Annual report North America. Latin America. Europe. Africa. Spain. A global bank

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1 17 Spain Europe Latin America North America Africa A global bank In 2000 Banco Santander Central Hispano successfully met all its strategic and management objectives. It continued to build up a large bank, which is the leader in Spain and has a strong international presence in many countries and markets and in new sectors and businesses. And it achieved this with a greater degree of efficiency, higher quality of service and greater profitability and financial soundness. In short, it has consolidated a stronger and more competitive Group which, day by day, is creating value for its shareholders.

2 18 Spain At the beginning of 2000, Banco Santander Central Hispano put forward very ambitious objectives for the year. In the strategic sphere, it set the goal of consolidating a larger Group, with an enhanced international presence and a greater relative share of business in those markets which are the most profitable and offer the best growth prospects. The strategic objectives also included consolidating an industrial portfolio with an optimum presence in traditional and new economy companies. And always preserving the Group s financial strength. As well as these goals, the Bank had also imposed, through its Program ONE, greater demands in all variables that measure management, with specific targets for net attributable income, net operating income, efficiency, the NPL ratio and NPL coverage and the Group s ROE. A year later, the Bank can present excellent results to its shareholders relating to all the proposed targets. The demanding and rigorous management carried out during 2000 has enabled all the strategic and management goals to be met. Total assets rose 36.1% in 2000, bolstering leadership in the domestic market and international expansion. Businesses and products were broadened and investments selectively stepped up in the most strategic economic sectors. Net attributable income rose 43.4%; equity increased 128.9% and ROE rose 235 basis points to 20.9%. The Group also improved its efficiency ratio to 56.1%.

3 19 Germany Belgium France Netherlands Hungary A nuestros accionistas In 42 countries During 2000, Banco Santander Central Hispano developed a very active strategy which consolidated the Group as the financial leader in Spain, strengthened its position in Europe, unmatched by other banks, and secured with new acquisitions the largest financial services franchise in Latin America. The number of clients worldwide rose by 35 million. Spain Banco Santander Central Hispano is the largest financial group in Spain; the first in terms of equity, assets, income and market capitalization. Backed by the largest network of branches in Spain (5,518), the Group consolidated in 2000 its leadership position in the domestic market in the main financial business areas. The Bank has the largest market shares in loans (17.7%) and managed funds (20.7%). In mutual funds the Group s market share is more than 25%, underscoring the Bank s leading role in this business and which no other bank has reached in its domestic market. In real estate funds, the leadership is also unrivalled: the Group manages 75% of the market and in private banking BSN Banif is the clear leader. This enhanced role in domestic business is the result of the excellent activity developed by the Group s different networks in Spain. The BCH and Santander networks have propelled the main areas of their business, with growth of 13.3% in lending and 10.9% in on-balance sheet customer funds.

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5 21 Ireland Italy Luxembourg A nuestros accionistas Banesto once more played a key role in the Group s leadership. The strong business carried out by its network produced 18% growth in lending while, at the same time, maintaining asset quality. The NPL ratio dropped to 0.84% and NPL coverage increased to 227%. Customer deposits grew 8% to Pta. 3.9 trillion. This performance is even more buoyant if one also bears in mind Banesto s improved efficiency. Cost constraint policies led to a 0.2% decline in general and personnel expenses and helped to improve the efficiency ratio by 340 basis points to 55.4%. In private banking, BSN Banif continued to be the leader. Assets under management increased 12% to Pta. 2.6 trillion. Its excellent quality of service and capacity to satisfy customer demand underscored its notable position in the market. Europe The Bank strengthened its presence in Europe during 2000 through the acquisition of subsidiary banks and by increasing its stakes in allied banks. Total investment amounted to EUR 5,500 million (more than Pta. 900,000 million). In Portugal, the acquisition of Totta and Crédito Predial increased the Group s market share to 10%. The network of alliances with Royal Bank of Scotland, Société Générale, San Paolo-IMI and Commerzbank was boosted with new investments. These alliances are one of the Group s strategic strengths. The financial support provided to Royal Bank of Scotland in its takeover of Natwest made Banco Santander Central Hispano the largest single shareholder (9.6%) in the UK s second biggest bank. The alliance with the French bank Société Générale was also strengthened, increasing the stake and the scope of the agreements to develop joint businesses. We also lifted our stake in Germany s Commerzbank and the Italian San Paolo-IMI, with whom we signed a collaboration agreement under which clients have at their disposal the local banking services of Santander Central Hispano in Latin America and our clients are given preferential treatment by San Paolo-IMI. As well as having a clear strategic value, these alliances are a very profitable investment for the bank: they contributed Pta. 128,315 million (EUR million) to earnings in 2000 and unrealized capital gains of more than Pta. 700,000 million (EUR 4,500 million).

