SECURITIES NOTE ON THE ISSUE OF SUBORDINATED BONDS NECESSARILY EXCHANGEABLE FOR BANCO POPULAR ESPAÑOL, S.A. SHARES, I/2010 ISSUED BY

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1 Popular Capital, S.A. hereby declares that this document is an English translation of Securities Note on the issue of Subordinated Bonds Necessarily Exchangeable for Banco Popular Español, S.A. Shares I/2010 registered with the Comisión Nacional del Mercado de Valores (CNMV) on 19 November Popular Capital assumes responsibility for the translation and declares that the official version of the documentation is that in Spanish. Therefore, in case of any discrepancy between the Spanish and English versions, that in Spanish prevails. SECURITIES NOTE ON THE ISSUE OF SUBORDINATED BONDS NECESSARILY EXCHANGEABLE FOR BANCO POPULAR ESPAÑOL, S.A. SHARES, I/2010 ISSUED BY POPULAR CAPITAL, S.A. UNDER THE GUARANTEE OF BANCO POPULAR ESPAÑOL, S.A. Annexes III, V and VI of Commission Regulation (EC) No. 809/2004 of April 29, 2004 This Securities Note was entered in the Official Registers of the Spanish Securities Market Commission on November 19, 2010 and is supplemented by the Popular Capital, S.A. Registration Document entered in the official register of the Spanish Securities Market Commission on March 4, 2010 and the Banco Popular Español, S.A. Registration Document entered in the Spanish Securities Market Commission s official register on July 8, 2010, incorporated by reference.

2 CONTENTS I. SUMMARY RISK FACTORS Risk factors of the Necessarily Exchangeable Subordinated Bonds Risk factors of the Guarantor DESCRIPTION OF THE ISSUE DESCRIPTION OF THE ISSUER DESCRIPTION OF THE GUARANTOR... II. RISK FACTORS... III. NOTE ON THE SECURITIES PERSONS RESPONSIBLE Persons assuming responsibility for the contents of the Securities Note Declaration of responsibility RISK FACTORS KEY INFORMATION Declaration on the current capital Capitalization and indebtedness Interest of natural and legal persons involved in the offer Reasons for the offer and use of proceeds INFORMATION ON THE NECESSARILY EXCHANGEABLE SUBORDINATED BONDS, THE NECESSARILY CONVERTIBLE SUBORDINATED NOTES ISSUED AND ON THE SHARES INTO WHICH THEY ARE CONVERTIBLE Description of the type and class of securities Legislation of the securities Representation of the securities Currency of the securities issue Ranking Description of rights attaching to the securities and procedure for enforcement thereof Type of remuneration and related provisions Provisions relative to maturity of the securities Indication of investor yield and calculation method Representation of the security holders Resolutions, authorizations and approvals pursuant to which the securities are issued Issue Date... 2

3 4.13. Restrictions on the free transferability of the securities Indication of any mandatory offer to acquire, and/or rules of withdrawal and compulsory buyback in connection with the securities Takeover offers in respect of Banco Popular Español, S.A capital Taxation of the Necessarily Exchangeable Subordinated Bonds, of the Necessarily Convertible Subordinated Notes and of the Shares TERMS AND CONDITIONS OF THE OFFER Conditions, offer statistics, expected timetable and procedure for subscription Time period during which the offer will be open and description of the application process Plan of distribution and allotment Pricing Placing and underwriting ADMISSION TO TRADING AND DEALING ARRANGEMENTS Applications for admission to trading Regulated markets on which securities of the same class are admitted to trading Liquidity Entities EXPENSE OF THE ISSUE/OFFER DILUTION The amount and percentage of immediate dilution resulting from the offer In the case of a subscription offer to existing holders, the amount and percentage of immediate dilution if they do not subscribe to the new offer ADDITIONAL INFORMATION Persons and institutions that are advisors on the issue Further information in the securities note audited or reviewed by auditors and where auditors have produced a report Statement or reports attributed to persons in expert capacity Validity of information provided by third parties Ratings... IV. GUARANTEE NATURE OF GUARANTEE SCOPE OF GUARANTEE Guaranteed Payments Withholdings Prorated payments... 3

4 2.4. Characteristics of Guarantor s obligations under the Guarantee Other Guarantor obligations pursuant to the Guarantee Termination of the Guarantee Miscellaneous Applicable Law Priority of credits INFORMATION TO BE DISCLOSED ABOUT THE GUARANTOR DOCUMENTS ON DISPLAY... ANNEX I: VALUATION REPORTS ON THE NECESSARILY CONVERTIBLE SUBORDINATED NOTES... 4

