Annual
Report
2017
#Connected
In 2017 we obtained excellent results the right way: through profitable growth and a strong balance sheet, while helping people and businesses prosper
Our success in 2017 shows that
our way of doing business, and our
focus on building loyalty, is creating
a virtuous circle that delivers
growth, profitability and strength
We are one of the most
profitable and efficient banks in
the world, allowing us to lend
more to customers, increase
the per share dividend and
organically generate capital
Ana Botín,
Group executive
chairman of
Banco Santander
ATTRIBUTABLE PROFIT
(Millions of euros)
6,619
6,204
+7%*
2017/2016
2016
2017
* +7.4% in constant euros
Return on tangible
equity (underlying)
11.8%
Fully loaded
CET1 capital ratio
10.84%
Efficiency
(cost-to-income) 47.4%
NPL ratio
4.08%
Balanced geographic diversification is
key to our stable and predictable growth
UNITED
STATES
4%
OTHER
COUNTRIES
1%
UNITED
KINGDOM
16%
BRAZIL
26%
PORTUGAL
5%
MEXICO
7%
CHILE
6%
SPAIN
15%
SANTANDER
CONSUMER
FINANCE
13%
POLAND
3%
ARGENTINA
4%
Main countries
Contribution to underlying
Group profit, %.
Santander Consumer Finance
* Including Popular (3%).
2
Annual Report 2017
In 2017 we obtained excellent results the right way: through profitable growth and a strong balance sheet, while helping people and businesses prosper
Our leading positions in 10 core
markets, with a total population
of a billion people, provide us
stability and new opportunities
Our scale, our diversification and
the predictability of our business
give us strong foundations
on which to innovate
81%
employees believe
that their colleagues
behave in ways that
are more simple,
personal and fair
77%
of employees
are engaged
17.3 (+13%)
million loyal
customers
25.4 (+21%)
million digital
customers
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People
202,251
Communities
2.1
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helped in 2017
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Customers
133
million
Shareholders
4.0
million
44,862
scholarships
granted
in 2017
1,295
agreements with
universities
and academic institutions
in 21 countries
Figures excluding Banco
Popular, except number
of employees and data on
shareholders.
16.6%
total shareholder
return
+11%
cash
dividend
per share
growth
3
Annual Report 2017
Our purpose is to help people
and businesses prosper
Our contribution to society
Santander contributes to the economic and social progress of the communities in which it is present
People
€12,047 million
Personnel expenses1
€98 million
invested in employee training, with an
average of 39.6 hours of training per employee
97%
of employees have permanent contracts
Customers
€848,914 million
Loans outstanding (net)
Shareholders
€3,540 million2
Total shareholder
remuneration
Communities
€183 million
Social investment
Suppliers
€7,770 million
Payments to suppliers
Tax contribution
8/10
Lending grew in eight out of the Group’s ten
core markets, particularly household and
business lending
>250,000
microentrepreneurs supported in Brazil and
other countries
€88,410 million
stock market value at year-end 2017, largest in
the euro zone
€0.22
dividend per share, +7%3
€54 million
allocated to programmes and projects to
support communities
€129 million
allocated to universities
9,104
suppliers in the Bank's network
95%
95% of the Group’s suppliers are local
€7,972 million
Taxes paid
€4,137 million
corporate income tax
€3,835 million
social security payments and other payroll
taxes made by the Group, non-recoverable
VAT and other taxes
1. From Group audited accounts.
2. Subject to the approval of the fourth dividend against the 2017 results by the board of directors and the shareholders’ meeting.
3. Adjusted for the July 2017 capital increase.
4
Annual Report 2017 A responsible bank that helps address major global challenges:
financial inclusion, job creation and sustainable growth
Transparency
For Santander, transparency goes
beyond meeting legal or regulatory
disclosure requirements. It means
maintaining an open and fluid
dialogue with all its stakeholders.
This dialogue and the stable, lasting
relationships it engenders allows us to
be more responsive to relevant issues
that can arise and to our stakeholders’
expectations.
See more on page 48-51 of this report
The best company
to work for
Santander is one of the three best
banks to work for in the majority of its
core markets. In 2017 it launched a new
performance management model which
places importance on the corporate
culture and behaviours (40%) as well as
on business objectives (60%).
See more on pages 40-41 of this report
A trusted partner
for SMEs
SMEs are the main driver of job crea-
tion. Santander has a comprehensive
offering to help SMEs as they grow,
which goes well beyond just a finan-
cial offering. In 2017 it was named by
Euromoney magazine for the second
consecutive year as the Best Bank in
the World for SMEs.
See more on page 43 of this report
Committed to
higher
education
Santander invests more in
supporting higher education
than any other private company
in the world (according to the
Varkey Foundation in cooperation
with Unesco). The main areas of
focus are access to education,
job skills, fostering university
student entrepreneurs and the
modernization of universities.
See more on page 49 of this report
Inclusive,
sustainable
growth
Santander promotes financial
inclusion in order to support social
and economic progress in the
countries where it operates. The Bank
promotes microfinance programmes
in countries such as Brazil, Mexico
and Argentina.
See more on pages 50 of this report
Santander is one of the ten most highly ranked banks
in the world in the Dow Jones Sustainability Index
5
Annual Report 2017 Highlights in 2017
Santander celebrates
its 160th anniversary
Banco Santander celebrated
its 160th anniversary on
15 May 2017. The Bank
was founded in the city of
Santander, Cantabria (in the
north of Spain) to finance
the growing trade between
the port of Santander and
the Americas.
Openbank becomes
the first fully digital
Spanish bank
The new Openbank uses
an IT infrastructure hosted
in the cloud. This enables
it to offer a fully digital
proposition with innovative
features and meet the
highest security standards.
See more on pages 32-33
of this report
FULLY
digital bank
6
Increased target for
profitability
During the Group Strategy
Update held in New York in
October, Santander raised its
target for return on tangible
equity (RoTE) for 2018 from
11.0% to 11.5%. The increase
reflected the improved
economic outlook in some of
the Group's core countries.
+0.5 pp
increase in
RoTE target
Santander Río
integrates the
Citibank N.A.'s retail
business in Argentina
Santander Río in April
integrated the retail
business acquired from
Citibank N.A.’s Argentine
unit into its network. As
a result, it now has 482
branches, over 3.34 million
individual customers,
288,000 SMEs and 1,300
corporates
482
branches
3.6
million
customers
Banco Santander to
sponsor of the UEFA
Champions League
The Bank announced in
November that it will be the
official sponsor of the UEFA
Champions League for three
seasons starting in 2018.
The Champions League is
the world’s most prestigious
football club competition, with
mass audiences in Santander’s
core markets in Europe and
the Americas. The Champions
League final is watched live by
more than 160 million people.
Creation of Santander
X, a unique ecosystem
for universities and
entrepreneurs
Banco Santander and 40
universities launched in
October Santander X,
which aims to be the largest
platform in the world
for promoting university
entrepreneurship. This is a
network in which universities
and entrepreneurs from all
over the world will be able
to collaborate, share ideas
and knowledge, and attract
investment.
See more on pages 24-25
of this report
60
universities
engaged
Santander acquires
business from Deutsche
Bank in Poland
The Santander Group
reached an agreement to
acquire the commercial and
private banking business of
Deutsche Bank in Poland. This
transaction reinforces Bank
Zachodni WBK (the local
subsidiary of the Santander
Group) as the third bank
in Poland. The acquisition
is expected to generate a
15% return on investment
in 2021 and be accretive to
Santander's earnings per
share.
11.7%
combined market
share in lending
Santander Brazil
launches Superdigital,
a digital payment
platform
In April, Santander Brazil
launched Superdigital, an
online and mobile platform
that enables users to make and
receive payments with no need
for a bank account. By the end
of the year, Superdigital had
over 1 million users.
See more on pages 16-17
of this report
OVER 1
million users
Annual Report 2017 Santander Group
Awards in 2017
Santander acquires Banco Popular, strengthening
its leadership in Spain and Portugal
The Banker
Global Bank of the Year
Bank of the Year in
Latin America
Bank of the Year in
Brazil, Spain, Chile
and Portugal
Euromoney
Best Bank in the World
for SMEs
Best Bank in Latin
America
Best Bank in Brazil,
Poland, Chile, Puerto
Rico and Portugal
On 7 June 2017, Banco Santander acquired Banco Popular
following its resolution by European and Spanish
authorities. This transaction is underpinned by a good
strategic and business fit for the Santander Group
and will add value for customers and Banco Santander
shareholders.
The acquisition provided financial stability to Banco
Popular, enabling it to return to operational normality
after a strong outflow of deposits in the preceding
months, maintaining systemic stability and without
drawing on public funds.
Strengthening of the franchise
Expected return on
investment of
13-14%
in year three
Banco Santander + Banco Popular
Largest BANK
in Spain
19% market share
in lending
Portugal’s leading
private bank
~17% market
share in lending
Key fgures and milestones
of this acquisition:
A capital increase of Banco Santander
of €7,072 million to support the
transaction. The issue was eight times
oversubscribed.
The sale of 51% of Banco Popular’s
property assets, with a nominal value
of €30,000 million.
The launch of a voluntary
commercial action aimed at retail
customers affected by the resolution
of Banco Popular, with an acceptance
rate of 78%.
The appointments of new members
to the board of directors and its
committees:
Chairman of Banco Popular:
Mr Rodrigo Echenique.
Chief executive officer: Mr Rami
Aboukhair.
The sale of Totalbank of Miami,
Florida, to Chile’s Banco de Crédito e
Inversiones for US$ 528 million.
7
Annual Report 2017
Annual
Report
2017
1
2
34 A MODEL FOR SUSTAINABLE,
52 THE GROUP’S
PREDICTABLE GROWTH
RESULTS IN 2017
10 Message from Ana Botín
36 The Santander vision
54 Economic, banking and regulatory
16 Superdigital: Banking without a bank
18 Message from José Antonio Álvarez
24 Santander X: Opening doors to
university entrepreneurs
26 Corporate governance
32 Openbank: The digital bank that makes
your life easier
38 Creating value
40 People
42 Customers
46 Shareholders
48 Communities
update
58 Group results
61 Results by countries and businesses
The online version of the 2017 Annual Report will
be available as of the annual general meeting on
March 23rd. You can access via smartphone or tablet
by scanning the QR code.
http://www.santanderannualreport.com/2017/en/
8
Annual Report 2017 3
4
5
70 CORPORATE GOVERNANCE
110 ECONOMIC AND
196 RISK MANAGEMENT
REPORT
FINANCIAL REVIEW
REPORT
72 Executive summary
112 Consolidated financial report
74 Introduction
112 2017 Summary
75 Ownership structure
114 Santander Group Results
78 Banco Santander´s Board of
122 Santander Group Balance sheet
128 Liquidity and funding risk
management
198 Executive summary
200 Risk management and control
model - Advanced Risk Management
201 Risk map
201 Risk governance
203 Risk culture - Risk Pro
204 Management processes and
directors
99
Group structure and governance
framework
102
Shareholder rights and the general
shareholders’ meeting
104
Santander Group magement team
106 Transparency and independence
108 Challenges in 2018
136 Capital management and adequacy.
tools.
Solvency ratios
148 Geographical footprint
150 Continental Europe
166 United Kingdom
169 Latin America
184 United States
187 Corporate Centre
189 Global businesses
189 Retail Banking
192 Global Corporate Banking
211 Background and upcoming
challenges
213 Risk profile
213 Credit risk
243 Trading market risk, structural
risk and liquidity risk
264 Operational risk
274 Compliance and conduct risk
285 Model risk
287 Strategic risk
288 Capital risk
294 Historical data
296 Glossary
300 General information
9
Annual Report 2017
Message from Ana Botín
Simple, Personal and
Fair – these three words
are the bedrock of a
responsible bank, and
of a digital bank
10
We are living in an age of unprecedented change.
An economic revolution, powered by digital
technology, which is creating new challenges and
opportunities at a pace we have never seen before.
That change is having an impact on politics and
society on every continent. And for Santander, it
has an impact on how we do business.
To succeed in this revolution, a business needs
one thing more than anything else: loyalty.
Why? Because people have more choice and
information than ever before. Consequently,
the expectations people have of businesses are
higher than ever before. People don’t just expect
to be treated personally, quickly and fairly – as an
employee or a customer. They expect businesses
to go the extra mile in the communities they serve:
to make a profit, yes, but to do so in a way that
benefits society overall.
Get this right and a business can prosper from
the virtuous circle of loyalty. Research shows that
employees are more likely to be motivated if they
work for a company with a strong social purpose.
Their motivation means better customer service,
building customer loyalty. That loyalty delivers
sustainable returns. And those returns build loyalty
among shareholders, and enables the business to
invest and do more in the communities it serves,
fulfilling its purpose.
All of this is reflected in Santander’s approach to
business. Our purpose is clear: to help people
and businesses prosper. Our aim is to be the best
retail and commercial bank, by earning the lasting
loyalty of our people, customers, shareholders and
the communities we serve. How do we achieve
this? By being Simple, Personal and Fair in all we do.
These three words are the bedrock of a responsible
Message from Ana BotínAnnual Report 2017 People expect businesses
to go the extra mile in the
communities they
serve: to make a profit,
but to do so in a way that
benefits society overall
Our strategy is working
Growth
bank. They are also the hallmarks of a digital bank.
Digital banking is simple. A digital bank uses data to
personalise its service. And a digital bank – like any
good business – treats those it serves, and those
who work for it, fairly.
I am confident that we can deliver this aspiration
by applying the wisdom and experience we have
built up over generations to innovate and reinvent
banking, while maintaining the strengths that have
made us successful. We can do so because
• our growth, profitability and strength show our
strategy is working
Our success in 2017 shows that our way of doing
business, and our focus on building loyalty, are
creating a virtuous circle that delivers growth,
profitability and strength. The Group again
delivered very strong results for the year, ahead of
plan on all our targets – growing underlying profit
before taxes by 20% and earning the loyalty of a
further 2 million customers. We have endeavoured
to create value for our customers, by lending more
to them (our loans book is up 2% compared to last
year excluding Popular), and by improving our value
proposition (customer funds are up 8%).
• our scale, diversification and predictability give
Here’s the detail.
us strong foundations to innovate
• our culture – our relentless focus on being a
responsible bank – will strengthen people’s
loyalty in our brand.
Let me take each of those in turn.
Growth: Last year, I said we would increase
our number of loyal customers by a further 1.8
million to 17 million, and invest in technology
to raise the number of digital customers to 25
million. We have achieved these targets, with loyal
customer growth of 13% compared to last year to
17.3 million, and digital customer growth of 21%
to 25.4 million. This had positive impacts on our
revenues – in particular the net fees line grew by
14% to €11.6 billion.
Loyal Customers
17.3 million
(+13%)
Digital Customers
25.4 million
(+21%)
Customer revenues
€45,892
million (+11%)
11
Annual Report 2017 We have strong foundations.
We have scale. We are
diversifed. Our business
is predictable
Profitability: Santander is one of the most
profitable banks in the world (10.4% RoTE) and, as
I set out last year, we maintained a broadly stable
cost to income ratio making Santander one of
the most efficient banks in the world (47% cost
to income ratio). This allows us to lend more to
customers; increase dividends (11% cash dividend
per share increase) and generate capital through
organic growth (53 bps increase) all at the same
time.
Brazil, despite political and economic uncertainty
we grew our revenues by 18% compared to last
year, the strongest growth among all banks, while
narrowing the gap in profitability compared to
our peers. In the United States, 2017 was a pivotal
year for Santander US with significant progress on
regulatory and business issues: we passed Federal
Reserve’s qualitative capital stress test, made the
first dividend payment to Group since 2011, and
grew underlying profit by 5%.
Strength: I said that in 2017 our aim was to
increase our earnings and dividend per share; and
that we would do this while continuing to grow
our capital towards our target of reaching more
than 11% Fully Loaded Common Equity Tier 1 by
2018. How have we done? We have grown our
attributable profit per share by 1% compared to
last year, and we have increased our FL CET1 by
29 basis points to 10.84%, on track to achieve our
2018 target.
As a result of our growth, profitability and
strength, we were able to acquire Banco Popular
when it ran into difficulties. We executed the
transaction without government assistance,
acting fairly with respect to Popular’s teams
and customers and in the best interests of our
shareholders. I would like to congratulate our
team who worked tirelessly to put in place the
€7 billion capital increase to support the deal
within weeks, and thank our shareholders for their
confidence in us.
It was followed by the largest sale of real estate
assets in Spanish history and a responsible
approach to dealing with depositors, with the aim
of ensuring their business remained within the
Santander Group.
This has obviously been a highlight of the year,
but it should not overshadow what has happened
elsewhere. We will expand in Poland after
reaching an agreement to buy part of Deutsche
Bank’s business. In the United Kingdom, as our
business prepares for the challenge of Brexit,
we have seen sustained strong performance. In
Strong foundations to innovate
This performance matters as we implement our
plans for digital growth, as behind these dry
statistics lie some key points.
First, we have scale – and scale gives us insight.
We don’t simply have 133 million customers:
we know those customers – and in the case of
our 17 million loyal customers, we know them
very well. In my mind, it’s much better to have
a deep understanding of many customers in
10 core markets, than it is to have a shallow
understanding of the same number of customers
in dozens of markets. In the digital age, that
depth of insight combined with our scale is
invaluable, and those relationships are priceless.
Second, we are diversified. Our business is
mostly focused on retail banking, serving a
diverse range of customers, and is balanced
between developed economies and emerging
economies and between Europe and the
Americas, where growth is expected to be
strong in 2018. The US will see its ninth year
of economic expansion – the longest upward
cycle since 1850 – which will help propel growth
elsewhere. In the Eurozone, we expect to see
strong growth of 2.3%. Looking at our major
markets, Spain is forecast to see its fourth
consecutive year of growth of around 3%; while
the UK's economic growth, although expected
to be subdued due to uncertainty caused by
Brexit, is forecast to be 1.4%. Meanwhile the
Brazilian economy, having returned to growth
in 2017, is expected to grow by 3.2%, supported
Profitability
Cost to income ratio
47.4%
(-70 bps)
RoTE
10.4%
(+3 bps)
Strength
Attributable Profit
€6,619
million (+7%)
FL CET1
10.84%
(+29 bps)
12
Message from Ana BotínAnnual Report 2017 We aim to redefne banking in
a way that serves the distinct
needs of all our customers,
through common, efficient and
flexible global platforms
by historically low interest rates: business
confidence is at the highest levels of the last
years. And in Mexico, while the economy is
still overcoming the uncertainty regarding the
renegotiation of NAFTA and the impact of the
September earthquake, it is expected to benefit
from structural reforms.
Our leading position in 10 core markets, with an
aggregate population of a billion people, gives us
stability and presents us with new opportunities.
In these markets, digital technology is making
it easier to win new customers – especially the
160 million people in Latin America who are
“unbanked.” And thanks to our global network,
I see great potential in developing relationships
to serve our customers better along natural
corridors of economic opportunity – such as
between Brazil and Argentina, or the United
States and Mexico.
Third, our business delivers predictable results
throughout the economic cycle. This is
because we are diversified, and thanks to our
leading market shares in nine of our 10 markets,
which allows us to sustain consistent and
predictable results. Compared with our peers,
for the last twenty years Santander has had the
lowest volatility in earnings. This enables us to
pay dividends, grow our business, invest in new
technology, and as in last years to organically
generate capital.
And this brings me to our approach to
innovation. Our sector, like all sectors, faces
the challenge of the digital revolution. We aim to
redefine banking in a way that serves the distinct
needs of all our customers, through common,
efficient and flexible global platforms, which can
support our local businesses. Our customers
want services that are frictionless anytime,
anyhow and anywhere. To provide that we need
platforms that are resilient and flexible.
To achieve this, we describe our approach
to innovation as reliable "supertankers” and
agile "speedboats”. The supertankers are our
established businesses, carrying the bulk of our
revenues and our growth. The speedboats are
our new opportunities, with the flexibility to
race ahead of our competitors. Each shares their
experiences and all perform better as a result.
In 2017 we showed what this means in practice.
In Spain, we relaunched Openbank with its own,
new IT structure and new team. It now serves
1 million customers, offering a full range of
services – from stocks to mortgages, but only
has one branch and just 70 fulltime employees,
some of whom have never worked for a bank
before. In Brazil, SuperDigital – which allows
customers to carry out transactions on their
phones without the need for a bank account –
is growing at around half a million customers a
year.
Meanwhile, we’ve been investing and innovating
in new payment systems. Santander is likely
to be one of the first global banks to roll out
in the next few months our distributed ledger
technology to retail customers across Europe
and the Americas, bringing real benefits by
reducing the speed of international payments
from 2-4 days to end of day/overnight. We have
completed live pilots in the UK and Spain, with
over 1,500 payments made for a value of €2
million. Leveraging this technology and other
state of the art solutions, Santander Pay aims
to become the definitive crossborder payment
solution for our customers worldwide.
As the digital world of financial services
continues to grow, much of today’s regulation
remains rooted in the analogue age. Many
insurgent market entrants do not always face the
same rigorous regulation as banks like Santander.
Over time, the regulation of these businesses
must and, I believe, will develop, guaranteeing
a level playing field promoting innovation for
banks as well as for new entrants. I am certain
that reliable, responsible businesses with loyal
customers, led by Santander, will emerge as the
winners.
Shareholders
Cash Dividend
per share
€0.19/
share
(+11%)
Tangible Net Asset
Value per share
€4.15/
share
(+6% excluding
exchange rate impact)
Attributable Profit
per share
€0.40/
share
(+1%)
Total Shareholders’
return 2017
16.6%
(vs. 12%
European banks)
13
Annual Report 2017 Putting our purpose at the
heart of our business is
critical if we are to be a truly
responsible bank. Our actions
need to match our words
A responsible bank
This brings me to the theme of responsibility. There
are many hallmarks of a responsible bank, but here I
would like to single out a few: a strong team that lives
by clear values and behaviours; good governance; and
a strong sense of purpose that drives the business.
Let me start with the team. To thrive in today’s
world, we obviously need to attract and retain the
best talent. But we also need to attract a diverse
team (women now make up 36% of our board), so
that we are better able to understand and serve our
customers. If we are to build this team, we need offer
people great opportunities. But today, people want
more than that. As I mentioned above, people want
to work for a company that lives by its values, has a
strong sense of purpose, and gives them the chance
to make transformational change that benefits
millions of people.
Building this team will enable us to implement change
at pace – which requires us to work with agility and
focus. This year, we’ve shown how we can work
better, together, across all markets where we operate.
Example of this active collaboration are the four
speedboats launched, which are global businesses
with key executives from various countries.
But there is more to do. A strategic target for us this
year is to focus on developing our businesses by
fostering greater collaboration. Each of our businesses
has local management and is locally responsive, but
I want to see them extract full value from being part
of a group, so we continue to create the best possible
products for our customers. And, wherever our
businesses operate, we want to ensure that everything
they do is Simple, Personal and Fair.
To turn these three words into reality, we are
embedding our common culture in the day to day of
all our teams, encouraging them to live by eight key
behaviours. Starting in 2017, under our newly created
performance management system, MyContribution,
40% of variable remuneration is linked to how
well employees live our behaviours. This applies to
our leadership as well. Across all markets, we have
undertaken a series of initiatives (such as KISS – Keep
It Simple Santander in the UK) to change processes
so they are Simple, Personal and Fair. Alongside this,
we have also made changes to our governance, to
ensure that we have easy to understand policies
and procedures, and clear lines of accountability
so everyone knows who is responsible for what;
transparent processes, so we, our regulators and, where
appropriate, the public can see how decisions are made;
and clear metrics, so we can assess our performance.
I also want to take the opportunity again to thank
Matías Rodríguez Inciarte and Isabel Tocino
Biscarolasaga for their great contribution in our Board.
Matías, in particular, has been a key senior executive,
a board member for more than three decades and an
important part of Santander's history. And I would
like to welcome Ramiro Mato García-Ansorena, who
I am certain will add much value thanks to his broad
financial and international banking experience.
Above all, we need to be sure that we are managing
risks in a prudent, responsible way. This year, for
instance, we upgraded all of our credit risk models
across the group to reinforce the sustainability of our
business, and we have increased our investment in
Cyber Security to stay at the forefront of technological
advances in the field. We have also dramatically
reduced our exposure to real estate in Spain, which
will reach nonmaterial levels by the end of 2018.
More than that, though, I want to ensure that we are
fulfilling our purpose – to help people and businesses
prosper. Putting that purpose at the heart of our
business is critical if we are to be a truly responsible
bank. Our actions need to match our words. For
example, I was immensely proud of how our teams
in Puerto Rico and Mexico responded to the crises
caused by both Hurricane Maria and the earthquake,
donating time and money to help those in need. Our
scale and strength gives us the ability not just to help
in these circumstances, but to support inclusive and
sustainable growth wherever we operate. In doing so,
we need to tackle three major challenges.
The first challenge: Two billon people still have no
access to the financial system. But once they have
a mobile phone and can get online, they can gain
access to a bank. They don’t need to travel to deposit
money or take out a loan or get insurance. The bank
is there in their hands. This is empowering millions of
Responsible
bank
More than 250,000
microentrepreneurs
supported
Financial inclusion
programmes to more
than 300,000 people
€129 million invested
in education in 2017
14
Message from Ana BotínAnnual Report 2017
The challenge we face is nothing less
than the reinvention of banking. Our
results, our targets, and above all our
approach, show that Santander is
rising to that challenge – and winning
people especially women. Between 2011 and 2014, 700
million people became account holders at banks or
other financial institutions for the first time, reducing
the number of “unbanked” adults by 20 percent. As
I mentioned above, our services and products are
already bringing the unbanked into the financial system,
enabling them to share the benefits of growth. In 2017,
we supported more than 250,000 entrepreneurs with
microcredits, mainly in Brazil, and our financial inclusion
programmes have reached more than 300,000 people.
Our aim is to up the pace, and do even more.
The second challenge: 600 million jobs need to be
created over the next 15 years to match the growth
in the global workforce. Many of these jobs will be
created by small businesses, which are the engine of
economic growth. And those jobs will largely go to
people with skills needed in the digital age. To help
these businesses grow, we will use technology to
provide a personalised service, giving them online
advice and helping them to export to foreign markets.
We’ve created a global online network so we can put
a small business in Warsaw or Oporto in touch with
potential customers in São Paulo or Mexico City.
And these new businesses need to be sustainable
businesses – which is the third challenge: the need
for sustainable growth. Banks need to help businesses
act in a socially responsible way. That means a number
of things, such as supporting businesses as they cut
carbon emissions and make the transition to the green
economy; financing innovation in green technology;
encouraging businesses to operate in a way that
supports local communities, respect human rights and
encourages inclusive growth. Thanks to Santander’s
footprint and scale, we are in a good position to
support businesses that do this.
By supporting inclusive and sustainable growth
in this way, we shall do even more to help people
and businesses prosper. And our efforts will be
supported by the unique multinational network of
1,300 universities that Santander has created over
several decades. Santander is the largest corporate
contributor to education in the world, investing 129
million euros in 2017 alone. Our task now is to work
with this network – the research, innovation and
skill of these universities – to create a formidable
partnership to tackle these global challenges.
Main targets
for 2018
18.6
million loyal
customers (+8%)
30
million digital
customers (+18%)
RoTE
more than
11.5%
Fully loaded
CET1 above
11%
EPS
Double digit
growth
Cash DPS
Growth
Looking ahead
As I look to the future, there will be many
challenges to address: the supervisory and
regulatory regime, especially in Europe and in the
UK; emerging risks related to the normalization
of interest rates, exchange rate headwinds
from a strong euro; and continuing geopolitical
volatility. However, my team and I look ahead with
confidence. Strong growth, digital innovation,
meeting the global challenges – all this is why I
believe Santander’s best days lie ahead. As the
world changes, so will we.
We will provide more details on how we are
transforming ourselves to be prepared for future
challenges at our Investor Day in October 2018. For
this year, I would like to remind you of our strategic
targets:
Growth: We aim to have 18.6 million loyal
customers (an 8% increase) and 30 million digital
customers (an 18% increase).
Profitability: We are targeting a RoTE of more
than 11.5%.
Strength: We are aiming for FL CET1 above 11%.
And for our shareholders, we reiterate our targets of
reaching double digit growth in earnings per share
and growing our cash dividend per share in 2018.
So let me end where I began. We are living through an
economic revolution. The challenge we face is nothing
less than the reinvention of banking. Our results,
our targets, and above all our approach, show that
Santander is rising to that challenge – and winning.
Your continued support is key, and I would like to
thank you for your trust.
Ana Botín
Executive Chairman
15
Annual Report 2017 Superdigital
Banking
without a bank
Superdigital is a mobile platform for
making deposits, withdrawals and
payments even if you do not have a
bank account. Santander Brazil launched
Superdigital using its own tools and
technology. Developed as a mobile-first
solution, Superdigital is simple and easy-
to-use. For many customers, it has become
their main financial services channel.
Superdigital will soon offer its customers
microcredits as well.
Luiz Fortunato, centre, law student and
Superdigital customer, with his friends
in the Praça Pôr do Sol of Sao Paulo.
16
Financial services available to everyone
“I use Superdigital to buy directly online,
without paying charges to any bank
because I hardly use the services they
offer me,” explains Rafael De Menezes, a
Brazilian university coordinator, aged 32.
“The app is designed to be used by young
people. It is very intuitive,” he added.
“THE APP IS
YOUNG PEOPLE. IT IS
DESIGNED FOR
“We needed to
reach customers
who consumed
and thought
differently.
Superdigital is
an incredible tool for this market because
it is a live, democratic product. It is for
everyone,” explains Ezequiel Archipretre,
CEO of Superdigital.
VERY INTUITIVE”
Superdigital is a digital payment platform
that is defined as simple and young. It
was relaunched with an eye on the new
generations. “When we discussed the
product concept, we knew we had to
do things differently,” explains Renata
Canin, Superdigital’s head of marketing.
To achieve this when they developed the
app, they took into account the opinions
of nine influencers with millions of
followers in Brazil.
“Superdigital provides people with a
totally different experience from the
one on offer in the traditional financial
market,” explains Fernando Oliveira,
the software development manager.
One of the most interesting features is
being able to chat among users, just like
a messaging app. “In December alone,
600,000 messages were exchanged using
Superdigital,” notes Mr Oliveira.
Another Superdigital functionality
is splitting expenses among groups
(“vaquinhas”). What Rita Siqueira, a
22-year-old university student and
call centre
supervisor,
likes most
about
Superdigital
is how easy
it is to buy
bus tickets in
São Paulo. “It's very
simple. Superdigital saves me a lot of
time,” explains Ms Siqueira.
Rita Siqueira
But Superdigital targets not only
young people. In Brazil, 32% of over-
15s do not have a bank account. “We
have agreements in place in less
usual segments for the Bank, such as
agribusiness and temporary employment
agencies,” explains Ezequiel Archipretre.
At the end of 2017, Superdigital had
more than a million customers.Of these,
350,000 belong to segments classified
as “of little interest” for the traditional
financial services system.
MAKES US INCLUSIVE
“SUPERDIGITAL
“This is crucial
for Santander
Group as a
whole,” adds
Sergio Rial, CEO
of Santander
Brazil. “It enables us to broaden our
possibilities of banking the unbanked.”
IN BRAZILIAN
SOCIETY”
“We are reaching different profiles and
new types of customer. It makes us more
inclusive in Brazilian society and is the
perfect complement to our portfolio,”
concludes Mr Rial.
17
Message from
José Antonio Álvarez
Grupo Santander carried out its business
in 2017 in a more favourable environment,
one of the most positive in recent years.
The global economy and, in particular,
the economies of the countries where the
Bank operates, secured the upswing seen
in the second half of 2016. The low interest
rates in mature economies continued to be
the most unfavourable factor for banking
activity.
In this environment, Grupo Santander results
again underscored the soundness of our
business model. Underlying profit grew at
double-digit rates at Group level and in most
countries, the RoTE was one of the sector’s
highest and our capital ratios increased further.
I would like to thank our more than 200,000
professionals, as the results achieved in 2017
would not have been possible without the
contribution of each one of them.
Our objective is to consolidate our position
as the best retail and commercial bank for
our employees, customers, shareholders
and society in general. To this end, we must
continue to strengthen the pillars of our
corporate culture, being Simple, Personal and
Fair in all we do. We are convinced this is the
best way to lay the foundations for progress
and improve not only the quality of the income
statement, but also the company’s value and
the share price.
18
Annual Report 2017 Grupo Santander
results again
underscored the
soundness of our
business model
The Group’s performance in 2017
Our priorities were to:
1. Continue our commercial transformation,
both in the traditional banks as well as via
new units that work independently under a
start-up model. Their objective is to create
agile and innovative platforms, focused on
creating synergies for the Group. In 2017
we invested around €1 billion in global and
digitalisation projects, and we have similar
plans for the coming years.
2. Strengthen our position in the markets
in which we operate. As well as organic
growth in most of our countries (mainly in
developing markets), 2017 presented us with
new acquisition opportunities. The most
notable transaction was the purchase of
Banco Popular, which enabled us to reinforce
our leadership in Spain and Portugal, with the
clear aim of generating shareholder value. We
also improved our position in retail banking
in Argentina, increased stake in Santander
Consumer USA and reached an agreement to
acquire the retail and commercial business of
Deutsche Bank in Poland.
3. Exit non-core businesses in order to
improve the Bank’s profitability. Of note
were the sales of 51% of Banco Popular’s real
estate business to Blackstone and TotalBank
in the United States.
We posted an attributable profit of €6,619
million, 7% more than in 2016. These results were
hit by some non-recurring impacts amounting
to a net negative €897 million, mainly to do
with amortisation of goodwill and ongoing
optimisation plans.
Profit before extraordinary results was
14% higher at €7,516 million. Nine of the core
units increased their earnings, seven of them at
double-digit rates.
Gross income rose 10% to a record €48,392
million, driven by double-digit growth in
net interest income and fee income which
together generated 95% of revenues. This
enabled us to grow consistently and recurrently.
Attributable profit
€6,619
million
+7%
Gross income
€48,392
million
+10%
Record gross income
Double-digit growth
in net interest income
and fee income
19
Annual Report 2017 Loyal customers
Digital customers
+13%
+21%
The number of digital customers grew 21% and
loyal clients 13%. Their increase was important
for securing quality growth in the income
statement.
Operating expenses remained stable in
real terms and on a like-for-like basis, despite
higher regulatory costs and investments in
transformation. The focus on operational
excellence and digitalisation has enabled us
to continue to be the reference in efficiency
terms, while our units in seven of our core
countries are among the top three in customer
satisfaction.
The 4% decline in loan-loss provisions and the
continued improvement in the cost of credit
(to 1.07%) reflect a proactive risk management
that has enabled us to keep on enhancing the
quality of the portfolio and reduce the NPL
ratio to 4.08%.
We are conscious of the importance of
strengthening the risk culture of all the
Group’s employees, bolstering, among others,
processes in cyber security, prevention
of money laundering and operational and
reputational risk.
The balance sheet:
• Lending, which rose 12%, was balanced
between individual customers, consumer
credit, SMEs and corporates. Customer
funds, increased 17%. Both loans and funds
were driven by strong growth in developing
countries and by the integration of Banco
Popular. Excluding Popular, growth would
have been 2% and 8%, respectively. All figures
are stated at constant exchange rates.
• The Bank’s liquidity position is very
comfortable, as is that of all its units. The
liquidity ratios easily meet the minimum
requirements.
• We have generated capital quarter after
quarter. In fully loaded terms, we reached
a CET1 ratio of 10.84%, while comfortably
meeting the legal requirements.
We ended 2017 with an underlying RoTE of
11.8%, one of the highest among international
banks, and an underlying RoRWA of 1.5%,
which we expect to keep on improving in
2018, as we take measures to more efficiently
manage risk weighted assets and consumption
of capital.
The market positively assessed our strategy and
its impact on business. The total shareholder
return (TSR) was 16.6% in 2017.
Performance of the units in 2017
There are two aspects of business that I consider
particularly important.
The first is the excellent geographic
diversification of our results between mature
and developing markets, which gives us
stability, recurrence and growth greater than
that of our competitors.
The second is that we see a consistent
improvement in countries’ profits as well
as in their main metrics: customers, cost of
credit, efficiency and profitability.
Spain excluding Popular
We combined the acquisition of Banco Popular
and the first steps of its integration with the
execution of our strategy in Santander and a
very positive business performance.
Operating expenses
stable in real terms and
on a like-for-like basis
Cost of credit
improvement
and proactive
risk management
20
Mensaje de José Antonio AlvarezAnnual Report 2017 We ended 2017 with an underlying RoTE of
11.8%, one of the highest among international
banks, and an underlying RoRWA of 1.5%, which
we expect to keep on improving in 2018
The 1l2l3 account helped us to add close to
600,000 loyal customers (+42%) in 2017 and
the number of digital customers rose 15%,
spurred by the launch of Digilosofía. The new
means of payment strategy led to record sales
of cards and we are the mobile payments leader
in Spain. This growth produced market share
gains in the main products.
Of note in results were the increase in fee
income, lower operating expenses and the
decline in loan-loss provisions, due to the better
credit quality, all of which offset the pressure
on net interest income and boosted profits.
United Kingdom
Business was carried out in an environment
of lower growth and uncertainty over Brexit.
Customer loyalty remains our priority, aided by
1I2I3 World, the commercial transformation and
operational excellence.
Activity evolved very positively. The current
account balances of individuals, mortgages
and corporate loans and deposits all increased.
The results in the upper part of the income
statement were robust, although specific
provisions and amortisation of intangibles
dented profit.
Popular
Banco Popular’s incorporation produced a loss
of €37 million, due to extraordinary charges
made for integration costs. Excluding these,
underlying attributable profit was €263 million.
Santander Consumer Finance
SCF is Europe’s consumer finance leader.
The unit continued to advance in its strategy
of striking brand agreements with car
manufacturers and European distributors.
We began to integrate Banco Popular, a process
that is expected to be completed in the next
two years. We have been very careful to ensure
this process is done in the most reasonable way
in order to attain the efficiency levels promised
to the market, but also looking after those
affected and treating them appropriately.
A commercial action was also taken for
customers of Santander and Popular who
were shareholders of Banco Popular. This was
successfully completed, with 78% acceptance of
the loyalty bonds subscription offer.
Lastly, I would like to point out that we see a
recovery of business momentum, reflected in
growth in deposits and a slower decline in loans,
which were stable in the fourth quarter.
Profit grew for the eighth year running, spurred
by a positive trend in revenues, larger volumes
and high geographic diversification. The
efficiency ratio and cost of credit were also at
historically low levels. RoTE increased to 16%.
United States
Santander US passed the Federal Reserve’s
stress tests in 2017, both quantitative and
qualitative. This will enable us to focus on
improving the profitability of retail and
commercial banking, reducing duplications in
costs and optimising the structure of capital, as
Santander Holding USA begins to normalise its
policy of paying dividends to the Group.
Underlying profit rose 5%. The final profit was
hit by impacts stemming from the hurricanes,
increased stake in Santander Consumer USA
and the tax reform.
Spain exc. Popular
Proft
€1,180 (+46%)
million
Popular
Proft
-€37
million
United Kingdom
Proft
€1,498 (-3%*)
million
Santander
Consumer Finance
Proft
€1,168 (+4%*)
million
United States
Proft
€332 (-7%*)
million
* Excluding fx impact
21
Annual Report 2017 Banco Santander's solid position in
10 core markets puts us in a
privileged position to seize the
opportunities that arise
Portugal
The acquisitions of Banif and Popular bolstered
Santander Totta’s position as the largest private
sector bank in Portugal, gaining market share
in new lending to companies as well as in
mortgages and positioning it as the country’s
most profitable bank.
In addition, the good performance of the 1I2I3
World programme facilitated organic growth in
loyal and digital customers, increased volumes
and boosted profit by 10%.
Brazil
2017 was an excellent year for our franchise
in Brazil. We gained market share, and profit
evolution reflected the profitable, sustainable
and customer-focused business model, coupled
with solid organic growth.
Profit was 34% higher, growth that was well
above the sector, underpinned by a significant
increase in net interest income and fee income,
the fruit of the commercial strategy and greater
customer loyalty. These growth rates, together
with a lower cost of credit, pushed up RoTE to
17%, higher than in 2016.
The strength of our franchise, combined with
better macroeconomic prospects, make us
optimistic about recurring results in the future.
Mexico
We are strengthening the distribution model
and investing in systems and infrastructure that
focus on multichannel innovation, digitalisation
and the launch of new business initiatives.
Attributable profit rose 16%. Of note was the
13% increase in net interest income. The RoTE
reached more than 19%.
Chile
We continued to consolidate our commercial
transformation, launching digital onboarding,
the first fully digital system, and opening
more WorkCafé branches. Penetration of high
income, SME and large company segments
remained a priority, and we began to recover
growth in the mass consumer market.
Profit was 12% higher, thanks to a moderate rise
in gross income, control of operating expenses
and a lower cost of credit.
Argentina
Our bank has a leading position in a
country with a high growth potential of the
banking system. A greater financial stability
environment should enable us to capture this
growth and translate it into profits.
Attributable profit was 14% higher than in 2016,
driven by gross income growth.
Poland
At the end of 2017 we announced the
agreement to acquire Deutsche Bank’s
commercial and private banking business in
Poland, which will strengthen our position
(market share of 12% in loans and 11% in
deposits). Our aim is to continue to lead in
digital channels and innovation.
Profit was in line with 2016 when it benefited
from capital gains. Excluding this impact,
profit was 8% higher thanks to growth in gross
income, control of costs and lower provisions.
The units in Uruguay and Peru increased their
profits 19% and 7%, respectively. Uruguay’s
were driven by net interest income and fee
income. Peru maintained activity, despite the
economic downturn, and the cost of credit
dropped.
Global Segments
Global Corporate Banking, our wholesale
banking business, gained market share in high
value-added businesses, under a strategy that
places particular importance on efficient use
of capital. Santander is securing its leadership
Portugal
Proft
€440 (+10%)
million
Brasil
Proft
€2,544 (+34%*)
million
Mexico
Proft
€710 (+16%*)
million
Chile
Proft
€586 (+12%*)
million
Argentina
Proft
€359 (+14%*)
million
Poland
Proft
€300 (-3%*)
million
Global Corporate
Banking
Proft
€1,821 (+1%*)
million
* Excluding fx impact
22
Mensaje de José Antonio AlvarezAnnual Report 2017 and market position in Spain, Portugal and Latin
America. Also noteworthy was the significant
growth in our cash management platform for
multinationals and a continuous improvement
in the services for retail clients. GCB is
establishing itself as one of the most profitable
units in RoRWA terms.
Lastly, we created the Wealth Management
Division, which will integrate the private
banking businesses and asset management. The
creation of this division means focusing efforts
on a segment that is efficient in terms of capital
consumption and which boosts fee income.
2018 Objectives
The estimates for 2018 point to GDP growth
of around 2% in both mature economies as well
as in Latin America.
Banco Santander’s solid position in its 10
core markets puts us in a privileged position
to seize the opportunities that arise. Our
focus in mature markets will be on improving
profitability, adapting the business models in
order to increase customer satisfaction and gain
market share. In developing countries, we will
try to use the good conditions to gain market
share and improve, even more, our operational
efficiency.
We attained our goals in 2017 and begin 2018
in a good position to reach those for this year
announced at the Group Strategy Update.
In order to achieve these objectives, we have
set the following goals and management
priorities:
• Improve the quality of the income
statement in an environment with significant
pressure on spreads.
• Gain market share on a sustained basis, as
our growth opportunities are in those markets
in which we already operate.
• Continue the commercial and digital
transformation without affecting the
efficiency ratio. Offset the investment plan
with measures to optimise costs.
• Improve the main risk metrics. Manage
the higher loan-loss provisions derived from
greater lending and the impact of the new
accounting regulation on recognition of
provisions (IFRS9).
I would like to end by thanking our more
than four million shareholders for their
confidence in Banco Santander. We
are working to give them personalised
attention, listening to their concerns and
informing the market continuously and
transparently on our daily activities.
Our priority is to increase the profitability
of their investment in a sustainable way
and to this end we are dedicating our best
efforts.
José Antonio Álvarez
Chief executive officer
2018 financial
objectives
announced at the
Group Strategy Update
RoTE
> 11.5%
Earnings per share
Double-digit
growth
Cash dividend
per share
Increase
Fee income
Average growth
2015-2018 10%
Efficiency ratio
45%-47%
Cost of credit
Average cost
2015-2018 1.2%
Fully-loaded CET1
> 11%
23
Annual Report 2017 Santander X
Opening doors
to university
entrepreneurs
Santander X is an innovative platform that
is bringing together all the programmes to
support university entrepreneurs that Banco
Santander has been carrying out for more than
20 years through Santander Universities.
Santander X aims to be a meeting place
entrepreneurs. It will be the largest global
ecosystem for university entrepreneurship, a
shared space for international collaboration
among universities, businesses and
entrepreneurs who want to make their projects
a reality and open up to the world.
Jader Stefanello and Fernando Ferreira,
students at the Universidade Federal de Santa
Maria in Brasil and winners of the Empreenda
Santander 2K17 award for their Lunix
Project, which deploys sensors for intelligent
management of urban lighting networks.
24
2017 Annual Review Connection is the key
José Cárdenas had an idea. After talking with various specialists, the
Chilean medical student came up with the idea of creating a device for
performing health checks on pregnant women remotely, so that patients
would not have to visit a clinic. Although Mr Cárdenas had a clear idea of
how to develop the device, it would have to be produced on a large scale
to reach the market. In other words, he would need to set up a company.
Patricia Aymá lives in Spain, thousands of kilometres away from Mr
Cárdenas but she has several things
in common with him. As a student
of Biotechnology and Environmental
Engineering in Barcelona, during her
investigation work, she discovered the
potential of bacteria for creating bioplastics.
“Producing bioplastics is expensive. So, we
designed an alternative method, using bacteria that
produce bioplastics from waste, in a simple and robust manner,” explains
Ms Aymá. When she saw that the technology could be developed on a
large scale, the opportunity appeared, but so did the problem.
Patricia Aymá
“I had a science background, so the most difficult part for me was
setting up a company. I had no idea,”
confesses Ms Aymá. So she signed up to the
Santander Explorer programme, while Mr
Cárdenas joined Brain Chile: two initiatives
by Banco Santander to encourage university
entrepreneurship.
“WE CREATED A
FOR BUILDING A
CONNECTED, OPEN,
GLOBAL ECOSYSTEM
BETTER FUTURE”
For more than two decades, Santander has
been supporting training and development for
university students and entrepreneurs with initiatives such as these, and
now it has taken a further step forward by creating Santander X.
“With Santander X we want to go one step further by building, together
with our more than 1,000 partner universities,
the world's largest ecosystem for university
entrepreneurship,” states Javier Roglá,
global director of Santander Universities and
Universia. “We created a connected, open,
global ecosystem for building a better future
for everyone,” he adds.
AND PATRICIA AYMÁ
SUPPORT, THE IDEAS
WITH SANTANDER'S
CAME UP WITH HAVE
THAT JOSÉ CÁRDENAS
BECOME REALITY
Connection is key: Santander X will connect
university entrepreneurs and universities
worldwide to share knowledge, experience, and best practices. So far,
more than 60 universities have signed up for the project and many more
are expected.
With Santander's support, the ideas that José Cárdenas and Patricia
Aymá came up with have become reality. Mr Cárdenas founded
HubbyMed and Ms Aymá created Venvirotech. HubbyMed is set to
launch the device in early 2018 and Venvirotech is currently developing
its business and strategic plan.
25
Corporate governance
A responsible bank has clear, robust governance, in which accountabilities are well-defined; risks and
opportunities are prudently managed; and long-term strategy is designed to safeguard the interests
of all stakeholders and society at large.
Balanced board
composition
Respect for
shareholders’
rights
Maximum
transparency in
remuneration
Of 14 directors, 11 are non-
executive and three are
executive. 36% are women.
More than half of the
directors are independent.
The board is diverse
in terms of expertise,
gender and international
experience.
The principle of one share,
one vote, one dividend.
The Bylaws do not include
anti-takeover clauses.
Encouragement of
informed participation at
shareholders’ meetings.
This is essential for
generating shareholder
and investor confidence.
Remuneration policy for
executive directors and
senior management is
aligned with our Simple,
Personal and Fair culture.
At the forefront
of best practices
and long-term
vision
A strong lead director
to foster proactive
communications with
stakeholders.
Effective corporate and
internal governance system
for the supervision and
oversight of the Group
and its subsidiaries.
Carlos Fernández
González
José Antonio Álvarez and Bruce Carnegie-Brown
Belén Romana García and Juan Miguel Villar Mir
26
Corporate governanceAnnual Report 2017 COMPOSITION OF THE BOARD
RELEVANT EXPERTISE OF BOARD MEMBERS (% OF MEMBERS)
7%
14%
22%
57%
Non-executive directors
(Independent)
Executive directors
Non-executive directors
(Neither proprietary nor independent)
Proprietary non-executive directors
(Proprietary)
79%
93%
93%
86%
71%
64%
29%
BOARD DIVERSITY
(% of women)
36%
33%
19%
11%
2011
2013
2015
2017
Banking
Information
technology
Latin
America
UK /US
International
experience
Other
commercial
expertise
Strategy
Risk
management
Board of Directors
The board of directors is the Group’s highest
decision-making body, except for matters reserved
for the Annual General Meeting of shareholders.
The main assets of Santander's highly-qualified
board are the experience, knowledge, dedication
and diversity of its members.
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, long-term strategy and corporate
culture, the definition of the Group’s structure and
on fostering the most appropriate corporate social
responsibility policies. The board also promotes
a prudent risk culture by establishing a solid
framework for management, taking into account the
regulatory and competitive environment and the
Group’s long-term interests, and ensuring that the
"three lines of defence" model is respected.
The board of directors is also responsible for
ensuring that the Group complies with the relevant
legislation, respects best practices in the sectors
and countries in which it operates, and observes
the principles of social responsibility to which it has
voluntarily adhered.
The board defines
the Bank’s long-term
strategy, taking into
account the interests
of all its stakeholders
All board members are recognised for their
professional capacity, integrity and independence.
Together, their skills and experience provide the
outlook and understanding required to define
Santander's long-term strategy.
The annual self-assessment carried out by the board
of directors and its committees ensures continuous
improvement in the quality and efficiency of the
board’s operation and composition.
The three lines of defence
1ST
2ND
3RD
Business and support units
Risk management and compliance
Internal audit
Meetings
of the board of directors
held in 2017
Meetings of
the board
committees
15
96
27
Annual Report 2017 Sol Daurella Comadrán
Javier Botín-Sanz de Sautuola and Rodrigo Echenique
Changes in the composition
of the board and its committees
Remuneration policy
Board remuneration
as a percentage of
attributable profit
0.42%
The Group’s remuneration policy is based on the
following principles:
1. Remuneration must be aligned with shareholders’
interests.
2. Fixed remuneration must account for a
significant part of total remuneration.
3. The variable component must reward
performance based on the achievement of
agreed targets, reflecting the employee's role and
responsibilities, in a framework of prudent risk
management.
4. Similarly, appropriate corporate benefits to
support employees and their families must be
provided.
5. The total remuneration package and its structure
must be competitive in order to help attract and
retain employees.
6. When decisions on remuneration are taken,
conflicts of interest must always be avoided.
7. There must be no discrimination in remuneration
decisions.
8. The remuneration structure and amount in each
country must comply with local practices and
regulations.
To reinforce its culture, in 2017 the Group made
a fundamental change in the way it appraises
employees and sets their variable remuneration:
60%
what we do
(business objectives)
40%
how we do things
(SPF behaviours)
For more information on corporate
governance see pages 72 to 109 of Banco
Santander’s 2017 Annual Report.
In June 2017, Ms Homaira Akbari and
Ms Esther Giménez-Salinas were
appointed members of the audit
committee and the risk, regulation
and compliance oversight committee,
respectively, replacing Mr Juan Miguel
Villar Mir.
In November, Mr Ramiro Mato
García-Ansorena was designated
independent director when Ms
Isabel Tocino left the board on her
appointment as non-executive
(independent) vice chairman of
Santander Spain. Mr Mato was the
chief executive of BNP Paribas in
Spain and Portugal for 20 years.
Mr Matías Rodríguez Inciarte left
the board in November and was
appointed non-executive chairman of
Santander Universities.
In November, Mr Carlos Fernández
was appointed to the remuneration
committee and ceased to hold office
as a member of the risk, regulation
and compliance oversight committee.
In December, Ms Belén Romana
was appointed as a member of
the innovation and technology
committee.
28
Corporate governanceAnnual Report 2017 Jaime Pérez Renovales,
Homaira Akbari and Esther
Giménez-Salinas i Colomer
Ramiro Mato García-
Ansorena (left),
Guillermo de la Dehesa
Romero and Ignacio
Benjumea Cabeza de Vaca
International advisory board
The international advisory board, comprising eight non-
executive members, provides the Group with strategic
advice, focusing particularly on innovation, digital
transformation, cybersecurity and new technologies.
It also offers its views on the trends it sees in capital
markets, corporate governance, brand and reputation,
regulation and compliance, and in global financial
services with a focus on customers.
Chairman
Mr Larry Summers
Former US Treasury Secretary and President
Emeritus of Harvard University
Members
Ms Sheila Bair
Former Chair
of the Federal
Deposit Insurance
Corporation
and President of
Washington College
Mr George Kurtz
CEO
and co-founder
of CrowdStrike
Ms Marjorie
Scardino
Former CEO
of Pearson and
director of Twitter
Mr Francisco
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
Secretary
Mr Jaime Pérez Renovales
29
Internal governance
Santander is structured around subsidiaries, of
which the parent is Banco Santander, S.A. and which
are autonomous in capital and liquidity. Its system
of internal governance consists of a governance
model and corporate frameworks, which are
approved by Banco Santander and are adopted by
the subsidiaries while taking their local needs into
account.
The main features of the governance model are:
• Presence of Group representatives on the
subsidiaries’ respective boards of directors.
• Reporting lines of the local CEOs / country heads
to the Group CEO.
• Interaction between the Group and the
subsidiaries' oversight, management and business
functions, including the Group's participation in
the appointment, target-setting and assessment of
results of the subsidiaries' key positions.
Meanwhile, the corporate frameworks establish
the common principles in matters that have a
significant impact on the Group's risk profile. These
include risks, compliance, technology, cybersecurity,
audit, financial accounting and control, financial
management, strategy, human resources,
communication, sustainability and branding.
Annual Report 2017 Board of directors
of Banco Santander
Ms Ana Botín-Sanz
de Sautuola y O’Shea
Group executive chairman and
executive director
Mr José Antonio Álvarez Álvarez
Chief executive officer and
executive director
Mr Bruce Carnegie-Brown
Vice chairman and lead
non-executive director
(Independent)
Ms Homaira Akbari
Non-executive director
(Independent)
Mr Carlos Fernández González
Non-executive director
(Independent)
Mr Ignacio Benjumea Cabeza
de Vaca
Non-executive director
Mr Juan Miguel Villar Mir
Non-executive director
(Independent)
30
Corporate governanceAnnual Report 2017
Executive committee
Audit committee
Appointments committee
Remuneration committee
Risk, regulation and compliance
oversight committee
Innovation and technology
committee
Mr Rodrigo Echenique Gordillo
Vice chairman and executive
director
Mr Guillermo de la Dehesa
Romero
Vice chairman and non-
executive director
Ms Belén Romana García
Non-executive director
(Independent)
Mr Ramiro Mato
García-Ansorena
Non-executive director
(Independent)
Ms Sol Daurella Comadrán
Non-executive director
(Independent)
Ms Esther Giménez-Salinas i
Colomer
Non-executive director
(Independent)
Mr Javier Botín-Sanz
de Sautuola y O’Shea
Non-executive director
(Proprietary)
Mr Jaime Pérez Renovales
General secretary and secretary
of the board
31
Annual Report 2017
Openbank
The digital bank
that makes your
life easier
Openbank is the first fully digital Spanish
bank. All its commercial activity is based on
machine learning and artificial intelligence,
enabling greater knowledge of customers,
better analysis of risks and a more
personalised selection of products and
services offered via a completely revamped
website and mobile app.
Sara Pérez, head of cybersecurity at
Openbank: “I had been hacking systems
legally for eight years when Openbank
called me.”
32
“Openbank gives me what I’m looking for”
If you ask Miguel Montáñez about his daily
routine, he responds with three words: “Work,
work, work”. “I have a very demanding work life,”
he acknowledges. “I can work several 12-hour
days in a row, working under a lot of pressure
and travelling a lot,” he explains. “I spend more
than 100 days a year outside Spain,” he adds.
María José Talavera has a similar situation. Her
schedule is very hectic. “I can only ever go to two
types of office,” says Ms Talavera: “to that of my
customers or to mine. Never to a bank branch.”
María José
Talavera and
Miguel Montáñez
are customers
of Openbank, as
is David Stocks,
a US citizen
living in Spain. “I
don’t like banks,”
confesses Mr Stocks bluntly. “But Openbank
gives me what I’m looking for, it helps me
with what I need. It doesn’t bother me.”
David Stocks
Openbank was relaunched in 2017 with the
aim of becoming one of the world’s leading
digital banks. “Being a digital bank isn't just
about having a cute app,” notes Ezequiel Szafir,
CEO of Openbank. “Being a digital bank means
having the right technology and talent.”
“Many companies talk of digital transformation,
but few of them really do anything about it,”
explains Javier Ros, Cloud Technical Architecture
Manager of Openbank, who formerly worked
for Amazon. “If you want to keep pace with
your customers, you need to work completely
in the cloud. Openbank is genuinely committed
to changing digital banking,” says Mr Ros.
The case of Sara Pérez, Openbank’s Head of
Cybersecurity, is similar. “I had been hacking
systems legally for eight years when Openbank
called me,” she recalls. “I was very much attracted
to working on this project's cybersecurity,” she
affirms. Cybersecurity is Openbank’s top priority,
together with the customer, of course. “Machine
learning and artificial intelligence enable us to
offer our customers personalised products,”
explains Daniel Villatoro, Head of Data Science.
ABOUT HAVING A
BANK ISN'T JUST
“BEING A DIGITAL
“We are the only
bank that takes risk
decisions based on
artificial intelligence,”
says Mr Szafir. “For
example, in an
ordinary bank, around
70 per cent of customers have credit cards. We
grant a higher percentage of our customers
cards because our intelligent algorithm
takes into account many more variables.”
CUTE APP”
ANYTHING IT'S
WITHIN MY REACH”
“WHENEVER I NEED
To improve customer
satisfaction, Openbank
has developed a
new website and a
new app, the main
points of contact
between the customer and the bank. The aim is
for the customer service to be personalised and
to fully meet the customers’ needs. “I have an
adviser at my disposal, with a name and a face,”
explains Miguel Montáñez. “It’s not a virtual
entity. And whenever I need anything it's within
my reach, via my mobile phone,” he adds.
Montáñez highlights Openbank’s investments
platform as the apps strong point. “I can
view my investments, in a simple manner,
at any time and anywhere,” he explains.
This has allowed him to manage his portfolio
independently, with great results.
“We have the technology that Santander Group as
a whole will need over the next five years,” confirms
Szafir. “Openbank is already what every bank will
have to be in the near future. We are ready.”
33
1
A MODEL FOR
SUSTAINABLE,
PREDICTABLE
GROWTH
36 The Santander vision
38 Creating value
40 Employees
42 Customers
46 Shareholders
48 Communities
A Santander branch in Barcelona
Our model and the results it
generates show that Santander
is on the right track
The Santander vision
We are committed to generating growth in a sustainable,
predictable and responsible manner.
Our strengths
to continue growing
and to be successful in the long term
Our purpose
To help people and
businesses prosper
1
We have
SCALE and the
potential to grow
organically
Our aim
To be the
best retail and commercial bank,
earning the lasting loyalty
of our people, customers,
shareholders and communities
We are the leader in market share in five of our core
markets. We are also in the top three in seven of
those markets in terms of customer satisfaction.
We have 133 million customers in markets with
a total population of more than one billion.
We have more than 17 million loyal customers
and 25 million digital customers. This implies
huge potential for organic growth through
increased loyalty and digitalisation.
Our critical mass gives us efficiency, sources
of growth and new business opportunities
A bank that is...
Simple
Personal Fair
POSITION OF BANCO SANTANDER
IN MARKET SHARE IN LOANS
#1
#3
BRAZIL1
MEXICO
POLAND
#5
UK2
US3
SPAIN
ARGENTINA1
PORTUGAL1
CHILE
SCF
36
1. Only including private sector banks.
2. Mortgages, consumer and commercial loans.
3. Santander Bank market share in the States in which the Group operates.
1. A MODEL FOR SUSTAINABLE, PREDICTABLE GROWTH The Santander visionAnnual Report 2017
Our strengths
to continue growing
and to be successful in the long term
2
PREDICTABLE
GROWTH:
diversification by
country and business,
which contributes
higher profits in a
more stable manner
3
Focus on
INNOVATION
to increase
customer loyalty
and operational
excellence
Our diversification by country and business allows
us to maximise results throughout the cycle and
it is the key to our positive performance.
Geographically, we have a balanced distribution
between mature markets (which provide stability), and
developing markets (which fuel growth in revenue).
Our technological transformation contributes to
increasing the number of loyal and digital customers.
The digitalisation of our commercial business allows
us to offer our customers products and services
that are more simple, personalised and modern.
This increases customer satisfaction and loyalty.
By business, there is a good revenue mix between
products for individuals, consumer finance,
SMEs, companies and other products.
We have launched a wide array of initiatives
at the bank, focusing on four main areas:
blockchain, data, payments and services.
Our unique business model allows us to
deliver better results with less volatility and
higher growth
Our digital transformation is paying off: we
have more digital customers and more digital
transactions and sales
Distribution of underlying proft
48%
Americas
52%
Europe
Percentage of transactions and sales in
digital channels
39%
of
transactions
are digital
31%
of
total sales
are digital
37
Annual Report 2017
Creating value
We aim to be our customers' bank of choice. Through innovation, we are
transforming our business to become a more profitable and sustainable bank.
We are meeting our targets earlier than expected...
Strategic priorities
Key metrics
Be the best bank to work
for and have a strong
internal culture
People
Number of core markets where the Bank
is among the three leading banks to work
for (according to the local rankings)
Earn the lasting loyalty of
our individual and corporate
customers: improve our franchise
Loyal individual customers (millions)
Loyal corporate customers (thousands)
Growth in customer loans (%)6
Customers1
Number of countries where the Bank is among the
top 3 of its competitors in customer satisfaction
Operational excellence
and digital transformation
Capital strength and
risk management
Shareholders
Improve
profitability
Number of digital customers (millions)
Growth in fee income (%)6
Fully loaded CET1 capital ratio (%)
Cost of credit (%)
Cost-to-income ratio (%)
Growth in earnings per share (%)
RoTE (return on tangible equity, %)5
Cash dividend as a percentage of attributable profit
Santander Universities
Number of grants (thousands)
Communities
Support people in the
local communities
where the Bank operates
Number of people helped by the Bank's
social investment programmes (millions)
1. Excluding Popular.
2. 2015-2018 average.
3. Except in the United States, where it will be close to our competitors.
4. Total amount 2016-2018.
5. 2016 and 2017 are calculated using underlying profit. RoTE on attributable profit was 10.4% in both years.
6. Constant euros.
38
1. A MODEL FOR SUSTAINABLE, PREDICTABLE GROWTHCreating valueAnnual Report 2017 2016
2017
Targets
2018
Further
info
4
5
Most
countries
13.9
15.8
17
1,356
1,494
1,646
2%
2%
> com-
petitors
8
7
20.9
25.4
All3
30
8.1%
10.6%
c. 10%2
10.55%
10.84%
>11%
1.18%
1.07%
1.2%2
48.1%
47.4%
45-47%
1.0%
1.0%
double
digit
11.1%
11.8%
>11.5%
40%
40%
30-40%
37
1.7
45
2.1
1304
54
Pages
40-41
Pages
42-45
Pages
42-45
Page
58
Page
45
Pages
42
Page
59
Page
59
Page
59
Page
59
Page
60
Page
59
Pages
46-47
Page
49
Pages
48-51
People
Customers
Shareholders
Communities
...with a clear strategy and a strong culture
Simple Personal Fair
Just as important as what we do is how we do it: Simple, Personal and Fair.
This culture is based on our corporate behaviours.
I show
respect
I truly listen
I talk
straight
I keep
promises
I actively
encourage
cooperation
I bring
passion
I support
people
I embrace
change
The Santander brand
In 2017 we defined a strategy to evolve towards a brand which
Is more customer-focused, modern and digital, sustainable and
committed to communities. Our brand positioning revolves around
the idea that prosperity is created day by day. The evolution of global
sport sponsorship responds to this strategy: we are entering a new
phase in the UEFA Champions League.
The flame, which has been part of our logo since 1986, reflects our
commitment to progress and is inspired by fire and what its discovery
meant to human progress.
Risk culture: risk pro
Santander has a solid risk culture, called risk pro, which defines the
way in which we understand and manage risks in our day-to-day
activities. It is based on making all employees responsible for the
risks they generate and on other principles that underastood and
assimilated into the way of working throughout the Group.
All the Santander team engaged in risk
>94%
of employees recognise
and are responsible for the risks
in their daily work
39
Annual Report 2017 People
An engaged, motivated team
To better help people and businesses prosper, our transformation begins with our employees. We
aim to be one of the best banks to work for to be able to attract and retain the best global talent.
Our people management strategy focuses on six key areas:
A Santander
branch in Spain
Knowledge and development
Offer continuous training and development
to enhance our employees’ skills
and capabilities in a changing digital
environment.
Talent management
Identify the best professionals worldwide
and help them to grow both personally
and professionally, respecting and
fostering diversity.
Culture
Ensure that the entire Group shares
a common culture based on the
corporate behaviours and focused
on the purpose and aim, and on
doing things in a Simple, Personal
and Fair way.
Our goal is to be
the best Bank
to work for
Remuneration and benefits
Set clear targets and reward not only results
but how they were attained.
Systems
Use the benefits of digitalisation
to manage people better.
Employee experience
Foster teams’ engagement and motivation
with measures that encourage listening,
a more efficient and collaborative way
of working which enhances the work-
life balance, recognition and a healthy
environment.
OUR TEAM
55%
women
202,251
employees
45%
men
40
45%
with university
degrees
38 years
average
age
10 years
average length
of service
1. A MODEL FOR SUSTAINABLE, PREDICTABLE GROWTH Creating value > PeopleAnnual Report 2017 Initiatives carried out by Human Resources in 2017
Talent
• MyContribution: A new corporate performance management model
that strengthens the culture as a driver of transformation. To continue
creating that culture, we are introducing a new way to assess our
employees’ performance and decide their variable remuneration:
Knowledge and development
• A new strategy for knowledge and overall development to
stimulate continuous learning by all employees, with the
slogan Never stop learning.
60%
What we do
(Business objectives)
40%
How we do things
(SPF behaviours)
• Succession planning for leaders: The Group made progress in
succession planning for key roles.
• Talent Assessment Committees: With the participation of senior
management, over 2,500 executives have been analysed.
• Diversity and inclusion: The Santander Group recognises
and supports all types of diversity: gender, race, age, disability,
professional and life experience, religion, values and beliefs, sexual
orientation and personality. A global executive Diversity and Inclusion
task force was created in 2017, together with a global network of
diversity experts.
• The Bank is developing a new strategy to position itself as an
employer of choice for employees and external candidates, with a
particular focus on digital talent.
• The Global Knowledge Campus has been launched; it
is a new training space in which to share knowledge and
best practices, which will help the Group's employees
to contribute to cultural change and improve their
performance.
• Leading by example is now under way. This is a training
programme that helps leaders to identify the role that
they should play to implement the Simple, Personal and
Fair culture and carry out the transformation.
In this regard, the United States has launched two
programmes to accelerate the cultural transformation
in its leaders: Managing the Santander Way and
Accelerated Development Program.
Global
engagement
survey
84%
participation
77%
of employees are
engaged, above the
averages of peers
and the sector's best
performers
81%
of employees believe
that their colleagues
behave in a more Simple,
Personal and Fair way
92%
of employees know what
they have to do to build a
bank that is more Simple,
Personal and Fair
Important progress made in SPF* behaviours and new ways of working
International mobility
• Global job posting: corporate platform offering all staff
the chance to learn about and apply for vacant positions
in other countries, companies or divisions. Since its launch
in 2014, over 3,000 jobs have been posted.
• Mundo Santander: A corporate development programme
in which, for three months, the Bank's professionals work
on a project in another country, promoting the exchange
of best practices and broadening their global vision. Since
its launch, 1,726 employees in 30 countries have taken
part.
• The first two training modules of the Talent in Motion
(TiM) programme, aimed at fast-track development of
talented young people, have been held. This promotes
mobility and provides participants with the opportunity to
broaden their vision of the Group and to gain international
experience.
* Simple, Personal and Fair
Employee experience
• We are Santander Week: The 10th edition of this global initiative,
which conveys the Santander culture to employees and to promote
their pride in belonging, was held in June. This year it focused on
the corporate behaviours.
• A culture of recognition is being promoted through initiatives such
as StarmeUp, the first global recognition network to promote
collaboration and to recognise those individuals who practise the
corporate behaviours.
• The Group continued to implement its global health and well-being
programme, BeHealthy, an example of its commitment to the health
of its employees and to helping them to acquire healthy habits.
• Under the New Ways to Work programme, Argentina and the
corporate centre in Spain remodeled work spaces, eliminating offices
and creating open areas for teamwork, using new technologies to
facilitate teamwork and collaboration. Flexiworking continued to
improve work-life balance. Other initiatives in New Ways to Work include
Keep It Simple Santander (KISS) for branches and call centres in the UK
and the Inconsistencias programme in Chile to identify processes to be
improved.
41
Annual Report 2017
Customers
We work for the prosperity
of our 133 million customers
Our goal is to have more customers, who are increasingly more loyal and digital.
We want to be the bank of choice for our customers.
Innovative, simple, personalised solutions
1|2|3 World and other engagement strategies
Our value proposition for individual customers
With this relationship model, customers earn interest on their account balances and money back on
spending, among other advantages.
In Spain in 2017, the 1I2I3 model was extended to
new segments, such as the fully digital 1I2I3 Smart
Account, aimed at the 18-31 age group. A new
credit card was also launched, offering 1, 2 or 3
euros for each goal scored by the football teams
in Spain's top two divisions, LaLiga Santander and
LaLiga 1I2I3.
In the United Kingdom, the 1I2I3 strategy has 5.4
million customers, an increase of 275,000 from
December 2016.
In Mexico, Santander Plus, the local version
of 1I2I3, celebrated its first anniversary. Since
its launch, the Santander Plus programme has
attracted over 3.0 million customers, 52% of
whom are new.
In Portugal, activity continues to be strongly
supported by 1I2I3 World, with very positive
trends in the numbers of accounts, credit
cards and protection insurance policies.
Poland launched its of As I Want it Account,
which enables customers to decide what they
need and how to pay for the products and
services offered.
Loyal customers
17.3
million
Digital customers
25.4
million
1I2I3 customers
2.6
million
5.4
million
Santander Plus
customers
3.0
million
Santander Wealth Management
Asset management and private banking
Santander created a new global division bringing together its private banking and asset management
businesses, to build the best specialist wealth management unit in Europe and the Americas.
Following the repurchase of Santander Asset
Management’s business in 2017, and the
integration with Private Banking, the new
division will enable us to generate significant
synergies and exploit the competitive advantage
of our presence and positioning in Europe and
the Americas, allowing us to drive the growth
of the asset management business in our core
countries.
Our customers, who are always at the core of
our strategy, will benefit from the strength of
the new division and from an approach based
on personalised service, boosted by a global
value proposition, leveraging the connectivity
between the franchises and the development
of new digital capabilities.
Lastly, to create the most powerful and
winning value proposition for our customers in
Europe and the Americas.
Assets managed by
Santander Wealth
Management
€333,000
million
Specialised service
for clients in
14
countries
42
1. A MODEL FOR SUSTAINABLE, PREDICTABLE GROWTHCreating value > CustomersAnnual Report 2017 BREAKDOWN OF GROUP CUSTOMERS (MILLIONS)*
UNITED
STATES
5
OTHER
COUNTRIES
1
MEXICO
15
CHILE
3
UNITED
KINGDOM
25
BRAZIL
38
PORTUGAL
5
SPAIN
13
ARGENTINA
4
Main countries
Santander Consumer Finance
SANTANDER
CONSUMER
FINANCE
20
POLAND
4
Santander SMEs
A global solution making us partners in SMEs' growth
SMEs are the main driver of job creation. We aim to help companies grow in the new digital economy
and become more international by leveraging the Group’s innovation capabilities and geographic
diversification. This means both offering traditional bank products and services and innovating to meet
the financial needs of companies that have new business models and help entrepreneurs make their
plans reality.
Santander’s strategy with SMEs is a global
initiative adapted, in the local environment, to
the characteristics of each market in which we are
present. This model, which operates throughout
the Group, provides a strong financial offering
and other solutions to spur internationalisation,
training, employment and digitalisation of SMEs,
so that we can become their bank of choice.
Santander is committed to the long-term growth
of SMEs. Its aim with this strategy is to benefit
45,000 SMEs in Latin America and a total of
90,000 SMEs worldwide.
Euromoney named Santander the Best Bank in the World for small and medium-
sized enterprises, for the second consecutive year
* Excluding Popular.
43
Annual Report 2017 New digital solutions
Local banks are pushing forward with their digital transformation while the Group invests in
infrastructure and creates agile, global platforms. All teams work in collaboration. As a result,
we can offer our customers better products, services and channels.
Openbank
The fully digital bank
Superdigital Brazil
A digital mobile-first payment solution
Financial inclusion
The Santander Group launched the new
Openbank, Spain’s first fully digital bank. It offers
its customers a complete portfolio of products
and services through a totally redesigned website
and mobile app.
Openbank has the experience, the expertise and
the support of the Santander Group. It is one of
the first banks in the world to have its software,
application programming interfaces (API) and all
its customer activity hosted in the cloud. All with
the maximum security and replicated at various
European sites. Openbank’s technology model is
based on machine learning.
Santander Brazil launched Superdigital, an
independent digital payment platform, built
and developed in Brazil. With proprietary tools
and technology, this mobile-first solution allows
customers to open a new payment account in a
matter of minutes. They can also pay, deposit and
withdraw money with no need to have a bank
account.
Superdigital enables the Santander Group to
broaden its possibilities of helping individuals
to join the banking system for the first time,
through either Superdigital or Banco Santander,
irrespective of their customers’ socio-economic
profile.
Santander Cash Nexus
An agile cash management platform
Machine learning
Global platform to know our customers better
A services platform that allows customers to
manage their treasuries, combining the Bank’s
global services offer with a wide range of local
services in each country.
Customers may digitalise, in a simple and
competitive way, liquidity management, the
collection and payment of transactions, and
direct debits, and centralise the information
through electronic channels.
Our global machine learning platform is producing
very positive results in various countries.
It enables us to know our customers better, offer
them a personalised proposition, and assess the
related operational and credit risks faster and
better.
Actual results: up to 60% less customer attrition
and a 30% increase in loyalty.
Continuous learning thanks to the one billion
transactions that the Bank manages in its core
markets each year.
More than
1,000,000
Superdigital
customers
Of these, more than
350,000
belonged to sectors
with low rates of
access to banking
services
Four focuses of
digital innovation
Blockchain
Data
Payments
APIs and services
DIGITAL INITIATIVES
UNITED KINGDOM
Santander UK launches a
new digital account opening
process. Santander Investment
Hub, an online platform for
customers to manage their
portfolios without advisory
services, is being enhanced.
44
SPAIN
Fresh progress in the digital
transformation, with the
new app and the launch of
Digilosofia, which has enabled
the Bank to multiply by
seven the weekly acquisition
of digital customers. Spain
consolidates its leadership
in mobile payments through
Apple Pay and Samsung Pay.
BRAZIL
Santander ONE, a new
online bank for individual
customers. Consignado,
fully digital, signed up to by
mobile phone. WebCasas, a
digital platform for taking out
property loans.
MEXICO
In mobile payments, Súper
Wallet is a tool that enables
customers to manage all their
cards in one place.
Select Me is launched to
support women by providing
solutions to make their
daily lives easier and to
assist in their professional
development.
CHILE
Launch of the country's
first full digital On
Boardingprocess.
1. A MODEL FOR SUSTAINABLE, PREDICTABLE GROWTHCreating value > CustomersAnnual Report 2017 Operational excellence
Maximise the bank’s efficiency and customer service quality.
Throughout the Group, initiatives are under way to transform
and enhance the customer experience.
MEXICO
Automatic service by bots.
Santander has implemented
three automated reply
systems for customers using
robots: on the website,
Facebook and Twitter. It
is the only bank with this
triple automated system in
Mexico.
POLAND
Bank Zachodni WBK
introduced a biometric
voice solution aimed at
large companies, together
with electronic guarantees
incorporating an electronic
signature option.
PORTUGAL
The Bank made progress
with its mobile app,
increasing its sales though
digital channels. At year-
end, the digital channels
accounted for 28% of
the Bank’s total sales of
products.
UK
Santander UK expanded the
information content on its
fund platform (Investment
Hub) to help customers
understand and meet
their needs in relation to
investments, as well as
online mortgage loans and
increased its mobile banking
capacity (Android Pay).
BRAZIL
A new, more efficient, model
centred on operational
excellence was implemented,
with an end-to-end vision of
the process experienced by
customers using products
and services.
New, redesigned branches are
transforming customer experience
With initiatives such as WorkCafé in Chile,
Smart Red in Spain and the digital branch in
Argentina, our new branches are transforming
customer experience in nearly 1,000 locations.
The new branches:
• Are 20% more productive
• Generate 96% customer satisfaction
• Increase brand visibility and engagement
with communities
CUSTOMER SATISFACTION
WorkCafé in Chile
Santander is ranked in the top three banks in seven countries that account for more than 77% of our customers
RANKING
1
2
3
3
3
4
3
3
9
% satisfied
customers
87.1%
77.9%
91.6%
85.5%
96.4%
95.9%
91.4%
96.0%
81.8%
88.02%
ARGENTINA
BRAZIL
CHILE
SPAIN
MEXICO
POLAND
PORTUGAL
UK
US
GROUP
* Corporate benchmark of active individual customers’ experience and satisfaction. Data at 2017 year-end.
45
Annual Report 2017
Shareholders
We provide sustainable growth and
predictable profits for our shareholders
In 2017, the Bank made significant progress in its strategic priorities and met its business and financial targets
while remaining one of the most profitable and efficient banks in the world. Our shareholders’ trust is key to
achieving sustainable growth over the long term.
Shareholder remuneration
Shareholder remuneration increased in 2017, maintaining the payment of the four dividends
Total remuneration from 2017 profit: €0.22
per share, with an increase of 7% in the
total dividend per share and 11% in the
cash dividend, compared to 2016.*
16.6% total shareholder return in 2017,
compared with 11.3% on the IBEX 35, 12%
on the Stoxx Banks Index and 24.8% on
the MSCI World Banks Index.
The total Santander shareholder return
is higher than the average of European
banks.
Three of the four dividends
have already been paid:
two in cash of €0.06 per
share and one via the scrip
dividend of €0.04 per share.
The fourth and final dividend
is scheduled for May 2018
following approval at the
annual general meeting.
SHAREHOLDER REMUNERATION
Euros per share
0.20
0.16
0.21
0.17
0.22
0.19
2017/2016
+11%
+7%
2017
2015*
Cash dividend
2016*
Total dividend
The Santander share in 2017
Shareholder base
COMPARATIVE SHARE PRICE PERFORMANCE
(Dec. 2016 - Dec. 2017)
SAN
MSCI World Banks
130
120
110
100
90
+12.3%
Dec. 2016
Mar. 2017
June 2017
Sep. 2017
Dec. 2017
Markets performed well in 2017 in an environment of greater
optimism due to positive macroeconomic data.
The Santander share price ended 2017 at €5.48, an increase of 12.3%
during the year. The main Spanish index, the IBEX 35 rose 7.4% and
the European bank index 8.1%.
Banco Santander was the largest bank in the eurozone by stock
market value at year-end, with capitalisation of €88,410 million.
*Figures are adjusted to reflect the July 2017 capital increase.
46
In the year, the following capital transactions
were carried out:
• July 2017: a capital increase of €7,072 million
to support the acquisition of Banco Popular
(the issue was eight times oversubscribed). A
total of 1,458,232,745 new shares were issued.
• November 2017: 95,580,136 shares issued
as part of the Santander Scrip Dividend
programme.
16,136
million
shares at 31
December
2017
DISTRIBUTION OF THE SHAREHOLDER BASE
By type of shareholder
By geographic distribution
Institutional investors
Board
Retail shareholders
Americas
Europe
Rest of the world
1%
21%
61%
78%
38%
1%
1. A MODEL FOR SUSTAINABLE, PREDICTABLE GROWTH Creating value > ShareholdersAnnual Report 2017 4 million
shareholders in
over 100 countries
at year-end
Meeting our
commitments
RoTE (Underlying)
11.8%
Increase
Dividend
per share
€0.22
Increase
Earnings
per share
€0.40
Increase
Fully loaded
CET1 RATIO
10.84%
+40 bps in
organic generation
* Data at 2017 year-end vs target set
for the year.
Commitment to shareholders
The activity of the Shareholder and Investor Relations area in 2017 was aligned
with the following priorities:
Maintain continuous, fluid communication
with retail shareholders, institutional
investors, analysts and rating agencies
• In October, for the second consecutive
year, the Group Strategy Update was held to
update the market on the fulfilment of the
commitments made at the 2015 Investor Day.