6 22 Portugal United Kingdom Czech Republic Switzerland Latin America In Latin America, one of the Group s best hallmarks, EUR 8,869 million was invested, basically in the major countries, under the objectives of the Americas Project. These investments enabled us to progress in all the Project s targets. In Mexico, we acquired the Serfin Financial Group and also increased our stake in Banco Santander Mexicano to more than 95%, operations which made Santander Central Hispano the third largest banking group in the country. In Venezuela, 93% of Banco Caracas was acquired, enhancing our position as the leading financial group. In Argentina, after the merger of Banco Río de la Plata and Banco Tornquist, a successful bid was launched raising the Group s stake to 79.8% of what is the country s second largest private sector bank. In Brazil, the strategy developed enabled Santander Central Hispano to meet one of its priority objectives: a leading position in Latin America s largest market. The banks Meridional and Bozano were bought and later Banespa was acquired. The latter acquisition was an opportunity well exploited by our Bank in order to attain in Brazil a market share in accordance with the economic importance of this country in Latin America. Banespa carries out most of its business in Sao Paolo, the wealthiest and most buoyant region in Latin America, and its purchase makes Santander Central Hispano the third largest private sector group in Brazil. Other objectives in Latin America have been to step up asset management business. Several pension and mutual fund entities were acquired: Colmena and Davivir (Colombia), Unión (Peru), Previnter (Argentina) and Merrill Lynch s business in Puerto Rico. These investments consolidated Banco Santander Central Hispano as the largest financial services franchise in Latin America, with 93% of its business concentrated in the five largest countries that generate 84% of the region s total GDP. We are developing a uniform management model for all countries for key areas such as technology, risks, management techniques, service quality, etc, and keeping the different brands and local teams, in order to provide the best service. This strategy reflects our policy of combining a global vision with local management in all markets. The Banker and Euromoney awarded the Group the title of Best Bank in Latin America and Best Foreign Bank in Latin America, respectively.

7 23 Argentina Bolivia Brazil A nuestros accionistas Latin America is one of the most important sources of profits for the Group, contributing US$1,010 million in 2000 to net attributable income and, it is expected, another US$1,500 million in Other markets Banco Santander Central Hispano s presence also extends to other countries and financial centers including London, New York, Miami, Luxembourg, Zurich and all those were there are significant financial flows. In all businesses with all products Banco Santander Central Hispano is involved in all financial activities and in every one of them the Group s goal is to increase its range of its products and services. Many actions and projects were developed during 2000 which underscored the Bank s capacity in financial innovation, efficiency and service quality. Retail banking In retail banking, the strategy is customer-focused. In order to increase the number of clients and forge closer links, different projects were developed in the Bank s networks. The Millennium Project and the XDos Project were established in the BCH network and the Fénix Project in Banco Santander. The objective is to provide tailor-made treatment and strengthen the sales force in branches. This entails reducing the administrative tasks in branches and establishing more direct channels so that the simplest operations transactions, updating and consulting of balances are carried out in them, freeing up time in branches for those activities (which provide greatest added value) that require meeting with clients. The range of lending and deposit products has been increased. The Bank was the first to sell to retail clients warrants on Spanish stock market indices and on Spanish and foreign shares. It offers products which combine attractive interest rates with long-term tax advantages, as well as a broad array of mutual and pension funds and savings-investment insurance products. Particularly noteworthy among the financing services are the new lending products for companies and tailor-made mortgages. In credit cards, of note was the launch in the BCH network of a new consumer credit card, Crediexprés, and in the Banco Santander network the Mastercard Platinum card, a new card for high income clients.