5 SUMMARY The main characteristics and the essential risks associated with the issuer, the guarantor and this securities note on the issue of Necessarily Exchangeable Subordinated Bonds I/2010 (the Bonds ) issued by Popular Capital, S.A. (the Issuer ), guaranteed by Banco Popular Español, S.A. (the Guarantor ) are summarized herein. The Necessarily Exchangeable Subordinated Bonds I/2010 will be exchangeable for Necessarily Convertible Subordinated Notes of Banco Popular Español, S.A., I/2010 (the "Notes or the Necessarily Convertible Subordinated Notes ) which in turn shall be necessarily convertible into newly-issued common shares of Banco Popular Español, S.A. (the Shares ). This Summary, the Securities Note as well as the documentation incorporated by reference shall be collectively referred to as the Prospectus. The Summary, the Securities Note and any supplements published are complemented with the share Registration Document of Banco Popular Español, S.A. (the "Guarantor", the "Banco Popular Group" or the "Bank") (Annex I of Commission Regulation (EC) 809/2004 of April 29, 2004) entered in the official registers of the Spanish Securities Market Commission on July 8, 2010, as well as the Registration Document of the issuer (Annex IV of Commission Regulation (EC) 809/2004 of April 29, 2004) entered in the official registers of the Spanish Securities Market Commission on March 4, It is expressly stated for the record that: 1. This Summary must be read as an introduction to the Prospectus. 2. Any decision to invest in the Necessarily Exchangeable Subordinated Bonds must be based on the consideration by the investor of the Prospectus on the whole. No civil liability shall arise from this Summary or the information it contains, including any translation, for anyone responsible for its content unless the Summary proves to be deceptive, inaccurate or incoherent when read in conjunction with the remaining parts of the Prospectus. 5

6 1. RISK FACTORS 1.1. Risk factors of the Necessarily Exchangeable Subordinated Bonds Before deciding to subscribe to the Necessarily Exchangeable Subordinated Bonds which are the subject of this Securities Note, investors must consider, inter alia, the following risk factors. Risk of non-receipt of Remuneration On each quarterly Remuneration Payment Date, the Issuer, subject to approval of the Guarantor, will decide at its discretion on the payment of such Remuneration or, if the remuneration is not declared, on the opening of a quarterly Voluntary Exchange Period or a Total or Partial Necessary Exchange Period at the option of the Issuer, the latter as from the first year and in following the provisions of section (A), infra. In addition, the Bank of Spain may require the total or partial cancellation of the payment of remuneration. In this case a conditional quarterly Voluntary Exchange Period will be opened. Therefore, the holders of Necessarily Exchangeable Subordinated Bonds exchangeable into Shares of Banco Popular Español, S.A. I/2010 will not have the receipt of Remuneration guaranteed to them. The reasons why the Issuer, the Guarantor or Bank of Spain will cancel payment of the remuneration will be based on the status of the financial position and solvency of the credit entity or parent company, or on that of its group or sub-group subject to consolidation or due to the absence of Distributable Profit or breach of the equity ratios required of the Banco Popular Group, as established under section 4.6.1(B) of the Securities Note. The cancellation of the payment of remuneration resolved by the Guarantor, or required by the Bank of Spain, will not be considered to be obligations for the purpose of determining the state of the debtor s insolvency or dismissal of the payment of its obligations, in accordance with the provisions of Law 22/2003, of July 9, on Insolvency Proceedings. In addition, in the event a change in Spanish law, or in the official application or interpretation of said laws, takes place, as a consequence of which the Necessarily Exchangeable Subordinated Bonds or the Necessarily Convertible Subordinated Notes cease to be computed as Tier 1 Capital, as well as in the event there is a change in tax law, as a consequence of which the Issuer is not entitled to consider as a deductible expense any remuneration it must pay or if the value of said deduction for the Issuer is substantially reduced, the Issuer shall open a Total Necessary Exchange with the attributes detailed under section (A)2, so notifying the holders of the Necessarily Exchangeable Subordinated Bonds and the Spanish Securities Market Commission, in which case said notice shall be irrevocable. In this circumstance, holders of Bonds will receive the pertinent remuneration. The Bonds shall be necessarily exchangeable into Necessarily Convertible Subordinated Notes convertible into shares to be issued by Banco Popular Español, S.A. Said Notes shall be subscribed in their entirety by Popular Capital, S.A. in order to service, on each voluntary or necessary exchange date, the applications submitted by investors. The 6

7 Necessarily Convertible Subordinated Notes, with the intention of filling applications for exchange of the Bonds, will be converted into newly-issued shares of Banco Popular Español, S.A., except in the cases of section 4.6.3(H), which shall be delivered to the holders of Necessarily Exchangeable Subordinated Bonds. Should the Issuer fail to pay the Remuneration in full on a given Payment Date, Banco Popular Español, S.A. may not pay dividends or make other distributions to its shareholders, nor may it acquire or retire treasury stock. The smallest of the distributable profits of the last three years have been 780,347 thousand euros in 2009 (consolidated data), 891,736 thousand in 2008 (individual data) and 890,970 thousand euros in 2007 (individual data). For theoretical purposes, assuming that the Issue took place on January 1, 2009 and was subscribed for its initial amount, the total remuneration payable on this Issue, on other exchangeable bond issues and on preferential share issues (or equivalent securities) of the Issuer and secured by Banco Popular Español, S.A., would represent 15.03% of the Distributable Profit for fiscal year 2009 of Grupo Banco Popular Español, S.A.. Extended to the planned maximum (500 million euros) the theoretical charge would be 16.06%. Considering the 354,556 thousand euros (Distributable Profit obtained at June 30, 2010), the financial charges as a consequence of issues outstanding and the issue of Subordinated Bonds which itself is the subject of this securities note, would entail a financial charge of 19.27% for an issue amount of 400,000,000 euros, and 21.52% for an issue amount of 500,000,000 euros. This same fiscal year, considering the Distributable Profit at September 30, 2010 of 531,401 thousand euros, the financial expense generated for an issue amount of 400,000,000 euros would entail 12.89% and 14.39% if the maximum of 500,000,000 euros is issued. Subordinated nature Subordinated nature of the Necessarily Exchangeable Subordinated Bonds Ranking of the Bonds vis-à-vis other obligations of the Issuer: In cases of winding-up or dissolution of Popular Capital, S.A. the Bonds place, in order of priority: (a) (b) (c) (d) behind all of the Issuer s unsecured and subordinated creditors, behind the Preferential Shares or comparable securities issued or which may be issued by the Issuer; the same order of priority (pari passu) as other issues of notes, bonds, or other comparable convertible securities of the Issuer; and ahead of the Issuer s common shares. Ranking of priority of credits of the Guarantor s commitments under the Guarantee granted to the Bonds: The Guarantor s commitments under the Guarantee place, in order of priority of credits: a) behind all Banco Popular Español, S.A. s unsecured and subordinated creditors; 7

