san_Current_folio

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)
☐	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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 G. Cantera

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 *
Non-cumulative Preferred Stock Series 1, 4, 5 and 6	New York Stock Exchange
5.179% Fixed Rate Subordinated Debt Securities due 2025	New York Stock Exchange
Senior Non Preferred Floating Rate Notes due 2023	New York Stock Exchange
3.500% Second Ranking Senior Debt Securities due 2022	New York Stock Exchange
4.250% Second Ranking Senior Debt Securities due 2027	New York Stock Exchange
Second Ranking Senior Floating Rate Notes due 2022	New York Stock Exchange
3.125% Senior Non Preferred Fixed Rate Notes due 2023	New York Stock Exchange
3.800% Senior Non Preferred Fixed Rate Notes due 2028	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.

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 ☒ No ☐

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒

Indicate by check mark whether the registrant 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 ☒

Accelerated filer ☐

Non-accelerated filer ☐

Emerging growth company ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

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

U.S. GAAP ☐	International Financial Reporting Standards as issued by the	Other ☐
	International Accounting Standards Board ☒

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 ☒

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. 16,136,153,582 shares

Economic and Industry Conditions

 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;

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

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

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

 the effects of results of the negotiations for the UK’s exit from the European Union;

 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;

 potential losses associated with prepayment of our loan and investment portfolio, declines in the value of collateral securing our loan portfolio, and counterparty risk; 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 U.K., other European countries, Latin America and the U.S.;

 changes in Spanish, U.K., E.U., U.S., Latin American, or other jurisdictions’ laws, regulations or taxes, including changes in regulatory capital and liquidity requirements, including as a result of the UK exiting the European Union; 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 non‑performance by counterparties to other types of financial instruments;

 technical difficulties and/or failure to improve or upgrade our information technology;

 changes in our 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;

 our exposure to operational losses (e.g., failed internal or external processes, people and systems);

 changes in our ability to recruit, retain and develop appropriate senior management and skilled personnel;

 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 interest income / (charges).

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.

The financial statements for the year ended December 31, 2017 reflect the impact from the acquisition of Banco Popular on June 7, 2017 (see “Item 4. Information on the Company— A. History and development of the company — Principal Capital Expenditures and Divestitures — Acquisitions, Dispositions, Reorganizations — Acquisition of Banco Popular Español, S.A.” ). In addition, the financial information for the year ended December 31, 2014 reflect the impact of the reconsolidation of Santander Consumer USA Holdings Inc. (“SCUSA”) after we gained control of this company in January 2014. Prior to the aforementioned change of control, we accounted for our ownership interest in SCUSA using the equity method (see “Item 4. Information on the Company— A. History and development of the company — Principal Capital Expenditures and Divestitures — Acquisitions, Dispositions, Reorganizations — Purchase of the shares to DDFS LLC in SCUSA). Finally, 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 (Bank Zachodni WBK, S.A. and Kredyt Bank S.A.).


		Year ended December 31,
	2017	2016	2015	2014	2013
	(Millions of euros, except percentages and per share data)
Interest and similar income	56,041	55,156	57,198	54,656	51,447
Interest expense and similar charges	(21,745)	(24,067)	(24,386)	(25,109)	(25,512)
Interest income / (charges)	34,296	31,089	32,812	29,547	25,935
Dividend income	384	413	455	435	378
Income from companies accounted for by the equity method	704	444	375	243	500
Fee and commission income	14,579	12,943	13,042	12,515	12,473
Fee and commission expense	(2,982)	(2,763)	(3,009)	(2,819)	(2,712)
Gains/losses on financial assets and liabilities (net)	1,560	3,728	(770)	3,974	3,234
Exchange differences (net)	105	(1,627)	3,156	(1,124)	160
Other operating income	1,618	1,919	1,971	1,682	1,179
Other operating expenses	(1,966)	(1,977)	(2,235)	(1,978)	(1,598)
Income from assets under insurance and reinsurance contracts	2,546	1,900	1,096	3,532	4,724
Expenses from liabilities under insurance and reinsurance contracts	(2,489)	(1,837)	(998)	(3,395)	(4,607)
Total income	48,355	44,232	45,895	42,612	39,666
Administrative expenses	(20,400)	(18,737)	(19,302)	(17,899)	(17,452)
Personnel expenses	(12,047)	(11,004)	(11,107)	(10,242)	(10,069)
Other general expenses	(8,353)	(7,733)	(8,195)	(7,657)	(7,383)
Depreciation and amortization	(2,593)	(2,364)	(2,418)	(2,287)	(2,391)
Provisions (net)	(3,058)	(2,508)	(3,106)	(3,009)	(2,445)
Impairment or reversal of impairment of financial assets not measured at fair value through profit or loss (net)	(9,259)	(9,626)	(10,652)	(10,710)	(11,227)
Impairment on other assets (net)	(1,273)	(140)	(1,092)	(938)	(503)
Gains/(losses) on non financial assets and investments (net)	522	30	112	3,136	2,152
Gains from bargain purchases arising in business combinations	—	22	283	17	—
Gains/(losses) on non-current assets held for sale not classified as discontinued operations	(203)	(141)	(173)	(243)	(422)
Operating profit/(loss) before tax	12,091	10,768	9,547	10,679	7,378
Income tax	(3,884)	(3,282)	(2,213)	(3,718)	(2,034)
Profit from continuing operations	8,207	7,486	7,334	6,961	5,344
Profit from discontinued operations (net)	—	—	—	(26)	(15)
Consolidated profit for the year	8,207	7,486	7,334	6,935	5,329
Profit attributable to the Parent	6,619	6,204	5,966	5,816	4,175
Profit attributable to non controlling interest	1,588	1,282	1,368	1,119	1,154

Per Share Information:
Average number of shares (thousands) (1)	15,394,459	14,656,360	14,349,579	12,056,951	11,017,276
Basic earnings per share (in euros)	0.404	0.401	0.397	0.472	0.379
Basic earnings per share continuing operation (in euros)	0.404	0.401	0.397	0.474	0.380
Diluted earnings per share (in euros)	0.403	0.399	0.396	0.470	0.377
Diluted earnings per share continuing operation (in euros)	0.403	0.399	0.396	0.472	0.379
Remuneration (euros) (2)	0.22	0.21	0.20	0.60	0.60
Remuneration (US$) (2)	0.26	0.22	0.22	0.73	0.83


		Year ended December 31,
	2017	2016	2015	2014	2013
	(Millions of euros, except percentages and per share data)
Total assets	1,444,305	1,339,125	1,340,260	1,266,296	1,115,763
Loans and advances to central banks and credit institutions (net) (3)	77,430	76,687	82,530	81,288	77,913
Loans and advances to customers (net) (3)	848,915	790,470	790,848	734,711	668,856
Investment Securities (net) (4)	226,427	211,842	203,834	195,164	142,234
Investments: Associates and joint venture	6,184	4,836	3,251	3,471	5,536

Contingent liabilities (net)	49,117	44,434	39,834	43,770	40,600

Liabilities
Deposits from central banks and credit institutions (5)	190,314	149,398	175,374	155,616	109,397
Customer deposits (5)	777,730	691,111	683,142	647,706	608,201
Debt securities (5)	217,966	228,869	226,160	213,695	191,252

Capitalization
Subordinated debt issued by Banco Santander, S.A. or issued by subsidiaries and guaranteed by Banco Santander, S.A., excluding preferred securities and preferred shares (6)	7,116	6,448	6,091	3,276	4,603
Other Subordinated debt (7)	5,621	6,124	7,864	6,878	7,483
Preferred securities (8)	8,369	6,916	6,749	6,239	3,652
Preferred shares (8)	404	413	449	739	401
Non-controlling interest (including net income of the period)	12,344	11,761	10,713	8,909	9,314
Stockholders' equity (9)	94,489	90,939	88,040	80,805	70,328
Total capitalization	128,343	122,602	119,906	106,846	95,781
Stockholders’ Equity per average share (8)	6.14	6.20	6.14	6.70	6.38
Stockholders’ Equity per share at period end (9)	5.86	6.14	6.02	6.32	6.10
Other managed funds
Mutual funds	135,749	129,930	109,028	109,519	93,304
Pension funds	11,566	11,298	11,376	11,481	10,879
Managed portfolio	19,259	18,032	20,337	20,369	20,987
Total other managed funds (10)	166,574	159,260	140,741	141,369	125,170

