BANCO MARE NOSTRUM, S.A. AND SUBSIDIARIES (BMN Group)

Transcription

1 BANCO MARE NOSTRUM, S.A. AND SUBSIDIARIES (BMN Group) Limited review Report on Financial Statements Condensed Consolidated Interim, Condensed Consolidated Interim Financial Statements and Interim Directors' Report for the six-month period ended 30 June 2016, together with Auditor s report Translation of a report originally issued in Spanish based on our work performed in accordance with the audit regulations in force in Spain and of interim condensed consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Notes 1 and 20). In the event of a discrepancy, the Spanish-language version prevails.

2 This version of our report is a free translation of the original, which was prepared in Spanish. All possible care has been taken to ensure that the translation is in an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes precedence over this translation. REPORT ON LIMITED REVIEW OF CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS To the shareholders of Banco Mare Nostrum, S.A. at the request of Management: Report on the Condensed Interim Consolidated Financial Statements Introduction We have performed a limited review of the accompanying condensed interim consolidated financial statements (hereinafter, the interim financial statements) of Banco Mare Nostrum, S.A (hereinafter, the parent company ) and its subsidiaries (hereinafter, the group ), which comprise the statement of financial position as at June 30, 2016, and the income statement, statement of other comprehensive income, statement of changes in equity, cash flow statement and related notes, all condensed and consolidated, for the six months period then ended. The parent company s directors are responsible for the preparation of these interim financial statements in accordance with the requirements of International Accounting Standard (IAS) 34, Interim Financial Reporting, as adopted by the European Union, for the preparation of condensed interim financial information, as provided in Article 12 of Royal Decree 1362/2007. Our responsibility is to express a conclusion on these interim financial statements based on our limited review. Scope of Review We conducted our limited review in accordance with International Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity. A limited review of interim financial statements consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A limited review is substantially less in scope than an audit conducted in accordance with legislation governing the audit practice in Spain and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion on these interim financial statements.

3 Conclusion Based on our limited review, that cannot be considered as an audit, nothing has come to our attention that causes us to believe that the accompanying interim financial statements for the six months period ended June 30, 2016 have not been prepared, in all material respects, in accordance with the requirements of International Accounting Standard (IAS) 34, Interim Financial Reporting, as adopted by the European Union, for the preparation of condensed interim financial statements, as provided in Article 12 of Royal Decree 1362/2007. Emphasis of Matter We draw attention to Note 1.2, in which it is mentioned that these interim financial statements do not include all the information required of complete consolidated financial statements prepared in accordance with International Financial Reporting Standards, as adopted by the European Union, therefore the accompanying interim financial statements should be read together with the consolidated annual accounts of the group for the year ended December 31, This matter does not modify our conclusion. We draw attention to Note 1.3, in which it is mentioned the Plan of Reorganization and Recapitalization, approved by the Spanish Bank, the Fund for Orderly Bank Restructuring (FOBR), the European Commission and the Administrative Board of parent company, and the assumed commitments for the reorganization of the Group Banco Mare Nostrum, as well as the established ways of actions for the creation and fulfillment of the required own resources regarding the abovementioned commitments. This matter does not modify our conclusion. Report on Other Legal and Regulatory Requirements The accompanying interim consolidated directors Report for the six months period ended June 30, 2016 contains the explanations which the parent company s directors consider appropriate regarding the principal events of this period and their impact on the interim financial statements presented, of which it does not form part, as well as the information required under the provisions of Article 15 of Royal Decree 1362/2007. We have verified that the accounting information contained in this directors Report is in agreement with that of the interim financial statements for the six months period ended June 30, Our work is limited to checking the interim consolidated directors Report in accordance with the scope mentioned in this paragraph and does not include a review of information other than that obtained from Banco Mare Nostrum, S.A. and its subsidiaries accounting records.

4 Other Matter This report has been prepared at the request of Management in relation to the publication of the halfyearly financial report required by Article 119 of the Royal Legislative Decree 4/2015, of 23 October, approving the restated text on the Securities Market, developed by the Royal Decree 1362/2007, of 19 October. PricewaterhouseCoopers Auditores, S.L. Original in Spanish signed by Raúl Ara Navarro 29 July 2016

5 BMN Group Interim Condensed Consolidated Financial and Interim Directors Report for the six-month period ended 30 June 2016 Translation of a report originally issued in Spanish based on our work performed in accordance with the audit regulations in force in Spain and of interim condensed consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Notes 1 and 21). In the event of a discrepancy, the Spanishlanguage version prevails.

