Allfunds Bank, S.A. and Companies composing the Allfunds Bank Group

Transcription

1 Allfunds Bank, S.A. and Companies composing the Allfunds Bank Group Consolidated Financial Statements and Directors Report for the year ended 31 December 2009, together with Auditors Report Translation of a report originally issued in Spanish based on our work performed in accordance with generally accepted auditing standards in Spain and of consolidated financial statements originally issued in Spanish and prepared in accordance with generally accepted accounting principles in Spain (see Notes 1 and 34). In the event of a discrepancy, the Spanish-language version prevails.

2 Translation of a report originally issued in Spanish. In the event of a discrepancy, the Spanish-language version prevails. AUDITORS REPORT ON CONSOLIDATED FINANCIAL STATEMENTS To the Shareholders of Allfunds Bank, S.A.: 1. We have audited the consolidated financial statements of Allfunds Bank, S.A. ( the Bank ) and of the companies composing, together with the Bank, the Allfunds Bank Group (the Group - see notes 1 and 2), which consist of the consolidated balance sheet at 31 December 2009 and the related consolidated income statement, consolidated statement of recognized income and expense, consolidated statement of changes in equity, consolidated statement of cash flows and notes to the consolidated financial statements for the year then ended. The preparation of these consolidated financial statements is the responsibility of the Bank s directors. Our responsibility is to express an opinion on the consolidated financial statements taken as a whole based on our audit work performed in accordance with generally accepted auditing standards in Spain, which require examination, by means of selective tests, of the evidence supporting the consolidated financial statements and evaluation of whether their presentation, of the accounting policies applied and of the estimates made. 2. As required by Spanish corporate and commercial law, for comparison purposes the Bank s directors present, in addition to the figures for 2009 for each item in the consolidated balance sheet, the consolidated income statement, consolidated statement of recognized income and expense, consolidated statement of changes in equity, consolidated statement of cash flows and notes thereto, the figures for The consolidated financial statements for 2008 were not prepared by the Bank s directors, so the data presented for 2008 in the notes thereto have been not audited. Our opinion refers only to the consolidated financial statements for In our opinion, the accompanying consolidated financial statements for 2009 present fairly, in all material respects, the consolidated equity and consolidated financial position of Allfunds Bank Group at 31 December 2009, and the consolidated results of its operations, the changes in the consolidated equity and its consolidated cash flows for the year ended, and contain the required information, sufficient for their proper interpretation and comprehension, in conformity with applicable International Financial Reporting Standards accepted by Spanish legislation applied on a basis consistent with that used in the preparation of the consolidated statements and information for the preceding year, as indicated in the paragraph 2 above, which are presented only for comparation purposes in the consolidated financial statements for The accompanying directors report for 2009 contains the explanations which the Bank directors consider appropiate about the Group s situation, the evolution of its business and other matters, but is not an integral part of the consolidated financial statements. We have checked that the accounting information in the directors report is consistent with that contained in the financial statements for Our work as auditors was confined to checking the directors report with the aforementioned scope, and did not include a review of any information other than that drawn from the accounting records of the Group entities. DELOITTE, S.L. Registered in ROAC under no. S0692 Carlos Giménez Lambea 5 April 2010

3 Translation of a report originally issued in Spanish. In the event of a discrepancy, the Spanish-language version prevails. Allfunds Bank, S.A. and Companies composing the Allfunds Bank Group Consolidated Financial Statements and Directors Report for the year ended 31 December 2009

4 Translation of a report originally issued in Spanish. In the event of a discrepancy, the Spanish-language version prevails. ALLFUNDS BANK GROUP The consolidated financial statements of the ALLFUNDS BANK GROUP ("the Group") for 2009, which include the consolidated balance sheet, the consolidated income statement, the consolidated statement of changes in equity, the consolidated statement of cash flows and the notes to the consolidated financial statements, are audited by Deloitte, S.L. The accompanying directors' report summarises the main aspects of the Group's performance and highlights the most significant future prospects. DIRECTORS REPORT FOR 2009 In its professional progress the Allfunds Group has firmly established itself as one of the leading platforms in the distribution of third party funds, offering more than 18,000 funds from 350 management companies of collective investment undertakings to approximately 300 institutional customers. Given current market conditions, the open architecture concept needs to be reshaped and more focus needs to be placed on efficiency and the association of interests, so that the services offered by the various units of the Group make it possible to provide a comprehensive service that satisfies the investment needs of institutional customers. Brokerage: order execution platform. Investment advisory services. Information: global fund databases. In 2009 the Group reported net profit of EUR 695 thousand, down 95.75% on Fee and commission income continued to account for most of gross income, although net fees and commissions decreased by 34.88%, reflecting the sharp decrease in the average volume managed in 2009, as compared with The distribution, by geographical area, of customer positions in Allfunds Bank, S.A ( the Bank ) is as follows: Spain, EUR 11,463 million; Italy, EUR 14,969 million; United Kingdom, EUR 3,761 million; Latin America, EUR 723 million, and Portugal, EUR 157 million. Allfunds International, S.A. ( AFI ) commenced operations in September 2008 and at 31 December 2009, the volume of assets managed reached EUR 1,102 million. Taking into account just the domestic market, the Bank had a 73% share of brokerage transactions performed in the foreign collective investment undertakings market, which increased by one-third in This share rose with respect to 2008 (61%) because the Bank was able to attract larger brokerage volumes than the rest of the industry, which does not channel the purchase of third-party investment funds through the Bank. Also, at 31 December 2009 the Bank had a 7% share of the Italian market and a 9% share of the UK market. Economic environment Forecasts for 2010 concerning the performance of the world economy are much better than they were for Studies services expect economic growth to be stronger in 2010 (+3%) than in 2009 (-2.5%). These forecasts are based on the following events: - Revival of the US property market. 1

