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18 Contents 1. Nature of the Parent Company and Group, basis of presentation of the consolidated financial statements and other information Accounting principles, policies and measurement criteria Risk management Management and Risk Control Model Credit risk: Customer Insolvency Market risk Liquidity risk Structural balance-sheet interest rate risk Operational Risk Model Risk Business Risk Risk of investees Property Risk Appropriation of profit and earing/loss per share Business segment reporting Remuneration of the Board of Directors and Key Management Personnel Cash, cash balances in Central Banks and other demand deposits Financial assets and liabilities held for negotiation Available-for-sale financial assets Loans and accounts receivable Held-to-maturity investments Derivatives- Hedge Accounting Non-current assets and disposable groups of items classified as held for sale Assets and Liabilities created by insurance or reinsurance contracts Tangible assets Intangible assets Other assets Financial liabilities at amortised cost Provisions Other liabilities Tax matters Shareholders equity

19 23. Non-controlling interests Fair value Other significant information Consolidated income statement Related parties Annual customer services report Explanation added for translation to English Annex I: Detail of the Group entities at 31 December Annex II: Jointly controlled entities at 31 December Annex III: Detail of associates at 31 December Annex IV: Agency agreements of Liberbank, S.A Annex V: Segregation balance sheets of the Bank's shareholder Savings Banks ANNEX VI INFORMATION ON LIBERBANK GROUP AS PER SECTION 87, LAW NO. 10/2014 OF 26 JUNE ( ANNUAL BANKING REPORT ) Annex VII Information on the Tax Consolidation Group Directors Report corresponding to the year ended 31 December

20 Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group in Spain (see Notes 1 and 29). In the event of a discrepancy, the Spanish-language version prevails. LIBERBANK GROUP Notes to the consolidated financial statements for the year ended 31 December Nature of the Parent Company and Group, basis of presentation of the consolidated financial statements and other information a) Nature of the Parent Company and Group Liberbank, S.A. (the "Bank") is a financial institution incorporated on 23 May 2011 with the corporate name of Effibank, S.A. in a notarial instrument before the notary Manuel González-Meneses García- Valdecasas and filed at the Mercantile Registry of Madrid. The Bank was incorporated with the contribution from the spun-off financial businesses of Caja de Ahorros de Asturias, Caja de Ahorros y Monte de Piedad de Extremadura and Caja de Ahorros de Santander y Cantabria, entities that became banking foundations in At 31 December 2017, the three banking foundations owned 24.31% of share capital (44.80% at 31 December 2016). On 3 August 2011, the Bank's Shareholders' Meeting resolved to change the aforementioned corporate name to Liberbank, S.A. and filed the change at the Commercial Registry on 31 August The Bank s registered office is located at number 5, de Camino de Fuente de la Mora de Madrid. The Bank's bylaws and other relevant legal information can be viewed on the group's website ( and at the Bank's registered office. The Bank s by-laws establish the activities that it may carry out, which are the typical activities of credit institutions. The consolidated financial statements of the Group, the Bank and the other institutions that form part of it for the year ending 31 December 2017 have yet to be approved by their respective General Shareholders' Meetings. Nonetheless, the Bank s Board of Directors expects the financial statements to be approved without significant changes. On 16 May 2013, Liberbank, S.A. was admitted for trading on the Madrid, Bilbao, Barcelona and Valencia stock markets. At the day of the drawing up of these financial statements and after the share capital increase performed during the year, the Bank holds 2,926,872,511 outstanding shares with a par value of 0.02 per share (see Note 22). b) Basis of presentation of the consolidated financial statements and accounting principles The Liberbank Group s 2017 consolidated financial statements were approved by the Bank's directors at their Board meeting on 20 February 2018, in accordance with the financial reporting regulatory framework applicable to the Group, which is that established in the Spanish Code of Commerce and the other mercantile legislation, and in the European Union endorsed IFRSs, considering the Bank of Spain Circular 4/2004, of 22 December (adjusted to the last updates of banking regulation through the Bank of Spain Circular 4/2016 od 27 April), and the mandatory standards approved by the Bank of Spain, applying the consolidation principles, the accounting policies and the measurement criteria set forth in Note 2, to show a true and fair view of the Group s 3

21 equity and financial position at 31 December 2017 and the consolidated results of its operations and cash flow generated in the year then ended. The consolidated financial statements were prepared from the accounting records kept by the Bank and by the consolidated companies. The abbreviations IAS and IFRS are used throughout these notes to the consolidated financial statements and refer to International Accounting Standards and International Financial Reporting Standards, respectively. The abbreviations IFRIC and SIC are used throughout these notes to refer to the interpretations issued by the International Financial Reporting Interpretations Committee and the former Standing Interpretations Committee, respectively. All these standards and interpretations have been adopted by the European Union and were applied in the preparation of the consolidated financial statements. At 31 December 2017, the Bank's financial statements, which were essentially prepared in accordance with the provisions of the Bank of Spain's Circular 4/2004 and its successive amendments, show the amount of total assets at 25,186,170 thousand and the consolidated negative net result for the year at 345,544 thousand. The main accounting principles and policies and measurement criteria applied when preparing the 2017 financial statements are described in Note 2. All mandatory accounting principles with a significant effect on the consolidated financial statements were applied. Nevertheless, since the accounting policies and measurement criteria used in preparing the Group s consolidated financial statements for 2017 may differ from those used by certain Group entities, the required adjustments and reclassifications were made on consolidation to unify such policies and criteria and make them compliant with the EU-IFRSs used by the Group. c) Other information c.1) Recapitalisation and Restructuring Plan The Bank's Board of Directors approved a Recapitalisation and Restructuring Plan on 17 December 2012 (the "Plan"), detailing the actions and measures needed to meet the additional equity requirements, amounting to 1,198 million, based on the Term Sheet of the Spanish Authorities Commitments for the Approval of the Restructuring Plan of Liberbank by the European Commission, which contains the commitments undertaken by the Kingdom of Spain for restructuring Liberbank. On 31 December 2017 this Plan was terminated. This Recapitalisation and Restructuring Plan, which was approved by the Bank of Spain and by the European Commission on 19 and 20 December 2012, respectively, envisaged the following: subordinated debt and preference shares issued by the Group would be calculated for its core capital; measures would be adopted for deconsolidating problematic property assets to Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria, S.A. (SAREB); an application would be filed to list the Bank's shares; certain assets would be divested, and 124 million in capital would be needed. This additional capital was underwritten by the Fund for Orderly Bank Restructuring (FROB) in a subscription of contingent convertibles (CoCos) of the same amount. In the fiscal year 2014 they were fully amortised. Under the Plan, the Group would also continue the process of adjusting its production capacity to the expected reduction of its activity in both the corporate and property lines. The measures performed under Liberbank s Recapitalisation and Restructuring Plan allowed generating equity exceeding the initial equity required under the Recapitalisation and Restructuring Plan. In addition, during the second half of fiscal year 2017 and in the first half of fiscal year 2014, the Bank performed the two share capital increases generating an increase of capital and share premium for the amount of 499 million and 575 million respectively. As a result, at 31 December 2017 and 2016 the Group was compliant with minimum equity requirements (see section "i" of this Note). 4

22 c.2) Employment situation Unilateral measures On 22 May 2013, the Liberbank Group announced the implementation of a set of unilateral and internal flexible arrangements. On 23 September 2016, the Employment Tribunal of the National Court issued a ruling that resolved the challenge of the proceeding for the aforementioned unilateral arrangements. This judgment of the National Court had been appealed by the Group before the Supreme Court, where the appeal was overruled in a judgment delivered on 21 June 2017 and notified on 10 July. On 31 July 2017, an Application of Amparo was filed by the Bank before the Constitutional Court. These unilateral measures, affected by the foregoing ruling of the Supreme Court, were made, definitively, as from 1 January 2014, under the provisions of the agreement of 27 December 2013, and approved by a final ruling of the Supreme Court of 18 November 2015 and expiring at 30 June At 31 June 2017 and 2016, the Group has recorded a provision for an amount of 10,300 thousand, under the heading "Provisions - remaining Provisions" of the consolidated balance sheet (see Note 19) for the estimated risk related to the annulment of the unilateral measures. Labour agreement under the framework for the Restructuring and Recapitalisation Plan On 30 June 2017, the labour agreement signed on 27 December 2013 with the majority of trade unions expired. The main agreed measures to be adopted under such agreement, applicable to the Bank and its subsidiary, Banco de Castilla - La Mancha, S.A., were the following: a. Temporary salary reduction and temporary conversion of part of the fixed remuneration to variable applicable to the management. b. Temporary suspension of some benefits, employment improvements and harmonisation and savings commitments, as well as pension plan contributions. c. Temporary contract suspension to 30 workers, who voluntarily accepted this during 18 consecutive months and broken down into minimum periods of six months. d. Reduction in working hours: i. A total of 1,250 workers will decrease their working hours by 30% per year between 1 January 2014 and 30 June 2017, with the same proportional reduction in their salary. ii. Workers earning less than 30,000 and the management will reduce their working hours and their salary between 1 January 2014 and 30 June 2017 by the percentage resulting from the source entity and the actual yearly hours worked. This percentage is between 10.04% and 13.56%. The other workers not included in sections i) and ii) above will decrease their working hours by 18% between 1 January 2014 and 30 June 2017, with the same proportional reduction in their salary. Voluntary redundancy plan On 30 June 2015, the Group informed the workforce about the implementation of a paid voluntary redundancy plan aimed at 615 employees born before 1 January 1959, reserving the Group s right to offer adherence to the employees born after that date, until the redundancy quota set by this plan is reached. 5

23 At 31 December 2017, out of the 354 employees who joined the plan, 344 had already left. Paid leave of absence and redundancies. On 1 June 2016, a labour agreement was signed with the union majority, in order to establish the conditions for workers to be protected by the mutually agreed paid leave of absence modality or a voluntary redundancy plan: i) Mutually agreed paid leave of absence modality: the group covered by this agreement are the employees of Liberbank, S.A. and Banco de Castilla - La Mancha, S.A., born between the years , the duration of this leave of absence is the time between the starting date and 31 December of the calendar year in which it applies, extensible by mutual agreement between the parties by calendar year an up to age 63, or earlier, if entitled to retirement benefits. If not, the employee will take voluntary redundancy pursuant to art a) of the Workers Statute. At 31 December 2017 and 2016 a total of 552 employees have adhered to this plan. ii) Voluntary redundancy: it is foreseen the possibility that, until 31 March 2018, employees may request termination of their labour contract, receiving severance of 30 days' salary per year worked, with a maximum of 20 monthly instalments, in a way that the amount may not exceed 120,000 thousand. At 31 December 2017, 30 employees had availed themselves to this option and were terminated at the date of the preparation of these consolidated financial statements. Labour agreement under the framework for the Organisational Restructuring Efficiency Process On 21 June 2017, the Group entered into a labour agreement with the majority of the trade unions with the purpose of addressing a restructuring process allowing for a smaller, more streamlined and efficient structure. The implementation period of the foregoing agreement will be between 1 July 2017 and 31 December 2019, except for the implementation of the collective dismissals, which shall expire on 31 December 2018, where the Group shall determine the specific date for this measure. The main agreed measures adopted under such agreement, applicable to the Bank and its subsidiary, Banco de Castilla - La Mancha, S.A. were: i) Compensated redundancies: the maximum number of workers affected by the collective dismissals will be 525. The selection criterion will be the voluntary adherence to the measure, where all employees of the Bank and its subsidiary Banco de Castilla La Mancha S.A.; may enter into, including those who at the time of signing the Agreement have been on a paid leave of absence agreement under the collective agreement of 1 June The collective of workers born between 1956 and 1959 will be given priority over the other employees to accept the contact termination measure. At the date of preparing of these consolidated financial statements, 351 employees had adhered to the measure. ii) Reduction in working hours: a) All workers of both entities will have their working hours reduced, along with a proportional salary reduction, in the percentage based on the entity they work at and the yearly contractual working hours (between 10.04% and 13.56%). Employees who have a total gross salary of less than 30,000 will receive compensation, which will be received as a single payment of 400 gross in 2017 and 800 gross in both 2018 and

24 b) A maximum number of 50 workers are to have their working hours reduced by between 18% and 30%, based on their annual working hours, along with a proportional reduction in salary. At 31 December 2017, 31 employees of the Group had adhered to this plan. At 31 December 2017 the Group has recorded a provision for the different labour agreements and commitments with the employees above mentioned for an amount of 68,794 thousand ( 100,328 thousand at 31 December 2016) under the headings "Provisions - Pensions and other obligations" and "Provisions - Remaining provisions" of the consolidated balance sheet (Note 19). d) Information on average payment term to suppliers. Third additional provision Disclosure Requirements set out in Law 15/2010 of 5 July. For the purposes of proper understanding of the information contained in this Note, the term "suppliers" is understood to mean exclusively those suppliers of goods and services to the Group whose expenditure is recorded mainly under "Administrative expenses - Other general administrative Expenses" in the consolidated income statement, therefore not including in this Note the payment information on financial transactions which constitute the Group s subject and main activity, or property, plant and equipment suppliers that may exist, which in any case have been made according to the terms established in the corresponding contracts and current legislation. Pursuant to the provisions of the aforementioned ICAC resolution, the period between the date of receipt of invoices (which has no significant differences from the corresponding dates of invoices) and payment date has been considered as "days of payments" for purposes of the preparation of this information. Following is the information required for 2017 and 2016 in the format specified by the ICAC resolution: Average period of payment to suppliers (days) Ratio of transactions paid (days) Ratio of outstanding payment transactions (days) Thousands of euros Total Payments made (thousand euros) 142, ,405 Total Outstanding payments (thousand euros) 2,673 2,386 The Law 11/2013 of 26 July establishes the maximum payment term at 30 days, extendable to a maximum of 60 days by agreement between the parties. e) Responsibility for the information and use of estimates The information in these consolidated financial statements is the responsibility of the Bank's directors. In the Group's 2017 consolidated financial statements, estimates were occasionally made by Directors to quantify certain assets, liabilities, income, expenses and commitments recognised therein. These estimates refer basically to the following: Impairment losses on certain assets (Notes 9, 10, 13, 15, and 16) the assumptions used in the actuarial calculation of the post-employment benefit liabilities and commitments and other long-term commitments to employees (Notes 2-n and 19), the useful life of property, plant and equipment and intangible assets (see Notes 15 and 16), the measurement of consolidation goodwill (Note 16), 7

25 the fair value of certain unlisted assets (Notes 9, 10 and 24), the recoverability of the tax assets (Note 21) and the contingencies for litigation and/or claims in progress (Note 19). These estimates were drawn up on the basis of the best information available at 31 December 2017 on the analysed events. However, it is possible that future events may require them to be significantly modified (upwards or downwards) in subsequent years. Under IAS 8, any changes in accounting estimates are accounted for prospectively, and the impact of the changes in estimates is recognised in the consolidated income statement. f) Agency agreements The required list of agents is presented in Annex IV, as set forth in Article 21 of Royal Decree 84/2015 of 13 February, implementing Law 10/2014 of 26 June, on the organization, supervision and solvency of credit institutions. This list includes financial agents and real state agents. g) Investments in the share capital of credit institutions As required by article 20 of Royal Decree 1245/1995, of 14 July, at 31 December 2017, Liberbank held equity investments in Spanish and foreign credit institutions comprising more than 5% of share capital or voting rights only in Banco de Castilla La Mancha, S.A. (see Note 2.a). h) Environmental impact In view of the activities carried out, the Bank and its subsidiaries do not have any responsibilities, expenses, assets, provisions or contingencies with a significant impact on the environment. Therefore, no specific disclosures relating to environmental issues are included in these notes to the consolidated financial statements. i) Solvency and capital management On 26 June 2013, the European Parliament and the European Union Council approved (EU) Regulation No. 575/2013, on the prudential requirements for credit entities and investment companies, which came into force on 1 January 2014, and Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment companies, which came into force in July These regulations, referred to as CRR/CRD IV, entail the implementation of the Basel III Capital Accord with a gradual transition schedule to total implementation expected for 1 January In this respect, on 5 February 2014 the Bank of Spain s Circular 2/2014 of 31 January was published, establishing what alternatives of the aforementioned Regulation EU 575/2013 must be met by Spanish financial institutions, including the Bank, from 1 January 2014, either permanently or temporarily. On 10 February 2016, the Bank of Spain Circular 2/2016 of 2 February to Credit Institutions on monitoring and solvency came into force. This rule, designed to complete the adaptation of Spanish legal system to Directive 2013/36/EU and Regulation 575/2013, repeals the Circular 3/2008 of the Bank of Spain. Regulation (EU) No. 575/2013 sets forth consistent standards to be met by entities regarding: 1) equity requirements as to credit risk, market risk, operating risk and settlement risk elements; 2) requirements aimed at limiting important risks; 3) liquidity risk coverage regarding fully quantifiable, consistent and normalised elements, once developed by virtue of a Commission delegated act; 4) setting of the leverage ratio; and 5) information and public disclosure requirements. 8

26 As to equity requirements, the abovementioned Regulation introduces a review of the concept and the components of equity required from entities. They are formed by two elements: Tier 1 capital and Tier 2 capital. In addition, Tier 1 capital is equal to the sum of Tier 1 ordinary capital (or Common Equity) and Tier 1 additional capital. That is, Tier 1 capital is formed by those instruments which are capable of absorbing losses when the entity is in operation, while the elements of Tier 2 capital shall absorb losses mainly when the entity is not feasible, if applicable. The companies must comply with the following shareholders equity requirements: i) A Tier 1 ordinary capital ratio of 4.5% (CET 1). ii) A Tier 1 capital ratio (ordinary plus additional) of 6%. iii) A total capital ratio of 8%. Moreover, for these requirements, the Liberbank Group must meet, pursuant to the aforementioned regulations, the following capital requirements: - Maintain a capital conservation buffer, which had been set, for 2017, at 1.25% of common Tier 1 capital, which shall increase by a rate of 0.625% per annum, until reaching a common Tier 1 capital requirement, in 2019, of 2.5%. - Maintenance of a countercyclical buffer, which could amount to as much as 2.5% of common Tier 1 capital. The level that must be covered by this buffer is set by the national authorities on the basis of macroeconomic variables, when an excessive growth of credit has been observed that may be the cause of systemic risk. In this sense, the Bank of Spain had announced that, at the end of 2017 and 2016, the countercyclical capital buffer is to be maintained at 0% of the credit exposures in Spain, for Spanish financial institutions, during the first quarter of 2018 and for the fiscal year 2017 respectively. - Maintenance of a buffer should the entity be designated as a systematic entity. The Group has not been designated as a systemic entity and no capital buffer has been determined for On 25 November, 2016, the Group had been informed by the European Central Bank concerning the decision on prudential minimum capital requirements for 2017, where the requirement for the Liberbank Group was a phased in Common Equity Tier 1 ratio of 8.25% and 11.75% for Total Capital. At 31 December 2017 and 2016, the Group complied with that requirement. At the date of preparation of these consolidated financial statements the European Central Bank has not informed the Group about the capital requirements for the fiscal year Below is a breakdown of the main figures related to capital ratios applicable to the Group, as established in Regulation (EU) No. 575/2013: Thousands of euros 31/12/ /12/2016 Computable Common Equity Tier 1 (a) 2,261,054 2,239,879 Computable Additional Tier 1 Capital (b) 59,268 25,631 Computable Tier 2 Capital (c) 268,721 - Risks (d) 16,826,828 18,544,858 Common Equity Tier 1 Ratio (CET1) (A) = (a)/(d) 13.44% 12.08% Additional Tier 1 Capital Ratio (AT 1) (B) = (b)/(d) 0.35% 0.14% Tier 1 Capital Ratio (Tier 1) (A)+ (B) 13.79% 12.22% Tier 2 Capital Ratio (Tier 2) (C) = (c)/(d) 1.60% - Total Capital Ratio (A) + (B) + (C) 15.39% 12.22% 9

27 The tier 1 ordinary capital essentially includes capital, share premium, the net Group reserves of deductions. On the other hand, tier 2 capital basically includes the issue of subordinated debt performed during the year (see Note 18). Capital management The strategic objectives established by the Bank s Management in relation to capital management are as follows: - Comply at all times with the regulations on minimum capital requirements. - Aim to achieve maximum efficiency in the management of capital to ensure that capital consumption is considered alongside other variables associated with profitability and risk, as a key variable in the analysis underlying investment decisions made by the Bank. In order to meet these objectives, the Group has designed a number of capital management policies and procedures, the main points of which are that in the strategic and operational planning for the Group, as well as the analysis and monitoring of the operations, a key factor in decision-making is the impact of these activities on the Group's equity and the relationship between equity consumption, risk and return. Within its organisational structure, the Bank has monitoring and control units that continually analyse the level of compliance with the capital requirements. These units are equipped with alert systems to guarantee compliance with the applicable regulations. Leverage ratio Below is a breakdown of the main figures on leverage ratios applicable to the Group: Thousands of euros 31/12/ /12/2016 Tier 1 Capital (a) 2,320,322 2,265,510 Exposure (b) 34,454,698 37,796,281 Leverage Ratio (a)/(b) 6.73% 5.99% j) Minimum reserve ratio At 31 December 2017 and 2016, and during the years then ended, the Group met the minimum requirements for this ratio under the applicable Spanish regulations. k) Deposit Guarantee Fund and Single Resolution Fund i) Deposit guarantee fund The Bank and its subsidiary Banco de Castilla La Mancha, S.A. are included in the Deposit Guarantee Fund ("FGD").The regular annual contribution to be made by the entities in this fund, established by Royal Decree-Law 16/2011 dated 14 October, whereby the FGD was created, is determined by the FGD Management Committee and depends on the guaranteed deposits of each bank and its risk profile. The FGD is aimed at guaranteeing reimbursement of guaranteed deposits whenever the depository entity had been declared under insolvency proceedings or upon deposit default, provided that no entity resolution process had been agreed up to the limit established in that Royal Decree. To meet its objectives, FGD thrives on the aforementioned annual contributions made by the Fund between member entities and the funds raised in the securities markets, loans and any other debt operations. 10

28 During fiscal year 2012, Royal Decree-Law No. 2/2012, dated 3 February, for financial sector restoration was published, which amended Royal Decree-Law No. 16/2011, incorporating the possibility of financing the FGD through extraordinary contributions. Since then, the following approvals have taken place: - On 30 July 2012, the Management Committee of the Deposit Guarantee Fund for Credit Institutions resolved to impose an extraordinary contribution on entities covered by the fund, estimated on this basis of contributions at 31 December 2011, which can be settled through annual equal payments ten years. In fiscal year 2012, the Group booked this commitment assumed and the accrual and deferred income from expenses for an amount of 51,731 thousand to be settled in fiscal year 2013 through 2022, both included. The amount pending accrual at 31 December 2017 is 23,660 thousand ( 29,185 thousand at 31 December 2016), which is booked under Other assets and Financial liabilities at amortised cost Other financial liabilities in the consolidated balance sheet (see Notes 17 and 18). - Royal Decree-Law No. 6/2013 of 22 March on protection of holders of certain saving and investment products and other financial measures set an extraordinary contribution equal to 3 per thousands of entities deposits at 31 December At 31 December 2017 and 2016 there are no outstanding payments on this concept. The total expense incurred by the regular contributions made to this body amounted to 36,728 thousand in 2017 ( 33,471 thousand in 2016), and was recorded under Other operating expenses in the consolidated income statement (see Note 26). ii) Single Resolution Fund In March 2014, the Parliament and the European Council reached a political agreement on the creation of the bank union s second pillar: The Single Resolution Mechanism ("MUR"). The main objective of MUR is to ensure that bank failures that may occur in the future in the banking union are managed efficiently, with minimal cost to the taxpayer and the real economy. MUR scope of action is identical to that of the Single Supervisory Mechanism ("MUS"), i.e., a central authority, the Single Resolution Board ("JUR"), is ultimately responsible for the decision to start the resolution of a bank, while the operational decision shall be implemented in cooperation with national resolution authorities. The "JUR" began its work as an autonomous body of the European Union on 1 January The rules governing the banking union are intended to ensure, first, that banks and their shareholders are those who finance resolutions and, if necessary, also partially the bank's creditors. However, another source of funding shall be made available which may be used if contributions of the bank s shareholders and creditors are not enough. This is the Single Resolution Fund ("FUR"), which is managed by the "JUR". The legislation provides that banks will pay contributions to FUR over eight years. In this sense, the FUR became operational on 1 January 2016, which has been implemented by Regulation (EU) No. 806/2014 of the European Parliament and the Council. The calculation s competence of contributions to be made by credit institutions and investment companies to "FUR" corresponds to the JUR. As from 2016, these contributions will be based on: (a) a lump sum contribution (or base annual contribution), in proportion to the liabilities of each entity, excluding equity and covered deposits, with respect to total liabilities, excluding shareholder s equity and covered deposits of all entities authorized in the territory of the participating member states; and (b) a risk adjusted contribution, which will be based on the criteria established in Article 103 paragraph 7 of Directive 2014/59/EU, taking into account the proportionality principle, without creating distortions between structures in the banking sector of member states. The expenses incurred by the contribution made to the Single Resolution Fund in 2017 amounted to 10,460 thousand ( 10,524 thousand in 2016) and is recorded under "Other Operating Expenses" in the consolidated financial statement (see Note 26). 11

29 l) Disclosures required pursuant to Mortgage Market Act 2/1981, of 25 March, and to Royal Decree 716/2009, of 24 April, implementing certain provisions of the aforementioned Law. Article 12 of Mortgage Market Law 2/1981, of 25 March, amended by Law 41/2007, of 7 December, establishes that "the issuer of mortgage bonds shall keep a special accounting record of the loans and credits used to guarantee the mortgage-covered bond issues and, where applicable, the replacement mortgage assets to provide coverage to them, as well as the derivative financial instruments related to each issue. This special accounting record must also identify, for purposes of calculating the limit established in article 16, from among the recorded loans and credits, those which meet the conditions required in section two of this Law. Likewise, Royal Decree 716/2009, of 24 April, implements certain aspects of Law 2/1981, of 25 March. Several Group entities are issuers of mortgage-covered bonds and mortgage bonds and Note 18 provides certain relevant information which must be disclosed in accordance with the mortgage market regulations. Mortgage-covered bonds are securities whose capital and interest are specifically secured, without the need to be filed at the property register, by mortgages registered in the Group s favour and which are not affected by mortgage bond issues, without prejudice to the Bank's universal asset liability by the replacement assets and by the cash flow generated by the derivative financial instruments associated with each issue. m) New standards Changes introduced in fiscal year 2017 In 2017, the following Standards and Interpretations adopted by the European Union and the Group have come into force, and they have not had a significant impact on the consolidated financial statements: Amendment to IAS 12 "Income taxes". Recognition of deferred tax assets for unrealised losses" Modifications made to IAS 12 clarify the requirements for recognition of deferred tax assets for unrealised losses on debt instruments measured at fair value. Following are the aspects to clarify: - An unrealised loss in a debt instrument measured at fair value will result in a deductible temporary difference, regardless of whether the holder expects to recover its carrying amount through sell or through maintenance until expiration. - The entity shall assess the use of a deductible temporary difference in combination with other deductible temporary differences. When tax laws restrict the use of tax losses, the entity shall assess its use in relation to other temporary differences of the appropriate type. - The estimate of future tax benefits may contemplate benefits derived from assets recovery to an amount higher than its carrying amount, provided there is sufficient evidence that it is likely to be the amount for which the asset will be recovered. - The estimate of future tax benefits excludes tax deductions from reversal of deductible temporary differences. IAS 7 - "Statement of cash flows". Initiative on Disclosures. Amendments made to IAS 7 introduce the following new information disclosures related to changes in liabilities arising from financing activities, to the extent necessary to enable 12

30 financial statement users to evaluate changes in such liabilities: changes in financing cash flows; changes arising from obtaining or losing control of subsidiaries or other businesses; the effect of changes in exchange rates; changes in fair value; and other changes. IFRS Annual Improvements Project The annual project for the improvement of IFRS introduces minor amendments and clarifications to IFRS 12 - Disclosure of Interests in Other Entities. Standards and interpretations issued not in force In 2017, the following standards, interpretations or amendments have been published by the IASB and approved by the European Union, but are not mandatory at 31 December Although in some cases the IASB allows the amendments to be applied prior to their entry into force, the Group has not yet introduced them because the effects are currently being analysed. IFRS 9 Financial Instruments On 24 July 2014 the International Accounting Standards Board issued the International Financial Reporting Standard (IFRS) 9, related to Financial instruments. It is intended to improve the financial instruments information, addressing issues arisen on this matter during the financial crisis. The implementation of IFRS 9 involves amendments of several International Accounting Standards (IAS), as well as different interpretations of the International Financial Reporting Interpretations Committee (IFRIC) and of the Standards Interpretation Committee (SIC). In order to be consistent with the European Union Law, on 29 November 2016 the (EU) Regulations 2016/2067 of the European Commission was published, modifying the (EC) Regulations 1126/2008 in all related to the International Financial Reporting Standard. The Regulations has set 1 January 2018 as the mandatory application date for IFRS 9, with the possibility of early application. The purpose of this standard is setting forth rules on financial information related to the financial assets and liabilities, so as to provide relevant and useful information to the users of financial statements when assessing the amounts, schedules and uncertainty of the entities' future cash flows. During the 2017 fiscal year, the Group carried out an IFRS 9 implementation project, where all the affected departments participated: accounting, finance, risk, technology, business areas, etc. The Group s Senior Management was also involved. With regard to the foregoing, the Liberbank Group has established the following development milestones for the first IFRS 9 application: i) Classification of financial assets and liabilities Pursuant to the IFRS 9, the classification and valuation of the financial assets will be performed according to the business model considered by the Group for the management and the features of the contractual flows. As a result of this, the financial assets will be included for the purpose of valuation in some of the following headings: Financial assets at amortised cost, financial assets at fair value with changes in other comprehensive income or financial assets at fair value with changes in profit or loss. The combined effect of the business model application and the characteristics of contractual cash flows may result in differences in the generate of financial assets measured at amortised cost or at fair value compared to IAS 39, although the Group does not expect significant changes in this regard as it is shown below: 13

31 Loans and accounts receivable will be measured at the amortised cost. The Group has planned for the creation of a single business model where financial assets are managed to generate cash flows through contractual recoveries during the term of an instrument. Given the contractual characteristics of the operations granted by the Group, being consistent with a basic borrowing agreement and based on the analysis carried out, essentially there is no need for any reclassification of the portfolio due to the evaluation of the Solely Payments of Principal and Interests (SPPI) test. The debt securities currently classified on the balance sheet as Available for sale financial assets are recognised, for the most part, at their fair value with changes for other comprehensive income. This portfolio corresponds to the Group, containing a mixed business model approach, the purpose of which is for the management of financial assets for cash flow generation: (i) through contractual recovery during the term of an instrument and; (ii) during their sale. Following the analysis, any securities that do not comply with the SPPI test are considered as not significant. At 31 December 2017 and 31 December 2016, the Liberbank Group had no debt securities recognised on the balance sheet as Financial assets held for trading or as Held-to-maturity investments. At 31 December 2017, after reviewing the business models and the characteristics of the contractual cash flows (SPPI test) on all loans and debt securities registered on the balance sheet, at 31 December 2017, the Liberbank Group does not consider there to be any significant impact. Furthermore, with regard to the variable income portfolio, the analysis has been completed so as to make a final decision for its recognition. As for financial liabilities, the classification categories set out by IFRS 9 are similar to those already covered by IAS 39 and, accordingly, there are no relevant differences. ii) Credit risk classification At 31 December 2017, the Liberbank Group updated its individual and group classification algorithms based on the debtor insolvency risk. In this manner, the Group has established mass automatic classification criteria for the classification algorithm, allowing for the early identification of objective evidence for impairment as well as any significant increase in risk. Financial instruments are grouped into three categories when following the applied impairment methodology, in accordance with the following structure: Stage 1 - Standard Risk: during the initial recognition, a provision is estimated based on expected credit losses over the next 12 months. Stage 2 - Standard Risk under Special Surveillance: when an instrument experiences a significant increase in its credit risk, a provision must be recorded to cover the expected credit loss over the expected life of the financial instrument. Stage 3 - Doubtful Risk: expected credit losses over the expected life of these loans must be recognised. At the end of each period, the Group assesses whether there is objective evidence of impairment or a significant increase in credit risk after the initial recognition of all financial assets that are individually significant and based on a series of quantitative and qualitative criteria. Quantitative criteria: The Group uses a quantitative analysis based on the comparison of the current expected Probability of default (PD) with the original PD at the time of the initial recognition. The threshold used by the Group to determine whether there is a significant risk increase takes into account the internal policies 14

32 of the entity with regard to the operational risk acceptance powers delegated to the Risk Committees of the management centres. Qualitative criteria: The Group has established a set of alerts to detect whether an operation has incurred a significant increase in risk. In any case, Stage 2 includes instruments where any of the following circumstances are met: Default on payment for more than 30 days. On the basis of reasonable and substantiated information, a default of more than 30 days is a presumption that can be refuted for cases where the entity deems that it can demonstrate that the credit risk has not increased significantly. It is subject to special surveillance by the Risk areas due to the Group s monitoring systems. Instruments that have undergone refinancing or restructuring and that show no evidence of impairment. Risks where holders are undergoing insolvency proceedings with creditors, where they were previously classified under doubtful risk. Operations included in a special debt sustainability agreement. iii) Value impairment Among the changes considered in IFRS 9 it is worth to mention the new impairment model of the financial assets, according to the expected loss instead of the incurred loss (IAS 39). In this line, the objective of the requisites on impairment is to recognise the credit losses expected over the whole life of the assets related to all financial instruments in which a significant increase of the credit risk since the initial recognition has arisen, taking into account the change in the non-compliance risk over the remaining life of the financial instrument, and to this end using all the reasonable and sound information, included prospections. In the initial recognition of a transaction and until a significant increase of risk takes place, the valuation adjustment for losses will be calculated in an amount equal to the credit losses expected in the following 12 months ("losses expected in 12 months"). In case a significant increase of risk related to the instrument takes place, the valuation adjustment for losses will be increased until the credit losses expected over the whole life of the assets are covered. When estimating the foregoing expected loss, the Group considers various possible loss scenarios and weighs each scenario by its corresponding likelihood of occurrence. The Group has been working on the modelling of these possible loss scenarios and on the determination of their corresponding likelihood of occurrence. These new impairment requirements will: Be applicable to financial assets not valued at their fair value through profit or loss, as well as for lease agreements and certain commitments agreed in loan and financial guarantee contracts. Be applicable not only for balance positions. The risks and contingent commitments assumed by the Liberbank Group will also be considered at each analysis date. Estimate the following: (i) individually, for any exposures showing objective evidence of impairment and maintained with individually significant debtors and (ii) collectively, for all other exposures. In principle, an increase in the total level of impairment losses is expected as all financial assets will carry with them a provision for expected loss of at least 12 months, and the population of financial assets for which a provision for expected loss will apply over the life of the entire operation is expected to be greater than the population for which there is objective evidence of impairment under IAS

33 iv) Hedge accounting General hedge accounting shall also imply changes because the standard approach differs from that of the current IAS 39 upon trying to align accounting to risk economic management. In addition, IFRS 9 will allow applying hedge accounting to a wider range of risks and hedge instruments. The standard does not address the accounting of denominated macro-hedging strategies. In order to avoid any conflict between the current macrohedge accounting and the new general system of hedge accounting, IFRS 9 includes an accounting policy option to continue to apply hedge accounting according to IAS 39. The Group has analysed this regulatory change and has come to the decision, for the moment, to continue accounting for these financial instruments pursuant to IAS 39 until the entry into force of the macro hedging standard. In summary, following the application of this regulation, the Group expects a 10 basis-point reduction in the CET1 ratio. At the date of preparing these consolidated financial statements, there is uncertainty regarding the tax effect of the aforementioned adjustments. The foregoing impacts are based on the reviews conducted up to the date of preparing these consolidated financial statements and are the best estimate of the most significant impacts, however, it does not create a complete and accurate detail of the totality of the impacts after 1 January IFRS 15 Revenue from Contracts with Customers - IFRS 15 sets the principles to be applied by an entity to book revenues and cash flows from contracts for the sale of goods or services to its customers. According to this new standard, entities shall recognise revenues from contracts with customers once they have fulfilled their obligations to transfer assets or render services to their customers, as contractually agreed upon, and a good or service is deemed transferred when the customer gains control thereof. As to the amount to be recognised, it shall be the one reflecting the payment at which it is expected to have rights in relation to the goods or services transferred. IFRS 15 replaces IAS 18 "Revenue", IAS 11 "Construction Contracts", IFRIC 13 "Customer Loyalty Programmes", IFRIC 15 "Agreements for the Construction of Real Estate", IFRIC 18 "Transfers of Assets from Customers" and SIC 31 "Revenue-Swaps in advertising services. This standard shall be applied to the fiscal years beginning on or after 1 January 2018, though earlier application is permitted. IFRS 15 - "Clarifications to IFRS 15 Revenue from contracts with customers" Amendments to IFRS 15 clarify how some of the principles of the new standard must be applied. Specifically, they clarify: - How to identify a performance obligation (promise to transfer a good or service to a customer) in a contract; - How to determine whether an entity acts as the primary (provider of a good or service) or as an agent (responsible for arranging the transfer of the good or service); and - How to determine whether revenue from granting a license must be recognised at a certain time or over time. Additionally, two amendments are included to reduce the cost and complexity of first applying the new Standard. These amendments shall be applied at the same time that the IFRS 15, that is, to the fiscal years beginning on or after 1 January 2018, though earlier application is permitted. 16

34 Amendment to IFRS 10 "Consolidated Financial Statements" and amendment to IAS 28 "Investments in associates and joint ventures". Amendments to IFRS 10 and IAS 28 state that whenever an entity sold or contributed assets representing a business (including their consolidated subsidiaries) to an associated or joint venture, it shall fully recognise profit or loss from the transaction. However, whenever the assets sold or contributed did not represent a business, it shall recognise profit or loss only to the extent of interests in the associate or joint venture of other investors not related to the entity. These amendments shall be applied to the fiscal years beginning as of their effective date, though earlier application is permitted. IFRS 16 Leases On 13 January 2016, the IASB issued IFRS 16, which will replace IAS 17 "Leases". The new standard introduces a single accounting model for the lessee which is required to recognise the assets and liabilities of all leases within a period of more than 12 months, unless the underlying asset value is low. The lessee shall recognise in the asset a right of use representing their right to use the leased asset, and a lease liability representing their obligation to make lease payments. With regard to lessor accounting, IFRS 16 substantially maintains the accounting requirements of IAS 17. Therefore, the lessor shall continue to classify their leases as operating leases or finance leases, and shall record each of these two types of leases differently. This standard shall be applied to the fiscal years beginning on or after 1 January 2019, though earlier application is permitted as long as IFRS 15 is applied. IFRS 2 "Classification and Measurement of share based payments" Amendments made to IFRS 2 establish the requirements to be applied in three aspects: - In measuring the fair value of a share-based payment that is settled in cash, vesting conditions other than market conditions will only be taken into account to adjust the number of shares to be included in the transaction amount. - When, in a transaction that would be classified as share-based payment that is settled with equity instruments, an entity retains a number of equity instruments that equals the monetary value of withholding tax legal obligation, the whole transaction will be classified as a share-based payment that is settled with equity instruments. - When a share-based payment that is settled in cash is classified as share-based payment settled with equity instruments, the modification will be recorded by derecognising the original liability and recognising in equity the fair value of the equity instruments granted and those for which goods or services have been received on the modification date; differences will be recognised immediately in the income statement. These amendments shall be applied to the fiscal years beginning on or after 1 January 2018, though earlier application is permitted. Its implementation has not yet been approved by the European Union, which is foreseen for the first quarter of Amended IFRS 4 - Insurance Contracts The amendments introduce two options to address the issues relating to the financial statements of insurance contract issuers, which may be difficult to understand when applying IFRS 9 before the forthcoming rules on insurance contracts: 17

35 - Overlay Approach: allows any entity issuing insurance contracts to record, under equity, rather than the income statement, additional accounting volatility arising during the application of IFRS 9, when compared to IAS 39 prior to the application of the forthcoming standard on insurance contracts. - Deferral approach or temporary exemption: allows entities, whose main activities are related to insurance activities, to defer the application of the IFRS 9 and continue applying the IAS 39 until These amendments shall be applied to the fiscal years beginning on or after 1 January 2018, though earlier application is permitted. IFRS Annual Improvements Project The IFRS Annual Improvements Project introduces minor amendments and clarifications to IFRS 1 - First-Time Adoption of International Financial Reporting Standards and IAS 28 - Investments in Associates and Joint Ventures, which shall be applied to the fiscal years beginning on or after 1 January 2018, though earlier application is permitted for the amendments of IAS 28. IFRIC 22 Foreign Currency Transactions and Advance Considerations The Interpretation refers to the determination of the date of the transaction and, consequently, the exchange rate used to convert assets, expenditures or income related to the initial recognition, in circumstances where a non-monetary asset or non-monetary liability has been previously recorded for deferred income derived from a payment or prepayment for the consideration, and establishes that the transaction date is the date in which the entity initially recognises the non-monetary asset or non-monetary liability. If there are payments or prepayments, the entity shall determine a transaction date for each payment or prepayment for the consideration. The interpretation shall be applied to the fiscal years beginning on or after 1 January 2018, though earlier application is permitted. Its implementation has not yet been approved by the European Union, which is foreseen for the first quarter of Amended IAS 40 - Investment Property These amendments establish that an entity shall transfer a property to, or from, investment properties only when there is a change in use of a property reflected with the evidence depicting that a change has occurred. It is considered that a change of use occurs when the property ceases complying with, or that no longer meets, the definition of investment property. The interpretation shall be applied to the fiscal years beginning on or after 1 January 2018, though earlier application is permitted. Its implementation has not yet been approved by the European Union, which is foreseen for the first quarter of IFRS 17 Insurance Contracts IFRS 17 sets the principles to be applied by an entity to recognise insurance contracts. This new standard replaces IFRS 4. The new standard introduces a single accounting model for all the insurance contracts and requires the entities to use updated assumptions on their estimates. An entity will split the contracts by groups and will recognise and measure the insurance contract groups for the total amount of: 18

36 - the fulfilment cash flows, which include the estimates of the future cash flows, an adjustment to reflect the temporary value of money and the financial risk related to the future cash flows, as well as a risk adjustment for the non-financial risk. and - the spread of contractual service, representing the non-accrued profit. The amounts recognised in the profit or loss account will be broken down in income from the insurance activity, expenses from the provision of insurance services and income or expenses from the insurance financing. The income from the insurance activity and the expenses from the provision of insurance services will exclude any investment item. The income from the insurance activity will be recognised during the term in which the entity provides the insurance coverage, and will be allocated to the accounting terms in proportion to the value of the insurance coverage provided by the insurer during that term. This standard shall be applied to the fiscal years beginning on or after 1 January 2021, though earlier application is permitted. Its implementation has not yet been approved by the European Union, which is foreseen for the third quarter of IFRIC 23 - Uncertainty on income tax treatments. The interpretation explains how to apply recognition and measurement requirements of IAS 12 in case of uncertainty on the income tax treatments. If, according to the entity, the Tax Authorities may accept an uncertain tax treatment, the Interpretation requires the entity to calculate the tax gain (tax loss), the tax bases, the unused tax losses, the unused tax credits or the tax rates consistently with the tax treatment used or intended to be used in its income tax return. If, according to the entity, the Tax Authorities will not accept an uncertain tax treatment, the Interpretation requires the entity to use the most probable amount or the expected value (sum of the possible amounts weighted by their probability) in order to determine the tax gain (tax loss), the tax bases, the unused tax losses, the unused tax credits or the tax rates. The method finally used will be able to provide the best forecasting of the uncertainty resolution. The interpretation shall be applied to the fiscal years beginning on or after 1 January 2019, though earlier application is permitted. Its implementation has not yet been approved by the European Union. Amended IFRS 9 - Features of early repayment with negative compensation Amendments made to IFRS 9 establish that, under certain circumstances, early repayment of assets by the borrower involving the payment of compensation can be measured at amortised cost or at fair value with changes to other accumulated comprehensive income instead of at fair value through profit or loss. For this circumstance to occur, the financial asset must meet the requirements to be considered as having contractual cash flows being only principal and interest payments, with the exception of the option of early settlement. Additionally, with respect to the accounting of the contractual modifications for financial liabilities that do not imply their derecognition, it is established that these should be treated as a change in the estimate of cash flows for contractual liabilities, by maintaining the original effective interest rate and adjusting the carrying amount at the date of the change. These amendments shall be applied to the fiscal years beginning on or after 1 January 2019, though earlier application is permitted. Its implementation has not yet been approved by the European Union, which is foreseen for the first quarter of Amendments to IAS 28 - Long-term Interests in Associates and Joint Ventures 19

37 This amendment determines that IFRS 9 will be applicable to financial instruments that are long-term interests in associate companies and joint ventures that are part of the net investment held by the entity as ownership interests and that are not accounted for using the equity method. This amendment shall be applied to the fiscal years beginning on or after 1 January 2019, though earlier application is permitted. Its implementation has not yet been approved by the European Union, which is foreseen for the year IFRS Annual Improvements Project The annual IFRS improvement project introduces minor modifications and clarifications to IFRS 3 Business combinations, IFRS 11 Joint arrangements, IAS 12 Income taxes and IAS 23 Borrowing costs, which will be applied to fiscal years starting from 1 January 2019, although their early application is permitted. Its implementation has not yet been approved by the European Union, which is foreseen for the year n) Comparative information The information related to 31 December 2016 contained in these consolidated financial statements is presented solely and exclusively for comparative purposes with the information related to the fiscal year 2017, and therefore it can not be considered the Group's consolidated financial statements for the year For the sake of transparency and by applying the accounting standards in force, the Bank Directors have retroactively adjusted the comparative information related to the fiscal year 2016, therefore reclassifying the impairment of certain equity instruments classified as "Available-for-sale financial assets" for an amount of 30 million, from the heading "Equity - Other accumulated comprehensive income" to the heading "Equity-Accumulated gains" of the consolidated balance sheet. At the end of fiscal year 2016 there were no tax or equity impacts as a result of such adjustment. o) Going concern principle The Group operates in a low interest rate framework, along with a strong competition for attracting deposits, which has resulted in a narrowing of the interest margin and a decrease in the profitability of their operations. Additionally, financial institutions are subject, as a consequence of the last crisis, to a highly regulated environment, along with the ongoing supervision of supervisory and government bodies, which is expected to continue to adversely affect to the financial position of financial institutions. On the other hand, the Group registered losses at the end of 2017 totalling 302 million, as a result of the losses incurred during the third quarter of the year after redirecting the sales strategy of its entire portfolio of non-performing assets (doubtful loans and foreclosed assets), being in line with the market situation, in accordance with the decision made by the Board of the Bank on 6 September 2017 (see Note 2.v). Due to this circumstance, the Bank Directors have formulated these consolidated financial statements, prepared on a going concern basis, as it is considered that the Group's business will continue as usual into the future. For this evaluation, the Bank s Directors deem the following: The Bank has the financial support of its shareholders to implement its strategy. To this effect, in November 2017, Liberbank successfully completed a capital increase of 499 million, where of its significant shareholders participated creating a demand that was 7.9 times greater than the increase itself. The Group is subject to regulatory capital requirements, which are a determining factor as a going concern. Despite the losses incurred during the year, as a result of the 20

38 aforementioned capital increase, the Total Capital Ratio stood at 15.39% at the end of the year, compared to the minimum of 11.75% imposed by the European Central Bank for the Group (see Note 1.l). Additionally, the Group, pursuant to its business plan and specific capital measures, has capital generating mechanisms that it deems will enable it to comply with the capital requirements at any given moment. Other mechanisms include: (i) the generation of profits during the fourth quarter of 2017 and for the beginning of 2018, (ii) the reduction of riskweighted assets as the sale of non-performing assets continues. During the first days of June 2017, the listed share price of the Bank suffered sharp declines and high volatility (in a context where there was no negative information reported by the Bank or information pending announcement by the Bank), a situation that caused the supervisory authority of the securities market to prohibit the short selling and any other similar operation (short positions) associated with the Bank s shares. The CNMV lifted this prohibition in November 2017, as soon as the aforementioned capital increase process was successfully completed, without a similar situation having occurred since. One of the main factors impacting on Liberbank s share price, due to the contagious effect of Banco Popular Español, S.A., has been the large weight of non-performing assets on its balance sheet and its level of coverage compared to other entities in the sector, along with doubts arising from fast paced disposals in the future. The change of strategy for the management and sale of assets approved in the third quarter of 2017 has allowed for the reduction of the non-performing assets portfolio by 1,800 million during the 2017 fiscal year and the increase of its coverage level from 40% to 50%, being in line with the established objectives and reported to the markets for the end of the fiscal year. With regard to the financing structure, the Group has a broad base of stable resources, which is well diversified and it has no significant concentration in maturities. Additionally, the Group maintains a solid liquidity position. Accordingly, loans and retail deposits on the balance sheet follow a balanced evolution, at 31 December 2017, where the loan to deposit ratio stood at an optimal level of 90.8%. This fact is also reflected in the LCR (Liquidity Coverage Ratio), which indicates the level of short-term liquidity, where it reached 406% (well above the regulatory threshold of 80%). Furthermore, the NSFR (Net Stable Financial Ratio), which measures the ratio between available stable funds and required funds, in accordance to the type of investment made by the Group, remains well above 100% (131%). Moreover, the Group's liquid assets, at 31 December 2017, amounted to 6,535 million, all of which is readily convertible to cash. Additionally, the Group has an issuance capacity of 5,094 million at such date. p) Events after the reporting period From 31 December 2017 and until the date of preparing these consolidated financial statements, the following significant events have taken place: - Merger through absorption of Banco de Castilla-La Mancha, S.A. Common merger project On 6 February 2018, the Directors of Banco de Castilla-La Mancha, S.A. ( Absorbed Company ) and Liberbank S.A. ( Absorbing Company ), approved to raise, before the General Shareholders Meeting of Liberbank, the Common Merger Project for its approval, with the consequent extinction of the Absorbed Company and the transfer of its assets by universal succession, without liquidation, to the Absorbing Company, leaving the Absorbing Company subrogated to all the rights and obligations of the Absorbed Company. 21

39 The purpose of this operation was to simplify the corporate, organisational and operating structure of the Liberbank Group, by facilitating an improved and more efficient use of its resources, given that Banco de Castilla-La Mancha, S.A. was already fully owned by Liberbank at the end of the 2017 fiscal year (see Note 14). Merger balance sheet and financial statements In accordance with Article 36 of Law 3/2009, of 3 April, on structural modifications to companies, the merger balance sheets, at 31 December 2017, have been used. The audited merger balance sheets of Banco de Castilla-La Mancha, S.A. and Liberbank, S.A. are subject to the approval of its sole shareholder in the case of the Absorbed Company and the General Shareholders Meeting of the Bank in the case of the Absorbing Company. Date of merger for accounting purposes Pursuant to the provisions of the applicable accounting regulations, for accounting purposes, the date of 1 January 2018 will be the date at which operations made by Banco de Castilla-La Mancha, S.A. are considered as those of Liberbank. Tax System This operation will adhere to the tax regime established in Chapter VII of Title VII of Law 27/2014, of 27 November, on corporate income tax and, for this purpose, all pertinent measures required for the proper implementation of the established requirements of the aforementioned standard are to be enforced. Suspensive conditions The effectiveness of the merger is subject to the following conditions precedent: - the approval of the Merger Project at the General Shareholders Meeting. - the authorisation of the Ministry of Economy and Competitiveness, - all other authorisations, in accordance with the activities of the Absorbed Company, which have to be obtained from the Bank of Spain, the National Securities Market Commission (CNMV) and any other administrative body or entity. 2. Accounting principles, policies and measurement criteria The accounting principles and policies and measurement criteria applied in preparing the consolidated financial statements for 2017 were as follows: a) Business combinations and consolidation A business combination is a transaction or another event in which the acquirer obtains control over one or more businesses. For these purposes, an entity controls another one when it has the power to govern its financial and operating policies, as stipulated by law, the bylaws or agreement, so as to obtain economic benefits from its activities. Accordingly, a business is defined as an integrated set of activities and assets which can be controlled and managed for the purpose of providing a return in the form of a dividend, minus costs and other economic benefits, directly to the investors or other owners, members or ventures. In particular, the acquisition of control over an entity is considered a business combination. 22

40 The business combinations through which the Group acquired control of an entity or economic unit are recognised for accounting purposes using the acquisition method, the main phases of which are summarised as follows: a) Identify the acquirer. b) Determine the acquisition date. c) Recognise and measure the acquired identifiable assets, the assumed liabilities and any non-controlling interest in the acquiree. Apart from the exceptions mentioned in IFRS 3, in general, the identified assets, liabilities and contingent liabilities of the entity or business acquired are measured at fair value when control is acquired. d) Recognise and measure goodwill or the gain from a bargain purchase in the consolidated income statement comparing the price paid in the business combination and the initial value of the identified assets, liabilities and contingent liabilities of the acquired business. In situations in which the Group obtained control of an acquiree, in which it holds equity interest immediately prior to the acquisition date (a business combination achieved in stages), its equity interests in the acquiree previously held at fair value at the acquisition date are remeasured and the resulting gains or losses, if any, are recognised in the consolidated income statement. In the case of business combinations carried out without transferring consideration, such as business combinations achieved by contract alone, the Group recognises the amount of the net assets and liabilities of the acquiree applying the policies and bases contained in IFRS 3 (in general and with the exceptions established in IFRS 3 at fair value) in the Group s equity, such that any goodwill or gains arising from the purchase are not recognised in business combinations of this type. Subsidiaries Subsidiaries are defined as entities over which the Bank has the capacity to exercise control; control is, in general but not exclusively, presumed to exist when the Parent owns directly or indirectly half or more of the voting power of the investee or, even if this percentage is lower or zero, when, for example, there are other circumstances or agreements that give the Bank control. In accordance with IAS 27, control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Annex I to these Notes to the consolidated financial statements details the Group's companies and information thereon. The main changes that affected these companies in 2016 and 2017 were as follows: Fiscal Year 2017 On 5 June 2017, the incorporation deed of the company Explotaciones Macizos Montalbán, S.L. Unipersonal was formalised with a share capital of 3 thousand, divided into 3,000 shares of 1 par value, fully subscribed and paid by Banco de Castilla La Mancha, S.A. On 31 July 2017, the incorporation deed of the company Vetonia Hostelería, S.L.U. was formalised by the Bank for an amount of 3,600 thousand, resulting in a loss of 1,595 thousand, recognised under the heading " Net gains or losses from the derecognition in the non-financial assets and shareholdings account of the consolidated income statement. 23

41 On 8 August 2017, the Bank entered into an agreement with Promontoria Holding, owner of Haya Real Estate, S.L.U., under which this real estate management platform acquires Mihabitans Cartera, S.A.U, a subsidiary fully owned by the Bank. Under this agreement, Mihabitans Cartera, S.A.U entered into a contract of provision of services, by which it is entitled to manage and market the Bank and its subsidiaries' foreclosed assets for a 7 years term. As a result, a profit of 84,800 thousand has been generated for the Group, recorded under the heading "Net gains or losses from the derecognition in the non-financial assets and shareholdings account in the consolidated income statement. On 27 October 2017, the incorporation deed of the company Explotaciones Santa Isabel, S.L. Unipersonal was formalised with a share capital of 3 thousand, divided into 3,000 shares of 1 par value, fully subscribed and paid by Banco de Castilla La Mancha, S.A. On 13 November 2017, the incorporation deed of the company Hoteles Layos, S.L.U. was formalised with a share capital of 3 thousand, divided into 3,000 shares of 1 par value, fully subscribed and paid by Banco de Castilla La Mancha, S.A. in order to operate several hotels managed. On 13 December 2017, the liquidation and extinction of Sociedad Promotora de las Telecomunicaciones en Extremadura S.A. took place, which was 95.86% owned by the Group, which corresponded to a liquidation share of 1,193 thousand in cash and 83 thousand in other types of assets. As a result, a loss of 1,508 thousand has been generated for the Group, recorded under the heading "Net gains or losses from the derecognition in the non-financial assets and shareholdings account in the consolidated income statement. On 18 December 2017, the Bank signed the bylaws for the company Arco Explotaciones, S.L.U., before a notary public, having a share capital of 3 thousand, divided into 3,000 shares at 1 par value per share, fully subscribed and paid up by Banco de Castilla - La Mancha, S.A., in order to be awarded an agricultural and game operation. On 22 December 2017, the company Grafton Investments, S.L.U. was acquired for a share capital of 3 thousand, divided into 3,000 shares at 1 par value per share, in order to be awarded a hotel whose management is to be transferred to a third party after the signing of the management agreement. On 22 December 2017, the company Lisson Directorship, S.L.U was acquired for a share capital of 3 thousand, divided into 3,000 shares at 1 par value per share, in order to be awarded a car park whose management is to be transferred to a third party after the signing of the management agreement. On 22 December 2017, a share purchase agreement was signed before a notary public, where Liberbank sold its shareholding in Laoconte Operaciones, S.L.U., for the amount of 7,250 thousand, which yielded a 9,057 thousand profit for the Group and was recorded under Net gains or losses from the derecognition in the non-financial assets and shareholdings account on the consolidated income statement. On 28 December 2017, an agreement was signed before a notary public for the purchase of ownership interests where Liberbank sold its interest in Aquanex, Servicio domiciliario del Agua de Extremadura, S.A., for the amount of 6,100 thousand, having registered a loss of 267 thousand and recorded under Net gains or losses from the derecognition in the non-financial assets and shareholdings account on the consolidated income statement. At 31 December 2016, Banco de Castilla La Mancha, S.A. recorded an equity that was less than two-thirds of its capital. As laid down by Article 327 of the revised text of the Spanish Capital Companies Act, its administrators had one fiscal year to restore the equity balance or, failing this, Banco de Castilla La Mancha, S.A. shall be forced to reduce its capital. 24

42 Fiscal Year 2016 In order to restore the equity balance, on 13 March 2017, the Board of Directors of Banco de Castilla La Mancha, S.A. agreed to propose to the General Shareholders Meeting the decrease of the share capital of the company by 144,772 thousand, through the reduction of the par value of each of the shares in its capital by 1.6 per share. Such capital reduction was approved by the General Shareholders' Meeting on 24 April 2017, and was registered in the Commercial Registry on 10 April On 30 September 2017, Banco de Castilla-La Mancha, S.A. shows a negative equity for an amount of 193,045 thousand, being under cause of dissolution according to the article 363 of the Consolidated Companies Law. On 18 December 2017, the General Shareholders Meeting was held, which adopted the simultaneous capital reduction and increase agreement, which allows for the equity balance to be restored through the partial elimination of existing losses. The capital increase occurred through the issuance of 315,045,563 new shares with a nominal value of 0.08 each and a share premium of 0.92 euros each, reaching a final total of 315,046 thousand. On 31 January 2018, this operation was registered at the Companies Registry of Cuenca. At 31 December 2017, Liberbank had irrevocably committed to subscribe 100% of the capital increase, whereby becoming the Bank s sole shareholder (75% at 31 December 2016). On 12 March 2012, the General Shareholders' Meeting of Liberbank, S.A. agreed to guarantee, in solidarity and indefinitely, the obligations undertaken by Banco de Castilla La Mancha, S.A. In accordance with the addendum, dated 28 December 2010, the integration agreement, under the scope of the establishment of the Liberbank Group, Banco de Castilla La Mancha, S.A. has ceded the control of its investee companies over to Liberbank, S.A. The transfer of control over the investee companies to Liberbank was implemented through the assignment of political rights that corresponded to Banco de Castilla La Mancha, S.A., as a shareholder or partner of such investee companies. Under this assignment, the representation at the General Meeting of partners or shareholders and the proposal for the membership of the administrative bodies and Management of the investee companies corresponds to Liberbank, S.A. Accordingly, Annex I provides the most relevant financial information concerning the investee companies of Banco de Castilla La Mancha, S.A. On 31 March 2016 the Group signed the sale of 16,000,000 shares, which represent 100% of the share capital of Ecoiberia Solar, S.L.U. The total sale price for the ownership interest amounted to 20,227 thousand. The profit from the sale was 442 thousand and is recorded under the heading "Gains or losses for derecognition of non-financial assets and shares (net)" of the consolidated income statement. On 19 May 2016, the public articles of incorporation for the Company Mihabitans Cartera, S.A. Unipersonal were formalised with a share capital of 60 thousand, divided into 60,000 shares of 1 par value, fully subscribed and paid by Liberbank, S.A. On 27 July 2016, the Sole Shareholder of Bancantabria Systems, S.L.U. resolved to contribute funds to the equity of the Company for the amount of 780 thousand, in accordance with a payment schedule. At 31 December 2016, the contributions having been made amounted to 580 thousand. Additionally, in 2017 and 2016 the group's control, joint control or significant influence over its investees did not change as a result of the aforementioned facts, so no additional variations were made to their classification as a group, associates or jointly controlled entities or to their consolidation or measurement method for the purposes of drafting the 2017 consolidated financial statements with respect to the situation at 31 December The subsidiaries are fully consolidated using the method defined in IAS

43 The following criteria were applied during consolidation: 1. All material balances and transactions carried out between consolidated companies and the material results on internal transactions not made with third parties were eliminated on consolidation. 2. The value of the minority interest stake in equity and in the profit of the subsidiaries is recorded under Minority interest in the equity of the attached consolidated balance sheet and in Profit attributed to the minority interest in the attached consolidated income statement, respectively (see Note 23). 3. The change in equity of the consolidated subsidiaries since the acquisition that it not attributable to changes in ownership percentages is recorded under "Accumulated gains" in the consolidated balance sheet. 4. The results of subsidiaries acquired during the year are consolidated by only considering those corresponding to the period between the acquisition date and year-end. In parallel, the results of subsidiaries divested during the year are consolidated by only considering those corresponding to the period between the start of the year and the sale date. Joint Ventures A joint venture is a contractual arrangement whereby two or more entities ( venturers ) undertake a business activity which is subject to joint control, i.e. a contractual arrangement to share the power to govern the financial and operating policies of an entity, or another business activity, in order to benefit from its operations, whereby strategic financial and operating decisions require the unanimous consent of all the venturers. Likewise, investments in entities that are not subsidiaries but which are jointly controlled by two or more companies are also considered to be joint ventures. In the consolidated financial statements, investments in joint ventures are accounted for using the equity method, as defined by IAS 28. Relevant information on these entities is disclosed in Annex II. The main changes that affected these companies in 2016 and 2017 were as follows: Fiscal Year 2017 On 31 March 2017, the Annual General Meeting of "Liberbank Vida y Pensiones, Seguros y Reaseguros S.A. approved the capital decrease for an amount of 15,001 thousand by decreasing the par value of the shares in 5,665 euros in order to reimburse the contributions from the shareholders. On 21 April 2017, the Annual General Meeting of the Instituto de Medicina Oncológica Molecular de Asturias, S.A. approved the contribution by each shareholder to the company s equity amounting to 401 thousand, in order to compensate for losses incurred in previous years, regularise the current situation of asset imbalance at that time and provide liquidity to the society. The contribution corresponds to the proportionate interest of Liberbank Capital, S.A.U. (33.33%). Fiscal Year 2016 On 26 January and 15 December 2016, the Annual General Meeting of the Instituto de Medicina Oncológica Molecular de Asturias, S.A. approved the contribution by each shareholder to the company s equity amounting to 233 thousand, in order to compensate for losses incurred in previous years, regularise the current situation of 26

44 asset imbalance at that time and provide liquidity to the society. The contribution corresponds to the proportionate interest of Liberbank Capital, S.A.U. (33.33%). On 21 December 2016, a publication was released in the BORME (Official Gazette of the Companies Registry) on the liquidation of Infocaja S.L., upon the termination of the Company. Consequently, the Group has proceeded to remove the shareholdings on the balance sheet, by recording a loss of 6 thousand under Net gains or losses from the derecognition in the non-financial assets and shareholdings account on the consolidated income statement. Associates Associates are defined as companies over which the Group is in a position to exercise significant influence, but not control or joint control. This influence is usually evidenced by a direct or indirect holding of 20% or more of the investee s voting rights. In the consolidated financial statements, investments in associates are accounted for using the equity method, as defined by IAS 28. If, as a result of losses incurred by an associate, its equity is negative, the investment would be presented in the Group s consolidated balance sheet with a zero value, unless the Group is obliged to give it financial support. Relevant information on associates is provided in Annex III. The main changes that affected these companies in 2017 were as follows: On 3 April 2017, a publication was released in the BORME (Official Gazette of the Companies Registry) on the liquidation of Asturiana de Carnes S.A., upon the termination of the Company. As a consequence, the Group derecognised the investment in the consolidated balance sheet with no impact in profit or loss. On 13 March 2017, the cost of the ownership interest in CCM Vida y Pensiones y Reaseguros, S.A., amounting to 11 thousand, had increased following the capital increase approved by the General Shareholders Meeting of the same company, signed before a notary public on 15 March 2017, for a total amount of 22 thousand. In 2016 no significant changes affecting to these companies occurred. The control, joint control or significant influence over the investees did not change as a result of the aforementioned events, so no additional changes were made to their classification as group, associates or jointly controlled entities. b) Financial instruments Definitions A financial instrument is a contract generating, simultaneously, a financial asset in a company and a financial liability or equity instrument in another one. An equity instrument is a contract that evidences a residual interest in the assets of the issuing entity after deducting all of its liabilities. A financial derivative is a financial instrument whose value changes in response to the change in an observable market variable (such as an interest rate, exchange rate, financial instrument price or market index) and whose initial investment is very small compared to other financial instruments with a similar response to changes in market factors, and which is generally settled at a future date. 27

45 Hybrid financial instruments are contracts that simultaneously include a main contract that is not a derivative together with a financial derivative, called an embedded derivative that is not individually transferable and means that some cash flows of the hybrid contract vary in the same way as the embedded derivative would do on its own. Compound financial instruments are contracts that allow the issuer to simultaneously create a financial liability and an equity instrument, (such as, for example, convertible bonds which grant the holder the right to convert them into equity instruments for the issuing entity). The following transactions are not treated for accounting purposes as financial instruments: The investments in subsidiaries, joint ventures and associates. The rights and obligations arising as a result of benefit schemes for employees. Initial recognition of financial instruments Financial instruments are initially recognised on the consolidated balance sheet when the Group becomes a party to the contract in accordance with the conditions thereof. Specifically, debt instruments, such as loans and cash deposits, are recognised from the date on which the legal right to receive or the legal obligation to pay cash arises. Derivative financial instruments are generally recognised from the trade date. A regular way purchase or sale of financial assets, defined as one in which the parties' reciprocal obligations must be discharged within a time frame established by regulation or convention in the marketplace and that may not be settled net, such as stock market and forward currency purchase and sale contracts, is recognised on the date from which the rewards, risks, rights and duties attaching to all owners are for the purchaser, which, depending on the type of financial asset purchased or sold, may be the trade date or the settlement or delivery date. Specifically, trades on the spot currency market are recognised at their settlement date, trades in equity instruments traded on secondary markets for Spanish securities are recognised at their trade date and trades in debt instruments traded on secondary markets for Spanish securities are recognised at their settlement date. Derecognition of financial instruments Financial assets are only derecognised when: The contractual rights on the cash flow from the financial asset expire; or The financial asset is transferred and substantially all its risks and rewards are transferred or, even though substantially all the risks and rewards are neither transferred nor retained, control over the financial asset is transferred. A financial liability is derecognised when the related obligations are extinguished or when they are repurchased, even if they are placed once again in the future. Fair value and amortised cost of financial instruments The fair value of a financial instrument on a given date is taken to be the amount for which it could be bought or sold on that date by two knowledgeable parties in an arm's length transaction. The most objective and common reference for the fair value of a financial instrument is the price that would be paid for it on an organised, transparent and deep market ( quoted price or market price ). 28

46 When the market publishes both bid and asking prices for the same instrument, the market price for a purchased asset or a liability to be issued is the bid price and that for an asset to be purchased or an issued liability is the asking price. If there is significant market making activity or it can be demonstrated that the positions can be closed settled or hedged at the average price, the average price is used. When no market price is available for a given financial instrument, fair value is estimated on the basis of recent arm s length transactions in similar instruments or, where such information is unavailable, on the basis of valuation methodologies generally accepted by the financial community, taking into account the specific characteristics of the instrument to be valued and, in particular, the different types of risk associated with the instrument. The measurement techniques used to estimate the fair value of a financial instrument meet the following requirements: The techniques used are based on the most consistent and appropriate economic and financial methods, which have been demonstrated to provide the most realistic estimate of the financial instrument's price. They are those which are usually used by market players to measure this type of financial instrument, such as cash flow discounting, condition-based or non-arbitrage option pricing models, etc. They maximise the use of available information, in relation to both observable data and recent transactions of similar characteristics, and limit the use of non-observable data and estimates as far as possible. They are sufficiently and amply documented, including the reasons why they were chosen in preference to other possible alternatives. They are applied consistently over time so long as the reasons for choosing them do not change. The validity of the models is examined periodically using recent transactions and current market data. They take into account the following factors: the time value of money, credit risk, exchange rates, commodity prices, equity instrument prices, volatility, liquidity, prepayment risk and servicing costs. Specifically, the fair value of financial derivatives traded in organised, transparent and deep markets and classified as held for trading is deemed to be their daily quoted price and if, for exceptional reasons, the quoted price at a given date cannot be determined, these financial derivatives are measured using methods similar to those used to measure OTC derivatives. The fair value of OTC derivatives or derivatives traded in scantly deep or transparent organised markets is taken to be the sum of the future cash flows arising from the instrument, discounted to present value at the date of measurement ( present value or theoretical close ) using valuation techniques recognised by the financial markets: net present value (NPV), option pricing models, etc. Amortised cost is understood to be the acquisition cost of a financial asset or liability plus or minus, as appropriate, the principal repayments and interest payments, plus or minus, as appropriate, the portion allocated to the consolidated income statement, calculated using the effective interest method, of the difference between the initial cost and the redemption value of the financial instruments. In the case of financial assets, amortised cost also includes any reductions due to impairment or uncollectibility. 29

47 The effective interest rate is the discount rate that exactly matches the net carrying amount of a financial instrument to all its estimated cash flows over its remaining life. For fixed rate financial instruments, the effective interest rate coincides with the contractual interest rate established on the acquisition date, adjusted, where applicable, by the fees and transaction costs that must be included in the calculation of the effective interest rate, in accordance with IAS 39. In the case of floating rate financial instruments, the effective interest rate is determined in a similar way to that of fixed rate transactions and is recalculated on each contractual interest rate reset date, taking into account any changes in future cash flows. Classification and measurement of financial assets and liabilities Financial instruments are classified in the Group s consolidated balance sheet as follows: 1. Financial assets and liabilities at fair value with changes recognised in P&L: This category contains all the financial instruments classified as financial assets held for negotiation as well as other assets and liabilities at fair value with changes recognised in P&L: Financial assets held for trading include those acquired with the intention of selling them in the near term or which are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent pattern of short-term profit taking, and derivatives not designated as hedging instruments, including those separated from hybrid financial instruments pursuant to IAS 39. Financial liabilities held for trading include those that have been issued with an intention to repurchase them in the near term or that form part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent pattern of short-term profit taking; short positions arising from financial asset sales under nonoptional repurchase agreements or borrowed securities, and derivatives other than as hedging instruments, including those separated from hybrid financial instruments pursuant to IAS 39. Financial assets at fair value with changes recognised in profit or loss are considered as financial assets designated as such from initial recognition, the fair value of which may be determined reliably, which meet one of the following conditions: o o o o In the case of hybrid financial instruments in which the embedded derivative(s) must be accounted for separately from the host contract, the fair value of the embedded derivative(s) cannot be estimated reliably. In the case of hybrid financial instruments for which it is compulsory to separate the embedded derivative(s), the Group has elected to classify the entire hybrid financial instrument in this category from initial recognition, since the requirements established by current regulations are met in the sense that the embedded derivative(s) significantly modify/modifies the cash flows that the host contract would have had if it had been considered separately from the embedded derivative(s) and that there is an obligation to separate the embedded derivative(s) from the host contract for accounting purposes. When the classification of a financial asset in this category results in more relevant information, because it eliminates or significantly reduces a measurement or recognition inconsistency (also referred to as an accounting mismatch ) that would otherwise arise from measuring assets or liabilities or recognising the gains or losses on them on different bases. When the classification of a financial asset in this category results in more relevant information, because a group of financial assets, liabilities or both, is managed and its performance is evaluated on a fair value basis, in accordance with a 30

48 documented risk management or investment strategy, and information about the group is provided on that basis to the Group s key management personnel. Financial liabilities at fair value with changes recognised in profit or loss are considered as financial assets designated as such from initial recognition, the fair value of which may be determined reliably, and which meet the same conditions than for "other financial assets at fair value with changes in profit or loss" previously described. Financial instruments at fair value through profit or loss are initially measured at their fair value. Later changes to the fair value are recognised in the consolidated income statement under Gains/(Losses) on financial assets and liabilities (net)", except for changes in the fair value attributable to income accrued on the financial instrument other than trading derivatives, which is recognised in the consolidated income statement under either Interest and similar income, Interest expense, or Dividend income, in the consolidated income statement, depending on their nature. The accrued returns on debt instruments included in this category are calculated using the effective interest method. Notwithstanding the above, financial derivatives whose underlying assets are equity instruments whose fair value cannot be measured reliably and which are settled by delivery of the underlying, are measured in these consolidated financial statements at cost. 2. Held-to-maturity investments: this category includes debt securities traded on organised markets with fixed maturities and fixed or determinable payments that the Company's management has, from inception and at any subsequent date, both the positive intention and the financial ability to hold to maturity. Debt securities included in this category are initially measured at fair value adjusted by the amount of the transaction costs that are directly attributable to the acquisition of the financial asset, which are recognised in the consolidated income statement by the effective interest method as defined in IAS 39. Subsequent to acquisition, debt securities included in this category are measured at amortised cost calculated using the effective interest method. Interest accrued on these securities is recognised under Interest income on the consolidated income statement using the effective interest method. Exchange differences on securities included in this portfolio denominated in currencies other than the euro are recorded as set forth in section e) of this Note. Any impairment losses on these securities are recognised as set forth in section j) of this Note. 3. Loans and accounts receivable: This category includes unquoted debt securities, financing granted to third parties in connection with ordinary lending activities carried out by the consolidated entities and receivables from purchasers of goods and users of services. This category also includes finance lease transactions in which the consolidated entities act as the lessor (see section I of this Note). Financial assets included in this category are initially measured at fair value adjusted by the amount of the fees and commissions and transaction costs that are directly attributable to the acquisition of the financial asset which, in accordance with IAS 39, must be recognised on the consolidated income statement using the effective interest method until maturity. Subsequent to acquisition, assets included in this category are measured at amortised cost. Assets acquired at a discount are measured at the cash amount paid and the difference between their repayment value and the amount paid is recognised as finance income using the effective interest method during the remaining term to maturity. The consolidated entities generally intend to hold the loans and credits granted by them until their final maturity and, therefore, they are presented on the consolidated balance sheet at their amortised cost. 31

49 Interest accrued on these securities is recognised under Interest income on the consolidated income statement using the effective interest method. Exchange differences on securities included in this portfolio denominated in currencies other than the euro are recorded as set forth in section e) of this Note. Any impairment losses on these securities are recognised as set forth in section j) of this Note. 4. Available-for-sale financial assets: this category includes debt instruments owned by the Group that are not classified as held-to-maturity investments, loans and receivables or financial assets at fair value through profit or loss, and equity instruments owned by the Group and issued by entities other than subsidiaries, joint ventures or associates, provided that such instruments have not been classified as other financial assets at fair value through profit or loss. The instruments included in this category are initially measured at fair value adjusted by the transaction costs that are directly attributable to the acquisition of the financial asset, which are recognised on the consolidated income statement using the effective interest method defined in IAS 39, until maturity. However, if the financial assets have no fixed maturity, the related transaction costs are recognised on the consolidated income statement when the assets become impaired or are derecognised. Subsequent to acquisition, financial assets included in this category are measured at fair value. However, equity instruments whose fair value cannot be determined in a sufficiently objective manner are measured in these consolidated financial statements at cost, minus any impairment losses. Changes in the fair value of available-for-sale financial assets relating to accrued interest and dividends are recognised under Interest income (calculated using the effective interest method) and Dividend income on the consolidated income statement, respectively. Any impairment losses on these instruments are recognised as described in section j) of this Note. Exchange differences on financial assets denominated in currencies other than the euro are recognised as explained in section e of this Note. Other changes in the fair value of available-for-sale financial assets from the acquisition date are recognised in consolidated equity under Other comprehensive income- Items that may be recorded in P&L- Available for sale financial assets until the financial asset is derecognised, at which time the balance recorded under this item is recognised under Gains/Losses on derecognition of financial assets and liabilities not measured at fair value with changes in P&L (net). 5. Financial liabilities at amortised cost: this category comprises financial liabilities not included in any of the preceding categories. The financial liabilities included in this category are initially measured at fair value, adjusted by the amount of the transaction costs that are directly attributable to the issue of the financial liability, which are recognised on the consolidated income statement using the effective interest method, as defined in IAS 39, until maturity. Subsequently, these financial liabilities are measured at amortised cost calculated using the effective interest method defined in IAS 39. Interest accrued on these securities is recognised under Interest expense on the consolidated income statement using the effective interest method. Exchange differences on securities included in this portfolio denominated in currencies other than the euro are recorded as set forth in section e) of this Note. Financial liabilities included in fair value hedges are recognised as explained in section d) of this Note. Nevertheless, financial instruments that should be considered as non-current assets and disposal groups classified as held for sale in accordance with IFRS 5 are recognised in the consolidated financial statements as explained in section u) of this Note. 32

50 Main regulatory changes in financial instruments entering into force on 1 January As stated in Note 1.m, on 24 July 2014 the International Accounting Standards Board issued the International Financial Reporting Standard (IFRS) 9, related to Financial instruments, and it has set 1 January 2018 as the mandatory application thereof with the possibility of early application. It is intended to improve the financial instruments information, addressing issues arisen on this matter during the financial crisis (see Note 1-m). c) Reclassification of financial instruments between portfolios Reclassifications between financial instrument portfolios can only be made, where appropriate, as follows: a) Except in rare circumstances, set out in d) below, financial instruments classified as Measured at fair value through profit or loss cannot be reclassified into or out of this financial instrument category once purchased, issued or assumed. b) If, as a result of a change in intention or financial ability, it is no longer appropriate to classify a financial asset as held to maturity, it is reclassified into the available-for-sale financial assets category. In this case, the same treatment shall be applied to all the financial instruments classified as held-to-maturity investments, unless the reclassification is made in any of the circumstances permitted under the applicable regulations (sales very close to maturity, substantially all of the financial asset's original principal has been collected, etc.). On 1 June 2016, the Group sold fixed income securities classified under Held-to-maturity investments" in the balance sheet, for a cash value of 60,912 thousand, which generated a profit of 6,289 thousand, being recorded under Net gains or losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss in the consolidated income statement (see Notes 11 and 26). As a result of this sale, the whole Held-to-maturity investments portfolio not sold to the Available-for-Sale Financial Assets portfolio has been transferred, recording the difference between its amortised cost ( 2,415,907 thousand) and its fair value ( 2,568,977 thousand) amounting to 107,149 thousand (net of tax) under Accumulated other comprehensive income Elements that can be reclassified in results- Available-for-Sale Financial Assets" of equity. c) If there is a change in the Group's intention or financial ability, or if the two-year tainting period established by the regulations applicable to the sale of financial assets classified in the held-to-maturity investment category has elapsed, the financial assets (debt instruments) included in the available-for-sale financial assets category can be reclassified into the held-to- maturity investments category. In this case, the fair value of these financial instruments on the date of reclassification becomes their new amortised cost and the difference between this amount and the redemption value is allocated to the consolidated income statement over the remaining life of the instrument using the effective interest method. d) A non-derivative financial asset may be reclassified out of the held-for-trading category if it is no longer held for the purpose of selling or repurchasing it in the near term, provided that one of the following circumstances occurs: a. In rare and exceptional circumstances, unless the assets could have been included in the category of "Loans and accounts receivable". For these purposes, rare and exceptional circumstances are those arising from a particular event that is unusual and highly unlikely to recur in the foreseeable future. 33

51 b. When the entity has the intention and financial ability to hold the financial asset for the foreseeable future or until maturity, provided that the asset had met the definition of Loans and accounts receivable at initial recognition. In these circumstances, the financial asset is reclassified at its fair value on the day of reclassification, any gain or loss already recognised in profit or loss is not reversed, and this fair value becomes its amortised cost. Financial assets thus reclassified cannot under any circumstances be reclassified again into the "Financial assets held for negotiation" category. d) Hedge accounting and mitigation of risk The Group uses financial derivatives as part of its strategy to reduce its exposure to interest rate, foreign currency and other risks. When these transactions meet certain requirements stipulated in IAS 39, they qualify for hedge accounting. When the Group designates a transaction as a hedge, it does so from the initial date of the transactions or instruments included in the hedge, and the hedging transaction is documented appropriately. The hedge accounting documentation includes identification of the hedged item(s) and the hedging instrument(s), the nature of the risk to be hedged and the criteria or methods used by the Group to assess the effectiveness of the hedge over its entire life, taking into account the risk to be hedged. The Group only applies hedge accounting for hedges that are considered to be highly effective over their entire terms. A hedge is considered to be highly effective if, during its expected life, the changes in fair value or cash flows of the hedged item that are attributable to the risk hedged in the hedging of the financial instrument(s) are almost completely offset by changes in the fair value or cash flows, as appropriate, of the hedging instrument(s). To measure the effectiveness of hedges designated as such, the Group analyses whether, from the beginning to the end of the term defined for the hedge, it can expect, prospectively, that the changes in the fair value or cash flows of the hedged item that are attributable to the hedged risk will be almost fully offset by changes in the fair value or cash flows, as appropriate, of the hedging instrument and, retrospectively, that the actual results of the hedge will have been within a range of 80% to 125% of the results of the hedged item. The hedge transactions performed by the Group are classified as follows: Fair value hedges: hedge the exposure to changes in the fair value of financial assets or liabilities or unrecognised outright commitments, or of an identified portion of such assets, liabilities or outright commitments, that is attributable to a particular risk, provided that it affects the consolidated income statement. Cash flow hedges: hedge the changes of cash flows attributed to a specific risk related to a financial asset or liability or a highly probable transaction, as long as it may affect to the consolidated financial statement. In the specific case of financial instruments designated as hedged items or qualifying for hedge accounting, gains and losses are recorded according to the following criteria: In fair value hedges, the gains or losses arising on both the hedging instrument and the hedged item attributable to the type of risk being hedged are directly in the consolidated income statement. In cash flows hedges, the gains or losses attributable to the portion of the hedging instrument qualifying as an effective hedge are recognised temporarily in equity under " Accumulated other comprehensive income Elements that can be reclassified in results- Cash Flow Hedges" of the consolidated equity. The financial instruments in 34

52 hedged in these transactions are recognised according to the criteria explained in the section a) of this Note, with no amendment thereof due to the fact of being considered hedged instruments. The ineffective part of the gains or losses on the hedging instruments of cash flow hedges are recognised directly in the consolidated income statement. The Group discontinues hedge accounting when the hedging instrument expires or is sold, the hedge no longer meets the requirements for hedge accounting, or the designation as a hedge is revoked. When, as explained in the preceding paragraph, hedge accounting is discontinued for a fair value hedge, in the case of hedged items carried at amortised cost, the value adjustments made as a result of the hedge accounting are recognised in the consolidated income statement to the maturity of the hedged items, using the effective interest rate recalculated as at the date of discontinuation of hedge accounting. e) Foreign currency transactions Functional currency The Group s functional currency is the euro. Consequently, all balances and transactions denominated in currencies other than the euro are considered to be denominated in foreign currency. The detail of the equivalent euro value of the main asset and liability balances in the consolidated balance sheet at 31 December 2017 and 2016 denominated in foreign currency, mainly US dollars, based on the nature of these items, is as follows: Thousands of euros 31/12/ /12/2016 Assets Current Assets Current Cash, cash balances in Central Banks and 4,790-2,903 - other demand deposits Available-for-sale financial assets - - 2,658 - Loans and accounts receivable 90, ,035 - Financial liabilities at amortised cost - 126, ,016 Other liabilities - oooooo , , , ,061 Translation of foreign currency balances Foreign currency is translated to the Group's functional currency by applying the following criteria: 1. Non-monetary items measured at historical cost are translated to the functional currency at the exchange rate at the date of acquisition. 2. Non-monetary items measured at fair value are translated to the functional currency at the exchange rate at the date when the fair value was determined. Exchange rates applied The exchange rates used by the Group in translating the foreign currency balances to euros for the purpose of preparing the consolidated financial statements, taking into account the methods mentioned above, were the official rates published by the European Central Bank. 35

53 Recognition of exchange differences Exchange differences arising on translating foreign currency balances into the functional currency of consolidated entities and their branch offices are generally recognised at their net value in the consolidated income statement under "Exchange differences (net)". As an exception to this rule, exchange differences affecting the value of financial instruments measured at fair value through profit or loss are recognised in the consolidated income statement together with all other changes that may affect the fair value of the instrument, under "Gains/(Losses) on financial assets and liabilities measured at fair value through profit and loss(net)". However, exchange differences arising on non-monetary items measured at fair value through equity are recognised in consolidated equity under Other comprehensive income- Items that may be reclassified in profit and loss- Currency conversion in the consolidated balance sheet until they are realised, and exchange differences arising in non-monetary items whose fair value is adjusted to the balancing entry in equity. f) Recognition of Income and Expenses The most significant accounting criteria used by the Group to recognise its income and expenses are summarised as follows: Interest income, interest expense, dividends and similar items As a general rule, interest income, interest expenses and similar items are recognised on the basis of their period of accrual using the effective interest method defined in IAS 39. Dividends received from other companies are recognised as income when the right to receive them from consolidated companies arises. Commissions, fees and similar items Fee and commission income and expenses that are not to be included in the calculation of the effective interest rate of transactions and/or are not included in the cost of financial assets or liabilities other than those classified as at fair value through profit or loss are recognised in the consolidated income statement using criteria that vary according to their nature. The most significant fee and commission items are as follows: Fee and commission income and expenses relating to the acquisition of financial assets and liabilities measured at fair value through profit or loss are recognised in the consolidated income statement when settled. Those arising from transactions or services that are performed over a period of time are recognised in the consolidated income statement over the life of these transactions or services. Those relating to services provided in a single act are recognised in the consolidated income statement when the single act occurs. Non-financial income and expenses Non-financial income and expenses are recognised on an accrual basis. Deferred collections and payments These are recognised for accounting purposes at the amount resulting from discounting the expected cash flows at market rates. 36

54 g) Offsetting Asset and liability balances are offset, i.e. reported in the consolidated balance sheet at their net amount, when, and only when, they arise from transactions in which a contractual or legal right of set-off exists and the Group intends to settle them on a net basis, or to realise the asset and settle the liability simultaneously. In this regard, offsetting" is not considered when presenting the financial assets subject to valuation adjustments for decline in value or impairment, i.e. net of these adjustments, in the consolidated financial statements under IFRS-EU. h) Transfers of financial assets The accounting treatment of transfers of financial assets depends on the extent to which the risks and rewards associated with the transferred assets are transferred to third parties: If substantially all the risks and rewards of the transferred assets are transferred to third parties unconditional sale of financial assets, sale of financial assets under an agreement to repurchase them at their fair value at the date of repurchase, sale of financial assets with a purchased call option or written put option that is deeply out of the money, securitisation of assets in which the transferor does not retain a subordinated debt or grant any credit enhancement to the new holders, and other similar cases the transferred financial asset is derecognised and any rights or obligations retained or created in the transfer are recognised simultaneously. If the group retains substantially all the risks and rewards associated with the financial asset transferred (such as in the sale of financial assets under an agreement to repurchase them at a fixed price or at the sale price plus interest, a securities lending agreement in which the borrower undertakes to return the same or similar assets, securitisation of financial assets in which subordinated debts or other types of credit enhancement are retained that absorb substantially all the expected credit losses for the securitised assets, and other similar cases), the financial asset transferred is not derecognised and continues to be measured by the same criteria as those used before the transfer. However, the following items are recognised, without offsetting: - An associated financial liability, for an amount equal to the consideration received; this liability is subsequently measured at amortised cost, or, if the aforementioned requirements for classification as other financial liabilities at fair value through profit or loss are met, at fair value, in accordance with the aforementioned criteria for this type of financial liability. - The income from the financial asset transferred but not derecognised and any expense incurred on the new financial liability. If the Group neither transfers nor retains substantially all the risks and rewards associated with the financial asset transferred sale of financial assets with a purchased call option or written put option that is not deeply in or out of the money, securitisation of financial assets in which the transferor retains a subordinated debt or other type of credit enhancement for a portion of the transferred asset, and other similar cases the following distinction is made: - If the transferor does not retain control of the transferred financial asset, the asset is derecognised and any right or obligation retained or created in the transfer is recognised. - If the transferor retains control, it continues to recognise the transferred financial asset in the consolidated balance sheet for an amount equal to its exposure to changes in value and recognises a financial liability associated with the transferred financial asset. The net amount of the transferred asset and the associated liability will be the amortised cost of the rights and obligations retained, if the transferred asset is measured at amortised cost, 37

55 or the fair value of the rights and obligations retained, if the transferred asset is measured at fair value. Accordingly, financial assets are only derecognised when the cash flows they generate have been extinguished or when substantially all the inherent risks and rewards have been transferred to third parties. i) Asset swaps Assets swaps entail the acquisition of tangible or intangible assets in exchange for other nonmonetary assets or a combination of monetary and non-monetary assets. For the purposes of these consolidated financial statements, the foreclosure of assets to recover amounts owed to consolidated entities by third parties is not considered an asset swap. The financial assets received in an asset exchange transaction are recognised at fair value provided that it can be considered that the exchange has commercial substance, as defined in IAS 16 and IAS 38, and that the fair value of the asset received, or of the asset given up, can be reliably measured. The fair value of the asset received is taken to be the fair value of the asset given up plus, where applicable, the fair value of any monetary consideration given up in exchange, unless there is clearer evidence of the fair value of the asset received. If an asset swap does not meet the above requirements, the asset received is recognised at the carrying amount of the asset given up plus the monetary consideration given up or assumed in the acquisition. j) Impairment of value of financial assets A financial asset is considered to be impaired and therefore its carrying amount is adjusted to reflect the effect of impairment when there is objective evidence that events have occurred which: In the case of debt instruments (loans and debt securities), give rise to an adverse impact on the future cash flows that were estimated at the transaction date. In the case of equity instruments, mean that their carrying amount may not be fully recovered. As a general rule, the carrying amount of impaired financial instruments is adjusted with a charge to the consolidated income statement for the period in which the impairment becomes evident. The reversal of previously recognised impairment losses, if any, is recognised in the consolidated income statement for the period in which the impairment is reversed or reduced. When the recovery of any recognised amount is considered unlikely, the amount is written off from the consolidated balance sheet, without prejudice to any actions that the consolidated entities may initiate to seek collection until their contractual rights are extinguished due to expiry of the statute-of-limitations period, forgiveness or any other cause. The criteria applied by the Group to determine possible impairment losses in each of the various financial instrument categories and the method used to calculate such impairment losses are as follows: Debt instruments carried at amortised cost With regards to impairment losses arising from the materialisation of insolvency risk in relation to the obligors (credit risk), a debt instrument, mostly of loans and receivables, is considered impaired due to insolvency when there is evidence of impairment in the repayment capacity of the obligor to settle payments, either due to being in arrears or for other reasons. 38

56 The Group has developed policies, methods and procedures to estimate losses that may be incurred as a consequence of its credit risk. These policies, methods and procedures are implemented during the review, approval and formalisation of debt instruments and granted obligations and securities; as well as for identifying their possible impairment and, where appropriate, for the calculation of the amounts required to cover estimated losses. The amount of impairment losses on debt instruments measured at their amortised cost is calculated based on whether the impairment losses are classified individually or collectively. First, it is determined, on an individual basis, whether there is any objective evidence of impairment for individually significant financial assets and, on a collective basis, for financial assets that are not individually significant. Should the Group determine that there is no objective evidence of impairment, the assets are classified into groups of assets that have similar risk characteristics and, collectively, their impairment is analysed. When determining whether there is objective evidence of impairment, the Group uses observable data mainly on the following items: Significant financial difficulties of the debtor. Ongoing delays in the payment of interest or principal. Refinancing or debt restructuring caused by financial difficulties of the counterparty. When it is deemed that insolvency proceedings, or any another type of reorganisation/liquidation, is likely to take place. The disappearance of a financial asset in the active market due to financial difficulties. Observable data indicating a reduction in future cash flows as from the initial recognition, such as adverse changes in the payment status of the counterparty (delays in payments, credit card borrowers having reached their credit limit, etc.). National or local economic conditions that correlate with defaults on financial assets (increase in the unemployment rate, a decrease in property prices, etc.). Impairment losses assessed individually The amount of impairment losses incurred by the individually significant instruments (risks with exposure of at least 3 million) that show objective evidence of impairment coincides with the positive difference between its carrying amount and the present value of its estimated future cash flow. These cash flows are updated using the original effective interest rate of the instrument. If a financial instrument has a variable interest rate, the discount rate for measuring any impairment loss coincides with the contractual effective interest rate determined on the date of the calculation. As an exception to the general rule, the current value of future cash flows of the debt instruments traded on organised markets is associated with its quoted price. For estimating future cash flows of debt instruments, the following factors are taken into account: All the amounts that are expected to be recovered over the remaining life of the instrument; including, where appropriate, those which may result from the collateral guarantees and available credit enhancement (less the costs for obtaining and subsequently selling the collateral). The impairment loss takes into account the likelihood of collecting accrued pastdue interest receivable. The different types of inherent risks for each instrument. The circumstances in which incoming payments will be made. Impairment losses assessed collectively For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics that are indicative of the repayment capacity of the debtor, according to the contractual terms. The impairment is calculated through this analysis, by distinguishing between those who have no objective evidence of impairment and those that do, without taking into consideration, for the latter case, those that are individually significant, 39