Over 250 investors and analysts attended.
• 175 roadshows, 19 conferences and 1,560 meetings
with fixed income and equity investors.
• Meetings with almost 12,517 retail shareholders at 241
corporate events.
Enhance personalised service to
shareholders and seek their opinions
• 178,353 enquiries answered (by email and telephone).
• Over 300,000 shareholders consulted
in quality studies and surveys.
• Shareholders offered possibility of rating their degree
of interest in the communications received by email.
70% of the replies scored the information as quite
interesting or very interesting.
260
analysts and
investors at the
Group Strategy
Update
241
events for
shareholders
>1,000
communications sent
to shareholders
64%
record
participation at
the AGM
Facilitate the participation of shareholders
• Record participation in the general shareholders’
meeting. 64% of the Bank's share capital (over
800,000 shareholders) voted in person or by
proxy on the board of directors’ proposals.
• Santander was the first European bank to receive
the Aenor certification of its annual general
meeting as a sustainable event.
Drive the digital transformation
• New corporate website for shareholders and
investors; launch of WhatsApp as a new channel
for serving shareholders and new functionalities
in the specific app for them.
Offer exclusive products and benefits
Through the yosoyaccionista.santander.com
website.
47
Annual Report 2017 Communities
Our commitment is sustainable
and responsible
We carry out our business responsibly, by contributing to the economic and
social progress of the communities in which we are present. We manage our
environmental impact and we foster stable relationships with our main
stakeholders.
Companies have a responsibility to create value
by taking into account the positive and negative
effects of their decisions on their environment.
Acting responsibly is more important now than
ever before. Society is facing major challenges, both
social (achieving inclusive growth for everyone)
and environmental (addressing climate change).
Businesses must play a central role in meeting
these challenges.
Banco Santander’s view is that acting responsibly
is the best way for its activity to be profitable and
sustainable in the long term, and to help people,
businesses and communities prosper.
Santander helps communities prosper through its
social investments as well as its ordinary banking
activities.
Support for higher education is part of
the Group's identity. Access to education,
employability, driving university entrepreneurship
and modernising universities are its main areas of
action.
It also carried out numerous local community
support programmes, in many of which participation
by the Group’s professionals was encouraged as a
way of promoting solidarity, motivation and pride in
belonging. These programmes included:
• 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. Projeto Escola (in
Brazil) and Becalos (in Mexico) are two examples.
• Financial education programmes that convey
to children the importance of saving, prepare
young people for an independent life and help
families to take basic financial decisions.
• Programmes to combat social exclusion and
tackle poverty, vulnerability and marginalisation,
such as the social projects in Spain and Discovery
Grants in the UK.
Strategic
targets
To help five million
people between 2016
and 2018
5 million
People
helped in 2017
2.1 million
Community investment
€183 million
social investment
allocated to
48
€129 million
higher education
€54 million
Other
1. A MODEL FOR SUSTAINABLE, PREDICTABLE GROWTH Creating value > CommunitiesAnnual Report 2017 Santander Universities and Universia
Banco Santander, which is unique among 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.
Support for university progress
• Grants and social impact: over 290,000 grants
have been awarded since 2005 under various grant
programmes in 21 countries promoting excellence,
international mobility, equity and university
access, research and initial contact with the labour
market. Because education is synonymous with
progress and with fairer and more competitive
societies.
• Digitalisation and modernisation of
universities: Santander Universities’ digital
strategy aims to encourage the modernisation
of universities and to foster and boost their
programmes and initiatives in social networks. This
strategy includes the development of software to
enhance services and meet the new demands of
the university community in digital environments;
such as AppCrue in Spain, which registered 51,426
downloads at 11 universities in 2017, and offers
a wide range of services, such as consulting
academic grades, timetables, accesses and library
catalogues.
Fostering entrepreneurship with
Santander X
Santander Universities devotes over €13
million a year to programmes that support
and promote the university entrepreneurial
spirit. This key priority is what drives the
Santander X project which, in partnership
with universities, aims to become the world’s
largest ecosystem for entrepreneurs.
See more on page 24-25 of this report
Furthermore, the new global entrepreneurship
community, Santander X, based on a digital
platform which is currently being developed and
is evolving, already has its first 8,000 followers
in its related social networks, such as JointheX.
The various channels of Universia and Santander
Universities had 3,041,796 followers worldwide at
year-end 2017.
• Employability: Training, achievement and
excellence should be the basis of personal and
professional progress, the instruments that
help young people to be more employable and
competitive in professional environments that are
increasingly variable, digital and dynamic. This is
why Santander Universities and Universia carry
out initiatives that help young people join the
labour market, develop their skills, know where
to find new job opportunities and develop their
talents. This also includes the promotion of equity
and inclusion through the opportunities offered
by the Universia Foundation.
Further information is available in the sustainability section of our corporate website, the 2017 sustainability report
and the thematic reports available at www.santander.com.
Total scholarships and grants
awarded
44,862
39,069
university grants
and scholarships
5,793
grants for
e-learning
Agreements with
universities and other
academic institutions in 21
countries through Santander
Universities and Universia
1,295
49
Annual Report 2017 We support and promote financial inclusion
Contributing to the social and economic progress of the countries in which we operate.
Santander supports and promotes financial
inclusion as a way of contributing to the well-being
of the countries in which it operates. To this end,
the Bank promotes major microfinance programmes
in countries such as Brazil, Mexico and Argentina.
These programmes help the most underprivileged
groups to access credit in order to improve their
social and financial inclusion and the quality of their
lives and environment. In its relationships with the
university community, the Bank develops specific
products and services so that students may access a
wide range of basic financial services.
Financial inclusion
€150 million
outstanding
microfinance loans
micro-entrepreneurs
supported
>250,000
We want to serve
280,000 microenterprises
over the next four years
in order to increase
financial inclusion in
Mexico, by offering
them a broad range of
competitive financial
products and services.
Ana Botín,
at the presentation of “Tuiio” in Mexico
City, October 2017.
Tuiio, a new financial inclusion initiative in Santander
Mexico. Launched in October 2017, Tuiio is a financial
inclusion programme for people with low incomes which
aims to have a measurable social impact through a broad
and expanding range of interconnected products (from
microcredits to microinsurance, remittances, payments
and other services, etc.) supported by its own branches,
agents, ATMs, point of sale terminals and use of electronic
banking. The initiative includes a programme of training
and financial education for its customers, with the aim
of maximising their skills, developing their potential and
optimising their use of resources.
Prospera in Brazil
for microenterprises
Through the Prospera
programme in Brazil,
Santander encourages
small businesses to grow
and therefore helps the
underprivileged and those
with a lower standard of living
to escape from poverty. Loans
are mainly granted to informal
microenterprises that have no
access to credit.
50
• 70% of microcredits are granted to female breadwinners.
• They are granted to solidarity groups of three or four people.
• The average amount is EUR 300, with no need for additional guarantees.
• The average term is eight months.
• Active portfolio of over 170,000 customers.
• 30 branches and 300 employees serve 700 municipalities.
1. A MODEL FOR SUSTAINABLE, PREDICTABLE GROWTH Creating value > CommunitiesAnnual Report 2017 Firm commitment to the environment
Banco Santander is firmly commited to the
environment and the fight against climate change,
which is reflected in various lines of action, such
as the analysis of social and environmental risks in
funding transactions, the development of products
and services with a positive environmental impact
and the measurement of its internal environmental
footprint.
The Bank continued to reduce its consumption,
waste and emissions, meeting its targets for
reduction set in the 2016-2018 Efficiency Plan.
The rapid progress in meeting the energy reduction
and emissions goals is a result of the immediate
impact of more than 200 initiatives under the plan,
advances in technology and greater environmental
awareness.
The Bank continued to implement its policies for
sensitive sectors such as energy, soft commodities
and defense, and in 2017 approved a new policy on
mining and metallurgy. An extract of these policies
was published on the Bank's website, thus enhancing
transparency.
In 2017 the Bank subscribed to the banking sector's
main initiative for implementing the reporting
recommendations of the Task Force on Climate-
related Financial Disclosures (TCFD) of the Financial
Stability Board, under the auspices of the United
Nations Environment Programme.
These recommendations will represent a major step
forward in the reporting of risks and opportunities
associated with climate change.
In 2017 the Bank approved its policy for the mining
and metallurgy sector, which was added to the
policies on energy, defence and soft commodities.
€300 million
New lines of financing
signed with multilateral
institutions for renewable
and efficient energy projects
in Spain and Poland
€136 million
The Bank issued its first green
bond in Poland through a
bilateral accord between
Bank Zachodni WBK and the
International Finance Corp.
covering energy efficiency,
renewable energy and water
and waste management
Project finance to support
renewable energies
As a contribution to the transition to a low-
carbon economy, the Bank participated in
2017 in the financing of new renewable energy
projects such as photovoltaic plants and
windfarms with a installed capacity of 3,390
megawatts (MW).
3,390 MW
Total installed capacity
of solar and wind
generation supported
by the Bank in 2017
Presence in sustainability indices
Santander improved its scores on other renowned
sustainability rating indices such as Sustainalitycs,
MSCI, Oekom and Vigeo, and continues to form
part of the FTSE4Good index, in which its results
also improved.
Banco Santander has been included in the Dow
Jones Sustainability Index (DJSI) since 2000. In
2017, the Bank received a score of 89 out of 100,
well above the average for the financial services
sector. The Bank's place on the DJSI is a result of its
commitment to sustainablility and transparency.
This score again places Santander as one of the
world's leading banks and the leader in Spain for its
sustainable management, among the top ten banks
in the world on the Dow Jones Sustainability Index
and the first among the 17 financial institutions in
its benchmark peer group*.
*The benchmark group comprises the following entities: Itaú, JP Morgan, Bank of America, HSBC, BNP Paribas, Standard Chartered, Citi, Société
Générale, ING, Barclays, Wells Fargo, BBVA, Lloyds, UBS, Intesa San Paolo, Deutsche Bank and Unicredit.
51
Annual Report 2017 2
THE GROUP’S
RESULTS IN 2017
54 Economic, banking and
regulatory environment
58 Santander Group results
61 Results by countries and businesses
A Santander branch in Lisbon
We are meeting our financial
objectives earlier than expected and
in a responsible manner, with growth,
profitability and a strong balance sheet
An improved global economy
World economic growth rose in 2017 in an environment of improved global confidence which was reflected in
international markets. In the regulatory field, the Basel III review was completed in 2017 and the debate on the
impact of digital transformation on banking regulation and supervision advanced.
Advanced and emerging
economies revitalised
In 2017, the world economy recorded higher
growth than the previous year (3.7% vs 3.2%), in an
environment of improved global confidence arising
from the decline in political uncertainty, especially
in Europe, favourable financial conditions and
increased dynamism in international trade. Both
advanced and emerging economies benefited from
this renewed buoyancy.
GDP
(% annual change)
6
4
3
5.4
5.1
4.7
3.5
3.5
3.6
2.1
2.4
Global
Developing economies
Mature economies
4.3
4.4
3.4
2.9
3.2
2.1
1.7
4.7
3.7
2.3
2011
2012
2013
2014
2015
2016
2017
Source: IMF, World Economic Outlook, January 2018.
ECONOMIC PERFORMANCE BY COUNTRY
% CHANGE IN GDP
2016
2017
United States
1.5
2.3
United Kingdom
1.9
1.7
Eurozone
Spain
Portugal
Poland
Brazil
Mexico
Chile
1.8
3.3
1.5
2.9
-3.6
2.3
1.6
2.4
3.1
2.6
4.6
1.0
2.1
1.5
Argentina
-2.2
3.0
54
Acceleration in economic growth in the eighth year of the longest upward cycle since 1850, with
underlying inflation moderating to 1.5%. The unemployment rate fell to 4.1%, justifying the 75 bp
increase in the Fed Funds interest rate to a range of 1.25%-1.5%. It is expected to continue with gradual
increases.
The economy held up well in the face of Brexit uncertainty, but with some slowing of growth. The
unemployment rate remains at full employment levels and inflation, at around 3%, has exceeded the
2% target. The official rate was raised by 25 bp to 0.5% at year-end, reversing the cut that followed the
referendum.
Notable economic revival in 2017, broadly based by component (domestic demand and exports) and by
country. The unemployment rate declined to 8.8%, still above pre-crisis levels. Inflation remained low
at 1.5%, with the result that the European Central bank (ECB) held its rates unchanged.
GDP growth exceeded 3% for the third consecutive year. The healthy creation of employment enabled
the unemployment rate to fall to 16.6%. Growth was balanced, with no sign of inflationary pressure.
Notable acceleration of growth in 2017, driven by domestic demand. Employment rose by over 3%
and unemployment declined strongly to 8.5%. Inflation remained moderate. Private sector borrowing
continued to fall and the budget deficit ended the year at 1.5% of GDP.
Strong growth in 2017 driven by private consumption and the external sector. Unemployment rate at
historic lows (4.7%) and inflation at 2.5%. The central bank kept its official rate stable at 1.5%.
Gradual economic recovery during 2017, driven by consumption and investment. Inflation moderated
to less than 3%. The central bank continued to reduce the Selic rate to 7% at year-end. The real
depreciated slightly against the dollar (by 1.5%) and by almost 15% against the euro.
The economy slowed due to lower growth in domestic demand. Inflation picked up to 6.8%, but is still
expected to moderate in 2018. The central bank raised its official rate by 150 bp to 7.25%, while the
peso appreciated by 5.2% against the dollar and fell 8.1% against the euro.
The economy began to recover from the middle of the year. Inflation ended the year at 2.3%, below the
target of 3%, and the central bank cut the official rate by 100 bp to 2.5%. The peso rose by 8.1% against
the dollar during the year and fell by 4.5% against the euro.
The economic recovery consolidated throughout the year, due to the strength of investment and
private consumption. Inflation stabilised at around 2.0% a month and the central bank raised its
official interest rate by 400 bp to 28.75%, enhancing its commitment to price stability.
2. THE GROUP’S RESULTS IN 2017Economic, banking and regulatory environmentAnnual Report 2017
For the first time in a decade, all the economies
in which the Group has a presence grew
MSCI World
Index
+20%
in 2017
Brent crude
$67
per barrel (+21%)
Yield on 10-year
German bund
0.42%
(+22 bp on 2016)
Confidence in the financial markets
Financial markets were benign throughout the
year. The absence of major upheavals increased
investors' appetite for risk, which supported the rise
in stock markets, increases in commodity prices and
improved funding conditions in the corporate debt
market.
The ECB revealed it would not raise interest
rates until the end of the bond buying
programme, which will continue at least through
September 2018. Nevertheless, unexpectedly strong
growth and the reduction in political risk led to an
appreciation of the euro against the dollar.
In the United States, attention focused mainly
on the ability of the new administration to
implement its economic agenda. The S&P
scaled new highs, supported by the strength of the
economy and expectations of a more expansive
fiscal stance.
In the United Kingdom, sterling remained
weak amid the slow progress of the Brexit
negotiations. The Bank of England raised rates
in November, the first increase in over a decade.
This reversed the cut that followed the Brexit
referendum.
The performance of Latin American currencies was
uneven during the year. In the first half, they tended
to appreciate, reflecting expectations of a recovery
in the region's main economies. Recent months
have seen reversals in the face of the uncertainty
regarding the effects on these economies of the
normalisation of the Federal Reserve's monetary
policy.
The Federal Reserve raised interest rates on three
occasions and in October began reducing its
balance sheet; a process likely to take various years
to complete. The market reacted well to these initial
cautious steps. Long-term debt rates remained
stable, below the levels they reached after Donald
Trump's victory.
In the euro zone, political risk weighed heavily on
the markets in early 2017, mainly due to fears of the
far-right making further progress in France. This
caused the risk premiums of public debt to rise,
even in the traditionally stable countries. However,
political risk declined after Emmanuel Macron's
victory in the French elections, which led to
a normalisation of risk premiums. The rating
upgrades of Portugal and Italy caused risk premiums
in these countries to decline further.
The absence of major
upheavals encouraged
risk-taking in 2017; this
sustained the rise in
stock markets, higher
commodity prices
and improved
corporate debt
fnancing
conditions
55
Annual Report 2017 The Tenth Santander
International Banking
Conference, 8 November
2017, at the Santander
Group headquarters in
Boadilla del Monte, Spain
Regulatory milestones
in 2017
The regulatory agenda in
2017 was marked:
On an international scale,
by completion of the Basel
III agreement and launch
of the fintech debate.
uropean
The E
Commission’s proposed
reforms to the capital
requirements and
resolution framework
and measures to advance
the integration of the
European retail market.
In many countries, by
measures related to
consumer and investor
protection.
56
A stronger banking sector
Regulatory developments
The international banking sector continued
to improve the health of its balance sheet by
bolstering capital adequacy and liquidity, and
reducing impaired assets. A more benign economic
environment also allowed banks to improve their
profit margins. These factors were translated into
a generalised rise in financial share prices on the
stock markets.
However, in developed countries and especially
Europe, banks are still facing major challenges
when it comes to increasing their profitability.
Although monetary policy has begun to normalise
in some areas, interest rates remain low, as
do business volumes. In addition, competitive
pressures continue to rise in most markets, both
between banks and from new entrants and new
ways of funding.
In emerging countries, with interest rates and
margins above those in advanced countries, banks’
profits remain consistently higher, even when the
macroeconomic conditions are less favourable. This
is due to the strong increase in financial inclusion.
Thus, the proportion of the population with current
accounts increased by 12 percentage points in only
three years, although it still remains far below the
ratios found in developed countries (51% vs 94%).
The vast majority of banks are now adapting to the
digital revolution, which is changing the way they
deal with customers while also improving quality
and process efficiency, expanding the range of
services on offer.
Banks are also facing diverging socio-demographic
trends, with an ageing population across developed
economies and a rise in the middle classes in
emerging economies. These differences will require
strategies tailored for each market.
In 2017, the Basel III review was completed after
almost three years of negotiations. Discussions
advanced on the impact of technology on the
financial sector and its regulation and supervision.
In Europe, progress continued in negotiations on
revising capital and resolution frameworks.
Basel III revision completed
The Group of Central Bank Governors and Heads of
Supervision (GHOS) approved the final framework
for Basel III on 7 December. The revision seeks to
reduce unjustified differences in the risk weighting
of banking assets.
The final agreement will come into effect from
1 January 2022, but the capital floors to be
established to limit the capital saved by the use of
internal models will be implemented gradually until
2027.
In addition, the Basel Committee announced
that the implementation of the new market risk
framework (FRTB), initially planned for 2019, will be
delayed to 1 January 2022.
The final framework makes a number of significant
improvements on the proposals initially raised.
According to an analysis conducted by the
Basel Committee and the EBA, the final Basel III
framework will have only a limited impact overall.
The completion of Basel III provides certainty on
the regulatory requirements for the banking system
and contributes to the credibility of the banks' asset
valuation models.
The Basel Committee also published a consultative
document opening a debate on the review of
the capital treatment of sovereign debt and the
additional information requirements regarding
banks' exposure to this debt.
2. THE GROUP’S RESULTS IN 2017Economic, banking and regulatory environmentAnnual Report 2017
Santander believes regulation should:
Be agile and
flexible,
fostering
innovation
and digital
transformation.
Cover new realities:
cybersecurity, the
cloud, distributed
ledger technology, and
artificial intelligence,
as well as the use and
access to data.
Ensure a level
playing field: the
same activity and
the same risks
should require the
same regulation
and supervision.
Complete the European
Banking Union with
a European deposit
guarantee fund and a
fiscal backstop for crisis
management.
The fintech debate takes off
The Basel Committee released a set of
recommendations in 2017 to control and
supervise the activities of fintechs, focusing on
the risks these companies pose for banks, as well as
the opportunities that their developments may offer
for the economy.
These recommendations add to those already
issued by other international bodies, such as the
International Monetary Fund and the Financial
Stability Board (FSB), and European organisations
such as the European Banking Authority.
The aim of the authorities is to understand and
monitor developments in digital transformation
to assess the effects they might have on banking
business models, financial stability, consumer
protection and risks such as cybersecurity and
terrorism financing.
Cooperation between the authorities and an intense
dialogue with the industry is essential if this analysis
is to be carried out quickly and efficiently.
Sustainable economy
In June 2017, the Task Force on Climate-related
Financial Disclosures of the Financial Stability Board
(FSB) released its recommendations on how best
to prepare financial information in such a way as to
present most efficiently the risks relating to climate
change. This task force has set up a working group,
of which Banco Santander is a member, to facilitate
the implementation of these recommendations.
Meanwhile, in January 2018, the European
Commission's High-Level Expert Group on
Sustainable Finance (HLEG) published its definitive
recommendations on global strategy in the field
of sustainable finance in the EU, integrating social,
environmental and corporate governance aspects.
Based on these, the European Commission will
present an action plan in three main areas:
• Integrate sustainability factors into investment
criteria.
Review of the capital
and bank resolution
frameworks in Europe
In November 2016, the
European Commission
published a proposal to
reform the capital and bank
resolution frameworks with
several aims:
• Create a common vocabulary and classification to
let investors know what is green and sustainable.
• Reducing risk in the
banking sector.
• Encourage banks to play a role in financing the
• Introducing the new Basel
sustainable economy.
Banco Santander shares the aim of building a
financial system that supports sustainable economic
growth.
The Banking Union
In October 2017, the European Commission
published a communication in a bid to further
negotiations on completing the Banking Union.
The measures include the need to progress
with the revision of the capital and resolution
framework, the single European deposit
guarantee fund, a backstop for the European
resolution fund and the treatment of sovereign
debt.
III standards on market risk,
leverage ratios and interest
rate and counterparty risk.
• Integrating the loss
absorbing capacity
requirement (TLAC: Total
Loss Absorbing Capacity
(TLAC) requirement, set
at international level by
the FSB in the European
framework.
In addition, it proposes
reviewing other aspects
of the current resolution
framework, which was
applied in practice for the
first time with the resolution
of Banco Popuiar.
57
Annual Report 2017 In 2017 Santander grew its profit, increased shareholder return and strengthened its balance sheet, all in a responsible manner
Growth
In 2017, Santander grew in all its main metrics and met
its targets earlier than expected, with double-digit
growth in revenue and in underlying proft before taxes
Santander’s strategy focuses on customer loyalty in all its markets
and on growth in digital customers. The continued improvement
in the multichannel offering with new digital apps, innovative
products and sound business strategies led to a significant increase
in the number of loyal and digital customers in 2017.
LOYAL CUSTOMERS
DIGITAL CUSTOMERS
(Millions)
(Millions)
17.3
25.4
+13%
+21%
15.2
21.0
2016
2017
2016
2017
Santander grew responsibly, in line with its purpose: to help
people and businesses prosper. The Group recorded growth in
lending in the main segments in eight of the ten core units.
In customer funds, the focus was on demand deposits and
investment funds, which grew in eight of the ten core units.
The 109% loan-to-deposit ratio (114% at year-end 2016)
reflects the robust funding and liquidity structure.
ACTIVITY (EXCLUDING POPULAR)
(%)
+8%
+8.6%
Sight deposits
+13.8%
Investment funds
+2%
Lending
Customer
funds
Growth in constant euros
Our recurring proftability
enables us to lend more to
our customers and increase
dividends and generate capital
Ana Botín,
2017 Earnings presentation
Santander Group City, January 2018
58
2. THE GROUP’S RESULTS IN 2017Santander Group resultsAnnual Report 2017 In 2017 Santander grew its profit, increased shareholder return and strengthened its balance sheet, all in a responsible manner
Profitability
Strength
Santander is one of the most predictable, proftable
and efficient banks in the world. This enables it
to increase both customer lending and dividend
payments while organically generating capital
Santander strengthened its balance sheet thanks to a
unique business model focused on ten core markets
and ended 2017 with more capital and a lower NPL
ratio (excluding Banco Popular)
Improved customer loyalty drove strong growth in fee income,
while digitalisation and operational excellence helped revenue to
grow faster than costs, leading to an improvement in the cost-to-
income ratio to 47%. Santander is among the three leading banks
for customer satisfaction in seven of its nine core countries.
The organic generation of capital and the issuance of €7,072
million relating to the Banco Popular transaction helped
strengthen the Group. The fully loaded CET1 ratio reached
10.84%, 29 basis points more than at year-end 2016. The fully
loaded leverage ratio is 5.0% and the capital tangible book
value stands at €4.15.
FEE INCOME
(Million euros)
COST-TO-INCOME RATIO
CAPITAL RATIOS (FULLY LOADED)
(%)
(%)
11,597
+14%
64%
47%
10,180
14.48
12.11
10.84
CET1
Tier1
Total capital ratio
(including Tier2)
13.87
11.53
10.55
2016
2017
SANTANDER
GLOBAL PEERS
(Sept. 2017)
2016
2017
As a result of the growth in revenue, control of costs and the
trend in provisions, underlying profit before taxes rose by 20%
(in constant euros) and increased in eight of the Group’s ten
core units. Santander obtained one of the highest underlying
RoTE rates among European banks. Santander’s subsidiaries
are among the leaders in terms of profitability in their
respective markets.
Non-performing loans (excluding Banco Popular) fell 16% in
2017, a reflection of Santander’s traditional prudence in risk
management, while the coverage ratio rose to 71%. At 1.07%, the
cost of credit (excluding Banco Popular) is already below the
target maximum value established at the Investor Day. Including
Banco Popular, the NPL ratio stands at 4.08%, after the sale of
real estate assets to Blackstone.
ATTRIBUTABLE PROFIT
ROTE
NPL AND COVERAGE RATIOS
(Million euros)
(%)
6,619
+7%
6,204
11.08
11.82
10.38
10.41
2016
2017
2016
2017
Underlying
Total
(%)
Coverage ratio
Non-performing loans
Including Banco Popular
74
3.93
2016
71
65
4.08
3.38
2017
59
Annual Report 2017 Santander Group key data
Including Banco Popular
BALANCE SHEET (million euros)
Total assets
Net customer loans
Customer deposits
Total customer funds
Equity
INCOME STATEMENT* (million euros)
Net interest income
Gross income
Net operating income
Underlying profit before taxes**
Underlying profit attributable to the Group**
Profit attributable to the Group
EPS***, PROFITABILITY AND EFFICIENCY (%)
Underlying attributable profit per share (euros)
Underlying EPS (euros)**
RoE
Underlying RoTE**
RoTE
RoA
Underlying RoRWA**
RoRWA
Cost-to-income ratio (including depreciation and amortisation)
SOLVENCY AND NPL RATIO (%)
Fully-loaded CET1
Phased-in CET1
NPL ratio
Coverage ratio
MARKET CAPITALISATION AND SHARES
Number of shares (millions)
Share price (euros)***
Market capitalisation (millions of euros)
Tangible book value (euros)***
Price / tangible book value***
P/E ratio***
OTHER DATA
Number of shareholders
Number of employees
Number of branches
2017
1,444,305
848,914
777,730
985,703
106,832
2016
%2017/2016
2015
1,339,125
790,470
691,112
873,618
102,699
7.9
7.4
12.5
12.8
4.0
1,340,260
790,848
683,142
849,403
98,753
2017
34,296
48,392
25,473
13,550
7,516
6,619
2017
0.463
0,404
7.14
11.82
10.41
0.58
1.48
1.35
47.4
2017
10.84
12.26
4.08
65.2
2017
16,136
5,479
88,410
4.15
1.32x
13.56x
2017
2016
%2017/2016
10.3
10.3
11.9
20.0
13.5
6.7
%2017/2016
7.8
0.9
%2017/2016
31,089
43,853
22,766
11,288
6,621
6,204
2016
0.429
0,401
6.99
11.08
10.38
0.56
1.36
1.29
48.1
2016
10.55
12.53
3.93
73.8
2016
%2017/2016
10.7
12.3
22.3
14,582
4.877
72,314
4.15
1.15x
12.18x
2016
%2017/2016
4,029,630
3,928,950
202,251
13,697
188,492
12,235
2.6
7.3
11.9
2015
32,189
45,272
23,702
10,939
6,566
5,966
2015
0.438
0.397
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
4.483
65,792
4.00
1.12x
11.30x
2015
3,573,277
193,863
13,030
(*) Variations w/o exchange rate: 2017/2016: NII: +10.2%; Gross income: +10.2%; Net operating income: +11.4%;
Underlying attributable profit: +14.3%; Attributable profit: +7.4%
(**) Excluding net capital gains and provisions.
(***) Data adjusted to capital increase of July 2017.
60
For more information about the results of the
Group and its main units see 110-194 of Banco
Santander’s 2017 Annual Report.
2. THE GROUP’S RESULTS IN 2017Santander Group resultsAnnual Report 2017 Results by countries and businesses
Spain*
Banco Santander became the leading
bank in Spain following the acquisition
of Banco Popular. Santander Spain’s
loyalty-centred strategy is producing
good results while the Bank is making
progress in its digital transformation.
+42%
loyal customers
+15%
digital customers
A Santander branch in Spain
Strategic
priorities
Seamlessly integrate
Banco Popular
Profitable,
loyalty-based
growth
Bank of choice
for corporates
Digital transformation
to improve the
customer experience
2017
Highlights
Since the acquisition of Banco Popular in June, the
priority for Santander Spain has been to carry out
an exemplary integration, without losing a single
customer and maintaining the same excellence in
service.
Income from fees grew in double digits. Leadership
in Global Corporate Markets, private and personal
banking were maintained, while market share grew in
SMEs and large companies corporate.
ommercial strategy is focused on increasing
The c
customer loyalty and improving the customer
experience.
The 1l2l3 strategy was a key factor in increasing
individual customer loyalty by 54%. Progress was
made in completing the value proposition with
the Smart 1l2l3 account for millennials and the
Zero account, a fully digital, zero-fee account.
ith the new positioning in corporates,
W
aimed at making Santander their bank
of choice, loyalty rose by 6%. There was
notable growth in value-added products,
such as international business (up 16%).
In wholesale banking, Santander consolidated
its leadership in the main rankings, such as
those for fixed income and syndicated lending.
f cards reached a record 1.4 million
Sales o
in the year while new lending through
cards increased by more than 50%.
Household lending grow
the market, particularly mortgages, with new
lending increasing by 33% during the year.
th outperformed
digital transformation progressed with
The
the launch of Digilosofía, Santander’s new
digital philosophy. Santander is the leading bank
for mobile payments in Spain, with 60% of the
market. The digital ecosystem was renewed
with a new website and app for individual and
corporate customers, together with other launches
such as App Renting Bansacar, Confirming
Santander and Mi Comercio (My Business).
Sant
ander helped people and businesses
prosper by providing over 12,000 grants and
support to more than 1,200 entrepreneurs.
Sant
ander Spain was certified as a Top Employer,
demonstrating its commitment to the Simple Person
and Fair (SPF) culture and to the Organisation.
al
ander Spain received The Banker's award as
Sant
Bank of the Year in Spain and Best Private Bank.
Key data
People
22,916 (-0,4%)
Customers (millions)
12,675 (-1.2%)
Loans1 2
148,585 (-1,6%)
Attributable profit1
1,180 (+46,4%)
Contribution to
Group profit3
15%
1. Millions of euros.
2. Gross lending, changes without repos.
*Figures excluding Banco Popular.
3. Including Popular.
61
Annual Report 2017
Santander Consumer Finance
SCF is the consumer finance leader in Europe. It
specialises in auto finance and in loans for durable
goods, personal finance and credit cards.
It is present in 15 European countries: Germany,
Austria, Belgium, Denmark, Spain, Finland, France,
Netherlands, Italy, Norway, Poland, Portugal,
United Kingdom, Sweden and Switzerland.
>130K
agreements with
associated points
of sale
>100
agreements with 16
car and motorcycle
manufacturers
Santander Consumer Finance head office in Austria
Strategic
priorities
Support the
transformation
of manufacturers
and dealers
Develop innovative
products and digitalise
the customer
cycle processes
Implement open e-commerce
platforms in the businesses
and sign new agreements
with distributors
Develop channels,
business intelligence
and digital value-
added propositions
2017
Highlights
Ordinary profit of €1,254 million, 15%
more than the previous year. Attributable
profit of €1,168 million, including a charge
of €85 million in Germany.
The agreements with Banque PSA
Finance, finalised in prior quarters,
advanced and includes joint ventures in 11
countries.
Increased income, due mainly to net
interest income (up 5%).
Advances w
ere made in digitalisation of
channels and procurement and lending
procedures.
The cost-to-income ratio stands at 44%,
an improvement of 0.6 percentage point.
The NPL ratio fell to 2.5%, while coverage
is 101%.
By geographies, the main contributors
to underlying profit were Germany (€364
million), the Nordic countries (€318
million) and Spain (€241 million).
N ew production rose in the main
countries, especially in the automotive
sector (+11%) and the consumer business,
notably cards (+9%).
1. Millions of euros, with changes in constant currencies. 2. Gross lending, changes without repos.
62
Key data
People
15,131 (+1.4%)
Customers (millions)
19.9 (+11%)
Loans1 2
92,431 (+6.2%)
Attributable profit1
1,168 (+4.4%)
Contribution to
Group profit
13%
2. THE GROUP’S RESULTS IN 2017Results by countries and businessesAnnual Report 2017
Poland
Bank Zachodni WBK consolidates its position
as the third bank in the country following the
agreement to acquire the retail and private
banking activities of Deutsche Bank in Poland.
+3%
loyal
customers
+6%
digital
customers
2017
Highlights
The Bank pr
esented its new brand promise and
claim: "Bank As You Want It". The new Account
As I Want It, allowing users to adapt banking
services to their needs flexibly, was launched and
at year-end had 335,000 customers.
Nearly 3.4 mil
lion customers have access to
mobile and online banking services through
BZWBK24. The proportion of credit facilities sold
through remote channels (mobile, internet or
contact centre) rose to 38%.
Portugal*
Santander Totta is Portugal’s most profitable
bank, with market shares of around 15.5% in
loans and 13.2% in deposits (November 2017).
+8%
loyal customers
+11%
digital customers
Bank Zachodni WBK branch in Poland
The Bank issued nearly
electronic student cards with a payment function.
120,000 smart cards:
achodni WBK introduced a biometric voice
Bank Z
solution aimed at large companies, together with
electronic guarantees incorporating a qualified
electronic signature option and biometric facial
recognition for individuals.
E uromoney awarded Bank Zachodni WBK the
prizes for Best Bank in Poland and Best Bank in
Poland for SMEs.
2017
Highlights
Santander Totta branch in Portugal
W
ith the acquisition of Banco Popular, Santander
Totta became the country's largest private bank,
in terms of domestic assets and lending.
ket share in new lending to companies was
Mar
17% and in new mortgage lending above 20%.
The Bank made progr
increasing its sales through innovative products
in digital channels. At year-end, digital channels
ess with its mobile app,
*Figures excluding Banco Popular.
accounted for 28% of the Bank’s total sales of
products.
ander Totta was recognised as Best
In 2017, Sant
Bank in Portugal by Euromoney and Global
Finance and as Bank of the Year by The Banker.
Key data
People
11,572 (-3.6%)
Customers (millions)
4.4 (+1%)
Loans1 2
22,974 (+5.1%)
Attributable profit1
300 (-2.8%)
Contribution to
Group profit
3%
1. Millions of euros, with changes in
constant currencies.
2. Gross lending, changes without repos.
Key data
People
5,895 (-6.5%)
Customers (millions)
4.7 (+18%)
Loans1 2
31,296 (+7.8%)
Attributable profit1
440 (+10.2%)
Contribution to
Group profit3
5%
1. Millions of euros.
2. Gross lending, changes without repos.
3. Including Popular.
63
Annual Report 2017
United Kingdom
Santander is one of the leading banks in the
country, with an innovative value offering for
retail customers and small businesses. In 2017,
it remained focused on improving customer
loyalty and customer experience through
digitalisation and simpler products.
+5%
loyal
customers
+10%
digital
customers
Santander branch in the United Kingdom
Strategic
priorities
Increase customer
loyalty and
market share
Provide
operational and
digital excellence
Achieve profitability
growth and a strong
balance sheet
Support communities
through expertise,
knowledge and innovation
2017
Highlights
Sant
ander UK's principal businesses
recorded good results, with growth in net
interest income, an improved cost-to-
income ratio and high credit quality.
ander UK is continuing with its 1|2|3
Sant
World strategy, which has transformed
its business and accounts for 5.4 million
customers, up 275,000 on December 2016.
D igital customers continued growing to 5 million,
while users of mobile apps reached 1.9 million.
ander UK continued to develop its digital
Sant
offering by expanding the information on
the fund platform Investment Hub, which
helps its 220,000 registered users to better
understand and meet their investment needs.
ander UK launched in June a programme
Sant
that allows customers to apply for a mortgage
online or via videoconference with a financial
advisor. The bank also expanded the features
of its mobile offering through Android Pay.
Outst
anding residential mortgages grew
by GBP 600 million this year, reflecting
the price adjustments required in a
competitive market, with an emphasis
on customer service and retention.
ander UK rolled out the NeoCRM customer
Sant
relationship management tool, used by 14,000
branch and call centre employees, which
provides better customer knowledge enabling
improved communication with customers.
e inflationary pressure, operational
Despit
efficiency continued to benefit from
the growth of the business and
improvements in digital channels, leading
to a cost-to-income ratio of 50%.
Key data
People
25,971 (+1.1%)
Customers (millions)
25.4 (+0%)
Loans1 2
235,783 (+0.8%)
Attributable profit1
1,498 (-2.7%)
Contribution to
Group profit
16%
1. Millions of euros, with changes in constant currencies. 2. Gross lending, changes without repos.
64
2. THE GROUP’S RESULTS IN 2017Results by countries and businessesAnnual Report 2017
Brazil
Santander is Brazil's third largest private bank
and largest foreign bank. In 2017 it met its
profitability target thanks to its customer-
centred business model, the commitment of its
47,000 employees and a strategy focused on
profitable growth.
+14%
loyal
customers
+34%
digital
customers
A Santander branch in Brazil
Strategic
priorities
Income growth
Gain market share in
acquiring, consumer
and SMEs
Digital
transformation
Risk management
and recoveries
2017
Highlights
owth, credit quality and
Balance sheet gr
appropriate control of costs drove a significant
increase in Santander Brazil's net profit.
Deposits grew by 37% during the year and
lending by 7%. The cost-to-income ratio improved
by 3.9 percentage points to 35.6%, while the
NPL ratio declined from 5.90% to 5.29%.
Solutions to optimise the customer e
xperience:
Superdigital, the mobile platform that provides
transaction services without a bank account,
reached more than a million customers and
brought innovations such as transfers by chat
and online shopping. The Santander Way app,
which simplifies credit card transaction, continues
to garner high ratings from users, with 4.8 stars
in the Apple Store and 4.6 in Google Play.
ts and services: Santander One,
New produc
the new digital financial advice channel focused
on investment, registered over 8 million views.
Consignado Digital, which enables customers
to manage their payroll deposit, helped
increase market share in this segment by 214
basis points to 12.9%. Santander Corretora
also has a new app that enables customers
to ask questions, receive recommendations.
and invest more quickly and easily.
Sant
ander Brazil also created Santander
Auto, a fully digital insurer resulting from
a joint venture with HDI Seguros.
New opera
tions model: with the aim of
improving customer satisfaction, a new,
more efficient model, centred on operational
excellence, was implemented, with an end-
to-end vision of the process experienced by
customers when using products and services.
Str engthening of businesses: A 70% stake in
Ipanema Credit Management, a company that
manages impaired loan portfolios, was acquired.
It will contribute more experience and expertise
in loan recoveries. In ECM (Equity Capital
Markets), Santander Brazil was the country's
leading operator, according to Dealogic.
estigious awards received in 2017:
Most pr
Santander Brazil was named Bank of the Year
in Brazil for the first time by The Banker and Best
Bank in Brazil by Euromoney. In addition, for the
second consecutive year it was named as one the
best companies to work for by Great Place to Work.
Key data
People
47,135 (+0.9%)
Customers (millions)
38.1 (+11%)
Loans1 2
74,341 (+7.2%)
Attributable profit1
2,544 (+33.7%)
Contribution to
Group profit
26%
1. Millions of euros, with changes in constant currencies. 2. Gross lending, changes without repos.
65
Annual Report 2017
Mexico
Santander is the second largest bank in
Mexico in terms of mortgages and loans to
companies, and the third largest in credit
cards.
+24%
loyal
customers
+52%
digital
customers
A Santander branch in Mexico
Strategic
priorities
Increase direct
deposits by payroll
and strengthen the
Santander Plus offer
to encourage loyalty
Consolidate
positioning in SMEs
and strengthen
leadership in
mortgages
Operational and
technological
transformation through
digital platforms and
customer management
Improve customer
service in all
channels throughout
the Bank
2017
Highlights
ander Mexico advanced with its 15,000
Sant
million-peso, three-year investment plan,
focused on strategic initiatives such as the
modernisation of channels, systems and
infrastructure.
• Tuiio aims to foster mass market financial
inclusion with a measurable social impact
by means of a broad competitive offering
with its own operations, infrastructure and
brands.
unch, the Santander Plus
Since its la
programme has attracted over 3.0 million
customers, of whom 52% are new.
The Bank incr
eased its digital customer base
by over 52% compared to 2016, reaching 1.9
million active customers.
Launches
:
• Santander Connect, a new remote banking
model, personalised and fully digital, in which
customers interact with their relationship
managers by video call.
• S potlight, Santander Mexico's digital
factory, has 120 people dedicated to the
development of digital solutions based on
flexible, collaborative workstreams.
• C ampus Pay, a pioneering application for
Mexico that boosts the use of bank services
by university students and enables them
to make payments in their educational
establishments using their smartphones.
• Th e Santander Me programme is designed
to help women in their empowerment.
• S ervice by bots. Santander has implemented
three automated reply systems for customers
using robots: on the website, Facebook and
Twitter. It is the only bank with this triple
automated system in Mexico.
Euromoney recognised Santander Mexico
as Best Investment Bank in Mexico and
International Finance Magazine (IFM) named it
Most Socially Responsible Bank in Mexico,
for the second consecutive year.
1. Millions of euros, with changes in constant currencies. 2. Gross lending, changes without repos.
66
Key data
People
18,557 (+5.4%)
Customers (millions)
15.1 (+12%)
Loans1 2
26,962 (+4.6%)
Attributable profit1
710 (+16.5%)
Contribution to
Group profit
7%
2. THE GROUP’S RESULTS IN 2017Results by countries and businessesAnnual Report 2017
Chile
Santander is the country’s leading private
sector bank in terms of assets and customers.
+3%
loyal
customers
+5%
digital
customers
2017
Highlights
WorkCafé in Chile
ander Chile introduced On-boarding
In 2017, Sant
Digital, the first fully digital platform for non-
customers to become customers. Touch-ID
(fingerprint) enables customers to buy banking
products in seconds on their mobile phones.
These initiatives have enabled the Bank to recruit
a million digital customers, of whom 450,000
have downloaded the app and 300,000 are active
customers, the highest figures of any local bank.
f Santander Life, the new generation of
Launch o
products for individual customers sold in a fully digital
format, which enables them to accumulate Méritos
Life (exchangeable points). The better the customer's
payment behaviour, the more benefits they obtain.
The WorkCafé model was consolidated, with
over 20 new sites. WorkCafé has been recognised,
not only for its attractive format, but also for its
commercial process, based on advanced digital
technology.
ander Chile was named Best Bank in Chile by
Sant
The Banker, Euromoney and Latin Finance. In addition,
it is considered the second best large company to
work for in Chile, according to Great Place To Work.
Argentina
Santander Río is Argentina’s leading private
bank in business market share, following the
integration of the retail business acquired from
Citibank N.A.’s unit in Argentina and through
organic growth.
+20%
loyal
customers
+30%
digital
customers
2017
Highlights
Santander Río integrated 500,000 individual
customers and a network of 70 branches
following the acquisition of the retail business of
Citibank N.A.’s Argentine unit.
Market share stands at 10% in lending and 11%
in deposits.
Al
liance with American Airlines and its frequent
flyer AAdvantage®, which will allow Santander
Río customers to accumulate air miles when they
use their cards to make purchases.
Santander Rio branch in Argentina
The branch transf
ormation plan continues, with
276 already converted and two digital branches.
La unch of UVA inflation-linked mortgage loans.
Contribution to Group profit
Santander Río achieved fourth place in the
Great Place to Work ranking. In addition, it was
named Best Digital Bank and Best Mobile Bank
in Latin America by Global Finance magazine and
Best Bank in Argentina by LatinFinance magazine.
4%
1. Millions of euros, with changes in
constant currencies.
2. Gross lending, changes without repos.
67
Key data
People
11,675 (-2.7%)
Customers (millions)
3.5 (-3,3%)
Loans1 2
38,249 (+2.7%)
Attributable profit1
586 (+11.7%)
Contribution to
Group profit
6%
1. Millions of euros, with changes in
constant currencies.
2. Gross lending, changes without repos.
Key data
People
9,277 (+17%)
Customers (millions)
3.6 (+23%)
Loans1 2
7,608 (+44%)
Attributable profit1
359 (+14%)
Annual Report 2017
United States
Santander’s US franchise consists of a retail and
commercial bank in the Northeast, a nationwide
vehicle financing business based in Dallas, an
international private banking business in Miami
providing services to non-US residents, a broker-dealer
in New York and a retail bank in Puerto Rico.
+8%
loyal
customers
+5%
digital
customers
Santander branch in the United States
Strategic
priorities
Improve customer
experience
and loyalty
Provide auto
financing to all
customer segments
Improve
profitability
Continue to comply
with regulatory
expectations
2017
Highlights
Santander US achieved two key regulatory
milestones in 2017, passing the Federal Reserve’s
capital stress test and closing its 2014 Written
Agreement with the Federal Reserve. As a result,
Santander US has now returned to a normal
capital approval cycle and paid dividends to the
Group for the first time since 2011. Underlying
profit rose by 5% in 2017.
Santander Bank has 670 branches in the
Northeast of the United States. The net interest
margin improved substantially during the year,
reaching the same level as its peers. The Bank
continued to improve customer experience,
expanding its digital range and its commitment
to communities. Santander Bank announced a $11
billion five-year plan to invest in the communities
it serves.
orporate Banking (GCB) and Retail
Global C
and Commercial Banking continued to
demonstrate the value of Santander US to the
Group. The US-Mexico and US-UK collaboration
projects are well underway, with a considerable
number of transactions signed and an ample
portfolio of new ones in the pipeline. US-Mexico
collaboration increased cross-border income
by 64% in the 2015-2017 period, while US-UK
collaboration increased it by around 30% over the
same period.
Key data
Santander Consumer USA, one of the leading
automotive financial institutions in the US,
continued to optimise its customer mix, and
consolidated its strategic relationship with
Chrysler Capital, maintaining its leadership
position in the ABS market and strengthening
its risk management, compliance and consumer
practice programmes.
Banco Santander International in Miami
achieved double-digit growth in profits in 2017,
boosted by the inflow of new customers.
Banco Santander Puerto Rico was named Best
Bank in Puerto Rico by Euromoney magazine for
a fourth consecutive year. It quickly reopened
its branches after the destruction wrought by
hurricane Maria, and it continues to support the
recovery efforts.
People
17,560 (+0.3%)
Customers (millions)
5.0 (-3%)
Loans1 2
75,389 (-4.3%)
Attributable profit1
332 (-6.7%)
Contribution to
Group profit
4%
1. Millions of euros, with changes in constant currencies. 2. Gross lending, changes without repos.
68
2. THE GROUP’S RESULTS IN 2017Results by countries and businessesAnnual Report 2017
Santander Global Corporate Banking (SGCB)
SGCB is a global division that supports
corporate and institutional clients, offering
tailored services and value-added wholesale
products suited to their complexity and
sophistication. SGCB’s main aim is to be the
best bank for its clients in Latin American
and Europe, with solid business hubs in the
US and Asia.
Santander Global Corporate Banking (SGCB)
Strategic
priorities
Capture international
business flows
between the
countries in which
the Group is present
Offer value-added
products for specialised
customers of the
retail and commercial
banking network
Evolve towards a low
capital consumption
business
Deepen customer
relationships within
the franchise
2017
Highlights
engths are based on Santander's
SGCB's str
strong, extensive local network, with the best
franchise in Latin America and the Iberian
peninsula in debt capital markets, project finance,
equity capital markets and Export Credit Agency
(ECA) financing.
Debt capital markets: Santander maintains its
leadership in Latin America, with an increase
in origination and execution of cross-border
transactions in dollars, sterling, euros and local
currencies. Notable participation in the main
debt issues in Europe and the Americas.
The
cash management business grew faster
than the market in 2017, with very significant
mandates through the Santander Cash Nexus
solution. The number of transactions and the
active customer base both doubled, both in SGCB
and in retail and commercial banking.
E xport and agency finance: leadership positions
in the ECA global business rankings (No. 1
in Dealogic global league tables, excluding
aircraft and shipping). The focus continues to
be on origination, in both established and new
emerging markets.
T rade and working capital solutions: significant
growth in supply chain finance products, both
receivables and international reverse factoring
solutions, especially in Latin America.
Syndicated corporate loans: the Bank took part
in the main transactions in the year in its core
markets.
Sant
ander maintains its leadership position in
structured finance in Latin America, Spain and
the UK.
market activity, strong income growth in
In
Spain, the UK and Asia. Increased contribution
in book management, notably in the UK, Spain,
Portugal and Mexico.
C orporate finance: SGCB had a historic year
in share placement, taking part in the main
transactions in both continental Europe and Latin
America.
Key data
Loans1 2
87,015 (-5%)
Attributable profit1
1,821 (+1%)
Contribution to
Group profit
20%
1. Millones of euros, with changes in constant currencies. 2. Gross lending, changes without repos.
3. This global unit’s results are included in countries’ profit figures.
69
Annual Report 2017
3
CORPORATE
GOVERNANCE
REPORT
72 Executive summary
74 Introduction
75 Ownership structure
78 Banco Santander’s board of directors
99 Group structure and governance
framework
102 Shareholder rights and the general
shareholders’ meeting
104 Santander Group management team
106 Transparency and independence
108 Challenges in 2018
New and major challenges lie ahead,
against a backdrop of change. We will tackle
them with a robust system of corporate
governance and with the maximum
engagement of our board of directors
A committed, balanced and diverse board
> Of 14 directors, 11 are non-executive and 3 are executive.
> A majority of independent directors
> 36% female board members
Equality of shareholder rights
> Principle of one share, one vote, one dividend.
> No defensive mechanisms in the Bylaws.
> Encouragement of active and informed participation at
meetings.
Maximum transparency as regards remuneration
In the vanguard of best international practices
> A corporate governance system in line with the guidelines and
recommendations of international bodies.
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
Directors’ background and dedication, in addition to their
judgement, are a huge asset enabling the board and executive
team to turn technology challenges into opportunities
Ms Ana Botín,
executive chairman
of Banco Santander
General shareholders' meeting
7 April 2017
EXECUTIVE SUMMARY
Changes in the composition of the
Board and its Committees
In 2017 the composition of the board has changed in order to reinforce
its competences and diversity:
On 26 June 2017, the Bank's board of directors, at the proposal
of the appointments committee, agreed to appoint Ms Homaira
Akbari and Ms. Esther Giménez-Salinas i Colomer as members
of the audit committee and the risk supervision, regulation and
compliance committee, respectively, replacing Mr. Juan Miguel
Villar Mir, who resigned from both committees on the same date.
On 28 November 2017, at the proposal of the appointments
committee and after having obtained the necessary regulatory
clearance, the board of directors agreed to appoint Mr Ramiro
Mato García-Ansorena as independent director, filling the vacancy
left by Ms Isabel Tocino Biscarolasaga following her resignation on
that same date. The board also appointed, at the proposal of the
appointments committee, Mr Ramiro Mato García-Ansorena as
member of the executive committee, the audit committee and the
risk supervision, regulation and compliance committee.
Mr Mato holds a degree in Economics from the Universidad
Complutense and in Management Development Programme
of the Harvard Business School. He has spent all his extensive
professional career in banking, in which he started to work in the
year 1980. Having held a number of positions in the public group
Argentaria, some of them in the Latin America market, in 1993
he joined BNP Paribas, being its top representative in Spain and
Portugal and director in different companies of the BNP Group,
in Bolsas y Mercados Españoles, S.A. and in the Spanish Banking
Association.
Mr Mato’s appointment will be put forward for approval at the next
general shareholders’ meeting.
In addition, in the meeting of the board of directors held on
28 November 2017, Mr Matías Rodriguez Inciarte tendered his
resignation as director, resigning also as vice chairman of the board
of directors and as member of the executive committee and the
innovation and technology committee, and also as member and
chairman of the Executive Risk Committee, which is now chaired by
the CEO, Mr Jose Antonio Alvárez.
In the same meeting of 28 November 2017, the board of directors,
at the proposal of the appointments committee, agreed to appoint
Mr Carlos Fernández González as member of the remuneration
committee, who withdrew as a member of the risk supervision,
regulation and compliance committee on that date.
In its meeting of 19 December 2017, the board of directors agreed,
at the proposal of the appointments committee, to appoint Ms
Belén Romana García as member of the innovation and technology
committee, filling the vacancy left by Mr Matías Rodríguez.
In its meeting of 13 February 2018, the board of directors agreed,
at the proposal of the appointments committee, to submit to the
general shareholders’ meeting to be held on 22 or 23 March 2018,
in first or second call, respectively, the appointment of Mr. Álvaro
Antonio Cardoso de Souza as independent director to fill the
vacancy left following the resignation of Mr Matías Rodríguez
Inciarte.
Lastly, in the meeting of 13 February 2018, the board of
directors also agreed to submit to the aforementioned General
shareholders' meeting of 2018, the amendment of article 41 of
the Bylaws to reduce the minimum and maximum thresholds
of composition of the board of directors, which are currently
fixed between 14 and 22 members, at a minimum of 12 and a
maximum of 17, size more aligned with the recommendations of
the Good Governance Code.
Following the above changes, the board of directors and its
committees are now more diverse in terms of knowledge and
professional experience for the efficient performance of their
respective duties.
Activities of the board
The board held 15 meetings in 2017. In addition to the report made
by the executive chairman at each annual meeting, the chief
executive officer submitted management reports on the Group.
As in previous years, the board held one specific meeting on
the Group’s global strategy in the long term, with which he is
fully committed as a way to achieve a profitable and sustainable
business in the long term.
The board received reports from and was directly accessible
by the heads of internal control functions, namely risks (CRO),
compliance (CCO) and internal audit (CAE). This ensures the
necessary independence of such functions and facilitates the
board’s oversight work on the three lines of defence.
Digital transformation, Big Data and new information technologies,
in addition to risks related to cyber-security and technology threats,
have increased its importance amongst the topics dealt by the
board and are fully integrated in the board’s agenda.
The board actively takes part in defining and overseeing the
corporate culture and values, particularly in the corporate
social responsibility policy. On 13 February 2018, the board
amend its rules and regulations in order to, among others,
regulate a dedicated responsible banking, sustainability and
culture committee for the purpose of advising the board on the
formulation and review of corporate culture and values, and on
relations with stakeholders, especially employees, customers and
consumers in countries where the Group operates.
72
2017 Annual Report
Social demand for greater transparency in business activities,
beyond the financial sector, is fully internalised in board decision-
making and in the non-financial information reported in the long-
term strategy and in the non-financial information disclosed,
with special focus on the analysis of socio-environmental risks.
Dividend policy
Banco Santander has traditionally paid its shareholders, against
year earnings, three interim dividends and a final dividend in the
months of August, November, February and May, respectively.
Total remuneration charged to 2017 earnings is expected to
total 0.22 euros per share via a scrip dividend and three cash
dividends, which amounts to an increase of 5% in total dividend
per share and 9% in cash compared to 2016.
To date, two interim dividends of 0.06 euros per share have
been paid out against 2017 earnings, in August 2017 and
February 2018, and another of 0.04 euros per share in November
2017 through the Santander Scrip Dividend scheme, with a
subscription percent of 84.61%. If approved by the general
shareholders' meeting in 2018, a final cash dividend of 0.06 euros
per share will be paid out in May.
In coming years, dividends are expected to perform in line with
the increase in results, bringing the cash pay-out to between
30% and 40% of recurring profit.
Bylaw-stipulated emoluments
Bylaw-stipulated emoluments earned by the board amounted to
4.7 million euros in 2017, which is 22% lower than the maximum
amount approved by shareholders at the general meeting held
on 7 April 2017.
Remuneration of executive directors
At the general shareholders’ meeting of 7 April 2017, shareholders
also approved the maximum ratio of 200% between variable and
fixed pay items for 2017 for a maximum of 1,000 members of the
identified staff, including executive directors.
In addition, the same shareholders’ meeting also took the binding
decision to approve the director remuneration policy of Banco
Santander, S.A. for 2017, 2018 and 2019 and, on a consultative
basis, voted the annual report on director remuneration.
Investors and analysts held a positive view of, amongst other
changes, 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 multiyear performance measures, thus making the
ratio of long and short-term objectives more effective as part of
the directors remuneration policy.
Appointments at subsidiariess
On 2017 the appointments committee endorsed the appointment
of directors and senior executives of the main subsidiaries
of the Group, after assessing their skills, competencies and
appropriateness for the role.
Internal governance framework at the Group
In 2017, the Group continued to develop and update its Internal
Governance Framework, which comprises a model that regulates
parent-subsidiary relations and a set of corporate frameworks
that develop this model. The corporate frameworks cover all the
different functions and decision-making processes that the Board
of Directors deems to be important. A series of new corporate
frameworks were approved (for cyber-security and outsourcing
and arrangements with third parties) while others were updated
and improved where needed.
Also, Internal Governance continues to make progress in its
work of adapting the Group’s governance structure to meet the
expectations of the Board. This work continues to focus on;
• overseeing the effective application of the parent-subsidiary
model of governance;
• ensuring the internal consistency and effectiveness of the
Internal Governance system and of its different component
elements (governance model, corporate frameworks, operating
models, policies and procedures);
• identifying areas where new rules and improvements need to
be implemented;
• ensuring the consistent development and application of policy
documents and administering the repository where those
documents are kept; and
• supervising the process of applying the Internal Governance
system across the entire Group.
These initiatives continue to be continuously improved through
an ongoing action plan across three dimensions, namely
simplification, embedding and ongoing communication.
Lastly, with the aim of promoting continuous improvement of
overall effectiveness of our Governance bodies, the creation
of a Board Governance Office was announced in July 2017. This
new unit plays a key role in ensuring that appropriate support
mechanisms are in place to enable the Board and Board /
Executive Committees to discharge their roles with maximum
efficiency. It also provides additional assurance that consistency
of Governance is being applied through our Governance bodies.
Financial information periodically
published by the Bank
The board has approved the individual and consolidated quarterly,
half-yearly financial information, financial statements and
management report for 2017, 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. All these reports are
published on the Group’s corporate website (www.santander.com).
73
2017 Annual Report In particular, the board promotes a sound risk culture and ensures that
it is aligned with the corporate governance and internal governance
system, the strategic plan, the capital and financial plan and that it is
taken into account in the remuneration policies. In the past year, the
addition of Mr Ramiro Mato García-Ansorena has helped the board of
directors of Banco Santander reinforce its knowledge and professional
experience in the fields of finance and risk.
Lastly, the board of directors, has amended its rules and regulations in
order to, among others, create a committee for responsible banking,
sustainability and culture with the aim of providing the board with
specific advice in overseeing business performance in line with these
principles over the long term and in its relations with stakeholders.
3. CORPORATE GOVERNANCE REPORT
Introduction
1. Introduction
Santander has an effective and robust corporate governance structure
that enables us to confidently face the Group’s challenges in an ever
more complex environment.
During this year, we continued to move forward on the path of good
governance, strengthening and improving our corporate governance
structure and bringing it into line with our long-term strategy and
with the highest international standards in order to increase the
confidence of our shareholders, investors and other stakeholders, in an
environment that is demanding ever more transparency.
The board of directors, fully engaged and committed to the Group’s
corporate culture and strategy, has the expertise, experience,
knowledge, dedication and diversity needed to accomplish our
objective of making Santander the best commercial and retail bank,
helping people and businesses prosper and conveying the values in
which we believe. A planned and professionally prepared refresh of the
board ensures that we will always have the best talent for successfully
meeting that challenge.
In line with the Bank’s vision and mission, the board of directors, within
its general supervisory framework, performs the non-delegable task
of approving and overseeing the main policies and overall strategies,
particularly the strategic plan, the Group’s corporate governance and
internal governance system, defining its organisational structure,
the corporate culture and values, the corporate social responsibility
policy and the structure of the Group of companies, ensuring these
are in line with the business strategy and risk appetite and putting into
place mechanisms to ensure that all Group entities know how they
fit into these strategies and that their processes and mechanisms are
consistent with those of the parent.
Board of Directors. December 2017.
74
2017 Annual Report 2. Ownership structure
Number of shares and significant interests
Number of shares
In 2017, the Bank carried out two capital increases:
1. The first one on 27 July 2017, was designed to ensure that there
was no deterioration in the Group's capital ratio as a result of the
acquisition of 100% of the share capital of Banco Popular Español,
S.A. A total of 1,458,232,745 new shares were issued, representing
10% of the entity’s share capital at year-end 2016. The total new
shares subscribed plus the additional shares requested represented
demand that is 8.2 times the number of shares offered in the capital
increase
2. The second capital increase, as part of the Santander Scrip Dividend
scheme, became effective on 6 November 2017. A total of 95,580,136
new shares were issued, equivalent to 0.7% of the Bank's share
capital at year-end 2016.
On 31 December 2017, the Bank's share capital was represented
by 16,136,153,582 shares. At that date, stock market capitalisation
according to the listing price on the Electronic Spanish Stock Market
Interconnection System was 88,410 million euros.
All shares carry the same voting and dividend rights.
Significant interests
At 31 December 2017, the only shareholders appearing on the Bank’s
register of shareholders with a stake of over 3% were State Street
Bank and Trust Company (13.32%), The Bank of New York Mellon
Corporation (8.83%), Chase Nominees Limited (7.41%), EC Nominees
Limited (3.43%), Caceis Bank (3.13%), Clearstream Banking S.A. (3.10%)
and BNP Paribas (3.03%).
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 rights .
Bearing in mind the current number of members of the board of
directors (14), the percentage of capital needed to exercise the right
to appoint a director, in accordance with article 243 of the Spanish
Limited Liability Companies Law (Ley de Sociedades de Capital) on
proportional representation, is 7.14%.
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 material
fact and is described in the public records thereof.
On 3 August and 19 November 2012, Banco Santander notified the
CNMV, through a material fact, 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
material fact, 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
material fact, 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).
On 6 February and 29 May 2015, Banco Santander notified the CNMV,
through respective material facts, 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 material fact, 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.
The aforementioned material facts may be viewed on the Group’s
corporate website (www.santander.com).
1. The threshold stipulated in Royal Decree 1362/2007, of 19 October, which implemented the Securities Market Law 24/1988, of 28 July, 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 9 August 2017, in which
it notifies an indirect holding in the voting rights attributable to Bank shares of 5.940%, plus a further stake of 0.158% 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 2017.
75
2017 Annual Report 3. CORPORATE GOVERNANCE REPORT
Ownership structure
Shares included in the syndication
At 31 December 2017, the syndication included a total of 79,072,050 shares
of the Bank (0.49% of its share capital), broken down as follows:
Signatories to the shareholders’ agreement
Ms Ana Botín-Sanz de Sautuola 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
918,136
16,843,109
17,922,803
8,394,905
9,497,451
-
-
19,362,840
6,132,806
79,072,050
1. 7,800,332 shares held indirectly through Puente San Miguel, S.L.U.
2. 12,591,853 shares held indirectly through Agropecuaria El Castaño, S.L.U.
3. 7,187,903 shares held indirectly through Bright Sky 2012, S.L.
4. Controlled by Ms Ana Botín-Sanz de Sautuola O'Shea.
5. Controlled by Ms Carolina Botín-Sanz de Sautuola O'Shea.
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 a resolution of the Board of Directors on 23 October
2014, approved the current treasury share policy3 taking into ac count
the criteria recommended by 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
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 2017, the Bank and its subsidiaries and investees held
a total of 3,913,340 treasury shares in the Bank, representing 0.024%
of its share capital at that date (at year-end 2016, there were 1,476,897
treasury shares, representing 0.010% of the Bank’s share capital at
such date).
The following table sets out the monthly average percentages of
treasury shares in 2017 and 2016.
M
ONTHLY AVERAGE PERCENTAGES OF TREASURY SHARES1
% of the Bank’s social capital2
January
February
March
April
May
June
July
August
September
October
November
December
2017
0.05%
0.02%
0.01%
0.01%
0.02%
0.03%
0.07%
0.10%
0.09%
0.08%
0.07%
0.05%
2016
0.01%
0.3%
0.02%
0.04%
0.05%
0.05%
0.02%
0.06%
0.18%
0.06%
0.03%
0.02%
1. Further information in this regard is included in Section A.8 of the annual corporate
governance report.
2. Monthly average of daily positions of treasury shares.
Transactions with treasury shares performed by the consolidated
companies in 2017 entailed the acquisition of 239,028,959 shares,
equivalent to a par value of 119.5 million euros (cash amount of 1,309.4
million euros) and the sale of 236,592,516 shares, with a par value of
118.3 million euros (cash amount of 1,331.6 million euros).
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:
The average purchase price of the Bank’s shares in 2017 was 5.48 euros
per share, and the average sale price of the Bank’s shares was 5.63
euros per share.
• They may not entail a proposed intervention in the free formation
of prices.
The net gain for the Bank, net of tax, on transactions involving shares
issued by the Bank amounted to 26,226,030 euros and was recognised
in the Group’s equity under Shareholders’ Equity-Reserves.
• 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.
3. The treasury share policy is published on the Group’s corporate website (www.santander.com).
76
2017 Annual Report
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”.
At the date of this document, two issues of preference shares
contingently convertible into new ordinary shares of the Bank, with
disapplication of shareholders’ pre-emptive subscription right, for a
total nominal amount of 1,750 million euros: one in April 2017 for a
nominal amount of 750,000,000 euros and another in September 2017
for a nominal amount of 1,000,000,000 euros.
Moreover, the annual general meeting held on 7 April 2017 passed the
following resolutions:
1. To effect a rights issue charged to reserves for the maximum amount
that can be determined according to the terms of the agreement
within 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
2017 is typically paid, shares under a scrip issue for an amount equal
to that dividend payment.
This capital increase became effective on 14 November 2017 through
the issuance of 95,580,136 new shares, each of a par value of 0.50
euros each (equal to 47,790,068 euros), representing a total of 0.7%
of the Bank’s share capital at year-end 2016.
Resolutions in effect regarding the
possible issuance of new shares or
of bonds convertible into shares
The capital authorised by the general shareholders' meeting held on 7
April 2017, under item eight on the agenda, amounted to 3,645,585,175
euros. The Bank’s directors have until 7 April 2020 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 Spanish Limited Liability Companies Law, although
this power is limited to capital increases carried out under this
authorisation up to 1,458,234,070 euros.
At the date of this document, use of this authorisation has been made
in the amount of 729,116,372.50 euros by virtue of the capital increase
with pre-emptive subscription right adopted in July 2017 in connection
with the acquisition of Banco Popular Español, S.A.
The decision of the general meeting of 27 March 2015 authorising
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, remains in force. 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.
2. To render null and void, in the unused portion, the powers vested
by general meeting of 18 March 2016, and vest powers in the board
once again, pursuant to the terms of article 319 of the Regulations
of the Mercantile 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 7 April 2022, whereupon
any part thereof not exercised will be cancelled.
As of the date of this document, a total of 13,870,611,883.23 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 Spanish Limited Liability Companies Law, 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 through the
issue of new shares 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.
77
2017 Annual Report 3. CORPORATE GOVERNANCE REPORT
Banco Santander's board of directors
3. Banco Santander’s board of directors
Ms Ana Botín-Sanz de Sautuola
y O’Shea
Mr José Antonio Álvarez
Álvarez
Mr Bruce Carnegie-Brown
Mr Rodrigo Echenique Gordillo
VICE CHAIRMAN
Executive director
Nationality: Spanish.
Born in 1946 in Madrid, Spain.
Joined the board in 1988.
Graduate in Law and
Government Attorney.
Other positions of note:
former 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 and innovation and
technology.
CHIEF EXECUTIVE OFFICER
Executive director
Nationality: Spanish
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: He is
a member of the board of Banco
Santander (Brasil), S.A. and 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
has also been board member of
Bolsas y Mercados Españoles
(BME).
Membership of board
committees
Executive and innovation and
technology.
VICE CHAIRMAN
Non-executive director
(independent) and lead
independent director
Nationality: British.
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: He
is currently the non-executive
chairman of Moneysupermarket.
com Group Plc and Lloyd’s of
London. He was formerly the
non-executive chair of AON
UK Ltd (2012-2015), founder
and managing partner of the
quoted private equity division
of 3i Group Plc., and president
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.
GROUP EXECUTIVE
CHAIRMAN
Executive director
Nationality: Spanish
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:
member of the board of
directors of The Coca-Cola
Company. She is also 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) and she sits on the advisory
board of the Massachussetts
Institute of Technology (MIT).
Membership of board
committees
Executive (chairman) and
innovation and technology
(chairman).
78
2017 Annual Report Mr Guillermo de la Dehesa
Romero
Ms Homaira Akbari
Mr Ignacio Benjumea
Cabeza de Vaca
Mr Javier Botín-Sanz
de Sautuola y O’Shea
VICE CHAIRMAN
Non-executive director
Non-executive director
(independent)
Non-executive director
Non-executive director
Nationality: Spanish.
Born in 1973 in Santander,
Spain.
Joined the board in 2004.
Degree in Law.
Executive Chairman of JB Capital
Markets, Sociedad de Valores,
S.A.U.
Other positions of note:
in addition to his work in the
financial sector, he collaborates
with several non-profit
organisations. Since 2014 he
has been chairman of the Botín
Foundation and is a trustee of
the Princess of Girona.
Nationality: North-American
and French.
Born in 1961 in Tehran, Iran.
Joined the board in 2016.
Doctorate in Experimental
Particle Physics from Tufts
University and MBA from
Carnegie Mellon University.
She is Chief Executive Officer of
AKnowledge Partners, 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
CEO 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
Audit and innovation and
technology.
Nationality: Spanish.
Born in 1941 in Madrid, Spain.
Joined the board in 2002.
Government Economist and
head of office of the Bank of
Spain (on leave of absence).
Other positions of note:
former secretary of state of
Economy, secretary general
of Trade, chief executive
officer of Banco Pastor, S.A.
and international advisor to
Goldman Sachs International.
He is currently non-executive
vice chairman of Amadeus IT
Group, S.A., honorary chairman
of the Centre for Economic
Policy Research (CEPR) of
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 Vida y Pensiones,
S.A. de Seguros y Reaseguros
and chairman of Aviva Grupo
Corporativo, S.L.
Membership of board
committees
Executive, appointments,
remuneration, risk supervision,
regulation and compliance and
innovation and technology.
Nationality: Spanish.
Born in 1952 in Madrid, Spain.
Joined the board in 2015.
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
(BME) and of the Governing
Body of the Madrid Stock
Exchange.
Membership of board
committees
Executive, appointments,
remuneration, risk supervision,
regulation and compliance and
innovation and technology.
79
2017 Annual Report 3. CORPORATE GOVERNANCE REPORT
Banco Santander's board of directors
Ms Sol Daurella Comadrán
Mr Carlos Fernández González
Ms Esther Giménez-Salinas
i Colomer
Ms Belén Romana García
Non-executive director
(independent)
Non-executive director
(independent)
Non-executive director
(independent)
Non-executive director
(independent)
Nationality: Spanish.
Born in 1966 in Barcelona,
Spain.
Joined the board in 2015.
Degree in Business and MBA
from ESADE.
Executive chairman of Olive
Partners, S.A. and holds
several positions at companies
belonging to the Cobega Group.
She is also chairman of Coca
Cola European Partners, Plc.
Other positions of note:
Previously, she has served
on the board of the Círculo
de Economía and also as an
independent non-executive
director at Banco Sabadell, S.A.,
Ebro Foods, S.A. and Acciona,
S.A. She has also been honorary
counsel general of Iceland in
Barcelona since 1992.
Membership of board
committees
Appointments and
remuneration.
Nationality: Mexican and
Spanish.
Born in 1966 in Mexico City,
Mexico.
Joined the board in 2015.
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
remuneration.
Nationality: Spanish.
Born in 1949 in Barcelona,
Spain.
Joined the board in 2012.
PhD in Law and degree in
Psychology.
Professor Emeritus at Ramón
Llull University, director of
the Chair of Restorative Social
Justice, director of Unibasq and
Aqu (quality assurance agencies
for the Basque and Catalan
university systems) and of Gawa
Capital Partners, S.L.
Other positions of note: She
has been chancellor of the
Ramon Llull University, member
of the standing committee of
Conference of Chancellors of
Spanish Universities (CRUE),
member of the General Council
of the Judiciary, member of
the Scientific Committee on
Criminal Policy of the Council
of Europe, director general of
the Centre of Legal Studies
and Specialised Training of
the Department of Justice of
the Government of Catalonia
(Generalitat de Catalunya) and
member of the advisory board
of Endesa-Catalunya.
Membership of board
committees
Risk supervision, regulation and
compliance and innovation and
technology.
Nationality: Spanish.
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.
Non-executive director of Aviva
Plc, London and of Aviva Italia
Holding SpA, and member of the
advisory board of the Rafael del
Pino Foundation.
Other positions of note: she
was 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 (CNMV).
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), risk
supervision, regulation and
compliance and innovation and
technology.
The board has strengthened its knowledge and professional experience with the addition of Mr
Ramiro Mato García-Ansorena 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.
80
2017 Annual Report Mr Juan Miguel Villar Mir
Non-executive director
(independent)
Mr Ramiro Mato García-
Ansorena
Non-executive director
(independent)
Nationality: Spanish.
Born in 1931 in Madrid, Spain.
Nationality: Spanish.
Born in 1952 in Madrid, Spain.
Joined the board in 2013.
Joined the board in 2017.
Degree in Economics from
the Complutense University of
Madrid and the Management
Development Programme of the
Harvard Business School.
Other positions of note: He
has held several positions in
Banque BNP Paribas, including
chairman of the BNP Paribas
Group in Spain. Previously, he
held several significant positions
in Argentaria. He has been a
member of the Spanish Banking
Association (AEB) and of Bolsas
y Mercados Españoles, S.A.
(BME) and member of the Board
of Trustees of the Fundación
Española de Banca para Estudios
Financieros (FEBEF).
Membership of board
committees
Executive, audit, and risk
supervision, regulation and
compliance.
Doctorate in Civil
Engineering, graduate in
Law and degree in Industrial
Organisation.
He is the Chair of Villar Mir
Group.
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.
Mr Jaime Pérez Renovales
General secretary and secretary
of the board
Nationality: Spanish.
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
is non-executive chairman of
Santusa Holding, S.L., Santander
Holding International, S.A.
and Servicios de Alarmas
Controladas por Ordenadores,
S.A.; he is also non-executive
director of Portal Universia,
S.A. In addition, he is member
of the board of trustees of the
Universia Foundation, of the
Banco Santander Foundation,
being also a member of its
executive committee, and of
Fundacion Generación 2015.
Previously, 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 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 the
Santander Group, deputy
secretary of the Presidency of
the Government and chairman
of the committee for the Public
Administration Reform.
Formerly chairman of the
Agency of the Official State
Gazette and director, amongst
others, of Patrimonio Nacional,
of the 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 committees
Executive, audit, appointments,
remuneration, risk supervision,
regulation and compliance,
innovation and technology.
81
2017 Annual Report 3. CORPORATE GOVERNANCE REPORT
Banco Santander's board of directors
Appointment, ratification and
re-election of directors at the 2018
annual general shareholders’ meeting
Pursuant to article 55 of the Bylaws4 and article 27 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 appointment of Mr Ramiro Mato García-Ansorena as independent
director will be submitted for ratification by the general meeting. Mr
Mato was initially designated via co-option to fill the vacancy left by
Ms Isabel Tocino Biscarolasaga. Also, the appointment of Mr. Álvaro
Antonio Cardoso de Souza as independent director to fill the vacancy
left following the resignation of Mr Matías Rodríguez Inciarte will be
put forward.
The following directors will be put forward for re-election at the 2018
annual general shareholders’ meeting, scheduled for 22 or 23 March 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: Mr Carlos Fernández González, Ms Homaira Akbari, Ms Sol
Daurella Comadrán, Mr Guillermo de la Dehesa and Mr Ignacio
Benjumea Cabeza de Vaca, the first three as independent directors and
the latter two as non-executive directors that are neither proprietary
nor independent.
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 for their re-election, appointment or ratification, to be laid
before the general shareholders’ meeting of 2018.
Each of the re-elections, the appointment and the ratification 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.
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
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04.02.1989
07.04.2017
First six months of 2020
21.02.2017
924,541
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25.11.20143
07.04.2017
First six months of 2020
21.02.2017
22,263
0.000%
25.11.20144
18.03.2016
First six months of 2019
11.02.2016
14,474
950,247
0.006%
07.10.1988
07.04.2017
First six months of 2020
21.02.2017
172
0.000%
24.06.2002
27.03.2015
First six months of 2018
20.02.2015
22,000
0.000%
27.09.2016
07.04.2017
First six months of 2020
21.02.2017
3,463,716
0.021%
30.06.20156
18.03.2016
First six months of 2019
11.02.2016
12,649,973
119,466,183
137,388,986
0.851%
25.07.2004
18.03.2016
First six months of 2019
11.02.2016
456,970
599,064
0.004%
25.11.20147
18.03.2016
First six months of 2019
11.02.2016
18,524,502
0.115%
25.11.20144
27.03.2015
First six months of 2018
20.02.2015
6,014
0.000%
30.03.2012
07.04.2017
First six months of 2020
21.02.2017
0
0.000%
28.11.2017
28.11.2017
First six months of 2021
27.11.2017
166
0.000%
22.12.2015
07.04.2017
First six months of 2020
21.02.2017
1,328
0.000%
07.05.2013
27.03.2015
First six months of 2018
20.02.2015
d
e
t
n
e
s
e
r
p
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r
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r
a
h
S
-
-
-
-
-
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918,136
924,541
22,263
935,773
172
22,000
3,463,716
5,272,830
142,094
18,524,499
6,014
0
166
1,328
30,233,532
32,484,260
119,466,183
182,183,975
1.129%
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 Guillermo de la Dehesa Romero
Members
Ms Homaira Akbari
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
Mr Ramiro Mato García-Ansorena5
Ms Belén Romana García
Mr Juan Miguel Villar Mir
Total
General secretary and
secretary of the board Mr Jaime Pérez Renovales
1. 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.
2. Syndicated shares. See page 9.
3. Effective 13 January 2015.
4. Effective 12 February 2015.
82
2017 Annual Report
Powers and duties
The basic responsibility of the board of directors is to supervise
the Group, delegating the day-to-day management thereof and the
execution of its strategy to the appropriate executive bodies and the
various management teams.
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, in particular,
strategic or business plans, management objectives and the annual
budget, fiscal strategy and capital and liquidity strategy, investment
and financing, dividend, treasury share, new product approval,
activities and services of risk management and control (including
fiscal), corporate governance and internal governance of the Bank
and its Group, including definition of the organisational structure,
the policy for outsourcing services or activities, corporate culture
and values, including the corporate social responsibility policy, the
regulatory compliance policy, the 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, including employees in charge of internal control
functions and those holding other key positions) 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 certain 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.
COMPOSITION AND STRUCTURE OF THE BOARD OF DIRECTORS1
Board of directors
Committees
Equity holding
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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 Akbari
Mr Rodrigo Echenique Gordillo
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
Mr Ramiro Mato García-Ansorena5
Ms Belén Romana García
Mr Juan Miguel Villar Mir
Total
General secretary and
secretary of the board Mr Jaime Pérez Renovales
I
E
I
E
E
I
I
I
I
I
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d
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c
20.280,9762
0.126%
04.02.1989
07.04.2017
First six months of 2020
21.02.2017
924,541
0.006%
25.11.20143
07.04.2017
First six months of 2020
21.02.2017
22,263
0.000%
25.11.20144
18.03.2016
First six months of 2019
11.02.2016
950,247
0.006%
07.10.1988
07.04.2017
First six months of 2020
21.02.2017
172
0.000%
24.06.2002
27.03.2015
First six months of 2018
20.02.2015
22,000
0.000%
27.09.2016
07.04.2017
First six months of 2020
21.02.2017
3,463,716
0.021%
30.06.20156
18.03.2016
First six months of 2019
11.02.2016
t
c
e
r
i
d
n
I
19,362,840
-
-
14,474
-
-
-
12,649,973
119,466,183
137,388,986
0.851%
25.07.2004
18.03.2016
First six months of 2019
11.02.2016
456,970
3
-
-
-
-
-
-
-
-
-
-
599,064
0.004%
25.11.20147
18.03.2016
First six months of 2019
11.02.2016
18,524,502
0.115%
25.11.20144
27.03.2015
First six months of 2018
20.02.2015
6,014
0.000%
30.03.2012
07.04.2017
First six months of 2020
21.02.2017
0
0.000%
28.11.2017
28.11.2017
First six months of 2021
27.11.2017
166
0.000%
22.12.2015
07.04.2017
First six months of 2020
21.02.2017
1,328
0.000%
07.05.2013
27.03.2015
First six months of 2018
20.02.2015
t
c
e
r
i
D
918,136
924,541
22,263
935,773
172
22,000
3,463,716
5,272,830
142,094
18,524,499
6,014
0
166
1,328
30,233,532
32,484,260
119,466,183
182,183,975
1.129%
5. Their appointment will be submitted for ratification at the general shareholders’
meeting scheduled for 22 or 23 March 2018, on first or second call.
