2016
ANNUAL REPORT
To help people and
businesses prosper
31.01.2017
Santander in 2016: We progressed in becoming the best retail
and commercial bank by helping people and businesses prosper
In 2016 Santander has achieved strong
results, meeting all our business objectives:
we increased loyal customers, grew lending
and served 125 million people and businesses.
Santander is one of the most efficient and
profitable banks in the world, thanks to
the talent and hard work of our teams. We
have achieved excellent results by doing
things in a simple, personal and fair way.
Ana Botín,
Group executive
chairman
Attributable profit
Million euros
6,204
5,966
*
+4%
2016/2015
Return on Tangible
Equity
(underlying)
11.1%
Core Equity Tier1
Capital Ratio
fully loaded
10.55%
(+50bp 2016/2015)
2015
2016
* +15% at constant exchange rates.
Geographic diversification (contribution to underlying Group profit, %)
SANTANDER
CONSUMER
FINANCE
13%
POLAND
3%
UNITED
STATES
5%
UNITED
KINGDOM
20%
MEXICO
8%
BRAZIL
21%
OTHER
COUNTRIES
3%
CHILE
6%
ARGENTINA
4%
PORTUGAL
5%
SPAIN
12%
Main countries
Santander Consumer Finance
2
2016 ANNUAL REPORT
Santander in 2016: We progressed in becoming the best retail
and commercial bank by helping people and businesses prosper
prosper
Our investment in technology, together with the
advantages of working as a Group, make Santander
one of the most efficient banks in the world, while
also improving the customer experience. Santander
now ranks among the top three banks for customer
satisfaction in eight of our nine main countries.
Our balance sheet strength enables us to
finance our growth, while increasing the cash
dividend and accumulating more capital.
79%
of employees perceive
Banco Santander as
Simple, Personal and Fair
78%
employee
engagement rate
15.2 (+10%)
20.9 (+26%)
million loyal
customers
million digital
customers
People
188,492
employees
Communities
1.7
million people
helped in 2016
Customers
125
million
Our aim is to be the
best retail and
commercial bank,
earning the lasting
loyalty of our people,
customers, shareholders
and communities.
Shareholders
3.9
million
36,684
scholarships
granted in 2016
1,183
agreements with universities
and academic institutions in 21
countries
3,363
million euros of CET1
capital generated
+8%
cash dividend
per share
3
2016 ANNUAL REPORT 2016
ANNUAL REPORT
1
2
24 Business model and strategy
40 2016 Results
6 Message from Ana Botín, Group
executive chairman
14 Message from José Antonio Álvarez,
chief executive officer
20 Corporate governance
26 Purpose and business model
28 Aim and value creation
30 Employees
32 Customers
36 Shareholders
38 Communities
42 Economic, banking and
regulatory context
46 Santander Group results
49 Countries
57 Global Corporate Banking
Banco Santander’s 2016 annual
report is available online.
You can go straight to it on a
smartphone or tablet by scanning
the QR code.
http://www.santanderannualreport.com/2016/en.html
4
2016 ANNUAL REPORT
3
58
Corporate
governance report
60 Executive summary
62 Introduction
63 Ownership structure
66 Banco Santander’s
86
89
91
board of directors
Group structure and governance
framework
Shareholder rights and the
general shareholder’s meeting
Santander Group
management team
93 Transparency and independence
95 Challenges for 2017
4
96
Economic and financial
information
98 Consolidated financial report
98 2016 summary of Santander
Group
100 Santander Group results
106 Santander group Balance sheet
111 Santander Group’s own funds
and capital adequacy data
114 Geographical footprint
116 Continental Europe
130 United Kingdom
133 Latin America
147 United States
150 Corporate Centre
152 Global businesses
152 Retail and commercial banking
155 Global Corporate Banking
5
158 Risk management report
160 Executive summary
164 A. Pillars of the risk function
165
B. Risk control and management
model-Advanced Risk Management
166 1. Map of risks
166 2. Risk governance
169 3. Management processes
and tools
177
175 4. Risk culture- Risk Pro
C. Background and upcoming
challenges
183 D. Risk profile
183 1. Credit risk
215 2. Trading market risk
and structural risks
235 3. Liquidity and funding risk
243 4. Operational risk
254 5. Compliance and conduct risk
263 6. Model risk
265 7. Strategic risk
266 8. Capital risk
275 Appendix: EDTF transparency
278 Historical data
280 Glossary
284 General information
2016 ANNUAL REPORT
5
Message from Ana Botín
Our purpose is to help people and businesses prosper.
Once again, we delivered on all our promises and did so in the right way.
We made excellent progress against our long-term strategic goals.
In 2016, we lent more and improved service to our customers, earned more
for our shareholders and supported our employees and communities
in a sustainable, inclusive way.
6
2016 ANNUAL REPORT
Message from Ana Botín Our achievements in 2016 reflect the strength
and resilience of the Santander model and the
efforts of all 190,000 of our colleagues:
of working across the group, both for our
customers and for our shareholders.
• We increased lending to our customers by €16
Our strategic progress in 2016
billion.
• We continued to invest in technology,
maintaining our ‘best in class’ efficiency while
also improving customer service.
• We further strengthened our corporate
governance and risk model and increased our
Common Equity Tier 1 (CET1 Fully Loaded)
capital by 3 billion euros, reaching a ratio of
10.55%, exceeding our target.
• We maintained our position as one of the
most profitable banks in the world, with an
underlying return on tangible equity of 11.1%,
higher earnings per share of €0.41 (up 1%) and
a cash dividend per share rising to €0.17 (up
8%). Our total net asset value per share also
grew in 2016 by 15c to €4.22.
The market is recognizing our progress, as shown
by the total shareholder return of +14% for our
shares in 2016.
We also worked hard to improve how we work:
Our success at this time of exponential change
will depend on an ever stronger culture where
customers come first, uniting our banks in
Europe and the Americas.
By making better use of technology and
collaborating more effectively across the
Santander Group, we are making it easier than
ever for our clients to travel, to trade and to
fulfill their financial needs.
Greater collaboration among countries and people
is critically important to increasing prosperity for all.
We made further progress in ensuring that
everything we do is more simple, personal and fair.
We are strengthening the links between our
core markets and producing tangible benefits
Our aim is to become the best retail and
commercial bank, earning the lasting loyalty
of our people, customers, shareholders and
communities.
Customers
This year, we earned the trust of 4 million
new customers, raising our total number
of customers to 125 million. We did this by
improving the service and products we offer in
every one of our ten core markets.
Our 1I2I3 strategy is based on creating customer
value, which leads to attractive financial returns
as these customers do more business with us.
It is not a product strategy or market share
driven. And it is a profound change from the
strategy Santander pursued in the past in Spain.
It drives stable long terms relationships, as 1I2I3
customers consider Santander their primary
bank. It hence drives stable, current account
balance growth.
In the UK the 1I2I3 strategy has fundamentally
changed our bank, from relying on volatile and
expensive savings customers, to real banking
customers, in just 5 years.
As the English say, “the proof is in the pudding”.
Santander UK current account balances grew
from £12 billion to £65 billion, after being stuck
at £12 billion for many years, and we have gained
an average of 420,000 loyal customers per year
during that period.
Within this customer group, among other
financial benefits, our cost of credit is a quarter
of what it was in 2011. We have also improved
savings margins as these customers did more of
their business with us at lower cost.
In 2016 we have
achieved all our goals
Lending to customers
+ € 16 billion
Best in class efficiency
48%
cost to income ratio
FL CET1
10.55%
(+50bps)
Underlying RoTE
11.1%
Cash dividend per share
€ 0.17
(+8%)
2016 ANNUAL REPORT
7
Santander now ranks among the top 3 banks for customer
service in all but one of our 9 core countries. This was one
of our key strategic goals for 2018. We achieved it in 2016.
In Spain the strategy is similar but not identical,
as our teams and services are able to develop
relationships faster and therefore are already
growing fees, in a declining market - not by
raising fees but by growing the number of
customers that bank with us.
In 2016, our 32% loyal customers growth drove a
6% growth in fees, with 50% of the commercial
activity concentrated in 1I2I3 customers, who buy
1.7 times more products and services than the rest.
Similar strategies adapted to local conditions
have been launched in Mexico, Brazil, Portugal
and other markets, based on the same principles
of adding value to our customers, transparency
and excellence in service, as the way to achieve
profitable growth. These principles are the core
of our loyal and digital customer strategy.
Thanks to the Group’s investment in technology,
the number of customers using our digital
banking services rose by more than 25% in 2016
to just under 21 million.
equity in our Portuguese franchise to a best-in-
class 13%.
• We reached an agreement to acquire
Citigroup’s retail assets in Argentina – enabling
us to increase our market share and strengthen
our franchise in a significant growth market.
• And most recently, we agreed to purchase the
outstanding 50% stake in Santander Asset
Management. This will allow us to expand our
asset management business and the range of
our offerings to customers.
These transactions align well with our strategy
and allow us to offer better service to customers
and strengthen our competitive advantage.
People
The talent and motivation of our 190,000
employees are the foundations for our success.
Implementing a strong, common culture and
purpose across the Group remains the main
priority of the new management team.
Santander now ranks among the top 3 banks
for customer service in all but one of our 9 core
countries. This was one of our key strategic goals
for 2018. We achieved it in 2016.
We aim to be one of the top 3 banks to work for
in the majority of our geographies. We have
now achieved that goal in four of our ten core
markets.
Our technology is allowing us to improve
customer service while ensuring our cost to
income ratio, a measure of efficiency, remains
among the best in our industry.
Great products, great service and great value
lead to loyal customers. In 2016 the number of
people who consider Santander their primary
bank rose by 1.4 million to 15.2 million. Loyal
customers do more business with us, which
means our fee income from value-adding
services rose by 8.1%.
We also agreed or completed three transactions
which will allow us to serve more customers
and continue to deliver profitable growth in the
medium term in our core markets:
• We integrated Banif in Portugal – a deal that
has helped us increase the return on tangible
Our annual employee engagement survey is
a valuable tool in listening to the views of our
people and ensuring we take action to improve.
The results this year show we are on the right
path, as more than three quarters of our teams
support our Simple|Personal|Fair culture.
We have a clear plan for continuous
improvement in corporate behaviors and our
remuneration will be significantly determined by
our progress.
During 2016 we completed a significant
restructuring process in a number of business
areas to further improve our efficiency and
operational excellence. While these processes
are never easy, we have done our best to manage
the exits of some of our people in a way that is
fair to all, investing for the future.
A circle
190,000
employees
Serve
125
million
customers
Deliver for
3.9
million
shareholders
Helping
1.7
million
people
8
Message from Ana Botín Our critical mass and retail-commercial model, focused in
10 markets in Europe and the Americas, has allowed us to
deliver more predictable earnings than our peers across
the cycle, even in adverse macro- economic conditions.
Communities
While delivering for our teams and on our
financial and commercial targets is essential,
making sure that we achieve our goals in the
right way is even more important, as it ensures
sustainability and continuous customer value
creation.
Shareholders
Our critical mass and retail-commercial
model, focused in 10 markets in Europe and
the Americas, have allowed us to deliver more
predictable earnings than our peers across
the cycle, even in adverse macro-economic
conditions.
This means supporting a culture that rewards the
behaviors we believe to be right, encouraging
colleagues to speak up, actively collaborate and
embrace change.
It means building a business that aims high, that
our customers, people and shareholders can
rely on in the long term. And it means taking our
responsibilities to the communities we serve
seriously.
This year Santander was recognized by the Dow
Jones Sustainability Index as the best bank in
Europe for our commitment to sustainability,
contribution to social progress and for our
protection of the environment.
I am extremely proud of the work we have done
in 2016 to support our communities and there are
a number of initiatives I would like to highlight:
• In 2016 we further increased our support for
universities across all the markets in which
we operate. We are now in partnership with
1,200 universities, providing more than 35,000
scholarships and grants.
• Across Latin America we have supported
250,000 micro finance projects.
• More than 60,000 employees took part in
volunteering programmes during the year.
These ranged from financial education for
students, the elderly and people on low
incomes in Europe to support for childhood
education in Brazil, where 4,000 employees
worked to improve learning in 214 schools.
• In Spain, our coaching and mentoring
programmes helped the disadvantaged,
the socially excluded, and victims of gender
violence to improve their skills and find jobs.
We proved this yet again in 2016 as we increased
our revenues with strong growth in fee income
and improvements in credit quality. Together
with our focus on costs, this delivered an
increase in our attributable net profit of 4%, to
€6,204 million.
Our local operating performance was even
better, as excluding one-off items and currency
movements, our underlying profit before tax in
constant euros rose by 12%.
The strength of our business model and our
ability to generate profits year after year are
starting to be recognized by the European
Central Bank. In December, following its
Supervisory Review and Evaluation Process
(SREP), it decided to reduce the amount of
capital we are required to hold as a proportion of
our assets.
Strong corporate governance is at the core
of prudent risk management. It is critically
important to ensuring the sustainability of any
business.
In April the Group held the first meeting of its
International Advisory Board (IAB), a group of
CEO’s and leaders with expertise in strategy,
technology and innovation. The IAB’s focus is on
digital transformation, cyber security and how to
apply new technologies to improve service and
do so efficiently.
And in September we were delighted to
announce the appointment of Homaira Akbari
as a new independent member of our Board of
Directors. Homaira is a distinguished scientist,
technologist and business leader. She has deep
experience in developing and implementing the
most advanced technology at scale and will help
us further advance our digital transformation.
Banco Santander’s
International Advisory Board
Chairman
Mr Larry Summers
Former US Treasury Secretary
and President Emeritus
of Harvard University
Members
Ms Sheila Bair Mr Francisco
Former Chair
of the Federal
Deposit
Insurance
Corporation
and President
of Washington
College
D’Souza,
CEO of
Cognizant
and director
of General
Electric
Ms Blythe
Masters
CEO of Digital
Asset Holdings
Mr Mike
Rhodin
Senior Vice
President of
IBM Watson
Mr James
Whitehurst
CEO of
Red Hat
Mr George
Kurtz
CEO and
co-founder of
CrowdStrike
Mr Charles
Phillips
CEO of Infor
and former
President
of Oracle
Ms Marjorie
Scardino
Former CEO
of Pearson
and member
of the Board
of Directors
of Twitter
Secretary
Mr Jaime Pérez Renovales
9
Her appointment strengthens the Board’s
international and technology expertise and
brings the proportion of women on the Board
to 40% - one of the highest in international
banking.
I would like to take the opportunity to thank
Angel Jado for his dedication and outstanding
contribution to our Board for many years, and
wish him every success for the future.
And I would like to recognize the hard work and
commitment of all our Group and Subsidiary
banks Board members, and thank them for their
continued support throughout the past year.
Our unique opportunities
for growth
I am proud of our team’s progress this past
year. In 2016, we delivered strong operational
performance in all our businesses and at Group
level, as well as reaching or exceeding our cost of
equity in 95% of the group’s investments. But we
can do much more and much better.
The Santander business model is built upon strong
foundations, well suited for the world ahead of us:
• We serve the financial needs of 125 million
customers. We have critical mass in 10 markets
with one billion people, which drives profitable
growth.
• Geographic diversification leads to more
predictable earnings and means we require a less
capital intensive model than our global peers.
• Our subsidiary model allows us to be close
to our customers and our strong culture of
working together drives efficiency and service
excellence.
The proof is our predictability.
We are one of only three major international
banks to remain profitable throughout the crisis.
The European Banking Authority’s stress tests
this year show Santander to be the most resilient
bank among our peers.
We have increased our core capital by €17 billion
and have grown our profits by 40% over the past
three years.
We have paid dividends consistently for more
than 50 years.
And we generate some of the most stable and
growing earnings per share among our peers.
But what matters looking forward is our great
potential for organic growth. This is why I am
confident Santander will be one of the winning
companies over the next decade.
Looking forward…
The UK’s vote to leave the EU and Donald
Trump’s victory in the US presidential elections
confounded most expert predictions in 2016.
And we have considered these and other
potential unexpected international outcomes as
we develop our plans.
For the next few years the effect of Brexit on
our UK business will be as a consequence of
anticipated slower growth in the economy as
well as the weaker sterling effect on translation
of our earnings.
However our strong balance sheet of prime
mortgages and primary banking relationships
allows us to be confident we will continue to
deliver around or above our cost of capital.
Brazil should return to positive growth, after
two years of recession, thanks to a sound
set of economic reforms. It is a country
with 220 million people and a large and
growing middle class. Spain is expected to
remain at the forefront of Europe’s recovery.
The UK will continue to play a key role in the
global economy. And Mexico’s government has
shown it can manage through challenging times.
The Santander
business model is
built upon strong
foundations
1
Serving 125 MM
customers´financial needs,
with critical mass in 10
markets with c.1 Bn people
drives profitable growth
2
Geographic diversification
drives predictability of
earnings=less capital
3
Subsidiary model with
strong culture of working
together drives efficiency
and service excellence
10
Message from Ana Botín OUR EIGHT
CORPORATE
BEHAVIORS
Talk
straight
Keep
promises
Bring
passion
Show
respect
Truly
listen
Actively
collaborate
Support
people
Embrace
change
tool in Poland was first developed in Chile and
then taken and improved by the UK. It has been
deployed through our internal “open services”
model and is now being implemented in Mexico.
Santander Wallet is a single global solution for
around 400,000 of our commercial clients.
It allows them to use a single wallet for all
payments and channels, and offers additional,
real-time, value added services to help our
customers build their business. It has been
launched in Brazil and Spain and will soon be
available in Mexico and Chile.
Our microcredits programme in Brazil,
supported by an equally strong programme
of financial education, has helped 129,000
entrepreneurs to start and grow their
businesses.
We are now expanding microcredits to Mexico
to bring many more people into the financial
system and pursue our goal of sustainable,
inclusive growth.
As a management team, we are totally
committed to embedding our behaviors and
leading by example.
Commercial and financial performance is a given.
But what will make us a winner is a culture that
allows people to speak up, to embrace change,
to accept diversity of all types, so that we can
fully realize the potential in our teams and in our
markets.
Our performance the past year, for example, in
Portugal (€399 million profit, +33%) or Argentina
(€359 million profit, +52%) shows that we can
do very well for our customers and shareholders
even when the macro conditions are not
ideal. But we would always rather have the
macroeconomic winds behind us.
Santander Brazil earned €1.79 billion in profits
and is the single largest earnings contributor
to Group. For the last two years, we delivered
a return on tangible equity of 14%, despite
an adverse economic environment: net profit
to the Group grew by 15% in 2016 and did so
in a sustainable way, adding 500,000 loyal
customers and 2 million digital customers.
In the USA we have made regulatory progress,
as we committed, we have improved how we
manage the business and reduced risk.
At SBNA, we have lowered the cost of deposits,
improved service and efficiency.
Our retail and commercial Bank in the USA-
which represents 5% of our Group capital
invested - will deliver significant growth over
the next few years and I remain confident it will
deliver considerable value to shareholders.
…through active collaboration
Our model of local subsidiary banks and teams,
together with our ability to collaborate across
countries gives us our “unfair advantage”. In a
world which we anticipate being increasingly
insular, this is a winning combination.
It leads to better outcomes for customers and
value creation for shareholders.
We already do this better than most, as our best-
in-class cost-to-income ratio demonstrates. But
we can do more.
Allow me to share some examples: our new
CRM (Customer Relationship Management)
As a management
team, we are
totally committed
to embedding our
behaviors and
leading by example.
Commercial
and financial
performance is a
given. But what will
make us a winner
is our culture.
11
…and the trust of 125 million customers, in
both developed and developing markets.
As I mentioned, we serve 125 million customers
in ten core markets in Europe and the Americas
that are home to more than 1 billion people.
We have critical mass in all our markets. We
have scale and we are in the right places. This
represents a huge potential for value creation.
Our biometric technology, a joint project
between Mexico and Brazil has made banking
easier and more secure for 6 million customers
in the past year. In the UK we have reduced
the time it takes our customers to complete a
mortgage application from up to 3 hours to less
than 40 minutes, in a heavily regulated process.
We are collaborating with some of the most
innovative FinTech startups through Santander
Innoventures. And in H1 we will launch a new
platform for Openbank, a digital bank in Spain
which serves more than a million customers,
with just 100 people and is already profitable.
Looking forward, through active collaboration,
we have a unique opportunity for growth. To
deliver on this opportunity we will invest in our
people and in better use of technology, and
we will work across the group to improve the
customer experience and our efficiency.
PRIORITIES FOR 2017
Increase the number
of loyal customers by a
further 1.8 million to 17
million
Raise the number of
digital customers to 25
million
Broadly stable cost to
income ratio
Continue to strengthen
our capital
Increase value for our
shareholders
Our strategic priorities
and goals for 2017
We have clear goals for 2017: to increase our
number of loyal customers by a further 1.8
million to 17 million, and keep developing our
value-adding services.
We will continue to invest in technology to
raise the number of digital customers to 25
million, while improving service and efficiency,
aiming for a broadly stable cost to income ratio.
And we will increasingly do it working across
geographical boundaries.
Our aim is to continue to grow our capital by
another 40bp whilst increasing our earnings and
dividend per share and continuing to grow the
value of our company, as measured by tangible
net asset value per share. The delivery of our
2017 and 2018 goals will keep adding tangible net
asset value to our shares.
Conclusion
2016 has not been an easy year, but we have
delivered on our promises, and done so in the
right way. Once again, we lent more, we earned
more, and we became a better bank on every
significant measure.
In a changing and complex environment, for
the first time in years, we expect positive GDP
growth in all of our markets in 2017.
The financial system plays an important role
in supporting economic growth. And the
Santander model is based on supporting this
growth by maintaining appropriate capital levels,
strong corporate governance and prudent risk
management.
These are uncertain times. Volatility is growing
and growth, overall, might slow. Technology is
creating disruption. Automation is threatening
jobs. In the short term, we need to retrain
people, to encourage lifelong education so we
12
Message from Ana Botín Going forward, we have many opportunities for profitable
growth in Europe and the Americas, in an environment we
anticipate will be volatile but generally better than 2016
can bring everyone with us in this new wave of
growth, and ensure it is sustainable.
culture binds us together across our 10 markets,
fosters innovation and attracts the best talent.
We have reflected on these trends, what they
mean for us, and how to build a business
that delivers in a sustainable way, with great
performance for shareholders but that also cares
about making a difference.
At our Investor Day in London in September
2016 we set out our 2025 vision: to be an open
platform for financial services. Importantly,
as we transform the Group to succeed in the
medium term, we are delivering today.
As I said when we announced our earnings
for 2016, going forward, we have many
opportunities for profitable growth in Europe
and the Americas, in an environment we
anticipate will be volatile but generally better
than 2016. The key to our success for 2017 and
beyond will be an ever-stronger collaborative
culture across the Group and a shared purpose
to help people and businesses prosper.
I am confident Santander will continue to deliver
because of the 190,000 people who work hard
and work together every day, and to whom I
would like to say thank you.
And to all of you, to our customers, to our
shareholders, our communities, thank you for
your trust.
With your continued support, the best is yet to
come.
Ana Botín
Group Executive Chairman
At Santander we are in an extraordinary
position to help. Let’s start with our 125 million
customers. Add in their family members. Then
all the businesses we serve, with employees
ranging from a few to tens, even hundreds of
thousands.
Every action we take to enable inclusive,
sustainable growth has a powerful multiplier
effect which will help the lives of millions of
people. That is the power of our model.
In my first letter to you, only 2 years ago, I set
out our strategy. Maintaining our traditional
strengths, and foundations, we embarked on a
profound process of change.
It is the sort of change that is not fully reflected
in the news that generates media headlines. It is
not just about acquisitions or appearing at the
top of the rankings.
Our transformation is global and goes beyond
these metrics. It is mostly about how we
organize ourselves, how we behave, to succeed
in a world changing at exponential speed all
around us.
A more diverse, multicentric world, where being
local is a must.
And at the base of our transformation is a
culture of being local in each one of our markets
while also encouraging a shared way of doing
things that is Simple and Personal and Fair; this
I am confident
Santander will
continue to deliver
because of the
190,000 people who
work hard and work
together every day,
and to whom I would
like to say thank you
13
Message from
José Antonio Álvarez
Our results, for yet another year, underscore the soundness of Grupo Santander and
its capacity to provide sustained, quality growth. They are the consequence of positive
performance of the main income statement components: revenues, costs and provisions.
14
2016 ANNUAL REPORT
Message from José Antonio Álvarez Grupo Santander carried out its activity in
2016 in a challenging environment. Global
economic growth slowed down slightly, as
markets were hit by volatility stemming
from concerns about growth in China
and the uncertain international political
panorama.
However, there are some positive aspects that
invite optimism about the near future:
• Financial markets are increasingly resilient,
quickly recovering from bouts of volatility.
• Developing economies in general grew at a
faster pace, and the worst performers, such
as Brazil and Argentina, adopted economic
policies that should enable them to emerge
from recession in the coming quarters.
• Lastly, mature economies began to recover
in the second half of the year. The UK’s
referendum, in particular, had a limited
impact on growth, and the Spanish economy
again grew by more than 3%.
Another factor in this environment are
the pressures on banks since the onset of
the financial crisis, mainly because of new
regulatory requirements and low interest rates
in mature economies, limiting a more intense
recovery in profitability.
I will now set out the Group’s performance
during 2016, the priorities and main steps
taken in each of our markets, and the financial
objectives for 2017.
The Group’s performance in 2016
We posted an attributable profit of €6,204
million, 4% more than in 2015 and 15% higher in
constant euros (the exchange rate effect was
again negative).
This figure includes some positive and negative
one-off results which had a net negative effect
of €417 million (€600 million negative in 2015).
Profit before extraordinary items, taxes and
excluding the exchange rate effect, which
is a more appropiate way of assessing our
management, rose 12% to €11,288 million.
These results, for yet another year, underscore
the soundness of Santander Group, its capacity
to provide sustained quality growth. They are
the consequence of the positive performance
of the main P&L lines: revenues, costs and
provisions.
The first thing to emphasise in revenues
is their considerable recurrence in an
environment of high volatility. This was made
possible by the high relative share (94%) of
commercial revenues:
• In an environment of very low interest rates
in mature markets, net interest income
increased 2% in constant euros thanks to
management of spreads and our significant
exposure to developing countries and to
consumer credit business.
• Fee income increased 8%, double that in
2015, reflecting the greater loyalty and
satisfaction of our customers.
Attributable Profit
€6,204
million
+4%
Underlying Profit before taxes
€11,288
million
+12%*
* Excluding exchange rate.
2016 ANNUAL REPORT
15
Priorities and performance of
the business areas in 2016
The units’ strategy in mature markets
focused on boosting the number of loyal
customers, gaining market share, controlling
costs and improving the credit quality.
Spain
Santander Spain is building deeper and
long-lasting relationship with its customers,
underpinned by the 1|2|3 strategy. The number
of loyal individual customers rose 27% and
companies 48%. Santander remained among
the Top 3 in customer satisfaction surveys and
increased business activity.
In a sector in which activity is slowing
down, the higher profit was supported by an
improved risk profile, lower provisions, the
efficiency plan and higher fee income.
United Kingdom
Profit was impacted by the new tax on banks.
Pre-tax profit, which better reflects the
business performance, increased 8% thanks
to higher volumes, good management of
spreads and control of costs. In addition, lower
provisions due to the excellent improvement in
the quality of credit risk.
In a demanding environment characterised
by greater uncertainty in the second half of
the year the solid evolution of our business is
worth noting. The number of 1|2|3 customers
increased to 5.1 million while lending to
companies also saw further growth. We
continued to focus on operational excellence:
the sustained improvement in our mobile and
online channels produced a 25% rise in the
number of our digital customers.
Costs were 2% lower in real terms and on
a like-for-like basis. Seven of our core units
registered a rise in costs that was below the
inflation rate.
This good performance was the result of
efficiency plans and the active management
of our business, differentiated in each
market, where we adapted the cost base to
the business reality. The measures taken to
streamline and simplify structures, both in
the corporate centre as well as in some units,
are enabling us to continue investing in our
commercial transformation while remaining
one of the international financial system’s
most efficient banks.
More revenues and control of costs were
accompanied by a 2% fall in loan-loss
provisions in constant euros. As a result, the
cost of credit dropped from 1.25% in 2015
to 1.18% in 2016. The improvement in credit
quality is closely related to the strengthening
of the risk culture across the Group through
several initiatives.
Turning to the balance sheet, there are two
noteworthy aspects:
• We delivered balanced growth in both lending
and funds (+2% and +5% respectively) and our
liquidity ratios were well above the minimum
required levels.
• The Group continued to generate capital
quarter after quarter. In fully loaded terms,
we attained a capital ratio of 10.55% (+50
basis points), putting us in line with our
target of 11% in 2018, while comfortably
meeting all regulatory requirements.
Consequently, we combined a sustained
generation of capital, which underscored the
Group’s capital adequacy, with a high level of
profitability compared to the sector’s average:
a RoTE (Return on Tangible equity) of around
11% and a RoRWA (Return on Risk Weighted
Assets) that increased to 1.36%.
Commercial Revenues
Increase:
Net interest income +2%
Fee Income +8%
Operating expenses 2%
lower in real terms and
on a like-for-like basis
Cost of credit improves
and loan-loss provisions
2% down
Spain
Profit
€1,022
million
+5%
United Kingdom
Profit
€1,681
million
-4%*
*Before taxes and excluding
exchanges rates +8%
16
Message from José Antonio Álvarez We combined a sustained generation of capital,
which underscored the Group’s solvency, with
high profitability compared to the sector’s
average
Santander Consumer Finance
SCF remains the consumer finance leader
in Europe. In 2016 it continued to gain
market share and the agreement with
Banque PSA Finance (BPF) was completed
successfully, expanding activity to 11 countries,
strengthening our diversification.
Profit rose for the seventh straight year,
demonstrating the robustness of our business
model throughout the cycle.
United States
We completed building the holding company,
thereby consolidating the management of
all operations in the country, and we made
progress in meeting regulatory requirements.
We continued working on the transformation
programme to improve risk management and
our technological and operational capacities.
Santander Bank is focusing on driving
commercial activity and Santander Consumer
USA changed the composition of its portfolio
toward a lower risk profile.
All these changes and measures are aimed
at building a more profitable business in the
medium term. Meanwhile they are temporarily
impacting results and are the main reason
behind the lower profit.
Portugal
We own the country’s strongest bank. Our
strategy is centered, on the one hand, on
improving the bank´s profitability and, on the
other, on the technological and operational
integration of Banif’s business acquired at
the end of 2015. We are well positioned in the
country, with market shares of around 14%
both in loans and deposits.
Developing markets are in a different stage
due to structural reasons. They register
stronger growth than that of mature
economies in volumes, higher interest rates, a
substantial potential for banking penetration
and RoTEs between 15% and 20%. Santander
has local critical mass, a strong business model
and an effective risk management of the credit
cycle, which produced very good results in all
the units of the Group’s developing countries.
Brazil
Santander generated excellent results in
an environment of recession, thanks to the
improvements achieved in the last few years in
the franchise, the good commercial dynamics
and progress in the digital strategy, which
enabled the number of digital customers to
surpass six million (+45%).
In 2016, for the first time, Santander became
one of the best companies to work for and
launched several commercial offers, such as
Olé Consignado, in payrolls business. We also
announced a commercial agreement with
American Airlines so that our customers
can accumulate air miles, and created a joint
venture between Santander Financiamentos
and Hyundai.
All these measures were reflected in our
financial variables. We increased deposits,
improved the trend in lending in the second
half of the year, and profit was 15% higher
thanks to the good performance of commercial
revenues, improved efficiency and a cost of
credit below that of our competitors.
Santander
Consumer Finance
Profit
€1,093*
million
United States
Profit
€395
million €
-42%*
Portugal
Profit
€399
million
+33%
Brazil
Profit
€1,786
million
+15%*
* Excluding exchange rate.
17
The outlook for 2017 points to a modest upturn in
global growth, which could be close to 3.5%. This
would be supported by both mature as well as
developing economies
Mexico
Profit
€629
million
+18%*
Chile
Profit
€513
million
+16%*
Argentina
Profit
€359
million
+52%*
Poland
Profit
€272
million
-6%**
Mexico
The strategy was very focused on
improving customer retention, commercial
transformation and innovation. The year was
very active as we launched products and
commercial agreements produced a gain in
market share in lending, growth in deposits
and a sharp increase in loyal and digital
customers. Profit rose, spurred by the good
performance of revenues, particularly net
interest income.
Poland
We continue to be the leading bank in
innovation and digital channels. We increased
the number of loyal customers, notably so
among companies, and our growth in loans is
well above that of the sector.
Excluding the impact of the new tax on assets,
profit rose 14% due to the good performance
of net interest income and a very significant
improvement in credit quality.
In order to continue improving the franchise
and the IT systems, we announced a 15,000
million mexican pesos three-year investment
plan, over and above our recurring investments
and initiatives.
Lastly, the units in Uruguay and Peru
increased their profit by 32% and 21%
respectively. In Uruguay profit was
underpinned by the sharp growth in revenues
and in Peru by the decline in provisions.
Chile
Management focused on growing those
segments that contribute the most, such
as companies, high-income customers and
deposits. We also concentrated on improving
the quality of customer care, reaching the Top
3 in customer satisfaction.
Santander Chile continues to gain market share
in loans and deposits, ranking first in loans and
second in deposits. Profit rose thanks to higher
net interest income, control of costs and lower
provisions.
Argentina
Santander Río wants to exploit the high growth
potential of the financial system (which is very
transactional), and the improved environment
for developing banking business. As a result
we decided to strengthen our position in the
country by acquiring Citi’s retail business, as
well as continuing to modernise the network
and open new branches.
Financial objectives for 2017
As you can see, in 2016 we achieved our main
goals and our financial variables for the Group
and for the main units performed well.
The outlook for 2017 points to a modest upturn
in global growth, which could be close to 3.5%.
This would be supported by both mature and
developing economies, which are expected
to grow faster in 2017 for the first time in five
years, largely thanks to expansive policies in
the US and a significant improvement in some
large developing countries. US interest rates
can be expected to increase again, and could
produce a steeper yield curve in Europe.
The risks are primarily of a political nature,
such as the impact that the policies in the
US could have in some developing countries,
the Brexit negotiations and the outcome of
elections in France and Germany.
* Excluding exchange rate.
** Excluding the impact of
the new tax on assets and
exchange rate +14%.
18
Message from José Antonio Álvarez Lastly, I would like to thank all the
Group’s professionals for their efforts in
transforming and improving our bank. The
achievements in 2016 and attaining the goals
in 2017 would not be possible without the
contribution of each and every one of them.
We will continue to work every day to help
people and businesses prosper, and to turn
Santander into the best retail and commercial
bank by earning the lasting loyalty of
our people, customers, communities and
shareholders.
José Antonio Álvarez
Chief executive officer
FINANCIAL
OBJETIVES 2017:
Accelerate revenue
growth
Gain market share in
mature markets
Costs under control
Improve the cost of
credit
Grow RWAs below the
increase in the Group’s
loans and profit
Improve our profitability
We will continue to make progress in 2017
toward achieving the goals we announced at
the Global Strategic Update. In order to do
this, we have set the following priorities:
• Accelerate revenue growth, particularly in
developing markets, where we see high one-
digit or double-digit growth in all units and
where interest rates enable good spreads to
be obtained.
• In mature markets, where revenues are
under pressure, we must increase our market
share, mainly in companies, and continue to
grow in fee income, mainly in cards, insurance
and funds. The recent agreement to acquire
50% of Santander Asset Management should
be seen in this context.
• Continue to keep costs under control,
keeping their total increase below the
average inflation of the countries, and
maintain revenue growth above that of costs.
• Keep on improving the cost of credit, with
the Group’s provisions falling as the cycle
improves in some core markets such as Brazil
and Spain.
• Grow risk-weighted assets (RWAs) below the
increase in the Group’s loans and profit in
order to improve our RoRWA ratio.
• All these measures should improve our
profitability, moving us toward the RoTE
goal of 11% in 2018, and strengthening our
capital ratio.
19
Corporate governance
Santander has a solid corporate governance, based on its strong culture and values, a robust control of risks,
which assures that management is aligned with the interests of our shareholders, investors, employees, suppliers,
customers and other stakeholders.
Balanced Board
composition
Respect for
shareholders’ rights
Maximum transparency,
particularly in terms of
remuneration
At the forefront of
international best
governance practices
• Of the 15 directors, 11
are non-executive and 4
executive.
• More than half of the
directors are independent.
• Commitment to diversity of
knowledge, gender (women
make up 40% of the board)
and international experience.
• The principle of one share,
one vote, one dividend.
• The bylaws do not contain
anti-takeover clauses.
• Encouragement of informed
participation at shareholders’
meetings.
• This is essential for
• Consolidation of the position
generating shareholder and
investor confidence and
security.
• Remuneration policy for
executive directors and
senior management,
aligned with our Simple,
Personal and Fair culture.
of lead director and of
the role of the board’s
committees in supporting
the board.
• The functions of the
innovation and technology
committee have been
increased to meet the
challenges of the new digital
environment.
» Board of directors
The board of directors is the Group’s highest
decision-making body, except for matters
reserved for the general shareholders’ meeting.
Santander has a highly qualified board: experience,
knowledge, dedication and diversity are its
primary assets.
In line with the Bank’s aim and purpose and as
part of its general oversight function, the board
takes the lead on decisions regarding the Group’s
main policies, strategy, corporate culture, on
defining the Group’s structure and on fostering
the appropriate policies in matters of corporate
social responsibility. In particular, in the exercise
of its responsibility and involvement in managing
all risks, it must approve and monitor risk appetite
and the risk framework and ensure that the
“three lines of defence” model (business and
risk origination; risk control and compliance; and
internal audit) is respected.
Its function and activities are ruled by the
principles of transparency, responsibility, fairness
and effectiveness, reconciling social concern with
our stakeholders’ legitimate interests.
All board members are recognised for their
professional capacity, integrity and independence
and, individually and collectively, provide the
knowledge and experience needed to attain
Santander’s aim of being the best retail and
commercial bank. The non-executive directors have
extensive financial experience and wide knowledge
of the markets in which the Group operates.
The position of lead director has consolidated
since its creation in 2014, playing a significant
role in the annual assessment of the chairman
of the board and fostering pro-active
communication with investors in order to
understand their points of view.
The board held
13
meetings
in 2016.
20
2016 ANNUAL REPORT
For more information on
corporate governance see pages
58 to 95 of Banco Santander’s
2016 Annual Report.
Corporate governance » Banco Santander’s board: diverse and balanced
Composition of the board
% of directors
Diversity in the board
% of female directors
Relevant expertise of board members
%
Executive
directors
27%
Non-executive
directors
(independent)
53%
Non-
executive
directors
(proprietary)
7%
Non-
executive
directors (neither
proprietary nor
independent)
13%
73%
Non-executive directors
» Remuneration policy
2010
2012
2014
10%
19%
29%
80%
73%
87%
73%
60%
27%
2016
40%
Accounting
and finance
Banking
Risk
management
Information
technology
Latam
UK/US
International
experience
The Group’s remuneration policy is based on the following principles:
1. Remuneration must be aligned with shareholders’
interests.
5. The global remuneration package and its structure
must be competitive in order to help attract and
retain employees.
2. The fixed element must represent a significant
proportion of total remuneration.
6. Conflicts of interest must always be avoided
3. The variable portion must reward performance in
the attainment of agreed targets, reflecting the
person’s role and responsibilities, in a framework
of prudent risk management.
4. The appropriate benefits for supporting
employees and their families must be provided.
when making remuneration decisions.
7. There must be no discrimination in remuneration
decisions.
8. The structure and amount of the remuneration
in each country must be in line with the local
practices and regulations.
International advisory board
New external auditor
• Banco Santander’s new international advisory board,
• In line with the
comprising experts in strategy, IT and innovation external to
the Group, held its first meeting on 26 April 2016 in Boston
(United States).
• The purpose of this board is to provide strategic advice
to the Group, focusing particularly on innovation, digital
transformation, cyber security and new technologies.
It also offers its view on trends in the capital markets,
corporate governance, brand and reputation, regulation
and compliance, and global financial services with the
focus on the customer.
corporate governance
recommendations regarding
rotation of the external
auditor, the general
shareholders’ meeting on
March 18, 2016 appointed
PricewaterhouseCoopers
Auditores, S.L. (PwC) as
the Bank’s and the Group’s
external auditor for 2016,
2017 and 2018.
INTERNAL GOVERNANCE
The Santander Group
is structured around
subsidiaries, whose parent is
Banco Santander S.A., that
are autonomous in capital
and liquidity. Its internal
governance system comprises
a governance model and
corporate frameworks.
The model sets the principles
that regulate the relationship
between the Group and
its subsidiaries and the
interaction that must exist
between them at three
levels: the Group’s board of
directors and the boards of
the subsidiaries; the Group
and local CEOs; as well
as between the relevant
executives who exercise
internal control, support and
business functions in the
corporate centre and the
subsidiaries.
The corporate frameworks
establish common principles
of action in matters that are
significant for their impact
on the Group’s risk profile
such as risks, compliance,
technology, auditing,
accounting, finances,
strategy, human resources
and communications.
2016 ANNUAL REPORT
21
Board of directors
of Banco Santander
1. Ms Ana Patricia Botín-Sanz
de Sautuola y O’Shea
Group executive chairman
2. Mr José Antonio Álvarez
Álvarez
Chief executive officer and
executive director
3. Mr Bruce Carnegie-Brown
Vice chairman. Non-executive
director (independent) and
coordinator of the non-executive
directors (lead director)
4. Mr Rodrigo Echenique
Gordillo
Vice chairman and
executive director
5. Mr Matías Rodríguez Inciarte
Vice chairman and
executive director
6. Mr Guillermo de la Dehesa
Romero
Vice chairman and
non-executive director
7. Ms Homaira Akbari
Non-executive director
(independent)
8. Mr Ignacio Benjumea Cabeza
de Vaca
Non-executive director
15
11
9
5
3
4
6
8
16
12
13
14
2
1
10
7
Executive committee
Audit committee
Appointments committee
Remuneration committee
Risk, regulation and compliance
oversight committee
International committee
Innovation and technology
committee
22
Corporate governance
9. Mr Javier Botín-Sanz
de Sautuola y O’Shea
Non-executive director
(proprietary)
10. Ms Sol Daurella Comadrán
Non-executive director
(independent)
11. Mr Carlos Fernández
González
Non-executive director
(independent)
12. Ms Esther Giménez-Salinas
i Colomer
Non-executive director
(independent)
13. Ms Belén Romana García
Non-executive director
(independent)
14. Ms Isabel Tocino
Biscarolasaga
Non-executive director
(independent)
15. Mr Juan Miguel Villar Mir
Non-executive director
(independent)
16. Mr Jaime Pérez Renovales
General secretary and secretary
of the board
23
Pereda building. Santander Group city, Boadilla del Monte, Madrid, Spain, 20 December 2016.
CHANGES IN THE COMPOSITION
OF THE BOARD AND ITS COMMITTEES
On 27 September 2016, Ms Homaira Akbari was appointed as a non-executive director
(independent) and a member of the Bank’s innovation and technology committee, filling
the vacancy left by Mr Ángel Jado Becerro de Bengoa, who resigned from the board.
On 26 April 2016, Ms Belén Romana García was appointed chairman of the audit
committee in place of Mr Juan Miguel Villar Mir, who continued to be a member of
the committee. Ms Romana is regarded as a financial expert given her education and
experience in accounting, auditing and risk management.
The board, at the request of the appointments committee, decided at its meeting on 28
October 2016 to appoint Ms Romana to the risk, regulation and compliance oversight
committee.
Prosper is knowing
how to look
Rafael Rey, Microcredit, Paraisópolis,
Santander Brazil
Prosper is rejuvenation
Melissa Morsbach,
Marketing Consultant, Frankfurt,
Santander Consumer Finance, Germany
Prosper is helping to
improve people’s lives
Ian Carson, Branch Director,
Liverpool Old Swan, Santander UK
Prosper means going forward,
growing and achieving goals”
Adrián Fernández-Romero, entrepreneur
and shareholder of Banco Santander, Spain
Prosper is spending time
with my grandkids
Ringo Francis, Corporate Customer,
Santander UK
Prosper is innovation
for everyone
Roselly Kimura, IT, São Paulo,
Santander Brazil
Prosper is
collaboration
Justin Hannemann, Customer and
Innovation, London, Santander UK
1
Business model
and strategy
26 Purpose and business model
28 Aim and value creation
30 Employees
32 Customers
36 Shareholders
38 Communities
Prosper is to insist
Katarzyna Surowiec
General Manager, Grandpa’s
Garden, Poland
Our purpose is to
help people and
businesses prosper
Prosper is inclusion
Lorena López and Sabrina Escalante,
Representatives of Customer Service,
La Juanita, Santander Río, Argentina
Prosper is change
Teresa Sáenz-Díez, Senior Legal
Advisor, Santander Group Corporate
Centre, Madrid, Spain
Purpose and business model
Our
purpose
to help people and businesses prosper
to be the best retail and commercial
bank, earning the lasting loyalty
of our people, customers,
shareholders and communities
Our aim
Our way of
doing things
Sustainable, high
profitability enabling
growth opportunities
to be exploited
11.1%
Ordinary
RoTE
Top 3
vs. our global
peers
Cash dividend
per share
growth
+8%
in 2016
Predictable, stable profit
throughout the cycle
Average volatility of the quarterly EPS
(%, 1999-2016)
139
10
Santander
Competitors
26
2016 ANNUAL REPORT
1. Business model and strategy » Purpose and business model A differential business model
125
million customers
in markets with a
total population
of one billion
1 Serving 125 million
customers with
critical mass in
10 core markets drives
profitable growth.
Banco Santander aims to satisfy the needs of all
types of customer: individuals with different
income levels; companies of any size and sector;
private corporations and public institutions.
Santander is a strong brand that has great
recognition in the Group’s main markets and
globally.
The foundation of our business is long-term
customer relations. Innovation is enabling
Santander to transform its commercial model
in order to attain a larger number of loyal
and digital customers, which is fuelling more
profitable and sustainable business.
Santander has high market shares in retail and
commercial banking in Argentina, Brazil, Chile,
Spain, Northeast of the United States, Mexico,
Poland, Portugal and the United Kingdom and in
the consumer finance business in Europe.
2 Our geographic
diversification
generates predictable
profit, meaning lower
capital needs
3,363
million euros of
capital generated in
2016. CET1 capital
ratio of 10.55%
Santander’s business is well balanced
between mature and developing
markets, which generates predictable
and growing profit over the economic
cycle.
Santander’s capital position is strong
and appropriate for its business model,
geographic diversification, balance
sheet structure, risk profile and
regulatory requirements.
Santander’s balance sheet strength
and profitability enable it to finance
its growth, distribute a higher cash
dividend and continue to accumulate
capital.
45%
Contribution of
the Americas
to profit
55%
Contribution
of Europe
to profit
3 The subsidiary model, with a strong
culture of working together, drives
efficiency and service excellence
48%
efficiency ratio:
one of the
most efficient
international
banks
The Group is structured around a model of subsidiaries, autonomous in capital
and liquidity, that are subject to regulation and supervision by each country’s
authorities. The subsidiaries are managed by local teams with considerable
customer knowledge in their respective markets.
Santander strives for operational excellence through the digitalisation and
improvement of all its operations and commercial channels, streamlining
processes and optimising costs, enhancing customers’ experience and their
degree of satisfaction.
The Corporate Centre (which has reduced its costs by 23% in the past two years
so that they now represent 2.1% of the Group’s total costs) contributes value and
maximises subsidiaries’ competitiveness, developing collaboration, helping them
to be more efficient, strengthening the Group’s governance and fostering the
exchange of best commercial practices. This enables the Group to generate a
higher result than the sum of each of the local banks acting in isolation.
2016 ANNUAL REPORT
27
Aim and value creation
Our aim is to be the best retail and commercial bank, earning the lasting
loyalty of our employees, customers, shareholders and communities.
We have set ambitious targets …
Strategic priorities
Key indicators
Employees
Be the best bank to work
for and have a strong
internal culture
Number of core markets where the Bank
is among the top 3 best banks to work for
(according to the relevant local rankings)
Customers
Earn the lasting loyalty
of our individual and
corporate customers:
improve our franchise
Operational excellence
and digital transformation
Capital strength and
risk management
Shareholders
Improve
profitability
Loyal individual customers (million)
Loyal corporate banking customers
and SMEs (thousand)
Growth in customer loans (%) 5
Number of countries where the Bank is among the
Top 3 of its competitors in customer satisfaction
Number of digital customers (million)
Growth in fee income (%)5
Fully loaded CET1 capital ratio (%)
Cost of credit (%)
Cost-to-income ratio (%)
Growth in earnings per share (%)
Return on tangible equity (RoTE, %)4
Dividend pay-out as a percentage
of attributable profit
Santander Universities
Number of scholarships (thousand)
Communities
Support people in the
local communities in
which the Bank operates
Number of people helped by the Bank’s
social investment programmes (million)
1. 2015-2018 average.
2. Except in the US where it will likely be close to competitors.
28
2016 ANNUAL REPORT
3. Total amount 2016-2018.
4. As percentage of operating profit.
5. Constant Euros.
1. Business model and strategy » Aim and value creation Targets
… and we know how to attain them.
Simple Personal Fair
Simple, Personal and Fair is the essence of the Bank’s corporate
culture. These are the principles that define how all Santander’s
employees think and act and they guide us in our relations with
colleagues, customers, shareholders and communities.
CORPORATE BEHAVIOURS
Corporate behaviours are the basis for becoming a bank that is more
Simple, Personal and Fair. In 2016, knowledge and application of these
behaviours were fostered in day-to-day work, as was the recognition of
employees who best represent these values.
Show
respect
Truly
listen
Talk
straight
Keep
promises
Actively
collaborate
Bring
passion
Support
people
Embrace
change
RISK CULTURE: RISK PRO
Santander also has a solid risk culture, called risk pro, which defines
the way in which we understand and manage risks from day to day.
It is based on making all employees responsible for the risks they
generate and on other principles that must be known and integrated
into the way of working throughout the Group.
All the Santander team engaged in risk
>90%
of employees
know and are
responsible for
the risks in their
daily work
SANTANDER BRAND
The Santander brand expresses a corporate culture and a
unique international positioning, and consistent with a way
of banking that helps people and businesses prosper in a
Simple, Personal and Fair way.
2016 ANNUAL REPORT
29
201520162018More info34most countriespp. 30-3112.713.917pp. 32-331,0491,3561.646PP.32-336%2%> com-petitorsP.4858All 2p. 3516.620.930p. 344.3%8.1%c. 10%1p. 4710.05%10.55%>11%p. 481.25%1.18%1.2%1p. 4847.6%48.1%45-47%p. 47-15,9%1.0%double digitp. 4611.0%11.1%>11%p. 4738%40%30-40%pp. 36-3735371303p. 391.21.74.53pp. 38-39 Employees
In order to help people and businesses prosper, it is vital that Santander’s 188,492
employees are motivated and engaged.
Prosper is collaboration
Justin Hannemann , Customer and Innovation, UK
THE STRATEGY FOR MANAGING PEOPLE
FOCUSES ON SIX MAJOR CHALLENGES
Talent management
Help people to grow
professionally in a global
environment.
Expertise and
development
Provide continuous
training and
development that
strengthens employees’
capacities and skills.
2
3
1
6
challenges
6
5
4
Culture
Ensure that the whole Group shares a
common culture focused on its purpose, aim
and way of doing things, which helps us to be
the best bank for our employees, customers,
shareholders and communities.
Technology
Exploit the advantages of
digitalisation for managing
people in a more simple,
personal and fair way.
2018 target:
Top 3
best bank
to work for in our
core countries.
Remuneration and benefits
Set clear targets and
reward not only the
results attained but also the
way they are achieved.
Employee experience
Foster teams’ commitment
and motivation with measures
that encourage listening,
a more flexible way of working
which enhances the work-life
balance, as well as a healthy
environment.
Our professional team
Star Me UP:
the first global
recognition network
It arose in order to promote
collaboration and recognise
those who apply the
corporate behaviours in their
day-to-day work
>65,000
users
45%
55%
49%
Graduates
38
Average age
(years)
9
Average years
with Santander
188,492
employees
30
2016 ANNUAL REPORT
1. Business model and strategy » Aim and value creation » Employees
My work enables me to
help local communities
and businesses
Ian Carson,
Branch Director, Liverpool Old Swan,
Santander UK
Ian Carson is director of the Santander
UK Old Swan branch in Liverpool. For
several years, his branch has collaborated
on various local charity initiatives
and projects. For Ian “it is a great
privilege to form part of a large
family which is the Bank” because
thanks to his work he can improve
other people’s lives.
GLOBAL
ENGAGEMENT
SURVEY
The 2016 results
were better,
particularly in
two aspects:
extensive knowledge
of the corporate
Simple, Personal
and Fair culture and
motivation to make
the Bank more SPF;
and better
work-life balance.
There are also
areas of improvement
in simplifying
the way of working
and having more
innovative means to
work.
85%
record
participation
78%
employees
are engaged
91%
know the
corporate
Simple,
Personal and
Fair culture
78%
of employees
say their line
manager helps
them attain a
better work-life
balance
Initiatives developed by HR in 2016
• SPF (Simple, Personal, Fair) behaviours.
A plan was launched with communication,
awareness raising, training and adaptation
of the performance assessment and
recognition processes in order to help
employees apply the behaviours every
day, to make Santander a more Simple,
Personal and Fair bank.
• Recognition. Chile, Mexico, Argentina,
Spain and the corporate centre installed
platforms enabling those employees who
set outstanding examples in corporate
behaviours to be recognised. At the Group
Convention in December, there was an
event for the 100 SPF ambassadors –
employees chosen by their colleagues as
exponents of the corporate behaviours.
The Star Me Up app, the first global
recognition network, was also launched.
• New corporate segmentation. More
dynamic, with entries and exits being
reviewed every six months. It is based on
transparency and meritocracy according
to objetive (contribution, results) and
individual (performance, potential)
criteria.
• Succession plans. The succession
• Be Healthy, the global health and
policy approved will enable planning for
the replacement of leaders, providing
continuity to the business, with a common
and structured methodology for key
positions of senior management and
control functions.
• Global Assessment Process (GAP). This
process was launched to help leaders
contribute to the Bank’s transformation
with a leadership style appropriate to the
new phase that Santander is living.
• 360 appraisal. This is the first phase of
the corporate model for performance
assessment, in which executives are
appraised by their peers, direct reports
and by their line manager regarding
their adoption of the eight corporate
behaviours in their day-to-day work.
• Flexiworking: new spaces. Further
progress was made in this programme, the
first phase of which focused on promoting
more flexible working hours, through the
creation of new, open-plan areas that
enhance co-operation and the exchange
of knowledge, and tools that enable teams
to be in continuous contact with those in
other countries.
wellbeing/wellness programme. This
programme, which is already operating
in Chile, Poland, Mexico, Brazil, Spain,
Portugal, United Kingdom, Argentina
and Santander Consumer Finance, aims
to make Santander the world’s healthiest
organisation. The first initiative was a
challenge for the Group’s employees
to walk, in total, the equivalent of once
around the world. Santander donated
€44,000 to Unicef, a euro for each
kilometre covered.
• We are Santander Week. The 2016
week focused on corporate behaviours.
Town hall meetings, conferences and
volunteering activities were held to foster
team and family living in all the Group’s
countries.
• Knowledge. Solaruco Pop Up was
launched in June to extend the knowledge
imparted at the Corporate Centre
of Knowledge and Development to
all the Group’s employees. A cycle of
Santander Business Insights conferences
was launched, dedicated to sharing good
practices.
2016 ANNUAL REPORT
31
Customers
We want to help our customers prosper day by day and we know that this means something
different for each of them. We aim to meet the needs of our different customer profiles so that
every day they are more loyal, use digital channels more and are more satisfied with the Bank.
Prosper is loyalty
Alfredo Candela, CEO Bodegas Barahonda, Spain
Simple, tailor-made solutions to strengthen
the lasting loyalty of our customers.
1|2|3 WORLD: one of the preferred
options for retail customers.
This commercial relationship model rewards balances and
gives cashback on household bills and purchases, among other
advantages. It was extended to new segments in 2016, such
as the 1I2I3 Mini Account in Spain for children and those under
the age of 18, and in new countries, such as Mexico, where the
offer was launched under the name of Santander Plus.
Number of customers (millions)
5.1
United Kingdom
2.0
Spain
0.3
Portugal
1.1
Mexico
SANTANDER PRIVATE BANKING:
a specialised service model
for higher income customers.
Santander was recognised by
Euromoney as the “Best Bank
in Wealth Management” in
Latin America in 2016.
32
2016 ANNUAL REPORT
2018 target:
18.6
million loyal
customers
SANTANDER SELECT:
the differentiated value proposal
for high income customers.
New proposals were developed in 2016
such as Select Global Value, which
covers the needs of those customers
who travel or work and live abroad. This
forges customer loyalty, as customers
benefit from Santander’s international
branch and ATM network.
SANTANDER SMEs:
a global solution to support
the development of SMEs.
This model, which operates
throughout the Group, provides a
strong financial offering and other
solutions to spur internationalisation,
training, employment and
digitalisation of SMEs.
#1
Euromoney award
for Best Bank in the
World for SMEs
New developments in 2016 in the Santander SME strategy
POLAND
Firmowe Ewolucje
(Business Evolutions)
BRAZIL
Atendimento
Digital
PORTUGAL
Box Santander
Advance
URUGUAY
CRM Celestium
(SMEs)
1. Business model and strategy » Aim and value creation » Customers
Group customers
Million
REST OF
EUROPE
0.1
EE.UU.
5.2
UNITED
KINGDOM
25.3
SANTANDER
CONSUMER
FINANCE
17.9
POLAND
4.4
Total customers
125
Million
MEXICO
13.4
BRAZIL
34.3
REST OF LATIN
AMERICA
0.8
CHILE
3.6
ARGENTINA
2.9
PORTUGAL
4.0
SPAIN
12.8
Solutions to support the internationalisation
and growth of companies.
SANTANDER TRADE
NETWORK: a network
of services suppliers
certified by Santander
to help internationalise
businesses.
This solution is part of Santander
Trade, Santander’s online platform that
supports foreign trade with various
services.
GLOBAL TREASURY
SOLUTIONS: a service
that helps multinational
companies manage their
treasuries remotely.
SANTANDER
FLAME: an online
platform to execute and
manage foreign exchange
transactions and risk.
It provides multinationals with centralised
These transactions are essential for
reporting of their accounts with any
institution and enables them to order
payments from Santander Group accounts,
on a centralised basis using various
channels and a standard format.
importing and exporting. They are already
functioning in the United Kingdom and
Mexico, and will soon be available in Chile
and the United States.
+68,000
exporters and
importers
+60
multinational
companies
+20%
growth in
income
Relationship of customers to revenues
Fee income*
(billion euros)
Loyal customers
(million)
* Excluding exchange rate effects
9.4
13.8
2015
+8%
+10%
10.2
15.2
2016
Customer
loyalty drives
revenue growth
2016 ANNUAL REPORT
33
Prosper
Prosper is innovation for everyone
Roselly Kimura, IT, Santander, Brazil
We are transforming our commercial model because we know
our customers demand greater availability and proximity via digital
channels, while strengthening the personal service that has always
been Santander’s hallmark.
2018 target:
30
million
digital
customers
NEW DIGITAL SOLUTIONS: with
simple access to the range of banking
services and personalised advice.
This year has seen the reinforcement of the
remote customer services, such as Gestor Digital
in Brazil and Santander Personal in Spain, which
offer customers a qualified adviser to help them
with their finances, without the need to go to
their branch. Financial management tools have
also been enhanced, such as those in the UK,
Spain and Poland for checking and classifying
spending, and further improvements have been
made to mobile banking, with new payment and
card management solutions available in several
countries.
Digital solutions
Digital customers
Million
16.6
2015
20.9
+26%
+53%
mobile banking
costumers
2016
UNITED
KINGDOM
Investment centre,
spendlytics
(Android) and
mobile payments
SPAIN
Control of
personal finances
in MoneyPlan.
Mobile payments with
Wallet and ApplePay
BRAZIL
ContaSuper solutions
and SantanderWay.
MEXICO
Supermóvil
+900,000
users. Mobile
onboarding of
university student
customers
ARGENTINA
Best digital bank
according to
Global Finance
for seventeenth
year running
POLAND
Best mobile banking
app in the country and
third in Europe according
to Forrester. Enhanced
offering in mobile
payments (Android).
SANTANDER NEO CRM:
this commercial intelligence
tool offers a 360º view of
customer behaviour and
preferences.
We worked in 2016 to integrate the
information from all channels (branches,
contact centres, digital media, etc.) and
to add new transactional functionalities.
This information enables the Bank’s value
proposals to be improved, based on the
customers’ experience and needs, and
helps to generate cost savings and increase
productivity (+24%).
34
SMARTRED: an initiative
to transform the customer
experience at branches.
The aim is to incorporate new
technological advances and create
differentiated spaces for services
that help to streamline processes
and enhance personalised attention.
Spain, United Kingdom, Brazil,
Argentina, Portugal, Mexico and Chile
inaugurated new branches in line with
this model.
472
branches
renovated in 2016
and 1,000 more
expected in 2017
1. Business model and strategy » Aim and value creation » Customers
Thanks to the Bank’s programme to support
SMEs, we have the advice of experts in
promoting our brand and business
Katarzyna Surowiec,
General Manager, Grandpa’s Garden, Poland.
Grandpa’s Garden is a family-run company that
processes and prepares tinned vegetables in Poland.
When the global crisis hit the company’s business,
it sought the support of Bank Zachodni WBK
(Santander Group). Thanks to Firmowe Ewolucje
(Business Evolutions) programme, it was able to
access not only funding for new investments
in the plant, but also other high value-added
services that helped to strengthen its brand,
capture new customers and multiply sales by
10.
OPERATIONAL EXCELLENCE: to increase
customer satisfaction by offering the best service
at the lowest price possible.
Various initiatives are under way throughout the Group to
transform the customer experience in the main relationship
processes with the Bank (customer journeys).
Santander is one of the most efficient
international banks and it aims to keep
on improving its efficiency ratio through
greater process efficiency in technology
and operations and in corporate centres,
as well as from greater digitalisation of
the commercial distribution model.
2018 target:
45-47%
efficiency
ratio
Initiatives that enhance the customer experience
POLAND
Loans via
mobile phones
in 60 seconds
SPAIN
Santander ID
Digital
identification
of customers
and signing of
contracts in a
single process
UNITED
KINGDOM
Digital
processes for
mortgages
The time needed
to make a
request has been
cut from 3 hours
to less than 40
minutes (-75%)
CHILE
Neoclick
Online Request
for loans in 3
clicks. 93% of
the process is
electronic, saving
commercial
teams 200,000
hours
BRAZIL AND MEXICO
Biometrics
Customers are
identified by
fingerprint, voice
or face recognition.
This system is used in
Mexico for around 30%
of active customers
We are among the Top 3 in customer
satisfaction in countries accounting for
close to 80% of our pre-tax profit
Number of countries where Santander
is Top 3 in customer satisfaction1
8
+3
5
Argentina
Brazil
Chile
Spain
Mexico
Poland
Portugal
UK
2015
2016
(1) Corporate benchmark of customer satisfaction.
35
1. Business model and strategy » Aim and value creation » Shareholders
Shareholders and investors
At Banco Santander we offer our shareholders an attractive sustainable return to maintain their
lasting confidence. In 2016, the bank met all its financial targets and made significant progress
in its strategic priorities.
Main milestones related to investors
and shareholders in 2016
1. Increased remuneration and payment of
the four usual dividends maintained:
• The total shareholder remuneration against 2016 profit was
€0.21 per share (+5% vs 2015). Three of these dividends have
already been paid: two of them in cash of €0.055 per share and
one via the scrip dividend of €0.045 per share. The fourth and
final dividend is scheduled to be paid in May 2017.
• The dividend yield was 5.2% in 2016 (2016 dividend/Average
2016 price).
Remuneration in cash
Euros per share
0.17
0.16
0.09
2014
2015
2016
+8%
in 2016
+5%
total
remuneration
2. Increase in the number of shareholders:
• Banco Santander had 3.9 million
shareholders in more than 100
countries at the end of 2016.
3. Improved risk indicators
3.9
million
shareholders
• Santander’s robust governance of the risk
function facilitates appropriate and efficient
decision-taking, effective control of risks and
ensures that they are managed in accordance
with the level of risk appetite set by senior
management.
• Following full implementation of the Advanced
3.93%
NPL ratio
(down 43 bp
in 2016)
Risk Management (ARM) programme, Santander’s
advanced risk management is a reality and we are
regarded as best-in-class in the banking industry. The
Group also has a solid risk culture, which enables it to
respond to complex environments.
36
2016 ANNUAL REPORT
The Santander share in 2016
Comparative performance
Dec 15 vs. Dec 16
SAN
MSCI World Banks
120
110
100
90
80
70
60
+8.8%
Dec15
Mar16
Jun16
Sep16
Dec16
SHARE PERFORMANCE
Stock markets were very volatile in 2016
due to the uncertainty over the Chinese
economy, the evolution of commodity
prices, the solvency of the financial sector
in some countries, interest rate policies
and central banks’ stimulus policies, the
referendum in the UK and the US presidential
election.
In this context, the Santander share
performed better than the Ibex 35, the
benchmark Spanish stock market index,
and the European banking index.
€4,959
share price
at the end
of 2016
€ 72,314
millon
of Market
Capitalisation
Shareholder base and capital
(31 December 2016)
Shareholders
(number)
Outstanding shares
(number)
Average daily trading
(number of shares)
Dec. 2016
Dec. 2015
3,928,950
3,573,277
14,582,340,701
14,434,492,579
100,707,234
103,736,264
We have had a relationship
with Santander for three
generations
Adrián Fernández-Romero.
Entrepreneur and Banco Santander shareholder,
Seville
Adrián Fernández Romero emphasises
that “it is very important to have a clear
idea of who you are rowing with when you
begin”, both in his financial activity and
when investing in other companies. “As my
grandfather said, first the partner and then
the business. I am a shareholder because
I believe in Banco Santander. I know its
employees and, as with any company, its
value lies in the people behind it”.
Commitment to shareholders via the
Shareholder and Investor Relations area
The Shareholder and Investor Relations area
implemented various initiatives in 2016 in order to:
1. Foster constant communication with retail
shareholders, institutional investors, analysts
and rating agencies in order to strengthen
the relationship and trust. A Group Strategy
Update was held in London in September,
attended by more than 130 investors and
analysts.
The application
enables shareholders
to vote, or delegate
their vote, at the
general meeting
CONTRIBUTING
SHAREHOLDER
VALUE IN 2016
Total shareholder
return
+14%
Tangible book
value per share
4.22 euros
(+4%)
We strengthened
our capital (+50 bp)
10.55%
CET1 fully loaded ratio
2. Strengthen personalised attention for
shareholders. 183 forums and meetings
were held with shareholders, and 186,953
consultations were handled via remote
channels.
3. Facilitate the participation of shareholders.
Another rise in the number of shareholders who
participated in the annual meeting at which
57.63% of the share capital voted or delegated
its vote on the board’s proposals.
4. Encourage innovation in the various
Shareholder and Investor Relations channels.
Using the latest technologies, the corporate
website, the commercial website and the
Santander Shareholders and Investors app were
revamped.
5. Offer exclusive products and services via the
website www.yosoyaccionista.santander.com
2016 ANNUAL REPORT
37
Communities
At Banco Santander we ensure the integration of ethical, social and environmental
criteria in the development of our business, contributing to the economic and social
prosper of people and businesses in a responsible and sustainable way. Fostering higher
education is the hallmark of our social commitment.
Prosper is inclusion
Lorena López y Sabrina Escalante, customer service
representatives, La Juanita, Santander Río, Argentina
Santander has various policies, codes and internal
rules that ensure that its activity is developed
responsibly. They emanate from the best
international practices and protocols, codes of
conduct and international guidelines applicable
in each case.
• Financial education programmes that
transmit to children the importance of saving,
prepare young people for an independent
life and help families to take basic financial
decisions.
2018 target:
4.5
million
people helped
in 2016-2018.
The Bank develops and promotes products
and services that foster, among other things,
financial inclusion, such as microcredits.
Santander also has a special social commitment
to the communities in which it operates, via
Santander Universities and its investment in
numerous support programmes that promote
aspects such as education and social well-being.
These include:
• Local initiatives to support pre-school
education, particularly in Latin America where
the Bank co-operates in projects that support
each country’s education programmes, as
Amigo de Valor in Brazil.
• Programmes to combat social exclusion
that tackle poverty, vulnerability and
marginalisation, as for example Convocatoria de
Proyectos Sociales in Spain and Discovery Grants
in the UK.
The Paris agreement on climate change
represents a major step towards a less carbon-
intensive economy. The financial sector has a
significant role to play in this transition, which
involves risks and opportunities. The Bank has
strengthened this area by creating a new Climate
Finance working group that aims to set the
strategy, identify the risks and opportunities
derived from climate change and incorporate the
later into its management.
1st bank in Europe and 6th in
the world in the Dow Jones
Sustainability Index (DJSI),
Santander has been
present since 2000 in
the DJSI, one of the main
indexes that analyze
and assess companies’
activities in the sphere
of corporate social
responsibility
1.7
million
people helped
in 2016
209
million social
invested in
communities
in 2016
7,082
megawatts
financed in
renewable energy
projects in 2016
-8.5%
reduction in
electricity
consumption
in 2016
38
2016 ANNUAL REPORT
1. Business model and strategy » Aim and value creation » Communities
Thanks to Santander
Microcredits I can help
thousands of entrepreneurs
fulfil their dreams. It is very
gratifying
Rafael Rey, Paraisópolis,
Santander Brazil
Santander Microcredits spurs the growth of
small businesses without access to formal
loans. So far, it has supported 250,000
people in Latin America. Rafael says that
this programme enables him “to better know
people’s needs, what are their dreams and help
them to develop.” Santander aims to support close
to 300,000 new customers in the coming years by
extending the programme to Mexico.
Santander Universities
Banco Santander, which stands out from the rest
of banks for its firm support of higher education,
invests more in supporting education than any
other private company in the world, according
to the first global study published by the Varkey
Foundation in cooperation with UNESCO.
Keys of the support for universities
• University entrepreneurship, a vital factor
in social progress. We provided support,
advice and training for more than 2,400 young
people via programmes as the Santander
YUZZ ‘Jóvenes con ideas’. Competitions with
prizes for entrepreneurship were held in seven
countries – Brazil, Argentina, Chile, Mexico,
Portugal, Spain and United Kingdom – with
25,000 participants. Santander has a target of
supporting 80,000 entrepreneurs in 2017-18.
• Scholarships and social impact: scholarship
programmes for national and international
mobility, academic training and internships
in companies, in Spain, United Kingdom,
Puerto Rico, Brazil, Chile and Uruguay. The
Santander Impact project was created, with
information on the effect of these initiatives on
communities.
• Digitalisation and modernisation of
universities: in order to streamline academic
processes and services with tools such as the
University Smart Card (USC) which evolves with
technology (new supports and uses). There are 9.1
million USCs in 279 universities in 11 countries.
Universia
• Sponsored by Banco Santander, Universia
is Ibero-America’s largest network of
universities and an international reference
in university relations. It focuses on
fostering employment of graduates, online
training via resources such as MOOCs
(massive open online courses) and on
facilitating digital tools.
SANTANDER
UNIVERSITIES
IN FIGURES
36,684
scholarships
and grants
in 2016
1,183
agreements
with universities
and academic
institutions in 21
countries
157
million
invested
in higher
education
in 2016
1,407
universities in
23 countries form
part of Universia
More information is available in
the corporate website’s section
on sustainability and in the 2016
sustainability report.
2016 ANNUAL REPORT
39
2016 Results2
42 Economic, banking and
regulatory environment
46 Santander Group results
49 Countries
57 Global Corporate Banking
Santander met its strategic
financial targets for 2016, in a
very demanding economic and financial environment.
Attributable profit grew by 4%, buoyed by a good
performance in commercial revenue, cost control and
enhanced credit quality.
Economic, banking and
regulatory environment
2016 was characterised by volatility in capital markets, which reacted to unexpected economic
and political news, while the competitive environment and a demanding regulatory agenda
continued to restrain the recovery in banks’ profitability.
» International economic context
GDP
% annual change
The global economy grew slightly less than in 2015
(3.0% vs. 3.2%), due to slower growth in mature
economies, which began the year weakly due
to a series of one-off factors including financial
instability and weather conditions.
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
Global
Mature economies
Developing economies
Economic performance by country
Country
% annual
change GDP
2015
2016 Economic performance
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Source: IMF World Economic Outlook
United States
2.6
1.6
Fall in unemployment rate (to 4.7%), a level that is almost full employment, rise
in underlying inflation to 1.8%. Increase of 25 b.p. in the Federal funds rate in a
context of economic revitalisation, which points to gradual rises in 2017.
United Kingdom
2.2
1.8
Lower than expected initial impact of the Brexit referendum. The jobless rate continued to fall (to
4.8%), which is virtually full employment. Despite the rise in inflation and sterling’s depreciation, the
Bank of England cut its base rate by 25 b.p. to 0.25% and took new measures to support lending.
Eurozone
1.9
1.7
Moderate but resilient growth. Uneven performance by country, with the largest economies registering
positive growth. The risk of deflation abated, but inflation was still far from the 2% target, which led
the European Central Bank to reduce rates to new lows and adopt new quantitative easing measures.
Spain
3.2
3.2
Broadly based growth, mainly underpinned by domestic demand. Job creation was dynamic
and lowered the unemployment rate to 19%. Balanced recovery and sustained growth
with moderate inflation, a current account surplus and a reduced fiscal deficit.
Portugal
Poland
1.6
1.3
The unemployment rate continued the downward trend of the last few years
and was just above 10%. Inflation was similar to 2015 at 0.6%.
3.9
2.8
Slower growth, unemployment rate at historic low (5.9%), inflation again positive in
December (0.8%) and the key interest rate stable at 1.5% throughout the year.
Brazil
-3.8
-3.5
As the year progressed, the recession weakened. The new government is clearly reformist
and has the capacity in parliament to approve reforms. The central bank brought
inflation (6.3%) below the upper limit of its target band (6.5%), which enabled it to cut
the key rate from 14.25% to 13.75% at the end of the year with a downward bias.
Mexico
2.6
2.3
Slower growth due to a more challenging external environment, which produced a fiscal
policy adjustment and a tightening of monetary policy. The peso depreciated and its
impact on inflation led the central bank to raise its key rate from 3.25% to 5.75%.
Chile
2.3
1.5
Slower growth, due to the international context and the mining industry
adapting to an environment of moderate prices. Inflation fell to 3% and the key
interest rate remained at 3.5% (same level as at the end of 2015).
Argentina
2.4
-2.0
The government faced the macroeconomic imbalances and microeconomic distortions with determination,
and strengthened the institutional framework. It began to lay the groundwork for controlling inflation
and the public finances, for commercial and financial integration and for recovering growth.
42
2016 ANNUAL REPORT
2. 2016 Results » Economic, banking and regulatory environment
Going forward, we have many opportunities to grow profitably in
Europe and the Americas in an environment that we expect to be
volatile but, in general, better than 2016 in our main markets.
Ana Botín,
Presentation of Santander Group’s 2016 results (25 January 2017)
MSCI World index
+5%
in 2016
€/$ exchange rate
1.05
(-3% in 2016)
10-year US bond yield
2.43%
(+16 bp in 2016)
In 2016 the
financial markets
were impacted by
various shocks from
the economic and
political sphere
At the end of the year, the rise in the Federal
Reserve’s key rates and in oil prices, as well as
the improved growth in the main economies,
strengthened the rising trend in long-term
interest rates. Even so, monetary policies in
mature economies at the end of 2016 were
markedly expansive.
The Mexican peso depreciated 15% to
1€=21.8MXN, hit by the evolution of oil prices in
the first months of the year and by uncertainty
over a possible change in US trade and migration
policy in the last part of 2016. As the political
uncertainty cleared in Brazil, the Brazilian real
recovered notably to end the year at 1€=3.4 BRL
(1€=4.3 BRL a year earlier). The Chilean peso
ended the year at 1€=708 CLP, a 9% appreciation
over 2015 year-end.
» Financial markets
and exchange rates
As soon as the year started, signs of economic
slowdown in China and doubts on the soundness
of mature economies sparked a sharp rise in risk
aversion that caused stock markets to tumble and
oil prices to reach their lowest levels since 2003.
Financial markets sentiment recovered as of the
middle of February, reducing volatility, thanks
to signs of stabilisation in the Chinese economy,
some recovery in oil prices and improvement in
the US economy.
In March, the European Central Bank cut its key
rates and increased the programme for buying
public and private sector debt, which produced
a sharp decline in the yield on fixed income
securities in euros. Public debt was placed at
negative interest rates for the short and medium
term maturities of many eurozone countries.
The vote in the UK’s referendum in June to leave
the European Union triggered another bout of
volatility, particularly in exchange rates, with falls
in stock markets, a safe haven flight into quality
assets and the depreciation of sterling and the
euro. The impact was not lasting, as volatility
declined in the following months, share prices
recovered and risk aversion abated.
The result of the US presidential election in
November produced a new bout of volatility
in the currencies of emerging markets, with
rises in stock markets and in long-term interest
rates in the expectation that fiscal policy in the
short term would be more expansive. The dollar
appreciated against the euro.
2016 ANNUAL REPORT
43
The banking
environment in the
countries where
Banco Santander
operates continued
to be characterised
by regulatory
changes and a
challenging economic
environment
» Banking sector environment
In mature economies, banks continued to bolster
their balance sheets and capital adequacy.
Specifically, the tier one capital adequacy ratio
(CET1) of European banks was 14.1% in the third
quarter, according to the European Banking
Authority (EBA), more than one percentage point
above that recorded a year earlier. Except for
some isolated exceptions, the banking system
notably improved its capacity to absorb adverse
shocks, something that was underscored in the
EBA’s stress tests.
Even so, banks continued to face significant
challenges to drive profitability. Interest rates
and business volumes remained low; and there
was a sharp rise in competitive pressure in
most markets, among banks and in financing
via markets, and as a result of the entry of new
players in the sector. Shadow banking continued
to gain importance and non-banking financial
entities, which are focusing their business on
niches such as payments, advice and loans,
continued to grow.
In emerging countries, with interest rates and
margins above those in developed countries,
banks’ profits remain higher.
The great majority of banks are implementing
changes in culture, in order to recover trust,
and, in general, all seek to adapt to the digital
revolution, which is going to define the way
in which banks relate to their customers, the
level of services provided and the efficiency of
processes.
Moreover, international banks are facing differing
sociodemographic trends, with a clear process of
ageing in mature economies and a big rise in the
middle classes in developing economies, which
will require differentiated strategies depending
on the features of each market.
REGULATORY
HIGHLIGHTS
IN 2016
The regulatory agenda in
2016 was marked:
At the international level, by
progress in completing the Basel
III agreement.
At the European level, by
the European Commission’s
proposed reforms to the capital
requirements and resolution
framework and measures to
advance in the single European
market.
And in Spain, by measures
related to consumer and investor
protection.
» Supervisory and regulatory
environment
In 2016 the regulatory environment remained
demanding with relevant novelties among which
the most important are the revision of Basel III
and the proposal of the European Commission for
resolution of entities.
Basel III review
The objective of authorities in the Basel III
review is to simplify the ratios and make them
more comparable and sensitive to risk, without
significantly increasing banks’ overall capital
requirements.
Also under discussion is whether to set limits on
capital deductions for entities that use internal
models to calculate their capital requirements.
Although there is still much uncertainty, the new
framework is expected to be approved in the first
months of 2017 and come into force in 2021.
44
Prudential regulation review in Europe
The European Commission published in November
a new proposal of reforms on capital and
resolution rules. These include:
• The introduction of new Basel international
standards in the capital framework.
• Changes to the resolution framework. The Single
Resolution Board (SRB) has been fully operational
since 1 January 2016. It will set during 2017 a level
indicative of the loss absorbing capacity for each
institution (MREL and TLAC for the G-SIBs).
Santander is structured around subsidiaries that
are autonomous in terms of capital and liquidity.
As a result, it has a multiple point of entry
approach, which means that the resolution of a
particular subsidiary would not affect the other
Group entities. Accordingly, the TLAC requirement
is expected to be applied to each group’s
subsidiary, that must fulfil not only the local rules
but also the European ones. This will require
additional debt issues.
The Commission’s proposal is the first step in a
long legislative process. It is expected to come
into force between 2019 and 2021.
Meanwhile, the European Banking Authority
(EBA) and the European Central Bank (ECB) are
reviewing the internal models used by the banks
in Europe.
2. 2016 Results » Economic, banking and regulatory environment European Banking Union
Milestones in the construction of the European Banking Union
January 2015
The European
directive
on banking
supervision came
into force
November 2015
The European
Commission presented
its single deposit
insurance scheme
proposal (EDIS)
May 2016
European
Commission’s final
proposal for minimum
own funds and eligible
liabilities (MREL)
July 2017
The European
Commission’s
senior debt
subordination
proposal in Europe
January 2019
Final total
loss absorbing
capacity (TLAC)
implementation
proposal in Europe
November 2014
The European
Central Bank takes
on the single
supervision of banks
in the eurozone
Third quarter
of 2015
The ECB establishes
the minimum capital
requirements for 2016
as conclusion of the
Supervisory Review
Evaluation Process
(SREP)
January 2016
The European
resolution authority
fully assumes its
functions and the
bail-in comes into
force as the SREP’s
resolution tool
Fourth quarter
of 2017
Setting an indicative
MREL level for
systemic entities
November 2016
The European
Commission’s
proposal on reviewing
capital requirements
(CRR/CRDIV), the
bank recovery and
resolution directive
(BRRD) and the single
resolution mechanism
(SRM) regulation
Interaction between accounting
and prudential rules
The regulatory bodies are working on bringing
into force in 2018 the new international financial
reporting standard (IFRS 9), which will change
the calculation regarding the recognition of
losses incurred in the banking system. The new
accounting framework adapted to IFRS 9, which
must also reconcile with the capital framework,
will be defined in 2017.
There is still an intense political debate on the
creation of a single European deposit insurance
scheme (EDIS). The differences centre on how
to carry out the gradual allocation of the fund
envisaged for 2024 and to mitigate and share the
risks among countries. The date for reaching an
agreement is still not known.
Banking supervision via the Single
Supervisory Mechanism (SSM)
The number of banks supervised by the European
Central Bank stood at 126 at the end of 2016.
Of note among the SSM’s activities was the
Supervisory Review and Evaluation Process (SREP).
The supervisory team assigned to Santander had
more than 100 meetings with the Bank in 2016.
At the end of 2016, the ECB sent to each bank the
minimum capital requirements for the following
year. In 2017, at consolidated level, Santander
Group must maintain a minimum phase-in CET1
capital ratio of 7.75%, 9.25% for the phase-in T1
and a total phase-in ratio of 11.25%.
SRB (Single Resolution Board): single European mechanism for the resolution of failing banks.
TLAC (Total Loss Absorbing Capacity): loss absorbing capacity of globally systemically important banks.
It enables the bail-in to be carried out: the investors, rather than the taxpayers, assume the liabilities.
MREL: Minimum Requirement for own funds and Eligible Liabilities.
Similar to the TLAC for globally systemically important banks, the MREL is applied to European banks.
G-SIB: Globally Systemically Important Banks.
SREP : the Supervisory Review and Evaluation Process of banks performed by the European Central Bank.
CRDIV: the EU’s Capital Requirements Directive.
BRRD : the EU’s Bank Recovery and Resolution Directive.
SRMR: the Single Resolution Mechanism Resolution in the EU.
MiFID (Markets in Financial Instruments Directive): European rules on investor protection in relation to financial products.
SINGLE EUROPEAN
MARKET
The European Commission
continues to work on measures
to strengthen and advance in the
single European market.
Action plan of the single capital
market.
Action plan of the Green Book on
retail financial services.
Digital agenda and initiatives to
benefit the single digital market
such as digital economy and data
economy.
Harmonisation of consumer
protection regulations.
Member states face an important
schedule for implementing
rules that will come into force
in 2018, such as data protection
regulations, the cybersecurity
directive, the directive on
payment services and the
Markets in Financial Instruments
Directive (MiFID II), which will
play a key role in developing retail
and digital banking.
45
Santander Group key data
Balance sheet (million euros)
Total assets
Net customer loans
Customer deposits
Managed and marketed customer funds
Shareholders’ equity
Total managed and marketed funds
Income statement*(million euros)
Net interest income
Gross income
Net operating income
Underlying profit before taxes
Underlying profit attributable to the Group
Attributable profit to the Group
EPS, profitability and efficiency (%)
EPS (euros)
RoE
Underlying RoTE**
RoTE
RoA
Underlying RoRWA**
RoRWA
Efficiency ratio (with amortisations)
Solvency and NPL ratios (%)
CET1 Fully loaded
CET1 Phase-in
NPL ratio
Coverage ratio
Market capitalisation and shares
Number of shares (million)
Share price (euros)
Market capitalisation (million euros)
Tangible Book value (euros)
Price/ tangible book value (X)
P/E ratio (X)
Other data
Number of shareholders
Number of employees
Number of branches
2016
1,339,125
790,470
691,112
1,102,488
102,699
1,521,633
2016
31,089
43,853
22,766
11,288
6,621
6,204
2016
0.41
6.99
11.08
10.38
0.56
1.36
1.29
48.1
2016
10.55
12.53
3.93
73.8
2016
14,582
4.959
72,314
4.22
1.17
12.18
2015
%2016/2015
(0.1)
0.0
1.2
2.5
4.0
1.0
%2016/2015
(3.4)
(3.1)
(3.9)
3.2
0.8
4.0
%2016/2015
1.0
%2016/2015
%2016/2015
1.0
8.8
9.9
1,340,260
790,848
683,142
1,075,563
98,753
1,506,520
2015
32,189
45,272
23,702
10,939
6,566
5,966
2015
0.40
6.57
10.99
9.99
0.54
1.30
1.20
47.6
2015
10.05
12.55
4.36
73.1
2015
14,434
4.558
65,792
4.07
1.12
11.30
2014
1,266,296
734,711
647,706
1,023,189
89,714
1,428,083
2014
29,548
42,612
22,574
9,720
5,816
5,816
2014
0.48
7.05
10.95
10.95
0.58
1.27
1.27
47.0
2014
9.65
12.23
5.19
67.2
2014
12,584
6.996
88,041
4.01
1.75
14.59
2016
3,928,950
188,492
12,235
2015
%2016/2015
3,573,277
193,863
13,030
10.0
(2.8)
(6.1)
2014
3,240,395
185,405
12,951
(*) Variations w/o exchange rate: Net interest income: +2.3%, Gross income: +2.5%; Net operating income: +1.6%;
Underlying attributable profit: +10.5%; Attributable profit: +15.1%
(**) Excluding non-recurring capital gains and provisions
Note: RoE, RoTE y CET1, proforma data including the January 2015 capital increase.
For more information about
the results of the Group and
its main units see pages 96 to
157 of Banco Santander’s 2016
Annual Report.
2. Results » Santander Group results462016 ANNUAL REPORT Results
The commercial transformation is driving growth in loyal and digital customers
During 2016, Santander advanced in its customer
loyalty strategy in all its markets with the
launch of various strategies and high value-
added products. The Bank strengthened its
multichannel offering with new apps for mobile
banking, development of biometric identification
and the launch of new means of payment
facilities in several of its markets.
These measures increased the number of loyal
customers by 1.4 million (individuals: +9% and
companies: +29%) and digital customers by 4.3
million (notable growth of 53% in mobile banking
customers).
Loyal customers
Million
Digital customers
Million
20.9
15.2
+
10%
16.6
+2
6%
13.8
2015
2016
2015
2016
Recurrent growth in commercial revenues. Emphasis on cost control and lower provisions
The loyalty strategy enabled commercial
revenues to rise in eight of the Group’s 10 core
units. Of note was the increase in fee income.
Thanks to the efficiency plan, the investments
in the commercial transformation and the
higher regulatory costs were absorbed. As a
result, operating expenses fell on a like-for-
like basis and discounting inflation. Santander
remains one of the world’s most efficient banks.
It is among the Top 3 for customer satisfaction
in eight of its nine core countries.
Provisions continue to decline.
+2%
Net interest income
+8%
Fee income
Cost-to-income ratio
%
>60
48.1
+3%1
Gross income
-2%2
Costs
-2%1
Provisions
1. Constant euros; 2. Excluding perimeter and inflation.
S
antander
Peers
Solid growth in pre-tax profit and value creation for our shareholders
Underlying profit before taxes rose 12% (in
constant euros) and increased in nine of the
Group’s 10 core units. Attributable profit
was up 4% to €6,204 million.
The positive trend in the income statement
enabled Santander to meet its financial
objectives and consolidate itself as one
of the European banks with the best
shareholder return.
Attributable profit
Million euros
RoTE
%
Ordinary
Total
6,204
+4%
10.99
11.08
5,966
2015
2016
2015
2016
9.99
10.38
2016 ANNUAL REPORT
47
Balance sheet
Greater activity in a challenging environment
In an environment of low interest rates
and economic recovery, Santander
maintained constant growth in its
commercial activity, both loans and
customer funds in almost all its markets,
supporting its corporate clients in their
expansion plans and helping individual
customers to satisfy their financial needs.
Enhanced credit quality ratios
Santander maintained its traditional
prudence in risks and continued to reduce
the NPL ratio and increase the coverage
ratio. The cost of credit continued to
fall and was in line with the objectives
announced to the market.
Activity
%
+2%
+5 %
Loans
Funds
Growth in constant euros
+10%
Demand
deposits
+14%
Mutual funds
NPL and coverage ratios
%
Coverage ratio
NPL ratio
Cost of credit
%
73.1
4.36
2015
73.8
3.93
2016
1.25
1.18
2015
2016
Capital strength underpinned by organic generation
Santander maintained solid capital ratios
appropriate for its business model, balance
sheet structure and risk profile. The organic
generation of capital (€3,363 million in 2016)
enabled capital to increase, business growth
to be financed and an increased cash dividend
to be paid.
In the stress tests conducted by the European
Banking Authority, Santander is the bank that
destroys least capital among its competitors in
the adverse scenario.
48
Capital ratios (fully loaded)
%
13.05
11.00
10.05
13.87
11.53
10.55
2015
2016
CET1
Tier1
Total capital ratio
(including Tier2)
2. Results » Santander Group results462016 ANNUAL REPORT Results by countries and businesses
Spain
Santander Spain is
maintaining its 1|2|3
strategy to boost loyalty
in the medium and long
term and improve the
quality of service.
+32%
loyal
customers
+13%
digital
customers
New model of Santander branch in Spain.
STRATEGIC
PRIORITIES
Profitable
growth
Bank of choice for corporates
Improve efficiency and
customer experience
Best bank to work for
2016
HIGHLIGHTS
A s part of the 1|2|3 World programme,
a new means of payment strategy that
focuses on improving customer loyalty
was implemented.
T here were increases in loyal customers
(+27%), commercial productivity (50% of
production comes from 1|2|3 customers)
and investment in profitable products
(market share increased by 230 b.p. in new
consumer lending production).
N ew lending to individuals rose 16%. By
products, consumer credit (+91%) and
mortgages (+18%) fuelled growth.
S antander continued to support SMEs
(+48% in loyal SMEs).
T he NPL ratio dropped to 5.41% (-112 b.p.).
1. Million euros.
2. Change without repos.
A n efficiency plan was implemented which
saw optimisation of small branches and the
creation of a new and larger branch model
which enables better advice and service
to be given to customers, as well as the
integration with digital channels. Santander
remained among the Top 3 in customer
satisfaction among Spanish banks.
S antander Spain continued to be the leader
in the wholesale banking segment, as well
as in private banking and Select customers.
S antander has brought ApplePay to
Spain on an exclusive basis. This mobile
payment service demonstrates the Bank’s
commitment to digital innovation. In
addition, other payments services, such as
the Wallet app and the contactless payment
bracelet, have been launched.
L aLiga Santander came into being. This
strategic sponsorship agreement gives
the Bank projection and visibility, further
enhances its brand image and brings it
close to customers.
Key data
EMPLOYEES
23,017
CUSTOMERS (million)
12.8
LOANS 1 2
150,960 (-4%)
ATTRIBUTABLE PROFIT 1
1,022 (+ 5%)
CONTRIBUTION
TO GROUP PROFIT
12%
2016 ANNUAL REPORT
49
Santander
Consumer Finance
SCF is Europe’s market leader
in consumer finance and
specialises in auto finance
and in loans for the purchase
of durable goods, personal
finance and credit cards.
It has a presence in Germany,
Austria, Belgium, Denmark,
Spain, Finland, France,
Netherlands, Italy, Norway,
Poland, Portugal, United
Kingdom, Sweden and
Switzerland.
Santander Consumer Finance branch in Germany.
STRATEGIC
PRIORITIES
Maintain profitability
and gain market share
Manage agreements with vehicle
manufacturers proactively
Speed up the digitalisation
of the business
2016
HIGHLIGHTS
SCF is among the Top 3 in the markets
in which it operates. It generates
recurring profits throughout the
economic cycle and offers a unique value
proposition among its competitors.
It has an extensive network of
agreements with more than 130,000
associated points of sale (car dealers
and retailers).
It offers financing solutions via
innovative platforms.
It has substantial capacities in risk
management and recoveries that make
it possible to maintain high credit quality.
The evolution of results (+18%)
reflects higher growth in gross income
than costs, a fall in provisions with a
cost of credit of 0.47% and an efficiency
ratio (44.7%) better than that of its
competitors.
Of note among the units was the good
performance of profits in Spain, the
Nordic countries and Italy.
T he agreements signed in the last few
years have consolidated SCF’s leadership
position in its markets:
• The agreement with Banque PSA
Finance (BPF) to create joint ventures in
11 countries was completed.
• GE Money was integrated in the Nordic
countries.
A ll countries registered growth in new
lending (+17%).
Key data
EMPLOYEES
14,928
CUSTOMERS (millions)
17.9
LOANS1 2
87,742 (+14%)
ATTRIBUTABLE PROFIT 1
1,093 (+18%)
CONTRIBUTION
TO GROUP PROFIT
13%
1. Million euros. Change in constant euros. 2. Change without repos.
50
2016 ANNUAL REPORT
2. Results » Countries
Poland
Bank Zachodni WBK
One of the Poland’s main
banks, the leader in mobile
and online banking and
second in the card market.
Bank Zachodni WBK branch in Poland.
+4%
loyal
customers
+5%
digital
customers
1. Million euros, change in local currency.
2. Change without repos.
Portugal
Santander Totta
Portugal’s most profitable
bank, with market shares
of around 14% in loans and
deposits.
Santander Totta branch in Portugal.
2016
HIGHLIGHTS
I n order to increase loyalty and the number
of digital customers, Bank Zachodni WBK
continued to develop its electronic channels:
BZWBK24 received several awards as one of
the best mobile banking apps in Poland as well
as internationally.