57 (risks with exposure of at least 3 million) for those determining the loss as described in paragraph above. The Group applies statistical procedures in those portfolios for which it has a sufficient quantitative base, deriving from its development and use a substantial improvement in managing credit risk to which it is exposed. To that end, the Group uses its historical experience and other specific information to estimate the losses incurred as a result of events that had occurred up to the date of preparing the consolidated financial statements, but had not been recognised, and they shall be recorded individually after the presentation date thereof. This calculation is an interim step pending the specific identification of impairment losses on an individual level, when these financial instruments in the group of financial assets without objective evidence of impairment are removed. The calculation for the incurred losses takes into consideration three key factors: exposure at default, probability of default and loss given default: Exposure at default (EAD) is the value of risk exposure at the time of the counterparty s default taking place. Probability of default (PD) is the likelihood that the counterparty may default on its obligations to pay the principal and/or interest. This probability reflects the current conditions of the portfolio, at each date that the financial statements are prepared, and is estimated while taking into account the main characteristics of the creditworthiness of the counterparty/transaction. Loss given default (LGD) is the estimate for the loss in the event of a default. This depends mostly on the characteristics of the transaction and the valuation of guarantees or associated collateral. In order to calculate LGD at each closing date, the present value of the cash flows expected to be obtained during the financial asset s remaining life is estimated. The amount to be recovered on the effective collateral guarantees is estimated based on the appraisal of the property, discounting the necessary adjustments to adequately cover the potential reduction in value until their execution and sale, along with the execution costs, maintenance costs and selling costs. As stated in section v) of this Note considering the current real estate market conditions and the new available information, in September 2017 Liberbank Group has modified its estimates based on the update of the sales plan for non-performing assets and its impact on sales prices. The effect of these changes was the recognition of an impairment of bad assets for an amount of 191,463 thousand, under the heading "Impairment or impairment reversal of financial assets not measured at fair value through profit or loss - Loans and receivables of the consolidated income statement. The Bank's Directors consider that doubtful assets will be realised at the amounts recorded in the consolidated balance sheet at 31 December 2017 in accordance with the plan elaborated by the Group based on the new sale strategy for non-performing assets, although the final value of realisation will depend, among other aspects, on the effective fulfilment of the assumptions considered in the aforementioned plan, the market conditions existing at any given moment and the possible decisions and asset sales agreements that could be reached on them. When property rights are contractually acquired at the end of the foreclosure process or when the asset is purchased from the borrowers found in financial difficulties, the asset is recognised in the balance sheet. The accounting treatment for these assets is included in Note 2.v. Debt instruments classified as available for sale The impairment losses on debt instruments included in the available-for-sale financial asset portfolio are equal to the positive difference between their acquisition cost (net of any principal repayment) and their fair value after deducting any impairment loss previously recognised in the consolidated income statement. 40

58 At year-end, the Group analyses the losses generated on these instruments; it has established an impairment indication of a decrease of more than 40% (in which case, it analyses whether this is due to temporary or permanent factors) or long fall of more than 18 months (or a fair value below the cost for 18 months). When there is objective evidence that the losses arising on measurement of these assets are due to impairment, they are removed from the equity item Other comprehensive income- Elements that may be reclassified in P&L Available-for-sale financial assets on the Group s consolidated balance sheet and are recognised, for their cumulative amount, in the consolidated income statement. If all or part of the impairment losses are subsequently reversed, the reversed amount is recognised on the income statement for the year in which the reversal occurs. During 2017 and 2016, there have been no exceptions to the general rule, as a decline is considered as being significant when represented by a fall of 40% in the value of the asset or over 18 months. Similarly, any impairment losses arising on measurement of debt instruments classified as Noncurrent assets and disposal groups classified as held for sale, which are recorded in the Group s consolidated equity are considered to be realised and are therefore recognised in the consolidated income statement when the assets are classified as Non-current assets and disposal groups classified as held for sale. Equity instruments classified as available for sale The amount of the impairment losses on equity instruments included in the available-for-sale financial asset portfolio is the positive difference between their acquisition cost (net of any principal repayment) and their fair value less any impairment loss previously recognised in the consolidated income statement. The criteria for recognising impairment losses on equity instruments classified as available for sale are similar to those for debt instruments explained in the preceding section, with the exception that any recovery of these losses is recognised in equity under Other comprehensive income- Elements that may be reclassified in P&L Available-for-sale financial assets in the consolidated balance sheet. Equity instruments measured at cost The amount of the impairment losses on equity instruments measured at cost is the difference between their carrying amount and the present value of the expected future cash flows discounted at the market rate of return for similar securities. Impairment losses are recognised in the consolidated income statement for the period in which they arise as a direct reduction of the cost of the instrument. These losses can only be reversed subsequently if the related assets are sold. Asset Protection Scheme APS granting and recording The Group's consolidation scope includes the subsidiary Banco de Castilla - La Mancha, S.A., which integrated the financial business of Caja de Ahorros de Castilla La Mancha ( CCM ) in 2010 after the Bank of Spain's intervention, where the assets were segregated through a transfer en masse through universal succession; in exchange, Fundación Caja Castilla La Mancha, which took on CCM's welfare project, received shares representing 25% of capital of Banco de Castilla La Mancha, S.A. 41

59 Simultaneously to the approval by the Bank of Spain's Executive Committee of the aforementioned integration of CCM's banking business into Banco de Castilla - La Mancha, S.A., the Deposit Guarantee Fund ( FGD, Spanish acronym) granted Banco de Castilla La Mancha, S.A. an Asset Protection Scheme ( APS ) in the amount of 2,475 million over certain risks within CCM s banking business. This scheme initially had a duration of five years, from the integration date of CCM banking business in Banco de Castilla La Mancha, S.A., until 31 December On 2 December 2014, Liberbank S.A., the FGD and Banco de Castilla-La Mancha, S.A. signed an addendum to the initial contract, whereby it was agreed to extend the Asset Protection Scheme ( APS ) for a term of two years, extending the coverage from 1 January 2015 through 31 December 2016, pursuant to clause 5.1. of APS Regulations, which established the possibility of an extension if, in view of the economic situation, the parties considered that that would prevent illiquidity situations or complications upon valuing the covered risk portfolio. Expiration and settlement of Asset Protection Scheme On 31 December 2016, the APS expired, with the full consumption of the APS and an additional loss recorded on that date for 175,864 thousand in the 2016 income statement. At this time the settlement period provided for in the Regulations started. According to these Regulations, in the first nine months of the year 2017, the measurement of the assets and risk covered by the APS has been performed by three independent expert valuators proposed by the Deposit Guarantee Fund. The reports received on this matter state that the value of these assets is not very different from their carrying amount reflected in the financial statements of the Group for the year On 26 October 2017, Banco de Castilla - La Mancha, S.A. sent the APS settlement proposal to the FGD, stating that there are no outstanding amounts to be repaid by the Bank to the FGD. Subsequently, the FGD shall review the settlement and convey its agreement or disagreement, whereby estimating the final settlement to be made before March In the opinion of the Directors, the final amount for the valuation of the APS in accordance with the procedures described above, shall not differ significantly from the book value, at 2016 yearend, of the assets recorded in the accounts. k) Guarantees granted and provisions for financial guarantees Guarantees granted are defined as contracts whereby an entity undertakes to make specific payments on behalf of a third party if the latter fails to do so, irrespective of the various legal forms they may take, such as deposits, financial guarantees, irrevocable documentary credits issued or confirmed by the entity, etc. In accordance with EU-IFRS, the Group generally treats financial guarantees provided to third parties as financial instruments within the scope of IAS 39. The Group initially recognises the financial guarantees provided on the liability side of the consolidated balance sheet at fair value, plus the directly attributable transaction costs, which is generally the amount of the premium received plus, where applicable, the present value of the fees, commissions and interest receivable from these contracts over the term thereof, and it simultaneously recognises, on the asset side of the consolidated balance sheet, the amount of the commissions and interests received at the start of the transactions and the amounts receivable at the present value of the commissions and interest receivable. Subsequently, these contracts are recognised on the liability side of the consolidated balance sheet at the higher of the following two amounts: - The amount determined in accordance with IAS 37. Financial guarantees, regardless of the guarantor, instrumentation or other circumstances, are reviewed periodically so as to determine the credit risk to which they are exposed and, if appropriate, to consider whether a provision is required. The credit risk is determined by application of criteria similar to 42

60 those established for quantifying impairment losses on debt instruments carried at amortised cost, which are described in section j above. - The amount initially recognised for these instruments, less the related amortisation which, in accordance with IAS 18, is charged to the consolidated income statement on a straight-line basis over the contract term. Any provisions made for these transactions are recognised under Provisions for commitments and guarantees granted on the liability side of the balance sheet. These provisions are recognised and reversed with a charge or credit, respectively, to Provisions or provisions reversed in the consolidated income statement. If, in accordance with the foregoing, a provision is required for these financial guarantees, the unearned commissions on these transactions, which are recognised under Financial liabilities at amortised cost Other financial liabilities on the liability side of the consolidated balance sheet, are reclassified to the appropriate provision. l) Accounting of leases Financial leases Finance leases are leases that transfer substantially all the risks and rewards incidental to ownership of the leased asset to the lessee. The matters considered by the Group to determine whether a lease agreement is a finance lease include, inter alia, the following: The fact that the lease agreement is for the major part of the useful life of the asset, considering for these purposes the indicator established in other regulations i.e. that the lease term should exceed 75% of the useful life of the asset. Whether the exercise price of the purchase option is lower than the fair value of the residual value of the asset at the end of the lease term. The fact that at the inception of the lease the present value of the minimum lease payments amounts to substantially all of the fair value of the leased asset; i.e. that the present value should exceed 90% of the fair value of the leased asset. Whether use of the asset is restricted to the lessee. When the consolidated entities act as lessors of an asset in a finance lease transaction, the sum of the present values of the lease payments receivable from the lessee plus the guaranteed residual value (which is generally the exercise price of the lessee's purchase option at the end of the lease term) is recognised as lending to third parties and is therefore included under Loans and receivables in the consolidated balance sheet based on the type of lessee. In both cases, the finance income and finance expense arising from these contracts is credited or debited to Interest income respectively, in the consolidated income statement and the related accrual is estimated using the effective interest rate calculated in accordance with IAS 39. Operating leases In operating leases, the ownership of the leased asset and substantially all the risks and rewards incidental thereto remain with the lessor. 43

61 Consolidated companies act as lessees in operating leases. The lease expenses, including any incentives granted by the lessor, if applicable, are charged to Administrative expenses - Other general administrative expenses in the consolidated income statement on a straight-line basis. In addition, the income received as lease payments are recorded on a straight-line basis under the heading "Other Operating Income" in the consolidated income statement. m) Investment and pension funds managed by the Group The investment and pension funds managed and/or marketed by the consolidated companies are not shown in the Group's consolidated balance sheet since the related assets are owned by third parties. The fees and commissions earned in the year for the services rendered by the Group companies to these funds (asset management and custody services, etc.) are recorded under the heading "Commissions income" in the consolidated income statement. n) Staff costs Post-employment benefits Under the collective labour agreement and other labour agreements currently in force, the Group is required to supplement the social security benefits that its employees, or their beneficiaries, accrue in the event of retirement, death of a spouse, death of a parent, or permanent or major disability. The post-employment benefit commitments, based on the Company where they originated, are set out below. Caja de Ahorros de Asturias On 24 August 1989, the Board of Directors of Caja de Ahorros de Asturias resolved to apply Pension Plan Act 8/1987 of 8 June and integrate its pension fund into an external one. With that purpose, in 1990 a pension plan was created called Plan de Pensiones de Empleados de la Caja de Ahorros de Asturias, PECAJASTUR, where Caja de Ahorros de Asturias was the sponsor. This pension plan joined the Fondo de Pensiones de Empleados de la Caja de Ahorros de Asturias (FPCAJASTUR). The plan was underwritten by Caser Ahorrovida, Compañía de Seguros y Reaseguros, S.A. The PECAJASTUR Plan had three subplans. Employees who joined before 30 May 1986 belonged to Subplan I and those after 29 May 1986 to Subplan II. Employees who belonged to Subplan I or II also belonged to Subplan III, freely decided before 16 December Subplan II, for the retirement contingency, and Subplan III have a defined contribution. Subplan I had a defined benefit and Subplan II, for the other contingencies, has a defined benefit. On 16 September 2013, the Bank and the workers' representatives of Caja de Ahorros de Asturias signed a collective bargaining agreement to transform the commitment of the Pecajastur pension plan from a defined retirement benefit system for the Subplan I assets into a defined contribution model, and the risks were changed in accordance with the signed agreements. This agreement also states that, after deducting the agreed allocations for plans II and III, the surplus existing at the time of the transformation will be used to finance the Bank's future defined contribution commitments with the plan's participants. At 31 December 2017 and 2016, the surplus amounted to 24,010 thousand and 10,874 thousand respectively (see Note 17). 44

62 Caja de Ahorros y Monte de Piedad de Extremadura The Collective Bargaining Agreement signed on 15 January 2002 and ratified by the Pension Plan Control Committee on 17 July 2002 contains the Pension Plan specifications. Such Pension Plan specifications establish a mixed system of defined contributions for retirement contingencies and minimum defined benefits for decease and disability contingencies. At 31 December 2017 and 2016, the surplus amounted to 2,457 thousand and 2,278 thousand respectively (see Note 17). Caja de Ahorros de Santander y Cantabria Pension-related commitments for the employees of the Bank s Caja de Ahorros de Santander y Cantabria are covered by the following instruments: The Pension Plan itself, through the contribution of a percentage of the beneficiary s real salary for retirement benefits. Regarding other commitments, the bank had policies suitable for this. At 31 December 2017 and 2016, the surplus amounted to 2,748 thousand and 383 thousand respectively (see Note 17). Banco de Castilla-La Mancha S.A. On 16 September 2003, Caja de Ahorros de Castilla La Mancha signed a New Collective Bargaining Agreement with its employees for a welfare provision system with the aim of externalising the pension commitments arising from complying with the collective bargaining agreement in force. By virtue of this agreement, a new supplementary welfare provision system was created, establishing a single future contribution system for all the bank employees and defining the contribution to the retirement plan as a single percentage of each employee's actual salary. The benefits for the risk contingencies were also defined to protect against situations arising as a result of the death or disability of bank employees. The Group's post-employment obligations with its employees are deemed to be defined contribution plans when the Group makes pre-determined contributions to a separate entity and has no legal or constructive obligation to make further contributions if the separate entity cannot pay the employee benefits relating to the service rendered in the current and prior periods. Post-employment commitments that do not meet the aforementioned conditions are classified as defined benefit plans. 1. Defined contribution plans The defined contribution accrued in 2017 and 2016 is recorded under Administrative expenses Staff costs in the consolidated income statement. In 2017 the Group contributed to defined contribution plans for 5,231 thousand ( 583 thousand in 2016) (see note 26). If, at 31 December 2017 and 2016, there are any outstanding contributions to be made to the external plan funding the post-employment benefit obligations, the related amount is recognised at its present value under Provisions - Provisions for pensions and similar obligations in the consolidated balance sheet. 2. Defined benefit plans The Group recognises under Provisions - Provisions for pensions and similar obligations on the liability side of the consolidated balance sheet (or under Other assets on the asset side, depending on whether the difference is positive or negative and provided that the measurement conditions established in IAS 19 and IFRIC 14 are met) the present value of its 45

63 defined benefit pension obligations, net of the fair value of the assets that qualify as "plan assets. "Plan assets" are the assets linked to a certain defined benefit obligation that will be directly used to settle these obligations and that meet the following conditions: they are not owned by the Group but by a separate third party not related to the Group; they are only available to pay or fund post-employment benefits; and they cannot be returned to the Group unless the assets remaining in the plan are sufficient to meet all obligations of the plan and of the entity relating to current or former employee benefits, or to reimburse employee benefits already paid by the Group. If the Group can look to an insurer to pay part or all of the expenditure required to settle a defined benefit obligation, and it is practically certain that said insurer will reimburse some or all of the expenditure required to settle that obligation, but the insurance policy does not qualify as a plan asset, the Group recognises its right to reimbursement, which, in all other respects, is treated as a plan asset, under Assets under insurance or reinsurance contracts. Post-employment benefits are recognised as follows: - The costs of these obligations are recognised in the consolidated income statement and include the following components: Service costs for the current year (defined as the increase in the present value of obligations deriving from services provided by employees in the course of a year) are recognised under Administrative expenses - Staff costs. The cost of past services, arising from amendments to the existing post-employment benefits or the introduction of new benefits, and includes the reduction costs recognised under " Provisions or provisions reversed, net. Any gains or losses arising from the plan's settlement are recorded under Provisions or provisions reversed, net. - The net interest on the liability (asset), net of the defined benefit commitments (understood as the change during the year in the net liability (asset) for defined benefits arising over time), is recognised under "Interest expenses" (Interest income) in the consolidated income statement. - The recalculation of the net liability (asset) for defined benefits is recognised under "Other accumulated comprehensive income" and includes: Actuarial gains and losses generated in the year arising from differences between actuarial forecasts and actual performance and changes in the actuarial assumptions used. The return on the plan assets, excluding the amounts included in the net interest on the liability (asset) for defined benefits Any change in the effects of the asset limit, excluding the amounts included in the net interest on the liability (asset) for defined benefits. At 31 December 2017 the term of the post-employment obligations is years in Liberbank, S.A. and years in Banco de Castilla-La Mancha, S.A. 46

64 The detail of the present value of the Group s defined-benefit post-employment obligations at the end of 2017 and 2016, showing the funding status of these obligations and the fair value of the plan assets funding them is as follows: Thousands of euros 31/12/ /12/2016 Fair value of plan assets 334, ,581 Less: Present value of obligations: Accrued pension obligations (retired employees) 311, ,620 Risks arising from non-accrued pension obligations (current employees) 311, ,052 Excess / (Shortfall) 23,151 7,529 Assets limit 1, Net pension plan assets (Note 17) 29,215 13,535 Provisions provision for pensions and similar obligations (Note 26) (7,305) (6,989) Insurance contracts linked to pensions (Note 17) Non-accrued risks for non-accrued pensions (present value of future contributions) The obligations were valued by independent actuaries applying the following criteria among others: a) Valuation method: projected unit credit method, which sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately. b) Actuarial assumptions used: unbiased and mutually compatible. Specifically, the most significant actuarial assumptions used in the calculations were as follows: Actuarial Assumptions (Liberbank, S.A.) Discount rate (*) 1.64% 1.57% Mortality and life expectancy tables PERM/F PERM/F Rate of future increase in salaries 1.50% 1.50% Pension revaluation rate 2.00% 2.00% Rate of growth of maximum contributions 2.00% 2.00% Expected return on plan assets 1.64% 1.57% (*) Discount rate based on yield of euro-denominated corporate bonds rated AA by the three biggest credit rating agencies, Standard & Poor s, Moody s and Fitch, at the valuation date, for a term equal to the term of the obligations measured. 47

65 Actuarial Assumptions (Banco de Castilla-La Mancha S.A.) Discount rate (*) 1.70% 1.57% Mortality and life expectancy tables PERM/F PERM/F Rate of future increase in salaries 1.50% 1.50% Pension revaluation rate 2.00% 2.00% Rate of growth of maximum contributions 2.00% 2.00% Expected return on plan assets 1.70% 1.57% (*) Discount rate based on yield of euro-denominated corporate bonds rated AA by the three biggest credit rating agencies, Standard & Poor s, Moody s and Fitch, at the valuation date, for a term equal to the term of the obligations valued. For Liberbank, S.A., an increase by 50 basic points in the discount rate applied would imply a reduction in the value of corporate bonds by 12,284 thousand ( 13,850 thousand at 31 December 2016). In addition, an increase by 50 basic points in the inflation rate applied would imply an increase in the value of corporate bonds by 13,839 thousand ( 14,992 thousand at 31 December 2016). For Banco de Castilla-La Mancha, S.A., an increase by 50 basic points in the discount rate applied would imply a reduction in the value of corporate bonds by 3,941 thousand ( 3,604 thousand at 31 December 2016). In addition, an increase by 50 basic points in the inflation rate applied would imply an increase in the value of corporate bonds by 2,806 thousand ( 4,120 thousand at 31 December 2016). c) Each employee is assumed to retire as soon as he/she becomes entitled to do so, or at his/her agreed retirement age if earlier. d) The Group has determined the discount rate based on market returns, at the date of the consolidated balance sheet, corresponding to high-quality corporate bond and debenture issues which are related to the currency and payment term estimated for the benefits payment. The reconciliation of the beginning and end balances for 2017 and 2016 for the present value of the defined-benefit obligations is as follows: 48

66 Thousands of euros Balance at 1 January ,904 Service cost for the current year 7 Interest cost 7,071 Actuarial gain and loss 16,963 On changes in demographic assumptions - On changes in financial assumptions 20,612 On changes due to the adjustment for experience (3,649) Benefits paid (22,893) Balance at 31 December ,052 Service cost for the current year 12 Interest cost 5,151 Reductions and liquidations (82) Actuarial gain and loss (10,972) On changes in demographic assumptions - On changes in financial assumptions (2,092) On changes due to the adjustment for experience (8,880) Benefits paid (21,714) Balance at 31 December ,447 Below is the reconciliation between the amounts at beginning and end of fiscal years 2017 and 2016 of the fair value of assets under the defined benefit commitment plan and reimbursement rights: Thousands of euros Redemption Plan Assets rights Fair value at 31 December , Expected return on plan assets 6, Actuarial gain and loss 13,835 (17) Benefits paid (22,785) (12) Fair value at 31 December , Expected return on plan assets 5,270 8 Actuarial gain and loss 4,352 5 Reductions and liquidations - (82) Benefits paid (21,605) (12) Fair value at 31 December , The detail of the fair value of the main categories of plan assets at 31 December 2017 and 2016 is as follows: Accounts balance 6.70% 6.48% Insurance contracts 93.30% 93.52% Fair value at 31 December % % 49

67 In ,550 thousand were charged to "Other accumulated comprehensive income" of the equity due to actuarial gains (losses) net of their related tax effect (in 2016 the heading was credited in 2,019 thousand). The detail of the defined-benefit post-employment obligations in the current and previous available years is: Thousands of Euros Present value of obligations 311, , , , ,598 Fair value of plan assets 334, , , , ,197 Excess / (Shortfall) 23,151 7, ,822 3, ,599 Of which: Internal funds 7,305 6,989 7,414 10,142 8,426 Linked insurance contracts Other long-term benefit obligations 1. Pre-retirements Labour Agreement in the Framework of the Integration Process On 13 December 2010, the three shareholder savings banks of the Bank entered into a Labour Agreement with the trade union representatives of the Savings Banks, which had been reached by these entities and the employee representatives ( the Labour Agreement ) The validity, efficiency and entry into force of the Labour Agreement became effective from 24 January 2011 onwards, following its authorisation by the labour authorities through the relevant administrative process. The maximum headcount surplus to apply the proposed measures was set at 568 people, while 100% have availed themselves at 31 December The pre-retirement measure was open, up to 31 December 2013, to Group employees who were 55 years old at 31 December 2010, and who had been at the Group for at least 10 years at the pre-retirement date, except for employees who had already opted into the partial retirement scheme. The actual date to access pre-retirement for those who have availed themselves thereof was set on 29 February The pre-retirement period extended from the expiry date of the contract up to the date that the employee turns 64. During the pre-retirement period, employees received an amount which, when added to the net unemployment benefit, equals 80% of the gross annual fixed salary received by them in the twelve months prior to the expiry of the pre-retirement contract. This amount was at least 90%, and 95% at most, of the net salary (for personal income tax and social security purposes) of the twelve months prior to the expiry date. Employees must receive a total of at least 20 days salary for every year of service, with a limit of one year s salary. Also, the Group bear the cost of maintaining the Special Agreement with Social Security from the end of the period for receipt of unemployment benefit until the pre-retired employee reaches the age of 64, pursuant to the terms of Article of the Workers Statute and Additional Provision 31 of the Revised Social Security Law. A pre-retired employee could opt to receive the above compensation, envisaged in the aforementioned Labour Agreement, as a monthly amount up to the age of 64, or as a lump sum at the date of pre-retirement. When an employee opted to receive compensation as monthly amounts, the rate of increase would be 1.5% and reviewed on 1 January of every year. Should a pre-retired employee die during the pre-retirement period, the right-holders received the outstanding compensation. 50

68 In accordance with the prevailing plan, and based on the salary and other conditions applicable upon expiry, during the pre-retirement period, up to the age of 64, the Bank will continue to make contributions to the Pension Plan for the retirement contingency as if the employee were still active. However, after the labour agreement signed on 27 December 2013, which suspended contributions to pension plans until June 2017 (see Note 1.c.4.1), contributions to pension plans of this group were also suspended. From the age of 64 onwards, once an employee becomes pre-retired, and from the age of 65 onwards, the Bank would pay 50% of the difference between the gross social security pension and the net amount received in instalments or a lump sum, as the annual salary during the pre-retirement period. Pursuant to the applicable legislation, the obligations assumed in the Labour Agreement were considered long-term defined-benefit obligations. At 31 December 2017, the obligations assumed under the Labour Agreement were not being financed through an insurance policy or funded by assets and, therefore, the Group created an internal fund to cover these obligations, recognising the accrued liability under Provisions for other long term remunerations to employees on the consolidated balance sheet at 31 December 2017, for the amount corresponding to the actuarial present value of the obligations arising from the Labour Agreement used to calculate pre-retirement. The Group recognised the present value of these and other pre-retirement obligations, amounting to 5,795 thousand and 15,680 thousand, under Provisions Pensions and other obligations of post-employment defined benefits on the liability side of the consolidated balance sheets at 31 December 2017 and 2016 (see Notes 19 and 26). The present value of the pre-retirement obligations was determined by qualified actuaries using the following techniques: a) 189 employees opted into the pre-retirement scheme (358 employees at 31 December 2016). b) Actuarial assumptions used: unbiased and mutually compatible. Specifically, the most significant actuarial assumptions used in the calculations were as follows: Discount rate up to retirement (*) 0.00% 0.00% Mortality and life expectancy tables PERM/F 2000P PERM/F 2000P Rate of future increase in salaries 1.50% 1.50% (*) Discount rate based on yield of euro-denominated corporate bonds rated AA by the three biggest credit rating agencies, Standard & Poor s, Moody s and Fitch, at the valuation date, for a term equal to the term of the obligations measured. Other pre-retirements Caja de Ahorros de Santander y Cantabria The savings bank offered certain of its employees the possibility of retiring before reaching the age stipulated in the collective labour agreement in force. Accordingly, in 2004 and subsequent years, provisions were made for the obligations to early retirees in terms of both salaries and other employee welfare costs from the date of early retirement to the date of effective retirement. In January 2007, the Board of Directors of Caja Cantabria approved a pre-retirement plan for , applicable specifically in each of these years. 60 employees have availed themselves to this plan. Accordingly, an internal fund was made for the obligations to preretirees from the time of pre-retirement to the date of effective retirement. At 31 December 2017, pre-retirement payment obligations amount to 107 thousand (at 31 December 2016 they amounted to 478 thousand) (see Notes 19 and 26). 51

69 Pre-retirement obligations accrued until the date of effective retirement, recognised under Provisions - Other long term remuneration to employees are treated for accounting purposes, in all applicable respects, using the same criteria as those described above for defined-benefit obligations, with the exception of actuarial gains and/or losses, which are expensed currently on the consolidated income statement. The main actuarial assumptions considered for the calculations are as follows: Discount rate (*) 0.00% 0.00% Mortality and life expectancy tables PERM/F 2000 PERM/F 2000 Rate of future increase in salaries 1.50% 1.50% (*) Discount rate based on yield of euro-denominated corporate bonds rated AA by the three biggest credit rating agencies, Standard & Poor s, Moody s and Fitch, at the valuation date, for a term equal to the term of the obligations measured. 2. Seniority awards: Liberbank has assumed the following obligations to employees, based on the originating savings bank: - Employees from Caja de Ahorros de Asturias: payment of a bonus equivalent to one twelfth of annual fixed remuneration as soon as an employee has 25 years of service. - Employees from Caja de Ahorros de Santander y Cantabria: pay an amount when employees have 25 or 40 years of service at the savings bank (based on the date that they joined). - Employees from Caja de Ahorros y Monte de Piedad de Extremadura: payment of a bonus equal to the base salary plus length of service in the month in which an employee achieves 25 years of service at the savings bank. Banco de Castilla - La Mancha, S.A. has assumed obligations to its employees based on their length of service. Length-of-service bonus obligations are treated for accounting purposes, in all applicable respects, using the same criteria as those described above for defined-benefit obligations, with the exception of actuarial gains and/or losses are recorded in the consolidated income statement through all the working life. The main actuarial assumptions considered for the calculations are as follows: Mortality and life expectancy tables PERM/F 2000 P PERM/F 2000 P Rate of future increase in salaries 1.50% 1.50% Interest rate (*) 1.36% - 0% 1.45% % (*) Discount rate based on yield of euro-denominated corporate bonds rated AA by the three biggest credit rating agencies, Standard & Poor s, Moody s and Fitch, at the valuation date, for a term equal to the term of the obligations measured. The amounts recognised in this connection at 31 December 2017 totalling 3,235 thousand ( 3,570 thousand at 31 December 2016) are included under "Provisions - Other long term employee benefits" on the consolidated balance sheet at that date (see Notes 19 and 26). 52

70 3. Voluntary redundancies On June , the Group informed the staff a voluntary redundancy plan. At 31 December 2017, 345 employees had joined the plan, from which 344 have already left. At 31 December 2017 the Group had recorded a provision in order to bear this commitment for an amount of 36,752 thousand ( 85,659 thousand at 31 December 2016) recorded under Provisions Pensions and other obligations of post-employment defined benefits in the consolidated balance sheet at 31 December 2017 (see Notes 19 and 26). The present value of the voluntary redundancy obligations was determined by qualified actuaries using the following techniques: a) 345 employees have availed themselves of the voluntary redundancy scheme. b) Actuarial assumptions used: unbiased and mutually compatible. Specifically, the most significant actuarial assumptions were as follows: Discount rate up to retirement (*) 0% 0.11% Mortality and life expectancy tables PERM/F 2000P PERM/F 2000P Rate of increase in salaries (1) 0% 1.5% (1) For the group of Liberbank Voluntary Severance, a 1.50% has been taken as a complement growth assumption. (*) Discount rate based on yield of euro-denominated corporate bonds rated AA by the three biggest credit rating agencies, Standard & Poor s, Moody s and Fitch, at the valuation date, for a term equal to the term of the obligations measured. The reconciliation of the beginning and end balances for 2017 and 2016 for the present value of the early retirements, seniority awards and voluntary redundancies Thousands of Euros Balance at 1 January ,327 Service cost for the current year 227 Interest cost 521 Reductions and liquidations - Actuarial gain and loss (7,279) On changes in demographic assumptions - On changes in financial assumptions 628 On changes due to the adjustment for experience (7,907) Transfer out (55) Benefits paid (18,353) Balance at 31 December ,388 Service cost for the current year 194 Interest cost 136 Reductions and liquidations 37,761 Actuarial gain and loss (4,309) On changes in demographic assumptions - On changes in financial assumptions 71 On changes due to the adjustment for experience (4,380) Transfer out - Benefits paid (71,541) Balance at 31 December ,629 53

71 4. Agreed leave and voluntary redundancy On 1 June 2016, a labour agreement was signed with the union majority, in order to establish the conditions for workers to be protected by the mutually agreed paid leave of absence modality or a voluntary redundancy plan: i) Mutually agreed paid leave of absence modality: the group covered by this agreement are the employees of Liberbank, S.A. and Banco de Castilla - La Mancha, S.A., having been born between 1956 and 1964, including those who have been suspended or with a reduction in working hours, according to the Collective Bargaining Agreement of 27 December Expressly excluded are those workers, born between 1956 and 1958, who adhered to the voluntary redundancy plan announced on 30 June 2015, even though the termination of their contract had not been formalised at the time of the signing of the current agreement. The extended leave of absence shall be equivalent to the time between the commencement date and 31 December of the calendar year in which such is formalised, where it may be extended through mutual agreement by the parties for a calendar year and up to the age of 63, or before this age, where there is an entitlement for retirement benefits. Should an employee not agree to retirement at the age 63, the automatic termination of the agreement shall proceed. In the event that both parties decide to extend, for one calendar year, the paid leave of absence agreement, a written document shall be submitted to the employee with the acceptance of the company, upon a business evolution and financial activity assessment for each of the years in which the employee may request to remain on extended leave. Once the decision of the employee to be reincorporated has been communicated, the Bank has a period of three months to make such reinstatement effective, whereby informing the employee of the position and the conditions thereof, which shall be consistent with those set out in the Collective Bargaining Agreement regarding the level the employee held at the moment in which the leave of absence took place, without the employee being able to object to such. Furthermore, in the event that the entity requires to, on the basis of requiring the services or due to the developments of the financial business, reinstate an employee, the employee must be notified two months in advance. For this latter case, the employee shall be reinstated in the same position and location where his/her services were previously rendered. In the event that the employee does not return to work on the indicated date, it shall be understood that such waives such right, leading to his/her dismissal. For as long as the employee adheres to the paid leave of absence agreement, such shall receive compensation in the form of monthly income, equivalent to 60% of the current gross salary, being limited to a minimum of 75% and a maximum of 80% of the gross salary that would have been received by the employee. Thus, the resulting gross amount shall not exceed, in any case, the limit of 50,000 per year or a proportionate part thereof for shorter periods. At the moment in which the leave commences, the Bank shall make an extraordinary contribution to the Pension Plan, being equivalent to those made for savings/retirement from the date of the employee being instated up to the paid leave of absence agreement, as a result of the suspension of such payments, as set forth in the Agreement of 27 December At 31 December 2017 a total of 552 Group employees have adhered to this plan. In 2017, the Group has recorded the labour costs resulting from this agreement, as follows: 54

72 The agreed financial compensation is accrued during the period in which the employees are on leave until such is reinstated or when the employment relationship has terminated. The contribution to the Pension Plan is recorded as an expenditure at the time in which the employee adheres to the Agreement. The Group recorded 24,868 thousand on this concept under the heading "Administrative expenses - Staff costs" in the consolidated income statement ( 5,033 thousand at 31 December 2016). iii) Voluntary redundancy: it is foreseen the possibility that, until 31 March 2018, employees may request termination of their labour contract, receiving severance of 30 days' salary per year worked, with a maximum of 20 monthly instalments, in a way that the amount may not exceed 120,000 thousand. During 2017, 30 employees of the Group had voluntarily adhered to this option, of which 15 employees of the Group had retired at the date of the preparation of these consolidated financial statements. 5. Labour agreement under the framework for the Organisational Restructuring Efficiency Process On 21 June 2017, Liberbank and Banco de Castilla - La Mancha entered into a labour agreement with the majority of the trade unions with the purpose of addressing a restructuring process allowing for a smaller, more streamlined and efficient structure (see Note 1.c.2). The main agreed measures adopted under such agreement, were a redundancy plan that would include a maximum of 525 employees and reduction of working hours for all the employees. At 31 December 2017 the Group had recorded a provision in order to bear this commitment for an amount of 21,740 thousand recorded under Provisions Pensions and other obligations of post-employment defined benefits in the consolidated balance sheet. Termination benefits Under current labour legislation, the Bank and its consolidated subsidiaries are required to pay termination benefits to employees terminated under certain conditions. At 31 December 2017 the Group did not notice or agree on any terminations that would warrant recognition of a provision in this connection. o) Income tax Pursuant to Royal Decree-Law 2/2011, the Bank has opted to file consolidated income tax returns as the parent of the tax group. The special consolidated tax regime of the groups of companies requires the group of entities to calculate the tax base of the relevant tax, for all intent and purpose, as if it were for a single taxpayer. However, each consolidated company must calculate the corresponding tax liability if it files an individual tax return, recognising the income tax payable or receivable under the relevant heading. Income tax revenue (expense) is recognised on the consolidated income statement, unless it arises from a transaction the result of which is recognised directly in equity, in which case the income tax is also recognised with a charge or credit to the Group s equity. The current income tax revenue (expense) is calculated as the tax receivable (payable) with respect to the tax loss/taxable profit for the year, adjusted for the amount of any changes in the year in the assets and liabilities recognised as a result of temporary differences, tax credits, or tax loss carryforwards. 55

73 The Group considers that there is a temporary difference when there is a difference between the carrying amount of an asset or liability and its tax base. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. A taxable temporary difference is one that will generate a future obligation for the Group to make a payment to the related authorities. A deductible temporary difference is one that will generate a right for the Group to a refund or a reduction in the tax charge in the future. Tax credits and tax loss carryforwards are amounts that, after performance of the activity or obtainment of the profit or loss giving entitlement to them, are not used for tax purposes in the related tax return until the conditions for doing so established in the tax regulations are met, and the Group considers it probable that they will be used in future periods. Current tax assets and liabilities are the taxes that are expected to be recoverable from or payable to the related tax authorities within 12 months from the date they are recognised. Deferred tax assets and liabilities are the taxes that are expected to be recoverable from or payable to, respectively, the related tax authorities in future years. Deferred tax liabilities are recognised for all taxable temporary differences. The Group only recognises deferred tax assets arising from deductible temporary differences and from tax credits and tax loss carryforwards when the following conditions are met: Deferred tax assets are only recognised if it is considered probable that consolidated entities will have sufficient future profits against which to offset the assets or they are guaranteed pursuant to Royal Decree Law 14/2013, of 20 November, on urgent measures to adapt Spanish law to EU legislation on oversight and solvency of financial institutions; and In the case of deferred tax assets due to tax loss carryforwards, the tax losses result from identifiable causes which are unlikely to recur. Deferred tax assets and liabilities are reviewed at the end of each reporting period to check that they are still effective, and the appropriate adjustments are made on the basis of the results of the review. p) Tangible assets Include the amount of the property, land, moveable property and other installations owned by the Group. Assets are classified on the basis of their purpose, into: Tangible assets for own use Property, plant and equipment for own use include assets, owned by the Group or held under a finance lease, for present or future administrative purposes or for the production or supply of goods, that are expected to be used for more than one period. This category includes, inter alia, property plant and equipment received by the consolidated entities in full or partial satisfaction of financial assets representing receivables from third parties, where these assets are intended to be held for continuing own use. Tangible assets for own use is presented on the consolidated balance sheet at acquisition cost, which is the fair value of any consideration given for the asset plus any monetary amounts paid or committed, less: The related accumulated depreciation, and any estimated impairment losses (carrying amount higher than recoverable amount). For this purpose, the acquisition cost of assets form foreclosure, included in the Group's property, plant and equipment for own use is the same as the carrying amount of the financial assets settled through foreclosure. 56

74 Depreciation is generally calculated by applying the straight-line method to the acquisition cost of the assets less their residual value. The land on which Group buildings and other constructions are located is deemed to have an indefinite life and is therefore not depreciated. The depreciation charge for the year is recognised under Depreciation and amortisation on the consolidated income statement and is calculated using the following depreciation rates (based on the average years of estimated useful life of the various assets): Annual percentage Buildings for own use 2-4% Furniture 10-15% Fixtures 10% Computer hardware and installations 12-25% Other 10-16% At each reporting date, consolidated entities test for indications, either internal or external, that the carrying amount of its tangible assets exceeds their recoverable value. If so, the carrying amount of the asset is reduced to its recoverable value and the future depreciation expense is reduced to take account of its new value and, where necessary, its revised useful life. When necessary, the carrying amount of property, plant and equipment for own use is reduced with a charge to Impairment losses or reversal of impairment losses of non-financial assets - tangible assets on the consolidated income statement. Similarly, if there is an indication of a recovery in the value of an impaired tangible asset item, the consolidated entities recognise the reversal of the impairment loss recognised in prior periods by crediting Impairment losses or reversal of impairment losses of non-financial assets - tangible assets on the consolidated income statement and adjusting the future depreciation charges accordingly. In no case may the reversal of an impairment loss on an asset raise its carrying amount above that which it would have had if no impairment losses had been recognised in prior years. The estimated useful lives of property, plant and equipment for own use are reviewed at least once a year with a view to detecting significant changes therein. If changes are detected, the useful lives of the assets are adjusted by correcting the depreciation charge to be recognised on the consolidated income statement in future years on the basis of the new useful lives. Maintenance and upkeep expenses for property, plant and equipment for own use are charged against profit or loss for the year in which they are incurred under the heading Administrative expenses- Other general administrative expenses on the consolidated incomes statement. Tangible assets that require more than twelve months to be readied for use include as part of their acquisition or production cost the borrowing costs which have been incurred before the assets are ready for use and which have been charged by the supplier or relate to loans or other types of borrowings directly attributable to their acquisition, production or construction. Capitalisation of borrowing costs is suspended, if appropriate, during periods in which the development of the assets is interrupted, and ceases when substantially all the activities necessary to prepare the asset for its intended use are complete. Investment property The heading "Investment property" of the consolidated Balance Sheet includes the net value of lands, buildings and other constructions managed on a rental basis. The criteria used to recognise the acquisition cost of investment properties, to calculate depreciation and estimated useful life and to recognise any impairment losses thereon are consistent with those described in relation to property, plant and equipment for own use. 57

75 The assets acquired by the Group through foreclosure, which are deemed to be the assets received by the Group from its borrowers or other debtors as total or partial payment for financial assets representing receivables from them, regardless of how they were acquired, and which, on the basis of their nature and intended purpose, are classified as investment property by the Group, are initially recognised at acquisition cost, which is the carrying amount of the liability incurred to acquire the asset, which is calculated in accordance with the legislation applicable to the Bank. The assets acquired through foreclosure are subsequently assessed for any corresponding impairment losses arising thereon, which are calculated by applying the criteria explained regarding the tangible assets for own use. All court costs are expensed currently on the consolidated income statement for the period of foreclosure. Registry costs and taxes paid may be added to the value initially recognised provided that, as a result, it does not exceed the appraisal value. All costs incurred between the date of foreclosure and the date of sale as a result of maintaining and protecting the asset, such as insurance, security services, etc., are recognised on the consolidated income statement for the period in which they are incurred. q) Intangible assets Intangible assets are identifiable non-monetary assets without physical substance that arise as a result of a legal transaction or that are developed internally by the consolidated entities. Only assets whose cost can be estimated reasonably objectively and from which the consolidated entities consider it probable that future economic benefits will be generated are recognised. Intangible assets are recognised initially at acquisition or production cost and are subsequently measured at cost less any accumulated amortisation and any accumulated impairment losses. The related amortisation charge is recognised under Depreciation and amortisation on the consolidated income statement. Goodwill Any differences between the cost of investments in consolidated entities accounted for by the equity method and other forms of business combinations, the corresponding net fair values of the assets and liabilities, adjusted by the acquired percentage holding of the net assets and liabilities in the event of purchase of shareholdings, at the date of acquisition, are recognised as follows: 1. If the acquisition price exceeds the aforementioned fair value, as goodwill under "Intangible assets - Goodwill" on the asset side of the consolidated balance sheet. In the case of acquisition of holdings in associates or jointly controlled entities accounted for using the equity method, any goodwill that may arise from the acquisition is recognised as forming part of the value of the investment and not as an individual item under "Intangible assets - Goodwill". 2. Any negative differences between the cost of acquisition less the aforementioned fair value are recognised, once the valuation process has been completed, as income on the consolidated income statement under "Negative goodwill in business combinations". Positive goodwill (excess between the acquisition price of an investee or business and the net fair value of the assets, liabilities and contingent liabilities acquired from this entity or business) - which are only recognised on the consolidated balance sheet when they have been acquired for consideration - thus represents advance payments made by the acquiring entity for future economic benefits arising from the assets of the entity or business acquired that are not individually and separately identifiable and recognisable. Positive goodwill acquired after 1 January 2004 is measured at acquisition cost. An impairment test is carried out at each year-end to assess whether goodwill has suffered any impairment loss 58

76 that would reduce its recoverable amount to below its recognised net cost. If so, the appropriate deduction is made with a balancing entry under Impairment losses or reversal of impairment losses of non-financial assets - Intangible assets on the consolidated income statement. Impairment losses on goodwill recognised under "Intangible assets - Goodwill" pursuant to the preceding paragraph cannot be subsequently reversed. Other intangible assets Intangible assets other than goodwill are recorded on the consolidated balance sheet at cost of acquisition or production, net of accumulated amortisation and any impairment losses. Intangible assets with a finite useful life are amortised over a period of 6 to 18 years, applying similar criteria to those used in the depreciation of tangible assets. The amortisation charge for intangible assets with finite useful lives for the period is recognised under Depreciation and amortisation on the consolidated income statement and is calculated using amortisation rates based on the average years of estimated useful life of the different assets. Consolidated entities recognise any impairment loss on the recorded amount of these assets with an entry being made under Impairment losses or reversal of impairment losses of nonfinancial assets - Intangible assets on the consolidated income statement. The criteria used to recognise the impairment losses on these assets and, where applicable, the recovery of impairment losses recognised in prior years are similar to those used for property, plant and equipment for own use. r) Inventories Inventories on the consolidated balance sheet includes non-financial assets held by the consolidated entities: For sale in the ordinary course of business, in the process of production, construction or development for such sale, or to be consumed in the production process or in the rendering of services. Consequently, inventories include land and other property (other than investment properties) held for sale or for inclusion in a property development. Inventories are measured at the lower of cost (which comprises all costs of purchase, costs of conversion and direct and indirect costs incurred in bringing the inventories to their present location and condition, as well as the directly attributable borrowing costs, provided that the inventories require more than one year to be sold, taking into account the criteria set forth above for the capitalisation of borrowing costs relating to property, plant and equipment for own use) and net realisable value (estimated selling price of inventories in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale). Any write-downs of the carrying amount of inventories to net realisable value and any subsequent reversals of write-downs are recognised under Impairment losses or reversal of impairment losses of non-financial assets - Other on the consolidated income statement for the year in which the write-down or reversal occurs. If the assets come from an adjudication process, and in accordance with their nature and purpose, they are classified as inventories held by the Group, they are initially accounted for at their acquisition cost, which is deemed as the net book value of the debts giving rise to them, by calculating this net value in accordance with the provisions of the applicable regulations for the Group. The assets acquired through foreclosure are subsequently assessed for any 59

77 corresponding impairment losses arising thereon, which are calculated by applying the criteria explained in section v) of this Note. s) Insurance transactions The guarantees or guarantee agreements in which the Group undertakes to compensate an obligee in the event of non-compliance with a specific obligation other than a payment obligation by a particular debtor of the obligee, such as deposits given to ensure participation in auctions or tender processes, surety bonds, irrevocable promises to provide surety and guarantee letters which are claimable by law, are considered, for the purpose of preparing these consolidated financial statements, to be insurance contracts. When the Group provides the guarantees or sureties indicated in the preceding paragraph, it recognises them under Liabilities under insurance contracts on the consolidated balance sheet at fair value plus the related transaction costs, which, unless there is evidence to the contrary, is the same as the value of the premiums received plus, if applicable, the present value of cash flows to be received for the guarantee or surety provided, and an asset is recognised simultaneously for the present value of the cash flows to be received. Subsequently, the present value of the fees or premiums to be received is discounted, and the differences are recognised under Interest income on the consolidated income statement; and the value of the amounts initially recognised in liabilities is allocated on -line basis to the consolidated income statement (or, if applicable, using another method which must be indicated). In the event that, in accordance with IAS 37, a provision is required for the surety which exceeds the liability recognised, the provision is recognised using criteria similar to those described for the recognition of impairment of financial assets and the amount recorded is reclassified as an integral part of the aforementioned provision. t) Provisions and contingent liabilities When preparing the consolidated financial statements, the Group's directors made a distinction between: provisions: amounts covering present obligations at the balance sheet date arising from past events which could give rise to a loss for the entities considered likely to occur and certain in terms of its nature but uncertain in terms of its amount and/or timing, and contingent liabilities: possible obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more future events not wholly within the control of the consolidated entities. The Group's consolidated financial statements include all the material provisions with respect to which it is considered that it is more likely than not that the obligation will have to be settled. Contingent liabilities are not recognised on the consolidated annual financial statements, but are disclosed, as required by IAS 37. Provisions are measured based on the best information available regarding the consequences of the events giving rise to them and re-measured at each balance sheet date. They are used to meet the specific obligations for which they were originally recognised, and may be wholly or partly reversed if these obligations cease to exist or diminish. The provisions considered necessary pursuant to the foregoing criteria are recognised and reversed with a charge or credit to Provisions or provisions reversed on the consolidated income statement. 60

78 Litigation and/or claims in process At the end of 2017 and 2016 certain litigation and claims were in process against the consolidated companies arising from the ordinary course of their operations. The Group s legal advisers and its directors consider that, given the provisions made by the Group in this connection, the outcome of litigation and claims will not have a material effect on the consolidated financial statements for the years in which they are settled. Floor clauses With regard to the effects arising from the invalidity of clauses limiting the interest rate on consumer mortgage loans (otherwise known as floor clauses ), the legal situation is as described below. The Supreme Court, on its decision of 9 May 2013, ruled against certain financial institutions (which did not include the Bank), unanimously resolving that these floor clauses are to be considered null and void if they do not meet certain transparency requirements set forth in such ruling. The Supreme Court stated that there was no repayment for the amounts provided for under such provisions prior to 9 May On 21 December 2016, the European Court of Justice (ECJ) issued the ruling that resolved the preliminary ruling of the Provincial Court and other national courts, regarding whether the temporary limit for the repayment of the amounts established by the Supreme Court complied with the contents of Directive 93/13/EEC, eliminating such temporary limit after considering it opposed to such Directive. On 21 January 2017, Royal Decree-Law 1/2017 of 20 January on urgent measures to protect consumers regarding floor clauses entered into force, whose purpose is to provide the measures to facilitate the reimbursement of amounts unduly settled by consumers to credit institutions through the application of certain floor clauses. The Rules establish the procedures that must be implemented by the credit institutions so as to create a claim system prior to the filing of claims, which shall be voluntary in nature for the consumer. Credit institutions must calculate and notify the consumer who has submitted a claim for the amounts to be reimbursed, which will include those corresponding to interest, by duly communicating the reasons substantiating the decision should it be deemed that a reimbursement is not applicable. In the case of ongoing judicial proceedings, the parties may mutually agree to submit themselves before foregoing claim process, whereby requesting the suspension of the proceedings. In the event that the consumer does not receive any notification; the application is rejected, does not agree with the calculations or rejects the offered amount, or, or, within a three-month period, has not been settled with the offered amount, may take the measures deemed appropriate. During 2017, the Group had set in motion the procedure established under aforementioned Royal Decree 1/2017, whereby addressing, during this period, a volume of claims founded on the basis of the provision recorded at 31 December 2016 (see Note 19). Moreover, the Group has also assessed the economic impact of the possible claims based on clauses, when taking into consideration the experiences of 2017, while following the procedure established in Royal Decree-Law 1/2017 of 20 January. In this line, at 31 December 2017 the Group has recorded a provision for an amount of 54,954 thousand ( 183,450 thousand at 31 December 2016) under the heading "Provisions - Remaining provisions" of the consolidated balance sheet (see Note 19) which, according to NIC 37, is the best of the estimates, with the information available at the date of the preparation of the current summarised consolidated interim financial statements. Deposit Guarantee Fund claim On 30 December 2013, the Court of First Instance of Madrid issued a ruling dismissing the complaint filed by the Deposit Guarantee Fund ( FGD ), in which it claimed payment of approximately 40,000 thousand from Banco de Castilla La Mancha S.A., on the basis of a discrepancy concerning the cost of the APS for 2010 and the payment of interest due to the late payment of the APS in The Deposit Guarantee Fund ( FGD ) filed an appeal against this 61

79 ruling, against which the Bank filed an opposing brief. On 8 June 2015, the Provincial Court issued a resolution whereby the First Instance Ruling was revoked and Banco de Castilla La Mancha, S.A. was liable to the payment of 37,125 thousand related to the Asset Protection Scheme ( APS ) accrued in fiscal year 2010, as well as 2,475 thousand for interests accrued for invoice delay. On 14 July 2015, the Bank s legal counsel filed a cassation appeal against the Provincial Court s resolution, which was disregarded on 22 December 2017 by the Supreme Court. At 31 December 2017 the Group had recorded ad Provision for an amount of 40,274 thousand ( 20,142 thousand at 31 December 2016) under the heading "Provisions- Other Provisions" of the consolidated balance sheet (see Note 19). Litigio Briareo Gestión, S.A. (Sole-Shareholder Company) Within the framework of the banking business split-off operation of CCM and its integration into Banco de Castilla - La Mancha, S.A., on 3 December 2010, Briareo Gestión, S.A., owned by a sole shareholder, (Group company) was entrusted with the divestment and management services for maintaining the value CCM s assets acquired by the Deposit Guarantee Fund (FGD) for a term of seven years, whereby establishing the payment of a fixed annual fee and quarterly variable fees based on the value of the assets being managed. The agreements entered into stipulate that the settlement of invoices must be made in cash. The Deposit Guarantee Fund (FGD) deems that it must be paid in cash up to the limit of the net liquidity received as a consequence of the divestment of the transferred assets and since it has not received sufficient liquidity to satisfy the payment, it has considered that Briareo must collect payment through assets. The offer made to Briareo for the collection of these fees through non-monetary assets cannot be accepted by the Group, since, apart from not being the correct interpretation of the provisions of the agreement made by the FGD, should the payment be accepted through the delivery of shares and if these had no value, then it could be considered as a procedural fraud. At 31 December 2017 and 31 December 2016, the amount pending collection for these fees stood at 61,259 thousand. On 22 October 2015, the FGD filed an ordinary claim, so as to seek a resolution determining the manner to collect the commission payments, a claim that Briareo has not been limited in opposing, but has also remonstrated by claiming the payment of the outstanding fees in cash. The Bank s Directors, on the basis of the opinion of the legal advisors, is of the understanding that the possibilities of a successful outcome for the proceedings are remote because they lack any substantiation and it considered that the Group should not suffer any impact on equity stemming from this litigation, as it is a claim filed with the liable party to pay (Deposit Guarantee Fund - FGD), which does not question its commitment to pay, but the means of conducting it. On 27 December 2016, the FGD, Briareo and Liberbank agreed to the termination of the management contract signed on 3 December 2010, effective as of the same date. u) Treasury shares The value of equity instruments issued by the Bank s entities and in the possession of the Bank and/or Group entities is recorded, net of consolidated equity, under Shareholders equity Treasury shares of the consolidated balance sheet. These financial assets are recorded at acquisition cost and the benefits and losses arising from the sale thereof are paid or charged, as applicable, under Shareholders equity - Other Reserves of the consolidated balance sheet. 62

80 v) Non-current assets and disposable groups of items classified as held for sale The heading Non-current assets and disposable groups of items classified as held for sale on the consolidated balance sheet includes individual items or groups of items ( disposal groups ) or items that form part of a business unit earmarked for sale ( discontinued operations ), whose sale is highly probable in the assets current condition within a year of the date referred to on the consolidated financial statements. Shareholdings in associates and joint ventures that meet the conditions set forth in the foregoing paragraph are also considered to be non-current assets and disposal groups that have been classified as held for sale. Therefore, the carrying amount of these items, which can be of a financial nature or otherwise, will foreseeably be recovered from sale rather than from continuing use. Specifically, property or other non-current assets received by the Bank as total or partial settlement of their debtors payment obligations to them, are deemed to be non-current assets and disposal groups that have been classified as held for sale, unless the Group has decided to classify these assets, on the basis of their nature and intended use, as property, plant and equipment for own use or as investment properties. These assets are recorded initially with the lowest amount of the either: - the updated carrying amount for the financial asset applied and; - the fair value at the time of the foreclosure or the delivery of the assets less the estimated selling costs. The carrying amount of the financial asset applied is updated at the time of the foreclosure, where the adjudicated property itself is treated as collateral and taking into account credit risk coverages that would correspond, pursuant to their classification at the moment prior to the acquisition. The moments subsequent to the initial recognition, these foreclosed real estate assets or those received in the settlement of a debt, classified as Non-current assets and disposal groups that have been classified as held for sale and liabilities included in these groups are valued by the lesser value of either their updated fair value less the estimated cost of sale or their carrying amount, whereby recognising an impairment or reversal of impairment due to the difference recorded under Gains or losses from non-current assets and disposal groups that have been classified as held for sale not considered as discontinued operations of the consolidated income statement. To determine the fair value less costs to sell the asset, the Bank starts, as a reference value, from the appraisal value obtained from periodically updated appraisals in accordance with Order ECO/805/2003. This appraisal value is applied to an adjustment, determined by internal measurement models, to estimate the discount on the reference value and selling costs. These internal models, which are consistent with the current regulations, take into account, where appropriate and among other factors, sales experience of similar goods (with regard to terms, price and volume), and the expenses expected to be incurred until asset realisation. At 31 December 2017, these assets have been valued mainly using appraisals or measurements made in accordance with the current regulations, and to which the aforementioned adjustment has been applied. In this regard, the Group has a corporate policy that guarantees the professional competence, independence and objectivity of the external measurement companies, in accordance with the regulations, which requires that the appraisal companies comply with neutrality and credibility requirements so that the use of their estimates does not undermine the reliability of their measurements. 63

81 This policy states that all the appraisal companies with which the Bank works in Spain must be registered in the Official Register of the Bank of Spain and their measurements must be carried out following the methodology established in Order ECO/805/2003, dated 27 March. The main companies with which the Group has worked during 2017 are detailed in Note 13 and comply with the requirements described above. As required by Bank of Spain Circular 4/2004, the fair value of real estate assets classified as non-current assets and disposal groups, which are classified as held for sale, is classified on the basis of the following fair value hierarchy: a) Level 2: Residential assets and finished properties, which form most of the item non-current assets held for sale, characterized by the use of observable market data, such as the price per square meter in observable transactions of comparable assets. b) Level 3: The properties under construction and the land for the measurement criteria used by the appraisal companies are those established in Order ECO/805/2003, using the methods indicated in Article 15 of the Order, depending on the assets situation. In the case of real estate under construction, measurement is done considering the property s current situation and not considering its final value. The fundamental methods used in the valuation were the following: - Comparative Market Analysis: the property under study is compared with others of similar characteristics that have recently been sold or that are offered for sale in the market, where a comparative analysis is made, whereby making the corresponding adjustments based on factors that could have an impact, such as location, surface area, dimensions, shape, topography, access, urban classification, type of construction, age, conservation, distribution, functionality and design. - Dynamic Residual Method (DRM): this is, in principle, the most appropriate manner for carrying out the valuation of unconsolidated land for building that is barely urbanised or undeveloped, where there is a minimum of planning (a land use and gross floor area) or a more defined development plan where the market is generally not very transparent. It is based on the consideration that the urbanisation and sale of the completed real estate product is conceived from the beginning as any other business project, which entails a risk, taking place on a time horizon where an initial investment of capital generates income and expenses. For such a business project, the objective is the maximisation of benefits and, therefore, the application of the principle of greater and better use. - Discounted Cash Flow (DCF) analysis: the value of the assets is determined on the benefits that may be received in the future (forecasts) where an appropriate discount rate is applied. A global assessment is made, reflecting the economic and profitability potential. In order determine the value, after analysing the market conditions, the following factors are taken into consideration: - Surface area, condition, and typology of the buildings. - Current conditions of the property market, evolution of sale and rental prices, real estate market competition or sector risk are adjusted on the basis of statistical information on local property and macroeconomic variables. - The greater and better use of the asset must be legally permitted, physically feasible, economically viable, while providing the maximum possible value and be backed financially. The analysis of the greatest and best use considers the current conditions and the status as being free and available, based on the aforementioned appraisals. 64

82 - Market Value of the property, when vacant and available for use, by analysing factors such as conditions, dimensions, physical characteristics, similar transactions and the value adjustments proposed by the current economic conditions. Moreover, during the month of September, property market statistics were published that depicted the moment of robust activity for the market. Experts predict that the highest sales rate will be in 2018 and Market participants, and particularly credit institutions, have taken advantage of the strong market activation to divest their portfolios of foreclosed assets with significant discounts on the original cost price. In this regard, at present important banking groups are in process of selling their real estate portfolios for very significant amounts according to the information provided to the market. This increase in the supply of real estate directly affects the decline on the estimated sale price. Furthermore, a consultation of the European Central Bank was published on 5 October in relation to the European Central Bank's Guide on doubtful loans where, in relation to existing nonperforming asset portfolios, the banking supervisor monitors progress made by credit institutions in reducing non-performing loans and has requested those with high doubtful assets to submit strategies for their reduction during the first half of In this context, on 6 September 2017 the Bank's Board of Directors modified the strategy of selling the Group's real estate portfolio, aligning it with the market situation, in order to avoid losing the opportunities that it currently presents. Thus, at 31 December 2017 the adjustment, which on the appraisal value results from applying the internal models for determining the fair value of the foreclosed assets, takes into account the new conditions of the real estate market in general and the new available information about it, which in both cases is obtained in the preparation and formulation of these consolidated financial statements. Consequently, the internal models have been updated with respect to the previous ones, to incorporate the new sales plan of the different assets. This update has its impact not only on the timing of expected future flows but also on its amount, as the new sales plan implies in most cases a lower selling price. The impact from the development of internal models for calculating impairment of foreclosed assets has entailed a provision record amounting to 269 million in the third quarter, which is included in the income statement. The Group's Directors consider that the foreclosed assets will be realised for the amounts recorded in the accompanying financial statements at 31 December 2017 in accordance with the plan elaborated based on the new sale strategy of the same, although their final value of realisation will depend, among other aspects, on the effective fulfilment of the assumptions considered in the aforementioned plan, on the market conditions existing at any moment and on the possible decisions and asset sales agreements that could be reached on them. The gains or losses arising from the sale of non-current assets and disposal groups that have been classified as held for sale are recorded under Gains or losses from non-current assets and disposal groups that have been classified as held for sale not considered as discontinued operations of the consolidated income statement. v) Consolidated cash flow statement The terms used on the consolidated cash flow statement are defined as follows: Cash flows: inflows and outflows of cash and cash equivalents, which are short-term, highly liquid investments that are subject to an insignificant risk of changes in value and, exclusively, since they form part of cash management, bank overdrafts repayable on demand, which reduce the amount of cash and cash equivalents. 65

83 Operating activities: the principal revenue-producing activities of credit institutions and other activities that are not investing or financing activities. Operating activities also include interest paid on any financing received, even if this financing is considered to be a financing activity. Activities performed with the various financial instrument categories stipulated in b) of this Note are classified, for the purpose of this statement, as operating activities, except for held-to-maturity investments, subordinated financial liabilities and investments in equity instruments classified as available for sale which are strategic investments. For these purposes, a strategic investment is that made with the intention of establishing or maintaining a long-term operating relationship with the investee, since, inter alia, one of the circumstances that could determine the existence of significant influence prevails, even though this influence does not actually exist. Investing activities: the acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents, such as tangible assets, intangible assets, investments in joint ventures and associates, non-current assets and disposal groups that have been classified as held for sale, equity instruments classified as available-for-sale which are strategic investments and debt instruments included in held-to-maturity investments portfolio. Financing activities: activities that result in changes in the size and composition of equity and liabilities that are not operating activities, such as subordinated liabilities. In preparing the consolidated cash flow statements, Cash and cash equivalents were considered to be short-term, highly liquid investments that are subject to a negligible risk of changes in value. The amount of interest received and paid during 2017 amounted to 496,893 thousand and 163,969 thousand, respectively, ( 609,710 thousand and 238,992 thousand for 2016, respectively). Furthermore, cash dividends received during 2017 amounted to 2,367 thousand (dividends received in 2016 amounted to 2,842 thousand). At 31 December 2017 and 2016 the changes of cash flows from financing activities are as follows: At 31 December 2017: Balance at 31/12/2016 Thousands of Euros Cash flows Other Balance at 31/12/2017 Subordinated liabilities 126, ,948 (8,083) 407,123 At 31 December 2016: Balance at 31/12/2016 Thousands of Euros Cash flows Other Balance at 31/12/2017 Subordinated liabilities 136,470 (13,643) 3, ,258 w) Consolidated statement of recognised income and expenses The consolidated statement of recognised income and expense presents the income and expenses generated by the Group as a result of its business activity in the year. A distinction is made between income and expenses recognised on the consolidated income statement, on one hand, and, on the other, income and expenses recognised directly in consolidated equity pursuant to prevailing legislation. Income and expenses recognised directly in consolidated 66

84 equity are distinguished by items that may be reclassified to profit or loss pursuant to the applicable legislation and those that may not. Accordingly, this statement presents: a) The consolidated profit or loss for the year. b) The recognised income and expense not being reclassified to profit or loss. c) The recognised income and expense to be reclassified to profit or loss. d) The income tax expense incurred for the items referred to in letters b) and c) above, except in relation to impairment losses on investments in associates or jointly controlled entities consolidated using the equity method, which are presented on a net basis. e) Total recognised consolidated income and expense for the period calculated as the sum of (a) to (d) above, showing separately the total amounts attributable to equity holders of the parent and to non-controlling interests. The amount of the income and expenses relating to entities accounted for using the equity method recognised directly in consolidated equity is presented in this statement, irrespective of the nature of the related items, under Equity-accounted companies. The changes in income and expenses recognised in consolidated equity as Valuation adjustments are broken down temporarily until they are subsequently reversed in profit or loss as follows: a) Revaluation gain/ losses: includes the amount of the income, net of the expenses incurred in the year, recognised directly in consolidated equity. The amounts recognised in the period under this item are maintained in this line, but in the same period are transferred to the consolidated income statement, where they are added to the initial value of other assets and liabilities or are reclassified to another item. b) Amounts transferred to profit and loss account: includes revaluation gains and losses previously recognised in consolidated equity, even in the same period, which are taken to the consolidated income statement. c) Amount transferred to the initial carrying amount of hedged items: comprises the revaluation gains and losses previously recognised in consolidated equity, even in the same period, which are recognised in the initial carrying amount of the assets and liabilities as a result of cash flow hedges. d) Other reclassifications: includes the amount of the transfers made during the period between valuation adjustment items in accordance with current legislation. The amounts of these items are presented gross, with the related tax effect recognised in this statement under Income tax. x) Consolidated statement of changes in total equity The consolidated statement of total changes in equity (which appears in these consolidated financial statements as "Consolidated statement of total changes in equity" in accordance with the terminology used by Bank of Spain Circular 4/2004) includes all the changes in consolidated equity, including those due to accounting policy changes and corrections of errors. This statement accordingly presents a reconciliation between the carrying amount of each component of consolidated equity at the beginning and the end of the period, separately disclosing each change into the following headings: 67

85 a) Adjustments due to accounting policy changes and corrections of errors: includes changes in consolidated equity due to retroactive adjustments to financial statement balances because of changes in accounting principles or to correct errors. b) Income and expense recognised during the year: represents the aggregate of all items of recognised income and expense, as outlined above. c) Other changes in equity: includes the remaining items recognised in consolidated equity such as capital increases or reductions, distribution of profit or application of loss, treasury share transactions, equity instrument-based payments, transfers between equity accounts, and any other increase or decrease in consolidated equity. 3. Risk management 3.1. Management and Risk Control Model Principles for the administration and management of risks The Group has a series of general principles of risk management on which its strategy is predicated, in accordance with its risk vision and appetite: Manage the Loans and accounts receivable quality in order to: a) maximise long term shareholder value; b) preserve the continuity of the company as a common objective in the interests of the shareholders. Implement risk policies in coordination with the strategies defined by the senior management, encompassing the growth of the investment with the optimal levels of solvency, profitability and liquidity (shareholder value). Safeguard the present and future solvency of the Group in keeping with the principle of good corporate governance and with the recommendations of the supervisory authorities (business continuity). Implement values and standards enhancing the positive performance of the competitiveness in the industry, with regard to quality, services, efficiency, agility and price. Perform the risk function applying the rules of: separation of functions, decision making ability, traceability, objectivity, efficiency and transparency. These rules -principles- are detailed as follows: o o o o o o Maintain the independence from the business generating units of the functions defining policies and planning risks and of the function controlling risk (separation of functions). Ensure the decision-making ability of risk execution, as a business management unit, with regard to the business generating units under Corporate and Financial Executive Office and Business Executive Office (Decision-making capability). Offer enough agility and flexibility to adapt, efficiently and timely, the strategies, business processes and technological systems to the changes of the Economy, observing always the Senior Management availability to risk. Establish circuits, procedures, people in charge and management mechanisms to treat risk throughout its life cycle (Traceability). Define decision-making criteria based on objective financial parameters (Objectivity). Generate and disseminate the use of advanced management tools within an optimum technological environment (Efficiency). 68

86 o Meet the reporting transparency requirements of all processes, methods and results (Transparency). These principles reflect the commitment that senior management has made to managing risks Government and organisation structure The Board of Directors has approved, the structure of all the General Managements which form the first level of the organisational structure of the Group with which the following objectives are pursued: - Provide the senior management levels with a better structure and greater autonomy in their respective areas of management. - Separate and specialize the transformational and operational areas. - Promote the transformation of the business processes and strengthen control over the implementation of the initiatives undertaken. - Encourage the integrated management of the development of systems, streamlining their provision to their users. - Adapt the Group's structure to best organizational practices. The following summarises the corporate and managerial bodies actively involved in the management of risks: Board of Directors The highest governing body in the Group. It determines the general principles for risk management, approving the Corporate Risk Framework, the Risk Appetite Framework, the different policies by area and type and the criteria for action in the main risks and business segments. It also monitors and supervises the internal information and risk control systems. Risk Committee of the Board Its objectives include advising the Board of Directors on the Group's overall propensity for risk, current and future, reporting on the Risk Appetite Framework, assisting it in monitoring the implementation of that strategy, ensuring that the Group's actions are consistent with the level of risk tolerance (risk appetite statement), with the defined strategies and policies and monitoring the degree of adaptation of the risks assumed to the profile established. Its responsibilities also include the analysis, monitoring and evaluation of the internal risk control, management and evolution functions. Audit Committee The committee s basic responsibility is to supervise the efficiency of the Group s internal control, internal audit and risk management systems, as well as monitoring the work carried out by the external auditor. Management Committee It has responsibility in matters of a strategic nature and those of an ordinary nature considered important for the proper coordination and Group's wide management. Some of its responsibilities are: to issue reports, at the behest of the CEO, on matters the CEO is considering submitting to the Board of Directors or any other committee regarding the Bank s corporate governance and management, as all the matters related to the management of risks of a strategic nature. Corporate Framework and policies, Strategy and Operating Management Plan of irregular assets, Recovery Plan, as well as proposing the Risk Appetite Framework to be submitted 69

87 to the Board of Directors following approval by the Director of the General Division of Comprehensive Risk Management (CRO). It is also in charge of the ongoing monitoring as often as the general performance of the Group so requires. Specialist committees for risk management Risk management takes place through specialist committees that promote and implement the Group's risk management model. What follows is a brief description of the main specialist committees in the field of risk: o Risk Committee This holds the highest authority in the Group for the management of credit risk due to customer and counterparty insolvency, as well as the assessment and monitoring of risk concentration with the different sectors and borrowers. Its duties also include the adoption of the statistical models and methodologies for internal rating and the measurement of the different types of risks, as well as maintaining an overview of the Group's risk profile. The role of the Risk Committee, among others, is to determine the ratings of doubtful assets for reasons other than default, normal assets under special surveillance and assets subject to individual analysis, as well as to determine the individualised provision of assets considered as significant, pursuant to current legislation and adopted standards thereon by the Board of Directors and the Steering Committee. Moreover, the approval for the estimation of the impairment foreclosed assets or received in payment of debts considered as significant also corresponds to the Risk Committee, upon the proposal of the General Subdivision of Investees and Real Estate. o Credit Operations Committee This committee is of an operational nature, reporting to the Risk Committee, whose responsibilities are limited to the analysis, sanctioning and resolution of operations with Credit Risk due to customer insolvency, for all the operations by individuals and legal entities except for customers in the segments of Enterprise Banking. It has maximum sanctioning limits established in the Group's Operational Admission Powers. The operations/customers that exceed the powers conferred on this Committee are resolved by the Risk Committee. o Monitoring and Defaults Committee This Committee, reporting to the Risk Committee, performs its functions in all matters relating to the powers for the management of credit risk due to customer insolvency, from the perspective of the monitoring and recovery of operations. In terms of monitoring, it evaluates the large exposures of the Group, analyses the annual monitoring plan, determines the degree of surveillance of a customer or sector, and determines the action plans to be implemented for specific customers. In the area of recoveries, it carries out the work of sanctioning operations related to write-offs, the purchase or acquisition of assets, the monitoring of defaults and the monitoring of the functioning and effectiveness of the Group's recovery procedures. The operations/customers that exceed the powers conferred on this Committee are resolved by the Risk Committee. o Territorial Risk Committee The highest decision-making body in the area of risk due to customer insolvency at the decentralised level. There is a committee appointed for each of the territories of the Assistant General Managements defined in the organisation of Corporate Banking and Commercial Banking at the Group. This committee has responsibility for all the operations defined by the grouping of the 70

88 Group's risk into the category of individual risks, except for the operations of customers in the Enterprise Banking segments and Large Developers, and within the limits conferred on it in the internal regulations for Operating Admission Powers. o Other Decentralised Risk Committees These are limited to the handling and management of credit risk due to customer insolvency. The operations will be dealt with by the Risk Committee for Enterprise Banking, Risk Committee for the Commercial Banking Offices or Centralised Management Unit and the Risk Committee of the Business Center, within the limits conferred on it in the internal regulations of the operational risks admission powers. The Operational Admission Power Manuals set out each and every one of the powers conferred on the committees defined in the Group and are approved by the Management Committee. o Assets and Liabilities Committee This holds the highest authority for the overall financial management of the Group's assets, liabilities and margins. Specifically, it will manage the following types of risk: market (including equity investments), liquidity and structural (interest rate on the balance sheet and exchange rate), carrying out the work of the admission and monitoring of these, within the framework of the operating limits approved by the Group. o Operational Risk Committee Aims to contribute to the achievement of the institutional goals, through the management and prevention of operational risks. Among its other roles: to gather and understand the information of all aspects related to operational risk management, to approve lines and action plans for improvement, to establish corrective measures, to monitor and track the recommendations and resolutions adopted to mitigate and reduce operating losses. o Business Continuity Committee This body addresses the management of crisis situations that may affect the business continuity of the Group, by assessing the appropriateness of the implementation of the Business Continuity Plan and determining the general guidelines for the response to the emergency situation. o Regulatory Compliance Committee This body has responsibility for control and compliance with the Internal Code in the Securities Market (Reglamento Interno de Conducta, RIC), the Suspicious Transaction of Market Abuse Reporting, MiFID, product classification, data protection act, Criminal Risk Prevention and control of Regulatory Compliance matters and it derives its powers from those delegated to the Management Committee by the Board of Directors. o Committee for the Prevention of Money Laundering and the Financing of Terrorism This body is responsible for preventing and impeding operations related to money laundering and the financing of terrorism at the Bank and at all Group companies that abide by the Manual on the Prevention of Money Laundering and Financing of Terrorism of the Bank. Its faculties stem from those that have been delegated to the Steering Committee by the Board of Directors. o Validation Committee This deals with matters related to the validation of the statistical models and internal rating methodologies used by the Group for measuring the different types of risks. 71

89 o Recovery Plan Steering Committee Reviews the developments of each of the phases of the Recovery Plan, validating any proposed drafting for updating the plan, assisting the Steering Committee on decisions prior to proposing the Plan, which is to be raised to the Board of Directors Management processes and tools Risk appetite in the Group The Risk Appetite Framework (RAF) is an instrument of governance, management and self-control that allows the Board of Directors to: Formalise the (appetite) targets and limits that will define the internal management of the most significant risks (Risk Appetite Statement); Establish the risk supervisory and monitoring mechanism; and Reinforce the Group s risk culture. Liberbank Risk Appetite Framework, and the Risk Appetite Statement contained therein, covers all the risks to which the Group may be exposed while conducting its activity, and is binding on each and every unit and employee of the Group. The RAF for the Liberbank Group is set by taking into consideration the principles of the Financial Stability Board (FSB) and best market practices: Covers each and every risk to which the Group is exposed. It is approved, and compliance with it is supervised by the Board of Directors. It is consistent with the other the Group s processes, as well as its business model, strategic plans, capital planning, Corporate Risk Framework, corporate risk policies, limits or powers, and Recovery Plan. Classifies risks by type and defines the level of appetite for each of them. It defines quantitative and qualitative measures to objectively determine the Group s risk profile and compare it to its risk appetite. It is prospective. Defines roles and responsibilities for its management, expressly including the roles of the Board of Directors, those of the risk control function and the internal audit function. It encompasses the methodology to define, approve, monitor and control risk appetite, including action protocols for risk profile deviations from risk appetite. Reviewed and updated at least annually. The Risk Appetite Framework also serves as a key tool to reinforce the Group s risk culture. By means of the following elements, it makes it possible to maintain a sound risk culture: It goes beyond risk control functions, making the entire organisation actively engaged in risk management and, in particular, making the business lines and the remaining risk-taking areas fully aware of appetite and committed to risk monitoring. It runs vertically through the entire organisation, both upwards and downwards: o It stems from the Board of Directors, who acts as its advocate, and requires its engagement, for it is responsible for validating and approving it, ensuring its correct implementation and overseeing fulfilment of the risk appetite. Additionally, 72

90 o the Board of Directors designates the Steering Committee for the latter to implement it and to adequately transfer risk appetite to the entire organisation. It establishes a reporting process starting from the business lines, the General Risk Division, and the Finance and Corporate General Division, running through the General Division of Comprehensive Risk Management and the Steering Committee, and up to the Board s Risk Committee and the Board itself. Relying on indicators, it defines an objective criterion to measure risk profile and compare it with risk appetite. It follows the "three lines of defense" risk control model described under the section "Control of risk activities". It provides support to prudent management and appropriate standards: o o o o Through the Risk Appetite Statement, the risk strategy to be followed is established. The Group s remuneration policy will consider the achievement of the objectives set under the Risk Appetite Framework when determining the compensation of any group concerned. Conversely, failure to meet any such objective might result in a pay reduction in accordance with the provisions of the remuneration policies. It encourages critical comments, requiring evaluations and justifications both in designing and monitoring the Risk Appetite Framework. Risk appetite forms part of information processes and systems (IT) and the Management Information System (MIS). It requires that the risk appetite and limits defined in the Risk Appetite Framework be considered in the ordinary processes and flows of analysis and approval of operations, and in general, in every business decision. Definition of the Risk Appetite Framework encompasses the Group s Risk Appetite Statement, that is, selecting and defining, for each risk type, a number of indicators intended to identify, in objective and basically quantitative terms, and on a forward-looking basis, exposure to any such risk. For some of these measurements and indicators, tolerance thresholds or limits are established (targets, critical levels, and limits) in a manner consistent with the business model, strategic plans, capital planning and the remaining processes of the Group. In the review performed in the fiscal year 2017 some indicators have been established for the following risks: Solvency. Profitability. Loan, including concentration risk. Sovereign. Operational, including compliance, reputational, and technological risk. Market. Interest rate structural. Liquidity. Investees Property development. Other non financial risks deemed relevant for the management, as it is the case of the assessment of the control environment and the assessment of the information included in the data bases. 73

91 The Risk Appetite Framework also defines the methodology for the risk appetite definition, approval, follow-up and control, including protocols of action in case the risk profile deviates from appetite. The Group launched a comprehensive programme for communication, dissemination and training on the Risk Appetite Framework, targeted at all its employees. The Comprehensive Risk Control General Management draws up a report monitoring the RAF and submits it monthly to the Management Committee and quarterly to the Risk Committee of the Board and to the Board of Directors. This report allows, through so-called first-level indicators, to identify the risk profile of the Group and compare it with the appetite and limits established. If the alert levels or limits are exceeded, it will be necessary to take additional management measures in keeping with the action mechanisms established in the RAF itself. In addition, the monitoring report should complete the vision of the profile through so-called second-level indicators. Both the violation of an alert level and the exceeding of a limit will demand the proper management of the situation and make it necessary for diligent action to be taken by the appropriate bodies, which must always assess the situation with sufficient care and properly justify its decisions Recovery Plan While meeting the applicable regulations of the framework for the restructuring and resolution of credit institutions and investment service companies, the Group has completed the yearly update of Recovery Plan, which has a dual purpose: Provide the entity with the tools to detect and manage a possible substantial impairment of its financial position and entry into crisis. Identify and analyse possible measures to be employed to restore its financial position to a desirable situation. The Recovery Plan of the Group transcends the mere scope of regulatory compliance, with it becoming a true leverage for organisational change. The principles that have been followed the development of the Recovery Plan are the following: Provide an honest insight into the Group and its business model to facilitate its appreciation by the relevant authorities. Take into account the proportionality principle with regard to the terms of the requirements. Establish a high degree of alignment and coherence between the Recovery Plan and other documents and management and regulatory processes, such as the Internal Capital Adequacy Assessment Process (ICAAP) the Internal Liquidity Assessment Process (ILAAP), the RAF, the Report on Prudential Relevance and the Annual Report on Corporate Governance. The Corporate and Finance Executive Officer oversees the implementation of the proposal and update of the Recovery Plan, which must be ultimately approved by the Board of Directors Risk Reporting framework The objectives of the information framework in the Group are: Providing the information necessary to establish, review and, where appropriate, amend the business strategies and risk profiles. Providing those responsible for the business units with the data they need to manage their areas and comply with the objectives and strategies established. Providing the information necessary for decision making and risk control. 74

92 This information should allow the management and units: Receive information regarding the matters of importance that each body/hierarchical level should be aware of or decide on. Be aware of and authorize, where appropriate, the management tools, improvement initiatives, progress with projects and any other relevant activity relating to the control of risks, specifically including the features and behaviour of the internal risk models as well as the result of their internal validation. Be aware of and perform the monitoring of the exposure to risk, both globally and individually, by risk type, geographical area of management, and segment of activity (markets, customers, products, sectors), ensuring that there is compliance with the objectives set and limits approved. Be aware of and perform the monitoring of the credit quality of the customers, by segment of activity and geographical area of management. Perform the monitoring of defaults, and of risks under special surveillance. The design of the information framework must promote compliance with the aforementioned objectives at all times. Among the requirements for risk activities, the Group has the proper databases to comply with its role, with management information systems to ensure the availability and usefulness of the data, a high degree of understanding of the different facets of risk, as well as the capacity to qualitatively explain any variations in the risk assessment. The Group has reporting procedures that ensure the timely, complete and consistent information, where the information stored on the database is integrated into the information system, in a manner that reports and other relevant documentation (regular or ad hoc), to facilitate the decision making process at various management levels, including Senior Management and the Board of Directors. To meet these requirements, controls have been established for the various sources of item information during the treatment systems performed by the information systems on these sources and, finally, for the quality of the resulting risk measures. The Chief Data Officer (CDO), under the Executive Officer for Intervention and Management Control, designs, implements and optimises the long-term strategy for data governance, whereby establishing a set of policies, standards and processes to ensure the accuracy, completeness, reliability, availability, consistency and traceability of information in the Group. Moreover, the role of Internal Control and Internal Audits of the Group verify that the databases meet, at all times, that established in the internal policies and, in particular, the foregoing requirements Control of risk activities The risk control functions are carried out by specialised units, reporting to the Executive Offices of Comprehensive Risk Control and Internal Auditing, which regularly report the activities performed to the management and governing bodies. These units have the task of permanently supervising the Group's risk activity, with special emphasis on compliance with and the application of the strategies and policies. However, in practice the control activity is broader and is structured in the form of a pyramid and organised into three main levels of supervision: 75

93 First line of defense: each unit involved in the area of planning and execution must establish the controls necessary to mitigate the risks inherent in their activity. Second line of defense: is the Comprehensive Risk Control General Management which carries out the Group's control activity, supervising the existence of the first-level controls in the different units involved in the planning and execution of the activity, as well as compliance with the standards defined in the risk policies. Similarly, included among the activities in the second line of defense are, among others, those performed by the Regulatory Compliance Department. Third line of defense: is the Internal Audit Executive Office, which under the independent working system afforded to it through good governance practices, is responsible for the final layer of control over the Group's risk, verifying compliance with the policies, processes and controls approved by the Board of Directors and in keeping with the standards defined by the regulatory bodies and international markets. The current organisational structure provides the Group with an overall governance and risk management structure in keeping with market trends and with the current needs and complexities of the business. This system involves the systematic and independent monitoring of compliance with the established policies and the models, circuits and systems implemented for management, in order to identify in advance any situations that may result in a higher exposure to risk than is desired. The control of activities is carried out using three different approaches: Compliance with the applicable regulation. Evolution of the business indicators given the forecasts made. Assessment of the available technological environment. Comprehensive Risk Control General Management is responsible for establishing the controls map within the Group and for promoting, sharing, supervising and ensuring compliance with these control groups within the Group in all the units directly or indirectly related to risk. Additionally, the Group also has a Compliance Policy reviewed by the Board of Directors in 2017 which establishes the principles for efficiently managing the risk of compliance, ensuring that the Group complies with the applicable legislation, the existing regulation and the codes of conduct. 3.2 Credit risk: Customer Insolvency Overview Credit Risk is defined as the potential for losses arising from default by the debtor of its contractual obligations. Credit risk, and more specifically the so-called credit risk due to customer insolvency (derived from the inability of the borrowers to meet their payment obligations to the Group on schedule), is the most significant risk within the banking activity of the Group. Most of the risks assumed by the bank in the commercial area would fall under this heading. The objectives of the management of credit risk due to customer insolvency are defined by the Group's Management Committee and approved by the Board of Directors taking into account the business plan. They take into account the following considerations: Admission criteria based on objective indicators of the payment capacity of the customer, current and future, never taking admission decisions solely on the basis of the guarantees provided. 76

94 Taking decisions to assume risks, following the principle of collegiality and specialization, considering the type of risk assumed. Decisions supported and justified in documents on the basis of some regulated and clear procedures that can be verified by independent third parties that are suitably safeguarded. Performance of ongoing activity for monitoring the exposures of the Group, based on the allocation of specific management responsibilities for customers/operations, which are supported by policies, procedures, tools and systems that allow for their appropriate identification and assessment throughout their lifecycle. Fostering of the recovery activity based on policies, procedures, tools and systems, which ensure a smooth procedure by the intervening parties, specified in actions and decisionmaking aimed at minimising the loss from exposures for the Group. The fundamental basis on which the Group carries out the implementation and management of credit risk due to customer insolvency is: Involvement of the senior management in decision-making. Grouping and portfolio allotment of the risks: as the basis for the differential treatment of customers in keeping with the business strategy. Overview of the credit risk management cycle that allows for: o o Planning the key credit risk figures in order to guide the actions of the business and the taking and assumption of risks. Specialising of each of the risk management phases with policies, procedures and resources according to each of these: Admission, Registration, Monitoring and Recovery. Corporate admission policies with criteria that allow for the identification of aspects such as: minimum requirements demanded for the operations and customers, target profile desired by the Group for each relevant type of risk and in keeping with the risk appetite framework, and elements or variables that are taken into account in the analysis and decision making. Preventive customer monitoring system involving all the business units and integrated into daily management, and that facilitates the recovery activity of the Group in the event of a default. Model of recoveries that is flexible and adaptable to changes in market patterns or in the regulatory environment. Support tools for risk decisions and measurement, based on the credit quality of the exposures (scoring, rating, RAROC), in order to objectify and maintain a risk management policy in keeping with the strategy desired by the Group at all times. Application of a pricing policy that takes into account the quality of the risk for Loans and accounts receivable operations and contingent risks. Individual customers and micro-enterprises that either form part of economic groups within which there are already individually managed customers or that have risk exposures above a specified amount will be treated as individual risks. The Group has set Corporate Policies on Admission, Debt Refinancing and Restructuring, Followup, Recoveries and Counterparty Risk which were updated and approved by the Board of Directors. Such policies are regularly reviewed and amended in order to reflect both the best practices in management and the regulatory changes applied Credit risk exposure The maximum credit risk to which the Group is exposed is measured, for the financial assets measured at amortised cost net of value adjustments due to impairment. Financial assets that are 77

95 debt instruments are also measured at amortised cost, except when they are classified as financial assets held-for-trading, as well as financial assets classified as available-for-sale, in which case they are measured at fair value. It should be indicated that, in view of the information offered in these 2017 consolidated financial statements on the credit risk to which the Group is exposed, the existence of guarantees received is not being considered; this data differs from the credit risk exposure analyses performed by the Group internally. Being consistent with the limits covered by the Risk Appetite Framework approved by the Bank s Board of Directors, the Management Committee approved the structure of credit risk operating thresholds, in 2017, which represent an essential pillar for the monitoring and control of the assumed risk derived from the Group s activity, so as to ensure that only desired risks are assumed and that they are covered by the Group s overall strategy. The following tables show the maximum level of exposure to credit risk assumed by the Group at 31 December 2017 and 2016 for each class of financial instruments, without deducting therefrom the amount of the collateral or other credit enhancements received to ensure the compliance of the debtors: 78

96 Fiscal Year 2017: Thousands of Euros Asset balances net of valuation adjustments for impairment Financial assets held for negotiation Availablefor-sale financial assets Loans and accounts receivable Derivatives Hedge Accounting Risks outside the balance sheet Instrument class Total Debt instruments- Loans and advances to Credit - - Entities 83, ,441 Debt securities - 4,407,043 2,179, ,586,669 Loans and advances to customers ,432, ,432,966-4,407,043 23,696, ,103,076 Equity instruments - 392, ,675 Derivatives 22, , ,270 Guarantees granted , ,527 Contingent commitments granted MAXIMUM LEVEL OF ,243,324 4,243,324 CREDIT RISK 22,528 4,799,718 23,696, ,742 4,818,851 33,693,872 Fiscal Year 2016: Thousands of Euros Asset balances net of valuation adjustments for impairment Financial assets held for negotiation Availablefor-sale financial assets Loans and accounts receivable Derivatives Hedge Accounting Risks outside the balance sheet Instrument class Total Debt instruments- Loans and advances to Credit - - entities 94, ,388 Debt securities 1 7,203,216 2,229, ,433,214 Loans and advances to customers ,900, ,900, ,203,216 24,224, ,428,019 Equity instruments - 388, ,326 Derivatives 30, , ,405 Guarantees granted , ,447 Contingent commitments granted MAXIMUM LEVEL OF ,983,898 3,983,898 CREDIT RISK 30,264 7,591,542 24,224, ,142 4,580,345 36,876,095 With respect to the information shown in the foregoing tables, it is necessary to indicate that: The data relating to Debt instruments and "Equity instruments" in the foregoing tables recognised on the asset side of the balance sheet are measured at their carrying amount, net of the impairment losses recognised thereon and the valuation adjustments. 79

97 The risk exposure for the Derivatives included in the tables above corresponds to their market value. The Contingent Commitments granted heading includes the amount of the balances available without any conditions from the debtors. The Guarantees granted are recorded with their maximum amount guaranteed by the Group, which corresponds to their carrying amount. Generally, it is considered that most of these balances will mature without involving a real need for Group to require financing Risk admission phase This is the fundamental phase of the risk process, to the extent that it is here where the Group makes the decision to assume the contracted positions with a particular customer. The Group places special emphasis on the management of this phase of the credit cycle so strengthens the use of policies, processes and methods that allow it to come to a well-founded opinion about the credit rating of the customer, the existing/proposed risk operations, the guarantees provided and, ultimately, the risk-adjusted return expected by the Group. To accomplish this, the Group places particular emphasis on the definition of some Corporate Admission Policies based on the following general principles: Tailoring to the overall strategy of the Group: the admission policy is aligned with the standards set by the senior management in relation to the strategy in terms of segments, products, markets, risk-adjusted return and other variables and be consistent with the management objectives established in the risk appetite framework by the Board of Directors. Credit rating based on the ability to pay: the different policies and criteria set forth in this regard are always intended to attain a high credit quality on the basis of the payment capacity assessment, aimed at minimizing debtor s non-compliance probability during the risk term. In addition, the admission policy should take into account the guarantees associated with the operation and its term, in order to minimize the expected loss in the event of default; but, under no circumstances, guarantees themselves shall be the only basis for the admission of an asset or risk operation. Diversification: the admission policy takes into account the level of risk assumed with a single borrower, economic group, product, sector, and geographical area in order to avoid significant concentrations that weaken or compromise the Group's solvency. Uniformity: the admission policy ensures that decisions are consistent with the risk criteria adopted, irrespective of the center, geographical unit or legal entity that applies them. Effectiveness: the admission should ensure that decision making is consistent with the quality standards defined by the Group at any time. Specialisation: the structure and organisation of the admission takes into consideration the Group's business plan and the degree of complexity of the risks assumed, to provide the units with the appropriate means and resources in order to ensure the proper handling of these. Dynamic management: the management of credit risk is carried out in a dynamic way, constantly assessing the level of exposure, the economic and financial position and the solvency of the borrowers, the degree of coverage of any guarantees provided, as well as all kinds of macroeconomic and sector-related factors considered relevant in this regard. This dynamic management is associated with collecting information to allow a detailed analysis of the quality of the concession of the loans sanctioned, since in this way it is possible to maintain the level of credit rigor in the concession phase. For the efficient implementation of this principle, the admission function has the appropriate reporting mechanisms. Delegation and collegiate bodies: given that the operational speed of the process for the concession of risks is a competitive factor of the first order, risk admission is organised 80

98 with a system of delegation of powers in a pyramid structure, starting from the Board of Directors and ending with the UGC and company centers, in order to be able to respond in a timely and proper manner to customer demands for financing in an efficient manner. Use of the decision systems and integration in the management: the decision systems (rating/scoring) form part of the Group's admission process. The use of internal models will apply for those products, segments and portfolios where their use is recommended. The internal models will take into account the opinion and judgement of the analyst, especially in those portfolios with less granularity. The expert analyst is involved in the design/construction of the internal model to ensure the correct assessment of the exposures and incorporates into their analysis the results provided by the models, based on the procedures defined by the Group. No self-concession: the people/centers with concession authority and powers granted by the Group are strictly prohibited from carrying out the self-concession of operations for assets, for themselves or for the family circle, or of patrimonial interest, understanding family circle or patrimonial interest to mean the spouses, parents and descendants or companies in which such persons, in any capacity, participate in the share capital, alone or together, or where they hold the positions of president, director, administrator, COO, CEO or equivalent. For these purposes, "company" means any public or private entity with its own or independent legal personality. Control: the management of credit risk is subject to ongoing monitoring to check both compliance with the risk policies, standards and limits established and the correct tailoring of these to the objective of ensuring the financial and equity position of the Group. Risk management is deployed through different bodies in charge of analysing and resolving risk transactions within the powers granted to them. The Group has a system of delegating powers which is built around the following aspects: credit quality (scoring/rating), type of product, segment, admission centre, deadline, guarantees, exposure by product line and by counterparty Stage of debt refinancing and restructuring In the same way as for the admission of risks, the Group has a specific policy for refinancing and restructuring debts with customers, which will be framed as part of the Group's admissions policies, and whose content must establish the following elements: Governing principles that guide the refinancing and restructuring processes: target customers, precautions to take in the processes and areas to avoid by policy. Impact of the restructuring and implications for the purposes of risk monitoring. During 2017, the Corporate Policy on Refinancing and Debt Restructuring has been updated, in line with the criteria published by the European Banking Authority (EBA). This Policy maintains the terminology used to identify the refinanced operations to be updated and adapted to regulations in force distinguishing between the refinancing operation, the refinanced operation, the restructured operation, the renewal operation and the renegotiated operation, and additionally incorporates mechanisms and criteria of frequency and control enabling the monitoring activities being performed by the Group in this kind of operations and clients to be further reinforced and boosted. The principles included in the Liberbank Group's Corporate policy on debt refinancing and restructuring to provide for refinancing are as follows: Economic rationality: the refinancing/restructuring analysis must be performed in line with comparative criteria respect to the non-refinancing/restructuring alternative. The existence of a previous risk introduces an additional economic assessment factor which differentiates it from other types of operations. 81