6 Banco Mare Nostrum, S.A. and subsidiaries Condensed consolidated balance sheets as at 30 June 2016 and 31 December 2015 ASSETS Note 30/06/ /12/2015 (*) Cash, cash balances at Central Banks and other demand deposits 601, ,487 Financial assets held for trading 8 66,689 70,495 Memorandum items, lent or delivered as guarantee with disposal or pledge rights - - Financial assets designated at fair value through profit or loss - - Memorandum items, lent or delivered as guarantee with disposal or pledge rights - - Available-for-sale financial assets 8 5,676,405 5,070,480 Memorandum items, lent or delivered as guarantee with disposal or pledge rights 2,636,360 2,103,577 Loans and receivables 8 28,998,326 29,812,982 Memorandum items, lent or delivered as guarantee with disposal or pledge rights 2,208,853 1,891,414 Held-to-maturity investments - - Memorandum items, lent or delivered as guarantee with disposal or pledge rights - - Derivatives Hedge accounting 199,623 81,872 Fair value changes of the hedged items in portfolio hedge of interest rate risk 53,676 32,597 Investments in subsidiaries, joint ventures and associates 100, ,891 Associated companies 54,539 73,287 Controlled companies 45,992 45,604 Reinsurance assets - - Tangible assets 10 1,229,833 1,161,130 Property, plant and equipment 639, ,942 For own-use 639, ,942 Leased out under an operating lease - - Investment property 590, ,188 Of which Leased out under an operating lease 347, ,499 Memorandum items: acquired in financial lease - - Intangible assets 124, ,100 Goodwill - - Other intangible assets 124, ,100 Tax assets 2,286,859 2,335,825 Current tax assets 39,889 84,337 Deferred tax assets 2,246,970 2,251,488 Other assets , ,770 Insurance contracts linked to pensions - - Inventories 129, ,010 Other 212, ,760 Non-current assets and disposal groups classified as held for sale 9 964, ,591 TOTAL ASSETS 40,643,875 40,794,220 (*) Presented for comparison purposes only (see Note 1.4). Notes 1 to 20 and Appendices I to III are an integral part of the condensed consolidated balance sheet at 30 June Translation of interim condensed consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Notes 1 and 21). In the event of a discrepancy, the Spanish-language version prevails.

7 Banco Mare Nostrum, S.A. and subsidiaries Condensed consolidated balance sheets as at 30 June 2016 and 31 December 2015 LIABILITIES Note 30/06/ /12/2015 (*) Financial liabilities held for trading 70,446 75,602 Financial liabilities designated at fair value through profit or loss - - Memorandum items: subordinated liabilities - - Financial liabilities measured at amortised cost 37,637,742 37,920,477 Memorandum items: subordinated liabilities - - Derivatives Hedge accounting 237, ,656 Fair value changes of the hedged items in portfolio hedge of interest rate risk - - Liabilities under insurance contract - - Provisions , ,763 Pensions and other post employment defined benefit obligations 18,994 18,824 Other long term employee benefits 26,576 31,172 Pending legal issues and tax litigation 34,377 34,762 Commitments and guarantees given 9,100 7,448 Other provisions 26,683 26,557 Tax liabilities 159, ,016 Current tax liabilities 5,588 3,966 Deferred tax liabilities 154, ,050 Other liabilities 144, ,954 Liabilities included in disposal groups classified as held for sale 1,013 1,329 TOTAL LIABILITIES 38,366,267 38,559,797 (*) Presented for comparison purposes only (see Note 1.4). Notes 1 to 20 and Appendices I to III are an integral part of the condensed consolidated balance sheet at 30 June Translation of interim condensed consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Notes 1 and 21). In the event of a discrepancy, the Spanish-language version prevails.

8 Banco Mare Nostrum, S.A. and subsidiaries Condensed consolidated balance sheets as at 30 June 2016 and 31 December 2015 EQUITY Note 30/06/ /12/2015 (*) Shareholder s equity 2,222,744 2,197,521 Capital 14 1,613,653 1,613,653 Paid up capital 1,613,653 1,613,653 Unpaid capital which has been called up - - Memorandum items: uncalled up capital - - Share premium - - Equity instruments issued other than capital - - Equity component of compound financial instruments - - Other equity instruments issued - - Other equity - - Accumulated retained - - Revaluation reserves - - Other reserves 580, ,473 (-) Own shares 3,143 2,933 Profit attributable to shareholders of the parent 31,753 64,328 (-) Interim dividends - - Accumulated other comprenhensive income 55,239 37,283 Items that will not be reclassified to profit or loss (28,630) (26,698) Actuarial gains or (-) losses on defined benefit pension plans (18,744) (18,744) Non-current assets and disposal groups classified as held for sale - - Share of the recognized income and expense of investments in subsidiaries, joint ventures and associates (9,886) (7,954) Other valuation adjustments - - Items that may be reclassified to profit or loss 83,869 63,981 Hedge of net investments in foreign operations (Effective portion) - - Foreign currency translation 1,845 2,179 Hedging derivatives. Cash flow hedges (Effective portion) 83,601 29,797 Available-for-sale financial assets (18,173) 15,046 Debt instruments 11,802 39,491 Equity instruments (29,975) (24,445) Non-current assets and disposal groups classified as held for sale - - Share of other recognized income and expense of investments in subsidiaries, joint ventures and associates 16,596 16,959 Minority interests (Non-controlling interests) (375) (381) Accumulated Other Comprehensive Income 2 2 Other ítems (377) (383) TOTAL EQUITY 2,277,608 2,234,423 TOTAL EQUITY AND LIABILITIES 40,643,875 40,794,220 MEMORANDUM ITEMS Contingent liabilities 8 664, ,294 Contingents commitments 8 1,106,609 1,047,445 (*) Presented for comparison purposes only (see Note 1.4). Notes 1 to 20 and Appendices I to III are an integral part of the condensed consolidated balance sheet at 30 June Translation of interim condensed consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Notes 1 and 21). In the event of a discrepancy, the Spanish-language version prevails.