8 b) behind the Preferential Shares or comparable securities issued or to be issued by the Bank itself or any of its Subsidiaries as well as obligations arising from the guarantees the Bank has granted or may grant in respect of the Preferential Shares or comparable securities issued by its Subsidiaries; c) the same order of priority (pari passu) as other issues of notes, bonds or other comparable convertible securities of the Issuer; d) ahead of the common shares of Banco Popular Español, S.A. Subordinated nature of the Necessarily Convertible Subordinated Notes Ranking of the Notes vis-à-vis other commitments of Banco Popular Español, S.A.: In cases of winding-up or dissolution of Banco Popular Español, S.A., the Notes place, in order of priority: a) behind all unsecured and subordinated creditors of Banco Popular, including other series of notes of Banco Popular having a better ranking than the notes which Banco Popular may issue in the future, b) behind the Preferential Shares or comparable securities which Banco Popular may issue in the future as well as the obligations arising from the guarantees Banco Popular has granted in respect of the Preferential Shares or comparable securities issued by its Subsidiaries; c) the same order of priority (pari passu) as other issues of notes, bonds or other comparable convertible securities; and d) ahead of Banco Popular common shares. As from the time of the conversion of the Necessarily Convertible Subordinated Notes into the shares, the latter rank at the same level as the common shares of Banco Popular Español, S.A., behind all its unsecured and subordinated creditors and behind Preferential Shares or comparable securities issued (or guaranteed) or which may be issued (or guaranteed) by Banco Popular Español, S.A. If in case of liquidation (in any corporate operation other than merger, spin-off and total assignment of assets and liabilities), reduction of the capital of Issuer or of Banco Popular Español, S.A., individually or simultaneously with the Issuer in the terms of Articles 343 of the Spanish Capital Corporations Law (Ley de Sociedades de Capital, "LSC"), the voluntary or necessary insolvency of the Issuer or of Banco Popular Español, S.A., or for any other reason it is not possible to convert the Notes into Shares, any right of those holding them shall be limited to the sum resulting from multiplying the Conversion Ratio by the settlement quota per common share of Banco Popular Español, S.A. which would have resulted from the conversion. Exchange of the Necessarily Exchangeable Subordinated Bonds and subsequent conversion into shares There is no provision for possible cash redemption of the Necessarily Exchangeable Subordinated Bonds or of the Notes so that, on the exchange dates (voluntary or necessary) of the Bond Issue, subscribers will receive Shares only according to the Conversion Ratio applicable and, under no circumstances, cash reimbursement of the 8

9 Bonds face value. Necessarily Exchangeable Subordinated Bonds shall be exchanged for Notes and these in turn for Shares (i) voluntarily in the cases provided for in paragraph 4.6.3(A)1 of the Securities Note, or (ii) necessarily, as provided for in paragraph 4.6.3(A)2 of the Securities Note, (as provided for in paragraph of the Securities Note on the date of the third anniversary following the Disbursement Date). Those holding Necessarily Exchangeable Subordinated Bonds who voluntarily seek their exchange on December 17, 2011 or 2012, shall be entitled to receive the Remuneration for that Payment Date coinciding in time with the Date of Exchange of the bonds. In such case, holders shall receive the corresponding remuneration together with the Necessarily Convertible Subordinated Notes which shall be converted into newly-issued Banco Popular Español, S.A. Shares, save in the cases in paragraph (H). Holders of Necessarily Exchangeable Subordinated Bonds shall be entitled to the right to receive the Remuneration on the date of exchange when this is the last Payment Date corresponding to December 17, 2013 and in each one of the cases of Necessary Exchange of the Bonds described in paragraph (A) 2 (a). Possibility of decline in stock price The market price of Banco Popular Español, S.A. shares may drop for a variety of reasons such as trends in Banco Popular Español, S.A. s earnings, changes in analysts recommendations or alterations in financial market conditions. The Conversion Ratio shall remain set at the number of Banco Popular Español, S.A. shares resulting from the quotient of dividing the face value of the Necessarily Convertible Subordinated notes by the value attributed to the Banco Popular Español, S.A. shares (the Conversion Price ) in function of the Events of Exchange established under section (A): a) Voluntary Exchange (quarterly, conditional quarterly, or annual): In this case, the Conversion Price shall be the arithmetic mean of the closing prices of the Banco Popular share pertaining to the five stock market business days preceding the end of the relevant Voluntary Exchange Period. b) Total Necessary Exchange on the Issue Maturity Date: In this case, the Conversion Price will be the arithmetic mean of the closing Prices of the Banco Popular share pertaining to the five stock market business days preceding the Issue Maturity Date. c) Necessary Exchange for all of the securities outstanding in cases (ii), (iii), (iv) and (v) of section 4.6.3(A)2: The Conversion Price will be the arithmetic mean of the closing prices of the Banco Popular share pertaining to the five stock market business days preceding the Exchange Date. d) Total or Partial Necessary Exchange, at the Issuer s option: The Conversion Price will be the arithmetic mean of the closing prices of the Banco Popular share pertaining to the five stock market business days preceding the end of the relevant Exchange Period. If the arithmetic means described above are less than or equal to 2.0 euros, the Conversion Price will be 2.0 euros per share. 9