99 Overview of the customer: it is necessary to assess the customer as a whole in line with its credit quality, strengths and weaknesses regardless of the situation of each individual contract. Avoid increased risk: new additional financing should not be granted without improved guarantees. Refinancing/restructuring must be made so that the payments are in line with the repayment capacity of the customer and, at the same time, at least cover the amounts (principal and interest) due at the date of the refinancing or restructuring operation, preferably within a maximum period of one year. Exhaust the collection channels for the required amounts and avoid procedures which encourage non-payment. The determination of the criteria used by the Group to recognise an impairment loss on a restructured or refinanced operation is based: Principal grace period: contractual terms that postpone the settlement of the operation through regular payments, such as grace periods greater than two years for the repayment of the principal. Debt relief: amounts written off from the balance sheet that are deemed as being irrecoverable, which exceed the coverages resulting from applying the set percentages for the risk segment corresponding to the coverage rates determined by the Bank of Spain ( alternative solutions ) for standard risk under special surveillance. Trial period refinancing: refinancing operations that have been refinanced or restructured during the trial period, understood as being at least a two-year period in which a refinanced or restructured loan must be maintained in a standard situation while under special surveillance, before it can be classified as in good standing. Existence of plan for improper payments Refinancing operations that have been refinanced or restructured must be specifically monitored until the meeting the following requirements before being classified as standard risk: Following a thorough review of the equity and financial position of the holder, it is determined that it is not foreseeable that such may enter any financial difficulties and, consequently, it is highly likely to meet its obligations to the Group in due time and manner. A minimum period of two years has elapsed from the date of the refinancing or restructuring or, if later, from the date in which it was reclassified as not being registered as doubtful. The holder has settled the payments accrued on the principal and interest, from the date in which the restructuring or refinancing operation was formalised or, if later, the date in which it was reclassified as not being registered as doubtful. All amounts (principal and interest) have been settled that were registered as outstanding at the time of the approval of the refinancing or restructuring or that were derecognised as a result of such. The holder has no other operation with amounts overdue by more than 30 days at the end of the trial period. The criteria for determining the accounting classification of refinanced and restructured operations have been reviewed and approved by the Board of Directors, in 2017, pursuant to current legislation, where the Risk Committee is the responsible body for overseeing the correct application thereof. The detail for the refinancing and restructuring by the counterparty, at 31 December 2017 and 31 December 2016, is as follows: 82

100 Fiscal Year 2017: Without collateral Number of transactions Gross carrying amount Number of transactions Total (Thousands of Euros) Secured with collateral Maximum amount that may be considered for collateral Gross carrying amount Other guarantees Accumulated impairment losses or accumulated fair value losses Property guarantees Credit institutions Public Sector 4 4, ,384 2,019 - (216) Other financial institutions and sole proprietors (financial business activity) (286) Non-financial institutions and sole proprietors (non-financial business activity) , , ,095 6,546 (364,963) Of which: financing for construction and property development 8 11, , ,922 2 (133,541) Households (non-business activity) and NPISH 1,093 9,903 2, , , (63,376) Total 1, ,071 3, , ,228 6,764 (428,841) Financing classified as non-current assets or disposal groups that have been classified as held for sale ,257 14,428 - (5,902) 83

101 Without collateral Number of transactions Gross carrying amount Of which: DOUBTFUL (Thousands of euros) Secured with collateral Number of transactions Gross carrying amount Maximum amount that may be considered for collateral Accumulated impairment losses or accumulated fair value losses Property guarantees Other guarantees Credit institutions Public Sector ,393 1,177 - (216) Other financial institutions and sole proprietors (financial business activity) (227) Non-financial institutions and sole proprietors (non-financial business activity) , , ,075 5,514 (359,047) Of which: financing for construction and property development 8 11, , ,556 2 (133,490) Households (non-business activity) and NPISH 697 6,945 1, , , (61,849) Total 1, ,335 2, , ,629 5,545 (421,339) Financing classified as non-current assets or disposal groups that have been classified as held for sale ,257 14,428 - (5,902) Fiscal Year 2016: Without collateral Number of transactions Gross carrying amount Number of transactions Total (Thousands of Euros) Secured with collateral Maximum amount that may be considered for collateral Gross carrying amount Other guarantees Accumulated impairment losses or accumulated fair value losses Property guarantees Credit institutions Public Sector 6 4, ,187-9,295 (1,076) Other financial institutions and sole proprietors (financial business activity) 5 2, , (2,276) Non-financial institutions and sole proprietors (non-financial business activity) ,113 1,542 1,284, , ,327 (499,231) Of which: financing for construction and property development 6 7, ,393 24, ,731 (205,638) Households (non-business activity) and NPISH 773 5,232 3, , ,691 7,548 (65,246) Total 210,55 1, ,719 1,649, , ,184 (567,829) Financing classified as non-current assets or disposal groups that have been classified as held for sale

102 Without collateral Number of transactions Gross carrying amount Of which: DOUBTFUL (Thousands of euros) Secured with collateral Number of transactions Gross carrying amount Maximum amount that may be considered for collateral Accumulated impairment losses or accumulated fair value losses Property guarantees Other guarantees Credit institutions Public Sector 3 3, (1,076) Other financial institutions and sole proprietors (financial business activity) 5 2, (773) Non-financial institutions and sole proprietors (non-financial business activity) ,751 1,138 1,117, , ,758 (487,309) Of which: financing for construction and property development 6 7, ,316 23, ,482 (205,592) Households (non-business activity) and NPISH 318 3,139 1, , ,557 4,745 (62,586) Total ,700 2,928 1,327, , ,517 (551,744) Financing classified as non-current assets or disposal groups that have been classified as held for sale Changes to the carrying value for refinanced operations during 2017 and 2016 is as follows: Thousands of euros 31/12/ /12/2016 Balance at the beginning of the period 1,292,434 2,346,353 Refinancing and restructuring for the period 182, ,441 Memorandum item: recorded impact on the income statement for the period (net) 101, ,117 Debt repayments (206,903) (323,125) Foreclosures (360,573) (239,068) Derecognition on balance sheet (reclassification to non-performing) (85,792) (163,995) Other changes (136,116) (506,172) Balance at the end of the period 685,163 1,292, Risk monitoring phase Risk monitoring is understood as the set of functions, standards, procedures and tools that allow for the effective development of the cycle of prevention, anticipation and management activities in response to a potential impairment in risks. The risk monitoring units/centers have the basic mission of customer management through monitoring the risks assumed that allows them to take measures that minimise the risk when the solvency or ability to pay of the borrowers decreases and endangers the repayment of the loans. The monitoring activity is established on the basis of the following premises: Anticipation: to be effective the monitoring should have a strong preventive aspect. The early detection of debt reimbursement problems enables to manage and reduce the expected/incurred loss of the loan and receivable portfolio. The probability of resolving a problem is inversely proportional to the time taken to detect it. The role of Group Monitoring includes the predictive and reactive alert system that anticipates situations in which the solvency or repayment capacity of customers decreases, whereby jeopardising the loan repayments. This anticipation fosters the undertaking of proactive measures that minimise the risks assumed. 85

103 Proactivity: the risk monitoring function must be proactive and permanent, from the granting of the operation to its cancellation; and particularly intense in the phases of the fastest growth in investment or in opening new markets. Efficiency: this is achieved by standardising the credit risk follow-up process, and setting the duties of the participants, handling procedures and information systems that will be used to manage and control risks. Value added: the monitoring work should mean that it is possible to obtain an information foundation from which to create management reports regarding the portfolio of customers, which on the one hand support the definition of risk admission policies and methodologies and on the other expedite the process of receivables management with really problematic customers. The management reports must facilitate operational decision-making and financial planning. The role of Monitoring analyses the situation of a customer/corporate group and determines the degree of weakness for the risks assumed and the customer rating for management purposes. These criteria are in line with the accounting classification criteria approved by the Board of Directors and are outlined in the Accounting Policies of the Group and the Corporate Policy on Credit Risk Provisioning Calculations, which describes the accounting treatment for each of the important items, which includes the financial statements as well as their structure, so as to ensure compliance with the applicable regulatory framework for financial reporting by the Group. The Group s follow-up activities are carried out by applying early warning mechanisms and a systematic review of certain clients and counterparties who, based on their level of exposure and impact, are permanently monitored, classifying exposures into two general categories: Normal: holders with a credit situation arising from the normal progress of the risk positions maintained in the Group and an adequate economic-financial and equity structure. Standard risk under special surveillance: includes all operations, which do not meet the criteria to be individually classified as doubtful or non-performing risk, depicting shortcomings that could assume losses greater than those of other similar operations classified as standard risk. Doubtful: includes operations which cast reasonable doubt with regard to their full repayment (principal and interest) by the holder under the contractual terms, as well as offbalance sheet exposures whose payment by the entity is likely and its recovery doubtful. The systematic review of holders may give rise to the definition of specific credit plans with specific associated review schedules. The allocation of a credit scheme associated to customers, which depict shortcomings, shall imply that the risk classification is standard under special surveillance or doubtful depending on the significance of the situation, upon the approval of the pertinent committee. The Group also constantly monitors the level of concentration and performance of the credit risk portfolios from various key areas, mainly economic sectors, products and customer groups Recovery Management Phase The phase of recovery or collection take place at the date of the partial or total non-payment of the contractual obligations established in the initial admission phase. The intensity of the recovery increases insofar as the unpaid debt extends over time. The main objective of the recovery process is anticipation and speed in the recovery management actions in order to increase the chances of success and optimize the percentage recovery of outstanding credit. To achieve this goal, the Group's personnel in charge of recovery should follow the following basic management principles: 86

104 Responsibility and continuity in management: the different units of the Group in contact with the customer, from the generation of the risk to its termination, will be responsible for overseeing and ensuring the proper functioning of the process of recovery of unpaid risks, in all those phases in which they are involved. Vision of the customer/contract: managing unpaid debts will combine a double vision of credits, including a customer and a contract vision. Collection priority criteria: for the purposes of managing unpaid contracts. The Group has collection priority rules in place, integrated into the Group's computer systems, in order to maximize the return from the debt collection process. Aggregation into homogeneous categories: the Group's recovery model has, at all times, a grouping into portfolios of unpaid risks conducive to the uniform treatment of the exposures in terms of circuits, recovery effort, and potential losses. Allocation of the management: the customers or contracts in recovery management always are in a single management phase, so that at all times it is possible to perfectly identify the type of management being carried out, those involved, the age of the case, and the time spent in it. Dynamic procedures: paying attention to the variations and changes in the markets, the Group regularly reviews the recovery procedures set in each time. Minimising the associated risks: such as reputational risk, legal risk, etc. Specialisation: the Group shall continually adjust the resources and the means allocated to the recovery activity, whereby taking into account factors such as the legal situation of a customer and the degree of complexity of the assets held as collateral for legal reasons or valuation, among others. Management information: with dashboards that enable to perform the follow-up of the compliance level with the Group's strategic plans and budgets and ensure the consistency of the available management information. This corporate model is subject to ongoing reviews and the improvement of processes and its management methodology, involving the direct involvement of the Group s entire organisational structure (commercial, technology, organisation, operations, risks, human resources, performance evaluation, etc.) to be fully integrated with the Strategy and Operational Plan of irregular asset management approved by the Board of Directors. The Group establishes various strategies for recovery, friendly management, pre-litigation and legal claims, through methodologies that incorporate the integration of advanced risk metrics and strategies for recovery circuits and customer prioritisation, in such a way so as to differentiate the portfolio monitoring through management situations and the recovery capacity of the issues, facilitating the planning, prioritisation, management bodies and management of portfolios. These recovery processes are defined internally at the Group and are managed dynamically by the specialist units, in order to adapt them to the changes in the economic situation and trends and to other surrounding aspects conditioning the success for the collection. The use of advanced risk metrics incorporates an additional dimension to the segmentation procedures of the debtor portfolio, facilitating a greater differentiation of the customer risk profile, not only for the characteristics of the agreement but also expected behaviour Measurement and valuation of credit risk The Group has a Corporate Policy on Internal Risk Measurement Models, having been reviewed by the Board of Directors in 2017, which establishes the management principles and the approval for risk models in the Group. Rating models allow us: 87

105 To classify credit Loans and accounts receivable into homogeneous groups for the purposes of credit risk valuation. To order exposures on the basis of their expected level of insolvency risk and observe their evolution. Be an element that provides the calculations on losses incurred in the provision models and those forecast in the capital models, as well as capital consumption, for the purposes of management and regulation; and therefore they provide a basic input for taking business decisions. The Group integrates the rating models into its decision making in order to have a valuation that is homogeneous and consistent with its investment strategy, creating a suitable balance between commercial and financial management. The valuation models in the Group fulfil the Use Test, for which: The approval for the use of credit risk models during the ordinary management of activity, including any possible amendments made to such, corresponds to the Risk Committee regarding all their terms, calculation process, applied risk rules, proposed operational changes and have, at least, a pre-implementation validation report. Their existence is an indispensable part of the risk process, affecting the operation sanctioning process, offering a binding opinion which alters the amounts delegated for the sanctioning of operations. The results of the models must be used as management information, for example when managing portfolios, the Group's risk strategies, determining expected/incurred losses, delegating sanctioning powers, and setting incentives and Management scorecards. They are incorporated into the pricing policy implemented within the Group, increasing the differentials when the credit quality is lower. Measuring risk means quantifying any losses that may occur, and for this different metrics are used: Exposure and Maturity Positions: exposure measures are static measures used to quantify the volume exposed to risk. Parameters: are used to quantify the variability of the different risk factors, probability of occurrence of different risk events, their relative impact and the relationships between them. Normally statistical techniques are used to quantify them and depending on the confidence level, they will be used to calculate measurements of expected or unexpected losses for each type of portfolio. The main management criteria may be: o o o o o o o o o o o Rating/Scoring. Probability of Default (PD). Credit conversion factors (CCF) Severity (Lost Given Default). Loss incurred. Expected loss. Unexpected loss. Observed default (management and accounting). Returns - Results. Capital Consumption. RAROC - Risk adjusted return on capital. Credit quality of not-yet-matured and non-impaired financial assets Pursuant to the policies of the Group, the following are the possible credit ratings for the operations: 88

106 - High rating: generally, risks with companies that have a history of very positive and sustained results over time, with an adequate level of sustained profitability, low reliance in terms of indebtedness and for those where there are no doubts regarding their repayment capacity in the medium term. Customers that are closely associated with the entity, with significant liability positions and a stable and adequate direct debit income stream to cover their financial commitments and without internal and external incidents of defaults are classified as such. - Medium rating: generally, risks with companies that have a history of acceptable and sustained results over time, with a moderate profitability, with a business model with differentiating factors, a moderate reliance in terms of indebtedness and for those where there are no foreseen indicators regarding their repayment capacity in the medium term. Customers that are moderately associated with the entity, without or with insignificant liability positions and a direct debit income stream and without internal and external incidents of defaults are classified as such. - Low rating: generally, risks with companies that have certain shortcomings in terms of profitability due to cyclical reasons, with a relatively increasing reliance on indebtedness, but without any indication of issues in repayments in the medium term or serious difficulties in finding a financial service provider under standard market conditions. Customers with that are loosely associated and/or that have internal and/or external incidents. - Non-rated: this corresponds to public-sector bodies, foreign companies, associations, small businesses and individuals without a proactive scoring (employees, customers with length-ofservice less than 6 months, among others). A breakdown of credit quality (gross amount) not-yet-matured and non-impaired financial assets, at 31 December 2017 and 31 December 2016, is as follows: Thousands of euros 31/12/ /12/2016 High rating 7,285,623 7,444,536 Medium rating 7,393,683 6,140,012 Low rating 2,323,300 2,681,988 Non-rated 3,262,157 3,905,522 TOTAL 20,264,763 20,172, Risk hedging and mitigation The Group's risk hedging and mitigation arises from its business model, focused mainly on retail banking, where the guarantees serve as coverage for our exposures and must be considered as complementary, and never substitutes for the repayment capacity. The creation of guarantees, in any of the generally accepted forms (monetary, property, personal, and other hedges), must be tailored to the risk assumed and will take into account the liquidity of the right taken as security for recovering the damaged risk. The Group performs, through the Credit Risk Management Assistant General Management, regular monitoring and reviews of the effectiveness of guarantees, collaterals and mitigations of risk Transparency requirements The Bank of Spain, in its Circular 5/2011 of 30 November 2011, requested, from individual credit institutions, the dissemination of specific quantitative and qualitative information regarding the following aspects: - Financing for construction, property development and to acquire housing. 89

107 - Assets acquired to pay debts. - Asset management policies and strategies vis-à-vis this sector. - Financing needs on the markets, as well as of the short-, medium- and long-term strategies. The quantitative information relating to property development loans on the basis of their purpose, at 31 December 2017 and 2016 is as follows: Fiscal Year 2017: Gross carrying amount Thousands of Euros Excess over the value of the collateral Accumulated impairment losses Financing for construction and property development (including land) (business in Spain) 513, ,829 (207,949) Of which: doubtful 419, ,881 (207,024) Memorandum item: Non-performing assets 425,

108 Fiscal Year 2016: Gross carrying amount Thousands of Euros Excess over the value of the collateral Accumulated impairment losses Financing for construction and property development (including land) (business in Spain) 1,215, ,155 (430,417) Of which: doubtful 1,078, ,308 (430,417) Memorandum item: Non-performing assets 370, Of the total loans and advances to customers, following are the balances at 31 December 2017 and 2016, excluding the positions with the public sector: Loans to customers excluding the public authorities Thousands of euros 31/12/ /12/ ,308,083 20,509,595 Total consolidated assets 35,462,011 38,324,438 Value adjustments and collective provisions for losses incurred but not reported as standard risks (81,205) (142,070) Following is a detail of the property credit risk based of the type of associated guarantees, at 31 December 2017 and 2016: Thousands of euros 31/12/ /12/2016 Without property mortgage guarantee 16,079 20,391 With property mortgage guarantee 497,912 1,195,224 Completed buildings 328, ,645 Buildings under construction - Housing 3,785 7,995 Lands 165, , ,991 1,215,615 The detail of the financial guarantees granted for the construction and real estate development operations, gathering the highest level of credit risk exposure is shown below, with the amount to be paid by the Group in case of guarantee foreclosure at 31 December 2017 and 2016 being: Financial guarantees secured for construction and property development Amount recorded as a liability on the balance sheet Thousands of euros 31/12/ /12/ ,951 25,852 2,081 1,995 91

109 Retail mortgage portfolio risk The quantitative information relating to the retail mortgage portfolio risk at 31 December 2017 and 2016 is as follows: Thousands of euros 31/12/ /12/2016 Loans for housing acquisition 12,990,029 12,887,147 Without property mortgage guarantee 82,012 86,636 With property mortgage guarantee 12,908,017 12,800,511 The ranges of loan to value (LTV) on the last valuation available of the retail mortgage portfolio at 31 December 2017 and 2016 are: Fiscal Year 2017: Gross carrying amount on the amount of the last available appraisal (LTV) Thousands of Euros >=0%, <40% >40%, <=60% >60%,<=80% >80%,<=100% >100% Total Gross carrying amount 3,054,508 4,647,677 4,529, , ,321 12,908,017 - Of which: doubtful 68, , ,332 66, , ,093 Fiscal Year 2016: Gross carrying amount on the amount of the last available appraisal (LTV) Thousands of Euros >=0%, <40% >40%, <=60% >60%,<=80% >80%,<=100% >100% Total Gross carrying amount 2,981,762 4,518,672 4,598, , ,913 12,800,511 - Of which: doubtful 100, , ,373 89,171 64,120 75,718 LTVs are formulated using the valuation of the updated guarantees, in accordance with the requirements of accounting regulations (IFRS 13). For doubtful risks, the regulations contemplate an annual update, whereas for standard risks an annual review for the valuation is provided in order to detect significant falls in value and in the case of their occurrence, this would lead to a valuation update. Assets acquired by the Group to pay debts The detail of the foreclosed and acquired assets, classified under Non-current assets and disposal groups that have been classified as held for sale and Tangible assets - investment properties in the consolidated balance sheet, at 31 December 2017 and 31 December 2016, is as follows: 92

110 Fiscal Year 2017: Gross debt Thousands of Euros Carrying Total coverage amount Property assets from financing aimed at construction and property development: 2,230,294 1,157,644 (1,072,650) Completed buildings 887, ,143 (342,828) Housing 629, ,596 (256,741) Remainder 258, ,547 (86,087) Buildings under construction 406, ,537 (204,436) Housing 351, ,457 (176,831) Remainder 55,685 28,080 (27,605) Land 935, ,964 (525,386) Consolidated urban land 400, ,517 (220,573) Other land 535, ,447 (304,813) Property assets derived from mortgage financing to households for home 427, ,268 (190,800) acquisition Other foreclosed property assets 398, ,726 (147,329) Total foreclosed property assets 3,055,417 1,644,638 (1,410,779) Foreclosed equity instruments Equity instruments of entities that are holders of an interest in foreclosed property assets Financing for entities that are holders of an interest in foreclosed property assets Includes property investments with a gross debt of 517,504 thousand and valuation adjustments for impairment for an amount of 147,001 thousand and accumulated amortisation for an amount of 7,155 thousand. 93

111 Fiscal Year 2016: Thousands of Euros Carrying Total Gross debt amount coverage Property assets from financing aimed at construction and property development: 2,565,008 1,548,311 (1,016,697) Completed buildings 980, ,885 (363,549) Housing 684, ,031 (269,457) Remainder 295, ,854 (94,092) Buildings under construction 510, ,674 (222,289) Housing 412, ,935 (178,083) Remainder 98,945 54,739 (44,206) Land 1,073, ,752 (430,859) Consolidated urban land 588, ,983 (229,294) Other land 485, ,769 (201,565) Property assets derived from mortgage financing to households for home acquisition 460, ,179 (191,278) Other foreclosed property assets 401, ,074 (141,521) Total foreclosed property assets 3,427,060 2,077,564 (1,349,496) Foreclosed equity instruments Equity instruments of entities that are holders of an interest in foreclosed property assets Financing for entities that are holders of an interest in foreclosed property assets Includes property investments with a gross debt of 394,706 thousand and valuation adjustments for impairment for an amount of 126,230 thousand and accumulated amortisation for an amount of 2,525 thousand Credit risk: Concentration The Concentration Risk is the possibility of significant losses occurring that may threaten the future viability of the Group, as a result of the accumulation of risks in a small group of borrowers that share common features or that present a high degree of correlation between them. The importance of measuring the concentration of risks is intrinsically related to the volatility of the financial income arising from the investments made. The risk concentration limits, which are included in credit risk indicators and defined in the Risk Appetite Statement being part of the Risk Appetite Framework, are the maximum level of risk the Group considers to be acceptable and hence is not willing to exceed. The objectives for the management of Concentration Risk will be defined by the Bank's Management Committee and approved by the Board of Directors following the business plan and will take into account at least the following considerations: Preventing the concentration of exposures in borrowers or groups of borrowers with a reduced or insufficient credit quality in terms of rating (internal and external). Having a portfolio diversified by both sector and borrower, to reduce the risks of a high volatility of expected financial income. 94

112 Keeping suitable control of the main exposures, by both sector and customer, with regards to the Group's different capital metrics. Preventing, insofar as is possible, investment situations in insufficiently diversified single product lines and with a high geographical concentration. From a management perspective, risk concentration in the different investment portfolios increases the Group's credit risk. It seeks, therefore, to have suitably diversified credit portfolios, with a better quality on the long term. Since economic cycles are very difficult to predict, the greater the diversification of the Group's credit risk exposures, the lower will be the volatility and magnitude of its losses. As a result, the Group assigns a series of elements to control exposures in order to maintain a suitable assessment of the degree of concentration assumed at all times and its evolution within its scorecards. The management and control of concentration risk essentially includes the valuation and analysis of two main aspects: Concentration of debtors: the concentration of risks with the Group's main sets of borrowers is assessed using different metrics of capital, exposure and results, in order to understand and assess the impact of a potentially negative evolution of the main risks in the basic financial indicators. Exposures relating to a set of counterparties whose probability of default arises from sharing common factors such as, for example: economic sector, geographical region, type of instrument, degree of rating. This is a second differential element in the study and valuation of the Group's risk concentration. The valuation of concentration by sector will be the first element to take into account, to the extent that it is a differential factor for the Group due to its investment structures and business composition. As for the above, the comparison with regards to metrics of capital, exposure and results will constitute a basic indicator in the Group's management. In addition to indicators defined in the Risk Appetite Statement included in the Risk Appetite Group, the Group has in place various concentration measurement metrics, which may vary in line with business and market performance. Concentration by geographical area Below is the aggregate information at 31 December 2017 and 2016 on risk concentration, broken down by geographical area and activity segment, distinguishing by counterparties. The risk definition includes the following consolidated balance sheet items: "Cash, cash balances in Central Banks and other demand depositv" (excluding cash) "Loans and accounts receivable", "Debt securities", "Equity instruments", "Held-for-trading financial assets- Derivatives", "Derivatives - Hedge accounting" - "Investments in subsidiaries, joint ventures and associates" and "Guarantees granted". The amounts of the following table are net of impairment losses: 95

113 Fiscal Year 2017: Total Spain Thousands of Euros Other EU countries America ROW Credit institutions 2,165,504 2,099,012 66, Public Sector- 5,497,463 4,174,662 1,322, Central Administration 2,897,432 1,574,631 1,322, Other public-sector bodies 2,600,031 2,600, Other financial institutions and sole 2,696,357 2,641,268 22,664 32,425 - proprietors (financial business activity) Non-financial institutions and sole 6,362,331 6,226,307 96,240 36,970 2,814 proprietors- Construction and property development (a) 416, , Civil engineering construction 36,258 36, Remaining purposes- 5,910,056 5,774,032 96,240 36,970 2,814 Of which: Large enterprises 1,160,254 1,160, Of which: SMEs and sole proprietors 4,749,802 4,613,779 96,239 36,970 2,814 Households and NPISH- 14,513,142 14,473,039 17,097 16,589 6,417 Housing 12,791,274 12,753,555 16,235 15,331 6,153 Consumer 394, , Other 1,327,271 1,325, , Total 31,234,797 29,614,288 1,525,294 85,984 9,231 (a) Includes all activities related with construction and property development, including that related with the financing of land for property development. Fiscal Year 2016: Total Spain Thousands of Euros Other EU countries America ROW Credit institutions 1,489,539 1,368, ,603-5,019 Public Sector- 8,381,122 6,725,447 1,655, Central Administration 6,557,235 4,901,560 1,655, Other public-sector bodies 1,823,887 1,823, Other financial institutions and sole 2,820,780 2,802,667 18, proprietors (financial business activity) Non-financial institutions and sole 7,045,347 6,834, ,789 73,970 4,090 proprietors- Construction and property development (a) 834, , Civil engineering construction 33,564 33, Remaining purposes- 6,177,215 5,966, ,789 73,970 4,090 Of which: Large enterprises 1,206,569 1,179,453 27, Of which: SMEs and sole proprietors 4,970,646 4,786, ,673 73,970 4,090 Households and NPISH- 14,167,830 14,130,061 15,134 16,244 6,391 Housing 12,905,704 12,870,212 14,498 14,847 6,147 Consumer 334, , Other 927, , , Total 33,904,618 31,861,590 1,937,314 90,214 15,500 (a) Includes all activities related with construction and property development, including that related with the financing of land for property development. 96

114 2017 Thousands of Euros Autonomous Communities TOTAL Andalucia Aragon Asturias Balearic Islands Canary Islands Cantabria Castilla-La Mancha Castilla y León Catalonia Credit institutions 2,099,012 5, , ,949-17,108 Public Sector 4,174,662 87,533 22, ,407 10,390 30,759 79, , ,556 16,833 Central Administration 1,574, Other public-sector bodies 2,600,031 87,533 22, ,407 10,390 30,759 79, , ,556 16,833 Other financial institutions 2,641, , ,940 80, ,795 and sole proprietors (financial business activity) Non-financial institutions 6,226, ,407 41, ,119 25,248 9, ,505 1,060, , ,493 and sole proprietors Construction and property development (a) 416,017 5,711 3,708 17, , ,688 2,331 18,367 Civil engineering 36, , ,233 2, construction Remaining purposes- 5,774, ,617 37, ,596 25,248 9, , , , ,349 Large enterprises 1,160,253 17, , ,165 59,994 46,055 22,630 SMEs and sole 4,613, ,107 37, ,493 25,248 8, , ,116 75, ,719 proprietors Households and NPISH- 14,473, ,373 46,169 2,553,940 13,607 24,334 2,205,330 3,311, , ,595 Housing 12,753, ,126 42,727 2,086,585 12,511 23,292 1,941, , ,157 Consumer 394,181 6, , , ,642 3,148 7,548 Other 1,325,303 17,788 2, , , ,070 9,540 13,890 Total (a) 29,614, , ,663 3,792,785 50,160 64,260 2,949,020 5,063, , ,824 Includes all activities related with construction and property development, including that related with the financing of land for property development. 97

115 Credit institutions Public Sector Central Administration Other public-sector bodies Other financial institutions and sole proprietors (financial business activity) Non-financial institutions and sole proprietors Construction and property development (a) Civil engineering construction Remaining purposes- Large enterprises SMEs and sole proprietors Households and NPISH- Total Housing Consumer Other 2017 Thousands of Euros Autonomous Communities Extremadura Galicia Madrid Murcia Navarra Valencia Basque Country La Rioja Ceuta and Melilla 6 2,672 1,767, ,232 12, ,164 42, ,686 10,860 68,928 13,607 88, ,164 42, ,686 10,860 68,928 13,607 88, , ,355, ,915 24,091 2,109,840 93,111 20, , ,987 1, , ,355 11,434 2,000 25,108 3, , , ,682 23,726 1,915,259 80,944 18, , ,649 1, ,099 2, ,303 7,958 1,777 22,865 63, ,583 20,782 1,243,956 72,986 16, ,966 54,620 1, ,499,439 96,355 2,568, ,099 5, , ,959 4,098 2,149 1,198,506 90,658 2,433, ,257 5, , ,275 3,828 1,998 66,129 1,551 31,844 2, ,359 1, ,804 4, ,227 8, ,277 3, ,343, ,469 9,762, ,086 94, , ,367 5,917 2,409 (a) Includes all activities related with construction and property development, including that related with the financing of land for property development. 98

116 2016 Thousands of Euros Autonomous Communities TOTAL Andalucia Aragon Asturias Balearic Islands Canary Islands Cantabria Castilla-La Mancha Castilla y León Catalonia Credit institutions 1,368,917 11, , ,026-21,890 Public Sector 6,725, ,990 51, ,580 12,470 2, , , ,935 19,281 Central Administration 4,901,560 Other public-sector bodies 1,823, ,990 51, ,580 12,470 2, , , ,935 19,281 Other financial institutions 2,802,667 4,436-52, ,036 83, and sole proprietors (financial business activity) Non-financial institutions 6,834, ,457 50,551 1,002,713 28,060 10, ,647 1,228, , ,194 and sole proprietors Construction and property development (a) 834,568 47,106 18,994 13,359 3,864-16, ,486 7,256 34,825 Civil engineering 33, , ,023 3, construction Remaining purposes- 5,966, ,351 31, ,445 24,196 10, , , , ,363 Large enterprises 1,179,453 16, , ,085 57,806 13,180 16,237 SMEs and sole 4,786, ,091 31, ,282 24,193 10, , , , ,126 proprietors Households and NPISH- 14,130, ,317 41,569 2,673,177 11,039 26,061 2,300,763 3,399, , ,829 Housing 12,870, ,988 39,948 2,308,650 10,028 25,232 3,085, , ,225 2,125,625 Consumer 334,130 4, , ,283 86,928 2,703 6,819 Other 925,719 9,537 1, , , ,728 7,247 7,785 Total 31,861, , ,140 4,011,733 52,484 39,050 3,151,178 5,472, , ,425 (a) Includes all activities related with construction and property development, including that related with the financing of land for property development. 99

117 Credit institutions Public Sector Central Administration Other public-sector bodies Other financial institutions and sole proprietors (financial business activity) Non-financial institutions and sole proprietors Construction and property development (a) Civil engineering construction Remaining purposes- Large enterprises SMEs and sole proprietors Households and NPISH- Total Housing Consumer Other 2016 Thousands of Euros Autonomous Communities Extremadura Galicia Madrid Murcia Navarra Valencia Basque Country La Rioja Ceuta and Melilla 6 2, , , ,383 53, ,963 12,963 11,479 17,789 55,426 9, ,383 53, ,963 12,963 11,479 17,789 55,426 9,577-2, ,504, ,982 21,568 2,347,446 90,449 21, , ,914 1, , ,212 19,378 3,031 51,249 3, ,407-20, ,248 21,568 1,956,553 70,520 18, , ,207 1, ,919 3, ,760 8,530 2,190 19,739 25, ,329 18,366 1,180,793 61,990 16, ,224 91,975 1, ,550,306 79,842 2,040, ,554 5, , ,692 3,750 1,924 1,309,222 76, ,513 5, , ,010 3,724 1,839 1,950,601 53,276 1,131 26,923 1, , ,808 2,322 63,154 3, ,807 1, ,398, ,648 8,168, ,985 38, , ,111 14,937 2,201 (a) Includes all activities related with construction and property development, including that related with the financing of land for property development. 100

118 Credit risk: Sovereign risk As a general rule, the Group considers sovereign risk to be that incurred by operations with the Central Bank, the issuer risk of the Treasury or the Republic and that arising from transactions with public entities with the following characteristics: their funds only arise from the State's budgetary income, they have the legal acknowledgement of entities directly integrated in the State sector and they perform activities of a non-commercial nature. With regard to the so-called periphery countries of the eurozone, the total exposure, distinguishing, based on the issuer or the debtor, between sovereign risk and private-sector risk, is as follows: 101

119 31/12/2017 Sovereign risk by country of the issuer/debtor Thousands of euros Debt securities Derivatives Deposits with credit institutions Financial assets held for trade and other measured at fair value with changes recognised in Profit and Loss. Available-forsale financial assets Held-tomaturity investments Loans and accounts receivable Loans and receivables - Customers (*) Direct risk Indirect risk (CDS) Total balance sheet exposure Contingent guarantees and obligations granted Total exposure Portugal , ,752-27,752 Italy - - 1,284, ,284,712-1,284,712 Greece , ,337-10,337 Ireland UK ,322, ,322,801-1,322,801 (*) They are presented without taking into account the valuation adjustments or the impairment loss allowances recognised. 31/12/2016 Sovereign risk by country of the issuer/debtor Thousands of euros Debt securities Derivatives Deposits with credit institutions Financial assets held for trade and other measured at fair value with changes recognised in Profit and Loss. Available-forsale financial assets Held-tomaturity investments Loans and accounts receivable Loans and receivables - Customers (*) Direct risk Indirect risk (CDS) Total balance sheet exposure Contingent guarantees and obligations granted Total exposure Portugal , ,911-23,911 Italy Greece - - 7, ,585-7,585 Ireland UK , ,496-31,496 (*) They are presented without taking into account the valuation adjustments or the impairment loss allowances recognised. 102

120 31/12/2017 Private-sector risk by country of the issuer/debtor Thousands of euros Debt securities Derivatives Loans and advances to credit institutions Financial assets held for trade and other measured at fair value with changes recognised in Profit and Loss. Available-forsale financial assets Held-tomaturity investments Loans and accounts receivable Loans and receivables - Customers (*) Direct risk Indirect risk (CDS) Total balance sheet exposure Contingent guarantees and obligations granted Total exposure Portugal , ,113 20,036 27,149 Italy - - 4, , ,451 Greece Ireland UK ,128 55,279-73, , , ,385 55,279-86,160 20, ,383 (*) They are presented without taking into account the valuation adjustments or the impairment loss allowances recognised. 31/12/2016 Private-sector risk by country of the issuer/debtor Thousands of euros Debt securities Derivatives Loans and advances to credit institutions Financial assets held for trade and other measured at fair value with changes recognised in Profit and Loss. Available-forsale financial assets Held-tomaturity investments Loans and accounts receivable Loans and receivables - Customers (*) Direct risk Indirect risk (CDS) Total balance sheet exposure Contingent guarantees and obligations granted Total exposure Portugal , , ,027 Italy - - 4, , ,171 Greece Ireland UK , ,497 65,926-98, , , ,619 65, , ,259 (*) They are presented without taking into account the valuation adjustments or the impairment loss allowances recognised. 103

121 Credit risk: Counterparty Counterparty Risk is understood as the credit risk produced as a result of the exposure incurred by a bank when it operates in the context of investments and hedging in the wholesale fixed income and derivatives financial markets: Derivative instruments. Repurchase operations. Lending operations for securities or raw materials. Deferred settlement operations. Margin lending transactions. The objectives for the management of counterparty credit risk are defined by the Bank's Management Committee and approved by the Board of Directors following the business plan and take into account at least the following considerations: Complementing the retail business with the activity arising from the wholesale or global markets, following an investment plan consistent with the Group's business plan and that helps optimize the risk-return ratio. Achieving a complete understanding of the risk profile of the exposures with counterparty risk that the Group holds; combining the most advanced management tools with supervision and expert opinion. Obtaining comprehensive and consistent databases relating to Counterparty Risk, and in turn having mechanisms that help verify their reliability and traceability. Associating profitability and counterparty risk, integrating both parameters into an overall analysis. Achieving a return adjusted to the consumption of equity that gives the Group the appropriate level of solvency and stability in net worth. Having a balanced funding and equity structure in instruments and terms, considering the accounting, economic and regulatory capital approaches. In the fiscal year 2017, the Group approved a set of corporate policies for the management, measurement and control of the overall counterparty risk which define the risk lines, in other words, the maximum risk that the Group would be willing to assume with each of them. Among other measures, they allow for the active involvement of the Senior Management in managing this type of risk. Counterparty risk management is based on the following procedures described below: Counterparty rating systems: counterparty risk rating methodology that helps establish the overall exposure limits by counterparty. Validation of the operation with products, currencies and counterparties: only counterparties/issuers that have an associated limit are accepted. Monitoring of the counterparty lines: documented procedures for the approval, cancellation and review of counterparty lines. Stress Tests: Stress tests are regularly and rigorously performed as a supplement to the analysis of counterparty risk based on the daily results of its risk measurement model. Updating of Add On Factors: calculation and updating of the Add On coefficients that allow for the calculation of the potential exposure of the contracted derivatives. 104

122 Additionally, the Group has some Operating Limits in place for counterparty risks, the purpose of which is to define the maximum levels at which the different risk-taking units can operate. These limits, which are approved by the Bank's Steering Committee, provide flexibility while helping to control risk-taking at the different decision-making tiers Market risk Overview Market risk is defined as the risk of incurring losses by maintaining open positions in financial instruments, arising as a result of adverse movements in the risk factors (interest rates, exchange rates, share prices, raw material prices, etc.) that determine the value of those positions. This risk materialises essentially when the Group acts on its own account in the financial markets, using financial instruments, either equity instruments (shares or ownership interest), debt securities instruments (fixed-income securities) or derivative instruments. Additionally, also included within this type of risk are the corporate holdings that the group wishes to have in listed and unlisted companies with a vocation or intention for these to be permanent. The objectives for the management of market risk will be defined by the Bank's Management Committee and approved by the Board of Directors following the business plan and will take into account at least the following considerations: Optimising the ratio between the expected return and the risk of the investments in financial assets. Optimising the ratio between the opportunity cost and the risk of the Group's funding operations. Facilitating the complete or partial neutralization of all or some of the aforementioned types of market risk, through their hedging. Facilitating the management of any trading activities on its own account in order to obtain profits and of investment within certain levels of risk. In order to attain these objectives, the main pillars on which the Group implements and manages market risk are as follows: Involvement of the senior management in decision-making. High degree of centralization, with the existence of units specialized in managing the different investments and their evolution. Risk Identification. Business scope. Business, operations/positions exposed to market risk. Type and factors of market risk. Establishment of risk limits. Authorised products and operations. Analysis and control of positions, risks and results, compliance with limits. The Group has several management instruments in place, defined in the Corporate Risk Framework, the Risk Appetite Framework and the Corporate Market Risk Policy. The market risk limits defined in the Risk Appetite Statement included in the Risk Appetite Framework are the maximum level of risk the Group considers to be acceptable and hence is not willing to exceed. These instruments are 105

123 approved by the Board of Directors, and the Bank Management is responsible for their implementation, execution and control in operating terms. Additionally, the Group has some Operating Limits in place for financial risks, the purpose of which is to define the maximum levels at which the different risk-taking units can operate. These limits, which are approved by the Steering Committee, provide flexibility while helping to control risktaking at the different decision-making tiers. The Assets and Liabilities Committee and the Treasury department reporting to the Finance and Corporate General Office are the main ones in charge of managing position taking in the trading activity based on a strong control and limit structure allowing to ensure that, upon taking positions at the market, the profitability goal becomes subject to risk assumption levels that are deemed acceptable. On its part, the General Deputy Office of Risk Strategy and Methodology, reporting to the General Risk Office, is responsible for putting forward the strategy, management framework and general policies on market risk. The Market and Counterparty Risk Department, being part of the General Risk Office, through the General Deputy Office of Risk Strategy and Methodology, has the independent role of measuring the assumed market risk, monitoring fulfilment of limits and assessing the relation between the results obtained and the risk assumed. The General Office of Comprehensive Risk Control establishes a control and supervision framework ensuring that any risks inherent to the Group's activities remain within the levels approved by the Corporate Bodies and meet the regulatory requirements, policies and internal procedures. Finally, the Internal Audit General Division conducts a regular assessment of the level of application of the permanent supervisory and monitoring framework. The Group has in place the following measures to quantify market risk: Value at Risk (VaR). Sensitivity measures. Position measures. As a supplementary analysis, Stress-Testing and Backtesting are performed in order to maintain suitable control and management of market risk Market risk exposure arising from foreign exchange rates The foreign currency exchange rate risk is the risk that the fair value or the cash flows associated with the financial instruments denominated in foreign currency fluctuate as a result of the variations in foreign currency exchange rates. Foreign-exchange rate risk is controlled by establishing the open foreign-exchange positions, applied by the Treasury Department which, in turn, is answerable to the Corporate and Finance Executive Office. However, the Group does not maintain foreign currency positions of a speculative nature and significant amount. The Group's policy is to limit this type of risk as far as possible, endeavouring to immediately cover any such risk through the arrangement of symmetric operations enabling their mitigation. The Group's main foreign currency positions at 31 December 2017 and 2016 relate to loans and financial liabilities at amortised cost, denominated in foreign currency (see Note 2-e). 106

124 Exposure to the risk of the price of equity instrument For the purposes of the information presented in the following paragraphs, the "risk of the price of equity instruments" associated with the equity instruments held by the Group, is deemed to be the market risk arising as a consequence of changes in their market prices, other than those which arise from the foreign currency exchange risk and from the interest rate risk explained in the preceding paragraphs, either due to the specific factors of the instrument itself or of its issuer or due to factors which affect all the similar instruments traded on the market. Accordingly, the market risk of the financial instruments is deemed to be the risk that the fair value or cash flows of a financial instrument fluctuate as a result of variations in market prices. More specifically, the Group is subject to other price risks associated with quoted variable-rate income positions classified in the financial assets portfolio at available for sale. The maintenance of these positions is subject to market risks associated with the issuer of the shares itself, its sector of activity, the market on which they are quoted, the issuing country, etc. The market risk control mechanisms are based on the following points: The level of exposure of all the portfolio positions is analysed daily, using the assessment at market prices of all the positions, and the duration and sensitivity for the Value at Risk, (VaR) by portfolio and global VaR portfolios. Likewise, back-testing will be used to determine the validity of the methods used. Where appropriate, it would be proposed to the related body to make changes therein or to review the limit. Periodic reporting is performed, at the adequate level, of the portfolio and product positions, measured at market price, also updating the volatility files and the correlations used to calculate the VaR. The Market and Counterparty Risk department in charge of the duty is responsible for monitoring and analysing market risk associated with the price of equity instruments. Additionally, the Risk Executive Office must monitor more closely the significant investments made by the Group in equity securities. The VaR is the main measure used to control the market risk, calculated with a confidence level of 99% over a time horizon of 10 days. At 31 December 2017 the VaR of the portfolio exposed to market risk amounted to 29 million and ( 34 million at 31 December 2016) Liquidity risk Overview Liquidity risk in a bank can be defined as the risk produced by an impact on the solvency or margin, derived from: The costs of unwinding a position in a real or financial asset (asset or market liquidity, or basic liquidity). Mismatches between the degree of enforceability of liability operations and the degree of realization of assets (funding liquidity or structural liquidity). In this case, the relevant liquidity risk is the risk of a bank not having sufficient liquid assets to meet the commitments demanded at a certain moment, causing a financial imbalance or severe situation for the Group. 107

125 Also known as liquidity risk is that produced by the existence of a negative impact on the growth targets caused by the difficulty of finding funding sources (strategic liquidity). The Group manages the liquidity risk inherent to the Group s business activity in order to ensure that it will at all times have sufficient liquidity to meet the payment commitments associated with the settlement of its liabilities, at their respective maturity dates, without compromising the Group s capacity to respond quickly to strategic market opportunities. The Group has implemented a liquidity management framework approved by the Board of Directors (Risk Corporate Framework, Corporate Policy and Contingency Plan), with the Group s Management responsibility regarding its implementation, execution and operating monitoring. Thus, Liberbank Group meets the liquidity risk management requirements imposed by the regulator. The Liquidity Contingency Plan has been prepared to systemise the procedures to be followed in the event of illiquidity situations, as well as to optimise the responses to be adopted in due time and manner. It contains the situations, actions and people responsible for performance measures (at commercial, institutional and communication levels) to be taken under different scenarios in order to obtain the liquidity required in liquidity crisis events that may entail a threat to the activity performance or, in the worst case, jeopardise its own effective life. Additionally, the Group has some Operating Limits in place for liquidity risks, the purpose of which is to define the maximum levels at which the different risk-taking units can operate. These limits, which are approved by the Steering Committee, provide flexibility while helping to control risktaking at the different decision-making tiers. The Group s liquidity management considers, as a key element, the analysis of maturities of its different financial assets and liabilities mainly considering their contractual maturity and evaluating their liquidity gaps periodically in order to anticipate any kind of related issues. It assesses a first and second line of liquidity considering stress scenarios and opportunities to access liquidity by disposing of certain investments listed on organised markets (therefore offering immediate liquidity), collateral accepted by the European Central Bank and surplus balances at the Bank of Spain with respect to the cash ratio permitted by law, etc. In general, the Group counts on several means to obtain liquidity, such as customer deposits acquisition, availability of various cash facilities from official bodies, liquidity access through the interbank market and debt securities issuance on wholesale and retail banking markets. In consistency with the government best practices, the Group has traditionally maintained a clear division between the development and design of the strategy to manage the liquidity risk. The Assets and Liabilities Committee performs advisory, executive and decision-making functions, and its powers are derived from the powers vested in the Management Committee by the Board of Directors. This Body is responsible for the management and ongoing followup of the decisions on liquidity risk, as set in the Corporate Risk Framework. The General Deputy Office of Risk Strategy and Methodology belonging to the General Risk Office proposes the strategy, management framework and general policies related to liquidity matters. The Treasury Department belonging to the General Corporate and Finance Office adopts the decisions taken by the Assets and Liabilities Committee in respect to the institutional positions of the Group. The General Office of Comprehensive Risk Control establishes a control and supervision framework ensuring that any risks inherent to the Group's activities remain within the levels approved by the Corporate Bodies and meet the regulatory requirements, policies and internal procedures. 108

126 The General Internal Audit Office makes the recurrent valuation of the application degree of the ongoing control and supervision framework. There is also a Liquidity Technical Group (GTL, Spanish acronym) that meets at least once a month to analyze the Group's long and short term liquidity position. As set out in the Commission Delegated Regulation (EU) 2015/61 dated 10 October 2014 for which Regulation (EU) 575/2013 of the European Parliament is completed, entities must maintain a Liquidity Coverage Ratio (LCR) above 100% as of 1 January For their part, the Basel Committee published in 2014 the Rules on the Net Stable Financing Ratio (NSFR), stating that they would also become part of the minimum standards as of 1 January 2018, and that entities should maintain a Stable Financing Ratio (NSFR) above 100% as of that date. At 31 December 2017 the LCR ratio was 406% and 131% for NSFR (At 31 December 2016 those ratios were 405% and 132% respectively), far exceeding the minimum requirements mentioned above. In any case, it is the entity s intention to follow a strategy of being provided with various financial sources to enable it to maintain an NSFR ratio above de regulatory minimum and equip itself with an adequate volume of high-quality liquid assets in order to meet not only the regulatory requirements set for the LCR but also to have an adequate margin to manage their liquidity in the event of stress in the markets that may affect these ratios. The Group conducts operations that may eventually require additional collateral. These are mainly the repurchase agreements and derivatives arranging. Therefore, in the face of adverse market movements, the Entity could suffer a loss of liquidity through additional collateral. For the purposes of the LCR regulatory ratio, the potential for liquidity outflows at 31 December 2017 is quantified at 50,930 thousand ( 161,970 thousand at 31 December 2016), which corresponds to the largest collateral outflow in the last 2 years over 30-day period Residual term of operations The following chart shows the Group s financial assets and liabilities at 31 December 2017 and 2016, classified based on the terms not yet expired as at those dates, in view of contractual conditions: Fiscal Year 2017: 109

127 On demand Within 1 month 1 to 3 months Thousands of euros 3 to 12 months 1 to 5 years Over 5 years Perpetual Total ASSETS: Cash, cash balances in Central Banks and other demand deposits 1,716, ,716,860 Financial assets held for negotiation ,527 4,541 15,579 (156) 22,528 Available-for-sale financial assets - 1, , ,490 1,288,419 2,691, ,675 4,799,717 Loans and accounts receivable 848, ,747 2,603, ,394 7,715,867 11,320, ,604 23,696,033 Derivatives- Hedge Accounting ,344 69, , ,742 Total at 31 December ,565, ,308 2,723, ,755 9,078,189 14,293,074 1,135,123 30,591,880 LIABILITIES: Financial liabilities held for negotiation ,523 5,700 15,528-22,818 Financial liabilities at amortised cost 16,885,558 2,241,075 1,423,080 4,733,474 4,847,591 2,239, ,532 32,744,029 Derivatives- Hedge Accounting ,809 24,947-28,112 Total at 31 December ,885,558 2,241,793 1,423,281 4,735,501 4,855,100 2,280, ,532 32,794,959 COMMITMENTS AND GUARANTEES GRANTED: Guarantees granted 75,619 4,838 7,873 27,503 23, , ,527 Fiscal Year 2016: On demand Within 1 month 1 to 3 months Thousands of euros 3 to 12 months 1 to 5 years Over 5 years Perpetual Total ASSETS: Cash, cash balances in Central Banks and other demand deposits 916, ,380 Financial assets held for negotiation ,281 21,383 (1,523) 30,264 Available-for-sale financial assets ,638 2,191, ,110 4,204, ,326 7,591,542 Loans and accounts receivable 1,084, ,776 2,425,521 1,687,817 5,845,131 11,216,090 1,825,607 24,224,802 Derivatives- Hedge Accounting ,298 3,943 88, , ,142 Total at 31 December ,001, ,050 2,467,505 3,882,861 6,727,166 15,780,898 2,212,410 33,212,130 LIABILITIES: Financial liabilities held for negotiation ,249 21,115-31,611 Financial liabilities at amortised cost 16,313,937 2,306,477 2,894,370 5,177,035 3,993,244 3,602, ,287 35,021,575 Derivatives- Hedge Accounting ,728-1,987 4,067-59,068 Total at 31 December ,313,937 2,306,775 2,947,165 5,177,203 4,005,480 3,627, ,287 35,112,254 COMMITMENTS AND GUARANTEES GRANTED: Guarantees granted 81,763 2,177 10,201 29,490 23, , ,447 The residual maturity of financial guarantee contracts issued (guarantees, letters of credit, etc.) and loan obligations (limits on credit facilities, etc.) is the first date from which payment can be demanded from the Group. Virtually all financial guarantee contracts and loan obligations are therefore short term (on demand or up to one year). The following is particularly noteworthy with respect to the information disclosed in the table above: Financial assets and liabilities have been classified by taking the first maturity date upon which the counterparty could demand repayment. The Group does not apply any historical renewal rate or charges to any of its asset and liability on sight contracts at the earliest possible maturity. 110

128 Financial assets and liabilities with staggered collections or payments have been classified based on the outstanding residual maturity date, at the date of the financial statements, of each of the collections and payments at 31 December 2017 and The outstanding maturity date included in the tables above for financial assets and liabilities that do not have a contractually-stated amount at the balance sheet date, for example, because it depends on a certain index, was calculated considering the conditions at 31 December 2017 and In the undetermined maturity column, flows that are not sensitive to the maturity of operations are included, which comprises of operations classified as doubtful, unpaid/uncollected accrued interest, corrections for impairment value, equity instruments, as well as guarantees granted without express maturity. 3.5 Structural balance-sheet interest rate risk Overview Balance-sheet interest rate risk is the risk of variations in market interest rates negatively affecting the financial situation of the Group. In short, this risk arises from the sensitivity to interest rates of the differential between assets and liabilities, depending on their maturity period. The interest rate risk associated with the financial instruments directly affects the Group's activity in two ways: On the one hand, through the effect of the interest-rate variations on the consolidated income statement since certain financial instruments may exist in its assets and liabilities which accrue fixed interest or reviewable rates over time and, accordingly, the variations in these interest rates do not symmetrically affect the interest accrued by one and other instruments ( interest rate gap ). In the case of variable-rate operations, the risk to which the Group is subject arises in the recalculation periods of the interest rate. Also, the Group is subject to interest rate risk since it holds mainly fixed-income securities included in the available-for-sale financial assets, in which their fair value varied as a result of the variations in these market interest rates, accordingly, they affect the Group's equity and results. The purpose is to ensure effective, prudent and conservative management regarding the balance sheet interest rate risk, as well as a strict follow-up of this risk considering different stress scenarios. The Group has several management instruments in place, defined in the Corporate Risk Framework, the Risk Appetite Framework and the Corporate Interest Rate Risk Policy. The interest rate risk limits defined in the Risk Appetite Statement included in the Risk Appetite Framework are the maximum level of risk the Group considers to be acceptable and hence is not willing to exceed. Additionally, the Group has some Operating Limits in place for financial risks, the purpose of which is to define the maximum levels at which the different risk-taking units can operate. These limits, which are approved by the Steering Committee, provide flexibility while helping to control risktaking at the different decision-making tiers. Within this context, at least on a monthly basis, the Group evaluates the level of exposure to the Group s balance sheet structural interest rate risk. These analyses are performed from a purely static and dynamic perspective. The Group uses hedging operations to individually manage the interest rate risk of all those financial instruments which may expose the Group to significant interest rate risks, thereby reducing this type of risk. The Assets and Liabilities Committee and the Treasury department reporting to the Finance and Corporate General Office are the main ones in charge of managing institutional position taking by the Group based on a strong control and limit structure allowing to ensure that, upon taking 111

129 positions at the market, the profitability goal becomes subject to risk assumption levels that are deemed acceptable. The General Deputy Office of Risk Strategy and Methodology, reporting to the General Risk Office, is responsible for putting forward the strategy, management framework and general policies on interest rate risk. The Treasury department implements the decisions made by the Assets and Liabilities Committee with respect to the Group s institutional positions, while Commercial Banking and Corporate Banking centres perform the price and rate strategies approved by the Commercial Committee for assets, liabilities and off-balance transactions, according to growth and profitability goals established by management bodies. On its part, the General Division of Comprehensive Risk Management is responsible for establishing a supervisory and monitoring framework to ensure that the risks inherent to the Group s business remain within the levels approved by the Corporate Bodies and aligned with regulatory requirements and the internal procedures and policies. Finally, the Internal Audit General Division conducts a regular assessment of the level of application of the permanent supervisory and monitoring framework. Detailed below are different metrics used in measuring interest rate risk: Maturity/repricing gap. o o Simple and cumulative statics. Simple and cumulative dynamics. Financial duration. Any of these metrics are included as indicators in the RAF Risk Appetite Statement Interest rate risk exposure The following tables show the Group's degree of exposure to the interest rate risk at 31 December 2017 and 2016 indicating the carrying amount (not including the interests or impairment value adjustments) of those financial assets and liabilities affected by this risk, which are classified based on the estimated deadline until the review date of the interest rate (for those operations with this characteristic in line with their contractual conditions) or the maturity date (for fixed-interest rate transactions): 112

130 Fiscal Year 2017: Up to 3 months From 3 to 12 months Thousands of euros From 1 to From 3 to 3 years 5 years Over 5 years Total Central banks 1,411, ,411,822 Credit institutions (*) 92, ,930 Loans and advances to customers (*) 6,895,740 8,959, , ,930 2,642,156 19,815,911 Fixed-income and other assets 946, ,665 2,958, ,135 2,170,821 6,591,251 Total sensitive assets 9,347,402 9,276,288 3,697, ,065 4,812,977 27,911,914 Central banks - - 2,937, ,937,960 Credit institutions 840,876 7,038 18,163 6,578 5, ,356 Counterparty entities 697, ,693 Customer deposits (**) 3,825,253 3,442, , , ,736 8,233,065 Mortgage-backed securities - 841, , ,580 1,817,295 3,475,423 Promissory notes 38,977 24, ,463 Bonds and other issues 50, ,000-95,000 Wholesale Subordinated debt , ,000 Convertible bonds COCOS - 92, ,685 Total sensitive liabilities 5,452,799 4,408,769 3,781, ,097 2,373,732 16,773,645 Asset-liability difference at each deadline 3,894,603 4,867,519 (84,067) 20,968 2,439,246 % of total assets 13.95% 17.44% (0.30)% 0.08% 8.74% Accumulated asset-liability difference 3,894,603 8,762,122 8,678,055 8,699,023 11,138,269 % of total assets 13.95% 31.39% 31.09% 31.17% 39.91% Recorded allowances: % Sensitive Assets / Liabilities % % 97.78% % % (*) Excluded the advances to pensions and different from loans, as well as doubtful assets. (**) Excluded the non-compensated demand deposits. 113

131 Fiscal Year 2016: Up to 3 months From 3 to 12 months Thousands of euros From 1 to From 3 to 3 years 5 years Over 5 years Total Central banks 563, ,187 Credit institutions (*) 174, ,282 Loans and advances to customers (*) 7,707,342 9,629, , , ,222 19,498,423 Fixed-income and other assets 3,097,865 2,328,115 3,387, , ,824 9,385,080 Total sensitive assets 11,542,676 11,957,481 4,276, ,236 1,371,045 29,620,972 Central banks ,937,960-2,937,960 Credit institutions 1,446,661 12,440 33,294 11,547 7,051 1,510,993 Counterparty entities 61, ,449 Customer deposits (**) 5,498,845 5,164, , , ,543 11,584,609 Mortgage-backed securities - 1,074, , ,895 2,127,480 4,549,626 Promissory notes 173,829 28, ,982 Bonds and other issues 50, ,000-95,000 Convertible bonds COCOS , ,495 Total sensitive liabilities 7,230,784 6,279,006 1,752,003 3,457,247 2,343,074 21,062,114 Asset-liability difference at each 4,311,892 5,678,475 2,524,531 (2,948,011) (972,028) deadline % of total assets 14.56% 19.17% 8.52% (10.07)% (3.28)% Accumulated asset-liability 4,311,892 9,990,367 12,514,898 9,530,887 8,558,859 difference % of total assets 14.56% 33.73% 42.25% 32.18% 28.89% Recorded allowances: % Sensitive Assets / Liabilities % % % 13.69% 58.51% (*) Excluded the advances to pensions and different from loans, as well as doubtful assets. (**) Excluded the non-compensated demand deposits. As to the level of exposure to the interest rate risk, it was estimated that, at 31 December 2017, a 1% upward variation in market interest rates would imply an increase by 79,589 thousand (-1.74%) in the Group s economic value (an increase of 180,572 thousand, 4.01% at 31 December 2016). In the same vein, a downward change of 1 percentage point (with a floor of 0%) in market rates, would increase the economic value at 31 December 2017 and 2016 by 313,987 thousand (6.88%) and 109,414 (2.43%) thousand, respectively. During 2017, the Company has changed its sensitivity to interest rate rises, as an increase in rates would lead to a decrease in the economic value of a lower rate than would occur with a downward movement in rates. The foregoing calculations were made in line with the methodology proposed by the Bank of Spain for the preparation of the RP51 statement, by applying instantaneous changes in the parallel interest rates (from the commencement of the period) of 100 basis points, although always using floors of 0% in the event of downward changes. The calculation considers all the positions sensitive to interest rates, with the assumption of maintaining the size of the balance sheet, that is, considering only the positions arranged by the entity at the reference date of the statement (31 December 2017) without envisaging the inclusion of new business. For the on demand accounts, an internal behaviour model based on the entity's historical experience has been used, which involves average maturity periods of less than four years and, according to the methodology of the Bank of Spain, 10% of such deposits are considered of an unstable nature and will have to be refunded through reconversion of long-term deposits. 114

132 Sensitivity of the interest margin to interest rate fluctuations To measure the effect of the interest rate variations on the consolidated income statement, due to the asymmetric impact of such variations on the asset and liability masses and on the fixed-rate and variable-rate instruments, results simulations are performed periodically with parallel upward and downward movements on the interest rate curves, comparing the results with the central forecast obtained from the existing rate curve to date. A series of simplifying hypotheses are assumed in order to perform this analysis, as follows: As with the calculation of the impact of economic value, permanence in the size of the consolidated balance sheet is assumed. The assumption consisting in the constant maintenance of the consolidated balance sheet structure is also considered, except in refinancing through term deposits of a 10% of demand deposits, a percentage that is deemed theoretically unstable. A parallel movement of 1% occurs in all the tranches of the interest rate curve, which would take place at the beginning of the simulation period, and the effects of this movement on net interest income over one year is measured. Under these circumstances, and based on the situation at 31 December 2017 and 2016, the estimated impacts that an increase and a decrease of 100 basis points in the market interest rates would have on the expected interest margin in the Group's consolidated income statement for the next twelve months would be as follows: With data at 31 December 2017, a 1% increase in market rates would mean increasing the sensitive margin by 10,466 thousand ( 1,504 thousand at 31 December 2016). With data at 31 December 2017, a 1% decline in market rates (with a 0% floor), would mean a reduction of the sensitive margin by 5,702 thousand (with data at 31 December 2016, would mean a reduction by 5,318 thousand). The margin deteriorates, both for increases and decreases, although for the latter case, since the curve is so low, the impacts are also reduced and this is caused by the low level of liabilities, which barely have any room for improvement, while financial income decreases in greater amounts Operational Risk Operational risk means the possibility of losses being sustained as a consequence of inadequate processes, systems, technical equipment and teams, or due to failures in them, as well as external events, including legal risks. The drafting of the different consultative documents of the New Basel Capital Accord (NBCA), the specific Guidelines of the European Banking Authority (EBA), the publication of Regulation No. 575/2013 of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms, and the adjustment to the best management practices have led the Group to strengthen its prudent management of operating risk. Considering that operational risk is implicit in substantially all the Group's activity, all the centres must act in accordance with the best practices, taking responsibility for the correct enforcement of processes in order to minimise the operational risk and actively undertaking the identification and assessment tasks regarding the risks arising therefrom. The Group has several management instruments in place, defined in the Corporate Risk Framework, the Risk Appetite Framework and the Corporate Market Risk Policy. The operating risk limits defined in the Risk Appetite Statement are the maximum level of risk the Group considers to be acceptable and hence is not willing to exceed. 115

133 The objectives of operational risk management are defined by the Bank's Management Committee and approved by the Board of Directors in line with the business plan, for which the following minimum considerations are taken into account: Creating a structure for the management of operational risk linked to the processes that regulate the Group's activity and the controls established to verify correct compliance with these. Assessing the impact on the Group's results of the alternative approach proposals for the improvements detected in the processes. Encouraging the development of a management culture that tends to optimise the internal control processes in order to ensure compliance with established policies. Improving management by identifying the information required to assess and establish, where appropriate, remedial plans aimed at mitigating operational risks, assigning responsibilities with regard to the obtainment of this information in order that it be sent to the related body. The Operational Risk Department s mission is to plan, organise and direct the Group s design, constitution and implementation of the operational risk management system in its different phases (loss risk identification, analysis, evaluation, monitoring and mitigation), and to promote and disseminate an appropriate culture throughout the Group that can reduce both actual and potential losses resulting from inadequacies or failures in internal processes, systems or resources, or from external events. The Operational Risk Committee performs advisory, executive and decision-making functions, and its powers are derived from the powers vested in the Management Committee by the Board of Directors. The Group applies the standard method for the calculation of the regulatory capital for operational risk. 3.7 Model Risk During 2017 the Corporate Policy for internal risk measurement models was approved, which aims to regulate the basic rules that guarantee the integrity of risk models and their modelling, development, management and utilization processes in the Group. Model risk management and control is structured around a model s life cycle: planning, design and construction, documentation, validation, approval, implementation and production use of the model. The model risk arises associated with the implantation in management of the internal models, which collects the losses originated by decisions based mainly on the models results, due to errors in the conception, application or use of these models. Model risk sources may be data gaps, both in terms of availability and quality, including errors in data, absence of critical variables, lack of historical depth, insufficient feeding of variables or sample sizes, etc. In general, a model is a theoretical framework usually expressed in mathematical, statistical, economic or financial language, used to explain a complex system or reality, which is developed to facilitate its understanding and the study of its behaviour. It is a set of data collection and information technology methods, processes, controls and systems that facilitate risk evaluation and measurement. The Group has been developing the structural and operational improvements necessary to strengthen and consolidate the comprehensive risk vision, based on complete, accurate and recurrent information, allowing Senior Management to assess and decide accordingly. Other possible model risk sources are, among others: 116

134 Inappropriate use of the model: including its application beyond the use for which it was conceived. The Group has established a permanent updating and review process for all aspects related to the management of risks arising from internal models and their use. Uncertainty in estimation or errors in the model, such as not reestimating or recalibrating models over a long time period: simplifications, approximations, erroneous hypotheses or incorrect design of the model, which can occur at any point in its development. They include uncertainty in estimators but also the use of unobservable parameters, the absence of market consensus and computational difficulties, among others. Models should be periodically reviewed to ensure that they continue to operate correctly and should be otherwise adapted or redesigned. The Group has a model performance monitoring system that allows early detection of deviations from the expected performance and corrective or preventive actions. Monitoring/maintenance is carried out with a periodicity proportional to the model risk, according to its materiality level, and the process has a series of alerts and objective criteria that allow to determine when a model must be rebuilt, recalibrated or discharged. Additionally, end-user feedback is essential in the business monitoring since it is the most effective source for detecting deviations from the model s expected behaviour. The materiality of changes in the models will depend on the type and the category of the proposed change (qualitative criteria) and its potential to alter shareholder s equity requirements or, where appropriate, risk-weighted exposure amounts (quantitative criteria). The Risk Methodology Department, under the General Subdivision of Risk Methodology and Strategy, is responsible for managing the different risk rating systems and metrics as a quantitative support for the Group's risk decision-making scheme, in terms of planning, management and regulation, as well as, in collaboration with the corresponding centres, defining the different databases of necessary risks, assuring their correct feeding and reliability and the map of available technological tools that support methodology development and process management integration. Additionally, they are responsible for developing methodological proposals and monitoring the model s performance, which must be submitted at least annually to the corresponding committee in order to determine the proposals for action arising from such monitoring. Within the second line of defense, the General Division of Comprehensive Risk Control, and within this the Validation Department, must provide a critical view on the internal methodologies and models used by the Group to measure the different risk typologies by reviewing the models methodological and quantitative aspects and by meeting regulatory requirements for use. The Group has several Internal Risk and Validation Control Policies, approved by the Board of Directors, that implement the validation and control framework for the different types and models of risk. The valuation models must be approved by the corresponding committees in all their terms, calculation processes, risk rules applied, proposed operational amendments and have at least one pre-implementation validation report. The General Division of Internal Audit is responsible for the Group's latest model risk control layer Business Risk The business risk is the possibility of losses being sustained as a result of hypothetical adverse events, either internal or external, that negatively affect the Group s ability to achieve its goals and which, as a result of this, adversely impact the Group s profits or solvency. Assuming losses attributed to a lack of understanding of the market in which an entity operates is considered a risk, which may threaten the viability and sustainability of the entity's business model. 117

135 Business and strategic risk attempts to isolate the effect that the remainder of risks could have on the business model of the entity, as it focuses only on the losses that could stem from a lack of knowledge in terms of the entity s market. Business risk is influenced by numerous factors, such as the volume of revenues/costs, interest rates, competition, the economic environment and regulations, among other factors Risk of investees The possibility of incurring losses during the medium-term and long-term, due to adverse fluctuations in market prices or due to the insolvency of the positions in the portfolio of shareholdings. The risk management of investees in the Group is supported by the following criteria: - Existence of objective investment criteria for the existing and planned holdings. - Purpose of the holding and the possibility of permanence or control in each case. - Normalised contribution of the investments to the Group's Pre-Tax Profit in a financial year. - Contribution to the general positioning in the target balance sheet and the Group's solvency coefficient Property Risk The risk associated with the loss of value of real estate assets held on the consolidated balance sheet of the Group. As for property risk management, the Group seeks to optimise the value of foreclosed assets, by applying the management and sales strategies set by Senior Management for these assets. As a property risk management and control approach, it is deemed that attention must be paid to the evolution of for-sale non-current real estate assets, since the value of real estate assets for own use or real estate investments should be associated with the function that they effectively provided the Group. On 8 August 2017, with this objective in mind, the Bank signed an agreement with Promontoria Holding, owner of Haya Real Estate, a real estate management platform, which acquired Mihabitans Cartera, S.A.U., a fully owned subsidiary of the Bank, and exclusively assumed the management of foreclosed assets owned by the Bank and its subsidiaries for a term of 7 years. The operation settled for a price of 85 million. Moreover, as described in Note 2-v, the Bank s Board of Directors amended the sales strategy of the Group s property portfolio, by accelerating the pace of its disposal, thereby aligning it with the market situation so as to avoid losing the current opportunities presented therein. 4. Appropriation of profit and earing/loss per share Appropriation of profit The Bank s Board of Directors will propose the following appropriation of profit for the Bank (Parent Company) for 2017 at its Annual General Meeting: Thousands of Euros Allocation: Accumulated gains (345,544) Bank net profit for the year (345,544) 118

136 Basic earnings (loss) per share Basic earnings or loss per share are calculated by dividing the Group's profit for the year attributable to equity holders of the parent by the weighted average number of shares outstanding during the year, excluding the average number of treasury shares held in the year. As stated in Note 22, on 16 October 2017 and 20 November 2017 the deeds of share capital reduction and subsequent increase were officialised respectively. Consequently, 2016 profit or loss per share calculation is presented for comparative purposes, and it is based on the number of shares held after the above said corporate transactions. Accordingly: Consolidated Profit for the year attributable to the Parent Company (thousands of euros) (258,706) 128,808 Weighted average number of shares outstanding (thousands of shares) 1,133, ,440 Basic earnings/(loss) per share (euros) (0.228) Diluted earnings / (loss) per share The diluted earnings per share at 31 December 2017 and 2016 were calculated by dividing adjusted profit by the number of diluted shares, the definitions being as follows: - The "adjusted result" is calculated by increasing the consolidated profit or loss for the year in the amount of the financial cost accrued from the contingently convertible bonds recognised in the summarised consolidated income statement. - The average number of diluted shares is calculated as the average of the basic shares plus the weighted average of the ordinary shares issued should the contingent convertibles, amounting to 102,644 thousand as a result of the exchange of hybrid instruments, be converted into shares of the Bank ( 130,263 thousand at 31 December 2016) (See Note 18.). By applying the above criteria, the earnings / (loss) per diluted share at 31 December 2017 and 2016 were as follows: Consolidated Diluted Profit (Loss) attributed to the Parent Company (thousand of euros) (258,706) 134,680 Average number of diluted shares (thousands of shares) 1,253, ,871 Diluted earnings / (loss) per share (euros) (0.203) Business segment reporting General disclosures The segment information disclosed below was prepared in accordance with IFRS 8, identifying the corresponding operating segments based on the different types of customers, products and services offered in each one. The information is reported using these segments, in line with the definition of operating segments in IFRS 8, and because it is considered to be the most relevant information in terms of providing the information required under IFRS

137 The following segments identified were used as the basis upon which to report the information required under IFRS 8: Banking business, which includes the banking businesses of the Bank, Banco de Castilla - La Mancha, S.A. and other entities that carry on financial services, as well as other ancillary businesses carried on by the Group for non-material amounts, and central or general services that have not been allocated to a segment. Corporate business activities, which include the activities performed by the other Group entities that have not been included above. Basis and methodology for segment reporting The following principles and policies were used to report the following segment information: Inter-segment transactions reported in this Note were recognised by applying the same rates and costs applied to transactions with external segments. The items forming part of the pre-tax profit of each segment were calculated by applying the same accounting policies and measurement bases indicated in Note 2 to these consolidated financial statements. The value of the assets and liabilities of each segment was calculated by applying the same accounting policies and measurement bases included in Note 2 above. 120

138 Banking activity Thousands of Euros Other corporate business activities group Adjustment s to the banking segment 1. Interest income 506,002 - (565) 505, Interest expense (99,528) (219) 219 (99,528) 3. Expenses on share capital payable on demand A) NET INTEREST INCOME 406,474 (219) (346) 405, Dividend income 2, , Share of profit (loss) of companies accounted for 44,356 - (182) 44,174 using the equity method 6. Commissions income 189,248 - (27) 189, Commissions expenses (7,572) (26) 22 (7,576) 8. Gains or losses for derecognition of financial assets and liabilities not measured at fair value with changes in profit and loss, net 88, , Gains or losses on financial assets and liabilities held for trade (net Gains or losses on financial assets and liabilities measured at fair value with changes in profit and loss, net Gains or losses from the hedge accounting, net Net exchange differences Other operating income 37,829 5,153 2,057 45, Other operating expenses (122,690) (88) 52 (122,726) 15. Income from assets covered by insurance or reinsurance contracts Expenses from liabilities covered by insurance or reinsurance contracts B) GROSS INCOME 639,436 4,820 1, , Administrative expenses (381,911) (4,340) (1,107) (387,358) 18. Depreciation (34,285) (842) (449) (35,576) 19. Provisions or provisions reversed (6,820) (6,737) 20. Impairment loss or reversal of impairment loss of financial assets not measured at fair value with changes in P&L (270,913) - 2,162 (268,751) C) OPERATING PROFIT/(LOSS) (47,610) (342) (4,638) (52,590) 21. Impairment loss or reversal of impairment loss of - - investments in joint ventures or associates Impairment loss or reversal of impairment loss of non financial assets 114 (10) Gains or losses for derecognition of non-financial assets and shares (net) 93, ,671 97, Negative goodwill recognised in profit and loss Gains or (-) losses on non-current assets and disposal groups classified as held for sale not allowed as discontinued activities (498,998) - - (498,998) D) GAINS OR LOSSES BEFORE TAXES FROM CONTINUING ACTIVITIES (453,317) (126) (967) (454,410) 26. Expenses or income on gains from continuing operations 150, , ,048 E) GAINS OR LOSSES AFTER TAXES FROM CONTINUING ACTIVITIES (302,619) (104) 361 (302,362) 27. Gains or losses after taxes from discontinuing activities F) PROFIT (LOSS) FOR THE PERIOD (302,619) (104) 361 (302,362) E.1. Attributable to Non-controlling interests (43,523) - (133) (43,656) E.2. Attributable to the Parent Company s owners (259,096) (104) 494 (258,706) Total 121

139 Operating segment reporting The operating segment information for 2017 required under IFRS 8 is reported in the table below: Thousands of Euros Other Banking activity corporate business Adjustments Total activities group Total assets 35,465,149 28,396 (31,534) 35,462,01 1 Total liabilities 32,783,138 27,020 (30,829) 32,779, Remuneration of the Board of Directors and Key Management Personnel Remuneration of directors The following table contains a detail of the remuneration earned by the members of the Bank s Board of Directors, in their capacity as directors and managers, in 2017 and 2016: Fiscal Year 2017 Permanent Salary Floating Thousands of Euros Non-variable remuneration Per diems Remuneration for membership of Board committees Other items Total Alcalde Barrio, Jesús María Bravo Cañadas, Víctor Manuel Delclaux Bravo, Jorge Fernández Fernández, Felipe Garaña Corces, María Marston, Davida Sara Masaveu Herrero, Luis Manuel Menéndez Menéndez Paredes Rodríguez, María Encarnación Pitarch Rodríguez, Alfonso (1) Rivero Torre, Pedro Manuel Roza Fresno, Víctor Tinajero Flores, Ernesto Luis Zúñiga Pérez del Molino, Eduardo (1) Mr Alfonso Pitarch Rodríguez presented his resignation as Liberbank's proprietary Director, made in writing dated 7 April 2017 and made public by Significant Event published on 10 April 2017 through the CNMV, which also implied his removal as a member of the Audit Committee. 122

140 Fiscal Year 2016 Permanent Salary Floating Thousands of Euros Non-variable remuneration Per diems Remuneration for membership of Board committees Other items Total Alcalde Barrio, Jesús María Bravo Cañadas, Víctor Manuel Delclaux Bravo, Jorge Fernández Fernández, Felipe Garaña Corces, María Garicano Gabilondo, Luis (1) Marston, Davida Sara Masaveu Herrero, Luis Manuel Menéndez Menéndez Paredes Rodríguez, María Encarnación Pitarch Rodríguez, Alfonso Rivero Torre, Pedro Manuel Roza Fresno, Víctor Tinajero Flores, Ernesto Luis Zúñiga Pérez del Molino, Eduardo (1) Luis Garicano Gabilondo, Independent Director, had resigned from his position as Board Member of Liberbank, presented in writing on 24 April 2016 and made public through the Significant Event published on 25 April 2016 by CNMV, which furthermore implied his resignation as member on the Risk Committee of the Board and on the Audit Committee, as well as his position as Chairman of the latter. The amounts reflected in the previous tables correspond to the gross amount of remuneration accrued by the Board of Directors of the Bank, during their membership of this body. In the case of the executive directors, the amounts correspond to the executive functions performed. At its meeting on 26 March 2012, the Bank's Board of Directors approved the Bank's Variable Compensation Model. Said model determines that: The Annual Variable Remuneration will be paid in equal parts of cash and shares. Once the fiscal year ends, the Annual Variable Remuneration was determined, by applying the conditions established by the Board and approved by the Annual General Meeting for that purpose. 60% of said remuneration is paid in the following year, except in the case of the Managing Director (CEO) who in the first year is paid 40%, and the remaining amount is deferred in three subsequent years by equal parts. All shares delivered according to the aforementioned rules will be unavailable for one year as of their delivery; this retention applies to the net value of the shares, net of the portion that is necessary for the payment of taxes over the received shares. The variable compensation model aims to establish a relationship between the results obtained by the Group and the amount of variable compensation payable to its executives, to compensate the objective achievement level, to align its performance with the Group's long-term interests and discard excessive risk assumption, both present and future. The variable compensation accrued is calculated using the best estimate based on the information available at the date of preparing these consolidated financial statements and is settled in accordance with the Variable Compensation Scheme approved by the Board of Directors on 31 January 2017 based on the Variable Compensation Model approved by the same body on 26 March Furthermore, that settlement takes into account all specific requirements applicable to the Identified Group on remuneration matters, approved by the Board of Directors on 29 June The Variable Remuneration System and the specific requirements are governed by the mandatory standards and the recommended standards established by the regulatory framework currently in 123

141 force for credit entities. With the data available at the closing date of this document no variable remuneration is foreseen for the fiscal year Remuneration of key management personnel In 2017 and 2016, the remuneration paid by the Bank to its management personnel and members of the Board of Directors (together Key Management Personnel ), in their managerial capacity, is as follows: Short-term remuneration Post-employment benefits Other long-term benefits Total Key personnel 2,830 3, ,872 3,075 For a correct interpretation and comparison of the above information, it should be taken into consideration that the remuneration accrued by the whole Key Staff in the fiscal year 2016 amounted to 314 thousand, which will be paid according to the above said Variable Compensation Scheme. The amounts corresponding to the members of the Board in 2017 and 2016, earned over the term thereof, and included in the total figure in the table above, have also been listed separately in the lists related to Remuneration of the Board of Directors. Other transactions carried out with the members of the Board of Directors and key management personnel In addition to the above remuneration earned in 2017 and 2016 by the Bank s Board of Directors and Key Management Personnel, below is a detail of the income and expense for transactions carried out with these groups and recognised on the consolidated income statement for the years ended 31 December 2017 and 2016: Thousands of euros Finance income Finance costs Key Management Personnel and members of the Board of Directors The detail of the asset and liability balances recognised on the consolidated balance sheet, for transactions carried out with members of the Bank s Board of Directors and the Bank's Key Management Personnel at 31 December 2017 and 2016 is as follows: Thousands of euros Assets loans and credits granted (Gross amount) Liabilities - Debits to customers Key personnel and members of the Board of Directors 1,207 1,118 6,778 4,

142 Post-employment benefits for directors of the Board and Key Management Personnel The expense recognised on the consolidated income statement for 2017 and 2016 for the Bank s pension and similar obligations to current members of the Bank s Board and the Bank's Key Management Personnel, in respect of defined contribution plans, amounted to 38 thousand ( 10 thousand in 2016), which were recognised in Administrative expenses-staff costs on the consolidated income statement. The actuarial value of the obligations to retired employees and the actuarial value of potential obligations to current employees, in respect of defined-benefit plans and other long-term benefits, is zero at 31 December 2017 and Conflict of interest At the end of fiscal year 2017, neither the members of the Bank s Board of Directors nor the people related thereto, as set out in the Spanish Companies Law, notified the other members of the Board of Directors about any direct or indirect conflict with the Bank s interest. In accordance with the Article of Royal Decree-Law 1/2010, of 2 July, approving the Consolidated Companies Law, details of the members of the Board linked to companies that engage in an activity that is identical, similar or complementary to the activity that constitutes the corporate purpose of the Bank (according to the definition set forth in Article 231 of said Law) and the tasks performed in them are shown below. Jesús María Alcalde Barrio Víctor Manuel Bravo Cañadas Company Activity Number of shares Share class Position or duties Banco de Castilla-La Member Mancha S.A. Banking - - Secretary Caja de Seguros Reunidos, Compañía de Seguros y Reaseguros, S.A. Vice Chairman Insurance of the Board Financial advise - - Director María Garaña Corces Alantra Partners, S.A. Euler Hermes, S.A. Insurance - - Davida Sara Marston Bank Of Ireland Banking - - Director 7. Cash, cash balances in Central Banks and other demand deposits The breakdown of this balance in the accompanying consolidated balance sheets at 31 December 2017 and 2016 is as follows: Thousands of euros 31/12/ /12/2016 Cash 263, ,656 Cash in Central banks 1,411, ,187 Other demand deposits 41, ,537 Valuation adjustments (140) - 1,716, ,

143 8. Financial assets and liabilities held for negotiation Balance breakdown The detail of the balances of this item on the consolidated balance sheets at 31 December 2017 and 2016, by type of financial instrument, is as follows: Thousands of Euros 31/12/ /12/2016 Assets Liabilities Assets Liabilities By instrument type- Debt securities Derivatives 22,528 22,818 30,263 31,611 22,528 22,818 30,264 31,611 Note 3 presents information on the credit, liquidity and market risk assumed by the Group in relation to these financial assets. Information on the fair value of these financial assets is provided in Note 24. Derivatives The detail, by derivative type, of the fair value of the Group's trading derivatives and their notional amount (amount on which the future payments and collections of these derivatives are calculated) at 31 December 2017 and 2016 is as follows: 126

144 Fiscal Year 2017: Thousands of euros Receivables Payables Fair value Fair value Notional Notional Amount Amount Unmatured foreign currency purchases and sales: Purchases of foreign currencies against ,684 euros Sales of foreign currencies against euros 104 3, , ,697 Foreign currency options: Bought 2,384 58, ,384 58, Interest rate options: Bought ,700 Issued 81 8, , ,700 Securities options: Bought , Issued , , ,303 Other interest rate transactions: Interest rate swaps 19, ,620 19, ,803 19, ,620 19, ,803 Embedded derivatives: Exchange rate risk - - 2,384 57,487 Equity price risk , , ,453 22, ,344 22,818 1,017,

145 Fiscal Year 2016: Thousands of euros Receivables Payables Fair value Fair value Notional Notional Amount Amount Unmatured foreign currency purchases and sales: Purchases of foreign currencies against 109 2, euros Sales of foreign currencies against euros , , ,797 Foreign currency options: Bought 4,631 61, ,631 61, Interest rate options: Bought 29 8, Issued 199 8, , Securities options: Bought , Issued , , ,537 Other interest rate transactions: Interest rate swaps (IRSs) 24, ,704 26, ,638 24, ,704 26, ,638 Embedded derivatives: Exchange rate risk - - 4,552 60,477 Equity price risk , , ,226 30, ,151 31, ,198 The Bank acquires options on securities in order to cover the risk assumed in the trade of Investment Funds Guaranteed by the Bank. At 31 December 2017 the fair value of these derivatives presents a credit balance of 184 thousand ( 478 thousand at 31 December 2016), being the notional value of the derivatives 730,303 thousand ( 375,537 thousand at 31 December 2016). The notional amount of the contracts entered into does not reflect the actual risk assumed by the Group, since the net position in these financial instruments is the result of offsetting and/or combining them. Relevant transactions On 27 December 2016, Midamarta, S.L. (an indirect subsidiary wholly-owned by the Deposit Guarantee Fund - FGD and holding company of Inversiones Corporativas, S.A.) and Liberbank, S.A. entered into an agreement under which Midamarta S.L. and the FGD were provided with a put option for the shares of the share capital of Inversiones Corporativas, S.A. at a strike price equal to the highest value between one euro and its market value, to be exercised on 30 June 2020 or sooner if certain circumstances are met. In accordance with the Viability Plan of Inversiones Corporativas, S.A., validated through an independent expert opinion, the future flows of this company that are generated by the divestment of its assets and ownership interests will be used in full to settle the repayment of the debt contracted with Banco de Castilla-La Mancha, S.A. In accordance with this Plan, as of 30 June 2020, it is forecast that Inversiones Corporativas, S.A. will have a remaining debt of 67.7 million along with valuation adjustments due to impairment amounting to 46.8 million, compared to assets 128

146 pending divestment valued at 21.8 million. This scenario, where the value of the assets does not cover the debts, is one that reflects that the market value of the ownership interest in Inversiones Corporativas, S.A. is immaterial. Accordingly, no accounting records have been made, given the conditional nature of the options through which they could be automatically resolved and extinguished, as well as the immateriality of the value of these options. 9. Available-for-sale financial assets The detail of the balances of this item on the consolidated balance sheets at 31 December 2017 and 2016, by type of financial instrument, is as follows: Thousands of euros 31/12/ /12/2016 By instrument type- Debt securities Government bonds 1,085,891 4,224,389 Other Spanish government debt securities 1,736,421 1,002,856 Foreign government debt securities 1,324,587 1,655,891 Issued by financial institutions 198, ,620 Other fixed-income securities 65,908 69,036 4,411,538 7,154,792 Equity instruments Shares of listed Spanish companies 11,313 10,552 Shares of unlisted Spanish companies 371, ,812 Shares of listed foreign companies Shares of unlisted foreign companies 9,198 24, , ,326 Valuation adjustments Valuation adjustments for impairment (427) (457) Adjustments for micro-hedging (4,068) 48,881 4,799,718 7,591,542 During 2017 fiscal year, among other operations, purchases of Spanish public debt were made for an effective value of 2,516,575 thousand ( 4,803,109 thousand, in 2016), Italian public debt for an amount of 1,300,318 thousand ( 2,090,364 thousand in 2016) and fixed income issued by private sectors amounting to 50,569 thousand. On the other hand, during the 2017 fiscal year, the Group sold Spanish and German public debt securities and private fixed-income securities for the amount of 2,790,665 thousand ( 7,269,203 thousand, in 2016), 1,514,273 thousand and 124,808 thousand, respectively. The result generated by these securities, being recorded under Net gains or losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss in the consolidated income statement, amounted to a profit of 63,834 thousand, a loss of 14,721 thousand and a profit of 10,311 thousand ( 280,642 thousand, in 2016), respectively. Additionally, amortisations of fixed-income securities amounting to 2,150,774 thousand ( 1,277,108 thousand at 31 December 2016) were made. Furthermore, as indicated in Notes 2.c. and 11, during 2016 a transfer of the portfolio classified as Held-to-maturity investments to the Available-for-sale financial assets portfolio has occurred for a fair value of 2,568,977 thousand. Likewise, in 2017 the sale of several variable-income securities for an effective value of 59,922 thousand has taken place, ( 43,687 thousand in 2016). The profit generated by these sales 129

147 amounted to 8,016 thousand ( 13,460 thousand in 2016) and was recorded under Gains or losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net in the consolidated income statement (see Notes 1.c.3 and 26). In 2017 and 2016, the Group recognised impairment losses on the equity instruments under the heading Available-for-sale financial assets on the consolidated balance sheet. Impairment associated with this portfolio amounted to 13,526 thousand and 7,208 thousand, respectively, recorded under Impairment or impairment reversal of financial assets not measured at fair value through profit or loss Available-for-sale financial assets in the consolidated income statement. In addition, in the fiscal year 2017 an impairment reversal has been recognised under this heading of the profit and loss account for an amount of 30 thousand ( 457 thousand in 2016) related to fixed-income securities (see Note 26). On the other hand, in 2017 and 2016 the Group has made fair value hedges, being the hedged item fixed-income instruments recorded in the available-for-sale financial asset portfolio. Valuation adjustments of the hedged items were recorded in "Adjustments for micro-hedging" in the consolidated balance sheet (see Note 12). In 2017, the Group has sold fixed-income instruments previously designed as hedged elements, cancelling the corresponding hedges. This cancelation generated a profit of 13,572 thousand (loss of 18,991 thousand in 2016) which has been recorded under Gains or (-) losses on derecognition of financial assets and liabilities not measured at fair value with changes on results, net in the consolidated income statement (see Note 26). Note 3 presents information on the credit, liquidity and market risk assumed by the Group in relation to these financial assets. Information on the fair value of these financial assets is provided in Note 24. The average effective interest rate of debt securities in this portfolio at 31 December 2017 was 1.32% (1.44% at 31 December 2016). 10. Loans and accounts receivable The detail of the balances of this item on the consolidated balance sheets at 31 December 2017 and 2016, by type of financial instrument, is as follows: Thousands of euros 31/12/ /12/2016 Loans and advances to Credit entities Term deposits at credit institutions 50,996 73,745 Other financial assets 32,444 20,765 Other valuation adjustments 1 (122) 83,441 94,388 Loans and advances to customers - Loans and advances to customers 22,010,778 23,005,608 Of which: doubtful 1,899,768 3,205,337 Other financial assets 313, ,059 Valuation adjustments for impairment (902,876) (1,275,477) Other valuation adjustments 11,471 3,227 21,432,966 21,900,417 Debt securities 2,179,626 2,229,997 Debt instruments 2,179,713 2,230,286 Valuation adjustments for impairment (87) (289) 23,696,033 24,224,

148 Debt securities Loans and receivables - Debt securities includes mainly the bonds issued by and received from SAREB as consideration for the transfer or assets (loans and property) thereto on 28 February 2013 (See Notes 1-c.1). At 31 December 2017 and 2016 the carrying amounts of the aforementioned bonds were 1,970,302 thousand and 2,084,123 thousand, respectively. The initial accounting of securities issued by SAREB was performed at transaction cost (par value). Inputs used for valuation, through the discount of cash flows, were the listed prices of the Spanish debt with similar maturity, taking into account that the maturity extension option would not imply material changes in their fair value. No transaction cost caused an increase in the cost of debt securities. In the fiscal year 2017 an impairment reversal has been recognised for an amount of 202 thousand ( 289 thousand in 2016) related to fixed-income securities, under the heading of Impairment or impairment reversal of financial assets not measured at fair value through profit or loss Loans and receivables in the consolidated income statement (see Note 26). Other information Note 3 presents information on the credit, liquidity and market risk assumed by the Group in relation to these financial assets. Information on the fair value of these assets is provided in Note 24. The average effective interest rate on financial instruments classified under loans and accounts receivable at 31 December 2017 was 1.56% (1.53% at 31 December 2016). 131

149 Distribution of customer credit by activity The distribution of credit by activity at 31 December 2017 and 2016 is as follows: Fiscal Year 2017: Carrying amount (net) Of which: Property guarantees Of which: other collateral Thousands of Euros Less than or equal to 40% Loans secured with collateral. Loan to value More than 40% and less than or equal to 60% More than 60% and less than or equal to 80% More than 80% and less than or equal to 100% More than 100% Public Sector 979,964 59,408 2,603 19,843 15,769 20, ,093 Other financial institutions and sole proprietors (financial activity) 350,739 35,686 4,676 2,199 32, ,760 Non-financial corporations and sole proprietors (non financial activity) 5,289,597 2,110, , , , , , ,619 Construction and real estate 283, ,348 1,576 47,389 42,739 36,928 31, ,508 Civil engineering construction 2, Remaining purposes- 5,003,489 1,838, , , , ,907 96, ,111 Large enterprises 910, , ,894 40,321 20,191 24, ,983 SMEs and sole proprietors 4,093,221 1,722, , , , ,636 96, ,128 Other households and NPISH 14,499,073 13,442,863 21,963 3,415,809 4,827,102 4,611, , ,541 Housing 12,791,273 12,712,638 1,438 3,049,708 4,628,131 4,475, , ,303 Consumer 394,597 62,914 1,914 35,970 18,313 3,662 3,563 3,320 Other 1,313, ,311 18, , , ,927 21,288 20,918 Total 21,119,373 15,648, ,171 4,124,833 5,574,318 5,067, ,018 1,005,013 Memorandum item- Refinancing, refunded and restructured operations 685, ,972 69, , , ,488 61, ,