Consolidated Ratios
Profitability Ratios:
Net Yield (11)	2.85%	2.76%	2.90%	2.89%	2.55%
Return on average total assets (ROA)	0.58%	0.56%	0.55%	0.58%	0.44%
Return on average stockholders' equity (ROE) (12)	7.14%	6.99%	6.61%	7.75%	5.84%
Return on tangible equity (ROTE) (13)	10.41%	10.38%	9.99%	12.75%	9.64%
Capital Ratio:
Average stockholders' equity to average total assets	6.58%	6.63%	6.70%	6.24%	5.89%
Ratio of earnings to fixed charges (14):
Excluding interest on deposits	2.18%	1.88%	1.77%	1.90%	1.69%
Including interest on deposits	1.55%	1.45%	1.39%	1.43%	1.29%

Credit Quality Data
Loans and advances to customers
Allowances for total balances including country risk and excluding contingent liabilities as a percentage of total gross loans	2.74%	2.99%	3.24%	3.57%	3.59%
Non-performing balances as a percentage of total gross loans (15)	4.16%	4.00%	4.42%	5.30%	5.81%
Allowances for total balances as a percentage of non-performing balances (15)	65.97%	74.89%	73.39%	67.42%	61.76%
Net loan charge-offs as a percentage of total gross loans	1.36%	1.37%	1.34%	1.38%	1.38%
Ratios adding contingent liabilities to loans and advances to customers and excluding country risk (*)
Allowances for total balances as a percentage of total loans and contingent liabilities	2.66%	2.90%	3.19%	3.49%	3.48%
Non-performing balances as a percentage of total loans and contingent liabilities (**) (15)	4.08%	3.93%	4.36%	5.19%	5.64%
Allowances for total balances as a percentage of non-performing balances (**) (15)	65.24%	73.82%	73.11%	67.24%	61.65%
Net loan and contingent liabilities charge-offs as a percentage of total loans and contingent liabilities	1.29%	1.31%	1.29%	1.30%	1.29%

(*) 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.

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

(1)

Average number of shares has been calculated on a monthly basis as 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 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 2013 and 2014 disclosed above, €0.60, is calculated assuming that the four dividends for these years were paid in cash.

On January 8, 2015, an extraordinary meeting of the board of directors took place to reformulate the dividend policy of the Bank to take effect with the first dividend to be paid with respect to our 2015 results, in order to distribute three cash dividends and a scrip dividend relating to such 2015 results. Each of these dividends amounted €0.05 per share. The Bank paid the dividends on account of the earnings for the 2015 financial year in August 2015, November 2015, February 2016 and May 2016 for a gross amount per share of €0.05.

The Bank has paid the four dividends on account of the earnings for the 2016 financial year in August 2016 (cash dividend of €0.055 per share), November 2016 (scrip dividend of €0.045 per share), February 2017 (cash dividend of 0.055 per share) and May 2017 (cash dividend of 0.055 per share).

The Bank has paid the first three dividends on account of the earnings for the 2017 financial year in August 2017 (cash dividend of €0.06 per share), November 2017 (scrip dividend of €0.04 per share) and February 2018 (cash dividend of 0.06 per share) and will pay the fourth dividend in May 2018 for an estimated gross amount per share of €0.06.

The remuneration per share disclosed for each financial year includes the four dividends paid or to be paid on account of that financial year.

(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”, “Loans and receivables” and “Held-to-maturity investments” 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 December 2017 the subordinated debt issuer entities merged with Banco Santander, S.A.

(7)

Other Subordinated debt amounts are at the subsidiary level.

(8)

In our consolidated financial statements, preferred securities and preferred shares are included under “Subordinated liabilities”. In the table above Subordinated liabilities are included both under Liabilities and Capitalization.

(9)

Equals the sum of the amounts included at the end of each year as “Shareholders’ Equity” and “Other comprehensive income” as stated in our consolidated financial statements. We have deducted the book value of treasury stock from stockholders’ equity.

(10)

Since December 2013 we hold a 50% ownership interest in Santander Asset Management (SAM) and control this company jointly with Warburg Pincus and General Atlantic. Funds under “Other managed funds” are mostly managed by SAM.

(11)

Net yield is the total of interest income / (charges) (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”.

(12)

The Return on average stockholders’ equity ratio is calculated as profit attributable to the Parent divided by average stockholders’ equity. In 2014, if for comparison purposes we include in the denominator the €7,500 million capital increase made in January 2015, ROE would be 7.05%.

(13)

The Return on average tangible equity ratio (ROTE) is calculated as profit attributable to the Parent divided by the monthly average of: capital + reserves + retained earnings + other comprehensive income (excluding non-controlling interests) - goodwill – other intangible assets. We provide this non-GAAP financial measure as an additional measure to return on equity to provide a way to look at our performance which is closely aligned to our capital position. In 2014, if for comparison purposes we include in the denominator the €7,500 million capital increase made in January 2015, ROTE would be 10.95%.


	(million euros, except percentages)
	2017		2016		2015		2014		2013
Profit attributable to the parent	6,619		6,204		5,966		5,816		4,175

Average equity	92,637		88,741		90,220		75,047		71,511
Effect of goodwill and other intangible assets	(29,043)		(28,972)		(30,486)		(29,446)		(28,221)
Average tangible equity	63,594		59,769		59,734		45,601		43,290

Return on equity (ROE)	7.14	%	6.99	%	6.61	%	7.75	%	5.84	%
Return on tangible equity (ROTE)	10.41	%	10.38	%	9.99	%	12.75	%	9.64	%

(14)

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.

(15)

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”.

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


Allowances refers to:	2017	2016	2015	2014	2013
		(in millions of euros)
Allowances for total balances (*) (excluding country risk)	24,529	24,835	27,121	28,046	25,681
Allowances for contingent liabilities and commitments (excluding country risk)	614	457	616	652	688
Allowances for total balances (excluding contingent liabilities and commitments and excluding country risk):	23,915	24,378	26,505	27,394	24,993
Allowances referred to country risk and other	767	528	322	46	154
Allowances for total balances (excluding contingent liabilities and commitments)	24,682	24,906	26,827	27,440	25,147
Of which:
Allowances for customers	23,934	24,393	26,517	27,217	24,903
Allowances for credit institutions and other financial assets	18	15	19	79	37
Allowances for Debt instruments	730	498	291	144	207

(*) Non-performing loans and contingent liabilities and other assets to collect.

Exchange Rates

The exchange rates shown below are those published by the European Central Bank (“ECB”), for euros and dollars (expressed in dollars per euro) 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.


	Rate During Period
Calendar Period	Period End ($)	Average Rate ($)
2013	1.38	1.33
2014	1.21	1.33
2015	1.09	1.11
2016	1.05	1.11
2017	1.20	1.13


	Rate During Period
Last six months	High $	Low $
2017
October	1.19	1.16
November	1.20	1.16
December	1.20	1.17
2018
January	1.25	1.19
February	1.25	1.22
March (through March 22, 2018)	1.24	1.22

On March 22, 2018, the exchange rate for euros and dollars (expressed in dollars per euro), as published by the ECB, was $1.23.

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 and Political Risks

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

Our loan portfolio is concentrated in Continental Europe (in particular, Spain), the United Kingdom, Latin America and the United States. At December 31, 2017, Continental Europe accounted for 45% of our total loan portfolio (Spain accounted for 27% of our total loan portfolio), the United Kingdom (where the loan portfolio consists primarily of residential mortgages) accounted for 29%, Latin America accounted for 17% (of which Brazil represents 8% of our total loan portfolio) and the United States accounted for 8%. 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, Latin America and the United States. In addition, we are exposed to sovereign debt in these regions (for more information on our exposure to sovereign debt, see Note 51.d and Note 54.b) 4. 4.4 to our consolidated financial statements). A return to recessionary conditions in the economies of Continental Europe (in particular, Spain), the United Kingdom, some of the Latin American countries in which we operate or the United States, would likely have a significant adverse impact on our loan portfolio and sovereign debt holdings and, as a result, on our financial condition, cash flows and results of operations. See “Item 4. Information on the Company—B. Business Overview”.