10 Market Risk Once the Necessarily Exchangeable Subordinated Bonds have been admitted to trading on the Fixed Income Electronic Market of the Madrid Stock Exchange, the market price of the Bonds may evolve favorably or unfavorably depending on market conditions, and may eventually place itself at levels lower than their face value. Liquidity Risk A) Necessarily Exchangeable Subordinated Bonds Admission to trading of the Bonds on the Madrid Stock Exchange Fixed Income Electronic Market does not of itself guarantee the development of a secondary liquid market for the Bonds, which may make their sale difficult for investors seeking to divest from the Bonds at a given time. The Issuer and Banco Popular Español, S.A. concluded a Liquidity Contract with BBVA on November 17, 2010 under which the latter undertakes to provide liquidity for the Necessarily Exchangeable Subordinated Bonds by listing bid and ask prices for a daily maximum of 2 million euros up to a maximum number of Bonds representing 10% of the total Issue amount outstanding from time to time. The characteristics of said Liquidity Contract are detailed in section 6.3 of the Securities Note. B) Necessarily Convertible Subordinated Notes The Necessarily Convertible Subordinated Notes shall be subscribed to in their entirety by Popular Capital, who shall hold them under its title in order to service the cases of exchange of the Necessarily Exchangeable Subordinated Bonds. In no case will admission to trading on official markets be applied for in respect of the Necessarily Convertible Subordinated Notes. On each Exchange Date (whether voluntary or necessary), the holder of the Bonds will become the holder of the Notes until the conversion thereof into shares. Banco Popular Español, S.A. shall have a deadline of one month from the Exchange Date (whether voluntary or necessary) for conversion of the Notes into newlyissued shares. During said period, Noteholders will not be entitled to any remuneration and may not sell the Notes on any official secondary market. In the cases referred to in section 4.6.3(H), the temporary holding of Notes shall entitle one to payment of remuneration accrued and not paid from each remuneration accrual period. The holders may not sell the Notes on any official secondary market and shall not be entitled to request conversion into newly-issued shares of Banco Popular Español, S.A. as stipulated in the aforementioned section 4.6.3(H). Irrevocable nature of subscription Subscription Orders for Necessarily Exchangeable Subordinated Bonds are irrevocable except when, prior to the business day prior to the Disbursement Date, there is a reduction in the credit rating of Banco Popular Español, S.A. in relation to the last update issued by Moody's, Fitch, Standard & Poor's or DBRS (Aa3/AA-/A/AA respectively) on the date of registration of the Securities Note, in which case investors may cancel subscription orders filed on the 2 business days following the date of publication of the associated Supplement on the Spanish Securities Market Commission s website. 10

11 Absence of preferential subscription rights Bondholders shall hold no right of preferential subscription in future issues of Bonds, preferential shares, shares or other securities issued or guaranteed by the Issuer or Guarantor. The Issue does however provide for a set of anti-dilution mechanisms described in section 4.6.3(G) of the Securities Note to compensate Bondholders for the economic dilution of the Banco Popular Español, S.A. shares underlying the Bonds, in the cases described therein Guarantor risk factors The Guarantor risk factors are described in the Banco Popular Español, S.A. Registration Document entered in the Spanish Securities Market Commission s official registers on July 8, The following is a summary of the Guarantor risk factors. Credit Risk This risk arises from the possible loss due to breach of the contractual obligations by the entity s counterparties. On May 22, 2008, Circular 3/2008 on determination and control of minimum equity (regulatory adaptation to the new framework for measuring capital adequacy coming from the Basel Banking Supervision Committee (commonly known as Basel II)) entered into force. Its principal objective is to provide incentives to the measurement and control of risks in a more sophisticated manner, thus achieving that capital adequacy requirements shall be more sensitive to the risk assumed in the activity of each bank. At the same time it introduces the additional need to maintain minimum equity in order to cover operational risk and calls for banks to measure other risks such as structural balance sheet risk, business risk and reputational risk as well as the funding of capital for the coverage thereof. In this regulatory context, the total exposure to credit risk at the end of the fiscal year stood at 132,272 million euros, up 17.33% on the previous year. If we add to this figure the 14,907 million euros of exposure to available third party lines, the maximum exposure stands at 147,179 million euros. In 2009, 87.4% of the exposure is formed by loans to customers and the remaining 12.6% stems from contingent risks. Market activity contributed 15.7% to the total exposure. As at December 31, 2009, weighted risks grew 0.48% whereas total risks increased 5.4%. This difference is justified by the creditworthiness of transactions granted throughout 2009, the approval of the Large Companies model and the improvements introduced in the rest of models. As at December 31, 2009, the Group's default ratio, or percentage of NPL's vis-à-vis total risks, stood at 4.81%, up 2.0% on December 31, As at March 31, 2010, the Group's default ratio stood at 4.91%. The following summarizes the principal risk magnitudes as at September 30, Sep Core capital (%) 8.66% Tier 1 ratio (%) 9.07% BIS ratio (%) Computable Equity 8,682,098 8,890,118 8,381,406 8,592,345 Surplus Equity 1,250,310 1,484,165 1,011,082 1,482,151 11

