	)
4. Effect of exchange rate changes on cash and cash equivalents (4)		(148	)		(66	)		110
5. Net increase/decrease in cash and cash equivalents (1+2+3+4)		(37,434	)		22,004			11,300
Cash and cash equivalents at beginning of period		48,363			19,347			8,047
Cash and cash equivalents at end of period		10,929			41,351			19,347

F-296

55.2 Preference Shares and Preferred Securities

The following table shows the balance of the preference shares and preferred securities as of December 31, 2013, 2012 and 2011:

	2013		2012		2011
	(Millions of Euros)
Preference shares		401		421		449
Preferred securities		3,652		4,319		5,447
Total at year-end 4		4,053		4,740		5,896

Both Preference Shares and Preferred Securities are recorded under the “Financial liabilities at amortized cost – Subordinated Liabilities” caption in the consolidated balance sheet as of December 31, 2013, 2012 and 2011.

Preference Shares include the financial instruments issued by the consolidated companies which, although equity for legal purposes, do not meet the requirements for classification as equity in the financial statements. These shares do not carry any voting rights and are non-cumulative. They were subscribed to by non-Group third parties except for the shares of Santander UK, plc amounting to GBP 200 million, are redeemable at the discretion of the issuer, based on the conditions of the issuer. None of these issues are convertible into Bank shares or granted privileges or right which, in certain circumstances, make them convertibles into shares.

This category includes non-cumulative preferred non-voting shares issued by Santander UK plc, Santander Holdings USA, Inc., Santander Bank, National Association and Banesto Holdings, Ltd.

For the purposes of payment priority, Preferred Securities are junior to all general creditors and to subordinated deposits. The payment of dividends on these securities, which have no voting rights, is conditional upon the obtainment of sufficient distributable profit and upon the limits imposed by Spanish banking regulations on equity.

This category includes non-cumulative preferred non-voting securities issued by Santander Finance Capital, S.A. (Unipersonal), Santander Finance Preferred, S.A. (Unipersonal), and Santander International Preferred, S.A. (Sociedad Unipersonal), guaranteed by the Bank. It also includes non-cumulative preferred non-voting securities issued by Banco Santander, S.A., and Santander UK Group.

F-297

Preference shares and preferred securities are perpetual securities and there is no obligation that requires the Group to redeem them. All securities have been fully subscribed by third parties outside the Group. In the consolidated balance sheets, these securities are shown net of any temporary operations relating to liquidity guarantees (see Note 23 and Exhibit III), and are described in the table below:

	Outstanding at December 31, 2013
Preference Shares		Amount in currency (million)		Interest rate	Redemption Option (1)
Issuer/Date of issue	Currency
Banesto Holding, Ltd, December 1992	US Dollar		1.6	10.50%	June 30, 2012
Santander UK plc, October 1995	Pounds Sterling		80.3	10.375%	No option
Santander UK plc, February 1996	Pounds Sterling		80.3	10.375%	No option
Santander UK plc, March 2004	Pounds Sterling		6.5	5.827%	March 22, 2016
Santander UK plc, May 2006	Pounds Sterling		34.9	6.222%(2)	May 24, 2019
Santander Bank, National Association, August 2000	US Dollar		150.4	12.000%	May 16, 2020
Santander Holdings USA, Inc, May 2006 (*)	US Dollar		75.5	7.300%	May 15, 2011
	Outstanding at December 31, 2013
Preferred Securities		Amount in currency (million)		Interest rate	Maturity date
Issuer/Date of issue	Currency
Banco Santander, S.A.
Banco Español de Crédito, October 2004	Euro		36.5	€CMS 10 + 0.125%	Perpetuity
Banco Español de Crédito (1), November 2004	Euro		106.7	5.5%	Perpetuity
Banco Español de Crédito, June 2009	Euro		7.8	6.0%	Perpetuity
Santander Finance Capital, S.A. (Unipersonal)
March 2009	US Dollar		18.2	2.0%	Perpetuity
March 2009	US Dollar		25.0	2.0%	Perpetuity
March 2009	Euro		310.1	2.0%	Perpetuity
March 2009	Euro		153.5	2.0%	Perpetuity
June 2009	Euro		20.9	Euribor (3M) + 2.2%	Perpetuity
Santander Finance Preferred, S.A. (Unipersonal)
March 2004 (*)	US Dollar		89.3	6.41%	Perpetuity
September 2004	Euro		144.0	€CMS 10 +0.05% subject to a maximum distribution of 8% per annum	Perpetuity
October 2004	Euro		155.0	5.75%	Perpetuity
November 2006 (*)	US Dollar		161.8	6.80%	Perpetuity
January 2007 (*)	US Dollar		109.5	6.50%	Perpetuity
March 2007 (*)	US Dollar		210.4	US3M + 0.52%	Perpetuity
July 2007	Pounds Sterling		4.9	7.01%	Perpetuity
July 2009	Pounds Sterling		640.7	Libor (3M) + 7.66%	Perpetuity
July 2009	Euro		111.8	Euribor (3M) + 7.66%	Perpetuity
September 2009 (*)	US Dollar		161.6	USD Libor (3M) + 7.67%	Perpetuity
September 2009 (*)	US Dollar		825.1	10.50%	Perpetuity
Santander International Preferred S.A. (Sociedad Unipersonal)
March 2009	US Dollar		979.9	2.00%	Perpetuity
March 2009	Euro		8.6	2.00%	Perpetuity
Santander UK Group
Abbey National Plc, February 2001(3)	Pounds Sterling		101.8	7.037%	Perpetuity
Abbey National Plc, August 2002	Pounds Sterling		12.0	Fixed to 6.984% until February 9, 2018, and thereafter, at a rate reset semi-annually of 1.86% per annum + Libor GBP (6M)	Perpetuity

(1) From these dates the issuer can redeem the shares, subject to prior authorization by the national supervisor.

(2) That issuance is a Fixed/Floating Rate Non-Cumulative Callable Preference Shares. Dividends will accrue on a principal amount equal to £1,000 per Preference Share at a rate of 6.222 per cent. per annum in respect of the period from (and including) May 24, 2006 (the Issue Date) to (but excluding) May 24, 2019 (the First Call Date) and thereafter at a rate reset quarterly equal to 1.13 per cent. per annum above the London interbank offered rate for three-month sterling deposits. From (and including) the Issue Date to (but excluding) the First Call Date, dividends, if declared, will be paid annually in arrears on May 24, in each year. Subject as provided herein, the first such dividend payment date will be May 24, 2007 and the last such dividend payment date will be the First Call Date. From (and including) the First Call Date, dividends, if declared, will be paid quarterly in arrears on May 24, August 24, November 24 and February 24, in each year. Subject as provided herein, the first such dividend payment date will be August 24, 2019.

(3) From February 14, 2026, this issue will bear interest at a rate, reset every five years, of 3.75% per annum above the gross redemption yield on a five-year specified United Kingdom government security.

(*) Listed in the U.S.

F-298

In accordance with Reg. S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered, Santander Finance Capital, S.A. (Unipersonal), Santander Finance Preferred, S.A. (Unipersonal) and Santander International Preferred, S.A. (Unipersonal) - issuers of registered preferred securities guaranteed by Banco Santander, S.A. - do not file the financial statements required for a registrant by Regulation S-X as:

• Santander Finance Preferred, S.A. (Unipersonal) is 100% owned finance subsidiary of Banco Santander, S.A. who fully and unconditionally guarantees the preferred securities (Series 1, 4, 5, 6, 10 and 11 are listed in the United States). No other subsidiary of the Bank guarantees such securities.

• Santander Finance Capital, S.A. (Unipersonal) is 100% owned finance subsidiary of Banco Santander, S.A. that fully and unconditionally guarantees the preferred securities (not listed in United States). No other subsidiary of the Bank guarantees such securities.

• Santander International Preferred, S.A. (Unipersonal) is 100% owned finance subsidiary of Banco Santander, S.A. that fully and unconditionally guarantees the preferred securities (not listed in United States). No other subsidiary of the Bank guarantees such securities.

The condensed financial statements of Santander Finance Capital, S.A. (Unipersonal), Santander Finance Preferred, S.A. (Unipersonal) and Santander International Preferred, S.A. (Sociedad Unipersonal) for the years ended December 31, 2012 and 2011 are the following:

SANTANDER FINANCE CAPITAL, S.A. (UNIPERSONAL)

Santander Finance Capital, S.A. (Unipersonal) was established in Spain on July 8, 2003.

The common stock of the company is 100% owned by Banco Santander, S.A.

Presented below are the condensed balance sheet, condensed statements of income and statements of changes in the stockholders’ equity for Santander Finance Capital, S.A. (Unipersonal), prepared in conformity with IFRS.

Balance sheets

	Thousands of Euros
SANTANDER FINANCE CAPITAL, S.A. (UNIPERSONAL)	2013		2012
Assets:
Cash		1,604		1,631
Deposits with Parent Bank		519,307		520,722
Accrual accounts		8,022		7,999
Other assets		—		—
Total Assets		528,933		530,352
Liabilities and stockholders’ equity:
LIABILITIES:
Public entities		22		23
Accrual accounts		7,877		7,960
Non-commercial debts		—		—
Commercial debts		18		36
Debts with Group companies		4,278		423
Provisions for taxes		—		—
Preferred securities		515,698		520,893
Total Liabilities		527,893		529,335
STOCKHOLDERS’ EQUITY:
Capital stock		151		151
Retained earnings		866		940
Net income		23		(74	)
Total Stockholders’ Equity		1,040		1,017
Total Liabilities and Stockholders’ Equity		528,933		530,352

F-299

Statement of income

	Thousands of Euros
SANTANDER FINANCE CAPITAL, S.A. (UNIPERSONAL)	2013			2012
Interest income		10,673			10,873
Interest expenses		(10,522	)		(10,813	)
Non interest income		—			—
Non interest expenses		(133	)		(78	)
Corporate income tax		5			(56	)
Net income / (loss)		23			(74	)

Statement of comprehensive income

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (Parent company only)	Thousands of Euros
	2013		2012
NET INCOME/(LOSS)		23		(74	)
Income and expense recognized directly in equity		—		—
Arising from revaluation of financial instruments:		—		—
Arising from cash flow hedges		—		—
Grants, donations and legacies received		—		—
Arising from actuarial gains and losses and other adjustments		—		—
Tax effect		—		—
Total income and expense recognized directly in equity		—		—
Transfers to profit or loss		—		—
Arising from revaluation of financial instruments:		—		—
Arising from cash flow hedges		—		—
Grants, donations and legacies received		—		—
Tax effect		—		—
Total transfers to profit or loss		—		—
TOTAL COMPREHENSIVE INCOME		23		(74	)

Statement of Changes in Stockholders’ Equity	Capital stock				Retained Earnings			Net income			Total Stockholders’ Equity
Changes in Stockholders’ Equity	Common Shares		Thousands of Euros
Balance at December 31, 2011		1,505		151		621			319			1,091
2011 Income allocation		—		—		319			(319	)		—
Net income 2012		—		—		—			(74	)		(74	)
Balance at December 31, 2012		1,505		151		940			(74	)		1,017
2012 Income allocation		—		—		(74	)		74			—
Net income 2013		—		—		—			23			23
Balance at December 31, 2013		1,505		151		866			23			1,040

F-300

In October 2005, the board of directors authorized a capital increase of 903 shares of common stock with a €100 par value. This capital increase was fully subscribed and paid by Banco Santander, S.A.

After this capital increase, the capital stock of Santander Finance Capital S.A. (Unipersonal), as of December 31, 2005, amounted to 1,505 shares of common stock with a €100 par value, fully subscribed and paid by Banco Santander, S.A. (wholly owner of this company).

Preferred Securities

	Issue Date	Thousands of Euros at 12/31/13
Issuances
Series VI	03/18/2009		13,185
Series VII	03/18/2009		18,109
Series VIII	03/18/2009		313,745
Series IX	03/18/2009		153,700
Series X	06/30/2009		20,863
Total			519,602
Issuances expenses
Series VI			(3	)
Series VII			(15	)
Series VIII			(58	)
Series IX			(28	)
Series X			—
Total			(104	)
Total			519,498

- Series I: on October 3, 2003, Santander Finance Capital, S.A. (Unipersonal) issued 18,000,000 preference securities, at €25 par value. On April 7, 2009 the company redeemed the whole series.

- Series II: on February 18, 2004, Santander Finance Capital, S.A. (Unipersonal) issued 16,000,000 preference securities, at €25 par value. On March 31, 2009 the company redeemed the whole series.

- Series III: on July 30, 2004, Santander Finance Capital, S.A. (Unipersonal) issued 30,000,000 preference securities, at €25 par value. On August 17, 2009 the company redeemed the whole series.

- Series IV: on September 30, 2004, Santander Finance Capital, S.A. (Unipersonal) issued 27,200,000 preference securities, at €25 par value. On August 17, 2009 the company redeemed the whole series.

- Series V: on April 12, 2005, Santander Finance Capital, S.A. (Unipersonal) issued 40,000,000 preference securities, at €25 par value. On July 12, 2010 the company redeemed the whole series.

- Series VI: on March 18, 2009, Santander Finance Capital, S.A. (Unipersonal) issued 12,122 preference securities, at €1,500 par value.

- Series VII: on March 18, 2009, Santander Finance Capital, S.A. (Unipersonal) issued 333 preference securities, at €75,000 par value.

- Series VIII: on March 18, 2009, Santander Finance Capital, S.A. (Unipersonal) issued 313,745 preference securities, at €1,000 par value.

- Series IX: on March 18, 2009, Santander Finance Capital, S.A. (Unipersonal) issued 3,074 preference securities, at €50,000 par value.

- Series X: on June 30, 2009, Santander Finance Capital, S.A. (Unipersonal) issued 78,624,629 preference securities, at €25 par value.

F-301

On December 2, 2011, we announced an offer (the “Repurchase Offer”) to repurchase Series X Preferred Securities issued by Santander Finance Capital, S.A.U. in June 2009 and guaranteed by the Bank (the “Series X Preferred Securities”) and a simultaneous public offer to subscribe for newly-issued shares of Banco Santander (the “New Shares”), on the terms set out below. We refer to the Repurchase Offer and the issuance of New Shares as the “Capital Increase.”

In order to participate in the Repurchase Offer, holders of Series X Preferred Securities were required to irrevocably subscribe the number of New Shares which corresponded to the repurchase price of their Series X Preferred Securities. The New Shares were offered solely to the abovementioned holders of Series X Preferred Securities who accepted the Repurchase Offer.

The issue price of the New Shares (nominal plus premium) equaled to the arithmetic mean of the average weighted prices of Banco Santander shares on the Spanish stock exchanges during the Acceptance Period. Consequently, the number of New Shares to be subscribed by each holder of Series X Preferred Securities who accepted the Repurchase Offer was the result from dividing the nominal value of the preferred securities (€25.00) by the issue price of the New Shares.

On December 28, 2011, we announced that during the acceptance period, the holders of 77,743,969 preferred securities, representing 98.88% of the preference shares outstanding, had accepted the repurchase offer.

The holders of these preferred securities subscribed 341,802,171 shares under the Capital Increase. Consequently, the total amount (nominal plus premium) subscribed was €1,943,599,225 and the nominal value of the Capital Increase was €170,901,085.50. The New Shares represented 3.84% of the share capital of Banco Santander following the Capital Increase.

On December 30, 2011, Banco Santander acquired the Series X Preferred Securities and the new shares subscribed by the holders of those preferred securities were paid up.

These issues are perpetual and can be redeemable at the option of the issuer, subject to the consent of the Bank of Spain, in whole or in part, at any time after five years from the issue date.

All the issues of Santander Finance Capital, S.A. (Unipersonal) are guaranteed by Banco Santander, S.A.

SANTANDER FINANCE PREFERRED, S.A. (UNIPERSONAL)

Santander Finance Preferred, S.A. (Unipersonal) was established in Spain on February 27, 2004.

The common stock of the company is 100% owned by Banco Santander, S.A.

Presented below are the condensed balance sheet, condensed statements of income and statements of changes in the stockholders’ equity for Santander Finance Preferred, S.A. (Unipersonal), prepared in conformity with IFRS.

F-302

Balance sheets

	Thousands of Euros
SANTANDER FINANCE PREFERRED, S.A. (UNIPERSONAL)	2013			2012
Assets:
Cash		33,176			34,117
Deposits with Parent Bank		3,615,746			3,725,047
Accrual accounts		63,344			64,393
Total Assets		3,712,266			3,823,557
Liabilities and stockholders’ equity:
LIABILITIES:
Public entities		—			—
Accrual accounts		51,549			52,588
Commercial debts		59			38
Non-commercial debts		—			—
Deferred income		—			—
Debts with group companies		1,343,549			1,377,472
Provisions for taxes		—			—
Preferred securities		2,313,824			2,389,994
Total Liabilities		3,708,981			3,820,092
STOCKHOLDERS’ EQUITY:
Capital stock		151			151
Retained earnings		3,314			2,862
Net income		(180	)		452
Total Stockholders’ Equity		3,285			3,465
Total Liabilities and Stockholders’ Equity		3,712,266			3,823,557

Statement of income

	Thousands of Euros
SANTANDER FINANCE PREFERRED, S.A. (UNIPERSONAL)	2013			2012
Interest income		278,782			299,859
Interest expenses		(277,885	)		(298,166	)
Non interest income		—			—
Non interest expenses		(1,077	)		(863	)
Corporate income tax		—			(378	)
Net income / (loss)		(180	)		452

F-303

Statement of comprehensive income

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (Parent company only)	Thousands of Euros
	2013			2012
NET INCOME/(LOSS)		(180	)		452
Income and expense recognized directly in equity		—			—
Arising from revaluation of financial instruments:		—			—
Arising from cash flow hedges		—			—
Grants, donations and legacies received		—			—
Arising from actuarial gains and losses and other adjustments		—			—
Tax effect		—			—
Total income and expense recognized directly in equity		—			—
Transfers to profit or loss		—			—
Arising from revaluation of financial instruments:		—			—
Arising from cash flow hedges		—			—
Grants, donations and legacies received		—			—
Tax effect		—			—
Total transfers to profit or loss		—			—
TOTAL COMPREHENSIVE INCOME		(180	)		452

Statement of changes in stockholders’ equity

Changes in Stockholders’ Equity	Capital stock				Retained Earnings		Net income			Total Stockholders’ Equity
	Common Shares		Thousands of Euros
Balance at December 31, 2011		1,505		151		1,569		1,293			3,013
2011 Income allocation		—		—		1,293		(1,293	)		—
Net income 2012		—		—		—		452			452
Balance at December 31, 2012		1,505		151		2,862		452			3,465
2012 Income allocation		—		—		452		(452	)		—
Net income 2013		—		—		—		(180	)		(180	)
Balance at December 31, 2013		1,505		151		3,314		(180	)		3,285

In October 2005, the board of directors authorized a capital increase of 903 shares of common stock with a €100 par value. This capital increase was fully subscribed and paid by Banco Santander, S.A.