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9 25 Chile Colombia Mexico Panama Paraguay A nuestros accionistas Wholesale banking In wholesale banking, the agreements with Société Générale restructured the Group s businesses in Asia, which are now channeled through Société Générale and, at the same time, the French bank will refer business to Banco Santander Central Hispano s banks in Latin America. These agreements have also led to joint operations in different spheres, particularly in export credits for Latin America, the granting of joint guarantees for large operations and mandates in mergers and acquisitions in Latin America, France and Spain. In other segments of wholesale banking, particularly noteworthy was the consolidation of Banco Santander Central Hispano as one of the main Spanish public debt market makers; leadership in syndicated loans among Spanish entities in the Euromarket, an area where it had a significant participation as co-underwriter in two of the largest operations in Europe (France Telecom and Vodafone) and director of Telefónica s syndicated loan, the most important operation in this segment during Banco Santander Central Hispano was the only Spanish underwriting bank in the Kingdom of Spain s issues and, in the futures market, the first bank to become a member of LIFFE. In Latin America, the Group s well defined strategy in treasury activity resulted in market maker status in Mexico, absolute leadership in Chile in the financing of local infrastructure and its positioning among the leading entities in the FRA market in Peru. The international financial community recognized this performance, with the awarding of Best Brokerage House in Latin America by Euromoney and Broker of the Year by IFR. Asset Management and Private Banking Of note in Asset Management and Private Banking was the creation of the best team of fund managers in Spain, with more than 90 professionals in investment activity. This, together with the 65 local fund managers in Latin America, makes Santander Central Hispano one of the strongest fund management entities in Europe and Latin America. This strategy has boosted the Bank s management capacity in one of the areas where competition has increased the most and has enabled the Group to create 152 new SIMCAVs a record in Spain and 62 new mutual funds.

10 26 Peru Puerto Rico In order to be more competitive in products and services, BSN Banif signed distribution agreements with 26 international fund management entities and incorporated new products (structured, alternative management, Cuenta 5 de Valores), which provided clients with a return of 5% during 2000, a year when the Ibex-35 fell 21%. The strong business activity of BCH Patrimonios and Santander Patrimonios spurred the creation during 2000 of 90 new SIMCAVs and a doubling of the total volume of managed funds. In insurance, the most noteworthy development were the agreements with MetLife and Generali to restructure in Spain the Group s stakes in insurance companies. A single company was established, with the assets of Génesis, BCH Vida and BCH Seguros, which assumed the development of all insurance activities in the Santander and BCH networks as of January This company starts from a position of leadership in Spain in bancassurance. During 2000, the aggressive marketing strategy in insurance products was particularly effective in unit linked products, where the Group doubled the volume distributed and reached a market share of 28.5%. New Businesses and Products As well as these developments in traditional products and financial services, Banco Santander Central Hispano was very active in 2000 in promoting new businesses and products, particularly in the area of e-banking. The Group acquired Patagon, the largest financial portal in Latin America, and merged it with Open Bank to create Patagon Internet Bank, which provides both high yield accounts as well as the on-line trade of securities in 34 markets. Patagon Internet Bank is also a financial supermarket which offers the products of 14 fund management entities and 130 mutual funds. At the end of 2000, Patagon had more than 160,000 clients in Spain and Pta. 320,000 million of funds. In the international arena, the acquisition of the US broker Key Trade Online enabled Patagon to cover new countries. In this context, Patagon.de is expected to be launched in Germany during the first half of 2001 and to be gradually established in Latin America, with Brazil, Mexico and Argentina the priority countries. Another line of activity to strengthen competition in the Group s network and its range of products was to promote development of BCH s and Banco

11 27 El Salvador Dominican Republic Uruguay Venezuela A nuestros accionistas Santander s transactional websites, which were redesigned to facilitate navigation and information and sales operations. The number of clients tripled to 376,000. Banesto s strategy for its network was very ambitious. It launched ibanesto.com, which operates solely as an Internet bank and it developed an Internet banking system for companies, Banesnet, which operates around the clock. Banesto Broker, meanwhile, expanded its services with the new Escaparate Banesto and the electronic purse Virtual Cash+. Banesto also signed agreements with other portals, such as Lycos, to open virtual offices for its products and services. Another way to promote financial services in the internet was by signing agreements with Airtel and Movistar to facilitate access from mobile phones. The first payments system via a mobile phone was launched with Airtel and Amena. The Group also developed a portal for university students, Universia.net. This is a world first, which brings together more than 40 universities and an investigation center in a portal that offers contents and services to universities on both sides of the Atlantic. Present in the old and new economies A traditional way to diversify in Banco Santander Central Hispano has been to take stakes in strategic sectors and build up a well structured and very profitable industrial portfolio. Active management of this portfolio resulted in large scale operations during The most significant was the operation under which the Bank exchanged its stake in Airtel for 2.85% of Vodafone, world leader in telecommunications. This transaction guarantees the total liquidity of an investment which is accumulating large capital gains. The Group invested Pta. 180,939 million (EUR 1,088 million), mostly to strengthen its positions in the energy sector and in new economy companies. The latter included US$150 million in BtoB factory, which channels the Group s B2B activities, and participation in the Prodigios Project - along with American Online, Planeta and Sol Meliá which will provide 500,000 households with specific terminals for Internet access. Investments in the new economy accounted for 3% of the total industrial portfolio.