Our revenues are also 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.

The economies of some of the countries where we operate have been affected by a series of political events, including the UK’s vote to leave the EU in June 2016, which caused significant volatility (for more information, see the risk factor 1.2 entitled ‘Exposure to UK political developments, including the negotiations for the country’s exit from the European Union, could have a material adverse effect on us’). The Catalonian region has recently experienced several social and political movements calling for the region’s secession from Spain. As of the date of this report, considerable uncertainty exists regarding the outcome of political and social tensions in Catalonia, which could result in potential disruptions in business, financing conditions or the environment in which we operate in the region and in the rest of Spain, any of which could have a material adverse effect on our business, results of operations, financial condition and prospects. There can be no assurance that the European and global economic environments will not continue to be affected by political developments.

The economies of some of the countries where we operate, particularly in Latin America, have experienced significant volatility in recent decades. 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. In addition, some of the countries where we operate are particularly affected by commodities price fluctuations, which in turn may affect financial market conditions through exchange rate fluctuations, interest rate volatility and deposits volatility. Negative and fluctuating economic conditions, such as slowing or negative growth and a changing interest rate environment, impact our profitability by causing lending margins to decrease and credit quality to decline and leading to decreased demand for higher margin products and services.

There is uncertainty over the long-term effects of the monetary and fiscal policies that have been adopted by the central banks and financial authorities of some of the world’s leading economies, including China. Furthermore, financial turmoil in emerging markets tends to adversely affect stock prices and debt securities prices of other emerging markets as investors move their money to more stable and developed markets. Continued or increased perceived risks associated with investing in emerging economies in general, or the emerging market economies where the Group operates in particular, could further dampen capital flows to such economies and adversely affect such economies, and as a result, could have an adverse impact on the Group’s business and results of operations.

Additionally, the results of the 2016 United States presidential and congressional elections generated volatility in the global capital and currency markets and created uncertainty about the relationship between the United States and Mexico. The uncertainty persists in relation to the United States trade policy, in particular the renegotiation of the North American Free Trade Agreement and a further protectionist shift.

1.2

Exposure to UK political developments, including the ongoing negotiations between the UK and the European Union, could have a material adverse effect on us.

On June 23, 2016, the UK held a referendum (the UK EU Referendum) on its membership in the EU, in which a majority voted for the UK to leave the EU. Immediately following the result, the UK and global stock and foreign exchange markets commenced a period of significant volatility, including a steep devaluation of the pound sterling. There remains significant uncertainty relating to the process,

timing and negotiation of the UK’s exit from, and future relationship with, the EU and the basis of the UK’s future trading relationship with the rest of the world.

On March 29, 2017, the UK Prime Minister gave notice under Article 50(2) of the Treaty on European Union of the UK’s intention to withdraw from the EU. The delivery of the Article 50(2) notice has triggered a two year period of negotiation which will determine the terms on which the UK will exit the EU, taking account of the framework for the UK’s future relationship with the EU. Unless extended, the UK’s EU membership will cease after this two year period. The timing of, and process for, such negotiations and the resulting terms of the UK’s future economic, trading and legal relationships are uncertain, as is the basis of the UK’s future trading relationship with the rest of the world. There is a possibility that the UK’s membership ends at such time without reaching any agreement on the terms of its relationship with the EU going forward, although we note that movement to phase two of the negotiations - with focus on finalizing withdrawal issues, transition arrangements and a framework for the UK’s future relationship with the EU - was agreed on December 15, 2017.

A general election in the UK was held on June 8, 2017 (the General Election). The General Election resulted in a hung parliament with no political party obtaining the majority required to form an outright government. On June 26, 2017 it was announced that the Conservative party had reached an agreement with the Democratic Unionist Party (the DUP) in order for the Conservative party to form a minority government with legislative support (‘confidence and supply’) from the DUP. The long term effects of the General Election, which resulted in a minority government, are difficult to predict due to significant uncertainty and the impact on the negotiation of the UK’s exit from the EU. The outcome of the General Election could have a significant impact on the future international and domestic political agendas of the government (including the UK’s exit from the EU), and on the ability of the government to pass legislation in the House of Commons, as well as increasing the risk of further early general elections and a period of political instability and/or a change of government.

While the longer term effects of the UK EU Referendum are difficult to predict, the effects of this Referendum, in addition to the uncertainty created as a result of the outcome of the General Election, could include further financial instability and slower economic growth as well as higher unemployment and inflation in the UK. For instance, the UK Government has stated its intention for the UK to leave both the EU Single Market and the EU Customs Union (thereby ceasing to be party to the global trade deals negotiated by the EU on behalf of its members) and this could affect the attractiveness of the UK as a global investment center and increase tariff and non-tariff barriers for the UK’s trading relationships and, as a result, could have a detrimental impact on UK economic growth. Sustained low or negative interest rates would put further pressure on our interest margins and adversely affect our operating results, financial condition and prospects. Equally, further rises in interest rates (in addition to the rate rise in November 2017) could result in larger default losses which would also impact on our operating results, financial condition and prospects.

The UK EU Referendum has also given rise to further calls for a second referendum on Scottish independence. These developments, or the perception that they could occur, could have a material adverse effect on economic conditions and the stability of financial markets, and could significantly reduce market liquidity and restrict the ability of key market participants to operate in certain financial markets.

Asset valuations, currency exchange rates and credit ratings may be particularly subject to increased market volatility during the period of the negotiation of the UK’s exit from the EU. The major credit rating agencies downgraded and changed their outlook to negative on the UK’s sovereign credit rating following the UK EU Referendum and there is a risk that this may recur during the negotiation of the UK’s exit from the EU as the potential terms of the exit (and any transition period) become public.

In addition, we are subject to substantial EU-derived regulation and oversight. There remains significant uncertainty as to the respective legal and regulatory environments in which we and our subsidiaries will operate when the UK is no longer a member of the EU. This may cause potentially divergent national laws and regulations across Europe should EU laws be replaced, in whole or in part, by UK laws on the same (or substantially similar) issues.

For example, we are in the process of implementing a number of key restructuring and strategic initiatives, such as the ring-fencing of our retail banking activities in the UK, all of which will be carried out throughout this period of significant uncertainty. This may impact the prospects for successful execution and impose additional pressure on management.

Operationally, there is a significant risk that we and other financial institutions may no longer be able to rely on the European passporting framework for financial services (or an equivalent regime) and may be required to apply for authorization in multiple EU jurisdictions, the costs, timing and viability of which is uncertain. This uncertainty, and any actions taken as a result of this uncertainty, as well as new or amended rules, may have a significant impact on our operating results, financial condition and prospects. In addition, the lack of clarity of the impact of the UK EU Referendum on foreign nationals’ long-term residency permissions in the UK may make it challenging for our subsidiaries in the UK to retain and recruit adequate staff, which may adversely impact our business.

The UK political developments described above, along with any further changes in government structure and policies, may lead to further market volatility and changes to the fiscal, monetary and regulatory landscape in which we operate and could have a material adverse effect on us, including our ability to access capital and liquidity on financial terms acceptable to us and, more generally, on our operating results, financial condition and prospects.

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

Global economic conditions deteriorated significantly between 2007 and 2009, and many of the countries in which we operate fell into recession. Although most countries have recovered, 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 were runs on deposits at several financial institutions, numerous institutions sought additional capital or were assisted by governments, and many lenders and institutional investors reduced or ceased providing funding to borrowers (including to other financial institutions). In the European Union the principal concern today is the risk of slowdown of activity, because the tax and financial integration, although not completed, has limited an individual country’s ability to address potential economic crises with its own fiscal and monetary policies.

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

Reduced demand for our products and services.

