Grupo Santander achieved healthy, geographically balanced and sustainable growth. Alfredo Sáenz Second Vice-Chairman and Chief Executive Officer

Grupo Santander achieved healthy, geographically balanced and sustainable growth. Alfredo Sáenz Second Vice-Chairman and Chief Executive Officer

Letter from the Chief Executive Officer Grupo Santander took further steps in 2005 to consolidate itself as one of the world's leading retail banks The Group's good results are based on significant growth in the most recurring revenues, strict cost control and excellent credit quality The total return in 2005 on Santander's shares, based on the rise in the share price and the dividend, was 26%, well above the 21% increase in the Spanish stock market. Only global banks with a strong investment banking component outperformed us, and this activity is much more volatile. We generated during 2005 EUR 14,800 million of value for shareholders. Grupo Santander's attributable income was 72.5% higher at EUR 6,220 million. Excluding net extraordinary capital gains, ordinary attributable income was EUR 5,212 million (+44.5%). This figure underscores Santander's strong capacity to generate recurring income and, for the first time, includes Abbey, which contributed EUR 811 million. Excluding Abbey, attributable income increased 22% to EUR 4,401 million. All these figures are the highest in the Group's history. Earnings per share rose 15% to EUR 0.8351 (+37% including capital gains). This growth was lower than that of ordinary attributable income because of the initial impact of dilution from the capital increase for the acquisition of Abbey. Nevertheless, our plan to generate value at Abbey is exceeding our own expectations and we believe the impact of the purchase will begin to be positive in 2007. 2005, a good year Grupo Santander took further steps in 2005 to consolidate itself among the world's leading retail banks. The most noteworthy features of the year were business expansion, the growth in ordinary attributable income, Abbey's integration and the strategic measures taken to enhance our future growth. There were three drivers behind ordinary attributable income. First, notable growth in the most recurring revenues, backed by stronger customer business in all countries. Growth was healthy, balanced among the regions and, above all, sustainable as it was based on the strength of our branch networks and on our capacity to innovate. Second, strict cost control, which enabled us to further improve the efficiency of the Group's main units. This improvement allows us to go on investing in developing our business capacity, particularly in Latin America. Third, the Group's excellent credit risk quality. The provisions assigned in 2005 were lower than in 2004 and we continued to improve our nonperforming loans (NPLs) ratio and our coverage. 9

As well as these achievements, we developed strategic actions to achieve further gains in efficiency and productivity and open up new sources of growth for the future. Of note among the measures to boost efficiency was the roll-out of the Partenón IT platform in Santander's branch network in Spain. This is a large investment and our challenge now is to take full advantage of the improvement potential provided by this platform in terms of costs and business efficiency. Also of note is the creation of global specialist units for products and deepening the global focus of Wholesale Banking. Furthermore, and as part of our policy of better use of capital, we sold stakes in non-strategic companies in order to invest in strategic businesses such as consumer finance and retail banking. Lastly, we reached an agreement at the end of 2005 to acquire a stake in US bank Sovereign. Continental Europe: revenue growth with flat costs Continental Europe's attributable income was 38% higher at EUR 2,984 million. In Europe, the Group continues to prove the effectiveness of our management model for developed economies: revenue growth with a continuous improvement in efficiency. This area's total net operating income increased 20% and was notable for its consistency and diversification as all the large units registered growth of more than 15% in their net operating income. In Spain, the stronger results of Santander and Banesto were due to an appropriate balance between greater business and efficient management of profitability. Mortgage business and lending to companies, particularly micro firms and SMEs, were very satisfactory. Santander Consumer Finance is already one of the leaders in Europe's structurally attractive market. New loans increased 24% and attributable income was up 46%, due to the twopronged strategy of organic growth and selective acquisitions. Our businesses in Portugal also did well in 2005, despite the weak economic environment. Net operating income rose 16%, due to higher revenues and controlled costs. Attributable income increased 36%. Of note among the other businesses was Banif, whose net operating income grew 47% and attributable income 20%. Abbey: turning a mortgage bank into a full-service retail bank When we acquired Abbey we said our goal was to return it to its appropriate position in the UK banking market because of its size and potential. We set three key objectives for 2005: stabilise recurring revenues, boost productivity and reduce its heavy costs structure. We exceeded all our initial forecasts. This positive performance is underlined by Abbey's contribution to the Group, in its first year, of EUR 1,408 million of net operating income and EUR 811 million of attributable income. Our goals are ambitious and we have drawn up a three-year plan to achieve them. This plan aims to make Abbey the best retail bank in the UK. We have a new business model, we are stepping up our sales capacity and are working on a new IT platform, for the whole Group, which will generate greater cost savings as of 2008. We want to expand Abbey's franchise and create a full-service commercial bank, growing cards, consumer and companies businesses strongly. This growth must go hand in hand with significant improvements in efficiency and earnings, and attain, as the plan foresees, a ROE of close to 20%. We are optimistic about achieving in 2007 a return on investment higher than our cost of capital. 10

