Special Report on the exclusion of pre-emptive rights under sections 308, 504 and 505 of the Restated Text of the Spanish Capital Corporations Law

Transcription

1 Special Report on the exclusion of pre-emptive rights under sections 308, 504 and 505 of the Restated Text of the Spanish Capital Corporations Law BANCO SANTANDER, S.A. This document is a translation of an original text in Spanish. In case of any discrepancy between both texts, the

2 SPECIAL REPORT ON THE EXCLUSION OF PRE-EMPTIVE RIGHTS UNDER SECTIONS 308, 504 AND 506 OF THE RESTATED TEXT OF THE SPANISH CAPITAL CORPORATIONS LAW To the shareholders of Banco Santander, S.A. For the purposes of Sections 308, 504 and 506 of the restated text of the Capital Corporations Law (Ley de Sociedades de Capital), approved by the sole section of Royal Legislative Decree 1/2010, of 2 July (hereinafter, the Capital Corporations Law ), and according to the request of Banco Santander, S.A. (hereinafter, the Bank or Banco Santander ), pursuant to the appointment made by the Commercial Registrar of Cantabria, Ms. Emilia Tapia Izquierdo on 26 December 2014, this Special Report is submitted in connection with the capital increase by means of cash contributions, through the issuance and circulation of up to 1,258,441,465 ordinary shares with the exclusion of preemptive subscription rights. This report, along with the attached report (Annex I) of the Board of Directors (hereinafter Board of Directors Report ), will be made available in the Bank s website on the occasion of the first Bank s General Shareholders Meeting to take place after the capital increase resolution is adopted. The share capital increase will be conducted through an accelerated book-building private placement among qualified investors of the new shares of Banco Santander to be issued (hereinafter, the Accelerated Book-building process ), with provision for incomplete subscription. Such ordinary shares will be issued at their par value of fifty euro cents (0.5) per share, of the same class and series as those currently outstanding and represented through book-entries, plus a share premium resulting from the issue price that will be determined according to subsection 2 of the Board of Directors Report and, subsequently, to the present report. This Accelerated Book-building process is framed within a transaction to strengthen the Bank s own funds by obtaining the highest-quality capital components, with a view of reinforcing its own funds by raising the highestquality capital components (i.e. common equity Tier 1 capital). The Bank s General Shareholders Meeting held on 28 March 2014 resolved, under item ninth of the Agenda, to delegate to the Board of Directors of the Bank the powers to increase its share capital pursuant to Sections b) and 506 of the Capital Corporations Law on one or more occasions and at any time, within a period of three years from the date of such Meeting, in the maximum amount of 2,890,266, euros through the issuance of new shares with or without a share premium and with or without voting rights-, with the consideration for such new shares consisting of cash contributions, and with the power to set the terms and conditions of the capital increase and of the new shares, as well as to freely offer the unsubscribed new shares within the pre-emptive subscription period or periods. Spanish version will prevail.

3 2 Likewise, the Board was authorized to totally or partially exclude pre-emptive rights pursuant to Section 506 of the Capital Corporations Law, although these powers were limited to a maximum amount of 1,156,106, euros. The Board of Directors was also authorized to delegate to the Executive Committee the powers it had been granted. In the Board of Directors Report it is noted that as of the date thereof it has used the abovementioned delegation on two occasions since, pursuant to the May and September 2014 issuances of contingently convertible preferred securities into the shares of the Bank, capital increases with exclusion of pre-emptive subscription rights of up to 264,099,622 euros have been approved. As a result, regarding the aforementioned 2,890,266, euros threshold established for capital increases, the Board of Directors (or, when applicable, the Executive Committee) still has a margin of 2,626,167, euros to increase the share capital of the Bank. In addition, regarding the 1,156,106, euros threshold established for the total or partial exclusion of pre-emptive rights in the terms of Section 506 of the Companies Law, the Board of Directors (or, when applicable, the Executive Committee) has the power to exclude the pre-emptive rights in capital increases of up to 892,007, euros (which equal 1,784,014,185 shares). By virtue of the aforementioned delegation of powers, the Bank s Board of Directors has prepared the attached Board of Directors Report (Annex I), in which they provide the rationale for the proposal, for the determination of the issue price of the shares including the criteria pursuant to which the new shares will be allotted among the requests for subscription received as well as for the nature of the contributions in consideration for the new shares. The Law requires that when pre-emptive rights are to be excluded, the new shares be issued at their fair value. Since the Bank is a listed company, in accordance to Section 504 of the Capital Corporations Law the fair value of the new shares shall be deemed to be their market value which, unless otherwise justified, shall be presumed to be the value set by reference to the listing price. A valuation of the shares, like any other valuation endeavor, entails, in addition to objective factors, other subjective factors that imply estimative judgments on the fair value; therefore, the values that result from the valuation task constitute, mainly, a reference point or an approximation to a range of values, that may highly depend on subjective evaluations made on a wide variety of aspects of the entity. The alternative that the Board of Directors of the Bank has considered to be more effective in order to implement the capital increase, taking into account the goals mentioned in the attached Board of Directors Report, is the Accelerated Book-Building process, that includes a Book-building period to be conducted by several renowned investment banks and the subsequent selection and confirmation of the subscription proposals received from qualified investors, subject to the practices and common usages regarding these kind of procedures. Moreover, for this procedure the Bank has signed an underwriting agreement with several investment banks in order to increase the level of certainty regarding the funds that will be raised after the Book-building period. Spanish version will prevail.

4 3 The Bank s Board of Directors believes, consistently with the international and national financial practices, that the price resulting from this procedure ( Issue Price ), which will take place in a transparent manner and between wellinformed parties, will reflect the fair value of the Bank s shares, as it allows to measure the strength of the demand in the most qualified sector of investors and, as a result, the price that the market is willing to pay for the Banco Santander s shares. Consequently, the Bank s Board of Directors has foreseen that the Issue Price per share of the newly issued shares resulting from the capital increase hereto shall correspond to the price resulting from the Accelerated Book-building process. However, the Board of Directors Report establishes, as a caution, that the Issue Price of the new shares shall not be lower than 5.98 euros per share (hereinafter, the Minimum Issue Price ). This price results from the application of a 10% discount to the closing price of the Bank s share in the Automated Quotation System (Mercado Continuo) of the Spanish Stock Exchanges as of yesterday, rounded up until a whole number figure for the cents of euro is obtained. In order to determine the abovementioned discount, the Bank s Board of Directors, on the basis of the advice received from its advisory bank, has taken into account the following: - The volume and amount, in absolute and relative terms in comparison with the daily average trading volume of the Bank s shares, of the transaction in comparison with similar transactions that have taken place in the European and the Spanish markets, since this is the issuance that entails the greatest volume of all the transactions with similar characteristics carried out in Europe in the last years. - On the basis of the usual market methodology employed to estimate the value at risk on financial investments ( VaR ), the variations on the Bank s shares closing price within a period of two consecutive business days (estimated period between the capital increase announcement and its closing), in the 6 years immediately preceding the date of the Board of Directors Report and taking into consideration a confidence level of 99%. - The discounts applied in similar transactions carried out by other companies in the last years both in the Spanish and the international markets, according to public available data and to the analysis made and provided by the advisory bank to the Board of Directors, in which, as mentioned above, the amount of funds to be raised was substantially inferior to the amount that Banco Santander expects to raise. - Additionally, the maximum downward variation experienced by Banco Santander s shares during a period of time of three days and within the same time horizon as the one used to calculate the VaR (i.e., 6 years). Spanish version will prevail.