Increased regulation of our industry. Compliance with such regulation will continue to increase our costs and may affect the pricing for our products and services, increase our conduct and regulatory risks related to non-compliance and limit our ability to pursue business opportunities.

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

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.

Despite recent improvements in certain segments of the global economy, uncertainty remains concerning the future economic environment. Such economic uncertainty could have a negative impact on our business and results of operations. 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.

A return to volatile conditions in the global financial markets could have a material adverse effect on us, including on our ability to access capital and liquidity on financial terms acceptable to us, if at all. If capital markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits to attract more customers 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 our financing availability and terms and, more generally, on our results, financial condition and prospects.

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

Conditions in the capital markets and the economy generally in the eurozone showed signs of fragility and volatility, with political tensions in Europe being particularly heightened in the past two years. In addition, interest rate spreads among eurozone countries affected government funding and borrowing rates in those economies. A reappearance of political tensions in the eurozone could have a material adverse effect on our operating results, financial condition and prospects.

The UK EU referendum caused significant volatility in the global stock and foreign exchange markets. On October 27, 2017, a Spanish region (Catalonia) declared independence from Spain resulting in subsequent intervention by the Spanish Government and causing political, social and economic instability in this region. Following these events, the risk of further instability in the eurozone cannot be excluded.

In the past, the European Central Bank (ECB) and European Council have taken actions with the aim of reducing the risk of contagion in the eurozone and beyond and improving economic and financial stability. Notwithstanding these measures, a significant number of financial institutions throughout Europe have substantial exposures to sovereign debt issued by eurozone (and other) nations, which may be under financial stress. 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 adversely affected, with wider possible adverse consequences for global financial market conditions. The risk of returning to fragile, volatile and political tensions exists if current ECB policies in place to control the crisis are normalized, the reforms aimed at improving productivity and competition do not progress, the closing of the bank union and other measures of integration is not deepened or anti-European groups succeed.

We have direct and indirect exposure to financial and economic conditions throughout the eurozone economies. Concerns relating to sovereign defaults or a partial or complete break-up of the European Monetary Union, including potential accompanying redenomination risks and uncertainties, still exist in light of the political and economic factors mentioned above. 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.

Risks Relating to Our Business

2.1 Risks relating to the acquisition of Banco Popular

2.1.1 The acquisition of Banco Popular (the “Acquisition”) could give rise to a wide range of litigation or other claims being filed that could have a material adverse effect on us.

The Acquisition took place in execution of the resolution of the Steering Committee of the Spanish banking resolution authority (“FROB”) of June 7, 2017, adopting the measures required to implement the decision of the European banking resolution authority (the Single Resolution Board or “SRB”), in its Extended Executive Session of June 7, 2017, adopting the resolution scheme in respect of Banco Popular, in compliance with article 29 of Regulation (EU) No. 806/2014 of the European Parliament and Council of July 15, 2014, establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No. 1093/2010 (the “FROB Resolution”).

Pursuant to the aforesaid FROB Resolution, (i) all of the ordinary shares of Banco Popular outstanding prior to the date of that decision were immediately cancelled to create a non-distributable voluntary reserve, (ii) a capital increase was effected with no preemptive subscription rights, to convert all of Banco Popular’s Additional Tier 1 capital instruments into shares of Banco Popular, (iii) the share capital was reduced to zero euros through the cancellation of the shares derived from the conversion described in point (ii) above to create a non-distributable voluntary reserve, (iv) a capital increase with no preemptive subscription rights was effected to convert all of Banco Popular’s Tier 2 regulatory capital instruments into Banco Popular shares, and (v) all Banco Popular shares deriving from the conversion described in point (iv) above were acquired by Banco Santander for a total consideration of one euro (€1).

Since Banco Popular’s declaration of resolution, the cancellation and conversion of its capital instruments, and the subsequent transfer to Banco Santander of the shares resulting from that conversion through the resolution tool of selling the entity’s business, all under the rules of the single resolution framework indicated above, have no precedent in Spain or in any other EU member state, appeals against the FROB’s decision cannot be ruled out, nor can claims against Banco Popular, Banco Santander or other entities of the Group derived from or related to the Acquisition. Various investors, advisors or financial institutions have announced their intention to explore, and, in some cases, have already filed various claims relating to the Acquisition. As to those possible appeals or claims, it is not possible to anticipate the specific demands that might be made, or their financial impact (particularly as any such claims may not quantify their demands, may make new legal interpretations or may involve a large number of parties). The success of those appeals or claims could affect the Acquisition, including the payment of indemnification or compensation or settlements, and in any of those events have a material adverse effect on the results and financial condition of the Group.

It is also possible that, as a result of the Acquisition, Banco Popular, its directors, officers or employees and the entities controlled by Banco Popular may be the subject of claims, including, but not limited to, claims derived from investors’ acquisition of Banco Popular shares or capital instruments prior to the FROB Resolution (including specifically, but also not limited to, shares acquired in the context of the capital increase with preemptive subscription rights effected in 2016), which could have a material adverse effect on the results and financial condition of the Group. In this regard, on April 3, 2017, Banco Popular submitted a material fact (hecho relevante) to the

Comisión Nacional del Mercado de Valores (the “CNMV” or “Spanish Securities Market Commission”) reporting some corrections that its internal audit unit had identified in relation to several figures in its financial statements for the year ended December 31, 2016. The board of directors of Banco Popular, being responsible for said financial statements, considered that, following a report of the audit committee, the circumstances did not represent, on an individual basis or taken as a whole, a significant impact that would justify the restatement of Banco Popular’s financial statements for the year ended December 31, 2016. Notwithstanding the foregoing, Banco Popular is exposed to possible claims derived from the isolated items identified in the aforesaid material fact or others of an analogous nature, which, if they were to materialize and be upheld, could have a material adverse effect on the results and financial condition of the Group.

2.1.2 The Acquisition might fail to provide the expected results and profits and might expose us to unforeseen risks.

Banco Santander decided to make an offer to acquire Banco Popular because it believed, based on the public information available about Banco Popular and other information to which it had limited access for a short period of time, that the Acquisition would generate a series of synergies and benefits for the Group, resulting from the implementation of business management and operating models that are more efficient in terms of costs and income. Banco Santander may have overvalued those synergies, or they may fail to materialize, which could also have a material adverse effect on the Group. The risk analysis and assessment done prior to the Acquisition was based on available public information and remaining non-material information that was provided in the aforesaid review process. Banco Santander did not independently verify the accuracy, veracity or completeness of that information. It cannot be ruled out that the information provided by Banco Popular to the market or to Banco Santander might contain errors or omissions, nor can Banco Santander, in turn, guarantee that that information is accurate and complete. Therefore, some of the valuations used by Banco Santander as the basis of its acquisition decision may have been inaccurate, incomplete or out of date. Likewise, and given the specific features and urgency of the process through which Banco Santander acquired Banco Popular, no representations or warranties were obtained regarding Banco Popular’s assets, liabilities and business in general, other than those relating to the ownership of the shares acquired. Banco Santander has had limited access to information on Banco Popular and Banco Santander’s information on Banco Popular may not yet have been processed or analyzed in its entirety. Therefore, Banco Santander might find damaged or impaired assets, unknown risks or hidden liabilities, or situations that are currently unknown and that might result in material contingencies or exceed the Group’s current estimates, and those circumstances are not hedged or protected under the terms of the Acquisition, which, were they to materialize, might have a material adverse effect on the Group’s results and financial condition.