6. Effective 21 September 2015.
7. Effective 18 February 2015.
C Chairman
I Independent
E Non-executive neither proprietary nor independent
83
2017 Annual Report
3. CORPORATE GOVERNANCE REPORT
Banco Santander's board of directors
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 representative bodies 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 14 members, 9 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. Two
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.
Changes made to the committee rules
and regulations in the past year
At its meeting of 13 February 2018, the board of directors approved
several changes to the Rules and Regulations of the Board aimed at
strengthening the supervisory function of its committees, among
other points, in line with the recommendations and best practices
published in 2017 by different Spanish and international bodies.
Specifically, the Rules and Regulations of the Board were adapted to
the following: (i) the 3/2017 Technical Guide of the Spanish National
Securities Market Commission, on audit committees of public interest
entities, of 27 June 2017, (ii) the guide to internal governance issued
by the European Banking Authority and (iii) the joint guidelines issued
by the European Banking Authority and the European Securities and
Markets Authority on assessing the suitability of members of the board
of directors and directors with key functions, the latter two published
on 26 September 2017 and coming into force on 30 June 2018.
Of the 14 members currently sitting on the board, three 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.
In its meeting of 13 February 2018, the board of directors agreed, at
the proposal of the appointments committee, to submit to the general
shareholders’ meeting to be held on 22 or 23 March 2018, in first or
second call, respectively, the appointment of Mr. Álvaro Antonio
Cardoso de Souza as independent director to fill the vacancy left
following the resignation of Mr Matías Rodríguez Inciarte. In case the
aforementioned proposal is agreed, the board of directors shall be
comprises of 15 members.
Lastly, in the meeting of 13 February 2018, the board of directors
also agreed to submit to the aforementioned General shareholders'
meeting of 2018, the amendment of article 41 of the Bylaws to reduce
the minimum and maximum thresholds of composition of the board
of directors , which are now fixed between 14 and 22 members,
at a minimum of 12 and a maximum of 17, more aligned with the
recommendations of the Good Governance Code.
SIZE OF THE BOARD
20
18
16
16
14
15
15
14
2010
2011
2012
2013
2014
2015
2016
2017
CURRENT COMPOSITION OF THE BOARD
Further, a new responsible banking, sustainability and culture
committee which is governed by article 21 of the Rules and
Regulations of the Board will be set up.
Non-executive directors
(non proprietary and
non- independent)
21,5%
This change in the rules and regulations of the board reflects the
Group’s commitment to complying with the highest corporate
governance standards at all times, and is a further step in
strengthening its internal governance system.
Size and composition of the board
Since the end of 2010, the size of the board has been downsized by
30%, from 20 to 14 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 and approved thereby at its
meeting on 13 February 2018.
84
Independent
non-executive
directors
57%
Executive
directors
21,5%
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 and Mr Rodrigo Echenique Gordillo.
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 Limited Liability Companies Law.
2017 Annual Report 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, Mr Ramiro Mato García-Ansorena, Ms
Belén Romana García and Mr Juan Miguel Villar Mir.
.
YEARS OF SERVICE OF INDEPENDENT DIRECTORS
At the date of this document, the average length of
service for independent non-executive directors in the
position of board member is about three years.
Given the current number of directors (14), independent non-executive
directors account for 57% of the board.
11.1
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-executive 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.
The board of directors, following the proposal of the appointments
committee, and after a review of practices in comparable markets
and companies, resolved on 13 February 2018 to apply the legally
established threshold for significant shareholdings (3% of share capital)
to be considered as proprietary director. Since the shareholding
represented by Mr. Javier Botín-Sanz de Sautuola y O’Shea (0.98%) is
below the referred threshold, he has ceased to meet the requirements
to be considered as proprietary director, whilst not satisfying the
criteria to be regarded as an independent director under Art. 529
duodecies.4.i of the Spanish Companies Act. As a consequence, the
board of directors, following the proposal of the said committee,
resolved on that same date, to categorize him as other external
director.
Therefore, following a report from the appointments committee, the
board of directors has classified the three members of the Board as
non-executive directors that are neither proprietary nor independent,
in accordance with article 529.duodecies.4 of the Spanish Limited
Liability Companies Law and article 6.2 of the Rules and Regulations of
the Board.
10.2
9.5
7.3
3.0
3.4
3.01
2011
2012
2013
2014
2015
2016
2017
Diversity on the board
As established in article 18.4.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.
The Bank has a policy of selecting directors that considers and favors
diversity in the board of directors, contemplating issues such as
experience and knowledge, geographical and gender diversity and
that, in general, does not suffer from implicit biases that may imply any
discrimination, from any point of view, including for reasons of age or
disability. The Bank applies this policy in the selection of directors to
cover vacancies that occur.
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.
The appointments committee, at a meeting held on
26 January 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 36% of seats.
At present, there are five women on the board of directors, one
of whom is its 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 and Ms Belén Romana García.
85
2017 Annual Report 3. CORPORATE GOVERNANCE REPORT
Banco Santander's board of directors
The share of women on Banco Santander's board (36%) 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
• The audit committee is chaired by an independent director acting
in her capacity as financial expert. All its members are independent
directors.
• The powers delegated to the executive chairman and the chief
executive officer exclude those that are exclusively reserved for the
board itself and directly exercised in the performance of its general
supervisory function.
36%
• The executive chairman may not simultaneously hold the position of
33%
chief executive officer of the Bank.
19%
11%
2011
2013
2015
2017
The table below shows the number and percentage of women on the
board and on each of its committees.
Board
Executive committee
Audit committee
Appointments committee
Remuneration committee
Risk supervision, regulation
and compliance committee
Innovation and
technology committee
Number of
members
Number
of female
directors
% of female
directors
14
7
4
5
5
6
9
5
1
2
1
1
2
4
35.7%
14.29%
50.0%
20,.0%
20.0%
33.3%
44.4%
Balanced structure of corporate governance
There is a clear separation of duties between those of the 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 executive chairman and the chief executive officer.
• The vice chairman and lead independent 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 with the appointments committee.
86
• The corporate risk, compliance and internal audit functions, as
independent units, periodically report to the board of directors and
maintain direct access thereto when deemed necessary. The risk and
compliance functions report to the risk supervision, regulation and
compliance committee and answer requests for information received
from this committee in the performance of its duties, while the
internal audit function reports to the audit committee.
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 29 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.
Rules for interim replacement of
the Group executive chairman
Article 44.2 of the Bylaws and article 10 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 executive chairman of the board of directors, in
the expectation that in such cases she will be substituted by a vice
chairman, according to the criterion of length of service on the board.
However, if one of the vice chairmen is the lead director, he will be
the first in the order of replacement. If there are no vice chairmen, the
remaining directors will replace the 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.
Lead director
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 14 of the Rules
and Regulations of the Board of Directors, the lead director will have
2017 Annual Report
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.
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
Average
Spain
USA
Average
UK
Average
Board
Executive committee
Audit committee
Appointments
committee
Remuneration
committee
Risk supervision,
regulation and
compliance committee
15
47
12
11
11
12
10.8
9
8
5.7
5.7
8.2
2.5
12.8
5.8
7.9
7.8
-
8.2
5.0
7.6
16
10.9
8.0
* Source: Stuart Spencer Board Indices 2017 (Spain, United States and United Kingdom).
Secretary of the board
The Bylaws (article 45.2) and the Rules and Regulations of the Board
(article 12) include among the duties of the secretary those of ensuring
the formal and substantive legality of all action taken 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 18.4.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 15 meetings during 2017.
The board holds its meetings in accordance with an annual calendar
and agenda of business to discuss, without prejudice to any further
items that may be added or any additional meetings that need to be
held according to the 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, and at least quarterly.
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
ROLES AND RESPONSIBILITIES
Group executive chairman
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 43.2 and 48.1 of the Bylaws and article 8.2 of
the Rules and Regulations of the Board). In accordance with her
position as such, the 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 executive chairman all its
powers, except those that cannot be delegated by law, the Bylaws or
the Rules and Regulations of the Board.
The corporate strategic functions report to the executive chairman,
directly involved in the long term strategy and corporate culture.
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 11.1 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 as
independent units.
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.
87
2017 Annual Report
3. CORPORATE GOVERNANCE REPORT
Banco Santander's board of directors
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 14 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 its
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.
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.
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.
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
and whether they are capable of carrying out good governance of
the Group. 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.
In 2017 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 and especially -of the execution of the strategy of the Group
with which it is fully involved-. During the year, the board has also been
reported on the conclusions of the external and internal audits.
Training of directors and information or
induction programme for new directors
Given the Board´s commitment to continuous improvement, an
ongoing training programme for directors is in place.
Within the framework of the Bank’s ongoing director training
programme, ten sessions were held in 2017. The following matters,
among others, were covered in detail at these meetings: the new
method for calculating provisions for credit risk; the regulatory and
supervisory framework in the US (TLAC, CCAR); public reporting
of financial information; risk identification assessment; Santander’s
operational risk framework and profile; credit risk models; cyber risk;
anti-money laundering; in-depth look at the “Risk Appetite Statement”
of 2018; MIFID II.
Likewise, the Rules and Regulations of the Board (article 26.7) 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, Mr Ramiro Mato García-Ansorena (appointed to the board on
28 November 2017) is attending a rigorous induction programme for
new directors covering all relevant dimensions of the Group.
In 2017, the audit committee also made an information and induction
programme available to the new members that joined the committee
regarding matters subject to its competence, which ensures their
active participation from the very beginning. Here, for example, Ms
Homaira Akbari (appointed as a member of the audit committee on 26
June 2017) attended this specific training programme for committee
members.
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%
Risk
management
20%
General policies
and strategies
30%
Capital and liquidity
10%
Business
performance
30%
Dedication to board duties
The duty of diligent management requires directors to dedicate the
necessary time and effort to their position, among other requirements.
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. The
Bank’s directors therefore may not at the same time hold more than:
(a) one executive position and two non-executive positions; or (b) four
88
2017 Annual Report % of board members with
relevant experience
93%
79%
79%
Decision-making process
The board of directors is aware of the business, is well
balanced, diverse and has vast experience.
86%
It takes decisions by consensus and has a long-term vision.
64%
Debate of the issues, participation and effective challenge
by external directors.
29%
Accounting
and financial
Banking
Risks
Information
technologies
Latam
UK/US
International
experience
Self-assessment by the board
Pursuant to article 24.7 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.
In accordance with article 18.4.(j) of the Rules of the Regulations
of the Board, the appointments committee reported on the self-
assessment of the board and of its committees, which in 2017 was
carried out by the board with the support of an external firm, the
independence of which was verified by the committee.
The self-assessment includes a specific section for assessing the
executive chairman, the chief executive officer, the lead director and
the secretary. The executive chairman led the assessment of the lead
director, who in turn led that of the executive chairman.
The self-assessment was based on a confidential and anonymous
questionnaire and personal interviews with the directors. Moreover,
best corporate governance practices at an international level and
benchmarking with respect to 31 comparable international banks
with regard to the composition and dedication of the board,
the committees, remuneration and other aspects of corporate
governance, in which the Bank ranks very highly, were taken into
consideration.
The assessment process focused on the following aspects:
• In relation to the board as a whole: size, composition, organisation
and functioning; internal arrangements and culture (planning of
meetings, director support and training); knowledge and diversity;
and performance of the supervisory function. Matters regarding the
future (strategy and internal and external factors that might affect
the Group’s performance) as well as what its challenges and priorities
should be for 2018 were also assessed.
• In relation to the committees: composition; functioning; board
support and reporting; committee content; and their main challenges
and priorities for 2018.
• In relation to the executive chairman: performance of her functions,
leadership, defining the responsibilities with the lead director and
with the chief executive officer, resulting in a clear and defined the
separation of functions, whereby those related to the Bank’s long-
term strategy, culture and development of the management team
correspond to the executive chairman.
• In relation to the chief executive officer: performance of his functions
and distribution of responsibilities with the executive chairman,
whereby he is responsible for ordinary management activities.
• In relation to the lead director: performance of his functions;
leadership; relations with other directors and with institutional
investors.
• In relation to the secretary of the board: performance of his functions
and contribution to the smooth functioning of the board and the
committees.
The directors consider the following to be strengths of the Group’s
corporate governance:
• The executive chairman has continued to promote the best
international standard across the Group in terms of corporate
governance practices, corporate culture, business performance and
customer focus.
• The long term vision in the banking business of the chief executive
officer, highly committed to the project, and the complmentarity of
his profile with that of the Group Executive Chairman's.
89
2017 Annual Report 3. CORPORATE GOVERNANCE REPORT
Banco Santander's board of directors
• The implementation of all recommendations for improvement
identified in the self-assessment processes carried out in previous
years.
Appointment, re-election and
ratification of directors
• The high level of dedication, participation and commitment of the
members of the board and of the committees and their involvement
in controlling all types of risks.
• A good balance between executive and non-executive directors
on the board and the audit committee, appointments committee,
remuneration committee, and risk supervision, regulation and
compliance committee, all of which are exclusively made up of non-
executive directors, the majority of which are independent.
• A good balance of experience, skills and knowledge among the
members of the board and the high degree of diversity of their skills.
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 be preceded by the relevant
selection process and be subject to the corresponding report of the
appointments committee which, if deemed adequate, submit the
corresponding reasoned proposal to the board.
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.
• The effective operation of the board committees.
Currently, all directors have been appointed or re-elected at the
proposal of the appointments committee.
The results of the assessment process for the board and its
committees revealed the following: high levels of commitment and
dedication from all board 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.
The contribution of the lead director in incorporating international
best practices on the board and in the committees and in developing
relations with institutional investors is also noteworthy of mention.
The report containing the conclusions and results of the assessment
process for the board and its committees in 2017 was presented at the
board meeting held on 19 December 2017. In view of these findings,
the board, at its meeting held on 30 January 2018, approved an action
plan that envisages improvements in the following areas, among
others:
• Strengthen the composition of the board of directors, showing
commitment to international diversity, especially from the strategic
markets in which the Group operates, and ensure the suitability of
the composition of the committees to improve performance of their
functions and their respective areas of action.
• Increase the dedication of the board to strategic matters, which was
already increased last year, and to the supervision of emerging risks,
such as cybersecurity.
• Continue strengthening the functions and activities of the
committees in advising the board.
• Increase the number of meetings of non-executive directors with the
lead director.
90
2017 Annual Report SKILLS MATRIX OF THE MEMBERS OF THE BOARD AND DIVERSITY
ANALYSIS*
In accordance with the aforementioned director selection process, as set out in articles 6.1 of the Rules and Regulations of the Board
and 42.4 of the Bylaws, the committee reviewed the director selection and succession policy on 23 January 2017. At the request of the
appointments committee, at its meeting held on 19 December 2017, the board of directors approved the conclusions of the annual self-
assessment process for the board carried out in 2017 with the support of an independent firm and assessed the balance of skills, ability,
diversity and experience on the board. With this information, the board of directors approved at the aforementioned meeting the following
skills matrix. The findings of the analysis identified the need to seek out new candidates with experience in the financial sector and with
greater geographical diversity, especially in Latin America, without prejudice to the need to continue strengthening skills relating to new
technologies.
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Skills as executive
Skills as non-executive
Nature * * Data at December 2017
Total number of independent directors
Total number of board members
8
14
91
2017 Annual Report
3. CORPORATE GOVERNANCE REPORT
Banco Santander's board of directors
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%. The shareholders acting at the general shareholders’ meeting
of 7 April 2017 approved a maximum ratio between fixed and variable
components of executive directors’ remuneration of 200% for 2017.
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 Limited Liability Companies Law 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. The board of directors, at the proposal of
the remuneration committee, is also 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 Bank of Spain Circular 2/2016, of 2
February, on credit institutions, supervision and capital adequacy.
Remuneration of the board in 2017
Bylaw-stipulated emoluments earned by the board amounted to 4.7
million euros in 2017, which is 22% lower than the maximum amount
of 6 million euros approved by the shareholders at the general
shareholders’ meeting on 7 April 2017.
Full details regarding director remuneration and the policy for 2017 can
be found in the activities report of the remuneration committee, which
forms part of the corporate documentation of Banco Santander, in the
Annual Corporate Governance Report and in the Annual Report on the
Remuneration of Directors.
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, European 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 Limited Liability Companies
Law and article 59.bis.1 of the Bylaws, each year the board of directors
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 TOTAL COMPENSATION FOR ALL EXECUTIVE DIRECTORS
RELATIVE TO THE ATTRIBUTABLE NET PROFIT
1.12%
0.70%
0.50%
0.41%
0.45%
0.42%
0.42%
2011
2012
2013
2014
2015
2016
2017
1.20%
1.00%
0.80%
0.60%
0.40%
0.20%
0.0%
92
2017 Annual Report
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 2017, the report corresponding to 2016 was submitted at the
general shareholders’ meeting held on 7 April for an advisory vote by
shareholders, as a separate item on the agenda, with 93.531% of the
votes being in favour of the report.
The director remuneration policy for 2017, 2018 and 2019 was also
submitted for approval, on a binding basis, by shareholders at
the annual general shareholders’ meeting held on 7 April 2017, in
accordance with article 529 novodecies of the Spanish Limited Liability
Companies Law. The policies were approved with 93.828% of the votes
in favour.
Lastly, the 2017 annual report on director remuneration will submitted
at the annual general shareholders’ meeting foreseen to be held on
22 or 23 March (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 2018, 2019 and 2020 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 report.
SOME MEASURES TAKEN BY THE BOARD WITH REGARD TO REMUNERATION
2013: cap on annual remuneration of the directors by
reason of their position
The ordinary general shareholders’ meeting of 2013 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
The ordinary general shareholders’ meeting of 2014 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: approval of the remunerations policy for directors
The ordinary general shareholders’ meeting of 2015 approved the
remunerations policy for directors for years 2015 and 2016, which
is consistent with the principles and rules included in the By-laws
and in the Rules and Regulations of the board, being unchanged
the maximum amount of the remunerations approved in the
general shareholders’ meeting of 2013
2016: changes in the remunerations policy
A number of changes were proposed at the 2016 general
shareholders’ meeting with regard to the remunerations policy
for executive directors and senior management, in line with the
Simple, Personal and Fair culture. The main new developments
with regard to the previous policy are as follows:
• Simplification: a new streamlined structure for variable and
long-term annual remuneration.
• 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.
• 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 .
2017: changes to the remuneration policy of executive
directors
A number of changes to the remuneration policy of executive
directors were laid before shareholders for their approval at the
2017 general shareholders’ meeting, intended to:
• Streamline the system of metrics and indicators so that only the
most relevant remain in the policy.
• In relation to individual remuneration, increase the weighting of
corporate behaviours that reflect the Simple, Personal and Fair
culture of the Santander Group.
2018: changes to the remuneration policy of executive
directors
The approval of some amendments to the remuneration policy of
executive shareholders will be submitted to the shareholders for
their approval at the general shareholders’ meeting foreseen to be
held on 22 or 23 March 2018. The amendments are aimed to:
• Reduce the amount of the annual contributions to the pension
system (sistema de previsión), proportionally increasing the annual
fixed allocation and with no increase of the total cost for the Bank.
• Allow the required changes to eliminate the complementary
pension system (sistema de prevision complementario) for the
events of death (for widows and orphans) and disability of directors,
including a fixed complement of remuneration and enhancing the
life insurance cover of the affected directors, with no increase of
the total cost for the Bank.
93
2017 Annual Report 3. CORPORATE GOVERNANCE REPORT
Banco Santander's board of directors
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 of 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.
Related party transactions
In accordance with that stipulated by law, article 53 of the Bylaws and
articles 3, 17 and 40 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.
These transactions will require board authorisation, based on a
favourable report from the audit committee, except for those cases
where approval by law 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
participating in the deliberation and voting on the resolution in
question.
Control mechanisms
As provided in the Rules and Regulations of the Board (article 36),
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 related 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.
In 2017, there were 86 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.
The breakdown of the 86 cases is as follows: on 27 occasions the
abstention was due to proposals to appoint, re-elect or withdraw
directors, and its appoint as members of board committees or as
member of other boards at Group companies; on 25 occasions the
matter under consideration related to remuneration or granting loans
or credits; on 22 occasions the matter concerned the discussion of
financing or investment proposals or other risk transactions involving
entities related to any of the directors; and on 12 occasions the
abstention concerned the annual verification of the status of directors
and the suitability of directors.
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, 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.
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.
At the meeting of 13 February 2018, the board of directors approved
an amendment of the Rules and Regulations of the board whereby it
creates and regulates a new responsible banking, sustainability and
culture committee. In addition, given that the board has formed an
international advisory board which, among other functions, advises the
board on the design and development of the global business strategy,
on the same date the board decided to disband the international
committee.
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.
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.
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.
94
2017 Annual Report Executive committee
The executive committee is a basic instrument for the corporate
governance of the Bank and 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 2017 it held 47
meetings.
There are currently seven directors sitting on the committee, three
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 16).
Audit committee
The audit committee, among other duties, 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 normally meets on a
monthly basis and met 12 times in 2017.
As provided in the Bylaws (article 53) and the Rules and Regulations
of the Board (article 17), the committee must be made up of 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, as defined in 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.
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 11 occasions in 2017.
The Bylaws (article 54) and the Rules and Regulations of the Board
(article 18) 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, three
of whom are independent
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 and the remuneration of other members of senior
management and draws up their remuneration policy.
The committee met on 11 occasions in 2017.
The Bylaws (article 54 bis) and the Rules and Regulations of the Board
(article 19) 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 the evaluation of
the risks associated to the most relevant corporate transactions. It
assists the board in the relation with supervisors and regulators in the
various countries in which the Group has a presence, in the drawing up
of its capital and liquidity strategy, and it monitors compliance with the
General Code of Conduct and, in general, with the Bank’s governance
rules and compliance and criminal risk prevention programmes. It
also oversees the corporate governance system and the policy of
communication and relations with the Bank’s stakeholders.
The committee met on 12 occasions in 2017.
As provided in the Bylaws (article 54 ter) and the Rules and Regulations
of the Board (article 20), the committee must be made up of non-
executive directors, the majority of whom must be independent,
including the chairman.
The committee is currently made up of six non-executive directors,
four of which are independent.
Innovation and technology committee
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 technology
and security risks and to supervise all matters relating to cybersecurity.
The committee met on 3 occasions in 2017.
This committee comprises nine directors, of whom three are executive
and six are non-executive, four of which are independent.
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 with the appropriate coordination.
* * *
95
2017 Annual Report 3. CORPORATE GOVERNANCE REPORT
Banco Santander's board of directors
In accordance with the Rules and Regulations of the Board, any
director may attend and participate but not vote at meetings of
board committees of which they are not a member, by invitation
of the chairman of the board and of the chairman of the respective
committee, after having requested such attendance from 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 2017, 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 2017. 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 2017.
International advisory board
Banco Santander’s international advisory board, comprising experts in
strategy, IT and innovation, and those outside the Group, held its first
meeting on 26 April 2016 in Boston (US). The international advisory
board meets at least twice per year.
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 international advisory board met on 4 May 2017 in London and on
11 October 2017 in New York.
Chairman
Mr Larry Summers
Former US Treasury Secretary
and President Emeritus of Harvard University
Members
Mr Frank
D’Souza
CEO of
Cognizant and
director of
General Electric
Mr George
Kurtz
CEO and
co-founder of
CrowdStrike
Ms Blythe
Masters
CEO of Digital
Asset Holdings
Ms Sheila Bair
Former Chair
of the Federal
Deposit
Insurance
Corporation
and President
of Washington
College
Mr Mike Rhodin
Board member of
TomTom, HzO and
Syncsort. Former IBM
senior Vice President
Ms Marjorie Scardino Mr James Whitehurst
Former CEO of
Pearson and member
of the Board of
Directors of Twitter
CEO of Red Hat
Mr. Jaime Pérez Renovales
Secretary
96
2017 Annual Report COMPOSITION OF THE BOARD COMMITTEES
Ejecutivos
No ejecutivos
EXECUTIVE COMMITTEE
AUDIT COMMITEE
APPOINTMENTS
COMMITTEE
57%
43%
100%
100%
REMUNERATION
COMMITTEE
RISK SUPERVISION,
REGULATION AND
COMPLIANCE COMMITTEE
INNOVATION AND
TECHNOLOGY COMMITTEE
100%
100%
62%
38%
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
Innovation and technology committee
1. Includes the dedication to preparing and attending the meetings.
No. of meetings
1
Hours/meeting
Hours/year
47
12
11
11
12
3
5
10
4
4
10
4
235
120
44
44
120
12
ATTENDANCE AT MEETINGS OF THE BOARD OF
DIRECTORS AND ITS COMMITTEES IN 2017
Pursuant to the Rules and Regulations
of the Board (article 25.1), absences
from meetings must be limited to
unavoidable cases. The average
attendance rate at board meetings in
2017 was 97%.
RATE OF ATTENDANCE AT BOARD MEETINGS
98.4
91.0
89.8
92.8
95.9
97.0
2012
2013
2014
2015
2016
2017
97
2017 Annual Report 3. CORPORATE GOVERNANCE REPORT
Banco Santander's board of directors
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 Inciarte1
Mr Guillermo de la Dehesa Romero
Ms Homaira Akbari
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
Mr Ramiro Mato García-Ansorena2
Ms Belén Romana García3
Ms Isabel Tocino Biscarolasaga1
Mr Juan Miguel Villar Mir
Comisiones
s
t
n
e
m
t
n
o
p
p
A
i
n
o
i
t
a
r
e
n
u
m
R
,
n
o
i
s
i
v
r
e
p
u
s
k
s
i
R
d
n
a
n
o
i
t
a
l
u
g
e
r
e
c
n
a
i
l
p
m
o
c
d
r
a
o
B
e
v
i
t
u
c
e
x
E
t
i
d
u
A
97%
95%
90%
100%
100%
95%
44/47
46/47
38/47
44/47
44/44
47/47
47/47
3/3
42/44
15/15
15/15
15/15
14/15
14/14
15/15
14/15
15/15
14/15
14/15
15/15
15/15
1/1
15/15
14/14
13/15
11/11
11/11
12/12
11/11
11/11
11/12
11/11
11/11
12/12
11/11
11/11
11/11
2/2
9/9
10/11
6/6
1/1
12/12
11/11
4/6
6/6
10/12
1/1
12/12
11/11
3/6
d
n
a
n
o
i
t
a
v
o
n
n
I
l
y
g
o
o
n
h
c
e
t
85%
3/3
3/3
1/3
1/3
3/3
3/3
3/3
3/3
3/3
0/0
1. Withdrawal from position of director on 28 November 2017.
2. Director since 28 November 2017.
3. Member of the Innovation and Technology committee since 19 December 2017.
98
2017 Annual Report
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
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:
company is managed rigorously and prudently, while ensuring their
economic solvency and upholding the interests of their shareholders
and other stakeholders.
• Making its governance more robust, through policies, models and
control frameworks that allow the Group to implement corporate
criteria and ensure effective supervision over the Group.
• Management of the subsidiaries is a local affair carried out by
• Making the Group’s units more efficient by unlocking cost management
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.
• Customer funds are secured by virtue of the deposit guarantee 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.
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.
Internal governance of the Santander Group
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, in full
compliance with the regulations and local supervisory criteria .
• Between the CEOs (Chief Executive Offices) and country heads of the
subsidiaries.
• And between the Group and the officers and teams deemed fit to
exercise control functions within the Group and at the subsidiaries:
CRO (Chief Risk Officer), COO (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.
In relation to CEO, country head 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.
99
2017 Annual Report 3. CORPORATE GOVERNANCE REPORT
Group structure and governance framework
Group
Board
of Directors
Group Executive
Chairman
Group CEO
Control, Management
and Business Functions
• Compliance
• Audit
• Risk
• Finance
• Financial Control/
Accounting
• Others
Subsidiary B
Subsidiary A
2
3
1
Board of
Directors
CEO/ Country
Head
Control, Management
and Business Functions
• Compliance
• Audit
• Risk
• Finance
• Financial Control/
Accounting
• Others
Presence of Santander Group in the Boards of
Directors of the Subsidiaries and guidelines for Board
dynamics and effectiveness
Reporting of the CEO/ Country Heads to the Group
CEO and Group Executive Committee
Interaction between Group and Subsidiaries Control,
Management and Business Functions
1
2
3
The Group’s Appointment and
suitability assessment procedure
is a key element of Governance.
Santander also has thematic frameworks (corporate 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,
cybersecurity and communication and brand, and which specify:
• The way of exercising oversight and control by the Group over the
subsidiaries.
• 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 make up the internal governance system 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. Both the model and the frameworks are maintained
up to date on an ongoing basis through the recurring adoption of
legislative changes and international best practices.
Based on the corporate frameworks, the functions included in the
governance model prepare regulatory documents that are given to the
Group’s subsidiaries as reference and development documentation,
promoting their effective implementation at the local level..
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 function,
the compliance function and the internal audit function, and also
between them and other functions which control or supervise them.
• The risk control function, the compliance function and the internal
audit function are headed by the following senior executive vice
presidents, each of whom has independent and direct access to the
Bank’s board of directors and its committees for the purpose of
reporting on their verification and inspection work
100
2017 Annual Report • Risk function: Mr José María Nus Badia (Group Chief Risk Officer -
Governance of the risk function
Group CRO).
• Compliance function: Ms Mónica López-Monís Gallego (Group
based on the following principles:
Chief Compliance Officer - Group CCO).
• Internal Audit function: Mr Juan Guitard Marín (Group Chief Audit
Executive - Group CAE).
• Strengthen the responsibility of the first line of defence in decision-
• Separate decision-making functions from control functions.
• The risk governance model, approved by the board of directors, is
The risk and compliance functions report to the risk supervision,
regulation and compliance committee and answer requests for
information received from this committee, while the internal audit
function reports to the audit committee.
• Furthermore, a further two functions are considered relevant at
Group level, one tasked with financial control functions and the
other with management control functions. Reporting directly to the
Group’s chief executive officer, they are themselves headed by a
senior executive vice president: These functions are:
• Financial function: Mr José García Cantera (Group Chief Financial
Officer - Group CFO).
• Financial Accounting and Control function: Mr José Doncel Razola
(Group Accounting Officer - Group CAO).
making.
• Ensure that all decisions concerning risk follow a formal approval
process.
• Ensure there is an overall vision of all types of risks, including those
outside the scope of control of the risk function.
• Strengthen the role of risk control committees, affording them
additional powers.
• Simplify the committee structure.
• There are currently two internal risk committees not specifically
envisaged in the Bylaws: the executive risk committee (chaired by
the CEO and in which the CRO has the right to veto), tasked with
global risk management functions and comprising two executive
members; and the risk control committee (chaired by the CRO),
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 granted general powers to support and advise the board of
directors with regard to the supervision and control of risks, and the
definition of the Group’s risk policies.
• The executive committee devotes a significant amount of its time to
discussions on the Group’s risks.
101
2017 Annual Report 3. CORPORATE GOVERNANCE REPORT
5. Los derechos de los accionistas y la junta general
5. Shareholder rights and
the general shareholders’ meeting
One share, one vote, one dividend. No
defensive mechanisms in the Bylaws
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
(ordinary 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 2017
The general shareholders’ meeting is the main vehicle in the direct
relationship with shareholders. The informed participation of
shareholders at general shareholders’ meetings is an objective expressly
acknowledged by the board (article 37.3 of the Rules and Regulations of
the Board).
The quorum for the annual general meeting for 2017 rose to 64.03%, the
highest to date.
QUORUM AT ANNUAL GENERAL SHAREHOLDERS' MEETINGS
Encouraging the informed
participation of shareholders at
general shareholders’ meetings
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.
Another channel of communication available to shareholders is the
electronic shareholders’ forum. Since the annual general meeting held
in 2011, shareholders have had access to the electronic shareholders’
forum in compliance with the provisions of the Spanish Limited
Liability Companies Law. 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 by law, as well as offers or requests to
act as a voluntary proxy.
KEY POINTS OF THE 2017 ANNUAL
GENERAL SHAREHOLDERS’ MEETING
54.9%
55,.9%
53.7%
58.8%
59.7%
57.6%
The 2016 annual report on director remuneration received
a 93.83% favourable vote.
64.03%
Shareholders approved the corporate management of the
Bank in 2016 with 97.74% voting in favour.
2011
2012
2013
2014
2015
2016
2017
102
2017 Annual Report Annual general shareholders’
meeting held on 7 April 2017
Information provided to shareholders
and communication with them
Information on the call notice, establishment of a quorum,
attendance, proxy-granting and voting
A total of 641,150 shareholders attended in person or by proxy, with
9,336,283,351 shares. The quorum was thus 64.03% 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 96.56%.
The following data are expressed as percentages of the Bank’s share
capital at the date of the meeting:
In line with the policy for communicating with shareholders, investors
and proxy advisors approved by the board of directors on 12 February
2016, in 2017 Banco Santander continued to strengthen communications
with, service to and relationships with its shareholders and investors.
In 2017, for the first time, it was created a WhatsApp line of
communication, as another customer service channel in addition to
those already existing (electronic mailboxes, telephone lines, in person
and postal mail) in accordance with the digital transformation and the
Bank’s Simple, Personal and Fair culture, promoting transparency and
maintaining the highest quality standards in providing service to our
shareholders.
Physically present
By proxy
Absentee votes
Total
0.905%1
47.485%2
15.635%3
64.025%
CHANNELS FOR SHAREHOLDER INFORMATION AND SERVICE
Telephone service lines
159,522 queries received
Shareholder and
investor mailbox
Postal Mailbox
18,831 e-mails answered
322,587 queries answered
1. Of this percentage (0.905%), 0.004% 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
1.380%.
3. Of this percentage (15.635%), 15.266% corresponds to votes cast by post, while the
rest is the percentage of electronic votes.
In accordance with article 186 of the Spanish Limited Liability
Companies Law, 9 of the board’s 15 directors at that date exercised the
right to vote on behalf of a total of 6,800,091,194 shares, equivalent to
the same number of votes, the breakdown being as follows:
Mr. Matías Rodríguez Inciarte*
Ms Ana Botín-Sanz de Sautuola O’shea
Mr José Ignacio Benjumea Cabeza de Vaca
Mr Rodrigo Echenique Gordillo
658,277
6,657,283,403
In 2017, there were a total of 1,560 interactions with investors, analysts
and rating agencies, which entailed contact with 959 investors/analysts.
In addition, the area of 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.
In October the Group organised the Group Strategy Update in New York,
an event where senior management reviewed the strategic objectives
for 2018 in relation to both the Group and its main business units. Over
260 delegates took part in the various Group Strategy Update events,
including the Group’s main analysts and investors. Liwewise, 175 road
shows were held, 19 conference were attended and 1.560 meetings were
held with fixed and variable income investors. Also, meetings with 12.517
retail shareholders were held in 241 corporate events.
27,487
570,534
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 by the Bank sufficiently in advance.
Mr Francisco Javier Botín-Sanz de Sautuola O’shea
56,544,602
Mr José Antonio Álvarez Álvarez
Ms Esther Giménez-Salinas I Colomer
Ms Belén Romana García
Mr. Carlos Fernández González
*Stood down from the board on 28 November 2017.
49,049
17,465
17,824
84,922,553
Resolutions adopted at the 2017
general shareholders’ meeting
The full texts of the resolutions adopted at the general shareholders’
meeting held in 2017 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 7 April 2017.
Policy for contacting and
communicating with shareholders
The policy for contacting and communicating with shareholders,
institutional investors and proxy advisors is published on the Group’s
corporate website (www.santander.com), 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
section 36 “Shareholders” of this annual report.
Communication between the board and shareholders
and investors continued to be strengthened through
the shareholders’ meeting, the Group Strategy
Update and the corporate governance road shows
arranged and held by the lead independent director.
103
2017 Annual Report 3. CORPORATE GOVERNANCE REPORT
Shareholder rights and the general shareholders' meeting
6. Santander Group management team1
Composition
Chairman
Chief executive officer
Executive vice chairman
Businesses
Argentina
Brazil
Chile
US
Spain2
Ms Ana Botín-Sanz de Sautuola y O’Shea
Mr José Antonio Álvarez Álvarez
Mr Rodrigo Echenique Gordillo
Mr Enrique Cristofani
Mr Sérgio 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
Wholesale Global Banking
Wealth Management
Business support divisions
Santander Digital
Support and control functions
Risks
Compliance
Internal Audit
Financial
Mr Héctor Grisi Checa
Mr Gerry Byrne
Mr Michal Gajewski
Mr António Vieira Monteiro
Mr Nathan Bostock
Mr José Linares Pou
Mr Víctor Matarranz Sanz de Madrid
Ms Lindsey Tyler Argalas
Mr José María Nus Badía (Group Chief Risk Officer)
Mr Keiran Foad3
Ms Mónica López-Monís Gallego (Group Chief Compliance Officer)
Mr Juan Guitard Marín (Group Chief Audit Executive)
Mr José Antonio García Cantera (Group Chief Financial Officer)
Office of the General Secretary and Human Resources
Mr Jaime Pérez Renovales
Communication, Corporate Marketing and Research
Mr Juan Manuel Cendoya Méndez de Vigo
Ms Jennifer Scardino
Corporate Development
Mr José Luis de Mora Gil-Gallardo
Financial Accounting and Control
Mr José Francisco Doncel Razola (Group Chief Accounting Officer)
Executive Chairman’s Office and Strategy
Mr Enrique Álvarez Labiano
Mr Javier Maldonado Trinchant
Mr Andreu Plaza López
Mr Javier Roglá Puig
Costs
Technology and Operations
Santander Universities
1. Information on 31 December 2017.
2. It includes Santander and Banco Popular.
3. Reports to the Group Chief Risk Officer.
104
2017 Annual Report Remuneration
Information on the remuneration of senior executive vice presidents is
provided in note 5 to the Group’s legal report.
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 2017 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).
105
2017 Annual Report 3. CORPORATE GOVERNANCE REPORT
Santander Group management team
7. Transparency and independence
We promote the implementation of good corporate
governance to generate confidence in the international
environment in which the Group operates.
Financial information and other
relevant information
Financial information
Pursuant to the provisions of its Rules and Regulations (article 41.2),
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 is disseminated in a true,
clear, complete and equitable fashion and on a timely basis and,
whenever practicable, such information shall be quantified.
In 2017, the Bank published 73 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 external auditor
Independence of the auditor
The Bank has the necessary mechanisms in place to ensure the
independence 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 2017 is
contained in note 48 to the Group’s legal report.
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 issues a
report in this regard. The financial statements of the Bank and of the
consolidated Group for 2017 are submitted without qualifications.
At its meeting of 8 February 2018, 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.
106
2017 Annual Report Compliance with corporate
governance recommendations
Banco Santander follows the corporate governance principles and
recommendations contained in the Good Governance Code of Listed
Companies, published by the Spanish National Securities Market
Commission in February 2015, and the recommendations and good
operating practices established in Technical Guide 3/2017 of the
Spanish National Securities Market Commission, on Audit Committees
of Public Interest Entities, of 27 June 2017, with regard to the
functioning of the audit committee.
Banco Santander also takes into account the good governance
recommendations and best practices for credit institutions established
by the Supervisors, such as the Corporate Governance Principles
for Banks of the Basel Committee on Banking Supervision of July
2015; the Corporate Governance Principles of the Organisation for
Economic Co-operation and Development (OECD) approved in July
2015; guidelines on various matters (internal governance, suitability
assessment of the members of the managing body, remuneration)
published by the European Banking Authority (EBA) and the European
Securities and Markets Authority (ESMA), and the good governance
codes of the stock markets on which its shares are listed.
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 Spanish
Limited Liability Companies Law; Order ECC/461/2013, of 20 March;
CNMV Circular 3/2015, of 23 June; and Bank 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 175,000 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 Group’s 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 2018 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).
The Bank’s board of directors approved several changes to its Rules and Regulations
of the Board aimed at strengthening the supervisory function of the various board
committees, among other points, in line with the recommendations and best practices
published in 2017 by different Spanish, European and international bodies.
107
2017 Annual Report 3. CORPORATE GOVERNANCE REPORT
Transparency and independence
8. Goals for 2018
The board’s goals and priorities for 2018 with regard to corporate
governance are as follows:
Strengthen the composition of the board of directors, showing
commitment to international diversity, especially from the strategic
markets in which the Group operates, and ensure the suitability of
the composition of the committees to improve performance of their
functions and their respective areas of action (Board refreshment).
Further improve the independence of the board by increasing the
number of meetings between the independent board members and
the lead independent director (Boardroom).
Intensify the board’s dedication to strategic matters and, in addition
to the annual meetings dedicated specifically to strategic matters,
hold a meeting every six months on the progress of the strategic
plan. The dedication to the supervision of emerging risks and
cybersecurity will also be strengthened (Board dynamics).
Continue strengthening the functions and activities of the
committees in advising the board (Board committees).
Increase the amount of time dedicated to the board to responsible
business practices and sustainability and, in particular, to the
supervision of the corporate culture and values and in relation to
the various stakeholders, through the new responsible business
practices and sustainability committee (Sustainability).
Execute the modifications introduced in the Rules and Regulations
of the Board, putting into practice the best operating practices of
our governance bodies that arise from the new guidelines issued by
the European Banking Authority (EBA) and the European Securities
and Markets Authority (ESMA) that also meet the expectations of
the supervisor (Regulatory framework).
Establish the new responsible banking, sustainability and culture
committee, intensifying the Board’s involvement in the development
of corporate culture and its commitment to responsible business
practices in relation to diversity, inclusion and sustainability.
108
2017 Annual Report 109
2017 Annual Report 4
ECONOMIC AND
FINANCIAL
REVIEW
112 Grupo Santander consolidated
financial report
112 2017 Summary
114 Results
122 Balance sheet
128 Liquidity and funding risk
management
136 Capital management and
adequacy. Solvency ratios
148 Geographical footprint
150 Continental Europe
166 United Kingdom
169 Latin America
184 United States
187 Corporate Centre
189 Global businesses
189 Retail Banking
192 Global Corporate Banking
110
2017 Annual Report 111
2017 Annual Report Consolidated
Financial Report
Grupo Santander 2017 summary
Grupo Santander conducted its business in a more favourable
economic environment than in previous years. Low interest rates
in mature markets continued to be the most unfavourable factor
for banking activity. The soundness of our business model enabled
us to deliver double-digit growth in the Group’s underlying profit
and that of most of the countries where we operate. Our RoTE
was among the best in the sector, and we combined balance sheet
growth with better capital ratios and a higher dividend per share.
Our strategic priorities were:
1. Continue our commercial transformation, both in the
traditional banks and through our independent units operating
under the start-up model. The three pillars of our transformation
programme are:
• Improve customer loyalty through innovative, simple and
tailored solutions. Among other actions, we continued to
secure the 1|2|3 strategy in various countries, adapted our
global strategy for the SME segment to the local features of
each market, achieved strong growth in the cards market,
particularly in Spain and Brazil, and created the Wealth
Management division in order to enhance the service we provide
to our private banking and asset management clients. Thanks
to this transformation process, we now have 17.3 million loyal
customers (+13%).
• Promote the digital transformation of channels, products
and services. Initiatives such as Digilosofia in Spain, the
fully digital Openbank, Superdigital in Brazil, the Cash Nexus
payment platform, Santander Pay, the new global machine
learning platform and other initiatives are driving the digital
transformation and significantly improving the customer
experience as well as opening new sources of revenue. This
strategy enabled us to increase the number of digital clients
in 2017 by more than four million to over 25 million, as well as
digital transactions (around 40% of total transactions).
• Continue to improve customer satisfaction and experience
with simpler and more efficient processes, underpinned by
a multichannel offering. We ended the year with seven units
among the three best local banks for customer satisfaction and
were recognised as Global Bank of the Year and Bank of the
Year, Latin America by The Banker magazine and Best Bank in the
World for SMEs and Best Bank in Latin America by Euromoney.
2. Strengthen our position in the markets where we operate.
The most notable transaction was our acquisition of Banco
Popular, which enabled us to strengthen our leading position in
Spain and makes us the largest private sector bank in Portugal
by domestic business. We also reinforced our position in retail
banking in Argentina, increased stake in the United States and
closed an agreement to acquire Deutsche Bank's commercial and
retail banking business in Poland.
3. Exit non-core businesses. Our main actions were the sale of
TotalBank in the United States and 51% of Banco Popular’s real
estate business.
As regards business performance, activity and results grew,
profitability was higher and the balance sheet stronger.
Growth. The change in exchange rates and in the perimeter
significantly affected balances during 2017.
Lending rose 12% excluding the forex impact, spurred by Popular’s
integration (+2% excluding it). On a like-for-like basis, seven units
of the core countries improved. Of note were Argentina (+44%,
driven by consumer credit and SMEs), Brazil (+7%, due to the good
evolution of individual customers and SMEs), Portugal (+8%, partly
thanks to a corporate operation), SCF (+6% due to auto finance)
and Poland (+5% from SMEs and companies).
112
4. ECONOMIC AND FINANCIAL REVIEWSummary2017 Annual Report Customer funds rose 17% (excluding the forex impact), benefiting
from the integration of Banco Popular. Excluding Popular, funds
increased 8%, due mainly to demand deposits and investment
funds, and they rose in eight of the core countries (including
double-digit growth in Latin America).
Santander’s business model and geographic diversification between
mature and developing countries enabled it to generate stable,
recurring profits.
Our capacity to generate stable, recurring profits over the last few
years has enabled us to accumulate capital, finance business growth
and boost total shareholder return in cash.
The underlying RoTE was 11.8% and the underlying RoRWA 1.48%,
both better than in 2016. We increased attributable profit per
share by 1% (8% in underlying profit terms) and increased the cash
dividend per share by 11%.
Unlike the balance sheet, the forex impact on the P&L statement
was virtually zero.
The market viewed our strategy and its impact on business
and results favourably. Total shareholder return (TSR) was 17%,
outperforming the DJ Stoxx Banks and DJ Stoxx 50.
Underlying profit before tax was €13,550 million, 20% more than in
2016. The Group’s strength is reflected in its main line items:
Strength. In 2017, we generated capital quarter after quarter (+29
bp), reaching a fully loaded CET1 of 10.84%, higher than our target
and putting us well on track to attain our objective of 11% in 2018.
• Record year in gross income (€48,392 million, up 10%), with
double-digit growth in net interest income and fee income
(together they generated 95% of total revenues).
• Stable costs in real terms and on a like-for-like basis, despite
higher costs related to regulatory matters and investments in
transformation. Grupo Santander is one of the world’s most
efficient banks, with a cost-to-income ratio of 47%.
• Continuous improvement in credit quality, reflected in a 4% fall in
provisions and an improvement in the cost of credit to 1.07%.
A higher tax charge in the lower part of the P&L statement, as
well as the recording of some positive and negative non-recurring
results in Net capital gains and provisions, which totalled a charge
of €897 million net of tax (€417 million in 2016).
The Group’s attributable profit was €6,619 million (+7%). Excluding
Banco Popular, which recorded a loss of €37 million because of
integration costs, attributable profit was €6,656 million.
Profitability. Greater profitability and creating shareholder value
were among our main priorities.
We comfortably met the minimum regulatory requirements, ending
the year with a phased-in CET1 of 12.26%, well above the minimum
requirement.
Santander has a medium-low risk profile and high-quality assets.
Our proactive risk management gives us credit quality ratios that
are among the best in the sector. We have an NPL ratio of 4.08%
(+15 bp as a result of the acquisition of Banco Popular) and a
coverage ratio of 65%. Excluding Popular, the NPL ratio was 3.38%,
55 b.p. lower than in 2016 and a reduction for the fourth year
running.
In addition, our cost of credit improved further, to 1.07%, 11 bp
lower than in 2016.
Almost all the countries where the Group operates improved their
credit quality ratios. The NPL ratio was lower in eight of them and
the cost of credit in seven.
The Group’s results and balance sheet are set out in this chapter in
greater detail, as well as the global and country businesses.
EXCHANGE RATES: 1 EURO / CURRENCY PARITY
2017
2016
Period-end
Average
Period-end
Average
US$
Pound sterling
Brazilian real
Mexican peso
Chilean peso
Argentine peso
Polish zloty
1.199
0.887
3.973
23.661
736.922
22.637
4.177
1.127
0.876
3.594
21.291
731.538
18.566
4.256
1.054
0.856
3.431
21.772
707.612
16.705
4.410
1.106
0.817
3.831
20.637
747.500
16.316
4.362
113
2017 Annual Report GRUPO SANTANDER. INCOME STATEMENT (Including Banco Popular)
Attributable profit of €6,619 million, 7% more than in 2016, including a charge of €897 million net for capital gains and provisions.
Underlying profit before tax increased 20% to €13,550 million
Record year in gross income, with double digit growth in net interest income and fee income
Stable costs adjusted for inflation and on a like-for-like basis. Grupo Santander remains one of the world's most efficient banks,
with a cost-to-income ratio of 47%
Continuous improvement in credit quality reflected in a 4% fall in provisions and an improvement in the cost of credit to 1.07%
The Group's underlying RoTE, based on this profit, was 11.8% (+70 b.p.) and the underlying RoRWA 1.48% (1.36% in 2016)
Earnings per share (EPS) rose 1% and underlying earnings per share 8%
INCOME STATEMENT (including Popular from 7 June 2017)
(€ million)
Change
amount
%
% excl. FX
2017
34,296
11,597
1,703
796
384
704
(291)
48,392
(22,918)
(20,325)
(11,972)
(8,353)
(2,593)
25,473
(9,111)
(414)
(2,398)
13,550
(4,587)
8,963
—
8,963
1,447
7,516
(897)
6,619
0.463
0.461
0.404
0.403
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
0.429
0.428
0.401
0.399
3,207
1,417
(20)
(66)
(29)
260
(296)
4,538
(1,831)
(1,602)
(975)
(627)
(229)
2,708
407
(167)
(686)
2,262
(1,191)
1,071
(0)
1,070
175
895
(480)
415
0.034
0.033
0.004
0.004
1,407,681
92,638
1,337,661
88,744
70,020
3,894
10.2
13.4
0.4
(6.5)
(7.9)
57.3
—
10.2
9.0
8.8
9.0
8.6
9.9
11.4
(5.6)
68.9
38.2
20.7
36.0
14.1
(100.0)
14.1
13.1
14.3
117.0
7.4
10.3
13.9
(1.1)
(7.6)
(7.1)
58.5
—
10.3
8.7
8.6
8.9
8.1
9.7
11.9
(4.3)
67.7
40.0
20.0
35.1
13.6
(100.0)
13.6
13.8
13.5
115.2
6.7
7.8
7.8
0.9
0.9
5.2
4.4
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
0.438
0.438
0.397
0.396
1,345,657
90,798
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
(*) Detail on the following page
(**) Data adjusted to capital increase of July 2017
114
4. ECONOMIC AND FINANCIAL REVIEWConsolidated financial information2017 Annual Report QUARTERLY INCOME STATEMENT (including Popular from 7 June 2017)
(€ 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) **
(*) Including:
2016
2017
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
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
0.106
0.106
0.106
0.106
7,570
2,549
366
270
209
112
(51)
10,755
(5,227)
(4,632)
(2,712)
(1,920)
(595)
5,528
(2,205)
(29)
(515)
2,779
(915)
1,864
0
1,864
338
1,526
(248)
1,278
0.099
0.098
0.082
0.081
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
0.110
0.110
0.110
0.110
8,096
2,637
412
142
124
130
(112)
11,288
(5,453)
(4,828)
(2,876)
(1,952)
(626)
5,835
(2,406)
(159)
(432)
2,838
(767)
2,071
0
2,072
305
1,766
(169)
1,598
0.114
0.114
0.103
0.103
8,402
2,844
573
211
41
133
37
12,029
(5,543)
(4,915)
(2,912)
(2,002)
(629)
6,486
(2,400)
(68)
(707)
3,311
(1,125)
2,186
—
2,186
319
1,867
—
1,867
0.120
0.120
0.120
0.120
8,606
2,916
286
240
238
160
(157)
12,049
(5,648)
(4,983)
(2,943)
(2,039)
(665)
6,401
(2,280)
(63)
(785)
3,273
(1,129)
2,144
—
2,144
395
1,749
—
1,749
0.112
0.111
0.112
0.111
8,681
2,888
422
260
31
188
42
12,252
(5,766)
(5,161)
(3,000)
(2,161)
(605)
6,486
(2,250)
(54)
(591)
3,591
(1,243)
2,347
—
2,347
371
1,976
(515)
1,461
0.118
0.119
0.084
0.085
8,607
2,949
421
85
75
223
(213)
12,062
(5,961)
(5,267)
(3,116)
(2,151)
(694)
6,101
(2,181)
(230)
(315)
3,375
(1,090)
2,285
—
2,285
362
1,924
(382)
1,542
0.113
0.111
0.088
0.087
– In 2Q'16, capital gains from the disposal of the stake in VISA Europe (€227 million) and restructuring costs (-€475 million).
– In 4Q'16 PPI UK (-€137 million) and restatement Santander Consumer USA (-€32 million).
– In 3Q'17, integration costs (Popular: -€300 million and Germany -€85 million) and charge for equity stakes and intangible assets (-€130 million).
– In 4Q'17, capital gains from the disposal of the stake in Allfunds Bank (€297 million), USA tax reform (€73 million), goodwill charges (-€603 million) and in the US provisions for
hurricanes, increased stake in Santander Consumer USA and other (-€149 million).
(**) Data adjusted to capital increase of July 2017.
NET CAPITAL GAINS AND PROVISIONS. 2016
(€ million)
NET CAPITAL GAINS AND PROVISIONS. 2017
(€ million)
115
2017 Annual Report The net negative impact in 2017 of non-recurring capital gains and
provisions was €897 million. The positive impacts were capital gains
of €297 million from the sale of Allfunds Bank and €73 million from
the United States tax reform. The charges were €603 million for
goodwill and €149 million in the US for hurricanes, the purchase of a
stake in Santander Consumer USA and other funds, €385 million for
charges related to integration processes (€300 million Popular and
€85 million Santander Consumer Finance) and €130 million for equity
stakes and intangible assets.
The net negative impact of non-recurring capital gains and
provisions in 2016 was €417 million. Capital gains were €227 million
from the sale of VISA Europe. Charges amounted to €644 million,
as follows: restructuring costs (€475 million), provisions to cover
eventual complaints related to payment protection insurance (PPI)
in the UK (€137 million) and Santander Consumer USA restatement
(€32 million).
The main developments between 2016 and 2017 were:
Grupo Santander conducted its business during 2017 in a more
favourable economic climate than in the last few years. Low interest
rates in mature countries continued to be the most unfavourable
factor for banking activity.
In this environment, our solid business model enabled us to achieve
double-digit growth in the Group’s underlying profit and in most of
the countries where we operate. The RoTE was among the highest of
the sector and we combined growth in the balance sheet with better
capital ratios and a higher dividend per share.
The Group posted an attributable profit of €6,619 million, 7% more
than in 2016. Excluding the non-recurring results set out below and
tax, which reflect the increased fiscal pressure, the underlying pre-tax
profit was 20% higher at €13,550 million.
Before looking at the P&L statement, details on some of the aspects
affecting year-on-year comparisons, are given:
• The 2017 P&L includes Banco Popular. Since its incorporation
on 7 June, it made a loss of €37 million, due to the €300 million
charge for its integration into the Group made in the third
quarter, in accordance with what was announced at the time.
• The evolution of exchange rates had little impact on the Group as
a whole (less than one percentage point on attributable profit). The
impact by units, however, varied: Brazil (+7 p.p.); Poland (+2 p.p.);
Chile (+2 p.p.); US (-2 p.p); Mexico (-3 p.p.); UK (-7 p.p.) and Argentina
(-14 p.p.).
• In order to help explain the changes between 2016 and 2017, a
summarised P&L account is included where non-recurring capital
gains and provisions are shown net and separately in a line before the
Group’s attributable profit (Net capital gains and provisions).
NET INTEREST INCOME
(%)
NET FEE INCOME
(%)
116
4. ECONOMIC AND FINANCIAL REVIEWConsolidated financial information2017 Annual Report NET FEE INCOME
(€ million)
Fees from services
Mutual & pension funds
Securities and custody
Insurance
Group net fee income (Excl. Popular)
Popular
Group net fee income
2017
7,142
762
1,079
2,325
11,308
288
11,597
2016
6,261
757
913
2,249
10,180
10,180
Change
amount
881
5
166
76
1,129
288
1,417
%
14.1
0.6
18.2
3.4
11.1
2015
6,040
862
905
2,225
10,033
13.9
10,033
Gross income
Gross income was up 10% at a record €48,392 million, and its quality
improved as it was driven by customer revenues (+11%).
Our revenue structure, in which net interest income and fee income
generated 95% of total revenues, continues to enable us to obtain
consistent and recurrent growth.
• Net interest income rose 10% to €34,296 million.
The largest rises in net interest income, excluding the forex impact in
order to better assess the business performance, were in developing
countries, particularly Brazil (+17%), Mexico (+13%), Argentina (+58%)
and Poland (+9%), due to faster growth in volumes. Their interest
rates were also higher than in mature countries, although with a
varied performance (they rose in Mexico and declined significantly in
Brazil).
The only declines were in Spain because of interest rate pressure and
lower volumes, in Portugal where the interest rate environment is
similar, together with reduced revenues from the ALCO portfolio and
in the US, affected by the fall in auto finance balances in Santander
Consumer USA and the change of mix toward a lower risk profile.
• Fee income totalled €11,597 million, with double-digit growth
stemming from greater activity and customer loyalty. Growth was
faster in 2017 than in 2016 and 2015 (14%, 8% and 4%, respectively).
By businesses, fee income rose in Retail Banking (86% of the total)
as well as in Global Corporate Banking.
It also rose in all countries, 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 3.5% of gross
income, declined 1%.
• The rest of revenues accounted for less than 2% of the total. This
includes dividends, which were €29 million lower, results by the
equity accounting method, which were €260 million higher, and
other operating income, which was €296 million lower, partly due to
larger contributions to the Deposit Guarantee Fund and to the Single
Resolution Fund.
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
Group operating expenses (Excl. Popular)
Popular
Group operating expenses
2017
11,551
7,993
1,219
513
740
1,743
131
507
3,140
19,544
2,501
22,045
873
22,918
2016
10,997
7,727
1,094
499
691
1,708
146
484
3,105
18,723
2,364
21,088
21,088
Change
amount
554
266
125
14
50
34
(15)
23
36
821
137
957
873
1,831
%
5.0
3.4
11.4
2.8
7.2
2.0
(10.2)
4.7
1.1
4.4
5.8
4.5
2015
11,107
8,045
1,039
587
705
1,786
157
529
3,243
19,152
2,419
21,571
8.7
21,571
117
2017 Annual Report EFFICIENCY RATIO (COST-TO-INCOME)
COST OF CREDIT (PROVISIONS / TOTAL CREDIT)
(%)
(%)
Operating expenses
Loan-loss provisions
Operating expenses were 9% higher at €22,918 million. Adjusted
for inflation and on a like-for-like basis, they were virtually flat,
despite incorporating higher costs linked to regulatory matters and
investments in transformation.
We continued to manage costs very actively, adapting the business
reality to each market. This enabled us to reduce or maintain them flat
in seven of the ten core units in real terms and on a like-for-like basis.
The two units whose costs rose the most were Mexico, because of
significant investments in infrastructure and systems under the plan
launched at the end of 2016, and Brazil, where they went hand in hand
with the business dynamic and investments in transformation.
The revenue and costs performance produced an improvement of 70
b.p. in the efficiency ratio (to 47.4% from 48.1% on 2016), which kept us
as one of the best among our peers. Excluding Popular which, at this
time, is responsible for proportionately more costs, the cost-to-income
ratio improved to 46.8%.
Loan-loss provisions fell 4% to €9,111 million. Excluding Popular, they
were 5% lower. In local currency terms, provisions fell sharply in
Continental Europe and the United States, and also in Latin America
as a whole. They increased, on the other hand, in the UK because of
some normalisation and a one-off in GCB. That country's cost of credit,
however, was still low at 8 b.p. compared to 2 b.p. in 2016.
The cost of credit continued to improve, reflecting the selective growth
strategy and the appropriate risk management policy. It dropped from
1.18% at the end of 2016 to 1.07% a year later. Excluding Popular, it was
1.12%. Almost all units improved, notably Brazil, US, Chile, Portugal,
SCF and Poland. In the UK, Mexico and Argentina it increased.
Other income and provisions
Other income and provisions were €2,812 million negative (€1,959
million also negative in 2016). This item records various kinds of
provisions, as well as capital gains, capital losses and impairment of
assets. The figure was higher in 2017 because we strengthened the
balance sheet and there were some higher than usual charges, mainly
in Brazil and in the UK.
NET LOAN-LOSS PROVISIONS
(€ million)
Non performing loans
Country risk
Recovery of written-off assets
Group net loan-loss provisions (Excl. Popular)
Popular
Group net loan-loss provisions
118
2017
10,612
5
(1,621)
8,997
114
9,111
2016
11,097
3
(1,582)
9,518
9,518
Change
amount
(484)
2
(39)
(521)
114
(407)
%
(4.4)
69.0
2.5
(5.5)
2015
11,484
(0)
(1,375)
10,108
(4.3)
10,108
4. ECONOMIC AND FINANCIAL REVIEWConsolidated financial information2017 Annual Report UNDERLYING PROFIT BEFORE TAXES
(€ million)
ATTRIBUTABLE PROFIT
(€ million)
Profit and profitability
Underlying pre-tax profit was 20% higher at €13,550 million,
reflecting the good evolution of revenues, cost control and the good
performance of provisions and the cost of credit. Excluding Popular,
profit was up 17%. Eight of the countries where we operate increased
their profits in local currency and seven at double-digit rates.
Underlying attributable profit (before net of capital gains and
provisions) was €7,516 million, 14% higher (excluding Popular:
+10%).
The Group’s underlying RoTE, based on this profit, was 11.8% (+70 b.p.),
the underlying RoRWA 1.48% (1.36% in 2016) and underlying earnings
per share €0.463 (+8%).
Taxes were higher, increasing the fiscal pressure in some units, mainly
Brazil, Spain, Poland, Chile and Argentina. The tax rate for the whole
Group rose from 30% to close to 34%.
Lastly, the Group’s attributable profit was 7% higher at €6,619 million
(excluding Popular also +7%).
Minority interests rose 14%, with significant increases at Santander
Consumer Finance, because of the agreement with Banque PSA, Brazil
and Chile. On the othe hand, decline at Santander Consumer USA,
partly due to lower profits and the purchase of a stake.
Earnings per share rose 1% to €0.404. Total RoTE was 10.41% (10.38% in
2016) and total RoRWA 1.35% (1.29% in 2016).
UNDERLYING RoTE
(%)
UNDERLYING RoRWA
(%)
119
2017 Annual Report Grupo Santander excluding Banco Popular
Since its incorporation on June 7, Banco Popular made a loss of
€37 million, due to the €300 million charge for its integration into
the Group made in the third quarter, in accordance with what was
announced at the time.
Excluding this charge, underlying profit amounted to €263 million,
coming from gross income of €1,309 million, operating expenses of
€873 million and loan-loss provisions of €114 million.
The performance of the main P&L items, excluding the exchange rate
impact and not on a like-for-like basis, is set out below.
The Group recorded gross income of €47,082 million, 7% more than
in 2016, underpinned by customer revenues, where net interest
income rose 7% and fee income 11%. Gains on financial transactions
remained stable and other income declined 9%, impacted by the
larger contribution to the Deposit Guarantee Fund and the Single
Resolution Fund.
Operating expenses were €22,045 million, 5% more than in
2016, and remained flat when excluding inflation and Citibank's
incorporation in Argentina. The revenue and costs evolution
improved the cost-to-income ratio by 1.3 p.p., to 46.8%.
Loan-loss provisions declined 7% and stood at €8,997 million, and the
cost of credit was 1.12%, down from 1.18% in 2016.
Underlying profit before tax amounted to €13,248 million, (+18%),
underlying attributable profit stood at €7,253 million (+10%), and
attributable profit was €6,656 million (+8%), including the charge
already mentioned.
INCOME STATEMENT (EXCL. POPULAR)
(€ 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
2017
33,293
11,308
1,702
779
378
609
(209)
47,082
(22,045)
(19,544)
(11,551)
(7,993)
(2,501)
25,038
(8,997)
(413)
(2,380)
13,248
(4,548)
8,700
—
8,700
1,447
7,253
(597)
6,656
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
Change
amount
2,204
1,129
(20)
(83)
(35)
165
(213)
3,229
(957)
(821)
(554)
(266)
(137)
2,272
521
(166)
(667)
1,960
(1,152)
808
(0)
807
175
632
(180)
452
%
7.1
11.1
(1.2)
(9.6)
(8.4)
37.2
—
7.4
4.5
4.4
5.0
3.4
5.8
10.0
(5.5)
67.1
39.0
17.4
33.9
10.2
(100.0)
10.2
13.8
9.5
43.3
7.3
% excl. FX
7.0
10.6
0.4
(8.6)
(9.2)
36.2
—
7.3
4.8
4.7
5.2
3.9
6.0
9.5
(6.8)
68.3
37.2
18.0
34.8
10.8
(100.0)
10.8
13.0
10.3
44.4
8.0
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
(*) In 2017, integration costs in Germany (-€85 million) and charges for equity stakes and intangible assets (-€130 million), capital gains from the disposal of the stake in Allfunds
Bank (€297 million), USA tax reform (€73 million), goodwill charges (-€603 million) and in the US provisions for hurricanes, increased stake in Santander Consumer USA and
other (-€149 million)
In 2016, capital gains from the disposal of the stake in VISA Europe (€227 million), restructuring costs (-€475 million), PPI in the UK (-€137 million) and restatement of Santander
Consumer USA (-€32 million).
120
4. ECONOMIC AND FINANCIAL REVIEWConsolidated financial information2017 Annual Report QUARTERLY INCOME STATEMENT (Excl. Popular)
(€ 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
(*) Including:
2016
2017
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
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
7,570
2,549
366
270
209
112
(51)
10,755
(5,227)
(4,632)
(2,712)
(1,920)
(595)
5,528
(2,205)
(29)
(515)
2,779
(915)
1,864
0
1,864
338
1,526
(248)
1,278
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
8,096
2,637
412
142
124
130
(112)
11,288
(5,453)
(4,828)
(2,876)
(1,952)
(626)
5,835
(2,406)
(159)
(432)
2,838
(767)
2,071
0
2,072
305
1,766
(169)
1,598
8,402
2,844
573
211
41
133
37
12,029
(5,543)
(4,915)
(2,912)
(2,002)
(629)
6,486
(2,400)
(68)
(707)
3,311
(1,125)
2,186
—
2,186
319
1,867
—
1,867
8,497
2,885
287
240
237
154
(151)
11,910
(5,552)
(4,896)
(2,899)
(1,997)
(656)
6,358
(2,272)
(63)
(765)
3,258
(1,125)
2,133
—
2,133
395
1,738
—
1,738
8,225
2,760
413
220
30
140
50
11,617
(5,379)
(4,822)
(2,823)
(1,999)
(557)
6,239
(2,212)
(54)
(598)
3,375
(1,194)
2,180
—
2,180
371
1,809
(215)
1,594
8,169
2,820
429
108
71
182
(145)
11,526
(5,571)
(4,912)
(2,917)
(1,994)
(660)
5,955
(2,114)
(228)
(309)
3,305
(1,104)
2,200
—
2,200
361
1,839
(382)
1,457
– In 2Q'16, capital gains from the disposal of the stake in VISA Europe (€227 million) and restructuring costs (-€475 million).
– In 4Q'16 PPI UK (-€137 million) and restatement Santander Consumer USA (-€32 million).
– In 3Q'17, integration costs in Germany (-€85 million) and charge for equity stakes and intangible assets (-€130 million).
– In 4Q'17, capital gains from the disposal of the stake in Allfunds Bank (€297 million), USA tax reform (€73 million), goodwill charges (-€603 million) and in the US provisions for
hurricanes, increased stake in Santander Consumer USA and other (-€149 million).
121
2017 Annual Report BALANCE SHEET (including Banco Popular)
(€ 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 equity
122
2017
2016
110,995
125,458
36,351
21,353
8,815
1,696
57,243
34,781
20,475
9,889
4,417
133,271
128,481
4,790
903,013
17,543
819,625
65,845
13,491
6,184
22,975
28,683
25,769
65,454
1,444,305
107,624
28,179
—
574
57,892
20,979
59,617
28,945
3,056
27,027
589
1,126,069
720,606
214,910
162,714
27,839
1,117
14,490
28,556
1,337,472
116,265
8,068
103,608
6,619
(2,029)
(21,777)
12,344
106,832
1,444,305
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
Change
amount
34,541
(22,729)
(12,571)
6,856
(689)
(1,525)
(14,800)
3,172
2,879
(180)
473
16,497
17,194
(697)
63,009
4,306
56,255
2,448
(977)
1,348
(311)
(738)
(955)
11,368
105,180
(1,141)
18,183
—
(821)
(16,477)
(2,026)
19,354
5,600
265
12,900
589
81,829
62,836
(11,168)
28,838
1,323
465
31
509
101,046
10,288
777
9,459
415
(362)
(6,738)
583
4,133
105,180
%
45.2
(15.3)
(25.7)
47.3
(7.3)
(47.3)
(20.5)
10.0
16.4
(1.8)
12.0
14.1
15.5
(12.7)
7.5
32.5
7.4
3.9
(6.8)
27.9
(1.3)
(2.5)
(3.6)
21.0
7.9
(1.0)
181.9
—
(58.9)
(22.2)
(8.8)
48.1
24.0
9.5
91.3
—
7.8
9.6
(4.9)
21.5
5.0
71.4
0.2
1.8
8.2
9.7
10.7
10.0
6.7
21.7
44.8
5.0
4.0
7.9
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
4. ECONOMIC AND FINANCIAL REVIEWConsolidated financial information2017 Annual Report GRUPO SANTANDER BALANCE SHEET*
Excluding the acquisition of Banco Popular:
- Lending rose 2%, and in eight of the ten core countries
- The NPL ratio was 3.38% and the cost of credit 1.12%, both better than in 2016
- Funds increased 8%, due to demand deposits and mutual funds. They grew in eight core units
Including the balances of Banco Popular:
- Loans were up 12% and funds 17%
- The NPL ratio was 4.08% and the cost of credit 1.07%
The net loan-to-deposit ratio was 109% (114% in 2016)
* Changes in constant currency
Grupo Santander including Banco Popular
investments held to maturity was €13,491 million, and tangible assets
amounted to €22,975 million.
Total gross loans at the end of 2017 amounted to €853,976 million
(excluding repos), 7% more than in 2016 (+12% in constant euros) and
total customer funds (excluding repos) plus mutual funds increased
12% (+17% in constant euros) to €890,135 million.
The net loan-to-deposit ratio was 109%, and the ratio of deposits
plus medium- and long-term funding to the Group’s loans was 115%.
Non-performing loans amounted to €37,596 million. The NPL ratio
was 4.08%, coverage ratio of 65% and the cost of credit was 1.07%.
Regarding other items of the balance sheet, total financial assets
available for sale stood at €133,271 million at the end of 2017,
Total goodwill was €25,769 million, after the amortisations carried
out in the last quarter in the United States.
Balances were significantly affected by the exchange rates of the
currencies in which the Group operates, as well as the change in
perimeter.
• Negative impact of around five p.p. on the whole Group from the
change in exchange rates. By units: Poland (+6 p.p.); UK and Chile
(-4 p.p.); Mexico (-8 p.p.); US (-12 p.p.); Brazil (-14 p.p.) and Argentina
(-38 p.p.).
GROSS CUSTOMER LOANS (including Popular)
excluding repos
(€ billion)
GROSS CUSTOMER LOANS
excluding repos
(% of operating areas), December 2017
Other America: 1%
Argentina: 1%
Chile: 4%
Brazil: 9%
United Kingdom: 28%
Mexico: 3%
USA: 9%
Other Europe: 1%
Poland: 3%
Portugal: 4%
SCF: 11%
Spain1: 26%
(1) Including Popular: 9%
123
2017 Annual Report
CUSTOMER FUNDS (including Popular)
excluding repos
€ billion
CUSTOMER FUNDS
excluding repos
(% of operating areas), December 2017
Argentina: 1%
Chile: 4%
Other America: 0.5%
Brazil: 12%
Mexico: 4%
USA: 7%
Other Europe: 0.5%
Poland: 3%
Portugal: 4%
United Kingdom: 24%
SCF: 4%
Spain1: 36%
(1) Including Popular: 8%
• Positive perimeter impact of 10 p.p. from the acquisition of Banco
Popular in the second quarter of 2017.
In order to better assess management of customer balances, the
figures and changes shown below do not take into account the
evolution of exchange rates or the acquisition of Banco Popular.
Gross lending to customers excluding repos
Poland thanks, in both cases, to SMEs, Chile's rose 3% thanks
to individuals, high income customers and SMEs, and the UK's
rose 1% due to residential mortgages and loans to companies,
offsetting the drop in non-core loans.
• Fall of 2% in Spain, due to institutional balances and GCB, and 4%
in the United States, from the sale of a Santander Consumer USA
portfolio and the reduction in GCB at Santander Bank.
Loans at the end of 2017 totalled €774,443 million, 2% more than in
2016. They increased in retail banking and in eight of the ten core
units:
• The largest rises were in Argentina (+44%, driven by consumer
credit), Portugal (+8%, benefiting from a corporate operation) and
Brazil (+7% due to individual customers).
• Balanced by segments: individuals (47%), consumer credit (18%),
SMEs and companies (24%) and GCB (11%). Growth in individual
customers, consumer finance and SMEs, while loans to companies
and GCB declined.
• Loans to the Real Estate Sector in Spain, excluding Banco Popular,
fell 56%, continuing the strategy of previous years.
• Growth of 6% in Santander Consumer Finance, largely due
to growth in auto finance and credit cards, 5% in Mexico and
CUSTOMER LOANS
(€ million)
Commercial bills
Secured loans
Other term loans
Finance leases
Receivable on demand
Credit cards receivable
Impaired assets
Gross customer loans (excluding repos)
Repos
Gross customer loans
Loan-loss allowances
Group net customer loans (Excl. Popular)
Popular
Group net customer loans
124
2017
25,680
434,384
233,762
26,569
5,081
21,792
27,175
774,443
18,378
792,821
19,424
773,398
75,516
848,914
2016
23,894
454,676
232,289
25,357
8,102
21,363
32,573
798,254
16,609
814,863
24,393
790,470
790,470
Change
amount
1,786
(20,291)
1,473
1,212
(3,020)
428
(5,398)
(23,811)
1,769
(22,041)
(4,969)
(17,072)
75,516
58,444
%
7.5
(4.5)
0.6
4.8
(37.3)
2.0
(16.6)
(3.0)
10.7
(2.7)
(20.4)
(2.2)
2015
18,486
481,221
217,829
22,900
8,504
20,270
36,133
805,341
12,024
817,366
26,517
790,848
7.4
790,848
4. ECONOMIC AND FINANCIAL REVIEWConsolidated financial information2017 Annual Report
NPL AND COVERAGE RATIOS. TOTAL GROUP
CREDIT RISK MANAGEMENT. December 2017
(%)
(%)
Spain
Spain's real estate activity
Consumer Finance
Poland
Portugal
United Kingdom
Brazil
Mexico
Chile
Argentina
USA
Banco Popular
NPL ratio
vs. 2016 (bp)
Coverage
ratio
4.72
87.47
2.50
4.57
5.71
1.33
5.29
2.69
4.96
2.50
2.79
10.75
(69)
97
(18)
(85)
(310)
(8)
(61)
(7)
(9)
101
51
—
45.9
48.4
101.4
68.2
59.1
32.0
92.6
97.5
58.2
100.1
170.2
48.7
Credit risk
Bad and doubtful loans, excluding Banco Popular, ended 2017 at
€28,104 million, 16% lower than in 2016.
The NPL ratio, excluding Banco Popular, stood at 3.38%, (-55 b.p.
over December 2016), after improving for the fourth straight year.
Moreover, this NPL ratio is the lowest since the middle of 2010.
In order to cover bad loans, provisions amounted to €19,906 million
(coverage of 71% compared to 74% in 2016). In order to properly view
this figure, one has to take into account that the UK and Spain's ratios
are affected by the weight of mortgage balances, which require fewer
provisions as these loans have guarantees.
The improved credit quality is reflected in the reduction in loan-loss
provisions.
The cost of credit also improved and dropped from 1.18% in 2016 to
1.12% in December 2017. It declined for the fifth year running.
This positive evolution of the credit quality ratios occurred in almost
all the countries where the Group operates. The NPL ratio fell in
eight of them and the cost of credit in seven of the ten core units.
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.
CREDIT RISK MANAGEMENT (Excl. Popular)
(€ million)
Non-performing loans
NPL ratio (%)
Loan-loss allowances
For impaired assets
For other assets
Coverage ratio (%)
Cost of credit (%)
2017
28,104
3.38
19,906
12,505
7,401
70.8
1.12
2016
33,643
3.93
24,835
15,466
9,369
73.8
1.18
Change
amount
(5,539)
(0.55)
(4,929)
(2,961)
(1,968)
(3.0)
(0.06)
%
(16.5)
(19.8)
(19.1)
(21.0)
2015
37,094
4.36
27,121
17,707
9,414
73.1
1.25
125
2017 Annual Report Customer funds excluding repos
Total managed funds (deposits excluding repos and mutual funds)
rose 8% to €815,849 million at the end of 2017.
As well as 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.
Growth in eight of the ten core units, except for the United States
(-9% due to lower institutional balances), as follows:
In 2017, various Group units (excluding Banco Popular) carried out:
• Growth in Latin America (Argentina: +53%; Brazil: +24% and
• Medium- and long-term senior debt issuances amounting to €12,769
Mexico: +6%). In Europe, Spain rose 12% and the UK 3%.
million and covered bonds placed in the market of €5,181 million.
• Moderate rises at Santander Consumer Finance, Poland and
• Securitisations placed in the market (€13,965 million).
Portugal (+2% each). In all of them we focused on reducing the
cost instead of increasing the volume and thus, growth in demand
deposits was offset by the fall in time deposits.
• Chile remained unchanged.
− Issues eligible for Total Loss Absorbing Capacity (TLAC)
amounting to €19,529 million, in order to strengthen the Group’s
situation, consisting of senior non-preferred: €16,222 million;
subordinated debt: €1,282 million and preferred: €2,321 million.
Reflecting the strategy of loyalty and management of funding
costs, demand deposits rose 9% increasing in almost all countries
and mutual funds rose 14%, also in all countries. Time deposits, on
the other hand, remained stable and with a varied performance by
units.
− Maturities of medium and long-term debt of €36,461 million.
Detailed information is in the chapter of liquidity and funding risk
management.
CUSTOMER FUNDS
(€ million)
Demand deposits
Time deposits
Mutual funds
Customer deposits excluding repos + Mutual funds
Pension funds
Managed portfolios
Subtotal
Repos
Group customer funds (Excl. Popular)
Popular
Group customer funds
2017
486,716
173,046
155,794
815,556
11,566
24,203
851,326
53,009
904,334
81,369
985,703
2016
467,261
181,089
147,416
795,766
11,298
23,793
830,858
42,761
873,618
873,618
Change
amount
19,455
(8,043)
8,378
19,790
268
410
20,468
10,248
30,716
81,369
112,085
%
4.2
(4.4)
5.7
2.5
2.4
1.7
2.5
24.0
3.5
12.8
2015
443,096
202,666
129,077
774,839
11,376
25,808
812,023
37,380
849,403
849,403
126
4. ECONOMIC AND FINANCIAL REVIEWConsolidated financial information2017 Annual Report RATING AGENCIES
In 2017 four rating agencies confirmed their ratings and one of them (Scope) upgraded its rating from A+ to AA-
At the end of 2017, Banco Santander's rating exceeded the sovereign with the five agencies
These ratings recognise Santander's business model and financial strength
• The Group's access to the wholesale funding markets, as well as the
cost of issuances, depends to some extent on the ratings of rating
agencies.
related to the general economic environment, the banking sector's
situation and the sovereign risk of the countries in which the Bank
operates.
• During 2017, DBRS, Fitch, Moody’s and Standard & Poor´s
confirmed Santander's rating, and the rating agency Scope
upgraded the Bank's rating in April, from A+ to AA-, All rating
agencies maintained the stable outlook.
• Rating agencies regularly review the Group's ratings. The rating
depends on a series of internal (business model, strategy, capital,
capacity to generate results, liquidity, etc.) and external factors
• At December 2017, Banco Santander's rating exceeded Spain's
sovereign with the five agencies, recognising Banco Santander's
business model and financial strength.
DEBT RATINGS
December 2017
DBRS
Fitch Ratings
Moody's
Standard & Poor's
Scope
Long
term
A
A-
A3
A-
AA-
Short
term
R-1(low)
F2
P-2
A-2
S-1
Outlook
Stable
Stable
Stable
Stable
Stable
127
2017 Annual Report LIQUIDITY AND FUNDING RISK
MANAGEMENT
The Group’s liquidity remains at comfortable levels, well above regulatory requirements
Positive deposit evolution in the year, resulting in an improvement in the commercial gap
Issuance activity prioritised medium- and long-term funding instruments expected to be TLAC/MREL eligible
Grupo Santander’s moderate encumbrance of assets continued
First, we present the Group’s liquidity management, the principles
on which it is based and the framework in which it is included.