After this capital increase, the capital stock of Santander Finance Preferred, S.A. (Unipersonal), as of December 31, 2005, amounted to 1,505 shares of common stock with a €100 par value, fully subscribed and paid by Banco Santander, S.A. (wholly owner of this company).

F-304

Preferred Securities

	Issue Date		Thousands of Euros at 12/31/13
Issuances
Series 1- $190,000		03/11/2004		137,771
Series 2- €300,000		09/30/2004		300,000
Series 3- €200,000		10/08/2004		200,000
Series 4- $500,000		11/21/2006		362,555
Series 5- $600,000		31/01/2007		435,066
Series 6- $350,000		05/03/2007		253,789
Series 7- £250,000		07/10/2007		299,868
Series 8- £679,400		07/27/2009		814,922
Series 9- €125,700		07/27/2009		125,700
Series 10- $825,110		09/29/2009		598,296
Series 11- $161,587		09/29/2009		117,168
				3,645,135
Issuances expenses
Series 1				—
Series 2				—
Series 3				—
Series 4				—
Series 5				(605	)
Series 6				(22	)
Series 7				—
Series 8				(14	)
Series 9				(14	)
Series 10				(18	)
Series 11				(18	)
				(691	)
Total				3,644,444

- Series 1: on March 11, 2004, Santander Finance Preferred, S.A. (Unipersonal) issued 7,600,000 preferred securities, at $25 par value.

- Series 2: on September 30, 2004, Santander Finance Preferred, S.A. (Unipersonal) issued 300,000 preferred securities, at €1,000 par value.

- Series 3: on October 8, 2004, Santander Finance Preferred, S.A. (Unipersonal) issued 200,000 preferred securities, at €1,000 par value.

- Series 4: on November 21, 2006 Santander Finance Preferred, S.A. (Unipersonal) issued 20,000,000 preferred securities, at €25 par value.

- Series 5: on January 31, 2007 Santander Finance Preferred, S.A. (Unipersonal) issued 24,000,000 preferred securities, at $25 par value.

- Series 6: on March 5, 2007 Santander Finance Preferred, S.A. (Unipersonal) issued 14,000,000 preferred securities, at $25 par value.

- Series 7: on July 10, 2007 Santander Finance Preferred, S.A. (Unipersonal) issued 5,000 preferred securities, at £50,000 par value.

- Series 8: on July 27, 2009, Santander Finance Preferred, S.A. (Unipersonal) issued 13,588 preferred securities, at £50,000 par value.

- Series 9: on July 27, 2009, Santander Finance Preferred, S.A. (Unipersonal) issued 2,514 preferred securities, at €50,000 par value.

- Series 10: on September 29, 2009, Santander Finance Preferred, S.A. (Unipersonal) issued 33,004,383 preferred securities, at $25 par value.

- Series 11: on September 29, 2009, Santander Finance Preferred, S.A. (Unipersonal) issued 161,587 preferred securities, at $1,000 par value.

- These issues are perpetual and can be redeemable at the option of the issuer, subject to the consent of the Bank of Spain, in whole or in part, at any time after five years from the issue date.

F-305

- All the issues of Santander Finance Preferred, S.A. (Unipersonal) are guaranteed by Banco Santander, S.A.

- On July 9, 2009, we published on the international markets offers to exchange issues of securities eligible to be included in capital issued by Santander and its subsidiaries. The exchange envisaged the delivery of new securities that meet the current market standards and regulatory requirements to be classified as equity at the consolidated Group level. For this purpose Santander Finance Preferred, S.A. (Unipersonal) issued Series 8, 9, 10 and 11 above.

SANTANDER INTERNATIONAL PREFERRED, S.A. (SOCIEDAD UNIPERSONAL)

Santander International Preferred, S.A. (Sociedad Unipersonal) was established in Spain on February 17, 2009.

The common stock of the company is 100% owned by Banco Santander, S.A.

Presented below are the condensed balance sheet, condensed statements of income and statements of changes in the stockholders’ equity for Santander International Preferred, S.A. (Sociedad Unipersonal), prepared in conformity with IFRS.

Balance sheets

	Thousands of Euros		Thousands of Euros
SANTANDER INTERNATIONAL PREFERRED, S.A. (SOCIEDAD UNIPERSONAL)	2013		2012
Assets:
Cash		452		278
Deposits with Parent Bank		719,626		751,800
Accrual accounts		11,471		12,137
Other current assets		1		—
Total Assets		731,550		764,215
Liabilities and stockholders’ equity:
LIABILITIES:
Public entities		—		—
Commercial debts		13		17
Debts with group companies		874		697
Accrual accounts		11,389		11,901
Preferred securities		719,045		751,385
Total Liabilities		731,321		764,000
STOCKHOLDERS’ EQUITY:
Capital stock		60		60
Retained earnings		155		79
Net income		14		76
Total Stockholders’ Equity		229		215
Total Liabilities and Stockholders’ Equity		731,550		764,215

F-306

Statement of income

	Thousands of Euros			Thousands of Euros
SANTANDER INTERNATIONAL PREFERRED, S.A. (SOCIEDAD UNIPERSONAL)	2013			2012
Interest income		15,067			15,666
Interest expenses		(14,966	)		(15,494	)
Non interest income		—			—
Non interest expenses		(81	)		(58	)
Corporate income tax		(6	)		(38	)
Net income / (loss)		14			76

Statement of comprehensive income

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (Parent company only)	Thousands of Euros
	2013		2012
NET INCOME/(LOSS)		14		76
Income and expense recognized directly in equity		—		—
Arising from revaluation of financial instruments:		—		—
Arising from cash flow hedges		—		—
Grants, donations and legacies received		—		—
Arising from actuarial gains and losses and other adjustments		—		—
Tax effect		—		—
Total income and expense recognized directly in equity		—		—
Transfers to profit or loss		—		—
Arising from revaluation of financial instruments:		—		—
Arising from cash flow hedges		—		—
Grants, donations and legacies received		—		—
Tax effect		—		—
Total transfers to profit or loss		—		—
TOTAL COMPREHENSIVE INCOME		14		76

F-307

Statement of changes in stockholders’ equity

Changes in Stockholders’ Equity	Capital stock				Retained Earnings		Net income			Total Stockholders’ Equity
	Common Shares		Thousands of Euros
Balance at December 31, 2011		602		60		22		57			139
2011 Income allocation		—		—		57		(57	)		—
Net income 2012		—		—		—		76			76
Balance at December 31, 2012		602		60		79		76			215
2012 Income allocation		—		—		76		(76	)		—
Net income 2013		—		—		—		14			14
Balance at December 31, 2013		602		60		155		14			229

At December 31, 2013, the capital stock of Santander International Preferred, S.A. (Sociedad Unipersonal) amounted to 602 shares of common stock with a €100 par value, fully subscribed and paid by Banco Santander, S.A. (wholly owner of this company).

Preferred Securities

	Issue Date		Thousands of Euros at 12/31/13
Issuances
Series 1 ($)		03/19/2009		711,328
Series 2 (€)		03/19/2009		8,582
				719,910
Issuances expenses				(80	)
Total				719,830

- Series 1: on March 19, 2009, Santander International Preferred, S.A. (Sociedad Unipersonal) issued 653,995 preferred securities, at $1,500 par value.

- Series 2: on March 19, 2009, Santander International Preferred, S.A. (Sociedad Unipersonal) issued 8,582 preferred securities, at €1,000 par value.

- These issues are perpetual and can be redeemable at the option of the issuer, subject to the consent of the Bank of Spain, in whole or in part, at any time after ten years from the issue date.

- All the issues of Santander Finance Preferred, S.A. (Sociedad Unipersonal) are guaranteed by Banco Santander, S.A.

55.3 US Registered senior debt

SANTANDER US DEBT, S.A. (Sociedad Unipersonal)

Santander US Debt, S.A. (Sociedad Unipersonal) was established in Spain on February 27, 2004.

The common stock of the company is 100% owned by Banco Santander, S.A. The entity issues senior debt and the issuances are guaranteed fully and unconditionally by Banco Santander, S.A.

On December 31, 2013, no entity of Grupo Santander has issued senior debt that is registered in the U.S. It is expected that Santander US Debt, S.A. (Sociedad Unipersonal) issue U.S. registered senior debt during 2014.

Presented below are the condensed balance sheet, condensed statements of income and statements of changes in the stockholders’ equity for Santander US Debt, S.A. (Sociedad Unipersonal), prepared in conformity with IFRS.

F-308

Balance sheets

	Thousands of Euros			Thousands of Euros
SANTANDER US DEBT, S.A. (SOCIEDAD UNIPERSONAL)	2013			2012
Assets:
Cash		1,032			1,906
Deposits with Parent Bank		992,369			1,991,609
Other current assets		1			1
Total Assets		993,402			1,993,516
Liabilities and stockholders’ equity:
LIABILITIES:
Public entities		29			—
Commercial debts		38			24
Debts with group companies		3,300			972
Senior debt		989,765			1,992,186
Total Liabilities		993,132			1,993,182
STOCKHOLDERS’ EQUITY:
Capital stock		120			120
Retained earnings		214			129
Net income		(64	)		85
Total Stockholders’ Equity		270			334
Total Liabilities and Stockholders’ Equity		993,402			1,993,516

Statement of income

	Thousands of Euros			Thousands of Euros
SANTANDER US DEBT, S.A. (SOCIEDAD UNIPERSONAL)	2013			2012
Interest income		52,477			71,733
Interest expenses		(51,996	)		(71,029	)
Non interest income		15			148
Non interest expenses		(560	)		(768	)
Corporate income tax		—			1
Net income / (loss)		(64	)		85

F-309

Statement of comprehensive income

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (Parent company only)	Thousands of Euros
	2013			2012
NET INCOME/(LOSS)		(64	)		85
Income and expense recognized directly in equity		—			—
Arising from revaluation of financial instruments:		—			—
Arising from cash flow hedges		—			—
Grants, donations and legacies received		—			—
Arising from actuarial gains and losses and other adjustments		—			—
Tax effect		—			—
Total income and expense recognized directly in equity		—			—
Transfers to profit or loss		—			—
Arising from revaluation of financial instruments:		—			—
Arising from cash flow hedges		—			—
Grants, donations and legacies received		—			—
Tax effect		—			—
Total transfers to profit or loss		—			—
TOTAL COMPREHENSIVE INCOME		(64	)		85

Statement of changes in stockholders’ equity

Changes in Stockholders’ Equity	Capital stock				Retained Earnings			Net income			Total Stockholders’ Equity
	Common Shares		Thousands of Euros
Balance at December 31, 2011		1,200		120		203			(74	)		249
2011 Income allocation		—		—		(74	)		74			—
Net income 2012		—		—		—			85			85
Balance at December 31, 2012		1,200		120		129			85			334
2012 Income allocation		—		—		85			(85	)		—
Net income 2013		—		—		—			(64	)		(64	)
Balance at December 31, 2013		1,200		120		214			(64	)		270

At December 31, 2013, the capital stock of Santander US Debt, S.A. (Sociedad Unipersonal) amounted to 1,200 shares of common stock with a €100 par value, fully subscribed and paid by Banco Santander, S.A. (wholly owner of this company).

F-310

Exhibit I

Subsidiaries of Banco Santander, S.A. (1)

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2013			2012			Line of business
2 & 3 Triton Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	PROPERTY
A & L CF (Guernsey) Limited (e)	Guernsey		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF (Jersey) Limited (e)	Jersey		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF December (1) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF December (10) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF December (11) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF June (1) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF June (2) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF June (3) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF June (8) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF March (1) Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF March (5) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF March (6) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF September (3) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF September (4) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A & L CF September (5) Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
A N (123) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
A N Loans Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
A&L Services Limited	Isle of Man		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Abbey Business Services (India) Private Limited	India		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Abbey Covered Bonds (Holdings) Limited	United Kingdom		—				(a)		—			—		SECURITIZATION
Abbey Covered Bonds (LM) Limited	United Kingdom		—				(a)		—			—		SECURITIZATION
Abbey Covered Bonds LLP	United Kingdom		—				(a)		—			—		SECURITIZATION
Abbey National (America) Holdings Inc.	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Abbey National (America) Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Abbey National (Holdings) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Abbey National Beta Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Abbey National Business Office Equipment Leasing Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
Abbey National Financial Investments 3 B.V.	The Netherlands		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Abbey National Financial Investments 4 B.V.	The Netherlands		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Abbey National GP (Jersey) Limited	Jersey		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Abbey National International Limited	Jersey		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Abbey National Investments (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Abbey National Investments Holdings Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Abbey National Legacy Holdings Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Abbey National Legacy Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY

F-311

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2013			2012			Line of business
Abbey National Nominees Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIES COMPANY
Abbey National North America Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Abbey National North America LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Abbey National Pension (Escrow Services) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	PENSION FUND MANAGEMENT COMPANY
Abbey National PLP (UK) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Abbey National Property Investments	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Abbey National Securities Inc.	United States		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIES COMPANY
Abbey National September Leasing (3) Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
Abbey National Treasury Investments	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Abbey National Treasury Services (Transport Holdings) Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Abbey National Treasury Services Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Abbey National Treasury Services Overseas Holdings	United Kingdom		0.00	%		100.00	%		100.00	%		99.99	%	HOLDING COMPANY
Abbey National Treasury Services plc	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Abbey National UK Investments	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Abbey Stockbrokers (Nominees) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIES COMPANY
Abbey Stockbrokers Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIES COMPANY
Ablasa Participaciones, S.L.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Ablasa Participações S.A.	Brazil		0.00	%		75.25	%		100.00	%		100.00	%	HOLDING COMPANY
Administración de Bancos Latinoamericanos Santander, S.L.	Spain		24.11	%		75.89	%		100.00	%		100.00	%	HOLDING COMPANY
Aevis Europa, S.L.	Spain		68.80	%		0.00	%		68.80	%		—		CARDS
Afisa S.A.	Chile		0.00	%		100.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Agrícola Tabaibal, S.A.	Spain		0.00	%		74.23	%		100.00	%		100.00	%	AGRICULTURE AND LIVESTOCK
AKB Marketing Services Sp. Z.o.o.	Poland		0.00	%		100.00	%		100.00	%		100.00	%	MARKETING
AL (ROUTH) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		—		HOLDING COMPANY
Alcaidesa Golf, S.L.	Spain		0.00	%		50.00	%		100.00	%		50.00	%	SPORTS OPERATIONS
Alcaidesa Holding, S.A.	Spain		0.00	%		50.00	%		50.00	%		50.00	%	PROPERTY
Alcaidesa Inmobiliaria, S.A.	Spain		0.00	%		50.00	%		100.00	%		50.00	%	PROPERTY
Alcaidesa Servicios, S.A.	Spain		0.00	%		50.00	%		100.00	%		50.00	%	SERVICES
ALCF Investments Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
ALIL Services Limited	Isle of Man		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Aljarafe Golf, S.A.	Spain		0.00	%		89.41	%		89.41	%		89.41	%	PROPERTY
Aljardi SGPS, Lda.	Portugal		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Alliance & Leicester (Jersey) Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Cash Solutions Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Commercial Bank plc	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Commercial Finance (Holdings) plc (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Alliance & Leicester Equity Investments (Guarantee) Limited (b)	United Kingdom		—				(a)		—			—		FINANCE
Alliance & Leicester Estate Agents (Mortgage & Finance) Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE

F-312

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2013			2012			Line of business
Alliance & Leicester Financing plc (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Independent Financial Advisers Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Investments (Derivatives No.3) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Investments (Derivatives) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Investments (No.2) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Investments (No.3) LLP (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Investments (No.4) Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Alliance & Leicester Personal Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Alliance & Leicester Print Services Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Alliance Bank Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Alliance Corporate Services Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Altamira Asset Management, S.L.	Spain		72.50	%		27.50	%		100.00	%		—		HOLDING COMPANY
Altamira Santander Real Estate Distribución, S.A.	Spain		0.00	%		100.00	%		100.00	%		—		SERVICES
Altamira Santander Real Estate, S.A.	Spain		98.85	%		1.15	%		100.00	%		100.00	%	PROPERTY
Amazonia Trade Limited	United Kingdom		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Andaluza de Inversiones, S.A.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
ANITCO Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Aquanima Brasil Ltda.	Brazil		0.00	%		100.00	%		100.00	%		100.00	%	E-COMMERCE
Aquanima Chile S.A.	Chile		0.00	%		100.00	%		100.00	%		100.00	%	E-COMMERCE
Aquanima México S. de R.L. de C.V.	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	E-COMMERCE
Aquanima S.A.	Argentina		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Argenline, S.A.	Uruguay		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Asesora Caraban, C.A.	Venezuela		0.00	%		90.00	%		90.00	%		90.00	%	SECURITIES COMPANY
Asesoría Estratega, S.C.	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Atual Companhia Securitizadora de Créditos Financeiros	Brazil		0.00	%		75.25	%		100.00	%		100.00	%	FINANCIAL SERVICES
Aurum Inversiones Limitada	Chile		50.00	%		50.00	%		100.00	%		100.00	%	HOLDING COMPANY
Aviación Antares, A.I.E.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Aviación Británica, A.I.E.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Aviación Centaurus, A.I.E.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Aviación Intercontinental, A.I.E.	Spain		65.00	%		0.00	%		65.00	%		65.00	%	FULL-SERVICE LEASING
Aviación RC II, A.I.E.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Aviación Real, A.I.E.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Aviación Regional Cántabra, A.I.E.	Spain		73.58	%		0.00	%		73.58	%		73.58	%	FULL-SERVICE LEASING
Aviación Scorpius, A.I.E.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Aviación Tritón, A.I.E.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Aymoré Crédito, Financiamento e Investimento S.A.	Brazil		0.00	%		75.25	%		100.00	%		100.00	%	FINANCE
Bajondillo, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	PROPERTY
Banbou S.A.R.L.	France		0.00	%		90.00	%		100.00	%		100.00	%	HOLDING COMPANY