9 Banco Mare Nostrum, S.A. and subsidiaries Condensed consolidated income statements for the six-month periods ended 30 June 2016 and 2015 Note 30/06/ /06/2015 (*) Interest income 327, ,236 Interest expense 128, ,503 NET INTEREST INCOME 199, ,733 Dividend income 3,185 9,761 Share of results of entities accounted for using the equity method (5,803) 3,285 Fee and commission income 116, ,805 Fee and commission expense 9,537 16,717 Gain or (-) losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net 92, ,101 Gain or (-) losses on financial assets and liabilities held for trading, net 1,404 27,439 Gain or (-) losses on financial assets and liabilities designated at fair value through profit or loss, net - - Gain or (-) losses from hedge accounting, net Exchange differences [gain or (-) loss], net 1,442 (975) Other operating income 18,365 12,771 Other operating expenses 30,678 8,796 Income from assets under insurance and reinsurance contracts - - Expenses from liabilities under insurance and reinsurance contracts - - TOTAL OPERATING INCOME 386, ,477 Administrative expenses 173, ,780 Staff expenses 129, ,884 Other administrative expenses 44,287 56,896 Depreciation 17,384 14,632 Provisions or (-) reversal of provisions 10,679 20,661 Impairment or (-) reversal of impairment on financial assets not measured at fair value through profit or loss 99, ,558 Financial assets measured at cost 413 4,411 Available-for-sale financial assets (135) 3,777 Loans and receivables 8 99, ,370 Held-to-maturity investments - - PROFIT FROM OPERATIONS 85, ,846 Impairment or (-) reversal of impairment of investments in subsidiaries, joint ventures and associates - - Impairment or (-) reversal of impairment on non-financial assets 15,312 17,972 Tangible assets 8,460 9,342 Intangible assets 1, Others 5,228 8,562 Gain or (-) losses on non financial assets and investments, net 1,247 (5,187) Negative goodwill recognized in profit or loss - - Profit or (-) loss from non-current assets and disposal groups classified as held for sale not qualifying as discounted operations (35,959) (43,440) PROFIT OR (-) LOSS BEFORE TAX FROM CONTINUING OPERATIONS 35,414 50,247 Tax expense or (-) income related to profit or loss from continuing operations (3,662) (8,192) PROFIT OR (-) LOSS AFTER TAX FROM CONTINUING OPERATIONS 31,752 42,055 Profit or (-) loss after tax from discontinued operations - - PROFIT OR (-) LOSS FOR THE YEAR 31,752 42,055 Attributable to minority interest [non-controlling interest] (1) 75 Attributable to owners of the parent 31,753 41,980 EARNINGS PER SHARE Basic Diluted (*) Presented for comparison purposes only (see Note 1.4). Notes 1 to 20 and Appendices I to III are an integral part of the condensed consolidated income statement for the six-month period ended 30 June Translation of interim condensed consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Notes 1 and 21). In the event of a discrepancy, the Spanish-language version prevails.

10 Banco Mare Nostrum, S.A. and subsidiaries Condensed consolidated statements of recognized income and expense for the six-month periods ended 30 June 2016 and /06/ /06/2015 (*) PROFIT OR LOSS FOR THE YEAR 31,752 42,055 OTHER COMPREHENSIVE INCOME 17,955 (224,707) Items that will not be reclassified to profit or loss - (8,999) Actuarial gains and losses on defined benefit pension plans - (12,855) Non-current assets disposal groups held for sale - - Share of other recognised income and expense of entities accounted for using the equity method - - Income tax relating to ítems that will not be reclassified - 3,856 Items that may be reclassified to profit or loss 17,955 (215,708) Hedges of net investments in foreign operations (Effective portion) - - Valuations gains or losses taken to equity - - Transferred to profit or loss - - Other reclassifications - - Foreign currency translation (477) 1,224 Translations gains or losses taken to equity (477) 1,224 Transferred to profit or loss - - Other reclassifications - - Cash flow hedges (Effective portion) 76,863 (2,393) Valuation gains or losses taken to equity 79,269 - Transferred to profit or loss (2,406) (2,393) Transferred to initial carrying amount of hedged items - - Other reclassifications - - Available-for-sale financial assets (36,882) (302,629) Valuation gains or losses taken to equity 47,929 (186,716) Transferred to profit or loss (84,811) (115,913) Other reclassifications - - Non-current assets and disposal groups held for sale - - Valuation gains or losses taken to equity - - Transferred to profit or loss - - Other reclassifications - - Share of other recognized income and expense of Investments in subsidiaries, joint ventures and associates (2,296) (3,050) Income tax relating to items that may be reclassified to profit or loss (19,253) 91,140 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 49,707 (182,652) Attributable to minority interest [Non-controlling interests] (1) 77 Attributable to owners of the parent 49,708 (182,729) (*) Presented for comparison purposes only (see Note 1.4). Notes 1 to 20 and Appendices I to III are an integral part of the condensed consolidated statement of recognized income and expense for the sixmonth period ended 30 June Translation of interim condensed consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Notes 1 and 21). In the event of a discrepancy, the Spanish-language version prevails.