5 4 The Board of Directors has expressly authorized the Executive Committee as well as Ms. Ana Patricia Botín-Sanz de Sautuola y O Shea and Mr. José Antonio Álvarez Álvarez, so that any of them, acting severally, may perform all such acts as may be required or appropriate in connection with the relevant capital increase and the Accelerated Bookbuilding process and, in particular: a) to decide the date on which this increase, as well as the Accelerated Book-building process of the shares issued hereunder, is to be carried out; b) at any time prior to the disbursement by the investment banks of the Issue Price, to cancel the capital increase and, thus, the Accelerated Book-building process for the new shares, in the event of a material change in market conditions or because of any other reason that is relevant in their opinion; c) to set all the terms and conditions of the increase that have not been established in the Board of Directors Report and in accordance with the terms and conditions thereof and, specifically, to determine the amount of the share premium and, thus, the Issue Price of the new shares as well as the number of shares effectively offered for subscription; and d) to declare the capital increase to be closed once the new shares have been fully subscribed and paid up, and to execute all such public and private documents as may be appropriate for the total or partial implementation of the capital increase. Our responsibility is to issue a professional opinion, as independent experts, regarding the fair value of the shares of the Bank, the underlying value of the pre-emptive rights the exercise of which it is proposed to be excluded, and the reasonableness of the information contained in the Board of Directors Report. Our work has been carried out in accordance with the Technical Standard for preparation of the Special Report on the exclusion of pre-emptive rights approved by resolution of the Institute of Accounting and Auditing (Instituto de Contabilidad y Auditoría de Cuentas) of 16 June 2004 (hereinafter, the Technical Standard ). The accounting information used for this work has been obtained from the consolidated interim financial statements of Banco Santander and the Santander Group (hereinafter, the Group or Santander Group ) for the six month period ended on 30 June 2014, which were audited by Deloitte, S.L. on 4 July 2014, providing an unqualified opinion. In accordance with the abovementioned Technical Standard for preparation of this Special Report, our work consisted of applying the following procedures: a) Obtaining and performing an overall review of the consolidated interim financial statements of Banco Santander and the companies within the Santander Group for the six-month period ended on 30 June 2014, together with the corresponding audit report. Spanish version will prevail.

6 5 b) Obtaining and performing an overall review of the consolidated interim financial statements of the Group for the nine-month period ended on 30 September 2014 together with the corresponding limited review report issued by the Group s auditor. c) Obtaining information from the Bank s auditor concerning potential facts or material factors regarding Banco Santander s economic and financial situation and of which it may have become aware after the issuance of the limited review report mentioned in letter b). d) Asking questions to the Bank s Management regarding important events that might have a significant impact on the value of the Group and, if applicable, verification of such events. e) Review of the Bank s Bylaws in force when the special report was issued. f) Reading of the Minutes of the Shareholders and the Board of Directors meetings held from 4 August 2014 through the date of this report. g) Determination of the net asset value resulting from the consolidated interim financial statements audited as of 30 June h) Evaluation of the reasonableness of the information contained in the report issued by the Board of Directors (Sections 308, 504 and 506 of the Capital Corporations Law) that provides the rationale for the capital increase with exclusion of pre-emptive rights, including a review of the documentation that justifies it (Board of Directors Report and other supporting documentation). i) Analysis of the evolution of the Bank s shares listing price and determination of the average listing price of these shares during the quarter preceding the date of this Special Report (from 8 October 2014 to 7 January 2015) and the closing price of the Bank s share in the Automated Quotation System (Mercado Continuo) of the Spanish Stock Exchanges on 7 January 2015, all of which are deemed to be indicative of the Bank s fair value. This assessment was made on the basis of a certificate issued by the Governing Body of the Madrid Stock exchange (Sociedad Rectora de la Bolsa de Valores de Madrid) on 8 January 2015, a copy of which is attached to this special report as Annex II. j) Reading and understanding of the Board of Directors Report concerning the transaction and analysis of the reasons provided as the rationale for the exclusion of pre-emptive rights as well as of the valuation methods employed. Spanish version will prevail.

7 6 k) Analysis and evaluation of whether the Issue Price proposed by the Directors corresponds to the fair value of the shares of the Bank that arises from the information obtained as described in the preceding sections. l) Determination of the book value of the pre-emptive rights the exercise of which is proposed to be excluded, calculated by reference to both the listing price and the book value of the Banco Santander s shares. m) Obtaining a letter of representations from the Board of Directors of the Bank in which they communicate that they have informed us of all hypotheses, data and material information as well as of any subsequent material events. Taking into account the foregoing, in our professional opinion as independent experts: - The information contained in the Board of Directors Report supporting their proposal is reasonable on the basis of being adequately documented and presented. - The Minimum Issue Price of 5.98 euros per share approved by the Board of Directors, pursuant to the authorization by the shareholders at their annual general meeting held on 28 March 2014 and that corresponds to the figure resulting from the application of a 10% discount to the closing price of the Bank s share in the Automated Quotation System (Mercado Continuo) of the Spanish Stock Exchanges as of yesterday rounded up until a whole number for the cents of euro is obtained, is within the range of values that can be considered indicative of the fair value of the Bank s shares. Furthermore, below we include the book value of the pre-emptive rights which the Board proposes to exclude concerning the Minimum Issue Price set by the Board of Directors of the Bank and that refers,respectively, to the closing price of Banco Santander s share in the Automated Quotation System (Mercado Continuo) on 7 January 2015, to the average quoted price for the period of 8 October 2014 to 7 January 2015 and to the book value of the Bank s shares, in accordance to the consolidated interim financial statements as of 30 June 2014 (last audited information), in case the maximum foreseen issuance of 1,258,441,465 new shares takes place. The dilution per outstanding share (excluding the treasury shares that have been communicated to us by the Bank), expressed in euros per share is as follows: Value in euros On the quoted prices (excluding treasury shares as of 31 December 2014 last available information-): At closing on 7 January On the three-month period ended on 7 January On the Book Value as of 30 June 2014 (excluding treasury shares as of 30 June 2014): Spanish version will prevail.

8 7 This Special Report is issued for the purposes of complying with the requirements contained in Sections 308, 504 and 506 of the Capital Corporations Law regarding the accounting auditors report. This report shall not be used for any other purpose. ERNST & YOUNG, S.L. (Registered in the Official Registry of Accounting Auditors under No S0530) (Signed in the original in Spanish) 8 January 2015 Roberto Diez Cerrato Spanish version will prevail.

9 ANNEX I Report submitted by the Board of Directors of Banco Santander, S.A. in connection with the capital increase resolution to be approved by the Board of Directors pursuant to the authorization granted by the General Shareholders Meeting held on 28 March 2014, under item ninth of the Agenda

10 REPORT ISSUED BY THE BOARD OF DIRECTORS OF BANCO SANTANDER, S.A. RELATING TO THE CAPITAL INCREASE RESOLUTION THAT WILL BE ADOPTED BY THE BOARD OF DIRECTORS PURSUANT TO THE AUTHORIZATION GRANTED BY THE SHAREHOLDERS GENERAL MEETING HELD ON MARCH 28, 2014 UNDER ITEM NINE OF THE AGENDA. This report is submitted in relation with the resolution of capital increase of Banco Santander, S.A. (hereinafter, Banco Santander or the Bank ) by means of monetary contributions and with the exclusion of the pre-emption right, that will be approved by the board of directors pursuant to the authorization granted by the general shareholders meeting of the Bank held on March 28, 2014 under item nine of the agenda. This report is issued in compliance with the requirements established by sections 286 and 296 (regarding the capital increase resolution and the ensuing amendment of the bylaws) and 308 and 506 (regarding the exclusion of the pre-emption rights) of the consolidated text of the Corporate Enterprises Act approved by the sole section of Royal Legislative Decree 1/2010, of 2 July (hereinafter, the Corporate Enterprises Act ). Additionally, the text of the capital increase resolution whose adoption is being proposed by the board of directors pursuant to the authorization granted by the shareholders at the general shareholders meeting is attached. As provided by section of the Corporate Enterprises Act, this report and the report to be issued by Ernst & Young, S.L., in its capacity as auditor other than the auditor of Banco Santander appointed by the Commercial Registry of Cantabria, regarding the fair value of the Bank s shares, the underlying value of the pre-emption rights the exercise of which is proposed to be excluded and the reasonableness of the information contained in this report, will be made available to the shareholders and reported to them at the first general shareholders meeting of the Bank that is held following the approval of the capital increase resolution covered by this report. This report is issued on the basis of the advice provided by Goldman Sachs International as advisory bank (the Advisory Bank ).