F irmowe Ewolucje (Business Evolutions) was
launched, an online platform to help SMEs do
business in the virtual world and expand into
foreign markets.
Loans increased 8% year on year, well above
the market pace, with the focus on SMEs and
mortgages.
Growth in commercial revenue and
improvement in credit quality. The 2016 profit
was affected by the new tax on assets, excluding
this effect profit grew 14%.
Euromoney magazine recognised Bank Zachodni
WBK as the Best Bank in Poland in 2016.
2016
HIGHLIGHTS
Following the acquisition of most of Banif’s
assets and liabilities in December 2015,
Santander Totta became Portugal’s second
largest private sector bank. The technological
and operational integration was completed in
less than a year.
The bank continued to focus on structural
improvements to its commercial model to boost
efficiency and the quality of customer service,
via the CRM platform, a multichannel offering
and streamlined processes. This was reflected in
gains in market share in loans to companies.
The 1|2|3 World programme evolved well,
with significant increases in the number of
accounts, credit cards and protection insurance.
+21%
loyal
customers
+32%
digital
customers
Among the awards Santander Totta received in
2016 was Best Bank in Portugal, from both
Euromoney and Global Finance.
1. Million euros. 2. Change without repos.
Key data
EMPLOYEES
12,001
CUSTOMERS (millions)
4.4
LOANS1 2
20,697 (+8%)
ATTRIBUTABLE PROFIT 1
272 (-6%)
CONTRIBUTION
TO GROUP PROFIT
3%
Key data
EMPLOYEES
6,306
CUSTOMERS (millions)
4.0
LOANS1 2
29,030 (-5%)
ATTRIBUTABLE PROFIT 1
399 (+33%)
CONTRIBUTION
TO GROUP PROFIT
5%
51
United Kingdom
Santander UK aims to
deepen customer loyalty,
and improve customer
experience through
digitalisation and product
simplification.
+3%
loyal
customers
+25%
digital
customers
Santander UK branch in the United Kingdom.
STRATEGIC
PRIORITIES
Grow customer loyalty
and market share
Deliver operational
and digital excellence
Growing profitability and a
strong balance sheet
2016
HIGHLIGHTS
T he UK’s decision to leave the EU has led to
economic uncertainty and financial market
volatility. Santander’s commitment to
British businesses, customers and our
people remains as strong as ever.
Santander UK continued to support
UK companies, despite a competitive
environment, economic uncertainty and the
slowdown in SMEs activity. Lending was up
3%.
Key data
EMPLOYEES
25,688
CUSTOMERS (millions)
25.3
LOANS1 2
242,510 (+2%)
ATTRIBUTABLE PROFIT 1
1,681 (-4%)
CONTRIBUTION
TO GROUP PROFIT
20%
Strong performance for 2016 with solid
business growth, increased cost discipline
and good credit quality – all supported by
robust UK economic growth.
O perational efficiency is underpinned by
digitalisation and product simplification.
The efficiency ratio improved to 51%,
reflecting increased cost discipline.
Pre-tax profit increased by 8%.
Attributable profit was affected by the new
bank corporation tax surcharge.
Santander UK maintained a strong
balance sheet. CET1 capital ratio was 11.6%.
The NPL ratio also improved to 1.41%.
1 I2I3 World now has 5.1 million customers
(up 483,000 in 2016). Current account
balances continued to grow (£11,600 million
in 2016) and resulted in fee income growth.
Digital customers reached 4.6 million,
delivering continual improvement in
customer experience. Investment made
in new technology such as voice banking
capabilities and a digital end-to-end
mortgage application process, which can be
completed in under an hour.
Santander UK continued to support the
housing market. Gross mortgage lending
stood at £25,800 million, including loans to
25,300 first-time buyers.
1. Million euros, change in local currency. 2. Change without repos.
52
2. Results » Countries Brazil
In a challenging economic
enviroment, Santander Brazil
showed the strength of its
banking model, registering
a sharp growth in profit and
accelerating its commercial
transformation to focus on the
customer.
+16%
loyal
customers
+45%
digital
customers
Santander’s headquarters in São Paulo, Brazil.
STRATEGIC
PRIORITIES
Focus on
revenue growth
Gain market share in acquiring,
consumer credit, SMEs, etc.
Digital
transformation
Risk management
and recoveries
2016
HIGHLIGHTS
Santander Brazil posted growing
profit in 2016 thanks to its approach
to commercial activity, risk (NPL ratio
below the average of private sector
banks), and costs, which are well-
balanced (via initiatives such as the ‘Fit to
grow’ programme).
Solutions to improve the customer
experience: Acquisition of 100% of the
digital prepaid platform Conta Super;
streamlining of processes with solutions
such as Clique Único, for digitalisation of
administrative work previously done on
paper and reduce customer reponse time.
The mobile banking app has become a
benchmark in the market and has been
valued highly in Apple Store and Google
Play, while e-commerce sales have tripled.
T he bank has 6.4 million customers
that regularly use digital services.
Transactions made through digital
channels represented 73% of total
transactions and 6.3 million customers
use biometric identification systems.
S trengthening of businesses: Santander
Financiamentos created joint ventures
with Hyundai and Banco PSA Finance and
launched a new digital model to improve
the sales process. In wholesale banking,
Santander participated in the country’s
largest mergers and acquisitions reaching
the leading position on the rankings.
I nnovation in retail banking: in the pay
roll business, creation of Olé Consignado
with Banco Bonsucesso; innovative
initiatives in payments instruments
(Santander Way, Getnet, arrangement
with American Airlines). In the SME
segment, in addition to its financial
services, the bank has Avançar, a
programme that helps businesses with
staff training and international expansio
n.
S antander is among the best companies
to work for in Brazil, according to Great
Place to Work.
Santander Brazil included social and
environmental aspects in the credit
analysis of more than 1,000 companies in
the corporate customer segment.
Key data
EMPLOYEES
46,728
CUSTOMERS (millions)
34.3
LOANS1 2
80,306 (+0.4%)
ATTRIBUTABLE PROFIT 1
1,786 (+15%)
CONTRIBUTION
TO GROUP PROFIT
21%
1. Million euros, change in local currency. 2. Change without repos.
53
Mexico
Santander Mexico is the country’s
third largest bank per loan
portfolio with a 14% market share.
Its main strength is innovation in
customer service.
+16%
loyal
customers
+46%
digital
customers
Santander’s headquarters in Mexico.
STRATEGIC
PRIORITIES
Be the 2nd or 3rd main
operator in most segments
Improve the retail
banking franchise
Improve infrastructure
and digitalisation
Increase the RoTE
to close to 17%
Key data
EMPLOYEES
17,608
CUSTOMERS (millions)
13.4
LOANS1 2
28,017 (+8%)
ATTRIBUTABLE PROFIT 1
629 (+18%)
CONTRIBUTION
TO GROUP PROFIT
8%
2016
HIGHLIGHTS
Focus on customer loyalty with
the launch of programmes such as
Santander Plus, the most innovative
available from banks in Mexico, which pays
cashback to customers on the basis of their
transactions. This programme attained 1.1
million customers in its first year.
T otal annual lending growth of 8%.
Companies, SMEs and consumer credit
stand out.
S antander-Aeroméxico travel card,
the best offer of its kind in Mexico, has
430,000 cards have been issued since the
launch, and will be managed exclusively by
Santander for the next 10 years.
A better, simpler and more innovative
mortgage offering: the range was
reduced from four products to two,
and included the launch of Hipoteca
Personal, the only one in Mexico that
offers a tailored interest rate based on the
customer’s profile.
The number of digital customers rose
46% to 1.3 million. The Digital Suite,
the digital banking offer that integrates
different services, includes products such
as the Súper Cuenta Go, which enables
accounts to be opened and managed
completely digitally. The customer can
also check prices for insurance, with the
Segurómetro, make investments online
and control spending via an app.
Santander Mexico will allocate MXN
15,000 million over the next three years
to strategic investments and initiatives,
notably to modernise channels, systems
and infrastructure.
I nternational Finance Magazine (IFM)
recognised Santander as the Most
Socially Responsible Bank in Mexico.
It also achieved first place in the banking
sector and second in the total ranking
of the Mexican stock market’s IPC
Sustentable index.
1. Million euros, change in local currency. 2. Change without repos.
54
2. Results » Countries Chile
Santander is the
country’s leading private
sector bank in terms of
assets and customers
Work café in Chile.
+8%
loyal
customers
+4%
digital
customers
1. Million euros, change in local currency. 2. Change without repos.
Argentina
Santander Río
Santander Río consolidated
itself as the country’s leading
private sector bank following
its acquisition of Citi’s retail
business.
Santander Select branch in Argentina.
+6%
loyal
customers
+20%
digital
customers
1. Million euros, change in local currency. 2. Change without repos.
* Operation subject to authorization by the relevant authorities.
2016
HIGHLIGHTS
I n 2016 Santander Chile registered a substancial
improvement in the indicators of customer
satisfaction thanks to the simplification of
processes and a greater focus on the customer
and this closing the gap with the main
competitors in terms of quality of service.
I nnovative model of work/café branches, a new
way of doing banking that adapts to society’s
changes. These branches have coffee shops
along with an ample working area open to
anyone, with free Wi-Fi.
In crease in the market shares of loans and
deposits in 2016. Total lending increased 7%.
Of note was the market share gain of 22 bp.
Customer deposits rose 7%.
Santander was voted the Best Bank in Chile by
Euromoney and Bank of the Year by LatinFinance
magazine.
Key data
EMPLOYEES
11,999
CUSTOMERS (millions)
3.6
LOANS1 2
38,800 (+7%)
ATTRIBUTABLE PROFIT 1
513 (+16%)
CONTRIBUTION
TO GROUP PROFIT
6%
2016 HIGHLIGHTS
S antander Río will incorporate 500,000
individual customers and a 70-branch network
by acquiring the retail business of Citibank
Argentina*. This operation includes an agreement
with American Airlines and its AAdvantage®
frequent traveller programme.
17 new branches were opened and 246 branches
transformed. Santander Río pioneered in
innovation by opening the country’s first
digital branch.
Improved internal processes: the +CHE CRM
system was implemented in the branch network
in order to offer the most appropriate services
at the best moment and via the most suitable
channel.
Credit and deposits market share increase.
Santander Río was top of the Great Place to
Work ranking, was named Best Digital Bank in
Argentina by Global Finance magazine and Best
Bank 2016 by Euromoney and the Banker.
Key data
EMPLOYEES
7,940
CUSTOMERS (millions)
2.9
LOANS1 2
7,142 (+37%)
ATTRIBUTABLE PROFIT 1
359 (+52%)
CONTRIBUTION
TO GROUP PROFIT
4%
55
United States
Santander US made significant
progress toward its goals:
improving digital capabilities,
enhancing product offerings
and meeting regulatory
obligations to build a strong
business and better serve
customers.
+5%
loyal
customers
+26%
digital
customers
Santander branch in the United States.
STRATEGIC
PRIORITIES
Enhance customer
experience
Meet regulatory
requirements
Improve profitability
Maintain leadership
in auto finance
2016
HIGHLIGHTS
Santander’s business in the US focuses on retail
and corporate banking via Santander Bank and
auto finance via Santander Consumer USA. It
also has an investment banking business, wealth
management capabilities for non-US residents,
and retail and commercial banking in Puerto Rico.
In 2016, Santander US completed the creation
of an intermediate holding company, Santander
Holdings USA (SHUSA), which brings together
the country’s units under a single management
and governance structure in order to manage risk
and capital more effectively.
Santander US continued making significant
progress toward meeting its regulatory
obligations in 2016. The team made critical
investments to improve its technological,
financial control and risk management
capabilities. This justifies in part the fall in profit
in 2016.
S antander Bank, which has a significant
presence in the Northeastern U.S., focused in
2016 on strengthening customer relationships,
enhancing the product offerings and improving
its digital capabilities.
The number of digital banking customers
increased 26%, spurred by the launch of a
new mobile application that enables customers
to access their account information more easily
through fingerprint technology. This, coupled
with increased marketing, drove core deposit
growth of 4%
Santander Bank achieved this growth while
lowering its deposit costs in a rising interest
environment.
Corporate and Commercial Banking grew its
loan book by 16%. In wholesale banking, the
continued focus was on offering products
tailored to customers’ needs and leveraging
global connections within the Group.
Santander Consumer USA is one of the
country’s leading auto finance companies, with an
efficient, scalable infrastructure that enables it to
achieve its profitability goals. Its strategy focuses
on optimizing its customer mix; leveraging its
Chrysler Capital platform for growth; maintaining
its leadership position in the ABS market; and
strengthening its programs in operational risk,
compliance, and consumer practices.
Key data
EMPLOYEES
17,509
CUSTOMERS (millions)
5.2
LOANS1 2
89,638 (-2%)
ATTRIBUTABLE PROFIT 1
395 (-42%)
CONTRIBUTION
TO GROUP PROFIT
5%
1. Million euros, change in local currency. 2. Change without repos.
56
2. Results » Countries
Santander Global
Corporate Banking
(SGCB)
SGCB is the global business
division focused on corporate
customers and institutions
that, due to their size or
sophistication, require a
tailored service or value-added
wholesale products.
STRATEGIC
PRIORITIES
Consolidate position as
experts on Latin America
Develop high value-
added products with low
capital consumption
Increase the offer of
products for commercial
banking customers
2016
HIGHLIGHTS
SGCB attained leading positions in Cash
Management, Export Finance, syndicated
corporate loans, capital markets and
structured finance in Europe and Latin
America.
Cash Management performed well,
particularly in Latin America, due to high
interest rates.
Export Finance maintained its growth trend,
and consolidated its position as a reference in
the industry.
T rade & Working Capital Solutions. SGCB
strengthened its capabilities and product
offering in the Receivables business in order t
be the leading bank in this segment.
o
S GCB remains the leading bank in Europe and
Latin America with top level participations in
significant syndicated corporate lending
transactions.
In structured financing, it maintained a
clear leadership position, both in Latin
America and core geographies in Europe.
In market activity, positive trend in
revenues from the customers business,
particularly in the corporate segment with
strong growth in Latin America.
In capital markets, SGCB continued to
participate in the main transactions in Europe
and Latin America.
The efficiency exercises conducted by
SGCB in various countries enabled costs to
be held down, particularly in Spain and the
United States.
The trend of the results (+30% in constant
euros) is based on the strength and
diversification of customer revenues.
Key data
LOANS1 2
96,796 (+0.2%)
ATTRIBUTABLE PROFIT 1 3
2,089 (+30%)
CONTRIBUTION
TO GROUP PROFIT
25%3
1. Million euros, change in constant currency. 2. Change without repos.
3. This global unit’s result is included in countries’ profit figures.
57
An effective system of corporate governance will
guarantee the Group’s long-term competitiveness and
sustainability as we embrace our strategic objectives with
adequate controls and risk management process in place
report3
Corporate governance
76 Executive summary
62 Introduction
63 Ownership structure
66 Banco Santander’s board of directors
86 Group structure and governance
60
62
63
66
86
framework
89 Shareholder rights and the general
89
shareholders’ meeting
91 Santander Group management team
93 Transparency and independence
95 Goals for 2017
91
93
95
Balanced and committed board.
> Of 15 directors, 11 are non-executive
and 4 are executive.
Equality of shareholder rights.
> Principle of one share, one vote, one
dividend.
> No defensive mechanisms in the Bylaws.
> Encouragement of informed participation
at meetings.
Maximum transparency, particularly as
regards remuneration.
A corporate governance model recognised
by socially responsible investment indices.
> Santander has been listed on the Dow
Jones Sustainability Index and FTSE4Good
since 2000 and 2002, respectively.
3. Corporate governance report » Executive summary
Our aim is to make things Simple, Personal
and Fair. These three words are our guiding
philosophy and this year we have progressed far.
Our people, our customers, our shareholders and
communities expect this much of us
Ms Ana Botín, executive chairman
of Banco Santander
General shareholders’ meeting
18 March 2016
Executive summary
Changes in the composition of the
board and its committees
On 27 September 2016, the board of directors agreed to
appoint Ms Homaira Akbari as independent director on the
proposal of the appointments committee and after having
obtained the necessary regulatory clearance. Ms Akbari will
occupy the vacancy left by Mr Ángel Jado Becerro de Bengoa
following his resignation on that same date. The board also
appointed Ms Akbari to the innovation and technology
committee, again on the proposal of the appointments
committee.
Ms Akbari holds a PhD in Particle Physics from Tufts University
and an MBA from Carnegie Mellon Tepper School of Business.
She has had a solid business career in both the US and France
and has served on the boards of several companies working
with new technologies. She is the President and CEO of
AKnowledge Partners, a global advisory firm specialised in the
Internet of Things, Big Data and data analytics.
Ms Akbari’s appointment will be put forward for approval at
the next general shareholders’ meeting.
In addition, on 26 April 2016 the Bank’s board of directors
agreed to appoint Ms Belén Romana García as chairman of
the audit committee on the proposal of the appointments
committee. Ms Romana García will replace Mr Juan Miguel
Villar Mir, who will retain his seat on the committee.
It was subsequently agreed at a board meeting held on
28 October 2016 to appoint Ms Romana García to the risk
supervision, regulation and compliance committee, again on
the proposal of the appointments committee.
Following the changes just discussed, the board of directors
and its committees are now more diverse in terms of
nationality, knowledge, professional experience and gender.
60
2016 ANNUAL REPORT
Activities of the board
The board held 13 meetings during 2016. In addition to the
report made by the Group executive chairman at each annual
meeting, the chief executive officer submitted management
reports on the Group and the vice chairman, Mr Matías
Rodríguez Inciarte, reported on the Group’s risks. As in
previous years, the board held one meeting on the Group’s
global strategy in 2016.
The Group’s external auditors and heads of internal audit took
part in all the meetings held by the audit committee in 2016
and reported to the board on two occasions.
Dividend policy
In 2015, the Bank restructured its dividend policy with the
aim of once again making shareholder remuneration largely a
cash event, with the change to become effective from the first
dividend paid out against earnings for that year. The Bank also
announced its intent that the cash payout represent between
30% and 40% of its recurring profit in the coming years, instead
of the previous 20%, and that payments to shareholders reflect
the growth in its profit.
A proposal was raised at the general shareholders’ meeting
held on 18 March 2016 to make a 5% increase in the total
dividend charged to earnings for 2016 in respect of the 0.20
euros relating to 2015, as just discussed. To date, a total of
0.155 euros per share has been paid out against 2016 earnings
through the scrip dividend scheme −at a value of 0.045 euros,
gross, per free allotment right− and two cash payments
−of 0.055 euros each−. A final cash payment of 0.055 euros
per share is also to be paid this coming May, subject to
the approved of the general meeting. Once paid, this will
effectively constitute the aforementioned 5% increase on the
total dividend charged to 2016 earnings.
Bylaw-stipulated emoluments
Bylaw-stipulated emoluments earned by the board amounted
to 4.6 million euros in 2016, which is 23.9% lower than the
maximum amount approved by shareholders at the general
meeting held on 18 March 2016.
Remuneration of executive directors
At the general shareholders’ meeting of 18 March 2016,
shareholders also approved the maximum ratio of 200%
between variable and fixed pay items for 2016 for a maximum
of 1,700 members of the identified staff, including executive
directors.
The binding decision was also reached at the same meeting to
approve the director remuneration policy of Banco
Santander, S. A. for 2016, 2017 and 2018 and the annual report
on director remuneration underwent a consultative vote by
shareholders.
Investors and analysts held a positive view of the changes
made to the director remuneration policy, such as streamlining
the different variable items of remuneration, improving the
adjustment for ex-ante risk in relation to variable remuneration
and increasing the weighting of long-term pay items and the
multiyear performance measures, thus making the ratio of long
and short-term objectives more effective and efficient.
Appointments at subsidiaries
On 16 May 2016, the supervisory board of Bank Zachodni
WBK appointed Mr Michal Gajewski as chief executive officer
taking over from Mr Mateusz Morawiecki, who left the bank
in November 2015 to join the new Polish Government as Vice
President and Minister of Development. The appointment was
approved by the Polish Financial Supervision Authority on 29
November 2016.
Likewise, on 25 December 2016, the general shareholders’
meeting of Santander Brasil, acting on a favourable report
from the appointments committee of Banco Santander, S.A.,
proceeded to appoint Mr Álvaro Antonio Cardoso de Souza as
independent chairman of Santander Brasil, taking over from
Mr Jesús María Zabalza Lotina.
Financial information periodically
published by the Bank
The board has approved or drawn up the quarterly and
half-yearly financial information, financial statements and
management report for 2016, in addition to other documents
such as the annual report, the sustainability report, the Pillar III
disclosures report, the annual corporate governance report and
the annual report on director remuneration.
Internal governance framework at the Group
In 2016, the Group continued to develop and update its
governance framework, which comprises a governance model
regulating parent-subsidiary relations and a set of corporate
frameworks that effectively implement this model for all the
different functions and decision-making processes. A series
of new corporate frameworks were approved in 2016 (for
managing special situations and one for strategic purposes)
while others were updated where needed.
Also in 2016 the Group appointed a new global director of
internal governance, who is presently implementing a plan
to build a suitable internal governance structure that meets
the expectations of supervisors. This process will consist of
overseeing the effective application of the parent-subsidiary
model of governance; ensuring the internal consistency of
the system and of its different component elements (model,
corporate frameworks, procedure, policies, etc.); identifying
areas where new rules need to be implemented; managing the
policy relating to regulatory documents and administering
the repository where those documents are kept; defining
rules on the functioning and on documenting the decisions of
committees and other bodies; and supervising the process of
applying the governance system across the entire Group.
2016 ANNUAL REPORT
61
3. Corporate governance report » 1. Introduction
1. Introduction
Against this complicated economic landscape, with a huge number
of players and scenarios involved, we are aware that corporate
governance constitutes a key factor driving the creation of value.
At Santander, we are continuously coming up with improvements,
in line with the highest international standards, and we implement
these through specific actions. In doing so, we are building the
confidence and trust of our shareholders and other stakeholders, as
well as society in general.
We are therefore continuing to strengthen our corporate
governance, focusing especially on the effective functioning of
the board of directors. For Santander, robust governance is a key
element in ensuring a sustainable long-term business model.
We now have a board of directors that possesses the expertise,
experience, knowledge, dedication and diversity needed to attain the
objective of making Santander the best commercial and retail bank.
In line with the Bank’s vision and mission (described in chapter
one of this annual report) and within the framework of its general
supervisory function, the board of directors takes decisions that
relate to the Group’s main policies and strategies, its corporate
culture, the definition of its structure and the promotion of suitable
corporate social responsibility policies. In addition, and especially
in exercising its responsibility in managing all risks, the board must
approve and monitor the risk framework and appetite, ensure it is in
line with the Bank’s business plans, capital and liquidity, verify that
risks are correctly reported by all units and oversee the operation
of the three lines of defence, guaranteeing the independence of the
heads of risk, compliance and internal audit and their direct access to
the board.
Last year, following the arrival of Ms Homaira Akbari, the board
of directors of Banco Santander is now more diverse in terms of
nationality, knowledge and professional experience and gender.
62
2016 ANNUAL REPORT
2. Ownership structure
» Number of shares and significant interests
Number of shares
In 2016, the Bank effected a rights issue under the Santander Scrip
Dividend scheme, a process effectively completed on 4 November.
A total of 147,848,122 new shares were issued, equivalent to 1.02% of
the Bank’s share capital at year-end 2015.
On 31 December 2016, the Bank’s share capital was represented
by 14,582,340,701 shares. At that date, stock market capitalisation
according to the listing price on the Electronic Spanish Stock Market
Interconnection System was 72,313.8 million euros.
All shares carry the same voting and dividend rights.
Significant interests
At 31 December 2016, the only shareholders appearing on the
Bank’s register of shareholders with a stake of over 3%1 were State
Street Bank and Trust Company, holding 12.10%; The Bank of
New York Mellon Corporation, holding 8.86%; Chase Nominees
Limited, holding 5.98%; EC Nominees Limited, holding 4.39%; and
Clearstream Banking S.A., holding 3.38%.
Nevertheless, the Bank believes that those stakes are held in custody
in the name of third parties and to the best of the Bank’s knowledge
none of those shareholders holds itself a stake of over 3% in the
share capital or in the voting rights2.
Bearing in mind the current number of members of the board of
directors (15), the percentage of capital needed to exercise the
right to appoint a director, in accordance with article 243 of the
Spanish Corporate Enterprises Act (Ley de Sociedades de Capital) on
proportional representation, is 6.67%.
» Shareholders’ agreements and
other significant agreements
Section A.6 of the annual corporate governance report, which
forms part of the management report, contains a description of the
shareholders’ agreement executed in February 2006 by Mr Emilio
Botín-Sanz de Sautuola y García de los Ríos, Ms Ana Botín-Sanz de
Sautuola y O’Shea, Mr Emilio Botín-Sanz de Sautuola y O’Shea,
Mr Francisco Javier Botín-Sanz de Sautuola y O’Shea, Simancas, S.A.,
Puente San Miguel, S.A., Puentepumar, S.L., Latimer Inversiones, S.L.
and Cronje, S.L. Unipersonal, providing for the syndication of the
Bank shares held by the signatories to the agreement or whose
voting rights have been granted to them. This agreement was also
reported to the Spanish National Securities Market Commission
(CNMV) as a significant event and is described in the public records
thereof.
On 3 August and 19 November 2012, Banco Santander notified the
CNMV, through a significant event, that it had been formally notified
of amendments to this shareholders’ agreement with regard to the
signatories thereto.
On 17 October 2013, the Bank also notified the CNMV, through a
significant event, of an update to the signatories and the distribution
of shares included in the syndication, as a result of a business
reorganisation carried out by one of the parties to the agreement.
On 3 October 2014, Banco Santander notified the CNMV, through
a significant event, of a new update to the signatories and the
distribution of shares included in the syndication, as well as the
change in the chairmanship of the syndicate, which is vested in
the chairman of the board of trustees of the Botín Foundation
(currently Mr Francisco Javier Botín-Sanz de Sautuola y O’Shea).
This information was subsequently supplemented through a further
significant event notification on 6 February 2015.
On 6 February and 29 May 2015, Banco Santander notified the
CNMV, through respective significant events, of the updates to the
signatories and the distribution of shares included in the syndication,
all within the framework of the inheritance process as a result of the
death of Mr Emilio Botín-Sanz de Sautuola y García de los Ríos.
Lastly, on 29 July 2015 Banco Santander notified the CNMV,
through a significant event, of an update to the signatories and
the distribution of shares included in the syndication as a result
of extinguishing the usufruct over the shares of one of the parties
to the agreement along with the voting rights arising therefrom,
thereby consolidating the full price of the aforementioned shares in
the Botín Foundation.
1. The threshold stipulated in Royal Decree 1362 of 19 October 2007, which implemented the Spanish Securities Market Act of 28 July 1988, defining the concept of significant
holding.
2. The website of the Spanish National Securities Market Commission (www.cnmv.es) contains a notice of significant holding published by Blackrock, Inc. on 27 October
2016, in which it notifies an indirect holding in the voting rights attributable to Bank shares of 5.028%, plus a further stake of 0.043% held through financial instruments.
However, according to the Bank’s shareholder register, Blackrock, Inc did not hold more than 3% of the voting rights on that date, or on 31 December 2016.
2016 ANNUAL REPORT
63
3. Corporate governance report » 2. Ownership structure
Shares included in the syndication
At 31 December 2016, the syndication included a total of 73,428,193
shares of the Bank (0.5035% of its share capital), broken down as
follows:
Signatories to the shareholders’ agreement
Ms Ana Botín-Sanz de Sautuola y O’Shea
Mr Emilio Botín-Sanz de Sautuola O’Shea1
Mr Francisco Javier Botín-Sanz de Sautuola O’Shea2
Ms Paloma Botín-Sanz de Sautuola O’Shea3
Ms Carmen Botín-Sanz de Sautuola O’Shea
PUENTEPUMAR, S.L.
LATIMER INVERSIONES, S.L.
CRONJE, S.L., Unipersonal4
NUEVA AZIL, S.L.
5
TOTAL
Number
of shares
612,696
16,873,709
16,291,842
7,835,293
8,636,792
-
-
17,602,582
5,575,279
73,428,193
1.
7,800,332 shares held indirectly through Puente San Miguel, S.L.U.
2.
11,447,138 shares held indirectly through Agropecuaria El Castaño, S.L.U.
3.
6,628,291 shares held indirectly through Bright Sky 2012, S.L.
4.
Controlled by Ms Ana Patricia Botín-Sanz de Sautuola O’Shea.
5.
Controlled by Ms Carolina Botín-Sanz de Sautuola O’Shea.
In all other respects the aforementioned syndication agreement
remains unchanged.
The aforementioned significant events may be viewed on the
Group’s corporate website (www.santander.com).
» Treasury shares
Treasury share policy
The sale and purchase of own shares, whether by the company
or its subsidiaries or investees, must conform to the provisions
of applicable law and the resolutions adopted at the general
shareholders’ meeting in this regard.
The Bank, by resolution of the board of directors on 23 October
2014, approved the current treasury share policy3 taking into account
the recommendations of the CNMV.
Treasury share transactions have the following objectives:
a) To provide liquidity or a supply of securities, as applicable, in the
market for the Bank’s shares, giving depth to such market and
minimising possible temporary imbalances between supply and
demand.
b) To take advantage, in benefit of shareholders as a whole, of
situations of weakness in the price of the shares in relation to
prospects of changes in the medium term. Such transactions are
subject to the following general guidelines:
• They may not entail a proposed intervention in the free
formation of prices.
• Trading may not take place if the unit entrusted with such
transaction is in possession of insider or relevant information.
• Where applicable, the execution of buy-back programmes and
the acquisition of shares to cover obligations of the Bank or the
Group shall be permitted.
Transactions with treasury shares are carried out by the investments
and holdings department, which is isolated as a separate area from
the rest of the Bank’s activities and protected by the respective
Chinese walls, preventing it from receiving any inside or relevant
information. The head of such department is responsible for the
management of treasury shares.
Key data
At 31 December 2016, the Bank and its subsidiaries and investees
held a total of 1,476,897 treasury shares in the Bank, representing
0.010% of its share capital at that date (at year-end 2015, there were
40,291,209 treasury shares, representing 0.279% of the Bank’s share
capital at such date).
The following table sets out the monthly average percentages of
treasury shares in 2016 and 2015.
Monthly average percentages of treasury shares1
% of the Bank’s social capital2
January
February
March
April
May
June
July
August
September
October
November
December
2016
0.006%
0.029%
0.021%
0.044%
0.050%
0.051%
0.015%
0.060%
0.179%
0.064%
0.026%
0.017%
2015
0.200%
0.218%
0.233%
0.246%
0.181%
0.169%
0.132%
0.187%
0.244%
0.336%
0.336%
0.335%
1. Further information in this regard is included in section A.8 of the annual
corporate governance report, which forms part of the management report, and
in the capital and treasury share section of this latter report.
2. Monthly average of daily positions of treasury shares.
3. The treasury share policy is published on the Group’s corporate website (www.santander.com).
64
2016 ANNUAL REPORT
Transactions with treasury shares performed in the Group’s interest
by its consolidated companies in 2016 entailed the acquisition of
319,416,152 shares, equivalent to a par value of 159.7 million euros
(cash amount of 1,380.5 million euros) and the sale of 358,230,464
shares, with a par value of 179.1 million euros (cash amount of 1,604.8
million euros).
The average purchase price of the Bank’s shares in 2016 was 4.32
euros per share, and the average sale price of the Bank’s shares was
4.48 euros per share.
In addition, the decision was reached at the same general meeting of
27 March 2015 to authorise the board to issue fixed-income securities
convertible into and/or exchangeable for shares in the Bank for a
combined maximum issue value (on one or more occasions) of 10,000
million euros, or equivalent value in another currency. The general
meeting also authorised the directors to fully or partially disapply
the pre-emptive subscription right, subject to the same limits as for
the aforementioned authorised capital. The Bank’s directors will be
entitled to issue instruments under this power through to 27 March
2020.
The net gain for the Bank in 2015, net of tax, on transactions
involving shares issued by the Bank amounted to 14,889,813 euros
and was recognised in the Group’s equity under Shareholders’ Equity-
Reserves.
This authorisation had not been used as of the date of this document.
Moreover, the annual general meeting held on 18 March 2016 passed
the following resolutions:
Authorisation
The current authorisation for transactions with treasury shares arises
from resolution Five adopted by the shareholders at the general
shareholders’ meeting held on 28 March 2014, item II) of which reads
as follows:
“To expressly authorise the Bank and the subsidiaries belonging to the
Group to acquire shares representing the Bank’s share capital for any
valuable consideration permitted by law, within the limits of the law and
subject to all legal requirements, up to a maximum number of shares
(including the shares they already hold) equal to 10% of the share capital
existing at any given time or the maximum percentage permitted by
law while this authorisation remains in force, such shares being fully
paid at a minimum price per share equal to the par value thereof and
a maximum price of up to 3% higher than the last listing price for
transactions in which the Bank does not act on its own behalf on the
Continuous Market of the Spanish stock exchanges (including the block
market) prior to the acquisition in question. This authorisation may only
be exercised within five years of the date of the general shareholders’
meeting. The authorisation includes the acquisition of any shares that
must be delivered to the employees and directors of the company either
directly or as a result of the exercise of the options held by them”.
» Resolutions in effect regarding the
possible issuance of new shares or of
bonds convertible into shares
The capital authorised by the shareholders at the annual general
meeting held on 27 March 2015, under item eight on the agenda,
amounted to 3,515,146,471.50 euros. The Bank’s directors have
until 27 March 2018 to carry out capital increases up to this limit.
The shareholders gave the board (or, by delegation, the executive
committee) the power to exclude pre-emptive rights, in full or in part,
pursuant to the provisions of article 506 of the Corporate Enterprises
Act, although this power is limited to capital increases carried out
under this authorisation up to 1,406,058,588.50 euros.
This authorisation had not been used as of the date of this document.
1. To effect a rights issue charged to reserves for the maximum
amount of 750 million euros at market value under the shareholder
compensation scheme (Santander Scrip Dividend), whereby the
Bank has offered shareholders the possibility of receiving, on the
date on which the second interim dividend for 2016 is typically
paid, shares under a scrip issue for an amount equal to that
dividend payment.
This capital increase was carried out on 4 November 2016 through
the issuance of 147,848,122 new shares, each of a par value of 0.50
euros each (equal to 73,924,061 euros), representing a total of
1.02% of the Bank’s share capital at year-end 2015.
2. To vest powers in the board of directors, pursuant to the terms
of article 319 of the Regulations of the Companies Registry,
authorising it to issue fixed-income securities on one or more
occasions up to a maximum of 50,000 million euros, or equivalent
value in another currency, doing so in any legally admissible
manner, including bonds, covered bonds, promissory notes,
debentures and preference shares, or other analogous debt
instruments (including warrants, whether settled through physical
delivery or netting). The Bank’s directors will be entitled to
exercise this power through to 18 March 2021, whereupon any part
thereof not exercised will be cancelled.
As of the date of this document, a total of 11,834 million euros has
been used under this authority.
3. To delegate to the board of directors, pursuant to the provisions
of article 297.1.a) of the Companies Act, the broadest powers such
that, within one year of the date on which the aforementioned
shareholders’ meeting is held, it may set the date and the
terms and conditions, as to all matters not provided for by the
shareholders themselves, of an increase in capital agreed by
the general meeting in the amount of 500 million euros. If the
board does not exercise the powers delegated to it within the
aforementioned period, these powers will be rendered null and
void.
This authorisation had not been used as of the date of this
document.
2016 ANNUAL REPORT
65
3. Corporate governance report » 3. Banco Santander’s board of directors
3. Banco Santander’s board of directors
Mr Rodrigo Echenique
Gordillo
VICE CHAIRMAN
Executive director
Born in 1946 in Madrid, Spain.
Joined the board in 1988.
Graduate in Law and
Government Attorney.
Other positions of note:
former Group Chief Executive
Officer of Banco Santander,
S.A. (1988-1994). He has served
on the board of directors of
several industrial and financial
companies, including Ebro
Azúcares y Alcoholes, S.A. and
Industrias Agrícolas, S.A., and
he was chairman of the advisory
board of Accenture, S.A. He
also held the position of non-
executive chairman of
NH Hotels Group, S.A.,
Vocento, S.A., Vallehermoso, S.A.
and Merlin Properties SOCIMI,
S.A. He is currently a
non-executive director of
Inditex.
Membership of board
committees
Executive, international and
innovation and technology.
Ms Ana Botín-Sanz de Sautuola
y O’Shea
Mr José Antonio Álvarez
Álvarez
Mr Bruce
Carnegie-Brown
GROUP EXECUTIVE
CHAIRMAN
Executive director
Born in 1960 in Santander,
Spain.
Joined the board in 1989.
Degree in Economics
from Bryn Mawr College
(Pennsylvania, United States).
She joined Banco Santander
after working at JP Morgan (New
York, 1980-1988). In 1992 she
was appointed senior executive
vice president. Between 1992
and 1998 she led the expansion
of Santander in Latin America.
In 2002, she was appointed
executive chairman of Banesto.
Between 2010 and 2014 she
was Chief Executive Officer of
Santander UK. In 2014 she was
appointed executive chairman of
Santander.
Other positions of note:
sits on the board of directors
of The Coca-Cola Company
and on the advisory board of
the Massachusetts Institute
of Technology (MIT’s CEO
Advisory Board). She is founder
and president of the CyD
Foundation (which supports
higher education) and of the
Empieza por Educar Foundation
(the Spanish subsidiary of
international NGO Teach for All).
Membership of board
committees
Executive (chairman),
international (chairman) and
innovation and technology
(chairman).
CHIEF EXECUTIVE OFFICER
Executive director
Born in 1960 in León, Spain.
Joined the board in 2015.
Graduate in Economics and
Business Administration. MBA
from the University of Chicago.
Joined the Bank in 2002 and
appointed senior executive
vice president of the financial
management and investor
relations division in 2004 (Group
Chief Financial Officer).
Other positions of note: board
member of Banco Santander
(Brasil), S.A. and of SAM
Investments Holdings Limited.
He has also served as director of
Santander Consumer Finance,
S.A. and Santander Holdings
USA, Inc. and he sits on the
supervisory boards of Santander
Consumer AG, Santander
Consumer Holding GMBH and
Bank of Zachodni WBK, S.A.
He was also board member of
Bolsas y Mercados Españoles.
Membership of board
committees
Executive, international and
innovation and technology.
VICE CHAIRMAN
Non-executive director
(independent) and lead director
Born in 1959 in Freetown, Sierra
Leone.
Joined the board in 2015.
Master of Arts in English
Language and Literature from
the University of Oxford.
Other positions of note:
currently the non-executive
chairman of Moneysupermarket.
com Group Plc and
non-executive director of
Santander UK Plc and of Jardine
Lloyd Thompson Group plc.
He was formerly the
non-executive chairman of Aon
UK Ltd (2012-2015), founder
and managing partner of the
quoted private equity division
of 3i Group Plc., and chairman
and chief executive officer of
Marsh Europe. He was also lead
independent director at Close
Brothers Group Plc (2006-2014)
and Catlin Group Ltd (2010-
2014). He previously worked at
JPMorgan Chase for eighteen
years and at Bank of America for
four years.
Membership of board
committees
Executive, appointments
(chairman), remuneration
(chairman), risk supervision,
regulation and compliance
(chairman) and innovation and
technology.
66
2016 ANNUAL REPORT
Mr Matías Rodríguez Inciarte
Mr Guillermo de la Dehesa
Romero
VICE CHAIRMAN
Executive director
VICE CHAIRMAN
Non-executive director
Born in 1948 in Oviedo, Spain.
Born in 1941 in Madrid, Spain.
Joined the board in 1988.
Joined the board in 2002.
Ms Homaira Akbari
Non-executive director
(independent)
Mr Ignacio Benjumea Cabeza
de Vaca
Non-executive director
Born in 1961 in Tehran, Iran.
Born in 1952 in Madrid, Spain.
Joined the board in 2016.
Joined the board in 2015.
Graduate in Economics and
Government Economist. He also
studied Business Administration
at the Massachusetts Institute of
Technology (MIT).
Other positions of note:
Minister of the Presidency
between 1981 and 1982, as well
as technical general secretary of
the Ministry of Economy, general
secretary of the Ministry for
European Community Relations
and deputy secretary of state
to the President. He is currently
chairman of Unión de Crédito
Inmobiliario, S.A., of the Princess
of Asturias Foundation and of
the social council of Universidad
Carlos III in Madrid. He is
also a non-executive director
of Sanitas, S.A. de Seguros,
Financiera Ponferrada, S.A.,
SICAV and Financiera El Corte
Inglés E.F.C.
Membership of board
committees
Executive and innovation and
technology.
Government Economist and
head of office of the Bank of
Spain (on leave of absence).
PhD in Experimental Particle
Physics from Tufts University
and MBA from Carnegie Mellon
University.
He is an international advisor to
Goldman Sachs International.
Chief Executive Officer of
AKnowledge Partner, LLC.
Other positions of note:
currently non-executive
director of Gemalto NV,
Landstar System, Inc. and Veolia
Environment S.A. Ms Akbari
has also been president and
chief executive of Sky Bitz,
Inc., managing director of True
Position Inc., non-executive
director of Covisint Corporation
and US Pack Logistics LLC and
she has held various posts at
Microsoft Corporation and at
Thales Group.
Membership of board
committees
Innovation and technology.
Other positions of note:
former secretary of state for
Economy, Secretary General
for Trade and chief executive
officer of Banco Pastor, S.A.
He is currently a non-executive
vice chairman of Amadeus
IT Holding, S.A., honorary
chairman of the Centre for
Economic Policy Research
(CEPR) based in London, a
member of the Group of Thirty
based in Washington, chairman
of the board of trustees of
IE Business School and non-
executive chairman of Aviva
Corporación and of Aviva Vida
y Pensiones, S.A. de Seguros y
Reaseguros.
Membership of board
committees
Executive, appointments,
remuneration, risk supervision,
regulation and compliance,
international and innovation and
technology.
Degree in Law from Deusto
University, ICADE E-3, and
Government Attorney.
He is vice chairman of the
Financial Studies Foundation
and a member of the board
of trustees and the executive
committee of the Banco
Santander Foundation.
Other positions of note: senior
executive vice president, general
secretary and secretary to the
board of Banco Santander,
S.A., and board member, senior
executive vice president, general
secretary and secretary to the
board of Banco Santander de
Negocios and of Santander
Investment. He was also
technical general secretary of
the Ministry of Employment and
Social Security, general secretary
of Banco de Crédito Industrial
and director of Dragados, S.A.,
Bolsas y Mercados Españoles
and of the Governing Body of
the Madrid Stock Exchange.
Membership of board
committees
Executive, appointments,
remuneration, risk supervision,
regulation and compliance,
international and innovation and
technology.
2016 ANNUAL REPORT
67
3. Corporate governance report » 3. Banco Santander’s board of directors
Mr Javier Botín-Sanz de
Sautuola y O’Shea
Non-executive director
(proprietary)
Born in 1973 in Santander,
Spain.
Joined the board in 2004.
Degree in Law.
Chairman and Chief Executive
Officer of JB Capital Markets,
Sociedad de Valores, S.A.U.
Other positions of note:
in addition to his work in
the financial sector, he´s
collaborates with several non-
profit organisations. Since 2014
he has been chairman of the
Botín Foundation and member
of the board of trustees of the
Princess of Girona.
Ms Sol Daurella Comadrán
Mr Carlos Fernández González
Ms Esther Giménez-Salinas
i Colomer
Non-executive director
(independent)
Non-executive director
(independent)
Non-executive director
(independent)
Born in 1966 in Barcelona,
Spain.
Born in 1966 in Mexico City,
Mexico.
Born in 1949 in Barcelona,
Spain.
Joined the board in 2015.
Joined the board in 2015.
Joined the board in 2012.
Degree in Business and MBA in
Business Administration.
Executive chairman of Olive
Partners, S.A. and holds
several positions at companies
belonging to the Cobega Group.
She is also non-executive
chairman of Coca Cola European
Partners, Plc.
Other positions of note: she
has served as a member of the
governing board of the Círculo
de Economía and also as an
independent non-executive
director of Banco Sabadell, S.A.,
Ebro Foods, S.A. and Acciona,
S.A. She is also honorary counsel
general of Iceland in Catalonia.
Membership of board
committees
Appointments and
remuneration.
Industrial engineer. He has
undertaken graduate studies in
business administration at the
Instituto Panamericano de Alta
Dirección de Empresas.
He is the chairman of the board
of directors of Finaccess, S.A.P.I.
Other positions of note: Mr
Fernández has also sat on the
boards of Anheuser-Busch
Companies, LLC and Televisa
S.A. de C.V., among other
companies. He is currently non-
executive director of Inmobiliaria
Colonial, S.A. and member of
the supervisory board of AmRest
Holdings, SE.
Membership of board
committees
Audit, appointments and risk
supervision, regulation and
compliance.
PhD in Law and psicologist.
Professor Emeritus at Ramon
Llull University, board member
of Unibasq and Aqu (quality
assurance agencies for the
Basque and Catalan university
systems) and of Gawa Capital
Partners, S.L. She also sits on
the advisory board of Endesa-
Catalunya.
Other positions of note: she
has been chancellor of Ramon
Llull University, member of the
General Council of the Judiciary,
member of the standing
committee of the Conference
of Chancellors of Spanish
Universities and executive
vice president of the Centre
for Legal Studies attached to
the Department of Justice of
the Government of Catalonia
(Generalitat de Catalunya).
Membership of board
committees
International and innovation and
technology.
The board is now more diverse in terms of nationality, knowledge, professional
experience and gender following the arrival of Ms Homaira Akbari as a new board
member, thus concluding a rigorous selection process that involved a careful assessment
of the capacities of board members (skills matrix) and a precise identification of the
profiles best suited to helping the Group meet its strategic objectives, in accordance with
the principles set out in the Bank’s director selection and succession policy. This process
has been organised and overseen by the appointments committee.
68
2016 ANNUAL REPORT
Ms Belén Romana García
Ms Isabel Tocino Biscarolasaga
Mr Juan Miguel Villar Mir
Mr Jaime Pérez Renovales
Non-executive director
(independent)
Non-executive director
(independent)
Non-executive director
(independent)
General secretary and secretary
of the board
Born in 1965 in Madrid, Spain.
Joined the board in 2015.
Graduate in Economics and
Business Administration
from Universidad Autónoma
de Madrid and Government
Economist.
Born in 1949 in Santander,
Spain.
Joined the board in 2007.
PhD in Law. She has undertaken
graduate studies in business
administration at IESE and the
Harvard Business School.
Born in 1931 in Madrid, Spain.
Joined the board in 2013.
PhD in Civil Engineering,
graduate in Law and degree in
Industrial Organisation.
Chairman of the Villar Mir
Group.
Non-executive director of
Aviva Plc.
She is a professor at Universidad
Complutense de Madrid.
Other positions of note:
formerly executive
vice-president of Economic
Policy and executive
vice-president of the Treasury of
the Ministry of Economy of the
Spanish Government, as well as
director of the Bank of Spain and
the Spanish National Securities
Market Commission. She also
held the position of director of
the Instituto de Crédito Oficial
and of other entities on behalf
of the Spanish Ministry of
Economy. She was the executive
chairman of Sociedad de Gestión
de Activos Procedentes de la
Reestructuración
Bancaria, S.A. (SAREB).
Membership of board
committees
Audit (chairman) and risk
supervision, regulation and
compliance.
Other positions of note:
formerly Spanish Minister for the
Environment, chairman of the
European Affairs Committee and
of the Foreign Affairs Committee
of the Spanish Congress and
chairman for Spain and Portugal
and vice chairman for Europe of
Siebel Systems. She is currently
an elected member of the
Spanish State Council, a member
of the Royal Academy of Doctors
and a non-executive director of
ENCE Energía y Celulosa, S.A.,
Naturhouse Health, S.A. and
Enagás, S.A.
Membership of board
committees
Executive, audit, remuneration
and risk supervision, regulation
and compliance.
Other positions of note:
formerly Minister of Finance
and vice president of the
government for Economic Affairs
from 1975 to 1976. He has also
served as chairman of the OHL
Group, Electra de Viesgo, Altos
Hornos de Vizcaya, Hidro Nitro
Española, Empresa Nacional
de Celulosa, Empresa Nacional
Carbonífera del Sur, Cementos
del Cinca, Cementos Portland
Aragón, Puerto Sotogrande,
the COTEC Foundation and of
Colegio Nacional de Ingenieros
de Caminos, Canales y Puertos.
He is also currently professor
of Business Organisation at
Universidad Politécnica de
Madrid, a member of the Royal
Academy of Engineering and of
the Royal Academy of Moral and
Political Sciences, an honorary
member of the Royal Academy
of Doctors and supernumerary
of the Royal Academy of
Economics and Finance.
Membership of board
committees
Audit and risk supervision,
regulation and compliance.
Born in 1968 in Valladolid,
Spain.
Joined the Group in 2003.
Graduate in Law and Business
Administration at Universidad
Pontificia de Comillas (ICADE
E-3), and Government Attorney.
Other positions of note: he
was deputy director of legal
services at the CNMV, director
of the office of the second vice
president of the government
for Economic Affairs and the
Minister of Economy, general
secretary and secretary of
the board of Banco Español
de Crédito, S.A., general vice
secretary and vice secretary
of the board and head of legal
advisory services of Grupo
Santander, deputy secretary
of the Presidency of the
Government and chairman of
the committee for the reform of
public administration.
Formerly chairman of the
Agency of the Official State
Gazette and director of
Patrimonio Nacional, Sociedad
Estatal de las Participaciones
Industriales, Holding Olímpico,
S.A., Autoestradas de Galicia, S.A.
and Sociedad Estatal para la
Introducción del Euro, S.A.
Secretary of board
committes
Executive, audit, appointments,
remuneration, risk supervision,
regulation and compliance,
international and innovation and
technology.
2016 ANNUAL REPORT
69
3. Corporate governance report » 3. Banco Santander’s board of directors
» Re-election of directors at the 2017
annual general shareholders’ meeting
Pursuant to article 55 of the Bylaws and article 22 of the Rules and
Regulations of the Board4, directors are appointed to three-year
terms, such that one-third of the board is renewed each year.
The following directors will be put forward for re-election at the 2017
annual general shareholders’ meeting, scheduled for 6 or 7 April on first
and second call, respectively, and following the order determined by
seniority for annual renewal and for renewal of one-third of the board: Ms
Ana Botín-Sanz de Sautuola y O’Shea, Mr José Antonio Álvarez Álvarez,
Mr Rodrigo Echenique Gordillo, Ms Esther Jiménez-Salinas i Colomer and
Ms Belén Romana García, the first three as executive directors and the
latter two as independent directors.
Ms Homaira Akbari’s appointment as independent director will also be
put before the general meeting for its approval.
Their professional profiles, together with a description of their work and
activities, can be found in the preceding pages of this report and also on
the Group’s corporate website (www.santander.com) and in the motions
to be laid before the general shareholders’ meeting of 2017.
Each of the re-elections and ratifications will be submitted separately for
voting at the general meeting in accordance with article 21.2 of the Rules
and Regulations for the General Shareholders’ Meeting.
» Powers and duties
The basic responsibility of the board of directors is to supervise the
Group, delegating the day-to-day management thereof to the appropriate
executive bodies and the various management teams.
4. The Bylaws and the Rules and Regulations of the Board of Banco Santander are published on the Group’s corporate website (www.santander.com).
Composition and structure of the board of directors1
Board of directors
Committees
Shareholding
Group executive
chairman
Ms Ana Botín-Sanz de Sautuola y O’Shea
Chief Executive Officer
Mr José Antonio Álvarez Álvarez
Vice chairmen
Mr Bruce Carnegie-Brown
Mr Rodrigo Echenique Gordillo
Mr Matías Rodríguez Inciarte
Mr Guillermo de la Dehesa Romero
Members
Ms Homaira Akbari6
Mr Ignacio Benjumea Cabeza de Vaca
Mr Javier Botín-Sanz de Sautuola y O’Shea
Ms Sol Daurella Comadrán
Mr Carlos Fernández González
Ms Esther Giménez-Salinas i Colomer
Ms Belén Romana García
Ms Isabel Tocino Biscarolasaga
Mr Juan Miguel Villar Mir
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D
s
t
n
e
m
t
n
i
o
p
p
a
e
h
t
f
o
e
e
t
t
i
m
m
o
c
699,261
0.005%
25.11.20144
27.03.2015
First six months of 2018
20.02.2015
20,099
0.000%
25.11.20145
18.03.2016
First six months of 2019
11.02.2016
837,111
0.006%
07.10.1988
28.03.2014
First six months of 2017
13.02.2014
1,783,324
0.012%
07.10.1988
27.03.2015
First six months of 2018
20.02.2015
148
0.000% 24.06.2002
27.03.2015
First six months of 2018
20.02.2015
22,000
0.000%
27.09.2016
27.09.2016
First six months of 2019
26.09.2016
3,067,201
0.021% 30.06.20157
18.03.2016
First six months of 2019
11.02.2016
11,498,361
116,250,993
132,542,835
0.909% 25.07.2004
18.03.2016
First six months of 2019
11.02.2016
412,521
540,784
0.004%
25.11.20148
18.03.2016
First six months of 2019
11.02.2016
16,840,455
0.115%
25.11.20145
27.03.2015
First six months of 2018
20.02.2015
5,405
0.000% 30.03.2012
28.03.2014
First six months of 2017
17.02.2014
150
0.000%
22.12.2015
18.03.2016
First six months of 2019
11.02.2016
270,585
0.002% 26.03.2007
18.03.2016
First six months of 2019
11.02.2016
1,199
0.000%
07.05.2013
27.03.2015
First six months of 2018
20.02.2015
28,757,683
29,837,159
116,250,993
174,845,835
1.198%
t
c
e
r
i
D
612,696
697,913
20,099
822,927
1,475,161
148
22,000
3,067,201
4,793,481
128,263
16,840,455
5,405
150
270,585
1,199
t
c
e
r
i
d
n
I
17,602,582
1,348
14,184
308,163
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
General secretary and
secretary of the board
Mr Jaime Pérez Renovales
1. Figures at 31 December 2016.
2. However, pursuant to the provisions of article 55 of the Bylaws, one-third of the board will be renewed each year, based on length of service and according to the date and
order of the respective appointment.
3. Syndicated shares. See page 64.
4. Effective 13 January 2015.
70
2016 ANNUAL REPORT
The Rules and Regulations of the Board (article 3) reserve thereto the
power, which cannot be delegated, to approve general policies and
strategies and oversee their application, including the following in
particular: strategic or business plans; management objectives and
the annual budget; fiscal strategy and capital and liquidity strategy;
investment, financing, dividend, treasury share, risk management
and control (including fiscal), corporate governance, corporate social
responsibility and regulatory compliance policies; policies regarding the
internal governance of the Bank and its Group; remuneration policies for
employees of the Bank and its Group; and policies for reporting to and
notifying shareholders, markets and public opinion.
Various matters, which likewise cannot be delegated, are also reserved for
the board, including decisions regarding: the acquisition and disposal of
substantial assets (except when the decisions come within the purview of
the shareholders at a general shareholders’ meeting) and major corporate
transactions; the determination of each director’s remuneration and the
approval of contracts governing the performance by the directors of
duties other than those of director, including executive duties, as well as
the remuneration to which they are entitled for the discharge thereof;
the selection, appointment by co-option and ongoing assessment of
directors; the selection, appointment and, if necessary, removal of the
other members of senior management (senior executive vice presidents
and equivalents) and the monitoring of management activity and ongoing
assessment thereof, as well as the determination of the basic terms and
conditions of their contracts; authorisation to create or acquire interests in
special purpose entities or in entities registered in countries or territories
regarded as tax havens; the approval of investments or transactions of a
strategic nature or with a particular tax risk; and the approval of certain
related party transactions. With regard to those powers that cannot be
delegated, the executive committee may make any appropriate decisions,
whenever justified by reasons of urgency, provided that the board is
subsequently informed at the first meeting held to ratify such decisions.
Both the Bylaws (article 40) and the aforementioned Rules and
Regulations of the Board of Directors (article 5) establish the board’s
obligation to ensure that the Bank faithfully complies with applicable law,
observes usage and good practices of the industries or countries where it
does business and abides by the additional social responsibility principles
that it has voluntarily accepted. The board of directors and its standing
committees shall exercise their powers and, in general, carry out their
duties in accordance with the interests of the company, understood to
be the attainment of a long-term sustainable and profitable business that
furthers its continuity and maximises the value of the company.
In addition, the Bank’s board takes a very active interest in the Group’s
risk function. Of its 15 members, 11 are members of at least one of the two
board committees that deal with risk: the executive committee and the
risk supervision, regulation and compliance committee. Three executive
directors are also members of the executive risk committee, which is the
body not mandated by the bylaws responsible for global risk management
in the Group.
Composition and structure of the board of directors1
Board of directors
Committees
Shareholding
e
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C
C
Group executive
chairman
Ms Ana Botín-Sanz de Sautuola y O’Shea
Chief Executive Officer Mr José Antonio Álvarez Álvarez
Vice chairmen
Mr Bruce Carnegie-Brown
Members
Ms Homaira Akbari6
Mr Rodrigo Echenique Gordillo
Mr Matías Rodríguez Inciarte
Mr Guillermo de la Dehesa Romero
Mr Ignacio Benjumea Cabeza de Vaca
Mr Javier Botín-Sanz de Sautuola y O’Shea
Ms Sol Daurella Comadrán
Mr Carlos Fernández González
Ms Esther Giménez-Salinas i Colomer
Ms Belén Romana García
Ms Isabel Tocino Biscarolasaga
Mr Juan Miguel Villar Mir
Total
N
I
N
P
I
I
I
I
I
I
I
C
General secretary and
secretary of the board
Mr Jaime Pérez Renovales
d
e
t
n
e
s
e
r
p
e
r
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e
r
a
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S
l
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a
Do
f
-
-
-
-
-
-
-
18,215,2783
0.125% 04.02.1989
28.03.2014
First six months of 2017
17.02.2014
699,261
0.005%
25.11.20144
27.03.2015
First six months of 2018
20.02.2015
20,099
0.000%
25.11.20145
18.03.2016
First six months of 2019
11.02.2016
837,111
0.006%
07.10.1988
28.03.2014
First six months of 2017
13.02.2014
1,783,324
0.012%
07.10.1988
27.03.2015
First six months of 2018
20.02.2015
148
0.000% 24.06.2002
27.03.2015
First six months of 2018
20.02.2015
22,000
0.000%
27.09.2016
27.09.2016
First six months of 2019
26.09.2016
3,067,201
0.021% 30.06.20157
18.03.2016
First six months of 2019
11.02.2016
t
c
e
r
i
d
n
I
17,602,582
1,348
-
14,184
308,163
-
-
-
11,498,361
116,250,993
132,542,835
0.909% 25.07.2004
18.03.2016
First six months of 2019
11.02.2016
412,521
-
-
-
-
-
-
-
-
-
-
-
540,784
0.004%
25.11.20148
18.03.2016
First six months of 2019
11.02.2016
16,840,455
0.115%
25.11.20145
27.03.2015
First six months of 2018
20.02.2015
5,405
0.000% 30.03.2012
28.03.2014
First six months of 2017
17.02.2014
150
0.000%
22.12.2015
18.03.2016
First six months of 2019
11.02.2016
270,585
0.002% 26.03.2007
18.03.2016
First six months of 2019
11.02.2016
1,199
0.000%
07.05.2013
27.03.2015
First six months of 2018
20.02.2015
t
c
e
r
i
D
612,696
697,913
20,099
822,927
1,475,161
148
22,000
3,067,201
4,793,481
128,263
16,840,455
5,405
150
270,585
1,199
28,757,683
29,837,159
116,250,993
174,845,835
1.198%
5. Effective 12 February 2015.
6. Their appointment will be submitted for ratification at the general shareholders’
meeting scheduled for 6 or 7 April 2017, on first or second call.
7. Effective 21 September 2015.
8. Effective 18 February 2015.
C Chairman of the committee
P Proprietary
I Independent
N Non-executive (neither proprietary nor independent
2016 ANNUAL REPORT
71
3. Corporate governance report » 3. Banco Santander’s board of directors
Commitment of the board1
Number of shares of the Board
Stock market value
174,845,835
1.2% of share capital
1. Figures at 31 December 2016.
868
million euros
Share price
4.959
euros
» Size and composition of the board
Since the end of 2010, the size of the board has been downsized by
25%, from 20 to 15 members.
The composition of the board of directors is balanced between
executive and non-executive directors, most of whom are
independent. All members are distinguished by their professional
ability, integrity and independence of opinion.
Pursuant to article 6.3 of the Rules and Regulations of the Board,
the appointments committee has duly verified the status of each
director. Its proposal was submitted to the board, which approved it
at the meeting held on 21 February 2017.
Of the 15 members currently sitting on the board, four are executive
and 11 are non-executive. Of the latter, eight are independent, one
is proprietary and the other two, in the opinion of the board, are
neither proprietary nor independent.
Size of the board
20
18
16
16
14
15
15
2010
2011
2012
2013
2014
2015
2016
Current composition of the board
Proprietary non-executive
directors
7%
Non-executive
director (neither
proprietary nor
independent)
13%
Executive
directors
27%
Independent
non-executive
directors
53%
72
2016 ANNUAL REPORT
Executive directors
Pursuant to the Rules and Regulations of the Board (article 6.2.a)),
the following are executive directors: Ms Ana Botín-Sanz de Sautuola
y O’Shea, Mr José Antonio Álvarez Álvarez, Mr Rodrigo Echenique
Gordillo and Mr Matías Rodríguez Inciarte.
Proprietary non-executive directors
According to article 6.2.b) of the Rules and Regulations of the Board,
proprietary directors are non-executive directors who hold or
represent shareholdings equal to or greater than that which qualifies
as significant under the law, or who have been designated as such on
account of their status as shareholders despite their shareholdings
not reaching the threshold to be considered significant, as well as
anyone representing such shareholders.
Since 2002, the appointments committee and the board of directors
have stipulated that having or representing at least 1% of the
Bank’s share capital is a necessary condition, though not the only
condition, to be appointed a non-executive proprietary director. This
percentage was established by the Bank in accordance with its self-
regulatory powers and is less than that deemed significant by law,
although the Bank believes it is sufficiently important so as to enable
the board to classify directors that hold or represent a shareholding
equal to or greater than such percentage as proprietary directors.
The board, taking into account the prevailing circumstances of
each case, and following a report by the appointments committee,
appointed Mr Javier Botín-Sanz de Sautuola y O’Shea as an external
proprietary director representing the following shareholders:
Fundación Botín, Cronje, S.L., Puente de San Miguel, S.L.U., Nueva
Azil, S.L., Agropecuaria El Castaño, S.L.U., Bright Sky 2012, S.L.,
Ms Ana Botín-Sanz de Sautuola y O’Shea, Mr Emilio Botín-Sanz de
Sautuola y O’Shea, Ms Carmen Botín-Sanz de Sautuola y O’Shea,
Ms Paloma Botín-Sanz de Sautuola y O’Shea, Mr Jorge Botín-Sanz de
Sautuola Ríos, Mr Francisco Javier Botín-Sanz de Sautuola Ríos,
Ms Marta Botín-Sanz de Sautuola Ríos and his own shareholding.
The voting rights of the aforementioned shareholders corresponded
to 1.034% of the Bank’s share capital at year-end 2016.
Independent non-executive directors
The Rules and Regulations of the Board (article 6.2.c)) include the
legal definition of independent director established in article 529.
duodecies.4 of the Spanish Companies Act. Taking into account
the circumstances in each case and following a report from the
appointments committee, the board considers the following eight
directors to be independent non-executive directors: Mr Bruce
Carnegie-Brown (lead director), Ms Homaira Akbari, Ms Sol Daurella
Comadrán, Mr Carlos Fernández González, Ms Esther
Giménez-Salinas i Colomer, Ms Belén Romana García, Ms Isabel
Tocino Biscarolasaga and Mr Juan Miguel Villar Mir.
Given the current number of directors (15), independent non-
executive directors account for 53% of the board.
This percentage exceeds the minimum threshold of one half of
total directors set out in article 6.1 of the Rules and Regulations of
the Board and reflects the board’s goal for the board to be made
up predominantly of non-executive directors, which in turn are
predominantly independent, in compliance with best practices in
corporate governance.
Other non-executive directors
Mr Guillermo de la Dehesa Romero and Mr Ignacio Benjumea
Cabeza de Vaca are non-executives directors that are neither
proprietary nor independent. Neither can be classified as a
proprietary director as they do not hold nor represent shareholdings
equal to or greater than that which qualifies as significant under
the law and have not been designated as such on account of their
status as shareholders. Likewise, neither can be considered an
independent director since, in the case of Mr de la Dehesa, he has
held the position of director for more than 12 years and, in the case
of Mr Benjumea, since three years have not yet elapsed since his
resignation as a member of the Group’s senior management.
Therefore, following a report from the appointments committee, the
board of directors has classified both as non-executive directors that
are neither proprietary nor independent, in accordance with article
529 duodecies of the Spanish Companies Act and article 6.2 of the
Rules and Regulations of the Board.
The share of women on Banco Santander’s board (40%) exceeds
the target set by the appointments committee and is well above the
average for large listed companies in Europe. According to a study
conducted by the European Commission with data from July 2016,
the percentage of female board members at large listed companies
was 23.3% for all 28 countries in the European Union and 20.2% for
Spain.
Percentage of women on the board
40%
33%
29%
19%
19%
11%
2011
2012
2013
2014
2015
2016
The table below shows the number and percentage of women on the
board and on each of its committees.
» Diversity on the board
As established in article 17.4 a) of the Rules and Regulations of the
Board, the appointments committee is responsible for proposing and
reviewing the director selection policies and succession plans and
the internal procedures for determining who is to be proposed for
the position of director.
As regards gender diversity, both the appointments committee and
the board of directors are aware of the importance of fostering equal
opportunities between men and women and of the appropriateness
of appointing to the board women who fulfil the requirements of
ability, suitability and effective dedication to the position of director.
Board
Executive committee
Audit committee
Appointments committee
Remuneration committee
Risk supervision, regulation
and compliance committee
International committee
Innovation and
technology committee
Number of
members
Number
of female
directors
% of
female
directors
15
8
4
5
5
7
6
9
6
2
2
1
2
2
2
3
40.0%
25.0%
50.0%
20.0%
40.0%
30.0%
33.3%
33.3%
The appointments committee, at the meeting held
on 26 March 2016, agreed to raise the target level for
the least represented gender on the board to 30% of
total board members. This target has been met as the
minority gender now accounts for 40% of seats.
Years of service of independent directors
At the date of this document, the average length of service for
independent non-executive directors serving as board member
is just over three years.
At present, there are six women on the board of directors, one of
whom is its Group executive chairman, namely Ms Ana Botín-Sanz
de Sautuola y O’Shea, while the others are independent
non-executive directors: Ms Homaira Akbari, Ms Sol Daurella
Comadrán, Ms Esther Giménez-Salinas, Ms Belén Romana García
and Ms Isabel Tocino Biscarolasaga.
11.1
10.2
9.5
7.3
3.0
3.4
2011
2012
2013
2014
2015
2016
2016 ANNUAL REPORT
73
3. Corporate governance report » 3. Banco Santander’s board of directors
» Balanced structure of corporate governance
There is a clear separation of duties between those of the Group
executive chairman, the chief executive officer, the board, and its
committees, and various checks and balances that assure proper
equilibrium in the Bank’s corporate governance structure, including
the following:
• The board and its committees oversee and control the activities of
both the Group executive chairman and the chief executive officer.
• The lead director chairs the appointments, the remuneration and
the risk supervision, regulation and compliance committees. The
lead director also oversees the periodic process of assessing the
chairman and coordinates the succession plan.
• The audit committee is chaired by an independent director acting
in her capacity as financial expert.
» Succession plans for the Group executive
chairman and the chief executive officer
Succession planning for the main directors is a key element of the
Bank’s good governance, assuring an orderly leadership transition
at all times. The process is regulated by article 24 of the Rules and
Regulations of the Board, which also governs the succession plans for
the Group’s other directors and senior management. The board of
directors has prepared a matrix of skills that it must possess, together
with a succession plan aligned with those skills so as to ensure that
when vacancies arise the incoming members reinforce and bolster
those skills.
On the proposal of the appointments committee, the following were
approved at board meetings held on 30 November 2016 and 24 January
2017, respectively: (i) the Group’s succession policy; and (ii) the board
member selection and succession policy.
• The powers delegated to the Group executive chairman and the
chief executive officer exclude those that are exclusively reserved
for the board itself.
» Rules for interim replacement of
the Group executive chairman
• The Group executive chairman may not simultaneously hold the
position of chief executive officer of the Bank.
• The corporate Risk, Compliance and Internal Audit functions report
to a committee or a member of the board of directors and have
direct access thereto.
Article 44.2 of the Bylaws and article 9 bis of the Rules and Regulations
of the Board set out interim replacement rules for the temporary
performance (in cases of absence, inability to act or indisposition) of the
duties of the chairman of the board of directors, stating that in these
cases the chairman will be substituted by a vice chairman to be selected
in order of length of service on the board, except where the lead director
is one of the vice chairmen, in which case he or she will be the first
choice. If there are no vice chairmen, the remaining directors will replace
the Group executive chairman in the order established by the board,
whereby the lead director should be the first in this order if such director
does not hold the position of vice chairman.
Roles and responsibilities
Group executive chairman
Chief Executive Officer
The Chief Executive Officer is entrusted with the day-to-
day management of the business and the highest executive
functions (article 49.1 of the Bylaws and article 10.1 of the Rules
and Regulations of the Board).
The board of directors has delegated to the chief executive
officer all its powers, except those that cannot be delegated by
law, the Bylaws or the Rules and Regulations of the Board.
Corporate business and ordinary management support
divisions and control functions all report to the chief executive
officer, although they also have direct access to the board of
directors.
The country heads, who are the Group’s first representatives in
the countries in which the Group operates, also report to the
Chief Executive Officer.
The chairman of the board is the Bank’s highest-ranking officer,
responsible for managing the board and ensuring its effective
operation (article 48.1 of the Bylaws and article 8.1 of the Rules
and Regulations of the Board). In accordance with her position
as such, the Group executive chairman is responsible, among
others, for the following duties:
• Ensure compliance with the Bylaws and that the resolutions
of the general shareholders’ meeting and of the board of
directors are faithfully executed.
• Carry out a high-level inspection of the Bank and all its
services.
• Meet with the chief executive officer and senior executive
vice presidents to keep informed of the performance of the
businesses.
The board of directors has delegated to the Group executive
chairman all its powers, except those that cannot be delegated
by law, the Bylaws or the Rules and Regulations of the Board.
The Group strategic and corporate functions report to the
Group executive chairman.
74
2016 ANNUAL REPORT
» Lead director
» Secretary of the board
By resolution of the general shareholders’ meeting of 28 March
2014, the figure of lead director, already established in the Rules
and Regulations of the Board, has been included in the Bylaws, the
responsibilities thereof being defined in article 49 bis of the Bylaws.
Pursuant to article 49 bis of the Bylaws and article 12 bis of the Rules
and Regulations of the Board of Directors, the lead director will have
special powers to: (i) request that a meeting of the board of directors
be called or that new items be added to the agenda for a meeting of
the board that has already been called; (ii) coordinate and organise
meetings of the non-executive directors and voice their concerns;
and (iii) direct the regular assessment of the chairman of the board
of directors and coordinate the succession plan; (iv) contact investors
and shareholders to obtain their points of view for the purpose of
gathering information on their concerns, in particular, with regard
to the Bank’s corporate governance; and (v) substitute the chairman
in the event of absence under the terms envisaged in the Rules and
Regulations of the Board of Directors.
At its meeting of 25 November 2014, the board of directors
appointed Mr Bruce Carnegie-Brown as vice chairman and lead
director, replacing Mr Fernando de Asúa Álvarez.
The appointment of the lead director has been made for an indefinite
period of time and with the abstention of the executive directors, as
provided in the Bylaws.
Comparison of number of meetings held*
Santander
Spanish
average
US
average
UK
average
Board
Executive
committee
Audit
committee
Appointments
committee
Remuneration
committee
Risk supervision,
regulation and
compliance
committee
13
52
10
10
9
11.3
9.4
7.7
6.0
6.0
8.4
-
8.6
4.8
6.1
7.7
-
5.1
3.7
5.1
12
16.0
-
5.5
* Source: Stuart Spencer Board Indices 2016 (Spain, United States and United
Kingdom).
The Bylaws (article 45.2) and the Rules and Regulations of the
Board (article 11) include among the duties of the secretary those of
ensuring the formal and substantive legality of all action undertaken
by the board, ensuring that the good governance recommendations
applicable to the Bank are taken into consideration, and ensuring
that governance procedures and rules are observed and regularly
reviewed.
The secretary of the board is the general secretary of the Bank, and
also acts as secretary for all board committees.
The Rules and Regulations of the Board (article 17.4.e)) provide that
the appointments committee must report on proposals for the
appointment or withdrawal of the secretary of the board prior to
submission thereof to the board.
On 27 September 2016, the board of directors agreed to appoint
Mr Óscar García Maceiras as vice-secretary to the board of directors,
on the proposal of the appointments committee.
» Proceedings of the board
The board of directors held 13 meetings during 2016.
The board holds its meetings in accordance with an annual calendar
and agenda of business to discuss, without prejudice to any further
business needs that may arise. Directors may also propose the
inclusion of items on the agenda. The Rules and Regulations of the
Board provide that the board shall hold not less than nine annual
ordinary meetings.
The board shall meet whenever the chairman so decides, acting
on her own initiative or at the request of not less than three
directors (article 46.1 of the Bylaws). Additionally, the lead director
is especially authorised to request that a meeting of the board of
directors be called or that new items be added to the agenda for a
meeting that has already been called (article 49.bis.1 (i) of the Bylaws
and article 12 bis of the Rules and Regulations of the Board).
When directors are unable to personally attend a meeting, they may
grant any other director proxy, in writing and specifically for each
meeting, to represent them for all purposes at such meeting. Proxy
is granted with instructions and non-executive directors may only be
represented by another non-executive director.
The board may meet in various rooms at the same time, provided
that interactivity and communication among them in real time is
ensured by audiovisual means or by telephone and the concurrent
holding of the meeting is thereby ensured.
Board meetings shall be validly convened when more than half
of board members are present in person or by proxy. Except in
instances in which a greater majority is specifically required pursuant
to legal provisions, the Bylaws or the Rules and Regulations of the
Board, resolutions are adopted by absolute majority of the directors
attending in person or by proxy. The chairman has the casting vote in
the event of a tie.
2016 ANNUAL REPORT
75
3. Corporate governance report » 3. Banco Santander’s board of directors
In 2016 the board was kept continuously and fully informed of the
performance of the various business areas of the Group through
the management reports and risk reports submitted to it, among
other things. During the year, the board has also reported on the
conclusions of the external and internal audits.
The chart below shows a breakdown of the approximate time
devoted to each task at the meetings held by the board in 2016.
Approximate time devoted to each duty
Internal and external audit and
review of the financial information
10%
General policies
and strategies
15%
Capital and liquidity
15%
Risk
management
30%
Business
performance
30%
» Dedication to board duties
» Training of directors and information or
induction programme for new directors
As a result of the Board’s self-assessment process of 2005, an ongoing
training programme for directors was implemented.
Within the framework of the Bank’s ongoing director training
programme, ten sessions were held in 2016 with an average
attendance of eight directors, who devoted approximately two
hours to each session. Various issues were covered in depth at
such meetings, including: multi-channel and digital transformation;
corporate defence; non-financial risks: model risk and reputational
risk; regulatory developments relating to capital; risk appetite in
relation to compliance and conduct risk, and approval systems for the
marketing and sale of products.
Likewise, the Rules and Regulations of the Board (article 21.7) establish
that the board must make an information and induction programme
available to new directors that provides swift and sufficient knowledge
of the Bank and its Group, including their governance rules. Here,
for example, Ms Homaira Akbari (appointed to the board in 2016)
attended a specific training programme for new board members, at
which the following matters were addressed:
• General presentation of the Group and the regulatory context in
which it operates.
• Compliance.
• Capital.
The duty of diligent management requires directors to dedicate
the necessary time and effort to their position, among other
requirements.
• Liquidity and balance sheet management.
• Budget and financial statements.
The maximum number of boards of directors to which they may
belong is established in article 26 of Law 10/2014, of 26 June, on the
organisation, supervision and solvency of credit institutions. Thus,
Bank directors will not be allowed to occupy, at the same time, more
than: (a) one executive position and two non-executive positions,
or (b) four non-executive positions. For such purposes, positions
held within the same group will be counted as a single position,
while positions held at non-profit organisations or organisations
not pursuing commercial ends will not be included. The European
Central Bank may authorise a director to hold an additional non-
executive position if it considers that it does not impede the proper
performance of the director’s duties at the Bank.
• The Group’s main regions and businesses.
• Main support areas (Technology and Operations, Risks, Audit,
Human Resources, Organisation and Costs).
• Innovation.
• Corporate governance and internal governance.
• Sustainability, communication and the Santander brand.
% Of board members with relevant experience
Directors shall endeavour to ensure that absences from meetings of
the board and of the committees to which they belong are reduced
to cases of absolute necessity.
87%
80%
73%
The appointments committee analyses directors’ dedication to their
position on an annual basis, using information received regarding
their other professional obligations and other available information
to evaluate whether the directors are able to dedicate the necessary
time and effort to complying with the duty of diligent management.
Dedication is also taken into account for re-election, since proposals
by the appointments committee must contain an assessment of their
work and of effective dedication to the position during the most
recent period of time in which the proposed director has performed
his or her duties.
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2016 ANNUAL REPORT
73%
60%
27%
Accounting
and financial
Banking
Risk
Information
technology
Latam
UK/US
International
experience
DECISION-MAKING PROCESS
A board of directors is aware of the business, is well balanced and has vast experience.
It takes decisions by consensus and has a long-term vision.
Debate of the issues and effective challenge by external directors.
Self-assessment by the board
Pursuant to article 19.7 of the Rules and Regulations of the Board,
the board shall conduct a yearly assessment of its own functioning
and the quality of its work. An assessment must also be conducted
by an independent advisor once every three years, the last one
having been completed in 2015.
Specific measures or practices adopted as a product of the board’s
assessment in 2015 included the following:
The assessment process focused on the following aspects:
• In relation to the board as a whole: structure; organisation and
functioning; internal culture and arrangements (planning of
meetings, director support and training); knowledge and diversity;
and performance of the supervisory function. The process also
addressed a number of other issues relating to strategy, such as
where their priorities should lie and what their challenges should
be for 2017, plus other matters of interest.
• Meetings to be held yearly to analyse matters of strategic interest
to the Group.
• In relation to commissions: composition; functioning; board
support and reporting; committee content; and their main
challenges and priorities for 2017.
• Information to be sent to board members on all opinions and
reports issued by financial analysts and institutional investors in
relation to the Bank.
• Board composition to be adjusted by incorporating new
independent directors with a more international profile, while
strengthening diversity and increasing board expertise in digital
strategy.
• More preparatory meetings to be held in the lead-up to actual
board members so as to improve relations between board members
and encourage interaction between board members and company
executives.
• Board to become involved in managing talent by setting up talent
committees tasked with assessment processes and succession
plans and reporting to the appointments committee and the board.
In accordance with article 17.4.(j) of the Rules and Regulations of
the Board, the appointments committee, at the meeting held on 18
November 2016, agreed to initiate the board assessment process in
2016, which was conducted internally.
The assessment is based on the information collected from
board members via a questionnaire, as part of a confidential and
anonymous process that also included personal interviews between
the directors and the chairman of the appointments committee.
All non-executive directors were involved in the process of assessing
the lead director. In turn, the lead director oversaw the process of
assessing the chairman.
• In relation to the lead director: performance of his or her functions;
leadership; relations with institutional investors; dedication; and
performance of the role.
The results of the assessment process for the board and its
committees revealed the following: high levels of commitment
and dedication from all board and committee members; effective
functioning of all committees; high quality debate and discussions
on the board and sufficient time dedicated to board business; sound
annual planning of board meetings and sufficient quality of the
documents delivered at board meetings; annual strategic meeting
deemed to be useful.
It also confirmed a clear and proper segmentation of responsibilities
and functions between the chairman and chief executive officer, and
a steady increase in the work of the lead director in supporting non-
executive directors by scheduling periodic meetings with them to
assess the activities and functioning of the board.
The report containing the conclusions and results of the
assessment process for the board and its committees in
2016 was presented at the board meeting held on 24 January
2017. In view of these findings and the results of the business
reports of the various committees in 2016, the board
approved an action plan that envisages improvements in the
following areas, among others:
Increase the time dedicated to digital transformation
and technology, human resources, succession and talent,
strategic, cyber-security, competitor landscape and
innovation.
Strengthen coordination among committees of the Group
entities, especially regarding the audit, appointments and
risk supervision, regulation and compliance committees.
Monitoring and updating verified and robust succession
plans for the board of directors, its committees and the
senior management.
2016 ANNUAL REPORT
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3. Corporate governance report » 3. Banco Santander’s board of directors
» Appointment, re-election and
ratification of directors
Proposals for appointment, re-election and ratification of
directors, regardless of the status thereof, that the board of
directors submits to shareholders for consideration at the
general shareholders’ meeting and the appointment decisions
adopted by the board itself, by virtue of the legal powers of
co-option, must, following the relevant selection process, be
preceded by the corresponding report and proposal of the
appointments committee.
Although the proposals of such committee are not binding, the Rules
and Regulations of the Board provide that if the board does not
follow them, it must give reasons for its decision.
Currently, all directors have been appointed or re-elected at the
proposal of the appointments committee.
Skills matrix of the members of the board and diversity analysis*
In accordance with the director selection process just discussed, as set out in articles 6.1 of the Rules and Regulations of the Board and
42.4 of the Bylaws, the committee proceeded to review the director selection and succession policy on 23 January 2017, as well as the
conclusions of the annual board self-assessment process completed in 2016. Following this self-assessment, and on a proposal from the
appointments committee, the board of directors reviewed its composition and drew up the following skills matrix at a meeting held on
21 February 2017. The findings of the analysis identified the need to strengthen skills with profiles that specialise in new technologies and
banking.
Vice chairmen
Members
e
v
i
t
u
c
e
x
e
p
u
o
r
G
n
a
m
r
i
a
h
c
e
v
i
t
u
c
e
x
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f
e
i
h
C
r
e
c
ffi
O
1
n
a
m
r
i
a
h
c
e
c
i
V
2
n
a
m
r
i
a
h
c
e
c
i
V
3
n
a
m
r
i
a
h
c
e
c
i
V
4
n
a
m
r
i
a
h
c
e
c
i
V
1
r
e
b
m
e
M
2
r
e
b
m
e
M
3
r
e
b
m
e
M
4
r
e
b
m
e
M
5
r
e
b
m
e
M
6
r
e
b
m
e
M
7
r
e
b
m
e
M
8
r
e
b
m
e
M
9
r
e
b
m
e
M
Senior
management
Experience in the
financial sector
General
Banking
International
experience
International
diversity
Spain
Latam
UK/US
Others
Accounting
and financial
background
Other commercial
Risks
Government/
Academic/
Research
IT/Digital
Strategy
Regulation/
Regulatory
relations
Experience
in corporate
governance
Gender diversity
Skills as executive
Skills as non-executive
Nature *Data in February 2017
Total number of independent directors
Total board members
8
15
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2016 ANNUAL REPORT
» Remuneration system
At the general shareholders’ meeting of 28 March 2014, shareholders
resolved to amend the Bylaws to bring the remuneration system for
executive directors into line with the provisions of Spanish Law 10
of 26 June 2014, on the planning, supervision and capital adequacy
of credit institutions, and Directive 2013/36/EU of the European
Parliament and of the Council of 26 June 2013, on access to the
activity of credit institutions and the prudential supervision of credit
institutions and investment firms, so as to ensure that the variable
components of their remuneration do not exceed 100% of the fixed
components, unless the general meeting approves a higher ratio,
which may in no event exceed 200%.
With relation to the foregoing, the shareholders acting at the general
shareholders’ meeting of 18 March 2016 approved a maximum ratio
between fixed and variable components of executive directors’
remuneration of 200% for 2016.
At the general shareholders’ meeting of 27 March 2015, the
shareholders once again amended the Bylaws to bring the directors
remuneration system into line with the new developments
introduced in the Spanish Companies Act by Law 31/2014.
The remuneration of directors acting as such, whether they
are executive or not, is made up of fixed annual allotments and
attendance fees, as set forth in the Bylaws, which are determined by
the board of directors within the maximum amount approved by the
shareholders at the general meeting based on the positions held by
each director on the board, their membership on and attendance at
the various committees and any other objective circumstances that
the board may take into account. Accordingly, the board of directors,
at the proposal of the remuneration committee, is responsible
for establishing director remuneration for carrying out executive
functions, taking into account for such purpose the director
remuneration policy approved by the shareholders at the general
meeting. The shareholders at the general meeting also approved
those remuneration plans that entail the delivery of shares of the
Bank or options thereon or that entail remuneration tied to the value
of the shares.
On the proposal of the appointments committee, the board of
directors has undertaken to adapt the contracts of executive
directors in relation to the performance of non-director functions
so as to bring them in line with the terms of Circular 2/2016 of 2
February, of Banco of Spain, on credit institutions, supervision and
capital adequacy.
Remuneration of the board in 2016
Bylaw-stipulated allotments earned by the board amounted to
4.6 million euros in 2016, which is 23.9% lower than the maximum
amount of 6 million euros approved by shareholders at the general
shareholders’ meeting.
Full details regarding director remuneration and the policy for 2016
can be found in the report of the remuneration committee, which
forms part of the corporate documentation of Banco Santander.
The chart below shows the evolution of total remuneration
of directors with executive duties against the total return for
shareholders (pay for performance).
Anticipation of and adjustment to the regulatory framework
At the proposal of the remuneration committee, the board of
directors promotes and encourages a remuneration system that
fosters rigorous risk management, and implements ongoing
monitoring of the recommendations issued by the main Spanish and
international bodies with authority in this field.
Director remuneration policy and annual
report on director remuneration
As provided in article 541 of the Spanish Companies Act and in the
Bylaws (article 59.bis.1), the board of directors annually approves
an annual report on director remuneration, which sets forth the
standards and basis for determining remuneration for the current
financial year, as well as an overall summary of the application of
the remuneration policy during the financial year ended, and a
breakdown of the individual remuneration earned for all items by
each of the directors during such year. The report is available to
shareholders with the call notice for the annual general shareholders’
meeting and is submitted to a consultative vote.
Evolution of the remuneration for all items of directors with executives duties against attributable net profit*
7,000
37.3
6,000
5,000
5,351
4,000
3,000
2,000
1,000
0
Attributable net profit (€ million)
Total remuneration (€ million)
5,816
5,966
6,204
23.8
27.0
25.8
4,370
21.7
24.7
2,205
40
35
30
25
20
15
10
5
0
2011
2012
2013
2014
2014
2016
* Remuneration data of executive directors and attributable net profit in millions of euros.
2016 ANNUAL REPORT
79
3. Corporate governance report » 3. Banco Santander’s board of directors
The content of such report is subject to the provisions of article 10 of
Order ECC/461/2013 and CNMV Circular 4/2013, of 12 June (amended
by Circular 7/2015, of 22 December).
In 2016, the report corresponding to 2015 was submitted to the
shareholders at the general shareholders’ meeting held on 18 March,
as a separate item on the agenda and as a consultative matter, with
91.507% of the votes being in favour of the report accounts.
The director remuneration policy for 2016, 2017 and 2018 was also
submitted for approval, on a binding basis, by shareholders at the
annual general shareholders’ meeting held on 18 March 2016, in
accordance with article 529 novodecies of the Spanish Companies
Act. The policies were approved with 91.467% of the votes in favour.
Lastly, the 2016 annual report on director remuneration will be
laid before the annual general shareholders’ meeting to be held
on 6 or 7 April 2017 (on first or second call, respectively) for an
advisory vote by shareholders (as a separate item on the agenda).
Meanwhile, the director remuneration policy for 2017, 2018 and 2019
will be laid before that same meeting for a binding and final vote by
shareholders.
Transparency
Pursuant to the Bylaws (article 59.bis.5), the annual report includes
itemised information on the remuneration received by each director,
with a statement of the amounts for each item of remuneration.
The report also sets forth, on an individual basis for each item, the
remuneration for the executive duties entrusted to the executive
directors of the Bank. All such information is contained in note 5 to
the Group’s annual accounts.
» Duties of directors, related-party
transactions and conflicts of interest
Duties
The duties of directors are governed by the Rules and Regulations of
the Board, which are compliant with the laws of Spain and with the
recommendations of the good governance code for listed companies.
The Rules and Regulations expressly include the duties of diligent
management and loyalty and the duty to refrain from taking any
action should the director come into the possession of inside or
privileged information.
The duty of diligent management includes the directors’ duty
to adequately inform themselves of the Bank’s business and to
dedicate the time and effort needed to effectively carry out their
duties, and also to adopt the measures needed to ensure the sound
management and control of the Bank.
Some measures taken by the board
2012: maximum limit for share capital increases without pre-
emptive rights
• Simplification: a new streamlined structure for variable and
long-term annual remuneration.
At the proposal of the board, the shareholders for the first
time established a maximum limit on the power to exclude pre-
emptive rights for share capital increases; pre-emptive rights may
only be excluded for up to the equivalent of 20% of the Bank’s
share capital as of the date of the general shareholders’ meeting.
• Alignment with the objectives announced at Investor day held
in September 2015; a new set of objectives linked to variable
remuneration which includes the four categories on which the
Bank’s strategy is based: employees, customers, shareholders
and society.
2013: cap on annual remuneration of the directors by reason of
their position
The shareholders established a maximum amount of 6 million
euros, which may only be amended by a decision of the
shareholders acting at the general shareholders’ meeting.
2014: maximum variable remuneration for executive directors
• Closer alignment with shareholder interests by setting a
mandatory requirement for senior executives to invest in
shares and increasing the weighting of remuneration pegged
to long-term targets, specifically earnings per share, total
shareholder return, capital targets and profitability.
2016: changes to the remuneration policy of executive
directors
The shareholders approved an amendment to the Bylaws
establishing a maximum ratio between the fixed and variable
components of total remuneration of the executive directors
and other employees belonging to categories with professional
activities that significantly affect the Group’s risk profile.
2015: changes in the remuneration policies
A number of changes were proposed at the 2016 general
shareholders’ meeting with regard to the remuneration policies
for executive directors and senior managers, in line with the
Simple, Personal and Fair culture. The main new developments
with regard to the previous policy are as follows:
A number of changes to the remuneration policy of executive
directors will be laid before shareholders for their approval
at the general meeting to be held on 6 or 7 April, on first or
second call, respectively. These changes are intended to:
• Streamlining the system of metrics and indicators so that only
most relevant remain in the policy.
• In relation to individual remuneration, increasing the weighting
of corporate behaviours that reflect the Simple, Personal and
Fair culture of the Santander Group.
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2016 ANNUAL REPORT
Related-party transactions
In accordance with that stipulated by law, article 53 of the Bylaws
and articles 3, 16 and 33 of the Rules and Regulations of the Board,
the board of directors will be aware of any transactions that the
company or companies belonging to its Group carry out with
directors, under the terms envisaged by law and in the Rules and
Regulations of the Board; with shareholders, either individually or
in concert with other shareholders, holding a significant ownership
interest, including shareholders represented on the board of
directors of the company or of other Group companies; or with
persons related thereto.
In accordance with applicable legislation and the Rules and
Regulations of the Board, authorisation will not be necessary in
the case of transactions subject to standard terms and conditions,
normal market prices and where the amount does not exceed 1% of
the company’s annual income.
These transactions will require board authorisation, based on a
favourable report from the audit committee, except for those cases
where by law approval is required by the shareholders at the general
shareholders’ meeting. All affected directors, those representing
shareholders affected or who are related parties must abstain from
the deliberation and voting on the resolution in question.
The breakdown of the 95 cases is as follows: on 28 occasions the
abstention was due to proposals to appoint, re-elect or withdraw
directors, and to appoint members of board committees or other
committees at Group or related companies; on 51 occasions the
matter under consideration related to remuneration or granting
loans or credits; on nine occasions the matter concerned the
discussion of financing or investment proposals or other risk
transactions in favour of companies related to any director; on five
occasions the abstention concerned the annual verification of the
status of directors carried out by the appointments committee,
pursuant to article 6.3 of the Rules and Regulations of the Board;
and on two occasions the abstention concerned the approval of a
related-party transaction.
» Board committees
General information
The board has set up an executive committee to which general
decision-making powers have been delegated.
The board also has other committees with powers of supervision,
information, advice and proposal (the audit, appointments,
remuneration, risk supervision, regulation and compliance,
international, and innovation and technology committees).
Such transactions will be evaluated from the point of view of
equality of treatment and of market conditions, and will be included
in the annual corporate governance report and in the periodic public
information under the terms envisaged in applicable regulations.
The committees of the board hold their meetings in accordance
with an annual calendar and there is a suggested agenda of annual
matters to be discussed for committees with supervisory powers.
By way of exception, when advisable for reasons of urgency, related
transactions may be authorised by the executive committee and
subsequently ratified by the board.
The audit committee has verified that all transactions completed
with related parties during the year were fully compliant with the
Rules and Regulations of the Board and did not require approval
from the governing bodies; otherwise, approval was duly obtained
following a positive report issued by the committee, once the agreed
consideration and other terms and conditions were found to be
within market parameters.
Control mechanisms
As provided in the Rules and Regulations of the Board (article 30),
directors must inform the board of any direct or indirect conflict
of interest between their own interests, or those of their related
parties, and those of the Bank. If the conflict relates to a transaction,
the director may not carry it out without the approval of the board,
following a report from the audit committee.
The director involved must abstain from participating in the
discussion and voting on the transaction to which the conflict refers,
the body in charge of resolving any disputes being the board of
directors itself.
The board is tasked with promoting and encouraging communication
between the various committees, especially between the risk
supervision, regulation and compliance committee and the audit
committee, and also between the former and the remuneration
committee.
At the annual general shareholders’ meeting of 18 March 2016, a
proposal was put forward to amend articles 53, 54, 54.bis and 54.ter
of the Bylaws in order to increase the maximum number of members
of the audit, the appointments, the remuneration and the risk
supervision, regulation and compliance committees from the current
seven directors to a maximum of nine directors for the purpose
of giving the board of directors more flexibility in establishing the
adequate composition for these committees at any given time.
Executive committee
The executive committee is key to ensuring the proper functioning of
the Bank’s corporate governance, and that of its Group. It exercises
by delegation all the powers of the board (except those which cannot
be delegated pursuant to the law, the Bylaws or the Rules and
Regulations of the Board). It reports to the board on the principal
matters dealt with and resolutions adopted and provides directors
with a copy of the minutes of its meetings. It generally meets once a
week and in 2016 it held 52 meetings.