12 Continued Risk-weighted Assets 92,897,350 92,574,130 92,129,050 88,877,415 Default ratio (%) 5.17% Coverage ratio (%) Foreign Risk This type of risk, also called country-risk, arises due to the difficulty of borrowers in some foreign countries to fulfill their obligations to repay debts. At the close of the fiscal year, the Group s aggregate risks affected by country risk stood at 68.1 million euros. These figures are not significant in relation to the Group s total risk, inasmuch as they represent 0.06% and 0.10% of such risk in 2009 and 2008 respectively. Market Risk This concept includes risk resulting from potential adverse variations in the market prices of the negotiable financial instruments managed by the Group s Treasury department as a consequence of adverse variations in interest rates, in exchange rates, in stock or commodity prices, in credit spreads, or in the volatilities thereof. It also includes the liquidity risk associated with these positions, taken to mean the impossibility of unloading positions on the market in a short timeframe. For such purpose, positions are valued at a time horizon equal to the estimated time for closing the risk. The indicator used for measuring market risk is Value at Risk (VaR), defined as the maximum potential loss estimated as from historic data on the evolution of prices and calculated pursuant to a confidence level and at a specified term. In order to homogenize the measurement of the Group s global risk the methodology of parametric VaR is used. It is calculated with a confidence level of 99%, bearing in mind historical variations of 75 days, giving more weight to more recent observations, and taking the term of one day to measure potential losses, since all open positions are highly liquid. In 2009, the average VaR of the treasury department s trading activity was 436 thousand euros. Despite the prudent risk management which characterizes the Group, the risk assumed increased in the second half of the year. Liquidity Risk This concept reflects the possible difficulty of a credit entity in having available or accessing liquid funds in sufficient quantity and at an adequate cost in order to meet its payment obligations at all times. As at March 31, 2010, the second liquidity line amounted to 16,197 million euros in cash. This level of liquid assets enables coverage of maturities of sensitive liabilities within the analyzed time range. Consequently, the cumulative gap considering all maturities of liabilities and assets stands at 8,369 million euros. As at December 31, 2009, assets subject to fixed maturity amounted to 113,252 million euros, as opposed to 93,134 million euros in liabilities of like nature, with a positive differential of 20,118 million euros. Nevertheless, during the first 12 months maturity of liabilities takes place earlier than that of assets, thereby generating a negative gap amounting to 26,493 million euros. This situation is the consequence of several factors. On the one hand, the contractual maturities of retail financing are under one year, although subsequently they offer great stability since the majority of transactions are 12

13 renewed. On the other hand, some sources of wholesale financing, such as European promissory notes and interbank deposits, also have maturities of under one year, and the bank uses them as a medium to minimize costs and maximize the customer base. As at September 30, Banco Popular has succeeded in growing in both lending and deposits. Thus, loans to customer grew 1.0% year-on-year. Consequently, Popular s market share improved 20 basis points. On the deposit side, year-on-year growth was 21.5%, motivated principally by the increase in time deposits. This increase has resulted in a rise in market share of 40 basis points. With this performance, Banco Popular continues meeting its goals to reduce the commercial gap in order to decrease its dependency on wholesale markets. Since September 2009 it has earmarked 4,627 million euros towards meeting this goal. As a result, it has succeeded in eliminating the dependency of seeking financing from the European Central Bank at the close of the quarter. In relative terms, the reduction in the commercial gap implies a reduction of 19 basis points in the deposit/loan ratio. Operational Risk The Banco Popular Group has adopted the definition of operational risk established in the New Capital Accord (Basel II), i.e. "the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events", integrating, within global risk management, the creation of procedures to identify, evaluate, monitor and control this risk. Senior Management approved the Framework for Operational Risk Management in which the policies and functions are designed for the development and implantation of methodologies and tools which allow a better management of operational risk at the Group. Initially the Standard method, contemplated in Basel II, was chosen for the calculation of capital from operational risk, the methodology of which was also approved by Senior Management, although it is contemplated to apply the Advanced method in the future. In this regard, an historic database of operational risk events from January 2004 is being generated. In addition, since December 2006 the Group has been associated with ORX (Operational Riskdata Exchange Association), an international consortium which maintains a database to which the principal financial institutions worldwide contribute events and with which we carry out exchanges of data on a quarterly basis. Structural Balance Sheet Risk This concept entails the risks resulting from possible adverse variations in the interest rates of on-balance-sheet assets and liabilities, in the exchange rates in which on- or offbalance sheet assets and liabilities are denominated and in the market prices of negotiable financial instruments. This concept also includes business risk, defined as the possibility of the gross margin not being sufficient to cover fixed costs due to changes in volumes of balance sheet items and fee income, caused in turn by changes in economic conditions. Given Popular's efficiency ratio, this risk is absolutely remote, although periodic estimates of growth and changes to balance sheet structure are carried out, measuring their impact on gross margin. As at December 31, 2009, the effect of a 200 basis point rise in euro interest rates vis-àvis current implicit rates had a negative impact of 5.02% on economic value, equivalent 13