11 1. RATIONALE FOR THE CAPITAL INCREASE An increase in the share capital of the Bank for a maximum nominal amount equal to 9.99% of its share capital on the date hereof is proposed. The purpose of the capital increase is to strengthen the Company s shareholders funds by raising up to 7,500 million euros in maximum quality regulatory capital (i.e. common equity Tier 1). Banco Santander has a solid capital position and comfortably meets the capital requirements that are currently enforceable in accordance with applicable law. As of September 30, 2014, the Bank s common equity Tier 1 ratio or CET 1- phased-in (that takes into account the schedule for the progressive application of Basel III capital requirements ) was 11.2%, above the minimum threshold that will be applicable to the Bank pursuant to the capital buffers that will be required, on a progressive basis starting on 1 January 2016, by Law 10/2014, of 26 June, on the regulation, supervision and solvency of credit institutions ( Law 10/2014 ) 1. Furthermore, this ratio is in line with those of its main European competitors that show a CET1 phased-in ratio of around 11.8%. Furthermore, and as of September 30, 2014, Banco Santander s leverage ratio stood at 4.5%, that is, 150 basis points above the minimum recommended by the European authorities (i.e., 3%) and above the average leverage ratio of comparable European banking entities that is 4.2%. This solid capital position is also reflected in the recent stress tests performed by the European Central Bank and the European Banking Authority. In these stress tests, Banco Santander increased its CETº1 phased-in ratio by 160 basis points in the baseline scenario while in the adverse scenario such ratio was only reduced by 1.4 percentage points. Regarding the Asset Quality Review or AQR, exercise that consisted in a very exhaustive and detailed assessment of bank balance sheets with particular focus on credit and market risk, Banco Santander only had a negative adjustment of 4 basis points in its capital showing that it does not present deficit on its provisions. 1 The capital buffers applicable to Banco Santander are as follows:(a) capital conservation buffer; (b) buffer for systemically relevant financial institutions and, when appropriate, (c) an specific counter-cyclical capital buffer for each entity and (d) buffer against systemic sector risks. The entities shall have this buffers starting in January 1, 2016; however, there is a gradual implementation schedule that goes until January, 1, 2019.

12 Nevertheless, the proposed capital increase will strengthen Banco Santander s level of regulatory capital and allow it to anticipate compliance with the CETº1 fully loaded ratio (disregarding the application of the different transitory provisions on solvency legislation that derive from Basel III and assuming the full application of its definitions and capital requirements from this year instead of January 1, 2019) positioning it amongst the ratios of the best capitalized entities of the banking sector, taking into consideration the diversification of its business model and the low volatility of its profits. Currently, Banco Santander s CETº1 fully loaded ratio is around 8.3%, this is below the ratios of some of its main European competitors that show figures between 10% and 11%. Despite not being a regulatory requirement yet, the CETº1 fully loaded ratio attracts, more and more, the attention of the financial analysts, investors, rating agencies and, in general, the market, that increasingly consider it and indicative measure for the medium term capital needs of a credit entity. That is why, through the capital increase, the Bank will obtain a volume of shareholders funds that would allow it to increase its CETº1 fully loaded to levels close to those of its European competitors, taking into consideration the diversification of its business model and the low volatility of its profits, and responding to the current market trend 2. In addition, reinforcing the shareholders funds presents other strategic advantages, as detailed in the following section 3.1(A). Firstly, the strengthening of the balance sheet due to the capital increase will provide Banco Santander with more autonomy when selecting and executing organic growth opportunities in the markets where it is currently operating. The capital increase will also contribute to the reorientation of the Bank s shareholder remuneration policy, by way of progressively increasing the proportion of cash retributions, with the subsequent reduction of the remuneration consisting in the delivery of bonus shares. Banco Santander considers that the current market conditions are favorable for the execution of this operation as shown by the important support granted by the international investor 2 As evidenced in the analysts reports published by Société Générale, Deutsche Bank and Morgan Stanley, last November, 4 and by Berenberg on November, 5, agreeing all of them on the convenience of reinforcing the CET1 ratio fully loaded.

13 community to the capitalization operations executed by European financial entities in the last few years where investors have, in general, increased their exposure to the European banking sector. This is shown by, for example, the volume of equity issues in the primary market carried out by European financial institutions in the recent past that, according to the information provided by the Advisory Bank, reached 41,300 million euros in 2014, a figure 29% above that of 2013 and a 51% above that of The board considers that the best suitable way to execute an operation like the one described herein is through an accelerated book-building offering between qualified investors. This procedure, in accordance with the advice received from the Advisory Bank, allows raising an important volume of shareholder s funds in a short period of time, reducing exposure to the risks associated to the volatility of the market in general and, in particular, to the volatility on the quotation of Banco Santander s sector. The capital increase will be approved pursuant to the authorization granted by the shareholders general meeting held on March 28, 2014 in favour of the board of directors. In order to be able to execute an accelerated book-building offering for a capital increase like the one the Bank intends to perform, it is essential that the pre-emption rights of Banco Santander s current shareholders are excluded, so that the new shares are subscribed by qualified investors, that have indicated their interest through the accelerated book-building process executed by the investment banks, being this exclusion, therefore, inherent to the class of placement proposed. The following section 3.1 thoroughly justifies the necessity of proceeding to such exclusion from the point of view of the Bank s corporate interest. 2. DESCRIPTION OF THE PLACEMENT The board of directors, in sight of the advice received from the Advisory Bank, considers that the most efficient way to reach the objectives pursued and to take advantage, at the same time, of the current market situation is to implement the issuance of new shares through a private placement through several investment banks by way of a procedure known as Accelerated Book-building that has already been put into practice in the Spanish market by various listed companies and by the Bank in 2001.

14 To these effects, Banco Santander will sign an agreement with several investment banks with acknowledged international prestige pursuant to which, after the approval of the capital increase resolution by the board, the investment banks will perform a private placement among qualified investors of the new shares of Banco Santander that will be issued in execution of the increase this report relates to, that is (i) in Spain, those specified in section 39 of the Royal-Decree 1310/2005, of November, 4, which partially develops Law 24/1988, of July, 28, on the Securities Market, on matters relating to admission to trading of securities on official secondary markets, public offerings and the necessary offering prospectus (hereinafter, the Royal-Decree 1310/2005 and the Securities Market Act ); (ii) in the rest of the EU member States, those specified in Directive 2003/71/CE of November, , as modified and transposed into their internal legal systems, and (iii) in non-eu countries, those which have the condition of qualified investors or an equivalent category pursuant to the applicable law in each jurisdiction and complying with those requirements contained in such law so as to make the share capital increase not require any filing or approval before the relevant authorities. The placement will be done through an accelerated book-building since subscription and payment of the new shares is expected to occur within not more than two business days and, according to the consolidated market practice, it requires the exclusion of the preemptive subscription rights as they are incompatible in terms of deadlines and procedures with an accelerated book-building process addressed to a specific group of investors such as the one described herein. During this private placement period, the investment banks will explore the existing demand for Banco Santander s shares that will determine the price that the market is willing to pay for them. The board understands that, in accordance with both the international and national financial practices, the price resulting from this procedure (that will need to be carried out in a transparent way and between well informed parties) will reflect the fair value of the Bank s share. Consequently, the board proposes using this price as a reference when determining the issue price of the share capital increase described herein. Nevertheless, as an additional caution, the board considers that it is necessary to establish a minimum issue price per share in the capital increase and this amount should be of 5.98 euros, this is the resulting figure of applying a discount of 10% on the closing quoted price of the Bank s share in the Automated