F-313

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2013			2012			Line of business
Banco Bandepe S.A.	Brazil		0.00	%		75.25	%		100.00	%		100.00	%	BANKING
Banco de Albacete, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	BANKING
Banco de Asunción, S.A. in voluntary liquidation (b)	Paraguay		0.00	%		99.33	%		99.33	%		99.33	%	BANKING
Banco Madesant - Sociedade Unipessoal, S.A.	Portugal		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Banco Santander - Chile	Chile		0.00	%		67.01	%		67.18	%		67.18	%	BANKING
Banco Santander (Brasil), S.A.	Brazil		0.00	%		75.25	%		76.19	%		76.09	%	BANKING
Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México	Mexico		0.00	%		75.08	%		99.99	%		99.99	%	BANKING
Banco Santander (Panamá), S.A.	Panama		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Banco Santander (Suisse) SA	Switzerland		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Banco Santander Bahamas International Limited	Bahamas		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Banco Santander Consumer Portugal, S.A.	Portugal		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Banco Santander de Negocios Colombia	Colombia		0.00	%		99.99	%		99.99	%		—		FINANCE
Banco Santander International	United States		100.00	%		0.00	%		100.00	%		100.00	%	BANKING
Banco Santander Perú S.A.	Peru		99.00	%		1.00	%		100.00	%		100.00	%	BANKING
Banco Santander Puerto Rico	Puerto Rico		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Banco Santander Río S.A.	Argentina		8.23	%		91.07	%		98.45	%		99.02	%	BANKING
Banco Santander Totta, S.A.	Portugal		0.00	%		99.79	%		99.91	%		99.89	%	BANKING
Banco Santander, S.A.	Uruguay		97.75	%		2.25	%		100.00	%		100.00	%	BANKING
Banesto Banca Privada Gestión, S.A. S.G.I.I.C.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Bank Zachodni WBK S.A.	Poland		70.00	%		0.00	%		70.00	%		94.23	%	BANKING
Bansa Santander S.A.	Chile		0.00	%		100.00	%		100.00	%		100.00	%	PROPERTY
Bansalud, S.L.	Spain		53.00	%		12.00	%		65.00	%		65.00	%	TECHNOLOGY SERVICES
Bansamex, S.A.	Spain		50.00	%		0.00	%		50.00	%		50.00	%	CARDS
Bayones ECA Limited	Ireland		—				(a)		—			—		FINANCE
BCLF 2013-1 B.V.	The Netherlands		—				(a)		—			—		SECURITIZATION
Bel Canto SICAV Erodiade	Luxembourg		100.00	%		0.00	%		100.00	%		100.00	%	OPEN-END INVESTMENT COMPANY
Besaya ECA Limited	Ireland		—				(a)		—			—		FINANCE
BFI Serwis Sp. z o.o. w likwidacji (b)	Poland		0.00	%		70.00	%		100.00	%		—		FUND MANAGEMENT COMPANY
Bilkreditt 1 Limited	Ireland		—				(a)		—			—		SECURITIZATION
Bilkreditt 2 Limited	Ireland		—				(a)		—			—		SECURITIZATION
Bilkreditt 3 Limited	Ireland		—				(a)		—			—		SECURITIZATION
Bilkreditt 4 Limited	Ireland		—				(a)		—			—		SECURITIZATION
Bilkreditt 5 Limited	Ireland		—				(a)		—			—		SECURITIZATION
Blue Energy Ridgewind Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%		—		ELECTRICITY PRODUCTION
Blue Energy Ridgewind Operations Limited	United Kingdom		0.00	%		100.00	%		100.00	%		—		HOLDING COMPANY
Bracken Securities Holdings Limited (b)	United Kingdom		—				(a)		—			—		SECURITIZATION
Brazil Foreign Diversified Payment Rights Finance Company	Cayman Islands		—				(a)		—			—		SECURITIZATION
Broxsted Solar Co Limited	United Kingdom		0.00	%		100.00	%		100.00	%		—		ELECTRICITY PRODUCTION
BRS Investments S.A.	Argentina		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY

F-314

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2013			2012			Line of business
BST International Bank, Inc.	Puerto Rico		0.00	%		99.79	%		100.00	%		100.00	%	BANKING
BZ WBK Asset Management S.A.	Poland		50.00	%		35.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
BZ WBK Faktor Sp. z o.o.	Poland		0.00	%		70.00	%		100.00	%		100.00	%	FINANCIAL SERVICES
BZ WBK Finanse Sp. z o.o.	Poland		0.00	%		70.00	%		100.00	%		100.00	%	FINANCIAL SERVICES
BZ WBK Inwestycje Sp. z o.o.	Poland		0.00	%		70.00	%		100.00	%		100.00	%	SECURITIES COMPANY
BZ WBK Leasing S.A.	Poland		0.00	%		70.00	%		100.00	%		100.00	%	LEASING
BZ WBK Nieruchomości S.A.	Poland		0.00	%		69.99	%		99.99	%		99.99	%	SERVICES
BZ WBK Towarzystwo Funduszy Inwestycyjnych S.A.	Poland		0.00	%		85.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
BZ WBK - Aviva Towarzystwo Ubezpieczeń na Życie S.A.	Poland		0.00	%		46.20	%		66.00	%		50.00	%	INSURANCE
BZ WBK - Aviva Towarzystwo Ubezpieczeń Ogólnych S.A.	Poland		0.00	%		46.20	%		66.00	%		50.00	%	INSURANCE
C.S.N.S.P. 442, S.A.	Portugal		0.00	%		100.00	%		100.00	%		—		ELECTRICITY PRODUCTION
C.S.N.S.P. 451, S.A.	Portugal		0.00	%		100.00	%		100.00	%		—		ELECTRICITY PRODUCTION
Caja de Emisiones con Garantía de Anualidades Debidas por el Estado, S.A.	Spain		62.87	%		0.00	%		62.87	%		62.87	%	FINANCE
Cántabra de Inversiones, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Cántabro Catalana de Inversiones, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
CAPB Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Capital Riesgo Global, SCR de Régimen Simplificado, S.A.	Spain		95.46	%		4.54	%		100.00	%		100.00	%	VENTURE CAPITAL COMPANY
Capital Street Delaware, LP	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Capital Street Holdings, LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Capital Street REIT Holdings, LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Capital Street S.A.	Luxembourg		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Carfax (Guernsey) Limited (e)	Guernsey		0.00	%		100.00	%		100.00	%		100.00	%	INSURANCE BROKER
Carpe Diem Salud, S.L.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	SECURITIES INVESTMENT
Cartera Mobiliaria, S.A., SICAV	Spain		0.00	%		81.74	%		93.24	%		93.08	%	SECURITIES INVESTMENT
Casa de Bolsa Santander, S.A. de C.V., Grupo Financiero Santander México	Mexico		0.00	%		75.06	%		99.97	%		99.97	%	SECURITIES COMPANY
Cater Allen Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Cater Allen International Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIES COMPANY
Cater Allen Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Cater Allen Lloyd’s Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Cater Allen Pensions Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	PENSION FUND MANAGEMENT COMPANY
Cater Allen Syndicate Management Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	ADVISORY SERVICES
Central Eólica Santo Antonio De Padua S.A.	Brazil		0.00	%		75.25	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
Central Eólica Sao Cristovao S.A.	Brazil		0.00	%		75.25	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
Central Eólica Sao Jorge S.A.	Brazil		0.00	%		75.25	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
Certidesa, S.L.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	LEASE OF AIRCRAFT

F-315

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2013			2012			Line of business
Clínica Sear, S.A.	Spain		50.58	%		0.00	%		50.58	%		50.58	%	HEALTHCARE
Club Zaudin Golf, S.A.	Spain		0.00	%		85.04	%		95.11	%		95.11	%	SERVICES
Conaraz Inversiones, SICAV, S.A.	Spain		80.78	%		0.00	%		80.78	%		—		OPEN-END INVESTMENT COMPANY
Costa Canaria de Veneguera, S.A.	Spain		37.09	%		37.14	%		74.23	%		74.23	%	PROPERTY
Crawfall S.A.	Uruguay		100.00	%		0.00	%		100.00	%		100.00	%	SERVICES
Credisol, S.A. (b)	Uruguay		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
CRV Distribuidora de Títulos e Valores Mobiliários	Brazil		0.00	%		75.25	%		100.00	%		100.00	%	MANAGEMENT COMPANY
Dansk Auto Finansiering 1 Ltd	Ireland		—				(a)		—			—		SECURITIZATION
Darep Limited	Ireland		100.00	%		0.00	%		100.00	%		100.00	%	REINSURANCE
Desarrollos Eólicos Mexicanos de Oaxaca 2, S.A.P.I. de C.V.	Mexico		0.00	%		79.99	%		79.99	%		26.00	%	ELECTRICITY PRODUCTION
Digital Procurement Holdings N.V.	The Netherlands		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Diners Club Spain, S.A.	Spain		75.00	%		0.00	%		75.00	%		75.00	%	CARDS
Dirección Estratega, S.C.	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Dom Maklerski BZ WBK S.A.	Poland		0.00	%		70.00	%		99.99	%		99.99	%	SECURITIES COMPANY
Dudebasa, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Egmere Airfield Solar Park Limited	United Kingdom		0.00	%		100.00	%		100.00	%		—		ELECTRICITY PRODUCTION
Elerco, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	PROPERTY
Empresas Banesto 5, Fondo de Titulización de Activos	Spain		—				(a)		—			—		SECURITIZATION
Empresas Banesto 6, Fondo de Titulización de Activos	Spain		—				(a)		—			—		SECURITIZATION
EOL Brisa Energias Renováveis S.A.	Brazil		0.00	%		100.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
EOL Vento Energias Renováveis S.A.	Brazil		0.00	%		100.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
EOL Wind Energias Renováveis S.A.	Brazil		0.00	%		100.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
Eolsiponto S.r.l.	Italy		0.00	%		92.00	%		92.00	%		—		ELECTRICITY PRODUCTION
Ercole Investments, SICAV, S.A.	Spain		99.97	%		0.00	%		99.97	%		—		OPEN-END INVESTMENT COMPANY
Erestone S.A.S.	France		0.00	%		90.00	%		90.00	%		90.00	%	PROPERTY
FFB - Participações e Serviços, Sociedade Unipessoal, S.A.	Portugal		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Fideicomiso 100740 SLPT	Mexico		0.00	%		75.08	%		100.00	%		100.00	%	FINANCE
Fideicomiso 2002114	Mexico		0.00	%		75.02	%		100.00	%		100.00	%	HOLDING COMPANY
Fideicomiso GFSSLPT Banca Serfín, S.A.	Mexico		0.00	%		75.08	%		100.00	%		100.00	%	FINANCE
Fideicomiso Super Letras Hipotecarias Clase I	Argentina		0.00	%		99.30	%		100.00	%		100.00	%	TRUST SERVICES
Fideicomiso Super Letras Hipotecarias Clase II	Argentina		0.00	%		99.30	%		100.00	%		100.00	%	TRUST SERVICES
First National Motor Business Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
First National Motor Contracts Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
First National Motor Facilities Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
First National Motor Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	ADVISORY SERVICES
First National Motor Leasing Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
First National Motor plc	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING

F-316

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2013			2012			Line of business
First National Tricity Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Fomento e Inversiones, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Fondo de Titulización de Activos PYMES Banesto 3	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización de Activos PYMES Santander 3	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización de Activos PYMES Santander 4	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización de Activos PYMES Santander 5	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización de Activos PYMES Santander 6	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización de Activos PYMES Santander 7	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización de Activos Santander 2	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización de Activos Santander Consumer Spain 09-1	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización de Activos Santander Consumer Spain Auto 2010-1	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización de Activos Santander Consumer Spain Auto 2011-1	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización de Activos Santander Consumer Spain Auto 2012-1	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización de Activos Santander Consumer Spain Auto 2013-1	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización de Activos Santander Empresas 1	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización de Activos Santander Empresas 10	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización de Activos Santander Empresas 2	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización de Activos Santander Empresas 3	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización de Activos Santander Empresas 8	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización de Activos Santander Empresas 9	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización de Activos Santander Financiación 5	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización de Activos Santander Hipotecario 7	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización de Activos Santander Hipotecario 8	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización de Activos Santander Hipotecario 9	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización de Activos Santander Público 1	Spain		—				(a)		—			—		SECURITIZATION
Fondo de Titulización Santander Financiación 1	Spain		—				(a)		—			—		SECURITIZATION
Fondos Santander, S.A. Administradora de Fondos de Inversión (in liquidation) (b)	Uruguay		0.00	%		100.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Formación Integral, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	TRAINING

F-317

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2013			2012			Line of business
Fortensky Trading, Ltd.	Ireland		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Fosse (Master Issuer) Holdings Limited	United Kingdom		—				(a)		—			—		SECURITIZATION
Fosse Funding (No.1) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIZATION
Fosse Master Issuer PLC	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIZATION
Fosse PECOH Limited	United Kingdom		—				(a)		—			—		SECURITIZATION
Fosse Trustee (UK) Limited	United Kingdom		—				(a)		—			—		SECURITIZATION
Fosse Trustee Limited	Jersey		—				(a)		—			—		SECURITIZATION
FTPYME Banesto 2, Fondo de Titulización de Activos	Spain		—				(a)		—			—		SECURITIZATION
FTPYME Santander 2 Fondo de Titulización de Activos	Spain		—				(a)		—			—		SECURITIZATION
Garilar, S.A.	Uruguay		0.00	%		100.00	%		100.00	%		100.00	%	INTERNET
Geoban UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Geoban, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	SERVICES
Gesban México Servicios Administrativos Globales, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Gesban Santander Servicios Profesionales Contables Limitada	Chile		0.00	%		100.00	%		100.00	%		100.00	%	INTERNET
Gesban Servicios Administrativos Globales, S.L.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	SERVICES
Gesban UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	COLLECTION AND PAYMENT SERVICES
Gestión de Instalaciones Fotovoltaicas, S.L. Sole-Shareholder Company	Spain		0.00	%		100.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
Gestora de Procesos S.A. in liquidation (b)	Peru		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Gestora Patrimonial Calle Francisco Sancha 12, S.L.	Spain		68.80	%		0.00	%		68.80	%		—		SECURITIES AND PROPERTY MANAGEMENT
Girobank Carlton Investments Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Girobank Investments Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Golden Bar (securization) S.r.l.	Italy		—				(a)		—			—		SECURITIZATION
Golden Bar Securitization Programme IV 2009-1	Italy		—				(a)		—			—		SECURITIZATION
Golden Bar Stand Alone 2011-1	Italy		—				(a)		—			—		SECURITIZATION
Golden Bar Stand Alone 2011-2	Italy		—				(a)		—			—		SECURITIZATION
Golden Bar Stand Alone 2011-3	Italy		—				(a)		—			—		SECURITIZATION
Golden Bar Stand Alone 2012-1	Italy		—				(a)		—			—		SECURITIZATION
Golden Bar Stand Alone 2012-2	Italy		—				(a)		—			—		SECURITIZATION
Golden Bar Stand Alone 2013-1	Italy		—				(a)		—			—		SECURITIZATION
Golden Bar Stand Alone 2013-2	Italy		—				(a)		—			—		SECURITIZATION
Grupo Alcanza, S.A. de C.V.	Mexico		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Grupo Empresarial Santander, S.L.	Spain		99.11	%		0.89	%		100.00	%		100.00	%	HOLDING COMPANY
Grupo Financiero Santander México, S.A.B. de C.V.	Mexico		51.05	%		24.04	%		75.13	%		75.17	%	HOLDING COMPANY
Grupo Konecta Centros Especiales de Empleo, S.L.	Spain		0.00	%		51.86	%		100.00	%		100.00	%	TELEMARKETING
Grupo Konecta Maroc S.A.R.L. à associé unique	Morocco		0.00	%		51.86	%		100.00	%		100.00	%	TELEMARKETING
Grupo Konecta UK Limited	United Kingdom		0.00	%		51.86	%		100.00	%		100.00	%	FINANCE
Grupo Konectanet México, S.A. de C.V.	Mexico		0.00	%		51.86	%		100.00	%		100.00	%	TELEMARKETING
Grupo Konectanet, S.L.	Spain		7.08	%		44.77	%		51.86	%		51.86	%	HOLDING COMPANY

F-318

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2013			2012			Line of business
GTS El Centro Equity Holdings LLC	United Kingdom		0.00	%		74.20	%		74.20	%		—		ELECTRICITY PRODUCTION
Guaranty Car, S.A. Sole-Shareholder Company	Spain		0.00	%		100.00	%		100.00	%		100.00	%	AUTOMOTIVE
Hall Farm Wind Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%		—		HOLDING COMPANY
Hansar Finance Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Hipototta No. 1 FTC	Portugal		—				(a)		—			—		SECURITIZATION
Hipototta No. 1 plc	Ireland		—				(a)		—			—		SECURITIZATION
Hipototta No. 4 FTC	Portugal		—				(a)		—			—		SECURITIZATION
Hipototta No. 4 plc	Ireland		—				(a)		—			—		SECURITIZATION
Hipototta No. 5 FTC	Portugal		—				(a)		—			—		SECURITIZATION
Hipototta No. 5 plc	Ireland		—				(a)		—			—		SECURITIZATION
Hipototta No. 7 FTC	Portugal		—				(a)		—			—		SECURITIZATION
Hipototta No. 7 Limited	Ireland		—				(a)		—			—		SECURITIZATION
Hipototta No. 8 FTC (b)	Portugal		—				(a)		—			—		SECURITIZATION
Hipototta No. 8 Limited (b)	Ireland		—				(a)		—			—		SECURITIZATION
Hispamer Renting, S.A. Sole-Shareholder Company	Spain		0.00	%		100.00	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Holbah II Limited	Bahamas		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Holbah Limited	Bahamas		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Holmes Funding Limited	United Kingdom		—				(a)		—			—		SECURITIZATION
Holmes Holdings Limited	United Kingdom		—				(a)		—			—		SECURITIZATION
Holmes Master Issuer plc	United Kingdom		—				(a)		—			—		SECURITIZATION
Holmes Trustees Limited	United Kingdom		—				(a)		—			—		SECURITIZATION
Holneth B.V.	The Netherlands		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Hualle, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	SECURITIES INVESTMENT
Ibérica de Compras Corporativas, S.L.	Spain		97.17	%		2.82	%		100.00	%		100.00	%	E-COMMERCE
Independence Community Bank Corp.	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Independence Community Commercial Reinvestment Corp.	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Infraestructuras Americanas, S.L.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Ingeniería de Software Bancario, S.L.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	IT SERVICES
Inmo Francia 2, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	PROPERTY
Instituto Santander Serfin, A.C.	Mexico		0.00	%		75.08	%		100.00	%		100.00	%	NOT-FOR-PROFIT INSTITUTE
Insurance Funding Solutions Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Interfinance Holanda B.V.	The Netherlands		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Inversiones Marítimas del Mediterráneo, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	INACTIVE
Isban Argentina S.A.	Argentina		87.42	%		12.58	%		100.00	%		100.00	%	FINANCIAL SERVICES
Isban Brasil S.A.	Brazil		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Isban Chile S.A.	Chile		0.00	%		100.00	%		100.00	%		100.00	%	IT SERVICES
Isban DE GmbH	Germany		0.00	%		100.00	%		100.00	%		100.00	%	IT SERVICES
Isban México, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	IT SERVICES
Isban U.K., Ltd.	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	IT SERVICES
Konecta Activos Inmobiliarios, S.L.	Spain		0.00	%		49.34	%		52.80	%		52.80	%	PROPERTY
Konecta Brazil Outsourcing, Ltda.	Brazil		0.00	%		51.85	%		99.99	%		99.99	%	SERVICES
Konecta Broker, S.L.	Spain		0.00	%		51.86	%		100.00	%		100.00	%	SERVICES
Konecta Bto, S.L.	Spain		0.00	%		51.86	%		100.00	%		100.00	%	TELECOMMUNICATIONS
Konecta Chile Limitada	Chile		0.00	%		51.86	%		100.00	%		100.00	%	SERVICES
Konecta Colombia Grupo Konecta Colombia Ltda	Colombia		0.00	%		51.86	%		100.00	%		100.00	%	TELEMARKETING