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13 29 Bahamas Canada United States A nuestros accionistas Under the policy of optimization of stakes, divestments amounted to Pta. 123,280 million (EUR million). Capital gains amounted to around Pta. 1 trillion and net attributable income was Pta. 40,938 million (EUR 246 million). More efficient The Group s efficiency improved 159 basis points in 2000 to 56.1%. This achievement was particularly significant in a year of strong business growth and a large number of acquisitions, and signified the development of a very active strategy with different initiatives taken. Excluding the new acquisitions, the Group s efficiency rate would have been 53.8%. The Bank made further progress in the optimization of its networks and employees, restructuring the network of branches and promoting the development of low cost channels. During 2000, 500 branches were closed in Spain, with the consequent adjustment of staff, and the role of branches was refocused in order to lift productivity. These measures, together with those taken in 1999, increased the productivity of the networks in Spain by 35% over two years. A substantial effort was made to develop low cost channels. The number of ATMs and updaters increased to more than 7,000, telephone banking clients doubled in 1999/2000 and the Internet channel is used by more than 500,000 clients in Spain. During 2000, internet transactions tripled and phone banking operations rose 13%. The lower operating costs of these channels is helping to boost the Bank s efficiency. The integration of all processes and businesses was completed during The Unified Management Control System was established in March for customer banking in Spain, producing a single customer data base for Retail and Corporate Banking. The process of unifying the Management Risk of Retail Banking for the Banco Santander and BCH networks was also concluded. The IT systems were also fully integrated during the year. The platform of the BCH and Banco Santander networks was unified and they now operate with the RETO system after its establishment in the 1,440 retail branches of Banco Santander. The process was completed in a record time of five months. This produced unified management of the customer base and more effective marketing. The platforms of telephone banking and electronic banking for companies were also merged.

14 30 Australia Philippines Iran Japan China In Latin America, the Altair Project is developing a common platform of basic retail banking applications for the Group s entities in the region. It is already operating in Argentina, Chile, Venezuela and Colombia. Integration of businesses was completed in private banking, investment banking, asset management and wholesale banking. Businesses were also integrated in other countries. In Portugal the treasury areas of Santander Portugal, Totta and Predial were merged and a common platform of applications in these banks was established. In Latin America, the pension fund management entities were integrated in Colombia and Peru. In order to make all processes more efficient, the Bank promoted the internetization of the Group, developing corporate Intranet as the Bank s management and global communication tool. In Spain 25,000 employees are already connected via Intranet, strengthening team work and cost savings. These strategies involved a downsizing of the head count, with a net reduction in Spain of 6,421 people in the past two years. These measures enabled growth in general and personnel costs to be contained. On a like-for-like basis (excluding new incorporations), costs fell 0.2% in nominal terms in 2000 and more than 4% in real terms. Cost savings on a like-for-like basis over the two years reached 11%. Completion of the integration processes, together with the restructuring of distribution networks, guarantees large potential cost savings, which will remain a priority objective. The Group s goal is an efficiency ratio of 50% and 40% for the retail networks. Greater service quality Santander Central Hispano achieved a milestone in 2000 in its objective of Customer Service Quality: it was the first bank in the world to obtain a Global Certification of Quality UNE-EN ISO 9001 (version 2000), after attaining certifications of quality for all the more than 2,500 internal and external processes and activities in Spain. This achievement reflected the continuous effort by Banco Santander Central Hispano to improve its business, activity and service quality processes. It