14 to 7.46% of equity. The impact due to the variation of rates of non-euro currencies is considered immaterial given the Group's scant position at year-end. Economic value sensitivity in the face of very stressed rate variations is quite removed from the maximum thresholds permitted by current law in force. Management of interest rate risk is instrumented principally through derivatives. The policy is to carry out the most perfect hedging possible. For this reason the preference leans towards contracting individualized transactions. Consequently, the greatest hedging volume is concentrated on wholesale market financing transactions. Liability positions and positions in derivatives on rates sold to customers of the branch network, which, due to their amount, are hedged by masses as a volume which allows this is accumulated, are an exceptional case. The interest rate risk of the fixed income securities portfolio is also partially hedged via swaps. A particularity of the Group's interest rate management is the existence of floors on a significant portion of transactions forming loans to customers. As at December 31, 2009 the volume of transactions subject to an interest rate floor represented 50% of the outstanding balance. Out of all floors, 64.5% were capitalized. Therefore, an additional reduction of rates or a delay in a rate rise favors the Bank's margin in the short term. In fiscal year 2009, the Group decided to establish an additional fixed income portfolio for the face amount of 10 billion for the purpose of stabilizing revenues during a period of low interest rates, estimated for at least 2 years. The portfolio is distributed as follows: 20% held-to-maturity investment and 80% available-for-sale investment. In the held-tomaturity investment portfolio, references are classified with a high absolute coupon and high credit ratings, in order to ensure a stable margin in the long term. Interest rate risk is limited, given that all the portfolio's available-for-sale references with a residual life of over 3 years have been hedged via swaps. The face value of the portfolio's fixed rate references amounts to 1,341 million euros with an average weighted term of 2.04 years. For the selection of the assets forming the portfolio, criteria of high creditworthiness, attractive absolute coupons, credit spreads with room to fall lower and with the capacity to be auto-financed were applied. During fiscal year 2009, this portfolio generated a profit of almost 190 million euros, of which 91 million pertain to interest margins and 96 million to gains on financial transactions as a consequence of portfolio turnover transactions. Exchange rate risk for business on the Iberian Peninsula is practically non-existent as a result of the criterion applied in this regard: cash and financial asset positions in non-euro currencies are limited to the placement of surplus funds from the commercial banking business in the same currency and for similar terms. The stake of Totalbank, an entity resident in the United States, represents an open position in dollars on the entity's goodwill. This risk is monitored and on occasion, depending on the expected evolution of the currency, is partially hedged. In fiscal year 2009, a positive adjustment of 18 million euros was recorded for valuation of net assets. Reputational Risk The Regulatory Compliance Office, which functionally reports to Legal and Compliance Department, handles identifying, evaluating and preventing potential risks of breach, material from an economic or reputational standpoint, which may occur in relation to laws and regulations, codes of conduct and good practice standards, in relation to the 14

15 prevention of money-laundering and terrorism financing, performance on the securities markets, data privacy and protection and business activities. In relation to this latter aspect, it identifies and evaluates the risks of breach associated with the development of new products and the practices of each business area, striving to achieve the respect of regulations on transparency and customer protection. In addition, it analyzes and promotes the development of systems established for training the staff in relation to the aforementioned areas. Ratings Banco Popular is rated by the principal international credit rating agencies. The ratings in effect on the date of registration of this document are: Short Term Long Term Date of last revision Outlook Moody s P1 Aa3 June 2009 Negative Fitch Ratings F1 A July 2010 Stable Standard & Poor s A1 A July 2009 Negative DBRS R-1 (high) AA (high) December 2008 Negative 15

16 2. DESCRIPTION OF THE ISSUE There are four hundred thousand (400,000) Necessarily Exchangeable Subordinated Bonds in this Issue, which may be enlarged to a maximum of five hundred thousand (500,000), each having a face value of one thousand (1,000) euros, in one single class and series, to be represented by book-entries. Application will be made for them to be listed on the Electronic Fixed Income Market. The Issue has no rating. The following are the essential characteristics of the Issue: Issuer: Popular Capital, S.A. Nature and name of the securities: The securities issued are Necessarily Exchangeable Subordinated Bonds exchangeable for Shares of Banco Popular Español S.A., and will be issued under the name Subordinated Bonds Necessarily Exchangeable for Shares of Banco Popular Español S.A. I/2010. Total issue amount: Four hundred million euros (400,000,000 euros) which may be extended to a maximum of five hundred million euros (500,000,000 euros). Face value of each security: The Bonds issued will have a face value of ONE THOUSAND EUROS ( 1,000). The Placement Entities may make the processing of orders conditional upon a provision of funds by applicants to secure payment of the subscriptions, which will be remunerated at a nominal 8% per annum. Minimum amount contracted: The minimum amount contracted shall be ONE THOUSAND EUROS ( 1,000). Issue Price: 1,000 euros (issued at par, without premium or discount). Issue and Disbursement Date: There will be one single disbursement on December 17, 2010 (the "Disbursement Date"), coinciding with the issue date, notwithstanding the terms of section of the Securities Note. Form of representation: The bonds will be issued as book-entries, and book running is assigned to Sociedad de Gestión de los Sistemas de Registro, Compensación and Liquidación de Valores, S.A.U. (IBERCLEAR). 16