5 - Increase in world trade volume. - Economic growth in China. - Rise in oil prices. - Strong growth in world stock markets. The negative aspects which may slow down growth are as follows: - Contraction of bank lending - High worldwide unemployment rates that will have a negative impact on consumption. Against this backdrop, BRIC countries (Brazil, Russia, India and China) will play an important role, with growth of over 7% in Operating performance The objectives set in prior years were maintained and furthered in These objectives were as follows: - To strengthen the organisational structure of Allfunds International, S.A., a financial services company which was incorporated by the Bank in Luxembourg at the end of It replicates the Bank s business model and its purpose is to channel the Bank s brokerage business in countries where it has no permanent establishment. At 31 December 2009 it had 10 employees. - The commencement of the business activities of the subsidiary Allfunds Alternative, S.A. ( AFA ), which was incorporated in 2008 with the purpose of generating new sources of income for the Bank, particularly through the provision of counselling services and/or the delegated management of funds of hedge funds. - In 2008 a representative office was opened in Santiago de Chile, thereby providing new offices. This enables the Bank to have more direct contact with customers and a greater commercial capacity in Latin America. - To increase the number of distribution agreements entered into with customers, despite the current market crisis, In new commercial agreements were entered into. - To consolidate the Bank's current strategic position as a distributor of the leading management companies in the world, by increasing the number of contracts. The products of 37 new management companies were included in the brokerage platform. Performance of distribution channels As a key element for the generation of income at the Bank, distribution channels present fairly investment fund market trends: - The direct distribution of funds, i.e. direct purchase by Bank customers (retail), accounted for 53.8%, as compared with 62.9% in Although this channel represented 42% of the growth in business volume (EUR 13 billion overall), the 9% decrease with respect to the Bank's global position was due to the increase in the insurance channel in Italy and in Funds of funds and SICAVs investing in investment funds in Latam and UK. 2

6 - The collective investment undertaking channel (Funds of funds and SICAVs investing in investment funds), and insurance accounted for 40.3% of the total brokered volume, as compared with 34.4% in These modalities represented 25% and 23%, respectively, of the total increase in volume. - The share of structured products, which include investment funds as an underlying, remained in line with 2008 levels, increasing from 2% to 2.5%. Balance sheet The total assets in the consolidated balance sheet amounted to EUR 205,929 thousand at 31 December 2009, up 26.49% on 2008 year-end. The Bank's assets accounted for 95.41% of the Group's total assets. AFA and AFI provide the remaining 4.59% in the same proportion. The assets of Allfunds Nominee are not significant. The balance sheet structure was very similar to that of 2008 and the balance of bank accounts (Loans and advances to credit institutions Demand accounts) was the main asset component of the balance sheet. The balance of "Loans and Advances to Credit Institutions" amounted to EUR 158,493 thousand, up 37.06% on 2008 year-end. Fees and commissions receivable and payable at 31 December 2009 amounted to EUR 29,677 thousand and EUR 24,451 thousand, respectively, up 67.03% and down 21.48% on 2008 year-end, respectively. The increase reflected the larger volume of assets under management at year-end, and the decrease was due to the reduction in customer payment periods. Intangible assets (exclusively software) amounted to EUR 3,717 thousand, up 12.77% on 2008 year-end. This increase arose mainly from the computer improvements made to develop new lines of business, to enter new markets and to update current software. Tangible assets (furniture and fixtures) amounted to EUR 4,809 thousand, representing an 8.17% decrease. The Bank commenced to open customer deposit accounts in order to enhance its brokerage services in the purchase and sale of shares and units in collective investment undertakings, rather than to use a new financing facility. At 31 December 2009, the balance amounted to EUR 25,361 thousand. Unsettled purchase and sale transactions involving shares and units in collective investment undertakings amounted to EUR 47,081 thousand at 31 December 2009, a 185% increase with respect to 2008 year-end. Results The Group s net profit amounted to EUR 695 thousand at 2009 year-end, down 95.75% on 2008 year-end. The breakdown by company is as follows: Allfunds Bank, S.A.: EUR 2,600 thousand. Allfunds International, S.A.: EUR (1,546) thousand. Allfunds Alternative, S.A.: EUR (488) thousand. Net interest income totalled EUR 1,284 thousand, down 77.76% on 2008, and related mostly to the return on current accounts. The increase in the balances of these accounts did not offset the sharp decrease in interest rates in Net fee and commission income amounted to EUR 26,613 thousand, representing a 34.88% decrease with respect to