15 31 Angola Cape Verde Guinea Bissau A nuestros accionistas underscored that, even in a full phase of growth and effort to boost efficiency, quality is a priority strategic objective for the Bank. The Program ONE specifically sets the objective of establishing a single and universal quality model for the whole Group. The model is being extended to all subsidiaries and geographic areas where the Group operates, such as Latin America and Portugal. Financial strength and profitability Financial strength is the best support for undertaking new projects and consolidating solid growth. In our Group financial strength is a strategic and priority objective, which makes us be very prudent in capital and risk management. In order to reinforce the Group s capital base and have the necessary funds for taking advantage of market opportunities in international expansion, the Bank made a capital increase in July and issuing 345 million shares (including the green shoe option) amounting to Pta. 635,800 million (EUR 3,821 million), the largest ever by a Spanish bank. The market s exceptional response, with demand more than three times greater than the shares offered in the retail tranche, resulted in the incorporation of 257,000 new shareholders and lifted the total number of these to more than one million. This capital increase, together with other issues made during 2000, increased capital by 24.3%. In addition, the Group issued EUR 2,005 million (Pta. 333,600 million) of subordinated debt and redeemed another EUR 240 million (Pta. 40,000 million). In the fourth quarter of 2000, two issues of preferred shares of US$300 million and US$295 million were made, one for the US market and the other subscribed by Royal Bank of Scotland. As regards risks policy, the Bank s rigorous management systems made our Group one of the soundest and most prestigious institutions in this area. In this context, we fine-tuned management instruments and we are in the vanguard in risk measurement and control systems. These systems are implanted in all entities incorporated to the Group, with excellent results. Thanks to this rigorous approach, the Group s NPL ratio in Spain at the end of 2000 was only 0.82%. The NPL ratio for the whole Group, excluding new acquisitions made during 2000, declined from 1.97% to 1.70% and NPL coverage reached 133.1%.

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17 33 Morocco Mozambique São Tomé and Principe South Africa A nuestros accionistas A noteworthy factor in Santander Central Hispano s financial strength are the high capital gains of more than Pta. 1.7 trillion that have accumulated. They come from the stakes in European banks (more than Pta. 700,000 million at the end of 2000) and from the industrial portfolio. The Bank s financial strength is also backed by its high and growing profitability. Net attributable income rose 43.36% in 2000 to Pta. 375,723 million (EUR 2,258.1 million), the largest among Spanish banks. It lifted ROE to 20.86% and ROA to 0.99%. The target for 2001 is a 27% increase in net attributable income (+ Pta. 100,000 million) to Pta. 475,000 million. The large investments made resulted in a temporary fall during the last months of 2000 in the Group s BIS ratio to 10.9%. Banco Santander Central Hispano is firm in its proposal to return to a BIS ratio of 12%, with a surplus above the minimum requirement. Creating shareholder value Banco Santander Central Hispano s market capitalization at the end of 2000 was EUR 51,986.7 million (more than Pta. 8.6 trillion), an increase of EUR 10,760.7 million (Pta trillion) over Its capitalization makes it the second largest bank in Euroland and among the 15 biggest in the world. Since the merger, the Santander Central Hispano share has risen 55.7%, well above the 43.1% increase in the Spanish banking index and the 2.1% decline in the Ibex-35. The remuneration for shareholders increased in 2000 via dividend payments. Net attributable income per share rose 25.03% to Pta Dividends charged to 2000 results amounted to Pta per share, 20.2% more than in Over the two year period, the dividend increased 45%. The SCH share is also one of the most liquid on the Spanish stock market; it is the third most actively traded on the continuous market. As well as trading on the four Spanish stock markets, through the continuous market, the share is also traded on the Frankfurt, London, Paris, Milan, New York, Lisbon, Swiss, Buenos Aires and Tokyo markets. After the capital increases and the excellent market reception, the number of SCH shares reached 4,560.2 million and the number of shareholders exceded one million.

18 Santander Central Hispano Group s presence in the world Canada United States United Kingdom Ireland Netherlands Germany Belgium Luxembourg France Switzerland Italy SPAIN Portugal Morocco Mexico Bahamas El Salvador Panama Dominican Republic Puerto Rico Colombia Venezuela Cape Verde Guinea-Bassau São Tomé and Príncipe Peru Brazil Bolivia Paraguay Chile Argentina Retail Banking and Private Banking and Asset Management Global Wholesale Banking Representative Office Uruguay 34

19 Czech Republic Hungary Iran Japan China Philippines Angola Mozambique Australia South Africa 35