11 Banco Mare Nostrum, S.A. and subsidiaries Condensed consolidated statement of changes in total equity for the six-month period ended 30 June 2016 Equity Minority interest Capital Share premium Other reserves (-) Own Equity instruments Parent result for the period Other comprehensive income accumulated Other comprehensive income accumulated Other items Total Opening balance at 01/01/16 (before restatement) 1,613, ,473 2,933 64,328 37,283 2 (383) 2,234,423 Effects of corrections of errors Effects of changes in accounting policies Opening balance at 01/01/16 (current period) 1,613, ,473 2,933 64,328 37,283 2 (383) 2,234,423 Total recognized income and expense ,753 17,955 - (1) 49,707 Other changes in equity - 58, (64,328) 1-7 (6,522) Issuance of ordinary shares Issuance of preference shares Issuance of other equity instruments Exercise or expiration of other equity instruments issued Conversion of debt to equity Capital reduction Dividends Purchase of treasury shares (210) Sale or cancellation of treasury shares Reclassification of financial instruments from equity to liability Reclassification of financial instruments from liability to equity Transfers among components of equity ,328 - (64,328) Equity increase or (-) decrease resulting from business combinations Share-based payment Other increase or (-) decrease in equity - - (6,320) (6,312) Closing balance at 30/06/16 1,613, ,481 3,143 31,753 55,239 2 (377) 2,277,608 Notes 1 to 20 and Appendices I to III are an integral part of the condensed consolidated statement of changes in total equity for the six-month period ended 30 June Translation of interim condensed consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Notes 1 and 21). In the event of a discrepancy, the Spanish-language version prevails.

12 Banco Mare Nostrum, S.A. and subsidiaries Condensed consolidated statement of changes in total equity for the six-month period ended 30 June 2015 (*) Equity Minority interest Capital Share premium Other reserves (-) Own Equity instruments Parent result for the period Other comprehensive income accumulated Other comprehensive income accumulated Other items Total Opening balance at 01/01/15 (before restatement) 1,613, ,624 (45,147) 2, , , ,456,479 Effects of corrections of errors Effects of changes in accounting policies Opening balance at 01/01/15 (current period) 1,613, ,624 (45,147) 2, , , ,456,479 Total recognized income and expense ,980 (224,709) 2 75 (182,652) Other changes in equity - (478,624) 577, (101,732) - - (575) (3,280) Issuance of ordinary shares Issuance of preference shares Issuance of other equity instruments Exercise or expiration of other equity instruments issued Conversion of debt to equity Capital reduction Dividends Purchase of treasury shares (131) Sale or cancellation of treasury shares Reclassification of financial instruments from equity to liability Reclassification of financial instruments from liability to equity Transfers among components of equity - (478,624) 580,356 - (101,732) Equity increase or (-) decrease resulting from business combinations Share-based payment Other increase or (-) decrease in equity - - (2,574) (575) (3,149) Closing balance at 30/06/15 1,613, ,635 2,655 41,980 85,318 2 (386) 2,270,547 (*) Presented for comparison purposes only (see Note 1.4). Translation of interim condensed consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Notes 1 and 21). In the event of a discrepancy, the Spanish-language version prevails.

