AUDITORS REPORT AND ANNUAL CONSOLIDATED ACCOUNTS 2015 Consolidated Directors Report. Consolidated Directors Report

Transcription

1 Consolidated Directors Report 229

2 Banco Santander, S.A. and Companies composing Santander Group for 2015 This report has been prepared following the recommendations given in the guide for the preparation of management reports of listed companies published by the Spanish Securities Market Commission (CNMV) in September 2013, and is arranged in the nine sections suggested in the guide. Santander Group organisation General Meeting (once a year) Units/Businesses 1. Situation of the entity 1.1 Description At the end of 2015, the Group was the largest bank in the euro area and the 19th in the world in terms of market capitalisation: EUR 65,792 million. Its corporate purpose is to engage in all kinds of activities, operations and services that are typical of the banking business in general. Its business model focuses on commercial banking products and services with the objective of meeting the needs of its 121 million customers - private individuals, SMEs and businesses, through its global network of 13,030 branch offices, which is the biggest in international banking, as well as digital channels, in order to provide top-quality service and greater flexibility. It has EUR 1,340 thousand million in assets and manages funds of EUR 1,507 thousand million for all the customer segments. It has 3.6 million shareholders and more than 190,000 employees. Commercial banking accounts for 88% of its income. The Group is highly diversified and operates in 10 main markets where it has a significant market share. Within the Group organisation, the senior decision-making body is the board of the directors, which has the broadest powers to administer the Bank except with respect to matters for which the general meeting has sole responsibility. The board s operating procedures and actions are regulated under the Bank s internal regulations, which are governed by the principles of transparency, efficiency and defence of shareholder interests. The board also monitors compliance with international best practices in corporate governance, and engages fully in the Group s risk taking. In particular, at the proposal of the senior management, it is responsible for establishing and monitoring the Group s risk appetite, and Board of Directors (once a MONTH) Board Committees (vary in frequency) Countries Global businesses Support units for approving the internal capital and liquidity adequacy assessment processes (ICAAP/ILAAP). The board has fifteen members: four executive directors and eleven non-executive directors. Of the latter, eight are independent, one is a proprietary director and two, in the board s opinion, are neither proprietary nor independent. The board has set up an executive committee to which general decision-making powers have been delegated. The board also has other committees with supervisory, reporting, advisory and proposal powers (the audit; risk supervision, regulation and compliance; appointments; remuneration; innovation and technology; and international committees). The model of corporate governance follows a set of principles designed to safeguard the equal rights of shareholders. These include the principle of one share, one vote, one dividend. The Bylaws do not contain any protective measures, and steps are taken to encourage informed participation at shareholders meetings. A policy of maximum transparency is also applied, particularly as regards remuneration. This model of corporate governance is recognised by socially responsible investment indices. The Group has been included in the DJSI and FTSE4Good indices since 2000 and 2003, respectively. Further information on the Bank s administrative structure is provided in Section C of the Annual Corporate Governance Report. 230

3 Regular (usually weekly), meetings are held, which are chaired by the CEO and attended by the executive vice presidents of each division and the country heads, to monitor the various businesses and other important matters concerning the day-to-day running of the Group. The structure of the operating business areas is presented on two levels: a) Geographic businesses This segments the activities of the operating units by geographical region, a view that coincides with the first level of Group management and reflects the positioning of Santander in the three areas of monetary influence in the world (euro, pound sterling and dollar). The segments reported on are: Continental Europe, which comprises all the businesses in the region, as well as the real estate operations in Spain business unit. Detailed financial information is given for Spain, Portugal, Poland and Santander Consumer Finance (which covers all the business in the region, including that of Spain, Portugal and Poland). Geographical structure EE.UU. Brazil Mexico Chile Argentina Spain Portugal United Kingdom SCF 1 Poland Uruguay Peru Colombia Asia, Pacific Representative branches Geografías Commercial banking Global corporate banking Group funtions & corporate centre activities Internal Chairman s Communication, Corporate Risks Compliance Innovation Universities Audit Office & Strategy Marketing & Research Controller s General & Board Financial Corporate Strategic alliances in Technology & Office & Secretary & Human Management Development & Asset management Costs Operations Management Resources Financial Plans & insurance Control 1. Santander Consumer Finance (SCF) operates in Austria, Belgium,Denmark,Finland, France, Germany, Italy, Netherlands, Norway, Poland, Portugal, Spain, Switzerland and the United Kindom. United Kingdom, which includes all the business done by the Group s units and branches operating there. Latin America. This includes all of the financial business activities that the Group engages in through its banks and subsidiaries in the region. Details are provided of the accounts for Brazil, Mexico and Chile. United States. This includes the holding company (SHUSA) and the businesses of Santander Bank, Santander Consumer USA, Banco Santander Puerto Rico, the specialised unit of Banco Santander International and the New York branch. There are no customers located in areas other than those in which the Group s assets are located that generate income exceeding 10% of gross income. b) Global businesses The activities of the operating units are divided by type of business into commercial banking, Santander Global Corporate Banking (SGCB) and the real estate operations in Spain unit. Commercial banking. This contains all of the customer banking businesses, including consumer finance, except those of corporate banking, which are managed through SGCB. Also included in this 231