The integration of Banco Popular and its group of companies into the Group after the Acquisition may be difficult and complex, may involve internal restructuring, including the potential merger of Banco Popular with another Group entity or other corporate transaction or restructuring involving other Group entities, and the costs, profits and synergies derived from that integration may not be in line with expectations. For example, Banco Santander might have to face difficulties and obstacles as a result of, among other things, the need to integrate, or even the existence of conflicts between the operating and administrative systems, and the control and risk management systems at the two banks, or the need to implement, integrate and harmonize different procedures and specific business operating systems and financial, information and accounting systems or any other systems of the two groups; and have to face losses of customers or assume contract terminations with various counterparties and for various reasons, which might determine the need to costs or losses of income that are unexpected or in amounts higher than anticipated. Similarly, the integration process may also cause changes or redundancies, especially in the Group’s business in Spain and Portugal, as well as additional or extraordinary costs or losses of income that make it necessary to make adjustments in the business or in the resources of the entities. Additionally, our assessment over internal controls over financial reporting for the year ended December 31, 2017, excluded Banco Popular and its subsidiaries, as permitted by the relevant rules and regulations. Accordingly, initial testing of Banco Popular’s internal controls over financial reporting in connection with the assessment for the year ending December 31, 2018, may result in the identification of control deficiencies that we would be required to remediate. All these circumstances could have a material adverse effect on the results and financial condition of the Group.

2.1.3 The integration of Banco Popular and its consequences could require a great deal of effort from Banco Santander and its management team.

The integration of Banco Popular into the Group could require a great deal of dedication and attention from the Banco Santander’s management and staff, which could restrict its resources or prevent them from carrying out the Group’s business activities, and this could negatively impact its results and financial situation.

2.1.4 A number of individual and class actions have been brought against Banco Popular in relation to floor clauses (“cláusulas suelo”). If the cost of these actions is higher than the provisions made, this could have material adverse impact on our results and financial situation.

Floor clauses (“cláusulas suelo”) are clauses whereby the borrower agrees to pay a minimum interest rate to the lender regardless of the applicable benchmark rate. Banco Popular has included floor clauses in certain asset operations with customers.

See details of the legal proceedings related to floor clauses in “Item 8. Financial Information – A. Consolidated statements and other information – Legal Proceedings – ii. Non-tax-related proceedings”.

The estimates for these provisions and the estimate for maximum risk associated with the aforementioned floors clauses as described in “Item 8. Financial Information – A. Consolidated statements and other information – Legal Proceedings – ii. Non-tax-related proceedings” were made by Banco Popular based on hypotheses, assumptions and premises it considered to be reasonable. However, these estimates may not be complete, may not have factored in all customers or former customers that could potentially file claims, the most recent facts or legal trends adopted by the Spanish courts, or any other circumstances that could be relevant for establishing the impact of floor clauses for Banco Popular and its group or the successful outcome of the claims filed in relation to these floor clauses. Consequently, the provisions made by Banco Popular or the estimate for maximum risk could prove to be inadequate, and may have to be increased to cover the impact of the different actions being processed in relation to floor clauses or to cover additional liabilities, which could lead to higher costs for the entity. This could have a material adverse effect on the Group’s results and financial situation.

2.2

Legal, Regulatory and Compliance Risks

2.2.1

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 and tax enforcement 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 regulatory investigations and civil and tax claims, and party to certain legal proceedings incidental to the normal course of our business, including in connection with conflicts of interest, lending securities and derivatives 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 investigation or 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. The amount of our reserves in respect of these matters 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.

2.2.2

We are subject to substantial regulation and regulatory and governmental oversight which could adversely affect our business, operations and financial condition.

As a financial institution, we are subject to extensive regulation, which materially affects our businesses. The statutes, regulations and policies to which we are subject may be changed at any time. In addition, the interpretation and the application by regulators of the laws and regulations to which we are subject may also change from time to time. Extensive legislation and implementing regulation 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, the UK, Latin America and other jurisdictions, and further regulations are in the process of being implemented. 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 regulations are implemented inconsistently in the various jurisdictions in which we operate, we may face higher compliance costs. Any legislative or regulatory actions and any required changes to our business operations resulting from such legislation and regulations, as well as any deficiencies in our compliance with such legislation and regulation, could result in significant loss of revenue, limit our ability to 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 compliance and other costs on us or otherwise adversely affect our businesses. In particular, legislative or regulatory actions resulting in enhanced prudential standards, in particular with respect to capital and liquidity, could impose a significant regulatory burden on the Bank or on its bank subsidiaries and could limit the bank subsidiaries’ ability to distribute capital and liquidity to the Bank, thereby negatively impacting the Bank. Future liquidity standards could require the Bank to maintain a greater proportion of its assets in highly-liquid but lower-yielding financial instruments, which would negatively affect its net interest margin. Moreover, the Bank's regulatory authorities, as part of their supervisory function, periodically review the Bank's allowance for loan losses. Such regulators may require the Bank to increase its allowance for loan losses or to recognize further losses. Any such additional provisions for loan losses, as required by these regulatory agencies, whose views may differ from those of the Bank's management, could have an adverse effect on the Bank’s earnings and financial condition. Accordingly, there can be no assurance that future changes in regulations or in their interpretation or application will not adversely affect us.

The wide range of regulations, actions and proposals which most significantly affect us, or which could most significantly affect us in the future, relate to capital requirements, funding and liquidity and development of a fiscal and banking union in the EU, which are discussed in further detail below. Moreover, there is uncertainty regarding the future of financial reforms in the United States and the impact that potential financial reform changes to the U.S. banking system may have on ongoing international regulatory proposals. In general, regulatory reforms adopted or proposed in the wake of the financial crisis have increased and may continue to materially increase the Group's operating costs and negatively impact the Group's business model. Furthermore, regulatory authorities have substantial discretion in how to regulate banks, and this discretion, and the means available to the regulators, have been increasing during recent years. Regulation may be imposed on an ad hoc basis by governments and regulators in response to a crisis, and these may especially affect financial institutions such us that are deemed to be a global systemically important institution ("G-SII").

The main regulations and regulatory and governmental oversight that can adversely impact us include but are not limited to the following (see more details on “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation):

Capital requirements, liquidity, funding and structural reform

Increasingly onerous capital requirements constitute one of our main regulatory challenges. Increasing capital requirements may adversely affect our profitability and create regulatory risk associated with the possibility of failure to maintain required capital levels. As a Spanish financial institution, we are subject to the Capital Requirements Regulation (Regulation (EU) No 575/2013) (“CRR”) and the Capital Requirements Directive (Directive 2013/36/EU) (“CRD IV”), through which the EU began implementing the Basel III capital reforms from January 1, 2014, with certain requirements in the process of being phased in until January 1, 2019. While the CRD IV required national transposition, the CRR was directly applicable in all the EU member states. This regulation is complemented by several binding technical standards and guidelines issued by the European Banking Authority (“EBA”), directly applicable in all EU member states, without the need for national implementation measures either. The implementation of the CRD IV into Spanish law has taken place through Royal Decree Law 14/2013 and Law 10/2014, Royal Decree 84/2015, Bank of Spain Circular 2/2014 and Bank of Spain Circular 2/2016. Credit institutions, such as us, are required, on a standalone and consolidated basis, to hold a minimum amount of regulatory capital of 8% of risk weighted assets (of which at least 4.5% must be Common Equity Tier 1 (“CET1”) capital and at least 6% must be Tier 1 capital). In addition to the minimum regulatory capital requirements, the CRD IV also introduced capital buffer requirements that must be met with CET1 capital. The CRD IV introduces five new capital buffers: (1) the capital conservation buffer for unexpected losses, requiring additional CET1 of up to 2.5% of total risk weighted assets; (2) the institution-specific counter-cyclical capital buffer (consisting of the weighted average of the counter-cyclical capital buffer rates that apply in the jurisdictions where the relevant credit exposures are located), which may require as much as additional CET1 capital of 2.5% of total risk weighted assets or higher pursuant to the requirements set by the competent authority; (3) the G-SIIs buffer requiring additional CET1 of between 1% and 3.5% of risk weighted assets; (4) the other systemically important institutions buffer, which may be as much as 2% of risk weighted assets; and (5) the CET1 systemic risk buffer to prevent systemic or macro prudential risks of at least 1% of risk weighted assets (to be set by the competent authority). Beginning in 2016, and subject to the applicable phase-in period, entities are required to comply with the “combined buffer requirement” (broadly, the combination of the capital conservation buffer, the institution-specific counter-cyclical buffer and the higher of (depending on the institution) the systemic risk buffer, the G-SIIs buffer and the other systemically important institutions buffer, in each case as applicable to the institution).