Letter from the Chief Executive Officer Strict cost control improved the efficiency of the Group's main units and enabled us to continue investing in developing our business capacity Latin America: focus on retail business with customers The positive trend of previous years in Latin American economies was confirmed in 2005, when the region's GDP grew by more than 4%. The improvement in the region's macroeconomic situation was due to the implementation over the last few years of orthodox fiscal and monetary policies, which have strengthened public sector finances considerably. Our positioning, unique in the region, is enabling us to strongly expand business with customers and substantially boost the most recurring revenues. Net operating income increased 32% in dollars, the currency used to manage the region, and attributable income was 21% higher at US$2,208 million. We focused in the three main markets for the Group on strengthening recurring business. Business volumes rose notably, and we increased the level of linkage and the number of customers. Lending in Brazil rose 42% and customer funds 24%, pushing up net operating income by 43% and attributable income to US$734 million. Mexico's net operating income rose 24% and Chile's 30%. The gain in market share in Chile is significant and it now stands at more than 20%. Business volumes and earnings were also generally higher in the other countries where we operate. The performance in Colombia and Venezuela was particularly noteworthy and Argentina is gradually recovering. Global areas: taking advantage of latent synergies We are making the wholesale banking businesses we have in each country more globally integrated. Wholesale banking is by its nature a global business and it should be managed as such. We have a great opportunity to generate more business in this area because we are not yet extracting all the value from being an international bank. Revenues increased 9% in 2005, spurred by the improved coverage of our corporate clients through the Global Relationship Model and the greater proportion of customer revenues in the markets area. We also deepened the global focus of Asset Management and Insurance. Among the measures we took were integration of the asset management businesses, the creation of a Global Insurance Unit and extending the activity of Optimal, our specialist in alternative fund management. Total revenues from mutual funds, pension plans and insurance amounted to EUR 3,696 million, 63% more than in 2004. These are very relevant revenues, because of their volume and quality, as they are very recurring, produce high returns and have low volatility. 11