13 Banco Mare Nostrum, S.A. and subsidiaries Condensed consolidated statements of cash flows for the six month periods ended 30 June 2016 and /06/ /06/2015 (*) A) CASH FLOWS FROM OPERATING ACTIVITIES 1,445,749 1,400, Consolidated profit for the period 31,752 42, Adjustments made to obtain the cash flows from the operating activities 221, ,817 Depreciation 17,284 14,632 Other adjustments 203, , Net increase/(decrease) in operating assets: 308, ,465 Financial assets held-for-trading 3,806 36,267 Financial assets designated at fair value through profit or loss - - Available-for-sale financial assets (219,611) (226,726) Loans and receivables 729, ,821 Other operating assets (205,053) (171,897) 4. Net increase/(decrease) in operating liabilities: 880, ,520 Financial liabilities held-for-trading (5,156) (36,955) Financial liabilities designated at fair value through profit or loss - - Financial liabilities at amortised cost 801,632 1,059,488 Other operating liabilities 84,250 (281,013) 5. Income tax recovered/(paid) 3,793 8,192 B) CASH FLOWS FROM INVESTING ACTIVITIES (387,553) (240,737) 6. Payments: (4,195,592) (1,996,188) Tangible assets (2,220) (4,189) Intangible assets (19,759) (12,684) Investments - - Subsidiaries and other business units - - Non-current assets held for sale and associated liabilities - - Held-to-maturity investments - - Other proceeds related to investing activities (4,173,613) (1,979,315) 7. Proceeds: 3,808,039 1,755,451 Tangible assets 2,268 65,264 Intangible assets - - Investments - 9,054 Subsidiaries and other business units - - Non-current assets and disposal groups classified as held for sale and liabilities included in disposal groups classified as held for sale 74,325 28,308 Held-to-maturity investments - - Other proceeds related to investing activities 3,731,446 1,652,825 C) CASH FLOW FROM FINANCING ACTIVITIES (1,081,457) (1,095,282) 8. Payments: (1,101,104) (1,400,765) Dividends - - Subordinated liabilities - - Redemption of own equity instruments - - Acquisition of own equity instruments (210) (131) Other payments related to financing activities (1,100,894) (1,400,634) 9. Proceeds: 19, ,483 Subordinated liabilities - - Issuance of own equity instruments - - Disposal of own equity instruments - - Other proceeds related to financing activities 19, ,483 D) EFFECT OF FOREIGN EXCHANGE RATE CHANGES - - E) NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (23,261) 64,030 F) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 455, ,795 G) CASH AND CASH EQUIVALENTS AT END OF PERIOD 431, ,825 COMPONENTS OF CASH AND CASH EQUIVALENTS AT END OF PERIOD Cash 175, ,411 Cash equivalents at central banks 256, ,414 Other financial assets - - Less - Bank overdrafts refundable on demand - - TOTAL CASH AND CASH EQUIVALENTS AT END OF PERIOD 431, ,825 In which: restricted cash - - (*) Presented for comparison purposes only (see Note 1.4). Notes 1 to 20 and Appendices I to III are an integral part of the condensed consolidated statement of cash flows for the six-month period ended 30 June 2016.Translation of interim condensed consolidated financial statements originally issued in Spanish and prepared in accordance with the regulatory financial reporting framework applicable to the Group (see Notes 1 and 21). In the event of a discrepancy, the Spanish-language version prevails.

14 Banco Mare Nostrum, S.A. and subsidiaries comprising the BMN Group Notes to the condensed consolidated interim financial statements for the period ended 30 June Introduction, basis of presentation of the condensed consolidated interim financial statements and other information 1.1 Introduction Banco Mare Nostrum, S.A. (the Bank or the Parent ) is a financial institution incorporated on 22 December 2010 in a public deed before Notary Antonio Morenés Giles, and is registered in the Mercantile Registry and in the Bank of Spain Credit Institutions Registry under code The Bank s registered office is located at Paseo de Recoletos no. 17, Madrid. The company bylaws may be consulted, together with other relevant legal information, at its registered office and its web page ( The bylaws establish the business activities in which the Bank may engage, which relate to the typical activities of credit institutions and, in particular, are adjusted pursuant to banking legislation operating in Spain. The Bank s corporate purpose consists of carrying out all manner of activities, operations and services that are characteristic of the banking business in general permitted under current legislation. As indicated in Note 5.13 of the Group's 2015 consolidated financial statements, as a result of the commitments made to the Spanish authorities and the European Commission in order to approve the Bank's Restructuring and Recapitalisation Plan, certain restrictions were established on the activities to be carried out by the Bank during the period of the aforementioned Plan. In addition to the activities carried out directly, the Bank is the head of an economic group of credit institutions (the Group or the BMN Group ); accordingly, the Bank, as Parent of the Group, is obliged to prepare, in addition to its own individual financial statements, the consolidated financial statements which include information on its subsidiaries, on investments in its associates and on interests in joint ventures. Therefore, based on applicable legislation, the Bank's directors have prepared these condensed consolidated interim financial statements applying the accounting policies and measurement bases indicated in Note 1.2. The Group's consolidated financial statements for 2015 were approved by the Bank's shareholders at the general meeting held on 16 March Notes 2 and 3 of the Group's 2015 consolidated annual accounts contain information about the Integration Agreement, the segregation of assets and liabilities from the Savings Banks to the Bank, the business combination completed by virtue of the mentioned Agreement and changes to the consolidation scope during Basis of presentation of the condensed consolidated interim financial statements In accordance with Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of 19 July 2002, all companies governed by the laws of a member state of the European Union and whose securities are traded on a regulated market in any European Union country must file consolidated financial in accordance with the International Financial Reporting Standards ( IFRS ) as adopted by the European Union. The Group s consolidated annual accounts for 2015 have been prepared by the Bank s Directors in accordance with the IFRS adopted by the European Community and taking into consideration the provisions of Bank of Spain Circular 4/2004 (22 December) credit institutions, public and reserved financial reporting standards and model financial statements, as well as subsequent amendments, which have developed and adapted the IFRS to the Spanish credit institution sector. Those accounts were prepared taking into account all the accounting principles and standards and mandatory measurement criteria that have a significant effect on the accounts such that they reflect a true and fair view of the Group s equity and financial position at 31 December 2015, the results of its operations and changes in equity and in cash flows that took place during Notes 6 and 5.12 of the notes to those consolidated annual accounts summarize the most significant accounting principles and policies, and the measurement criteria applied during their preparation, and present a synopsis of the main accounting legislation changes that took place in