• Limited recourse to short-term wholesale funding.
We then look at the funding strategy developed by the Group and
its subsidiaries, with particular attention on the liquidity evolution
in 2017. We examine changes in the liquidity management ratios and
the business and market trends that gave rise to these over the past
year.
• Availability of sufficient liquidity reserves, including standing
facilities/discount windows at central banks to be used in adverse
situations.
• Compliance with regulatory liquidity requirements both at Group and
subsidiary level, as a new factor conditioning management.
The section ends with a qualitative description of the outlook for
funding in the coming year for the Group and its main countries.
The effective application of these principles by all institutions
comprising the Group required the development of a unique
management framework built upon three essential pillars:
1.1 Liquidity Management in Grupo Santander
Structural liquidity management aims to fund the Group’s recurring
activity optimising maturities and costs, while avoiding taking on
undesired liquidity risks.
Santander’s liquidity management is based on the following
principles:
• Decentralised liquidity model.
• Medium- and long-term funding needs must be covered 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 maturities.
• A solid organisational and governance model that ensures the
involvement of the subsidiaries’ senior management 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
corporate Asset and Liability Management (ALM) 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 adequate liquidity levels necessary to
cover its short- and long-term needs with stable funding sources,
optimising the impact of their costs on the income statement,
128
4. ECONOMIC AND FINANCIAL REVIEWConsolidated financial information2017 Annual Report both in normal and stressed conditions. The Group’s liquidity
risk management processes are contained within a conservative
risk appetite framework established in each geographic area in
accordance with its commercial strategy. This risk appetite defines
maximum tolerance levels for key risk factors using internal and
regulatory metrics in both normal and stressed market conditions,
which establish the limits within which the subsidiaries can operate
in order to achieve their strategic objectives.
• Management adapted in practice to the liquidity needs of each
business. Every year, based on business needs, a liquidity plan is
developed which ensures:
• 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 encumbrance of assets;
• compliance with both regulatory metrics and other metrics
1.2 Funding strategy and
liquidity evolution in 2017
1.2.1. 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 from 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 periods of market stress.
included in each entity’s risk appetite statement.
• Over the last few years, it has been necessary to adapt funding
Over the course of the year, all dimensions of the plan are monitored.
strategies to reflect commercial business trends, market conditions
and new regulatory requirements.
The Group continues developing the ILAAP (Internal Liquidity
Adequacy Assessment Process), an internal self-assessment of
liquidity adequacy 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 an input to the SREP
(Supervisory Review and Evaluation Process). The ILAAP evaluates the
liquidity position both in ordinary and stressed scenarios. In the Risk
chapter of this report, there is a brief description of the considered
scenarios.
As a result of the aforementioned process, a regulatory requirement
is that once a year the Group must send the supervisor a document,
signed by the Board of Directors, that concludes that the Group’s
funding and liquidity structure remains solid in all scenarios and
that the internal processes are suitable to ensure sufficient liquidity.
This conclusion is the result of analysis carried out by each of the
subsidiaries, following the Group’s autonomous liquidity management
model.
The Group has a robust structure suited to the identification,
management, monitoring and control of liquidity risks, established
through common frameworks, conservative principles, clearly defined
roles and responsibilities, a consistent committee structure, effective
local lines of defence and a well-coordinated corporate supervision.
Additionally, frequent and detailed liquidity monitoring reports are
generated for management, control and informational purposes. The
most relevant information is periodically sent to senior management,
the Executive Committee and the Board of Directors.
Over the last few years, the Group and each of its subsidiaries
have developed a comprehensive special situations management
framework which centralises the Bank’s governance in these scenarios.
Contingency funding plans are integrated within this governance
model, detailing a series of actions which are feasible, pre-assessed,
with an established execution timeline, categorised, prioritised and
sufficient both in terms of volumes as well as timeframes to mitigate
stress scenarios.
• In 2017, Santander continued to improve in specific aspects based on
a very comfortable liquidity position both at Group and subsidiary
levels, with no significant changes in liquidity management or
funding policies or practices. All of this enables us to face 2018 from
a strong starting point, with no material growth restrictions.
In general terms, the funding strategies and liquidity management
approaches implemented by Santander subsidiaries remain as
follows:
• Maintain adequate and stable medium- and long-term wholesale
funding levels.
• Ensure a sufficient volume of assets which can be discounted in
central banks as part of the liquidity buffer.
• 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 due to its retail focused
balance sheet. Customer deposits are the Group’s main source
of funding, representing just over two-thirds of the Group’s net
liabilities (i.e. of the liquidity balance sheet) and 92% of net loans
as of December 2017. Moreover, these deposits are a highly stable
due to the fact that they mainly arise from retail client activity. This
represents an increase with respect to the 2016 figure of 87%. The
liquidity evolution explains the majority of this change.
129
2017 Annual Report With regards to the breakdown of net customer loans, compared to
2016 there has been a notable increase in the weight of the Euro Zone,
largely due to the incorporation of Grupo Banco Popular into Grupo
Santander, as its main area of operations was the Euro Zone. Likewise,
there was a similar increase the Euro Zone’s weight in medium- and
long-term funding partly due to Popular and partly due to issuance
activity throughout the year.
The bulk of the Bank’s medium- and long-term funding is made up of
debt issuances. The outstanding balance as of December 2017 was
€153,961 million in nominal terms, with a comfortable maturity profile
and a weighted average maturity of 5.0 years, a favourable increase
compared to the 4.3 years as of end 2016.
The distribution of this funding by instrument over the last three years
and maturity profile is as follows.
MEDIUM- AND LONG-TERM DEBT
ISSUANCE. GRUPO SANTANDER
(€ million)
Change in outstanding balance
at nominal value
Dec 17
10,365
12,049
85,962
45,585
Dec 16
8,515
11,981
89,568
39,513
Dec 15
8,491
12,262
83,630
45,010
153,961
149,578
149,393
Preferred
Subordinated
Senior debt
Covered bonds
Total
GRUPO SANTANDER LIQUIDITY BALANCE SHEET
(%) December 2017
• Wholesale funding diversified in terms of issuers, markets and
instruments, focusing on medium- and long-term markets with
a limited reliance on short-term funding. Medium- and long-term
wholesale funding accounts for 18% of the Group’s net funding,
compared with 20% at the end of 2016, and comfortably covers the
lending not funded by customer deposits (commercial gap).
This funding is well balanced by instruments (approximately 43% senior
debt, 23% securitisations and structured products with guarantees,
23% covered bonds, and the rest preferred shares and subordinated
debt) and also by markets so that those with the highest weight in
issuances are those where the Bank’s investor activity is the strongest.
The following charts show the geographic distribution of the
Group’s customer loans and its medium and long-term wholesale
funding, so that their similarity can be appreciated.
NET CUSTOMER LOANS
M/LT WHOLESALE FUNDING
(%) December 2017
(%) December 2017
Other Latin
America
9%
Brazil
8%
Euro Zone
43%
Other Latin
America
6%
Brazil
8%
Euro Zone
45%
United States
9%
Other Europe
3%
United Kingdom
29%
United
States
14%
United Kingdom
27%
130
4. ECONOMIC AND FINANCIAL REVIEWConsolidated financial information2017 Annual Report
MEDIUM- AND LONG-TERM DEBT ISSUANCES. GRUPO SANTANDER
(€ million)
Distribution by contractual maturity. December 2017*
Preferred
Subordinated
Senior debt
Covered bonds
Total
0-1
month
1-3
months
3-6
months
6-9
months
9-12
months
12-24
months
2-5
years
more than
5 years
Total
-
-
1,309
3,100
-
-
3,017
-
4,409
3,017
-
197
4,048
2,133
6,377
-
86
4,556
250
-
-
-
580
-
129
10,365
10,365
11,057
12,049
1,484
14,285
36,784
20,479
85,962
-
5,001
18,693
16,408
45,585
4,891
1,484
19,866
55,606
58,310
153,961
* In the case of issues with put option in favour of the holder, the first early redemption date of the put option is considered instead of the original contractual maturity date.
Note: there are no additional guarantees for any of the debt issued by the Group’s subsidiaries.
It is worth noting that compared to 2016 the volume of issuances with
a maturity date within the next year has decreased.
In addition to the debt issuances of the medium- and long-term
wholesale funding, the Bank has securitisations placed in the market,
collateralised funding and other specialist funding amounting to a total
of €45,364 million with a residual maturity of 1.7 years.
Wholesale funding stemming from short-term issuance programmes is
a residual part of the Group’s funding structure (accounting for around
2% of net liabilities), is related to treasury activities and is comfortably
covered by liquid assets.
The outstanding balance as of end 2017 was €20,999 million
distributed as follows: various certificate of deposit and commercial
paper programmes in the UK, 43%; European Commercial Paper, US
Commercial Paper and domestic programmes issued by the parent
bank, 17%; issuance programmes in other units, 40%.
On 9 November 2015, the Financial Stability Board (FSB) published
its final principles and term sheet containing an international
standard to enhance the loss absorbing capacity of global
systemically important institutions (G-SIIs). The final standard
consists of an elaboration of the principles on loss absorbing and
recapitalisation capacity of G-SIIs in resolution and a term sheet
setting out a proposal for the implementation of these proposals
in the form of an internationally agreed standard on total loss
absorbing capacity (TLAC) for G-SIIs. Once implemented in the
relevant jurisdictions, these principles and terms will form a new
minimum TLAC standard for G-SIIs.
Directive 2014/59/EU of 15 May 2014 on recovery and resolution of
credit institutions and investment firms (BRRD) includes an additional
loss absorption concept and a minimum eligible liabilities requirement
known as MREL (Minimum Required Eligible Liabilities) which applies
to all entities operating in Europe, not only those the G-SIIs. MREL and
TLAC are discussed further in the Capital section of this report.
The medium-and long-term debt issuances that are considered to be
MREL/TLAC eligible are preferred and subordinated debt. The ability
of senior bonds to be MREL/TLAC eligible instruments depends on
the insolvency legislation in the country of domicile of the issuer. For
example, in Spain, recent legislation has created a new instrument
category known as senior non-preferred, an instrument which Banco
Santander has been a pioneering issuer in. In other countries, such as
the UK or the United States, subordination is structural and is achieved
by issuing ordinary senior debt via the entity’s Holding company.
Contractual subordination is also possible where a clause is included in
the contract stating that the issuance is subordinate to certain liabilities.
1.2.2. Evolution of liquidity in 2017
The main aspects of liquidity in 2017 can be summarised as follows:
i) Basic liquidity ratios remain at comfortable levels.
ii) We are continuing to achieve regulatory ratios ahead of schedule.
iii) Moderate use of encumbered assets in funding operations.
i. Basic liquidity ratios remain at comfortable levels
The table shows the evolution of the basic monitoring liquidity metrics
at the Group level over the last few years:
GRUPO S
ANTANDER MONITORING METRICS
Net loans / net assets
Net loan-to-deposit ratio (LTD)
2017
75%
109%
2016
75%
114%
2015
75%
116%
Customer deposits and medium- and
long-term funding / net loans
115%
114%
114%
Short-term wholesale
funding / net liabilities
Structural liquidity surplus
/ net liabilities
2%
3%
2%
15%
14%
14%
As at end-December 2017, Grupo Santander recorded:
• A stable credit to net assets ratio (total assets minus trading
derivatives and inter-bank balances) of 75%, in line with 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) of 109%, very comfortably within the
target 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 115% at the end of 2017.
• Limited recourse to short-term wholesale funding. The ratio was
around 2%, in line with previous years.
• Lastly, the Group’s structural surplus (i.e. the excess of structural
funding sources - deposits, medium- and long-term funding and
capital - as a percentage of structural liquidity needs - fixed assets
and loans-) rose in 2017, to an average of €156,927 million, higher than
at the end of the previous year.
131
2017 Annual Report As at 31 December 2017, the consolidated structural surplus stood
at €163,957 million. This consists of fixed-income assets (€162,586
million), equities (€22,958 million), partly offset by short-term
wholesale funding (-€20,999 million) and net interbank and central
bank deposits (-€587 million). In relative terms, the total volume
was equivalent to 15% of the Group’s net liabilities, in line with
December 2016.
Having discussed the principal liquidity ratios at Group level, the
following table sets out the ratios for for Santander’s main units as at
end 2017:
MAIN UNITS AND LIQUIDITY METRICS
December 17
LTD Ratio
Deposits + M/LT
funding/
Net loans
Spain
Popular
Portugal
Santander Consumer Finance
Poland
United Kingdom
Brazil
Mexico
Chile
Argentina
United States
Group total
79%
117%
100%
254%
92%
106%
101%
87%
143%
76%
141%
109%
160%
100%
115%
66%
111%
117%
122%
123%
95%
134%
110%
115%
Generally speaking, there were two key drivers behind the evolution
of the Group’s liquidity and that of its subsidiaries in 2017 (excluding
the forex effect):
1. Good performance in deposits in the main geographies where
the Group operates, particularly in Spain and in the UK. This
performance has helped to narrow the commercial gap, as deposit
growth has more than outstripped the increase in lending.
2. Debt issuance momentum continued, especially in the European
units, though more targeted in its execution due the lower balance
sheet needs. In particular, issuances that are expected to be TLAC
and MREL eligible have been prioritised.
In 2017, the Group as a whole has captured €51,740 million of medium-
and long-term funding (calculated using year-average exchange rates).
In terms of instruments, medium and long-term debt instruments
(senior debt, covered bonds, subordinated debt and preferred shares)
showed the greatest increase, up around 15% to €37,775 million, mainly
due to senior and preferred issuances. Securitisation and structured
finance activity increased 6% compared to 2016, at €13,965 million.
By geography, the largest issuers of medium- and long-term debt
were Spain, the UK and Santander Consumer Finance. Santander
Consumer Finance further increased its diversification this year in
terms of funding sources and has accessed senior and pfandbriefe
markets in Germany for the first time. Compared to 2016, Spain and
Portugal increased the most; Spain due to the need to build MREL
and TLAC eligible liability buffers, explaining the limited covered bond
issuance in the year in favour of unsecured debt. In Portugal's case, as
a consequence of funding needs deriving from the integration of Banco
Popular Portugal into Santander Totta following Popular’s resolution
and subsequent sale to Santander.
The main issuers of securitisations were Santander Consumer Finance
and the United States, via its consumer lending subsidiary Santander
Consumer USA.
The charts below set out in greater detail their distribution by
instruments and geographic areas:
DISTRIBUTION BY INSTRUMENT
December 2017. (%)
Subordinated 2%
Preferred 4%
Covered bonds
10%
Securitisation and other
27%
Senior debt
56%
DISTRIBUTION BY GEOGRAPHY
December 2017. (%)
Other Latin America 3%
Other Europe 4%
Brazil 6%
United Kingdom
18%
Santander Consumer
Finance
17%
United States
24%
Spain
28%
132
4. ECONOMIC AND FINANCIAL REVIEWConsolidated financial information2017 Annual Report
The weight of covered bonds issued in the year remains in line with
2016 at 10% of total issuances. However, in contrast to last year when
the main issuers were Santander and the UK, in 2017 the main issuers
were Portugal and the UK.
As at end 2017, the Group’s LCR ratio stood at 133%, comfortably
exceeding regulatory requirements. The following table provides
detail of the LCR ratio by unit, which shows the considerable excess
over requirements:
Grupo Santander regularly holds different types of meetings with
analysts, investors and shareholders in which we disclose our strategic
funding plans for the coming years. Analysing the issuance activity
over the course of the year in the main geographies and comparing it
to the information presented at the beginning of 2017, we can conclude
the following:
LIQUIDITY COVERAGE RATIO
Santander
Popular
Santander Consumer Finance
• Santander parent bank marketed around €3 billion of hybrid
securities, in line with forecasts; roughly €10 billion of senior non-
preferred, in the lower range of that disclosed to the market; and
completed its funding plan with senior preferred and covered bond
expectations of just over €1 billion.
• Santander Consumer Finance issued senior preferred debt in line
with the amounts disclosed to the markets.
• The UK issued over €2 billion of senior debt via its holding company,
in line with expectations, and less than €1 billion of hybrid debt,
below forecasted amounts due to lower funding needs. The UK
completed its funding plan by directly issuing around €4 billion of
senior and covered bond securities.
• The United States issued around €4 billion of senior debt via its
holding company, somewhat above disclosed volumes.
• In the year, using year-average exchange rates, the Group as a whole
issued €19.825 billion of MREL/TLAC eligible securities, of which
€16.222 billion were senior non-preferred and eligible senior debt,
€2.321 billion were AT1, and €1.282 billion were subordinated debt.
In summary, Grupo Santander retained its comfortable access to the
different markets in which it operates, reinforced by new issuing units
and products. In 2017, we issued debt and securitisations in 14 different
currencies, with participation from 22 relevant issuers in 14 countries and
with an average maturity of 5 years, slightly above the previous year.
ii. Compliance with regulatory ratios ahead of schedule
Under its liquidity management model, over the last few years Grupo
Santander has been managing the implementation, monitoring and
compliance with the new liquidity requirements established under
international financial regulations ahead of schedule.
LCR (Liquidity Coverage Ratio)
The regulatory requirement for this ratio in 2017 was set at 80%. As
of 1 January 2018 the requirement increased to 100%. As a result, the
Group, both at a consolidated and subsidiary level, has increased its
risk appetite from 100% in 2017 to 105% in 2018.
The Group’s strong short-term liquidity starting position, combined
with autonomous management in all major units, enabled compliance
levels of more than 100% to be maintained throughout the year, at
both the consolidated and individual levels.
Dec 17
130%
146%
201%
123%
141%
120%
118%
126%
138%
188%
133%
Portugal
Poland
United Kingdom
United States
Brazil
Chile
Mexico
Grupo Santander
NSFR (Net Stable Funding Ratio)
The final definition of the net stable funding ratio approved by the
Basel Committee in October 2014, has not yet come into effect.
The Basel requirement still needs to be written into the CRR, which
is expected to be published in the second half of 2018. The NSFR
regulatory requirements will only become binding two years after its
inclusion into European Law.
However, the Group has defined a management limit of 100% at the
consolidated level and for almost all of its subsidiaries.
With regards to 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 enables Santander to maintain a balanced liquidity structure,
reflected in NSFR ratios greater than 100%, both at Group and
individual levels as at end December 2017.
In particular, the NSFR of the parent bank was 105%, the UK 121%,
Brazil 109% and the United States 110%.
In short, the liquidity models and management of the Group and its
main subsidiaries have enabled them to meet both regulatory metrics
well ahead of schedule.
133
2017 Annual Report iii. Asset Encumbrance
Lastly, it is worth highlighting 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 on-balance sheet assets pledged as collateral in operations to
obtain liquidity as well as those off-balance sheet assets received and
re-used for a similar purpose, in addition to other assets associated
with liabilities other than for funding reasons.
The following tables present the data Grupo Santander is required to
report to the EBA as at end 2017.
GRUPO SANTANDER
ASSET ENCUMBRANCE
€ billion
Assets
Credit and loans
Equities
Debt instruments
Other assets
Carrying amount of
encumbered assets
Fair value of
encumbered assets
Carrying
amount of
unencumbered
assets
Fair value of
unencumbered
assets
349.6
224.9
16.3
89.8
18.6
16.2
94.4
1,094.7
803.9
10.8
109.6
170.5
10.8
104.9
GRUPO SANTANDER
ENCUMBERED RECEIVED COLLATERAL
€ billion
Collateral received
Credit and loans
Equities
Debt instruments
Other collateral received
Debt instruments issued by the entity other
than covered bonds and securitisations
Fair value of encumbered
collateral received or own
debt securities issued
Fair value of collateral
received or own debt
securities issued available
for encumbrance
86.7
0.0
3.2
81.6
1.9
0.0
27.2
0.0
5.5
21.7
0.0
3.6
GRUPO SANTANDER
ENCUMBERED ASSETS AND COLLATERAL RECEIVED AND ASSOCIATED LIABILITIES
€ billion
Matching liabilities,
contingent liabilities
or securities lent
Assets, collateral
received and own
debt securities issued
other than covered bonds
and ABSs encumbered
Total sources of encumbrance (carrying amount)
330.7
436.3
134
4. ECONOMIC AND FINANCIAL REVIEWConsolidated financial information2017 Annual Report On-balance sheet encumbered assets amounted to €349.6 billion, 64%
of which is accounted for by loans (mortgages, corporate, etc.). Off-
balance sheet asset encumbrance stood at €86.7 billion, mainly relating
to debt securities received as collateral in repo and similar operations
which were then re-used. The total for the two categories was €436.3
billion of encumbered assets, giving rise to a volume of associated
liabilities of €330.7 billion.
As at end 2017, total asset encumbrance in funding operations
represented 28.0% of the Group’s extended balance sheet under
EBA criteria (total assets plus guarantees received: €1,558 billion as of
end 2017). The increase in this ratio compared to the values reported
in 2016 are due to the acquisition of Banco Popular in June 2017,
whose balance sheet was more encumbered than the rest of Grupo
Santander.
Finally, a distinction needs to be made between the different natures
of the sources of encumbrance, as well as their role in the Group’s
funding:
• 44.5% of total asset encumbrance corresponds to collateral pledged
in medium- and long-term operations (with a residual maturity of
more than 1 year) to fund the commercial activity on the balance
sheet. This results in a level of asset encumbrance known as
“structural” at 12.5% of the extended balance sheet, using EBA
criteria.
• The other 55.5% corresponds to short-term market transactions with
a residual maturity of less than one year or to collateral pledged
in derivative operations whose purpose of which is not to finance
ordinary business activity of businesses but rather efficient short-
term liquidity management.
1.3 Funding outlook for 2018
Grupo Santander starts 2018 with a comfortable liquidity position
and with good prospects for the coming year. However, some
risks to stability remain namely those related to funding regulation
uncertainties.
With manageable debt maturities over the next few quarters,
supported by the low weight of short-term funding and an issuance
dynamic expected to be in line with recent years, the Group will
manage each geographic area in order to optimise liquidity usage and
to maintain a robust balance sheet structure in the units and in the
Group as a whole.
For the Group as a whole, reduced commercial needs are envisaged
as, in most cases, the increase in lending is expected tFo largely be
counter-balanced out by increases in customer deposits. The greatest
liquidity requirements will stem from Spain, both Banco Santander and
Banco Popular, Santander Consumer Finance and from the UK.
At Group level, Santander will continue with its long term plan to
issue liabilities with loss-absorbing capacity, regardless of whether
they are considered to be capital instruments or not. This plan seeks
to enhance the Group’s current regulatory ratios efficiently, and also
takes into account future regulatory requirements. Specifically, the
TLAC principles and term sheet require a minimum TLAC requirement
to be determined individually for each G-SII at the greater of (a) 16% of
risk weighted assets as of 1 January 2019 and 18% as of 1 January 2022,
and (b) 6% of the Basel III Tier 1 leverage ratio exposure measure as
of 1 January 2019, and 6.75% as of 1 January 2022. Although currently
TLAC is only an international agreement awaiting to be transposed
into binding regulations in the different jurisdictions (CRR in the case
of European G-SIIs), the Group is already incorporating and covering
potential requirements into its funding plans.
On the other hand, the MREL requirement was scheduled to come
into force by January 2016. However, Commission Delegated
Regulation (EU) No. 2016/1450 of 23 May 2016 (the "MREL RTS")
gave discretion to resolution authorities to determine appropriate
transitional periods to each institution. Under the current proposal
of the European Commission to implement TLAC requirements into
European regulation, institutions such as Banco Santander would
continue to be subject to an institution-specific MREL requirement
(i.e., a Pillar II add-on MREL Requirement), which may be higher than
the requirement of the TLAC standard (which would be implemented
as a Pillar I MREL requirement for G-SIIs). In this sense, we expect
Grupo Santander’s MREL requirement to be communicated to us by
the Single Resolution Board (“SRB”) during 2018/2019, based on the
current regulation (BRRD). (See 1.6 under Capital Management and
Adequacy Solvency Ratios).
Given this focus, Santander plans to issue between €2 billion and
€3 billion of hybrid instruments in 2018, and between €7 billion and
€10 billion of senior non-preferred; Santander Consumer Finance
between €4 billion and €6 billion of senior debt and will continue to
develop its pfandbriefe programme in Germany; UK expects to issue
between €6 billion and €8 billion of senior debt, both via the Holding
company and directly via the bank and will complete its funding
programme with between €2 billion and €4 billion of covered bonds;
and finally, the United States plans to issue between €1 billion and €2
billion during the year.
The Group’s units, especially Santander Consumer Finance and the
US via Santander Consumer USA, have budgeted for securitisations
whose execution will depend on loan origination in line with the
business plan.
Within this general picture, several of the Group’s units took
advantage of the positive market conditions at the beginning of 2018,
issuing close to €7 billion in January and the first few days of February.
135
2017 Annual Report CAPITAL MANAGEMENT AND ADEQUACY.
SOLVENCY RATIOS
The fully loaded CET1 ratio was 10.84% at the end of 2017 (+29 b.p.), in line with our goal of surpassing 11% in 2018
The fully loaded capital ratio was 14.48%, (+61 b.p.) in the year
In July, following the acquisition of Banco Popular and in order to recover the capital ratio levels prior to the purchase, the Group
carried out a capital increase of €7,072 million
Active capital management continues to be strengthened across the Group
• Economic capital: the economic capital model aims to guarantee
that the Group adequately assigns its capital to all risks to which it
is exposed as a result of its activity and risk appetite. Its purpose is
to optimise value creation for the Group and its business units.
The real economic measurement of capital needed for an activity,
together with its return, guarantees value creation optimisation by
selecting those activities that maximise the return on capital. This
is carried out under different economic scenarios, both expected as
well as unlikely but plausible, and with the solvency level decided
by Grupo Santander.
Grupo Santander’s capital management and adequacy seeks to
guarantee solvency and maximise profitability, ensuring compliance
with the Group’s internal objectives as well as regulatory requirements.
It is a key strategic tool for taking decisions at the local and corporate
levels and enables us to set a common framework of actions, defining
and standardising capital management criteria, policies, functions,
metrics and processes.
The function of the Group’s capital is carried out at two levels:
• Regulatory capital: regulatory management stems from an
analysis of the capital base, the solvency ratios under the prevailing
regulatory criteria and the scenarios used for capital planning. The
objective is to make the capital structure as efficient as possible
both in terms of cost as well as compliance with the regulatory
requirements. Active capital management includes strategies to use
and assign capital efficiently to businesses as well as securitisations,
asset sales, issuances of capital instruments (preferred shares,
subordinated debt) and capital hybrids.
136
4. ECONOMIC AND FINANCIAL REVIEWConsolidated financial information2017 Annual Report Capital
The Group considers the following capital concepts:
Regulatory capital
Return on risk adjusted capital (RoRAC)
• 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.
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.
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.
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.
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.
Value creation
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.
Leverage ratio
Expected loss
This is a regulatory metric that monitors the soundness 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 takes into account
the size of the balance sheet with adjustments for derivatives,
funding of securities operations and off-balance sheet items.
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.
1.1 Priorities and main activities in
the Group’s capital management
The Group’s most notable capital management activities are:
• Establishing solvency objectives and the capital contributions aligned
with the minimum regulatory requirements and internal policies, in
order to guarantee a solid level of capital, coherent with the Group’s
risk profile, and an efficient use of capital to maximise shareholder
value.
• Assessing capital adequacy in order to ensure that the capital plan
is coherent with the Group’s risk profile and with its risk appetite
framework also in stress scenarios.
• Developing the annual capital budget as part of the Group’s
budgetary process.
• Monitoring and controlling budget execution and drawing up action
plans to correct any deviation from the budget.
• Developing a capital plan to meet the objectives coherent with the
strategic plan. Capital planning is an essential part of executing the
three-year strategic plan.
• Drawing up internal capital reports, as well as reports for the
supervisory authorities and for the market.
• Calculating capital metrics.
137
2017 Annual Report The main measures taken in 2017 are set out below:
Issuances of financial instruments with the legal nature of
capital
During the year, Banco Santander issued two contingent convertible
bonds (CoCos) of €750 million and €1,000 million to strengthen its AT1
capital.
• The dedicated capital management teams were strengthened, and
there was greater coordination between the Corporate Centre and
local teams.
• All countries and business units developed their individual capital
plans focused on having businesses that maximise the return on
capital.
As regards subordinated debt, in the first half of the year Banco
Santander's issuances totalled €1,150 million. These issuances bolstered
the total capital ratio as they count towards Tier 2 funds.
• A higher weight of capital in incentives. To this end, certain aspects
related to capital and its profitability are taken into account in the
variable pay of senior executives:
In December, Banco Santander issued €981 million of contingently
amortisable perpetual bonds (Loyalty Bonds) for certain customers of
the Group affected by the resolution of Banco Popular, with no impact
on the Group’s capital ratios. This issuance is TLAC/MREL eligible (see
section 1.6.)
In July, following the acquisition of Banco Popular and in order to
recover the ratio levels prior to the purchase, Banco Santander
announced a capital increase for a nominal amount of €729,116,327.50,
through the issuance and circulation of 1,458,232,745 new ordinary
shares of the same class and series as those currently in circulation and
with preferred subscription rights for shareholders. The new shares
were issued at a nominal value of €0.50 per share plus a premium of
€4.35 per share (total value €4.85 per share) and the total effective
amount of the capital increase (including the nominal value and
issuance premium) was €7,072,428,813.25.
Dividend policy*
During 2017, the Group maintained cash payments for most of its
quarterly remunerations, with the aim of distributing €0.22 charged to
the year’s earnings in four dividends, three of them in cash of €0.06
each one and one scrip dividend (Santander Dividendo Elección) of
€0.04 per share. We also communicated our intention for 2017 and
successive years to offer a cash pay-out of between 30% and 40% of
the Group’s profit and for shareholder remuneration to be line with the
growth in earnings.
The objectives set for 2017 were met (cash pay-out of 40% of profit
and an increase in the cash dividend per share of 9%).
Strengthen active capital management culture
Grupo Santander continued to work towards having a fully loaded CET1
in excess of 11% in 2018.
The continuous improvement in the capital ratios reflects the Group’s
profitable growth strategy and a culture of active management of
capital at all levels of the organisation. Of note:
• Among the metrics taken into account are the fully loaded CET1,
the contribution of capital and the return on risk weighted assets
(RoRWA).
• Among the qualitative aspects contemplated are adequate
management of regulatory changes in capital, effective capital
management in business decisions, progress in the capital plan
towards the set goals and effective capital allocation.
We are developing in parallel a programme of measures to
continuously improve the infrastructure, processes and methodologies
that support all aspects related to capital in order to further strengthen
active capital management, respond more agilely to the numerous
and increasing regulatory requirements and conduct all activities
associated within this sphere more efficiently.
FULLY-LOADED CET1
(%)
9.65%
10.05%
10.84%
>11%
10.55%
20141
2015
2016
2017
2018e
(*) Subject to the final dividend against the 2017 results being approved at the Bank's annual shareholders' meeting.
138
4. ECONOMIC AND FINANCIAL REVIEWConsolidated financial information2017 Annual Report 1.2 Evolution of capital ratios in 2017
The phased-in ratios are calculated by applying the Basel III
transitory schedules, while the fully-loaded ratios are calculated
without applying any schedule (i.e. with the final regulations).
In fully-loaded terms, the CET1 ratio at the end of 2017 was 10.84%
(+29 b.p.) which puts us well within reach of the declared objective
of more than 11% in 2018.
The total fully-loaded capital ratio was 14.48%, having increased 61 b.p.
during the year.
ELIGIBLE CAPITAL (FULLY-LOADED)*
(€ million)
Capital stock and reserves
Attributable profit
Dividends
Other retained earnings
Minority interests
31.12.17
111,362
6,619
(2,998)
(23,108)
7,228
31.12.16
101,437
6,204
(2,469)
(16,116)
6,784
Goodwill and intangible assets
(28,537)
(28,405)
Other deductions
Core CET1
Preferred shares and other T1 eligibles
Tier 1
Generic funds and eligible T2 instruments
Eligible capital
Risk-weighted assets
CET1 capital ratio
T1 capital ratio
Total capital ratio
(*).- 31.12.17 including Popular.
(5,004)
65,563
7,730
73,293
14,295
87,588
(5,368)
62,068
5,767
67,834
13,749
81,584
605,064
588,088
10.84
12.11
14.48
10.55
11.53
13.87
%
9.8
6.7
21.4
43.4
6.5
0.5
(6.8)
5.6
34.1
8.0
4.0
7.4
2.9
Change
Amount
9,925
415
(529)
(6,992)
443
(132)
365
3,495
1,964
5,458
546
6,004
16,976
0.29
0.58
0.61
31.12.15
98,193
5,966
(2,268)
(15,448)
6,148
(28,254)
(5,633)
58,705
5,504
64,209
11,996
76,205
583,917
10.05
11.00
13.05
The following table compares the CET 1, Tier 1 and total capital in accordance with phased-in and fully-loaded methodologies
MAIN CAPITAL AND SOLVENCY RATIOS
Common equity (CET1)
Tier1
Eligible capital
Risk-weighted assets
CET1 capital ratio
T1 capital ratio
Total capital ratio
Leverage ratio
Fully-loaded
Phased-in
Dec'17
65,563
73,293
87,588
Dec'16
62,068
67,834
81,584
Dec'17
74,173
Dec'16
73,709
77,283
73,709
90,706
86,337
605,064
588,089
605,064
588,088
10.84%
10.55%
12.26%
12.53%
12.11%
14.48%
5.02%
11.53%
13.87%
4.98%
12.77%
12.53%
14.99%
14.68%
5.28%
5.40%
139
2017 Annual Report
FL CET1 PERFORMANCE
(%)
The 29 b.p. increase in the year is principally due to profit and risk
weighted assets management, resulting in an organic generation of 53 b.p.
in the year. In addition to this organic increase, there were deductions of
19 b.p. due to perimeter impacts (SAM and Allfunds transactions and the
increased stake in SC USA) and 5 b.p. relating to various impacts, such as
the Available for Sale portfolio valuation among others. The consolidation
of Popular's risk weighted assets had a negative 114 b.p. impact on the CET1
ratio. However the Group increased capital in July and the net of the two
operations was neutral in capital terms.
As regards the leverage ratio, there were no significant changes in 2017.
Tier 1 capital was stable and the leverage exposure registered the usual
movements of balance sheet volumes from business activity and from
exchange rate changes.
From a qualitative point of view, Grupo Santander has solid capital ratios,
in alignment with its business model, balance sheet structure and risk profile.
With regards to the regulatory ratios, Banco Santander exceeds the 2018
minimum regulatory requirements by 284 b.p., taking into account the
surplus and shortfall in AT1 and T2 respectively.
14.99%
T2
AT1
2.22%
0.51%
CET1
12.26%
12.155%
2.00%
T2
1.50%
0.03%
0.75%
1.875%
1.50%
4.50%
AT1
CCyB 3
G-SIB1
CCoB2
Pillar II
requirement
CET1
8.655%
Minimum
Pillar I
Regulatory ratios
Dec 17 (phased-in)
Regulatory requirement
2018
1. Global systemically important banks (G-SIB) buffer
2. Capital conservation buffer
3. Countercyclical buffer
140
1.3 Economic capital
The economic capital is the capital needed to support all the risks
of our activity with a certain level of solvency. It is measured using
an internally developed model. In our case, the solvency level is
determined by the objective long-term rating of “A” (two notches
above the Kingdom of Spain’s rating), which represents a confidence
level of 99.95% (higher than the regulatory level of 99.90%) to
calculate the necessary capital.
Santander’s economic capital model incorporates in its measurement
all significant risks incurred by the Group in its activity (concentration
risk, structural interest rate risk, business risk, pensions risk and
others that are beyond the scope of regulatory Pillar I). Furthermore,
economic capital incorporates the diversification effect which in Grupo
Santander’s case is key, due to the multinational nature of its activity
covering many businesses, in order to appropriately determine and
understand the risk profile and solvency of a group with global activity
such as Santander.
The fact that Santander’s business activity is spread across various
countries via a structure of separate legal entities, with a variety of
client and product segments, exposed to different types of risks,
means that Grupo Santander’s results are less vulnerable to adverse
situations in one of the particular markets, portfolios, client types or
risks. The economic cycles, despite the current high level of economic
globalisation, are not the same nor are the different geographies
affected with the same intensity. In this way, groups with a global
presence have more stable results and are more resistant to the eventual
market or portfolio crises, which translates to lower risk. In other words,
Grupo Santander’s risk and the associated economic capital of the group
as a whole are less than the sum of the individual parts.
Unlike with regulatory criteria, Grupo Santander considers certain
intangible assets, such as DTAs, goodwill and software, to retain value,
even in the hypothetical case of resolution given the geographic
structure of Grupo Santander's subsidiaries. As such, the asset is valued
and its unexpected loss and capital impact are estimated.
Economic capital is a key tool for 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, Grupo Santander uses its economic
model, in the context of the Basel Pillar II, for the internal capital
adequacy assessment process (ICAAP). The business evolution and
capital needs are planned under a central scenario and alternative
stress scenarios. This ensures the Group meets its solvency objectives
to be ensured even in adverse scenarios.
The metrics derived from economic capital enable the risk-return
objectives to be assessed, the price of operations to be set based on
risk and the economic viability of projects, units and business lines
to be evaluated, with the overriding objective of maximising the
generation of shareholder value.
As a homogeneous risk measure, economic capital can be used to
explain the distribution of risk throughout the Group, reflecting
comparable activities and different types of risk in a single metric.
The economic capital requirement at the end of 2017 amounted to
€72,144 million which, compared to an available economic capital base
of €99,080 million, implies a capital surplus of €26,936 million.
4. ECONOMIC AND FINANCIAL REVIEWConsolidated financial information2017 Annual Report AVAILABLE ECONOMIC CAPITAL
(€ million)
Net capital and issue premiums
Reserves and retained profits
Valuation adjustments
Non-controlling interests
2017
2016
59,098
52,196
55,862
52,967
(23,108)
(16,116)
7,228
6,784
Base economic capital available
99,080
95,831
Economic capital required
Capital supluss
72,144
72,632
26,936
23,199
The distribution of economic capital among the main business areas
reflects the diversified nature of the Group’s business and risk.
Continental Europe represents 49% of the capital, Latin America
including Brazil 23%, the UK 14% and the US 13%.
Outside the operating areas, the main risks the Corporate Centre
assumes are 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 (similar to geographic
diversification) as well as inter-risks, amounted to approximately 30%.
DISTRIBUTION OF ECONOMIC CAPITAL NEEDS BY TYPE OF RISK
December 2017. (%)
The main difference compared to regulatory CET1 lies in the treatment
of goodwill, other intangible assets and DTAs which we consider as
additional capital requirements rather than a deduction from available
capital.
The following chart sums up the Group’s economic capital needs at the
end of 2017, geographic area and types of risk:
Market 9%
Interest (ALM) 4%
Operational 4%
Business 4%
Tangible assets 4%
Other 9%
Goodwill 27%
Lending 39%
DISTRIBUTION OF ECONOMIC CAPITAL NEEDS BY GEOGRAPHIC AREA AND TYPE OF RISK
December 2017. (€ million)
€ million
Grupo Santander
Total requirements: 72,144
Corporate Activities
24,754
Continental Europe
23,300
United Kingdom
6,777
Latin America
10,997
United States
6,317
All risks:
Goodwill: 77%
12%
10%
1%
Market:
DTA:
Other:
All risks:
All risks:
All risks:
All risks:
Credit: 55%
Market: 13%
Operational: 8%
Interest (ALM): 8%
Other: 16%
Credit: 58%
Pensions:: 20%
8%
6%
8%
Operational:
Business:
Other:
Credit: 66%
10%
7%
6%
11%
Interest (ALM):
Business:
Operational:
Other:
Operational:
Tangible assets:
Intangible assets:
Business:
Other:
Credit: 60%
10%
8%
6%
6%
10%
141
2017 Annual Report
1.3.1. RoRAC and value creation
Grupo Santander has been using RoRAC methodology since 1993 in
order to:
The following chart shows the value creation and RoRAC at the end of
2017 of the Group’s main business areas:
RoRAC AND VALUE CREATION
• Calculate the consumption of economic capital and the return on it
(€ million)
of the Group’s business units, as well as for segments, portfolios and
customers, in order to facilitate optimum allocation of capital.
Dec-17
Dec-16
• Measure management of the Group’s units through budgetary
monitoring of capital consumption and RoRAC.
Main segments
RoRAC
Value
creation
RoRAC
Value
creation
• Analyse and set prices for taking decisions on operations (admission)
and customers (monitoring).
The RoRAC methodology enables the return on operations, customers,
portfolios and businesses to be compared on a like-for-like basis,
identifying those that obtain a risk-adjusted return higher than the
cost of the Group’s capital, thus aligning risk and business in order
to maximise value creation, which is the ultimate goal of the Group’s
senior management.
Grupo Santander also regularly assesses the level and evolution of
value creation (VC) and the risk-adjusted return (RoRAC) of the Group
and its main business units. The VC is the profit generated above the
cost of economic capital (EC) employed, and is calculated as follows:
Value creation = recurring profit – (average economic capital x
cost of capital)
The profit used is obtained from making the necessary adjustments
to the accounting profit so as to extract only the recurring result that
each unit generates in its year of activity.
The minimum return on capital that a transaction must obtain is
determined by the cost of capital, which is the minimum remuneration
required by shareholders. This is calculated by adding to the risk-free
return the premium that shareholders require to invest in Grupo
Santander. This premium depends essentially on the degree of
volatility in Banco Santander’s share price with respect to the market’s
performance. The Group’s cost of capital in 2017 was 8.60% (compared
to 9.37% in 2016).
As well as reviewing the cost of capital annually, the Group’s internal
management also estimates a cost of capital for each business
unit, taking into account each market’s specific features, under the
philosophy of subsidiaries autonomous in capital and liquidity, in order
to evaluate whether each business is capable of generating value
individually.
If an operation or portfolio obtains a positive return, it contributes to
the Group’s profits, but it only creates shareholder value when that
return exceeds the cost of capital.
Continental
Europe
United Kingdom
Latin America
United States
Total business
units
19.7%
19.3%
41.8%
8.9%
2,110
764
4,049
22
17.3%
20.2%
33.1%
9.2%
1,426
825
2,879
-13
23.9%
6,946
20.7%
5,117
1.4 Capital planning and stress tests
Capital stress test exercises are a key tool in the dynamic evaluation of
risks and the solvency of banks.
It is a forward-looking evaluation based on macroeconomic as well
as idiosyncratic scenarios that are unlikely but plausible. Thus, robust
planning models are required, capable of transferring the effects
defined in the projected scenarios to different elements that influence
the bank’s solvency.
The ultimate aim of capital stress exercises is to make a complete
assessment of the risks and solvency of banks, which enables possible
capital requirements to be determined in the event they are needed
because of banks’ failure to meet their regulatory and internal capital
objectives.
Internally, Grupo Santander has a defined capital stress and planning
process not only to respond to various regulatory exercises but also as
a key tool integrated into the Bank’s management and strategy.
The objective of the internal capital stress and planning process is to
ensure sufficient current and future capital, including in unlikely but
plausible economic scenarios. Based on the Group’s initial situation
(defined by its financial statements, its capital base, risk parameters
and regulatory ratios), the envisaged results are estimated for different
business environments (including severe recessions as well as expected
macroeconomic environments), and the Group’s solvency ratios are
obtained projected usually over a three-year period.
The planning process offers a comprehensive view of the Group’s
capital for the analysed time period and in each of the defined
scenarios. The analysis incorporates the regulatory capital, economic
capital and available capital metrics.
142
4. ECONOMIC AND FINANCIAL REVIEWConsolidated financial information2017 Annual Report
The structure in place is detailed in the following chart:
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 LGD 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
The structure presented facilitates attainment of the ultimate objective
of capital planning, by turning it into an important strategic element
for Grupo Santander which:
• Ensures current and future solvency, including in adverse economic
scenarios.
• Ensures comprehensive capital management and incorporates an
analysis of specific effects, 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 strategy.
• Facilitates communication with the market and supervisors.
In addition, the whole process is developed with the maximum
involvement of senior management and their close supervision, under
a framework that ensures that the governance is suitable and that
all the elements that configure it are subject to adequate levels of
questioning, review and analysis.
One of the key elements in capital planning and stress analysis
exercises, due to its particular importance in projecting the income
statement under defined adverse scenarios, consists of calculating the
provisions that will be needed under these scenarios, mainly those that
are produced to cover losses on credit portfolios. Specifically, in order
to calculate loan-loss provisions, Grupo Santander uses a methodology
that ensures at all times the level of provisions covers all loan losses
projected by its internal models of expected loss, based on Exposure at
Default (EAD), Probability of Default (PD) and Loss Given Default (LGD
parameters).
This methodology is widely accepted and is similar to that used in the
2016 European Banking Authority (EBA) stress test, as well as in 2011
and 2014 and in the stress test on the Spanish banking industry in 2012.
Lastly, the capital planning and stress analysis process culminates with
the analysis of solvency under different scenarios and over a defined
time period, in order to assess capital sufficiency and ensure the Group
meets its internally defined capital objectives as well as all regulatory
requirements.
In the event that the capital objectives set are not met, an action plan
will be drawn up which sets out the necessary measures to be able to
attain the desired minimum capital. These measures are analysed and
quantified as part of the internal exercises although it is not necessary
to utilise them as the minimum capital thresholds are exceeded.
This internal process of stress and capital planning is carried out
transversally throughout the Group, not only at the consolidated
level, but also locally in the different units that comprise the
Group, and which use the stress process and capital planning as an
internal management tool and in response to their local regulatory
requirements.
143
2017 Annual Report Grupo Santander has undergone six stress tests since the economic crisis
in 2008, in which its strength and solvency has been demonstrated in the
most extreme and severe macroeconomic scenarios. All of them showed
that, thanks mainly to its business model and geographic diversification,
Banco Santander would still be capable of generating profits for its
shareholders and meeting the most demanding regulatory requirements.
1.5 Recovery and Resolution Plans and
Special Situations Management Framework
This section summarises the main advances in the sphere of the
Group’s crisis management. Specifically, the main principles developed
regarding Recovery Plans, Resolution Plans and the management
framework governing special situations.
In the first of them (CEBS 2010), Grupo Santander was the bank with
the least impact on its solvency ratio, except for those banks that do
not distribute dividends. In the second test, conducted by the EBA in
2011, Santander was not only in the small group of banks that improved
their solvency in the stress scenario but also the one with the highest
level of profits.
1.5.1. Recovery Plans
Context. The eighth version of the Corporate Recovery Plan was
prepared in 2017. Its most important part sets out the measures that
Banco Santander would have at its disposal to survive a very severe
crisis on its own.
In the stress exercises carried out by OIiver Wyman for Spanish
Banks in 2012 (top down and then bottom up), Banco Santander again
demonstrated its strength to face the most extreme scenarios with full
solvency. It was the only bank that improved its core capital ratio, with
an excess of capital over the minimum of more than €25 billion.
Two of the most important objectives are, first, to test the feasibility,
effectiveness and credibility of the recovery measures identified and,
second, the degree of suitability of the recovery indicators and their
respective thresholds that if surpassed entail activating the scaling of
decision-making in order to cope with stress situations.
With this end, the Corporate Plan sets out different macroeconomic
and/or financial crisis scenarios in which idiosyncratic and/or systemic
events important for the Group which could entail activating the
Plan are envisaged. Moreover, the Plan has been designed with the
premise that, if activated, there would be no extraordinary public aid,
in accordance with article 5.3 of the BRRD.
It is important to point out that the Plan should not be interpreted as
an instrument independent of the rest of the structural mechanisms
established to measure, manage and supervise the risk assumed by
Grupo Santander. The Plan is integrated with the following tools,
among others: the Risk Appetite Framework (RAF); the Risk Appetite
Statement (RAS); the Risk Identification Assessment (RIA), the
Business Continuity Management System (BCMS) and the internal
processes for assessing the sufficiency of capital and liquidity (ICAAP
and ILAAP). The Plan is also integrated into the Group’s strategic plans.
Evolution in 2017. We continued the improvement work in line with
the European regulator’s requirements and expectations and the
industry’s best practices. Specifically, the following were included: (i) in
the Strategic Analysis chapter, greater detail and granularity regarding
internal and external interdependencies; (ii) in the Governance section,
the advances made in conducting stress simulation exercises , defining
macroeconomic and political risk Early Warning Indicators (EWIs),
which are regularly monitored at the corporate level for the Group’s
main countries were reflected and, and describing the development,
review and approval processes of the corporate and local plans; (iii)
the Scenarios section incorporates two systemic scenarios (global
and local), specifically designed for recovery as their objective is to
break the red threshold of, at least, one indicator which would entail
potential activation of the Corporate Plan. There is also an analysis of
the potential reputational implications in the idiosyncratic and local-
systemic scenarios; (iv) in the Measures section, the feasibility analysis
was completed for each measure with greater granularity and detail
regarding the assumptions and hypotheses behind calibrating the
recovery capacity as well as the necessary preparatory measures to
execute them on time and credibly.
In the stress exercise conducted by the European Central Bank in 2014, in
co-operation with the EBA, the Group was the bank with the least impact
in the adverse scenario among its international competitors (capital
surplus of around €20 billion above the minimum requirement).
The 2016 stress exercise, unlike previous ones, did not incorporate a
minimum level of capital. It used the results as an additional variable
within the Supervisory Review and Evaluation Process (SREP). Grupo
Santander was the bank with the least capital destroyed among its
peers. Its fully loaded CET1 capital ratio declined 199 b.p. (compared to
an average fall of 335 b.p.).
The results of the various stress tests showed that the Group’s business
model, based on retail banking and geographic diversification, enables it
to robustly confront the severest international crisis scenarios.
As well as the regulatory stress tests, Grupo Santander has conducted
internal stress tests every year since 2008, within its capital self-
evaluation process (Pilar II). In all of them, the Group’s capacity to
confront the most difficult exercises, both at the global level as well as
in the countries in which it operates, has been demonstrated.
EBA transparency exercise 2017
In 2017, the European Banking Authority carried out a transparency
exercise and published information on risk weighted assets (RWA),
capital, solvency and details of sovereign positions at the end of 2016
and June 2017 for 132 banks in 25 European countries. The purpose of
the exercise was to foster transparency and knowledge of European
banks’ capital and solvency, contributing to market discipline and to
the European Union’s financial stability. It is important to point out
that the results did not include Grupo Santander’s capital increase
following the acquisition of Grupo Banco Popular, though Popular’s
RWAs were included. Including the capital increase, the CET1 ratio
would have been 10.72%.
This report accompanied the November 2017 report on the risks and
vulnerabilities of EU banks. The report concluded that banks have
strengthened their positions, underpinned by a benign macroeconomic
and financial environment, a better capital position and enhanced asset
quality, as well as a slight increase in profitability. However, a greater
effort is needed regarding management of non-performing loans and
the long-term sustainability of business models remains a challenge.
The importance of maintaining robust technological infrastructures
and operational strength are also priorities.
144
4. ECONOMIC AND FINANCIAL REVIEWConsolidated financial information2017 Annual Report The main conclusions extracted from analysing the contents of the
2017 Corporate Plan confirm that:
• There are no material interdependencies between the Group’s
different countries.
• The measures available ensure an ample recovery capacity in all
the scenarios raised in the Plan. Moreover, the Group’s geographic
diversification model is a point in its favour from the recovery
perspective.
• Each subsidiary has sufficient capacity to emerge by its own means
from a recovery situation, which increases the strength of the
Group’s model, based on subsidiaries that are autonomous in terms
of capital and liquidity.
• None of the subsidiaries, in the event of serious financial problems
or solvency, can be considered as sufficiently relevant to surpass the
severest levels established for the recovery indicators and which
could result in activating the Corporate Plan.
• The Group has sufficient mitigation mechanisms to minimise the
negative economic impact from potential damage to its reputation in
different stress scenario.
All of these factors underscore that the Group’s model and geographic
diversification strategy, based on a model of subsidiaries autonomous
in liquidity and capital, continues to be strong from a recovery
perspective.
Regulation and governance. The Plan was developed in accordance
with the current EU regulation1. The Plan also follows the non-binding
recommendations made by international bodies such as the Financial
Stability Board (FSB2).
As in previous versions, the Group’s Plan was presented in September
to the Single Supervisory Body. As of then the EBA has six months to
make formal considerations.
The Group’s Plan comprises both the Corporate Plan (which
corresponds to Banco Santander) as well as local plans for its main
countries (UK, Brazil, Mexico, US, Germany, Argentina, Chile, Poland
and Portugal), which are annexed to the Corporate Plan. It is important
to mention that, except for Chile, all countries have to draw up a
local plan as a local regulatory requirement as well as the corporate
requirement to do so.
The Board of Banco Santander approves the Corporate Plan, though
the content and relevant figures are previously presented and
discussed in the Bank’s main management and control committees
(Capital Committee, Global ALCO and the Risk Supervision, Regulation
and Compliance Committee). The Local Plans are approved by the
corresponding local bodies and always in coordination with Grupo
Santander, as they must form part of the Group Plan (as they are
annexed to the Corporate Plan).
1.5.2. Resolution plans
Grupo Santander continues to cooperate with the relevant
authorities in preparing resolution plans, providing all the
information they request.
The authorities that form part of the Crisis Management Group (CMG)
maintained their decision on the strategy to follow for the resolution
of Grupo Santander: the Multiple Point of Entry (MPE)3.
This strategy is based on the legal and business structure with which
Grupo Santander operates, organised into nine “Resolution Groups”
which can be resolved independently without involving other parts of
the Group.
In March 2017, the Single Resolution Board (SRB) communicated
the preferred resolution strategy as well as the priorities of work for
improving the Group’s resolvability.
The Group continued to advance in the projects to improve its
resolvability, defining four lines of action:
1) Ensure the Group has a sufficient buffer of instruments with
loss absorption capacity.
The Bank issued €13 billion of senior non-preferred debt in 2017 which
absorbs losses before any senior debt.
In addition, in order to avoid legal uncertainties when executing a
bail-in, all MREL/TLAC issuance contracts include a clause where the
holder recognises the capacity of the resolution authority bail-in said
instrument.
Lastly, and again to avoid any type of legal uncertainty when bailing-in
issuances, the issuing companies have been merged with the parent
company so that as of 2018 the direct issuer is the parent company4.
2) Ensure that there are information systems that can quickly
provide high quality necessary information in the event of
resolution.
In 2017, we worked on automating the information on liabilities that
could be the object of a bail-in in the event of resolution.
Furthermore, we are working on automating the rest of the
information that is delivered to the resolution authority and used for
drawing up the Resolution Plan.
1. Directive 2014/59/EU (Directive of the European Union on crisis management); prevailing regulation of the European Banking Authority in matters of recovery plans (EBA/
RTS/2014/11; EBA/GL/2014/06; EBA/GL/2015/02); recommendations of the European Banking Authority to the European Commission on key business lines and critical
functions (EBA/op/2015/05); regulation of the European Banking Authority pending approval (EBA/CP/2015/01 on ITS templates for recovery plans); regulation of the European
Banking Authority not directly related with recovery, but with significant implications in this sphere (EBA/GL/2015/03 on factors triggering early intervention measures); as well
as Spanish regulations: Law 11/2015, on recovery and resolution of credit institutions and investment service companies and Royal Decree 1012/2015 which develops this Law.
2. FSB Elements key for effective resolution systems for financial institutions (15 October 2014, updating of the first publication in October 2011), guidelines for identifying critical
functions and shared critical services (15 July 2013) and guidelines on elements triggering recovery and crisis scenarios (July 15 2013).
3. Except for what has been stated, the drawing up of resolution plans in the US corresponds to the individual entities. In December 2015, Grupo Santander delivered the third
version of its local resolution plans, although the FRB and the FDIC said it must not submit plans for 2016 and 2017 as they were in the process of supplying comments on the
previous plans and beginning to give a guide for the plans to be delivered in 2018..
4. Except for two issuers of structured debt, which at December 2016 accounted for €2 billion out of €25 billion total issuance.
145
2017 Annual Report Both process are expected to be automated during the first quarter
of 2018.
deterioration of the entity’s or the Group’s financial situation, as it would
mean a significant distancing from the risk appetite and defined limits.
Projects were also launched to have data repositories on:
The main elements of this framework are:
1. It defines a series of common crisis indicators.
2. It defines a traffic light code on the basis of the degree of
deterioration or risk of deterioration of the financial situation
consistent with the limits used in daily business as usual
management.
3. It defines a Crisis Manager Director who coordinates the response
to a crisis situation.
4. It identifies personnel in charge of alerting and escalating crisis
events.
5. It creates a high level Crisis Committee backed by a Technical Crisis
Committee.
In 2017, progress was made in implementing the framework in order
to attain a homogeneous level of development in the Group’s main
subsidiaries and promote adherence of new countries.
Moreover, progress was also made in developing instruments to
facilitate rapid and effective crisis management (e.g. automation of
communications in special situations, having specific rooms prepared
for crisis management, etc) and in strengthening the awareness and
training of employees and the Group’s governance bodies involved
in the escalation and management of this type of situation, mainly by
preparing and conducting war games.
1. Legal entities that form part of Grupo Santander
2. Critical suppliers.
3. Critical infrastructure.
4. Financial contracts in accordance with article 71.7 of the BRRD
3) Guarantee operational continuity in resolution situations
The operational continuity clauses were reinforced in the contracts
with internal suppliers and the clauses to be included in external
supplier contracts are being analysed.
A survey of the main market infrastructures on which Grupo Santander
depends was launched in order to understand their policies in the
event that one of the member entities of this infrastructure were to
enter into resolution.
Lastly, contingency plans are expected to be developed in 2018 to
cover an infrastructure which ceases providing service in the event of
resolution.
4) Foster a culture of resolvability in the Group
Progress was made in involving senior management by raising
questions regarding the resolvability of Grupo Santander to the Board
and the creation of a Steering Committee specialised in resolution
issues.
Advances are expected to be made in 2018 in developing tools that
help to identify the potential obstacles to resolution and assess the
impact of management decisions on the Bank’s resolvability.
More emphasis will be placed on training throughout the organisation
in these issues in order to generate greater awareness.
1.5.3. Special Situations Management Framework
As regards governance in crisis situations, the Special Situations
Management Framework was formally approved in 2016, both in the
corporation as well as in the Group’s main countries.
This framework has a holistic nature, resulting from its application
to those special events or situations of any type in which there is an
exceptional situation, different from that expected or from those
which arise from ordinary businesses management, and which could
compromise the development of activity or give rise to a serious
146
4. ECONOMIC AND FINANCIAL REVIEWConsolidated financial information2017 Annual Report The European Commission’s proposals require the introduction of
limited adjustments to the existing MREL rules ensuring technical
consistency with the structure of any requirements for G-SIIs. In
particular, technical amendments to the existing rules on MREL are
needed to align them with the TLAC standard regarding, inter alia,
the denominators used for measuring loss-absorbing capacity, the
interaction with capital buffer requirements, disclosure of risks to
investors, and their application in relation to different resolution
strategies. Implementation of the TLAC/MREL Requirements is
expected to be phased-in from 1 January 2019 (a 16% minimum TLAC
requirement) to 1 January 2022 (an 18% minimum TLAC requirement).
Additionally, the European Commission's Proposals dated 23
November 2016 include a proposal for a European Directive amending
BRRD that would create a new asset class of non-preferred senior
debt that should only be bailed-in after capital instruments but before
other senior liabilities. On 27 December 2017, Directive 2017/2399
of the European Parliament and of the Council of 12 December 2017
amending Directive 2014/59/EU as regards the ranking of unsecured
debt instruments in insolvency hierarchy, was published in the Official
Journal of the European Union. Before that, Royal Decree-law 11/2017,
of 23 June, on urgent measures in financial matters created in Spain the
new category of senior non-preferred debt.
The final texts are expected to be approved in 2018 and come into
force in 2019.
During 2018/2019 we expect the relevant authorities to inform us for
the first time of the MREL requirement for the Group on the basis of
the prevailing legislation (BRRD).
From 2019, the minimum requirement established in the CRR will apply
to us, though the resolution authority will be able to set higher levels
based on resolvability considerations.
1.6 Total Loss Absorbing Capacity (TLAC) y
Minimum Required Eligible Liabilities (MREL)
On 9 November 2015, the FSB published its final principles and
term sheet containing an international standard to enhance the loss
absorbing capacity of G-SIIs.
The final standard consists of an elaboration of the principles on loss
absorbing and recapitalisation capacity of G-SIIs in resolution and a
term sheet setting out a proposal for the implementation of these
proposals in the form of an internationally agreed standard on total
loss absorbing capacity (“TLAC”) for G-SIIs. Once implemented in
the relevant jurisdictions, these principles and terms will form a new
minimum TLAC standard for G-SIIs, and in the case of G-SIIs with more
than one resolution group, each resolution group within the G-SII. The
FSB will undertake a review of the technical implementation of the
TLAC principles and term sheet by the end of 2019.
The TLAC principles and term sheet require a minimum TLAC
requirement to be determined individually for each G-SII at the greater
of (a) 16% of risk weighted assets as of 1 January 2019 and 18% as of 1
January 2022, and (b) 6% of the Basel III Tier 1 leverage ratio exposure
measure as of 1 January 2019, and 6.75% as of 1 January 2022.
Furthermore, BRRD provides that Member States shall ensure that
institutions meet, at all times, a minimum requirement for own funds
and eligible liabilities (“MREL”). The MREL shall be calculated as the
amount of own funds and eligible liabilities expressed as a percentage
of the total liabilities and own funds of the institution. The MREL
requirement was scheduled to come into force by January 2016.
However, resolution authorities were given discretion to determine
appropriate transitional periods to each institution.
The European Commission committed to review the existing MREL
rules with a view to provide full consistency with the TLAC standard.
The European Commission's proposals dated 23 November 2016 to
amend BRRD and CRR aimed to implement the TLAC standard and to
integrate the TLAC requirement into the general MREL rules thereby
avoiding duplication from the application of two parallel requirements.
As mentioned above, although TLAC and MREL pursue the same
regulatory objective, there are, nevertheless, some differences
between them in the way they are constructed.
The European Commission is proposing to integrate the TLAC standard
into the existing MREL rules and to ensure that both requirements
are met with largely similar instruments, with the exception of the
subordination requirement, which will be institution-specific and
determined by the resolution authority. Under these proposals,
institutions such as Banco Santander would continue to be subject to
an institution-specific MREL requirement (i.e., a Pillar II add-on MREL
Requirement), which may be higher than the requirement of the TLAC
standard (which would be implemented as a Pillar I MREL requirement
for G-SIIs).
147
2017 Annual Report DESCRIPTION OF BUSINESSES
In 2017 Grupo Santander maintained the same general criteria
applied in 2016, as well as the business segments, with the following
exceptions:
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 Activity.
• In the second quarter of 2016, and in order to make it comparable with
the same period of 2015, the contribution to the Single Resolution
Fund (SRF) of €120 million net was reclassified to “Net capital gains
and provisions” from “Other operating results.” In the fourth quarter,
this reclassification was reversed. In the information presented here,
and in order to facilitate the quarterly comparison, the contribution to
the SRF is recorded in "Other operating results". This change affects
the composition of the consolidated Group accounts, Spain, Santander
Consumer Finance and Portugal, but not the attributable profit.
• Assigning to the various countries and global segments the capital
gains and non-recurring provisions that were being presented in the
Corporate Centre. They relate to the second and fourth quarters of
2016 and affect the attributable profit of the units of Spain (-€216
million), Santander Consumer Finance (+€25 million), Poland (+€29
million), United Kingdom (-€30 million), United States (-€32 million)
and, as a counterpart of all of them, the Corporate Centre itself
(+€231 million). The Group’s total attributable profit does not change.
• Annual adjustment of the perimeter of the Global Customer
Relationship Model between Retail Banking and Santander Global
Corporate Banking. This change has no impact on the geographic
businesses.
• Retail Banking. This covers all customer banking businesses,
including consumer finance, except those of corporate banking,
which are managed through the 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.
The acquired perimeter of Banco Popular is temporarily presented
separately.
In addition to these operating units, which report by geographic
area and by businesses, the Group continues to maintain the area of
Corporate Centre. This area 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 via issues.
The financial statements of each business unit 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.
As the Group’s holding entity, this area manages all capital and
reserves and allocations of capital and liquidity with the rest of
businesses. It also incorporates amortisation of goodwill but not the
costs related to the Group’s central services (charged to the areas),
except for corporate and institutional expenses related to the Group’s
functioning.
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.
• 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.
• United States. Includes the holding Santander Holdings USA
(SHUSA) and its subsidiaries Santander Bank, Banco Santander Puerto
Rico, Santander Consumer USA, Banco Santander International,
Santander Investment Securities and the New York branch.
DISTRIBUTION OF UNDERLYING ATTRIBUTABLE PROFIT BY
GEOGRAPHICAL BUSINESS*
2017
Other America: 1%
Argentina: 4%
Chile: 6%
United Kingdom: 16%
Brazil: 26%
Spain1: 15%
Mexico: 7%
USA: 4%
SCF: 13%
Portugal: 5%
Poland: 3%
(1) Including Popular: 3%
(*) As a percentage of 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.
148
4. ECONOMIC AND FINANCIAL REVIEWBusiness information by geographic area2017 Annual Report 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 (Excl. Popular)
Popular
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 (Excl. Popular)*
Popular*
Total Group*
Net capital gains and provisions
Total Group
(*) In the units, underlying attributable profit (excluding net capital gains and provisions)
GROSS LOANS EXCLUDING 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 (Excl. Popular)
Popular
Total Group
FUNDS (DEPOSITS EXCLUDING REPOS + MUTUAL FUNDS)
(€ 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 (Excl. Popular)
Popular
Total Group
2017
6,338
2,434
2,506
814
595
2,855
13,779
9,193
2,078
1,498
3,761
26,734
(1,696)
25,038
436
25,473
2017
2,953
1,180
1,254
300
440
1,498
4,284
2,544
710
586
408
9,143
(1,889)
7,253
263
7,516
(897)
6,619
2017
307,340
148,585
92,431
22,974
31,296
235,783
151,542
74,341
26,962
38,249
75,389
770,054
774,443
79,533
853,976
2017
352,726
251,196
35,398
27,803
32,213
210,305
193,264
106,959
35,548
33,104
59,329
815,624
815,849
74,286
890,135
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
(0)
22,766
2016
2,599
1,022
1,093
272
399
1,681
3,386
1,786
629
513
395
8,060
(1,439)
6,621
(0)
6,621
(417)
6,204
2016
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
798,312
2016
322,606
224,798
35,052
25,898
31,438
210,611
187,516
99,771
36,438
34,559
74,166
794,899
795,757
795,757
Change
amount
% % excl. FX
313
123
148
79
(25)
6
2,706
2,348
150
63
(573)
2,452
(180)
2,272
436
2,708
Change
amount
354
157
161
28
41
(183)
898
758
81
72
13
1,082
(450)
632
263
895
(480)
415
Change
amount
4,776
(2,375)
4,688
2,277
2,266
(6,727)
(7,593)
(5,965)
(1,055)
(551)
(14,249)
(23,793)
(23,869)
79,533
55,664
Change
amount
30,120
26,398
346
1,905
775
(306)
5,749
7,188
(890)
(1,455)
(14,837)
20,725
20,092
74,286
94,378
5.2
5.3
6.3
10.8
(4.0)
0.2
24.4
34.3
7.8
4.4
(13.2)
10.1
11.9
10.0
11.9
4.9
5.3
6.2
8.1
(4.0)
7.4
20.6
26.0
11.2
2.1
(11.6)
9.7
11.9
9.5
11.4
% % excl. FX
13.4
15.4
14.6
7.7
10.2
(4.4)
24.0
33.7
16.5
11.7
5.2
14.1
31.3
10.3
13.6
15.4
14.7
10.4
10.2
(10.9)
26.5
42.5
12.9
14.1
3.2
13.4
31.3
9.5
13.5
115.2
6.7
14.3
117.0
7.4
% % excl. FX
1.6
1.6
(1.6)
(1.6)
6.2
5.3
5.1
11.0
7.8
7.8
0.8
(2.8)
6.7
(4.8)
7.2
(7.4)
4.6
(3.8)
2.7
(1.4)
(4.3)
(15.9)
1.7
(3.0)
1.7
(3.0)
7.0
12.1
% % excl. FX
9.3
11.7
1.0
7.4
2.5
(0.1)
3.1
7.2
(2.4)
(4.2)
(20.0)
2.6
2.5
11.9
9.0
11.7
1.7
1.7
2.5
3.5
16.4
24.2
6.0
(0.2)
(9.0)
7.6
7.5
17.3
149
2017 Annual Report CONTINENTAL EUROPE (Excl. POPULAR)
(€ million)
Income statement
2017
8,267
Net interest income
3,882
Net fee income
625
Gains (losses) on financial transactions
379
Other operating income
13,154
Gross income
(6,815)
Operating expenses
(6,343)
General administrative expenses
(3,277)
Personnel
(3,066)
Other general administrative expenses
(472)
Depreciation and amortisation
6,338
Net operating income
(995)
Net loan-loss provisions
(726)
Other income
4,617
Underlying profit before taxes
(1,283)
Tax on profit
3,334
Underlying profit from continuing operations
—
Net profit from discontinued operations
3,334
Underlying consolidated profit
381
Minority interests
2,953
Underlying attributable profit to the Group
(85)
Net capital gains and provisions*
2,868
Attributable profit to the Group
In 2017, integration costs in Germany In 2016, capital gains from the disposal of the stake in VISA Europe.
Balance sheet
Customer loans
Cash, central banks and credit institutions
Debt securities
o/w: available for sale
Other financial assets
Other assets
Total assets
Customer deposits
Central banks and credit institutions
Debt securities issued
Other financial liabilities
Other liabilities
Total liabilities
Total equity
Other managed and marketed customer funds
Mutual funds
Pension funds
Managed portfolios
Pro memoria:
Loans excluding repos
Funds (customer deposits excluding repos + mutual funds)
Ratios (%) and operating means
Underlying RoTE
Efficiency ratio (with amortisations)
NPL ratio
NPL coverage
Number of employees
Number of branches
150
Change
amount
%
% excl. FX
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
(169)
2,430
297,214
77,232
80,639
54,474
40,689
24,360
520,134
269,934
105,152
53,064
49,042
9,452
486,644
33,490
73,624
54,010
11,298
8,316
107
385
(192)
48
348
(35)
(1)
(20)
19
(34)
313
348
(55)
605
(200)
406
—
406
51
354
84
438
10,125
37,426
2,254
2,346
(2,455)
1,940
49,290
19,671
30,749
(2,360)
(5,485)
4,261
46,836
2,454
11,933
10,390
268
1,274
307,339
114,658
82,893
56,820
38,234
26,300
569,424
289,605
135,901
50,704
43,558
13,713
533,480
35,944
85,557
64,401
11,566
9,590
307,340
352,726
302,564
322,606
4,776
30,120
9.83
51.8
4.50
58.0
56,640
4,538
8.51
52.9
5.92
60.0
57,259
4,805
1.32
(1.1)
(1.42)
(2.0)
(619)
(267)
1.0
10.7
(23.7)
15.4
2.5
0.3
(0.2)
0.4
(0.8)
7.3
4.9
(26.1)
7.9
14.7
18.1
13.5
—
13.5
14.4
13.4
(49.3)
17.7
3.5
49.0
2.5
3.9
(6.0)
8.6
9.6
7.0
30.2
(4.0)
(11.2)
44.7
9.7
7.4
16.1
18.9
2.4
16.8
1.6
9.0
1.3
11.0
(23.5)
14.6
2.7
0.5
0.0
0.6
(0.6)
7.7
5.2
(25.9)
8.2
15.1
18.4
13.9
—
13.9
15.5
13.6
(49.5)
18.0
3.4
48.5
2.8
4.3
(6.0)
8.0
9.5
7.3
29.2
(4.4)
(11.2)
45.1
9.6
7.3
16.2
19.2
2.4
15.3
1.6
9.3
(1.1)
(5.6)
4. ECONOMIC AND FINANCIAL REVIEWBusiness information by geographic area2017 Annual Report CONTINENTAL EUROPE*
2017 highlights
Sustained economic recovery with GDP growth
Santander continued to improve customer loyalty and grow number of digital customers
Higher business volumes and lower NPL ratios, with the consequent fall in the cost of credit
Underlying profit rose 13% to €2,953 million, increasing in all units
* Changes in constant currency
€2,868 M
Attributable profit
Strategy
In an environment of particularly low interest rates, the Bank
continued to focus on improving customer loyalty, gaining market
share, controlling costs and enhancing credit quality. We also
continued to enhance the customer experience and boost efficiency
via the digital transformation, streamlining processes and marketing
innovative products.
As a result, the number of loyal customers rose 18%, driven by both
individuals (+20%) as well as SMEs and companies (+8%). The greater
loyalty fuelled growth in fee income (+11% excluding acquisitions). The
digital strategy increased the number of these customers by 11% (big
rises in many countries).
2017 was also an important year in terms of inorganic growth. Of
note was the incorporation of Banco Popular, the 50% acquisition of
Santander Asset Management and the agreement to acquire the retail
business and private banking of Deutsche Bank in Poland, which will
become effective in 2018 after receiving the necessary authorisations.
Banco Popular’s acquisition made Banco Santander Totta the largest
private sector bank in Portugal and enabled Banco Santander to
recover the leadership in Spain.
Activity (figures excluding Popular)
Lending rose 2%, with all units growing except Spain (-1.6%) due to
institutional balances. Of note was Portugal whose loans had declined
in previous years, but at the end of 2017 and thanks to the increase in
the institutional segment, recorded growth of 8%. Poland’s increased
5% due to SMEs, and SCF’s 6%, spurred by auto finance.
Funds increased 9%. Deposits and mutual funds rose in all units.
Results (figures excluding Popular)
Continental Europe posted a profit of €2,868 million (+18%). The drivers
were fee income (+11%), reflecting the greater customer loyalty, and a
26% fall in loan-loss provisions. The improvement was due to a dynamic
that can be seen in the core units and which reflects the better NPL
ratios and lower cost of credit. Net interest income was flat, affected by
interest rates at historic lows.
All units increased their underlying profit and at double-digit rates in
Spain, SCF and Portugal, to a lesser extent in Poland, affected by higher
tax and regulatory impacts.
LOYAL CUSTOMERS
DIGITAL CUSTOMERS
Thousands
Thousands
ACTIVITY PERFORMANCE
% change 2017 / 2016 (excl. FX)
ATTRIBUTABLE PROFIT
Constant € million
151
2017 Annual Report SPAIN (Excl. POPULAR)
(€ 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
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
(*) In 2016, capital gains from the disposal of the stake in VISA Europe and restructuring costs.
Balance sheet
Customer loans
Cash, central banks and credit institutions
Debt securities
o/w: available for sale
Other financial assets
Other assets
Total assets
Customer deposits
Central banks and credit institutions
Debt securities issued
Other financial liabilities
Other liabilities
Total liabilities
Total equity
Other managed and marketed customer funds
Mutual funds
Pension funds
Managed portfolios
Pro memoria:
Loans excluding repos
Funds (customer deposits excluding repos + mutual funds)
Ratios (%) and operating means
Underlying RoTE
Efficiency ratio (with amortisations)
NPL ratio
NPL coverage
Number of employees
Number of branches
152
2017
2,909
2,067
429
289
5,694
(3,259)
(3,080)
(1,597)
(1,482)
(180)
2,434
(513)
(207)
1,714
(518)
1,197
—
1,197
17
1,180
—
1,180
153,632
89,585
61,836
42,780
35,391
10,354
350,798
193,639
79,146
16,713
41,168
7,883
338,549
12,249
77,221
58,438
10,563
8,221
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
(216)
806
152,850
54,207
58,084
38,727
37,741
9,473
312,354
176,779
52,071
20,863
46,951
4,186
300,850
11,504
66,649
49,357
10,359
6,932
Change
amount
(169)
287
(167)
135
86
37
77
35
42
(39)
123
72
60
255
(102)
153
—
153
(4)
157
216
374
782
35,378
3,752
4,054
(2,350)
881
38,444
16,860
27,075
(4,150)
(5,784)
3,697
37,699
744
10,572
9,080
203
1,288
148,585
251,196
150,960
224,798
(2,375)
26,398
10.11
57.2
4.72
45.9
22,916
2,843
8.88
58.8
5.41
48.3
23,017
2,911
1.22
(1.5)
(0.69)
(2.4)
(101)
(68)
%
(5.5)
16.1
(28.0)
87.0
1.5
(1.1)
(2.4)
(2.1)
(2.7)
28.1
5.3
(12.3)
(22.6)
17.5
24.4
14.7
—
14.7
(18.2)
15.4
(100.0)
46.4
0.5
65.3
6.5
10.5
(6.2)
9.3
12.3
9.5
52.0
(19.9)
(12.3)
88.3
12.5
6.5
15.9
18.4
2.0
18.6
(1.6)
11.7
(0.4)
(2.3)
4. ECONOMIC AND FINANCIAL REVIEWBusiness information by geographic area2017 Annual Report SPAIN*
2017 highlights
€1,180 M
Attributable profit
Our loyalty and customer-focused strategy produced a 42% rise in loyal customers, enhanced satisfaction and gains in market
share
Ongoing digital transformation of the customer relationship model, strengthening digital capacities in all channels, and launch of
Digilosofía. Growth of 15% in digital customers and leadership in the mobile phone payments market
Attributable profit increased 46%, thanks to growth in gross income spurred by fee income, lower costs and reduced loan-loss
provisions
* Excl. Popular
Strategy
Our commercial strategy is mainly focused on reinforcing customer
loyalty and experience, through the digital transformation.
The number of loyal customers increased 54%, underpinned by the
1l2l3 strategy and the new means of payment strategy, and with market
share gains in all the main products (mortgages and companies).
The most notable developments included:
• Within the 1|2|3 strategy, we completed the commercial offer with
the launch of the Smart account for millenial customers and the
100% digital and no-fee Zero account, which already has more than
2.6 million customers.
• We bolstered transactions with record sales in cards, with more than
1.4 million units issued and an over 50% increase in the turnover of
credit.
Of note in companies was growth in business with SMEs, with market
share gains, enhanced customer quality and a greater focus on value-
added and short-term products. This resulted in a gain of 38 b.p. in
lending, with international business increasing 16% and the commercial
portfolio 12%.
We remained very committed to the Bank’s digital transformation. In
this context, the launch of Digilosofia enables us to add value to our
digital capacities, with significant advances on the transformation
process:
• We reached 3.2 million digital customers (+15%) and grew mobile
phone customers by 40%.
• We are market leaders in mobile payments, with a market share
of around 60% and pioneers in the launching of an international
payments solution based on distributed ledger technology.
• Continued improvement in key processes such as the opening of
accounts, granting loans, insurance and international payments.
Remote channels give us the possibility to contract all our products
online. Sales through digital channels account for 25% of the total.
• Launch of a new website and app for both individuals and companies,
with new solutions such as the Confirming app that facilitates
treasury management for customers and non-customers with just
three clicks and the Bansacar app.
LOYAL CUSTOMERS
DIGITAL CUSTOMERS
ACTIVITY PERFORMANCE
ATTRIBUTABLE PROFIT
Thousands
Thousands
% change 2017 / 2016
€ million
153
2017 Annual Report NPL RATIO
%
COVERAGE RATIO
COST OF CREDIT
UNDERLYING RoTE
%
%
%
• We remain the leader in quality in our contact centre.
• By the end of the year, 500 branches of the SmartRed network had
undergone a digital transformation: digitally integrated, intelligent,
simple and accessible.
Results
Attributable profit was 46% higher at €1,180 million due to the positive
evolution in fee income, containment of costs and reduced needs for
provisions, which offset the pressure on net interest income and gains
on financial transactions.
• The Banker recognised Santander Espanha as the Best Bank in Spain
• Net interest income continued to be impacted by low interest rates,
and the Best Private Bank.
the repricing of loans and competitive pressure in prices.
Activity
• Solid commercial dynamics with excellent performance of loans. New
lending rose 13%, with all segments doing well, mainly individuals
(+24%) and SMEs (+13%).
• Fee income rose 16%, notably that from means of payment and
customer transactions as well as from wholesale banking. Gross
income inched up 2%.
• Mortgages surged 33% and the commercial portfolio 12%, with
activity in all segments.
• Commercial and retail banking lending increased and was particularly
positive to SMEs and companies which rose €1,600 million. The
growth in consumer credit, SMEs and other products neutralised the
lower mortgage balances.
• Operating expenses were 1% lower, after absorbing the costs related
to the launch of Openbank, the perimeter impact from integrating
a firm which manages POS terminals and IT amortisation. This was
thanks to the efficiency plans of previous years. The cost-to-income
efficiency was 57%.
• Provisions continued to normalise and the cost of credit to decline
(to 0.33%).
• Solid structure of funding and liquidity in funds, bolstered by
sustained growth in customer funds (+12%). Time deposits gave way
to demand deposits (+19%).
Sustained improvement in the risk profile. The NPL ratio fell to 4.72%,
70 bp less than in 2016.
Mutual funds rose 18%, spurred by positive and sustained net inflows
every month.
Strategy in 2018
Secure our leadership in Spain, following the acquisition of Popular and combining the best of both banks
Strengthen our competitive advantage as the reference bank in SMEs with high value-added products, while remaining the leader
in wholesale banking and large companies
Increase customer loyalty, maintaining the 1l2l3 strategy as the driver to enhance the customer relation and satisfaction
Continue to advance in the digital transformation
Maintain sustainable profitability with a model based on advanced risk management, capital planning and liquidity management
154
4. ECONOMIC AND FINANCIAL REVIEWBusiness information by geographic area2017 Annual Report SANTANDER CONSUMER FINANCE
(€ million)
Income statement
2017
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
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
(*) In 2017, integration costs in Germany. In 2016, capital gains from the disposal of the stake in VISA Europe.