F-319

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2013			2012			Line of business
Konecta Field Marketing, S.A.	Spain		0.00	%		51.86	%		100.00	%		100.00	%	MARKETING
Konecta Gestión Integral de Procesos, S.L.	Spain		0.00	%		51.86	%		100.00	%		100.00	%	SERVICES
Konecta Portugal, Lda.	Portugal		0.00	%		51.86	%		100.00	%		100.00	%	MARKETING
Konecta Servicios Administrativos y Tecnológicos, S.L.	Spain		0.00	%		51.86	%		100.00	%		100.00	%	SERVICES
Konecta Servicios de BPO, S.L.	Spain		0.00	%		51.86	%		100.00	%		99.97	%	SERVICES
Konecta Soluciones Globales, S.L.	Spain		0.00	%		51.86	%		100.00	%		100.00	%	SERVICES
Konectanet Andalucía, S.L.	Spain		0.00	%		51.86	%		100.00	%		100.00	%	SERVICES
Konectanet Comercialización, S.L.	Spain		0.00	%		51.86	%		100.00	%		100.00	%	MARKETING
Kontacta Comunicaciones, S.A.	Spain		0.00	%		51.48	%		99.27	%		75.00	%	SERVICES
Kredyt Lease, S.A.	Poland		0.00	%		70.00	%		100.00	%		—		LEASING
La Unión Resinera Española, S.A.	Spain		76.79	%		19.55	%		96.35	%		96.44	%	CHEMICALS
Laboratorios Indas, S.A.	Spain		0.00	%		73.22	%		73.22	%		73.22	%	HEALTH PRODUCTS
Langton Funding (No.1) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIZATION
Langton Mortgages Trustee (UK) Limited	United Kingdom		—				(a)		—			—		SECURITIZATION
Langton Mortgages Trustee Limited	Jersey		—				(a)		—			—		SECURITIZATION
Langton PECOH Limited	United Kingdom		—				(a)		—			—		SECURITIZATION
Langton Securities (2008-1) plc	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIZATION
Langton Securities (2010-1) PLC	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIZATION
Langton Securities (2010-2) PLC	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIZATION
Langton Securities (2012-1) PLC	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIZATION
Langton Securities Holdings Limited	United Kingdom		—				(a)		—			—		SECURITIZATION
Laparanza, S.A.	Spain		61.59	%		0.00	%		61.59	%		61.59	%	AGRICULTURE AND LIVESTOCK
Larix Chile Inversiones Limitada	Chile		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Lease Totta No. 1 FTC	Portugal		—				(a)		—			—		SECURITIZATION
Leasetotta No. 1 Limited	Ireland		—				(a)		—			—		SECURITIZATION
Liquidity Import Finance Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FACTORING
Liquidity Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FACTORING
Lizar Sp. z o.o.	Poland		0.00	%		70.00	%		100.00	%		—		LEASING
Luresa Inmobiliaria, S.A.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	PROPERTY
Luri 1, S.A. (d)	Spain		5.80	%		0.00	%		100.00	%		100.00	%	PROPERTY
Luri 2, S.A. (d)	Spain		5.00	%		0.00	%		100.00	%		100.00	%	PROPERTY
Luri 4, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%		100.00	%	PROPERTY
Luri Land, S.A. (d)	Belgium		0.00	%		5.36	%		100.00	%		100.00	%	PROPERTY
MAC No. 1 Limited	United Kingdom		—				(a)		—			—		MORTGAGE LOAN COMPANY
Mantiq Investimentos Ltda.	Brazil		0.00	%		75.25	%		100.00	%		100.00	%	SECURITIES COMPANY
Marylebone Road CBO 3 BV (b)	The Netherlands		—				(a)		—			—		SECURITIZATION
Master Red Europa, S.L.	Spain		68.80	%		0.00	%		68.80	%		—		CARDS
Mata Alta, S.L.	Spain		0.00	%		61.59	%		100.00	%		100.00	%	PROPERTY
Med 2001 Inversiones, SICAV, S.A.	Spain		99.99	%		0.00	%		99.99	%		—		OPEN-END INVESTMENT COMPANY
Merciver, S.L.	Spain		99.90	%		0.10	%		100.00	%		100.00	%	FINANCIAL ADVISORY
Middlewick Wind Farm Holdings Limited	United Kingdom		0.00	%		100.00	%		100.00	%		—		ELECTRICITY PRODUCTION
Middlewick Wind Farm Limited	United Kingdom		0.00	%		100.00	%		100.00	%		—		ELECTRICITY PRODUCTION
Motor 2011 Holdings Limited (b)	United Kingdom		—				(a)		—			—		SECURITIZATION
Motor 2011 PLC (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIZATION

F-320

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2013			2012			Line of business
Motor 2012 Holdings Limited	United Kingdom		—				(a)		—			—		SECURITIZATION
Motor 2012 PLC	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIZATION
Motor 2013 Holdings Limited	United Kingdom		—				(a)		—			—		SECURITIZATION
Motor 2013 PLC	United Kingdom		0.00	%		100.00	%		100.00	%		—		SECURITIZATION
Multinegocios S.A.	Chile		0.00	%		99.54	%		100.00	%		100.00	%	ADVISORY SERVICES
Multiservicios de Negocios Limitada	Chile		0.00	%		100.00	%		100.00	%		100.00	%	FINANCIAL SERVICES
Natixis Corporate Financement – Compartment Hexagone	France		100.00	%		0.00	%		100.00	%		—		INVESTMENT FUND
Naviera Mirambel, S.L.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Naviera Trans Gas, A.I.E.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Naviera Trans Ore, A.I.E.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Naviera Trans Wind, S.L.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Nebraska Wind I LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Norbest AS	Norway		7.94	%		92.06	%		100.00	%		100.00	%	SECURITIES INVESTMENT
Novimovest – Fundo de Investimento Imobiliário	Portugal		0.00	%		71.45	%		71.60	%		—		INVESTMENT FUND
NW Services CO.	United States		0.00	%		100.00	%		100.00	%		100.00	%	E-COMMERCE
Oil-Dor, S.A.	Spain		100.00	%		0.00	%		100.00	%		99.99	%	FINANCE
Open Bank, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	BANKING
Optimal Alternative Investments, S.G.I.I.C., S.A.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Optimal Investment Services S.A.	Switzerland		0.00	%		100.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Optimal Multiadvisors Ireland Plc / Optimal Strategic US Equity Ireland Euro Fund	Ireland		0.00	%		54.18	%		51.25	%		51.09	%	FUND MANAGEMENT COMPANY
Optimal Multiadvisors Ireland Plc / Optimal Strategic US Equity Ireland US Dollar Fund	Ireland		0.00	%		43.72	%		51.26	%		54.47	%	FUND MANAGEMENT COMPANY
Optimal Multiadvisors Ltd / Optimal Strategic US Equity Series (consolidated)	Bahamas		0.00	%		53.47	%		54.10	%		63.79	%	FUND MANAGEMENT COMPANY
Paglialonga Due S.r.l. Unipersonale	Italy		0.00	%		100.00	%		100.00	%		—		ELECTRICITY PRODUCTION
Parasant SA	Switzerland		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Parley Court Solar Park Limited	United Kingdom		0.00	%		100.00	%		100.00	%		—		ELECTRICITY PRODUCTION
PBE Companies, LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	PROPERTY
PECOH Limited	United Kingdom		—				(a)		—			—		SECURITIZATION
Penare Farm Solar Park Limited	United Kingdom		0.00	%		100.00	%		100.00	%		—		ELECTRICITY PRODUCTION
Pereda Gestión, S.A.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	HOLDING COMPANY
Pingham International, S.A.	Uruguay		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Portada S.A. in liquidation (b)	Chile		0.00	%		96.17	%		96.17	%		96.17	%	FINANCE
Portal Universia Argentina S.A.	Argentina		0.00	%		75.75	%		75.75	%		75.75	%	INTERNET
Portal Universia Portugal, Prestação de Serviços de Informática, S.A.	Portugal		0.00	%		100.00	%		100.00	%		100.00	%	INTERNET
Portal Universia, S.A.	Spain		0.00	%		56.56	%		56.56	%		56.56	%	INTERNET
Produban Servicios Informáticos Generales, S.L.	Spain		99.96	%		0.04	%		100.00	%		100.00	%	SERVICES
Produban Serviços de Informática S.A.	Brazil		0.00	%		100.00	%		100.00	%		100.00	%	IT SERVICES
Producciones Ramses, A.I.E.	Spain		99.00	%		1.00	%		100.00	%		—		FILM FINANCING
Programa Multi Sponsor PMS, S.A.	Spain		50.00	%		50.00	%		100.00	%		100.00	%	ADVERTISING

F-321

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2013			2012			Line of business
Promociones y Servicios Monterrey, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	PROPERTY
Promociones y Servicios Polanco, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	PROPERTY
Promociones y Servicios Santiago, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	PROPERTY
Promodomus Desarrollo de Activos, S.L.	Spain		0.00	%		51.00	%		51.00	%		51.00	%	PROPERTY
Punta Lima, LLC	United States		0.00	%		100.00	%		100.00	%		—		LEASING
Puntoform, S.L.	Spain		0.00	%		51.86	%		100.00	%		100.00	%	TRAINING
REB Empreendimentos e Administradora de Bens S.A.	Brazil		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Reintegra, S.A.	Spain		55.00	%		45.00	%		100.00	%		100.00	%	SERVICES
Reliz Sp. z o.o. w upadłości likwidacyjnej (b)	Poland		0.00	%		70.00	%		100.00	%		—		FULL-SERVICE LEASE
Retail Financial Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Riobank International (Uruguay) SAIFE (b)	Uruguay		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Rosenlease, S.L.	Spain		99.99	%		0.01	%		100.00	%		99.99	%	FULL-SERVICE LEASING
Rosteral, SICAV, S.A.	Spain		99.98	%		0.00	%		99.98	%		—		OPEN-END INVESTMENT COMPANY
Ruevilliot 26, S.L.	Spain		70.00	%		0.00	%		70.00	%		70.00	%	PROPERTY
Saja Eca Limited	Ireland		—				(a)		—			—		FINANCE
SAM UK Investment Holdings Limited	United Kingdom		77.67	%		22.33	%		100.00	%		—		HOLDING COMPANY
Sancap Investimentos e Participações S.A.	Brazil		0.00	%		75.25	%		100.00	%		100.00	%	HOLDING COMPANY
Saninv - Gestão e Investimentos, Sociedade Unipessoal, S.A.	Portugal		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Sansol S.r.l.	Italy		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander (CF Trustee Property Nominee) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Santander (CF Trustee) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY
Santander (UK) Group Pension Scheme Trustees Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY
Santander Agente de Valores Limitada	Chile		0.00	%		67.33	%		100.00	%		100.00	%	SECURITIES COMPANY
Santander Ahorro Inmobiliario 2 S.I.I., S.A.	Spain		85.50	%		0.01	%		85.51	%		78.06	%	PROPERTY
Santander AM Holding, S.L.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Asset Finance (December) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
Santander Asset Finance plc	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
Santander Asset Management - Sociedade Gestora de Fundos de Investimento Mobiliário, S.A.	Portugal		0.00	%		100.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Santander Asset Management Chile S.A.	Chile		0.01	%		99.83	%		100.00	%		100.00	%	SECURITIES INVESTMENT
Santander Back-Offices Globales Especializados, S.A.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	SERVICES
Santander Back-Offices Globales Mayoristas, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	SERVICES
Santander Banca de Inversión Colombia SAS	Colombia		0.00	%		100.00	%		100.00	%		—		FINANCIAL SERVICES
Santander Banco de Emisiones, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	BANKING
Santander BanCorp	Puerto Rico		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Banif Inmobiliario, F.I.I.	Spain		99.65	%		0.00	%		99.65	%		98.73	%	PROPERTY
Santander Bank & Trust Ltd.	Bahamas		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Santander Bank, National Association	United States		0.00	%		100.00	%		100.00	%		100.00	%	BANKING

F-322

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2013			2012			Line of business
Santander Benelux, S.A./N.V.	Belgium		83.20	%		16.80	%		100.00	%		100.00	%	BANKING
Santander Brasil Administradora de Consórcio Ltda.	Brazil		0.00	%		75.25	%		100.00	%		100.00	%	SERVICES
Santander Brasil Advisory Services S.A.	Brazil		0.00	%		72.64	%		96.52	%		96.52	%	CONSULTANCY SERVICES
Santander Brasil, EFC, S.A.	Spain		0.00	%		75.25	%		100.00	%		100.00	%	FINANCE
Santander Capital Desarrollo, SGECR, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	VENTURE CAPITAL COMPANY
Santander Capital Structuring, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	COMMERCE
Santander Capitalização S.A.	Brazil		0.00	%		75.25	%		100.00	%		100.00	%	INSURANCE
Santander Carbón Finance, S.A.	Spain		99.98	%		0.02	%		100.00	%		100.00	%	SECURITIES INVESTMENT
Santander Cards Ireland Limited	Ireland		0.00	%		100.00	%		100.00	%		100.00	%	CARDS
Santander Cards Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	CARDS
Santander Cards UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Carteras, S.G.C., S.A.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Santander Central Hispano Financial Services Limited	Cayman Islands		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Santander Central Hispano Issuances Limited	Cayman Islands		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Santander Chile Holding S.A.	Chile		22.11	%		77.43	%		99.54	%		99.54	%	HOLDING COMPANY
Santander Commercial Paper, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Santander Consulting (Beijing) Co., Ltd.	China		0.00	%		100.00	%		100.00	%		100.00	%	ADVISORY SERVICES
Santander Consumer (UK) plc	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Consumer Bank AG	Germany		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Santander Consumer Bank AS	Norway		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Consumer Bank GmbH	Austria		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Consumer Bank, S.A.	Poland		0.00	%		100.00	%		100.00	%		70.00	%	BANKING
Santander Consumer Bank S.p.A.	Italy		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Consumer Beteiligungsverwaltungsgesellschaft mbH	Germany		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Consumer Chile S.A.	Chile		51.00	%		0.00	%		51.00	%		51.00	%	FINANCE
Santander Consumer Credit Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Consumer Finance Benelux B.V.	The Netherlands		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Consumer Finance Media S.r.l.	Italy		0.00	%		65.00	%		65.00	%		65.00	%	FINANCE
Santander Consumer Finance Oy	Finland		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Consumer Finance Zrt.	Hungary		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Consumer Finance, S.A.	Spain		63.19	%		36.81	%		100.00	%		100.00	%	BANKING
Santander Consumer Finanse S.A.	Poland		0.00	%		100.00	%		100.00	%		70.00	%	SERVICES
Santander Consumer Holding Austria GmbH	Austria		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Consumer Holding GmbH	Germany		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Consumer Leasing GmbH	Germany		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
Santander Consumer Multirent Sp. z.o.o.	Poland		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
Santander Consumer Renting, S.L.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	FULL-SERVICE LEASING
Santander Consumer Services GmbH	Austria		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Santander Consumer Unifin S.p.A.	Italy		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Consumer, EFC, S.A.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Consumo Perú S.A.	Peru		55.00	%		0.00	%		55.00	%		55.00	%	FINANCE
Santander Consumo, S.A. de C.V., SOFOM, E.R.	Mexico		0.00	%		75.08	%		100.00	%		100.00	%	CARDS