In 2016, there were 95 occasions in which directors abstained from
participating in discussions and voting on matters at the meetings of
the board of directors or of its committees.
There are currently eight directors sitting on the committee, four of
whom are executive and the other four are non-executive, two of
which are independent.
Its duties, composition and functioning are established in the Bylaws
(article 51) and in the Rules and Regulations of the Board (article 14).
2016 ANNUAL REPORT
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3. Corporate governance report » 3. Banco Santander’s board of directors
Audit committee
The audit committee, among other functions, reviews the Group’s
financial information and its internal control systems, serves as
a communication channel between the board and the external
auditor, ensuring the independent exercise of the latter’s duty, and
supervises work regarding the Internal Audit function. It typically
meets on a monthly basis and met 10 times in 2016.
Remuneration committee
Among other duties, the remuneration committee proposes
the director remuneration policy to the board, drawing up the
corresponding report, and proposes the remuneration of board
members, including executive directors. It also proposes the
remuneration of other members of senior management and draws
up their remuneration policy.
As provided in the Bylaws (article 53) and the Rules and Regulations
of the Board (article 16), the committee must comprise non-
executive directors, the majority of whom must be independent,
including the chairman.
The committee currently comprises four independent non-executive
directors.
Ms Belén Romana García, the committee’s chairman, is considered a
financial expert within the meaning of SEC Form 20-F, in accordance
with Section 407 of the Sarbanes-Oxley Act, given her training and
expertise in accounting, auditing and risk management.
Lastly, and so as to ensure that the audit committee exercises its
decision-making powers properly when commissioning the external
auditor to provide non-audit services, it was agreed at the audit
committee meeting held on 20 April 2016 to approve the policy for
approving non-audit services provided by the external auditor. In
line with the latest national and international practices, this policy
contains the proper procedure for approving non-audit services
provided by the Group’s financial auditor, as well as the system
governing the maximum fees payables. The committee must endorse
any decision to arrange non-audit services insofar as not prohibited
by applicable regulations, having first properly assessed any threats
to the auditor’s independence and the safeguard measures applied in
accordance with said regulations.
Appointments committee
The appointments committee, among other duties, proposes
appointments of members of the board, including executive
directors, and those of the other members of senior management
and the Group’s key personnel.
The committee met on 10 occasions in 2016.
The Bylaws (article 54) and the Rules and Regulations of the Board
(article 17) state that this committee is also to be made up exclusively
of non-executive directors and that its chairman and the majority of
its members must be independent directors.
The committee currently comprises five non-executive directors, five
of whom are independent.
The committee met on nine occasions in 2016.
The Bylaws (article 54 bis) and the Rules and Regulations of the
Board (arti-cle 17 bis) state that the remuneration committee is also
to be made up exclusively of non-executive directors and that its
chairman and the majority of its members must be independent.
The committee currently comprises five non-executive directors,
three of whom are independent.
Risk supervision, regulation and compliance committee
The risk supervision, regulation and compliance committee, among
other duties, supports and advises the board on the definition and
assessment of the risk strategy and policies and on its relationship
with authorities and regulators in the various countries in which
the Group has a presence, assists the board with its capital and
liquidity strategy, and monitors compliance with the General Code
of Conduct and, in general, with the Bank’s governance rules and
compliance and criminal risk prevention programmes. Matters
such as sustainability, communication and relations with the Bank’s
stakeholders, as well as matters regarding corporate governance and
regulation, are also discussed at committee meetings.
The committee met on 12 occasions in 2016.
As provided in the Bylaws (article 54 ter) and the Rules and
Regulations of the Board (article 17 ter), the committee must be
made up of non-executive directors, the majority of whom must be
independent, including the chairman.
The committee currently comprises seven non-executive directors,
five of whom are independent.
International committee
The international committee has the following functions (article
17 of the Rules and Regulations of the Board): (i) monitoring the
development of the Group’s strategy and of the activities, markets
and countries in which the Group desires to have a presence through
direct investments or specific transactions, while remaining duly
informed of the commercial initiatives and strategies of the various
units within the Group and of the new projects presented thereto;
and (ii) reviewing the performance of financial investments and
businesses, as well as the international economic situation, and
making proposals to adjust risk-country limits, its structure and
return and its assignment by businesses and/or units.
This committee comprises six directors, of whom three are executive
and three are non-executive, one of which is independent.
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2016 ANNUAL REPORT
Innovation and technology committee
Given the importance assigned to innovation and technology as a
strategic priority for the Group, the regulations of the innovation
and technology committee have been amended in order to expand
the committee’s functions by redrafting article 17 quinquies of the
Rules and Regulations of the Board upon a board resolution dated 26
January 2016.
The functions of the innovation and technology committee include
the following: (i) to study and report on relevant projects regarding
innovation and technology; (ii) to assist the board in assessing
the quality of technological services, new business models,
technologies, systems and platforms; and (iii) to assist the risk
supervision, regulation and compliance committee in monitoring the
technological and security risks and to supervise all matters relating
to cyber-security.
The committee met on three occasions in 2016.
This committee comprises nine directors, of whom four are executive
and five are non-executive. Three of these five non-executive
directors are independent.
***
In accordance with the Rules and Regulations of the Board, any
director may attend meetings of board committees of which the
director is not a member, with the right to participate but not to
vote, at the invitation of the chairman of the board and of the
respective committee, and by prior request to the chairman of the
board.
Additionally, all board members who are not also members of
the executive committee may attend its meetings, whatever the
chairman’s reason is for calling such meeting. In 2016, directors with
no seat on the executive committee attended an average of 10.9
meetings of that committee.
The audit, appointments, remuneration and risk supervision,
regulation and compliance committees have prepared reports on
their activities in 2016. The remuneration committee’s report also
includes the director remuneration policy. All such reports are made
available to shareholders as part of the Bank’s annual documentation
for 2016.
» International advisory board
Banco Santander’s new international advisory board, comprising at-
large experts in strategy, IT and innovation, held its first meeting on
26 April 2016 in Boston (US).
The international advisory board’s objective is to provide strategic
advice to the Group, with a special focus on innovation, digital
transformation, cybersecurity and new technologies. It also provides
its views on trends in capital markets, corporate governance, brand
and reputation, regulation and compliance, and global financial
services with a customer-based approach. The board is expected to
meet two times per year.
First meeting of the international advisory board held on 26 April 2016
in Boston (US).
Chairman
Mr Larry Summers
Former US Treasury Secretary and
President Emeritus of Harvard University
Members
Mr Francisco
D’Souza,
CEO of
Cognizant and
director of
General Electric
Ms Sheila Bair
Former Chair
of the Federal
Deposit
Insurance
Corporation
and President
of Washington
College
Mr Mike Rhodin
Mr Charles
Phillips
Senior Vice
CEO of Infor and President of
former President
IBM Watson
of Oracle
Mr George Kurtz
CEO and
co-founder of
CrowdStrike
Ms Blythe
Masters
CEO of Digital
Asset Holdings
Mr James
Whitehurst
CEO of Red Hat
Ms Marjorie
Scardino
Former CEO
of Pearson
and member
of the Board
of Directors
of Twitter
Secretary
Mr Jaime Pérez Renovales
2016 ANNUAL REPORT
83
3. Corporate governance report » 3. Banco Santander’s board of directors
Composition of the committees of the board
Executive
Non-executive
Executive committee
Audit committee
Appointments committee
Remuneration committee
50%
50%
100%
100%
100%
Risk supervision,
regulation and
compliance committee
International committee
Innovation and
technology committee
100%
56%
44%
50%
50%
Number of meetings and estimated average hours devoted by each director
Committees
Executive committee
Audit committee
Appointments committee
Remuneration committee
Risk supervision, regulation and compliance committee
International committee
Innovation and technology committee
No. of meetings
Hours
52
10
10
9
12
-
3
260
100
40
36
120
-
12
Attendance at meetings of the board of directors and its committees in 2016
Pursuant to the Rules and
Regulations of the Board (article
20.1), absences from meetings must
be limited to unavoidable cases. The
average attendance rate at board
meetings in 2016 was 95.92%.
Rate of attendance at board meetings
%
98.4%
91.0%
89.8%
92.8%
95.9%
2012
2013
2014
2015
2016
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2016 ANNUAL REPORT
Committees
Directors
Average attendance
Individual attendance
Ms Ana Botín-Sanz de Sautuola y O´Shea
Mr José Antonio Álvarez Álvarez
Mr Bruce Carnegie-Brown
Mr Rodrigo Echenique Gordillo
Mr Matías Rodríguez Inciarte
Mr Guillermo de la Dehesa Romero
Ms Homaira Akbari1
Mr Ignacio Benjumea Cabeza de Vaca
Mr Javier Botín-Sanz de Sautuola y O´Shea
Ms Sol Daurella Comadrán
Mr Carlos Fernández González
Ms Esther Giménez-Salinas i Colomer
Ms Belén Romana García
Ms Isabel Tocino Biscarolasaga
Mr Juan Miguel Villar Mir
Mr Ángel Jado Becerro de Bengoa2
a. No meetings held in 2016.
1. Director since 27 September 2016.
Decision-
making
Advisory
Reporting
d
r
a
o
B
e
v
i
t
u
c
e
x
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i
d
u
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e
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n
o
i
t
a
r
e
n
u
m
e
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,
n
o
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s
i
v
r
e
p
u
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s
i
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a
n
o
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t
a
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n
a
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o
n
n
I
y
g
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h
c
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t
95.92%
94.71%
91.49% 93.10% 100.00%
89.16%
100.00%
a
l
a
n
o
i
t
a
n
r
e
t
n
I
–
50/52
51/52
39/52
50/52
52/52
50/52
52/52
50/52
13/13
13/13
13/13
13/13
13/13
13/13
4/4
13/13
11/13
11/13
12/13
13/13
13/13
13/13
10/13
10/10
10/10
9/9
12/12
10/10
9/9
12/12
10/10
9/9
12/12
10/10
6/10
9/9
9/9
8/8
7/7
8/10
10/10
10/10
8/10
7/7
7/12
2/2
11/12
9/12
9/9
3/3
3/3
3/3
3/3
3/3
3/3
0/0
3/3
3/3
2. Withdrawal from position of director effective 27 September 2016.
The Bank continues to increase the role played by board committees by broadening
their functions and arranging joint meetings to address matters that fall within the
remit of more than one such committee.
Improvements were made to the functioning of the board and its committees. These
include the use of devices and technological tools in order to make the documents
relating to each item on the agenda available to board members, thereby enhancing
their knowledge and awareness of the matters to be addressed, the ensuing discussions,
and their ability to challenge any proposals or motions made by the directors.
2016 ANNUAL REPORT
85
3. Corporate governance report » 4. Group structure and governance framework
4. Group structure
and governance framework
The structure of the Santander Group is one of a model of
subsidiaries whose parent is Banco Santander, S.A. The Group has its
traditional headquarters in the city of Santander (Cantabria, Spain)
and its corporate centre in Boadilla del Monte (Madrid, Spain).
The Santander Group’s subsidiaries model has the following features:
• The governing bodies of each subsidiary shall see to it that their
company is managed rigorously and prudently, while ensuring
their economic solvency and upholding the interests of their
shareholders and other stakeholders.
• Management of the subsidiaries is a local affair carried out by
local management teams who provide immense knowledge and
experience in relation to local customers and markets, while also
benefiting from the synergies and advantages of belonging to the
Santander Group.
• The subsidiaries are subject to the regulation and supervision of
their respective local authorities, without prejudice to the global
supervision of the Group by the European Central Bank.
» Corporate centre
The subsidiaries model of Banco Santander is further complemented
with a corporate centre that brings together Group support
and control units tasked with functions relating to strategy,
risks, auditing, technology, human resources, legal services,
communication and marketing, among others. The corporate centre
adds value to the Group by:
• Making the Group’s governance more robust, through policies,
models and control frameworks that allow the Group to implement
corporate criteria and ensure effective supervision over the Group.
• Making the Group’s units more efficient by unlocking cost
management synergies, economies of scale and achieving a
common brand.
• Sharing the best commercial practices, focusing on global
connectivity, launching global commercial initiatives and fostering
digitalisation.
• Customer funds are secured by virtue of the deposit guarantee
» Internal governance of the Santander Group
funds in place in the relevant country.
Subsidiaries finance themselves autonomously when it comes to
both capital and liquidity. The Group’s capital and liquidity positions
are coordinated by the corporate committees. Intragroup exposure
is limited and transparent and any such transactions are invariably
arranged under arm’s length conditions. Moreover, the Group has
listed subsidiaries in certain countries, in which it always retains a
controlling stake.
The subsidiaries’ autonomy limits the contagion risk between the
Group’s different units, which reduces systemic risk. Each subsidiary
has its own resolution plan.
Santander has an internal governance framework that takes the form
of a governance model, establishing a set of principles that regulate
relations and the interaction that must exist between the Group and
its subsidiaries on three levels:
• On the governing bodies of the subsidiaries, where the Group
has devised rules and procedures regulating the structure,
composition, make-up and functioning of the boards and their
committees (audit, appointments, remuneration and risks), in
accordance with international standards and good governance
practices, as well as other rules and regulations concerning the
appointment, remuneration and succession planning of members
of governing bodies.
• Between the CEOs (Chief Executive Officers) and country heads
and the Group and between the officers and teams deemed fit to
exercise control functions within the Group and at the subsidiaries:
CRO (Chief Risk Officer), CCO (Chief Compliance Officer), CAE
(Chief Audit Executive); CFO (Chief Financial Officer), CAO (Chief
Accounting Officer) or general auditor; and also between certain
support functions (IT, Operations, HR, General Secretary’s Office,
Legal Services, Marketing, Communication and Strategy) and
business functions.
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2016 ANNUAL REPORT
In relation to CEOs, country heads and other significant office
holders, the governance model establishes, among other aspects,
the relevant rules and regulations to be followed in relation to their
appointment, fixing of objectives, assessment, and fixing of variable
remuneration and succession planning. It also explains how Group
officers and their counterparts at the subsidiaries should liaise and
interact.
Group
Board of directors
Group executive
chairman1
Group CEO2
Control management
and support functions
• Compliance
• Audit
• Risks
• Financial
Management
Subsidiary B
Subsidiary A
1
Board of
directors
CEO/Country
head
Control Management
and support functions
• Compliance
• Audit
• Risks
• Financial
Management
2
3
• Financial Acounting
• Financial Acounting
and Control
• Others
and Control
• Others
1. Senior executive.
2. Second-ranking executive.
Santander also has thematic frameworks (corporate frameworks),
developed as common operating frameworks for those matters
considered important due to their impact on the Group’s risk profile
—notable among which are risks, compliance, technology, auditing,
accounts, finances, strategy, human resources and communication
and brand— and which specify:
» Internal control framework
• In line with the objective of strengthening the Group’s corporate
governance, in recent years governance of the risk control
functions has been updated and reinforced, and best international
practices have been incorporated. The Group is convinced of
the need to establish an organisational structure that includes
a proper and clear separation of functions, with well-defined
responsibilities that are both transparent and consistent so as to
ensure the healthy and prudent management of the Group and all
its companies.
• The Group relies on a risk management and control model based on
three lines of defence: the first is located at the different business
and support functions; the second is exercised by the Risks and
Compliance functions; while the third is wielded by Internal Audit.
There is a sufficient degree of segregation between the risk control
function, the compliance function and the internal audit function,
and also between them and other functions which control or
supervise them.
• The risks control function, the compliance function and the internal
audit function are headed by the following group chief executives,
each of whom has independent and direct access to the directors
and committees for the purpose of reporting on their verification
and inspection work.
• Risks Function: Mr José María Nus Badia (Group Chief Risk
Officer-Group CRO).
• Compliance Function: Ms Mónica López-Monís Gallego (Group
Chief Compliance Officer-Group CCO).
• Internal Audit Function: Mr Juan Guitard Marín (Group Chief
Audit Executive-Group CAE).
• Furthermore, and given the Group’s structure, a further two
functions are considered relevant at Group level, entrusted with
financial control functions. Reporting directly to the Group’s chief
executive officer, they are themselves headed by a group chief
executive: These functions are:
• Financial function: Mr José García Cantera (Group Chief Financial
Officer-Group CFO).
• The way of exercising oversight and control by the Group over the
• Financial Accounting and Control function: Mr José Doncel Razola
subsidiaries.
(Group Accounting Officer-Group CAO).
• The Group’s involvement in certain of the subsidiaries’ important
decisions, as well as the subsidiaries’ involvement in the Group’s
decision-making processes.
The aforementioned governance model and corporate frameworks
effectively comprise the internal governance framework and have
been approved by the board of directors of Banco Santander, S.A. for
subsequent adherence by the governing bodies of the subsidiaries,
with due regard to any local requirements to which the subsidiaries
may be subject.
2016 ANNUAL REPORT
87
3. Corporate governance report » 4. Group structure and governance framework
» Governance of the risk function
• In 2015, the board of directors approved a new risk governance
model based on the following principles:
• Separate decision-making functions from control functions;
• Strengthen the responsibility of the first line of defence in
decision-making;
• Ensure that all decisions concerning risk follow a formal approval
process.
Number of meetings of the executive, the audit, and the
risk supervision, regulation and compliance committees
Executive*
Audit
Risk supervision,
regulation and
compliance
Total meetings
2012
2013
2014
2015
2016
59
11
-
70
58
12
-
70
65
13
5
81
59
13
13
85
52
10
12
74
* The executive committee devoted a very significant amount of its time to
• Ensure there is an overall vision of all types of risks, including
discussions on risks.
those outside the scope of control of the risk function.
• Strengthen the role of risk control committees, affording them
additional powers.
• To simplify the committee structure.
• There are currently two internal risk committees not specifically
envisaged in the Bylaws: the executive risks committee, tasked with
global risk management functions and comprising three executive
members; and the risk control committee, which is charged with
the global risk supervision and control. This organisational model is
compliant with best risk governance practices.
• The Bank’s risk supervision, regulation and compliance committee
was set up in June 2014 with general powers to support and
advise the board of directors on risk supervision and control, on
determining the Group’s risk policies, on relations with supervisory
authorities, on regulation and compliance, corporate social
responsibility and corporate governance. This committee held 12
meetings in 2016, the estimated time devoted by each member of
the committee to preparing and taking part in those meetings was
approximately 10 hours per meeting.
• The executive committee held 52 meetings in 2016 and devoted a
very significant amount of its time to discussions on the Group’s
risks.
• The audit committee met 10 times in 2016, the estimated time
devoted by each member of the committee to preparing and taking
part in those meetings was approximately 10 hours per meeting,
it received the report of the head of internal audit and discussed
matters relating to conduct risk and the financial reporting process.
88
2016 ANNUAL REPORT
5. Shareholder rights and the general
shareholders’ meeting
» One share, one vote, one dividend. No
defensive mechanisms in the Bylaws
» Encouraging the informed participation of
shareholders at general shareholders’ meetings
The Bank does not have any defensive mechanisms in the Bylaws,
fully conforming to the principle of one share, one vote, one
dividend.
The Bylaws of Banco Santander provide for only one class of shares
(common shares), granting all holders thereof the same rights.
There are no non-voting or multiple-voting shares, or shares giving
preferential treatment in the distribution of dividends, or shares that
limit the number of votes that can be cast by a single shareholder,
or quorum requirements or qualified majorities other than those
established by law.
Any individual is eligible for a director position, subject, exclusively,
to the limitations established by law.
» Quorum at the annual general
shareholders’ meeting held in 2016
The informed participation of shareholders at general shareholders’
meetings is an objective expressly acknowledged by the board
(article 31.3 of the Rules and Regulations of the Board).
The quorum at the 2016 annual general shareholders’ meeting was
57.627%.
Quorum at annual general shareholders’ meetings
58.8%
59.7%
57.6%
55.9%
54.9%
53.7%
2011
2012
2013
2014
2015
2016
Since the annual general meeting held in 2011, shareholders have
had access to an electronic shareholders’ forum, in compliance
with the provisions of the Companies Act. The forum, which the
Bank has set up on the corporate website (www.santander.com),
allows shareholders to post supplementary proposals to the agenda
announced in the call notice, along with requests for support
for those proposals, initiatives aimed at reaching the percentage
required to exercise any of the minority shareholder rights provided
for at law, as well as offers or requests to act as a voluntary proxy.
Furthermore, remote attendance at the shareholders’ meetings has
been made possible and shareholders are now able to exercise their
information and voting rights in real time.
KEY POINTS OF THE 2016
ANNUAL GENERAL
SHAREHOLDERS’ MEETING
Shareholders approved the corporate
management of the Bank in 2015 with 94%
voting in favour.
The 2015 annual report on director
remuneration received a 92% favourable
vote.
2016 ANNUAL REPORT
89
3. Corporate governance report » Shareholder rights and the general shareholders’ meeting
» Annual general shareholders’
meeting held on 18 March 2016
» Information provided to shareholders
and shareholder communication
Information on the call notice, establishment of a
quorum, attendance, proxy-granting and voting
A total of 541,072 shareholders attended in person or by proxy, with
8,318,158,012 shares. The quorum was thus 57.627% of the Bank’s
share capital at the date of the meeting.
The average percentage of affirmative votes upon which the
proposals submitted by the board were approved was 93.491%.
The following data are expressed as percentages of the Bank’s share
capital at the date of the annual general shareholders’ meeting:
Physically present
By proxy
Absentee votes
Total
0.863%1
43.459%2
13.305%3
57.627%
1.
Of this percentage (0.863%), 0.003% corresponds to the share capital that
attended the meeting remotely via Internet connection.
2.
The percentage of share capital that granted proxies through the Internet was
1.064%.
3.
Of this percentage (13.305%), 13.039% corresponds to votes cast by post, while
the rest is the percentage of electronic votes.
At that meeting, 12 of the board’s 15 directors at that date exercised,
in accordance with article 186 of the Spanish Corporate Enterprises
Act, the right to vote on behalf of a total of 6,194,277,775 shares,
equivalent to the same number of votes, the breakdown being as
follows:
Ms Ana Botín-Sanz de Sautuola y O’Shea
6,032,110,807
Mr José Antonio Álvarez Álvarez
Mr Bruce Carnegie-Brown
Mr Rodrigo Echenique Gordillo
Mr Matías Rodríguez Inciarte
Mr Guillermo de la Dehesa Romero
Mr Ignacio Benjumea Cabeza de Vaca
Mr Javier Botín-Sanz de Sautuola y O’Shea
Ms Sol Daurella Comadrán
Mr Ángel Jado Becerro de Bengoa*
Ms Belén Romana García
Ms Isabel Tocino Biscarolasaga
*Stood down from the board on 27 September 2016.
155,651
1,690
90,323
714,933
762
742,941
67,993,418
73,941
5,180,557
33,151
154,299
» Resolutions adopted at the 2016
general shareholders’ meetings
The full texts of the resolutions adopted at the general shareholders’
meetings held in 2016 can be viewed on the corporate website of the
Group (www.santander.com) and on the CNMV’s own website (www.
cnmv.es), since it was filed as a significant event on 18 March 2016.
90
2016 ANNUAL REPORT
In 2016, Banco Santander continued to strengthen communication
with, service to and its relationship with shareholders and investors.
Channels for shareholder information and service
Telephone service lines
177,884 Queries received
Shareholder and investor mailbox
9,069 E-mails answered
Personal actions
928 Actions carried out
During 2016, there were 928 meetings with investors, analysts and
rating agencies, which entailed contact with 531 investors/analysts.
In addition, Shareholder Relations maintained direct contact with the
Bank’s main shareholders during the year to offer them information
on Group policies relating to sustainability and governance. London
was the venue of the Group’s Group Strategy Update in September.
During the event, the senior management reviewed the 2018
objectives presented at the 2015 Investor Day in relation to both the
Group and its main business units. Over 200 delegates took part in
the various Group Strategy Update events, including the Group’s
main analysts and investors.
In line with CNMV recommendations, announcements of meetings
to be held with analysts and investors and the documentation to be
used at those meetings are published sufficiently in advance.
» Policy for contacting and communicating
with shareholders
The Bank’s board of directors has approved a policy for contacting
and communicating with shareholders, institutional investors and
proxy advisors. This policy is published on the Group’s corporate
website (www.santander.com). The policy contains the general
principles governing communication and contact between the Bank
and its shareholders, institutional investors and proxy advisors. It
also explains the main channels and procedures in a bid to improve
the Bank’s existing relations with those stakeholders. In accordance
with the principles of transparency, equal treatment and protection
of shareholder interests and within the framework of the new
Simple, Personal and Fair culture, the Bank makes available to its
shareholders and investors the information and communication
channels set out in the Shareholder section of this annual report.
Communication between the board
and shareholders and investors has
been stepped up through the Group
Strategy Update and the corporate
governance road show arranged and
held by the lead director
6. Grupo Santander management team1
Everything we do stems from a sense
of responsibility and commitment to
our people, to sustainability and to the
communities in which we are present
Ms Ana Botín, executive chairman
of Banco Santander
General shareholders’ meeting
18 March 2016
Composición
Group executive chairman
Chief Executive Officer
Executive vice chairman
Executive vice chairman2
Businesses
Argentina
Brazil
Chile
United States
Spain
Ms Ana Botín-Sanz de Sautuola y O’Shea
Mr José Antonio Álvarez Álvarez
Mr Rodrigo Echenique Gordillo
Mr Matías Rodríguez Inciarte
Mr Enrique Cristofani
Mr Sérgio Agapito Lires Rial
Mr Claudio Melandri Hinojosa
Mr Scott Powell
Mr Rami Aboukhair Hurtado
Consumer Finance
Ms Magda Salarich Fernández de Valderrama
Mexico
Poland
Portugal
United Kingdom
Business divisions
Mr Héctor Blas Grisi Checa
Mr Gerry Byrne
Mr Michal Gajewski
Mr Antonio Vieira Monteiro
Mr Nathan Bostock
Santander Global Corporate Banking
Mr Jacques Ripoll
Business support divisions
Retail & Commercial Banking
Support and control functions
Risks
Financial
Mr Ángel Rivera Congosto
Mr José María Nus Badía (Group Chief Risk Officer)
Mr Keiran Foad3
Mr José Antonio García Cantera (Group Chief Financial Officer)
Office of the General Secretary and Human Resources
Mr Jaime Pérez Renovales
Compliance
Internal audit
Ms Mónica López-Monís Gallego (Group Chief Compliance Officer)
Mr Juan Guitard Marín (Group Chief Audit Executive)
Strategic Alliances in Asset Management and Insurance
Mr Juan Manuel San Román López
Communication, Corporate Marketing and Research
Corporate Development
Innovation
Financial Accounting and Control
Executive Chairman’s Office and Strategy
Costs
Technology and Operations
Universities
Mr Juan Manuel Cendoya Méndez de Vigo
Ms Jennifer Scardino3
Mr José Luis de Mora Gil-Gallardo
Mr J. Peter Jackson
Mr José Francisco Doncel Razola (Group Chief Accounting Officer)
Mr Víctor Matarranz Sanz de Madrid
Mr Javier Maldonado Trinchant
Mr Andreu Plaza López
Mr Javier Roglá Puig
1. Information on 31 December 2016. Subsequent to that date it was announced: the integration of the Retail & Commercial Banking and Innovation divisions into a new division called
Santander Digital whose will be temporarily occupied by Mr Víctor Matarranz Sanz de Madrid as global head until the appointment of a new person in charge; the departure of the
Group of Mr J. Peter Jackson; the appointment of Mr Ángel Rivera Congosto as executive vice president of Banco Comercial de Santander México; and the departure of the Group of
Mr Jacques Ripoll and the appointment of Mr José María Linares Perou as executive vice president of Santander Global Corporate Banking. Those appointments are subject, where
appropiate, to clearance of supervisor.
2. To whom the Group Chief Risk Officer reports.
3. This appointment is subject authorisation and other formalities.
2016 ANNUAL REPORT
91
3. Corporate governance report
» 6. Grupo Santander management team
» Remuneration
Information on the remuneration of senior executive vice presidents
is provided in note 5 to the Group’s annual accounts.
» Related-party transactions
To the Bank’s knowledge, no member of senior management who
is not a director, no person represented by a member of senior
management who is not a director, and no company in which
such persons or persons with whom they act in concert or who
act through nominees therein are directors, members of senior
management or significant shareholders, has carried out any unusual
or significant transaction therewith during 2016 and through the
date of publication of this report.
» Conflicts of interest
The control mechanisms and the bodies in charge of resolving this
type of situation are described in the Code of Conduct in Securities
Markets, which is available on the Group’s corporate website
(www.santander.com).
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2016 ANNUAL REPORT
7. Transparency and independence
Santander has been included in the DJSI and FTSE4Good indices since
2000 and 2002, respectively, and its corporate governance model is
recognised by socially responsible investment indices.
» Financial information and other
relevant information
Financial information
Pursuant to the provisions of its Rules and Regulations (article
34.2), the board has taken the necessary actions to ensure that the
quarterly and half-yearly information and any other information
made available to the markets is prepared following the same
principles, standards and professional practices as are used to
prepare the financial statements. To such end, this information is
reviewed by the audit committee prior to being released.
Other relevant information
Pursuant to the provisions of the Code of Conduct in Securities
Markets, the Compliance area is responsible for informing the CNMV
of the relevant information generated in the Group.
Such communication is simultaneous to the release of relevant
information to the market or to the media and occurs as soon as the
decision in question is made or the resolution in question has been
signed or carried out. Relevant information shall be disseminated in a
true, clear, complete and equitable fashion and on a timely basis and,
whenever practicable, such information shall be quantified.
In 2016, the Bank published 57 significant events, which are available
on the Group’s corporate website (www.santander.com) and from
the website of the CNMV (www.cnmv.es).
» Relationship with the auditor
Independence of the auditor
In line with good corporate governance recommendations
regarding the rotation of the external auditor, the annual general
shareholders’ meeting held on 18 March 2016 agreed to designate
PricewaterhouseCoopers Auditores, S.L. (PwC) as external auditor of
both the Bank and its wider consolidated Group for the years 2016,
2017 and 2018, obtaining the favourable vote of 94.663% of all capital
present and represented by proxy
The Bank has the necessary mechanisms in place to ensure the inde-
pendence of the external auditor, and its audit committee verifies
that the services provided by this auditor comply with applicable
legislation.
In addition, the Rules and Regulations of the Board imposes certain
restrictions when arranging non-audit services with the audit firm
insofar these could jeopardise the independence of the auditor. In
this regard, the audit committee must approve such services. They
also require the board to make public the overall fees paid by the
Bank to the auditor for non-audit services. The information for 2016
is contained in note 48 to the Group’s annual accounts.
The Rules and Regulations of the Board set out the mechanisms used
to prepare the accounts so as to ensure that an unqualified audit
report is eventually issued. Nevertheless, the Bylaws and the Rules
and Regulations also provide that, whenever the board believes that
its opinion must prevail, it shall provide an explanation, through the
chairman of the audit committee, of the content and scope of the
discrepancy and shall endeavour to ensure that the auditor issue a
report in this regard. The financial statements of the Bank and of the
consolidated Group for 2016 are submitted without qualifications.
At its meeting of 15 February 2017, the audit committee received
written confirmation from the external auditor of its independence
in respect of the Bank and the entities directly or indirectly related
thereto, as well as information regarding additional services of any
kind provided to such entities by the auditors or by entities related
thereto, in accordance with that provided in legislation governing
financial audits.
At that same meeting, the audit committee issued a report
expressing a favourable opinion regarding the independence of
the external auditors and reporting, among other matters, on the
provision of additional services as mentioned in the preceding
paragraph.
The report, which was issued prior to the financial audit report, can
be viewed on the Group’s corporate website (www.santander.com)
as part of the annual report on the activities of the audit committee.
2016 ANNUAL REPORT
93
» Good governance code of listed companies
Banco Santander follows the recommendations for good corporate
governance contained in the good governance code of listed
companies.
Banco Santander follows the good governance recommendations
and best practices for credit institutions, such as the corporate
governance principles for banks of the Basel Committee and the
recommendations of the Organisation for Economic Co-operation
and Development, and also takes into account the good governance
codes of the stock markets on which its shares are listed.
3. Corporate governance report
» 7. Transparency and independence
The Bylaws, the Rules and Regulations for
the General Shareholders’ Meeting and
the Rules and Regulations of the Board
were amended in 2016 to bring them in
line with both legislative changes and best
practices in corporate governance.
» Intra-group transactions
There were no intra-group transactions in 2016 that were not
eliminated in the consolidation process and that are not part of the
ordinary course of business of the Bank or of the Group companies
as regards their purpose and conditions.
» Group’s corporate website
Since 2004, the Group’s corporate website (www.santander.com)
has disclosed, in the Shareholders and Investors section of the main
menu, all information required under applicable law (mainly the
Corporate Enterprises Act; Order ECC/461/2013, of 20 March; CNMV
Circular 3/2015, of 23 June; and Banco of Spain Circular 2/2016, of 2
February).
The Group’s website, which is presented with specific sections
for institutional investors and shareholders and can be viewed in
Spanish, English and Portuguese, receives approximately 145,000
visits per week.
The information available on such website includes:
• The Bylaws.
• The Rules and Regulations for the General Shareholders’ Meeting.
• The Rules and Regulations of the Board.
• The composition of the board and its committees.
• Professional profiles and other information on the directors.
• The annual report.
• The annual corporate governance report and the annual report on
director remuneration.
• The Code of Conduct in Securities Markets.
• The General Code of Conduct.
• The sustainability report.
• The reports of the board committees.
• Pillar III disclosures report.
The call notice for the 2017 annual general shareholders’ meeting
may be viewed as from the date of publication thereof, together with
the information relating thereto, which shall include the proposed
resolutions and mechanisms for exercising rights to receive
information, to grant proxies and to vote, including an explanation
of the mechanisms for exercising such rights by means of data
transmission and the rules applicable to the electronic shareholders’
forum that the Bank will make available on the Group’s corporate
website (www.santander.com).
94
2016 ANNUAL REPORT
8. Goals for 2017
The board’s goals for 2017 with regard to corporate governance are as follows:
Disseminating the culture and corporate values of Simple,
Personal and Fair across the entire organisation.
Consolidating the governance model so as to further
strengthen the relations between the parent bank and its
subsidiaries, especially with regard to corporate governance,
ensuring gradual implementation of the model at all of
the Group’s main units. The purpose here is to ensure the
consistency and soundness of decision-making processes,
control systems, information flows and control mechanisms
on a Group scale.
Consolidating interaction between board members,
especially between non-executive directors and the
management team.
Arranging and encouraging joint meetings between the
isk supervision, regulation and compliance committee and
r
he audit committee, and also between the former and the
t
emuneration committee, so as to ensure an effective and
r
fficient exchange of information and proper coverage of all
e
isks.
r
ncorporate into the functioning of the board the
I
mprovements resulting from the self-assessment process
i
y counteracting the growing number of matters the board
b
ust address -especially regulatory affairs- with an agile and
m
ffective system for making well-informed decisions.
e
2016 ANNUAL REPORT
95
4 Economic and financial
review
98 Consolidated financial report
98 2016 summary of Santander Group
100 Santander Group results
106 Santander Group balance sheet
111 Santander Group’s shareholders’
equity and solvency ratios
114 G eographical businesses
116 Continental Europe
130 United Kingdom
133 Latin America
147 United States
150 Corporate Centre
152 Global businesses
152 Retail banking
155 Global Corporate Banking
4. Economic and financial review » Summary
Consolidated
Financial Report
» Grupo Santander 2016 summary
The main lines of the income statement reflect the strategy followed
in 2016:
Our strategy and business model continued to generate value for
our customers and shareholders. Our geographic diversification,
with critical mass in our ten core markets, and leadership in
efficiency give us a clear competitive advantage that enables us to
withstand a difficult economic environment, particularly for banks,
bouts of high volatility and greater tax pressure in some countries.
In this context, we ended 2016 with solid financial results, generating
sustainable and predicable returns, and meeting our financial and
commercial commitments.
Profit and dividends increased, we grew in volumes in constant euro
terms, the balance sheet maintained a balanced structure, with
liquidity ratios well above those required, and we significantly
improved our capital position and our credit quality. All of this while
advancing in our process of commercial transformation, renewing
the relation with our customers and improving their experience with
the bank.
The highlights in 2016 were:
Strong results. Santander’s business model has demonstrated its
strength in the last few years, which has enabled us to generate very
predictable results and put us among the leaders in efficiency and
profitability.
Underlying profit before tax was 3% higher at €11,288 million. In
constant euros, the increase was 12%, with rises in nine out of the 10
core markets.
• Good evolution of revenues, driven by net interest income and
fee income, which together generated 94% of gross income.
• Strict control of costs for the third year running. They were 2%
lower in real terms and on a like-for-like basis.
• Further fall in loan-loss provisions and improvement in the cost
of credit thanks to the strengthening of the corporate risk culture.
Higher tax charge, with new taxes in some units, as well as the
recording of some non-recurring positive and negative results, which
overall represented a charge net of taxes of €417 million (€600
million negative in 2015).
As a result, Grupo Santander posted an attributable profit of
€6,204 million, 4% more than in 2015 and 15% higher in constant
euros.
Commercial transformation process. We continued to make
progress in 2016 in transforming our commercial model into one
focusing more on customer loyalty, digitalisation and customer
satisfaction.
Progress in all units to improve customer loyalty, developing new
products and services, both for individuals as well as companies,
which provide innovative solutions and global proposals. The
examples include: the 1|2|3 World, Santander Select, Santander Private
Banking, Santander pymes, Santander Trade Network, Global Treasury
Solutions, Santander Flame and new digital apps in all countries.
98
ANNUAL REPORT 2016
In order to improve customer loyalty, we need to ensure operational
excellence which for us means the best customer experience and
efficiency. Exploiting new technologies is key to achieve this. We
continued to work on different levels of digital transformation.
Our customers require greater availability and proximity from us and
via digital channels, but at the same time strengthening the
attention and tailored treatment that have always been Santander’s
hallmarks. We worked hard to also improve branches with the Smart
Red project and contact centres. Equally noteworthy was the
significant progress made in Santander NEO CRM, our commercial
intelligence tool which integrates the information of all channels
(branches, contact centres, digital means, etc) and incorporates new
transactional capacities, enabling us to know our customers better
and offer them value proposals, on the basis of their experience and
needs, and help to achieve cost savings.
As a result of this transformation process, we reached 15.2 million
loyal customers (+10%) and 20.9 million digital customers (+26%).
These increases improved our revenue base, mainly fee income,
where growth doubled that in 2015.
In customer funds, all main units grew, particularly in demand
deposits and mutual funds, as part of our strategy to improve the
cost of funding.
Strengthened solvency. In capital, we again demonstrated our
capacity to combine a solid generation of sustainable capital with
payment of dividends. Our fully loaded CET1 capital ratio was
10.55% at the end of 2016, surpassing the target and progressing
toward our goal of 11% in 2018.
The total fully loaded ratio and the leverage ratio also improved, and
we ended the year with a CET1 of 12.53%, well above the European
Central Bank’s minimum requirement.
Enhanced credit quality. Santander maintains a medium-low risk
profile and high asset quality. All the quality indicators improved.
The Group’s NPL ratio was 43 b.p. lower at 3.93%, coverage rose one
percentage point to 74% and the cost of credit fell by 7 b.p. to 1.18%.
Almost all countries improved; this was directly related to the
strengthening of our risk culture throughout the Group, known as
risk pro.
As regards customer satisfaction, we also achieved improved results.
We now have eight units, three more than in 2015, among the three
best local banks in customer experience.
Creation of shareholder value. This was again one of our main
priorities.
Growth in activity. The greater customer loyalty and commercial
strategy is reflected in higher business volumes, particularly in
emerging markets, while maintaining our medium-low risk profile
and a well-diversified portfolio.
Lending increased more in Latin America, Santander Consumer
Finance and Poland and more moderately in the United Kingdom. Of
note was Brazil (+0.4%), after improving its trend in the second half
of the year. Spain and Portugal are still in a process of deleveraging
and the United States was partially affected by the sale of portfolios
of lower quality.
We increased earnings per share by 1%, the cash dividend by 8% and
we continued to offer one of the best returns among banks in terms
of RoTE.
In addition, our fully loaded capital rose by more than €3,000 million
and the tangible book value per share increased for the third straight
year to €4.22 per share.
The Santander share rose 8.8% in 2016 and the total shareholder
return was 14.2% higher. Both these increases were much better than
the rise in the DJ Stoxx Banks and DJ Stoxx 50 indexes.
Exchange rates: 1 euro / currency parity
US$
Pound sterling
Brazilian real
Mexican peso
Chilean peso
Argentine peso
Polish zloty
2016
2015
Period-end
1.054
0.856
3.431
21.772
707.612
16.705
4.410
Average
1.106
0.817
3.831
20.637
747.500
16.316
4.362
Period-end
1.089
0.734
4.312
18.915
773.772
14.140
4.264
Average
1.109
0.725
3.645
17.568
724.014
10.207
4.182
ANNUAL REPORT 2016
99
4. Economic and financial review » Consolidated financial information
GRUPO SANTANDER. INCOME STATEMENT
Attributable profit of €6,204 million, 4% more than 2015 (+15% in constant euros). The main factors were:
• Solid commercial revenues, underpinned by net interest income and fee income.
• Strict control of costs for the third straight year. They declined 2% in real terms and on a like-for-like basis, principally
because of savings products and the streamlining measures.
• Further reduction in provisions and in the cost of credit (from 1.25% in December 2015 to 1.18%), reflecting the improvement
in the quality of portfolios.
The efficiency ratio was 48.1%, one of the best among our competitors.
Underlying RoTE of 11.1%, a reference in the banking sector.
Earnings per share of €0.41 (+1%).
Income statement
€ Million
Net interest income
Net fee income
Gains (losses) on financial transactions
Other operating income
Dividends
Income from equity-accounted method
Other operating income/expenses
Gross income
Operating expenses
General administrative expenses
Personnel
Other general administrative expenses
Depreciation and amortisation
Net operating income
Net loan-loss provisions
Impairment losses on other assets
Other income
Underlying profit before taxes
Tax on profit
Underlying profit from continuing operations
Net profit from discontinued operations
Underlying consolidated profit
Minority interests
Underlying attributable profit to the Group
Net capital gains and provisions
Attributable profit to the Group
Underlying EPS (euros)
Underlying diluted EPS (euros)
EPS (euros)
Diluted EPS (euros)
Pro memoria:
Average total assets
Average stockholders' equity*
2016
31,089
10,180
1,723
862
413
444
5
43,853
(21,088)
(18,723)
(10,997)
(7,727)
(2,364)
22,766
(9,518)
(247)
(1,712)
11,288
(3,396)
7,892
0
7,893
1,272
6,621
(417)
6,204
0.44
0.43
0.41
0.41
2015
32,189
10,033
2,386
665
455
375
(165)
45,272
(21,571)
(19,152)
(11,107)
(8,045)
(2,419)
23,702
(10,108)
(462)
(2,192)
10,939
(3,120)
7,819
—
7,819
1,253
6,566
(600)
5,966
0.45
0.44
0.40
0.40
Variation
amount
%
%w/o FX
2.3
8.1
(24.0)
26.1
(7.7)
26.0
—
2.5
3.5
3.7
4.5
2.6
2.2
1.6
(2.1)
(45.6)
(19.0)
11.7
16.4
9.8
—
9.8
6.2
10.5
(30.5)
15.1
(1,101)
147
(663)
197
(41)
69
170
(1,419)
483
429
110
318
54
(936)
590
215
480
349
(276)
73
0
73
18
55
183
238
(0.01)
(0.01)
0.00
0.00
(3.4)
1.5
(27.8)
29.7
(9.1)
18.3
—
(3.1)
(2.2)
(2.2)
(1.0)
(4.0)
(2.3)
(3.9)
(5.8)
(46.5)
(21.9)
3.2
8.9
0.9
—
0.9
1.5
0.8
(30.5)
4.0
(2.1)
(2.3)
1.0
0.9
2014
29,548
9,696
2,850
519
435
243
(159)
42,612
(20,038)
(17,781)
(10,213)
(7,568)
(2,257)
22,574
(10,562)
(375)
(1,917)
9,720
(2,696)
7,024
(26)
6,998
1,182
5,816
—
5,816
0.48
0.48
0.48
0.48
1,337,661
88,744
1,345,657
90,798
(7,996)
(2,054)
(0.6)
(2.3)
1,203,260
82,545
(*).- In 2014, pro-forma taking into account the January 2015 capital increase
100100
ANNUAL REPORT 2016
Grupo Santander posted attributable profit of €6,204 million, 4%
higher than the €5,966 registered in 2015 (+15% in constant euros).
The profit includes non-recurring negative results of €417 million
(-€600 million in 2015), as follows:
• In 2016: €227 million of capital gains from the sale of VISA Europe;
-€475 million of restructuring costs; a €137 million provision for
eventual claims related to payment protection insurance (PPI) in
the UK and -€32 million following the re-statement of Santander
Consumer USA’s figures.
The underlying pre-tax profit, before these non-recurring results
and taxes, was 3% higher at €11,288 million (+12% in constant euros),
due to the good performance of commercial revenues, strict control
of costs, lower provisions and a reduced cost of credit.
Nine of the ten core units generated higher profits and six of them
registered double-digit growth.
This performance is even more striking if we bear in mind the
environment in which banks have been operating since the
beginning of the financial crisis:
• In 2015: the net result of the reversal of tax liabilities in Brazil (€835
million), €283 million of badwill of Banif in Portugal, a €600 million
provision for eventual claims related to PPI in the UK, -€683 million
for impairment of intangible assets and -€435 million for other
provisions (goodwill and others).
• Mature markets continue to have low interest rates, tough
regulatory requirements, high levels of unproductive assets,
sluggish demand for loans, new entrants, the technological
challenge and a level of profitability still below the cost of
capital.
Quarterly income statement
€ Million
Net interest income
Net fee income
Gains (losses) on financial transactions
Other operating income
Dividends
Income from equity-accounted method
Other operating income/expenses
Gross income
Operating expenses
General administrative expenses
Personnel
Other general administrative expenses
Depreciation and amortisation
Net operating income
Net loan-loss provisions
Impairment losses on other assets
Other income
Underlying profit before taxes
Tax on profit
Underlying profit from continuing operations
Net profit from discontinued operations
Underlying consolidated profit
Minority interests
Underlying attributable profit to the Group
Net capital gains and provisions*
Attributable profit to the Group
Underlying EPS (euros)
Underlying diluted EPS (euros)
EPS (euros)
Diluted EPS (euros)
2015
2016
1Q
8,038
2,524
695
186
33
99
53
11,444
(5,377)
(4,785)
(2,755)
(2,030)
(592)
6,067
(2,563)
(60)
(454)
2,990
(922)
2,067
0
2,067
350
1,717
—
1,717
0.12
0.12
0.12
0.12
2Q
8,281
2,586
372
379
239
101
39
11,618
(5,429)
(4,826)
(2,836)
(1,989)
(603)
6,189
(2,508)
(78)
(605)
2,998
(939)
2,059
0
2,059
350
1,709
835
2,544
0.12
0.12
0.18
0.17
3Q
7,983
2,474
634
225
75
93
57
11,316
(5,342)
(4,731)
(2,717)
(2,015)
(611)
5,974
(2,479)
(110)
(606)
2,778
(787)
1,991
(0)
1,991
311
1,680
—
1,680
0.11
0.11
0.11
0.11
4Q
7,888
2,448
684
(126)
107
82
(315)
10,894
(5,422)
(4,810)
(2,799)
(2,011)
(612)
5,472
(2,558)
(215)
(526)
2,173
(471)
1,702
—
1,702
242
1,460
(1,435)
25
0.10
0.10
(0.01)
(0.01)
1Q
7,624
2,397
504
204
44
83
78
10,730
(5,158)
(4,572)
(2,683)
(1,889)
(586)
5,572
(2,408)
(44)
(389)
2,732
(810)
1,922
—
1,922
288
1,633
—
1,633
0.11
0.11
0.11
0.11
2Q
7,570
2,549
366
445
209
112
124
10,929
(5,227)
(4,632)
(2,712)
(1,920)
(595)
5,703
(2,205)
(29)
(515)
2,954
(970)
1,984
0
1,984
338
1,646
(368)
1,278
0.11
0.11
0.08
0.08
3Q
7,798
2,597
440
245
37
119
90
11,080
(5,250)
(4,692)
(2,726)
(1,966)
(558)
5,831
(2,499)
(16)
(376)
2,940
(904)
2,036
(0)
2,036
341
1,695
—
1,695
0.11
0.11
0.11
0.11
4Q
8,096
2,637
412
(32)
124
130
(286)
11,113
(5,453)
(4,828)
(2,876)
(1,952)
(626)
5,660
(2,406)
(159)
(432)
2,663
(712)
1,951
0
1,951
305
1,646
(49)
1,598
0.11
0.11
0.10
0.10
ANNUAL REPORT 2016
101
4. Economic and financial review » Consolidated financial information
Net interest income
€ Million
Net fee income
€ Million
• Developing markets, meanwhile, recorded faster growth in
business volumes, higher interest rates and substantial potential
for banking services.
Lastly, there are two factors to take into account in the year-on-year
comparisons. The first one is a slightly positive perimeter impact
from SCF operations and Banif’s acquisition in Portugal and the
other is negative from the evolution of exchange rates against the
euro of the various currencies in which the Group operates. The
forex impact is 6 p.p. for the whole Group in revenue and cost
comparisons and 11 p.p. in the attributable profit.
The main lines of the income statement were as follows:
• Net interest income in 2016 amounted to €31,089 million (71% of
gross income) and was 3% lower in constant euros. On a like-for
like basis, growth was 2%, due to higher lending and deposits
combined with good management of the cost of funds.
By units and in constant euros, growth of 28% in Argentina, 14% in
Mexico, 11% in Santander Consumer Finance and Poland, 7% in
Chile, 2% in Brazil and 0.4% in the UK.
The only declines were in Spain because of lower volumes and
interest rate pressure on loans and the US, affected by the fall in
Santander Consumer USA’s auto finance balances and the change
of mix toward a lower risk profile.
Gross income
Gross income was 3% lower at €43,853 million because of the impact
of exchange rates. Excluding this impact, growth was 3% and the
quality of the results was better as they were underpinned by
customer revenues.
Our revenue structure, where net interest income and fee income
account for 94% of gross income, much higher than that of our
competitors, continues to enable us to grow revenues consistently
and recurrently. Gross income grew in six of the last seven
quarters.
• Fee income increased 1% to €10,180 million (+8% in constant
euros, double the growth in 2015), reflecting the greater activity
and customer loyalty. By businesses, fee income rose from both
Retail Banking (86% of the total) and Global Corporate Banking.
All countries generated more fee income, linked to the increase in
loyal customers in all units, the offer of higher value-added
products and a better customer experience.
• Gains on financial transactions, which only account for 4% of gross
income, fell 24% in constant euros as they were very high in 2015
due to management of interest rate and exchange rate hedging
portfolios.
Net fee income
€ Million
Fees from services
Mutual & pension funds
Securities and custody
Insurance
Net fee income
102
ANNUAL REPORT 2016
2016
6,261
757
913
2,249
10,180
2015
6,040
862
905
2,225
10,033
Variation
amount
220
(105)
9
23
147
%
3.6
(12.2)
1.0
1.0
1.5
2014
5,827
913
763
2,193
9,696
Operating expenses
€ Million
Efficiency ratio
%
• Lastly, other revenues represented less than 2% of gross income,
They include dividends, which were €41 million lower, equity
accounted method results (up by €69 million) and other operating
income, which rose by €170 million, partly due to higher revenues
from leasing activity in the US.
Operating expenses
Operating expenses fell 2% to €21,088 million (+4% in constant
euros). In real terms and on a like-for-like basis, they were 2% lower.
This was the third consecutive year with flat growth or lower in real
terms.
The measures adopted to simplify structures are enabling us to
keep on investing in the commercial transformation (commercial
tools, streamlined processes, new branch models) and improve
customer satisfaction while forging a more efficient corporation.
We continued to manage the units very actively throughout the
year, adapting the cost base to the business reality in each market.
This enabled us to reduce costs in seven of the 10 core units in real
terms and on a like-for-like basis, and also in the Corporate Centre.
The two units whose costs rose the most were Mexico, because of
the business expansion plans that entail investments in technology,
and the US due to adapting to regulatory requirements and
developing the franchise.
The evolution of revenues in an environment of high pressure on
them and the control of costs are reflected in the stable efficiency
ratio (48.1% vs. 47.6% in 2015), a level that compares very well with
that of our main European and US competitors.
Loan-loss provisions
Loan-loss provisions fell 6% to €9,518 million. In constant euros, the
reduction was 2%.
Operating expenses
€ Million
Personnel expenses
General expenses
Information technology
Communications
Advertising
Buildings and premises
Printed and office material
Taxes (other than profit tax)
Other expenses
Personnel and general expenses
Depreciation and amortisation
Total operating expenses
2016
10,997
7,727
1,094
499
691
1,708
146
484
3,105
18,723
2,364
21,088
2015
11,107
8,045
1,039
587
705
1,786
157
529
3,243
19,152
2,419
21,571
Variation
amount
(110)
(318)
55
(88)
(14)
(78)
(11)
(45)
(138)
(429)
(54)
(483)
%
(1.0)
(4.0)
5.3
(15.0)
(2.0)
(4.4)
(6.8)
(8.5)
(4.3)
(2.2)
(2.3)
(2.2)
2014
10,213
7,568
936
489
654
1,775
155
460
3,098
17,781
2,257
20,038
ANNUAL REPORT 2016
103
4. Economic and financial review » Consolidated financial information
Net loan-loss provisions
€ Million
Cost of credit
%
Net loan-loss provisions
€ Million
Non-performing loans
Country-risk
Recovery of written-off assets
Total
In constant euros, all European units recorded significant falls in
provisions: Spain (-41%), United Kingdom (-39%), SCF (-27%), Portugal
(-25%) and Poland (-10%). Increases in Latin American countries in line
with the growth in lending, except for Chile where they were lower.
The cost of credit continued to improve quarter after quarter,
reflecting the strategy of selective growth and an appropriate risk
management policy. It fell from 1.25% in 2015 to 1.18%. Almost all the
Group’s units improved, notably Spain, Portugal, Argentina and SCF
but also Mexico, Chile and Poland. Brazil’s cost of credit was
virtually stable and ended the year at below the 5% set as the
maximum objective.
Other income and provisions
Other income and provisions was €1,959 million negative compared
to €2,654 million also negative in 2015. This item covers various kinds
of provisions, as well as capital gains and losses and impairment of
financial assets. The decline over 2015 was very diluted by concepts,
countries and businesses.
2016
11,097
3
(1,582)
9,518
2015
11,484
(0)
(1,375)
10,108
Variation
amount
(387)
3
(207)
(590)
%
(3.4)
—
15.1
(5.8)
2014
11,922
(24)
(1,336)
10,562
Attributable profit to the Group
%
(*) In constant euros: +15.1%
104
ANNUAL REPORT 2016
Non-recurring results net of tax. 2015
€ Million
Non-recurring results net of tax. 2016
€ Million
Underlying profit before taxes
Group attributable profit
The underlying profit before taxes was 3% higher at €11,288 million
(+12% in constant euros), underscoring the good evolution of gross
income, control of costs and the good evolution of provisions and
the cost of credit.
Despite the difficult environment in some markets, all units
increased their underlying profit before taxes except for the US,
and six of them did so by more than 15%.
Taxes increased in most countries, increasing the tax pressure in
some units, mainly in Chile, UK and Poland (the latter two because
of the introduction of new taxes on the sector). The tax rate for the
Group as a whole was 30%.
As already indicated, attributable profit was affected by non-recurring
positive and negative results. Excluding them, underlying attributable
profit was 1% higher at €6,621 million (+10% in constant euros).
We ended 2016 with solid results, profit growth and an underlying
RoTE of 11.081%, which continued to be among the highest in the
financial sector. The underlying RoRWA also improved (from 1.30% to
1.36%).
The Group’s attributable profit was €6,204 million, 4% more than in
2015 (+15% in constant euros).
Earnings per share increased 1% to €0.41 (€0.40 in 2015). The total
RoTE was 10.38% (9.99% in 2015) and the total RoRWA 1.29%
(1.20%).
Underlying RoTE
%
Underlying RoRWA
%
ANNUAL REPORT 2016
105
4. Economic and financial review » Consolidated financial information
Balance sheet
€ Million
Assets
Cash, cash balances at central banks and other demand deposits
Financial assets held for trading
Debt securities
Equity instruments
Loans and advances to customers
Loans and advances to central banks and credit institutions
Derivatives
Financial assets designated at fair value
Loans and advances to customers
Loans and advances to central banks and credit institutions
Other (debt securities an equity instruments)
Available-for-sale financial assets
Debt securities
Equity instruments
Loans and receivables
Debt securities
Loans and advances to customers
Loans and advances to central banks and credit institutions
Held-to-maturity investments
Investments in subsidaries, joint ventures and associates
Tangible assets
Intangible assets
o/w: goodwill
Other assets
Total assets
Liabilities and shareholders' equity
Financial liabilities held for trading
Customer deposits
Debt securities issued
Deposits by central banks and credit institutions
Derivatives
Other
Financial liabilities designated at fair value
Customer deposits
Debt securities issued
Deposits by central banks and credit institutions
Other
Financial liabilities measured at amortized cost
Customer deposits
Debt securities issued
Deposits by central banks and credit institutions
Other
Liabilities under insurance contracts
Provisions
Other liabilities
Total liabilities
Shareholders' equity
Capital stock
Reserves
Attributable profit to the Group
Less: dividends
Accumulated other comprehensive income
Minority interests
Total equity
Total liabilities and shareholders’ equity
106
ANNUAL REPORT 2016
2016
76,454
148,187
48,922
14,497
9,504
3,221
72,043
31,609
17,596
10,069
3,944
116,774
111,287
5,487
840,004
13,237
763,370
63,397
14,468
4,836
23,286
29,421
26,724
54,086
1,339,125
108,765
9,996
—
1,395
74,369
23,005
40,263
23,345
2,791
14,127
—
1,044,240
657,770
226,078
133,876
26,516
652
14,459
28,047
1,236,426
105,977
7,291
94,149
6,204
(1,667)
(15,039)
11,761
102,699
1,339,125
2015
77,751
146,346
43,964
18,225
6,081
1,352
76,724
45,043
14,293
26,403
4,347
122,036
117,187
4,849
836,156
10,907
770,474
54,775
4,355
3,251
25,320
29,430
26,960
50,572
1,340,260
105,218
9,187
—
2,255
76,414
17,362
54,768
26,357
3,373
25,037
1
1,039,343
647,598
222,787
148,081
20,877
627
14,494
27,057
1,241,507
102,402
7,217
90,765
5,966
(1,546)
(14,362)
10,713
98,753
1,340,260
Variation
amount
(1,297)
1,841
4,958
(3,728)
3,423
1,869
(4,681)
(13,434)
3,303
(16,334)
(403)
(5,262)
(5,900)
638
3,848
2,330
(7,104)
8,622
10,113
1,585
(2,034)
(9)
(236)
3,514
(1,135)
3,547
809
—
(860)
(2,045)
5,643
(14,505)
(3,012)
(582)
(10,910)
(1)
4,897
10,172
3,291
(14,205)
5,639
25
(35)
990
(5,081)
3,575
74
3,384
238
(121)
(677)
1,048
3,946
(1,135)
%
(1.7)
1.3
11.3
(20.5)
56.3
138.2
(6.1)
(29.8)
23.1
(61.9)
(9.3)
(4.3)
(5.0)
13.2
0.5
21.4
(0.9)
15.7
232.2
48.8
(8.0)
(0.0)
(0.9)
6.9
(0.1)
3.4
8.8
—
(38.1)
(2.7)
32.5
(26.5)
(11.4)
(17.3)
(43.6)
(100.0)
0.5
1.6
1.5
(9.6)
27.0
4.0
(0.2)
3.7
(0.4)
3.5
1.0
3.7
4.0
7.8
4.7
9.8
4.0
(0.1)
2014
69,853
148,094
54,374
12,920
2,921
1,020
76,858
42,673
8,971
28,592
5,111
115,251
110,249
5,001
782,005
7,510
722,819
51,676
—
3,471
23,256
30,401
27,548
51,293
1,266,296
109,792
5,544
—
7,572
79,048
17,628
62,318
33,127
3,830
25,360
—
961,053
609,034
209,865
122,685
19,468
713
15,376
27,331
1,176,581
91,664
6,292
80,026
5,816
(471)
(10,858)
8,909
89,714
1,266,296
GRUPO SANTANDER. BALANCE SHEET*
Loans increased 2%, with advances in the main segments and increases in seven of the Group’s 10 core countries.
NPL ratio improved to 3.93%, below 4% for the first time since March 2012.
The cost of credit dropped to 1.18%, meeting the goal set at the Investor Day for the 2016-2018 average.
In funds, growth of 5% due to demand deposits and mutual funds. Growth in all 10 core units.
The Group’s net loan-to-deposit ratio was 114% (116% in 2015).
* Variations in constant euros
Total managed and marketed funds at the end of 2016 amounted
to €1,521,633 million, of which €1,339,125 million were on-balance
sheet and the rest mutual and pension funds and managed
portfolios.
In the Group as a whole, exchange rates had a negative impact on
the evolution of loans (-3 p.p.) and customer funds (-2 p.p.). The
impact varied by country: Brazil (+26 p.p.); Chile (+10 p.p.); United
States (+3 p.p.); Poland (-4 p.p.); Mexico (-14 p.p.); United Kingdom
(-15 p.p.) and Argentina (-21 p.p.).
The perimeter impact was irrelevant (less than 1%).
Gross customer lending (excluding repos)
The Group’s gross lending (excluding repos) fell 1% (+2% in constant
euros). By country:
• The main rises were in Argentina (+37%), Santander Consumer
Finance (+14%, benefiting from the agreement with PSA Finance),
Mexico and Poland (both +8%) and Chile (+7%).
• More moderate rises in the United Kingdom (+2%) and Brazil
(+0.4%) after increasing 5% in the fourth quarter, reflecting the
change of trend, mainly in mortgage loans, in the second half of
2016.
Customer loans
€ Million
Spanish Public sector
Other residents
Commercial bills
Secured loans
Other loans
Non-resident sector
Secured loans
Other loans
Gross customer loans
Loan-loss allowances
Net customer loans
Pro memoria: Doubtful loans
Public sector
Other residents
Non-resident sector
2016
14,127
147,246
9,567
87,509
50,170
653,490
387,546
265,944
814,863
24,393
790,470
32,573
101
12,666
19,806
2015
13,993
153,863
9,037
92,478
52,348
649,509
409,136
240,373
817,366
26,517
790,848
36,133
145
16,301
19,686
Variation
amount
133
(6,617)
531
(4,969)
(2,178)
3,981
(21,590)
25,571
(2,503)
(2,125)
(378)
(3,560)
(44)
(3,635)
120
%
1.0
(4.3)
5.9
(5.4)
(4.2)
0.6
(5.3)
10.6
(0.3)
(8.0)
(0.0)
(9.9)
(30.3)
(22.3)
0.6
2014
17,465
154,905
7,293
96,426
51,187
589,557
369,266
220,291
761,928
27,217
734,711
40,424
167
19,951
20,306
ANNUAL REPORT 2016
107
4. Economic and financial review » Consolidated financial information
Gross customer loans
(w/o repos)
€ Billion
Gross customer loans
(w/o repos)
% / operating areas. December 2016
Other America: 1%
Argentina: 1%
Chile: 5%
Brazil: 10%
Mexico: 4%
USA: 11%
Other Europe: 2%
Poland : 3%
United Kingdom: 30%
Portugal: 4%
Spain: 19%
SCF: 11%
• Falls of 2% in the United States, partly affected by the sale of
portfolios, 4% in Spain, mainly due to balances in institutions,
mortgages and the reduction in doubtful balances, and 5% in
Portugal. The latter two occurred in markets that are
deleveraging, where growth in new lending is still not sufficient to
increase the stock.
• By segments, growth in loans to individual customers as well as
SMEs and companies, spurred by the 1|2|3 and SMEs strategies.
The effort made in marketing of products and services for SMEs
was recognised by the magazine Euromoney and awarded
Santander as the Best Bank in the World for SMEs.
• As for real estate activity in Spain, net lending was down 29%, as a
result of continuing the deleveraging strategy of the last few
years.
Credit risk
Net NPL entries in 2016 amounted to €7,362 million (-4% over 2015)
after eliminating the perimeter and exchange-rate effects.
Bad and doubtful loans ended the year at €33,643 million, 9% lower
(-11% in constant euros). This lowered the Group’s NPL ratio to
3.93%, 43 b.p. lower than in 2015. It fell every quarter of the year
and, for the first time since March 2012, was below 4%.
Loan-loss provisions amounted to €24,835 million, which provided
coverage of 74% (73% in 2015). In order to properly view this figure,
one has to take into account that the UK and Spain ratios are
affected by the weight of mortgage balances, which require fewer
provisions as these loans have guarantees.
Credit risk management*
€ Million
Non-performing loans
NPL ratio (%)
Loan-loss allowances
For impaired assets
For other assets
Coverage ratio (%)
Cost of credit (%) **
(*) Excluding country-risk
(**) 12 months net loan-loss provisions / average lending
Note: NPL ratio: Non-performing loans / computable assets
108
ANNUAL REPORT 2016
2016
33,643
3.93
24,835
15,466
9,369
73.8
1.18
2015
37,094
4.36
27,121
17,707
9,414
73.1
1.25
Variation
amount
(3,450)
(0.43)
(2,286)
(2,241)
(45)
0.7
(0.07)
%
(9.3)
(8.4)
(12.7)
(0.5)
2014
41,709
5.19
28,046
21,784
6,262
67.2
1.43
NPL and coverage ratios
%
Net NPL entries
€ Million
The improved credit quality is reflected in the 6% reduction in loan
loss provisions (-2% in constant euros) and in the consequent
reduction in the cost of credit, which dropped from 1.25% at the end
of 2015 to 1.18%. Excluding Santander Consumer USA, which because
of the nature of its business has a high level of provisions and
recoveries, the cost of credit was 0.82% (0.90% at the end of 2015).
Credit quality ratios improved in almost all the Group’s countries.
More information on credit risk, the control and monitoring
systems and the internal risk models for calculating provisions can
be found in the specific section of the risk management report in
this Annual Report.
Customer funds under management and marketed
Total managed funds (deposits excluding repos and mutual funds)
rose 3%. In constant euros growth was 5%.
All the main countries increased their funds, in constant euros as
follows:
• Double-digit growth in Argentina (+49%), Mexico (+12%) and
Poland (+10%).
• More moderate rises in the United States and SCF (+7%) and in
the United Kingdom and Chile (+6%).
Managed and marketed customer funds
€ Million
Resident public sector
Other residents
Demand deposits
Time deposits
Other
Non-resident sector
Demand deposits
Time deposits
Other
Customer deposits
Debt securities issued
On-balance-sheet customer funds
o/w: subordinated debt
Mutual funds
Pension funds
Managed portfolios
2016
8,699
160,026
119,425
39,506
1,094
522,387
328,736
134,528
59,123
691,112
228,869
919,981
19,897
147,416
11,298
23,793
2015
11,737
157,611
108,410
47,297
1,904
513,795
313,175
146,317
54,303
683,142
226,160
909,302
21,151
129,077
11,376
25,808
Other managed and marketed customer funds
Managed and marketed customer funds
182,508
166,260
1,102,488
1,075,563
Variation
amount
(3,038)
2,415
11,016
(7,791)
(809)
8,592
15,561
(11,789)
4,820
7,970
2,709
10,679
(1,254)
18,340
(78)
(2,015)
16,247
26,926
%
(25.9)
1.5
10.2
(16.5)
(42.5)
1.7
5.0
(8.1)
8.9
1.2
1.2
1.2
(5.9)
14.2
(0.7)
(7.8)
9.8
2.5
2014
9,349
163,340
88,312
67,495
7,532
475,017
273,889
151,113
50,015
647,706
213,696
861,402
16,884
124,708
11,481
25,599
161,788
1,023,189
ANNUAL REPORT 2016
109
4. Economic and financial review » Consolidated financial information
Customer funds
(deposits w/o repos + mutual funds)
€ Billion
Customer funds
(
deposits w/o repos + mutual funds)
% / operating areas. December 2016
Other America: 1%
Argentina: 1%
Chile: 4%
Brazil: 13%
Mexico: 5%
USA: 9%
Other Europe: 1%
Poland : 3%
Portugal: 4%
SCF: 4%
United Kingdom: 27%
Spain: 28%
• Lastly, rises of 3% in Brazil and Spain and 2% in Portugal, in the
latter two due to the strategy of reducing time deposits. The
balances of demand deposits increased €10,000 million and
€4,000 million respectively.
The balance of the portfolio of investment held to maturity was
€14,468 million, higher than in 2015 due to the acquisition of a
€7,765 million portfolio of UK sovereign bonds, as part of the
management of the ALCO balances.
In accordance with the strategy to reduce the cost of funds, demand
deposits increased 10% and mutual funds 7% (growing in all
countries). Time deposits, on the other hand, fell 9%.
Total goodwill was €26,724 million, similar to the €26,960 million
recorded in 2015.
Tangible assets amounted to €23,286 million, €2,034 million less
than in 2015 due to the deconsolidation of assets from the merger
of Metrovacesa / Merlín, which amply offset the increase in the
United States from assets associated with leasing business.
Total Group. Loan-to-deposit ratio
%
As well capturing customer deposits, Grupo Santander, for strategic
reasons, maintains a selective policy of issuing securities in the
international fixed income markets and strives to adapt the
frequency and volume of its market operations to the structural
liquidity needs of each unit, as well as to the receptiveness of each
market.
In 2016, various Group units carried out:
• Medium and long-term senior debt issues amounting to €24,309
million, covered bonds of €4,720 million and subordinated debt
issues of €2,239 million.
• Securitizations placed in the market (€13,144 million).
• Maturities of medium and long-term debt of €35,597 million
The net loan-to-deposit ratio was 114% (116% in 2015) and the ratio
of deposits plus medium- and long-term funding to the Group’s
loans was 114%, underscoring the comfortable funding structure.
Other items of the balance sheet
The balance of financial assets available for sale stood at €116,774
million at the end of 2016, €5,262 million less than in 2015 (-4%), due
to reduced positions in Spain and the United States.
110
ANNUAL REPORT 2016
GRUPO SANTANDER. SHAREHOLDERS’ EQUITY AND SOLVENCY RATIOS
In fully loaded terms, the CET1 capital ratio rose 50 b.p. to 10.55%, surpassing the target after rising in every quarter.
Tangible equity per share rose for the third year running (+4%) to €4.22.
The fully loaded leverage ratio was 5.0% (4.7% in December 2015).
The eligible CET1 fully-loaded amounted to €62,068 million, €3,300
million more than in 2015 (+6%), mostly due to the profit retained
after the payment of dividends.
Capital ratios (fully loaded)
%
In fully-loaded terms, the CET1 increased from 10.05% in 2015 to
10.55% in 2016, after increasing every quarter during 2016.
The fully-loaded total capital ratio was 13.87%, after increasing 82
b.p. in the year.
From a qualitative standpoint, the Group's ratios are solid and
adequate to its business model, balance sheet structure and risk
profile.
Grupo Santander has a business model that generates stable and
predictable results. This model allows us to accumulate capital
organically in a recurring way while funding the growth in customer
lending. And all of this consistent with the increase in cash
dividends.
Eligible capital (fully loaded)*
€ Million
Capital stock and reserves
Attributable profit
Dividends
Other retained earnings
Minority interests
Goodwill and intangible assets
Treasury stock and other deductions
Core CET1
Preferred shares and other eligibles T1
Tier 1
Generic funds and eligible T2 instruments
Eligible capital
Risk-weighted assets
CET1 capital ratio
T1 capital ratio
Total capital ratio
(*),- In 2014, pro-forma data taking into account the January 2015 capital increase
Note: on February 3rd 2016, the ECB authorised the use of the Alternative Standardised
Approach to calculate the capital charge for operational risk on a consolidated level for
Banco Santander (Brasil) S.A.
2016
101,437
6,204
(2,469)
(16,116)
6,784
(28,405)
(5,368)
62,068
5,767
67,834
13,749
81,584
588,088
10.55
11.53
13.87
2015
98,193
5,966
(2,268)
(15,448)
6,148
(28,254)
(5,633)
58,705
5,504
64,209
12,000
76,209
583,917
10.05
11.00
13.05
Variation
amount
3,244
238
(201)
(668)
636
(151)
265
3,363
262
3,625
1,749
5,375
4,171
0.50
0.53
0.82
%
3.3
4.0
8.8
4.3
10.3
0.5
(4.7)
5.7
4.8
5.6
14.6
7.1
0.7
2014
93,748
5,816
(1,014)
(11,468)
4,131
(29,164)
(5,767)
56,282
4,728
61,010
7,561
68,570
583,366
9.65
10.46
11.75
ANNUAL REPORT 2016
111
4. Economic and financial review » Consolidated financial information
Eligible capital (phase-in)
€ Million
Capital ratios
%
CET1
Basic capital
Eligible capital
Risk-weighted assets
CET1 capital ratio
T1 capital ratio
Total capital ratio
2016
73,709
73,709
86,337
588,088
12.53
12.53
14.68
2015
73,478
73,478
84,350
585,633
12.55
12.55
14.40
Santander again obtained excellent results in the stress tests
conducted by the European Banking Authority (EBA) in 2016. Under
the adverse scenario, Santander showed greater resistance than its
peers due to its high generation of revenues and results, thanks to
its commercial and retail banking model and unique geographic
diversification
This continuous improvement in capital ratios reflects, on the one
hand, the Group's strategy of profitable growth, where we aim to
increase lending and profit ahead growth in risk-weighted assets.
On the other, the various measures adopted by the Group, including
the effort made to improve and deepen a more active capital
management culture at all levels.
Among the actions taken were:
• Capital will have a greater relevance in the incentives as of 2016.
• Launch of a training programme with global scope.
• All countries and business units developed their individual capital
plans, focused on having a business that consumes less capital per
unit of return in the future.
Tangible equity per share rose from €4.07 to €4.22 (+4%).
The fully loaded leverage ratio was 5.0%. (4.7% in December 2015).
In regulatory terms, the phase-in eligible capital amounted to
€86,337 million, equivalent to a total capital ratio of 14.68%, and
the phase-in CET1 to 12.53%.
• More teams for managing capital together with continued
improved coordination between the Corporate Centre and local
teams.
The minimum ratios required by the European Central Bank for
Grupo Santander on a consolidated basis for 2017 are a total capital
ratio of 11.25% and a CET1 of 7.75%.
112
ANNUAL REPORT 2016
RATING AGENCIES
The Group’s access to the wholesale funding markets, as well as the cost of issues, depends to some extent on the ratings of rating
agencies.
Rating agencies regularly review the Group’s ratings. The rating depends on a series of internal (solvency, business model, capacity to
generate results) and external factors related to the general economic environment, the banking sector’s situation and the sovereign risk
of the countries in which the Bank operates.
During 2016 the agencies DBRS, Fitch, Moody’s and Standard & Poors confirmed their ratings, with stable outlook by all of them. In 2017,
Standard & Poors affirmed the ratings, improving the outlook from stable to positive.
Rating agencies
DBRS
Fitch Ratings
Moody’s
Standard & Poor´s
Scope
Long
term
A
A
A3
A
A+
Short
term
R-1 (low)
F2
P-2
A-2
S-1
Outlook
Stable
Stable
Stable
Positive
Stable
ANNUAL REPORT 2016
113
4. Economic and financial review » Information by business
Description of the businesses
Grupo Santander maintained the general criteria applied since the
third quarter of 2015 when some changes were made to them and to
the composition of some units, in order to make the Group more
transparent, facilitate analysis of the business units and enhance the
value of the activity developed by the corporation.
The only exception, as in prior years, is the annual adjustment of the
perimeter of the Global Customer Relationship Model between
Retail Banking and Santander Global Corporate Banking, whose
figures from previous periods have been restated to include these
adjustments.
The change has no impact on the geographic businesses or on the
Group’s consolidated figures, which remained unchanged.
The financial statements of each business segment have been drawn
up by aggregating the Group’s basic operating units. The information
relates to both the accounting data of the units integrated in each
segment, as well as that provided by the management information
systems. In all cases, the same general principles as those used in the
Group are applied.
The operating business areas are structured into two levels:
Geographic businesses. The operating units are segmented by
geographical areas. This coincides with the Group’s first level of
management and reflects Santander’s positioning in the world’s
three main currency areas (euro, sterling and dollar). The segments
reported on are:
• Continental Europe. This covers all businesses in the area.
Detailed financial information is provided on Spain, Portugal,
Poland and Santander Consumer Finance (which incorporates all
the region's business, including the three countries mentioned
herewith).
• United Kingdom. This includes the businesses developed by the
Group’s various units and branches in the country.
Global businesses. The activity of the operating units is distributed
by the type of business: retail banking, Santander Global Corporate
Banking and Spain Real Estate unit.
• Retail Banking. This covers all customer banking businesses,
including consumer finance, except those of corporate banking,
which are managed through Global Customer Relationship Model.
The results of the hedging positions in each country are also
included, conducted within the sphere of each one’s Assets and
Liabilities Committee.
• Santander Global Corporate Banking (SGCB). This business
reflects the revenues from global corporate banking, investment
banking and markets worldwide including treasuries managed
globally (always after the appropriate distribution with
commercial banking customers), as well as equities business.
In addition to these operating units, which report by geographic area
and by businesses, the Group continues to maintain the Corporate
Centre. This incorporates the centralised activities relating to equity
stakes in financial companies, financial management of the structural
exchange rate position, assumed within the sphere of the Group’s
Assets and Liabilities Committee, as well as management of liquidity
and of shareholders’ equity through issues and securitisations.
As the Group’s holding entity, the Corporate Centre manages all
capital and reserves and allocations of capital and liquidity with the
rest of businesses. It also incorporates provisions of a varied nature
and amortisation of goodwill. The costs related to the Group’s central
services (charged to the areas) are not included, except for corporate
and institutional expenses related to the Group’s functioning.
Distribution of underlying attributable profit by
geographical business*. 2016
Other
America: 1%
Argentina: 4%
Chile: 6%
United Kingdom: 20%
Spain : 12%
• Latin America. This embraces all the Group’s financial activities
conducted via its banks and subsidiaries in the region. The
financial statements of Brazil, Mexico and Chile are set out.
Brazil: 21%
• United States. Includes the Intermediate Holding Company (IHC)
and its subsidiaries Santander Bank, Banco Santander Puerto Rico,
Santander Consumer USA, Banco Santander International,
Santander Investment Securities, and the Santander branch in New
York.
Mexico: 8%
USA: 5%
Other Europe: 2%
Poland : 3%
Portugal: 5%
SCF: 13%
(*) Over operating areas excluding Corporate Centre and Real Estate
Activity in Spain
The figures of the Group’s various units have been drawn up in accordance with these criteria, and so do not coincide individually with
those published by each unit.
114
ANNUAL REPORT 2016
Net operating income
€ Million
Continental Europe
o/w: Spain
Santander Consumer Finance
Poland
Portugal
United Kingdom
Latin America
o/w: Brazil
Mexico
Chile
USA
Operating areas
Corporate Centre
Total Group
Attributable profit to the Group
€ Million
Continental Europe
o/w: Spain
Santander Consumer Finance
Poland
Portugal
United Kingdom
Latin America
o/w: Brazil
Mexico
Chile
USA
Operating areas
Corporate Centre*
Total Group
2016
6,025
2,311
2,357
735
620
2,850
11,073
6,845
1,928
1,435
4,334
24,282
(1,516)
22,766
2016
2,599
1,022
1,093
272
399
1,681
3,386
1,786
629
513
395
8,060
(1,856)
6,204
2015
6,093
2,646
2,192
683
522
3,025
10,851
6,689
1,947
1,332
4,774
24,744
(1,042)
23,702
2015
2,218
977
938
300
300
1,971
3,193
1,631
629
455
678
8,059
(2,093)
5,966
(*).- Including net capital gains and provisions. Without them, 2016: -€1.439 million; 2015: -€1.493 million
Gross customer loans w/o repos
€ Million
Continental Europe
o/w: Spain
Santander Consumer Finance
Poland
Portugal
United Kingdom
Latin America
o/w: Brazil
Mexico
Chile
USA
Operating areas
Total Group
2016
2015
302,564
150,960
87,742
20,697
29,030
242,510
159,134
80,306
28,017
38,800
89,638
793,847
798,312
298,720
157,162
76,561
19,805
30,564
277,718
137,331
63,636
29,739
33,309
88,412
802,181
805,395
Customer funds (deposits w/o repos + mutual funds)
€ Million
2016
2015
Continental Europe
o/w: Spain
Santander Consumer Finance
Poland
Portugal
United Kingdom
Latin America
o/w: Brazil
Mexico
Chile
USA
Operating areas
Total Group
322,606
224,798
35,052
25,898
31,438
210,611
187,516
99,771
36,438
34,559
74,166
794,899
795,767
312,482
219,263
32,597
24,421
30,684
231,960
158,322
76,751
37,499
29,680
66,870
769,634
774,839
Variation
amount
%
% w/o FX
(68)
(335)
166
53
99
(176)
222
157
(19)
103
(440)
(462)
(474)
(936)
(1.1)
(12.7)
7.6
7.7
18.9
(5.8)
2.0
2.3
(1.0)
7.7
(9.2)
(1.9)
45.5
(3.9)
(0.3)
(12.7)
8.6
12.3
18.9
6.1
11.6
7.6
16.3
11.2
(9.4)
3.6
45.5
1.6
Variation
amount
%
% w/o FX
381
45
155
(29)
99
(290)
193
154
0
58
(283)
1
237
238
Variation
amount
3,845
(6,201)
11,182
892
(1,534)
(35,208)
21,804
16,670
(1,722)
5,491
1,226
(8,334)
(7,083)
Variation
amount
10,124
5,535
2,455
1,477
754
(21,349)
29,194
23,020
(1,061)
4,879
7,296
25,265
20,928
ANNUAL REPORT 2016
17.2
4.6
16.5
(9.5)
33.0
(14.7)
6.1
9.5
0.1
12.7
(41.8)
0.0
(11.3)
4.0
18.5
4.6
17.9
(5.6)
33.0
(4.0)
18.6
15.0
17.5
16.4
(41.9)
7.8
(11.3)
15.1
%
% w/o FX
1.3
(3.9)
14.6
4.5
(5.0)
(12.7)
15.9
26.2
(5.8)
16.5
1.4
(1.0)
(0.9)
1.3
(3.9)
13.9
8.1
(5.0)
1.9
4.5
0.4
8.4
6.5
(1.8)
1.7
1.9
%
% w/o FX
3.2
2.5
7.5
6.0
2.5
(9.2)
18.4
30.0
(2.8)
16.4
10.9
3.3
2.7
3.4
2.5
7.0
9.7
2.5
5.9
7.3
3.4
11.8
6.5
7.4
5.3
4.7
115
4. Economic and financial review » Business information by geography
Continental Europe
€ Million
Income statement
Net interest income
Net fee income
Gains (losses) on financial transactions
Other operating income*
Gross income
Operating expenses
General administrative expenses
Personnel
Other general administrative expenses
Depreciation and amortisation
Net operating income
Net loan-loss provisions
Other income
Profit before taxes
Tax on profit
Profit from continuing operations
Net profit from discontinued operations
Consolidated profit
Minority interests
Attributable profit to the Group
Balance sheet
Customer loans **
Financial assets held for trading (w/o loans)
Financial assets available-for-sale
Central banks and credit institutions **
Tangible and intangible assets
Other assets
Total assets/liabilities & shareholders' equity
Customer deposits **
Debt securities issued **
Liabilities under insurance contracts
Central banks and credit institutions **
Other liabilities
Stockholders' equity ***
Other managed and marketed customer funds
Mutual and pension funds
Managed portfolios
Variation
amount
155
80
(369)
110
(24)
(44)
(68)
(34)
(34)
24
(68)
632
82
646
(196)
450
—
450
69
381
9,961
(6,185)
(5,177)
(18,026)
(3,896)
4,811
(18,511)
6,472
1,960
26
2016
8,161
3,497
818
330
12,806
(6,781)
(6,342)
(3,257)
(3,085)
(439)
6,025
(1,342)
(671)
4,012
(1,083)
2,929
—
2,929
330
2,599
2015
8,006
3,417
1,186
220
12,830
(6,736)
(6,274)
(3,223)
(3,051)
(463)
6,093
(1,975)
(753)
3,366
(887)
2,479
—
2,479
261
2,218
297,214
287,253
60,151
60,913
76,111
11,798
42,420
538,645
263,462
51,104
626
53,966
55,736
58,085
7,902
47,231
520,134
269,934
53,064
652
103,816
61,485
31,183
73,624
65,308
8,316
132,688
(28,872)
58,251
32,515
71,389
62,669
8,720
3,234
(1,332)
2,236
2,640
(404)
Managed and marketed customer funds
396,622
385,954
10,668
Ratios (%) and operating means
RoTE
Efficiency ratio (with amortisations)
NPL ratio
NPL coverage
Number of employees
Number of branches
8.07
52.9
5.92
60.0
57,259
4,805
7.27
52.5
7.27
64.2
58,049
5,548
0.80
0.4
(1.35)
(4.2)
(790)
(743)
(*).- Including dividends, income from equity-accounted method and other operating income/expenses
(**).- Including all on-balance sheet balances for this item
(***).- Capital + reserves + profit + other accumulated results
116
ANNUAL REPORT 2016
% w/o FX
2.8
3.0
(30.8)
49.1
0.5
1.3
1.7
1.7
1.7
(4.6)
(0.3)
(31.6)
(10.8)
20.5
23.2
19.6
—
19.6
29.2
18.5
3.5
(10.2)
(8.3)
(23.9)
(33.2)
11.4
(3.5)
2.6
3.5
4.1
(22.0)
5.7
(4.2)
3.2
4.4
(4.9)
2.9
%
1.9
2.3
(31.1)
49.9
(0.2)
0.7
1.1
1.1
1.1
(5.2)
(1.1)
(32.0)
(10.9)
19.2
22.1
18.2
—
18.2
26.5
17.2
3.5
(10.3)
(8.5)
(23.7)
(33.0)
11.3
(3.4)
2.5
3.8
4.1
(21.8)
5.6
(4.1)
3.1
4.2
(4.6)
2.8
(1.4)
(13.4)
CONTINENTAL
EUROPE*
2016 HIGHLIGHTS
Growth in Europe was moderate and varied by country.
€2,599 M
Attributable
Profit
* Changes in constant currency
Santander accelerated customer loyalty and growth in digital customers.
Slight growth in volumes, compatible with a strong improvement in credit quality and a better funding
structure.
Profit before tax rose 21%, with the four units increasing.
Economic environment
The euro zone grew by an estimated 1.7%, lower than in 2015 but
resistant if one takes into account the year’s adverse news.
The deflation risk seems to have gone away, although consumer
prices increased at below the 2% target, which led the European
Central Bank to cut interest rates to new lows.
Strategy
The dynamics of banking business in Continental Europe continued
to be moderate. The strategy in this environment focused on growth
in loyal customers, gaining market share, controlling costs and
improving credit quality.
Of note was the successful completion of the agreement between
Santander Consumer Finance and Banque PSA Finance, as well as
integrating Banco Internacional do Funchal (Banif) technologically
and operationally in Portugal within the timetable.
Activity
Lending rose 1% over December 2015 in constant euros. This is the net
between the growth in SCF and Poland, and the drop in Spain and
Portugal.
Funds increased 3%, with the four units in positive growth rates. The
strategy to increase demand deposits (+11%) and mutual funds (+6%)
continued, while time deposits fell 12%.
Results
Attributable profit was 18% higher in constant euros at €2,599 million.
This improvement was largely due to the 32% fall in loan-loss
provisions, something seen in the main units and which reflects the
improvement in NPL ratios and the cost of credit.
Strict control of costs (+1%, -3% on a like-for-like basis) was another
positive factor.
Loyal and digital customers continued to grow (individuals: +12%;
SMEs and companies: +48%). The effort in multi channels produced
an 11% rise in the number of digital customers.
Lastly, low growth in net interest income and fee income in an
environment of interest rates at historic lows and tough competition
that eroded spreads on loans.
Loyal customers
Thousand
Digital customers
Thousand
Activity performance
% var. 2016 / 2015 (w/o FX)
Attributable profit
Constant € million
ANNUAL REPORT 2016
117
4. Economic and financial review » Business information by geography
Spain
€ Million
Income statement
Net interest income
Net fee income
Gains (losses) on financial transactions
Other operating income*
Gross income
Operating expenses
General administrative expenses
Personnel
Other general administrative expenses
Depreciation and amortisation
Net operating income
Net loan-loss provisions
Other income
Profit before taxes
Tax on profit
Profit from continuing operations
Net profit from discontinued operations
Consolidated profit
Minority interests
Attributable profit to the Group
Balance sheet
Customer loans **
Financial assets held for trading (w/o loans)
Financial assets available-for-sale
Central banks and credit institutions **
Tangible and intangible assets
Other assets
Total assets/liabilities & shareholders' equity
Customer deposits **
Debt securities issued **
Liabilities under insurance contracts
Central banks and credit institutions **
Other liabilities
Stockholders' equity ***
Other managed and marketed customer funds
Mutual and pension funds
Managed portfolios
2016
3,077
1,781
595
155
5,608
(3,297)
(3,156)
(1,632)
(1,524)
(140)
2,311
(585)
(267)
1,459
(416)
1,043
—
1,043
21
1,022
2015
3,430
1,688
784
178
6,080
(3,434)
(3,244)
(1,670)
(1,573)
(190)
2,646
(992)
(263)
1,392
(393)
999
—
999
22
977
152,850
155,204
51,470
39,267
42,701
3,147
22,919
312,354
176,779
20,863
552
50,687
50,690
12,783
66,649
59,716
6,932
57,401
44,057
53,582
2,874
13,920
327,039
174,828
22,265
536
68,995
47,502
12,913
63,931
57,017
6,914
Managed and marketed customer funds
264,291
261,024
Ratios (%) and operating means
RoTE
Efficiency ratio (with amortisations)
NPL ratio
NPL coverage
Number of employees
Number of branches
7.74
58.8
5.41
48.3
23,017
2,911
8.15
56.5
6.53
48.1
24,216
3,467
(*).- Including dividends, income from equity-accounted method and other operating income/expenses
(**).- Including all on-balance sheet balances for this item
(***).- Capital + reserves + profit + other accumulated results
118
ANNUAL REPORT 2016
Variation
amount
(353)
93
(189)
(24)
(472)
137
87
38
49
50
(335)
406
(4)
67
(23)
44
—
44
(1)
45
(2,354)
(5,931)
(4,790)
(10,881)
273
8,999
(14,685)
1,951
(1,402)
15
(18,308)
3,188
(129)
2,718
2,699
19
3,267
(0.41)
2.3
(1.12)
0.2
(1,199)
(556)
%
(10.3)
5.5
(24.1)
(13.2)
(7.8)
(4.0)
(2.7)
(2.3)
(3.1)
(26.1)
(12.7)
(41.0)
1.7
4.8
5.8
4.4
—
4.4
(5.5)
4.6
(1.5)
(10.3)
(10.9)
(20.3)
9.5
64.6
(4.5)
1.1
(6.3)
2.9
(26.5)
6.7
(1.0)
4.3
4.7
0.3
1.3
(5.0)
(16.0)
SPAIN
2016 HIGHLIGHTS
We maintained the 1|2|3 strategy to foster a deeper and lasting relation with customers.
€1,022 M
Attributable
Profit
This strategy enabled us to increase loyalty, boost activity and improve customers’ satisfaction and
their risk profile.
Loyal customers rose 32%, there was greater activity in consumer credit, payroll, savings products,
insurance and cards, while we remain the leader in the wholesale and private banking segments.
Attributable profit rose 5% underpinned by improved credit quality, higher fee income from more
transactions and control of costs.
Economic environment
The economy grew 3.2%, similar to 2015 but significantly higher than
the euro zone average. Growth was broadly based and again
underpinned by domestic demand. Job creation was strong and the
unemployment rate came down to 19%.
The recovery continued to be very balanced as it combined growth
with moderate inflation and a current account surplus, the fruit of
the improvement over the last few years in competitiveness. The
fiscal deficit was also lower. This situation favours sustained growth.
Strategy
In this environment, Santander Spain made progress in the Bank’s
commercial transformation and in attaining its objectives. The 1|2|3
strategy is the driving force of this transformation and is enabling us
to increase customer loyalty, boost activity and improve customers’
satisfaction and their risk profile. This was reflected in:
• 50% of new lending comes from 1|2|3 customers.
• Our ranking in customer satisfaction has risen from 5th, before the
launch of the 1|2|3 strategy, to the Top 3.
• The number of loyal customers rose 32% (+27% individuals; +48%
companies).
The main 2016 HIGHLIGHTS were:
• We are transforming our commercial network with the creation of
a new and larger branch model (Smart Red) to enable better advice
and services for customers, as well as integration with digital
channels.
• Substantial progress was made in the Bank’s technological and
operational transformation. We have 2.7 million digital customers
and more than 950,000 mobile banking customers, and this is
growing at 45% thanks to the development of new apps and the
push in payments via mobile phones.
• Exclusive launch of Apple Pay in Spain, underscoring the Bank’s
• We are gaining market share in new consumer credit loans, payroll
drive for digital leadership and innovation.
and transactional products.
• Improved risk profile, underscored by a 112 b.p. reduction in the
Attention, the most prestigious in the contact centre industry.
• We received the CRC Gold Award for Excellence in Customer
NPL ratio.
Loyal customers
Thousand
Digital customers
Thousand
Activity performance
% var. 2016 / 2015
Attributable profit
€ Million
ANNUAL REPORT 2016
119
4. Economic and financial review » Business information by geography
NPL ratio
%
Coverage ratio
%
Cost of credit
%
RoTE
%
• We began to sponsor LaLiga Santander, a strategic agreement that
will enable us to improve our brand image and become closer to
our customers.
Activity
New lending increased, although this is not yet reflected in an
increase in the stock. Loans fell 4%, mainly due to amortisation of
mortgages, the reduction in credit to institutions and the sharp
fall in doubtful loans.
Results
Attributable profit was 5% higher at €1,022 million, due to better
credit quality, the efficiency plan and the good performance of fee
income.
• Substantial improvement in the cost of credit, which continued to
normalise thanks to a more favourable cycle, improved profile of
1|2|3 customers and active risk management focused on
anticipation. Loan-loss provisions fell 41% and were the main
factor behind the higher profit.
Loans to individuals increased 16% (+91% consumer credit; +18%
mortgages).
The NPL ratio was 112 b.p. lower at 5.41%.
We continued to lead the wholesale and private banking segments.
In corporate global banking we maintained our leadership in the
market league tables for structured financing and markets. We
participated in most of the listings in the Spanish market. In Private
Banking, the lending balance rose 6%.
In funds, we maintained the strategy to reduce the cost of deposits,
with 8% growth in demand deposits and 6% in mutual funds, while
time deposits declined 14%.