150 Fiscal Year 2016: Thousands of Euros Loans secured with collateral. Loan to value Carrying amount (net) Of which: Property guarantees Of which: other collatera l Less than or equal to 40% More than 40% and less than or equal to 60% More than 60% and less than or equal to 80% More than 80% and less than or equal to 100% More than 100% Public Sector 1,330,703 53,392 3,763 8,021 16,948 27,145 2,490 2,551 other financial corporations and sole proprietors (financial activity) 262,550 19,872 14,003 18,963 6,586 8, Non-financial corporations and sole proprietors (non financial activity) 5,983,331 2,910, ,276 1,122, , , , ,615 Construction and real estate 767, ,299 1, ,333 79, ,218 79, ,291 Civil engineering construction 3, Remaining purposes- 5,212,864 2,147, ,731 1,018, , , , ,324 Large enterprises 964, ,070 95, ,196 13,031 4,393 1,537 61,096 SMEs and sole proprietors 4,248,405 2,025, , , , , , ,228 Other households and NPISH 14,156,774 13,204,414 21,097 3,244,380 4,671,701 4,604, , ,882 Housing 12,905,705 12,764,020 1,331 3,053,421 4,554,369 4,515, , ,094 Consumer 334,567 59, ,464 18,606 5,264 3,225 2,309 Other 916, ,185 19, ,495 98,726 83,984 32,608 24,479 Total 21,733,358 16,188, ,139 4,394,303 5,344,455 5,216, ,209 1,064,177 Memorandum item- Refinancing, refunded and restructured operations 1,292,434 1,129,681 88, , , , , ,

151 Below is the detail by counterparty and by proceeds from loans and advances to customers, central banks and credit institutions, net of impairment losses, classified in the different asset categories at 31 December 2017 and 31 December 2016: Fiscal Year 2017: Central Banks Public Sector Credit institutions Thousands of Euros Other financial corporat ions Non-financial corporations Households On demand and with short notice period (current account) 1,411,682 66,510 41, , ,439 1,834,133 Credit card debt , , ,378 Commercial portfolio - 1, ,821 6, ,056 Financial leases ,152 12, ,655 Reverse repurchase loans Other term loans - 911,665 50, ,846 4,570,330 14,380,926 20,260,764 Advances different from loans - 144,919 32,444 36,888 94,938 36, ,037 LOANS AND ADVANCES 1,411,682 1,124, , ,602 5,027,447 14,896,034 22,970,023 Of which: mortgage loans (loans secured through real property) - 59,408-35,268 1,926,599 13,630,245 15,651,520 Of which: other loans with collateral - 2,603-4, ,809 40, ,800 Of which: consumer credit , ,597 Of which: loans for house purchase ,081,165 13,081,165 Of which: Loans for project financing Fiscal Year 2016: Total Central Banks Public Sector Collateral received and other credit enhancements Credit institutions Thousands of Euros Other financial corporat ions Non-financial corporations Households On demand and with short notice period (current account) 563, , , , ,202 1,107,496 Credit card debt , , ,687 Commercial portfolio - 2, ,024 6, ,582 Financial leases , ,999 9, ,353 Reverse repurchase loans Other term loans - 1,202,623 71, ,581 5,130,381 14,161,985 20,823,587 Advances different from loans - 60,126 20,765 19,230 44,999 42, ,824 LOANS AND ADVANCES 563,187 1,390, , ,197 5,546,468 14,684,923 22,658,529 Of which: mortgage loans (loans secured through real property) - 53,392 2,606 18,419 2,617,644 13,501,640 16,193,701 Of which: other loans with collateral - 3,763-14, ,996 36, ,422 Of which: consumer credit , ,567 Of which: loans for house purchase ,905,704 12,905,704 Of which: Loans for project financing The Group uses collateral and other credit enhancements in addition to the debtor s own personal guarantee as an instrument in credit risk management. The Group's risk analysis and selection policies define, depending on the different characteristics of operations, such as risk purpose, counterparty, term, consumption of own resources, etc., collateral or credit enhancements that must be available, in addition to the debtor s own collateral, to proceed with its contracting. Total 134

152 Collateral evaluation is made based on the nature of the collateral received. In general, collateral in the form of real property are valued at their appraisal value, made by independent entities in accordance with the rules established by the Bank of Spain at the time of hiring. Collateral in the form of securities quoted in active markets are valued at their market value, adjusted by a percentage to cover possible variations in said market value that could affect risk coverage. Similar collateral and sureties are measured by the amount guaranteed in said operations. Credit derivatives and similar operations used to hedge credit risk are measured at their nominal value, which is equivalent to the risk hedged, in order to determine the coverage achieved. For their part, guarantees in the form of pledged deposits are valued by the amount of such deposits and, if they are denominated in foreign currency, converted at the exchange rate at each valuation date. Below is the amount of collateral associated with the loans and advances granted by the Group that have collateral at 31 December 2017 and 31 December 2016: At 31 December 2017: Residential property Thousands of Euros Other loans with Mortgage loans collateral Commercial property Cash Remainder Financial guarantees received Loans and advances 13,284,094 1,802,137 28,922 85,128 32,965 Of which: other financial corporations 8,621 26, Of which: non-financial corporations 569,353 1,289,701 19,187 58,599 23,542 Of which: households 12,651, ,814 9,735 26,529 9,423 At 31 December 2016: Residential property Thousands of Euros Other loans with Mortgage loans collateral Commercial property Cash Remainder Financial guarantees received Loans and advances 13,204,881 2,361,493 33,324 88,408 18,795 Of which: other financial corporations 10,266 8, ,054 Of which: non-financial corporations 743,313 1,778,784 23,043 69,707 2,519 Of which: households 12,406, ,484 10,281 18,701 5,

153 Value adjustments by credit risk impairment Below is the movement in value adjustments by impairment recorded by the Group during 2017 and 2016 for financial assets: Fiscal Year 2017: Thousands of Euros Opening balance at 31 December 2016 Increases over the period due to provisions for estimated credit losses (Note 26) Decreases over the period due to reversal in estimated credit losses (Note 26) Decreases due to amounts charged against value adjustments Transfers between value adjustments Other adjustments Closing balance at 31 December 2017 Specific value adjustments for individually assessed financial assets (650,778) (181,919) 84, ,209-18,472 (355,394) Recoveries recorded directly in the income statement (Note 26) Value adjustments recorded directly in the income statement (Note 26) - (1,285) Loans and advances (650,778) (181,919) 84, ,209-18,472 (355,394) - (1,285) Specific value adjustments for collectively assessed financial assets (482,629) (267,164) 96, ,235-23,214 (466,277) 59,303 (87,803) Debt securities Loans and advances (482,629) (267,164) 96, ,235-23,214 (466,277) 59,303 (87,803) Collective value adjustments for losses on financial assets incurred but not reported (142,816) (65,237) 108, ,143 (81,719) - - Debt securities (*) (746) (34) (514) - - Loans and advances (142,070) (65,203) 107, ,143 (81,205) - - Total (1,276,223) (514,320) 288, ,444-59,829 (903,390) 59,303 (89,088) (*) Of this amount, 426 thousand correspond to impairment associated with the Available-for-sale financial assets portfolio (see Note 9) and 87 thousand correspond to impairment associated with the Loans and receivables portfolio (see Note 10). Additionally, during 2017 the Group recorded an impairment amounting to 13,526 thousand corresponding to equity instruments classified in the Available-for-sale financial assets portfolio (see Notes 9 and 26). 136

154 Fiscal Year 2016: Thousands of Euros Opening balance at 31 December 2015 Increases over the period due to provisions for estimated credit losses (Note 26) Decreases over the period due to reversal in estimated credit losses (Note 26) Specific value adjustments for individually assessed financial assets (1,021,458) (210,055) 5,537 Decreases due to amounts charged against value adjustments - Transfers between value adjustments Other adjustments Closing balance at 31 December , ,518 (650,778) Recoveries recorded directly in the income statement (Note 26) Value adjustments recorded directly in the income statement (Note 26) - - Loans and advances (1,021,458) (210,055) 5,537-1, ,518 (650,778) - - Specific value adjustments for collectively assessed financial assets (848,208) (382,140) 543, ,225 (1,680) (108,991) (482,629) 47,230 (120,069) Debt securities (240) Loans and advances (848,208) (382,140) 543, ,225 (1,680) (108,991) (482,629) 47,230 (119,765) Collective value adjustments for losses on financial assets (121,154) (137,338) 118,317 - incurred but not reported - (2,641) (142,816) - - Debt securities (*) - (762) (746) - - Loans and advances (121,154) (136,576) 118, (2,657) (142,070) - - Total (1,990,820) (729,533) 667, , ,886 (1,276,223) 47,230 (120,069) (*) Of this amount, 457 thousand correspond to impairment associated with the Available-for-sale financial assets portfolio (see Note 9) and 289 thousand correspond to impairment associated with the Loans and receivables portfolio (see Note 10). Additionally, during 2016 the Group recorded an impairment amounting to 7,208 thousand corresponding to equity instruments classified in the Available-for-sale financial assets portfolio (see Notes 9 and 26). Past-due but not impaired financial assets Below is the detail of financial assets that are past due and not considered impaired by the Bank at 31 December 2017 and 31 December 2016, classified by nature of the financial instrument, counterpart and according to the time elapsed since maturity; 137

155 Fiscal Year 2017: 30 days Thousands of Euros Past due but whose value has not impaired > 30 days > 60 days y < 90 days Total Debt securities Loans and advances 441, , , ,867 Public administrations 1, ,904 Other financial corporations Non-financial corporations 86,018 33,758 25, ,461 Households 354, ,897 94, ,254 TOTAL 441, , , ,867 Fiscal Year 2016: Thousands of Euros 30 days Past due but whose value has not impaired > 30 days > 60 days y < 90 days Total Debt securities Loans and advances 510, , , ,513 Public administrations 20,721-2,186 22,907 Non-financial corporations 108,599 32,907 73, ,854 Households 380, , , ,752 TOTAL 510, , , ,

156 Doubtful financial assets and valuation adjustments for impairment Below is the detail of doubtful financial assets classified by nature of the financial instrument and counterpart as well as the detail of the value adjustments with the distinction between their identification through separate or joint analysis. At 31 December 2017 At 31 December 2016 Doubtful Specific value adjustments for individually assessed financial assets Thousands of Euros Specific value adjustments for collectively assessed financial assets Collective value adjustments for losses incurred but not reported Debt securities (514) Loans and advances 1,899,768 (355,394) (466,277) (81,205) Public administrations 3,598 (636) - (5,749) Other financial corporations (297) (922) Non-financial corporations 1,113,855 (354,758) (219,726) (50,331) Households 781,827 - (246,254) (24,203) TOTAL 1,899,768 (355,394) (466,277) (81,719) Doubtful Specific value adjustments for individually assessed financial assets Thousands of Euros Specific value adjustments for collectively assessed financial assets Collective value adjustments for losses incurred but not reported Debt securities (746) Loans and advances 3,205,337 (650,778) (482,629) (142,070) Public administrations 7,434 (663) (1,699) - Other financial corporations 20,975 (15,458) (833) (2,496) Non-financial corporations 2,216,786 (634,657) (218,962) (53,502) Households 960,142 - (261,135) (86,072) TOTAL 3,205,337 (650,778) (482,629) (142,816) 139

157 Financial assets impaired and derecognised Following is a detail of the changes in 2017 and 2016 in the Group's impaired financial assets which are not included in the consolidated balance sheets since their recovery is considered to be unlikely, although the measures have not been discontinued to recover the amounts owed: Thousands of euros 31/12/ /12/2016 Balance at 1 January 2,784,728 1,616,880 Total Additions- Use of accumulated impairment balance 538, ,225 Direct restructuring in the income statement 89, ,764 Contractually enforceable interests 56, ,579 Total Deductions- Principal cash collection (49,381) (46,196) Interest cash collection (1,399) (1,034) Tangible assets assignment (131,811) (57,455) Other transactions: For the sale of assets derecognised (196,384) - By net transfer to failures in the EPA portfolio - 911,507 Reduction and other causes (289,503) (189,542) Balance of financial assets for which recovery is considered remote at the end of the period 2,800,762 2,784,728 In April 2017 the Group sold to Lindorff Holding Spain S.L.U. a portfolio for an amount of 172,167 thousand of SME and private assets, including contracts of Liberbank S.A. and its subsidiary Banco de Castilla La Mancha, S.A. The portfolio included unsecured credits and loans, discounted notes and credit card debt which are unlikely to be recovered. The price of the transaction was 5.1% of the nominal value with a gain of 7,048 thousand recorded under the heading "Impairment loss or reversal of impairment of financial assets not measured at fair value with changes in P&L" of the consolidated income statement (see Note 26). In addition, in July 2017 the Group sold to LC Asset 1 S.A.R.L. a portfolio for an amount of 24,217 thousand of SME and private assets, including contracts of Liberbank S.A. and its subsidiary Banco de Castilla La Mancha, S.A. The price of the transaction was 6% of the nominal value with a gain of 1,475 thousand recorded under the heading "Impairment loss or reversal of impairment of financial assets not measured at fair value with changes in P&L" of the consolidated income statement (see Note 26). Other information Financial income accrued and not collected from financial assets that were considered as impaired, not recorded in the consolidated balance sheet at 31 December 2017 and 2016, amounts to 595,730 thousand and 592,503 thousand, all of which correspond to customer credit. NPL ratio At 31 December 2017 and 2016, the NPL ratio of the Group's loans and advances to customers was 8.63% and 13.93% respectively. 140

158 Assets taken as guarantee and guarantees executed At 31 December 2017 and 2016 the carrying amount of the assets taken as guarantees or guarantees executed by the Group for the payment of the financial assets amounts to 1,638,878,thousand and 1,861,544 thousand respectively. 11. Held-to-maturity investments On 1 June 2016, the Group sold fixed-income securities classified under Held-to-maturity investments in the consolidated balance sheet, for an effective value of 60,912 thousand, which generated a gain amounting to 6,289 thousand, which is recorded under Gains or (-) losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net in the consolidated income statement (see Notes 9 and 26). As a result of this sale, the whole Held-to-maturity investments portfolio not sold to the Available-for-Sale Financial Assets portfolio has been transferred, recording the difference between its amortised cost ( 2,415,907 thousand) and its fair value ( 2,568,977 thousand) amounting to 107,149 thousand (net of tax) under Accumulated other comprehensive income Elements that can be reclassified in results- Available-for-Sale Financial Assets of consolidated equity. Additionally, during the first half of 2016, amortizations of fixed-income securities issued by credit institutions amounting to 55,000 thousand and acquisitions of fixed-income securities issued by the foreign private sector and securities issued by credit institutions have taken place, for an effective value of 336,286 thousand and 69,565 thousand, respectively. As a result of the foregoing, at 31 December 2017 and 2016 the Group has no assets recorded under this heading in the consolidated balance sheet. 12. Derivatives- Hedge Accounting Fair value hedges The breakdown, by type of product, of the fair value and the notional amount of the derivatives designated as hedging instruments in fair value hedges at 31 December 2017 and 2016 is as follows: Fiscal Year 2017 Thousands of euros Receivables Payables Fair value Fair value Notional Notional Amount Amount Forward purchases of foreign currency ,358 Forward sales of foreign currency 48 16, Other interest rate transactions: 356,694 5,832,469 25,866 2,665,682 Interest rate swaps 356,694 5,832,469 25,866 2,665, ,742 5,849,223 26,548 2,714,

159 Fiscal Year 2016 Thousands of euros Receivables Payables Fair value Fair value Notional Amount Notional Amount Forward purchases of foreign currency , ,668 Forward sales of foreign currency 53 11, ,005 Forward financial asset sales , ,130 Other interest rate transactions: 448,899 6,346,977 6,054 1,412,777 Interest rate swaps (IRSs) 448,899 6,346,977 6,054 1,412, ,142 6,371,114 59,068 2,058,580 The notional amounts of the contracts entered into do not reflect the actual risk assumed by the Group in relation to these instruments. At 31 December 2017 and 2016, the Group had arranged swaps with various counterparties of renowned solvency to hedge the interest rate risk on mortgage-backed securities and other instruments classified as "Financial liabilities at amortised cost" on the consolidated balance sheets (see Note 18) and fixed-income securities recorded under the heading "Available-for-sale financial assets" (see Note 9). At 31 December 2017, the fair value of these hedges show a debit and credit balance of 356,694 thousand and 25,866 thousand, respectively ( 448,899 thousand and 6,054 thousand, respectively, at 31 December 2016). At 31 December 2017 and 2016 the notional amounts of the aforementioned swap transactions were 8,498,151 thousand and 7,759,754 thousand, respectively. During 2016, the Group made a fair value hedge on fixed-income securities classified under "Available-for-sale financial assets", in order to meet the changes in fair value caused by the price (ex-coupon) of those securities for sale to term (see Note 9). At 31 December 2016, the fair values of these hedges present a credit balance of 52,728 thousand and a notional value of 617,130 thousand. Cash flow hedges At 31 December 2017 the Group has derivatives designated as cash flow hedges for amount of 1,563 thousand, with a notional value of 750,000 thousand. At 31 December 2016, the Group did not have any derivatives designated as cash flow hedges. 13. Non-current assets and disposable groups of items classified as held for sale The detail of this item on the consolidated balance sheets at 31 December 2017 and 2016 was as follows: 142

160 Assets from awards- Gross debt- (*) It relates to the funds created after the time of the granting. Thousands of euros Buildings and structures 1,537,692 1,893,329 Rural properties, plots and lots 977,367 1,125,412 Other 2, Hedges - 2,517,756 3,019,678 Buildings and structures (677,906) (755,480) Rural properties, plots and lots (575,702) (463,059) Other (962) (174) Of which: Valuation adjustments for impairment (*) (510,806) (61,049) Other assets- (1,254,570) (1,218,713) Loans 16,911 - Equity instruments 1,699 10,904 Other assets for own use ,862 11,241 Total, net 1,282,048 1,812,206 On 15 November 2016, Ahorro Corporación Annual General Meeting agreed to sell its subsidiary Ahorro Corporación Financiera, S.V., S.A.U. (ACF), through a settlement process of the Parent Company, which is expected to be solved during the first half of At 31 December 2017 the outstanding amount to be settled was 1,699 thousand ( 10,904 thousand at 31 December 2016). In 2017 he Group agreed upon the sale of loans for an amount of 16,911 thousand, proceeding to their reclassification as non-current assets and disposable groups of items classified as held for sale. Their sale is foreseen in the first half of On 21 October 2017, Liberbank entered into an agreement with Bain Capital Credit and Oceanwood, for the incorporation of seven companies with the corporate purpose of managing, developing and disposing of the portfolio of foreclosed assets belonging to the Liberbank Group, in which, at 31 December 2017, Liberbank directly and indirectly owned 9.99% of the capital, Bain Capital Credit owned 80% and Oceanwood owned the remaining 10.01%. Under the scope of this agreement, the Group transferred real estate assets to the incorporated companies, representing an aggregate gross debt of 613 million. The sale of 90.01% of the ownership interests has not generated any results for the Group, in consideration of the provisions the Bank had recorded on the transferred assets. At 31 December 2017, the management of the equity held by the aforementioned companies is attributed to Bain Capital Credit, holding 80% of the share capital, in such a way that the transferred ownership interest held by the Group in the various companies is recorded in Available-for-sale financial assets in the consolidated balance sheet. During the 2017 fiscal year, asset acquisitions stemming from foreclosures were made for the gross amount of 645,121 thousand ( 653,917 thousand, at 31 December 2016). Furthermore, during the 2017 fiscal year, sales were recorded for a gross debt of 1,155,493 thousand ( 289,839 thousand, 143

161 at 31 December 2016), of which 542,588 thousand correspond to retail sales and 612,905 thousand with the losses associated with the operation described above and agreed between Liberbank, Bain Capital Credit and Oceanwood. Also, assets with a gross value of 8,450 thousand were moved from Tangible assets - investment properties to Non-current assets (or disposal groups) classified as held for sale (see Note 15). Valuation adjustments for impairment A detail of the changes in the impairment losses on these assets in 2017 and 2016 is shown below: Thousands of euros Balance at 1 January ,253 Net provision for impairment losses on the remaining non-current assets held for sale (Note 26) 98,774 Amounts reversed on impairment losses recognised in prior years (Note 26) (8,039) Transfers to Tangible assets Property investments (99,939) Balance at 31 December ,049 Net provision for impairment losses on the remaining non-current assets held for sale (Note 26) 481,908 Amounts reversed on impairment losses recognised in prior years (Note 26) (13,891) Other items (18,260) Balance at 31 December ,806 The following detail shows the average period at 31 December 2017 and 2016, based on the Group's record of experience in recent years, during which the assets from foreclosures, by type of asset, were sold or derecognised. The calculation runs from the date of foreclosure of the asset: Months Residential assets Other assets The following table presents the corporate purpose of the appraisal companies and agencies whose appraisals were relied on to estimate the need to recognise impairment losses on non-current assets from grantings on sale recognised by the Group, indicating for each company or agency and type of asset the carrying amount of the impairment losses recognised, and the related fair value estimated in the aforementioned appraisals at 31 December 2017 and 2016: 144

162 Thousands of euros Appraisal company Carrying amount (net) Appraisal value Carrying amount (net) Appraisal value Tasaciones Inmobiliarias, S.A. 272, , , ,715 Valoraciones Mediterráneo, S.A. 8,781 18,326 29,372 55,619 Tecnitasa, S.A. 124, , , ,896 Sociedad de Tasación, S.A. 16,270 32,660 48,080 90,428 Arco Valoraciones, S.A ,106 3,403 7,261 Ibertasa, S.A. 14,711 28,164 33,521 53,779 Gesvalt, S.A. 131, , , ,153 Aesval Lógica de Valoraciones, S.A. 265, , , ,852 Instituto de valoraciones, S.A. 319, , , ,865 CBRE Valiation Advisory, S.A. 19,343 31,788 34,838 44,870 Agrupación Técnica de Valor, S.A. 32,945 56, Tasiberica, S.A. 52,452 75, Other 5,455 7,402 7,688 15,157 TOTAL 1,263,186 1,972,200 1,800,965 2,350,595 The fair value of tangible assets in Spain was estimated using the criteria set forth in the Ministerial Order ECO/805/2003, of 27 March and its subsequent amendments. The net book value recorded corresponds to the lower amount between the carrying amounts at the time these assets are considered as non-current assets held for sale and their estimated fair value based on their adjusted appraisal value to reflect any uncertainties that may arise with respect to the appraisal value, as well as the expenses expected to be incurred until the realization of the asset. In 2017 and 2016 the Group sold several non-current assets held for sale and provided the buyer with financing for certain amount of the sell value. This financing has been provided independently of the sales transaction, in accordance with the Group's general lending policy and the risk rating requirements for each borrower. Accordingly, there are no gains that have not been recognised. The Group reported a net loss of 30,981 thousand (a net gain of 27,242 thousand in 2016) on these sales, which has been recognised under Gains / Losses on non-current assets held for sale not classified as discontinued operations on the consolidated income statement (see Note 26). 14. Assets and Liabilities created by insurance or reinsurance contracts Assets created by insurance or reinsurance contracts No amount was booked at 31 December 2017 or 31 December 2016 under this caption of the consolidated balance sheet for provisions for benefits (reinsurance share). Liabilities by insurance or reinsurance contracts At 31 December 2017 and 2016, this heading in the consolidated balance sheet includes the financial guarantee fees to be accrued on technical guarantees amounting to 7,276 thousand and 8,182 thousand, respectively. No amount was booked at 31 December 2017 or 31 December 2016 for life insurance technical provisions. 145

163 15. Tangible assets The changes in Tangible assets on the consolidated balance sheets in 2017 and 2016 were as follows: Fiscal Year 2017: Thousands of euros For own use Other assets leased out under an operating lease Investment property (*) Total Cost: Balances at 1 January ,915 7, ,089 1,430,396 Additions 93, , ,620 Derecognitions for disposals (39,840) - (91,607) (131,447) Transfers and other changes (39,554) - 32,823 (6,731) Balances at 31 December ,010,874 7, ,572 1,638,838 Accumulated depreciation: Balances at 1 January 2017 (455,711) (7,175) (23,760) (486,646) Charge for the year (Note 26) (18,320) (217) (8,442) (26,979) Derecognitions for disposals 25,512-2,755 28,267 Transfers and other changes 10,047 - (10,047) - Balances at 31 December 2017 (438,472) (7,392) (39,494) (485,358) Impairment losses at 31 December 2017 (30,455) - (52,425) (82,880) Net tangible assets at 31 December , ,653 1,070,600 (*) Includes property investments from assets acquired by the Group in debt payment for a net amount of 363 million (net) (see note 3.2.9). 146

164 Fiscal Year 2016: Thousands of euros For own use Other assets leased out under an operating lease Investment property (*) Total Cost: Balances at 1 January ,104,896 7, ,804 1,229,092 Additions 34,235-57,083 91,318 Derecognitions for disposals (95,528) - (4,295) (99,823) Transfers and other changes (46,688) - 256, ,809 Balances at 31 December ,915 7, ,089 1,430,396 Accumulated depreciation: Balances at 1 January 2016 (475,296) (7,175) (14,884) (497,355) Charge for the year (Note 26) (17,497) - (2,073) (19,570) Derecognitions for disposals 31, ,484 Transfers and other changes 5,965 - (7,170) (1,205) Balances at 31 December 2016 (455,711) (7,175) (23,760) (486,646) Impairment losses at 31 December 2016 (23,381) - (14,755) (38,136) Net tangible assets at 31 December , , ,614 (*) Includes property investments from assets acquired by the Group in debt payment for a net amount of 266 million (see note 3.2.9). In 2016, the Group has implemented a specific strategy to enhance the valorisation of certain assets foreclosed through their exploitation on a rental basis. Therefore, the Group has carried out a detailed analysis of the assets classified under Non-current assets and disposal groups classified as held for sale in the balance sheet, preparing certain assets to facilitate direct exploitation on a rental basis, through the implementation of various maintenance and improvement tasks. As a result of this change in the intended use, from which market returns are expected, during 2016 the Group has transferred assets classified under Non-current assets classified groups classified as held for sale to Tangible assets Property investments in the consolidated balance sheet, for a net book value amounting to 208,604 thousand (see Note 13). During 2017, assets were transferred from Property, plant and equipment for own use to Property investments in the balance sheet for a net book value of 29,507 thousand ( 40,723 thousand in 2016). Also, assets with a gross value of 6,732 thousand were moved from Tangible assets - investment properties to Non-current assets (or disposal groups) classified as held for sale (see Note 13). 147

165 Property, plant and equipment for own use The detail, by type of asset, of Property, plant and equipment for own use on the consolidated balance sheets at 31 December 2017 and 2016 is as follows: Fiscal Year 2017: Cost Thousands of euros Accumulated depreciation and amortisation Impairment losses Carrying amount Cost: Computer hardware and installations 110,661 (83,007) - 27,654 Furniture, vehicles and other fixtures 287,844 (251,856) - 35,988 Buildings 543,054 (103,130) (30,455) 409,469 Construction in progress 18, ,947 Other 50,368 (479) - 49,889 Property, plant and equipment at 31 December ,010,874 (438,472) (30,455) 541,947 Fiscal Year 2016: Cost Thousands of euros Accumulated depreciation and amortisation Impairment losses Carrying amount Cost: Computer hardware and installations 98,040 (80,458) - 17,582 Furniture, vehicles and other fixtures 296,270 (269,316) - 26,954 Buildings 530,722 (105,458) (23,381) 401,883 Construction in progress 18,144 (12) - 18,132 Other 53,739 (467) - 53,272 Property, plant and equipment at 31 December ,915 (455,711) (23,381) 517,823 At 31 December 2017 and 2016, the Group had fully-depreciated property, plant and equipment for own use, the total cost and related accumulated depreciation of which are 286,590 thousand and 278,532 thousand respectively. The Group arranges insurance policies to cover the possible risks to which its investment properties may be exposed. At 31 December 2017 and 2016, the Group considers that the insurance cover arranged is sufficient. Investment property In 2017 and 2016 rental income from investment property owned by the consolidated companies amounted to 12,459 thousand and 5,189 thousand, respectively, recorded under the heading "Other operating income" in the consolidated income statement. The operating expenses related to said rental income amounted to 1,282 and 1,146 thousand respectively and are recorded under the heading "Other operating expenses" in the consolidated income statement (see Note 26). Information on the fair value of these assets is provided in Note

166 Valuation adjustments for impairment A detail of the changes in the impairment losses on property, plant and equipment in 2017 and 2016 is as follows: Thousands of euros Balance at 1 January 2016 (38,725) Amount reversed or charged in consolidated income statement - Other changes 589 Balance at 31 December 2016 (38,136) Amount reversed or charged in consolidated income statement 115 Transfers and other changes (44,859) Balance at 31 December 2017 (82,880) 16. Intangible assets Goodwill The detail of Goodwill on the consolidated balance sheets at 31 December 2017 and 2016 is as follows: Thousands of euros Goodwill on consolidation- Banco de Castilla-La Mancha Mediación, Operador de Banca Seguros Vinculado, S.A. 22,221 22,221 CCM Brokers 2007 Correduría de Seguros, S.A CCM Finance, S.A Other ,742 22,742 As mentioned in Note 2.q, goodwill is reviewed periodically including in its carrying amount the part of the goodwill assigned in order to determine their possible impairment. This analysis is performed at least annually, or whenever there are indications of impairment. At 31 December 2017 and 2016, no impairment has been recorded in any goodwill. The most significant Group goodwill corresponds to Banco de Castilla-La Mancha Mediación, Operador de Banca Seguros Vinculado, S.A. In the calculation of impairment test, it is used an average of the results of the last three years and the distribution of profit in dividends. Given the potential growth of the sector, at 31 December 2017 and 2016 the Group used a sustainable growth constant rate of 0.5% to extrapolate cash flows, in accordance with section 33 of IAS 36. At 31 December 2017, the rate used to discount cash flows for the purpose of this assessment is 9% (9% at 31 December 2016); which consists of a risk-free rate plus a premium reflecting the inherent business risk assessed. 149

167 Strongest assumptions whose volatility could have a greater impact in determining the present value of cash flows are the discount rate and the growth rate as follows: Impact of an increase of 50 bp (*) Thousands of Euros Impact of an increase of 50 bp (*) Impact of an increase of 50 bp (*) Impact of an increase of 50 bp (*) Discount rate (5,226) 5,879 (4,033) 4,874 Growth rate 5,879 (5,226) 4,874 (4,333) (*)Based on the observed historical movements, the use of 50 basis points for a sensitivity analysis calculation would be a reasonable variation with respect to the variations observed in the last five years. In previous years, the Group carried out appropriate impairment tests for goodwill, with no evidence of any impairment. Other intangible assets The detail of this item on the consolidated balance sheets at 31 December 2017 and 2016 is as follows: Useful life (years) Thousands of euros With finite useful life- Licences and IT applications ,264 65,623 Other ,742 35,028 Total 103, ,651 Of which: Developed internally 49,156 28,479 Remainder 53,850 72,172 Total 103, ,651 The changes in this heading on the consolidated balance sheet in 2017 and 2016 were as follows: 150

168 Thousands of euros Cost Balance at 1 January 241, ,378 Additions 25,837 50,184 Derecognitions for disposals or other (15,762) (1,438) Cost at 31 December 251, ,124 Accumulated amortisation Balance at 1 January Charge for the year (Note 30) Derecognitions for disposals or other (140,473) (8,597) 1,383 (124,540) (17,275) 1,342 Other changes Accumulated amortisation at 31 December (140,473) Valuation adjustments for impairment Balance at 1 January - - Other changes (737) - Balance (net) at 31 December 103, ,651 At 31 December 2017 and 2016, certain Group's intangible assets were fully amortised for amounts of 81,582 thousand and 83,261 respectively. 17. Other assets The detail of "Other assets" on the asset side of the consolidated balance sheets at 31 December 2017 and 2016 is as follows: Thousands of euros 31/12/ /12/2016 Inventories 19,711 12,239 Other prepayments and accrued income 46,173 36,911 Other assets (*) 26,113 32,835 Insurance contracts linked to pensions (note 2.n) Net pension plan assets (Note 2-n) 29,215 13, ,630 96,019 Valuation adjustments for impairment (215) (224) 121,415 95,795 (*) Including at 31 December 2017 and 2016, 23,660 and 29,185 thousand, respectively, for contribution related to the first extraordinary contribution to the Deposit Guarantee Fund pending accrual (see Note 1.k). 151

169 18. Financial liabilities at amortised cost The detail of this item on the consolidated balance sheets at 31 December 2017 and 2016 is as follows: Thousands of euros 31/12/ /12/2016 Deposits- Deposits from central banks 2,919,973 2,931,888 Deposits from credit institutions 878,805 1,511,409 Customer deposits 27,682,993 29,934,678 Debt securities 566, ,110 Other financial liabilities 190, ,490 32,239,020 35,021,575 Deposits from central banks The detail, by type of transaction, of Deposits from Credit Institutions on the consolidated balance sheets at 31 December 2017 and 2016 is as follows: Thousands of euros 31/12/ /12/2016 Term or notification deposits- Other accounts 2,937,960 2,937,960 Valuation adjustments - accrued interest (17,987) (6,072) 2,919,973 2,931,888 The average effective interest incurred on the financial liabilities classified under this heading was 0.40% and 0.19% at 31 December 2017 and 2016, respectively. These financing transactions mature on 24 June At the end of 2017 and 2016, the limit on the credit facility from the European Central Bank was 6,404,605 thousand and 6,098,987 thousand. The amount drawn down was 2,937,960 on both dates. Deposits from credit institutions Below is a breakdown of the amounts included in this caption of the consolidated balance sheet, in view of the nature of activities: 152

170 Thousands of euros 31/12/ /12/2016 Demand deposits- Other accounts 9,150 9,625 9,150 9,625 Term or notification deposits- Term deposits 365, ,092 Repurchase agreements 503,855 1,008, ,205 1,501,368 Valuation adjustments - accrued interest ,805 1,511,409 The average effective interest rate of financial instruments under this heading at 31 December 2017 was -0.29% (-0.19% at 31 December 2016). Customer deposits The detail, by type of transaction and the related counterparty, of Customer deposits on the consolidated balance sheets is as follows: Thousands of euros 31/12/ /12/2016 By type- Current accounts 4,538,308 4,294,588 Savings accounts 12,254,111 11,579,600 Term deposits 9,448,009 13,052,374 Hybrid financial liabilities 120, ,786 Repurchase agreements 776, ,452 Other 25,446 73,109 27,162,994 29,276,909 By counterparty- Money market transactions with an entity 697,693 61,449 Public authorities 1,351,700 1,318,948 Other private sectors 25,113,601 27,896,512 27,162,994 29,276,909 Valuation adjustments- Accrued interest 252, ,751 Micro-hedge transactions 279, ,355 Transaction costs (11,826) (14,337) 519, ,769 27,682,993 29,934,678 The average effective interest rate of financial instruments under this heading at 31 December 2017 was 0.23% (0.10% at 31 December 2016). 153

171 Disclosures required pursuant to Mortgage Market Act 2/1981, of 25 March, and to Royal Decree 716/2009, of 24 April, implementing certain provisions of the aforementioned Law. Mortgage-backed securities are securities, the principal and interest of which are specifically secured by all the mortgages (there being no need for registration in the Property Register and without prejudice to the Bank's universal equity liability) registered in the Group s favour that are not subject to the issuance of the mortgage-backed bonds and, where appropriate, by the replacement assets stated in the sections subsequent to this Note and by the cash flows generated by the derivative financial instruments associated with each issuance. The mortgage-backed securities include the holder s receivable right against the Group, secured as indicated in the preceding paragraph, and may be enforced to claim payment from the issuer after maturity. The holders of these securities have the status of special preferential creditors vis-à-vis all other creditors (as established by section 3 of Article 1,923 of the Spanish Civil Code) in relation to all the mortgage loans and credits registered in the issuer's favour and, where appropriate, in relation to the replacement assets and the cash flows generated by the derivative financial instruments associated with the issuances. In the event of insolvency, the holders of mortgage-backed securities will enjoy the special privilege established in Article of Insolvency Act 22/2003, of 9 July. Notwithstanding the above, pursuant to Article of Insolvency Law 22/2003, of 9 July, during the insolvency proceedings, the payments relating to the repayment of the principal and interest of the bonds issued and outstanding at the date of the insolvency filing will be settled up to the amount of the income received by the insolvent party from the mortgage loans and credits and, where appropriate, from the replacement assets backing the securities and from the cash flows generated by the financial instruments associated with the issuances. If, due to a timing mismatch, the income received by the insolvent party is insufficient to meet the payments described in the preceding paragraph, the receivers must settle them by realising the replacement assets identified to cover the issuance and, if this is not sufficient, they must obtain financing to meet the mandated payments to the backed bond holders, and the finance provider must be subrogated to the position of the holders. In the event that the measure indicated in Article of the aforementioned Law were to be adopted, the payments to all holders of the mortgage-backed securities issued would be made on a pro-rata basis, irrespective of the issue dates of the securities. The members of the Board of Directors expressly indicate that it has in place policies and procedures guiding all activities carried out in respect of mortgage market issuances. These policies and procedures ensure strict compliance with prevailing applicable mortgage market regulations. These policies and procedures include the following aspects: - Ratio between loans and receivables and the appraisal value of the mortgaged property - Ratio between the borrower s debt and income, as well as verification of the borrower s solvency and other information provided - Avoidance of imbalances between inflows from the hedging portfolio and payment outflows in respect of securities issued. Term deposits includes mortgage-backed securities issuances written by the Group for 3,475,423 thousand and 4,549,626 thousand at 31 December 2017 and 2016, the main features of which are as follows: 154

172 Transferee Issue date Thousands of Euros 31/12/ /12/2016 Interest rate Maturity AyT Cédulas Cajas V "B" 02/12/ ,742 67, % 02/12/2018 AyT Cédulas Cajas, VIII B 16/11/ ,829 26, % 16/11/2019 Cédulas TDA, 5 29/11/ , , % 27/11/2019 AyT Cédulas Cajas IX B 29/03/ ,500 87, % 29/03/2020 Cédulas TDA 6 23/05/ , , % 21/05/2025 Cédulas TDA 7 20/06/ , % 20/06/2017 AyT Cédulas Cajas Global, Series III 12/12/ , , % 12/12/2022 Cédulas TDA 8, A4 08/04/ , , % 08/04/2021 Cédulas TDA 8, A6 08/04/ , , % 08/04/2031 AyT Cédulas Cajas Global Serie VII 26/05/ ,914 3-month euribor+0.086% 24/05/2017 AYT Cédulas Cajas Global, Series VIII 12/06/ , , % 12/06/2018 Cédulas TDA 8, A3 21/10/ ,893 98, % 21/10/2018 AyT Cédulas Cajas Global Serie X 23/10/ , , % 23/10/2023 AyT Cédulas Cajas Global, Series XII 16/03/ , % 19/03/2017 Cédulas TDA 8 A5 26/03/ , , % 26/03/2027 AyT Cédulas Cajas Global Serie XIII 23/05/ , , % 23/05/2027 PITCH, Series I 17/07/ , , % 18/07/ month AyT Cédulas Cajas Global, Series XVI 26/12/ ,000 euribor+0.192% 21/10/2017 3,475,423 4,549,626 Pursuant to Article 16 of Mortgage Market Law 2/1981, of 25 March, amended by Law 41/2007, of 7 December, the total volume of issued mortgage-backed securities payable may not exceed 80% of the unpaid principal of all the mortgage loans of an entity that could be used as the underlying. At 31 December 2017 and 2016, the total issued mortgage-backed securities payable represented 22.70% and 28.33% of the unamortized principal on all the Group s mortgage loans. At 31 December 2017 and 2016, the Group did not own any mortgage-backed securities from among the issuances written by it. In 2017, the finance costs incurred on these issuances and net of hedges stood at 57,528 thousand ( 86,035 thousand in 2016), and are recognised under Interest expense on the consolidated income statement. Below is the nominal amount of the Group s total mortgage loans and receivables and the eligible mortgage loans and receivables pursuant to the applicable legislation to calculate the limit of issuances of mortgage bonds and mortgage-backed securities: 155

173 Thousands of euros Face value 31/12/ /12/2016 Balance receivable drawn down against mortgage-backed loans and receivables 16,286,857 17,142,628 Mortgage participation certificates issued 135, ,501 Of which: loans maintained on the balance sheet 60,665 67,705 Mortgage transfer certificates issued 842, ,862 Of which: loans maintained on the balance sheet 819, ,211 Mortgage loans pledged as security for financing received - - Loans backing the issuance of mortgage bonds and mortgage-backed securities issued 15,309,657 16,059,265 Non-eligible loans 1,961,685 2,640,342 Meet the requirements to be eligible except for the limit established in Article 5.1 of Royal Decree 716/2009 1,961,685 2,640,342 Remainder - - Eligible loans 13,347,972 13,418,924 Non-eligible amounts 338, ,435 Eligible amounts 13,009,315 12,775,489 The nominal value of the mortgage receivables and loans outstanding and the nominal value of the loans and receivables that were eligible pursuant to Royal Decree 716/2009, without taking into consideration the limits in their calculation established by Article 12 of Royal Decree 716/2009, are detailed below based on the origin thereof, currency in which they are denominated, their payment situation, average residual maturity period, interest rate and type of collateral, by calculating the ratio of the transaction amount to the appraisal values of the respective mortgaged properties: 156

174 Nominal value of the mortgage loans and receivables pending amortisation pursuant to Royal Decree 716/2009 (excluding securitised ones) Thousands of Euros 31/12/ /12/2016 Nominal value of the eligible Nominal value of mortgage loans the mortgage and receivables loans and without applying receivables the limits pending established in amortisation section 12 pursuant to Royal pursuant to Decree 716/2009 Royal Decree (excluding 716/2009 securitised ones) Nominal amount of the mortgage loans and receivables eligible, excluding the limits envisaged under Article 12 of Royal Decree 716/2009 By origin Arising from the Bank 10,481,918 9,123,071 10,147,721 8,546,167 Subrogations 4,279,832 3,993,119 4,809,466 4,411,494 Remainder 547, ,782 1,102, ,263 15,309,657 13,347,972 16,059,265 13,418,924 Currency in which they are denominated Euros 15,271,059 13,337,595 16,021,370 13,412,395 Other currencies 38,598 10,377 37,895 6,529 15,309,657 13,347,972 16,059,265 13,418,924 By payment situation Normal payment situation 13,408,861 12,343,563 12,955,427 11,828,478 Other 1,900,796 1,004,409 3,103,838 1,590,446 15,309,657 13,347,972 16,059,265 13,418,924 By residual maturity term Within 10 years 3,294,887 2,449,611 4,039,798 2,743, to 20 years 5,808,623 5,410,444 5,771,754 5,200, to 30 years 5,382,623 4,952,477 5,171,661 4,634,540 More than 30 years 823, ,440 1,076, ,979 15,309,657 13,347,972 16,059,265 13,418,924 By interest rate - Fixed interest rate 1,915,171 1,747,204 1,097, ,746 - Floating interest rate 11,292,643 9,898,421 13,132,950 10,972,778 - Fixed and floating interest rate 2,101,843 1,702,347 1,828,788 1,524,400 15,309,657 13,347,972 16,059,265 13,418,924 By type of borrower Legal entities and natural persons 4,064,104 2,979,792 4,873,979 3,178,366 Of which: property developments 577, ,152 1,334, ,628 Other natural persons and non-profit 11,245,553 10,368,180 11,185,286 10,240,558 accommodation institutions (ISFLSH) 15,309,657 13,347,972 16,059,265 13,418,924 By type of collateral Completed buildings residential 13,098,053 11,893,171 13,330,207 11,863,047 Of which: government-subsidised housing 274, , , ,591 units Completed buildings business 1,786,268 1,255,876 1,918,174 1,305,006 Completed buildings other 39,934 28,134 37,362 17,210 Buildings under construction 55,127 8, ,649 25,672 Of which: government-subsidised housing units Buildings under construction business 89,144 79,847 67,570 62,232 Buildings under construction - other 32,616 29,839 36,724 33,649 Land developed land 135,831 43, ,664 69,376 Land other 72,684 8, ,915 42,732 15,309,657 13,347,972 16,059,265 13,418,

175 The following detail shows the nominal amounts, based on the LTV ratio from the last available mortgage market valuation, of the mortgage loans qualifying for the issuance of mortgage bonds and mortgage-backed securities (in thousand of euros): Fiscal Year 2017: LTV ranges Type of collateral LTV 40% 40%<LTV 60% 60%<LTV 80% 80%<LTV 100% Total On housing units On other assets 3,190,346 4,449,378 3,871,862-11,511, , , ,262-1,836,386 4,027,428 5,267,420 4,053,124-13,347,972 Fiscal Year 2016: LTV ranges Type of collateral LTV 40% 40%<LTV 60% 60%<LTV 80% 80%<LTV 100% Total On housing 3,961,333 2,952,059 4,371,834 units 200,132 11,485,358 On other assets 903, , ,292-1,933,566 3,855,932 5,008,235 4,354, ,132 13,418,924 The detail of the changes in 2017 and 2016 in the nominal amounts of the mortgage loans and receivables covering the mortgage bonds and mortgage-backed securities is as follows: Fiscal Year 2017: Thousands of euros Eligible mortgage loans and receivables Non-eligible mortgage loans and receivables Balance at 1 January ,418,924 2,640,342 Reductions in the period- (1,987,546) (1,415,130) Repayments on maturity (345,882) (488,495) Early repayment (263,285) (39,486) Remainder (1,378,379) (887,149) Additions in the period- 1,916, ,473 Arising from the entity 1,361, ,891 Remainder 555, ,582 Balance at 31 December ,347,972 1,961,

176 Fiscal Year 2016: Thousands of euros Eligible mortgage loans and receivables Non-eligible mortgage loans and receivables Balance at 1 January ,528,745 2,743,805 Reductions in the period- (2,176,932) (973,127) Repayments on maturity (297,948) (373,902) Early repayment (267,431) (36,521) Remainder (1,611,553) (562,704) Additions in the period- 1,067, ,664 Arising from the entity 840, ,463 Remainder 226, ,201 Balance at 31 December ,418,924 2,640,342 The detail of the available balances of mortgage loans and receivables backing the issuance of mortgage bonds and mortgage-backed securities at 31 December 2017 and 2016 is as follows: Thousands of euros 31/12/ /12/2016 Total nominal value of mortgage loans and receivables mortgage bonds and mortgage-backed securities issued Of which: 189, ,863 - potentially eligible transactions 164, ,070 - not eligible 25,709 41,793 In 2017 and 2016 no mortgage-backed securities were issued and, therefore, the Group did not have any replacement assets for this purpose. Mortgage bonds The detail of the mortgage bonds issued at 31 December 2017 and 2016 is as follows: 159

177 Thousands of Euros Nominal value 31/12/ /12/2016 Outstanding mortgage bonds issued Mortgage-backed securities issued 5,475,423 5,549,625 Of which: Recognised in liabilities- 3,475,423 4,549,625 Debt securities. Issued through a public offering - - Debt securities. Other issuances 2,000,000 1,000,000 Residual maturity up to one year - 1,000,000 Residual maturity over one year but not more than two years - - Residual maturity over two years but not more than three years - - Residual maturity over three years but not more than five years - - Residual maturity over five years but not more than ten years 2,000,000 - Residual maturity over ten years - - Deposits- 3,475,423 4,549,626 Residual maturity up to one year 841,635 1,074,202 Residual maturity over one year but not more than two years 150, ,635 Residual maturity over two years but not more than three years 87, ,412 Residual maturity over three years but not more than five years 578, ,895 Residual maturity over five years but not more than ten years 1,282,657 1,049,638 Residual maturity over ten years 534,638 1,077,842 Mortgage participation certificates issued 60,665 67,705 Issued through a public offering - - Other issuances 60,665 67,705 Mortgage transfer certificates issued 819, ,211 Issued through a public offering - - Other issuances 819, ,211 At 31 December 2017, the average residual maturity of mortgage securities issued and mortgage transfer certificates issued was 231 months and 234 months, respectively (240 months and 244 months, respectively, at 31 December 2016). Debt securities The detail of these liabilities at 31 December 2017 and 2016 was: Thousands of euros 31/12/ /12/2016 Marketable debt securities- Discounted promissory notes 63, ,982 Mortgage bonds 2,000,000 1,000,000 Other non-convertible bonds 95,000 95,000 Treasury shares (2,000,000) (1,000,000) Valuation adjustments , ,852 Subordinated liabilities- Marketable subordinated-debt securities 392, ,495 Valuation adjustments 14,438 5, , , , ,110 On 25 July 2017 the Group issued mortgage-backed securities for a nominal value of 2,000,000 thousand, recorded in the item "Mortgage bonds", maturing on 25 July 2024 and with an interest rate of 3 months Euribor %. Of this issuance, 705,000 thousand are held by the Bank and the other 1,295,000 thousand were assigned to other Group companies. At 31 December 2016, the amount recorded for mortgage-backed securities issued was 1,000,000 thousand maturing on 19 December

178 Discounted promissory notes The main features of the discounted promissory notes outstanding at 31 December 2017 and 2016 were as follows: Thousands of euros 31/12/ /12/2016 Average interest rate of the issuances Maturity Liberbank promissory notes issued 63, , % 2018 / , ,982 Other non-convertible bonds The main features of the non-convertible bonds outstanding at 31 December 2017 and 2016 were as follows: Issuance Thousands of Euros Interest Date of Date of 31/12/ /12/2016 rate Issuance Maturity I Straight debentures, CCM 50,000 50, %+ inflation at maturity 23/06/ /06/2021 EMTN Programme, First Issuance of Debentures CCM FINANCE S.A.U. 45,000 45, % 25/10/ /10/ ,000 95,000 In 2017 and 2016 interest accrued on marketable debt securities amounted to 2,852 thousand and 3,575 thousand, respectively recognised under "Interest expenses" on the consolidated income statement (See Note 26). Marketable subordinated-debt securities The main features of the outstanding subordinated liabilities at 31 December 2017 and 2016, excluding any valuation adjustments, were as follows: Thousands of euros Date of Issuance Date of Maturity Issuance 31/12/ /12/2016 Interest rate Necessarily Convertible Subordinated Series A Debentures (*) 9,775 10, % 17/04/ /07/2018 Necessarily Convertible Subordinated Series B Debentures (*) 3,063 3, % 17/04/ /07/2018 Necessarily Convertible Subordinated Series C Debentures (*) 79, , % 17/04/ /07/2018 Liberbank subordinated debentures 300, % 14/03/ /03/2027 Total debits represented by subordinated marketable securities 392, ,495 (*) Issuances, as detailed in Note 1-c.1, as a result of the management of hybrid bonds. On 7 March 2017 the Bank issued subordinated debentures Tier 2 for a nominal value of 300 million. The changes in debentures belonging to Series A/2013, Series B/2013 and Series C/2013 during the fiscal year 2017 is due to the reimbursement derived from the legal proceedings of subordinated debentures and to the voluntary conversion option available to the holders, described in Note 22. Purchases of subordinated transferable securities on following the conclusion of judicial proceedings were carried out at the issue value, where this amount reduces the liability for this 161

179 concept and the difference between the subordinated nominal values and their carrying value is recorded in the consolidated income statement. Subordinated debentures will be amortised at par on the maturity dates indicated in the previous charts. However, the issuer may amortise all subordinated debentures issued, at any time and on an early basis, subject to the previous authorisation of the Bank of Spain, provided that five years have elapsed from the issuance date. Total interest accrued during fiscal year 2017 and 2016 for subordinated liabilities during those fiscal years amounted to 16,666 and 8,311 thousand, respectively, and was booked under Interest expense of the consolidated income statement (see Note 26). Compensation is paid if there are sufficient unrestricted profits and reserves following the payment of compensation, if applicable, to holders of the Bank's preference shares or comparable securities issued by it or by a subsidiary with a guarantee from the Bank, and provided that the payment does not breach the equity limits for credit institutions envisaged in Spanish legislation. However, the Bank of Spain could demand cash-settled compensation if the financial position and solvency of the Bank of the Group so require or if the Bank considers it necessary. Issuances, buybacks or repayments of debt securities by the Group The summary of the debt securities issued by the Group from 1 January to 31 December 2017 and 2016, and the detail of the securities held in the period, excluding mortgage-backed securities, are as follows: Fiscal Year 2017: Outstandin g balance 01/01/17 Issuances Thousands of Euros Buybacks, swaps or repayments Outstandin g balance 31/12/17 Debt instruments issued by a EU member state requiring the filing of a prospectus: - Bonds secured by the Government Straight bonds 95, ,000 - Subordinated debentures 120, ,000 (27,810) 392,685 - Subordinated deposits - Debt instruments issued in a European Union Member State which did not require the filing of a prospectus - Promissory notes issuance programmes (*) 201, ,609 (590,128) 63,463 Other debt instruments issued outside a European Union Member State - (*) Including issuances subscribed by Group companies or entities 417, ,609 (617,938) 551,

180 Fiscal Year 2016: Outstandin g balance 01/01/16 Issuances Thousands of Euros Buybacks, swaps or repayments Outstandin g balance 31/12/16 Debt instruments issued by a EU member state requiring the filing of a prospectus: - Bonds secured by the Government - - Straight bonds 95, ,000 - Subordinated debentures 130,278 - (9,783) 120,495 - Subordinated deposits Debt instruments issued in a European Union Member State which did not require the filing of a prospectus - Promissory notes issuance programmes (*) 324, ,323 (602,737) 201,982 Other debt instruments issued outside a European Union Member State - - (*) Including issuances subscribed by Group companies or entities 549, ,323 (612,520) 417,477 For the purpose of the tables above, prospectus is defined as the document describing the final terms and conditions registered when issuances are made under a base prospectus, as indicated in Article 21 of Royal Decree 1310/2005, of 4 November, implementing in part Securities Market Law 24/1988, of 28 July, on the admission for trading of securities on secondary markets, public offerings and the prospectus required for each case. Issuances, buybacks or repayment of debt securities by the Group or by jointly controlled entities consolidated using the proportionate method. During 2017 and 2016, no debt securities secured by a Group entity, including the Bank, had been issued by associates or jointly-controlled entities accounted for using the equity method or by entities outside of the Group. Other financial liabilities The detail of Other financial liabilities on the accompanying consolidated balance sheets at 31 December 2017 and 2016 is as follows: Thousands of euros Tax collection accounts 82, ,827 Special accounts 23,101 19,982 Compensation payable on debt instruments 78,551 78,331 and deposits received Financial guarantees 5,001 3,127 Other 1,331 2, , ,490 As of 31 December 2017, chapter entitled Other financial liabilities Compensation payable on debt instruments and deposits received contains liabilities related to the extraordinary contributions made by the Deposit Guarantee Fund for Credit Institutions for an amount of 23,660 thousand ( 29,185 thousand as of 31 December 2016) as well as ordinary contributions for an amount of 36,728 thousand ( 33,741 thousand as of 31 December 2016) (see Notes 1-k and 26). 163

181 19. Provisions The change of the provisions recognised under "Provisions" on the consolidated balance sheets at 31 December 2017 and 2016 is as follows: Fiscal Year 2017: Provisions for pensions and other obligations of postemployment defined benefits Thousands of Euros Provisions for Long term procedural provisions issues and and other litigation employee benefits Provisions for commitments and guarantees granted Remaining provisions Balances at 1 January ,806 3,570 2,946 27, ,112 Charge to provisions (net) (Note 26) 33,734 (282) (293) (3,200) (23,222) Other expenses through profit or loss Provisions used and other changes (71,044) (295) - (2) (113,495) Balances at 31 December ,699 3,235 2,653 24, ,395 Fiscal Year 2016: Provisions for pensions and other obligations of postemployment defined benefits Long term provisions and other employee benefits Thousands of Euros Provisions for procedural issues and Provisions for litigation commitments and guarantees granted Remaining provisions Balances at 1 January ,225 4,517 3,181 63, ,300 Charge to provisions (net) (Note 26) (6,843) (491) (54) (17,990) 158,052 Other expenses through profit or loss Provisions used and other changes (18,026) (761) (181) (17,724) (59,240) Balances at 31 December ,806 3,570 2,946 27, ,112 The breakdown of Other Provisions at 31 December 2017 and 2016 was as follows: Thousands of euros 31/12/ /12/2016 Floor clauses (Note 2-t) 54, ,450 Labour agreement litigation - 3,065 Unilateral measures litigation (Note 1-c.2) 10,300 10,300 Litigation FGD (Note 2-s) 40,274 20,142 Other litigation and charges (*) 30,867 56, , ,112 (*) It relates mainly to the provisions created to cover different litigations against the Group and they are not significant on an individual basis. 20. Other liabilities The detail of Other liabilities at 31 December 2017 and 2016 is as follows: 164

182 Thousands of euros 31/12/ /12/2016 Accrued expenses 38,437 36,592 Other accruals and deferred income 83,001 48,879 Other liabilities 20,116 27, , , Tax matters The Bank as the Parent company of the Tax Group, in accordance with the provisions of Royal Decree Law 2/2011, has opted for the application of the Tax Consolidation Scheme, in Corporate Tax. The tax Group is led by the Bank as a parent company and 51 subsidiaries (see Annex VII). Years open for review by the tax authorities In 2016, verification proceedings in Banco Castilla-La Mancha were completed and the respective inspection records have been signed to express consent. Tax liabilities from those assessments do not implied a material impact on consolidated financial statements for On July 2016 the Group Company Liberbank Capital was given notice of the beginning of inspection and review proceedings for the following reporting periods 2011 to In 2017 a disagreement record was signed, reducing the negative tax base of the year It has been appealed in the Administrative Economic Court. The fiscal years 2011 to 2016 are currently open to inspection for the Corporate Income Tax and the last four years for the rest of taxes. Due to the different possible interpretations of the tax legislation applicable to the transactions performed, certain contingent tax liabilities could arise that may not be assessed objectively. However, the Bank s directors and tax advisors consider that the resulting tax liability that might arise from possible future or ongoing tax audits would not have a significant impact on the consolidated financial statements for the year ended 31 December Reconciliation of accounting profit/(loss) to taxable profit/ (tax loss) Following is a reconciliation of the income tax revenue (expense) recognised in the 2017 and 2016 income statements to the consolidated profit (loss) before tax for those years multiplied by the current tax rate: 165

183 Thousands of euros Consolidated profit or loss before tax (454,410) 151,101 Applicable tax rate 30% 30% Income tax at 30% (136,323) 45,330 Impact of result of companies accounted for using the equity method (13,174) (6,922) Impact of permanent differences 2,042 1,098 Deductions (1,348) (1,467) Deferred taxes cancellation for revaluation of portfolio - (6,910) Elimination of advanced tax Royal Decree Law 3/ ,192 Prior years and other adjustments (3,245) 1,074 Corporate Tax expense (152,048) 48,395 Law 27/2014, which came into force on 1 January 2015, establishes a general exemption system for significant shares (acquisition value greater than 20 thousand or 5% of the capital), dividends and profits from the sale. Therefore, the Group derecognised tax liabilities which were recorded for the fair value in the business combination in the incorporation of the Group (see Note 1.a) associated with the significant shares for the amount of 6,910 thousand in 2016 as recorded under section Income tax of the consolidated profit (loss) account. Royal Decree-Law 3/2016 established the non-deductibility of losses made during the transfer of these shareholdings, consequently, in 2016, the Group has derecognised the tax asset associated with such, amounting to 16,192 thousand. The reconciliation of the accounting profit (loss) for 2017 and 2016 to the taxable base of the accounting group is as follows: Thousands of Euros Income and expense balance for the reporting period (302,362) 102,706 Income tax (152,048) 48,395 Permanent differences (37,106) (19,413) Individual companies 283,976 (25,182) From consolidation adjustments (321,082) 5,769 Temporary differences (71,883) 14,657 Individual companies 363, ,880 From consolidation adjustments (435,180) (350,223) Consolidated Taxable profit/loss (563,399) 146,345 Tax recognised in equity Irrespective of the income tax revenue recognised on the consolidated income statement, in 2017 and 2016 the Group charged the following deferred corporate tax items to consolidated equity: 166

184 Credit (charges) net Thousands of euros Measurement of available-for-sale assets (31,923) (62,910) Valuation of cash flow hedging derivatives (7,208) - Other valuation adjustments - - (39,131) (62,910) Actuarial gains and losses 4,522 (865) Other - - (34,609) (63,775) Deferred taxes In accordance with current tax law, in 2017 and 2016 temporary differences arose which should be taken into account when quantifying the relevant income tax expense. The sources of the deferred tax assets and liabilities at 31 December 2017 and 2016 are as follows: Thousands of Euros 31/12/ /12/2016 Deferred Deferred tax tax assets liabilities Deferred tax assets Deferred tax liabilities Temporary differences 133,202 88, , ,817 Valuation adjustments for impairment 24,510-76,687 - Financial Assets 21, , Non-current assets 18,153 61,485 18,626 62,639 Assets granted 17,100 - Commitments to employees 24,595 11,334 37,302 6,621 Other provisions 10,174-11,888 - Other adjustments for temporary differences 1,147 3,384 3,472 4,733 Adjustments in equity 15,549 12,459 3,986 40,031 Temporary differences excluded from tax base, art ,150,781-1,100,678 - Provision for insolvencies 1,047,313-1,009,020 - Commitments to employees 103,468-91,658 - Negative taxable amounts to be offset 609, ,795 - Outstanding deductions 37,982-44,109 - TOTAL 1,931,224 88,732 1,763, ,817 Pursuant to article in the consolidated Text of the Corporate Tax Law, introduced by Royal Decree Law 14/2013, tax loss carryforwards for 2011 and 2012 have been reclassified to temporary differences, by the estimate of the tax loss carryforwards portion for those years corresponding to reversals of temporary differences arising from insolvency funds or social security systems and in 2013 and 2014 the reversals are included in the taxable income with the limit of the previous taxable income for 2013 and 25% of the previous taxable income for 2014, the oldest being integrated first. Article of the new Corporate Tax Law, Law 27/2014, establishes the same limitation in 2015, 25% of the previous taxable income, for the integration into the temporary differences for the above said concepts. This limit becomes definitive for the years beginning on or after 1 January 2016 by the fifteenth additional provision of Law 27/2014 introduced by Royal Decree Law 3/2016. These tax assets may be converted into a receivable from Public Authorities, provided that any of the circumstances indicated in the Law occur, and may be exchanged for Public Debt securities after 167

185 an 18-year term computed from the last day of the tax period in which the accounting record of such assets occurs. In 2015, regulation on monetizable fiscal assets was completed by means of Law 48/2015 by introducing a financial contribution that will entail the payment, starting in 2016, of 1.5% per annum to maintain the right to monetization of the assets generated until 2015 that exceed the sum of positive net instalments corresponding to the periods between 2008 and At 31 December 2017 this amount was 12,485 thousand (the amount estimated in 2016 was 12,920 thousand and the amount finally paid in July 2017 was 12,485 thousand) recorded under "Other operating expenses" of the consolidated income statement (see Note 26). The contribution is accrued on the day the voluntary term of Corporate Tax return begins. Additionally, from 2016 onwards, generation of new tax assets likely to be converted into receivables from Public Authorities will be limited to the amount of the positive net fee for the year if the circumstances indicated for this purpose occur. Estimated tax assets guaranteed for the Group amounts to 1,188,988 thousand in accordance with the provisions of the Corporate Tax Law. During this fiscal year, since the group had incurred accounting losses and while having no positive tax liability, no new guaranteed tax assets were generated and the collection of the receivable from the Tax Authority will be requested in accordance with the percentage represented by the accounting losses of the Group for the year with regard to the sum of the capital and reserves for an approximate amount of 123 million. Deferred tax assets and liabilities are reviewed at the end of the reporting period to check that they are still effective, and the appropriate adjustments are made on the basis of the results of the review. Those analyses consider, among other factors, (i) prior-year profit (loss), (ii) estimated profit (loss), (iii) an estimation of the reversal of the different temporary differences based on their nature, and (iv) the period and limits established for the recovery of different deferred tax assets, thus concluding on the tax group s capacity to recover its registered deferred tax assets. The Group only recognises deferred tax assets arising from temporary differences or negative tax bases and deduction pending offsetting whenever it considered that it is probable to obtain in the future sufficient taxable profits against which they may be utilised. In 2012 the directors assessed the recoverability of the deferred tax assets, using the five-year business plan approved by the relevant authorities as the basis, which was extended to cover the period for offset of the tax assets. The extended plan used assumptions of reasonable growth based on the business plan, justifying the capacity for generating sufficient taxable profits to be offset in the legally established period. To extend the Plan, the assumptions of a flat rate curve as from 2017 were considered, as well as the fact that the Group would not resort to wholesale markets or perform any capital transaction other than that required to convert into shares the convertible corporate bonds granted as part of the hybrid instruments swap; the rest of the assumptions considered were consistent with those used in the Business Plan. In fiscal year 2017, an update of the financial estimates considered was made based on the 2018 budget and adjusting estimates for period In the most conservative scenario projected, a long-term interest rate curve has been estimated based on the evolution of these for a ten-year period, without exceeding subsequent Euribor levels of the period , as well as an increase in gross domestic product not exceeding 2% from It was considered that in this environment the Group s results would reflect a progressive improvement in business conditions, reflecting the expected positive evolution for the entire sector over the projected period. Concerning the margin evolution and risk cost, the other formulated hypotheses are consistent with the described macroeconomic hypotheses. In any case, considering the different scenarios raised by the Group, the recovery of total tax credits would occur in a period not more than 20 years. 168

186 Tax loss carryforwards pending compensation The Corporate Tax Law 27/2014 of 27 November, which came into force on 1 January 2015, abolishes the temporary limits and establishes a quantitative limit for taxable income compensation, 25% of the positive taxable income prior to compensation for 2015 and taxable persons with revenue above 60 million. Royal Decree Law 3/2016 adds an additional fifteenth provision to Law 27/2014 that makes permanent the previous limitation, that is, for the tax periods initiated after 2016, the limitation to the compensation of taxable income from previous years tax loss carryforwards will be 25% when net revenue is at least 60 million. The amount of the tax loss carryforwards prior to the creation of the tax group headed by the Bank is as follows: Thousands of euros Entity Banco de Castilla-La Mancha, S.A. 855, ,452 Mosacata, S.L. 20,922 20,922 Valle de Tejo, S.L.U. 30,453 30,453 Other 13,409 22, Shareholders equity Issued capital At 31 December 2017, the Bank s share capital comprised 2,926,872,511 fully subscribed and paid shares with a nominal value of 0.02 each. All shares carry the same dividends and voting rights. The Bank s main shareholders are the old shareholder savings banks holding 24.31% of the capital share of Liberbank, S.A. (Fundación Bancaria Caja de Ahorros de Asturias in 16.14%, Fundación Bancaria Caja de Ahorros y Monte de Piedad de Extremadura in 4.80% and Fundación Bancaria Caja de Ahorros de Santander y Cantabria in 3.36%), Oceanwood Capital Management and Oceanwood Opportunities master Fund in 17.47%, (including financial instruments) Aivilo Spain, S.L.U. and Inmosan, S.A. in 7.41%, Corporación Masaveu (including Flicka Forestal and Fundación María Cristina Masaveu) in 5.77% and Norges Bank in 3.26%.Both wholesale and retail investors hold the other 41.8%. Operations performed during 2017 and 2016 and having an impact on equity are detailed below: Share capital increase and decrease transactions On 9 October 2017 the Bank s General Shareholders Meeting approved a capital decrease for an amount of 816,987 thousand to create a restricted reserve for the same amount by decreasing the nominal value of the shares from 0.90 to 0.02 per share. As a result, the Liberbank's share capital stood at 18,567,869.06, divided in 928,393,453 shares. On 13 October 2017, the public deed of the capital decrease was registered with the Commercial Registry. Likewise, in said Annual General Meeting a capital increase of 500,000 thousand was approved. Under such agreement, the Bank's Board of Directors held on 24 October 2017 approved the execution of the share capital increase, by issuing 1,996,090,904 outstanding ordinary shares of 0.02 par value each and with a share premium of 0.23 per share. This capital increase was performed with monetary contributions with pre-emptive rights for a total effective amount of 499,023 thousand, of which 39,922 thousand were related to share capital and 459,101 thousand to the share premium. The Other Reserves heading of the consolidated balance sheet was decreased in the amount of 12,671 thousand related to the issue expenses involving the new shares. 169

187 On 20 October, Liberbank, S.A. s capital increase was registered with the Commercial Registry of Madrid, with the share capital amounting to 58,537 thousand, represented by 2,926,872,511 shares. Conversion of convertible bonds The Group published a significant disclosure to the CNMV informing that it had opened the voluntary conversion period for bond holders of Series A/2013, Series B/2013 and Series C/2013 (see Note 1.c.1). The results of such conversions are stated below: Issues (converted corporate bonds) 6th conversion (15 April 2016) 7th conversion (14 October 2016) 8th conversion (20 April 2017) 9th conversion (17 October 2017) Series A/2013 1,960 1,680 3,735 - Series B/2013 5, , Series C/ ,776 13,382 2,349, ,711 Total converted corporate bonds 493,970 15,356 2,355, ,879 Total issue of new shares 3,967, ,981 19,106,629 2,388,154 % newly-issued shares over the Bank s capital to date 0.438% 0.012% 2.101% 0.257% Impact on share capital (in thousands of euros) 3, , Impact on issue premium (in thousands of euros) 1, ,355 2,891 Treasury shares The consolidated balance sheet caption "Equity (Treasury shares)" reflects the equity held by the Group. 170

188 During fiscal 2017 and 2016, Group companies performed the following transactions with shares issued by the Bank: No. of shares Thousands of Euros No. of shares Thousands of Euros Opening balance 7,783,364 11,871 10,393,718 8,742 +Purchases 9,755,477 9,514 16,032,094 23,729 -Sales and other Movements (10,091,104) (12,311) (18,642,448) (20,600) Closing balance 7,447,737 9,074 7,783,364 11,871 Of which: Propiedad de Liberbank, S.A. 5,852,113 5,007 6,225,210 7,424 Average purchase price (euros) n/a 0.92 n/a 1.48 Average sale price (euros) n/a 0.92 n/a 0.89 Net profit or loss from transactions (Shareholders Equity and Reserves) n/a (2,267) n/a (3,946) The percentages of shares held in the Group s treasury shares during fiscal year 2017 and 2016 were as follows: Maximum Minimum Maximum Minimum % Treasury shares 0.87% 0.25% 0.90% 0.23% Share premium The Consolidated Spanish Limited Liability Companies Law expressly permits the use of the share premium to increase capital and establishes no specific restrictions as to its use. At 31 December 2017 and 2016, the share premium amounted to 1,797,061 thousand and 1,328,714 thousand, respectively. Retained earnings and other reserves a) Definitions The amount under Shareholders equity Accumulated gains includes the net amount of accumulated profits and losses recognised in prior years through the consolidated income statement, which, upon profit distribution, were allocated to equity, while the heading "Shareholders Equity- Other reserves" includes the amount of reserves note included in other items, as equity instruments issue expenses and differences between the amount at which treasury shares are sold and their acquisition price. The amount under Shareholders equity Reserves (losses) from companies accounted for using the equity method includes the net amount of prior-year accumulated profits and losses, generated by companies accounted for using the equity method, recognised through the consolidated income statement. b) Composition The structure of these items is shown below: 171

189 Thousands of euros 31/12/ /12/2016 Reserves Restricted reserves Legal Of the Parent Company 54,885 40,032 Unrestricted reserves 912,836 1,325 Reserves of equity-accounted companies 77,432 75,262 1,045, ,619 Legal reserve According to Consolidated Companies Law, Spanish companies earning profits during the fiscal year are required to allocate 10% of net profits for the year to the legal reserve. Such allocations shall be performed until the reserve reaches 20% of share capital. The legal reserve can be used to increase share capital provided that the remaining reserve balance does not fall below 10% of the increased share capital amount. Reserves of equity-accounted companies Below is a breakdown, by company, of such amount, considering their contribution to the Group (as well as the effect of consolidation adjustments): Thousands of euros 31/12/ /12/2016 Oppidum Capital, S.L. 95,488 95,788 Liberbank Vida y Pensiones, Seguros y Reaseguros, S.A., (Sole-Shareholder Company) 4,377 1,962 CCM Vida y Pensiones de Seguros y Reaseguros, S.A Sedes, S.A. (19,110) (19,042) Hostelería Asturiana, S.A. (1,976) (1,834) Aquanex, Servicio domiciliario del Agua de Extremadura, S.A. - (288) Other (2,102) (2,081) 23. Non-controlling interests 77,432 75,262 The detail, by consolidated entity, of Non-controlling interests on the consolidated balance sheets at 31 December 2017 and 2016, and Profit/(Loss) attributable to non-controlling interests on the consolidated income statement for 2017 and 2016 is as follows: Fiscal Year 2017: Entity Thousands of euros Profit/Loss Other attributable accumulated to noncontrolling comprehensi ve income Other items interests Banco de Castilla - La Mancha and Subsidiaries (43,523) - - Other (133) - 16 (43,656)

190 Fiscal Year 2016: Entity Thousands of euros Profit/Loss Other attributable accumulated to noncontrolling comprehensi ve income Other items interests Banco de Castilla - La Mancha and Subsidiaries (26,084) 8,380 35,938 Other (18) (26,102) 8,380 36, Fair value Fair value of financial assets and liabilities Below is the fair value at 31 December 2017 and 2016 for each class of the Bank's financial assets and liabilities: Assets: Thousands of euros 31/12/ /12/2016 Book value Fair value Book value Fair value Cash, cash balances in Central Banks and other demand deposits: 1,716,860 1,716, , ,437 Financial assets held for negotiation: 22,528 22,528 30,264 30,264 Debt securities Equity instruments Derivatives 22,528 22,528 30,263 30,263 Available-for-sale financial assets: 4,799,718 4,799,718 7,591,542 7,591,542 Debt securities 4,407,043 4,407,043 7,203,216 7,203,216 Equity instruments 392, , , ,326 Loans and receivables: 23,696,033 25,912,154 24,224,802 26,573,390 Loans and advances to credit entities 83,441 84,206 94,388 95,190 Loans and advances - Customers 21,432,966 23,355,264 21,900,417 23,992,629 Debt securities 2,179,626 2,472,684 2,229,997 2,485,571 Derivatives- Hedge Accounting: 356, , , ,142 30,591,881 32,808,002 33,212,130 35,560,

191 Liabilities: Thousands of euros 31/12/ /12/2016 Book value Fair value Book value Fair value Financial liabilities held for negotiation: 22,818 22,818 31,611 31,611 Derivatives 22,818 22,818 31,611 31,611 Financial liabilities at amortised cost: 32,239,020 32,572,268 35,021,575 35,422,698 Deposits - Central Banks 2,919,973 2,877,339 2,931,888 2,891,678 Deposits - credit institutions 878, ,069 1,511,409 1,521,163 Deposits- Customers 27,682,993 27,868,897 29,934,678 30,339,381 Debt securities 566, , , ,986 Other financial liabilities 190, , , ,490 Derivatives- Hedge Accounting: 28,111 28,111 59,068 59,068 32,289,949 32,623,197 35,112,254 35,513,377 All financial instruments are classified in one of the followings levels, according to the method employed to obtain the fair value thereof: LEVEL 1: Financial instruments whose fair value has been determined taking their price quotation on active markets, without modifying these assets. LEVEL 2: Financial instruments whose fair value was estimated by reference to quoted prices on organised markets for similar instruments or using other valuation techniques in which all the significant inputs are based on directly or indirectly observable market data. LEVEL 3: Instruments whose fair value was estimated by using valuation techniques in which one or another significant input is not based on observable market data. According to the above, an input is considered significant when it is important for calculating the fair value as a whole. 174

192 The breakdown of financial instruments held by the Bank at 31 December 2017 and 2016 according to the calculation method of the fair value is as follows: Financial assets: Thousands of Euros 31/12/ /12/2016 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Cash, cash balances in Central Banks and other demand deposits 1,716, , Financial assets held for negotiation: 1 30, ,528 - Debt securities Derivatives - 22, ,263 - Available-for-sale financial assets: 4,420,039 13, ,496 7,115, , ,732 Debt securities 4,407, ,113,172 90,044 - Equity instruments 12,996 13, ,496 2,667 20, ,732 Loans and receivables: ,912,154 3,478-26,569,912 Loans and advances - Credit entities , ,190 Loans and advances - Customers ,355, ,992,629 Debt securities - - 2,472,684 3,478-2,482,093 Derivatives- Hedge Accounting: - 356, ,142-6,136, ,453 26,278,650 8,035, ,376 26,934,644 Financial liabilities: Thousands of Euros 31/12/ /12/2016 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Financial liabilities held for - 22, ,611 - negotiation: Derivatives - 22, ,611 - Financial liabilities at amortised cost: ,575, ,422,698 Deposits - Central Banks - - 2,877, ,891,678 Deposits - credit institutions , ,521,163 Deposits- Customers ,874, ,339,381 Debt instruments issued , ,055 Other financial liabilities , ,490 Derivatives- Hedge Accounting: ,068-28, ,929 32,575,842-90,679 35,422,698 Process for determining fair value The established process of determining fair value by the Bank ensures that assets and liabilities are properly valued. Market inputs and other parameters and methodologies for assessing and 175

193 quantifying risks, as well as constraints on the recording of operations and possible accounting, legal and fiscal impacts, are subject to analysis by the responsible areas. For the Bank, the majority of financial instruments recorded as available-for-sale financial assets use the active market share price (Level 1) as the objective benchmark for determining their fair value and, therefore, in order to determine their fair value, it uses the price that would be paid for these in an organised, transparent and deep market (trading price). This level includes, in a general manner, the debt securities on the liquid market, the listed equity instruments and derivatives traded in organised markets, along with investment funds. Level 2 is for instruments that have no listed price, where their fair value is estimated using recently quoted prices of similar instruments and valuation models sufficiently verified and recognised by the international financial community, while taking into account the specific characteristics of the instrument being valuated and, especially, the various types of risks associated with them. In this manner, the fair value of Over The Counter (OTC) derivatives and financial instruments (mostly debt securities) traded on less transparent and organised markets is determined by employing methods, such as net present value (NPV), where each flow is estimated and deducted in consideration of the market to which it belongs, the index it refers to and the credit risk assumed with the issuer or counterparty, or option price determining models based on observable parameters in the market, such as Black-Scholes for equity options and exchange rates. Essentially all financial instruments recorded as trading derivatives and hedging derivatives are valued in accordance with the expressed Level 2 approach. Level 3 includes mostly Loans and receivables and Financial liabilities measured at amortised cost. Their fair value is estimated by deducting forecast cash flows, by incorporating an estimated of interest rate, credit and liquidity risks within this deduction. These estimates use, among others, the historical prepayment ratios and the credit loss ratios estimated using internal models. To calculate the fair value of other Level 3 financial instruments, when the valuation does not include any directly observable data from the market, alternative techniques are used, among which are the price requests made to the marketing entity or the use of market parameters corresponding to instruments with a similar risk profile to that of the instrument being valuated and adjusted for the purpose of compiling the various intrinsic risks. As for unlisted equity instruments, it is considered that their acquisition cost minus any impairment obtained on the basis of available public information is the best estimate of their fair value. Finally, the fair value classification level (Levels 1, 2 and 3), which includes the valuation of each of the Bank s financial instruments, is determined on the basis of the lowest level variable that is relevant for the estimation of its fair value. The principal valuation methods, hypotheses and inputs used for fair value estimations, according to the type of financial instrument being assessed, and the corresponding balances at 31 December 2017 and 2016 are presented below: 176

194 31/12/ /12/2016 Level 2 and 3 Level 2 and 3 Main valuation techniques Main inputs used Financial assets held for negotiation: 22,528 30,263 Trading derivatives 22,528 30,263 Available-for-sale financial assets: 379, ,703 Debt securities - 90,044 Equity instruments 379, ,659 Swaps: Method of present value; interest rate options: Black normal model; Securities and index options: Black-Sholes and Montecarlo Model. Method of present value Market data, correlations (variable income), dividends (variable income) Market data (interest rates, risk premium, comparative from market), Net Asset Value Derivatives- Hedge Accounting 356, , , ,108 Swaps and forwards: Method of present value; interest rate options: Black normal model Market data 31/12/ /12/2016 Level 2 and 3 Level 2 and 3 Main valuation techniques Main inputs used Financial liabilities held for negotiation: 22,818 31,611 Trading derivatives 22,818 31,611 Derivatives- Hedge Accounting 28,111 59,068 50,929 90,679 Swaps: Method of present value; Securities and index options: Black-Sholes and Montecarlo Model Swaps and forwards: Method of present value; interest rate options: Black normal model Market data, correlations (variable income), dividends (variable income) Market data The valuations calculated using the internal models would vary if other methods or other assumptions had been applied to the interest rate risk, credit risk spreads, market risk, exchange risk or their corresponding correlations and volatilities. Notwithstanding the foregoing, the Bank s Directors consider that the applied models and techniques adequately reflect the fair value of the financial assets and liabilities, as recorded on the balance sheet, as well as the results generated by these financial instruments. Inter level transfers The approach used for the revaluation of the portfolio is reviewed at least on a monthly basis, where one of two circumstances may arise: Improvements in the valuation level of the financial instruments, as a result of having gathered prices from the publishers of market prices or because the quality of the published price has improved. Worsening of the valuation level of the financial instruments, as a result of the publishers of market prices having ceased reporting prices or because the quality of the published price has deteriorated. 177

195 Movements between valuation levels of the financial instruments during 2017 fiscal year are presented below: Thousands of Euros Level 1 Level 2 Level 3 Level 2 Level 3 Level 1 Level 3 Level 1 Level 2 Available-for-sale financial assets ,840 - The main reason behind the movements between Levels 3 to 1 is due to equity instruments that commenced trading on an active market. During 2016, there have been no movements between the levels. Movements for Level 3 financial instruments Movements having occurred during the 2017 and 2016 fiscal years on the Level 3 balance for the financial instruments classified as Available for sale financial assets is shown below: Debt securities Thousands of Euros 31/12/ /12/2016 Equity instruments Debt securities Equity instruments Balance at the beginning of the period - 364, ,791 Tools or total losses to profit and loss account - (4,671) - (12,441) Equity valuation adjustments - 5,383 - (1,029) Purchases - 38,858-17,411 Settlements and other - (29,966) - - Transfers - (7,840) - Balance at the end of the period - 366, ,732 Total tools or losses for the year of instrument held at the end of the year - 22,924-2,158 Sensitivity analysis In order to determine whether there is any significant variation in the value of the Level 3 financial instruments, as a consequence of changes in one or more unobservable market input data that support reasonably likely alternative assumptions, the Bank has analysed the most significant instruments, where it has been determined that there would not be any substantial changes in the calculated values. The impact on the fair value of the main Level 3 financial instruments after modifying the values of the most significant unobservable inputs, while taking the highest value (best-case scenario) and lowest (worst-case scenario) at 31 December 2017 is described below: 178

196 Thousands of Euros Potential effect on profit and loss account Potential effect in Valuation adjustments (*) Most positive scenario Most negative scenario Most positive scenario Most negative scenario Available-for-sale financial assets - Equity instruments ,679 (13,679) Total ,679 (13,679) (*) A valuation of -5%, +5% has been considered. Adjustments to valuation due to default risk Credit Valuation Adjustments (CVA) and Debit Valuation Adjustments (DVA) are added to derivatives valuation, both in assets and liabilities, in order to show the fair value impact of the counterparty s and own credit risks, respectively. The adjustments to be made are calculated by estimating the Exposure at Default, the Probability of Default and the Loss Given Default for all derivative products over any underlying item, at the level of the legal entity (all counterparties under the same ISDA/Framework Agreement for Financial Transactions (CMOF in Spanish)) with which the Group is exposed. As a general rule, the CVA calculation is the product of the positive expected exposure by the probability of default, multiplying the result by severity, i.e. by the estimated loss in the event of default by the counterparty. Similarly, the DVA is calculated as the product of the negative expected exposure by the probability of default, multiplying the result by Group's severity. Both calculations comprise the whole potential exposure period. The data required to calculate the probability of default and severity derive from credit markets (Credit Default Swaps or itraxx indexes), applying those of the entity, if available. If the information is not available, Liberbank implements a process based on sectors, ratings and geographical segments in order to allocate both bankruptcy probabilities and expected losses in the event of bankruptcy, weighed up directly according to the market or to a market adjustment factor of the historical probability of bankruptcy and expected loss. Gains or losses on financial assets and liabilities held for trade (net) of the consolidated income statement for fiscal year 2017 includes a net expense of 379 thousand ( 1,523 thousand in 2016) for the credit risk valuation of derivative positions, both in assets, Credit Valuation Adjustment (CVA), and in liabilities, Debit Valuation Adjustment (DVA). Fair value of the tangible assets The fair value of tangible assets was determined as follows: The fair value of those assets for which an updated measurement by an authorised appraiser of the Bank of Spain is not available is based on the estimates made by the Group taking into account the data of the mortgage market relating to the variations in the price of property, plant and equipment with similar characteristics to that of the Group. The fair value of those assets for which an updated measurement by an authorised appraiser of the Bank of Spain is available is based on the value obtained from this appraisal performed in line with ORDER ECO/805/2003. The fair value of property investments at 31 December 2017 amounts to 614,568 thousand ( 475,965 thousand at 31 December 2016), which was estimated using an appraisal made by an authorized appraiser of the Bank of Spain, the Bank has taken as fair value its value obtained from said appraisal in accordance with the provisions of ORDER ECO/805/

197 The main appraisal companies which performed appraisals were Tasaciones Inmobiliarias, S.A., Valoraciones Mediterráneo, S.A., Aesval Logística de Valoraciones, S.A., Arco Valoraciones, S.A., Valtecnic Técnicos en Tasación, S.A. y Sociedad de Tasación, S.A., and several valuation methods were used, such the comparative method and the dynamic residual method. 25. Other significant information Commitments and guarantees granted Guarantees granted are the amounts that would be payable by the consolidated entities on behalf of third parties as a result of the commitments assumed by those entities in the course of their ordinary business, if the parties who are originally liable to pay failed to do so. Additionally, contingent commitments are defined as possible obligations for the Group as a result of past events, whose existence is conditional on the occurrence or not of one or more future events independent of the entity's will and which may give rise to the recognition of financial assets. The breakdown of these items in the balance sheet at 31 December 2017 and 2016 is as follows: 180

198 Thousands of euros 31/12/ /12/2016 Commitments from loans granted Public administrations 295, ,078 Credit institutions - - Other financial corporations 24,027 20,419 Non-financial corporations 662, ,345 Households 635, ,954 1,617,672 1,649,796 Financial guarantees granted Public administrations 9,273 6,534 Credit institutions - 31 Other financial corporations 530 2,107 Non-financial corporations 135, ,609 Households 13,651 13, , ,833 Other obligations granted Public administrations 32,056 23,439 Credit institutions 323 1,064 Other financial corporations 11,193 9,227 Non-financial corporations 2,974,779 2,736,936 Households 23,951 23,050 3,042,302 2,793,716 Total commitments and guarantees granted 4,818,851 4,580,345 Other commitments granted includes, among other items, debit orders received from customers that are within the reimbursement period allowed by the SEPA regulation amounting to 2,302,036 thousand ( 2,305,490 thousand at 31 December 2016). Pursuant to Section 29 of Law 16/2009 on Payment Services, which reproduces Directive 64/2007/EC, the maximum refund term is 13 months from the debit date. Note 3.2 shows the maximum credit risk assumed by the Bank in relation to these instruments at 31 December 2017 and 2016, and other information relating to the credit risk incurred by the Bank in relation therewith. A significant portion of these guarantees will expire without any payment obligation materialising for the consolidated entities. Therefore, the aggregate balance of these commitments cannot be considered as an actual future need for financing or liquidity to be provided by the Group to third parties. Income from guarantee instruments is recognised under Fee income and Interest income (at the amount relating to the revalued commission income) in the consolidated income statements for 2017 and 2016, and is calculated by applying the rate established in the related contract to the nominal amount of the guarantee. The provisions established to cover the guarantees granted, which are calculated by applying similar criteria to those used to calculate the impairment of financial assets at amortised cost, are recognised in the consolidated balance sheet as Provisions - Provisions for commitments and guarantees granted (see Note 19). Assets pledged as security Both at 31 December 2017 and at 31 December 2016, there were no securities assigned to own obligations. 181

199 At 31 December 2017 and 2016, fixed-income securities with a nominal amount of 6,145,239 thousand and 5,507,463 thousand, and credits with an outstanding risk of 991,138 thousand and 1,045,290 thousand existed, pledged at the Bank of Spain to obtain financing from the European Central Bank (see Note 18). At 31 December 2017 there is no public debt secured by Public Authorities and pledged in favour of the Tax Authority ( 4,459 thousand at 31 December 2016). Drawable by third parties At 31 December 2017 and 2016, the undrawn amounts of the loan agreements granted, which could give rise to the recognition of financial assets, for which the Group had assumed a credit commitment exceeding the amount recognised on the asset side of the consolidated balance sheet at that date, were as follows: Thousands of euros Drawable by banks 3,211 - Drawable by the public sector 295, ,078 Drawable by other resident sectors- 1,545,400 1,391,342 Credit cards 483, ,895 Other immediate drawdowns 585, ,564 Conditionally drawable 222,307 95,883 Drawable by non-residents 28,511 14,376 1,617,672 1,649,796 Third-party funds managed and marketed by the Group and by a custodian of securities The detail of the off-balance-sheet funds managed and marketed by the Group at 31 December 2017 and 2016 is as follows: Thousands of euros Investments funds and companies 2,022,595 1,891,612 Pension funds 327, ,413 Other 2, ,352,923 2,232,036 The following table shows a detail of the off-balance-sheet funds which were marketed but not managed by the Group at 31 December 2017 and 2016: 182

200 Thousands of euros Investments funds and companies 790, ,400 Pension funds 1,169,532 1,170,381 Savings in insurance contracts 1,040,916 1,121,174 Repurchase agreements 3,000,793 2,571,955 In 2017 and 2016, the Group performed various transactions under a non-optional resale agreement, whereby the Group receives an amount of money for a certain period of time whereby certain interest is paid in the agreement, delivering debt instruments owned by it to secure the transaction on a temporary basis, basically debt securities, which are returned to the Group on completion of these agreements. Under the applicable regulations, the repurchased assets in these transactions are not derecognised from the balance sheet, rather they continue to be recognised on the asset side, without any modification as a result of them having been transferred temporarily, since the Group conserves all the advantages and risks associated therewith. The cash amount of the fixed-income securities transferred under a repurchase agreement at 31 December 2017 and 2016 is as follows: Thousands of Euros Repurchase agreements of debt securities Available-for-sale financial assets 835,954 1,106, ,954 1,106,013 Asset securitisation Since, as a result of the conditions agreed upon for the transfer of assets, the Group retains substantial risks and rewards of the securitised assets, they were not derecognised from the balance sheet, and an associated financial liability was recognised, as established by the regulations, for an amount equal to the consideration received, which is measured at amortised cost. Also, the Group recognises the bonds issued for the asset securitisation funds arranged in each of these transactions, netting of the aforementioned financial liability. Following is a detail of the balances recognised in the balance sheet at 31 December 2017 and 2016 of the transferred assets in these operations, together with the value of the liabilities associated therewith recognised in the consolidated balance sheet at that date: Thousands of euros Securitised assets- Loans and receivables - Customers 977,201 1,083,363 Associated liabilities- Financial liabilities at amortised cost Customer deposits (854,822) (939,749) 183

201 Following is the effective amount held by the Group in the bond portfolio issued as a result of the securitisation funds recognised in full in the balance sheet. This amount is presented by offsetting the Investments issued under the heading "Financial liabilities at amortised cost- Customer Deposits" in the consolidated balance sheet: Thousands of Euros Singular securitisations- Ayt CajaCantabria Maturity 2048 Sr A 102, ,583 Ayt CajaCantabria Maturity 2048 Sr B 12,700 12,700 Ayt CajaCantabria Maturity 2048 Sr C 10,300 10,300 Ayt CajaCantabria Maturity 2048 Sr D 3,500 3,500 IM CajAstur MBS Maturity 2052 SrA 228, ,063 IM CajAstur MBS Maturity 2052 SrB 123, ,000 AYT CCM I. E/12-07 SR.B 45,600 45,600 AYT CCM I. E/12-07 SR.C 28,000 28,000 AYT CCM I. E/12-07 SR.D 10,400 10,400 AYT CCM I. E/12-07 SR.A 290, , , , Consolidated income statement Interest income The detail of the balance of this item in the consolidated income statement for the years 2017 and 2016 recognised according to the related portfolio of financial instruments is as follows: Thousands of euros Debt securities- 97, ,702 Loans and advances (*) 362, ,284 Rectification of income as a result of hedge accounting 17,170 (493) Deposits 23,964 16,397 Other assets 4, , ,873 (*) Of which 23,623 thousand are related to doubtful assets ( 28,360 thousand at 31 December 2016). Interest expense The breakdown of the balance of this heading in the consolidated income statements in 2017 and 2016 is as follows: 184

202 Thousands of euros Deposits 149, ,340 Debt securities: 19,518 11,886 Marketable debt securities (Note 18) 2,852 3,575 Subordinated liabilities (Note 18) 16,666 8,311 Rectification of costs as a result of hedge accounting (73,464) (74,137) Loans and advances Other charges 3,619 4,372 Dividend income 99, ,448 The breakdown of the balance of this heading in the consolidated income statements in 2017 and 2016 is as follows: Thousands of euros Equity instruments classified as: Available-for-sale financial assets 2,367 2,842 2,367 2,842 Share of profit (loss) of companies accounted for using the equity method The breakdown of the balance of this heading in the consolidated income statements in 2017 and 2016 is as follows: Thousands of euros Oppidum Capital, S.L. 29,222 13,746 CCM Vida y Pensiones de Seguros y Reaseguros, S.A. 9,154 7,358 Liberbank Vida y Pensiones, Seguros y Reaseguros, S.A. 5,755 3,192 Aquanex Servicio Domiciliario del Agua de Extremadura, S.A. - - (852) Other 43 (372) Commissions income 44,174 23,072 Below is the amount of the fee and commission accrued, classified in line with the main items in relation to which it has arisen, and with the headings in the consolidated income statements for the year: 185