F-323

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2013			2012			Line of business
Santander Corredora de Seguros Limitada	Chile		0.00	%		67.10	%		100.00	%		100.00	%	INSURANCE BROKER
Santander Corretora de Câmbio e Valores Mobiliários S.A.	Brazil		0.00	%		75.25	%		100.00	%		100.00	%	SECURITIES COMPANY
Santander de Titulización S.G.F.T., S.A.	Spain		81.00	%		19.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Santander Energías Renovables I, SCR de Régimen Simplificado, S.A.	Spain		56.76	%		0.00	%		56.76	%		56.76	%	VENTURE CAPITAL COMPANY
Santander Envíos, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	TRANSFER OF FUNDS FOR IMMIGRANTS
Santander Equity Investments Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Estates Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	PROPERTY
Santander Factoring, S.A.	Chile		0.00	%		99.54	%		100.00	%		100.00	%	FACTORING
Santander Factoring y Confirming, S.A., E.F.C.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	FACTORING
Santander Finance 2012-1 LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	FINANCIAL SERVICES
Santander Financial Exchanges Limited	United Kingdom		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Santander Financial Products plc	Ireland		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Financial Services, Inc.	Puerto Rico		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Santander Fundo de Investimento Amazonas Multimercado Crédito Privado Investimento no Exterior	Brazil		0,00	%		75,25	%		100.00	%		—		INVESTMENT FUND
Santander fundo de Investimento Diamantina Multimercado Crédito Privado Investimento no exterior	Brazil		0,00	%		75,25	%		100.00	%		—		INVESTMENT FUND
Santander Fundo de Investimento em Cotas de Fundos de Investimento Contract i Referenciado DI	Brazil		0,00	%		84,99	%		100.00	%		—		INVESTMENT FUND
Santander Fundo de Investimento Financial Renda Fixa	Brazil		0,00	%		75,25	%		100.00	%		—		INVESTMENT FUND
Santander Fundo de Investimento Guarujá Multimercado Crédito Privado Investimento no Exterior	Brazil		0,00	%		75,25	%		100,00	%		—		INVESTMENT FUND
Santander Fundo de Investimento Renda Fixa Capitalization	Brazil		0,00	%		75,25	%		100,00	%		—		INVESTMENT FUND
Santander Fundo de Investimento SBAC Referenciado di Crédito Privado	Brazil		0,00	%		75,25	%		100,00	%		—		INVESTMENT FUND
Santander Fundo de Investimento Unix Multimercado Crédito Privado	Brazil		0,00	%		75,25	%		100,00	%		—		INVESTMENT FUND
Santander GBM Secured Financing Limited	Ireland		—				(a)		—			—		SECURITIZATION
Santander Gestão de Activos, SGPS, S.A.	Portugal		0.00	%		99.79	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Gestión de Recaudación y Cobranzas Ltda.	Chile		0.00	%		99.54	%		100.00	%		100.00	%	FINANCIAL SERVICES
Santander Gestión Inmobiliaria, S.A.	Spain		0.01	%		99.99	%		100.00	%		100.00	%	PROPERTY
Santander Getnet Serviços para Meios de Pagamento, S.A.	Brazil		0.00	%		37.63	%		50.00	%		50.00	%	SERVICES
Santander Global Consumer Finance Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Global Facilities, S.A. de C.V.	Mexico		100.00	%		0.00	%		100.00	%		100.00	%	PROPERTY MANAGEMENT
Santander Global Facilities, S.L.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	PROPERTY
Santander Global Property México, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	PROPERTY
Santander Global Property U.S.A., Inc.	United States		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES

F-324

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2013			2012			Line of business
Santander Global Property, S.L.	Spain		97.34	%		2.66	%		100.00	%		100.00	%	SECURITIES INVESTMENT
Santander Global Services, S.A. (b)	Uruguay		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Santander Global Sport, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	SPORTS OPERATIONS
Santander Guarantee Company	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
Santander Hipotecario 1 Fondo de Titulización de Activos	Spain		—				(a)		—			—		SECURITIZATION
Santander Hipotecario 2 Fondo de Titulización de Activos	Spain		—				(a)		—			—		SECURITIZATION
Santander Hipotecario 3 Fondo de Titulización de Activos	Spain		—				(a)		—			—		SECURITIZATION
Santander Hipotecario, S.A. de C.V., SOFOM, E.R.	Mexico		0.00	%		75.08	%		100.00	%		100.00	%	FINANCE
Santander Holanda B.V.	The Netherlands		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Holding Internacional, S.A.	Spain		99.95	%		0.05	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Holding Vivienda, S.A. de C.V.	Mexico		0.00	%		75.08	%		100.00	%		100.00	%	SERVICES
Santander Holdings USA, Inc.	United States		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Insurance Agency, Inc.	Puerto Rico		0.00	%		100.00	%		100.00	%		100.00	%	INSURANCE BROKER
Santander Insurance Agency, U.S., LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	INSURANCE
Santander Insurance Europe Limited	Ireland		0.00	%		100.00	%		100.00	%		100.00	%	INSURANCE BROKER
Santander Insurance Holding, S.L.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Insurance Life Limited	Ireland		0.00	%		100.00	%		100.00	%		100.00	%	INSURANCE BROKER
Santander Insurance Services Ireland Limited	Ireland		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Santander Insurance Services UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	ASSET MANAGEMENT COMPANY
Santander Intermediación Correduría de Seguros, S.A.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	INSURANCE BROKER
Santander International Debt, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Santander International Products, Plc.	Ireland		99.99	%		0.01	%		100.00	%		99.99	%	FINANCE
Santander International Securities, Inc.	United States		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIES COMPANY
Santander Inversiones Limitada	Chile		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Investment Bank Limited	Bahamas		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Santander Investment Bolsa, S.V., S.A.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIES COMPANY
Santander Investment Chile Limitada	Chile		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Investment I, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Investment Limited	Bahamas		0.00	%		100.00	%		100.00	%		100.00	%	INACTIVE
Santander Investment Securities Inc.	United States		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIES COMPANY
Santander Investment, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	BANKING
Santander Issuances, S.A., Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Santander Lease, S.A., E.F.C.	Spain		70.00	%		30.00	%		100.00	%		100.00	%	LEASING
Santander Leasing S.A. Arrendamento Mercantil	Brazil		0.00	%		75.25	%		99.99	%		99.99	%	LEASING
Sovereign Leasing, LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
Santander Lending Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	MORTGAGE LOAN COMPANY
Santander Mediación Operador de Banca-Seguros Vinculado, S.A.	Spain		34.00	%		64.00	%		100.00	%		100.00	%	INSURANCE BROKERAGE
Santander Merchant S.A.	Argentina		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY

F-325

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2013			2012			Line of business
Santander Microcrédito Assessoria Financeira S.A.	Brazil		0.00	%		75.25	%		100.00	%		100.00	%	FINANCIAL SERVICES
Santander Multiobrigações - Fundo de Investimento Mobiliário Aberto de Obrigações de Taxa variável	Portugal		0,00	%		91,03	%		91,20	%		—		INVESTMENT FUND
Santander Operaciones Retail, S.A.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Santander Overseas Bank, Inc.	Puerto Rico		0.00	%		100.00	%		100.00	%		100.00	%	BANKING
Santander Paraty Qif PLC	Ireland		0,00	%		75,25	%		100,00	%		—		INVESTMENT COMPANY
Santander Participações S.A.	Brazil		0.00	%		75.25	%		100.00	%		100.00	%	HOLDING COMPANY
Santander PB UK (Holdings) Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Santander Pensões - Sociedade Gestora de Fundos de Pensões, S.A.	Portugal		0.00	%		100.00	%		100.00	%		100.00	%	PENSION FUND MANAGEMENT COMPANY
Santander Perpetual, S.A., Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Santander Private Banking Gestión, S.A., S.G.I.I.C.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Santander Private Banking s.p.a.	Italy		100.00	%		0.00	%		100.00	%		100.00	%	BANKING
Santander Private Banking UK Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	PROPERTY
Santander Private Equity, S.A., S.G.E.C.R.	Spain		90.00	%		9.98	%		100.00	%		100.00	%	VENTURE CAPITAL MANAGEMENT COMPANY
Santander Private Real Estate Advisory, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	PROPERTY
Santander Public Sector SCF S.A.	France		94.00	%		6.00	%		100.00	%		—		FINANCE
Santander Real Estate, S.G.I.I.C., S.A.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Santander Río Servicios S.A.	Argentina		0.00	%		99.97	%		100.00	%		100.00	%	ADVISORY SERVICES
Santander Río Sociedad de Bolsa S.A.	Argentina		0.00	%		99.34	%		100.00	%		100.00	%	SECURITIES COMPANY
Santander Río Trust S.A.	Argentina		0.00	%		99.97	%		100.00	%		100.00	%	SERVICES
Santander S.A. - Serviços Técnicos, Administrativos e de Corretagem de Seguros	Brazil		0.00	%		84.99	%		100.00	%		100.00	%	INSURANCE BROKER
Santander S.A. Corredores de Bolsa	Chile		0.00	%		83.18	%		100.00	%		100.00	%	SECURITIES COMPANY
Santander S.A. Sociedad Securitizadora	Chile		0.00	%		67.13	%		100.00	%		100.00	%	FUND MANAGEMENT COMPANY
Santander Secretariat Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Santander Securities LLC	Puerto Rico		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIES COMPANY
Santander Seguros y Reaseguros, Compañía Aseguradora, S.A.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	INSURANCE
Santander Service GmbH	Germany		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Santander Servicios Corporativos, S.A. de C.V.	Mexico		0.00	%		75.08	%		100.00	%		100.00	%	SERVICES
Santander Servicios de Recaudación y Pagos Limitada	Chile		0.00	%		67.01	%		100.00	%		100.00	%	SERVICES
Santander Servicios Especializados, S.A. de C.V.	Mexico		0.00	%		75.08	%		100.00	%		100.00	%	FINANCIAL SERVICES
Santander Tecnología y Operaciones A.E.I.E.	Spain		—				(a)		—			—		SERVICES
Santander Totta Seguros, Companhia de Seguros de Vida, S.A.	Portugal		0.00	%		99.88	%		100.00	%		100.00	%	INSURANCE
Santander Totta, SGPS, S.A.	Portugal		0.00	%		99.88	%		99.88	%		99.87	%	HOLDING COMPANY
Santander Trade Services Limited	Hong-Kong		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES

F-326

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2013			2012			Line of business
Santander UK Foundation Limited	United Kingdom		—				(a)		—			—		CHARITABLE SERVICES
Santander UK Group Holdings Limited	United Kingdom		100.00	%		0.00	%		0.00	%		—		FINANCE
Santander UK Investments	United Kingdom		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Santander UK plc	United Kingdom		77.67	%		22.33	%		100.00	%		100.00	%	BANKING
Santander US Debt, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Santander Vivienda, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada (SOFOM E.R.)	Mexico		0.00	%		75.08	%		100.00	%		—		FINANCE
Santos Energia Participações S.A.	Brazil		0.00	%		75.25	%		100.00	%		99.99	%	HOLDING COMPANY
Santotta-Internacional, SGPS, Sociedade Unipessoal, Lda.	Portugal		0.00	%		99.79	%		100.00	%		100.00	%	HOLDING COMPANY
Santusa Holding, S.L.	Spain		69.76	%		30.24	%		100.00	%		100.00	%	HOLDING COMPANY
SC Germany Auto 08-2 Limited (b)	Ireland		—				(a)		—			—		SECURITIZATION
SC Germany Auto 2009-1 Limited	Ireland		—				(a)		—			—		SECURITIZATION
SC Germany Auto 2010-1 UG (haftungsbeschränkt)	Germany		—				(a)		—			—		SECURITIZATION
SC Germany Auto 2011-1 UG (haftungsbeschränkt)	Germany		—				(a)		—			—		SECURITIZATION
SC Germany Auto 2011-2 UG (haftungsbeschränkt)	Germany		—				(a)		—			—		SECURITIZATION
SC Germany Auto 2013-1 UG (haftungsbeschränkt)	Germany		—				(a)		—			—		SECURITIZATION
SC Germany Auto 2013-2 UG (haftungsbeschränkt)	Germany		—				(a)		—			—		SECURITIZATION
SC Germany Consumer 08-1 Limited (b)	Ireland		—				(a)		—			—		SECURITIZATION
SC Germany Consumer 09-1 Limited (b)	Ireland		—				(a)		—			—		SECURITIZATION
SC Germany Consumer 10-1 Limited (b)	Ireland		—				(a)		—			—		SECURITIZATION
SC Germany Consumer 11-1 Limited (b)	Ireland		—				(a)		—			—		SECURITIZATION
SC Germany Consumer 2013-1 UG (haftungsbeschränkt)	Germany		—				(a)		—			—		SECURITIZATION
SC Germany Vehicles 2013-1 UG (haftungsbeschränkt)	Germany		—				(a)		—			—		SECURITIZATION
SCF Ajoneurohallinto Limited	Ireland		—				(a)		—			—		SECURITIZATION
SCF Ajoneuvohallinta Limited	Ireland		—				(a)		—			—		SECURITIZATION
SCF Rahoituspalvelut 2013 Limited	Ireland		—				(a)		—			—		SECURITIZATION
SCF Rahoituspalvelut Limited	Ireland		—				(a)		—			—		SECURITIZATION
SCI BANBY PRO	France		0.00	%		90.00	%		100.00	%		100.00	%	PROPERTY
Scottish Mutual Pensions Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	INSURANCE
Serfin International Bank and Trust, Limited	Cayman Islands		0.00	%		99.79	%		100.00	%		100.00	%	BANKING
Services and Promotions Delaware Corp	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Services and Promotions Miami LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	PROPERTY
Servicio de Alarmas Controladas por Ordenador, S.A.	Spain		99.99	%		0.01	%		100.00	%		100.00	%	SECURITY
Servicios Administrativos y Financieros Ltda.	Chile		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Servicios Corporativos Seguros Serfin, S.A. de C.V. (b)	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Servicios de Cobranza, Recuperación y Seguimiento, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Servicios de Cobranzas Fiscalex Ltda.	Chile		0.00	%		99.54	%		100.00	%		100.00	%	SERVICES
Servicios Universia Venezuela S.U.V., S.A. (b)	Venezuela		0.00	%		82.99	%		82.99	%		82.99	%	INTERNET

F-327

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2013			2012			Line of business
Sheppards Moneybrokers Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	ADVISORY SERVICES
Shiloh III Wind Project, LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	ELECTRICITY PRODUCTION
Silk Finance No. 3 Limited	Ireland		—				(a)		—			—		SECURITIZATION
Sinvest Inversiones y Asesorías Limitada	Chile		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Sistema 4B, S.L. (consolidated)	Spain		68.80	%		0.00	%		68.80	%		—		CARDS
Sociedad Integral de Valoraciones Automatizadas, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	APPRAISALS
Societa’ Energetica Pezzullo S.r.l. Unipersonale	Italy		0.00	%		100.00	%		100.00	%		—		ELECTRICITY PRODUCTION
Societa’ Energetica Vibonese Due S.r.l.	Italy		0.00	%		100.00	%		100.00	%		—		ELECTRICITY PRODUCTION
Socur, S.A.	Uruguay		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Sodepro, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	FINANCE
Solar Red, SGPS, S.A.	Portugal		0.00	%		100.00	%		100.00	%		50.00	%	HOLDING COMPANY
Solarlaser Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	PROPERTY
SOV APEX LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Sovereign Capital Trust IV	United States		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Sovereign Capital Trust IX	United States		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Sovereign Capital Trust V	United States		0.00	%		100.00	%		100.00	%		100.00	%	INACTIVE
Sovereign Capital Trust VI	United States		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Sovereign Community Development Company	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Sovereign Delaware Investment Corporation	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Sovereign Lease Holdings, LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	FINANCIAL SERVICES
Sovereign Precious Metals, LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	PURCHASE AND SALE OF PRECIOUS METALS
Sovereign REIT Holdings, Inc.	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Sovereign Securities Corporation, LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIES COMPANY
Sovereign Spirit Limited (e)	Bermuda		0.00	%		100.00	%		100.00	%		100.00	%	LEASING
Sterrebeeck B.V.	The Netherlands		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Suleyado 2003, S.L.	Spain		0.00	%		100.00	%		100.00	%		100.00	%	SECURITIES INVESTMENT
Suzuki Servicios Financieros, S.L.	Spain		0.00	%		51.00	%		51.00	%		51.00	%	INTERMEDIATION
Svensk Autofinans 1 Limited	Ireland		—				(a)		—			—		SECURITIZATION
Swesant SA	Switzerland		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Synergy Abstract, LP	United States		0.00	%		70.00	%		70.00	%		70.00	%	INSURANCE
Task Moraza, S.L.	Spain		0.00	%		73.22	%		73.22	%		73.22	%	HOLDING COMPANY
Taxagest Sociedade Gestora de Participações Sociais, S.A.	Portugal		0.00	%		99.79	%		100.00	%		100.00	%	HOLDING COMPANY
Teatinos Siglo XXI Inversiones S.A.	Chile		50.00	%		50.00	%		100.00	%		100.00	%	HOLDING COMPANY
Teylada, S.A. in liquidation (b)	Spain		11.11	%		88.89	%		100.00	%		100.00	%	SECURITIES INVESTMENT
The Alliance & Leicester Corporation Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	PROPERTY
The National & Provincial Building Society Pension Fund Trustees Limited	United Kingdom		—				(a)		—			—		ASSET MANAGEMENT COMPANY
The Prepaid Card Company Limited (b)	United Kingdom		0.00	%		80.00	%		80.00	%		80.00	%	FINANCE
Time Finance Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES
Time Retail Finance Limited (b)	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	SERVICES

F-328

		% of ownership held by the Bank						% of voting power (c)
Company	Location	Direct			Indirect			2013			2012			Line of business
Títulos de Renta Fija, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	SECURITIES INVESTMENT
Tonopah Solar I LLC	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Tornquist Asesores de Seguros S.A. (b)	Argentina		0.00	%		99.99	%		99.99	%		99.99	%	ADVISORY SERVICES
Totta & Açores Inc. Newark	United States		0.00	%		99.79	%		100.00	%		100.00	%	BANKING
Totta (Ireland), PLC	Ireland		0.00	%		99.79	%		100.00	%		100.00	%	FINANCE
Totta Urbe - Empresa de Administração e Construções, S.A.	Portugal		0.00	%		99.79	%		100.00	%		100.00	%	PROPERTY
Trade Maps 3 Hong Kong Limited	Hong-Kong		—				(a)		—			—		SECURITIZATION
Trade Maps 3 Ireland Limited	Ireland		—				(a)		—			—		SECURITIZATION
Turyocio Viajes y Fidelización, S.A. (b)	Spain		0.00	%		65.06	%		65.06	%		65.06	%	TRAVEL
Tuttle & Son Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	COLLECTION AND PAYMENT SERVICES
Universal Support, S.A.	Spain		0.00	%		51.86	%		100.00	%		100.00	%	TELEMARKETING
Universia Brasil S.A.	Brazil		0.00	%		100.00	%		100.00	%		100.00	%	INTERNET
Universia Chile S.A.	Chile		0.00	%		85.11	%		85.11	%		84.39	%	INTERNET
Universia Colombia S.A.S.	Colombia		0.00	%		100.00	%		100.00	%		100.00	%	INTERNET
Universia Holding, S.L.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	HOLDING COMPANY
Universia México, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	INTERNET
Universia Perú, S.A.	Peru		0.00	%		76.66	%		76.66	%		84.45	%	INTERNET
Universia Puerto Rico, Inc.	Puerto Rico		0.00	%		100.00	%		100.00	%		100.00	%	INTERNET
Viking Collection Services Limited	United Kingdom		0.00	%		100.00	%		100.00	%		100.00	%	FINANCE
Vista Capital de Expansión, S.A. SGECR	Spain		0.00	%		50.00	%		50.00	%		50.00	%	VENTURE CAPITAL MANAGEMENT COMPANY
Vista Desarrollo, S.A. SCR de Régimen Simplificado	Spain		100.00	%		0.00	%		100.00	%		100.00	%	VENTURE CAPITAL COMPANY
W.N.P.H. Gestão e Investimentos Sociedade Unipessoal, S.A.	Portugal		0.00	%		100.00	%		100.00	%		100.00	%	PORTFOLIO MANAGEMENT
Wallcesa, S.A.	Spain		100.00	%		0.00	%		100.00	%		100.00	%	SECURITIES INVESTMENT
Wandylaw Holdings Ltd	United Kingdom		0.00	%		100.00	%		100.00	%		—		HOLDING COMPANY
Wandylaw Wind Farm Ltd	United Kingdom		0.00	%		100.00	%		100.00	%		—		ELECTRICITY PRODUCTION
Waypoint Insurance Group, Inc.	United States		0.00	%		100.00	%		100.00	%		100.00	%	HOLDING COMPANY
Webcasas, S.A.	Brazil		0.00	%		84.99	%		100.00	%		—		INTERNET
Whitewick Limited	Jersey		0.00	%		100.00	%		100.00	%		100.00	%	INACTIVE
WIM Servicios Corporativos, S.A. de C.V.	Mexico		0.00	%		100.00	%		100.00	%		100.00	%	ADVISORY SERVICES

(a) Companies over which effective control is exercised.