7 In % of these fees and commissions related to brokerage fees for the distribution of shares and units in international collective investment undertakings (2008: 98.35%). AFA, as a result of the advisory services, and AFI, as a result of the brokerage fees for the distribution of shares and units of collective investment undertakings, generated net fee and commission income of EUR 358 million and EUR 184 million, respectively. Administrative expenses, which consisted of staff costs and other general administrative expenses, amounted to EUR 21,041 thousand, up 0.1% on The expenses were maintained due to the implementation of a cost containment policy and of a new recruitment freeze in Off-balance-sheet items As in prior years, the Bank's main business activity was the provision of brokerage services in the distribution of foreign collective investment undertakings, with no ownership of the assets in which investments are made. Accordingly, customer assets are not recognised in the Bank's balance sheet. The volume distributed at 31 December 2009 amounted to EUR 32,175 million, up 77.32% on This increase occurred in the final months of 2009, which explains why this effect was not reflected in the consolidated income statement. Share capital and treasury shares At 31 December 2009, the Bank's share capital amounted to EUR 27,040,620, represented by 901,354 fully subscribed and paid registered shares of EUR 30 par value each. At 31 December 2009, Banco Banif, S.A. sold its ownership interest to Banco Santander, S.A. The current shareholders of the Bank are Banco Santander, S.A. (50%) and Intesa Sanpaolo S.p.A. (50%) at 31 December In 2009 no transactions involving treasury shares were performed by the Bank, by group companies or by a third party acting in its own name but on behalf of others. Research and Development In 2009 the Group undertook new developments in the computer platform in order to address new business needs, improve the service provided to current and/or new customers and to comply with new regulatory requirements. The following developments are to be highlighted: - Web New reporting systems to collective investment undertaking management companies. - Segregation of recruitment duties in a multi-entity environment. - New price proposal system. - On-line order management systems. - Warning systems for the prevention of money laundering. Personnel information The main data relating to the Bank's personnel are provided in Note 26 to the accompanying financial statements. 4

8 Financial risk management policies The main risks arising from the Bank's operations and financial instruments are credit, liquidity, interest rate, market and operational risks. The action taken by the Bank to manage these risks is described in Note 32 to the financial statements. Prospects The Bank's management policy for 2010 is aimed at: - Increasing the market share in the marketing of foreign collective investment undertakings in the various markets in which the Bank is present. - Increasing commercial activity in the United Kingdom once the brokerage platform has been adapted to local needs and entering into sufficient agreements with management companies to supply their products in this market. - Strengthening subsidiary activities: Make AFI a key element in the expansion of the Allfunds Group. Enter into new advisory agreements and/or agreements for delegated management in funds of hedge funds at AFA. - Launching and consolidating the Bank's presence in the Middle East and Asia. The Group's results are strongly affected by the market performance and the global economic situation. The directors of the Bank consider that the current business plan will enable the budgets agreed for 2010 to be met. The environment The Bank's operations do not have any direct impact on the environment (see Note 1.5 to the financial statements). Events after the reporting period In the period from 1 January 2010 to the date when the financial statements were authorised for issue, no events took place having a material effect thereon. 5

9 Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with generally accepted accounting principles in Spain (see Notes 1 and 34). In the event of a discrepancy, the Spanish-language version prevails ALLFUNDS BANK GROUP CONSOLIDATED BALANCE SHEETS AT 31 DECEMBER 2009 AND 2008 (NOTES 1 TO 4) (Thousands of Euros) ASSETS (*) LIABILITIES AND EQUITY (*) CASH AND BALANCES WITH CENTRAL BANKS LIABILITIES FINANCIAL LIABILITIES HELD FOR TRADING: FINANCIAL ASSETS HELD FOR TRADING: Trading derivatives (Note 8) Trading derivatives (Note 8) OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOS - - OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (Note 7) 33 3 FINANCIAL LIABILITIES AT AMORTISED COST: Deposits from credit institutions (Note 13) AVAILABLE-FOR-SALE FINANCIAL ASSETS: Customer deposits (Note 14) Equity instruments (Note 7) Other financial liabilities (Note 15) LOANS AND RECEIVABLES: CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO Loans and advances to credit institutions (Note 6) HEDGES OF INTEREST RATE RISK - - Loans and advances to customers (Note 9) HEDGING DERIVATIVES - - HELD-TO-MATURITY INVESTMENTS - - LIABILITIES ASSOCIATED WITH NON-CURRENT ASSETS HELD FOR SALE - - CHANGES IN THE FAIR VALUE OF HEDGED ITEMS IN PORTFOLIO HEDGES OF INTEREST RATE RISK - - LIABILITIES UNDER INSURANCE CONTRACTS - - HEDGING DERIVATIVES - - PROVISIONS - - NON-CURRENT ASSETS HELD FOR SALE - - TAX LIABILITIES: Current (Note 16) INVESTMENTS - - OTHER LIABILITIES (Note 12) INSURANCE CONTRACTS LINKED TO PENSIONS - - TOTAL LIABILITIES REINSURANCE ASSETS - TANGIBLE ASSETS: Property, plant and equipment (Note 10) For own use INTANGIBLE ASSETS: SHAREHOLDERS' EQUITY (Note 17): Other intangible assets (Note 11) Share capital (Note 18) Registered TAX ASSETS: Reserves (Note 19) Current (Note 16) Accumulated reserves Profit for the year OTHER ASSETS: VALUATION ADJUSTMENTS - - Other (Note 12) TOTAL EQUITY TOTAL ASSETS TOTAL LIABILITIES AND EQUITY Memorandum items: Contingent liabilities - - Contingent commitments - - (*) Presented for comparison purposes only. Unaudited figures. The accompanying Notes 1 to 34 and Appendix 1 are an integral part of the consolidated balance sheet at 31 December