15 Quotation System (Mercado Continuo) of the Spanish Stock Exchanges on yesterday s date, rounded up until a whole number for the cents of euro is obtained (the Minimum Issue Price ). The abovementioned discount is within the range of variations that, according to most updated data available are reasonable to expect from Banco Santander s share to experiment in a two days period (the maximum period of time that, according to the advice provided by the Advisory Bank, the operation is reasonable expected to last), using (i) the usual market methodology to estimate the value at risk in financial investments as well as (ii) an analysis on the maximum negative variation experimented by the share of Banco Santander within that timeframe (in both cases and complying with what, as indicated by the advice received from the Advisory Bank, has been the practice in several similar operations carried out in Spain in the last few years the analysis has been made on the basis of the quotation data of Banco Santander s share in the last 6 years 3 ). Furthermore, it is worth noting that this discount is in line with those applied by other companies in similar transactions carried out in Spain and in the international market were the funds expected to be raised were substantially inferior. The agreement to be signed with the investment banks will establish, subject to the final determination of its terms and conditions, that if the investment banks are unable to find investors to subscribe for and pay up the new shares in the terms described herein, it will be the investment banks themselves the ones subscribing for and paying up the new shares at an issue price that will by no means be lower than the Minimum Issue Price pursuant to the usual terms and conditions established for this type of operations. Once the price resulting from the book-building process has been established and, consequently, the issue price of the new shares, the new shares will be fully subscribed and paid up. The subscription and payment shall be made either by all or some of the investment banks acting in the name and on behalf of the investors among which the shares have been placed and with a view to transferring them to the latter or, if that were the case, by the investment banks acting in their own name and behalf and in the exercise of their underwriting commitment. In any case, after the subscription and payment of the new shares, the board of directors or, by delegation, the executive committee, will implement the share 3 According to the advice provided by the Advisory Bank, 6 years is an adequate period of time because it provides statistical relevance to the analysis and, additionally, takes into consideration the evolution of the capital markets after the abrupt falls that followed the bankruptcy of Lehman Brothers on September, 2008.

16 capital increase. In addition, it is hereby declared that the number of shares to be issued pursuant to the share capital increase could be lower than initially foreseen if the board of directors or, by delegation, the executive committee deem it necessary taking into account the fundraising target and, among others, the issue price of the new shares resulting from the placement procedure described in this paragraph 2. Finally, the board of directors wishes to state that, given its vast experience in these kind of transactions in the national and international markets, the investment banks participation in the private placement of the shares as well as their firm underwriting commitment it is confident on the success of the operation. 3. REPORT SUBMITTED BY THE BOARD OF DIRECTORS FOR PURPOSES OF SECTIONS 308 AND 506 OF THE SPANISH COMPANIES LAW The capital increase proposed for approval includes the proposal for exclusion of the preemptive rights held by the shareholders of the Bank, all as provided by Sections 308 and 506 of the Spanish Companies Law. Such exclusion is necessary in order to implement the share capital increase through the described procedure. Pursuant to the legal rules applicable to the exclusion of pre-emptive rights in an issuance of new shares, the directors of the Bank must prepare a report providing a detailed rationale for the proposal, specifying the value of the Bank s shares and the consideration to be paid for the new shares as well as stating the persons to whom they are to be allotted. The following two subparagraphs detail the compliance with the legal requirements in order to implement a share capital increase like the one described herein: subparagraph 3.1 justifies, from a corporate interest perspective both the capital increase and the exclusion of preemptive rights while subparagraph 3.2 details the fulfillment of the legal requirement establishing that the issue price of the shares must correspond with its fair value. 3.1 Justification in furtherance of the corporate interest The directors of Banco Santander believe that the exclusion of preemptive rights is fully consistent with the substantive requirements established by law and, in particular, with the need for the exclusion to be justified in furtherance of the corporate interest of the Bank. This

17 is the case because (i) such exclusion makes it possible to implement a scheme that is particularly suitable from the standpoint of the corporate interest; (ii) such scheme is not only appropriate but also necessary to achieve the objective sought; and (iii) there is a relation of proportionality between the aim pursued and the means chosen to achieve it, as explained below: (A) Convenience of the increase from a corporate interest perspective Although as described in the previous paragraph 1, Banco Santander has a solid capital position and comfortably meets the capital requirements that are currently enforceable in accordance with applicable law 4, it has been deemed appropriate to further reinforce its level of maximum quality regulatory capital taking advantage of the current market conditions to strengthen its balance sheet. Without prejudice to the good results obtained by the Bank in the stress tests mentioned in paragraph 1, both the regulators and the markets have repeatedly insisted on the necessity that the largest euro-zone banks strengthen their capital base. In particular, despite that the new laws on capital requirements derived from Basel III (i.e. CRR and Law 10/2014) lay down a transitional period for the gradual implementation of their requirements until their full entry into force in January, , analysts, rating agencies, supervisors and the market in general take very much into account and positively value entities that meet these requirements in advance (i.e. entities with a fully loaded capital ratio), as they consider that these requirements are a good estimate to analyze the future capital needs of credit institutions (additionally annulling the effect that the local transitory regimes may have in the indicative capital figures). The regulators analyzed the fully loaded capital level of the European entities in the aforementioned stress test and where Banco Santander revealed its solid business model. However, the reality is that the Bank s CET1 fully loaded ratio is positioned in the lower range of ratios held by comparable entities. 4 In the European Union, Regulation (EU) Nº 575/2013 of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms ( CRR ) directly applicable in Spain- and, in the matter of capital buffers and other issues involving Pillar 2, Directive 2013/36/EU of the European Parliament and of the Council, on access to the activity of credit institutions and the prudential supervision of credit institutions ( CRD IV ), transposed in Spain through Law 10/2014.

18 As a result, by means of the share capital increase described herein, Banco Santander aims to reinforce its shareholders funds and to achieve a common equity tier 1 (CET 1) fully loaded ratio in accordance with what, despite not being legally mandatory until January 1, 2019, is the current market trend and positioning itself among the best capitalized entities of the banking sector, taking into consideration the diversification of its business model and the low volatility of its profits. Therefore, as a result of the share capital increase and taking into account its internal capacity of capitalization, the Bank will improve its capital position with a view of achieving a common equity tier 1 (CET 1) fully loaded of circa 10% throughout the year Assuming the effective issue price (par value plus issue premium) of the increase is 7,500 million euros, the effect in the Bank s main solvency indicators will be as follows: Data in percentages Estimate as of Pro-forma after issuance as of Common equity tier 1 CET * Additional tier Tier Tier Total shareholders funds *The impact of the capital increase in the CET1 fully loaded ratio would be of 140 basis points Pro-forma after issuance (CRR fully loaded) On the other hand, the improvement in the solvency ratios of Banco Santander (and especially, of its CET 1 ratio) entails a clear strategic advantage, that improves the Bank s position to benefit from new organic growth opportunities. This reinforcement of the regulatory capital will provide Banco Santander with more flexibility when selecting organic growth opportunities, that with the turning of the economic cycle, are forecasted to take place in the main markets where the Bank currently operates 5 that will, in turn, enable the Bank to increase the credit and business share in these markets. 5 The economic growth forecast for the markets where the Bank operates confirm a turn in the economic cycle, in 2016 the Eurozone economies (Spain, Portugal and Germany) will grow close to 2%, Brazil, United Kingdom, United States, Poland and Argentina, approximately 3%, and Mexico and Chile, above 4%.