17 Subscription period: From November 19 through December 15, 2010, unless closed early because the Issue is fully subscribed, in which case the Disbursement Date will not be brought forward. There is express provision for the possibility that the Issue may not be fully subscribed. Issue Placement Entities: Banco Popular Español, S.A., Banco Popular Portugal, S.A., Popular Banca Privada, S.A., bancopopular-e.com S.A. and Banco Popular Hipotecario. Paying Agent and Calculation Agent: Banco Popular Español, S.A. Target investors of issue: Natural person or legal entity retail investors. Marketing shall be carried out within the branch network of the Placement Entities in Spain and Portugal. The placement of the Bonds in Portugal is conditioned upon the awarding of the so-called cross-border passport by the Comissão do Mercado de Valores Mobiliários. Maturity Date: December 17, 2013, notwithstanding the terms of section of the Securities Note. Exchangeable nature of the Bonds: Coinciding with the date of issue and disbursement of the Necessarily Exchangeable Subordinated Bonds, Banco Popular Español, S.A. must issue the same number of Subordinated Notes Necessarily Convertible into newly-issued Shares as the Necessarily Exchangeable Subordinated Bonds subscribed and paid-up. Bonds must be subscribed by the Issuer which, on each voluntary exchange date and on the date of necessary exchange in terms of the exchange and conversion ratio, will make it possible to deliver newly-issued shares to holders of Necessarily Exchangeable Subordinated Bonds. The Notes are thus converted to newly-issued shares in Banco Popular Español, S.A. in the terms of voluntary and necessary exchange petitions, except as provided in paragraph (H). Circumstances for Exchange of Bonds Exchange of Necessarily Exchangeable Subordinated Bonds for Necessarily Convertible Subordinated Notes may be: 1. Voluntary: Holders of the Necessarily Exchangeable Subordinated Bonds may voluntarily apply for their exchange into Necessarily Convertible Subordinated Notes (the "Voluntary Exchange"), with respect to all or part of the Necessarily Exchangeable Subordinated Bonds of which they are holders, on the following dates: (i) within the thirty calendar days prior to the tenth business day (the latter 17

18 inclusive) prior to December 17, 2011 and 2012 ( Dates of Annual Voluntary Exchange (or, in case of delay in the Disbursement Date as provided by section of the Securities Note, prior to the day completing the first and second anniversary during the life of the Issue running from the Disbursement Date). In this case of Voluntary Exchange, holders of Exchangeable Bonds will receive payment of the remuneration accrued between the last Payment Date of the remuneration and the relevant Date of Annual Voluntary Exchange; (ii) (iii) in cases in which the Issuer, at the discretion of the Guarantor s Board of Directors, and in considering reasons relating to its financial position and the solvency of the credit entity or parent company, being able to choose between opening a Voluntary Exchange Period or paying the Remuneration, effectively chooses to open said period, within thirty calendar days prior to the tenth business day (the latter inclusive) preceding March 17, June 17, September 17 or December 17 of each year ( Quarterly Voluntary Exchange Date ) during the life of the Issue, as applicable (or, in case of delay in the Disbursement Date as provided by section of the Securities Note, prior to the day completing the first, second, third and fourth quarter of each year during the life of the Issue running from the Disbursement Date); in cases in which the Bank of Spain requires cancellation of the payment of remuneration based on the financial position and solvency of the credit entity or parent company, or on that of its group or sub-group subject to consolidation. In this event, the Issue shall open a Voluntary Exchange Period within thirty calendar days preceding the tenth business day (the latter inclusive) prior to March 17, June 17, September 17 or December 17 of each year ( Conditional Quarterly Voluntary Exchange Date ) during the life of the Issue, as applicable (or, in case of delay in the Disbursement Date as provided by section of the Securities Note, prior to the day completing the first, second, third and fourth quarter of each year during the life of the Issue running from the Disbursement Date). The term "conditional" refers to the discretion of the Bank of Spain to demand the cancellation of payment of remuneration. The declaration of total or partial non-remuneration required by the Bank of Spain will not cause the application of the restrictions cited in section 4.6.1(A), of this Securities Note. In order that this case of Conditional Quarterly Voluntary Exchange may apply, the Bank of Spain shall notify in writing sufficiently in advance the decision to cancel payment of the remuneration mentioned above so as to allow the Issuer to respect the notice periods to holders of the Necessarily Exchangeable Subordinated Bonds, to the Spanish Securities Market Commission by means of a Price Sensitive Information Disclosure, to the Participating Entities in Iberclear and to the Fixed Income Electronic Market of the Madrid Stock Exchange for publication in the pertinent market trading bulletin. Each one of the periods indicated above shall be referred to as a Voluntary Exchange Period. In all cases, the Issuer shall notify the opening of the Exchange Period to holders of Necessarily Exchangeable Subordinated Bonds at least thirty calendar days in advance of the tenth business day (the latter inclusive) preceding the relevant Remuneration 18