10 Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with generally accepted accounting principles in Spain (see Notes 1 and 34). In the event of a discrepancy, the Spanish-language version prevails ALLFUNDS BANK GROUP CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008 (NOTES 1 TO 4) (Thousands of Euros) Income/ (Expenses) (*) INTEREST AND SIMILAR INCOME (Note 21) INTEREST EXPENSE AND SIMILAR CHARGES (Note 22) (27) (154) NET INTEREST INCOME INCOME FROM EQUITY INSTRUMENTS - - SHARE OF RESULTS OF ENTITIES ACCOUNTED FOR USING THE EQUITY METHOD - - FEE AND COMMISSION INCOME (Note 23) FEE AND COMMISSION EXPENSE (Note 24) (56.372) (96.436) GAINS/LOSSES ON FINANCIAL ASSETS AND LIABILITIES (net) (Note 25) Held for trading EXCHANGE DIFFERENCES (net) OTHER OPERATING INCOME (Note 28) Other OTHER OPERATING EXPENSES (Note 28) (348) (602) Other (348) (602) GROSS INCOME ADMINISTRATIVE EXPENSES (21.041) (21.014) Staff costs (Note 26) (11.129) (10.715) Other general administrative expenses (Note 27) (9.912) (10.299) DEPRECIATION AND AMORTISATION CHARGE (3.237) (2.704) Tangible assets (Note 10) (990) (826) Other intangible assets (Note 11) (2.247) (1.878) PROVISIONS (net) - - IMPAIRMENT LOSSES ON FINANCIAL ASSETS (net) (134) (17) Loans and receivables (Note 8) (47) 33 Other financial instruments not measured at fair value through profit or loss (Note 7) (87) (50) PROFIT FROM OPERATIONS IMPAIRMENT LOSSES ON OTHER ASSETS (net) - - GAINS/(LOSSES) ON DISPOSAL OF ASSETS NOT CLASSIFIED AS NON-CURRENT ASSETS HELD FOR SALE - 11 NEGATIVE GOODWILL ON BUSINESS COMBINATIONS - - GAINS/(LOSSES) ON NON-CURRENT ASSETS HELD FOR SALE NOT CLASSIFIED AS DISCONTINUED OPERATIONS - - PROFIT BEFORE TAX INCOME TAX (Note 16) (2.776) (8.005) PROFIT FOR THE YEAR FROM CONTINUING OPERATIONS PROFIT FROM DISCONTINUED OPERATIONS (net) - - CONSOLIDATED PROFIT FOR THE YEAR PROFIT ATTRIBUTABLE TO THE PARENT PROFIT ATTRIBUTABLE TO NON-CONTROLLING INTERESTS - - (*) Presented for comparison purposes only. Unaudited figures. The accompanying Notes 1 to 34 and Appendix 1 are an integral part of the consolidated income statement for

11 Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with generally accepted accounting principles in Spain (see Notes 1 and 34). In the event of a discrepancy, the Spanish-language version prevails ALLFUNDS BANK GROUP CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY A) CONSOLIDATED STATEMENTS OF RECOGNISED INCOME AND EXPENSE FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008 (NOTES 1 TO 4) (Thousands of Euros) (*) A) CONSOLIDATED PROFIT FOR THE YEAR B) OTHER RECOGNISED INCOME AND EXPENSE - - Available-for-sale financial assets - - Cash flow hedges - - Hedges of net investments in foreign operations - - Exchange differences - - Non-current assets held for sale - - Actuarial gains (losses) on pension plans - - Entities accounted for using the equity method - - Other recognised income and expense - - Income tax - - TOTAL RECOGNISED INCOME AND EXPENSE (A + B) Attributable to the Parent Attributable to non-controlling interests - - (*) Presented for comparison purposes only. Unaudited figures. The accompanying Notes 1 to 34 and Appendix 1 are an integral part of the consolidated statement of recognised income and expense for