15 These condensed consolidated interim financial statements have been prepared and presented in accordance with IAS 34 Interim Financial Reporting adopted by the European Union for the preparation of condensed interim financial statements, and with Article 12 of Royal Decree 1362/2007, of 19 October, and they take into account the disclosure breakdowns required by CNMV Circular 1/2008 of 30 January, and subsequent amendments. In accordance with IAS 34, the interim financial report is intended to provide an update on the latest consolidated financial statements prepared by the Group, focusing on new activities, events and circumstances that took place during the first half of the year and not duplicating information previously reported in the 2015 consolidated financial statements. Accordingly, in order to adequately understand the information included in these condensed consolidated interim financial statements, they must be read in conjunction with the Group's consolidated financial statements for New standards a) Standards and interpretations approved by the European Union applicable in the period The accounting policies used in preparing these condensed consolidated interim financial statements for the interim period ended 30 June 2016 are the same as those applied in preparing the consolidated financial statements for the year ended 31 December 2015, taking into account the standards and interpretations which entered into force in the first half of 2016 and which are indicated below: Amendments to IFRS 11 Recognition of the acquisition of an interest in a joint operation: requires that the relevant principles regarding the recognition of business combinations (IFRS 3) and other standard applied when recording the acquisition of an interest in a joint operation whose activity constitutes a business. Amendments to IAS 16 Property, plant and equipment and IAS 38 Intangible assets: clarification is provided as to when a depreciation or amortization method based on income may be appropriate. The use of methods based on income to calculate the depreciation of an asset are not considered to be appropriate. It also indicates that, in general, income does not constitute an adequate basis for measuring consumption of the financial benefits deriving from an intangible asset, this presumption may be refuted in certain limited circumstances. Amendments to IAS 1 Presentation of financial statements: encourages companies to apply professional judgement when determining what information must be disclosed in the financial statements, which items must be desegregated and which headings and additional sub-totals should be included in the financial position statement, the income statement and other comprehensive results for the period, as well as determining the place and order of presentation for the information disclosures. Annual improvements to IFRS, cycle. Minor amendments to IFRS 5 and 7; and IAS 19 and 34. The application of the mentioned standards has not had a significant impact on the condensed consolidated interim financial statements. b) Standards and interpretations issued by the IASB and that have yet to be adopted by the European Union IFRS 9 Financial instruments: the final version of IFRS 9, published on 24 July 2014 indicates the classification, measurement, impairment and hedge accounting phases for financial instruments in order to replace IAS 39. The Group is analysing the impact that this standard may have on its consolidated financial statements if adopted by the European Union. In particular this matter refers to the estimate of the provisions for insolvencies through the development of a method for calculating expected losses. At the date these condensed interim consolidated financial statements were prepared, a working plan supporting the implementation of this standard was in progress and therefore it is not possible to quantify the potential impact the application of the standard could have on the Group s consolidated annual accounts for Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosures of interests held in other entities, and IAS 28 Investments in associates and joint ventures: clarification is provided regarding accounting requirements for investment entities. 2