• Costs declined 4%, partly due to the efficiency plan.
• Fee income rose 6%, particularly from retail banking, very linked
to the greater volume of transactions derived from the customer
loyalty strategy.
• Net interest income, on the other hand, was lower, due to low
interest rates, the repricing of mortgages and the impact of
reduced revenues from ALCO portfolios. Also lower gains on
financial transactions (-24%).
STRATEGY IN 2017
Gain market share in an organic, sustainable, profitable and predictable way.
Be the reference bank for companies, strengthening our commercial positioning while maintaining leadership in wholesale
banking and large companies.
Continue the digital transformation in order to boost loyalty and improve the customer experience.
Continue to implement our Simple, Personal and Fair culture and the commitment to be the best bank to work for.
120
ANNUAL REPORT 2016
Santander Consumer Finance
€ Million
Income statement
Net interest income
Net fee income
Gains (losses) on financial transactions
Other operating income*
Gross income
Operating expenses
General administrative expenses
Personnel
Other general administrative expenses
Depreciation and amortisation
Net operating income
Net loan-loss provisions
Other income
Profit before taxes
Tax on profit
Profit from continuing operations
Net profit from discontinued operations
Consolidated profit
Minority interests
Attributable profit to the Group
Balance sheet
Customer loans **
Financial assets held for trading (w/o loans)
Financial assets available-for-sale
Central banks and credit institutions **
Tangible and intangible assets
Other assets
Total assets/liabilities & shareholders' equity
Customer deposits **
Debt securities issued **
Liabilities under insurance contracts
Central banks and credit institutions **
Other liabilities
Stockholders' equity ***
Other managed and marketed customer funds
Mutual and pension funds
Managed portfolios
2016
3,391
862
(14)
23
4,262
(1,904)
(1,719)
(810)
(910)
(185)
2,357
(387)
(168)
1,803
(521)
1,282
—
1,282
189
1,093
2015
3,096
876
(11)
4
3,965
(1,774)
(1,602)
(746)
(855)
(172)
2,192
(537)
(152)
1,502
(426)
1,076
—
1,076
137
938
Variation
amount
295
(14)
(3)
19
296
(131)
(118)
(63)
(54)
(13)
166
150
(16)
301
(95)
206
—
206
51
155
85,180
73,709
11,471
25
3,836
2,894
632
7,054
99,622
35,050
27,892
—
23,399
5,470
7,811
7
7
—
94
3,654
2,297
692
8,087
88,534
32,595
23,347
—
20,314
4,325
7,953
7
7
—
(69)
182
597
(59)
(1,033)
11,088
2,455
4,545
—
3,085
1,145
(142)
0
0
—
Managed and marketed customer funds
62,950
55,950
7,000
Ratios (%) and operating means
RoTE
Efficiency ratio (with amortisations)
NPL ratio
NPL coverage
Number of employees
Number of branches
14.86
44.7
2.68
109.1
14,928
567
12.63
44.7
3.42
109.1
14,533
588
2.23
(0.0)
(0.74)
—
395
(21)
(*).- Including dividends, income from equity-accounted method and other operating income/expenses
(**).- Including all on-balance sheet balances for this item
(***).- Capital + reserves + profit + other accumulated results
% w/o FX
10.7
(1.2)
27.2
428.2
8.5
8.3
8.4
9.6
7.3
8.2
8.6
(27.3)
10.6
21.3
23.2
20.5
—
20.5
38.1
17.9
14.8
(74.1)
3.9
24.2
(8.8)
(13.1)
11.8
7.0
18.5
—
14.3
26.0
(2.6)
2.5
2.5
—
11.8
%
9.5
(1.6)
25.8
508.5
7.5
7.4
7.3
8.5
6.4
7.6
7.6
(28.0)
10.2
20.0
22.2
19.2
—
19.2
37.3
16.5
15.6
(73.2)
5.0
26.0
(8.6)
(12.8)
12.5
7.5
19.5
—
15.2
26.5
(1.8)
2.5
2.5
—
12.5
2.7
(3.6)
ANNUAL REPORT 2016
121
4. Economic and financial review » Business information by geography
SANTANDER
CONSUMER
FINANCE*
€1,093 M
Attributable
Profit
2016 HIGHLIGHTS
The agreement with PSA Finance to increase SCF’s activity in 11 European countries was successfully
completed.
Other management priorities: auto and consumer finance and strengthening digital channels.
As a result, new business increased in all countries. Attributable profit of €1,093 million, 18% more than
in 2015. This was the seventh consecutive year of profit growth.
* Changes in constant currency
High profitability, with RoTE around 15% and RoRWA above 2%. Moreover, 2016 ended with an
excellent cost of credit.
Economic environment
The main European markets where Santander Consumer Finance
(SCF) carries out its activity, registered growth ranging from 0.9% in
Italy to 3.2% in Spain. This growth was underpinned by the recovery
in consumer indicators, as well as by new car sales (+7%).
Strategy
SCF is Europe’s consumer finance leader. It operates in 14 countries,
providing finance and services via more than 130,000 associated
points-of-sale (auto dealerships and shops). It also has a large number
of finance agreements with manufacturers of cars and motorbikes and
with retail distribution groups.
In 2016, SCF continued to gain market share, backed by its solid
business model: high geographic diversification with critical mass in
key products, better efficiency than our competitors and a common
risk control and recoveries system that keeps credit quality high.
Management focused on:
• Completing the agreements with Banque PSA Finance (BPF) in order
to create joint-ventues in 11 countries.
• Increase auto and consumer finance by extending the agreements to
the main dealers.
• Boost digital channels.
The creation of the joint-ventures was implemented as scheduled. In
2015 we created joint-ventures in Spain, Portugal, UK, France and
Switzerland, and in 2016 we incorporated six more countries: Italy and
Netherlands (first quarter), Belgium (second quarter), Germany and
Austria (third quarter) and Poland (fourth quarter).
Customer loans by geography
2016
Activity performance
% var. 2016 / 2015 (w/o FX)
Attributable profit
Constant € million
7%
4%
16%
11%
8%
15%
39%
Germany
Spain
Italy
France
Nordic countries
Poland
Other
122
ANNUAL REPORT 2016
NPL ratio
%
Coverage ratio
%
Cost of credit
%
RoTE
%
Activity
As well as the agreement with BPF, we continued to progress in
signing and developing new agreements with retail distributors as well
as manufacturers.
Lending rose 14% in the year, with new loans increasing 17% over 2015,
spurred by auto finance, which increased 28%. Widespread growth in
all units.
Of note on the funding side was the 7% rise in customer deposits,
something that distinguishes us from our competitors. Recourse to
wholesale funding amounted to €12,484 million, via senior issues and
securitizations and other long-term issues.
Deposits plus medium and long-term issues and securitisations
covered 72% of net lending.
Results
Attributable profit was €1,093 million, 18% more than in 2015. Growth
was due to two factors:
• The low interest rate environment, very positive for consumer
business, both in revenues and provisions.
• The impact of the incorporated units, reflected in growth in the
main lines of the income statement.
Gross income increased, mainly due to the 11% rise in net interest
income, which accounts for 80% of revenues.
Operating expenses rose 8%, in line with business growth and the
incorporation of new units. The efficiency ratio remained at around
45%, unchanged from 2015.
Provisions fell 27% and the cost of credit dropped significantly
from 0.77% in 2015 to 0.47%, which is very low for consumer
business. This was made possible by the good performance of
portfolios and a reduction of 74 b.p. in the NPL ratio to 2.68%.
Coverage remained at 109%.
Of note by units was Spain’s attributable profit (+22%), the Nordic
countries (+24%) and Italy (+226%).
In short, solid organic business and a good execution of agreements,
giving us a strong potential to keep on growing in 2017, gain market
share and maintain our levels of profitability and efficiency.
STRATEGY IN 2017
Increase and maximize auto finance business through pro-active management of brand agreements and development of digital
projects.
Sustained growth and focused on value creation, while maintaining a good risk-adjusted return.
Step up consumer finance business by speeding up the digital transformation and increasing our presence in these channels.
ANNUAL REPORT 2016
123
4. Economic and financial review » Business information by geography
Poland
€ Million
Income statement
Net interest income
Net fee income
Gains (losses) on financial transactions
Other operating income*
Gross income
Operating expenses
General administrative expenses
Personnel
Other general administrative expenses
Depreciation and amortisation
Net operating income
Net loan-loss provisions
Other income
Profit before taxes
Tax on profit
Profit from continuing operations
Net profit from discontinued operations
Consolidated profit
Minority interests
Attributable profit to the Group
Balance sheet
Customer loans **
Financial assets held for trading (w/o loans)
Financial assets available-for-sale
Central banks and credit institutions **
Tangible and intangible assets
Other assets
Total assets/liabilities & shareholders' equity
Customer deposits **
Debt securities issued **
Liabilities under insurance contracts
Central banks and credit institutions **
Other liabilities
Stockholders' equity ***
Other managed and marketed customer funds
Mutual and pension funds
Managed portfolios
Managed and marketed customer funds
Ratios (%) and operating means
RoTE
Efficiency ratio (with amortisations)
NPL ratio
NPL coverage
Number of employees
Number of branches
2016
834
400
83
(2)
1,314
(579)
(521)
(303)
(219)
(58)
735
(145)
(83)
508
(121)
387
—
387
115
272
19,979
634
5,974
911
258
2,023
29,779
22,780
504
—
853
3,249
2,393
3,202
3,118
84
26,487
11.64
44.1
5.42
61.0
12,001
658
2015
782
422
112
(40)
1,276
(594)
(550)
(324)
(226)
(44)
683
(167)
(4)
511
(101)
410
—
410
110
300
18,977
894
5,305
1,153
260
2,523
29,112
21,460
498
—
1,152
3,515
2,487
3,209
3,106
103
25,168
12.89
46.5
6.30
64.0
11,474
723
Variation
amount
52
(22)
(29)
38
38
15
28
21
7
(14)
53
23
(78)
(3)
(20)
(23)
—
(23)
5
(29)
1,002
(259)
669
(242)
(2)
(500)
667
1,320
6
—
(298)
(267)
(94)
(7)
12
(19)
1,319
(1.25)
(2.5)
(0.88)
(3.0)
527
(65)
% w/o FX
11.2
(1.2)
(22.6)
(94.4)
7.4
1.7
(1.1)
(2.6)
1.1
36.5
12.3
(9.8)
—
3.6
24.7
(1.6)
—
(1.6)
9.5
(5.6)
8.9
(26.6)
16.5
(18.3)
2.7
(17.1)
5.8
9.8
4.6
—
(23.3)
(4.4)
(0.5)
3.2
3.8
(15.8)
8.9
%
6.6
(5.3)
(25.8)
(94.6)
3.0
(2.5)
(5.2)
(6.6)
(3.1)
30.9
7.7
(13.5)
—
(0.7)
19.6
(5.6)
—
(5.6)
5.0
(9.5)
5.3
(29.0)
12.6
(21.0)
(0.7)
(19.8)
2.3
6.2
1.2
—
(25.9)
(7.6)
(3.8)
(0.2)
0.4
(18.6)
5.2
4.6
(9.0)
(*).- Including dividends, income from equity-accounted method and other operating income/expenses
(**).- Including all on-balance sheet balances for this item
(***).- Capital + reserves + profit + other accumulated results
124
ANNUAL REPORT 2016
POLAND*
2016 HIGHLIGHTS
Santander continued to be the leader in mobile and online banking and second in cards.
Market share gain in loans, with focus on SMEs and mortgages. In deposits, focus on demand deposits.
€272 M
Attributable
Profit
In results, management of spreads, revenues and costs in a low interest rate environment. Big
improvement in the cost of credit.
* Changes in local currency
The regulatory changes stemming from the introduction of the new tax on assets in February 2016
impacted the year’s results. Excluding this, attributable profit would have increased 14% over 2015.
Economic environment
The economy slowed in 2016 (an estimated 2.8% against 3.9% in
2015), due to the poor performance of investments and exports and
also lower than expected growth in consumption.
Inflation, after 28 months of deflation (-0.6% on average in 2016)
began to turn positive in December (0.8% year-on-year). The low
inflation did not harm purchasing decisions and the profile of the
GDP slowdown, as a result of which the Bank of Poland held its
benchmark rate at 1.5% throughout the year.
The zloty ended the year at PLN 4.41/€, a depreciation of 3%. This
weakening was largely due to external factors such as the UK
referendum and the US elections.
Strategy
The Bank maintained in 2016 its objective of being the bank of first
choice for customers.
We remained the leader in mobile and online banking and the
second in the number of active credit cards. We are also the second
in debit cards, third in total assets (September 2016 data) and
fourth in the number of current accounts in Poland, almost level
with the third.
We promoted digital channels and improved our digital bank by:
• Introducing the new version of the BZWBK24 mobile app with new
features, such as BLIK payments, forex option, ID Touch.
• Incorporating the function that allows sales of credit products
without going to your branch (new version of BZWBK24 Internet).
• TLS 1.2 security protocol in both mobile and online channels.
As a result of these improvements, BZWBK24 was again recognised
in June 2016 as one of Europe’s best mobile banking apps. For the
second year running, Forrester Research recognised BZWBK24 as the
best app in Poland and the third among the 11 main banks in Europe.
And we are also making improvements to the processes.
• We continued to strengthen mortgage business, focusing on
improving processes. As a result, 2016 was a record year for
mortgage sales (+30%). Our share of new business was around
15%, putting us in third place.
• The CRM tool was installed during the year in order to provide
better customer attention and service. It focuses on their needs
and expectations. This tool enables the Bank to give a tailored
service, based on knowledge of the customer, their performance
and risk profile, as well as offering continuous service and
communication via the various distribution channels.
Loyal customers
Thousand
Digital customers
Thousand
Activity performance
% var. 2016 / 2015 (w/o FX)
Attributable profit
Constant € million
ANNUAL REPORT 2016
125
4. Economic and financial review » Business information by geography
NPL ratio
%
Coverage ratio
%
Cost of credit
%
RoTE
%
These actions produced growth of 4% in loyal customers and 5% in
digital customers.
Activity
Business volumes increased more than the sector average. Of note
was the 8% rise in loans, both to companies and individuals. Lending
to SMEs grew 9%, Business and Corporate 6% and Global Corporate
Banking 17%. That to individuals rose 11% (mortgages: +12%, cash
loans +8% and credit cards +12%).
Deposits were up 11%, a growth equally shared by individuals and
companies.
Our funding structure remained solid (net loan to deposit ratio of 88%).
Results
Attributable profit was 6% lower at €272 million, due to the new tax
on assets of 0.44%. Excluding this impact, profit was 14% more than
in 2015, as follows:
• Gross income rose 7%, with a good performance of net interest
income (+11%, mainly due to larger volumes). Fee income was
slightly down due to regulatory issues, but was better than the
sector’s. Reduced sales of ALCO portfolios in 2016 lowered gains
on financial transactions.
• Operating expenses rose 2%, due to the higher amortisations
which increased 37%. On the other hand, personnel expenses
were 3% lower.
• Loan-loss provisions fell 10% thanks to the significant
improvement in credit quality. The NPL ratio dropped to 5.42%
from 6.30% in 2015 and the cost of credit fell from 0.87% to
0.70%.
STRATEGY IN 2017
Top 3 in quality of service, increasing the number of loyal customers.
Continue end-to-end digital transformation in order to remain the leaders in digital channels in Poland.
Grow at a faster pace than our competitors in volumes, gaining market share.
Remain the leader in profitability in an environment of tougher regulatory pressure.
126
ANNUAL REPORT 2016
Portugal
€ Million
Income statement
Net interest income
Net fee income
Gains (losses) on financial transactions
Other operating income*
Gross income
Operating expenses
General administrative expenses
Personnel
Other general administrative expenses
Depreciation and amortisation
Net operating income
Net loan-loss provisions
Other income
Profit before taxes
Tax on profit
Profit from continuing operations
Net profit from discontinued operations
Consolidated profit
Minority interests
Attributable profit to the Group
Balance sheet
Customer loans **
Financial assets held for trading (w/o loans)
Financial assets available-for-sale
Central banks and credit institutions **
Tangible and intangible assets
Other assets
Total assets/liabilities & shareholders' equity
Customer deposits **
Debt securities issued **
Liabilities under insurance contracts
Central banks and credit institutions **
Other liabilities
Stockholders' equity ***
Other managed and marketed customer funds
Mutual and pension funds
Managed portfolios
2016
733
314
112
51
1,209
(589)
(551)
(339)
(212)
(38)
620
(54)
(34)
533
(131)
402
—
402
2
399
27,328
1,553
5,769
1,320
703
8,148
44,820
30,002
3,805
39
6,743
904
3,326
2,770
2,369
402
2015
555
263
164
33
1,016
(494)
(458)
(291)
(167)
(36)
522
(72)
(31)
419
(118)
301
—
301
1
300
28,221
1,678
6,799
2,104
720
10,046
49,568
29,173
4,994
20
11,307
1,351
2,724
2,842
2,426
416
Variation
amount
178
50
(53)
18
193
(95)
(93)
(48)
(45)
(2)
99
18
(3)
114
(13)
101
—
101
2
99
(893)
(126)
(1,030)
(784)
(17)
(1,898)
(4,749)
830
(1,189)
20
(4,564)
(447)
603
(72)
(58)
(14)
Managed and marketed customer funds
36,578
37,009
(431)
Ratios (%) and operating means
RoTE
Efficiency ratio (with amortisations)
NPL ratio
NPL coverage
Number of employees
Number of branches
13.03
48.7
8.81
63.7
6,306
657
12.53
48.7
7.46
99.0
6,568
752
0.50
0.0
1.35
(35.3)
(262)
(95)
(*).- Including dividends, income from equity-accounted method and other operating income/expenses
(**).- Including all on-balance sheet balances for this item
(***).- Capital + reserves + profit + other accumulated results
%
32.0
19.1
(31.9)
54.1
19.0
19.1
20.3
16.6
26.6
4.7
18.9
(25.4)
9.1
27.2
11.4
33.4
—
33.4
197.8
33.0
(3.2)
(7.5)
(15.2)
(37.3)
(2.4)
(18.9)
(9.6)
2.8
(23.8)
101.1
(40.4)
(33.1)
22.1
(2.5)
(2.4)
(3.3)
(1.2)
(4.0)
(12.6)
ANNUAL REPORT 2016
127
4. Economic and financial review » Business information by geography
PORTUGAL
2016 HIGHLIGHTS
The technological and operational integration of Banco Internacional do Funchal’s (Banif) business
was completed.
€399 M
Attributable
Profit
The commercial model continued to be improved in order to become more efficient and enhance the
quality of customer attention.
Attributable profit increased 33% thanks to greater revenues and lower provisions.
Economic environment
The Portuguese economy has been losing momentum since the
second half of 2015. GDP growth ended the year at an estimated
1.3% compared to 1.6% in 2015. Investment was stagnant, however,
exports had a positive evolution despite unfavourable external
conditions.
Under our strategy, we made progress in the following areas:
• In banking for individual customers (Mid and Mass Market and
Select segments), the 1|2|3 World programme continued to support
commercial activity, with significant gains in the number of
accounts, credit cards and protection insurance.
Domestic demand remained largely unchanged and the jobless rate
continued to drop.
• We also achieved significant increases in new credit lines for
individuals and companies.
Inflation performance was similar to that of 2015, at 0.6% and drove
the growth of revenues.
• These improvements produced a 21% rise in loyal customers and
32% in digital ones.
Strategy
The Bank continued to focus on structural improvements to the
commercial model so as to increase efficiency and the quality of
customer service, via the CRM platform, multi channel and
streamlining processes.
In line with the timetable, the technological and operational
integration of Banif’s business was completed in October. All
branches are now operating under the same technological platform.
Thanks to this operation, the bank has a more balanced loan
portfolio and gained market share in companies.
Loyal customers
Thousand
Digital customers
Thousand
Activity performance
% var. 2016 / 2015
Attributable profit
€ Million
(*) Excluding Banco Internacional do Funchal (Banif)
128
ANNUAL REPORT 2016
NPL ratio
%
Coverage ratio
%
Cost of credit
%
RoTE
%
Santander Totta’s good performance was recognised by the
magazine Euromoney with prizes such as Best Bank in Portugal and
Best Private Banking Services Overall – Portugal, in the category of
big banks, and by the magazine Exame with Best Bank, Most Solid
Bank, Most Profitable Bank and Bank which Grows the Most.
Activity
Lending fell 5%. Although new mortgages remained dynamic, the
stock was 1% lower, as their volume still does not offset
amortisations. The evolution of lending in 2016 also reflects the sale
of portfolios.
Total funds increased 2%. Deposits evolved better, underscoring the
Bank’s good positioning in the Portuguese financial system. Of note
here was the 46% growth in demand deposits under the strategy of
improving the overall cost of deposits.
Results
Attributable profit was €399 million, 33% more than in 2015, due to
the good performance of commercial revenues and provisions and
some perimeter impact:
• Gross income grew 19% (rise of 32% in net interest income and
19% in fee income). Gains on financial transactions were 32%
lower, down from very high levels in 2015 (greater sales of public
debt and of the stake in Banco Caixa Geral Totta Angola).
• Operating expenses were 19% higher, due to the perimeter
impact. In real terms they were 5% lower. The efficiency ratio was
49%.
• Loan-loss provisions declined 25% and the cost of credit dropped
from 0.29% in 2015 to 0.18% in 2016.
• Lastly, the NPL ratio, affected by Banif’s portfolios, started to drop
in the second half of the year.
STRATEGY IN 2017
Continue to increase the number of loyal and digital customers.
Keep on gaining profitable market share (companies and SMEs) while optimising the cost of funds.
Continue improving the levels of efficiency and lowering the cost of credit.
Normalise and adjust the structure of capital to the new regulatory requirements.
ANNUAL REPORT 2016
129
4. Economic and financial review » Business information by geography
United Kingdom
€ Million
Income statement
Net interest income
Net fee income
Gains (losses) on financial transactions
Other operating income*
Gross income
Operating expenses
General administrative expenses
Personnel
Other general administrative expenses
Depreciation and amortisation
Net operating income
Net loan-loss provisions
Other income
Profit before taxes
Tax on profit
Profit from continuing operations
Net profit from discontinued operations
Consolidated profit
Minority interests
Attributable profit to the Group
Balance sheet
Customer loans **
Financial assets held for trading (w/o loans)
Financial assets available-for-sale
Central banks and credit institutions **
Tangible and intangible assets
Other assets
Total assets/liabilities & shareholders' equity
Customer deposits **
Debt securities issued **
Liabilities under insurance contracts
Central banks and credit institutions **
Other liabilities
Stockholders' equity ***
Other managed and marketed customer funds
Mutual and pension funds
Managed portfolios
2016
4,405
1,032
319
61
5,816
(2,967)
(2,656)
(1,418)
(1,238)
(311)
2,850
(58)
(339)
2,452
(736)
1,716
—
1,716
35
1,681
2015
4,942
1,091
302
47
6,382
(3,356)
(3,009)
(1,592)
(1,417)
(347)
3,025
(107)
(354)
2,564
(556)
2,008
—
2,008
37
1,971
251,250
282,673
33,986
12,336
15,305
2,581
39,502
354,960
212,113
71,108
—
21,559
34,068
16,112
8,564
8,447
118
40,138
12,279
14,083
3,025
30,957
383,155
231,947
74,260
—
23,610
36,162
17,176
9,703
9,564
139
(538)
(59)
17
14
(565)
390
353
174
179
37
(176)
49
15
(112)
(180)
(292)
—
(292)
(2)
(290)
(31,423)
(6,152)
57
1,222
(444)
8,545
(28,195)
(19,834)
(3,151)
—
(2,051)
(2,094)
(1,064)
(1,139)
(1,117)
(22)
Managed and marketed customer funds
291,785
315,910
(24,125)
Ratios (%) and operating means
RoTE
Efficiency ratio (with amortisations)
NPL ratio
NPL coverage
Number of employees
Number of branches
10.59
51.0
1.41
32.9
25,688
844
11.83
52.6
1.52
38.2
25,866
858
(1.24)
(1.6)
(0.11)
(5.3)
(178)
(14)
(*).- Including dividends, income from equity-accounted method and other operating income/expenses
(**).- Including all on-balance sheet balances for this item
(***).- Capital + reserves + profit + other accumulated results
130
ANNUAL REPORT 2016
Variation
amount
%
% w/o FX
0.4
6.5
19.1
47.3
2.7
(0.4)
(0.6)
0.3
(1.6)
0.8
6.1
(38.9)
7.9
7.7
49.2
(3.8)
—
(3.8)
6.0
(4.0)
3.7
(1.2)
17.2
26.8
(0.5)
48.9
8.1
6.7
11.7
—
6.5
9.9
9.4
3.0
3.0
(1.4)
7.7
(10.9)
(5.4)
5.7
30.7
(8.9)
(11.6)
(11.7)
(10.9)
(12.6)
(10.5)
(5.8)
(45.7)
(4.2)
(4.4)
32.4
(14.6)
—
(14.6)
(5.8)
(14.7)
(11.1)
(15.3)
0.5
8.7
(14.7)
27.6
(7.4)
(8.6)
(4.2)
—
(8.7)
(5.8)
(6.2)
(11.7)
(11.7)
(15.5)
(7.6)
(0.7)
(1.6)
UNITED
KINGDOM*
€1,681 M
Attributable
Profit
2016 HIGHLIGHTS
Strong business performance, increased cost discipline and good credit quality supported by robust
UK economic growth.
Solid business flows in both retail and corporates. Growth in loans to corporates in a competitive and
uncertain operating environment.
Digital transformation continued to support operational efficiency and improve customer experience.
* Changes in sterling
Attributable profit impacted by the introduction of the 8% bank corporation tax surcharge.
Economic environment
The United Kingdom economy grew 2.0% in 2016, slightly below the
previous year (2.2%). Following the initial uncertainty after the EU
referendum in August, the Bank of England cut its base rate by 25
basis points to 0.25% and it added a package of QE measures
designed to support growth in the economy.
The unemployment rate continued its downward trend and reached
4.8% in October. Inflation climbed to 1.6% year-on-year in December,
the highest level since July 2014, and the pound depreciated 14%
against the euro.
Strategy
Over the last few years we developed a strategy of ongoing
transformation. By leveraging our scale and presence we can offer a
full range of products and services and, as a result, our business is
more diversified. Underpinning our success is our customer-centred
culture.
Our priority is to ensure that we are the best bank, while serving
our customers in a Simple, Personal and Fair way. By building upon
the strong foundations we already have, Santander UK is well
positioned to succeed despite the changeable macro environment.
In 2016 we had:
• Developed our digital proposition in 2016, with several
enhancements well received by customers, such as the launching
of the Investment Hub, our digital end-to-end mortgage
application process and the expansion of mobile payment
capabilities to include Android Pay.
• Leveraged the 1|2|3 World strategy, which has transformed our
business. 1|2|3 World customers increased by 483,000 to 5.1 million
since the end of 2015. Retail current account balances were up by
£11,600 million, and continue to show positive net inflows.
• Driven further improvement in customer relationships and to drive
business growth, underpinned by our client-centric infrastructure
and an award-winning international proposition. As a result, loyal
corporate and SME customers increased by more than 24,000
since the end of 2015.
• Digital customers reached 4.6 million, increasing 25% since the
end of 2015.
The UK banking sector faces a very demanding regulatory change
agenda, in particular banking reform, where our planning and
implementation is well advanced. We have recently revised our
approach in order to minimise the impact on customers and maintain
long-term flexibility in the changeable macro environment.
Loyal customers
Thousand
Digital customers
Thousand
Activity performance
% var. 2016 / 2015 (w/o FX)
Attributable profit
Constant € million
ANNUAL REPORT 2016
131
4. Economic and financial review » Business information by geography
NPL ratio
%
Coverage ratio
%
Cost of credit
%
RoTE
%
Activity
Customer loans increased 2% over the end of 2015, due to lending to
companies (+3%) and mortgages (+1%). New gross mortgage loans
was £25,800 million and we helped 25,300 first-time buyers purchase
their new home.
Good growth in customer deposits excluding repos (+6%) was driven
by 1|2|3 current account inflows, more than offsetting lower demand
for savings products.
Santander UK is focused on maintaining a strong balance sheet. Our
capital strength was demonstrated in the 2016 Prudential Regulation
Authority stress test results, which comfortably exceeded regulatory
threshold and in which we were by far the most resilient of the UK
banks with stressed CET1 drawdown of 170 b.p.
Results
Attributable profit for the year was £1,373 million, down 4%,
adversely impacted by the 8% bank corporation tax surcharge. Profit
before tax was up 8%, mainly due to fee income growth, increased
cost discipline and good credit performance, partially offset by
pressure on net interest income.
Following the rise in net interest income in the fourth quarter, it
was broadly flat with increased lending volumes and retail liability
margin, that offset continued SVR (Standard Variable Rate) attrition
and asset margin pressures.
Fee income increased 7% over 2015, with higher 1|2|3 fees in Retail
Banking and international and digital payment fees in Commercial
Banking, partially offset by regulatory impacts on cards and
investment income.
Operating expenses were broadly flat as efficiency improvements
absorbed investments in business growth, Banking Reform costs of
£85 million, and the continued enhancements to our digital
channels.
Credit quality remained strong in all loan portfolios, supported by
prudent lending criteria and the low rate environment. The NPL
ratio improved to 1.41% at end of 2016, from 1.52% at end of 2015,
with provisions down 39%.
STRATEGY IN 2017
We have a relentless focus on customer loyalty as the key driver for growth.
We prioritise operational and digital excellence to offer the best experience to our customers.
We aim to grow our profits in a predictable way while maintaining a strong balance sheet.
132
ANNUAL REPORT 2016
Latin America
€ Million
Income statement
Net interest income
Net fee income
Gains (losses) on financial transactions
Other operating income*
Gross income
Operating expenses
General administrative expenses
Personnel
Other general administrative expenses
Depreciation and amortisation
Net operating income
Net loan-loss provisions
Other income
Profit before taxes
Tax on profit
Profit from continuing operations
Net profit from discontinued operations
Consolidated profit
Minority interests
Attributable profit to the Group
Balance sheet
Customer loans **
Financial assets held for trading (w/o loans)
Financial assets available-for-sale
Central banks and credit institutions **
Tangible and intangible assets
Other assets
Total assets/liabilities & shareholders' equity
Customer deposits **
Debt securities issued **
Liabilities under insurance contracts
Central banks and credit institutions **
Other liabilities
Stockholders' equity ***
Other managed and marketed customer funds
Mutual and pension funds
Managed portfolios
Managed and marketed customer funds
Ratios (%) and operating means
RoTE
Efficiency ratio (with amortisations)
NPL ratio
NPL coverage
Number of employees
Number of branches
2016
13,346
4,581
806
32
18,764
(7,692)
(7,007)
(3,886)
(3,121)
(685)
11,073
(4,911)
(785)
5,377
(1,363)
4,014
—
4,014
628
3,386
152,187
43,422
29,840
48,612
4,111
42,596
320,768
143,747
47,436
1
47,585
57,473
24,526
81,482
75,002
6,480
272,665
15.56
41.0
4.81
87.3
86,312
5,818
2015
13,752
4,452
517
36
18,757
(7,906)
(7,230)
(3,955)
(3,274)
(676)
10,851
(4,950)
(893)
5,008
(1,219)
3,789
—
3,789
596
3,193
133,138
33,670
25,926
35,523
3,522
36,106
267,885
122,413
39,527
1
42,393
43,872
19,678
65,690
61,096
4,594
227,631
15.20
42.1
4.96
79.0
89,819
5,841
Variation
amount
(407)
128
290
(4)
8
214
223
70
153
(9)
222
39
107
369
(143)
225
—
225
32
193
19,049
9,752
3,914
13,090
589
6,490
52,884
21,334
7,909
(1)
5,192
13,601
4,849
15,792
13,906
1,886
45,034
0.36
(1.2)
(0.15)
8.3
(3,507)
(23)
%
% w/o FX
6.2
15.2
85.1
(38.0)
10.2
8.1
7.8
8.8
6.5
12.0
11.6
7.2
(7.3)
19.7
25.3
17.9
—
17.9
14.3
18.6
3.5
23.6
1.9
15.6
2.2
5.0
7.6
6.7
2.7
(59.5)
1.6
18.1
12.7
6.7
5.7
18.8
6.0
(3.0)
2.9
56.1
(10.9)
0.0
(2.7)
(3.1)
(1.8)
(4.7)
1.3
2.0
(0.8)
(12.0)
7.4
11.7
5.9
—
5.9
5.4
6.1
14.3
29.0
15.1
36.8
16.7
18.0
19.7
17.4
20.0
(49.1)
12.2
31.0
24.6
24.0
22.8
41.0
19.8
(3.9)
(0.4)
(*).- Including dividends, income from equity-accounted method and other operating income/expenses
(**).- Including all on-balance sheet balances for this item
(***).- Capital + reserves + profit + other accumulated results
ANNUAL REPORT 2016
133
4. Economic and financial review » Business information by geography
LATIN
AMERICA*
€3,386 M
Attributable
Profit
2016 HIGHLIGHTS
The region’s GDP shrank for the second year running in a complex international environment.
The measures carried out in innovation, streamlining of processes and commercial actions, were
reflected in a significant rise in loyal and digital customers.
Santander grew in loans and funds, particularly demand deposits.
* Changes in constant currency
Attributable profit in constant euros was 19% higher, with double digit growth in all units, notably
Brazil, which rose 15% in a recession environment.
Economic environment
The economy shrank for the second year running, due to a very
varied performance of countries in both GDP and exchange rates,
and markets in general. The change in economic policy in
Argentina and Brazil and, in general, improvements in inflation and
the current account deficit laid the foundations for recovery.
In general, the environment was not propitious for business,
mainly due to the depreciation of currencies and in particular the
shrinking of Brazil’s GDP.
Strategy
The focus remained on deepening the customer relation, improving
their experience and satisfaction, as well as accelerating the digital
transformation.
The value propositionsd for individual customers were consolidated
with the launch of innovative products and agreements with
companies supplying services. Plans for SMEs continued on this
same path in all countries.
Customer business was solid. Loyal and digital customers in the
main countries increased by 13% and 36%.
Activity
Lending without repos increased 5% in constant euros.
Deposits without repos rose 8%, also in constant euros. Demand
deposits were up 13%, time deposits 4% and mutual funds 6%.
Results
Attributable profit was €3,386 million, up 19%, as a result of:
• Gross income increased 10%, spurred by net interest income and
fee income.
• Operating expenses rose 8% due to salary agreements, dollar
indexed expenses and investments. Growth was moderate in real
terms.
• Loan-loss provisions rose 7%, and reflected an improved NPL
ratio to 4.81% (-15 b.p.) and a coverage ratio (+8 p.p.) to 87%.
Loyal customers
Thousand
Digital customers
Thousand
Activity performance
% var. 2016 / 2015 (w/o FX)
Attributable profit
Constant € million
134
ANNUAL REPORT 2016
Brazil
€ Million
Income statement
Net interest income
Net fee income
Gains (losses) on financial transactions
Other operating income*
Gross income
Operating expenses
General administrative expenses
Personnel
Other general administrative expenses
Depreciation and amortisation
Net operating income
Net loan-loss provisions
Other income
Profit before taxes
Tax on profit
Profit from continuing operations
Net profit from discontinued operations
Consolidated profit
Minority interests
Attributable profit to the Group
Balance sheet
Customer loans **
Financial assets held for trading (w/o loans)
Financial assets available-for-sale
Central banks and credit institutions **
Tangible and intangible assets
Other assets
Total assets/liabilities & shareholders' equity
Customer deposits **
Debt securities issued **
Liabilities under insurance contracts
Central banks and credit institutions **
Other liabilities
Stockholders' equity ***
Other managed and marketed customer funds
Mutual and pension funds
Managed portfolios
2016
8,062
2,940
238
80
11,321
(4,475)
(4,046)
(2,253)
(1,793)
(429)
6,845
(3,377)
(696)
2,772
(773)
1,999
—
1,999
213
1,786
75,474
26,007
16,851
36,430
2,704
24,036
181,502
72,478
31,679
1
27,226
34,571
15,547
59,631
55,733
3,898
2015
8,320
2,643
42
135
11,140
(4,452)
(4,040)
(2,205)
(1,835)
(411)
6,689
(3,297)
(878)
2,513
(689)
1,824
—
1,824
193
1,631
60,238
13,360
15,814
26,692
2,280
20,150
138,534
56,636
26,171
1
21,600
24,085
10,040
45,607
42,961
2,646
Managed and marketed customer funds
163,788
128,414
Ratios (%) and operating means
RoTE
Efficiency ratio (with amortisations)
NPL ratio
NPL coverage
Number of employees
Number of branches
13.84
39.5
5.90
93.1
46,728
3,431
14.09
40.0
5.98
83.7
49,520
3,443
(*).- Including dividends, income from equity-accounted method and other operating income/expenses
(**).- Including all on-balance sheet balances for this item
(***).- Capital + reserves + profit + other accumulated results
Variation
amount
(257)
297
196
(55)
180
(24)
(6)
(48)
42
(18)
157
(80)
182
259
(84)
175
—
175
20
154
15,236
12,647
1,037
9,737
424
3,886
42,968
15,842
5,507
(1)
5,626
10,486
5,507
14,024
12,772
1,252
35,373
(0.25)
(0.4)
(0.08)
9.4
(2,792)
(12)
%
(3.1)
11.2
467.9
(40.8)
1.6
0.5
0.1
2.2
(2.3)
4.3
2.3
2.4
% w/o FX
1.8
16.9
496.8
(37.8)
6.8
5.7
5.3
7.4
2.7
9.6
7.6
7.6
(20.7)
(16.7)
15.9
17.9
15.2
—
15.2
16.1
15.0
(0.3)
54.9
(15.2)
8.6
(5.6)
(5.1)
4.2
1.8
(3.7)
(59.5)
0.3
14.2
23.2
4.0
3.2
17.2
1.5
10.3
12.2
9.6
—
9.6
10.5
9.5
25.3
94.7
6.6
36.5
18.6
19.3
31.0
28.0
21.0
(49.1)
26.0
43.5
54.8
30.7
29.7
47.3
27.5
(5.6)
(0.3)
ANNUAL REPORT 2016
135
4. Economic and financial review » Business information by geography
BRAZIL*
2016 HIGHLIGHTS
€1,786 M
Attributable
Profit
* Changes in local currency
Commercial actions, digital innovations and streamlining processes helped to increase transactions
and customer loyalty.
Attributable profit of €1,786 million (+15%), with a more dynamic business and growth quarter after
quarter.
The preventative risk management is reflected in provisions and credit quality under control.
Improved productivity and efficiency helped costs grow below the average inflation rate.
Santander Brasil was recognised as one of the best companies to work for by Great Place to Work and
as the best bank for SMEs by the magazine Euromoney.
Economic environment
Brazil was in recession for the second year running. As the year
advanced, the recession weakened and markets showed a clear
recovery. This suggested that GDP growth was poised to turn
positive.
The central bank secured its credibility: final inflation (6.3%) was
below the upper limit of its target range (6.5%). The inflation outlook
for 2017 and 2018 is around 4.5% (the central target), which enabled
the bank to cut its benchmark rate from 14.25% to 13.75% at the end
of the year and point to a downward path. This started in January
2017, with a further cut in interest rates of 75 b.p. to 13%.
As the year ended, the real recovered to BRL 3.43/€1 from BRL 4.31
in 2015.
Strategy
In this difficult political and economic environment, Santander Brasil
continued its transformation process, while growing customers and
results. The main points are set out below.
Actions to spur digitalisation:
• Speeding up the digital transformation. Thanks to new features in
mobile banking for individual customers, we achieved an evaluation
of 4.5 stars in the Apple Store and 4.2 stars in Google Play (before we
had two stars) and sales grew threefold via e-commerce .
• Launch, in commercial banking, of the digital attention channel for
Van Gogh and Empresas 1 customers and, in wholesale banking, a
remote channel for all corporate and GCB customers.
• Development of Santander Way, an app that enables cards to be
managed in real time. We were also the first bank to offer
customers Samsung Pay.
• We completed the acquisition of 100% of the digital prepayment
platform ContaSuper.
• In consumer finance, we launched the new digital platform
+Negócios, a tool that digitizes the whole customer experience and
has a big potential to grow business.
Launch of commercial actions to improve or consolidate our
presence in the market:
• Increased presence in the credit market in payroll with Olé
Consignado, which combines the experience of Banco Bonsucesso
and Santander.
• Strong growth in credit card business, three times the market’s
turnover. We announced the commercial agreement with
American Airlines for accumulating air miles.
Loyal customers
Thousand
Digital customers
Thousand
Activity performance
% var. 2016 / 2015 (w/o FX)
Attributable profit
Constant € million
136
ANNUAL REPORT 2016
NPL ratio
%
Coverage ratio
%
Cost of credit
%
RoTE
%
• In acquiring business, turnover increased 30% (well above the
market). We also offered individual customers the possibility of a
current account with a low cost point-of sale terminal.
• In SMEs, Santander Negócios & Empresas provided innovative
solutions in the Brazilian market, helping customers in their
development, internationalisation and training.
• A joint venture was created between Santander Financiamientos
and Hyundai.
• Agri business was strengthened and we were nominated for the
2016 Lide Agronegocios prize.
Internal processes were simplified and we became more efficient and
productive via the CERTO model and the Clique Único (one click)
digital platform.
Lastly, in GCB we were recognised as leaders in financial advice in
project finance in Brazil. We also continued to be the leading bank in
the forex market according to the central bank and in the ranking of
the largest M&A operations in 2016, according to Thomson Reuters.
As regards segments, lending to companies and GCB fell 7% and
credit to SMEs started to grow (+1.4%), after three consecutive
quarters of falling. Loans to individuals increased 7%, driven by cards
(+8%) and mortgages (+5%).
Funds rose 3%, with balanced growth between demand deposits,
saving accounts and time deposits.
Results
Attributable profit was 15% higher at €1,786 million. Of note in year
on-year terms were:
• Gross income increased 7% and fee income 17%, notably that from
current accounts, mutual funds and cards. Net interest income
rose 2%, backed by higher spreads on funds and loans.
• Operating expenses continued their good evolution and increased
6% (3 p.p. less than the average inflation rate), reflecting the
discipline in managing them.
• Loan-loss provisions were up 8% within a still weak
macroeconomic environment.
All these strategies played a key role in the business dynamic. The
number of loyal customers rose 16% and digital ones 45% to 6.4
million. Of note also was the number of biometric-identified
customers (6.3 million) and the rise in transactions through digital
channels, which represent 73% of total transactions.
• Credit quality ratios remained good: the cost of credit was 4.89%,
below the target of 5% announced at the beginning of the year and
the NPL ratio was 5.90% (-8 b.p.). In local criteria, both the cost of
credit and credit quality evolved better than that of our main
competitors.
Activity
Lending was stable (+0.4% over December 2015), reflecting a good
performance given the economic scenario and after absorbing the
negative impact of dollar balances (excluding it: +3%). The trend
improved in the last months (+5% in the fourth quarter) and we expect
it to continue in 2017.
STRATEGY IN 2017
Continue to increase our base of active, loyal and digital customers and improve knowledge of their needs.
Continue the digital transformation, innovating the offer of products and services as well as sell more in digital channels.
Continue to gain market share, mainly in products such as acquirer business, consumer credit and SMEs.
Improve profitability, focusing on revenue growth via risk adjusted spreads and fee income.
ANNUAL REPORT 2016
137
4. Economic and financial review » Business information by geography
Mexico
€ Million
Income statement
Net interest income
Net fee income
Gains (losses) on financial transactions
Other operating income*
Gross income
Operating expenses
General administrative expenses
Personnel
Other general administrative expenses
Depreciation and amortisation
Net operating income
Net loan-loss provisions
Other income
Profit before taxes
Tax on profit
Profit from continuing operations
Net profit from discontinued operations
Consolidated profit
Minority interests
Attributable profit to the Group
Balance sheet
Customer loans **
Financial assets held for trading (w/o loans)
Financial assets available-for-sale
Central banks and credit institutions **
Tangible and intangible assets
Other assets
Total assets/liabilities & shareholders' equity
Customer deposits **
Debt securities issued **
Liabilities under insurance contracts
Central banks and credit institutions **
Other liabilities
Stockholders' equity ***
Other managed and marketed customer funds
Mutual and pension funds
Managed portfolios
2016
2,385
711
149
(43)
3,203
(1,274)
(1,168)
(606)
(562)
(106)
1,928
(832)
(30)
1,067
(247)
820
—
820
191
629
27,315
14,222
7,096
8,562
392
7,524
65,112
28,910
5,393
—
11,269
15,963
3,577
10,242
10,242
—
2015
2,451
800
138
(72)
3,317
(1,370)
(1,257)
(662)
(595)
(113)
1,947
(877)
(4)
1,067
(236)
831
—
831
202
629
30,158
16,949
5,972
4,717
396
6,535
64,728
28,274
5,783
—
12,884
12,829
4,957
11,477
11,477
—
Managed and marketed customer funds
44,545
45,535
Ratios (%) and operating means
RoTE
Efficiency ratio (with amortisations)
NPL ratio
NPL coverage
Number of employees
Number of branches
15.45
39.8
2.76
103.8
17,608
1,389
13.19
41.3
3.38
90.6
17,847
1,377
(*).- Including dividends, income from equity-accounted method and other operating income/expenses
(**).- Including all on-balance sheet balances for this item
(***).- Capital + reserves + profit + other accumulated results
138
ANNUAL REPORT 2016
Variation
amount
(66)
(89)
11
30
(114)
95
88
56
33
7
(19)
45
(26)
0
(11)
(11)
—
(11)
(12)
0
(2,843)
(2,726)
1,124
3,845
(4)
990
385
636
(390)
—
(1,615)
3,134
(1,380)
(1,235)
(1,235)
—
(990)
2.27
(1.5)
(0.62)
13.2
(239)
12
% w/o FX
14.3
4.4
26.9
(30.9)
13.4
9.3
9.2
7.6
11.0
10.5
16.3
11.4
859.2
17.5
23.1
15.9
—
15.9
10.7
17.5
4.3
(3.4)
36.8
108.9
14.0
32.5
15.8
17.7
7.3
—
0.7
43.2
(16.9)
2.7
2.7
—
12.6
%
(2.7)
(11.1)
8.0
(41.2)
(3.4)
(6.9)
(7.0)
(8.4)
(5.5)
(5.9)
(1.0)
(5.2)
716.5
0.0
4.8
(1.4)
—
(1.4)
(5.7)
0.1
(9.4)
(16.1)
18.8
81.5
(1.0)
15.1
0.6
2.2
(6.7)
—
(12.5)
24.4
(27.8)
(10.8)
(10.8)
—
(2.2)
(1.3)
0.9
MEXICO*
2016 HIGHLIGHTS
Strategy centred on being the bank of first choice for customers, increasing the attraction and long
term transaction loyalty.
Focus on multi channel innovation, operational transformation and launching of commercial initiatives
(Santander Plus y Santander-Aeroméxico).
Profit rose 18%, with an excellent performance of net interest income (+14%).
€629 M
Attributable
Profit
* Changes in local currency
The strategy in 2016 was to retain customers and capture deposits (+16%).
Economic environment
Mexico's GDP decelerated a little in 2016 to an estimated 2.3% from
2.6% in 2015. The challenging external environment prompted the
adjustment of the fiscal strategy and a tougher monetary policy. The
central bank raised its target interest rate throughout 2016, from
3.25% to 5.75%, with the objective of countering the risk that the
peso's depreciation posed for prices and financial stability. Inflation
rose from 2.1% to 3.3% and the jobless rate was an average of 3.8%
for the year.
The peso depreciated 13% against the dollar to MXN 21.8, impacted by
oil prices in the first few months of the year and the heightened
uncertainties of possible changes in the trade and migration policies of
the US in the latter part of 2016.
Strategy
Under the strategy of transformation, innovation and effort to
increase customer loyalty, the Bank developed various measures.
The main ones included:
• A three-year €15,000 million investment plan was announced in
December to continue improving the franchise and our systems.
Strengthen business with new commercial actions and the launching
of products:
• The commercial strategy focused, on the one hand, on the
Santander Plus programme, which offers many benefits for those
affiliated to it. So far more than 1.1 million customers have
registered, half of whom are new.
• The Santander-Aeroméxico credit card was launched, following an
alliance with Mexico’s leading airline. The offer will be exclusive for
the next 10 years. So far more than 430,000 cards have been
issued, 30% of which were for new customers.
• Other competitive offers were launched such as the Santander
Personal Mortgage, which offers a tailored interest rate on the basis
of each customer profile and needs.
Drive in multi channels and digitalisation:
Improvement in the structure of funds and drive in business with
companies:
• We installed 836 new ATMs and strengthened strategic alliances
with correspondent banks, offering our services via a network of
close to 20,000 shops.
• Demand deposits rose 16% and we continued to promote
diversification toward value funds, in line with customers’ profile.
• Improvements in electronic banking via the Portal Público,
SuperNet and SuperMóvil.
Loyal customers
Thousand
Digital customers
Thousand
Activity performance
% var. 2016 / 2015 (w/o FX)
Attributable profit
Constant € million
ANNUAL REPORT 2016
139
4. Economic and financial review » Business information by geography
NPL ratio
%
Coverage ratio
%
Cost of credit
%
RoTE
%
• We streamlined the structure and number of series in monetary
funds and launched offers to promote the attraction of time
deposits.
• In lending, we conducted campaigns to refinance credit lines for
SMEs, focused on customers who maintain a good credit profile,
and simplifying products.
• As regards companies and institutions, the focus was on
transactional loyalty and attracting new customers via confirming
products, as well as commercial efforts in the various productive
sectors and boosting agribusiness.
All these measures helped to improve customer retention, increase
loyal customers by 16% and reach 1.3 million digital customers (+46%).
Activity
Loans rose 8% and deposits excluding repos 16%. Growth benefited
from the commercial measures launched at the beginning of 2016
and already commented on.
Lending to individuals rose 8%, as follows: mortgages (+7%);
consumer credit (+11%) and credit cards (+8%). We continued to
consolidate our leadership in the medium-high income segment.
In deposits, those of individual customers increased 20% and their
composition continued to improve, within a policy of reducing their
cost. Both demand and time deposits rose 16% while mutual funds
were up 3%.
Results
Attributable profit was 18% higher at €629 million, driven mainly by
growth in revenues and the lower cost of credit.
• Gross income rose 13%. Of note was the 14% increase in net
interest income underpinned by credit growth and a rise in
demand deposits, along with higher interest rates since
December 2015.
• Operating expenses grew 9%, reflecting the strategic measures
taken to position us as the bank of first choice for our customers.
Despite this effort, the efficiency ratio improved by 150 b.p. to
below 40%.
• All the credit quality ratios improved: the NPL ratio fell 62 b.p. to
2.76%, coverage rose 13 p.p. to 104% and the cost of credit dropped
5 b.p. to 2.86%.
STRATEGY IN 2017
Improve commercial tools, CRM and digital platforms via the technology plan.
Strengthen the Santander Plus offer to capture new high potential customers and increase loyalty.
Boost payrolls and digital customers, while further enhancing customer service quality.
Consolidate our positioning in mortgage business and recover leadership in SMEs.
140
ANNUAL REPORT 2016
Chile
€ Million
Income statement
Net interest income
Net fee income
Gains (losses) on financial transactions
Other operating income*
Gross income
Operating expenses
General administrative expenses
Personnel
Other general administrative expenses
Depreciation and amortisation
Net operating income
Net loan-loss provisions
Other income
Profit before taxes
Tax on profit
Profit from continuing operations
Net profit from discontinued operations
Consolidated profit
Minority interests
Attributable profit to the Group
Balance sheet
Customer loans **
Financial assets held for trading (w/o loans)
Financial assets available-for-sale
Central banks and credit institutions **
Tangible and intangible assets
Other assets
Total assets/liabilities & shareholders' equity
Customer deposits **
Debt securities issued **
Liabilities under insurance contracts
Central banks and credit institutions **
Other liabilities
Stockholders' equity ***
Other managed and marketed customer funds
Mutual and pension funds
Managed portfolios
2016
1,864
353
206
(1)
2,422
(986)
(895)
(558)
(337)
(91)
1,435
(514)
(27)
894
(159)
735
—
735
222
513
37,662
3,002
4,820
2,998
424
4,599
53,505
27,317
10,174
—
7,172
5,476
3,366
9,903
7,321
2,582
2015
1,791
360
173
12
2,336
(1,004)
(926)
(568)
(358)
(77)
1,332
(567)
3
768
(114)
655
—
655
199
455
32,338
3,144
2,668
3,294
355
4,161
45,960
24,347
7,467
—
5,886
5,280
2,980
7,370
5,422
1,948
Managed and marketed customer funds
47,394
39,184
Ratios (%) and operating means
RoTE
Efficiency ratio (with amortisations)
NPL ratio
NPL coverage
Number of employees
Number of branches
17.17
40.7
5.05
59.1
11,999
435
15.51
43.0
5.62
53.9
12,454
472
(*).- Including dividends, income from equity-accounted method and other operating income/expenses
(**).- Including all on-balance sheet balances for this item
(***).- Capital + reserves + profit + other accumulated results
Variation
amount
73
(7)
33
(12)
86
17
31
10
21
(14)
103
53
(30)
126
(45)
81
—
81
23
58
5,324
(142)
2,152
(296)
68
438
7,545
2,970
2,707
—
1,285
196
386
2,533
1,899
634
8,210
1.65
(2.2)
(0.57)
5.2
(455)
(37)
% w/o FX
7.4
1.2
22.6
—
7.0
1.5
(0.2)
1.4
(2.8)
22.1
11.2
(6.5)
—
20.2
44.5
15.9
—
15.9
14.9
16.4
6.5
(12.7)
65.2
(16.8)
9.0
1.1
6.5
2.6
24.6
—
11.4
(5.1)
3.3
22.9
23.5
21.2
10.6
%
4.1
(1.9)
18.8
—
3.7
(1.7)
(3.4)
(1.8)
(5.8)
18.2
7.7
(9.4)
—
16.4
40.0
12.3
—
12.3
11.3
12.7
16.5
(4.5)
80.7
(9.0)
19.2
10.5
16.4
12.2
36.3
—
21.8
3.7
13.0
34.4
35.0
32.5
21.0
(3.7)
(7.8)
ANNUAL REPORT 2016
141
4. Economic and financial review » Business information by geography
CHILE*
2016 HIGHLIGHTS
Significant progress in transforming the commercial network into a new branch model.
€513 M
Attributable
Profit
* Changes in local currency
Improved customer satisfaction, narrowing the gap with our competitors.
Greater activity in target segments of loans and funds, gaining market share.
Attributable profit of €513 million, up 16%.
Economic environment
Economic growth slowed in 2016 to an estimated 1.6% from 2.3% in
2015, despite the good performance of consumer durables, lending
and, to a lesser extent, employment (the jobless rate rose from 6.2%
to 6.5%). The international context and the mining industry’s
adapting to an environment of moderate prices were the main
factors behind the slowdown.
Inflation fell to an estimated 3% from 4% in 2015, coinciding with the
centre of the target range, in a context of sluggish activity.
The currency ended the year at CLP708 per euro, an appreciation
of 9%.
The central bank ended 2016 with an interest rate of 3.5%, unchanged
since the end of 2015.
Strategy
The Group maintained its strategy of improving long-term
profitability against a backdrop of lower spreads and greater
regulation. The bank aims to become the most valued in the country
by improving the quality of customer attention and transforming the
commercial and retail banking segment (36 branches already up and
operating in the new network model), particularly in business with
medium- and high-income customers and SMEs.
With this in mind, a series of measures were taken:
• A strategy focused more on the customer and streamlining
internal processes, adjusting them to a digital and multi channel
environment, enabled us to improve customer satisfaction and
narrow the gap in quality of service with our competitors.
• In order to make us more attractive to customers, we launched
projects such as WorkCafé, a new concept of multi-segment
branches focused on co-operation and aligned with the SPF
culture (Simple, Personal, Fair).
• Increased digitalisation: launch of 123 Click, a new consumer loan
100% digital.
These measures produced an increase in loyal customers, mainly
SMEs (+14%) and high income (+12%), as well as fee income linked to
transactions. The number of digital customers rose 4%.
The magazines Euromoney and LatinFinance recognised Santander
as the Best Bank in Chile.
Loyal customers
Thousand
Digital customers
Thousand
Activity performance
% var. 2016 / 2015 (w/o FX)
Attributable profit
Constant € million
142
ANNUAL REPORT 2016
NPL ratio
%
Coverage ratio
%
Cost of credit
%
RoTE
%
Activity
These measures were reflected in higher balances of loans and funds.
• Gross income rose 7%, with growth in all components.
Lending rose 7% in local currency, with advances in the target
segments. Of note was the 16% growth in loans to high-income
customers and 9% to SMEs.
Deposits rose 3% (+2% in demand deposits and +3% in time
deposits).
There were gains in market share in various products (+22 b.p. in
total loans and 47 b.p. in deposits).
Results
Attributable profit was 16% higher at €513 million, an increase affected
by the higher tax charge. Pre-tax profit rose 20% to €894 million, as
follows:
Net interest income increased 7%, spurred by higher volumes and
management of the cost of funds. Gains on financial transactions
increased 23% and fee income grew slightly because of the good
performance of those linked to means of payment and transactions.
• Operating expenses grew by only 1% despite greater investment in
technological developments and indexation of contracts, rentals
and salaries to year-on-year inflation.
• Loan-loss provisions fell 6%, with a sustained improvement in the
portfolio of individual customers. All credit quality indicators
improved, leaving the cost of credit at 1.43%, the NPL ratio at 5.05%
and coverage at 59%.
STRATEGY IN 2017
Consolidate the transformation of commercial and retail banking business via the new branch network model.
Continue to improve the quality of customer attention and experience.
Strenthen business with large and medium sized companies.
Focus on fee income and on long-term profitability in an environment of lower spreads and greater regulations.
ANNUAL REPORT 2016
143
4. Economic and financial review » Business information by geography
ARGENTINA*
2016 HIGHLIGHTS
The strategy centred on increasing our penetration in the market through expanding the branch
network and moving to a more digital bank, focusing on Santander Select and Pymes Advance.
Agreement for the acquisition of Citibank Argentina’s retail banking business and agreement with
American Airlines for the AAdvantage® frequent traveller programme.
Attributable profit was 52% higher at €359 million, driven by higher revenues and a lower cost of
credit.
€359 M
Attributable
Profit
* Changes in local currency
Economic environment
Argentina decisively faced in 2016 its macroeconomic imbalances and
microeconomic divisions and also strengthened the institutional
framework. The adjustment measures led to GDP shrinkage of 2%,
but at the same time began to lay the foundations for control of
inflation and the public finances and for growth recovery.
The benchmark interest rate was cut from 33% to 24.5%, while the
peso depreciated strongly against the euro.
Strategy
The Group’s strategy continued to centre on growing customer
business, paying particular attention to loyalty and profitability:
• Agreement with American Airlines for the AAdvantage®
programme under which air miles are accumulated through
purchases with cards that adhere to the programme.
• Launch of a new line of UVA inflation-indexed mortgages.
• In the high-income segment, the Select products were strengthened
and new corners and spaces specialised in SMEs opened.
• The expansion and transformation plan of branches continued with
the opening of 17 branches (246 already transformed).
• The Gestión Comercial “+CHE” system was implemented in the
branch network.
In the year, loyal customers rose 6% and digital ones 20%.
In addition, an agreement was signed in October with Citibank
Argentina to acquire its retail business, consolidating Santander as
the country’s main private sector bank as it incorporated 500,000
customers and 70 branches. The transaction is pending the central
bank’s authorisation.
The magazine Global Finance recognised Santander Río as the “Best
Digital Bank in Argentina” and the “Best in Mobile Banking in
Argentina”. The bank was also ranked first in the Great Place to Work
ranking and Euromoney named it “Best Bank in 2016”.
Activity
Lending increased 37%, particularly consumer credit. Deposits rose
47%, with demand deposits up 111% and those in dollars 241%, while
time deposits fell 23%.
All these factors enabled us to gain market share (10.3% in loans and
10.9% in deposits).
Results
Attributable profit was €359 million (+52%). The commercial strategy
pushed up gross income by 42% (net interest income: +28% and fee
income: +36%).
Operating expenses rose 37% due to the impact of inflation, the new
salary agreement, the opening of new branches and investments in
transformation and technology.
Loan-loss provisions increased less than lending, as a result of which
the cost of credit dropped by 43 b.p. The quality of credit remained
high (NPL ratio of 1.49% and coverage of 142%).
Activity performance
% var. 2016 / 2015 (w/o FX)
Attributable profit
Constant € million
STRATEGY IN 2017
Continue the transformation toward a digital bank,
improving efficiency, loyalty and satisfaction.
Complete the integration of Citibank’s retail business.
Boost lending to companies and households that have a low
level of debt, mainly consumer credit, mortgages and
financing lines for investments and foreign trade.
Grow significantly in customer funds, particularly mutual
funds
144
ANNUAL REPORT 2016
URUGUAY*
2016 HIGHLIGHTS
Consolidate customer service quality and satisfaction, ranking second.
Credit card leaders for the third year running.
Greater lending to target segments and products.
Profit before tax rose 48%. Excluding the perimeter impact, growth was 35% due to higher
commercial revenues.
€84 M
Attributable
profit
* Changes in local currency
Economic environment
The economy grew 0.5% (1.0% in 2015) and inflation was 9.2% (9.4%
in 2015), above the official target of 3%-7%. The peso ended 2016 at
UYU30.6/€, an appreciation of 6%.
Activity
• Lending rose in target segments and products (SMEs and
consumer business), as well as consumer credit (+15%).Total loans
up 1%.
Strategy
The Group continued to be the country’s leading private sector bank,
focusing on growing in retail banking and improving efficiency and
the quality of service. In 2016 we continued to offer our customers
value-added via the following measures:
• We were ranked second in the customer satisfaction survey.
• The number of loyal customers rose 4% via measures such as the
launch of the new CRM Celestium and the launch of the customer
retention unit.
• As part of the process to digitalise and modernise channels, we
developed significant advances in the Santander app and launched
a new payments app to increase customer transactions. These
measures helped lift the number of digital customers by 50%.
• We consolidated our leadership in consumer finance business (+70
b.p. in consumer credit market share).
• Deposits fell 7, because of the exit of non-resident deposits and
the strategy of making funds more profitable.
Results
Attributable profit was 32% higher at €84 million, benefiting from
the incorporation of Créditos de la Casa in August 2015. Excluding
this, profit would have increased 19% because of the higher tax
charge.
Profit before tax increased 48% (+35% on a like-for-like basis),
spurred by growth in net interest income, fee income and the
efficiency plan’s measures.
The efficiency ratio was 5.5 p.p. better at 51.4%.
Loan-loss provisions increased 13%, albeit from a low base. The
cost of credit was low (1.79%), the NPL ratio was 1.63% and
coverage 168%.
Activity performance
% var. 2016 / 2015 (w/o FX)
Attributable profit
Constant € million
STRATEGY IN 2017
Continue to grow in retail business, with excellent levels of
quality of service.
Increase our market share in the segments of individuals and
SMEs and in products such as consumer loans, means of
payment and payroll.
Boost revenues, mainly through the drive in fee income due
to greater customer loyalty.
Keep on improving the efficiency ratio through digital
transformation.
ANNUAL REPORT 2016
145
4. Economic and financial review » Business information by geography
PERÚ*
2016 HIGHLIGHTS
Strategy focused on retail banking with global and corporate customers and the large company
segment.
Attributable profit increased 21%, mainly due to higher net interest income and lower provisions.
€37 M
Attributable
Profit
* Changes in local currency
Economic environment
GDP growth slowed to 3.9%. Sharp drop in domestic demand. Inflation
was around 3.4% and the currency depreciated 6% against the euro.
Activity
Lending rose 8% and deposits fell 6%, due to the 10% reduction in
time deposits as a result of the funding strategy.
Public debt stood at 23% of GDP, one of the lowest in the region, and
the country’s reserves totalled $61,000 million (more than 30% of
GDP). The system’s loans and deposits grew 4% and 2%, respectively.
Results
Attributable profit was 21% higher at €37 million.
Strategy
In this environment, the Group focused on corporate banking and
the country’s big companies, as well as continuing to provide
services to the Group’s global customers.
A closer relationship with customers and quality of service were
priorities, taking advantage of operational and business synergies
with other Group units.
An auto finance company continued to consolidate its activity in
Peru. This company has a specialised business model, centred on
service and with market shares that enable customers to acquire a
new vehicle via most of the brands and dealerships in the country.
• Gross income rose 3%., with a good performance of net interest
income and fee income , but affected by the fall in gains on
financial transactions.
• Operating expenses increased 1% and loan-loss provisions
declined 84%.
The efficiency ratio was 33 b.p. better at 30.5%, the NPL ratio
remained very low (0.37%) and coverage was high.
Activity performance
% var. 2016 / 2015 (w/o FX)
Attributable profit
Constant € million
STRATEGY IN 2017
Continue to increase lending to the corporate segment,
global customers and large companies.
Promote advisory services in investment banking and in
public infrastructure works via public and private sector
link ups.
COLOMBIA
The operation in Colombia focuses on growing business with Latin American companies, multinational companies, international desk and
big and medium-sized local companies, contributing treasury solutions, risk hedging, foreign trade, financing working capital and
confirming, as well as developing investment banking and capital market products.
Premier Credit focused on increasing its volume of operations by signing commercial agreements with dealership networks. It also
launched the project that will give Banco Santander de Negocios Colombia the capacity to finance loans originated by Premier Credit.
The various businesses generated net operating income of €8 million.
146
ANNUAL REPORT 2016
United States
€ Million
Income statement
Net interest income
Net fee income
Gains (losses) on financial transactions
Other operating income*
Gross income
Operating expenses
General administrative expenses
Personnel
Other general administrative expenses
Depreciation and amortisation
Net operating income
Net loan-loss provisions
Other income
Profit before taxes
Tax on profit
Profit from continuing operations
Net profit from discontinued operations
Consolidated profit
Minority interests
Attributable profit to the Group
Balance sheet
Customer loans **
Financial assets held for trading (w/o loans)
Financial assets available-for-sale
Central banks and credit institutions **
Tangible and intangible assets
Other assets
Total assets/liabilities & shareholders' equity
Customer deposits **
Debt securities issued **
Liabilities under insurance contracts
Central banks and credit institutions **
Other liabilities
Stockholders' equity ***
Other managed and marketed customer funds
Mutual and pension funds
Managed portfolios
Managed and marketed customer funds****
Ratios (%) and operating means
RoTE
Efficiency ratio (with amortisations)
NPL ratio
NPL coverage
Number of employees
Number of branches
2016
5,917
1,102
22
491
7,532
(3,198)
(2,882)
(1,636)
(1,247)
(316)
4,334
(3,208)
(90)
1,036
(355)
681
—
681
286
395
85,389
2,885
16,089
1,090
10,648
21,289
137,390
64,460
26,340
—
22,233
9,897
14,461
18,827
9,947
8,880
89,200
3.11
42.5
2.28
214.4
17,509
768
2015
6,116
1,086
231
367
7,799
(3,025)
(2,761)
(1,543)
(1,219)
(264)
4,774
(3,103)
(148)
1,523
(516)
1,007
—
1,007
329
678
84,190
2,299
19,145
1,046
9,156
14,747
130,584
60,115
23,905
—
26,169
9,073
11,321
19,478
7,123
12,355
84,238
6.54
38.8
2.13
225.0
18,123
783
Variation
amount
(199)
16
(208)
124
(267)
(173)
(121)
(93)
(28)
(52)
(440)
(105)
58
(487)
161
(326)
—
(326)
(43)
(283)
1,199
586
(3,056)
44
1,491
6,542
6,805
4,345
2,434
—
(3,936)
823
3,139
(651)
2,824
(3,475)
4,961
(3.42)
3.7
0.15
(10.6)
(614)
(15)
% w/o FX
(3.5)
1.2
(90.4)
33.6
(3.6)
5.5
4.1
5.8
2.1
19.5
(9.4)
3.1
(39.3)
(32.1)
(31.4)
(32.5)
—
(32.5)
(13.2)
(41.9)
(1.8)
21.5
(18.6)
0.9
12.6
39.8
1.9
3.8
6.7
—
(17.7)
5.6
23.7
(6.4)
35.2
(30.4)
2.5
%
(3.3)
1.5
(90.4)
33.9
(3.4)
5.7
4.4
6.0
2.3
19.8
(9.2)
3.4
(39.1)
(32.0)
(31.3)
(32.4)
—
(32.4)
(13.0)
(41.8)
1.4
25.5
(16.0)
4.2
16.3
44.4
5.2
7.2
10.2
—
(15.0)
9.1
27.7
(3.3)
39.6
(28.1)
5.9
(3.4)
(1.9)
(*).- Including dividends, income from equity-accounted method and other operating income/expenses
(**).- Including all on-balance sheet balances for this item
(***).- Capital + reserves + profit + other accumulated results
(****).- Excluding debt securities issued of Santander Consumer USA
ANNUAL REPORT 2016
147
4. Economic and financial review » Business information by geography
UNITED
STATES*
€395 M
Attributable
Profit
* Changes in dollars
2016 HIGHLIGHTS
The year’s three key priorities were to advance in complying with regulatory requirements, improve
the franchise of Santander Bank and optimise the risk adjusted return profile of SC USA.
The revitalising of Santander Bank was reflected in a 4% rise in customer core deposits and 26% in
digital customers.
Santander Consumer USA continued to adjust the business mix toward a more attractive risk adjusted
return profile, compatible with RoTE levels of 15%.
Attributable profit was 42% lower at €395 million.
Economic environment
The US economy grew an estimated 1.6% in 2016, partly due to the
slow growth at the start of the year. This did not prevent, however,
the jobless rate falling to 4.7%, a level regarded as almost full
employment, and core inflation of 1.8%.
The outcome of the US election helped to strengthen the dollar to
€1/$1.05 ($1.09 at the end of 2015) and spurred the markets.
In this context, in which the economy was already showing some
strengthening, the Federal Reserve raised its key rate in December
to 0.75% from 0.50% and pointed to gradual hikes in 2017.
Strategy
Santander in the US includes Santander Holdings, the Intermediate
Holding Company (IHC), and its subsidiaries Santander Bank, Banco
Santander Puerto Rico, Santander Consumer USA, Banco Santander
International and Santander Investment Securities, as well as the
branch of Santander in New York.
Santander Bank is one of the largest banks in the northeast of the
country and offers a full range of products such as consumer loans,
mortgages and loans for individuals, SMEs and large multinationals.
Santander Consumer USA is one of the largest auto finance
companies in the US and makes loans to a wide spectrum of
customers in the US.
Santander US is focusing on strategic priorities that aim to
transform it into a diversified and leading bank in the US. These
include:
• Improve the profitability of Santander Bank.
• Optimise the auto finance business.
• Grow GCB’s business with customers established in the US by
leveraging the connectivity of the Group’s global footprint.
Loyal customers*
Thousand
Digital customers*
Thousand
Activity performance
% var. 2016 / 2015 (w/o FX)
Attributable profit
Constant € million
148
ANNUAL REPORT 2016
NPL ratio
%
Coverage ratio
%
Cost of credit
%
RoTE
%
Santander US continued to progress in 2016 in complying with its
regulatory obligations. The IHC holding was created, unifying the
main units in the country under the same management and
governance structure in order to manage risk in the US more
effectively.
The commercial transformation continued in order to improve the
technological and financial capacities and create a successful
business while complying with all the regulatory requirements.
Santander Bank continued to improve the franchise and build closer
and deeper relations with customers, through a simplified and full
suite of products, as well as enhancing customer satisfaction. We are
beginning to see results such as the rise in digital customers (+26%)
and in core deposits (+4%).
Santander Consumer USA’s ongoing strategy continues to be to
leverage its efficient, scalable infrastructure to underwrite, originate
and service profitable assets. This strategy evolved with the focus on
regulatory compliance and customer protection, optimisation of
assets retained versus sold and serviced for others, realising the full
value of Chrysler Capital.
Banco Santander Puerto Rico launched a new customer onboarding
program that simplifies and personalises customer service. It also
improved the e-banking platforms and apps and provided customers
with the necessary tools to manage their banking needs from
anywhere and at any time.
Activity
Santander Bank’s lending fell 2%, as growth of 16% in Corporate and
Commercial Banking partially offset sales of portfolios. Customer
deposits increased 2% while treasury deposits declined.
The fall in Santander Consumer USA lending was due to lower
originations because of the competitive environment and improving
the risk adjusted returns of non prime originations. In addition,
certain consumer lending portfolios were sold, such as Lending Club.
Results
Attributable profit was $437 million, with an evolution that reflected
the Group’s strategy during 2016.
Significant investments were made in technology to enhance
customer experience and improve risk management and capital
planning in order to comply with regulatory obligations, causing
costs to remain high. Santander Bank also repurchased costly
liabilities, which had a negative impact on gains on financial
transactions.
Santander Consumer USA changed its business mix to a low risk
profile (with impact on revenues) which was made compatible with
obtaining a RoTE of 18% in 2016.
These factors, combined with certain non-recurring costs and an
increase in provisions, partly due to those made in the first quarter
for oil and gas related business, produced a 42% fall in the
attributable profit. Profit before taxes was 32% lower.
STRATEGY IN 2017
Improve customer experience and loyalty through an efficient sales force, simple products and continued development of digital
channels at Santander Bank.
Maintain leadership in auto finance with continued focus on improving Chrysler channel to support growth of prime originations.
Continue to improve management of capital, risk and liquidity in order to comply with regulatory requirements and build a strong
US business.
ANNUAL REPORT 2016
149
4. Economic and financial review » Business information by geography
Corporate Centre
€ Million
Income statement
Net interest income
Net fee income
Gains (losses) on financial transactions
Other operating income*
Gross income
Operating expenses
Net operating income
Net loan-loss provisions
Other income
Underlying profit before taxes
Tax on profit
Underlying profit from continuing operations
Net profit from discontinued operations
Underlying consolidated profit
Minority interests
Underlying attributable profit to the Group
Net capital gains and provisions
Attributable profit to the Group
Balance sheet
Financial assets held for trading (w/o loans)
Available-for-sale financial assets
Goodwill
Capital assigned to Group areas
Other assets
Total assets/liabilities & shareholders' equity
Customer deposits**
Marketable debt securities**
Other liabilities
Stockholders' equity ***
Other managed and marketed customer funds
Mutual and pension funds
Managed portfolios
2016
(739)
(31)
(243)
(52)
(1,066)
(450)
(1,516)
2
(75)
(1,589)
141
(1,448)
0
(1,448)
(9)
(1,439)
(417)
(1,856)
1,203
2,774
26,724
79,704
21,750
132,154
858
30,922
16,014
84,361
10
10
—
2015
(627)
(13)
150
(5)
(495)
(547)
(1,042)
27
(507)
(1,523)
59
(1,464)
—
(1,464)
30
(1,493)
(600)
(2,093)
2,656
3,773
26,960
77,163
37,583
148,136
5,205
37,364
21,052
84,515
—
—
—
Variation
amount
(112)
(18)
(393)
(47)
(571)
97
(474)
(25)
433
(66)
82
16
0
16
(38)
54
183
237
(1,453)
(1,000)
(236)
2,541
(15,833)
(15,981)
(4,347)
(6,442)
(5,038)
(154)
10
10
—
%
17.8
137.3
—
980.8
115.3
(17.7)
45.5
(94.2)
(85.3)
4.3
138.5
(1.1)
—
(1.1)
—
(3.6)
(30.5)
(11.3)
(54.7)
(26.5)
(0.9)
3.3
(42.1)
(10.8)
(83.5)
(17.2)
(23.9)
(0.2)
—
—
—
Managed and marketed customer funds
31,790
42,569
(10,779)
(25.3)
Operating means
Number of employees
1,724
2,006
(282)
(14.1)
(*).- Including dividends, income from equity-accounted method and other operating income/expenses
(**).- Including all on-balance sheet balances for this item
(***).- Capital + reserves + profit + other accumulated results
150
ANNUAL REPORT 2016
CORPORATE
CENTRE
-€1,856 M
Attributable
Profit*
* Before non-recurring results: -€1,439 M
2016 HIGHLIGHTS
The purpose of our corporate centre is to improve efficiency and contribute value-added for the
operating units. It also develops functions related to financial and capital management.
In year-on-year terms, lower revenues from centralised management of the various risks (mainly interest
rate risk), offset by reduced costs and provisions.
It includes the negative impact of €417 million of the net non-recurring results, set out in page 101 of this
report.
Strategy and functions
Banco Santander subsidiaries’ model is complemented by a
corporate centre that has support and control units which carry out
functions for the Group in matters of risk, auditing, technology,
human resources, legal affairs, communication and marketing,
among others.
– Strategic management of the exposure to exchange rates on
equity and dynamic on the countervalue of the units’ results in
euros for the next 12 months. Net investments in equity are
currently covered by €21,680 million (mainly Brazil, UK, Chile,
Mexico and Poland) with different instruments (spot, forex
swaps and forwards).
The Corporate Centre contributes value to the Group in various
ways:
• Total management of capital and reserves:
• It makes the Group’s governance more solid, through frameworks
of control and global supervision, and taking strategic decisions.
• It makes the Group’s units more efficient, fostering the exchange
of best practices in management of costs and economies of scale.
This enables us to be among the most efficient in the sector.
• By sharing best commercial practices, launching global
commercial initiatives and driving digitalisation, the centre
contributes to the Group’s revenue growth.
It also develops functions related to financial management and
capital, as follows:
• Functions developed by Financial Management:
– Structural management of liquidity risk associated with funding
the Group’s recurring activity, stakes of a financial nature and
management of net liquidity related to the needs of some
business units.
This activity is carried out through diversifying the various
sources of funding (issues and others), always maintaining an
adequate profile (volumes, maturities and costs). The price at
which these operations are conducted with other units of the
Group is the market rate (euribor or swap) plus the premium
which, in concept of liquidity, the Group supports by
immobilising funds during the term of the operation.
– Interest rate risk is also actively managed in order to soften the
impact of interest rate changes on net interest income,
conducted via derivatives of high quality, high liquidity and low
consumption of capital.
– Capital assigned to each of the units. Lastly, and marginally, the
corporate centre reflects the stakes of a financial nature that
the Group makes under its policy of optimising investments.
Results
We reformulated the centre’s role in the Group, in order to improve
the transparency and visibility of both the centre’s accounts and the
Group’s, as well as the responsibility of the operating units. The
centre generated 22% of the Group’s profits (23% in 2015).
In year-on-year terms:
• Lower revenues due to reduced results from centralized
management of the different risks (mainly interest rate and
exchange rate risk).
• Costs were 18% lower, due to the restructuring carried out in the
second quarter and the continued streamlining of the corporation
begun in 2015.
• Other results and provisions recorded losses of €75 million,
compared to a loss of €507 million in 2015. These amounts
included provisions of different nature, as well as capital gains,
capital losses and impairment of financial assets. The figure
normalized in 2016, as in 2015 it was higher than average.
• The losses in 2016 were €1,439 million compared to losses of
€1,493 million in 2015. After including the impact of the net non
recurring positive and negative results of €417 million (€600
million negative in 2015), the total loss was €1,856 million, down
from one of €2,093 million in 2015.
ANNUAL REPORT 2016
151
4. Economic and financial review » Information by global business
RETAIL
BANKING
€6,297 M
Attributable
Profit
2016 HIGHLIGHTS
We continued to transform our commercial and retail banking model into a more Simple, Personal and
Fair model.
Focus on three lines: customer loyalty and satisfaction, digital transformation and operational
excellence.
The Group had 15.2 million loyal customers and 20.9 million digital customers at the end of 2016.
The magazine Euromoney recognised Santander as the Best Bank in the World for SMEs.
Profit before tax of €10,201 million and attributable profit of €6,297 million.
Commercial activity
The programme to transform commercial and retail banking is
structured around three principles:
1.- Customer loyalty and satisfaction
2.-Digital transformation of our channels, products and services
3.-Operational excellence of our processes.
The following measures were adopted in 2016, and summarise those
commented on in this annual report:
1.- In order to improve customer loyalty and satisfaction
continuously, the following measures were adopted in 2016, among
others:
Retail Banking
€ Million
Income statement
Net interest income
Net fee income
Gains (losses) on financial transactions
Other operating income*
Gross income
Operating expenses
Net operating income
Net loan-loss provisions
Other income
Profit before taxes
Tax on profit
Profit from continuing operations
Net profit from discontinued operations
Consolidated profit
Minority interests
Attributable profit to the Group
2016
29,090
8,745
664
557
39,055
(18,476)
20,580
(8,693)
(1,686)
10,201
(2,798)
7,402
—
7,402
1,105
6,297
2015
29,857
8,562
1,360
375
40,154
(18,675)
21,479
(9,247)
(1,751)
10,482
(2,626)
7,855
—
7,855
1,114
6,741
Variation
amount
(767)
183
(697)
182
(1,099)
199
(900)
554
65
(281)
(172)
(453)
—
(453)
(9)
(444)
%
(2.6)
2.1
(51.2)
48.5
(2.7)
(1.1)
(4.2)
(6.0)
(3.7)
(2.7)
6.6
(5.8)
—
(5.8)
(0.8)
(6.6)
% w/o FX
2.9
8.9
(49.3)
45.5
2.8
5.0
0.9
(2.2)
1.2
3.6
12.4
0.6
—
0.6
3.6
0.1
(*).- Including dividends, income from equity-accounted method and other operating income/expenses
152
ANNUAL REPORT 2016
Loyal customers
Thousand
Retail loyal customers
Thousand
SMEs & corporate loyal
customers. Thousand
Digital customers
Thousand
• The 1|2|3 strategy in Spain, Portugal and the United Kingdom
• The continuous evolution of plans for SMEs in all countries –
which continued the good pace of opening accounts.
• Consolidation of value propositions for individual customers in
Mexico such as Santander Plus and the alliance with Aeroméxico,
which has already attained more than 430,000 cards and the
Superpuntos programme in Chile that offers significant advantages
for customers.
• The pioneer Digital Suite platform launched in Mexico, which
integrates a fully digital offer of banking services and financial
education; the sina financial app that Germany offers its customers
to manage their savings and the investment centre launched by
Santander UK which enables customers to manage their
investments online.
• The launch of the Select Global Value offer, which complements the
local offer with non-financial services and makes available to
customers a homogeneous and exclusive service in all countries
where the Group operates.
Breakthrow in the United Kingdom, Firmowe Ewolucje in Poland,
Avançar in Brazil and Advance in Chile, Spain, Argentina and
Portugal, among others – with constant improvements such as the
Business Evolution platform in Poland, the factoring web for SMEs
and companies in Chile, and the Santander Trade Network global
proposition, a comprehensive service to help companies
internationalise. Santander UK was recognised as the Best
International Provider of Solutions in the Business Money Facts
prizes and as Best Trade Finance Provider in Mexico, Argentina,
Chile by the magazine Global Finance.
2.- In order to create a simpler bank for our customers, we continued
to foster the digital transformation and multi channels:
• Santander Mexico already has 1.3 million digital customers.
SuperMóvil enables them to access all services from any mobile
device and with the same password.
• In Brazil, more than 6 million customers already access our channels
through biometric identification. Of note was the launch of the new
commercial +negocios model for the consumer finance segment.
• In Spain, Santander Personal was launched as a specialised and
personalised attention channel, while in Poland we launched the
new online bank with a Customer Attention section that allows
personal attention.
• Various payment solutions were launched such as, in Spain, the
Wallet app that allows payments to be made from a mobile phone
in any establishment, the contactless wristband for payments, the
Apple Pay service and Bizum which allows direct P2P payments; or
in Brazil the Santander Way app which provides card users with
speed, control and security.
ANNUAL REPORT 2016
153
efficient and omnichannel, developed with Agile methodology, and
also on improving the quality of service. These efforts are reflected
in our improved position in the customer satisfaction rankings where
eight of the Group’s nine core countries are already among the Top 3
in each market.
These constant advances earned Santander many recognitions, such
as Bank of the Year in the Americas, Portugal and Argentina by The
Banker magazine; Best Bank in the World for SMEs, and Best Retail
Bank in Argentina, Portugal, Poland, Puerto Rico and Chile by
Euromoney. Santander Private Banking was also recognized by
Euromoney as Best Bank in Asset Management in Latin America.
Results
Profit before tax was a little lower at €10,201 million because of the
exchange rate impact (+4% excluding it). The sharp rise in the tax
charge left attributable profit at €6,297 million, virtually unchanged
in constant euros.
The P&L account was characterised by the spur of net interest
income, good performance of fee income in almost all units,
discipline in costs and lower loan-loss provisions.
Activity performance
% var. 2016 / 2015 (w/o FX)
Attributable profit
Constant € million
4. Economic and financial review » Information by global business
• The magazine Global Finance again chose Santander Río as the
best digital bank in Argentina. It was also recognized as the best
bank for SMS and having the best designed website in Latin
America.
• Progress was also made in transforming branches under the Smart
Red programme. Spain, Brazil, Mexico, the United Kingdom and
Argentina have already inaugurated new branch models, Portugal
already has specialised spaces for companies and Chile
inaugurated the first WorkCafé, a novel branch format where
customers can take advantage of their visits to use the co-working
zone. New ATMs, which enable customers to carry out basic
operations simply and agilely, also continued to be installed at a
good pace.
• The NEO CRMs were consolidated as the reference CRM tool in
the market, with new improvements such as Santander Río’s
transactional CRM+Che, the new multi channel CRM in Poland’s
contact centre, the NEO Jupiter that is already deployed in all offices
in Mexico and the NEO CRM recently launched in the United
Kingdom which was developed in record time, with a dedicated multi
discipline team and working with Agile methodology.
3.- The satisfaction and experience of our customers is one of our
priorities, which is why we continue to work on improving
operational excellence, with new processes that are simpler, more
STRATEGY IN 2017
Continuous improvement in our financial solutions in order to increase customer satisfaction.
Keep on driving the integration of channels in order to offer our customers a homogenous and personal experience.
Continue to promote the digital transformation in order to make available to customers simple products, services and solutions
that distinguish us for our operational excellence.
Progress the offer of differentiated value that gives us global presence.
Consolidate our culture of service: Simple, Personal and Fair.
154
ANNUAL REPORT 2016
GLOBAL
CORPORATE
BANKING
€2,089 M
Attributable
Profit
2016 HIGHLIGHTS
Reference positions in export finance, corporate loans, project finance and issuance, among others, in
Europe and Latin America.
Attributable profit of €2,089 million, 30% more in constant euros.
Positive evolution in revenues, maintaining an efficiency in costs that leverages the strengths of our
model.
Strategy
The main lines of action were:
• Progress in changing our model toward a business lighter in
capital, with the creation of an area solely dedicated to rotation of
assets and optimisation of capital (ARCO) in order to strengthen
the division’s distribution capacity.
• Creation of an innovation area to drive new solutions and meet the
challenge of new non-banking players. We are involved in various
blockchain technology projects to position us in the financial
sector’s transformations that this technology could introduce
(Digital Assets Holding, Utility Settlement Coin, Ripple Payments,
etc). In GTB receivables, big-data is used for risk scoring of
companies based on information sources available in the market.
• Strengthening our leadership position in Latin America, where we
are the leader in export finance, debt capital markets (DCM),
equity capital markets (ECM), mergers and acquisitions (M&A) and
project finance. We participated in the largest repo in Argentina’s
history and in the bond issue of this country’s central bank.
• In the region, we are number one in project finance advisory
operations and number two in project bonds.
• Progress in facilitating the international connectivity of retail and
commercial banking customers. The Flame platform for FX,
designed and installed in the United Kingdom, was installed in
Mexico and in 2017 will be so in the United States and Chile.
Various measures were adopted to internalise the flows in
Santander’s countries, we defined solutions so that commercial
corridors capture flows of export letters of credit and we created a
Global Corporate Banking
€ Million
Income statement
Net interest income
Net fee income
Gains (losses) on financial transactions
Other operating income*
Gross income
Operating expenses
Net operating income
Net loan-loss provisions
Other income
Profit before taxes
Tax on profit
Profit from continuing operations
Net profit from discontinued operations
Consolidated profit
Minority interests
Attributable profit to the Group
2016
2,781
1,465
1,293
286
5,825
(1,951)
3,874
(660)
(77)
3,137
(876)
2,261
—
2,261
172
2,089
2015
3,001
1,483
724
268
5,476
(2,114)
3,362
(681)
(93)
2,589
(732)
1,857
—
1,857
119
1,738
Variation
amount
(220)
(18)
569
18
349
163
512
21
16
549
(144)
405
—
405
53
352
%
(7.3)
(1.2)
78.6
6.8
6.4
(7.7)
15.2
(3.1)
(16.8)
21.2
19.6
21.8
—
21.8
44.9
20.2
% w/o FX
(0.5)
4.6
96.8
5.0
13.7
(2.2)
23.8
1.1
(15.9)
31.5
31.1
31.7
—
31.7
55.9
30.0
(*).- Including dividends, income from equity-accounted method and other operating income/expenses
ANNUAL REPORT 2016
155
4. Economic and financial review » Information by global business
global tool (ORBE) for facilitating information to the commercial
network on countries and banks with which the Group can operate.
Activity
SGCB used the strengths of its model to attain good results and
maintain levels of cost efficiency leaders in the industry, thanks to its
customer-centric model that combines global and local capacities
with active management of risk, capital and liquidity.
Notable actions included:
• In trade finance, export finance measures that put the Group
among the main players in this business (5th in international
rankings).
• Of note in trade & working capital solutions, was the increased
demand for working capital solutions. Latin America was the main
engine of growth in receivables finance as well as in confirming.
Brazil registered double-digit growth.
• International financial institutions increased the Group’s scope to
operate with other international banks in a more agile way, be
more efficient from a risk standpoint and adapt to the new
regulatory requirements. The Group stepped up its capacity to
accompany export customers in those countries and banks where
they do business.
• Cash management, recorded double-digit growth in revenues from
transactions and from funds. The investment effort was
maintained in order to improve the global and local platforms and
specific commercial plans were implemented to consolidate Banco
Santander’s leadership in its 10 core markets.
• In syndicated corporate loans, we maintained our reference
position in Europe and Latin America, with participations in
significant transactions, such as: the loan granted to AT&T to
purchase Time Warner and to Henkel for acquiring Sun Products in
the United States; the refinancing by Acciona; the syndicated loan
to Danone to buy WhiteWave Foods and support for Shire in the
bridging loan for the merger with Baxalta.
• Noteworthy in corporate finance, within equity capital markets
was our participation in the listing of Innogy, the renewable energy
subsidiary of the RWE Group, which was the largest IPO (€4,600
million) in Europe of the last five years.
• In structured financing, we continued to enjoy a clear position of
leadership in both Latin America and Spain. Notable operations
included the purchase of 20% of Gas Natural by Global
Infrastructure Partners and the financial advice and finance
provided to the consortium comprising Vinci, ADP and Astaldi to
build the new international terminal in Chile.
• In debt capital markets Santander led the Latin American ranking
as it took part in the region’s main operations. Also noteworthy
were the US dollar operations of Brazilian, Argentinian and Chilean
issuers. Santander also participated in AB Inbev’s issues. In Europe,
Santander remained active in the market, supporting both
financial issuers (Commerzbank, Unicredit, CFF) as well as
corporate ones (BP, Cellnex, EDP, Ferrovial, Iberdrola).
• As regards markets’ activity, good results with positive evolution
of income from sales business, especially in the corporate segment
with strong growth in the United Kingdom, Brazil and Mexico.
Greater contribution from management of books, notably Spain,
United Kingdom, Brazil, Argentina and Mexico.
Gross income breakdown
Constant € million
Attributable profit
Constant € million
Customers
+12%*
(*) In euros: total revenues: +6%; customers: +6%
156
ANNUAL REPORT 2016
Results (in constant euros)
GCB’s results were fuelled by the strength and diversification of
customer revenues. Profit was 30% higher over 2015 at €2,089 million.
containment of spreads and low interest rates, Financing Solutions
and Advisory 1%, reflecting the soundness of the various
businesses, and Global Markets 21% (good performance in Europe
and particularly the Americas).
• The area generated 13% of revenues and 25% of the attributable
profit of the Group’s operating areas.
• Gross income grew 14%, with growth in all products. Global
Transaction Banking increased 13% against a backdrop of
• Operating expenses were 2% lower thanks to the efficiency plans
implemented, particularly in Spain and the United States and
provisions increased 1%.
Ranking in 2016
Source Área Award / Ranking
Global Finance GTB
Cash Management Best Bank in the Americas
EFMA GTB Cash Management Global Distribution & Marketing Innovation awards for Financial Services
TFR GTB Best Trade Bank in Spain
TFAnalytics GTB Best Trade Bank in LATAM
TFR GTB TFR Deals of the Year 2016 -ECA highly commended : Enel Green Power US$111
IFR
FS&A Latin America Bond of the Year: Argentina’s US$16.5bn four-tranche bond
Global Finance Magazine Global Markets World's Best FX Providers 2016 in Portugal
LatinFinance Global Markets Sovereign Issuer and Sovereign Bond of the Year. The Republic of Argentina bond
LatinFinance Global Markets Corporate Liability Management of the Year : Petrobras liability management
LatinFinance Global Markets Bank of the Year Chile
PFI
PFI
PFI
FS&A Americas Oil & Gas Deal of the Year: FERMACA
FS&A Latin American Power Deal of the Year: Transmisora Eléctrica del Norte
FS&A Power Deal of the Year in Europe: MGT Power deal
Global Capital
FS&A
2016 Corporate Bond Deals of the Year: Corporate Deal of the Year by a European Issuer - Anheuser-Busch InBev
IJ GLOBAL
IJ GLOBAL
PEI
FS&A Latin America Transport Deal of the Year: Santiago Airport PPP Expansion
FS&A Latin America Transmission Deal of the Year: TEN Transmission Project
FS&A Infrastructure Investor annual awards : Latin America Bank of the year
Global Finance
FS&A Best Debt Bank Latam
Latin Finance Corporate Finance Deals of the Year: Equity Follow-On of the Year: Telefonica Brasil BRL16.1 bn | May 2015
Global Capital Corporate Finance Deals of the Year: Equity Follow-On of the Year: Telefonica Brasil BRL16.1 bn | May 2015
LatinFinance Corporate Finance Cross-Border M&A Deal of the Year: State Power Investment Corp/Pacific Hydro
(GTB) Global Transaction Banking: includes the business of cash management, trade finance, basic financing and custody.
(FS&A) Financing Solutions & Advisory : includes the units of origination and distribution of corporate loans and structured financings, bond and securitisation origination
teams, corporate finance units (mergers and acquisitions, primary markets of equities, investment solutions for corporate clients via derivatives), and asset & based
finance.
(GM) Global Markets : includes the sale and distribution of fixed income and equity derivatives, interest rates and inflation; the trading and hedging of exchange rates, and
short-term money markets for the Group’s wholesale and retail clients; management of books associated with distribution; and brokerage of equities, and derivatives
for investment and hedging solutions.
STRATEGY IN 2017
Focus on efficiency in capital, improving the capacities of origination and distribution, developing high-value added products and
low consumption of capital.