4 business area are the results of the hedging positions taken in each country within the scope of the relevant ALCO committees. Santander global corporate banking (SGCB). This reflects the income from the global corporate banking, investment banking and markets businesses worldwide, including the globally managed treasury departments (after passing the appropriate share to commercial banking customers), and the equities business. In addition to the operating businesses described above by region and business, the Group also maintains the corporate centre area. This segment includes the centralised management businesses relating to financial investments, the financial management of the structural currency position, taken from within the scope of the Group s corporate ALCO committee, as well as the management of liquidity and equity through issues. As the Group s holding unit, this segment handles the total capital and reserves, capital allocations and liquidity with the other businesses. It also incorporates amortisation of goodwill but not the costs related to the Group s central services, which are charged to the areas, with the exception of corporate and institutional expenses related to the Group s functioning. Lastly, the Group has a number of support units, such as Risks; Compliance; Internal Audit; Strategy; Innovation; Communication, Marketing and Research; General Secretary s Office and Human Resources; Technology and Operations; Controller s Office and Management Control; Financial Management; Corporate Development; Strategic Alliances; and Costs. The function of them all is to ensure that the Group is a cohesive, efficient and productive group, and they are responsible for implementing the Group s corporate policies. 1.2 Mission and business model Santander has a customer-focused business model that enables it to fulfil its mission of helping people and businesses to prosper. Geographic diversification, focused on Europe and America The Group s geographic diversification is balanced between mature and emerging markets, with significant operations in Spain, Germany, Poland, Portugal, the United Kingdom, Brazil, Mexico, Chile, Argentina and the United States. It also has a significant market share in Uruguay, and consumer finance businesses in other European countries. In addition to its local offering of services, Santander has global business areas which develop products that are distributed in the Group s commercial networks and serve global customers. Model of subsidiaries Santander Group is structured using a model of subsidiaries that are autonomous in terms of capital and liquidity, which are subject to the regulation and supervision of their local authorities as well as the European Central Bank s regulation and supervision of the Group. The subsidiaries are managed according to local criteria and by local teams with a high level of knowledge and experience of customer relations in their markets, while enjoying the benefit of the synergies and advantages of belonging to Santander Group. The autonomy of the subsidiaries limits any contagion among the Group s units, thereby reducing risk. International talent, with the same culture and a global brand Santander employees share a culture focused on fulfilling the Group s mission and achieving its vision. The Santander brand synthesises the Group s identity and expresses a corporate culture and a unique international positioning that is consistent and congruent with a way of doing banking that helps people and businesses to prosper in a Simple, Personal and Fair way. Balance sheet strength, prudence in risks and global control frameworks Santander has a medium-low risk profile and high quality assets, with a risk management and culture that it endeavours to improve day by day. It has sound capital that is appropriate for its business model, balance sheet structure, risk profile and regulatory requirements. The corporate centre contributes value and maximises the competitiveness of the subsidiaries by helping them to be more efficient, supporting them in the generation of income and enforcing the highest standards in terms of corporate governance through frameworks for action, corporate policies and global control systems. This enables the Group to obtain better results and add more value than would be achieved by the sum of each of the local banks. Innovation, digital transformation and best practices Innovation has always been one of Santander Group s distinguishing features. On numerous occasions the Bank has revolutionised the financial sector with new products and services. The Group s size allows it to identify and quickly and efficiently transfer best practices between the various markets in which it is present, and to adapt them to local peculiarities. Santander is engaged in a major process of digitization that affects not just the services it provides to customers but all of its operations, both internally and externally, as well as how it uses data to drive growth, the updating and modernisation of systems, and the simplification of processes and of the organisation in general. Focus on customer-oriented commercial banking Banco Santander s commercial model focuses on meeting the needs of all types of customers: individuals with different levels of income; businesses of any size in different sectors of activity; private corporations and public institutions. Developing lasting and sustainable relations with them is the Bank s principal objective. Santander has high market shares in commercial banking in its main countries where its biggest business is attracting deposits and extending loans. The Bank concentrates its wholesale banking offering on serving its principal customers in the local markets where it operates. 232