203 Thousands of euros Commissions income- Debt Assets management 18,020 14,454 Trust 3,131 2,967 Payment services 76,400 78,125 Customer resources allocated but not managed 40,815 35,182 Management services of securitization activities Commitments from loans granted 1,436 1,173 Financial guarantees granted 5,464 5,762 Other fees and commissions 43,025 51,641 Other operating income- 189, ,093 Financial fees clearing direct costs 3,539 3,045 Other commissions include, an amount of 7,981 thousand in 2017 ( 5,360 thousand in 2016) for revenues from the administration and management agreement signed with SAREB (see Note 1.c.2). Commission s expenses Following is the amount of the fee and commission expense accrued in 2017 and 2016, classified in line with the main items which gave rise to them: Thousands of euros Clearing and settlement 4,504 3,702 Financial guarantees received Other fees and commissions 3,003 4,185 Gains or losses on financial assets and liabilities (net) 7,576 7,932 The breakdown of the balance of this heading in the consolidated income statements in 2017 and 2016, based on the financial instruments portfolios giving rise to them, is as follows: Thousands of euros Gains or losses on financial assets and liabilities held for trade (net) 464 (382) Gains or losses for derecognition of financial assets and liabilities not measured at fair value with changes in profit and loss (net) Available-for-sale financial assets 82, ,674 Investments held until maturity (Notes 2.b and 11) - 6,298 Loans and accounts receivable 6, Financial liabilities at amortised cost - - Gains or losses on financial assets and liabilities measured at fair value with changes in profit and loss (net , ,878 The heading Net gains or losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss - Available-for-sale financial assets (net) in the income statement for the year 2017 includes mainly a profit for an amount of 59,424 thousand for the sale of fixed- 186

204 income securities ( 341,047 thousand in 2016) and a profit amounting to 13,572 thousand (a loss of 27,389 thousand in 2016) for the settlement of hedge derivatives related to the interest rate of the securities sold (see Note 9). This heading includes as well a profit of 8,016 thousand for the sale of variable income securities ( 13,454 thousand in 2016) (see Note 9). Other operating income The breakdown of the balance of this heading in the consolidated income statements in 2017 and 2016 is as follows: Thousands of euros Sales and income from the provision of non-financial services 13,005 10,653 Remaining operating income- Income from investment properties (Note 15) 12,459 5,189 Income from insurance companies Other products 18,895 13,909 Other operating expenses 45,039 30,536 The breakdown of the balance of this heading in the consolidated income statements in 2017 and 2016 is as follows: Thousands of euros Contribution to the Deposit Guarantee Fund (Note 1-k) 36,728 33,471 Contribution to the Resolution Administrator Fund (Note 1-10,460 10,524 Expenses associated with investment properties (Note 15) 1,282 1,146 Tax on Deposits 8,342 9,223 Equity provision for deferred tax assets guarantee (Note 21) 12,050 12,920 Other expenses 53,864 32,371 Administrative expenses Staff costs 122,726 99,655 The breakdown of the balance of this heading in the consolidated income statements in 2017 and 2016 is as follows: Thousands of euros Wages and salaries 160, ,122 Social security 54,047 54,986 Transfers to defined benefit plans (Note 19) Contributions to defined benefit plans (Note 2-n) 5, Termination benefits 679 1,930 Other staff costs (*) 28,500 7, , ,759 (*) They include 24,868 thousand and 5,033 thousand in 2017 and 2016 respectively, for the leave of absence agreements. 187

205 Average number of employees The average number of employees at the Company in 2017 and 2016, by professional category, was as follows: Average number of employees Executives and technicians 2,057 2,515 Administrative and sales personnel 2,374 2,396 Assistants ,500 4,998 Number of employees at the end of the year Following is the breakdown of the Board of Directors of the Bank and of the Group s workforce by gender at 31 December 2017 and 2016: Men Women 31/12/ /12/ /12/ /12/2016 Board of Directors Key personnel Other 1,884 2,383 2,239 2,454 At 31 December 2017 the number of employees with a disability equal or higher then 33% amounts to 57 (80 at 31 December 2016). Commitments to employees Following is a summary of the changes in 2017 and 2016 in the amounts recognised in the consolidated balance sheet in relation to the post-employment commitments assumed with current and previous employees and other long-term remuneration: 188

206 Fiscal Year 2017: Thousands of Euros Post-employment commitments (Note Other long-term benefit obligations (Note 2-n) 2-n) Outsourced pensions funds Net assets in pension plans and Insurance contracts linked to pensions Early retirements and seniority awards Voluntary redundancies Indemnified redundancies Balances at 1 January 2017 (6,989) 15,017 (19,729) (85,659) - Amounts recognised with a balancing entry in the profit and loss account: Staff costs - Normal cost for the year (12) - (194) - - Return on assets 940 4, Finance cost of the commitments (1,049) (4,102) (48) (88) - Reductions and liquidations 82 (82) - 30,644 - Charges to provisions for immediate recognition of actuarial gains and losses - - 4,683 (373) (68,406) Adjustments in equity (386) 15, Actuarial gain and loss Payments made 109 (12) 6,151 18,724 46,666 Balances at 31 December 2017 (7,305) 30,874 (9,137) (36,752) (21,740) 189

207 Fiscal Year 2016: Thousands of euros Other non-current Post-employment commitments (Note 2- remuneration (Note 2-n) n) Outsourced pensions funds Net assets in pension plans and Insurance contracts linked to pensions Early retirements and seniority awards Voluntary redundancies Balances at 1 January 2016 (7,414) 18,753 (32,766) (97,561) Amounts recognised with a balancing entry in the profit and loss account: Staff costs - Normal cost for the year (7) - (227) - Return on assets 1,342 5, Finance cost of the commitments (1,505) (5,566) (141) (380) Charges to provisions for immediate recognition of actuarial gains and losses - - 5,275 2,059 Adjustments in equity 487 (3,632) - Actuarial gain and loss Payments made 108 (12) 8,131 10,223 Balances at 31 December 2016 (6,989) 15,017 (19,729) (85,659) Compensation in kind Pursuant to the Bank's Collective Labour Agreement in force, the Group recognises under the Staff Costs heading in the consolidated income statement certain payments in kind to its employees in 2017 and 2016 as follows: Thousands of euros Child care aid 9 7 Training aids for the children of employees 2, Subsidised interest from advances and loans Life insurance Medical aid insurance Loans to employees are governed by the criteria established in the employees' Collective Labour Agreement and by the Entity's internal regulations. The heading Subsidised interest from advances and loans in the foregoing table includes remuneration involving the granting of credit facilities to employees under market conditions. Its amount is calculated annually as the difference between these market conditions and those agreed upon with the employee. 190

208 Pursuant to the labour agreement of 25 June 2013 (see Note 1-c.2), a series of measures were adopted that included, among other aspects, the temporary suspension of certain benefits and social improvements until 30 June However, the agreement of 21 June 2017 (see Note 1-c.2.), which came into effect on 1 July 2017, lifted the aforementioned suspension of benefits and social improvements. Administration costs - Other administration costs The breakdown of the balance of this heading in the consolidated income statements in 2017 and 2016 is as follows: Thousands of euros From property, fixtures and supplies 27,896 28,739 From computer technology 26,695 27,541 From communications 13,526 15,127 From advertising and publicity 6,798 5,821 From technical reports 13,622 17,731 From services and surveillance and the transfer of 4,910 7,506 funds From contributions and taxes 4,582 5,505 From subcontracted administrative services 21,840 20,434 Total general expenses 17,820 15, , ,692 The heading "Other Administration costs - from Technical reports" - includes the fees paid by the Group for the audit of its consolidated financial statements and other accounting verification engagements performed by the auditor. The detail of these expenses in 2017 and 2016 was as follows: Thousands of euros Auditing services 1, Other assurance services 1, Total audit and related services 2, Tax advisory services - - Other services 1, Total Professional Services 3,706 1,456 Additionally, in 2017 and 2016, professional services other than audit services were arranged with other firms amounting to 1,295 thousand and 1,760 thousand, respectively, recognised under the Administration costs - Other general administration costs - From technical reports and Administration costs - Other general administration costs - From subcontracted administrative services. Depreciation Following is the detail by type of the balance recognised in this heading in the consolidated income statements for 2017 and 2016: 191

209 Thousands of euros Depreciation of tangible assets for own use (Note 15) 18,320 17,497 Investment property amortisation (Note 15) 8,442 2,073 Amortisation of other assets leased out (Note 15) Amortisation of intangible assets (Note 16) 8,597 17,275 35,576 36,845 Provisions or provisions reversed Following is the detail by type of the balance recognised in this heading in the consolidated income statements for 2017 and 2016: Thousands of euros Commitments and guarantees granted (Note 19) (3,200) (17,990) Pensions and other obligations of post-employment defined benefits (Note 19) 33,452 (6,843) Other provisions (Note 19) (23,515) 157,507 6, ,674 Impairment of financial assets not measured at fair value through profit or loss Following is the detail by category of financial instruments to which the net provision of the balance recognised in this heading in the consolidated income statements for 2017 and 2016 corresponds: Thousands of euros Available-for-sale financial assets (note 9) 13,496 7,665 Loans and accounts receivable (Notes 3.2 and 10) 255, , , ,

210 Gains (losses) on non-current assets and disposal groups classified as held for sale not allowed as discontinued operations Following is the detail by type of the balance recognised in this heading in the consolidated income statements for 2017 and 2016: Thousands of Euros Gains Losses Gains Losses Gains (losses) on non-current assets and disposal groups classified as held for sale (Note 13) 36,166 (67,147) 32,223 (4,981) Net provision for impairment losses on the remaining Other non-current assets and disposal groups classified as held for sale (Note 13) - (468,017) - (90,735) 36,166 (535,164) 32,223 (95,716) In 2016, Under Net gains due to the derecognition of non-current assets and disposable groups classified as held for sale includes an income of 23,600 thousand, corresponding to the end of the review period for the transfer of assets to SAREB. 27. Related parties Aside from the information presented in Note 6 in relation to the balances and transactions performed with the members of the Bank's Board of Directors and with the Group's key personnel, following are the balances recognised in the consolidated balance sheet at 31 December 2017 and 31 December 2016 and in the consolidated income statement for 2017 and 2016 arising from transactions with related parties other than those included in Note 6: 193

211 Associates Thousands of euros Jointly Other Associates Jointly controlled Related controlled entities Parties entities Other Related Parties ASSETS: Loans and advances to customers 12, ,382 16,380 1, ,985 Other assets Valuation adjustments for impairment - - (1,966) (663) (3) (67) LIABILITIES: Customer deposits 144,821 65,552 78,057 91,050 67,018 84,000 Marketable debt securities , Subordinated liabilities Other liabilities PROFIT AND LOSS: Expenses- Interest expense Fee and commission expense Other expenses 119-6, ,445 Income- Interest income ,470 Fee and commission income Other income OTHER: Guarantees granted 825-2,879 2,044 1,376 2,054 Available 2, ,327 1, Annual customer services report Law 44/2002, of 22 November, on Measures Reforming the Financial System, and Law 35/2003 of 4 November on Collective Investment Institutions, established the obligation for all credit entities, insurance companies, management companies and investment service companies to set up a Customer Services Department and, where appropriate, appoint a Customer Ombudsman. Enacting these regulations, the Ministry of Economy Order ECO/734/2004, of 11 March on Customer Services Departments and Customer Ombudsmen of financial entities establishes the obligation for each Entity or Group to approve Customer Ombudsmen regulations, regulating the Customer Services Department's activities and, where appropriate, those of the Customer Ombudsman, as well as the relationships between the two bodies. By virtue of all of the foregoing, the Bank, as the Group's Parent, approved the Customer Ombudsmen regulations, in order to regulate the functions of the Customer Services Department and improve relations with the Bank's customers, endeavouring to maintain their trust by making instruments available to them which enable them to resolve as easily as possible any potential conflicts which may arise therefrom, thereby offering them an adequate level of protection. Following is a summary of the Customer Services Department report for 2017, which will be submitted to the Board of Directors for its approval prior to 31 March 2018 (31 March 2017 in the case of those relating to 2016). The reports include the outcome of the claims and complaints dealt with by the Customer Services Department in 2017 and 2016: The statistical summary of the claims and complaints is as follows: 194

212 Total number of claims and complaints submitted Admitted Not admitted Fiscal year , Fiscal year ,905 1,023 Total number of claims and complaints resolved In favour of the customer In favour of the entity Resolved without a ruling Fiscal year 2017 Fiscal year ,826 2,370 25,201 1,433 3,877 1,109 Of the total number of claims and complaints resolved in favour of the customer in 2017 and 2016, 515 and 621 led to the acknowledgement of economic rights totalling 168 thousand and 134 thousand respectively. 29. Explanation added for translation to English These consolidated financial statements are presented on the basis of the regulatory financial reporting framework applicable to the Group in Spain (see Note 1-b). Certain accounting practices applied by the Group that conform with that regulatory framework may not conform with other generally accepted accounting principles and rules. 195

213 Annex I: Detail of the Group entities at 31 December 2017 % capital held Information on the companies at 31 December (a) (Thousands of Euros) Entity Activity and registered offices Carrying amount of the ownership interest (Thousands of euros) Impairment loss (Thousands of euros) % current ownership interest Direct Indirect Total Ownership interest Share capital office Reserves Profit/Loss for the year Valuation adjust ments Equity Interim dividends for the year Total Assets Administradora Valtenas, S.L., (Sole- Shareholder Company) Asturiana de Administración de Valores Mobiliarios, S.L., (Sole- Shareholder Company) Beyos y Ponga, S.A., (Sole-Shareholder Company) Liberbank Capital, S.A. (Sole- Shareholder Company) Viacava Incós de Energía, S.A., (Sole- Shareholder Company) Liberbank Mediación, Operador de Banca Seguros Vinculado, S.L., (Sole- Shareholder Company) Liberbank I.T., S.L. (Sole-Shareholder Company) Advisory services (Oviedo) Advisory services (Oviedo) Real Estate (Cáceres) Holding (Oviedo) Hospitality (Oviedo) Private insurance brokering (Oviedo) Computer services (Oviedo) % - 100% % - 100% ,532 (813,532) 100% - 100% 4, ,910 46, , , , % - 100% 251,000 11,878 4,737 11, , , % 100% 500 (1,061) 49 - (512) - 7,001 1, % - 100% 66 5, ,990-12, % - 100% 3 2, ,035-8,870 Liberbank Servicios Auxiliares Banca Seguros, AIE Liberbank Servicios Financieros, S.A., (Sole-Shareholder Company) Ancillary services (Oviedo) % 100% Holding (Madrid) 11, % - 100% 3,913 10, ,230-14,

214 Annex I continued: Detail of the Group entities at 31 December 2017 % capital held Information on the companies at 31 December (a) (Thousands of Euros) Entity Activity and registered offices Carrying Amount of the ownership interest (Thousands of euros) Impairment loss (Thousands of euros) % current ownership interest Direct Indirect Total Ownership interest Share capital office Reserves Profit/ Loss for the year Valuation adjustments Equity Interim dividends for the year Total Assets Liberbank Pensiones, Sociedad Gestora de Fondos de Pensiones, S.A., (Sole-Shareholder Company) Camín de la Mesa, S.A., (Sole- Shareholder Company) Pension fund manager (Madrid) Advisory services (Oviedo) % 100% 1,949 2, ,477-4, (15) 100% - 100% Cantábrica de Inversiones de Cartera, S.L. (Sole-Shareholder Company) Advisory services (Gijón) 457, % - 100% , , ,851 Finca Las Huelgas, S.A., (Sole- Shareholder Company) Farm land 1,442 (1,344) 100% - 100% Inforliber Servicios, S.A., (Sole- Advisory services Shareholder Company) (Oviedo) 7,664 (3,973) 100% - 100% 4, ,701-3,956 Norteña Patrimonial, S.L., (Sole- Shareholder Company) Advisory services (Oviedo) % - 100% Peña Rueda, S.L., (Sole-Shareholder Company) Pico Cortés, S.L., (Sole-Shareholder Company) Pico Miravalles, S.L., (Sole-Shareholder Company) Advisory services (Oviedo) Advisory services (Oviedo) Advisory services (Oviedo) 196 (100) 100% - 100% % - 100% (21) 100% - 100%

215 Annex I continued: Detail of the Group entities at 31 December 2017 % capital held Information on the companies at 31 December (a) (Thousands of Euros) Entity Activity and registered offices Carrying amount of the ownership Impairment interest loss (Thousands of (Thousands euros) of euros) % current ownership interest Direct Indirect Total Ownership interest Share capital office Reserves Profit/Loss for the year Valuation adjustments Equity Interim dividends for the year Total Assets Procesa Recuperación de Activos, S.A., (Sole-Shareholder Company) Puertu Maravio, S.L., (Sole-Shareholder Company) Sierra del Acebo, S.L., (Sole- Shareholder Company) Tiatordos, S.A., Company (Sole-Shareholder Company) Briareo Gestión S.A. (Sole-Shareholder Company) Banco de Castilla-La Mancha S.A. (b) Advisory services (Oviedo) Advisory services (Oviedo) Advisory services (Oviedo) Advisory services (Oviedo) Business advisory (Madrid) Banking (Cuenca) % - 100% 60 2,333 6,628-9,021-13, (3) 100% - 100% 61 (3) (1) (19) 100% - 100% % - 100% % - 100% 60 36, ,880-72, ,442 (784,030) - 100% 100% 25,204 2,186 (214,208) 14, ,394-15,068,397 Banco de Castilla La Mancha Mediación Operador de Banca Seguros Vinculado, S.A.U. Insurance broker (Toledo) % 100% 382 2, ,515-6,639 Sant Cugat Activos, S.A.U. (former Caja Castilla La Mancha Renting, S.A.U.) Macizos de Montalbán, S.L.U. Advisory services (Madrid) Real Estate (Cáceres) % 100% (23) , % 100%

216 Annex I continued: Detail of the Group entities at 31 December 2017 % capital held Information on the companies at 31 December (a) (Thousands of Euros) Entity Activity and registered offices Carrying Amount of the ownership interest (Thousands of euros) Impairments (Thousands of euros) % current ownership interest Direct Indirect Total Ownership interest Share capital office Reserves Profit or loss for the year Valuation adjustments Equity Interim dividends for the year Total Assets Arco Explotaciones, S.L.U. Real Estate (Cáceres) % 100% 3 - (64) - (61) - 7,359 Explotaciones Santa Isabel, S.L.U. Real Estate (Cáceres) % 100% 3 - (13) - (10) - 6,618 Grafton Investments, S.L. Hospitality (Cáceres) % 100% 3 (1) (6,819) - (6,817) - 44,258 Hoteles Layos, S.L.U. Hospitality (Cáceres) % 100% Lisson Directorship, S.L. Real Estate (Cáceres) % 100% 3 - (583) - (580) - 2,422 CCM Brokers 2007 Correduría de Seguros, S.A.U. Insurance broker (Toledo) % 100% (13)

217 Annex I continued: Detail of the Group entities at 31 December 2017 % capital held Information on the companies at 31 December (a) (Thousands of Euros) Entity Activity and registered offices Carrying Amount of the ownership interest (Thousands of euros) Impairment loss (Thousands of euros) % current ownership interest Direct Indirect Total Ownership interest Share capital office Reserves Profit/Loss for the year Valuation adjustments Equity Interim dividends for the year Total Assets Retamar Soluciones Inmobiliarias, S.A. Property company (Madrid) % 100% ,017 (13,502) - 33, ,235 Caja Castilla La Mancha Finance, S.A.U. Mosacata, S.L. Finance (Cuenca) % 100% 60 9, ,947-55,298 Real Estate (Madrid) % 100% 1, ,857 (237,042) - 548,814-1,526,999 Bancantabria Sistemas, S.L. (Sole-Shareholder Company) Computer services (Santander) 640 (175) 100% - 100% Canfogestión, S.A. (Sole- Shareholder Company) Administra Cantabria, S.A. (Sole-Shareholder Company) Cantabria Capital Sociedad de Participaciones Preferentes, S.A. (Sole- Shareholder Company) Cantabria Preferentes, S.A., (Sole-Shareholder Company) Real State Businesses (Santander) Consulting and advisory services (Santander) Advisory services (Madrid) Advisory services (Madrid) 1,457 (1,455) 100% - 100% 781 1, , % - 100% % - 100% 301 (30) (52) 100% - 100% Sistemas Financieros, S.A. (b) Holding (Santander) 8,131 (1,927) 99.73% % 3,913 10, ,230-14,233 Urbe Cantabria, S.L. Real Estate (Santander) 1,028 (634) 31% 68.81% 99.81% 1, ,261-1,

218 Annex I continued: Detail of the Group entities at 31 December 2017 % capital held Information on the companies at 31 December (a) (Thousands of Euros) Entity Activity and registered offices Carrying Amount of the ownership interest (Thousands of euros) Impairment loss (Thousands of euros) % current ownership interest Direct Indirect Total Ownership interest Share capital office Reserves Profit/ Loss for the year Valuation adjustments Equity Interim dividends for the year Total Assets Puntida, S.L. (b) Holding (Santander) 5, % - 100% 6,550 (1,166) 302-7,037-6,910 Fonocantabria, S.L.U. Services (Santander) 527 (91) 100% - 100% Valle del Tejo, S.L.U. Celsus Altamira Promociones, S.L. (Sole-Shareholder Company) Real Estate (Santander) Real State Businesses (Cáceres) 285,500 (273,758) 100% - 100% , ,421-68,421 2,330 (1,653) 100% - 100% 1,000 (320) Corporación Empresarial Caja Extremadura, S.L.U. (b) Doña Tierra Selección de Calidad, S.L.U. Holding (Cáceres) 23,110 (8,172) 100% - 100% 23,973 6,662 3, ,969-14,198 Hospitality (Cáceres) % 100% ,571 Análisis y Gestión de Innovación Tecnológica, S.L. (Sole-Shareholder Company) Factoría de Transformación de Operaciones y Servicios S.L.- (Sole-Shareholder Company) Liberbank Gestión, S.G.I.I.C., S.A. Real Estate business (Madrid) Computer Services (Toledo) Collectice Investment Institutions (Madrid) 62 (62) 100% - 100% ,034 1, % - 100% 1, ,073-2,252-4, % - 100% ,285-2,329-3,

219 Annex I continued: Detail of the Group entities at 31 December 2017 % capital held Information on the companies at 31 December (a) (Thousands of Euros) Entity Activity and registered offices Carrying Amount of the ownership interest (Thousands of euros) Impairment loss (Thousands of euros) % current ownership interest Direct Indirect Total Ownership interest Share capital office Reserves Profit/ Loss for the year Valuation adjustments Equity Interim dividends for the year Total Assets Colegio Alamín, S.A Sole Shareholder Company Advisory services (Gijón) % - 100% (2) Total 2,788,823 (1,891,016) (a) All the data relating to the financial statements indicated has not yet been prepared by the competent bodies (b) Consolidated data 202

220 Annex I continued: Detail of the Group entities at 31 December 2016 % capital held Information on the companies at 31 December (a) (Thousands of Euros) Entity Activity and registered offices Carrying amount of the Ownership interest (Thousands of euros) Impairment loss (Thousands of euros) % current ownership interest Direct Indirect Total Ownership interest Share capital office Reserves Profit/Loss for the year Valuation adjustments Equity Interim dividends for the year Total Assets Administradora Valtenas, S.L., (Sole-Shareholder Company) Asturiana de Administración de Valores Mobiliarios, S.L., (Sole- Shareholder Company) Beyos y Ponga, S.A., (Sole- Shareholder Company) Advisory services (Oviedo) % - 100% (2) Advisory services (Oviedo) % - 100% (19) Real State (Cáceres) 813,532 (790,049) 100% - 100% 4, ,299 (31,389) - 235, ,619 Liberbank Capital, S.A. (Sole- Shareholder Company) Holding (Oviedo) 251, % - 100% 251,000 17,091 (1,940) (12,515) 253, ,004 Viacava Incós de Energía, S.A., Company (Sole-Shareholder Company) Hospitality (Oviedo) % 100% 500 (566) (436) - (502) - 6,794 Liberbank Mediación, Operador de Banca Seguros Vinculado, S.L., (Sole- Shareholder Company) Liberbank I.T., S.L. (Sole Shareholder Company) Liberbank Servicios Auxiliares Banca Seguros, AIE Liberbank Servicios Financieros, S.A., Company (Sole-Shareholder Company) Liberbank Pensiones, Sociedad Gestora de Fondos de Pensiones, S.A., Company (Sole-Shareholder Company) Private insurance brokering (Oviedo) 1, % - 100% 66 5, ,567-9,075 Computer services (Oviedo) % - 100% ,910-2,579-8,295 Ancillary services (Oviedo) % 100% 600 (3) Holding (Madrid) 11, % - 100% 3,913 10, ,223-14,226 Pension fund manager (Madrid) % 100% 1,949 2, ,461-4,

221 % capital held Information on the companies at 31 December (a) (Thousands of Euros) Entity Activity and registered offices Carrying amount of the Ownership interest (Thousands of euros) Impairmen t loss (Thousands of euros) % current ownership interest Direct Indirect Total Ownership interest Share capital office Reserves Profit/Loss for the year Valuation adjustments Equity Interim dividends for the year Total Assets Camín de la Mesa, S.A., (Sole- Shareholder Company) Cantábrica de Inversiones de Cartera, S.L. (Sole-Shareholder Company) Advisory services (Oviedo) Advisory services (Gijón) 61 (13) 100% - 100% 61 (12) (2) , % - 100% ,865 2, , ,074 Finca Las Huelgas, S.A., (Sole- Shareholder Company) Farm land 1,443 (1,372) 100% - 100% (18) Inforliber Servicios, S.A., (Sole- Shareholder Company) Advisory services (Oviedo) 7,664 (4,340) 100% - 100% 4,070 (936) 271-3,405-3,629 Norteña Patrimonial, S.L., (Sole- Shareholder Company) Advisory services (Oviedo) % - 100% Peña Rueda, S.L., (Sole-Shareholder Company) Pico Cortés, S.L., (Sole-Shareholder Company) Pico Miravalles, S.L., (Sole- Shareholder Company) Procesa Recuperación de Activos, S.A., (Sole-Shareholder Company) Puertu Maravio, S.L., (Sole- Shareholder Company) Sierra del Acebo, S.L., (Sole- Shareholder Company) Sociedad Promotora de las Telecomunicaciones en Extremadura, S.A, in liquidation Tiatordos, S.A., (Sole-Shareholder Company) Briareo Gestión S.A. (Sole- Shareholder Company) Banco de Castilla-La Mancha S.A. (b) Advisory services (Oviedo) Advisory services (Oviedo) Advisory services (Oviedo) 196 (73) 100% - 100% (27) % - 100% (27) 100% - 100% 61 (29) Advisory services (Oviedo) % - 100% 60 1, ,393-3,246 Advisory 61 (2) 100% - 100% 61 (1) (3) services (Oviedo) Advisory 69 (35) 100% - 100% 61 (34) services (Oviedo) Telecom(Cácere s) 1,511 (734) 23.43% 72.43% 95.86% 10,653 (7,316) (116) - 3,220-3,220 Adv services (Oviedo) Business advisory (Madrid) Banking (Cuenca) % - 100% (1) % - 100% 60 29,909 6,349-36,318-72, ,397 (462,444) 75% - 75% 309,450 (56,783) (110,281 ) - 174,361-14,279,

222 Annex I continued: Detail of the Group entities at 31 December 2016 % capital held Information on the companies at 31 December (a) (Thousands of Euros) Entity Activity and registered offices Carrying amount of the Ownership interest (Thousands of euros) Impairment losses (Thousands of euros) % current ownership interest Direct Indirect Total Ownership interest Share capital office Reserves Profit/Loss for the year Valuation adjustments Equity Interim dividends for the year Total Assets Bancantabria Sistemas, S.L.- (Sole- Shareholder Company) Canfogestión, S.A. (Sole-Shareholder Company) Computer services (Santander) Real Estate Businesses (Santander) 640 (115) 100% - 100% (218) ,455 (1,455) 100% - 100% 781 (408) (526) - (152) - 4,708 Administra Cantabria, S.A. (Sole- Shareholder Company) Cantabria Capital Sociedad de Participaciones Preferentes, S.A. (Sole-Shareholder Company) Cantabria Preferentes, S.A., (Sole- Shareholder Company) Consulting and advisory services (Santander) Advisory services (Madrid) Advisory services (Madrid) % - 100% (13) % - 100% (3) (50) 100% - 100% (3) Sistemas Financieros, S.A. (b) Urbe Cantabria, S.L. Puntida, S.L. (b) Fonocantabria, S.L.U. Valle del Tejo, S.L.U. Celsus Altamira Promociones, S.L. (Sole-Shareholder Company) Holding (Santander) 8,131 (1,743) % % 6, (21) (3) 6,823-6,925 Real Estate (Santander) 1,028 (624) 31% 68.81% 99.81% 1,346 - (35) - 1,293-1,336 Holding 5, % - 100% 6,550 (1,367) 201-6,735-18,447 (Santander) Services (Santander) 98 (55) 100% - 100% 78 (108) (23) Real Estate (Santander) 285,500 (273,758) 100% - 100% , ,187-68,663 Real Estate Businesses (Cáceres) 2,330 (1,651) 100% - 100% 1,000 (312) (9)

223 Annex I continued: Detail of the Group entities at 31 December 2016 % capital held Information on the companies at 31 December (a) (Thousands of Euros) Entity Activity and registered offices Carrying amount of the Ownership interest (Thousand s of euros) Impairment losses (Thousands of euros) % current ownership interest Direct Indirect Total Ownership interest Share capital office Reserves Profit/Loss for the year Valuation adjustments Equity Interim dividends for the year Total Assets Vetonia Hostelería, S.L. (Sole- Shareholder Company) Hospitality (Plasencia - Cáceres) 5,046 (1,170) 100% - 100% 4,397 (2,240) 54-2,211-4,048 Corporación Empresarial Caja Extremadura, S.L.U. (b) Holding (Cáceres) 23,110 (8,330) 100% - 100% 23,973 (6,440) (222) - 17,311-19,203 Doña Tierra Selección de Calidad, S.L.U. Hospitality (Cáceres) % 100% 60 5 (71 - (6,487) - 6,880 Análisis y Gestión de Innovación Tecnológica, S.L. (Sole-Shareholder Company) Real Estate business (Madrid) 62 (62) 100% - 100% (157) - (113) - 7,091 Factoría de Transformación de Operaciones y Servicios S.L.- (Sole- Shareholder Company) Liberbank Gestión, S.G.I.I.C., S.A. Computer Services (Toledo) Collectice Investment Institutions (Madrid) 1, % - 100% 1,003 (30) 207-1,180-3, % - 100% 650 (105) 499-1,044-3,197 Laoconte Operaciones, S.L. (Sole- Shareholder Company) Colegio Alamín, S.A Sole Shareholder Company Mihabitans cartera, S. A Sole- Shareholder Parking (Cáceres) 3 (3) 100% - 100% 3 (4) (3,803) - (3,805) - 16,495 Advisory services (Gijón) Advisory services (Madrid) % - 100% (6) % - 100% 60 (1) Total 2,479,968 1,548,104 (a) All the data relating to the financial statements indicated has not yet been prepared by the competent bodies, (b) Consolidated data (c) Percentage calculated on the total outstanding shares, the investment in ordinary shares amounting to 100%. The amount of share capital of these shares includes the capital constituting financial liabilities, which does not form part of the companies' equity 206

224 Annex II: Jointly controlled entities at 31 December 2017 % capital held Information on the companies at 31 December (a) (Thousands of Euros) Entity Activity and registered offices Carrying amount of the ownership interest (Thousands of euros) Impairmen t loss (Thousand s of euros) % current ownership interest Direct Indirect Total Ownership interest Share capital office Reserves Profit/Loss for the year Valuation adjustm ents Equity Interim dividends for the year Total Assets Instituto de Medicina Oncológica y Molecular de Asturias, S.A. Medicine (Oviedo) % 33.33% 298 (360) ,677 Aquanex Servicio Domiciliario del Agua de Extremadura, S.A. (b) Water treatment (Mérida-Badajoz) % 45% 14,736 (618) ,118-49,324 Liberbank Vida y Pensiones, Seguros y Reaseguros, S.A. Insurance (Oviedo) 11,268 - (a) All the data relating to the financial statements indicated has not yet been prepared by the competent bodies, (b) Consolidated data 11,268-50% - 50% 10,465 5,316 12,012-39, ,

225 Annex II continued: Jointly controlled entities at 31 December 2016 Carrying % capital held Information on the companies at 31 December (a) (Thousands of Euros) amount of the Impairment % current ownership interest Interim Entity Activity and registered offices Ownership interest (Thousands of euros) (Thousands of euros) Direct Indirect Total Ownership interest Share capital office Reserves Profit/(loss) for the year Valuation adjustments Equity dividend for the year Total Assets Instituto de Medicina Oncológica y Molecular de Asturias, S.A. Medicine (Oviedo) % 33.33% (686) ,679 Aquanex Servicio Domiciliario Water treatment del Agua de Extremadura, S.A. (a) (Mérida-Badajoz) % 45% 14,736 (598) ,118-49,324 Liberbank Vida y Pensiones, Seguros y Reaseguros, S.A. Insurance (Oviedo) 18,769-50% - 50% 25,466 (2,192) 9,562 22,530 55, ,168 (a) Consolidated data 18,

226 Annex III: Detail of associates at 31 December 2017 Carrying % capital held amount of the Impairmen t % current ownership interest Information on the companies at 31 December (a) (Thousands of Euros) Entity Activity and registered offices Ownership interest (Thousand s of euros) (Thousand s of euros) Direct Indirect Total Ownership interest Share capital office Reserves Profit/Los s for the year Valuation adjustments Equity Interim dividends for the year Total Assets Hostelería Asturiana, S.A. Leche del Occidente de Asturias, S.A. (c) Sedes, S.A. Sociedad Astur- Castellano Leonesa de Navegación, S.A. Hospitality (Oviedo) 3,267 (2,006) 38.87% % 5,012 (1,885) (178) - 3,040-5,284 Food (Oviedo) 20 (20) 33.34% % n/a n/a n/a n/a n/a n/a n/a Real Estate and construction (Oviedo) Maritime transport (Gijón) 20,103 (18,698) 39.85% % 1,212 1, ,392-31, (34) 23.05% % n/a n/a n/a n/a n/a n/a n/a Sociedad Regional de Promoción del Principado de Asturias, S.A. CCM Vida y Pensiones de Seguros y Reaseguros, S.A. Regional Development Company (Llanera, Asturias) Insurance (Cuenca) 20,735 (1,263) 29.33% % 66,547 (603) ,066-89, % 50.00% 28,925 7,859 18,308 28,308 69,682 (13,718) 970,069 Fitex Ilunion, S.A Services (Cáceres) % 25.00% 625 2, ,418-3,765 Electra de Sierra de San Pedro, S.A. Electra de Malvana, S.A. Renewable energies (Cáceres) % 20.00% Renewable energies (Cáceres) % 20.00% 60 (11) Cantabria Capital S.G.E.I.C., S.A. Financial (Santander) % % 301 (2) World Trade Center Santander, S.A. (c) Real Estate (Santander) 82 (82) 31.50% % n/a n/a n/a n/a n/a n/a n/a Oppidum Capital, S.L. Holding (Oviedo) 125, % % 235, ,257 63,915 90, , , ,694 (22,103) (a) All the data relating to the financial statements indicated has not yet been prepared by the competent bodies (b)companies under liquidation (c)companies being dissolved 209

227 Annex III continued: Detail of associates at 31 December 2016 Carrying % capital held Entity Activity and registered offices amount of the Ownership interest (Thousands of euros) Impairment losses % current ownership interest (Thousands of euros) Direct Indirect Total Ownership interest Information on the companies at 31 December (a) (Thousands of Euros) Share capital office Reserves Profit/Lo ss for the year Valuation adjustments Equity Interim dividends for the year Total Assets Asturiana de Carnes, S.A. in liquidation(b) Food (Gijón) 200 (200) 29.45% % n/a n/a n/a n/a n/a n/a n/a Hostelería Asturiana, S.A. Hospitality (Oviedo) 3,267 (1,928) 38.87% % 5,012 (5,362) (248) - 3,249-5,512 Leche del Occidente de Asturias, S.A. Food (Oviedo) 20 (20) 33.34% % n/a n/a n/a n/a n/a n/a n/a Sedes, S.A. (c) Real estate and 20,103 (18,667) 39.85% % 1,212 47,111 (252) - 2,452-34,997 construction (Oviedo) Sociedad Astur-Castellano Maritime transport Leonesa de Navegación, S.A. (Gijón) 34 (34) 23.05% % n/a n/a n/a n/a n/a n/a n/a Sociedad Regional de Sociedad de Desarrollo Promoción del Principado de Regional de (Llanera, 20,735 (945) 29.33% % 66,547 4,210 1,582-81,350-93,058 Asturias, S.A. Asturias) CCM Vida y Pensiones de Seguros y Reaseguros, S.A. Insurance (Cuenca) % 50% 28,903 7,857 14,720 31,441 73,911 (9,011) 1,071,348 Fitex Ilunion, S.A Services (Cáceres) % 25% 625 2, ,375-3,005 Electra de Sierra de San Pedro, S.A. Electra de Malvana, S.A. Renewable energies (Cáceres) % 20% Renewable energies (Cáceres) % 20%

228 Annex III continued: Detail of associates at 31 December Entity Activity and registered offices Carrying % capital held amount of the Impairment % current ownership interest Ownership interest (Thousands of euros) (Thousands of euros) Direct Indirect Total Ownership interest Information on the companies at 31 December (a) (Thousands of Euros) Share capital office Reserves Profit/L oss for the year Valuation adjustments Equity Interim dividends for the year Total Assets Cantabria Capital S.G.E.I.C., S.A. Financial (Santander) 41-20% - 20% (3) World Trade Center Santander, Real Estate (Santander) 82 (82) 31.50% % n/a n/a n/a n/a n/a n/a n/a S.A. Oppidum Capital, S.L. Holding (Oviedo) 125, % % 235, ,729 31,105 94, ,314 (31,827) 958, ,894 (21,876) (a) All the data relating to the financial statements indicated has not yet been prepared by the competent bodies (b)companies under liquidation (c)companies being dissolved (d) Information at 30 September 2016 (e) Information at 30 November

229 Annex IV: Agency agreements of Liberbank, S.A. NAME LAST NAME NAME LAST NAME ALBERTO ÁLVAREZ LOBATO CARLOS BLANCO GONZÁLEZ ALBERTO SALGADO GONZÁLEZ CARLOS FIGUEROA SANCHEZ ALBERTO DELFÍN MANCHA SÁNCHEZ CARLOS FRANCO CABRERA ALBERTO JESÚS GARCIA SARDIÑA CARLOS QUILES MENDOZA ALEJANDRO MASTACHE RUBIO CARLOS VALLECILLO PARTAL ALFONSO LOPEZ MARTINEZ CARLOS JAVIER DOMINGO ALVAREZ ALFREDO SANCHEZ MARTÍNEZ CARLOS JAVIER RODERA MENENDEZ ALVARO CONEJO SASTRE CARLOS JULIO GONZALEZ SANTOS ANA BELEN LOPEZ GOMEZ CARLOS RUFINO MUÑOZ MUÑOZ ANA ISABEL GOMEZ COLLAZOS CELIA BURGOS IBAÑEZ ANA ISABEL GUTIERREZ ANTOLIN CÉSAR GUTIERREZ DE DIEGO ANA MARIA HERMIDA GARCIA CESAR CELESTINO PEREIRA SAAVEDRA ANA MARIA MIER PRADO CONSUELO SAMPEDRO LEÓN ANDRÉS POSADA TRUJILLO CRISTINA HORRILLO FERNANDEZ ANGEL PUENTE LEGUINA CRISTINA ROZA BRAVO ÁNGEL GONZÁLEZ GARCÍA DADIMAR SALAZAR VALLEJO ÁNGEL MARTÍN TORREJÓN DANIEL SANZ LAIRADO ANGEL MARIA SOTOCA OSORIO DAVID CONTRERAS SANZ ANGELES TRAPOTE PÉREZ DAVID FREIJO MURRAY ANTONIA JESÚS CASTILLO MORENO DAVID FRIAS RICO ANTONIO FLORES BENITEZ DAVID MEJIAS PEREZ ANTONIO HERNANDEZ SAMPER DIEGO LÓPEZ PAREJA ANTONIO RODRIGUEZ CIFUENTES EDUARDO DE MIGUEL VILLAMEDIANA ARAM DOMINGUEZ GARCIA ELISEO VICENTE JORGE ESTEBAN ARTURO CHAVARRÍA TERUEL EMILIANO ESCUDERO SOTO AZUCENA DIAZ CORDERO EMILIO LOPEZ CASELLES BARBARA BLANCO SAN EMETERIO ENDIKA ZUBILLAGA PEÑA BENJAMIN GARCÍA ARMERO ENEDINA SUAREZ SUAREZ BLANCA ELENA DOMINGUEZ RUIZ ENRIQUE COLLADO FERNÁNDEZ BORJA TORAÑO FERNANDEZ ENRIQUE YAGO BASTIDAS 212

230 Annex IV continued: Agency agreements. NAME LAST NAME NAME LAST NAME EVA REYES AVILA JORGE PEREZ SANCHEZ EVA MARIA IGLESIAS PEREZ JOSÉ CARRASCO PEREZ FABIO MARIO DEL BARCO PERIANES JOSÉ SANCHEZ VILLORA FERNANDO ALDAMA RODRÍGUEZ JOSE ANDRÉS VEGAR ARANDA FERNANDO GUILLEM GONZALEZ JOSE ANGEL HERRERO RUIZ-NAVARRO FERNANDO SÁNCHEZ MUÑOZ JOSE ANTONIO DEL ARCO CUECAS FLORENCIA RON LOPEZ-BARRGAN JOSE ANTONIO ORTEGA MARZAL FRANCISCA LOPEZ MANTECA JOSÉ ANTONIO AYLLÓN LOMA FRANCISCO JIMENEZ AREVALO JOSÉ LUIS ARANGO IBIAS FRANCISCO GONZÁLEZ RODRÍGUEZ JOSÉ LUIS BLANCO BLANCO FRANCISCO ANTONIO AGUILAR GARRIDO JOSÉ LUIS DE LUCAS LEYVA FRANCISCO JAVIER BERMEJO DE LA HERA JOSÉ LUIS PEIRÓ FERNÁNDEZ FRANCISCO JAVIER HERRAN NAVARRO JOSE MANUEL GOMEZ PEREZ FRANCISCO JAVIER QUESADA FERNANDEZ JOSE MANUEL LUCAS BLAZQUEZ FRANCISCO JAVIER RANZ ASENSIO JOSE MAXIMINO FERNANDEZ CORDERA FRANCISCO JOSE LORENZO ALVAREZ JOSE MIGUEL PALANCA FONTESTAD INÉS MARÍA DÍAZ CERVANTES JOSE VIDAL GOMEZ COLLAZOS INMACULADA FERNÁNDEZ GIRALDO JOSEFA EGEA PEREZ INMACULADA VARGAS CAÑIZARES JUAN ANTONIO GALVEZ LOPEZ IRANTZU SANTISTEBAN GUERRERO JUAN BAUTISTA GUILLEM ESCUDE ISABEL CALLEJA BERMEJO JUAN CARLOS ELÍAS CASAL ISABEL MUÑOZ LARA JUAN CARLOS GARCIA RODRIGUEZ IVONNE CAROLINA BENITES VELASQUEZ JUAN CARLOS GOZALO GONZALEZ JAIME GUTIÉRREZ RIVERO JUAN CARLOS MORALES RODRÍGUEZ JAVIER CASANOVA LÓPEZ JUAN CARLOS SUÁREZ RODRÍGUEZ JAVIER FERNANDEZ FERNANDEZ JUAN CARLOS HERNANDEZ NIEVES JAVIER MARTIN MARCOS JUAN FRANCISCO GARCIA ZAPATA JESÚS MEANA ALVAREZ JUAN JOSE MENÉNDEZ RODRÍGUEZ JESÚS ORTIZ DE LOS REYES JULIO CÉSAR PABLOS SALGADO JORGE GARCIA MARTIN JULIO PEDRO CORCHERO RETORTILLO 213

231 Annex IV continued: Agency agreements. NAME LAST NAME NAME LAST NAME LUIS NOGUÉS GUERRA MARIA EULALIA PORCEL GARCIA LUIS CARLOS SALAZAR MONTOYA MARIA EUSEBIA SOTO SEQUEIROS LUIS MANUEL MEDINA MEDINA MARIA INMACULADA GALVEZ ALBENDEA LUIS MIGUEL DIAZ SANZ MARIA ISABEL CASO PARDO LUZ MARIA CARRERA MONSALVE MARIA LOURDES MARINO ESTEBAN MANUEL HERNANDEZ VILLARROEL MARIA MARTA MARCOS PATARRO MANUEL VIJANDE QUINTANA MARIA ROSA SANTOS REIGADAS MANUEL EMILIO ALONSO GONZÁLEZ MARIA VICTORIA ASTORGA RODRIGUEZ MARCELINO MANUEL CARRIO GUTIÉRREZ MARIA VICTORIA BOLADO MELO MARCOS ALONSO FERNANDEZ MARIANA GUTIERREZ BADA MARGARITA L. DOMINGO ALVAREZ MERCEDES LÓPEZ PÉREZ MARIA ANGELES FERRANDO TALENS MIGUEL PÉREZ CANAL MARIA ANGELES IGLESIAS NORIEGA MIGUEL ANGEL LEIVA GONZÁLEZ MARÍA ÁNGELES MARTÍN HERNÁNDEZ MIGUEL ANGEL PEREZ CONESA MARIA ARANZAZU LABRADOR PANIAGUA MIGUEL ANGEL SOTILLOS RODRIGUEZ MARIA ASUNCIÓN QUINTANA DÍAZ MIRIAM RODRÍGUEZ ANGEL MARIA CARMEN CONEJO BRAVO NATALIA GARRIDO BLANCO MARIA CARMEN MIRANDA HORRILLO NELSON ESCRIBANO RODRÍGUEZ MARIA CRISTINA ÁLVAREZ HERES NOELIA MARTINEZ TORRES MARIA DE LOS ANGELES GALLEGO INIESTA NOELIA MARIA SANCHEZ PERIAÑEZ MARIA DEL CARMEN LÓPEZ MARTÍNEZ OLIVIA FRA DIAZ MARIA DEL MAR GOMEZ RENERO OMAR LORENTE BENACHES MARIA DEL ROSARIO MOLINERO TORTAJADA ÓSCAR ENRIQUEZ SAN NICOLÁS MARIA DOLORES CUMPLIDO PEREA PABLO VIGIL ARBESU MARIA DOLORES PONCE ALEMANY PABLO EMILIO HERNÁNDEZ GÓMEZ MARIA DOLORES RUIZ HERNÁNDEZ PATRICIA GONZALEZ PARDIÑA MARIA ELENA ORTIZ GÓMEZ PELAYO ALONSO PRIETO MARIA ELENA PACHECO MADARIAGA PEÑAS ALBAS CASTRO BARBERO MARIA ELENA TERESA SERRANO HERNANDEZ PIERLUCA FILIPPI MARIA ESTHER DIEZ RODRIGUEZ RAFAEL CAVA MÉNDEZ 214

232 Annex IV continued: Agency agreements. NAME LAST NAME NAME AND LAST NAME / COMPANY NAME RAFAEL GARCÍA CABRERA XAVIER PLANA VALLVÉ RAFAEL SANCHEZ ESTRELLA YEIBER BASILIO CASO RAMIREZ RAMÓN GOMEZ GOMEZ YOKEBED BENEDI CUELLAR RAUL TIRADOR GUTIERREZ ZAHIRA ASOROY GONZÁLEZ RAÚL MOSCARDO POUS ZHENYU ZHONG RICARDO HERRERO HERRERO ABITALIA, C.B. RICARDO MIGUELEZ GONZALEZ ACCURACY CONSULTING S.L. RICARDO MUÑOZ GÓNZALEZ ACREDITA SERVICIOS CORPORATIVOS S.L. ROBERTO DIAZ RIVERO ADA INMOBILIARIOS, S.L. ROMÁN SAN EMETERIO PEDRAJA ADM HOUSING REAL ESTATE, S.L. ROSA MARIA FERNANDEZ LEÑERO ADMINISTRACIONES INMOBILIARIAS LA COSTA, S.L. ROSA MARIA MONTERRUBIO MILLÁN ADV BROKERS INMOBILIARIOS, S.L. ROSA MARIA ORRACA MORO AFINANCE CONSULTING, S.L. ROSA MARIA RODRIGUEZ MARAÑON AG. MEDIT. DE INTERMEDIACION Y ASESORAMIENTO,S.L. RUBEN ANTONIO GARCIA FAU AGENCIA ARIAS VILLALEGRE, C.B. RUBEN JESÚS BENITEZ LUQUE AGENCIA ASTURIAS JAG, S.L. SALVADOR PEDRO ROSELLÓ PARRA AGENCIA AYALA S.L. SAMUEL PIÑERA DIEGO AGENCIA DE LA PROPIEDAD INMOBILIARIA DOMINGO S.L. SANTIAGO MARTÍNEZ ORTEGA AGENCIA DOMINGO S.C. SARA AVENDAÑO ALVAREZ AGENCIA INMOBILIARIA LA MURALLA S.A. SERGIO LOPEZ BARBETA AGENCIA INMOBILIARIA NEWEUROCASA, S.L.U. SILVIA SERRANO BIENER AGENCIA MASPALOMAS, C.B. SOFIA TEJUCA MORO AGENCIA NOU MOLES 2016, S.L. SONIA BARRERO FERNÁNDEZ AGRUPACION CANTABRA DE INMOBILIARIAS S.L. SONIA GARCÍA FERNÁNDEZ AINCAT 2000 S.L. SONIA MARÍA CANO ESCALANTE AIZUS GROUP S.L. SUSANA VALVERDE ROMEU AJCM GROUP CONSULTING 2016, S.L. SUSANA MARÍA SUÁREZ CAVEDA ALEIX SEGARRA ASSOCIATS, S.L. VICENTE JESUS FERRIOL APARICIO ALFA VILLAFONTANA, C.B. VICTORIA MARIA ALVAREZ RUEDA ALFASTUR VILLAVICIOSA S.L. 215

233 Annex IV continued: Agency agreements. COMPANY NAME COMPANY NAME ALICIA DESIGN S.L. AZULCASA GESTION INMOBILIARIA, S.C. ANA BARNUEVO S.L. BADAFINAN S.L. ANJUMA GESTIONES INMOBILIARIAS S.L. BAHIA HOME S.L. APARTAMENTOS EQUIPADOS, S.L. BASICO HOMES GESTION S.L. API MARTINEZ S.L. BENIBEACH, S.L. ARGANCREDIT S.L. BERNABEU CAPITAL S.L. ARGESIN 2003, S.L. BEST SERVICES NETWORK 137 S.L. ARROYOASTUR S.L. BG 2 INTEGRA S.L. ARTE Y NUMEROS S.L. BIG HOUSE, S.L. ARTIUS ASESORES S.L. BLUE SEA 2007 GESTION INMOBILIARIA, S.L. ASESORAMIENTO INMOBILIARIO EN MONTIJO Y COMARCA, S.L. BRASIL VERDE BUSINES, S.L. ASESORES REUNIDOS DE CASTILLA Y LEON C.B. BRETÓN SOLUCIONES FINANCIERAS, S.L. ASESORIA INMOBILIARIA SANTOS, S.L. CADACASA SERVICIOS INTEGRALES S.L. ASESORIA INMOBILIARIA SOLPISOS S.L CANGAS SERVICIOS INMOBILIARIOS S.L. ASESORIA Y COMPRAVENTA, S.L. CASA PLUS 2009, S.L. ASFIN TEATINOS, S.L. CASA SANT CUGAT GRUP INMOBILIARI, S.L. ASM CREDILE, S.L. CASA Y CRÉDITO MADRID, S.L. ASTUERA FINANCIACION 2007, S.L. CASAR DE ESPALIER, S.L. ASTURSAYME S.L. CASAS DEL GUADALHORCE, S.L. ATEEX SEGURIDAD, S.L. CASAS Y PISOS VALENCIA, S.L. ATICO MIRAFLORES S.L. CASASTUR INVERSIONES S.L. ATISBO INVERSIONES S.L. CASSAS ACTIVOS INMOBILIARIOS, S.L. ATLANTIC HOMES S.L. CASTAÑO ASESORES ADMIN. DE FINCAS S.L. ATLANTIS SOLUCIONES INMOBILIARIAS, S.L. CENCA ENERGIAS FUTURAS 2005 S.L. ATM & FERGON ASOCIADOS, S.L. CENTRO DE NEGOCIOS HIPOTECARIOS MADRID, S.L. AVALOS LARA & ASOCIADOS ASESORES, S.L. CENTRO DE NEGOCIOS INMOBILIARIOS MADRID S.L. AVANTA NORTE S.L. CENTRO INMOBILIARIO Y EMPRESARIAL MIAJADEÑO, C.B. AVANTI 2013, S.L. CERTIGREENPROJET S.L. AVENIDA 31 GESTION INMOBILIARIA S.L. CO FINANCES CONSULTING GROUP S.L. AVORE S.L. CONEMI TREBOL, S.L. 216

234 Annex IV continued: Agency agreements COMPANY NAME COMPANY NAME CONSULTING HIPOTECARIO MADRID NORTE, S.L. EL ALMACEN DE VESI S.L. CONSULTING ROYAL, S.L. EL PILAR-GABINETE INMOBILIARIO S.L. CONSULTORES INMOBILIARIOS DE ASTURIAS S.L. CONSULTORÍA LA PLAYA S.L. CORPORACIÓN FISCAL Y FINANCIERA, S.L. EL SOL INMOCORP IBERIA S.L.U ELIAS CASAL, JUAN CARLOS R S.L.N.C. ELIX SERVICIOS INMOBILIARIOS S.L. CORTE GESTION INTEGRAL S.L. ENERGIA RENOVE S.L CORVAS MMXV, S.L. ERSSY POZUECO S.L. COSTA AZUL MEDITERRANEA, S.L. COSTA DEL SUR INMOGESTIÓN, S.L. ESCOSAN SERVICIOS INMOBILIARIOS ESFERA GESTION DE ESPACIOS S.L. COTA Y GULIAS SCP ESTUDIO EL RINCÓN, S.L. CPI GESTIÓN ENCUENTRA TU MANSIÓN, S.L.U. CREDEX, SOCIEDAD COOPERATIVA ESPECIAL EURO-POBLA, S.L. ESTUDIOS HERMANOS GARCIA NOBLEJAS, S.L. CREDIHABITAT S.L. EXPERTOS INVERSORES GISA, S.L. CREDITLLAR MONTORNES S.L. EXPOBEL GESTIO S.L. CREZIT FINANCIAL ADVISORS S.A.U. EXTREGEV S.L. CRUVERSAN SOLUCIONES, S.L. CUERVO & SOLIS, S.L. FERALBA INMUEBLES, S.L. CULLALVERA SIGLO XXI S.L. FERCO GESTION, S.L. CURBANA, S.L. FEYSA 2000 S.L. DELAGRANDA INMOBILIARIA S.L. FICONTAS, S.C. DESARROLLOS INMOBILIARIOS ALCALA, S.L. F&H PRODUCTOS INMOBILIARIOS Y FINANCIACION, S.L. FINANCES HISPA-MEX, S.L. DIAZ & SOUTULLO FINANCIALPAR S.L. DIAZ LUNA ASESORES S.L. FINANESTUDI SANT PERE, S.L. DIEGO MARTINEZ PACHO BUSINESS, S.L. FINANGEL S.L.U DIFEPI CONSULTING, S.L. FINCAS ERIMAR 2005 S.L. DILMUN PROPERTY, S.L. FINCASA & FINCAEX AGENTES PROPIEDAD Y ABOGADOS S.L. DIMASOL SERVICIOS INMOBILIARIOS, S.L. FINIMSAB, S.L. DISTRITO 24 S.L. FINQUES MAJES 2000, S.L. EASY BUY, S.C.A. FINSOLUTIA SPAIN S.L.U. EGG NOUS PROJECTES S.L.U. FRANCISCO DE PAZ & ASOCIADOS, S.L. 217

235 Annex IV continued: Agency agreements. COMPANY NAME COMPANY NAME FUENHOME S.L. GESTIONES Y SOLUCIONES EFFICAX, S.L. GACESI SERVICIOS INMOBILIARIOS S.L. GESTORÍA BRENES Y GUTIERREZ, S.L. GAMAR GESTORES Y ASESORES INMOBILIARIOS S.L. GESVAR GLOBAL S.L. GAMBIN GESTION INMOBILIARIA S.L. GEVI MADRID S.L. GARCÍA Y MARQUEZ SERVICIOS INMOBILIERIOS S.A. GIMENO I PLANELLS GESTIO S.L.L. GARPE GESTION, S.L. GIRALDO DE SOTO, S.L. GASPAR PROPERTIES S.L. GLOBAL MOLLER, S.L. GDC PATRIMONIO CONSULTORIA Y SERV. FINAN., S.L. GOCRUSA, S.L. GEOPOLIS 25, S.L. GONGER S.A. GERSOL EXCLUSIVAS EN LA PLAYA, S.L. GONZALEZ CONSULTING, S.L. GESBANK CONSULTING, C.B. GPO FRO TENGOTUCRÉDITO CONSULTING CIUDAD LINEAL S.L. GESCUBER, S.L. GRADOMARA GESTORES 2015, S.L. GESIEX INVERSIONES S.L. GRANADA 2013 S.L. GESTFIN FUENLABRADA S.L. GRENFIN INVESTMENT SOLUCIONES, S.L. GESTIDAIMA S.L.U GRIMALVA S.L. GESTINMA ASESORES INMOBILIARIOS S.L. GROCASA RED INMOBILIARIA, S.L. GESTIÓN COSTA SAN VICENTE S.L. GRUP GESTIO BCN INMOBLES I DERIVATS, S.L. GESTION DE ACTIVOS TAURUS IBERICA, S.L. GRUPO ADAIX S.L. GESTION INMOBILIARIA ANTUÑA C.B. GRUPO ASESOR INMOBILIARIO TTORRE46, S.L. GESTIÓN INMOBILIARIA CERRADO DE CALDERÓN, S.L. GRUPO BUY HOUSE S.L. GESTION INMOBILIARIA IGARKA S.L. GRUPO CUEVAS & RIVERO S.L GESTION INMOBILIARIA INMOGARCIA S.L. GRUPO DE INVERSIONES ARAGONESAS S.L. GESTION INMOBILIARIA LUANCO S.L. GRUPO EMPRESARIAL VALENCIA CASAS SL GESTION INMOBILIARIA PROFESIONAL DE ALCORCON, S.L. GRUPO ESE CUATRO 2005, S.L. GESTION INMOBILIARIA TIPECE S.L. GRUPO GESTE ASESORÍA GESTION INMOBILIARIA VAL DE CELLA S.C. GRUPO INMOBILIARIO BALBUENA S.L. GESTION INMOBILIARIA VAL DE CELLA, S.L. GRUPO INMOBILIARIO SEVILLA 2000, S.L. GESTION INMOBILIARIA ZARASISTEM S.L. GRUPO NEGOCIADOR ALR S.L. GESTION MANTENIMIENTOS Y CONTRATAS DEL NOROESTE S.L. GRUPO NUMARES GESTION, S.L. GESTION SOLO BANCOS, S.L. GRUPO REDPISO DCREDIT, S.L. 218

236 Annex IV continued: Agency agreements. COMPANY NAME COMPANY NAME GRUPOGESTORR GESTION PATRIMONIAL, S.L. INMOFORTUNA S.L. GUIA INMOBILIARIA, C.B. INMOHOGARES ASTURES S.L. HABITAT VIVIENDA BADALONA S.L. INMOJET SERVIICOS INMOBILIARIOS S.L. HACIENDA VALBONIEL S.L. INMOMASMETROS S.L. HG GESTIO GRUP S.L. INMONORBA CERES S.L. HOME GROUP CITA S.L. INMOPERSEO HOLDING INMOBILIARIO S.L. HOMELAND RESTDIF S.L. INMORESTAURANT 05 S.L. HOUSE PALACE EM S.L. INMOSPAIN FEM, S.L. IBERO TECNOCASA ADVISORY, S.L. INMUEBLES CACEREÑOS S.L. IDEALISTA, CREDITO Y FINANCIACION, S.L. INMUEBLES Y EXCLUSIVAS REAL STATE S.L. IMASFINCAS, S.L. INSTITUTO HIPOTECARIO HISPALENSE IMPLICA SERVEIS I GESTIÓ S.L. INTEMA GRUPO INMOBILIARIO S.L. INFACAMP, S.L. INTERMEDIADOR FINANCIERO LA CASA GROUP S.L. INGRAVIT INVEST TECNOLOGIE S.L. INVERJUALCE S.L. INMOBARRIO.S.C AGENCIA DE LA PROPIEDAD INMOBILIARI INVERSIONES ALBASIERRA S.L. INMOBEL PAIPORTA C.B. INVERSIONES PLANETA SUR, S.L. INMOBILIARIA BRIME-CUEVAS S.L. INVERSIONES PRESENTES, S.L. INMOBILIARIA CALIFAL, S.L. INVERSIONES RUEDA HIDALGO S.L. INMOBILIARIA COBO MANTECON, S.L. JADEIN FERREO GESTION INMOBILIARIA, S.L. INMOBILIARIA DE ADMINISTRADORES ALFA S.A. KCS INVERSIN 2006 S.L. INMOBILIARIA DE LA VEGA 73 S.L. KREEDIT INNOVA, S.L. INMOBILIARIA DEL SUDOESTE DE MADRID, S.L. LAFFER CONSULTORES SL INMOBILIARIA PAS NUEVO PISO S.L. LAMADRID RODRÍGUEZ, S.L. INMOBILIARIA REGUERAS, S.L. LANZASTUR CD S.L. INMOBILIARIA SOBRINO LLANES, S.L. LAS DUNAS SERVICIOS INMOBILIARIOS S.L. INMOBILIARIA VIVIENDAS 365 SRL LEON INMOBILIARIAS 2005 S.L. INMOBILIARIA Y MULTISERVICIO SANDE S.L. LFCANTABRIA GESTION INMOBILIARIA S.L. INMOBILIARIA Y SERVICIOS JABATO, C.B. LLIRBEN SERVICIOS INMOBILIARIOS, S.L. INMOBILIARIO HUMAN HOUSE S.L. LOS ARCOS 98, S.L. INMOCON, C.B. LUCIA FOMENTO Y GESTION INMOBILIARIA, S.L. 219

237 Annex IV continued: Agency agreements. COMPANY NAME COMPANY NAME LUNA DE MONTIEL CONSTRUCCIONES Y PROMOCIONES S.L. PATERNA A3 ASEINFI S.L. MANUEL MORA CORREDURIA DE SEGUROS, S.L. PERALTA JIMENEZ INVERSIONES INMOBILIARIAS, S.L. MAPIDI, S.L. PESCE & PESCE ABOGADOS, S.L.P.U. MARCEM CONSULTORES, S.L. PISELMO, S.L. MARNAT INVERSIONES S.L. PLANETACASA CONSULTING REAL ESTATE, S.L. MARTINEZ & HERRERO JF ASESORES S.L. PLATAFORMA VIVIENDA MADRID 2000, S.L. MEGAGESTION SERVICIOS INMOBILIARIOS S.L. PRIMERA GESTION GRUPO DE EMPRESAS, S.L. MENDIOLA Y MARTÍN, CONSULTING INMOBILIARIO S.L. PRISMMA ASESORES FINANCIEROS, S.L. MERCA CASA GESTIÓN INMOBILIARIA PROCUBAS S.L. MERCASER, S.L. PROMOCIONES E INVERSIONES FERPOSADA S.L. MICRA INGENIERIA Y ARQUITECTURA, S.L. PROMOCIONES KLINTON 2002, S.L. MILENIUM INMOBILIARIO DE MADRID, S.L. PROPIEDADES Y FINCAS DEL SURESTE, S.L. MORGAN GLOBAL PROPERTY SERVICES, S.L. PROYECTA MULTISERVICIOS S.L. MULTIGESTION EXTREMEÑA S.L. PROYECTO CASA SERVICIOS INMOB PERSONALIZADOS S.L. MUNDO RENTA SAIRUS, S.L. PROYECTOS Y GESTION EMERITA BROKER, S.L. NATINVER PATRIMONIO, S.L. PUBLICIDAD E INVERSIONES ASTURIANAS S.L. NAVARRO EDO CIEN CASAS S.L. PUERTAS AUTOMÁTICAS E INMOBILIARIA GARAL, S.L. NOVA PAIPORTA, S.L. PUERTO OVIEDO INMOBILIARIA, S.L.U NOVALGES MULTIGESTION, S.L.U RADIX GESTION INMOBILIARIA S.C. NOVA-URBANA 2007, S.L. RC S.L. NUEVO DESARROLLO INMOBILIARIO, S.L. REAL ESTATE FINCAS SUR, S.L. NURIA MARIA FUENTES NOVA S.L.U. REALMARK AGENTES INMOBILIARIOS ASOCIADOS S.L. O PARRAL INVERSIONES SL RED INMOBILIARIA COTOLINO S.C. OBRA NOVA S.L. REGENTA GESTION INMOBILIARIA S.L.L OPCIÓN COSTA BRAVA, S.L. REGYCARM S.L. OPTIMUS MULTIGESTION S.L.U REHABILITACIÓN DE ACTIVOS INMOBILIARIOS, S.L. ORTEA, GARCIA Y ANTUÑA ASOCIADOS S.L. REVENGA Y CONSULTORIA Y ASESORIA, S.L. PACVI 1948 S.L. RIVERA GUZMAN ASESORES, S.L. PARQUE CENTRO CONSULTING INMOBILIARIO S.L. ROCOSUR LANDELA S.L. PASOCORRECTO S.L. ROSSO INMOBILIARIA 21, S.L. 220

238 Annex IV continued: Agency agreements of Liberbank, S.A. COMPANY NAME COMPANY NAME RUIZ MARTINEZ INMOLLAR S.L. SYG AUDITORIA Y PERITACIONES ASESORES Y CONSULTORE S.C. BUSINESS ADVISOR, S.L. TECNICASA GESTION DE VIVIENDAS S.L. SABUGO SERVICIOS INMOBILIARIOS DE GIJON TRADITIO CONSULTORES INMOBILIARIOS, S.L. SALAMANCA INMOTORMES, S.L. TREMARCTOS, S.L. SALAMANCA SERVICIOS INMOBILIARIOS HERNANDEZ MARTIN UNIDAD HIPOTECARIA SPI, S.L. SALT SERVEIS I ESTUDIS S.L. UNIVERSO ASESORIA DE EMPRESAS SL SAMARINCHA Y ARAMAR S.L. UP INMOBILIARIA 2015, S.L. SANT NEBRIDI INMOBLES S.L. URBAN AREA REAL STATE, S.L. SANTANDER DE INMUEBLES S.L. URBAN PROYECTOS & INTERIORISMO, S.L. SEA AND HOME BCN, S.L. V&R, C.B. SEDASPAN S.L VALENZUELA GESTORES Y ADMINISTRADORES S.L. SEED CAPITAL S.L. VERKASA S.L. SEINSA COSTA BLANCA S.L. VERSIA CONSULTORES FINANCIEROS S.L. SERV.INMOBILIARIOS CONCHA ESPINA TORRELAVEGA S.C. VETUSTA GESTION INMOBILIARIA S.L. SERVICIOS INMOBILIARIOS A LA CARTA, S.L. VGM ASESORES INMOBILIARIOS SERVICIOS INMOBILIARIOS ALJUMAR, S.L. VIACREDIT SERVICIOS FINANCIEROS S.L. SERVICIOS INMOBILIARIOS BARRIO S.L. VICTOR ANTUÑA INMOBILIARIA S.L. SERVICIOS INMOBILIARIOS CUALIFICADOS S.L.L VILA VALLS 2 SERVICIOS INMOBILIARIOS FM GESTIONA S.L. VISTABREZO PATRIMONIO S.L. SERVICIOS INMOBILIARIOS INTEGRALES DEL PRINCIPADO VIVALIA 2007 C.B. SERVICIOS INMOBILIARIOS INTEGRALES PRINCIPADO S.L. VIVE ASESORES INMOBILIARIOS S.L. SERVICIOS INMOBILIARIOS MECO S.L. VIVENDA GRUPO INMOBILIARIO, S.L. SERVICIOS INMOBILIARIOS Y PROMOCIONES JEMAR S.L. VIVIENDAS COSTA DEL SOL 2008, S.L. SERVICIOSINMOBILIARIOS HOME MALAGA, S.L. WFERRERO GESTION S.L. SERVIRAE 2004 S.L. SOLOCASA GESTION INMOBILIARIA S.L. SOLUCIONES INTEGRALES GESTION HIPOTECARIA S.L. STUDIUM RENTAS S.L. SUMINISTROS INTEGRALES JLC EL CASAR, S.L. SUMMUM REAL STATE, S.L. 221

239 Annex IV continued: Agency agreements of Banco de Castilla - La Mancha, S.A. NAME AND LAST NAME NAME AND LAST NAME / COMPANY NAME ADOLFO DIAZ GARCIA-CONSUEGRA DAMASO GARCIA ZAPATA ADRIAN MARTINEZ VINDEL DAVID FREIJO MURRAY AGNIESZKA BARBARA ZWOLINSKA DAVID MARTINEZ BELMONTE AGUSTÍN FRONCE GARCÍA DAVID DE LA LLAVE MOLINA ALEJANDRA LAGAR VICENT DIEGO TORRALBA MORALES ALFREDO MARTINEZ LAJARA DINISIO MANUEL BALLESTEROS TORRES AMELIA FERNANDEZ RAMOS DOMINGO ANGEL MAESTRE MANZANARES AMPARO RUIZ LOZANO EDUARDO SANTIAGO MARTINEZ ANA ISABEL MORATALLA SANTIAGO EMILIO LOPEZ CASELLES ANA ROSA GABALDON LANDETE ENRIQUE GONZALEZ MUÑOZ ANGEL MIGUEL MATARRANZ VILLAGORDO FABIÁN COLLADO CONGOSTO ANTONIO GONZALEZ CARCELEN FAUSTO SANDOVAL MARIN ANTONIO CEBALLOS RIAZA FELIX RAYON RESINO ANTONIO FERNANDEZ MARTINEZ FERNANDO DOMINGO SAMPER CASTRO ANTONIO ARAGONES DIAZ-PAVON FRANCISCA ZARZUELO GOMEZ ANTONIO JAVIER GARCIA-PLATA PACHECO FRANCISCA MAYOR MAYOR ANTONIO JOSÉ ARREAZA PRADO FRANCISCO MARTIN PEÑALVER ASCENSION CHAPARRO GRANADOS FRANCISCO NOVILLO JAREÑO CARLOS CASTELLANOS SANTOS FRANCISCO CARRETERO CARCELEN CARLOS QUILES MENDOZA FRANCISCO GONZALEZ DE LA ALEJA GIMENEZ DE LOS GALANES CARLOS MONEREO RAGEL FRANCISCO EMILIO JIMENEZ MORENO CARLOS NAVARRO GONZALEZ FRANCISCO JAVIER MOTJE TORNERO CARLOS JAVIER RODERA MENENDEZ FRANCISCO JAVIER CASTELLANOS SANCHEZ CARMELO PACHECO MARIN FRANCISCO JOSE RODRIGUEZ DE LAMO RECUERO CESAR MORENO VALERO GEMA ZAPATA DEL CAMPO CLARA INES MANRIQUE GONZALEZ GREGORIO CARAVACA VILLALBA CONSUELO SANCHEZ VALERA IGNACIO MARTORELL FOS CONSUELO SAMPEDRO LEÓN IGNACIO JOSE SANFELIX DIANA CRISTINA CAMACHO DIAZ-PINES ISMAEL DAMAS SANCHEZ CRISTINA MENA MARTINEZ IVAN CARCELEN GARCIA 222

240 Annex IV continued: Agency agreements of Banco de Castilla - La Mancha, S.A. NAME AND LAST NAME NAME AND LAST NAME EMILIO SUÑE SANCHEZ IGNACIO JORDAN CHIVELI ENRIQUE GARCIA FERNÁNDEZ IGNACIO MARTORELL FOS ENRIQUE GONZALEZ MUÑOZ IGNACIO JOSE SANFELIX DIANA ENRIQUE MARTÍNEZ LÓPEZ IRENE RAMIREZ GARCIA ENRIQUE YAGO BASTIDAS ISABEL GIMENO BENLLOCH FABIÁN COLLADO CONGOSTO ISMAEL DAMAS SANCHEZ FAUSTO SANDOVAL MARIN IVAN CARCELEN GARCIA FELIX GARCIA VALERO IVAN CARLOS ORTEGA RUBIO FERNANDO ESTALAYO VADILLO JAIME MASIP BELTRAN FERNANDO TEJERO JIMÉNEZ JAUME HELIODORO ROMERO FERNANDO DOMINGO SAMPER CASTRO JAVIER CASA MONZONIS FRANCISCA LOPEZ MANTECA JAVIER MARTIN HURTADO FRANCISCA MAYOR MAYOR JAVIER RODRIGO SANCHEZ DE LEON FRANCISCA ZARZUELO GOMEZ JESÚS MORENO REVIRIEGO FRANCISCO CARRETERO CARCELEN JESÚS ANGEL ROBLES CREPO FRANCISCO CORROCHANO PALOMEQUE JORGE GARCIA MARTIN FRANCISCO GONZALEZ DE LA ALEJA GIMENEZ DE LOS GALANES JOSE GUTIERREZ PATIÑO FRANCISCO MARTIN PEÑALVER JOSE LÓPEZ JIMÉNEZ FRANCISCO NOVILLO JAREÑO JOSÉ VALIENTE GOMEZ FRANCISCO PLAZA LOPEZ BUENO JOSE ANDRÉS ZABALA AGUILAR FRANCISCO EMILIO JIMENEZ MORENO JOSE ANGEL HERRERO RUIZ-NAVARRO FRANCISCO JAVIER CASTELLANOS SANCHEZ JOSE ANTONIO CÓRDOBA ANDRÉS FRANCISCO JAVIER MOTJE TORNERO JOSE ANTONIO GONZALEZ GUIJARRO FRANCISCO JAVIER RANZ ASENSIO JOSE ANTONIO SIRVENT HERNANDEZ FRANCISCO JOSE RODRIGUEZ DE LAMO RECUERO JOSE JAVIER PEREZ RIVERA FRANCISCO MANUEL LOPEZ ESTEVEZ JOSÉ JAVIER OCAÑA PELADO GABRIEL QUINTANA CASTELLANO JOSÉ JAVIER PALOMARES MANSO GEMA ZAPATA DEL CAMPO JOSE JESUS GARCIA GARCIA GONZALO RIOJA MORENO JOSE LUIS ARROYO CHICO GREGORIO CARAVACA VILLALBA JOSÉ LUIS CORTES NAVALON 223

241 Annex IV continued: Agency agreements of Banco de Castilla - La Mancha, S.A. NAME AND LAST NAME NAME AND LAST NAME JOSÉ LUIS DE LUCAS LEYVA LUISA MARIA DE LA GUIA ESCOBAR JOSÉ LUIS PEIRÓ FERNÁNDEZ MANUEL BLEDA GARCIA JOSE MANUEL JIMENEZ INIESTA MANUEL CACERES VAZQUEZ JOSE MANUEL LAOSA MUÑOZ MANUEL GONZÁLEZ IBÁÑEZ JOSE MANUEL SANCHEZ ARIZA MANUEL MATIAS GARCIA JOSE MIGUEL NARANJO CASTRO MANUEL MORENO BLAZQUEZ JOSE RAFAEL ALARCON GOMEZ MANUEL SANTOS VALIENTE JOSE RAMON GARCIA TORRALBA MANUEL ZAGRA MORENO JOSEFINA RIVAS SANTIAGO MARIA CEBRIAN VILLAR JUAN CASTILLEJO HURTADO MARIA CERVIGON DIAZ-MAYORDOMO JUAN AGUSTIN FERNANDEZ DEL REY MARIA ANGELES FERRANDO TALENS JUAN ANTONIO CORROTO CASAÑA MARIA ANGELES MARTINEZ CLEMENTE JUAN CARLOS GARCIA RODRIGUEZ MARIA CONCEPCIÓN GARCÍA GARCÍA JUAN FRANCISCO RICHART FORTE MARIA DE LOS LLANOS BALLESTEROS BALLESTEROS JUAN FRANCISCO TORRES TORRES MARIA DEL CARMEN BAUTISTA CARRASCO JUAN JOSE DONCEL LINARES MARIA DEL CARMEN LÓPEZ MARTÍNEZ JUAN SEBASTIAN FERNANDEZ FERNANDEZ MARIA DEL CARMEN NOVALBOS PARRO JULIA GARCIA REINOSA MARIA DEL SOL OJEDA SEGOVIA JULIO CESAR CHAVARRO VELEZ MARIA DOLORES CHAPA GARCIA JULIO MIGUEL GOMEZ ALONSO MARIA ELENA TERESA SERRANO HERNANDEZ JUNA RAMON MOLINA BORREGUERO MARIA ESTHER SANCHEZ MARTIN JYNG ZHANG MARIA ISABEL LOPEZ CABALLERO LAETITIA STEPHANIE NICOU MARIA ISABEL LOPEZ MARTINEZ LOURDES LOPEZ-CASERO MARTÍNEZ MARIA ISABEL MARTIN DE LA CRUZ LUIS HORMIGO MUNICIO MARIA ISABEL MORENO DIAZ-BERNARDO LUIS DORDA ECHAVARRI MARIA ISABEL SANCHEZ PACHECO MARTIN LUIS ALFONSO HERNANDO PARRAL MARIA JESUS BOTIFORA RAMIREZ LUIS MANUEL ESPAÑOL CODINA MARIA JOSE AMOROS NAVARRO LUIS MIGUEL FLOREZ MENA MARIA JOSEFA CASTRO CASTRO LUIS MIGUEL GARCIA RODRIGUEZ MARIA NIEVES HERCHIGA MARTIN 224

242 Annex IV continued: Agency agreements of Banco de Castilla - La Mancha, S.A. NAME AND LAST NAME NAME AND LAST NAME MARIA NURIA ROJAS ROJAS RAFAEL SABUQUILLO JIMÉNEZ MARIA PIEDAD HUERTA ZAFRA RAFAEL ALBERTO URIBE MENESES MARIA PILAR MORENO LOPEZ RAFAEL FRANCISCO GARCÍA TITOS MARIA TERESA MARTINEZ-PARDO BUSTOS RAMON LOPEZ PIQUERAS MARIA VICENTA SANCHEZ GARCIA RAQUEL MORENO RUBIO MARIA VICTORIA CREMADES SALAVERT RAQUEL QUINTO VALERO MARIA VICTORIA HERMIDA DIAZ RAUL ALCAZAR GIRONA MARTA MARIA LOPEZ RUIZ RAUL LOZANO RUIZ MERCEDES GOMEZ MATEO RAÚL MOSCARDO POUS MIGUEL ANGEL BARRIL MOLINA RESURECCIÓN RINCON CHACON MIGUEL ANGEL ENCABO DEL PESO ROSA ANA SANCHIS GISBERT MIGUEL ANGEL NAVARRO POVEDA ROSA ISABEL LÓPEZ VALLADOLID MIGUEL ANGEL RUBIA RODRIGUEZ RUBEN AVILES VENTURA MIGUEL ANGEL SOTILLOS RODRIGUEZ SAGRARIO MARTIN GARRIDO MIGUEL ÁNGEL CORBALÁN ABELLÁN SANTOS CUESTA LOPEZ NATALIA MEDINA HERRERO SERGIO GALAN CALVO NATALIA PULPON PEÑALVER SERGIO GOMEZ GOMEZ NESTOR MESEGUER ESPLUGUES SERGIO LOPEZ BARBETA NURIA ROJAS MOYA SERGIO LÓPEZ MORENO PATRICIA GONZALEZ PARDIÑA SILVERIO CAMPOS RODRÍGUEZ PEDRO CONDES MUÑOZ SILVIA MEDINA IBAÑEZ PEDRO GOMEZ RODRIGUEZ SILVIA MONTERO PICO PEDRO GOMIS HERNÁNDEZ SIMONE BALDUSSI PEDRO IZQUIERDO SANZ SOLEDA DEL MILAGRO MORENO MORENO PEDRO SORIA ARROYO TERESA PEREZ-MUELAS MARTIN PEDRO JAVIER NOVILLO HUERTAS VICENTE BERENGUER RUBIO PEDRO JOSE FRANCO CARPES VICENTE GARCIA NAVARRO RAFAEL ESCRIG LATORRE VICENTE OROZCO GONZALEZ RAFAEL GARCÍA CABRERA VICENTE JESUS FERRIOL APARICIO RAFAEL MARTINEZ GONZALEZ VICTOR CHAPARRO JIMENEZ 225

243 Annex IV continued: Agency agreements of Banco de Castilla - La Mancha, S.A. NAME AND LAST NAME NAME AND LAST NAME VLADIMIR RODRIGUEZ DE CASTRO ASEFITCON S.L. SABUQUILLO JIMÉNEZ XAVIER VALLS GIRALT ASEGAP S.L. URIBE MENESES 126INNOVA24H, S.L. ASENFI 2000, S.L. GARCÍA TITOS 3D GESTION INMOBILIARIA, C.B. ASESORES COSTA ESTE, S.L. LOPEZ PIQUERAS A. ASESORIA Y GESTION INMOBILIARIA, S.L. ASESORES INMOBILIARIOS CORREAL S.L. MORENO RUBIO ABACEKAS S.R.L. ASESORES LA SOLANA S.C. ABARCA & SALA SERVICIOS INMOBILIARIOS, S.L. ASESORIA MORALEDA-ECONOMISTAS, S.L. ACCURACY CONSULTING S.L. ASOC AGENTES PROPIEDAD INMOB Y AGENTES INMOB ACTIVOS INMOBILIARIOS 2020, S.L. ASSET VALUE, S.L. ACTORA PROFESIONAL, S.L. ATENEA INMOBILIARIA LA RODA, S.L.U. ACTUACIONES Y PROYECTOS CONSTRUCTIVOS CENTRO S.L. AVILES SOLUCIONES INMOBILIARIAS S.L. AGENCIA NEGOCIADORA PB S.L. AZULCASA GESTION INMOBILIARIA, S.C. AINCAS CASTELLÓN S.L. BAYGARS ASESORAMIENTO INMOBILIARIO S.L. AJCM GROUP CONSULTING 2016, S.L. BENIBEACH, S.L. ALABAMA SWEET HOME, S.L. BESANA GESTIÓN, S.L. ALBATROS G.I., C.B. BMA INVER 2016, S.L. ALCACER CONTROLLER, S.L. BROKER FINANCE 2015, S.L. ALCARREÑA DE GESTION Y PROMOCION S.L. CARIMBA 2016, S.L. ALFA FINCAS, C.B. CARRASCAL-LEGANES NORTE S.L. ALIA CONSULTING INMOBILIARIO, S.L. CASA PLUS 2009, S.L. ALLURE INMUEBLES, S.L. CASA SANT CUGAT GRUP INMOBILIARI, S.L. ALMANBROKER INMOBILIARIA 2012 S.L. CASA Y CRÉDITO MADRID, S.L. AMRONAFE S.L. CASA Y GESTION ADMINISTRACION DE FINCAS, S.L. ANA CARRASCOSA, S.L. CASAGESTION HOUSE AND HOUSE, S.L. ANLUFESA S.L. CASAR DE ESPALIER, S.L. AQUANET TRATAMIENTO DEL AGUA, S.L. CASAS DEL GUADALHORCE, S.L. ARENAMARINA INSTALACIONES S.L. CASAS MT PAIPORTA, S.L. ARGANCREDIT S.L. CASAS Y PISOS VALENCIA, S.L. ARIZA & GOMEZ 2009, S.L. CASSAS ACTIVOS INMOBILIARIOS, S.L. ARQUITECTURA Y CONSTRUCCIONES IZAYA S.L. CASTALIA MANAGEMENT S.L. 226

244 Annex IV continued: Agency agreements of Banco de Castilla - La Mancha, S.A. NAME AND LAST NAME NAME AND LAST NAME CASTES DE VALENCIA, S.L. DECASA CONSULTORES INMOBILIARIOS S.L. CEDEV 83, S.L.U DESARROLLO TORREFIEL 2003 S.L. CENTRO DE GESTIONES EMPRESARIALES CAMBEL, S.L. DESARROLLOS INMOBILIARIOS ALCALA, S.L. CENTRO DE NEGOCIOS HIPOTECARIOS MADRID, S.L. DESARROLLOS INMOBILIARIOS Y URBANISTICOS CONCASA S.L. CERVANTES PROYECTOS INMOBILIARIOS S.L. DEVUIT CONSORCIO S.L. CETEFIN S.L. DIANA MARTINEZ GIMENO S.L. CO FINANCES CONSULTING GROUP S.L. DUCAN INVERSIONES INMOBILIARIAS S.L. COMERCIALIZACION FUENSALIDA S.L. E & M PROPIEDADES, S.L. COMPAS REFORMAS Y GESTION INMOBILIARIA S.L. EASY BUY, S.C.A. CONCESIONES ALBORACHE S.L. EBORAJARA SOLUCIONES PROFESIONALES, S.L. CONSTRUCCIONES RAMOS 2006 S.L. ECODRET ASSOCIATS, S.L. CONSTRUCCIONES VALAZANCA, S.L. EHT TALAVERA, S.L. CONSTRUCCIONES Y REFORMAS REHOGAR, S.L. EL PILAR-GABINETE INMOBILIARIO S.L. CONSULTING ATOCHA S.L. EL RASTREADOR DE VIVIENDAS S.L. CONSULTING FINACIERO CALVO S.L. ELDAMAR URBANA, S.L. CONSULTING HIPOTECARIO MADRID NORTE, S.L. ELITE ACTIVIDADES S.L. CORPORACIÓN FISCAL Y FINANCIERA, S.L. ELITE ASESORAMIENTO INMOBILIARIO, S.L. COTOLIU S.L. ELROMI HOUSE, S.L. COTS & PLA, S.L. EMP ASESORAMIENTO INMOBILIARIO S.L. CPI GESTIÓN ENCUENTRA TU MANSIÓN, S.L.U. ESFERA GESTION DE ESPACIOS S.L. CR HOMES INMOBILIARIA, S.L. ESTILO DESARROLLOS INMOBILIARIOS, S.L. CREDIPREST, S.L. ESTUDIO CARCAGENTE, S.L. CREDYMAS 2012, S.L. ESTUDIO FUENSALIDA S.L. CRUVERSAN SOLUCIONES, S.L. ESTUDIO PUERTOLLANO 2005 S.L. CS ASESORES VALDEPEÑAS S.L. ESTUDIOS HERMANOS GARCIA NOBLEJAS, S.L. CURBANA, S.L. EUROCASTILLA SUR, S.L. CYR 2011 S.L. EUROFOMENTO INMOBILIARIO, S.L. CYSAS VALENCIA S.L.N.E. EV MMC SPAIN, S.L. DACAR VEHÍCULOS, S.L. EXMOCASA DARDANIUS FINANTIAL SOLUTIONS, S.L. EXPANSION S.L. 227

245 Annex IV continued: Agency agreements of Banco de Castilla - La Mancha, S.A. NAME AND LAST NAME NAME AND LAST NAME EXPERTOS INVERSORES GISA, S.L. GESTION DE INMUEBLES & PATRIMONIO DMM, S.L. EXPORTACOR 2011 S.L. GESTION DE PATRIMONIO GRUPO 57 S.L. F&H PRODUCTOS INMOBILIARIOS Y FINANCIACION, S.L. GESTIÓN E INVERSIÓN MÉNTRIDA, S.L. FAIB C.B. GESTIÓN INMOBILIARIA HERNÁN ALMARCHA S.L. FERCO GESTION, S.L. GESTION INMOBILIARIA IGARKA S.L. FINANCECO 3006, S.L. GESTIONES FINANCIERAS MANCHEGAS S.L.U. FINANCIACION HYPRESS, S.L. GESTIONES Y SOLUCIONES EFFICAX, S.L. FINANCIACIONES FUENLABRADA SUR, S.L. GESTORA DE INMUEBLES ALBACETE FINANCLICK FINANCIAL SERVICES, S.L. GIJON-GIL, S.L. FINANESTUDI SANT PERE, S.L. GIMENO I PLANELLS GESTIO S.L.L. FINCAS CIMA USERA CONSULTING INMOBILIARIO, S.L. GLOBAL MOLLER, S.L. FINCAS LA COLMENA, S.L. GLOBALGESTION INNOVATION S.L. FINCAS PRIMER HOGAR S.L. GODES INMOGESTION S.L. FINCAS VILLALOBOS S.L. GOMEZ Y BAÑULS, S.L. FINQUES MESLLOC GOMEZ-CORRALES ASESORES, S.L. FINSOLUTIA SPAIN S.L.U. GONZALEZ ESPARZA, S.L. FRANCIA CONSULTORES INMOBILIARIOS, S.L. GONZALEZ-MARTINEZ INMUEBLES S.L. GABINETE INMOBILIARIO ALMOROX SIGLO XXI, S.L GOTICA SIGLO XXI, S.L. GAMÓN INTERMEDIACIÓN, S.L. GRADOMARA GESTORES 2015, S.L. GARPE GESTION, S.L. GRAIN GRUPO INMOBILIARIO GARCIA VELASCO S.L.U GEDI LEVANTE S.L. GRAN AVENIDA GESTION INMOBILIARIA, S.L. GEFISA GESTION S.L. GRAN RIOSAN, S.L. GENERA 2 SOLUCIONES INMOBILIARIAS GRENFIN INVESTMENT SOLUCIONES, S.L. GESIDO GESTION INTEGRAL S.L.P. GROCASA RED INMOBILIARIA, S.L. GESKASA, C.B. GRUP GESTIO BCN INMOBLES I DERIVATS, S.L. GESLUZPAT S.L. GRUPO ADAIX S.L. GESPAIN ACTIVIDADES INMOBILIARIAS, S.L. GRUPO ALJADA GESTION S.L. GESPROMUEVE E INNOVA, S.L. GRUPO ASESOR INMOBILIARIO TTORRE46, S.L. GESTAE VALENCIA, S.L. GRUPO BUY HOUSE S.L. GESTION DE FINCAS CAMINO VIEJO, S.L. GRUPO DE NEGOCIOS VIGOMAN S.L. 228

246 Annex IV continued: Agency agreements of Banco de Castilla - La Mancha, S.A. NAME AND LAST NAME NAME AND LAST NAME GRUPO EMPRESARIAL VALENCIA CASAS SL INAGRI SIGLO XXI S.L. GRUPO EXEDIO, S.L. INIESTA ASESORES S.L. GRUPO HIPOTECARIO CASAS S.L.U. INMO 23, S.L. GRUPO INMOBILIARIO BASCUÑANA, C.B. INMO MARAZU, S.L. GRUPO INMOBILIARIO MADRID HOGAR S.L. INMOARGES S.L. GRUPO INMOBILIARIO SEIPE, S.L. INMOASESORIA VALDINIEBLA, S.L. GRUPO NEGOCIADOR ALR S.L. INMOBEL PAIPORTA C.B. GRUPO NUMARES GESTION, S.L. INMOBELMO S.L. GRUPO REDPISO DCREDIT, S.L. INMOBILIARIA BIELSA C.B. GRUPO VILANOVA CONSULTING, S.L. INMOBILIARIA CASITAS SAURA, S.L. GRUPOGESTORR GESTION PATRIMONIAL, S.L. INMOBILIARIA CASTAÑO, S.L. GUINOT PRUNERA S.L. INMOBILIARIA CONCEPCION ACTIVOS S.L. H&M GESTION INMOBILIARIA S.L. INMOBILIARIA DE ADMINISTRADORES ALFA S.A. HABITA 100 DISEÑO S.COOP. DE C-LM INMOBILIARIA REHABILITIA DESING, S.L. HABITUA GESTIÓN INMOBILIARIA, S.L. INMOBILIARIA ROMERO MERCHANTE S.L. H-ALLIANCE ASESORES S.L. INMOBILIARIA SERRANO Y ABAD, S.L. HAPPY BIG PROYECT, S.L. INMOBILIARIA VERACRUZ, C.B. HAUSE SOLUCIONES INMOBILIARIAS, S.L. INMOBILIARIAS GAECH S.L.U HERMANOS RODRÍGUEZ RUIZ, S.L. INMOBILIARIO MEGAPOLIS CAROLINAS, S.L. HERMANOS SIERRA TOLEDO S.L. INMOFAMILY SERVICIOS S.L. HG GESTIO GRUP S.L. INMOGOLF HOME, S.L. HOGARTE ARQUITECTOS S.L.P. INMOINVERS GESTION VIVIENDA S.L. HOUSE AND CREDIT GLOBAL SOLUTIONS, S.L. INMOSPAIN FEM, S.L. HOUSE AND CREDIT MADRID 1, S.L. INMOURDI, C.B. HUCASA ASESORES S.L. INMPROBAR 2014 S.L. HULOMA S.A. INMUEBLES GESTIÓN INTEGRAL, S.L. IBERCONSULTING TRANSACIONES INMOBILIARIAS S.L. INNOVA FUTURE REAL ESTATE II, S.L. IBERO TECNOCASA ADVISORY, S.L. INOSPAL GESTION, S.L. IMPLICA SERVEIS I GESTIÓ S.L. INTERMEDIACION INMOBILIARIA VIVE, S.L. IMPULSO REAL ESTATE, S.L. INTERMEDIADOR FINANCIERO LA CASA GROUP S.L. 229