19 As a result, the share capital increase is very convenient for Banco Santander as it will allow the Bank to raise a level of funding that will enable it to take advantage of these business opportunities. Additionally, with the consequent strengthening of the Bank s shareholders funds through the capital increase, Banco Santander will reorientate its shareholder remuneration policy, by way of progressively increasing the proportion of cash retributions, with the subsequent reduction of the remuneration consisting in the delivery of bonus shares (an alternative that, taking into consideration the latest reforms on fiscal legislation, will no longer result attractive to investors) and by setting its cash pay-out target at a figure of, approximately, between 30% and 40% of its recurrent profit in the coming years. The board of directors of Banco Santander intends to remunerate the Bank s shareholders with a charge to the 2015 profits through the payment of three cash dividends and a single application of the Santander Dividendo Elección program (scrip dividend scheme), in each case for a total amount of, approximately, five euro cents per share. This reorientation in the Bank s shareholder remuneration policy will not affect the remuneration that the Bank will execute with a charge to the 2014 profits, this is, the remuneration that corresponds to the third interim dividend with a charge to the 2014 profits (to be paid on January/February 2015) and to the additional dividend (to be paid on April/May 2015) of In particular, the Bank mantains that these two remuneration will be satisfied through the application of the Santander Dividendo Elección program (scrip dividend scheme) 6 and, in both cases, for an approximate total amount of fifteen euro cents per share. Finally, the combined buffer requirement set forth in section 43 of Law 10/2014 affects the Bank s capacity to remunerate its shareholders and investors in hybrid capital instruments that qualify as additional common equity tier 1 capital (e.g., the issuance of contingent convertible preferred securities of 2014), establishing in its Section 48 certain restrictions to the remuneration of shares and computable instruments for entities that do not comply with the combined buffer requirement. Even though the Bank complies with its applicable capital 6 In relation to the remuneration expected to be paid in April/May 2015, equivalent to the traditional additional dividend, the board of directors of Banco Santander maintains its intention to propose the corresponding capital increase to the Bank s ordinary general shareholders meeting.

20 requirements, the reinforcement of shareholders funds will grant the bank a more extended compliance margin to remunerate its shareholders. (B) Suitability of the execution of a share capital increase through an accelerated private placement of the shares The chosen procedure to bring the fund raising transaction into effect (accelerated book-building) is not only suitable to achieve the desired goal but also convenient from a corporate interest perspective. In line with the current market practice and the advice that this board of directors has received from the Advisory Bank, this technique is the only one that enables the raise of shareholders funds in the described terms and in a short period of time while reducing the volatility risk inherent to the markets. It is worth mentioning that this kind of operation is normally used by the largest capital issuers in the international financial markets and has already been used by several Spanish listed companies (including the Bank itself in 2001) due to its flexibility, efficiency and speed. On the one hand, the procedure will be carried out according to the practices and usages that are common in this type of operations and, in particular, according to the Criterios de la Comisión Nacional del Mercado de Valores sobre operaciones de colocación o compra de grandes paquetes accionariales, aprobados por su Consejo el 19 de diciembre de 2007, approved by the Spanish National Securities Market Commission s ( CNMV ) Council in December, 19, On the other hand, capital increase operations carried out by means of an accelerated book-building with a firm underwriting commitment like the one hereby detailed, grant Banco Santander certainty, from the very moment of their launch, about the minimum level of funds that will be raised after the process of book-building. In order to further assess in detail the suitability of the intended operation, it is important to stress the main advantages of the proposed structure versus other alternatives that could be raised and that have already been examined on the basis of the advice received from the Advisory Bank. The board of directors considers that these advantages can be divided into five main groups: (i) speed in the

21 implementation; (ii) lower exposure to market volatility; (iii) opportunity to increase the shareholder base of the Bank; (iv) cost savings and (v) possible lower discount. (i) Speed in the implementation: Any alternative strategy to the one here being proposed will considerably delay the fundraising process. Actually, the only alternatives that could allow at the same time both the fundraising and an increase in the level of equity of the Bank would be a share capital increase by way of monetary contributions with preemptive subscriptions rights or a share capital increase, also with monetary contributions, but excluding the preemptive rights to launch a public offering of shares addressed to the market as a whole. Any of these options would entail a considerable delay in the process of raising the necessary funds that, in addition, would expose the operation to market volatility. That way, in the case of an offer with preemptive subscription rights, these need to be exercised within a legal timeframe that cannot be shorter than fifteen days since the publishing of the subscription offer announcement in the Boletín Oficial del Registro Mercantil and, in the case of a public offering for the subscription of shares with retail participation, a minimum timeframe close to two weeks from the announcement until the issue price determination is required. In addition, in both cases it is compulsory to prepare and file with the CNMV, a securities note and a summary that, together with the valid Bank s registry document, will configure the relevant prospectus for the operation and, when appropriate, to be used as the equivalent documents that allow the extension of the share capital increase with preemptive rights or the public offering to other jurisdictions, as it is the case in the United States, taking this process several weeks. These timeframes differ from those required to complete the subscription and the payment of the shares in the terms that are being proposed herein (accelerated book-building) and that limit the length of the operation to two business days. Ultimately, neither an issuance with preemptive subscriptions rights nor a public offering of shares excluding these rights are capable of being implemented with the - almost instant and the flexibility in terms of its launching (since the

22 proposed operation does not require a prior filing of a prospectus with the CNMV) that an accelerated private book-building placement grants. The accelerated book-building placement allows the Bank to implement the operation in the best available conditions. (ii) Lower exposure to market volatility: It is also worth reminding that in the last months markets in general and particularly the banking sector have experimented a certain degree of volatility as it is evidenced by the fact that: (a) the variation percentage between the maximum and the minimum quotation price of the index IBEX 35 within the last 12 months and until December 26 reached 15.7% (10.1% in the last month); and (b) the volatility index most commonly referred by the global equity markets (the VIX index) has experimented a remarkable rise in the last 12 months, going from 10.3% to the current 15.9%. This is only the reflection of the macroeconomic situation (characterized by the political turmoil in Greece, the plummeting in the oil prices that have notably impacted certain economies, such as for example the Russian) and of the situation and expectations being raised by the monetary policy in Europe and in the United States. All of this has had as a consequence that equity investors have adopted a more cautious stance when compared to the previous months. Pursuant to the advice that this board of directors has received from the Advisory Bank, this volatility discourages, as a general rule, an equity raise when it exposes the Bank to a negative evolution of its shares quotation price for a long period of time. I n this regard, it is important to point out that, should an issuance of shares with preemptive subscription rights be adopted, the price of the new shares would need to be determined at the beginning of the process thus exposing the Bank to the market evolution during the negotiation period of these rights. As a result, as it will be indicated below, this entails a significant discount with respect to the share s quotation price in order to ensure the success of the operation and enable its underwriting. In the case of a public offering, again the lengthy process of the offer to the investors involves the assumption of a market risk that, depending on its evolution, could prevent the Bank from raising the necessary funds to achieve the abovementioned