(b) Company in liquidation at December 31, 2013.

(c) Pursuant to Article 3 of Royal Decree 1159/2010, of September 17, approving the rules for the preparation of consolidated financial statements, in order to determine voting power, the voting power relating to subsidiaries or to other persons acting in their own name but on behalf of Group companies was added to the voting power directly held by the Parent. For these purposes, the number of votes corresponding to the Parent in relation to companies over which it exercises indirect control is the number corresponding to each subsidiary holding a direct ownership interest in such companies.

(d) See note 2.b.i.

(e) Company resident in the UK for tax purposes.

(1) The preference share issuer companies are detailed in Appendix III, together with other relevant information.

F-329

Exhibit II

Companies in which Santander Group has ownership interests of more than 5% (c), associates of Santander Group and jointly controlled entities

		% of ownership held by the Bank						% of voting power (b)
Company	Location	Direct			Indirect			2013			2012			Line of business	Type of company
26 Rue Villiot S.A.S.	France		0.00	%		35.00	%		50.00	%		50.00	%	PROPERTY	Jointly controlled entity
3E1 Sp. z o.o	Poland		0.00	%		12.26	%		21.60	%		—		ELECTRICITY PRODUCTION	—
Administrador Financiero de Transantiago S.A.	Chile		0.00	%		13.40	%		20.00	%		20.00	%	COLLECTION AND PAYMENT SERVICES	Associate
Aegón Santander Generales Seguros y Reaseguros, S.A.	Spain		0.00	%		49.00	%		49.00	%		100.00	%	INSURANCE	Jointly controlled entity
Aegón Santander Vida Seguros y Reaseguros, S.A.	Spain		0.00	%		49.00	%		49.00	%		100.00	%	INSURANCE	Jointly controlled entity
Affirmative Insurance Holdings Inc. (consolidado)	United States		0.00	%		5.03	%		0.00	%		0.00	%	INSURANCE	—
Affirmative Investment LLC	United States		0.00	%		5.03	%		4.99	%		4.99	%	HOLDING COMPANY	—
Agres, Agrupación Restauradores, S.L.	Spain		0.00	%		43.00	%		43.00	%		43.01	%	RESTAURANTS	Associate
Aguas de Fuensanta, S.A.	Spain		36.78	%		0.00	%		36.78	%		42.21	%	FOOD	Associate
Alcover AG	Switzerland		27.91	%		0.00	%		27.91	%		27.91	%	INSURANCE	—
Allfunds Bank, S.A.	Spain		50.00	%		0.00	%		50.00	%		50.00	%	BANKING	Jointly controlled entity
Allfunds International S.A.	Luxembourg		0.00	%		50.00	%		50.00	%		50.00	%	FINANCIAL SERVICES	Jointly controlled entity
Allfunds International Schweiz AG	Switzerland		0.00	%		50.00	%		50.00	%		50.00	%	SERVICES	Jointly controlled entity
Allfunds Nominee Limited	United Kingdom		0.00	%		50.00	%		50.00	%		50.00	%	HOLDING COMPANY	Jointly controlled entity
Anekis, S.A.	Spain		24.75	%		24.75	%		49.50	%		49.50	%	ADVERTISING	Associate
Aquajerez, S.L.	Spain		0.00	%		49.00	%		49.00	%		—		WATER SUPPLY	Associate
Arena Communications Network, S.L.	Spain		20.00	%		0.00	%		20.00	%		20.00	%	ADVERTISING	Associate
Attijari Factoring Maroc, S.A.	Morocco		0.00	%		28.95	%		28.95	%		28.99	%	FACTORING	Associate
Attijariwafa Bank Société Anonyme (consolidado)	Morocco		0.00	%		5.26	%		5.26	%		5.32	%	BANKING	—
Autopistas del Sol S.A.	Argentina		0.00	%		7.14	%		7.14	%		14.17	%	MOTORWAY CONCESSIONS	—
Aviva Powszechne Towarzystwo Emerytalne Aviva BZ WBK S.A.	Poland		0.00	%		7.00	%		10.00	%		10.00	%	PENSION FUND MANAGEMENT COMPANY	—
Aviva Towarzystwo Ubezpieczeń na Życie S.A.	Poland		0.00	%		7.00	%		10.00	%		10.00	%	INSURANCE	—
Banco Caixa Geral Totta de Angola, S.A.	Angola		0.00	%		24.94	%		24.99	%		24.99	%	BANKING	Associate

F-330

		% of ownership held by the Bank						% of voting power (b)
Company	Location	Direct			Indirect			2013			2012			Line of business	Type of company
Banco Internacional da Guiné-Bissau, S.A. (a)	Guinea Bissau		0.00	%		48.90	%		49.00	%		49.00	%	BANKING	—
Bank of Beijing Consumer Finance Company	China		0.00	%		20.00	%		20.00	%		—		FINANCE	Associate
Benim - Sociedade Imobiliária, S.A. (consolidado)	Portugal		0.00	%		25.76	%		25.81	%		25.81	%	PROPERTY	Associate
BW Guirapá I S.A.	Brazil		0.00	%		30.53	%		40.57	%		—		HOLDING COMPANY	Associate
Cantabria Capital, SGECR, S.A.	Spain		50.00	%		0.00	%		50.00	%		50.00	%	VENTURE CAPITAL MANAGEMENT COMPANY	Associate
Carnes Estellés, S.A. (a)	Spain		21.41	%		0.00	%		21.41	%		21.41	%	FOOD	Associate
Cartera del Norte, S.A.	Spain		36.10	%		0.00	%		36.10	%		36.10	%	FINANCE	Associate
CCPT - ComprarCasa, Rede Serviços Imobiliários, S.A.	Portugal		0.00	%		47.56	%		47.56	%		47.56	%	PROPERTY SERVICES	Jointly controlled entity
Central Eólica Angical S.A.	Brazil		0.00	%		30.53	%		40.57	%		—		ELECTRICITY PRODUCTION	Associate
Central Eólica Caititu S.A.	Brazil		0.00	%		30.53	%		40.57	%		—		ELECTRICITY PRODUCTION	Associate
Central Eólica Coqueirinho S.A.	Brazil		0.00	%		30.53	%		40.57	%		—		ELECTRICITY PRODUCTION	Associate
Central Eólica Corrupião S.A.	Brazil		0.00	%		30.53	%		40.57	%		—		ELECTRICITY PRODUCTION	Associate
Central Eólica Inhambu S.A.	Brazil		0.00	%		30.53	%		40.57	%		—		ELECTRICITY PRODUCTION	Associate
Central Eólica Tamanduá Mirim S.A.	Brazil		0.00	%		30.53	%		40.57	%		—		ELECTRICITY PRODUCTION	Associate
Central Eólica Teiu S.A.	Brazil		0.00	%		30.53	%		40.57	%		—		ELECTRICITY PRODUCTION	Associate
Centro de Compensación Automatizado S.A.	Chile		0.00	%		22.34	%		33.33	%		33.33	%	COLLECTION AND PAYMENT SERVICES	Associate
Centro para el Desarrollo, Investigación y Aplicación de Nuevas Tecnologías, S.A.	Spain		0.00	%		49.00	%		49.00	%		49.00	%	TECHNOLOGY	Associate
Comder Contraparte Central S.A	Chile		0.00	%		7.43	%		11.09	%		—		FINANCIAL SERVICES	Associate
Companhia de Arrendamento Mercantil RCI Brasil	Brazil		0.00	%		30.02	%		39.89	%		39.90	%	LEASING	Jointly controlled entity
Companhia de Crédito, Financiamento e Investimento RCI Brasil	Brazil		0.00	%		30.02	%		39.90	%		39.90	%	FINANCE	Jointly controlled entity
Companhia Promotora UCI	Brazil		0.00	%		25.00	%		25.00	%		25.00	%	FINANCIAL SERVICES	Jointly controlled entity
Compañía Española de Seguros de Crédito a la Exportación, S.A., Compañía de Seguros y Reaseguros (consolidado)	Spain		20.53	%		0.55	%		21.08	%		21.08	%	CREDIT INSURANCE	—
Comprarcasa Servicios Inmobiliarios, S.A.	Spain		0.00	%		50.00	%		50.00	%		47.50	%	PROPERTY SERVICES	Jointly controlled entity
Dirgenfin, S.L.	Spain		0.00	%		50.00	%		50.00	%		40.00	%	REAL ESTATE DEVELOPMENT	Jointly controlled entity
Ecosistema Virtual para la Promoción del Comercio, S.L.	Spain		33.33	%		0.00	%		33.33	%		—		SERVICES	Associate
Eko Energy Sp. z o.o	Poland		0.00	%		12.49	%		22.00	%		—		ELECTRICITY PRODUCTION	—
Elincasiol S.L. (consolidado)	Spain		0.00	%		46.19	%		46.19	%		—		ELECTRICITY PRODUCTION	Jointly controlled entity
Energía Eólica de México, S.A. de C.V. (consolidado)	Mexico		0.00	%		50.00	%		50.00	%		100.00	%	HOLDING COMPANY	Jointly controlled entity
Energía Renovable del Istmo, S.A. de C.V.	Mexico		0.00	%		50.00	%		50.00	%		—		ELECTRICITY PRODUCTION	Jointly controlled entity
Enerstar Villena, S.A.	Spain		0.00	%		42.20	%		42.20	%		—		ELECTRICITY PRODUCTION	Jointly controlled entity
Farma Wiatrowa Jablowo Sp. z o.o	Poland		0.00	%		12.26	%		21.60	%		—		ELECTRICITY PRODUCTION	—
FC2Egestión, S.L.	Spain		0.00	%		50.00	%		50.00	%		50.00	%	ENVIRONMENTAL MANAGEMENT	Jointly controlled entity
Federal Home Loan Bank of Pittsburgh	United States		0.00	%		15.23	%		15.23	%		21.01	%	BANKING	—

F-331

		% of ownership held by the Bank						% of voting power (b)
Company	Location	Direct			Indirect			2013			2012			Line of business	Type of company
Federal Reserve Bank of Boston	United States		0.00	%		28.38	%		28.38	%		40.18	%	BANKING	—
Fondo de Titulización de Activos UCI 11	Spain		—				(d)		—			—		SECURITIZATION	Jointly controlled entity
Fondo de Titulización de Activos UCI 14	Spain		—				(d)		—			—		SECURITIZATION	Jointly controlled entity
Fondo de Titulización de Activos UCI 15	Spain		—				(d)		—			—		SECURITIZATION	Jointly controlled entity
Fondo de Titulización de Activos UCI 16	Spain		—				(d)		—			—		SECURITIZATION	Jointly controlled entity
Fondo de Titulización de Activos UCI 17	Spain		—				(d)		—			—		SECURITIZATION	Jointly controlled entity
Fondo de Titulización de Activos UCI 18	Spain		—				(d)		—			—		SECURITIZATION	Jointly controlled entity
Fondo de Titulización Hipotecaria UCI 10	Spain		—				(d)		—			—		SECURITIZATION	Jointly controlled entity
Fondo de Titulización Hipotecaria UCI 12	Spain		—				(d)		—			—		SECURITIZATION	Jointly controlled entity
Fortune Auto Finance Co., Ltd	China		0.00	%		50.00	%		50.00	%		—		FINANCE	Jointly controlled entity
Friedrichstrasse, S.L.	Spain		35.00	%		0.00	%		35.00	%		35.00	%	PROPERTY	Associate
Gestión Santander, S.A. de C.V., Sociedad Operadora de Sociedades de Inversión, Grupo Financiero Santander México	Mexico		0.00	%		50.00	%		50.00	%		100.00	%	FUND MANAGEMENT COMPANY	Jointly controlled entity
Gire S.A.	Argentina		0.00	%		57.92	%		58.33	%		58.33	%	COLLECTION AND PAYMENT SERVICES	Associate
Grupo Alimentario de Exclusivas, S.A. (a)	Spain		40.46	%		0.00	%		40.46	%		47.23	%	FOOD	Associate
Helican Desarrollo Eólico, S.L.	Spain		0.00	%		46.00	%		46.00	%		46.00	%	ELECTRICITY PRODUCTION	Jointly controlled entity
Hidroatlixco, S.A.P.I. DE C.V.	Mexico		0.00	%		50.76	%		50.76	%		—		ELECTRICITY PRODUCTION	Jointly controlled entity
HLC – Centrais de Cogeração, S.A.	Portugal		0.00	%		24.46	%		24.49	%		24.49	%	ELECTRICITY PRODUCTION	—
HRE Investment Holdings II-A S.à.r.l.	Luxembourg		0.00	%		73.70	%		0.00	%		0.00	%	HOLDING COMPANY	—
HSH Delaware L.P.	United States		0.00	%		69.19	%		0.00	%		0.00	%	HOLDING COMPANY	—
Hyundai Capital Germany GmbH	Germany		0.00	%		49.99	%		49.99	%		49.99	%	SERVICES	Jointly controlled entity
Hyundai Capital UK Limited	United Kingdom		0.00	%		50.01	%		50.01	%		50.01	%	FINANCE	Jointly controlled entity
Ideia Produções e Design Ltda - ME	Brazil		0.00	%		59.49	%		70.00	%		—		SERVICES	Jointly controlled entity
Imperial Holding S.C.A.	Luxembourg		0.00	%		36.36	%		36.36	%		36.36	%	SECURITIES INVESTMENT	—
Indice Iberoamericano de Investigación y Conocimiento, A.I.E.	Spain		0.00	%		51.00	%		51.00	%		51.00	%	INFORMATION SYSTEM	Jointly controlled entity
Inmo Alemania Gestión de Activos Inmobiliarios, S.A.	Spain		0.00	%		20.00	%		20.00	%		20.00	%	HOLDING COMPANY	—
Inversiones ZS América Dos Ltda	Chile		0.00	%		49.00	%		49.00	%		49.00	%	SECURITIES AND REAL ESTATE INVESTMENT	Associate
Inversiones ZS América SpA	Chile		0.00	%		49.00	%		49.00	%		49.00	%	SECURITIES AND REAL ESTATE INVESTMENT	Associate
Invico S.A.	Poland		0.00	%		14.76	%		21.09	%		12.21	%	COMMERCE	—
J.C. Flowers I L.P.	United States		0.00	%		10.60	%		4.99	%		4.99	%	HOLDING COMPANY	—
J.C. Flowers II-A L.P.	Canada		0.00	%		69.40	%		4.43	%		4.43	%	HOLDING COMPANY	—