12 Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with generally accepted accounting principles in Spain (see Notes 1 and 34). In the event of a discrepancy, the Spanish-language version prevails ALLFUNDS BANK GROUP CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY B) CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008 (NOTES 1 TO 4) (Thousands of Euros) EQUITY ATTRIBUTABLE TO THE PARENT SHAREHOLDERS' EQUITY Less: Profit Total Non- Share Share Accumulated Other Equity Treasury Attributable to Less: Dividends Shareholders' Valuation Controlling Capital Premium Reserves Instruments Shares the Parent and Remuneration Equity Adjustments Total Interests Equity Balance at 01/01/ Adjustments due to changes in accounting policies Adjustments due to errors Adjusted beginning balance Total recognised income/(expense) Other changes in equity Transfers between equity items (16.362) Balance at 31/12/ EQUITY ATTRIBUTABLE TO THE PARENT (*) SHAREHOLDERS' EQUITY Less: Profit Total Non- Share Share Accumulated Other Equity Treasury Attributable to Less: Dividends Shareholders' Valuation Controlling Capital Premium Reserves Instruments Shares the Parent and Remuneration Equity Adjustments Total Interests Equity Balance at 01/01/ Adjustments due to changes in accounting policies Adjustments due to errors Adjusted beginning balance Total recognised income/(expense) Other changes in equity Transfers between equity items (23.141) Balance at 31/12/ (*) Presented for comparison purposes only. Unaudited figures. The accompanying Notes 1 to 34 and Appendix 1 are an integral part of the consolidated statement of changes in total equity for

13 Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with generally accepted accounting principles in Spain (see Notes 1 and 34). In the event of a discrepancy, the Spanish-language version prevails ALLFUNDS BANK GROUP CONSOLIDATED STATEMENT OF CASH FLOW S FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008 (NO TES 1 T O 4) (Thousands of Euros) (*) 1. CASH FLOWS FROM OPERATING ACTIVITIES Profit for the year attributable to the Parent Adjustments made to obtain the cash flows from operating activities: D epreciation and amortisation charge Other adjustments (1.157) Net increase/decrease in operating assets: Financial assets held for trading Tra ding d erivatives Available-for-sale financial assets- 382 (550) Other equity instruments 382 (550) Loans and receivables- (40.441) Loans and advances to credit institutions (48.822) Loans and advances to customers (7.249) Other operating assets (20.667) Net increase/decrease in operating liabilities: Financial liabilities held for trading- (25) (64) Tra ding d erivatives (25) (64) Financial liabilities at am ortised cost (78.870) D eposits from credit institutions (253) D eposits from customers Other fina ncial liab ilities (80.363) Other operating liabilities (20.275) (59.242) ( ) Proceeds/payments from incom e tax (3.864) (6.839) Total cash flows from operating activities (1) (2.387) CASH FLOWS FROM INVESTING ACTIVITIES Payments Tangible assets (836) (2.175) Inangible assets (2.668) (2.400) (3.504) (4.575) Proceeds - - Total cash flows from investing activities (2) (3.504) (4.575) 3. CASH FLOWS FROM FINANCING ACTIVITIES (3) EFFECT OF FOREIGN EXCHANGE RATE CHANGES (4) 73 (262) 5. N ET INCR EASE/DECR EASE IN CASH AND CASH EQUIVALEN TS ( ) (5.818) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH AND CASH EQUIVALENTS AT END OF YEAR MEMORANDUM ITEMS: COMPONENTS OF CASH AND CASH EQUIVALENTS AT THE END OF YEAR Cash Cash equivalents at central banks Other financial assets Less: Bank overdrafts refundable on demand - - TOTAL CASH AND CASH EQUIVALENTS AT THE END OF YEAR (*) Presented for comparison purposes only. Unaudited figures. The accompanying Notes 1 to 34 and Appendix 1 are an integral part of the consolidated statement of cash flows for

14 Translation of consolidated financial statements originally issued in Spanish and prepared in accordance with generally accepted accounting principles in Spain (see Notes 1 and 34). In the event of a discrepancy, the Spanish-language version prevails. Allfunds Bank Group Notes to the Consolidated Financial Statements for the year ended 31 December Introduction, basis of presentation of the consolidated financial statements, and other information 1.1. Introduction Allfunds Bank, S.A. ( the Bank ) is a private-law entity subject to the rules and regulations applicable to banks operating in Spain. The Bank's registered office is at c/ Estafeta 6- Complejo Plaza de la Fuente, Edificio 3, La Moraleja (Madrid). In addition to the operations carried on directly by it, the Bank is the head of a group of subsidiaries that engage in various business activities and which compose, together with it, the Santander Group ( the Group ). Therefore, the Bank is required to prepare in addition to its own financial statements, the Group's consolidated financial statements Basis of presentation of the consolidated financial statements The Group's consolidated financial statements for 2009 were prepared by the Bank's directors at the Board meeting on 25 March 2010 in accordance with Bank of Spain Circular 4/2004, of 22 December, with Royal Decree 1815/1991, 20 December, approving the rules for the preparation of consolidated financial statements, and with the Note issued by the Spanish Accounting and Audit Institute on 24 November 2008, relating to the criteria applicable in the preparation of consolidated financial statements and, accordingly, present fairly the Group s consolidated equity and financial position at 31 December 2009 and the consolidated results of its operations, the changes in the consolidated equity and its consolidated cash flows for the year then ended. These consolidated financial statements, which were prepared from the accounting records of the Bank and those of each of its subsidiaries, include the adjustments and reclassifications required to unify the accounting policies used by the subsidiaries with those used by the Parent. The Group's consolidated financial statements for 2009 have not yet been approved by the shareholders at the Annual General Meeting. However, the Bank's Board of Directors considers that the aforementioned financial statements will be approved without any changes. The Group s consolidated financial statements for 2008 were not prepared by the Bank s directors and, therefore, were not subject to an audit. The principal accounting policies and measurement bases applied in preparing the Group's consolidated financial statements for 2009 are described in Note 2. All mandatory accounting policies and measurement bases with a material effect on the consolidated financial statements for 2009 were applied in their preparation. All the figures (unaudited) relating to 2008 included in these notes to the financial statements are presented for comparison purposes only Use of estimates In the Group's consolidated financial statements for 2009 estimates were occasionally made by the senior executives of the Group and of the consolidated entities, later ratified by the directors, in order to quantify 11