5 USA Share 1 : 3% Branches: 783 United Kingdom Share 3 : 11% Branches: 858 Poland Share 1,4 : 10% Branches: 723 Brazil Mexico Share 2 : 12% Share 1 : 14% Branches: 3,433 Branches: 1,377 Spain Share 1 : 13% Branches: 3,467 Germany Share 5 : 14% Branches: 249 Chile Share 1 : 19% Branches: 472 Argentina Share 1 : 10% Branches: 436 Portugal Share 1,4 : 11% Branches: Lending. 2. free lending. 3.Including total mortgage loans, UPLs&SME loans. 4. Includes Santander Consumer Finance (SCF) businesses. 5. Consumer loans Branches do not include consumer business The Group s vision The Group s vision is to be the best commercial bank there is by winning the trust and loyalty of its employees, customers and shareholders and of society. In order to be the best commercial and business banking bank for its customers the Group must start with its employees. If they feel proud to belong to Santander and more committed, they will be able to win the trust and loyalty of the Bank s customers. Santander s aim is to help its customers to prosper day by day with simple customised solutions that increase their engagement with the Bank; fair and equal treatment based on trust, and excellent service through the branch offices and digital channels. One of the priorities of Santander s strategy is to win the trust and loyalty of its shareholders and investors in a manner that is Simple, Personal and Fair. Banco Santander s business model is focused on helping people and businesses to prosper, and on generating active and sustainable profitability that benefits the development of the communities in which it operates. 1.3 Economic, regulatory and competitive context The world economy slowed its rate of growth in 2015 (3.1% vs. 3.4% in 2014). The improved performance of the advanced economies was not sufficient to counter the slowdown of the emerging economies. The fall in commodity prices and the cooling of the Chinese economy had a greater relative impact on the emerging economies, although the degree of slowdown varied depending on their internal context. As for the financial markets, their performance in 2015 can be divided into two parts. In the first half of the year there were rises across the board in stock market indices, and risk premiums on both government and private debt securities fell significantly, especially in the developed economies. Access to capital markets was more fluid and in the advanced economies the conditions on the supply of bank credit eased. This performance was supported by the monetary policies of the central banks, which supplied abundant liquidity, and this facilitated investors pursuit of returns. The quantitative easing of the European Central Bank (ECB) contained any contagion effect during the worst moments of the Greek bail-out negotiations. During the summer there was an increase in volatility in the markets linked to the concerns about the slowdown of growth in China and the emerging economies. Although the start of monetary normalisation in the United States was delayed until December, equities underwent a major adjustment that significantly eroded the gains accumulated in the year. The banking sector environment of the countries in which Banco Santander operates continued to be marked by the regulatory changes and the challenging economic environment, which presented a significant challenge for management to raise profitability. Interest rates remained extraordinarily low; although business volumes gradually recovered they were still low; and there was a big increase in competitive pressure in most markets. In the supervisory and regulatory context, there was once again an intensive regulatory agenda in While progress continued with 233

6 the revision of the prudential framework and the development of crisis management frameworks, issues concerning consumer and investor protection were the focus of increased attention. The aim is to make all these matters compatible with driving economic growth. Lastly, as regards banking supervision, the Single Supervisory Mechanism (SSM) launched in November 2014 enabled the ECB to assume the comprehensive supervision of banks in the euro area. In 2015 the SSM became fully operational and the 123 most important banking groups came under the direct supervision of the ECB. Each bank has a joint supervisory team made up of personnel from the ECB and the national authorities of the member states where the bank has a significant presence. A summary of the macroeconomic performance of the main countries in which the Group operates is given in the comments made in this Report on the geographical units with which it operates. 2. Business performance and results Balance sheet (millions of euros) Total assets 1,340,260 1,266,296 Loans and advances to customers (net) 790, ,711 Customer deposits 683, ,628 Customer funds under management & marketed 1,075,565 1,023,437 Shareholders equity 88,040 80,806 Total funds managed & marketed 1,506,520 1,428,083 Ordinary income statement (*) (millions of euros) Net interest income 32,189 29,548 Gross income 45,272 42,612 Pre-provision profit (net operating income) 23,702 22,574 Profit before tax 10,939 9,720 Profit attributable to the Group 6,566 5,816 EPS, net return and efficiency (%) (*) Attributable profit per share (euro) RoE (1) RoTE (1) RoA RoRWA Efficiency (incl. depreciation and amortisation) Solvency and non-performing loans (%) Fully-loaded CET1 (1) Phase-in CET1 (1) Non-performing loans ratio Non-performing loans coverage ratio Shares and capitalisation Number of shares (millions) 14,434 12,584 Market price (euro) Market capitalisation (millions of euros) 65, Shareholders' equity per share (euro) Price / Shareholders' equity per share (times) PER (price / earnings per share) (times) Other data Number of shareholders 3,573,277 3,240,395 Number of employees 193, ,405 Number of branches 13,030 12,951 Information on total profit (**) Profit attributable to the Group 5,966 5,816 Attributable profit per share (euro) RoE (1) RoTE (1) RoA RoRWA PER (price / earnings per share) (times) In 2014, pro forma figure including January 2015 capital increase. * Excluding Non-recurring capital gains and write-downs, net ** Including Non-recurring capital gains and write-downs, net 234