F-332

		% of ownership held by the Bank						% of voting power (b)
Company	Location	Direct			Indirect			2013			2012			Line of business	Type of company
JC Flowers AIV P L.P.	Canada		0.00	%		7.67	%		4.99	%		4.99	%	HOLDING COMPANY	—
JCF BIN II-A	Mauritania		0.00	%		69.52	%		4.43	%		4.43	%	HOLDING COMPANY	—
JCF II-A AIV K L.P.	Canada		0.00	%		69.52	%		0.00	%		0.00	%	HOLDING COMPANY	—
JCF II-A Special AIV K L.P.	Canada		0.00	%		72.29	%		4.99	%		4.99	%	HOLDING COMPANY	—
Jupiter III C.V.	The Netherlands		0.00	%		72.75	%		4.99	%		4.99	%	HOLDING COMPANY	—
Jupiter JCF AIV II-A C.V.	The Netherlands		0.00	%		69.41	%		4.99	%		4.99	%	HOLDING COMPANY	—
Kassadesign 2005, S.L.	Spain		0.00	%		50.00	%		50.00	%		50.00	%	PROPERTY	Jointly controlled entity
Konesticial, S.L.	Spain		0.00	%		50.00	%		50.00	%		—		HOLDING COMPANY	Jointly controlled entity
Krynicki Recykling S.A.	Poland		0.00	%		15.62	%		22.32	%		24.54	%	WASTE MANAGEMENT	Associate
Luri 3, S.A.	Spain		10.00	%		0.00	%		10.00	%		10.00	%	PROPERTY	Jointly controlled entity
Metrohouse S.A.	Poland		0.00	%		14.86	%		21.23	%		21.23	%	PROPERTY	Associate
Metrovacesa, S.A. (consolidado)	Spain		36.82	%		0.00	%		36.82	%		34.87	%	PROPERTY	Associate
Nevis Power Limited	United Kingdom		0.00	%		50.00	%		50.00	%		50.00	%	ELECTRICITY PRODUCTION	Jointly controlled entity
New PEL S.a.r.l.	Luxembourg		0.00	%		7.67	%		0.00	%		0.00	%	HOLDING COMPANY	—
NIB Special Investors IV-A LP	Canada		0.00	%		99.70	%		4.99	%		4.99	%	HOLDING COMPANY	—
NIB Special Investors IV-B LP	Canada		0.00	%		95.80	%		4.99	%		4.99	%	HOLDING COMPANY	—
Norchem Holdings e Negócios S.A.	Brazil		0.00	%		16.37	%		29.00	%		29.00	%	HOLDING COMPANY	Associate
Norchem Participações e Consultoria S.A.	Brazil		0.00	%		37.63	%		50.00	%		50.00	%	SECURITIES COMPANY	Jointly controlled entity
Nowotna Farma Wiatrowa Sp. z o.o	Poland		0.00	%		12.26	%		21.60	%		—		ELECTRICITY PRODUCTION	—
NPG Wealth Management S.àr.l (consolidado)	Luxembourg		0.00	%		7.63	%		0.00	%		0.00	%	HOLDING COMPANY	—
Olivant Investments Switzerland S.A.	Luxembourg		0.00	%		35.18	%		35.18	%		35.18	%	HOLDING COMPANY	Associate
Olivant Limited (consolidado)	Guernsey		0.00	%		10.39	%		10.39	%		10.39	%	HOLDING COMPANY	—
Omega Financial Services GmbH	Germany		0.00	%		50.00	%		50.00	%		50.00	%	SERVICES	Jointly controlled entity
Operadora de Activos Alfa, S.A. De C.V.	Mexico		0.00	%		49.98	%		49.98	%		49.98	%	FINANCE	Associate
Operadora de Activos Beta, S.A. de C.V.	Mexico		0.00	%		49.99	%		49.99	%		49.99	%	FINANCE	Associate
Operadora de Tarjetas de Crédito Nexus S.A.	Chile		0.00	%		8.65	%		12.90	%		—		CARDS	Associate
Parque Eólico Dominica, S.A.P.I. de C.V.	Mexico		0.00	%		41.07	%		41.07	%		50.00	%	ELECTRICITY PRODUCTION	Jointly controlled entity
Parque Eólico el Mezquite, S.A.P.I. de C.V.	Mexico		0.00	%		41.07	%		41.07	%		50.00	%	ELECTRICITY PRODUCTION	Jointly controlled entity
Parque Eólico la Carabina I, S.A.P.I. de C.V.	Mexico		0.00	%		41.07	%		41.07	%		50.00	%	ELECTRICITY PRODUCTION	Jointly controlled entity
Parque Eólico la Carabina II, S.A.P.I. de C.V.	Mexico		0.00	%		41.07	%		41.07	%		50.00	%	ELECTRICITY PRODUCTION	Jointly controlled entity
Parque Solar Afortunado, S.L.	Spain		98.00	%		0.00	%		25.00	%		25.00	%	ELECTRICITY PRODUCTION	Jointly controlled entity
Parque Solar la Robla, S.L.	Spain		95.00	%		0.00	%		25.00	%		25.00	%	ELECTRICITY PRODUCTION	—
Parque Solar Páramo, S.L.	Spain		92.00	%		0.00	%		25.00	%		25.00	%	ELECTRICITY PRODUCTION	Jointly controlled entity
Parque Solar Saelices, S.L.	Spain		95.00	%		0.00	%		25.00	%		25.00	%	ELECTRICITY PRODUCTION	—
Partang, SGPS, S.A.	Portugal		0.00	%		48.90	%		49.00	%		49.00	%	HOLDING COMPANY	Associate

F-333

		% of ownership held by the Bank						% of voting power (b)
Company	Location	Direct			Indirect			2013			2012			Line of business	Type of company
Persano Energy 2 S.r.l.	Italy		0.00	%		20.00	%		20.00	%		—		ELECTRICITY PRODUCTION	Jointly controlled entity
Persano Energy S.r.l.	Italy		0.00	%		20.00	%		20.00	%		—		ELECTRICITY PRODUCTION	Jointly controlled entity
POLFUND - Fundusz Poręczeń Kredytowych S.A.	Poland		0.00	%		35.00	%		50.00	%		50.00	%	MANAGEMENT COMPANY	Associate
Ponte Albanito S.r.l.	Italy		0.00	%		30.00	%		30.00	%		—		ELECTRICITY PRODUCTION	Jointly controlled entity
Prodesur Mediterráneo, S.L.	Spain		0.00	%		50.23	%		50.23	%		50.00	%	PROPERTY	Jointly controlled entity
Proinsur Mediterráneo, S.L.	Spain		0.00	%		50.00	%		50.00	%		50.00	%	PROPERTY	Jointly controlled entity
PSA Finance PLC	United Kingdom		0.00	%		50.00	%		50.00	%		50.00	%	LEASING	Associate
Q 205 Real Estate GmbH	Germany		0.00	%		17.50	%		17.50	%		17.50	%	PROPERTY	—
Queenford, S.L.	Spain		0.00	%		49.00	%		49.00	%		49.00	%	PROPERTY	Associate
Redbanc S.A.	Chile		0.00	%		22.40	%		33.43	%		33.43	%	SERVICES	Associate
Redbanc, S.A.	Uruguay		0.00	%		20.00	%		20.00	%		20.00	%	SERVICES	—
Redsys Servicios de Procesamiento, S.L.U.	Spain		16.97	%		0.00	%		16.97	%		16.29	%	CARDS	Associate
Retama Real Estate, S.A.	Spain		0.00	%		50.00	%		50.00	%		50.00	%	SERVICES	Jointly controlled entity
Rio Alto Gestão de Créditos e Participações, S.A.	Brazil		0.00	%		37.63	%		50.00	%		—		COLLECTION AND PAYMENT SERVICES	—
SAM Brasil Participações Ltda.	Brazil		0.00	%		50.00	%		50.00	%		—		HOLDING COMPANY	Jointly controlled entity
SAM Finance Lux S.à.r.l	Luxembourg		0.00	%		50.00	%		50.00	%		—		MANAGEMENT COMPANY	Jointly controlled entity
SAM Investment Holdings Limited	Jersey		0.00	%		50.00	%		50.00	%		—		HOLDING COMPANY	Jointly controlled entity
SAM Puerto Rico Holdings, Inc.	Puerto Rico		0.00	%		50.00	%		50.00	%		—		HOLDING COMPANY	Jointly controlled entity
Santander Ahorro Inmobiliario 1, S.I.I., S.A.	Spain		30.94	%		0.01	%		30.95	%		28.77	%	PROPERTY	Associate
Santander Asset Management Luxembourg, S.A.	Luxembourg		0.00	%		50.00	%		50.00	%		100.00	%	FUND MANAGEMENT COMPANY	Jointly controlled entity
Santander Asset Management S.A. Administradora General de Fondos	Chile		0.00	%		49.99	%		49.99	%		100.00	%	FUND MANAGEMENT COMPANY	Jointly controlled entity
Santander Asset Management UK Holdings Limited	United Kingdom		0.00	%		50.00	%		50.00	%		100.00	%	HOLDING COMPANY	Jointly controlled entity
Santander Asset Management UK Limited	United Kingdom		0.00	%		50.00	%		50.00	%		100.00	%	FUND AND PORTFOLIO MANAGER	Jointly controlled entity
Santander Asset Management USA, LLC	United States		0.00	%		50.00	%		50.00	%		—		FUND AND ASSET MANAGEMENT COMPANY	Jointly controlled entity
Santander Asset Management, LLC	Puerto Rico		0.00	%		50.00	%		50.00	%		100.00	%	MANAGEMENT COMPANY	Jointly controlled entity
Santander Asset Management, S.A., S.G.I.I.C.	Spain		0.00	%		50.00	%		50.00	%		100.00	%	FUND MANAGEMENT COMPANY	Jointly controlled entity
Santander Brasil Asset Management Distribuidora de Títulos e Valores Mobiliários S.A.	Brazil		0.00	%		50.00	%		50.00	%		100.00	%	MANAGEMENT COMPANY	Jointly controlled entity
Santander Brasil Gestão de Recursos Ltda.	Brazil		0.00	%		50.00	%		50.00	%		—		PROPERTY	Jointly controlled entity

F-334

		% of ownership held by the Bank						% of voting power (b)
Company	Location	Direct			Indirect			2013			2012			Line of business	Type of company
Santander Consumer USA Inc. (consolidado)	United States		0.00	%		64.97	%		64.97	%		64.97	%	FINANCE	Jointly controlled entity
Santander Elavon Merchant Services Entidad de Pago, S.L.	Spain		49.00	%		0.00	%		49.00	%		—		PAYMENT SERVICES	Jointly controlled entity
Santander ISA Managers Limited	United Kingdom		0.00	%		50.00	%		50.00	%		100.00	%	FUND AND PORTFOLIO MANAGER	Jointly controlled entity
Santander Pensiones, S.A., E.G.F.P.	Spain		0.00	%		50.00	%		50.00	%		100.00	%	PENSION FUND MANAGEMENT COMPANY	Jointly controlled entity
Santander Portfolio Management UK Limited	United Kingdom		0.00	%		50.00	%		50.00	%		100.00	%	FINANCE	Jointly controlled entity
Santander Río Asset Management Gerente de Fondos Comunes de Inversión S.A.	Argentina		0.00	%		50.00	%		50.00	%		100.00	%	FUND MANAGEMENT COMPANY	Jointly controlled entity
Santander Seguros, S.A.	Uruguay		0.00	%		49.00	%		49.00	%		49.00	%	INSURANCE	Associate
Santander Unit Trust Managers UK Limited	United Kingdom		0.00	%		50.00	%		50.00	%		100.00	%	FUND AND PORTFOLIO MANAGER	Jointly controlled entity
Saturn Japan II Sub C.V.	The Netherlands		0.00	%		69.30	%		0.00	%		0.00	%	HOLDING COMPANY	—
Saturn Japan III Sub C.V.	The Netherlands		0.00	%		72.71	%		0.00	%		0.00	%	HOLDING COMPANY	—
Saudi Hollandi Bank (consolidado)	Saudi Arabia		0.00	%		11.16	%		11.16	%		11.16	%	BANKING	—
Servicios de Infraestructura de Mercado OTC S.A	Chile		0.00	%		7.45	%		11.11	%		—		SERVICES	Associate
Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria, S.A.	Spain		17.28	%		0.00	%		17.28	%		17.15	%	FINANCIAL SERVICES	—
Sociedad Interbancaria de Depósitos de Valores S.A.	Chile		0.00	%		19.63	%		29.29	%		29.29	%	SECURITIES DEPOSITORY SERVICES	Associate
Sociedad Promotora Bilbao Plaza Financiera, S.A.	Spain		19.04	%		14.86	%		33.90	%		33.90	%	ADVISORY SERVICES	—
Solar Energy Capital Europe S.à.r.l. (consolidado)	Luxembourg		0.00	%		33.33	%		33.33	%		33.33	%	HOLDING COMPANY	Jointly controlled entity
Tecnologia Bancária S.A.	Brazil		0.00	%		17.70	%		20.82	%		20.82	%	ATMs	Associate
Teka Industrial, S.A. (consolidado)	Spain		0.00	%		9.42	%		9.42	%		9.42	%	DOMESTIC APPLIANCES	—
The HSH AIV 4 Trust	United States		0.00	%		69.19	%		4.99	%		4.99	%	HOLDING COMPANY	—
The JCF HRE AIV II-A Trust (a)	United States		0.00	%		73.70	%		4.99	%		4.99	%	HOLDING COMPANY	—
Tonopah Solar Energy Holdings I, LLC	United States		0.00	%		26.80	%		26.80	%		—		HOLDING COMPANY	Associate
Trabajando.com Chile S.A.	Chile		0.00	%		33.33	%		33.33	%		33.33	%	SERVICES	Associate
Transbank S.A.	Chile		0.00	%		16.75	%		25.00	%		25.00	%	CARDS	Associate
Transolver Finance EFC, S.A.	Spain		0.00	%		50.00	%		50.00	%		50.00	%	LEASING	Jointly controlled entity
U.C.I., S.A.	Spain		50.00	%		0.00	%		50.00	%		50.00	%	HOLDING COMPANY	Jointly controlled entity
UCI Holding Brasil Ltda	Brazil		0.00	%		50.00	%		50.00	%		50.00	%	HOLDING COMPANY	Jointly controlled entity
UCI Mediação de Seguros Unipessoal, Lda.	Portugal		0.00	%		50.00	%		50.00	%		50.00	%	INSURANCE BROKER	Jointly controlled entity
Unicre-Instituição Financeira de Crédito, S.A.	Portugal		0.00	%		21.45	%		21.50	%		21.50	%	FINANCE	Associate
Unión de Créditos Inmobiliarios, S.A., EFC	Spain		0.00	%		50.00	%		50.00	%		50.00	%	MORTGAGE LOAN COMPANY	Jointly controlled entity
Vector Software Factory, S.L. (consolidado)	Spain		0.00	%		45.00	%		45.00	%		45.00	%	IT	Associate
Viking Consortium Holdings Limited (consolidado)	United Kingdom		0.00	%		24.99	%		24.99	%		24.99	%	HOLDING COMPANY	—
Webmotors S.A.	Brazil		0.00	%		59.49	%		70.00	%		100.00	%	SERVICES	Jointly controlled entity

F-335

		% of ownership held by the Bank						% of voting power (b)
Company	Location	Direct			Indirect			2013			2012			Line of business	Type of company
Zakłady Przemysłu Jedwabniczego DOLWIS S.A. w upadłości likwidacyjnej (a)	Poland		0.00	%		30.80	%		44.00	%		—		TEXTILE MANUFACTURING	—
Zurich Santander Brasil Seguros e Previdência S.A.	Brazil		0.00	%		48.79	%		48.79	%		49.00	%	INSURANCE	Associate
Zurich Santander Brasil Seguros S.A.	Brazil		0.00	%		48.79	%		48.79	%		49.00	%	INSURANCE	Associate
Zurich Santander Holding (Spain), S.L.	Spain		0.00	%		49.00	%		49.00	%		49.00	%	HOLDING COMPANY	Associate
Zurich Santander Holding Dos (Spain), S.L.	Spain		0.00	%		49.00	%		49.00	%		49.00	%	HOLDING COMPANY	Associate
Zurich Santander Insurance América, S.L.	Spain		49.00	%		0.00	%		49.00	%		49.00	%	HOLDING COMPANY	Associate
Zurich Santander Seguros Argentina S.A.	Argentina		0.00	%		49.00	%		49.00	%		49.00	%	INSURANCE	Associate
Zurich Santander Seguros de Vida Chile S.A.	Chile		0.00	%		49.00	%		49.00	%		49.00	%	INSURANCE	Associate
Zurich Santander Seguros Generales Chile S.A.	Chile		0.00	%		49.00	%		49.00	%		49.00	%	INSURANCE	Associate
Zurich Santander Seguros México, S.A.	Mexico		0.00	%		49.00	%		49.00	%		49.00	%	INSURANCE	Associate

(a) Company in liquidation at December 31, 2013.

(b) Pursuant to Article 3 of Royal Decree 1159/2010, of September 17, approving the rules for the preparation of consolidated financial statements, in order to determine voting power, the voting power relating to subsidiaries or to other persons acting in their own name but on behalf of Group companies was added to the voting power directly held by the Parent. For these purposes, the number of votes corresponding to the Parent in relation to companies over which it exercises indirect control is the number corresponding to each subsidiary holding a direct ownership interest in such companies.

(c) Excluding the Group companies listed in Appendix I and those of negligible interest with respect to the fair presentation that the consolidated financial statements must express (pursuant to Article 48 of the Spanish Commercial Code and Article 260 of the Spanish Limited Liability Companies Law.

(d) Companies over which the non-subsidiary investee of the Group maintains effective control is exercised.

F-336

Exhibit III

Preference share issuer subsidiaries

		% of ownership held by the Bank
Company	Location	Direct			Indirect			Line of business
Banesto Holdings, Ltd. (a)	Guernsey		99.99	%		0.00	%	INACTIVE
Emisora Santander España, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%	FINANCE
Santander Emisora 150, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%	FINANCE
Santander Finance Capital, S.A., Sole-Shareholder Company	Spain		100.00	%		0.00	%	FINANCE
Santander Finance Preferred, S.A., Sole-Shareholder Company	Spain		100.00	%		0.00	%	FINANCE
Santander International Preferred, S.A. Sole-Shareholder Company	Spain		100.00	%		0.00	%	FINANCE
Sovereign Real Estate Investment Trust	United States		0.00	%		100.00	%	FINANCE
Totta & Açores Financing, Limited	Cayman Islands		0.00	%		99.79	%	FINANCE

(a) Company in liquidation at December 31, 2013.

F-337

Exhibit IV

Notifications of acquisitions and disposals of investments in 2013

(Article 155 of the Spanish Limited Liability Companies Law and Article 53 of Securities Market Law 24/1998).

On May 7, 2013, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in OBRASCON HUARTE LAIN, S.A. had exceeded 3% on April 26, 2013.

On May 7, 2013, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in OBRASCON HUARTE LAIN, S.A. had fallen below 3% on May 3, 2013.

On May 9, 2013, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in METROVACESA, S.A. had fallen below 30% on May 3, 2013. (The reason for the notification was the change from indirect to direct ownership of the shares of METROVACESA, S.A held by BANESTO as a result of the merger by absorption of BANESTO into BANCO SANTANDER.)

On May 16, 2013, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in OBRASCON HUARTE LAIN, S.A. had exceeded 3% on May 8, 2013.

On May 16, 2013, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in OBRASCON HUARTE LAIN, S.A. had fallen below 3% on May 13, 2013.

On May 21, 2013, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in METROVACESA, S.A. had exceeded 35% on May 16, 2013.

On December 16, 2013, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BOLSAS Y MERCADOS ESPAÑOLES, SDAD HOLDING DE MDOS Y SMAS FIN., S.A. had exceeded 3% on December 6, 2013.

On December 18, 2013, the CNMV registered a notification from Banco Santander which disclosed that Santander Group’s ownership interest in BOLSAS Y MERCADOS ESPAÑOLES, SDAD HOLDING DE MDOS Y SMAS FIN., S.A. had fallen below 3% on December 16, 2013.

F-338

Exhibit V

Other information on the Group’s banks

A) Following is certain information on the share capital of the Group’s main banks based on their total assets.

1. Santander UK plc

a) Number of financial equity instruments held by the Group

The Group holds ordinary shares amounting to GBP 3,105,176,886.60 through Banco Santander, S.A. (24,117,268,865 shares with a par value of GBP 0.10 each), Cántabro Catalana de Inversiones, S.A. (1 share with a par value of GBP 0.10) and Santusa Holding, S.L. (6,934,500,000 shares with a par value of GBP 0.10 each).

On October 23, 1995 and February 13, 1996, Santander UK plc issued subordinated bonds, for a total of GBP 200 million, which are convertible into non-cumulative preference shares with a par value of GBP 1 each. The exchange may be performed on any interest payment date provided that shareholders receive between 30 and 60 days’ notice. The Group holds 63,913,355 securities through Santander Financial Exchanges Limited.