3,571
878
3
32
4,484
(1,978)
(1,798)
(848)
(951)
(180)
2,506
(266)
(157)
2,083
(588)
1,495
—
1,495
241
1,254
(85)
1,168
Balance sheet
Customer loans
Cash, central banks and credit institutions
Debt securities
o/w: available for sale
Other financial assets
Other assets
Total assets
Customer deposits
Central banks and credit institutions
Debt securities issued
Other financial liabilities
Other liabilities
Total liabilities
Total equity
Other managed and marketed customer funds
Mutual funds
Pension funds
Managed portfolios
Pro memoria:
Loans excluding repos
Funds (customer deposits excluding repos + mutual funds)
Ratios (%) and operating means
Underlying RoTE
Efficiency ratio (with amortisations)
NPL ratio
NPL coverage
Number of employees
Number of branches
Change
amount
%
% excl. FX
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
25
1,119
85,180
7,144
3,927
3,823
38
3,333
99,622
35,050
23,373
27,892
870
3,280
90,466
9,156
7
2
6
—
180
16
17
9
222
(74)
(79)
(38)
(41)
6
148
121
11
280
(67)
213
—
213
53
161
(111)
50
4,911
(2,249)
(707)
(603)
(17)
175
2,113
393
(31)
801
126
356
1,646
467
0
(0)
1
—
90,091
4,895
3,220
3,220
22
3,508
101,735
35,443
23,342
28,694
996
3,637
92,112
9,623
8
2
6
—
92,431
35,398
87,742
35,052
4,688
346
16.44
44.1
2.50
101.4
15,131
546
14.83
44.7
2.68
109.1
14,928
567
1.60
(0.6)
(0.18)
(7.7)
203
(21)
5.3
1.9
—
41.0
5.2
3.9
4.6
4.7
4.5
(3.0)
6.3
(31.4)
(6.4)
15.5
12.9
16.6
—
16.6
27.9
14.7
—
4.5
5.8
(31.5)
(18.0)
(15.8)
(43.5)
5.2
2.1
1.1
(0.1)
2.9
14.5
10.9
1.8
5.1
4.9
(13.4)
10.6
—
5.3
1.0
1.4
(3.7)
5.2
1.8
—
45.8
5.1
3.8
4.5
4.6
4.4
(3.1)
6.2
(31.5)
(6.5)
15.4
12.8
16.5
—
16.5
27.5
14.6
—
4.4
6.7
(30.3)
(17.1)
(14.9)
(41.8)
5.7
3.0
1.8
0.9
4.0
14.4
11.3
2.7
6.3
4.9
(13.4)
10.6
—
6.2
1.7
155
2017 Annual Report SANTANDER CONSUMER FINANCE*
2017 highlights
SCF is Europe’s consumer finance market leader
€1,168 M
Attributable profit
Main management focuses: boost auto finance, consumer credit and digital channels
New lending rose in all countries and underlying profit increased 15%, growing for the eighth year running. Including non-recurring
results in both years, attributable profit rose 4%
High profitability, with RoTE at around 16% and RoRWA above 2%. Furthermore, the year ended with a cost of credit at an
historic low
* Changes in constant currency
Strategy
SCF is Europe’s consumer finance market leader, with a presence
in 14 countries and more than 130,000 associated points-of-sale
(auto dealers and shops). It also has a significant number of finance
agreements with auto and motorbike manufacturers and retail
distribution groups.
In 2017, SCF continued to gain market share, underpinned by a solid
business model: highly diversified by geography with a critical mass in
key products, more efficient than competitors and a risk control and
recovery system that enables high credit quality to be maintained.
Management focused on:
• Improving the efficiency of capital, in a competitive environment
characterised by the entry of new competitors, an excess of liquidity
in markets and low GDP growth.
Activity
• We continued to sign and develop new agreements, both with
retail distributors as well as producers, seeking to help them in
the commercial transformation process and thus increase the
value proposition for the final client.
• Lending rose 6%, with new loans growing 9%, spurred by auto
finance (+11%). Almost all country units grew their business: over
70% of lending is in countries with the highest rating and Germany
and the Nordic countries account for more than 50% of the
portfolio.
• Customer deposits rose 2%, growth that distinguishes us from
our competitors. The volume of wholesale funding captured in
2017 amounted to €11,692 million, via senior issues, securities and
other long-term issues.
• Deposits and medium- and long-term issuances-securitisations
• Management of the agreements with Banque PSA Finance (BPF)
placed in the market covered 70% of net loans.
completed in 2016 (joint ventures in 11 countries).
• Increasing auto finance and consumer credit, extending agreements
with the main dealers.
• Strengthen digital channels.
CUSTOMER LOANS BY GEOGRAPHIC AREA
December 2017
ACTIVITY PERFORMANCE
% change 2017 / 2016 (excl. FX)
ATTRIBUTABLE PROFIT
Constant € million
7%
4%
16%
11%
9%
15%
38%
Germany
Spain
Italy
France
Nordic countries
Poland
Other
156
4. ECONOMIC AND FINANCIAL REVIEWBusiness information by geographic area2017 Annual Report NPL RATIO
%
COVERAGE RATIO
COST OF CREDIT
UNDERLYING RoTE
%
%
%
Results
Attributable profit was 4% higher at €1,168 million, due to two factors:
• The current interest rate environment, very positive for consumer
business, both in revenues and provisions.
• The low level of the cost of credit.
Looking more closely at the P&L statement:
• Gross income increased, mainly due to net interest income (80% of
revenues) which rose 5%.
• Operating expenses were 4% higher, in line with business, and the cost-
to-income ratio was around 44%, slightly better than in 2016.
• Loan-loss provisions declined 32%, producing a strong reduction in
the cost of credit (to 0.30% from 0.47%), which is a very low level for
consumer business. This was made possible by the good performance
of credit risk and the positive impact of the sale of portfolios and
certain release of provisions. The NPL ratio fell 18 b.p. to 2.50% and
coverage was 101%.
• Attributable profit was hit by the €85 million charge net of taxes, mainly
for the cost of integrating the commercial networks in Germany.
Of note was underlying attributable profit in Poland (+35%), Spain (+16%)
and Italy (+12%).
In short, solid organic dynamics and well executed agreements, which
provide a high potential for further growth in 2018, market share gains and
continued high profitability and efficiency.
Strategy in 2018
Maintain our leadership position in new auto finance and grow in that for used cars, generating value-added for the producers
Proactive management of brand agreements and development of digital projects
Accompany our partners in their transformation plans, both in digitalisation of the purchasing process and financing of vehicles, as
well as in other strategic projects
Reorganise business in Germany under the same brand, with greater efficiency and a better and more complete customer attention
Drive digitalisation via cooperation with fintechs and signing agreements with the main retailers
157
2017 Annual Report 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
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
(*) In 2016, capital gains from the disposal of the stake in VISA Europe and some regulatory impacts
2017
928
443
52
(3)
1,419
(605)
(548)
(319)
(229)
(58)
814
(137)
(96)
581
(148)
432
—
432
132
300
—
300
Balance sheet
Customer loans
Cash, central banks and credit institutions
Debt securities
o/w: available for sale
Other financial assets
Other assets
Total assets
Customer deposits
Central banks and credit institutions
Debt securities issued
Other financial liabilities
Other liabilities
Total liabilities
Total equity
Other managed and marketed customer funds
Mutual funds
Pension funds
Managed portfolios
Pro memoria:
Loans excluding repos
Funds (customer deposits excluding repos + mutual funds)
Ratios (%) and operating means
Underlying RoTE
Efficiency ratio (with amortisations)
NPL ratio
NPL coverage
Number of employees
Number of branches
158
22,220
1,661
6,786
5,959
491
1,014
32,171
24,255
952
821
523
684
27,235
4,936
4,007
3,900
—
108
22,974
27,803
11.56
42.6
4.57
68.2
11,572
576
2016
834
400
83
(2)
1,314
(579)
(521)
(303)
(219)
(58)
735
(145)
(83)
508
(121)
387
—
387
115
272
29
301
19,979
2,021
6,301
5,774
537
941
29,779
22,780
824
504
511
917
25,537
4,243
3,202
3,118
—
84
20,697
25,898
11.57
44.1
5.42
61.0
12,001
658
Change
amount
%
% excl. FX
8.6
8.1
(39.7)
36.4
5.4
1.9
2.5
2.9
2.0
(3.2)
8.1
(7.5)
13.9
11.6
19.8
9.0
—
9.0
12.1
7.7
(100.0)
(2.8)
5.3
(22.2)
2.0
(2.3)
(13.3)
2.1
2.3
0.8
9.4
54.2
(3.1)
(29.3)
1.0
10.2
18.5
18.5
—
21.7
5.1
1.7
95
43
(32)
(1)
105
(26)
(26)
(16)
(10)
0
79
8
(14)
73
(27)
45
—
45
17
28
(29)
(1)
2,240
(360)
484
184
(46)
73
2,392
1,475
128
317
12
(233)
1,698
694
805
782
—
24
2,277
1,905
(0.00)
(1.4)
(0.85)
7.2
(429)
(82)
11.4
10.8
(38.2)
39.8
8.0
4.5
5.1
5.4
4.6
(0.8)
10.8
(5.2)
16.8
14.3
22.7
11.7
—
11.7
14.8
10.4
(100.0)
(0.4)
11.2
(17.8)
7.7
3.2
(8.5)
7.8
8.0
6.5
15.5
62.8
2.3
(25.4)
6.7
16.4
25.2
25.1
—
28.4
11.0
7.4
(3.6)
(12.5)
4. ECONOMIC AND FINANCIAL REVIEWBusiness information by geographic area2017 Annual Report POLAND
2017 highlights
€300 M
Attributable profit
Bank Zachodni continued to be the reference bank in mobile and online banking
Focused on growth in mortgages, SMEs, leasing and companies
Attributable profit dropped 3%, impacted by capital gains of VISA Europe in 2016. Underlying profit before tax rose 12% driven by
higher revenues, cost control and lower cost of credit
Management of spreads and activity in a low interest rate environment was reflected in solid commercial revenues (net interest
income and fee income)
Agreement with Deutsche Bank, A.G. to acquire the retail and private banking business of Deutsche Bank Polska, S.A. The
transaction is expected to be closed in the fourth quarter of 2018, once all the regulatory authorisations have been received
* Changes in constant currency
Strategy
The Bank maintained its objective of being the bank of first choice for
customers.
Due to the changes in the macroeconomic environment, the 2017-2019
strategy was updated and took into account the current and envisaged
challenges that might arise in the external environment, as well as the
Group’s development objectives and other relevant factors.
The strategy promotes a customer-centred culture, underpinned by the
digital transformation and the continuous improvement in the business
model and in the range of products.
Among the Bank’s main actions in 2017 were:
• We installed new CRM tools in order to keep on responding to and
anticipating our customers’ expectations and needs.
• Particular interest in all products being simple and easy to
understand, with transparent conditions and prices, incentives and
benefits based on the strength of the customer relation.
• The As I Want it Account was launched at the end of August, enabling
customers to decide which products and services they need and how
to pay for them. This account is for new as well as existing customers.
By the end of the year, 335,000 accounts had been opened.
• On 14 December 2017, the Bank announced the agreement to acquire
Core Deutsche Bank Polska & DB Securities. The transaction is
expected to be closed during the fourth quarter of 2018, once all the
regulatory and corporate authorisations have been received. Core
DB Polska contributes gross loans of PLN 18,200 million, customer
deposits of PLN 10,400 million and managed assets of PLN 6,900
million (all data as of June 2017). It's worth mentioning that the
acquired balances did not include mortgages in foreign currency.
LOYAL CUSTOMERS
DIGITAL CUSTOMERS
Thousands
Thousands
ACTIVITY PERFORMANCE
% change 2017 / 2016 (excl. FX)
ATTRIBUTABLE PROFIT
Constant € million
159
2017 Annual Report NPL RATIO
%
COVERAGE RATIO
COST OF CREDIT
UNDERLYING RoTE
%
%
%
All of this resulted in the following recognitions:
• BZ WBK was named the Best Bank in Poland for the third year
running in the Euromoney Awards for Excellence, one of the most
prestigious categories of the financial sector. This award highlights
the Bank’s excellent results and the rolling out of its digital
transformation programme. Bank Zachodni WBK also received the
Best Bank award for SMEs in Poland.
• Bank Zachodni WBK was also recognised in 2017 as one of the
best places to work (TOP Employer 2017). This prize recognises the
creation of a cordial work environment, the focus on talent and
career and employment development.
Activity
Loans rose 5%, underpinned by companies (+7%, with SMEs rising 11%)
and individuals (+3%).
Customer funds increased 2% in 2017, reflecting the profitability
strategy in place: demand deposits rose 8% and mutual funds 18%,
while time deposits dropped 16%.
This evolution maintained our solid funding structure (net loan-to-
deposit ratio of 92%).
Results
Attributable profit was 3% lower at €300 million, mainly due to the
recording of capital gains from the disposal of VISA Europe recorded in
2016 and some regulatory impacts.
Excluding these impacts, underlying profit before tax increased 12%,
with good performance of the recurring lines:
• Excellent net interest income (+9%), spurred by higher volumes
and fee income (+8%). Gross income grew at a slower pace (+5%),
due to lower gains on financial transactions from the sale of ALCO
portfolios.
• Operating expenses rose 2%, mainly due to higher personnel costs
(+3%). Amortisations, on the other hand, fell 3%.
• Loan-loss provisions were down 8%, thanks to the significant
improvement in credit quality. The NPL ratio dropped to 4.57%
from 5.42% in 2016 and the cost of credit was 0.62% (0.70% in
2016).
Strategy in 2018
Make Bank Zachodni WBK the reference bank for customers, gaining their confidence and loyalty
Grow faster than our competitors, supported by digitalisation
Keep on being the country’s most profitable bank
Carry out the necessary measures to close the operation with Core Deutsche Bank Polska according to schedule and continue with
its integration
160
4. ECONOMIC AND FINANCIAL REVIEWBusiness information by geographic area2017 Annual Report PORTUGAL (Excl. POPULAR)
(€ 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
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
Customer loans
Cash, central banks and credit institutions
Debt securities
o/w: available for sale
Other financial assets
Other assets
Total assets
Customer deposits
Central banks and credit institutions
Debt securities issued
Other financial liabilities
Other liabilities
Total liabilities
Total equity
Other managed and marketed customer funds
Mutual funds
Pension funds
Managed portfolios
Pro memoria:
Loans excluding repos
Funds (customer deposits excluding repos + mutual funds)
Ratios (%) and operating means
Underlying RoTE
Efficiency ratio (with amortisations)
NPL ratio
NPL coverage
Number of employees
Number of branches
2017
697
341
84
24
1,145
(550)
(512)
(326)
(186)
(38)
595
12
(35)
573
(130)
442
—
442
2
440
—
440
30,210
4,517
10,018
4,066
1,602
1,855
48,202
30,269
8,452
4,477
327
1,008
44,534
3,668
3,423
1,944
998
482
31,296
32,213
12.70
48.0
5.71
59.1
5,895
563
2016
733
314
112
51
1,209
(589)
(551)
(339)
(212)
(38)
620
(54)
(34)
533
(131)
402
—
402
2
399
—
399
27,328
2,459
11,622
5,683
1,667
1,745
44,820
30,002
6,743
3,805
349
590
41,489
3,331
2,770
1,435
933
402
29,030
31,438
13.03
48.7
8.81
63.7
6,306
657
Change
amount
(36)
27
(28)
(27)
(64)
39
39
13
26
(0)
(25)
66
(1)
40
1
41
—
41
(0)
41
—
41
2,882
2,058
(1,604)
(1,617)
(65)
111
3,382
267
1,710
672
(22)
418
3,045
337
652
508
64
80
2,266
775
(0.34)
(0.7)
(3.10)
(4.6)
(411)
(94)
%
(4.9)
8.7
(25.4)
(53.2)
(5.3)
(6.7)
(7.1)
(3.9)
(12.3)
0.3
(4.0)
—
3.0
7.5
(0.4)
10.1
—
10.1
(5.0)
10.2
—
10.2
10.5
83.7
(13.8)
(28.5)
(3.9)
6.4
7.5
0.9
25.4
17.7
(6.2)
70.9
7.3
10.1
23.6
35.4
6.9
19.9
7.8
2.5
(6.5)
(14.3)
161
2017 Annual Report PORTUGAL*
2017 highlights
€440 M
Attributable profit
The strategy to transform the commercial model, distinguished by the 1|2|3 World and development of new digital platforms,
spurred growth in loyal and digital customers (+8% and +11%, respectively)
Market share of new lending to companies was 17%. In mortgages, the market share of new loans stood above 20%
Attributable profit rose 10%, reflecting lower operating expenses and provisions
Following the acquisition of Banco Popular Portugal, Santander Totta is the country’s largest private sector bank in terms of
assets and loans in domestic activity
* Excl. Popular
Strategy
Commercial activity remained focused on exploiting the country’s
growth trend. This was reflected in the market share gain in business
with individuals and companies, growth in transactions and rise in the
number of loyal and digital customers (+8% and +11%, respectively).
In individuals, the activity continued to be underpinned by the 1|2|3
World which evolved very well in the number of accounts, credit cards
and protection insurance.
In companies, the main focus was still on developing new digital
platforms such as the new Santander Totta Empresas app.
The Bank placed in September ten-year mortgage bonds for €1.0
billion. This was the first issuance with this maturity in Portugal
since 2010.
In 2017, Euromoney and Global Finance recognised Santander Totta
as the best bank in Portugal and The Banker magazine named it Bank
of the Year. It was also ranked the most reputable banking brand in
Portugal by the consultancy Onstrategy.
Activity
• Total lending rose 8%, benefitting from a corporate operation in
the third quarter. New mortgage business remained very dynamic
and the Bank continued to record market shares of more than 20%.
Likewise, in companies, the market share in lending was around 17%.
• Funds amounted to €32,213 million (+2%). Deposits and mutual
funds increased 1% and 35%, respectively. Also, the funding cost
improved and dropped from 0.35% in 2016 to 0.19%.
• The capital ratio remained very solid (fully loaded CET1 of 16.4%,
well above the minimum requirement).
• S&P upgraded the Bank to BBB-, Moody’s confirmed its rating after
the acquisition of Banco Popular and DBRS upgraded the Bank to
A (low). Fitch also improved its rating to BBB+. Santander Totta’s
ratings are the best in the Portuguese banking system
LOYAL CUSTOMERS
DIGITAL CUSTOMERS
ACTIVITY PERFORMANCE
ATTRIBUTABLE PROFIT
Thousands
Thousands
% change 2017 / 2016
Constant € million
162
4. ECONOMIC AND FINANCIAL REVIEWBusiness information by geographic area2017 Annual Report NPL RATIO
%
COVERAGE RATIO
COST OF CREDIT
UNDERLYING RoTE
%
%
%
Results
Attributable profit was 10% higher at €440 million, driven by lower
operating expenses and provisions. In gross income, the good
performance of fee income did not offset the lower net interest
income and gains on financial transactions.
• Net interest income fell 5% as the positive impact of the lower cost of
deposits did not offset the drop in revenue from loans and securities,
due to the low interest rate environment and the reduced share of
the public debt portfolio in the Bank’s balance sheet.
• Fee income amounted to €341 million, up 9% and reflecting the
greater customer loyalty and transactions. Gains on financial
transactions, on the other hand, fell 25%, due to lower results from
the sale of portfolios.
• Operating expenses were 7% lower, thanks to the optimisation plans
of the last few years. This reduction, combined with the evolution of
revenues, improved the efficiency ratio to 48%.
• Loan-loss provisions declined and closed the year with a small release
of provisions. This reflected the excellent evolution of the NPL ratio,
which improved notably to 5.71%, well below the peak of 10.46% in
June 2016 following Banif’s integration.
Strategy in 2018
Integrate Banco Popular Portugal, improving efficiency
Strengthen our position as the best private sector bank in Portugal on a higher market share
Growth in lending, driven by companies, and in funds, mainly off-balance-sheet
Deepen our digital transformation and streamline processes, increasing loyalty and cross selling
163
2017 Annual Report POPULAR
(€ 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
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
Customer loans
Cash, central banks and credit institutions
Debt securities
o/w: available for sale
Other financial assets
Other assets
Total assets
Customer deposits
Central banks and credit institutions
Debt securities issued
Other financial liabilities
Other liabilities
Total liabilities
Total equity
Other managed and marketed customer funds
Mutual funds
Pension funds
Managed portfolios and insurance premiums
Pro memoria:
Gross customer loans excluding repos
Funds (customer deposits excluding repos + mutual funds)
(*) Results consolidated into Grupo Santander as of 7 June 2017.
(**) Restructuring costs.
164
2017*
1,003
288
1
17
1,309
(873)
(781)
(421)
(360)
(92)
436
(114)
(20)
302
(39)
263
—
263
0
263
(300)
(37)
75,516
14,025
17,457
16,171
1,709
18,246
126,953
64,960
37,279
10,661
2,460
3,666
119,026
7,927
16,409
9,619
4,600
2,190
79,533
74,286
4. ECONOMIC AND FINANCIAL REVIEWBusiness information by geographic area2017 Annual Report BANCO POPULAR
2017 highlights
-€37 M
Attributable profit
Banco Santander announced on 7 June its acquisition of Banco Popular, an operation that bolstered our position as the leading
bank in Spain
Since then we have focused on recovering commercial activity and offering the best service to Popular’s customers who already
benefit from a larger network of ATMs throughout Spain
Deposits have increased 15% since the purchase and loans remained stable in the fourth quarter when new lending grew
Popular posted a loss of €37 million, due to the extraordinary charge of €300 million for the integration process. Excluding this,
underlying profit was €263 million
Strategy and Activity
Significant progress has been made in the management of Popular
since its incorporation into Grupo Santander, in accordance with
the initial plan envisaged and meeting the commitment made to the
market and to our shareholders:
• We began to integrate Popular, capturing cost synergies and moving
toward optimum efficiency levels.
• The agreement to sell the portfolio of foreclosed properties to
Blackstone, doubtful loans and other related assets reduced the
exposure to the real estate sector.
• In December we agreed to sell TotalBank, based in Florida. This
transaction is scheduled to be completed by the end of 2018, with a
positive impact on the Group's CET1 ratio of five b.p.
• The Portuguese subsidiary of Banco Popular was sold to Santander
Totta. This is an intragroup transaction and therefore, it has no
impact on the consolidated results. The integration of Popular’s
business will strengthen Santander Totta making it the largest
private sector bank in the country.
• Lastly, a commercial action was successfully launched for retail
customers who were shareholders of Banco Popular, 78% of whom
subscribed to the offer of loyalty bonds.
As regards activity, customer deposits, both current and time, have risen
significantly since the beginning of June, underscoring the recovery of
market confidence. The stock of loans stabilised in the last few months,
aided by the rise in new lending in the fourth quarter thanks to Popular’s
notable position in the SMEs segment. This trend, although positive, is
not yet sufficient to recover the balances prior to the acquisition.
Results
Banco Popular made a loss since 7 June of €37 million, due to
integration costs of €300 million. Excluding this, underlying profit was
€263 million.
Gross income was €1,309 million. Net interest income was affected by
interest rate pressure (Euribor at historical lows). The fourth quarter
was also hit by ALCO portfolios and the €63 million contribution to the
Deposit Guarantee Fund.
Operating expenses were €873 million and loan-loss provisions
amounted to €114 million.
Strategy in 2018
Make progress in meeting the goals announced at the time of the acquisition
Optimise Popular’s structure, improving its efficiency ratio. Cost savings will be gradually reflected in the P&L statement as the
year advances
Continue to analyse the best alternatives for joint ventures and non-core businesses that continue on the balance sheet, so that
they fit into Banco Santander’s business model
Increase customer loyalty and satisfaction, in accordance with the transformation process taking place in all the Group’s units
165
2017 Annual Report UNITED KINGDOM
(€ million)
Income statement
2017
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
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
(*) In 2016, capital gains from the disposal of the stake in VISA Europe, restructuring costs and PPI.
4,363
1,003
282
68
5,716
(2,861)
(2,513)
(1,358)
(1,156)
(348)
2,855
(205)
(466)
2,184
(662)
1,523
—
1,523
25
1,498
—
1,498
Balance sheet
Customer loans
Cash, central banks and credit institutions
Debt securities
o/w: available for sale
Other financial assets
Other assets
Total assets
Customer deposits
Central banks and credit institutions
Debt securities issued
Other financial liabilities
Other liabilities
Total liabilities
Total equity
Other managed and marketed customer funds
Mutual funds
Pension funds
Managed portfolios
Pro memoria:
Loans excluding repos
Funds (customer deposits excluding repos + mutual funds)
Ratios (%) and operating means
Underlying RoTE
Efficiency ratio (with amortisations)
NPL ratio
NPL coverage
Number of employees
Number of branches
166
Change
amount
%
% excl. FX
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
(30)
1,651
251,250
36,643
28,045
12,204
26,819
12,202
354,960
212,113
21,590
71,108
27,913
5,221
337,945
17,014
8,564
8,447
—
118
(42)
(29)
(37)
7
(100)
106
143
61
82
(37)
6
(146)
(127)
(268)
75
(193)
—
(193)
(11)
(183)
30
(153)
(7,634)
20,118
(1,857)
(2,318)
(2,130)
(2,228)
6,270
18,391
6,243
(9,996)
(6,746)
(911)
6,981
(711)
93
96
—
(3)
243,617
56,762
26,188
9,887
24,690
9,974
361,230
230,504
27,833
61,112
21,167
4,310
344,926
16,304
8,657
8,543
—
114
235,783
210,305
242,510
210,611
(6,727)
(306)
10.26
50.1
1.33
32.0
25,971
808
10.56
51.0
1.41
32.9
25,688
844
(0.30)
(1.0)
(0.08)
(0.9)
283
(36)
6.2
4.3
(5.1)
19.2
5.4
3.4
1.5
2.6
0.1
20.0
7.4
276.7
47.4
(4.5)
(3.6)
(4.8)
—
(4.8)
(25.3)
(4.4)
(100.0)
(2.7)
0.5
60.5
(3.2)
(16.1)
(4.6)
(15.3)
5.5
12.6
33.6
(10.9)
(21.4)
(14.5)
5.8
(0.7)
4.7
4.8
—
0.7
0.8
3.5
(0.9)
(2.8)
(11.5)
11.1
(1.7)
(3.6)
(5.4)
(4.3)
(6.6)
11.9
0.2
251.3
37.5
(10.9)
(10.1)
(11.3)
—
(11.3)
(30.3)
(10.9)
(100.0)
(9.2)
(3.0)
54.9
(6.6)
(19.0)
(7.9)
(18.3)
1.8
8.7
28.9
(14.1)
(24.2)
(17.4)
2.1
(4.2)
1.1
1.1
—
(2.8)
(2.8)
(0.1)
1.1
(4.3)
4. ECONOMIC AND FINANCIAL REVIEWBusiness information by geographic area2017 Annual Report UNITED KINGDOM*
2017 highlights
€1,498 M
Attributable profit
The strategic and operational advances underpinned solid results despite the changeable macroeconomic environment
Good business evolution: growth in retail current account balances, mortgages, and corporate loans and deposits of UK
companies, excluding commercial real estate (CRE)
Digital transformation continued to support operational efficiency and improved customer experience
Attributable profit slightly lower than in 2016, due to higher loan-loss provisions in GCB and software write-offs. Net operating
income was 7% higher with strong net interest income and fee income growth
* Changes in constant currency
Strategy
We remained focused on growing customer loyalty, operational and
digital excellence and steady and sustainable profit growth, while
being the best bank for our people and the communities in which we
operate.
• We continued to benefit from the 1|2|3 World which now has 5.4
million customers, up 275,000 in the year. Retail current account
balances rose by £2,500 million, maintaining a good pace of growth.
• We continued to develop our digital proposition. Digital customers
continued to increase by around 10% and we gained an average of
1,400 new active mobile banking users per day. In 2017, 47% of our
mortgages were retained online, 38% of current account openings
and 51% of credit cards were via digital channels.
• The number of loyal retail customers continued to grow, up 5%,
although at a slower pace with customers consolidating their savings
into our 1|2|3 current account. Loyal SME and corporate customers
increased 5%, driven by improving customer satisfaction and our
international proposition.
• As published by the Financial Research Survey (FRS), retail customer
satisfaction was broadly in line with our three highest performing
peers as at December 2017.
This performance was achieved despite a very competitive UK
banking environment, and one which faces major regulatory changes.
Open Banking and PSD II (Payment Services Directive) will influence
customer interaction and potentially the competitive landscape.
The implementation of our wide ring-fence structure is progressing
well and we are on track to comply with the Banking Reform Act
before the 1 January 2019 deadline.
Consequently, and as reaffirmed at our 2017 Group Strategy Update,
we are well positioned to deliver on our strategic priorities for 2018.
LOYAL CUSTOMERS
DIGITAL CUSTOMERS
Thousands
Thousands
ACTIVITY PERFORMANCE
% change 2017 / 2016 (excl. FX)
ATTRIBUTABLE PROFIT
Constant € million
167
2017 Annual Report NPL RATIO
%
COVERAGE RATIO
COST OF CREDIT
UNDERLYING RoTE
%
%
%
Activity
• Lending was 1% higher. Residential mortgages rose by £600 million
and loans to UK trading companies increased by £800 million, up 4%
year on year, offset by the reduction of our CRE lending that declined
£900 million.
• Customer deposits excluding repos rose 3%, underpinned by retail
current accounts, other retail products and corporate deposits, and
partly offset by the decrease in savings balances.
• Santander UK focuses on maintaining a strong balance sheet and
a low risk profile, as was demonstrated in the 2017 PRA stress test
results. Once again, we had the lowest stressed CET1 drawdown of all
the participating UK banks.
Results
Attributable profit for the year fell 3%, adversely impacted by the
single GCB loan that went into non-performance. Excluding this, the
business was strong.
• Net interest income rose 6%, driven by the improvement in retail
liability spreads from the changes made to the 1I2I3 World terms. This
was partially offset by the pressure on new lending spreads.
• Fee income increased 4%, with higher transaction fees in Retail
Banking and international and digital payment fees in Commercial
Banking.
• Operating expenses were up 3%, under control despite inflationary
pressures and banking reform costs of £81 million. Higher investment
costs in business growth and enhancements to our digital channels
were partly offset by improved operational efficiency.
Credit quality remained solid in all loan portfolios, supported by good
risk management and the low interest rate environment. The NPL ratio
was 1.33% at the end of the year (1.41% in 2016).
Underlying RoTE was unchanged at 10%.
Strategy in 2018
Ongoing focus on customer loyalty as the key driver of business growth
Leverage our Investment Hub and NEO CRM platforms, and improve cross-border customer relationships via international trade
corridors
Prioritise operational and digital excellence in order to offer the best customer experience
Increase our profits in a predictable way, while maintaining a strong balance sheet
168
4. ECONOMIC AND FINANCIAL REVIEWBusiness information by geographic area2017 Annual Report 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
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
Customer loans
Cash, central banks and credit institutions
Debt securities
o/w: available for sale
Other financial assets
Other assets
Total assets
Customer deposits
Central banks and credit institutions
Debt securities issued
Other financial liabilities
Other liabilities
Total liabilities
Total equity
Other managed and marketed customer funds
Mutual funds
Pension funds
Managed portfolios
Pro memoria:
Loans excluding repos
Funds (customer deposits excluding repos + mutual funds)
Ratios (%) and operating means
Underlying RoTE
Efficiency ratio (with amortisations)
NPL ratio
NPL coverage
Number of employees
Number of branches
2017
15,944
5,490
1,012
27
22,473
(8,694)
(7,877)
(4,366)
(3,511)
(817)
13,779
(4,973)
(1,329)
7,477
(2,380)
5,097
—
5,097
814
4,284
—
4,284
146,133
55,934
57,364
32,475
14,226
17,160
290,818
141,543
39,212
34,434
36,084
10,994
262,267
28,550
80,779
74,482
—
6,297
151,542
193,264
18.04
38.7
4.50
84.8
88,713
5,891
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
—
3,386
152,187
67,400
63,314
29,219
18,696
19,171
320,768
143,747
47,585
47,436
41,395
11,291
291,454
29,315
81,482
75,002
—
6,480
159,134
187,516
15.56
41.0
4.81
87.3
86,312
5,818
Change
amount
%
% excl. FX
2,598
909
206
(5)
3,709
(1,002)
(870)
(480)
(390)
(132)
2,706
(62)
(544)
2,100
(1,017)
1,083
—
1,083
185
898
—
898
(6,054)
(11,466)
(5,951)
3,256
(4,470)
(2,011)
(29,951)
(2,205)
(8,373)
(13,001)
(5,311)
(297)
(29,186)
(764)
(703)
(520)
—
(182)
(7,593)
5,749
2.48
(2.3)
(0.31)
(2.5)
2,401
73
19.5
19.8
25.5
(14.4)
19.8
13.0
12.4
12.4
12.5
19.3
24.4
1.3
69.3
39.1
74.6
27.0
—
27.0
29.5
26.5
—
26.5
(4.0)
(17.0)
(9.4)
11.1
(23.9)
(10.5)
(9.3)
(1.5)
(17.6)
(27.4)
(12.8)
(2.6)
(10.0)
(2.6)
(0.9)
(0.7)
—
(2.8)
(4.8)
3.1
2.8
1.3
15.8
16.7
26.5
(27.6)
16.4
10.3
9.7
9.5
10.0
15.8
20.6
(2.6)
60.6
36.2
70.8
24.5
—
24.5
26.9
24.0
—
24.0
7.6
(5.3)
2.5
24.5
(15.4)
2.0
2.2
11.2
(7.6)
(18.5)
(1.4)
10.3
1.4
10.1
12.7
13.1
—
7.7
6.7
16.4
169
2017 Annual Report LATIN AMERICA*
2017 highlights
€4,284 M
Attributable profit
Economic growth throughout the region, with stabilisation and recovery in Argentina and Brazil, respectively, and slight
downturns in Chile and Mexico
Innovation measures, streamlining processes and commercial actions produced a 16% rise in loyal customers and more than three
million digital customers (+33%)
Lending and funds increased
Excluding the forex impact, attributable profit rose 24% and at double-digit rates in the main units
* Changes in constant currency
Strategy
Among the most notable developments were significant investments
in operating systems and digital infrastructure in order to streamline
processes and enhance the customer experience, loyalty, transactions
and the number of digital customers. The measures taken are set out
in each unit.
The number of loyal customers rose 16% (+16% individuals and +15%
companies), and in all units. Digital customers rose by 3 million (+32%).
Activity
Lending excluding the forex impact was up 7%. Of note was Brazil
and Argentina. Santander gained market share in both cases. Mexico,
on the other hand, opted for more selective growth and in Chile the
medium-high income and SME segments remained the priorities, while
the mass consumer market began to recover.
Funds increased 16%, due to growth in both deposits as well as mutual
funds.
Results
Attributable profit was 24% higher at €4,284 million, driven by
revenues, particularly net interest income, reflecting the growth in
volumes and management of spreads in an environment with varied
interest rates. Brazil significantly reduced its Selic rate and Mexico
increased its official interest rates. Fee income rose 17%, the result of
greater loyalty. Operating expenses increased to a lesser extent (+10%),
which improved the cost-to-income ratio by 2 p.p. to 39%.
Loan-loss provisions dropped slightly (3%). The cost of credit improved
thanks to larger business volumes.
Profit increased in six of the seven units, most notably in Brazil (+34%),
the largest contributor to Group earnings.
LOYAL CUSTOMERS
DIGITAL CUSTOMERS
Thousands
Thousands
ACTIVITY PERFORMANCE
% change 2017 / 2016 (excl. FX)
ATTRIBUTABLE PROFIT
Constant € million
170
4. ECONOMIC AND FINANCIAL REVIEWBusiness information by geographic area2017 Annual Report 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
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
Customer loans
Cash, central banks and credit institutions
Debt securities
o/w: available for sale
Other financial assets
Other assets
Total assets
Customer deposits
Central banks and credit institutions
Debt securities issued
Other financial liabilities
Other liabilities
Total liabilities
Total equity
Other managed and marketed customer funds
Mutual funds
Pension funds
Managed portfolios
2017
10,078
3,640
510
46
14,273
(5,080)
(4,571)
(2,565)
(2,006)
(509)
9,193
(3,395)
(1,186)
4,612
(1,725)
2,887
—
2,887
343
2,544
—
2,544
70,454
34,920
38,693
21,321
5,798
11,825
161,690
70,074
23,591
20,056
23,783
7,536
145,040
16,650
58,479
54,779
—
3,700
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
—
1,786
75,474
41,352
42,513
16,275
8,486
13,677
181,502
72,478
27,226
31,679
24,974
7,561
163,917
17,584
59,631
55,733
—
3,898
Pro memoria:
Loans excluding repos
Funds (customer deposits excluding repos + mutual funds)
74,341
106,959
80,306
99,771
Ratios (%) and operating means
Underlying RoTE
Efficiency ratio (with amortisations)
NPL ratio
NPL coverage
Number of employees
Number of branches
16.91
35.6
5.29
92.6
47,135
3,465
13.84
39.5
5.90
93.1
46,728
3,431
Change
amount
%
% excl. FX
2,016
700
272
(34)
2,953
(605)
(525)
(312)
(213)
(80)
2,348
(18)
(489)
1,840
(953)
888
—
888
130
758
—
758
(5,020)
(6,432)
(3,820)
5,046
(2,688)
(1,852)
(19,812)
(2,404)
(3,635)
(11,623)
(1,191)
(25)
(18,878)
(934)
(1,152)
(954)
—
(198)
(5,965)
7,188
3.07
(3.9)
(0.61)
(0.5)
407
34
25.0
23.8
114.2
(42.6)
26.1
13.5
13.0
13.9
11.9
18.7
34.3
0.5
70.3
66.4
123.2
44.4
—
44.4
60.7
42.5
—
42.5
(6.7)
(15.6)
(9.0)
31.0
(31.7)
(13.5)
(10.9)
(3.3)
(13.4)
(36.7)
(4.8)
(0.3)
(11.5)
(5.3)
(1.9)
(1.7)
—
(5.1)
(7.4)
7.2
0.9
1.0
17.3
16.2
100.9
(46.2)
18.3
6.5
6.0
6.8
4.9
11.4
26.0
(5.7)
59.7
56.1
109.4
35.5
—
35.5
50.8
33.7
—
33.7
8.1
(2.2)
5.4
51.7
(20.9)
0.1
3.2
12.0
0.3
(26.7)
10.3
15.4
2.5
9.7
13.6
13.8
—
9.9
7.2
24.2
171
2017 Annual Report BRAZIL
2017 highlights
€2,544 M
Attributable profit
The expansion of commercial businesses and the greater operational efficiency underpinned the recurring revenue growth, well
above the average of our competitors. Net interest income and fee income registered double-digit growth.
Good risk management: credit growth with profitable gain in market share and a reduction in the cost of credit.
Continued good evolution of profitability. Attributable profit of €2,544 million (+34%) and RoTE of 17%, reflecting a more
productive, efficient and customer-focused business model, with solid organic growth
* Changes in constant currency
Strategy
Santander Brazil attained historically noteworthy results in 2017,
better than that of its main competitors, with a dynamic of strong
business acceleration, agility in innovations and services and greater
operational efficiency. This was combined with advances in enhancing
the internal culture: we are today an organisation more aligned with
offering customers the best experience and, on this basis, growing in a
sustained and profitable way.
The year’s main actions included:
• In cards, continued strong growth in revenues (+23%), increasing our
market share. Marketing of the Santander/AAdvantage® credit cards
continued to be well received and Santander Way maintained the
best evaluations in the market (4.8 stars in the Apple Store and 4.6 in
Google Play).
We continued the intense agenda of innovative associations and
solutions for customers: in the fourth quarter we launched Santander
Pass, a bracelet and sticker with NFC (near field communication)
technology a contactless payment system; in Mastercard and Dafiti
we started identity check mobile tests, a method that authenticates
online payments with the use of biometrics (digital fingerprint or
face recognition); and we announced the commercial agreement with
Smiles to market the Santander Smiles cards, which give customers
exclusive advantages for accumulating miles.
• We implemented the full acquirencia model and launched the
option to buy or rent the point of sale (POS). Turnover surged 31%
(three times higher than the market) which produced a gain of 168
b.p. in market share to 11.5%.
• Payroll credit increased 58% and we launched the consignado 100%
digital.
• In mortgages, we cut interest rates, offering the best rate for
customers, which helped boost new lending to individuals by 88%,
well above the market.
• In consumer finance, we held our leadership and increased our
market share in lending to 23% (+310 b.p.). The digital tool +Negocios
continued to support business expansion with growth of 60%
in simulations of vehicle purchases. We also launched the digital
platform +Vezes, focused on the goods and services segment (CDC)
and attained close to 175,000 simulations a month.
• In SMEs, we increased our market share in loans (+241 b.p.) to 11%.
In GCB, we improved customer attention with a model closer to
the client and were recognised in Brazil as leaders in ECM, financial
advice for project finance and in the currency market. We were also
recognised as the Best Treasury in Brazil and among the best in
research in Brazil and Latin America.
LOYAL CUSTOMERS
DIGITAL CUSTOMERS
Thousands
Thousands
ACTIVITY PERFORMANCE
% change 2017 / 2016 (excl. FX)
ATTRIBUTABLE PROFIT
Constant € million
172
4. ECONOMIC AND FINANCIAL REVIEWBusiness information by geographic area2017 Annual Report NPL RATIO
%
COVERAGE RATIO
COST OF CREDIT
UNDERLYING RoTE
%
%
%
• On the liabilities side, we launched Santander One, a digital
financial advice tool that attained more than eight million logins
in the fourth quarter.
Activity
• Loans grew 7% (individuals: +18%; consumer finance: +24% and SMEs:
+12%), the latter increased for the fifth quarter running.
• In line with the digital strategy, we put on Black Week, promoting
• Funds continued to grow at double-digit rates (+24%), mainly due to
special product conditions both for customers and non-customers.
As well as strong growth in e-commerce sales, the campaign attained
a record in the contracting of new cards and in personal loans
(almost doubling growth in both cases).
time deposits and mutual funds.
Results
Attributable profit of €2,544 million (+34%). Of note:
All of this produced significant recognitions: Bank of the Year in Brazil
from The Banker and Best Bank in Brazil, Best Bank in Latin America,
Best Bank for Transformation in Latin America and Best Bank in the
World for SMEs from Euromoney. We were also classified for the
second year running as one of the best companies to work for in the
Great Place to Work ranking.
We continued to increase our customer base in a sustainable way
during the year: loyal customers (+14%) and digital ones (+34%).
On sustainability, Santander continues to hold an outstanding position
in the Prospera Santander Microcredit Program, with R$425 million in
the loan portfolio at the end of December 2017. In higher education,
we have awarded about 9,500 scholarships since 2015, actively
contributing to the advancement of education in the country.
• Rise of 17% in net interest income, mainly business with customers.
Revenues from loans increased 13% due to volumes and spreads and
that from funds 31%, reflecting the plan we implemented.
• Fee income rose 16% thanks to the increase in customer loyalty and
greater transactions. Of note that from credit cards (+23%), current
accounts (+20%) and insurance (+14%).
• Operating expenses were 7% higher, due to the business dynamic
and ongoing investments. The cost-to-income ratio improved by 3.9
p.p. to 35.6%, the best level in the last five years.
• Provisions fell 6%, with a good evolution of credit quality indicators:
the cost of credit was 53 b.p. lower at 4.36%, the NPL ratio dropped
61 b.p. to 5.29% and coverage was 93%.
Strategy in 2018
Customers: excellence in services so that customers find the best experience in Santander Brazil
Digital: continue to consolidate our leadership in terms of innovative products and services
Volumes: maintain profitable gains in market share, with offers adjusted to each customer profile
Profitability: keep on fostering recurrent growth in profitability, underpinned by greater activity, higher operational efficiency and
advances in the digital strategy
173
2017 Annual Report 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
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
Customer loans
Cash, central banks and credit institutions
Debt securities
o/w: available for sale
Other financial assets
Other assets
Total assets
Customer deposits
Central banks and credit institutions
Debt securities issued
Other financial liabilities
Other liabilities
Total liabilities
Total equity
Other managed and marketed customer funds
Mutual funds
Pension funds
Managed portfolios
Pro memoria:
Loans excluding repos
Funds (customer deposits excluding repos + mutual funds)
Ratios (%) and operating means
Underlying RoTE
Efficiency ratio (with amortisations)
NPL ratio
NPL coverage
Number of employees
Number of branches
174
2017
2,601
749
150
(40)
3,460
(1,382)
(1,258)
(653)
(606)
(124)
2,078
(905)
(39)
1,134
(230)
904
—
904
194
710
—
710
26,462
9,956
13,676
6,971
5,627
2,481
58,203
30,392
8,247
5,168
7,680
1,779
53,267
4,936
9,919
9,919
—
—
26,962
35,548
19.50
39.9
2.69
97.5
18,557
1,401
Change
amount
%
% excl. FX
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
—
629
27,315
13,362
14,124
7,088
7,722
2,590
65,112
28,910
11,269
5,393
12,648
2,037
60,257
4,855
10,242
10,242
—
—
216
38
1
3
258
(108)
(90)
(46)
(44)
(17)
150
(73)
(9)
67
17
85
—
85
3
81
—
81
(853)
(3,406)
(447)
(117)
(2,094)
(108)
(6,909)
1,482
(3,022)
(225)
(4,968)
(258)
(6,990)
81
(323)
(323)
—
—
28,017
36,438
(1,055)
(890)
15.45
39.8
2.76
103.8
17,608
1,389
4.05
0.1
(0.07)
(6.3)
949
12
12.5
8.7
3.6
(3.8)
11.5
11.9
11.1
11.1
11.2
20.2
11.2
12.3
35.2
9.7
(3.9)
13.8
—
13.8
5.0
16.5
—
16.5
5.3
(19.0)
5.2
6.9
(20.8)
4.1
(2.9)
14.2
(20.5)
4.1
(34.0)
(5.1)
(3.9)
10.5
5.3
5.3
—
—
4.6
6.0
9.1
5.4
0.4
(6.7)
8.0
8.4
7.7
7.7
7.8
16.5
7.8
8.8
31.1
6.3
(6.9)
10.3
—
10.3
1.7
12.9
—
12.9
(3.1)
(25.5)
(3.2)
(1.6)
(27.1)
(4.2)
(10.6)
5.1
(26.8)
(4.2)
(39.3)
(12.7)
(11.6)
1.7
(3.2)
(3.2)
—
—
(3.8)
(2.4)
5.4
0.9
4. ECONOMIC AND FINANCIAL REVIEWBusiness information by geographic area2017 Annual Report MEXICO*
2017 highlights
€710 M
Attributable profit
Strategy focused on attracting new customers with high long-term transaction loyalty and on consolidating the loyalty of current
customers
Focus on commercial transformation, multi-channel innovation, digital strategy and launching new business initiatives (Santander
Plus, Santander-Aeroméxico, Select Me, SúperWallet, SúperConnect, SúperDigital and TUIIO)
Strong growth in deposits and maintaining profitability of loans
Attributable profit rose 16%, driven by the excellent performance of net interest income (+13%)
* Changes in constant currency
Strategy
During the year and under the transformation strategy, significant
investments were made in infrastructure and systems focused on
improving multichanneling, deepening digital strategy, strengthening
the distribution model and launching new commercial initiatives.
Also, efforts were made to attract new customers and payrolls (which
resulted in market share gains), retain existing customers (churn ratio
dropped 52%) and grow deposits of individual customers.
• SúperConnect, unique customer attention model in Mexico for Select
customers, whose main feature is that it is fully remote.
• SúperDigital, where our customers can open an account from any
device linked to Internet, without having to visit a branch.
• Select Me, a programme that supports women with solutions that
facilitate their day-to-day tasks and professional development.
The benefits for Santander Plus customers were expanded with initiatives
related to loans, insurance and commercial alliances with self-service
companies in order to attract and make loyal a larger number of
customers. More than three million customers registered, of which 52%
were new.
• TUIIO, a financial inclusion initiative that has its own operating
model, infrastructure and brand which takes advantage of the
technology to support the needs of the low income segment in
Mexico and seeks to maximise the social impact on customers via a
boad range of products (micro-credits, micro-insurance, international
transfers, etc.)
The following actions were taken to bolster the digital strategy:
• The new Factoría Digital to drive digitalisation of our products.
We also continued to consolidate Santander in the SMEs market,
taking advantage of our position to attract and make loyal individual
customers and make us their main bank:
• Súper Wallet, the new mobile app that enables customers to
centralise management of their cards.
LOYAL CUSTOMERS
DIGITAL CUSTOMERS
Thousands
Thousands
ACTIVITY PERFORMANCE
% change 2017 / 2016 (excl. FX)
ATTRIBUTABLE PROFIT
Constant € million
175
2017 Annual Report NPL RATIO
%
COVERAGE RATIO
COST OF CREDIT
UNDERLYING RoTE
%
%
%
• Campaigns were carried out to refinance credit lines for SMEs,
focused on customers that have a good credit profile, and products
were simplified.
The structure of funds improved and business with SMEs, companies
and institutions was strengthened. Their demand deposits rose 10%
and we promoted diversification into time deposits and mutual funds,
in line with the profile of customers.
• In Companies and Institutions, we focused on transactional loyalty
and on attracting new customers via confirming. We also took
actions in various productive sectors and spurred agro business.
Results
Attributable profit was 16% higher at €710 million.
The number of loyal customers increased 24% (individuals: +24% and
SMEs: +33%) to two million. Digital customers increased 52% to 1.9 million.
Activity
Loans rose 5% and deposits excluding repos 6%.
• Gross income increased 11%. Of note was the 13% rise in net
interest income, driven by growth in loans and the continued
growth in deposits, together with higher interest rates since
December 2015.
Lending to individual customers was up 4%, as follows: consumer
credit grew 8%, credit cards 6% and mortgages 1%.
• Operating expenses were 12% higher, due to the investment plan to
position us as the main bank of our customers. The cost-to-income
ratio remained virtually stable at 40%.
Demand deposits of individual customers increased 12%, time deposits
rose 38% and mutual funds 5%.
Solid credit quality: the NPL ratio improved seven b.p. to 2.69%,
coverage reached 98% and the cost of credit was around 3%.
Strategy in 2018
Continuing with the commercial transformation and innovation in order to be the first choice bank of our customers in Mexico
Install a new distribution model based on: strategy in micro markets, new commercial model and a new design for branches
Continue the drive in digitalisation, remote attention models, customer experience and improvements in information and analysis
Continued focus on capturing payrolls and strengthen the Santander Plus offer
Maintain our leadership in the services offered to corporate customers in such a way that this segment’s contribution to the Bank’s
gross income continues to consolidate
176
4. ECONOMIC AND FINANCIAL REVIEWBusiness information by geographic area2017 Annual Report 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
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
Customer loans
Cash, central banks and credit institutions
Debt securities
o/w: available for sale
Other financial assets
Other assets
Total assets
Customer deposits
Central banks and credit institutions
Debt securities issued
Other financial liabilities
Other liabilities
Total liabilities
Total equity
Other managed and marketed customer funds
Mutual funds
Pension funds
Managed portfolios
Pro memoria:
Loans excluding repos
Funds (customer deposits excluding repos + mutual funds)
Ratios (%) and operating means
Underlying RoTE
Efficiency ratio (with amortisations)
NPL ratio
NPL coverage
Number of employees
Number of branches
2017
1,907
391
213
12
2,523
(1,025)
(918)
(574)
(344)
(108)
1,498
(462)
23
1,059
(200)
859
—
859
273
586
—
586
37,153
4,321
4,143
3,490
2,789
1,949
50,355
26,043
5,491
8,967
3,598
1,222
45,321
5,034
9,761
7,163
—
2,597
38,249
33,104
17.89
40.6
4.96
58.2
11,675
439
2016
1,864
353
206
(1)
2,422
(986)
(895)
(558)
(337)
(91)
1,435
(514)
(27)
894
(159)
735
—
735
222
513
—
513
37,662
5,955
5,348
4,787
2,474
2,065
53,505
27,317
7,172
10,174
2,794
1,226
48,683
4,822
9,903
7,321
—
2,582
38,800
34,559
17.17
40.7
5.05
59.1
11,999
435
Change
amount
%
% excl. FX
43
39
7
12
102
(39)
(23)
(16)
(6)
(16)
63
52
51
165
(41)
124
—
124
52
72
—
72
(509)
(1,635)
(1,205)
(1,297)
315
(116)
(3,150)
(1,274)
(1,681)
(1,206)
804
(4)
(3,362)
212
(142)
(158)
—
16
(551)
(1,455)
0.72
(0.1)
(0.09)
(0.9)
(324)
4
2.3
10.9
3.6
—
4.2
3.9
2.5
2.9
1.9
17.9
4.4
(10.1)
—
18.4
25.7
16.9
—
16.9
23.2
14.1
—
14.1
(1.4)
(27.4)
(22.5)
(27.1)
12.7
(5.6)
(5.9)
(4.7)
(23.4)
(11.9)
28.8
(0.3)
(6.9)
4.4
(1.4)
(2.2)
—
0.6
(1.4)
(4.2)
(2.7)
0.9
0.1
8.6
1.4
—
2.0
1.7
0.3
0.7
(0.3)
15.4
2.1
(12.0)
—
15.9
23.0
14.4
—
14.4
20.6
11.7
—
11.7
2.7
(24.4)
(19.3)
(24.1)
17.4
(1.7)
(2.0)
(0.7)
(20.3)
(8.2)
34.1
3.8
(3.0)
8.7
2.6
1.9
—
4.8
2.7
(0.2)
177
2017 Annual Report CHILE*
2017 highlights
€586 M
Attributable profit
Focus on commercial and technological innovations such as WorkCafé, digital onboarding and Santander Life, which are changing
the way of doing banking in Chile
Better profitability indicators and stable credit quality in an economic downturn
The medium-high income and SME segments remained priorities, while growth began to recover in mass consumer market
Attributable profit rose 12% driven by commercial revenues, improved cost of credit and control of costs
* Changes in constant currency
Strategy
The Group aspires to be the best bank in Chile, leading digital
excellence and customer experience and always committed to the
Simple, Personal and Fair (SPF) culture. The Bank has focused since
2012 mainly on the segments of medium-high income individuals and
SMEs.
In addition, with the digital innovations introduced this year and the
better economic outlook, the Bank grew again in the mass consumer
market, which had declined since 2012.
The main innovations were:
• Launch of the new World Member Limited credit card, focused on
high income customers.
• Rolling out of the WorkCafé branches, a kind of co-working space
backed by an advanced technological platform resulting in more
productive and efficient branches. The programme was sped up
in 2017, with the number rising from seven to 20 throughout the
country.
• Development of digital banking and the 2.0 app, launching various
functionalities during the year including digital onboarding that
enables someone to be a client via the app or digital banking in a few
minutes.
• Santander Life: this innovative model, which recognises who has a
good financial performance, was launched in December. It has led to
the Bank focusing again on the mass consumer market, underpinned
by a better outlook for the Chilean economy, and on technological
innovations that help to reduce the risk and costs of opening new
accounts.
These measures produced an increase in the number of loyal customers,
in SMEs (+7%) and in individuals (+3%), as well as an increase in fee
income linked to transactions. The number of digital customers rose 5%.
Santander Chile was recognised in the Adimark Gfk customer
satisfaction survey as the best digital bank in Chile and it came first in
the Digital Index, a ranking of digital brands developed by Llorente &
Cuenca that measures the presence in digital environments.
LOYAL CUSTOMERS
DIGITAL CUSTOMERS
Thousands
Thousands
ACTIVITY PERFORMANCE
% change 2017 / 2016 (excl. FX)
ATTRIBUTABLE PROFIT
Constant € million
178
4. ECONOMIC AND FINANCIAL REVIEWBusiness information by geographic area2017 Annual Report NPL RATIO
%
COVERAGE RATIO
COST OF CREDIT
UNDERLYING RoTE
%
%
%
The Banker, Euromoney and Latin Finance magazines also recognised
Santander as the Best Bank in Chile.
Of note was the 15% growth in Retail Banking profit, spurred by
increased activity and fee income, lower provisions and flat costs.
Activity
Loans rose 3%, with higher growth in the segments of high income
individuals (+10%) and SMEs (+5%). Mortgages grew 6% and consumer
credit 4%. Commercial credit remained virtually stable, driven by SMEs
and companies which offset the fall in GCB.
Customer funds remained stable, as the Bank focused on lowering the
cost and mix of funds. Demand deposits grew 4% and mutual funds
2%, while time deposits declined 4%.
Results
Attributable profit was €586 million (+12%). RoTE was 17.9% (17.2% in
2016).
• Gross income grew 2%. Net interest income remained stable due to
low inflation, partly offset by the lower cost of funding. Fee income
rose 9% thanks to the increase in loyal retail banking customers,
growth in cash management business and advisory services for
companies and GCB. Gains on financial transactions rose 1%, driven
by customer activity.
• Operating expenses were up 2%, mainly due to an increase in
depreciation and amortisations, the result of investments in branches
and technology. Personnel expenses rose by only 1% and administrative
ones were flat. The cost-to-income ratio remained at around 41%.
• Loan-loss provisions fell 12%, with a sustained improvement in the
portfolio of individuals. Credit quality indicators improved. The cost
of credit was 1.21% (1.43% in 2016), the NPL ratio dropped to below
5% and coverage was 58%
Strategy in 2018
Continue to enhance the quality of customer attention and the experience of our customers
Keep on transforming the WorkCafé branches
Boost growth among mass consumer market customers via Santander Life
Higher growth in lending and savings than our peer group, underpinned by stronger economic growth
Attain high levels of efficiency and productivity via excellence in execution and increased digitalisation
179
2017 Annual Report ARGENTINA*
2017 highlights
€359 M
Attributable profit
The retail banking of Citibank Argentina was fully integrated into Santander Rio at the end of August, five months after taking
control
Strategy focused on increasing the penetration in the market through expanding branches and becoming a digital bank, with the
focus on Santander Select and Pymes Advance
Net operating income increased 39%, driven by net interest income and fee income. Attributable profit, including the charges for
Citibank integration, rose 14%
* Changes in constant currency
Strategy
The strategy remained focused on growing business with customers,
paying particular attention to loyalty and profitability:
• Citibank’s incorporation, together with organic growth, have made
Santander Río the leading private bank in Argentina by business
market share (credits + deposits).
Activity
• Both loans and deposits rose 44%, about 14 p.p. and 20 p.p. of which,
respectively, came from the incorporation of Citibank's retail banking.
Of note was the growth in consumer credit and UVA mortgages.
• This helped us gain market share, to 10% in lending and over 11% in
deposits.
• We also continued to transform branches (276 transformed and two
digital offices).
Results
Attributable profit was 14% higher at €359 million and RoTE 32.0%.
• We launched auto finance and UVA mortgages indexed to inflation.
• The commercial strategy, together with higher volumes and efficient
• The number of Santander Río app users increased 53% to 875,000. New
functionalities were added including the capacity to make payments and
transfers without the need for prior registry in online banking.
Loyal customers rose 20% and digital ones 30%. Some 77% of Select
customers are loyal, of which 93% are digital.
All these efforts were recognised with several awards. The magazine
Global Finance awarded Santander Río as Best Digital Bank and
Foreign Trade in Argentina, Best Bank in Online Products and the Most
Innovative Digital Bank in Latin America, Euromoney and The Banker as
the Best Bank in Argentina in 2017. We were also fourth in the Great
Place to Work ranking.
management of spreads, led to a 44% rise in gross income, 58% in net
interest income and 43% in fee income.
• Operating expenses rose 49%, mainly due to Citibank’s
incorporation. Excluding it costs grew at a slower rate than revenues
despite the impact of the new salary agreement, expansion of the
branch network and investments in transformation and technology.
The cost to income ratio was 55.5%.
• Loan loss provisions rose in line with lending. Credit quality remained
high, with a NPL ratio of 2.50%, coverage of 100% and a cost of credit
of 1.85%.
ACTIVITY PERFORMANCE
% change 2017 / 2016 (excl. FX)
ATTRIBUTABLE PROFIT
Constant € million
Strategy in 2018
Maximise the profitability of business acquired from Citibank
Continue the transformation into a digital bank, improving
efficiency, loyalty and satisfaction
Grow in consumer credit, mortgages, financing lines and
foreign trade, as well as in businesses with the public sector
Increase customer funds significantly, especially mutual funds
and investment products
180
4. ECONOMIC AND FINANCIAL REVIEWBusiness information by geographic area2017 Annual Report URUGUAY*
2017 highlights
€103 M
Attributable profit
Santander is the country’s largest private sector bank, with a strategy focused on growing in retail banking and improving
efficiency and the quality of service
Lending rose in all target segments and products, mainly SMEs and consumer credit
Attributable profit increased 19%, driven by gross income that grew at almost double the rate of operating expenses
* Changes in constant currency
Strategy and Activity
The goal in 2017 was to enhance the quality of service and loyalty of
our customers by launching various products and services:
• We launched Verano Select Experience, a new way of relating to
customers, in the first quarter. This had a big impact on our Select
customers.
• Lending rose 2%, spurred by consumer credit and cards (+20%).
Loans in pesos increased 13% and those in foreign currencies fell
3%. Total deposits dropped 4% (local currency deposits rose 16%
and foreign currency ones dropped 7%), due to the outflow of
non-resident deposits and the strategy of improving profitability
of funds.
• As part of the digitalisation process, we launched the Buzonera
Inteligente, deposit terminals with immediate online deposit and
cheques with scanned image that already cover 80% of the Bank’s
network.
Results
Attributable profit was €103 million (+19%), driven by the stronger
growth (+13%) in gross income than in costs (+7%), which remained
stable in real terms.
• We also created the country’s first banking portal specialised in
mortgages and developed virtual assistance that tends to the first
line of all our digital channels. In finance companies, we launched the
second version of the app through which 36% of loans are already
requested.
• We continued to advance in the growth strategy for digital customers
whose number has already reached 176,000 (+42%). Digital
penetration stood at 49%, up from 36% in 2016.
The cost-to-income ratio improved to 48.5%, 2.9 p.p. better than in
2016.
Loan-loss provisions were up 22%. The NPL ratio was 2.84% and
coverage 130%, both at controlled levels and in accordance with the
greater focus on retail banking.
ACTIVITY PERFORMANCE
% change 2017 / 2016 (excl. FX)
ATTRIBUTABLE PROFIT
Constant € million
Strategy in 2018
Continue to grow in retail business
Become the leaders in the segments of individuals and
SMEs, as well as in consumer credit, means of payment and
transactional products
Increase customer loyalty as the source of revenue growth
Keep on improving the efficiency ratio, through the digital
transformation
181
2017 Annual Report PERU*
2017 highlights
€40 M
Attributable profit
Strategy focused on specialised financial services for global customers, corporates and large companies.
Attributable profit rose 7%, spurred by higher revenues and release of loan-loss provisions
* Changes in constant currency
Strategy
Activity centres on corporate banking and the country’s large
companies, as well as providing service for the Group’s global
customers and helping to develop public infrastructure.
Specialised business model, which gives precedence to a close relation
with customers and quality of service, while taking advantage of
operational and business synergies with other Group units.
increased 12%, strengthening the capturing of new customers in order
to diversify funding sources.
Results
Attributable profit was 7% higher at €40 million.
• Gross income grew 4%, thanks to a good performance of net interest
income and gains on financial transactions.
We continued to consolidate the auto finance company, which has a
specialised business model that facilitates buying various brands of
new vehicles via most of the dealerships.
• Operating expenses increased 5%. The efficiency ratio remained
stable at around 31%.
Activity
Loans fell 2% because of the slowdown in the economy and the sol’s
appreciation which affected the evolution of dollar balances. Deposits
• The very low NPL ratio (0.65%) released provisions and coverage was
still high.
ACTIVITY PERFORMANCE
% change 2017 / 2016 (excl. FX)
ATTRIBUTABLE PROFIT
Constant € million
Strategy in 2018
Keep on increasing loans to companies, expanding the offer
and distribution capacity and incorporating new customers
from the global relationship model and corporate banking
Promote advisory services in investment banking and public
infrastructure
Expand auto finance, widening the range of products,
distribution channels and funding sources
182
4. ECONOMIC AND FINANCIAL REVIEWBusiness information by geographic area2017 Annual Report COLOMBIA*
2017 highlights
€6 M
Attributable profit
Auto finance began in 2017 and a trust company (S3 Colombia) will be set up to provide custody services
Attributable profit was €6 million compared to a loss in 2016
* Changes in constant currency
Strategy
Grupo Santander in Colombia focuses on Global Corporate Banking,
Large Companies and Companies. It combines local and global reach
and is continuously providing more services and products for these
customers. The Group concentrates on developing treasury solutions,
risk coverage, basic financing, project finance, M&A, deposits, accounts
and confirming, among others.
The Bank launched auto finance in 2017 with a specialised and
comprehensive business model, providing service to the brand, the
importer, the distributor and the final client.
In order to complete the range of services, the Colombian regulator
authorised the establishment of a trust company (S3 Colombia) that
will provide custody service and is pending the required authorisations.
Activity
Loans stood at €582 million, 2% more than in 2016, and deposits €255
million (+42%).
Results
We continued to develop the Group's capacities and began to generate
a profit, which was achieved in a particularly difficult environment for
the financial industry because of the impact of bad loans and the fall in
domestic demand.
Attributable profit amounted to €6 million compared to a loss in the
previous years, mainly due to gross income, which rose 36% to €26
million and a 97% drop in loan-loss provisions.
ACTIVITY PERFORMANCE
% change 2017 / 2016 (excl. FX)
ATTRIBUTABLE PROFIT
Constant € million
Strategy in 2018
Make Banco Santander the reference for large customers,
creating capacities in Treasury and in Global Transactional
Banking
Consolidate Banco Santander in auto finance, reaching a
critical mass
Launch S3 Colombia in the second quarter after receiving the
authorisations
183
2017 Annual Report UNITED STATES (Excl. POPULAR)
(€ million)
Income statement
2017
2016
Change
amount
%
% excl. FX
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
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
(*) In 2017, tax reform, provisions for hurricanes, increased stake and other. In 2016, restatement of Santander Consumer USA.
5,569
971
9
410
6,959
(3,198)
(2,875)
(1,664)
(1,211)
(324)
3,761
(2,780)
(90)
892
(256)
636
—
636
228
408
(76)
332
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
(32)
363
(348)
(131)
(13)
(82)
(573)
0
8
(28)
36
(8)
(573)
428
0
(144)
99
(45)
—
(45)
(58)
13
(43)
(30)
(13,426)
(3,670)
(4,097)
(3,663)
(197)
(1,611)
(23,002)
(13,270)
(6,380)
(164)
(404)
(1,333)
(21,551)
(1,450)
(2,395)
(1,580)
—
(815)
(4.1)
(10.2)
(57.2)
(15.0)
(5.8)
1.9
1.6
3.7
(1.0)
4.4
(11.6)
(11.7)
1.5
(12.3)
(26.5)
(4.9)
—
(4.9)
(18.7)
5.2
138.1
(6.7)
(4.1)
(10.8)
(12.2)
(13.2)
7.5
0.2
(5.3)
(9.6)
(18.8)
13.1
(2.0)
(18.0)
(6.5)
3.9
(0.7)
(4.3)
—
3.3
(4.3)
(9.0)
(5.9)
(11.9)
(58.0)
(16.6)
(7.6)
(0.0)
(0.3)
1.7
(2.9)
2.4
(13.2)
(13.4)
(0.4)
(13.9)
(27.9)
(6.6)
—
(6.6)
(20.3)
3.2
133.6
(8.4)
(15.7)
(21.6)
(22.8)
(23.7)
(5.5)
(11.9)
(16.7)
(20.6)
(28.7)
(0.6)
(13.9)
(27.9)
(17.8)
(8.7)
(12.7)
(15.9)
—
(9.2)
(15.9)
(20.0)
0.3
(11.1)
71,963
13,300
13,843
11,775
3,368
11,914
114,388
51,189
15,884
26,176
2,503
3,437
99,189
15,199
16,432
8,367
—
8,065
85,389
16,970
17,940
15,437
3,566
13,526
137,390
64,460
22,264
26,340
2,907
4,770
120,740
16,650
18,827
9,947
—
8,880
75,389
59,329
89,638
74,166
(14,249)
(14,837)
3.12
46.0
2.79
170.2
17,560
683
3.11
42.5
2.28
214.4
17,509
768
0.01
3.5
0.51
(44.2)
51
(85)
Balance sheet
Customer loans
Cash, central banks and credit institutions
Debt securities
o/w: available for sale
Other financial assets
Other assets
Total assets
Customer deposits
Central banks and credit institutions
Debt securities issued
Other financial liabilities
Other liabilities
Total liabilities
Total equity
Other managed and marketed customer funds
Mutual funds
Pension funds
Managed portfolios
Pro memoria:
Loans excluding repos
Funds (customer deposits excluding repos + mutual funds)
Ratios (%) and operating means
Underlying RoTE
Efficiency ratio (with amortisations)
NPL ratio
NPL coverage
Number of employees
Number of branches
184
4. ECONOMIC AND FINANCIAL REVIEWBusiness information by geographic area2017 Annual Report UNITED STATES*
2017 highlights
€332 M
Attributable profit
Santander Holding USA passed the Federal Reserve’s capital stress test and terminated its 2014 Written Agreement, enabling the
Bank to operate within a normal capital cycle
Santander Bank N.A.’s underlying profit increased significantly to €275 million, (+49%), underpinned by a 53 b.p. increase in its
net interest margin during the year
Santander Consumer USA maintained its high RoTE (13%) despite the shift in the mix of assets temporarily affecting results
Attributable profit in the United States declined 7%. Excluding impacts from non-recurring items in both years, underlying
attributable profit rose 5%
* Excl. Popular and changes in constant currency
Strategy
Santander US includes Santander Holdings USA (the intermediate
holding company – IHC) and its subsidiaries: Santander Bank, which
is one of the largest banks in the northeast of the country, Santander
Consumer USA, an auto finance business, the private banking unit in
Miami, the broker dealer in New York and the retail bank in Puerto
Rico.
2017 was an important year for Santander US from a regulatory
point of view. SHUSA passed the Federal Reserve’s stress tests, and
there were no objections to the bank’s capital plan. This will allow the
Bank to concentrate on improving profitability, reducing costs and
optimising the country’s capital structure. Accordingly, SHUSA paid
its first dividend to the Group in 6 years.
At the country level, work is being done to better leverage the
synergies between the different subsidiaries and structure the group
more efficiently. It is an ongoing process which will permit Santander
US to focus on improving its technological and financial capacities as
well as its commercial offering.
Santander Bank continues to focus on improving profitability. Its
NIM is now 2.7%, in line with foreign-owned peers in the United
States. It has undertaken numerous initiatives to expand its digital
footprint, improve customer experience, and earn customer loyalty.
The impact of these initiatives was reflected in the 8% increase in
loyal customers and the 5% increase in digital ones.
In Santander Consumer USA a new management team was put
in place in the third quarter, paving the way for strengthened
performance. SC USA’s strategy is centred on the optimisation of the
mix of assets retained on the balance sheet, improving funding costs,
maximising the value of the Fiat Chrysler agreement and improving
dealer experience. Santander Consumer USA continued to focus
on growth in its core segment, i.e. non-prime, as well as increasing
market share in the prime segment.
LOYAL CUSTOMERS*
DIGITAL CUSTOMERS*
Thousands
Thousands
ACTIVITY PERFORMANCE
% change 2017 / 2016 (excl. FX)
ATTRIBUTABLE PROFIT
Constant € million
(*) Santander Bank
185
2017 Annual Report NPL RATIO
%
COVERAGE RATIO
COST OF CREDIT
UNDERLYING RoTE
%
%
%
Activity
Total lending decreased in the year. Compared to 2016, credit
declined 4% due to the sale of a portfolio in Santander Consumer
USA and to fewer originations in Santander Bank, together with a
reduction in GCB balances as part of a disciplined pricing initiative
aimed at improving profitability.
Customer funds fell 9% due to the run-off of government and GCB
balances, resulting in an increased weight of core deposits in the
banks funding structure. Additionally, wholesale funding balances
decreased around 10% mainly due to lower funding needs from FHLB
(Federal Home Loan Banks).
Results
Attributable profit was €322 million, 7% less than in 2016. Excluding
impacts from non-recurring items from both years (related to
hurricanes, increased stake in SC USA and the tax reform in 2017;
and due to SC USA's restatement in 2016), underlying attributable
profit increased 5%, benefiting from the reduced weight of minority
interests.
Gross income also decreased, mainly due to lower interest income
at Santander Consumer USA, affected by the change in business
mix towards a lower risk profile and higher funding costs, partially
mitigated by lower provisions. On the other hand, Santander Bank's
gross income rose, benefitting from the increase in official interest
rates and lower funding costs following balance sheet optimisation.
Costs increased due to investments at Santander Consumer USA and
the Holding, while those at Santander Bank remained flat.
Provisions fell 12%, thanks to the change in the portfolio mix and the
reduced volumes at Santander Consumer USA.
Santander Consumer USA maintained its high RoTE (13%) while
Santander Bank’s improved one percentage point over the year.
Strategy in 2018
Continue making progress in addressing Santander US’ regulatory issues
Improve customer experience and loyalty with special emphasis on products and global connectivity
Continue the cost reduction initiatives, shared services integration and synergy realisation in order to improve efficiency and drive
profitability
In Santander Bank, continue with the balance sheet optimisation while growing volumes and improving margins
In SC USA, maintain leading position in auto finance, ensuring an adequate risk-return profile in the non-prime segment and
increasing prime originations via the Fiat Chrysler agreement
186
4. ECONOMIC AND FINANCIAL REVIEWBusiness information by geographic area2017 Annual Report CORPORATE CENTRE
(€ million)
Income statement
2017
2016
Change
amount
%
15.1
Net interest income
21.3
Net fee income
(6.6)
Gains (losses) on financial transactions
99.5
Other operating income
14.5
Gross income
5.8
Operating expenses
11.9
Net operating income
—
Net loan-loss provisions
142.8
Other income
21.0
Underlying profit before taxes
(77.1)
Tax on profit
30.5
Underlying profit from continuing operations
(100.0)
Net profit from discontinued operations
30.6
Underlying consolidated profit
(86.0)
Minority interests
31.3
Underlying attributable profit to the Group
134.9
Net capital gains and provisions*
43.1
Attributable profit to the Group
(*) In 2017, charge for equity stakes an intangible assets, capital gains from the disposal of the stake in Allfunds Bank and goodwill charges. In 2016, restructuring costs.
(851)
(38)
(227)
(104)
(1,220)
(476)
(1,696)
(45)
(181)
(1,923)
32
(1,890)
—
(1,890)
(1)
(1,889)
(436)
(2,326)
(739)
(31)
(243)
(52)
(1,066)
(450)
(1,516)
2
(75)
(1,589)
141
(1,448)
0
(1,448)
(9)
(1,439)
(186)
(1,625)
(111)
(7)
16
(52)
(154)
(26)
(180)
(47)
(107)
(334)
(109)
(442)
(0)
(443)
7
(450)
(251)
(701)
Balance sheet
Debt securities
Goodwill
Capital assigned to Group areas
Other financial assets
Other assets
Total assets
Debt securities issued
Other financial liabilities
Other liabilities
Total liabilities
Total equity
Other managed and marketed customer funds
Mutual funds
Pension funds
Managed portfolios
Resources
Number of employees
1,768
25,769
83,045
7,841
14,929
133,353
35,030
3,381
8,092
46,502
86,850
2
2
0
—
1,374
26,724
78,537
9,872
15,648
132,154
30,922
4,042
12,422
47,387
84,768
—
—
—
—
394
(955)
4,509
(2,031)
(719)
1,198
4,108
(661)
(4,331)
(884)
2,083
2
2
0
—
28.7
(3.6)
5.7
(20.6)
(4.6)
0.9
13.3
(16.4)
(34.9)
(1.9)
2.5
—
—
—
—
1,784
1,724
60
3.5
187
2017 Annual Report CORPORATE CENTRE
2017 highlights
-€2,326 M
Attributable profit*
The purpose of the Corporate Centre is to provide support and control, contributing value-added to the operating units. It also
develops functions inherent in a holding related to financial and capital management
Revenues negatively affected by costs associated with exchange rate hedging, which had a positive impact on the business areas, as
well as the higher volume of issues made. Recovery of taxes was also lower
In addition, a negative impact of €436 million from the net of non-recurring results mainly related with amortisation of goodwill in
SC USA and the capital gain from the sale of Allfunds
* Before net capital gains and provisions: -€1,889 M
Strategy and functions
Banco Santander’s Corporate Centre has support and control units
that carry out functions for the Group in matters of risk, financial
management, audit, technology, human resources, legal affairs,
communication and marketing, among others.
Brazil, UK, Chile, Mexico and Poland) with different instruments (spot,
forex swaps and forwards).
• Total management of capital and reserves:
– The capital assigned to each unit and its consolidated management is
It contributes value to the Group in various ways:
carried out at the Corporate Centre.
• It makes the Group’s governance more solid, through frameworks of
control and global supervision, and taking strategic decisions.
Results
Loss of €2,326 million, of which €436 million was non-recurring.
• 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 one of the most efficient banks.
In year-on-year terms:
• Revenue was impacted by the costs stemming from the centralised
management of the exchange rate risk and liquidity management.
• By sharing the best commercial practices, launching global commercial
initiatives and driving digitalisation, the Corporate Centre contributes
to the Group’s revenue growth.
• Operating expenses increased 6% in part due to the roll-out of global
projects.
• It also develops functions related to financial management and capital,
• Other results and provisions recorded losses of €181 million, up
from €75 million in 2016. This item includes provisions at the Group
level. The most notable ones in 2017 were for intangible assets (-€50
million), the cost of the government's guarantee on DTAs, as well as
other provisions of a varied nature (pensions, litigation, supervisors,
etc.) and equity stakes.
These items include very different kinds of provisions, as well as capital
gains, capital losses and impairment of financial assets.
• The underlying loss in 2017 was €1,889 million compared to €1,439
million also negative in 2016. After including the impact of the net
non-recurring positive and negative results of €436 million, the total
loss was €2,326 million, up from €1,625 million in 2016.
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 of the 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 Group units 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.
– Strategic management of the exposure to exchange rates on equity
and dynamic on the countervalue of the units’ results, according to
the forecast of exchange rates evolution in the coming months. Net
investments in equity are currently covered by €20,787 million (mainly
188
4. ECONOMIC AND FINANCIAL REVIEWInformation by global business2017 Annual Report
RETAIL BANKING*
2017 highlights
€7,463 M
Attributable profit
Continued transformation of our commercial model toward one that is increasingly Simple, Personal and Fair
Focus on three priorities: customer loyalty and satisfaction, digital transformation and operational excellence
The Group had 17.3 million loyal customers at the end of 2017 and 25.4 million digital customers
The Banker chose Santander as Global Bank of the Year and Euromoney as the Best Bank in the World for SMEs for the second
year running. We were also recognised as the Best Bank in Latin America in five of the countries where we operate
* Changes in constant currency
Strategy
Santander has a clear and consistent strategy of commercial
transformation. The three main elements are:
3. Keep on enhancing customer satisfaction and experience, improving
operational excellence with new processes that are simpler, more
efficient and omnichannel.
1. Improve customer loyalty and satisfaction.
Of note were the following actions:
2. Promote the digital transformation of channels, products and
services.
1. In loyalty, the 1l2l3 strategy continues to be anchored in most
countries and at the end of 2017 there were 13% more loyal
customers than in 2016.
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
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
Pro memoria:
Loans excluding repos
Funds (customer deposits excluding repos + mutual funds)
2017
31,701
9,718
706
631
42,755
(19,374)
23,381
(8,174)
(2,387)
12,820
(3,914)
8,906
—
8,906
1,282
7,624
(161)
7,463
681,191
739,935
Change
amount
%
% excl. FX
2016
29,343
8,804
700
553
39,400
(18,509)
20,890
(8,695)
(1,687)
10,509
(2,887)
7,622
—
7,622
1,103
6,519
(173)
6,346
2,358
914
6
78
3,355
(864)
2,491
521
(700)
2,312
(1,027)
1,284
—
1,284
179
1,105
12
1,117
692,026
728,347
(10,836)
11,589
8.0
10.4
0.8
14.0
8.5
4.7
11.9
(6.0)
41.5
22.0
35.6
16.9
—
16.9
16.2
17.0
(6.8)
17.6
(1.6)
1.6
7.9
9.8
3.4
17.1
8.4
4.9
11.5
(7.2)
39.8
22.7
36.5
17.5
—
17.5
15.9
17.8
(5.0)
18.4
3.1
6.5
(*) In 2017, integration costs and USA tax reform. In 2016, capital gains from the disposal of the stake in VISA Europe, restructuring costs, PPI in the UK and restatement of Santander
Consumer USA
189
2017 Annual Report LOYAL CUSTOMERS
Thousands
LOYAL RETAIL CUSTOMERS
LOYAL SME & CORPORATE
DIGITAL CUSTOMERS
Thousands
CUSTOMERS. Thousands
Thousands
• Of note was the 1|2|3 Smart in Spain aimed at millenials (18-31 year
olds) with tailored financing products, and the 100% digital and no-
fee Zero account, which already has more than 3 million customers;
Santander Plus in Mexico with more than three million customers,
52% of them new; Mundo 1|2|3 in Portugal that contributed to the
growth in loyal (+8%) and digital (+11%) customers.