7 2.1 Review of the year Against this background, the review of the year for Santander Group is positive, since it succeeded in making the organisational changes and the implementation of the commercial transformation process in which it is engaged compatible with achieving the objectives that the Group had set itself at the beginning of the year: it grew in volumes, in profit, accumulated capital, and increased the dividend paid in cash. The highlights of the Group s management in 2015 were: Strong earnings. Santander faces these challenges with a business model that has proved its strength in recent years and which it is adapting to the new environment in order to maximise the levels of profitability. The Santander model, which has demonstrated its validity during the crisis, rests on two main pillars: Santander is a big bank, but it is uncomplicated. Its diversification is unique, it engages in commercial banking in nine core countries in addition to the different services it provides through Consumer Finance and in the United States with Santander Consumer USA. Its management approach is adapted to each market, and its subsidiaries, which are autonomous in capital and liquidity, have sufficient critical mass to be within the three top players in each market and generate value for the Group s shareholders. The Bank has a corporate centre that enables it to attract talent, and to share best practices and best-in-class information and control systems. The corporate centre will continue to add value in the future and will do so even more efficiently. As a result, in 2015 Santander Group obtained ordinary attributable profit of EUR 6,566 million, which was 13% more than in 2014, based on: consistent and recurring growth of commercial income quarter by quarter (disregarding the impact of exchange rates) resulting in net interest income and total income that were all-time records. cost control and operating excellence that resulted in growth of 1% in real terms, disregarding the changes in the scope of consolidation. a decrease in period provisions and a fall in the cost of lending, reflecting the strategy for growth and the appropriate risk management policy. Also, both positive and negative non-recurring results were booked in the year, with a net charge of EUR 600 million, taking the final profit to EUR 5,966 million, an increase of 3%. Commercial transformation process saw further progress in the transformation of the Bank s commercial model to one that is increasingly simple, personal and fair. The focus is on the customers both private individuals and businesses, and the Group s efforts are directed at developing specialised models, ranges of simple products and comprehensive proposals that cover all of their requirements, thereby anticipating their needs and winning their confidence. There was a significant improvement in customer engagement and long-term relations, supported heavily by differential value offerings and their expansion to all the geographical areas, with the sharing of best practices. Examples are: The launch of the strategy in Spain, after its success in the United Kingdom and Portugal, and similar products in Poland and Germany. A number of products and services were also launched in the high-income segment, such as Select Premium Portfolios in Germany or Select Expat in Mexico. In SMEs and businesses, comprehensive proposals to strengthen our support for this segment, with the rollout of Santander Advance in 8 countries, Santander Trade now available in 12 countries with over 30,000 export and import users, International Desk, Santander Passport and the current account in Spain. A major effort was also made to promote multichannel banking, with noteworthy developments in digital channels, which are playing a key role in this process of transformation. Innovation and technology development are one of the Group s strategic pillars, with the objective of responding to the new challenges arising out of the digital revolution, with the focus on operating excellence and customer experience. As a result, improvements were made to the commercial websites, and new applications and developments for mobile phones were launched, such as Cash Kitti and Spendlytics in the United Kingdom, and the new Deposit capture functionality for mobile phones in the United States. There were also some noteworthy initiatives in smartwatches such as the investment in the United Kingdom and Spain in the first group of Apple Pay issuers. No less important were the simplification of processes and products, the implementation of a new commercial front with 360 vision in many of the countries, latest generation ATMs and the opening of what are being called the branch offices of the future. Santander wishes to be a digital bank without losing the essence of what makes it a bank. The branch offices will continue to be an important channel for both customers and the Bank, and in the long term they will focus to a greater extent on the sale of more complex products and advisory services. These improvements as part of the commercial transformation process were reflected in increased engagement and digitization, enabling the Bank to reach the figure of 13.8 million engaged customers (an increase of 1.2 million (+10%) in the year); and 16.6 million digital customers (an increase of 2.5 million (+17%) in the year). These are improvements that will translate into an increased income base Growth of business activity. The commercial activity and the increased customer engagement were reflected in the growth of lending and customer funds. In lending, by geographical area, there was growth at nine of the ten main units, and by segment, private individuals, SMEs and large companies also all recorded growth. In customer funds, all the countries were up, while the Group continued to apply a strategy of reducing the cost of funding, which was reflected in the growth of demand accounts and investment funds, and the decrease in time deposits. Stronger solvency. The target set for capital in 2015 was achieved, in spite of negative extraordinary impacts. The fully-loaded CET1 ratio was 10.05% at year end, evidencing the Group s capacity for organic generation of capital of 10 basis points per quarter on average. 235

8 In addition, in regulatory terms, the Group ended the year with a CET1 ratio of 12.55%, which was 280 basis points above the minimum required by the European Central Bank for On 3 February 2016, the European Central Bank authorised the use of the Alternative Standardised Approach to calculate the capital requirements at consolidated level for operational risk at Banco Santander (Brasil) S.A. The impact of the aforementioned authorisation on the Group s risk-weighted assets (EUR -7,836 million) and, in consequence, on its capital ratios, was not taken into account in the data published on 27 January 2016, which are those presented in this report. Improved credit quality was a good year in terms of credit quality, with improvements in the Group s principal indicators. The non-performing loans ratio improved by 83 basis points, taking it to 4.36%; the coverage ratio rose by 6 percentage points to 73%, and the cost of lending fell to 1.25%. This positive performance was also recorded in practically all of the geographical areas, and is a reflection of the change in mix towards lower risk products in some countries, and an appropriate management policy that the Bank is strengthening with the launch of the advanced risk management (ARM) programme. Creation of value for shareholders Taking into account the ordinary profit, the Bank s RoTE in 2015 was 11%, which is higher than the sector average. There was also a slight improvement in the Group s RoRWA, which stood at 1.30%. The tangible book value per share increased by 3% in the year, on a like-for-like basis, which was compatible with the distribution of dividends amounting to over EUR 2,200 million in cash in The dividend yield was 4.4% based on the share price at year end. 2.2 Earnings The 2015 earnings performance as compared with 2014 is shown below. Condensed consolidated statements of income Millions of euros Interest and similar income 57,198 54,656 Interest expense and similar charges (24,386) (25,109) Net interest income 32,812 29,547 Income from equity instruments Share of results of entities accounted for using the equity method Fee and commission income 13,042 12,515 Fee and commission expense (3,009) (2,819) Gains/(losses) on financial assets & liabilities, net (770) 3,974 Exchange differences, net 3,156 (1,124) Other operating income 3,067 5,214 Other operating expenses (3,233) (5,373) Gross income 45,895 42,612 Administrative expenses (19,302) (17,899) Staff costs (11,107) (10,242) Other general administrative expenses (8,195) (7,657) Depreciation & amortisation charge (2,418) (2,287) Provisions, net (3,106) (3,009) Impairment losses on financial assets, net (10,652) (10,710) Profit from operations 10,417 8,707 Impairment losses on nonfinancial assets, net (1,092) (938) Gains/(losses) on disposal of assets not classified as non-current assets held for sale 112 3,136 Negative difference on business combinations Gains/(Losses) on disposal of noncurrent assets held for sale not classified as discontinued operations (173) (243) Profit before tax 9,547 10,679 Income tax (2,213) (3,718) Profit for the year from continuing operations Profit/(loss) from discontinued operations, net 7,334 6,961 (26) Consolidated profit for the year 7,334 6,935 Profit attributable to the parent 5,966 5,816 Profit attributable to noncontrolling interests 1,368 1,119 In the statement presented above, the capital gains and write-downs that are considered non-recurring are included in each of the income statement line items where they were recognised due to their nature. To facilitate understanding of the changes between the two years, below is a condensed income statement that presents these nonrecurring capital gains and write-downs for the net amount on a separate line just before the profit attributable to the Group (Extraordinary capital gains and write-downs, net). The negative net impact of the non-recurring capital gains and writedowns in 2015 was EUR 600 million. Specifically, there were capital gains of EUR 1,118 million relating to the net result of the reversal of tax liabilities in Brazil (EUR 835 million), and the generation of badwill amounting to EUR 283 million as a result of the transaction to acquire 236