Continue the integration with the commercial and retail banking network and the offer of products, focusing on the least mature
economies.
Launch in supply chain finance of a new model based on purchasing orders, as well as a global programme to buy receivables that
will enable the offer of hedged products and customers to be increased.
ANNUAL REPORT 2016
157
5 Risk management
report
160 Executive summary
164 A. Pillars of the risk function
165 B. Risk control and management
model - Advanced Risk Management
166 B1. Risk map
166 B2. Risk governance
169 B3. Management processes and tools
175 B4. Risk culture - Risk Pro
177 C. Background and upcoming
challenges
183 D. Risk profile
183 D1. Credit risk
215 D2. Trading market risk and structural risks
235 D3. Liquidity risk and funding
243 D4. O perational risk
254 D5. Compliance and conduct risk
263 D6. M odel risk
265 D7. Strategic risk
266 D8. Capital risk
275 Appendix: EDTF transparency
5. Risk management report » Executive summary
Executive summary
Pillars of the risk function
pages 164 to 164
Through its forward-looking risk management, Grupo Santander ensures it maintains robust control
whilst continuing to build its future.
A risk culture integrated throughout the organisation,
comprising attitudes, values, skills and guidelines for
action to cope with all risks.
Business strategy determined by a comprehensive
review of risk appetite.
Forward-looking vision of all risk types.
Independence of risk function from business functions.
Best in class for processes and infrastructure.
Risks managed by units which generate them, using advanced
models and tools.
Continuing improvement in credit risk profile
pages 183 to 214
Customer credit risk by country
%
Other 20%
UK 30%
Portugal 4%
Chile 5%
Brazil 10%
Spain 20%
NPL ratio
%
4,36
Cost of credit1
%
3,93
1,25
1,18
US 11%
2015
2016
2015
2016
Over 80% of risk relates to retail banking. Significant
geographic and sector diversification.
Continuing improvement in main credit quality
indicators, which at December 2016 stood at:
• Group NPL ratio falls further to 3.93%, down 43 bp
on the previous year, with noteworthy reductions in
Spain, Poland, SCF and Brazil.
• The coverage ratio remains at around 74%.
• Annual provisions are down to EUR 9,518 million, with the
biggest reduction in Spain.
• Cost of credit drops to 1.18% (-7 bp), in line with the
improvement in credit profile.
Trading market risk and structural risks
pages 215 to 234
Due to customer service
operations and geographical
diversification, average VaR in the
SGCB trading business remains at
low levels.
An appropriate balance sheet
structure ensures that the impact
of changes in interest rates on net
interest income and equity value
are contained.
Coverage levels for the core capital
ratio stand at around 100% for
changes in exchange rates.
VaR 2014-2016: change over time
Million euros. VaR at a 99% confidence interval over a one day horizon.
35
30
25
20
15
10
5
— VaR
— 15 day moving average
— VaR, 3 year average
MAX (32.9)
MIN (8.2)
4
1
0
2
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a
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4
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D
1. Cost of credit = loan-loss provisions twelve months / average lending.
160
2016 ANNUAL REPORT
Liquidity risk and funding
Short-term liquidity coverage ratio (LCR)
%
146
146
120
Dec 14
Dec 15
Dec 16
pages 235 to 242
Santander has a strong liquidity position, based on its
structure of autonomous sudsidiaries and retail business
model with strong customer deposits.
As of December 2016, the Group’s LCR ratio stood at
146%, comfortably exceeding the regulatory requirement.
The liquidity reserve amounted to EUR 265,913 million.
The loan-to-deposit ratio remains at very comfortable
levels (114%).
Market environment similar to 2015 in terms of costs,
although because of the ECB’s and BoE’s monetary
policies, there has been less use of medium and long-term
wholesale funding: 23 issuing units in 16 countries and
13 currencies.
Non-financial risks
Operational risk
• Transformation project for the advanced
measurement approach to risk.
• Investing in measures against cyber-risk, data
security and fraud.
• Roll-out of new risk self-assessment process and
controls throughout the organisation.
pages 243 to 262
Compliance and conduct risk
• Increased consumer protection not only driven by
regulatory requirements but also reinforced with our
internal policies aligned to SPF culture.
• Development of reputational risk model and elements
used to mitigate it.
• New challenges associated with digitalisation.
Regulatory capital
Evolution CET1 (%FL)
%
+50 bp
10.55
10.05
2015
2016
pages 266 to 274
CET1 is at a level of 10.55%, in line with the outlook for
organic growth. The Group has a higher ratio than the
minimum prudential capital requirement set by the ECB
for 2017.
In the EBA stress test:
• Santander demonstrated great resilience, due to its
retail and commercial banking model and geographic
diversification.
• In the adverse scenario, Santander is the bank wich
destroys the least capital among its peers.
2016 ANNUAL REPORT
161
5. Risk management report » Navigation map
This management report provides extensive information on the risks
faced by the Group, the manner in which it manages and controls
these and the way that they affect the Group’s activity and results.
the Group’s activity and results. The report also provides details of
the actions taken by the entity to minimise the occurrence of such
risks and mitigate their severity.
Following best practice in the market, the following navigation map
is a guide to the main issues addressed in this risk management
report through the various documents the Group publishes: the
annual report, the audit report, the annual financial statements
and the Prudential Relevance Report (PRR or Pillar III). To further
foster transparency, the PRR also includes a glossary of the basic risk
terminology used in this section and the PRR itself.
The appendix to the risk management report includes a table
indicating the location of the recommendations of the EDTF
(Enhanced Disclosure Task Force, fostered by the Financial Stability
Board) in the information published by Grupo Santander.
162
2016 ANNUAL REPORT
Map of Grupo Santander documents with information on risk management and control
Block
Points
Pillars of the
risk function
Pillars of the risk function
Annual
report
Pag. 164
Audit report
and annual
accounts
Note 54.a and
other notes
and related
information
PRR
(Pilar III)
Section 3*
Risk control and
management model
Management processes and tools
Risk map
Risk governance
Lines of defence
Risk committees structure
Structural organisation of the risk function
The Group’s relationship with subsidiaries in risk management
Pag. 166
Pag. 166
Pag. 166
Pag. 167
Pag. 167
Pag. 168
Pag. 169
Risk appetite and structure of limits
Pag. 169
Risk Identification Assessment (RIA)
Pag. 172
Analysis of scenarios
Pag. 172
Recovery and resolution plans and the Special situations management framework Pag. 173
Risk Data Aggregation and Risk Reporting Framework (RDA & RRF)
Pag. 175
Pag. 175
Risk culture
Background and
upcoming challenges
Background and upcoming challenges
Introduction to credit risk treatment
Key figures and change over time
Details of main geographies: United Kingdom, Spain, United States, Brazil
Other credit risk optics (credit risk from activities in financial markets,
concentration risk, country risk, sovereign risk and environmental risk)
Credit risk cycle (pre-sale, sale and post-sale)
Study of risk and credit rating process; planning and establishment of limits
Decisions on operations (credit risk mitigation techniques)
Monitoring, measurement and control
Recovery management
Activities subject to market risk and types of market risk
Trading market risk
Key figures and change over time
Methodologies
Systems for controlling limits
Structural balance sheet risks
Key figures and change over time
Methodologies
Systems for controlling limits
Pension and actuarial risk
Liquidity management in Grupo Santander
Funding strategy and evolution of liquidity in 2016
Funding outlook for 2017
Definition and objectives
Operational risk management and control model (management cycle, identification
model, risk measurement and assessment, model roll-out, reporting system)
Evolution of the main metrics. Mitigation measures. Business continuity plan
Other aspects of operational risk control and monitoring
Scope, aim, definitions and objective
Compliance and conduct risk control and oversight
Governance and the organisational model
Regulatory compliance
Product governance and consumer protection
Anti-money laundering and terrorist financing
Reputational risk
Risk assessment model of compliance and risk appetite
Transversal corporate projects
Model risk
Strategic risk
Regulatory framework
Regulatory capital
Economic capital
Capital planning and stress tests
Credit risk
Trading market risk
and structural risks
Liquidity risk
and funding
Operational risk
Compliance and
conduct risk
Model risk
Strategic risk
Capital risk
Appendix: EDTF
Transparency
EDTF recommendations table
* Sections with cross-references to this chapter of the annual risk report
Pag. 177
Pag. 183
Pag. 184
Pag. 192
Pag. 202
Pag. 209
Pag. 210
Pag. 211
Pag. 213
Pag. 214
Pag. 215
Pag. 217
Pag. 217
Pag. 226
Pag. 228
Pag. 229
Pag. 229
Pag. 232
Pag. 233
Pag. 233
Pag. 235
Pag. 236
Pag. 242
Pag. 243
Pag. 243
Pag. 248
Pag. 252
Pag. 254
Pag. 255
Pag. 255
Pag. 257
Pag. 259
Pag. 260
Pag. 261
Pag. 261
Pag. 261
Pag. 263
Pag. 265
Pag. 268
Pag. 268
Pag. 271
Pag. 273
Pag. 275
Note 54.b and
other notes
and related
information
Section 3*
Section 1
Note 54.c and
other notes
and related
information
Section 3*
Note 54.d and
other notes
and related
information
Section 5
Note 54.e and
other notes
and related
information
Note 54.f and
other notes
and related
information
Section 7.1*
Section 6*
Note 54.g and
other notes
and related
information
Section 7.2*
Note 54.h
Note 54.i
Note 54.j and
other notes
and related
information
Section 3.7.1
Section 3*
Section 2
Section 3
2016 ANNUAL REPORT
163
5. Risk management report » Pillars of the risk function
EXECUTIVE SUMMARY
A. PILLARS OF THE RISK FUNCTION
B. RISK CONTROL AND MANAGEMENT MODEL - Advanced Risk Management
C. BACKGROUND AND UPCOMING CHALLENGES
D. RISK PROFILE
APPENDIX: EDTF TRANSPARENCY
A. Pillars of the risk function
3. The forward-looking approach for all risk types must be part of
the risk identification, assessment and management processes.
4. The independence of the risk function encompasses all
risks and provides an appropriate separation between the risk
generating units and units responsible for controlling these risks.
This means that the risk function has sufficient authority and direct
access to the management and governance bodies responsible for
establishing and overseeing risk strategy and policies.
5. Risk management has to have the best processes and
infrastructures. Grupo Santander aims to set a benchmark model in
developing risk management support infrastructure and processes.
6. A risk culture integrated throughout the organisation,
composed of a series of attitudes, values, skills and guidelines
for action to cope with all risks. Grupo Santander believes that
advanced risk management cannot be achieved without a strong and
steadfast risk culture, which is found in each and every one of its
activities.
Seeking to achieve excellence in risk management has been a priority
for Grupo Santander throughout its 160 year history. In 2016, it
continued to evolve to stay one step ahead of economic, social and
regulatory changes affecting its activities.
Through its forward-looking risk management, Grupo Santander
ensures it maintains robust control whilst continuing to build its
future. Risk management is one of the key functions in ensuring that
the Group remains a robust, safe and sustainable bank, trusted by its
employees, customers, shareholders and society as a whole.
The risk function is based on the following pillars, which are
aligned with Grupo Santander’s strategy and business model, and
incorporate the recommendations of supervisory bodies, regulators
and best practices in the market:
1. Business strategy is defined by risk appetite. The board of Banco
Santander determines the quantity and type of risk it considers
reasonable to assume in the execution of its business strategy and
sets targets that are objective, comparable and consistent with its
risk appetite for each key activity.
2. All risks have to be managed by the units which generate them,
using advanced approaches and tools that are integrated into the
businesses. Grupo Santander fosters advanced risk management
using models and innovative metrics, and also a control, reporting
and escalation framework in order to pinpoint and manage risks from
different standpoints.
164
2016 ANNUAL REPORT
EXECUTIVE SUMMARY
A. PILLARS OF THE RISK FUNCTION
B. RISK CONTROL AND MANAGEMENT MODEL - Advanced Risk Management
1. Risk map
2. Risk governance
3. Management processes and tools
4. Risk culture - Risk Pro
C. BACKGROUND AND UPCOMING CHALLENGES
D. RISK PROFILE
APPENDIX: EDTF TRANSPARENCY
B. Risk control and management
model – Advanced Risk Management
The Group’s risk management model establishes a control
environment which ensures the risk profile is maintained within the
levels set in the risk appetite and other limits.
The independence of the risks function and the control environment
have been enhanced through the risks governance model, ensuring
separation of control and risk decisions at all levels.
Progress has also been made in all management models to offset all
of the risks faced by the bank in its day-to-day operations:
• Significant boost to operational risk management. The foundations
of the operational risk framework have been implemented in all
countries.
• Progress in management of model risk. The unit set up to control
model risk has been beefed up. This unit is independent of the
model-development function and users of the model, ensuring a
robust and efficient double layer of control.
• Improved credit risk management. Strategic commercial plans
(SCPs) have been drawn up for the main lending portfolios,
providing an important tool for day-to-day management of credit
risk. Progress has also been made with the management of the end
to-end credit risk lifecycle, in line with business models.
• Optimisation of the Group’s capacity to anticipate and identify
risks, by improving scenario analysis and stress testing in all
countries.
The definition of a new special situations management framework is
also being developed jointly with the Finance Division, to enhance
the measures at the Bank’s disposal to respond to serious and
unexpected situations of whatever type.
The main elements that ensure effective control are:
1. Robust governance, with a clear committee structure that
separates decision making, on one side, from risk control, on the
other, all encompassed and developed within a solid risk culture.
2. A set of key, inter-related processes in the planning of the Group’s
strategy (budget processes, risk appetite, regular assessment of
liquidity and capital adequacy, and recovery and resolution plans).
3. Aggregated supervision and consolidation of all risks.
4. Regulatory and supervisory requirements are incorporated into
day-to-day risk management.
5. Independent assessment by internal audit.
6. Decision making based on appropriate management of
information and technological infrastructure.
To ensure progress towards advanced risk management, the Group
launched an Advanced Risk Management (ARM) programme in
2014. This provides the basis for the best model for comprehensive
risk management in the industry. This programme was completed
in 2016. The advanced risk management model is now a reality in
Grupo Santander.
The advanced risk management model will enable Grupo Santander
to do more business, and do it better, within a robust control
framework, enhancing management capacity, developing talent and
providing greater autonomy for Group units.
Continuing this work, in 2016 we continued to evolve towards a more
consistent and granular version of the risk appetite.
2016 ANNUAL REPORT
165
5. Risk management report » Risk control and management model – Advanced Risk Management
B.1. Risk map
Identifying and evaluating all risks is a corner stone for controlling
and managing risks. The risks map covers the main risk categories
in which Grupo Santander has its most significant current and/or
potential exposures, facilitating their identification.
The first level includes the following risks:
Non-financial risks
• Operational risk: risk of losses resulting from inadequate or failed
processes, people and internal systems, or from external events.
• Conduct risk: risk caused by inadequate practices in the Bank’s
relationships with its customers, the treatment and products
offered and their adequacy for each specific customer.
Financial
risks
-
Non financial
risks
Transversal
Risks
• Compliance and legal risk: risk owing to the breach of the legal
framework, norms or regulators’ and supervisors’ requirements.
Transversal risks
• Model risk: consists of losses arising from decisions mainly based
on results of models, due to errors in the design, application or
usage of such models.
• Reputational risk: risk of damages to the way the bank is
perceived by public opinion, its customers, investors or any other
interested party.
• Strategic risk: risk associated with strategic decisions and with
changes in the entity’s general conditions, which have an important
impact on its business model in both the medium and long term.
All risks should be referenced to the basic risk categories established
in the Risk Map, in order to organise their management, control and
related information.
Operational
risk
Conduct risk
Compliance
and legal risk
Model
risk
Reputational
risk
Strategic
risk
Credit
risk
Market
risk
Liquidity
risk
Structural and
capital risks
Financial risks
• Credit risk: risk of losses from non-compliance with contractual
obligations agreed in financial transactions.
• Market risk: resulting from the possibility of changes in market
factors affecting the value of trading book positions.
• Liquidity risk: risk of non-compliance with payment obligations in
time or at an excessive cost.
• Structural and capital risks: risk occasioned in the management
of the various balance sheet items, including those concerning
sufficient equity levels and those resulting from insurance and
pension activities.
B.2. Risk governance
The governance of the risk function should safeguard adequate and
efficient decision making and effective risk control, and ensure that
they are managed in accordance with the risk appetite defined by the
Group’s senior management and its units, as applicable.
• Bolstering risk control committees.
• Maintaining a simple committee structure.
For this purpose, the following principles are established:
» B.2.1. Lines of defence
• Segregation between risk decisions and control.
• Stepping up the responsibility of risk generating functions in the
decision making process.
• Ensuring that all risks decisions have a formal approval process.
• Ensuring an aggregate overview of all risk types measured against
the Group´s aggregate risk appetite.
Banco Santander’s management and control model is based on three
lines of defence.
The business functions or activities that create or generate
exposure to a risk are the first line of defence. The acceptance or
generation of risk in the first line of defence should fit with the risk
appetite and limits defined. In order to tend to this function, the
first line of defence must have the resources to identify, measure,
manage and report the risks assumed.
166
2016 ANNUAL REPORT
The second line of defence consists of the risk control and
oversight function and the compliance function. This line vouches
for effective control of risks and ensures they are managed in
accordance with the defined risk appetite.
Internal audit is the third line of defence. As the last layer of
control in the Group, it regularly assesses policies, methods and
procedures to ensure they are adequate and are being implemented
effectively.
The risk control function, the compliance function and the internal
audit function are sufficiently separated and independent from each
other and from the other functions that they control or supervise for
the performance of their duties, and they have access to the board of
directors and/or its committees through the heads thereof.
financing, and, in general, the rules of governance and the
Company’s compliance programme, and make proposals as
necessary for improvements. In particular, it is the committee’s
responsibility to receive information and, where necessary, issue
reports on disciplinary measures for senior management.
• Supervise the Group’s policy and rules of governance and
compliance and, in particular, adopt the actions and measures
resulting from the reports or the inspection measures of
administrative supervision and control authorities.
• Monitor and assess proposed regulations and regulatory
developments that result from their implementation and the
possible consequences for the Group.
» B.2.2. Risk committees structure
Ultimately, the board of directors is responsible for risk control and
management, and, in particular, for setting the risk appetite for the
Group, and it can delegate its powers to committees. The board uses
the Risk Supervision, Regulation and Compliance Committee (Board
Risk Commitee, BRC), as an independent risk control and oversight
committee. The Executive Committee of the Group also pays special
attention to managing the Group’s risks.
The following bodies form the highest level of risk governance:
Bodies for independent control
Board Risk Committee (BRC):
The purpose of this committee is to assist the board in the sphere
of risk supervision and control, define the Group’s risk policies,
relations with the supervisory authorities and matters of regulation
and compliance, sustainability and corporate governance.
It is made up of external non-executive directors (a majority of
whom are independent) and is chaired by an independent director.
The functions of the Board Risk Committee are:
• Support and advise the board in defining and assessing the risk
policies that affect the Group and in determining the risk appetite
and risk strategy.
• Provide assistance to the board for overseeing implementation of
the risk strategy and its alignment with strategic commercial plans.
• Systematically review the exposures with the main customers,
economic sectors, geographic areas and types of risk.
• Understand and assess management tools, ideas for improvement,
progress with projects and any other relevant activity relating
to risk control over the course of time, including the internal risk
model policy and its internal validation.
• Support and advise the board as regards supervisors and regulators
in the various countries where the Group operates.
• Oversee compliance with the General Code of Conduct, manuals
and procedures for money laundering and combating terrorism
Risk Control Committee (RCC):
This collegiate body is responsible for the effective control of
risks, ensuring they are managed in accordance with the level of
risk appetite approved by the board, permanently adopting an
all-inclusive overview of all the risks included in the general risk
framework. This duty implies identifying and tracking both current
and strategic risks, and gauging their impact on the Group’s risk
profile.
This committee is chaired by the Group Chief Risk Officer (GCRO)
and is made up of members of senior management. The risk
function, which chairs the committee, and the compliance, financial
accounting and management control and financial management
functions are all represented. The CROs of local entities take part in
committee meetings on a regular basis to report on the risk profile of
the entities and other tasks.
The Risk Control Committee reports to the Board Risk Committee
and assists it in its function of supporting the board.
Decision making bodies
Executive Risk Committee (ERC):
This collegiate body is responsible for risk management, due to the
powers assigned to it by the board of directors, and, within its field
of action and decision making, it addresses all matters relating to
risks.
It takes part in risk decisions at the highest level, ensuring that risk
decisions are within the limits set out in the Group’s risk appetite. It
reports on its activity to the board or its committees whenever it is
required to do so.
This committee is chaired by an executive vice chairman of the
board, and includes the chief executive officer, executive directors,
and other directors of the entity. The risk function, financial function
and compliance function, inter alia, are represented. The GCRO has a
right to veto the decisions taken by this committee.
» B.2.3. Structural organisation
of the risk function
The Group Chief Risk Officer (GCRO) is responsible for the risk
function and reports to the Bank’s executive vice chairman, who is a
member of the board of directors and chairman of the executive risk
committee.
The GCRO advises and challenges the executive line and also reports
independently in the Risk, Regulatory and Compliance Committee
and to the board.
2016 ANNUAL REPORT
167
5. Risk management report » Risk control and management model – Advanced Risk Management
In 2016, the GCRO took a leading role in driving forward the
consolidation of advanced risk management, based on a holistic
and forward-looking approach to risks, intensive use of models,
and a robust control environment and risk culture in the Group,
whilst ensuring compliance with the requirements of regulators and
supervisors.
The risk management and control model is structured on the
following pillars:
• Coordination of the relationship between the local units and
the Corporation, assessing the effective deployment of the risk
management and control model in each unit, and ensuring these
are aligned to achieve strategic risk targets.
• Enterprise Risk Management (ERM) provides consolidated
oversight of all risks to senior management and the Group’s
governance bodies, and the development of the risk appetite and
the risk identification and assessment exercise.
• Control of financial, non-financial and transversal risks (see risk
map in section B.1 Risk map), verifying that risk management
and exposure are as set by senior management, by risk type. The
control environment for non-financial risks has been enhanced,
with measures implemented to beef up control of operational
risk, including strengthening of the cyber-risk function, which is
taking on increasing importance against the backdrop of digital
transformation.
• Transversal development of internal regulations, methodologies,
scenario analyses, stress tests and data infrastructure, and robust
risk governance.
» B.2.4. The Group’s relationship with
subsidiaries in risk management
Regarding the alignment of units with the corporation
The management and control model shares, in all the Group’s units,
basic principles via corporate frameworks. These frameworks are
established by the Group’s board of directors, and the local units
adhere to them through their respective boards of directors, shaping
the relations between the subsidiaries and the Group, including the
role played by the latter in taking important decisions by validating
them.
Over and above these principles and basics, each unit adapts its
risk management to its local reality, in accordance with corporate
frameworks and reference documents provided by the Corporation,
so creating a recognisable management model for common risks in
Grupo Santander.
One of the strengths of this model is the adoption of the best
practices developed in each of the units and markets in which the
Group operates. The Risk division act as centralisers and conveyors
of these practices.
Furthermore, the Group-Subsidiary Governance Model and good
governance practices provide for regular interaction and functional
reporting by each local CRO to the GCRO. They also stipulate that
the Group must take part in the process of appointing, setting
targets for, and assessment and remuneration of local CROs, in order
to ensure risks are adequately managed in the Group.
Regarding the structure of committees
The Group-Subsidiaries Governance Model and good governance
practices for subsidiaries recommends that each subsidiary should
have bylaw-mandated risk committees and other executive risk
committees, in line with best corporate governance practices,
consistently with those already in place in the Group.
The governance bodies of subsidiary entities are structured in
accordance with local regulatory and legal requirements and the
dimension and complexity of each subsidiary, being consistent
with those of the parent company, as established in the internal
governance framework, thereby facilitating communication,
reporting and effective control.
The administration bodies of the subsidiaries, in accordance with
the internal governance framework established in the Group, define
their own models for risk powers (quantitative and qualitative).
These local models for assigning powers must follow the principles
contained in the reference models and frameworks developed at the
corporate level.
Given its capacity for comprehensive (enterprise wide) and
aggregated oversight of all risks, the Corporation exercises a
validation and questioning role with regard to the operations and
management policies of the subsidiaries, insofar as they affect the
Group’s risk profile.
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2016 ANNUAL REPORT
B.3. Management processes and tools
Risk appetite
Risk identification and
Assessment (RIA)
Scenario analysis
Recovery and
resolution plans
Risk Data Aggregation
& Risk Reporting
Framework (RDA/RRF)
• Improvement
• More robust and systematic
• Make strategic
• Adaptation
• Compliance with the
of metrics with
greater granularity
and inclusion of
additional metrics.
• New corporate
appetite
framework
reinforcing
integration into
management.
risk profile assessment.
• Approach based on:
- Risk performance.
- Assessment of the control
environment.
- Identification of top risks.
planning more robust
by challenging the
model.
• Draw up
improvement plans
for processes and
procedures backed
by self-assessment
exercises.
* Basel Committee on Banking Supervision.
to new
international
guidelines.
• New Special
situations
management
framework.
principles set down in
BCBS* guidelines.
• Structural and
operational
improvements to
enhance reporting of all
risks at all level.
» B.3.1. Risk appetite and structure of limits
Santander defines risk appetite as the amount and type of risks
considered reasonable to assume for implementing its business
strategy, so that the Group can maintain its ordinary activity in the
event of unexpected circumstances. Severe scenarios are taken into
account that could have a negative impact on the levels of capital,
liquidity, profitability and/or the share price.
The board is responsible for annually setting and updating the risk
appetite, monitoring the Bank’s risk profile and ensuring consistency
between both of them.
The risk appetite is set for the whole of the Group as well as for
each of the main business units in accordance with a corporate
methodology adapted to the circumstances of each unit/market.
At the local level, the boards of the subsidiaries are responsible for
approving the respective risk appetite proposals once they have
been validated by the Group.
The whole organisation shares the same corporate risk appetite
framework. This sets out common requirements for processes,
metrics, governance bodies, controls and corporate standards for
integration into management, cascading down in an effective and
traceable way to all management policies and limits.
Work continued in 2016 to extend the scope of the metrics, adding
new metrics for strategic risk, operational risk, compliance, product
governance, consumer protection and the prevention of money
laundering. Metrics were also incorporated to enhance alignment
between the declared risk appetite and crisis management plans.
Management systems were also bolstered in 2016 with a specific
development of control risk appetite limits, enabling early
identification of potential excesses and ensuring robust escalation of
these.
Banking business model and fundamentals of the risk appetite
The definition and establishment of the risk appetite in Grupo
Santander is consistent with its risk culture and banking business
model from the risk perspective. The main elements that define this
business model and which are behind the risk appetite are:
• A general medium-low and predictable risk profile based on a
diversified business model, focused on retail and commercial
banking and with an internationally diversified presence and with
important market shares, and a wholesale banking business model
that gives priority to relations with customers in the Group’s main
markets.
• A stable and recurrent earnings and shareholder remuneration
policy, underpinned by a sound base of capital and liquidity and an
effective diversification strategy in terms of sources of funding and
maturities.
• An organisational structure based on subsidiaries that are
autonomous and self-sufficient in capital and liquidity, minimising
the use of non-operational or shell companies, and ensuring
that no subsidiary has a risk profile that jeopardises the Group’s
solvency.
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• An independent risk function with very active involvement of
• bottom-up vision: the risk appetite must emanate from the
senior management that guarantees a strong risk culture focused
on protection and ensuring an adequate return on capital.
• A management model that ensures a global and inter-related
view of all risks, through an environment of control and robust
monitoring of risks with responsibilities with a global scope: all
risks, all businesses, all countries.
• The Group’s business model is focused on products where the
Group has expertise and where it can exercise active management
through its systems, processes and resources.
• Development of activity on the basis of a conduct model that
protects the interests of customers and shareholders.
• Adequate and sufficient availability of staff, systems and tools
that guarantee a risk profile compatible with the established risk
appetite is maintained, both at the global and local levels.
• A remuneration policy that has the necessary incentives to ensure
that the individual interests of employees and executives are
aligned with the corporate risk appetite framework, and that
these are consistent with the evolution of the Bank’s long-term
performance.
Corporate risk appetite principles
The following principles govern Grupo Santander’s risk appetite in all
its units:
• Responsibility of the board and of senior management. The
board is the most senior body responsible for setting the risk
appetite and supporting regulations, as well as supervising
compliance.
• Enterprise Wide Risk, backtesting and challenging of the risk
profile. The risk appetite must consider all significant risks to
which the Bank is exposed, facilitating an aggregate vision of the
risk profile through the use of quantitative metrics and qualitative
indicators. This enables the board and senior management to
question and assimilate the current risk profile and that envisaged
in business and strategic plans, and its consistency with maximum
risk limits.
• Forward-looking view. The risk appetite must consider the
desirable risk profile for the current moment as well as in the
medium term, taking into account both the most probable
circumstances as well as stress scenarios.
• Link with strategic and business plans and integration in
management (three-year plan, annual budget, ICAAP, ILAAP,
and crisis and recovery plans). The risk appetite is a benchmark in
strategic and business planning and is integrated into management
through a bottom-up and top-down focus:
• top-down vision: the board must lead the setting of the risk
appetite, vouching for the disaggregation, distribution and
transfer of the aggregated limits to the management limits set at
the portfolio level, unit or business line.
board’s effective interaction with senior management, the risk
function and those responsible for the business lines and units.
The risk profile contrasted with the risk appetite limits will be
determined by aggregation of the measurements at the portfolio,
unit and business line level.
• Coherence in the risk appetite of the various units and common
risk language throughout the organisation. The risk appetite of
each unit of the Group must be coherent with that defined in the
remaining units and that defined for the Group as a whole.
• Regular review, continuous backtesting and adapting to the
best practices and regulatory requirements. Assessing the
risk profile and backtesting it against the limits set for the risk
appetite must be an iterative process. Adequate monitoring and
control mechanisms must be established to ensure the risk profile
is maintained within the levels set, as well as taking the necessary
corrective and mitigating measures in the event of non-compliance.
Limits structure, monitoring and control
The risk appetite is formulated every year and includes a series of
metrics and limits on these metrics (statements) which express
in quantitative and qualitative terms the maximum risk exposure
that each unit of the Group or the Group as a whole is prepared to
assume.
Fulfilling the risk appetite limits is continuously monitored. The
specialised control functions report at least every quarter to the
board and its risk committee on the adequacy of the risk profile with
the risk appetite authorised.
Excesses and non-compliance with the risk appetite are reported
by the risk control function to the relevant governance bodies.
The presentation is accompanied by an analysis of the causes that
provoke it, an estimation of the time they will remain this way
as well as the proposed actions to correct the excess when the
corresponding governance body deems it opportune.
Linkage of the risk appetite limits with the limits used to manage the
business units and portfolios is a key element for making the risk
appetite an effective risk management tool.
The management policies and structure of the limits used to manage
the different types and categories of risk, which are described in
greater detail in sections D.1.5.2. Planning (Strategic Commercial
Plan), D.2.2.3. and D.2.3.3. Systems of controlling limits in this report,
have a direct and traceable relation with the principles and limits
defined in the risk appetite.
In this way, changes in the risk appetite reflect in the limits and
controls used in Santander’s risk management and each of the
business and risk areas is responsible for verifying that the limits
and controls used in their daily management are set in such a way
that the risk appetite limits cannot be breached. The risk control and
supervision function then validates this assessment, ensuring the
adequacy of the management limits for the risk appetite.
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Pillars of the risk appetite
The risk appetite is expressed via limits on quantitative metrics and
qualitative indicators that measure the exposure or risk profile by
type of risk, portfolio, segment and business line, in both current
and stressed conditions. These metrics and risk appetite limits
are articulated in five broad areas that define the positioning that
Santander’s senior management wants to adopt or maintain in the
development of its business model:
• The volatility in the income statement that the Group is willing to
accept.
• The solvency position that the Group wants to maintain.
• The minimum liquidity position that the Group wants to have.
• The maximum levels of concentration that the Group considers
reasonable to admit.
• Non-financial and transversal risks.
Risk appetite pillars and main metrics
Volatility of
results
Solvency
Liquidity
Concentration
Complementary aspects
• Maximum loss the
• Minimum capital
Group is prepared to
accept under a scenario
of acute stress
position the Group is
prepared to accept under
a scenario of acute stress
• Maximum leverage the
Group is prepared to
accept under a scenario
of acute stress
• Minimum structural
liquidity position
• Minimum liquidity
horizon position that
the Group is prepared
to accept under a
scenario of acute stress
• Minimum liquidity
coverage position
• Concentration by
individual customer
• Concentration in
non-investment grade
counterparties
• Concentration in
large exposures
• Qualitative non-financial
risk indicators:
• Fraud
• Technology
• Security and cyber-risk
• Litigation
• Other...
• Maximum operational
risk losses
• Maximum risk profile
Volatility of results
The objective is to limit the potential negative volatility of the results
projected in the strategic and business plan in the event of stress
conditions.
This axis contains metrics which measure the behaviour and
evolution of real or potential losses in the business.
Stress tests included at this level measure the maximum level of
the decrease in profits under adverse conditions, for the main types
of risk to which the Bank is exposed, with a feasible probability of
occurring, by risk type (so that they can be aggregated).
Solvency
The object of this axis is to ensure that risk appetite adequately
considers the maintenance and upkeep of the entity’s equity,
keeping capital higher than the levels marked by regulatory
requirements and market demand.
Its purpose is to determine the minimum level of capital which the
entity considers it needs to maintain to cope with potential losses
under both normal and stressed conditions and arising from its
activity and from its business and strategic plans.
This capital focus included in the risk appetite framework is
supplementary and consistent with the capital objective approved
within the Group’s capital planning process, which extends to a
period of three years. (More detail is available in chapter D.8. Capital
risk and the Prudential Relevance Report (PRR), Pillar III).
Liquidity position
Grupo Santander has developed a funding model based on
autonomous subsidiaries that are responsible for covering their own
liquidity needs.
On this basis, liquidity management is conducted by each subsidiary
within a corporate framework of management that develops its
basic principles (decentralisation, equilibrium in the medium and
long term of sources-applications, high weight of customer deposits,
diversification of wholesale sources, reduced recourse to short-term
funds, sufficient reserve of liquidity) and revolves around three main
pillars (governance model, balance sheet analysis and measurement
of liquidity risk, with management adapted to business needs).
Further information on the corporate management framework and
its principles and pillars is set out in section D.3. Liquidity risk and
funding.
Santander’s liquidity risk appetite establishes demanding objectives
in terms of positions and time frames for systemic and idiosyncratic
stress scenarios (local and global). In addition, a limit is set for
the structural funding ratio that relates customer deposits, equity
and medium and long-term issuances to structural funding needs,
together with a limit on the minimum liquidity coverage position.
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Concentration
Santander wants to maintain a widely diversified risk profile from
the standpoint of its exposure to large risks, certain markets and
specific products. In the first instance, this is achieved by virtue of
Santander’s retail and commercial banking focus with a high degree
of international diversification.
This level includes individual maximum exposure limits
with customers, aggregated maximum exposure with major
counterparties, and maximum exposure by activity sectors, in
Commercial Real Estate and in portfolios with a high risk profile.
Customers with an internal rating lower than investment grade or
equivalent, or which have excessive exposure of a certain degree, are
also monitored.
Non-financial and transversal risks
The objective is to limit exposure to the non-financial and transversal
risks in the corporate risk map.
This involves qualitative and quantitative metrics that help pinpoint
exposure to non-financial risks. These include specific indicators
for fraud, technology risk, security and cyber risk, prevention of
money laundering, regulatory compliance, product governance and
customer protection.
» B.3.2. Risk identification and assessment (RIA)
Grupo Santander is continuously evolving its identification and
assessment of different types of risks. It involves different lines of
defence in the execution of these to foster advanced and proactive
risk management. It also sets itself management standards that not
only meet regulatory requirements but also reflect best practice in
the market. The RIA is a mechanism for disseminating the risk culture
and involving the business lines of the units in its management.
In addition to identifying and assessing the Group’s risk profile by risk
factor and unit, RIA analyses the evolution of risks and identifies areas
for improvement in each of the blocks of which it is composed.
• Risk performance, enabling understanding of residual risk by
risk factor through a set of metrics calibrated using international
standards.
• Assessment of the control environment, measuring the
implementation of a target management model, pursuant to
advanced standards.
• Forward-looking analysis of the unit, based on stress metrics
and/or identification and/or assessment of the main threats to the
strategic plan (Top Risks), putting in place and monitoring specific
action plans to mitigate potential impacts.
The RIA initiative is being increasingly integrated into risk
management, developing each of the methodological blocks
independently, and increasing their application to the Group’s risks,
pursuant to the risk map.
Significant progress has been made in the uses of this exercise: the
risk profile is being used as a strategic metric in the local and Group
risk appetite; it has been included in the generation of strategic plans
and analysis of potential threats; analysis of the internal vision of
the risk profile and contrast with the perception of external agents;
risks identified in the RIA are being used as inputs in the generation
of idiosyncratic scenarios in capital, liquidity, and recovery and
resolution plans; it includes the diversification effect of the
Group’s business model, and internal audit planning now considers
exploitation of the risk control environment.
The RIA has become a major risk management tool. Through
the implementation of a demanding control environment and
monitoring of the weaknesses detected, it enables Grupo Santander
to undertake more and better business in the markets in which it
operates, without putting at risk its income statement or its strategic
objectives, whilst reducing the volatility of its earnings.
The RIA methodology is being consolidated, improved and simplified
as part of the Group’s continuous improvement and review process.
It has been extended to all of the Group’s risks and units, and is
being more closely integrated into day-to-day risk management. One
of its priorities is to order and manage the various risk assessments
in the Group in general, and the Risk division in particular,
establishing a benchmark assessment model that ensures the
robustness and consistency of the assessments carried out, whilst
governing the various exercises carried out in different management
areas.
» B.3.3. Analysis of scenarios
Banco Santander conducts advanced management of risks by
analysing the impact that different scenarios could provoke on
the environment in which the Bank operates. These scenarios are
expressed both in terms of macroeconomic variables as well as other
variables that affect management.
Scenario analysis is a very useful tool for management at all levels. It
enables the Bank’s resistance to stressed environments or scenarios
to be assessed, and puts into effect measures to reduce the Bank’s
risk profile in these scenarios. The objectives is to maximise the
stability of the income statement and capital and liquidity levels.
The robustness and consistency of scenario analysis exercises are
based on the following pillars:
• Developing and integrating mathematical models that estimate the
future evolution of metrics (for example, credit losses), based on
both historic information (internal to the Bank and external from
the market), as well as simulation models.
• Including the expert judgement and know-how of portfolios,
questioning and back testing the result of the models.
• The backtesting of the results of the models against the observed
data, ensuring that the results are adequate.
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• The governance of the whole process, covering the models,
• Governance: review of the governance framework for scenario
scenarios, assumptions and rationale for the results, and their
impact on management.
analysis exercises in order to adjust to their growing importance,
greater regulatory pressure and best market practices.
The application of these pillars of the EBA (European Banking
Authority) stress test executed and reported in 2016 has enabled
Santander to satisfactorily meet the requirements set down - both
quantitative and qualitative - and to contribute to the excellent
results obtained by the Bank, particularly with regard to its peers (see
table 1 section C. Background and upcoming challenges).
Uses of analysis of scenarios
• Regulatory uses: scenario stress tests are performed using
the guidelines set by the European regulator or each one of the
national supervisors who oversee the Bank’s activity.
• Internal exercises of self-assessment of capital (ICAAP) or
liquidity (ILAAP) in which, while the regulator can impose certain
requirements, the Bank develops its own methodology to assess its
capital and liquidity levels in the face of different stress scenarios.
These tools enable capital and liquidity management to be planned.
• Risk appetite. Contains stressed metrics on which maximum levels
of losses (or minimum of liquidity) are established that the Bank
does not want to exceed. These exercises are related to those for
capital and liquidity, although they have different frequencies and
present different granularity levels. The Bank continues to work to
improve the use of analysis of scenarios in risk appetite and ensure
an adequate relation of these metrics with those used in daily risk
management. For more detail see sections B.3.1. Risk appetite and
structure of limits and D.3. Liquidity risk and funding.
• Daily risk management. Scenario analysis is used in budgeting
processes and strategic planning, in the creation of commercial
policies for risk admission, in the global analysis of risks by senior
management and in specific analysis of the profile of activities or
portfolios. Further details are provided in the sections on credit
risk (section D.1.5.2. Planning (Strategic Commercial Plan), market
risk (D.2.2.1.6. and D.2.2.2.3. Analysis of scenarios) and liquidity risk
(D.3.1. Liquidity management in Grupo Santander).
In order to improve management through metrics and advanced
approaches, the scenario analysis project is structured around five
axes:
• Tool for analysing scenarios: installation of an advanced tool for
estimating losses with greater soundness and computerisation of
information handling, with the capacity to aggregate various types
of risk and with an environment of multi user execution.
• Models: preparing plans to develop statistical stress models that
have sufficient precision and granularity to meet requirements,
not only of current regulation and supervision, but also to improve
predictive risk capacity in accordance with advanced management
approaches.
• Processes and procedures: continuous self-assessment exercises
and improvement plans to evolve processes in the context of
advanced scenario analysis management.
• Integration into management: fostering and improving the use of
scenario analysis in the various scopes of risk management.
» B.3.4. Recovery and resolution plans and the
Special situations management framework
In 2016, the Bank prepared the seventh version of its corporate
recovery plan, the most important part of which envisages the
measures available to emerge on its own from a very severe crisis.
This plan has been prepared in accordance with applicable European
Union1 regulations. The plan also considers the non-binding
recommendations made in this area by international bodies such as
the Financial Stability Board (FSB2).
As with the previous versions from 2010 to 2015, the Group
presented the plan to the relevant authorities (for the second time,
to the European Central Bank (ECB) in September, unlike previous
years when it was only submitted to the Bank of Spain) for it to be
assessed in the fourth quarter of 2016.
The plan encompasses the corporate plan (covering Banco
Santander) and the individual plans for the main local units (UK,
Brazil, Mexico, US, Germany, Argentina, Chile, Poland and Portugal),
thereby meeting the commitment made by the Bank with the
authorities in 2010. It is important to note the cases of the countries
referred to above belonging to the European Union, where, apart
from the fact they mandatorily form part of the corporate plan, they
also need to be completely developed in accordance with regulatory
requirements arising from the transposition of Directive 2014/59/EU
(European Union Crisis Management Directive) into local legislation.
Two of the most important objectives in the plan are to verify: firstly,
the feasibility, effectiveness and credibility of the recovery measures
identified in the plan; and, secondly, the adequacy of the specific
1. Directive 2014/59/EU (“Directive establishing a framework for the recovery and resolution of credit institutions and investment firms”);prevailing European Banking
Authority regulations dealing with recovery plans (EBA/RTS/2014/11; EBA/GL/2014/06; EBA/GL/2015/02); recommendations from the European Banking Authority to the
Commission in relation to key business lines and critical functions (EBA/op/2015/05); European Banking Authority regulations pending approval (EBA/CP/2015/01 on the
ITS for procedures, forms and templates for resolution plans); European Banking Authority regulations not directly related to recovery but with significant implications in
this field (EBA/GL/2015/03 on triggers for early intervention measures); and local Spanish regulations: Act 11/2015, on credit entities and investment service firms recovery
and resolution, and Royal Decree 1012/2015 implementing this Act.
2. FSB: Key attributes of effective resolution regimes for financial institutions (15 October 2014, updating the initial publication of October 2011), “Guidance on Identification
of Critical Functions and Critical Shared Services” (15 July 2013) and “Guidance on recovery triggers and stress scenarios” (15 July 2013).
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5. Risk management report » Risk control and management model – Advanced Risk Management
indicators and limits defined for triggering the governance process
established in the plan for stress situations.
• The available measures provide ample recovery capacity in all
of the scenarios considered in the plan. The Group’s geographic
diversification model is a plus from a recovery perspective.
To this end, the corporate plan has defined different macroeconomic
and financial crisis scenarios that would represent idiosyncratic or
systemically important events for the entity, as established in article
5.6 of Directive 2014/59/EU. These scenarios refer to crisis situations
that could impact the Group’s viability, as set out in applicable
regulations. The plan has been designed under the premise that
there would be no extraordinary public support in the event of it
being activated, as established in article 5.3 of Directive 2014/59/EU.
It is also important to state that the plan should not be interpreted
as being independent from other structural mechanisms in place to
measure, manage and oversee the risk undertaken by the Group.
The Group’s recovery plan is integrated, among others, with the risk
appetite framework, risk appetite statement, risk identification and
evaluation process, business continuity management system and
internal capital and liquidity adequacy assessments.
Works continued in 2016 to adapt the structure and content of
the plan to new international guidance. This involved including a
number of improvements: (i) in the governance section (mainly, a
more detailed description of the Special Situations Management
Framework - explained in greater detail below – and on the structure
of recovery indicators); (ii) in the scenarios chapter which now
includes a crisis situation that leads to the breach of the liquidity
indicators and a multi-local systemic crisis affecting two of the units
most relevant to the Group; and (iii) finally, greater granularity and
detail in the sections on strategic analysis and measures.
The Group’s senior management is fully involved in preparing and
regularly monitoring the content of the plans, through specific
committees of a technical nature, as well as monitoring at the
institutional level, guaranteeing that the content and structure of the
documents are adapted to local and international regulations in crisis
management, which have been in continuous development for the
last years.
The board of directors of Banco Santander S.A. is responsible for
approving the corporate plan, once the plan’s content and data
have been previously submitted and discussed in the bank’s main
management and control committees (Board Risk Committee, Global
ALCO Committee and Capital Committee). The individual plans are
approved by the local bodies and always in coordination with the
Group, as these plans must be part of the corporate plan.
The main conclusions that can be drawn from the 2016 corporate
plan are:
• There are no material inter-dependencies among the Group’s
countries.
• Every subsidiary has sufficient recovery capacity to emerge from
a recovery situation using its own means. This enhances the
resilience of the Group’s model, based on autonomous subsidiaries,
in terms of capital and liquidity.
• None of the Bank’s subsidiaries, should they fail, are considered of
sufficient relevance to breach the most severe levels established
for the recovery indicators that could trigger the activation of the
corporate recovery plan.
From this, we can conclude that the Group’s model of geographic
diversification - based on a model of autonomous subsidiaries, in
terms of liquidity and capital - remains resilient from a recovery
perspective. The Group plans to continue to evolve its plans in line
with recommendations from supervisors and best practices in the
industry in relation to recovery plans in 2017.
In relation to the governance of crisis situations set out in the
Group’s recovery plans, the Group formally approved and
implemented its Special Situations Management Framework in
2016 - in both the corporation and the Group’s main countries, which
together with its implementing documents:
i. sets out the main common principles for the identification,
escalation and management of events that could pose a serious
risk to Santander or any of its entities, or that could affect their
robustness, reputation, activity, liquidity, solvency or present or
future viability;
ii. defines basic roles and responsibilities in this area and identifies
the planning elements required and the key processes; and
iii. sets down essential governance elements, seeking to ensure
coordinated action among all Group entities and, where
necessary, the participation of the Corporation, as the parent
company of Grupo Santander.
This framework has a holistic nature and applies to crisis events and
situations of any kind (e.g. financial and non-financial, systemic or
idiosyncratic, and slowly evolving or rapidly emerging, etc.) that
might give rise to exceptional situations other than what might be
expected or that should arise in the normal course of business, and
that might compromise the development of the activity of the entity
or Group, or lead to a serious deterioration in its financial situation,
as it involves a serious deviation from the defined risk appetite and
limits.
Regarding resolution plans, the authorities which take part in the
Crisis Management Group (CMG) have adopted a common approach
on the strategy to follow for the Group’s resolution plan that, given
the legal and business structure through which Santander operates,
corresponds to the so-called multiple point of entry (MPE); they have
signed the cooperation agreement on resolution (COAG); and have
developed the first resolution plans. In particular, the 2016 corporate
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resolution plan was analysed in a meeting of the CMG held on 7
November 2016.
» B.3.5. Risk Data Aggregation & Risk
Reporting Framework (RDA/RRF)
As an exception to the above, resolution plans for the USA are
prepared by the entities themselves. The Group filed the third
version of its local resolution plans in December 2015. However
the FRB (Federal Reserve Board) and the FDIC (Federal Deposit
Insurance Corporation) have stated that plans for 2016 should not be
filed, as they are still in the process of commenting on earlier plans,
and are preparing guidance for plans to be filed in December 2017.
The Group continues to cooperate with the competent authorities
in the preparation of resolution plans, providing all the information
that the authorities might require. Meanwhile, the Group has also
continued to develop projects to improve its resolution capacity.
These include measures to guarantee operational continuity in
resolution situations. In this respect:
i) In November 2016, Banco Santander S.A. became a signatory to
the ISDA protocol for the settlement of derivatives in resolution
situations;
ii) the market infrastructures to which the Group is connected have
been analysed to assess their criticality and the continuity of such
services in the event of resolution;
iii) operational continuity clauses have been strenghtened in
agreements with internal suppliers; and
iv) further progress has been made in automating the information
requested by the supervisory authority.
In recent years, the Group has developed and implemented the
necessary structural and operating improvements to reinforce and
consolidate enterprise wide risk, based on complete, precise and
regular data. This allows the Group’s senior management to assess
risk and act accordingly.
Against this background, Santander believes that regulatory
requirements are aligned with the strategic risk transformation plan,
and hence at the current date the Group complies with the standards
set forth in the BCBS 239 regulation. Once the objectives of the Risk
Data Aggregation (RDA) project had been achieved at the end of
2015, in 2016 work continued to consolidate the comprehensive data
and information management model, and its transposition to the
countries where the Group operates.
Risks reports contain an appropriate balance between data, analysis
and qualitative comments, include forward-looking measures, risk
appetite data, limits and emerging risks, and are distributed in due
time and form to senior management.
The Group applies a common reporting taxonomy which covers all
the significant risk areas within the organisation, and which is in
keeping with the Group’s size, risk profile and activity.
B.4. Risk culture - Risk Pro
Our internal culture includes a Santander way of managing risks,
a Santander risk culture, which we call risk pro, which is one of our
main competitive advantages in the market.
Excellence in risk management is thus one of the strategic priorities
that have most shaped the Group’s development. This involves
promoting a robust risk culture throughout the organisation, which is
understood and applied by all Grupo Santander employees.
Grupo Santander’s robust risk culture is one of the key reasons why
it has been able to cope with changes in economic cycles, customers’
new demands and increased competition, and why it is considered
to be an entity that earns the trust of its employees, customers,
shareholders and society.
Against a background of constant changes, with new types of
risks and more demanding requirements from regulators, Grupo
Santander wishes to maintain an excellent level of risk management
in order to achieve sustainable growth.
This risk culture is defined through five principles which must
necessarily form part of all the Group’s employees’ day-to-day
activities:
Responsibility, because all units and employees (no matter what
function they perform) should know about and understand the
risks incurred in their daily activities, which they are responsible for
identifying, assessing, managing and reporting.
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A risk component is therefore included in the training plans for
all employees. In addition, the Risk Pro Banking School, together
with the other local risk schools, helps to spread the risk culture,
developing the best talent and training the Group’s professionals.
In 2016, 55,497 hours of training were given, benefiting 20,690
Group employees.
As a result, Grupo Santander’s 2016 global commitment survey
found that 95% of employees felt directly responsible for managing
their risks, irrespective of their position in the Bank.
• Communication. The main channels of communication are
used to foster the principles of the risk culture among all
employees, providing all the information needed for advanced risk
management in a clear and comprehensible format. These channels
are also used to spread behaviours, actions and decisions that
exemplify the risk culture.
• Risk assessment and measurement. Banco Santander carries out
systematic and consistent assessment of the Group’s risk culture
to identify potential improvements and implement action plans. It
has put in place specific indicators to measure the penetration and
spread of the risk culture in the Group. It also carries out surveys
to measure the perceptions of employees in relation to their
knowledge of, and responsibilities for, risk management.
• Advanced Risk Management (ARM) programme. The final phase
of the ARM programme was reached in 2016. This has developed
an advanced risk management model in all units, based on a strong
risk culture. For Grupo Santander, advanced risk management is a
priority in its long-term objective of continuing to be a solid and
sustainable bank.
All Group units and all employees carry out their activities under
the umbrella of our risk culture - risk pro - with a common purpose:
to build the future through the forward-looking management
of all risks, and to protect the present through a robust control
environment.
Resilience, which is a combination of prudence and flexibility. All
employees have to be prudent and steer clear of any risks they
are not familiar with or which are in excess of the established risk
appetite. They must also be flexible, because risk management has to
quickly adapt to new environments and unexpected scenarios.
Challenge, because ongoing debate is encouraged throughout
the Group. We always ask ourselves how we can manage risks in a
proactive, positive and open way, giving us an overview that allows
us to anticipate future challenges.
Simplicity, because universal risk management needs clear
processes and decisions which are documented and easily
understood by employees and customers.
Customer focus. Because all risks actions are focused on the
customer, on his or her long term interests. Our aim at Grupo
Santander is to be the best retail and commercial bank that earns
the lasting loyalty of our people, customers, shareholders and
communities. We can achieve this goal by making a proactive
contribution to help our customers prosper with excellent risk
management.
Customer
focus
Responsibility
Simplicity
Resilience
Challenge
The risk pro risk culture is being reinforced in all Grupo Santander
units through four drivers:
• The employee lifecycle. This involves generating awareness of the
importance of risk management and personal responsibility for it
in each new employee, starting from the selection and recruitment
stage, and reinforcing this continually.
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2016 ANNUAL REPORT
EXECUTIVE SUMMARY
A. PILLARS OF THE RISK FUNCTION
B. RISK CONTROL AND MANAGEMENT MODEL - Advanced Risk Management
C. BACKGROUND AND UPCOMING CHALLENGES
D. RISK PROFILE
APPENDIX: EDTF TRANSPARENCY
C. Background and
upcoming challenges
Growth in the advanced economies was weak in 2016 and slower
than in the previous year. This slowdown affected the USA, the
European Union and Japan, and was concentrated in the first half of
the year, with a degree of recovery in the second half. The USA is in
an advanced stage of the cycle. Expectations for 2017 are positive,
buoyed by expectations of fiscal expansion that is likely to lead
to further increases in interest rates. The UK is facing uncertainty
stemming from the impact of its decision to leave the European
Union. The eurozone is growing slowly, but proving resistant to
episodes of instability, with core inflation of less than 1%. Monetary
policy remains very expansionary, with no outlook for higher
interest rates.
Growth in emerging economies as a whole was similar to 2015,
although the picture at the end of the year was more positive,
as in the advanced economies. Progress continued in correcting
imbalances, improving the outlook for 2017. However, performance
differed markedly across different areas.
Banking activity continues to be affected by historically low interest
rates, the stimulus measures implemented by central banks in most
developed markets, uncertainty about the solvency of the financial
sector, increased competition in some markets (mainly on the asset
side), and an ever more demanding regulatory environment.
Against this backdrop, Banco Santander has maintained its
medium-low risk profile. The Bank’s robust risk culture is reflected
in all of its lending-quality metrics. Its NPL ratio stands at 3.93%
(-43 bp compared to December 2015), its cost of credit at 1.18%
(-7 bp compared to December 2015) and its coverage ratio remains
stable at 74%.
There was a lot of activity on the regulatory front in 2016. The year’s
highlights include:
• The Basel Committee has continued its review of the frameworks
for calculating capital requirements for credit, market and
operational risk. In April, it presented a final proposal for the
review of regulatory treatment of the interest rate for the held-to
maturity portfolio.
• The European Banking Authority (EBA) has continued to issue
standards¬ and guidance developing aspects of European
capital regulations (CRR/CRD IV), helping to ensure harmonised
implementation of minimum capital requirements across the
European Union. In July, the EBA also published the results of its
stress tests of the 51 leading banks in the European Union (see
table 1. Stress tests).
• Various modifications and interpretations by domestic and
international bodies of the definition and treatment of the non
performing loans and the forbearance portfolio.
Top Risks
As indicated in section B.3.2 Risk Identification and Assessment, as
part of its traditional forward-looking risk management, the Group
uses this regular exercise to identify, assess and monitor potential
future risk events.
The main strategic risks identified by the Group at present are
subject to regular monitoring by the Bank’s senior management,
through a governance process that enables appropriate management
and mitigation, using the following four categories:
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5. Risk management report » Background and upcoming challenges
Macroeconomic and political risks:
The European economy is finally on the road to recovery, although
it is expected to remain weak over the coming years. This backdrop
of low growth is characterised by weak demand and influenced by
the uncertain results of elections in various eurozone countries, and
the complicated negotiations between the UK and the EU. All of
these factors are conducive to a continuation of low interest rates
for a prolonged period.
Confidence in the Brazilian economy is improving, as political
uncertainty diminishes and a general perception that growth
will be positive in 2017 takes hold, underpinned by a continuous
improvement in the latest confidence indexes for companies and
consumers.
But some structural threats to the economy persist, such as the
structural deficit and the increase in international financial volatility
following the results of the US elections: these have increased risk
aversion (flight to quality) and could affect the outlook for growth in
Brazil.
Following the referendum result in June to leave the EU, the
UK economy could be affected by the prolonged and complex
negotiations between the UK government and the EU. Whilst the
result has no immediate effect on the current structure of the Bank
or its operations, it has increased volatility in the markets, including
a depreciation of the pound, and may continue causing uncertainty
as the negotiations progress.
Finally, the US election results may imply a degree of uncertainty
because of their potential impact on emerging economies,
particularly in Latin America, and the US economy itself, although
this needs to be considered in tandem with the robustness of the
region.
Against the backdrop of these macroeconomic and political
risks, the Banco Santander business model, based on geographic
diversification - balanced between mature and emerging markets -
and on retail banking, underpins the stability of its results, helping it
to maintain its medium-low risk profile.
Competitive environment and customer relations
The Bank is facing the challenge of adapting the way it does business
to meet the new needs of its customers, against the backdrop of
the rapid rise of disruptive innovation and new technology that is
revolutionising the financial industry.
The ever increasing digitalisation of the sector requires constant
innovation to keep the Bank one step ahead of the changes
taking place and to protect its market share against the entry of
new digital competitors - financial start-ups, technology giants,
etc. - and the publication of new regulations that foster financial
disintermediation, such as the new payment services directive
(PSD2), which comes into effect in January 2018.
The identification and assessment of the impact of this risk to its
business has enabled Banco Santander to turn this threat into an
opportunity. Innovation and digital transformation are one of the
cornerstones of our business model.
Increasing supervisory and regulatory pressures are affecting
aspects of behaviour, transparency, consumer protection and the
sale of appropriate products, due in part to certain cases of poor
practices in the sector over recent years.
Given this situation, the Bank has developed a robust governance
structure, in which the compliance and conduct function reports
directly to the board of directors, and which is subject to the
product-approval process and the general system set out in its Code
of Conduct. Section D.5, on conduct and compliance risks details the
functions involved in managing this risk.
Moreover, regulators are focusing increasing attention on
the accumulation of assets in the financial sector that do not
generate adequate returns and which are difficult to transfer,
potentially causing liquidity difficulties in the market. The Bank
has set up a specific area dedicated to the management and sale of
potentially problematic assets, so as to reduce its exposure.
Regulatory environment
Over recent years, there has been intense activity in the regulatory
field to improve the capitalisation of banks, mainly in response to the
financial crisis. This impacts in particular on banks considered to be
systemic.
This new regulation focuses mainly on capital, liquidity and
resolution requirements, consistent information management and
the adequacy of the internal governance of entities.
Entities have had to make significant efforts to respond to this
changing and more demanding backdrop, which has had a significant
impact on their profitability.
For the financial industry, it is crucial to have a stable and enduring
regulatory framework, allowing banks to apply valid mid-term
strategies, and to constantly assess the global impact of that
framework so as to ensure a healthy balance between financial
stability and economic growth.
Threats to the systems (cyber risk)
Just like any other organisation, the Bank may be subject to cyber
attacks that impact on its banking services, including digital attacks
that threaten its internal information and customer data, or that
reveal security weaknesses. These attacks have increased.
The Bank works tirelessly to enhance protection based on
international standards and preventive measures, so that it is ready
to respond to incidents of this type. These measures are set out in
section D.4.4 Operational risk mitigation measures.
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2016 ANNUAL REPORT
» Table 1: Stress tests
In July, the European Banking Authority (EBA) published
the results of its stress tests of the 51 leading banks in the
European Union.
This time, no minimum capital requirements were set for
passing the test. Instead, the final results were used as
a variable by the ECB to determine the minimum capital
requirements for each bank (under the Supervisory Review and
Evaluation Process - SREP).
This exercise used two macroeconomic scenarios (base case and
adverse), taking the bank’s balance sheet at year-end 2015 as the
starting point, with a three-year horizon, ending in 2018. These
tests are not comparable to the 2014 exercise, as they are based
on a more demanding scenario and different assumptions.
The adverse scenario - which has a very low likelihood of
occurring - considers a major deterioration in macroeconomic
conditions and financial markets in Europe and the other
countries where Banco Santander is active. For example, it
considers an accumulated fall of 3% in GDP for the eurozone as a
whole, major falls in securities markets (-30%) and house prices
(-11%), and wider credit spreads on public debt.
Santander once again received excellent results, as in the
other stress tests carried out over recent years.
In the adverse scenario, Santander is the bank that least destroys
capital among its peers, with the fully loaded CET1 capital ratio
falling by 199 basis points (vs. -335 on average) from 10.2% in 2015
to 8.2% in 2018.
In the baseline scenario, Santander generates the second highest
capital amongst its peers. Therefore, it not only destroys less
capital, it also generates more.
We can conclude that Santander is more resilient than its
competitors, due to its strong generation of recurrent revenue
and results, based on its retail and commercial banking model
and its unique geographic diversification.
The result is that our stable and predictable business model
requires less capital and entails a lower cost of capital.
EBA stress test results
Fully loaded CET1
ratio, base ST
%
Fully loaded CET1
ratio, adverse ST
%
+299 bp
13.17
10.19%
-199 bp
10.19
8.20
Impact
CET1
ratio
Dec 15
Adjusted
CET1
ratio
Dec 18
Impact
CET1
ratio
Dec 15
Adjusted
CET1
ratio
Dec 18
We can conclude that Santander is more resilient than its
competitors3, due to its strong generation of recurrent revenue
and results, based on its retail and commercial banking model
and its unique geographic diversification.
CET1 variation 2015 vs.
base case scenario (bp)
CET1 variation 2015 vs.
adverse scenario (bp)
C1
Santander
C2
C3
C4
C5
C6
C7
C8
C9
C10
C11
C12
C13
C14 -20
340
Santander
299
210
170
120
110
110
110
100
100
70
50
40
30
123
C1
C2
C3
C4
C5
C6
C7
C8
C9
C10
C11
C12
C13
C14
-199
-210
-230
-240
-240
-290
-310
-320
-330
-330
-340
-370
-410
-470
-740
-335
3. Peers: BBVA, BNP, Soc Gen, C.Agricole, Deutsche Bank, Commerzbank, Unicredit, Intensa Sanpaolo, ING, Nordea, Lloyds, HSBC, Barclays y RBS
2016 ANNUAL REPORT
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5. Risk management report » Background and upcoming challenges
» Table 2: New model of classification and measurement of financial instruments (IFRS 9)
1. Introduction:
In July 2014, the International Accounting Standards Board
(IASB) approved the International Financial Reporting Standard
9 - Financial Instruments (IFRS 9), to replace IAS39 – Financial
instruments: recognition and assessment, in accordance with the
guidelines which were prepared during the G-20 meeting in April
2009.
IFRS 9 sets out the requirements for recognition and
measurement of both financial instruments and certain types of
contracts for the sale of non-financial items. It will be applicable
from 1 January 2018 on. It has been endorsed by the European
Commission in November 2016 .
2. Model proposed by IFRS 9
The main new developments of the standard are as follows:
2.a Classification of financial instruments
The criterion for classifying financial assets will depend
both on their business management model and the features
of the contractual flows. Consequently, the asset will be
measured at amortized cost, at fair value with changes in other
comprehensive income (equity), or at fair value with changes in
profit/loss for the period. IFRS 9 also establishes the option of
designating an instrument at fair value with changes in P/L under
certain conditions.
The main activity of Santander Group is the concession of retail
banking operations and does not concentrate its exposure on
complex financial products. The main objective of the Group is to
achieve a homogeneous implementation of the classification of
financial instruments of the portfolios established under IFRS 9
and, for this purpose, it has developed standardized guidelines to
enable a homogeneous analysis in all of its units.
The Group is currently implementing an analysis of its portfolios
under the mentioned guidelines in order to identify and classify
the financial instruments into their corresponding portfolio
under IFRS 9.
Based on current analysis, since no significant changes are
expected in the composition of until 2018, it is considered
that there will be no significant changes with respect to the
classification that was being carried out under the pre-existing
regulation:
• Financial assets classified as loans and advances and held-to
maturity under IAS 39 will generally be classified into amortized
cost.
• Available for sale debt instruments will generally continue to be
classified into fair value with changes in other comprehensive
income, unless cash flows features imply its classification into
other portfolio.
• Available for sale capital instruments will be classified at fair
value, with changes reported in profit and loss for the year,
unless the Group decides, for non-trading assets, to classify
at fair value, with changes reported in other comprehensive
income (irrevocably).
• IAS 39 financial liabilities classification and measurement
criteria remains substantially under IFRS 9. Nevertheless, in
most cases, the changes in the fair value of financial liabilities
designated at fair value with changes reported in profit and loss
for the year, due to the entity credit risk, will be classified on
other comprehensive income.
2.b Credit risk impairment model
The most important new development compared with the
current model is that the new accounting standard introduces
the concept of expected loss, whereas the current model (IAS 39)
is based on incurred loss.
Scope of application
The IFRS 9 asset impairment model is applicable to financial
assets valued at amortised cost, to debt instruments valued
at fair value through other comprehensive income, to leasing
receivables, and to contingent risks and commitments not valued
at fair value.
Application of practical expedients under IFRS 9
IFRS 9 contains a set of practical expedients that might be used
by the entities to facilitate its implementation. However, in order
to achieve full and high quality implementation of the standard,
considering industry best practices, these practical solutions will not
be widely used:
• Rebuttable presumption that the credit risk has increased
significantly when payments are more than 30 days past due:
this threshold will be used as an additional – but not primary -
indicator of significant risk increase.
• Financial instruments that have low credit risk at the reporting
date: this solution will not be implemented and the Group will
analyse the credit quality of all financial assets.
4. Official Journal of the European Commission, Commission Regulation (EU) 2016/2067 of 22 November 2016.
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2016 ANNUAL REPORT
Impairment estimation methodology
The portfolio of financial instruments subject to impairment
will be divided into three categories, based on the stage of each
instrument with regard to its level of credit risk:
management and regulatory processes, considering several
scenarios. In this sense, the Group will leverage its experience in
the management of such information and maintain consistency
with the information used in the other processes.
• Stage 1: a financial instrument will be considered to be in this
phase where there has been no significant increase in risk since
its initial recognition. In this case, the value correction will
reflect expected credit losses arising from defaults over the 12
months from the reporting date.
• Stage 2: financial instruments are included in this stage when
there has been a significant increase in risk since the date of
initial recognition, but the impairment has not materialised.
In this case, the value correction for losses will reflect the
expected losses from defaults over the residual life of the
financial instrument. The existence of a significant increase in
credit risk will be determined by considering the quantitative
indicators used in the ordinary management of credit
risk, together with other qualitative variables, such as the
indication of whether refinanced transactions are considered
non-impaired and transactions included in special debt
sustainability agreements.
• Stage 3: financial instruments are catalogued in this stage when
they show effective signs of impairment as a result of one or
more events that have already occurred that will result in a loss.
In this case, the amount of the value correction will reflect the
expected losses for credit risk over the expected residual life of
the financial instrument.
The methodology required for quantification of expected loss
for credit events will be based on an unbiased and weighted
consideration of the occurrence of a range of possible future
scenarios that could impact the collection of contractual cash
flows, taking into account the time-value of money, all available
information relevant to past events, and current conditions
and projections of macroeconomic factors deemed relevant
to the estimation of this amount (e.g. GNP, house pricing,
unemployment rate, etc.).
In estimating the parameters used in the expected loss
calculation (EAD, PD, LGD and discount rate), the Group
leverages its experience of developing internal models for
calculating parameters for regulatory and management purposes.
The Group is aware of the differences between such models and
regulatory requirements for provisions. As a result, it is focusing
on preparing for, and adapting to, such requirements as it
develops its IFRS 9 models.
Use of present, past and future information
In addition to considering both present and past information,
the Group currently uses forward-looking information in internal
Impairment registration
The main change with respect to the current standard
related to assets measured at fair value with changes in other
comprehensive income. For these assets, the portion of the
changes in fair value due to expected credit losses will be
recorded at the current profit and loss account while the rest will
be recorded in other comprehensive income.
2.c Hedge accounting
IFRS 9 includes new hedge accounting requirements which have
a twofold objective: to simplify current requirements, and to
bring hedge accounting in line with risk management, so allowing
there to be a greater variety of derivative financial instruments
which may be considered to be hedging instruments.
Furthermore, additional breakdowns are required providing
useful information regarding the effect which hedge accounting
has on financial statements and also on the entity’s risk
management strategy.
According to the analysis performed until now, the Group expect
to maintain the application of IAS 39 in hedge accounting.
2.d Transition
European Union has already endorsed IFRS 9. The criteria
established by this rule for the classification, measurement and
impairment of financial assets, will be applied in a retrospective
way adjusting the first opening balances in the first application
date.
2.e IFRS 9 implementation strategy
The Group has established a global workstream with the aim
of adapting its processes to the new classification standards
for financial instruments, accounting of hedges and estimating
credit risk impairment, so that such processes are applicable in
a uniform way for all Group units, and, at the same time, can be
adapted to each unit’s individual features.
Accordingly, the Group is working towards defining an objective
internal model and analysing all the changes which are needed
to adapt accounting classifications and credit risk impairment
estimation models in force in each unit to the previous
definitions.
In principle, the governance structure currently implemented at
both corporate level and in each one of the units, complies with
the requirements set out in the new standards.
2016 ANNUAL REPORT
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5. Risk management report » Background and upcoming challenges
Regarding the governance structure, the Group has set up a
regular committee to manage the project governance structure,
and a task force which is responsible for its tasks, and also
assuring that the pertinent responsible teams take part.
Hence, the main divisions involved in the project at the highest
level, and which are thus represented in the project governance
bodies, are Risks, Financial Accounting & Management Control
and Technology and Operations. Both the Internal Audit division
and the External Auditor are also involved in the project, having
shared the implementation plan and keeping regular meetings
about the status of the project.
2.f The project’s main phases and milestones
During this exercise, the Group has successfully completed the
design and development phase of the implementation plan. The
major milestones achieved include:
• Complete the definition of functional requirements as
well as the design of an operational model adapted to the
requirements of IFRS 9.
• Development a training plan for all the staff who could be
involved or impacted with the standards application.
• At the IT environment, the technological needs have been
identified as well as the necessary adaptations to the existing
control environment.
The Group is currently in the implementation phase of the
models and requirements defined.
The objective of the Group at this stage is to ensure an efficient
implementation, optimizing its resources as well as the designs
elaborated in previous stages.
Once the implementation phase is completed, the Group will
ensure the effective performance of the model through several
simulations and ensuring that the transition to the new operating
model meets the objectives established in the previous phases.
This last stage includes the parallel execution of the provisions
calculation, as a complement to the internal simulations that
the Group has been carrying out during the different phases of
the project and to the participation of the Group in the different
impact assessments that the regulators have carried out.
2.g Guidelines and complementary rules
In addition to the standards issued by IASB, a number of
regulatory and supervisory bodies have issued further
considerations both in regard to the impairment model for
financial instruments in IFRS 9, and items directly relating to it.
These include the following documents and initiatives:
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2016 ANNUAL REPORT
• European Banking Authority (EBA) – Draft guidelines on
credit institutions’ Credit risk management practices and
accounting for Expected Credit Losses (July 2016, under
consultation): the aim of the document is to transpose the
guidelines developed by the Basel Committee on Banking
Supervision into European regulatory framework, providing
appropriate practices for credit risk management in relation to
the implementation of the calculation of expected credit losses.
• European Banking Authority (EBA) – The EBA 2017 Annual
Work Programme (September 2016): it establishes a work
plan that includes, among others, a quantitative and qualitative
analysis of IFRS 9 as a result of the technical standards and
guidelines that the EBA will develop to provide advice in the
areas of accounting and auditing.
• European Central Bank – Draft guidance to banks on non
performing loans (September 2016, under consultation): this
document presents supervisory guidelines in relation to Non-
Performing Exposures establishing the best practices for risk
management of European entities.
• Basel Committee on Banking Supervision – Discussion paper
on regulatory treatment of accounting provisions (October
2016, under consultation): the objective of the document is
to propose alternatives for the interaction between regulatory
capital and provisions after the entry into force of the expected
loss models for the calculation of provisions. The document
proposes different approaches as well as a particular treatment
of provisions during the transition period.
• Financial Accounting Standards Board (FASB) – Accounting
Standard Update Number 2016-13, Financial Instruments,
credit losses (Jun 2016, Final report): the final version of the
American accounting regulation that include the calculation
of the expected loss for entities that shall issue their financial
reports under the requirements of FASB.
EXECUTIVE SUMMARY
A. PILLARS OF THE RISK FUNCTION
B. RISK CONTROL AND MANAGEMENT MODEL - Advanced Risk Management
C. BACKGROUND AND UPCOMING CHALLENGES
D. D. RISK PROFILE
1. Credit risk
2. Trading market risk and structural risks
3. Liquidity risk and funding
4. Operational risk
5. Compliance and conduct risk
6. Model risk
7. Strategic risk
8. Capital risk
APPENDIX: EDTF TRANSPARENCY
D. Risk profile
D.1. Credit risk
» Organisation of this section
After an introduction to the concept of credit risk and the
segmentation that the Group uses for its treatment, the key figures
for 2016 and change over time will be presented [pag. 184-191].
This is followed by a look at the main geographies, setting out their
main features from the credit risk standpoint [pag. 192-201].
The qualitative and quantitative aspects of other credit risk matters
are then presented, including information on financial markets, risk
concentration, country risk, sovereign risk and environmental risk
[pag. 202-209].
Lastly, there is a description of the credit risk cycle in Grupo
Santander, with a detailed explanation of the various stages in the
pre-sale, sale and post-sale phases, as well as the main credit risk
metrics [pag. 209-214].
» D.1.1. Introduction to credit risk treatment
Credit risk arises from the possibility of losses stemming from the
total or partial failure of customers or counterparties to comply with
the financial obligations they have agreed with the Group.
The credit risk function is organised on the basis of three types of
customers:
• The individuals segment includes all physical persons, except
those with a business activity. This segment is, in turn, divided into
sub-segments by income levels, which enables risk management
adjusted to the type of customer.
• The SMEs, companies and institutions segment includes
companies and physical persons with business activity. It also
includes public sector activities in general and non-profit making
private sector entities.
• The Santander Global Corporate Banking (SGCB) segment
consists of corporate customers, financial institutions and
sovereigns, comprising a closed list that is revised annually. This
list is determined on the basis of a full analysis of the company
(business, countries of operation, product types, volume of
revenues it represents for the bank, length of relation with the
customer, etc).
The following chart shows the distribution of credit risk on the basis
of the management model.
Credit risk distribution
SGCB
15%
SMEs, companies
and institutions
29%
Individuals
56%
The Group’s risk profile is mainly retail, accounting for 85% of total
risk generated by the retail and commercial banking business.
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5. Risk management report » Risk profile > Credit risk
» D.1.2. Key figures and change over time
D.1.2.1. Global map of credit risk, 2016
The table below sets out the global credit risk exposure map in
nominal amounts (except for exposure for derivatives and repos,
which are expressed in credit risk equivalent) at 31 December 2016.
Gross credit risk exposure classified by geographies
Million euros
Customer loans
Drawn1
334,720
205,961
34,562
31,827
62,370
239,446
163,484
78,941
40,401
28,809
15,334
83,912
681
822,244
63.2%
(2.1%)
Undrawn
80,126
65,370
1,099
4,756
8,902
46,574
44,454
26,636
10,310
6,461
1,048
26,966
302
198,421
15.3%
1.8%
Loans to entities2
Drawn
27,960
20,923
2,032
1,425
3,579
20,921
32,889
20,011
2,889
4,575
5,414
10,513
79
92,361
7.1%
3.7%
Undrawn
809
368
378
63
24
23
0
230
1,062
0.1%
67.6%
Fixed income3
Derivatives
and Repos
Sovereign
52,405
38,490
203
6,119
7,594
12,208
32,645
20,344
3,517
7,345
1,439
9,255
-
106,513
8.2%
11.3%
Private
11,927
6,306
103
4,076
1,442
8,539
6,981
5,090
1,608
270
14
8,226
56
35,730
2.7%
(5.7%)
REC4
18,861
16,708
1,868
286
17,968
7,695
4,583
1,322
1,765
25
30
44,554
3.4%
(14.5%)
Total
526,807
354,126
37,999
50,448
84,235
345,656
288,171
155,628
60,046
49,224
23,273
139,132
1,118
1,300,885
100.0%
(0.7%)
Continental Europe
Spain
Germany
Portugal
Other
UK
Latin America
Brazil
Chile
Mexico
Other
US
Rest of the world
Group total
% Total
Var. vs. Dec-15
Gross credit risk exposure: change over time
Million euros
Change on 13
2015
9.6%
529,030
Continental Europe
Spain
6.3%
365,071
15.4%
35,069
Germany
15.3%
53,622
Portugal
19.2%
75,267
Other
(1.0%)
382,366
UK
9.0%
248,292
Latin America
(3.1%)
131,673
Brazil
30.3%
49,034
Chile
12.8%
46,681
Mexico
63.8%
20,905
Other
12.4%
149,609
US
148.1%
896
Rest of the world
6.8%
1,310,193
Group total
1. Balances with customers include contingent risks (details in note 35 to the Annual Financial Statements and Audit Report) but exclude repos (EUR 14,244 million) and other
Change on 14
(0.4%)
(3.0%)
8.4%
(5.9%)
11.9%
(9.6%)
16.1%
18.2%
22.5%
5.4%
11.3%
(7.0%)
24.8%
(0.7%)
2016
526,807
354,126
37,999
50,448
84,235
345,656
288,171
155,628
60,046
49,224
23,273
139,132
1,118
1,300,885
2014
480,551
333,227
32,929
43,754
70,641
349,169
264,459
160,532
46,084
43,639
14,204
123,758
450
1,218,387
customer lending financial assets (EUR 19,023 million).
2. Balances with credit entities and central banks include contingent risks but exclude Repos, the trading portfolio and other financial assets.
3. Total fixed income excludes the trading portfolio.
4. CRE (Credit Risk Equivalent: net value of replacement plus maximum potential value. Includes mitigants).
Gross exposure (lending to customers, entities, fixed income,
derivative and repos) to credit risk in 2016 amounted to EUR
1,300,885 million. The highest proportion, accounting for 86% of the
total, is credit to customers and credit entities.
Risk is diversified among the main regions where the Group
operates: Continental Europe (40%), UK (27%), Latin America (22%)
and the US (11%).
In 2016, credit risk exposure fell by 0.7%, due mainly to lower
exposure in the UK (caused by exchange rate effects).
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Changes in scope
In 2016, the inclusion of the agreement with PSA (50% joint venture
between Banque PSA Finance and Santander Consumer Finance
- SCF) in the consumer finance business was completed. The core
purpose of this agreement is financing of vehicles manufactured by
Peugeot, Citroën and DS and bought by end customers, and also of
second-hand vehicles sold in these 3 French brand dealerships. This
incorporation increased exposure by some EUR 8,176 billion, as of
December 2016.
This alliance has enabled SCF to enhance its position in the market,
improving its presence in countries to which it was already exposed,
such as Germany and Italy, whilst entering new markets, such as
Belgium, increasing its scope.
Key figures of credit risk arising from activity with customers
The portfolio incorporated had a non-performing loans ratio of
around 1.9% at the end of December, continuing the trend seen in
the previous year. The coverage of the new incorporation is around
100%, similar to levels for SCF. The incorporations carried out in 2016
completed the incorporation process for this business.
D.1.2.2. Main figures in 2016
The table below sets out the main items related to credit risk derived
from our activity with customers:
Credit risk with customers2
(million euros)
Non-performing loans
(million euros)
Non-performing loans rate
(%)
Continental Europe
Spain
Santander Consumer Finance 1
Portugal 5
Poland
UK
Latin America
Brazil
Mexico
Chile
Argentina
US
Puerto Rico
Santander Bank
SC USA
2016
331,706
172,974
88,061
30,540
21,902
255,049
173,150
89,572
29,682
40,864
7,318
91,709
3,843
54,040
28,590
2015
321,395
173,032
76,688
31,922
20,951
282,182
151,302
72,173
32,463
35,213
6,328
90,727
3,924
54,089
28,280
2014
310,008
182,974
63,654
25,588
18,920
256,337
161,974
90,572
27,893
33,514
5,703
76,014
3,871
45,817
22,782
2016
19,638
9,361
2,357
2,691
1,187
3,585
8,333
5,286
819
2,064
109
2,088
274
717
1,097
2015
23,355
11,293
2,625
2,380
1,319
4,292
7,512
4,319
1,096
1,980
73
1,935
273
627
1,034
2014
27,526
13,512
3,067
2,275
1,405
4,590
7,767
4,572
1,071
1,999
92
1,838
288
647
903
Group total
855,510
850,909
804,084
33,643
37,094
41,709
Continental Europe
Spain
Santander Consumer Finance 1
Portugal 5
Poland
UK
Latin America
Brazil
Mexico
Chile
Argentina
US
Puerto Rico
Santander Bank
SC USA
Group total
Coverage ratio
(%)
Net ASR provision3
(million euros)
2016
60.0
48.3
109.1
63.7
61.0
32.9
87.3
93.1
103.8
59.1
142.3
214.4
54.4
99.6
328.0
73.8
2015
64.2
48.1
109.1
99.0
64.0
38.2
79.0
83.7
90.6
53.9
194.2
225.0
48.5
114.5
337.1
73.1
2014
57.2
45.5
100.1
51.8
60.3
41.9
84.5
95.4
86.1
52.4
143.3
193.6
55.6
109.4
296.2
67.2
2016
1,342
585
387
54
145
58
4,911
3,377
832
514
107
3,208
96
120
2,992
9,518
2015
1,975
992
537
72
167
107
4,950
3,297
877
567
148
3,103
85
64
2,954
10,108
2014
2,880
1,745
544
124
186
332
5,119
3,682
756
521
121
2,233
55
26
2,152
10,562
2016
5.92
5.41
2.68
8.81
5.42
1.41
4.81
5.90
2.76
5.05
1.49
2.28
7.13
1.33
3.84
3.93
2015
7.27
6.53
3.42
7.46
6.30
1.52
4.96
5.98
3.38
5.62
1.15
2.13
6.96
1.16
3.66
4.36
Cost of credit
(% /risk)4
2015
0.68
0.62
0.77
0.29
0.87
0.03
3.36
4.50
2.91
1.65
2.15
3.66
2.12
0.13
10.97
1.25
2016
0.44
0.37
0.47
0.18
0.70
0.02
3.37
4.89
2.86
1.43
1.72
3.68
2.58
0.23
10.72
1.18
2014
8.88
7.38
4.82
8.89
7.42
1.79
4.79
5.05
3.84
5.97
1.61
2.42
7.45
1.41
3.97
5.19
2014
1.01
1.06
0.90
0.50
1.04
0.14
3.70
4.91
2.98
1.75
2.54
3.31
1.43
0.06
10.76
1.43
1. SCF includes PSA in figures for 2015 and 2016.
2. Includes gross lending to customers, guarantees and documentary credits.
3. Recovered Written-Off Assets (EUR 1,582 million).
4. Cost of credit = loan-loss provisions twelve months / average lending
5. Portugal includes Banif in figures for 2015 and 2016
NOTE: The figures for 2014 have been recalculated because of the transfer of the Banco Santander International units and the New York branch to USA.
2016 ANNUAL REPORT
185
5. Risk management report » Risk profile > Credit risk
In 2016, credit risk with customers rose slightly by 0.6%, largely due
to the increases in Brazil, SCF and Chile, which offset the fall in the
United Kingdom, mainly due to the exchange rate effect. There is
growth across the board in local currency, with the UK standing out.
These levels of lending, together with lower non-performing loans
(NPLs) of EUR 33,643 million (-9% vs. 2015) reduced the Group’s NPL
ratio to 3.93% (-43 bp vs. 2015).
For coverage of these NPLs, the Group recorded net credit losses of
EUR 9,518 million (-6% vs. 2015), after deducting write-off recoveries.
This fall is reflected in a fall in the cost of credit to 1.18% (7 bp less
than the previous year).
Total loan-loss provisions were EUR 24,835 million, bringing the
Group’s coverage ratio to 74%. It is important to bear in mind
that this ratio is affected downwards by the weight of mortgage
portfolios (particularly in the UK and Spain), which require fewer
provisions as they have collateral.
Reconciliation of the main magnitudes
The consolidated financial report details the portfolio of customer
loans, both gross and net of funds. Credit risk also includes off
balance sheet risk. The following chart shows the relation between
the concepts that comprise these magnitudes.
Million euros
CREDIT RISK
WITH CUSTOMERS
Breakdown 1
Breakdown 2
LENDING
(LOANS AND
ADVANCES
TO CUSTOMERS)
LOANS AND ADVANCES
TO CUSTOMERS
(GROSS)
855,510*
Drawn by customers
822,244**
Repos, other financial
assets
33,266
Lending (loans and advances to customers)
813,140
Off-balance sheet exposure
42,370
SECTION ON
CREDIT RISK
* Table main
figures
** Table gross
exposure
to creditrisk
813,140
814,863
Other +1,723
Lending
787,763
Trading
Portfolio
9,504
Fair
value
17,596
BALANCE FROM
CONSOLIDATED FINANCIAL
REPORT
Funds
(24,393)
Asset: lending:
loans and advances to customers
763,370
9,504
17,596
LOANS AND ADVANCES
TO CUSTOMERS
(NET)
790,470
186
2016 ANNUAL REPORT
Geographic distribution and segmentation
On the basis of the aforementioned segmentation, the geographic
distribution and situation of the portfolio is shown in the following
charts.
Total
Million euros
Other
20%
Spain
20%
821,867
813,815
762,375
US
11%
Chile
5%
Portugal
4%
Individuals
Other
23%
Total
855,510
Brazil
10%
UK
30%
Spain
11%
Brazil
7%
Performing
Non-performing loans
33,643
37,094
41,709
2016
2014
2013
469,450
472,807
436,612
Total
483,182
US
10%
Chile
5%
Portugal
4%
SMEs, companies and institutions
Performing
Non-performing loans
UK
40%
13,732
16,204
17,482
2016
2014
2013
Other
16%
Spain
29%
228,303
211,612
199,657
US
14%
Chile
6%
Portugal
4%
Total
245,607
UK
21%
SGCB
Other
19%
Performing
Brazil
10%
Non-performing loans
17,304
17,137
20,869
2016
2014
2013
Spain
38%
124,113
129,397
126,107
Total
126,721
US
8%
Chile
3%
Portugal
2%
UK
7%
Performing
Non-performing loans
Brazil
23%
2,607
3,752
3,357
2016
2014
2013
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5. Risk management report » Risk profile > Credit risk
The structure of the main magnitudes by geographic area:
• Continental Europe
• In Spain5, the NPL ratio stood at 5.41 % (-112 bp compared
to 2015), as a result of the favourable performance of non
performing loans due to fewer new entries in most portfolios
and, to a lesser extent, portfolio sales and forbearance positions
returning to normal. The coverage ratio remains at 48% (stable
over the year).
Portfolio with normal status: amounts past due
Amounts past due by three months or less represented 0.32% of
total credit risk with customers. The following table shows the
structure at 31 December 2016, classified on the basis of the maturity
of the first maturity:
Amounts past due pending collection
Million euros
• Portugal, downward trend in non-performing loans due to fewer
new entries in main segments and from portfolio sales. After the
adjustments due to the acquisition of Banif, non-performing loans
stand at 8.81%, (+135 bp vs. 2015) with a coverage ratio of 64%.
Loans and advances to
credit institutions
Loans and advances to customers
Public administrations
• In Poland the down turn in the NPL ratio continue to 5.42%
Other private sector
Debt instruments
Total
Less
than
2 to 3
1 month months months
1 to 2
20
1,672
8
1,664
-
1
659
2
657
-
1,692
660
-
393
-
393
-
393
Non-performing loans and provisions:
change over time and mix
Non-performing assets are classified as:
• Assets classified as non-performing due to the delinquency of
the counterparty: debt instruments that are more than 90 days
past due, irrespective of their holder or collateral. In the case of
individually significant exposures, these assets are covered for the
difference between the carrying value of the asset and the current
value of expected future cash flows.
• Assets classified as non-performing for reasons other than the
delinquency of the counterparty: debt instruments for which
there are reasonable doubts about collection in the contractually
agreed terms, even though there are no reasons to classify them
as non-performing due to delinquency. In the case of individually
significant exposures, these assets are covered for the difference
between the carrying value of the asset and the current value of
expected future cash flows.
(-88 bp vs. 2015). The coverage ratio was 61%.
• In Santander Consumer the NPL ratio, following the increase
in the perimeter, was 2.68% (-74 bp in the year), with a generally
strong performance by portfolios in most countries. The coverage
ratio remains at 109%.
• The UK6 reduced its NPL ratio to 1.41% (-11 bp in the year), due to
strong performance across all segments, particularly SMEs and
individual customers. The coverage ratio was 33%.
• Brazil7, against an adverse macroeconomic background, the NPL
ratio was reduced to 5.90% (-8 bp in the year) using proactive risk
management. The coverage ratio was 93%.
• Chile has reduced its NPL ratio to 5.05 % (-57 bp in the year),
thanks to the strong performance in non-performing loans across
most segments, particularly individual customers. The coverage
ratio was 59%.
• Non-performing loans in Mexico fell to 2.76% (-62 bp in the year),
due to a fall in the NPL ratio mainly in individuals and wholesale.
The coverage ratio was 104%.
• The NPL ratio in the United States8 stood at 2.28% (+15 bp), with
the coverage ratio remaining high, at 214%.
• The NPL ratio at Santander Bank stood at 1.33% (+16 bp), driven by
the increase in the oil and gas sector in the first quarter, although
the trend has been positive since then. The coverage ratio rose to
100%.
• In SC USA, the high rotation of the portfolio and the unit’s
forward-looking NPL management brought the NPL ratio to
3.84% and the coverage ratio increased to 328%.
• Puerto Rico’s NPL ratio increased to 7.13%, whilst its coverage
ratio rose to 54%.
5. Does not include real estate activity. Further details in section D.1.3.2. Spain.
6. Further details in section D.1.3.1. UK.
7. Further details in section D.1.3.4. Brazil.
8. Further details in section D.1.3.3. US
188
2016 ANNUAL REPORT
The table below shows the change over time in non-performing
loans by constituent items:
Performance 2014-2016
Million euros
Change over time in non-performing
loans loans by constituent item
Million euros
7,362
1,946
(12,758)
37,094
For impaired assets
For other assets
Gross provision for impaired
assets and write-downs
33,643
Provision
Write-downs
Provision for other assets
Fund (start of period)
25,681
28,046
2014
2015
2016
27,121
17,706
9,414
19,118
6,563
19,786
8,260
11,766
10,670
11,045
11,766
10,670
11,045
156
-
52
(625)
814
(48)
Exchange differences and other
2,271
Non-performing
loans
2015
Net
entries
Scope
and exchange
rate
Losses Non-performing
loans
2016
Performance 2014-2016
Million euros
NPL (start of period)
Net inflows
Scope
Exchange differences
and other
Losses
NPL (end of period)
2014
41,652
9,652
497
1,734
(11,827)
41,709
2015
2016
41,709
37,094
7,705
106
(65)
(12,361)
37,094
7,362
734
1,211
(12,758)
33,643
Change over time in loan loss provisions,
according to constituent item
Million euros
11,045
52
(12,758)
Losses
(11,827)
(12,361)
(12,758)
Fund (end of period)
28,046
27,121
24,835
Forbearance portfolio
Forbearance is defined as the modification of the payment
conditions of a transaction which allow a customer who is
experiencing financial difficulties (current or foreseeable) to fulfil its
payment obligations, on the basis that whether this modification was
not to be made it would be reasonably certain that it would not be
able to meet its financial obligations. The modification could be done
in the same original transaction or through a new transaction which
replaces the previous one. The aforementioned modifications are
driven by concessions from the bank to the customer (concessions
more favourable than those that are established in the market).
The Bank has a detailed corporate policy for forbearance which acts
as a reference in the various local transpositions of all the financial
institutions that form part of the Group. These share the general
principles established in the new Bank of Spain circular 4/2016 and
the technical criteria published in 2014 by the European Banking
Authority, developing them in a more granular way on the basis of
the level of customer impairment.
27,121
(625)
24,835
For other
assets
9,369
For impaired
assets
15,466
This policy sets down rigorous criteria for the evaluation,
classification and monitoring of such transactions, ensuring the
strictest possible care and diligence in their granting and follow up.
These forbearance principles:
• Must be focused on recovery of the amounts due; must adapt the
payment obligations to the customer’s actual situation; and must
recognise a loss as soon as possible, if any amounts are deemed
irrecoverable.
For other
assets
9,414
For impaired
assets
17,706
Fund
2015
Gross
provision
for impaired
assets and
write-downs
Provision
for other
assets
Exchange
rate and
other
Losses
Fund
2016
• Forbearances may never be used to delay immediate recognition of
losses or to hinder appropriate recognition of risks of default.
• Further forbearance may also be granted if it is deemed
appropriate in order to maximise recoveries, providing this does
not in any way represent an incentive for non-payment by the
customer.
2016 ANNUAL REPORT
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5. Risk management report » Risk profile > Credit risk
• Restructuring must always envisage maintaining existing
guarantees and, if possible, improving them.
The forbearance portfolio stood at EUR 48,460 million at the end of
December, as follows9.
• Forbearance decisions must be based on analysis of the transaction
at a suitable level of the organisation other than that which granted
the initial transaction, or must be reviewed by a higher decision
making level or body.
Instances have been established for considering transactions to
be experiencing financial difficulties, and therefore to be eligible
for consideration for forbearance. Although the consideration of
financial difficulties remains the responsibility of the analyst or
manager, based on a number of risk indicators (high indebtedness,
falling turnover, narrowing margins, impaired access to markets,
operations included in a debt sustainability accord, risks relating
to holders declared bankrupt with no liquidation filing, etc.), an
operation can be considered for forbearance if it has been past due
for more than 30 days at least once in the three months prior to the
modification.
Classification criteria have also been defined for forborne
transactions, in order to ensure risks are recognised appropriately.