23 goals, while taking into account that this kind of operations are not usually guaranteed until the conclusion of the public offering period Consequently, neither an issuance of shares with preemptive subscription rights nor a public offering excluding these rights would respond to the needs of Banco Santander taking into consideration the the financial markets inherent volatility risk and the time required to implement any of the alternatives. (iii) Shareholder base increase: It is worth stressing that the proposed share capital increase constitutes an opportunity to expand the universe of qualified investors interested in participating in the Bank s shareholder base. The participation of qualified investors in the operation evidences their trust in Banco Santander and in its future business prospects, showing their support to the Bank. In addition, the book-building process will allow the participation in the process of allotment of shares with the objective of creating a shareholder base that is aligned with the Bank s interests, not speculative and with a long-term permanence vocation that is estimated to contribute to the positive evolution in the price of its share. (iv) Cost savings: It is also worth highlighting that the costs of an accelerated bookbuilding operation are substantially lower than those associated with a share capital increase with preemptive subscription rights or with a public offering aimed at the market as a whole, with reduced investment bank fees (especially, the ones derived from their firm underwriting commitment, since the risk to be assumed is lower than in capital increases with preemptive rights or in public offerings, where the periods of time devoted to placement among investors and to the implementation of the operations are way longer), legal fees (due to the lower complexity in the documentation that needs to be prepared) and no need for advertising or commercialization expenses (since no roadshows are required). Additionally, the speed of this procedure sensibly reduces the administration expenses associated to any capital increase. (v) Possible lower discount with respect to the quotation price: the issue price of the new shares under an accelerated book-building procedure normally represents a lower discount with respect to the shares quotation price in that moment since it

24 avoids the market risk that a capital increase with preemptive rights entails, as the latter requires a timeframe of approximately 4 weeks since its announcement until its closing (assuming the filing of the relevant securities note is made promptly after the announcement of the operation), whereas the accelerated capital increase only entails a maximum of two business days from subscription until disbursement. That way, the Minimum Issue Price (that, as explained above, represents the maximum discount with respect to the quotation Price at which the new shares will be issued) involves a discount of 10% - figure that is in line with the minimum issue price for this kind of operations both in Spain and on an international level - whereas the capital increase with preemptive rights carried out by the Bank in 2008 for a similar amount had a discount of 46% on the price of its shares on the business date immediately preceding the announcement of the operation. Furthermore, according to the data provided by the Advisory Bank, the range of discounts applied in share capital increases with preemptive subscription rights carried out by European banks in the last 3 years positioned itself between 40% and 96% on the price of their shares on the business date immediately preceding the announcement of the operation. (C) Proportionality of the exclusion of the preemptive subscription rights Lastly, the exclusion amply complies with the due proportionality that must exist between the advantages obtained for the company and the possible inconveniences that might be caused to those shareholders whose expectations are reduced because of the political dilution that any increase without rights necessarily entails. This is more than justified by the benefits derived for the Bank that are described in the preceding section. In any event, it is worth noting that any inconvenience for the individual position of the shareholders that could potentially arise would be practically irrelevant. On the one hand, the ownership structure of the Bank, characterized by a low concentration of capital, determines that the exclusion will not disturb or alter the strategic position of any shareholder or group of shareholders. On the other hand,

25 economic dilution has also been eradicated, as it explained below, given the fact that the new shares will be issued at their fair value. In view of all of the foregoing, Banco Santander s board of directors is of the opinion that the capital increase covered by this report is more than justified from a corporate interest perspective. Therefore, and given that the structure and characteristics of the proposed transaction make it impossible to maintain shareholders preemptive rights, the exclusion of such preemptive rights is proposed in the capital increase covered by this report, in the belief, as stated and substantiated above, that it is so required by the corporate interest of the Bank. 3.2 Issuance at fair value Section of the Spanish Companies Law requires, in order for the board of directors to effect a capital increase excluding pre-emptive rights, that the par value of the shares to be issued plus the issue premium, if any, be equal to the fair value that results from the report of an auditor, other than the auditor of the Company s financial statements, appointed for such purpose by the Commercial Registry. Such report, together with this report, must be made available to the shareholders and disseminated at the first general shareholders meeting to be held following the adoption of the resolution providing for the capital increase. Furthermore, Section 2 of article 504 of the Spanish Companies Law states that, in the case of listed companies (such as the Bank), the fair value will be considered to be the market value and that, unless otherwise justified, there is a presumption that the market value is the one referenced in the quotation price. In compliance with such provision, it is proposed to issue the new shares at an issue price per share which shall be the price that results from the Accelerated Book-building to be carried out within the framework of the accelerated private placement by the Investment Banks of the new shares to be issued as a result of the capital increase covered by this report. The board of directors considers that the fair value corresponds to the one resulting from the book-building process described that the investment banks will implement. The reason is that the process allows to measure the strength of the demand in the most qualified sector of investors (capable of swiftly evaluating the offer and determining the value and price that they are willing to pay to acquire the shares) and, as a result, it expresses adequately and reliably

26 what the market is willing to pay for Banco Santander s shares. The issue price par value plus issue premium that is being proposed corresponds to, and is therefore compliant with part 4 of Section 506 of the Companies Law in fine, the fair value of the Bank s shares. However, as an additional caution and without prejudice to the foregoing paragraph, the board s proposal establishes a Minimum Issue Price that ensures that the resulting issue price will substantially correspond to its fair value. More specifically, the Minimum Issue Price will be 5.98 euros per share and the minimum issue premium 5.48 euros per share. Additionally, it is worth noting that this discount is aligned with the ones applied by other Spanish and international companies in order to assess the minimum issue price, and in certain cases the effective issue price, in similar operations. For instance, according to available public information on capital increases through accelerated book-building placements in Spain, some of the discount percentages (on the closing quotation price of the day preceding the increase or on some other average quotation price) used to determine the minimum issue price were the following: 9.5% (Banco Sabadell, January 2011), 12% (Banco Popular, September 2009), 8.89% - deducting also the additional dividends paid- (Iberdrola, June 2009), 11.13% (Iberdrola, June 2007), 7.3% (BBVA, November 2006). Furthermore, according to the information provided by the Advisory Bank, some data regarding actual discounts in operations carried out in Europe by way of the procedure that the Bank wishes to use are the following: 9.4% (KBC Group Belgian insurer and banking institution in 2012), 10.3% (Danske Bank Danish banking institution in 2012), 14.3% (RWE German entity in the energy sector in 2011), 6.9% (UBS Swiss banking institution in 2009). On the other hand, it must be noted that the volume of shares offered in all these operations (that, as described, present a discount coherent with the proposed Minimum Issue Price) was inferior to the volume expected to be placed under the capital increase described herein. In fact, according to information provided by the Advisory Bank, the largest capital increase operations carried out these last years in Europe through an accelerated book-building placement like the one described herein for Banco Santander were those of Iberdrola in 2007 (for an effective amount of 3,375 million euros), UBS (for an effective amount of 2,500 million euros), RWE (for an effective amount of 2,000 euros) mentioned before as well as

27 the one executed by Deutsche Bank in 2013 (for an effective amount of 2,960 million euros). As shown, all of the above represent less than half of the amount that Banco Santander aims to raise through the capital increase described herein. This is relevant because the greater the amount of fundraising sought the more difficult it is that the demand for shares generated in such a short period of time fully subscribes the offer of the new shares thus minimizing the effect on the price that the expansive shift of the demand curve produces. This, in turn, determines that, in order to place all the offered shares, a price (in this case the issue price) must be fixed and such price must necessarily be inferior to the quotation price of the shares before the offer. Accordingly, the proposed discount is entirely justified from the perspective of the economic theory of supply and demand that regulates the functioning of the capital markets 7. In addition, the Minimum Issue Price constitutes a discount on the quotation price of the share consistent with the one determined by application of the VaR (value at risk) methodology, commonly used in this kind of operations, that measures the exposure to the risks of a portfolio or an specific position showing the maximum expected loss with a certain confidence level and time frame. The application of this methodology determines that the aforementioned discount is within the range of variations that, attending to the latest available data, are reasonably expected to apply to Banco Santader s shares and that it measures the average volatility to which the share is exposed in the maximum period that would go from the capital increase announcement until all the actions to implement it are taken (that has been estimated, according to the recommendations of the Advisory Bank, in a period of two business days). That way, if we analyze the average variation of the closing quotation price of Banco Santander s share during two consecutive business days within a period of 6 years (since 7 January 2009 to 7 January 2015) we obtain a VaR of 9.4% for a confidence level (in statistical terms) of 99%, value that is coherent with the discount percentage applied on the 7 According to this theory, a share s price i.e., its quoting price is determined by the point where supply and demand meet and it represents the price at which the market participants are willing to buy and sell a nonsignificant amount of shares of an entity. Consequently, the placement of a significant package of shares (like the one that is intended to be issued by way of the share capital increase hereby) entails that the supply of shares in the market is going to be way greater than the one existing before the placement (i.e., a shift in the supply curve). In other words, the natural trend of the market is that the greater the increase, both in absolute and relative terms in comparison with the average daily trading volume of the security, the bigger the pressure towards a reduction on the share s price and, therefore, the greater the discount that will result from an accelerated placement.