247 Annex IV continued: Agency agreements of Banco de Castilla - La Mancha, S.A. NAME AND LAST NAME NAME AND LAST NAME INVERSIONES COSTA VALENCIANA S.L. MANGANA INMOBILIARIA S.L. J.FINANCIAL, S.L. MAQUEDA PROMOCIONES Y GESTIONES INMOBILIARIAS S.L. JADI-MERCAPISO, S.L. MARIN LARA GESTION INMOBILIARIA, S.L. JOAQUIN CARCELES ASOCIADOS S.L. MARINAR 2011 S.L.U. JORMANU, S.L. MARTEMAR QUINTANAR, S.L. JVJ ALBAREALTY, S.L. MD SOLUTIONS, C.B. KCS INVERSIN 2006 S.L. MERCASER, S.L. KEEBLAR CONSULTING S.L. MERCEDES COCERA PROPIEDADES S.L. L. JUZGADO CONSTRUCCIONES, S.L. MEZCUA BUSSINESS S.L. L ALGUER 10 INMOBILIARIA, S.L. MIES GESTION INMOBILIARIA, C.B. LACASAQUEBUSCAS INMOBILIARIA, S.L. MIRA Y ESCOGE, S.L. LAFFER CONSULTORES S.L. MIRVAL PROYECTOS S.L. LAGUNA DE ALCAHOZO INVERSIONES S.L. MODESTO L. BELTRAN S.L. LEGISMAR CONSULTING, S.L. MOLNAR MULTISERVICIO S.L. LEY Y GESTION ASESORES S.L. MORALES KONGSVOLD Y ASOCIADOS, S.L. LF TORREJON S.L. MORGAN GLOBAL PROPERTY SERVICES, S.L. LLAVECAPITAL, S.L.N.E. MORNINGSIDE & ASOCIADOS, S.L. LLIRBEN SERVICIOS INMOBILIARIOS, S.L. MR HOUSE GESTIÓN Y PROMOCIONES INMOBILIARIAS, S.L. LM ASESORES GESTION ASEGURADORA DE CLM S.L. MULTIGLOBAL SERVICIOS INTEGRALES MANCHEGOS, S.L. LUCAS TRADING VALENCIA S.L MY HOME VALENCIA INMOBILIARIA, S.L. LUCIANT FINCAS, S.L. NARVAEZ ASESORES INMOGESTIONA S.L. LUFRAN CASAS, S.L. NATINVER PATRIMONIO, S.L. LUMINE, S.L. NAVARRO EDO CIEN CASAS S.L. LUNA DE MONTIEL CONSTRUCCIONES Y PROMOCIONES S.L. NEXUS ASESORES INMOBILIARIOS, S.L. LUPERCAM 2015, S.L. NOACOR SERVICIOS, S.L. LUXURY HOMES CONSULTING S.L. NOMADA SERVICIOS INMOBILIARIOS S.L. LV CONSULTING S.L.U. NOVA LUXURY PROPERTIES S.L. M.G GESTINTER, S.L. OBRAS MAQUEDA, S.L. M2 ASSET PARTNERS S.L. OBRAS NUMANCIA S.L. MANCERA & BUSTOS SERVICIOS INMOBILIARIOS S.L. OFIGEST OCA 321 S.L. 230

248 Annex IV continued: Agency agreements of Banco de Castilla - La Mancha, S.A. NAME AND LAST NAME NAME AND LAST NAME ONE SMILE S.L. SANCHEZ MONREAL C.B. OPEN CLUB INMNOGESTION S.L. SANMARTIN ASESORES DE ALBACETE S.L. PARDO FERNANDEZ SOFIA M, S.L.N.E. SEED CAPITAL S.L. PARQUE CENTRO CONSULTING INMOBILIARIO S.L. SENIOR CAPITAL INVEST S.L. PATERNA A3 ASEINFI S.L. SEPULVEDA CONSULTORES S.L. PEREZ SIDERA S.L. SERVICIOS FINANCIEROS E INMOBILIARIOS INFOAREA S.L PIEDRA CAMDEN CONSULTORIA, S.L. SERVICIOS INMOBILIARIOS CELDA, S.L. PISOCASION IBERIA, S.L. SERVICIOS INMOBILIARIOS EUROPA 2000, S.L. PLAZA DEL RELOJ TALAVERA, S.L. SERVICIOS INMOBILIARIOS GISMERO S.L. PRESCRIPTORES BANCARIOS 2012 S.L. SERVICIOS INMOBILIARIOS LA SAFOR, S.L.L. PROCUBAS S.L. SERVICIOS INMOBILIARIOS MECO S.L. PROMOCIONES Y CONSTRUCCIONES APARICIO ESTEBAN, S.L SERVICIOS INMOBILIARIOS MURAES S.L. PROVAN PROMOCION Y GESTION DE VIVIENDAS S.L. SERVICIOS INMOBILIARIOS VIECO S.L. PROYECTOS DE GESTION E INVERSION S.L. SERVICOS INMOBILIARIOS DE GESTIÓN, S.L. PROYECTOS INTEGRALES FINCASA S.L. SERVIFINCAS SERVICIOS INTEGRALES S.L. PROYECTOS Y DESARROLLOS REIN S.L. SERVIRAE 2004 S.L. PUERTOLLANO GESTION S.L. SERVITEC INSTALACIONES INMUEBLES, S.L. QUALITY CASAS E INVERSION, S.L. SERVYCOM CLM, S.L. QUIMI INMOBILIARIA 2014, S.C. SIFVK, S.L. R&M SFDO. DE HENARES S.L. SKYLINE SOLUCIONES S.L. RAMCOR, C.B. SOLO KSA VALENCIA S.L. RATIO INMOBILIARIO S.L. SOLUCIONES FINANCIERO INMOBILIARIAS CONSULTING S.L. RDI BIOMASA Y CONSTRUCCIONES, S.L. SOLUCIONES GRUPO ASESOR S.L. REALMARK AGENTES INMOBILIARIOS ASOCIADOS S.L. SOLUCIONES INMOBILIARIAS TARANCON S.L. REHABILITACIÓN DE ACTIVOS INMOBILIARIOS, S.L. SOLUCIONES INTEGRALES GESTION HIPOTECARIA S.L. RESECBAN S.L. SOLUCIONES INTEGRALES POZUELO, S.L. RODALI GESTIÓN INMOBILIARIA S.L. SOLUCIONES PROFESIONALES A MEDIDA S.L. ROIZO ASESORES INMOBILIARIOS S.L.U. SUESPACIO ALCORCÓN, S.L S.C. BUSINESS ADVISOR, S.L. SUÑER ASESORES FINANCIEROS, S.L. SALICO SERVICIOS INMOBILIARIOS, S.L. TALGONPER, S.L. 231

249 Annex IV continued: Agency agreements of Banco de Castilla - La Mancha, S.A. NAME AND LAST NAME NAME AND LAST NAME TECNICASA RIVAS S.L. VILSA GRUPO INMOBILIARIO S.L. TEMPLO CONSULTING S.L. VIU BE A TERRASSA, S.L. TEMPOGESTION 2005, S.L. VIVENDA GRUPO INMOBILIARIO, S.L. TEPOPLAN GESTION INMOBILIARIA S.L. WIEDER GESTION DE PRESTAMOS E HIPOTECAS S.L. THE BEST OF COSTABLANCA, S.L. YLLANA CONSULTORES ASESORES, S.L. TIERRA VALORACIONES, S.L. ZISIM GRUPO, S.L. TRAMITA LEVANTE ASESORES VALENCIA S.L. TRANSPARENCIA INMOBILIARIA 2010, S.L. TRIBEUS INVESTMENTS, S.L. TU OCASIÓN INMOBILIARIA S.L. TU PROPERTY IN SPAIN, S.L. UP INMOBILIARIA 2015, S.L. URBABOL S.L. URBAN PROYECTOS & INTERIORISMO, S.L. URBILAR SERVICIOS INMOBILIARIOS, S.L. URBIS CONNECTION VALENCIA C.B. URBITANEA, S.L. VALENCIA COMPRALQUILA, S.L. VALLERUZAFA CONSULTING, S.L. VALMODOMUS, S.L. VERKASA S.L. VERSIA CONSULTORES FINANCIEROS S.L. VERSIA CONSULTORES FINANCIEROS S.L. VERTICA GESTION INMOBILIARIA S.L. VESTA HOUSE INMOBILIARIA, C.B. VEYSAN CONSULTORES INMOBILIARIOS S.L. VGM ASESORES INMOBILIARIOS VIA DE GESTION EMPRESARIAL S.L. VIADA INMUEBLES S.L. VICTORY TEAM, S.L. (SOLE-SHAREHOLDER COMPANY) 232

250 Annex V: Segregation balance sheets of the Bank's shareholder Savings Banks. BALANCE SHEETS OF CAJA DE AHORROS DE ASTURIAS (Thousands of euros) ASSETS 31/12/2010 (*) 01/01/2011 Segregation adjustments LIABILITIES AND EQUITY 31/12/2010 (*) 01/01/2011 Segregation adjustments CASH AND BALANCES WITH CENTRAL BANKS 243, ,249 - LIABILITIES HELD FOR TRADING 33,843 33,843 - HELD FOR TRADING 18,567 18,567 - Debt securities 16,427 16,427 - Trading derivatives 18,567 18,567 - Equity instruments 10,096 10,096 - Trading derivatives 7,320 7,320 - OTHER FINANCIAL LIABILITIES AT FAIR VALUE WITH CHANGES IN PROFIT AND LOSS OTHER FINANCIAL ASSETS AT FAIR VALUE WITH CHANGES IN PROFIT AND LOSS 29,335 29,335 - Financial liabilities at amortised cost 14,526,800 14,573,745 46,945 Debt securities 29,335 29,335 - Deposits from central banks Deposits from credit institutions 1,203,821 1,203,821 - AVAILABLE-FOR-SALE FINANCIAL ASSETS 1,146,388 1,146,388 - Customer deposits 11,931,575 11,931,575 - Debt securities 535, ,642 - Marketable debt securities 1,048,315 1,048,315 - Equity instruments 610, ,746 - Subordinated liabilities 200, ,400 - Other financial liabilities 142, ,634 46,945 LOANS AND RECEIVABLES 12,428,922 12,428,922 - Loans and advances to credit institutions 999, ,102 - ADJUSTMENTS TO FINANCIAL LIABILITIES FOR MACRO-HEDGE TRANSACTIONS Loans and advances to customers 10,952,725 10,952,725 - Debt securities 477, ,095 - HELD-TO-MATURITY INVESTMENTS 825, ,999 - HEDGING DERIVATIVES 5,600 5,600 - ADJUSTMENTS TO FINANCIAL ASSETS FOR MACRO-HEDGE TRANSACTIONS LIABILITIES ASSOCIATED WITH NON-CURRENT ASSETS HELD FOR SALE HEDGING DERIVATIVES 144, ,583 - PROVISIONS 80,457 80,457 - Provisions for pensions and similar obligations 51,438 51,438 - NON-CURRENT ASSETS HELD FOR SALE 23,384 23,384 - Provisions for contingent liabilities and commitments 8,807 8,807 - Other provisions 20,212 20,212 - INVESTMENTS 1,359,794 1,351,794 8,000 Associates 49,493 41,493 8,000 TAX LIABILITIES 175, ,596 - Jointly controlled entities Current Group entities 1,310,145 1,310,145 - Deferred 175, ,596 - INSURANCE CONTRACTS LINKED TO PENSIONS - - WELFARE FUND 34,409 - (34,409) PROPERTY, PLANT AND EQUIPMENT 245, ,086 6,264 OTHER LIABILITIES 42,857 42,857 - Property, plant and equipment 223, ,473 6,264 For own use 217, ,473 - TOTAL LIABILITIES 14,884,286 14,896,822 12,536 Assigned to welfare projects 6,264-6,264 EQUITY Investment property 21,613 21,613 - SHAREHOLDERS EQUITY 1,799,643 1,772,843 26,800 INTANGIBLE ASSETS 11,106 11,106 - Share capital - 660, ,000 Other intangible assets 11,106 11,106 - Share premium - 1,112,843 1,112,843 Reserves 1,632,131 - (1,632,131) TAX ASSETS 177, ,808 - Profit/(loss) for the year 167,512 - (167,512) Current 6,129 6,129 - Deferred 171, ,679 - VALUATION ADJUSTMENTS Available-for-sale financial assets OTHER ASSETS 14,168 14,168 - Cash flow hedges TOTAL EQUITY 1,799,643 1,772,843 (26,800) TOTAL ASSETS 16,683,929 16,669,665 14,264 TOTAL LIABILITIES AND EQUITY 16,683,929 16,669,665 (14,264) MEMORANDUM ITEM CONTINGENT LIABILITIES 488, ,498 - (*) data audited by Deloitte, S.L. CONTINGENT COMMITMENTS 1,892,972 1,892,

251 BALANCE SHEETS OF AHORROS Y MONTE PIEDAD EXTREMADURA (Thousands of euros) ASSETS 31/12/2010 (*) 01/01/2011 Segregation adjustments LIABILITIES AND EQUITY 31/12/2010 (*) 01/01/2011 Segregation adjustments CASH AND BALANCES WITH CENTRAL BANKS 124, ,022 - LIABILITIES HELD FOR TRADING 8,140 8,140 - HELD FOR TRADING 7,920 7,920 - Trading derivatives 8,140 8,140 - Trading derivatives 7,920 7,920 - OTHER FINANCIAL ASSETS AT FAIR VALUE WITH CHANGES IN PROFIT AND LOSS OTHER FINANCIAL LIABILITIES AT FAIR VALUE WITH CHANGES IN PROFIT AND LOSS AVAILABLE-FOR-SALE FINANCIAL ASSETS 722, ,277 4,411 FINANCIAL LIABILITIES AT AMORTISED COST 6,561,279 6,572,834 11,555 Debt securities 590, ,451 4,411 Deposits from central banks Equity instruments 131, ,826 - Deposits from credit institutions 92,815 92,815 - Customer deposits 6,231,129 6,231,129 - Marketable debt securities 67,761 63,350 (4,411) LOANS AND RECEIVABLES 5,820,639 5,820,639 - Subordinated liabilities 144, ,313 - Loans and advances to credit institutions 105, ,767 - Other financial liabilities 25,261 41,227 15,966 Loans and advances to customers 5,318,355 5,318,355 - Debt securities 396, ,517 - ADJUSTMENTS TO FINANCIAL LIABILITIES FOR MACRO-HEDGE TRANSACTIONS HELD-TO-MATURITY INVESTMENTS 183, ,348 - HEDGING DERIVATIVES 40,218 40,218 - ADJUSTMENTS TO FINANCIAL ASSETS FOR MACRO- HEDGE TRANSACTIONS LIABILITIES ASSOCIATED WITH NON-CURRENT ASSETS HELD FOR SALE HEDGING DERIVATIVES 8,804 8,804 - PROVISIONS 56,296 56,296 - Provisions for pensions and similar obligations 44,812 44,812 - NON-CURRENT ASSETS HELD FOR SALE 72,866 72,866 - Provisions for contingent liabilities and commitments 7,100 7,100 - Other provisions 4,384 4,384 - INVESTMENTS 60,238 58,038 2,200 Associates 2,200-2,200 TAX LIABILITIES 31,807 31,807 - Jointly controlled entities 34,693 34,693 - Current 8,335 8,335 - Group entities 23,345 23,345 - Deferred 23,472 23,472 - INSURANCE CONTRACTS LINKED TO PENSIONS WELFARE FUND 47,071 - (47,071) PROPERTY, PLANT AND EQUIPMENT 100,327 64,793 35,534 OTHER LIABILITIES 12,377 12,377 - Property, plant and equipment 98,851 63,317 35,534 For own use 63,317 63,317 - TOTAL LIABILITIES 6,756,968 6,721,452 (35,516) Assigned to welfare projects 35,534-35,534 EQUITY Investment property 1,476 1,476 - SHAREHOLDERS EQUITY 468, ,409 (6,700) INTANGIBLE ASSETS 5,032 5,032 - Share capital 1 200, ,999 Other intangible assets 5,032 5,032 - Share premium - 261, ,409 Reserves 431,779 - (431,779) TAX ASSETS 118, ,380 - Profit/(loss) for the year 36,329 - (36,329) Current 16,058 16,058 - Deferred 102, ,322 - VALUATION ADJUSTMENTS Available-for-sale financial assets OTHER ASSETS Cash flow hedges TOTAL EQUITY 468, ,409 (6,700) TOTAL ASSETS 7,255,077 7,182,861 42,216 TOTAL LIABILITIES AND EQUITY 7,255,077 7,182,861 (42,216) MEMORANDUM ITEM CONTINGENT LIABILITIES 201, ,762 - (*) Data audited by PricewaterhouseCoopers Auditores, S.L. CONTINGENT COMMITMENTS 597, ,

252 BALANCE SHEET OF CAJA DE AHORROS DE SANTANDER Y CANTABRIA (Thousands of euros) ASSETS 31/12/2010 (*) 01/01/2011 Segregation adjustments LIABILITIES AND EQUITY 31/12/2010 (*) 01/01/2011 Segregation adjustments CASH AND BALANCES WITH CENTRAL BANKS 54,991 54,991 - LIABILITIES HELD FOR TRADING 2,250 2,250 - HELD FOR TRADING 2,347 2,347 - Trading derivatives 2,250 2,250 - Trading derivatives 2,347 2,347 - OTHER FINANCIAL LIABILITIES AT FAIR VALUE WITH CHANGES IN PROFIT AND LOSS OTHER FINANCIAL ASSETS AT FAIR VALUE WITH CHANGES IN PROFIT AND LOSS FINANCIAL LIABILITIES AT AMORTISED COST 9,357,848 9,376,089 18,241 Deposits from central banks 600, ,306 - Deposits from credit institutions 140, ,949 - AVAILABLE-FOR-SALE FINANCIAL ASSETS 170, ,075 - Customer deposits 7,577,010 7,577,010 - Debt securities 67,500 67,500 - Marketable debt securities 623, ,697 - Equity instruments 102, ,575 - Subordinated liabilities 346, ,467 - Other financial liabilities 69,419 87,660 18,241 LOANS AND RECEIVABLES 9,177,429 9,177,429 - Loans and advances to credit institutions 621, ,749 - ADJUSTMENTS TO FINANCIAL LIABILITIES FOR MACRO-HEDGE TRANSACTIONS Loans and advances to customers 7,648,041 7,648,041 - Debt securities 907, ,639 - HEDGING DERIVATIVES 2,786 2,786 - HELD-TO-MATURITY INVESTMENTS 129, ,180 - LIABILITIES ASSOCIATED WITH NON-CURRENT ASSETS HELD FOR SALE ADJUSTMENTS TO FINANCIAL ASSETS FOR MACRO-HEDGE TRANSACTIONS PROVISIONS 56,442 56,442 - HEDGING DERIVATIVES 3,682 3,682 - Provisions for pensions and similar obligations 45,843 45,843 - Provisions for contingent liabilities and 6,550 6,550 - commitments NON-CURRENT ASSETS HELD FOR SALE 38,184 38,184 - Other provisions 3,867 3,867 - Provisions for taxes and other legal contingencies INVESTMENTS 48,771 46,971 1,800 Associates 16,489 14,689 1,800 TAX LIABILITIES 40,577 40,577 - Jointly controlled entities 4,544 4,544 - Current Group entities 27,738 27,738 - Deferred 40,577 40,577 - INSURANCE CONTRACTS LINKED TO PENSIONS - - WELFARE FUND 23,546 - (23,546) PROPERTY, PLANT AND EQUIPMENT 153, ,326 9,608 OTHER LIABILITIES 12,076 12,076 - Property, plant and equipment 151, ,204 9,608 For own use 142, ,204 - TOTAL LIABILITIES 9,495,622 9,490,317 (5,305) Assigned to welfare projects 9,608-9,608 EQUITY Investment property 2,122 2,122 - SHAREHOLDERS EQUITY 414, ,953 (6,500) INTANGIBLE ASSETS 1,979 1,979 - Share capital 1 140, ,999 Other intangible assets 1,979 1,979 - Share premium - 267, ,953 Reserves 390,061 - (390,061) TAX ASSETS 121, ,680 - Profit/(loss) for the year 24,391 - (24,391) Current 1,182 1,182 - Deferred 120, ,498 - VALUATION ADJUSTMENTS Available-for-sale financial assets OTHER ASSETS 7,920 7, Cash flow hedges TOTAL EQUITY 414, ,953 (6,500) TOTAL ASSETS 9,910,075 9,898,270 11,805 TOTAL LIABILITIES AND EQUITY 9,910,075 9,898,270 (11,805) MEMORANDUM ITEM CONTINGENT LIABILITIES 289, ,039 - CONTINGENT COMMITMENTS 685, ,612 - (*) Data audited by PricewaterhouseCoopers Auditores, S.L. 235

253 ANNEX VI INFORMATION ON LIBERBANK GROUP AS PER SECTION 87, LAW NO. 10/2014 OF 26 JUNE ( ANNUAL BANKING REPORT ) This information has been prepared in compliance with section 87 and the twelfth interim provision under Law No. 10/2014, of 26 June, on credit institutions organisation, supervision and solvency, published in the Official Gazette of the Spanish State of 27 June 2014, which transcribe section 89 of Directive 2013/36/UE of the European Parliament and of the Council of 26 June 2013 on access to credit institutions activity and the prudential supervision of credit institutions and investment companies, amending Directive 2002/87/CE (CRD IV) and abrogating Directives 2006/48/CE and 2006/49/CE. Pursuant to those regulations, on 1 July 2014, credit institutions will be required to publish for the first time, specifying the countries in which they are based, the following consolidated information for the last fiscal year closed: a) Name, nature and geographical location of the activity. b) Business volume. c) Number of full-time comparable employees. d) Gross income before taxes. e) Income taxes. f) Government assistance or subsidies received In view of the previous comments, below is the information required: - Name, nature and geographical location of the activity Liberbank, S.A. (the "Bank" or "Entity") is a financial institution incorporated on 23 May 2011 with the corporate name of Effibank, S.A. in a notarial instrument before the notary Manuel González- Meneses García-Valdecasas and filed at the Mercantile Registry of Madrid. The Bank was incorporated with the contribution from the spun-off financial businesses of Caja de Ahorros de Asturias, Caja de Ahorros y Monte de Piedad de Extremadura and Caja de Ahorros de Santander y Cantabria, which owned 24.31% of its share capital at 31 December On 3 August 2011, the Bank's Shareholders' Meeting resolved to change the aforementioned corporate name to Liberbank, S.A. and filed the change at the Registry on 31 August The Bank s registered office is located at number 5, de Camino de Fuente de la Mora de Madrid. The Bank's bylaws and other relevant legal information can be viewed on the group's website ( and at the Bank's registered office. The bylaws establish the business activities in which the Bank may engage, i.e. the typical activities of credit institutions. These business activities are in line with the Discipline and Intervention of Credit Institutions Law 26/1988, of 29 July. In addition to the transactions carried out directly, the Bank leads a group of subsidiaries engaged in different activities (see Annexes I, II and III of the Group s consolidated financial statements) and that, along with it, make up Liberbank Group. As a result, the Bank has to prepare, apart from its own individual financial statements, the Group consolidated financial statements, also including interests in joint ventures and investments in associates. 236

254 The consolidated group carries on its business in Spain. - Business volume and number of full-time comparable employees The information on Liberbank Group regarding business volume and the number of full-time comparable employees as at 2017 year-end, is shown below, as well as explanatory notes on the basis for presentation of that information: Liberbank Group Business volume (Thousands of euros) Number of full-time comparable employees (Liberbank, S.A. y Banco de Castilla La Mancha, S.A.) Spain 645,833 3,077 For the purpose of this report, Business volume is deemed to include the gross margin, as defined and disclosed in the consolidated income statement, which is part of the Group s consolidated financial statements. The information on full-time comparable employees was obtained from the internal records of Liberbank, S.A. and Banco de Castilla-La Mancha, S.A. as at 2017 year-end. - Income before taxes and income tax The consolidated income statement for fiscal year 2017 includes, for Liberbank Group, a loss before taxes for an amount of 454,410 thousand, and income tax for 152,048 thousand. - Government assistance or subsidies received During fiscal 2017, Liberbank Group did not receive any government assistance. - Return on assets The performance of the Group's assets during the fiscal year 2017, calculated by dividing the net profit by the average total balance, understood as the semi-sum of the total balance at the end of the last two years, is (0.82) %. 237

255 Annex VII Information on the Tax Consolidation Group The Bank as the parent company of the Tax Group, in accordance with the provisions of Royal Decree Law 2/2011, has opted for the application of the Tax Consolidation Scheme, in Corporate Tax. The Bank as a parent company of the Tax Group, in accordance with the provisions of Royal Decree Law 2/2011 has opted for the application of the Tax Consolidation Scheme, in Corporate Tax. The Tax Group comprises the Bank as the parent entity and the following subsidiaries: (CIF) A B B B B B A A A A A A A A A A B A A B B B B B B A B B A A A B B A Name Administra Cantabria, S.A. Administradora Valtenas, S.L. Análisis y Gestión de Innovación Tecnológica, S.L. (Sole-Shareholder Company) Arco Explotaciones, S.L.U. Asturiana de Administración de Valores Mobiliarios, S.L. Bancantabria Sistemas, S.L. Banco de Castilla-La Mancha, S.A. Beyos y Ponga, S.A. Briareo Gestión, S.A. Caja Castilla La Mancha Finance, S.A.U. Caja Castilla La Mancha Mediación OBSV Caja Castilla La Mancha Renting, S.A. Cajastur Inversiones, S.A. Camín de la Mesa, S.A. Cantabria Preferentes, S.A. Cantábrica Capital Sociedad de Participaciones Preferentes Cantábrica de Inversiones de Cartera, S.L. Cantábrica Fondos, S.A. Sociedad Gestora ICC CCM Broker 2007, Correduría de Seguros, S.A. Celsus Altamira Promociones, S.L.U. Corporación Empresarial Caja Extremadura Doña Tierra Selección Calidad, S.L.U. Explotaciones Macizos montalbán, S.L. Esplotaciones Santa Isabel, S.L. (Sole-Shareholder Company) Factoría de Transformación de Operaciones, S.L. Finca Las Huelgas, S.A. Fonocantabria, S.L.U. Hoteles Layos, S.L. Inforliber Servicios, S.A. Liberbank Capital, S.A. Liberbank Gestión SGII, S.A. Liberbank IT, S.L. Liberbank Mediación Operador de Banca y Seguros Vinculado, S.L. Liberbank Pensiones, SGF, S.A.U. 238

256 Continued from Annex VII: Information on the Tax Consolidation Group (CIF) A B B B B B A B B A B A A A B B A Name Liberbank Servicios Financieros, S.A. Mosacata, S.L. Norteña Patrimonial, S.L. Peña Rueda, S.L. Pico Cortés, S.L. Pico Miravalles, S.L. Procesa Recuperación de Activos, S.A. Puerto Maravio, S.L. Puntida, S.L. Retamar Soluciones Inmobiliarias, S.A. Sierra del Acebo, S.L. Sistemas Financieros, S.A. Sociedad Promotora de las Telecomunicaciones de Extremadura, S.A. Tiatordos, S.A. Urbe Cantabria, S.L. Valle del Tejo, S.L.U. Viacava Incos de Energía, S.A. 239

257 Translation of a report originally issued in Spanish. In the event of a discrepancy, the Spanish-language version prevails. LIBERBANK GROUP Directors Report corresponding to the year ended 31 December Economic framework 1.1. International economic outlook The partial climate indicators assume that world economic growth will remain solid. Confidence data remains at high levels and shows a more synchronised growth between advanced and emerging economies. Accordingly, the International Monetary Fund (IMF) forecast global GDP growth at 3.6% in 2017 and 3.7% in 2018, the highest figures since In the US, economic activity regained momentum in 2017, after the beginning of the year being marked by uncertainty arising from weak growth in 2016 (1.5%) and the unknown circumstances associated with the new administration. The Fed estimates that GDP could have grown by 2.5% in 2017 (one percentage point higher than 2016), which has allowed for the creation of two million jobs and a reduction in the unemployment rate, standing at 4.1%, its lowest level in 17 years. In this scenario, and despite the modest inflation figures, the Fed has continued with the stimulus reduction process, by implementing interest rate hikes throughout 2017 (within the 1.25% % band) and introducing a gradual reduction of debt assets. Furthermore, it should be stressed that the communication policy of the Fed has allowed this process to be conducted without any disruptions having an impact on financial stability. Also, 2017 was a record year for the equity markets, where the S&P 500 registered a rise close to 20%, which has been compatible with several volatility indexes recording lows. In terms of outlooks, the Fed improved GDP growth and unemployment forecasts, while keeping inflation virtually intact. As for interest rates, three additional increases are expected in 2018, although a further increase may occur if the Trump Administration s fiscal reform has any significant impact on activity and inflation. Lastly, it should be highlighted that long-term interest rate expectations remain fixed at 2.75%. In the Eurozone, activity has registered greater momentum in the economy (2.4% in 2017, according to ECB), which rests on higher investment, the strength of consumption and the encouragement of exports. The latest known data depicts that confidence remains at a high, especially for the manufacturing sector, boosted by higher export orders resulting from an increase in global demand and reduced political uncertainty. Moreover, improvements in domestic demand and an increase in the capacity utilisation are promoting the creation of employment. In this scenario, the ECB has adopted a less expansive tone with regard to its monetary policy, where it announced the reduction of the pace of asset purchases ( 30,000 million per month) between January and September 2018 by half. All of the aforementioned has led to an appreciation of the Euro against the other major currencies. Where, specifically, the euro-dollar exchange rate registered a 15% growth during 2017, closing the year at around 1.20/$. Accordingly, inflation remains below the target rate of 2%, which has led the ECB to continue with its commitment to maintain the benchmark interest rates at current levels for a prolonged period of time. In this manner, the divergence between the reference interest rates of the Eurozone and the US continued to drift apart during At the end of December 2017, the 12-month Euribor stood at %, compared to 2.080% for the 12-month Libor in the United States which has been the greatest interest rate difference between both economies since the beginning of the last decade. 240

258 For the upcoming fiscal year, economic growth is expected to remain robust (2.3% in 2018 and 1.9% in 2019, according to ECB forecasts) and inflation should converge with the target rate, as stronger activity and employment figures are translated into wages. In this manner, throughout 2018, it is likely that the steps towards the normalisation of monetary policy in the Eurozone will be completed The Spanish economy In Spain, according to estimates made by the Bank of Spain, the economy grew by 0.8% between October and December, this being in line with the previous quarter. Accordingly, GDP may have increased by 3.1% during 2017, which would mean three back-to-back years with growth rates greater than 3% per year and the recuperation of activity levels prior to the crisis. This increase during 2017 was due to the greater strengthening of exports, record figures in the tourism industry and the strengthening of private consumption. This has also allowed for the fiscal consolidation process to continue, thereby reducing the public deficit to levels in range of the target figures (-3.1% of GDP). In the near future, the Bank of Spain expects a continuity of this growth cycle, even if is less intense than that observed over recent years, due to the cessation of some factors that had encouraged recent growth (such as the fall in the price of oil and the expansionist policy of the ECB) and the increase in political uncertainty around Catalonia. Specifically, the Bank of Spain has published a GDP growth of 2.4% for 2018 and 2.1% for both 2019 and 2020 and that the unemployment rate should fall below 11% by the end of Financial System The Spanish economy has already seen eight straight years of uninterrupted deleveraging, however, currently, it has been at more moderate rates compared to previous years, where some items have registered increases. Data published up until November 2017 depicted a 2.9% reduction in business loan stock compared to the same period of the previous year. At the same time, household loan stock continued to fall, due to housing loans having decreased by 2.6% compared to November On the contrary, consumer lending stock increased by 4.4%, supporting operations with a term greater than one year. Moreover, the formulisation of new operations depicted a positive trend for This growth has contributed to both household and business loans. From January to November 2017, the number of new household loan approvals grew by 8.2% compared to the same period of the previous year, due to the growth of consumer credit. Moreover, new transactions for non-financial companies increased by 4.8%, which is a contrast with the 17.8% decrease experienced for the whole of This improvement is consistent with the reduction of the default rate, which has benefited from lower financing costs, lower unemployment figures and greater disposable income for households and businesses. The volume of doubtful credit, as a percentage of the total, fell in November to 8.1%, the minimum level since January 2012, one percentage point lower than that registered during the previous year. Savings, based on data known up until November 2017, experienced a slight increase in the total volume of deposits compared to the same month in 2016, with positive performances coming from households (+0.6%) and businesses (11.5%). It is worth mentioning the growth in the weight of demand deposits, due to the low profitability offered by other savings instruments in the current low interest rate environment. Specifically, the weight of demand deposits stood around 74% for households and 85% for businesses, being around 9% and 6% higher than their November 2016 levels, respectively. 2. Liberbank Group Performance 2.1. Corporate activity The main corporate changes for 2017 are described in Notes 2-a (Business combinations and consolidation) and 22 (Shareholders Equity) to these financial statements. 241

259 2.2. Organisational structure The Group's organisational structure, its decision-making bodies and procedural policies are described in the annual Corporate Governance Report Procedural objectives and strategies During the fiscal year 2017, the Liberbank Group had carried out a change of strategy with regards to the management of non-performing assets, which seeks to strengthen the balance sheet, reduce the risk profile and reinforce the business plan by quickly reducing the volume of non-performing assets or NPAs (non-performing loans and foreclosed assets) entailed under the proposed plan of Liberbank Group. This new plan includes several actions: the sale, in August, of the Real Estate Servicer "Mihabitans" to Haya Real Estate (see Note 3.10 of the Report). the recalibration, in September, of the calculation models of loan provisions and foreclosed assets. The impact of this recalibration had been mainly registered under the September accounts and has allowed for the NPA coverage levels to rise by around fifty percent. a capital increase of 499 million for the month of November, which was approved at the General Shareholders Meeting held on 9 October and executed during the month of November. the finalisation of a wholesale transaction, during the last quarter, to offload a foreclosed property portfolio, with a gross value of 613 million at the consolidated level. This implies a reduction of non-performing assets during the second half of the year, amounting to 1,232 million (gross), including retail and wholesale sales, an increase in the coverage levels of non-performing assets, up to 49%, and achieve some solvency ratios significantly higher than those registered during the previous year. While this change was made to the management of non-performing assets, the remaining guidelines included in the business plan, approved for , remained the same, which are summarised below: Financial equilibrium Efficiency Solvency Profitability The financial equilibrium is reflected in the Loan to Deposit ratio, which stood at 90.8%, implying that all credit is being financed by retail deposits, which limits the degree of dependence on wholesale markets for financing. The Group's efficiency level, as viewed via the efficiency ratio, stood at 60.0%. The solvency levels of the Group have been strengthened during the year, as a result of the capital increase and the reduction of non-performing assets, where the CET1 ratio stands at 13.4% and the total capital ratio stands at 15.4%, both having improved during the year by 1.4% and 3.2%, respectively. As for returns, the result of the operating activities before provisions and impairments totalled 223 million, although the aforementioned hedge increases reduced the attributed results to million euros. 242

260 2.4. Business performance and results The public consolidated balance reaches 35,462 million at the end of 2017, with a decrease for the year of - 2,862 million, representing -7.5%. Off balance financial liabilities for customers and savings instruments amounted to 28,328 million, which fell by -3.9%, year-on-year. In this low interest rate environment, savings are being funnelled into demand deposits investment funds. The former has recorded a year-on-year growth of +5.8% and the latter +29.5%. Term deposits, however, fell by -29.9%, registering minimum historical remunerations. Wholesale resources amounted to 4,321 million, which include nonretained covered bonds, repurchase agreements, bonds and wholesale promissory notes. Over the last twelve months, wholesale resource agreements fell by million, mostly due to the maturity of non-retained mortgage bonds (- 974 million). Gross credit to customers amounted to 22,011 million. Performing loans in the private sector continued to grow ( 652 million, year to date). However, non-performing loans were considerably reduced (- 1,306 million, during the year). The new loans and borrowing transactions executed in the six-month period amount to 4,397 million. New financing approved for individuals increased, by +63.9% year-on-year, and especially for the mortgage portfolio (+79.4%). The risk profile of the Group continues to be mostly in retail: Individual and SME risks account for 84.9% of the performing loans to customers and, in particular, household lending for house purchases represent 64.3% of the performing loans to customers. Loans and retail deposits on the balance sheet follow a balanced evolution, where the loan to deposit ratio stands at an optimal level of 90.7%. This fact is also reflected in the LCR (Liquidity Coverage Ratio), which indicates the level of short-term liquidity, where it reached 406% (well above the regulatory threshold of 80%). Furthermore, the NSFR (Net Stable Financial Ratio), which measures the ratio between available stable resources and desirable resources, in accordance to the type of investment made by Liberbank, remains well above 100% (131%). The Group's liquid assets amounted to 6,535 million, all of which is readily convertible to cash. Additionally, Liberbank has an issuance capacity of 5,094 million. The bank's financing structure has a broad base of stable resources, which is well diversified and it has no significant concentration in maturities. Non-performing loans amounted to 1,900 million and fell by -40.7% during the year, continuing the trend of previous years. The non-performing loans ratio fell to 8.6%, 530 basis points below the recorded level in December The Group s targets, redefined in September, in line with the new fast-tracked NPA reduction strategy, has been achieved, as it set the reduction of the non-performing loans ratio by at least 9% by the end of the year, where it was 20.1% and 13.9% at the close of 2015 and 2016, respectively. The valuation adjustments due to the impairment of loans and receivables amounted to 903 million, representing a coverage level of 48%, although almost 40% of the doubtful risks are mortgages taken out by individuals that require a low coverage level since they are secured with the home. The Group s impaired assets (non-performing loans and non-current foreclosed assets held for sale) stood at 2,278 million (net), registering a fall of - 1,463 during the year. These assets have a coverage ratio of 49%. The securities portfolio amounts to 7,310 million, from which 6,587 million are related to the fixed income portfolio. The portfolio's profile continues to be conservative, where 98% is comprised of sovereign debt, with an average internal rate of return (IRR) of 1.0% and an average term of 3.54 years. As for the equity portfolio, it closes the year with a balance of 723 million, an annual change of -14 million, and gains amounting to 62 million. 243

261 As for the income statement, the interest margin amounted to 406 million, accounting for 1.1% in relative terms for the Average Total Assets (ATAs), reflecting a -10.7% year-on-year decrease mainly due to lower contributions from the wholesale business. Shares in various companies have recorded 47 million against results, these being dividends and results of entities evaluated using the equity method. The revenue due to Fees and commissions amounts to 182 million, reaching the figure recorded in 2016.Recurring commissions experienced a year-on-year increase of 1.4%, on the basis of investment funds and insurance business (+17.9% year-on-year and +2.9% year-on-year growth, respectively). The results for gains or losses on financial assets and liabilities and Translation in exchange rates added 89 million to the gross margin, for the most part being derived from the sale of fixed income securities. The results recognised as "Other operating income and charges" entailed a loss of -78 million in September. This section includes, among others, 37 million for contributions to the Deposit Guarantee Fund, 12 million for equity provisions for monetised deferred tax assets, 10 for contributions to the Single Bank Resolution Fund and 8 for state taxes on deposits; the remainder of the revenues and costs under this item are derived from the provision of non-financial services by the various companies comprising the Consolidated Group. All these factors gave rise to a gross margin of 646 million, with a year-on-year variation of %, being mostly due to a reduction in earnings from financial assets and liabilities. Administrative expenses had decreased by -1.0%, where there was a significant decrease in administrative expenses (-4.2%) and a stabilisation of staff costs (+0.8%), following the completion of the Temporary Redundancy Plan (ERTE), in June, and the start of the implementation of the new labour agreement, signed on 21 June with the majority of trade unions (see Note 1.c.2 of the notes to the financial statements). The result of the operating activities before provisions and impairments totalled 223 million, which represents a ROA of 0.6%. On 21 June, an agreement was entered into with the employee representatives with the purpose of implementing a redundancy plan that would include a maximum of 525 employees, whose costs have been provisioned under Provisions or Reversal of Provisions in the consolidated income statement ( 52 million). The same heading records the impact of the reviewed provisions associated with floor clauses, based on the ongoing experiences regarding the resolution of claims filed on the basis of Royal Decree-Law 1/2017 (which has involved the release of funds amounting to 35 million). Moreover, under this heading, other provisions for legal contingencies, guarantees, pension plans, etc. are recorded. The impairment of financial assets amounted to 269 million, of which 255 million corresponded to credit impairment, which increased by $120 million compared to the amount recorded in 2016, mostly due to the recalibration of the impairment estimation models. The total cost of risk stood at 1.16% of the Loan and advances to customers, however the cost of recurring risk was much lower, (0.39%). Moreover, Net gains or losses from the derecognition in the non-financial assets and shareholdings account on the consolidated income statement, amounting to 97 million, reflect income derived from the sale of Mihabitans to Haya Real Estate for the amount of 84,800 thousand (see Note 3.10 of the Notes to financial statements). Lastly, Gains or losses on non-current assets and disposal groups classified as held for sale not considered as discontinued operations on the consolidated income statement, which amounted 244

262 to million, registers the write-downs of foreclosures as a result of the recalibration of the calculation models for provisions and the results following property sales. The consolidated profit attributed to the Parent Company amounted to -259 million Solvency As for the Basel III ratios, the Liberbank Group has achieved a CET 1 (Common Equity Tier 1), at 31 December, of 13.4% (where the regulatory minimum is set at 4.5%), a Tier 1 Capital Ratio of 13.8% (where the regulatory minimum is set at 6%) and a Total Capital Ratio of 15.4% (where the regulatory minimum is set at 8%). Moreover, the leverage ratio stood at 6.7%. As of 31 December 2017, common stock of level 1 and assets weighed by risk of the Group amounted to 2,261 and 16,827 million, respectively. The Group believes that the implementation of IFRS 9 will lead to a reduction in its highest ranked common equity ( CET 1 ), of 10 basis points (see Note 1.m of the consolidated notes to the financial statements) Stock performance and capital structure During 2017 two voluntary swaps of corporate bonds convertible into shares were performed. The first one took place on 20 April. The Group received conversion requests for 2,355,054 debentures, which at a face value of 10/debenture were transformed into 23.6 million in shareholders equity. In view of the changes made to the weighted averages of the Company's shares, along with the minimum and maximum limits established for their issuance, a total of 19,106,629 new shares were issued, representing 2.10% of the Company's share capital. The new shares were issued on 22 May The second voluntary swap took place on 17 October. Swap requests were received for 293,879 bonds, which, at a nominal value of 10/bond, were converted into 2.94 million as equity. In view of the changes made to the weighted averages of the Company's shares, along with the minimum and maximum limits established for their issuance, a total of 2,388,154 new shares were issued, representing 0.26% of the Company's share capital. The new shares were issued on 25 October On 9 October 2017 Liberbank held the Extraordinary General Meeting agreeing on the following: I) reduce the Company's share capital from 835,554, to 18,567,869.06, with the creation of a restricted voluntary reserve for the full amount in which the capital stock had been reduced. The capital reduction will be made by reducing the nominal value of all the shares outstanding, representing the Entity s share capital, from 0.90 to 0.02 per share, and (ii) an increase in the share capital, as described below. During the month of November, Liberbank conducted a capital increase by recognising the preemptive rights of subscription for an effective amount of 499 million and the issue of 1,996,090,904 new shares. The subscription price of the new shares was set at 0.25 per share, and it was established that the proportion of new shares to be received per each former share would be 41 new shares for every 19 former shares. Total shares subscribed in the senior tranche and the requests of the additional tranche accounted for 7.9 times the total increase with Rights. Liberbank s total shares after the increase numbered 2,926,872,

263 As for the shareholding structure, Fundación Bancaria Caja de Ahorros de Asturias, along with Fundación Bancaria Caja de Ahorros y Monte de Piedad de Extremadura and Fundación Bancaria Caja de Ahorros de Santander y Cantabria have a 24.3% ownership, Oceanwood 17.5%, Aivilo Spain SL 7.4%, Corporación Masaveu 5.8% and Norges 3.3% Risk management The Liberbank Group's main business risks are detailed in Note 3 of the financial statements R&D&I activities In the period from 1 January 2017 and 31 December 2017, the Group performed R&D&I activities in IT applications. In 2017, it has obtained a Technical Innovation Certificate pursuant to the Royal Decree 1432/2003, issued by an entity duly accredited by the National Accreditation Body (ENAC) of three project launched in previous years, for a total amount of 11.2 million. A portion of the cost of these completed projects complies with the requirements to be recognised as an intangible asset and amortised on the basis of their useful life Environmental impact In view of the Group's activities, it does not incur any liabilities, expenses, assets or provisions or contingencies which have a significant impact on the environment. Therefore, no specific disclosures relating to environmental issues are included in these notes to the financial statements. 3. Outlook for 2018 For 2018, the global recovery is expected to continue, creating a cyclical upturn in Europe, the US, China and Japan, along with the emerging Asian economies. Inflation will remain at low levels, despite the predicted fall in unemployment rates, and as such there will be emphasis placed on the monetary policies of the various central banks. The Eurozone also expects the recovery to continue, where both the activity levels and the confidence levels will increase, due to increased domestic consumption and public sector investment. There is no significant increase expected for the inflation rate, which will remain below the 2% target set by the ECB. In Spain, the positive GDP growth trend will continue, even though it may be more moderate compared to previous years. This growth will continue to be very intensive due to the labour factor, a process that will contribute to the moderate growing pace of the unit costs, which will mean changes to the CPI as a consequence. There is still an expectation of a strong interest of foreign buyers in the Spanish property market, fuelling a rise in housing prices, however, the uncertainties surrounding Brexit could mitigate this effect. As a result of this situation, it is expected that interest rates will remain at low levels, although, due to the gradual recovery, it is expected that there will be a slight hike during the year. It is expected that there will be a slow recovery process for the financial sector, which is beginning to experience gradual increases in the volumes of loans and deposits managed by the sector. However, certain uncertainties still remain that could dampen the outlook on a global scale, including Europe, Spain and the financial sector, such as the fanning of geopolitical tensions, increased risk due to various political processes (the UK s exit from the EU, elections to be held in the countries of the Eurozone, the domestic situation of Spain, changes to US economic and monetary policy, etc.), which could undermine the confidence of various actors and, therefore, the rate of investment and consumption. 246

264 4. Post balance sheet events Except from the facts described in Note 1.p. of the consolidated notes to the financial statements, no relevant events have occurred subsequent to the end of the reporting period. 5. Corporate Governance Report The Corporate Governance Report is attached as Annex I to this consolidated Directors' Report. 6. Direct and indirect holdings All the Group's holdings are listed in Appendices I, II and III to the notes to the financial statements. 7. Restrictions to the transferability of securities and to the voting right Such restrictions are described in section A.10 of the Annual Corporate Governance Report. 8. Shareholder agreements Such restrictions are described in section A.6 of the Annual Corporate Governance Report. 9. Rules applicable to the amendment of the Group's bylaws. Such rules are described in section B.3 of the Annual Corporate Governance Report. 10. Rules applicable to the appointment and substitution of the members of the Board of Directors Such rules are described in section C.1.19 of the Annual Corporate Governance Report. 11. Powers of members of the Board of Directors Such powers are defined in article 36 of Liberbank's bylaws: 1. The Board of Directors has the most extensive powers to administer, manage and represent the Company, and it has the authority to adopt resolutions on any matter except those attributed by Law or under the bylaws to the General Shareholders' Meeting. 2. The Board of Directors will assume on a non-delegable basis all those powers reserved to the full Board by the law, the bylaws or the Board of Directors' Regulations, as well as any others required to responsibly exercise the general function of supervising and monitoring the Company's ordinary management. Specifically, the Board of Directors will reserve the following powers for its exclusive knowledge and resolution: a) The adoption of resolutions which to be valid require the favourable vote of a qualified majority of directors, pursuant to the Law or these articles of association. b) Responsibility for the administration and management of the Company, the determination of general policies and strategies of the Company and its group and, in particular, the tax strategy of the Company, monitoring and supervision of their execution, the approval and surveillance of the strategic or business plan, the implementation of strategic and management purposes, the risk control and management policy (inclusive of fiscal risks), and monitoring internal information and control systems, the risk strategy and the internal governance. 247

265 c) The establishment of the corporate governance policy for the Company and the group for which it is the Parent Company, as well as regular monitoring, control and assessment of the corporate governance system effectiveness and the adoption of proper measures to address such shortcomings, if applicable. d) The surveillance of the effective functioning of its established internal committees, the performance of delegated bodies as well as an effective surveillance of Senior Management and the appointed managers. e) Policy on treasury shares. f) The approval of the annual budget, the investment and financing policy, the corporate social responsibility policy and the dividend policy. g) Ensuring the integrity of the financial and accounting information systems, including the operational and financial control and compliance with applicable legislation. h) Monitoring the disclosure process and communications of the Company arising from its status as credit institution. i) The preparation of the individual and consolidated financial statements and directors' report, ensuring that these documents express fairly the equity and financial position and results of the Company, pursuant to the applicable legislation and the presentation to the General Shareholder's Meeting. j) Appointing and removing the Company s CEOs as well as determining the terms and conditions of their contracts. k) The approval of the appointment and dismissal of the Company's senior executives, and of the basic terms and conditions of their contracts incluiding the compensation. l) Making decisions on directors remuneration pursuant to the regulating framework and to the remuneration policies approved at the Annual General Meeting and any additional remuneration to executive directors for executive responsibilities, as well as any other terms and conditions which must be respected in their contracts. m) Calling the Annual General Meeting, setting the agenda and the agreement proposals. n) Authorizations or exceptions to obligations originated in the duty of loyalty pursuant to the Law. o) The approval of the financial information listed companies must periodically disclose. p) Determining the structure of the group to which the Company is a Parent. q) The approval of investments or transactions of any kind, whose high amount or special characteristics provide them with a strategic nature or special tax risk, unless the GSM is charged with approving them. r) The approval of the creation or acquisition of shares in special purpose vehicles or entities resident in jurisdictions considered tax havens, and any other transactions or operations of a comparable nature whose complexity might impair the transparency of the Company and its group. s) Approving, after a report from the Audit Committee, those transactions made by the Company or the Group's Companies with directors or shareholders, individually or collectively, including those represented on the Board of Directors of the Company or other Companies of the same group, or with persons related thereto, pursuant to the Law. 248

266 t) The periodic evaluation of the quality and efficiency of the functioning of the Board of Directors and of its internal committees, based on the annual report issued by them and, subject to the approval of the Appointments Committee, the periodic evaluation of the performance of its functions by the chairman and, where appropriate, by the CEO. u) Preparing any report required to the Board of Directors pursuant to the Law, as long as the transaction the report refers to is non-delegable. Approving the annual report on the corporate governance of the Company and the annual report on remuneration policy and any others which may be considered suitable to the Board of Directors in order to enhance shareholders and investors information. v) Its own organization and functioning and, specifically, the approval and amendment of the Board of Directors' Regulations. w) Powers granted to the Board of Directors at the Annual General Meeting unless their subdelegation has been expressly authorized. Decisions on the matters set forth in items (f) and (o) to (s) (inclusive) may be taken by the delegated bodies or persons under urgent and duly justified circumstances, and must then be ratified at the first meeting of the Board of Directors' held after the adoption of the decision. 12. Significant resolutions amended or completed in the event of changes in control Such rules are described in section C.1.44 of the Annual Corporate Governance Report. 13. Resolutions between the Company, the directors, executives or employees which foresee compensation on completion of the relationship with the Company following a takeover bid. Such rules are described in section C.1.45 of the Annual Corporate Governance Report. 14. Information on average payment term to suppliers The average payment term to suppliers is 25 days and it is explained in Note 1.d of the consolidated notes to the financial statements. 15. Non-financial information status: corporate social responsibility Contents of the Non-Financial Information Status, pursuant to Royal Decree-law 18/2017, of 24 November, amending the Commercial Code, the revised text of the Spanish Capital Companies Act, approved by Royal Legislative Decree 1/2010, of 2 July and Law 22/2015, of 20 July, on auditing of accounts, on matters of non-financial information and diversity, which is presented following the criteria of the international standards of the United Nations Global Compact and the Global Reporting Initiative (GRI Sustainability Reporting Standards) and following the methodology for the presentation of non-financial information promoted by the National Securities Market Commission (CNMV) found in the Guide for the preparation of the director report of listed companies and the integrated information model of the Spanish Association of Accounting and Business Administration (AECA), covered by the Integrated Indicators Table (CII-FESG) XBRL Taxonomy, referenced, in turn, by the aforementioned Guide of the CNMV. During the 2017 fiscal year, the Liberbank Group has carried out, as a continuation and strengthening of the actions initiated in 2016, and within the framework of the Corporate Responsibility Policy (CSR), approved by its Board of Directors on 14 December 2015, an intense activity aimed at developing a rigorous, sincere and balanced strategy for the achievement of the objectives commonly accepted and shared in the business and economic sector that concern 249

267 society, the environment, human resource management, human rights, and anti-corruption and diversity. The Group intends to make progress in its responsible management style, being sustained and capable of providing a proper and adequate response to the needs and legitimate interests of the various groups. Such requires that the development of the aforementioned CSR strategy be implemented progressively, persistently and permanently, in such a manner that it gradually becomes entrenched in all of the Entity s areas of activity and stakeholders, who are at the same time the legitimate actors associated with the Entity s aspirations and involved in the proper performance of CSR actions that benefit other groups and society as a whole. This shared commitment, assumed as a long-term undertaking, has been the mainstay in the development of CSR actions, all under the rationale that these are not standalone elements, but rather part of a management style for the development of any activity at Liberbank, this being a conscious and enduring adoption of the integral CSR approach, as responsible management ought to be. This shared commitment, however, requires ongoing momentum, where this task is taken on by a specialised department, around which a CSR working group has been created where other departments with a transversal vision of the entity steer organisational efforts through the alignment of processes and cooperation. The Liberbank Group, apart from adhering to the applicable rules for the different areas and complying with regulations, has agreed to abide by national and international commitments and codes and has its own internal codes of conduct and rules that are intended to ensure ethical and responsible behaviour throughout the entire organisation as well as all its members. In this sense, Liberbank is committed to the key codes of good practice and commitment to social responsibility, such as the United Nations Global Compact (which covers human rights, labour, the environment and anti-corruption), or the accession agreement signed between the Spanish Confederation of Savings Banks (CECA), the National Securities Market Commission (CNMV) and the Bank of Spain, under the framework of the National Financial Education Plan, which, due to its characteristics, the target audience and guiding principles is one of the more pertinent CSR lines of action at Liberbank. Furthermore, Liberbank is a member of AUTOCONTROL (Association for Self-Regulation of Commercial Communication). Internally, Liberbank has implemented a set of codes and standards that ensures its commitment towards responsible, rigorous and sustainable management, which comprise a part of the essential core CSR principles and policies and responsible management. Among these are: the Code of Ethics the Rules of Conduct regarding Securities Market the Corporate Policy on Criminal Risk Prevention the Corporate Policy for the Prevention of Money Laundering and Terrorist Financing (AML/CFT) the Corporate Policy on Customer Admission (AML/CFT) and the AML/CFT Operating Manual for the Liberbank Group Code of Conduct for Directors Corporate Policy on Outsourcing of Essential Services Corporate Risk Admission Policy Corporate Refinancing and Restructuring Debt Policy for the Corporate Policy on Conflicts of Interest and Related-Party Transactions 250

268 Also included are the general policies and strategies approved by the Board of Directors (Investment and Financing Policy; Corporate Governance Policy; Remuneration Policy; Risk control and management systems; Dividend Policy ) Moreover, the Group has provided a detailed report in Section E of the Annual Corporate Governance Report on aspects where there is a greater likelihood of the materialisation of the main major risks Customer-Focused Management Model Customer focus The strategy of rigorous and responsible management with regard to the relationship with customers, where the customer approach is as a priority, which gives preference to a relationship based on transparency, simplicity and closeness, in order to respond to customer needs and requirements and to generate value for all stakeholders. Clear and precise information is the premise of this relationship, which requires, among other measures, the use of responsible and rigorous advertising materials, which are submitted to AUTOCONTROL, so as to safeguard these principles. Moreover, the task of simplifying contractual processes continues, which provides for further simplicity, especially throughout remote channels, where the Entity's staff are not involved and, therefore, cannot help and support customer self-management. Liberbank is of the understanding that the responsibility towards customers has a scope the goes beyond that found in the commercial, contractual and financial services relationship and, in the context of the previous economic and financial crisis and the consequences of an inadequate financial education of the general public and consumers, it has been necessary to support the necessary education in finance on the basis of the Entity s own experience and understanding. In this regard, Liberbank is developing a broad set of actions under the framework of the National Financial Education Plan that is focused on certain groups. Based on several pillars of commercial neutrality, rigor, simplicity and transparency, Liberbank promotes financial education through collaborative programs with the media, being the disseminators and providers of this information and training, where more than 30,000 people had been the recipients of knowledge, training and information following the actions carried out in Commitment towards Anti-Corruption and Anti-Bribery Of particular importance is the fight against corruption and bribery, developed in accordance with the Bank s Code of Ethics and the mechanisms established within the Policy on Prevention of Money Laundering, which has a specific and single-purpose Committee that properly manages this key strategy. For this area, Liberbank has developed professional training plans for the organisation, essentially in terms of criminal risk: Criminal Risk Prevention Prevention of Money Laundering and Terrorist Financing Internal Code of Conduct (ICC) regarding the securities market Reporting of suspicious transactions involving market abuse In 2017, in addition to the training actions, the Bank has developed other initiatives in the fight against corruption and bribery: Approval of the Dissemination Plan for the Corporate Policy on Criminal Risk Prevention and the Code of Professional Ethics. 251

269 Presentation of the Evaluation Report on Liberbank s Criminal Risk Prevention Model to the Bank's governing bodies, conducted by an external consultant. Inclusion of the recommendations contained in the external consultant report in the Regulatory Compliance Action Plan and the Internal Audit Report. Annual review of the Operational Manual for Criminal Risk Prevention, with the incorporation of the criminal risk assessment methodology and the updating of the list of specific implemented oversight measures for each identified risk, including that concerning corruption and bribery offenses. Annual review of the Operational Manual for Criminal Risk Prevention Control. Assessment of potential or intrinsic risks for the Entity should there be any incurrence of any of the crimes attributable to legal entities, including corruption and bribery. In 2017, the Bank has not been involved in any incident or report on the basis of any irregularities regarding corruption and bribery Respect for Human Rights Another of the Liberbank s CSR premises rests on the respect and promotion of human rights with regard to the relationship with all its stakeholders: customers, shareholders, professionals, the environment and service providers. Among the global actions developed in this area, the following should be highlighted: Approval for the Dissemination Plan of the Corporate Policy on Criminal Risk Prevention and the Code of Professional Ethics, which includes the rules of conduct regarding equal opportunities and respect for people Training for staff and the Board of Directors regarding criminal risk prevention and the Code of Professional Ethics Annual review of the Operational Manual for Criminal Risk Prevention, with the incorporation of the criminal risk assessment methodology and the updating of the list of specific implemented oversight measures for each identified risk, including that concerning offenses against the rights of foreign citizens. Annual review of the Operational Manual for Criminal Risk Prevention Control. Assessment of potential or intrinsic risks for the Entity should there be any incurrence of any of the crimes attributable to legal entities, including offenses against the rights of foreign workers. In 2017, Liberbank has not been involved in any incident or claim involving an incident or infringement of Human Rights as a result of the Bank s actions. Finally, in order to continue fostering the development of Corporate Social Responsibility within the organisation, as of July 2016, the Bank has adhered to the United Nations Global Compact, an international initiative that promotes the compliance of ten universally accepted principles in the 252

270 areas of Human Rights and Business, Labour Standards, the Environment and the Fight against Corruption Responsibility to our employees Traditionally, the Group has been a company that has respectfully management people and every professional belonging to the organisation, by strictly adhering to the principles of stability, equality and non-discrimination, talent management, professional training and education, as well as health and safety in the workplace. In this regard, the entity has a Workplace Risk Prevention Plan, which is overseen by the endeavours of the Safety Committees It is committed to professional development through internal promotion, which is decided upon using selection criteria on the basis of the number of years of experience, academic background, specialised knowledge and achievement, along with a competence assessment of the candidates for a certain position. This is a system that ensures equal opportunities for its professional staff at all times. Another of the basic equality principles that Liberbank follows is non-discrimination among its professionals. Accordingly, the Group has established a base salary that depends on the professional category, which ensures financial equality among men and women. Among the measures aimed at ensuring equality, the Bank has a whistleblowing channel that allows all Bank employees to report possible situations involving discrimination or harassment. The talent promotion model has been implemented through a processes of internal selection for managers, which has included the delivery of several training programs amounting to a total of 265,715 hours. Being an additional element, an Equality Plan and a protocol for the prevention and the means of addressing unethical behaviour and sexual and gender harassment in the workplace have been approved at Banco de Castilla-La Mancha. The intention of the entity is to extend and standardise actions to promote equality within the Group Responsibility to the Environment Commitment to the environmental is instilled by the Group in a comprehensive manner, based on a global strategy to reduce consumption and by reducing waste, which includes measures based on the use of intelligent electrical consumption, maximum use of office supplies and a reduction of paper consumption, through a policy of almost exclusive use of paper for processing and contracting which is governed by regulations. The set of actions, including those that centralise and personalise the use of photocopiers, the use of digital signatures and intelligent lighting systems, have led to the following reductions in consumption for 2017: 13% in electricity, 13% in toner, 3% in paper, 5% in diesel and 12% in water. Together, these improvements have led to a CO2 reduction of 3,233 tonnes. Additionally, in collaboration with the utility company, there is a move towards generating electricity from renewable sources. In 2017, 42.7% of the electricity consumed by the Group was from renewable sources. Energy audits carried out at all the Liberbank facilities have been one of the essential driving forces behind the improvements achieved in Responsibility to society The Group, like any other company or cultural organisation, develops its activity in a social environment. The Group is fully committed to create value in a social context, beyond the defined activities described in its corporate purpose, this is to mean that it is an active body found within society, by fostering the enrichment of society in terms of its culture, science, education, etc. 253

271 The vocation to be an active element within society implies that Liberbank develops its social plans and activities in collaboration with other socio-cultural entities, which translates into a greater impact for the beneficiary groups and a greater effectiveness for these programs, as there are expert and specialised entities involved in these processes. This philosophy is what underpins the majority of the Group s social actions, being implemented through collaborations and joint actions with entities from various sectors. The Liberbank Group, under the scope of its commitment to society, undertakes a set of actions in collaboration with other social and cultural entities, where priority is given to specific social groups with special needs. The promotion of talent and the labour insertion of young people is one of the areas of action, which was implemented through a training program for 240 students receiving specific training and practical experiences having commenced in October 2017, which will finalise in April 2018, where they will obtain official accreditation to apply for a job in the financial sector. Within this same strategy to promote education and training for young people, Liberbank collaborates with the Fernando Alonso Foundation for the delivery of road safety and awareness courses for primary school students (8 to 11 year olds), where 4,130 students from 106 schools participated during the academic year. On the other hand, some actions have been focused on groups with specific issues, such as the social renting housing program or the insertion and socialisation of the prison population, an activity developed in collaboration with the Real Madrid Foundation. 16. Alternative performance measures In addition to the financial information contained herein, prepared in accordance with the applicable International Financial Reporting Standards (IFRS), certain Alternative Performance Measures (APMs) have been included, as per the provisions laid down under the Guidelines on Alternative Performance Measures, published by the European Securities and Markets Authority on 30 June 2015 (ESMA/2015/1057) ( ESMA Guidelines ). The ESMA Guidelines define the APMs as a financial measure of historical or future financial performance, financial position, or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework. The Group uses specific APMs, which have not been audited, for the purpose of contributing to a better understanding of the financial performance of the company. These measures must be considered as additional information and, under no circumstance, are they to replace the financial reporting. Furthermore, these measures may differ, either in their definitions and calculations, to similar measures calculated by other companies and, therefore, they may not be comparable. The APMs used in this document are the following: NPL (Non performing loans): Non-performing Loans and advances to customers recorded under Loans and accounts receivable- customers. NPA (Non performing assets): Gross Assets granted of property nature recorded under the heading "Non-current assets classified as held for sale". Loan to deposit: The ratio of Loans and advances to customers (net) to Deposits. Loans and advances to customers are recorded under" Loans and receivables" in the balance sheet, from which the reverse repurchase agreements (reverse repos) are deducted. Deposits are recorded under Financial liabilities at amortised cost (Deposits) on the published balance sheet. For the purpose of this calculation, mortgage bonds, repurchase agreements (repos), deposits from credit institutions and central banks are removed and promissory notes and retail CoCos are included. The ratio of loans and advances to doubtful customers (net) to the total loans and deposits to customers (net). The numerator and denominator are recorded under" Loans and receivables" on 254

272 the balance sheet. Not included, either in the numerator or the denominator, are the reverse repurchase agreements, valuation adjustments or debts recorded on the balance sheet reserved under Other financial assets not corresponding to credit institutions. Defined as value adjustments due to impairment of loans and advances to customers over loans and advances to doubtful customers (net). The numerator and denominator are recorded under" Loans and receivables" on the balance sheet. Ratio of administrative expenses to gross margin. Cost of risk: Ratio of Impairment losses on financial assets (from loans and receivables) of the consolidated income statement (on an annual basis if not related to a full fiscal year) and Loans and advances to customers. Average Total Assets (ATAs): Calculated as the simple average of the total assets of all the consolidated monthly balance sheets for the current financial year (including that for the month of December of the previous financial year), being one half of the sum of the extremes. 255

273 Translation of a report originally issued in Spanish. In the event of a discrepancy, the Spanish-language version prevails. MODEL APPENDIX I ANNUAL CORPORATE GOVERNANCE REPORT OF LISTED COMPANIES ISSUER S PARTICULARS END OF FISCAL YEAR DATE TAX ID NO. (CIF): A Company name: LIBERBANK, S.A. Company s registered office: CAMINO DE LA FUENTE DE LA MORA 5, MADRID 1

274 ANNUAL CORPORATE GOVERNANCE REPORT OF LISTED COMPANIES A OWNERSHIP STRUCTURE A.1 Complete the following table on the company s share capital: Date of last Number of voting Share capital ( ) Number of shares change rights 17/11/ ,537, ,926,872,511 2,926,872,511 Indicate whether different types of shares exist with different associated rights: Yes No A.2 List the direct and indirect holders of significant ownership interests in your company at year-end, excluding directors. Name or corporate name of shareholder Number of direct voting rights Fundación Bancaria Caja de Ahorros de Asturias Fundación Bancaria Caja de 0 Ahorros de Asturias Fundación Bancaria Caja de 0 Ahorros de Asturias Fundación Bancaria Caja de Ahorros de Santander y Cantabria Fundación Bancaria Caja de Ahorros de Extremadura Fernando Masaveu Herrero Fernando Masaveu Herrero Fernando Masaveu Herrero 0 Fernando Masaveu Herrero Indirect voting rights Direct holder of interest Number of voting rights % over total voting rights 472,504, % Fundación Bancaria Caja de Ahorros de Santander y Cantabria Fundación Bancaria Caja de Ahorros de Extremadura 98,358, % 140,647, % 98,358, % 140,647, % 2,315, % 0 Flicka Forestal, S.L. 11,804, % Fundación María Cristina Masaveu Peterson 0 Corporación Masaveu, S.A. 7,962, % 146,708, % 2

275 Fernando Masaveu Elías Masaveu 4, % Herrero Compostizo Fernando Masaveu Jaime Masaveu 4, % Herrero Compostizo Fernando Masaveu Herrero Pedro Masaveu Compostizo 4, % Corporación 146,708, % Masaveu, S.A. Aivilo Spain, S.L.U 217,326, % Oceanwood Opportunities Master Fund Crown/Oceanwood Segregated Portfolio OCEANWOOD CAPITAL MANAGEMENT LLP 0 Oceanwood Investments II Designated Activity Company 265,674, % Oceanwood European Financial Select Opportunities Master Fund NORGES BANK 22,261, % Indicate the most significant movements in the shareholder structure during the year: Name or corporate name of shareholder Date of the transaction Arrowgrass Master Fund Ltd 17/11/2017 Arrowgrass Master Fund Ltd 20/11/2017 Norges Bank 17/11/2017 Fundación Bancaria Caja de Ahorros de Asturias 25/10/2017 Fundación Bancaria Caja de Ahorros de Extremadura 25/10/2017 Fundación Bancaria Caja de Ahorros de Santander y Cantabria 25/10/2017 Oceanwood Capital Management LLP 25/10/2017 Wellington Management Group LLP 25/10/2017 Wellington Management Group LLP 20/11/2017 Wellington Management Group LLP 21/11/2017 Wellington Management Group LLP 06/12/2017 Description of the transaction Ownership interest has risen above 3% of share capital Ownership interest has fallen below 3% of share capital Ownership interest has risen above 3% of share capital Ownership interest has fallen below 40% of share capital Ownership interest has fallen below 5% of share capital Ownership interest has fallen below 5% of share capital Ownership interest has risen above 15% of share capital Ownership interest has risen above 3% of share capital Ownership interest has risen above 5% of share capital Ownership interest has fallen below 5% of share capital Ownership interest has fallen below 3% of share capital 3

276 A.3 Fill out the following tables on the members of the Company s Board of Directors who hold voting rights over shares in the company: Name or corporate name of director Mr. Pedro Manuel Rivero Torre Mr. Manuel Menéndez Mr. Víctor Manuel Bravo Cañadas Number of direct voting rights Indirect voting rights Direct holder of interest Number of voting rights % over total voting rights 257, % María del Carmen 1,135,703 Villa Rodríguez María de la Paz 275,254 Fernández Sánchez 85, % 17, % Mr. Eduardo Zúñiga Pérez del Molino 153, % Mr. Jesús María Alcalde Barrio 200, % Mr. Jorge Delclaux Bravo 227, % Ms. Davida Sara Marston 5, % Ms. María Encarnación Paredes Rodríguez 217, % Mr. Felipe Fernández 323, % Mr. Víctor Roza Fresno Ana Victoria Roza 547,753 Álvarez 19, % Ms. María Luisa Garaña Corces Mr. Ernesto Luis Tinajero Flores Mr. Luis Masaveu Herrero 223, % 3,491,820 0 Aivilo Spain 217,326, % Masaveu Capital S.L. 1,036, % % of total voting rights held by the Board of Directors 7.73% Fill out the following tables on the members of the Company s Board of Directors who hold rights over shares in the Company: Name or corporate name of director Number of direct voting rights Indirect rights Number of Direct voting rights Holder Number of equivalent shares % over total voting rights A.4 Indicate, as appropriate, any relationships of a family, commercial, contractual or corporate nature existing between the holders of significant ownership interests, insofar as they are known to the company, unless they have scant relevance or arise from the ordinary course of business. Related name or company name Fundación Bancaria Caja de Ahorros de Asturias Fundación Bancaria Caja de Ahorros y Monte de Piedad de Extremadura 4

277 Type of relationship: corporate Brief description: Shareholder agreement Related name or company name Fundación Bancaria Caja de Ahorros de Asturias Fundación Bancaria Caja de Ahorros de Santander y Cantabria Type of relationship: corporate Brief description: Shareholder agreement Related name or company name Fundación Bancaria Caja de Ahorros y Monte de Piedad de Extremadura Fundación Bancaria Caja de Ahorros de Santander y Cantabria Type of relationship: corporate Brief description: Shareholder agreement A.5 Indicate, as appropriate, any relationships of a commercial, contractual or corporate nature existing between the holders of significant ownership interests and the company and/or its Group, unless they have scant relevance or arise from the ordinary course of business: Related name or company name Fundación Bancaria Caja de Ahorros de Asturias Liberbank, S.A. Type of relationship: Contractual Brief description: service provision and collaboration agreement in certain matters. Related name or company name Fundación Bancaria Caja de Ahorros y Monte de Piedad de Extremadura Liberbank, S.A. Type of relationship: Contractual Brief description: service provision and collaboration agreement in certain matters. A.6 Indicate whether the company has been notified of any shareholders agreements that may affect it pursuant to Sections 530 and 531 of 5

278 Companies Law. Provide a brief description and list the shareholders bound by the agreement, as applicable. Yes No Parties to the shareholders agreement Fundación Bancaria Caja de Ahorros de Asturias Fundación Bancaria Caja de Ahorros y Monte de Piedad de Extremadura Fundación Bancaria Caja de Ahorros de Santander y Cantabria Percentage of share capital affected: 24.31% Brief description: On 13 April 2011 Caja de Ahorros de Asturias, Caja de Ahorros de Santander y Cantabria, y Caja de Ahorros y Monte de Piedad de Extremadura signed an integration agreement whereby they adopted a voting syndication agreement. The above said syndication agreement was amended and a new syndication agreement was signed on 23 February In this regard, and pursuant to the syndication agreement regarding adopting resolutions, it should be noted that, except for certain concrete matters listed in significant event no filed with the CNMV on 25 may 2015, Fundación Bancaria Caja de Ahorros de Asturias shall decide how their votes shall be cast. Furthermore, some aspects in the transfer and purchase of shares are regulated by some of the banking foundations of the agreement. Indicate whether the company is aware of the existence of any concerted actions among its shareholders. Give a brief description as applicable: Yes No Parties to concerted action Fundación Bancaria Caja de Ahorros de Asturias Fundación Bancaria Caja de Ahorros y Monte de Piedad de Extremadura Fundación Bancaria Caja de Ahorros de Santander y Cantabria Percentage of share capital affected: 24,31% Brief description of concerted action: The above said. Expressly indicate any amendment to or termination of such agreements or concerted action during the fiscal term: A.7 Indicate whether there is any individual or legal entity that exercises, or can exercise, control over the Company, in accordance with Article 5 of the Securities Market Law. If so, identify: Yes No 6

279 Name or corporate name Comments A.8 Fill out the following tables on the company s treasury shares: At year-end: Number of shares held directly Number of indirect shares (*) Total % on share capital 5,852,113 1,596, % (*) Through: Name or company name of direct holder of ownership interest Banco de Castilla-La Mancha S.A. Banco de Castilla La Mancha Mediación, Operador de Banca Seguros Vinculado, S.A.U. Total Number of shares held directly 1,595, ,596,454 Give details of any significant changes during the year, pursuant to Royal Decree 1362/2007. Explain significant changes a) Communication from 23 November 2017 on updating by amendment in the number of voting rights of the issuer, reaching the following percentages of votes: Direct votes: Indirect votes: A.9 Give details of the applicable conditions and time periods governing any resolutions of the General Shareholders Meeting to issue, buy back and/or transfer treasury stock. With regard to the details of the conditions and effective term of the current authorisation by the Shareholders Meeting to the Board of Directors to issue, repurchase or transfer treasury shares, information on the resolutions adopted by the Annual General Meeting of Liberbank, S.A. held on 21 April 2015 is included in the Annex. A.9 bis Estimated floating capital. Estimated floating capital 45.00% % A.10 Explain any restrictions on the transfer of securities and on voting rights. Indicate, in particular, the existence of any restrictions that may hinder the takeover of the company by means of share purchases on the market. 7

280 Yes No Description of restrictions In this respect, the agreement made public as a relevant event published on the website of the National Securities Market Commission on 25 February 2015, amending the one published on 16 May 2013, is included in the annex. A.11 Indicate whether the General Shareholders Meeting has agreed to take neutralisation measures to prevent a public takeover bid by virtue of the provisions of Act 6/2007. Yes No If applicable, explain the measures adopted and the terms under which these restrictions may be lifted. A.12 Indicate whether the Company has issued securities that are not traded on an EU regulated market. Yes No If so, identify the various classes of shares and, for each class of shares, the rights and obligations they confer. B GENERAL SHAREHOLDERS MEETING B.1 State if there are differences with the quorum provisions of the Companies Law in respect of General Meetings. If so, give details. Yes No B.2 State if there are differences with the rules laid down in the Companies Law regarding the adoption of resolutions. If so, give details: Yes No Describe how they differ from the rules established in the LSC. B.3 State the provisions applicable to amendments to the company s bylaws. Specifically, the required majorities for amending the bylaws shall be informed, as well as the provisions set forth for safeguarding the rights of the shareholders during the bylaw amendments, as the case may be. Pursuant to article 20 of the Bylaws, shareholders in General Meeting are responsible, inter alia, for amending the Bylaws. Article 25 of the Bylaws establishes the quorum necessary for the General Meeting to be validly constituted: The General Meeting shall be validly constituted at first call when shareholders in attendance or represented by proxy hold at least 25% of the subscribed capital with voting rights. The General Meeting at second call shall be validly constituted regardless of the percentage of share capital in attendance. Notwithstanding the above, in order for the General Shareholders' Meeting to validly approve resolutions on an increase or reduction of capital and any other amendment to the Company Bylaws, an issuance of convertible bonds and bonds conferring a stake in corporate earnings for bondholders, the elimination or limitation of the pre-emptive right to acquire new shares, as well as a change of 8

281 corporate form, merger, spin-off or en bloc transfer of assets and liabilities and the transfer of the registered office abroad, at first call, shareholders holding at least fifty per cent (50%) of the subscribed capital with voting rights must be present in person or by proxy. At second call, the presence of shareholders representing twentyfive per cent (25%) of the aforementioned share capital shall be sufficient. Any absences occurring after the General Meeting is officially called to order will not affect the validity of the quorum. As regards the system for adopting resolutions and pursuant to article 33.2 of the Bylaws, resolutions shall be adopted by simple majority of the of the shareholders attending the Shareholders' Meeting in person or by proxy, except for the specific cases laid down by law or the Bylaws which require a greater majority. For this purpose, pursuant to Article 33º.2 and Article 201 from the Consolidated Companies Law, the approval of capital increase or reduction or any other amendment to company s bylaws, the bond issue, suppression or limitation on new shares pre-emptive rights, as well as the transformation, merger, spin-off or the total transfer of assets and liabilities and the transfer of registered office abroad, shall require an absolute majority if the capital present or represented exceeds fifty percent. Favourable vote of two thirds of the capital present or represented at the meeting shall be required when, on second call, shareholders attend the meeting representing twenty-five percent or more of the subscribed capital with voting rights without reaching fifty percent. Notwithstanding the foregoing, Art. 3 of the Bylaws states that Liberbank s registered office may be changed upon agreement of the Board of Directors within Madrid region. According to article 39.2 of the Bylaws, the Board shall be validly constituted to decide regarding any matter when the meeting is attended by the majority of its members, in person or by proxy, and the resolution shall be adopted by majority vote of the Directors attending the meeting in person or by proxy, as per Article 39.6 of the Bylaws. 9

282 B.4 Indicate the data on attendance at the General Meetings held in the year to which this report refers and those related to the previous year: Attendance data Date of % remote voting Annual % attendance % attendance by Electronic Total General in person proxy Other vote Meeting 20/04/ % 64.91% 0.0% 0.72% 66.14% 19/04/ % 62.99% 0.0% 0.22% 63.27% 09/10/ % 67.59% 0.0% 0.27% 67.94% B.5 Indicate whether the Bylaws impose any minimum requirement on the number of shares required to attend the Annual General Meetings. Yes No Number of shares required to attend a Annual General Meeting 1 B.6 Section repealed. B.7 Indicate the address and mode of accessing corporate governance content on your company s website as well as other information on Annual General Meetings which must be made available to shareholders on the website. The information on Corporate Governance is located in the corporate portal ( under Inversores y accionistas (Investors and Shareholders), in a specific section called Corporate Governance and Remunerations Policy whose direct link is: Within this section there is a subsection dedicated to general meetings, highlighting the section on the last Extraordinary General Meeting (2017). Once the General Meeting is called, all relevant documentation is available via a direct link to the web homepage until the meeting is held. All Annual Corporate Governance Reports are available in a dedicated sub-section, under Corporate Governance, its direct link is: 10

283 C MANAGEMENT STRUCTURE OF THE COMPANY C.1 Board of Directors C.1.1 List the maximum and minimum number of directors included in the Bylaws. Maximum number of directors 15 Minimum number of directors 5 C.1.2 Complete the following table with Board members details. Name or corporate name of director Director's condition Board office Date of first appointment Date of last appointment Procedure for election Pedro Manuel Rivero Torre Manuel Menéndez Menéndez Víctor Manuel Bravo Cañadas Eduardo Zúñiga Pérez del Molino Jesús Maria Alcalde Barrio Víctor Roza Fresno Felipe Fernández Fernández Jorge Delclaux Bravo Davida Sara Marston María Encarnación Paredes Rodríguez María Luisa Garaña Corces Luis Masaveu Herrero Ernesto Luis Tinajero Flores Independent Chairman 5 December 2011 Executive Proprietary Proprietary Proprietary Other nonexecutive directors Managing Director First Deputy- Chairman Second Deputy Chairman Director and Secretary 23 May May January January 2013 Director 23 May 2011 Proprietary Director 23 May 2011 Independent Director 5 December 2011 Independent Director 17 January 2012 Proprietary Director 23 January January January January January January January January January January January 2013 Independent Director 21 April April 2015 Proprietary Director 21 April April 2015 Proprietary Director 21 April April 2015 Agreement on Annual General Meeting Agreement on Annual General Meeting Agreement on Annual General Meeting Agreement on Annual General Meeting Agreement on Annual General Meeting Agreement on Annual General Meeting Agreement on Annual General Meeting Agreement on Annual General Meeting Agreement on Annual General Meeting Agreement on Annual General Meeting Agreement on Annual General Meeting Agreement on Annual General Meeting Agreement on Annual General Meeting Total number of directors 13 11

284 Indicate any removals of directors during the reporting period: Name or corporate name of director Alfonso Pitarch Rodríguez Director s condition Date of upon termination termination Proprietary 07/04/2017 C.1.3 Fill out the following tables on the members of the Board and their status: EXECUTIVE DIRECTORS Name or corporate name of director Manuel Menéndez Menéndez Office per Company organisation chart Chief Executive Officer - Chairman of Steering Committee Total number of executive directors 1 % of the board 7.69% EXTERNAL PROPRIETARY DIRECTORS Name or corporate name of director Víctor Manuel Bravo Cañadas Eduardo Zúñiga Pérez del Molino Jesús María Alcalde Barrio Felipe Fernández Fernández María Encarnación Paredes Rodríguez Ernesto Luis Tinajero Flores Luis Masaveu Herrero Name or company name of significant shareholder represented or proposing appointment Fundación Bancaria Caja de Ahorros y M.P. de Extremadura Fundación Bancaria Caja de Ahorros de Santander y Cantabria Fundación Bancaria Caja de Ahorros de Asturias Fundación Bancaria Caja de Ahorros de Asturias Fundación Bancaria Caja de Ahorros de Asturias Aivilo Spain SA Corporación Masaveu, S.A. Total number of proprietary directors 7 % of the board 53.85% 12

285 INDEPENDENT EXTERNAL DIRECTORS Name or corporate name of director: Pedro Manuel Rivero Torre Profile: Pedro Manuel Rivero Torre has been the Chairman of Liberbank since 27 October 2014, and an independent director of the entity since 5 December Mr. Rivero holds a degree in Business Studies from the Santander School of Commerce and a Doctorate in Economics and Business Studies from the Complutense University of Madrid. He is a member of the Royal Academy of Doctors and a Professor of Financial Economics and Accounting at the Complutense University. He is also a Chartered Accountant and Auditor on leave in the Spanish Accounting and Audit Institute (ICAC) He has also written various books, including "Cash-Flow, Estado de Origen y Aplicación de Fondos y Control de Gestión", published by the Asociación para el Progreso de la Dirección (APD), Madrid, and LIMUSA, Mexico, "Análisis de Balances y Estados Complementarios", Ed. Pirámide, Madrid and articles in numerous Spanish and foreign journals. He also gives conferences on productivity, financial analysis, cost control, accounting standards, energy policy, the electricity system, etc. Name or corporate name of director: Jorge Delclaux Bravo Profile: Jorge Delclaux Bravo has been a member of Liberbank s Board of Directors since 5 December He is an independent director. He holds a graduate degree in Business and Economic Sciences granted by Colegio Universitario de Estudios Financieros (CUNEF) Madrid. Between 1985 and 2006, he built his career at different investment banks (Morgan Grenfell & Co. Ltd., UBS Phillips & Drew, and Rothschild). In 2006 he was appointed Executive Vice President of Inversiones Ibersuizas, one of Spain s leading private equity investment firms. He is also member of the board in the following companies: Zángano Charter, S.L., Findel, S.L., Amadel Capital, S.L., Promotora Residencial Liendo, S.L., Península Capital S.A.R.L. y de Península Promotores S.A.R.L. Name or corporate name of director: Davida Sara Marston Profile: Davida Sara Marston has been a member of Liberbank s Board of Directors since 17 January She is an independent director. She speaks three languages and has also been a member of the boards of directors of companies listed on British, Irish and Spanish stock exchanges. She has vast experience in regulated sectors and business changes and extensive expertise in different business cultures, including emerging markets. Over her 30 years experience in the international banking sector, she has acquired specific knowledge of Spain, Latin America (especially, Venezuela), Canada, the United States and the United Kingdom. She also has broad experience in corporate governance, risks, audits and regulations, including Sarbanes Oxley. She is currently member of Bank of Ireland's Board of Directors. 13

286 Name or corporate name of director: María Luisa Garaña Corces Profile: Maria Luisa Garaña Corces has been a member of Liberbank s Board of Directors since 21 April She is an independent director. She holds a graduate degree in Business Law granted by the University of San Pablo CEU in Madrid, an undergraduate degree in international trade granted by the University of California, Berkeley, and a Master in Business Administration (MBA) granted by Harvard University. Before joining the Spanish subsidiary, Mrs. Garaña was General Manager at Microsoft for the Southern Cone of Latin America, with responsibility over Argentina, Chile, Uruguay, Paraguay and Bolivia. Previously she was Operations and Marketing Manager at Microsoft Mexico. María Garaña joined Microsoft in 2002 coming from the publishing group Zoom Media based in Miami, where she served as Managing Director. In the same area, she held positions of maximum responsibility within Grupo Televisión Azteca. She has also worked for Merrill Lynch International in London, Andersen Consulting in Madrid and Istanbul, and Citibank in Madrid. Currently, María Garaña is member from the Governing Board of European Institute of Innovation and Technology (EIT), the UNED Social Board and the APD Board (Association for Progress in Management). Moreover, she is also a member on the Board of Euler Hermes (Allianz Group) in Paris, Board of Alantra Partners, S.A. and of Distribuidora Internacional de Alimentación, S.A., and a member on the Board of Trustees of Fundación Junior Achievement and the Board of Trustees of Fundación Seres in Spain. Currently, she is the Professional Services General Manager for Europe, the Middle East and Africa at Google, a position, along with her broad and diverse background and extensive professional experience, as well as the many awards she has received (Award for Women Directors awarded by the Spanish Federation of Women Directors, Executives, Professionals and Entrepreneurs (FEDEPE), the FUNDE Award as Manager of the Year, the Gold Master from the Senior Management Forum and the distinction as Best Digital Manager of 2014 awarded by eawards). Total number of independent directors 4 Total % of the Board 30.77% Indicate whether any independent director receives any sums of money or benefits from the Company or from the Company s group, other than the directors remuneration, or whether he or she currently has or formerly had, over the last year, a business relationship with the Company or with any Group company, whether on his/her behalf or as a significant shareholder, director or senior executive of an entity currently or formerly maintaining such a relationship. No. 14

287 If so, please include a well-founded statement by the Board of Directors regarding the reasons why it considers this director suitable to perform duties as an independent director. Name or corporate name of director Description of the relationship Reasons OTHER EXTERNAL DIRECTORS Other non-executive directors will be identified and reasons will be provided on why these other non-executive directors cannot be considered either proprietary or independent members and their relations, whether with the company or its officers, or with its shareholders: Name or corporate name of director: Víctor Roza Fresno Company, officer or shareholder with whom relation is maintained: Corporación Masaveu, S.A Reason: The Board of Directors meeting dated 16 March 2015 concluded in this respect that Mr. Victor Roza Fresno: No longer holds the position of nonexecutive proprietary director of the Banking Foundation Caja de Ahorros de Asturias as he has ceased to represent such shareholder, holder of a significant stake in Liberbank; Continues to meet the suitability requirements prescribed in the applicable regulation to credit institution s directors and other requirements stated at Liberbank Bylaws and the Board of Directors Regulations; Given his personal and professional qualities, knowledge, skills and experience, and his extensive career as manager of credit institutions, his leave as member of this Entity s Board of Directors would mean a significant reduction in the composition of this Body: Taking into account that Mr. Víctor Roza Fresno does not represent any shareholder, he shall not be considered as independent and does not qualify to be considered as executive director for not meeting the related requirements, the Board of Director agreed upon to qualify Mr. Víctor Roza Fresno as nonexecutive director other non-executive. Total number of other non-executive directors 1 Total % of the Board 7.69% Indicate any variations in the status of each director that may have occurred during the year: Name or corporate name of director Date of change Previous status Current Category 15

288 C.1.4 Complete the following table with Board female members details at the end of the last four years, as well as the category of those directors: Fiscal year 2017 Number of female directors Fiscal year 2016 Fiscal year 2015 Fiscal year 2014 % of total directors of each category Fiscal year 2017 Fiscal year 2016 Fiscal year 2015 Fiscal year 2014 Executive % 0.0% 0.0% 0.0% Proprietary % 12.50% 14.29% 16.67% Independent % 40% 40% 25% Other external % 0.0% 0.0% 0.0% Total % 20% 20% 16.67% C.1.5 Explain the measures that would have been adopted, as the case may be, to attempt to include a number of women in the Board of Directors so as to reach a balanced number of men and women. Explanation of measures Article 18.5.b) of the Board of Directors Regulations provides that the Appointments Committee shall ensure that, when new vacancies arise or when appointing new directors, selection procedures promote experience and knowledge diversity, facilitate women directors selection and, in general, that no biases are included which may involve discrimination. In this regard, the Committee shall set an objective of representation for the gender less represented in the Board of Directors and develop guidelines on how to increase the number of people from the underrepresented gender in order to achieve that objective. The section 5.3 of the Directors Selection Policy states that in any case, during the directors selection processes, knowledge, experience and gender already existing within the Board shall be taken into account in order to promote diversity in the composition thereof. In this regard, the Board of Directors shall ensure that such body has sufficient number of female directors by promoting the compliance with the objective of representation for gender less represented in the Board set by the Appointments Committee at any time through decision-making in the selection process of new directors and, in any case, as provided in 14th Recommendation of Unified Code of Good Governance, a total number of female directors representing at least 30 % of total Board members by 2020 shall be pursued for this purposes. In this process, and in order to achieve this objective, the Appointments Committee shall meet the following guidelines: a) Regarding the appointment of independent directors, the Appointments Committee, by giving the right instructions shall ensure that in the search for candidates that fit the desired profile, the consultancy firm renowned in the field of personnel selection conducting the process includes candidates who meet the conditions established by the Appointments Committee taking into account the provisions of the Directors Selection Policy. b) Regarding the other directors appointment, at the time of preparing its preliminary report on the nomination proposal, the Appointments Committee shall weigh the potential impact of the proposed candidate appointment in the 16

289 Board s experience and knowledge diversity and its orientation to achieve the objective set on the representation percentage of female directors. C.1.6. Explain the measures that would have been decided by the Appointments Committee, as the case may be, so that the selection processes are free of implicit biases hindering the selection of female directors, and so that the Company may deliberately headhunt and include among the potential candidates, women with the sought-after professional profile: Explanation of measures As has been stated in the current corporate documents, the Appointments Committee must ensure that when board vacancies arise or when new directors are appointed, there is no implicit bias in the selection processes that could mean any discrimination and, in particular, bias against selecting female candidates. The committee must inform the Board of Directors about the entire process. These measures are included in the Directors Selection Policy as stated in section C.1.5. If in spite of the measures that have been adopted, as the case may be, the number of female directors is low or nil, please provide the reasons: Explanation of the reasons As has been stated in the foregoing sections, the Appointments Committee must ensure that when board vacancies arise or when new directors are appointed, there is no implicit bias in the selection processes that could mean any discrimination and, in particular, bias against selecting female candidates. The Committee must inform the Board of Directors about the entire process. Therefore, in the selection processes for candidates to fill the vacancies on the Board of Directors, profiles of both male and female candidates have been taken into account, taking care that, in accordance with Article 529 bis.2 of the Spanish Capital Companies Act, with Article 8 of the Regulations of the Board of Directors and with Recommendation 14 of the Code of Good Governance, such favours gender diversity, experience and understanding and, pursuant to Article 24 of Law 10/2014 and to Article 8.6 of the Regulations of the Board of Directors, the membership of the Board of Directors, considered as a whole, brings together sufficient professional experience for the governance of credit institutions, so as to ensure the effective capacity of the Board of Directors to take decisions independently and autonomously for the benefit of the Company. The Appointments Committee took into consideration the fulfilment of the objective of the underrepresented sex on the Board, without such having conditioned the final outcome of the decision, where the candidate meeting the desired profile and the compliance of the conditions established by the Appointments Committee took precedence. C.1.6.bis Explain the Appointments Committee s conclusions on compliance verification of the directors selection policy. In particular, how the policy is promoting the objective that by 2020 the number of female directors represents at least 30% of total board members. 17

290 Explanation of conclusions The Appointments Committee, during its meeting held on 22 January 2018, approved the Report on the Compliance of the Directors Selection Policy for 2017, whereby complying with its verification duty, as stated under section 6.1 of the aforementioned policy, which includes the last paragraph of recommendation 14 of the Code of Good Governance for Listed Companies of the National Securities Market Commission (CNMV) of February Its conclusions were the following: In view of the foregoing, it is concluded that, after verifying the compliance of the Directors Selection Policy for 2017, it has been deemed that the procedures for the appointment of board members having taken place during the year abided by the founding principles and such were in line with the process established therein. Furthermore, it is esteemed that the Directors Selection Policy promotes the diversity of knowledge, experience and gender with regard to the membership of the Board of Directors and adequately achieves the objective where, by 2020, there shall be at least 30% women Board Members. C.1.7 Explain how shareholders with significant holdings are represented on the board. Pursuant to article 7, section 4 of the Regulations of the Board of Directors, external directors, proprietary and independent, should occupy an ample majority of board places, while the number of executive directors should be the minimum practical bearing in mind the complexity of the Company and the ownership interests they control. Among non-executive directors, the ratio of proprietary members and independents should match the proportion between the capital represented on the board by proprietary directors and the remainder of the Company's capital. Independent directors should represent at least one-third of the total number of directors. The Board of Directors shall take this into account in exercising its powers to make proposals for appointments at the General Shareholders Meeting and when appointing directors by co-option to fill vacancies. In this regard, and as mentioned above, five of the majority shareholders of Liberbank (Fundación Bancaria Caja de Ahorros de Asturias, Fundación Bancaria Caja de Ahorros y Monte de Piedad de Extremadura, and Fundación Bancaria Caja de Ahorros de Santander y Cantabria, Aivilo Spain S.A and Corporación Masaveu S.A.) are represented, at the Board of Directors of the company, by seven nonexecutive proprietary directors. C.1.8 Describe, if applicable, the reasons why proprietary directors have been appointed at the initiative of shareholders whose shareholding is less than 3% of share capital: Name or corporate name of shareholder Reason State if formal requests for a presence of the Board have been rejected from shareholders with a shareholding equal to or greater than that of others who have been successfully appointed proprietary directors. If so, explain why these requests have not been entertained. Yes No 18