15 certain of the assets, liabilities, income, expenses and commitments reported herein. These estimates relate basically to the following: 1.- The impairment losses on certain assets (see Notes 6, 7, 8 and 9); 2.-The useful life of the tangible and intangible assets (see Notes 10 and 11). Although these estimates were made on the basis of the best information available at 2009 year-end, future events might make it necessary to change these estimates in coming years. Changes in accounting estimates would be applied prospectively in accordance with the requirements of Bank of Spain Circular 4/2004, recognising the effects of any change in estimates in the related consolidated income statement. 1.4 Basis of consolidation Subsidiaries are defined as entities over which the Bank has the capacity to exercise management control; this capacity 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 agreements with other shareholders of the investee that give the Bank control. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of the subsidiaries are fully consolidated with those of the Bank. Accordingly, all material balances and transactions between consolidated entities and the Bank are eliminated on consolidation. Appendix I contains salient information on the subsidiaries Agency agreements Neither at 2009 year-end nor at any other time during the year did the Bank or the subsidiaries have any agency agreements in force, as defined in Article 22 of Royal Decree 1245/1995, of 14 July Environmental impact In view of the business activities carried on by the Group, it does not have any environmental contingencies. Therefore, no specific disclosures relating to environmental issues are included in these notes to the consolidated financial statements Capital Bank of Spain Circular 3/2008, of 22 May, on the calculation and control of minimum capital requirements, regulates the minimum capital requirements for Spanish credit institutions -both as individual entities and as consolidated groups- and how to calculate them, as well as the various internal capital adequacy assessment processes they should have in place and the information they should disclose to the market. The aforementioned Circular establishes the elements that are eligible for inclusion in capital for the purpose of compliance with the minimum capital requirements set forth therein. Under this Circular, capital is classified into Tier 1 and Tier 2 capital. The Group's management of its capital, as far as conceptual definitions are concerned, is in keeping with Bank of Spain Circular 3/2008. Accordingly, the Bank considers eligible capital to be that specified in Rule Eight of Bank of Spain Circular 3/

16 The minimum capital requirements established by Bank of Spain Circular 3/2008 are calculated on the basis of the Bank's exposure to credit risk and dilution risk (on the basis of the assets, obligations and other memorandum items that present these risks, depending on their amounts, characteristics, counterparties, guarantees, etc.), to counterparty risk and position and settlement risk in the trading book, to foreign exchange risk (on the basis of the overall net foreign currency position) and to operational risk. Additionally, the Group is subject to compliance with the risk concentration limits established in Circular 3/2008 and with the requirements concerning internal corporate governance, internal capital adequacy assessment, measurement of interest rate risk and information to be disclosed to the market also set forth therein. With a view to guaranteeing compliance with the aforementioned objectives, the Group performs integrated management of these risks, in accordance with its internal policies. At 31 December 2009 and 2008, and throughout these years, the eligible capital of the Group exceeded the minimum required under the regulations then in force Deposit Guarantee Fund The Bank participates in the Deposit Guarantee Fund. In 2009 and 2008, the consolidated income statements did not include any expense in this connection since there was no obligation in this respect Customer care service annual report As required by Article 17 of Ministry of Economy Order ECO/734/2004, of 11 March, on Customer Care Departments and Services and the Customer Ombudsmen of Financial Institutions, the Annual Report presented by the Head of the Service to the Board meeting held on 25 March 2010 is summarised in the Note Events after the reporting period From 1 January 2010 to the date on which these consolidated financial statements were authorised for issue no events took place having a material effect on the financial statements that have not been described in the other notes to the consolidated financial statements. 2. Accounting policies and measurement bases The accounting policies and rules and measurement bases applied in preparing the Group's consolidated financial statements were as follows: a) Definitions and classification of financial instruments i. Definitions A financial instrument is any contract that gives rise to a financial asset of one entity and to a financial liability or equity instrument of another entity. An equity instrument is any agreement 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 a specified variable, sometimes called the underlying (such as an interest rate, financial instrument price, commodity price, foreign exchange rate, credit rating or index thereof), whose initial investment is very small compared with other financial instruments with a similar response to changes in market factors, and which is generally settled at a future date. 13