28 closing quoted price of the Bank s share in the Automated Quotation System (Mercado Continuo) of the Spanish Stock Exchanges on yesterday s date, to obtain the Minimum Issue Price. The reason for can be found, in accordance with the advice received from the Advisory Bank, in the elevated volume of the capital increase both in absolute terms as in relative terms when compared to the daily average trading volume of Banco Santander s shares that justify a superior discount percentage even to the discount that may result from the strict application of the VaR method. Finally, the maximum downward variation experienced by Banco Santander s share during two days has also been taken into account, taking as a reference the same time horizon as the one used to calculate the VaR (i.e., 6 years), in order to have a historic reference on the potential market risk during the period of implementation of the share capital increase. Such maximum variation was 12.4% that, like the VaR methodology, is coherent with the discount applied to obtain the Minimum Issue Price. In any case, as it has been indicated at the beginning of this paragraph 3.2., in accordance with the provisions contained in Section in connection with Section a) of the Companies Law, the issue price of the shares needs to correspond to the fair value that results from the auditor s report on the financial statements, so Ernst & Young, S.L., as auditor other than the Bank s auditor appointed for such purpose by the Commercial Registry of Cantabria, will issue prior to the adoption of the resolution on the issuance of the new shares, the relevant report regarding the fair value of the Bank s shares, the underlying value of the preemptive rights whose exercise is intended to be excluded and the reasonableness of the information contained in this report. Pursuant to Section of the Companies Law, the report, together with the report hereby, will be made available to the shareholders and disclosed at the first general shareholders meeting of the Bank that is held following the approval of the capital increase resolution covered by this report. 4. AUTHORISATION OF THE SHAREHOLDERS AT THE GENERAL SHAREHOLDERS MEETING In consideration of all the foregoing, the board of directors resolves to increase the share capital by making use of the delegation of powers approved at the general shareholders

29 meeting held on March, , under item nine of the agenda, and as permitted by Sections b) and 506 of the Companies Law, that reads as follows: I) To deprive of any and all effect, to the extent of the unused amount, the authorization granted by the shareholders by means of resolution Ten II).at the general shareholders meeting of March, II) To re-authorise the Board of Directors, as broadly under the Law as may be necessary, so that, in accordance with the provisions of Section b) of the Companies Law, it may increase share capital on one or more occasions and at any time, within a period of three years from the date of this meeting, in the maximum amount of 2,890,266, euros by means of the issuance of new shares with or without a premium and with or without voting rights, with the consideration for such new shares consisting of cash contributions, and with the power to set the terms and conditions of the capital increase and the characteristics of the shares, as well as to freely offer the unsubscribed new shares within the pre-emptive subscription period or periods, to establish that, in the case of an incomplete subscription, the capital shall be increased only by the amount of subscriptions made, and to amend the article of the bylaws regarding share capital. The amount of capital increases, if any, made to accommodate the conversion of debentures under the provisions of the resolution adopted by the shareholders at this ordinary General Shareholders Meeting under item Ten A of the agenda or pursuant to any other resolution adopted in this connection by the shareholders at the general meeting shall be deemed to be included within the limit of the aforementioned maximum amount available at any time. Furthermore, the Board is authorised to totally or partially exclude pre-emptive rights upon the terms of Section 506 of the Companies Law; however, this power will be limited to capital increases that are carried out pursuant to the present authorization and up to 1,156,106, euros The Board of Directors is also authorised to delegate to the Executive Committee the delegable powers granted by virtue of this resolution. The Bank s board of directors notes that as of the date hereof it has used the abovementioned delegation on two occasions; pursuant to the May and September 2014 issuances of contingent convertible preferred securities into the Bank s shares (adopted by the board or, by delegation, by the executive committee, in the use of the delegation approved by the general

30 shareholders meeting held on March, , under item Eleven A of the agenda), where share capital increases of up to 264,099,622 euros with exclusion of preemptive rights were approved. Therefore, regarding the aforementioned 2,890,266, euros threshold established for capital increases, the board (or, the executive committee) still has a margin of 2,626,167, euros to increase capital. In addition, regarding the 1,156,106, euros threshold established for the total or partial exclusion of pre-emptive rights upon the terms of Section 506 of the Companies Law, the board (or, the executive committee) has the power to exclude the preemptive subscription rights in capital increases of up to 892,007, euros. 5. PROPOSED RESOLUTION TO INCREASE SHARE CAPITAL TO BE APPROVED BY THE BOARD OF DIRECTORS The full text of the proposed resolution providing for the increase in share capital to be adopted on the date hereof reads as follows: 1. Increase in share capital by means of monetary contributions Pursuant to the authorization granted under item nine of the Agenda for the ordinary general shareholders meeting held on March 28, 2014, it is hereby resolved to increase the share capital in the nominal amount of 629,220,732.5 euros, by means of the issuance and flotation of 1,258,441,465 ordinary shares with a par value of fifty euro cents (0.5 euros) each, of the same class and series as those currently outstanding and represented by book-entries. The shares are issued at their par value of fifty euro cents (0.5 euros) plus an issue premium, such as to result in the issue price set forth in section two of this resolution. The par value and the issue premium of the new shares to be issued by Banco Santander, S.A. (hereinafter Banco Santander or the Bank ) by way of implementation of this resolution shall be fully paid-up for by means of monetary contributions. Section of the Companies Law expressly provides for the possibility of incomplete subscription of the share capital increase.

31 2. Issue price The issue price of the new shares to be issued will be the price that results from the private placement of the shares of Banco Santander among qualified and institutional investors to be conducted by the investment banks appointed by the Bank for such purpose. In any case, the minimum issue price (including the par value and the issue premium) will be 5.98 euros per share, which equals a discount of 10% on the closing quoted price of the Bank s share in the Automated Quotation System (Mercado Continuo) of the Spanish Stock Exchanges on yesterday s date, rounded up until a whole number figure for the cents of euro is obtained. Accordingly, the report issued by Ernst & Young, in its capacity as auditor other than the auditor of Banco Santander appointed by the Commercial Registry of Cantabria, regarding the fair value of the Bank s shares, the underlying value of the pre-emptive rights whose exercise is excluded, and the reasonableness of the information contained in the report issued by the board of directors in connection with the present resolution, has been made available to the board of directors of the Bank. Both the cited report and the report issued by the Bank s directors pursuant to Sections 308 and 506 of the Companies Law will be made available to the shareholders and disclosed in the first general shareholders meeting that takes place after the adoption of the present resolution. For the purposes of Section 299 of the Companies Law, it is noted that the outstanding shares of Banco Santander existing prior to the capital increase are fully paid-in. 3. Exclusion of pre-emptive rights In the exercise of the powers expressly granted by the shareholders at the general shareholders meeting and pursuant to the provisions of Section 506 of the Companies Law, considering the requirements imposed by the corporate interest and in order to allow the new shares to be subscribed by all or some of the investment banks that will ensure the capital increase (acting in the name and on behalf of the qualified and institutional investors among which the new shares are placed with a view to the subsequent transfer thereof to such investors and, if appropriate, by way of fulfillment of their underwriting commitment), the pre-emptive rights of the shareholders are entirely excluded.