Transactions not classified as non-performing loans at the time
of the forbearance are in general considered normal but under
special monitoring. Those operations that remain classified as
non-performing loans for not meeting the requirements for their
reclassification to another category at the time of forbearance must
fulfil a 12-month schedule of prudent payments, to ensure with
reasonable certainty that the customer has recovered their payment
capacity and is no longer non-performing loans.
The operation is no longer considered non-performing loans once
this period has been completed, but remains subject to a trial
period of special monitoring. This monitoring continues: whilst it is
considered that the customer might still be experiencing financial
difficulties; for at least two years; until the holder has paid all
principal and interest outstanding from the date of the restructuring
or refinancing; and providing that the holder has no other operations
with amounts more than 30 days past due at the end of the trial
period.
Forbearance volume
Million euros
Performing
Non
performing
loans
Total risk
Amount
Amount
Amount
%
coverage/
total
Total
forbearance
29,770
18,690
48,460
23%
The Group’s forbearances were down 14.5%, continuing the trend
from recent years. In terms of credit quality, 39% of the forbearance
portfolio is classified as non-performing loans, with average
coverage for these amounts of 59% (23% of the total portfolio).
Management metrics10
Credit risk management uses other metrics to those already
commented on, particularly change in managed non-performing
loans variation plus net write-offs (known in Spanish as VMG) and
expected loss. Both enable risk managers to form a complete idea of
the portfolio’s evolution and future prospects.
VMG is the result of subtracting the initial balance of non
performing loans from the final balance for the period under
consideration, plus the write-offs in this period, less loan loss
recoveries in the same period. It is often considered in relation to the
average lending on which it is based, giving rise to what is known as
the risk premium, the change in which over time can be seen below.
9. For more detail on the real estate portfolio consult note 54 of the auditor’s report and the annual financial statements.
10. For further details of these metrics refer to section D.1.5.6. Measurement and control in this chapter.
190
2016 ANNUAL REPORT
Risk premium (VMG/average balances)
Figures at constant exchange rate.
2014
2015
2016
4.88
4.31
3.42
1.07
0.80 0.721
Group
Brazil
(1) Management adjustment due to change in scope.
The Group´s risk premium continued its downward trend in 2016,
falling across most greographies.
Expected loss is an estimate of future losses on the portfolio
over the coming year, for a particular moment in time. It reflects
the characteristics of the portfolio compared to exposure (EAD),
probability of default (PD) and severity or recovery in the event of
default (LGD).
0.01
0.04
0.28
-0.07
UK
-0.49
-0.55
Spain
The table below sets out the distribution by segments in terms of
EAD, PD and LGD. For example, it can be seen that the consideration
of LGD in the metrics makes portfolios with mortgage guarantees
generally produce a lower expected loss, as a result of the recovery
that occurs in the event of default via the mortgaged property.
The expected loss with portfolio customers classified as being in a
normal situation is 1.12% (1.00% in 2015) and 0.88% for the whole of
the Group’s credit exposure (0.79% in 2015), maintaining a medium
low risk profile.
Credit risk exposure: segmentation
Segment
Sovereign debt
Banks and other financial entities
Public sector
Corporate
SMEs
Mortgages, individuals
Consumer, individuals
Credit cards, individuals
Other assets
Pro memoria customers2
Total
EAD1
184,387
62,037
3,688
151,836
169,243
317,533
168,387
46,911
15,812
857,596
1,119,832
% EAD
total
16.5%
5.5%
0.3%
13.6%
15.1%
28.4%
15.0%
4.2%
1.4%
76.6%
100.0%
Figures to December 2016.
1. Excludes non-performing assets.
2. Excludes Sovereign debt, Banks and other financial entities and Other assets.
PD Medium
LGD Medium
0.30%
0.38%
1.83%
0.75%
3.26%
2.44%
6.36%
3.80%
2.46%
3.15%
2.51%
6.26%
38.05%
21.50%
31.16%
41.31%
7.15%
48.98%
65.62%
34.47%
35.66%
EL
0.02%
0.14%
0.39%
0.23%
1.35%
0.17%
3.12%
2.49%
0.85%
1.12%
35.08%
0.88%
2016 ANNUAL REPORT
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5. Risk management report » Risk profile > Credit risk
» D.1.3. Details of main geographies
The portfolios of the geographies where Grupo Santander has the
highest risk concentrations are set out below, based on the data in
section D.1.2.2. Main figures in 2016.
D. 1.3.1. UK
Geographic concentration
%
3% 5%
5%
4%
3%
30%
1.3.1.1. Overview of the portfolio
Credit risk with customers in the UK amounted to EUR 255,049
million at the close of December 2016, accounting for 30% of the
Group total.
The Santander UK portfolio is divided into the following segments:
8%
3%
8%
2%
5%
24%
South East (Exc London)
Greater London
Yorks And Humber
North
North West
Wales
South West
East Anglia
East Midlands
West Midlands
Northern Ireland
Scotland
Segmentation of the portfolio
%
Other individuals
3%
SMEs and companies
20%
Mortgages, individuals
77%
1.3.1.2. Mortgage portfolio
It is worth highlighting the mortgage portfolio because of its
importance not only for Santander UK but for all of the Group’s
lending. This stood at EUR 180,476 million at the end of December
2016.
This portfolio consists of mortgages for acquisition or reforming
homes, granted to new as well as existing customers and always
constituting the first mortgage. There are no operations that entail
second or successive charges on mortgaged properties.
The mortgaged property must always be located within UK territory,
regardless of the destiny of the financing except in the case of some
one-off operations in the Isle of Man. Mortgages can be granted for
properties outside the UK, but the collateral for such mortgages
must consists of a property in the UK.
Most of the credit exposure is in the south east of the UK, and
particularly in the metropolitan area of London, where housing
prices have risen over the last year.
All the properties are valued independently before each new
operation is approved, in accordance with the Group’s risk
management principles.
Mortgages that have already been granted are subject to a
quarterly updating of the value of the property in guarantee, by
an independent agency, using an automatic valuation system in
accordance with the market’s usual practices and in compliance with
prevailing legislation.
The distribution of the portfolio by type of borrowers is shown in the
chart below:
Mortgage portfolio loan types
Million euros
180,476
4%
7,664
34%
61,961
19,709
13%
2,598
48%
9,530
43%
76,827
13%
2,661
19%
34,024
25%
4,920
Stock
New production
First-time buyers1
Home movers2 Re-mortgagers3
Buy to let4
1. First-time buyers: customers who purchase a home for the first time..
2. Home movers: customers who change houses, with or without changing the bank
granting the loan.
3. Re-mortgagers: customers who switch the mortgage from another financial entity.
4. Buy to let: houses bought for renting out.
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2016 ANNUAL REPORT
There are many different types of products with different risk
profiles, all of them subject to the limits inherent to the policies of
a prime lender such as Santander UK. The features of some of these
are described below (in brackets the percentage of the portfolio of
the mortgage portfolio they represent):
• Interest only loans (36.5%)11: the customer pays the interest
every month and amortises the capital at maturity. An appropriate
repayment vehicle such as a pension plan, mutual funds, etc.
is needed. This is a regular product in the UK market for which
Santander UK applies restrictive policies in order to mitigate the
inherent risks. For example: a maximum LTV of 50%, higher cut-off
in the admission score or the evaluation of the payment capacity,
simulating the amortization of capital and interest payments
instead of just interest.
• Flexible loans (11.3%): The contract for this type of loan enables
the customer to modify their monthly payments or make additional
provision of funds up to a pre-established limit, as well as having
access to disbursements from previously paid amounts above that
limit.
• Buy to Let (4.2%): Buy to let mortgages (purchase of a property
to rent out) account for a small percentage of the total portfolio.
Admission was halted between 2009 and 2013, when it was
reactivated following the improvement in market conditions, with
approval subject to strict rick policies. In December 2016, they
represented around 13% of total admissions.
There was growth of 0.9% in local-currency terms in 2016, against
a backdrop of uncertainty in the second half of the year, although
prices increased in the real estate market.
10.6%
The NPL rate fell from 1.44% in 2015 to 1.35% in December 2016.
The decrease was sustained by the evolution of non-performing
loans, which improved thanks to a more favourable economic
environment, as well as increased NPL exits due to the improved
efficiency of recovery teams. The volume of non-performing loans
thus dropped by 6%, continuing the trend seen in 2015.
It is also necessary to point out the more conservative focus adopted
in Santander UK’s definition of an NPL, in line with the criteria set by
the Bank of Spain and Grupo Santander, with regard to the standard
applied in the UK market. This focus includes classification of the
following operations as non-performing loans:
• Customers with payment delays of between 30 and 90 days and
who have been declared publicly insolvent (via a bankruptcy
process) in the previous two years.
• Operations where, once the maturity date is reached, there is still
loan capital pending payment with a maturity of more than 90
days, although the customer remains up to date with their monthly
payments.
• Forbearance operations which, in accordance with the corporate
policy, are considered as “payment agreements” and thus classified
as non-performing loans.
Excluding these concepts, which are not included in calculating the
NPL ratio in the UK market, and under which EUR 637 million was
classified as NPLs at the end of December 2016, the ratio of the
mortgage portfolio was 1.01%.
The strict credit policies mentioned limit the maximum loan-to-value
(LTV) to 90% for those loans that amortise interest payments and
capital, and to 50% for those that amortize interest regularly and the
capital at maturity. These policies were applied, bringing the simple
arithmetic average LTV of the portfolio to 42.9% and the average
weighted LTV to 38.9%. The proportion of the portfolio with an LTV
of more than 100% was down to 1.2%, from 1.7% in 2015.
The following charts show the LTV structure for the stock of
residential mortgages and their distribution in terms of the income
multiple for new loans as of December 2016:
Loan to value
(average 42.9%)1
Income multiple
(average 3.0)2
3.1%
86.3%
71.4%
17.1%
11.5%
< 75%
75%-90%
> 90%
< = 2.5
> 2.5-3
> 3.0
1. Loan to value:relation between the amount of the loan and the appraised value of
the property. Based on indices.
2. Income multiple: relation between the total original amount of the mortgage and
the customer’s annual gross income declared in the loan application.
The credit risk policies currently used explicitly forbid loans
regarded as high risk (subprime mortgages) and establish demanding
requirements for credit quality, both for operations and for
11. Percentage calculated for loans with total or some interest only component.
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5. Risk management report » Risk profile > Credit risk
customers. For example, as of 2009 mortgages with a loan-to-value
of more than 100% have not been allowed.
D. 1.3.2. Spain
An additional indicator of the portfolio’s strong performance is the
reduced volume of foreclosed properties, which in December 2016
amounted to EUR 42 million, less than 0.03% of total mortgage
exposure. Efficient management of these cases and the existence of
a dynamic market for this type of housing enables sales to take place
in a short period of time (around 18 weeks on average), contributing
to the good results.
1.3.1.3 SMEs and business
As shown in the chart on the segmentation of the portfolio at the
beginning of this section, lending to SMEs and companies (EUR 47,234
million) represented 20% of the total at Santander UK as of December
2016.
1.3.2.1. Overview of the portfolio
Total credit risk (including guarantees and documentary credits)
in Spain (excluding the real estate unit, which is discussed later)
amounted to EUR 172,974 million (20% of the Group total), with
an adequate level of diversification by both product and customer
segment.
In 2016, total credit risk was in line with the previous year, after
successive falls in recent years. The growing volume of new lending
in the main individual and business segments portfolios offsets the
lower funding to government bodies and the pace of repayments,
still higher than growth of new lending in the individuals segment.
Meanwhile, the companies segment returned to growth.
The following sub-segments are included in these portfolios:
Credit risk by segment
Million euros
Total credit risk*
Household
mortgages
Other credit
for individuals
Companies
Public
administrations
2016
2015
2014
Var
16/15
Var
15/14
172,974
173,032
182,974
0%
(5%)
46,219
47,924
49,894
(4%)
(4%)
16,608
96,081
16,729
92,789
17,072
96,884
(1%)
4%
(2%)
(4%)
14,065
15,590
19,124
(10%)
(18%)
* Including guarantees and documentary credits
NPL ratio for the total portfolio was 5.41%, 112 bp lower than at
year-end 2015, due to the trend of falling delinquency. This pattern
is due to the lower gross NPL entries in the individual and business
segments, which are 24% lower than 2015, and, to a lesser extent, the
normalisation of several restructured positions and portfolio sales.
The coverage ratio remained at 48%, similar to year-end year end 2015.
SME and business portfolio: segments
Social housing
20.7%
SGCB
19.7%
SMEs
38.7%
Companies
20.9%
SMEs: this segment includes small firms belonging to the business
lines of small business banking and regional business centres. Total
lending at December 2016 was EUR 18,295 million, with an NPL ratio
of 3.4%.
Companies: This includes companies to which a risk analyst is
assigned. It also includes portfolios considered as not strategic
(legacy and non-core). Lending at December 2016 was EUR 9,867
million, with an NPL ratio of 2.3 %.
GCB: includes companies under the Santander Global Corporate
Banking risk management model. Lending at December amounts to
EUR 9,314 mn with an NPL ratio of 0.01%.
Social housing: this includes lending to companies that build,
sell and rent social housing. This segment is supported by local
and central government and has no NPLs. Outstanding lending in
December stood at EUR 9,758 million.
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2016 ANNUAL REPORT
NPL and coverage ratio
NPL rate, household mortgages, Spain
Coverage ratio
NPL ratio
6.72%
5.82%
44%
45%
48%
48%
5.09%
3.83%
7,49%
7,38%
6,53%
5,41%
2013
2014
2015
2016
2013
2014
2015
2016
The portfolio of mortgages for homes in Spain kept its medium-low
profile with limited expectations of further deterioration:
• All mortgages repay principle right from the start.
Below are the main portfolios.
• Early amortization is usual and so the average life of the operation
1.3.2.2. Home mortgages
Lending to households to acquire a home in Spain amounted to EUR
46,864 million at the end of 2016 (27% of total credit risk). 99% of
this has a mortgage guarantee.
Lending to households to acquire a home*
Million euros
2016
2015
2014
Gross amount
46,864
48,404
50,388
Without mortgage
guarantee
645
480
496
With mortgage guarantee
46,219
47,924
49,894
of which non
performing loans
Without mortgage
guarantee
With mortgage guarantee
1,796
2,477
2,964
27
1,769
40
2,437
61
2,903
is well below that in the contract.
• High quality of collateral concentrated almost exclusively in
financing the first home.
• Average affordability rate of close to 28%.
• Some 74% of the portfolio has a loan-to-value of less than 80%
(total risk/latest available valuation of the home).
Income multiple
%
Loan to value
%
25%
53.8%
9%
22%
17%
* Does not include the Santander Consumer España mortgage portfolio
(EUR 2,192 million, with EUR 97 million of non-performing loans).
21.2%
The NPL ratio of mortgages to households to acquire a home was
3.83%, 126 bp less than in 2015. The fall in lending (which increases
the NPL ratio by 19 bp), which is due to repayments being higher
than the new growth in loans, is offset with the fall in delinquency
(NPL ratio down 145 bp), underpinned by further reduction in gross
NPL entries while the pace of recoveries remains at 2015 levels.
IM< 30%
30% < IM< 40%
IM > 40%
24%
28%
LTV< 40%
LTV between 40% and 60%
LTV between 60% and 80%
LTV between 80% and 100%
LTV> 100%
Loan to value: percentage indicating the total risk/latest available valuation of the
home.
Income multiple: relation between the annual instalments and the customer’s net
income.
The evolution of vintages in 2016 continued to be very positive,
backed by the quality of the admission measures applied since 2008
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5. Risk management report » Risk profile > Credit risk
and a refocusing of demand towards better profiles, resulting in a
decreasing rate of NPL entries.
Maturity of vintages
o
i
t
a
r
s
n
a
o
l
i
g
n
m
r
o
f
r
e
p
-
n
o
N
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
2008
6.46%
2016
0.01%
2015
0.13%
20
0.1
14
3%
2011
1.77%
2009
1.86%
2010
1.28%
2
0
013
.36%
2012
0.81%
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95
100
105
110
115
Months maturity
1.3.2.3. Business portfolio
Credit risk assumed directly with SMEs and companies (EUR 96,081
million) is the main lending segment in Spain (56% of the total).
Most of the portfolio (93%) corresponds to customers who have been
assigned an analyst to monitor them continuously throughout the risk
cycle.
It is a highly diversified portfolio, with over 199,561 active customers
and without significant concentrations in any one particular business
segment.
Business portfolio distribution
Trade and
repairs 13.8%
Manufacturing
industry 13.5%
Construction 12.0%
Electricity, gas and
water supplies 9.9%
Real estate
activities 8.6%
Financial and
insurance
activities 8.6%
Professional, scientific
and technical
activities 7.1%
Transport and
storage 4.8%
Information and
communications 4.7%
Accommodation 4,4%
Other 4.2%
Food service
activities 3,2%
Administrative
activities 2.3%
Metallurgy,
manufacture of iron,
steel and ferroalloy
products 1.3%
Other social
services 1.0%
Extractive
industries 0,6%
The NPL ratio of this portfolio was 5.79% at the end of 2016, 185 bp
lower than 2015. This fall is the result of the growth in lending (which
reduces the NPL ratio by 16 bp) and the fall in delinquency (NPL ratio
down by 169 bp), with gross NPL entries 33% lower than the previous
year and a rate of recoveries at similar levels.
1.3.2.4. Real estate activity in Spain
The Group manages real estate activity in Spain through a separate
unit, which includes loans to customers mainly for real estate
promotion, and has a specialised management model, with stakes in
companies in the real estate sector12 and foreclosed assets.
The Group’s strategy in the last few years has been to reduce the
volume of these assets, which at the end of 2016 stood at EUR 5,937
million in net terms (around 2% of loans in Spain and less than 1% of
the Group’s loans). The portfolio’s composition is as follows:
• Net loans of EUR 1,874 million, EUR 722 million less than at
December 2015, with coverage of 54%.
• Net foreclosed assets at year end were EUR 3,403 million, with
coverage of 58%.
• The net value of stakes in real estate companies was EUR 660
million.
The gross exposure in loans and foreclosures continued the
downward trend of previous years and fell 65% between 2008 and
2016.
12. As of December 2014, the stake in Metrovacesa was consolidated by the full equity method.
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2016 ANNUAL REPORT
• Santander Consumer USA (SC USA): Focused on Automobile
financing with lending of EUR 28,590 million (31% of the total for
the USA), and a vehicle leasing portfolio amounting to EUR 9,120
million. This activity is mainly based on its relationship with the
Fiat Chrysler Automobiles (FCA) group, which dates back to 2013.
Through this agreement, SC USA became the preferred lender for
Chrysler vehicles in the USA.
• Other USA businesses: Banco Santander Puerto Rico (BSPR) is a
retail and commercial bank operating in Puerto Rico. Its lending
stood at EUR 3,843 million at year-end 2016, 4% of total lending
in the USA. Santander Investment Securities (SIS), Nueva York, is
dedicated to wholesale banking, with total lending at year-end 2016
of EUR 1,459 million (2% of the USA total). Finally, Banco Santander
International (BSI), Miami, focuses mainly on private banking. Its
lending stood at EUR 3,760 million at year-end 2016, 4% of total
lending in the USA.
At an aggregate level, Santander US´s lending increased by 1.1%
compared to year-end 2015. Non-performing loans and cost of credit
remained stable. This was due to the improved performance of SC
US´s Auto portfolios, following the implementation of new risk
policies in the first quarter to improve the profile of new originations,
and adjustments to the Oil & Gas sector in Santander Bank, in line
with the industry. The NPL ratio stood at 2.28% (+15 bp) at year end,
with a cost of credit of 3.68% (+2 bp). Details of the performance of
Santander US’s main units are set out below.
Great progress has been made in projects related to existing
regulatory commitments, particularly with regard to stress testing
and CCAR (Comprehensive Capital Adequacy and Review) exercises,
reducing the number of outstanding recommendations by 66%.
1.3.3.1. Santander Bank N.A. performance
Most of the lending of Santander Bank is secured - around 60% of
the total - mainly in the form of mortgages to individuals and also in
companies lending. This explains its low NPL ratio and cost of credit.
Lending remained broadly stable in 2016.
The NPL ratio remains very low, as shown in the charts below, standing
at 1.33% at 31 December. The increase is explained by NPL classifications
carried out in the first quarter for the Oil & Gas sector, which were
offset by significant improvements throughout the rest of the year
due to active portfolio management and favourable movements in oil
prices. The cost of credit stood at 0.23%, up 10 bp compared to year
end 2015, due mainly to increased coverage for customers in this sector.
The changes over time and the classification of the credit and
foreclosed assets portfolios are shown in the table below:
Credits and foreclosed assets portfolio
Million euros
2016
2015
Gross
Net
balance cover. balance balance cover. balance
Gross
Net
%
%
1. Lending
4,069
54%
1,874
5,959
56%
2,596
a. Performing
228
5%
217
435
27%
318
b. Non
performing
loans
3,841
57%
1,657
5,524
59%
2,278
2. Foreclosed
8,061
58%
3,403
8,253
55%
3,707
Total 1+2
12,130
56%
5,277
14,212
56%
6,303
Net exposure under the management scope of the real estate unit
fell by 16% in 2016.
By type of real estate that guarantees the loans and foreclosed
assets, the coverage levels are as follows:
Coverage by guarantee type
Million euros
Real estate
lending
Foreclosed real
estate assets
Total
Expos. Cover.
Expos. Cover.
Expos. Cover.
2,120
47%
2,178
49%
4,298
48%
97
26%
839
46%
936
44%
Completed
buildings
Developments
under
construction
Land
1,517
62%
5,044
63%
6,561
63%
Other
guarantees
335
72%
0
-
335
72%
TOTAL
4,069
54%
8,061
58%
12,130
56%
D. 1.3.3. United States
The credit risk of Santander’s US subsidiary stood at EUR 91,70913
million at year-end 2016. This subsidiary comprises the following
business units, after their integration under Santander Holdings USA
in July:
• Santander Bank N.A.: With total loans, including off-balance
sheet exposure, of EUR 54,040 million (59% of Santander US
total). Its lending activity is focused on retail and commercial
banking, of which 33% is with individuals and approximately 67%
with companies. One of the main strategic goals for this unit is its
transformation plan. This focuses on compliance with all regulatory
programs, together with the development of the retail and
commercial banking model towards a comprehensive solution for
its customers.
13. Includes EUR 17 million of lending under the holding company.
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5. Risk management report » Risk profile > Credit risk
The coverage ratio, therefore, remains at comfortable levels ending the
year at 100%.
Non-performing loans ratio
Coverage ratio
Cost of credit
1.47%
1.41%
1.27%
1.33%
1.16%
114%
95%
96%
109%
100%
0.27%
0.23%
0.21%
0.19%
0.13%
4T15
1T16
2T16
3T16
4T16
4T15
1T16
2T16
3T16
4T16
4T15
1T16
2T16
3T16
4T16
The unit’s strategic priority is its transformation plan, which seeks to
ensure regulatory compliance and the alignment of management and
governance standards with the corporate model. Significant progress
was made throughout the year.
1.3.3.2. SC USA Performance
The risk indicators for Santander Consumer USA are higher than
those of the other US units, due to the nature of its business, which
focuses on vehicle financing through loans and leases. The credit
profile of the unit’s customers covers a wide spectrum as SC USA
seeks to optimise the risk assumed and the associated returns.
This means that the costs of credit are higher than those in other
Group units, but these are compensated by the returns generated.
This is facilitated by one of the most advanced technological
platforms in the industry, including a servicing structure for third
parties that is scalable and extremely efficient. Other competitive
advantages include its excellent knowledge of the market and the
use of internally-developed pricing, admission, monitoring and
recovery models, based on effective management of comprehensive
databases. This is complemented by the availability of numerous
other business tools, such as discounts from the brands (OEM -
Original Equipment Manufacturers), pricing policies with highly
responsive recalibration capacity, strict monitoring of new
production and optimised recovery management.
The lending of Santander Consumer USA also include the personal
lending portfolio, which is considered non-strategic. In early 2016
the Lending Club business was sold for EUR 824 million.
The NPL ratio remains moderate at 3.84% (up 18 bp compared to
the previous year), thanks to preventive delinquency management
accordingly to the type of business involved. The cost of credit
improved to 10.72%, from 10.97% at year-end 2015. This was due
to new risk policies implemented in the first quarter, with more
demanding criteria resulting in a higher quality mix of new lending,
and lower volumes of new vehicle lending.
The leasing portfolio - business carried out exclusively under the
FCA agreement and focused on customers with high quality credit
profiles - grew by 30.9% in the year, to EUR 9,120 million. The
performance of customers has been positive, and the focus is now
on managing and mitigating the residual value risk of leasing: i.e.
the difference between the book value of the vehicles at the time of
underwriting of the leasing agreement, and their potential value at
maturity. These mitigating actions are carried out in accordance with
the prudent risk appetite framework, through the definition of limits,
and through management of the business, with rapid and efficient
sales of the vehicles when the agreements end. The unit is currently
evaluating “share-agreement” structures and sales agreements with
third parties.
The growth in this portfolio has maintained profitability at adequate
levels, with revenues performing favourably. This is reflected in the
positive results for leases that matured during the year, and the
mark-to-market valuation of vehicles in the portfolio compared to
their book value, amounting to EUR 67 million at year-end 2016.
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2016 ANNUAL REPORT
The coverage ratio remains high, at 328% compared to 337% in the
previous year.
Non-performing loans ratio
Coverage ratio
Cost of credit
3.82%
3.84%
3.66%
3.55%
3.28%
375%
357%
337%
323%
328%
11.37%
10.97%
11.09%
11.02%
10.72%
4T15
1T16
2T16
3T16
4T16
4T15
1T16
2T16
3T16
4T16
4T15
1T16
2T16
3T16
4T16
This was mainly due to a lack of solvent demand, maturities of
wholesale transactions (partially offset in the last quarter with the
signing of confirming transactions) and the strengthening of the
Brazilian real against the US dollar.
The strategy focused on changing the mix used in recent years
continued during 2016. Stronger growth was obtained in segments
with a more conservative profile, fostering customer loyalty and
digitalisation at the same time. The individuals segment was marked
by growth in the mortgage portfolio and the portfolio of payroll
discount loans (marketed under the brand name Olé Consignado),
commercial efforts aimed at the select segment, and by marketing
campaigns to increase card exposure in the third quarter.
Turning to SMEs, unsecured products - such as the special cheque -
also lost ground to less risky forms of funding, such as Adquirência.
Finally, the companies and GCB portfolios (with large dollar
positions in both cases) were both hit by the appreciation of the real
against the US dollar, and the strategy of reducing exposure to some
commodity sectors (mainly oil and gas and electricity), whilst the
agricultural and foreign trade segments were boosted.
SC USA is benefitting from increasing access to third party funding,
with a 7.5% increase in funding obtained throughout the year.
The main strategic focus is on continuing to improve the portfolio
mix and its profitability, which has started to be achieved in 2016,
and continuing to improve control and monitoring processes in
relation to regulatory compliance and practices with customers.
D. 1.3.4. Brazil
Credit risk in Brazil amounts to EUR 89,572 million, up 24.1% against
2015 and largely due to the strengthening of the Brazilian currency.
Santander Brasil thus accounts for 10.5% of all Grupo Santander
lending. It is adequately diversified and with a mainly retail profile
(51.4% individuals, consumer finance and SMEs).
Portfolio mix
%
SGCB
30.9%
Other
1.5%
Individuals
31.1%
Santander Financiamentos*
9.4%
Companies
15.0%
Institutions
1.2%
SMEs
10.9%
* Santander Financiamentos: unit specialising in consumer finance (mainly auto
finance).
As of December 2016, there was a decrease of around 1.5% in local
currency terms, in line with the other private banks in the country.
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5. Risk management report » Risk profile > Credit risk
The following table shows the levels of lending and growth in the
main segments at current exchange rates.
Lending: segmentation
Million euros. Exchange rate fixed at 31 December 2016
Individuals
Mortgages
Consumer
Cards
Other
Santander financiamentos
SMEs and large companies
SMEs
Companies
Corporate
2016
29,200
8,069
11,687
5,973
3,472
8,420
51,952
10,838
13,436
27,678
2015
23,838
7,677
8,810
5,535
1,816
7,592
56,365
10,609
15,033
30,723
2014
23,131
6,321
9,814
5,313
1,683
8,207
51,707
11,131
13,507
27,069
16 / 15
22%
5%
33%
8%
91%
11%
(8%)
2%
(11%)
(10%)
15 / 14
3%
21%
(10%)
4%
8%
(7%)
9%
(5%)
11%
13%
The leading indicators for the credit profile of new loans (vintages)
are continuously tracked. These are shown below, confirming the
entity’s resilience to this macroeconomic climate.
The vintages show transactions over 30 days in arrears at three
and six months respectively from their origination date, in order to
anticipate any possible portfolio impairment. This enables the Entity
to define corrective measures (Defence Plans), if any deviations from
expected scenarios are detected. As we can see, these vintages were
kept at comfortable levels through proactive risk management.
Vintages. Performance of the Over 30* ratio at three and six months from each vintage admission
As a percentage
Individuals
3.9%
3.6%
3.2%
3.0% 3.0%
2.8%
3.2%
2.9%
2.7%
2.7% 2.7%
SMEs1
4.6% 4.5%
4.3%
3.7%
3.1%
3.1%
3.0%
1.4%
1.3%
1.1%
1.3%
1.5%
1.4%
1.5%
1.6%
1.4%
1.2% 1.2%
1.4%
1.3% 1.3%
1.3%
2.1% 2.0% 1.9% 1.9%
1.7%
2.7%
2.4%
2.4%
2.2%
1.4% 1.5%
1.1% 1.1%
1.3%
1.1% 1.1%
1.0%
4
1
c
e
D
5
1
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a
M
5
1
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u
J
5
1
p
e
S
5
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D
6
1
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6
1
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F
6
1
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M
6
1
r
p
A
6
1
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a
M
6
1
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J
6
1
l
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J
6
1
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u
A
6
1
p
e
S
4
1
c
e
D
5
1
r
a
M
5
1
n
u
J
5
1
p
e
S
5
1
c
e
D
6
1
n
a
J
6
1
b
e
F
6
1
r
a
M
6
1
r
p
A
6
1
y
a
M
6
1
n
u
J
6
1
l
u
J
6
1
g
u
A
6
1
p
e
S
Over30 Mob3 2
Over30 Mob6 2
* Ratio calculated as the total value of business more than 30 days in arrears over the total value of the vintage.
1. Based on the new SME segmentation.
2. Months on Book
200
2016 ANNUAL REPORT
The NPL ratio stood at 5.90% at the end of 2016 (-8 bp compared to the
previous year). Despite the economic situation, the outlook in Brazil is
increasingly optimistic, as shown by the increase in confidence indicators
and also inflation, which is converging towards the government’s target
range. As a result, the official interest rate (SELIC) has been reduced at
recent meetings of the Monetary Policy Committee, after a period of
increases. Nonetheless, the recovery could prove to be slower in terms of
GDP and in employment, with direct impact on NPL entries/exists.
Given this situation, Santander Brasil has continued to beef up its
risk management to anticipate any portfolio impairment through its
Defence Plan. This Plan was implemented in the previous year, and
is continuing to yield satisfactory results. These results include the
performance of the retail portfolio, in terms of budget compliance
and the evolution of the over 90 index (the local NPL ratio published
for the Brazilian financial industry). The defensive measures in the
Plan include:
• Preventive management of delinquency, extended through the
payroll discount model (“consignado”).
• Implementation of specific renegotiation products for different
segments and products (Santander Financiamentos and real estate
lending).
• Reduction of limits for high risk products and customers, and
implementation of maximum indebtedness limits.
• Migration from revolving products to instalment repayment
products.
• Increased collateralisation of the portfolio.
• Improved admission models, which are more accurate and
predictive, and collection channels.
• More tailored treatment of the largest SMEs.
• Management of risk appetite by sectors, and restrictions on powers
in the most critical sectors.
This proactive risk management - based on knowledge of our
customers, strict policies and control mechanisms - is enabling
Santander Brasil to enhance its position during the current economic
cycle. As already mentioned, this is demonstrated by the evolution
of the impairment rate for the loan portfolio (known locally as “over
90” rate). This stood at 3.40% at the end of 2016, below the average
for private Brazilian banks, which stood at 4.52%.
Over90 total
5.75%
5.25%
4.75%
4.25%
3.75%
3.25%
2.75%
2.25%
2
1
Q
4
3
1
Q
1
3
1
Q
2
3
1
Q
3
3
1
Q
4
4
1
Q
1
4
1
Q
2
4
1
Q
3
4
1
Q
4
5
1
Q
1
5
1
Q
2
5
1
Q
3
5
1
Q
4
6
1
Q
1
6
1
Q
2
6
1
Q
3
6
1
Q
4
Santander
System
Private financial sector
There has been an upward trend in the cost of credit, from 4.50%
in 2015 to 4.89% in 2016. This is mainly due to increased coverage
for specific economic groups in the Companies and GCB portfolios
(generalised impact in the local financial system) and the general
economic backdrop. However, the third quarter of 2016 is expected
to be a turning point, after which the cost of credit should gradually
correct over the following quarters in response to the efforts made
previously.
The coverage ratio in the fourth quarter of 2016 stood at 93.1%,
an increase of 9.4 pp compared to year-end 2015, due to increased
coverage in companies.
Non-performing loans ratio
Coverage ratio
Cost of credit
6.90%
5.64%
5.05%
5.98%
5.90%
90%
95%
95%
93%
84%
7.38%
6.34%
4.84%
4.89%
4.50
%
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
2016 ANNUAL REPORT
201
5. Risk management report » Risk profile > Credit risk
» D.1.4. Other credit risk optics
D. 1.4.1. Credit risk by activity in the financial markets
This section covers credit risk generated in treasury activities with
customers, mainly with credit institutions. This is developed through
financing products in the money market with different financial
institutions, as well as products with counterparty risk to provide
services to Group customers.
According to chapter six of the CRR (EU regulation 575/2013), the
credit risk of the counterparty is the risk that the customer in an
operation could enter into non-payment before the definitive
settlement of the cash flows of this operation. This includes the
following types of operations: derivative instruments, operations
with repurchase commitments, stock and commodities lending,
operations with deferred settlement and financing of guarantees.
As of December 2016, there were also CVA (Credit Valuation
Adjustments) of EUR 643.9 million (-24.3% compared to 2015) and
DVA (Debt Valuation Adjustments) of EUR 390.2 million (-26.4%).
These reductions were mainly due to improved methodologies for
calculating exposure and a general narrowing of credit spreads14.
Around 93% of the counterparty risk operations in nominal terms
were with financial institutions and central counterparties (CCPs),
with whom we operate almost entirely under netting and collateral
agreements. Other operations with customers that are not financial
institutions are, in general, operations for hedging purposes.
Operations are occasionally conducted for purposes other than
hedging, but always with specialised customers.
Distribution of counterparty risk by
customer rating (in nominal terms)*
There are two methodologies for measuring this exposure: the mark
to market (MtM) methodology (replacement value of derivatives
or amount available in committed credit lines); and calculation of
exposure by Montecarlo simulation, which was introduced in the
middle of 2014 for some countries and products. The capital at risk
or unexpected loss is also calculated, i.e. the loss which, once the
expected loss has been subtracted, constitutes the economic capital,
net of guarantees and recovery.
AAA
AA
A
BBB
BB
B
RESTO
0.88%
7.61%
77.30%
11.05%
3.14%
0.02%
0.003%
* Ratings based on equivalences between internal ratings and credit agency ratings.
After markets close, exposures are re-calculated by adjusting all
operations to their new time frame, adjusting the potential future
exposure and applying mitigation measures (netting, collateral, etc),
so that the exposures can be controlled directly against the limits
approved by senior management. Risk control is done through an
integrated system and in real time, enabling the exposure limit
available with any counterparty, product and maturity and in any
Group unit to be known at each moment.
Exposures in counterparty risk: over the counter
(OTC) operations and organised markets (OM)
As of December 2016 total exposure on the basis of management
criteria in terms of positive market value after applying netting
agreements and collateral for counterparty risk activities was
EUR 16,834 million (net exposure of EUR 44,554 million) and was
concentrated in high credit quality counterparties (85.79% of
counterparty risk has a rating of A or higher).
14. The definition and methodology for calculating the CVA and DVA are set out in D.2.2.2.6. Credit Valuation Adjustment (CVA) and Debt Valuation Adjustment (DVA.
202
2016 ANNUAL REPORT
Counterparty risk: distribution by nominal risk and gross market value (*)
Million euros
2016
2015
2014
Market value
Market value
Market value
Nominal
Positive Negative
Nominal Positive Negative
Nominal Positive Negative
CDS protection bought**
CDS protection sold
Total credit derivatives
Equity forwards
Equity options
Spot equities
Equity swaps
Equities - ETF
Total equity derivatives
Fixed income forwards
Fixed income options
Spot fixed income
Fixed income - ETF
23,323
19,032
42,355
134
15,154
234
15,388
36,512
67,421
6,357
483
5,159
349
83
339
422
48
448
0
631
-
1,127
37
5
5
-
(384)
(33)
(416)
(0)
(426)
(0)
(461)
-
(888)
(83)
(2)
(2)
-
32,350
26,195
58,545
980
23,564
20,643
28
6,480
51,695
11,340
789
3,351
831
(529)
(52)
(581)
(6)
(1,383)
(1,210)
80
428
508
5
959
794
-
-
38,094
31,565
69,659
1,055
36,616
19,947
472
8,616
60
658
717
117
(769)
(48)
(817)
(17)
1,403
(2,192)
-
(701)
421
-
-
1,758
(2,598)
66,705
1,941
(2,910)
(66)
-
39
8
3,905
423
5,055
1,636
11,018
151,172
44,105
354
3
4
8
(124)
0
-
(124)
3,633
(2,828)
530
3
(790)
(6)
Total fixed income derivatives
12,348
48
(88)
16,311
47
(66)
Spot and term exchange rates
150,095
3,250
(6,588)
148,537
5,520
(3,315)
Exchange rate options
Other exchange rate derivatives
31,362
606
479
7
(624)
(27)
32,421
189
403
1
(644)
(4)
Exchange rate swaps
Exchange rate -
organised markets
510,405
25,753
(24,175)
522,287
20,096
(21,753)
458,555
14,771
(15,549)
824
-
-
Total exchange rate derivatives
693,292
29,489
(31,413)
703,434
26,019
(25,716)
654,187
18,936
(19,173)
Asset swaps
Call money swaps
22,948
1,178
(758)
22,532
950
(1,500)
223,005
2,006
(1,581)
190,328
2,460
Interest rate structures
7,406
2,321
Forward rate agreements - FRAs
370,433
41
(593)
(106)
8,969
2,314
178,428
19
(1,792)
(3,031)
(78)
22,617
264,723
23,491
171,207
999
1,228
2,215
13
(1,749)
(1,150)
(2,940)
(63)
IRS
3,182,305
92,268
(92,873)
3,013,490
85,047
(85,196)
2,899,760
95,654
(94,624)
Other interest rate derivatives
210,061
3,762
(2,985)
194,111
3,838
(3,208)
Interest rate - ETF
117,080
-
-
26,660
218,167
38,989
4,357
(3,728)
Total interest rate derivatives
4,133,238
101,576
(98,896)
3,634,518
94,628 (94,806)
3,638,955 104,466 (104,253)
Commodities
Commodities - ETF
Total commodity derivatives
539
47
586
108
-
108
(5)
-
(5)
468
59
526
130
130
(40)
(40)
1,020
208
1,228
243
243
(112)
-
(112)
Total OTC derivatives
4,794,429
132,770 (131,706)
4,431,000 123,089
(123,805)
4,392,303
126,312 (127,389)
Total derivatives
organised markets***
154,812
34,028
49,449
Repos
122,035
2,374
(2,435)
128,765
3,608
(3,309)
166,047
3,871
(5,524)
Securities lending
33,547
9,449
(4,124)
30,115
10,361
(1,045)
27,963
3,432
(628)
Total counterparty risk
5,104,823
144,593
(138,265)
4,623,908
137,058
(128,159)
4,635,762
133,615
(133,541)
* Figures with management criteria.
** Credit derivatives acquired including hedging of loans.
*** Refers to transactions involving listed derivatives (propr
ietary portfolio). Listed derivatives have a market value of zero. No collateral is received for these types of
transactions.
2016 ANNUAL REPORT
203
5. Risk management report » Risk profile > Credit risk
Counterparty risk: exposure in terms of market value and credit risk equivalent, including mitigation effect1
Million euros
Market value, netting effect2
Collateral received
Market value with netting effect and collateral 3
Net CRE4
2016
34,998
18,164
16,834
44,554
2015
34,210
15,450
18,761
52,148
2014
28,544
11,284
17,260
50,077
1. Figures with management criteria. Listed derivatives have a market value of zero. No collateral is received for these types of transactions.
2. Market value used to include the effects of mitigation agreements so as to calculate exposure for counterparty risk.
3. Considering the mitigation of netting agreements and having deducted the collateral received.
4. CRE (credit risk equivalent): net value of replacement plus the maximum potential value, minus collateral received. Includes regulatory EAD for organised markets
(EUR 3.1 million in December 2016, EUR 41 million in December 2015 and EUR 71 million in 2014).
Counterparty risk: distribution of nominals by maturity*
Million euros
Up to 1 year
Up to 5 years
Up to 10 years
More than
10 years
CDS protection bought**
CDS protection sold
Total credit derivatives
Equity forwards
Equity options
Spot equities
Equity swaps
Equities - ETF
Total equity derivatives
Fixed income forwards
Fixed income options
Spot fixed income
Fixed income - ETF
Total fixed income derivatives
Spot and term exchange rates
Exchange rate options
Other exchange rate derivatives
Exchange rate swaps
Exchange rate - organised markets
Total exchange rate derivatives
Asset swaps
Call money swaps
Interest rate structures
Forward rate agreements - FRAs
IRS
Other interest rate derivatives
Interest rate - ETF
9,113
7,020
16,133
134
5,400
234
12,503
10,490
28,761
6,333
483
4,156
349
11,321
132,349
25,462
560
186,913
824
346,107
200
133,823
1,428
355,486
495,424
38,011
60,906
13,413
11,681
25,094
0
7,520
2,885
24,678
35,084
24
952
0
976
16,994
5,900
46
178,562
0
201,501
1,121
77,070
2,859
14,947
1,433,620
107,215
55,241
Total interest rate derivatives
1,085,277
1,692,073
717
277
994
122
0
122
15
0
15
51
38,611
0
38,662
20,043
1,086
1,726
393,985
14,573
53
TOTAL
23,323
19,032
42,355
134
15,154
234
15,388
36,512
67,421
6,357
483
5,159
349
12,348
150,095
31,362
606
510,405
824
693,292
22,948
223,005
7,406
370,433
3,182,305
210,061
117,080
79
54
134
2,111
1,343
3,455
36
0
36
702
106,320
0
107,022
1,584
11,026
1,394
859,276
50,262
881
924,423
0
0
Commodities
Commodities - ETF
Total commodity derivatives
Total OTC derivatives
Total derivatives
organised markets***
Repos
Securities lending
Total counterparty risk
308
47
355
1
0
1
431,465
4,133,238
229
0
229
539
47
586
1,415,338
1,874,811
1,032,845
471,434
4,794,429
72,616
113,687
26,017
79,919
7,716
2,751
2,224
632
95
1,625,289
1,965,196
1,035,797
53
0
4,685
476,172
154,812
122,035
33,547
5,104,823
* Figures with management criteria.
** Credit derivatives acquired including hedging of loans.
*** Refers to transactions involving listed derivatives (proprietary portfolio). Listed derivatives have a market value of zero. No collateral is received for these types of
transactions.
204
2016 ANNUAL REPORT
The distribution of risk in notional derivatives by type of
counterparty was 38% with financial institutions and 55% with
clearing houses.
Counterparty risk by customer type
Companies/individuals Sovereign/supranational
2% 2%
Corporate/
individuals
4%
Clearing houses
55%
Financial institutions
38%
As regards geographic distribution, 58% of notional derivatives are
with UK counterparties (the weight of which within the total is due
to the increasing use of clearing houses), 14% with North American
counterparties and 7% with Spanish counterparties.
Counterparty risk, organised markets and clearing houses
The Group’s policies seek to anticipate wherever possible the
implementation of measures resulting from new regulations
regarding operations of OTC derivatives, repos and securities
lending, whether settled by clearing house or traded bilaterally.
In recent years, there has been a gradual standardisation of OTC
operations in order to conduct clearing and settlement of all new
trading operations required by the new rules through clearing
houses, and to foster internal use of electronic execution systems.
With regard to organised markets, regulatory credit exposure has
been calculated for such operations since 2014 and the entry into
force of the new CRD IV (Capital Requirements Directive) and
CRR (Capital Requirements Regulation), transposing the Basel III
principles for calculating capital, even though counterparty risk
management does not consider credit risk on such operations15.
The following tables show the importance of transactions cleared
through a clearing house as a share of total counterparty risk at
year-end 2016, and the significant evolution of operations settled by
clearing houses since 2014.
Counterparty risk by geography
Other
3%
Latam
4%
France
6%
Spain
7%
Rest of Europe
8%
US
14%
UK
58%
Distribution of counterparty risk by settlement channel and product type*
Nominal in EUR million
Bilateral
CCP**
Organised markets ***
Nominal
%
38,440
30,853
11,999
691,874
1,401,135
539
92,272
33,543
2,300,653
90.8%
46%
97.2%
99.8%
33.9%
92.0%
75.6%
100%
Nominal
3,916
56
-
595
2,615,023
-
29,763
4
2,649,358
%
Nominal
9.2%
0.1%
0.0%
0.1%
63.3%
0.0%
24.4%
0.0%
-
36,512
349
823.8
117,080.1
46.8
-
154,812
%
0.0%
54.2%
2.8%
0.1%
2.8%
8.0%
0.0%
0.0%
3.0%
Total
42,355
67,421
12,348
693,292
4,133,238
586
122,035
33,547
5,104,823
Credit derivatives
Equity derivatives
Fixed income derivatives
Exchange rate derivatives
Interest rate derivatives
Commodity derivatives
Repos
Securities lending
General total
* Figures with management criteria.
** Central counterparties (CCP).
*** Refers to transactions involving listed derivatives (proprietary portfolio). Lis
ted derivatives have a market value of zero. No collateral is received for these types of
transactions.
15. Credit risk is eliminated when organised markets act as the counterparty in the transaction, as they have in place mechanisms that enable them to protect their financial
position through deposit and guarantee replacement systems and processes that ensure the liquidity and transparency of transactions.
2016 ANNUAL REPORT
205
5. Risk management report » Risk profile > Credit risk
Distribution of risk settled by CCP and organised
markets, by product and change over time*
Nominal in million euros
Credit derivatives
Equity derivatives
Fixed income derivatives
Exchange rate derivatives
2016
3,916
36,568
349
1,419
2015
1,778
6,522
896
11,755
2014
1,764
8,686
1,651
484
Off-balance sheet credit risk
The off-balance sheet risk corresponding to funding and guarantee
commitments with wholesale customers was EUR 93,279 million,
with the following distribution by products:
Off balance sheet exposure
Million euros
Maturity
< 1
year
1-3
years
3-5
years
> 5
years
Total
Interest rate derivatives
2,732,103
2,069,802
1,778,261
Product
Commodity derivatives
47
59
208
Repos
Securities lending
General total
29,763
44,679
57,894
4
-
2,804,170 2,135,489 1,848,948
* Figures with management criteria.
The Group actively manages operations not settled through clearing
houses and seeks to optimise their volume, given the spread and
capital requirements imposed by new regulations.
Funding*
11,860
14,772
32,848
3,168
62,648
Technical guarantees
4,976
8,379
952
431
14,738
Financial and
commercial
guarantees
4,311
4,636
3,416
2,907
15,271
Foreign trade**
344
254
25
0
622
General total
21,492 28,041
37,241
6,505
93,279
(*) Mainly including committed bilateral and syndicated credit lines.
(**) Mainly including stand-by letters of credit.
In general, transactions with financial institutions are done under
netting and collateral agreements, and constant efforts are made
to ensure that all other operations are covered under this type
of agreement. Generally, the collateral agreements that the
Group signs are bilateral ones with some exceptions, mainly with
multilateral institutions and securitisation funds.
The collateral received under the different types of collateral
agreements (CSA, OSLA, ISMA, GMRA, etc) signed by the Group
amounted to EUR 18,164 million (of which EUR 12,870 million
corresponded to collateral received for derivatives), being mostly
cash (77.4%), with other types of collateral being subject to strict
quality policies for the type of issuer and its rating, debt seniority
and any haircuts applied.
The chart below shows the geographic distribution:
Collateral received. Geographic distribution
Other
5%
Brazil
5%
Mexico
5%
UK
26%
Spain
59%
Activity in credit derivatives
Grupo Santander uses credit derivatives to cover loans, customer
business in financial markets and trading operations. The volume of
this activity is small compared to that of our peers and, moreover, is
subject to a solid environment of internal controls and minimising
operational risk.
The risk of these activities is controlled via a broad series of limits,
such as Value at Risk (VaR)16, nominal by rating, spread sensitivity by
rating and name, and recovery rate and correlation sensitivity. Jump
to-default limits are also set by individual name, geographic area,
sector and liquidity.
In notional terms, the CDS position incorporates EUR 19,98417 million
of protection acquired and EUR 19,029 million of protection sold.
At 31 December 2016, the sensitivity of lending to increases in
spreads of one basis point was EUR -4.1 million, whilst the average
VaR at year-end 2016 was EUR 1.7 million, lower than the 2015 figure
(EUR 2.4 million).
D. 1.4.2. Concentration risk
Control of concentration risk is a vital part of management. The
Group continuously tracks the degree of concentration of its credit
risk portfolios using various criteria: geographic areas and countries,
economic sectors, products and groups of customers.
16. The definition and calculation methodology for VaR is set out in section D.2.2.2.1. Value at Risk (VaR).
17. This figure excludes CDSs with a value of around EUR 2,389 million used to hedge loans that for accounting purposes are recorded as financial guarantees rather than credit
derivatives, as their change in value has no impact on results or reserves, in order to avoid accounting asymmetry.
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2016 ANNUAL REPORT
The board, via the risk appetite, determines the maximum levels
of concentration, as detailed in section B.3.1. Risk appetite and
structure of limits. In line with the risk appetite, the Executive Risk
Committee establishes the risk policies and reviews the exposure
levels appropriate for adequate management of the degree of
concentration of credit risk portfolios.
In geographic terms, credit risk with customers is diversified in the
main markets in which the Group operates, as shown in the chart
below.
Credit risk with customers
Spain
20%
Brazil
10%
Other
20%
US
11%
Chile
5%
Portugal
4%
UK
30%
Some 56% of the Group’s credit risk corresponds to individual
customers, who, due to their inherent nature, are highly diverse. In
addition, the portfolio is also well distributed by sectors, with no
significant concentrations in specific sectors. The following chart
shows the distribution at the end of the year.
Sector diversification
Individuals 56.4%
Trade and
repairs 6.1%
Real estate
activities 5.5%
Construction and
public works 3.8%
Transport and
communications
2.9%
Other manufacturing
industries 3.3%
Other business
services 2.7%
Prod. and distrib.
Electricity, gas
and water 1.8%
Other financial
intermediaries 2,0%
Public
administration,
excluding central
govt. 1.7%
Food, drink and
tobacco 1.5%
Other social
services 1.3%
Accommodation
1.1%
Oil refining 0.8%
Metalwork 0.8%
Other <1% 8.3%
The Group is subject to the regulation on large risks contained in
the fourth part of the CRR (EU regulations 575/2013), according
to which the exposure contracted by an entity with a customer or
group of customers linked among themselves will be considered a
“large exposure” when it equates to 10% or more of eligible capital.
In addition, in order to limit large exposures, no entity can assume
exposure exceeding 25% of its eligible capital with a single customer
or group of linked customers, after taking into account the impact of
the reduction of credit risk contained in the regulation.
Having applied the risk mitigation techniques, no groups triggered
these thresholds at the end of December.
The regulatory credit exposure with the 20 largest groups within the
sphere of large risks represented 4.7% of outstanding credit risk with
clients (lending plus balance sheet risks).
The Group’s Risk division works closely with the Financial division
to actively manage credit portfolios. Its activities include reducing
the concentration of exposures through various techniques, such
as using credit derivatives and securitisations to optimise the risk
return relationship for the whole portfolio.
D. 1.4.3. Country risk
Country risk is a component of credit risk in all cross-border credit
operations for circumstances other than normal commercial risk.
The main elements involved are sovereign risk, transfer risks and
other risks that affect international financial activity (wars, natural
disasters, balance of payments crises, etc).
At 31 December 2016, the provisionable exposure to country-risk was
EUR 181 million (EUR 193 million in December 2015). At the end of
December 2016, total provisions stood at EUR 29 million, compared
to EUR 25 million at the end of the previous year. It should be noted
that Argentina was reclassified from Group 4 to Group 5 in the Bank
of Spain classification in 201618 .
The principles of country risk management continued to follow
criteria of maximum prudence; country risk is assumed very
selectively in operations that are clearly profitable for the bank, and
which enhance the global relationship with customers.
D. 1.4.4. Sovereign risk and vis-á-vis the
rest of public administrations
As a general criterion, sovereign risk is that contracted in
transactions with a central bank (including the regulatory cash
reserve requirement), the issuer risk of the Treasury or similar entity
(portfolio of public debt) and that arising from operations with
public institutions with the following features: their funds only come
from the state’s budgeted income and the activities are of a non
commercial nature.
This criterion, historically used by Grupo Santander, differs in some
respects from that requested by the European Banking Authority
(EBA) for its regular stress exercises. The main differences are
that the EBA’s criterion does not include risk with central banks,
exposures with insurance companies, indirect exposures via
guarantees and other instruments. On the other hand, it includes
public administrations in general (including regional and local
bodies), not only the State sector.
18. The typology of countries for each risk group is defined in Bank of Spain circular 4/2004.
2016 ANNUAL REPORT
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5. Risk management report » Risk profile > Credit risk
Exposure to sovereign risk (according to the criteria applied in the
Group) mainly emanates from the obligations to which our subsidiary
banks are subject regarding the establishment of certain deposits
in central banks, the establishment of deposits with excess liquidity
and fixed-income portfolios held as part of the structural interest
rate risk-management strategy for the balance sheet and treasury
trading books. The vast majority of such exposure is in local currency
and is funded on the basis of customer deposits captured locally, also
in the local currency.
Local sovereign exposure in currencies other than the official one of
the country of issuance is not very significant (EUR 14,477 million,
6.5% of total sovereign risk), and exposure to non-local sovereign
issuers involving cross-border risk is even less significant (EUR 2,028
million, 0.90% of total sovereign risk).
In general, total exposure to sovereign risk has rem¬ained at
adequate levels to support the regulatory and strategic motives of
this portfolio.
The investment strategy for sovereign risk also takes into account
the credit quality of each country when setting the maximum
exposure limits. The following table shows percentage exposure by
rating levels19.
Exposure by rating
%
AAA
AA
A
BBB
Lower than BBB
31 Dec. 2016
31 Dec. 2015 31 Dec. 2014
16%
17%
29%
8%
30%
34%
4%
22%
33%
7%
29%
4%
28%
32%
7%
The sovereign risk distribution by rating level has been affected by
many rating reviews for the sovereign issuers of the countries where
the Group operates over the last few years (Brazil, the UK, etc.).
On the basis of the EBA criteria already mentioned, the exposure to
public administrations at the end of each of the last three years was
as follows (figures in million euros)20.
Exposure is moderate and remained on an upward path in 2016.
The sovereign risk exposure to Spain (where the Group has its
headquarters) is not high in terms of total assets (3.5% at the end of
December 2016), compared to its Spanish peers.
Exposure to sovereign risk (EBA criterion)
Million euros
31 Dec 2016
Portfolio
31 Dec 2015
Portfolio
Trading
and
other
at fair
value
9,415
(58)
1,453
0
0
(1,171)
475
287
0
1,174
4,044
2,216
428
134
1,903
20,300
Spain
Portugal
Italy
Greece
Ireland
Rest Eurozone
UK
Poland
Rest of Europe
US
Brazil
Mexico
Chile
Rest of America
Rest of the world
Total
Available
for sale Lending
11,085
1,143
7
0
0
79
7,463
30
289
720
1,190
3,173
330
541
683
26,732
23,415
5,982
492
0
0
751
1,938
5,973
502
3,819
16,098
5,072
2,768
497
889
68,197
Held-to
maturity
portfolio
1,978
4
0
0
0
0
7,764
0
0
0
2,954
0
0
0
0
12,701
Total net
direct
exposure
45,893
7,072
1,952
0
0
(341)
17,639
6,290
791
5,713
24,286
10,461
3,525
1,172
3,475
127,930
Trading
and
other
at fair
value
8,954
104
2,717
0
0
(211)
(786)
13
120
280
7,274
6,617
193
155
3,657
29,087
Spain
Portugal
Italy
Greece
Ireland
Rest Eurozone
UK
Poland
Rest of Europe
US
Brazil
Mexico
Chile
Rest of America
Rest of the world
Total
Available
for sale Lending
26,443
11,272
7,916
1,987
0
0
0
0
0
0
143
69
5,808
141
5,346
42
312
238
4,338
475
13,522
947
3,630
272
1,601
3,568
1,204
443
1,687
546
20,000
71,950
Held-to
maturity
portfolio
2,025
0
0
0
0
0
0
0
0
0
2,186
0
0
0
0
4,211
Total net
direct
exposure
48,694
10,007
2,717
0
0
1
5,163
5,401
670
5,093
23,929
10,519
5,362
1,802
5,890
125,248
19. Internal ratings used.
20. In addition at 31 December 2016, the Group had direct net exposures to derivatives with a fair value of EUR 2,505 million, as well as indirect net
exposure to derivatives with a fair value of EUR 2 million.
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2016 ANNUAL REPORT
Exposure to sovereign risk (EBA criterion)
Million euros
Sovereign exposure in Latin America is almost all in local currency,
being recognised in the local accounts and concentrated in short
term maturities with lower interest rate risk and greater liquidity.
Sovereign risk and vis-á-vis other public administrations:
Net direct exposure (EBA criterion)
Million euros
Other
Latin America
Other Europe
Spain
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
Dec 14
Dec 15
Dec 16
31 Dec 2014
Portfolio
Spain
Portugal
Italy
Greece
Ireland
Rest Eurozone
UK
Poland
Rest of Europe
US
Brazil
Mexico
Chile
Other
America
Rest of the world
Total
Trading and
others at FV
5,778
104
1,725
0
0
(1.070)
(613)
5
1,165
88
11,144
2,344
593
Available
for sale
23,893
7,811
0
0
0
3
6,669
5,831
444
2,897
17,685
2,467
1,340
Lending
15,098
589
0
0
0
1
144
30
46
664
783
3,464
248
181
4,840
26,284
1,248
906
71,194
520
618
22,205
Total net
direct
exposure
44,769
8,504
1,725
0
0
(1.066)
6,200
5,866
1,655
3,649
29,612
8,275
2,181
1,949
6,364
119,683
D. 1.4.5. Social and environmental responsibility
Banco Santander fosters the protection, conservation and recovery
of the environment and the fight against climate change. To do so,
Santander analyses the social and environmental risks of its funding
transactions in the framework of its sustainability policies. These
policies were updated in late 2015 after a painstaking review process
in which the best international practices and standards were taken
into account.
During 2016, the Group went to great lengths to communicate and
disseminate the new versions, coordination between the different
teams was stepped up, and internal processes were improved to
apply the new requirements of the social and environmental policies.
Supporting documentation was developed for the business and risks
teams, and a training course was given by external experts designed
for the areas which take part in implementing the policies i sensitive
sectors such as energy and soft commodities (related to the primary
sector), and in other sectors such as mining-metals and chemicals. A
total of 440 pupils from across the geographical spectrum in which
the Group operates took part in the course.
Policies were implemented throughout the Group by creating social
environmental risk task forces in the main geographies where Banco
Santander operates, chaired by the Chief Compliance Officer. These
groups were created using the same format as the corporate task
force chaired by the Group Chief Compliance Officer, which includes
all the functions which take part in the origination, review and
decision making so as to have a common understanding and opinion
about the transactions and customers affected by policies.
In addition to the above, Grupo Santander has also applied the
Equator Principles (EP) since 2009, to Project Finance and corporate
funding for a known purpose, including bridge loans before project
finance is granted and corporate lending arrangements for building
or remodelling a specific project.
» D.1.5. Credit risk cycle
The process of credit risk management consists of identifying,
analysing, controlling and deciding on the risks incurred by the
Group’s operations. The business areas, senior management and the
risk areas are all involved.
Credit risk management is organised around a sound organisational
and governance model, with the participation of the board of
directors and the Executive Risk Committee, which establishes the
risk policies and procedures, the limits and delegation of powers, and
approved and oversees the framework of the credit risk function.
Exclusively within the field of credit risk, the Credit Risk Control
Committee is the collegiate body responsible for credit risk oversight
and control of Grupo Santander. The aim of the committee is to
effectively control credit risk, ensuring and advising the Chief Risk
Officer and the Risk Control Committee that credit risk is managed in
accordance with Group’s level of risk appetite approved by the board
of directors, which includes identifying and monitoring current and
emerging credit risk and its impact on the Group’s risk profile.
2016 ANNUAL REPORT
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5. Risk management report » Risk profile > Credit risk
The risk cycle has three phases: pre-sale, sale and post-sale.
The process is constantly revised, incorporating the results and
conclusions of the post-sale phase to the study of risk and presale
planning.
Scoring is an automatic assessment system for loan applications.
It automatically assigns an individual assessment to the customer
for subsequent decision making on the loan, as explained in the
‘Decisions on operations’ section.
Each of these phases is associated with different decision models,
understood as the manifestations of business objectives and the
lending policy that underpins them in a logical sequence associated
with a decision event, with the objective that all decisions should
respect the lending policies defined by the entity.
BACKFEEDING
Pre-sales
Sales
Post sales
-
CONTROL
4. Decisions on
operations
• Mitigants
1. Study of risk and
credit rating process
2.Planning (strategic
commercial plan-SCP)
• Scenario analysis
3. Establishing limits /
pre-approved limits
5. Monitoring/Anticipation
6. Measurement and control
7. Recovery management
• Impaired and
restructured portfolio
D. 1.5.1. Study of risk and credit rating process
Generally speaking, risk study consists of analysing a customer’s
capacity to meet their contractual commitments with the Bank and
other creditors. This entails analysing the customer’s credit quality,
risk operations, solvency and profitability on the basis of the risk
assumed.
With this objective, the Group has used customer credit
classification models since 1993. These models are applied to the
SGCB segment (Santander Global Corporate Banking - sovereign,
financial entities, corporate companies), companies and institutions,
and SMEs and individuals.
These are known as rating models in the case of SGCB customers,
companies and SMEs with individualised treatment, and scoring
models for SMEs with standardised treatment and individuals.
The rating results from the application of mathematical algorithms
incorporating a quantitative model based on balance sheet ratios or
macroeconomic variables, and a qualitative module supplemented by
the analyst’s expert judgment.
The ratings given to customers are regularly reviewed, incorporating
the latest available financial information and experience in the
development of banking relations. The regularity of the reviews
increases in the case of customers who reach certain previously
determined levels in the automatic warning systems and who are
classified as special watch. The rating tools are also reviewed in order
to adjust the accuracy of the rating granted.
D. 1.5.2. Planning (strategic commercial plan)
The purpose of this phase is to limit the risk levels assumed by the
Group, efficiently and comprehensively.
The credit risk planning process serves to set the budgets and limits
at portfolio level. Planning is carried out through the Strategic
Commercial Plan (SCP), created as a joint initiative between the sales
and risk areas.
The SCP is a management model that sets out the planning and
control of the Group’s lending portfolios. It has developed into
an integrated and coordinated working procedure, involving all
areas with a stake in the management of loan portfolios (risk,
business, management control, capital and financial management).
This working model makes it possible to plan and integrate sales
strategies and lending policies based on the risk appetite, and to
verify the availability of the resources needed to achieve the budget
of each business.
The highest Executive Risk Committee of each entity is responsible
for authorising and monitoring the plan. It is validated and
monitored at corporate level.
SCPs are used to arrange the map of all the Group’s lending
portfolios.
Analysis of scenarios
As described in section B.3.3. Analysis of scenarios, credit risk
scenario analysis enables senior management to understand the
portfolio’s evolution in the face of market conditions and changes
in the environment. It is a key tool for assessing the sufficiency of
provisions and capital in stress scenarios.
Scenario analysis is applied to all of the Group’s significant
portfolios, usually over a three year horizon. The process involves the
following main stages:
• Definition of benchmark scenarios for the central or most likely
(baseline scenario) and more stressed scenarios, which are less
likely, but still possible (stress scenarios). A global stress scenario
is defined describing a world crisis situation and the way it would
affect each of the countries in which Grupo Santander operates.
In addition, a local stress scenario is defined which affects in an
isolated way some of the main units with a greater degree of stress
than the global stress scenario.
These scenarios are defined by Grupo Santander’s research
department in coordination with each unit, using figures published
by leading international institutions as a benchmark. All scenarios
are backed by a rationale and are verified and reviewed by all areas
involved in the simulation process.
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2016 ANNUAL REPORT
• Determination of the value of risk parameters and metrics
(probability of default, loss given default, etc) for the scenarios
defined. These parameters are established using internally
developed statistical-econometric models, based on the default
and loss histories of the portfolios for which they are developed,
in relation to historical data for macroeconomic variables. The
simulation models employed by the Group use data from a
complete economic cycle in order to calibrate the performance of
risk factors in the face of changes in macroeconomic variables.
These stress test models follow the same development, validation
and governance cycles as the Group’s other internal models. They
are subject to regular backtesting and recalibration to ensure
they correctly capture the relationship between macroeconomic
variables and the risk parameters.
• Estimation of the expected loss associated with each of the
scenarios put forward and the other important credit risk metrics
deriving from the parameters obtained (NPLs, provisions, ratios,
etc.).
• Analysis and rationale for the evolution of the credit risk profile
at the portfolio, segment, unit and Group levels, in the face of
different scenarios and compared to previous years.
• A series of controls and comparisons are run to ensure that the
controls and back-testing are adequate, thus completing the
process.
The entire process takes place within a corporate governance
framework, and is thus adapted to the growing importance of this
framework and to best market practices, assisting the Group’s senior
management in gathering knowledge and in their decision making.
D. 1.5.3. Establishment of limits, pre
classifications and pre-approvals
Limits are planned and established using documents agreed between
the business and risk areas and approved by the Executive Risk
Committee or committees delegated by it, in which the expected
business results, in terms of risk and return, are set out, together
with the limits to which this activity is subject and management of
the associated risks by group or customer.
Meanwhile, analysis is conducted at the customer level in the
wholesale sphere and for other companies and institutions. When
certain circumstances occur, the customer is assigned an individual
limit (pre-approved limit).
In this way, a pre-classification model based on a system for
measuring and monitoring economic capital is used for large
corporate groups. The result of pre-classification is the maximum
risk level that a customer or group can assume, in terms of amount
of maturity. A more streamlined version of pre-approved limits is
used for those companies which meet certain requirements (high
knowledge, rating, etc).
When individuals and SMEs display certain characteristics, limits
are established with a customer-centric vision. The objective is to
determine pre-approved transactions for customers, and pre-granted
transactions for potential customers, for marketing campaigns and
policies to foster use of the limit. For example, sales of specific
products, offers to increase operational limits, sales of consumer
credit tailored to each customer, etc.
BACKFEEDING
Pre-sales
Sales
Post sales
-
CONTROL
4.Decisions on
operations
• Mitigants
5. Monitoring/Anticipation
6. Measurement and control
7. Recovery management
• Impaired and
restructured portfolio
1. Study of risk and
credit rating process
2. Planning (strategic
commercial plan-SCP)
• Scenario analysis
3. Establishing limits /
pre-approved limits
D. 1.5.4. Decisions on operations
The sales phase consists of the decision-making process, which
analyses and resolves operations. Approval by the risk area is a
prior requirement before the contracting of any risk operation. This
process must take into account the policies defined for approving
operations and both the risk appetite and those elements of the
operation that are relevant in the search for the right balance
between risk and profitability.
In the sphere of individual customers, businesses and SMEs with low
turnover, large volumes of credit operations can be managed more
easily with the use of automatic decision models for classifying the
customer/transaction binomial. Lending is classified consistently into
homogeneous risk groups, on the basis of the information on the
features of the operation and of its owner.
As previously mentioned, the admission model makes a decision
on the transaction based on the pre-approved limits and pre-
sale models, checking against additional and more up-to-date
information, such as internal and external information files. If there
is no pre-approved limit, the transaction is analysed directly using
the non-pre-approved model.
With regard to companies and SGCB, and as already indicated, the
prior phase of setting limits can follow two different paths, giving
rise to different types of decisions:
• Automatic, verifying whether there is capacity for the proposed
operation (in terms of amount, product, maturity and other
conditions) within the limits authorised under the pre-classification
framework. This process is generally applied to SGCB pre-
classifications.
2016 ANNUAL REPORT
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5. Risk management report » Risk profile > Credit risk
• Always requiring the authorisation of the analyst although the
operation meets the amount, maturity and other conditions set
in the pre-approved limit. This process is applied to company pre
classifications.
Credit risk mitigation techniques
Grupo Santander applies various forms of credit risk reduction on
the basis, among other factors, of the type of customer and product.
As we will later see, some are inherent to specific operations (for
example, real estate guarantees) while others apply to a series of
operations (for example, netting and collateral).
The various mitigation techniques can be grouped into the following
categories:
Determination of a net balance by counterparty
The concept of netting is the possibility of determining a net balance
between operations of the same type, under the umbrella of a
framework agreement such as the ISDA or similar.
It consists of aggregating the positive and negative market values
of derivative transactions that Santander has with a certain
counterparty, so that in the event of default it owes (or Santander
owes, if the netting off is negative) a single net figure and not a
series of positive or negative values corresponding to each operation
with the counterparty.
As a general rule, repayment capacity is the most important aspect in
decisions on the acceptance of risks, although this is no impediment
to seeking the highest possible level of real or personal guarantees.
In order to calculate the regulatory capital, only those guarantees
that meet the minimum qualitative requirements set out in the Basel
agreements are taken into consideration.
A very important example of a real financial guarantee is collateral.
This is a series of instruments with a certain economic value and
high liquidity that are deposited/transferred by a counterparty in
favour of another in order to guarantee/reduce the credit risk of the
counterparty that could result from portfolios of transactions of
derivatives with risk existing between them.
The nature of these agreements is diverse, but whatever the specific
form of collateralisation, the final purpose, as in the netting technique,
is to reduce the counterparty risk.
The operations subject to the collateral agreement are regularly valued
(normally day to day) and, on the net balance resulting from this
valuation, the parameters defined in the contract are applied so that a
collateral amount is obtained (normally cash or securities), which is to
be paid to or received from the counterparty.
As regards property collaterals, there are regular re-appraisal
processes, based on real market values for the different types of
property, which meet all the requirements set by the regulator.
An important aspect of framework contracts is that they represent a
single legal obligation that covers all operations. This is fundamental
when it comes to being able to net the risks of all operations covered
by the contract with the same counterparty.
Implementation of the mitigation techniques follows the minimum
requirements established in the guarantee management policy, which
consists of:
Real guarantees
These are assets that are subject to compliance with the guaranteed
obligation. These can be provided by the customer or by a third
party. The real assets or rights that are the object of the guarantee
can be:
• Legal certainty. The possibility of legally requiring the settlement
of guarantees must be examined and ensured at all times.
• The lack of substantial positive correlation between the
counterparty and the value of the collateral.
• Financial: cash, deposit of securities, gold, etc.
• The correct documentation of all guarantees.
• Non-financial: property (both homes and commercial premises,
• The availability of documentation for the methodologies used for
etc), other movable property, etc.
each mitigation technique.
Thus guarantees can be in the form of:
• Adequate monitoring and regular control.
• Pledges/financial asset guarantees: a transaction with collateral in
which the assets received as the guarantee are debt instruments or
other financial assets.
• Real estate mortgages: a transaction with an ordinary or maximum
mortgage guarantee on real estate assets.
• Other real guarantees: any other type of transaction with a real
guarantee.
• Traceability of the goods or assets used as the guarantee.
Personal guarantees and credit derivatives
This type of guarantees corresponds to those that place a third party
in a position of having to respond to obligations acquired by another
to the Group. It includes, for example, sureties, guarantees, stand-by
letters of credit, etc. The only ones that can be recognised, for the
purposes of calculating capital, are those provided by third parties that
meet the minimum requirements set by the supervisor.
Credit derivatives are financial instruments whose main objective is
to cover credit risk by acquiring protection from a third party, through
which the bank transfers the issuer risk of the underlying asset. Credit
derivatives are over the counter (OTC) instruments that are traded
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2016 ANNUAL REPORT
in non-organised markets. Hedging with credit derivatives, mainly
through credit default swaps, is contracted with front-line banks.
Information on mitigation techniques is set out in the “Credit risk
reduction techniques of the Prudential Relevance Report (Pillar III)”
section. There is also more information on credit derivatives in the
section “Activity in credit derivatives” of section D.1.4.1. Credit risk by
activity in financial markets.
BACKFEEDING
Pre-sales
Sales
Post sales
-
CONTROL
4. Decisions on
operations
• Mitigants
1. Study of risk and
credit rating process
2. Planning (strategic
commercial plan-SCP)
• Scenario analysis
3. Establishing limits /
pre-approved limits
5. Monitoring/Anticipation
6. Measurement
and control
7. Recovery management
• Impaired and
restructured portfolio
D. 1.5.5. Monitoring/Anticipation
Monitoring is a continuous process of constant observation, which
allows changes that could affect the credit quality of customers to
be detected early on, in order to take measures to correct deviations
with a negative impact.
Monitoring is based on customer segmentation, and is carried out
by dedicated local and global risk teams, supplemented by internal
audit.
In the companies and SME with assigned analyst model, the function
consists, among other things, of identifying and tracking customers
whose situations require closer monitoring, reviewing ratings and
continuously monitoring indicators.
Four degrees are distinguished depending on the level of concern
about the observed circumstances (extinguish, secure, reduce,
monitor). The inclusion of a position in one of these four levels does
not mean that default has occurred, but rather that it is advisable
to adopt a specific policy toward that position, establishing a
responsible person and time frame for it. Customers classified in
this way are reviewed at least every six months, and every quarter in
the most serious cases. A company can be classified in one of these
levels as a result of monitoring, a decision by the officer responsible
for the customer, the triggering of the system established for
automatic warnings, or internal audit reviews.
Ratings are reviewed at least every year, but if weaknesses are
detected, or on the basis of the rating, it is done more regularly.
Surveillance of the risks of individual customers, businesses and
SMEs with a low turnover is carried out through automatic alerts for
the main indicators, in order to detect shifts in the performance of
the loan portfolio with respect to the forecasts in strategic plans.
D. 1.5.6. Measurement and control
As well as monitoring customer credit quality, Santander establishes
the control procedures needed to analyse the current portfolio and
its evolution, through the various phases of credit risk.
The function uses a comprehensive vision of credit risk to assess
risks from various complementary perspectives, with the main
elements being control by countries, business areas, management
models, products, etc, facilitating early detection of points for
specific attention, and preparing action plans to correct any
deteriorations.
Portfolio analysis permanently and systematically controls the
evolution of risk with respect to budgets, limits and benchmark
standards, assessing the impacts of future situations, both
exogenous and resulting from strategic decisions, to establish
measures to bring the risk portfolio profile and volumes within the
parameters set by the Group and in line with its risk appetite.
The credit risk control phase uses, among others and in addition to
traditional metrics, the following metrics:
• VMG (Change in Managed NPLs plus net write-offs)
Unlike non-performing loans, VMG refers to the total impaired
portfolio over a period of time, regardless of its current situation
(non-performing loans and write-off). This makes the metric a
main driver when it comes to establishing measures to manage the
portfolio. The VMG and its components play a key role as monitoring
variables.
VMG is the result of subtracting the initial balance of non
performing loans from the final balance for the period under
consideration, plus the write-offs in this period, less loan loss
recoveries in the same period.
It is an aggregate and forward looking measure at the portfolio level
that allows a response to any observed deterioration in the evolution
of NPLs.
• Expected loss (EL) and capital
Unlike the loss incurred, used by the Group to estimate loan-loss
provisions, expected loss is the estimate of the economic loss
which will occur during the following year in the existing portfolio
at a given moment. Its forward-looking component complements
the view provided by the VMG when analysing the portfolio and its
evolution.
It is one more cost of activity, and must impact on the price of
operations. Its calculation is mainly based on three parameters:
• Exposure at default (EAD): maximum amount that could be lost as
a result of a default.
• Probability of default (PD): the probability of a customer’s default
during the year.
2016 ANNUAL REPORT
213
The diverse features of our customers make segmentation necessary
in order to manage recoveries adequately. Mass management of
large groups of customers with similar profiles and products is
conducted through processes with a high technological component,
while personalised management focuses on customers who, because
of their profile, require a specific manager and more individualised
management.
Recovery activity has been aligned with the socio-economic reality
of our countries and different risk management mechanisms are used
with adequate prudential criteria on the basis of age, guarantees
and conditions, always ensuring, as a minimum, the required
classification and provisions.
Particular emphasis in the recovery function is placed on
management of the aforementioned early management mechanisms,
in line with corporate policies, taking account of local realities and
closely tracking vintages, stocks and performance. These policies are
renewed and regularly adapted to reflect best management practices
and regulatory changes.
As well as measures to adapt transactions to the customer’s payment
capacity, another important feature is recovery management, which
seeks non-judicial solutions to achieve early payment of debts.
One of the ways to recover debt from customers who have suffered
a severe deterioration in their repayment capacity is through
repossession (judicial or deed in lieu) of the real estate assets that
serve as collateral for the loans. In countries with a high exposure
to real estate risk, such as Spain, very efficient sales management
instruments have been put in place that enable capital to be
recovered by the bank, reducing the stock on the balance sheet at a
faster pace than other banks.
5. Risk management report » Risk profile > Credit risk
• Loss Given Default (LGD): this reflects the percentage of exposure
that could not be recovered in the event of a default. It is calculated
by discounting at the time of the default the amounts recovered
during the whole recovery process. This figure is then compared in
percentage terms with the amount owed by the customer at that
moment.
Other relevant aspects regarding the risk of operations are
covered, such as quantification of off-balance sheet exposures or
the expected percentage of recoveries, related to the guarantees
associated with the operation, as well as other issues such as the
type of product, maturity, etc.
The risk parameters also enable economic and regulatory capital to
be calculated. The integration in management of capital metrics is
vital for optimising their use. More detail is available in chapter D.8.
Capital risk.
D. 1.5.7. Recovery management
Recovery activity is a significant element in the Bank’s risk
management. This function is carried out by the recovery area, which
defines a global strategy and an enterprise-wide focus for recovery
management.
The Group has a corporate recovery management model that sets
the guidelines and general lines of action to be applied in the various
countries, always taking into account the local particularities that the
recovery activity requires (economic environment, business model or
a mixture of both).
The recovery areas are business areas that directly manage
customers: the corporate model thus has a business focus, where
sustained value creation is based on effective and efficient collection
management, whether by regularisation of balances pending
payment or by total recovery.
The recovery management model requires adequate co-ordination
of all management areas (commercial, technology and operations,
human resources and risks). It is subject to constant review and
continuous improvement in the processes and management
methodologies that sustain it, through applying the best practices
developed in the various countries.
Recovery management is divided into four phases for adequate
management: irregularity or early non-payment; recovery of non
performing loans; recovery of write-offs; and management of
foreclosed assets. Indeed, the recovery function begins before the
first non-payment, when the customer shows signs of impairment
and ends when the debt has been paid or returned to normal. The
function aims to anticipate non-compliance and is focused on
preventative management.
The current macroeconomic environment directly impacts the
non-performance ratio and customer delinquency. The quality of
portfolios is thus fundamental for the development and growth of
our businesses in different countries. Debt collection and recovery
functions are given a special and continuous focus, in order to ensure
that this quality always remains within expected levels.
214
2016 ANNUAL REPORT
D.2. Trading market risk and structural risks
» Organisation of this section
We will first describe the activities subject to market risk, setting out
the different types and risk factors [pag. 215-216].
Next a section is given over to each one of the market risk types
according to the purpose of the risk, distinguishing between
trading market risk [pag. 217-229] and structural risks
[pag. 229-234], and, within the latter, structural balance sheet
risks and pension and actuarial risks.
The most relevant aspects to take into account such as the principal
magnitudes and their evolution are set out for each type of risk, the
methodologies and metrics employed in Santander and the limits
used for their control.
» D.2.1. Activities subject to market
risk and types of market risk
The scope of activities subject to market risk includes transactions
in which equity risk is borne due to changes in market factors. Thus
they include trading risks and also structural risks, which are also
affected by market shifts.
This risk comes from changes in risk factors - interest rates, inflation
rates, exchange rates, share prices, the spread on loans, commodity
prices and the volatility of each of these elements - as well as from
the liquidity risk of the various products and markets in which the
Group operates.
• Interest rate risk is the possibility that changes in interest rates
could adversely affect the value of a financial instrument, a
portfolio or the Group as a whole. It affects loans, deposits, debt
securities, most assets and liabilities in the trading books and
derivatives, among others.
• Inflation rate risk is the possibility that changes in inflation
rates could adversely affect the value of a financial instrument, a
portfolio or the Group as a whole. It affects instruments such as
loans, debt securities and derivatives, where the return is linked to
inflation or to a change in the actual rate.
• Exchange rate risk is the sensitivity of the value of a position in a
currency other than the base currency to a movement in exchange
rates. Hence, a long or open position in a foreign currency will
produce a loss if that currency depreciates against the base
currency. Among the positions affected by this risk are the Group’s
investments in subsidiaries in non-euro currencies, as well as any
foreign currency transactions.
• Equity risk is the sensitivity of the value of positions in equities
to adverse movements in market prices or expectations of future
dividends. Among other instruments, this affects positions in
shares, stock market indices, convertible bonds and derivatives
using shares as the underlying asset (put, call, equity swaps, etc).
• Credit spread risk is the risk or sensitivity of the value of positions
in fixed income securities or in credit derivatives to movements in
credit spread curves or in recovery rates associated with issuers
and specific types of debt. The spread is the difference between
financial instruments listed with a margin over other benchmark
2016 ANNUAL REPORT
215
5. Risk management report » Risk profile > Trading market risk and structural risks
instruments, mainly the IRR of Government bonds and interbank
interest rates.
Depending on the nature of the risk, activities are segmented as
follows:
• Commodities price risk is the risk derived from the effect of
potential changes in prices. The Group’s exposure to this risk is
not significant and is concentrated in derivative operations on
commodities with customers.
a) Trading: financial services for customers and purchase-sale and
taking positions in fixed-income, equity and currency products,
mainly. The SGCB (Santander Global Corporate Banking) division
is mainly responsible for managing this risk.
• Volatility risk is the risk or sensitivity of the value of a portfolio
b) Structural risks: we distinguish between balance sheet risks and
to changes in the volatility of risk factors: interest rates, exchange
rates, shares, credit spreads and commodities. This risk is incurred
by all financial instruments where volatility is a variable in the
valuation model. The most significant case is financial options
portfolios.
All these market risks can be partly or fully mitigated by using
options, futures, forwards and swaps.
Other types of market risk require more complex hedging. For
example:
• Correlation risk. Correlation risk is the sensitivity of the portfolio
to changes in the relationship between risk factors (correlation),
either of the same type (for example, two exchange rates) or
different types (for example, an interest rate and the price of a
commodity).
• Market liquidity risk. Risk when a Group entity or the Group as a
whole cannot reverse or close a position in time without having an
impact on the market price or the cost of the transaction. Market
liquidity risk can be caused by a reduction in the number of market
makers or institutional investors, the execution of a large volume
of transactions, or market instability. It increases as a result of the
concentration of certain products and currencies.
• Prepayment or cancellation risk. When the contractual
relationship in certain transactions explicitly or implicitly permits
the possibility of early cancellation without negotiation before
maturity, there is a risk that the cash flows may have to be
reinvested at a potentially lower interest rate. This mainly affects
mortgage loans and mortgage securities.
• Underwriting risk. This occurs as a result of an entity’s
involvement in underwriting a placement of securities or another
type of debt, assuming the risk of partially owning the issue or the
loan due to non-placement of all of it among potential buyers.
Pension and actuarial risks, which are described below, also depend
on shifts in market factors.
pension and actuarial risks:
b.1) Structural balance sheet risks: market risks inherent to the
balance sheet, excluding the trading portfolio. Management
decisions on these risks are taken by the ALCO Committees
of each country in coordination with the Group’s ALCO
Committee and are executed by the Financial Management
division. This management seeks to inject stability and
recurrence into the financial margin on the Group’s
commercial activity and economic value, maintaining adequate
levels of liquidity and solvency. The risks are:
• Structural interest rate risk: This arises from maturity
mismatches and re-pricing of all assets and liabilities.
• Structural exchange rate risk/hedging: Exchange rate risk
occurs when the currency in which the investment is made is
different from the euro, irrespective of whether the company
consolidates or not (structural exchange rate). Exchange-rate
hedging positions for future profits in currencies other than
the euro (hedging of profits) are also included under this
heading.
• Structural equity risk: This involves investments via
stakes in financial or non-financial companies that are
not consolidated, as well as available-for-sale portfolios
consisting of equity positions.
b.2) Pension and actuarial risk
• Pension risk: the risk assumed by the Bank in relation to
pension commitments with its employees. The risk lies in the
possibility that the fund will not cover these commitments
in the accrual period for the provision and the profitability
obtained by the portfolio will not be sufficient, obliging the
Group to increase its contributions.
• Actuarial risk: unexpected losses resulting from an increase
in commitments to holders of insurance policies, as well as
losses from unforeseen cost increases.
216
2016 ANNUAL REPORT
» D.2.2. Trading market risk
D.2.2.1. Key figures and change over time
Grupo Santander’s trading risk profile remained relatively low in
2016, in line with previous years, due to the fact that the Group’s
activity has traditionally focused on providing services to its
customers, with only limited exposure to complex structured assets,
as well as geographic diversification and risk factors.
D.2.2.1.1. VaR analysis21
In 2016, the Group maintained its strategy of concentrating its
trading activity on customer business, minimising where possible
exposures to directional risk in net terms. This is reflected in the
Value at Risk (VaR) of the SGCB trading book, which, despite the
market’s volatility in response to events during the year (Brexit,
elections in Spain and the USA, the political and economic situation
in Brazil and the constitutional referendum in Italy), grew in line with
its average path over the last three years, ending 2016 at EUR 17.9
million22.
VaR 2014-2016
Million euros. VaR at a 99% confidence interval over a one day horizon.
35
3
0
2
5
2
0
1
5
1
0
5
— VaR
— 15 day moving average
— VaR, 3 year average
MAX (32.9)
MIN (8.2)
4
1
0
2
n
a
J
4
1
0
2
r
a
M
4
1
0
2
y
a
M
4
1
0
2
l
u
J
4
1
0
2
p
e
S
4
1
0
2
v
o
N
5
1
0
2
n
a
J
5
1
0
2
r
a
M
5
1
0
2
y
a
M
5
1
0
2
l
u
J
5
1
0
2
p
e
S
5
1
0
2
v
o
N
5
1
0
2
c
e
D
6
1
0
2
n
a
J
6
1
0
2
r
a
M
6
1
0
2
y
a
M
6
1
0
2
l
u
J
6
1
0
2
p
e
S
6
1
0
2
v
o
N
6
1
0
2
c
e
D
VaR during 2016 fluctuated between EUR 11.1 million and EUR 32.9
million. The most significant changes were related to changes in
exchange rate and interest rate exposure and also market volatility.
VaR risk histogram
VaR at 99% over a one day horizon
Number of days (%) in each range
The average VaR in 2016 was EUR 18.3 million, very similar to the two
previous years (EUR 15.6 million in 2015 and EUR 16.9 million in 2014).
18.3%
17.4%
19.0%
18.4%
The chart below shows the distribution of risk in VaR terms from
2014 to 2016. The accumulation of days with levels of between EUR
8.25 million and EUR 24.25 million (96%) is shown. Values of higher
than EUR 24.25 million (3.9%) largely occur in periods affected by
temporary spikes in volatility, mainly in the Brazilian real against the
dollar and also in the interest rates for both currencies.
)
%
(
s
y
a
d
f
o
r
e
b
m
u
N
9.4%
0.1%
1.0%
7.9%
4.6%
3.9%
5
2
.
8
<
5
2
0
1
.
5
2
.
2
1
5
2
.
4
1
5
2
.
6
1
5
2
.
8
1
.
5
2
0
2
5
2
.
2
2
5
2
.
4
2
5
2
.
4
2
>
VaR in million euros
21. Value at Risk. The definition and calculation methodology for VaR is set out in section D.2.2.2.1. Value at Risk (VaR).
22. Regarding trading activity in financial markets by SGCB (Santander Global Corporate Banking). As well as the trading activity of SGCB, there are other
positions catalogued for accounting purposes. The total VaR of trading of this accounting perimeter was EUR 17.8 million.
2016 ANNUAL REPORT
217
5. Risk management report » Risk profile > Trading market risk and structural risks
Risk per factor
The following table displays the average and latest VaR values at 99%
by risk factor over the last three years, and the lowest and highest
values in 2016 and the Expected Shortfall (ES) at 97.5%23 at the close
of 2016:
VaR statistics and Expected Shortfall by risk factor24, 25
Million euros. VaR at 99% and ES at 97.5% with one day time horizon.
2016
VaR (99%)
ES
(97.5%)
2015
VaR
2014
VaR
Minimum Average Maximum
Latest
Latest
Average
Latest
Average
Latest
11.1
(3.6)
8.9
1.0
3.3
2.4
0.0
6.0
(3.7)
5.0
0.9
1.5
2.1
0.0
5.9
(0.6)
5.4
0.4
1.3
0.7
(0.2)
0.7
0.0
0.1
0.3
0.0
0.0
0.3
0.0
18.3
(10.3)
32.9
(20.9)
15.5
1.9
6.9
4.2
0.1
9.0
(9.1)
8.2
1.6
4.1
4.1
0.1
13.7
(3.6)
11.4
1.4
4.5
1.3
(0.5)
1.3
0.1
0.4
0.6
(0.1)
0.1
0.5
0.0
23.1
3.3
13.3
7.4
0.2
19.5
(18.1)
14.9
2.8
13.2
7.0
0.2
26.9
(15.1)
21.6
3.8
11.4
4.8
(1.2)
4.9
0.6
0.9
1.9
(0.3)
0.2
1.9
0.1
17.9
(9.6)
17.9
1.4
4.8
3.3
0.1
9.4
(7.6)
9.1
1.5
3.0
3.4
0.1
13.5
(2.7)
13.0
0.8
2.4
2.7
(0.6)
2.7
0.0
0.5
0.5
(0.1)
0.1
0.5
0.0
17.6
(9.5)
16.8
1.7
4.9
3.6
0.1
9.1
(7.7)
8.6
1.6
3.2
3.3
0.1
14.4
(3.0)
14.1
0.8
2.5
2.8
(0.2)
2.8
0.0
0.2
0.8
(0.1)
0.1
0.8
0.0
15.6
(11.1)
14.9
1.9
4.5
5.2
0.2
11.6
(8.3)
10.6
1.4
3.3
4.4
0.2
10.6
(4.8)
10.7
1.5
3.2
0.9
(0.5)
0.8
0.1
0.4
1.6
(0.6)
0.5
1.6
0.0
13.6
(5.8)
12.7
1.1
2.6
2.9
0.1
11.1
(5.6)
10.9
1.0
1.9
2.8
0.1
9.7
(4.4)
9.3
0.5
4.3
0.9
(0.4)
0.8
0.0
0.4
0.4
(0.2)
0.1
0.4
0.0
16.9
(13.0)
14.2
2.7
3.5
9.3
0.3
12.2
(9.2)
8.9
1.7
2.9
7.6
0.3
12.3
(3.5)
11.8
2.1
2.0
10.5
(9.3)
10.5
1.8
2.9
4.6
0.1
7.3
(5.5)
6.2
1.0
1.5
3.9
0.1
9.8
(12.2)
9.8
3.0
9.2
0.7
0.7
(0.3)
(0.2)
0.7
0.1
0.3
0.7
0.0
0.2
2.3
1.9
(0.6)
(0.6)
0.6
2.2
0.0
0.4
1.9
0.2
Total
Diversification effect
i
g
n Interest rate
d
a
r
t
Equities
l
a
t
o
T
Exchange rate
Credit spread
Commodities
Total
Diversification effect
Interest rate
e
p
o
r
u
E
Equities
Exchange rate
Credit spread
Commodities
Total
Diversification effect
a
c
i
r
e
m
A Interest rate
n
i
t
a
L
Equities
Exchange rate
Total
Diversification effect
a
i
s
A
d
n
e
i
t
i
v
i
t
c
l
a
b
o
G
l
a Interest rate
A
S
U
Equities
Exchange rate
s Total
a Interest rate
Credit spread
Exchange rate
Diversification effect
23. This metric is defined in detail in section 2.2.2.2. Following the recommendation of the Basel Committee in its Fundamental review of the trading book: a revised market
risk framework (October 2013), the confidence level of 97.5% approximates a risk level similar to that captured by VaR with a 99% confidence level.
24. The VaR of global activities includes operations that are not assigned to any particular country.
25. In Latin America, the United States and Asia, VaR levels are not shown separately for credit spreads and commodities, because of their scant or zero materiality.
218
2016 ANNUAL REPORT
At the end of 2016, VaR had increased by EUR 4.3 million against
2015, increasing average VaR by EUR 2.7 million. By risk factor,
average VaR increased for exchange rates, interest rate and equity
risk, but fell for credit spread and commodities. By geographies,
there was a slight increase in Latin America and the United States/
Asia, but it fell in the other geographies.
D.2.2.1.2. Gauging and backtesting measures
The real losses can differ from the forecasts by the VaR for various
reasons related to the limitations of this metric. This is set out in
detail later in the section on the methodologies. The Group regularly
analyses and contrasts the accuracy of the VaR calculation model in
order to confirm its reliability.
The evolution of VaR by risk factor has, in general, been stable over
the last few years. The temporary rises in VaR for various factors are
explained more by temporary increases in the volatility of market
prices than by significant changes in positions.
Historical VaR by risk factor
Million euros. VaR at 99% with one day time horizon (15 day moving
average)
25
20
15
10
5
0
— VaR interest rate
— VaR credit spread
— VaR Equity
— VaR Commodities
— VaR exchange rate
4
1
0
2
n
a
J
4
1
0
2
r
a
M
4
1
0
2
y
a
M
4
1
0
2
l
u
J
4
1
0
2
p
e
S
4
1
0
2
v
o
N
5
1
0
2
n
a
J
5
1
0
2
r
a
M
5
1
0
2
y
a
M
5
1
0
2
l
u
J
5
1
0
2
p
e
S
5
1
0
2
v
o
N
5
1
0
2
c
e
D
6
1
0
2
n
a
J
6
1
0
2
r
a
M
6
1
0
2
y
a
M
6
1
0
2
l
u
J
6
1
0
2
p
e
S
6
1
0
2
v
o
N
6
1
0
2
c
e
D
Lastly, the table below compares the VaR figures with stressed
VaR figures26 for the trading activity of the two portfolios with the
highest average VaR in 2016.