We will be required to maintain a capital conservation buffer of additional CET1 capital of 2.5% of risk weighted assets and a systemically important institutions buffer of additional CET1 capital of 1% of risk weighted assets, in each case considered on a fully loaded basis. However, as of the date of this report, due to the application of the phase-in period, we are required to maintain a conservation buffer of additional CET1 capital of 1.875% of risk weighted assets, a G-SII buffer of additional CET1 capital of 0.75% of risk weighted assets and a counter-cyclical capital buffer of additional CET1 capital of 0.03% of risk weighted assets.

Article 104 of the CRD IV, as implemented by Article 68 of Law 10/2014, and similarly Article 16 of Council Regulation (EU) No 1024/2013 of October 15, 2013 conferring specific tasks on the ECB concerning policies relating to the prudential supervision of credit institutions (the “SSM Regulation”), also contemplate that in addition to the minimum “Pillar 1” capital requirements and any applicable capital buffer, supervisory authorities may impose further “Pillar 2” capital requirements to cover other risks, including those not considered to be fully captured by the minimum capital requirements under the CRD IV or to address macro-prudential considerations. This may result in the imposition of additional capital requirements on us pursuant to this “Pillar 2” framework. Any failure by us to maintain our “Pillar 1” minimum regulatory capital ratios and any “Pillar 2” additional capital requirements could result in administrative actions or sanctions (including restrictions on discretionary payments), which, in turn, may have a material adverse impact on our results of operations.

The European Central Bank clarified in its "Frequently asked questions on the 2016 EU-wide stress test" (July 2016) that the institution specific Pillar 2 capital will consist of two parts: Pillar 2 requirement and Pillar 2 guidance. Pillar 2 requirements are binding and breaches can have direct legal consequences for banks, while Pillar 2 guidance is not directly binding and a failure to meet Pillar 2

guidance does not automatically trigger legal action, even though the ECB expects banks to meet Pillar 2 guidance. Following this clarification, it is understood that Pillar 2 guidance is not expected to trigger the automatic restriction of the distribution and calculation of the “Maximum Distributable Amount”.

The ECB is required to carry out, at least on an annual basis, assessments under the CRD IV of the additional “Pillar 2” capital requirements that may be imposed for each of the European banking institutions subject to the Single Supervisory Mechanism (the “SSM”) and accordingly requirements may change from year to year. Any additional capital requirement that may be imposed on us by the ECB pursuant to these assessments may require us to hold capital levels similar to, or higher than, those required under the full application of the CRD IV. There can be no assurance that we will be able to continue to maintain such capital ratios.

In addition to the above, the EBA published on December 19, 2014 its final guidelines for common procedures and methodologies in respect of its supervisory review and evaluation process (“SREP”). Included in this were the EBA’s proposed guidelines for a common approach to determining the amount and composition of additional Pillar 2 capital requirements implemented on January 1, 2016. Under these guidelines, national supervisors must set a composition requirement for the Pillar 2 additional capital requirements to cover certain specified risks of at least 56% CET1 capital and at least 75% Tier 1 capital. The guidelines also contemplate that national supervisors should not set additional capital requirements in respect of risks which are already covered by capital buffer requirements and/or additional macro-prudential requirements; and, accordingly, the above “combined buffer requirement” is in addition to the minimum Pillar 1 capital requirement and to the additional Pillar 2 capital requirement. Therefore capital buffers would be the first layer of capital to be eroded pursuant to the applicable stacking order, as set out in the “Opinion of the EBA on the interaction of Pillar 1, Pillar 2 and combined buffer requirements and restrictions on distributions” published on 16 December 2015. In this regard, under Article 141 of the CRD IV, Member States of the EU must require that an institution that fails to meet the “combined buffer requirement” or the “Pillar 2” capital requirements described above, will be prohibited from paying any “discretionary payments” (which are defined broadly by the CRD IV as payments relating to CET1, variable remuneration and payments on Additional Tier 1 capital instruments), until it calculates its applicable restrictions and communicates them to the regulator and, once completed, such institution will be subject to restricted “discretionary payments”. The restrictions will be scaled according to the extent of the breach of the “combined buffer requirement” and calculated as a percentage of the profits of the institution since the last distribution of profits or “discretionary payment”. Such calculation will result in a “Maximum Distributable Amount” in each relevant period. As an example, the scaling is such that in the bottom quartile of the “combined buffer requirement”, no “discretionary distributions” will be permitted to be paid. Articles 43 to 49 of Law 10/2014 and Chapter II of Title II of Royal Decree 84/2015 implement the above provisions in Spain. In particular Article 48 of Law 10/2014 and Articles 73 and 74 of Royal Decree 84/2014 deal with restrictions on distributions.

In connection with this, we have announced that we have received from the ECB its decision regarding prudential minimum capital phased-in requirements for 2018, following the results of SREP. The ECB decision requires us to maintain a CET1 phased-in capital ratio of at least 8.655% on a consolidated basis. This 8.655% capital requirement includes: the minimum Pillar 1 requirement (4.5%); the Pillar 2 requirement (1.5%); the capital conservation buffer (1.875%); the requirement deriving from its consideration as a G-SII (0.75%) and the counter-cyclical buffer (0.03%). The ECB decision also requires that Banco Santander, S.A. maintain a CET1 phased-in capital ratio of at least 7.875% on an individual basis. This 7.875% capital requirement includes: the minimum Pillar 1 requirement (4.5%), the Pillar 2 requirement (1.5%) and the capital conservation buffer (1.875%). Taking into account our consolidated and individual current capital levels, these capital requirements do not imply any limitations on distributions in the form of dividends, variable remuneration and coupon payments to holders of AT1 instruments.

In addition to the above, the CRR also includes a requirement for institutions to calculate a leverage ratio (“LR”), report it to their supervisors and to disclose it publicly from January 1, 2015 onwards. More precisely, Article 429 of the CRR requires institutions to calculate their LR in accordance with the methodology laid down in that article. In January 2014, the Basel Committee finalized a definition of how the LR should be prepared and set an indicative benchmark (namely 3% of Tier 1 capital). Such 3% Tier 1 LR has been tested during a monitoring period until the end of 2017 although the Basel Committee had already proposed the final calibration at 3% Tier 1 LR. Accordingly, the CRR does not currently contain a requirement for institutions to have a capital requirement based on the LR though prospective investors should note the European Commission’s proposal amending the CRR which contain a binding 3% Tier 1 LR requirement, that would be added to the own funds requirements in article 92 of the CRR, and which institutions must meet in addition to their risk-based requirements. However, the full implementation of the LR is currently under consultation as part of the proposals. Moreover, the potential for the introduction of a LR buffer for G-SIIs at some point in the future is also noted in the proposals.

On November 9, 2015, the Financial Stability Board (the “FSB”) published its final principles and term sheet containing an international standard to enhance the loss absorbing capacity of G-SIIs such as us. The final standard consists of an elaboration of the principles on loss absorbing and recapitalization capacity of G-SIIs in resolution and a term sheet setting out a proposal for the implementation of these proposals in the form of an internationally agreed standard on total loss absorbing capacity (“TLAC”) for G-SIIs. Once implemented in the relevant jurisdictions, these principles and terms will form a new minimum TLAC standard for G-SIIs, and in the case of G-SIIs with more than one resolution group, each resolution group within the G-SII. The FSB will undertake a review of the

technical implementation of the TLAC principles and term sheet by the end of 2019. The TLAC principles and term sheet require a minimum TLAC requirement to be determined individually for each G-SII at the greater of (a) 16% of risk weighted assets as of January 1, 2019 and 18% as of January 1, 2022, and (b) 6% of the Basel III Tier 1 leverage ratio exposure measure as of January 1, 2019, and 6.75% as of January 1, 2022. Under the FSB TLAC standard, capital buffers stack on top of TLAC.