32 4. Representation of the new shares The new shares shall be represented in book-entry form, the registry for such shares being in the care of Sociedad de Gestión de los Sistemas de Registro, Compensación y Liquidación de Valores, S.A.U. (Iberclear) and its participating entities. 5. Rights carried by the new shares The new shares shall grant their holders the same financial, voting and related rights as the ordinary shares of Banco Santander, S.A. currently outstanding as from the date that the increase is declared to have been subscribed and paid-up. In particular, the acquirers of the new shares will have the right to participate in those Santander Dividendo Elección programs whose record date is subsequent to the implementation and closing of the increase hereof. The acquirers shall also be entitled to receive both the ordinary and additional dividends that are paid by the Bank as of that date. 6. Subscription and payment The share capital increase will be addressed, by means of an accelerated private placement, exclusively to those persons that are considered qualified investors, that is (i) in Spain, those specified in Section 39 of the Royal-Decree 1310/2005, of November, 4, which partially develops Law 24/1988, of July, 28, on the Securities Market, on matters relating to admission to trading of securities on official secondary markets, public offerings and the necessary offering prospectus (hereinafter, the Royal-Decree 1310/2005 and the Securities Market Act ); (ii) in the rest of the EU member States, those specified in Directive 2003/71/CE of November, , as modified and transposed into their internal legal systems, and (iii) in non-eu countries, those which have the condition of qualified investors or an equivalent category according to the applicable law in each jurisdiction and by virtue of which the share capital increase does not require any filing or approval before the relevant authorities. The accelerated book-building for the new shares will be coordinated by one or more investment banks that will execute a placing and underwriting agreement with Banco Santander.

33 The subscription and payment of the total price of the new shares will occur after its placement among qualified and institutional investors and it may be made by the investment banks acting in the name and on behalf of the investors to subsequently transfer the shares to them or, when appropriate, by the referred banks in their own name and behalf in the exercise of their firm commitment. 7. Implementation of the increase The board of directors, or the executive committee by delegation therefrom, shall declare the increase to be subscribed for and paid-up, in whole or in part and, therefore, closed, and shall amend the text of article 5 of the bylaws in order to conform it to the new amount of share capital and to the number of resulting shares. For the purposes of Section 167 of the Regulation on the Commercial Registry, the board of directors or the executive committee shall also state the amount effectively used in respect of the maximum amount established in the authorization to increase share capital granted by the shareholders at the general shareholders meeting, as well as the amount remaining to be used. 8. Admission to listing of the new shares It is resolved to apply for the listing of the new shares on the Madrid, Barcelona, Bilbao and Valencia Stock Exchanges through Spain s Automated Quotation System (Continuous Market), as well as to take the steps and actions that may be necessary and file the required documents with the relevant authorities of the foreign Stock Exchanges on which the shares of Banco Santander are traded in order for the new shares issued under this capital increase to be admitted to trading, expressly stating Banco Santander s submission to such rules as may now be in force or hereafter be issued on stock exchange matters and, especially, on trading, continued listing and delisting. Currently, the Bank s shares are traded in Lisbon, London, Milan, Buenos Aires, Mexico and Warsaw and through ADSs (American Depositary Shares), the New York Stock Exchange, and through BDRs (Brazilian Depositary Receipts), the São Paulo Stock Exchange). It is expressly stated for the record that, if the delisting of the Banco Santander shares is subsequently requested, the delisting resolution will be adopted with the same formalities that may be applicable and, in such event, the interests of shareholders opposing or not voting on

34 the delisting resolution will be safeguarded in compliance with the requirements established in the Spanish Companies Law and related provisions, all in accordance with the provisions of Securities Market Act and its implementing provisions in force at any time. 9. Delegation for purposes of the implementation and formalization of the preceding resolutions Without prejudice to any other existing power of attorney, it is hereby resolved to authorize the executive committee, with powers for substitution, as well as Dª. Ana Patricia Botín-Sanz de Sautuola y O Shea and D. José Antonio Álvarez Álvarez, so that any of them, acting severally, may perform all acts and execute all public and private documents that may be required or appropriate in connection with the preceding resolutions, with express authority to make corrections, until the capital increase hereby approved is fully registered with the Commercial Registry, including, if applicable, the power to apply for partial registration, and admission to trading of the new shares and, specifically including but not limited: (a) (b) (c) to decide the date on which this increase, as well as the accelerated offer of the shares issued hereunder, is to be carried out (taking into account that such date may under no circumstances be later than February 3, 2015; at any time prior to payment by the investment banks of the amounts corresponding to the actual aggregate amount of the new shares (including par value and issue premium), to cancel the capital increase and, thus, the accelerated book-building for the new shares, in the event of a material change in market conditions or because of any other reason that is relevant in their opinion; to set all terms and conditions for the increase that have not been established in this resolution and in accordance with the terms and conditions hereof and, specifically, to determine the amount of the issue premium and, thus, the issue price of the new shares and determine the number of shares effectively offered for subscription. This number of shares may be reduced with respect to the number established in paragraph 1 of this resolution taking into account, among other circumstances, the issue price of the new shares;

35 (d) to declare the capital increase to be closed upon expiration of the subscription period and once the new shares have been paid for, and to execute all such public and private documents as may be appropriate for the implementation of all or part of the capital increase; and Furthermore, Dª. Ana Patricia Botín-Sanz de Sautuola y O Shea, D. José Antonio Álvarez Álvarez, D. Ignacio Benjumea Cabeza de Vaca, D. José Luis de Mora Gil-Gallardo, D. José Manuel de Araluce Larraz, D. Adolfo Díaz-Ambrona Moreno, D. Francisco Javier Illescas Fernández-Bermejo, D. José Galiana Guiu and D. Alberto Ortega Fernández, are authorized, so that any of them, acting severally, in the name and on behalf of Banco Santander, can: (i) (ii) (iii) (iv) (v) (vi) sign the contractual documents relating to the accelerated book-building including, without limitation, the Underwriting Agreement and the Pricing Agreement, as well as any other document he deems appropriate in connection with such procedure; select the investment banks and financial advisors of his choice to carry out the accelerated book-building; appoint the agent bank that is to participate in the capital increase covered by this resolution and sign with such entity the documents and agreements that may be required for such purpose; accept, reject or modify, in whole or in part, the allocation proposal made by the investment banks upon completion of the accelerated book-building in the shares, all subject to the standards established in the report prepared on the date hereof by the board of directors in connection with the increase in share capital approved hereby; carry out all such acts as may be necessary or appropriate in any jurisdiction where application is made for admission to listing of the shares of Banco Santander; and carry out all acts, submit all requests, sign all documents and take all steps that may be required to ensure the full effectiveness of and compliance with the capital increase, and also, without prejudice to any other existing power of attorney, to convert the corporate resolutions into public instruments, for which purpose any of the aforementioned attorneys-in-fact may appear before a Notary and execute the respective notarial instrument of capital increase and amendment of Article 5 of the

36 Bylaws of Banco Santander and, if applicable, correct and clarify this resolution to the extent required to obtain the complete registration hereof with the Commercial Registry. Finally, the board of directors of Banco Santander ratifies any and all actions taken prior to the adoption of this resolution with regards to the share capital increase herein. * * * January 8, 2015

37 ANNEX II Certificate of the Governing Body of the Madrid Stock Exchange (Sociedad Rectora de la Bolsa de Valores de Madrid)

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