291 Name or company name of shareholder Explanation C.1.9 Indicate whether any director has resigned from office before their term of office has expired, whether that director has given the board their reasons and through which channel. If made in writing to the whole board, list below the reasons given by that director: Name of board member Alfonso Pitarch Rodríguez Reasons for resignation Alfonso Pitarch Rodríguez presented his resignation as Dominical Director on behalf of the shareholder Fundación Bancaria Caja de Ahorros y Monte de Piedad de Extremadura, made in writing dated 7 April 2017 and made public by Significant Event published on 10 April 2017 through the CNMV, which also implied his removal as a member of the Audit Committee. In his letter, Mr. Pitarch alleges personal reasons that prevent him from continuing to devote the time and attention necessary for the fulfilment of his duties and responsibilities in the Company. C Indicate what powers, if any, have been delegated to the Managing Director. Name or corporate name of director Manuel Menéndez Menéndez Brief description He has been permanently delegated all the powers of the board except for those that cannot be delegated by Law and those matters expressly reserved for the exclusive authority of the Board of Directors pursuant to the company Bylaws and the Board of Directors' Regulations. C.1.11 Identify, as appropriate, the board members who hold office as directors or executives at other companies forming part of the listed company s group: Name or company name of director Jesús María Alcalde Barrio Corporate name of the group entity Banco de Castilla La Mancha, S.A. Position Member- Secretary of the Board of Directors Does he hold any executive positions? No 19

292 C.1.12 Give details, as appropriate, of any directors of the company who are members of the boards of directors of other non-group companies that are listed on official securities markets in Spain, as disclosed to the company: Name or corporate name of director Name of listed company Position Manuel Menéndez Menéndez Edp Renovaveis, S.A. Director Davida Sara Marston Bank Of Ireland Director María Luisa Garaña Corces Alantra Partners, S.A. Director María Luisa Garaña Corces Distribuidora Director Internacional de Alimentación, S.A. (DIA) María Luisa Garaña Corces Euler Hermes Director C.1.13 Indicate and, where appropriate, explain whether the Board of Directors' Regulation has established rules about the maximum number of boards on which its directors may sit. Yes No Explanation of rules Article 8. Appointment of directors. Section 4. In the selection of who should be proposed for the position of director, care shall be taken that this person be recognised for their business and professional integrity, competence, skills and solvency, experience, availability and willingness to exercise a good governance. They must also meet the following requirements: a) They may not hold office or discharge representative, management or advisory duties at rival companies or those holding a controlling stake in rival companies. b) They may not hold office or discharge representative, management or advisory duties at customers or habitual suppliers of goods or services to the Company when such commercial relationship could give rise to a conflict or clash of interest with the Company. c) They may not hold the office of director at a number of companies above that allowed by legislation governing credit institutions. d) They may not be subject to any of the cases of incompatibility or prohibition provided by the legislation in force at any given time. The provisions of this section shall also apply to natural persons who are appointed representatives of a board member that is a legal entity, where his or her proposal must be subject to a report of the Appointments Committee. C.1.14 Section repealed. C.1.15 Indicate the overall remuneration of the board of directors: Board remuneration (thousands of euros) 1,670 Amount of the pension rights accumulated by current directors (thousand of euros) Amount of the pension rights accumulated by former directors (thousand of euros)

293 C.1.16 Identify the senior executives who are not executive directors, and indicate the total remuneration paid to them during the year: Name or corporate name Jesús Ruano Mochales Miguel Ángel Barra Quesada Orlando Sánchez Jardón Marta Suárez González Jorge Diez Fernández José Luis Martín Sariego Jonathan Joaquín Velasco Marcos Fernández Espina Francisco José Martínez Sampedro Rafael María Muriel Barriuso Carlos José Álvarez Díaz Gregorio Pérez Carlos Rubio Vallina Ángel Miguel Marcos Maldonado Ana Echenique Lorenzo Joaquín Sevilla Rodríguez Severino Jesús Méndez Suárez Position(s) Chief Corporate and Financial Officer Risk Executive Officer Media Executive Officer Intervention and Control Management Executive Officer Chief Risk Officer (CRO) Human Resources Executive Officer Head of Sales Strategy Head of Commercial Banking Chief Corporate Banking Officer Chief Internal Audit Officer Head Banking Analytics General Secretariat Executive Officer Head of Legal Advice Head of Communication Head of Steering Cabinet and Institutional Relations Digital Transformation Area Executive Officer Deputy General Manager of Organization and Transformation Total remuneration received by senior management (thousands of euros) 2,430 C.1.17 Indicate, as appropriate, which board members are, in turn, members of the board of directors of companies of significant shareholders and/or group companies: Name or corporate name of director Name or corporate name of significant shareholder Position Luis Masaveu Herrero Corporación Masaveu, S.A. Director Ernesto Luis Tinajero Aivilo Spain S.A. Chairman Flores and CEO List, if appropriate, any relevant relationships, other than those included under the previous heading, that link members of the Board of Directors with significant shareholders and/or their group companies. Name or company name of associated director: FELIPE FERNÁNDEZ FERNÁNDEZ 21

294 Name or company name of significant associated shareholder: CORPORACIÓN MASAVEU, S.A. Description of relationship: Mr. Fernández Fernández is a Member of the Board of Directors of Masaveu Inmobiliaria, S.A., Cimento Verde do Brasil, S.A. and Cementos Tudela Veguín, S.A. all of them being part of Grupo Corporación Masaveu, S.A. Name or company name of associated director: LUIS MASAVEU HERRERO Name or company name of significant associated shareholder: CORPORACIÓN MASAVEU, S.A. Description of relationship: Mr. Masaveu Herrero is a Member of the Board of Directors of Corporación Masaveu, S.A., Masaveu Inmobiliaria S.A and Aalto Bodegas y Viñedos, S.A., all of them within Grupo Corporación Masaveu, S.A. Name or company name of associated director: VÍCTOR ROZA FRESNO Name or company name of significant associated shareholder CORPORACIÓN MASAVEU, S.A. Description of relationship Mr. Roza Fresno is a Member of the Board of Directors of Cementos Tudela Veguín, S.A., Medicina Asturiana, S.A., Masaveu Brasil Ltda., Masaveu Investimentos Ltda., Masaveu Bodegas, S.L., y Masaveu Inmobiliaria, S.A., and a Joint Administrator of Masaveu Internacional, S.L., all of them within Grupo Corporación Masaveu, S.A. He also is the Chief Corporate Officer of Masaveu S.A. Name or company name of associated director: ERNESTO LUIS TINAJERO FLORES Name or company name of significant associated shareholder AIVILO SPAIN S.A. Description of relationship Mr. Tinajero Flores is Chief Executive Officer of Leasa Spain, S.L. and Inmosan S.A. de CV, as well as Member of the Board of Directors of Compañía de Viñedos Iberian, S.L., Viñas del Jaro, S.L.U. and Bodegas y Viñedos de Cal Grau, S.L., all of them within the Group Aivilo Spain S.A. C.1.18 Indicate the amendments, if any, to the Board Regulations during the year: Yes No 22

295 Description of changes For adaptation to the Technical Guide 3/2017 on Audit Commissions of Public Interest Entities published by the National Securities Market Commission on 27 June 2017 (the Technical Guide ), on 12 December 2017 the Board of Directors unanimously approved to amend articles 16 and 17 of its Regulations. The Technical Guide has come to complete the existing regulation on audit commissions contained in the Companies Law, the Audit Law and the Good Governance Code of Listed Companies with a series of good practices in regard to, among other things, its composition, operation and functions, under the provisions of article 21.3 and 21.4 of the Securities Market Law. C.1.19 Indicate the procedures for the selection, appointment, re-election, evaluation and removal of directors. List the competent bodies, procedures and criteria used for each of these procedures. Article 8 from the Board of Directors Regulations governs the Appointment of Directors : 1. Directors shall be appointed, reappointed and ratified by the Annual General Meeting pursuant to the Law, company's bylaws and these regulations, without prejudice to any possible filling of vacancies by the board of directors through cooption. 2. The proposals for appointment, re-election and ratification of directors that the board submits for consideration at the General Shareholders Meeting, as well as the decisions regarding appointments that the board makes in the exercise of the powers conferred upon it by law to designate directors by interim appointment (co-option) to fill vacancies shall, in turn, be preceded by (i) the corresponding proposal made by the Appointments Committee in the case of independent directors; or (ii) a report from the Appointments Committee, in the case of all other directors. In the event of re-election or ratification, such proposals or Committee reports made by the audit shall contain an assessment of work performed and actual dedication to the position during the last period of time in which the proposed director held office. In all events, should the board not agree with the committee s recommendations, it must explain the reasons for this and duly record its reasons in the minutes. 3. The proposals for appointment or reappointment of directors shall in any case be accompanied by a justificatory report made by the Board of Directors in which the competence, experience and merits of the proposed candidate are valued, which is attached to the minutes of the General Meeting or the Board itself. 4. In the selection of who should be proposed for the position of director, care shall be taken that this person be recognised for their business and professional integrity, competence, skills and solvency, experience, availability and willingness to exercise a good governance. They must also meet the following requirements: a) They may not hold office or discharge representative, management or advisory duties at rival companies or those holding a controlling stake in rival companies. b) They may not hold office or discharge representative, management or advisory duties at customers or habitual suppliers of goods or services to the Company when such commercial relationship could give rise to a conflict or clash of interest with the Company. 23

296 c) They may not hold the office of director at a number of companies above that allowed by legislation governing credit institutions. d) They may not be subject to any of the cases of incompatibility or prohibition provided by the legislation in force at any given time. The provisions of this section shall also apply to natural persons who are appointed representatives of a board member that is a legal entity, where his or her proposal must be subject to a report of the Appointments Committee. 5. The Company shall provide the necessary support, and may organise induction programmes, for new directors to acquaint them rapidly and sufficiently with the workings of the Company and its corporate governance rules. Directors shall also be offered refresher programmes when circumstances so dictate. 6. Furthermore, the general structure of the Board of Directors as a whole shall have the necessary expertise, skills and experience in the management of financial institutions so as to adequately understand the activities of the Company, including the main risks, and ensure the Board of Directors effective ability to make independent and autonomous decisions in the best interest of the Company. In any case, the Board of Directors shall ensure that the procedures for recruitment of its members favour diversity of gender, experiences and knowledge and facilitate the appointment of female members and, in general, that they have no implied bias which might entail any form of discrimination whatsoever. 7. The Appointments Committee shall issue a preliminary report for the appointment of member integrating each of the board committees and for the appointments to the board, its delegated bodies and internal committees. In addition to the above, in its directors selection process, Liberbank meets the requirements stated in Law 10/2014, of 26 June, on the regulation, supervision and solvency of credit institutions, and Royal Decree 84/2015, dated 13 February, implementing Law 10/2014, dated 26 June, on the regulation, supervision and solvency of credit institutions, in the Bank of Spain Circular 2/2016 of 2 February, in the Companies Law and in the Good governance Code of the listed companies published by the CNMV in February The Board of Directors approved a Suitability Assessment Policy at its meeting held on 29 June 2015, which expressly states that members from the Company s Board of Directors or candidates for positions on the board must meet the standards regarding integrity, knowledge and experience, and good governance, which are described in such Policy, and according to these criteria their adequacy is assessed. Such Policy was subject to updating on 13 December 2016, being reviewed last time on 12 December 2017, and no amendments were considered necessary at that time. CONTINUING IN ANNEX C.1.20 Explain, if applicable, to what extent this evaluation has prompted significant changes in its internal organisation and the procedures applicable to its activities. Description of changes No significant changes were made 24

297 C.1.20.bis Describe the assessment process and the areas evaluated by the Board of Directors assisted, if necessary, by an external consultant, regarding diversity in its composition and powers, operation and composition of its committees, performance of the Board of Directors Chairman and the company s chief executive, as well as performance and contribution of each director. The Board of Directors has been supported by its Internal Committees in the field of their respective powers in order to assess the diversity in its composition and performance and evaluate the performance of the Board of Directors Chairman and the company s chief executive. C.1.20.ter Break down, if any, business relationships between the consultancy firm or any company in its group and the company or any company in its group. C.1.21 Indicate the cases in which the directors must resign. Article 10 of the Regulations of the Board of Directors stipulates the cases in which directors must resign. Directors must tender their resignation to the Board of Directors and, if the latter sees fit, resign in the following cases: a) When they are subject to any of the cases of incompatibility or prohibition provided by law, or when they lose the personal or professional integrity necessary to hold the post of director, and when their interests conflict with those of the Company in any way. b) When they are sentenced by a firm judgement or disciplinary ruling for a criminal act or serious or very serious breach based on action related to corporate, financial or market regulations. The board shall examine all cases as soon as possible and, based on the particular circumstances, shall decide whether or not the director should resign. The board shall explain its reasons in the Annual Corporate Governance Report. c) When they are in serious breach of their duties as a director; d) When, by continuing to serve as a member of the board, they place the interests of the Company in jeopardy. e) When events caused by the director seriously harm the Company s equity, credit or reputation or when they lose the personal or professional integrity necessary to hold the post of director of the Company; f) When the reasons for their appointment and, in particular, in the case of proprietary directors, when the shareholder at whose initiative they were appointed fully transfers their holding in the Company or reduces it to a level that demands the reduction of the number of its proprietary directors. g) When independent directors become involved in any of the circumstances which prevent them from being classified as independent. As an exception, the circumstances described in points f) and g) shall not be applicable when the board deems that there is just cause for the director 25

298 to remain on the board, on the basis of a favourable report from the Appointments Committee, without prejudice to new unexpected events which may affect the assessment of the director. When a director resigns or leaves the board for any reason prior to completion of the appointed term, the director shall state the reasons in a letter to be sent to all members of the board, irrespective of the leaving being filed with the CNMV as a significant event and the motive for the same being explained in the Annual Corporate Governance Report. The resignation letter submitted to the remaining directors should expressly indicate whether the director is resigning because the board has adopted significant or reiterated decisions against which the director has voiced serious reservations. C.1.22 Section repealed. C.1.23 Are qualified majorities, other than statutory majorities, required for any type of decision? Yes No If applicable, describe the differences. Description of differences Under the provisions of section 5 of Article 20 from the Board of Directors Regulations, the favourable vote of the absolute majority of the Board members shall be necessary in any case in order to approve the following agreements: i) Approval of strategic plans and annual budgets drawn up by the Managing Director and their managing team; ii) Corporate social responsibility policy; iii) Resolutions relating to the risk management and control policy; iv) The on distribution of profits; and v) Any amendment to the Board Regulations. In addition, a two-third majority is required for the appointment of a Chairman of the Board when he is an Executive Director. C.1.24 Indicate whether there are any specific requirements, apart from those relating to the directors, to be appointed Chairman. Yes No Description of requirements C.1.25 State whether the Chairman has a casting vote. Yes No Matters where the Chairman has the casting vote C.1.26 Indicate whether the bylaws or the board regulations set any age limit for directors: Yes No 26

299 Age limit for Chairman Age limit for CEO Age limit for Director C.1.27 Indicate whether the Bylaws or the Board Regulations set a limited term of office for independent directors other than that established in the relevant rules: Yes No Maximum number of years in office C.1.28 Indicate whether the Bylaws or board regulations stipulate specific rules on appointing a proxy to the board, the procedures thereof and, in particular, the maximum number of proxy appointments a director may hold. Also indicate whether any limitation has been set forth regarding the right delegating conditions beyond the limitations established by law. If so, give brief details. Articles 20 and 26 of the Regulations of the Board of Directors include among the director s general duties, that of attending meetings of the bodies of which they are a member and actively taking part in deliberations such that their judgement contributes to decision-making. Should it not be possible, with just cause, for a board member to attend meetings that have been called, another board member may be granted proxy. The proxy to represent and vote on behalf of the director should be provided with special nature for the corresponding meeting of the board, it should include the appropriate instruction and be reported by any postal, electronic means or by fax to the Secretary or Deputy Secretary; In no case the non-executive directors will delegate their representation in an executive-director. C.1.29 Indicate the number of board meetings held during the year and how many times the board has met without the Chairman s attendance. Attendance will also include proxies appointed with specific instructions. Number of board meetings 30 Number of board meetings held without the Chairman s attendance 0 Should the chairman be an executive director, state if the number of meetings held without attendance of any executive director in person or by proxy and with the chairmanship of the coordinating director. Number of meetings 0 27

300 Indicate the number of meetings of the various board committees held during the year. Number of meetings of the Audit Committee 19 Number of meetings of the Appointments Committee 11 Number of Remuneration Committee meetings 8 Number of meetings of the Board Risk Committee 16 C.1.30 State the number of meetings held by the Board of Directors during the year, with the attendance of all members. Attendance will also include proxies appointed with specific instructions. Number of meeting with the attendance of all directors 30 % of attendances of the total votes cast during the year 100% C.1.31 Indicate whether the consolidated and individual financial statements submitted for authorisation for issue by the board are certified previously: Yes No Identify, where applicable, the person(s) who certified the company s individual and consolidated financial statements prior to their authorisation for issue by the board: Name Jesús María Alcalde Barrio Position Secretary of the Board of Directors C.1.32 Explain the mechanisms, if any, established by the Board of Directors to prevent the individual and consolidated financial statements prepared by it from being submitted at the Annual General Meeting with a qualified auditors report. The Board of Directors is responsible for preparing the individual and consolidated financial statements of Liberbank, S.A., and is empowered to adopt the measures and mechanisms necessary to ensure that the auditor s opinion is known and understood. In this regard, the duties of the Audit Committee, an advisory body whose members are appointed by the board, include overseeing the process of preparing and filing all regulated financial information, as well as liaising with the auditors in order to monitor the recommendations made by the auditors during the process. C.1.33 Is the Secretary of the board also a director? Yes No Complete the following table if the secretary is not a director: Name or corporate name of secretary Representative 28

301 C.1.34 Section repealed. C.1.35 Indicate and explain, where applicable, the particular mechanisms implemented by the company to preserve the independence of the auditor, financial analysts, investment banks and rating agencies. Article 17.5(b) of the Regulations of the Board of Directors established that the Audit Committee of Liberbank is the competent body to submit, before the Board of Directors, the proposals for the selection, appointment, reappointment and removal of an external auditor of the Company, being responsible for the selection process, in accordance with the provisions of the applicable legislation, whereby preserving its independence during the undertaking of its role. Furthermore, among the duties conferred to such Committee includes that of establishing the appropriate relations with the external auditor in order to receive information on issues that may prejudice the independence of the auditor, to be assessed by the Audit Committee, and on any other matters concerning the undertaking of the auditing of the accounts and, where appropriate, the approval of services other than those prohibited, under the terms established under the governing regulations for the activities of auditing accounts on the independence regime, as well as establishing, with the external auditor, any other notifications envisaged in the legislation on the auditing of accounts and, in any case, to verify that senior management has taken into account its recommendations. The Audit Committee must ensure that the Company and the auditor adhere to current regulations on the provision of non-audit services, the limits on the concentration of the auditor s business and, in general, other requirements designed to safeguard auditors independence. In any case, the Committee must receive, on an annual basis from the external auditor, a written statement affirming its independence in relation to the Company or companies directly or indirectly connected to such, as well as detailed information and a breakdown for any type of additional services rendered and corresponding fees received from these entities by the auditor, or by persons or entities associated to the latter, pursuant to the governing regulations concerning the undertaking of account auditing. Pursuant to Article 17.5.b) of the Board Regulations, the Audit Committee is to issue, on an annual basis, prior to the issue of the External Audit Report, a report expressing an opinion as to whether the independence of the external auditor is prejudiced. Such report must contain, in any case, an assessment on the provision of each and every additional services referred to in the foregoing section, whereby reviewed individually and as a whole, beside the various legal auditing and in relation to the regime of independence and governing regulations for the undertaking of account auditing. With regard to the independence of financial analysts, investment banks and rating agencies, the selection and engagement of the providers of those services is carried out via the Entity s purchasing process, which thus guarantees their independence. C.1.36 State whether the Company has changed its external auditor during the period. If so, identify the incoming audit firm and the outgoing auditor. Yes No 29

302 Outgoing auditor Incoming auditor Explain any disagreements with the outgoing auditor and the reasons for the same. Yes No Explanation of the disagreements C.1.37 Indicate whether the audit firm performs non-audit work for the company and/or its group. If so, state the amount of fees paid for such work and the percentage they represent of all fees invoiced to the company and/or its group: Yes No Company Group Total Amount of non-audit work (in thousands euros) 2, ,642 Amount of non-audit work as a % of the total amount billed by the audit firm 79.03% 28.52% 71.29% C.1.38 State whether the audit report on the financial statements for the previous year contained reservations or qualifications. Indicate the reasons given by the Chairman of the Audit Committee to explain the content and scope of those reservations or qualifications. Yes No Explanation of reasons C.1.39 Indicate the number of fiscal years that the current audit firm has been uninterruptedly auditing the financial statements of the Company and/or the Group. Likewise, indicate for how many years the current firm has been auditing the financial statements as a percentage of the total number of years over which the financial statements have been audited. Company Group Number of consecutive years 7 7 Number of years audited by current firm/number of years the company has been audited (as a %) Company Group 100% 100% 30

303 C.1.40 Indicate whether there is a procedure for directors to be able to receive outside advisory services: Yes No Details of the procedure Pursuant to Article 16 of the Board of Directors Regulations, (Internal Committees of the Board), the Board of Directors may set up as many purely internal committees without executive functions as it deems necessary. They may be tasked with the duties of reporting, advising and preparing proposals to be laid before the board, its Chairman, and, if applicable, the CEO. The Board of Directors shall create and maintain an Audit Committee, a Risk Committee that will be called Board Risk Committee, an Appointments Committee and a Remunerations Committee. In accordance with the Regulations of the Board of Directors, these committees may engage external advisors. On the other hand, Chapter 8 of the Regulations of the Board of Directors, Information to Directors, stipulates the following: Article 22. Expert advice 1. For assistance in the exercise of their functions, directors may request that legal, accounting, technical, financial or commercial advisors or other experts be hired at the Company s expense. This assistance must be aimed at dealing with specific problems of a certain importance and complexity that arise during the performance of the director's duties. 2. All requests shall be channelled via the Chairman of the board who may then seek board authorisation which may be refused should there be just reason, including the following: a) The hiring is not necessary for the proper performance of the duties entrusted to the directors; b) Its cost is not reasonable in view of the scale of the problem and the Company's assets and income. c) The technical assistance sought may be adequately provided by the Company s own technical experts. d) This may entail a risk given the confidential information that must be supplied to the expert. C.1.41 Indicate whether there is a procedure for the directors to be able to receive the necessary information to prepare for meetings of the managing bodies sufficiently in advance, and if so, give details: Yes No 31

304 Details of the procedure The Board Regulations establishes: Article 11. The Chairman The Chairman shall be appointed by the Board of Directors from among its members upon report from the Appointments Committee, being ultimately responsible for the Board of Directors effective operation and vested in him, in addition to those provided for in the Law, bylaws and present regulations, the following powers: To convene and chair meetings of the Board of Directors and Executive Committee, setting the agenda for such meetings and directing the debates. For this purpose, the Chairman, as responsible for the Board of Directors effective operation, shall ensure, with the assistance of the secretary, that the directors receive previously and well in advance sufficient and necessary information for the perform their duties and to deliberate and adopt agreements on the items of the agenda; and work to procure a good level of debate and the active involvement of all members, safeguarding their rights to freely express and adopt positions. He or she shall organise and coordinate with the chairmen of the Executive Committee and internal committees regular evaluations of the board, the Executive Committee and the internal committees, the Chairman of the board and, where appropriate, the company s chief executive. Article 19. Board meetings Board meetings shall be convened in writing by the Chairman or Secretary with the authorisation of the Chairman, stating the venue, date and time of the meeting together with the agenda. The meeting notice shall be sent by fax, or letter, or by any other means which allows a record of receipt to be kept, to each director at least two (2) working days prior to the date of the meeting. Should the Chairman deem that an emergency meeting is required, directors shall be notified twenty-four (24) hours in advance. Unless the Board of Directors had been formed or exceptionally called for urgent reasons, together with the call, all necessary information shall be sent or made available to directors sufficiently in advance for deliberation and adoption of agreements on the matters to be addressed. Article 21. Powers of information and inspection: 1. In the performance of their duties, the director has the obligation to demand and the right to seek all appropriate and necessary information from the Company that will serve to fulfil their obligations. In this regard, directors shall have the broadest powers to obtain information regarding any aspect concerning the Company. 2. In order not to disrupt the day-to-day management of the Company, the exercise of the powers of information shall be channelled, with the help of the Secretary, through the Chairman, who shall immediately inform the CEO and respond to the requests made by directors by directly providing them with the information or offering to them the appropriate parties within the Company with whom to interact. 32

305 C.1.42 Indicate whether the Company has put forward rules that compel directors to disclose and, if applicable, resign in situations that may harm the Company's credit and reputation. If so, give details: Yes No Explain the rules Pursuant to Article 10.2 of the Board Regulations, directors must tender their resignation to the Board of Directors Directors and formalise their resignation, if the latter deems it appropriate, in the following events: a) When they are subject to any of the cases of incompatibility or prohibition provided by law, or when they lose the personal or professional integrity necessary to hold the post of director, and when their interests conflict with those of the Company in any way. b) When they are sentenced by a firm judgement or disciplinary ruling for a criminal offence or serious or very serious breach based on action related to corporate, financial or market regulations; The board shall examine all cases as soon as possible and, based on the particular circumstances, shall decide whether or not the director should resign. The board shall explain its reasons in the Annual Corporate Governance Report. c) When they are in serious breach of their duties as a director; d) When, by continuing to serve as a member of the board, they place the interests of the Company in jeopardy; e) When events caused by the director seriously harm the Company s equity, credit or reputation or when they lose the personal or professional integrity necessary to hold the post of director of the Company; f) When the reasons for their appointment and, in particular, in the case of proprietary directors, when the shareholder at whose initiative they were appointed fully transfers their holding in the Company or reduces it to a level that demands the reduction of the number of its proprietary directors. g) When independent directors are subsequently involved in any of the circumstances which prevent them from being classified as independent; As an exception, the circumstances described in points f) and g) shall not be applicable when the board deems that there is just cause for the director to remain on the board, on the basis of a favourable report from the Appointments Committee, without prejudice to new unexpected events which may affect the assessment of the director. In addition, according to article 26 of that corporate text, directors shall exercise the diligence of a prudent businessperson and of a representative acting in good faith. In particular, directors are under a duty to: d) Investigate any irregularities they detect in the management of the Company which have come to their attention and monitor any situations of risk; f) Express clear opposition when they feel a proposal submitted for board approval might damage the Law, Bylaws, current Regulations or corporate interest. Independents and other directors unaffected by potential conflicts of interest must 33

306 clearly challenge any decision when they consider it could go against the interests of shareholders lacking board representation. g) Directors shall notify the Board of Directors if they are indicted or an order is issued to initiate proceedings against them for any of the crimes specified in the Companies Law. The board shall examine the matter as promptly as possible and, in view of the particular circumstances, decide where or not the director should continue in their role. All such determinations shall be disclosed in the Annual Corporate Governance Report. C.1.43 State whether any Board member has advised the Company that he or she has been prosecuted or ordered to stand trial for any of the criminal offences referred to in Section 213 of the Companies Law: Yes No Name of board member Criminal proceedings Comments Indicate whether the Board of Directors has examined this matter. If so, provide a justified explanation of the decision taken as to whether or not the director should continue to hold office or, if applicable, detail the actions taken or to be taken by the board. Yes No Decision/action taken Justified explanation C.1.44 Detail any significant agreement entered into by the Company which may come into force, be amended or terminated in the event of a change of control of the Company due to a takeover bid, and its outcomes. On 1 June 2016, a labour agreement was reached with the union majority, in order to establish the conditions for workers to be protected by the mutually agreed paid leave of absence modality or a voluntary redundancy plan. Active employees, born between 1956 and 1964, can benefit from the first modality. The situation will last until the end of the calendar year in which it was materialized, and can be extended by mutual agreement on an annual basis and up to 63 years, or previously, if the employee agrees to the retirement benefit. The worker will receive compensation in the form of monthly income equivalent to 60% of the current fixed gross salary, with a 75% minimum and an 80% maximum of the net salary without the resulting gross amount exceeding 50,000 per year or the proportional for lower periods. 34

307 Additionally, Liberbank and the Workers' Legal Representation (RLT, for its acronym in Spanish) signed a labour agreement on 21 June 2017, which will be in force until 31 December 2019, and which affects one hundred per cent of the workforce. The agreement includes 525 voluntary compensated redundancies for employees born between 1956 and 1959 and for the rest of the workforce, reduced working hours with proportionate reduction in salary between 10 and 13 per cent depending on the entity of origin and geographical mobility. In the event of a significant change in the Bank s ownership, active employees reincorporated upon request of the Bank after the benefit of the compensated leave agreed, may terminate their employment in the same economic terms provided in the agreement for the suspension of the contract and for the time remaining until 63 years. Additionally, the measures to reduce working hours and wages agreed upon in the June 2017 agreement will be rendered null and void. It is understood that there is a loss of control when, as a consequence of a corporate operation, the current shareholders (Banking Foundations) do not designate the largest number of representatives in the Board among the dominical directors. C.1.45 Identify in general and indicate specifically the agreements on severance payment, guarantee or golden parachute clauses between the company and its managers and directors or employees, where the latter resign or are unfairly dismissed or where the employment relationship terminates due to a takeover bid or other types of operations. Number of beneficiaries 11 Type of beneficiary Description of the resolution In the event of unfair dismissal or if the employment relationship is terminated as a result of a takeover bid, they shall receive compensation equivalent to one year s worth of fixed remuneration at the time the contract is terminated, unless the compensation is less than the legallyestablished minimum, in which case the latter shall apply. General Manager or higher Additionally, there is also a noncompetition agreement for the posttermination period, whereby they shall receive compensation equivalent to one year s worth of their fixed remuneration at the time the contract is terminated, where such settlement shall be divided into two equal payments, based on an annuity, one of which shall be settled with the liquidation of the entitlements following the termination of contract and the other at the same date during the subsequent year. 35

308 Payments for early termination of a contract shall be based on the results achieved over time and shall not reward poor performance or misconduct. In particular, compensation obligations assumed by the Company shall be specified in existing contracts between the Company and each director. In any event, the contracts will limit the established compensation amounts to the restrictions laid down by current or future legislation on this matter. In addition, if any part of the compensation exceeds the legal minimum established by the existing labour legislation, it shall be subject to deferral clauses and penalties contained in Liberbank s Remuneration Policy. State if such agreements should be reported and/or approved by the bodies of the Company or its group: Board of Directors Annual General Meeting Body approving clauses YES NO Is the General Shareholders Meeting informed of such clauses? YES X NO C.2 Committees of the Board of Directors C.2.1 Give details of all the board committees, their members and the proportion of executive, proprietary, independent and other nonexecutive directors: AUDIT COMMITTEE Name Position Category Pedro Manuel Rivero Torre Member Independent Jorge Delclaux Bravo Member Independent Eduardo Zúñiga Pérez del Molino Member Proprietary % of executive directors 0 % of proprietary directors % of independent directors

309 % Other non-executive directors 0 Explain the functions assigned to this Committee, describe the procedures and rules of organization and operation thereof and summarise their most important performances during the year. The Audit Committee meets effectively the functions assigned pursuant to Article 529m from the Companies Law and recommendations 42nd, 44th and 53rd of Unified Code of Good Governance, and pursuant to Articles 44.4 from the Company s Bylaws and 17.5 from the Board of Directors Regulations and 2 from the Audit Committee s General Regulations. The Audit Committee has met 19 times during 2017 and at least one every quarter, thus complying with the provisions of article 17.3 from the Board of Directors Regulations and article 8 from the Audit Committee s General Regulation, which provide that the Board shall meet at least on a quarterly basis and whenever it is convened by the Committee, by its Chairman, by the Board of Directors or when requested by two of its members, within the timing established by regulation. Regarding preparation and conduct of the sessions, Committee meetings shall be called by its Chairman with the notice established in regulations, and in any case with at least two days before the date the meeting (except for the extraordinary meeting held on 24 October 2017) pursuant to Article 9 from the Audit Committee s General Regulations, all members having attended the 19 meetings either present or duly represented. Furthermore, information has been provided to the Committee members in advance of each meeting concerning the matters to be discussed therein, thus promoting their active participation and making informed decisions when adopting a resolution. In addition to the attendance to meetings of members from the Audit Committee, the Committee collects from Company s senior officers the information it deems suitable for the best and proper development of their functions, requesting their presence at Committee meetings when this is deemed appropriate. In this regard and according to the Article 10 of Audit Committee General Regulations, the Chairman of the Board of Directors and the Managing Director, when they are not members of such Committee, may attend the meetings thereof, with voice but without vote, upon invitation from the Chairman of the Committee. Other Board members may also attend the meetings, as well as other managers or employees for information purposes, upon invitation from the Chairman of the Committee. It is also noteworthy that the Company s external Auditor has been invited to participate in various Committee meetings to explain to members the audit work carried out and deeply analyse financial issues relevant to the Company. Furthermore, pursuant to Article 17.8 from the Board of Directors Regulations and Article 13 of the Audit Committee s General Regulations, the Committee Chairman has invited external consultants to specific sessions thereof when he deemed it appropriate in order for Committee members to be provided with more accurate information on convenient matters. In this regard, during 2017 the Committee has held, among others, the powers described in the ANNEX of this report. 37

310 Identify the directors in the Audit Committee assigned as per their skills and expertise in accounting, auditing or both areas, and report on the number of years the current Chairman of this Committee has been in this position. Name of the experienced director Pedro Manuel Rivero Torre Number of years of chairman in office 2 APPOINTMENTS COMMITTEE Name Position Category Davida Sara Marston Chairman Independent Pedro Manuel Rivero Torre Member Independent Víctor Roza Fresno Member Other non-executive directors Ernesto Luis Tinajero Flores Member Proprietary % of executive directors 0 % of proprietary directors 25 % of independent directors 50 % Other non-executive directors 25 Explain the functions assigned to this Committee, describe the procedures and rules of organization and operation thereof and summarise their most important performances during the year. The Appointments Committee focuses its functions in the support and assistance to the Board of Directors essentially in connection with the proposals for appointment, ratification and removal of directors, as well as supervising compliance with the corporate governance regulations, Suitability Assessment Policy, Directors Selection Policy and Chairman and Managing Director Succession Plan of the Company. During 2017, the Committee had met eleven times, and at least one each quarter. It can be concluded that in this way the provisions of Article 8 from the Appointments Committee s General Regulations have been met, pursuant to Article 18.3 from the Board of Directors Regulations, which states that the Committee shall meet at least on a quarterly basis. Regarding the preparation and conduct of the meetings, pursuant to Articles 8 and 9 of the General Regulations of the Appointments Committee, the Committee Chair called its meetings with adequate notice and at least two days before the date of holding the meetings, except for the extraordinary meetings held on 20 April 2017, 26 July 2017 and 12 December 2017 (held immediately at the request of the Board), pursuant to Article 9 of the General Regulations of the Appointments Committee, where all members had attended the meetings, in person or duly represented. In addition to the attendance of members from the Appointments Committee to meetings thereof, the Board of Directors Chairman and the Managing Director, when they are not members of said Committee, are entitled to attend to all meetings with voice but no vote upon invitation from the Chairman, pursuant to Article 10 from the Appointments Committee s General Regulations. Other Board members may also attend 38

311 the meetings, as well as other managers or employees for information purposes, upon invitation from the Chairman of the Committee. Furthermore, pursuant to Article 13 from the Appointments Committee s General Regulations, and Article from the Board of Directors Regulations, the Committee Chairman has called on specific sessions thereof when he deemed it appropriate in order for Committee members to be provided with more accurate information on convenient matters. Additionally, its members have been duly informed prior to the conduct of Committee meetings on the matters to be discussed, actively participating in a dynamic and constructive manner. The Committee assumes and develops in an efficient manner the powers conferred in Article 18 from the Board of Directors Regulations and Article 2 from the Appointments Committee s General Regulations. In this regard, during 2017 the Committee has held, among others, the powers described in the ANNEX of this report. REMUNERATION COMMITTEE Name Position Category María Luisa Garaña Corces Chairman Independent Davida Sara Marston Member Independent Víctor Roza Fresno Member Other nonexecutive directors María Encarnación Paredes Rodríguez Member Proprietary % of executive directors 0 % of proprietary directors 25 % of independent directors 50 % Other non-executive directors 25 Explain the functions assigned to this Committee, describe the procedures and rules of organization and operation thereof and summarise their most important performances during the year. The Remuneration Committee focuses its functions in the proposed remuneration policy applicable to directors, general managers and those who carry out their senior management duties directly dependent on the Board of Directors Chairman or the Managing Director; and in support and assistance to the Board of Directors in connection with individual remuneration and other executive directors contractual conditions, ensuring their observance. Consequently, it is accountable for the preparation of decisions regarding remuneration, including those that have an impact on risk and the risk management of the Company, which must be approved by the Board of Directors, and ensures the transparency of remuneration and adherence to the remuneration policy established by the Company for board members. It is also in charge of verifying the information on the remuneration received by directors and senior officers contained in different corporate documents, including the Annual Report on Director's Remuneration. 39

312 During 2017, the Committee had met eight times. It can be concluded that in this way the provisions of Article 8 from the Remuneration Committee s General Regulations have been met, in line with Article 18 bis.3 from the Board of Directors Regulations, which establishes that the Committee shall meet at least on a quarterly basis. Regarding the preparation and conduct of meetings, pursuant to Articles 8 and 9 from the Remuneration Committee s General Regulations, the Committee Chairman has called its meetings with adequate notice and at least two days before the day of holding the meeting, pursuant to Article 9 from the Remuneration Committee s General Regulations, all members having attended the meetings. In addition to the attendance of members from the Remunerations Committee to meetings thereof, the Board of Directors Chairman and the Managing Director, when they are not members of said Committee, are entitled to attend to all meetings with voice but no vote upon invitation from the Chairman, pursuant to Article 10 from the Remunerations Committee s General Regulations. Other Board members may also attend the meetings, as well as other managers or employees for information purposes, upon invitation from the Chairman of the Committee. Furthermore, pursuant to Article 13 from the Remuneration Committee s General Regulations and Article 18 bis.8 from the Board of Directors Regulations, the Committee Presidency has invited external consultants to specific sessions thereof when it was deemed appropriate in order for Committee members to be provided with more accurate information on convenient matters. Additionally, its members have been duly informed prior to the conduct of Committee meetings on the matters to be discussed, actively participating in a dynamic and constructive manner. The Committee assumes and develops in an efficient manner the powers conferred in Article 18 bis.5 from the Board of Directors Regulations and Article 2 from the Remuneration Committee s General Regulations. In this regard, during 2017 the Committee has held, among others, the powers described in the ANNEX of this report. RISK COMMITTEE OF THE BOARD OF DIRECTORS Name Position Category Jorge Delclaux Bravo Chairman Independent María Luisa Garaña Corces Member Independent Felipe Fernández Fernández Member Proprietary Luis Masaveu Herrero Member Proprietary % of executive directors 0 % of proprietary directors 50 % of independent directors 50 % Other non-executive directors 0 Explain the functions assigned to this Committee, describe the procedures and rules of organization and operation thereof and summarise their most important performances during the year. The Committee efficiently meets the functions assigned pursuant to section 5 of Article 17 bis from the Board of Directors Regulations, in line with Article 2 from the Board s Risk Committee Regulations. 40

313 The Board s Risk Committee has met eleven times during 2017, and at least one in each quarter, thus complying with the provisions in Article 17 bis of the Board of Directors Regulations and in line with the provisions in Article 8 of the Board s Risk Committee Regulations, which provide that the Committee shall meet at least on a quarterly basis and whenever it is convened by the Committee itself, its Chairman, the Board or as otherwise requested by two of its members, within the period provided by regulation. Regarding the preparation and conduct of sessions, Committee meetings have been generally convened by its Chairman, with at least two days before the celebration date, and stating the place, date and time that the meeting will be held as provided in Article 9 of the Board s Risk Committee Regulations, all members having attended to the sixteen meetings held, in person or duly represented. Furthermore, Committee members in advance of each meeting have been provided with information concerning the matters to be discussed therein, thus encouraging its active participation and making informed decisions when adopting a resolution. In addition to the attendance of members from the Risk Committee of the Board to meetings thereof, the Board of Directors Chairman and the Managing Director, when they are not members of said Committee, are entitled to attend to all meetings with voice but no vote upon invitation from the Chairman, pursuant to Article 10 from the Risk Committee s General Regulations. Other Board members may also attend the meetings, as well as other managers or employees for information purposes, upon invitation from the Chairman of the Committee. Furthermore, pursuant to section 7º of Article 17 bis from the Board of Directors Regulations and Article 13 from the Board s Risk Committee Regulations, the Committee Chairman has invited external consultants to certain sessions thereof when he deemed it appropriate in order for Committee members to be provided with more accurate information on convenient matters. In this regard, during 2017 the Committee has held, among others, the powers described in the ANNEX of this report. C.2.2 Fill out the following table with the information regarding the number of female directors in the Board of Directors committees at the end of the last four years: Fiscal year 2017 Number of female directors Fiscal year 2016 Fiscal year 2015 Fiscal year 2014 Number % Number % Number % Number % Executive Committee n/a n/a n/a n/a n/a n/a n/a n/a Audit Committee 0 0% 0 0% 0 0% 0 0% Appointment Committee Remuneration Committee Risk Committee of the Board of Directors 1 25% 1 25% 1 25% 0 0% 3 75% 3 75% 3 75% 0 0% 1 25% 1 25% 1 20% 0 0% 41

314 C.2.3 Section repealed. C.2.4 Section repealed. C.2.5 Indicate, as appropriate, whether there are any regulations for the Board Committees; if so, indicate where they can be inquired and whether any amendments have been made during the year. Also, indicate whether an annual report on the activities of each committee has been prepared voluntarily. Each and every Board Committees: Audit Committee, Risk Committee of the Board of Directors, Appointments Committee and Remunerations Committee have their own Regulations. Information on the board committees and their members can be found at while the regulations governing these committees can be found at The Audit Committee s General Regulations, the Appointment Committee's General Regulations, the Remuneration Committee's General Regulations and the Risk Committee of the Board's General Regulations were amended on 12 December 2017, in line with the changes made on the Board's Regulations on the same date, with regard to the attendance to the meetings of persons who are not members. Article 4.4 o) (Board s powers) of the Board of Directors Regulations provides for periodic quality and efficiency assessment of the Board itself and its internal committees based on their respective annual reports. Pursuant to Articles 17º.7, 17º bis.6, 18º.9 and 18º bis.7 of the Board of Directors Regulations, all Committees are required to issue an annual report to the Board on its activity for the year. C.2.6 Section repealed. 42

315 D RELATED-PARTY AND INTRAGROUP TRANSACTIONS D.1 Explain and identify the competent body and explain, if applicable, the procedures for approving related-party or intragroup transactions. Procedure to notify the approval of related-party transactions Pursuant to article 29 of the Regulations of the Board of Directors regarding related-party transactions. 1. The board shall be informed of the transactions the Company or its group companies perform directly or indirectly with directors or shareholders with significant participation, individually or concerted with others, including shareholders represented on the Company s board of directors or other group companies or persons related to them or their advisers. Board authorization is required to conduct such transactions, subsequent to obtaining a favourable report from the Audit Committee, unless approval corresponds to the annual general meeting in accordance with the provisions of the applicable regulations. These transactions shall be assessed to verify that they carried out are on equal market terms and at arm's length, and shall be included in the Annual Corporate Governance Report and periodic public information in accordance with applicable legislation. Affected directors or representatives or persons related to affected shareholders shall abstain from participating in the deliberation and vote on the resolutions at issue. 2. However, the provisions of the preceding paragraph shall not apply when it relates to transactions that simultaneously meet the conditions set forth in Article 28.9 of the Board s Regulations. If these conditions are met, affected directors are not obliged to report these transactions nor obtain prior board authorisation. These conditions are the following: (a) they are governed by standard form agreements applied on an across-the board basis to a large number of clients. (b) they go through at prices or rates, generally set by the person supplying the goods and services; and (c) their amount does not exceed more than 1% of the Company's annual revenue. D.2 List any relevant transactions, by virtue of their amount or importance, between the company or its group of companies and the company s significant shareholders: 43

316 Name or corporate name of significant shareholder Name or corporate name of the company or its group company Nature of the relationship Type of transaction Amount (in thousan ds of euros) Aivilo Spain, S.L Liberbank Contractual Corporación Masaveu Liberbank Contractual Sale of non-current financial assets Sale of non-current financial assets 29,300 85,600 Corporación Masaveu Oceanwood Capital Management Liberbank Contractual Financing agreements: loans 40,000 Liberbank Contractual Other 21,479 D.3 List any relevant transactions, by virtue of their amount or importance, between the company or its group of companies and the company s managers or directors: Name or corporate name of director or senior manger Name or corporate name of related party Relationship Type of transaction Amount (in thousands of euros) D.4 List any relevant transactions undertaken by the company with other companies in its group that are not eliminated in the process of drawing up the consolidated financial statements and whose subject matter and terms set them apart from the company s ordinary trading activities. In any case, list any intragroup transactions carried out with entities in countries or territories considered to be tax havens. Corporate name of the group company Brief description of the transaction Amount (in thousands of euros) D.5 State the amount of the transactions performed with other related parties. D.6 Give details of the mechanisms in place for detecting, identifying and resolving any potential conflicts of interest between the Company and/or its Group and its directors, executives or significant shareholders. Article 37 of the Bylaws regulates the composition of the Board of Directors and states that: Directors (and natural persons appointed representatives of a legal person) must be recognised for their business and professional integrity, have the suitable knowledge and experience to carry out their duties, be willing to perform a good 44

317 governance of the company and meet the requirements laid down in law, the Bylaws and the Regulations of the Board of Directors, as well as the following additional requirements. They should comply with the following additional requirements: a) They may not hold office or discharge representative, management or advisory duties at rival companies or those holding a controlling stake in rival companies; b) They may not hold office or discharge representative, management or advisory duties at customers or habitual suppliers of goods or services to the Company when such commercial relationship could give rise to a conflict or clash of interest with the Company; c) They may not hold the office of director at a number of companies higher than that allowed by legislation governing credit institutions; and d) They may not be subject to any of the cases of incompatibility or prohibition provided by law at all times. Chapter 10 (articles 25-29) of the Regulations of the Board of Directors regulates directors duties and states that: Directors (and the natural person assigned as representative of a director being a legal person) shall exercise the diligence of a prudent business person and of a loyal representative acting in good faith. In particular, directors are under a duty to: a) Dedicate to the position the time and effort needed to carry it out effectively. Directors shall inform the Appointments Committee of their other professional obligations in case these interfere with the dedication required. They shall, at all times, respect the limitation regarding the maximum number of boards to which they may belong pursuant to applicable banking legislation; b) Request the appropriate and necessary information for all meetings of the Board of Directors, its delegated bodies and internal committees to which they belong for the right performance of their duties. c) Attend meetings of the bodies of which they are a member and take part actively in deliberations such that their judgement contributes to decisionmaking. When unable, with just cause, to attend in person meetings which they have been called to attend, they shall grant a proxy and include the appropriate instructions therein. The proxy to represent and vote should be reported by any postal, electronic means or by fax to the Secretary or Deputy Secretary of the company and in no case the non-executive directors will delegate their representation in an executive-director. d) Investigate any irregularities they detect in the management of the Company which have come to their attention and monitor any situations of risk; e) Request that those directors with the power to do so call extraordinary board meetings or include items deemed necessary on the agenda of the next meeting. f) Express clear opposition when they feel a proposal submitted for board approval might damage the Law, Bylaws, Board Regulations or corporate interest. Independents and other directors unaffected by potential conflicts of interest must clearly challenge any decision when they consider it could go against the interests of shareholders lacking board representation. g) Directors shall notify the Board of Directors if they are indicted or an order is issued to initiate proceedings against them for any of the crimes specified in the Corporate Enterprises Act. The board shall examine the matter as promptly as possible and, in view of the particular circumstances, decide 45

318 where or not the director should continue in their role. All such determinations shall be disclosed in the Annual Corporate Governance Report. CONTINUING IN ANNEX D.7 Is more than one company in the group publicly traded in Spain? Yes No Identify the listed subsidiaries in Spain: Listed subsidiaries Indicate whether they have provided detailed disclosure on the type of activity they engage in, and any business dealings between them, as well as between the subsidiary and other group companies. Yes No Business dealings between the parent and listed subsidiary, as well as between the subsidiary and other group companies Indicate the mechanisms in place to resolve possible conflicts of interest between the listed subsidiary and other group companies: Mechanisms to resolve possible conflicts of interest E RISK MANAGEMENT SYSTEM E.1 Describe the risk management system in place at the company, including the tax risks. The Risk Management System works holistically and continuously, consolidating that management by area or business unit or activity, subsidiaries, geographical zones and supporting areas (such as human resources, marketing or management control) at a corporate level. The Board of Directors is the highest body, entrusted with responsibility for determining the Corporate Risk Framework, the various Corporate Risk Policies contained under the Policy on Tax Risk Management and Control, the internal control Policy as well as the Risk Appetite Framework for the Liberbank Group (hereinafter the Group.) At the request of the board, the Group s governing bodies define the risk management structure, delegate powers and create committees/bodies to ensure the policies are correctly applied. The Corporate Risk Framework, approved by the Board of directors and understood as the strategies, principles, policies, organisation and measures involved in comprehensive risk management, in order to offer a comprehensive overview of the different risks assumed by the banking activity. This helps manage the Group s 46

319 overall risk profile to ensure it is aligned with the Entity s capital requirements in terms of profitability, solvency and stability. The Group has a series of general principles on which its strategy is predicated, in accordance with its risk vision and appetite. These principles reflect Senior Executives commitment to risk management and are the following: I. To manage the quality of the credit investment in order to maximise the long term value for the shareholder; and preserve the continuity of the company as a common objective in the interests of the stakeholders. II. III. IV. To implement risk policies in coordination with the strategies defined by the senior management, encompassing the growth of the investment with the optimal levels of solvency, profitability and liquidity (shareholder value). To safeguard the present and future solvency of the Group in keeping with the principle of good corporate governance and with the recommendations of the supervisory authorities (business continuity). To implement values and standards enhancing the positive performance of the competitiveness in the industry, with regard to quality, services, efficiency, agility and price. V. To carry out the role of dealing with risk in order to fulfil its objectives, applying the rules or principles of: separation of functions, decision making ability, traceability, objectivity, efficiency and transparency. These rules, or principles, are set out in more detail in the following points: Maintain the independence from the business generating units of the functions defining policies and planning risks and of the function controlling risk (separation of functions). Ensure the decision-making ability of risk execution, as a business management unit, with regard to the business generating units under Corporate and Financial Executive Office, Commercial Banking and Corporate Banking Executive Office (Decision-making capability) Offer enough agility and flexibility to adapt, efficiently and timely, the strategies, business processes and technological systems to the changes of the Economy, observing always the Senior Management availability to risk. Establish circuits, procedures, people in charge and management mechanisms to treat risk throughout its life cycle (Traceability). Define decision-making criteria based on objective financial parameters (Objectivity). Generate and disseminate the use of advanced management tools within an optimum technological environment (Efficiency). Meet the reporting transparency requirements of all processes, methods and results (Transparency). Additionally, the Board of Directors is ultimately responsible for setting the Group s risk appetite, which is embodied in the Risk Appetite Framework, as well as monitoring compliance. The Risk Appetite Framework is of a corporate nature and its principles and contents are applicable and mandatory for all Group entities, becoming a key tool to strengthen the Group's risk culture through the following elements: It goes beyond the scope of the risk control functions, actively engaging the entire organization in the management of risks and it includes solvency, profitability and all the risks to which the Group is exposed in 47

320 the course of its business (business, credit, operational, market, interest rate, liquidity risks ). It runs vertically through the entire organization, both upwards and downwards. Using indicators, it establishes an objective criterion for the measurement of the risk profile and for its comparison with the risk appetite. It follows the "three lines of defense" risk control model. It supports prudent management and appropriate values and requires that risk appetite and limits established in the Risk Appetite Framework to be considered in the normal circuits and processes for analysing and approving transactions and in all business decisions. With this comprehensive view of the various risks assumed, the Group establishes the risk management map whose purpose is to reflect the domains of existing general responsibilities at the level of collegiate bodies, General Divisions and Subdivisions, attending to every type of risk, and under the pillars of its management strategy, which resides in an adequate separation and specialization of functions: Planning and Policies, Risk Taking, Monitoring and control which are described in detail in the Annex of this report. E.2 Identify the bodies responsible for preparing and implementing the risk management system, including the tax system. Board of Directors The highest governing body in the Group. It determines the general risk management principles, approving the Corporate Risk Framework, the Risk Appetite Framework (and the Risk Appetite Statement included in that Framework), the various policies, according to scope and type, and action criteria for the main risks and activity segments. It also monitors and supervises the internal information and risk control systems. The Board of Directors has created several Committees for information and advise purposes, as well as submission of proposals to the Board, its Chairman or, if appropriate, the Managing Director. Risk Committee of the Board The goals of the Risk Committee include advising the Board of Directors on the Group s present and future global risk exposure, reporting on the Risk Appetite Framework, assisting the Board in safeguarding the application of this strategy, ensuring that the Group s actions are consistent with the risk tolerance level (Risk Appetite Statement) and the adopted strategies and policies, and monitoring the degree to which the assumed risks are consistent with the established profile. Its responsibilities also include the analysis, monitoring and evaluation of the internal risk control, management and evolution functions. Audit Committee The committee s basic responsibility is to supervise the efficiency of the Group s internal control, internal audit and risk management systems, as well as monitoring the work carried out by the external auditor. Management Committee It has responsibility in matters of a strategic nature and those of an ordinary nature considered important for the proper coordination, management and monitoring of the risks assumed by the Group. Its primary duties are to determine and propose, prior to submission to the Board of Directors, all risk-management-related issues 48

321 which are strategic in nature: Corporate Framework and policies, Strategy and Operating Management Plan of irregular assets (EPOGAI), Recovery Plan, as well as approving operating circuits, procedures and limits (the maximum risk lines granted by the specialist committees to the main borrowers, sectors, markets, products and instruments, at a more in-depth level than established in the Risk Appetite Statement). It is also responsible for proposing the Risk Appetite Framework to be submitted to the Board of Directors following approval by the Director of the General Division of Comprehensive Risk Management (CRO). It also has responsibility for the monitoring of all the risks generated in the banking business and the resolutions adopted by the specialist committees. Risk Committee It holds the highest authority in the Group for the management of credit risk due to customer and counterparty insolvency, as well as the assessment and monitoring of risk concentration with the different sectors and borrowers. Its duties also include approving statistical models and internal methods for rating and measuring the different types of risks, as well as keeping a comprehensive view of the Group s risk profile. At a lower organisational level, within the bounds and powers granted, credit risk management is handled by specialist committees in charge of driving and developing the Group s risk management model. Assets and Liabilities Committee Its duties concern the overall financial management of the Group s assets, liabilities and margins. Specifically, it will manage the following types of risk: market (including equity investments), liquidity and structural (interest rate on the balance sheet and exchange rate), carrying out the work of the admission and monitoring of these, within the framework of the operating limits approved by the Group. Operational Risk Committee Aims to contribute to the achievement of the institutional goals, through the management and prevention of operational risks. Among its other roles: to gather and understand the information of all aspects related to operational risk management, to approve lines and action plans for improvement, to establish corrective measures, to monitor and track the recommendations and resolutions adopted to mitigate and reduce operating losses. Business Continuity Committee This body addresses the management of crisis situations that may affect the business continuity of the Group, by assessing the appropriateness of the implementation of the Business Continuity Plan and determining the general guidelines for the response to the emergency situation. Regulatory Compliance Committee It has responsibility for control and compliance with the Internal Code in the Securities Market (Reglamento Interno de Conducta, RIC), the Suspicious Transaction of Market Abuse Reporting, MiFID, product classification, data protection act, Criminal Risk Prevention and control of Regulatory Compliance matters. Committee for the Prevention of Money Laundering and the Financing of Terrorism Validation Committee Recovery Plan Steering Committee The roles of these last three bodies are detailed in the Annex of the current report. 49

322 E.3 Indicate the main risks, including tax risks, which may prevent the company from achieving its targets. The main risks the Group faces in the ordinary course of business are: Credit and concentration risk. The possibility of losses being sustained as a result of the customers and counterparties failure to satisfy their payment obligations when and as agreed, as well as potential losses in value due to impairments in their credit quality. It includes Counterparty Risk. Sovereign Risk. Risk arising from carrying sovereign exposures with publicsector bodies (foreign, national, regional and local), including agencies (FADE, FROB, ICO, etc.) or those guaranteed by these government bodies. Market risk. The possibility of losses being sustained as a result of adverse changes in the market prices of the negotiable instruments the Group trades in. Operational Risk. The possibility of losses being sustained as a consequence of inadequate processes, systems, technical equipment and teams, or due to failures in them, as well as external events, including legal risks. It includes the reputational risk, resulting from Group actions that allow negative publicity in connection with the Group s practices and business relations that may cause a loss of confidence which, in turn, will have a negative impact on its solvency. Conduct Risk is also within this risk, defined as the risk derived from suffering losses due to inadequate provision of financial services to clients, including cases of negligent or malicious misconduct. Tax risk. The Possibility of incurring losses resulting from when Tax Authorities request additional amounts from the taxpayer other than those considered as payable to the Tax Authority, either through declarations or additional settlements not yet submitted or additional to those already declared and/or settled, either as an instalment, default interest or penalty, or any other concept considered as a tax debt. Interest rate risk The possibility of losses being sustained due to changes in the market interest rates that adversely impact the Group s financial position. In short, this risk arises from the sensitivity to interest rates of the differential between assets and liabilities, depending on their maturity period. Liquidity Risk. The risk that the Group will have difficulties in meeting its obligations concerning its financial liabilities. Therefore, it represents a risk that it will not have sufficient liquidity to cover, at the due date, its payment obligations to third parties. Business risk. The possibility of losses being sustained as a result of hypothetical adverse events, either internal or external, that negatively affect the Group s ability to achieve its goals and which, as a result of this, adversely impact the Group s profits or solvency. Risk of investees. The possibility of incurring losses during the medium-term and long-term, due to adverse fluctuations in market prices or due to the insolvency of the positions in the portfolio of shareholdings. Property Risk. The risk associated with the loss of value of real estate assets held on the balance sheet of the Group. E.4 Identify if the company has a risk tolerance level, including the tax risk. The Group has a risk tolerance level that is defined in the Risk Appetite Framework and the Risk Appetite Statement which includes both the risks identified as significant in the assessment processes of the internal capital and liquidity 50

323 compliance and the risks assessed as relevant for the management purposes associated with the Group activity. Liberbank s Board of Directors is the highest authority in charge of setting, via the Risk Appetite Framework, the level and types of risk the Group is willing to assume, within its capacity, to achieve its strategic and business goals. With the Corporate and Finance Executive Office s collaboration, the Risk Executive Office prepares the draft Risk Appetite Framework for validation by the Steering Committee. Once validated by said Committee, it is submitted to the Board s Risk Committee and the Board of Directors after being validated by the Comprehensive Risk Control Executive Office. The Group s Risk Appetite Framework is set up with the following principles in mind: Covers each and every risk to which the Group is exposed. It is approved, and compliance with it is supervised by the Board of Directors. It is consistent with the other the Group s processes, as well as its business model, strategic plans, capital planning, Corporate Risk Framework, corporate risk policies, limits or powers, and Recovery Plan. It classifies risks into different types and sets the appetite level accordingly. It defines quantitative and qualitative measures to objectively determine the Group s risk profile and compare it to its risk appetite. It is prospective. It sets roles and responsibilities for governance, expressly including those of the Board of Directors, and those pertaining to the risk control and Internal Audit roles. It encompasses the methodology to define, approve, monitor and control risk appetite, including action protocols for risk profile deviations from risk appetite. It is reviewed and updated on an annual basis, at the very least. In general, the amount of risk the Group is willing to assume for each risk type in order to achieve its business goals is in line with the budgets and business plans, whereas the maximum risk levels the Group finds acceptable and, accordingly, does not wish to exceed are mostly in line with stress scenarios. Objective risk-profile measuring is done through a collection of indicators representative of each risk type which, accordingly, are used for management purposes and usually followed by the regulatory and oversight authorities. In the review performed in the fiscal year 2017 some indicators have been established for the following risks: Solvency. Profitability. Loan, including concentration risk. Sovereign. Operational, including compliance, reputational, and technological risk. Market. Interest rate structural. Liquidity. Investees 51

324 Property development. Other non financial risks deemed relevant for the management, as it is the case of the assessment of the control environment and the assessment of the information included in the data bases. On a monthly basis, the Comprehensive Control Risk Executive Office prepares a Risk Appetite Framework monitoring report, which it submits, on a monthly basis as well, to the Steering Committee, and is then passed on to the Board s Risk Committee and the Board of Directors at the first meeting of these bodies immediately following that of the Steering Committee. Through the use of indicators, this report allows the Group s risk profile to be determined and compared to the defined appetite, goals and limits. If the warning levels (the risk level to detect whether the risk profile is deteriorating and approaching the limit) or the established limits are exceeded, additional management measures are taken, following the action mechanisms provided for in the Risk Appetite Framework (specific action Protocols). In the case of the main risks, the thresholds and standards established in the Risk Appetite Statement are detailed in operational limits applied to different categories, lines of business, territories, etc. E.5. Identify any risks, including tax risks, which have occurred during the year. The risks which occurred in the course of this year are those inherent in the financial sector and, in particular, those associated with lending activities, which have become more significant in the past few years due to the consequences of the recent economic crisis on the deterioration of the borrowers financial solvency. In turn, there has been a gradual increase in the litigation rate in the past few years, as the grounds of the claims not resulting only from floor clauses but from mortgage costs, interest or early maturities have diversified. On the opposite, the customer claims in connection with the acquisition of hybrid products have nearly disappeared. In any event, the very changes in the economy as the main external factor, as well as the measures taken by the Group for an adequate coverage and mitigation of the aforementioned risks, have made it possible for the consequences of the occurrence of such risks being assumed during the year. E.6 Explain the response and monitoring plans for the main risks the company is exposed to, including tax risks. The Group s risk management and control model is based on the definition of three lines of defence that operate independently but in coordination in order to ensure adequate coverage of the risks Liberbank is exposed to. The first line of defence consists of business and support offices. These are responsible for applying the Internal Control procedures within each process they are involved in and are responsible for, and undertake the management of those risks that arise from those processes and the preparation of, and compliance with, internal policies. 52

325 The second line of defence consists of the Comprehensive Control Risk Executive Office (Chief Risk Officer or CRO) and the offices operating under it, as well as the Regulatory Compliance Department, which in turn reports to the General Secretariat, (Chief Compliance Officer), currently named Management and Compliance Bodies. The Comprehensive Control Risk Executive Office s mission is to ensure, in a truly independent manner, that the risks from the Group s business remain below the approved levels. It is also responsible for maintaining an overview of the Group's risks in order to ensure effective control of these and to define and implement, in accordance with that established in the risk appetite framework, an internal control environment that ensures that all relevant risks to which the Group is exposed are properly managed by the corresponding centers. The Internal Risk Control model, devised in line with Liberbank s Corporate Risk Framework, is defined and regulated in the Internal Risk Control Policy, the last update of which was approved by the Board of Directors on 26 July Moreover, the Group has a Corporate Validation Policy, the last update of which was approved by the Board of Directors on 26 July 2017, describing the policies implemented at the Liberbank Group in connection with the internal model validation role. The Regulatory Compliance Department s mission is to control compliance with the applicable laws and regulations excepting those related with risk control area which are responsibility of the Internal Control Department; specially on compliance of applicable laws related to prevention of money laundering and terrorist financing, the internal code of conduct of the securities market (RIC), FATCA (the Foreign Account Tax Compliance Law), MiFID (the Markets in Financial Instruments Directive) and data protection; identify the risk of regulatory noncompliance by conducting controls, specifically, to prevent and mitigate the materialisation of criminal risks, by managing the whistle-blowing channel. Likewise, the Entity has a Corporate Compliance Policy, whose latest version was approved by the Board of Directors of Liberbank on 20 April Moreover, the Board of Directors of Liberbank has approved the update of the Corporate Policy of Liberbank and Group Companies on the Prevention of Money Laundering and the Financing of Terrorism, on 25 September 2017 and, on 12 December 2017 the update of the Corporate Policy on Prevention of Criminal Risks. The third line of defence consists of the General Internal Audit Executive Office, as the independent auditor in charge of supervising the correct functioning of the Internal Risk Control System, compliance with policies and procedures, as well as the ultimate assessment of the effectiveness of the action plans in place and implemented recommendations. As a result, it is responsible for conducting the specific audits and investigations required to prevent and detect economic, operational and reputational risks and the risks of alteration of the accounting and financial information and risks associated with the image of the Group. As for the tax risks, the Group has the Corporate Policy on Management and Control of Tax Risk, as well as the Group's Tax Strategy, whose last update was approved on 27 June

326 F INTERNAL CONTROL AND RISK MANAGEMENT SYSTEMS IN RELATION TO FINANCIAL REPORTING (ICFR) Describe the mechanisms which comprise the internal control over financial reporting (ICFR) risk control and management system at the company. F.1 Company s control environment Specify at least the following components with a description of their main characteristics: F.1.1 The bodies and/or functions responsible for: (i) the existence and regular updating of a suitable, effective ICFR; (ii) its implementation; and (iii) its monitoring. Liberbank s Board of Directors, as the maximum management and administrative body at Liberbank, is responsible for ensuring that all information is transparent and truthful, and is responsible for making decisions on the preparation of the financial statements, as stipulated in the regulations of the Board of Directors. As to the Audit Committee s duties in connection with the ICFR, contained under Article 17 of the Regulations of the Board, where the latest version was approved on 12 December 2017, these include: Verify the adequacy and integrity of internal control systems, and to review the designation and replacement of the officers responsible therefor, discussing with the auditor any significant shortcomings detected in the internal control system during performance of the audit without committing its autonomy. For this purpose, and where applicable, it may submit recommendations or proposals to the Board of Directors and the corresponding period for its monitoring. Being acquainted with and overseeing the preparation, clarity and integrity of the financial information and not financial related information made public by the Company and referring to the Company and the group, verifying fulfilment of legal requirements, the adequate definition of the consolidation scope, and the correct application of accounting policies, with a view to guaranteeing the integrity of accounting and financial reporting systems, including financial and operating control and compliance with applicable legislation. For this purpose, it may submit recommendations or proposals to the board of directors, so as to safeguard such integrity. Review that the information published on the Company's website is constantly updated and reflects the one prepared by the Board of Directors, which has been published, when appropriate, in the CNMV's website. Monitor the effectiveness of internal control, internal audits and risk management systems and, where applicable, it may submit recommendations or proposals to the Board of Directors and the corresponding period for its monitoring. Monitor the independence and efficacy of the internal audit function; propose, to the board of directors, the selection, appointment, reappointment and removal of the head of internal audits; propose the budget for this service; receive periodic financial information on its activities; verify that the conclusions and recommendations of its reports are taken into account by senior management; approve its direction and work plans, making sure that their activity is mainly focused on the relevant risks of the Company. Establish and supervise a mechanism whereby staff can report, confidentially and, if necessary, anonymously, any irregularities they detect in the course of their duties, in particular financial or accounting irregularities, with potentially 54

327 serious implications for the firm; proposing, when necessary, relevant measures to improve its operation. Review the Company's financial statements, monitoring compliance with legal requirements and the proper application of generally accepted accounting principles, and reporting on the proposals for amendments to the accounting principles and standards suggested by management. Oversee the process of preparation of prospectuses and regular financial information that must be submitted by the Board to the markets and its control bodies, and, in general, the process of dissemination of information and communications relating to the Company. The head of internal audit, who shall monitor the correct operation of the reporting and internal control systems, shall present an annual work programme to the Audit Committee for approval at the start of the year, including the necessary resources for its execution, and an activities report at the year end, and shall also report to the Audit Committee on any incidents arising during the internal audit activities. The Committee will evaluate the functioning of the internal audit function, supervising its annual plan as well as the performance of the person responsible, participating in the determination of their remuneration. Additionally, the Committee will ensure that the profiles of the internal audit staff are adequate and that they can carry out their work with objectivity and independence. The Intervention and Control Management Executive Office is responsible for designing, organising and monitoring the accounting system to ensure that all transactions are correctly monitored and recorded along with Liberbank s equity, in accordance with prevailing legislation. The Internal Control Department, which reports to the Comprehensive Risk Management Executive Office (CRO), has, among others, the following duties, as reflected in the Duties Manual approved by the Steering Committee on 27 October 2017: Proposing action plans for the improvement of the Financial Reporting Internal Control System (ICFR), in collaboration with the affected offices, following the external auditor s recommendations and, as the case may be, recommendations from Internal Audit. Moreover, it is to monitor these action plans, reporting on their development to the appropriate body. Coordinating and assuming global responsibility for the ICFR, providing advice and implementing a culture of internal control in relation to financial reporting at all levels of the organization. F.1.2 The existence or otherwise of the following components, especially in connection with the financial reporting process: The departments and/or mechanisms in charge of: (i) the design and review of the organisational structure; (ii) defining clear lines of responsibility and authority, with an appropriate distribution of tasks and functions; and (iii) deploying procedures so this structure is communicated effectively throughout the company. An adequate and well-documented organisational structure is important to ensure ICFR works correctly. Due to this, at Liberbank, high-level bodies are involved in the design and review of the organisational structure as follows: The Regulations of the Board of Directors defines the Board as the maximum governing and administrative body of Liberbank (except for matters reserved for the General Meeting), with responsibility for the definition of the structure of the Parent Company's Group. 55

328 The General Subdivision of Organization and Transformation is responsible for proposing, and assisting the CEO and the Corporate Executive Office in designing, changes to Liberbank s organisational structure which arise from redefining processes and procedures. The responsibilities of the Organization and Functional Processes Department include proposing the definition of the duties of the Bank s various offices, their interrelations and coordination mechanisms; resolving any organisational conflicts that arise in the performance of the various offices tasks; assisting the Bank s management in designing structural changes and proposing the size of the different offices, and defining and updating the Group s global processes map, suggesting changes to improve their quality and efficiency. The Group has a Duties Manual approved by Liberbank s Steering Committee, defining each office s responsibility and authority lines. The organisational structure and specific functions of each centre are disseminated internally on a permanent basis, being directly available on the Bank s corporate Intranet. Organisational changes are more explicitly communicated through an internal circular, thereby ensuring a firm regulation thereof and differentiated dissemination at the time of implementation. The Executive Officer for Intervention and Management Control is responsible for defining, preparing, controlling and supervising the accounting and tax information according to the current legislation, observing the changes in the regulatory environment. The Accounts Department is responsible, inter alia, for defining and keeping all accounting policies up to date, resolving any queries or conflicts regarding their interpretation and verifying and monitoring the correct accounting and execution of all accounting circuits and standards. The Liberbank Group s Consolidation and Equity Department is responsible for designing the system for recording and compiling the financial and accounting information reported by all the consolidated group. It also reviews, controls, and adapts the accounting practices of the companies in the Liberbank Group to the accounting standards for credit institutions. It also advises group companies on how to apply the accounting policies to be followed to manage accounting information, given their status as members of a consolidated group of credit entities. The Analysis and Management Information Department, which reports to the General Sub-Division of Management Control, is in charge of preparing the scorecard and any other periodic and non-periodic information for the Management Bodies and for disclosure to the market, analysing, comparing and justifying the causes behind the changes in the main management indicators and verifying the management information from other departments for the decision making. The Third-Party Reporting and Information Department is responsible for coordinating all non-standardised and non-regulated information (mainly accounting and financial information) requested by Supervisory bodies and other institutions, rating agencies, investors, and third parties generally, as well as reviewing and standardising the content. Code of conduct, approving body, dissemination and instruction, principles and values covered (stating whether it makes specific reference to record keeping and financial reporting), body in charge of investigating breaches and proposing corrective or disciplinary action. In order to ensure that employees efficiently carry out their duties, Liberbank has an Internal Code of Conduct on matters regarding the Securities Market, subject to regular 56

329 updates for adjusting it to the corresponding circumstances. The last update was approved by the Board of Directors on 20 April Additionally, Liberbank has a Code of Professional Ethics in place (hereinafter, the Code of Ethics ), subject to regular updates for adjusting it to the corresponding circumstances, with the latest update being approved by its Board of Directors on 12 December This Code is binding on directors, managers and all the Group employees, including agents, professionals, interns, and grant holders. The Code of Ethics purports to gather the basic guidelines for an ethical behaviour, being applicable to the Group entities having adhered thereto, and to outline the basis for the behaviour of its professionals, including between professionals or contractor firms (suppliers). Moreover, on 12 December 2017, the update of the Corporate Policy on the Prevention of Criminal Risk and the Rules of Conduct for Board Members was approved. The Code of Ethics must be formally signed by Liberbank s employees (Human Resources sends it to each employee personally, who, upon receipt, must send a return receipt and their consent thereto). Inspired by the values of honesty, proximity, prudence and renewing tradition the Code of Ethics lays down a set of rules of conduct relating to: Compliance with the laws, and respect for corporate values. Conflict of interests. Transparent professional conduct and integrity. Social and environmental responsibility. Use of IT systems and programmes. Prevention of money laundering and terrorist financing. Confidential, insider and/or classified information. Equal opportunities and respect for people. Personal data protection. The full text of the Code of Ethics is available in a dedicated section of the Liberbank intranet. Any news regarding the Code of Ethics is disseminated at briefing meetings (briefing channel). Specific issues are also discussed at periodical meetings called by the various departments with communication or training duties or by the Regulatory Compliance Department. As regards financial reporting, the abovesaid rules include the following: 1. The financial and accounting information of the Entity must be prepared with reliability and accuracy, ensuring that it is true, clear, complete and compliant with applicable regulations, and that it presents fairly the Entity s equity, financial position and results of operations. In order to comply with the above, Liberbank focuses on the efficiency of the internal control system in place at the Entity with regard to financial reporting (ICFR). 2. The employees responsible for preparation of financial information must ensure its reliability, undertaking to act independently and professionally, with commitment and responsibility, and fulfilling their duty of confidentiality. The Company's corporate policy includes the abovesaid rules. The last update of said policy was approved by the Board of Directors on 23 January Liberbank has procedures to ensure that the principles on integrity and professional ethics are adhered to, as well as measures to identify and amend any inconsistencies. 57

330 In this sense, the compliance control for the Corporate Policy on the Prevention of Criminal Risk is entrusted to the Regulatory Compliance Department, which periodically informs the Regulatory Compliance Committee (herein after, RCC ) on the adherence to and compliance by individuals abiding by the Code of Ethics. The Regulatory Compliance Department reports to the Risk Committee, through its annual report, on the degree of compliance with the Code of Ethics and analyses all queries, incidents and resolutions in this regard. The Regulatory Compliance Committee informs the Audit Committee of any possibly significant irregularities, especially those of a financial or accounting nature, after being detected in the Entity. Internal Audits shall report to the Audit Committee on the performance of the whistleblowing channel. The Body in charge of analysing non-compliance and proposing corrective actions is the Regulatory Compliance Committee. 'Whistle-blowing channel', for the reporting to the Audit Committee of any irregularities of a financial or accounting nature, as well as breaches of the code of conduct and malpractice within the organisation, stating whether reports made through this channel are confidential. Liberbank s employees must inform the Regulatory Compliance Committee about any irregular action which might constitute a crime or a violation of the Entity s Code of Ethics, and must warn the Committee of any significant and legitimate concern about matters related to the Bank s internal governance which they may learn of while performing their work or, as applicable, commercial duties (service agreements including an exclusivity clause or suppliers performing a basic function as per the Entity s Policy on the Outsourcing of Basic Services). For this purpose, all Liberbank employees/exclusive service providers have access to a confidential whistle-blowing channel via which to report any of the abovementioned irregularities. The communication channel the whistle-blowing channel relies on is the , there being a number of reinforced security measures in place to guarantee confidentiality. Any information communicated through the Whistle-Blowing Channel shall be confidential in nature and such must not be anonymous. The identity of the whistleblower shall also be considered as confidential information, where no disciplinary action, either direct or indirect, may be taken on the basis of the accusation, unless such is made in bad faith. Any communication intended to warn about any relevant concern relating to the Group s internal governance will also be sent to the whistle-blowing channel s address, and must be identified as such, i.e. the subject must textually read Internal Warning. Such communication will be considered confidential. The Director for Regulatory Compliance provides an account of the information received by the RCC, as soon as possible, once a preliminary study has been conducted on such. Once the Regulatory Compliance Committee has examined an internal warning reported through the whistle-blowing channel, it will make a decision on its relevance and accuracy, and, as the case may be, on whether it will be sent over to the Steering Committee or other appropriate Body. To make a justified decision on any such report, the Regulatory Compliance Committee may request such information as it may deem appropriate from any of the organization s offices. Should there be any sign of a crime affecting any member of the governing bodies, the Audit Committee shall be informed about it, and, in turn, shall refer any information 58

331 available to the relevant authority, including the identity of the individuals involved, reporting it also to the Board of Directors. In the event of detecting possibly significant irregularities, especially those of a financial or accounting nature, such are to be reported to the Audit Committee. In 2017, Internal Audits conducted a review on the Whistle-Blowing Channel, resulting in a satisfactory overall outcome (overall rating of Very Good ). This task was intended to examine the implementation of the whistle-blowing channel as regards its basic attributes (publicity, confidentiality, identification of reporting party, and so on), and to review any reports thus received and the procedure through which these are dealt with. The Audit Committee, among others, has the following role: Establish and supervise a mechanism whereby staff can report, confidentially and, if necessary, anonymously, any irregularities they detect in the course of their duties, in particular financial or accounting irregularities, with potentially serious implications for the firm. And the Risk Committee of the Board of Directors: The Regulatory Compliance Department is to submit an annual report on the Control and Monitoring of Criminal Risk, being a section of the Compliance Department s annual report, after having been approved by the RCC. Provide the Board of Directors with information on matters regarding the prevention of criminal risk. Training and update courses for personnel involved in preparing and reviewing financial information or evaluating ICFR, which address, at least, accounting rules, auditing, internal control and risk management. Liberbank has a training plan for personnel involved in the preparation of financial information, as a mechanism that allows the necessary skills to generate complete and reliable financial information to be built and maintained over time. The Department of Training, Selection and Development, which reports to the Executive Officer for Human Resources, manages staff training plans of the Group. The Human Resources Committee is the body responsible for approving such. During the 2017 reporting period, the staff involved in the preparation and review of the Group s financial information, as well as the assessment of the SCIIF, participated in training programmes relating to, among other topics: Regulatory matters (Organic Law on Personal Data Protection, Prevention of Money Laundering, Suspicious Transaction of Market Abuse, VAT management system etc), financial matters (CIRBE, general matters of A-IRB project, operational risk, Internal Control System for Financial Information-ICFR, General Framework of trade process, accounting, etc.) and related to products and services (marketing of cards, pension plans, confirming, etc.). As for the Senior Management, there is a Training Plan in place for members of the Board of Directors, structured into a Welcome Training Program for new members and a Continuing Training Program focusing on ongoing learning for Board members. Annual training for board members, contained under the aforementioned Training Plan, are approved by the Appointments Committee, which reports to the Board of Directors. F.2 Financial information risk assessment. Report at least: F.2.1 The main characteristics of the risk identification process, including risks of error or fraud, stating whether: 59

332 The process exists and is documented. Liberbank has a Corporate Risk Framework, whose latest version was approved by the Board of Directors on 12 December 2017, which states the basic principles for risk management: the organisational structure, management model, risk management map, objectives, key management cornerstones, and the methodologies and tools used for each class of risk. Delimited by the Corporate Risk Framework, the Group has a global map of processes from which the homogeneous and detailed documentation of process description and flowcharting is articulated, as well as identification of the centres responsible for their execution and collaborators. The processes that impact on the preparation of financial information are identified expressly. The global processes map is classified into the following general areas: Risk Management, Strategy, Business, Control and Improvements, Resources, Financial Management and Support. Liberbank has a modular documentation tool ARIS that allows for the management and to look-up the process map and associated information (manuals, risks and controls). The process documentation serves as a starting place for the analysis and identification of risks, the definition of mitigation measures for recorded risks and the identification of the various levels of control. In connection with the processes affecting the financial information, the corresponding risks have been identified, which are classified according to the risk categories included in the Corporate Risk Framework, namely: Credit (on Insolvency, Concentration or Counterparty), Market, Operational, Structural Interest Rate, Liquidity, Structural, and Reputational Risks; and according to the above said risk categories specific to the preparation of financial statements, namely: Existence, Integrity, Valuation, Submission, breakdown and comparative purpose, and Rights and Duties, including as well the risk of errors related to fraud. The Internal Control, Regulatory Compliance and Operational Risk Departments, together with the responsible departments of each process, are in charge of establishing the control map within the Group and enhancing, disseminating, supervising and observing the compliance thereof. The risk map shall be reviewed regularly, identifying and assessing the controls implemented to mitigate them. Whether the process covers all financial information objectives (existence and occurrence, completeness; valuation; presentation, disclosure and comparability; and rights and obligations), is updated and with what frequency. From the global processes map of Liberbank, processes have been identified under the scope of ICFR, addressing a criterion on materiality and the impact on financial information. In connection with such ICFR processes, the corresponding risks have been identified, which are classified according to the risk categories included in the Corporate Risk Framework, namely: Credit (on Insolvency, Concentration or Counterparty), Market, Operational, Structural, Liquidity, Structural, and Reputational Risks; and according to the risk categories specific to the preparation of financial statements, namely: Occurrence, Rights and Obligations, Existence, Integrity, Accuracy, Cut-off of Operations, Classification and Assessment, and Allocation. The risk map shall be reviewed regularly, and the action plans which may derive from the assessment and management of risks are implemented immediately after identification thereof. 60

333 The Executive Officer for Comprehensive Risk Management (CRO) is responsible for undertaking this duty. Whether a process is in place to define the consolidation scope, considering, without limitation, any complex corporate structures, special purpose vehicles or similar entities. There is a Corporate Consolidation Policy, which describes in detail the consolidation extent and subjects, defining the consolidation scope as well as the consolidation methods used. The last update of said policy was approved by the Board of Directors on 23 January As for the structure of the consolidation scope, the Consolidation and Equity Department regularly reviews its adequacy. Whether the process considers the effects of other kinds of risks (operational, technological, financial, legal, reputational, environmental, etc.) insofar as they may affect the financial statements. The second paragraph of this section contains the list of other kind of evaluated risks. Finally, which of the company s governing bodies is responsible for overseeing the process. The Audit Committee is responsible for being acquainted with and overseeing the preparation and integrity of the financial information referring to the Company and the group, verifying fulfilment of legal requirements, the adequate definition of the consolidation scope, and the correct application of accounting policies, with a view to guaranteeing the integrity of accounting and financial reporting systems, including financial and operating control and compliance with applicable legislation. F.3. Control tasks Indicate the existence of at least the following components, and specify their main characteristics: F.3.1 Procedures for reviewing and authorising the financial information and description of ICFR to be disclosed to the markets, stating who is responsible in each case and documentation and flow charts of activities and controls (including those addressing the risk of fraud) for each type of transaction that may materially affect the financial statements, including procedures for the closing of accounts and for the separate review of critical judgements, estimates, evaluations and projections. Liberbank, as covered by its Corporate Accounting Policies, has controls in place that ensure that the procedure for the closing of accounts and the preparation of financial information is conducted correctly, for the purpose of ensuring accuracy, reliability and integrity of the following periodic financial information which are detailed below and are subject to authorisations specified by the same policy: ongoing reconciliation of inventory and accounting; control of items yet to be applied; regular control of atypical balances; comparison of current data with historical data referring to the same periods; comparison of actual information with budgeted information; control of valuations; control of coverage effectiveness; Reconciliation of the Front-Back Office position; banking reconciliation; specific review on manual journal entries; specific controls subject to special authorisations and control of estimates and projections. For the purpose of the control of financial reporting, manual accounting processes are of particular importance, due to the high risk of inherent errors. The most significant are: Data Correction; Making Adjustments; Data Entry/Recording Keeping of Transactions; 61

334 Adjustment of Accounting Information under the Scope of Consolidation; Corporation Tax Accounting. The Consolidation and Equity Department is responsible for the consolidation process of the Liberbank Group. It also oversees the correct composition of the scope of consolidation which is reviewed periodically and ensures that the criteria of all the group companies are standardised. As far as estimates and projections are concerned, the purpose of the specific controls in place is to guarantee that the estimates used in the preparation of financial information are made adequately. The Entity s Managers are responsible for overseeing any necessary estimates made for their respective Department which must be ratified by the members of the Steering Committee to measure certain assets, liabilities, income, expenses and obligations. These estimates are subject to specific reviews to ensure that they offer a true and fair view of the equity and financial situation of the Company. As for the preparation of relevant projections, the Corporate and Finance Executive Office is responsible, among other things, for defining the Strategy, preparing the Business Plans and following up on their implementation, as well as preparing the annual and pluri-annual budgets consistently with the strategy then in place, giving special consideration to the Group s risk profile. According to the procedure in place at Liberbank for authorising the financial statements (the main component of the financial information disclosed), after these have been prepared by the Intervention and Control Management Executive Office they must be submitted to the Steering Committee for approval. They are then submitted to the Board of Directors having previously been examined by the Audit Committee and the external auditor. The Liberbank Board of Directors, as the maximum governing and administrative body at Liberbank, is responsible for ensuring that all information is transparent and truthful, and is responsible for making decisions on the preparation of the financial statements. As we have mentioned above, the Audit Committee is the body responsible for supervising the process of preparing and presenting the regulated financial information. For further information, see Section 5 on the Supervision of the System Operation. The Intervention and Control Management Executive Office acts as the representative before the External Audit Firm, Supervisors and other Bodies in relation to the presentation of financial and accounting information within the required terms. The last update of Corporate Accounting Policy was approved by the Board of Directors on 23 January F.3.2 Internal control policies and procedures for IT systems (including secure access, control of changes, system operation, continuity and segregation of duties) giving support to key company processes regarding the preparation and publication of financial information. To ensure security for the access to data and programs, Liberbank has a Security Policy on Information Systems and Technological Risk, approved by the Board of Directors on 27 June 2017, which covers the objectives of the Entity for the protection of its information assets and its expectations for employees and external agents. Furthermore, Liberbank has an Information Systems Security Document, whose latest version was approved by the Steering Committee on 25 October The procedures contained in the document include logical access controls which detect unauthorised access, guarantee secure access and prevent any unauthorised access to data or resources (according to the user s profile), as well as physical access controls. The Accounting Department is tasked with being involved in the functional specifications of accounting IT programmes, defining the accounting circuits of the applications, as well as the minimum inventory conditions of the various items comprising the financial statements. The security document details the mechanisms in place to provide backup copies to help recover any data lost. Additionally, there is a Business Continuity Management System in place aimed at minimising business losses in the event of a disaster, including a response plan in the event of any incident which might threaten the continuity of the business. The Business Continuity System comprises of the following documents: The Corporate Policy on Business Continuity of Liberbank, whose latest version was approved by the 62

335 Board of Directors on 25 September 2017, Risk Analysis and Impact and the Operating Manual on Business Continuity, which includes the Implementation and Improvement Plan and the Internal Audits Plans. In 2017, the Business Continuity System tests scheduled for the reporting period were successfully carried out. F.3.3. Internal control policies and procedures for overseeing the management of outsourced activities, and of the appraisal, calculation or valuation services commissioned from independent experts, when these may materially affect the financial statements. The Group has a Policy on the Outsourcing of Core Services, the latest version of which was approved by the Board of Directors on 28 June Said Policy lays down a series of assessment criteria to analyse whether outsourcing is viable; if so, a decision should be made on the service level. Each office responsible for the outsourced service is in charge of periodically assessing the service rendered by the provider. The assessment criteria take into account the aspects concerning the economic reasons for its outsourcing and the suitability of the service provider. The Procurement and Security Department is responsible for verification, when essential services are outsourced, which is to be in line with that defined under the above said policy, as well as to oversee the suitability of service providers outsourced by the responsible centres. The Regulatory Compliance Department will validate the indicators identified by the centre responsible for assessing the service providers and reports the results of the annual assessment on the suitability of the service providers in its annual activity report submitted to the Steering Committee, which shall raise such to the Risk Committee of the Board before its final presentation at the Board of Directors. The Executive Officer for Comprehensive Risk Management (CRO) is responsible for establishing an ongoing control and oversight framework that ensures, through indicators and controls, the compliance of policies and procedures for outsourcing essential services. The Executive Officer for Internal Audits conducts the appropriate tests for the assessment of the adequacy of the policy and compliance verification for the established procedures. The Group has an Operating Manual on Essential Outsourcing Services, whose latest version was approved by the Regulatory Compliance Committee on 21 November 2016, in which it defines the procedures to be followed for both the outsourcing of essential services and the annual assessment on the suitability of the providers of such services. Additionally, the Group has an Operating Manual on Procurement and Contract Management for External Service Providers, which ensures a comprehensive understanding of the procurement activity and its centralisation at the Group level. F.4 Information and communication Indicate the existence of at least the following components, and specify their main characteristics: F.4.1 A specific function in charge of defining and maintaining accounting policies (accounting policies area or department) and settling doubts or disputes over their interpretation, which is in regular communication with the team in charge of operations, and a manual of accounting policies regularly updated and communicated to all the company s operating units. As per Liberbank s Duties Manual approved by the Steering Committee, Liberbank s Accounting Department is responsible, inter alia, for defining and keeping all accounting policies up to date, resolving any queries or conflicts regarding their interpretation and 63

336 verifying and monitoring the correct accounting and execution of all designed accounting circuits and standards. The Liberbank Group s accounting policies are outlined in a specific document called "Corporate Accounting Policy", which describes the accounting treatment of each of the important items which comprise the financial statements as well as their structure, to ensure compliance with the applicable financial reporting standards framework. There is also a Policy on fair value calculation and the definition of categories of fair value that embodies the principles for the practical application of the International Financial Reporting Standard 13 Fair Value Measurement (IFRS 13). The Consolidation and Equity Department is in charge of designing, organizing, managing and controlling the accounting system of the owned managed subsidiaries and the Bank s accounting consolidation in a systematic, efficient manner, and preparing the Group s consolidated financial statements. The Group has a Corporate Consolidation Policy, which collects, describes and elaborates on all rules and procedures followed by the Liberbank Group in connection with the preparation of consolidated financial information. These policies, which are available on Liberbank s intranet, are updated at least annually. The last update of said policy was approved by the Board of Directors on 23 January F.4.2. Mechanisms in standard format for the capture and preparation of financial information, which are applied and used in all units within the entity or group, and support its main financial statements and accompanying notes as well as disclosures concerning ICFR. Preparation of the financial statements mainly takes place at the Departments of Accounting and Consolidation and Equity, reporting directly to the Executive Officer for Intervention and Management Control, which prepare them based on the standards and instructions of the Bank of Spain and the European Banking Authority, for being finally uploaded in the financial reporting programme Pyramid, which in turn re-validates any collected data before their filing with the Bank of Spain and monitors the status of any such filing. This multi-module tool consists of the following modules: DPS Module, for the construction, handling and creation of Reporting files for the Bank of Spain. TEES Module, for the administration and recording of financial transactions made abroad. Auditing Module, which can be used to review use and application logs and to audit the use by users. Administration Module, which administers the permissions and users of a platform. Liberbank uses the SIRBE programme (an integral Reporting solution for the Bank of Spain) which designs, constructs and generates all the separate and consolidated financial statements and disclosures to be sent to the supervisory bodies. With regard to the information sent to the National Securities Market Commission (CNMV), Liberbank has documented the process of publishing the information to the CNMV, which establishes the procedure to carry out communications of relevant information to the CNMV and its publication on the corporate website of Liberbank. 64

337 F.5 System operation supervision Indicate the existence of at least the following components, describing their main characteristics: F.5.1 The ICFR monitoring activities undertaken by the Audit Committee and an internal audit function whose competencies include supporting the Audit Committee in its role of monitoring the internal control system, including ICFR. Furthermore, information will be reported on the scope of the ICFR assessment carried out during the fiscal year and on the procedure through which the assessor reports on its outcomes, as well as whether the company has an action plan describing any corrective measures, if applicable, and whether their impact on the financial information has been considered. The Audit Committee is responsible for being acquainted with and overseeing the preparation and integrity of the financial information referring to the Company and the group, verifying fulfilment of legal requirements, the adequate definition of the consolidation scope, and the correct application of accounting policies, with a view to guaranteeing the integrity of accounting and financial reporting systems, including financial and operating control and compliance with applicable legislation. It also verifies the adequacy and integrity of internal control systems, and reviews the designation and replacement of the officers responsible therefor, discussing with the auditor or the auditing firm any significant shortcomings detected in the internal control system during performance of the audit. The Internal Audit and Compliance Executive Office, reporting to the Chairman of the Board of Directors and directly to the Audit Committee, is hierarchically independent from the Entity s risk-generating areas as well as the areas responsible for planning and establishing its business goals. The main duty of the Executive Officer for Internal Audits of Liberbank, pursuant to the Duties Manual of the Bank, is to plan and perform internal audit processes, in line with the current legal framework and the guidelines of the Company Bodies of the Bank, in order to verify the accuracy of the information, to minimise risks and to improve management efficiency, with particular emphasis on the recurrent assessment of the degree of application of the ongoing risk control and supervision framework, as defined by the Executive Officer for Comprehensive Risk Management (CRO). Through the activities carried out while performing its duties, Internal Audit widely covers most of the risks to which Liberbank Group is exposed. On a quarterly basis, review the scope of consolidation for the Group. Likewise, in 2017 some reviews on the quality of information have been performed, related to the implementation of internal procedures for the calculation of the provisions for impairment of risk of credit, according to the Circular 4/2016 of Bank of Spain, as well as on the implementation of methodologies for the AIRB processes. The Internal Audit Charter, whose latest version was approved at the Audit Committee held on 29 March 2017, assigns the following roles for the Executive Officer for Internal Audits: Develop and propose the establishment of standards and audit procedures for all centres of the Bank. Ensure compliance of the standards and audit procedures. Plan and conduct the specific audits and investigations required to prevent and detect economic, operational and reputational risks and the risks of alteration of the accounting and financial information and risks associated with the image of the Bank. 65