Furthermore, Article 45 of the European Bank Recovery and Resolution Directive (Directive 2014/59/EU) (“BRRD”) provides that Member States shall ensure that institutions meet, at all times, a minimum requirement for own funds and eligible liabilities (“MREL”). The MREL shall be calculated as the amount of own funds and eligible liabilities expressed as a percentage of the total liabilities and own funds of the institution. The EBA was in charge of drafting regulatory technical standards on the criteria for determining MREL (the “MREL RTS”). On July 3, 2015 the EBA published the final draft MREL RTS. In application of Article 45(2) of the BRRD, the current version of the MREL RTS is set out in a Commission Delegated Regulation (EU) No. 2016/1450 that was adopted by the Commission on May 23, 2016 (the “MREL Delegated Regulation”).

The MREL requirement was scheduled to come into force by January 2016. However, article 8 of the MREL Delegated Regulation gave discretion to resolution authorities to determine appropriate transitional periods to each institution.

The European Commission committed to review the existing MREL rules with a view to provide full consistency with the TLAC standard by considering the findings of a report that the EBA is required to provide to the European Commission under Article 45(19) of the BRRD. On December 14, 2016, the EBA published its final report on the implementation and design of the MREL framework where it stated that, although there was no need to change the key principles underlying the MREL Delegated Regulation, certain changes would be necessary with a view to improve the technical soundness of the MREL framework and implement the TLAC standard as an integral component of the MREL framework. On December 20, 2017, the SRB published its second policy statement on MREL, which will serve as a basis for setting binding MREL targets.

On November 23, 2016, the European Commission published, among others, a proposal for a European Directive amending CRR, the CRD IV Directive and the BRRD and a proposal for a European Regulation amending Regulation (EU) No. 806/2014 which was passed on July 15, 2014 and became effective from January 1, 2015 (the “SRM Regulation”). The proposals cover multiple areas, including the Pillar 2 framework, the leverage ratio, mandatory restrictions on distributions, permission for reducing own funds and eligible liabilities, macroprudential tools, a new category of “non-preferred” senior debt that should only be bailed-in after junior ranking instruments but before other senior liabilities, changes to the definitions of Tier 2 and Additional Tier 1 instruments, the MREL framework and the integration of the TLAC standard into EU legislation as mentioned above. The proposals also cover a harmonized national insolvency ranking of unsecured debt instruments to facilitate the issuance by credit institutions of such “non-preferred” senior debt. The proposals are to be considered by the European Parliament and the Council of the EU and therefore remain subject to change. The final package of new legislation may not include all elements of the proposals and new or amended elements may be introduced through the course of the legislative process. Until all the proposals are in final form and are finally implemented into the relevant legislation, it is uncertain how the proposals will affect Banco Santander or the Holders.

One of the main objectives of these proposals is to implement the TLAC standard and to integrate the TLAC requirement into the general MREL rules (the “TLAC/MREL Requirements”) thereby avoiding duplication from the application of two parallel requirements. As mentioned above, although TLAC and MREL pursue the same regulatory objective, there are, nevertheless, some differences between them in the way they are constructed. The European Commission is proposing to integrate the TLAC standard into the existing MREL rules and to ensure that both requirements are met with largely similar instruments, with the exception of the subordination requirement, which will be institution-specific and determined by the resolution authority. Under these proposals, institutions such as the Bank would continue to be subject to an institution-specific MREL requirement, which may be higher than the requirement of the TLAC standard.

The European Commission’s proposals require the introduction of limited adjustments to the existing MREL rules ensuring technical consistency with the structure of any requirements for G-SIIs. In particular, technical amendments to the existing rules on MREL are needed to align them with the TLAC standard regarding inter alia the denominators used for measuring loss-absorbing capacity, the interaction with capital buffer requirements, disclosure of risks to investors, and their application in relation to different resolution strategies. Implementation of the TLAC/MREL Requirements is expected to be phased-in from January 1, 2019 (a 16% minimum TLAC requirement) to January 1, 2022 (an 18% minimum TLAC requirement).

Additionally, with regard to the European Commission’s proposal to create a new asset class of “non-preferred” senior debt, on December 27, 2017, Directive 2017/2399 amending Directive 2014/59/EU as regards the ranking of unsecured debt instruments in insolvency hierarchy was published in the Official Journal of the European Union. Before that, Royal Decree-Law 11/2017, of June 23, approving urgent measures on financial matters (“RDL 11/2017”) created in Spain the new asset class of senior-non preferred debt.

Although there is continued uncertainty regarding the final form of TLAC requirements, we are focusing our funding plan in 2018 on the issuance of TLAC-eligible instruments. Based on our current financial forecast and our expectations for the TLAC requirements, we estimate that we will issue an aggregate of approximately €12-18 billion of qualifying debt in 2018, €9-13 billion of which would be issued at the parent company level, with the remainder issued by our subsidiaries that are expected to be subject to TLAC requirements, Santander UK and Santander Holdings USA. In addition, we estimate that, for 2018 our subsidiaries will issue an aggregate of approximately €12-20 billion of senior debt.

In addition, the comprehensive reform of financial instruments accounting, IFRS 9, is applicable to the Group since January 1, 2018. IFRS 9 introduces, among other things, a new impairment model based on expected loss rather than incurred loss. Banco Santander expects that this change is likely to increase loan loss provisions and decrease equity at the date of transition and that volatility in the credit loss line item in the income statement is also likely to increase, which will have a negative effect on the Group’s CET 1 capital. The European Commission has proposed that the initial effect on equity, as it relates to capital adequacy ratios, is to be gradually phased-in over a five-year period between January 1, 2018 and December 31, 2022.

Moreover, while the general goal of these proposals is now well understood, it is too early to confirm the exact amendments that will be introduced and consequently the precise impact on us.

Any failure by an institution to meet the applicable minimum TLAC/MREL Requirements is intended to be treated in the same manner as a failure to meet minimum regulatory capital requirements (the imposition of restrictions or prohibitions on discretionary payments by us), where resolution authorities must ensure that they intervene and place an institution into resolution sufficiently early if it is deemed to be failing or likely to fail and there is no reasonable prospect of recovery.

Additionally, the Basel Committee is currently in the process of reviewing and issuing recommendations in relation to risk asset weightings which may lead to increased regulatory scrutiny of risk asset weightings in the jurisdictions who are members of the Basel Committee.

On December 7, 2017, the GHOS published the finalization of the Basel III post-crisis regulatory reform agenda. This review of the regulatory framework covers credit, operational and credit valuation adjustment (CVA) risks, introduces a floor to the consumption of capital by internal ratings-based methods (IRB) and the revision of the calculation of the leverage ratio. The main features of the reform are: (i) a revised standard method for credit risk, which will improve the soundness and sensitivity to risk of the current method; (ii) modifications to the IRB methods for credit risk, including input floors to ensure a minimum level of conservatism in model parameters and limitations to its use for portfolios with low levels of noncompliance; (iii) regarding the CVA risk, and in connection with the above, the removal of any internally modelled method and the inclusion of a standardized and basic method; (iv) regarding the operations risk, the revision of the standard method, which will replace the current standard methods and the advanced measurement approaches (AMA); (v) the introduction of a leverage ratio buffer for G-SIIs; and (vi) regarding capital consumption, it establishes a minimum limit on the aggregate results (output floor), which prevents the risk-weighted assets (RWA) of the banks generated by internal models from being lower than the 72.5% of the RWA that are calculated with the standard methods of the Basel III framework.

The GHOS have extended the implementation of the revised minimum capital requirements for market risk until January 2022, to coincide with the implementation of the reviews of credit, operational and CVA risks.

In addition to the above, we should also comply with the liquidity coverage ratio (“LCR”) requirements provided in CRR. According to article 460.2 of CRR, the LCR has been progressively introduced since 2015 with the following phasing-in: (a) 60% of the LCR in 2015; (b) 70% as of 1 January 2016; (c) 80% as of January 1, 2017; and (d) 100% as of January 1, 2018. As of December 31, 2017, our LCR was 133%, comfortably exceeding the regulatory requirement.

EU fiscal and banking union

The project of achieving a European banking union was launched in the summer of 2012. Its main goal is to resume progress towards the European single market for financial services by restoring confidence in the European banking sector and ensuring the proper functioning of monetary policy in the Eurozone.