17 ii. Classification of financial assets for measurement purposes Financial assets are generally included for measurement purposes in one of the following categories: i. Financial assets at fair value through profit or loss: - Financial assets held for trading: this category includes the financial assets acquired for the purpose of generating a profit in the near term from fluctuations in their prices and financial derivatives that do not meet the definition of a financial guarantee contract and have not been designated as hedging instruments. - Other financial assets at fair value through profit or loss: this category includes hybrid financial instruments containing one or more embedded derivatives that do not significantly modify the cash flows that otherwise would be generated by the instrument and whose separation is prohibited. These instruments must be assigned to this category from their initial recognition, and can only be assigned thereto if this reduces accounting mismatches or if they are part of a group of financial instruments whose performance is evaluated in accordance with a documented risk management or investment strategy. ii. Loans and receivables. This category includes the financial assets not traded in an active market, which are not required to be measured at fair value but which generate fixed or determinable cash flows and all the investment made by the Group will be recovered, except for reasons attributable to the insolvency of the obligor. Therefore, it includes unquoted debt securities, financing to third parties arising from the Group's typical lending activities and debt incurred by the purchasers of goods or the users of its services. iii. Classification of financial assets for presentation purposes Financial assets are classified by type of instrument into the following items in the consolidated balance sheet: - Cash and balances with central banks: cash balances and deposits with the Bank of Spain and other central banks. - Loans and advances to credit institutions: credit of any nature in the name of credit institutions. - Loans and advances to customers: all credit granted by the Group, other than that represented by marketable securities, money market operations through central counterparties, finance lease receivables and loans and advances to credit institutions. - Other equity instruments: financial instruments issued by other entities, such as shares and non-voting equity units, which have the nature of equity instruments for the issuer, unless they are investments in subsidiaries, jointly controlled entities or associates. Investment fund units are included in this item. - Trading derivatives: includes the fair value in favour of the Group of derivatives which do not form part of hedge accounting. iv. Classification of financial liabilities for measurement purposes Financial liabilities are classified for measurement purposes into one of the following categories: 14

18 i.financial liabilities at fair value through profit or loss: Financial liabilities held for trading: includes financial derivatives that do not meet the definition of a financial guarantee contract and have not been designated as hedging instruments. ii.financial liabilities at amortised cost: Financial liabilities not included in the above category which arise from the ordinary borrowing activities carried on by financial institutions, irrespective of their instrumentation and maturity. v. Classification of financial liabilities for presentation purposes Financial liabilities are classified by type of instrument into the following items: - Deposits from credit institutions: deposits of any nature, including credit received and money market operations in the name of credit institutions. - Customer deposits: includes all repayable balances received in cash by the Group, other than those represented by marketable securities, money market operations through central counterparties and subordinated liabilities. - Trading derivatives: includes the fair value of the Group's liability in respect of derivatives which do not form part of hedge accounting. - Other financial liabilities: includes the amount of payment obligations having the substance of financial liabilities not included under any other item. b) Measurement of financial assets and liabilities and recognition of fair value changes In general, financial instruments are initially recognised at fair value which, in the absence of evidence to the contrary, is deemed to be their acquisition cost. Financial assets and liabilities are subsequently measured at each year-end as follows: i. Measurement of financial assets Financial assets are measured at fair value, without deducting any transaction costs that may be incurred on their sale or other form of disposal, except for loans and receivables and equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have those equity instruments as their underlying and are settled by delivery of those 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, willing parties in an arm's length transaction acting prudently. 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 ). If there is no market price for a given financial instrument, its fair value is estimated on the basis of the price established in recent transactions involving similar instruments and, in the absence thereof, of valuation techniques commonly used by the international financial community, taking into account the specific features of the instrument to be measured and, particularly, the various types of risk associated with it. However, the inherent limitations of the valuation techniques used and the possible inaccuracies of the assumptions made under these techniques may result in a fair value of a financial instrument which does not exactly coincide with the price at which the instrument could be bought or sold at the date of measurement. 15