9 the assets and liabilities of Banco Internacional do Funchal (Banif) in Portugal. There were also charges for an aggregate amount of EUR 1,718 million that related to the provisioning of an allowance to cover possible claims relating to payment protection insurance (PPI) products in the United Kingdom (EUR 600 million), the impairment and accelerated amortisation of intangible assets (EUR 683 million) and other write-downs (EUR 435 million). In 2014 capital gains were booked for: the sale of Altamira Asset Management, S.L. (EUR 385 million, net), the flotation of Santander Consumer USA Holdings Inc. (EUR 730 million, net), the changes to pension commitments in the United Kingdom (EUR 224 million, net) and the insurance transaction with CNP (EUR 250 million, net). There were write-downs that related to restructuring costs, impairment of intangible assets and other write-downs for an aggregate amount, net of taxes, of EUR 1,589 million. The net impact of these amounts on the profit was therefore nil. Condensed income statement - Directors report Millions of euros Net interest income 32,189 29,548 Net fees and commissions 10,033 9,696 Gains (losses) on financial assets & liabilities 2,386 2,850 Other income Gross income 45,272 42,612 Operating expenses (21,571) (20,038) General administrative expenses (19,152) (17,781) Staff costs (11,107) (10,213) Other general administrative expenses (8,045) (7,568) Depreciation and amortisation charge (2,419) (2,257) Net operating income 23,702 22,574 Provisions to the allowance for loan losses (10,108) (10,562) Impairment losses on other assets (462) (375) Other income and provisions (2,192) (1,917) Ordinary profit before tax 10,939 9,720 Income Tax (3,120) (2,696) Ordinary profit from continuing operations Profit/(loss) from discontinued operations, net 7,819 7,024 - (26) Ordinary consolidated profit for the year 7,819 6,998 Profit attributable to noncontrolling interests 1,253 1,182 Ordinary profit attributable to the Group 6,566 5,816 Extraordinary capital gains and write-downs, net (600) - Profit attributable to the Group 5,966 5,816 In 2015 the Group obtained an attributable profit of EUR 5,966 million, which represents an increase of 3% on the profit for Excluding the effect of the net amount of non-recurring capital gains and write-downs, the ordinary attributable profit was EUR 6,566 million, an increase of 13% on Before analysing the performance of the income statement lines, the details of some of the aspects that have affected the comparison between the two years are as follows: A macro environment in which the world economy slowed its rate of growth. Interest rates that remained at all-time lows in many of the economies. Strong competition in some of the markets in which the Group operates. A more demanding regulatory environment, with impacts in revenue limitation and increased costs. A positive effect on the scope of consolidation due to the transactions in consumer banking (mainly the agreements with PSA) and in Brazil (agreement with Bonsucesso, Getnet and the acquisition of non-controlling interests in the fourth quarter of 2014). The impact of the exchange rates of the various currencies in which the Group operates against the euro was less than one positive percentage point for the Group as a whole in the comparison of income and costs. By unit, the impacts were as follows: United States (+21 percentage points), United Kingdom (+12 percentage points), Argentina (+7 percentage points), Chile (+5 percentage points), Brazil (-16 percentage points). In Mexico and Poland the impact was less than one percentage point. Exchange rates: Parity 1 euro=currency Av. exchange rate (income statement) US dollar Pound sterling Brazilian real Mexican peso Chilean peso Argentine peso Polish zloty Breakdown of the main lines of the income statement The most noteworthy aspects of the performance of the income statement year on year were as follows. Income totalled EUR 45,272 million, an increase of 6% on This was good quality growth, since it was based on increases in the most commercial levers of the income line (net interest income and fees and commissions), and the gains on financial assets and liabilities accounted for only 5% of the Group s income (7% in 2014). Broken down: The increase in income was due mainly to the net interest income, which at EUR 32,189 million accounted for 71% of the total, and was up by 9% year on year, mainly as a result of the increase in lending and the decrease in the cost of liabilities. The table below shows the average balance sheet balances for each year, obtained as the average of the months in the period, which does not differ significantly from obtaining the average of the daily balances. The distinction between domestic and international is based on the domicile of the customer. 237