2. In digital strategy the number of digital customers was 21% higher.
Of note:
• The launch of Openbank, Spain’s first fully digital bank, with
one of the sector’s most complete, flexible and agile platforms;
SuperDigital in Brazil, independent payment platform for the
youngest customers and which widens the possibilities to promote
bank use; SúperDigital in Mexico, where our customers open an
account via any device connected to internet, and the launch in
Chile of the country’s first 100% digital onboarding.
• In mobile payments, we launched Súper Wallet in Mexico, an
app that gives customers centralised management of all their
cards, while in Spain we were consolidated as the leaders with
a market share of around 60%.
• Santander continued to set itself apart with the launch of
innovative products tailored to customers’ needs. For example,
Select Me in Mexico, which seeks to support women in their day-
to-day tasks and in their professional life, or the development
of value-added services and programmes that contribute to the
growth of SMEs, such as the new business model ROF PyME also
in Mexico.
• We remain committed to the long-term growth of SMEs. Our
strategy in this segment is to maintain a global initiative that we
adapt in each market to local features. This produced an increase
in the satisfaction levels of our customers as well as recognition in
specialised international publications.
• We are registering solid growth in the cards segment, notably
in Spain, where we made record sales of 1.4 million cards and
increased turnover by 50%. In Brazil, credit card turnover rose 23%,
gaining market share.
The marketing of the cards of various loyalty programmes with
airlines continued to be well received (American Airlines with
AAdvantage card in Brazil, where activation of cards continued to
be significant), Santander Aeroméxico in Mexico y WorldMember
Limited in Chile).
190
4. ECONOMIC AND FINANCIAL REVIEWInformation by global business2017 Annual Report • In the US, the Apple Pay card was launched for retail customers
and Treasury Link, a cash management platform for commercial
customers.
Santander InnoVentures incorporated to its portfolio three new
financial technology companies, the UK firms Pixoneye and
Curve and the US Gridspace, widening its focus toward artificial
intelligence as a technology that will transform banking in the
coming years. We also invested in the Mexican company ePesos to
promote financial inclusion.
Results
Profit was 18% higher at €7,463 million.
Results were driven by met interest income (+8%), the good
performance of fee income (+10%) in almost all units, contained costs
and lower provisions.
ACTIVITY PERFORMANCE
% change 2017 / 2016 (excl. FX)
ATTRIBUTABLE PROFIT
Constant € million
• Other digital initiatives were the launch of Digilosofia,
Santander's digital philosophy in Spain and improvements in
our channels. In Brazil we launched Consignado (100% digital),
contracted by mobile, Web Casas, a digital platform for real
estate loans and Santander Pass, a bracelet with NFC (near field
communication) a contactless payment system. In Poland, the
As I Want it Account enables customers to decide what they
need and how to pay for the products and services offered.
3. In operational excellence, we are working with new processes that
are simpler, more efficient and multichannel. Of note:
• In Mexico, Dinero Creciente was re-launched with simpler processes
and competitive rates.
• In Brazil, we enlarged our team of business managers for SMEs,
while promoting packets of products with personalised conditions.
In order to incentivise real estate business, interest rates were
lowered which led to growth of 88% in new mortgages to
individuals and in the agribusiness segment 12 shops were opened
(market share of 8.6%).
• In Chile, more WorkCafé branches, an innovative model, were
opened, with co-working areas, a coffee shop and financial services.
The number of these branches was stepped up, rising from seven to
20 throughout the country.
• In the UK, new digital processes were launched. Some 47% of
mortgages were retained online, 38% of current account openings
and 51% of credit cards were via digital channels.
Strategy in 2018
Consolidate our culture of service: Simple, Personal and Fair
Advance in our differential value offering that gives us the global presence to improve customer satisfaction
Continue to foster the commercial transformation in order to make available to customers products, services and simpler
solutions that make us stand out for operational excellence
Keep on progressing in our digital transformation in order to become the best open platform for digital financial services
191
2017 Annual Report SANTANDER GLOBAL CORPORATE BANKING* (GCB)
2017 highlights
€1,821 M
Attributable profit
Improved quality of customer revenues (+2%), driven by value-added businesses and higher fee income that offset lower use of
the balance sheet
Better positioning in value-added businesses, particularly in debt and capital issues and regional transaction services via Cash
Nexus. Drive in low capital consumption businesses such as export finance, agent finance and trade finance
Continued improvement in services to retail network customers through digitalisation and tailored products
Attributable profit up 1% and accounting for 20% of the operating areas
* Changes in constant currency
Strategy
The main activities were:
• Priority in efficient use of capital by rigorously assigning it to various
businesses and greater speed in rotating the balance sheet. A private
debt mobilisation team was also created to improve origination
and distribution capacities, offering value-added and low capital
consumption solutions to our customers.
• Leadership consolidated in Latin America, Spain and Portugal in
debt and capital markets, project finance and financing via export
credit agencies (ECAs). Significant growth in the M&A area in most
countries, with particular focus on the Asia-Latin America corridor.
• Two new global transaction banking products developed: confirming
based on purchase orders and the global receivables purchase
programme. Both solutions enable customers to optimise use of
working capital.
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
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
Pro memoria:
Loans excluding repos
Funds (customer deposits excluding repos + mutual funds)
(*) In 2016, restructuring costs.
192
2017
2,478
1,627
1,224
224
5,552
(1,988)
3,564
(690)
(70)
2,804
(802)
2,002
—
2,002
181
1,821
—
1,821
87,015
75,642
2016
2,528
1,407
1,256
289
5,480
(1,917)
3,563
(658)
(76)
2,829
(788)
2,042
—
2,042
174
1,868
(58)
1,809
Change
amount
%
% excl. FX
(50)
221
(33)
(66)
72
(71)
1
(32)
6
(25)
(15)
(40)
—
(40)
7
(47)
58
12
(2.0)
15.7
(2.6)
(22.7)
1.3
3.7
0.0
4.9
(7.5)
(0.9)
1.9
(2.0)
—
(2.0)
3.8
(2.5)
(100.0)
0.7
(2.5)
15.9
(1.9)
(23.9)
1.2
4.8
(0.7)
0.8
(7.3)
(0.9)
2.3
(2.1)
—
(2.1)
0.9
(2.4)
(100.0)
0.8
97,591
66,453
(10,576)
9,189
(10.8)
13.8
(5.4)
19.9
4. ECONOMIC AND FINANCIAL REVIEWInformation by global business2017 Annual Report • Strengthened integration with retail banking networks and offer of
value-added products to customers.
• We maintained the best efficiency levels among Banks, thanks to our
customer-focused business model that combines global and local
reach in risk management, capital and liquidity.
Activity
• Cash Management: double-digit growth with very good results, both
in transactional business as well as in funds. Nexus was consolidated
in 2017 as a solid and robust solution for our customers’ regional
business, in order to obtain significant mandates via Santander
Cash Nexus, which doubled the number of transactions and active
customers, both those managed by SGCB as well as by commercial
banking.
• Export Finance & Agency Finance: Santander consolidated its
leadership position as one of the world’s best banks by volume of
managed assets. In 2017 we worked in new organisations in non-core
markets where this business has a high potential.
• Trade & Working Capital Solutions: strong growth, especially in
confirming products and receivables, where we made significant
improvements in the offer which enabled business in structured
receivables to be doubled.
• Of note in Corporate Finance was the participation of Equity
Capital Markets in Unicredit’s capital increase and in the IPO of BR
Distribuçoes. In M&A, the sole advisory role in China Merchants
to acquire the terminal of Conteiner Paranaguá in Brazil and the
advisory services for the Australian fund First State’s acquisition of
Ancora Wind Portfolio in Portugal.
• In Debt Capital Markets, Santander held its leadership position in
Latin America. We were again the bank that conducted the most
operations in the region, leading placements of sovereign bonds,
such as that of the Argentine Republic, as well as Brazilian, Chilean,
Argentinian and Mexican corporate issuances. Also of note was
the solid position in Europe and the US, leading issuances in the
three main currencies for companies such as Coca Cola, BASF, VW,
Iberdrola, Enel, Unilever and Nestlé, among others. And also for
banks such as Wells Fargo and Barclays.
• Syndicated corporate loans: major role in the main operations related
to M&A, including Gerdau, Chemchina / Syngenta, Reckitt Benckiser,
Fresenius and Vidrala.
• In Structured Financing: we are leaders in Latin America, Spain
and the UK. Of note was the financing of the M6 (the largest M&A
transaction on infrastructure assets in the UK), the placement
of one of the largest project bonds in Europe to finance the
Pedemontana-Veneta motorway, financing the largest renewable
energy park in 2017 in the US (Mount Signal III, owned by Capital
Dynamics) and the financing of Latin America’s biggest wind farm,
developed by Zuma Energía in Mexico.
RANKING IN 2017
Source
Euromoney
Latin Finance
Global Finance
Area
SGCB
SGCB
Award / Ranking
Best Investment Bank in Mexico and Chile
Best Infrastructure Bank 2017 in Mexico and Brazil
Global Debt Financing
Best Debt Bank Latam
Infrastructure Investor
Global Debt Financing
Latin America Bank of the year
Euromoney
Global Markets
Best Liquidity Provider Euro Covered Bond
MTN-I
Risk Magazine
Market Axess
Institutional Investor
Institutional Investor
Institutional Investor
Global Markets
Global Markets
Global Markets
Global Markets
Global Markets
Global Markets
2017 mtn-i Award in the Power Performer category for Senior Non-
Preferred Debt Leadership
#2 Risk Solutions House of the Year
#1 E-Flows FRN European Corporate Bonds
#1 Corporate Access (Research) in Mexico
#1 Latin America Research Team- sector winners: Equity Strategy, Electric
Utilitites, Transportation
#1 Equity Research in Iberian markets
TFR
Global Transaction Banking
Best Trade Bank in Latin America
Global Capital
Global Capital
Corporate Finance
Corporate Finance
Latin Finance
Corporate Finance
Best Equity Capital Raising by a Listed Company: Banco Popular's € 2.5bn
rights issue | 2016
ECM Deal of the Year in Iberia: Banco Popular's € 2.5bn rights issue | 2016
Cross-Border M&A Deal of the Year: State Power Investment Corp/Pacific
Hydro | 2016
193
2017 Annual Report • Good results in Markets activity thanks to the evolution of sales
business and the larger contribution of management of books.
Significant growth in Spain and the UK. Also strong growth in
equities’ brokerage, particularly in Spain and Portugal, Mexico and
the US.
Results
Attributable profit of €1,821 million (+1%), driven by the strength
and diversification of customer revenues. Gross income and
attributable profit accounted for 11% and 20%, respectively, of the
Group’s operating areas.
Gross income increased from Corporate Finance, Global Markets
and Global Transaction Banking, spurred by fee income and gains
on financial transactions, mainly, and with a good performance in
the UK, Continental Europe and Mexico. The positive evolution
of markets more than offset the loss of DVA from contracting the
Group’s risk cost.
Operating expenses rose a little and provisions declined,
particularly in Brazil and Spain.
GROSS INCOME BREAKDOWN
(Constant € million)
ATTRIBUTABLE PROFIT
(Constant € million)
(1) Global Transaction Banking: includes the business of cash management. trade finance. basic
financing and custody.
(2) 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). as well as asset based finance.
(3) 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 2018
Capture international business flows between the countries where the Group operates, expanding the offer of high value-added
products and increasing the penetration in the business of our customer franchise
Re-launch the UK and US franchises’ business to accelerate their growth
Continue to develop and integrate the factory of SGCB products for customers of the commercial banking network
Maintain the low capital consumption business model, with a disciplined rotation of the balance sheet
Transform the technological and risk infrastructure in a simplified, scalable and digital platform
194
4. ECONOMIC AND FINANCIAL REVIEWInformation by global business2017 Annual Report 195
2017 Annual Report 5
RISK
MANAGEMENT
REPORT
198 Executive summary
200 A. Risk management
and control model
201 A1. Risk map
201 A2. Risk governance
203 A3. Risk culture - Risk Pro
204 A4. Management processes and
tools
211 B. Background and
upcoming challenges
213 C. Risk Profile
213 C1. Credit risk
243 C2. Trading market risk, structural
risk and liquidity risk
264 C3. Operational risk
274 C4. Compliance and conduct risk
285 C5. Model risk
287 C6. Strategic risk
288 C7. Capital risk
EXECUTIVE SUMMARY
Risk management and control model principles
pages 200 to 210
Advanced, comprehensive management of all risks, with a
forward-looking approach.
Lines of defence that enable risk to be managed at source,
controlled and monitored, in addition to an independent
assessment.
A model based on autonomous subsidiaries with robust
governance that separates the risk management and
control functions.
Appropriate information management and technological
infrastructure.
Risk culture embedded in the entire Organisation.
Risks managed by the units that generate them.
These principles, combined with a series of relevant interrelated tools and processes in the planning of the Group
strategy, make for a robust control framework.
Consolidation of improvement in credit risk profile
pages 213 to 242
CUSTOMER CREDIT RISK BY COUNTRY
NPL RATIO
COST OF CREDIT1
Other
21%
US
9%
Chile
5%
Portugal
4%
Spain
21%
Brazil
10%
UK
30%
%
%
Excl. Popular
Incl. Popular
Excl. Popular
Incl. Popular
5.37
3.55
3.93
2016
1.19
1.17
4.08
3.38
2017
1.18
2016
1.12
1.07
2017
1. Cost of credit = loan-loss provisions
twelve months / average lending.
Over 80% of risk relates to retail banking. Adequate
geographic and sector diversification.
Consolidation of the improvement trend in the Group's
main credit quality indicators, which in December 2017
stood at (excl. Popular):
NPL ratio fell to 3.38%, decrease of 55 bp compared to
year-end 2016, with noteworthy reductions in Portugal,
Spain, Poland and Brazil.
Provisions fell to EUR 8,997 million in December, down
5.5% compared to the same period of the previous year,
mainly due to SCUSA, SCF and Spain.
Cost of credit decreased to 1.12% (-6 bp), in line with
the credit profile improvement.
The coverage ratio remains at approximately 71%.
Trading market risk, liquidity risk and structural risks
pages 243 to 263
Trading market risk
VAR 2015-2017 (EXCL. POPULAR)
Our core business is client
facilitation driven (market
making, sales/fees), along
with an active management
and geographically diversified
model.
An appropriate balance sheet
structure reduces the impact of
interest rates changes on net
interest income and equity.
Core capital ratio coverage
at approximately 100% for
exchange rate movements.
Million euros. VaR at a 99% confidence interval over a one day horizon
65
60
55
50
45
40
35
30
25
20
15
10
5
— VaR
— 15 day moving average
— VaR, 3 year average
MAX (63.2)
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
n
u
J
5
1
0
2
g
u
A
5
1
0
2
t
c
O
5
1
0
2
c
e
D
6
1
0
2
b
e
F
6
1
0
2
r
p
A
6
1
0
2
n
u
J
6
1
0
2
g
u
A
6
1
0
2
t
c
O
6
1
0
2
c
e
D
7
1
0
2
b
e
F
7
1
0
2
r
p
A
7
1
0
2
n
u
J
7
1
0
2
g
u
A
7
1
0
2
t
c
O
7
1
0
2
c
e
D
MIN (9.7)
2017 Annual Report5. RISK MANAGEMENT REPORTExecutive summary198
SHORT-TERM LIQUIDITY COVERAGE RATIO (LCR)
Liquidity risk
146%
146%
133%
120%
Santander has a comfortable liquidity position,
based on its commercial strength and autonomous
subsidiaries model, with a strong weighting of
customer deposits and robust liquid asset buffers.
The long term ratio (NSFR) maintained comfortable
levels above 100% and the short term ratio (LCR)
stood at 133%, complying with the regulatory
requirement of 80%.
Short and long-term liquidity metrics, and those
related to encumbered assets and stress scenarios
are within the risk appetite levels established for
each of the Group’s units.
2014
2015
2016
2017
Non-financial risks
pages 264 to 284
Operational risk
Compliance and conduct risk
Completion of the operational risk advanced measurement
transformation project.
Cyber risk strategy reinforcement, with the improvement
of the anticipation, defence and awareness capacities.
Development of control and critical risk methodologies to
prioritise their management.
Sustainability and climate change initiatives
implementation to respond to the growing interest of
investors, customers and shareholders.
Supervisor pressure increase regarding customer
protection and customer complaints management.
Challenges derived from new relevant regulations:
MiFID II, GDPR, PSD II, 4th AML Directive.
Capital Risk
REGULATORY CAPITAL (PHASE IN)
%
14.99%
Total Capital ratio
T2
2.22%
T1
0.51%
12.155%
Total Capital ratio
RWA*
BY RISK TYPE
Operational
10%
Market
4%
CET1
12.26%
(FL 10.84%)
2.00%
1.50%
0.03%
0.75%
T2
AT1
CCy B3
G-SIB1
1.875%
CCoB2
CET1
8.655%
Credit
86%
1.50%
4.50%
Pilar ll
requirement
Pilar l minimum
* Risk weighted assets
Regulatory
ratios Dec 17
(transitional)
Regulatory
requirement
2018 CET1
1. Global Systemically Important Banks buffer.
2. Conservation Capital Buffer.
3. Countercyclical Capital Buffer. Calculated with December 2017 data
and required from 1 January 2018.
pages 288 to 290
ECONOMIC CAPITAL
(EXCL. POPULAR)
Billion euros
Surplus
26.9
99.1
72.1
Available
capital
Self capital
requirements
In terms of capital risk, the Group holds a comfortable solvency
position, both in terms of regulatory and economic capital.
The breakdown of capital requirements by risk type is
unchanged compared to the previous year.
2017 Annual Report199 5. RISK MANAGEMENT REPORT
Risk management and control model
EXECUTIVE SUMMARY
A. RISK MANAGEMENT AND CONTROL MODEL
1. Risk map
2. Risk governance
3. Risk culture - Risk Pro
4. Management processes and tools
B. BACKGROUND AND UPCOMING CHALLENGES
C. RISK PROFILE
A. Risk management
and control model
Since its foundation in 1857, Banco Santander has had among its
priorities the development of a forward-looking risk management
strategy, through a sound control environment. This has enabled the
Group to deal appropriately with changes in the economic, social and
regulatory context in which it operates, contributing to the progress of
people and businesses.
2. Lines of defence that enable risk to be managed at source,
controlled and monitored, in addition to an independent
assessment.
3. A model predicated on autonomous subsidiaries with robust
governance based on a clear committee structure that separates
the risk management and control functions.
Risk management is therefore one of the key functions in ensuring that
Santander remains a robust, safe and sustainable bank, that guarantees
a management aligned with the interests of its employees, customers,
shareholders and society.
4. Information and technological management processes that
allow all risks to be identified, developed, managed and reported at
appropriate levels.
The risk management and control model deployed by the Santander
Group is based on the principles set down below, which are aligned
with the Group’s strategy and take into account, the regulatory and
supervisory requirements, as well as the best market practices:
5. A risk culture integrated throughout the Organisation,
composed by a series of attitudes, values, skills and action guidelines
to deal with all risks.
1. An advanced and comprehensive risk management policy, with
a forward-looking approach that allows the Group to maintain
a medium-low risk profile, through a risk appetite defined by
Santander’s board of directors and the identification and assessment
of all risks.
6. All risks are managed by the units that generate them.
These principles, combined with a series of relevant interrelated tools
and processes in the Group's strategy planning (risk appetite, risk
identification and assessment, analysis of scenarios, risk reporting
framework, budgetary processes, etc.) make up a key control
framework when developing the risk profile control.
200
2017 Annual Report
A.1. Risk map
The Santander Group has established the following first level risks in
its general risk framework:
Credit risk: risk of financial loss arising from the default or credit
quality deterioration of a customer or other third party, to which the
Santander Group has either directly provided credit or for which it
has assumed a contractual obligation.
Market risk: risk incurred as a result of changes in market factors
that affect the value of positions in the trading book.
Liquidity risk: risk that the Group does not have the liquid financial
resources to meet its obligations when they fall due, or can only
obtain them at high cost.
Structural risk: risk arising from the management of different
balance sheet items, not only in the banking book but also in
relation to insurance and pension activities.
Capital risk: risk of Santander Group not having an adequate
amount or quality of capital to meet its internal business objectives,
regulatory requirements or market expectations.
All identified risks should be referenced to the basic risk categories
mentioned above, in order to organise their management, control and
related information.
A.2. Risk governance
For the proper development of the risk function, the Group has
a strong governance policy, which is in place to ensure that the
risk decisions taken are appropriate and efficient and that they are
effectively controlled within the established risk appetite framework.
The Group Chief Risk Officer (GCRO) oversees this function within
the Group, advises and challenges the executive line and also reports
independently to the Risk Supervision, Regulation and Compliance
Committee and to the board.
A.2.1. Lines of defence
Banco Santander’s management and control model is based on three
lines of defence.
The business functions and all support functions that generate
exposure to a risk make up the first line of defence. The role of
these functions is to establish a management structure for the risks
Operational risk: defined as the risk of loss resulting from
inadequate or failed internal processes, people and systems or from
external events. This definition includes legal risk1.
Conduct risk: risk arising from practices, processes or behaviours
which are not adequate or compliant with internal regulation, legal
or supervisory requirements.
Reputational risk: risk of current or potential negative economic
impact to the Bank due to damage to the perception of the Bank on
the part of employees, customers, shareholders/investors and the
wider community.
Model risk: risk of loss arising from inaccurate predictions, causing
the Bank to make suboptimal decisions, or from a model being used
inappropriately.
Strategic risk: risk of loss or damage arising from strategic
decisions or their poor implementation, that impact the long term
interests of our key stakeholders, or from an inability to adapt to
external developments.
that are generated as part of their activity ensuring that these remain
within the approved appetite risk and the established limits.
The second line of defence is composed by the risk control
function, and the compliance and conduct function. The role of
these functions is to provide independent oversight and challenge the
risk management activities performed by the first line of defence.
These functions are responsible for ensuring that the risks are
managed in accordance with the risk appetite defined by senior
management and to foster a strong risk culture across the whole
Organisation. They must also provide guidance, advice and expert
opinion in all key risk-related matters.
Internal audit as the third line of defence. As the last layer of
control, regularly assesses policies, methods and procedures to ensure
they are adequate and are being implemented effectively in the
management and control of all risks.
1. Legal risk includes, but is not limited to, exposure to fines, penalties, or punitive damages resulting from supervisory actions, as well as private settlements.
2017 Annual Report
201
The risk control, compliance and conduct and internal audit functions
are sufficiently separated and independent from each other, and
regarding to other functions they control or supervise for the
performance of their duties, and they have access to the board of
directors and/or its committees through their maximum responsibles.
A.2.2. Risk Committees structure
Ultimately, the board of directors is responsible for the risk control
and management and, in particular, for setting the risk appetite for
Santander Group. It can also delegate its powers to committees classed
as independent control bodies or decision-making bodies. The board
uses the Risk Supervision, Regulation and Compliance Committee as
an independent risk control and oversight committee. The Group’s
Executive Committee also pays special attention to the management of
all risks.
The highest risk governance bodies are described as follows:
Bodies for independent control
Risk Supervision, Regulation and Compliance Committee:
The purpose of this committee is to assist the board in matters of risk
supervision and control, in the Group risk policies definition, in the
relation with the supervisory authorities and in aspects of regulation
and compliance, sustainability and corporate governance.
It is chaired by an independent director and is formed by external or
non-executive directors, the majority of which are independent.
The functions of the Risk Supervision, Regulation and Compliance
Committee are:
• 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 applicable proposed regulations and regulatory
initiatives, as well as analyse the possible consequences for the
Group.
• Review the Corporate Social Responsibility policy, ensuring that it
is oriented to the value creation of the Group, and monitoring of
the strategies and practices in this matter, evaluating its compliance
level.
Risk Control Committee (RCC):
This collegiate body is responsible for the effective risk control,
ensuring they are managed in accordance with the risk appetite level
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 potential risks, and gauging
their impact on the Group's risk profile.
This committee is chaired by the Group Chief Risk Officer (GCRO) and
is composed of senior management members. The risk function, which
presides the committee, and the compliance and conduct, financial
accounting and control, and management control functions are
represented, among others. The risk function officers (CROs) of local
entities take part in the committee on a regular basis to report on the
risk profile of the entities and other aspects.
The Risk Control Committee reports to the Risk Supervision,
Regulation and Compliance Committee and assists it in its function of
supporting the board.
• Support and advise the board in defining and assessing the risk
Decision making bodies
policies that affect the Group and in determining the risk propensity
and risk strategy.
• Provide assistance to the board for overseeing the risk strategy
implementation and its alignment with strategic commercial plans.
• Systematically review the exposures of major clients, economic
sectors, geographical areas and risk types.
• Understand and assess management tools, improvement initiatives,
projects progress 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 regarding supervisors and regulators in
the various countries where the Group operates.
• Oversee compliance with the General Code of Conduct, manuals and
procedures for anti-money laundering and anti-terrorism financing,
and, in general, the rules of governance and the Bank’s compliance
programme, as well as the necessary proposals for its improvement.
In particular, it is the committee’s responsibility to receive
information and, where necessary, issue reports on disciplinary
measures for senior management.
Executive Risk Committee (ERC):
This collegiate body is responsible for the management of all risks
under the powers allocated to it by the board of directors.
The committee takes part in risk decisions at the highest level,
ensuring that they 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.
It is chaired by the CEO and comprises executive directors, and the
Entity’s senior management. The risk, finance and compliance and
conduct functions, among others, are represented. The GCRO has a
right to veto the decisions taken by this committee.
A.2.3. The Group’s relationship with
subsidiaries in risk management
Regarding the units alignment 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 relationship between the subsidiaries and the Group, including
the role played by the latter in taking important decisions by
validating them.
2017 Annual Report
5. RISK MANAGEMENT REPORTRisk management and control model202 Pursuant to these shared 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,
thus creating a recognisable and common risk management and
control model in Santander Group.
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 centralises and conveys these practices.
Furthermore, the "Group-subsidiary governance model and good
governance practices for subsidiaries" sets a regular interaction and
functional reporting by each local CRO to the GCRO, as well as the
participation of the Corporation in the process of appointing, setting
targets, evaluation and remuneration of local CROs, in order to ensure
risks are adequately controlled by the Group.
Regarding the structure of committees
The "Group-subsidiary 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 the best corporate governance practices,
consistent with those already in place in the Group.
The governance bodies of subsidiary entities are structured in
accordance to local requirements, both regulatory and legal, and to the
dimension and complexity of each subsidiary, being consistent with
those of the parent company, as established in the internal governance
framework, thereby promoting communication, reporting and effective
control.
The subsidiaries management bodies have their own risk faculty model
(quantitative and qualitative) and must follow the principles contained
in the frameworks and reference models developed at corporate level.
Given its capacity for comprehensive (enterprise wide) and aggregated
oversight of all risks, the Corporation exercises a validation and
challenging role with regard to the operations and management
policies of the subsidiaries, insofar as they affect the Group’s risk
profile.
A.3. Risk culture - Risk Pro
The Santander Way corporate culture entails a robust risk culture
known as risk pro.
Bank's professionals in accordance with Group priorities, in addition
to disseminating the risk culture and developing the best talent.
Risk management is underpinned by a shared culture that ensures that
every employee understands and manages the risks that are part of
their daily work.
In 2017, 358,462 hours of training were given, attended by 140,527
Group employees.
Santander Group’s solid risk culture is one of the main reasons the
Group has been able to deal with changes in the economic cycle,
new customer requirements and the rise of competitiveness, and the
reason why it is considered to be an Entity that has earned the trust of
its customers, employees, shareholders and society as a whole.
Against a backdrop of constant change, with new types of risk
emerging and increasingly stringent regulatory requirements,
Santander Group maintains an excellent level of risk management that
enables it to achieve sustainable growth.
As a result, the Santander Group 2017 Global Engagement Survey
concluded that 94% of employees thought that they could detect and
take personal responsibility for the risks they encountered in their
day-to-day work.
• Communication. The conduct, best practices and initiatives that
exemplify the risk culture are disseminated through the different
communication channels and individual actions involving the main
risk managers. The Group optimised and improved its website, in
which all the information required for advanced risk management is
contained.
Excellence in risk management is therefore one of the strategic
priorities that has shaped the Group’s development. This involves
prudence in risk management and building a sound internal risk
management culture across the whole Organisation, which is
understood and implemented by all Santander Group employees.
• Risk culture assessment. Santander Group performs a systematic
and ongoing assessment of the risk culture to detect any potential
areas for improvement and implement action plans. This has involved
defining the global indicators used to assess the level of penetration
and dissemination of the risk culture within the Group.
The risk pro culture is reinforced in all the Group's units by the
following factors:
• Governance. The risk culture and risk management are underpinned
by sound internal governance.
• Employee life cycle. From the selection and hiring phases and
throughout their professional career, employees are made aware of
their personal responsibility regarding risk management.
Therefore, risk management is included in all employees’ training
plans. The Risk Pro Banking School, together with the other training
centres for risk, help define the best strategic training lines for the
• Advanced Risk Management (ARM). ARM is a reflection of the
importance of having a robust risk culture. For Santander Group, it
is a priority aspect for its long-term goal for remaining a solid and
sustainable bank.
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A.4. Management processes and tools
The Santander Group has defined a series of key risk management and
control processes, as shown below:
• Planning. Is the process of setting business objectives, which include
• Monitoring performance versus Plan. Risk management and
the articulation of the types and levels of risk that the business is
willing and able to accept in pursuit of these objectives.
• Identification. Risk identification is a key component of effective
risk management and control. Every employee is responsible
for identifying external and internal risks to the business in a
timely manner, ensuring they are categorised according to the
aforementioned risk map.
• Assessment. Once identified, risks must be assessed to determine
their likelihood, impact and materiality under different scenarios.
• Decision-making and Execution. Decisions are required to manage
the business’s risk profile within the limits agreed in the planning
phase, and to achieve business objectives. Strategy decisions are also
needed to manage material and emerging risks within the functions
bestowed to committees or individuals and in accordance with the
powers delegated by the board of directors.
control include monitoring business performance on a regular basis,
and comparing performance against agreed plans. All plans and risk
metrics should have clear alert thresholds (triggers) with defined
escalation paths.
• Mitigation (actions to address Plan deviations). If monitoring
highlights that performance has deviated, or is likely to deviate,
beyond the approved ranges or thresholds, mitigating action should
be considered to bring performance back to acceptable levels.
• Reporting. The risk reporting process includes the elaboration
and submission of accurate and relevant management information,
ensuring regular reporting on the business progress, and the urgent
escalation of unexpected situations if required.
It should also provide sufficient support to ensure the effectiveness
of the aforementioned processes.
To develop the processes described above, Santander Group has
several tools in place. These include:
Risk
appetite
Risk identification and
Assessment (RIA)
Scenario
analysis
Risk Reporting
Framework (RRF)
• New metrics with
greater granularity and
inclusion of additional
metrics.
• Consolidation of
management and
control systems of the
risk appetite framework
in the Corporation and
units.
• Simplification, improvement and
interaction communities of control
under new standards.
• More robust and wider assessment
of the control environment that
measures the management model
implementation.
• Strengthening of the
operating and control
model in the execution of
capital planning exercises.
• Evolution of the provisions
forecast methodology and
the infraestructure to Big
Data technology, increasing
the analytical and reporting
capacity.
• Structural and operational
improvements to enhance
reporting of all risks at all levels.
• Consolidation of the
governance model for risk
information and reporting.
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5. RISK MANAGEMENT REPORTRisk management and control model202PlanningMonitoringIdentificationMitigationAssessmentReportingDecision-making
A.4.1. 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. For the latter, severe scenarios
that could have a negative impact on the levels of capital, liquidity,
profitability and/or the share price, are taken into account.
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 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 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 a common and unique risk appetite
model. This sets out common requirements for processes, metrics,
governance bodies, controls and corporate standards for its
management integration, cascading down in an effective and traceable
way to all management policies and limits.
Business model and fundamentals of the risk appetite
The definition and establishment of the risk appetite in the Santander
Group is consistent with its risk culture and 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 banking with an
internationally diversified presence and with important market
shares, as well as a wholesale banking business model that gives
priority to customers relation in the Group’s main markets.
• A stable and recurrent earnings and shareholder remuneration policy,
underpinned by a sound base of capital and liquidity, as well as an
effective diversification strategy in terms of sources of funding and
maturities.
• An organisational structure based on subsidiaries that are legally
independent 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 could jeopardise the Group’s
solvency.
• An independent risk function with very active involvement of
senior management that guarantees a solid risk culture focused on
protection, and ensuring an adequate return on capital.
• A management model that guarantees a global and inter-related view
of all risks, through a corporate control and monitoring environment,
with global level responsibilities: all risks, all businesses and all
countries.
• A business model focused on those products that the Group knows
sufficiently well and has the capacity to manage (systems, processes
and resources).
• Development of its activity based on a conduct model that protects
the interests of customers and shareholders.
• Adequate and sufficient availability of human resources, systems and
tools that guarantee the preservation of a risk profile compatible with
the risk appetite established, both at 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 risk appetite model, and that these are consistent with the
evolution of the Bank’s long-term results.
Corporate risk appetite principles
The following principles govern Santander Group risk appetite in all its
units:
• Board and senior management responsability. The board is
the maximum body responsible for setting the risk appetite and its
regulation support, as well as supervising its 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 and forecasted risk profile in the business
and strategy plans, as well as its consistency with the 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 plausible
circumstances and the stress scenarios.
• Alignment with strategic and business plans and management
integration (3 year plan, annual budget, ICAAP, ILAAP crisis
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 approach:
• 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 portfolio
level, unit or business line.
• bottom-up vision: the risk appetite must emanate from the 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 portfolio, unit and business
line level.
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• 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 best practices and
regulatory requirements adaptation. 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 established, 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 metric (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 willing 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 risk profile adequacy with the
authorised risk appetite.
The 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
provoked 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 this report, in sections C.1.5. Credit risk cycle, C.2.2.3.
and C.2.3.3. Systems of controlling limits, have a direct and traceable
relation with the principles and limits defined in the risk appetite.
The connection between the credit risk appetite of the Group and
the credit portfolios management is implemented, formalized and
materialized through the Strategic Commercial Plans (SCPs), which
define the credit policies and the plans of means necessary to achieve
the commercial strategies. The transposition and cascading down of
credit risk metrics of the Group's risk appetite strengthens the control
over credit portfolios. Each SCP includes the risk appetite metrics
corresponding to the SCP segment, and also the risk appetite control is
carried out through the portfolio and new production limits in order to
anticipate the portfolio risk profile.
In this way, changes in the risk appetite can be translated into changes
in the limits and controls used in Santander’s risk management and
each of the business and risk areas have the responsibility of 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.
Risk appetite pillars
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 large areas that define the positioning that
Santander’s senior management is wiiling 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 accept.
• Non-financial and transversal risks.
RISK APPETITE PILLARS AND MAIN METRICS
Volatility of
results
• Maximum loss the
Group is prepared to
accept under a scenario
of acute tension
Solvency
Liquidity
Concentration
• Minimum capital position
the Group is prepared to
accept under a scenario
of acute tension
• Maximum leverage the
Group is prepared to
accept under a scenario
of acute tension
• Minimum structural
liquidity position
• Minimum liquidity
horizon position that
the Group is prepared to
accept under a scenario
of acute tension
• Minimum liquidity
coverage position
• Concentration by
individual customer
• Concentration in
non-investment grade
counterparties
• Concentration in
large exposures
Non-financial and
transversal risks
• Qualitative operational
risk indicators:
• Fraud
• Technological
• Security and cyber-risk
• Litigation
• Other...
• Maximum operational
risk losses
• Maximum risk profile
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5. RISK MANAGEMENT REPORTRisk management and control model206 Volatility of results
Its object is to limit the potential negative volatility of the results
projected in the strategic and business plan in the event of stress
conditions.
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.
This axis contains metrics which measure the behaviour and evolution
of real or potential losses in the business.
The stress tests included in this level, measure the results maximum
fall under adverse conditions, in the main types of risk to which the
Bank is exposed, with a feasible probability of occurrence and similar
by risk type (thus allowing aggregation).
Solvency
The object of this axis is to ensure that the risk appetite adequately
considers the maintenance and upkeep of the Entity's equity, keeping
capital higher than the levels set by regulatory requirements and
market demand.
Its purpose is to determine the minimum level of capital for which the
Entity considers necessary to maintain, in order to cope with potential
losses under both normal and stressed conditions and derived from its
activity, its business and strategic plans.
This capital approach included in the risk appetite model 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 the Pillar III disclosures).
Liquidity position
Santander Group has developed a funding model based on
autonomous subsidiaries that are responsible for covering their own
liquidity needs.
Non-financial and transversal risks
This involves qualitative and quantitative metrics that help pinpoint
exposure to non-financial risks. These include specific indicators for
fraud, technological risk, security and cyber-risk, money laundering
prevention, regulatory compliance, product governance and customer
protection, reputational risk and model risk.
A.4.2. Risk identification and assessment (RIA)
Santander Group carries out the identification and assessment of the
different risks it is exposed to involving the different lines of defence
to strengthen its advanced and proactive risk management practice,
establishing management standards that not only meet regulatory
requirements but also reflect best practices in the market, and being
also a risk culture transmission mechanism.
The function includes all the risk identification and assessment
processes, as well as its integration, within the Santander Group risk
profile, its units and activities, thereby keeping the risk map up to date.
In addition to identifying and assessing the Group's risk profile
by risk type and unit, RIA analyses the evolution of risks and identifies
improvement areas in each of the blocks that compose it:
• Risk performance, enabling understanding of residual risk by
risk type through a set of metrics and indicators calibrated using
international standards.
On this basis, liquidity management is conducted by each subsidiary
within a corporate management framework 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 appeal to short-term
financing, sufficient liquidity reserve) and revolves around three main
pillars: governance model, balance sheet analysis and measurement of
liquidity risk, and management adapted to business needs.
• Assessment of the control environment, measuring the degree of
implementation of the target operating model, pursuant to advanced
standards.
• Forward-looking analysis of the unit, based on stress metrics and
identification and/or assessment of the main threats to the strategic
plan (Top Risks), enabling specific action plans to be put in place to
mitigate potential impacts and monitoring these plans.
Santander's liquidity risk appetite establishes demanding objectives of
liquidity positions and horizons under 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.
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 business orientation to retail banking with a high degree
of international diversification.
This axis includes, among others, the individual maximum exposure
limits with customers, aggregated maximum exposure with major
counterparties, and maximum exposure by activity sectors, in
Each block of these methodologies strengthens risk management
and provide a comprehensive and holistic view of the risk profile. RIA
uses, among others, the assessment of the risk level of the different
risk metrics and indicators and their integration in risk management
policies and limits, the control environment assessment consideration
in internal audit annual planning, the use of Top risks as inputs to
generate idiosyncratic scenarios in capital and liquidity planning and
recovery and resolution plans, and the analysis of the risk profile of
the Group and its units, used as a comparison with other external
assessments of the Bank.
RIA strengthens Santander Group’s risk management and control
capacity to carry out more and better business in the markets in
which it operates without jeopardising its P&L, or its defined strategic
targets, and reducing earnings volatility.
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In 2017, the function evolved along three main lines, ensuring the
simplification and reinforcement of the interaction among the
communities of control and the completeness of the risk profile:
A.4.3. Scenario analysis
• Updated control environment standards based on industry
performance, internal management models and regulatory
requirements:
i) Homogeneous conceptual architecture developed to enable
consistent analysis and assessments, and to simplify data
execution/exploitation, as well as the reporting to senior
management.
ii) Environment control assessments simplification.
iii) Greater involvement of the different stakeholders of the control
functions particularly local and corporate risk control functions
and internal audit (communities of control).
iv) Prioritisation of areas for improvement identified according to
their materiality.
• New technology platform to facilitate data exploitation and process
implementation:
i) Manual processes automatization.
Santander conducts advanced management of risks by analysing
the impact that different scenarios could trigger in the environment
in which the Bank operates. These scenarios are expressed both in
terms of macroeconomic variables, as well as other variables that alter
management.
Scenario analysis is a very robust and useful tool for management at all
levels. It enables the assessment of the Bank’s resistance to stressed
environments or scenarios, and puts into force a set of measures that
reduce its risk profile to these scenarios. The objective is to maximise
the stability of the income statement and capital and liquidity levels.
The robustness and consistency of the scenario analysis exercises are
based on the following pillars:
• Development and integration of mathematical models that estimate
the future evolution of metrics (e.g. credit losses), based on both
historic information (internal to the Bank and external from the
market), as well as simulation models.
• Inclusion of expert judgement and know-how of portfolios,
questioning and backtesting the models results.
• The backtesting of the models results against the observed data,
ii) Real time access to information in the different units and for all
ensuring that the results are adequate.
stakeholders.
iii) Internal technology solution with improved data safety and
enhanced user experience.
iv) Information reporting module to design and produce ad hoc
reports.
• Wider scope by risk type and geography.
As part of the ongoing review and improvement process, over the
next few months the RIA will focus on the review of risk indicators
and metrics, increasing the scope of application by risk type and
geography, and further strengthening the risk culture in the Group’s
different lines of defence.
• The governance of the whole process, covering the models,
scenarios, assumptions and rationale of the results, and their impact
on management.
The application of these pillars within the EBA (European Banking
Authority) stress test, executed and reported bi-annually, 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.
From 1 January 2018, the processes, models and scenario analysis
methodology will be included in the new regulatory provisions
requirements (IFRS 9).
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2017 Annual Report
5. RISK MANAGEMENT REPORTRisk management and control model Uses of scenario analysis
The EBA guidelines establish that the scenario analysis should
be integrated in the risk management framework and entities’
management processes. This requires a forward-looking vision in risk
management and strategic, capital and liquidity planning.
Scenario analysis is included in the Group’s control and management
framework, ensuring that any impact affecting the Group’s solvency or
liquidity can be rapidly identified and addressed.
With this objective, a systematic review of exposure to the different
types of risk is included, not only in the baseline scenario but also in
the simulation of various adverse scenarios, to ensure that the risk
levels assumed comply with the established targets and thresholds.
• Identification of emerging and plausible risks (“Top Risks”).
After a systematic process to identify and assess all the risks to
which the Group is exposed, the “Top Risks” are selected and the
Entity’s risk profile is established. Each “Top Risk” has an associated
macroeconomic or idiosyncratic scenario. To assess the impact
of these risks on the Group, internal scenario analysis and stress
testing models and methodologies are employed.
• Recovery plan performed annually to establish the available
measures the Bank will have, in order to survive an extremely
severe financial crisis. The plan sets out a series of financial and
macroeconomic stress scenarios, with differing degrees of severity,
that include idiosyncratic and/or systemic events that are relevant
for the Entity.
The scenario analysis forms an integral part of several key processes of
the Bank:
Further details are provided in the sections on credit risk
(C.1.5.1. Planning) and market risk (C.2.2.1.6., C.2.2.2.3. and
C.2.4.2. Scenario analysis).
• Regulatory uses. Stress tests exercises are performed using the
guidelines set by the European regulator or each local supervisor.
• ICAAP or 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 is
not willing to exceed. These exercises are related to those for capital
and liquidity, although they have different frequencies and present
different granularity levels. Santander continues to work to improve
the use of analysis of scenarios in the risk appetite and to ensure an
adequate relation of these metrics with those used in the daily risk
management. For more detail see sections A.4.1. Risk appetite and
structure of limits and B.2.4. Liquidity risk in this report.
• Recurrent risk management in different processes/tests:
• Budgetary and strategic planning process, in the generation
of commercial policies for risk approval, in the global risk analysis
made by senior management and in specific analyses of activities
and portfolios.
Additionally, the Bank is working together with other financial
institutions on a joint project, led by UNEP FI2 to implement the
recommendations issued by the Task force on Climate-related Financial
Disclosures (TCFD) of the Financial Stability Board (FSB). These
recommendations incorporate, for the first time, stress exercises that
include different climate scenarios.
Scenario analysis aims to assess the impact derived from climate
change, both in the form of physical risks (i.e. natural disasters caused
by climate change) or by the transition to an economy with lower
emissions (due to the impact of regulatory, technological and market
changes).
As an internal management tool, Banco Santander has a Map of Uses
in place to strengthen the alignment of scenario analysis for each risk
type, along with the continuous improvement of such uses. The goal
is to reinforce the integration among the different regulatory and
management exercises (ICAAP, ILAAP, risk appetite, recovery plan,
budget, etc.).
Stress test and scenario analysis programme
The stress test and scenario analysis programme is a pluri-annual plan
containing the requirements for the development of these activities as
part of the Group´s risk management processes. The development of
the programme and its objectives are reviewed and updated regularly.
It is structured along five axis, as follows:
• Processes and procedures: performance of calculation processes
and associate documentation, facilitating execution with suitable
frequency, aligning the stress test with regulatory requirements and
advanced risk management.
2. UN Environment Programme Finance Initiative.
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209
• Methodologies and models: preparation of development plans for
statistical stress models that are sufficiently precise and granular to
meet the programme objectives, improving the capacity to assess the
sensitivity to different scenarios and associated impacts.
• Governance: establishment and update (where applicable) of
stress tests and scenario analysis governance, reviewing the defined
structure efficiency, its interpretation and documentation.
• Data and infrastructure: implementation and development of
a flexible calculation tool and a multi-user reporting environment
with capacity to handle data with different levels of granularity,
project parameters and losses with greater accuracy and
automation, aggregate different types of risk during the process
and report the results.
• Integration into management: expansion and improvement of the
uses of scenario analysis in the different risk management areas.
A.4.4. Risk Reporting Framework (RRF)
In recent years, Santander 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 has enabled the Group's senior management
to assess risk and act accordingly. In this sense, the strategic risk
transformation plan is aligned with regulatory requirements, as
evidenced in the review performed by the European supervisor
with regard to compliance with the standards defined by the Basel
Committee (BCBS 239).
In 2017, the Group has worked to consolidate the comprehensive
data and information management model, and the implementation
and renewal of technology systems, thereby enabling a balanced
reporting taxonomy to be maintained that covers all the key risk
areas within the Organisation, in compliance with the Group’s size,
risk profile and activity.
Therefore, three reports are submitted each month to senior
management relating to risk management issues and the subsequent
decision-making: the Group risks report, the risks report for each unit
and a report for each risk factor.
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5. RISK MANAGEMENT REPORTRisk management and control model EXECUTIVE SUMMARY
A. RISK MANAGEMENT AND CONTROL MODEL
B. BACKGROUND AND UPCOMING CHALLENGES
C. RISK PROFILE
B. Background and
upcoming challenges
The global economy grew at a higher rate in 2017 compared to 2016
(3.6% vs 3.2%), the strongest performance seen in the past few years,
fuelled by favourable financial conditions, buoyant trade, the recovery
of commodity prices, improved confidence and a political environment
in which uncertainties were reduced. Both the advanced and emerging
economies participated in this revitalisation.
In the United States, the growth acceleration was combined with a
moderation in underlying inflation. The Federal Reserve embarked on
a gradual monetary policy normalisation. It increased interest rates
in three ocassions during the year, and in October began reducing its
balance sheet.
The Eurozone saw a notable economic reactivation, broadly based
by component and countries. With inflation still low, the ECB has
extended its debt repurchases until September 2018, although the
programme has been scaled back, and its policy stance remains
accommodative.
The UK economy has fared well in face of the uncertainties thrown up
by the Brexit, although growth was slower. Inflation stood at around
3%, surpassing the 2% target, which prompted the Bank of England to
raise its official interest rate to 0.5% at the end of the year, reversing
the adjustment that followed the referendum.
Among the emerging markets, China unexpectedly sustained a slightly
stronger growth than in 2016, and Latin America has recovered from
the recession thanks to the economic revival in Brazil and Argentina.
Monetary policies remain uneven, according to the different inflation
trends. Therefore, in Brazil and Chile, the central banks have cut the
official rates in a context of reduced inflation, while in Argentina and
Mexico, the monetary authorities increased the official interest rates to
strengthen their anti-inflationary stance and setinflation expectations in a
context of rising prices.
In general, the international banking sector continued to be
characterised by the ongoing strengthening of balance sheets
following improvements in capital adequacy, liquidity positions and
impaired assets. As a result, in the developed nations, especially
in Europe, entities continue to face significant challenges to boost
profitability, in the midst of strong competition and low interest rates.
Business volumes have been affected in the same way, although in
both cases the trend is gradually becoming more favourable.
Top Risks
As part of its traditional forward-looking risk management strategy,
the Group identifies, assesses and monitors potential threats affecting
the development of its strategic plan, through regular assessment of
the top risks.
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 as follows:
Macroeconomic and political risks
The Eurozone economy is in an expansion phase. Economic growth in
2017 was sound and well-founded. The unemployment rate has fallen
to its lowest level since 2008. Nonetheless, inflation remains low. The
growth rhythm is currently above its potential, suggesting a more
moderate growth rates in the coming years.
The main risks affecting this favourable evolution derive from the
political environment and the impact of the normalisation of US
monetary policy on interest rates in the Eurozone. The ECB is also
scaling back its asset purchase programme and while rates are
expected to remain stable in 2018 given the lack of inflationary
pressure, there could be hikes starting in 2019.
211
2017 Annual Report The performance of the UK economy will depend on the outcome of
its negotiations to exit the EU, expected to take place in March 2019.
model, focusing on customers, shareholders, employees and society
as a whole through innovation and digital transformation.
After phase I negotiations, an agreement has been reached with the
European Commission on citizens’ rights, in addition to a soft deal on
the Irish border and the exit bill.
However, phase II will kick off with differences between the two
parties with regard to the future relationship between the UK and
the EU and the conditions of the transition period. The transition
period and trade agreements eventually reached will be key for the UK
economy in the short-medium term.
After years of recession, confidence in the Brazilian economy
continues to grow and the outlook for the next few years is favourable.
This trend is expected to run parallel with structural reforms, mainly
relating to the tax deficit, which should continue irrespective of the
result of the forthcoming election in order to maintain the growth
expected.
In the United States, economic performance remains positive,
with stable growth and a projected drop in the unemployment rate,
which will have both a positive impact domestically and in emerging
markets.
Given these macroeconomic and geopolitical risks, Banco Santander's
business model, based on geographical diversification - balanced
between mature and emerging markets - and on a retail banking
business supported by customer loyalty, reduces the volatility of its
results maintaining a medium-low risk profile.
Competitive environment and customer relations
Santander Group’s business model is facing the challenge of adapting
to changes in demand and consumer behaviour, the possibilities
offered by new technologies, new value propositions and also changes
in the strategic positioning of competitors.
The new technologies have had, have and will have a permanent impact
on the banking industry, enabling a highly competitive environment,
with the emergence of new and innovative financial participants that
also offer ease of access to their services. This is also favoured by new
regulation, such as PSD2 (Payment Services Directive 2) in force in 2018,
which allows access to other operators to the data held by banks and
thereby favours financial disintermediation. All this, and especially the
growing tendency to open financial data without symmetrical initiatives
for the data guarded by the large technological platforms, makes it
imperative to adapt to this new environment with agility.
Therefore, constant innovation and review of the processes in place is
required to allow the Bank to proactively adapt to the industry and its
competitors in order to maintain its market share against new digital
rivals - financial start-ups, big technology companies. The Santander
Group sees this change in the industry as an opportunity to improve
its market position, gain market share and optimise its business
The automotive industry is undergoing a continuous process
of innovation, driven in part by the more stringent regulatory
environment, with environmental measures that imply an
important transformation towards the use of technology with lower
environmental impact, as well as due to possible strategic changes
in the sector with the emergence of autonomous vehicles, shared
mobility, higher taxes according to vehicle type, potential restrictions
on access to cities, etc. This will trigger a shift in consumer behaviour
and the perception held of this industry, making it essential to adapt
to the new situation.
Regulatory environment
There has been intense activity in the regulatory field to improve the
capitalisation of banks and their resilience to economic shocks, having
a stronger impact in those institutions that are considered systemic.
This new regulation focuses mainly on capital, liquidity and resolution
requirements, consistent information management and the adequacy
of the internal governance of entities.
There is also increasing supervisory and regulatory pressure affecting
mainly, aspects of conduct, transparency, consumer protection and the
sale of products that are appropriate to customer needs, is due in part
to relevant poor practices in the sector over recent years.
In addition, there is a growing interest in social and environmental
aspects, for which different initiatives are emerging under the
regulatory scope.
Entities have had to make significant efforts to respond to these
increasing demands, which has led to a drop in profitability.
For the financial industry, it is crucial to have a stable and enduring
regulatory framework, allowing banks to apply valid medium-
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. This framework must pursue the same level
playing field for all competitors and must follow the activity principle,
regulating what is done and not who does it. The reference should be:
the same regulation and supervision should apply to the same activity
and risks.
Systems threats (cyber risk)
In an increasingly digital environment, cyber attacks have become
one of the main global risks, not only for the financial sector, but for
all industries across the world. There has a been a noticible and high
increase in such attacks in recent years.
Threats include espionage, cyber crime, data leaks, hacking and cyber
warfare through the unauthorised access to networks or the release of
viruses that threaten the confidentiality of the Bank’s internal data and
customer data, in addition to the strength of the systems themselves
as security weaknesses are revealed.
The Group works intensively to enhance protection based on
international standards and preventive measures, in order to be ready
to respond to incidents of this type. These measures are set out in the
Operational risk section C.3.4 Mitigation measures.
2017 Annual Report5. RISK MANAGEMENT REPORTBackground and upcoming challenges212 EXECUTIVE SUMMARY
A. RISK MANAGEMENT AND CONTROL MODEL
B. BACKGROUND AND UPCOMING CHALLENGES
C. RISK PROFILE
1. Credit risk
2. Trading market risk, structural risk and liquidity risk
3. Operational risk
4. Compliance and conduct risk
5. Model risk
6. Strategic risk
7. Capital risk
C. Risk profile
C.1. Credit risk
C.1.1. Introduction to credit risk treatment
Credit risk is the risk of financial loss arising from the default or credit
quality deterioration of a customer or other third party, to which the
Santander Group has either directly provided credit or for which it has
assumed a contractual obligation.
The Group’s risks function is organised on the basis of three types of
customers:
The following chart shows the distribution of credit risk on the basis of
the management model:
CREDIT RISK DISTRIBUTION
SGCB
15%
Individuals
59%
• The Individuals segment includes all individuals, 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.
SMEs,
Commercial Banking
and Institutions
26%
• The SMEs, Commercial Banking and Institutions segment
includes companies and individuals with business activity. It also
includes public sector activities in general and private sector non-
profit 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 type, level
of geographic diversification, product types, volume of revenues it
represents for the Bank, etc.).
Notes: Excluding Popular. Risk segmentation.
The Group’s profile is mainly retail, accounting for 85% of total risk
generated by the retail and commercial banking businesses.
2017 Annual Report
213
C.1.2. Key figures and change over time
C.1.2.1. Changes in scope
Banco Popular
On 7 June 2017, Santander Group acquired Banco Popular Español, S.A.
(Popular) within the framework of the “resolution” adopted by the
Single Resolution Board (SRB) and executed by the Fund for Orderly
Bank Restructuring (FROB).
The transaction had a sound strategic and business fit that came at
an attractive moment in the cycle, reinforcing the Group’s position in
Spain and Portugal.
After the adjustments associated with the acquisition, Banco
Popular contributed3 net loans of EUR 82,589 million and deposits
of EUR 64,814 million, concentrated mainly in Spain. Additionally, it
incorporated EUR 10,003 million in investment funds and EUR 8,118
million of other off-balance sheet assets.
At that date, Banco Popular had EUR 20,969 million of non-performing
loans, with an NPL ratio of 20%. To cover this amount, an insolvency
fund of EUR 12,689 million was set up, offering coverage of 61%.
Further, on 8 August, with the intention of reducing the Santander
Group’s unproductive assets, Banco Popular signed an agreement with
Blackstone whereby the fund would acquire 51%, a controlling stake,
of Banco Popular’s real estate business comprising the foreclosed
assets portfolio, non-performing loans from the real estate sector, and
other assets relating to this activity owned by Banco Popular and its
subsidiaries.
The transaction gave rise to the creation of a company to which Banco
Popular would transfer the business unit containing these assets and
100% of the share capital of Aliseda. Since that date, Blackstone has
been responsible for managing the assets included in the joint venture.
Citibank-Argentina
Having obtained the relevant regulatory authorisation, on 31 March
2017 an irrevocable offer was received and accepted to acquire the
assets and liabilities of the retail banking business of the Citibank N.A.
branch set up in Argentina with effect from 1 April. As a result of the
transaction, the Bank obtained a network of 70 branches, with their
employees and a portfolio of around 518 thousand new customers,
increasing its volume of loans and deposits by EUR 604 million and
EUR 1,261 million, respectively.
C.1.2.2. Changes in key figures in 2017
The tables below set out the main items related to credit risk derived
from activity with customers:
KEY FIGURES OF CREDIT RISK ARISING FROM ACTIVITY WITH CUSTOMERS
Data at 31 December 2017
Credit risk with customers1
(million euros)
Non-performing loans
(million euros)
NPL ratio
(%)
Continental Europe
337,768
331,706
321,395
15,184
19,638
23,355
2017
2016
2015
2017
2016
2015
Spain
172,176
172,974
173,032
Santander Consumer Finance
92,589
88,061
32,816
24,391
30,540
21,902
76,688
31,922
20,951
247,625
255,049
282,182
Portugal
Poland
UK
Latin America
165,683
173,150
151,302
Brazil
Mexico
Chile
Argentina
US
Puerto Rico
Santander Bank
SC USA
83,076
28,939
89,572
29,682
40,406
40,864
8,085
7,318
72,173
32,463
35,213
6,328
77,190
91,709
90,727
2,944
3,843
44,237
54,040
24,079
28,590
3,924
54,089
28,280
8,120
2,319
1,875
1,114
3,295
7,462
4,391
779
2,004
202
2,156
210
536
9,361
2,357
2,691
1,187
3,585
8,333
5,286
819
2,064
109
11,293
2,625
2,380
1,319
4,292
7,512
4,319
1,096
1,980
73
2,088
1,935
274
717
273
627
1,410
1,097
1,034
Total Group (excl. Popular)
832,655
855,510
850,909
28,104
33,643
37,094
Banco Popular
Total Group
88,313
9,492
920,968
855,510
850,909
37,596
33,643
37,094
3. 30 June 2017 figures.
214
2017 Annual Report
2017
4.50
4.72
2.50
5.71
4.57
1.33
4.50
5.29
2.69
4.96
2.50
2.79
7.13
1.21
5.86
3.38
10.75
4.08
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
3.93
4.36
5. RISK MANAGEMENT REPORTRisk profile > Credit risk Continental Europe
Spain
Santander Consumer Finance
Portugal
Poland
UK
Latin America
Brazil
Mexico
Chile
Argentina
US
Puerto Rico
Santander Bank
SC USA
Total Group (excl. Popular)
Banco Popular4
Total Group
Coverage ratio
(%)
Net ASR provisions2 (million euros)
Cost of credit
(% /risk)3
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
2017
58.0
45.9
101.4
59.1
68.2
32.0
84.8
92.6
97.5
58.2
100.1
170.2
55.2
102.2
212.9
70.8
48.7
65.2
2017
995
513
266
(12)
137
205
4,973
3,395
905
462
159
2016
1,342
585
387
54
145
58
4,911
3,377
832
514
107
2015
1,975
992
537
72
167
107
4,950
3,297
877
567
148
2,780
3,208
3,103
96
120
2,992
9,518
85
64
2,954
10,108
73
116
2,590
8,997
114
9,111
2017
0.32
0.33
0.30
(0.04)
0.62
0.08
3.17
4.36
3.08
1.21
1.85
3.42
2.22
0.25
9.84
1.12
0.23
1.07
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
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
1. Includes gross lending to customers, guarantees and documentary credits.
2. Recovered write-off assets (EUR 1,621 million).
3. Cost of credit = loan-loss provisions twelve months / average lending.
4. Provisions carried out since the Bank's acquisition in June 2017.
Risk is diversified among the main regions where the Group operates:
Continental Europe4 (41%), UK (30%), Latin America (20%) and the US
(9%), with a suitable balance between mature and emerging markets.
Credit risk with customers fell by 3% in 2017, considering an unchanged
perimeter, mainly due to the US, UK and Brazil (as a result of exchange
rate effects). Growth in local currency was generalised across all units
with the exception of the United States and Spain.
These levels of lending, together with lower non-performing loans
(NPLs) of EUR 28,104 million (-16% vs. 2016) reduced the Group’s NPL
ratio to 3.38% (-55 bp against 2016).
For coverage of these NPLs, the Group recorded provisions of EUR
8,997 million (-5.5% vs. December 2016), after deducting write-off
recoveries. This fall is materialised in a decrease in the cost of credit to
1.12% (6 bp less than the previous year).
Total loan-loss allowances were EUR 19,906 million, bringing the
Group’s coverage ratio to 71%. 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), since by having collateral, less
provisions are required.
4. Excluding Popular.
2017 Annual Report
215
Reconciliation of the key figures
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 table shows the relation between the
concepts that comprise these figures:
Million euros
CREDIT RISK
WITH CUSTOMERS
Breakdown 1
Breakdown 2
LENDING
(LOANS AND
ADVANCES TO
CUSTOMERS)
LOANS AND ADVANCES
TO CUSTOMERS
(GROSS)
920,968*
Drawn by customers
883,093
Repos, other financial
assets
37,875
Lending (loans and advances to customers)
872,838
Off-balance sheet exposure
48,130
SECTION ON
CREDIT RISK
* Table main
figures
872,838
872,848
+10
Other
Lending
843,559
Held for
trading
portfolio
8,815
Fair
value
20,475
BALANCE FROM
CONSOLIDATED FINANCIAL
REPORT
Allowances
(23.934)
Asset: lending:
loans and advances to customers
819,625
8,815
20,475
LOANS AND ADVANCES TO
CUSTOMERS
(NET)
848,914
216
2017 Annual Report
5. RISK MANAGEMENT REPORTRisk profile > Credit risk Geographical distribution and segmentation
On the basis of the aforementioned segmentation, the geographical
distribution and situation of the portfolio is shown in the following
charts (excl. Popular):
TOTAL
Million euros
Other
21%
Spain
21%
804,551
821,867
813,815
US
9%
Chile
5%
Portugal
4%
INDIVIDUALS
Other
25%
Total
832,655
Brazil
10%
UK
30%
Spain
11%
Brazil
7%
Performing
Non-performing loans
28,104
33,643
37,094
2017
2016
2015
478,085
469,450
472,807
Total
492,172
US
9%
Chile
4%
Portugal
5%
Performing
UK
39%
Non-performing loans
14,087
13,732
16,204
2017
2016
2015
SMES, COMMERCIAL BANKING AND INSTITUTIONS
Other
14%
US
11%
Chile
7%
Portugal
4%
SGCB
Other
21%
US
5%
Chile
3%
Portugal
2%
UK
9%
207,108
228,303
211,612
Performing
Non-performing loans
11,946
17,304
17,137
2017
2016
2015
119,358
124,113
129,397
Spain
32%
Brazil
11%
Spain
40%
Total
219,054
UK
21%
Total
121,429
Performing
Non-performing loans
Brazil
20%
2,071
2,607
3,752
2017
2016
2015
2017 Annual Report
217
• The NPL ratio in the United States8 stood at 2.79% (+51 bp in the
year), with the coverage ratio remaining high, at 170%.
• At Santander Bank the NPL ratio was 1.21% (-12 bp), due to
the strong performance of the individuals portfolio, proactive
management of certain positions and customers credit profile
improvement from the Oil&Gas sector. The coverage ratio
was 102%.
• SC USA reported an increase in its NPL ratio to 5.86%, due mainly
to the forbearance portfolio. The coverage ratio stood at 213%.
• Puerto Rico maintains its NPL ratio at 7.13% whilst the coverage
ratio at 55%.
C.1.2.3. Amounts past due (performing loans)
Amounts past due by three months or less represented 0.26% of total
credit risk with customers. The following table shows the structure at
31 December 2017, classified on the basis of the first maturity:
AMOUNTS PAST DUE. MATURITY DETAIL
Million euros
Less
than
2 to 3
1 month months months
1 to 2
Loans and advances to
credit institutions
Loans and advances to customers
Public administrations
Other private sector
Debt instruments
Total
5
1,381
1
1,380
-
-
623
1
622
-
1,386
623
0
373
1
372
-
373
C.1.2.4. Non-performing loans portfolio 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 loans 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.
Key figures by geographical area are shown below:
• Continental Europe
• In Spain5, the NPL ratio dropped to 4.72% (-69 bp compared to
2016), due mainly to the proactive management of non-performing
loans and, to a lesser extent, portfolio sales and forbearance
positions regularisation. The coverage ratio was 46%.
• In Portugal the lower default entries and a proactive management
of the portfolio have allowed to continue with the decreasing trend
of non-performing loans putting the NPL ratio at 5.71% (-310 bp
regarding 2016). The coverage ratio was 59%.
• In Poland the NPL ratio decreased further to stand at 4.57% (-85 bp
vs. 2016). The coverage ratio was 68%.
• At Santander Consumer the NPL ratio was 2.50% (-18 bp in the
year), with a strong overall performance by portfolios in most
countries, with a coverage ratio higher than 100%.
• At Banco Popular, the non-performing loans rise to EUR 9,492
million, representing an NPL ratio of 10.75%, a decrease of 9 pp in
the quarter following the formalization, with Blackstone, of the
acquisition agreement of 51% of the real estate business of Banco
Popular. The coverage ratio was 49%.
• In the UK6 the NPL ratio was reduced to 1.33% (-8 bp in the year), due
to strong performance across all segments, particularly SMEs and
individual customers. The coverage ratio maintains stable at 32%,
thanks to an important presence of real guarantees.
• In Brazil7, a sound risk culture based on preventive management,
together with the improved macroeconomic scenario, pushed the
NPL ratio down to 5.29% (-61 bp in the year) at the close of December
2017. The coverage ratio was 93%.
• Chile reduced its NPL ratio to 4.96% (-9 bp in the year), thanks to the
good performance in non-performing loans mainly in the mortgage
and SGCB segment. The coverage ratio was 58%.
• The NPL ratio in Mexico fell to 2.69% (-7 bp in the year), due to a fall
in non-performing loans mainly in the SGCB segment. The coverage
ratio was 98%.
5. Does not include real estate activity. Further details in section C.1.3.2. Spain.
6. Further details in section C.1.3.1. UK
7. Further details in section C.1.3.4. Brazil
8. Further details in section C.1.3.3. US
218
2017 Annual Report
5. RISK MANAGEMENT REPORTRisk profile > Credit risk The table below shows the change over time in non-performing loans
by constituent items:
PERFORMANCE 2015-2017
Million euros
CHANGE OVER TIME IN NON-PERFORMING
LOANS BY CONSTITUENT ITEM (EXCL.POPULAR)
Allowances (start of period)
24,835
27,121
28,046
2017
2016
2015
Million euros
33,643
8,424
(754)
(13,209)
28,104
Non-
performing
loans
2016
Net
entries
Scope
and FX
Write-off
Non-
performing
loans
2017
PERFORMANCE 2015-2017
Million euros
NPL (start of period)
33,643
37,094
41,709
2017
2016
2015
Net entries
Scope
FX and other
Write-off
NPL (end of period
excl. Popular)
Banco Popular
NPL (end of period)
8,424
18
(772)
7,362
734
1,211
7,705
106
(65)
(13,209)
(12,758)
(12,361)
28,104
9,492
37,596
33,643
37,094
33,643
37,094
CHANGE OVER TIME IN ALLOWANCES, ACCORDING
TO CONSTITUENT ITEM (EXCL. POPULAR)
Million euros
11,493
(881)
(2,332)
(13,209)
For other
assets
9,369
For impaired
assets
15,466
For other
assets
7,401
For impaired
assets
12,505
Allowances
2016
Gross
provision
for impaired
assets and
write-downs
Provision
for other
assets
FX and
other
Write-off
Allowances
2017
For impaired assets
For other assets
Gross provision for impaired
assets and write-downs
Provision
Write-downs
Provision for other assets
FX and other
Write-off
Allowances (end of
period excl. Popular)
Banco Popular
15,466
17,706
19,786
9,369
9,414
8,260
11,493
11,045
10,670
11,493
11,045
10,670
-
(881)
-
52
(2.332)
(625)
-
814
(48)
(13,209)
(12,758)
(12,361)
19,906
24,835
27,121
4,623
Allowances (end of period)
24,529
24,835
27,121
C.1.2.5. Forbearance portfolio
The Group has a detailed corporate policy for forbearance which acts
as a reference in the various local transpositions of all the subsidiaries
that form part of the Group. These share the general principles
established by the Bank of Spain and the European Banking Authority.
This policy defines forbearance as the modification of the payment
conditions of a transaction that allow a customer who, is experiencing
financial difficulties (current or foreseeable), to fulfil their payment
obligations, on the basis that if this modification were not made it
would be reasonably certain that they would not be able to meet their
financial obligations. The modification could be made to the original
transaction or through a new transaction replacing the previous one.
In addition, this policy also sets down rigorous criteria for the
evaluation, classification and monitoring of such transactions,
ensuring the strictest possible care and diligence in their granting
and monitoring. Therefore, the forbearance transaction must be
focused on recovery of the amounts due, the payment obligations
must be adapted to the customer's actual situation and losses
must be recognised as soon as possible if any amounts are deemed
irrecoverable.
Forbearances may never be used to delay the immediate recognition of
losses or to hinder the appropriate recognition of risk of default.
Further, the policies define the classification criteria for the
forbearance transactions in order to ensure that the risks are suitably
recognised, bearing in mind that they must remain classified as non-
performing or watch-list for a prudential period of time to attain
reasonable certainty that repayment capacity can be recovered.
2017 Annual Report
219
FORBEARANCE PORTFOLIO
Million euros
Performing
Non-
performing
loans
Total risk
The forbearance portfolio stood at EUR 47,705 million at the end
of December. In terms of credit quality, 42% is classified as non-
performing loans, with average coverage of 58% (24% of the total
portfolio).
Amount
Amount
Amount
% Coverage
/total
Regarding its evolution, and considering a constant perimeter, the
Group’s forbearance exposure has decreased by 19.8%, in line with the
trend marked in prior years.
27,661
20,044
47,705
24%
Total
forbearance
IFRS 9 Financial instruments - Classification and measurement, hedging and
impairment (required for annual periods starting on 1 January 2018)
IFRS 9 establishes the recognition and measurement requirements
for financial instruments and certain classes of contracts for trades
involving non-financial assets. These requirements should be applied
in a retrospective manner, by adjusting the opening balance at 1
January 2018, without restating the comparative financial statements.
The main aspects of the new standard are:
a) Classification of financial instruments: the classification
criteria depends on the business model, which refers to how
an entity manages its financial assets in order to generate cash
flows. Depending on these factors, the asset can be measured
at amortised cost, at fair value with changes reported in other
comprehensive income, or at fair value with changes reported
through profit and loss for the period. IFRS 9 also establishes
an option to designate an instrument at fair value with changes
in profit or loss, under certain conditions. Santander Group
uses the following criteria for the classification of financial debt
instruments:
• Amortised cost: financial instruments under a business model
whose objective is to collect principal and interest cash flows,
over those where no significant unjustified sales exist and fair
value is not a key factor in managing these financial assets. In
this way, unjustified sales are those that are different from sales
related with an increase in the asset’s credit risk, unanticipated
funding needs (stress case scenario), even if such sales are
significant in value, changes in the investment policy no longer
meet the credit criteria or sales imposed by third parties,
except if the regulator requires to demonstrate that the assets
are liquid. Additionally, the contractual flow characteristics
substantially represent a “basic financing agreement”.
• Fair value with changes recognised through other comprehensive
income: financial instruments held in a business model whose
objective is to collect principal and interest cash flows and the
sale of these assets, where fair value is a key factor in their
management. Additionally, the contractual cash flow characteristics
substantially represent a “basic financing agreement”.
• Fair value with changes recognised through profit or loss:
financial instruments included in a business model whose
objective is not obtained through the above-mentioned models,
where fair value is a key factor in managing these assets, and
financial instruments whose contractual cash flow characteristics
do not substantially represent a “basic financing agreement”.
Santander Group’s main activity revolves around retail and
commercial banking operations, and its exposure does not focus
on complex financial products. The Group's main objective is
to achieve consistent classification of financial instruments in
the portfolios as established under IFRS 9. To this end, it has
developed guidelines containing criteria to ensure consistent
classification across all of its units. Additionally, the Group has
analysed its portfolios under these criteria, in order to assign its
financial instruments to the appropriate portfolio under IFRS
9, with no significant changes being identified. Based on this
analysis, Santander Group concludes that:
• Most of its financial assets classified as loans and advances
under IAS 39 will continue to be recognised at amortised cost
under IFRS 9. As a consequence of the contractual cash flows
characteristics analysis of the financial instruments, a 0.2% of
the total balance under IAS 39 for the period will be reclassified
to fair value with changes reported through profit and loss .
As a result of the business model definition according to the
assets management, a 0.2% of the total balance under IAS 39
will be reclassified to fair value with changes recognised in other
comprehensive income.
• In general, debt instruments classified as available-for-sale
financial assets will be measured at fair value with changes
recognised through other comprehensive income. As a
consequence of the contractual cash flows characteristics
analysis of the financial instruments, a 0.2% of the total balance
under IAS 39 for the period, will be reclassified to fair value with
changes reported through profit and loss. As a result of the
business model definition according to the assets management,
a 5.1% of the total balance under IAS 39 will be reclassified to fair
value with changes recognized in other comprehensive income.
However, the expected impact in shareholders’ equity due to the
reclassifications mentioned above is not considered significant.
Available-for-sale equity instruments will be classified at fair
value under IFRS 9, with changes recognised through profit
or loss, unless the Group decides, for non-trading assets, to
classify them at fair value with changes recognised through other
comprehensive income (irrevocably).
IAS 39 financial liabilities classification and measurement criteria
remains substantially unchanged under IFRS 9. Nevertheless, in
220
2017 Annual Report
5. RISK MANAGEMENT REPORTRisk profile > Credit risk most cases, the changes in the fair value of financial liabilities
designated at fair value with changes recognised through profit or
loss for the year, due to the entity credit risk, are classified under
other comprehensive income.
On 12 October 2017, the International Accounting Standards
Board (IASB) published a clarification on the treatment of certain
prepayment options in relation to the assessment of contractual
cash flows of principal and interest on financial instruments, which
is currently pending approval by the European Union. However,
the Group does not expect a significant impact in the transition
period prior to the adoption of this amendment.
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 impairment model applies
to financial assets valued at amortised cost, debt instruments
valued at fair value with changes reported in other
comprehensive income, lease receivables, and commitments and
guarantees given not valued at fair value.
• Use of practical expedients: IFRS 9 includes a number of
practical expedients that may be implemented by entities to
facilitate implementation. However, in order to achieve full
and high quality implementation of the standard, considering
industry best practices, these practical expedients 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 is used as an additional – but not primary -
indicator of significant risk increase. Additionally, there may be
cases in the Group where its use has been rebutted as a result
of studies that show a low correlation of the significant risk
increase with this past due threshold.
• Assets with low credit risk at the reporting date: in general, the
Group assesses the existence of significant risk increase in all
its financial instruments.
• Impairment estimation methodology: the portfolio of financial
instruments subject to impairment is divided into three
categories, based on the stage of each instrument with regard to
its level of credit risk:
• Stage 1: financial instruments for which no significant increase
in risk is identified since its initial recognition. In this case, the
impairment provision reflects expected credit losses arising
from defaults over the following 12 months from the reporting
date.
• Stage 2: if there has been a significant increase in risk since the
date of initial recognition but the impairment event has not
materialised, the financial instrument is classified as Stage 2. In
this case, the impairment provision reflects the expected losses
from defaults over the residual life of the financial instrument.
• Stage 3: a financial instrument is catalogued in this stage when
shows effective signs of impairment as a result of one or more
events that have already occurred resulting in a loss. In this
case, the amount of the impairment provision reflects the
expected losses for credit risk over the expected residual life of
the financial instrument.
Additionally, the amount relative to the impairment provision
reflects expected credit risk losses through the expected residual
life in those financial instruments purchased or originated credit
impaired (POCI).
The methodology required for the quantification of expected
loss due to credit events will be based on an unbiased and
weighted consideration of the occurrence of up to five 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. GDP, house
pricing, unemployment rate, etc.).
In estimating the parameters used for impairment provisions
calculation (EAD, PD, LGD and discount rate), the Group
leverages on its experience of developing internal models for
calculating parameters for regulatory and internal management
purposes. The Group is aware of the differences between such
models and regulatory requirements for provisions. As a result, it
has focused on adapting to, such requirements the development
of its IFRS 9 impairment provisions models.
• Determination of significant increase in risk: with the purpose to
determine whether a financial instrument has increased its credit
risk since initial recognition, proceeding with its classification
into Stage 2, the Group considers the following criteria.
Quantitative
criteria
Qualitative
criteria
Changes in the risk of a default occurring
through the expected life of the financial
instrument are analyzed and quantified
with respect to its credit level in its initial
recognition.
With the purpose of determining if such
changes are considered as significant, with
the consequent classification into Stage 2,
each Group unit has defined the quantitative
thresholds to consider in each of its portfolios
taking into account corporate guidelines
ensuring a consistent interpretation in all
geographies.
In addition to the quantitative criteria mentioned
above, the Group considers several indicators
that are aligned with those used in ordinary
credit risk management (e.g. over 30 days past
due, forbearances, etc.). Each unit has defined
these qualitative criteria for each of its portfolios,
according to its particularities and with the
policies currently in force.
The use of these qualitative criteria is
complemented with the use of expert judgement.
• Default definition: the definition considered for impairment
provisioning purposes is consistent with that used in the
development of advanced models for regulatory capital
requirements calculations.
2017 Annual Report
221
• Use of present, past and future information: estimation
of expected losses requires a high component of expert
judgement and it must be supported by past, present and future
information. Therefore, these expected loss estimates take into
consideration multiple macroeconomic scenarios for which
the probability is measured considering past events, current
situation and future trends and macroeconomic indicators, such
as GDP or unemployment rate. The Group already uses forward
looking information in internal management and regulatory
processes, considering several scenarios. In this sense, the
Group has leveraged its experience in the management of such
information, maintaining consistency with the information used
in the other processes.
• Expected life of the financial instrument: with the purpose of
its estimation all the contractual terms have been taken into
account (e.g. prepayments, duration, purchase options, etc.),
being the contractual period (including extension options) the
maximum period considered to measure the expected credit
losses. In the case of financial instruments with an uncertain
maturity period and a component of undrawn commitment
(e.g. credit cards), expected life is estimated considering the
period for which the entity is exposed to credit risk and the
effectiveness of management practices mitigates such exposure.
• Impairment recognition: the main change with respect to the
current standard related to assets measured at fair value with
changes recognised through other comprehensive income.
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.
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, allowing 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. The treatment of macro-hedges is being
developed as a separate project under IFRS 9. Entities have the
option of continuing to apply IAS 39 with respect to accounting
hedges until the project has been completed. According to the
analysis performed until now, the Group will continue to apply IAS
39 in hedge accounting.
Transition
The 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
(1 January 2018). This new international standard is aligned with the
credit risk directives of the EBA and Bank of Spain Circular 4/2017.
Santander Group has estimated an impact in CET1 fully loaded
of -20 bp. The Group will apply a progressive phased-in regime in
the period of 5 years based on Regulation (EU) No 2017/2395 of the
European Parliament and of the Council amending Regulation (EU)
No 575/2013 as regards transitional arrangements for mitigating
the impact of the introduction of IFRS 9 on own funds that would
suppose an impact of the new impairment model of IFRS 9 of -1 bp on
Common Equity Tier 1 capital during the period from 1 January 2018
to 31 December 2018 in 2018 or 5% of total impact. The increase in
impairment provisions amounts to approximately EUR 2,200 million.
The main causes of this impact are the requirements to record
impairment provisions for the whole life of the transaction for
instruments where a significant risk increase has been identified after
initial recognition, in addition to forward-looking information in the
estimates of impairment provisions.
IFRS 9 implementation strategy and governance
The Group has established a global and multidisciplinary workstream
with the aim of adapting its processes to the new classification
standards for financial instruments, accounting of hedges and
estimating credit risk impairment, ensuring that these processes have
been applied in a uniform way for all Group units, and, at the same
time, have been adapted to each unit’s individual features.
Accordingly, since 2016, the Group has been 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. The process was completed in 2017.
Regarding the governance structure, the Group established a
regular committee to manage the project, and a task force, which
is responsible for its tasks, ensuring that the pertinent responsible
teams take part in coordination with all geographical areas.
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. Internal Audit division was involved in
the project, having kept regular meetings regarding the status of the
project.
The governance structure currently implemented at both corporate
level and in each unit, complies with the requirements set out in
the new standards both in IFRS 9, and in other related regulatory
standards (e.g. EBA credit risk guidelines).
Main project stages and milestones
In relation to the entry into force of this new international standard,
in its 2016 consolidated financial statements the Group reported the
progress and main milestones achieved to that date regarding the
implementation plan for its adoption. This report includes an update
on this information included in the 2016 consolidated financial
statements.
The work undertaken by Santander Group includes an assessment
of the financial instruments included in the classification and
measurement requirements of IFRS 9 and the development of
impairment methodology for calculating expected loss impairment
provisions.
The Group has drawn up the accounting policies and methodological
framework for the implementation developments carried out by
each local unit. These internal regulations have been approved by all
relevant corporate bodies before the new standard comes into force.