In addition, on June 9, 1997, Santander UK plc also issued subordinated bonds, for a total of GBP 125 million, which are convertible into non-cumulative preference shares with a par value of GBP 1 each. At the discretion of the issuer, the exchange may be performed on any interest payment date, provided that holders receive between 30 and 60 days’ notice. The Group holds 100,487,938 securities through Santander Financial Exchanges Limited.

On April 28, 2010, Santander UK plc issued 300 million preference shares with a par value of GBP 1 each to replace, pursuant to current legislation, a previous issue launched by Alliance & Leicester Limited under the same terms and conditions. As part of this new issue, the Group holds 107.3 million shares through Banco Santander, S.A. and 155.7 million shares through Santander Financial Exchanges Limited.

b) Capital increases in progress

No approved capital increases are in progress.

c) Repurchases of share capital authorized by the shareholders at the general meeting

The shareholders at the annual general meeting held on April 24, 2013 resolved to unconditionally authorize the company to carry out the following repurchases of share capital.

1. The repurchase of its own 8.625% yield preference shares, subject to the following conditions:

(a) The company may repurchase up to 125,000,000 of the 8.625% yield preference shares;

(b) The lowest price that the company may pay for the 8.625% yield preference shares will be 75% of the average market price of the preference shares for the five days prior to the purchase; and

(c) The highest price (excluding costs) that the company may pay for each 8.625% yield preference share will be 125% of the average market price of the preference shares for the five days prior to the purchase.

F-339

The authorization will expire at the date of the next annual general meeting of the company unless it is renewed, amended or revoked by the company. However, prior to such expiry, the company may enter into an agreement on the repurchase of its 8.625% yield preference shares even if the purchase is finalized after this authorization expires.

2. The repurchase of its own 10.375% yield preference shares, subject to the following conditions:

(a) The company may repurchase up to 200,000,000 of the 10.375% yield preference shares;

(b) The lowest price that the company may pay for the 10.375% yield preference shares will be 75% of the average market price of the preference shares for the five days prior to the purchase; and

(c) The highest price (excluding costs) that the company may pay for each 10.375% yield preference share will be 125% of the average market price of the preference shares for the five days prior to the purchase.

The authorization will expire at the date of the company’s next annual general meeting unless it is renewed, amended or revoked by the company. However, prior to such expiry, the company may enter into an agreement on the repurchase of its 10.375% yield preference shares even if the purchase is finalized after this authorization expires.

3. The repurchase of its own fixed/floating rate series A non-cumulative preference shares subject to the following conditions:

(a) The company may repurchase up to 300,002 redeemable fixed/floating rate series A non-cumulative preference shares;

(b) The lowest price that the company may pay for the redeemable fixed/floating rate series A non-cumulative preference shares will be 75% of the average market price of the preference shares for the five days prior to the purchase; and

(c) The highest price (excluding costs) that the company may pay for each redeemable fixed/floating rate series A non-cumulative preference shares will be 125% of the average market price of the preference shares for the five days prior to the purchase.

The authorization will expire at the date of the company’s next annual general meeting unless it is renewed, amended or revoked by the company. However, prior to such expiry, the company may enter into an agreement on the repurchase of its redeemable fixed/floating rate series A non-cumulative preference shares even if the purchase is finalized after this authorization expires.

However, prior to such expiry, the Company may submit bids or adopt resolutions that could require the allocation of shares and the directors may allocate shares in accordance with any bid or resolution, notwithstanding the expiry of the authorization granted in this resolution.

In accordance with this resolution, any previous authorizations granted to the directors and not exercised for the allocation of shares are hereby revoked and substituted, notwithstanding any allocation of shares or grant of rights already completed, offered or agreed.

F-340

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

Not applicable.

e) Specific circumstances that restrict the availability of reserves

Not applicable.

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Quoted equity instruments

Not applicable.

2. Abbey National Treasury Services plc

a) Number of financial equity instruments held by the Group

The Group holds ordinary shares amounting to GBP 2,549,000,000 through Santander UK plc (2,584,999,999 shares with a par value of GBP 1 each) and Abbey National Nominees Limited (1 share with a par value of GBP 1).

The Group also holds 1,000 tracker shares (shares without voting rights but with preferential dividend rights) amounting to GBP 1,000 and 1,000 B tracker shares amounting to GBP 1,000 through Santander UK plc, both with a par value of GBP 1 each.

b) Capital increases in progress

No approved capital increases are in progress.

c) Capital authorized by the shareholders at the general meeting

Not applicable.

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

Not applicable.

e) Specific circumstances that restrict the availability of reserves

Not applicable.

f) Entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

F-341

g) Quoted equity instruments

Not applicable.

3. Banco Santander (Brasil) S.A.

a) Number of equity instruments held by the Group

The Group holds 161,084,696,502 ordinary shares and 137,645,883,715 preference shares through Banco Santander S.A. and its subsidiaries Sterrebeeck B.V., Grupo Empresarial Santander, S.L. and Santander Insurance Holding, S.L.

The shares composing the share capital of Banco Santander (Brasil) S.A. have no par value and there are no capital payments payable. At 2013 year-end the bank’s treasury shares consisted of 1,021,459,175 ordinary shares and 928,599,250 preference shares, with a total of 1,950,058,425 shares.

In accordance with current Bylaws (Article 5.7) the preference shares do not confer voting rights on their holders, except under the following circumstances:

a) In the event of the transformation, merger, consolidation or spin-off of the company.

b) In the event of approval of agreements between the company and the shareholders, either directly, through third parties or other companies in which the shareholders hold a stake, provided that, due to legal or bylaw provisions, they are submitted to a general meeting.

c) In the event of an assessment of the assets used to increase the company’s share capital.

d) The selection of a specialized entity or company to determine the economic value of the company.

e) Amendments and repeals of bylaw provisions that change any of the requirements stipulated in point 4.1 of the Level 2 Best Practices on Corporate Governance of the Brazilian Securities Commodities and Futures Exchange (BM&FBOVESPA), although these voting rights will prevail upon the entry into force of the Agreement for the Adoption of the Level 2 Best Practices on Corporate Governance.

The General Assembly may, at any moment, decide to convert the preference shares into ordinary shares, establishing a reason for the conversion.

However, the preference shares do have the following advantages (Article 5.6):

a) Their dividends are 10% higher than those on ordinary shares.

b) Priority in the distribution of dividends.

c) Participation, on the same terms as ordinary shares, in capital increases resulting from the capitalization of reserves and profits and in the distribution of bonus shares arising from the capitalization of retained earnings, reserves or any other funds.

d) Priority in the reimbursement of capital in the event of the dissolution of the company.

e) In the event of a public offering due to a change in control of the company, the holders of preference shares are guaranteed the right to sell the shares at the same price paid for the block of shares that changed hands as part of the change of control, i.e. they are treated the same as shareholders with voting rights.

F-342

b) Capital increases in progress

No approved capital increases are in progress.

c) Capital authorized by the shareholders at the general meeting

The company is authorized to increase share capital, subject to approval by the board of directors, up to a limit of 500,000,000,000 ordinary shares or preference shares, and without the need to maintain any ratio between any of the different classes of shares, provided they remain within the limits of the maximum number of preference shares established by Law.

At present the share capital consists of 399,044,116,905 shares (212,841,731,754 ordinary shares and 186,202,385,151 preference shares).

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

Not applicable.

e) Specific circumstances that restrict the availability of reserves

The only restriction on the availability of Banco Santander (Brasil) S.A.’s reserves relates to the legal reserve (restricted reserves), which can only be used to offset losses or to increase capital.

The legal reserve is provided for in Article 196 of the Spanish Public Limited Liability Companies Law, which establishes that before being allocated to any other purpose, 5% of profits must be transferred to the legal reserve, which must not exceed 20% of share capital.

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Quoted equity instruments

All the shares are listed on the Brazilian Securities, Commodities and Futures Exchange (BM&FBOVESPA) and the share deposit certificates (units) are listed on the New York Stock Exchange (NYSE).

4. Santander Bank, National Association

a) Number of financial equity instruments held by the Group

At December 31, 2013, the Group held 520,307,043 ordinary shares which carry the same voting and dividend acquisition rights on Santander Holdings USA, Inc. This holding company and Independence Community Bank Corp. hold 1,237 ordinary shares with a par value of USD 1 each and the same voting rights, representing the entire share capital of Santander Bank, National Association.

b) Capital increases in progress

No approved capital increases are in progress.

F-343

c) Capital authorized by the shareholders at the general meeting

Banco Santander, S.A. is the sole shareholder.

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

Not applicable.

e) Specific circumstances that restrict the availability of reserves

Not applicable.

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Quoted equity instruments

Class C preference shares are listed on the New York Stock Exchange (NYSE).

5. Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México

a) Number of equity instruments held by the Group

The Group holds a 75% ownership interest in the subsidiary in Mexico through the holding company Grupo Financiero Santander México, S.A. B de C.V. This holding company and Santander Global Facilities, S.A. de C.V. (México) held 80,848,258,165 ordinary shares representing 99.99% of the share capital of Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México at December 31, 2013.

b) Capital increases in progress

At December 31, 2013 there were no approved capital increases in progress.

c) Capital authorized by the shareholders at the general meeting

The shareholders at the general meeting held on February 22, 2012 resolved to increase the authorized share capital of Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander to MXN 8,085,540,380.30, represented by a total of 80,855,403,803 fully subscribed and paid shares of MXN 0.10 par value each.

d) Rights on founder’s shares, bonds or debt issues, convertible debentures and similar securities or rights

(i) At the board of directors meeting held on October 17, 2013 the directors ratified the limits approved at the board meeting held on October 26, 2011 relating to the issue of senior or subordinated debt for a maximum term of 15 years. They also approved including debt instruments that qualify as capital under current legislation and resolved that such issue may be instrumented individually or through various issue programs. On December 13, 2013, the shareholders at the general meeting approved that the Bank, pursuant to such limits, issue capitalization instruments qualifying as Tier 2 capital amounting to approximately USD 1,000,000.

F-344

On December 19, 2013, Banco Santander (Mexico) issued a total of USD 1,300,000,000 in subordinated notes that meet the capital requirements established by Basel III for Tier 2 capital at a rate of 6.125% and maturing in 2023. The Parent of Santander México, Banco Santander, S.A. Spain, resolved to purchase USD 975,000,000, i.e. 75% of the total amount of the notes.

These notes were offered through a private placement to qualified institutional buyers only in accordance with Rule 144A under the US Securities Act of 1933 and subsequent amendments thereto. Outside the US, they were offered in accordance with Regulation S of the Securities Act.

The issue was approved with a view to increasing the efficiency of the Bank’s capital structure, adapting the Bank’s profile with regard to capitalization to that of its competitors and obtaining a greater performance of capital with the same strength of capital and capacity for growth of risk-weighted assets.

(ii) The shareholders at the general meeting held on May 14, 2012 ratified the resolution adopted by the shareholders at the extraordinary general meeting held on March 17, 2009, which approved the arrangement of a collective loan from the shareholders for USD 1,000,000,000 through the placement of unsecured subordinated non-preference debentures not convertible into shares. This issue had not yet been launched at the reporting date.

(iii) At the board of directors meeting held on January 27, 2011 the directors approved the general terms and conditions for the issue of senior debt in international markets. This issue of USD 500 and USD 1,000 million at a five to ten year term was authorized on October 18, 2012. The issue was approved in order to obtain resources to finance the increase of business assets and the management of the Bank’s liquidity. As a result of these resolutions adopted by the board of directors, on November 9, 2012, debt amounting to USD 1,000 million was issued.

e) Specific circumstances that restrict the availability of reserves

Pursuant to the Mexican Credit Institutions Law and the general provisions applicable to credit institutions, the Mexican Companies Law and the institutions’ own Bylaws, universal banking institutions are required to constitute or increase capital reserves for the purposes of ensuring solvency and protecting payment systems and savers.

The bank increases its legal reserve annually directly from the profit obtained in the year.

The bank must recognize the various reserves as stipulated in the legal provisions applicable to credit institutions. Credit loss reserves are calculated on the basis of the credit rating assigned to each loan and are released when the rating of the related loan improves or when the loan is settled.

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Quoted equity instruments

The company does not have any equity instruments quoted on a stock exchange.

F-345

6. Banco Santander Totta, S.A.

a) Number of equity instruments held by the Group

The Group holds 656,112,362 ordinary shares through its subsidiaries: Santander Totta, SGPS, S.A. with 641,269,620 shares, Taxagest Sociedade Gestora de Participações Sociais, S.A. with 14,593,315 shares, and Banco Santander Totta, S.A. with 249,427 treasury shares, all of which have a par value of EUR 1 each and identical voting and dividend rights and are subscribed and paid in full.

b) Capital increases in progress

No approved capital increases are in progress.

c) Capital authorized by the shareholders at the general meeting

Not applicable.

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

At December 31, 2013, no securities with these characteristics had been issued.

e) Specific circumstances that restrict the availability of reserves

Under Article 296 of the Portuguese Companies’ Code, the legal and merger reserves can only be used to offset losses or to increase capital.

Non-current asset revaluation reserves are regulated by Decree-Law 31/1998, under which losses can be offset or capital increased by the amounts for which the underlying asset is depreciated, amortized or sold.

f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Quoted equity instruments

The shares of Banco Santander Totta, S.A. are not listed.

7. Santander Consumer Bank AG

a) Number of financial equity instruments held by the Group

At December 31, 2013, through Santander Consumer Holding GmbH, the Group held 30,002 ordinary shares with a par value of EUR 1,000 each, all of which carry the same voting rights.

b) Capital increases in progress

At December 20, 2013, by means of a decision by the sole shareholder, Santander Consumer Finance, S. A., a capital increase was approved at Santander Consumer Holding Gmbh for EUR 3,660,000,000, thereby improving the capital ratios of the holding company of Santander Consumer Bank AG.

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c) Capital authorized by the shareholders at the general meeting

Not applicable.

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

Not applicable.

e) Specific circumstances that restrict the availability of reserves

Not applicable.

f) Entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Quoted equity instruments

Not applicable.

8. Banco Santander- Chile

a) Number of equity instruments held by the Group

The Group holds a 67% ownership interest in its subsidiary in Chile corresponding to 126,593,017,845 ordinary shares of Banco Santander – Chile through its subsidiaries: Santander Chile Holding S.A. with 66,822,519,695 ordinary shares, Teatinos Siglo XXI Inversiones Limitada, now known as Teatinos Siglo XXI Inversiones S. A., with 59,770,481,573 ordinary shares and Santander Inversiones Limitada with 16,577 fully subscribed and paid ordinary shares that carry the same voting and dividend rights.

b) Capital increases in progress

No approved capital increases are in progress.

c) Capital authorized by the shareholders at the general meeting

Share capital at December 31, 2013 amounted to CLP 891,302,881,691.

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

At December 31, 2013, no securities with these characteristics had been issued.

e) Specific circumstances that restrict the availability of reserves

Remittances to foreign investors in relation to investments made under the Statute of Foreign Investment (Decree-Law 600/1974) and the amendments thereto require the prior authorization of the foreign investment committee.

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f) Non-Group entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Quoted equity instruments

All the shares are listed on the Chilean Stock Exchanges and, through American Depositary Receipts (ADRs), on the New York Stock Exchange (NYSE).

9. Banco Zachodni WBK S.A.

a) Number of financial equity instruments held by the Group

At December 31, 2013, Banco Santander, S.A. held 65,481,563 ordinary shares with a par value of PLN 10 each, all of which carry the same voting rights.

b) Capital increases in progress

There were no capital increases in progress at the end of 2013. On July 30, 2012, the shareholders at the extraordinary general meeting approved the merger with Kredyt Bank S.A., thereby resolving to increase the share capital by PLN 189,074,580 (the increase was made effective January 4, 2013).

c) Capital authorized by the shareholders at the general meeting

Not applicable.

d) Rights on founder’s shares, “rights” bonds, convertible debentures and similar securities or rights

At the general meeting held on April 20, 2011, the shareholders resolved to approve the “Incentive Scheme IV” as an initiative to attract, motivate and retain the bank’s employees. Delivery of the shares is tied to the achievement of certain targets in the years from 2011 to 2013. The bank considers that the exercise of these rights might give rise to the issuance of more than 400,000 shares.

e) Specific circumstances that restrict the availability of reserves

Not applicable.

f) Entities which hold, directly or through subsidiaries, 10% or more of equity

Not applicable.

g) Quoted equity instruments

All the shares of Bank Zachodni WBK, S.A. are listed on the Warsaw stock exchange.

B) The restrictions on the ability to access or use the assets and also to settle the Group’s liabilities, as required under paragraph 13 of IFRS 12, are described below.

In certain jurisdictions, restrictions have been established on the distribution of dividends on the basis of the new, much more stringent capital adequacy regulations. However, there is currently no evidence of any practical or legal impediment to the transfer of funds by Group subsidiaries to the Parent in the form of dividends, loans, advances, repatriation of capital or any other means.

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Exhibit VI

(Millions of Euros)	Year end December 31,
	2013				2012				2011				2010				2009
IFRS:	Including interest on deposits		Excluding interest on deposits		Including interest on deposits		Excluding interest on deposits		Including interest on deposits		Excluding interest on deposits		Including interest on deposits		Excluding interest on deposits		Including interest on deposits			Excluding interest on deposits
FIXED CHARGES:
Fixed charges and preferred stock dividends		25,162		10,499		28,466		11,903		29,624		12,590		23,197		9,476		26,392			10,540
Preferred dividends		112		112		132		132		99		99		61		61		92			92
Fixed charges		25,050		10,387		28,334		11,771		29,525		12,491		23,136		9,415		26,300			10,448
EARNINGS:
Income from continuing operations before taxes and extraordinary items		7,652		7,652		3,583		3,583		7,858		7,858		12,010		12,010		10,633			10,633
Less: Earnings from associated companies		197		197		427		427		57		57		17		17		(6	)		(6	)
Fixed charges		25,050		10,387		28,334		11,771		29,525		12,491		23,136		9,415		26,300			10,448
Total earnings		32,505		17,842		31,490		14,927		37,326		20,292		35,129		21,408		36,939			21,087
Ratio of earnings to fixed charges		1.30		1.72		1.11		1.27		1.26		1.62		1.52		2.27		1.40			2.02
Ratio of earnings to combined fixed charges and preferred stock dividends		1.29		1.70		1.11		1.25		1.26		1.61		1.51		2.26		1.40			2.01

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