Lastly, the Global Cards Unit is extending its mono-product business management model, successfully launched in Mexico, to other Latin American and European countries, particularly Spain and the UK, where our position offers us excellent growth opportunities. Opportunities for improvement Even though 2005 was a very good year, there is inevitably room for improvements. In my view we must go further in 2006 and: Step up the bank's global integration in a flat world without frontiers. Unless we do this we will not be able to take advantage of all the revenue opportunities and economies of scale in the increasingly globalised market. We have been extending the areas we manage globally, which is basic to wholesale banking, asset management and consumer finance, to include other businesses (cards, insurance, etc.) and to the various support areas such as technology and operations, creating corporate factories that specialise in products. Be more efficient. We have improved the Group's efficiency ratio over the last few years. However, we still have ample leeway to improve in those areas of the Group where we have been investing in business capacity, and where we should now begin to improve costs. Enhance customer service quality, particularly in the most mature markets. In an increasingly competitive environment we have to make customers the mainstay of the business. Growth drivers The global economy grew briskly in 2005. We began the year 2006 with the main economies aligned in strong or improving growth. The outlook for banking is positive. We must not forget, however, that the global economy has been growing for almost 10 consecutive years and structural cuts in interest rates have enabled lending and retail and wholesale banking businesses to grow strongly. There are also potential risks stemming from well-known imbalances in the global economy. Cycles are an inherent part of the economy and we must be ready for changing macroeconomic scenarios. We are preparing to increase business in a structural way and not through the market's cyclical growth. I believe Santander is an excellent investment for the future because we have seven levers that will give us structural growth opportunities over the next five years: 1) In mature markets, where we expect constant growth in competition, only the most efficient banks will be able to grow on a sustained basis. Our policy of revenue growth with flat costs, supported by our technological advantage, should give us economies of scale and improvements in efficiency. 2) Globalisation provides a big opportunity in emerging markets. Grupo Santander has a strong presence in these markets through its very solid position in Latin America, which should enable the Group to grow structurally. 3) Abbey is another opportunity for growth. We can generate more income by substantially improving efficiency in business and costs, using the same IT platform as in Spain. This will extend the period of efficiency improvements in the medium term. 4) The Americanisation of the global consumer is structural. Low interest rates have put consumer finance on a path of solid expansion. Santander Consumer Finance is the European leader and we will continue to strengthen this area. 5) Develop Global Wholesale Banking on the basis of predominantly local corporate banks. This will give us economies of scale in product knowhow and costs, and a more effective relationship with large corporate clients. 6) An opportunity to obtain global synergies. The greater integration of support areas will produce synergies in corporate costs. We must also progress further in the integration and global vision of the various business models in order to boost productivity and efficiency. 7) Reassign capital from non-strategic areas to key areas of the bank such as consumer and retail banking, both organically and inorganically, and exercise strong discipline in capital. 12

Letter from the Chief Executive Officer We will focus in 2006 on accelerating global integration, improving service quality and efficiency These seven levers are avenues for structural growth in the Group's income which are rarely subject to the ups and downs of economic cycles. We believe they constitute our advantage over other banks and will be reflected in recurring and sustained growth in earnings per share in the medium term. Outlook and priorities in 2006 The Group's management in 2006 will focus on capitalising and increasing our options for generating recurring revenues and improving operational efficiency. This will be done by continuing to invest in technology and by improving and expanding our branch networks, always making control of costs and credit quality basic priorities of management. In Europe we are striving to increase business productivity. The full availability of the Partenón IT platform in Spain, which is being rolled out in Portugal, the UK and Santander Consumer Finance, will help to achieve this. The Santander branch network will concentrate on attracting individual customers and increasing their linkage, backed by the launch of the We want to be your bank plan. Abbey's transformation of business will produce stronger activity and revenues and further cost savings. In Latin America we will capitalise on the investments made in recent years to expand retail business. Our consumer banking business will continue to grow at a fast pace, driven by the greater penetration and critical mass achieved in some countries after the latest acquisitions. Lastly, we are going to develop selective wholesale business more strongly in the markets where we operate. To strengthen all businesses, the Group reviews its business plan (currently the I06-I08 Plan) every year. We want to ensure future growth by examining the challenges and opportunities of each business and market. This means continuously reviewing projects and activities in search of new business options and gains in productivity. To achieve these ambitious goals, Santander has an excellent team of professionals with the best capacity and motivation, and which is continually being improved and renewed. We are confident 2006 will be another excellent year for Santander, enabling us to continue to increase shareholder value. All of us in the Group will devote our efforts to ensuring that it is. Alfredo Sáenz Second Vice-Chairman and CEO 13