10 Average balance sheet - assets and interest income (in millions of euros, except percentages) ASSETS Cash and balances with central banks Average balance Interest Average rate Average balance Interest Average rate Domestic 2, % 1, % International 72,101 1, % 75,567 2, % Loans and advances to credit institutions 74,612 1, % 77,304 2, % Domestic 28, % 22, % International 60,238 1, % 59,180 1, % Loans and advances to customers 88,687 1, % 81,794 1, % Domestic 159,897 4, % 164,517 5, % International 625,763 41, % 542,853 37, % Debt securities 785,660 45, % 707,370 42, % Domestic 51, % 44,797 1, % International 130,918 6, % 110,741 5, % Income from hedging transactions 182,385 7, % 155,538 7, % Domestic International (350) 198 Other interest-earning assets (267) 293 Domestic International Total interest-earning assets 1,422 1,121 Domestic 242,324 5, % 233,665 7, % International 889,020 51, % 788,341 47, % Investments in Group companies 1,131,344 57, % 1,022,006 54, % Domestic 1, % 1, % International 2, % 1, % Total earning assets 3, % 3, % Domestic 243,690 5, % 235,295 7, % International 891,106 51, % 790,310 47, % 1,134,796 57, % 1,025,605 54, % Other assets 210, ,655 Assets from discontinued operations - - Total average assets 1,345,657 57,198 1,203,260 54,656 The average balance of earning assets in 2015 was EUR 1,135 thousand milion, which was 11% more than in This increase occurred mainly in the international component, in which the biggest rises were in Loans and advances to customers and Debt securities, partially offset by the fall in Cash and balances with central banks. The lower increase in the domestic component was due to the Loans and advances to credit institutions and Debt securities, that were partially offset by the lower balances of Loans and advances to customers, largely due to those booked at the real estate operations in Spain unit. 238

11 The average return on total earning assets fell by 29 basis points to 5.04%. Average balance sheet - liabilities and interest expense (in millions of euros, except percentages) LIABILITIES & SHAREHOLDERS EQUITY Deposits from credit institutions Average balance Interest Average rate Average balance Interest Average rate Domestic 31, % 16, % International 134,781 2, % 116,761 1, % Customer deposits 166,712 2, % 132,972 2, % Domestic 173,793 1, % 170,327 1, % International 511,282 12, % 459,133 11, % Marketable debt securities 685,075 13, % 629,460 13, % Domestic 62,510 1,628 2,60% 68,571 2, % International 140,147 5, % 122,029 4, % Subordinated liabilities 202,657 6, % 190,600 6, % Domestic 7, % 7, % International 8, % 7, % Other interest-bearing liabilities 15, % 14,876 1, % Domestic 6, % 6, % International 2, % 2, % Expenses from hedging transactions 9, % 9, % Domestic (307) (388) International (103) (158) Total interest-bearing liabilities (410) (546) Domestic 282,175 3, % 269,210 5, % International 796,666 21, % 707,843 20, % 1,078,841 25, % 977,053 25, % Other liabilities 166, ,352 Non-controlling interests 10,283 9,808 Shareholders' equity 90,220 75,047 Liabilities from discontinued operations - - Total average liabilities and shareholders' equity 1,345,657 25,009 1,203,260 25,109 The average balance of interest-bearing liabilities in 2015 was EUR 1,079 thousand milion, which was 10% more than in The increase in balances was largely due to the international component, in which Customer deposits was the most noteworthy heading. Most notable in the advance in the domestic component were the Deposits from credit institutions. The average cost of the interest-bearing liabilities fell by 25 basis points to 2.32%. As in the case of assets, there were falls by heading across the board in both the domestic and international components. 239