Stressed VaR vs. VaR in 2016: main portfolios
Million euros. Stressed VaR and VaR at 99% with one-day time horizon.
2016
2015
Mín Average Max Latest Average Latest
VaR (99%)
3.1
5.7
14.1
4.7
8.9
11.2
Spain
Stressed
VaR (99%)
10.5
14.9
23.9
14.3
19.4
13.5
VaR (99%)
4.5
12.0
26.8
10.6
9.5
9.4
Brazil
Stressed
VaR (99%)
6.4
22.2
47.5
23.0
16.6
14.2
The most important test consists of backtesting exercises, analysed
at the local and global levels and in all cases with the same
methodology. Backtesting consists of comparing the forecast VaR
measurements, with a certain level of confidence and time frame,
with the real results of losses obtained in a same time frame. This
enables anomalies in the VaR model of the portfolio in question to
be detected (for example, shortcomings in the parameterisation
of the valuation models of certain instruments, not very adequate
proxies, etc).
Santander calculates and evaluates three types of backtesting:
• “Clean” backtesting: daily VaR is compared to the results obtained
without taking into account intraday results or changes in portfolio
positions. This method contrast the effectiveness of the individual
models used to assess and measure the risks of positions.
• Backtesting on complete results: the daily VaR is compared with
the day’s net results, including the results of intraday operations
and those generated by fees.
• Backtesting on complete results without mark-ups or fees: the daily
VaR is compared to the day’s net results from intraday operations
but excluding those generated by mark-ups and fees. This method
aims to give an idea of the intraday risk assumed by Group
treasuries.
In the first case and for the total portfolio, there were four
exceptions for Value at Earnings (VaE)27 at 99% in 2016 (days on
which daily profit was higher than VaE) on 12 and 18 February, 13
April and 24 June. These were caused primarily by major shifts in
the exchange rates of the euro and US dollar against the Brazilian
real and the interest rate curves for these currencies, together witha
generalised increase in volatility in the markets as a result of Brexit.
There was also an exception to VaR at 99% (days on which the daily
loss was higher than the VaR) on 3 February, caused mainly, as in the
above cases, by high volatility in exchange rates and interes curves,
in this case for euro and Brazilian real.
The number of exceptions occurred is consistent with the
assumptions specified in the VaR calculation model.
26. Description in section 2.2.2.2.
27. The definition and calculation methodology for VaE is set out in section 2.2.2.1.
2016 ANNUAL REPORT
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5. Risk management report » Risk profile > Trading market risk and structural risks
Backtesting of trading portfolios: daily results vs. Value at Risk (VaR) for previous day
Million euros
60
45
30
15
0
-15
-30
-45
— Clean P&L
— VaE 99%
— VaE 95%
— VaR 99%
— VaR 95%
4
1
0
2
n
a
J
2
4
1
0
2
b
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F
9
1
4
1
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8
4
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3
D.2.2.1.3. Distribution of risks and management results28
Geographic distribution
In trading activity, the average contribution of Latin America to the
Group’s total VaR in 2016 was 69.6% compared with a contribution
of 50.1% in economic results. Europe, with 29.7% of global risk,
contributed 41.9% of results. In relation to prior years, there was
a gradual homogenisation in the profile of activity in the Group’s
different units, focused generally on providing service to professional
and institutional clients.
Below is the geographic contribution (by percentage) to the Group
total, both in risks, measured in VaR terms, as well as in results,
measured in economic terms.
VaR - P&L binomial:
Geographic distribution
Average VaR (at 99% with a 1 day time horizon) and Annual
cumulative management P&L (EUR million), % of annual totals
80%
70%
60%
50%
40%
30%
20%
10%
0%
Management P&L
2014
2015
2016
Average annual VaR
2014
2015
2016
4
1
0
2
5
1
0
2
6
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
4
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5
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Latin America
Europe
USA and Asia Global Activities
28. Results in terms similar to Gross Margin (excluding operating costs, the financial would be the only cost).
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2016 ANNUAL REPORT
Distribution of risk by time
The next chart shows the risk assumption profile, in terms of VaR,
compared to results in 2016. The average VaR remained relatively
stable, albeit with higher values in the second half of the year, while
results evolved in a more regular way during the same period, and
were higher in the first half.
Time distribution of risks and P/L in 2016: percentages of annual totals
VaR (at 99% with a 1 day time horizon) and annual cumulative management P&L (EUR mn), % of annual totals.
Monthly management P&L
Monthly average VaR
20%
15%
10%
5%
0%
January
February
March
April
May
June
July
August
September October November December
The following frequency histogram shows the distribution of daily
economic results on the basis of their size between 2014 and 2016. It
shows that on over 95.9% of days on which the markets were open
daily29 returns were in a range of between EUR -12 and +13 million.
Daily management P&L (MtM) frequency histogram
Daily management P&L “clean” of fees and intraday
operations (EUR mn). Number of days (%) in each range
37.3%
27.8%
16.7%
3.4%
1.0%
0.3% 0.3%
)
%
(
s
y
a
d
f
o
r
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b
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9.1%
3.1%
1.0%
0
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5
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-
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0
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1
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.
5
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.
0
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0
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5
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.
0
0
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0
.
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0
.
5
2
>
D.2.2.1.4. Risk management of derivatives
Derivatives activity is mainly focused on marketing investment
products and hedging risks for clients. Management is focused on
ensuring that the net risk opened is the lowest possible.
These transactions include options on equities, fixed-income and
exchange rates. The units where this activity mainly takes place are:
Spain, Santander UK, and, to a lesser extent, Brazil and Mexico.
The chart below shows the VaR Vega30 performance of structured
derivatives business over the last three years. It fluctuated at around
an average of EUR 5 million. In general, the periods with higher
VaR levels related to episodes of significant rises in volatility in the
markets.
Although in 2015, VaR Vega was similar to the previous year in the
first quarter of the year, in the two next quarters it was affected by
high market volatility due to events such as Greece’s bail-out, high
stock market volatility in China currency depreciation, and rating
downgrade in Brazil, as well the strong depreciation of its currency
against the euro and the dollar. During 2016, a number of different
events pushed up market volatility as indicated above (Brexit,
general elections in Spain and the US, political-economic situation in
Brazil, constitutional referendum in Italy).
29. Yields “clean” of fees and results of intraday derivative operations.
30. Vega, a Greek term, means here the sensitivity of the value of a portfolio to changes in the price of market volatility.
2016 ANNUAL REPORT
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5. Risk management report » Risk profile > Trading market risk and structural risks
Change in risk over time (VaR) of the derivatives business
Million euros. VaR vega at a 99% over a one day horizon.
16
14
12
10
8
6
4
2
0
— VaR Vega
— 15 day moving average
4
1
0
2
n
a
J
4
1
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2
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4
1
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2
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4
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2
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1
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2
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5
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1
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2
y
a
M
5
1
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5
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2
p
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5
1
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6
1
0
2
n
a
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6
1
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6
1
0
2
y
a
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6
1
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2
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6
1
0
2
p
e
S
6
1
0
2
v
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6
1
0
2
c
e
D
As regards the VaR by risk factor, on average, the exposure was
concentrated, in this order, in interest rates, equities, exchange rates
and commodities. This is shown in the table below:
Financial derivatives. Risk (VaR) by risk factor.
Million euros. VaR at a 99% over a one day horizon.
Total VaR Vega
Diversification effect
VaR interest rate
VaR equities
VaR exchange rate
VaR commodities
2016
2015
2014
Minimum
Average Maximum
Latest
Average
Latest
Average
Latest
2.4
(1.1)
2.0
0.9
0.5
0.0
4.0
(2.4)
3.6
1.7
1.1
0.0
11.4
(7.1)
10.6
3.0
4.8
0.1
2.5
(2.3)
2.6
1.3
0.9
0.0
6.8
(2.3)
6.5
1.5
1.1
0.1
7.0
(1.7)
7.3
0.8
0.6
0.0
3.3
(2.1)
2.4
1.8
1.2
0.0
2.7
(2.6)
1.7
2.0
1.6
0.1
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2016 ANNUAL REPORT
Exposure by business unit was mainly concentrated in Spain,
Santander UK, Brazil and Mexico (in that order).
Financial derivatives. Risk (VaR) by unit
Million euros. VaR at a 99% over a one day horizon.
Total VaR Vega
Spain
Santander UK
Brazil
Mexico
2016
2015
2014
Minimum
Average Maximum
Latest
Average
Latest
Average
Latest
2.4
2.1
0.6
0.3
0.2
4.0
3.6
1.3
0.8
0.4
11.4
11.3
3.4
2.4
0.8
2.5
2.3
0.9
0.7
0.2
6.8
6.6
0.9
0.7
0.8
7.0
6.9
0.9
0.4
0.3
3.3
2.4
1.4
0.8
0.9
2.7
1.5
0.9
0.7
1.3
The average risk in 2016 (EUR 4 million) is lower compared to 2015
and higher than in 2014, for the reasons explained above.
Grupo Santander continues to have a very limited exposure
to complex structured instruments or vehicles, showing that
it maintains a culture in which prudence in risk management is
particularly important. At the end of 2016, the Group had:
• The existence of an appropriate valuation model to monitor the
value of each exposure: Mark-to-Market, Mark-to-Model or Mark
to-Liquidity.
• The availability in the market of observable data (inputs) needed to
be able to apply this valuation model.
• Hedge funds: the total exposure is not significant (EUR 179.4
And provided these two points are always met:
million at close of December 2016) and is all indirect, acting as
counterparty in derivatives transactions. The risk with this type of
counterparty is analysed case by case, establishing percentages
of collateralisation on the basis of the features and assets of each
fund. Exposure has fallen compared with the previous year.
• The availability of appropriate systems, duly adapted to calculate
and monitor every day the results, positions and risks of new
operations.
• The degree of liquidity of the product or underlying asset, in order
• Monolines: the Grupo Santander’s exposure to bond insurance
to make possible their coverage when deemed appropriate.
D.2.2.1.5. Issuer risk in trading portfolios
Trading activity in credit risk is mainly conducted in the Treasury
Units in Spain. It is done by taking positions in bonds and credit
default swaps (CDS) at different maturities on corporate and
financial references, as well as indices (Itraxx, CDX).
companies (monolines) was, EUR 49.5 million as of December 2016,
mainly indirect exposure, EUR 49 million by virtue of the guarantee
provided by this type of entity to various financing or traditional
securitisation operations. The exposure in this case is to double
default, been the primary underlying assests of high credit quality.
The small remaining amount is direct exposure (for example,
via purchase of protection from the risk of non- payment by any
of these insurance companies through a credit default swap).
Exposure has fallen compared with the previous year.
This was mainly due to the integration of positions of institutions
acquired by the Group, as Sovereign in 2009. All these positions
were known at the time of purchase, having been duly provisioned.
These positions, since their integration in the Group, have been
notably reduced, with the ultimate goal of eliminating them from the
balance sheet.
Santander’s policy for approving new transactions related to these
products remains very prudent and conservative. It is subject
to strict supervision by the Group’s senior management. Before
approving a new transaction, product or underlying asset, the Risks
division verifies:
2016 ANNUAL REPORT
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5. Risk management report » Risk profile > Trading market risk and structural risks
The accompanying table shows the major positions at year-end in
Spain, distinguishing between long (purchases of bonds and sales
of CDS protection) and short (sales of bonds and purchases of CDS
protection) positions.
Million euros. Data at December 2016
1st reference
2nd reference
3rd reference
4th reference
5th reference
Sub-total top 5
Total
More ‘long’ positions
(sales of protection)
More ‘short’ positions
(purchase of protection)
Exposure at
default (EAD)
% of
total EAD
Exposure at
default (EAD)
% of
total EAD
1,132.6
132.3
90.9
87.3
81.9
1,525.0
6,130.0
18.5%
2.2%
1.5%
1.4%
1.3%
24.9%
100%
(30.9)
(24.0)
(19.0)
(19.0)
(18.7)
(111.6)
(4,748.4)
0.7%
0.5%
0.4%
0.4%
0.4%
2.4%
100%
Note: zero recoveries are supposed (LCR=0) in the EAD calculation
D.2.2.1.6. Analysis of scenarios
Various stress scenarios were calculated and analysed regularly
in 2016 (at least monthly) at the local and global levels for all the
trading portfolios and using the same risk factor assumptions.
Maximum volatility scenario (worst case)
This scenario is given particular attention as it combines historic
movements of risk factors with an ad-hoc analysis in order to reject
very unlikely combinations of variations (for example, sharp falls
in stock markets together with a decline in volatility). A historic
volatility equivalent to six standard deviations is applied. The
scenario is defined by taking for each risk factor the movement
which represents the greatest potential loss in the portfolio,
rejecting the most unlikely combinations in economic-financial
terms.
At year-end, that scenario implied, for the global portfolio, interest
rate rises in Latin American markets and falls in core markets, stock
market falls, depreciation of all currencies against the euro, and
increased credit spreads and volatility.
The results for this scenario at the close of 2016 are shown in the
following table.
Stress scenario: maximum volatility (worst case)
Million euros. Data at December 2016
Total trading
Europe
Latin America
US
Global activities
Asia
Interest rate
Equities
Exchange rate
Credit spread
Commodities
(100.5)
(14.7)
(74.8)
(7.5)
(0.1)
(3.4)
(3.1)
(1.2)
(1.9)
0.0
0.0
0.0
(10.3)
(10.0)
(2.9)
(6.8)
(0.5)
0.0
(0.1)
(9.2)
0.0
0.0
(0.8)
0.0
(0.1)
(0.1)
0.0
0.0
0.0
0.0
Total
(124.0)
(28.1)
(83.5)
(8.0)
(0.9)
(3.5)
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2016 ANNUAL REPORT
The stress test shows that the economic loss suffered by the Group
in its trading portfolios, in terms of the mark to market (MtM)
result, would be, if the stress movements defined in the scenario
materialised in the market, EUR 124 million. This loss would be
concentrated in Latin America (in the following order: interest rates,
exchange rates and equity) and Europe (in the following order:
interest rates, credit spread, exchange rates and equities).
Other global stress scenarios
Abrupt crisis: an ad hoc scenario with sharp market movements.
Rise in interest rate curves, sharp falls in stock markets, strong
appreciation of the dollar against other currencies, rise in volatility
and in credit spreads.
Subprime crisis: historic scenario of the US mortgage crisis. The
objective of the analysis is to capture the impact on results of the
reduction in liquidity in the markets. Two time horizons were used
(one day and 10 days), in both cases there are falls in stock markets
and in interest rates in core markets and rises in emerging markets,
and dollar appreciation against other currencies.
“Plausible Forward Looking Scenario”: a hypothetical plausible
scenario defined at local level in market risk units, based on the
portfolio positions and their expert judgement regarding short-term
changes in market variables which can have a negative impact on
such positions. This year, the new scenario has been included in the
set of scenarios handled by the entity.
EBA adverse scenario: the scenario proposed by the European
Banking Authority (EBA) in April 2014 as part of the EBA 2014
EU-Wide Stress Test and updated in January 2016. It was initially
conceived as an adverse scenario proposed by European banks
thinking in terms of a 2014-2016 time horizon and updated this year
to the 2016-2018 time horizon. It reflects the systemic threats which
are considered to be the most serious threats to the stability of the
banking sector in the European Union.
This latter scenario replaced the sovereign debt crisis scenario in
November 2014. This historic scenario identified four geographic
zones (the USA, Europe, Latin America and Asia) and included
interest rate rises, falls in stock markets and volatilities, widening
credit spreads, depreciation of the euro and Latin American
currencies, and appreciation of Asian currencies, against the dollar.
In 2016, the analysis of the Reverse Stress Tests was added. These
tests are based on establishing a predefined result (unfeasiability of
a business model or possible insolvency) and subsequently the risk
factor scenarios and movements which could cause that situation are
identified.
Every month a consolidated stress test report is drawn up with
explanations of the main changes in results for the various scenarios
and units. An early warning mechanism has also been established
so that when the loss for a scenario is high in historic terms and/or
in terms of the capital consumed by the portfolio in question, the
relevant business executive is informed.
The results of these global scenarios for the last three years are
shown in the following table:
Stress test results. Comparison of the 2014-2016 scenarios (annual averages)
Million euros
2014
2015
2016
100
0
-100
-200
-300
-400
-500
-600
Worst
case
Abrupt crisis
Plausible
Fwd Looking
Crisis 07 08
1d
Crisis 07 08
10d
EBA Adverse
2016 ANNUAL REPORT
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5. Risk management report » Risk profile > Trading market risk and structural risks
D.2.2.1.7. Linkage with balance sheet items.
Other alternative risk measures
Below are the balance sheet items in the Group’s consolidated
position that are subject to market risk, distinguishing the positions
whose main risk metric is VaR from those where monitoring is
carried out with other metrics. The items subject to market trading
risk are highlighted.
Relation of risk metrics with balances in Group’s consolidated position
Million euros. (December 2016)
Main market risk metric
Assets subject to market risk
Cash and deposits at central banks
Trading portfolio
Other financial assets at fair value
Available-for-sale financial assets
Investments
Hedging derivatives
Loans
Other assets financials1
Other non-financial assets2
Liabilities subject to market risk
Trading portfolio
Other financial liabilities at fair value
Hedging derivatives
Financial liabilities at amortised cost3
Provisions
Other financial liabilities
Equity
Other non-financial liabilities
Balance
sheet
amount
1,339,125
76,454
148,187
31,609
116,774
4,836
10,377
854,472
35,531
60,885
1,339,125
108,765
40,263
8,156
1,044,688
14,459
9,025
102,699
11,070
VaR
189,372
147,738
31,284
-
-
10,350
157,098
108,696
40,255
8,147
Other
Main risk factor for ‘Other’ balance
1,149,753
76,454
449
325
116,774
4,836
27
854,472
35,531
60,885
1,182,027
69
8
9
1,044,688
14,459
9,025
102,699
11,070
Interest rate
Interest rate, credit spread
Interest rate, credit spread
Interest rate; equities
Equities
Interest and exchange rates
Interest rate
Interest rate
Interest rate, credit spread
Interest rate, credit spread
Interest and exchange rates
Interest rate
Interest rate
Interest rate
1. Includes adjustments to macro hedging, non-current assets held for sale, reinsurance assets, and insurance contracts linked to pensions and fiscal assets.
2. Includes intangible assets, material assets and other assets.
3. Macro-hedging adjustment.
For activity managed with metrics other than VaR, alternative
measures are used, mainly: sensitivity to different risk factors
(interest rate, credit spread, etc).
In the case of the trading portfolio, the securitisations and “level III”
exposures (those in which non-observable market data constitutes a
significant input in the corresponding internal valuation models) are
excluded from the VaR measurement.
Securitisations are mainly treated as if they were part of the credit
risk portfolio (in terms of default, recovery rate, etc). For “level
III” exposures, which are not very significant in Grupo Santander
(basically derivatives linked to the home price index - HPI - in
market activity in Santander UK, and interest rate and correlation
derivatives for share prices in the parent bank’s market activity), as
well as in general for inputs that cannot be observed in the market
(correlation, dividends, etc), a very conservative policy is followed:
this is reflected in valuation adjustments as well as sensitivity.
D. 2.2.2. Methodologies
D.2.2.2.1. Value at Risk (VaR)
The standard methodology the Group applies to trading activities
is Value at Risk (VaR), which measures the maximum expected loss
with a certain confidence level and time frame. The standard for
historic simulation is a confidence level of 99% and a time frame of
one day. Statistical adjustments are applied enabling the most recent
developments affecting the levels of risk assumed to be incorporated
efficiently and quickly. A time frame of two years or at least 520 days
from the reference date of the VaR calculation is used. Two figures
are calculated every day: one applying an exponential decay factor
that accords less weight to the observations furthest away in time
and another with the same weight for all observations. The higher of
the two is reported as the VaR.
Value at Earnings (VaE) is also calculated. This measures the
maximum potential gain with a certain level of confidence and time
frame, applying the same methodology as for VaR.
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2016 ANNUAL REPORT
being a subadditive metric31. Going forward, in the near term the
Basel Committee has recommended replacing VaR with Expected
Shortfall as the baseline metric for calculating regulatory capital for
trading portfolios32. The committee considers that ES with a 97.5%
confidence interval delivers a similar level of risk to VaR at a 99%
confidence interval. ES is calculated by applying uniform weights to
all observations.
D.2.2.2.3. Analysis of scenarios
The Group uses other metrics in addition to VaR, giving it greater
control over the risks it faces in the markets where it is active.
These measures include scenario analysis. This consists of defining
alternative behaviours for various financial variables and obtaining
the impact on results of applying these to activities. These scenarios
may replicate events that occurred in the past (such as a crisis) or
determine plausible alternatives that are unrelated to past events.
The potential impact on earnings of applying different stress
scenarios is regularly calculated and analysed, particularly for trading
portfolios, considering the same risk factor assumptions. Three
scenarios are defined, as a minimum: plausible, severe and extreme.
Taken together with VaR, these reveal a much more complete
spectrum of the risk profile.
A number of trigger thresholds have also been established for global
scenarios, based on their historical results and the capital associated
with the portfolio in question. When these triggers are activated, the
portfolio managers are notified so they can take appropriate action.
The results of the global stress exercises, and any breaches of the
trigger thresholds, are reviewed regularly, and reported to senior
management, when this is considered appropriate.
D.2.2.2.4. Analysis of positions, sensitivities and results
Positions are used to quantify the net volume of the market
securities for the transactions in the portfolio, grouped by main risk
factor, considering the delta value of any futures or options. All risk
positions can be expressed in the base currency of the unit and the
currency used for standardising information. Changes in positions
are monitored on a daily basis to detect any incidents, so they can be
corrected immediately.
Measurements of market risk sensitivity estimate the variation
(sensitivity) of the market value of an instrument or portfolio to any
change in a risk factor. The sensitivity of the value of an instrument
to changes in market factors can be obtained using analytical
approximations by partial derivatives or by complete revaluation of
the portfolio.
In addition, the statement of income is also drawn up every day,
providing an excellent indicator of risk, enabling us to identify the
impact of changes in financial variables on the portfolios.
VaR by historic simulation has many advantages as a risk metric (it
sums up in a single number the market risk of a portfolio; it is based
on market movements that really occurred without the need to make
assumptions of functions forms or correlations between market
factors, etc), but it also has its limitations.
Some limitations are intrinsic to the VaR metrics, regardless of the
methodology used in their calculation, including:
• The VaR calculation is calibrated at a certain level of confidence,
which does not indicate the levels of possible losses beyond it.
• There are some products in the portfolio with a liquidity horizon
greater than that specified in the VaR model.
• VaR is a static analysis of the risk of the portfolio, and the situation
could change significantly during the following day, although the
likelihood of this occurring is very low.
Using the historic simulation methodology also has its limitations:
• High sensitivity to the historic window used.
• Inability to capture plausible events that would have significant
impact, if these do not occur in the historic window used.
• The existence of valuation parameters with no market input (such
as correlations, dividend and recovery rate).
• Slow adjustment to new volatilities and correlations, if the most
recent data receives the same weight as the oldest data.
Some of these limitations are overcome by using Stressed VaR
and Expected Shortfall, calculating VaR with exponential decay
and applying conservative valuation adjustments. Furthermore,
as previously stated, the Group regularly conducts analysis and
backtesting of the accuracy of the VaR calculation model.
D.2.2.2.2. Stressed VaR (sVaR) and Expected Shortfall (ES)
In addition to standard VaR, Stressed VaR is calculated daily for the
main portfolios. The calculation methodology is the same as for VaR,
with the two following exceptions:
• The historical observation period for the factors: when calculating
Stressed VaR a window of 260 observations is used, rather than
520 for VaR. However, this is not the most recent data: rather, the
data used is from a continuous period of stress for the portfolio in
question. This is determined for each major portfolio by analysing
the history of a subset of market risk factors selected based on
expert judgement and the most significant positions in the books.
• Unlike VaR, Stressed VaR is obtained using the percentile
with uniform weighting, not the higher of the percentiles with
exponential and uniform weightings.
Moreover, the Expected Shortfall (ES) is also calculated, estimating
the expected value of the potential loss when this is higher
than the level set by VaR. Unlike VaR, ES has the advantages of
capturing the risk of large losses with low probability (tail risk) and
31. According to the financial literature, subaddivity is a desirable property for a coherent risk metric. This property establishes that f(a+b) is less than or equal to f(a)+f(b).
Intuitively, it assumes that the more instruments and risk factors there are in a portfolio, the lower the risks, because of the benefits of diversification. Whilst VaR only
offers this property for some distributions, ES always does so.
32. “Minimum Capital Requirements for Market Risk” (BCBS Document on banking supervision, January 2016).
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D.2.2.2.5. Derivatives activities and credit management
Also noteworthy is the control of derivative activities and credit
management which, because of its atypical nature, is conducted daily
with specific measures. First, the sensitivities to price movements
of the underlying asset (delta and gamma), volatility (vega) and time
(theta) are controlled. Second, measures such as the sensitivity to
the spread, jump-to-default, concentrations of positions by level of
rating, etc, are reviewed systematically.
With regard to the credit risk inherent to trading portfolios, and in
line with the recommendations of the Basel Committee on Banking
Supervision and prevailing regulations, a further metric is also
calculated: the Incremental Risk Charge (IRC). This seeks to cover
the risks of non-compliance and ratings migration that are not
adequately captured in VaR, through changes in the corresponding
credit spreads. This metric is basically applied to fixed-income bonds,
both public and private, derivatives on bonds (forwards, options,
etc.) and credit derivatives (credit default swaps, asset backed
securities, etc.). IRC is calculated using direct measurements of loss
distribution tails at an appropriate percentile (99.9%), over a one
year horizon. The Montecarlo methodology is used, applying one
million simulations.
D.2.2.2.6. Credit Valuation Adjustment (CVA)
and Debt Valuation Adjustment (DVA)
Grupo Santander incorporates credit valuation adjustment (CVA)
and debt valuation adjustment (DVA) when calculating the results
of trading portfolios. The CVA is a valuation adjustment of over the
counter (OTC) derivatives, as a result of the risk associated with the
credit exposure assumed by each counterparty.
D.2.2.3. System for controlling limits
Setting market risk and liquidity limits is designed to be a dynamic
process, responding to the Group’s risk appetite level (as described
in section B.3.1. Risk appetite and limits structure). This process
is part of an annual limits plan drawn up by the Group’s senior
management, involving every Group entity.
The market risk limits used in the Group are established based on
different metrics and try to cover all activity subject to market risk
from many perspectives, applying a conservative approach. The main
ones are:
• VaR and Stressed VaR limits.
• Limits of equivalent and/or nominal positions.
• Interest rate sensitivity limits.
• Vega limits.
• Delivery risk limits for short positions in securities (fixed income
and securities).
• Limits to constrain the volume of effective losses, and protect
results generated during the period:
• Loss trigger.
• Stop loss.
• Credit limits:
The CVA is calculated by taking into account the potential exposure
with each counterparty in each future maturity. The CVA for a
particular counterparty is therefore the sum of the CVAs over all such
future terms. The following inputs are used:
• Total exposure limit.
• Jump to default by issuer limit.
• Expected exposure: including, for each operation the current
• Others.
market value (MtM) as well as the potential future risk (add-on)
to each maturity. CVA also considers mitigating factors such as
collateral and netting agreements, together with a decay factor for
derivatives with interim payments.
• Loss given default: the percentage of final loss assumed in case of
credit/ non-payment of the counterparty.
• Probability of default: for cases in which there is no market
information (spread curve traded through CDS, etc.), general
proxies generated on the basis of companies with listed CDSs for
the same sector and external rating as the counterparty are used.
• Discount factor curve.
The Debt Valuation Adjustment (DVA) is a valuation adjustment
similar to the CVA, but in this case as a result of the Group’s risk that
counterparties assume in OTC derivatives.
• Limits for origination transactions.
These general limits are complemented by other sub-limits to establish
a sufficiently granular limits framework for effective control of the
market risk factors to which the Group is exposed in its trading
activities. Positions are monitored on a daily basis, at both the unit
and global levels, with exhaustive control of changes to portfolios, so
as to identify any incidents that might need immediate correction.
Meanwhile, the daily drawing up of the income statement by the
Risks area is an excellent indicator of risks, as it allows the impact that
changes in financial variables have had on portfolios to be identified.
Implementation of the Volcker Rule throughout the Group in July 2015
required activities to be reorganised to ensure compliance with this
new regulation, the preparation of new metrics and the definition of
limits at the desk level.
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Three categories of limits were established based on the scope
of approval and control: global approval and control limits, global
approval limits with local control, and local approval and control limits.
The limits are requested by the business executive of each country/
entity, considering the particular nature of the business and so as
to achieve the budget established, seeking consistency between
the limits and the risk/return ratio. The limits are approved by the
corresponding risk bodies.
Business units must comply with the approved limits at all times. In
the event of a limit being exceeded, the local business executives have
to explain, in writing and on the day, the reasons for the excess and
the action plan to correct the situation, which in general might consist
of reducing the position until it reaches the prevailing limits or setting
out the strategy that justifies an increase in the limits.
If the business unit fails to respond to the excess within three days,
the global business executives will be asked to set out the measures
to be taken in order to make the adjustment to the existing limits.
If this situation lasts for 10 days as of the first excess, senior risk
management will be informed so that a decision can be taken: the risk
takers could be made to reduce the levels of risk assumed.
Net interest income (NII) sensitivity34
% of total
Other
11.7%
UK
28.7%
Parent bank
29.6%
Other: Portugal and SCF.
Poland
6.0%
US
24.0%
At the same date, the main risk to the most relevant economic
value of equity, measured as its sensitivity to parallel changes in the
worst-case scenario of ±100 basis points, was in the euro interest
rate curve, at EUR 3,736 million, followed by the US dollar at EUR 341
million, the British pound at EUR 59 million and the Polish zloty at
EUR 45 million, all with a risk of falling interest rates, scenarios which
are now very unlikely.
» D.2.3. Structural balance sheet risks33
Economic value of equity (EVE) sensitivity35
% of total
Other
4.6%
US
4.8%
UK
1.9%
Parent bank
88.6%
Other: Poland, Portugal and SCF.
D. 2.3.1. Key figures and change over time
The market risk profile inherent in Grupo Santander’s balance sheet,
in relation to its asset volumes and shareholders’ funds, as well as
the budgeted financial margin, remained moderate in 2016, in line
with previous years.
D.2.3.1.1. Structural interest rate risk
Europe and the United States
The main balance sheets, the Parent, United Kingdom and United
States, in mature markets and in a low interest rate setting, usually
show positive sensitivities to interest rates in economic value of
equity and net interest income.
Exposure levels in all countries are moderate in relation to the annual
budget and capital levels.
At the end of 2016, net interest income risk at one year, measured
as sensitivity to parallel changes in the worst-case scenario of ±100
basis points, was concentrated in the euro yield curve, at EUR 186
million, the British pound, at EUR 166 million, the US dollar, at EUR
140 million and the Polish zloty, at EUR 32 million, all relating to risks
of rate cuts.
33. This includes the whole balance sheet with the exception of trading portfolios.
34. Sensitivity to the worst-case scenario between +100 and -100 basis points.
35. Sensitivity to the worst-case scenario between +100 and -100 basis points.
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The tables below set out the interest-rate risk of the balance sheets
of the Parent bank and Santander UK by maturity, at the end of 2016.
Parent: Interest rate repricing gap36
Million euros. December 2016
Total
3 months
Assets
Liabilities
Off balance sheet
Net gap
365,495
399,667
34,172
0
112,927
112,551
34,174
34,550
Santander UK: Interest rate repricing gap37
Million euros. December 2016
1 year
67,646
43,856
(445)
3 years
21,565
57,518
2,477
5 years
15,836
43,329
45
> 5 years
Not sensitive
27,989
59,929
(2,079)
119,534
82,484
0
23,346
(33,477)
(27,448)
(34,020)
37,049
Assets
Liabilities
Off balance sheet
Net gap
Total
3 months
322,299
326,740
4,441
0
162,655
194,038
(18,061)
(49,443)
1 year
37,162
23,848
8,872
22,186
3 years
63,408
27,133
(713)
35,562
5 years
> 5 years
Not sensitive
19,719
21,550
8,598
6,766
19,106
29,803
5,745
(4,953)
20,249
30,368
0
(10,118)
In general, the gaps by maturities are at reasonable levels in relation
to the size of the balance sheet.
Latin America
Latin American balance sheets are usually positioned for interest
rate cuts for both economic value and net interest income, except
for net interest income in Mexico, where excess liquidity is invested
in the short term in the local currency.
In 2016, exposure levels in all countries were moderate in relation to
the annual budget and capital levels.
At the end of the year, net interest income risk over one year,
measured as sensitivity to parallel changes in the worst-case scenario
of ±100 basis points, was concentrated in three countries: Brazil
(EUR 112 million), Chile (EUR 37 million) and Mexico (EUR 32 million),
as shown in the chart below.
Risk to the economic value of equity over one year, measured as
sensitivity to parallel changes in the worst-case scenario of ±100
basis points, was also concentrated in Brazil (EUR 489 million), Chile
(EUR 166 million) and Mexico (EUR 113 million).
Economic value of equity (EVE) sensitivity39
% of total
Other
1.9%
Mexico
14.4%
Chile
21.2%
Brazil
62.4%
Other: Argentina and Uruguay.
Net interest income (NII) sensitivity38
% of total
Other
1.7%
Me
17.
xico
4%
e
Chil
20.1%
Other: Argentina and Uruguay.
Brazil
60.8%
36. Aggregate gap for all currencies on the balance sheet of the parent bank unit, in euros.
37. Aggregate gap for all currencies on the balance sheet of the Santander UK unit, in euros.
38. Sensitivity to the worst-case scenario between +100 and -100 basis points.
39. Sensitivity to the worst-case scenario between +100 and -100 basis points.
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The table below shows the interest-rate risk maturity structure of the
Brazil balance sheet in December 2016.
Brazil: Interest rate repricing gap40
Million euros. December 2016
Total
3 months
Assets
Liabilities
Off balance sheet
Net gap
205,668
205,668
0
0
102,488
141,865
15,059
(24,317)
1 year
21,710
7,188
2,506
17,028
3 years
20,601
7,322
2,572
15,852
5 years
> 5 years
Not sensitive
8,911
3,734
(140)
5,037
16,078
7,027
2,384
11,435
35,880
38,533
(22,382)
(25,035)
Balance sheet structural interest rate VaR
In addition to sensitivities to interest rate movements (in which,
assessments of ±100 bp movements are supplemented by
assessments of +/-25 bp, +/-50 bp and +/-75 bp movements to give a
fuller understanding of risk in countries with very low rates), Santander
also uses other methods to monitor structural balance sheet risk from
interest rates: these include scenario analysis and VaR calculations,
applying a similar methodology to that for trading portfolios.
The table below shows the average, minimum, maximum and year
end values of the VaR of structural interest rate risk over the last
three years:
Balance sheet structural interest rate risk (VaR)
Million euros. VaR at a 99% over a one day horizon.
2016
Minimum
Average Maximum
Latest
Structural interest
rate VaR*
242.5
340.6
405.8
327.2
Diversification effect
(129.2)
(271.0)
(294.3)
(288.6)
Europe and USA
Latin America
157.7
214.0
376.8
234.9
449.3
250.8
365.0
250.8
* Includes credit spread VaR on ALCO portfolios.
2015
Minimum
Average Maximum
Latest
Structural interest
rate VaR*
Diversification effect
Europe and USA
Latin America
250.5
(90.8)
171.2
170.1
350.0
(181.1)
275.2
255.9
775.7
264.2
(310.7)
(189.1)
777.0
309.3
210.8
242.6
* Includes credit spread VaR on ALCO portfolios.
2014
Minimum
Average Maximum
Latest
Structural interest
rate VaR*
411.3
539.0
698.0
493.6
Diversification effect
(109.2)
(160.4)
(236.2)
(148.7)
Europe and USA
Latin America
412.9
107.6
523.0
176.4
704.9
229.4
412.9
229.4
* Includes credit spread VaR on ALCO portfolios.
Structural interest rate risk, measured in terms of VaR at one-day
and at 99%, averaged EUR 340.6 million in 2016. It is important to
note the high level of diversification between the Europe and United
States balance sheets and those of Latin America.
D.2.3.1.2. Structural exchange-rate risk/hedging of results
Structural exchange rate risk arises from Group operations in
currencies, mainly related to permanent financial investments, and
the results and hedging of these investments.
This management is dynamic and seeks to limit the impact on the
core capital ratio of movements in exchange rates41. In 2016, hedging
levels of the core capital ratio for exchange rate risk were maintained
at around 100%.
At the end of 2016, the largest exposures of permanent investments
(with their potential impact on equity) were, in order, in Brazilian
reais, pounds sterling, US dollars, Chilean pesos, Mexican pesos
and Polish zlotys. The Group hedges some of these positions of a
permanent nature with exchange-rate derivatives.
In addition, the Financial Management area is responsible for
managing exchange-rate risk for the Group’s expected results and
dividends in units where the base currency is not the euro.
D.2.3.1.3. Structural equity risk
Santander maintains equity positions in its banking book in addition
to those of the trading portfolio. These positions are maintained as
available for sale portfolios (capital instruments) or as equity stakes,
depending on the percentage or control.
The equity portfolio available for the banking book at the end of
2016 was diversified in securities in various countries, mainly Spain,
China, the USA, Brazil and the Netherlands. Most of the portfolio
is invested in the financial and insurance sectors. Other sectors,
to a lesser extent, are public administrations (stake in Sareb),
professional, scientific and technical activities, the transport and
storage sector and manufacturing industry.
Structural equity positions are exposed to market risk. VaR is
calculated for these positions using market price data series or
proxies. At the close of 2016, the VaR at 99% with a one day time
frame was EUR 323 million (EUR 208.1 and EUR 208.5 million at the
end of 2015 and 2014, respectively).
40. Aggregate gap for all currencies on the balance sheet of the Brazil unit, in euros.
41. In early 2015, the criteria for coverage of the core capital ratio was changed from phase-in to fully loaded.
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D.2.3.1.4. Structural VaR
A standardised metric such as VaR can be used for monitoring total
market risk for the banking book, excluding the trading activity of
Santander Global Corporate Banking (the VaR for this activity is
described in section 2.2.1.1.), distinguishing between fixed income
(considering both interest rates and credit spreads on ALCO
portfolios), exchange rate and equities.
In general, structural VaR is not high in terms of the Group’s volume
of assets or equity.
Structural VaR
Million euros. VaR at a 99% over a one day horizon.
Structural VaR
Diversification effect
VaR interest rate*
VaR exchange rate
VaR equities
2016
2015
Minimum
Average Maximum
Latest
Average
717.8
(288.0)
242.5
564.1
199.3
869.3
(323.4)
340.6
603.4
248.7
990.6
(399.5)
405.8
652.7
331.5
922.1
(316.6)
327.2
588.5
323.0
698.5
(509.3)
350.0
634.7
223.2
Latest
710.2
(419.2)
264.2
657.1
208.1
2014
Average
718.6
(364.1)
539.0
315.3
228.4
Latest
809.8
(426.1)
493.6
533.8
208.5
Economic value of equity (EVE) sensitivity
This measures the interest rate risk implicit in equity value (which
for the purposes of interest rate risk is defined as the difference
between the net current value of assets and the net current value of
liabilities outstanding), based on the impact that a change in interest
rates would have on those current values.
Treatment of liabilities without defined maturity
In the corporate model, the total volume of the balances of accounts
without maturity is divided between stable and unstable balances.
This separation between stable and unstable balances is obtained
from a model that is based on the relation between balances and
their own moving averages.
From this simplified model, the monthly cash flows are obtained and
used to calculate NII and EVE sensitivities.
This model requires a variety of inputs:
• Parameters inherent in the product.
• Performance parameters of the client (in this case analysis of
historic data is combined with the expert business view).
• Market data.
• Historic data of the portfolio.
* Includes credit spread VaR on ALCO portfolios.
D. 2.3.2. Methodologies
D.2.3.2.1. Structural interest rate risk
The Group analyses the sensitivity of its net interest income and
equity value to changes in interest rates. This sensitivity arises
from gaps in maturity dates and the review of interest rates in the
different asset and liability items.
The financial measures to adjust the positioning to that sought by
the Group are agreed on the basis of the positioning of balance sheet
interest rates, as well as the situation and outlook for the market.
These measures range from taking positions in markets to defining
the interest rate features of commercial products.
The metrics used by the Group to control interest rate risk in these
activities are the repricing gap, the sensitivities of net interest
income and of economic value of equity to changes in interest
rate levels, the duration of equity and Value at Risk (VaR), for the
purposes of calculating economic capital.
Assets and liabilities interest rate gap
This is the basic concept for identifying the entity’s interest-rate
risk profile and measuring the difference between the volume of
sensitive assets and liabilities on and off the balance sheet that
re-price (i.e. that mature or are subject to rate revisions) at certain
times (buckets). This provides an immediate approximation of the
sensitivity of the entity’s balance sheet and its net interest income
and equity value to changes in interest rates.
Net interest income (NII) sensitivity
This is a key measure of the profitability of balance sheet
management. It is calculated as the difference which arises in the
net interest income during a certain period of time due to a parallel
movement in interest rates. The standard period for measuring net
interest income sensitivity is one year.
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2016 ANNUAL REPORT
Pre-payment treatment for certain assets
The pre-payment issue mainly affects fixed-rate mortgages in units
where the relevant interest rate curves for the balance sheet are at
low levels. This risk is modelled in these units, and this can also be
applied, with some modifications, to assets without defined maturity
(credit card businesses and similar).
The usual techniques used to value options cannot be applied
directly because of the complexity of the factors that determine
borrower pre-payments. As a result, the models for assessing
options must be combined with empirical statistical models that
seek to capture pre-payment performance. Some of the factors
conditioning this performance are:
• Interest rate: the differential between the fixed rate on the
mortgage and the market rate at which it could be refinanced, net
of cancellation and opening costs.
• Seasoning: pre-payment trends downward at the start of the
instrument’s life cycle (signing of the contract) and upwards,
stabilising, as time passes.
D.2.3.2.2. Structural exchange-rate risk/hedging of results
These activities are monitored via position measurements, VaR and
results, on a daily basis.
D.2.3.2.3. Structural equity risk
These activities are monitored via position measurements, VaR and
results, on a monthly basis.
D.2.3.3. System for controlling limits
As already stated for the market risk in trading, under the framework
of the annual limits plan, limits are set for balance sheet structural
risks, responding to the Group’s risk appetite level.
The main ones are:
• Balance sheet structural interest rate risk:
• Limit on the sensitivity of net interest income to 1 year.
• Limit of the sensitivity of equity value.
• Structural exchange rate risk:
• Seasonality: redemptions or early cancellations tend to take place
at specific dates.
• Net position in each currency (for hedging positions of results).
• Burnout: decreasing trend in the speed of pre-payment as the
instrument’s maturity approaches, which includes:
In the event of exceeding one of these limits or their sub limits, the
relevant risk management executives must explain the reasons and
facilitate the measures to correct it.
a) Age: defines low rates of pre-payment.
b) Cash pooling: defines as more stable those loans that have
already overcome various waves of interest rate falls. In other
words, when a portfolio of loans has passed one or more
cycles of downward rates and thus high levels of pre-payment,
the “surviving” loans have a significantly lower pre-payment
probability.
c) Others: geographic mobility, demographic, social and available
income factors, etc.
The series of econometric relations that seek to capture the impact
of all these factors is the probability of pre-payment of a loan or pool
of loans and is denominated the pre-payment model.
Value at Risk (VaR)
For balance sheet activity and investment portfolios, this is defined
as the 99% percentile of the distribution function of losses in equity
value, calculated based on the current market value of positions
and returns over the last two years, at a particular level of statistical
confidence over a certain time horizon. As with trading portfolios, a
time frame of two years or at least 520 days from the reference date
of the VaR calculation is used.
The Group is working on implementing the guidelines published by
the Basel Committee in its review of the treatment of Interest Rate
Risk in the Banking Book (IRRBB), published in April 2016, which
come into force in 2018.
» D.2.4. Pension and actuarial risk
D. 2.4.1. Pension risk
When managing the pension fund risks of employees (defined
benefit), the Group assumes the financial, market, credit and
liquidity risks it incurs for the assets and investment of the fund,
as well as the actuarial risks derived from the liabilities, and the
responsibilities for pensions to its employees.
The Group’s objective in the sphere of controlling and managing
pension risk focuses on identifying, measuring, monitoring,
controlling, mitigating and communicating this risk. The Group’s
priority is thus to identify and mitigate all the focuses of risk.
This is why the methodology used by the Group estimates every
year the combined losses in assets and liabilities in a defined stress
scenario from changes in interest rates, inflation, stocks markets and
properties, as well as credit and operational risk.
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D.2.4.2. Actuarial risk
Actuarial risk is produced by biometric changes in the life
expectancy of those with life assurance, from the unexpected
increase in the indemnity envisaged in non-life insurance and, in
any case, from unexpected changes in the performance of insurance
takers in the exercise of the options envisaged in the contracts.
The following are actuarial risks:
Risk of life liability: risk of loss in the value of life assurance
liabilities caused by fluctuations in risk factors that affect these
liabilities:
• Mortality/longevity risk: risk of loss from movements in the value
of the liabilities deriving from changes in the estimation of the
probability of death/survival of those insured.
• Morbidity risk: risk of the loss from movements in the value of the
liabilities deriving from changes in estimating the probability of
disability/incapacity of those insured.
• Redemption/fall risk: risk of loss from movements in the value of
the liabilities as a result of the early cancellation of the contract, of
changes in the exercise of the right of redemption by the insurance
holders, as well as options of extraordinary contribution and/or
suspending contributions.
• Risk of costs: risk of loss from changes in the value of the liabilities
derived from negative variances in envisaged costs.
• Catastrophe risk: losses caused by catastrophic events that
increase the entity’s life liability.
Risk of non-life liability: risk of loss from the change in the value of
the non-life insurance liability caused by fluctuations in risk factors
that affect these liabilities:
• Premium risk: loss derived from the insufficiency of premiums to
cover the disasters that might occur.
• Reserve risk: loss derived from the insufficiency of reserves for
disasters, already incurred but not settled, including costs from
management of these disasters.
• Catastrophe risk: losses caused by catastrophic events that
increase the entity’s non-life liability.
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D.3. Liquidity risk and funding
» Organisation of this section
First, we present the Group’s Liquidity management, which
includes the principles on which it is based and the framework in
which it is included.
We then look at the funding strategy developed by the Group
and its subsidiaries, with particular attention to the evolution
of liquidity in 2016. For the last year, we examine changes in the
liquidity management ratios and the business and market trends that
gave rise to these [pag. 236-241].
The section ends with a qualitative description of the outlook for
funding in the following year for the Group and its main countries
[pag. 242].
» D.3.1. Liquidity management
in Grupo Santander
Management of structural liquidity aims to fund the Group’s
recurring activity in optimum conditions of maturity and cost,
avoiding the assumption of undesired liquidity risks.
Santander’s liquidity management is based on the following
principles:
• Decentralised liquidity model.
• Needs derived from medium- and long-term activity must be
financed by medium- and long-term instruments.
• High contribution from customer deposits, due to the retail nature
of the balance sheet.
• Diversification of wholesale funding sources by instruments/
investors, markets/currencies and terms.
• Compliance with regulatory liquidity requirements required
at Group and subsidiary level, as a new conditioning factor in
management.
The effective application of these principles by all the institutions
that comprise the Group required the development of a unique
management framework built upon three essential pillars:
• A solid organisational and governance model that ensures
the involvement of the senior management of subsidiaries in
decision-taking and its integration into the Group’s global strategy.
The decision-making process for all structural risks, including
liquidity and funding risk, is carried out by Local Asset and Liability
Committees (ALCO) in coordination with the global ALCO, which
is the body empowered by Banco Santander’s board in accordance
with the ALM corporate framework.
This governance model has been reinforced as it has been included
within the Santander Risk Appetite Framework. This framework
meets the demands of regulators and market players emanating
from the financial crisis to strengthen banks’ risk management and
control systems.
• In-depth balance sheet analysis and measurement of liquidity
risk, supporting decision-taking and its control. The objective is to
ensure the Group maintains optimum levels of liquidity to cover its
short and long-term needs with stable funding sources, optimising
the impact of its cost on the income statement, both under
ordinary circumstances and under stress.
Accordingly, risk appetite metrics have been set up with specific
levels, both for the different ratios and for the minimum liquidity
horizons under the different stress scenarios. Generally, the
following scenarios are defined for all Group units in their
reporting to the senior management, without overlooking the local
development of ad hoc scenarios:
a. Idiosyncratic crisis: Only affects the entity but not its
• Limited recourse to wholesale short-term funding.
environment.
• Availability of sufficient liquidity reserves, including the discounting
b. Local systemic crisis: A loss of trust by international financial
capacity in central banks to be used in adverse situations.
markets in the country where the unit is located.
2016 ANNUAL REPORT
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5. Risk management report » Risk profile > Liquidity risk and funding
c. Global crisis: The global economy deteriorates, mainly in the
United States and in Europe, and this effect spreads to the
leading emerging countries (BRIC).
In general terms, the approaches to funding strategies and liquidity
management implemented by Santander subsidiaries are being
maintained:
• Management adapted in practice to the liquidity needs of each
business. Every year, based on business needs, a liquidity plan is
developed which will ensure a solid balance sheet structure, with a
diversified presence in the wholesale markets in terms of products
and maturities, with moderate recourse to short-term products; the
use of liquidity buffers and limited use of balance sheet assets, as
well as complying with both regulatory metrics and other metrics
included in each entity’s risk appetite statement. Over the course
of the year, all the dimensions of the plan are monitored.
The Group applies ILAAP (internal liquidity adequacy assessment
process), an internal self-assessment process of the adequacy
of liquidity which must be integrated into the Group’s other
risk management and strategic processes. It focuses on both
quantitative and qualitative matters and is used as input for the
SREP (Supervisory Review and Evaluation Process). The ILAAP shares
the stress scenarios described above, with the Grupo Santander
recording sound liquidity ratios in all of these.
» D.3.2. Funding strategy and
evolution of liquidity in 2016
D.3.2.1. Funding strategy and structure
Santander’s funding activity over the last few years has focused on
extending its management model to all Group subsidiaries, including
new incorporations, and, in particular, adapting the strategies of the
subsidiaries to the increasingly demanding requirements of both
markets and regulators.
• Santander has developed a funding model based on autonomous
subsidiaries responsible for covering their own liquidity needs.
• This structure makes it possible for Santander to take advantage
of its solid retail banking business model in order to maintain
comfortable liquidity positions at Group level and in its main units,
even during stress in the markets.
• Maintaining adequate and stable medium and long-term wholesale
funding levels.
• Ensuring a sufficient volume of assets which can be discounted in
central banks as part of the liquidity reserve.
• Strong liquidity generation from the commercial business through
lower credit growth and increased emphasis on attracting
customer deposits.
All these developments, built on the foundations of a solid liquidity
management model, enable Santander to enjoy a very robust
funding structure today. The basic features of this are:
• High share of customer deposits in a retail banking balance
sheet. Customer deposits are the main source of the Group’s
funding, representing around two-thirds of the Group’s net
liabilities (i.e. of the liquidity balance) and 87% of net loans at the
end of 2016.
They are also very stable funds given their origin mainly in business
with retail customers (89% of the Group’s deposits come from
retail and private banking, whilst the remaining 11% come from
large corporate and institutional clients).
Grupo Santander liquidity balance sheet
%. December 2016
65% Deposits
Lending 75%
• Over the last few years, it has been necessary to adapt funding
strategies to reflect commercial business trends, market conditions
and new regulatory requirements.
Fixed assets and others 8%
Financial
assets
17%
5% Securitisations
14% Medium and
long-term funding
Equity and other liabilities
13%
3% Short-term funding
• In 2016, Santander continued to improve in specific aspects based
on a very comfortable liquidity position at the level of the Group
and in the subsidiaries, with no significant changes in liquidity
management or funding policies or practices. All of this enables
us to face 2017 from a good starting point, with no restrictions on
growth.
Assets
Liabilities
• Diversified wholesale funding focused on the medium and long
term, with a very small relative short-term component . Medium
and long term wholesale funding accounts for 20%% of the Group’s
net funding and comfortably covers the lending not financed by
customer deposits (commercial gap).
This funding is well balanced by instruments (approximately 40%
senior debt, 30% securitisations and structured products with
guarantees, 20% covered bonds, and the rest preferred shares
and subordinated debt) and also by markets so that those with the
highest weight in issues are those where investor activity is the
strongest.
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2016 ANNUAL REPORT
The following charts show the geographic distribution of customer
loans in the Group, and its medium and long-term wholesale
funding, so that their similarity can be appreciated.
Net customer loans
December 2016
M/LT wholesale funding
December 2016
Rest of Latam
10%
Brazil
10%
US
11%
Rest of
Europe
2%
UK
32%
Euro
zone
35%
Rest of Latam
6%
Brazil
12%
Euro
zone
36%
US
15%
UK
31%
The bulk of medium and long-term wholesale funding consists
of debt issues. Their outstanding balance at the end of 2016 was
149.578 million in nominal terms, with an adequate maturity profile
and average maturity of 4.3 years).
The distribution of this by instrument, evolution over the last three
years and maturity profile was as follows:
Medium and long-term debt issue. Grupo Santander
Million euros
Preferred
Subordinated
Senior debt
Covered bonds
Total
Preferred
Subordinated
Senior debt
Covered bonds
Total*
Change in outstanding balance at nominal value
Dec-16
8,515
11,981
89,568
39,513
149,578
Dec-15
8,491
12,262
83,630
45,010
149,393
Distribution by contractual maturity. December 2016*
0-1
month
1-3
months
3-6
months
6-9
months
9-12
months
12-24
months
2-5
years
Dec-14
7,340
8,360
68,457
56,189
140,346
more
than 5
years
8,515
Total
8,515
61
2,035
3,112
5,208
7,331
749
8,079
4,438
3,284
7,722
215
601
580
10,524
11,981
6,892
8,018
15,374
32,310
13,170
89,568
4,850
1,073
11,629
14,816
39,513
6,892
13,083
17,048
44,520
47,025
149,578
* In the case of issues with put option in favour of the holder, the maturity of the put option is considered instead of the contractual maturity. Note: there are no additional
guarantees for any of the senior debt issued by the Group’s subsidiaries.
2016 ANNUAL REPORT
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5. Risk management report » Risk profile > Liquidity risk and funding
In addition to debt issues, medium and long-term wholesale funding
is completed by securitised bonds placed on the market, and
collateralised and other specialist financing amounting in total to
EUR 57.012 million, with a maturity of 1.7 years.
The wholesale funding of short-term issuance programmes is a
residual part of the Group’s financial structure, accounting for
around 3% of net funding, which is related to treasury activities and
is comfortably covered by liquid financial assets.
The outstanding balance at the end of 2016 was EUR 27.250 million,
distributed as follows: various certificate of deposit and commercial
paper programmes in the UK, 36%; European commercial paper and
US commercial paper and the domestic programmes of the parent
bank, 25%, and programmes in other units, 39%.
D.3.2.2. Evolution of liquidity in 2016
The main aspects of liquidity in 2016 can be summarised as follows:
i. Basic liquidity ratios were maintained at comfortable levels.
• Reduced recourse to short-term wholesale funding. The ratio was
around 3%, in line with previous years.
• Lastly, the Group’s structural surplus (i.e. the excess of structural
funding resources - deposits, medium and long-term funding and
capital - over structural liquidity needs - fixed assets and loans)
rose in 2016, to an average of EUR 151,227 million, unchanged on
the end of the previous year.
At 31 December 2016, the consolidated structural surplus stood
at EUR 150,105 million. This consists of fixed-income assets (EUR
169,931 million) and equities (EUR 17,139 million), partly offset by
short-term wholesale funding (EUR -27,250 million) and net interbank
and central bank deposits (EUR -9,716 million). In relative terms, the
total volume was equivalent to 14% of the Group’s net liabilities, a
similar level to December 2015.
The table below sets out the most frequently used liquidity ratios for
Santander’s main units at the end of December 2016:
ii. We are continuing to achieve regulatory ratios ahead of schedule.
Main units and liquidity metrics
%. December 2016
iii. Our large liquidity reserves are continuing to increase.
iv. Moderate use of encumbered assets in funding operations.
i. Basic liquidity ratios at comfortable levels
The table shows the evolution of the basic metrics for monitoring
liquidity at the Group level over the last few years:
Grupo Santander Monitoring metrics
Net loans/net assets
2016
2015
2014
75%
75%
74%
Net loan-to-deposit ratio (LTD ratio)
114%
116%
113%
Spain
Portugal
Santander Consumer
Finance
Poland
UK
Brazil
Mexico
Chile
Argentina
Customer deposits and medium and
long-term funding/net loans
114%
114%
116%
US
Short-term wholesale funding/net liabilities
Structural liquidity surplus (% net liabilities)
3%
14%
2%
14%
2%
15%
Group total
LTD Ratio
Deposits + M<
funding/Net lending
86%
91%
243%
88%
118%
104%
94%
138%
72%
132%
114%
148%
124%
66%
116%
109%
129%
115%
99%
141%
113%
114%
At the end of 2016, and compared to the previous year, Grupo
Santander recorded:
• A stable ratio of credits over net assets (total assets minus trading
derivatives and inter-bank balances) of 75%, similar to the level
in recent years. This high level in comparison with European
competitors reflects the retail nature of Grupo Santander’s balance
sheet.
• Net loan-to-deposit ratio (LTD ratio) at 114%, within a very
comfortable range (below 120%). This stability shows a balanced
growth between assets and liabilities.
• The ratio of customer deposits plus medium and long-term funding
to lending was held at 114% in the year.
Generally speaking, there were two drivers behind the evolution of
the Group’s liquidity and that of its subsidiaries in 2016 (stripping
out the forex effect):
1. Good performance in deposits in the main geographies where
the Group operates, particularly in Spain and the UK. This
performance has helped to narrow the commercial gap, which has
more than made up for the increased lending.
2. The firm momentum in debt issuance has been maintained,
particularly by European units, although a more selective approach
has been adopted in its execution due to the lower banking book
requirements and the greater funding facilities implemented by
central banks, in particular the Bank of England’s Term Funding
Scheme, following the UK’s referendum on EU membership.
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2016 ANNUAL REPORT
In 2016, the Group as a whole attracted EUR 45,995 million in
medium and long-term funding.
In terms of instruments, the biggest fall was in issuances of
medium and long-term fixed-income (senior debt, covered bonds,
subordinated debt and preferred shares), down 25% to EUR 32,851
million, mainly due to the decrease in senior bonds. Spain and the
UK were the largest issuers, followed by Santander Consumer
Finance, accounting jointly for 73% of issuances. Securitisations and
structured financing activities amounted to EUR 13,144 million, 9%
lower than in 2015.
By geography, the biggest falls were in Brazil and the UK. In Brazil,
this was mainly due to lower funding requirements, as a result of the
performance of assets. In the UK, this was due to a more positive
than expected performance by deposits.
Santander Consumer Finance achieved a securitisation volume of
around EUR 4,868 million, significantly higher than in 2015, due to
the new incorporations.
The chart below sets out in greater detail their distribution by
instruments and geographic areas:
Distribution by instrument
Issued in 2016 (%)
Mortgage covered bonds
10%
Securitisations
29%
Subordinated
5%
Senior
56%
Distribution by geography
Issued in 2016 (%)
Chile
7%
Mexico
1%
Santander
20%
Brazil
7%
In summary, Grupo Santander maintained comfortable access
to the markets in which it operates, strengthened by the
incorporation of new issuing units. It was involved in issuances
and securitisations in 13 currencies in 2016, in which 23 issuers
from 16 countries participated, with an average maturity of
around 4 years, similar to the previous year.
ii. Compliance ahead of schedule with regulatory ratios
Under its liquidity management model, over the last few years
Grupo Santander has been managing the implementation,
monitoring and compliance - ahead of schedule - with the
new liquidity requirements established under international
financial regulations.
LCR (Liquidity Coverage Ratio)
Implementation was delayed until October 2015, although
the initial compliance level of 60% was maintained. This
percentage will be gradually increased to 100% in 2018.
The Group’s strong short-term liquidity starting position,
combined with autonomous management of the ratio in all
major units, enabled compliance levels of more than 100% to
be maintained throughout the year, at both the consolidated
and individual levels. As of December 2016, the Group’s LCR
ratio stood at 146%, comfortably exceeding regulatory
requirements. Although this requirement has only been set
at the Group level, the other subsidiaries also comfortably
exceed this minimum ratio: Spain 134%, the UK 139%, Brazil
165%.
NSFR (Net Stable Funding Ratio)
The final definition of the net stable funding ratio was
approved by the Basel Committee in October 2014, and will
come into force on 1 January 2018.
As regards this ratio, Santander benefits from a high weight of
customer deposits, which are more stable, permanent liquidity
needs deriving from commercial activity funded by medium
and long-term instruments and limited recourse to short-term
funds. Taken together, this enabled Santander to maintain a
balanced liquidity structure, with a high NSFR. This ratio stood
at over 100% at the Group level and in most subsidiaries at al
year-end 2016, even though this is not required until 2018.
In short, the liquidity models and management of the Group
and its main subsidiaries have enabled them to meet both
regulatory metrics ahead of schedule.
Santander
Consumer
Finance
22%
Santander US
20%
Santander UK
23%
iii. High liquidity reserve
This is the third major aspect reflecting the Group’s
comfortable liquidity position during 2016.
The liquidity reserve is the total volume of highly liquid assets
for the Group and its subsidiaries. This serves as a last resort
recourse at times of maximum stress in the markets, when it
is impossible to obtain funding with adequate maturities and
prices.
As a result, this reserve includes deposits in central banks and
cash, unencumbered sovereign debt, discounting capacity with
central banks, assets eligible as collateral and undrawn credit
lines in official institutions (e.g. Federal Home Loans Banks in
the US).
2016 ANNUAL REPORT
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5. Risk management report » Risk profile > Liquidity risk and funding
All of this reinforces the solid liquidity position that Santander’s
business model (diversified, retail banking focus, autonomous
subsidiaries, etc.) confers on the Group and its subsidiaries.
Most of the assets are denominated in the currency of the country,
and so there are no restrictions on their use. There are however
regulatory restrictions in most countries limiting activity between
related parties.
At 31 December 2016, Grupo Santander’s liquidity reserve amounted
to EUR 265,913 million, 3% higher than at year-end 2015 and 10%
above the average for the year. The structure of this volume by asset
type according to cash value (net of haircuts) was as follows:
Geographically, the liquidity reserve is distributed 51% in the UK,
25% in the Eurozone, 10% in the USA, 6% in Brazil and 8% in the
other geographies.
Liquidity reserve
Cash value (net of haircuts) in million euros
Location of liquidity reserves
Million euros
2016
2016
average
2015
Cash and deposits at central banks
52,380
45,620
48,051
Unencumbered sovereign debt
89,135
81,040
85,454
Undrawn credit lines granted
by central banks
Assets eligible as collateral
and undrawn credit lines
105,702
100,531
110,033
18,696
15,358
14,202
Liquidity reserve
265,913 242,549 257,740
Other
8%
Brazil
6%
UK
51%
USA
10%
Eurozone
25%
iv. Asset encumbrance
Lastly, it is worth pointing out Grupo Santander’s moderate use of
assets as collateral in the structural funding sources of the balance
sheet.
In line with the guidelines established by the European Banking
Authority (EBA) in 2014, the concept of asset encumbrance
includes both assets on the balance sheet contributed as collateral
in operations to obtain liquidity as well as those off-balance sheet
assets received and re-used for a similar purpose, as well as other
assets associated with liabilities for different funding reasons.
Liquidity reserve
Net of haircuts
Assets eligible as collateral
and undrawn credit lines
7%
Cash and deposits
at central banks
19%
242,549
million
euros
Unencumbered
sovereign debt
33%
Undrawn credit lines
granted by central banks
41%
This increase was accompanied by a qualitative rise in the Group’s
liquidity reserve, deriving from the varied evolution of its assets.
The first two categories (cash and deposits in central banks +
unencumbered sovereign debt), the most liquid (or high quality
liquidity assets in Basel’s terminology, as first line of liquidity),
increased by more than the average. They rose by EUR 8,010 million,
increasing their share of total reserves at the end of the year to 53%
(52% in 2015).
Under the autonomy conferred by the funding model, each
subsidiary maintains a suitable composition of assets in its liquidity
reserve for its business and market conditions (for example, capacity
to mobilise their assets and recourse to additional discounting lines,
such as in the US).
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2016 ANNUAL REPORT
The report on the Grupo Santander information required by the EBA
at the end of 2016 is given below.
Grupo Santander
Asset encumbrance
Billion euros
Assets
Credit and loans
Equities
Debt instruments
Other assets
Carrying value of
encumbered assets
Fair value of
encumbered assets
Carrying
value of
unencumbered
assets
Fair value of
unencumbered
assets
303.2
210.2
10.9
62.6
19.5
10.9
62.4
1,035.9
725.0
9.7
128.8
172.5
9.7
128.9
Grupo Santander
Encumbered received collateral
Billion euros
Collateral received
Credit and loans
Equities
Debt instruments
Other collateral received
Debt instruments issued by the entity other
than covered loans and securitisations
Fair value of encumbered
collateral received and
or of debt issued by the
encumbered entity
Fair value of collateral
received or of the debt
issued by the entity available
to be encumbered
54.6
0.0
1.9
50.5
2.2
0.0
43.6
0.0
3.1
35.5
5.1
4.1
Grupo Santander
Encumbered assets and collateral received. and related liabilities
Billion euros
Liabilities. contingent
liabilities or securities
loan associated with the
encumbered assets
Encumbered assets and
collateral received. including
debt instruments issued
by the entity other than
covered or securitised
bonds encumbered
Total sources of encumbrances (carrying value)
279.4
357.8
On-balance sheet asset encumbrance amounted to EUR 303,200
million, over two-thirds of which is accounted for by loans
(mortgages, corporate, etc.). Off-balance sheet asset encumbrance
stood at EUR 54,600 million, mainly relating to debt securities
received as collateral in operations to acquire assets which were
re-used. The total for the two categories was EUR 357,800 million of
encumbered assets, giving rise to a volume of associated liabilities of
EUR 279,400 million.
At the end of 2016, total asset encumbrance in funding operations
represented 25% of the Group’s extended balance sheet under EBA
criteria (total assets plus guarantees received: EUR 1,437 million
as of December 2016). The ratio of encumbered assets in funding
transactions stands at 25%, compared to 26% last year. The Group’s
request to the TLTRO in 2016 was more than offset by maturities of
secured debt (mainly mortgage bonds).
Lastly, a distinction needs to be made between the different natures
of the sources of encumbrance within these, as well as their role in
funding the Group:
• 47% of total asset encumbrance corresponds to collateral
contributed in medium and long-term funding operations (with a
residual maturity of more than 1 year) to finance the commercial
activity on the balance sheet. This puts the level of asset
encumbrance understood as “structural” at 12% of the extended
balance sheet, using EBA criteria.
• The other 53% corresponds to market transactions with a
residual maturity of less than one year or collateral contributed in
operations with derivatives the purpose of which is not to finance
the ordinary activity of businesses but efficient short-term liquidity
management.
2016 ANNUAL REPORT
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5. Risk management report » Risk profile > Liquidity risk and funding
» D.3.3. Funding outlook for 2017
Grupo Santander starts 2017 with a comfortable liquidity position
and a good outlook for financing over the coming year. However,
some risks to stability remain, such as volatility in financial markets
and geopolitical risks.
With maturities which can be assumed in the coming quarters, due
to the reduced weight of short-term maturities and a dynamic of
medium and long-term issues similar to that in recent years, the
Group will manage each geography separately to maintain a robust
balance sheet structure in its units and the Group as a whole.
Low commercial requirements are envisaged over the Group as a
whole, due, in most cases, to the increase in lending being balanced
by increased customer deposits. The greatest liquidity requirements
will arise in Santander Consumer Finance units and the UK.
Without prejudice to this, at Group level, Santander is continuing its
long-term plan to issue liabilities eligible as capital. This plan seeks
to enhance the Group´s current regulatory ratios efficiently, and
also takes into account future regulatory requirements. Specifically,
this includes fulfilment of TLAC (total loss-absorbing capacity)
requirements, which come into effect in 2019 for systemically
important financial institutions. Although this is currently just an
international agreement and awaits transposition into European
regulations, the Group is already incorporating it into its issuance
plans to meet potential requirements. The issue of such instruments
therefore does not relate so much to larger volumes of issuances as
the need to focus on specific unsecured instruments. As a result,
it is likely that the level of assets committed in long-term funding
operations will be even more limited over the coming quarters.
Within this general picture, the Group’s various units took advantage
of favourable market conditions at the beginning of 2017 to make
issues, capturing more than EUR 5,000 million in January.
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2016 ANNUAL REPORT
D.4. Operational risk
» Organisation of this section
We first introduce the concept of operational risk and then
describe the operational-risk management and control model
[pag. 243-248].
We then detail the performance of the main metrics associated
with this risk factor [pag. 248-250]. We then set out the Group’s
mitigation measures for the main sources of this risk and describe its
Business Continuity Plan [pag. 250-252].
Finally, we discuss other aspects of the monitoring and control of
operational risk [pag. 252-253].
» D.4.1. Definition and objectives
Following the Basel framework, Grupo Santander defines
operational risk (OR) as the risk of losses from defects or failures
in its internal processes, employees or systems, or external events,
thus covering risk categories such as fraud, and technological, cyber,
legal and conduct risk.
Operational risk is inherent to all products, activities, processes and
systems and is generated in all business and support areas. For this
reason, all employees are responsible for managing and controlling
the operational risks generated in their sphere of action.
This chapter refers to operational risks in general (these are also
referred to as non-financial risks in Santander). Particular aspects of
some risk factors are set out in more detail in specific sections (for
example, section D.5. Compliance and conduct risk).
The Group’s objective in controlling and managing operational risk
is to identify, measure, evaluate, monitor, control, mitigate and
communicate this risk.
The Group’s priority is thus to identify, assess and mitigate risk
concentrations, regardless of whether they produce losses or not.
Analysing exposure to OR helps to establish priorities in managing
this risk.
During 2016, the Group has sought further improvement in its
management model through a number of different initiatives
designed by the Risks division. One of these initiatives is to
continue the AORM (Advanced Operational Risk Management)
transformation project. This programme is designed to enhance
operational risk management capacities through an advanced risk
measurement approach, helping to reduce future exposure and
losses impacting the income statement.
The Bank has received a major boost through the completion of all
the organisation of the risk identification and assessment exercise,
in inherent and residual terms, and its control environment, and also
the roll-out of the new Heracles application42.
Grupo Santander has been calculating regulatory capital by
operational risk using the standardised approach set forth in the
European Capital Directive. The AORM programme helps Grupo
Santander develop capital estimation models in its main geographic
areas, both for economic capital and stress testing, and for potential
application as regulatory capital. During 2016, operational losses
under stress estimation methodology have been forecast using the
guidelines provided by the EBA in the EU-Wide stress test (conduct
risk and other operational risks) methodological note published
in 2016.
The Prudential Relevance Report (Pillar III) includes information on
the calculation of capital requirements for operational risk.
» D.4.2. Operational risk management
and control model
D.4.2.1. Operational risk management cycle
In Grupo Santander, operational risk is managed in accordance with
the following elements:
C o m munication
P
l
a
n
n
i
n
g
Management
and control
OR
Evaluatio
Measurement
Identific
tion
n
a
tion
a
g
i
t
i
M
e
g
l
fi
n
o
i
r
o
r
p
it
n
R
O
o
M
42. Heracles is a GRC (Governance, Risk & Compliance) application for enterprise-wide risk management.
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5. Risk management report » Risk profile > Operational risk
The various phases of the operational risk management and control
model are:
• It sets out common tools, taxonomies and metrics for the entire
organisation.
• Identify the inherent risk in all the Group’s activities, products,
• It improves knowledge of existing and potential operational risks
processes and systems.
and assigns them to business and support lines.
• Define the target profile for the risk, specifying the strategies
by unit and time frame, by establishing the OR appetite and OR
tolerance for the annual losses estimation and monitoring thereof.
• Operational risk information helps to improve processes and
controls, and reduces losses and the volatility of revenues.
• It facilitates the establishment of operational risk appetite limits.
• Promote the involvement of all employees in the operational risk
culture, through adequate training in all spheres and at all levels.
• Measure and assess operational risk objectively, continuously and
consistently with regulatory standards (BCBS, European Banking
Authority, Single Supervisory mechanism, Bank of Spain) and the
sector.
• Continuously monitor operational risk exposure, and implement
control procedures, improve the internal control environment and
mitigate losses.
• Establish mitigation measures that eliminate or minimise the risk.
• Produce regular reports on operational risk exposure and its level
of control for senior management and the Group’s areas and units,
and inform the market and regulatory bodies.
• Define and implement the methodology needed to calculate
internal capital in terms of expected and unexpected loss.
The following are needed for each of the aforementioned processes:
• Define and implement systems that enable operational risk
exposure to be monitored and controlled, taking advantage of
existing technology and achieving the maximum automation of
applications.
• Define and document policies for managing and controlling
operational risk, and implement management tools for this risk in
accordance with regulations and best practices.
The advantages of Grupo Santander’s operational risk management
and control model include:
• It fosters the development of a risk culture, assigning
responsibilities in risk management to all functions within the
organisation.
• It allows comprehensive and effective operational risk management
(identification, measurement, assessment, control and mitigation,
and reporting).
• It prioritises risks and the associated mitigation measures for
decision making.
Grupo Santander has put in place a management structure for
operational risk that complies with all regulatory requirements
and is aligned with the Group’s risk culture and the risk profile
of its activities. This structure includes the lines of defence
and interaction with corporate governance, ensuring the
coverage of all operational risks and the involvement of the
Group’s senior management in managing operational risk.
The Corporate Operational Risk Committee (CORC) is the collegiate
body responsible for oversight of the identification, mitigation,
monitoring and reporting of operational risk in the Group. It
ensures compliance with the operational risk framework, the
risk tolerance limits and the policies and procedures set down
in this area. The CORC oversees the identification and control
of actual and emerging operational risks and their impact on
the Group’s risk profile, and the integration of the identification
and management of operational risk into decision making.
This is a transverse committee, which involves all corporate
divisions in the management and control of operational risk.
The Group has also set up a number of specialist committees and
forums in response to the scale of this risk and the specifics of each
category. These include the marketing and anti-money laundering
committees (for more detail, see chapter D.5 Compliance and
conduct risk), the suppliers and cyber-security committees, and
the fraud management, damage to physical assets, employment
practices and cyber-security forums. These involve the first and
second lines of defence. This risk and the mitigation measures
implemented in the organisation are subject to special monitoring.
D.4.2.2. Risk identification, measurement
and assessment model
A series of quantitative and qualitative corporate techniques and
tools has been defined to identify, measure and assess operational
risk. These are combined to produce a diagnosis on the basis of the
risks identified and an assessment of the area or unit through their
measurement and evaluation.
The quantitative analysis of this risk is carried out mainly with
tools that register and quantify the level of losses associated with
operational risk events. Qualitative analysis seek to assess aspects
(coverage, exposure) linked to the risk profile, enabling the existing
control environment to be captured.
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The most important operational risk tools used by the Group are as
follows:
• An internal database of events, which is designed to record all of
the Group’s operational risk events. The capture of operational risk
events is not restricted by thresholds (i.e. there are no exclusions
for reasons of amount), and events with both accounting (including
positive effects) and non-accounting impact are entered.
Accounting reconciliation processes have been put in place to
guarantee the quality of the information in the databases. The main
events for the Group and each operational risk unit are specifically
documented and reviewed.
• Analysis of OR scenarios. An expert opinion is obtained from
the business lines and from risk and control managers to identify
potential events with a very low probability of occurrence, but
which could result in a very high loss for an institution. The possible
effects of these are assessed and extra controls and mitigating
measures are identified to reduce the likelihood of high economic
impact.
• Corporate indicators system. These are various types of statistics
and parameters that provide information on an institution’s risk
exposure and control environment. These indicators are regularly
reviewed in order to flag up any changes that could reveal risk
problems.
• Operational risk control self-assessment (RCSA). Self
assessment of operational risks and controls is a qualitative process
that seeks, using the criterion and experience of a pool of experts
in each function, to determine the main operational risks for each
function, the control environment and their allocation to the
different functions of the organisation.
In 2016, the Group evolved its corporate indicators to monitor the
main risk concentrations in the Group and the industry. It has also
fostered the use of indicators in all spheres of the organisation,
from front-line risk managers down. The objective is to incorporate
the most relevant risk indicators into the metrics that form the
basis for constructing the operational risk appetite.
The RCSA identifies and assesses the material operational risks
that could stop a business or support unit achieving its objectives.
Once they are assessed in inherent and residual terms, and the
design and working of the controls are evaluated, mitigation
measures are identified if the risk levels prove to be above the
tolerable profile.
The Group has put in place an on-going operational risk self
assessment process: this ensures that material risks are assessed
at least once a year. This process combines expert judgement
and participation in workshops involving all interested parties,
particularly the first-line managers responsible for the risks and
their control. These workshops are run by a facilitator, who is
neutral and has no decision-making authority, helping the Group
achieve its desired results.
The Group also produces risk assessments for specific sources of
operational risk, enabling transversal identification of risk levels at
a greater degree of granularity. These are applied in particular to
technological risks and factors that could lead to regulatory non
compliance, and areas that are exposed to money laundering and
terrorism financing risks. The two latter areas, together with the
conduct risks factor in 2016, are set out in greater detail in section
D.5 Compliance and conduct risk.
• An external database of events, as Grupo Santander participates
in international consortiums, such as the Operational Risk
Exchange (ORX). The use of external data bases has been stepped
up, providing quantitative and qualitative information leading to
a more detailed and structured analysis of events in the sector,
and the scenario analysis exercises described below have been
adequately prepared.
• Capital calculation through the standardised approach (see
the corresponding section in the Prudential Relevance Report/
Pillar III).
• Internal data model and stress tests: concerns the application
of statistical models to measure expected and unexpected loss,
mainly based on the information included in the internal loss
database. In 2016, the Group has made headway in carrying out
modelling exercises. The main application in this exercise has been
the estimation of operational risk losses in the EBA stress tests.
• Audit and regulatory recommendations. These provide relevant
information on inherent risk due to internal and external factors,
enabling weaknesses in the controls to be identified.
• Customer complaints. The Group’s increasing systemisation of
the monitoring of complaints and their root causes also provides
relevant information for identifying and measuring risk levels. In
this regard, the compliance and conduct function prepares detailed
analysis, as set out in section D.5.3. Governance and organisational
model.
• Other specific instruments that enable more detailed analysis
of technology risk, such as control of critical system incidents and
cyber-security events.
• Specific assessment of risks related to technological
infrastructure management processes, the acquisition and
development of solutions, control of information security and IT
governance.
The appetite for non-financial risks is structured as follows:
• A general statement setting out that Grupo Santander is, in
principle, averse to operational risk events that could lead
to financial loss, fraud and operational, technological, legal
and regulatory breaches, conduct problems or damage to its
reputation.
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5. Risk management report » Risk profile > Operational risk
• General metrics. These include measures relating to the volume
of losses compared to the gross margin, stressed losses, the
relevant events ratio, the loss multiplier and expired audit
recommendations.
• An additional statement is included for the most important risk
factors, together with a number of forward-looking monitoring
metrics. Specifically, these cover: fraud, technological, cyber, legal,
anti-money laundering, commercialisation of products, regulatory
compliance and supplier management risk.
D.4.2.3. Implementation of the model and initiatives
Almost all the Group’s units are now incorporated into the model
with a high degree of uniformity. However, the different pace of
implementation and historical depth of the respective databases
means that the degree of progress varies from country to country.
• Involvement of first lines in the risk instruments (self-assessment,
database, event escalation, indicators, etc.).
• New operational risk appetite approach broken down for the
most significant business units.
• Addition of further risk appetite metrics relating to the volume of
relevant losses over total losses (losses multiplier) and controlling
supplier management, and for the management and control of
money laundering, conduct and regulatory compliance (As set out
in section D.5.8. Risk assessment model of compliance and risk
appetite).
• Improvement in the process of assurance, certification and
oversight of control model and inclusion of control activities in the
risks self-assessment process.
As set out in section D.4.1. Definition and objectives, the Group
accelerated its transformation to an advanced operational risk
management (AORM) approach in 2016. The programme has a
twofold objective: on the one hand, to consolidate the current
operational risk framework, and, on the other, to adopt the best
market practices and to use monitoring of an integrated and
consolidated operational risk profile to direct the business strategy
and tactical decisions in a proactive way.
• Deployment of more robust cross-checking processes between
different operational risk instruments, to ensure a better
understanding of the relevant risks of the organisation.
• A training programme at all levels of the organisation (from the
board to the employees most exposed to risk in the first business
lines) and initiatives for the sharing of experiences (best practice
sessions, launch of a monthly newsletter, etc.).
This programme involves a number of key areas (risk appetite, self
assessment, scenarios, metrics, etc.) that enable the Group to refine
the improvements it is implementing: most of them, covering the ten
main geographic areas, have been completed in 2016. A monitoring
structure has been set up at the highest organisational levels, both
at the corporate centre and in the local units, to ensure adequate
monitoring of progress.
This programme is supported by the development of a customised
and integrated operational risk solution (Heracles). It has been
implemented for the main operational risk management instruments
in 2016 in all Group geographies, in addition to the transformation
plan.
The main activities and global initiatives adopted to ensure effective
operational risk management are:
• Consolidation of the operational risk framework, policies and
procedures, both at the corporate level and in the geographic
areas. An important development here has been the approval of
the new fraud model, and also the review of the documentary
structure and promotion of the operational risk policies in the
first lines of defence. This is independent of the new conduct
framework discussed in section D.5. Compliance and conduct risk.
• The reinforcement of governance and the operational risk
instruments in the first lines of defence, leading to a greater
degree of involvement and integration in businesses and support
functions, through the following:
• Clear definition of roles and responsibilities for risk management
and mitigation.
• Fostering of mitigation plans for aspects of particular relevance
(information security and cyber-security in the widest sense,
control of suppliers, etc.): monitoring of the implementation of
corrective measures and projects under development.
• Improvements to the quality and granularity of the information
on such risks analysed and presented to the main decision making
forums.
• Improvements to contingency, business-continuity and, in general,
crisis-management plans (this initiative is linked to the recovery
and resolution plans).
• Fostering the control of risk associated with technology
(application development and maintenance, design,
implementation and maintenance or technological platforms,
output of IT processes, etc.).
• Development of the model and governance of the compliance and
conduct function, as described in section D.5. Compliance and
conduct risk.
For the control of suppliers referred to above, in 2016 the corporate
framework and model of reference were reviewed, covering the new
requirements issued by the regulator in this field and aligning them
with the best practices in the sector. We have also made progress in
defining and deploying procedures and tools in the Group entities
so as to adapt current processes to the model’s principles and
requirements. In 2016, our efforts have been focused on:
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2016 ANNUAL REPORT
• Identifying and assigning roles and responsibilities to cover the
various activities described in the model to manage the complete
life cycle of the relationship with the supplier or other party
(decision, approval, contracting, monitoring and termination) and
ensure adaptation to the three lines of defence structure, where
the first lines are responsible for the management functions and
risks carries out the control procedure to check that the model’s
principles are fulfilled.
• Evolving the corporate supplier management system to cover the
new model requirements, particularly regarding:
• Adding a decision making tool which can be used to discriminate
services by their relevance and level of associated risk, so that the
most appropriate controls for each can be set up in other phases
of the service life cycle.
• Defining specific questionnaires which are used in the supplier
approval stage to ensure that adequate controls are in place to
cover the risks associated with the service given.
• Setting up approval flows to guide the whole decision-making,
approval, negotiations and contracting process.
• Creation of specific committees by geography to monitor and
decision making for all matters concerning relevant services and
suppliers and review of procedures and escalation criteria.
• Definition and monitoring of indicators and dashboard concerning
the model implementation. Including specific suppliers metrics in
the Group risk appetite report.
• Review and enhancing quality of data of inventories of relevant
services and associated suppliers.
• Training and awareness raising of risks associated with suppliers
and other third parties.
The Group is continuing to work on the implementation and
consolidation of the model, reinforcing and standardising the
activities to be carried out throughout the management life cycle for
suppliers and other third parties.
D.4.2.4. Operational risk information system
The Group’s corporate information system supports operational risk
management tools, providing information for reporting functions
and needs at both local/corporate levels.
As part of the implementation of the advanced operational risk
management approach, and taking into account the synergies
that will be produced in the control sphere (the operational risk
control functions, broadly defined, its special features in the field
of compliance and conduct, and internal control model control
documentation and certification, are all integrated in the same tool),
the Group is in the process of installing a new GRC (Governance,
Risk and Compliance) tool based on the SAP system, known as
Heracles. The objective of Heracles is to improve decision making for
operational risk management throughout the organisation.
PROACTIVE RISK MANAGEMENT
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TRANSPARENCY (RESPONSIBILITY)
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Evaluation
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FUNCTIONS RESPONSIBLE FOR RISK AND CONTROLS
TRANSPARENCY (RESPONSIBILITY)
2016 ANNUAL REPORT
247
5. Risk management report » Risk profile > Operational risk
This objective will be achieved by ensuring that those responsible for
risks in every part of the organisation have a comprehensive vision of
the risk, and the supporting information they need, when they need
it. This comprehensive and timely vision of risk is facilitated by the
integration of various programmes, such as assessment or risks and
controls, scenarios, events and metrics, using a common taxonomy
and methodological standards. This integration provides a more
accurate risk profile and significantly improves efficiency by cutting
out redundant and duplicated effort.
Heracles also enables the interaction of everybody involved in
operational risk management with the information in the system,
but subject to their specific needs or limited to a particular sphere.
However, it is always draws on a single source of information for all
of the functions involved.
At year-end 2016, Heracles had been implemented globally
throughout the Group, providing integrated risk and control
information for units that generate and control risks.
The risk self-assessment and certification of controls were
completed in this tool during the year, together with the migration
of the internal events database and operational risk indicators.
Development of operational-risk scenario functionality is pending
implementation this year.
In 2016, the Group also worked on uploading data in OR
management systems, and on improving reporting capabilities in
the context of the project to comply with regulations on effective
aggregation and reporting principles (Risk Data Aggregation/Risk
Reporting Framework - RDA/RRF).
In order to achieve the objectives for this project, a reference
technological architecture has been developed, providing solutions
for information capture and feeding an integrated and reliable
database (Golden Source) that is used for the generation of
operational risk reports.
Within the framework for the implementation of RDA standards, the
progress made this year has been along the lines of extending the
scope, through defining new metrics in the dictionary, as far as RIA
and risk appetite tools are concerned.
Further work has also been done in automating the supply of data
from entities’ local systems.
D.4.2.5. Training initiatives and risk culture
The Group fosters awareness and knowledge of operational risk
at all levels of the organisation through its risk-pro culture. During
2016, a number of different training sessions were conducted using
the e-learning format, and which addressed general knowledge of
OR and specifically, cybersecurity. The courses are designed for all
Group employees, although specific courses for directors have also
been designed.
The compliance and conduct function has prepared and launched a
number of training actions, as described in section D.5.9. Transversal
corporate projects.
A number of other new training initiatives were implemented in
2016, including specific disclosure and on-site sessions. This also
included the creation of the Higher Operational Risk programme,
providing in-depth knowledge for the employees most involved in
this area. A number of specific courses were also held throughout
the year for each of the modules of the new corporate Heracles tool.
The Group uses an number of different initiatives to enhance its
implementation of a better operational risk culture, one of which
is the OR newsletter, with the aim of raising awareness about the
importance of this risk, distribution of procedure and guidelines,
significant external events, related subjects of interest and events
which have occurred in the Group.
» D.4.3. Evolution of the main metrics
Regarding the databases of events, and after consolidating the
information received, the evolution of net losses (including both
incurred loss and net provisions) by Basel43 risk category over the last
three years is set out in the chart below:
43. The Basel categories include the risks set out in chapter D.5. Compliance and conduct risk.
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2016 ANNUAL REPORT
Distribution of net losses by operational risk category44
% total
2014
2015
2016
80%
70%
60%
50%
40%
30%
20%
10%
0%
58.7%
19.1%
17.1%
0.7%
1.6%
2.3%
0.4%
I - Internal fraud
II - External fraud
III - Employment
practices and
workplace safety
IV - Practices with
customers and
products, and
business practices
V - Damage to
physical assets
VI - Business
disruption and
system failures
VII - Execution,
delivery
and process
management
The evolution of losses by category shows a large reduction in
relative terms for practices with clients, products and business,
although it continues to be the largest item.
In the 2016 year, the most significant losses by type and geography
are due to legal proceedings in Brazil. Here the Bank maintains a
set of measures to improve customer service (as set down in the
comprehensive mitigation plan described in section 4.4 Mitigation
measures), enabling it to reduce the volume of losses due to legal
proceedings. In 2016, the volume of losses fell in the UK, owing to
provisions allocated the previous year, primarily to cover future
claims for the sale of Payment Protection Insurance (PPI).
The main risk concentrations in external fraud still concern the
fraudulent use of debit and credit cards, card not present and
channels (Internet banking and mobile banking).
The chart below shows the evolution of the number of operational
risk events by Basel category over the last three years:
Distribution of number of events by operational risk categories45
% total
2014
2015
2016
60%
50%
40%
30%
20%
10%
0%
34.4%
52.3%
0.1%
0.1%
1.5%
0.8%
I - Internal fraud
II - External fraud
III - Employment
practices and
workplace safety
IV - Practices with
customers and
products, and
business practices
V - Damage to
physical assets
VI - Business
disruption and
system failures
VII - Execution,
delivery
and process
management
10.9%
44. In accordance with local practices, the remuneration of employees in Brazil is managed as personnel expenses for the entity, without prejudice to its treatment under the
Basel operational risk framework, and is therefore not included.
45. In accordance with local practices, the remuneration of employees in Brazil is managed as personnel expenses for the entity, without prejudice to its treatment under the
Basel operational risk framework, and is therefore not included.
2016 ANNUAL REPORT
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• Implementation of the secure e-commerce standard (3DSecure)
for internet purchases and requiring additional security codes for
transactions, including the use of one-time passwords (OTP-SMS).
• Gradual roll-out in Brazil of a new biometric authentication system
in ATMs and branch cashier desks. Customers can use this new
system to withdraw cash from ATMs using their fingerprint to sign
off their transactions.
• Incorporation of anti-skimming detectors and passive elements in
ATMs to stop card cloning.
• Review of card limits based on the product and customer segment,
to adjust these for risk levels.
• Application of specific fraud monitoring rules and detection tools
to block suspicious transactions abroad.
Electronic fraud:
• Implementation of specific protection measures for mobile
banking, such as identification and registration of customer devices
(Device Id).
• An improved Internet banking authentication system, with
additional checks depending on the risk level for the customer or
transaction.
• Checks of online banking transactions through a second security
factor based on one-time use passwords. Evolution of technology,
depending on the geographic area (for example, based on image
codes (QR) generated from data for the transaction).
Cyber-security and data security plans:
The Santander Cyber-Security Program has been developed to
foster and complement actions in progress, setting out:
• management based on the three lines of defence;
• an approach based on cyber-resilience, including prevention,
identification, detection, protection and response actions;
• aspects of cyber-security that affect training, access
control and segregation of functions, and secure software
development;
• organisational enhancement initiatives.
5. Risk management report » Risk profile > Operational risk
In 2015, the Group established a new procedure for escalation of
relevant events (in terms of both financial impact and number of
customers affected), enabling us to implement corrective measures
more efficiently. This process has been updated in 2016, including
more details in terms of impacts on customer data security. The
concentration of relevant events compared to total events remained
at very low levels, and was lower than in the previous year.
» D.4.4. Mitigation measures
The Group uses the model to monitor the mitigation measures for
the main risk sources which have been identified through the tools
(internal event database, indicators, self-assessment, scenarios, audit
recommendations, etc.) used in OR management, and the preventive
implementation of operational risk management and control policies
and procedures.
Active mitigation management became even more important in
2016. A new governance model has been introduced, with the
participation of the first line of defence and the operational risk
control function, through which specialist business and support
functions exercise additional control.
A significant volume of measures have been identified in the self
assessment exercise, and are distributed in accordance with the root
cause of the risk, in the following way:
Mitigation 2016 - by root cause of risk
Environment
13%
People
14%
Technology
27%
Processes
46%
The most significant mitigation measures have been centred on
improving the security of customers in their usual operations,
the management of external fraud, continued improvements in
processes and technology, and management of the sale of products
and adequate provision of services.
Regarding the reduction of fraud, the main specific measures were:
Card fraud:
• Deployment of chip cards (EMV) in all the Group’s geographic
areas in line with the time frame set down by the payment channels
industry and applying additional security measures:
• Replacement of vulnerable cards with new cards based on CDA
technology, reducing the risk of cloning through more robust and
complete encryption algorithms.
• Robust (Full Grade) validation of card transactions, including
more checks, always carried out online.
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2016 ANNUAL REPORT
Throughout 2016, Santander continued paying full attention to
cyber-security risks, which affect all companies and institutions,
including those in the financial sector. This situation is a
cause of concern for all entities and regulators, prompting the
implementation of preventative measures to be prepared for any
attack of this kind.
One particularly noteworthy technical improvement has been in
protection measures to cope with denial of service attacks.
The Group has evolved its internal cyber-security model to reflect
international standards (including, the US NIST - National Institute
of Standards and Technology - framework), incorporating concepts
which can be used to assess the degree of maturity in deployment.
Based on this new assessment model, individual in-situ analyses have
been carried out in the main geographies to identify deficiencies and
include them in the cyber-security Master Plans.
The Group’s organisational and governance structure for the
management and control of this risk has also been beefed up.
Specific committees have been set up and cyber-security metrics
have been included in the Group’s risk appetite.
The Group’s intelligence and analysis function has also been
reinforced, by contracting bank threat monitoring services.
Progress has also been made in the incident registration, notification
and escalation mechanisms for internal reporting and reporting to
supervisors.
Another good practice which has been continued is that local units
take part in different coordinated cyber-exercises in the different
countries with public bodies, and also carrying out internal cyber
security scenarios such as risk assessment mechanisms, and
response capacity tests when faced with these kinds of events.
In addition, observation and analytical assessment of the events in
the sector and in other industries enables us to update and adapt our
models for emerging threats.
Other relevant mitigating measures:
The Group has set up mitigation measures to optimise process
management according to our customers’ needs. Plans in the UK in
retail and commercial banking, and aimed at improving transaction
banking and customer account management, are considered to be
particularly important.