With regard to classification and measurement, since 2016 the
Group has been carrying out an analysis of its stock of products,
focusing mainly on those that could trigger a change in accounting
222
2017 Annual Report
5. RISK MANAGEMENT REPORTRisk profile > Credit risk Further, given the importance of the control environment in the
processes, the corporate development of the governance model of
the impairment provisions calculation process as well as aspects
related to the classification of financial instruments has been
completed. The proposed model includes a reference design of the
controls to be implemented in the new developments made in the
implementation of the new standard. Also, as part of the proposed
government model, has defined a process of periodic review of the
main elements including, among others, the following areas:
• Business models defined in each Group unit.
• Quantitative and qualitative criteria defined for significant increase
in risk.
• Macroeconomic scenario defined for impairment provisions
calculation.
• Model adequacy for impairment provisions calculation.
C.1.3.1.2. Mortgage portfolio
It is worth highlighting the individuals mortgage portfolio because of
its importance for Santander UK and all of the Group’s lending. This
stood at EUR 174,930 million at the end of 2017.
This portfolio consists of mortgages for the housing acquisition,
granted to new, as well as existing customers and always constituting
the first mortgage. There are no operations that entail second or
successive liens on mortgaged properties.
The real estate market has shown price growth of 2,7% in the year
– higher than expected – and a stable number of transactions.
The NPL ratio fell from 1.35% in 2016 to 1.13% in December 2017. This
was due to the implementation of prudent policies and a resilient
housing markets. The volume of non-performing loans therefore
dropped by 10%, continuing the trend seen in 2016.
methodology, due to the business model involved and failure to meet
SPPI test requirements (solely payments of principal and interest).
Additionally, using information from 2017, the Group has updated this
analysis and reviewed any new products during the period, assessing
both its asset management strategies (identifying the corresponding
business model), and broadening the review of products in stock.
The local units have now finished developing impairment models
for all their portfolios. The implementation of these impairment
methodologies has enabled the Group to assess the cause of impact
in each portfolio, the impact of each material Group unit, and to
consider the total impact at group level.
The Group has started, in the second half of 2017, the parallel
calculation of impairment provisions under IFRS 9 formally,
without prejudice to the fact that a preliminary parallel calculation
was already being made at consolidated level for monitoring,
performance tracking and impact purposes. Based on the preliminary
results obtained from the impairment provisions calculations, the
Group has addressed the disclosure requirements of the EBA’s
second Quantitative Impact Study (QIS).
The governance process has been completed for the development,
validation and approval of the model that started with a validation of
the first models by the Corporate Internal Validation team and the
Internal Validation units of the countries where these exist.
C.1.3. Details of main geographies
The portfolios of the geographies where the Santander Group has the
highest risk concentrations are set out below, based on the data in
section C.1.2.2. Changes in key figures in 2017.
C.1.3.1. UK
C.1.3.1.1. Portfolio overview
Credit risk with customers in the UK amounted to EUR 247,625 million
at the end of December 2017, accounting for 30% of the Group total.
Santander UK portfolio is divided into the following segments:
PORTFOLIO SEGMENTATION
Other individuals
3%
SMEs and
Commercial Banking
18%
Mortgages, individuals
79%
2017 Annual Report
223
Geographically, the credit exposures are predominantly concentrated
in the south east area of the UK and, particularly, in the metropolitan
area of London.
GEOGRAPHICAL CONCENTRATION
5%
3%
5%
31%
4%
3%
8%
3%
8%
2%
5%
23%
South East (Exc London)
Greater London
Yorks And Humber
North
North West
Wales
South West
East Anglia
East Midlands
West Midlands
Northern Ireland
Scotland
All properties are valued independently before each new transaction is
approved, in accordance with the Group’s risk management principles.
The value of the property used as collateral for mortgages that have
already been granted is updated quarterly by an independent agency,
using an automatic valuation system in accordance with market
practices and in compliance with the prevailing legislation.
The distribution of the portfolio by type of borrower is shown in the
chart below:
MORTGAGE PORTFOLIO LOAN TYPE
Million euros
174,930
4%
7,679
27,378
6%
1,555
35%
60,916
25%
6,839
42%
73,845
52%
14,403
19%
32,490
17%
4,581
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-mortgages: customers who switch the mortgage from another financial entity.
Santander UK offers a wide range of mortgage products, in alignment
with its policies and risk limits. Most of the portfolio contains standard
products (repayment including principal and interest) but also other
specific type of products:
• Interest only loans (25.1%)9 : the customer pays the interest every
month and repays the capital at maturity. An appropriate repayment
vehicle such as a pension plan, mutual funds, etc. is required. This
is a common product in the UK market for which Santander UK
applies restrictive policies in order to mitigate the inherent risks.
For example: a maximum loan to value (LTV) of 50%, more stringent
approval criteria and assessment of payment capacity, simulating the
repayment of capital and interest instead of just interest.
• Flexible loans (9.8%): the contract for this type of loan enables
the customer to modify their monthly payments or make additional
drawdowns of funds up to a previously pre-established limit, under
various conditions.
• Buy to let (4.4%): buy to let mortgages (purchase of a property
to rent out) account for a small percentage of the total portfolio.
These loans were halted between 2009 and 2013, although they
were reactivated following the improvement in market conditions,
with approval subject to strict risk policies. In December 2017, they
represented approximately 6% of total underwriting and 4% of the
remaining portfolio.
It is also necessary to point out the more conservative approach
adopted in Santander UK’s definition of an NPL, in line with the criteria
set by the Bank of Spain and Santander Group, with regard to the
standard applied in the UK market.
The application of these prudent policies has brought the average LTV
of the portfolio to 42% and the weighted average LTV to 38.5%. The
proportion of the portfolio with an LTV of more than 100% was down
to 1.0% in December 2017, from 1.2% in 2016 and 1.7% in 2015.
The following charts show the LTV structure for the stock of residential
mortgages and their breakdown according to the income multiple for
new loans as of December 2017:
LOAN TO VALUE
(AVERAGE 42%)1
INCOME MULTIPLE
(AVERAGE 3.0)2
3%
10%
87%
68%
21%
11%
4. Buy to let: houses bought for renting out.
< 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
annual gross income declared in the customer loan application.
9. Percentage calculated for loans with total or some interest only component.
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2017 Annual Report
5. RISK MANAGEMENT REPORTRisk profile > Credit risk C.1.3.2. Spain (excl. Popular)
C.1.3.2.1. Portfolio overview
Total credit risk (including guarantees and documentary credits) at
Santander Spain (excluding the real estate unit, which is discussed
subsequently in more detail) amounted to EUR 172,176 million (20.7%
of the Group total), with an adequate level of diversification by both
product and customer segment.
Growth in new production in the main portfolios for individuals and
corporates continued in 2017, underpinned by the improved economic
situation and the different strategies implemented by the Bank.
Total credit risk was down 0.5% in year-on-year terms, mainly due to
decreased funding extended to public administrations and the pace of
repayments that exceeded growth in new production in the housing
mortgages segment. All other individuals loans (consumer loans and
credit cards) returned to growth tendency, and the commercial banking
segment consolidated its tendency started in 2016.
CREDIT RISK BY SEGMENT
Million euros
Total
credit risk*
Household
mortgages
Other credit
for individuals
Business
portfolio
Public
administrations
2017
2016
2015
Var
17/16
Var
16/15
172,176
172,974
173,032
(0.5%)
0%
45,483
46,213
47,924
(2%)
(4%)
17,053
16,614
16,729
96,726
96,082
92,789
3%
1%
(1%)
4%
12,914
14,065
15,590
(8%)
(10%)
* Including guarantees and documentary credits
The NPL ratio for the total portfolio was 4.72% 69 bp less than in
2016. The fall in lending (which increased the NPL ratio by 3 bp) was
offset by the better NPL figure (which reduced the ratio by 72 bp). This
improvement was mainly due to gross NPL entries, which were 19%
lower than in 2016, and to the normalisation of several restructured
positions and portfolio sales.
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 customers. For example,
as of 2009 mortgages with a loan-to-value of more than 100% have
not been allowed.
An additional indicator of the portfolio’s good performance is the
reduced volume of foreclosed properties, which in December 2017
amounted to EUR 30.1 million, less than 0.02% of total mortgage
exposure.
C.1.3.1.3 SMEs and Commercial Banking
As shown in the portfolio segmentation chart at the beginning of this
section, lending to SMEs and Commercial Banking (EUR 40,142 million)
represented 18% of total lending at Santander UK as of December 2017.
The following sub-segments are included in these portfolios:
SMES AND COMMERCIAL BANKING
PORTFOLIO SEGMENTS (1%)
Social housing
21%
SGCB
21%
SMEs
39%
Commercial Banking
19%
SMEs: this segment includes firms that are served through small
business banking and regional busines centres. Total lending was EUR
15,748 million, with an NPL ratio of 2.9%.
Commercial Banking: this includes companies to which a risk analyst
is assigned. Total lending was EUR 7,600 million, with an NPL ratio of
1.8 %. It also includes portfolios considered to be non strategic (legacy
and non-core).
SGCB: includes companies under the Santander Global Corporate
Banking risk management model. Lending amounted to EUR 8,269
million with an NPL ratio of 5.5%.
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. Investment stood at EUR 8,525 million.
2017 Annual Report
225
The coverage rate stood at 46%, a year-on-year decline of 2 pp, as a
result of portfolio sales.
The NPL ratio of mortgages extended to households to acquire a home
was 3.48%, 35 bp less than in 2016, supported by a continuing decline
in gross NPL entries.
NPL AND COVERAGE RATIO
Coverage ratio
NPL ratio
NPL RATIO, HOME MORTGAGES, SPAIN
NPL ratio
48%
48%
46%
5.82%
45%
7.38%
5.09%
3.83%
3.48%
6.53%
5.41%
4.72%
2014
2015
2016
2017
The more relevant portfolios are described in the following
subsections.
C.1.3.2.2. Household mortgages
Home acquisition mortgages in Spain amounted to EUR 45,775 million
at the end of 2017 (26% of total credit risk), 99% of which have a
mortgage guarantee.
2014
2015
2016
2017
The portfolio of mortgages extended to acquire homes in Spain kept
its medium-low risk profile with an limited:
• The principal is repaid on all mortgages from the start.
• Early repayment is usual and so the average life of the transaction is
well below that of the contract.
• High quality of collateral concentrated almost exclusively in financing
HOME MORTGAGES*
Million euros
Without mortgage
guarantee
With mortgage guarantee
of which non-
performing loans
Without mortgage
guarantee
With mortgage guarantee
Gross amount
45,775
46,858
48,404
• Average affordability rate stood at 28%.
2017
2016
2015
the first home.
292
45,483
645
46,213
480
47,924
Average 28.2%
DEBT TO INCOME
LOAN TO VALUE
1,624
1,796
2,477
25%
54%
39
1,585
27
1,769
40
2,437
* Does not include the Santander Consumer Spain mortgage portfolio (EUR 2,007
million, with EUR 83 million of non-performing loans)
21%
DI < 30%
30% < DI < 40%
DI > 40%
%
13%
6%
24%
26%
31%
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 house appraisal.
Debt to income: relation between the annual instalments and the customer’s net
income.
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2017 Annual Report
5. RISK MANAGEMENT REPORTRisk profile > Credit risk C.1.3.2.3. Business portfolio
Credit risk assumed directly with SMEs, Corporates and SGCB (EUR
96,726 million) is the main lending segment in Spain (56% of the total).
REAL ESTATE PORTFOLIO EVOLUTION
Million euros
2017
2016
2015
Most of the portfolio (95%) corresponds to customers who have been
assigned an analyst to monitor them continuously throughout the risk
cycle.
Balance at beginning of year
5.515
7.388
9.349
Foreclosed assets
(27)
(28)
(62)
Banco Popular (Perimeter)
2.934
-
-
The portfolio is highly diversified, with more than 200,817 active
customers and with no significant concentrations by activity sector.
Reductions*
Written-off assets
(1.620)
(1.415)
(1.481)
(330)
(430)
(418)
BUSINESS PORTFOLIO DISTRIBUTION
Balance at end of year
6.472
5.515
7.388
* Includes portfolio sales, cash recoveries and third-party subrogations.
Trade and
repairs 14.2%
Manufacturing
industry 13.4%
Construction 11.8%
Electricity, gas and
water supply 9.9%
Real estate
activities 9.4%
Financial and
insurance
activities 7.6%
Professional,
scientific and
technical
activities 7.2%
Transport and
storage 4.7%
Information and
communications
4.8%
Hotels and
restaurants 4.2%
Other 4.2%
Food industry 3.3%
Administrative
activities 2.1%
Metallurgy,
manufacture of iron,
steel and ferroalloy
products 1.6%
Other social
services 1.0%
Extractive
industries 0.6%
The NPL ratio for this portfolio stood at 4.88% in 2017, 91 bp lower
than in 2016, with gross NPL entries falling vs. the previous year,
normalisation of several restructured positions and portfolio sales.
C.1.3.2.4. Real estate activity (incl. Popular)
The Group manages, as a separate unit, the real estate business
portfolio as result of the previous year’s sector crisis and the new
business identified as viable. In both cases the Group has specialised
teams not only involve in the risk areas, but also complement and
support all these transactions life cycle: commercial management,
legal treatment and an eventual recovery function.
In recent years the Group's strategy has been geared towards reducing
these assets. The changes in property development loans to customers
were as follows:
The NPL ratio of this portfolio ended the year at 29.96% (compared
with 61.87% at December 2016) due to the increase in the proportion
of non-performing assets in the troubled loan portfolio and, in
particular, to the sharp reduction in lending in this segment. The
coverage ratio of the real estate non-performing exposure in Spain
stands at 38.7%.
C.1.3.3. US
Credit risk at Santander Holding USA (SHUSA) increased to EUR
77,19010 million at the end of December (representing 9% of the total
Group), is made up of the following business units:
• Santander Bank N.A.: with total loans, including off-balance
sheet exposure, of EUR 44,237 million (57% of Santander US
total). It focuses on retail and commercial banking, of which 38%
is with individuals and approximately 62% with companies. One of
the main strategic goals for this unit is to continue to roll out its
transformation plan. This focuses on compliance with all regulatory
programmes, together with the development of the retail and
commercial banking model towards a comprehensive solution for its
customers.
• Santander Consumer USA (SC USA): vehicles finance company,
with lending of EUR 24,079 million (31% of the total for the USA),
with a vehicle leasing portfolio amounting to EUR 9,439 million.
This activity is mainly based on its business relationship with the
Fiat Chrysler Automobiles (FCA) group, which dates back to 2013.
Through this agreement, SC USA became the preferred finance
provider 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 2,944 million at December 2017, 4% of the total.
Santander Investment Securities (SIS), the New York, is dedicated to
wholesale banking, with total lending at the end of December 2017 of
EUR 2,451 million (3% of total in the USA). Finally, Banco Santander
International (BSI), the Miami, focuses mainly on private banking. Its
lending portfolio stood at EUR 3,471 million at the close of December
2017 with 4% of the total in the USA.
10. Includes EUR 11 million of lending under the holding company.
2017 Annual Report
227
In consolidated terms, US reported a 16% drop in lending compared
to year-end 2016 due to the pricing policy implemented from the
second quarter by SC USA, the disposal of non-strategic assets from
SBNA and the sale of the finance provider in Puerto Rico. NPLs and
the cost of credit remain at moderate levels thanks to the stricter
underwriting policy for new loans adopted by SC USA, and following
the good performance of loans to individuals and Commercial
Banking at Santander Bank. The NPL ratio stood at 2.79% (+52 bp)
at the close of December, with a cost of credit of 3.42% (-26 bp). US
main units performance details are set out below.
Additionally, great progress has been made in projects related to
existing regulatory commitments, particularly with regard to stress
testing and CCAR (Comprehensive Capital Analysis and Review)
exercises, passing both the qualitative and quantitative tests set by
the Federal Reserve and allowing SHUSA once again to distribute
dividends in the third quarter of the year.
C.1.3.3.1. Santander Bank N.A. performance
Most of the lending of Santander Bank is secured - around 59% of
the total - mainly through mortgages and lending to Commercial
Banking. This explains its low NPL ratio and cost of credit. Lending has
decreased by 16% over 2017, due to the sale of non-core assets in a bid
to optimise its balance sheet and improve profitability, and due to the
exchange rate effect.
The NPL ratio remains very low, and continues to decline, as shown in
the charts below, standing at 1.21% in December (-12 bp). This reduction
is explained by a proactive management of certain positions and the
improvement of customer’s credit profile in the Oil&Gas sector due
to more favourable oil prices, in addition to the good performance of
loans to individuals, mainly mortgage loans. Higher coverage in some
segments means that despite the good performance of NPLs, the cost
of credit remains stable at 0.25% (+2 bp). The coverage ratio remains at
comfortable levels, ending the year at 102%.
NON-PERFORMING LOANS RATIO
COVERAGE RATIO
COST OF CREDIT
1.33%
114%
0.23%
0.25%
1.17%
1.21%
100%
102%
0.13%
2015
2016
2017
2015
2016
2017
2015
2016
2017
On a residual basis, SC USA lending also includes the personal lending
portfolio, which is considered non-strategic.
The NPL ratio stands at 5.86%, compared to 3.84% at year-end 2016,
due mainly to the forbearance portfolio, although it remains at
moderate levels thanks to the early management of NPLs resulting
from the nature of the business. The cost of credit improved to
9.84% at 31 December, from 10.72% at year-end 2016. This was due to
new pricing policy implemented from the second quarter and more
stringent requirements on new production, in terms of both risk and
price, resulting in a higher quality new lending mix, and lower new
lending volumes for vehicle financing.
The leasing portfolio - business carried out exclusively under the FCA
agreement and focused on customers with high quality credit profiles
- grew by 4% in the year, to EUR 9,439 million, providing stable and
recurrent earnings. 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 estimated residual
vehicle value at the contract signature and the real vehicle value at the
end of the contract.
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.
C.1.3.3.2. Santander Consumer USA business performance
The risk indicators for SC 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 leasings. 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. As a result, the cost of credit
is higher than in other Group units, but this is offset 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, underwriting, 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.
228
2017 Annual Report
5. RISK MANAGEMENT REPORTRisk profile > Credit risk These mitigating actions are carried out in accordance with the
prudent risk appetite, through the definition of limits, and through
business management, with rapid and efficient sales of the vehicles
when the agreements end, in addition to accelerated depreciation
policies to mitigate future potential losses on the value of the vehicles.
The mark to market of the vehicles held by SC USA on its balance
sheet remain positive, standing at EUR 241 million at the end of
December.
Coverage dropped to 213% (-115 pp) due to the reduction in funds and
an improved portfolio mix, in addition to the rise in NPLs associated
with the forbearance portfolio. Despite the reduction, coverage
remains high, surpassing the average figure for its competitors.
NON-PERFORMING LOANS RATIO
COVERAGE RATIO
COST OF CREDIT
3.66%
3.84%
213%
9.84%
5.86%
337%
328%
10.97%
10.72%
2015
2016
2017
2015
2016
4Q17
2015
2016
2017
The main strategic focus is to improve the return obtained on the
different portfolios, by improving risk-related predictability and pricing
policies, in addition to the optimisation of control and monitoring
processes deriving from events related to regulatory compliance and
customer practices.
C.1.3.4. Brazil
Credit risk in Brazil amounts to EUR 83,076 million, down
approximately 7% against 2016 and largely due to the depreciation of
the Brazilian currency. Santander Brazil therefore accounts for 10% of
the Group lending.
Santander Brazil is adequately diversified and has an increasingly
marked retail profile, with more than 60% of loans extended to
individuals, consumer financing and SMEs.
In December 2017, growth in local currency was approximately 7.5%.
This increase was more pronounced in retail segments with a more
conservative risk profile, at the same time boosting customer relations
and loyalty and business attracted through digital channels.
In the individuals loan segment, it is noteworthy the increase in payroll
discount loans through the Olé Consignado brand, in addition to
credit cards. It is also significant the growing interest in increasing the
mortgage loan portfolio, under stricter admission requirements. At
the same time, Santander Financiamentos has reported strong growth
thanks to the new +Negócios (auto financing) and +Vezes (financing for
goods and services) platforms and has enabled the Bank to increase its
leadership position in the market, attaining a market share of over 20%.
In the SME segment, the main highlight is the increase in rural loans,
with low risk profile and the continued growth of Adquirência.
Finally, the Corporate and SGCB portfolios (with significant dollar
positions in both cases) were once again hit by the depreciation in
the last quarter of the brazilian real against the US dollar. On the
other hand the strategy of reducing exposure to certain sectors, while
boosting exposure to the agricultural and foreign trade segments.
Other products, such as financing working capital continue to hold a
substantial weighting in the portfolio.
The leading indicators for the credit profile of new loans (vintages) are
continuously tracked. These are shown below, confirming the Entity's
resilience. 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 if any deviations from expected scenarios
are detected.
As observable in the following chart, vintages have been kept
at historically low levels thanks to proactive risk management.
The rebound observed in individuals loans was rapidly identified
(concentration in a specific product) and the appropriate measures
taken to improve performance.
2017 Annual Report
229
VINTAGES. PERFORMANCE OF THE OVER 30* RATIO AT THREE AND SIX MONTHS FROM EACH VINTAGE ADMISSION
Individuals
SMEs1
3.0%
3.0%
2.8%
3.9%
3.1%
3.2%
3.1%
2.7%
4.0%
3.5%
3.1% 3.4%
3.9%
3.7%
3.8%
4.6%
4.5%
4.3%
3.1%
3.7%
3.0%
2.4%
2.3%
2.0%
2.7%
2.0%
1.7% 1.8% 1.9%
2.1%
1.4%
1.3%
1.3%
1.5%
1.1%
1.6%
1.2%
1.3%
1.9%
1.5%
1.4%
1.6% 1.5% 1.7% 1.9%1.8%1.8% 1.5%
2.1%
2.0%
1.9%
1.9%
1.5%
1.3%
1.3%
1.0%
1.1%
1.4%
0.9%
1.0%
1.0% 0.9% 1.0% 1.0% 1.3% 1.4%
4
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6
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6
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6
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7
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* 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.
Over30 Mov3 2
Over30 Mov6 2
The NPL ratio stood at 5.29% at year-end 2017 (-61 bp compared to
the year-end of 2016). This fall was due to the preventive management
of risks on the portfolio, in addition to the improved macroeconomic
outlook and the implementation of certain structural reforms that
were well received by the market.
The outlook is optimistic since the economy returned to growth, with
GDP rising on the back of private consumption and exports. This is
significant as it marks a trend change after several years of recession.
Investment has also picked up, supported by the improved business
confidence climate. Additionally, inflation is below the government’s
target, which has allowed the Monetary Policy Committee to
significantly reduce the country’s official interest rate (SELIC). The
unemployment rate, while still high, has also shown improvement
signs.
The Santander Brazil impairment rate on the lending portfolio, known
locally as “over 90 rate”, stood at 3.20% year-end 2017, below the
average for private Brazilian banks for the second consecutive year,
despite of the occasional rise in the last quarter due to a specific client.
OVER 90 TOTAL
5.48%
5.07%
3.53%
3.86%
3.25%
3.20%
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
7
1
Q
1
7
1
Q
2
7
1
Q
3
7
1
Q
4
Santander
System
Private Banking
In general terms, and taking into consideration the last years evolution,
a decreasing trend is observable in the cost of credit (4.36% at the
end of 2017), falling by 53 pp compared to the previous year. This is
due, mainly, to the increase in coverage achieved in 2016 in certain
economic groups for the Corporates and SGCB portfolios (overall
impact on the local financial system). As a result, in 2017 provisioning
requirements for these portfolios were reduced, which, in addition
to the ongoing positive performance of the retail portfolios, has
consolidated its cost of credit downward tendency, for which there
is confidence that it will remain stable in the year in spite of the new
regulatory requirements.
The coverage ratio at year-end stood at 92.6%, at a comfortable level
and presenting stability regarding the previous year.
NON-PERFORMING LOANS RATIO
COVERAGE RATIO
COST OF CREDIT
6.90%
5.64%
5.05%
5.98%
5.90%
5.29%
90%
95%
95%
93%
93%
84%
7.38%
6.34%
4.84%
4.50%
4.89%
4.36%
2012
2013
2014
2015
2016
2017
2012
2013
2014
2015
2016
2017
2012
2013
2014
2015
2016
2017
230
2017 Annual Report
5. RISK MANAGEMENT REPORTRisk profile > Credit risk
C.1.4. Other credit risk aspects
C.1.4.1. Credit risk by activity in the financial markets11
This section covers credit risk generated in treasury activities with
customers, mainly with credit institutions. The operations are
developed through money market financial products with different
financial institutions and through counter-party risk products which
serve the Group’s customers.
According to chapter six of the CRR (EU regulation 575/2013), the
counterparty credit risk is the risk that the client in an operation
could default before the definitive settlement of the cash flows of the
operation. It includes the following types of operations: derivative
instruments, operations with repurchase commitment, stock and
commodities lending, operations with deferred settlement and
financing of guarantees.
There are two methodologies for measuring this exposure: (i) mark to
market (MtM) methodology (replacement value of derivatives) plus
potential future exposure (add on) and (ii) the calculation of exposure
using Monte Carlo simulation 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.
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 performed 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 2017, 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
14,869 million (net exposure of EUR 32,876 million).
COUNTERPARTY RISK: EXPOSURE IN TERMS OF
MARKET VALUE AND CREDIT RISK EQUIVALENT,
INCLUDING MITIGATION EFFECT1
Million euros
2017
2016
2015
Market value, netting effect2
31,162
34,998
34,210
Collateral received
16,293
18,164
15,450
Market value with netting
effect and collateral 3
Net CRE4
14,869
32,876
16,834
44,554
18,761
52,148
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 90 million in December, EUR 3 million in December 2016 and EUR 41 million
in 2015).
11. Includes Banco Popular derivative positions with wholesale customers, excluding repos notional of EUR 9,222 million.
2017 Annual Report
231
In the following table the distribution is shown, both in nominal and
market value terms, of the Group’s different products that generate
counterparty credit risk. The latter, is mainly concentrated in interest
and exchange rate hedging insturments:
COUNTERPARTY RISK: DISTRIBUTION BY NOMINAL RISK AND GROSS MARKET VALUE *
Million euros
2017
2016
Market value
Market value
2015
Market value
Nominal
Positive Negative
Nominal
Positive Negative
Nominal
Positive Negative
32,350
26,195
58,545
980
23,564
20,643
28
6,480
51,695
11,340
789
3,351
831
80
428
508
5
959
794
-
-
(529)
(52)
(581)
(6)
(1,383)
-
(1,210)
-
1,758
(2,598)
39
(66)
8
-
-
-
-
-
CDS protection bought**
CDS protection sold
Total credit derivatives
Equity forwards
Equity options
Spot equities
Equity swaps
Equities - ETF
18,134
12,097
30,231
733
10,572
-
25,264
26,088
36
266
302
4
(95)
(0)
(95)
(0)
770
(2,841)
-
859
-
-
(554)
-
23,323
19,032
42,355
134
15,154
234
15,388
36,512
83
339
422
48
448
0
631
-
(384)
(33)
(416)
(0)
(426)
(0)
(461)
-
Total equity derivatives
62,657
1,633
(3,395)
67,421
1,127
(888)
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
-
-
-
8,660
128,914
37,140
963
8,660
89
(13)
-
-
-
-
-
-
6,357
483
5,159
349
37
5
5
-
(83)
(2)
(2)
-
89
(13)
12,348
48
(88)
16,311
47
(66)
2,604
(3,870)
150,095
3,250
(6,588)
148,537
5,520
(3,315)
256
23
(343)
(17)
31,362
606
479
7
(624)
(27)
32,421
403
(644)
189
1
(4)
488,671
18,264
(15,892)
510,405
25,753
(24,175)
522,287
20,096
(21,753)
1,404
-
-
824
-
-
-
-
-
Total exchange rate derivatives
657,092
21,147
(20,122)
693,292
29,489
(31,413)
703,434
26,019
(25,716)
Asset swaps
Call money swaps
Interest rate structures
Forward rate agreements - FRAs
22,736
1,194
(817)
22,948
1,178
(758)
22,532
950
(1,500)
376,596
2,544
(2,301)
223,005
2,006
(1,581)
190,328
2,460
(1,792)
4,180
190,476
977
23
(594)
(39)
7,406
2,321
370,433
41
(593)
(106)
8,969
2,314
(3,031)
178,428
19
(78)
IRS
3,219,369
71,346
(75,391)
3,182,305
92,268
(92,873)
3,013,490
85,047
(85,196)
Other interest rate derivatives
Interest rate - ETF
185,925
127,288
2,816
(2,113)
210,061
3,762
(2,985)
194,111
3,838
(3,208)
-
-
117,080
-
-
26,660
-
-
Total interest rate derivatives
4,126,570
78,900
(81,255)
4,133,238
101,576
(98,896)
3,634,518
94,628
(94,806)
Commodities
Commodities - ETF
Total commodity derivatives
221
124
345
0
-
0
-
-
-
539
47
586
108
-
108
(5)
-
(5)
468
59
526
130
-
130
(40)
(40)
Total OTC derivatives
4,730,651
102,071
(104,880)
4,794,429
132,770
(131,706)
4,431,000
123,089
(123,805)
Total derivatives
organised markets***
Repos
Securities lending
Total counterparty
risk
154,904
154,812
34,028
165,082
2,322
(2,363)
122,035
2,374
(2,435)
128,765
3,608
(3,309)
54,923
15,469
(16,580)
33,547
9,449
(4,124)
30,115
10,361
(1,045)
5,105,560
119,862
(123,823)
5,104,823
144,593
(138,265)
4,623,908
137,058
(128,159)
* 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.
232
2017 Annual Report
5. RISK MANAGEMENT REPORTRisk profile > Credit risk
The following chart shows a breakdown of nominals in counterparty
operations by maturity. The Bank’s derivatives transactions focus on
terms of less than five years, repos and securities loans maturing in less
than one year.
COUNTERPARTY RISK: DISTRIBUTION OF NOMINALS BY MATURITY*
Million euros
Credit derivatives**
Equity derivatives
Fixed income derivatives
Exchange rate derivatives
Interest rate derivatives
Commodity derivatives
Total OTC derivatives
Total derivatives organised markets***
Repos
Securities lending
Total counterparty risk
* Figures with management criteria.
*** Credit derivatives acquired including hedging of loans.
Up to 1 year
Up to 5 years
Up to 10 years More than 10 years
40%
71%
100%
51%
26%
100%
29%
68%
96%
100%
33%
50%
25%
0%
29%
43%
0%
41%
30%
4%
0%
39%
0%
4%
0%
15%
21%
0%
20%
2%
0%
0%
19%
10%
0%
0%
5%
10%
0%
10%
0%
0%
0%
9%
TOTAL
30,231
62,657
8,660
657,092
4,126,570
345
4,730,651
154,904
165,082
54,923
5,105,560
*** 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.
From the client´s perspective, counterparty credit risk exposure
is concentrated in those clients with high credit quality (90.5%
counterparty risk with a rating equal or higher than A), and mainly with
clearing houses (60%) and financial institutions (34%).
DISTRIBUTION OF COUNTERPARTY RISK BY
CUSTOMER RATING (IN NOMINAL TERMS)*
AAA
AA
A
BBB
BB
B
Other
0.87%
9.92%
79.70%
7.15%
2.30%
0.06%
0.00%
* Ratings based on equivalences between internal ratings and credit agency ratings .
COUNTERPARTY RISK BY CUSTOMER TYPE
Commercial Banking/individuals
1%
Sovereign/supranational
2%
Corporate/
Project Finance
3%
In general, transactions with financial institutions are performed
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 with counted exceptions, mainly with multilateral
institutions and securitisation funds, in which are unilateral in favour of
the client.
The collateral received under the different types of collateral (CSA,
OSLA, ISMA, GMRA, etc.) signed by the Group amounted to EUR
16,293 million (of which EUR 11,398 million corresponded to collateral
received by derivatives), mostly cash (81.2%), and the rest of the
collateral types are subject to strict policies of quality regarding the
issuer type and its rating, debt seniority and haircuts applied.
In geographical terms, the collateral received is distributed as shown in
the following chart:
COLLATERAL RECEIVED. GEOGRAPHICAL DISTRIBUTION
Brazil
2%
Mexico
5%
Other
3%
UK
23%
Financial institutions
34%
Clearing houses
60%
Spain
67%
2017 Annual Report
233
As a consequence of the risk associated with the credit exposure
that is taken on with each counterparty, Santander Group includes a
valuation adjustment for OTC (over the counter) derivatives due to the
risk associated with credit exposure assumed with each counterparty,
i.e. a Credit Valuation Adjustment (CVA)12, and a valuation adjustment
due to the risk relating to the Group itself assumed by counterparties
on OTC derivatives, i.e. Debt Valuation Adjustment (DVA).
At year-end, there were CVAs of EUR 322.5 million (-49.9% compared
to December 2017) and DVA of EUR 219.6 million (-43.7%). The
decrease is due to the fact that credit spreads have been reduced by
percentages greater than 40% in the most liquid terms and reductions
in the main counterparty’s exposure.
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 through clearing
houses, as required by the recent regulation and to foster internal use
of electronic execution systems.
Furthermore, 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.
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 operations13.
The following tables show the weighting of trades settled through
clearing houses as a portion of total counterparty risk at December 2017:
DISTRIBUTION OF COUNTERPARTY RISK BY SETTLEMENT CHANNEL AND PRODUCT TYPE*
Nominal in million euros
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).
Bilateral
Nominal
27,707
36,568
8,660
655,501
1,175,774
221
100,996
54,923
2,060,350
%
91.6%
58.4%
100%
99.8%
28.5%
64.2%
61.2%
100%
CCP**
Organised markets ***
Nominal
2,524
0
-
188
2,823,508
-
64,086
-
2,890,306
%
8.4%
0.0%
0.0%
0.0%
68.4%
0.0%
38.8%
0.0%
Nominal
-
26,088
1,404
127,288
124
-
-
154,904
%
0.0%
41.6%
0.0%
0.2%
3.1%
35.8%
0.0%
0.0%
Total
30,231
62,657
8,660
657,092
4,126,570
345
165,082
54,923
5,105,560
*** 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.
12. The definition and methodology for calculating the CVA and DVA are set out in C.2.2.2.6. Credit Valuation Adjustment (CVA) and Debt Valuation Adjustment (DVA)
in this report.
13. 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.
234
2017 Annual Report
5. RISK MANAGEMENT REPORTRisk profile > Credit risk
DISTRIBUTION OF RISK SETTLED BY CCP AND ORGANISED
MARKETS, BY PRODUCT AND CHANGE OVER TIME (*)
In notional terms, the CDS position incorporates EUR 13,019 million of
protection acquired17 and EUR 12,117 million of protection sold.
Nominal in million euros
Credit derivatives
Equity derivatives
Fixed income derivatives
Exchange rate derivatives
2017
2,524
2016
3,916
26,088
36,568
-
1,592
349
1,419
2015
1,778
6,522
896
11,755
Interest rate derivatives
2,950,796
2,732,103
2,069,802
Commodity derivatives
124
47
59
Repos
Securities lending
General total
64,086
29,763
44,679
-
4
-
3,045,210 2,804,170
2,135,489
* Figures with management criteria.
Off-balance sheet credit risk14
The off-balance sheet risk corresponding to funding and guarantee
commitments with wholesale customers was EUR 90,453 million, with
the following distribution by products:
OFF BALANCE SHEET EXPOSURE
Million euros
Product
Funding*
Maturity
< 1
year
1-3
years
3-5
years
> 5
years
Total
At 31 December 2017, the lending sensitivity to increases in spreads
of one basis point was EUR -3.7 million, whilst the average VaR at
year-end 2017 was EUR 2.3 million, lower than the 2016 figure (EUR 1.7
million).
C. 1.4.2. Concentration risk18
The concentration risk control is a vital part of management. The
Group continuously tracks the degree of concentration of its credit
risk portfolios using various criteria: geographical areas and countries,
economic sectors, products and groups of customers.
The board, via the risk appetite, determines the maximum levels of
concentration, as detailed in section A.4.1. Risk appetite and structure
of limits. In line with the risk appetite, the Executive Risk Committee
establishes the risk policies and reviews the appropriate exposure
levels for the adequate management of the degree of concentration of
credit risk portfolios.
As indicated at the beginning of this chapter, in geographical terms,
credit risk with customers is diversified in the main markets where the
Group operates (UK 30%, Spain 21%, USA 9%, Brazil 10%, etc.).
In terms of diversification by sector, approximately 59% of the Group’s
credit risk corresponds to individual customers, who, due to their
inherent nature, are highly diverse. In addition, the lending portfolio is
well distributed, with no significant concentrations in specific sectors.
The following chart shows the distribution at the end of the year:
13,834
19,231
27,229
3,004
63,298
SECTOR DIVERSIFICATION
Individuals 59.1%
Trade and
repairs 6,9%
Real estate
activities 5.1%
Construction and
public works 3.3%
Other business
services 3.3%
Other manufacturing
industries 2.8%
Transport and
communications 2.4%
Prod. and distrib.
of electricity, gas
and water 2%
Technical guarantees
5,657
7,242
819
328
14,046
Financial and
commercial
guarantees
6,936
3,944
Foreign trade**
459
143
965
22
637
12,482
3
627
General total
26,886 30,560
29,035
3,972 90,453
* Mainly including committed bilateral and syndicated credit lines.
** Mainly including stand-by letters of credit.
Activity in credit derivatives15
Santander Group uses credit derivatives to cover loans, customer
business in financial markets and trading operations. The volume of
this activity is small compared to that the main 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, geographical area, sector
and liquidity.
Public administrations
excl. central
admin. 1.9%
Other financial
intermediaries 1.8%
Food, beverages
and tobacco 1.2%
Other social
services 1.2%
Hotels and
restaurants 1.1%
Oil refining 0.6%
Metalwork 0.6%
Other sectors
<1% 6.7%
14. Excluding Popular.
15. Excluding Popular.
16. The definition and calculation methodology for VaR is set out in section C.2.2.2.1. Value at Risk (VaR).
17. This figure excludes CDSs with an approximate value of EUR 2,293 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.
18. Excluding Popular.
2017 Annual Report
235
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 its value is equal or greater than 10% 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.
Regulatory credit exposure with the 20 largest groups within the
scope of large risks represented 4.7%19 of outstanding credit risk with
customers (lending plus balance sheet risks) at December 2017.
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.
C.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 2017, the provisionable exposure to country-risk was
EUR 184 million (EUR 181 million in 2016). At the end of December 2017,
total provisions stood at EUR 37 million, compared to EUR 29 million at
the end of the previous year.
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.
C.1.4.4. Sovereign risk vis-á-vis the rest of public
administrations
As a general criteria, sovereign risk is that contracted in transactions
with a central bank (including the regulatory cash reserve
requirement), the Treasury risk issuer or similar entity (public debt
portfolio) 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 criteria, historically used by the Group, differs in some respects
from that requested by the EBA for its regular stress exercises. The
main differences are that the EBA’s criterion does not include deposits
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.
Exposure to sovereign risk (according to the criteria applied in the
Group) mainly emanates from the obligations to which the Bank´s
subsidiaries are subject regarding the establishment of certain deposits
in central banks, the establishment of deposits with liquidity excess
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 currency
of the country of issuance is not very significant (EUR 13,175 million,
5% of total sovereign risk), and exposure to non-local sovereign issuers
involving cross-border20 risk is even less significant (EUR 2,886 million,
1.2% of total sovereign risk).
In general, over the past few years, total exposure to sovereign risk has
remained 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 levels21:
EXPOSURE BY RATING
AAA
AA
A
BBB
Lower than BBB
2017
13%
19%
29%
14%
25%
2016
16%
17%
29%
8%
30%
2015
34%
4%
22%
33%
7%
The sovereign risk distribution by rating level has been affected by
several rating reviews for the sovereign issuers of the countries where
the Group operates over the last few years (Brazil, UK, etc.).
19. Including Popular.
20. Countries that are not considered as “low risk” by the Bank of Spain.
21. Internal ratings used.
236
2017 Annual Report
5. RISK MANAGEMENT REPORTRisk profile > Credit risk On the basis of the EBA criteria already mentioned, the exposure to
public administrations at the end of each of the last three years is
shown in the table below (figures in million euros)22.
EXPOSURE TO SOVEREIGN RISK (EBA CRITERION)
Million euros
Trading and
other
at fair value
4,928
53
1,479
-
-
(1,192)
2
1,034
172
2,548
3,202
1,780
428
147
3,422
18,003
Spain
Portugal
Italy
Greece
Ireland
Rest Eurozone
UK
Poland
Rest of Europe
US
Brazil
Mexico
Chile
Rest of America
Rest of the world
Total
31 Dec 2017
Portfolio
31 Dec 2016
31 Dec 2015
Available
for sale
37,748
5,220
4,613
-
-
497
1,751
5,566
358
2,616
20,201
5,152
2,985
424
512
Lending
18,055
3,541
16
-
-
81
7,236
40
40
765
1,171
2,586
312
940
920
Held-to-maturity
portfolio
Total net direct
exposure
Total net direct
exposure
Total net direct
exposure
1,906
3
-
-
-
-
7,414
-
-
-
2,720
-
-
-
-
62,637
8,817
6,108
-
-
(614)
16,403
6,640
570
5,929
27,294
9,518
3,725
1,511
4,854
45,893
7,072
1,952
-
-
(341)
17,639
6,290
791
5,713
24,286
10,461
3,525
1,172
3,475
48,694
10,007
2,717
-
-
1
5,163
5,401
670
5,093
23,929
10,519
5,362
1,802
5,890
87,643
35,703
12,043
153,392
127,930
125,248
Exposure is moderate and remained on an upward tendency in
2017, The sovereign risk exposure of Spain (where the Group has its
headquarters) is not high in terms of total assets (4.3% at the end of
December 2017), compared to its peers.
Sovereign exposure in Latin America is mostly 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
Spain
39%
36%
Other Europe
19%
26%
41%
25%
Latin America
33%
31%
27%
Other
9%
7%
7%
Dec 2015
Dec 2016
Dec 2017
22. In addition at 31 December 2017, the Group maintained direct net exposures in derivatives with a fair value of EUR 1,681 million, and indirect net exposures in derivatives with a
fair value of EUR 15 million.
2017 Annual Report
237
C.1.4.5. Social and environmental responsibility
Social and environmental policy
Banco Santander contributes with society for sustainable economic
growth, promoting the protection, conservation and recovery of the
environment, and human rights protection. To this end, Santander has
included the social, environmental and reputational risk assessment of
its operations and customers in the decision-making processes across
the whole Organisation, in line with its sustainability policy.
The sustainability policies are annually revised. After the 2015 review,
they apply to more activities, more customers and follow the best
international practices and standards. These policies define the
banking activity behaviour framework regarding sectors of defence,
energy and soft commodities. A summary of these policies is provided
in Santander´s website. It is noteworthy the approval in 2017, by the
board, of a new mining and metal sector.
The policies were implemented throughout the Group by creating
social-environmental risk task forces in the main geographies in
which all functions involved in the decision making of the banking
activities are represented. These groups were created as a replica of
the corporate working group headed by the Group Chief Compliance
Officer to assess and issue a collegiate opinion on the transactions and
customers affected by these policies, as a prior step to the imposition
of sanctions by the corresponding decision-making bodies.
In addition to the above, the Group has applied the Equator Principles
(EP) since 2009, to project finance and corporate funding for a known
purpose, including bridge loans before finance is granted for building
or remodelling a specific project. An in-depth report is available on the
Equator Principles website and in the Santander Group Sustainability
Report.
Climate change
As indicated in section A.4.3 Scenario analysis, the Task Force on
Climate-related Financial Disclosures (TCFD) of the Financial Stability
Board recently published a series of recommendations for corporate
governance, strategy, risk management, measurements and targets
in relation to climate change. These recommendations will imply
a significant advance in the reporting of risk and opportunities
associated with climate change by financial institutions.
The banking sector is key in the transition, both in terms of investment
opportunities that it will present and the importance in terms of risk
management derived from adjusting the system and world economic
activities to the new climate change challenges.
Santander Group integrates the risks related to climate change
in its control module through, among other aspects, social and
environmental policies incorporated in the decision-making process
and the periodic risk identification exercise (for further detail consult
section B. Background and upcoming challenges). In addition, to
implement some of the TCFD recommendations, the Group is
participating together with other entities in an UNEP FI financial
initiative aforementioned in section A.4.3. Scenario analysis.
As a result of the Paris climate agreement, governments in the
different countries are currently working to develop and implement
the financial mechanisms necessary to meet the established targets
and facilitate the transition to a lower emission economy. In Europe,
the High Level Expert Group on Sustainable Finance of the European
Commission is the main developer of this type of measure, seeking to
adjust the financial system for a more sustainable future.
C.1.5. Credit risk cycle
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 approves 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 its oversight and
control within the Santander Group. 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 the level of risk appetite approved by the board of
directors.
The cycle that includes credit risk management, with the involvement
of the business areas of risk and senior management, is predicated on
the key risk management, and control processes mentioned in section
A.4. Management processes and tools, Specifically for credit risk, these
processes are split into three interrelated phases, including the results
of the post sales phase in the risk study and planning pre sales phase.
Each of these phases is associated with specific decision models
established for decision-making in line with the business objectives
and credit policies defined by the Group.
BACKFEEDING / INFORMATION
Pre-sales
Sales
After-sales
CONTROL
4. Decision-making
on transactions
5. Monitoring
6. Measurement and control
7. Recovery management
1. Planning
2. Assessment: study
of the risk and credit
rating process
3. Establishment of limits/
pre-classifications/
pre-approvals
238
2017 Annual Report
5. RISK MANAGEMENT REPORTRisk profile > Credit risk C.1.5.1. Planning
When defining joint business objectives among business and risks
areas, including the types and levels of risk to be assumed, the
following factors stand out:
Identification
The identification of credit risk is a key component for the active
management and an effective control of portfolios. The identification
and classification of external and internal risk in each business allows
corrective and mitigating measures to be adopted.
Planning (strategic commercial plan-SCP)
Strategic commercial plans (SCPs) are a basic management and control
tool for the Group’s credit portfolios. The plans are prepared jointly by
the commercial and risks areas, and define the commercial strategies,
risk policies and measures/infrastructures required to meet the annual
budget targets. These three factors are considered as a whole, ensuring
a holistic view of the portfolio to be planned and allowing a map of all
the Group’s credit portfolios to be drawn up.
Planning allows business targets to be set and specific action plans
to be defined, within the risk appetite established by the Entity, and
these targets to be met by assigning the necessary means (models,
resources, systems).
The comprehensive management of the SCP means that an up-to-date
view of the credit quality of the portfolios is available at all times,
credit risk can be measured, internal controls carried out, in addition to
regular monitoring of the planned strategies, to anticipate deviations
and identify significant changes in risk and their potential impact,
along with the application of corrective measures.
SCPs are approved by each entity’s most senior executive Risks
Committee, and validated at corporate level in the Executive Risks
Committee or equivalent body. The regular monitoring, established by
the governance in place, is performed by the same bodies that approve
and validate the plans.
Scenario analysis
As described in section A.4.3. Scenarios analysis of this report, credit
risk scenario analysis enables senior management to better 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 the
provisions made and the capital to 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, both central or most likely
scenarios (baseline), as well as economic scenarios that although less
likely to occur can be more adverse (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 the Group 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 the Santander Group’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.
• 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 portfolio and historical
losses 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 risk factors performance regarding changes in macroeconomic
variables.
These forecasting models follow the same development, validation
and governance cycles as with other internal models of the Group.
They are subject to regular backtesting and recalibration to ensure
they correctly capture the relationship between macroeconomic
variables and the risk parameters.
• Adaptation of the new projection methodology to the new
regulatory requirements (IFRS 9), with an impact on the estimation of
the expected loss associated with each of the scenarios put forward,
as well as with other important credit risk metrics deriving from
the parameters obtained (NPLs, provisions, allowances, etc.).
• Analysis and rationale for the credit risk profile evolution at portfolio,
segment, unit and Group levels, in the face of different scenarios and
compared to previous years.
• Integration of management indicators to supplement the analysis
of the impact caused by macroeconomic factors on risk metrics.
• A series of controls and comparisons are run to ensure that the
controls and backtesting 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 for their decision making.
C.1.5.2. Assessment: study of the 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
on a short and medium term horizon, risk operations, solvency and
expected return on the basis of the risk assumed.
With this objective, the Group uses customer credit decision models in
all segments in which it operates: SGCB (Santander Global Corporate
Banking: sovereign, financial institutions and corporate companies),
Commercial Banking, institutions, SMEs and individuals.
2017 Annual Report
239
The decision models applied are based on credit rating drivers. These
models and drivers are monitored and controlled to calibrate and
precisely adjust the decisions and ratings they assign. Depending on
the segment, drivers may be:
• Rating: resulting 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 judgement. Used for the SGCB, Commercial
Banking, institutions and SMEs (treated on an individual basis)
segments.
• Scoring: an automatic assessment system for credit applications.
It automatically assigns an individual assessment of the customer
for subsequent decision making. There are two types: approval or
performance and it is used in the individuals and SMEs (treated on a
standard basis) segments.
The resulting ratings are regularly reviewed, incorporating the latest
available financial information and experience in the development of
banking relations. The reviews are increased in the case of customers
who reach certain levels previously determined in the automatic
warning systems and are classified as special watch.
C.1.5.3. Establishment of limits, pre-classifications
and pre-approvals
This process establishes the risk that each customer is able to assume.
These limits are set jointly by the business and risks areas and have
to be approved by the executive Risks Committee (or committees
delegated by it) and reflect the expected risk-return by the business.
Different models are used according to the segment:
• 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 or maturity.
• For commercial banking and institutions that meet certain
requirements (high knowledge, rating, etc.) a more simplified pre-
classification model is used.
• For SMEs and individuals, in specific situations where a series of
requirements are met, pre-approved operations are established
for customers, or pre-approved operations for potential customers
(campaigns and policies to encourage the use of limits).
BACKFEEDING / INFORMATION
Pre-sales
Sales
After-sales
CONTROL
4. Decision-making
on transactions
5. Monitoring
6. Measurement and control
7. Recovery management
1. Planning
2. Assessment: study
of the risk and credit
rating process
3. Establishment of limits/
pre-classifications/
pre-approvals
C.1.5.4. Decision-making on transactions
The sales phase consists of the decision-making process, which
analyses and resolves operations. Approval by the risk area is a prior
requirement before contracting any risk operation. All decisions
regarding risks must consider the risk appetite, limits and management
policies defined in the planning stage, in addition to other factors
relevant to the risk and profitability equilibrium.
According to the segment, decision-making follows different
procedures:
• For SGCB, and according to the prior limit-setting phase, two types
of decision will be available: (1) automatic, within the limits set under
the pre-classification framework, (2) approval from a risk analyst or
committee (although the operation meets the amount, maturity and
other conditions set in the pre-approved limit).
• For commercial banking and institutions, approval is required from a
risk analyst or committee (although the operation meets the amount,
maturity and other conditions set in the pre-approved limit).
• In terms of individual customers 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.
Mitigation measures
Santander Group applies various credit risk mitigation techniques on
the basis, among other factors, of the type of customer and product.
Some are inherent to specific operations (e.g. real estate guarantees)
while others apply to a series of operations (e.g. netting and collateral).
The different mitigation techniques can be grouped into the following
categories:
Personal guarantees and credit derivatives
This type of guarantees correspond 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.
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2017 Annual Report
5. RISK MANAGEMENT REPORTRisk profile > Credit risk 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
in non-organised markets. Hedging with credit derivatives, mainly
through credit default swaps (CDS), is contracted with front-line banks.
Real guarantees
These are assets that are subject to compliance with the guaranteed
obligation. They can be provided by the customer or by a third party.
The real goods or rights used for the guarantee may be financial
(cash, securities deposits, gold, etc.) or non-financial (property, other
moveable property, etc.). Therefore guarantees can be in the form of:
• Pledges / financial assets: debt/equity instruments or other
financial assets received as the guarantee.
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.
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.
A very important example of a real financial guarantee is the
collateral, which is used for the purpose (as with the netting
technique) of reducing counterparty risk. 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 operations subject to the collateral agreement
are regularly valued (normally daily) applying the parameters defined
in the contract so that a collateral amount is obtained (usually cash or
securities), which is to be paid to or received from the counterparty.
• Real estate mortgages: real estate assets used in transactions with
an ordinary or maximum mortgage guarantee. There are regular
appraisal processes, based on real market values, for the different
types of property, which meet the requirements established by local
and the Group regulators.
• Other real guarantees: any other type of real guarantee.
As a general rule, the repayment capacity is the most important aspect
in decisions on the acceptance of risks, although this is no impediment
to seek the highest 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.
Implementation of the mitigation techniques follows the minimum
requirements established in the guarantee management policy:
legal certainty (possibility of legally requiring the settlement of
guarantees at all times), the lack of substantial positive correlation
between the counterparty and the value of the collateral, the correct
documentation of all guarantees, the availability of documentation for
the methodologies used for each mitigation technique and appropriate
monitoring, traceability and regular control of the goods/assets used
for the guarantee.
BACKFEEDING / INFORMATION
Pre-sales
Sales
After-sales
CONTROL
4. Decision-making
on transactions
5. Monitoring
6. Measurement
and control
7. Recovery management
1. Planning
2. Assessment: study
of the risk and credit
rating process
3. Establishment of limits/
pre-classifications/
pre-approvals
C.1.5.5. Monitoring
Monitoring business performance on a regular basis, and comparing
performance against agreed plans is a fundamental task. Monitoring is
performed in several areas:
Monitoring / Anticipation of customers
All customers must be monitored in an ongoing and holistic manner
that enables the earliest detection possible of any incidents that may
arise in relation to risk impacting the customer’s credit rating, so that
specific measures (predefined or ad-hoc) can be implemented to
correct any deviations that could have a negative impact for the entity.
This responsibility is shared by the commercial and risk functions.
Monitoring is carried out by local and global risk teams, supplemented
by internal audit. It is based on customer segmentation:
• In the commercial banking, institutions and SMEs with individual
treatment, the function consists of identifying and tracking
customers whose situations require closer monitoring, reviewing
ratings and continuously analysing indicators.
2017 Annual Report
241
• In the individual customers, businesses and SMEs with a low turnover
segment monitoring 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.
Portfolio measurement and control
In addition to the monitoring customer credit quality, Santander
establishes the control procedures needed to analyse portfolios and
their performance, as well as possible deviations regarding planning or
approved alert levels.
The function is developed through an integrated and holistic vision of
credit risk, establishing as the main elements the control by countries,
business areas, management models, products, etc., facilitating early
detection of specific attention points, as well as preparing action plans
to correct any deteriorations.
C.1.5.6. 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).
Recovery activity has been aligned with the socio-economic reality of
the Group's countries and different risk management mechanisms are
used with adequate prudential criteria on the basis of age, guarantees
and unpaid debt conditions.
Portfolio analysis permanently and systematically controls the
evolution of credit risk with regard 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 recovery areas are business areas that directly manage customers
for which the corporate model has a business focus, where
sustained value creation is based on effective and efficient collection
management The new digital channels are becoming increasingly
important in recovery management, and new forms of customer
relations are developing.
The credit risk control phase uses, among others and, in addition to
traditional metrics such as:
• Cost of credit: is the result of dividing credit risk allowances net of
recovery of write-offs at 12 months, by the average gross loans and
advances to customers on the balance sheet for those 12 months.
The monitoring and control of this metric reflect a direct relationship
between the risk appetite of the Group and the business units, giving
rise to a medium-low risk profile.
• Concentration: in the individuals and SMEs segments, the
monitoring of HRP (high risk profile) portfolios prevent concentration
in portfolios with a risk profile that does not fit with the Group’s
medium-low risk profile target. In the SGCB, commercial banking and
institutions segment concentration limits are monitored in sectors,
single names, large exposure, underwriting, specialised lending and
counterparties with ratings of < 5.0.
• Expected loss: is the estimate of the economic loss that would
occur during the next year of the current portfolio at a given
moment. It is an additional activity cost that must impact on the
operations price.
The diverse features of Santander´s 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
and digital component, while personalised management focuses on
customers who, because of their profile, require a specific manager and
more individualised management.
Recovery management is divided into four phases: irregularity or early
non-payment; recovery of non-performing loans; recovery of write-
offs; and management of foreclosed assets.
The management scope for the recovery function includes
management of non-productive assets (NPAs), corresponding to the
forbearance portfolios, NPLs, write-off loans and foreclosed assets,
where the Bank may use mechanisms to rapidly reduce these assets,
such as disposals of loan portfolios or foreclosed assets.
The Bank employs specific policies for recovery management that
include the principles of the different recovery strategies, while
ensuring the required rating and provisions are maintained. Therefore,
the Group is constantly seeking alternative solutions to legal channels
for collecting debt.
In countries with a high exposure to real estate risk, 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.
242
2017 Annual Report
5. RISK MANAGEMENT REPORTRisk profile > Credit risk C.2. Trading market risk,
structural risk and liquidity risk
C.2.1. Activities subject to market
risk and types of market risk
The perimeter of activities subject to market risk involve those
operations where patrimonial risk is assumed as a consequence of
variations 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, and balance sheet liquidity risk.
• 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 instruments,
mainly the IRR of Government bonds and interbank interest rates.
• 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.
• Volatility risk is the risk or sensitivity of the value of a portfolio 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.
2017 Annual Report
243
• Prepayment or cancellation risk. When the contractual
c) Liquidity risk: when measuring liquidity risk, the following types of
relationship in certain transactions explicitly or implicitly allows 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.
In addition to market risks, balance sheet liquidity risk must also be
considered: unlike market liquidity risk, liquidity risk is defined as the
possibility of not meeting payment obligations on time, or doing so at
excessive cost. Among the losses caused by this risk are losses due to
forced sales of assets or margin impacts due to the mismatch between
expected cash inflows and outflows.
Pension and actuarial risks, which are described below, also depend
on shifts in market factors.
Depending on the nature of the risk, activities are segmented as
follows:
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
responsible for managing this risk.
b) Structural risks: market risks inherent in the balance sheet,
excluding the trading portfolio. Management decisions on these
risks are taken by the Assets and Liabilities Committee (ALCO)
of each country in coordination with the Group’s ALCO and are
executed by the Financial 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.
risk are considered:
• Financing risk (or short-term liquidity risk): this identifies the
possibility that the entity is unable to meet its obligations as a
result of the inability to sell assets or obtain financing.
• Mismatch risk (or long term liquidity risk): this identifies the
possibility that differences between the maturity structures of
assets and liabilities generate an additional cost to the entity
as a consequence of unappropriated management or a market
situation that might affect the availability or the cost of funding
sources.
• Contingency risk: this identifies the possibility that adequate
management levers will be unavailable to raise liquidity as a result
of an outlier event that entails greater financing needs or more
strict collateral requirements to raise funds.
• Concentration risk: this identifies the possibility that the
entity is overly concentrated as to sources of funding in terms of
counterparties, maturities, products or geographies that might
give rise to issues if such concentration were to lead to non-
renewal of financing.
• Market risk for liquidity risk purposes: the risk of loss of value
of the entity's liquid assets buffer and that changes in the value
of the entity's transactions (derivatives and guarantees, among
others) may imply additional collateral needs and therefore impair
liquidity.
• Asset encumbrance risk or risk of excess assets committed in
financing transactions and other types of market dealing: the risk
of not having sufficient unencumbered assets available to meet
collateral or margin requirements or to execute actions under the
liquidity contingency plan.
d) 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, requiring 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.
244
2017 Annual Report
5. RISK MANAGEMENT REPORTRisk Profile > Trading market risk, structural risk and liquidity risk C.2.2. Trading market risk
C.2.2.1. Key figures and change over time23
Santander Group’s trading risk profile remained relatively low in 2017,
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 by risk factors.
C.2.2.1.1. VaR analysis24
In 2017, Santander 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 volatility in
Brazil in May in terms of interest rates and exchange rates owing to the
political turmoil, rose slightly above its average path over the last three
years, ending 2017 at EUR 10.2 million, close to the minimum level of
the year25.
VAR 2015-2017 (EXCL. POPULAR)
Million euros. VaR at 99% over a one day horizon.
65
60
55
50
45
40
35
30
25
20
15
10
5
— VaR
— 15 day moving average
— VaR, 3 year average
MAX (63.2)
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
n
u
J
5
1
0
2
g
u
A
5
1
0
2
t
c
O
5
1
0
2
c
e
D
6
1
0
2
b
e
F
6
1
0
2
r
p
A
6
1
0
2
n
u
J
6
1
0
2
g
u
A
6
1
0
2
t
c
O
6
1
0
2
c
e
D
7
1
0
2
b
e
F
7
1
0
2
r
p
A
7
1
0
2
n
u
J
7
1
0
2
g
u
A
7
1
0
2
t
c
O
7
1
0
2
c
e
D
MIN (9.7)
VaR during 2017 fluctuated between EUR 9.7 million and EUR 63.2
million. The most significant changes were related to variations in
exchange and interest rate exposures and also market volatility.
The average VaR in 2017 was EUR 21.5 million, slightly higher than in
the two previous years (EUR 18.3 million in 2016 and EUR 15.6 million
in 2015).
The following histogram shows the distribution of risk in VaR terms
from 2015 to 2017. The accumulation of days with levels of between
EUR 13 million and EUR 31 million (95.2%) is shown. Values higher than
EUR 31 million (3.6%) largely occur in periods affected by temporary
spikes in volatility, mainly in the Brazilian real against the dollar and
also in the Brazilian interest rates.
HISTOGRAM VaR 2015-2017
VaR at 99% over a one day horizon
Number of days (%) in each range
30.3%
)
%
(
s
y
a
d
f
o
r
e
b
m
u
N
10.2%
1.2%
21.5%
14.8%
8.4%
5.5%
4.5%
2.8%
0.8%
1
1
<
3
1
6
1
9
1
2
2
5
2
8
2
1
3
4
3
7
3
>
VaR in million euros
23. Excluding Popular. Trading portfolios of Popular represents less than 1% of the equivalent market risk of Santander Group with very low activity and complexity.
24. Value at Risk. The definition and calculation methodology for VaR is set out in section C.2.2.2.1. Value at Risk (VaR).
25. Regarding trading activity in SGCB (Santander Global Corporate Banking) financial markets. In addtion to the trading activity of SGCB, there are other positions catalogued for
accounting purposes. The total VaR of trading of this accounting perimeter was EUR 9.9 million.
2017 Annual Report
245
Risk per factor
The following table displays the average and latest VaR values at 99%
by risk factor over the last three years, the lowest and highest values in
2017 and the Expected Shortfall (ES) at 97.5%26 at the close of 2017:
VAR STATISTICS AND EXPECTED SHORTFALL BY RISK FACTOR27, 28
Million euros. VaR at 99% and ES at 97.5% with one day time horizon.
2017
VaR (99%)
ES
(97.5%)
2016
VaR
2015
VaR
Minimum
Average
Maximum Latest
Latest
Average
Latest
Average
Latest
Total
Diversification effect
Interest rate
Equities
Exchange rate
Credit spread
Commodities
Total
Diversification effect
Interest rate
Equities
Exchange rate
Credit spread
Commodities
Total
Diversification effect
Interest rate
Equities
Exchange rate
Total
Diversification effect
Interest rate
Equities
Exchange rate
i
g
n
d
a
r
t
l
a
t
o
T
e
p
o
r
u
E
a
c
i
r
e
m
A
n
i
t
a
L
a
i
s
A
d
n
a
A
S
U
s Total
9.7
(2.1)
7.7
1.0
2.1
2.3
0.0
4.8
(3.2)
4.3
0.3
0.3
2.4
0.0
7.7
1.6
7.2
0.5
1.5
1.2
0.5
1.2
0.0
0.1
0.1
e
i
t
i
v
i
t
c
a
l
a
b
o
G
l
Diversification effect
(0.0)
Interest rate
Credit spread
Exchange rate
0.0
0.1
0.0
21.5
(8.0)
16.2
3.0
6.6
3.6
0.0
7.0
(6.1)
6.1
1.1
2.1
3.7
0.0
20.1
(3.7)
15.1
3.3
5.5
2.1
(0.6)
2.0
0.2
0.5
0.4
(0.1)
0.1
0.4
0.0
63.2
(39.9)
70.4
5.9
15.7
5.1
0.1
12.0
(11.1)
11.5
2.9
5.7
5.7
0.1
72.8
(34.9)
82.3
6.5
14.7
3.7
(1.7)
2.9
1.4
1.3
0.7
(0,2)
0.3
0.6
0.0
10.2
(7.6)
7.9
1.9
3.3
4.6
0,0
6.4
(6.0)
5.7
0.5
1.4
4.7
0.0
8.4
(4.1)
7.5
1.9
3.1
1.2
(0.4)
1.2
0.0
0.4
0.2
(0,1)
0.0
0.2
0.0
11.5
(7.9)
10.0
2.1
2.8
4,6
0.0
6.9
(5.6)
5.7
0.6
1.5
4.7
0.0
9.2
(4.3)
8.7
2.2
2.6
1.5
(0.2)
1.4
0.0
0.2
0.2
(0.0)
0.0
0.2
0.0
18.3
(10.3)
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
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
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
26. This metric is defined in detail in section C.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.
27. The VaR of global activities includes operations that are not assigned to any particular country.
28. In Latin America, the United States and Asia, VaR levels are not shown separately for credit spreads and commodities, because of their scarce or zero materiality.
246
2017 Annual Report
5. RISK MANAGEMENT REPORTRisk Profile > Trading market risk, structural risk and liquidity risk
At the end of 2017, VaR decreased by EUR 7.7 million regarding year-
end 2016, increasing average VaR by EUR 3.2 million. By risk factor,
average VaR increased in interest rate and equity risk, but fell in
exchange rate, credit spread and commodities. By geographies, there
was a slight increase in Latin America and the United States/Asia,
although it fell in the other geographies.
C.2.2.1.2. Gauging and backtesting measures
The real losses can differ from the VaR forecasts for various reasons
related to the limitations of this metric. This is set out in more detail
in the section C.2.2.2. 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)
The most important test consists of backtesting exercises, analysed
at local and global levels and in all cases with the same methodology.
Backtesting consists of comparing the VaR forecast 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.).
— VaR interest rate
— VaR credit spread
— VaR Equity
— VaR Commodities
— VaR exchange rate
Santander calculates and evaluates three types of backtesting:
25
20
15
10
5
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6
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6
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6
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6
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7
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Lastly, the table below compares the VaR with stressed VaR29 figures
for the trading activity of the two units with the highest average VaR
in 2017.
VAR VS. STRESSED VAR IN 2017:
MAIN PORTFOLIOS
Million euros. VaR and stressed VaR at 99% with one-day time horizon
2017
2016
Mín Average Max
Latest Average
Latest
VaR (99%)
2.3
3.9
5.6
5.3
5.7
4.7
Spain
Stressed
VaR (99%)
12.8
17.6 25.0
VaR (99%)
6.2
18.6
72.7
17.9
6.3
14.9
12.0
14.3
10.6
Brazil
Stressed
VaR (99%)
9.0
31.4 66.7
11.7
22.2
23.0
• “Clean” backtesting: daily VaR is compared to the results obtained
without taking into account intraday results or changes in portfolio
positions. This method compares 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 2017, for the total portfolio, there were two exceptions for Value
at Earnings (VaE)30 at 99% (day on which daily profit was higher
than VaE). The first, on 23 May, explained by the major shifts in the
exchange rates of the euro and US dollar against the Brazilian real and
the interest rate curves for Brazil, as a result of political events in the
country, and the second on 28 December due to a general markets
movement favourable to the portfolio positions.
There was also an exception to VaR at 99% (day on which the daily
loss was higher than the VaR) on 18 May, for the same reason as the
exception to VaE of the same month.
The number of exceptions which occurred is consistent with the
assumptions specified in the VaR calculation model.
29. Description in section C.2.2.2.2.
30. The definition and calculation methodology for VaE is set out in section C.2.2.2.1.
2017 Annual Report
247
BACKTESTING OF TRADING PORTFOLIOS: DAILY RESULTS VS. VAR FOR PREVIOUS DAY
Million euros
65
50
35
20
5
-25
-40
-55
-70
— Clean P&L
— VaE 99%
— VaE 95%
— VaR 99%
— VaR 95%
5
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2
C.2.2.1.3. Distribution of risks and management results31
Geographical distribution
In the trading activity, the average contribution of Latin America to
the Group’s total VaR in 2017 was 88.4% compared with a contribution
of 43.8% in economic results. Europe, with 10.6% of global risk,
contributed 50.5% 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 / MANAGEMENT P&L:
GEOGRAPHICAL DISTRIBUTION
Average VaR (at 99% with a 1 day time horizon) and Annual cumulative
management P&L (EUR million), % of annual totals
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Management P&L
2015
2016
2017
Average annual VaR
2015
2016
2017
5
1
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6
1
0
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5
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Latin America
Europe
USA and Asia Global Activities
31. Results similar in terms to Gross Margin (excluding operating costs, the financial margin would be the only cost).
248
2017 Annual Report
5. RISK MANAGEMENT REPORTRisk Profile > Trading market risk, structural risk and liquidity risk
Distribution of risk by time
The next chart shows the risk assumption profile, in terms of VaR,
compared to results in 2017. The average VaR remained relatively stable
in the first half, as did results, although they displayed higher volatility
in the second half owing to market instability.
TIME DISTRIBUTION OF RISKS AND P&L IN 2017: PERCENTAGES OF ANNUAL TOTALS
VaR (at 99% with a 1 day time horizon) and annual cumulative management P&L (million euros), % 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 2015 and 2017. It
shows that in more than 94.5% of the days with open markets, the
daily returns32 were between a range of EUR -10 and +10 million.
C.2.2.1.4. Risk management of derivatives
Derivatives activity is mainly focused on marketing investment
products and hedging risks for customers. Management is focused on
ensuring that the net risk opened is the lowest possible.
DAILY MANAGEMENT P&L (MTM) 2015-2017
FREQUENCY HISTOGRAM
Daily management P&L “clean” of fees and intraday operations (EUR mn).
Number of days (%) in each range.
38.7%
27.8%
15.1%
)
%
(
s
y
a
d
f
o
r
e
b
m
u
N
9.7%
3.2%
0.9%
0.1%
These transactions include options on equities, fixed-income and
exchange rates. The units where this activity mainly takes place are:
Spain, Brazil, UK and Mexico.
The following chart shows the VaR Vega33 performance of structured
derivatives business over the last three years. It fluctuated at around
an average of EUR 4 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.
3.3%
0.8%
0.4%
During 2016, a number of different events pushed up market volatility
(Brexit, general elections in Spain and the US, political-economic
situation in Brazil, constitutional referendum in Italy).
0
2
-
<
5
1
-
0
1
-
5
-
0
5
0
1
5
1
0
2
0
2
>
32. Yields “clean” of fees and results of intraday derivative operations.
33. Vega, a Greek term, means here the sensitivity of the value of a portfolio to changes in the price of market volatility.
2017 Annual Report
249
2017, excluding certain occasions, was less volatile than the two
previous years, which means less risk and, hence a lower VaR Vega.
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
— 15 day moving average
— VaR Vega
5
1
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Regarding the VaR by risk factor, on average, the exposure was
concentrated, in this order: equities, interest rates, 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
2017
2016
2015
Minimum
Average
Maximum
Latest
Average
Latest
Average
Latest
1.4
(0.6)
0.6
0.9
0.4
0.0
2.3
(1.5)
1.3
1.5
0.9
0.0
3.7
(3.1)
2.5
2.2
2.4
0.0
2.5
(0.6)
0.7
1.4
1.0
0.0
4.0
(2.4)
3.6
1.7
1.1
0.0
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
250
2017 Annual Report
5. RISK MANAGEMENT REPORTRisk Profile > Trading market risk, structural risk and liquidity risk
Exposure by business unit was mainly concentrated in Spain, Brazil, UK
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
2017
2016
2014
Minimum
Average
Maximum
Latest
Average
Latest
Average
Latest
1.4
1.0
0.5
0.4
0.2
2.3
1.9
0.6
0.8
0.5
3.7
3.0
0.8
3.1
1.2
2.5
1.7
0.6
0.9
0.7
4.0
3.6
1.3
0.8
0.4
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
The average risk in 2017 (EUR 2.3 million) is lower compared to 2016
and 2015, for the reasons explained above.
Santander Group continues to have a very limited exposure
to instruments or complex structured vehicles, reflecting a
management culture one of whose hallmarks is prudence in risk
management. In both cases exposure has once again been reduced
compared to the prior year, and the Group therefore holds:
• Hedge funds: the total exposure is not significant (EUR 32.6 million
at close of December 2017) 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.
• Monolines: exposure to bond insurance companies (monolines) as
of December 2017 was EUR 27.3 million, all of it indirect, by virtue of
the guarantee provided by this type of entity for various financing
or traditional securitisation transactions. The exposure in this case is
to double default, as the primary underlying assets are of high credit
quality.
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 Risk division verifies:
• 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
apply this valuation model.
And provided these two points are always met:
• The availability of appropriate systems, duly adapted to calculate
and monitor the results, positions and risks of new operations every
day.
• The degree of liquidity of the product or underlying asset, in order
to make possible their coverage when deemed appropriate.
C.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).
2017 Annual Report
251
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.
LONG AND SHORT MAJOR POSITIONS
Million euros
1st reference
2nd reference
3rd reference
4th reference
5th reference
Sub-total top 5
Total
Top ‘long’ positions
(sales of protection)
Top ‘short’ positions
(purchase of protection)
Exposure at
default (EAD)
% of
total EAD
Exposure at
default (EAD)
% of
total EAD
129
89
68
64
60
410
4,462
2.9%
2.0%
1.5%
1.4%
1.3%
9.1%
100%
(166)
(25)
(16)
(14)
(9)
(230)
(5,863)
2.8%
0.4%
0.3%
0.2%
0.2%
3.9%
100%
Note: zero recoveries are supposed (LCR=0) in the EAD calculation
C.2.2.1.6. Scenario analysis
Various stress scenarios were calculated and analysed regularly in 2017
(minimum 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 2017 are shown in the
following table:
STRESS SCENARIO: MAXIMUM VOLATILITY (WORST CASE)
Million euros
Total trading
Europe
Latin America
US
Global activities
Asia
Interest rate
Equities
Exchange rate
Credit spread
Commodities
(32.5)
(10.3)
(21.0)
(0.1)
(0.1)
(1.0)
(8.7)
(3.3)
(5.4)
(0.0)
(0.0)
(0.0)
(5.3)
(1.9)
(3.0)
(0.3)
(0.0)
(0.1)
(18.7)
(18.2)
(0.0)
(0.0)
(0.5)
(0.0)
(0.0)
(0.0)
(0.0)
(0.0)
(0.0)
(0.0)
Total
(65.2)
(33.7)
(29.4)
(0.4)
(0.6)
(1.1)
252
2017 Annual Report
5. RISK MANAGEMENT REPORTRisk Profile > Trading market risk, structural risk and liquidity risk 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 EUR 65.2 million, if the stress movements defined in the
scenario materialised in the market. This loss would be concentrated in
Europe (in the following order: credit spread, interest rate, equities and
exchange rate) and in Latin America (in the following order: interest
rates, equities and exchange rate).
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 was to capture the impact on results of the
reduction in liquidity in the markets. Two time horizons were used (one
day and 10 days), and in both cases there were 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.
"EBA adverse scenario": the scenario proposed by the 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 last 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.
Reverse stress tests analysis, which are based on establishing a
predefined result (unfeasibility 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 performed 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 2015-2017 SCENARIOS (ANNUAL AVERAGES)
Million euros
2015
2016
2017
100
50
0
-50
-100
-150
-200
-250
Worst
case
Abrupt crisis
Plausible
Fwd Looking
Crisis 07-08
1d
Crisis 07-08
10d
EBA Adverse
2017 Annual Report
253
C.2.2.1.7. Linkage with balance sheet items. Other alternative
risk measures
Below are the year-end 2017 balance sheet items in the Group’s
consolidated position that are subject to market risk, distinguishing
the positions whose main risk metric is the 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
Main market risk metric
Balance sheet
amount
VaR
Other Main risk factor for ‘Other’ balance
Assets subject to market risk
1,444,305
167,943
1,276,362
Cash and deposits at central banks
110,995
110,995
Interest rate
Trading portfolio
Other financial assets at fair value
Available-for-sale financial assets
Investments
Hedging derivatives
Loans
Other assets financials1
Other non-financial assets2
125,458
124,924
534
Interest rate, credit spread
34,782
34,500
282
Interest rate, credit spread
133,271
6,184
8,537
916,504
47,390
61,184
-
-
133,271
Interest rate; equities
6,184
Equities
8,519
18
Interest and exchange rates
916,504
Interest rate
47,390
Interest rate
61,184
Liabilities subject to market risk
1,444,305
175,088
1,269,217
Trading portfolio
107,624
107,442
182
Interest rate, credit spread
Other financial liabilities at fair value
Hedging derivatives
Financial liabilities at amortised cost3
Provisions
Other financial liabilities
Equity
Other non-financial liabilities
59,616
8,044
1,126,399
14,489
8,709
106,833
12,591
59,609
8,037
7
7
Interest rate, credit spread
Interest and exchange rates
1,126,399
Interest rate
14,489
Interest rate
8,709
Interest rate
106,833
12,591
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 the Santander Group
(basically derivatives linked to the home price index - HPI - in market
activity in the UK, and interest rate and correlation derivatives for
share prices in the parent bank’s market activity), as well as for
inputs, in general, 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.
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C.2.2.2. Methodologies
C.2.2.2.1. Value at Risk (VaR)
The standard methodology Santander 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 on a timely manner. 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.
5. RISK MANAGEMENT REPORTRisk Profile > Trading market risk, structural risk and liquidity risk
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.
• Unlike VaR, Stressed VaR is obtained using the percentile with
uniform weighting, not the higher of the percentiles with exponential
and uniform weightings.
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 portfolio risk, 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 VaR calculation model accuracy.
C.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.
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 being a
subadditive metric34. The Basel 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.
C.2.2.2.3. Scenario analysis
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, which consists in 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.
C.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
34. 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.
2017 Annual Report
255
to changes in market factors can be obtained using analytical
approximations by partial derivatives or by complete revaluation of the
portfolio.
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.
Furthermore, the daily definition of the income statement by the Risks
area is an excellent indicator of risks, as it allows the impact of changes
in financial variables on portfolios to be identified.
C.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 essentially 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.
C.2.2.2.6. Credit Valuation Adjustment (CVA) and Debt
Valuation Adjustment (DVA)
Santander Group incorporates CVA and DVA when calculating the
results of trading portfolios. The Credit Valuation Adjustment
(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. The CVA is calculated by taking into account the
potential exposures with each counterparty in each future maturity.
C.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 A.4.1. Risk appetite and limits structure). This process is part
of an annual limits plan defined 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 activities 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:
• Total exposure limit.
• Jump to default by issuer limit.
The CVA for a particular counterparty is the sum of the CVA for all
maturities. For its calculation, the following inputs are considered:
• Others.
• Expected exposure: including, for each operation the current market
• Limits for origination transaction.
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.
These general limits are complemented by other sub-limits to establish
a sufficiently granular limits framework for the effective control of
the market risk factors to which the Group is exposed in its trading
activities. Positions are monitored on a daily basis globally and for each
unit at desk level, as well as with an exhaustive control of changes to
portfolios, so as to identify any incidents that might need immediate
correction, and thus comply with the Volcker Rule.
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 in
order to achieve the budget established, seeking consistency between
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2017 Annual Report
5. RISK MANAGEMENT REPORTRisk Profile > Trading market risk, structural risk and liquidity risk the limits and the risk/return ratio. The limits are approved by the
corresponding risk bodies.
NET INTEREST INCOME (NII) SENSITIVITY36
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.
C.2.3. Structural balance sheet risks35
C.2.3.1. Key figures and change over time
The market risk profile inherent in Santander Group’s balance sheet,
in relation to its asset volumes and shareholders’ funds, as well as the
budgeted financial margin, remained moderate in 2017, in line with
previous years.
C.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 2017, 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 British pound yield curve, at EUR 246
million, the Euro, at EUR 219 million, the US dollar, at EUR 190 million
and the Polish zloty, at EUR 55 million, all relating to risks of rate cuts.
Other
10%
UK
35%
Parent Bank
22%
Poland
8%
US
25%
Other: Portugal and SCF.
At the same date, the most relevant risk in 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 4,902 million, followed by the US dollar at EUR 626 million, the
British pound at EUR 431 million and the Polish zloty at EUR 72 million,
all with a risk of falling interest rates, scenarios which are now very
unlikely.
ECONOMIC VALUE OF EQUITY (EVE) SENSITIVITY37
Other
6%
US
7%
UK
6%
Parent Bank
81%
Other: Poland, Portugal and SCF.
35. Includes the total balance sheet with the exception of trading portfolios. Excluding Popular with the exception in the VaR metric.
36. Sensitivity to the worst-case scenario between +100 and -100 basis points.
37. Sensitivity to the worst-case scenario between +100 and -100 basis points.
2017 Annual Report
257
3 years
25,701
60,258
4,605
5 years
16,939
47,721
321
> 5 years
Not sensitive
33,876
72,469
(4,735)
122,026
91,455
0
30,571
(29,952)
(30,461)
(43,329)
3 years
66,785
28,727
4,919
42,977
5 years
21,128
20,002
6,353
7,479
> 5 years
Not sensitive
18,318
29,841
6,867
(4,655)
28,297
27,953
0
344
Risk to the economic value of equity over one year, measured as
sensitivity to parallel ± 100 basis point movements in the worst-case
scenario, was also concentrated in Brazil (EUR 521 million), Chile
(EUR 179 million) and Mexico (EUR 91 million).