338 Plan, conduct and, where appropriate, oversee the internal auditing of the group companies. Remotely conduct the audit activity, identifying any possible irregularities on the basis of documentary information. Monitor the compliance of the internal and external standards, applicable to the activities of the Bank and its Group and, in particular, that which concerns Corporate Governance and Regulatory Compliance. Review the accounting and administrative documentation and its compliance with the internal and external regulations. Review the implementation and compliance with the methodologies and procedures for the calculation of provisions for credit risk. Inform Management of any irregularities or anomalies that have been detected and to suggest any corrective measures. Collaborate with the tasks of the external auditors and Supervisors and other regulatory bodies, verifying that the requirements and recommendations communicated by such have been put into practice, under the scope of their roles, and that have been adopted permanently by the Board of Directors. Verify the implementation and continuation of the recommendations that have been submitted and accepted by the reporting centres. Analyse and evaluate internal/external fraud and propose actions for the purposes of prevention. Draft the Annual Audit Plan and the Annual Activity Report of Internal Audits. Support the Audit Committee in supervising the internal control system, including the Internal Control System of Financial Information (ICFR). Verify the proposal of the Recovery Plan, as well as the definition of processes resulting from its activation, reporting the conclusions to the Audit Committee. Take part in the management of the crisis that could result from the activation of the Recovery Plan. In addition to the abovementioned duties regarding monitoring the financial information, the internal control system and risk management systems, the Audit Committee liaises with the external auditors to receive information regarding the audit of the financial statements. In particular, during 2017, the Executive Officer for Internal Audits of Liberbank specifically reviewed the ICFR of the Bank, determining, as priorities, the review of the headings of the Profit and Loss account, as well as verifying the recommendations issued in previous years con the control processes over different sections of the Balance Sheet (Wholesale Financing, Equity, financial assets, property investments and retail financing). Additionally, with regard to the recommendations for improvement made by the External Auditor after review of the control environment for reporting period 2017, said recommendations were immediately turned into action plans, which in turn have been executed by the responsible units. Both the improvements recommendations and actions plans are submitted to the Steering Committee. The Internal Control Department, whose role has already been explained, coordinates the overall ICFR responsibility, overseeing the action plans and reporting, at year-end and half-year, to the mentioned committees on its performance and compliance. 66

339 F.5.2. A discussion procedure whereby the auditor (pursuant to TAS), the internal audit function and other experts can report any significant internal control weaknesses encountered during their review of the financial statements or other assignments, to the company s senior management and its Audit Committee or Board of Directors. Likewise, it will report on the availability (or not) of an action plan aimed at correcting or mitigating any weakness observed. Given that part of its duties include overseeing the services provided by the Internal Audit function, and pursuant to the Internal Audit regulations, as with the internal audit plans, the Audit Internal Committee receives periodic information on the work carried out by the General Sub-division of Internal Audit and its impact on financial reporting, as well as all ICFR monitoring activities. It also receives information on all recommendations made and the action plans proposed. Similarly, and in the same line, it receives information from and discusses with the External Auditor any significant weaknesses of the internal control system identified during the audit. Additionally, in accordance with the provisions of the Regulations of the Audit Committee, external auditors attended the Committee meetings, where the Chairperson thereof deems it appropriate and they do so, in any event, for the purpose of reviewing the external auditor report on the financial statements, as well as the management report of the Company and its Group Companies, as well as meetings held for the verification of the quarterly results prior to their publication. The information reported to the Audit Committee is also reported to the Steering Committee of Liberbank. F.6 Other disclosures No additional relevant information. F.7 External auditor report State whether: F.7.1. The ICFR information supplied to the market has been reviewed by the external auditor, in which case the corresponding report should be attached. Otherwise, explain the reasons for the absence of this review. Pursuant to the recommendation included in the Guidelines for Action on the Auditor s Report on the information related to the Financial Information Internal Control System of listed companies, published by the National Securities Market Commission (CNMV) on its website, Liberbank has submitted the information on the Internal Control System for Financial Reporting for review by the auditor. Upon issuance, the resulting report will be included as an Annex to this Annual Corporate Governance Report. 67

340 G DEGREE OF COMPLIANCE WITH CORPORATE GOVERNANCE RECOMMENDATIONS Indicate the degree of the company s compliance with Corporate Governance recommendations for listed companies. Should the company not comply with any of the recommendations or comply only in part, include a detailed explanation of the reasons so that shareholders, investors and the market in general have enough information to assess the company s behaviour. General explanations are not acceptable. 1. The bylaws of listed companies should not place an upper limit on the votes that can be cast by a single shareholder, or impose other obstacles to the takeover of the Company by means of share purchases on the market. Complies Explain 2. When a dominant and a subsidiary company are stock market listed, the two should provide detailed disclosure on: a) The type of activity they engage in, and any business dealings between them, as well as between the subsidiary and other group companies. b) The mechanisms in place to resolve possible conflicts of interest. Complies Partly complies Explain Not applicable 3. During the General Annual Shareholders Meeting, in addition to the written dissemination of the annual corporate governance report, the Chairman of the Board of Directors orally informs the shareholders, in sufficient detail, of the most relevant aspects of the company s corporate governance and, in particular: a) Any changes that have taken place since the last annual general meeting. b) The specific reasons why the company is not following a recommendation in the Code of Corporate Governance and, if any, the alternative rules it is then applying. Complies Partly complies Explain 4. The company establishes and furthers a policy of communication and contact with the shareholders, institutional investors and proxy advisors that is fully in line with the rules on market abuse and provides for equal treatment of shareholders in the same position. In addition, the company makes said policy publicly available on its website, including information concerning the way in which it has been implemented in practice, identifying the representatives or authorities responsible for executing that policy. Complies Partly complies Explain The Company follows a policy of communication and contact with its shareholders, institutional investors and proxy advisors that is fully in line with the rules on market abuse and provides for equal treatment of shareholders in the same position. However, such policy has not been formally defined or, accordingly, made publicly available on the corporate website. 68

341 5. The board of directors does not submit to the shareholders for discussion at a general meeting a proposed delegation of powers, to issue stock or convertible securities without pre-emptive rights for a sum exceeding 20% of the capital at the time of such delegation. In addition, when the board of directors approves any issue of stock or convertible securities without pre-emptive rights, the company immediately posts the reports on such exclusion provided for in commercial laws on its website. Complies Partly complies Explain 6. Any listed companies that prepare the following reports, either mandatorily or voluntarily, post them on their websites sufficiently in advance of the annual general shareholders meeting, even if the disclosure of such reports is not a mandatory requirement: a) Report on the auditor s independence. b) Reports on the operation of the audit and appointments and remuneration committees. c) Report of the audit committee on related-party transactions. d) Report on corporate social responsibility policy. Complies Partly complies Explain 7. The company provides a live broadcast of the general shareholders meetings on its website. Complies Explain 8. The Audit Committee ensures that the board of Directors presents the annual accounts to the General Shareholders Meeting without qualifications in the audit report. Should such qualifications exist, both the chairman of the Audit Committee and the auditors should give a clear account to shareholders of their scope and content. Complies Partly complies Explain 9. The company s website permanently features the requirements and procedures that will be accepted to establish shares ownership or the right attend the general shareholders meeting and the exercise or delegation of voting rights. In addition, such requirements and procedures favour attendance and the exercise of shareholder rights, and apply in a non-discriminatory manner. Complies Partly complies Explain 10. When a recognised shareholder has, prior to the general shareholders meeting, exercised the right to add to the agenda or submit new proposed decisions, the company: a) Immediately publicizes such additional agenda items and new proposed decisions. 69

342 b) Makes the form of attendance, proxy or remote voting card publicly available with the necessary changes in order that the new items on the agenda and alternative proposals may be voted on subject to the same terms as proposed by the due to board of directors. c) Submits all such items and alternative proposals for voting and subjects them to the same voting rules as established by the board of directors, including, in particular, any presumptions or inferences on the direction of a given vote. d) After the general shareholders meeting, it reports a breakdown of how such additional items or alternative proposals were voted on. Complies Partly complies Explain Not applicable 11. If the company has decided to offer attendance fees for the general shareholders meeting, it has established in advance a general policy on such fees, and such policy is stable. Complies Partly complies Explain Not applicable 12. The Board of Directors must perform its functions with a single purpose and an independent criterion, provide the same treatment to all shareholders under the same circumstances and follow social interest, which is understood to imply seeking a profitable and sustainable business in the long term, promoting its continuity and maximising the Company's economic value. In its efforts to act in the company s best interest, in addition to abiding by the laws and regulations and behaving based on good faith, ethics and the observance of generally accepted conventions and good practices, it strives to reconcile its own corporate interests with, as the case may be, the legitimate interests of its employees, providers, customers and any other stakeholders that might be affected, as well as the impact of the company s activities in the life of the community as a whole and the environment. Complies Partly complies Explain 13. In the interests of maximum effectiveness and participation, the Board of Directors should ideally comprise from five to fifteen members. Complies Explain 14. The Board should approve a director selection policy that: a) Is specific and verifiable; b) Ensures that appointment or re-election proposals are based on a previous analysis of the Board of Directors' needs; and c) Favours diversity of knowledge, experience and gender. The result of the previous analysis of the Board's needs should be rendered from the Appointments Committee's supporting report disclosed when convening the Annual General Meeting in which each Director will be ratified, appointed or reappointed. The director selection policy should promote the objective that by 2020 at least 30% of the Board members will be female directors. The Appointments Committee will monitor compliance with the director selection policy annually and will report on it in the Annual Corporate Governance Report. 70

343 Complies Partly complies Explain 15. Proprietary and independent directors should occupy an ample majority of board places, while the number of executive directors should be the minimum practical bearing in mind the complexity of the corporate group and the ownership interests they control. Complies Partly complies Explain 16. The percentage of proprietary directors over all non-executive directors should be no greater than the proportion between the capital represented on the Board by said proprietary directors and the remainder of the Company's capital. This criterion can be relaxed: a) In large cap companies where few or no equity stakes attain the legal threshold for significant shareholdings. b) In companies with a plurality of shareholders represented on the Board but not otherwise related. Complies Explain As a result of changes in the Company s capital structure after the execution of the closed capital increase in the last quarter of the year, the percentage of dominical directors over the total of non-executive directors (58%) has been distanced from the percentage of the share capital that said directors represent (37.4%). However, it is estimated that during the next year the Board of Directors composition could be reconfigured to adapt it to the new shareholding structure, which would make it possible to move forward in adapting to this recommendation of Corporate Governance. 17. The number of independent directors should represent at least one half of all board members. However, when the company is not large cap or when, despite being so, it has one shareholder or shareholders acting concertedly controlling over 30% of share capital, the number of independent directors should represent at least one third of all Board members. Complies Explain As a result of the resignation of the independent director Mr Luis Garicano Gabilondo communicated on 25 April 2016, the percentage of independent directors over the total number of the Board of Directors members is currently at 30.77%. However, it is estimated that during the next year the Board of Directors composition can be reconfigured and comply with that recommendation. 18. Companies should post the following director particulars on their websites, and keep them permanently updated: a) Professional experience and background. b) Directorships held in other companies, listed or otherwise, and other paid activities they engage in, regardless of their nature. c) An indication of the director's classification as executive, proprietary or independent; in the case of proprietary directors, stating the shareholder they represent or have links with. d) The date of their first and subsequent appointments as a Company director. 71

344 e) Shares held in the Company and any options on the same. Complies Partly complies Explain 19. The Annual Corporate Governance Report, upon verification by the Appointments Committee, should also disclose the reasons for the appointment of proprietary directors at the urging of shareholders controlling less than 3% of capital; and explain any rejection of a formal request for a board place from shareholders whose equity stake is equal to or greater than that of others applying successfully for a proprietary directorship. Complies Partly complies Explain Not applicable 20. Proprietary directors should resign when the shareholders they represent dispose of their ownership interest in its entirety. If such shareholders reduce their stakes, thereby losing some of their entitlement to proprietary directors, the latter s number should be reduced accordingly. Complies Partly complies Explain Not applicable As a result of the increase in closed capital in the last quarter of the year, the Banking Foundations of Asturias, Extremadura and Cantabria have seen their joint participation in the Company reduced from 44.8% to 24.31%, although the number of dominical directors appointed by them has not decreased to date. However, it is estimated that during the next year the Board of Directors composition could be reconfigured to adapt it to the new shareholder structure, which would allow us to move forward in complying with this recommendation. 21. The Board of Directors should not propose the removal of independent directors before the expiry of their tenure as mandated by the Bylaws, except where just cause is found by the board, based on a proposal from the Appointments Committee. In particular, just cause will be presumed when directors incur new obligations or hold new positions preventing them from dedicating the time needed to the proper performance of the directors relevant duties; when they are in breach of their fiduciary duties or come under one of the disqualifying grounds for being independent directors. The removal of independents may also be proposed when a takeover bid, merger or similar corporate operation produces changes in the company s capital structure, in order to meet the proportionality criterion set out in Recommendation 16. Complies Explain 22. Companies should establish rules obliging directors to inform the board of any circumstance that might harm the organisation's name or reputation, tendering their resignation as the case may be, with particular mention of any criminal charges brought against them and the progress of any subsequent trial. The moment a director is indicted or tried for any of the crimes stated in the Companies Law, the Board should examine the matter and, in view of the particular circumstances and potential harm to the Company's name and reputation, decide whether or not he or she should be called on to resign. The board should also disclose all such determinations in the Annual Corporate Governance Report. Complies Partly complies Explain 72

345 23. All directors should express clear opposition when they feel a proposal submitted for the board's approval might damage the corporate interest. In particular, independents and other directors unaffected by the conflict of interest should challenge any decision that could go against the interests of shareholders lacking board representation. When the board makes material or reiterated decisions about which a director has expressed serious reservations, then he or she must draw the pertinent conclusions. Directors resigning for such causes should set out their reasons in the letter referred to in the next Recommendation. The terms of this Recommendation should also apply to the Secretary of the board, director or otherwise. Complies Partly complies Explain Not applicable 24. Directors who give up their place before their tenure expires, through resignation or otherwise, should state their reasons in a letter to be sent to all members of the board. Irrespective of whether such resignation is filed as a significant event, the motive for the same must be explained in the Annual Corporate Governance Report. Complies Partly complies Explain Not applicable 25. The Appointment Committee should ensure that the non-executive directors have enough free time for the right performance of their duties. And the Board Regulations should determine the number of directorships their Board members can hold. Complies Partly complies Explain 26. The board should meet with the necessary frequency to properly perform its functions, and at least eight times a year, in accordance with a calendar and agendas set at the beginning of the year, to which each director may propose the addition of other items. Complies Partly complies Explain 27. Director absences should be kept to the bare minimum and quantified in the Annual Corporate Governance Report. And that, when they should occur, a representation with instructions must be provided. Complies Partly complies Explain 28. When directors or the Secretary express concerns about some proposal or, in the case of directors, about the company's performance, and such concerns are not resolved at the meeting, the person expressing them can request that they be recorded in the minute book. Complies Partly complies Explain Not applicable 29. The company should establish suitable channels for directors to receive the advice and guidance they need to carry out their duties, including, if applicable, external advise at the company's expense. Complies Partly complies Explain 73

346 30. Regardless of the knowledge directors must have to perform their duties, they should also be offered ongoing learning programs when circumstances so dictate. Complies Explain Not applicable 31. The agenda of the meetings should clearly state the matters about which the Board shall make a decision or reach an agreement so directors may obtain or assess accurate information in advance for its application. When, in urgent and exceptional cases, the Chairman wishes to submit for the approval by the Board decisions or agreements that were not included in the agenda, the prior express consent of the majority of the attending directors shall be required, which will be recorded in the minute book. Complies Partly complies Explain 32. Directors should be informed on a regular basis about shareholding changes and about the opinion that significant shareholders, investors and rating agencies keep of the Company and the Group. Complies Partly complies Explain 33. The Chairman, as the person responsible for the proper operation of the Board, in addition to carrying law or Bylaws and statutory duties, should prepare and submit to the Board a calendar and agenda; he should organize and coordinate the regular evaluations of the Board and, where appropriate, those of the company s chief executive; he should be responsible for the Board's direction and its proper operation; he should ensure enough time is devoted to discuss strategic matters, as well as accept and review ongoing learning programs for each director when circumstances so dictate. Complies Partly complies Explain 34. When there is a coordinating director, in addition to powers conferred by law, the By-laws or the Board regulations should delegate the following duties to said director: to chair the Board of Directors when the chairman and deputy chairmen, if applicable, are not present; hearing the concerns of non-executive directors, to be in contact with investors and shareholders in order to learn their points of view and form an opinion about their concerns, especially about the Company's corporate governance; and to coordinate a succession plan for the chairman. Complies Partly complies Explain Not applicable 35. The Secretary should take care to ensure that the Board's actions and decisions consider the good governance recommendations of the Unified Code that are applicable to the Company. Complies Explain 36. The Board in full should evaluate and adopt, on an annual basis, if applicable, an action plan aimed at correcting deficiencies found regarding: a) The quality and efficiency of the Board's operation. b) The operation and structure of its committees. c) The diversity of the structure and competences of the Board. 74

347 d) The performance of the Board's Chairman and of the Company s chief executive. e) The performance and contribution of each director, paying special attention to those in charge of the different committees of the Board. The evaluation of the different committees will be based on the reports submitted by said committees to the Board, and the evaluation of the Board will be based on the report submitted by the Appointments Committee. Every three years, the Board will perform the evaluation with the support of an external advisor, whose independence will be verified by the Appointments Committee. Business dealings between the advisor or any company of his group and the company or any company of its group shall be detailed in the Annual Corporate Governance Report. The process and the assessed areas will be described in the Annual Corporate Governance Report. Complies Partly complies Explain 37. When the company has an Executive Committee, the breakdown of its members by director category should be similar to that of the board itself. The Secretary of the board should also act as secretary to the Executive Committee. Complies Partly complies Explain Not applicable 38. The board should be kept fully informed of the business transacted and decisions made by the Executive Committee. To this end, all board members should receive a copy of the Executive Committee s minutes. Complies Partly complies Explain Not applicable 39. Audit committee members, particularly the Chairman, are appointed in light of their knowledge and experience of accounting, audit or risk management and the majority of those members should be independent directors. Complies Partly complies Explain 40. Under the supervision of the Audit Committee, there should be a unit in charge of internal audit that ensures the proper operation of internal control and reporting systems, and the operation of this unit will be dependent on the non-executive chairman of the Board or of the Audit Committee. Complies Partly complies Explain 41. The head of internal audit should submit an annual work programme to the Audit Committee, report to it directly on any incidents arising during its implementation, submit an activities report at the end of each year. Complies Partly complies Explain Not applicable 42. In addition to those established by law, the Audit Committee should have the following functions: 1. With regard to internal control and reporting systems: 75

348 a) Supervise the preparation and the integrity of the financial information on the company and, if applicable, the group, reviewing compliance with the regulatory requirements, proper delimitation of the scope of consolidation and correct application of accounting policies. b) Monitor the independence and efficacy of the division performing the internal audit function; proposing the selection, appointment, reappointment and removal of the head of internal audit; propose the budget for this service; approving work plans and orientation, ensuring that its activity is mainly focused on the company's material risks; receive periodic financial information on its activities; and check that senior management is considering its recommendations and conclusions. c) Establish and supervise a mechanism whereby staff can report, confidentially and, if necessary, anonymously, any irregularities they detect in the course of their duties, in particular financial or accounting irregularities, with potentially serious implications for the firm. 2. With respect to the external auditor: a) In the event of the resignation of the external auditor, investigate the issues giving rise to that resignation. b) Ensure that the external auditor's compensation for his work does not compromise its quality or independence. c) Ensure that the Company notifies any change of auditor to the National Securities Market Commission as a significant event, accompanied by a statement of any disagreements arising with the outgoing auditor the reasons for the same. d) Ensure that the external auditor holds an annual meeting with the Board in plenary session to report on the work carried out, the progress in the accounting situation, and the risks the Company faces. e) Ensure that the Company and the external auditor adhere to current regulations on the provision of non-audit services, the limits on the concentration of the auditor s business and, in general, other requirements designed to safeguard auditors independence. Complies Partly complies Explain 43. The Audit Committee should be empowered to meet with any company employee or manager, even ordering their appearance without the presence of another senior officer. Complies Partly complies Explain 44. The Audit Committee should be informed on the structural and corporate changes intended by the Company for reviewing and submitting the report to the Board of directors on the economic conditions and the accounting effects and, specifically, on the swap ratio proposed. Complies Partly complies Explain Not applicable 45. Control and risk management policy should specify at least: a) The different types of financial and non financial risks affecting the Company (operational, technology, social, legal, environmental, reputational, political, fiscal etc.) with the inclusion under financial or economic risks of contingent liabilities and other off-balance-sheet risks. b) Risk level considered acceptable by the Company. 76

349 c) Measures in place to mitigate the impact of risk events, should they occur. d) The internal reporting and control systems to be used to oversee and manage the above risks, including contingent liabilities and off-balancesheet risks. Complies Partly complies Explain 46. Under direct supervision of the Audit Committee or, if applicable, of a specialized committee of the Board, there should be an internal function of risk control and management carried out by a unit or internal department of the Company with the following functions: a) Ensure the proper operation of risk control and management systems and, specifically, that all important risks faced by the Company are properly identified, managed and quantified. b) Actively participate in the development of the risk strategy and in the important decisions about its management. c) Ensure that risk control and management systems mitigate risks adequately in accordance with the policy framework set forth by the Board. Complies Partly complies Explain 47. The members of the Appointments and Remuneration Committee or of the Appointments Committee and the Remuneration Committee, if they are separated should be designated seeking to ensure that they have the knowledge, skills and experience required for the duties they will perform, and that the majority of said members are independent directors. Complies Partly complies Explain The members of the Appointments Committee and the Remuneration Committee of the Company will be designated seeking to ensure that they have the knowledge, skills and experience required for the duties they will perform. In both committees, the percentage of independent directors is 50%, thus, it cannot be said that they represent the majority in spite of the fact that the Chairwomen of both committees, who are independent, have the casting vote to decide in case of a tie (Section 16.5 of the Board of Directors Regulations.) 48. Large cap companies should have two separate committees, an Appointments Committee and a Remuneration Committee. Complies Explain Not applicable 49. The Appointments Committee should consult with the Board's Chairman and company's chief executive, especially on matters relating to executive directors. Any board member may suggest directorship candidates to the Appointments Committee for its consideration. Complies Partly complies Explain 50. The Remuneration Committee should perform its duties independently, and in addition to those conferred by law, it should have the following functions: a) Propose standard conditions for senior officer employment contracts to the 77

350 Board. b) Oversee compliance with the remuneration policy set by the Company. c) Review periodically the remuneration policy applied to directors and high executives, including share-based compensation systems and their application, as well as ensuring that their individual compensation is proportionate to that paid to the Company's other directors and high executives. d) Ensure that potential conflicts of interests do not compromise the independence of the external advice received by the committee. e) Check the information on the remuneration received by directors and senior officers contained in different corporate documents, including the Annual Report on Director's Remuneration. Complies Partly complies Explain 51. The Remuneration Committee should consult with the Chairman and chief executive, especially on matters relating to executive directors and senior officers. Complies Partly complies Explain 52. The rules on structure and operation of the supervision and control committees should be established on the Regulations of the Board of Directors and should be consistent with those that are legally binding and applicable to committees, pursuant to previous recommendations, including: a) They should be formed exclusively by non-executive directors, with a majority of independent directors. b) Committees should be chaired by an independent director. c) The Board of Directors should appoint the members of such committees with regard to the knowledge, aptitudes and experience of its directors and the terms of reference of each Committee, and it should discuss their proposals and reports and be responsible for overseeing and evaluating their work, which should be reported to the first board plenary following each meeting. d) The Committees may engage external advisors, when they feel this is necessary for the discharge of their duties. e) Minutes of meeting proceedings should be drawn up and a made available to all Board members. Complies Partly complies Explain Not applicable 53. The job of supervising compliance with corporate governance rules, internal codes of conduct and the corporate social responsibility policy should be entrusted to one or several committees of the Board, namely, the Audit Committee, the Appointments Committee, the Corporate Social Responsibility Committee, if applicable, or a specialized committee created by the Board, exercising its power to self-organize, which should have the following minimum functions: a) Supervising compliance with internal codes of conduct and the corporate governance rules of the Company. b) Supervising the strategies of communication and relation with shareholders and investors, including small and medium shareholders. 78

351 c) Evaluating, on a regular basis, the adequacy of the Company's corporate governance rules and procedures, so it can accomplish its mission of promoting social interest, considering, accordingly, the legitimate interests of the remaining stakeholders. d) Reviewing the corporate social responsibility policy of the Company, ensuring it is directed towards the creation of value. e) Monitoring strategies and actions of corporate social responsibility, and evaluating the degree of compliance. f) Supervising and evaluating the relations with the different stakeholders. g) Evaluating everything related to the Company's non-financial risks, including operational, technological, financial, legal, social, environmental, political and reputational risks. h) Coordinating the process of reporting non-financial and diversity information, according to the applicable regulations and the international standards of reference. Complies Partly complies Explain 54. The corporate social responsibility policy should include the principles and commitments the Company takes on voluntarily in relation to the different stakeholders, and it should identify, at least: a) The objectives of the corporate social responsibility policy and the development of support instruments. b) The corporate strategy related to sustainability, the environment and social affairs. c) The specific practices related to shareholders, employees, clients, suppliers, social affairs, the environment, diversity, fiscal responsibility, related to human rights and the prevention of illegal behaviour. d) Methods or systems to monitor the results of the implementation of the specific practices detailed in the preceding item, the associated risks and their management. e) Mechanisms for the supervision of non-financial risks, business conduct and ethics. f) Channels of communication, participation and dialogue with stakeholders. g) Responsible communication practices that prevent information manipulation and protect integrity and honour. Complies Partly complies Explain 55. The Company should report, in a separate document or in the directors report, matters related to corporate social responsibility using some of the internationally accepted methods. Complies Partly complies Explain 56. Directors remuneration should be sufficient to attract and retain directors with the desired profile and to compensate them for the dedication, abilities and responsibility that the position entails; but should not be so high as to compromise the independence of criterion of non-executive directors. 79

352 Complies Explain 57. Variable remuneration linked to the Company's performance, individual performance, and remuneration comprising the delivery of shares, share options or other share-based instruments, and long-term saving systems such as pension plans, retirement systems or other systems of social provision should be confined to executive directors. The delivery of shares for the remuneration of non-executive directors may be considered when they are obliged to retain them until the end of their tenure. The foregoing will not be applicable to shares that the director needs to sell in order to afford the expenses related to their acquisition. Complies Partly complies Explain 58. In the case of variable awards, remuneration policies should include technical safeguards to ensure they reflect the professional performance of the beneficiaries and not only the general progress of the markets or the company s sector, atypical or exceptional transactions or circumstances of this kind. And, specifically, variable components of remuneration should: a) Be linked to predetermined and measurable performance criteria that consider the risk incurred to obtain a result. b) Promote the Company's sustainability and include non-financial criteria that are proper for the long-term creation of value, such as the compliance with the Company's rules and internal procedures and its risk management and control policies. c) Be designed based on a balance between the accomplishment of short, medium and long term objectives that allow for the remuneration of continuous performance over a period that is sufficiently long to appreciate their contribution to the creation of value, in a way that the measurement elements of that performance do not only revolve around specific, occasional or extraordinary events. Complies Partly complies Explain Not applicable 59. Payment of a relevant part of the variable components of remuneration should be postponed during a period sufficiently long to verify that previously established performance conditions have been fulfilled. Complies Partly complies Explain Not applicable 60. In the case of remuneration linked to company earnings, deductions should be computed for any qualifications stated in the external auditor s report. Complies Partly complies Explain Not applicable 61. A relevant percentage of the variable remuneration of non-executive directors should be linked to the delivery of shares or other share-based financial instruments. Complies Partly complies Explain Not applicable 80

353 62. Once shares, share options or rights over shares of remuneration systems have been attributed, directors cannot transfer ownership of a number of shares equal to twice their fixed annual remuneration and cannot make use of said options or rights for, at least, three years after they are attributed. The foregoing will not be applicable to shares that the director needs to sell in order to afford the expenses related to their acquisition. Complies Partly complies Explain Not applicable 63. Contractual agreements should include a clause allowing the company to ask for a reimbursement of the variable components of remuneration when payment was not adjusted to performance conditions or when payment was made pursuant to data that is later deemed inaccurate. Complies Partly complies Explain Not applicable 64. Payments due to the termination of the agreement should not exceed the established amount equivalent to two years of the total annual remuneration and should not be paid until the company can verify that the director has fulfilled the performance criteria that were previously established. Complies Partly complies Explain Not applicable H OTHER INFORMATION OF INTEREST 1. If the Company or Group companies are dealing with any relevant matters in terms of corporate governance that have not been addressed in the rest of the sections in this report, but which must be included so as to provide more complete and reasoned information on the structure and governance practices of the entity or that of its group, please provide a brief description. 2. You may include in this section any other information, clarification or observation related to the above sections of this report. Specifically indicate whether the company is subject to corporate governance legislation from a country other than Spain and, if so, include the compulsory information to be provided when different to that required by this report. 3. Also state whether the company voluntarily subscribes to other international, sectorial or other ethical principles or standard practices. If so, please state the code in question and the date of adherence. In particular, mention will be made to the observance of the Code of Good Tax Practices of 20 July SECTION A. Ownership structure SECTION A.2 As regards the information provided in this section and in the Syndication Agreement, it is stated that, although the Banking Foundation Caja de Ahorros de Asturias is not the owner of the shares held by the Banking Foundation Caja de Ahorros y Monte de Piedad de Extremadura and by the Banking Foundation Caja de Ahorros de Santander y Cantabria in Liberbank, the same criteria has been followed as that applied for voting rights notifications lodged with the CNMV in accordance with Royal Decree 1362/

354 Oceanwood Capital Management LLP is the managing entity of the funds Oceanwood Opportunities Master Fund (3.116%), Crown/Oceanwood Segregated Portfolio (0.830%), Oceanwood European Select Opportunities Master Fund (3.650%) and Oceanwood Peripheral European Select Opportunities Fund (OPESOF), which, in turn, invests through the Irish investment vehicle Oceanwood Investments II Designated Activity Company (1.481%). The OEFSO fund invests through the Irish vehicle Oceanwood Investments II Designated Activity Company. This indirect ownership could reach % if Oceanwood Opportunities Master Fund and Crown/Oceanwood Segregated Portfolio exercise the rights derived from financial instruments that give right to acquire shares. With respect to the most significant movements in the shareholding structure occurred during the year corresponding to the significant shareholder Oceanwood Capital Management LLP, operated on 25 October 2017, it is stated that the percentage of 15% (threshold exceeded) includes rights derived from financial instruments that give the right to acquire shares. Norges Bank s ownership interest could reach 3.260% if it exercised the rights derived from financial instruments that give right to acquire shares (according to the last communication made to the CNMV, which took place prior to the inscription of the deed relating to the capital increase approved by the Extraordinary General Shareholders' Meeting of Liberbank on 9 October 2017, which was communicated through the corresponding significant event, registration number on 20 November 2017). SECTION A.3 Manuel Menéndez Menéndez: under deferred payments in shares reported as financial instruments, it could become the owner of 172,929 additional voting rights, which would currently represent an additional 0.006% in its percentage ownership interest over the total voting rights of the Company. Víctor Manuel Bravo Cañadas: under deferred payments in shares reported as financial instruments, it could become the owner of 4,525 additional voting rights, which would not represent a change in its percentage ownership interest over the total voting rights of the Company. SECTION A.8 Indirect ownership interest: In the statement, indirect ownership has been stated at 100% of the position of Banco de Castilla la Mancha, S.A., although the ownership interest held by Liberbank, S.A. in said bank is 75% at 31 December On 29 January 2018, a public deed of simultaneous reduction and increase of capital was issued, with Liberbank, S.A. becoming sole shareholder of Banco de Castilla-La Mancha, S.A.U. Moreover, it is indicated that Banco de Castilla La Mancha Mediación, Operador De Banca Seguros Vinculado, S.A.U., is wholly owned by Banco de Castilla-La Mancha, S.A. SECTION C. Management Structure of the Company SECTION C.1.2 and C.2.1 On 25 April 2016, through the corresponding Significant Event (No ), the resignation of Mr. Luis Garicano Gabilondo was reported, being a member on the Board of Directors, due to his assumption of commitments and responsibilities in other areas that did not allow him to dedicate the time or attention required to fulfil his obligations as a member on the Board of Directors. Mr. Luis Garicano was appointed Independent Director on 17 January 2012 and was reappointed on 23 January 2013, being a member on the Risk Committee of the Board and, since 27 October 2014, he was also Chairman of the Audit Committee. 82

355 Consequently, regarding the Chairship of the Audit Committee and in accordance with the provisions of Article 5 of the General Regulations of the Audit Committee, on the basis of the aforementioned resignation, Manuel Pedro Rivero Torre shall hold the role of Acting Chairman. On 10 April 2017, through the corresponding Significant Event (No ), the resignation of Mr. Alfonso Pitarch Rodríguez was reported, due to personal reasons that did not allow him to dedicate the time or attention required to fulfil his obligations as a member on the Board of Directors. Such resignation involved his leave as member of the Audit Committee. In section C.2.1, Mr. Pedro Manuel Rivero Torre has been identified as the board member to be appointed on the Audit Committee, on the basis of his background and expertise in accounting, auditing or both of these areas. It must be noted that the following have also been appointed, after applying the same criteria, being the other members of the aforementioned Committee: Mr. Jorge Delclaux Bravo and Mr. Eduardo Zúñiga Pérez del Molino. The Extraordinary General Shareholders' Meeting held on 9 October 2017 agreed to ratify the agreement approved by the Liberbank s General Meeting held on 19 April 2017 to maintain the number of members in the Company s Board of Directors at fifteen, thus keeping the vacancies produced by the resignations of Mr Luis Garicano Gabilondo as an Independent Director on 25 April 2016 and Mr Alfonso Pitarch Rodríguez as Dominical Director on 7 April SECTION C.1.3 and C.1.4 Regarding these sections, it must be noted that the percentages have been calculated while including the 13 members of the Board. SECTION C.1.15 The amount recorded under Board remuneration (thousands of Euros) corresponds to the gross amount of remuneration earned by every member of the Board of Directors of the Bank, during the time in which they were members of this body. In the case of the executive directors, the amounts correspond to the executive functions performed. For the case of the Non-Executive Directors, the amounts are comprised of a fixed amount for being a member on the Board of Directors. Regarding the Executive Director, it must be noted that the Board of Directors of the Bank, during its meeting held on 26 March 2012, approved the Variable Remuneration Model of the Bank. Said model determines that: The Annual Variable Remuneration will be paid in equal parts of cash and shares. Once the fiscal year ends, the Annual Variable Remuneration was determined, by applying the conditions established by the Board and approved by the Annual General Meeting for that purpose. 60% of the aforesaid remuneration is to be settled during the following year, except in the case of CEO, who, during the first year, is paid 40% and the remainder is deferred over the three subsequent years in equal amounts. All shares delivered according to the aforementioned rules will be unavailable for one year as of their delivery; this retention applies to the net value of the shares, net of the portion that is necessary for the payment of taxes over the received shares. The variable compensation model aims to establish a relationship between the results obtained by the Group and the amount of variable compensation payable to its executives, to compensate the objective achievement level, to align its performance with the Group's long-term interests and discard excessive risk assumption, both present and future. 83

356 The accrued variable remuneration is calculated using the best estimation on the basis of the available information at the date of preparing these financial statements and is settled according to the Variable Remuneration System approved by the Board of Directors on 31 January of 2017, based on the Variable Remuneration Model approved by the same body on 26 March Furthermore, that settlement takes into account all specific requirements applicable to the Identified Group on remuneration matters, approved by the Board of Directors on 29 June The Variable Remuneration System and the specific requirements are governed by the mandatory standards and the recommended standards established by the regulatory framework currently in force for credit entities. SECTION C.2.1 Regarding this section, Mr. Jesús María Alcalde Barrio, Secretary of the Board of Directors, will act as the Secretary (not a member) of the Audit Committee, the Appointments Committee, the Remuneration Committee and the Risk Committee of the Board. SECTION C.2.2 In regard to this section, clarify that the number of members on the Risk Committee of the Board, at year-end 2017, amounts to four, due to the resignation of Mr. Luis Garicano Gabilondo as Board Member of the Company. Consequently, the percentages relating to the Committee shall now be calculated on the number of currently appointed members. Additionally, regarding the Audit Committee, it is stated that after the leave of Mr. Luis Garicano Gabilondo and Mr. Alfonso Pitarch Rodríguez there were 3 members at the end of the fiscal year 2017.Consequently, the percentages relating to the Committee shall now be calculated on the number of currently appointed members. SECTION g. Degree of compliance with corporate governance regulations As regards Recommendation 11 (if the Company plans to pay attendance fees to the Annual General Meeting, it shall previously establish a stable general policy on said fees), it is the Company's tradition to give the shareholders that are present at the General Meetings a commemorative gift of low economic value for which the Company does not deem necessary to establish a formal policy. Due to the absolutely low cost of said gift, it is not perceived as compensation to shareholders, and thus, the Company complies with Recommendation 11 of the Code of Good Governance. ENDORSEMENT OF CODES On 26 March 2012, the Company adhered to the Code of Good Practices for the viable restructuring of mortgage-backed debts on the principle residence, as set out in the appendix to Royal Decree-Law 6/2012, of 9 March. Likewise, on 5 November 2013, it adhered to the Framework Agreement on Collaboration signed on 30 May 2010 by the CNMV, the Bank of Spain and the CECA (the Spanish Confederation of Savings Banks) on undertaking initiatives within the framework of the Financial Education Plan. On 15 December 2014, the Board of Directors resolved to adhere to the amendments made to the Code of Best Practices for the feasible restructuring of debts secured by mortgages on the usual dwelling by Law 1/2013, of 14 May, on measures to reinforce protection of mortgage debtors, debt restructuring and rented social housing, ratifying the resolution adopted by the Operating Steering Committee at a meeting held on 11 November Moreover, the Board of Directors, in accordance with what is set forth in the Fifth Additional Provision of the Royal Decree - Law 1/2015, of 27 February, belonging to the second opportunity mechanism, reduction of the financial burden and other social order 84

357 measures, agreed unanimously in their request to maintain the scope of the previous versions of the Code of Good Practices for the feasible restructuring of the debt with mortgage security on main residence. This agreement has been forwarded to the General Secretary of Treasury and Financial Policy. Additionally, after the entry into force of Royal Decree-Law 5/2017, which modifies Royal Decree-Law 6/2012 on urgent measures for the protection of mortgage debtors without resources and Law 1/2013 on measures to strengthen protection to mortgage debtors, restructuring of debt and social income, it was agreed to communicate expressly to the General Secretary of the Treasury and Financial Policy that Liberbank requests to remain in the application scope of the previous versions that apply. In order to comply with the provisions of article C) 6º of the Companies Law, drafted by art. 2.3 of Royal Decree-Law 18/2017 dated 24 November, the following is indicated: In addition to what is indicated in section C.1.5., the Liberbank s Directors Selection Policy, updated by the Board of Directors at the meeting held on 13 December 2016, is aimed at establishing the criteria that Liberbank must take into account in the selection processes for new members of the Board of Directors as well as the re-election of the members who are already in office at that moment, under the provisions of the applicable regulations. According to section 5.3 of said Policy, during the directors selection processes, knowledge, experience and gender already existing within the Board shall be taken into account in order to promote diversity in the composition thereof. In virtue of the competence that the Board of Directors Regulations assign in Article 18.5 g) to the Appointment Committee to formulate and review the criteria that must be followed for the Board of Director s composition and the candidates selection, the Committee will be responsible, among others, for the following functions: a) Evaluate the balance of skills, knowledge and experience on the Board. Likewise, it will evaluate the Board of Directors balance of knowledge, capacity, diversity and experience and, for these purposes, will define the functions and aptitudes necessary in the candidates that must cover each vacancy, and will evaluate the time and dedication required so that they can effectively perform their duties (Article 18.5 a) of the Board of Directors Regulations. b) Ensure that, when new vacancies arise or when appointing new directors, selection procedures promote experience and knowledge diversity, facilitate women directors selection and, in general, that no biases are included which may involve discrimination. Additionally, the Appointment Committee must comply with the following guidelines included in the same policy: a) Regarding the appointment of independent directors, the Appointments Committee, by giving the right instructions shall ensure that in the search for candidates that fit the desired profile, the consultancy firm renowned in the field of personnel selection conducting the process includes candidates who meet the conditions established by the Appointments Committee taking into account the provisions of section 5.3 on Board diversity. b) Regarding the other directors appointment, at the time of preparing its preliminary report on the nomination proposal, the Appointments Committee shall weigh the potential impact of the proposed candidate appointment in the Board s experience and knowledge diversity and its orientation to achieve the objective set on the representation percentage of female directors. Finally, in terms of the measures adopted and the ways in which they were applied, the Appointments Committee, in the suitability analyses carried out during 2017, has examined various aspects, highlighting, for the purposes that concern us, the training, the practical experience in the financial sector and/or in those areas of knowledge that were understood to be relevant for the performance of their duties or complementary to the set of knowledge already performed within the bodies in which said candidate would be integrated, and the complementarity with the rest of the members. 85

358 This Annual Corporate Governance Report was approved by the company s Board of Directors at its meeting held on 20 February State if there were any directors who voted against or abstained from the approval of this Report. Yes Name or company name of director not voting in favour of the approval of this Report No Reasons (voted against, abstention, non-attendance) Explain the reasons 86

359 ANNEX TO THE 2017 ANNUAL CORPORATE GOVERNANCE REPORT LIBERBANK S.A. A.9. Give details of the applicable conditions and time periods governing any resolutions of the General Shareholders Meeting to issue, buy back and/or transfer treasury stock. The following resolutions were adopted at the General Shareholders Meeting of Liberbank, S.A. on 21 April 2015: ( ) to authorize the Company in order to, directly or through any of its subsidiaries, and during a maximum period of five years from the date of approval of the present agreement, carry out, at any time and as often as it deems appropriate, the acquisition of treasury stock by any legal means, including from profits and/or unrestricted reserves, all of which pursuant provisions of article 146 and related provisions of the Bylaws, as well as to sell the acquired shares subsequently. The acquisition of treasury shares shall be carried out observing at all times the conditions set forth in the applicable legislation and, in particular the following: i. That at no time the nominal value of the acquired treasury shares, directly or indirectly, in the present authorization, added to those of the Company and its subsidiaries may exceed 10% of the subscribed share capital of the Company or, if applicable, a higher amount legally permissible during the validity of the present authorization, without prejudice to the suppositions set forth in the article 144 by reference of 509 of the Bylaws. ii. iii. That the acquisition, including shares that the Company or a person acting in his own name but on behalf of the Company, would have previously acquired and held by it, does not produce the effect that the net assets is inferior to the amount of share capital plus the unavailable legal or statutorily reserves. That the acquisition price per share is not less then the nominal value thereof, nor 20% superior to the stock exchange value at the moment of execution or the operation is agreed. Expressly authorising, for the purposes set forth in the last paragraph of section a) of the article of the Bylaws, that the shares acquired by the Company or its subsidiaries under this authorization may be used, entirely or partially, to be given to the employees or the directors of the Company or its subsidiaries, either directly or as a result of exercising option rights they hold, when a recognised right exists thereto. ( ) Empower the Board of Directors, in the broadest possible terms, to exercise the present authorization, authorizing it to substitute, entirely or partially, those powers in favour of the Chairman of the Board of Directors, the Managing Director, Secretary or any other members of the Board". A.10 Explain any restrictions on the transfer of securities and on voting rights. Indicate, in particular, the existence of any restrictions on the takeover of the company by means of share purchases on the market. Below is the transcription of the agreement made public through the significant event filing published on the CNMV s website on 25 February 2015: In continuance of the significant events number , published on the 16 May 2013, and , published on the 10 June 2013, in which an integration agreement was stated between certain shareholders of Liberbank, S.A., and pursuant the article 531 of the Bylaws, attached is the literal transcription of the Syndication Agreement, which in 87

360 accordance with the provisions of article of the Bylaws, constitutes the integration agreement of the Company. Madrid, 25 of February 2015" Syndication Agreement between the Banking Foundations Cajas de Ahorros de Asturias, Caja de Ahorros y Monte de Piedad de Extremadura and Caja de Ahorros de Santander y Cantabria, as partners of Liberbank S.A. 1. General principles In general, and subject to applicable legislation, the Savings Banks agree to act on their own behalf, while exercising their respective rights as shareholders, and through their representatives at Liberbank s corporate bodies, in accordance with this Syndication Agreement. 2. Syndicate of shareholders During the term of the present Syndication Agreement, in their capacity of shareholders of Liberbank, the Parties constitute a Syndicate of shareholders and undertake to exercise their rights as shareholders of Liberbank pursuant what is set forth in the present Syndication Agreement. The Syndicate Shares based upon the participation of each of the Parties in the share capital of Liberbank shall be as follows: Cajastur 66% Caja Extremadura 20% Caja Cantabria 14% The mentioned shares may be altered as a result of the alteration of the participations of each of the Parties in the share capital of Liberbank in the terms and conditions provided in the present Syndication Agreement. The Parties shall form a Syndication Committee, which shall be formed by a representative of every Party, in order to determine the direction of the vote at the Annual General Meeting of Liberbank and in general decide regarding all matters attributed by the present Syndication Agreement (Syndication Committee), always in accordance with the regulations set forth in the present Syndication Agreement. Each Party shall communicate to the other Parties the Representative in the Syndication Committee, and this representation shall be deemed in effect if no communication has been made to the other Parties regarding a change in representation. The representative of the Party which at all times has the major share in the Syndicate shall act as the Chairman of the Syndicate Committee, it shall be his duty to call the Committee Meeting and take the minutes of the meetings sending a copy thereof to all the Parties through any means that proofs the acknowledgement of receipt on behalf of the addressee. Any of the Parties who notified in writing the other Parties through any means which provides proof of acknowledgement of receipt on behalf of the addressee, may call for a Meeting of the Syndicate Committee stating the subjects to be handled therein. The Chairman of the Syndicate Committee shall call for the meeting by notifying the other two Parties through any means which provides proof of acknowledgement of receipt on behalf of the addressee, at least three (3) working days before the date of the celebration of the meeting, stating in the notification the subjects to be handled during the meeting (including both the subjects set forth by the Party requesting the meeting as those added by the other parties), the day, hour and place- which shall be in Madrid-, nevertheless the members of the Syndicate Committee shall be able to take part in the meeting by any means that allows the recognition and identification of the assisting Party, regardless 88

361 where that Party is. When the Chairman of the Committee deems there are urgent reasons to call for a meeting, the Chairman, using any means, shall be able to call for an immediate meeting, sufficing a period of at least twenty-four (24) hours between the notification and the celebration of the meeting. Notwithstanding the above, the Syndicate Committee can be constituted at all times by agreement of the Parties to handle any subject of their competence without the need of any notification. In any event, the Syndicate Committee shall necessarily meet through the notification of its Chairman, at least five (5) working days before the set date for every Annual General Meeting of the Liberbank Shareholders, in order to determine how their votes shall be cast regarding the subject matters to handle at the mentioned General Meeting. The Syndicate Committee shall be validly constituted to decide regarding any matter of its competence in accordance to what is set forth in the present Syndication Agreement, when the meeting is attended by the Party or Parties representing at least fifty (50) percent of the Syndicate Shares. Without prejudice for the provisions of the present clause, the Syndicate Committee shall be entitled to establish the operating rules deemed appropriate for the best performance of their functions. 3. Decisions of the Syndicate Committee. In general, unless explicitly stated in another way in the present Syndication Agreement, the agreements of the Syndicate Committee in all matters of their competence pursuant the present Syndication Agreement, shall be adopted with favourable votes representing more then fifty percent (50%) of the Syndicate Shares. In that regard, therefore how the vote of the Parties shall be cast at the Annual General Meeting of the Liberbank shareholders, shall be decided through an agreement of the Syndicate Committee with favourable votes representing more then fifty percent (50%) of the Syndicate Shares, unless the present Syndication Agreement establishes a different majority; failing to come to an agreement on the item on the agenda handled at the Annual General Meeting of the Liberbank shareholders, the Parties shall abstain or vote against any kind of proposed agreement. Additionally, at the Annual General Meeting of Liberbank the favourable vote of one hundred percent (100%) of the Shares in the Syndicate shall be required to vote for the transfer of its registered offices outside the province of Madrid. Likewise, in case of agreement on transformation, merger, dissolution, division or global transfer of assets and liabilities, and any structural modification of Liberbank, an agreement of on behalf of the Syndicate Committee with one hundred percent (100%) of the Syndicate shares shall be necessary, in virtue of this agreement of the Annual General Meeting of the Liberbank shareholders, the Bank shall replace the shares of the Parties in Liberbank for shares or securities in an unlisted Company; in any of the mentioned cases, if the majority of the Syndicate Shares would be in favour of the structural modification, the present Syndication Agreement shall be automatically resolved and each of the Parties shall be entitled to decide their vote at the Annual General Meeting of the Liberbank shareholders in which the structural modification is handled. 4. Board of Directors of Liberbank. Composition and appointment of the Members The Parties agree to exercise their voting rights at the Annual General Shareholders Meeting of Liberbank during the validity of the Syndication Agreement, in order to ensure the representation of the three banking foundations in the Board of Directors of Liberbank based upon the participation percentage of each of them in the capital of Liberbank taking into account, at all times, the applicable regulations and recommendations of the 89

362 corporate governance regarding the structure and composition of the Board of Directors of Liberbank. In accordance with the above and in order to ensure the presence on the Board of Directors of at least one representative of each of the parties, these undertake to submit jointly and exercise their right to vote in favour of the appointment of directors of Liberbank complying with the following criteria: Distribution of the number of Directors between the parties according to the number of members of the Board of Directors of Liberbank based upon a criterion that, without prejudice to take into account the percentage of participation of each Banking Foundation in the share capital of Liberbank, endeavour the presence on the Board of directors of, at least, one representative of each of the Parties. In this regard the proposition of appointment shall provide the distribution of Directors set forth in the following sections. In case the number of Directors to be appointed by the Banking Foundations in accordance with the participation percentage in Liberbank is 7, the jointly presented proposal shall consider the appointment of 4 Directors proposed by FB Cajastur, 1 Director proposed by FB Caja Extremadura, 1 Director- legal person whose representative towards Liberbank shall be a natural person designated therefore by FB Caja Extremadura (in this case, for the appointment as director-legal person a capital company controlled by FB Cajastur shall be proposed) and 1 Director proposed by FB Caja Cantabria. In case the number of Directors to be appointed by the Banking Foundations in accordance with the participation percentage in Liberbank is 6, the jointly presented proposal shall consider the appointment of 4 Directors proposed by FB Cajastur, 1 Director proposed by FB Caja Extremadura, and 1 Director proposed by FB Caja Cantabria. In case the number of Directors to be appointed by the Banking Foundations in accordance with the participation percentage in Liberbank is 5, the jointly presented proposal shall consider the appointment of 3 Directors proposed by FB Cajastur, 1 Director proposed by FB Caja Extremadura, 1 Director- legal person whose representative towards Liberbank shall be a natural person designated therefore by FB Caja Cantabria. In this case, for the appointment as director-legal person a capital company controlled by FB Cajastur shall be proposed. In case the number of Directors to be appointed by the Banking Foundations in accordance with the participation percentage in Liberbank is 4, the jointly presented proposal shall consider the appointment of 2 Directors proposed by FB Cajastur, 1 Director proposed by FB Caja Extremadura, 1 Director- legal person whose representative towards Liberbank shall be a natural person designated therefore by FB Caja Cantabria. In this case, for the appointment as director-legal person a capital company controlled by FB Cajastur shall be proposed. In case the number of Directors to be appointed by the Banking Foundations in accordance with the participation percentage in Liberbank is 3, the jointly presented proposal shall consider the appointment of 2 Directors proposed by FB Cajastur, and a third Director- legal person whose representative towards Liberbank during the first three years of the mandate shall be a natural person designated therefore by FB Caja Extremadura and during the remaining year of mandate, the natural person designated therefore by FB Caja Cantabria. In this case, for the appointment as Director-legal person a capital company controlled by FB Cajastur shall be proposed. 90

363 With regard to the natural persons representing the company wholly owned by FB Cajastur referred to above, at the end of the Director s mandate, if applicable pursuant to the preceding paragraphs, the concerned Banking Foundation may propose to FB Cajastur to maintain the same natural person or the appointment of a different one instead. Moreover, in case there are relevant discrepancies regarding the decision criteria between the legal person and the representing natural person, FB Cajastur may dismiss the representing natural person proceeding, prior to the next session of the Board of Directors of Liberbank taking place after the mentioned dismissal, to the appointment of a new representing natural person based upon the proposal carried out by the affected Banking Foundation, although in case FB Cajastur would not agree with the proposal, it may designate whom it considers to act as representing natural person during a period equal to the mandate of the Directors; at the termination of this period, and if appropriate pursuant the preceding paragraphs, the affected Banking Foundation shall propose a representing natural person in accordance with the present Section, without prejudice of the application, if any, of the regulations set forth in the present paragraph. In case the number of Directors to be appointed by the Banking Foundations in accordance with the participation percentage in Liberbank is inferior to 3, the jointly presented proposal shall consider the appointment of the Director or Directors included in the agreement adopted by the Syndicate Committee, without prejudice of what is set forth in the Section 6.3 of the present Syndication Agreement. During the validity of the present Syndication Agreement, the three Banking Foundations shall put in their best effort within the legal boundaries for the Proprietary Directors named on their behalf in the Board of Directors of Liberbank, and shall support, in the Board and its committees, the proposals of appointment of office of the Board and its Committees that have the prior support of the Syndicate Committee, which shall necessarily meet with immediate effect at the request of any Party as soon as notified of the calling of any meeting on behalf of the Board or its Committees in which the appointment of offices of any kind are planned, in order to determine their position thereof. 5. Acquisition and transfer of Liberbank shares on behalf of the Parties 5.1. Transfer of Liberbank shares During the first five (5) years of validity of the present Syndication Agreement each Party may transfer, without prior consent on behalf of the other Parties, up to a total of five percent (5%) of the Liberbank shares of which each Party is holder at the time of the signature of the present Syndication Agreement, providing that the transfer does not imply that the Syndicate loses the capacity to continue appointing the number of Proprietary Directors of the Board of Directors, who have been designated prior to the transfer. After this five (5) year period, during the remaining time of the initial validity of the Syndication Agreement, each Party may transfer, without prior consent on behalf of the other Parties, in addition to the shares of Liberbank until the aforementioned limit of five percent (5%) which would not have been transferred during the initial period of five (5) years, to a total of five percent (5%) of the holding of each party in Liberbank at the time of the signature of the present Syndication Agreement, providing that the transfer does not imply that the Syndicate loses the capacity to continue appointing the number of Proprietary Directors of the Board of Directors, who have been designated prior to the transfer. Notwithstanding the above, when any Party decides to transfer Liberbank shares they must notify the other Parties pursuant the terms set forth in the clause below. If any of the other Parties expresses their willingness to transfer part of their Liberbank shares, so that the 91

364 total of the transfer could entail the loss of the capacity, on behalf of the Syndicate, to continue appointing the number of Proprietary Directors of the Board of Directors, who have been designated prior to the transfer, an apportionment of the maximum number of shares that can be transferred without losing the mentioned capacity shall take place, in accordance with their Syndication Shares, between the Parties which have expressed their intention to transfer. In any event, prior to any transfer of Liberbank shares by any of the Parties which entails an amendment to the corresponding ownership stakes, the Parties must mutually agree in good faith to amend the corporate governance rules contained in this Syndication Agreement and any other rights and obligations established herein regarding the initial ownership stake of each of the Parties comprising Liberbank. The transfer of shares carried out by any Party within the time and quantitative limits, shall entail the corresponding adjustment of the shares of the Shareholder Syndicate set forth in Section 2 above. The same rules that are applicable for the transfer of shares shall apply for the transfer of pre-emptive subscription rights Pre-emptive rights, In the event of transfer of Liberbank shares subject to the limits, requirement or plans established in the previous section, the rest of the Parties shall have first refusal in the preemptive right to purchase all of the shares being transferred, either for valuable consideration, at the price and under the terms and conditions offered by the third party to whom the Savings Bank is attempting to transfer the shares, at a maximum price limit of ten per cent (10%) above the arithmetical average of the average weighted price of the shares in the thirty (30) days prior to the date the transfer is notified, or for no consideration, in which case the price will be the arithmetical average of the average weighted price of the shares in the thirty (30) days prior to the date the transfer is notified. For these purposes, the Party wishing to transfer its shares must notify, previously to the other Parties, indicating whether the transfer is for no consideration or for valuable consideration, and, as appropriate, the price and terms offered by the third party wishing to receive the transfer. The rest of the Parties may express their intention to acquire the shares within fifteen (15) working days following the date of the notification. In the event that only one Party decides to acquire the shares, the transfer shall be completed within a maximum of fifteen (15) working days. Should the remaining two Parties state their intention to exercise their pre-emptive rights, the shares shall be distributed between them on a pro-rata basis according to their holding in the Syndicate Shares. If, within the deadline given, none of the Parties expresses its intention to exercise its pre-emptive right, the Party wishing to [sell] may proceed with this transfer Acquisition of Liberbank shares outside the Shareholder Syndicate After signing the present Syndication Agreement, the Parties may freely acquire Liberbank shares. Any acquisitions of shares made by a Party which imply holding a Syndicate Share in the Syndicate which is higher than that allocated to each Party in Clause 2, shall not alter the Shares in the Syndicate, without prejudice to the acquired shares being, on the one hand, affected by the resolutions of the Syndication Committee in the terms provided in this Syndication Agreement, and, on the other hand, not subject to the transfer limits established in Clause 5.1 and 5.2 above. In case one of the Parties has transferred shares so as to reduce its Syndicate Shares set forth in Section 2, the acquisition of shares carried out by this Party implying the fact that 92

365 they reach an inferior or equal ownership in Syndicate Shares to the one set forth in Section 2 regarding each of the Parties, in case they alter the Syndicate Shares, at the end of each year from the entry in force of the present Syndication Agreement the mentioned Syndicate Shares shall be recalculated based upon the holding percentages in the Liberbank share capital held by each Party at that time. The acquired shares shall be subject to the resolutions of the Syndication Committee under the terms of this Syndication Agreement and shall also be subject to the transfer limits described in Clause 5.1 and 5.2 above Acceptance or rejection of a takeover bid of shares on behalf of a third party In case of a Takeover Bid of Liberbank shares on behalf of a third party during the validity of the present Syndication Agreement, the Syndicate Committee's regime set forth in the Section 3 of the present Syndication Agreement, regarding the adoption of an agreement concerning the acceptance or the rejection of the offer, should be applied. Should the Syndication Committee, with the favourable vote of over fifty per cent (50%) of the Shares in the Syndicate, resolve not to accept the takeover bid, none of the Parties may, either totally or partially, accept it. If, on the other hand, the Syndication Committee resolves to accept the bid, with the favourable vote of over fifty per cent (50%) of the Shares in the Syndicate, those Party on the Committee which have voted against accepting the bid, may, either totally or partially, reject the bid. In case total acceptance is decided, the present Shareholder Agreement shall be automatically resolved after the settlement of the Takeover Bid. Meanwhile, in case of a partial acceptance by one or more of the Parties, the Syndication Agreement shall only remain in force after the settlement of the Takeover Bid, between the Parties holding at least 50% of the shares they had in the share capital of Liberbank before the mentioned settlement and provided that the joint holding in Liberbank be superior to 10% of its share capital and the mentioned Parties reach an agreement regarding the adjustment of the Syndication Agreement to the new situation, leaving it extinguished if the mentioned agreement is not reached within 15 days from the settlement date of the Takeover Bid Compliance by the Parties of the obligations forthcoming from the loyalty plan No limitation established in Section 5 shall affect the compliance of the obligations and commitments forthcoming from the Customer Loyalty Plan, approved by the Saving Banks and assumed by the Banking Foundations resulting from the transformation thereof, aimed at the retail customers who received shares and/or convertible bonds of Liberbank in the voluntary repurchase offer of hybrid capital instruments and subordinated debt issued by Liberbank, as well as the mandatory offer developed by the Fund for Orderly Bank Restructuring in the framework of the restructuring plan approved by the Bank of Spain and the European Commission in December Transfer of all the Liberbank shares In case of transfer of all the shares in Liberbank on behalf of one of the Parties, it shall be dissociated from the present Syndication Agreement. C.1.19 Indicate the procedures for the selection, appointment, re-election, evaluation and removal of directors. List the competent bodies, procedures and criteria used for each of these procedures. The removal of independent directors may also be proposed when a takeover bid, merger or similar corporate operation produces changes in the company s capital structure, in order to meet the proportionality criterion stipulated in corporate governance 93

366 recommendations whereby there is an even balance of proprietary and independent directors among the non-executive directors. Furthermore, the Board of Directors approved Liberbank s Directors Selection Policy at its meeting held on 28 September 2015 in order to meet the requirements derived from the regulations applicable to credit institutions and listed companies. Such Policy was subject to updating at the meeting held by the Board of Directors on 13 December 2016, in order to modify its structure and format to that contemplated by the Policies of the Liberbank Group, as well as to include better techniques. Such Policy was subject to review by the Board of Directors during the meeting held on 12 December 2017, and no amendments were considered necessary at that time. Article 10 of the Board of Directors Regulations refers to procedure for removal of directors. Such article states that directors shall leave their positions when the term of their appointment expires and upon decision by the General Meeting. Notwithstanding the above, the Board of Directors shall not propose the removal of non-executive directors before the expiry of their tenure as mandated by the Bylaws, except where just cause is found by the board, based on a report from the Appointments Committee. In these cases, the following shall be taken into consideration. C.2.1 Give details of all the board committees, their members and the proportion of executive, proprietary, independent and other non-executive directors: Explain the functions assigned to this committee, describe the procedures and rules of organization and operation thereof and summarize their most important performances during the year. AUDIT COMMITTEE In 2017 the Audit Committee has performed, among other, the following powers: 1. It has been a communication channel between the Board of Directors and the Company s external Auditor, assessing the results on financial information from each audit, making sure that the external Auditor has held a meeting with the full Board. 2. It has approved the professional services to be performed by the auditor (Deloitte) in accordance with the provisions of Law 22/2015, dated 20 July, on Audits that establishes certain services provided by the audit firms to customers domiciled in the European Union and that are public interest entities, as well as other complementary services to be carried out within the framework of the audit corresponding to 2017 financial statements of group companies together with their fees. 3. It has approved the Annual Internal Audit Plan for 2017, which included the planning of the work to be carried out, covering all the risks, processes, activities and companies of the Liberbank Group. 4. It has reported favourably on the Financial Statements closed at 31 December 2016, both individual and consolidated, the Annual Banking Report, the Management Report, the Annual Corporate Governance Report, as well as the rest of the periodic financial information (semi-annual and quarterly reports), ensuring the correct application of generally accepted accounting principles and reporting to the Board of Directors, prior to the adoption by the latter of the decisions relating to such financial information. 5. It has submitted, with a favourable report, to the Board of Directors, for preparation where applicable, the interim condensed consolidated financial statements and the consolidated management report at 30 June

367 6. It has reported favourably on the Interim Summarised Consolidated Financial Statements and the Interim Consolidated Directors Report at 30 September 2017, for preparation by the Board of Directors. 7. It has submitted to the Board of Directors, with a favourable report and for approval, where appropriate: a. The annual review of the Corporate Policy on Information with Prudential Relevance that is required by Article 431 of Regulation (EU) No. 575/2013 to comply with the information disclosure requirements established in Part Eight of said Regulation. b. The annual review of the Corporate Policy on Treasury Stock Transactions. c. The annual review of the Corporate Policy on Conflicts of Interest and Operations with Related Parties. d. The revision of the Corporate Policy for the Prevention of Criminal Risks, the Professional Ethical Code and the Rules of Conduct for Directors. e. The annual review of the Corporate Social Responsibility Policy. 8. It has been informed about the content of the letter sent by the Market Conduct and Claims Department of the Bank of Spain on the Customer Service operation, taking into account the main issues raised. 9. It has ensured the independence of the external auditors vis-à-vis the Company and Liberbank group companies, with additional services submitted to its consideration, individually and as a whole, of any kind, other than those of auditing, provided to these entities by the aforementioned auditors or by the persons or entities linked to them, in accordance with the provisions of the regulations governing the audit. 10. It has submitted to the Board of Directors with a favourable report the Annual Report on Corporate Social Responsibility which summarises the activities that Liberbank has carried out in 2016 in this strategy, aimed at interacting with its stakeholders, responding to their concerns and ensuring a transparent and quality performance. Subsequently, it has submitted to the Board of Directors the modification of said Report, aimed at complying with the requirement to continue with the commitment of adhesion to the United Nations Global Compact, by means of a declaration by the President that expresses its continued support to the Global Compact. 11. It has been informed, on a half-yearly basis, about the implementation stage of the Corporate Social Responsibility (CSR) Master Plan, detailing the follow-up of each of the actions undertaken in the development of the commitments contemplated in the aforementioned Plan. 12. The Board of Directors reported favourably with regard to the proposal for the reappointment of the External Auditor for Liberbank and its consolidated group for 2017 and for the award of the contract. 13. It has agreed to submit to the Board of Directors, with a favourable report, the Information of Prudential Relevance for the Liberbank Group, whose parent company is Liberbank, S.A, drafted for the purpose of complying with the obligations concerning information to be disseminated throughout the market, in accordance with the provisions of Part Eight of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June on prudential requirements for credit institutions and investment firms. 14. It has been informed about the updating of the Internal Audit Methodological Framework in which the basic principles and procedures that regulate the actions of the internal audit function are developed. 95

368 15. It has approved the modification of the Internal Audit Statute, which aims to establish the basic operating principles of the Internal Audit General Directorate within Liberbank, S.A. in alignment with established professional quality standards; define the functions, dependence, guiding and methodological principles, organization and relational framework for the audit function of Liberbank, S.A. and, finally, establish the basic operative and procedural guidelines for Auditing, so that the internal audit actions adapt to previously established methodological systems. 16. It has supervised the base prospectus draft of the seventh Liberbank promissory note program, the annual review of the Non-Equity Securities Base Prospectus and the Securities Note prepared for the Public Offering to Subscribe Shares of Liberbank, S.A. through an increase in the money capital with pre-emptive rights for a total maximum cash amount of 500,000,000 agreed by the Extraordinary General Shareholders' Meeting held on 9 October It has recorded the content of the Bank of Spain's requirement on the advertising activity of the Company, which highlights the need to make certain adjustments in the internal advertising record, in the Corporate Advertising Communication Policy, in the Operating Manual that develops it, as well as the review of the procedures and controls included in the aforementioned Policy to be carried out by the internal audit function, at least on an annual basis. 18. It has submitted to the Board of Directors, with a favourable report, the proposal that from 2017 the coupons of the mandatorily convertible subordinated debentures will be recorded against net equity at the time in which the payment is formally agreed, in accordance with IAS 32 and according to criteria applied by other listed banks. 19. It has reported favourably to the Board of Directors on the calculation review for the provisioning of floor clauses. 20. It has ensured that the Company and the external Auditor adhere to current regulations on the provision of non-audit services, the limits on the concentration of the auditor s business and, in general, other requirements designed to safeguard auditors independence. For this purpose, the External Auditor has presented the corresponding written statement of its independence from the Company and its group, including information on the additional rendered services, individually and as a whole, other than legal auditing and in relation to the independence regime and the governing regulations of the audit activities, provided to the Company and Group Companies by the foregoing auditors or by persons or entities associated to such, pursuant to the governing regulations of the account auditing activities. 21. It has regularly supervised the effectiveness of internal control, internal audit, the whistle-blowing channel and risk management systems, including tax. 22. It has examined all those operations which can be classified as linked, issuing its timely report. 23. A favourable opinion has been submitted to the Board of Directors for the annual review of the Corporate Policy on the Prevention of Criminal Risk, along with the Review on the Code of Professional Ethics and the Rules of Conduct for Board Members. Finally, it is noteworthy that the Committee Secretary has raised the minutes corresponding to all sessions held, reflecting thereof their development, content, deliberations and resolutions adopted, which have been made available to all Board members, pursuant to Article 17.4 from the Board of Directors Regulations and Article 12 from the Audit Committee s General Regulations. Likewise, the Committee has reported timely and promptly to the Board through its Chairman on the activities and the work carried out. 96

369 According to the above, it can be concluded that the Audit Committee assumes and efficiently meets the powers conferred by the applicable regulations and the various corporate documents of the Company. APPOINTMENTS COMMITTEE In 2017 the Appointments Committee has performed, among other, the following powers: 1. It has regularly taken due note of the resolutions adopted during 2017 concerning removals, appointments and replacements of the Company representatives in the Corporate Bodies of other entities. 2. It has reported to the Board of Directors on its own operation for assessment, as well as the performance of the Chairman and the CEO. 3. It has submitted to the Board of Directors the revision of the Succession Plan for the Identified Group, the Selection Policy for Directors and the Suitability Evaluation Policy, without identifying any need for modification. 4. Reports on representation at Administrative Bodies of other Entities during 2017 have been assessed, concerning resignations, appointments and removal of Bank representatives on Corporate Bodies of other entities. 5. In the Liberbank s Suitability Policy area, it has carried out the annual review for the application of the aforementioned Policy in relation to the members of the affected Group. Within the scope of this annual review, it has analysed the file prepared for this purpose by the General Directorate of Human Resources in collaboration with the General Secretariat Area (CCO) regarding each of the Directors, General Managers and similar, concluding that, in accordance with the information available to the Company and the individual declarations signed by said persons, it can be affirmed that there have been no changes in professional or personal circumstances that require a re-evaluation of the members in the affected group; therefore, the Appointments Committee considers that all the persons affected meet the required suitability in accordance with the provisions in the Company s Suitability Evaluation Policy. On the other hand, the Appointments Committee has deemed that, on the basis of the analysed data, the Board of Directors has members who, considered as a whole, bring together sufficient professional experience for the governance of credit institutions, so as to ensure the effective capacity of the Board of Directors to make decisions independently and autonomously for the benefit of the Company, and are found to exercise good governance, having the possibility of devoting sufficient time to the requirements of their position, exhibiting the absence of potential conflicts of interest and the ability to assess and be critical of the decisionmaking process and decisions made by senior management. 6. After the Board of Directors confirmed that the vacancy generated by the resignation of Luis Garicano Gabilondo from its position as member of the Board of Directors on 24 April 2016 is maintained, it has begun the proceedings and actions leading to the selection of consulting firms with recognised prestige in the field of personnel selection to initiate a new process to search for candidates that fit the desired profile and provide coverage to said vacancy. 7. After the resignation of Mr Alfonso Pitarch from the Board of Directors on 7 April 2017, it has unanimously agreed to submit to the Board of Directors a proposal for the appointment of a dominical director at the request of the shareholder Oceanwood to cover the existing vacancy, subject in any case to the suitability evaluation that the competent authority must also carry out. 97

370 8. It has informed the Board of Directors about the appointment proposal and has analysed the suitability for the position of General Manager of Intervention and Management Control in accordance with section 5.2 of Liberbank s Suitability Evaluation Policy. 9. In the development of the agreement adopted by the Board of Directors in relation to the proposal to simplify the Bank's organisational structure and improve the agility in decision-making, through adjustments in the first-level organizational structure, it has analysed the suitability for the development of the following positions: To Mr Javier Basarte Albertos, current Coordination Manager with the Management Bodies, as Director of the Management and Compliance Bodies (Chief Compliance Officer) of Liberbank, S.A. To Mr Jonathan de Joaquín Velasco, current General Manager of Commercial Strategy, as General Business Manager (CBO) of Liberbank, S.A. To Mr Severino Jesús Méndez Suárez, current Deputy General Manager of Organization and Transformation, as General Manager of People and Media (COO) of Liberbank, S.A. To Mr José Luis Martín Sariego, current General Manager of Human Resources, as Manager of the General Secretariat of Liberbank, S.A. 10. It has reported favourably the appointment of Mr Javier Basarte Albertos, Director of the Management and Compliance Bodies (CCO), with effect from 1 January 2018, as Representative of Liberbank, S.A. before the Executive Service of the Commission for the Prevention of Money Laundering and Monetary Infractions (SEPBLAC). 11. Finally, it has submitted a proposal to the Board of Directors to adapt the Regulations of said Board to Technical Guide 3/2017, on Auditing Commissions of Public Interest Entities, by modifying articles 16 and 17 thereof. Finally, it should be noted that the Committee s Secretary has drawn up the corresponding minutes of all meetings held, reflecting in them the development, content, deliberations and agreements adopted, which have been made available to all members of the Board. Likewise, the Committee has reported timely and promptly to the Board through its Chairman on the activities and the work carried out. According to the above, it can be concluded that the Appointments Committee assumes and efficiently meets the powers conferred by the various corporate documents of the Company. REMUNERATION COMMITTEE During 2017, the Remuneration Committee has exercised, among others, the following powers: 1. It has agreed to submit the Variable Remuneration Scheme for the year to the Board of Directors. 2. It has acknowledged and is satisfied with the application of the reference framework to set the remuneration limits of the representatives in the administrative bodies of other entities, referring to the remuneration of the non-executive in the group companies Liberbank IT, S.L.U., Factoría de Transformación de Operaciones, S.L.U., and Mihabitans Cartera, S.A.U. 98

371 3. It has reported and verified the information contained in the Directors Remuneration Annual Report for the fiscal year 2016 approved by the Board of Directors and subsequently voted upon at the Company s Annual General Meeting in an advisory capacity. 4. The annual report that must be drafted by the Remuneration Committee on the implementation of the general remuneration policy for Board Members has been submitted to the Board of Directors. 5. It has approved the Justification Report in relation to the proposal for approval of the Remuneration Policy in which it is concluded that the Remuneration Policy for Directors is in accordance with the regulations, recommendations, the supervising environment and best practices, following the criteria of prudence in the assumption of risk, good governance and transparency, and is adequate and aligned with the interests of the shareholders and with prudent risk management. Said Policy was approved by the General Shareholders' Meeting in the session held by said Body on 19 April 2017 on the motion of the Board of Directors. 6. It has analysed and agreed to submit to the Board of Directors the report on provisional compliance with the Corporate Objectives at 31 December 2016, as well as the milestones and economic and operational indicators linked to the 2017 corporate objective of strategic projects. 7. It has taken due note from the report contents of Ernst & Young Abogados, S.L.P., as an independent expert, which assesses the adequacy of Liberbank s Remuneration Policy to the regulatory framework applicable in 2016, noting that as conclusion that Liberbank s Remuneration Policy presents a sufficient adequacy level relative to the requirements for remuneration applicable to credit institutions, insofar as such Remuneration Policy (i) is consistent with an appropriate and effective risk management, (ii) provides no incentive to take risks that exceed the risk level tolerated by the Company and (iii) is consistent with the Company s business strategy, objectives, values and long term interests, agreeing unanimously, to submit to the Board of Directors the conclusions included in those assessment reports. 8. It has analysed the quantification of incentive grants to the Board of Directors in concept of Variable Remuneration for compliance with objectives corresponding to 2016, agreeing to submit to the Board of Directors, with a favourable report, a proposal not to endow the Board of Directors with incentive grants as compensation. 9. It has agreed to submit with a favourable report a proposal for payment of the fixed remuneration part that became variable in application of the labour agreement dated 27 December 2013, paying each director the corresponding part of The Remuneration Committee Report on the implementation of the malus and clawback clauses was approved, concerning the variable remuneration of previous years, whereby complying, pursuant to Article 39.1 of Royal Decree 84/2015 of 13 February, implementing Law 10/2014 of 26 June on ordination, supervision and solvency of credit institutions, as provided in the document Specific Requirements Applicable to the Identified Collective, approved on 29 June 2015, and in the Directors Remuneration Policy, approved at the Annual General Meeting held on 19 April 2017, with regard to the implementation procedure of the reduction clauses for deferred variable remuneration (malus clauses) and variable remuneration recovery that could be settled (clawback clause). 99

372 11. It has acknowledged and is satisfied with the procedure for processing and controlling the payment of expenses to non-executive directors of the Bank and other Group companies. 12. It has submitted a favourable report to the Board of Directors regarding the updating of the Corporate Policy for Determining the Identified Group, incorporating the necessary amendments to adapt said Policy to the provisions of the Guidelines on appropriate remuneration policies pursuant to articles 74 section 3, and 75 section 2 of Directive 2013/36/EU and the disclosure of information under article 450 of Regulation (EU) No. 575/2013 ( EBA Guide ), which has entered into force in These Guidelines include specific requirements in relation to the procedure for review and exclusion of the members in the Identified Group, in particular with regard to certain formal aspects related to the determination of the identification policy and procedure. 13. It has submitted a favourable report to the Board of Directors regarding the proposal to approve the first version of the Typology and Establishment of Corporate Objectives corresponding to Finally, it is noteworthy that the Committee Secretary has raised the corresponding minutes from all meetings held, reflecting therein its development, content, deliberations and resolutions adopted, which have been made available to all members from the Board of Directors, pursuant to Article 18 bis 8 from the Board of Directors Regulations and Article 12 from the Remuneration Committee s General Regulations. Additionally, the Committee has reported timely and promptly to the Board of Directors through its Chairman on the activities and works carried out. According to the above, it can be concluded that the Remuneration Committee assumes and efficiently meets the powers conferred by the various corporate documents of the Company. Risk Committee of the Board In 2017, the Risk Committee of the Board of Directors has executed, among others, the following powers: 1. It has reviewed the Annual Validation Report corresponding to 2016, and the Internal Validation Strategic Plan and the Annual Internal Validation Plan for It has regularly and periodic monitored the metrics of the Risk Appetite Framework (RAF). 3. It has been informed about the different aspects that make up the functional scope of the Treasury Department. 4. It has held a meeting with the General Manager of Internal Audit in order to be informed about the results of the Internal Audit work and, in particular, with respect to those areas related to the activity of the risk control function (CRO). 5. It has submitted to the Remuneration Committee and the Board of Directors, with a favourable report, the Variable Remuneration Scheme for 2017, based on the Variable Remuneration Model approved by the Company s Board of Directors in March 2012 and in the specific Variable Remuneration Model for the senior management team of the companies segment, whose approval was made in March

373 6. On the basis of the recommendations on good practices contained under the SREP (Supervisory Review Evaluation Process) Project, the task of the Internal Code of Conduct (ICC) has been reviewed for the scope of the securities market. 7. A follow-up has been made for the reporting on the efforts for the Prevention of Money Laundering and Financing of Terrorism. 8. It has been informed about the Internal Control activity regarding the methodology used in the work developed, the main conclusions of the reviews carried out and the follow-up of the recommendations issued and reported in previous activity reports and those issued by the Group auditor, in the scope of the annual review of the Internal Control System of Financial Information (SCIIF) of Liberbank and Banco de Castilla la Mancha (BCLM). 9. It has approved the 2017 Internal Control Work Plan, which plans the activity to be developed by the Internal Control Department, which has among its functions the establishment of a control and supervision framework ensuring that the risks inherent in the Group's activity remain within the levels approved by the Social Bodies, the internal policies and procedures, and correspond to the best market practices. 10. It has given its approval to the recoverability analysis of tax assets and the hypotheses that lie behind the numbers that support it. 11. It has submitted to the Board of Directors, with a favourable report, the MiFID Corporate Commercial Policy, which establishes the definition and guidelines for the provision of investment and auxiliary services, and the distribution of investment products in the Company and its Group. 12. It has examined and submitted to the Board of Directors for approval, where appropriate, the revision of the Liberbank Group s Corporate Risk Framework, as well as each and every one of the risk policies, the Liquidity Contingency Plan, the MiFID Corporate Commercial Policy, etc. 13. It has been regularly informed about the main risk exposures of the Liberbank Group. 14. It has examined the requirement forwarded by the Standing Committee of the Commission for the Prevention of Money Laundering and Monetary Infringements regarding the inspection carried out in 2015 at Liberbank, S.A., in relation to transactions with banknotes and metallic currency. 15. It has recorded the Methodological Framework of the Transfer Pricing System that seeks to ensure a definition of the transfer pricing system in accordance with the Group's objectives, to establish the procedure for its definition and to specify the control mechanisms that guarantee its effective application. 16. It has given its approval to the PCI-DSS and Cyber-Risk Compliance Plan that will allow Liberbank to improve the level of compliance, as well as the detection and response capabilities in terms of Cyber-security. 17. It has recorded the conclusions submitted by the supervision team (JST) for the qualitative assessment of non-performing loans (NPL) that have been carried out during 2016, as well as the strategy template on non-performing assets that refers to the establishment of objectives in Liberbank for the reduction of NPAs in 2017, and in the following years until 2019, with the level of breakdown requested by portfolios. 101

374 18. It has submitted a favourable report to the Board of Directors on the 2016 Tax Risk Management and Control that contains information regarding the amount paid in relation to the different taxes, including information related to deferred tax assets and liabilities, statements filed during the year, information about ongoing litigation and tax inspections in progress, information about the tax contingencies that must be reported to the Board of Directors, information about the transactions carried out in the period and its tax implications, as well as, where applicable, possible investments in tax havens, and information on related transactions. 19. It has submitted to the Board of Directors, with a favourable report, the Corporate Stress Testing Policy, thus properly formalizing the work carried out to generate the different stress exercises, both internal and regulatory. 20. It has submitted to the Board of Directors the Capital Self-Assessment Report (ICAAP) as well as the Liquidity Self-Assessment Report (ILAAP) for It has submitted the Compliance Action Plan for 2017, in accordance with the provisions of the Corporate Policy on Regulatory Compliance that sets the priority control objectives of the Regulatory Compliance Department and the PBCyFT 2017 Action Plan on Prevention of Money Laundering and Financing of Terrorism. 22. It has recorded and agreed to submit to the Board of Directors, with a favourable report, the approval of the budget items in terms of compliance with regulations within the 2017 Budget. 23. It has submitted to the Board, with a favourable report, the Risk Appetite Framework (RAF) in the annual review process corresponding to It has agreed to submit to the Board of Directors, with a favourable report, the Strategy and Operational Plan for Irregular Asset Management (EPOGAI, for its acronym in Spanish) of the Liberbank Group, which seeks to respond to the deficiencies identified by the European Central Bank, as well as to adapt to the supervisory expectation and best market practices and, above all, its main objective is to continue reducing the volume of irregular assets and improve the Company s profitability and solvency. 25. It has monitored the liquidity situation during 2017 and the commercial actions carried out. 26. It has recorded the start of an On-Site Inspection (OSI) in the Liberbank Group in order to assess the management of credit and counterparty risk and the risk control system. 27. It has been informed about the reception from the MUS Secretariat of a Decision from the European Central Bank (ECB) by which Liberbank is required, as well as all significant entities, to communicate cyber-incidents that are classified as significant by these entities based on criteria provided by the ECB itself, where cyber-incidents are a series of unwanted or unexpected information security events that have a significant probability of compromising business operations and threaten information security. 28. It has been informed about the valuation by independent experts of the portfolio covered by the EPA, in accordance with the provisions of the EPA Operating Regulations and its Addendum, as well as the result of the EPA settlement of Banco de Castilla-La Mancha, S.A. (BCLM). 102

375 29. It has submitted a favourable proposal to update the document called Structure of the Compliance Function in the scope of the Internal Code of Conduct in the Securities Market, in order to adapt it to the Corporate Compliance Policy by incorporating the figure of the Chief Compliance Officer (CCO), modify the attributions of the Audit Committee and set the corresponding ones to the Board s Risk Committee. 30. It has recorded the information provided regarding the receipt of a letter from the Secretary of the Supervisory Board concerning the European Central Bank's project to adopt a decision on the evaluation of the Liberbank Recovery Plan and, consequently, to prepare a proposal to update the said plan according to the expectations of the supervisor. 31. It has submitted to the Board of Directors, with a favourable report, the approval of the Internal Validation Report of Individualized, Collective, Adjudicated and Guarantees Analysis under Circular 4/2016 from the Bank of Spain, which requires the internal validation of the methodologies developed for the estimating hedges for credit risk. 32. It has agreed to submit to the Board of Directors the review of risk identification and internal capital allocation aimed at identifying additional risks to those of December 2016, identifying material risks with data at 06/30/2017, updating the internal capital allocation with data at 06/30/2017, and including the weaknesses identified by the European Central Bank in terms of risk identification and quantification as next steps to take into account in preparing the ICAAP/ILAAP for 2017; having been informed of the actions necessary to correct them. 33. It has agreed to submit to the Board of Directors with a favourable report the approval, as the case may be, of the new version of the Internal Code of Conduct (ICC). 34. It has acknowledged and agreed with the report from the external expert of the Liberbank Group s PBCyFT System and ratified the measures proposed in the Action Plan to comply with the recommendations proposed in this matter. 35. Given the breakdowns of indicators that have occurred within the scope of the Recovery Plan, the Committee has recorded, in all cases, the corresponding report issued by the Crisis Management Committee, has informed the Board of Directors Chair to convene extraordinary session no later than the 8th business day after the initial communication of the breach, and has issued the appropriate report in favour of the activation, or not activation if applicable, of the Recovery Plan. 36. It has agreed to submit with a favourable report the revision of the methodologies for estimating loss coverage of credit risk due to insolvency and impairment of assets foreclosed or received in payment of debts. 37. It has submitted with a favourable report the internal validation report of the fair value estimation models for housing, land, developments in progress and offices, warehouses and premises under Circular 4/2016 of the Bank of Spain and the Corporate Policy for the Estimation of Provisions for credit risk. 38. It has recorded the review carried out by the external expert (the firm PB Consultores) and the response to the letter received from the Secretariat of the Commission for the Prevention of Money Laundering and Monetary Infractions mentioned in the second paragraph of this section, agreeing unanimously its submission to the Board of Directors for recording purposes, if applicable. 103

376 39. It has agreed to submit with a favourable report to the Board of Directors approval of the revised Recovery Plan for This document includes the corrections of the material and immaterial incidents notified by the European Central Bank (ECB) in the supervisory evaluation over the RP for 2016, and those corrections carried out to improve the content of the plan. 40. It has been informed that on 15 November 2017, a letter was sent to the Joint Supervision Team (JST), regarding the management and control of the Credit and Counterparty Risk, signed by the auditor (Deloitte, SL). The letter sent confirms that the opinion on the audit of consolidated financial statements at 31 December 2016 and the opinion on the review limited to 30 June 2017 and 30 September 2017, is not modified after the analysis of the document related to the Methodologies developed by the Liberbank Group for estimating the fair value of real estate guarantees and foreclosed assets received in payment of debts. 41. It has examined the annual review of the Corporate Policy on Conflicts of Interest and Related Party Transactions, in force since 13 December 2016, submitting a favourable report to the Board of Directors. 42. It has examined the annual review of the Corporate Policy for the Prevention of Criminal Risks and the Director s Professional Code of Ethics and Rules of Conduct that are part of it, submitting a favourable report to the Board of Directors. 43. It has been informed about the quarterly monitoring of the Strategy and operational plan for the management of irregular assets, in accordance with the Action Plans derived from the Self-Assessment of the operating model for irregular assets and identified in the document Strategy and Operational Plan for irregular asset management (EPOGAI, for its acronym in Spanish), approved by the Board of Directors. 44. It has submitted to the Board of Directors the proposal for the appointment of Mr Javier Basarte Albertos as Head of the Management and Compliance Bodies (Chief Compliance Officer), in charge of the Bank's Compliance Function. Finally, it should be noted that the Committee s Secretary has drawn up the corresponding minutes of all meetings held, reflecting in them the development, content, deliberations and agreements adopted, which have been made available to all members of the Board. Likewise, the Committee has reported timely and promptly to the Board through its Chairman on the activities and the work carried out. According to the above, it can be concluded that the Board Risk Committee assumes and efficiently meets the powers conferred by the various corporate documents of the Company. D.6 Give details of the mechanisms in place for detecting, identifying and resolving any potential conflicts of interest between the Company and/or its Group and its directors, executives or significant shareholders. Article 28º.3 (Duty to avoid conflicts of interest) provides that under the duty to avoid conflicts of interest, directors shall refrain from: a) Making direct or indirect transactions with the Company or its group companies, except in the case of ordinary transactions made under standard conditions for customers and of little relevance, defined as those whose information is not necessary to express the true and fair view of the Company s equity, financial position and results. b) Using the Company s name or invoke their status as director to improperly influence the performance of private transactions. 104

377 c) Making calls using Company s assets, including Company s confidential information, or taking advantage of their position for private purposes. d) Taking advantage of the Company s business opportunities. For these purposes, a business opportunity shall be understood as any possibility to make an investment or trade operation triggered or discovered by the director in connection to his/her office, or by means of Company information resources, or under such circumstances that make it reasonable to believe that the third party offer was directed to the Company. e) Obtaining benefits or remuneration from third parties other than the Company and its group related to the performance of their duties, except in the case of mere courtesy attentions. f) Developing self-employed or employed activities involving existing or prospective effective competition with the Company or otherwise placing them at a permanent conflict with Company s interest. Furthermore, the Board of Directors met on 13 December 2016, whereby it agreed unanimously to approve the Corporate Policy on Conflicts of Interest and Related-Party Transactions. The object of such Policy is to establish the guidelines that must be followed at Liberbank and any other Group entity, for the purposes of preventing and, where applicable, to manage any conflict of interest that may exist for the shareholders, members on the Board of Directors, staff, senior managers and natural persons and legal entities associated to such, the relations inside the Liberbank Group, as well as any conflicts that may be raised by customers, service providers and the company in general, all of such pursuant to the corporate and governing regulations and the corporate governance framework of the Company. It was resolved that the scope of conflicts of interest was already extensively regulated at Liberbank through existing internal regulations. Consequently, after the drafting of this Policy, in line with the corporate model approved by the Company, a document has been prepared that details the existing internal regulations on such matters. The aforementioned Corporate Policy on conflicts of interest and transactions with related parties was modified by resolution from the Board of Directors in the session held on 12 December The main amendments were the following: Updating the list of manuals and internal documents (section 2. Objective) and related regulations (section 7. Related regulations). Section 4. Roles and Responsibilities has been restructured in order to clarify the competences of each of the responsible bodies and centres involved. The format has been adjusted. E.1 Describe the risk management system in place at the company, including the tax risks. Description of functions: - Planning and Policies: The General Risk Strategy and Methodology Subdivision, under the General Risk Executive Office, is in charge of proposing the strategy, general policies and management framework for risk arising from the different business. It is responsible for defining and proposing the Corporate Risk Framework and Policies for the assumption, management and mitigation of the different types of risk (credit, counterparty, market, liquidity, concentration, securitization, foreign exchange, interest rate, operational and other significant risks) and to establish and propose limits in keeping with the strategic policy 105

378 of the Group on the basis of indicators of risk and the environment, to set limits by portfolio, segment, sector, product, rating, etc. and their associated target return. In addition, the General Risk Strategy and Methodology Subdivision, under the General Risk Executive Office, is responsible for designing and proposing, in collaboration with the General Planning, Balance Management and Margins Subdivision, the Group s target risk level (Risk Appetite) to be presented to the Steering Committee for its subsequent validation by the Integral Risk Management Executive Office (CRO) and submission to the Board of Directors. Additionally, the General Planning, Balance Management and Margins Subdivision, under the Corporate and Finance Executive Office (CFO), is entrusted with the task of planning margins and balance sheet management from a global perspective of profitability-risk and propose the Strategy, Business Plans and budgets to ensure adequate composition of the Group s balance sheet and income statement. With regards to the planning of the tax risk strategy, the Tax Management Department, under the Executive Officer for Intervention and Management Control, has the mission to manage and plan the tax obligations for the Group, by proposing, to the Board of Directors, the strategies and management alternatives for tax risks, in accordance with current legislation, at all times. - Execution and risk taking: The General Credit Risk Management Subdivision, under the Risk Executive Office (CRMO), is in charge of managing credit risk in accordance with regulations, strategy, positioning, and business and efficiency criteria approved by the Group, and is responsible for directing and managing the processes of analysis, approval, monitoring and recovery of risks arising from Commercial Banking and Corporate Banking business, and coordinating the actions of the different institutions involved in credit risk management during the life of operations. The Corporate and Finance Executive Office (CFO), under the Managing Director (CEO), is responsible for optimizing and running the Group s treasurer management and capital market activity in terms of profitability, risk, liquidity and capital in different time scenarios. The Commercial Banking Executive Office, and the General Corporate Banking Executive Office and Subdivision are responsible for directing and managing the commercial activity of banking (individuals, businesses, micro and small enterprises) and corporate banking respectively, in line with the annual budget and Business Plan approved by the Group Management. - Follow-up: The General Credit Risk Management Subdivision assumes the function of developing quantitative and qualitative monitoring of the risk portfolio depending on the risk policy marked by Senior Management. For its part, the General Risk Strategy and Methodology Subdivision has the function of monitoring the credit risk s pricing models and also monitoring the Group s risk of market, counterparty, and operational. The monitoring of interest rate and liquidity risks corresponds to the Deputy Executive Officer for Planning, Balance Management and Margins. - Control: The Comprehensive Risk Control General Management (CRO), reporting to the Chairman of the Board of Directors, has the task of ensuring, with effective independence, that the risks of the Group's activity remain within the approved levels. It is also responsible for maintaining a comprehensive view of the Group's risks in order to ensure effective control over them, and defining and implementing, as established in the Risk Appetite Framework, an internal control environment to ensure that all relevant risks to which the Group is exposed are adequately managed by the respective centres. Additionally, the Regulatory Compliance Department, reporting to the General Secretariat, is in charge of monitoring compliance with the current regulations relating 106

379 to the prevention of money laundering and the financing of terrorism, the Internal Code of Conduct in matters relating to the Securities Market (RIC), FATCA, MiFID and data protection, in order to prevent and mitigate any penalty, reputational or other risks. As third line of defense, the Internal Audit Executive Office, reporting to the Chairman of the Board of Directors, is in charge of the planning and execution of the audit process, to verify the truthfulness of the information, minimize risks and improve the efficiency of the management, with a particular emphasis on the recurrent assessment of the degree of implementation of the permanent control and supervision framework regarding risks, defined by the Comprehensive Risk Control General Management (CRO). As a result, it is responsible for conducting the specific audits and investigations required to prevent and detect economic, operational and reputational risks and the risks of alteration of the accounting and financial information and risks associated with the image of the Group. In 2017, the Group's risk management process has been continuously improved. In this line, in order to further reduce the volume of irregular assets and improve the Group s profitability and solvency, a 3-year Quantitative Strategy and a transversal planning exercise have been developed, which is materialized in the Operational Plan for Irregular Asset Management (EPOGAI, for its acronym in Spanish), with the approval and review of the Board of Directors. E.2 Identify the bodies responsible for preparing and implementing the risk management system, including the tax system. Committee for the Prevention of Money Laundering and the Financing of Terrorism This body is responsible for preventing and impeding operations related to money laundering and the financing of terrorism at the Bank and at all Group companies that abide by the Corporate Policy and the Manual on the Prevention of Money Laundering and Financing of Terrorism of the Bank. Validation Committee This body deals with matters related to the validation of the statistical models and internal rating methodologies used by the Group for measuring the different types of risks. Recovery Plan Steering Committee It Reviews the developments of each of the phases of the Recovery Plan, validating any proposed drafting for updating the plan, assisting the Steering Committee on decisions prior to proposing the Plan, which is to be raised to the Board of Directors. 107

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