12 The changes in income and expense shown in the table below are calculated and attributed mainly to: The change in volume, which is obtained by applying the previous period s interest rate to the difference between the average balances of the present and previous periods. The change in interest rate, which is obtained by applying to the average balance for the previous year the difference between the rates of the present and previous periods. Distinguishing between interest income and interest expense reveals that: Interest income rose by EUR 2,542 million, as a result of the increased volume (up by EUR 6,292 million), since the lower rates resulted in a decrease of EUR 3,750 million. The net positive variation occurred in the international component; the domestic component fell. Interest expense was down by EUR 100 million due to the interest rate effect (EUR -2,213 million), mostly as a result of the lower cost of customer deposits, which offset the higher cost by volume (up by EUR 2,113 million). In this case, the decrease in the expense was due to the rate effect in the domestic component. The net result is an increase of EUR 2,642 million, all due to the increased volumes. Interest income (In millions of euros) Cash and balances with central banks 2015/2014 Increase (decrease) due to changes in: Net Volume Rate variation Domestic 4 (10) (6) International (89) (551) (640) Loans and advances to credit institutions (85) (561) (646) Domestic International Loans and advances to customers Domestic (140) (851) (991) International 5,506 (1,245) 4,261 5,366 (2,096) 3,270 Debt securities 0 Domestic 209 (932) (723) International 1,005 (168) 837 1,214 (1,100) 114 Total interest-earning assets excl. hedging transactions Domestic 99 (1,791) (1,692) International 6,452 (1,959) 4,493 Income from hedging transactions 6,551 (3,750) 2,801 Domestic (12) 0 (12) International (548) 0 (548) Other interest (560) 0 (560) Domestic (31) 0 (31) International Total interest-earning assets Domestic 56 (1,791) (1,735) International 6,236 (1,959) 4,277 6,292 (3,750) 2,542 Interest expense (In millions of euros) Deposits from credit institutions 2015/2014 Increase (decrease) due to changes in: Volume Rate Net variation Domestic 138 (183) (45) International 294 (98) 196 Customer deposits 432 (281) 151 Domestic 33 (560) (527) International 1,286 (726) 560 Marketable debt securities 1,319 (1,286) 33 Domestic (186) (428) (614) International Subordinated liabilities 504 (383) 121 Domestic (4) (153) (157) International 45 (38) 7 Other interest-bearing liabilities 41 (191) (150) Domestic (2) (53) (55) International 0 (19) (19) (2) (72) (74) Total interest-bearing liabilities excl. hedging transactions Domestic (21) (1,377) (1,398) International 2,315 (836) 1,479 Expenses from hedging transactions 2,294 (2,213) 81 Domestic International Other liabilities Domestic International (353) - (353) Total interest-bearing liabilities (317) - (317) Domestic 96 (1,377) (1,281) International 2,017 (836) 1,181 2,113 (2,213) (100) 240

13 Excluding the impact of exchange rates, the net interest income was up by 8% year on year, with increases in most of the geographical areas, except for Poland (down by 6%), due to the fall in interest rates, Spain (down by 5%), in an environment of low interest rates and strong competition in lending, and Chile (down by 1%), due to the impact of the lower rate of variation in the UF unit of account and the regulation of the policy on maximum rates. There was noteworthy growth in Santander Consumer Finance (up by 31%), partly due to the change in the scope of consolidation, Mexico (up by 14%), due to the increase in lending, Brazil (up by 10%), after quarter-by-quarter improvements throughout the year, and the United States (up by 7%) due to the higher portfolio volume at Santander Consumer USA and Santander Bank. Fees and commissions amounted to EUR 10,033 million, an increase of 4%. By unit, performance was very uneven due to the different economic and business cycles in each of the countries. In some cases regulatory changes that limited revenues, mainly in insurance and cards, also had an impact. The aggregate net interest income and income from fees and commissions was up by 8% at EUR 42,222 million, and accounted for 93% of the total income (92% in 2014). Gains on financial assets and liabilities were down by 16%, impacted by the higher income in 2014 from the management of interest rate hedging portfolios and the global corporate unit. Other income increased by EUR 146 million, which was the net result of two opposite impacts. On the one hand, the positive impact of the income from leasing operations (mainly in the United States) and the higher results of companies accounted for using the equity method. On the other, the contribution to the deposit guarantee funds, which is also booked on this line, was more than EUR 750 million in the year for the whole Group, after rising by over 30%, mainly due to Poland (where the sector made extraordinary contributions due to the failure of a bank), Spain and Argentina. Operating costs totalled EUR 21,571 million, and were up by 8% year on year (up by 7% disregarding the impact of exchange rates). This increase was due to a number of factors: the evolution of inflation in Latin America, the investments in programmes for innovation and improved future efficiency, the impact of the measures adopted by the Bank as a result of the new regulatory requirements (in particular in the United States) and the change in the scope of consolidation. Adjusted for the effects of the changes in the scope of consolidation and the average inflation for the period, costs increased by only 1%, which reflects the positive impact of the three-year efficiency and productivity plan launched at the end of 2013, which is making it possible to make the bigger investments mentioned earlier, and keep the real growth of costs close to zero. By country, noteworthy was the fall in real terms in Brazil (down by 6% disregarding changes in the scope of consolidation) and in Spain and Portugal (down by 1% in each case). The efficiency ratio was 47.6%, compared with 47.0% in This increase was due to the performance of the results on financial assets and liabilities mentioned above, since without them, the efficiency ratio remained stable. The period provisions to allowances for loan losses amounted to EUR million, a decrease of 4% year on year. There were significant falls in the United Kingdom (down by 71%), Spain (down by 43%), Portugal (down by 42%) and the real estate operations in Spain unit (down by 26%). They were also down in Poland and Santander Consumer Finance. In contrast, the period provisions were higher in countries like Chile (up 4%), Brazil (up 5%), Mexico (up 15%) and the United States (up 16%), which all recorded significant growth in volumes. All these variations at the units are disregarding the effect of exchange rates. The lower provisions combined with the increase in lending made it possible for continued improvement of the cost of the Group s lending, which fell from 1.43% in December 2014 to 1.25% in December Excluding Santander Consumer USA, which has a high level of provisions due to its type of business, the cost of lending stood at 0.90%, compared with 1.15% in December This improvement in the cost of lending was recorded at all of the Group s units, with the exception of the United States. Noteworthy were Spain, Portugal, the United Kingdom and Brazil. This performance was due to the increased quality of the portfolios as a result of the active risk management, combined with a better macro situation in certain countries. Accordingly, the net operating income after loan loss provisions was up by 13% (+12% excluding the exchange rate effect) driven by the double-digit growth of a large proportion of the units. Together, Other income and write-downs were negative by an amount of EUR 2,654 million (EUR 2,292 million in 2014). The ordinary profit before taxes, which equates with the performance of the business, was 13% higher in current euros (+10% in constant euros). The increase in taxes was largely due to the greater tax burden at some units such as Portugal, Santander Consumer Finance, Mexico, Chile and the United States, mainly. Non-controlling interests were up by 6%, since the increases in the United States (due to the improvement in Santander Consumer USA s earnings) and Santander Consumer Finance (implementation of the agreements with PSA), were partially cancelled out by the repurchase made in Brazil in the fourth quarter of The ordinary attributable profit was EUR 6,566 million, an increase of 13% year on year (10% in constant euros). By geographical region, the biggest increases were in Portugal (up by 63%), Brazil (up by 33%, due in part to the repurchase of non-controlling interests), SCF (up by 18%, due in part to the changes in the scope of consolidation), Spain (up by 18%) and the United Kingdom (up by 14%). In all cases, in the respective currencies in which they operate. Conversely, there were decreases in Poland (mainly due to the fall in interest rates and the extraordinary charge for the deposit guarantee fund), Chile (due to the lower UF inflation, the effect of which was not fully offset by the increased volumes and higher gains on financial assets and liabilities, combined with a higher tax rate) and the United States (where the setting up of the holding company, the improvement in the franchise of Santander Bank and the discontinuance of personal loans in order to focus more on vehicle finance, is having a temporary impact on income and costs). 241