19 Payment Date, by means of a Price Sensitive Information Disclosure to the Spanish Securities Market Commission. With the same advance notice, the Issuer will also notify this agreement to the Participating Entities in Iberclear, for the purpose of proceeding with the exchange of the Necessarily Exchangeable Subordinated Bonds into Necessarily Convertible Subordinated Notes and to the Fixed Income Electronic Market of the Madrid Stock Exchange for publication in the pertinent market trading bulletin. The Bondholders will receive the Remuneration accrued and not paid in the case of Annual Voluntary Exchange. On the contrary, when dealing with a Quarterly or Conditional Quarterly Voluntary Exchange Period, holders of Necessarily Exchangeable Subordinated Bonds exchangeable into Shares of Banco Popular Español, S.A. I/2010 will not receive the remuneration accrued and not paid. 1. Necessary: In the cases indicated below, the Necessarily Exchangeable Subordinated Bonds shall be necessarily converted into Necessarily Convertible Subordinated Notes (the Necessary Exchange ) on one of the Necessary Exchange Dates defined below: a) Necessary Exchange in respect of all outstanding securities: (i) on the Maturity Date, i.e. December, 17, 2013 (ii) if Banco Popular adopts any corporate measure (other than merger, spin-off and global conveyance of assets and liabilities) leading to the voluntary or involuntary dissolution and winding-up of the Issuer; (iii) if Banco Popular adopts any measure aimed at the approval of a share capital reduction in accordance with the provisions of articles or 343 of the Spanish Corporations Law (Ley de Sociedades Anónimas); (iv) (v) if Banco Popular or, as the case may be, the Issuer, is declared insolvent or their intervention or substitution of their administrative or management bodies is resolved, in accordance with the provisions established by Law 26/1988, of July 29, on Discipline and Intervention of Credit Institutions and Law 6/2005, of April 22, on streamlining and liquidation of credit institutions, and regulations in implementation thereof; in the event a change in Spanish law, or in the official application or interpretation of said laws, takes place, as a consequence of which the Necessarily Exchangeable Subordinated Bonds or the Necessarily Convertible Subordinated Notes cease to be computed as Tier 1 Capital, as well as in the event there is a change in tax law, as a consequence of which the Issuer is not entitled to consider as a deductible expense any remuneration it must pay or if the value of said deduction for the Issuer is substantially reduced. b) Total or Partial Necessary Exchange of outstanding securities: (i) Once the first anniversary of the Issue has transpired, the Issuer, at the discretion of the Guarantor s Board of Directors, and in considering reasons relating to its financial position and solvency of the credit entity or parent 19

20 company, may open a Total or Partial Necessary Exchange Period. In the event of opening a Total Necessary Exchange Period, the exchange shall be necessary for all Bondholders. This Exchange will take place on any of the Remuneration Payment Dates, i.e. March 17, June 17, September 17 and December 17 of each year ( Date of Total Necessary Exchange at option of Issuer ) during the life of the Issue, as applicable (or, if there is a delay in the Disbursement Date as provided by section of the Securities Note on the day completing the first, second, third and fourth quarter of each year during the life of the Issue running from the Disbursement Date). In the event of opening a Partial Necessary Exchange Period, this will be established as from the tenth business day preceding March 17, June 17, September 17 or December 17 of each year ( Dates of Partial Necessary Exchange at option of Issuer ) during the life of the Issue, as applicable (or, if there is a delay in the Disbursement Date as provided by section of the Securities Note on the day completing the first, second, third and fourth quarter of each year during the life of the Issue running from the Disbursement Date) until the applicable Remuneration Payment Date. If the exchange percentage set by the Issuer ( Partial Exchange Necessary Percentage ) is not covered in full by voluntary applications from the Bondholders, they must take into consideration that the Issuer may proceed to carry out a random drawing among the rest of Bondholders who have not voluntarily exchanged until reaching the said percentage. This random drawing will be carried out between the fifth business day preceding the payment date of the remuneration and the Date of Partial Necessary Exchange at option of Issuer. The Partial Necessary Exchange Period at option of the Issuer could be closed early if the Partial Exchange Necessary Percentage has been covered in its entirety. If not, the random drawing to be carried out in order to complete the said percentage shall be established on the basis of the following characteristics: i. The Bondholders shall be ordered from highest to lowest by the number (excluding letters) of the Tax Identification Number (NIF), Foreigner Identification Number (NIE), National Identity Card (DNI), or equivalent, that appears reflected in the personal data of which the Issuer has a record in the relevant subscription orders ( Identification Number ). ii. Once ordered from highest to lowest, a random drawing will be performed before a Notary Public (appointed for such purpose) among all of the Identification Numbers, obtaining a specific Identification Number (the Number ). Once the Number has been obtained, this Number as well as the one pertaining to the higher bondholders and the necessary exchange of those Bonds that have not been cancelled voluntarily shall proceed. In the event that the number of Bonds of the holder of the last Identification Number is greater than that necessary in order to achieve the Partial Exchange Necessary Percentage, only those Bonds necessary in order to comply with the aforesaid percentage will be exchanged. If any of the events of Necessary Exchange should take place, the Issuer will notify the 20