ECONOMIC VALUE OF EQUITY (EVE) SENSITIVITY41
Other
3%
Mexico
11%
Chile
22%
Brazil
64%
Other: Argentina, Peru and Uruguay.
The tables below set out the balance-sheets interest-rate risk of the
Parent Bank and UK by maturity, at the end of 2017:
PARENT: INTEREST RATE REPRICING GAP38
Million euros
Assets
Liabilities
Off balance sheet
Net gap
Total
3 months
377,668
430,024
52,355
0
107,820
108,696
51,431
50,555
SANTANDER UK: INTEREST RATE REPRICING GAP39
Million euros
Assets
Liabilities
Off balance sheet
Net gap
Total
324,613
327,639
3,027
0
3 months
151,018
200,826
(11,703)
(61,511)
1 year
71,307
49,425
734
22,615
1 year
39,066
20,291
(3,409)
15,366
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 liquidity excess is invested in the
short term in the local currency.
In 2017, 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
95 million), Chile (EUR 39 million) and Mexico (EUR 36 million), as
shown in the chart below:
NET INTEREST INCOME (NII) SENSITIVITY40
Other
5%
Mexico
20%
Chile
22%
Brazil
53%
Other: Argentina, Peru and Uruguay.
38. Aggregate gap for all currencies on the balance sheet of the parent bank unit, in euros.
39. Aggregate gap for all currencies on the balance sheet of the Santander UK unit, in euros.
40. Sensitivity to the worst-case scenario between +100 and -100 basis points.
41. Sensitivity to the worst-case scenario between +100 and -100 basis points.
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2017 Annual Report
5. RISK MANAGEMENT REPORTRisk Profile > Trading market risk, structural risk and liquidity risk The table below shows the interest-rate risk maturity structure of the
Brazil balance sheet in December 2017:
BRAZIL: INTEREST RATE REPRICING GAP42
Million euros
Assets
Liabilities
Off balance sheet
Net gap
Total
172,337
172,337
0
0
3 months
52,940
77,555
5,689
(18,926)
1 year
20,807
6,722
(268)
13,818
3 years
17,673
7,973
(4,231)
5,469
5 years
> 5 years
Not sensitive
8,180
3,757
598
5,021
14,355
8,457
(1,367)
4,531
58,382
67,873
(421)
(9,912)
Balance sheet structural interest rate VaR
In addition to sensitivities to interest rate movements (in which,
assessments of ±100 bp movements are complemented 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.
2017
Minimum
Average Maximum
Latest
Structural interest
rate VaR*
280.9
373.9
459.6
Diversification effect
(198.6)
(230.3)
(256.5)
Europe and USA
Latin America
362.6
116.9
433.6
170.6
517.8
198.4
459.6
(169.1)
511.8
116.9
* Includes credit spread VaR on ALCO portfolios.
2016
Minimum
Average Maximum
Latest
Structural interest
rate VaR*
Diversification effect
Europe and USA
Latin America
242.5
(129.2)
157.7
214.0
340.6
(271.0)
376.8
234.9
405.8
327.2
(294.3)
(288.6)
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
(310.7)
777.0
309.3
264.2
(189.1)
210.8
242.6
* Includes credit spread VaR on ALCO portfolios.
Structural interest rate risk, measured in terms of VaR at one-day and
at 99%, averaged EUR 373.9 million in 2017. It is important to note the
high level of diversification between Europe and United States balance
sheets and those of Latin America.
C.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 rates43. In 2017, hedging levels
of the core capital ratio for exchange rate risk were maintained at
approximately 100%.
At the end of 2017, the largest exposures of permanent investments
(with their potential impact on equity) were, in order, in Brazilian
reais, UK pounds sterling, US dollars, Chilean pesos, Polish zlotys
and Mexican pesos. The Group hedges some of these positions of a
permanent nature with exchange-rate derivatives.
In addition, the Financial 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.
C.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 2017
was diversified in securities in various countries, mainly Spain, China,
USA, Morocco and the Netherlands. Most of the portfolio is invested
in financial activities and insurance sectors. Among other sectors,
to a lesser extent, are for example the public administrations or the
professional, scientific and technical activities.
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 2017, the VaR at 99% with a one day time frame was
EUR 261.6 million (EUR 323 and EUR 208.1 million at the end of 2016
and 2015, respectively).
42. Aggregate gap for all currencies on the balance sheet of the Brazil unit, in euros.
43. In early 2015, the criterion for coverage of the core capital ratio was changed from phase-in to fully loaded.
2017 Annual Report
259
C.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 rates 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
2017
2016
2015
Minimum
Average
Maximum
754.9
(258.9)
280.9
471.2
261.6
878.0
(337.3)
373.9
546.9
294.5
991.6
(407.5)
459.6
621.1
318.4
Latest
815.7
(376.8)
459.6
471.2
261.6
Average
869.3
(323.4)
340.6
603.4
248.7
Latest
922.1
(316.6)
327.2
588.5
323.0
Average
698.5
(509.3)
350.0
634.7
223.2
Latest
710.2
(419.2)
264.2
657.1
208.1
* Includes credit spread VaR on ALCO portfolios.
C.2.3.2. Methodologies
C.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.
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.
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.
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.
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
which are obtained from a model that is based on the relation between
balances and their own moving averages.
Interest rate gap on assets and liabilities
This is the basic concept for identifying the entity's interest rate risk
profile and measures 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 (called,
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.
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.
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2017 Annual Report
5. RISK MANAGEMENT REPORTRisk Profile > Trading market risk, structural risk and liquidity risk 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 fixed rates on the mortgage
and the market rate at which it could be refinanced, net of
cancellation and opening costs.
• Seasoning: trend that the pre-payment is downward at the
beginning of the instrument life-cycle (contract signature) and then
increases, stabilising as time passes.
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, applicable in 2018.
C.2.3.2.2. Structural exchange-rate risk/hedging of results
These activities are monitored via position measurements, VaR and
results, on a monthly basis.
C.2.3.2.3. Structural equity risk
These activities are monitored via position measurements, VaR and
results, on a monthly basis.
C.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 limits are:
• Balance sheet structural interest rate risk:
• Limit on the sensitivity of net interest income to 1 year.
• Seasonality: redemptions or early cancellations tend to take place at
specific dates.
• Limit of the sensitivity of equity value.
• Burnout: decreasing trend in the speed of pre-payment as the
• Structural exchange rate risk:
instrument’s maturity approaches, which includes:
a) Age: defines low rates of pre-payment.
b) Cash pooling: define those loans that have already overcome
various waves of interest rate falls as more stable. In other words,
when a loan portfolio 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) Other: 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.
• Net position in each currency (for hedging positions of results).
In the event of exceeding one of these limits or their sub limits, the
risk management responsibles must explain the reasons it occured and
provide an action plan to correct it.
C.2.4. Liquidity risk
C.2.4.1. Key figures and change over time
The Group has a strong liquidity and financing position based on
a decentralised liquidity model, where each of the Group's units is
autonomous in managing its liquidity and maintains large buffers of
highly liquid assets.
As a rule, short-term liquidity metrics, the Liquidity Coverage Ratio
(LCR), remains stable, with regulatory ratios above the threshold (the
minimum required in 2017 is 80%).
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LIQUIDITY COVERAGE RATIO (LCR)
LCR
Group
Spain
UK
Brazil
US
2017
133%
130%
120%
126%
118%
2016
146%
134%
139%
165%
136%
Santander has an effective management of its liquidity buffers to
face the challenge of maintaining a proper liquidity profile (regulatory
limits) while protecting the profitability of our balance sheet.
Furthermore, most of the Group's units maintain sound balance
sheet structures, with a stable financing structure based on a broad
customer deposit base, which covers structural needs, with low
dependence on short-term financing and liquidity metrics well above
regulatory requirements, both locally and at Group level, and within
the limits of risk appetite.
Hence, for long-term liquidity, the regulatory metric, Net Stable
Funding Ratio (NSFR), remains above 100% for the Group's core units
and for the consolidated ratio.
As to structural asset encumbrance risk, i.e. the risk of facing an
excess of assets bearing charges or encumbrances in connection with
financing transactions and other market dealings, at Group level the
risk is in line with our European peers, where the main sources of
encumbrance are collateralised debt issues (securitisations and covered
bonds) and collateralised funding facilities provided by central banks.
The soundness of units' balance sheets is also demonstrated by stress
scenarios constructed in accordance with uniform corporate criteria
across the Group. All units would survive the worst-case scenario for
at least 45 days, meeting liquidity requirements with their liquid asset
buffers alone.
C.2.4.2. Methodologies
The Group measures liquidity risk using a range of tools and metrics
that account for the risk factors identified within this risk.
Liquidity buffer
The buffer is a portion of the total liquidity available to an entity to
deal with potential withdrawals of funds (liquidity outflows) that may
arise as a result of periods of stress. Specifically, a buffer consists of a
set of unencumbered liquid resources that are available for immediate
use and capable of generating liquidity promptly, without incurring any
loss or excessive discount. The Group uses the liquidity buffer as a tool
that forms part of the calculation of most liquidity metrics and is also a
metric in its own, with specified limits for each entity.
Liquidity Coverage Ratio (LCR)
LCR, or liquidity coverage ratio, is one of the short-term liquidity
metrics used by the Group. LCR has a regulatory definition. It is
intended to reinforce the short-term resistance of banks' liquidity risk
profile by ensuring that they have available sufficient high-quality liquid
assets to withstand a stress scenario (idiosyncratic stress or market
stress) of considerable severity for thirty calendar days.
Wholesale liquidity metric
This metric takes the form of a liquidity horizon assuming non-
renewable wholesale financing outflows; it measures the number
of days the entity would survive using its liquid assets to cover that
loss of liquidity. The Group uses this figure as an internal short-
term liquidity metric which also reduces the risk of dependence on
wholesale funding.
Net Stable Funding Ratio (NSFR)
NSFR, or net stable funding ratio, is one of the metrics used by the
Group to measure long-term liquidity risk. It is a regulatory metric
defined as the coefficient of the available amount of stable funding and
the required amount of stable funding. This metric requires banks to
maintain a stable funding profile in relation to the composition of their
assets and off-balance sheet activities.
Structural funding ratio
The structural funding ratio measures the volume of structural
funding sources used by the entity in relation to all assets regarded as
structural. This internal metric is used by each Group unit to measure
long-term liquidity risk. It is intended to limit recourse to short-term
wholesale funding and encourage the use of medium- and long-term
instruments to fund requirements arising from the entity's core
business.
Asset encumbrance metrics
The Group uses at least two types of metric to measure asset
encumbrance risk: (i) the asset encumbrance ratio, which calculates
the proportion of total encumbered assets, which are unavailable
for raising funds, to the entity's total assets; and (ii) the structural
asset encumbrance ratio, which measures the proportion of assets
encumbered by reason of structural funding transactions (mainly long-
term collateralised issues and funding from central banks).
Other liquidity indicators
Aside from traditional liquidity risk measurement tools for short-term
risk and long-term or funding risk, the Group has constructed a range
of additional liquidity indicators that supplement the conventional
toolset and measure other liquidity risk factors not otherwise
covered. Most of these indicators are concentration metrics, such as
concentration facing the five largest liability -side counterparties, or
concentration of financing by time to maturity.
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5. RISK MANAGEMENT REPORTRisk Profile > Trading market risk, structural risk and liquidity risk 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.
Liquidity scenario analysis
The Group uses four standard scenarios as liquidity stress tests: (i)
an idiosyncratic scenario featuring events that adversely affect the
Entity alone; (ii) a local market scenario, which considers events having
serious adverse effects on the financial system or real economy of the
Entity's base country; (iii) a global market scenario, which considers
events having serious adverse effects on the global financial system;
and (iv) a combined scenario, coupling idiosyncratic events with
severe (local and global) market events arising simultaneously and
interactively.
Santander uses the outcomes of the stress scenarios in combination
with other tools to determine risk appetite and support business
decision-making.
Liquidity early warning indicators
The system of liquidity early warning indicators, or EWIs, comprises
quantitative and qualitative indicators that enable us to foresee
liquidity stress situations and potential weaknesses in Group entities'
funding and liquidity structure. EWIs are both external (environmental),
relating to market financial variables, or internal, relating to the Entity's
own actions.
C.2.5. Pension and actuarial risk
C.2.5.1. 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.
C.2.5.2. Actuarial risk
Actuarial risk is produced by biometric changes in the life expectancy
of those with life insurance, 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.
2017 Annual Report
263
C.3. Operational risk
C.3.1. Definition and objectives
Following the Basel framework, Santander Group defines operational
risk (OR) as the risk of losses from defects or failures in its internal
processes, people 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.
Santander has been calculating regulatory capital by OR using the
standardised approach set forth in the European Capital Directive. The
AORM programme helps the Group develop capital estimation models
in its main geographic areas, both for economic capital and stress
testing, and for potential application as regulatory capital.
The Pilar III disclosure includes information on the calculation of
capital requirements for operational risk.
C.3.2. Operational risk management
and control model
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 (e.g.
section C.4. Compliance and conduct risk).
C.3.2.1. Operational risk management cycle
In Santander Group, 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
Assessm
Measurement
Identif c
n
e
tion
a
t
tion
a
g
i
t
i
M
e
g
l
f
n
i
r
o
r
R p
o
it
n
O
o
M
The Group’s target in the area of OR management and control is
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 2017, 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.
Risk analysis has improved through a range of information quality
enhancement initiatives, allocation of the Group's appetite and legal
entities to the main business units, and integrated self-assessment of
risks and controls.
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2017 Annual Report
5. RISK MANAGEMENT REPORTRisk profile > Operational risk The various phases of the operational risk management and control
model are the following:
• Identify the inherent risk in all the Group’s activities, products,
processes and systems.
• 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.
• Measure and assess operational risk objectively, continuously and
consistently with regulatory and sector standards.
• Continuously monitor operational risk exposure, and implement
control procedures and improve the internal control environment.
• Establish mitigation measures that eliminate or minimise the risk.
• Develop 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.
• Define common tools, taxonomies and metrics for the entire
Organisation.
The advantages of 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 improves knowledge of existing and potential operational risks and
assigns them to business and support lines.
• Operational risk information helps to improve processes and
controls, and reduces losses and the volatility of revenues.
• It prioritises risks and the associated mitigation measures for decision
making.
The Group 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 a transversal
committee in which all corporate division involved in the management
and control of OR participate, and is responsible for the oversight of
the identification, mitigation, monitoring and reporting of operational
risk in the Group. It ensures compliance with the model, 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 Corporate committee is
replicated in the different units of the Group.
The Group has also set up a number of specific 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 C.4 Compliance and conduct risk), the
suppliers and Cyber-security Committees, and the fraud management,
damage to physical assets and operations 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.
C.3.2.2. Risk identification, measurement and
assessment model
A series of quantitative and qualitative corporate techniques and
tools have been defined by the Group 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 potential 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.
The most important operational risk tools used by the Group are as
follows:
• Internal events database. The objective is to capture the Group’s
operational risk events. This 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.
Internal databases are supplemented by the process of events
escalation treated as significant (by reason of their financial impact
or other factors, such as number of customers affected, regulatory
impact or media coverage), which alerts senior management to the
key operational risk events arising across the Group on a timely basis.
2017 Annual Report
265
• 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 2017, Santander 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 levels 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 elaborates 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, fraud 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, are set out in greater detail in section C.4
Compliance and conduct risk.
• External events database44. 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, comparison of the loss profile with the wider industry, locally
and globally, and the scenario analysis exercises described below
have been adequately prepared.
• Analysis of OR scenarios. The objective is to identify potential
events with a very low probability of occurrence, but which could
result in a very high loss for the Bank. The possible effects of
these are assessed and extra controls and mitigating measures are
identified to reduce the likelihood of high economic impact. Expert
opinion is obtained from the business lines and risk and control
managers.
• 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.
• 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 C.4.5. Product governance and consumer
protection.
• Other specific instruments. Enable more detailed analysis of
technology risk, such as control of critical system incidents and
cyber-security events.
• Internal data model. Application of statistical models are used
to capture the Group's risk profile, mainly based on information
collected from the internal loss database, external data, and
scenarios. The main application of the model in 2017 was to help
determine economic capital and estimate expected and stressed
losses, as a tool for specifying operational risk appetite.
The risk profile is part of the appetite of the non-financial risks that are
structured as follows:
• A general statement setting out that Santander Group 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.
• General metrics of expected loss, stressed losses and overdue 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: internal and external fraud,
technological, cyber, legal, anti-money laundering, commercialisation
of products, regulatory compliance and supplier management risk.
44. Santander takes part in international consortiums such as the ORX (Operational Risk Exchange).
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2017 Annual Report
5. RISK MANAGEMENT REPORTRisk profile > Operational risk C.3.2.3. Implementation of the model and initiativess
Almost all the Group’s units are now incorporated into the model with
a high degree of homogeneity.
As set out in section C.3.1. Definition and objectives, the Group
completed its transformation to an advanced operational risk
management (AORM) approach in 2017. The programme has a twofold
objective: on one hand, to consolidate the current operational risk
model, 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.
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, covering the ten main
geographic areas. 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.
• Development of processes for the determination, identification
and assessment of critical theoretical controls. The purpose if this
initiative is to strengthen and standardize the control environment
in the Organisation, by means of analysis of the minimum control
aspects that must be covered in the different units of the Group.
• Deployment of more robust cross-checking processes between
different operational risk instruments, to ensure a better
understanding of the relevant risks of the Organisation.
• Fostering of mitigation plans for aspects of particular relevance
(information security and cyber-security in the widest sense, control
of suppliers, among others): monitoring of the implementation of
corrective measures and projects under development.
• Improvements to contingency, business-continuity and, in general,
crisis-management plans (initiative linked to the recovery and
resolution plans), also providing coverage to emerging risks (cyber).
This programme is supported by the development of a customised
and integrated operational risk solution (Heracles45), and has been
implemented in all the Group's geographies.
• Fostering the control of risk associated with technology (control and
supervision over the system design, infrastructure management and
applications development).
The main activities and global initiatives adopted in 2017 for an
effective operational risk management are:
• Information enhancement, especially the internal loss database, key
to ensuring the integration of all instruments and the Bank´s ability
to cross-check analysis of the data.
• Creation of a new methodology of objective qualification to evaluate
the reporting of the main risks (Top risks) that include risk exposure
and the environment control taking into account the actual and
forecasted elements.
This approach constitutes a more detailed process for final
determination of risk level and trend. It encourages prioritisation in
risk management and the framing of specific mitigation plans, while
supporting ongoing communication of risks to senior management.
• Reinforcement of governance and the operational risk instruments
in the first lines of defence, among which it is noteworthy the
operational risk appetite scope for the most relevant business and
support units.
• Incorporation of additional risk appetite metrics related to internal
fraud in the market approach, external fraud in cards and with the
supplier management control.
For the control of suppliers referred to previously, in 2017 a new
version of the corporate reference framework, was approved covering
the new requirements issued by the regulator in this field, widening
the scope of types with relevant third parties, and aligning them with
relationship the best practices in the sector. The Bank has also made
progress in defining and deploying policies, procedures and tools in
the Group entities in order to adapt current processes to the model’s
principles and requirements. In 2017, the efforts have been focused on:
• 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 the OR
function carries out the control procedure to check that the model's
principles are fulfilled.
• Evolving the corporate supplier management system to cover the
new framework requirements and anticipate upcoming regulatory
changes (e.g. GDPR), particularly regarding:
• Adding a decision making tool which can be used to discriminate
services by their relevance and level of associated risk (e.g. based
on the sensitivity of the information processed), so that the most
appropriate controls for each can be set up in other phases of the
service life cycle.
45. Heracles is a GRC (Governance, Risk & Compliance) application for enterprise-wide risk management.
2017 Annual Report
267
• Reviewing specific questionnaires and criteria 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 for the monitoring and
decision-making regarding the relevant services and suppliers and
the review of the escalation procedures and criteria.
• Including third-party risk as one of the main risks on Risk Committee
and senior management agendas at the Group's main entities.
• Definition and monitoring of indicators and dashboard concerning
the model implementation. Including specific suppliers metrics in the
Group's and the core entities' risk appetite reports.
• Review and enhancing quality of data of inventories of relevant
services and associated suppliers.
• Moving forward with implementing a management system that
automates the various stages of the supplier management cycle to
achieve enhanced process control and higher information quality.
• 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.
C.3.2.4. Operational risk information system
The Group’s corporate information system, called Heracles, supports
operational risk management tools, providing information for reporting
functions and needs at both local/corporate levels. The objective
of Heracles is to improve decision making for OR management
throughout the Organisation.
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 with
specific needs or limited to a particular level based on the premise of
only one source of information.
PROACTIVE RISK MANAGEMENT
APPROVAL FLOWS
)
M
R
A
/
M
R
O
A
(
E
R
U
T
L
U
C
S
E
I
M
O
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O
X
A
T
Evaluation
of risks
Thematic
evaluation
Risks
Policies and
Regulations
Regulations
Org.
structure
Controls
Metrics
Evaluation
of Controls
Action plans
Scenarios
Loss
events
Internal
Audit
E
V
A
L
U
A
T
I
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F
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S
K
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A
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B
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A
V
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U
R
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FUNCTIONS RESPONSIBLE FOR RISK AND CONTROLS
TRANSPARENCY (RESPONSIBILITY)
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2017 Annual Report
5. RISK MANAGEMENT REPORTRisk profile > Operational risk
In 2017, the Group achieved the aim of having fully fledged
functionality, through the incorporation of the metrics, thematic
assessment and scenario modules. In addition, the decision-making
capacity has been improved through the definition of approval flows.
Work was also done on improving the reporting capacity, to comply
with regulations on Risk Data Agreggation.
To raise consciousness of cyber-security issues, "phishing" awareness
campaigns were launched among all employees to enhance their ability
to identify and report this form of malicious conduct.
The compliance and conduct function has prepared and launched a
number of training actions, as described in section C.4.9. Transversal
corporate projects in this report.
In order to achieve this last goal, 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.
Further, in 2017 training initiatives were developed such as
dissemination sessions and specific face-to-face sessions (Executive
Operational Risk programme, training for the Heracles tool, etc.).
In addition, furhter work has been carried out by the Group regarding
the data supply automatization from the local systems of the units.
C.3.2.5. 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 2017,
a number of different training sessions were conducted using the
e-learning format, and which addressed general knowledge of OR.
These sessions have been designed for all the Group's employees and
are explicitly aimed at directors.
Likewise, 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.
C.3.3. Evolution of the main metrics
The evolution of net losses (including both incurred loss and net
provisions) by Basel46 risk category over the last three years is the
following:
DISTRIBUTION OF NET LOSSES BY OPERATIONAL RISK CATEGORY (EXCL. POPULAR)47
70%
60%
50%
40%
30%
20%
10%
0%
2015
2016
2017
67.5%
16.7%
10.4%
1%
1.7%
1.9%
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
46. The Basel categories include the risks set out in chapter C.4. Compliance and conduct risk.
47. 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.
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In general terms, the losses in the category of practices with
customers and products, and business practices increase regarding the
previous year, although for external fraud and processes failures they
have reduced.
to the decrease of provisions to cover future complaints by the sale
of the Payment Protection Insurance (PPI) and other cases of product
commercialisation.
During 2017, the most relevant losses by category and geography
correspond to judicial causes in Brazil where a group of measures to
improve customer service (gathered in a complete mitigation plan,
as descried in section 4.3 Mitigation measures) is maintained. On the
other hand, in 2017 the volume of losses in the UK has decreased due
The main risk concentrations in external fraud still concern the
fraudulent use of debit and credit cards, with a significant rise in fraud
in card not present, and distance 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 CATEGORY (EXCL. POPULAR)48
60%
50%
40%
30%
20%
10%
0%
2015
2016
2017
41.1%
39.3%
16.2%
0.1%
0.1%
2.9%
0.3%
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
C.3.4. Mitigation measures
The Group uses the model to monitor the mitigation measures for
the main risk foci which have been identified through the internal
OR management tools (internal event database, indicators, self-
assessment, scenarios, audit recommendations, etc.) and other
external information sources (external events and industry reports).
Active mitigation management became even more important in 2017,
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. Furthermore, the Group
continued to move forward with pre-emptive implementation of
operational risk management and control policies and procedures.
The most significant mitigation measures have been centred on
improving the security of customers in their usual operations,
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:
Use of EMV-standard chip cards based on advanced authentication
technology in the geographies where Santander Group is present.
• Card protection against electronic commerce fraud attacks (the
fastest-growing fraud pattern in the industry):
48. 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.
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2017 Annual Report
5. RISK MANAGEMENT REPORTRisk profile > Operational risk • Implementation of a secure e-commerce standard (3DSecure), with
reinforced robustness via two-step authentication based on one-
time passwords.
Progress has also been made in the incident registration, notification
and escalation mechanisms for internal reporting and reporting to
supervisors.
Additionally, the Group units take part in different coordinated
cyber-exercises in the different countries with public bodies, and also
carrying out internal cyber-security and crisis management scenarios
such as risk assessment mechanisms, and response capacity tests
when faced with these kinds of events.
Also, observation and analytical assessment of the events in the sector
and in other industries enables Santander to update and adapt its
models for emerging threats.
Other relevant mitigating measures:
The Group sets as a priority the establishment of mitigation measures
in order to optimise the processes management according to the
Bank’s customer needs.
With regard to mitigation measures relating to customer practices,
products and business, Santander Group 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.
In particular and in general terms, during 2017, two policies that
develop the corporate framework for commercialization of products
and services and consumer protection were approved, in regard to
the Fiduciary risk management and Consumer Protection. In addition,
the risk identification processes and the development of mandatory
training regarding this matter has been strengthen in the Group.
Further detail is available in section C.4.5. Product governance and
consumer protection.
Furthermore, it is noteworthy the analysis of incidents and customer
complaints made by local units, establishing root-cause working
groups with permanent monitoring (as an illustrative example, Chile
during 2017 established 12 root-cause working groups where 157
initiatives were discussed regarding customer problems mitigation
and the improvement of user experience, from which 100 have been
implemented).
It is also significant, the continuous customer relation improvement in
Brazil, where with focus on electronic channels fraud, an executive first
level quorum was established in which all the Bank’s areas participate
with two work streams: one tactical (customer communication,
contact centre attention reinforcement, customer training adaptation
to processes changes, concepts and behaviours) and other structural
(changes in systems and processes security to reduce the fraud
events).
• Innovative solutions based on mobile applications that let users
deactivate cards for e-commerce use.
• Issue of virtual cards using dynamic authentication passwords.
• Use in Brazil of a 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.
• Integration of monitoring and fraud detection tools with other
systems, internally and externally, to enhance suspicious activity
detection capabilities.
• Reinforced ATM security by incorporating anti-skimming devices to
prevent card cloning.
Online/mobile banking fraud:
• Validations 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).
• Enhanced online banking security by introducing a transaction risk
scoring system that requests further authentication when a given
security threshold is crossed.
• Implementation of specific protection measures for mobile
banking, such as identification and registration of customer devices
(Device Id).
Cyber-security and data security plans:
Throughout 2017, 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 service denial attacks.
The Group has evolved its cyber regulations by adopting a new Cyber
Security Framework and the Cyber Risk Supervision Model, along with
a range of related policies.
A new organisational structure has been specified and Group
governance for management and control of this risk has been reinforced.
Specific committees have been set up and cyber-security metrics have
been included in the Group's risk appetite. These metrics have been
monitored and reported in the geographies and at global level.
The Group’s intelligence and analysis function has also been reinforced,
by contracting Bank threat monitoring services. In addition, progress
is being made in mitigation activities related to the identification and
access management in all geographies, with the backing of senior
management.
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C.3.5. Business continuity plan
The Group has a business continuity management system (BCMS),
which ensures that the business processes of the Bank's entities
continue to operate in the event of a disaster or serious incident.
o u s
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Impact
analysis
Definition of
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i
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u
i
t
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a nisatio
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O r g
Policy
G
overn a n c e
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Development
of crisis
management
procedures
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asurement - C
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Training and
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The basic objective is to:
Group has worked towards reinforcing response protocols facing these
scenarios and ensuring that the required logistics capabilities will
be available to respond effectively and in a coordinated way to crisis
situations.
The Group has also updated the corporate application which is used to
register and store the Group’s continuity plans, improving integration
with other repositories housing significant Group assets (people,
applications and suppliers).
C.3.6. 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. Throughout the year, the Bank has
accordingly continued to cement the integration of OR management
with business strategy, through holistic follow-up of business risks and
their mitigating controls. This has considerably enhanced the control
environment, with a focus on:
• Implementing a new model to deal with unauthorised trading and
developing a specific risk appetite metric to the trading business to
measure the robustness of the environment in each geography.
• Minimise the possible damage from an interruption to normal
• Adapting the control model to new regulatory requirements, such as
business operations on people, and adverse financial and business
impacts for the Group.
MiFID II, EMIR, PRIIPS and GDPR, among others.
• Reduce the operational effects of a disaster, providing predefined
and flexible guidelines and procedures to be used to re-launch and
recover processes.
• Restart time-sensitive business operations and associated support
functions, in order to achieve business continuity, stable profits and
planned growth.
• Protect the public image of, and confidence in, the Santander Group.
• Reviewing compliance in the core geographies with the principles of
the Global FX Conduct Code, involving the entire Organisation.
• Strengthening business continuity plans by incorporating – among
other improvements – new scenarios reflecting new risks in the
industry.
• Reinforcing the controls ensuring appropriate functional separation
in market operation systems.
• Intensified scrutiny of markets-related suppliers, given the critical
• Meet the Group’s obligations to its employees, customers,
nature of this topic in view of market trends in online trading.
shareholders and other stakeholders.
During 2017, the Group continued to advance in implementing and
continuously improving its business continuity management system.
The Bank has reviewed the methods and approaches to reinforce
governance of the review and approval of continuity strategies and
plans, to ensure that this process is implemented at the appropriate
level within the Organisation, to comply with new regulatory
requirements and to cover emerging risks (such as cyber-risk).
Throughout the year Santander conducted several crisis simulation
exercises based on scenarios that might affect the continuity of critical
business operations (including cyber-attacks), involving the Group's
various crisis management committees and senior management. The
For more information on issues relating to regulatory compliance in
markets, refer to section C.4.4. Regulatory compliance.
Lastly, it is important to note that the business is also undertaking
a global transformation that 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.
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5. RISK MANAGEMENT REPORTRisk profile > Operational risk
Corporate information
The OR function has a management information system that provides
data on the Group’s main elements of risk. In 2017, Santander
introduced the operational risk consolidation and reporting procedure
with the goal of defining the minimum requirements of information,
frequency, as well as validation, consolidation and its use in the
reporting to the Entity’s governance bodies.
The information available at the operational risk level 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 Santander Group’s 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 developed:
Insurance in the management of operational risk
Santander Group regards insurance as a key element in the
management of operational risk. In 2017, 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 loss analysis and the scenarios that enable
the Group’s level of exposure to each risk to be determined.
• The Santander Group’s operational risk management model and the
• Analysis of coverage available in the insurance market, as well as
Group’s main units and countries.
• The scope of operational risk management.
• Operational risk regulatory capital.
• Monitoring of risk appetite metrics.
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.
• The consolidated operational risk profile, through identifying,
• Negotiating with suppliers and contract in allocation accordance with
assessing and prioritising the key foci of risk.
the procedures established by the Group.
• The risk profile by country and risk category, and the main aspects of
• Monitoring of incidents declared in the policies, as well as of those
operational risk monitoring in each of these dimensions.
• The action plans associated with each risk source.
• Distribution of losses by geographic area and risk category.
• Evolution of losses and provisions (accumulated annual, deviation on
previous year and against budget).
• Analysis of significant external events.
not declared or not recovered due to an incorrect declaration,
establishing protocols for action and specific monitoring forums.
• 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 operational risk
mitigation.
• Analysis of the most relevant risks detected by self-assessment
• Active involvement of both areas in the own insurance forum, the
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 Risk Supervision,
Regulation and Compliance Committee, the Operational Risk
Committee, senior management, regulators, rating agencies, etc.
Group’s highest technical body for defining coverage strategies and
contracting insurance, (replicated 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.
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C.4. Compliance and conduct risk
C.4.1. Scope, aim, definitions and objective
C.4.2. Compliance risk control and supervision
The compliance and conduct function fosters the adherence of
Santander Group 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 as a whole.
The first lines of defence have the primary responsability for managing
compliance and conduct risks jointly with the business units where
such risks originate, as well as 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. For this purpose, in 2017 a
standard regulatory tree has been developed throughout the Group, as
well as a process for its monitoring and systematic control.
The GCCO is responsible for reporting to Santander Group’s
governance and management bodies, and must also advise and
inform, as well as promote the development of the function. This
is independently of the Risks function's other reporting to the
governance and management bodies of all Group risks, which also
includes compliance and conduct risks.
In 2017, the Bank has reinforced and evolved the new compliance and
conduct model, especially at the Group's units. The Corporation has
put in place the necessary components to ensure ongoing control and
oversight by creating robust governance schemes, and systems for
reporting and interacting with units in accordance with the parent/
subsidiaries governance model operated by the Group.
Furthermore, Internal Audit - as part of the 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.
In 2017, the Bank has reviewed, updated and streamlined corporate
frameworks for the compliance and conduct function. These are
first-level documents that regulate the function, with which the
management bodies of the various units must comply.
This function addresses all matters related to regulatory compliance,
prevention of money laundering and terrorism financing, governance
of products and consumer protection, and reputational risk.
Compliance and Conduct has cemented progress made in the two
previous years. In 2017, the function has taken a leap forward at the
corporate level and in the various units of the Group, as part of the
strategic compliance programme now underway.
Under the current corporate configuration of the three lines of defence
at Santander Group, compliance and conduct is an independent
second-line control function under the CEO, reporting directly and
regularly to the board of directors and its committees, through the
GCCO (Group Chief Compliance Officer). This configuration is aligned
with the requirements of banking regulation and with the expectations
of supervisors.
The following are defined as compliance risks:
• Conduct risk: risk arising from practices, processes or behaviours that
are inappropriate or in breach of internal regulations, the law or the
supervisor's requirements.
• Reputational risk: risk of current or potential negative economic
impact to the Bank due to damage to the perception of the Bank on
the part of employees, customers, shareholders/investors and the
wider community.
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.
Other control functions (risks and audit) also take part in controlling
these risks.
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2017 Annual Report
5. RISK MANAGEMENT REPORTRisk profile > Compliance and conduct risk • General compliance framework.
• Products and services marketing and consumer protection
framework.
ii) Specifying the regulatory compliance risk control model throughout
the Santander Group, based on common regulations applicable to
several countries where the Group operates.
iii) Deciding on significant regulatory compliance issues that might
• Anti-money laundering and anti-terrorist financing framework.
pose a risk to the Group.
The General Code of Conduct enshrines the ethical principles and
rules of conduct that govern the actions of all Santander Group’s
employees. It is supplemented in certain matters by the rules found in
other codes and their internal rules and regulations.
iv) Fixing the correct interpretation of the General Code of Conduct
and specialised codes, and making proposals for improvement.
In 2017, the Regulatory Compliance Committee held four meetings.
In addition, the General Code of Conduct sets out:
• Compliance functions and responsibilities.
The Corporate Commercialisation Committee is the collegiate
governance body for the approval of products and services. It has the
following key functions:
• The rules governing the consequences of non-compliance with it.
i) Validating new products or services proposed by the parent
• 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
Risk Supervision, Regulation and Compliance Committee (RSRCC), 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.
A highlight of 2017 was the development of a reputational risk model
that captures the key elements for managing risk in this area. The
model is being gradually implemented in the units.
This model identifies the main sources of reputational risk, establishing
a preventive approach for its correct management, determines the
functions involved in the management and control of this risk and its
governance bodies.
C.4.3. Governance and the
organisational model
In accordance with the mandate entrusted by the board to the
compliance and conduct function, in 2017, great strides were made in
the strategic compliance programme. In the two previous years, the
scope and objectives of the model were defined, and the initiative was
implemented at Corporate level. In 2017, it was implemented at the
Group's various units, so that by the end of 2018 the Bank will have
achieved compliance and conduct function in line with the highest
standards of the finance industry.
C.4.3.1. Governance
The following corporate committees - each of which has a
corresponding local replica - are collegiate complaince and conduct
governance bodies:
The Regulatory Compliance Committee is the collegiate body for
regulatory compliance matters. It has the following key functions:
i) Controlling and overseeing regulatory compliance risk in the Group,
as a second line of defence;
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 and consumer protection risk appetite to the
Compliance Committee.
iii) Establishing interpretation criteria and approving the reference
models to develop the corporate product and service marketing
and consumer protection framework, and its rules, and to validate
the local adaptations of those models.
iv) Assessing and deciding which significant marketing questions might
pose a potential risk for the Group, depending on the authorities
granted or the powers required to be exercised under legal
obligations.
The Corporate Commercialisation Committee met 12 times in 2017
and presented a total of 148 proposals of new products/services and
models or other reference documents regarding commercialisation,
having validated all of them except one.
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 marketing 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.
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iv) Identifying, managing and reporting preventively on the
problems, events, significant situations and best practices in
commercialisation and consumer protection in a transversal way
across the Group.
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.
The Monitoring and Consumer Protection committee met 23 times in
2017.
The Anti-money Laundering/Anti-terrorism Financing
Committee is the collegiate body in this field. It has the following key
functions:
i) Controlling and overseeing the risk of anti-money laudering and
anti-terrorism financing (AML/ATF) in the Group, as second line of
defence.
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 Corporate and Conduct Committee met nine times in 2017.
ii) Defining the AML/ATF risk control model in Santander Group.
iii) Creating the reference models for the develoment of the AML/ATF
frameworks and their development regulations.
iv) Monitor projects for improvement and transformation plans for
AML/ATF and, where appropriate, set in motion supporting or
corrective measures.
During 2017, this committee met four times.
C.4.3.2. Organisational model
Derived from the strategic compliance programme 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 specialised risks (vertical
functions) with an aggregated and homogenised overview of them
(transversal functions).
This functional structure was cemented at the Corporate level in the
course of 2017.
The Reputational Risk Steering committee. This governance body
was created in September 2016 to safeguard proper implementation of
the reputational risk model.
The committee is chaired by the Group Chief Compliance Officer,
whose main functions are:
i) Supporting implementation of the corporate reputational risk
model.
Transversal functions
Governance, planning and consolidation
a) Governance. Governing and managing 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.
ii) Evaluating sources of reputational risk, and their criticality.
b) Planning. Planning and fostering the definition of the compliance
iii) Defining action plans to prevent reputational risk.
iv) Analysing reputational risk events.
and conduct strategy and the necessary resources, carrying out the
corresponfing annual planning. Maintaining the compliance and
conduct regulatory map and policies. Managing and coordinating
the function's internal organisational and human resources
processes.
v) Specifying processes for escalation and reporting to senior
management in matters of reputational risk.
c) Consolidation. Consolidating the various compliance and conduct
The committee met four times in 2017.
The Corporate Compliance and Conduct Committee is the high-
level collegiate body of the dompliance and conduct function, bringing
together the objectives of the committee's referred to above.
Its main functions are as follows:
i) Monitoring and assessing compliance and conduct risk which could
impact Santander Group, 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.
risks at global level, in coordination with the Risks function.
Supervising the application of the mitigation measures and risk
assessment plans defined, and monitoring responses to, and
the implementation of, requests from regulators. Developing
compliance and conduct risk appetite proposals for the Group’s
risk appetite, through the integration of different local level
proposals, as well as coordinating and integrating the different risk
assessments carried out. In addition, supervising the monitoring of
Internal Audit recommendations.
d) Regulatory radar. Developing and coordinating the creation and
administration of the policies and regulation global repository
applicable to all units, through a multi-disciplinary process in which
different functions participate. Manages the governance aimed at
assigning regulatory implementation responsibilities, making the
appropriate monitoring.
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2017 Annual Report
5. RISK MANAGEMENT REPORTRisk profile > Compliance and conduct risk Coordination with units
Supporting the relationship among compliance and conduct functions
of the corporation and of the different units of Santander Group in
accordance with its Group/Subsidiaries Governance Model.
This task is carried out through the involvement in the appointment
of the CCO of each unit, the establishment of his or her functional
goals; coordination, together with specialist teams, of the framing and
follow-up of annual compliance and conduct programmes, as well as
encouraging an exchange of knowledge and best practices related to
the function.
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.
c) Improving processes. Identifying the map of the function's
key processes and associated metrics. Defining and supervising
application of the continuous improvement methodology for the
processes identified.
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.
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 regulations, ensuring the units
compliance.
Governance of products and consumer protection
Management, control and supervision of governance of products and
services in the Group, and risks relating to marketing conduct with
customers, consumer protection, and fiduciary and custody risk for
financial instruments, developing specific policies and regulations in
this regard.
Anti-money laundering and anti-terrorism financing
Management, control and supervision of the application of the
anti-money laundering and anti-terrorism 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.
Reputational risk
Defines, controls and oversees the reputational risk model through
prevention and early detection of risks and events and mitigation of
any potential impact on the Group's reputation or any impairment to
how the Group is perceived by stakeholders (customers, shareholders,
investors, employees, public opinion and the wider community).
C.4.4. 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.
• Receive and handle the accusations made by employees or third
parties via the whistle blowing channel.
• Direct and coordinate investigations into 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.
• Control and oversee compliance risk relating to: (i) employee-
related events (Corporate Defence); (ii) regulations affecting the
Organisation (General Data Protection Regulation – GDPR – and
Foreign Account Tax Compliance Act –FATCA); (iii) compliance
with specific regulations on international markets (Volcker Rule,
EMIR, Dodd-Frank); (iv) publication of relevant Santander Group
information; and (v) implementation of policies and rules to prevent
market abuse.
• Report significant Group information to the Comisión Nacional del
Mercado de Valores, Spain's securities market regulator, and the
regulators of other exchanges on which Santander is listed.
• Oversee mandatory training activities on regulatory compliance.
The most relevant areas of the regulatory compliance function are
described below:
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 to minimize the impact of the criminal responsibility of
legal persons for any crimes committed on their account or for their
benefit, by their administrators or representatives and by employees as
a result of a lack of control.
The Group has in place a corporate defence model designed to
implement awareness-raising activities as to the main crime risks
across the Organisation. The corporate model began to be introduced
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in 2016, in the Argentina, Brazil, Chile, Mexico, Poland, Portugal,
Consumer (Germany and Headquarters) units, and in the Private
Banking units (Bahamas and Switzerland). In 2017, the model was
approved locally in Spain, UK and US units.
In June 2017, the Group hosted the First Global Corporate Defence
Summit to encourage networking among Group subject matter
experts and create a broadly based forum for sharing criminal risk
prevention best practices and conduct guidelines for employees across
the Group.
In accordance with the General Code of Conduct, Santander Group
has whistleblower channels in place in all its geographies. Specifically,
in the Group's 10 core units and in Banco Popular there are in place
a total 14 whistleblower channels available to employees, with some
countries having more than one channel.
Furthermore, in 2017 the Bank created whistleblower channels
available to the Group's suppliers in six geographies (Argentina, Brazil,
Chile, Spain, Mexico and Portugal). Via these channels, Group suppliers
can report conduct breaches in the context of their contractual
relationship.
As a rule, whistleblower channels are managed by the compliance
and conduct function. Confidentiality is assured and whistleblowers
are protected reprisals against the complainants. Santander Group
employees can access the whistleblower channels by email, over the
web or using an app.
Whistleblower complaints are reported to the relevant governing
bodies. In the course of 2017, the management of Compliance
and Conduct reported on two occasions on the general state of
whistleblower channels and on the irregularity committees attached to
the Bank's Audit Committee.
Organisational aspects
In response to the launch in 2016 of the European General Data
Protection Regulation, throughout 2017 the regulatory compliance
function has advised on and supported the processes of adapting
to the new rules underway at the Group's different units to ensure
compliance with the new requirements, which will become effective in
May 2018.
The European General Data Protection Regulation brings about a
paradigm shift as to the protection of data on individuals (customers,
employees, shareholders, etc.). Entities must collect, store and
process personal data in accordance with the principle of proactive
accountability.
This new regulatory approach has given rise to new requirements and
renewed emphasis on existing ones, including:
• Introduction of technical and organisational measures in the
collection, storage and processing of data based on detailed analysis
of risks to individuals.
• New rights for data subjects (customers, employees, shareholders,
etc.), such as rights of portability and the "right to be forgotten".
• Appointment of a Data Protection Officer (DPO), in charge of
overseeing compliance with the rules and acting as a point of contact
with the controlling authority.
• Security incident communication to the control authority within 72
hours since its acknowledgement and in case they entail a high risk
for individuals.
• Consent obtained tacitly for the treatment of personal data is invalid.
In 2017, a total of 1.300 whistleblower complaints were received
across the Group. The main topics of complaint were employment
relationships (61%), operational irregularities (23%) and mis-selling (9%).
The regulatory compliance function has accordingly taken steps to
mobilise and raise awareness among affected units, such as:
• Identifying the scope of companies affected by the rules.
Approximately 30% of whistleblower complaints led to disciplinary
sanctions for at least one of the persons complained of.
A key aspect of the model is mandatory training for all Group
employees. In 2017, Santander continued to teach the mandatory
training course on the General Course of Conduct and corporate
defence.
Finally, in the light of the experience of the compliance and conduct
function in managing and applying the General Code of Conduct, over
the course of the year, the Bank identified areas for improvement,
and the Code has been revised accordingly. Such modifications in
this review were presented to and approved by the Bank´s board of
directors in November.
• Communication by the Group's Chief Compliance Officer to the
various Country Heads of the need to adapt to the new regulation in
their respective jurisdictions.
• Support for countries and units to launch their own projects for
adaptation to the European General Data Protection Regulation.
• Monthly monitoring governance of local adaptation projects
execution, presided by the Group's Chief Compliance Officer.
• Initiatives for raising awareness among employees by alerting them
to the main new features of the European General Data Protection
Regulation by producing and launching a training video.
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5. RISK MANAGEMENT REPORTRisk profile > Compliance and conduct risk In this domain, regulatory compliance also focuses on reporting and
due diligence duties relating to financial accounting in the context of
automated exchange of tax data among sovereign states (FATCA and
Common Reporting Standard Regulation –CRS). The following were
key areas of action in 2017:
Code of Conduct in Securities Markets (CCSM)
The 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:
• Timely and formally correct fulfilment of all units' reporting duties
• Register and control sensitive information known and generated by
owed to their local authorities.
the Group.
• The entry into force of CRS regulations in late-adopter countries
• Maintain the lists of securities affected and related personnel, and
(Brazil, Chile, Uruguay, Panama, China and Singapore) has prompted
follow-up of adaptation efforts.
watch the transactions conducted with these securities.
• Popular´s Group units units have been included in the FATCA
Expanded Affiliated Group Santander.
The role of the compliance and conduct function focuses on ensuring
fulfilment of the different units' reporting duties. For this purpose,
the Bank has in place a detailed compliance programme that has been
adapted by local compliance officers to the specific features of their
respective arrangements. The programme is regularly monitored by
the corporate team. In addition, the relevant regulatory developments
are updated and advised to the units on an ongoing basis.
Market regulations
In 2017, the Group create policies, procedures and processes as
required by MIFID II, which entered into force on 3 January 2018,
focusing on harmonising the rules on securities markets, trading
platforms, algorithmic trading, direct electronic access, tradable
financial instruments, organisational matters, transparency and
investor protection.
In addition, throughout 2017 the regulatory compliance function was
involved in the separation of retail banking and investment banking in
the United Kingdom – the ring-fencing process – which is part of the
banking reforms in that country. We analysed the regulatory impacts
on UK-based entities by reason of this change in business model.
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 Act or its European counterpart, EMIR (European
Market Infrastructure Regulation).
Regulatory compliance is responsible for disclosing relevant Group
information to the markets. Banco Santander made public 75 relevant
facts in 2017, which are available on the Group’s web site (www.
santander.com) and the National Securities Market Commission
(CNMV) web site (www.cnmv.es). Standouts among these relevant
facts were the acquisition of Banco Popular and the rights issue
launched in June and August 2017.
• 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.
• Identify, register and resolve conflicts of interest and situations that
could give rise to them.
• Analyse activities suspicious of constituting market abuse and where
appropriate, report them to the supervisory authorities.
• Solve questions on the CCSM.
In 2017, the role of the regulatory compliance function in this
area focused mainly on improving coordination with various local
compliance units to safeguard Group standards as to market
abuse prevention measures. The Bank made considerable strides
in implementing corporate procedures supplementing the CCSM
(sensitive information, lists of insiders, soundings, Chinese walls
breaches, inter alia), distributing training courses and installing in-
house CCMS management tool in Mexico and Chile, and of Treasury
dealing control in Brazil, Mexico and Chile.
C.4.5. Product governance and
consumer protection
The products and consumer protection governance function defines
the key elements needed for adequate management and control of
commercialisation and consumer protection risks, which are defined
as risks arising from inadequate practices in customer relations, the
customer treatment and the products offered to customers and their
suitability for each specific customer.
This function promotes an appropriate culture in the Santander Group,
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 based on the 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.
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The corporate framework for the commercialisation of products and
services and consumer protection defines the key items for adequate
management and control of compliance, conduct and reputational risks
arising from commercialisation/distribution, encompassing all phases
(design, sale and post-sale). The revised version of this framework was
approved by the board of directors in July 2017.
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 commercialisation
committee, ensuring correct validation of any new product or 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 commercialisation risk throughout
the entire life cycle, with a twofold purpose: possible impact on
customers and over the Group. Identify and follow up on actions
taken to mitigate the detected risks.
• Establish and apply methodologies to assess conduct risks in
commercialisation and follow up on such assessments.
• Support internal consumer protection with the objective of
improving relations with the Group, effectively preserving their
rights, following up customer claims, complaints, survey responses
and requests and encouraging good practices. Enhance the Bank's
customers's financial knowledge and focus the function on the new
challenges posed by innovation in the industry by implementing rules
and standards.
• Identify, analyse and control fiduciary risk generated by Private
Banking, asset management, insurance and outsourced activity of
custody services for customers' financial instruments. Fiduciary risk
arises from liability for mismanagement of third-party assets causing
loss to the customer, with the concomitant financial or reputational
impact.
• Identify and disclose the best practices for commercialisation and
consumer protection.
The main activities carried out by this function in 2017 were as follows:
• Developing and strengthening the consumer protection function
in the Group. The function is governed by the consumer protection
policy approved by the Commercialisation and Compliance
Committees in April 2017, and sets specific criteria for identifying,
regulating and exercising principles for the protection of consumers
in their relationship with the Group, and frames specific guidelines
for overseeing compliance with the policy.
• Developing and strengthening the fiduciary risk function in the
Group. The function is governed by the fiduciary risk acceptance,
monitoring and control policy approved by the Commercialisation
and Compliance committees in April 2017.
• Updating corporate procedures for approving products and services,
monitoring the marketing of products and services, and managing
complaints and root-cause analysis.
• Approving the manual that formally documents the methodology
for the commercialization conduct risk self-assessment exercise
carrying out an annual exercise having a scope of 17 geographies
within the Group and 26 legal entities, where the first line of defence
functions assess the main conduct risks relating to marketing and
the effectiveness of risk mitigation controls, and set in motion action
plans where assessed risk exceeds specified risk appetite.
• In addition to the 148 proposals submitted to the Corporate
Commercialisation Committee, the product governance function also
analysed:
• 48 products or services considered to be not new.
• 55 structured notes issued by Santander International Products
Plc. (subsidiary fully owned by Banco Santander), for which the
compliance with applicable agreement is reviewed.
• 123 consultations from different areas and countries for resolution.
• Fiduciary risk management includes the following processes:
Analysis and processing for corporate validation in the fiduciary risks
subcommittee of:
• 572 requests for the launch, renewal or modification of product
characteristics (397 collective investment vehicles and profile
discretionary management portfolios, 13 saving/investment
insurance, 113 products distributed by Private Banking and 49
structured notes/deposits for Commercial Banking).
• 64 requests relating to policies, fund and ETF distribution focus lists
and requests for opinion from other areas.
Monitoring of products, and the exposure and performance of the
assets of customers managed by the Santander Group 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.
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5. RISK MANAGEMENT REPORTRisk profile > Compliance and conduct risk • Analyse and consolidate complaint information and management
• The Bank has in place a technological infrastructure supporting
thereof from 28 local units and 36 business units and 9 branch offices
of SGCB.
• In the custody risk management scope, the function has carried out
the following activities:
• The review of 28 custody services files, approved by different
custody services demanding units of the Santander Group, for
presentation and validation in the Executive Risk Committee.
• Monitoring the volume and situation, according to corporate
procedures regarding the monitoring of providers of custody
services, of more than the 51 current providers (42 of them external
to Santander Group) that provide custody services for Santander
Group in its own or its clients.
Corporate projects
Analysis of the governance and systems of remuneration of the sales
force to assess the degree of implementation of the corporate policy
on remuneration and identify areas for improvement and introduction
of good practices across the Group.
C.4.6. Anti-money laundering
and anti-terrorism financing
One of Santander Group's strategic objectives is to maintain an
advanced and efficient anti-money laundering and anti-terrorism
financing system, constantly adapted to international regulations,
with the capacity to confront the development of new techniques by
criminal organisations.
Money laundering and terrorism financing are pervasive, globalised
phenomena that leverage the opportunities of the international
economy and the gradual removal of barriers to worldwide exchange
and trade for unlawful purposes. Santander Group acknowledges
the importance of the fight against money laundering and terrorism
financing, which affect vital aspects of the life of the community. The
Group actively cooperates with the competent authorities, in this matter.
ongoing improvement of systems and processes in all units, based
on technological systems that enable the Corporate function
to obtain local management information and data, as well as of
reporting, monitoring and control. These systems allow for active and
preventive management in the course of analysis, identification and
monitoring of activities that might be linked to money laundering or
terrorist financing.
• The Santander Group 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 Group's key actions in this domain include:
• Participation in a range of working groups and/or sessions
regarding different topics.
• Collaboration and elaboration of the Wolfsberg Knowledge
Questionnaire and several best practice guidelines.
• Participation in consultations with the private sector initiated by
international organisations (FATF, UNODC, EU, etc.) and private
institutions (FSB, SWIFT, FFIS, etc.).
The prevention organisation covers 167 different Group units
established in 34 countries. Over one thousand Group professionals
currently carry out the anti-money laundering/anti-terrorism financing
function.
The main activity data in 2017 are as follows:
• Subsidiaries reviewed: 167
• Investigations: 152,253
• Disclosure to authorities: 41,204
• Management and control of money laundering and terrorism
• Employee training: 166,322
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 anti-terrorism financing.
financing prevention in the Group is based on the principles set
out in the general compliance and conduct framework and in
the corporate AML/ATF framework, on the rules, standards and
recommendations issued by a range of international bodies and
institutions, such as the Basel committee on Banking Supervision and
the Financial Action Task Force (FATF), and the duties and obligations
arising from EU directives.
• The corporate AML/ATF framework sets out principles of action in
this domain, and sets minimum standards of application for local
units. Local units are responsible for managing and coordinating
the systems and procedures of prevention of money laundering and
terrorism financing in the countries in which the Group 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.
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• Development of specific processes to detect and report risks and
events in the Group's various geographies and use of specific
management indicators.
• Definition and reporting of risk appetite metrics.
• The Bank has moved forward with identifying and monitoring
reputational risk events, focusing on mitigating the effect, as well as a
preventive approach when managing reputational risks.
• In conjunction with the relevant functions, development of other
reputational risk-related policies, such as financing policy for sensitive
sectors.
• Implementation of general training on reputational risk: general
training for local CCO´s, and development of an awareness video
regarding the implementation of the social-environmental policies
featuring top management.
C.4.8. Risk assessment model of Compliance
and Conduct 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 by a homogeneous process in units, by establishing a
common taxonomy, according to the standards of the Risks function,
which consists of setting a series of compliance risk indicators and
assessment matrices which are prepared for each local unit, as well
qualitative statements.
With this objective, during 2017 the development and implementation
of said appetite has been carried out in the Group's units within the
established perimeter. Likewise, the annual formulation of the risk
appetite has been carried out at the end of the year, with the objetive
to verify that the current model is adequate to measure the function’s
risk appetite. To this end, the corporate thresholds of three of the
indicators were adjusted, reducing them, in order to provide a more
accurate image and be able to show an alignment with the strategy of
the function and its risk tolerance. These adjustments were approved
in the corresponding committees and transferred to the different units.
As in previous years, the compliance and conduct function carried
out a regulatory risk assessment exercise in 2017, focused on the main
units of the Group. Annually, this exercise is carried out, following
a bottom-up process, where the first lines of the local units identify
the inherent risk of those rules and regulations that apply to them.
Once the consistency of the controls mitigating this inherent risk is
assessed, the residual risk of each of these obligations is determined,
establishing, as the case may be, the corresponding action plans.
C.4.7. Reputational risk
In 2017, the Group made significant progress implementing the
corporate reputational risk model, which is now embedded in the
Corporation.
The specific characteristics of reputational risk are a vast number
of sources that requires a unique approach and control model,
separate from other risks. The reputational risk management
requires for a global interaction with both first and second lines of
defence functions and with management functions in relation to the
stakeholders in order to ensure a consolidated supervision of the risk,
efficiently supported on the current control frameworks. The aim is
for reputational risk to be integrated into both business and support
activities, and internal processes, thus allowing the risk control and
oversight functions to integrate them in their activities.
The reputational risk model is accordingly based on a prominently
preventive approach to risk management and control, and also on
effective processes for identification and early warning management of
events, and subsequent monitoring of events and detected risks.
So as to achieve suitable control and oversight of reputational risks, the
function – as a second line of defence – is in charge of the following:
• Defining and implementing the reputational risk model and related
methodologies, highlighting the development and update of the
model, the development of a specific methodology for this risk
identification, setting reputational risk appetite, and developing
reputational risk policies and controls.
• Preventive risk management, highlighting the monitoring of external
and internal sources to identify reputational risk events, and advising,
monitoring and challenging the first and second lines of defence
and decision-making bodies (for decisions carrying reputational
risk). In connection with reputational risk-related topics, assess the
analysis of stakeholder perceptions and action plans, and validate and
challenge risk management action plans.
• Safeguard and support reputational risk event management, offering
specialised advice to any function or working group that might be
affected by reputational risk.
• Information and reporting management.
Key actions:
Within the reputational risk management and control activities
developed during the year, together with its daily management, the
following are highlighted:
• Launch and development in the adoption and implementation of the
model in the Group's various geographies.
• Coordination with all corporate and local units to implement socio-
environmental policies.
• Implementation and development of policies relating to specific
sectors (mining, soft commodities, defence and energy).
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5. RISK MANAGEMENT REPORTRisk profile > Compliance and conduct risk Similarly, the risk assessment exercise regarding conduct was carried
out in the marketing and execution of the annual exercise with a scope
of 17 geographies of the Group and 26 legal entities, where the first
line defence functions evaluate the main risks of conduct in marketing,
the suitability of the controls that mitigate said risks and establish
action plans in those cases where risk assessments exceed the defined
risk appetite.
In addition, in 2017, the compliance and conduct function carried
out the annual money laundering and terrorism financing (ML/TF)
risks self-assessment exercise, on the units considered as Obligatory
Subjects in this matter (or equivalent) in the Santander Group. This
annual self-assessment exercise is carried out by the business units
and the local ML/TF prevention officers, under the supervision of
the corporation’s ML/TF prevention function. In this regard, the
methodology adopted by the Group for the assessment of ML/TF risks
of each of the units is based on a three-phase process: 1. Evaluation
of the unit’s inherent risk (derived from its activity), 2. Evaluation of
the control environment (as a mitigating element of the inherent risk)
and 3. Calculation of the net residual risk (obtained by combining the
previous 2 according to a predefined scale). Where appropriate, and
depending on the result obtained, the corresponding action plans are
linked.
In addition, and in coordination with the risk function, a convergence
plan has been established to integrate the joint vision of non-financial
risks into a common tool called Heracles. To this end, work has been
carried out throughout the year on a plan to jointly coordinate all
the risk assessments carried out in 2017 for the first line of defence
(Regulatory Risk Assessment, Risk Assessment of Conduct and Risk
Assessment of Operational Risk) in such a way that they were carried
out simultaneously in the same period of time; supported by Heracles,
the corporate tool; and their results being jointly presented to the
different corporate committees in the first quarter of 2018.
C.4.9. 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.
During 2017, 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:
• 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.
At the corporate centre over the course of 2017, documentation
was completed on the processes of the compliance and conduct
function, identifying teams' core activities and the related risks
and operational controls. After the documentation stage, over the
course of the year we held meetings for ongoing improvement via
a "process enhancement community" involving the "owners" of the
processes addressing the various risks, so as to identify and implement
improvements in the productivity and effectiveness of compliance
activities.
Against this background, in the first quarter of 2018 new digitised
processes will be deployed for financial intelligence and corporate
transactions. The compliance and conduct function is pioneering the
use of BPM (Business Process Management) methods to improve
its processes. The Bank plans to extend this practice to the main
compliance and conduct processes at the corporate centre and local
units over the next two years.
As to Information Systems, the technology strategy agreed with
the Technology and Operations unit, continue to roll out. In 2017,
the digital compliance and conduct strategy was updated, focusing
resources and priorities on the following lines of action:
• Online cooperation with Group units, fostering platforms and
structured spaces for information exchange, such as the "Compliance
Portal" and the "VERUM platform for TOM maturity assessment".
In 2016 -first year of these transversal functions existance- a great deal
of progress was made in the four main areas:
• Risk assessment, completing existing functionalities on the Heracles
platform, to which in 2017 we added risk assessment for the AML and
corporate defence domains.
• Development of the organisational structure of the function and
the necessary needs for its correct functionality and its impact
monitoring.
• Access to external information sources to enhance compliance
control processes (regulatory sources, online media, stakeholder
perceptions, etc.).
• Development of a new compliance and conduct culture based on the
Simple, Personal and Fair culture and aligned with the spirit of the
TOM.
• Digitalization of internal processes to improve productivity and
effectiveness.
• Promoting data systems to support and implement a continuous
• Management information and analytical environments, leveraging
improvement methodology in the processes of the Bank.
• Organisational development and monitoring TOM's degree of
maturity in units.
new Big Data and Multidimensional Reporting capabilities to
enhance generation and distribution of compliance and conduct
management reports and optimise the response to money laundering
and terrorist financing alerts.
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At the corporate centre, compliance and conduct is now rolling out the
regulatory management system (Regulatory Radar), which will lead to
integration on a single platform of new regulation capture, analysis of
applicability and materiality for the Group, break-down into actionable
duties and obligations, and follow-up of the process of implementing
required changes. The system is expected to be deployed to local units
in 2018, along with automatic integration of regulatory sources.
Finally, the implementation and deployment of the APAMA system is
being carried out in the Group’s units, in order to control market abuse
scenarios.
As to information management, the Bank has implemented new
report templates that support the governance and reporting of all
risk families, and the respective consolidated view of compliance
and conduct risks. The new reporting templates are organised
into common chapters (executive summary, risk profile, appetite,
management metrics, etc.), with dimensions by family (admission of
products, sale and after-sale, customer on-boarding, AML alerts, etc.),
and combine quantitative metrics and expert qualitative analysis. As
mentioned in the systems chapter, Santander is working on automating
the generation and distribution of these reports.
As in previous years, the development of these new reporting tools
are part of the data governance model spearheaded by the Chief Data
Officer (CDO). This assures the quality of information supplied to
senior management.
In 2018, a common compliance and conduct risks report template
across the Group's various units will be rolled out.
Finally, throughout 2017 the compliance and conduct function
continued to drive forward the implementation of MiFID II rules
throughout the Group's units attracting the application of this
regulation. Headed by the GCCO, the Project Management Office
(PMO MiFID) has continued its role of planning, coordinating and
monitoring local implementation programs, focusing on the regulatory,
business, operational and technology dimensions. Monthly project
follow-up meetings have been held (SteerCo), attended by the GCCO
and local unit sponsors. A progress report on the project has been
submitted to the Group’s management committee and the RSRCC.
Lastly, within the MiFID II training programme, training sessions are
scheduled for compliance governance bodies and the board.
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5. RISK MANAGEMENT REPORTRisk profile > Compliance and conduct risk C.5. Model risk
The Santander Group 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 observed
assumptions. By simplifying in this way, the Group can focus attention
on the specific aspects which are considered to be most important to
apply a certain model.
Use of models entails model risk, defined as the risk of loss arising
from inaccurate predictions that prompt the Bank to take sub-optimal
decisions, or misuse of a model.
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.
Santander Group 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.
Model risk management and control functions are performed in the
Corporation and in each of the Group's core entities. These functions
are guided by the model risk management model, with principles,
responsibilities and processes that are common across the Group. The
model addresses organisation, governance, model management and
model validation, among other matters.
The Model Risk Control Committee, chaired by the Deputy Chief Risk
Officer, is the collegiate body responsible for supervision and control
of model risk at Santander. The aim of the Committee is to effectively
control model risk, 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 responsibility of authorising the models use falls under the local
model committees and its ratification is provided by the corporate
model approval subcommittee. Currently there is a delegation scheme
whereby certain models, according to their tier, do not require corporate
ratification, being the corporate model approval subcommittee
periodically informed.
Senior management at Santander has an in-depth knowledge of the
key models. In addition, senior management 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.
Model risk management and control is structured around a set of
processes regarded as the model life cycle, as described below:
1
Identification
2
Planning
3
Development
4
Validation
5
Approval
6
Implementation
and use
7
Monitoring
and control
2017 Annual Report
285
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 the Bank 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, internal validation units and internal
audit 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. Deployment 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
management model 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.
The Group 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. One of the key data points in the inventory that determines
the management approach to the model is the tier to which the model
belongs. The tier reflects the relevance of a model taking into account
quantitative criteria and other significant qualitative criteria.
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 parties 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 ratified by
the Corporation.
3. Development
This is the model's construction phase, based on the needs established
in the model plan and with the information provided by the model
owners for that purpose.
Most of the models used by Santander Group 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 the Santander Group’s model risk.
Hence, a specialist unit is in place which is independent 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.
286
2017 Annual Report
5. RISK MANAGEMENT REPORTRisk profile > Model risk C.6. Strategic risk
Strategic risk is the risk of loss or harm arising from strategic
decisions or poor implementation of decisions affecting the long-term
interests of the Group's main stakeholders, or inability to adapt to
changes in the environment.
For Santander, strategic risk is considered to be a transversal risk,
and counts with a strategic risk control and management model
which is used as a reference for Group subsidiaries and contemplates
procedures and tools for its adequate monitoring and control:
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 and over time. Within the strategic risk, three
components are differentiated:
• Business model risk: the risk associated with the Entity's viability
business model. 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 unexpected results. It is also important to consider the cost of
opportunity of designing another more adequate strategy.
• Strategy execution risk: the risk associated with executing long-
term three-year strategic financial 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.
• Long-term strategic plan and three-year plan: the strategic
risk function, with the support of different areas of the Risk
division, monitors and challenges, in an independent way, the
risk management activities performed by the strategy function,
incorporating an integrated section, although independent, of
the long-term strategic plan and three-year financial plan (risk
assessment).
• Corporate development operations: the strategic risk function,
with the support of different areas of the Risk division, ensures that
the corporate development operations consider an adequate risk
valuation and its impact in both risk profile and appetite.
• Top Risks: according to section B. Background and upcoming
challenges, the Group identifies, evaluates and monitors those
risks that have a significant impact on the Entity’s results, liquidity
or capital, or risks that might involve undesirable concentrations
affecting the entity's financial health, differentiating four main
categories: i) macroeconomic and geopolitical, ii) competitive
environment and customers, iii) regulatory environment, and iv)
internal factors.
Awareness of these risks is a necessary input to strategic risk
management and control, with the support of all business areas
in partnership with the Bank's risk areas. These risks are reported
regularly to senior management via a governance process that allows
for appropriate monitoring and mitigation.
• Strategic Risk report: it is a report performed jointly by the
strategy function and strategy risk, as a combined tool for the
monitoring and strategy valuation, as well as associated risks.
This report is sent to the board of directors and contains: strategy
execution, strategical projects, corporate development operations,
business model performance, main threats (Top risks) and risk profile.
2017 Annual Report
287
C.7. Capital risk
C.7.1. Introduction
C.7.2. Implementation of functions
Santander Group defines capital risk as the risk that the Entity does
not have sufficient capital, in quantitative or qualitative terms, to fulfil
its internal business objectives, regulatory requirements, or market
expectations.
Supervision of capital planning and adequacy exercises
The review by the Risks function of capital planning and adequacy
exercises ensure that capital is consistent with the established risk
appetite and risk profile.
The capital risk function, in its capacity as second line of defence,
controls and oversees the activities of the first line of defence chiefly
by means of the following processes:
• Supervision of capital planning and adequacy exercises through
a review of all their components (balance sheet, profit and loss
account, risk-weighted assets and available capital).
• Ongoing supervision of the Group's capital measurement activities,
including single operations with capital impact.
The function is designed to carry out full and regular monitoring of
capital risk by verifying that capital is sufficient and adequately covered
in accordance with the Group's risk profile.
Capital risk control focuses on the capital management model
established in the Group, bringing together a range of processes,
such as capital planning and adequacy and the subsequent budget
execution and monitoring, alongside the ongoing measurement of
capital and the reporting and disclosure of capital data, as described in
the following chart:
Planning
3 year plan
Budget
Capital
adequacy
Implementation
and monitoring
Capital measurement
Reporting and disclosure
With this objective, the process of all significant risks to which
the Group is exposed in the course of its business is evaluated. In
addition, it contributes to ensure that the methods and assumptions
used in capital planning are appropriate and that the capital forecast
calculations are reasonable with the scenarios used, volumes forecast,
coherence between exercises, among others.
This function is implemented in stages, according to the following
scheme:
Definition
of scope
Qualitative
analysis
Quantitative
analysis
Conclusions
and disclosure
Definition of scope
The process starts by deciding which units are to be assessed on the
basis of their significance for the Group, and which lines of business or
portfolios are to be evaluated having regard to their importance within
the strategy undertaken by the subsidiary or by the Group, so as to
attain an appropriate level of materiality.
Qualitative analysis
At this stage, the overall quality of the process in generating forecasts
is assessed. This involves a review of the models used and the
macroeconomic scenarios, scope, metrics, granularity, consistency with
previous periods, etc.
288
2017 Annual Report
5. RISK MANAGEMENT REPORTRisk profile > Capital risk Quantitative analysis
The specified metrics and components that affect forecasts of pre-
provision net revenue (PPNR), of provisions, of risk-weighted assets
and available capital are quantitatively assessed. The tests conducted
include analysis of volumes, trends, reasonableness and cross-checks
against the development of macroeconomic variables and historic data
series.
This stage calls for the involvement and appropriate coordination of
all subsidiaries within the scope of the process, to conduct analysis of
local projections, which in turn underpin Group-level projections.
Conclusions and disclosure
Based on the outcomes from the capital planning and adequacy
stages, the Group conducts a final assessment, at least encompassing
the scope of analysis and the areas for improvement detected in the
course of the supervision process, reporting to senior management in
accordance with the established governance.
Ongoing supervision of capital measurement
As mentioned before, another function of capital risk control is the
supervision and control of the integrity of the capital measurement
process, in order to ensure a suitable capital risk profile.
For this purpose, Santander Group conducts qualitative analysis of the
regulatory and supervisory framework and ongoing review of capital
metrics and specified thresholds.
Moreover, ongoing compliance monitoring of the capital risk appetite
is carried out, maintaining capital above the regulatory requirements
and market demands.
To fulfil this function, the following stages have been established, in
accordance with the process described below:
Definition of
metrics and
thresholds
Preliminary
analysis
Measurement
assessment
Conclusions
and disclosure
Definition of metrics and thresholds
A set of metrics and thresholds that are used in the supervision
process and provide the capital risk monitoring and control vision are
annually specified.
Preliminary analysis
At this stage of the control process, the qualitative issues, such as
process governance and the regulatory framework are analysed.
In addition, the steps taken in connection with capital to fulfil
recommendations and instructions issued by supervisory authorities
in the exercise of their powers and by the Internal Audit function are
examined.
Measurement assessment
At this stage, the scope of the exercise in accordance with the
significance of subsidiaries' contribution to the Group is delimited.
Moreover, these subsidiaries and/or portfolios are included, despite
not being material in themselves, but are regarded by the Group as
requiring analysis at that specific juncture.
After delimiting the scope, the specified metrics and thresholds are
reviewed, analysing any excess over stipulated thresholds, with a
statement of the reasons for the deviation. This allows for detailed
review of the reliability of capital measurement.
Furthermore, to ensure the capital measurement integrity, more in-
depth analysis of specific aspects of the process are carried out, if
deemed necessary.
Conclusions and disclosure
Based on the outcomes of the capital measurement stages, a final
assessment is conducted that will include the scope of analysis and
the improvement aspects detected in the course of the supervision
process, reporting to senior management.
Within the capital measurement control process, the Bank uses the
following metrics:
Capital ratios evolution
During 2017 the Group ratios evolved positively achieving a total
capital ratio of 14.48%, demonstrating the Group's ability to generate
capital organically.
KEY REGULA
TORY CAPITAL FIGURES (FL)
%
CET1 Ratio
Tier 1 Ratio
Total Capital
Ratio
Leverage Ratio
Million euro
CET1
Tier 1
Total capital
RWA
2017
10.84%
12.11%
14.48%
5.02%
65,563
73,293
87,588
2016
Variation bp
10.55%
11.53%
13.87%
4.98%
62,068
67,834
81,584
+29
+58
+61
+4
Variation %
+5.6%
+8.0%
+7.4%
+2.9%
605,064
588,089
2.34%
0.98%
2.37%
1.27%
10.55%
10.84%
T2
AT1
CET1
Dec 16
Dec 17
2017 Annual Report
289
Change in RWAs by risk type
The composition of the Group's RWAs did not change significantly in
2017. A key component was the contribution of credit risk, exceeding
86% in 2017. Market risk was relatively immaterial.
RWA BY RISK TYPE
10%
4%
10%
4%
86%
86%
Operational
Market
Credit
Dec 16
Dec 17
Breakdown of RWAs by core geographies and risk types
The Group's credit portfolio as of December 2017 stood at 519,643
million euros of RWAs, accounting for 86% of the Group's RWAs. By
the main geographies, in which the Group operates, the Group’s RWA
contribution percentage is the following:
RWA BY GEOGRAPHY
Billion euros
Total Group RWA EUR 605.06 Bn
Credit
Market
Operational
226
95
149
68
67
9%
4%
9%
4%
12%
4%
15%
87%
87%
84%
85%
6%
7%
87%
Continental
Europe
UK
Latin
America
USA
Other
290
5. RISK MANAGEMENT REPORTRisk profile > Capital risk 291
2017 Annual Report 6
ANNEX
294 Historical data
296 Glossary
300 General information
HISTORICAL DATA. 2007 - 2017
Balance sheet
Total assets
Net customer loans
Customer deposits
Total customer funds
Total equity
Income statement
Net interest income
Gross income
Net operating income
Profit before taxes
Attributable profit to the Group
Per share data*
Attributable profit to the Group
Dividend
Share price
US$ Mill.
2017
€ Million
1,732,155
1,444,305
1,018,103
848,914
932,732
1,182,154
128,124
777,730
985,703
106,832
38,661
54,552
28,716
13,630
7,461
US$
0,46
0,26
6,571
34,296
48,392
25,473
12,091
6,619
2017
Euros
0,40
0,22
5,479
2016
€ Million
1,339,125
790,470
691,111
873,618
102,699
31,089
43,853
22,766
10,768
6,204
2016
Euros
0,40
0,21
4,877
2015
€ Million
1,340,260
790,848
683,142
849,403
98,753
32,189
45,272
23,702
9,547
5,966
2015
Euros
0,40
0,20
4,483
2014
€ Million
1,266,296
734,711
647,706
809,494
89,714
29,548
42,612
22,574
10,679
5,816
2014
Euros
0,47
0,59
6,881
2013
€ Million
1,134,128
684,690
607,836
743,750
80,298
28,419
41,920
21,762
7,378
4,175
2013
Euros
0,38
0,59
6,399
Market capitalisation (million)
76,226
88,410
72,314
65,792
88,041
73,735
Euro / US$ = 1.199 (balance sheet) and 1.127 (income statement)
(*) Figures adjusted to capital increases
ANNEXHistorical data2017 Annual Report294 2012
US$ Mill.
1,282,880
731,572
626,639
756,375
81,747
31,914
44,989
24,753
3,565
2,283
2012
US$
0,23
0,59
6,000
2011
€ Million
1,251,008
748,541
632,533
763,989
80,813
28,883
42,466
23,055
7,858
5,330
2011
Euros
0,59
0,59
5,773
62,959
50,290
2010
€ Million
1,217,501
724,154
616,376
761,923
80,914
27,728
40,586
22,682
12,052
8,181
2010
Euros
0,93
0,59
7,798
66,033
HISTORICAL DATA. 2007 - 2017
2009
€ Million
1,110,529
682,551
506,976
651,289
73,871
25,140
38,238
22,029
10,588
8,943
2009
Euros
1,03
0,59
11,360
2008
€ Million
1,049,632
626,888
420,229
551,291
60,001
20,019
32,624
17,807
10,849
8,876
2008
Euros
1,20
0,62
6,639
2007
€ Million
912,915
571,099
355,407
515,393
57,558
14,443
26,441
14,417
10,970
9,060
2007
Euros
1,31
0,60
13,563
95,043
53,960
92,501
2017 Annual Report295 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.
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.
Back-testing: the use of historical data to supervise the return on risk
models.
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.
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.
Concentration risk: the risk of loss due to large exposures to a small
number of debtors to which the entity has lent money.
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.
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.
Cost of credit: a measure of credit quality, calculated as the ratio
between loan-loss provisions and total lending
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.
CCAR (Comprehensive capital analysis review): the Federal
Reserve’s evaluation of the planning and capital adequacy process of
the US’s main banks.
CRM (Customer Relationship Management): systems to manage
customer relations.
ANNEXGlossary2017 Annual Report296 CRR (Capital Requirements Regulation) and CRD IV (Capital
Requirements Directive): these incorporate European rules to the
legal framework of Basel III.
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.
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.
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.
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.
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.
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.
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.
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).
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.
2017 Annual Report297 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.
298
ANNEXGlossary2017 Annual Report Ordinary profit: profit excluding extraordinary results.
SREP (Supervisory Review and Evaluation Process): the European
Central Bank’s process for supervising and evaluating banks.
OTC (over-the-counter): bilateral transactions (e.g. derivatives) that
are not traded on an organised market.
SRF: Single Resolution Fund.
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.
Phased-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
consolidated profit as a percentage of average total assets.
RoE (return on equity): this measures an entity’s return, calculated
as attributable profit as a percentage of average stockholders's equity
excluding minority interests.
RoTE (return on tangible equity): this measures an entity’s
return, calculated as attributable profit as a percentage of average
stockholders' equity excluding minority interests - Intangible assets.
RoRWA (return on risk-weighted assets): this measures an entity’s
return, calculated as consolidated profit as a percentage of average
risk-weighted assets.
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.
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
accumulated other comprehensive income deducting goodwill
attributable and other 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.
In addition to the financial information prepared under International Financial
Reporting Standards (“IFRS”), this annual report includes certain alternative
performance measures as defined in the Guidelines on Alternative Performance
Measures issued by the European Securities and Markets Authority on 5 October
2015 (ESMA/2015/1415es) as well as non-IFRS measures (“Non-IFRS Measures”) . The
APMs and Non-IFRS Measures are performance measures that have been calculated
using the financial information from the Santander Group but that are not defined
or detailed in the applicable financial information framework and therefore have
neither been audited nor are capable of being completely audited. These APMs and
Non-IFRS Measures are been used to allow for a better understanding of the financial
performance of the Santander Group but should be considered only as additional
information and in no case as a replacement of the financial information prepared
under IFRS. Moreover, the way the Santander Group defines and calculates these
APMs and Non-IFRS Measures may differ to the way these are calculated by other
companies that use similar measures, and therefore they may not be comparable. For
further details of the APMs and Non-IFRS Measures used, including its definition or a
reconciliation between any applicable management indicators and the financial data
presented in the consolidated financial statements prepared under IFR, please see 2017
Consolidated Directors’ Report, published on February 16, 2018, Section 26 of the
Documento de Registro de Acciones for Banco Santander filed with the CNMV on July
4, 2017 and Item 3A of the Annual Report on Form 20-F filed with the U.S. Securities
and Exchange Commission on March 31, 2017 (the “Form 20-F”). These documents are
available on Banco Santander’s website (www.bancosantander.com).
299
2017 Annual Report297 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 Santander, 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 Mercantile 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)
www.santander.com
This report was printed on ecologically friendly paper
and has been produced using environmentally friendly
processes.
©February 2018, Santander Group
Photographs:
Miguel Sánchez Moñita, Lucía M. Diz,
Helge Bauer, Jaime Boira, Javier Vázquez
Production:
MRM-Mccann
http://mrm-mccann.com/
Printing:
Alborada
Legal deposit:
M-5605-2018
Relations with investors and analyts
Santander Group City
Pereda, 2ª planta.
Avda. de Cantabria, s/n.
28660 Boadilla del Monte
Madrid
Spain
Telephone: +34 91 259 65 14
investor@gruposantander.com
Customer service 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.
2017 Annual Report300
www.santander.com