With regard to mitigation measures relating to customer practices,
products and business, Grupo Santander is involved in continuous
improvement and implementation of corporate policies on aspects
such as the selling of products and services and prevention of money
laundering and terrorism financing. Detailed information on these
areas can be found in section D.5.2. Compliance risk control and
supervision.
The Working Well (Trabalhar Bem) project in Brazil is also relevant
to this category of operational risk, seeking to provide the
Bank’s customers with a better service, with fewer incidents and
complaints, by improving internal processes and the products
offered. This project includes various lines of action to improve
selling practices and customer protection, including: influencing
design decisions for products and services, analysis and solution
of the root causes of customer complaints, development of
a complaints management and monitoring structure, and
improvement of protection networks at contact points.
» D.4.5. Business continuity plan
The Group has a business continuity management system (BCMS),
which ensures that the business processes of our entities continue to
operate in the event of a disaster or serious incident.
-Contin u o u s i m p
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-Continuousimp
The basic objective is to:
• Minimise the possible damage from an interruption to normal
business operations on people, and adverse financial and business
impacts for the Group.
• Reduce the operational effects of a disaster, providing predefined
and flexible guidelines and procedures to be used to re-launch and
recover processes.
2016 ANNUAL REPORT
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5. Risk management report » Risk profile > Operational risk
• Restart time-sensitive business operations and associated support
functions, in order to achieve business continuity, stable profits
and planned growth.
• Strengthening of controls on cancelling and modifying operations
and calculation of the actual cost thereof, where these are due to
operational errors.
• Protect the public image of, and confidence in, Grupo Santander.
• Meet the Group’s obligations to its employees, customers,
shareholders and other stakeholders.
During 2016, the Group continued to advance in implementing and
continuously improving its business continuity management system.
The methodology has been reviewed to include the definition of
scenarios and plans to cope with emergency risks (such as cyber
risks), the reference policy for preparing IT contingency plans
has been updated, and a control dashboard has been designed
and deployed for monitoring the status of continuity plans in all
geographies in which the Bank operates.
The Group has also updated the corporate application which is
used to register and store the Group’s continuity plans, improving
the functionalities (continuity scenarios and strategies, control
dashboard with monitoring metrics, etc.) so as to enhance the daily
management of the plans’ monitoring and maintenance.
Furthermore, and based on the improvements made to the Group’s
Recovery and resolution plans, a new comprehensive model for
the management of special situations (crises) has been defined (for
more details see section B.3.4. Recovery and resolution plans). This
model helps to deal with potential non-financial stress situations
(e.g. operational or reputational, etc.) by reinforcing the escalation
and governance process protocols specifically established for crisis
situations, in addition to those applied in normal situations.
The Group has rolled out this new model in the corporate centre and
main geographies in 2016, adapting the current business continuity
committees to the governance and the escalation procedures
outlined in the new model.
» D.4.6. Other aspects of control and
monitoring of operational risk
Analysis and monitoring of controls in market operations
Due to the specific nature and complexity of financial markets, the
Group considers it necessary to continuously improve operational
control procedures to keep them in line with new regulations and
best practices in the market. During 2016, therefore, the control
model of this business has been steadily improved, with special
emphasis on preparing a framework on unauthorised trading, and
also on drawing up an assessment methodology to measure the
robustness of that environment in each geography. Further efforts
have also been made in reinforcing the following points:
• Reinforcement of additional controls to detect and prevent
irregular transactions (such as controls on triangular sales).
• Formalisation of IT procedures, tools and systems for cyber
security protection, prevention and training.
• Review of specific procedure for control and governance of trading
in remote books used in some geographies and applying the
procedure to the rest.
• Development of the Keeping in B project. This involves a range of
inter-disciplinary teams seeking to reinforce aspects relating to
corporate governance, compliance with money laundering and
credit risk controls and procedures, the architecture of financial
and operational architecture, technological platforms, regulatory
and organisational aspects and sufficiency of resources.
For more information on issues relating to regulatory compliance in
markets, refer to section D.5.4. Regulatory compliance.
Lastly, it is important to note that the business is also undertaking
a global transformation and evolution of its operational risk
management model. This involves modernising its technology
platforms and operational processes to incorporate a robust control
model, enabling a reduction of the operational risk associated with
its business.
Corporate information
The operational risk function has an operational risk management
information system that provides data on the Group’s main elements
of risk. The information available for each country and unit in the
operational risk sphere is consolidated to give a global vision with
the following features:
• Two levels of information: corporate with consolidated information,
and individual for each country or unit.
• Dissemination among Grupo Santander’s countries and units of the
best practices identified through a combined study of the results of
qualitative and quantitative analysis of operational risk.
Information on the following aspects is drawn up:
• Grupo Santander’s operational risk management model and the
Group’s main units and countries.
• The scope of operational risk management.
• Monitoring of risk appetite metrics.
• Analysis of individual transactions of each Treasury trader in order
to detect anomalous behaviour not aligned with the specific limits
for each desk.
• The risk profile by country and risk category, and the main
operational risk concentrations.
• Improvement of the “Speachminer” tool, which enhances control
over recordings and enables compliance with new record keeping
requirements for monitoring communication channels, adapted to
the requirements of new regulations.
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• Operational risk regulatory capital.
• The action plans associated with each risk source.
• Monitoring of incidents declared in the policies, as well as of those
not declared or not recovered due to an incorrect declaration,
establishing protocols for action and specific monitoring forums.
• Distribution of losses by geographic area and risk category.
• Analysis of the adequacy of the Group’s policies for the risks
covered, taking appropriate corrective measures for any
shortcomings detected.
• Close cooperation between local operational risk executives
and local insurance coordinators to strengthen mitigation of
operational risk.
• Active involvement of both areas in the global insurance sourcing
unit, the Group’s highest technical body for defining coverage
strategies and contracting insurance, the forum for monitoring the
risk insured (created specifically in each geography to monitor the
activities mentioned in this section), the claim monitoring forum,
and the Corporate Operational Risk Committee.
The own insurance area has also played a more active role in
different Group forums (damages in physical assets, fraud,
scenarios, special situation management, etc.), thereby increasing its
interaction with other Group functions and its capacity to properly
identify and assess insurable risks and optimise the protection of the
income statement.
• Evolution of losses (accumulated annual, deviation on previous year
and against budget) and provisions by detection and accounting
dates.
• Analysis of the database of relevant internal and external events.
• Analysis of the most relevant risks detected from different
information sources, such as the self-assessment exercises for
operational and technological risk and operational risk scenarios.
• Assessment and analysis of risk indicators.
• Mitigating measures/active management.
• Business continuity and contingency plans.
This information forms the basis for complying with reporting
requirements to the Executive Risk Committee, the Board Risk
Committee, the Operational Risk Committee, senior management,
regulators, rating agencies, etc.
Insurance in the management of operational risk
Grupo Santander regards insurance as a key element in the
management of operational risk. In 2016, the Group has continued
to develop procedures with a view to achieving better coordination
between the different functions involved in management cycle
of insurance policies used to mitigate operational risk. Once the
functional relationship between the own insurance and operational
risk control areas is established, the primary objective is to inform
the different first line risk management areas of the adequate
guidelines for the effective management of insurable risk. The
following activities are particularly important:
• Identification of all risks in the Group that can be covered by
insurance, including identification of new insurance coverage for
risks already identified in the market.
• Establishment and implementation of criteria to quantify the
insurable risk, backed by analysis of losses and loss scenarios that
enable the Group’s level of exposure to each risk to be determined.
• Analysis of coverage available in the insurance market, as well as
preliminary design of the conditions that best suit the identified
and assessed needs.
• Technical assessment of the protection provided by the policy, its
costs and the elements retained in the Group (franchises and other
elements at the responsibility of the insured) in order to make
contracting decisions.
• Negotiating with suppliers and award of contracts in accordance
with the procedures established by the Group.
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5. Risk management report » Risk profile > Compliance and conduct risk
D.5. Compliance and conduct risk
Organisation of this section
We first introduce the compliance and conduct function and
describe how it is governed, its organisational model and the
functions involved in monitoring and controlling risks in this area
[pag. 254-257].
We then detail the transversal functions and those that control and
monitor specialist risks: regulatory compliance, product governance
and consumer protection, prevention of money laundering and
terrorist financing, and reputational risk [pag. 257-261].
Under the current corporate configuration of the three lines
of defence in Grupo Santander, compliance and conduct was
consolidated in 2016 as an independent second-line control
function reporting directly and regularly to the board of directors
and the committees thereof, through the GCCO (Group Chief
Compliance Officer), who acts independently. The compliance and
conduct function reports to the Chief Executive Officer (CEO). This
configuration is aligned with the requirements of banking regulation
and with the expectations of supervisors.
The following compliance risks have been defined:
Finally, we describe the annual risk assessment exercise, and how the
risk appetite proposed by compliance and conduct to the board in
2016 was prepared [pag. 261-262].
• Compliance risk: risk of not complying with the legal framework,
internal rules or the requirements of regulators and supervisors.
» D.5.1. Scope, aim, definitions and objective
The compliance and conduct function fosters the adherence of
Grupo Santander to the rules, supervisory requirements, principles
and values of good conduct, by setting standards, and discussing,
advising and reporting in the interest of employees, customers,
shareholders and the community at large.
• Conduct risk: risk arising from the actions of people or the Bank as
a whole that might have poor consequences for customers or the
markets.
• Reputational risk: risk of damage to the Bank’s image among the
public, customers, investors and other stakeholders.
The Group’s objective is to minimise the probability that
irregularities occur and that any irregularities that should occur are
identified, assessed, reported and quickly resolved.
This function addresses all matters related to regulatory compliance,
prevention of money laundering and terrorism financing, product
governance and consumer protection and reputational risk.
Other control functions (risks and audit) also take part in controlling
these risks.
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5.2. Compliance and conduct risk
control and oversight
According to the configuration of lines of defence in the Grupo
Santander and in particular, within this function, the first lines of
defence have primary responsibility for managing this function’s
risks, jointly with the business units that directly originate such risks
and the compliance and conduct function. This is performed either
directly or through assigning compliance and conduct activities or
tasks.
The function is also responsible for setting up, fostering and ensuring
that units begin to use the standardised frameworks, policies and
standards applied throughout the Group. A number of different
initiatives have been launched along these lines in 2016 throughout
the Group, and they have been monitored and controlled.
The GCCO is responsible for reporting to Grupo Santander’s
governance and management bodies, and must also advise and
inform, as well as promote the development of the function, in
accordance with the annual plan. This is independently of the vice
chairman of risks’ and the GCRO’s other reporting to the governance
and management bodies of all Group risks, which also includes
compliance and conduct risks.
In 2016, the new compliance and conduct model was rolled out at
the corporate level and started to be developed in the main Group
units and countries, providing the basic components for these
risks to be managed (frameworks and policies for prevention of
money laundering and terrorism financing, governance of products
and services and consumer protection, regulatory compliance,
reputational risk, etc.) and ensuring that other risks are duly covered
by the appropriate units (codes of conduct, responsible financing
policies, etc.). The pertinent governance, control and oversight
systems are established for this purpose.
Furthermore, Internal Audit - as part of its third line of defence
functions - performs the tests and audits necessary to verify that
adequate controls and oversight mechanisms are being applied, and
that the Group’s rules and procedures are being followed.
The corporate frameworks of the compliance and conduct function
are as follows:
• General compliance and conduct framework.
• Commercialisation of products and services and consumer
protection framework.
• Anti-money laundering and terrorist financing framework.
These corporate frameworks are developed in the Grupo Santander’s
internal governance and are consistent with the parent-subsidiary
relationship model. The existing frameworks for marketing products
and services and consumer protection were brought together in a
single document in 2016, to improve the integration of these areas
and simplify their management.
The General Code of Conduct enshrines the ethical principles and
rules of conduct that govern the actions of all Grupo Santander’s
employees. It is supplemented in certain matters by the rules found
in other codes and their internal rules and regulations.
In addition to the frameworks mentioned, the General Code of
Conduct also establishes:
• Compliance functions and responsibilities in this field.
• The rules governing the consequences of non-compliance with it.
• A whistle-blowing channel for the submission and processing of
reports of allegedly irregular conduct.
The compliance and conduct function, under the supervision of the
Board Risk Committee (BRC), is responsible for ensuring effective
implementation and oversight of the General Code of Conduct, as
the board is the owner of the Code and the corporate frameworks
that implement it.
» D.5.3. Governance and the organisational model
A global transformation process - TOM - was carried out in 2016,
in accordance with the mandate entrusted to the compliance and
conduct function by the board. The scope and targets of this model
were defined in the first phase. In 2016, the model was deployed in
the corporation, and the Group also launched an assessment and
development process in the main Group units, seeking to ensure
that the compliance and conduct function is in line with the best
standards in the financial sector by the end of 2018.
It is also important to note the coordination with the risk function
and in particular, with the operational risk function, which, through
risk governance, fosters a global overview of all the Group’s risks. It
also reports to the board and its committees.
D.5.3.1. Governance
The following corporate committees - each of which has a
corresponding local replica - are collegiate bodies with compliance
competencies:
The Regulatory Compliance Committee is the collegiate body for
regulatory compliance matters. It has the following key functions:
(i) Controlling for regulatory compliance matters and overseeing
regulatory compliance risk in the Group, as a second line of
defence.
(ii) Defining the regulatory compliance risk control model in the
Group and validating the annual work plans of the different local
units.
(iii) Assessing proposed regulatory compliance programmes, or
modifying them, for presentation to the Compliance Committee
and subsequently, the board of directors for approval.
In 2016, the Regulatory Compliance Committee held 4 meetings.
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The Commercialisation Committee is the collegiate governance
body for the approval of products and services. It has the following
key functions:
(i) Validating new products or services proposed by the parent
company or by any subsidiary/Group unit, prior to their launch.
(ii) Establishing the commercialisation risk control model in the
Group, including risk assessment indicators, and proposing the
commercialisation risk appetite to the Compliance Committee.
(iii) Establishing interpretation criteria and approving the
refence models to develop the corporate product and
service and consumer protection framework and its rules of
commercialisation, and also to validate the local adaptations of
those models.
The Monitoring And Consumer Protection Committee met 24 times
in 2016.
The Anti-money Laundering/Terrorism Financing Committee is
the collegiate body in this field. It has the following key functions:
(i) Controlling and overseeing anti-money laundering/terrorism
financing (AML/TF) risk in the Group, as a second line of
defence.
(ii) Defining the AML/TFC risk control model in Grupo Santander.
(iii) Considering corporate AML/TF framework proposals for
escalation to the Compliance Committee, and updates of that
framework.
(iv) Considering and analysing local adaptations and validating them,
(iv) Assessing and deciding which significant commercialisation
as the case may be.
questions might pose a potential risk for the Group, depending
on the authorities granted or the powers required to be
exercised under legal obligations.
It met on 4 times in 2016.
The Commercialization Committee met 15 times in 2016 and analysed
128 new products/services, having validated all of them.
The Monitoring and Consumer Protection Committee is the
Group’s collegiate governance body for the monitoring of products
and services, and the assessment of customer protection issues in all
Group units. It has the following key functions:
(i) Monitoring the commercialisation of products and services
by country and by product type, reviewing all the available
information and focusing on products and services under special
monitoring, and costs of conduct, compensation to customers,
sanctions, etc.
(ii) Monitoring the common claim measurement and reporting
methodology, based on root-cause analysis and the quality and
sufficiency of the information obtained.
(iii) Establishing and assessing how effective corrective measures can
be when risks are detected in the governance of products and
consumer protection within the Group.
(iv) Identifying, managing and reporting preventively on the
problems, events, significant situations and best practices in
commercialization and consumer protection in a transversal way
across the Group.
The Compliance Committee. In 2016, in order to reinforce function
governance, the functions and objectives of these committees have
been aligned, to bring them in line with the Group governance
model, including its actions in the Compliance Committee, which
is the higher-level collegiate body of the compliance and conduct
function and which combines the objectives of these committees.
It has the following key functions:
(i) Monitoring and assessing compliance and conduct risk which
could impact on Grupo Santander, as the second line of defence.
(ii) Proposing updates and modifications to the general compliance
framework and corporate function frameworks for ultimate
approval by the board of directors.
(iii) Reviewing significant compliance and conduct risk events and
situations, the measures adopted and their effectiveness, and
proposing that they be escalated or transferred, whenever the
case may be.
(iv) Setting up and assessing corrective measures when risks of
this kind are detected in the Group, either due to weaknesses
in established management and control, or due to new risks
appearing.
(v) Monitoring new regulations which appear or those modified,
and establishing their scope of application in the Group, and, if
applicable, the adaptation or mitigation measures necessary.
The Compliance Committee met eight times in 2016.
D.5.3.2. Organisational model
Derived from the aforementioned transformation programme
(TOM) and with the objective of attaining an integrated view and
management of the different compliance and conduct risks, the
function is structured using a hybrid approach in order to combine
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specialised risks (vertical functions) with an aggregated and
homogenised overview of them (transversal functions).
This functional structure has been consolidated and reinforced
during the 2016 year, helping the Group’s purpose in this field:
d) Projects. Leading the function’s projects and other projects
related to the transformation plan. Coordinating management
of requirements with technology and operations teams.
Implementing the execution methodology and monitoring
projects.
Transversal functions
Governance, planning and consolidation
a) Governance. Governance and management of the functioning
of the compliance and conduct function at the corporate level.
Development of training, culture, talent and professional
development initiatives and elements in the function, with a long
term approach. Interacting and ensuring the consistency of the
relationship with other control and support functions, and acting
with staff from the GCCO.
b) Planning. Planning and fostering the definition of the compliance
and conduct strategy and its annual plan and reporting on this
to senior management. Maintaining the compliance and conduct
regulatory map and policies. Managing and coordinating the
function’s internal organisational and human resource processes.
c) Consolidation. Consolidating compliance risks and conduct at
a global level through an annual risk assessment exercise in the
various Group units, in coordination with risks. Supervising the
application of the mitigation measures and risk assessment plans
defined and monitoring responses to, and the implementation of,
requests from regulators. Proposing risk appetites for compliance
and conduct, by collating proposals from local levels into the
Group’s risk appetite.
d) Regulatory radar. Developing and coordinating the creation and
administration of the global repository of rules and regulations
applicable to all units, through a multidisciplinary process
involving various functions.
Coordination with units
Coordinating interactions with Group units, providing a global
outlook on compliance risks and the models in these units.
Compliance processes and information systems
a) Compliance and conduct information systems. Defining the
information management model for the function and developing
key indicators.
b) Information quality, systems and operations. Defining the
function’s systems plan, providing a comprehensive compliance
and conduct approach to system needs and prioritising these.
Acting as the main channel with the technology and operations
function.
Vertical functions
Regulatory compliance
Control and supervision of regulatory compliance risk events related
to employees, organisational aspects, international markets and
securities markets, developing policies and rules and ensuring
compliance by units.
Governance of products and consumer protection
Management, control and supervision of governance of products and
services in the Group and risks relating to conduct with customers,
consumer protection and fiduciary and custody risk for financial
instruments, developing specific policies and regulations in this
regard.
Anti-money laundering/ terrorist financing
Management, control and supervision of the application of the anti
money laundering and terrorist financing framework, coordinating
analysis of local and Group information to identify new risks that
might attract domestic or international sanctions. Analysis of new
suppliers and participants in corporate transactions for approval and
ensuring units comply with the rules and policies established in this
regard, consolidating the global vision of these risks in the Group
and global trends.
Reputational risk
Development of the control and supervision model for reputational
risk, through early detection and prevention of events and mitigation
of any potential impact on the Group’s reputation for employees,
customers, shareholders, investors and society in general.
» D.5.4. Regulatory compliance
Functions
The following functions are in place for adequate control and
supervision of regulatory compliance risks:
• Implement the Group’s General Code of Conduct and other codes
and rules developing the same. Advise on resolving doubts that
arise from such implementation.
• Collaboration with Internal Audit on its regular audits of the
General Code of Conduct and other codes and their implementing
regulations, and other issues subject to direct review.
c) Improving processes. Identifying the map of the function’s
• Assessment and detection of risks not covered by specific
key processes and associated metrics. Defining and supervising
application of the continuous improvement methodology for the
processes identified.
regulations, and preparing and modifying compliance programmes
for presentation to the Regulatory Compliance Committee and,
as applicable, subsequent approval by the board of directors or its
committees.
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• Regularly report to the RSRCC and the board of directors on the
development of the framework and the implementation of the
compliance programme.
A key element in this system is the whistleblowing channel. The
Group has 5 main whistleblower channels and in total, they received
450 complaints in 2016.
• Assess changes that need to be introduced into the compliance
programme, particularly in the event of detecting unregulated risk
situations and procedures which could be improved, proposing any
changes required to the Regulatory Compliance Committee or the
RSRCC.
In 2016, a whistleblowing channel was set up for suppliers,
through which any supplier of services to Banco Santander, S.A.
or its subsidiaries in Spain can inform compliance and conduct
of inappropriate conduct by Group employees in the contractual
relationship between the supplier and the Group.
• Receive and handle the accusations made by employees or third
parties via the whistle blowing channel.
• Direct and coordinate investigations into possible acts of non
compliance, being able to request support from Internal Audit and
proposing the sanctions that might be applicable in each case to
the Irregularities Committee.
• Supervise mandatory training activity on Compliance programme.
The compliance TOM guides the focus of the regulatory compliance
function in the following areas:
Employees
The objective - based on the General Code of Conduct - is to
establish standards for the prevention of criminal risks and conflicts
of interest and from a regulatory perspective, to cooperate with
other areas in setting guidelines for remuneration and dealings with
suppliers.
In corporate defence (prevention of criminal risks), the responsibility
is undertaken of minimising the impact of the criminal responsibility
of legal persons for any crimes committed on account of and for the
benefit of them administrators, or representatives and by employees
as a result of a lack of control.
In 2016, the Group rolled out a corporate defence model which
focuses on the Group’s main units, with the view of developing
initiatives to raise awareness of the main criminal risks in the
organisation. This model is structured in each country with the
formal recognition of this function by each compliance function,
with the appointment of a subject matter expert responsible for
management of the model at the local level and coordinating with
the corporate centre and disseminating corporate policies and tools
in the local unit.
Organisational aspects
One of the main developments in 2016 was the launch of the new
General Data Protection Regulation (GDPR), as a result of which
the corporate centre has developed guidelines with uniform criteria
to help Group countries adapt to the regulation. During the 2017
year and until May 2018, when compliance with the regulation will
be compulsory, the approach will be to monitor the redesign of the
impacted processes and to increase the degree of awareness about
the importance of complying with this regulation.
There are two areas of work in relation to the automatic exchange
of fiscal information between FATCA and CRS statements: support
for implementation and the second line of compliance with the
regulation in the Group.
Market regulations
In 2016, once the corporate project for adaptation to the US Volcker
Rule was implemented, the next stage has been to supervise the
compliance with this regulation which limits proprietary trading to
very specific cases that the Group controls by means of a compliance
programme. Compliance with other specific securities market
regulations are also monitored: e.g. in the field of derivatives, the
provisions of Title VII of the US Dodd Frank law or its European
counterpart, EMIR (European Market Infrastructure Regulation).
Regulatory compliance is responsible for disclosing relevant
information on the Group to the markets. Banco Santander made
public 57 relevant facts in 2016, which are available on the Group’s
web site and that of the National Securities Market Commission
(CNMV).
Code of Conduct in Securities Markets (CCSM)
The Code of Conduct in Securities Markets (CCSM), supplemented
by the Code of Conduct for Analysis Activity and another series of
regulations, contains Group policies in this field and defines, inter
alia, the following responsibilities in regulatory compliance:
The system of managing risks for the prevention of criminal offences
obtained AENOR certification in 2014. It was audited in 2016, with
favourable results.
• Register and control sensitive information known and generated by
the Group.
• Maintain the lists of securities affected and related personnel, and
watch the transactions conducted with these securities.
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• Monitor transactions with restricted securities according to the
type of activity, portfolios or collectives to whom the restriction is
applicable.
• Receive and deal with communications and requests to carry out
proprietary trading.
• Control own account trading of the relevant personnel and manage
possible non-compliance of CCSM.
service proposed by any Group subsidiary or the Parent prior to the
launch thereof.
• Gather from local units - and analyse and report to the Group’s
governance bodies - the information needed to adequately monitor
and analyse product and service commercialization risk throughout
the entire life cycle and of complaints, with a twofold purpose:
possible impact on customers and over the Group. Identify and
follow up on actions taken to mitigate the detected risks.
• Identify, register and resolve conflicts of interest and situations
• Identify and disclose the best practices for commercialization
that could give rise to them.
marketing and consumer protection.
• Analyse activities suspicious of constituting market abuse and
where appropriate, report them to the supervisory authorities.
The main activities carried out by this function in 2016 were as
follows:
• Resolve doubts on the CCSM.
In 2016, the corporate centre worked hard on deploying new IT tools
to detect possible market abuse scenarios, to review procedures
to adapt them to the European market abuse regulation and the
training programmes which have been launched to inform people of
the new developments in this new system.
» D.5.5. Product governance
and consumer protection
The product governance and consumer protection function defines
the key elements needed for adequate management and control of
commercialization and consumer protection risks, which are defined
as risks arising from inadequate practices in customer relations, the
service and products offered to customers and their adequacy for
each specific customer.
This function promotes an appropriate culture in Grupo Santander,
fostering transparency and a Simple, Personal and Fair approach
that protects the interests of customers. To do so, the following
functions have been established, and organised on the basis of
commercialisation of products and services and consumer protection
corporate framework and a set of policies setting out the basic
principles and guidelines in this field.
The corporate framework for the commercialization of products and
services and consumer protection defines the key items for adequate
management and control of risks arising from commercialisation,
distribution, encompassing all phases (design, sale and post-sale).
Functions
The following functions are in place for adequate control and
supervision of these risks:
• Foster units’ adherence to aforementioned corporate framework.
• Facilitate the functions of the Corporate Commercialization
• Update of the products and services commercialization and
consumer protection framework (including the previous
corporate complaint management framework) and processing for
its approval by the governing bodies.
• Updating the regulations of the committees associated with
the function, integrating the fiduciary risks subcommittee
into the function and adapting their responsibilities for the
new organisational structure, functions and governance of the
corporate compliance and conduct function.
• Development and dissemination within the Group of the
procedure to control training for sale of products and
services, which defines the set of activities which need to be
performed to ensure correct training/qualification of the sales
force and thereby, minimise risks arising from inadequate
commercialization and of infringements of the applicable laws.
• Update of the new corporate procedure which regulates the
processes for the approval and monitoring of own and/or
customers assets custody.
• Preparation of the risk alerts report, in collaboration with the
corporate credit risk function and distribution to units.
• Taking part, in coordination with the Group’s human resources
function, in defining the variable remuneration corporate policies
associated with the sales force.
• In addition to the 128 products and services submitted to the
Commercialisation Committee, the products and consumer
protection governance function also analysed:
- 32 products or services considered to be not new.
- 37 structured notes issued by Santander International Products
Plc. (subsidiary fully owned by Banco Santander), for which the
compliance with applicable agreement is reviewed.
Committee, ensuring correct validation of any new product or
- 172 consultations from different areas and countries for
resolution.
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• Preserve internal consumer protection, with the objective of
improving relations with the Group, effectively promoting their
rights, facilitating a solution to any controversies, in accordance
with best practices through any channel and fostering financial
knowledge. The objective is to contribute to lasting relationships
with customers.
• Identify, analyse and control fiduciary risk generated by private
banking, asset management, insurance and outsourced activity of
custody services for customers’ financial instruments. Fiduciary
risks are considered to be risks incurred when acting as the
trustee or manager of third party assets. Improper management
or administration of assets could cause losses for the customer,
and the trustee may be held responsible for such losses, and will
face the ensuing economic or reputational impact.
Fiduciary risk management includes the admission and
monitoring of products, and the exposure and performance of
the assets of customers managed by Grupo Santander or whose
management is delegated to a third party. This management
includes collective investment vehicles, profiled discretionary
management portfolios, and saving and investment insurance
products, and involves:
- The regular assessment of compliance of products’ mandates,
such that the risk associated to customers’ position is always
handled in the customer’s best interest.
- The monitoring of the final result of the investments both with
regard to the fiduciary relations with the client who expects the
best result as well as with regard to competitors.
• Establish and maintain methodologies to assess marketing risks
and follow up on such assessments.
• Analysis and processing for corporate validation in the fiduciary
risks subcommittee of:
- 519 requests for the launch, renewal or modification of product
characteristics (314 collective investment vehicles and profile
discretionary management portfolios, 46 saving insurance/
investment, 134 products distributed by Private Banking and 25
structured notes/deposits).
- 69 requests relating to policies, fund and ETF distribution focus
lists and requests for opinion from other areas.
• Analyse and consolidate complaint information and management
thereof from 25 local units and 36 business units and 10 branch
offices of SGCB.
Corporate projects
• Definition of the commercialization conduct risks taxonomy, which
has been used to carry out the first self-assessment exercise with a
scope of 19 entities in 16 different geographies.
centralise the information and controls which are currently carried
out locally on insurance business, thus providing a global overview
and simplifying reporting lines.
• Launch of compulsory online training on commercialization
conduct risk in the corporation and dissemination thereof to Group
subsidiaries for implementation.
» D.5.6. Anti-money laundering
and terrorist financing
One of Grupo Sanatnder strategic objectives is to maintain an
advanced and efficient anti-money laundering and terrorist financing
system, constantly adapted to the latest international regulations,
with the capacity to confront the development of new techniques by
criminal organisations.
• This is based on a corporate framework setting out the basic
principles and guidelines for action, establishing mandatory
minimum standards for Grupo Santander units. These are
formulated based on the principles set out in Financial Action Task
Force (FATF), recommendations and obligations in EU directives to
prevent the use of the financial system for money laundering and
terrorist financing.
• Local units are responsible for managing and coordinating anti
money laundering and counter terrorist financing systems and
procedures in the countries where Santander operates. They also
investigate and process communications relating to suspicious
transactions and information requirements from supervisory
bodies. Each local unit has appointed an officer with responsibilities
for this function.
• Corporate systems and processes have been put in place in
all units, based on decentralised exploitation of technological
systems. These provide local management information and data
for active and preventive management, enabling the analysis,
identification and monitoring of suspicious activities that might
involve money laundering or terrorist financing. These systems
enable reporting to the corporate function responsible for
oversight and control.
• Grupo Sanatnder is a founding member of the Wolfsberg Group,
with other major international financial entities, which works
to establish international standards and develop initiatives to
improve the effectiveness of programmes in this area. Supervisory
authorities and experts in this area believe that the principles and
guidelines set by the Wolfsberg Group represent an important step
in the fight against money laundering, corruption, terrorism and
other serious crimes.
The prevention organisation covers 169 different Group units
established in 31 countries. Over one thousand Group professionals
currently carry out the anti-money laundering/financing of terrorism
function.
• Creation of the insurance conduct forum in seven countries to
identify, assess and manage commercialization risks, so as to
The main activity data in 2016 are as follows:
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• Subsidiaries reviewed: 169
• Investigations: 118,453
• Disclosure to authorities: 32,036
• Employee training: 139,246
The Group has training plans in place at both local and corporate
level, in order to cover all employees. Specific training plans are also
in place for the most sensitive areas from the perspective of anti
money laundering and combating terrorism financing.
» D.5.7. Reputational risk
Due to the transformation of the compliance function through the
development of the TOM model, very significant progress has been
made in spelling out the details of the reputational risk model.
The specific characteristics of reputational risk are: there are a
vast number of sources and a widely varying understanding of
the concept among stakeholders. This means it requires a unique
approach and control model, separate from other risks.
The reputational risk model uses a primarily preventive approach,
but it also takes part in efficient crisis management processes.
The aim is for reputational risk to be integrated into both business
and support activities, and internal processes, allowing the risk
control and oversight functions to include it in their activities.
The reputational risk model also implies a comprehensive
understanding not only of the bank’s activities and processes in
carrying out its business activity, but also of how it is perceived by
stakeholders (employees, customers, shareholders and investors and
the wide society), in its different settings. This approach requires
the management, support and control functions to be closely
coordinated with different stakeholders.
Reputational risk governance is thus included in the governance
of compliance and conduct, as described. This function reports to
senior management on reputational risk questions, once data on the
sources of this risk has been consolidated.
» D.5.8. Risk assessment model of
compliance and risk appetite
The Group sets out the type of compliance and conduct risks that it
is not willing to incur - for which it does not have a risk appetite - in
order to clearly reduce the probability of any economic, regulatory
or reputational impact occurring within the Group. Compliance
risk is organised in a homogeneous way in units, by establishing a
common taxonomy, which consists of setting a series of compliance
risk indicators and assessment matrices which are prepared for each
local unit.
As in previous years, the compliance and conduct function carried
out a regulatory risk assessment exercise in 2016 focused on the
Group’s main units. This exercise is performed every year, using
a bottom-up process. The first lines of the local units identify the
inherent risk of all rules and regulations applicable to them and once
they have assessed how consistent controls upon them are, they
determine the residual risk of each entity and set up, as the case may
be, the appropriate action plans. Actions plans have been designed
to offset the risks identified in this risk assessment. These are
monitored on a quarterly basis, unit by unit.
In accordance with the new TOM, the different indicators of the
different compliance and conduct risks have been reviewed in 2016.
Furthermore, a convergence plan has been established, with the
assistance of the risk function to integrate the global overview of
non-financial risks into a common tool called Heracles.
With this purpose, compliance and conduct proposed the risk
appetite to the board of directors in July 2016, through its
governance bodies and those of risks. The board of directors
approved the proposal, and that risk appetite is currently being
developed and implemented in the Group’s units.
Also as part of the TOM development, the taxonomy of the different
types of compliance and conduct risks have been reviewed, in
coordination with the risk function, so that such risks can be clearly
identified.
» D.5.9. Transversal corporate projects
In accordance with the organisational principles defined in the
TOM, transversal functions support specialised vertical functions,
providing them with methodologies and resources, management
systems and information and support in executing multi-disciplinary
projects.
In 2016 - the first year in which these transversal functions have been
running - a great progression has been made in the three areas:
• Development of the organisation structure of the function and of
the resources needed for it to function and monitoring its impact.
• Development of a new compliance and conduct culture based on
the Simple, Personal and Fair culture and aligned with the spirit of
the TOM.
• Promoting data systems to support and implement a continuous
improvement methodology in our processes.
• Organisational development and monitoring TOM’s degree of
maturity in units.
During 2016, special efforts have been made to recruit new human
resources profiles for the compliance and conduct function who
promote and assist in transforming the function.
One of the key pillars of all the corporate functions is monitoring the
units’ deployment of models. To that end, a methodology is currently
being developed:
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5. Risk management report » Risk profile > Compliance and conduct risk
• To acquire an objective knowledge of the TOM’s degree of
deployment in each one of the units.
• Regularly follow up on progress in deploying the model.
• Be used as a source for joint identification (Group-units) of the
work plans defined every year.
This methodology is currently in the testing phase and the idea is
that it will be deployed in mid 2017.
A project has been launched with the aim of ensuring compliance
with the mandatory training activities within the Group. The project,
organised in conjunction with the Human Resources function, will
determine the minimum guidelines to be followed by units, and also
define the reporting metrics required for this type of training. At
the same time, the vertical functions have prepared and launched
various e-learning initiatives in 2016, such as the General Code
of Conduct and Corporate Defence, prevention of market abuse,
conduct risk in marketing, the Volcker Rule and others which have
also been shared with units.
Following the best practices already applied in other Group units,
significant efforts have been made to identify and document all
processes of the corporate compliance and conduct function. Once
details of the activities have been gathered and the main operational
risks and controls are identified, the next phase to be developed in
2017 is to implement continuous improvement dynamics. Here it
is important to note the project already launched to automate and
digitalise the main processes.
The systems map and strategy for information systems have been
set up in conjunction with the technology and operations function.
Efforts are also being made to develop solutions to enable data to
be exchanged between compliance units, to monitor TOM’s degree
of deployment, the effective application of regulatory management
and Risk Assessment methodologies and the execution of control
models linked with the second line function. For example, during
2016 work has been done on the following systems: Opera (products
governance), Fiduciary Catalogue (Group fiduciary risks consolidated
data repository), Codcon (code of conduct in securities market),
Apama (market abuse scenarios), FIT (financial intelligence unit cases
management), Regulatory Radar (end-to-and management of the
process to assess and deploy new regulations), etc.
Lastly, the following progress has been made in management data:
according to the mandate and objectives set out in the TOM for
risk types, the management metrics have been reviewed, the most
relevant ones have been identified and special attention paid to
the coverage of risk appetite. In addition, management reports are
being improved for each risk type, to provide adequate support
for decisions by governance bodies. This process of adapting our
management data has been coordinated with the Chief Data Officer
(CDO), ensuring that all compliance metrics and reports comply with
data governance standards in the Group.
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D.6. Model risk
Grupo Santander has far-reaching experience in the use of models to
help make all kinds of decisions, and risk management decisions in
particular.
A model is defined as a system, approach or quantitative methods
which applies theories, techniques or statistical, economic, financial
or mathematical hypotheses to convert input data into quantitative
estimates. The models are simplified representations of real world
relationships between observed characteristics, values and cases.
By simplifying in this way, we can focus our attention on the specific
aspects which are considered to be most important to apply a
certain model.
Using models implies model risk, which is defined as the potential
negative consequences arising from decisions based on the results
of incorrect, inadequate models or models used in an inappropriate
way.
According to this definition, the sources of Model Risk are as follows:
• the model itself, due to the utilisation of incorrect or incomplete
data, or due to the modelling method used and its implementation
in systems.
• Improper use of the model.
The materialisation of model risk may prompt financial losses,
inadequate commercial and strategic decision making or damages to
the Group’s reputation.
Grupo Santander has been working towards the definition,
management and control of model risk for several years. Since 2015,
a specific area has been put aside to control this risk, within the Risk
division.
The function is deployed at the corporation and also at each of the
Group’s main entities. This function is governed by the model risk
framework, a common control framework throughout the Group
with details concerning questions such as organisation, governance,
model management and model validation, According to internal
regulations in force, the Models Committee is largely responsible for
authorising the use of models.
The Models Committee is the collegiate body responsible for
supervision and control of the risk model in Grupo Santander. The
committee is established as set down in the model risk, credit risk
and market risk admission and control, and structural and liquidity
frameworks, in accordance with the powers delegated by the
Executive Risk Committee.
The aim of the committee is to effectively control model risk, with
the functions involved, advising the Chief Risk Officer and the
Risk Control Committee to ensure that model risk is managed in
accordance with the Group risk appetite approved by the board of
directors, which includes identifying and monitoring current and
emerging model risk and its impact on the Group’s risk profile.
The Senior management of Grupo Santander, in the various units
and also at the Corporation itself, regularly monitors model risk in a
set of reports that provide a consolidated view of the Group’s model
risk and enable decisions to be taken in this regard.
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5. Risk management report » Risk profile > Model risk
Management and control of Model Risk is based on the life cycle
of a model as defined by Grupo Santander, shown below:
1
Identification
2
Planning
3
Development
4
Validation
5
Approval
6
Implementation
and use
7
Monitoring
and control
The internal validation encompasses all models under the scope
of model risk control, from those used in the risk function (credit,
market, structural or operational risk models, capital models,
economic and regulatory models, provisions models, stress tests,
etc.), up to types of models used in different functions to help in
decision making.
The scope of validation includes not only the more theoretical or
methodological aspects, but also IT systems and the data quality
they allow, which determines their effectiveness. In general, it
includes all relevant aspects of management in general (controls,
reporting, uses, senior management involvement etc.).
This corporate internal validation environment at Grupo Santander
is fully aligned with the internal validation criteria of advanced
models produced by the financial regulators to which the Group is
subject. This maintains the criterion of a separation of functions
for units developing and using the models (first line of defence),
internal validation units (second line of defence) and internal audit
(third line of defence) as the ultimate layer of control, checking the
effectiveness of the function and its compliance with internal and
external policies and procedures, and commenting on its level of
effective independence.
5. Approval
Before being deployed and thus used, each model has to be
presented to be approved in the appropriate bodies, as established
in the internal regulations in force at any given time, and in the
approved delegation schemes.
6. Implementation and use
This is the phase during which the newly developed model is
implemented in the system in which it will be used. As indicated
above, this implementation phase is another possible source of
model risk, and it is therefore essential that tests be conducted
by technical units and the model owners to certify that it has
been implemented pursuant to the methodological definition and
functions as expected.
7. Monitoring and control
Models have to be regularly reviewed to ensure that they function
correctly and are adequate for the purpose for which they are being
used, or, otherwise, they must be adapted or redesigned.
Also, control teams have to ensure that the model risk is managed
in accordance with the principles and rules set out in the model risk
framework and related internal regulations.
1. Identification
As soon as a model is identified, it is necessary to ensure that it
is included in the control of the model risk.
One key feature of proper management of model risk is a
complete exhaustive inventory of the models used.
Grupo Santander has a centralised inventory, created on the
basis of a uniform taxonomy for all models used at the various
business units. The inventory contains all relevant information
on each of the models, enabling all of them to be properly
monitored according to their relevance. The inventory enables
transversal analyses to conducted on the information (by
geographic area, types of model, importance etc.), thereby
easing the task of strategic decision-making in connection with
models.
2. Planning
All figures who take part in the model life cycle play a role in this
phase (owners and users, developers, validators, data suppliers,
technology, etc.), agreeing on and setting priorities regarding
the models which are going to be developed, reviewed and
implemented over the course of the year.
This planning takes place once a year at each of the Group’s
main entities, and is approved by local governance bodies, and
validated by the corporation.
3. Development
This is the model’s construction phase, based on the needs set
out in the Models Plan and the information furnished to this end
by the specialists.
Most of the models used by the Grupo Santander are developed
by internal methodology teams, though some models are
also outsourced from external providers. In both cases, the
development must take place using common standards for the
Group, and which are defined by the corporation. By this means,
we can assure the quality of the models used for decision-making
purposes.
4. Independent validation
Internal validation of models is not only a regulatory requirement
in certain cases, but it is also a key feature for proper
management and control of Grupo Santander’s model risk.
Hence, a specialist unit is in place which is totally independently
of both developers and users, draws up a technical opinion
of the suitability of internal models to their purposes, and
sets out conclusions concerning their robustness, utility and
effectiveness. The validation opinion takes the form of a rating
which summarises the model risk associated with it.
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D.7. Strategic risk
For Grupo Santander, strategic risk is one the risks considered to be
transversal, and there is a strategic risk control and management
model which is used as a reference for Group subsidiaries. This
model includes the definition of the risk, the principles and key
processes for management and control, as well as functional and
governance aspects.
Strategic risk is the risk which is associated with strategic decisions
and with changes in the entity’s general conditions, which have an
important impact on its business model in both the mid and long
term.
The entity’s business model is a key factor for strategic risk. It has
to be viable and sustainable, and capable of generating results in line
with the Bank’s objectives each year and for the next three years at
least.
There are three categories or types of strategic risk:
• Business model risk: the risk associated with the entity’s
business model. This includes the risk of the business model being
obsolescent, of it being irrelevant, and/or losing value, and so not
being able to deliver the expected results. This risk is caused both
by external factors (macroeconomic, regulatory, social and political
questions, changes in the banking industry, etc.) and also internal
ones (strength and stability of the income statement, distribution
model/channels, revenue and expenses structure, operational
efficiency, adequacy of human resources and systems, etc).
• Strategy design risk: the risk associated with the strategy set out
in the entity’s five-year strategic plan. Specifically, it includes the
risk that the strategic plan may not be adequate per se, or due to
its assumptions, and thus the Bank will not be able to deliver on
its expected results. It is also important to consider the cost of
opportunity of designing another more adequate strategy or the
lack of action through not designing it.
• Strategy execution risk: The risk associated with executing
long-term strategic plans and three-year plans. The risks to
be taken into account include both the internal and external
factors described above, the inability to react to changes in the
business environment, and, lastly, risks associated with corporate
development transactions (those which imply a change in the
entity’s perimeter and activity, acquisitions or disposals of
significant shareholdings and assets, joint ventures, strategic
alliances, shareholders’ agreements and capital operations) which
may also affect the strategic execution.
Lastly, in addition to the three components above, strategic risk
management and control also takes into account other risks
which may not be of a strategic origin (credit, market, operational,
compliance risks, etc.) but which could cause a significant impact
or affect the entity’s strategy and business model. These risks
are identified, assessed and managed through the corporate Risk
Identification & Assessment exercise (see details in section B.3.2).
jointly by the business areas and the risks areas of the bank. This
identifies the “top risks”, which are regularly reported to the bank’s
senior management in a manner that enables them to be adequately
monitored and mitigated.
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5. Risk management report » Risk profile > Capital risk
D.8. Capital risk
» Organisation of this section
At 31 December 2016, the Group’s main capital ratios are as follows:
First we shall introduce the concept of capital management and
adequacy and the solvency levels at the close of 2016, and then
next describe the main capital items [page. 266-267].
After which the regulatory framework with regards to capital is
described [pag. 268-268].
Common Equity (CET1)
Tier1
Total Ratio
Leverage ratio
Fully loaded
Phase-in
10.55%
11.53%
13.87%
5.00%
12.53%
12.53%
14.68%
5.40%
Next, the regulatory capital and economic capital figures are
presented [pag. 268-273].
Phase-in ratios are calculated applying the transitional Basel III implementation
schedules, while Fully Loaded ratios are calculated using the final standard.
In late 2016, the ECB sent each entity its minimum prudential capital
requirements for the following year. In 2017, at the consolidated
level, Grupo Santander has to maintain a minimum capital ratio of
7.75% CET1 phase-in (4.5% for Pillar I, 1.5% for Pillar 2 requirement,
1.25% for the capital conservation buffer, and 0.50% as a Global
Systemically Important Entity). Grupo Santander must also maintain
a minimum Tier 1 phase-in capital ratio of 9.25%, and minimum total
phase-in capital of 11.25%.
As shown in the table above, the Group’s Capital is in excess of the
ECB minimum requirement.
Main capital figures and solvency ratios
14.68%
Capital ratio
(transitional)
T2
2.15%
11.25% Total capital
12.53%
CET 1
2.00%
1.50%
0.50%
1.25%
1,50%
4.50%
T2
AT1
G-SIB
CCoB
Pillar II
requirement
Minimum Pillar I
CET1
7.75%
Regulatory ratios
Dec 16 (transitional)
Regulatory requirement
2017
The Group is working towards its goal of having a CET1 fully loaded
ratio higher than 11% by 2018.
Lastly, the capital planning process and stress tests in the Grupo
Santander are described [pag. 273-274].
Refer to the Prudential Relevance Report (Pillar III) of Grupo
Santander for further details.
» D.8.1. Introduction
Santander defines capital risk as the risk that the Group or
some of its companies do not have the amount and/or quality of
equity sufficient to meet the minimum regulatory requirements
set for operating as a bank, to fulfil the market’s expectations
of its solvency and support business growth and the strategic
possibilities they present, in accordance with the strategic plan.
Capital management and adequacy in the Group are conducted
using an all-encompassing approach, seeking to guarantee the
solvency of the entity to comply with regulatory requirements and
to obtain the highest possible profitability. It is determined by the
strategic targets and the risk appetite established by the board
of directors. With this purpose in mind, a series of policies are
defined, reflecting the Group’s approach to capital management:
• Establish an adequate capital planning which can be used to cover
the current needs and to provide the own funds needed to cover
the needs of business plans, regulatory demands and associated
short and mid term risks, maintaining the risk profile approved by
the board.
• Ensure that under stress scenarios, the Group and its subsidiaries
have sufficient capital to cover needs arising from the increased
risks due to worsening macroeconomic conditions.
• Optimise the use of capital through an adequate capital allocation
to businesses based on relative return on regulatory and economic
capital, taking into account risk appetite, its growth and strategic
targets.
Grupo Santander commands a sound solvency position, above the
levels required by regulators and by the European Central bank, our
supervisor.
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2016 ANNUAL REPORT
Capital
The Group considers the following capital concepts:
Regulatory capital
Value creation
• Capital requirements: the minimum volume of own funds
required by the regulator to ensure the solvency of the entity,
depending on its credit, market and operational risks.
• Eligible capital: the volume of own funds considered eligible by
the regulator to meet capital requirements. The main elements
are accounting capital and reserves.
The profit generated in excess of the cost of economic capital.
The Bank creates value when risk adjusted returns (measured by
RORAC) exceed its cost of capital, and destroys value when the
reverse occurs. This measures risk adjusted returns in absolute
terms (monetary units), complementing the RORAC approach.
Expected loss
This is the loss due to insolvency that the entity will suffer
on average over an economic cycle. Expected loss considers
insolvencies to be a cost that can be reduced by appropriate
selection of loans.
Leverage ratio
This is a regulatory metric that monitors the solidity and
robustness of a financial institution by comparing the size of the
entity to its capital.
This ratio is calculated as the ratio between Tier 1 divided by the
leverage exposure, that depends on the size of the balance sheet.
Return on risk-weighted assets (RORWA)
This is the return (net of tax) on risk-weighted assets for a
particular business.
The Bank uses RORWA to establish regulatory capital allocation
strategies, guaranting that the maximum return is achieved.
Economic capital
• Self-imposed capital requirement: the minimum volume of
own funds required by the Group to absorb unexpected losses
resulting from current exposure to the risks assumed by the entity
at a particular level of probability (this may include other risks in
addition to those considered in regulatory capital).
• Available capital: the volume of own funds considered eligible
by the entity under its management criteria to meet its capital
requirements.
Cost of capital
The minimum return required by investors (shareholders) as
remuneration for the opportunity cost and risk assumed by
investing in the entity’s capital. The cost of capital represents a
“cut-off rate” or “minimum return” to be achieved, enabling analysis
of the activity of business units and evaluation of their efficiency.
Return on risk adjusted capital (RORAC)
This is the return (net of tax) on economic capital required
internally. Therefore, an increase in economic capital decreases the
RORAC. For this reason, the Bank requires transactions or business
involving higher capital consumption to deliver higher returns.
This considers the risk of the investment, and is therefore a risk
adjusted measurement of returns.
Using the RORAC enables the Bank to manage its business more
effectively, assess the real returns on its business - adjusted for the
risk assumed - and to be more efficient in its business decisions.
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Refer to section 1.3.1.1. of the Prudential Relevance Report for more
details of regulatory developments.
In 2016, the European Banking Authority carried out a transparency
exercise, in which it published capital and solvency information and
details for sovereign positions at December 2015 and June 2016 for
131 banks in 24 European countries. This exercise has been aimed
at promoting transparency and knowledge about European banks’
capital and solvency data, thereby enhancing market discipline and
financial stability in the EU. The results demonstrate the Group’s
sound capital position and solvency, and show that it is ahead of its
peers in many of the main metrics.
Lastly, this past year the Supervisory Board of the ECB has launched
the Targeted Review of Internal Models (TRIM) exercise, which is
aimed at restoring its credibility, homogenising the discrepancy
in capital requirements which are not due to the risk profile of
exposures, and standardising supervisory practices through better
knowledge of models. This review affects 70 entities at European
level and approximately 2,000 models; it is going to be developed in
2016, 2017 and 2018 with different intermediary milestones.
» D.8.3. Regulatory capital
The regulatory capital framework is based on three pillars:
• According to Pillar I, minimum regulatory capital for credit, market
and operational risk, with the possibility of using internal rating
based models (IRB) to calculate the exposures weighted by credit
risk, internal models (VaR) for market risk, and internal models for
operational risk. The goal is that regulatory requirements should be
more sensitive to risks actually borne by entities when carrying out
their business activities.
• Pillar II establishes a supervisory review system to improve internal
management of risks and self-assessment of capital adequacy
based on risk profile.
• Lastly, Pillar III defines elements referring to higher transparency in
reporting and discipline.
5. Risk management report » Risk profile > Capital risk
» D.8.2. Regulatory framework
In December 2010, the Basel Committee on Banking Supervision
published a new global regulatory framework for international
capital requirements (Basel III). This reinforced the requirements
set out in the earlier Basel I, Basel II and Basel 2.5 regulations,
enhancing the quality, consistency and transparency of the capital
base and improving risk coverage. The Basel III legal framework
was incorporated into European regulations on 26 June 2013
through Directive 2013/36 (hereinafter, CRD IV), which repealed
Directives 2006/48 and 2006/49 and Regulation 575/2013, on
prudential requirements for credit institutions and investment firms
(hereinafter, CRR).
CRD IV was introduced into Spanish law through Act 10/2014, on
the ordering, supervision and solvency of credit institutions, and
its subsequent regulatory implementation through Royal Decree
Act 84/2015 and Bank of Spain Circular 2/2016, which completed
the adaptation of the Spanish legislative framework. This Circular
repealed most of Circular 3/2008 (which continued to apply to
aspects of Circular 5/2008 on minimum own funds and mandatory
information for mutual guarantee societies), on the determination
and control of own funds; and a section of Circular 2/2014, on the
exercise of various regulatory provisions set down in the CRR. The
CRR is directly applicable in Member States from 1 January 2014
and repeals lower-ranking standards that entail additional capital
requirements.
The CRR provides for a phase-in period that will allow institutions
to adapt gradually to the new requirements in the European Union.
The phase-in arrangements have been introduced into Spanish
law through Bank of Spain Circular 2/2014. The phase-in affects
both the new deductions from capital and the instruments and
elements of capital that cease to be eligible as capital under the new
regulations. The capital conservation buffers provided for in CRD
IV will also be phased in gradually, starting in 2016 and reaching full
implementation in 2019.
The Basel regulatory framework is based on three pillars: Pillar I
determines minimum eligible capital, allowing the possibility of using
internal models and ratings to calculate risk-weighted exposures. The
idea is that regulatory requirements should be more sensitive to risks
actually borne by entities when carrying out their business activities.
Pillar II establishes a supervisory review system to improve internal
management of risks and self-assessment of capital adequacy
based on risk profile. Lastly, Pillar III defines elements relating to
information and market discipline.
On 23 November 2016, the European Commission published a
draft of the new CRR and CRD IV, including different standards
to those used by Basel, such as the Fundamental Review of the
Trading Book for market risk, the Net Stable Funding Ratio for
liquidity risk and the SA-CCR for calculating EAD for counterparty
risk. It also introduced changes to the treatment of central clearing
counterparties, the MDA (Maximum distributable amount), Pillar II
and the leverage ratio. One of the most significant developments
was the implementation of the TLAC Term Sheet issued by the FSB
(Financial Stability Board) for capital, such that systemic entities
have to comply with TLAC requirements in Pillar I, whilst non
systemic entities only have to comply with the MREL in Pillar II, as
the resolution authority decides on a case by case basis.
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2016 ANNUAL REPORT
In 2016, the solvency target set was achieved. Santander’s CET1 fully
loaded ratio stood at 10.55% at the close of the year, demonstrating
its organic capacity to generate capital. The key regulatory capital
figures are indicated below:
Capital
%
Tier1
CET1
Tier2
Fully loaded
Phase-in
Dec 16
Dec 15
Dec 16 Dec 15
Capital
ratio
13.05
13.87
Capital
ratio
Common equity (CET1)
62,068
58,705
73,709
73,478
Tier2
2.05 2.34
Tier2
Tier1
Total capital
67,834
64,209
73,709
73,478
Tier1
0.95 0.98
Tier1
81,584
76,209
86,337
84,350
Capital
ratio
14.40
14.68
Capital
ratio
Tier2
1.85
2.15
Tier2
Risk-weighted assets
588,088
583,917
588,088 585,633
CET1 Ratio
Tier 1 ratio
10.55%
10.05%
12.53%
12.55%
11.53%
11.00%
12.53%
12.55%
Total capital ratio
13.87%
13.05%
14.68%
14.40%
CET1
10.05
10.55
CET1
CET1
12.55
12.53
CET1
Dic 15
Dic 16
Dic 15
Dic 16
Fully Loaded
Phase In
The table below shows risk-weighted assets (RWAs) in the main
geographic areas and type of risk.
Million euros
Monitoring metrics
Total FL RWAs: 588,088
Continental Europe
Total: 246,349
UK
Total: 97,329
Latin America
Total: 162,994
US
Total: 80,626
Other
Total: 790
All risks:
Credit: 85%
8%
7%
Operational:
Market:
All risks:
Credit: 87%
9%
4%
Operational:
Market:
All risks:
Credit: 84%
13%
3%
Operational:
Market:
All risks:
Credit: 85%
15%
Market: 0%
Operational:
All risks:
Credit: 92%
8%
Market: 0%
Operational:
Deployment of models
As regards credit risk, Grupo Santander continued its plan to
implement Basel’s advanced internal rating-based (AIRB) approach
for almost all the Group’s banks (up to covering more than 90% of
net exposure of the credit portfolio under these models). Meeting
this objective in the short term will also be conditioned by the
acquisition of new entities, as well as by the need for coordination
between supervisors of the validation processes of internal models.
The Group operates in countries where the legal framework among
supervisors is the same, as is the case in Europe via the Capital
Directive. However, in other jurisdictions, the same process is
subject to the cooperation framework between the supervisor in the
home country and that in the host country with different legislations.
This means, in practice, adapting to different criteria and calendars
in order to attain authorisation for the use of advanced models on a
consolidated basis.
Grupo Santander currently has supervisory authorisation to
use advanced approaches for calculating the regulatory capital
requirements for credit risk of the parent bank and its main
subsidiaries in Spain, the UK and Portugal, and certain portfolios
in Mexico, Brazil, Chile, Scandinavia (Sweden, Finland, Norway),
France and the US. The strategy of implementing Basel in the
Group is focused on achieving use of advanced models in the main
institutions in the Americas and Europe. During 2016, this was
authorised for the portfolios of IFIC, which have been integrated
into Santander Totta Portugal. We are now awaiting completion of
the supervisory validation process for the institutions and sovereign
portfolios in Chile, the mortgages and most of the revolving product
portfolios of Santander Consumer Germany, and the consumer
portfolios of PSA UK.
2016 ANNUAL REPORT
269
5. Risk management report » Risk profile > Capital risk
With regard to operational risk, Grupo Santander currently applies
the standard approach to calculating regulatory capital, as set out
in the European Capital Directive. In February 2016, the European
Central Bank authorised the use of the alternative standard approach
to calculate capital requirements at consolidated level in Banco
Santander Brazil.
As for the other risks expressly considered in Basel Pillar I, in market
risk this year the Group received permission to use its internal model
in the treasury trading activity in the UK, in addition to those already
authorised in Spain, Chile, Portugal and Mexico.
The ratios published by the Group since December 2015 are indicated
below:
Fully loaded leverage ratio
Phase-in leverage ratio
6.0%
5.5%
5.4%
5.0%
4.7%
5.2%
4.8%
5.3%
4.9%
5.4%
5.4%
5.0%
5.0%
Leverage ratio
The leverage ratio has been defined within the regulatory
framework of Basel III as a measure of the capital required by
financial institutions not sensitive to risk. The Group performs the
calculation as stipulated in CRD IV and its subsequent amendment
in EU Regulation no. 573/2013 of January 17, 2015, which was aimed
at harmonising calculation criteria with those specified in the BCBS
Basel III leverage ratio framework and disclosure requirements
document.
4.5%
4.0%
3.5%
3.0%
Dec 15
Mar 16
Jun 16
Sep 16
Dec 16
This ratio is calculated as the ratio between Tier 1 divided by the
leverage exposure. This exposure is calculated as the sum of the
following items:
• Accounting assets, without derivatives and not including items
considered to be deductions in Tier 1 (for example, it includes the
balance of loans but not of goodwill).
• Off-balance sheet items (guarantees, unused credit limits granted,
documentary credits, in the main) weighted by the credit limits.
• Inclusion of net value of derivatives (gains and losses are netted
with the same counterparty, minus collaterals if they comply with
certain criteria) plus a charge for the future potential exposure.
• A charge for the potential risk of security funding transactions.
• Lastly, it includes a charge for the risk of the credit derivatives
(CDS).
The leverage ratio is still undergoing calibration and it is not
compulsory until 2018. For the time being, a reference of 3% has
been set (the Bank’s ratio is higher). During this period, the only
obligation is to publish the data on the market. More details are
available in the Prudential Relevance Report (Pillar III) which is
published on the Group website.
Global systemically important banks
Grupo Santander is one of the 30 entities which have been classified
as global systematically important banks (G-SIB).
The designation as a systemically important entity is based on the
measurement set by regulators (the FSB and BCBS), based on 5
criteria (size, cross-jurisdictional activity, interconnectedness with
other financial institutions, substitutability and complexity). This
information is requested annually from banks with leverage exposure
in excess of EUR 200,000 million, which are required to publish it
(refer to the information at www.gruposantander.com).
According to the information published on November 21 2016 by
the FSB and the BCBS, Grupo Santander is included in the group of
systemic banks with a small capital buffer of 1%.
This definition means it has to fulfil certain additional requirements,
which consist mainly of a capital buffer (1%), in TLAC requirements
(total loss absorbing capacity), that we have to publish relevant
information more frequently than other banks, greater regulatory
requirements for internal control bodies, special supervision and
drawing up of special reports to be submitted to supervisors.
The fact that Grupo Santander has to comply with these
requirements makes it a more solid bank than its domestic rivals.
Refer to the Prudential Relevance Report (Pillar III) for more
information.
270
2016 ANNUAL REPORT
» D.8.4. Economic capital
The table below sets out the available economic capital:
Economic capital is the capital needed, in accordance with an
internally developed model, to support all the risks of business with
a certain level of solvency. In the case of Santander, the solvency
level is determined by the long-term rating objective of “A” (two
notches above Spain’s rating), which means a confidence level of
99.95% (above the regulatory level of 99.90%) for calculating capital
requirements.
The measurement of Santander’s economic capital model includes
all the significant risks incurred by the Group in its operations
(concentration risk, structural interest risk, business risk, pensions
risk and others beyond the sphere of Pillar 1 regulatory capital).
Moreover, economic capital incorporates the diversification
impact, which in the case of Grupo Santander is vital, because of its
multinational nature and many businesses, in order to determine the
global risk profile and solvency.
Economic capital is a key tool for the internal management and
development of the Group’s strategy, both from the standpoint of
assessing solvency, as well as risk management of portfolios and
businesses.
From the solvency standpoint, the Group uses, in the context of
Basel Pillar II, its economic model for the internal capital adequacy
assessment process (ICAAP). For this, the business evolution and
capital needs are planned under a central scenario and alternative
stress scenarios. By using this planning, the Group ensures that it
meets its solvency targets even under adverse economic scenarios.
The economic capital metrics also enable risk-return objectives to
be assessed, setting the prices of operations on the basis of risk,
evaluating the economic viability of projects, units and lines of
business, with the overriding objective of maximising the generation
of shareholder value.
Million euros
Net capital and issue premiums
Reserves and retained profits
Valuation adjustments
Non-controlling interests
Base economic capital available
Economic capital required
Excess capital
Dec 16
Dec 15
52,196
52,004
52,967
49,673
(16,116)
(15,448)
6,784
6,148
95,831
92,377
72,632
71,444
23,199
20,933
The main difference to regulatory CET1 comes from the treatment
of goodwill, other intangible assets and deferred tax assets (DTAs),
which we consider as additional capital requirements, rather than
deductions from available capital.
The distribution of economic capital needs by type of risk at the end
of December 2016 is shown in the following chart:
Million euros
Physical assets
2% Other
9%
Lending
39%
Business
4%
Operational
5%
Interest (ALM)
4%
Market
11%
Lending
Goodwill
Market
Interest (ALM)
Operational
Business
Physical assets
Other
TOTAL CAPITAL
ECONÓMICO
28,278
18,794
7,666
3,179
3,382
3,118
1,653
6,562
72,632
As a homogeneous measurement of risk, economic capital can be
used to explain the risk distribution throughout the Group, reflecting
comparable activities and different types of risk in a metric.
Goodwill
26%
The economic capital requirement at the end of September 2016 was
EUR 72,632 million, EUR 23,199 million above the EUR 95.831 million
available economic capital.
2016 ANNUAL REPORT
271
5. Risk management report » Risk profile > Capital risk
The table below sets out Grupo Santander’s distribution by types of
risk and geographic area at the end of 2016:
Million euros
Monitoring metrics
Total requirements: 72,632
Corporate activities
26,561
Continental Europe
18,129
UK
7,524
Latin America
13,121
Estados Unidos
7,297
All risks:
Goodwill:
Market:
DTAs:
Other:
71%
18%
9%
2%
All risks:
All risks:
All risks:
All risks:
Credit: 58%
Market: 11%
Operational: 8%
Interest (ALM): 7%
Other: 16%
Credit: 59%
Pensions: 22%
8%
5%
6%
Operational:
Business:
Other:
Credit: 61%
11%
9%
7%
12%
Interest (ALM):
Business:
Operational:
Other:
Operational:
Tangible assets:
Intangible assets:
Business:
Other:
Credit: 66%
8%
8%
7%
5%
6%
The distribution of economic capital among the main business areas
reflects the diversified nature of the Group’s business and risk.
Continental Europe represents 39% of the capital, Latin America
including Brazil 28%, the UK 17% and the US 16%.
The Group regularly assesses the level and evolution of value
creation (VC) and the risk-adjusted return (RoRAC) of its main
business units. The VC is the profit generated above the cost of the
economic capital (EC) employed, and is calculated as follows:
Outside the operating areas, the corporate centre assumes,
principally, the risk from goodwill and the risk derived from the
exposure to structural exchange rate risk (risk derived from
maintaining stakes in subsidiaries abroad denominated in currencies
other than the euro).
The benefit of diversification included in the economic capital
model, including both the intra-risk diversification (equivalent to
geographic) as well as inter-risks, amounted to approximately 30%.
Return on risk adjusted capital (RoRAC) and value creation
Grupo Santander has been using the RoRAC methodology in its
credit risk management since 1993 in order to:
• Calculate the consumption of economic capital and the return on it
of the Group’s business units, as well as segments, portfolios and
customers, in order to facilitate optimum assigning of economic
capital.
• Measurement of the Group units’ management, using budgetary
tracking of capital consumption and RoRAC.
Value creation =profit – (average EC x cost of capital)
The profit used is obtained by making the necessary adjustments to
the accounting profit so as to extract just the recurrent profit that
each unit generates in the year of its activity.
The minimum return on capital that an operation must attain is
determined by the cost of capital, which is the minimum required
by shareholders. It is calculated objectively by adding to the free
return of risk the premium that shareholders demand to invest in our
Group. This premium depends essentially on the degree of volatility
in the price of the Banco Santander share in relation to the market’s
performance. The Group’s cost of capital for 2016 was 9.37% (vs.
9.31% the previous year).
The Group’s internal management includes an annual revision of the
cost of capital and also an estimated cost of capital for each business
unit, taking into account the specific features of each market, under
the philosophy of subsidiaries which are autonomous in capital and
liquidity, in order to assess if each business is capable of generating
value individually.
• Analyse and set prices in the decision-taking process for operations
(admission) and clients (monitoring).
A positive return from an operation or portfolio means it is
contributing to the Group’s profits, but it is only creating shareholder
value when that return exceeds the cost of capital.
RoRAC methodology enables one to compare, on a like-for-
like basis, the return on operations, customers, portfolios and
businesses, identifying those that obtain a risk-adjusted return
higher than the cost of the Group’s capital, aligning risk and business
management with the intention of maximising the creation of value,
the ultimate aim of the Group’s senior management.
272
2016 ANNUAL REPORT
The creation of value and the RoRAC for the Group’s main business
areas at September 2016 are shown below:
Dec 16
Dec 15
Main segments
RoRAC
Value
creation
RoRAC
Value
creation
Continental Europe
UK
Latin America
US
17.3%
20.2%
33.1%
9.2%
Total business units
20.7%
1,426
825
2,879
(13)
5,117
13.9%
22.5%
33.8%
13.4%
883
1,065
2,746
308
20.2%
5,001
» D.8.5. Capital planning and stress tests
Capital stress tests have become particularly important as a
dynamic evaluation tool of the risks and solvency of banks. It is a
forward-looking assessment, based on macroeconomic as well as
idiosyncratic scenarios of little probability but plausible. Thus, It is
necessary to have robust planning models, capable of transferring
the impact defined in projected scenarios to the different elements
that influence a bank’s solvency.
The ultimate objective of the stress exercises is to carry out a
full assessment of the risks and solvency of banks, which enables
possible capital requirements to be calculated in the event that they
are needed because of banks’ failure to meet the capital objectives
set, both regulatory and internal.
Internally, Grupo Santander has defined a process of stress and
capital planning not only to respond to the various regulatory
exercises, but also as a key tool integrated in the Bank’s management
and strategy.
The goal of the internal process of stress and capital planning is to
ensure sufficient current and future capital, including when facing
adverse though plausible economic scenarios. Starting from the
Group’s initial situation (defined by its financial statements, capital
base, risk parameters and regulatory ratios), the envisaged results
are estimated for different business environments (including severe
recessions as well as “normal” macroeconomic situations), and the
Group’s solvency ratios are obtained for a period of usually three
years.
This process provides a comprehensive view of the Group’s¬ capital
for the time frame analysed and in each of the scenarios defined. It
incorporates the metrics of regulatory capital, economic capital and
available capital.
The structure of the process is shown below:
1
2
3
4
5
Macroeconomic
scenarios
Forecasts of balance sheet
and income statement
Central and recession
Idiosyncratic: based on specific risks facing the entity
Multi-year horizon
Projection of volumes. Business strategy
Margins and funding costs
Operating fees and expenses
Market shocks and operational losses
Credit losses and provisions. PIT LGC and PD models
Forecasts of
capital requirements
Consistent with projected balance sheet
Risk parameters (PD, LGD and EAD)
Solvency analysis
Available capital base. Profits and dividends
Regulatory and legislative impacts
Capital and solvency ratios
Compliance with capital objectives
Action plan
In the event of failure to comply with internal objectives or regulatory
requirements
2016 ANNUAL REPORT
273
Throughout the 2008 economic crisis, Grupo Santander was
submitted to six stress tests which demonstrated its strength and
solvency in the most extreme and severe macroeconomic scenarios.
All of them, thanks mainly to the business model and geographic
diversification in the Group, showed that Banco Santander will
continue to generate profits for its shareholders and comply with the
most demanding regulatory requirements.
Last July, the European Banking Authority (EBA) published the
results of its stress tests of the 51 leading banks in the European
Union. Unlike in the 2014 year, no minimum capital requirements
were set for passing the test. Instead, the final results were used
as a further variable by the ECB to determine the minimum capital
requirements for each bank (under the Supervisory Review and
Evaluation Process - SREP). Despite facing a more demanding
adverse scenario than in previous yeas, and more stringent
assumptions in relation to operational risk, conduct risk and market
risk, Grupo Santander was the bank which destroyed the least capital
of all its peers (see further details in section C. Environment and
next challenges, table 1).
As already mentioned, as well as the regulatory stress tests, Grupo
Santander annually conducts since 2008 internal exercises of
resilience within its self-assessment process of capital (Pillar II). All
of them showed, in the same way, Grupo Santander’s capacity to
meet the most difficult scenarios, both globally as well as in the main
countries in which it operates.
5. Risk management report » Risk profile > Capital risk
The recently presented structure facilitates achieving the ultimate
objective which is capital planning, by turning it into an element of
strategic importance for the Group which:
• Ensures the solvency of current and future capital, including in
adverse economic scenarios.
• Enables comprehensive management of capital and incorporates
an analysis of the specific impacts, facilitating their integration into
the Group’s strategic planning.
• Enables a more efficient use of capital.
• Supports the design of the Group’s capital management and
adequacy strategy.
• Facilitates communication with the market and supervisors.
In addition, the whole process is developed with the maximum
involvement of senior management and its close supervision, under
a framework that ensures that the governance is the suitable one
and that all elements that configure it are subject to adequate levels
of challenge, review and analysis.
One of the key elements in capital planning and stress analysis
exercises, due to its particular importance in forecasting the income
statement under defined stress scenarios, consists of calculating
the provisions needed under these scenarios, mainly those to
cover losses in the credit portfolios. Specifically, to calculate credit
portfolio loan loss provisions, Grupo Santander uses a methodology
that ensures that at all times there is a level of provisions that
covers all the projected credit losses for its internal models of
expected loss, based on the parameters of exposure at default (EaD),
probability of default (PD) and loss given default (LGD).
This methodology is widely accepted and it is similar to that used in
the EBA stress tests of 2016 and in previous stress tests (in 2011 and
2014 or the stress test on the Spanish banking sector in 2012).
Lastly, the capital planning and stress analysis process is completed
by solvency analysis under the various scenarios designed and over
a defined time frame. This assesses the sufficiency of capital and
ensures that the Group meets its internally defined capital objectives
and all regulatory requirements.
In the event of not meeting the capital objectives set, an action plan
will be prepared which envisages the measures needed to be able
to attain the desired minimum capital. These measures are analysed
and quantified as part of the internal exercises, even it is not
necessary to put them into force as Santander exceeds the minimum
capital thresholds.
This internal stress and capital planning process is conducted in
a transversal way throughout Grupo Santander, not only at the
consolidated level, but also locally in the Group’s units, as they use
the stress and capital planning process as an internal management
tool and to respond to their local regulatory requirements.
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2016 ANNUAL REPORT
Appendix: EDTF transparency
Banco Santander has traditionally maintained a clear commitment
to transparency. By virtue of this transparency, it has played an
active role in the Enhanced Disclosure Task Force (EDTF) promoted
by the Financial Stability Board (FSB) in order to improve the quality
and comparability of the risk information that banks provide to the
market. Several studies have analysed the degree of adoption of
the 32 recommendations formulated by the EDTF in October 2012,
in which Santander stands out as one of the banks that is leading
globally the practical application of this initiative.
The table below sets out where the EDTF recommendations can be
found in the information published by Grupo Santander.
1
2
3
4
5
6
7
8
General
Risk
governance
and
management
and business
model
EDTF Recommendations
Index with risk information
Risk terminology and measures
Main and emerging risks
New regulatory ratios and compliance plans
Organisation of risk management, processes and functions
Risk culture and internal measures
Business model, management and risk appetite risks
Stress test uses and processes
Annual report
Executive summary
B.1.; D.1.5.;
D.2.1.-D.2.4.; D.3.1.
C
D.1.; D.3.; D.8.
B; D.3.1.
A; B.4.
B, D.8.
B.3.1-B.3.3; D.1.5;
D.2.2-D.2.3;
D.3.1.; D.8.5.
Audit report
and annual
accounts
Notes 54b,
54c, 54d, 54e
Notes 54c,
54e, 54j
Notes 54b, 54e
Notes 54a, 54b
Notes 54b, 54j
Notes 54b, 54c
54d, 54e, 54j
9
Minimum capital requirements (Pillar I)
D.8.
Note 54j
10
Components of regulatory capital and
reconciliation with balance sheet
11
Breakdown of changes in regulatory capital
Capital and
risk-weighted
assets
12
13
14
15
Capital planning
Business activities and risk-weighted assets
Capital requirements by calculation method and portfolio
Credit risk by portfolios
16
Flows of risk-weighted assets
Liquidity
Financing
Market Risk
Credit Risk
Back-testing of models (Pillar III)
17
18 Liquidity, management and liquidity reserve requirements
19
Encumbered and unencumbered assets
Contractual maturities of assets, liabilities
and off-balance sheet amounts
The entity's funding plan
Reconciliation of balance sheet with trading
and non-trading positions
Significant market risk factors
Limitations of the measurement model for market risk
Management techniques for managing
and evaluating the risk of losses
Credit risk profile and reconciliation with balance sheet items
Policies for impaired and restructured loans
Reconciliation of impaired balance and loan-loss provisions
Counterparty risk from transactions with derivatives
Mitigation of credit risk
20
21
22
23
24
25
26
27
28
29
30
Other risks
31
Other risks
32
Discussion of risk events in the public domain
D.8.5.
D.8.
Note 54j
Note 54j
D.3.1.; D.3.2.
D.3.2.
D.3.2.
D.3.2.; D.3.3.
D.2.2.
D.2.1-D.2.3.
D.2.2.
D.2.2.
D.1.2.
D.1.2.
D.1.2.
D.1.4.
D.1.5.
D.4; D.6; D.7
D.5.
Note 54e
Note 54e
Note 54e
Note 54e
Note 54d
Note 54d
Note 54d
Note 54d
Note 54c
Note 54c
Note 54c
Note 54c
Note 54c
Notes 54f,
54h, 54i
Note 54g
PRR (Pillar III)
Appendix V;
Appendix VI; 1.2.4.
Appendix IV -->
Corporate website.
3
1; 2.1; 2.2.2.2; 7.1
3; 2.1.1; 2.1.2; 2.1.3
3
3; 7.2
2.3.2
Executive summary;
2.2.1; 2.2.2;2.2.3
1.2.7, 2.2.1. Appendices
III.a and III.c
2.2; 2.2.1; Appendix
III.b; Appendix III.c
2.3.2
2.2.2
2.2; 2.2; 2; 3.4
2.2.2.1.1; 3.2-3.4
Executive summary;
2.2.2.1; 2.2.2.3; 2.2.2.4
3.7; 3.9; 5.2.5
7.1
7.1
7.1
5.1; 5.2
5.2:5.2.6
5.2.1; 5.2.2; 5.2.3;
5.2.4; 5.2.5
3.2
3.2
3.10
3.11
6; 7
7.2
INFORME ANUAL 2016
275
Annex
278 Historical data
280 Glossary
284 General information
APPENDIX
Historical data. 2006 - 2016
Balance sheet
Total assets
Net customer loans
Customer deposits
Customer funds under management
Total equity
Total managed funds
Income statement
Net interest income
Gross income
Net operating income
Profit before taxes
Attributable profit to the Group
Per share data (1)
Attributable profit to the Group
Dividend
Share price
2016
2015
US$Mill. € Million € Million
1,411,572
1,339,125
833,234
728,501
790,470
691,112
1,162,133
1,102,488
108,255
102,699
1,603,953
1,521,633
34,388
48,507
25,182
11,911
6,863
31,089
43,853
22,766
10,768
6,204
1,340,260
790,848
683,142
1,075,563
98,753
1,506,520
32,189
45,272
23,702
9,547
5,966
2016
2015
US$
Euros
Euros
0.45
0.22
5.227
0.41
0.21
4.959
0.40
0.20
4.558
2014
€ Million
1,266,296
734,711
647,706
1,023,189
89,714
1,428,083
29,548
42,612
22,574
10,679
5,816
2014
Euros
0.48
0.60
6.996
2013
€ Million
1,134,128
684,690
607,836
946,210
80,298
1,270,042
28,419
41,920
21,762
7,378
4,175
2013
Euros
0.39
0.60
6.506
2012
€ Million
1,282,880
731,572
626,639
990,096
81,747
1,412,617
31,914
44,989
24,753
3,565
2,283
2012
Euros
0.23
0.60
6.100
Market capitalisation (million)
76,226
72,314
65,792
88,041
73,735
62,959
Euro / US$ = 1.054 (balance sheet) y 1.106 (income statement).
(1) Figures adjusted to capital increase in 2008.
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ANNUAL REPORT 2016
Historical data. 2006 - 2016
2011
2010
2009
2008
2007 2006
€ Million € Million € Million
€ Million € Million € Million
1,251,008
748,541
632,533
984,353
80,813
1,382,464
28,883
42,466
23,055
7,858
5,330
1,217,501
724,154
616,376
985,269
80,914
1,362,289
27,728
40,586
22,682
12,052
8,181
1,110,529
682,551
506,976
900,057
73,871
1,245,420
25,140
38,238
22,029
10,588
8,943
1,049,632
626,888
420,229
826,567
60,001
1,168,355
20,019
32,624
17,807
10,849
8,876
912,915
571,099
355,407
784,872
57,558
833,873
523,346
331,223
739,223
47,072
1,063,892
1,000,996
14,443
26,441
14,417
10,970
9,060
12,480
22,333
11,218
8,995
7,596
2011
2010
2009
2008
2007 2006
Euros Euros Euros
Euros Euros
0.60
0.60
5.870
0.94
0.60
7.928
1.05
0.60
11.550
1.22
0.63
6.750
50,290
66,033
95,043
53,960
1.33
0.61
13.790
92,501
Euros
1.13
0.49
13.183
88,436
ANNUAL REPORT 2016
279
Glossary
Additional Tier 1: capital mainly constituted by debt instruments
convertible into shares (hybrids) in case of a contingent event
(usually when the CET1 ratio drops below a certain value).
Advanced IRB approach: all the risk parameters are internally
estimated by the bank, including CCF (credit conversion factors) to
calculate the EAD.
Advanced Risk Management: programme to accelerate the
implementation of strategic projects to improve risk management
capacity and control.
ALM (Asset liability management): a series of techniques and
procedures to ensure correct decision-making on investments and
funding at the entity, taking into consideration the interrelation
between the various on- and off-balance sheet items.
AQR (Asset Quality Review): asset quality review exercise
performed by the European Central Bank.
Attributable profit: the portion of consolidated profit that
corresponds to owners of the Group’s ordinary shares.
Back-testing: the use of historical data to supervise the return on
risk models.
Basel III: a set of amendments to the Basel II regulations, published
in December 2010, which came into force in January 2013 and will be
gradually implemented until January 2019.
Basic IRB approach: all the risk parameters are determined by the
regulator except for the probability of default, which is internally
estimated by the bank. The credit conversion factors required for
calculating the EAD are determined by the regulator.
BCBS: Basel Committee on Banking Supervision.
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2016 ANNUAL REPORT
BIS: Bank for International Payments.
BRRD (Bank Recovery and Resolution Directive): approved in
2014, it establishes the European framework for bank recovery and
resolution in order to minimise the cost for taxpayers.
CB (Conservation buffer): a capital buffer equal to 2.5% of risk
weighted assets (and comprised fully of high quality instruments) to
absorb losses generated from the business.
CCAR (Comprehensive capital analysis review): the Federal
Reserve’s evaluation of the planning and capital adequacy process of
the US’s main banks.
CCB (Counter cyclical buffer): buffer whose objective is to mitigate
or prevent cyclical risks arising from excessive growth in lending at
aggregate level. Accordingly, the CCB is designed to build up capital
buffers during expansionary phases with a dual objective: to bolster
the banking system’s solvency and stabilise the credit cycle.
CCP (Central Counterparty Clearing House): responsible for
clearing and settlement, facilitating trading in shares and derivatives
in international markets.
CDS (Credit default swap): a derivatives contract that transfers the
credit risk of financial instrument from the buyer (who receives the
credit protection) to the seller (who guarantees the instrument’s
solvency).
CoCos (Contingent convertible bonds): debt securities convertible
into capital if a specified event occurs. AT1 instruments are a type of
CoCo.
Common equity: a capital measure that takes into account, among
other components, ordinary shares, the share premium and retained
earnings. It does not include preferred shares.
Common Equity Tier 1: an entity’s highest quality capital, consisting
of equity mainly constituted by ordinary shares and retained
earnings and excluding preferred shares.
Concentration risk: the risk of loss due to large exposures to a small
number of debtors to which the entity has lent money.
Cost of credit: a measure of credit quality, calculated as the ratio
between loan-loss provisions and total lending
Annex » Glossary
Coverage of non-performing loans: a risk quality indicator,
expressed as the percentage of loans considered as doubtful which
are covered by loan-loss provisions.
Credit risk mitigation: a technique to reduce the credit risk of a
transaction by applying coverage such as personal guarantees or
collateral.
Credit risk rating: the result of the objective evaluation of the
future economic situation of the counterparties based on current
features and assumptions. The methodology for assigning ratings
depends largely on the type of customer and on the available data.
A wide range of methodologies to assess credit risk is used, such as
expert systems and econometric methods.
CRM (Customer Relationship Management): systems to manage
customer relations.
CRR (Capital Requirements Regulation) and CRD IV (Capital
Requirements Directive): these incorporate European rules to the
legal framework of Basel III.
EAD (Exposure at default): the amount that the entity could lose in
the event of counterparty default.
EBA (European Banking Authority): created in 2010, it began to
operate in 2011. The EBA acts as a coordinator between the national
entities responsible for safeguarding values such as the financial
system’s stability, transparency of markets and financial products,
and the protection of bank customers and investors.
ECB Governing Council: the main decision-making body of the
European Central Bank, consisting of all the members of the
Executive Board and the governors of the national central banks of
the euro zone countries.
Economic capital: the figure that demonstrates to a high degree
of certainty the quantity of capital resources the Group needs at
a given point in time to absorb unexpected losses arising from its
current exposure.
EDTF (Enhanced Disclosure Task Force): task force that issues
recommendations to enhance the transparency of information that
banks disclose to the market.
CSP (Commercial Strategic Plan): management model for
coordinating the planning and control of loan portfolios at Santander
Group, in which all those areas involved in managing portfolios
(risk, business, management control, capital, financial management)
participate in a comprehensive and coordinated way.
Efficiency ratio: calculated as the ratio between operating costs and
gross income. It measures how many euros an entity needs to spend
in order to generate €1 of revenue (an efficiency ratio of 50% means
an entity needs to spend €0.5 to generate €1 of revenue).
CVA (Credit Valuation Adjustment): valuation adjustment of over
the-counter (OTC) derivatives as a result of the risk associated with
the credit exposure assumed by each counterparty.
Derivatives: financial instruments that derive their value from the
performance of an underlying asset or index, e.g. bonds, currencies
or stock market indices.
Digital customers: for Santander a digital customer is an individual
or a company who, being a customer of a retail bank, has started to
use online banking, mobile banking or both, in the last 30 days.
DTA: Deferred tax assets.
DVA (Debt Valuation Adjustment): valuation adjustment similar
to the CVA, but in this case as a result of the risk with the Group
assumed by its counterparties in OTC derivatives.
EL (Expected loss): a regulatory calculation of the average amount
expected to be lost on an exposure, using a 12-month time horizon.
EL is calculated by multiplying probability of default (a percentage)
by exposure at default (an amount) and LGD (a percentage).
EPS (earnings per share): calculated by dividing a company’s profits
for the period by the number of shares comprising its share capital.
ESRB (European Systemic Risk Board): the body that has been
charged with macroprudential supervision of the European Union’s
financial system in order to contribute to preventing or mitigating
the systemic risk to financial stability.
Exposure: the gross amount that the entity could lose if the
counterparty is unable to meet its contractual payment obligations,
without taking into consideration the impact of any guarantees,
credit enhancements or credit risk mitigation transactions.
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281
Fully-loaded: denotes full compliance with Basel III capital adequacy
requirements (mandatory in 2019).
FSB (Financial Stability Board): international institution that
monitors and makes recommendations on the global financial
system.
GHOS (Group of Governors and Heads of Supervision):
supervisory body of the Basel Committee.
G-SIB (Global Systemically Important Bank) or SIFI (Systemically
Important Financial Institution): a framework is in place to
mitigate the possible impact of the insolvency of this type of bank on
international financial stability and particular economies.
ICAAP: Internal Capital Adequacy Assessment Process.
ICAAR: Internal Capital Adequacy Assessment Report.
IFRS: International Financial Reporting Standards.
ILAAP (Internal Liquidity Adequacy Assessment Process):
internal process to identify, measure, manage and control liquidity
implemented by the entity in accordance with article 86 of Directive
2013/36/EU.
IRB (Internal Ratings-based) approach: based on internal ratings
to calculate risk-weighted exposures.
IRP: initials in Spanish for the Pillar III disclosures report.
ISDA (International Swaps and Derivatives Association): the
organisation that establishes the framework contracts for over-the
counter (OTC) derivative transactions between financial institutions.
JST (Joint Supervisory Team): one of the main forms of cooperation
between the ECB and the national supervisors.
LCR (Liquidity Coverage Ratio): a ratio that ensures that a bank
has an adequate stock of unencumbered high quality liquid assets
that can be converted, easily and immediately, into cash in private
markets, in order to meet its liquidity needs for a 30 calendar day
liquidity stress scenario.
Leverage ratio: a complementary (non-risk based) regulatory capital
measure that attempts to guarantee the financial resilience and
strength of entities in terms of indebtedness. The ratio is calculated
by dividing Tier 1 eligible capital by exposure.
LGD (Loss Given Default): that part of EAD not recovered at
the end of the loan recovery process. It is equal to 1 minus the
recovery rate (i.e: LGD=1-recovery rate). The definition of loss used
to estimate the LGD must be a definition of economic loss, not an
accounting loss.
Loyal customers: customers who consider Santander as their main
bank.
LTD (loan to deposits): the ratio of loans to deposits, which
measures a bank’s liquidity.
LTV (loan to value): amount of credit extended/value of guarantees
and collateral.
Mark-to-market approach: in regulatory terms, an approach for
calculating the value of the counterparty credit risk exposure of
derivatives (present market value plus a margin, i.e. the amount that
takes into account the potential future increase in market value).
MiFID (Markets in Financial Instruments Directive): European
rules on investor protection in financial products.
MREL (Minimum Requirement for Eligible Liabilities): minimum
requirement of eligible liabilities with loss absorbing capacity. It
applies to European banks in the same way as total loss-absorbing
capacity (TLAC) applies to systemic banks.
Multiple Point of Entry: resolution by multiple points of entry.
It entails applying various powers of resolution, both of the local
authorities of the subsidiaries of a bank as well as the authorities of
the parent.
Netting: a bank’s ability to reduce its credit risk exposure by setting
off the value of the rights against its obligations with the same
counterparty.
Non-performing loan ratio: risk quality indicator. The relation
between loans considered as doubtful and total lending.
NSFR (Net stable funding ratio): this requires banks to have a
stable funding profile in relation to the composition of its off-balance
sheet assets and activities a ratio of net stable funding that ensures a
bank has a balanced balance sheet structure, in which stable funding
requirements are funded by stable liabilities.
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2016 ANNUAL REPORT
Annex » Glossary
Ordinary profit: profit excluding extraordinary results.
OTC (over-the-counter): bilateral transactions (e.g. derivatives) that
are not traded on an organised market.
RWA (Risk-weighted Assets): calculated by assigning a level of
risk, expressed as a percentage (risk weighting) to an exposure in
accordance with the relevant rules under the standardised approach
or the IRB approach.
PD (Probability of default): this represents the likelihood that a
customer or transaction will fall into default. It is the probability than
an event (the default) will occur within a given time horizon.
SREP (Supervisory Review and Evaluation Process): the European
Central Bank’s process for supervising and evaluating banks.
SRF: Single Resolution Fund.
SRMR: Single Resolution Mechanism Regulation.
SSM (Single Supervisory Mechanism): banking supervisory system
in Europe, consisting of the ECB and the relevant supervisory
authorities of the participating EU countries.
Standardised approach: used to calculate credit risk capital
requirements under Basel Pillar 1. The risk weightings used to
calculate capital are determined by the regulator.
TNAV (Tangible Net Asset Value) per share: indicator of
capitalisation. Tangible equity, calculated as the sum of equity
and valuation adjustments (excluding non-controlling interests)
after deducting goodwill and intangible assets/number of shares
(deducting treasury shares).
TLAC (Total Loss Absorbing Capacity): loss absorbing capacity of
global systemic banks. It enables a bail-in: investors, not taxpayers,
assume the losses.
Unexpected loss: unexpected losses (not covered by allowances)
must be covered by capital.
VaR (Value at Risk): metric that establishes the maximum expected
loss with a level of confidence and a certain time horizon.
VMG (management of non-performing loans variation): credit
management metric defined as the final balance less the initial
balance of non-performing loans for the period, plus write-offs, less
loan loss recoveries for the same period.
Phase-in: denotes compliance with current capital adequacy
requirements, taking into account the transition schedule for Basel
III compliance.
Pillar 1: Minimum Capital Requirements: the part of the new capital
accord that establishes the minimum regulatory capital requirements
for credit, market and operational risk.
Pillar 2: includes the supervisory review process. Internal capital
adequacy assessment process reviewed by the supervisor with
possible additional capital requirements for risk that are not included
in Pillar 1, and the use of more sophisticated methodologies than
Pillar 1.
Pillar 3: includes market discipline. This pillar is designed to
complete the minimum capital requirements and the supervisory
review process and, accordingly, enhance market discipline through
the regulation of public disclosure by the entities.
QIS (Quantitative Impact Study): ad hoc requests by the EBA
for studies analysing and calibrating the impact of new changes in
regulation.
RDL: Royal Decree Law.
Repurchase agreement (repo): contract whereby the seller
temporarily transfers ownership of securities to the buyer, and
undertakes to repurchase these assets at a future date and at a pre-
set price.
Risk appetite: the amount and type of risks considered as
reasonable to assume when implementing the Group’s business
strategy.
Risk premium: credit risk management metric that relates the VMG
to lending.
RoA (return on assets): this measures an entity’s return, calculated
as profit before tax as a percentage of total assets.
RoE (return on equity): this measures an entity’s return, calculated
as attributable profit as a percentage of capital.
RoTE (return on tangible equity): this measures an entity’s return,
calculated as attributable profit as a percentage of tangible capital.
RoRWA (return on risk-weighted assets): this measures an entity’s
return, calculated as profit as a percentage of risk-weighted assets.
2016 ANNUAL REPORT
283
General
information
Banco Santander, S.A.
The parent group of Grupo Santander was established on 21 March 1857
and incorporated in its present form by a public deed executed in Santan
der, Spain, on 14 January 1875, recorded in the Mercantile Registry of the
Finance Section of the Government of the Province of Santander, on folio
157 and following, entry number 859. The Bank’s By-laws were amended
to conform with current legislation regarding limited liability companies.
The amendment was registered on 8 June 1992 and entered into the Mer
cantile Registry of Santander (volume 448, general section, folio 1, page
1,960, first inscription of adaptation).
The Bank is also recorded in the Special Registry of Banks and Bankers
0049, and its fiscal identification number is A-390000013. It is a member
of the Bank Deposit Guarantee Fund.
Registered office
The Corporate By-laws and additional public information regarding the
Company may be inspected at its registered office at Paseo de Pereda,
numbers 9 to 12, Santander.
Corporate center
Santander Group City
Avda. de Cantabria s/n
28660 Boadilla del Monte
Madrid
Spain
General information
Telephone: 902 11 22 11 (Central Services)
Telephone: 91 289 00 00 (Customer support central services)
Relations with investors and analyts
Santander Group City
Edificio Marisma, Planta Baja
Avda. de Cantabria, s/n.
28660 Boadilla del Monte
Madrid
Spain
Telephone: +34 91 259 65 14
investor@gruposantander.com
Customer attention department
Santander Group City
Avda. de Cantabria s/n
28660 Boadilla del Monte
Madrid
Spain
Telephone: 91 257 30 80
Fax: 91 254 10 38
atenclie@gruposantander.com
Ombudsman
Mr José Luis Gómez-Dégano,
Apartado de Correos 14019
28080 Madrid
Spain
All customers, shareholders and the general public
can use Santander’s official social network channels
in all the countries in which the Bank operates.
www.santander.com
This report was printed on ecologically
friendly paper and has been produced using
environmentally friendly processes.
© March 2017, Grupo Santander
Photographs:
Miguel Sánchez Moñita, Lucía M. Diz,
Stephen Hyde, Javier Vázquez, Beto Adame
Production:
MRM Worldwide
Printing:
Alborada
Legal deposit:
M-7447-2017
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2016 ANNUAL REPORT
Annex » General information
www.santander.com