16 Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in associates and joint ventures: when selling or contributing assets to a joint venture or an associate, the scope of any recognized gain or loss depends on whether the assets or the dependent entity constitutes a business as defined by IFRS 3 on Business Combinations. IFRS 2 Classification and measurement of share-based payment transactions: clarification is provided as to the recognition of certain types of share-based payment transactions. IFRS 15 Revenue recognition: a group of requirements is included regarding the disclosures to be made with respect to the nature, amount, timing and uncertainty involving revenue and cash flows that arise from contracts with consumers. The clarifications provided for this IFRS are intended to reduce the cost and complexity of its implementation and to clarify the application of some of its principles. Amendments to IFRS 16 Leases: the dual accounting model is eliminated for lessees and a single accounting model is developed within the balance sheet, under which most leases should be recognized as a right-of-use asset and initially as a liability, except for leases of minor importance and those with a term of less than twelve months. Amendments to IAS 12 Income taxes. Recognition of deferred tax assets due to unrealized losses: the intention is to provide clarification of the requirements for recognizing deferred tax assets relating to unrealized losses on debt instruments measured at fair value. Amendments to IAS 7 Cash flow statements: they are intended to require certain information disclosures. The Group has the intention of adopting these standards and amendments, if they are ultimately applicable, after their approval by the European Union. It is currently analysing the related impact Accounting policies and measurement bases not applied All accounting principles and measurement bases with a significant effect on the condensed consolidated interim financial statements were applied. 1.3 Restructuring and Recapitalisation Plan As detailed in Note 5.13 to these 2015 consolidated financial statements, based on the terms of the Memorandum of Understanding, Law 9/2012, of 14 November, on the Restructuring and Termination of Credit Institutions, and their classification as a viable bank in the process of restructuring, the Group prepared a Restructuring and Recapitalisation Plan (the "Plan"), the purpose of which is to ensure the long-term viability of the Bank in the general framework of restructuring the Spanish banking system. The Plan was approved by the Bank of Spain, the Fund for Orderly Bank Restructuring (FROB) and the European Commission in December Taking into account the main points of the Memorandum of Understanding, the Plan sets out the Group's primary objectives for the coming years: the focus of its traditional businesses and areas, where it has significant regional franchises, the cleaning up of its balance sheet and a reduction of a significant portion of its real estate risks, and the strengthening of its equity, thereby defining itself as a viable credit institution, capable of repaying, with its own resources, the assistance received over the next five years. The primary obligations under the Plan included, among other measures, the transfer of assets to Sociedad de Gestión de Activos procedentes de la Reestructuración Bancaria S.A. (SAREB), the sale of the banking business of 462 branches and the hybrid instrument management plan. The main obligations that have been repaid or for which a significant amount has been repaid are detailed in Note The authorities are monitoring the Group's fulfilment of the Plan, the adoption of the necessary measures have been notified. Fulfilment of the main commitments of 2015 is completed and considerable progress has been made for commitments of 2016 and

17 1.4 Other disclosures a) Comparative information Bank of Spain Circular 5/2014 (28 November) was published on 23 December, which amends Circular 4/2004 (22 December), in order to adapt the content of the public financial information regarding credit institutions to the preparation, terminology, definition and format standards known as FINREP in European Union legislation. The latter statements are mandatory for consolidated financial reporting purposes and are prepared by either applying international financial reporting standards (adopted by virtue of Regulation (EU) No.1126/2008 of 3 November 2008, which adopts certain International Accounting Standards in accordance with Regulation (EU) No.1606/2002 of the European Parliament and of the Council) or the appropriate national accounting standards in accordance with Commission Implementing Regulation (EU) No. 680/2014 of 16 April, which establishes the technical execution standards relating to the reporting of information for supervisory purposes by credit institutions, in accordance with Regulation (EU) No. 575/2013 of 26 June of the European Parliament and of the Council. The model statements are based on the data point model developed by the European Banking Authority to model credit institution information for supervisory purposes. The National Stock Market Commission published Circular 5/2015 (28 October) on 19 November and it amends Circular 1/2008 (30 January) on periodic disclosures relating to issues of securities admitted for trading on regulated markets. These disclosures relate to half-yearly financial reports, interim management statements and, if appropriate, quarterly financial reports whose primary objective is to adapt the models established in Annex II of Circular 1/2008 (30 January) for credit institutions to the new models established by Bank of Spain Circular 5/2014 (28 November). It therefore must be taken into account that the model balance sheet, income statement, statement of recognized income and expense, statement of total changes in equity and the cash flow statement, all of which are consolidated, which are included for the purposes of comparison with these condensed interim consolidated financial statements, differ from those included in the condensed interim consolidated financial statements for the six-month period ended 30 June The information contained in these condensed consolidated interim financial statements relating to 31 December 2015 and to the six-month period ended 30 June 2015 is presented solely and exclusively for comparative purposes. b) Use of estimates The consolidated results and determination of consolidated equity are a product of the accounting policies and principles, measurement bases and estimates followed by the Bank s directors in the preparation of the condensed consolidated interim financial statements. The principal accounting policies and measurement bases applied are described in Note 6 to the 2015 consolidated financial statements. In the preparation of the Group s condensed consolidated interim financial statements estimates are used to measure certain assets, liabilities, revenues, expenses and commitments recognized therein. These estimates, made on the basis of the best information available, relate primarily to: The need to recognise provisions or consider certain obligations assumed by the Group to be contingent liabilities. The use of actuarial assumptions to estimate pension commitments and similar obligations. The useful lives of items of property, plant and equipment and intangible assets. The costs to sell and the fair value of non-current assets held for sale, property investments and inventory, based on their nature, state of use and the purpose for which they are intended, acquired by the Group as payment of debts. The recoverable value of the loans and receivables classified as doubtful or sub-prime. Corporate income tax expense and reversal period for the temporary differences for the purposes of their valuation and the recovery of the recognized tax assets. The fair value of certain unlisted securities. 4