The banking union is expected to be achieved through new harmonized banking rules (the single rulebook) and a new institutional framework with stronger systems for both banking supervision and resolution that will be managed at the European level. Its two main pillars are the SSM and the Single Resolution Mechanism (“SRM”).

The SSM (comprised by both the ECB and the national competent authorities) is designed to assist in making the banking sector more transparent, unified and safer. In accordance with the SSM Regulation, the ECB fully assumed its new supervisory responsibilities

within the SSM, in particular direct supervision of the 126 largest European banks (including us), on November 4, 2014. In preparation for this step, between November 2013 and October 2014, the ECB conducted, together with national supervisors, a comprehensive assessment of 130 banks, which together hold more than 80% of Eurozone banking assets. The exercise consisted of three elements: (i) a supervisory risk assessment, which assessed the main balance sheet risks including liquidity, funding and leverage; (ii) an asset quality review, which focused on credit and market risks; and (iii) a stress test to examine the need to strengthen capital or take other corrective measures.

The SSM represents a significant change in the approach to bank supervision at a European and global level. The SSM results in the direct supervision of 119 financial institutions (as of December 2017), including us, and indirect supervision of around 3,500 financial institutions and is now one of the largest in the world in terms of assets under supervision. In the coming years, the SSM is expected to continue working on the establishment of a new supervisory culture importing best practices from the 19 national competent authorities that are part of the SSM and promoting a level playing field across participating Member States. Several steps have already been taken in this regard such as the recent publication of the Supervisory Guidelines; the approval of the Regulation (EU) No 468/2014 of the ECB of April 16, 2014, establishing the framework for cooperation within the SSM between the ECB and national competent authorities and with national designated authorities (the SSM Framework Regulation); the approval of a Regulation (Regulation (EU) 2016/445 of the European Central Bank of March 14, 2016 on the exercise of options and discretions available in Union law) and a set of guidelines on the application of CRR's national options and discretions, etc. In addition, this new body represents an extra cost for the financial institutions that funds it through payment of supervisory fees.

The other main pillar of the EU banking union is the SRM, the main purpose of which is to ensure a prompt and coherent resolution of failing banks in Europe at minimum cost for the taxpayers and the real economy. The SRM Regulation establishes uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of the SRM and a Single Resolution Fund (“SRF”). Under the intergovernmental agreement (“IGA”) signed by 26 EU member states on May 21, 2014, contributions by banks raised at national level were transferred to the SRF. The new Single Resolution Board (“SRB”), which is the central decision-making body of the SRM, started operating on January 1, 2015 and has fully assumed its resolution powers on January 1, 2016. The SRB is responsible for managing the SRF and its mission is to ensure that credit institutions and other entities under its remit, which face serious difficulties, are resolved effectively with minimal costs to taxpayers and the real economy. From that date onwards, the SRF is also in place, funded by contributions from European banks in accordance with the methodology approved by the Council of the EU. The SRF is intended to reach a total amount of €55 billion by 2024 and to be used as a separate backstop only after an 8% bail-in of a bank’s liabilities has been applied to cover capital shortfalls (in line with the BRRD).

By allowing for the consistent application of EU banking rules through the SSM and the SRM, the banking union is expected to help resume momentum towards economic and monetary union. In order to complete such union, a single deposit guarantee scheme is still needed which may require a change to the existing European treaties. This is the subject of continued negotiation by European leaders to ensure further progress is made in European fiscal, economic and political integration.

Regulations adopted towards achieving a banking and/or fiscal union in the EU and decisions adopted by the ECB in its capacity as our main supervisory authority may have a material impact on our business, financial condition and results of operations; in particular, the BRRD and Directive 2014/49/EU on deposit guarantee schemes which were published in the Official Journal of the EU on June 12, 2014. The BRRD was required to be implemented on or before January 1, 2015, although the bail-in tool only applies since January 1, 2016. The BRRD was partially implemented in Spain in June 2015 through Law 11/2015 of June 18, on the Recovery and Resolution of Credit Institutions and Investment Firms (“Law 11/2015”) and Royal Decree 1012/2015, of November 6, implementing Law 11/2015 (“Royal Decree 1012/2015”).

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

Other regulatory reforms adopted or proposed in the wake of the financial crisis

On August 16, 2012, Regulation (EU) No 648/2012 on over-the-counter (“OTC”) derivatives, central counterparties and trade repositories entered into force (“EMIR”). While a number of the compliance requirements introduced by EMIR already apply, the ESMA is still in the process of finalizing some of the implementing rules mandated by EMIR. EMIR introduced a number of requirements, including clearing obligations for certain classes of OTC derivatives, exchange of initial and variation margin and various reporting and disclosure obligations. Although some of the particular effects brought about by EMIR are not yet fully foreseeable, many of its elements have led and may lead to changes which may negatively impact our profit margins, require it to adjust its business practices or increase its costs (including compliance costs).


		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	12
	C. Reasons for the offer and use of proceeds	12
	D. Risk factors	13

ITEM 4.	INFORMATION ON THE COMPANY	41

	A. History and development of the company	41
	B. Business overview	46
	C. Organizational structure	106
	D. Property, plant and equipment	106

ITEM 4A.	UNRESOLVED STAFF COMMENTS	106

ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	106

	A. Operating results	114
	B. Liquidity and capital resources	139
	C. Research and development, patents and licenses, etc.	140
	D. Trend information	140
	E. Off-balance sheet arrangements	145
	F. Tabular disclosure of contractual obligations	145
	G. Other disclosures	145

ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	147

	A. Directors and senior management	147
	B. Compensation	153
	C. Board practices	168
	D. Employees	179
	E. Share ownership	180

ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	180

	A. Major shareholders	180
	B. Related party transactions	182
	C. Interests of experts and counsel	183

ITEM 8.	FINANCIAL INFORMATION	183

	A. Consolidated statements and other financial information	183
	B. Significant Changes	192


ITEM 9.	THE OFFER AND LISTING	192

	A. Offer and listing details	192
	B. Plan of distribution	194
	C. Markets	194
	D. Selling shareholders	200
	E. Dilution	200
	F. Expense of the issue	200

ITEM 10.	ADDITIONAL INFORMATION	201

	A. Share capital	201
	B. Memorandum and articles of association	201
	C. Material contracts	210
	D. Exchange controls	210
	E. Taxation	211
	F. Dividends and paying agents	216
	G. Statement by experts	216
	H. Documents on display	216
	I. Subsidiary information	216

ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	216

	Introduction.	216
	Part 1. Cornerstones of the risk function	217
	Part 2. Credit risk	223
	Part 3. Trading market and structural risk	240
	Part 4. Liquidity and funding risk	263
	Part 5. Operational risk	266
	Part 6. Compliance and conduct risk	269
	Part 7. Reputational Risk	273
	Part 8. Model risk	273
	Part 9. Strategic risk	273
	Part 10. Capital risk	274

ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	277

	A. Debt Securities	277
	B. Warrants and Rights	277
	C. Other Securities	277
	D. American Depositary Shares	277

PART II

ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	279

ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	279

ITEM 15.	CONTROLS AND PROCEDURES	279

ITEM 16	[Reserved]	280

	A. Audit committee financial expert	280
	B. Code of Ethics	280
	C. Principal Accountant Fees and Services	281
	D. Exemptions from the Listing Standards for Audit Committees	282
	E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers	282
	F. Changes in Registrant’s Certifying Accountant	282
	G. Corporate Governance	282
	H. Mine Safety Disclosure	285


PART III

ITEM 17.	FINANCIAL STATEMENTS	285

ITEM 18.	FINANCIAL STATEMENTS	285

ITEM 19	EXHIBITS	285


	Exchange rates: 1 euro / currency parity
	Average		December, 31
	2017	2016	2017	2016
US$	1.127	1.106	1.199	1.054
Pound sterling	0.876	0.817	0.887	0.856
Brazilian real	3.594	3.831	3.973	3.431
Mexican peso	21.291	20.637	23.661	21.772
Chilean peso	731.538	747.500	736.922	707.612
Argentine peso	18.566	16.316	22.637	16.705
Polish zloty	4.256	4.362	4.177	4.410