19 All derivatives are recognised in the consolidated balance sheet at fair value from the trade date. If the fair value is positive, they are recognised as an asset and if the fair value is negative, they are recognised as a liability. The fair value on the trade date is deemed, in the absence of evidence to the contrary, to be the transaction price. The changes in the fair value of derivatives from the trade date are recognised in Gains/Losses on Financial Assets and Liabilities (Net) in the consolidated income statement. Specifically, the fair value of standard financial derivatives included in the portfolios of financial assets or liabilities held for trading is deemed to be their daily quoted price and if, for exceptional reasons, the quoted price cannot be determined on a given date; these financial derivatives are measured using methods similar to those used to measure OTC derivatives. The fair value of OTC derivatives 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 that are commonly used by the financial markets: net present value, option pricing models and other methods. Loans and Receivables are measured at amortised cost using the effective interest method. Amortised cost is understood to be the acquisition cost of a financial asset or liability plus or minus, as appropriate, the principal repayments and the cumulative amortisation (taken to the consolidated income statement) of the difference between the initial cost and the maturity amount. In the case of financial assets, amortised cost furthermore includes any reductions for impairment or uncollectibility. In the case of loans and receivables hedged in fair value hedges, the changes in the fair value of these assets related to the risk or risks being hedged are recognised in the consolidated income statement. The effective interest rate is the discount rate that exactly matches the initial amount of a financial instrument to its estimated cash flows during its estimated life, based on the contractual terms, but disregarding future credit losses. For fixed rate financial instruments, the effective interest rate coincides with the contractual interest rate established on the acquisition date plus, where applicable, the fees that, because of their nature, can be equated with a rate of interest. In the case of floating rate financial instruments, the effective interest rate coincides with the rate of return prevailing in all connections until the next benchmark interest reset date. Equity instruments of other entities whose fair value cannot be determined in a sufficiently objective manner and financial derivatives that have those instruments as their underlying and are settled by delivery of those instruments are measured at acquisition cost adjusted, where appropriate, by any related impairment loss. ii. Measurement of financial liabilities In general, financial liabilities are measured at amortised cost, as defined above, except for those included under Financial Liabilities Held for Trading, which are measured at fair value. iii. Valuation techniques Following is a summary of the various valuation techniques used by the Group to measure the financial instruments included in the Financial assets held for trading and Other financial assets at fair value through profit and loss captions on the asset side of the consolidated balance sheet and the Financial liabilities held for trading caption on the liability side of the consolidated balance sheet, at 31 December 2009: Market Value Based on Assets Liabilities Public price quotations in active markets 39% - Internal valuation models with non-market data 61% 100% 100% 100% 16

20 The main techniques employed in the internal valuation models is the present value method. The Bank's directors consider that the financial assets and liabilities recognised in the consolidated balance sheet and the income arising from these financial instruments are reasonable and reflect their market value. The detail of the financial instruments, by valuation method, at 31 December 2009 is as follows: Thousands of Euros Public Price Quotations in Active Markets Internal Models Total Financial assets held for trading Other financial assets at fair value through profit or loss Financial liabilities held for trading iv. Recognition of fair value changes As a general rule, changes in the fair value of financial instruments are recognised in the consolidated income statement. A distinction is made between the changes resulting from the accrual of interest or dividends, which are recognised under Interest and Similar Income, Interest Expense and Similar Charges and Income from Equity Instruments, as appropriate; those arising from the impairment of asset quality; and those arising for other reasons, which are recognised at their net amount under Gains/Losses on Financial Assets and Liabilities (net) in the consolidated income statement. c) Derecognition of financial assets and liabilities 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. Similarly, financial liabilities are only derecognised when the obligations they generate have been extinguished or when they are acquired (with the intention either to cancel them or to resell them) In 2009 the Group did not transfer any financial instrument which was not derecognised. d) Offsetting of financial instruments Financial asset and liability balances are offset, i.e. reported in the consolidated balance sheet at their net amount, only if the Group currently has a legally enforceable right to set off the recognised amounts and intend either to settle on a net basis, or to realise the asset and settle the liability simultaneously. e) Impairment 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. 17

21 - 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 year in which the impairment becomes evident. The reversal, if any, of previously recognised impairment losses is recognised in the consolidated income statement for the year in which the impairment ceases to exist or is reduced. When the recovery of any recognised amount is considered unlikely, the amount is written off, without prejudice to any actions that the Group 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. f) Tangible assets The Group's tangible assets relate in full to property, plant and equipment for own use and are presented at acquisition cost, less: - The related accumulated depreciation, and - Any estimated impairment losses (carrying amount higher than recoverable amount). Depreciation is calculated, using the straight-line method, on the basis of the acquisition cost of the assets less their residual value. The land on which the buildings and other structures stand has an indefinite life and, therefore, is not depreciated. The period tangible asset depreciation charge is recognised in 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 Rate Furniture 10 Fixtures 10 Office and IT equipment 25 The consolidated entities asses at the reporting date whether there is any indication that an asset may be impaired (i.e. its carrying amount exceeds its recoverable amount). If this is the case, the carrying amount of the asset is reduced to its recoverable amount and future depreciation charges are adjusted in proportion to the revised carrying amount and to the new remaining useful life (if the useful life has to be re-estimated). Similarly, if there is an indication of a recovery in the value of a tangible asset, the Group recognises the reversal of the impairment loss recognised in prior periods and adjust the future depreciation charges accordingly. In no circumstances may the reversal of an impairment loss on an asset raise its carrying amount above that which it would have 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 at the end of the reporting period 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 in the consolidated income statement in future years on the basis of the new useful lives. Upkeep and maintenance expenses relating to property, plant and equipment for own use are recognised as an expense in the period in which they are incurred. 18