18 Although the aforementioned estimates were made on the basis of the best information available on the events analysed at 30 June 2016 and at the date of authorisation for issue of these condensed consolidated interim financial statements, future events might make it necessary to significantly change these estimates in coming years. These changes would be applied prospectively, if necessary, in accordance with the relevant standards, recognising the effects of the change in estimates in the related consolidated income statements. c) Contingent assets and liabilities Notes 24 and 31 of the consolidated financial statements for the year ended 31 December 2015 provide information on contingent assets and liabilities at that date. Note 13 of these condensed consolidated interim financial statements gives additional information about contingent liabilities. At 30 June 2016 and at 31 December 2015, the Group had no contingent assets of a significant amount which should be disclosed in these condensed consolidated interim financial statements. d) Single Resolution Fund As is indicated in Note 5.8 of the notes to the consolidated annual accounts for 2015, the Single Resolution Fund commenced operations on 1 January 2016 and it is administered by the Single Resolution Board, which is also responsible for calculating the contribution that must be made by credit institutions and the investment service companies defined by Article 2 of Regulation (EU) No. 806/2014 of the European Parliament and of the Council of 15 July About 30 June 2016 the cost of the contribution to the Single Resolution Fund totals 14,249 thousand and it has been recognized under the heading Other operating expenses in the accompanying condensed consolidated income statement. e) Seasonality of the Group s operations Owing to the activities of the Group, its transactions are not considered to be highly cyclical or seasonal. Therefore, no specific disclosures are provided in these explanatory notes to the condensed consolidated interim financial statements for the six-month period ended 30 June f) Materiality In determining the information to be broken down in these explanatory notes on different items in the condensed consolidated interim financial statements or other matters, the Group, in accordance with IAS 34, has taken account of their materiality in relation to the condensed consolidated interim financial statements for the six-month period. g) Condensed consolidated statement of cash flows The following terms are used in the condensed consolidated statement of cash flows with the meanings specified: Cash flows: inflows and outflows of cash and cash equivalents. Operating activities: the principal revenue-producing activities of the Group, and other activities that are not investing or financing activities. Investing activities: the acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents. Financing activities: activities that result in changes in the size and composition of equity and borrowings that are not operating activities. The condensed consolidated cash flow statement has been prepared in accordance with the model established in Bank of Spain Circular 4/2004 and CNMV Circular 1/2008, as well as subsequent amendments. The Group estimates that there is no significant difference between interest paid and collected in the first half of 2016 and 2015 compared with the accrued amounts. For the purposes of preparing the condensed consolidated statement of cash flows, the net balances recognized under cash and cash equivalents at central banks set out in the heading Cash, cash balances at central banks and other sight deposits have been considered to be cash and cash equivalent components in the condensed consolidated balance sheet at 30 June

19 h) Events after the reporting period From 30 June 2016 until the date of authorisation for issue of these condensed consolidated interim financial statements, no other significant events have occurred. 2. BMN Group In the first half of 2016, the most significant changes have been the sale of the following companies classified as non-current assets available for sale as at 31 December 2015: On 25 February, the sale of the company Tineo Group, L.L.C., that was held 7.5% through the subsidiary Innostrum División Inmobiliaria, S.L., recording a profit of 2,210 thousand. In June the wholly owned companies Serincep, S.L. and Serveis Agrupats de Contact Center, S.L were liquidated, generating a loss of 386 thousand and 37 thousand, respectively. Note 3 to the 2015 consolidated annual accounts provides information on the most significant consolidation scope changes during 2015, while Appendices I, II and III provide relevant details on the consolidated Group entities and on those accounted for using the equity method at 31 December Dividends paid by the Bank and earnings per share a) Dividends paid by the Bank The Bank paid no dividends in the first six months of b) Earnings per share from continued and discontinued activities Basic earnings per share: calculated by dividing the net profit attributed to the Group by the weighted average number of shares, excluding the average number of treasury shares held in the year. Diluted earnings per share: calculated by adjusting the profit for the year attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, net of the number of treasury shares, for all dilutive effects inherent to potential ordinary shares (stock options, warrants and convertible debt). 30/06/ /06/2015 Earnings per share numerator Profit/(loss) attributed to the Parent (thousands of euros) 31,753 41,980 Adjusted profit/(loss) (thousands of euros) 31,753 41,980 Earnings per share denominator Weighted average number of shares 1,611,420,868 1,611,710,351 Basic and diluted earnings per share (euros) Related parties The Group considers related parties to be subsidiaries, associates and jointly controlled entities, as well as its "key management personnel" (members of the Board of Directors and senior executives), along with their close family members, and entities over which key management personnel have significant influence or control. The table below presents related party transactions carried out by the Group in the first six months of 2016 and 2015, distinguishing between significant shareholders, Board members and management, and other related parties. The terms of related-party transactions are equivalent to those made on an arm s-length basis. 6