14 The ordinary RoTE stood at 11.0%, while the ordinary earnings per share were EUR 0.45, which was 7% less year on year, impacted mainly by the increase in the number of shares in the period (capital increase in January 2015 and Santander Dividendo Elección scrip dividend scheme), as well as the increased financial cost as a result of the new issues of AT1 instruments. After incorporating the net result of extraordinary capital gains and write-downs, the profit attributable to the Group was EUR 5,966 million in 2015, 3% more than in The RoTE was 10.0% and the earnings per share EUR 0.40, down 16% on Balance sheet Below is the condensed balance sheet as at 31 December 2015, compared with that as at 31 December Condensed balance sheet - Directors report Millions of euros Assets Cash and balances with central banks 81,329 69,428 Financial assets held for trading 147, ,888 Debt instruments 43,964 54,374 Loans and advances to customers 6,081 2,921 Equity instruments 18,225 12,920 Trading derivatives 76,724 76,858 Loans and advances to credit institutions 2,293 1,815 Other financial assets at fair value 45,043 42,673 Loans and advances to customers 14,293 8,971 Other (loans and advances to credit institutions, debt instruments and other equity instruments) 30,750 33,702 Available-for-sale financial assets 122, ,251 Debt instruments 117, ,249 Equity instruments 4,849 5,001 Loans and receivables 831, ,635 Loans and advances to credit institutions 50,256 51,306 Loans and advances to customers 770, ,819 Debt instruments 10,907 7,510 Held-to-maturity investments 4,355 Investments 3,251 3,471 Tangible and intangible assets 27,790 26,109 Goodwill 26,960 27,548 Other assets 50,572 51,293 Total assets 1,340,260 1,266,296 Liabilities and equity Financial liabilities held for trading 105, ,792 Customer deposits 9,187 5,544 Marketable debt securities Trading derivatives 76,414 79,048 Other 19,617 25,200 Other financial liabilities at fair value 54,768 62,318 Customer deposits 26,357 33,127 Marketable debt securities 3,373 3,830 Deposits from central banks and credit institutions 25,038 25,360 Financial liabilities at amortised cost 1,039, ,053 Deposits from central banks and credit institutions 148, ,437 Customer deposits 647, ,956 Marketable debt securities 201, ,059 Subordinated liabilities 21,153 17,132 Other financial liabilities 20,877 19,468 Liabilities under insurance contracts Provisions 14,494 15,376 Other liabilities Total liabilities 27,057 27,331 1,241,507 1,176,581 Shareholders' equity 102,402 91,664 Share capital 7,217 6,292 Reserves 90,765 80,026 Profit attributable to the Group 5,966 5,816 Less: dividends and remuneration (1,546) (471) Valuation adjustments (14,362) (10,858) Non-controlling interests Total equity 10,713 8,909 98,753 89,714 Total liabilities and equity 1,340,260 1,266,296 At 31 December 2015, the total business managed and marketed was EUR 1,506,520 million. Of this amount EUR 1,340,260 million related to on-balance-sheet assets and the remainder to investment funds, pension funds and assets under management. In the Group overall, the impact of exchange rates on the variation in lending to customers was zero, and just one negative percentage point on the variation in customer funds. However, by unit, the impact was significant in the United States (+13 percentage points), the United Kingdom (+6 percentage points), Chile ( 5 percentage points), Mexico (-6 percentage points), Brazil (-28 percentage points) and Argentina (-42 percentage points). 242